59

income to the program (including interest on the trust fund balance) in 1996. As a
result of that annual deficit in the Hl account, the balance in the HI trust fund will
begin to erode, and by 2002 it will be depleted.

CBO's projections of the Hil trust fund balance only cover the 1995-2005
period. Those projections support the trustees' estimates concerning the depletion of
the HI trust fund in 2002. Moreover, CBO's analysis provides ample reason to agree
with the broad conclusions of the trustees regarding the short-range adequacy of HI
funding

It is useful to consider what trust fund depletion in 2002 means for the
operation of the HI program. Under current-law assumptions, Hi payroll taxes would
continue to be collected from all covered workers (and their employers) throughout
the year. According to CBO's assumptions, total HI income in fiscal year 2002
would be $153 billion. The total amount in the trust fund at the beginning of that
fiscal year would be about $16 bitlion. Projected disbursements for the full year
‘equal $199 billion. Consequently, the HI program would have a shortfall of $30
billion in fiscal year 2002. Thus, without some Congressional action to provide it
with additional financial resources, the HI program would be unable to pay for all of
the services Medicare beneficiaries are expected to receive in that year.

MEDICARE'S COST CONTAINMENT MEASURES TO DATE.

‘The rate of growth in Medicare's costs has caused concern almost from the program's
inception. The Congress has made repeated attempts to slow that growth, but with
limited success.

Early efforts, in the 1970s, relied on price controls and relatively weak
utilization review programs. It became apparent, however, that much of the potential
savings to Medicare from price controls was lost, offset by an increase in the volume
or intensity of services provided despite utilization review. Subsequent cost control
efforts sought to introduce mechanisms that focused not just on price but on
spending~the product of service price and volume.

‘The prospective payment system (PPS) for hospital services was established
in 1984 to replace retrospective cost-based reimbursement. Under the PPS, hospitals
are paid a fixed amount for each inpatient case, based on the patient's diagnosis.
Under that payment system, hospitals are given strong incentives to avoid
unnecessary services during a patient's stay and to discharge patients as soon as
possible, since extra services or days in the hospital would increase hospitals’ costs
but not their reimbursement from Medicare. By contrast, under the previous payment
system, Medicare paid hospitals for the costs of whatever services they provided.

Changes in the physician payment system were implemented in 1992 t0
replace charge-based reimbursement for physicians’ services. The new system
includes an explicit fee schedule along with an updating mechanism intended to
generate lower fee increases when growth in the volume of physicians’ services is
large. Unlike the earlier changes in the hospital payment system, these changes did
litle to alter incentives for physicians. The method of seting fees was changed, but
it remains a fee-for-service system that rewards physicians for providing more
services.

One can see some indication of the effects of those changes for hospital and
physician payment in the fee-for-service sector by comparing the rates of growth in
Medicare's spending by service category for different time periods. Between 1985
‘and 1990, the rate of growth in Medicare's total costs was nearly half the rate forthe
preceding decade~annual growth of 9.0 percent, down from 17.1 percent. That


25

They never asked the White House, I do not think they have
asked you for any assistance, did they, Madam Secretary, when
they reformed welfare? I do not know as they have needed any as-
sistance, they haven't asked the White House for any help on a
budget. All of a sudden they are stumped. They just can’t figure
Medicare out. That is the problem. I think maybe we ought to send
them off to school and we could teach them a few things.

Medicare has been running right well I think for the last 30
years. I think they are in a box, and they won’t face up to it. They
do not know what to do. They have been lying to the American
public about the idea that they can pay for these tax cuts to the
rich without hurting anybody, and they want us to do the dirty
work. I do not think you should, Madam Secretary. I think you
should do just what you are doing and let them stew in their own
juice and figure out how this contract will not balance, and will not
work. It is going to do nothing but harm seniors the way they have
already harmed children in this country. I can understand why the
President doesn’t want to have any part of it. I would like to yield
the balance of my time to Mr. McDermott.

Mr. McDermott. Thank you, Mr. Stark.

Obviously, it has eluded the attention of the Republican leader-
ship that tax measures start in the House of Representatives, ac-
cording to the Constitution, and they start in the Ways and Means
Committee, and they are supposed to, by law, pass a budget resolu-
tion by April 15. We have never come this far into the session with-
out even a proposal laid on the table. All of this weeping and wail-
ing here is a little bit hard to take.

I would like to ask Secretary Shalala, I think you rightly hit the
point again and again about universal coverage, you can’t control
costs, the President made a proposal, but I would like to ask you
a specific question.

If Medicare is cut by $250 billion over the next 7 years—let’s just
take that as an example because I read in the newspaper they are
going to take $300 or $400 billion. I do not know. I do not know
what they are going to do because they won’t put out a resolution
and commit themselves. They want the President to run out and
throw himself in the street. They trashed him 2 years ago, and now
they won’t put anything on the table.

But let’s say $250 billion are cut. What is the estimate by HCFA,
the Health Care Financing Administration, as to the estimated in-
crease in out-of-pocket costs to the American senior citizens by that
kind of a cut?

Secretary SHALALA. Well, the best way to translate it would be
probably in terms of its impact on people’s Social Security check
and what it would do is cut the COLA, cost-of-living adjustment,
in half between now and 2002. That gives you some impact. For the
senior citizens, the thousands that are coming to town this week,
an increase in their part B payments, a cut in Medicare that is
passed on to them, is, in fact, a cut in their Social Security check,
and HCFA has estimated that if that was applied, we were basi-
cally talking about them getting half the COLA that they would
normally get during that period of time. That is a tremendous im-
pact for millions of Americans.


COMMITTEE ON WAYS AND MEANS.
BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Ilinois SAM M. GIBBONS, Florida
BILL THOMAS, California CHARLES B. RANGEL, New York

E. CLAY SHAW, JR, Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ANDY JACOBS, Jr., Indiana

JIM BUNNING, Kentucky HAROLD E. FORD, Tennessee

AMO HOUGHTON, New York ROBERT T. MATSUI, California
WALLY HERGER, California BARBARA B. KENNELLY, Connecticut
JIM McORERY, Louisiana WILLIAM J. COYNE, Pennsylvania
MEL HANCOCK, Missouri SANDER M. LEVIN, Michigan

DAVE CAMP, Michigan BENJAMIN L. CARDIN, Maryland
JIM RAMSTAD, Minnesota JIM McDERMOTT, Washington

DICK ZIMMER, New Jersey GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa JOHN LEWIS, Georgia

SAM JOHNSON, Texas LF. PAYNE, Virginia

JENNIFER DUNN, Washington RICHARD E. NEAL, Massachusetts

MAC COLLINS, Georgia
ROB PORTMAN, Ohio
PHILIP S. ENGLISH, Pennsylvania
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
Purp D, Mosetey, Chief of Staff
Janice Mays, Minority Chief Counsel

a


68

If, in fact, we were to change the law so that HI produced sur-
pluses and did not go into deficits, what impact would that have
on the budget of the country as far as the deficit of the overall
budget?

Ms. O'NEILL. It depends on how that was done.

Mr. CarDIN. If we were to just increase the revenues, or reduce
the spending in Medicare so that the HI Fund ran surpluses, what
impact would that have on the overall budget?

Ms. O’NEILL. Literally anything that you do to reduce expendi-
tures in any program would contribute toward deficit reduction.

Mr. CaRDIN. Even though the moneys can only be spent in
Medicare, the fact we reduce Medicare spending reduces the overall
deficit of the country?

Ms. O’NEILL. The way we figure the budget deficit is that, we fig-
ure the net deficit, we do not count the surplus.

Mr. CarDIN. Unless there is an understanding that the Medicare
savings will not be used for deficit reduction, the way the current
bookkeeping of the Federal Treasury is managed, a Medicare sav-
ings would be used for overall deficit reduction.

s. O'NEILL. To the extent that they are blended. The way it is
currently figured, that would be true; what is called the net budget.

Mr. CarpIN. I say that for Mr. Collins’ benefit, because you can’t
separate under our current way that we budget, the Medicare HI
Trust Fund from the overall budget considerations unless there is
some understanding as to how the Medicare cuts are being
handled.

I just wanted to underscore the point that on April 15, we were
supposed to have the budget. Without having the budget before us,
it is impossible to know how Medicare is being calculated within
the overall budget situation by the Republican leadership. I just
wanted to clarify this point for Mr. Collins, and maybe others. If
we run surpluses in the trust fund, it impacts the deficit and could
be used to help finance the tax cut.

That is what concerns many of us on this side of the aisle.

Thank you, Ms. O'Neill.

Mr. THoaS. Thank you very much.

Apparently, this is a debating point that obviously is going to go
back and forth.

When you said, “extend it by a year,” does that mean 12 months,
since all of us know 12 months is 1 year. Frankly, if you look at
the total dollar amounts we are dealing with, it couldn’t possibly
extend it for 1 full year. It might tip it from one fiscal year into
the next by several months, but my understanding, and the under-
standing of most people watching, is that 1 year is 12 months.

Are we prepared to say that the extension of this particular pro-
gram, which you have estimated at $26 billion, which Joint Tax
has estimated at $15.6 billion over a 5-year period, is really 1 year
as was stated?

Ms. O'NEILL. No, it is not. It is probably not a full year. The tax,
as you say, is small per year. It is raising something like three,
four, maybe up to——

Mr. CarDIN. Would the Chairman yield to clarify?

Mr. THOMAS. I would say that near the end of the Secretary’s tes-
timony, the Secretary indicated it would shorten it by some


79

nonpartisan manner. Delay will only serve to increase the difficulty
and the severity of any related changes.

In addition, failure to effectively address the financial imbalance
in the Medicare Programs will likely have long-term adverse impli-
cations for the Social Security Program as well since Congress has
had a history of redirecting funds from the better financed pro-
grams in the short term to the less well financed programs.

