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[Senate Hearing 107-531]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 107-531
 
                  THE ECONOMIC DOWNTURN AND ITS IMPACT
                 ON SENIORS: STRETCHING LIMITED DOLLARS
                IN MEDICAID, HEALTH, AND SENIOR SERVICES

=======================================================================

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             MARCH 14, 2002

                               __________

                           Serial No. 107-21

         Printed for the use of the Special Committee on Aging

78-784              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001

                       SPECIAL COMMITTEE ON AGING

                  JOHN B. BREAUX, Louisiana, Chairman
HARRY REID, Nevada                   LARRY CRAIG, Idaho, Ranking Member
HERB KOHL, Wisconsin                 CONRAD BURNS, Montana
JAMES M. JEFFORDS, Vermont           RICHARD SHELBY, Alabama
RUSSELL D. FEINGOLD, Wisconsin       RICK SANTORUM, Pennsylvania
RON WYDEN, Oregon                    SUSAN COLLINS, Maine
BLANCHE L. LINCOLN, Arkansas         MIKE ENZI, Wyoming
EVAN BAYH, Indiana                   TIM HUTCHINSON, Arkansas
THOMAS R. CARPER, Delaware           PETER G. FITZGERALD, Illinois
DEBBIE STABENOW, Michigan            JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri              CHUCK HAGEL, Nebraska
                    Michelle Easton, Staff Director
               Lupe Wissel, Ranking Member Staff Director

                                  (ii)

  

                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Larry E. Craig......................     1
Prepared Statement of Senator John Breaux........................     3
Prepared Statement of Senator Debbie Stabenow....................     3

                                Panel I

Dr. Jack Riggs, Lieutenant Governor, State of Idaho, Boise, ID, 
  accompanied by Karl Kurtz, Director, Idaho Department of Health 
  and Welfare, Boise, ID.........................................     4
Gail Wilensky, John M. Olin Senior Fellow, Project HOPE, 
  Bethesda, MD, and Former Administrator, Health Care Financing 
  Administration.................................................    26
Barbara Lyons, Deputy Director, Kaiser Commission on Medicaid and 
  the Uninsured, Washington, DC..................................    44
Vernon K. Smith, Principal, Health Management Associates, and 
  former Medicaid Director, State of Michigan, Lansing, MI.......    66

                                Panel II

Joan W. Lawrence, Director, Ohio Department of Aging, Columbus, 
  OH.............................................................    89
Barry Donenfeld, Executive Director, Mid-Willamette Valley Senior 
  Services Agency, and President, National Association of Area 
  Agencies on Aging, Salem, OR...................................    98

                                 (iii)

  THE ECONOMIC DOWNTURN AND ITS IMPACT ON SENIORS: STRETCHING LIMITED 
            DOLLARS IN MEDICAID, HEALTH, AND SENIOR SERVICES

                              ----------                              

                        THURSDAY, MARCH 14, 2002

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:37 a.m., in 
room SD-628, Dirksen Senate Office Building, Hon. Larry E. 
Craig, presiding.
    Present: Senators Craig and Carper.

          OPENING STATEMENT OF SENATOR LARRY E. CRAIG

    Senator Craig. Good morning, everyone. The Senate Special 
Committee on Aging will convene.
    Today we will be examining what I think is a very critical 
issue to our Nation's seniors. I also want to thank Senator 
John Breaux, the chairman of the committee, for facilitating 
this hearing and allowing me to chair the hearing this morning.
    Of course, all of us are hopeful that the recession, which 
began last year, is at last beginning to ease. Sadly, however, 
for many, the downturn's repercussions remain very, very 
serious. For seniors, the recession's painful effects are 
perhaps nowhere more starkly evident than in the Medicaid 
program. Contrary to the perception of some, Medicaid is not 
just a lifeline for America's poorest citizens, but rather, for 
America's seniors, Medicaid is now also very much a middle 
class program. Funded jointly by States and the Federal 
Government, Medicaid today pays nearly two-thirds of all 
nursing home and long-term care bills. So when Medicaid is in 
trouble, so too is middle America. In trouble it is. As the 
economy has contracted, so too have tax revenues, leaving 
States facing a collective $40 billion deficit this year--a 
near record level.
    Regrettably, these shortfalls are now colliding painfully 
with the demands of State Medicaid programs, which have been 
growing rapidly in recent years. Last year, national Medicaid 
expenditures jumped about 10 percent, and similar increases are 
expected this year. In my home State of Idaho, the rate is even 
higher--approximately 15 percent. Nationally, Medicaid is now 
growing between two to three times faster than other key State 
programs, including higher education and corrections.
    Most troubling perhaps are Medicaid's prescription drug 
costs, which are rising much faster than the program as a 
whole, by approximately 20 percent annually.
    Caught in a catch-22 of rising Medicaid costs and sharply 
declining growth in State revenues, at least 42 of the 50 
States are now projecting Medicaid budget shortfalls this year. 
In the face of these pressures, States are turning to an 
increasingly aggressive array of strategies to control costs 
and stretch limited dollars. Many of these will be discussed by 
our witnesses today.
    I am especially pleased to have with us today Dr. Jack 
Riggs, Lieutenant Governor of my home State of Idaho, along 
with Karl Kurtz, Director of our State's Department of Health 
and Welfare.
    Our second panel will discuss similar pressures confronting 
America's area agencies on aging and our State units on aging.
    Finally, before we start, let me stress that it is always 
easy to look at problems like these and just say the answer is 
more money. However, in lean times, the reality is that big new 
expenditures, whether Federal or State, are extremely unlikely. 
Rather, our challenge is to find effective ways to work within 
our limited resources to deliver the best services we possibly 
can for our seniors.
    Again let me thank our witnesses for being with us today.
    [The prepared statement of Senator Craig follows along with 
prepared statements of Senator Breaux and Senator Stabenow:]

               Prepared Statement of Senator Larry Craig

    Good Morning, and thank all of you for joining us here this 
morning to discuss the economic downturn and its effects on 
America's seniors. Thank you, too, Senator Breaux for 
facilitating my chairing this morning's hearing.
    Of course, all of us are hopeful that the recession that 
began last year is at least beginning to ease. Sadly, however, 
for many, the downturn's repercussions remain very, very 
serious.
    For seniors, the recession's painful effects are perhaps 
nowhere more starkly evident than in the Medicaid program. And 
contrary to the perceptions of some, Medicaid is not just a 
lifeline for America poorest citizens. Rather, for America's 
seniors, Medicaid is now also very much a middle class program. 
Funded jointly by the states and the federal government, 
Medicaid today pays nearly two-thirds of all nursing home and 
long-term care bills. So when Medicaid is in trouble, so too is 
middle America.
    And in trouble it is. As the economy has contracted, so 
too, have tax revenues, leaving states facing a collective $40 
billion deficit this year, a near-record level. Regrettably, 
these shortfalls are now colliding--painfully--with the demands 
of state Medicaid programs that have been growing rapidly in 
recent years. Last year, national Medicaid expenditures jumped 
about 10 percent, and similar increases are expected again this 
year. In Idaho, the rate is even higher, approximately 15 
percent. Nationally, the Medicaid is now growing between two 
and three times faster than other key state programs, including 
higher education and corrections. Most troubling, perhaps, are 
Medicaid's prescription drug costs, which are rising must 
faster than the program as a whole, by approximately 20 percent 
annually.
    Caught in a Catch-22 of rising Medicaid costs and sharply 
declining growth in state revenues, at least 42 of the 50 
states are now projecting Medicaid budget shortfalls this year.
    In the face of these pressures, states are turning to an 
increasingly aggressive array of strategies to control costs 
and stretch limited dollars. Many of these will be discussed by 
our witnesses today. I am especially pleased to have with us 
today Dr. Jack Riggs, Lt. Governor of my own state of Idaho 
together with Karl Kurtz, director of our state's health and 
welfare programs. Also, our second panel will discuss similar 
pressures confronting America's area agencies on aging and our 
state units on aging.
    Finally, before we start, let me stress that it's always 
easy to look at problems like these and just say the answer is 
more money. However, in lean times, the reality is that big new 
expenditures, whether federal or state, are extremely unlikely. 
Rather, our challenge is to find effective ways to work within 
our limited resources to deliver the best services we possibly 
can for our seniors.
    Again, sincere thanks to our witnesses for coming today, 
and I look forward to your testimony.
                                ------                                

               Prepared Statement of Senator John Breaux

    Good morning and thank your for being here today. This 
committee has held a series of hearings on long-term care and 
will continue to examine the questions surrounding financing 
and delivery of care for older Americans. Today's hearing, 
which will explore how best to stretch dollars when it comes to 
services for seniors, is a timely one. I want to thank Ranking 
Member Craig for calling today's hearing and thereby allowing 
us to delve into this issue further, as it is clearly one with 
no easy answers.
    In a time of declining state revenues and limited resources 
at the federal level, states are struggling to find ways to cut 
costs. States are being forced to make some difficult choices--
including cutting back on services affecting seniors. The 
Medicaid program-which is a primary payor of long-term care--
has not been spared from this cost-cutting in the states.
    Today we will hear data, demographics, statistics and 
projections--all of which are necessary to understand the scope 
of this issue. It is not enough, however, to simply lay out the 
problem. We are facing a national crisis when it comes to the 
questions surrounding long-term care. States' financial woes 
are especially pressing in light of the wave of baby boomers 
who will be needing long-term care services in the decades 
ahead. We must continue our dialogue and explore potential 
solutions, which I plan to do in this Committee's upcoming 
hearings.
    Today's hearing is just one more step in our efforts to 
stimulate debate and discussion regarding how best to reform 
long-term care for our nation's seniors. I look forward to 
having our witnesses share their thoughts on this vital and 
increasingly challenging question. This committee's broader 
series of hearings and efforts to stimulate discussion 
hopefully will help us to formulate ideas to ensure that long-
term care will be available to each of us should we ever need 
it.
    Thank you.
                                ------                                

             Prepared Statement of Senator Debbie Stabenow

    Chairman Breaux and Senator Craig, thank you for holding 
today's hearing on the ``Economic Downturn and Its Impact on 
Seniors: Stretching Limited Dollars in Medicaid, Health, and 
Senior Services.'' As a member of the Budget Committee, and a 
strong support of many health care and senior programs, I think 
is critically important that we examine these issues.
    It is my pleasure to introduce one of today's witnesses, 
Vernon Smith, Ph.D. Dr. Smith is from Michigan where he has 
been an expert on Medicaid and other health issues for a very 
long time. As the former Director of Michigan's Medicaid 
program, he has a comprehensive understanding of the program 
and will provide valuable information for the committee.
    Currently, Dr. Smith is a Principal with Health Management 
Associates, where he conducts research on economic, health 
care, and public policy trends and their impacts on many 
important health programs. Most recently, Dr. Smith has 
published reports on the effect of the economic downturn on 
Medicaid and S-CHIP (entitled MIChild in Michigan) and other 
programs such as welfare reform. I know that his work provided 
important background for the committee as we prepared to hold 
this hearing and we are all looking forward to your testimony 
today.
    I would like to take a few minutes to highlight some 
important points before we begin. We have known for some time 
that the funding structure for Medicaid could lead to hardship 
during economic downturns. When state's face declining revenues 
they often must debate making cuts to the program. The irony is 
that these cuts must be considered when demand is increasing. 
States also face the difficult reality that for every dollar 
they cut from their own budgets for Medicaid; they lose, on 
average, the $1.33 federal match as well. In other words, for a 
limited saving to the state, dramatic cuts in the program could 
be the result.
    This committee is especially concerned about cuts to 
Medicaid because many low income seniors are covered through a 
combination of Medicaid and Medicare. Through this coverage, 
some seniors are very fortunate because they have coverage for 
prescription drugs. Ensuring that all seniors who are eligible 
for Medicare get good prescription drug coverage is one of my 
top priorities. States are currently considering many options 
to slow their Medicaid spending and it would be especially 
devastating if states opted to limit prescription drug 
coverage.
    Related to that issue, I would like to mention that I 
intend to introduce a bill, the Senior Nutrition Act, that 
would help seniors account for the high cost of their 
prescription drugs when they are seeking food assistance 
through important USDA nutrition programs. I urge my colleagues 
to contact my office if you are interested in getting more 
information and joining me as an original cosponsor.
    In closing, I know we are discussing a complex and 
important issue. Many have suggested that we need to reexamine 
the basic funding structure for Medicaid so that resources are 
not limited during economic downturns when the need for this 
important health care program is at its highest. I think this 
committee will provide an excellent forum to begin that debate 
and I look forward to hearing from all of our witnesses today.

