Long-Term Care Financing: Growing Demand and Cost of Services Are Straining Federal and State Budgets
Published: 2005-04-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Long-term care relies heavily on financing by public payers, especially Medicaid, and has significant implications for state budgets as well as the federal budget. It includes an array of health, personal care, and supportive services provided to persons with physical or mental disabilities. As the baby boom generation ages, the number of elderly with disabilities will greatly expand the demand for long-term care services and will impose greater burdens on federal and state budgets. GAO was asked to discuss the budgetary and other challenges resulting from the anticipated increase in demand for long-term care services. This testimony addresses (1) the pressure that entitlement spending for Medicare, Medicaid, and Social Security is expected to exert on the federal budget in coming decades; (2) how the aging of the baby boom population will increase the demand for long-term care services; and (3) how these trends will affect the current and future financing of long-term care services, particularly in federal and state budgets. The testimony also highlights several considerations for any possible reforms of long-term care financing. This testimony updates prior GAO work, particularly Long-Term Care: Aging Baby Boom Generation Will Increase Demand and Burden on Federal and State Budgets, GAO-02-544T (Washington, D.C.: March 21, 2002).
section_title: What GAO Found
paragraphs: Over the coming decades, entitlement spending for Medicare, Medicaid, and Social Security is expected to absorb larger shares of federal revenue and threatens to crowd out other spending as the baby boom generation enters retirement age. The increasing demand for long-term care services fueled in part by the baby boom generation will also further strain federal and state budgets. Estimates suggest the future number of disabled elderly who cannot perform basic activities of daily living without assistance may as much as double from 2000 through 2040, resulting in a large increase in demand for long-term care services. Spending on long-term care services just for the elderly is estimated to increase by more than two-and-a-half times between 2000 and 2040, and could nearly quadruple in constant dollars between 2000 and 2050 to $379 billion, according to some estimates. Without fundamental financing changes, Medicaid can be expected to remain one of the largest funding sources, straining both federal and state governments. Financing the increasing demand for long-term care services will be a significant 21st century challenge for the nation. A key question for policymakers will be to consider what options exist for rethinking the federal, state, and private roles in financing long-term care. In considering options for reforming long-term care financing, GAO notes that long-term care is not just about health care. It also comprises a variety of services an aged or disabled person requires to maintain quality of life--including housing, transportation, nutrition, and social support to help maintain independent living. Given the challenges in providing and paying for these myriad and growing needs, GAO has identified several considerations for shaping reform proposals that include: determining societal responsibilities; considering the potential role of social insurance in financing; encouraging personal preparedness; recognizing the benefits, burdens, and costs of informal caregiving; assessing the balance of state and federal responsibilities to ensure adequate and equitable satisfaction of needs; adopting effective and efficient implementation and administration of reforms; and developing financially sustainable public commitments.

section_title: Letter
paragraphs: I am pleased to be here today as you discuss the anticipated growing  demand and associated costs for long-term care services, which will be  driven largely by the aging baby boom generation, and the challenges that  increased demand will bring for federal and state budgets. Earlier this  year, we issued a report entitled 21st Century Challenges: Reexamining  the Base of the Federal Government to provide policymakers with a  comprehensive compendium of those areas throughout government that  could be considered ripe for reexamination and review based on our past  work and institutional knowledge. In that report, we presented illustrative  questions for policymakers to consider as they carry out their  responsibilities. These questions examined major areas of the budget and  federal operations including discretionary and mandatory spending, and  tax policies and programs. One prominent question that we raised in that  report and that will be the focus of my comments today is “What options  are there for rethinking the federal, state, and private insurance roles in  financing long-term care?”
In general, the aging of the baby boom generation will lead to a sharp  growth in federal entitlement spending that, absent meaningful reforms,  will represent an unsustainable burden on future generations. As the  estimated 76 million baby boomers born between 1946 and 1964 become  elderly, Medicare, Medicaid, and Social Security will nearly double as a  share of the economy by 2035. We have been able to sustain these  entitlements in the past with low depression-era birth rates and a large  postwar workforce. However, absent substantive reform of entitlement  programs, a rapid escalation of federal spending for Social Security,  Medicare, and Medicaid is virtually certain to overwhelm the rest of the  federal budget.
