Committee on Finance
United States Senate
Delivered March 25, 2009
My name is Dennis Smith. I am a Senior
Research Fellow in Health Care Reform at The Heritage Foundation.
The views I express in this testimony are my own, and should not be
construed as representing any official position of The Heritage
Long-term care is an important but all too often overlooked
component of health care reform. The great challenges we face
because of population changes between now and 2030 are well known
and will require bold solutions. As the Committee's statement
points out, "... Medicaid continues to be overwhelmed as the sole
solution for long-term care ...". All too often, Medicaid is
called upon to fill missing pieces. Yet the federal government and
the states are facing the reality that Medicaid in its current form
is unaffordable and unsustainable.
About one-third of Medicaid spending, or about $100 billion in
FY 2007 went to long-term care. Over the next 10 years,
Medicaid long-term care spending is projected to grow at an average
rate of 8.6 percent per year. At this rate, Medicaid will
spend a cumulative total of $1.7 trillion on long-term care between
2008 and 2017. Within Medicaid, there has been some shift in where
long-term care dollars are spent. In FY 2000, 72 percent of
Medicaid long-term care expenditures went to institutional care and
just 28 percent to community based services. The overall
distribution of FY 2007 expenditures had changed to 58 percent
institutional and 42 percent community-based.
The Committee has asked the panel to address four questions
which should help lead to the formulation of policies to create a
system that is adequately prepared to meet the challenges of the
21st century. I will address them, however, in a
different order as the policy decisions should lead sequentially
from one to the next, ending with the financing question. From past
experience, the financing is where consensus tends to fall apart.
If you start with financing, chances are good that enthusiasm will
wane before you discuss the policies of change. If agreement on
policy can be reached, financing should follow.
How would better long-term care
coverage affect overall health care access, quality and costs?
Long-term care coverage includes a mix of private and government
sources. Better coverage should include the promotion of private
sector options. Research from the National Bureau of Economic
Research demonstrates that Medicaid has a large "crowd out" effect
on private long-term care insurance.
We certainly see every day how poor quality increases costs. The
journey into the long-term care system often begins with a senior
who is on too many prescription drugs becomes disoriented, falls
and breaks a hip. A person with a disability who did not get the
properly equipped wheelchair is at risk for skin problems that can
lead to pressure ulcers and hospitalization. In one study, the
actuarial firm Milliman, Inc. estimated that 25 percent of
hospitalizations for Wyoming's long-term care population were
More money does not mean better quality. Last month, the Nelson
Rockefeller Institute of Government issued a report, Medicaid
and Long-Term Care: New York Compared to 18 Other States. It
concludes, "[u]nfortunately, New York's broad range of services and
higher spending have not produced a higher quality of care. The
state is about average or slightly above average on measures of
quality. The comparisons in this report show that New York has room
to improve quality and lower costs."
The AARP Public Policy Institute has recently published its
2009 Across the States: Profiles of Long-Term Care and
Independent Living. Among its ten key findings, AARP estimates
that, "[o]n average, Medicaid dollars can support nearly three
older people and adults with physical disabilities in home and
community-based settings for every person in a nursing home."
Reform should offer more alternatives to Medicaid in order to
divert people from needing Medicaid in the first place and Medicaid
itself must be rebalanced. In this respect, Vermont provides a
model for serious consideration. Patrick Flood, Deputy Secretary of
the Vermont Agency of Human Services, has described how Vermont has
abandoned the out-dated Medicaid structure of long-term care, and
leveled the playing field between institutional and home care with
the option of self-direction:
In 2005, Vermont received approval from CMS for an 1115 Waiver
to re-design our Medicaid long term care system. The goals for the
Waiver were to:
- Provide equal access to either a nursing home or home based
- Serve more people
- Manage the overall costs of long term care.
Three years later, it is clear that the Waiver has succeeded
beyond what Vermont hoped for. We are serving many more people than
we could have under the old system. The number of new persons we
can admit each year to our home based alternative programs has
grown 2-3 times over what we could in the old system. Nursing home
use continues to decline gradually. Overall costs of the system
have remained manageable.
