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S. HRG. 107–491

BROKEN AND UNSUSTAINABLE: THE COST CRISIS

OF LONG-TERM CARE FOR BABY BOOMERS

HEARING

BEFORE THE

SPECIAL COMMITTEE ON AGING

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

WASHINGTON, DC

MARCH 21, 2002

Serial No. 107–22

Printed for the use of the Special Committee on Aging

(

SPECIAL COMMITTEE ON AGING

JOHN B. BREAUX, Louisiana, Chairman

HARRY REID, Nevada

HERB KOHL, Wisconsin

JAMES M. JEFFORDS, Vermont

RUSSELL D. FEINGOLD, Wisconsin

RON WYDEN, Oregon

BLANCHE L. LINCOLN, Arkansas

EVAN BAYH, Indiana

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JEAN CARNAHAN, Missouri

LARRY CRAIG, Idaho, Ranking Member

CONRAD BURNS, Montana

RICHARD SHELBY, Alabama

RICK SANTORUM, Pennsylvania

SUSAN COLLINS, Maine

MIKE ENZI, Wyoming

TIM HUTCHINSON, Arkansas

PETER G. FITZGERALD, Illinois

JOHN ENSIGN, Nevada

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 John Breaux ......................................................... 1

Prepared statement of Senator Larry E. Craig ..................................................... 3

Prepared statement of Senator Debbie Stabenow ................................................. 3

Statement of Senator Jean Carnahan ................................................................... 40

PANEL I

Hon. Paul Patton, Governor of Kentucky, Frankfort, KY .................................... 4

Hon. David Walker, Comptroller General, U.S. General Accounting Office,

Washington, DC ................................................................................................... 17

APPENDIX

Statement from the American Association of Homes and Services for the

Aging ..................................................................................................................... 49

Statement from Yung-Ping Chen, the Frank J. Manning Eminent Scholar’s

Chair in Gerontology at the University of Massachusetts Boston ................... 55

Testimony from the American Health Care Association ...................................... 60

(III)

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BROKEN AND UNSUSTAINABLE: THE COST

CRISIS OF LONG-TERM CARE FOR BABY

BOOMERS

THURSDAY, MARCH 21, 2002

U.S. SENATE,

SPECIAL COMMITTEE ON AGING,

Washington, DC.

The committee met, pursuant to notice, at 9:35 a.m., in room

SD–628, Dirksen Senate Office Building, Hon. John Breaux (chairman of the committee) presiding.

Present: Senators Breaux, Carper, and Carnahan.

OPENING STATEMENT OF SENATOR JOHN BREAUX,

CHAIRMAN

The CHAIRMAN. The Committee on Aging will please come to

order. Our ranking member, Senator Craig, is on his way, so we

will go ahead and begin. Our Committee on Aging, as most of you

know who are here as guests and also our witnesses, has a responsibility to really look ahead and see that we as a nation are prepared to address the long-term health needs of the pending age

wave of 77 million baby boomers that are part of our country who

are right on the brink of becoming eligible for entitlement programs such as Social Security and Medicare.

Over the past few years, we have had many hearings on the

question of Social Security reform and Medicare reform, and we

have tried to find some solutions to these very, very difficult problems.

Now, of equal importance, we are focusing in on the problems

that we as a nation are experiencing along with our states on the

question of Medicaid, a combination Federal-state program, in trying to find out what the problems are and what we as a nation

might do now to prepare for this problem that is awaiting us all.

Medicaid was originally designed, as most people know, as a

health program to provide health care for our nation’s people who

are on the edges and, in fact, are in poverty themselves. It was basically a program for poor people to provide them adequate health

care.

It is really tearing into our nation’s de facto long-term health

program, and it was never intended to do that. But most people in

this country now get long-term health care through the Medicaid

program, which was originally designed only to provide health care

for people in poverty-type conditions.

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The unfortunate thing is that you see people having to spend

down their life savings in order to be able to qualify. That is degrading and it is not how it should work. So I think it is clear that

we as a nation can do much better as we focus in on solutions to

long-term health care.

Clearly trying to make the Medicaid program a long-term health

care program without significant changes is simply not going to

work. It was never intended to do that. We have sort of forced it

to try and meet that need. It is interesting to note that the Federal

Employees Health Benefit Plan, which I and folks behind me are

probably all in and nine million other Federal employees as well,

is beginning to offer a program for long-term health care insurance

for Federal workers.

I think that that sets a good example as to what are the possible

solutions to this very serious problem. But it is an issue that just

cannot continue to be ignored and swept under the rug. We have

two distinguished witnesses this morning to present testimony.

We are delighted to have Governor Paul Patton of Kentucky who

is a distinguished Governor back in Kentucky. It is interesting that

they tell me that, Paul, you were the first Governor of Kentucky

in 200 years to be reelected to a second consecutive term. That is

an outstanding achievement. In my State of Louisiana, you get in

once, you are almost guaranteed a second term.

You serve now as vice chairman of the National Governors’ Association, and in July will become the chairman of the NGA, and you

have been a real leader in this whole effort in determining what

we do as a nation in long-term health care and health care problems, and we are very, very pleased to have you give us your

thoughts on this issue today.

We also are delighted to have once again David Walker who is

Comptroller General of the General Accounting Office and has been

there since 1998. I want to thank him for appearing once again.

You have been with us, I think, for eight hearings on long-term

care and the problems of Medicare and Social Security.

