[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
MEDICARE SOLVENCY
=======================================================================
HEARING
before the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
MARCH 20, 2001
__________
Serial No. 107-17
Printed for the use of the Committee on Ways and Means
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COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa JOHN LEWIS, Georgia
SAM JOHNSON, Texas RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania XAVIER BECERRA, California
WES WATKINS, Oklahoma KAREN L. THURMAN, Florida
J. D. HAYWORTH, Arizona LLOYD DOGGETT, Texas
JERRY WELLER, Illinois EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
Allison Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
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C O N T E N T S
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Page
Advisory of March 13, 2001, announcing the hearing............... 2
WITNESSES
Health Care Financing Administration, Richard S. Foster, Chief
Actuary, Office of the Actuary................................. 4
Congressional Budget Office, Dan L. Crippen, Director............ 14
SUBMISSION FOR THE RECORD
Advanced Medical Technology Association, statement............... 42
HEARING ON MEDICARE SOLVENCY
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TUESDAY, MARCH 20, 2001
House of Representatives,
Committee on Ways and Means,
Washington, DC.
The Committee met, pursuant to notice, at 12:30 p.m., in
room 1100 Longworth House Office Building, Hon. William M.
Thomas [Chairman of the Committee] presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE,
March 13, 2001
FC-5
Thomas Announces Hearing on Medicare Solvency
Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
and Means, today announced that the Committee will hold a hearing on
Medicare solvency. The hearing will take place on Tuesday, March 20,
2001, in the main Committee hearing room, 1100 Longworth House Office
Building, directly following the joint Committee on Ways and Means and
Senate Committee on Finance hearing on solvency.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. The sole
witness at this hearing will be Rick Foster, Chief Actuary, Office of
the Actuary, Health Care Financing Administration. However, any
individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee and for
inclusion in the printed record of the hearing.
BACKGROUND:
Although growth in Medicare expenditures has been flat the last
several years, costs are expected to rise substantially in the near-
and long-term. For example, the Congressional Budget Office estimates
that Medicare expenditures will rise by 10.5 percent in fiscal year
2001 and more than double over the next 10 years, from $219 billion in
2000 to $497 billion in 2011. At that time, 77 million baby boomers
begin to retire and the ratio of workers per beneficiary will decline
from about 4:1 today to 2:1 in 2030. The Medicare Trustees will release
their updated 30-year projections of Medicare expenditures and
revenues, on Monday, March 19, 2001.
In announcing the hearing, Chairman Thomas stated: ``Members of
Congress must have a thorough understanding of the fiscal challenges
that confront the Medicare program before we embark on any policies to
modernize the program. The Chief Actuary will provide insight and
analysis regarding the factors driving the Trustees' projections.''
FOCUS OF THE HEARING:
The House Committee on Ways and Means and the Senate Committee on
Finance will hold a joint hearing on the Medicare and Social Security
Trustees' report earlier in the day. The purpose of this hearing is to
explore in more depth the fiscal challenges confronting the Medicare
program and current measures of Medicare solvency.
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Chairman Thomas. The Committee will come to order. The
Chair was interested in having a Ways and Means hearing
following the joint hearing with the Senate Finance Committee
on the Medicare and Social Security reports for principally one
reason. There may be other reasons that members wish to focus
on. But when there is a change in the estimating procedure,
especially when it is a change which increases the concerns
about the solvency of the program, the Chair believes that it
is useful to spend a few minutes talking about the background,
the history of, the intention of the decision to make the
change. There is so much in this process which is not political
or partisan that we do not focus on that the Chair thought that
if we would bring the Medicare Actuary before us, Mr. Foster,
who has been very helpful to us in the past, and I do want to
personally say, Mr. Foster, thank you for the contributions you
made to the bipartisan Commission on the Reform of Medicare at
the time we were grappling with what does the future look like
and how do you predict it, to shed light on why we changed the
way we estimate the cost of Medicare.
With us also is Mr. Crippen of the Congressional Budget
Office (CBO) because they had adopted the methodology prior to
that. I would say that without objection we would move directly
to any comments they might have and then throw it open to
questions by members, hopefully focusing on the rationale for,
the reason for and the consequences of the change of the
estimating procedure for the Medicare Trust Fund. And first I
would recognize the Chief Actuary of the Medicare Trust Fund,
Mr. Foster.
STATEMENT OF RICHARD S. FOSTER, CHIEF ACTUARY, OFFICE OF THE
ACTUARY, HEALTH CARE FINANCING ADMINISTRATION
Mr. Foster. Thank you, Chairman Thomas. Chairman Thomas,
distinguished members of the Committee, thank you for inviting
me here today to testify about the financial outlook of the
Medicare program. I welcome the opportunity to assist you in
your efforts to ensure the future financial viability of the
Nation's second largest social insurance program. I will
briefly mention the most important findings of the 2001
trustees reports that were introduced yesterday. My written
testimony as well as the reports themselves contain substantial
additional detail.
I would like to note I am not much of a historian, but I do
know the history of Medicare a little bit. I think legislative
historians recognize that Medicare was enacted as a combination
of competing proposals that were artfully assembled by your
predecessor, Mr. Thomas, Wilbur Mills, in order to consolidate
political support. As a result, there are substantial
differences between hospital insurance, or Part A of Medicare,
and supplementary medical insurance, or Part B of Medicare.
These involve differences in coverage, eligibility
requirements, benefit structures, and in particular the
financing provisions.
Hospital insurance is financed primarily by payroll taxes,
and the tax rate is fixed in the law. It cannot change without
further legislation. In contrast, supplementary medical
insurance, or Part B, is financed about 25 percent by
beneficiary premiums and the balance, 75 percent, by general
revenues. These financing amounts for Part B are adjusted
annually to match the following year's expected cost.
I would argue that because by law these two trust funds are
distinct financial entities, each with its own specified
financing and benefits, that it is necessary to do a separate
analysis of the financial status of each Part because they are
so different. Accordingly, in the Trustees reports and in
evaluating the financial status of Medicare, we look separately
at the two trust funds. That is consistent with actuarial
standards of practice and also the statutory requirements. That
is a different issue of course, (and we may get into this in
the discussion) than focusing on Medicare overall in terms of
its financial requirements on society and on the economy.
We heard a lot this morning about the mixed financial
picture presented by the new Medicare Trustees reports. We have
seen a moderate improvement in the short range financial
outlook for the Part A trust fund over the next 25 to 30 years,
and that is welcome. On the other hand, based on more realistic
assumptions adopted for use in this year's Trustees reports,
the long-range expenditure growth for Medicare, both Part A and
Part B, is substantially greater than previously assumed. This
revision in assumptions was recommended by an independent
expert panel of actuaries and economists that was convened by
the prior Board of Trustees in 2000 to review these
assumptions.
I concurred with these recommendations, as did the Board of
Trustees, and I would note that in both the Part A and Part B
Trustees reports, as in prior Trustees reports, the Board of
Trustees urges prompt attention to the remaining financial
issues facing Medicare.
I would conclude these introductory comments by again
thanking you for the opportunity to testify and I pledge the
Office of the Actuary's continuing assistance with the efforts
by the Congress and by the administration to determine
effective solutions to the remaining financial problems facing
Medicare. I would be happy to answer any questions that you
have.
[The prepared statement of Mr. Foster follows:]
Statement of Richard S. Foster, Chief Actuary, Office of the Actuary,
Health Care Financing Administration
Chairman Thomas, Congressman Rangel, distinguished Committee
members, thank you for inviting me to testify today about the financial
outlook for the Medicare program as shown in the recently released 2001
annual reports of the Medicare Board of Trustees. I welcome the
opportunity to assist you in your efforts to ensure the future
financial viability of the nation's second largest social insurance
program--one that is a critical factor in the income security of the
our aged and disabled populations.
The financial outlook for the Medicare program presents a mixed
picture. Over the next 10 years, the Hospital Insurance (HI) and
Supplementary Medical Insurance (SMI) trust funds are adequately
financed and meet the Trustees' formal tests for short-range financial
adequacy. The depletion of the HI trust fund, which had been projected
for 2025 in last year's Trustees Report, has been postponed to 2029 in
the new estimates.
Over the long range, in contrast, HI and SMI expenditures are
projected to grow more rapidly than in previous reports as a result of
revised long-range Medicare cost growth assumptions. The assumption
change was recommended by the 2000 Medicare Technical Review Panel, an
independent, expert group of actuaries and economists convened by the
Board of Trustees to review the Medicare financial projections. HI tax
revenues are projected after 2015 to fall increasingly short of program
expenditures, eventually covering only one-third of estimated costs by
the end of the Trustees' 75-year projection period. For SMI, continuing
rapid expenditure growth would place growing financial burdens both on
beneficiaries and on the Federal budget. The SMI trust fund would
remain in financial balance indefinitely, however, due to the annual
redetermination of program financing.
Background
Roughly 39 million people were eligible for Medicare benefits in
2000. HI, or ``Part A'' of Medicare, provides partial protection
against the costs of inpatient hospital services, skilled nursing care,
post-institutional home health care, and hospice care. SMI covers most
physician services, outpatient hospital care, home health care not
covered by HI, and a variety of other medical services such as
diagnostic tests, durable medical equipment, and so forth.
Only about 22 percent of HI enrollees received some reimbursable
covered services during 2000, since hospital stays and related care
tend to be infrequent events even for the aged and disabled. In
contrast, the vast majority of enrollees incur reimbursable SMI costs
because the covered services are more routine and the annual deductible
for SMI is only $100.
The two parts of Medicare are financed on totally different bases.
HI costs are met primarily through a portion of the FICA and SECA
payroll taxes.1 Of the total FICA tax rate of 7.65 percent
of covered earnings, payable by employees and employers, each, HI
receives 1.45 percent. Self-employed workers pay the combined total of
2.90 percent. Following the Omnibus Budget Reconciliation Act of 1993,
HI taxes are paid on total earnings in covered employment, without
limit. Other HI income includes a portion of the income taxes levied on
Social Security benefits, interest income on invested assets, and other
minor sources.
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\1\ Federal Insurance Contributions Act and Self-Employment
Contributions Act, respectively.
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SMI enrollees pay monthly premiums ($50.00 in 2001) that cover
about 25 percent of program costs. The balance is paid by general
revenue of the Federal government and a small amount of interest
income.
The HI tax rate is specified in the Social Security Act and is not
scheduled to change at any time in the future under present law. Thus,
program financing cannot be modified to match variations in program
costs except through new legislation. In contrast, SMI premiums and
general revenue payments are reestablished each year to match estimated
program costs for the following year. As a result, SMI income
automatically matches expenditures without the need for legislative
adjustments.
Each part of Medicare has its own trust fund, with financial
oversight provided by the Board of Trustees. My discussion of
Medicare's financial status is based on the actuarial projections
contained in the Board's 2001 reports to Congress. Such projections are
made under three alternative sets of economic and demographic
assumptions, to illustrate the uncertainty and possible range of
variation of future costs, and cover both a ``short range'' period (the
next 10 years) and a ``long range'' (the next 75 years). The
projections are not intended as firm predictions of future costs, since
this is clearly impossible; rather, they illustrate how the Medicare
program would operate under a range of conditions that can reasonably
be expected to occur. The projections shown in this testimony are based
on the Trustees' ``intermediate'' set of assumptions.
Short-range financial outlook for Hospital Insurance
Chart 1 shows HI expenditures versus income over the last 10 years
and projections through 2010. For most of the program's history, income
and expenditures have been very close together, illustrating the pay-
as-you-go nature of HI financing. The taxes collected each year are
intended to be roughly sufficient to cover that year's costs. Surplus
revenues are invested in special Treasury securities.
Chart 1--HI expenditures and income
(In billions)
[GRAPHIC] [TIFF OMITTED] T4214A.001
During 1990-97, HI costs increased at a faster rate than HI income.
Expenditures exceeded income by a total of $17.2 billion in 1995-97.
Prior to the Balanced Budget Act of 1997, this trend was expected to
continue, with costs growing at about 8 percent annually, against
revenue growth of only 5 to 6 percent. The 1995-97 shortfalls were met
by redeeming trust fund assets, but in the absence of corrective
legislation assets would have been depleted in about 2001. The Medicare
provisions in the Balanced Budget Act were designed to help address
this situation. As indicated in chart 1, these changes--together with
subsequent lowgeneral and medical inflation and increased efforts to
address fraud and abuse in the Medicare program--resulted in a decline
in HI expenditures during 1998-2000 and trust fund surpluses totaling
$61.8 billion over this period.
The Board of Trustees has recommended maintaining HI assets equal
to at least one year's expenditures as a contingency reserve. As
indicated in chart 2, HI assets at the beginning of 2001 represented
about 125 percent of estimated expenditures for the year. The HI trust
fund is estimated to continue to experience significant surpluses for
about the next 15 years. After 2020, however, expenditures are
projected to again exceed income. As shown in chart 2, assets would
initially accumulate rapidly but then be drawn down to cover the
resulting shortfalls. The trust fund would be exhausted in 2029 under
the Trustees' intermediate assumptions.