Flood summarized the Vermont experience: "The beauty of
Vermont's approach is that it turns out our theory is correct: more
people, given the choice, will choose home based care, and less
money will be spent on nursing homes. Thus we can shift money from
the nursing home side of the ledger to the home based side and not
spend more than was planned, but still serve more people
Millions of Americans served by Medicaid are also clients of
other government programs such as the Supplemental Security Income
(SSI) program, Food Stamps, housing assistance, mental health,
aging, and even transportation programs. All of these programs are
part of the long-term care continuum and we should view them as a
cohesive system rather than individual, unconnected parts which is
the way these programs are currently organized. Better coordination
of current coverage would certainly increase access, improve
quality, and lower costs. Milliman observes that, "[m]uch of the
data collected and information reported about the LTC and DD
programs are intended to demonstrate compliance with entitlement
rules rather than support care management. A future that provides
more efficient, better quality care will have strong capabilities
to manage care processes."
In July 2008, the AARP Public Policy Institute published A
Balancing Act: State Long-Term Care Reform which provides a
good roadmap to reform. "Policy makers and researchers have
attempted to identify successful practices. A review of the
literature reveals several studies that analyze and identify key
determinants that contribute to more balanced LTSS (long term
services and supports) systems. But there is no magic formula that
will accomplish system change without strong leadership and the
political will to do so. 'Success' cannot be measured only by look
at the allocation of state's Medicaid dollars. An analysis of the
hallmarks of a balanced system identified the components of an
ideal LTSS system ...".
The report describes 12 components of an "ideal" system as
philosophy, array of services, state organization of
responsibilities, coordinated funding sources, single appropriation
(also called "global budgeting"), timely eligibility, standardized
assessment tool, single entry point, consumer direction, nursing
home relocation, quality improvement (which includes
patient-defined measures of success), and integrating health and
long-term care services.
These 12 ideal components suggest that from an organizational
perspective, the current federal structure is out-dated and
deficient. Reform should include a new organization at the federal
level to lead such change. The Centers for Medicare and Medicaid
Services (CMS) is too big and too slow to make the changes that are
needed. While people with disabilities want to self-direct, CMS is
still arguing with itself over the "homebound rule" dealing with
To support a system that can meet the challenges of the
21st century, the federal government should lead by
example. A new federal agency would be created and agencies dealing
with people with disabilities and the elderly would be consolidated
under one roof. Experts from Medicaid, the Administration on Aging,
vocational rehabilitation and other agencies and programs would be
brought together to focus on the common mission. Various federal
long-term care programs currently administered by the Social
Security Administration and the Departments of Agriculture,
Education, Health and Human Services, Housing and Urban
Development, and Labor would also be consolidated and added to the
new agency with a renewed emphasis on helping individuals with
disabilities to achieve or maintain independence.
The current fragmentation across agencies leaves individuals
with disabilities trying to navigate the system frustrated and
dilutes efforts to serve them. Fragmentation and duplication among
dozens of different programs that each serves the same populations
also drive up the costs of government, hidden from public view.
This consolidation will reduce the size of the federal bureaucracy
as duplicative support staff can be eliminated. To ensure savings,
Congress should reduce funding for program operations for the
effected agencies from current levels as part of consolidation. It
will be a more nimble agency as well and return the focus of the
various welfare programs to the most vulnerable populations.
Decisions will be more timely and consistent and a new structure
will provide a greater level of accountability.
The new agency would contain new centers for excellence for the
populations to be served:
- Center for Excellence in Long-term Care and Supportive
- Center for Excellence in Long-term Care and Supportive
- Center for Excellence in Long-term Care and Supportive
- Center for Excellence in Long-term Care and Supportive
Some will argue that Medicare and Medicaid must be kept together
because of the "dual eligibles," the 8 million low-income senior
citizens and individuals with disabilities who are eligible for
both Medicare and Medicaid. Some may think the missions of the two
agencies are too intertwined to be separated. But the same argument
was made in the past to keep Medicare and Social Security together
and was ultimately put to rest. Although the programs were
separated more than 30 years ago, the Social Security
Administration (SSA) continues to administer major parts of the
Medicare program including determining eligibility, collecting
Medicare premiums, and explaining benefits. Though there is overlap
between the two programs, they can be neatly separated. Most people
on Medicare will never cross over into Medicaid. Medicare does not
provide long term care services. The role of Medicaid, for most
seniors, is to pay bills, not make policy or deliver Medicare
Medicare is not the only program that has links to Medicaid.