GAO has just done an outstanding job for this committee and for

many other committees in the Congress in doing special work on

some very significant issues. Mr. Walker himself has a long history

on these entitlement reform issues and has served as a public

trustee for both Social Security and Medicare, and we have worked

with him on these issues and have been very pleased with the work

that he has personally done, as well as the work that the General

Accounting Office has done, particularly for this committee.

Gentlemen, we thank you both. Governor you may go first. If you

would like to start, we would be pleased to have your testimony.

[The prepared statement of Senator Breaux follows along with

prepared statements of Senator Craig and Senator Stabenow:]

PREPARED STATEMENT OF SENATOR JOHN BREAUX

This committee has the responsibility to look ahead and see that as a nation we

are prepared to handle the long-term care needs of the pending ‘‘age wave’’ of 77

million baby boomers. Over the past few years we have had many hearings on Social Security and Medicare reform and tried to move closer to solutions. Now, of

equal importance, we are tackling Medicaid reform and examining Medicaid’s growing role in financing long-term care.

Although Medicaid was originally designed to provide health care to low-income

women and children, it has become our country’s ‘‘de facto’’ payor of long-term care

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for elderly and disabled. Most people do not know that Medicaid expenditures are

now outpacing Medicare nor do they realize that Medicaid is the second largest expenditure for state budgets. The unsettling notion here is that we have no real, comprehensive long-term care system in this country and yet we are spending billions

of dollars for a system that was not designed—it just evolved. Unfortunately, the

system we have is inefficient, outdated, incomplete and unable to meet the needs

of current or future recipients.

Simply stated, this is an issue that just can’t wait.

PREPARED STATEMENT OF SENATOR LARRY CRAIG

Thanks to Chairman Breaux’s leadership, this committee has held many hearings

on the issue of long-term care. Today we are holding what may prove to be one of

the most important hearings on the subject. This hearing will be a hard look at the

finances that will be required to care for the 77 million aging baby-boomers as they

start retiring within the next ten years.

This committee is very aware that the long-term care system that we have in

place now most likely will not be able to accommodate the needs of the soon-to-beretiring. Not only does our current system lack a coherent system of care that seniors can turn to for help, but as this hearing will demonstrate, a solid financial foundation for the future may not be in place either.

Last week this committee heard from LT. Governor of Idaho, Jack Riggs, and Karl

Kurtz, the Director of Idaho Health and Welfare regarding the tight fiscal constraints they have to consider when developing Medicaid and long-term care policies. States like Idaho are having to make substantial changes right now in their

policies to provide care to current beneficiaries, and this says nothing of the changes

they will need to make to prepare for the future. As I am sure we will hear from

Governor Patton, these fiscal strains are felt in all states.

If long-term care financing changes are not made to our current system, both

state and federal governments may be unable to meet the needs of the many seniors

who depend on these programs. This country has focused many debates on the important need to keep Social Security and Medicare solvent, yet little attention has

been given to the need to shore up long-term care finances. For this reason, I am

happy the committee is looking at this topic and I welcome the opportunity to discuss this issue further.

I am delighted that Governor Patton is here to share some of the issues that he

is facing in Kentucky and I look forward to Mr. Walker’s testimony and his analysis

on projected spending of long-term care.

PREPARED STATEMENT OF SENATOR DEBBIE STABENOW

Chairman Breaux and Senator Craig, I thank you both for holding this important

hearing. Long-term care services are becoming increasingly important. As our population ages and lives longer, the amount of care we need increases. I am glad you

are bringing attention to the fact that the way we pay for these health care costs

today is increasingly problematic and will need to change as the baby boomers begin

to require these services. Today’s hearing will provide a basis from which we can

create effective and efficient changes for covering these costs.

Today, Medicaid pays a significant amount of long-term care costs. If patients do

not meet the strict qualifications for Medicaid, often their only other option is to

pay for these critical services out of pocket. Due to the increasing costs of health

care and prescription drugs, this option is not available to many of our seniors. We

all know that this problem will only get worse as the baby boomers get older. Medicaid funds are already stretched in many states, as we discussed last week. As more

and more seniors enter the Medicaid roles, those funds, as they are structured now,

will not be adequate to help provide our seniors with quality long-term care.

It is vital that we review how long-term care is funded. we must also review ways

in which we can educate and encourage baby boomers and young people alike to invest in long-term care insurance. I am very excited about the new initiative offered

to federal government employees and their families for purchasing long-term care

insurance. We must consider programs like this and other innovative methods in

order to ensure that we provide our seniors with the quality care that they deserve.

I am very interested in hearing from our witnesses today on this important issue.

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STATEMENT OF HON. PAUL PATTON, GOVERNOR OF

KENTUCKY, FRANKFORT, KY

Governor PATTON. Thank you, Chairman Breaux, for the opportunity to appear before this Special Committee on Aging and discuss some serious problems with long-term care and the Medicaid

program. I do appear both as Governor of Kentucky and on behalf

of the National Governors’ Association, and quite simply we have

at present a crisis in Medicaid that is heading toward catastrophe,

and so we need to have some short-term relief, and we need longterm solutions.

During the years when revenue was increasing, states were able

to keep up more or less with the growing Medicaid expenditure. It

was not easy given the pressure to find money for education, public

protection, and other vital state services, and it also was not easy

given the rapid growth of the cost of Medicaid.

The return of medical inflation and the new dynamic of pharmacy spending, growth of 20 to 25 percent a year, have made it a

real challenge. The demands have been such that Medicaid now

takes on average 20 percent of state budgets across the country.