The most recent example is the transferring of the tax revenues
achieved from increasing the amount of Social Security benefits
subject to income inclusion from 50 percent to 85 percent from the
OASI Trust Fund to the HI Trust Fund. This served to help the
HI Trust Fund and hurt the OASI Trust Fund. In my opinion, that
type of action is inappropriate.

In summary, as an informed and concerned private citizen and
a father of two, I am extremely concerned that this Nation faces
a number of looming crises, including a retirement and
intergenerational crisis. We must have the courage, the vision and
the commitment to deal with these looming crises in a timely, effec-
tive, and nonpartisan manner. Doing so is critical to the long-term
competitive posture and economic security of this Nation, the eco-
nomic security of our children and grandchildren, and the _retire-
ment security of American workers and retirees. As such, I stand
ready to assist the Congress and any other interested parties to ad-
dress this important challenge in a reasoned, responsible, and
nonpartisan manner.

adam Chairwoman, that concludes my statement. I would be
happy to answer any questions you might have.

Mrs. JOHNSON. Thank you very much.

[The prepared statement follows:]


15

to your own actuary and your trustees’ report, short of the Federal
Government taking over the entire health care system of this coun-
ty, which you know is not going to happen, and you are holdin;

edicare and the payment of Medicare bills hostage to a Federal
takeover comprehensively of the entire health care system in this
country.

That is what I hear you saying, Madam Secretary.

Secretary SHALALA. Mr. Chairman, I am saying exactly the oppo-
site. I am saying that any sophisticated understanding of the
American health care system recognizes that it is heavily a private
system with a strong public participation, and that it is not pos-
sible to squeeze down on the public part of that system without
spilling over into the private part, and therefore, we have to look
at the entire system, not a eover. The President made clear in
his letter to the Congress in December, and he has said it repeat-
edly, that it is necessary for us to talk about a whole set of health
care reforms, the first steps, incremental approaches, but that we
cannot simply expect the Medicare beneficiaries and the providers
to absorb radical cuts in the system without it having an effect on
the private sector, and that must be part of the discussion.

Chairman ARCHER. Well, Madam Secretary, you and our col-
league, Mr. Stark, continue to want to talk about the budget. We
are here today to talk about saving the Medicare Part A Trust
Fund and what it will take to do that. Now, that is what we are
talking about. That is the focus of this Committee today, and you
can obfuscate it with political sort of comments, but the reality is
that we have got to do something about this. We are prepared to
do it. We would like the President, as leader of this country, to give
us a specific proposal that we can look at. We would like for Mr.
Stark to give us a specific proposal that we can look at.

I am curious inasmuch as you think that the overall comprehen-
sive dictated reform of the health care system by the Federal Gov-
ernment is the only way we can answer Medicare, whether or not
you supported the Stark bill that was before this Committee and
voted out by the Democrats last year.

Is it fair to say that the administration supported that bill?

Secretary SHALALA. The administration supported its own health
care reform bill, and the point that I am making, if I might repeat
it, is that it is not possible, as we learned last year and the year
before, to squeeze down on the public system without it having
enormous implications on the private system, and that independent
recommendations to strengthen the Medicare Trust Fund can only
have marginal impact.

This administration, since OBRA 1993, has actually extended the
number of years to improve the solvency of the Medicare Trust
Fund and our whole approach has been to protect and to improve
the HI Trust Fund in a series of actions related to the deficit, in-
vestments in the trust fund, and our own strong innovative ap-
proaches to improve the quality of the Medicare Program. To re-
duce the baseline of the Medicare Program, and to see this inde-
pendently of the private health care system would be wrong and
dangerous in our judgment.

Chairman ARCHER. Yes, ma’am. You have repeated that now
three times and I am sure we will hear it many, many more times


74

does have to be fixed because something negative will happen if it
is not.

In the past few years it is true that private-sector spending has
grown more slowly than Federal programs.

Mr. HoucuTon. In effect, in terms of prioritizing this, you would
fix Medicare and then at a later time go on to some of the other
programs?

is. O'NEILL. I can’t really comment on that, you know.

Mr. HouGHTON. All right, thanks very much.

Mrs. JOHNSON. However, I would ask you to clarify your re-
sponse. What I hear my colleague from New York saying is that
in the early eighties, we made big changes in Medicare with hopes
that it would affect the private sector, which to some extent it did.
I mean, the DRGs came to cover reimbursements in the private
sector as well as the public sector and initially that system did cut
costs.

That indicates that it is perfectly possible to reform Medicare
without reforming all of health care and the private sector as well
and have some good effect on the Medicare problem. Is it not so?

Ms. O’NEILL. I believe that is true. I haven’t fully followed or
seen an argument that spelled out what that linkage is perceived
to be, so it is hard for me to comment on it.

Mrs. JOHNSON. I think it is relevant to this hearing that the link-
age has never been clearly defined, and in fact, past practice has
recognized that while there is a linkage, it still is possible to reform
one section of the economy without reforming the whole economy,
or one section of a sector without reforming every section of that
sector. I think that the implications of my colleague’s comment was
really in harmony with history, and I hear you not contradicting—
not dissenting from that.

Ms. O'NEILL. As best I can tell, it looks as if it should be possible
to do something to improve Medicare.

Mrs. JOHNSON. We only have 5 minutes. We do have to adjourn
to vote and the next panel will convene. I would just ask you all,
so if you would get back to me in writing any work that CBO has
done on analyzing the Medicare premium from the perspective of
what portion of it pays for seniors’ health care costs, what portion
of it pays for medical education in terms of percentage, and what
portion goes to uncompensated care.

The other piece is any analysis you have done on all the different
components that Support medical education in America, because I
want to get a better handle on those things.

Ms. O'NEILL. We do have those numbers. I would be happy to
provide them.

[The following was subsequently received:]

The SMI, supplementary medical insurance, premium pays for about 31 percent
of average SMI costs for an elderly beneficiary in 1995. Those costs include onl;
medical benefits (97 percent of ‘SM. outlays) and administration (3 percent of SMI
outlays). All of Medicare’s payments for medical education an uncompensated care
are part of hospital insurance outlays. Direct and indirect medical education
payments together account for about 5 percent of HJ outlays, and disproportionate
share payments account for about 3 percent of HI outlays.

Mrs. JOHNSON. Thank you very much and thank you for your
testimony.

Ms. O'NEILL. Nice to be here.


32

means the previous administration, the previous trustees had some
serious problems with the trust fund then.

Mr. Matsul. I think we are seeing panic now because they can’t
balance the Federal budget with these tax cuts and they want to
take it out on the backs of seniors.

Thank you.

Mr. THOMAS. The gentleman’s time has expired.

Mr. Hancock.

Mr. Hancock. Thank you, Mr. Chairman.

You know, I do not know that what we are asking for is impos-
sible from the President and from our Democrat colleagues. For 40
years, their solution to every problem was to raise taxes. Now, they
are in a situation where they can’t raise taxes and they do not
know what to do. They cannot come up with any ideas about how
we can live within the existing budgets.

I just wonder, they talk about us being in a panic. We are not
in a panic. We are trying to do what the American people said they
wanted done. They said we want to get government under control
and we do not want any tax increases.

Now, the mentality of the Democratic party cuts them completely
out of the circle because the only way they know how to solve any
problem is to raise taxes, and I think we are asking the Democrats,
including the President, for an impossible task. It is totally foreign
to their thinking to try to solve any problem without spending
more government money and raising taxes on the American people.

Now, would it be improper for me to suggest that the administra-
tion put itself in the frame of mind that we need to come up with
suggestions to live within the present income as ways to solve the
problem? It would appear to me that you are positioning yourself
to ask for another tax increase, and the only thing you know to
suggest is another tax increase.

Now, surely, surely there is enough brain power in this country
that we can address this problem without going back to the Demo-
crats’ old tried and true method, we have got to have more money,
we have got to start and create class warfare. We are going to give
money to the rich and take it away from the poor. I mean, let’s try
to do like everybody in their own budget—that every businessman
has to do when you have got a limited income, then you start try-
ing to address the solutions other than saying, well, I am just going
to go out and borrow more money and I am going to raise taxes.
Is that impossible to ask you all to think in that vein a little bit?

Secretary SHALALA. Congressman Hancock, as far as I know,
none of us have recommended additional tax cuts.

Mr. Hancock. I am aware of that. But, your refusal to try to
solve it within the present tax structure is sure putting us on the
road, 43 saying, we have got to raise taxes. That is what you did
in .

Secretary SHALALA. All we have suggested is a tax cut for the
well-off on the backs of the elderly and the disabled. This is not
what is acceptable to this administration. The biggest Medicare cut
in American history as a way to finance a huge tax cut for the well-
off is not a way of keeping our contract with the elderly in this
country.


103

Mr. COLLINS. Well, that is very good. I appreciate each of you
making those comments. There was quite a difference between the
comments and responses you had when compared to those of Mrs.
Shalala. We appreciate that very much and thank you, Madam
Chairman.

Mrs. JOHNSON. I thank the panel for your comments, and urge
you to provide follow-on information as requested by the Commit-
tee. .
Thank you for being with us and for your patience.
(Whereupon, at 3:08 p.m., the hearing was adjourned.]}

eo)


39

things on the table is absolutely critical to trying to control health
care costs in this country.

Mr. ZIMMER. You do not think we can control costs even within
Medicare without making major—without starting on the way to
universal coverage with the anticipated objective of getting to uni-
versal coverage.

Secretary SHALALA. What we have said is that taking large cuts
in the Medicare Program will simply cost shift and put at risk both
the rural health infrastructure in this country——

Mr. ZIMMER. Could you answer my question yes or no? Can you
make Medicare cuts without starting off on the way to universal
coverage?

