I had the same paneling problem in my family room. What I did was run new base, chair rail and crown moulding around the room.
Next, I filled the groove in the paneling with drywall joint compound and then painted the panling with a high hide hide white primer.
The upper part of the paneling with the filled grooves was wall papered and the lower part painted to give it a wainscott look.
The woork was done about 10 years ago. No problems to date.
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