    Our first panel this morning, as I have mentioned, includes 
Lieutenant Governor Jack Riggs of Idaho and Karl Kurtz, the 
Director of the Idaho Department of Health and Welfare; Gail 
Wilensky, who is the John M. Olin Senior Fellow, Project HOPE--
and former Administrator of the Health Care Financing 
Administration; Barbara Lyons, Deputy Director, Kaiser 
Commission on Medicaid and the Uninsured; and Vernon Smith, a 
principal with Health Management Associations and former 
Medicaid Director for the State of Michigan.
    Governor, I will turn to you and allow you to direct your 
testimony. I understand that you and Director Kurtz will 
participate jointly here.
    Please begin.

  STATEMENT OF DR. JACK RIGGS, LIEUTENANT GOVERNOR, STATE OF 
 IDAHO, BOISE, ID; ACCOMPANIED BY KARL KURTZ, DIRECTOR, IDAHO 
          DEPARTMENT OF HEALTH AND WELFARE, BOISE, ID

    Dr. Riggs. Thank you, Mr. Chairman. It is certainly an 
honor and privilege to be before you today on these important 
matters.
    I come before you in the dual role as both a physician and 
as an elected official in the State, looking at the policy 
issues. I will make opening comments, defer to the director, 
and then have a few closing thoughts.
    When looking at any complex problem, my initial approach is 
to do the analysis first, and of course, in current times, it 
seems like much of the news is bad.
    There are some things that I think are very obvious. First, 
we are in a recession, and many of the existing systems and 
models in health care delivery seem to be failing, and we have 
an ``age wave'' coming just a few short years away.
    Of course, I would say fundamentally that the economy, 
through our tax structure which creates the revenues, is--and 
it may be overly simplistic--but I think it is important for us 
to remember, that it is the economy that provides the revenues 
for any of the programs that we have, and I believe it is a 
very direct correlation. When the economy is flat or in 
recession, there will be a direct correlation and a direct 
decrease in the level of services to our existing models.
    Typically, I believe, my observation of the legislative 
process is that when there is a flattening of the economy and a 
decease in revenues, the initial approach is to cut budgets, 
and therefore, services will be directly hampered.
    My concern there, of course, is that when--and I speak now 
as a physician--when you displace individuals who are receiving 
Medicaid benefits, especially in long-term care, they will have 
a diminished health response and will probably end up in our 
medical system in inpatient hospitals. So I would actually 
expect to see Medicare costs go up. If you are displacing those 
who are receiving long-term care or getting prescription drug 
benefits through Medicaid, especially the elderly, they will 
end up in Medicare, and I think that that is very clear.
    When you cut reimbursement to providers, or as we are 
seeing the possibility in the prescription drug market, when 
you cut the reimbursement and go below what is overhead, access 
will certainly be hampered. Of course, then you get into a 
vicious cycle, because when you diminish access, the health of 
the individual, and collectively, will decline, which will then 
cause greater costs on the Medicare side, because you will have 
people who are basically more unhealthy.
    Of course, as you mentioned, for States, the typical 
approach is to ask for more money, and we in Idaho certainly 
recognize that this is probably not the best time for that, 
because we do recognize the national situation.
    I think part of the approach, therefore, needs to be that 
we should as policymakers help address some of what should be 
the expectations in the public. My sense as a physician over 
the years has been that the individual patients I have dealt 
with have grown to have great expectations not only of our 
system and our Government but also of technology, that it will 
keep them alive forever. Unfortunately, as a physician, I have 
to remind people over and over that we are born, and we live, 
and we die, and that is the natural order of things, and if we 
get later in years, and the end is inevitable, it is probably 
better to recognize that and to approach it gracefully.
    I do believe that without a doubt, as people age, if they 
can stay at home, it is far better, and I think home-based 
services is clearly the best approach. And the money spent in 
preventive care is much better than waiting for the emergency 
to occur and the patient to wind up in the hospital.
    I would suggest that looking at efficiencies in our current 
programs is really the first step, and that is something that 
we are doing in Idaho. I will turn to Director Kurtz, because I 
know he wants to share some ideas and things that we are doing 
looking for those efficiencies.
    Mr. Kurtz. Good morning, Mr. Chairman, and I thank you for 
the opportunity to come and talk about the impact of our aging 
population on our State budgets.
    It used to be that Idaho's economy followed the Nation's, 
but it always took us a couple years to catch up. That is no 
longer true. The economic downturn has hit Idaho hard. As the 
Lieutenant Governor said, tax revenues are shrinking, budgets 
are being cut, and as we all know, medical costs and therefore 
Medicaid spending are headed in the opposite direction.
    Every State agency in Idaho has been forced to cut back, 
Medicaid, and the elderly who depend upon Medicaid are not 
immune. For the past several years, Idaho's Medicaid 
expenditures, as you noted, have gone up at a 15 percent annual 
increase. In a strong economy, it is difficult to keep up with 
that kind of spending increase; in a recession, it is 
impossible.
    The Governor and the Idaho legislature have directed our 
agency to limit Medicaid growth to a 6 percent increase in the 
coming year. To do this, we must reduce the scope of our 
Medicaid coverage. Senior citizens are not targeted 
specifically, but they will feel the impact. We will reduce 
pharmacy costs, restrict adult dental coverage to emergency 
services, and limit what Idaho pays when a Medicaid patient is 
covered by both Medicare and Medicaid.
    In the interest of time, I will only discuss that pharmacy 
changes. I have presented written testimony about the other 
three areas, but I will limit my comments primarily to the 
pharmacy.
    According to a 1998 Medicaid study, 12 percent of Medicare 
enrollees rely on Medicaid to pay for their prescriptions. The 
cost of prescription medications is spiraling out of control. 
In 1999, Idaho Medicaid spend $64 million prescriptions. That 
level of spending ranked it as the third-largest expenditure 
category in our Medicaid program. Two years later, in 2001, 
that cost had gone up 58 percent, topping $101 million.
    Idaho individuals age 65 and older account for less than 6 
percent of Medicaid enrollees, but they account for nearly 25 
percent of our prescription drug costs. Those costs continue to 
climb. We project spending on medications to be $121 million 
this year, ending June 30, and it will be our No. 1 expenditure 
in our Medicaid program next year, at over $139 million. In 4 
short years, our prescription drug costs have more than 
doubled.
    The proportion of dollars spent on senior citizens will 
rise even faster. In the 1990's, according to the recent 
Census, the growth rate in the number of citizens 65 and older 
in Idaho was higher than 37 other States, so that population is 
increasing.
    The dollar figures that I have quoted may sound small in 
comparison with other figures that you hear on a daily basis 
here, but let me assure you that in Idaho, that money is a 
large sum. In fact, our total Medicaid budget in Idaho is 
second only to the appropriation for public education.
    So what are we doing to control Idaho's Medicaid pharmacy 
costs? No. 1, we will reduce the drug acquisition payment that 
pharmacists receive. We will intensify our review of pharmacy 
claims. We will deny prescription refills until an individual 
has used 75 percent of the previous prescription. The fourth 
step is a big one--we will implement a prior authorization 
system that kicks in after a Medicaid client has four 
prescriptions in any one month. Prior authorization will be 
required for anything above four. About 10,000 Medicaid 
clients, many if not most of whom are senior citizens, have 
more than four prescription drugs.
    A Medicare drug benefit will help Idaho and all other 
States as we try to gain some control over Medicaid spending.
    With that, Mr. Chairman, this concludes my testimony. 
Again, I appreciate the opportunity to provide an Idaho 
perspective on this critical issue of Medicaid and its impact 
on seniors.
    Senator Craig. Thank you, Karl.
    Dr. Riggs. Thank you, Mr. Chairman. I have just a couple of 
closing thoughts.
    I think that a fundamental question that we as policy 
setters need to be asking is ``where are we headed?'' I think 
we have a clash of the past and the future that is occurring, 
and we are seeing that right now. By ``the past,'' I mean some 
of those models that were created many years ago, in fact 
decades ago, of our health care delivery system and especially 
the Medicare and Medicaid models.
    What is happening is that you are being asked to put more 
money, in fact billions of dollars, into what I would call a 
very old model, and I do not believe you would be asked to put 
billions into 50-year-old technology in communication, 
transportation, or defense.
    By ``the future,'' I am referring to the age wave. The baby 
boomers, who are just a few years away from being Medicare age, 
is a wave in our demographics that I believe will overwhelm the 
system. I would use the analogy that many people criticized the 
Y2K preparation for the future. I would argue that because of 
that preparation, that is what really averted a real problem. I 
think there is still time for such preparation for the age 
wave, but we are seeing the front end of that wave right now.
    One or two examples of innovation--the Eden Alternative of 
Dr. William Thomas, which is the alternative where pets and 
children are brought into nursing homes, I think is being very 
well-received and is an example of an innovation. I would point 
to medical savings accounts; changing the attitude of younger 
people so that as they look toward their later years, they are 
actually being prepared for and thinking about the future. I 
would propose, as I am sure other people have, that a redesign 
of Medicare, which I know is a politically contentious 
discussion, really needs to be done, because that model cannot 
continue.
    In closing, I would say that keeping our economy strong 
regardless of the model is critical. So whenever there is a 
discussion, if we can be proactive at keeping our economy 
strong, that is the revenue stream that funds whatever system 
exists, so that is critical.
    The age wave that is coming, I would really characterize as 
a tidal wave that will crush our existing models, and it is 
only a few years away.
    The encouraging point that I want to leave with you is that 
I believe there is still time to act, but there has to be 
innovation in that action.
    Thank you, Mr. Chairman, and I am certainly happy to 
respond to any questions that you might have.
    Senator Craig. Governor and Director Kurtz, thank you both 
very much. That is a pretty stark reality that Idaho faces and 
that we all face.
    [The prepared statements of Lieutenant Governor Riggs and 
Mr. Kurtz follows:]

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    Senator Craig. Now, once again, let me introduce Dr. Gail 
Wilensky to the committee. She is former Administrator of the 
Health Care Financing Administration and currently John M. Olin 
Senior Fellow of Project HOPE, where she is one of the 
country's foremost authorities on health care, Medicaid, and 
Medicare.
    Here come the solutions. Gail, welcome to the committee.