Secretary SHALALA. The point that we have made is that because
we believe that coverage is critical to cost, that making Medicare
costs—Medicare cuts or slowing down the growth of Medicare with-
out understanding the implications for the rest of the health care
system, the last thing you want to do is increase the number of
people without health insurance or adequate health care coverage,
and therefore we have argued that there is a—as most health
economists have, that there is a relationship between coverage and
the large number of uninsured and what happens in the public sys-
tem.
Mr. Tuomas. Gentleman’s time has expired.

Madam Secretary, despite the rhetoric, some of us are trying to
look at solutions and I would like to ask of the resources that you
have if it is possible, within a reasonable timeframe, next week or
whenever it is reasonable, if you could give us what your depart-
ment actuaries believe would be a growth rate that would ensure
solvency for a 10- 15- 25- and 75-year period.

Secretary SHALALA. I will—whatever requests that you have, we
have in a bipartisan manner tried to fill those requests. Anything
specific the Committee wants to ask us, we will see whether the
actuaries are able to do it, but we would be happy to respond.

That would be the request, because clearly it is an actuarial
problem and not a political one.

[The information was not available at time of printing.]

Mr. Tuomas, Mr. Levin will inquire.

Mr. LevIN. Thank you, Mr. Chairman.

Mr. Zimmer, I think you asked some good questions and I think
the Secretary gave you good answers and I would like to just brief-
ly respond to them. Who goes first?

You can simplify this issue. There is a political dimension. I
think there is also a public policy dimension. People who make
promises should tell the public what they mean. You made prom-
ises. You should tell the public what you mean, period. Do it.

The budget resolution in previous years had already been passed
by the time we convened here this morning by many days. The bro-
ken record here is the broken record of your promises when you
were going to come forth with a budget. Now it is said you will sep-
arate that. I mean, you go back and forth. One day it is part of the
budget; the next day the Speaker says it will be taken separately.
This morning, a senior member of the panel, Mr. Walker, said you
have to include Medicare savings in the budget. We will provide a
number and an overall level of confidence.


64

could be obtained in the short run. One could think of that as
something that you might use in a transition period.

If the Congress and the Nation were to move toward a restruc-
turing, many of those provisions would not be needed. They would
be eclipsed by more systemic changes that would result in more ef-
ficient behavior on the part of providers, as well as, individuals
making choices about their own medical care.

Mr. THomas. A fundamental restructuring of Medicare, getting it
more into what seems to be a model that is occurring in the private
sector, will not only help us in the short run, but will help get us
ready for that more significant funding problem in later years?

Ms. O’NEILL. I meant, that the fundamental restructuring would
probably take time, but in the transition one could use some of
these short-range changes and presumably the particular bundle of
immediate cost savings that were selected would be ones that
would be helpful in leading to a major restructuring.

Mr. Tuomas. In the past, most often adjustments have been in
adjusting formulas for providers. If we continue to do that, would
that offer us a solution to our current funding program problem?

Ms. O'NEILL. It really hasn’t worked very well in the past. Usu-
ally past history gives you some idea of what you can expect in the
future.

In the past, Medicare problems seemed to be able to be resolved
fairly easily. That was done in the context of a period when the re-
tirement of the baby-boom population was not looming on the hori-
zon, and it was started when the initial HI tax rates seemed very
low. One could raise that and increase the tax base. We have gone
those routes so that now there is no cap on the taxable earnings
for HI program.

Mr. THomas. In fact, we have gone further than the Social
Security Trust Fund payroll tax which has a cap on it.

Ms. O’NEILL. That is right.

Mr. THOMAS. You are saying we have gone to that well so fre-
quently that we have removed all caps on income and it is simply
then a factor of increasing the percentage of payroll tax. Do you
have any estimates of what increase might be required of the
payroll tax?

Ms. O'NEILL. The increase would be about 40 percent, somewhat
more than a 40-percent increase in the HI tax rate. That is a 1.3
percentage point increase.

Mr. THomas. Forty-percent increase would cover us for the fore-
seeable future?

Ms. O'NEILL. No. I believe that is for the coming 25 years.

Mr. THomas. Thank you very much.

Mr. English will inquire.

Mr. ENGLISH. Thank you, Ms. O’Neill.

Following up on the last question, reviewing the report of the
trustees, is it not true that without fundamental reform, payroll
tax rates would have to triple to sustain the current Medicare Pro-
gram long term.

Ms. O’NEILL. Through what period of time?

Mr. ENGLISH. This would be going out to the middle of the next
century.


35

that money to bankruptcy that year off. Madam Secretary, as you
just mentioned yourself, this passed the House. It is now before the
Senate.

Is it the intention of the administration to try to convince the
Senators that in their wisdom they should not have this tax cut—
or excuse me, that they should not renege on this change and that
they should leave it the way it is now so at least we will have a
little more breathing room before we get to that horrible year of
bankruptcy?

Secretary SHALALA. It is, Congresswoman. It is our intention.

Mrs. KENNELLY. I hope you are successful because I think the
people I have talked to at home would much prefer that the pro-
gram remain solvent rather than some get a better deal, though
they found it hard, and every one of us heard from our constituents
about that change.

Let me ask you about another possible change so we are not just
at each other. In the report, your group, the trustees, recommended
that the quadrennial advisory council be reinstated. Now, we have
been hearing talk about the possibility of a commission, as hap-
pened in 1983 for the reform of Social Security. Would this commis-
sion—would this quadrennial advisory council be like a commis-
sion, or would you—any possibility you would want a commission
to look at this as they did in 1983 for Social Security?

Secretary SHALALA. The trustees recognize that in the creation of
the new independent Social Security Agency, we did not put in lan-
guage to keep a quadrennial advisory Committee for the Medicare
Trust Fund. In fact, it moved over to Social Security and became
the advisory Committee to Social Security, We were simply asking
for the reinstatement as another vehicle.

We believe that that advisory Committee, within the context of
what the trustees have recommended, and that is we look at some
health care reform as we discuss the HI Trust Fund issues, that
that certainly would be important. It is a reinstatement, though, is
the point that I should make, as opposed to something new that
has not been there before.

Mrs. KENNELLY. Thank you——

Mr. THOMAS. The gentlewoman’s time has expired.

Mrs. KENNELLY. Thank you. You will be back here and we will
be here, and when the initial dancing is over, we are all going to
have to come together to figure out how to save this program and
I look forward to working with you.

Secretary SHALALA. Thank you.

Mr. Tuomas. In using terms like the biggest cut in history to bal-
ance it on the backs of seniors and disabled, isn’t it true, Madam
Secretary, that the 1993 budget made the largest program cut in
the history of the trust fund? ts that true?

Secretary SHALALA. I am certain that there is no comparison be-
tween those steps and the kinds of steps that are being talked
about in terms of the Medicare Program.

Mr. THOMAS. The largest program cut in the history of Medicare
was made in the 1993 Budget Act. President Clinton attempted to
balance the budget on the backs of seniors and the disabled, if we
use your phraseology, Madam Secretary.

The gentleman from Wisconsin, Mr. Ramstad.


67

you address this in your statement, of sort of the baby boomer
crossing of the demographic lines, which does not occur before
2002, but in fact would occur at some later point. Which of these
two problems do you see as the most pressing? I ask that question
because our approaches might be guided by that.

Ms. O’NEILL. I think the next 10 years is a pretty big problem,
and if you do not resolve the problem now, one thing leads to an-
other.

I think the longer one waits, the harder it is to do anything
about it. It is a problem now, but will be a worse problem in the

ture.

Mr. PorRTMAN. Given the kinds of solutions that we have been
talking about, even here today, some of which are longer term solu-
tions, it seems to me we should get started now to address that de-
mographic shift, where instead of four workers per retiree, where
you indicated possibly two within 40 or 50 years.

Ms. O’NEILL. That is right, there is that.

Mr. PORTMAN. Again, thank you very much for your statement
again. We look forward to working with you on this and other
Issues.

Mr. THOMAS. Mr. Cardin will inquire.

Mr. CarpIn. Thank you, Mr. Chairman.

Ms. O'Neill, let me also welcome you. CBO has had a rich bipar-
tisan tradition with this Committee, and we look forward to you
building on that tradition with CBO.

If I might clarify a couple points that have been previously
raised; if I understand your testimony based upon your projections,
the HI Trust Fund would run into a shortfall in fiscal year 2002
of $30 billion?

Ms. O’NEILL. That is right.

Mr. CARDIN. That is based upon no changes in the current fund-
ing system relating to the revenues or expenditures.

's. O’NEILL. These estimates are made on the basis of current
law, so that doesn’t assume any legislative change.

Mr. CARDIN. You have not put into these calculations the impact
of the Contract With America on repealing the tax that went into
the HI Fund on the part of the Social Security income?

Ms. O’NEILL. Only legislation that has passed, so it includes the
current tax on Social Security recipients’ benefits.

Mr. CaRDIN. Chairman Thomas asked Secretary Shalala when
the trust fund would run into trouble if that particular change
would have come into law. The information that we have, I believe
from you—it could have been from Joint Tax—it was a $26 billion
loss of revenue over 5 years.

Ms. O'NEILL. It accelerates the depletion of the trust fund by 1

ear.

Mr. CaRDIN. One year. The statement is correct that there would
be a 1 year difference in which the fund would go into depletion,
2001 rather than 2002?

Ms. O’NEILL. That is correct.

Mr. CaRDIN. Thank you for that clarification.

Let me also clarify the point Mr. Collins raised earlier, because
I think it should be clarified in the record. It is true the HI is a
trust fund. The funds can only be expended for Medicare purposes.