Let me illustrate the problem by relating our experiences in Kentucky since I became Governor 6 years ago. During that period,

Kentucky state government revenue has increased about 26 percent. The consumer price index has increased 16 percent, so we

have had real growth, but we have experienced increases in our expenditure for elementary and secondary education of only 20 percent. That is it did not get its proportional part of the real growth.

Our social programs only grew by 18 percent, barely kept up

with inflation. Our Medicaid program has increased 47 percent, almost double the growth in actual state revenue.

When revenue was growing, we really could not say no to the

real medical needs of our needy citizens. Now that revenue growth

is stagnant, we have no other choice. While my legislature was

willing to give Medicaid more than its share of our growth revenue

over the past 6 years, it is unwilling to take money away from

other needed programs or to raise taxes to pay for double digit annual increases in the cost of providing the services that our Medicaid program has promised to our people.

Because of the downturn in the national economy, the Kentucky

general fund revenue in the second year of the next biennium, and

we are just right in that budget right now, is estimated to be less

than the originally budgeted expenditures for the current fiscal

year. Our challenge is to find ways to not cut services when we

have less money than we had the year before.

There is absolutely no way that we can absorb a 10-percent increase in Medicaid with a zero percent increase in revenue. Our

only choices are to increase taxes, and that is not going to happen,

or decrease services, unless the Federal Government steps to the

plate and helps us.

We will be forced, and I think this will be true of all the states,

to cut optional services and/or optional eligibles by the end of the

next biennial budget cycle. This is not what government is supposed to be. So while I am here today to discuss the burden of longterm care costs in the Medicaid program, I want to make an urgent

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plea for some short-term relief, specifically, a temporary increase in

the Federal match rate to states.

I know, Mr. Chairman, that you and perhaps other members of

the committee serve on the Finance Committee, so I would like to

ask you to carry this request for us. It is a very important issue

to the states. We are having a hard time keeping our heads above

water.

But there is another reason that Medicaid programs are in trouble. Demand for long-term care service under the Medicaid program is growing so rapidly that it will bankrupt state budgets unless another form of financing is found, and because of this, Mr.

Chairman, I am here to tell you that the Medicaid program is indeed broken and unsustainable.

Traditionally, states took care, as you say, of the poor and the

Federal Government took care of the needs of the elderly. Medicaid

was created to provide health care to those on welfare, mostly

moms and kids and folks that we really expected to eventually get

back into the workplace.

But it is fast becoming the program to fund long-term care services in our country, and because the cost of caring for this group

is so great, it is crowding out our ability to care for our traditional

state mandates. Today, older and disabled beneficiaries account for

only one-third of Medicaid beneficiaries, but account for more than

two-thirds of Medicare expenditures.

A good bit of the financial burden of caring for the elderly

through Medicaid comes to the states through our own decisions to

provide coverage for optional programs. In fact, 83 percent of optional Medicaid spending is devoted to the elderly and disabled.

Pharmacy is an optional program, although all 50 states provide

pharmacy services. Various spend-down programs for the poor elderly are also optional, but ending these programs is not a realistic

option. What we need is flexibility in Federal law to tailor the resources that we have to stretch them as far as possible. Right now

it is all or nothing. If you run a program by Medicaid, you cannot

limit benefits or require adequate cost sharing, for example.

So I strongly urge that for those optional programs and services,

the states should be given broad latitude to design an affordable

program. The states have tried to deal with long-term care services

in as responsive a way as possible. Through the creation of home

and community based waiver programs and services such as adult

day care, states have sought to give the elderly choices other than

institutional placement, options which the states hope would cost

less than inpatient nursing care, but we found in Kentucky—and

I do not think it is unique among the states—that the demand for

these services is so great that the alternatives ended up being program expansions with no commensurate reduction in facility spending.

Why? For every individual in a nursing home, it is estimated

that there are as many as four people in the community who need

care. There is a sense of urgency in my remarks today, Mr. Chairman, because at the time when state and Medicaid budgets are rising annually at double digit inflation rates and most states are facing budget deficits, we must find long-range solutions or we will be

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ill-prepared to meet the long-care needs of those 77 million baby

boomers that you referred to.

This is not an issue that can be put on the back-burner until Social Security and Medicare are reformed. It is an issue that will not

wait. Again, I congratulate you for your leadership, Mr. Chairman,

and that of the members of the committee for having the foresight

to begin resolving this crisis before the real flood of elderly persons

comes into the system.

No doubt hard questions about services, funding, expectations,

patient responsibility, shared program administration and Federal/

state responsibility will need to be asked and answered. When all

the Governors met late last month here in Washington under the

leadership of NGA Chairman Michigan Governor John Engler,

there was absolute agreement that a crisis is at hand, that it must

be confronted, and that the program must be changed if we are to

serve the needs of our families.

There was also consensus in calling for a national Medicaid commission to recommend fundamental long-term reform of the program. The scope of this commission would include a look at the

current and future capability of state government to finance health

care for populations and services that Medicaid currently covers, to

more clearly delineate between Federal and state roles and responsibilities and to make recommendations on how health care coverage should be provided to those who are dually eligible for both

Medicaid and Medicare.

It was recommended that this commission be formed as separate

from the NGA and should include bipartisan representatives from

the administration, members of the House and Senate, Governors,

and nationally recognized experts in the field.

So I urge you to join us in supporting the creation of a Medicaid

commission to ensure that the very best minds in our country can

elevate this issue to the top of the national agenda. The commission can sort through the complex issues, make recommendations

for changes essential to the future of Medicaid program, and I hope

enjoy substantial bipartisan support at both levels of government.