Most attention has been focused on the need for Social Security and  Medicare reform in order to maintain their viability and ability to meet  programmatic commitments. By 2017, Social Security’s cash income (tax  revenue) is projected to fall below program expenses. At that time, Social  Security will join Medicare’s Hospital Insurance Trust Fund, whose  outlays exceeded cash revenues in 2004, as having a cash flow deficit.  While these are important issues, a broader focus should also include  Medicaid, particularly as it involves financing long-term care. Long-term  care includes an array of health, personal care, and supportive services  provided to persons with physical or mental disabilities. It relies heavily  on financing by public payers, especially Medicaid, and has significant  implications for state budgets as well as the federal budget.
My remarks today will focus on (1) the pressure that entitlement spending  for Medicare, Medicaid, and Social Security is expected to exert on the  federal budget in coming decades; (2) how the aging of the baby boomers  will increase the demand for long-term care services; and (3) how these  trends will affect the current and future financing of long-term care  services, particularly in federal and state budgets. I will also highlight  several considerations for any possible reforms of long-term care  financing. My comments are based on prior GAO work, particularly a 2002  testimony by the Comptroller General. We updated prior GAO work by  including more recent data from GAO’s budget simulation model, the  Centers for Medicare & Medicaid Services, and the U.S. Census Bureau as  well as the literature. We conducted our work to update this earlier  testimony from February through April 2005 in accordance with generally  accepted government auditing standards.
In summary, it is clear that, taken together, Medicare, Medicaid, and Social  Security represent an unsustainable burden on future generations.  Increased demand for long-term care, which will be driven in part by the  aging baby boom generation, will contribute further to federal and state  budget burdens. Estimates suggest the number of disabled elderly who  cannot perform basic activities of daily living without assistance may as  much as double from 2000 through 2040. Current problems with the  provision and financing of long-term care could be exacerbated by the  swelling numbers of the baby-boom generation needing care. These  problems include whether individuals with disabilities receive adequate  services, the potential for families to face financially catastrophic long- term care costs, and the burdens and social costs that heavy reliance on  unpaid care from family members and other informal caregivers create  coupled with possibly fewer caregivers available in coming generations.  Long-term care spending from all public and private sources, which was  about $183 billion for persons of all ages in 2003, will increase dramatically  in the coming decades as the baby boom generation ages. Spending on  long-term care services just for the elderly is estimated to increase from  2000 by more than two-and-a-half times by 2040 and could nearly  quadruple in constant dollars to $379 billion by 2050, according to some  estimates. Without fundamental financing changes, Medicaid—which pays  over one-third of long-term care expenditures for the elderly—can be  expected to remain one of the largest funding sources, straining both  federal and state governments.
In considering options for reforming long-term care financing in light of  these anticipated demands for assistance and budgeting stresses, it is  important to keep in mind that long-term care is not just about health care.  It also comprises a variety of services an aged and/or disabled person  requires to maintain quality of life—including housing, transportation,  nutrition, and social support to help maintain independent living. Given  the challenges in providing and paying for these myriad and growing  needs, several considerations for shaping reform proposals include:    determining societal responsibilities;    considering the potential role of social insurance in financing;    encouraging personal preparedness;  recognizing the benefits, burdens, and costs of informal caregiving;    assessing the balance of state and federal responsibilities to ensure  adequate and equitable satisfaction of needs;    adopting effective and efficient implementation and administration of    developing financially sustainable public commitments.
subsections: section_title: Background
paragraphs: Long-term care includes many types of services needed when a person has  a physical or mental disability. Individuals needing long-term care have  varying degrees of difficulty in performing some activities of daily living  without assistance, such as bathing, dressing, toileting, eating, and moving  from one location to another. They may also have trouble with  instrumental activities of daily living, which include such tasks as  preparing food, housekeeping, and handling finances. They may have a  mental impairment, such as Alzheimer’s disease, that necessitates  assistance with tasks such as taking medications or supervision to avoid  harming themselves or others. Although a chronic physical or mental  disability may occur at any age, the older an individual becomes, the more  likely a disability will develop or worsen.