45

Mr. PAYNE [continuing]. That it be examined relative to the ne-
cessity of doing that. Thank you very much and I will yield back
the balance of my time.

Mr. THomas. The gentleman’s time has expired, and the Commit-
tee will stand in recess for not more than 10 minutes. We have a
vote on the floor. The Chair will return as soon as possible for addi-
tional inquiries.

[Brief Recess.]

Chairman THOMAS [presiding]. The Committee will reconvene.
Mr. Christensen will inquire.

Mr. CHRISTENSEN. Thank you, Mr. Chairman.

Madam Secretary, I have listened and I have waited patiently for
a long time. During, the last 21/2 hours you have been giving very
difficult answers. It has been a very difficult situation for you, I am
sure, because I know that you are very capable and a very smart
lady and I think that you have been given some marching orders
that are probably contrary to what you would normally be able to
do in answering the questioning.

As a new guy on this Committee, I come from a business back-
ground, and the best thing that I could probably do is—in terms
of comparing what I have heard today and what I have seen from
the Medicare Board of Trustees, would be to try to compare it to
a board of directors. If you were the board of directors and I was
the stockholder, I would probably sue and win on dereliction of du-
ties, because from what I have seen, the stock of Medicare has gone
down drastically during your watch, and what I would like to do,
and rather than just throw barbs back and forth, I would like to
talk about a couple of ideas that—and I know you gave Congress-
man Ramstad, you wouldn’t answer specifics, but if you would, just
for the moment, talk about some constructive ideas that might
work.

For example, in the Medicaid situation, you have allowed a lot
of waivers to various States. I know that our State, Nebraska, was
allowed to receive, a medical waiver.

Do you think the administration would be open to allowing a cou-
ple of States to look at this situation of Medicare, whether they
could handle the problem better, more efficiently, get better use of
dollars on their own as a trial basis to see if we could do the same
with Medicare like we have tried with Medicaid? Would the admin-
istration—and maybe if you can’t speak for the administration,
speak specifically as the Secretary of HHS.

Secretary SHALALA. I am afraid they are one in the same. I am
not even an individual.

Mr. CHRISTENSEN. Personally.

Secretary SHALALA. I can’t even speak personally. Let me make
a couple of comments here and try to be helpful to you.

First, I think that you would probably keep me as the chief exec-
utive officer because our stock has gone up. As I pointed out at the
beginning, we inherited a system that was supposed to be bankrupt
by 1999. At least we have added some years to the solvency of the
system.

Second, the trustees of the system, while they are called the
Medicare trustees, are in fact advisors to Congress and to the
administration.


87

Removing—dealing with the first factor, third-party payments, is
addressed by increasing coinsurance and deductibles, and a way for
dealing with the fee-for-service medicine factor is the managed care
approach, so I would characterize those two approaches as being
complementary and what I would define as true reform in the Med-
icare Program as opposed to just reducing the payment rates to
providers.

If some adjustments had just been made in the Medicare Pro-
gram many years ago, we wouldn’t be seeing the high rate of in-
crease that we see today. For example, in the SMI Program, if the
SMI deductible had just been indexed to inflation, then the SMI
premium today could be only $4 a month, and yet the contributions
of the government to the program could be $5 billion lower than
they are today, and instead of—instead of the SMI premium being
set at the rate of $46.10 per month that it is today, it could be
reduced to the level of $4.

I can see that my time is up, so I will be glad to answer any
questions.

[The prepared statement follows:]


8

vency date by three full years. Unfortunately, the only proposal in
the Contract With America that specifically addresses the Medicare
Trust Fund would weaken it and undo some of the progress made
in OBRA 1993. It is ironic that those who are suddenly interested
in the plight of the Medicare Trust Fund have advocated policies
that exacerbated the insolvency of the fund.

The fact is, any significant changes in Medicare, whether in the
financing eligibility, in the benefit provisions or in payment rates,
will affect the entire health care system. Therefore, this adminis-
tration believes that strong action to avoid depletion of the HI
Trust Fund should not be undertaken by looking at Medicare alone.
Instead, we must consider the issue of the larger context of health
reform as the trustees recommend.

We need an approach to protecting Medicare that is both bold
and balanced. The President has repeatedly called for a meaningful
bipartisan action on health reform, but so far, the reply from the
Republicans has been only silence. Let there be no mistake. Solu-
tions focused solely on Medicare could cause great harm. Let me
give you a few examples.

Reductions in payments to health professionals would have sig-
nificant effects on their overall financial condition. This is particu-
larly true for care givers whose patients are predominantly Medi-
care beneficiaries or uninsured persons, whether located in inner
cities or in rural America. In fact, large reductions in Medicare
payments would have a devastating effect on urban public hos-
pitals that already are providing a disproportionate share of un-
compensated care.

In the 1994 special report of the National Association of Public
Hospitals, it was reported that in 1991, Medicare accounted for a
bigger share of net operating revenues than private payers for
these hospitals. The Association further reported that while Medi-
care was the payer for only 11 percent of discharges in these insti-
tutions, it accounted for almost 20 percent of the net operating
revenues.

Large reductions in Medicare payments should—could also en-
danger rural hospitals. Nearly 10 million Medicare beneficiaries, 25
percent of the total, live in rural America where there is often only
a single hospital in their county. These rural hospitals tend to be
small and serve primarily Medicare patients. Significant reductions
in Medicare revenues will cause many of these hospitals, which al-
ready are in financial distress, to close or to turn to local taxpayers
to increase what are often substantial local subsidies.

Rural residents are more likely than urban residents to be unin-
sured, so the practice of offsetting the effects of Medicare cuts by
shifting costs to private payers is much more difficult for small
rural hospitals. Moreover, rural hospitals are often the largest em-
ployer in their communities. Closing them will result in job loss
and physicians leaving these communities.

Other providers may shift their costs on to payers who do not
have the market power to negotiate advantageous rates. This
means that ultimately many small businesses and individuals,
those Americans who are already paying the highest health insur-
ance premiums, will shoulder even larger shares of health care
costs. Large cuts in Medicare could also hurt beneficiaries. About


REPORT OF THE TRUSTEES OF THE FEDERAL
HOSPITAL INSURANCE TRUST FUND

TUESDAY, MAY 2, 1995

HOUSE OF REPRESENTATIVES,
COMMITTEE ON WAYS AND MEANS,
Washington, DC.
The Committee met, pursuant to call, at 10:08 a.m., in room
1100, Longworth House Office Building, Hon. Bill Archer (Chair-
man of the Committee) presiding.
[The advisory announcing the hearing follows:]

oo)


42

Ms. Dunn. I think at this point excuses are not good enough,
Madam Secretary. I would expect more than that from the
administration. Thank you, Mr. Chairman.

Mr. THomas. Mr. Collins will inquire.

Mr. Cou.ins. Thank you, Mr. Chairman.

Ms. Shalala, thank you. Let’s talk a minute about the budget and
how the budget actually pertains to the benefits that are paid for
by those who are covered under Medicare. The budget itself is actu-
ally a foundation whereby the appropriated funds are used to pay
benefits, are debited against the Hospital Insurance Trust Fund; is
that not true?

Secretary SHALALA. The budget affects both parts of the Medi-
care Program, but specifically part B of the Medicare Program. Any
cuts in the budget would affect other parts of the budget.

Mr. COLLINS. Ms. Shalala, please, we are talking about part A,
true? This is a report on part A. The appropriated funds that are
based on the budget for benefits are debited against the Hospital
Insurance Trust Fund; is that not true?

Secretary SHALALA. It is true and——

Mr. CoLLins. OK, that is enough.

Under the current law, there is no authorization to use any other
funds for health insurance benefits other than trust funds, is that
not true?

Secretary SHALALA. Under current law, that would require a
change by Congress.

Mr. COLLINS. Is that not true, my statement, under current law
that it is no authorization

Secretary SHALALA. That is exactly what we are waiting to hear,
your budget.

Mr. COLLINS [continuing]. To use any other funds than trust
funds for benefits for Medicare, true?

Secretary SHALALA. That is precisely why we are waiting to see
your budget, to see what you are doing.

Mr. COLLINS. Is that not true, Ms. Shalala? Please. I do not want
to go into all that other rhetoric.

Secretary SHALALA. I think I answered the question. I think I
said it would require a Congressional change.

Mr. Couns. You did. You said it was true. No funds in the trust
fund can be used for anything other than Medicare benefit pay-
ments or the administration of Medicare; is that not true?

Secretary SHALALA. That is true.

Mr. CoLLins. OK. That really makes the budget kind of a moot
issue; is that not true?

Secretary SHALALA. No, it doesn’t.

Mr. COLLINS. If you are not authorized to use those funds for
anything else other than Medicare and you can’t use public or gen-
eral funds for Medicare, then that makes the budget a moot issue;
is that not true?

Secretary SHALALA. I think that the difficulty here is
understanding the——

Mr. COLLINS. No. There is no difficulty. There is, but we won’t
get into the difficulty.

But based on that, the budget issue is a moot issue because any
adjustments that are made in Medicare in any shape, form, or


73

Ms. O'NEILL. It is very difficult under the current system be-
cause it is not a market system. It is essentially a fee-for-service
system. In terms of the beneficiaries the cost is the same.

On the other hand, there must be some mechanism whereby the
Federal Government could benefit from cost savings that HMOs
actually incur.

Mr. LevIN. But how would we—

Ms. O’NEILL. It has been suggested that one thing we could do
would be to have competitive bidding on the part of HMOs. That
isa change that could be implemented, instead of pegging it to 95
percent of the cost of the fee-for-service plan. Operating regionally,

(MOs could bid and presumably the ones that could provide the
same quality service for less would be the ones that would be
awarded the HMO contracts.