We look forward to working with you as our partners because we

know that we need to tackle this problem together if we are to succeed. Again, thank you for the opportunity to be with you and we

would answer questions at the appropriate time.

[The prepared statement of Governor Patton follows:]

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The CHAIRMAN. Thank you very much, Governor Patton, for a

very precise and concise statement. We appreciate your being with

us and for your leadership. We would like to recognize now Mr.

David Walker, David, for any comment that you might have.

STATEMENT OF HON. DAVID WALKER, COMPTROLLER GENERAL, U.S. GENERAL ACCOUNTING OFFICE, WASHINGTON,

DC

Mr. WALKER. Thank you, Mr. Chairman.

The CHAIRMAN. Plus charts.

Mr. WALKER. There we go. We have got some big charts for you.

These are big numbers. You need big charts.

The CHAIRMAN. Those may get the award for the largest charts,

I will tell you that.

Mr. WALKER. You will need a bigger room next time.

The CHAIRMAN. Wow.

Mr. WALKER. Mr. Chairman, it is always a pleasure to appear before you in your various capacities and here as chairman of the

Special Committee on Aging to talk about a very important topic,

and that is long-term care. I would ask, Mr. Chairman, that my entire statement be entered into the record if that is all right, and

I will move to summarize it now.

The CHAIRMAN. Without objection.

Mr. WALKER. Thank you. I think it is important to be able to put

the issue of long-term care in context. On the right, Mr. Chairman,

I know this is a graphic that you have seen previously in various

capacities including your capacity as a member of the Senate Finance Committee.

I think we have to put this in the broader context. Because of

known demographic trends including the aging baby boom generation and rising health care costs, primarily because of those two

reasons, the Federal Government faces severe long-range fiscal

challenges of unprecedented proportions.

The chart on the right shows that if we assume that tax levels

as a percentage of the economy—these are Federal tax levels, percentage of GDP, which is the black line—if they stay constant, and

if we assume that discretionary spending grows at the rate of GDP,

which is historically what it has done over the last 10 to 20 years,

and if we assume that the Medicare and Social Security trustees’

best estimate assumptions are reasonable, then this is what our future looks like at the Federal level, that by the year 2030, we will

be faced with a choice of either cutting discretionary spending by

two-thirds or raising taxes at the Federal level alone by 30 percent

or some combination thereof.

The CHAIRMAN. The green is discretionary.

Mr. WALKER. The green is discretionary. That is correct, Mr.

Chairman. As you know, discretionary includes certain things like

national defense, it includes our judicial system, infrastructure investments, the Federal portion of education, and a variety of other

items that are deemed to be discretionary spending.

If we look out to 2050, the Federal Government faces a choice of

either doubling Federal taxes or cutting Federal spending in its entirety by 50 percent. Now, again, these are based on CBO’s projections of economic growth. It is based upon the Social Security and

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Medicare trustees’ best estimate assumptions, and I think a reasonable assumption of what discretionary spending is likely to grow

in the future.

The CHAIRMAN. Could I interrupt?

Mr. WALKER. Yes, Mr. Chairman.

The CHAIRMAN. If you had another block in there between 2000

and 2030, you know, split the difference, and maybe 2015, where

would that line likely to be?

Mr. WALKER. Well, as you know, Mr. Chairman, it gets progressively worse between 2000 and 2030. These are just point in time

estimates, and I think one key date, Mr. Chairman, would be in

2016 based upon the last Social Security and Medicare trustees’ report. That is when Social Security and Medicare start turning

negative cash-flow which has real fiscal implications for the government. Even though the trust funds still have assets, we start running negative cash-flow at that point in time.

The CHAIRMAN. In Social Security?

Mr. WALKER. Social Security and Medicare.

The CHAIRMAN. And Medicare both.

Mr. WALKER. We would be more than happy to provide that information for you if you want.

The CHAIRMAN. I think that would be helpful to show that a lot

of Members of Congress—I do not mean to interrupt your testimony.

Mr. WALKER. No, that is fine.

The CHAIRMAN. But since it is just you and I, we can do that.

The question is a lot of members will think I am not going to be

here in 2030, you know, somebody else will solve that problem

then. I am looking in the short term. The short term really is 2015.

I mean that is not that far in the distance as far as making

changes now that will be available in 2015.

So I think to bring it closer to a sense of immediacy, you know,

I think it would be helpful to concentrate on that 2016 timeframe

and let us see something on that. 2050, I mean, you know, nobody

in this room will probably be here, I guess. Well, maybe.

Mr. WALKER. Well, I hope some of the people against the back

wall will be. I am sure they do, too.

The CHAIRMAN. As chairman of the Aging Committee, I stand

corrected. You are right. [Laughter.]

But I mean if you give us something on that 2015, I think it

would be very helpful.

Mr. WALKER. I think your point is an excellent one, Mr. Chairman. We will do that.

But I think while it is important to be able to help members understand this, and I think that clearly would be a help, I think

members also have children and grandchildren, in some cases

great-grandchildren. I think one of the things that I find that you

have to do is to be able to put a face on these issues, and sometimes by thinking of close family members and loved ones, that

helps to do it.

So that is our future. It is clearly unacceptable. It is clearly one

that we have to face some difficult choices. As you see the red, the

red represents Medicare and Medicaid. By far, the fastest growing

portion until we end up getting to a period of time where debt

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starts amassing and therefore interest ends up becoming a major

portion.