According to the 1999 National Long-Term Care Survey, approximately   7 million elderly had some sort of disability in 1999, including about   1 million needing assistance with at least five activities of daily living.  Assistance takes place in many forms and settings, including institutional  care in nursing homes or assisted living facilities, and home care services.  Further, many disabled individuals rely exclusively on unpaid care from  family members or other informal caregivers.
Nationally, spending from all public and private sources for long-term care  for all ages totaled about $183 billion in 2003, accounting for about 13  percent of all health care expenditures. About 69 percent of expenditures  for long-term care services were paid for by public programs, primarily  Medicaid and Medicare. Individuals financed about 20 percent of these  expenditures out of pocket and, less often, private insurers paid for long- term care. Moreover, these expenditures did not include the extensive  reliance on unpaid long-term care provided by family members and other  informal caregivers. Figure 1 shows the major sources financing these  expenditures.
Medicaid, the joint federal-state health-financing program for low-income  individuals, continues to be the largest funding source for long-term care.  Medicaid provides coverage for poor persons and for many individuals  who have become nearly impoverished by “spending down” their assets to  cover the high costs of their long-term care. For example, many elderly  persons become eligible for Medicaid as a result of depleting their assets  to pay for nursing home care that Medicare does not cover. In 2003,  Medicaid paid 48 percent (about $87 billion) of total long-term care  expenditures. States share responsibility with the federal government for  Medicaid, paying on average approximately 43 percent of total Medicaid  costs in fiscal year 2002. Eligibility for Medicaid-covered long-term care  services varies widely among states. Spending also varies across states— for example, in fiscal year 2000, Medicaid per capita long-term care  expenditures ranged from $73 per year in Nevada to $680 per year in New  York. For the national average, about 57 percent of Medicaid long-term  care spending in 2002 was for the elderly. In 2003, nursing home  expenditures dominated Medicaid long-term care expenditures,  accounting for about 47 percent of its long-term care spending. Home care  expenditures make up a growing share of Medicaid long-term care  spending as many states use the flexibility available within the Medicaid  program to provide long-term care services in home- and community- based settings. From 2000 through 2003, home and personal care  expenditures grew at an average annual rate of 15.9 percent compared  with 4.0 percent for nursing facility spending. Expenditures for Medicaid  home- and community-based services for long-term care almost doubled  from 1998 to 2003—from about $10 billion to about $19 billion.
Other significant long-term care financing sources include:  Individuals’ out-of-pocket payments, the second largest source of long- term care expenditures, accounted for 20 percent (about $38 billion) of  total expenditures in 2003. The vast majority (82 percent) of these  payments were used for nursing home care.
Medicare spending accounted for 18 percent (about $33 billion) of total  long-term care expenditures in 2003. While Medicare primarily covers  acute care, it also pays for limited stays in post-acute skilled nursing care  facilities and home health care.
Private insurance, which includes both traditional health insurance and  long-term care insurance, accounted for 9 percent (about $16 billion) of  long-term care expenditures in 2003.
section_title: Absent Reform, Spending for Medicaid, Medicare, and Social Security Will Put Unsustainable Pressure on the Federal Budget
paragraphs: Before focusing on the increased burden that long-term care will place on  federal and state budgets, it is important to look at the broader budgetary  context. As we look ahead we face an unprecedented demographic  challenge with the aging of the baby boom generation. As the share of the  population 65 and over climbs, federal spending on the elderly will absorb  a larger and ultimately unsustainable share of the federal budget and  economic resources. Federal spending for Medicaid, Medicare, and Social  Security is expected to surge—nearly doubling by 2035—as people live  longer and spend more time in retirement. In addition, advances in  medical technology are likely to keep pushing up the cost of health care.  Moreover, the baby boomers will be followed by relatively fewer workers  to support them in retirement, prompting a relatively smaller employment  base from which to finance these higher costs. Based on CBO’s long-term  Medicaid estimates, the federal share of Medicaid as a percent of GDP will  grow from today’s 1.5 percent to 2.6 percent in 2035 and reach 4.8 percent  in 2080. Under the 2005 Medicare trustees’ intermediate estimates,  Medicare will almost triple as a share of gross domestic product (GDP)  between now and 2035 (from 2.7 percent to 7.5 percent) and reach 13.8  percent of GDP in 2080. Under the Social Security trustees’ intermediate  estimates, Social Security spending will grow as a share of GDP from   4.3 percent today to 6.3 percent in 2035, reaching 6.4 percent in 2080. (See  fig. 2.) Combined, in 2080 almost one-quarter of GDP will be devoted to  federal spending for these three programs alone.