Mr. LEVIN. I think you point out on page 12, there is a potential
catch-22 in that. Because you say, however, generating more sav-
ings, theoretically, the program could reduce the additional benefits
that HMOs currently offer to beneficiaries, blunting incentives to
enroll in HMOs.

Ms. O'NEILL. That is right. On one side, you have generated a
way that the Federal Government Medicare Program could actually
receive some of the savings. But you have not done anything on the
other side, because there is no way for the beneficiary to benefit
by going into the HMO.

jow, although the dollar amount is the same, there are fewer
costs attached to a HMO because it has room to add such features
as not charging deductibles or providing free drugs.

Mr. LEvIN. Thank you.

Mrs. JOHNSON [presiding]. Thank you, Mr. Levin.

Mr. Houghton, it is your opportunity.

Mr. HOUGHTON. Just a very quick question.

Mrs. JOHNSON. I think we will be able to finish this very quickly.

Mr. HOUGHTON. Ms. O’Neill, good to see you, thanks very much.

One specific thing the Secretary stressed over and over again
this morning was that you cannot take Medicare in isolation from
the other health plans of both the public and private sector. I want
to sort of ask you how you feel about that, because if I remember
correctly, during the seventies and eighties when there were all
sorts of health care programs, DRGs and things like that, the gov-
ernment really through Medicare moved way ahead of the private
sector. The private sector really floundered. Then in the late
eighties and early nineties, it sort of flipped.

As I look at the figures here that came out of the Annual Report
of the Federal Hospital Insurance Trust Fund, that—and compar-
ing those to the private sector, really, the government expenditures
after the growth rate is about two times what the private sector
is. The whole thing changes. Since we are running out of money,
this thing has happened. It is different from what happened to the
last generation.

I just wonder whether this isn’t something we have to fix now
rather than worrying about the totality of the private and public
health programs?

Ms. O'NEILL. I do not think there is any question that Medicare
is posing a problem right now. It seems to us, technically, it really


82

The Public Trustees

‘Six people serve on the Social Security and Medicare Boards of Trustees: the Secretary of the
Treasury, the Secretary of Labor, the Secretary of Health and Human Services, the
Commissioner of Social Security and two members (of different political parties) appointed by
the President and confirmed by the Senate to represent the public. The Boards are required by
Jaw to report to the Congress each year on the operation of the four Social Security and
Medicare trust funds and the projected financial status of these funds for future years. The
Public Trustee positions were created by the Social Security Amendments of 1983. Stanford G.
Ross and David M. Walker began four-year terms as Public Trustees on October 2, 1990, and
completed their terms with issuance of the 1995 reports on April 3, 1995. In addition to their
duties overseeing the trust funds, they have worked to increase public understanding and public
confidence regarding Social Security and Medicare.

STANFORD G. ROSS

Stanford G. Ross is a Senior Partner in the law firm of Amold & Porter in Washington, D.C.
Mr. Ross dealt extensively with public policy issues while serving in the U.S. Treasury
Department, on the White House domestic policy staff, and as Commissioner of Social Security.
He also served as Chair of an Advisory Council on Social Security.

‘Mr. Ross has taught law at the Georgetown, Harvard, New York University and Virginia Law
Schools, and has been a Visiting Fellow at the Hoover Institution, Stanford University. Mr. Ross
has served as Chairman of the American Bar Association Tax Section Committee on Social
Security and Payroll Tax Problems. He has provided technical assistance to various foreign
‘countries on Social Security and tax issues under the auspices of the International Monetary
Fund, the World Bank, and the U.S. Treasury Department. Mr. Ross served as President of the
National Academy of Social Insurance from January 1990-April 1992, and is a founding member
and a member of its Board of Directors. He received a J.D. degree from Harvard Law School
and a B.A. degree from Washington University (St. Louis). He is the author of many papers on
federal taxation and income security and is a frequent participant in conferences on these
subjects.

DAVID M. WALKER

David M. Walker is a partner and worldwide managing director of the compensation and
benefits practice of Anhur Andersen LLP based in Atlanta, Georgia. Mr. Walker has held a
variety of executive and policymaking positions in the Federal government, including serving
as head of two of the three Federal agencies that administer the Employee Retirement Income
Security Act of 1974 (ERISA). His most recent full-time government position was Assistant
Secretary of Labor for Pension and Welfare Benefit Programs at the U.S. Department of Labor.
Mr. Walker served at the Pension Benefit Guaranty Corporation (PBGC) before joining the

Department of Labor.

Mr. Walker is a Certified Public Accountant and received his B,S. in accounting from
Jacksonville University. He holds a number of leadership positions, including serving as a
director of the Association of Private Pension and Welfare Plans (APPWP), chairman of the
American Instirute of Certified Public Accountants’ (AICPAs) Employee Benefit Plans
Committee, and vice-chairman of the Legislative Committee for the Southern Employee Benefits
Conference. He is a member of a number of other organizations, including the National
Academy of Social Insurance and the Editorial Advisory Board of Journal of Accountancy and
Journal of Taxation of Employee Benefits. He is a frequent speaker, author and expert witness on
variety of compensation, benefits, investment, retirement and related issues,


REPORT OF THE TRUSTEES OF THE FEDERAL
HOSPITAL INSURANCE TRUST FUND

HEARING

BEFORE THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

May 2, 1995

Serial 104-53

Printed for the use of the Committee on Ways and Means

ce

U.S. GOVERNMENT PRINTING OFFICE
26-820 CC WASHINGTON : 1996

For sale by the U.S. Government Printing Office
‘Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-053720-7
a





30

of the most crucial challenges that we have before the American
public today.

Let me now go to your testimony——

Secretary SHALALA. Mr. Herger, this is leadership. This is mak-
ing it very clear to Congress and to the administration from admin-
istrative members as well as public members that the HI Trust
Fund must be dealt with both in a short run strategy as well as
a long run strategy and pointing out——

Mr. HERGER. But no specifics. No specifics. We are talking in
generalities.

Secretary SHALALA. A bipartisan approach to the specifics, and
we would like to sit down and do that. We fully expected the budg-
et resolution to be passed by now, as is required by law. As soon
as that is done, we are prepared to deal and to discuss the ques-
tions of the Medicare Trust Fund within the context of the kind of
incremental health care reform that the President has talked
about.

Mr. HERGER. Well, again, we will have specifics. As Republicans,
we will. It would be nice if during this process, that the President,
who is the chief administrator of our Nation, could be involved
more so than just generalities, and if we could get some—at least
some direction, some specific direction from him.

Thank you, Mr. Chairman.

Mr. THomas [presiding]. Mr. Matsui will inquire.

Mr. Matsul. Thank you very much, Mr. Chairman.

I want to thank you, Madam Secretary, for your testimony today,
and I think you are absolutely correct in not suggesting a specific
proposal on how to deal with this Medicare problem until the Re-
publicans come up with a budget. Actually, who we should have
here today really is Speaker Newt Gingrich, the Republican Lead-
er, mainly because on Rriday, he made the observation that any
savings from Medicare should be plowed back into the system. I
thought, well, then that makes some sense, if you want to plow it
back in, you can keep it separate from the budget.

Today I read in Congress Daily A.M. that a Gingrich aide says
the Medicare savings won’t be put in a lockbox, in other words,
kept separate, but it will be made to reduce the deficit. Essentially
they are saying that whatever savings we have in the Medicare
system will then be used to reduce the deficit, which in turn will
pay for the tax cut that goes to basically the very wealthy in Amer-
ica, and other unidentified spending cuts.

Essentially, we need to make sure we see their budget and a
budget resolution passed before we fool around with the Medicare
system, because we have got a lot of seniors out there who are de-
pendent upon Medicare, and to use their money, their savings, the
money they put into the HI Trust over the years to pay for tax cuts
for the wealthy would be criminal for the Congress to pursue. Your
approach is the right approach.

Second, what you have said in terms of the comprehensive ap-
proach—I talk to hospital administrators and my physicians in
California all the time and they have said over the last decade,
when we made 10 billion dollars’ worth of cuts 1 year out of the
Medicare system with tinkering—and I understand Mr. Stark had
no choice, because that is what the budget resolution always re-


89

controls of the early 1970's, the threat of hospital cost
containment legislation during ‘the late 1970's, and during the
discussions of health care reform in i993 and 1994. Once the
perceived threat is past, the rate of increase in expenditures once
again accelerates.

In deciding how and when to take action to make the HI Program
solvent, one of the difficult questions that needs to be addressed
is the issue of generational equity. Generational equity can be
measured by comparing each generations’ contributions to the
program with the benefits they receive from the program. We
measured generational equity under four combinations of the
following policy options: 1) act immediately or delay action and
2) increase taxes or reduce benefits. Our studies show that the
solutions resulting in the greatest generational equity involve
taking inmediate action rather than delaying action and reducing
the growth in benefits rather than increasing taxes. The table
below shows the impact of various policy options on generational
equity for persons retiring in 1994, 2014, and 2034.

Ri i but.
Person Retiring in:
Proposed Change in Financing 1294 2014 2034,
1. Do nothing until trust fund 5.19 2.93 2.17

depleted, then increase taxes.

2. Do nothing until trust fund 3.25 1.3n 1.14
depleted, then reduce benefits.

Reduce benefits immediately. 2.10 1.36 1.54
Increase taxes immediately. 5.19 2.20 1.68
5. Reduce benefits immediately, 2.10 2.61 1.94

then index tax rates.