The depletion date estimated in the 2001 Trustees Report represents
a significant improvement compared to the estimate in last year's
report (2025). The improvement arises from higher payroll tax revenues
and income taxes on Social Security benefits in 2000 than had been
estimated, together with assumed faster economic growth over the next
10 years. In addition, benefit expenditures in 2000 were lower than
estimated, and adjustments have been made to projected expenditure
growth for the future based on this experience. The higher payroll
taxes in 2000 resulted from robust economic growth, particularly the
rapid growth in productivity and wages. Lower-than-expected HI
expenditures reflected a reduction in the utilization of skilled
nursing facility services, low increases in health care costs
generally, and continuing efforts to combat fraud and abuse in the
Medicare program.
Chart 2--HI trust fund assets
(Assets at beginning of year as percentage of annual expenditures)
[GRAPHIC] [TIFF OMITTED] T4214A.002
2000 Medicare Technical Review Panel
The projections in the new Trustees Reports also reflect a number
of recommendations made by the 2000 Medicare Technical Review Panel.
The impact of these recommendations on the HI projections for the first
25 years were largely offsetting and had a minimal impact on the
estimated year of asset depletion.
The Technical Panel was convened by the Board of Trustees in 2000
to review the financial projections in the Medicare Trustees Reports.
It was made up of seven independent health actuaries and health
economists, who were nominated by the prior public members of the Board
of Trustees. The panel met from June through November 2000 and issued
its final recommendations in December 2000.
The panel unanimously found that the projection work of the Office
of the Actuary at the Health Care Financing Administration was of
excellent quality and was performed in a highly competent and
completely professional manner. Overall, the members concluded that the
methods and assumptions used to project the status of the Medicare
program were reasonable, with the exception of the long-range
expenditure growth assumption, which they believed to be too low. In
addition to their recommendation to increase this growth rate
assumption, the panel issued 37 other findings and recommendations.
For the 2001 Trustees Reports, the Medicare Board of Trustees
adopted all of the panel's recommendations that could realistically be
incorporated within the short time available following the panel's
report. These included the recommended long-range growth assumptions,
corresponding adjustments to short-range ``case-mix'' growth
assumptions, an improvement in certain assumptions relating to the
costs for beneficiaries who switch from fee-for-service coverage to
Medicare+Choice plans, and several recommendations regarding the
content of the Trustees Reports. The Board will consider the panel's
remaining recommendations for possible inclusion in future reports, as
time and available health research knowledge permit.
In past Trustees Reports, increases in the average HI cost per unit
of service were assumed to gradually decline after the first 15 years
and to equal growth in average hourly earnings during the final 50
years of the projection. The last expert review panel, in 1991,
concluded that the assumption was ``not unreasonable'' but recommended
that it be monitored carefully in subsequent years. The 2000 Technical
Panel recommended that average HI and SMI expenditures per beneficiary
be assumed to increase at the rate of per capita GDP plus one
percentage point. They based this recommendation primarily on the
historical impact of advances in medical technology on health care cost
increases, which they expected to continue indefinitely. They also
considered other factors contributing to health care cost growth, the
assumptions of other forecasters, and the ``sustainability'' of such
cost increases in the very long range. Although they acknowledged the
remaining (and considerable) uncertainty regarding health expenditure
growth rates over very extended periods, the panel concluded that there
is substantially greater evidence in favor of the faster growth
assumption than there is in support of the prior HI and SMI Trustees
Report assumptions. I concur with their conclusion, as does the Board
of Trustees.
Long-range financial outlook for Hospital Insurance
The interpretation of dollar amounts through time is very difficult
over extremely long periods like the 75-year projection period used in
the Trustees Reports. For this reason, long-range tax income and
expenditures are expressed as a percentage of the total amount of wages
and self-employment income subject to the HI payroll tax (referred to
as ``taxable payroll''). The results are termed the ``income rate'' and
``cost rate,'' respectively. Projected long-range income and cost rates
are shown in chart 3 for the HI program.
Past income rates have generally followed program costs closely,
rising in a step-wise fashion as the payroll tax rates were adjusted by
Congress. Income rate growth in the future is minimal, due to the fixed
tax rates specified in current law. Trust fund revenue from the
taxation of Social Security benefits increases gradually, because the
income thresholds specified in the Internal Revenue Code are not
indexed. Over time, an increasing proportion of Social Security
beneficiaries will incur income taxes on their benefit payments.
Chart 3--Long-range HI income and costs under intermediate assumptions
(as a percentage of taxable payroll)
[GRAPHIC] [TIFF OMITTED] T4214A.003
Past HI cost rates have generally increased over time but have
periodically declined abruptly as the result of legislation to expand
HI coverage to additional categories of workers, raise (or eliminate)
the maximum taxable wage base, introduce new payment systems such as
the inpatient prospective payment system, etc. Cost rates decreased
significantly in 1998-2000 as a result of the Balanced Budget Act
provisions together with strong economic growth. After 2002, however,
cost rates are projected to increase steadily and accelerate
significantly with the retirement of the baby boom, beginning in about
2010. As a result of the revised long-range expenditure growth
assumption, projected cost rates after 2030 are substantially greater
than the corresponding estimates in last year's Trustees Report. In
particular, by the end of the 75-year period, scheduled tax income
would cover only one-third of projected expenditures.
The average value of the financing shortfall over the next 75
years--known as the actuarial deficit--is 1.97 percent of taxable
payroll. This deficit could be closed by an immediate increase of 1
percentage point in the HI payroll tax rate, payable by employees and
employers, each. (The projected deficit could also be eliminated by
many other revenue increases and/or expenditure reductions.) Note,
however, that such a change would only correct the deficit ``on
average.'' Initially, HI revenue would be significantly in excess of
expenditures, but by the end of the period, only about one-fourth of
the projected deficit would be eliminated.
The effect of the baby boom's retirement on Social Security and
Medicare is relatively well known, having been discussed at length for
more than 25 years. Basically, by the time the baby boom cohorts have
retired, there will be nearly twice as many HI beneficiaries as there
are today. When the HI program began, there were 4.5 workers in covered
employment for every HI beneficiary. As shown in chart 5, this ratio is
currently 4.0 workers per beneficiary. With the advent of the baby
boom's retirement, the number of beneficiaries will increase more
rapidly than the labor force, resulting in a decline in this ratio to
2.3 in 2030 and 2.0 in 2075 under the intermediate projections. Other
things being equal, there would be a corresponding increase in HI costs
as a percentage of taxable payroll.
Chart 4--Workers per HI beneficiary
[GRAPHIC] [TIFF OMITTED] T4214A.004
There are other demographic effects beyond those attributable to
the varying number of births in past years. In particular, life
expectancy has improved substantially in the U.S. over time and is
projected to continue doing so. The average remaining life expectancy
for 65-year-olds increased from 12.4 years in 1935 to 17.4 years
currently, with an estimated further increase to about 21 years at the
end of the long-range projection period. Medicare costs are also
sensitive to the age distribution of beneficiaries. Older persons incur
substantially larger costs for medical care, on average, than younger
persons. Thus, as the beneficiary population ages over time they will
move into higher-utilization age groups, thereby adding to the
financial pressures on the Medicare program.
Financial outlook for Supplementary Medical Insurance
Chart 5 presents estimates of the short-range outlook for SMI and
is generally similar to the information presented in chart 1 for the HI
program. Two key differences stand out: First, the income and
expenditure curves for SMI are nearly indistinguishable in the future.
As noted previously, SMI premiums and general revenue income are
reestablished annually to match expected program costs for the
following year. Thus, the program will automatically be in financial
balance, regardless of future program cost trends. The second
difference is--in contrast to the decline in HI expenditures during
1998-2000--SMI expenditures increased at an average rate of 6.9 percent
over this period.
Chart 5--SMI expenditures and income
(In billions)
[GRAPHIC] [TIFF OMITTED] T4214A.005
Although the Balanced Budget Act contained a number of provisions
designed to reduce the rate of growth in SMI expenditures, their impact
was more than offset by other factors. First, the Act specified that
home health services not associated with a prior stay in an institution
were to be converted to Part B benefits and paid for by the SMI trust
fund (phased in over several years). In addition, the Act provides for
several significant new preventive or ``screening'' benefits, such as
colorectal examinations, not previously covered by Medicare, and it
gradually corrects an excessive level of beneficiary coinsurance for
outpatient hospital services. As a result, SMI costs are estimated to
increase somewhat as a result of the Balanced Budget Act. Further cost
increases have resulted under the Balanced Budget Refinement Act of
1999 and the Benefit Improvement and Protection Act of 2000.
Chart 6 shows projected long-range SMI expenditures and premium
income as a percentage of GDP. Under present law, beneficiary premiums
will continue to cover approximately 25 percent of total SMI costs,
with the balance drawn from general revenues. Expenditures are
projected to increase at a significantly faster rate than GDP, for
largely the same reasons underlying HI cost growth. After about 2030,
the SMI costs projected in the 2001 Trustees Report are substantially
higher than those in the 2000 report, again primarily as a result of
the revised long-range growth rate assumption recommended by the
Medicare Technical Review Panel.
Although SMI is automatically in financial balance, the program's
continuing rapid growth in expenditures places an increasing burden on
beneficiaries and the Federal budget. In 2000, for example, about 6
percent of a typical 65-year-old's Social Security benefit was withheld
to pay the monthly SMI premium of $45.50, and another 8 percent was
required to cover average deductible and coinsurance expenditures for
the year. Twenty years later, under the intermediate assumptions, the
same beneficiary's premium and copayment costs would average 21 percent
of his or her benefit.2 Similarly, SMI general revenues in
fiscal year 2000 were equivalent to 5.4 percent of the personal and
corporate Federal income taxes collected in that year. If such taxes
remain at their current level, relative to the national economy, then
SMI general revenue financing in 2075 would represent 22 percent of
total income taxes.
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\2\ The growth in average copayment costs over this period is
reduced significantly by (i) the fixed $100 deductible applicable to
SMI services, and (ii) the gradual correction of an excessive level of
beneficiary coinsurance on outpatient hospital services, as provided
for in the Balanced Budget Act of 1997 and subsequent legislation.
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Chart 6--SMI expenditures and premiums as a percentage of GDP
[GRAPHIC] [TIFF OMITTED] T4214A.006
Combined HI and SMI expenditures
The financial status of the Medicare program is appropriately
evaluated for each trust fund separately, as summarized in the
preceding sections. By law, each fund is a distinct financial entity,
and the nature and sources of financing are very different between the
two funds. This distinction, however, frequently causes greater
attention to the HI trust fund--its projected year of asset depletion
in particular--and less attention to SMI, which does not face the
prospect of depletion. It is important to consider the total cost of
the Medicare program and its overall sources of financing, as shown in
chart 7. Interest income is excluded since, under present law, it would
not be a significant part of program financing in the long range.
Combined HI and SMI expenditures are projected to increase from 2.2
percent of GDP to about 8.5 percent in 2075, based on the Trustees'
intermediate set of assumptions. In past years, total income from HI
payroll taxes, income taxes on Social Security benefits, HI and SMI
beneficiary premiums, and SMI general revenues was very close to total
expenditures. Over the next 15 years, such Medicare revenues are
estimated to slightly exceed program expenditures, reflecting the
expected excess of HI tax income over expenditures. Thereafter,
however, overall expenditures are expected to exceed aggregate
revenues. Again, the growing difference arises from the projected
imbalance between HI tax income and expenditures--throughout this
period, SMI revenues would continue to approximately match SMI
expenditures.
Chart 7--Medicare expenditures and sources of income as a percentage of
GDP
[GRAPHIC] [TIFF OMITTED] T4214A.007
Over time, SMI premiums and general revenues would continue to grow
rapidly, since they would keep pace with SMI expenditure growth under
present law. HI payroll taxes are not projected to increase as a share
of GDP, primarily because no further increases in the tax rates are
scheduled under present law. Thus, as HI sources of revenue become
increasingly inadequate to cover HI costs, SMI premiums and general
revenues would represent a growing share of total Medicare income.
Conclusions
In their 2001 reports to Congress, the Board of Trustees notes the
significant improvement in the financial outlook for Medicare that has
come about as a result of legislation, strong economic growth,
relatively slow growth in health costs generally, and efforts to combat
fraud and abuse. But they emphasize the continuing financial pressures
facing Medicare and urge the nation's policy makers to take further
steps to address these concerns. They also argue that consideration of
further reforms should occur in the relatively near future. Today's
relatively favorable conditions could change, accelerating the expected
return to deficits in the HI trust fund. Moreover, the earlier
solutions are enacted, the more flexible and gradual they can be.
Finally, the Trustees note that early action increases the time
available for affected individuals and organizations--including health
care providers, beneficiaries, and taxpayers--to adjust their
expectations.
I concur with the Trustees' assessment and pledge the Office of the
Actuary's continuing assistance to the joint effort by the
Administration and Congress to determine effective solutions to the
remaining financial problems facing the Medicare program. I would be
happy to answer any questions you might have on Medicare's financial
issues.
Chairman Thomas. Thank you very much. Mr. Crippen.
STATEMENT OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET
OFFICE
Mr. Crippen. Mr. Chairman. We have----
Chairman Thomas. Turn the microphone on and it is
unidirectional.
Mr. Crippen. Mr. Chairman, we have effectively, although
not through any conspiracy, split our duties today. Rick has
talked to you about the trust funds, about changes. As you
know, the trustees assumptions on cost growth are roughly the
same as ours now. We went up a little earlier, not because we
were any better but frankly because we had more current
information at the time than the actuaries had for their last
report. So we were able to make this change last July in
contrast to the actuaries who were not able to make it in time,
did not have the data in time for the earlier reports.