  STATEMENT OF GAIL R. WILENSKY, JOHN M. OLIN SENIOR FELLOW, 
  PROJECT HOPE, BETHESDA, MD AND FORMER ADMINISTRATOR, HEALTH 
                 CARE FINANCING ADMINISTRATION

    Dr. Wilensky. Thank you, Mr. Chairman, for inviting me 
here.
    As you indicated, I am at Project HOPE now. I also co-chair 
the Presidential Task Force to Improve Health Care Delivery for 
our Nation's Veterans. But I am here today to share ideas as a 
health economist and a former HCFA Administrator, and I am 
going to try to make about half a dozen points.
    First, we all need to recognize that States are caught in a 
double-bind. They are finding their revenues squeezed because 
of the economic downturn at the same time that they are finding 
themselves pressed because of the rapid increase in Medicaid 
expenditures--11 percent this year, and the Congressional 
Budget Office predicts next year 9.5 percent, not quite so bad, 
but still quite steep.
    Part of that increase reflects deliberate actions on the 
part of the States. In the last several years, States have 
expanded benefits, they have included populations that were not 
previously included, they have expanded their outreach, and 
they have increased payments to providers. I do not say these 
are bad things. I think these are basically good things that 
States did. They are now struggling because of the change in 
the economy, and because of increases, in some areas that one 
not their doing increased health care spending across the 
country for hospitals in particular and for prescription drugs, 
as we have heard, in Idaho as well as elsewhere.
    There is no question that the States are finding themselves 
hard-pressed, and unlike the Federal Government, most States by 
then constitutions are required to be in balance at all times, 
which is facing them to act.
    When you look at what the States are doing, they are mostly 
relying on reductions in payments to providers as a way to do a 
quick fix. Looking around the country, you see this going on in 
Indiana, where payments for nursing homes, hospitals, and 
pharmacies were cut in the fall, and more proposals are being 
made to continue these reductions. Some States are using 
preferred drug lists, some requiring prior authorization, as we 
have heard Idaho is going to be doing. Maine is also proposing 
to reduce reimbursements, and Illinois is proposing some 
additional reductions to reimbursements.
    The problem, of course, is that Medicaid has typically been 
the lowest payer around, so the reductions in provider payments 
raises the question about whether access will be affected. In 
general, probably in the short term, it will be OK, although I 
am worried about nursing homes. This is an area that has been 
of particular concern to this committee because of the frail 
nature of the vulnerable populations in nursing homes. It is 
particularly a problem because unlike the other areas, Medicaid 
is the dominant payer for nursing homes--a point that you have 
already made--so that if Medicaid reduces payment, there are 
not a lot of other places to turn to to make up those payments. 
In fact, a recent report have seen from Lewin Associates, 
confirms what most people have suspected, which is that 
Medicare has been cross-subsidizing Medicaid's underpayments in 
nursing homes. If some of the extra Medicare payments for 
nursing homes are not continued this year, as may happen, it is 
likely to catch the nursing homes particularly short, an 
industry that has already proven itself to be quite fragile.
    In the short term, I am very concerned and would encourage 
the committee to continue its vigilance in providing oversight 
for the nursing home population.
    States need to be careful about how they proceed. Some of 
their strategies can backfire. We have seen this happen in the 
past. A decade ago, one of the States limited the Clozerol, one 
of the antipsychotic drugs, and had schizophrenics ending up 
back in institutions--hardly humane treatment for the 
schizophrenics and certainly not cost-saving for the State.
    There was a report in The Wall Street Journal a couple of 
weeks ago about a state that had required the use of generics 
whenever available, only to find out that sometimes, branded 
drugs that have just come off patents are actually cheaper than 
generics.
    So state have to act very carefully. The better ideas 
unfortunately are not quick fixes. They involve looking at 
clinical protocols to try to have the best use of some of the 
new, expensive therapeutics; they require using disease 
management for high-cost illnesses such as congestive heart 
failure and diabetes.
    There is an interesting proposal called a ``partnership 
program.'' It encourages middle-class individuals to protect 
their assets by not having to count their value as part of 
their spend-down if they buy long-term care insurance, thereby 
lessening the likelihood that they will end up on Medicaid if 
in fact they need extensive long-term care.
    But none of these, to be perfectly honest, is the kind of 
quick fix that many States need right now. I am a trustee of 
the United Mine Workers Health and Retirement Fund. They have a 
very old and frail population and are using a combination of 
generic drugs, preferred products, geriatric case management 
and disease management for diabetes and congestive heart 
failure. This program seems to have saved some money, and I 
believe it has improved health care, but in all honesty, it has 
taken a couple of years to implement.
    The Federal Government had better watch out. My experience 
as a HCFA Administrator is that when States get pressed, they 
become very fiscally creative. When I was there, it was called 
``provider taxes'' and ``voluntary donations.'' Now it is 
called ``upper payment limit,'' where the States basically bill 
Medicaid for more than they are actually reimbursing; some of 
the public facilities get the increased match, either make and 
get back or do not make the increased payment to the public 
facilities, and only the Feds have spent more money.
    If the Federal Government wants to temporarily increase the 
match rate under Medicaid, it ought to do so outright so that 
everybody plays by the same rules, and all States benefit 
appropriately. The Federal Government ought to be very careful 
not to tolerate, these other types of strategies, even 
understanding the States' fiscal crisis.
    Finally, it is obvious that a Medicare prescription drugs 
benefit would help the States a lot. I believe that 
prescription drug coverage ought to be part of a reformed 
Medicare program, but inadequate and unfair benefits are not 
Medicare's only problems. You heard reference to the ``age 
wave'' which is coming, the 78 million baby boomers who will 
start to retire at the end of the decade. Medicare has already 
made many promises and it is not clear how it will be able to 
pay for all these promises. While is is important to reform 
Medicare, adding a new benefit to a fiscally fragile program, 
without tackling the rest of reform Medicare needs, is a bad 
idea, and I encourage you not to do it.
    Senator Craig. Gail, thank you very much for your insights 
that I know come from current and past experience. Your studies 
are very valuable to us.
    [The prepared statement of Dr. Wilensky follows:]

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    Senator Craig. Now let me once again introduce Dr. Barbara 
Lyons, Deputy Director of the Kaiser Commission on Medicaid and 
the Uninsured, an organization that has focused heavily on the 
interplay of the economic forces of health care delivery.
    Barbara, welcome before the committee.

STATEMENT OF BARBARA LYONS, DEPUTY DIRECTOR, KAISER COMMISSION 
         ON MEDICAID AND THE UNINSURED, WASHINGTON, DC

    Ms. Lyons. Thank you for the opportunity to testify this 
morning on Medicaid's role for seniors.
    Medicaid is the nation's major program for financing health 
and long-term care for 44 million low-income Americans, 
including over 4 million seniors. Low-income seniors depend on 
Medicaid for help in three primary areas--paying for 
medications, paying for long-term care, and paying for 
Medicare's financial obligations.
    The downturn in the economy, coupled with the increased 
pressure on State budgets, place Medicaid's protections at 
risk. The scope of Medicaid assistance for seniors today varies 
by income and by State. The poorest elderly receive coverage 
for the full range of Medicaid benefits. These beneficiaries, 
known as ``dual-eligibles,'' rely on Medicaid primarily for 
wrap-around benefits not covered by Medicare, namely, 
prescription drugs and long-term care. A smaller share of 
seniors receive Medicaid help primarily for the payment of 
Medicare premiums, referred to as ``buy-in assistance.''
    The elderly comprise 10 percent of Medicaid beneficiaries 
overall, but account for one-quarter of Medicaid spending, 
largely due to their intensive use of acute and long-term care 
services. In fact, nearly three-quarters of Medicaid spending 
on the elderly is devoted to long-term care services.
    As was stated earlier, Medicaid is the only program that 
covers ongoing nursing home care, paying for nearly half of 
nursing home costs nationally and financing care for over two-
thirds of the nation's nursing home residents.
    Medicaid assistance with community-based long-term care has 
been growing but remains limited, with fiscal concerns 
constraining the broader development of these efforts.
    States' fiscal condition began to deteriorate at the end of 
2000. The slowing of State revenue growth combined with 
increasing Medicaid costs has created significant budget stress 
in many States. These trends are projected to continue, with 
Medicaid projected to increase at an average annual rate of 
about 8 to 9 percent over the next several years. Spending on 
services, especially nursing home care, prescription drugs, as 
well as the buy-in subsidies for the elderly, are all factors 
in Medicaid spending growth.
    According to our analysis of CBO's spending projections, 
the increased cost of caring for the elderly was the second-
largest factor, following the disabled, behind the $12.4 
billion increase in Federal Medicaid spending last year.
    The trends in Medicaid expenditures track the trends in 
private health care spending. Cost increases in the private 
market put pressure on Medicaid to keep pace. To maintain 
access, Medicaid programs are pushed to raise payment rates for 
providers and to pay for the escalating costs of prescription 
drugs.
    Medicaid long-term care spending has also been rising and 
may reflect the pressure to improve nursing home quality. As 
Gail stated, low Medicaid payment rates to nursing homes have 
historically limited access, and longstanding concerns about 
the quality of care in nursing homes persist.
    Federal law gives States broad discretion to restrain 
Medicaid expenditures, but decisions to trim eligibility, 
reduce benefits, or cut payments to providers are not easy. 
States must also consider the implications of losing the 
Federal matching funds to their health care financing systems. 
Some States are trying to hold the line and not reduce funding 
this year, but others have already initiated budget reduction 
actions for fiscal year 2002.
    Historically, States look to cutting provider payments to 
hospitals and nursing homes as a first step in reducing 
spending. As States prepare their budgets for fiscal year 2003, 
many are again likely to turn to curbing provider payments, 
with implications for access and quality. In addition, as was 
heard earlier today, most States are focusing on controlling 
prescription drug spending, adopting strategies including prior 
authorization, capping the number of prescriptions, higher 
copayments, and reducing payments for prescription drugs and 
dispensing fees.
    It is unclear what the ultimate effect of some of these 
strategies will be on overall spending and quality or whether 
they will have the unintentional effect of limiting access to 
essential medications. Low-income elderly beneficiaries often 
require multiple prescriptions to manage health conditions and 
therefore constitute a substantial portion of those most 
affected by these strategies.
    The pressure on Medicaid resulting from the aging of the 
population and rising health care costs is unlikely to abate. 
Consideration of short- and long-term alternatives to assure 
adequate coverage and financing are likely to be essential to 
Medicaid's future success in serving as this nation's safety 
net program.
    To conclude, budgetary problems, coupled with the pressure 
of rising health care costs, portend difficult times ahead. 
Medicaid is an essential source of coverage for seniors but 
also for low-income families and others with disabilities. 
Given the vulnerability of the population served by Medicaid, 
it is critical that attempts to constrain costs not compromise 
the quality of care available even in tough economic times.
    Thank you. I look forward to working with the committee on 
these issues in the future.
    Senator Craig. Dr. Lyons, thank you very much.
    [The prepared statement of Ms. Lyons follows:]

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    Senator Craig. Now, our last speaker on the first panel, 
Dr. Vernon Smith, who is currently a principal with Health 
Management Associates but also, as I mentioned, formerly 
Medicaid Director for the State of Michigan. He has done 
extensive work counseling States and others regarding Medicaid 
and related health, economics, and budgetary issues.
    Doctor, thank you for being with us this morning.