To move into the future with no changes in federal health and retirement  programs is to envision a very different role for the federal government.  Our long-term budget simulations serve to illustrate the increasing  constraints on federal budgetary flexibility that will be driven by  entitlement spending growth. Assume, for example, that all expiring tax  provisions are extended, revenue remains constant thereafter as a share of  GDP, and discretionary spending keeps pace with the economy. Under  these conditions, by 2040 federal revenues may be adequate to pay little  more than interest on the federal debt. (See fig. 3.)
Beginning about 2010, the share of the population that is age 65 or older  will begin to climb, with profound implications for our society, our  economy, and the financial condition of these entitlement programs. In  particular, both Social Security and the Hospital Insurance portion of  Medicare are largely financed as pay-as-you-go systems in which current  workers’ payroll taxes pay current retirees’ benefits. Therefore, these  programs are directly affected by the relative size of populations of  covered workers and beneficiaries. Historically, this relationship has been  favorable. In the near future, however, the overall worker-to-retiree ratio  will change in ways that threaten the financial solvency and sustainability  of these entitlement programs. In 2000, there were 4.8 working-age  persons (20 to 64 years) per elderly person, but by 2030, this ratio is  projected to decline to 2.9. This decline in the overall worker-to-retiree  ratio will be due to both the surge in retirees brought about by the aging  baby boom generation as well as falling fertility rates, which translate into  relatively fewer workers in the near future.
Social Security’s projected cost increases are due predominantly to the  burgeoning retiree population. Even with the increase in the Social  Security eligibility age to 67, these entitlement costs are anticipated to  increase dramatically in the coming decades as a larger share of the  population becomes eligible for Social Security, and if, as expected,  average longevity increases.
As the baby boom generation retires and the Medicare-eligible population  swells, the imbalance between outlays and revenues will increase  dramatically. Medicare growth rates reflect not only a rapidly increasing  beneficiary population, but also the escalation of health care costs at rates  well exceeding general rates of inflation. While advances in science and  technology have greatly expanded the capabilities of medical science,  disproportionate increases in the use of health services have been fueled  by the lack of effective means to channel patients into consuming, and  providers into offering, only appropriate services. In fiscal year 2004,  Medicare spending grew by 8.5 percent and is up 9.9 percent for the first 6  months of fiscal year 2005. The implementation of the Medicare  outpatient drug benefit in January 2006 will further increase Medicare  spending in future years.
To obtain a more complete picture of the future health care entitlement  burden, especially as it relates to long-term care, we must also  acknowledge and discuss the important role of Medicaid. In 2003,  approximately 69 percent of all Medicaid dollars was dedicated to services  for the elderly and people with disabilities. Medicaid is the second largest  and fastest growing item in overall state spending. At the February 2005  National Governors Association meeting, governors reported that states  are faced with proposing cuts in their Medicaid programs. Over the longer  term, the increase in the number of elderly will add considerably to the  strain on federal and state budgets as governments struggle to finance  increased Medicaid spending. In addition, this strain on state Medicaid  budgets may be exacerbated by fluctuations in the business cycle. State  revenues decline during economic downturns, while the needs of the  disabled for assistance remain constant.
section_title: Baby Boom Generation Will Greatly Expand Demand for Long- Term Care
paragraphs: In coming decades, the sheer number of aging baby boomers will swell the  number of elderly with disabilities and the need for services. These  overwhelming numbers offset the slight reductions in the prevalence of  disability among the elderly reported in recent years. In 2000, individuals  aged 65 or older numbered 35.1 million people—12.4 percent of our  nation’s total population. By 2020, that percentage will increase by nearly  one-third to 16.3 percent—one in six Americans—and will represent  nearly 20 million more elderly than there were in 2000. By 2040, the  number of elderly aged 85 years and older—the age group most likely to  need long-term care services—is projected to increase more than   250 percent from 4.3 million in 2000 to 15.4 million (see fig. 4).
