Remarks before the U.

S Senate Special Committee on Aging On

The Future of Long-Term Care Policy: Continuing the Conversation

Dr. Mark J. Warshawsky Adjunct Scholar American Enterprise Institute And Vice-Chair, Federal Commission on Long-Term Care December 18, 2013

The views expressed in this testimony are those of the author alone and do not necessarily represent those of the American Enterprise Institute.

My name is Mark Warshawsky. I am a Visiting Adjunct Scholar at the American Enterprise Institute and was the Vice-Chairman of the Commission on Long-Term Care. I would like to add to Bruces discussion my own views of the financing issues in more detail.

Although we did reach a consensus at a high level on the need for personal savings and insurance coverage, and significant government support for the lower income population, we did not agree on structures or proportions. I believe that some of that disagreement reflects fundamentally different political and philosophical views. But at least some of the divergence also arises from a lack of empirical clarity on several aspects of the problem, which perhaps further time and resources could resolve. In particular, I am referring to our debates on whether Medicaid is now a LTC insurance program for the middle-income and even higher income households, whether there is significant capacity of working age adults with severe functional limitations to participate in the labor force, and how to improve the private insurance market.

Focusing on the older population, some have expressed the view that Medicaid is now a program just for the poor. But I see that there is a significant extent of Medicaid coverage for those who were solidly in the middle-income group and above in their working years and through retirement. Evidence presented to the commission as well as our understanding of the Medicaid eligibility rules indicated that, in many states, significant housing, retirement, life insurance and spousal assets are set aside in considering Medicaid eligibility, and, many people who were in the middle-income group and higher do, in fact, get Medicaid benefits. Still, there

is much to learn about how significant is spend-down? What is the true extent of gamesmanship in Medicaid eligibility? What would additional efforts by the states bring in through estate recovery? And, how much do the elderly really care about leaving bequests or having expanded care options beyond what Medicaid currently provides? We believe one way to find out is to set up an option for a Medicaid carve-out whereby upon retirement, individuals would have the choice of receiving a lump-sum payment from the government for a significant portion of the expected value of their Medicaid benefitsmost for the poor, little or nothing for the better off. Retirees would use the payment to purchase private, permanent LTCI of their desired benefit design in place of Medicaid coverage.

Turning to the working age population with functional limitations, what little we heard and discussed indicated conflicting views about the extent of the capacity to return or to continue to work if significant supports were to be provided without the intended Medicaid requirement for impoverishment. To my understanding, past experience and data here is not encouraging about that capacity. But I supported the Commission's recommendations to create a demonstration project, and assist the states to achieve greater uniformity in state Medicaid buy-in programs for LTSS. Hopefully, we can learn much from these projects and changes. But even assuming that the results are positive, it is likely that the indicated policy changes will be costly. In light of severe fiscal condition of the Nation, we must be willing to prioritize needs, including by tightening the currently loose eligibility standards for workers above 50 to qualify for Social Security Disability Insurance and Medicare.

Finally, there was disagreement about the possibility to improve the functioning of the private long-term care insurance market. We all agree that it is currently a mess, but there was lesser consensus on the whys, which, of course, leads to the prescriptions put forward. In my view, the problem is mainly one of inadequate demand arising from the crowd-out effect of the Medicaid program, and also lack of public understanding. At the same time, there are problems on the supply side, partly stemming from restrictive state rules on insurance policy design and federal tax law. So we proposed the following: first, provide a tax preference for long-term care insurance policies through retirement and health accounts. Allowing tax-free withdrawals from existing 401(k), IRA, or Section 125 accounts to pay for private long-term care insurance (LTCI) would have minimal budget implications. Lower tax revenues will be more than offset by cost savings as seniors draw on private resourcesrather than public fundsto pay for care. Second, support new combination policies, such as a life care annuity. Such products would marry immediate life annuities to LTCI, allowing individuals to finance their care as well as their retirement. Combining LTCI and life annuities would decrease their combined cost and considerably ease underwriting standards, enabling more seniors to afford and obtain coverage.

I would also like to note that although five of the six Republican commissioners voted in favor of the report of the Commission, all of the Republican commissioners have also stated that the Commissions recommendations should not increase the existing budgetary commitment to health care faced by both state and federal governments. Likewise, we believe that raising

taxes to fund additional entitlement commitments is unwise, especially given recent tax increases to pay for the ACA.

In closing, I want to echo Bruce in stating my appreciation for the tremendous effort of my fellow Commissioners. They did the impossible and produced an important product on very tight schedule. I also want to thank Bruce for his incredible leadership. He was a great partner who worked diligently to instill trust and create an environment conducive to collaboration and dialogue.