We are now pretty much in accord, certainly on the long-run
cost assumptions. So instead of dwelling on that aspect, at
least until you get to your questions, I thought I would spend
a couple of minutes talking about different ways of analyzing
these trust funds.
I think part of the discussion at the earlier hearing today
showed some confusion about the concepts behind the approaches.
There are any number of ways of analyzing governmental
programs, especially those that span many years and multiple
generations. We need to be very careful about the questions we
are attempting to answer and which analyses to apply. We also
need to be careful not to mix the analyses and their respective
concepts.
In the case of Social Security and Medicare, we pay the
benefits of our parents and grandparents through our taxes,
both payroll and income taxes. When we retire, both programs
will take much more from our children to fund our benefits.
This year, Social Security and Medicare will account for 6.5
percent of gross domestic product (GDP). By 2030, those
programs will grow to 11 percent of GDP. Moreover, the number
of beneficiaries will grow much faster than the number of
workers paying taxes to support those programs.
How we analyze these spending commitments and demographic
changes is vitally important. One approach, the one you have
been dealing with thus far today, is to use actuarial
techniques to project costs and income and focus on the revenue
specifically dedicated to the program. That approach can help
us ascertain whether a program--when isolated from the rest of
the budget and the program's effect on the economy--is stable
on its face, over long periods of time.
One measure of actuarial long-run viability is solvency--
that is, when expected revenues and expenditures are roughly
equal over prescribed but long periods. Another measure is the
comparison of the present value of total expected revenues and
total expected obligations, or whether the program is
``funded'' in some sense. Within each of those measures are
variations on the concepts that could actually give you some
fairly disparate results.
In the end, actuarial analysis is limited to a relatively
narrow analysis of one program at a time without consideration
of the rest of the Federal budget or the economy. It can reveal
whether a program, as designed, appears to be stable over time,
but it cannot tell you if the program is sustainable over
time--whether the Federal budget or the U.S. economy will
support the program's level of transfer of resources from the
working population to the retired population.
A second approach to the analysis involves the program's
interaction with the rest of the budget. In the case of
Medicare the interactions are direct because it is on-budget
along with the rest of the non-Social Security programs. Even
Social Security, although technically off-budget, can have
striking on-budget effects. But whether a program is on- or
off-budget, it is the combined effects of all taxes and
spending that determine the Federal Government's impact on the
economy--for example on whether public debt is increasing or
declining.
Mr. Chairman, a quick example of difference between
actuarial and budgetary accounting might help. If you choose to
transfer general revenues, say, from the on-budget surplus to
the Medicare part A trust fund, the two analyses--that is,
budgetary versus actuarial, would yield very different
conclusions. Under an actuarial approach, the trust fund
balance, and therefore its projected solvency and unfunded
liability, would all be improved. If the transfer is large
enough, the trust fund could remain solvent forever. The trust
fund looks better because there would be more official
Committee debt credited to it. That debt and any interest on
it, however, would have to be redeemed in the future by raising
taxes, cutting spending elsewhere in the budget, or borrowing
from the public, effects that are much the same as those that
would occur if there had been no transfer at all.
Another obvious example is the construction of the part B
trust fund. It is actuarially sound, or adequately financed, in
the words of the trustees, but only because it has an unlimited
draw on the general funds of the Treasury. Again, the trust
fund appears sound, but the growth in part B spending will have
direct and potentially dramatic effects on the rest of the
budget and the economy.
Last, Mr. Chairman, these programs are susceptible to
economic analysis--that is, the interaction of the programs and
the economy. Let me give you one important example. The chart,
which the Committee has seen before, represents our best
current projection of the amount of resources we baby boomers
will consume after we retire. We will consume in just these
three programs almost as much of the economic output in 2030 as
does the entire Federal Government today. That result is driven
by the well-known fact that we will double the number of
retirees while the number of workers barely increases.
This measure depends on only two factors, the size of the
economy and the amount of resources obligated for retirees. It
has nothing to do with the existence of a trust fund or of any
balances within the fund. It does not matter if the program is
solvent or if it has unfunded liabilities, and the only way to
alter this in the future is to alter one of the two factors--
that is, change the size of the economy or the amount of
benefits.
By way of summary, let's compare the actuarial budgetary
and economic effects at the time when dedicated revenues to
either of these trust funds no longer cover expenditures. The
reports that Rick has presented to you today show that it
happens for both programs in the year 2016. In both cases, the
actuaries estimate that there will still be positive and, I
believe, growing trust fund balances in 2016. Therefore, the
actuarial analysis would suggest ample resources to meet
obligations.
The budgetary analysis, however, would denote the transfer
of general revenues to the trust funds, as interest paid on
trust fund balances. Those general revenues could not be used
for other spending or debt reduction. Indeed, the transfers
would have to be funded again by the usual tax increase,
reductions in spending, or the Treasury's issuance of debt.
Similarly, the economic analysis would pose the question,
that you heard this morning as well. Where is the cash? The
Treasury will have to have the cash to honor the checks sent to
retirees and medical providers. The Committee can get the cash
in only three ways: cut other spending, raise taxes, or borrow
from the public. The economic analysis also suggests that it
doesn't matter if there are balances in the trust fund or,
indeed, if there is a trust fund at all. The cash still has to
be generated to cover the shortfall in current revenues.
Mr. Chairman, until now we have been discussing how to
finance the promises made to retirees, but a clearer picture
may emerge if we think of these long-term programs in terms of
consumption, or how the elderly ultimately spend the money that
is transferred through these programs. After all, facilitating
the consumption of goods and services--including medical
services--is the purpose of the transfers. When I retire, I
will use Social Security funds to buy groceries, clothes, and
transportation, most of which will be produced about the time I
use it. In other words, I will be competing with my children
and grandchildren for the goods they are producing. What I eat,
what I wear, what I drive, they cannot. That is why measures
such as program spending as a percentage of GDP may be more
relevant and real than trust fund or actuarial balances.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Crippen follows:]
Statement of Dan L. Crippen, Director, Congressional Budget Office
Mr. Chairman, members of the Committee:
There are a number of ways of analyzing governmental programs,
especially those that span many years and multiple generations. We need
to be careful about the question we are attempting to answer and which
analyses to apply. We further need to be careful not to mix the
analyses and their respective concepts.
In the case of Social Security and Medicare, we pay the benefits of
our parents and grandparents through taxes on current workers, on us-
both payroll and income taxes-and both programs will take much more
from our children to fund them when we retire.
This year, Social Security and Medicare will account for 6.5
percent of GDP. By 2030, those programs will grow to 11.0 percent of
GDP. Moreover, the number of beneficiaries will grow much faster than
the number of workers paying taxes to support those programs. The ratio
of covered workers to beneficiaries will drop from about 3.4 this year
to about 2.3 by 2030.
How we analyze these spending commitments and demographic changes
is vitally important.
One approach, the one you've been dealing with thus far today, is
to use actuarial techniques to project costs and income, and focus on
the revenues specifically dedicated to the program. That approach can
help us ascertain whether a program, abstracted from the rest of the
budget and the program's effect on the economy, is stable on its face-
usually over long periods of time.
One measure of actuarial long-run viability is ``solvency''-are
expected revenues and expenditures roughly equal over proscribed but
long periods? Another measure is the comparison of the present value of
total expected revenues and total expected obligations-whether the
program is ``funded'' in some sense. Within each of these measures are
variations on the concepts that can give fairly disparate results.
In the end, actuarial analysis is limited, however, to a relatively
narrow analysis of one program at-a-time, without consideration of the
rest of the federal budget or the economy.
It can reveal whether a program as designed appears to be stable
over time. It cannot tell you, however, if the program is sustainable
over time-whether the federal budget or the U.S. economy will support
the level of transfer of resources from the working population to the
retired population.
A second approach to the analysis involves the programs'
interaction with the rest of the budget. In the case of Medicare, the
interactions are direct because it is ``on-budget'' with the rest of
the non-Social Security programs. Even Social Security, although
technically off-budget, can have striking on-budget effects. But
whether on- or off-, it is the combined effects of all taxes and
spending that determine the federal government's impact on the economy-
on whether public debt is increasing or decreasing, for example.
Mr. Chairman, a quick example of the difference between actuarial
and budgetary accounting might be helpful.
If you chose to transfer general revenues, say from the on-budget
surplus, to the Medicare Part A Trust Fund, the two analyses would
yield very different conclusions. The Trust Fund balance, and therefore
its' projected solvency and unfunded liability, would all be improved-
if the transfer is large enough, the Trust Fund could be made
``solvent'' forever. However, the rest of the budget would be unchanged
and unaffected and the effect of the transfer on the economy would be
nil.
The Trust Fund looks better because there would be more official
government debt credited to it. That debt and any interest on it,
however, would have to be redeemed in the future by raising taxes,
cutting spending elsewhere in the budget, or borrowing from the public-
effects much the same as if there had been no transfer at all.
Another obvious example is the construction of the Part B Trust
Fund. It is actuarially sound or ``adequately financed'', but only
because it has an unlimited draw on the general funds of the Treasury.
Again, the trust fund appears sound, but the growth in Part B spending
has direct and potentially dramatic effects on the rest of the budget
and the economy.
Last, Mr. Chairman, these programs are susceptible to economic
analysis-the interaction of the programs and the economy.
Let me give one important example. This chart, which the Committee
has seen before, represents our current best projection of the amount
of resources we baby-boomers will consume after we retire. We will
consume in just these three programs almost as much of the economic
output in 2030 as does the entire federal government today. This result
is driven by the fact we will almost double the number of retirees
while the number of workers barely increases.
This measure depends on only two factors: the size of the economy
and the amount of resources obligated for retirees. It has nothing to
do with the existence of a trust fund or any balances within it. It
does not matter if the program is solvent or has incurred unfunded
liabilities. And, the only way to alter this future is to alter one of
the two factors-change the size of the economy or the amount of
benefits.
By way of summary, let's compare the actuarial, the budgetary, and
the economic effects of the time when dedicated revenues to either of
these trust funds no longer covers expenditures for that year-in
yesterday's reports that year for both programs happens to be 2016.
In both cases, the actuaries estimate there will still be positive
and growing trust fund balances in 2016. Therefore, the actuarial
analysis would suggest ample resources to meet obligations.
The budgetary analysis would denote the transfer of general
revenues to the trust funds as an intergovernmental interest payment.
Those general revenues could not be used for other spending or debt
reduction-indeed, the transfers would have to be funded by a tax
increase, reductions in other spending, or the Treasury issuance of
debt.
Similarly, the economic analysis would pose the question: where's
the cash? Treasury will have to have the cash to honor the checks sent
to retirees and medical providers. It can get the cash in only three
ways: cut other spending, raise taxes, or borrow from the public. This
analysis also suggests that it doesn't matter if there are balances in
a trust fund or, indeed, if there is a trust fund at all-the cash has
to be generated by the Treasury to cover any shortfall of revenues.
Mr. Chairman, until now, we've been discussing how to finance the
promises made to retirees, but a clearer picture emerges if we think of
these long-tailed programs in terms of consumption-how the elderly
spend the money. After all, facilitating consumption is the purpose of
the transfers.
When I retire, I will use Social Security funds to buy groceries,
clothes, transportation-most of which will be produced about the time I
use it. In other words, I will be competing with my children and
grandchildren for the goods they are producing. What I eat, what I
wear, what I drive, they cannot. That is why measures such as program
spending as a percent of GDP may be more relevant and real than trust
fund or actuarial balances.
Chairman Thomas. Thank you very much. I want to ask a
question and I don't expect an answer today. But I would like
one as we begin to look at this. This is difficult enough in a
nonpolitical environment to make decisions about resources and
clearly who gets what, when and how, oftentimes, given the
longevity question, immediately competing with those who are
paying in versus those who are receiving the benefits. To what
extent does the terminology that we use; i.e., a trust fund,
with what people would normally read into the concept of a
trust fund, a fiduciary responsibility, people who are, quote -
unquote, managing the funds, to what extent does a term like
``supplemental medical insurance'' create an impression that
there is again a relationship there if you use the term
``insurance'' when in fact if we examine what is actually going
on, and neither the HI or the Social Security Trust Fund is a
trust fund in that sense, nor is the supplemental insurance an
insurance fund in that sense. Would it help us in your
opinion--and here is where I need your help--what would be the
terms that actuaries would use or people who have an apolitical
interest in dealing with this issue? Would you perhaps give us
choices of names we might begin to use so that we could deal
with this issue away from what people read into the terms so
that they take political positions that don't truly reflect the
decision that is in front of us in terms of how we deal with
the accounting problem of the Medicare and the Social Security
Trust Funds along with the so-called part B or the supplemental
medical insurance funds?
And I would request that you think about that and give us
some options. I know it is popular for large corporations now
to rename themselves. This some way has some response out of
the society. I just want to see what it would be that we would
be talking about if we had actuaries and others give us the
titles of the program rather than politicos, Mr. Foster, trying
to put together a deal to produce a majority of votes to pass
the House and the Nation to make something that was desirable
law. It may have been useful at that time to create an
appearance for purposes of creating it. I am not so sure that
it is really helping us solve our problem today, if you sat
through any of the earlier hearing, in trying to understand
what it is that we are doing.
That would be the Chair's request that you can take your
time and respond back to.