  STATEMENT OF VERNON K. SMITH, PRINCIPAL, HEALTH MANAGEMENT 
ASSOCIATES, LANSING, MI; AND FORMER MEDICAID DIRECTOR, STATE OF 
                            MICHIGAN

    Mr. Smith. Thank you, Mr. Chairman, members of the 
committee. I am very pleased to be here today to talk with you 
about the effects of the economic downturn on Medicaid and on 
the seniors and others whom the program serves.
    Medicaid is of course a critically important program in the 
Nation's health care safety net for seniors and others on 
Medicare. Medicaid is extremely important, because Medicaid 
pays premiums, coinsurance, deductibles, for services, notably 
prescription drugs and long-term care, that Medicare does not 
cover.
    Medicaid's role in supporting persons on Medicare has grown 
to the point where 35 percent of Medicaid spending is for 
persons also on Medicare.
    Medicaid is now the largest health program in America, even 
larger than Medicare. In terms of the number of beneficiaries, 
this fiscal year, Medicaid will serve 44 million persons, and 
Medicare will serve 40 million persons.
    In terms of expenditures, if my estimates are correct, this 
year, total Medicaid expenditures will be $250 billion; for 
Medicare, a total of $249 billion, and net of premium receipts, 
around $227 billion.
    The economic downturn has caused State revenues to take a 
nose dive just when Medicaid expenditures are skyrocketing. The 
State revenue outlook is not good at all. With the decrease in 
revenues this year at the State level, it would take an 
increase in State revenues of 8 or 9 percent in 2003 from this 
year for States just to achieve the same level of revenue in 
inflation-adjusted terms that they had 2 years before in 2001. 
This is extremely unlikely. In fact, States say they will be 
lowering their revenue forecasts still further this spring.
    What this means is more pressure for across-the-board State 
budget cuts, and the current round of Medicaid cuts may be just 
the beginning. Already States have decided or are in the 
process of deciding to make major cuts in an effort to slow the 
growth in Medicaid spending. Examples abound across the 
country, and Barbara and others have described those already, 
in terms of cutting or freezing payment rates, cutting or 
restricting benefits, or cutting eligibility, in some cases, 
specifically, eligibility for persons with high medical bills 
who qualify under the medically needy category of Medicaid.
    The current economic downturn has forced States to reduce 
Medicaid spending even if it means cutting services that have 
obvious value and even when the cutbacks have obvious adverse 
impacts on seniors and health care providers who serve them, 
and for States, the frustrating thing is that the total 
spending cuts may be double or triple the general fund savings 
that are realized in order to make the budget reduction 
targets, because states must also cut federal matching funds.
    When Medicaid was adopted by the U.S. Congress in 1965, no 
one expected Medicaid to become one of the largest programs in 
State budgets; no one expected Medicaid to allocate 35 percent 
of its spending to low-income Medicare beneficiaries, and no 
one expected States to have the fiscal capacity to finance a 
program whose costs would increase at twice the rate of State 
revenues over the long run. But that is what has happened.
    States seemingly have run out of strategies to control the 
growth in Medicaid spending. The prospect is that simple 
economics will put States under increasing pressure to scale 
back their programs. To the extent that that does occur, the 
brunt of program cutbacks will be borne by those on whose 
behalf most current expenditures are made--and those are low-
income persons who are disabled and elderly.
    Mr. Chairman, I am very pleased to have the chance to talk 
with you about this and look forward to working with you. I am 
happy to answer any questions.
    [The prepared statement of Mr. Smith follows:]