If we look on the left here, Mr. Chairman, you will see the projected burdens of Social Security and Medicare and Medicaid as a

percentage of GDP, as a percentage of our economy, and you will

see how they are projected to grow dramatically.

Interestingly, while Medicaid clearly represents a major challenge for the state governments, as Governor Patton has noted, and

while their challenge is a more immediate challenge, and one that

obviously they believe cries out for action, at the Federal level,

Medicaid is actually our smallest challenge, although a considerable one, as it relates to these three major entitlement programs.

The bottom line is that we are going to have to make some tough

choices because we now have a situation where we have made

promises that are unsustainable, and we are going to have to go

about reconciling the differences between what people want versus

what they need versus what can be afforded and what can be sustained over the longer term.

There is a huge expectation gap among individuals, and I think

at the Federal and state level that ultimately we have to move to

try to reconcile.

The next board, I think, is helpful to be able to demonstrate

what is happening in the long-term care area, because the next

board will demonstrate that long-term care, and these are in constant 1999 dollars, is projected to increase significantly, as the Governor mentioned, in the years ahead, and the red represents the

Medicaid portion of spending as it relates to total long-term care.

Bottom line, Mr. Chairman, I think one of the things we have to

keep in mind is that long-term care is not just a health care issue.

It also comprises a variety of services for the aged and disabled

persons that deal with maintaining quality of life, including housing, transportation, nutrition and social support, to help maintain

independent living.

Given the challenges of providing and for paying for these different types of services and the growing population and the growing needs, we think it is important to be able to look at this from

a variety of dimensions which I lay out on page two of my testimony. You need to look at what is the appropriate division of responsibilities, not only between the Federal and state levels of government but also between individuals, family members and government and other parties, to look at the potential role of social insurance and financing, to do more with regard to education to encourage people to prepare more for what is likely to be a significant

need in future years, to recognize the fact that much of this care

is provided by family members or other friends and loved ones, and

that that does impose certain burdens and costs on those parties,

to recognize that we are not going to be able to fiscally sustain the

current system. We are going to have to make some tough choices.

In addition, I think it is also important to note that if you are

going to look at Medicaid, that we need to consider changes in

Medicaid or long-term care or long-term care as it relates to Medicaid and changes there as it relates to our broader health care challenges, Medicare and other challenges, because they do have domino effects.

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One of the things that the Congress is considering right now is

whether or not to add a prescription drug benefit. Clearly, when

Medicare was created in 1965, prescription drugs were not as important or prevalent. They now are. However, we already know

that we have got an unsustainable program, and so we are going

to have to start making some tough choices as to how should this

program be designed, administered, how should the burdens be

shared, and there are things that could be done in the short term

that quite frankly we may not be able to fiscally sustain in the

longer term. Trying to be able to recognize that and have that as

an important part of current debates, we believe is imperative for

our children, grandchildren and those that will go after them.

So Mr. Chairman, I hope this is helpful to you, and I am more

than happy to be able to answer any questions that you may have

and Senator Carnahan.

[The prepared statement of Mr. Walker follows:]

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The CHAIRMAN. Thank you very much, Mr. Walker, for an excellent statement. Let me just ask you before I begin with the real

questions a factual thing. The increases on the Medicare and Medicaid, the projections, would that include a Medicare program that

would have prescription drugs in it or it does not?

Mr. WALKER. No. No, it does not.

The CHAIRMAN. Because it does not now. So that does not even

include Medicare with prescription drugs?

Mr. WALKER. No, it does not, Mr. Chairman.

The CHAIRMAN. Obviously, if you added a $750 billion prescription drug ingredient to Medicare today, which some are advocating,

that red box would be even substantially larger?

Mr. WALKER. Well, that is correct, and as you know, Mr. Chairman, the fastest growing cost in health care is prescription drugs,

and while some prescription drugs serve to end up reducing the

need for more acute care, many of them do not. So there is a net

cost increase, because a lot of prescription drugs are not just with

regard to extending life or saving life, but it is also something that

people want in order to enhance their quality of life, but it may not

necessarily be a need.

The CHAIRMAN. Well, thank you very much. Governor Patton,

thank you again for your statement. We have been joined by our

colleague, Senator Carnahan. Senator Carnahan, do you have a

statement you would like to make?

STATEMENT OF SENATOR JEAN CARNAHAN

Senator CARNAHAN. Thank you, Mr. Chairman. I certainly applaud your leadership on this issue of long-term care. This committee is focusing on a serious problem that is right around the corner.

The demographics in our country are changing rapidly. My home

State of Missouri has the 14th largest senior citizen population in

the country. The growth of Missouri’s 60 and over population now

outpaces all other age categories. Before we know it, the baby

boomers will be retiring and needing long-term care services.

We will not be prepared without laying the groundwork now.

Most Americans probably think little about this issue until someone in their family needs assistance. When this situation arises,

one of the first questions that comes to mind is what are the options? That is what we are discussing today, making sure that seniors have options.

We need to explore and support options that allow citizens to live

independently for as long as possible in their own homes and communities. That is why I have decided to cosponsor the Long Term

Care and Retirement Security Act.

This legislation would establish a $3,000 tax credit to individuals

with long-term care needs or their caregivers. Seniors are most

likely to receive long-term care from family members, typically

wives or daughters. Caregivers often lose wages and benefits, sometimes even jobs, to be able to care for family members.

These women provide care out of love, but to do so, they sometimes have to make a huge financial sacrifice. This tax credit would

make a real difference to families struggling to care for an ailing

loved one.