It is difficult to precisely predict the future increase in the number of the  elderly with disabilities, given the counterbalancing trends of an increase  in the total number of elderly and a possible continued decrease in the  prevalence of disability. The number of elderly with disabilities remained  fairly constant from 1982 through 1999 while the percentage of those with  disabilities fell between 1 and 2 percent a year from 1984 through 1999.  Possible factors contributing to this decreased prevalence of disability  include improved health care, improved socioeconomic status, and better  health behaviors. The positive benefits of the decreased prevalence of  disability, however, will be overwhelmed by the sheer numbers of aged  baby boomers. The total number of disabled elderly is projected to  increase, with estimates varying from an increase of one-third to twice the  current level, or as high as 12.1 million by 2040.
The increased number of disabled elderly will exacerbate current  problems in the provision and financing of long-term care services. For  example, in 2000 it was reported that approximately one in five adults with  long-term care needs and living in the community reported an inability to  receive needed care, such as assistance in toileting or eating, often with  adverse consequences. In addition, disabled elderly may lack family  support or the financial means to purchase medical services. Long-term  care costs can be financially catastrophic for families. Services, such as  nursing home care, are very expensive; while costs can vary widely, a year  in a nursing home typically costs more than $50,000, and in some locations  can be considerably more. Because of financial constraints, many elderly  rely heavily on unpaid caregivers, usually family members and friends;  overall, the majority of care received in the community is unpaid.  However, in coming decades, fewer elderly may have the option of unpaid  care because a smaller proportion may have a spouse, adult child, or  sibling to provide it. By 2020, the number of elderly who will be living  alone with no living children or siblings is estimated to reach 1.2 million,  almost twice the number without family support in 1990. In addition,  geographic dispersion of families may further reduce the number of  unpaid caregivers available to elderly baby boomers.
section_title: Spending for Long- Term Care for Elderly Anticipated to Increase Sharply
paragraphs: Public and private spending on long-term care was about $183 billion for  persons of all ages in 2003. CBO projected in 1999 that long-term care  spending for the elderly could increase by more than two-and-a-half times  from 2000 to 2040. A 2001 study projected that these expenditures could  quadruple from 2000 through 2050, reaching $379 billion in 2050. (See fig.  5.) Estimates of future spending are imprecise, however, due to the  uncertain effect of several important factors, including how many elderly  will need assistance, the types of care they will use, and the availability of  public and private sources of payment for care. Absent significant changes  in the availability of public and private payment sources, however, future  spending is expected to continue to rely heavily on public payers,  particularly Medicaid, which estimates indicate paid about 35 percent of  long-term care expenditures for the elderly in 2004.
One factor that will affect spending is how many elderly will need  assistance. As noted earlier, even with continued decreases in the  prevalence of disability, aging baby boomers are expected to have a  disproportionate effect on the demand for long-term care. Another factor  influencing projected long-term care spending is the type of care that the  baby boom generation will use. Per capita expenditures for nursing home  care greatly exceed those for care provided in other settings. Since the  1990s, there have been increases in the use of paid home care as well as in  assisted living facilities, a relatively newer and developing type of housing.
It is unclear what effect continued growth in paid home care, assisted  living facilities, or other care alternatives may have on future  expenditures. Any increase in the availability of home care may reduce the  average cost per disabled person, but the effect could be offset if there is  an increase in the use of paid home care by persons currently not  receiving these services.
Changes in the availability of public and private sources to pay for care  will also affect expenditures. Private long-term care insurance has been  viewed as a possible means of reducing catastrophic financial risk for the  elderly needing long-term care and relieving some of the financial burden  currently falling on public long-term care programs. Increases in private  insurance may lower public expenditures but raise spending overall  because insurance increases individuals’ financial resources when they  become disabled and allows the purchase of additional services. The  number of policies in force remains relatively small despite improvements  in policy offerings and the tax deductibility of premiums. However, as we  have previously testified, questions about the affordability of long-term  care policies and the value of the coverage relative to the premiums  charged have posed barriers to more widespread purchase of these  policies. Further, many baby boomers continue to assume they will never  need such coverage or mistakenly believe that Medicare or their own  private health insurance will provide comprehensive coverage for the  services they need. If private long-term care insurance is expected to play  a larger role in financing future generations’ long-term care needs,  consumers need to be better informed about the costs of long-term care,  the likelihood that they may need these services, and the limits of  coverage through public programs and private health insurance.
