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Testimony:

Before the Subcommittee on Health, Committee on Energy and Commerce, 
House of Representatives:

United States Government Accountability Office:

GAO:

For Release on Delivery Expected at 10:00 a.m. EDT:

Wednesday, April 27, 2005:

Long-Term Care Financing:

Growing Demand and Cost of Services Are Straining Federal and State 
Budgets:

Statement of Kathryn G. Allen:

Director, Health Care--Medicaid and Private Health Insurance Issues:

GAO-05-564T:

GAO Highlights:

Highlights of GAO-05-564T, a testimony before the Subcommittee on 
Health, Committee on Energy and Commerce, House of Representatives.

Why GAO Did This Study:

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).

What GAO Found:

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.

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-564T].

To view the full product, click on the link above. For more 
information, contact Kathryn G. Allen at (202) 512-7118.

[End of Section]

Mr. Chairman and Members of the Subcommittee:

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.[Footnote 1] 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.[Footnote 2] 
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 
reforms; and:

* developing financially sustainable public commitments.

Background:

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.[Footnote 3] 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.[Footnote 4] 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.

Figure 1: Funding Sources for Long-Term Care, 2003:

[See PDF for image]

Notes: Amounts do not include unpaid care provided by family members or 
other informal caregivers. Percentages do not add to 100 percent due to 
rounding.

[End of figure]

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.[Footnote 5] 
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.[Footnote 6] 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,[Footnote 7] accounted for 9 percent 
(about $16 billion) of long-term care expenditures in 2003.

Absent Reform, Spending for Medicaid, Medicare, and Social Security 
Will Put Unsustainable Pressure on the Federal Budget:

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.

Figure 2: Federal Spending for Medicaid, Medicare, and Social Security 
as a Percentage of GDP, 2000 through 2080:

[See PDF for image]

Notes: Medicaid spending includes federal, but not state, expenditures.

Social Security and Medicare projections based on the intermediate 
assumptions of the 2005 Trustees' Reports. Medicaid projections based 
on the Congressional Budget Office's (CBO) January 2005 short-term 
Medicaid estimates and the CBO's December 2003 long-term Medicaid 
projections under midrange assumptions.

[End of figure]

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.[Footnote 8] (See fig. 3.)

Figure 3: Composition of Federal Spending as a Share of GDP Assuming 
Discretionary Spending Grows with GDP after 2004 and All Expiring Tax 
Provisions Are Extended:

[See PDF for image]

Notes: Although the revenue projections assume that expiring tax 
provisions are extended, federal revenue as a share of GDP increases 
through 2015 due to (1) taxpayers paying higher marginal tax rates as 
the economy grows (referred to as "real bracket creep"), (2) more 
taxpayers becoming subject to the alternative minimum tax, and (3) 
increased revenue from tax-deferred retirement accounts. After 2015, 
the analysis assumes that revenue as a share of GDP is held constant. 
For additional information on our budget simulations, see GAO, Our 
Nation's Fiscal Outlook: The Federal Government's Long-Term Budget 
Imbalance, at [Hyperlink, 
http://www.gao.gov/special.pubs/longterm/longterm.html].

[End of figure]

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.[Footnote 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.[Footnote 10] 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.

Baby Boom Generation Will Greatly Expand Demand for Long-Term Care:

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).

Figure 4: Elderly Population, 2000 through 2040:

[See PDF for image]

[End of figure]

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.[Footnote 11] 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.[Footnote 12] In addition, geographic dispersion of families may 
further reduce the number of unpaid caregivers available to elderly 
baby boomers.

Spending for Long-Term Care for Elderly Anticipated to Increase Sharply:

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.[Footnote 13] (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.

Figure 5: Long-Term Care Expenditures for the Elderly, 2000 through 
2050:

[See PDF for image]

[A] CBO did not separately report spending by Medicaid or any other 
financing source as a portion of the total estimated long-term care 
expenditures for the elderly for years later than 2020.

[B] ASPE/Lewin did not report separate estimates for different 
assumptions about the role of private insurance.