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    Senator Craig. Doctor, thank you very much.
    I do have some questions of all of you.
    As you know, this committee is not an authorizing 
committee, it is an oversight committee. But we do believe that 
we play a valuable role with hearings like this and with 
testimony and the building of a record that clearly evidences 
the reality that we all face, both at the Federal level and at 
the State level. As health care progresses as rapidly as it 
has, and the costs occur, the programs that we are dealing with 
here are being rapidly outpaced. Then, of course, as you have 
mentioned, with economic downturns and States facing the 
reality of mandatory balanced budgets we run into some very 
difficult circumstances.
    This question would probably be for you, Governor, and 
Director Kurtz. You described Idaho's recent and I think 
ambitious, plan to restrain Medicaid spending growth.
    You have done this without fundamentally cutting core 
benefit eligibility other than prescription drugs; is that 
correct?
    Mr. Kurtz. Mr. Chairman, that is correct. We have looked at 
coverage areas rather than eligibility.
    Senator Craig. Do you believe that that is going to get you 
where you need to go?
    Mr. Kurtz. Mr. Chairman, I do not think it will. As Dr. 
Smith said, our Medicaid program has been increasing about 15 
percent a year. Our State revenues on a very good year increase 
4.5 to 5 percent. So you have this gap, and to cut that gap, we 
need to look at how can we impact that line of increase, and we 
will have to look at eligibility as one of those criteria. 
Right now, our Medicaid program is right at the minimum in 
terms of our pregnant women and children programs, our CHIP 
program; our basic Medicaid program is at the minimum, so we 
are going to have to work with the Federal Government in terms 
of how do we impact those eligibility requirements.
    Senator Craig. A few questions of you, Karl, and probably 
Gail. Some of these things States are doing in relation to 
cutting the benefit or at least payment to providers is short-
term or might work. In the long term, providers begin to deny 
services simply because they cannot afford to provide them, and 
that ultimately comes about.
    Overall, the analysis that we are going to have to have 8 
or 9 percent annual increases in state revenues just to stay 
current with growing Medicaid costs. And yet, returning to such 
high revenue growth is just not going to happen under almost 
any estimate, although we might see substantial comeback in 
state revenues--Karl, you just mentioned the reality that even 
with a robust economy Idaho experienced, Medicaid was outpacing 
that, and to get back to that level will be quite an 
accomplishment by next fiscal year if we can get there.
    I guess I am speaking generally but I would like all of you 
to comment on this difficult set of circumstances, and the 
reality that we are moving very slowly here as it relates to 
any form of Medicare prescription drug reform, although they do 
seem to be linked together in most policymakers' lexicon today 
here on Capitol Hill.
    Dr. Wilensky. I don't think the longer-term projections for 
Medicaid growth are double-digit; It is less than the 9.5 
percent growth that CBO is projecting next year. The growth may 
be faster than State revenues growth, but my understanding is 
that it is more in the 6 or 7 percent range.
    Senator Craig. What is slowing that?
    Dr. Wilensky. For one thing, there is pressure not to use 
the upper payment limit, which has artificially increased 
spending--it was basically free money on the part of the 
State--and some of the benefit expansions that we had seen 
earlier are going to slow down; the increased payments. Some of 
the causes that increased were good spending in the late 1990's 
will not continue that is basically the rationale that the 
Congressional Budget Office is providing.
    I think there are ways that States can slow down Medicaid 
spending by doing things better. The problem is that the are 
not quick fixes. In the 1990's, most States used managed care 
strategies for their acute care population and for a while 
slowed down the expenditures. They have run that gamut in my 
estimation, almost all of the States that could reasonably do 
that.
    There has been less effective innovations in long-term care 
treatment. Arizona has tried to use managed care and other 
strategies in long-term care. You are going to hear from the 
Ohio aging director about some ideas that we were discussing 
that they are considering or doing in Ohio. The types of 
disease management programs that are sometimes being instituted 
for high-cost, high-volume diseases really do slow down 
spending. Health care spending, as you know, tends to be highly 
concentrated with relatively small numbers of people using very 
large volumes of dollars.
    So there are some creative strategies. I am attracted to 
the long-term care partnering program which encourages middle-
class individuals to buy insurance to protect their assets that 
are now counted in spend-down. This discourages attempts to 
distributing assets for people who realize they are going to 
have substantial long-term care needs.
    None of them is going to be a silver bullet in the next 
year or two as States find themselves in a fiscal crunch, but 
they could allow for smarter spending over a longer period. But 
of course, there is the broader issue that was alluded to, 
which is whether Medicaid as we now know it really is the 
program for the 21st century in much the same way that people 
are asking whether Medicare as we now know it is the right 
program to accommodate the retirement of the baby boomers.
    Those are difficult questions. These programs have provided 
important services for the populations they were intended to 
serve, but I think it is fair to say that what might have been 
sensible for 1965 might not make it for 2010.
    Senator Craig. Thank you.
    Dr. Smith, you follow this, you discuss strategies, you 
advise States.
    Mr. Smith. The States face a very, very difficult prospect 
for the future. The long-term forecast for Medicaid expenditure 
growth from CBO through 2012 is 9 percent per year. There is no 
State that could possibly expect its revenues to continue to 
grow that rate.
    Medicaid has continued to increase as a share of State 
expenditures whether you measure it in terms of general funds 
expenditures or as total expenditures. The prospect is only 
that under the current financing structure, Medicaid will 
continue to take funds away from other worthwhile public 
purposes that are funded by State dollars, whether it be 
corrections, public health, education, or whatever.
    That is not a good prospect, and it does suggest, as Gail 
indicated, that perhaps there needs to be some evaluation of 
the financing structure of the program, especially one where 
the program relies so critically on the availability and 
stability of State funding as the primary source of funding. 
All the important decisions about Medicaid programs are made by 
the States, and they depend on the availability of State 
revenues. The fundamental problem is whether States can sustain 
this program, which they believe in and want to support and 
have demonstrated their commitment to year after year by making 
appropriations even though it took money away from other 
worthwhile purposes. But even in the most optimistic of 
projections, the growth in Medicaid costs will far outstrip 
growth in State revenues.
    Senator Craig. Let me add another question that you might 
want to respond to, and then I will turn to you, Barbara. Can 
we cut further without seriously risking further provider 
defections from the program?
    Mr. Smith. I think it is fair to say that every time 
Medicaid makes a cut, it does have consequences. It has 
consequences in terms of the health care services that States 
make available. Medicaid only pays for services which people 
need, and when you make cuts, whatever they may be, it has an 
effect on the people who are served by the program. It also has 
an effect on the providers who provide those services and have 
a commitment to serve the low-income populations.
    I think it is inevitable that when States are forced to 
make cuts in provider payments--especially, as Gail pointed 
out, when Medicaid is already kind of the low-dollar payer--
that that does have the effect of diminishing even further the 
pool of providers who are willing to serve and accept Medicaid 
as a source of payment.
    So it is sometimes dramatic when you see a large group--in 
the newspapers in the last couple days, there has been some 
discussion about pharmacies possibly dropping out because of 
cuts in payment rates--but it is not just pharmacies, it is 
nursing homes, all of whom do not participate in Medicaid, 
hospitals, all of whom do not participate in Medicaid, doctors, 
dentists who do not participate in Medicaid. When Medicaid is 
forced to make these cuts as they inevitably will have to under 
the current structure, it will only further erode the 
participation of the providers.
    Senator Craig. Thank you.
    Dr. Lyons.
    Dr. Lyons. Yes, I would concur with what Vernon has said. 
Thinking about the program, again, the majority of the spending 
in Medicaid is on elderly and disabled folks; these are people 
with serious, complicated, multiple health and long-term care 
needs. So any discussions of cutting the program could have 
very serious impacts on these populations who need access to 
health care services.
    Medicaid is also an important source of Federal funds to 
the States, so I think that Vernon's testimony actually very 
clearly lays out how much more money you lose by making a cut 
in State funding because you lose those Federal funds as well, 
and that money is very important to States' health care systems 
that serve elderly and disabled populations.
    Thinking about the future, I do think there are short-term 
strategies which need to be considered which run the gamut from 
trying to achieve more cost-efficient care, but also looking at 
options to provide fiscal relief to the States, including 
raising the Federal match rate, increasing savings through the 
prescription drug rebate program, and providing some relief to 
States for senior prescription drug spending.
    I think those are important things that could be done 
relatively quickly that would help States in the immediate 
timeframe. Longer-term, certainly there needs to be a broader 
discussion of whether there are better ways to provide care for 
these populations as we look toward the future. That could 
involve shifting responsibility from the States to the Federal 
Government for certain aspects of Medicaid.
    But those discussions are complicated, they are hard, they 
affect States differently. They have implications for the State 
budgets as well as implications for the Federal budget and so 
require lots of discussion and debate to get to that point. But 
looking at the budgetary problems that we are facing and the 
aging of the population, these are discussions that we also 
need to engage in.
    Senator Craig. Karl.
    Mr. Kurtz. Yes, Mr. Chairman. In terms of looking at 
provider payments, I think that what we really need to look at 
coverage areas--do we cover a service rather than reducing 
provider payments--because the key element is that we have 
adequate providers and providing access to that care.
    I think the other challenge we need to work on, and we are 
attempting to do, is getting our recipient enrollees engaged in 
their own health care, and making their own decisions around 
health care. That is one of the real encouragements I see in 
terms of our Children's Health Insurance Program, is working 
with those children--it is a long-term investment, as Gail 
said--but getting those children healthy and getting them 
educated about how do you become a good user of health care, so 
it is not a crisis, but it is health prevention and wellness. 
It is a long-term solution--it is not a quick fix--and some of 
us need some quick fixes.
    We have a number of proposals from advocates, providers, 
and other groups for expanding Medicaid, and we have put a 
freeze on those. We are not going to be covering new services 
and/or new classes of people coming into the Medicaid program.
    Senator Craig. Governor.
    Dr. Riggs. Thank you, Mr. Chairman.
    On the reference to quick fix, I agree there are no quick 
fixes, because as I alluded to, I think the quick fix in the 
legislative process is just to cut reimbursement. I think the 
good news here is that I do believe there are greater 
efficiencies. There are ultimately better ways to do these 
programs. If there is some light at the end of the tunnel, 
hopefully, what we are being squeezed by right now will get us 
to be more innovative, because traditionally, we shift the 
budget here, do this and that.
    I would point out what I would call the confusion of having 
Medicare, a program for those over 65, a medical program, and 
yet if you have particular financial liabilities or lack of 
funds, you also qualify for Medicaid. I think it is very 
confusing not only for providers but for the recipients to have 
this blending of programs. Then, of course, we get into the 
debate of whether it is the Federal responsibility or the State 
responsibility, so we have a blended--and a not very well-
blended--program of which criteria do you meet.
    I would say that it would be far simpler if you are over 
65--or whatever the age should be--you have Medicare, and if 
you have means-testing, then you get the extended care services 
and so on, rather than forcing this distortion of two models 
that now overlap.
    Let me add on the access issue that I do not think there is 
any question that as things get tighter, access also gets 
tighter. I would say that in Idaho, we have seen it, I have 
seen it. I have known of physicians who have always accepted 
Medicaid and Medicare who, with cuts in both programs, say it 
is to the point of being below the operation overhead cost, and 
they are just at a point--and we all know there is a nursing 
shortage now nationally--so those costs have actually gone up. 
You have forces that cannot coexist, and something has got to 
give, and for some, it is access, just saying, ``I just cannot 
afford to see Medicaid or Medicare patients any longer.'' 
Senator Craig. Concluding thoughts by any of you? I will give 
you a minute.
    Gail.
    Dr. Wilensky. You have hit on one of the biggest weakness 
in Medicaid, is the dual-eligible program. I agree with 
Lieutenant Governor Riggs that having Medicaid and Medicare 
overlapping programs is exceedingly expensive, is very clumsy, 
and does not provide the best source of care. I would very much 
rather have a Medicare program that had differential support 
for differing income levels so that people were on one program.
    We need to decide whether Medicaid should continue as a 
Federal-State matching program. I thought the jig was up in the 
nineties because of provider taxes and donations. The 
foundation for cost control has been the State's share. States 
have indicated that when pressed, State share does not mean 
what the Feds think State share means. I believe we need to 
rethink the right program for the low-income population.
    Finally, who gets to pay for long-term care. The proposals 
used to be that the Feds would take acute care, and the States 
would take long-term care. I was amused to notice in the last 
round of the National Governors' Association proposals, they 
proposed giving long-term care to the Feds, and they would take 
acute care. We clearly have not yet had a fulsome discussion 
about where long term care should be, who should control it, 
and who should pay.
    Senator Craig. Concluding remarks from anyone else?
    Dr. Smith.
    Dr. Smith. I would just like to build on what Gail said and 
what Lieutenant Governor Riggs also said in terms of the 
blending or the coordination between Medicare and Medicaid. I 
think this is really one of the key issues that needs to be 
looked at today. These two programs, established by the same 
Federal law, based on the Social Security Act, should work 
together; but in fact they do not work so well together. There 
needs to be some effort, which would require some change in 
Federal law, in order to have these programs work in a 
coordinated way so they work together, and they work together 
for the good of the patients as well as the providers.
    I would also suggest that there are some things just in 
terms of thinking about how to deal with the solution. Gail 
referenced who is responsible for what, but I think you could 
certainly build a case that the Federal Government has 
responsibility for the seniors, and that might in fact be a 
place where States could be provided some of the fiscal relief 
that they need if in fact the Federal Government were to assume 
the greater share of financing for the services that Medicaid 
provides to this group.
    We do have a situation that needs to be looked at. When 
States have this shortage--I was just thinking about Idaho and 
the other 10 or so States that have Federal matching rates for 
Medicaid at around 70 percent--when the State budget dictates 
that cuts have to be made, States have to cut. In the case of 
Idaho and these other 10 States, to save $1 million for State 
funds to apply to the shortage, you have to cut the budget by 
around $3.5 million. And it is the $3.5 million that has the 
impact on the providers and on the beneficiaries in those 
States. If there is some way that we can address that so that 
States can better finance the program, that would be good.
    Senator Craig. We have just been joined by one of my 
colleagues and a member of the committee, Senator Carper, and I 
will turn to him, before we release you, for any opening 
comments he might have or questions of you.
    Senator.
    Senator Carper. Thank you, Senator.
    I want to welcome each of you. Thanks for joining us today. 
It is nice to see some of you again and to meet others for the 
first time. I understand one of you is from Idaho, and you 
might even know the Governor there, who used to serve here. I 
had the pleasure of serving with him when I was Governor of 
Delaware and a member of the National Governors' Association.
    Would you give him a message for me?
    Dr. Riggs. Certainly.
    Senator Carper. I used to encourage him to consider at some 
point in time seeking the chairmanship of the National 
Governors' Association, which as you know rotates from Democrat 
to Republican. The current chairman is John Engler of Michigan, 
and succeeding him will be a Democrat, Paul Patton of Kentucky, 
and there will be a vacancy for the position of vice chairman, 
which will go to a Republican. Just tell your Governor that I 
cannot think of a better candidate than him.
    Dr. Riggs. I will relay that back.
    Senator Carper. I used to encourage him to do that; I said 
he was just made for the job. He will do a great job. Give him 
my best.
    Dr. Riggs. I will relay that message this evening.
    Senator Carper. Thanks very much.
    I apologize for arriving a bit late. We have been holding a 
hearing over in the Commerce Committee, where I testified with 
respect to future passenger rail service for our country.
    I am not going to ask each of you to repeat your testimony; 
I have a copy of it and will have a chance to review it later. 
What I will ask you to do is to take 30 seconds apiece, and 
say, if there is nothing else that the Senator from Delaware 
walks out of here with, I want him to keep this in mind. Just 
take 30 seconds. If he remembers noting else, this is what I 
would like him to keep in mind. I will just ask each of you to 
give me your best 30 seconds for the long haul, please.
    Lieutenant Governor, do you want to take the first shot?
    Dr. Riggs. Certainly. I would say that with the coming 
``age wave,'' if we think we have problems now, we have no idea 
what a few years will hold for us. It is just time to do a 
redesign of both Medicare and Medicaid and really create some 
efficiency and look at the whole system and build a better 
model. It is time.
    Senator Carper. Thank you.
    Mr. Kurtz. Senator, I am Karl Kurtz from Idaho. Looking at 
how we can get a handle around prescription drugs, the impact 
that seniors have on our Medicaid program in the area of 
prescription drugs, would be a take-home message; how do we as 
a partnership between Federal and State, our providers, and the 
clients that we serve build a better mousetrap in terms of 
prescription drugs.
    Senator Carper. Thank you.
    Dr. Wilensky. In the short time the States have to respond, 
they are probably going to respond by reducing provider 
payments. I think the biggest danger is for nursing homes, 
where Medicaid is the dominant payer. There is not a lot left 
there.
    In the medium term, you can have better delivery of 
services. There are smarter ways through disease management and 
other kinds of programs, clinical protocols for the better use 
of new prescription drugs. But ultimately, we have to decide 
what Medicare should look like and what Medicaid should look 
like--Medicare for the baby boomers and Medicaid because it is 
not clear that the Federal-State partnership that was set up in 
the 1960's makes sense for the 21st century.
    Senator Carper. Thank you.
    Ms. Lyons.
    Ms. Lyons. Medicaid is an essential source of coverage for 
low-income seniors, families, and others with disabilities. As 
we try to deal with these current budget stresses, I think it 
is critical that we remember that if States are forced to cut 
back either by lowering provider payments or cutting 
eligibility, the needs do not go away; so it shifts those needs 
to families and to providers who do not get compensated 
adequately for providing care. So policymakers need to address 
the financing of Medicaid to shore it up and strengthen it as 
the safety net program it has been for the past 35 years.
    Senator Carper. Thank you.
    Mr. Smith.
    Mr. Smith. Medicaid has grown so fast over the last decade 
that it has become as large as Medicare, even larger in terms 
of the number of persons served--44 million compared to 40 
million. The costs of the program have put stress on the States 
and their ability to continue to finance the program. As a 
result, they have had to undertake serious reductions in the 
program, and there needs to be a review of the structural 
financing of the program if it is to be successful into the 
future as it has been in the past.
    Senator Carper. Last week, we voted by a fairly wide margin 
to pass an economic stimulus package and sent it to the 
President, which he has signed. I did not support it. I 
actually supported a more expensive package back in October, 
November, and December, but I thought March 8 was a little bit 
late. The package that we passed, I said to one of our 
reporters back in Delaware that if I were the Governor of a 
State right now, especially a State that was hurting for 
revenues, I would be having a heart attack; and if I were the 
budget director for a State that was having a tough time with 
revenues, I would be in intensive care, given the effects, 
specially for those States that piggyback on the Federal Tax 
Code, and given I think the very positive effect that the 
accelerated deprecation will have on business investment that 
we need, by the same token, it serves to undercut State tax 
revenues rather considerably in my State and I know in other 
States.
    In earlier versions of the bill, we had an offset to help 
States particularly on the health side, but we could not work 
out a consensus there.
    In Idaho or any other States that are represented here, how 
are you going to deal with the impact on your revenues and your 
mounting Medicaid costs?
    Dr. Riggs. You pose an excellent question, and I am not 
sure that we have an excellent answer. We pieced together our 
budget for this year--the legislature will probably adjourn 
tomorrow--and it is razor thin. We have gone to every available 
source of revenue that we had, the budget stabilization funds 
and those sorts of thing, and there just is not money sitting 
anywhere.
    The only approach left for those who want more services, 
whether it be in this area or in education in Idaho, would be 
to raise taxes. Clearly, there is nowhere else to go. So it has 
been a challenge.
    Again, you all know the state of the Federal budget just a 
year ago; to see such a drastic change in 12 months has been 
truly remarkable, and it has been a challenge. That is why my 
sense is that we are going to squeak by right now, but with the 
problems that we see looming in the very near future, we will 
not be able to get by because of the number of elderly that are 
going to be coming into the system. It will not work.
    Senator Carper. Other comments?
    Mr. Kurtz. Looking specifically at the impact on our State 
revenues, there are estimates between $25 and $75 million over 
the 3-year period. In a State where we only generate a little 
over $1.9 billion in tax revenues anyway, that is a significant 
item. We were haggling between the departments and the 
legislature about $1 million quite often; so a $25 million 
swing is a significant point of discussion.
    Senator Carper. I am sure it is.
    Lieutenant Governor, go ahead.
    Dr. Riggs. If I could add--and this was part of my 
testimony before you arrived--my fundamental belief is that 
whatever system we have, it is the economy through our tax 
structure that creates the revenues for whatever the system is.
    So that most fundamentally, I believe that whatever we can 
do to keep the economy strong is very, very critically 
important. I see obviously the relationship that----
    Senator Carper. Yes. Unless you have a strong economy and 
the jobs and revenue that flow from that, you do not have much. 
I understand that in Delaware, and clearly you do in Idaho.
    It is good to see you all. Thank you very much for joining 
us today and for your testimony.
    Senator Craig. Let me thank the first panel for being here 
and for your contribution. We greatly appreciate it.
    Thank you.
    Let me ask our second and final panel to come forward, 
please.
    Thank you both for being here. Our second panel this 
morning will focus on senior services programs. We will hear 
from Joan Lawrence, Director, Ohio Department of Aging, and 
Barry Donenfeld, Executive Director, Mid-Willamette Valley 
Senior Services Agency, as well as the current President of the 
National Association of Area Agencies on Aging. We thank you 
both for being here.
    Joan, please proceed.