Development of Medicaid information systems requires interaction
not with Medicare but with federal, state, and local officials who
run other welfare programs--Food Stamps and the Temporary
Assistance for Needy Families (TANF) program. The cost of
eligibility workers and information systems are allocated among
Medicaid, Food Stamps, and TANF. There are as many "dual eligibles"
between Medicaid, Food Stamps, TANF and the Supplemental Security
Income (SSI) program as there are between Medicaid and Medicare.
Because Medicaid, TANF, SSI, and Food Stamps are means-tested
programs, there are more eligibility policy issues among these
programs than between Medicare and Medicaid.
Consolidation and reorganization will benefit recipients and
taxpayers alike by focusing resources on services rather than
bureaucracy, coordinating policies across programs that have the
same mission, shrinking the size of the federal bureaucracy,
reinvigorating federalism, and measuring results rather than
process. It is not sufficient to engage in wishful thinking that by
coordinating with greater intensity, frequency, or passion,
significant improvements in outcomes will be achieved under the
current organizational structures. The concentrated efforts will
emphasize a person-centered approach rather than an institutional
or provider-driven approach. Nor should taxpayers accept the
current "watered-down" versions of performance measurements.
Reorganization of the management at the federal level would be an
important message about how serious the Medicaid problem is and how
far the federal government is willing to go to solve it.
Are there different policy options for
improving long-term care for the elderly in comparison to the
There clearly are differences between the elderly and people
with disabilities in the use of long-term services and supports
when we examine the length of time the two populations use LTSS and
the array of services. However, policies for both populations
should be the same: they should be person-centered and money should
follow the person. Young adults with disabilities are more likely
than seniors to be interested in supports that will led to
employment, for example. But at the federal level, we should avoid
making artificial policy distinctions that could impede the choices
and preferences of either population. Some current federal policies
unnecessarily complicate the delivery of services to those who rely
on them. For example, a person's benefits can change solely because
he had a birthday.
Community care for the developmentally disabled has progressed
more rapidly than for the elderly and physically disabled.
Community based care for the developmentally disabled now accounts
for 63 percent of Medicaid long-term expenditures on their behalf
while 69 percent of long-term care expenditures for the elderly and
physically disabled still go to institutions.
Why has community care progressed more rapidly for the people
with developmental disabilities than for our seniors? A better
understanding of these changes and differences will assist in
identifying how current policies should be changed.
First, the overwhelming credit goes to families. The shift from
institutional care to community services reflects their preferences
and demands. Families spoke and states responded, though some
states faster than others. Long-term care should be properly viewed
as a matter of personal liberty and freedom, a family issue, and a
social issue as well as a health care issue. They have moved their
loved ones out of institutions and, in many cases, on to
self-direction. When long-term care is still viewed as a medical
model, the progress has been slower. Choice and self-direction
improves access and quality while lowering the cost. That is a
successful formula that families embrace.
Second, the financial relationships are different. Government
needs to acknowledge that its own fragmentation of programs and
philosophy of dependency in which providers, rather than people
themselves are the decision-makers may be contributing factors as
to why the majority of funding for the elderly and physically
disabled still goes to institutional care. The institutional bias
of Medicaid in which a nursing home bed is an entitlement but
supports at home are optional are reinforced by financing
advantages of institutions and relationships between institutions.
In many states, institutions themselves help finance the cost of
Medicaid through upper payment limits and provider taxes. Because
they can be a source of the nonfederal share of the cost of
Medicaid, they have an advantage when it comes to making budgetary
decisions at the state level. Furthermore, institutions, especially
in many rural areas in particular, nursing homes are major sources
of employment, giving the mutual business interests of owners and
workers a powerful political voice.
A third reason is the professionalization of community based
services within the developmentally disabled community.