[The following was subsequently received:]
There has been a long and honorable debate over proper terminology
for social insurance programs like Medicare and Social Security and
whether or not such programs constitute ``insurance.'' As former chief
actuary Robert J. Myers has written, ``The [Social Security
Administration] very definitely overstressed the insurance concept in
the early days of the program. This was done primarily to buildup and
maintain public support for the Social Security program--by drawing on
the good name and reputation of private insurance.''
Similarly, former chief actuary A. Haeworth Robertson blames some
of the public's lack of understanding of Social Security and Medicare
on government rhetoric. He notes that ``The use of words and phrases
such as `insurance,' `trust fund,' `account,' `contributions,' and
`earned right,' while not necessarily wrong, has sometimes conveyed the
wrong impression.''
Most experts conclude that these programs constitute ``insurance''
in the formal sense. As insurance professor George E. Rejda has pointed
out, Social Security involves the classic insurance characteristics of
risk pooling, fortuitous loss, risk transfer, and indemnification
against loss. Medicare also contains these elements. The problem is
more that relatively few people understand the important differences
between social insurance and private insurance.
On balance, the current statutory designations of ``Hospital
Insurance'' and ``Supplementary Medical Insurance'' seem reasonable to
me so long as the underlying nature of the Medicare program and its
financing are clearly explained. It is interesting to note, however,
that prior to the 1937 Supreme Court decision upholding the
constitutionality of the Social Security program, the trust fund was
called the ``Old-Age Reserve Account,'' rather than the ``Old-Age and
Survivors Insurance Trust Fund.'' In fact, the original name does a
nice job of capturing two of the most important characteristics of the
trust funds--namely, their role as contingency reserves, and the fact
that they exist as accounts within the U.S. Treasury. The ``reserve
account'' terminology thus helps to explain the nature of the funds,
rather than tending to confuse their purpose, as can occur with the
``trust fund'' terminology.
Chairman Thomas. Does the gentleman from New York have any
questions or inquiries?
Mr. Rangel. Mr. Chairman, in connection with your request,
I assume when you come back with this language that the
Chairman is suggesting it would be because you would know we
would have to change the law in order to use different language
than we are using now for the trust fund. Suggestions as to how
could we improve the way we deliver services and the way we pay
for it are always helpful. However, the Medicare Part A Trust
Fund is in better shape now no matter what system you use than
it has ever been. That is correct, Mr. Crippen?
Mr. Crippen. In terms of surpluses?
Mr. Rangel. Yes.
Mr. Crippen. I believe that is correct.
Mr. Foster. I would clarify slightly, Mr. Rangel.
Mr. Rangel. I don't care. Just--whatever.
Mr. Foster. If you go back to the beginning of Medicare----
Mr. Rangel. No, no, we do not do that.
Mr. Foster. Certainly in recent years, that is correct.
Chairman Thomas. Well, not so fast okay. Go ahead.
Mr. Rangel. It is not crippled, okay. It is in pretty good
shape, Part A. Now some people will have us to believe, and
some of them are pretty close to me physically, that we should
really take Part A and Part B and just merge this thing
together. And then of course we are dealing with a different
situation in terms of income and payment. I am asking you that
if Part B is paid for out of the general funds, at least 75
percent of it, is it possible that you can call that part
having a deficit at all? With your understanding of Committee
spending and trust funds, is it possible to say that you have a
deficit in Part B under existing law?
Mr. Foster. Mr. Crippen gave a nice summary of the
different perspectives.
Mr. Rangel. I know that, but if he could help me, if either
one of you could just help me understand existing law for the
purpose of getting where we have to change it. With all of your
expertise, can you assume any way that you could say that we
have a deficit in Part B as long as it is being funded the way
it is funded today?
Mr. Foster. Under present law and focusing on the financial
status of the Part B trust fund, I would not refer to it having
a deficit, no, sir
Mr. Crippen. No, sir. It runs fairly close to zero--a
little above or a little below, depending on whether we
misestimate the premiums, but it essentially runs at zero.
Chairman Thomas. On that, if in fact Part B continues to
grow in the portion of the general funds that it assumes since
it is an entitlement program and if you would extrapolate it
out to the future in which it goes from 20 percent to 50
percent to 70 percent to 90 percent, and that were projected to
take the entire general funds, which is not beyond the realm of
possibility, and have it to be expended on the Part B
entitlement program, you would then be forced to do what? In
essence, it would be in deficit because you didn't have enough
money to pay for it, given the current revenue stream; is that
correct?
Mr. Foster. I would differentiate between revenues that
under present law are owed to the Part B Trust Fund and the
means by which you come up with these revenues. Both are
important questions. We haven't seen any current scenarios
where in fact the revenues would get anywhere near that high
Chairman Thomas. What percentage of the general fund have
you looked at would be eaten up by Part B with the current
structure?
Mr. Foster. We have some examples in the current Trustees
report. Let me give you one of them. In the year 2000 if you
look at the Part B general revenues they represented 5.4
percent of the total Federal income taxes, both personal and
corporate, that were collected that year. Now if those income
taxes maintain the same share in the future of GDP that they
are currently, and SMI or Part B continues to grow as rapidly
as it has and we project, then at the end of our long-range
projection period the general revenues would require 22 percent
of the total income taxes.
Chairman Thomas. So one out of every five dollars of the
entire Federal budget would be dedicated to the Part B
entitlement program. At some point people would be concerned
about the total amount consumed by this program. Whether or not
the term deficit might be used, the crowding out of other
programs that might be funded certainly ought to be a
discussion matter. Without looking at changing the program, 22
percent of the Federal budget is consumed by this one program.
Mr. Rangel. Mr. Chairman, I think we have come a long way
in being together. If you want me to understand the use of
language like a crisis in terms of Part B because of the larger
proportion of the general revenues, we can find that language.
The problem is that you are using deficit-type language which
is making it difficult to explain your position. And the main
reason is that we don't have the same interpretation of the
same word. So if what you are saying and agreeing with them
that you can't have a deficit if you intend to pay for the
programs out of the general revenue, but you can have a crisis
in terms of the percentage, then I think we can understand each
other a lot clearer if that is what you are saying.
Chairman Thomas. What I am saying is that taking a piece of
the Medicare program that funds up to 50 percent of it and
never examining it, but simply paying for it because of the way
it was originally constructed 35 years ago, is probably not a
good way to husband the current resources or future resources
of the taxpayers of the United States.
Mr. Rangel. We were not debating that. I am just asking
whether or not you are prepared to say that you can't say Part
B is in deficit.
Chairman Thomas. No, because it is an entitlement program
and it is funded out of the general funds.
Mr. Rangel. Well, I think we have come a long way. This has
been a good discussion.
Chairman Thomas. I thank the gentleman. Does the
gentlewoman from Connecticut, the Chairman of the Health
Subcommittee, wish to inquire?
Mrs. Johnson of Connecticut. Yes, thank you. Mr. Foster or
either one of you, could you just highlight for us briefly what
were the differences in assumptions that made such a difference
in cost projections?
Mr. Foster. I would be glad to. By way of background let me
say that periodically it is a good idea to convene an
independent group of experts to review the financial
projections made in the Trustees reports. It is not that I
think we are doing a bad job, but it is a good idea to reassure
the public and reassure us that we are using the best methods
and the best assumptions.
Just about a year ago, the Board of Trustees convened a
Medicare Technical Review Panel, with seven of best known
health actuaries and health economists in the country. They
issued their report in December 2000 with a total of 38
findings and recommendations for us. In general they found the
methods and assumptions used by the Trustees were reasonable,
but they noted the exception of the long-range Medicare growth
rate assumption, which they thought was too low. In the past,
and this is an assumption that goes back for many, many years,
we have always assumed that over a long period of time it would
not be sustainable for Medicare growth rates to continue at
their worst level because eventually the entire economy would
be Medicare. As I like to joke, we would all be either doctors
or patients; there wouldn't be anything else. So we purposely
slowed down the assumption over the next 25 years to about the
growth rate in per capita GDP, and we have used that for some
time.
The last technical panel that reviewed this assumption was
back in 1991 prior to the current one, and they concluded that
the assumption was not unreasonable but they suggested we keep
an eye on it and consider forthe future any possible changes.
The new panel was specifically asked to look at this key assumption,
which they did. They have looked at long-range historical, past
experience. They have considered the determinants of health care
growth, including demographic impacts, insurance availability, income
growth, excess medical inflation, all the normal factors considered for
why health care costs increase, and in particular the role of
technology and improvements in medical technology. They also considered
other forecasts of long-range growth for health spending, including the
CBO projections. They also considered the long-term sustainability, how
high can health spending go in the U.S. before something has to give.
Based on all of these considerations and after a lot of hard work on
their part, they unanimously recommended that the Trustees increase the
assumed long-range growth rate for average per person spending from
about per capita GDP (what it used to be) to per capita GDP plus one
percentage point. I concurred with their recommendation. We passed the
recommendation on to the Board of Trustees and they adopted it, and
that is what is in the new reports.
Mrs. Johnson of Connecticut. So the key thing was moving
after the 25-year mark from per capita GDP to per capita GDP
plus 1 percent.
Mr. Foster. That is correct.
Mrs. Johnson of Connecticut. And, Mr. Crippen, in light of
past performance, is this a realistic assumption?
Mr. Crippen. Well, it is certainly closer to what we have
seen historically. As Rick said, we have both tried to come to
a middle economic ground where economists are keen on saying,
this can't go on forever. It can't go on forever, but it can go
on for a long time. So GDP-plus-1 percent growth is certainly
closer to what we have seen than just GDP growth would be. But
we aren't assuming that policy changes will eventually drive it
down to where, ultimately, it has to be, which is stable
relative to the growth rate of the economy.
Mrs. Johnson of Connecticut. Also in making estimates for
us in Part A or Part B, which you do regularly throughout the
process, does a change that we make in Part B often affect
spending in Part A?
Mr. Crippen. It would depend upon the change you made.
Mrs. Johnson of Connecticut. Right, but does that situation
come up of interactions between the two programs in terms of
cost?
Mr. Crippen. Only to a relatively small extent. It is only
when you make programmatic changes like moving home health care
that it dramatically changes that outlook.
Mrs. Johnson of Connecticut. When we shortened the length
of stay to control costs in Part A, did not we expect that it
would increase costs in Part B?
Mr. Crippen. It would.
Mrs. Johnson of Connecticut. So while a policy change is
not as blatant a corruption of the process, it is simply moving
home health services from A to B, it really did shift costs
from A to B?
Mr. Crippen. Yes, ma'am, it did, because of the way we
account for those two programs. As you know, it was a conscious
effort to move people out of hospitals and into skilled nursing
facilities and home health services.
Mrs. Johnson of Connecticut. So while it was good public
policy, it didn't in any way provide any greater solvency for
the Medicare problem as a whole?
Mr. Crippen. No, not as a whole.
Mrs. Johnson of Connecticut. So one of the things that
worries me in this debate about the HI Trust Fund, and that
worries me a lot when I look at my colleagues from across the
aisle's approach to this issue--it seems to be focused on
primarily budget issues in the immediate present--is that
unless we begin looking at both funds, A and B, and all of
these things we are talking about and it is fair to say all the
numbers in the Trustees reports are without prescription drugs,
without reforming the way technology is incorporated into
Medicare, which is 4 or 5 years behind the private sector. It
is a totally inadequate process, particularly as we move into
the modern era. It is without annual physicals. We will cover a
flu vaccine, but we don't cover the visit to get it. Truly the
program is a bizarre health care plan, but none of these
estimates in any way take into account any of the reforms that
we have to make that might increase the spending levels.
Let me conclude by saying I appreciate your comment, Dr.
Crippen, that we will consume in just Social Security,
Medicare, Medicaid almost as much of the economic output of
2030, that is 29 years from now, as does the entire Federal
Government today. When you think of a year ago the U.S. General
Accounting Office's (GAO) report that we would consume three-
quarters of the revenues, you can see how much your more
realistic assumptions and your experience has altered the
picture in just a single year. I don't care whether you use the
word ``deficit'' or not, but I consider this a crisis, and I
hope that people on both sides of the aisle in both bodies will
appreciate the significance of our responsibility this year to
try to impact these trend lines in such a way that we can make
good on your promise to provide seniors with a more modern
health care plan that is affordable to their children.
Mr. Crippen. Mr. Chairman, I want to make one quick
clarification. Our assumption, which matches that of the
Trustees, of GDP-plus-1-percent is a long-term assumption. Most
of the cost estimates we do for you cover 10 years, because
that is the baseline we have. In that baseline, we assume more
than GDP-plus-1-percent. We assume for example, in that next
year it will be higher than that.
Mrs. Johnson of Connecticut. Frankly, I thought it was
quite shocking that the Trustees all this time have allowed
themselves to drop back to GDP after 25 years, because we have
not been able to stay within GDP or GDP-plus-1 for I do not
know how long now. So thank you.
Chairman Thomas. In that regard when was the last time
there was an adjustment in the Actuary's estimates of this
magnitude for the Medicare trust funds.
Mr. Foster. For the long-range actuarial deficit for Part A
this is one of the bigger changes. Of course when the Balanced
Budget Act was enacted----
Chairman Thomas. Of course not.
Mr. Foster. That was a bigger impact. I would have to stop
and think beyond that. I can't think of one as big as this in
recent years.
Chairman Thomas. I thank the gentleman. The gentleman from
California, the ranking member on the Health Subcommittee, wish
to inquire?