[C] Projections are in constant dollars.

[End of figure]

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.[Footnote 14] 
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.

Considerations for Reforming Long-Term Care Financing:

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.[Footnote 15] 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.[Footnote 16] 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.

Contact and Acknowledgments:

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.

FOOTNOTES

[1] GAO, 21st Century Challenges: Reexamining the Base of the Federal 
Government, GAO-05-325SP (Washington, D.C.: February 2005).

[2] GAO, 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).

[3] See Kenneth G. Manton and XiLiang Gu, "Changes in the Prevalence of 
Chronic Disability in the United States Black and NonBlack Population 
Above Age 65 from 1982 to 1999," Proceedings of the National Academy of 
Sciences of the United States of America, vol. 98, no. 11, (2001). The 
National Long-Term Care Survey was conducted in 1982, 1984, 1989, 1994, 
1999, and 2004, but the 2004 results are not yet available. 

[4] Based on our analysis of data from the Office of the Actuary of the 
Centers for Medicare & Medicaid Services and The MEDSTAT Group. These 
figures include long-term care for all people, regardless of age. 

[5] The federal share of Medicaid funding varies by state and is based 
on a state's per capita income in relation to the national per capita 
income. By statute, the federal share of Medicaid expenditures across 
individual states may range from 50 to 83 percent. 42 U.S.C. § 1396 d 
(b) (2000).

[6] Through Medicaid home-and community-based services, states cover a 
wide variety of nonmedical and social services and supports that allow 
people to remain in the community. These services include personal 
care, personal call devices, homemakers' assistance, chore assistance, 
adult day health care, and other services that are demonstrated as cost-
effective and necessary to avoid institutionalization. In their home-
and community-based services programs, however, states often limit 
eligibility or the scope of services in order to control costs.

[7] Private long-term care insurance commonly includes policies that 
provide coverage for at least 12 months of necessary services--as 
demonstrated by an inability to perform a certain number of activities 
of daily living--provided in settings other than acute-care hospital 
units.

[8] For additional discussion of our budget simulations, see GAO, Our 
Nation's Fiscal Outlook: The Federal Government's Long-Term Budget 
Imbalance, at http://www.gao.gov/special.pubs/longterm/longterm.html. 

[9] The specific ratios for the programs differ because of differences 
in the respective covered populations. Specifically, for Social 
Security, the ratio of covered workers to beneficiaries in 2005 is 
estimated to be 3.3. Under the 2005 Trustees' intermediate estimates, 
this ratio is projected to decline to 2.1 by 2035. For Medicare 
Hospital Insurance, the ratio was estimated to be 3.9 for 2005 and was 
projected to decline to 2.3 by 2035 under the 2005 Trustees' 
intermediate estimates.

[10] See CBO, Monthly Budget Review for November 4, 2004, and April 6, 
2005.

[11] Judith Feder et al., "Long-Term Care in the United States: An 
Overview," Health Affairs, May/June 2000, pp. 40-56.

[12] "Aging into the 21st Century," prepared by Jacob Siegel for the 
Administration on Aging, U.S. Department of Health and Human Services, 
May 1996.

[13] Assistant Secretary for Planning and Evaluation (ASPE) of the U.S. 
Department of Health and Human Services, who contracted with The Lewin 
Group, as published in Urban Institute, "Long-Term Care: Consumers, 
Providers, and Financing, A Chart Book" (Washington, D.C.: March 2001).

[14] GAO, Long-Term Care: Baby Boom Generation Increases Challenge of 
Financing Needed Services, GAO-01-563T (Washington, D.C.: Mar. 27, 
2001) and Long-Term Care Insurance: Better Information Critical to 
Prospective Purchasers, GAO/T-HEHS-00-196 (Washington, D.C.: Sept. 13, 
2000).

[15] GAO, 21st Century Challenges: Reexamining the Base of the Federal 
Government.

[16] Pub. L. No. 104-191, §§ 321-327, 110 Stat. 1936, 2054-2067.