Organizations have moved out of someone's basement or the church
daycare into sophisticated operations. There are other reasons as
well, but whatever the reason is, the central focus should be on
leveling the playing field between institutional and
non-institutional care. To achieve this, Title XIX itself will need
to be amended and reorganized. Long-term care should have its own
distinct part within Title XIX. The current distinctions between
"mandatory" long term care services and "optional" long term care
services should be eliminated. After more than 25 years of
experience with home and community based waivers, it is time to
recognize the obvious. Home and community based care works and
states should not have to rely on waivers from Washington to
provide it. However, the budget scorekeepers at the Congressional
Budget Office (CBO) and the Office of Management and Budget (OMB)
generally view greater state flexibility in Medicaid will increase
costs. Thus, flexibility will need to be coupled with financing
reform as well.
How do we best achieve broad-based
long-term care coverage, and why is this important for health
Broad-based solutions will require improvement in all of the
current efforts in long-term Medicaid, our retirement systems, and
private long-term care coverage. Part of the solution to easing the
pressures on Medicaid is for Americans to better prepare for their
own retirement needs.
There is great attention to the aging of the "baby boomers" and
to the rapidly growing population over the age of 75 where the need
for long-term care increases. The age and functional abilities of
the person are not the only determinant in whether a person will
seek long-term care services and supports. What happens to someone
else also matters. That is, family members are the greatest source
of support, typically, one spouse caring for the other or an adult
child caring for her parent. Broad based solutions should focus on
keeping families together for as long as possible.
Better transition planning can lower costs. System redesigns
should focus on delaying entry into institutional care or reducing
the length of stay in an institutional setting. We should also help
ensure a sense of security for families by helping a person with
disabilities build assets for their future needs. Today, the
message from Medicaid and SSI to individuals and families is don't
work, don't build assets, don't plan because if you do, you will
lose eligibility. We should reverse this by creating special
accounts for people with disabilities to build assets. The Bush
Administration proposed such accounts called Living with Freedom,
Independence, and Equality (LIFE) Accounts. LIFE accounts would be
tax exempt and would not be counted in determining eligibility for
Medicaid or SSI. Families could draw some funding out of the
Account for incidental items, perhaps 10 percent annually, without
penalty. The Account would then be used for future cost of care if
the person needs to go into an institutional setting.
What is the range of distinct policy
options for financing long-term care? What are the pros and cons of
Option 1: Expansion of Medicare Benefits to include LTC.
Various interests have proposed that long-term care be added as a
benefit to Medicare and that an increase in the payroll tax be
added to finance the cost.
Adding new benefits to Medicare when the current program is
already stressed does not make sense. Medicare will soon be
liquidating assets in order to pay current benefits. The insolvency
date of the Hospital Insurance Trust Fund is likely to be moved up
when the Trustees report next month. Raising taxes on low-income
workers for a benefit 50 years away makes no sense in the current
economy. Small businesses would likely reject this as a threat to
recovery and jobs and so should Congress.
Option 2: Federalization of LTC Under Medicaid.
Federalization of Medicaid long-term care costs has been an
official position of the National Governors' Association (NGA) for
a number of years. The increased cost to the federal government has
been an obvious impediment to the idea.
Option 1 and Option 2 suffer from similar deficiencies. First,
the nature of long-term services and supports do not comport with
Medicare. Medicare is a medical model and provider-driven
entitlement model. Neither one of these is compatible with
long-term services and supports which should be flexible and
person-centered. Long-term care services and supports are as much
social services as they are health care services. Housing is often
a critical issue that needs to be addressed. Yet that is not an
issue that can be equitably reduced to an actuarial value. While
seniors typically use high cost long-term care for a relatively
short period of time, many people with disabilities will rely on
long-term care services and supports for a lifetime. What has been
accepted as sound public policy for years may actually be
counterproductive. For example, requiring a nursing home stay of
some length has been viewed as a deterrent against the so-called
"woodwork effect." But a person's ties to the community breaks down
over time. Policies that protect the Medicare trust funds do not
always work in the best interest of the individual.