6. No changes (hypothetical) 5.19 3.45 3.90

Supplementary Medical Insurance (SMI) Trust Fund

Because of the way it is financed, through a combination of premium
payments by individuals and debt financing by the Federal
Government, the SMI program is not in immediate danger of
insolvency, However, the growth rate in the cost of the program is
so rapid that it is not sustainable in the long run. During my
time as Chief Actuary the outlays for the Supplementary Medical
Insurance Trust Fund (Part B of Medicare) increase from $7.8
billion in 1978 to $61.8 billion in 1994. This is an average rate
of increase of about 14 percent per year. During that same 16 year
period, benefits paid by the SMI Trust Fund increased from .32
Percent of the U.S. Gross Domestic Product (GDP) to .93 percent of
GDP. This occurred despite the fact that some of the costs of the
program (such as for most home health benefits) were shifted to the
HI program. Even during the last five years, which have been
relatively £avorable, expenditures by the program have increased 53
percent in the aggregate and 40 percent per enrollee. According to
the 1995 SMI Trustees report, SMI expenditures will be 3.18 percent
of GDP by 2020 when the Post World War II Baby Boom has begun to
reach age 65 and will be 3.97 percent of GDP by the middle of the
next century when the Baby Boom will have been fully retired. As
with the HI Program, these projections are being driven now by the
coming demographic Shift and the Baby Boom rather than pessimistic
health care cost projections.


Social Security Program

‘The Old-Age and Survivors Insurance Trust Fund shows a deficit of 1.87 percent
of payroll in the long run. It is by far the best financed of the trust funds, and we
believe strongly that the OASI program can and should be maintained over the
long term. Yet even here reforms should be undertaken sooner rather than later
to ease the transition to providing financial stability in the next century. We note
the recent work of the Bipartisan Entitlement Commission and the current work
of the Advisory Council on Social Security regarding the long-term financing of
the OASI program. We hope that this kind of work will continue and that this
problem will be addressed in a timely fashion,

‘The condition of the Disability Insurance Trust Fund is more troublesome. While
the Congress acted this past year {0 restore its short-term financial balance, this
necessary action should be viewed as only providing time and opportunity to
design and implement substantive reforms that can lead to long-term financial
stability, The research undertaken at the request of the Board of Trustees, and
particularly of the Public Trustees, shows that there are serious design and
administrative problems with the DI program. Changes in our society, the
workforce and our economy suggest that adjustments in the program are needed
to control long-range program costs. Also, incentives should be changed and the
disability decision process improved in the interests of beneficiaries and
taxpayers. We hope that this research will be completed promptly, fully presented
to Congress and the public, and that the Congress will take action over the next
few years to make this program financially stable over the long term.

Medicare Program

‘The most critical issues, however, relate to the Medicare program, Both the
Hospital Insurance Trust Fund and the Supplementary Medical Insurance Trust
Fund show alarming financial results. While the financial status of the HI
program improved somewhat in 1994, the HI Trust Fund continues to be severely
‘out of financial belance and is projected to be exhausted in about 7 years. The
‘SMI Trust Fund, while in balance on an annual basis, shows a rate of growth of
costs which is clearly unsustainable. Moreover, this fund is projected to be

75 percent or more financed by general revenues, so that given the general budget
deficit problem, it is a major contributor to the larger fiscal problems of the
nation,

‘The Medicare program is clearly unsustainable in its present form. We had hoped
for several years that comprehensive health care reform would include meaningful ,
Medicare reforms. However, with the results of the last Congress, it is now clear
that Medicare reform needs to be addressed urgently as a distinct legislative
‘We also believe strongly that Medicare reform should be included as
‘an integral part of any broader health care reform initiative which may be
considered in the future.

There are basic questions. with the scale, structure and administration of the
‘Medicare program that need to be addressed. For example, is it appropriate to
have a Part A and Part B today, or should this legacy of the political process that
enacted Medicare in the mid-1960s be revised to create a unified program? Is it
appropriate to combine participants’ social insurance tax contributions for Part A
and premium payments for approximately one-quarter of Part B with general
revenues? If so, what should be the proper combination of beneficiary premiums,
taxpayer social insurance contributions, and general revenues? How are each of
these kinds of revenue sources to be justified and what rights to benefits and
responsibilities to pay benefits are thereby established? How can the program
become more cost-effective? How can fraud, abuse and waste be better
controlled?


12

* Large reductions in Medicare payments could also endanger
rural hospita:

- Nearly 10 million Medicare beneficiaries (25 percent of
the total) live in rural America where there is often
only a single hospital in their county. These rural
hospitals tend to be small and to serve primarily
Medicare patients.

- Significant reductions in Medicare revenues will cause
many of these hospitals, which already are in financial
distress, to close or to turn to local taxpayers to
increase what are often substantial local subsidies

- Rural residents are more likely than urban residents to
be uninsured. As a result, offsetting the effects of
Medicare cuts by shifting costs to private payers is
more difficult for small rural hospitals.

- Rural hospitals are often the largest employer in their
communities; closing these hospitals will result in job
loss and physicians leaving these communities.

Other providers may shift their costs onto payers who do not
have the market power to negotiate advantageous rates. This
means that ultimately many small businesses and individuals --
those Americans who are already paying the highest health
insurance premiums in the nation -- will shoulder an even larger
share of health care costs.

Large reductions in Medicare reimbursements to providers
could also hurt beneficiaries. Significantly cutting payment
providers might restrict access for beneficiaries as
‘to them.
would be the hardest hit.
According to AARP, out-of-pocket health costs represent 21
Percent of income for those over 65 years. In addition, over 75
percent of Medicare beneficiaries have incomes below $25,000.
Medicare reductions could increase the cost burden of the
nation's most vulnerable elderly -- the low-income. such
increases become the equivalent of reducing their Social
Security.

Attempts to restore the solvency of the trust fund cannot
undermine Medicare's commitment to access to care for elderly
Persons. We should take care that any efforts to extend the
beneficiaries at
for them in

the future.

only through focusing on the entire health
able to address issues within Medicare and prese:
Medicare beneficiaries and underserved populations.

tem will we be
‘access for

The Administration takes seriously its responsibility to
current and future Medicare beneficiaries to insure the solvency
of the trust fund. The Health Care Financing Administration
(HCFA) continues to make many program changes to improve the
efficiency of the Medicare system. For example, hospital
prospective payment has contributed to slowing the increase in
Medicare expenditures for hospital services. As a result, on a
per enrollee basis, Medicare grew at a slower rate than the
private sector between 1984 and 1991 -- 7.7 percent compared to
the private sector's 9.8 percent.



54

patient services for Medicare beneficiaries, is also experiencing
rapid growth in costs.

The Medicare Program is absorbing a growing share of the Na-
tion’s resources, and is expected to constitute 3.5 percent of the
gross domestic product by 2005. Moreover, as the baby-boom gen-
eration reaches retirement age, the number of workers available to
support each HI enrollee is projected to drop.

Currently, about four covered workers support each HI enrollee,
but this ratio will decline rapidly after the turn of the century.
Only two covered workers will be available to support each enrollee
by midcentury. That demographic change will cause a continuing
deterioration in the financial situation confronting Medicare and
the Social Security program.

The evidence strongly supports the conclusion of the trustees
that prompt effective and decisive action is necessary by the Con-
gress to avert a financial crisis in the Medicare Program.

CBO projects that under current law, Medicare expenditures in
HI and SMI combined will increase from $181 billion in 1995 to
$463 billion in 2005. That reflects an average rate of growth of 9.8
percent a year.

Consequently, under current law, outlays for Medicare’s share of
Federal outlays will increase from 11 percent in 1995 to 16 percent
in 2005.

Most of the projected increase in Medicare spending over the
next 10 years can be attributed to rising medical prices and in-
creases in the use of services. Beneficiary growth, however, will be
slow as the baby-bust generation retires. The elderly population is
growing slowly now, much more slowly than that which will come
later.

The financial instability of the HI Trust Fund has been evident
since 1992 when HI outlays first began to exceed income from the
payroll tax.

HI outlays will begin to exceed all sources of income to the pro-
gram in 1998. As a result of a continuing annual deficit in the HI
account, the balance of the HI Trust Fund will erode each year,
and by 2002 it will be depleted. In that fiscal year, according to
CBO’s assumptions, total HI income would be $153 billion, and the
total amount in the trust fund at the beginning of that year would
be about $16 billion. But projected outlays for the full year equal
$199 billion; that would leave a shortfall of $30 billion.

Thus, without congressional action to provide additional financial
resources the HI Program would be unable to pay for all the serv-
ices that Medicare beneficiaries are expected to receive in 2002.

The rate of growth in Medicare’s costs has caused concern almost
from the program’s inception. The Congress has made repeated at-
tempts to slow that growth, including developing a prospective pay-
ment system for hospitals, changing the physician payment system,
and allowing beneficiaries to enroll in HMOs. Those efforts have
met with limited success.

A key question is whether Medicare can take advantage of man-
aged care savings. Since 1985, Medicare enrollment in risk-based
HMOs has grown steadily, although at 7 percent it is still very low
compared with the privately insured population.


96

Mr. Walker, about making sure that what we do is actuarially
sound and provides for an actuarially sound system.

If I am not mistaken, when Medicare was created in 1965, they
fully expected it to be actuarially sound with the mechanism that
was in place, and what has happened is the assumptions they
made in declaring that system to be actuarially sound just simply
didn’t hold water. I am afraid any time the government creates a
program or adjusts a program or comes up with a new approach
that is actuarially sound, we have proven time and time again that
it is almost impossible for us to come up with an actuarially sound
program, particularly when it is something as open-ended as Medi-
care.

Social Security is another thing. We have defined benefits and
we have a way to finance those. Medicare is not like Social Secu-
rity. It is an open-ended benefit. I am not sure that although you
are well intended, I am not sure we can create a Medicare system,
a government health care system that is actuarially sound that will
deliver open-ended benefits.