41

In addition, the legislation would create a tax deduction for the

cost of long-term care insurance premiums. These tax benefits

would help seniors pay for the high cost of long-term care insurance premiums and also provide incentives for younger people to

begin investing in long-term care insurance.

This legislation is a step in the right direction. I would like to

thank both the witnesses for being here today and I look forward

to hearing your testimony.

The CHAIRMAN. Thank you, Senator Carnahan, and thank you

for your cosponsorship of the legislation on the long-term care tax

credit. I think that is very important. I have questions, and I know

Senator Carnahan has questions, and we have a vote. So I think

that what we will do is take a short recess if that is OK and come

right back and get some discussion with you. The committee would

be in recess. [Recess.]

The committee will come to order. If everybody can take their

seats, we will continue. Governor, let me ask you questions. I know

you have to depart, and thank you very much for your patience. I

like your testimony up till the time when you start talking about

another commission. [Laughter.]

I think from a congressional standpoint, commissions really reflect what Congress should be doing ourselves. I mean, commissions normally, you know, the concept is that they are going to

make recommendations that Congress can accept. The experience

with commissions, Social Security and Medicare, which I chaired,

has really not been that good. I know we are looking for a way to

solve this, and I appreciate that. You know, perhaps a commission

is the right idea.

Let me ask you another question, in Kentucky, maybe from your

experiences. We are trying to say to the states that, look, long-term

care is not just nursing homes. Nursing homes are good for people

who need 24 hours a day, 7 day a week care. But many people in

nursing homes, at least a significant number in nursing homes,

really do not need to be there. Assisted living facilities or home

health care or something short of 24 hour a day, 7 day a week care

would be sufficient to meet their needs.

Has Kentucky utilized Medicaid waivers in order to use those

funds for assisted living facilities or other type of care short of 24

hour/7 day a week care facility?

Governor PATTON. Yes, but let me address briefly the commission. We are looking for a way to elevate this issue to its appropriate place, and we recognize that it is going to have to be a partnership with the Congress. So the National Governors’ Association

wants to work with you to try to figure out how can we bring attention to this issue.

Yes, Kentucky has a waiver on in-home care, but we find the

need so great that, to be very frank, the only way we are able to

contain the cost at all is just to limit the availability of service.

Even with institutional care, through certificates of need, we do not

allow nursing home beds to be built at a market demand because

we know that they would be filled and Medicaid would be picking

up a large part of that cost.

With our home care waiver, we have a fixed number of waivers

or the slots that are available, and when the slots are filled, then

42

the next person does not get the service. That is the only way we

can control the costs. If it were unlimited it is estimated that there

are probably four times as many people that would meet a definition of real need than is what is being served.

The CHAIRMAN. Do you remember what the reimbursement rate

for Medicaid Federal/state in Kentucky happens to be? 70/30? 65?

Governor PATTON. Kentucky’s rate is 70/30, 30 percent state.

The CHAIRMAN. 70/30. So if your costs in Medicaid have gone up

by 47 percent, what are you attempting to do with the legislature

to try and curtail, reduce those costs? How are you doing that?

Governor PATTON. Flexibility is the greatest thing that could

happen to us to reduce costs. Now there is a limit to how much we

could do, but Medicaid, as I understand it, is sort of one-size-fitsall. If you are going to provide some benefit, then you have to provide that benefit to all people that are eligible, and you cannot

have a different copay for different income levels. I am getting a

little deeper into this than I really know, but I know that if we

could tailor our optional benefits a little bit more closely to fit some

populations, it would make a tremendous difference.

Over the last year, we have had some experts and we have done

an awful lot of reducing the cost of our program. One of the things

that we have done has been to become more efficient in transferring more of the cost to the Federal Government by finding more

services than we have been providing that are, in fact, Medicaid eligible that we were paying 100 percent of the cost of.

The CHAIRMAN. Yes.

Governor PATTON. But we have gone as far down that road as

we can go.

The CHAIRMAN. Well, you have done some great work in Kentucky, and we admire you for it. I appreciate your leadership in the

National Governors’ Association on this issue. I would really hope

that what you said about elevating this issue to a level of national

debate and national discussion really can be what we accomplish

here.

I think the NGA can be a major player in that. Maybe it is another commission. I do not reject it out of hand, but I think, you

know, if we can work together on this with the NGA and the Congress, I think perhaps we can get some serious discussion. When

I left here, a reporter asked me outside of the Senate chamber

what are you all going to do about increasing health costs?

I said, you know, we are not going to do anything this year; it

is an election year. You know we are not going to make any real

decisions of major importance on Medicaid or Medicare because no

one wants to touch it, because it is such a volatile issue, and then

we are going to say, well, we will do it next year. But next year

never gets here, and that is the problem.

But we appreciate your leadership. I urge you to continue providing it when you become chairman of the NGA. We look forward to

working with you, and I understand you have to depart. So we appreciate your being with us and let you go.

Governor PATTON. Thank you, Mr. Chairman. We appreciate the

opportunity.

The CHAIRMAN. Thank you. Thank you very much, Governor Patton.

43

Governor PATTON. We do look forward to working with you in

partnership.

The CHAIRMAN. Yes, absolutely.

Governor PATTON. Thank you.

The CHAIRMAN. With regard to some of the things that Governor

Patton said, Mr. Walker, I become convinced that we operate

health care in this country under the box theory. Senator Kerrey

used to talk about this, that if you are a veteran, you are in the

veteran’s box at VA; if you are a poor American, you are in the

Medicaid box; if you are a working American, you are in an employer-sponsored health insurance box; if you are an old American,

you are in the Medicare box. Each one of those boxes has a complete bureaucracy that is set up to run it.