With or without increases in the availability of private insurance, Medicaid  and Medicare are expected to continue to pay for the majority of long-term  care services for the elderly in the future. Without fundamental financing  changes, Medicaid can be expected to remain one of the largest funding  sources for long-term care services for aging baby boomers, with Medicaid  expenditures for long-term care for the elderly reaching as high as   $132 billion by 2050. As noted earlier, this increasing burden will strain  both federal and state governments.
section_title: Considerations for Reforming Long-Term Care Financing
paragraphs: Given the anticipated increase in demand for long-term care services  resulting from the aging of the baby boom generation, the concerns about  the availability of services, and the expected further stress on federal and  state budgets and individuals’ financial resources, some policymakers and  advocates have called for long-term care financing reforms. Indeed, we  identified options for rethinking the federal, state, and private insurance  roles in financing long-term care as one of the key questions that our  nation needs to face as it addresses 21st century challenges. The  Comptroller General previously testified in 2002 on several considerations  for policymakers to keep in mind when considering reforms for long-term  care financing, and these considerations remain relevant today.
At the outset, it is important to recognize that long-term care services are  not just another set of traditional health care services. Meeting acute and  chronic health care needs is an important element of caring for aging and  disabled individuals. Long-term care, however, encompasses services  related to maintaining quality of life, preserving individual dignity, and  satisfying preferences in lifestyle for someone with a disability severe  enough to require the assistance of others in everyday activities. Some  long-term care services are akin to other health care services, such as  personal assistance with activities of daily living or monitoring or  supervision to cope with the effect of dementia. Other aspects of long-term  care, such as housing, nutrition, and transportation are services that all of  us consume daily but become an integral part of long-term care for a  person with a disability. Disabilities can affect housing needs, nutritional  needs, or transportation needs. But, what is more important is that where  one wants to live or what activities one wants to pursue also affects how  needed services can be provided. Providing personal assistance in a  congregate setting such as a nursing home or assisted living facility may  satisfy more of an individual’s needs, be more efficient, and involve more  direct supervision to ensure better quality than when caregivers travel to  individuals’ homes to serve them one on one. Yet, those options may  conflict with a person’s preference to live at home and maintain autonomy  in determining his or her daily activities.
Keeping in mind that policies need to take account of the differences  involved in long-term care, there are several issues that policymakers may  wish to consider as they address long-term care financing reforms. These  include:    Determining societal responsibilities. A fundamental question is how  much the choices of how long-term care needs are met should depend  upon an individual’s own resources or whether society should supplement  those resources to broaden the range of choices. For a person without a  disability requiring long-term care, where to live and what activities to  pursue are lifestyle choices based on individual preferences and  resources. However, for someone with a disability, those lifestyle choices  affect the costs of long-term care services. The individual’s own  resources—including financial resources and the availability of family or  other informal supports—may not be sufficient to preserve some of their  choices and also obtain needed long-term care services.
Societal responsibilities may include maintaining a safety net to meet  individual needs for assistance. However, the safety net may not provide a  full range of choices in how those needs are met. Persons who require  assistance multiple times a day and lack family members to provide some  share of this assistance may not be able to have their needs met in their  own homes. The costs of meeting such extensive needs may mean that  sufficient public support is available only in settings such as assisted living  facilities or nursing homes. More extensive public support may be  extended, but decisions to do so should carefully consider affordability in  the context of competing demands for our nation’s resources.
Considering the potential role of social insurance in financing.
Government’s role in many situations has extended beyond providing a  safety net. Sometimes this extended government role has been a result of  efficiencies in having government undertake a function, or in other cases  this role has been a policy choice. Some proposals have recommended  either voluntary or mandatory social insurance to provide long-term care  assistance to broad groups of beneficiaries. In evaluating such proposals,  careful attention needs to be paid to the limitations and conditions under  which services will be provided. In addition, who will be eligible and how  such a program will be financed are critical choices. As in establishing a  safety net, it is imperative that any option under consideration be  thoroughly assessed for its affordability over the longer term.