Mr. Stark. Yes, thank you. I hate to talk to actuaries with
my shoes and socks on because I have trouble with all these
numbers, Mr. Foster, but I will try. Due to the more rapid
growth of health care in general, and I assume that is for
Medicare and non-Medicare, the cost of everybody's health care
will go up. So it isn't just Medicare. The concerns are the
adequacy of long-term financing for the program. And as far as
I remember, we have got three ways to address the concerns you
raise. We can cut benefits or increase the
beneficiaries'payments, which are, I will submit, the same thing. We
can reduce payments to providers, or we can increase revenue through
increased taxes.
I think that pretty much represents our options. The
President's budget obviously prohibits tax increases. It is
silent on cuts in benefits or provider payments, so we must
assume that if we are going to do anything we have to make deep
cuts to beneficiaries and providers. Preliminarily, that is
uncomfortable for many of us. Could you please tell us, Rick,
what would the 2.9 percent Medicare tax have to go up to to
just accommodate for the 1 percent cost increase? Do you know,
or can you estimate it?
Mr. Foster. Sure.
Mr. Stark. Okay.
Mr. Foster. The HI deficit that we had before this change
was about 1.2 percent of taxable payroll. The deficit after
this change is not quite 2 percent of taxable payroll. There
were other changes in addition, but this of course was the
primary one. So I think you could argue that the increase from
1.2 to 2.0 roughly is the gap that you are looking to address
through your question by a higher payroll tax.
Mr. Stark. So saying it another way, if we raise the
payroll tax from 2.9 to approximately 3.7, or 1.85 percent for
employers and 1.85 percent for employees, we would offset the
change that your cost calculations have brought us right?
Mr. Foster. Yes, that is correct on average, sir.
Mr. Stark. Okay. I just wanted to get some idea of the
order of magnitude that we are talking about. Let's say we went
to 3.7 percent. How long does that solve our problems? Can we
do that once? Are we home free for the next 20 years, or does
that just push the soap a little farther ahead in the bathtub?
Mr. Foster. It probably comes as no surprise to this group
to know that the projections are quite uncertain and real life
has a bad habit of surprising us. If the projections came true
and if we immediately raised the HI payroll tax by the .4
percent for employers and employees each and held it at that
throughout the 75 years, that would balance the system on
average. It is important to understand though that that would
give us a higher tax now than we need but eventually a much
lower tax than we would need at that point. On average it would
be about right, but it wouldn't cover a very large percentage
of the ultimate deficit in the long term.
Mr. Stark. So put it another way, when I am accused of
being a tax-and-spend Democrat, if I said I want to use taxes
to solve our future Medicare problems right now, I would be
talking about .8 percent payroll tax, right? That is about as
bad as it can get, if raising taxes is bad. Is that another way
to say it?
Mr. Foster. If you did it immediately, sir----
Mr. Stark. We are changing taxes around here pretty fast.
Mr. Foster. Then on average that would do it. On the other
hand, suppose you decided to raise the tax rate year by year as
much as necessary to cover this higher projection.
Mr. Stark. You are saying we would build up a little
surplus in the outyears.
Mr. Foster. Yes, much like Social Security. If you did it
year by year--it is important to note that in the new
projections the scheduled tax income under present law for Part
A is only one-third of the total expenditures at the end of the
period. If you did it year by year, you would have to pretty
much triple the current tax rate.
Chairman Thomas. Is that triple the current tax rate?
Mr. Foster. Triple.
Mrs. Johnson of Connecticut. Would the gentleman yield? I
think you need to clarify that point. That is an extremely
significant point. Could you go through that again?
Mr. McCrery. May I ask a question for clarification?
Chairman Thomas. As soon as he finishes you will get your
time.
Mr. McCrery. I don't think you responded. Maybe I am
missing something, but I thought Mr. Stark was asking you to
estimate the payroll taxes needed to solve just the 1 percent
additional growth.
Mr. Stark. That is right.
Mr. Foster. That is correct.
Mr. McCrery. Okay. And that is .8 percent, but you
responded to his last question by saying that to solve the
whole Medicare problem all we needed to do was .8-percent
increase in the payroll tax, and I don't think that is correct.
Mr. Stark. I would defer to my distinguished colleague from
New Orleans, as I suspect he is correct as well.
Mr. Foster. I fully agree that what I gave you just now
with the tripling was to solve the entire deficit rather than
just the incremental part due to the 1 percent. If I were a
little faster mentally, I could figure that out here for you.
But it would be on the order, we used to have a ratio that was
on--one-half the scheduled taxes were one-half of the ultimate
at the end of the period and now it is about one-third. So if
you want to go on the difference there, that is what? A sixth,
if I did that right, of the difference, which would put us more
in the order of about a 1 percentage point each for employers
and employees at the end of the period rather than the .4. I
would be happy to check that arithmetic at some point and let
you know if I made any errors.
[The following was subsequently received:]
After the hearing, as I offered to do, I checked my
arithmetic and provide the following clarification: The Latter
would be on the order of about 2 percentage points each for
employers and employees at the end of the period rather than
the .4.
Chairman Thomas. And rather than a third party assessing
whether it is too much we ought to ask the people who are
paying it. The gentleman has one more question.
Mr. Stark. If I may, Mr. Chairman. Again, to Mr. Foster in
terms of reform, in both last year's report and this year's
report you indicated, though in somewhat different ways, that
Medicare+Choice is costly or does not save money for the
Medicare system. In fairness, you have also indicated that we
are losing less currently but you did not tell me how much
less. We were still losing money but how much less this year
than last year, half as much?
Mr. Foster. You are correct, Mr. Stark, that we estimate
that--under present law with the way we pay managed care plans
under Medicare--that on average (not necessarily plan by plan
but on average) we pay on behalf of these beneficiaries amounts
more than they would cost us under fee-for-service. There is a
well-known selection impact that has occurred. The Balanced
Budget Act requires risk adjustment in order to help us adjust
this, and we believe in fact that once full risk adjustment can
be implemented that can help a lot. Risk adjustment would
reduce payments compared to where they are now on the order of
7, 8 or 9 percent. But it wouldn't eliminate the entire
difference.
Mr. Stark. So it would be fair to say that encouraging
people to join managed care-plus-choice is not going to save
Medicare any money?
Mr. Foster. That is our expectation under present law
because what we pay the managed care plans--the capitation rate
is determined off of what was originally an average fee-for-
service cost with fee-for-service growth thereafter. If we
change the reimbursement mechanism, I think there is the
potential for savings.
Mr. Stark. How would you change it?
Mr. Foster. If we went to something that reflected the
plan's actual cost more so than what happens now, perhaps in
the context of competitive bidding, I think the potential is
there.
Mr. Stark. Thank you.
Chairman Thomas. Thank you. My assumption is it wasn't a
rhetorical question that he asked at the beginning because if
you look at some of the recent changes we have made in the area
of prevention and wellness, that in fact if some of these
managed programs were moving forward on prevention and
wellness, notwithstanding the fact you would not count the
savings, we probably could see a benefit which might accrue to
savings, productivity, technology, error rate reduction, fraud
and abuse reduction. All of these are ways in which we can
continue to get, if you will, more bang for your buck; i.e.,
savings in the program, which by the way would probably produce
a healthier America.
The gentleman from Louisiana wish to inquire?
Mr. McCrery. Yes, thank you, Mr. Chairman. Mr. Crippen, on
your graph over here, in the year 2030 it appears that Social
Security expenditures and Medicare expenditures are roughly
equal in that year. But you do not show beyond 2030. Isn't it
true that beyond 2030 the Social Security expenditures level
off as a percent of GDP and the Medicare expenditures continue
to rise at a fairly sharp rate?
Mr. Crippen. Yes.
Mr. McCrery. So if you extend the graph out to 2075, which
is the end of the window that the trustees have to look at,
those colors would be in different proportions, in fact
dramatically different proportions, wouldn't they?
Mr. Crippen. They would. We assume, just as the trustees
do, that Medicare will continue to grow faster than the economy
in the long run, even if you have a steady number of people in
the program. That is not the case with Social Security. So
Medicare grows faster than Social Security, and after the lines
cross, it continues to grow faster.
Mr. McCrery. And correct me if I am wrong, but I believe
that your graph and the extension of that graph, it would show
Medicare expenditures rising at a much faster rate than Social
Security, that does not include prescription drug expenditures,
does it?
Mr. Crippen. It does not. This is our attempt to look at
current law.
Mr. McCrery. So if we were to add a new entitlement
component to Medicare, prescription drugs, that red section of
your graph would be even larger than it is today?
Mr. Crippen. Yes.
Mr. McCrery. I don't know exactly what the Ranking Member
of the Committee is getting at with his line of questioning
about the deficit and whether part B is in a technical deficit
or not, but I assume he is trying to tell us that there is
really no hurry here, that there is no crisis and we do not
need to do much with Medicare right now because gosh,
everything is OK. We have a surplus in Part A, Part B has a
surplus, so no problem.
Well, if that is the case I would refer my good friend from
New York to the Trustees report, this little summary. It is in
the back message from the Trustees and they say, quote, Thus,
rather than providing net revenue to the Treasury, after 2016
the combined trust funds will require rapidly growing infusions
from revenues from the Treasury to pay benefits projected under
current law. It is at this point and not at later dates when
trust fund assets are technically exhausted, that Social
Security and Medicare will begin to be in direct competition
with other Federal programs for resources of the Treasury,
requiring either growing tax increases or debt financing to pay
the benefits promised under current Federal law. And again that
is not even counting prescription drugs.
And they go on to say, It is important that changes in
Social Security and Medicare be initiated sooner rather than
later that address the rapidly growing annual deficits these
programs are projected to incur beginning with the retirement
of the baby boom population.
Mr. Crippen, Mr. Foster, do you concur in the assessment of
the trustees as I just read it?
Mr. Crippen. I do, yes.
Mr. Foster. I think it is important to address these longer
range issues. I might note that the current Board of trustees
made these statements regarding the need for action sooner
rather than later. If you look at prior reports you will find
that language is the same language used by the prior trustees
as well.
Mr. McCrery. Yes, their language hasn't changed. It appears
to me at least in the reading of this trustees report that the
years in the immediacy of years past is still there regardless
of the fact that we can say some trust fund has been extended
by 4 years or another one is still in technical surplus. Isn't
that right? Isn't that a correct reading of this year's report?
It is still an immediate concern?
Mr. Foster. Yes, the trustees I think are pretty clear that
the need remains.
Mr. McCrery. To sum up, the sooner that we put in place
changes that over time will give us positive results in terms
of expenditures or revenues or whichever approach we take, then
the easier it will be to solve this problem. The longer we wait
the more drastic the solutions that we will have to put in
place. Is that accurate? Is that in keeping with the trustees'
words?
Mr. Foster. Yes, it is. Part of the message is that if you
act sooner rather than later you have more options and the
changes can be introduced more gradually and give greater
warning time to affected parties, whether it is beneficiaries
or taxpayers or health care providers.
Mr. McCrery. To use a historical analogy, the longer we
fiddle the more Rome is going to burn, and I think we are
burning right now and we are fiddling and we ought to be
acting. Thank you.
Chairman Thomas. Does the gentleman from Michigan wish to
inquire?
Mr. Levin. Let me, if I might, pick up that theme, because,
you know, I think all of us tend to use optimism or pessimism,
I said we tend to, to drive a policy result, and so we can put
on our optimistic or our pessimistic hat depending on the
conclusion we want to reach. And I want to pick up that issue
because the Secretary of Treasury touched on this kind of issue
earlier today.
Mr. Crippen, I am not sure if I understood what you said
here and I am sorry the page number is not here but you say at
the bottom of, it is quite far back, and the only way to alter
this future is to alter one of two factors, change the size of
the economy or the amounts of benefits. I am not sure the
context is clear. What is not included there are program
changes.
Mr. Crippen. What I was trying to say, Mr. Levin, is that
to change the outlook on this chart--which is based on how
large these programs are as a percentage of the economy--you
only really have two moving parts: one is how big the economy
which you are dividing by is and the other is how many benefits
you are dedicating to the retirees.
Mr. Levin. Well, I think it has been suggested another way
to do it is not to change the benefits or the size of economy
but the content and the quality of the program. And I didn't
get a chance to ask the Secretary this. I was struck by his
statements about the defects in the present system and the need
for systemic reform and how--and then you talked about the
error of the medical error rate and said something about we
could cut costs 30 to 50 percent and our system would be
wonderfully better. And I didn't really understand that at all.
I mean, and he talked about his experience with Alcoa, but--and
this somewhat relates to Mr. Stark's question about how we
handle care in managed care and fee for service. But if there
are these savings, these efficiency savings that are just right
here to pick up off the tree, we do not need this kind of
dramatic reform, whether you favor it or not, whatever it is.
Now, do you in your work, either of you, have you come up
with any information that would give you optimism that we can
dramatically change the cost of health care through these
efficiency reforms? I don't mean to pit you against the
Secretary of the Treasury and I am sorry I didn't ask him that.
But in your testimony you do not seem to give any substantial
weight to a dramatic reduction in costs through such changes.
Am I wrong?
Mr. Foster. I like your analogy, sir, of the low hanging
fruit or the easy picking fruit. But in fact I think the
potential is there, but I think it is a lot further up that
tree and it is hiding behind some pretty big branches. There
was a RAND study from a few years ago that suggested roughly 30
percent of medical services are unnecessary, that they don't
accomplish anything. So the potential is there if we could find
a magical way of avoiding doing those.