I am going to give you a chance to respond because I liked most
of what you said. In fact, you are using what I call the honest ap-
proach, which is very seldom used in this place and is not being
used now, in my opinion.

You said—and I do not want to put words in your mouth, you
correct me if I am wrong—but you said, we simply cannot afford
as a society to provide the current set of benefits or level of benefits
in the manner that we provide now, and that, to me, says it all.
You are exactly right, that we ought to be, as policymakers from
the Speaker to the President on down, honest with the American
people, honest with the AARP, with the elderly, and say what we
have, and what we cannot afford. We couldn't afford it, I don’t
think, in 1965, and we darn sure can’t afford it in 1995. Where do
we go? What is our responsibility, as a public, to deliver to our el-
derly citizens?

If it is what we are delivering now, Lord help us. We are going
to have to change our whole economy and our economic system. I
appreciate your using the honest approach. We get further in this
debate if we would start using that approach rather than, you
know, trying to tiptoe around all these issues and placate the
AARP and placate the Democratic Party and the Republican Party.
T appreciate your testimony.

Did I mischaracterize your comment?

Mr. WALKER. The only thing I would say is, we have to
reengineor the program to make it financially sustainable, and
clearly the current program is not. I do not think we can throw
enough money at it.

If you look at it in the broader context, we have to fundamentally
restructure it, and we have to be candid with the American people
and tell them that. In order to do it, we are going to have to ulti-
mately do it within the broader context of more comprehensive re-
form, more comprehensive health care reform, but we need to get
on with it because it is a major job.

Mr. McCrery. Well, I am intrigued by your two-step solution
here, first do incremental reform and then do more broad-based re-
forms. You are speaking in codes here and J wish we could get out


75

[Recess.]

Mrs. JOHNSON [presiding]. If the panel will be seated, some
Members have returned and others will be along shortly and we
will proceed.

Mr. Ross, senior partner, Arnold & Porter, and public trustee of
the Federal Hospital Insurance Trust Fund, you are welcomed to
be with us. We appreciate you being here and you will open. After
you, David Walker, partner, worldwide managing director of com-
pensation and benefits, Arthur Andersen, another public trustee of
the Federal Hospital Insurance Trust Fund; and then Guy King,
consulting actuary, Ernst & Young, chief actuary of the Healt!
Care Financing Administration.

We appreciate the opportunity to share your thoughts about a
problem that really affects people of all ages, not just the seniors,
but all of their families as well.

Mr. Ross.

STATEMENT OF STANFORD G. ROSS, SENIOR PARTNER,
ARNOLD & PORTER, WASHINGTON, DC; AND PUBLIC
TRUSTEE, FEDERAL HOSPITAL INSURANCE TRUST FUND

Mr. Ross. Thank you, Madam Chairman, and Members of the
Committee. We appreciate the opportunity to appear before you to
testify on the 1995 trust fund reports. Mr. Walker and I have pro-
vided you a statement as public trustees and in order to maximize
the value of our limited time before the Committee, I would ask
that you enter our statement into the record and then Mr. Walker
and I would like to each make some remarks on our own behalf.

Mrs. JOHNSON. Without objection.

Mr. Ross. The public trustees are a part-time position and we act
to represent the public interest in the preparation of these reports;
and although I was appointed to the Democratic seat and Mr.
Walker to the Republican seat by President Bush, we have oper-
ated through both a Republican and Democratic administration on
what we believe is a nonpartisan basis.

We have made all of our statements jointly and we have had
total accord in what we have reported over the 5 years, and my de-
sire today is to emphasize some historical aspects of the long-term
effort to adapt the Social Security and Medicare Programs to
changing economic and social conditions, drawing particularly on
my experience as Commissioner of Social Security in the late
seventies and as a public trustee the last 5 years.

When viewed in historical perspective, the long-term financing
problems of these programs that are before us today are not recent
occurrences and the solutions are likely to be complicated to
conceive and difficult to enact.

The Social Security Program was first enacted by the Congress
in 1935 in a limited form. The program expanded slowly over the
next 37 years and, in fact, did not reach full maturation until the
amendments of 1972.

The Medicare Program was enacted in 1965. Although a Federal
health care program was considered in 1935, only rr some 30
years did such a program get enacted and then only for the elderly
and disabled as a logical expansion of the Social Security system.


36

Mr. RamstaD. Thank you, Mr. Chairman.

Mr. Chairman, I think your point is well taken. I wish we could
get away from this hyperbolic rhetoric and roll up our sleeves and
work together in a bipartisan, pragmatic way to deal with this
Medicare crisis, and it is a crisis, as your own trustees have point-
ed out to us.

Madam Secretary, in that spirit, I would like to ask you a series
of questions for which I believe there is a yes or no answer. I am
just trying to get at what, if anything, the administration has
considered in terms of solving this crisis.

My first question, has the administration considered means test-
ing higher income seniors as a way to reduce Medicare costs?

cretary SHALALA. Congressman, I am not prepared to discuss
what would be part of a roader discussion in terms of how we
would reinforce the HI Trust Fund, make changes that would im-
prove affordability and coverage and quality and choice as part of
our discussions of insurance reforms, and I am not prepared to an-
swer yes or no questions about very specific narrow changes that
some may well want to consider as an indication of what we would
put on the table.

Mr. RAMSTAD. Madam Secretary, what point in time will you be
willing to discuss the administration’s proposal?

Secretary SHALALA. Put your detailed budget on the table, sit
down with us in a bipartisan manner, and right after that——

Mr. RamstaD. I think I am asking a very legitimate, straight-
forward question. Has the administration considered, as a way to
solve this Medicare crisis, means testing?

Secretary SHALALA. The administration is not going to answer
specific questions, and we have repeated that 75 percent of all of
the Medicare recipients in this country have incomes under
$25,000 a year. Eighty-three percent of our expenditures for Medi-
care recipients are for those with incomes under $25,000 a year. I
do not know what we are talking about.

Mr. RamstaD. Madam Secretary, if I may, 1 only——

Secretary SHALALA. We are not talking about means testing be-
cause we are talking about a poverty population. To be old in
America is not to have very much money, and I think that to have
a reasonable discussion in a bipartisan manner, put your budget on
the table and we are prepared to sit down and to talk about the
Medicare Program, insurance reforms, what kinds of implications
that has for the private sector. We obviously want to reduce the
amount of cost shifting that goes to individuals who pay for private
health insurance, but I will not answer detailed questions about
what will be part of that discussion.

Mr. RamsTaD. Madam Secretary, I thought that was the purpose
of this hearing, to air not only the problem—we all know the prob-
lem. We know Medicare is going to be bankrupt by 2002. You, as
the trustee, told us that previously. We want to try to deal with
some solutions. Again, in a bipartisan, pragmatic spirit, may I ask
the question, has the administration considered giving Medicare re-
cipients incentives to participate in managed care plans? That is a
very straightforward question. Have they considered that?

Secretary SHALALA. This administration has expanded access to
managed care more than any previous administration, and both in


48

Mr. PoRTMAN. Specifically, then, you are not discounting the no-
tion of an employer link, sort of a continuous service from the em-
ployer in some way?

ecretary SHALALA. I am not discounting anything, and as we see
what is happening to people moving into Medicare—into HMOs, for
example, clearly those who are currently in HMOs are interested
in staying in their HMOs and working out these transitions ought
to be part of the discussions that we are having.

Mr. PoRTMAN. One other question, if I could. I do not want to
lose my time here. Again, I think you are right. The continuing on
makes sense. More and more Americans are used to managed care
now and I think it would be easier to have them adjust to that at
the Medicare level.

Medical savings accounts, Congressman Ramstad wanted to ask
you about that. How do fon feel about that? How much impact is
it going to have on the Medicare population? An idea, as an exam-
ple, would be for people to save tax free over time, during their
working life, and then have that available upon retirement to draw
from. They would be required to have some sort of catastrophic
plan as well. What is your reaction?

Secretary SHALALA. When I testified earlier on medical savings
accounts, I raised questions about whether we were not, in fact,
taking the healthier and wealthier folks out of the health care sys-
tem and setting them up separately. There is some evidence that
we may be paying too much in terms of what our contributions are,
and I think that we have had some very deep concerns about medi-
cal savings accounts. Creaming off part of the population is not the
way to solve the health care crisis in America, and that is why it
has to be part of a broader discussion.

Mr. Portman. I thank you.

Mr. THomas. The gentleman’s time has expired.

Mr. PorTMAN. I wish we had another hour or so. I thank the
Chairman.

Mr. Tuomas. The gentleman from Nevada will be the last in-
quirer, I would tell the Secretary.

Mr. Ensicn. Thank you, Mr. Chairman. Just a couple of quick
questions. What does the administration see as the fundamental
underlying problem with the growth of Medicare spending?

Secretary SHALALA. Well, the problem with the growth of Medi-
care spending—

Mr. ENSIGN. Or the cost. The cost.

Secretary SHALALA [continuing]. Is similar to what is happening
in the private sector. It is the introduction of new technology. It
is—

Mr. ENSIGN. The volume of services?

Secretary SHALALA [continuing]. For the Medicare population in
particular, it is health inflation. I mean, it is the growth of health
care costs.

The point I was making is that the growth in health care costs
in the private sector is similar to what is happening in the public
sector for very vulnerable populations. It is also, as we get better
treatment, it costs us more in health care. Unlike other parts of the
economy, if you have a technological breakthrough, it doesn’t nec-
essarily save you money.


53

Mr. McDERMOTT. The States could choose in that block grant not
to cover the out-of-pocket costs for senior citizens in their Medicaid;
is that correct?