  STATEMENT OF JOAN W. LAWRENCE, DIRECTOR, OHIO DEPARTMENT OF 
                      AGING, COLUMBUS, OH

    Ms. Lawrence. Thank you, Mr. Chairman. I appreciate the 
opportunity to appear before this committee, whom we in the 
aging network count on for the kind of oversight you do and the 
ideas that you generate.
    We are glad you chose Ohio to be part of the panel. We 
think we are really representative of the Nation in many ways. 
We are very diverse--we are rich, we are poor, we are urban, we 
are rural; and I think something that a lot of people do not 
know is that one-third of our counties are Appalachian, so we 
have a significant number of problems that accrue to being in 
that area.
    I am Director of a Cabinet-level agency, but I am not the 
Medicaid agency. We have a contract with the Medicaid agency 
for our home health program. It represents nearly two-thirds of 
our budget at this time, and it is fast-growing--or, it was 
fast-growing, at least. We were serving 25,000 nursing home-
eligible seniors. That may change a bit with the funding 
changes.
    Our funding in the department is basically 58 percent 
Federal, 42 percent State, and at the local level, 51 of our 88 
counties have senior levies of some kind to enhance services.
    I am hitting my 71st birthday this year, so I am one of 
those seniors who is healthy and generally enjoying life, but I 
am here today to represent the others who are not.
    I was glad--no one picked up on it in Lieutenant Governor 
Riggs' testimony--he referred to a proposal to change the way 
we look at seniors in Medicare to a group called ``pre-
seniors'' who are 65 to 75. I like that.
    Senator Craig. I am soon going to like that also.
    Ms. Lawrence. Well, there is a lot of truth to it, too, and 
we should look at the populations differently. Eighty-five and 
over is where the problem really hits home the most.
    The economic downturn has had a significant effect on 
Ohio's seniors. We have had, as has everyone else, shrinking 
personal income and sales tax revenues. Before the budget was 
even cold, in addition to a 1.5 percent cut we made through the 
budget process, another 6 percent cut. For the first time in 
some time, our in-home health program, which we call Passport, 
was affected. Normally, we have been protected from those cuts. 
The 6 percent cut produced waiting lists immediately. It was 
drastic--going from 700 per month enrollment to 500--and 
managing that enrollment is very difficult. In just 2 months, 
we had over 1,000 on the waiting list, and of that 1,000, 15 
percent, or 150, entered nursing homes directly.
    Interestingly, we are going to be able to demonstrate to 
the Governor--and I hope it will do some good--that the amount 
of general revenue we saved in our home health program is going 
to be equal to the amount we spend on the increased nursing 
home placement, even though it is only 15 percent. So I am 
hoping that that might make a difference in the future.
    It is compromising our ability to implement the Olmstead 
decision and will continue to do so. Our waiver cost is about 
$11,200 including administration. Nursing home average is 
$52,000. So the difference in cost is quite significant. Here 
is where we come to you. Part of the problem is that the 
Medicaid program is biased and has been since it was created 
toward institutionalization. Medicaid will pay--it is an 
entitlement--if you are Medicaid-eligible, nursing home-
eligible, Medicaid pays, there is no question about it.
    There are cheaper alternatives to nursing home placement, 
but because Medicaid does not pay for it--it does not pay for 
room and board, does not pay for other services--we cannot use 
that opportunity for some of our clients.
    The Governor is very eager to implement our report on 
``Ohio Access for Persons with Disabilities'' and is severely 
limited in doing so because of the way we fund these services.
    We are hoping that some of that will change. I talked to 
someone recently who is working with getting people out of 
nursing homes who could live at home if they had the ability to 
have the money follow them. She has 25 people waiting, and she 
is struggling to find housing and other services.
    We even have a waiver in our State budget to allow 200 
people to get some extra money so they can move out of nursing 
homes if they are able to, with health and safety, and we can 
hardly find 200 because the funding to pay for the housing is 
just simply not there.
    I thought--and I feel like I want to say it because at this 
point, no one has mentioned it--Illinois just recently got a 
waiver from CMS for prescription drug coverage, and CMS did 
something that I think is very helpful. They said that if any 
other State wants to follow exactly what Illinois proposed, 
they could do it without going through the waiver process. I 
think that is a step in the right direction, and I hope they 
will continue along that track.
    I have several examples of how senior services have been 
affected--I will let you read them--but one thing that really 
surprised us was that the waiting lists for home-delivered 
meals have doubled in some areas of the State just in the 
recent period of time.
    So what we suggest to you in general is that we should help 
people help themselves. Most long-term care is done by friends, 
neighbors, family, as you know, and I think Congress can be 
very, very proud of the National Caregiver Support Program that 
was enacted with the reauthorization of the Older Americans 
Act. It is making a big difference. I think you are going to 
see good results. It really does help people who are doing all 
the work.
    We have to give people real choice in long-term care. That 
is a real challenge for you, and you have heard that you really 
do have to look at Medicare and Medicaid together--you just do. 
When I hear our Medicaid director suggest that a program does 
not make any difference in Ohio because it saves Medicare 
money--that it does not save Medicaid anything--that is 
something I think we need to somehow nip in the bud.
    We have to support people in their efforts to plan for 
long-term care. We just put on the web last week a Long-Term 
Care Consumer Guide that incorporates not only the regulatory 
information and the basic facts about nursing homes--all of 
them--but includes for the first time family satisfaction 
surveys, and it will include by the end of the summer resident 
satisfaction surveys; we are in the process of doing those now.
    Finally, I will just agree with everyone else about 
prescription drugs. It would be a critical place to start. The 
Governor is trying to get a drug discount card in place through 
the legislature, a little different from what the President is 
proposing, and we are having trouble. The pharmacists claim it 
will drive them out of business and similar things that you 
have probably heard.
    So the effort goes on in Ohio and in the rest of the 
Nation, and I thank you for listening.
    Senator Craig. Joan, thank you very much.
    [The prepared statement of Ms. Lawrence follows:]

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    Senator Craig. Now let us turn to Barry Donenfeld, 
Executive Director, Mid-Willamette Valley Senior Services 
Agency, and currently President of the National Association of 
Area Agencies on Aging.
    Thank you, Barry.