Mr. Levin. Is there a magical way?
Mr. Foster. That is the thing because the RAND study also
showed after the fact you can often identify unnecessary
services. But you can almost never identify them before the
fact.
Mr. Levin. If we could just legislate after the fact around
here, we might even have some bipartisanship.
Chairman Thomas. Actually I thought we do that more often
than not.
Mr. Levin. But seriously, I mean, to talk about something
wonderfully better and it wouldn't take 40 years, 50 years to
do this, right? I mean if the potential is there, I assume it
is there not next year but over a decade, we ought to be able
to squeeze that kind of excess, if it is real, but----
Mr. Crippen. I don't know, Mr. Levin, who the Secretary was
directly referring to. There are probably some subsets of the
Medicare population among whom you could, through case
management or some other innovation that we know about today,
save substantial amounts of money and maybe have better health
care outcomes. But at this point, the subset that we could
think about applying that to is probably small. If we could
expand those techniques, then maybe there would be systemic
savings, but my guess is that what he was referring to was some
unusual techniques applied to a very small number of people.
Chairman Thomas. I will tell the gentleman, it also, as I
have had discussions with the Secretary, deals in the way we
could reduce error. The problem is it is easy to talk about it,
but when you say it is something we should be able to pick up
immediately what we are dealing with is the fundamental shift
in the mindset of those who deliver health care. And you look
at someone in a white coat with a stethoscope around their
neck, there is a conspiracy of silence to discuss what is going
on. If you put them in a blue uniform with epaulets, they are
anxious to get on the stand to talk about all of the errors
that were made in the crash they are examining. It is a
fundamental way that health care has been delivered in the
relationship between health care providers that if we could
change it to create a punishment free assessment of decisions
that are made and how they are made from a systemic point of
view rather from the heroic artist healing, a physician point
of view--I don't mean that in a pejorative sense, but that is
the way the system is structured today--you could get
significant reductions in errors and in unnecessary operations.
But to say that and then to do it means you fundamentally have
to change the culture and the character of those who
participate in the delivery of health care today, and that is
the problem.
Does the gentlewoman from Florida wish to be inquire?
Mrs. Thurman. Thank you, Mr. Chairman. Mr. Foster, I need
to get some clarification here because I know there has been a
lot of conversation about the GDP-plus-1, and in reference to
the chairlady of the Health Care Subcommittee, and rightfully
so, there is a concern about what is going to happen with
medical technology and our seniors being able to participate in
any technology that comes. Is that not a part though of your
assumptions, your growth assumptions, did you not use medical
technology as one of the components?
Mr. Foster. Yes, ma'am. In fact, it is the primary
component of the recommendation from the technical panel. They
have measured the historical contribution of medical technology
improvement to health care cost increases and they assumed that
that level of impact would continue indefinitely.
Mrs. Thurman. So the technology issue is really already in
here; it is just how do we implement it as being part of the
issue. What it doesn't have is the prescription drug benefit.
That is not a part of the technology then, and change and new
medicine, or anything of that nature.
Mr. Foster. In a sense it is part of it because what has
happened with prescription drugs has an impact on Medicare
beneficiaries and their Medicare costs because we do not pay--
--
Mrs. Thurman. Because of the in-hospital drug----
Mr. Foster. Hospitalization rates, other issues.
Mrs. Thurman. Okay.
Mrs. Thurman. Okay. One of the areas that--and this goes to
the Medicare reform issue because we are hearing an awful lot
of that. I mean, I am not even sure I know what a reform is
anymore because it keeps changing on me, and I think it kind of
fits whoever wants to make it fit.
But, you know, we hear about how this is a 35-year-old
program and we need to make changes. But some of the changes
that we have made in the past were specifically on the managed
care program and for Medicare+Choice. And in your report, you
actually make an assumption that reductions in the projected
levels of managed care enrollment resulted actually in a
positive 30 percent change in the actuarial balance because of
people pulling out of these plans, suggesting to them fee-for-
service is a lesser cost.
So then let me take a step further: When you talked about--
you thought that potentially those numbers would switch if we
had something that was more--get active, I think is what you
said. Let me ask this question, then, if that is true; and then
I need to find out, do you think that the Federal Employees
Health Benefits Plan (FEHBP) is a competitive program? Do you
think private pay is a competitive program, and if so, what I
have understood to believe is that over the last 20 years the
costs have been about the same in all of those programs,
including Medicare?
Mr. Foster. There is competition in private health
insurance, for example, starting back when, about the early
1990's, employers got fed up with the rising cost of health
care for their employees, and they started shopping around for
better premiums. And this did lead to a degree of competition
that I think did help get to a lower cost than would otherwise
have occurred.
Mrs. Thurman. But in saying that, we have seen Medicare and
all of these others maintain about the same cost over the last
20 years, so no real significant savings.
Mr. Foster. That is correct. If you look over a long time
period, say the last 30 years perhaps, and you look at the
average cost increase over that whole period per person insured
or per beneficiary for Medicare, if you make the comparison
between Medicare and private health insurance, the average
increases are pretty similar. Medicare is actually a little bit
lower, but overall over the whole period they are pretty
similar.
Within subperiods, you can find some fairly large
differences. For example, when the inpatient prospective
payment system was introduced for Medicare back in 1984, the
Medicare growth rates were quite a bit lower than private
health insurance for some period. More recently, with the
managed care revolution, it was the other way around; the
private health insurance rates were much lower. Most recently,
with the Balanced Budget Act and the strong economy, et cetera,
Medicare has been doing a lot better.
On a long-term average, they are similar.
Mrs. Thurman. So then if we look at this report and based
on the conversations that we are going to have over the next
couple of years of solvency, nonsolvency, whatever, and the
guess the President has taken off, which, quite frankly, I
probably rightfully think so, on the payroll taxes, what does
that leave us? If we have got a similar program other than we
now talk about Breaux-Frist, which seems to be the competitive
mode, but yet based on your answer that really doesn't give us
much savings in the long run.
I think there might be some things that could happen. But
other than decreasing benefits, Mr. Crippen, what do we do?
Mr. Foster. I will let Mr. Crippen answer that one.
Mr. Crippen. Fortunately, we don't deal in policy. But I
will suggest one approach that you might think about, and this
is not a math solution either. Since the outset of these
programs we have been thinking about a set of benefits that we
provide to the elderly population and the financing of them as
the problem we have to worry about, and rightly so. But one
could also think about the issue as an insurance pool. I mean
that in the generic sense--not private or public, but just an
insurance pool with 39 million people. In that pool, there is a
significant amount of risk, both health risk and financial
risk.
You can think about apportioning that risk perhaps
differently than we do now, so that there is some risk borne by
the recipients, the providers, and by the taxpayers. And in the
division of that risk you may create a set of incentives that
produces a much more efficient, better health care system. But
it is just a different way of thinking about it rather than
considering it as a set of benefits that we have to finance for
a given population.
Mrs. Thurman. However, Mr. Crippen, back to the Trust Fund
report, it actually uses an implementation of an improved risk
in it. That is part of the statement that I just pulled out on
the point 30, so I am not sure.
On the benefit issue when you talk to me then about
managed--management of a person's health and those kinds of
things, those are also benefits that actually increase other
than decrease. So then we have a trade-off of what do we give
to a beneficiary based on some of those assumptions as well.
Mr. Crippen. This is an example I have used before, so the
numbers are no longer right because they are now 2 years old.
But if you were going to get a liver transplant and you were a
Medicare recipient in the New York City area, you would
probably go to the nearest hospital that would perform that
operation for you and that Medicare would reimburse for that
surgery. If, however, you wanted to get the best liver
transplant available, the one that would let you live the
longest or not be rehospitalized--the most successful--you
would go to the Mayo Clinic.
It turns out that Mayo charges about half of what the
hospital in Manhattan would charge. What we are talking about
here is $150,000 versus $300,000--those are the kinds of
numbers. So, clearly, you could afford to pay for a plane
ticket to send somebody to the Mayo Clinic.
In that kind of a system hospitals would compete against
each other on not only price but outcomes. Because we can
measure outcomes on some of these things pretty clearly: Does
the patient survive?
On that basis, you have a better outcome in quality, and
you have a lower price. So you could allow people to take
advantage of the lower price and the better outcome. They could
still go to the hospital next door to them if they wanted to,
but they would pay a higher price.
What you are doing is changing the nature of the risk in
the overall pool by taking out some of these very big payments.
And if you think about the nature of that risk, you may be
able to restructure the pools in a way that we haven't thought
of thus far. I don't know if that makes any sense.
Mrs. Thurman. But that wouldn't mean just necessarily going
to some kind of managed care program. That would actually work
within the Medicare program as we know it today.
Mr. Crippen. You could take solid-organ transplants out of
any payment system, whether it be managed care or fee-for-
service, and do what we were just talking about.
Chairman Thomas. I tell the gentlelady, though, a couple of
points with that colloquy. One is, to be able to measure
outcomes and have the taxpayers' dollars spent for the highest
and best result will require the ability tocollect data. We
don't have a patient confidentiality statistical structure available to
us, and to the degree it is done on a State basis, it becomes a crazy
quilt. That is a thing that we have tried to work on here.
Also, in terms of prescription drugs, remember the Part A
Trust Fund is the part A Trust Fund; and the only really
significant portion of prescription drugs in that would be in
the in-hospital, diagnostic-related group provision. Your
party, your President's proposal, was a part B which was
outside of Part A. And the successes of using higher technology
on drugs where the associated costs really are largely going to
be influencing the General Fund portion of Medicare, rather
than the hospital Part A. So their adjustment, from a
technology point of view on drugs, is in that area of the
hospitalization portion.
Mrs. Thurman. And I would agree with you. I was trying to
get to that point, though, that--you know, that the technology
with that GDP-plus-1 was--there were some purposes in that. And
so we can't just say that that has not been included in this
growth that is being looked at as we look at changes in
Medicare.
Chairman Thomas. Right, to the extent that drugs are in the
Part A program. But the idea of getting to outcomes so that we
could compare costs and quality is something I think that would
advance the debate far beyond where we are now in making sure
that we can get the best product for the dollar spent. It won't
necessarily reduce costs, of course, but it can reduce the
amount of the increase, which is, after all, one of the things
we are looking for.
Does the gentleman from Texas wish to inquire?
Mr. Doggett. Thank you, Mr. Chairman.
Gentlemen, frankly I have to tell you that I was planning
my questions today for Secretary Thompson, who I had been
advised would be back here. I gather that after some of his
answers last week, he is in reeducation camp today.
So I am going to try to focus my questions--since there is
no one here from the administration to discuss policy--just on
the numbers since Mr. Crippen said that your focus is on the
numbers.
If I understand correctly, if by law, as Secretary Thompson
told the Committee last week, all of Part A must be used for
Part A, and that the commitment of the administration,
according to what you might call the ``Thompson oral lockbox''
on Part A, is to use it only for that purpose, then is it not
true that it is not available for the contingency fund for
other purposes that the President proposed in his budget?
Mr. Crippen. The answer depends on how you analyze the
program.
Legally, you may be absolutely correct that if you look
just at Part A, that analysis can tell you what kind of
financial shape the program is in. What I was suggesting is
that to look at Part A alone, outside the rest of the Federal
budget or the economy, could be misleading.
You may want to change Part A, even if it looks all right,
simply because you have other budgetary constraints. The
extreme example is that you could either increase spending or
cut taxes by $5.6 trillion over the next 10 years, and the
actuarial analysis in the trustees' report, would not change.
So if you think of the issue as Part A, then yes, in an
actuarial sense, your statement is absolutely right. If you
think of it in the context of a larger budget or of the
economy, you may get a different answer.
Mr. Doggett. If it is by law for Part A only, it can't be
used for the Contingency Fund for something else, can it?
Mr. Crippen. It depends on what you mean by ``used.'' For
years we've used the Social Security Trust Fund for other
things.
Mr. Doggett. Fortunately, we are not doing that. You are
not proposing that we do that again, are you?
Mr. Crippen. No, I am not. All I am saying is that because
of the way the Federal budget works and the way the program's
financing works, the money that flows through the Part A trust
fund leaves behind Committee debt but also provides cash out
the other side, which can----
Mr. Doggett. So unless we want to use it in the way the
Social Security surplus was once used, then Part A is for Part
A, and it is not an available for the Contingency Fund for
other things.
Mr. Crippen. Again, in the actuarial and legal senses, I am
sure that the words you are using are right. In a budgetary
sense, it doesn't matter.
Mr. Doggett. Let me ask you about prescription drugs then.
Your CBO came out with a new estimate that seniors, I
believe, will be paying about a third more for prescription
drugs over the next 10 years than had been previously
estimated. That is a total, I believe, of about $1.5 trillion,
which is the best estimate your number crunchers have been able
to come up with on that.
Mr. Crippen. Right.
Mr. Doggett. The President has proposed in his budget that
we allocate $105 billion over 10 years to meeting the
prescription drug needs of seniors; isn't that correct?
Mr. Crippen. I believe that is right, yes.