Medicaid program, the Medicare program, the VA program, the

employer’s sponsored health insurance, ERISA box. It just seems to

me that we as a nation ought to just provide health care for Americans and get out of the box system. What I am thinking about and

what I have been working on with other members is a concept that

the Federal Government should mandate health care insurance for

all Americans, not an employer mandated system, but federally

mandated requirement that every American have health insurance.

Every state in the union requires every American before they

drive a car or get a driver’s license to have liability insurance. People have accepted that and they understand they have to do it, and

there is no distinguishing difference between poor people or

wealthy people. It is just a flat law. You have to have liability insurance or you cannot drive a car.

We are thinking of the approach which would say that every

American has to have a health insurance policy, and we will help

buy it for poor people. It will be a graduated contribution to their

premium. For poor people, we will pay 100 percent of the premium.

Then on a sliding scale up to the point where people can afford to

pay for their own premium, perhaps with it being deductible on

their income tax.

We spend $300 billion a year on Medicare, $200 billion on Medicaid, billions of dollars on the VA program, billions of dollars on a

tax credit for employer sponsored health insurance because it is deductible. We could take all of that money and use it to have a program that we would be subsidizing and requiring everybody to

have health insurance.

Do you have any thoughts about that type of concept? I know it

is a long-term process, and it is not going to be done overnight, but

if we do not start, we will never finish. Do you have any thoughts

on that concept?

Mr. WALKER. Well, Senator, without specifically addressing the

mandate per se, let me address some elements that I think that

you touched on. I think what we have to recognize is we have a

lot of silos right now. You talk about it in terms of boxes. I look

at it in terms of silos. You know we have got, you know, Medicare.

We have got VA. We have got DoD. We have got all these things,

each with their own infrastructures, each with their own definitions of what is covered, and in many cases each with their own

delivery mechanisms.

44

I think we need to step back, and we need to say that what we

have right now is fundamentally broken, it is unsustainable. If

there is one thing that could bankrupt this country, it is health

care costs. All right. Now that is not going to happen. We will not

allow that to happen, but it is that serious.

So I think we need to step back and we need to say, OK, what

are fundamental needs, and how best can those needs be met? I

would argue for your consideration that access to health care at

group rates or, stated differently, guaranteed insurability; second,

protection against financial ruin due to an unexpected catastrophic

illness.

All right. Now, financial ruin is different if you are a multi-millionaire than if you have very little; OK. Inoculations for children

against infectious diseases. All right. So to try to define what are

the basics, what are the basics that people need and it is in the

national interest for them to have and how best to go about doing

that.

To the extent that people want more than that, then choices, options, and to the extent that they have resources, then obviously

they ought to put some of their resources on the table to be able

to make a more conscious choice about how much risk they want

to lay off versus resources that they are willing to put to do that.

I think you are right in saying you have got to put the tax preferences on the table. I think the tax preferences are part of the

problem right now. I would suggest that it is appropriate right now

for the employers to get a deduction, because if they do not get a

deduction, then they will not offer health care coverage. They will

just pay cash, and that could end up undercutting coverage.

On the other hand, right now all individuals get an income tax

exclusion for the value of health care, which further desensitizes

them to the cost of health care, and so there are different ways, I

think, you could go about it. But I think the idea that you need

to step back, you need to reassess, we need to focus on, you know,

what are the real needs, what is the appropriate role from the

standpoint of the individual versus the employer versus the government, tax side as well as the benefit, is the only way to go, because

right now we are on an unsustainable path and we are headed for

a train wreck of massive proportions. While the states are ahead

of us, because Medicaid is their biggest problem, that is our smallest problem.

The CHAIRMAN. I mean you make a very good point. And most

of the discussion in the Congress right now is not about reducing

the amount we spend in this area. If anything, adding $750 billion

prescription drug program to a Medicare program, we are going in

exactly the opposite direction as far as not controlling costs. We are

going to be adding to the government’s responsibility unless we fix

the program itself. Is that concern legitimate?

Mr. WALKER. Well, as you probably recall in your capacity as a

member of the Senate Finance Committee, one of the things I testified a year ago was different levels of fiscal risk that we need to

consider today: while there are things we can afford to do today,

are we going to be able to sustain it tomorrow? The area I said represented the highest fiscal risk is increasing entitlement spending.

45

Increasing entitlement spending when we already have a huge

delta, or huge gap, between what is promised and what funding we

have available for it right now, and the degree of difficulty in

changing entitlement promises represents the highest risk I believe

from a fiscal perspective.

The CHAIRMAN. My final question is how much of a risk is it if we are going to have a $750 billion prescription drug program, and

we just are going to pay for it out of Social Security surplus, which

is what some have advocated? I mean what does that do to that

system?

Mr. WALKER. Well, in the end, people will say, well, all we have

to do is grow the economy more and we will solve our problem, but

I think these charts, as you know, assume economic growth based

on CBO assumptions which are not that far different than OMB.

We are not going to grow ourselves out of this problem.

We are going to have to end up starting to make some of these

tough choices because Social Security might have a surplus today,

but it is not going to have one in the not too distant future—2016,

based on the latest Social Security trustees’ estimates. Frankly, the

trustees said when I was a trustee in 1992 that that program is

unsustainable in its present form, but, guess what, it is the easiest

thing to solve.