     STATEMENT OF BARRY DONENFELD, EXECUTIVE DIRECTOR, MID-
   WILLAMETTE VALLEY SENIOR SERVICES AGENCY, AND PRESIDENT, 
   NATIONAL ASSOCIATION OF AREA AGENCIES ON AGING, SALEM, OR

    Mr. Donenfeld. Thank you, Senator.
    Ranking member Senator Craig, Senator Carper, good morning. 
I am pleased and honored to be able to visit with you for a few 
minutes this morning.
    I am the Area Agency on Aging Director for Marion, Polk, 
and Yamhill Counties in Northwest Oregon. My testimony today 
will have three parts--sharing with you from NAAAA's national 
perspective some reflections on the difficulties older persons 
are having due to the economic downturn; briefly describing 
Oregon's community-based approach to long-term care; and 
discussing some innovative and cost-effective ways that our 
agency has stretched limited resources, improved and enhanced 
services, and prepared for the future.
    As I discuss these different topics, I will try to just 
touch on important themes and refer you to my detailed written 
testimony for lots more information and lots of statistics.
    I will start with information gathered by NAAAA. AAAs 
typically serve older women having difficulties with daily 
tasks like bathing, eating, and dressing. AAAs throughout the 
country report that they are working more and more with 
vulnerable and hard-to-teach individuals as well as persons 
with disabilities.
    For the last year and a half, NAAAA has heard repeatedly 
from AAA directors through the country that things are tough 
and that seniors are needier than ever. The economic downturn 
is definitely affecting older people. Here are a few anecdotal 
snapshots from around the country.
    New York City--and I would like to qualify this by saying 
that very little of this is related to the events of September 
11; these events were in play prior to those horrible events--
New York City has a $36 million cut to their Department of 
Aging. To absorb those budget cuts, they are eliminating 
weekend meals, they are shutting down seven senior centers, 
they are eliminating plans to build four new senior centers, 
they are eliminating service contracts, and they are reducing 
all of their contracts across the board.
    In Alabama, it has been reported that there is a 50 to 75 
percent increase in requests by seniors for employment 
assistance, with the greatest increase occurring since August 
of last year.
    My home State of Oregon has been hit hard as well. We have 
the highest unemployment rate in the country, and we are not 
recovering yet. At my agency, we have experienced a projected 
20 percent annual growth rate in requests for public 
assistance. Our local utility companies report between a 16 and 
37 percent increase from this same time last year in requests 
for payment assistance, and many of the individuals requesting 
such assistance are in fact seniors.
    My State of Oregon has a reputation for long-term care 
innovation. Most of that results from listening to our older 
residents and realizing from our own experience that nursing 
homes cost four times more than community-based care. I talk to 
lots of seniors, as I am sure the distinguished Senators do. I 
have never heard a senior say to me--and you probably never 
have, either--``I want to go to a nursing home.'' It simply 
does not happen.
    Using Federal Medicaid waivers, Oregon has figured out a 
way to minimize nursing home placements while maximizing 
community-based options. We save lots of money, and we use it 
to serve lots more people in the ways that they want to be 
served.
    We are the only State in the country that has fewer people 
in expensive nursing home care than we did 20 years ago. The 
Oregon long-term care system serves seniors and people with 
disabilities with a one-stop shopping approach. Most of the 
system is administered through local AAAs like my own, whose 
staff serve as navigators and gatekeepers.
    Also, as we developed options for Medicaid clients, these 
choices became available for older adults and people with 
disabilities who are not eligible for Medicaid, allowing them 
to stretch their personal resources further and delay or 
eliminate reliance on public resources.
    A final part of my testimony today will focus on ways in 
which our agency has strategically viewed threats such as 
funding decreases and other challenges such as demographics as 
opportunities for innovation and creativity.
    Oregon is graying faster than most States. People 85 and 
older are the fastest-growing age group in our State. They will 
double in 20 years. Nearly one in five is low-income, and 50 
percent have significant long-term care needs. As this group 
ages and the boomers join them, the demands and pressures, as 
you have heard from previous witnesses, on the long-term care 
system will be staggering.
    At our agency, we have taken a variety of actions to 
respond to these pressures. We have developed lease-purchase 
arrangements that will allow us to own two buildings and land 
after 15 years. For both buildings, planning began with 
feasibility studies that revealed that the cost of purchasing 
an operating space would actually cost less than continuing to 
lease commercial space. In 15 years, when we are no longer 
paying rent, we will have $500,000 a year to plow back into our 
programs.
    Ten years ago, we began an innovative way of stretching 
limited Title III-C nutrition funds by developing a seven-
county partnership with two other AAAs, Oregon Cascades West 
and Lane Council of Governments. Currently, this partnership 
provides 650,000 meals a year to about 11,000 seniors in 32 
communities. The economy of scale created immediate financial 
rewards for all three agencies. The initial rate for the meals 
was down 12 percent. Today, 10 years later, we pay 69 cents 
less per meal than if the consolidation had not occurred. 
During this project, the three programs have realized a savings 
in excess of $1.8 million--a lot of money in a small State like 
Oregon.
    If all we had done was save money, this consortium approach 
to Older Americans Act nutrition services would have been a big 
success. But we were not only able to cut costs but also to 
improve and enhance the actual meals service through the 
reinvestment of savings. We started a dual-entree system, 
including one ``heart-healthy'' choice per day. We have a high-
quality program featuring from-scratch cooking tailored to the 
tastes of Northwest seniors, and we started a frozen meal 
program that provides weekend meals, serves rural communities 
too small for a meal site, and gets homebound meals to 
geographically isolated individuals.
    Since this frozen meal program began in 1996, it has grown 
by nearly 62 percent, all paid for with savings from the 
reinvention of how we contract for the noon lunch program.
    Building upon the successful food service consortium, we 
are jointly contracting for in-home services with the same 
partners. We do not expect to leverage the same type of savings 
as the food project, but we have already stabilized costs and 
made sure that we are always likely to have a stable in-home 
services contractor in place.
    Thank you for the opportunity to share this information 
with you. I hope I have offered you some suggestions that can 
be replicated in other parts of the country. I look forward to 
answering your questions.
    [The prepared statement of Mr. Donenfeld follows:]