Mr. Doggett. So American seniors need to know that while
they were promised a kind of ``we can have it all'' budget in
the President's speech, in fact, what the President is
proposing in his budget is to give seniors a little less than a
dime on the dollar--I think it works out to about 7.5 percent--
to meet their prescription drug cost over the next 10 years if
your numbers are accurate and the sticks with his budget figure
of $105 billion.
Mr. Crippen. Certainly, what you have just said is true. I
would add, however, that a portion of the $1.5 trillion is
currently being paid by employers, by other insurance. We are
using----
Mr. Doggett. There are a few seniors that are fortunate to
have their prescription drugs met. Maybe instead of 7.5
percent, they will get a dime. But it is clearly not a dollar
of their prescription drug needs. It is not anywhere close to
meeting the prescription drug expenses that you think seniors
will have over the next 10 years, is it?
Mr. Crippen. It would depend upon how you spent the money.
We don't know exactly what the gap is, what the need is. For
seniors without insurance, you have to define how many more
pharmaceuticals they need than they are getting now and what
that would cost. We don't know, so we can't tell you whether
the input you mentioned meets the need.
I can't disagree with the numbers you use, but if you
targeted the money, presumably you could provide more than a
dime to those who don't have prescription drug coverage.
Mr. Doggett. So you could give nothing to other people or
you could give it all to some. Their helping-hand program seems
to be more like a helping-little-finger program than a helping-
hand.
But if you look at it just in terms of your numbers and the
President's number, he is proposing to give about 7.5 percent
on their dollar of prescription drug costs over the next 10
years. Thank you very much.
Chairman Thomas. Does the gentleman from North Dakota wish
to inquire?
Mr. Pomeroy. Yes. Thank you.
Mr. Foster, you are the Health Care Financing
Administration (HCFA) actuary?
Mr. Foster. That is correct.
Mr. Pomeroy. Mr. Crippen, we know you.
Mr. Crippen. For good or ill.
Mr. Pomeroy. I think the North Dakota basketball teams
whomped South Dakota again this year.
Mr. Crippen. Are you sure?
Mr. Pomeroy. I am a little--I am heartened by the
discussion today, because I think it is extraordinarily
important to talk about the entitlement programs and their
long-term consequence. And I think that sometimes the 10-year
focus ignores what is going to happen to us in the next decade,
and the decade I call the ``troublesome teens.''
GAO Comptroller General David Walker has said that even on
a unified budget basis the Social Security program, entitlement
program, and the Medicare program, the General Fund program, we
are in a deficit position by the year 2019 without a dime of
tax cuts.
Mr. Crippen, do you have any knowledge of whether that is
accurate?
Mr. Crippen. I know that on the spending side GAO uses our
numbers, so presumably that is pretty close. The question is
what level you assume for revenues--that is, whether you change
the tax laws or not. Historically revenues have been 18 or 19
percent of GDP; today, we are at 21 percent of output.
If you assumed that revenues would remain at 21 percent of
GDP for a long period, you might not be in deficit then. If you
assumed the historical average of 18 percent or 18 percent-
plus, then you might be. The conclusion you draw depends on
what you assume revenues are going to do even under current
law.
Mr. Pomeroy. Actually I think that there is no debate about
the exploding costs of entitlements as baby boomers move into
retirement years; is that correct?
Mr. Crippen. It is. We boomers start retiring in 2010, so
between 2010 and 2030, you get the most demographic impact
Mr. Pomeroy. I suppose from time to time there have been
demographic changes, substantially demographic changes across
cohorts within the American population.
Mr. Foster, do you know?
Mr. Foster. Well, the statistics going back for very long
periods are not too good, as you can imagine.
Mr. Pomeroy. We know what we are dealing with now. We have
three workers per retiree today, and we are going to have two
workers per retiree by the year 2030, a very substantial shift
and a very rapidly aging population if you look at the total
picture. Is that correct from an actuarial standpoint?
Mr. Foster. That is correct. What really happens is not
only the retirement of the baby boomers, but you also have the
low-birth cohorts during the Depression years; and then you
have, subsequent to the baby boom, the relatively low-birth
cohorts. There has been a long downward trend in U.S. fertility
for the last two centuries.
Mr. Pomeroy. Because my time is limited, I completely agree
with you. You and I are agreeing on the same point; that is, we
have a rapidly aging population, a significantly greater
proportion of our population moving into entitlement program
eligibility, the over-65 age group.
This will be the first time in the history of our country--
irrespective of whether this has happened before or not, it
will be the first time that it has happened when you have those
seniors, each one of those 65-year-olds and over, with an
absolute right to entitlement program support, Social Security
and Medicare. Is that correct?
Mr. Foster. It is the first time we have had this sort of
demographic change, an adverse change in that sense. In the
past we have had a favorable situation.
Mr. Pomeroy. You have an aging population, but this time an
aging population with Medicare and Social Security, which means
the next decade is going to be something like we have never
seen before. That would tell me that this decade we ought to be
doing everything we can to prepare for the next decade.
The President has said this surplus is the American
people's surplus, but a good chunk of that surplus is also
essentially the prefunding of the entitlement programs that has
been written into the program. The FICA taxes collect more
today than is paid out today, and that difference has all piled
into calculation of the surplus; is that correct, Mr. Foster?
Mr. Foster. It is essentially correct. Let me caution you
that it was not so much by design as by accident.
Mr. Pomeroy. I would say on the Social Security side it was
very deliberately by design.
Mr. Foster. I would disagree with you respectfully, sir.
Mr. Pomeroy. I think the heart of the 1983 reforms was to
bring a dimension of prefunding in. I used to be an insurance
commissioner; whenever I argued with actuaries, I lost. But I
do think that the demographic was anticipated. It is not a
surprise that suddenly the population is as it is by age
cohort, and therefore, prefunding was built into the program.
When we talk about the dramatically expanding obligations
and we talk about basically trying to stabilize them through
reform, reform essentially is cutting benefits, increasing the
tax burden to pay for the benefits, or laying off a
significantly greater cost than is presently laid off on the
beneficiaries. In other words, higher Medicare premiums,
something of that nature, is that basically the range of
alternatives?
Mr. Crippen. Again, it depends on which of the analyses you
are using. If it is an actuarial analysis, then you are right.
If it is one, however, that includes or, rather, looks at the
effect on the economy, there are only twomoving parts in the
macroeconomic analysis: you can reduce benefits--that is, the promises
made to the baby boomers, not the current retirees--or you can grow the
economy faster, then you will get a different result.
Mr. Pomeroy. I subject there is a third. Can I make my
suggestion?
Chairman Thomas. Move to the third.
Mr. Pomeroy. If this country moves into the next decade
having made the most rapid advance in debt retirement possible,
bringing us to--literally to the point without debt, we have as
Secretary Summers used to say, ``recharged the fiscal cannon of
the United States of America.'' We have bequeathed to--the next
generation has got to pay for our entitlement costs, virtually
the entire borrowing capacity of the United States; and in the
event there are some deficits encountered in some future
Congresses, God forbid, we have got a lot of borrowing capacity
to deal with that.
Would you agree with that from a budgetary standpoint?
Mr. Crippen. Yes, but I would argue that paying down the
debt might actually grow the economy faster and is thus even
more important.
Mr. Pomeroy. It is a two-fer. Win-win. Thank you.
Chairman Thomas. I thank the gentleman.
Without objection, the Chair will place in the record a
letter addressed today--dated today from the Secretary of
Health and Human Services.
[The information follows:]
U.S. Department of Health and Human Services
Washington, DC 20201
March 20, 2001
Hon. Bill Thomas,
Chairman, Committee on House Ways and Means
Rayburn House Office Building
Room 2208
Washington, DC 20515.
Dear Mr. Chairman:
Thank you for the invitation to testify before the Committee on
Ways and Means last week. It was a great honor to present the
President's Budget blueprint for the Department of Health and Human
Services to you and the Members of your Committee.
As Secretary of Health and Human Services, I was encouraged to be
reminded of your strong support and leadership in reforming the
Medicare Program by improving the current benefits package and adding a
prescription drug benefit for Medicare beneficiaries. As you know, I
share your commitment to true Medicare modernization. A 21st Century
Medicare program must catch up to the rest of health care by
recognizing that all modes of treatment--hospitalization, outpatient
care, home care and prescription medications--must be integrated if
patients are to receive quality care.
Modernizing and improving Medicare must rank among our most urgent
priorities. Reform, however, must not be limited to improving the
benefit package but must also establish an accurate measure of solvency
to ensure the program is financially stable for generations to come. To
this end, we must ensure that all Medicare money must be used for
Medicare and Medicare reform. I know that you share this goal.
I look forward to working with you in the coming months to address
these important issues. Your knowledge of the Medicare Program and your
history of leadership in reform is essential to our success.
Sincerely,
Tommy G. Thompson,
Secretary.
Chairman Thomas. Does the gentleman from Wisconsin wish to
inquire?
Mr. Ryan. Yes, thank you, Mr. Chairman.
Gentlemen, I just wanted to bring up some key timing
points. Is it not true--and I will ask each of you--that the
first year the outgo exceeds income, excluding interest, in the
HI Trust Fund in the year 2016? Correct?
Mr. Foster. That is correct.
Mr. Ryan. Payroll taxes will not meet the demand of the
time?
Mr. Foster. Payroll and other taxes.
Mr. Ryan. So the problem is not in the year 2029, as some
would say; the problem really begins in the year 2016, correct?
Mr. Foster. Well, there are lots of problems out there.
That is one of them.
Mr. Ryan. In looking at your spend-out rates--and I think
it is very exciting and interesting to see this--you are using
current-law assumptions in determining your spend-out rates,
correct?
Mr. Foster. That is correct.
Mr. Ryan. Based on the fee-for-service program exclusively?
Mr. Foster. Well, fee-for-service and Medicare+Choice.
Mr. Ryan. Which is based on fee-for-service.
It is pegged to the fee-for-service rate, correct?
Mr. Foster. The payments, that is correct.
Mr. Ryan. Mr. Crippen, is it not the case that the
Congressional Budget Office has estimated the premium support
commission plan as saving more money in the long run when you
switch your estimates from not just exclusively fee-for-
service, but fee-for-service plus private rates as well?
So it is my understanding that CBO's projections of
Medicare spending under the premium support system would grow
more slowly than Medicare spending under current law based on
the current fee-for-servicespending modeling; is that correct?
Mr. Crippen. I think you are right. I can't say for sure. I
think that is right.
Mr. Ryan. That is my recollection. And Mr. Foster----
Mr. Crippen. That is correct.
Mr. Ryan. Mr. Foster, that is not the case with HCFA,
though, as well, correct?
Mr. Foster. Referring to the premium support estimates?
Mr. Ryan. That is right. Yes.
Mr. Foster. We have had different versions of this proposal
going back to the bipartisan Medicare Commission and also the
last administration's proposal. And what we have found is that
there is the potential for savings. It tends not to be
dramatic, not of the same order of magnitude as the long-range
costs that we project, for example.
Mr. Ryan. I find that there is a decent-size discrepancy
between HCFA modeling and CBO modeling, and that the important
qualifying difference here is that the Congressional Budget
Office has looked at the price competition issue and has
concluded that it does exist and that savings can be accrued so
that when you apply the price competition model to your spend-
out rates, you can actually save a considerable amount of money
in the end.
So the point I am trying to get around to is, it has often
been said here in the Committee that the only way to reform or
fix Medicare, to address that chart, is to either raise taxes
or cut benefits. My colleague, who just left, said, ``or draw
down debts so that we can raise debt later.''
I just don't see it that way.
The third way is, reform Medicare. And reform Medicare
doesn't necessarily mean cut taxes or raise benefits. Reform
Medicare can necessarily mean inject price competition into the
system as has been measured by the Congressional Budget Office,
which ends up saving more money in the long run; and it does a
great deal of good toward limiting that liability that we see
on these charts in the outyears. Is that not correct, Mr.
Crippen?
Mr. Crippen. Yes, but we would not say it as generally as
you have; that is, the details of these things make a dramatic
amount of difference.
Rick hasn't had the opportunity to look at all of the plans
that we have--not that he would change HCFA's estimating
methods, as the differences in our methods aren't the major
issue. An economic proposition, I think we agree that if you
can introduce competition, as Rick said earlier, you have the
prospect of having some savings.
Mr. Ryan. So what you are saying is that that is the
possibility, that in addressing this issue there is a third way
other than raising taxes and cutting benefits, and that is to
enact Medicare reforms that inject price competition into the
system--the devil is in the details--but there is a possibility
of doing that whereby Medicare expenditures would slow relative
to current law; is that correct?
Mr. Foster. I would argue that price competition can get
you to your bottom-dollar cost, and more effectively than price
administration that we currently do or other methods. I tend to
believe--and Dan and I might differ just a little bit on this;
I tend to believe that once you are at the bottom-dollar price,
through competition or whatever means, that the factors
affecting health care growth, including technology, higher
incomes, insurance availability, et cetera--that the factors
affecting this growth tend to be the same.
So what a premium support proposal can do for you is get
you to a lower cost, but then the growth of the future won't be
a lot different than fee-for-service. It is just you are down
here instead of up here, but growing at similar rates.
Mr. Ryan. Growing at similar rates.
But it is my opinion from reading the CBO analysis that you
would actually incur some savings; that, yes, costs will incur,
new technologies will be hopefully evolving, and that those new
expenditures will occur, but that under current law those
expenditures growth rates would be higher than under the price
competition premium support model if constructed properly?
Correct?