Second, the cost of long-term care would increase substantially.
The political pressure to increase provider reimbursement to the
highest reimbursement levels possible would be significant. States
also play an important role in the supply side of long-term care
through the certificate of need process. Under Medicare or
federalization of Medicaid, the cost of long-term care could double
without any increase in real value. Finally, the federal government
lacks the expertise to develop, support, and sustain a community
based delivery system. Long-term services and supports are local
Option 3: LTSS Grant Under New Part B of Medicaid. I
recommend that a third option be considered that will assist in the
transformation of long-term care from institutional to
person-centered supports and services. The current
mandatory/optional services for long term care should be replaced
by a new Part B of Medicaid under which long term services and
supports (LTSS) are offered on an equal basis as under the Vermont
model. States should be allowed to move away from the institutional
level of care to a functional needs assessment system based on
prevention, low, intermediate, and high needs. States should be
required to offer families the opportunity to self-direct their
long term services and supports. Federal rules on important
policies such as spousal impoverishment protections, eligibility,
and nursing home quality standards would be preserved to continue
to hold providers and states accountable.
Medicaid long-term services and supports would be funded through
a dedicated but capped LTSS grant that is stable, predictable,
indexed, and guaranteed. States would have the incentive to adopt
new delivery options through the conversion of the current matching
system to a maintenance of effort requirement (MOE). States
therefore could improve service delivery and save state dollars
without losing federal dollars.
States need a more flexible financing arrangement within
existing funding levels to be able to level the playing field that
also provides them with the ability to work outside the lines of
current federal law and regulations. There can be good reasons to
want to deviate from the current payment rules. For example,
government generally does not want to pay providers for an empty
bed. But to shift to community care while maintaining quality
within institutions, a state would benefit from flexibility which
would allow it to offer a funding stream that puts some nursing
homes on a glide path to closure. The federal government would be
more favorable to states experimentation with "pay for performance"
if it did not have to take the risks connected with open-ended
The current match system works against the interests of what we
should be trying to accomplish--greater value at lower costs.
States are under tremendous pressure to maximize federal dollars.
Medicaid needs a neutral approach in which states can reform their
long term services and supports system but maintain a guaranteed
stable and predictable source of financing from the federal
As part of this transformation, the federal government should
create a new agency as previously suggested and increase, if
necessary, support for discretionary programs that can divert or
delay the need for long term care. The LTSS grant approach combined
with the recommended federal reorganization will fulfill the AARP's
12 "ideal" LTSS system. Investment in information and education
will provide families with greater emotional security that there
will be a continuum of care that supports the health, security,
dignity, and individuality of their loved ones.
Funding for Medicaid acute medical care benefits for eligible
individuals would continue under the current benefit structure
under a new Part A in Medicaid. A child with a disability, for
example, would remain eligible for the Medicaid early periodic,
screening, diagnosis, and treatment (EPSDT) services.
Response to Concerns over Capped Funding. Over the years,
criticism of and opposition to funding caps in Medicaid have
generally focused on three areas:
- states would be handicapped to respond to unforeseen events
that would increase eligibility. Hurricane Katrina, SARS, and
HIV /AIDS have been offered as reasons to oppose capped
- there could be medical breakthroughs that could be very
expensive, putting states at risk for high cost technology.
- states have little control over the cost drivers of health care
making capped funding an unacceptable risk.
None of these objections particularly apply to the area of
long-term care. These three reasons pose little risk in long-term
care in which populations are stable and predictable. Long-term
care is more high touch than high tech. And in the area of
long-term care, states have considerable control over how long-term
care is delivered, which is why there are such great differences
among the states in per capita spending and the distribution
between institutional and community-based care.
Summary. The current Medicaid financing and benefit
structure is an impediment to transformation of long-term care from
an institution-based, provider-driven medical model to a
person-centered, consumer-directed model. Reform should be focused
on policies that can keep families together which will result in
making Medicaid more sustainable and affordable. The current
program costs taxpaying families approximately $5,000 each.
Promises to lower the cost of health care for the average American
family should include modernizing Medicaid so they get the greatest
value for government programs they support with their taxes.