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    Senator Craig. Barry, thank you very much. I have watched 
Oregon from Idaho for a good number of years, and I know that 
in the areas that you are involved with, there has been a great 
deal of effort to innovate and create different approaches.
    This would be a question for both of you. First, Joan, and 
then, Barry, you mentioned that you had ``saved lots of 
money.'' But Joan, in your testimony, you cited a startling 
statistic that Ohio's home- and community-based Passport 
Medicaid waiver program keeps people out of nursing homes and 
in their homes for about $11,000 per year versus $52,000 a year 
that a nursing home would cost--and yet you testify that Ohio 
this year is cutting the Passport program and not nursing home 
care.
    If the cost-effectiveness of home-based care is as dramatic 
as you say, I guess I would have to ask why is the legislature 
doing that? But I would also then ask the question of Barry, 
can you give us some similar analyses, particularily because 
you have spoken to similar savings that have occurred in Oregon 
by shifting away from institutional care and toward home and 
community-based care?
    Ms. Lawrence. Thank you, Mr. Chairman.
    Actually, the 6 percent cut came from the administration. 
As you know, States have to have a balanced budget, so it was 
simply that we had to come up with--I think it was $1.5 billion 
that they were looking for. They protected Medicaid from cuts--
--
    Senator Craig. So it was a holdback based on budgets?
    Ms. Lawrence. Yes. There was no real discussion of whether 
or not to cut nursing homes per se. There is going to be 
conversation not just about nursing homes but about hospitals. 
We have already negotiated, as some of the other speakers have 
alluded to, a change in our prescription drug reimbursement. We 
are going from the average wholesale price minus 11 to average 
wholesale price minus 9--or am I saying it the wrong way--in 
any event, the way it saves more money. The pharmacists are 
challenging that, but I suspect it will hold up.
    So our Medicaid director has listed a variety of things 
that might keep us in check. She did, however, testify at the 
legislature a week or so ago that she felt that through the end 
of this fiscal year, through June 30, she would not have to 
propose additional cuts. Next year, the Governor is assuming 
that some of the cuts will continue, including ours. When I 
said I was hoping I could get him to change his mind, it was 
for next year; I am going to be saying just what I said here.
    Senator Craig. I see.
    Barry.
    Mr. Donenfeld. In our State, I think we have had the 
opposite experience. We have been on a 20-plus-year journey of 
essentially having as many of the people who qualify for 
Medicaid long-term care be in community-based settings as 
opposed to nursing homes, to the point where now only one in 
four of our Medicaid long-term care clients are in a nursing 
home setting, and the other 75 percent are in some type of----
    Senator Craig. But comparatively speaking, how much does 
community-based care save over what would be a contemporary 
nursing home cost?
    Mr. Donenfeld. Our community-based rate, which is then a 
blend of all the different community settings, some higher and 
some lower, runs at about $785 a month, and our nursing home 
runs at around $2,800 a month--so roughly four-to-one. That has 
been fairly consistent over the 20 years. The rates, of course, 
over that period of time have all gone up due to inflation, but 
that ratio has remained fairly constant.
    We have also learned that any time we have attempted to 
reduce access to community-based options, the nursing home 
counts do in fact go up, and you wind up spending the same or 
more dollars because of the entitlement to the nursing home 
placement than you do, and you are serving people in ways that 
they do not wish to be served.
    So we have deliberately, I think, in a bipartisan way in 
Oregon prioritized maintaining the community-based side of the 
long-term care system as a very high priority.
    Senator Craig. One last question before I turn to my 
colleague. Mr. Donenfeld, you singled out specific ways that 
you and your programs have stretched existing dollars to better 
maximize service to seniors, and I am particularly interested 
to your approach of pooling resources and purchasing among 
different area agencies on aging in your region.
    In your experience in Oregon and as the national President 
of the Association of Area Agencies on Aging, do you believe 
that this kind of pooled approach could or should be used more 
widely nationwide, and can such pooling and group purchasing be 
done in the absence of special waiver circumstances such as you 
have in Oregon?
    Mr. Donenfeld. Let me try to answer all of those questions. 
Yes, I believe it could be done in many parts of the country. 
This is an Older Americans Act program, so it does not require 
any special waivers. It is something that each State could do, 
depending on the view of the State Unit on Aging toward these 
arrangements. Our State Unit on Aging was extremely receptive 
and extremely cooperative, and I would imagine that most of the 
State Units on Aging would be with a project like this that has 
the ability to both stretch resources and actually improve the 
daily quality of the program at the same time.
    Should it be used? I think that in our area, it was 
relatively easy to make that decision because the population 
dynamics of the seven counties are very similar. The profile of 
the older people who live in the seven counties, even though 
they are served by three different agencies, is very similar.
    So I think that in places where those kinds of similar 
profiles would exist, it would be very simple to take this 
approach. In other parts of the country--take the San Francisco 
Bay area, where there are multi-ethnic and cultural groups, 
many of which have separate meal programs that serve ethnic 
food based on the diversity that exists there--it might be much 
harder to take that kind of approach, because a contractor 
would not get the economy of scale that he got from being able 
to cook the same menu for essentially three times as many 
people as he would if each of us had bid our program 
separately.
    Senator Craig. I see. Good point.
    Mr. Donenfeld. So I think that is applicable in many parts 
of the country where there are geographically contiguous areas 
with similar profiles; in other areas, it may not be so 
applicable.
    Senator Craig. Thank you.
    Let me turn now to my colleague, Senator Carper.
    Senator Carper. Ms. Lawrence, where do you live?
    Ms. Lawrence. I live just north of Columbus.
    Senator Carper. In Worthington?
    Ms. Lawrence. Close.
    Senator Carper. Where?
    Ms. Lawrence. Southern Delaware County; close to 
Worthington.
    Senator Carper. No kidding. I am from Delaware.
    Ms. Lawrence. Whom do you know in Worthington?
    Senator Carper. I went to Ohio State; I know a lot of 
people there. I went to Whetstone High School, graduated from 
Whetstone High School.
    Senator, if you will just indulge me, I went back to my 
high school reunion about 2 years ago. I was Governor then, and 
I drove in with a State trooper. We were trying to find this 
golf club where they were having the reunion for Whetstone High 
School. It was getting close to 7 o'clock, and at 7 o'clock, 
they were supposed to take the class picture, and the last 
thing I wanted to do was to miss being in the class picture 
having driven all the way from Delaware to be there for the 
event.
    If you know where the Columbus zoo is, this golf course was 
close to the Columbus zoo. We found the zoo, but we could not 
find the golf club. So it was 6:45, and time was bearing down 
on us, and we decided to stop at a convenience store and get 
directions.
    A friendly looking fellow was coming out of the convenience 
store, and I said, ``Sir, we are trying to find my high school 
reunion. It is at such-and-such golf course. Could you tell us 
where it is?'' He said, ``It is not far away. Go down there, 
take a left, then a right, and it is about a mile.'' We said 
thanks a lot, and he asked, ``Where are you from?'' I said, ``I 
am from Delaware.'' He said, ``What do you do there?'' At the 
time, I was Governor of Delaware, and I said, ``I am the 
Governor.'' Keep in mind, for people who do not know, that 
Delaware is a little town 30 miles north of Columbus. He said, 
``Well, I work in Delaware almost every day of the week.'' I 
could just see this guy going to work on Monday morning, 
saying, ``I did not know we had our own Governor. I thought 
Taft was Governor. I met this guy at the convenience store, and 
he said he was the Governor.'' [Laughter.]
    Ms. Lawrence. I believe it--and I think, by the way, in 
Delaware County at last count, we had 30 golf courses, so no 
wonder you could not find it.
    Senator Carper. I served with Bob Taft, your Governor, and 
he is a good friend, he and Hope, so when you see him, give him 
our best from the ``other'' Delaware, if you would.
    Would each of you take a minute and describe for us the 
prescription drug assistance programs that your States offer to 
senior citizens?
    Ms. Lawrence. Well, my description, Mr. Chairman, Senator 
Carper, is not going to be very long because unless they are on 
Medicaid, we do not do much. We do have in our department a 
Golden Buckeye Card program which offers 10 percent discounts 
in retail stores that participate, and many of the pharmacies 
do.
    The Governor this session of the legislature has been 
trying to get, with our help, an extension of that discount so 
that it could be more like 20 percent, or 25 percent, with help 
from the pharmacists and with help, we hope, from the 
manufacturers with rebates through, perhaps, a prescription 
benefit manager. But that bill has not yet made it through the 
process, largely because the pharmacists and the retail chains 
are very upset that some of that discount comes out of their 
pockets.
    We are still hopeful that we can get it. I keep thinking we 
should be able to turn the argument, because the pharmacists do 
grant those discounts to everybody who has insurance coverage 
or who is on Medicaid, but this last full-paying customer, the 
senior without coverage, is to pay full price so that they can 
protect their profit margin.
    In any event, we do hope we get it. Unfortunately, I do not 
have any other piece of decent news. There are a lot of people 
talking about the tobacco money, so they set aside $500,000 for 
prescription benefit assistance, but no one has been able to 
figure out how to use it effectively. They are considering 
using it now for advertising the existing discount card 
programs, which most seniors do not know exist.
    So that is not a very good answer, I am afraid.
    Senator Carper. But a straight answer. Thank you.
    Mr. Donenfeld.
    Mr. Donenfeld. Senator Carper, Senator Craig, my answer 
would be very similar. Unfortunately in Oregon, we do not have, 
other than as Joan mentioned, for Medicaid beneficiaries a 
prescription drug assistance program at all. Our legislature in 
its last session set aside some funds to start one next fiscal 
year, which have been cut as a result of our recent budget 
crisis. It was a very small amount of money, and it was going 
to provide limited assistance to the poorest of the poor, and 
now that is not going to happen at all.
    So I do not know--given our current budget deficit, with 
the changes that you referred to, Senator, from the economic 
stimulus package--there was a report in our local paper 
yesterday that Oregon is going to lose $148 million from those 
changes, which brings our budget deficit up to about $1 
billion. I do not think we will get there any time soon.
    Senator Carper. OK. In our State, we have taken a 
combination of funds from a foundation, moneys that are donated 
by a foundation for the purpose of providing for some of the 
medical needs of our poorest elderly citizens, and we have 
added to that a portion of moneys that we have received through 
the tobacco settlement, and we provide prescription assistance 
to senior citizens, people 65 and over, people who are disabled 
and unable to work, up to about 200 percent of poverty. In our 
little State, we have about 750,000 people, but we are able to 
literally serve the needs of thousands and thousands of people 
now.
    We do not use all the tobacco money for this purpose, but I 
would say maybe a bit less than half of it. That will probably 
grow over time.
    Delaware is not alone in providing that kind of 
prescription assistance. Our neighbors in Pennsylvania and 
other States do as well. Senator Craig, Senator Breaux and I 
and others are mindful of the interest and I think compelling 
need for a prescription drug program within Medicare. I think 
that if we were inventing Medicare anew today, we would include 
in it a prescription assistance program, because there are so 
many things that we can do with prescription medicines today 
that we could not do in, say, 1965.
    I think of my own mom, who is an Alzheimer's patient and 
lives in a nursing home now in Kentucky, close to my sister and 
close to my mother's sister. She takes any number of 
prescription drugs which help keep her alive that frankly were 
not around when Medicare was created. They actually help to 
give her a pretty decent quality of life given the fact that 
she has fairly advanced Alzheimer's disease.
    We are only going to get better at developing new 
pharmaceuticals to treat, whether it is Alzheimer's or 
Parkinson's disease or a variety of other maladies which make 
the later years of our lives, and sometimes not so later years 
of our lives, pretty unpleasant. It is important that we have 
the ability to ensure that as those medicines are developed and 
can help keep people out of nursing homes or keep people out of 
hospitals, they are made affordable and available to those who 
need them.
    One of the challenges for us--and it always comes down to 
money; we have talked about that already, but it always comes 
down to money--one of the challenges for us is to take the 
roughly $300 billion that we put in our budget resolution a 
year ago for Federal prescription drug assistance and to use 
that to help meet a portion of the need. It does not begin to 
meet all of the need that exists.
    Someone told me last year that if you added up all the 
expected or anticipated prescription costs for people 65 and 
over for the next decade, it would add up to several trillion 
dollars. Well, let us just say that that several trillion is $3 
trillion--it might be a little more, it might be a little less; 
we will just assume that it is $3 trillion--and he Federal 
Government comes in with $300 billion. There are a lot of 
people in our country who get prescription benefits from an 
employer; they are retired, and they receive some help from 
their employers. What is important for us is that we actually 
do agree on a prescription assistance program, and if it is 
$300 billion or $350 billion or $250 billion, what is really 
critical is for us to design something so that we do not induce 
other States to pull out and withdraw their coverage, or that 
we do not induce other employers--in my own State, Dupont, 
Hercules, Chrysler, General Motors--they need to stay in the 
game, providing prescription assistance for their retirees, and 
for foundations, like the Nemours Foundation in my States, 
which helps as well.
    So the key for us--and it is a tricky one--is, as we 
develop a program for the Federal Government to provide 
assistance to some of the neediest people, that we do not 
provide an incentive for others to cut and run. Right now for 
States, given the kind of revenue situations that a lot of our 
States are facing, if there were a Federal program and States 
had the opportunity to cut their costs in this area and simply 
shift the burden over to the Federal Government, my guess is 
that one or two would.
    Ms. Lawrence. You would hear the great sucking sound.
    Senator Carper. You surely would. That is one of the 
challenges that we face and one that, as we go forward, we 
would welcome your help in addressing.
    Ms. Lawrence. Mr. Chairman, Senator, you are absolutely 
right, and the more you leave us hanging out here without 
prescription drug coverage, the more of us will attempt to come 
up with something. The maintenance of effort is going to be 
real challenge. There are some good programs. I wish we could 
do what Delaware did, but we are a bigger State, and it makes a 
difference in the ability to even dream about it.
    I read recently about an individual city in Kentucky that 
has put together the kind of package Delaware did--a foundation 
and then manufacturers' rebates--and they are covering everyone 
up to 200 percent of poverty. No one has to worry about a 
prescription. That is good, but of course, it is just that 
city.
    Senator Carper. It is really good unless you are at 201 
percent of poverty, and you have a huge prescription drug need. 
You cannot wipe every tear from every eye, but we are doing our 
best to help where we can.
    Ms. Lawrence. Mr. Chairman, Senator Carper, you are right. 
The hard part is for you to design something that does not take 
away all that is already going into it, but I want to go back 
to something I said about nursing home placement versus home 
and community-based care and the need for alternatives.
    One of the questions we get from the Federal level but also 
from the State level is if we were to add an ability to pay for 
assisted living to some extent as a first step--we keep people 
in home and community-based care, and 50 percent of them 
eventually do go to a nursing home, but if half of that 50 
percent could go in the interim for a year or whatever they 
could to an assisted living facility, that is a savings right 
there. How do you keep that from expanding to a much bigger 
coverage group? Well, one way would be to tie it to the waiver 
program recipients; start with the people who are already 
receiving in-home care and can no longer safely stay at home 
and let them use another system in between.
    That would be one way to try to control the costs but do 
something that is cost-effective.
    Senator Carper. Thank you.
    Thank you, Mr. Chairman.
    Senator Craig. Thank you, Tom.
    Joan, Barry, thank you very much for your time and your 
testimony. It is extremely valuable as we wrestle with this 
sizable problem in our country that begs for a solution now.
    Tom has mentioned his interest, and I share that interest. 
I hope we can step back from the politics of the issue and look 
at it anew and design a new Medicare prescription drug program 
for this country that accomplishes what we want to accomplish 
as far as seniors and still allows that level of community 
participation that you are talking about, which is every bit as 
important for the payment. What is most important is the 
community involvement in the caring for our seniors. I do not 
think we ever want to create a Federal program that just does 
it all, the character of our country being what it is. I think 
community involvement will be an extremely valuable part of any 
solution--the dynamics of those communities, large and small, 
who reach out, provide for, and participate in the caring for 
this particular demographic group which is a pretty darn 
valuable group.
    Thank you all very much. The committee will stand 
adjourned.
    [Whereupon, at 11:21 a.m., the committee was adjourned.]

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