Mr. Crippen. I think that is right, yes.
Mr. Ryan. Thank you.
Chairman Thomas. I thank the gentleman.
You might recall that the last Congress, in putting out
prescription drug programs, the way in which the President's
plan was constructed and the way in which the plan that passed
the House of Representatives was constructed, there was
literally twice as much savings in a particular area because of
the way the competition was structured.
So I think the gentleman is correct that you can get, based
upon the plan, a reduction in the cost; but another way of
saying that is, you simply slow the growth curve. Eventually
you wind up having to talk about increased costs. But after
all, what we are doing is trying to make sure that we get out
into the future the best possible quality at the lowest
possible price. All of those factors would contribute to that.
If there are no further questions--the gentleman from
Louisiana.
Mr. McCrery. I would just like to clear up something,
because there may be some people watching, maybe even some
press listening, that are confused about the part A Trust Fund
and the Contingency Fund in the budget. And I am not accusing
any of our colleagues of trying to mislead the public on this,
but just to make it crystal clear:
The Part A--Medicare Part A Trust Fund, under current law,
will be spent on Medicare. Regardless of what we do with the
cash flow excess, at this time or next year or the year after,
the Part A Trust Fund is dedicated to Medicare. And when those
bills, those IOUs become due, the general Treasury has an
obligation, the full faith and credit of the United States is
behind that obligation to pay those IOUs. Regardless of what
kind of budget you set up for a tax cut or a contingency fund
or funding education or defense, that trust fund is dedicated
under current law and nobody is suggesting changing the current
law on Medicare, end of discussion. Not the administration, not
this Committee, nobody has suggested changing current law so
that the Part A Trust Fund is spent on anything other than
Medicare.
Does anybody on the panel disagree with that?
Mr. Foster. I would agree with you. You said ``under
present law,'' which is the critical factor here. Under present
law, not only is it spent only on Medicare, but it is only
spent on Part A Medicare.
Mr. McCrery. That is correct, only on Part A Medicare. That
is current law.
Mr. Crippen. I would say, as I said once before, that even
if you utilize for tax cuts or other spending, what we estimate
to be the entire surplus over the next 10 years that would not
change the actuarial reporting in this report at all. It would
still be reported as a surplus in the Medicare Part A trust
fund.
Mr. McCrery. That is correct. I just wanted to clear that
up, Mr. Chairman
Chairman Thomas. Or perhaps another way of saying it, do we
anticipate a Part A Trust Fund surplus beyond the 10-year--Mr.
Foster, as the actuary--beyond the 10-year window, Mr. Crippen,
that we require for our budgetary purposes?
Mr. Foster. Yes, we do.
Chairman Thomas. So if the surplus that has to be due and
payable when it is due and payable is outside the 10-year
window, we basically can deal with that surplus in any way we
want prior to being obligated to have to spend it. So if we
create a fund for 10 years or less, which is called a
contingency fund, travel fund, a help-mate fund, whatever we
call that, that money is not due and payable until we are
required to pay it. And if it is outside the 10-year window, no
one should be concerned about where or how it is structured
within that 10-year window, so long as it is not spent.
Mr. Stark. Would the Chairman yield?
Chairman Thomas. Sure.
Mr. Stark. I think what you are saying, or maybe not, is
that the Contingency Fund for other than Medicare purposes is
then really only approximately 300, instead of 800.
Chairman Thomas. Actually, it is more than 40 different
trust funds that are currently in surplus. So that it is a
number of trust funds, again because of the description as to
what the trust fund really is, from an actuarial point of view,
comprising the Contingency Fund. It is not just the Part A
Trust Fund.
Mr. Stark. If in 1 year you tried to spend $800 billion out
of the Trust Fund on defense, that would be spending Part A
Trust Fund money on something other than Medicare, right?
Mr. McCrery. That is incorrect.
Chairman Thomas. We have enough surplus to pay the bills
due and payable on Medicare Part A, clear through, outside the
10-year window. We are not spending that money.
Mr. Stark. My understanding, all you could do with that
Trust Fund money is buy certain Committee notes.
Mr. McCrery. No. No. No. No. No.
Initially that is correct. The Treasury Department is
obligated to put into the Trust Fund IOUs just so that
everybody out there will understand IOU--paper IOUs, go into
the Trust Fund and they stack up. No money. No cash.
That would be stupid, wouldn't it, to put the cash under
the mattress? But the Treasury Department has to do something
with the cash that it gets from the trustees.
What did we do with the cash? When you guys were in control
of Congress, we spent it on everything from defense to
education to anything else you can think of. We spent every
penny of it, plus some. We went out to the markets and borrowed
even more money.
Now, thankfully, we have reversed that and we are not
spending it; we are using it to buy down debt. The Treasury
Department takes that cash from the Trustees and buys down
debt.
Some of us would like to give it back in the form of a tax
cut to let the economy grow more so these trust funds may get
in even better shape.
Mr. Stark. The same thing is true with the Social Security
Trust Fund? Could you do the same with Social Security?
Mr. McCrery. We could. Just as you all spend it for years
and years, we could give a tax cut.
But the gentleman's statement that we are spending the
Medicare Trust Fund on defense, or anything else, was
incorrect. You are not spending the Trust Fund. You are
spending the excess in cash flow that comes into the Trustees.
And we have to spend that somewhere. You can't stuff it
under a mattress. So you can pay down debt, you can spend it,
or you can cut taxes. We are going to do probably some of each.
Chairman Thomas. Actually, this entire discussion is an
accounting discussion since there is no Trust Fund; it is
merely an entry. And hopefully we have made accounting far more
exciting than most people think it is, and we await our
friend's return visit to us.
I do think these discussions are important because frankly
perceptions govern; and some people's perception of what we are
doing hopefully is misguided. Because if they understand
exactly what we are doing, but make the accusations that they
are, it makes it much more difficult to resolve the problems
that already are extremely difficult to resolve for this
society. But we are going to resolve them.
I want to thank both of you for your time and more
importantly for your devotion and expertise in working with us
to make sure that the Social Security, the Medicare Trust Funds
are sound and will be sounder.
This hearing is adjourned.
[Whereupon, at 2:05 p.m., the hearing was adjourned.]
[Submission for the record follows:]
Statement of Advanced Medical Technology Association
AdvaMed, is pleased to present this testimony on behalf of the
world's leading medical technology innovators and the patients we
serve. As the largest medical technology trade association in the
world, AdvaMed is committed to ensuring that patients have timely
access to the advanced medical technologies that can save and improve
their lives and help reduce health care costs.
AdvaMed represents more than 800 medical device, diagnostic
products, and health information systems manufacturers of all sizes,
from small start-ups to global leaders. AdvaMed member firms provide
nearly 90 percent of the $68 billion of health care technology products
purchased annually in the U.S. and nearly 50 percent of the $159
billion purchased annually around the world.
AdvaMed shares the concerns of the Members of Congress, the
Administration and seniors across the country about the financial state
of the Medicare program. It is critically important to take steps to
make sure this program remains strong for today's seniors and people
with disabilities and future generations as well.
The annual Medicare Trustees' Report released yesterday offers
important insights to Congress as it addresses this issue. However, the
long-term cost increases projected in this report tell only part of the
story and must not be used by Medicare as a pretense for delaying or
denying patients' access to lifesaving and life-improving advances in
medicine.
In fact, AdvaMed believes that medical technology offers the
solution to rising health care costs. As such, ensuring timely adoption
of medical advances by Medicare is crucial not only for the health of
America's seniors and people with disabilities covered by the program,
but for the fiscal health of the program itself.
America is on the cusp of a revolution in medical technology.
Through advances in technology we can detect diseases earlier when they
are easier and less costly to treat, provide more effective and less
invasive treatment options, reduce recovery times and enable people to
return to work much more quickly.
The Trustees' Report does not account for this revolution in
medical technology. As a result, it overlooks a paradigm shift that is
already taking place to a New Health Economy. Medical technology has
advanced to the point where it is fundamentally transforming our health
care system in ways that improve quality and reduce costs.
For example:
Angioplasty and other minimally invasive heart procedures,
for example, have greatly reduced the need for riskier, more expensive
heart bypass procedures. An angioplasty procedure costs $20,960 on
average, compared to $49,160 for open-heart surgery. Surgeons can
complete an angioplasty procedure in 90 minutes compared to 2-4 hours
for open bypass surgery. Patients can leave the hospital in one day
instead of 5-6 days, and recovery only takes one week rather than 4-6
weeks for bypass.
Total knee replacement produces an average one-time health
care cost savings of $50,000 per patient; a savings of $11.5 billion in
1994 alone, according to the American Academy of Orthopedic Surgeons
(AAOS).
Three types of laparoscopic surgery have generated
approximately $1.9 billion annually in increased productivity by
enabling people to return to work more quickly, according to a study by
DRI-McGraw Hill.
A story in Sunday's Washington Post highlights another of the many
advances transforming health care delivery: a health care information
system that alerts doctors at Brigham and Women's hospital to
potentially dangerous medical decisions. The system has cut the
medication error rate at Brigham by 86% compared to 10 years ago.
Information systems like these can dramatically improve the safety
and efficiency of health care delivery and help reduce health care
costs. Automation in the insurance industry alone could save an
estimated $20 billion. That is why both the President's Information
Technology Advisory Committee and the Institute of Medicine in its
recent report on health care quality have stressed the need for a new
health information infrastructure.
Steady declines in mortality rates, medical procedure times,
hospital stays and patient recovery times all illustrate the emergence
of the New Health Economy. Gains in workforce productivity and
accelerating declines in disability rates point to this shift as well.
In order to reap these benefits, advanced medical technologies must
be rapidly assimilated into the health care system. The Institute of
Medicine's recent report, ``Crossing the Quality Chasm,'' underscored
this point, stating: ``Narrowing the quality chasm will make it
possible to bring the benefits of medical science and technology to all
Americans in every community . . . and this in turn will mean less pain
and suffering, less disability, greater longevity, and a more
productive workforce.''
In a statement yesterday on the Trustees' Report, Treasury
Secretary and Medicare Trustee Paul O'Neill cited this IOM report in
highlighting ``tremendous potential for improvements in the health care
sector.'' AdvaMed shares this concern, as well as Secretary O'Neill's
understanding of the importance of adopting new technologies and
medical practices that can transform the health care sector by
improving quality and reducing costs. As Chairman of Alcoa, O'Neill
championed the adoption of so-called ``disruptive'' technologies as the
solution to rising health care costs. In a recent Forbes article,
O'Neill stated: ``It is possible to improve the health and medical care
value equation by as much as 50%.''
AdvaMed also applauds HHS Secretary Thompson for pointing out the
need to improve health care quality, stating in March 7 testimony that
his department's goal is ``to build a healthier America by improving
the quality of health care, the quality of life for all Americans and
reduce health care costs.'' Secretary Thompson recognized during his
confirmation hearings that ``Medicare is failing to meet the needs of
our seniors and is not allowing them to reap the benefits of the
tremendous advances in medicine and technology we are witnessing
today.'' AdvaMed looks forward to working with the Secretary to achieve
his department's goal. One important step towards improved health care
quality is reducing Medicare delays in the adoption of advanced medical
technology.
The steps Congress took in the Balanced Budget Refinement Act of
1999 (BBRA) and the Benefits Improvement and Protection Act (BIPA) of
2000 will help ensure that advanced medical technologies are adopted by
Medicare in a timely manner. The technology access provisions in these
bills help move us into the New Health Economy of higher quality and
lower costs.
These bills made important changes to streamline HCFA's coverage,
coding and payment procedures, including: requiring HCFA to report
annually to Congress on the timeliness of its coverage, coding and
payment decisions; streamlining the Medicare Coverage Advisory
Committee process; establishing transitional payment mechanisms to
support adoption of breakthrough technologies used in the hospital
inpatient and outpatient settings; and reducing delays in establishing
codes and reimbursement rates for new diagnostic tests.
HCFA should rapidly and fully implement these important measures to
improve health care quality by eliminating roadblocks to patient access
to innovative medical technologies. The agency and Congress should
examine additional steps that should be taken to ensure that Medicare
patients have access to 21st century medicine.
The BBRA and BIPA legislation enacted by Congress help move HCFA
toward a leadership role in supporting timely patient access to
quality-enhancing innovations. AdvaMed believes it is critically
important for the agency to take the lead in this area, and can do so
by achieving the following goals:
Eliminate delays in coverage coding and payment for new
technologies. BBRA and BIPA legislation will help accomplish this goal.
HCFA and Congress should take additional steps to reduce access delays,
such as issuing codes on quarterly basis and establishing coverage
requirements that recognize broad range of reliable data that can
support coverage decisions.
Establish payment incentives that support quality health
care. BBRA and BIPA help eliminate payment policies that discriminate
against advances in care by systematically under-reimbursing for them
for two to three years after they are introduced.
Support creation of an integrated health care information
infrastructure.
Give patients more control over health care decisions.
HCFA should set coverage policies that give doctors and patients
flexibility to make their own medical decisions.
Develop policies and methodologies that recognize the full
benefits of medical technology.
Again, AdvaMed applauds Congress for recognizing the value of
technology in improving the quality and efficiency of the health care
system, and taking steps to reduce the barriers patients face to
accessing these innovations. Recent reforms continue to improve the
system and AdvaMed encourages additional changes to make coverage,
coding and payment decisions more predictable, transparent and timely.