Encouraging personal preparedness. Becoming disabled is a risk. Not  everyone will experience disability during his or her lifetime and even  fewer persons will experience a severe disability requiring extensive  assistance. This is the classic situation in which having insurance to  provide additional resources to deal with a possible disability may be  better than relying on personally saving for an event that may never occur.  Insurance allows both persons who eventually will become disabled and  those who will not to use more of their economic resources during their  lifetime and to avoid having to put those resources aside for the possibility  that they may become disabled.
The public sector has at least two important potential roles in encouraging  personal preparedness. One is to adequately educate people about the  current divisions between personal and societal responsibilities. Only if  the limits of public support are clear will individuals be likely to take steps  to prepare for a possible disability. Currently, one of the factors  contributing to the lack of preparation for long-term care among the  elderly is a widespread misunderstanding about what services Medicare  will cover. Another public sector role may be to assure the availability of  sound private long-term care insurance policies and possibly to create  incentives for their purchase. Progress has been made in improving the  value of insurance policies through state insurance regulation and through  strengthening the requirements for policies qualifying for favorable tax  treatment enacted by the Health Insurance Portability and Accountability  Act of 1996. Furthermore, since 2002 the federal government has offered  long-term care insurance to federal employees, military personnel,  retirees, and their families, providing the largest offering of long-term care  insurance. While the federal government’s program is still very new, other  employers and policymakers will likely be carefully watching the federal  government’s experience in offering long-term care insurance. Long-term  care insurance remains an evolving product, and given the flux in how  long-term care services are delivered, it is important to monitor whether  long-term care insurance regulations need adjustments to ensure that  consumers receive fair value for their premium dollars.
Recognizing the benefits, burdens, and costs of informal caregiving.
Family and other informal caregivers play a critical role in supplying the  bulk of long-term care to disabled persons. Effective policy must create  incentives and supports for enabling informal caregivers to continue  providing assistance. Further, care should be taken to avoid creating  incentives that result in informal care being inappropriately supplanted by  formal paid services. At the same time, it is important to recognize the  physical, emotional, and social burdens that providing care impose on the  caregiver and its economic costs to the caregiver and to society.  Caregiving may create needs in caregivers themselves that require respite  or other relief services. In addition, caregiving can conflict with caregivers’  employment, creating economic losses for caregivers and society. Such  losses in productivity will become even more important in the coming  decades as the proportion of the population that is working-age declines.
Assessing the balance of federal and state responsibilities to  ensure adequate and equitable satisfaction of needs. Reforms in  long-term care financing may require reevaluating the traditional federal  and state financing roles to better ensure an equitable distribution of  public support for individuals with disabilities. The variation across states  in Medicaid spending per capita on long-term care is in part reflective of  differences among states in generosity of services as well as their fiscal  capacity. Given these differences, having states assume primary  responsibility for financing long-term care subjects individuals to different  levels of support depending on where they live. In addition, because state  revenues are sensitive to the business cycle and states generally must have  balanced budgets, their services become vulnerable during economic  downturns.
Adopting effective and efficient implementation and  administration of reforms. Proposed reforms to better meet the  increasing demand for long-term care within budget constraints will be  successful only if they are administratively feasible, effectively reach  targeted populations and unmet needs, and efficiently provide needed  services at minimum cost while complementing already available services  and financing sources.
Developing financially sustainable public commitments. Finally, as  noted earlier, absent reform, existing federal entitlement commitments for  Medicaid, Medicare, and Social Security will represent an increasing and  potentially unsustainable share of the economy. States, too, are concerned  about their budgetary commitments for long-term care through their share  of the Medicaid program. Before committing to any additional public role  in financing long-term care, it is imperative to provide reasonable  assurance that revenues will be available to fund its future costs.
Mr. Chairman, this completes my prepared statement. I would be happy to  respond to any questions you or other members of the subcommittee may  have at this time.
section_title: Contact and Acknowledgments
paragraphs: For future contacts regarding this testimony, please call Kathryn G. Allen  at (202) 512-7118. Other individuals who made key contributions include  John Dicken, Linda F. Baker, Laura Sutton Elsberg, James R. McTigue, and  Joseph Petko.
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