Medicare and Medicaid are much tougher, and the reason being

is in the case of Social Security I would respectfully suggest that

you can restructure that program. You and I were on a commission

together. There are different ways to do it. You can restructure

that program in a way that you exceed the expectation of all generations of Americans, because current retirees can get what they

are promised, near-term retirees can, and you can restructure it increasingly toward baby boomers, Xers, and Y. They are already discounting this program to a great extent, much greater than they

should. So you can restructure it so you give everybody more than

they think they are going to get, and also make it sustainable.

But the problem is the subject of this hearing, which is long-term

care, which is really not just health care. The Medicare and Medicaid, the imbalances are so huge, the expectation gaps are so great,

that we are going to have to start making some of these tough

choices. I mean the states are starting to do it. They are starting

to cut back. In certain areas where they were discretionary, they

are not required to provide.

But it would be great if we could do it more comprehensively,

which is what you are talking about, to step back and let us try

to rationalize the whole system and try to make sense of it now

rather than just incrementally just keep on chopping back to where

we have got a worse situation years from now.

The CHAIRMAN. Well, I could not agree with you more. I thank

you very much. We have been joined by Senator Carper. Tom.

Senator Carper. Mr. Chairman, as we listen to Mr. Walker talking about restructuring Social Security and all, this is, you know,

the issue of notch babies. We have been dealing with that issue for

as long as you and I have been here.

The CHAIRMAN. Yes.

Senator Carper. In a sense, we have a great opportunity to have

a whole new generation of notch babies or those who perceive

46

themselves to be that. Thanks for joining us today and thank you

for the work you do and for the leadership that you provide. I

apologize for not being here to hear your testimony, and I had a

chance to visit with Governor Patton, my old colleague, and chatted

a little bit in the halls, so I have some sense for what he was here

to say.

One of the things that would be helpful for me would just be to

ask for you to take the next 5 minutes or so and lay out for me

what you think our options are with respect to long-term care, and

maybe some of the pluses and minuses of those options, and then

if you have an option or a path forward that you think would be

especially preferable, if you could share that with me.

Mr. WALKER. Well, let me give you an executive summary, Senator. First, I think we have to keep in mind that we face a very

serious long-range fiscal challenge at the Federal level due primarily to known demographic trends and rising health care costs,

Medicare, Medicaid being a subset of that, a major element of that.

Second, long-term care, as you know, is not just health related.

It is quality of life related. There are certain services that really

do not have that much to do with a person’s health. It is more a

matter of daily living, assisted daily living, and certain of those

types of things.

Clearly one of the things that has to be recognized is we already

have made more promises than we have funded, and the gaps are

huge, and so we to have a division, try to come up with what is

the appropriate division of responsibilities. How much should individuals personally be responsible? To what extent, through either

tax preferences, through encouraging the insurance market, and

through public education efforts, that you can get people to be

doing things today that will help put them in a better position to

be able to meet these needs in the future?

To the extent that there are portions of the population, whether

it be the disabled or the poor that might need special assistance,

for them to target assistance into those areas of greatest need, but

recognizing that, you know, we do not want to make promises that

we cannot deliver on 10 years from now or 15 years from now in

doing that.

So I think what I would commend to you, and I am happy to provide more details, if you would like, Senator, is on page two of the

testimony, which we have entered into the record. Those are some

of the key questions that I think, and I think part of it is defining

what is long-term care, and what kind of services represent needs

versus wants, because right now there are differences, there are

significant differences, there are about five or six basic services

that are normally included in there, but there are others that are

sometimes included.

I think the insurance market right now is not very strong, in

part because the numbers are not there yet, but, you know, when

baby boomers start retiring, I think the numbers will come, but I

would say last that I think we have to recognize that long-term

care is a subset of Medicaid. Medicaid is a subset of our health care

challenge, and our health care challenge is a subset of the overall

long-range challenge. So we have got to be careful not to try to

47

solve this piece without understanding how it fits with the rest of

the puzzle.

That is why I think the idea of trying to look more comprehensively here is the way to go, because otherwise we are in danger

of solving one problem but creating bigger problems in other areas,

and I think that would be unfortunate if that is what happens.

Senator CARPER. All right. Good. Thank you very much.

Mr. WALKER. Thank you, Senator.

The CHAIRMAN. Thank you, Senator Carper. Then the next hearing we are going to have is going to be on the use of tax credits

to buy long-term health care insurance in more specific detail. But

as a concept, I mean rather than just adding an ingredient into

Medicare or Medicaid, if the government is going to pay for it

again, can you comment on the concept of using the tax code to provide a tax credit for people to purchase long-term health care insurance?

Mr. WALKER. I think clearly from an intellectual standpoint, that

is preferred than adding an entitlement that would end up being

broad-based, if you will. I do, however, believe that one of the

things that has to be a part of your comprehensive review that you

are talking about is that Congress places a lot of time and attention focusing on direct spending programs, Medicare, Medicaid, et

cetera.

We do not spend enough time collectively in this country in looking at the revenue side, the tax preference side. Health care is either No. 1 or No. 2 on the tax preference. If it is not No. 1 yet,

it will be very shortly, and I think that has to come under the microscope to figure out how that fits within this overall equation, because obviously if you give tax preferences, it helps on one hand,

but it can end up hurting potentially with regard to the fiscal imbalance as well, and so that has got to be targeted as well I think.

The CHAIRMAN. Yes. I appreciate it. Thank you, Mr. Walker. Always a pleasure to have you before the committee and look forward

to continuing with our work with GAO. That will conclude this

hearing.

Mr. WALKER. Thank you.

[Whereupon, at 10:45 a.m., the committee was adjourned.]

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