Secretary SHALALA. As I understand the kinds of recommenda-
tions, talking about it would be up to the State unless Congress
mandated they pick up those costs.

Mr. McDermort. For my mother and father, my mother 85, m;
father 89, living on Social Security, if they have additional out-of-
pocket costs, it either comes out of their Social Security check or
they turn to my brothers and my sister and I to pay for it; is that
the alternative?

Secretary SHALALA. That is essentially what happens in real life
in the United States.

Mr. McDERMoTT. This will accelerate that process, in your view?

Secretary SHALALA. It will accelerate that process.

Mr. McDerRmort. Thank you very much.

ive appreciate your testimony today. You have done a very fine
job.

Mr. THOMAS. Madam Secretary, we appreciate your testimony.
Although we engage in debate, what may or may not happen in the
interaction between Medicaid and Medicare is precisely what we
were trying not to do, but rather deal with realities.

Thank you very much for your generous time.

Next, we will have June O’Neill, Director of the Congressional
Budget Office.

Director O'Neill, any written testimony you have will be made a
part of the record, and you may proceed as you see fit to inform
this Committee about this question from the Congressional Budget
Office perspective.

STATEMENT OF JUNE E. O’NEILL, DIRECTOR,
CONGRESSIONAL BUDGET OFFICE

Ms. O’NEILL. Mr. Chairman and Members of the Committee, it
is my pleasure to be here today to testify on the financial status
of the Medicare Program. Unfortunately, the financial liability of
Medicare is currently eroding, primarily because of continuing
growth in the cost of providing coverage to each beneficiary.

If left unchecked, this trend will create a problem of major pro-
portions when the baby-boom generation begins to reach retirement
age in 2010.

The 1995 Annual Report of the Board of Trustees of the Federal
Hospital Insurance Trust Fund, released last month, indicates that
under intermediate assumptions, the Hospital Insurance Trust
Fund, that is, the HI Program, will be depleted in 2002 unless
changes in policy are made.

Even under the trustees’ most optimistic assumption, the HI
Trust Fund will be exhausted by 2006, which is just 11 years from
now.

CBO finds ample reason to agree with the broad conclusions of
the trustees regarding the short-range adequacy of HI funding.
These projections of HI insolvency address only part of Medicare’s
overall financial outlook. It is well to keep in mind that the, SMI,
supplemental medical insurance, which pays for physician and out-


49

Mr. ENSIGN. You are talking volume of services basically; that is
the fundamental underlying problem?

Secretary SHALALA. The increase in population, too, and we have
talked about the demographics.

Mr. ENSIGN. That is going to get much worse obviously with the
baby boomers.

Earlier you and Mr. Matsui were in an exchange about cost shift-
ing to the private sector. I guess one of the things that I want to
get straight here, and then we need to get past this rhetoric, is that
the private sector, the last couple of years, has done better than
the public sector.

You are asserting that the public sector over the last 10 to 15
years has done as well, if not better, than the private sector as far
as controlling its costs or how fast they are increasing their serv-
ices. The cost shifting that Mr. Matsui was talking about, has that
contributed to the private sector’s increase in cost in your statis-
tics?

Secretary SHALALA. It has, to the extent—Medicaid, in particu-
lar, where we clearly do not pay as much as we should.

Mr. ENSIGN. Medicare is the cost shifting I am talking about.

Secretary SHALALA. In Medicare, there is some cost shifting that
is going on. What we do not want to do is produce more cost shift-
ing by slashing the budget.

Mr. ENSIGN. No. I agree with that. My point is that in your sta-
tistics, when you were trying to defend the public health care sys-
tem, Medicare basically, you were saying that it did as well or not
better than the private sector, but yet we have been shifting costs
to the private sector because of some of the reforms that have been
done in this Congress; is that not true? That contributes to those
statistics. OK, I just wanted to establish that. You agree?

Secretary SHALALA. No, I can’t agree with that.

Mr. ENSIGN. We have not shifted costs to the private sector from
Medicare?

Secretary SHALALA. It is not clear at this moment that the—
that—it is clear that the private sector has been squeezing down,
there is no question about it.

Mr. ENSIGN. Wait a second. We are talking about shifts of costs
to the private sector from Medicare.

Secretary SHALALA. Yes.

Mr. ENSIGN. You have said, you were exchanging with Mr. Mat-
sui, that we had shifted the cost to the private sector from the pub-
lic sector in terms of Medicare.

Secretary SHALALA. I think that——

Mr. ENSIGN. You disagree with that now?

Secretary SHALALA. My point was to Mr.—I thought Mr. Matsui

was asking me about cuts in the—dramatic cuts in the Medicare
system.
OM. ENSIGN. Correct, which shifted costs to the private sector. I
am saying, were those taken into account in your statistics the
total spending in the private sector? Do you understand what I am
saying?

Secretary SHALALA. Yes, I understand what you are saying.

Mr. ENSIGN. It skews the statistics is all I am trying to say.


78

ing certain uncontrollable factors, such as the increasing depend-
ency ratio and longer lifespans.

As Mr. Ross and I have stated in our last several public trustee
statements, in fact the last three, the Medicare Programs, in their
present form, are clearly unsustainable. In my opinion, these pro-
grams are in need of fundamental and dramatic reform. This in-
cludes reviewing who is covered, what benefits are provided, how
they are provided, and how the programs are financed.

There is little question in my mind that the incremental and cost
shifting approaches of the past have about been played out. In ad-
dition, while additional long-term savings can and should be
achieved by more aggressive use of managed care approaches and
tougher enforcement, these initiatives may result in more cost than
savings in the short term. In addition, these actions alone will not
come close to solving the long-term financing problems of the cur-
rent Medicare Programs.

In my opinion, while the current Medicare Programs may have
been appropriate and affordable in 1965, they clearly will not be in
the next century. This opinion is based upon a variety of factors,
such as known demographic trends, escalating health care costs,
existing health care coverage gaps, the current tax treatment of
health care benefits, the projected financial condition of Medicare
Programs, the relative financial well-being of the elderly as com-
pared to other cohort groups, the current national debt and fiscal
budget deficits.

As a result, the time has come to reengineer our Medicare Pro-
grams in a manner that is fair, fiscally responsible, and economi-
cally rational. We must also assure that the reengineered programs
are financially sound and sustainable over the Tonger term. Even
fundamental reexamination of the Medicare Programs should pref-
erably—I underline the word “preferably’—be pursued within the
context of more comprehensive health care reform.

Practically, given the significance of the reforms that will be
needed, we will have to pursue incremental reforms, conducting a
major education public campaign and then pursue more com-
prehensive and dramatic health care reform on a bipartisan basis.
Any broader health care reform initiative should include reviewing
and reconsidering appropriate roles of government, employers and
individuals in the provision and financing of health care, including
reconsidering all current health care tax preferences.

This broader reform initiative should also focus on what individ-
uals need and what our Nation can afford, rather than on what
benefits are currently being provided and what additional benefits
individuals want. After all, there is no free lunch, and to the extent
that these programs are not self-sustaining or otherwise affordable,
they will only serve to further mortgage our children’s future and
increase existing expectation gaps.

Importantly, a failure to effectively address escalating health
care costs and the financial imbalance in the Medicare Programs
in a timely, effective manner will have serious long-term economic
and intergenerational consequences. We must have the courage,
the vision, and the commitment to deal with the fundamental im-
balance in the Medicare Programs and our other health care relat-
ed challenges in a timely, comprehensive, and most importantly,


88

TESTIMONY BY

Guy King
Former Chief Actuary for HCFA
before the
House Committee on Ways and Means
May 2, 1995

Mr. Chairman, my name is Guy King. I am a Consulting Actuary with
the firm of Ernst & Young. I was the Chief Actuary for the Health
Care Financing Administration from 1978 to 1994. During my time as
Chief Actuary, the expenditures for both the HY and SMI programs
grew at rates that are unsustainable in the long run, and they
Continue to grow at those unsustainable rates today and into the
foreseeable future.

Hospital Insurance (HI) Trust Fund

‘The expenditures of the Hospital Insurance Trust Fund (Part A of
Medicare) increased from $17.7 billion in 1978 to $107.2. billion
in 1994. This is an average rate of increase of about 12 percent
per year. In 1978, the Annual Report of the Board of Trustees
projected that the HI trust fund would be bankrupt by 1990

Because of some minor price reduction changes in the program which
have been legislated over the years, the date of bankruptcy has
been pushed back by a few years, so that the 1995 Trustees Report
projects that the HI fund will be bankrupt by 2002. Thus, during
my 18 years as Chief Actuary, virtually nothing was done as the
problem grew and the HI program moved closer to the bankruptcy.
The impending bankruptcy of the fund is just the tip of the
iceberg, though. The hole is just going to céntinue to continue to
get deeper for many years, and the pace of decline is going to
accelerate. ‘The tax rate necessary to support the current program
will have tripled by the year 2065. Even by the year 2025 the tax
rate necessary to support the cost of the program will have more
than doubled.

I know that some people view these projections as a red herring

I have often heard it suggested that we should just wait awhile to
see if these problems really begin to materialize. That is
apparently what lawmakers were thinking when they heard the same
projections back in the mid-1970’s. The financial problems of the
HI program aren’t just the result of some extremely pessimistic
assumptions about the growth of health care costs. The assumptions
regarding the rate of growth in health care costs and the growth in
income to support the program are really very optimistic. These
projections are being driven now by the coming demographic shift.
The Baby Boomers who will retire and begin drawing benefits
starting in 2010 are all alive today. As the Post World War IT
Baby Boom begins to reach age 65, the growth in the number of
workers paying taxes 1s going to decline, and at the same time the
growth in the number of people eligible for Medicare benefits is
going to increase. Currently, about four taxpayers support each HI
beneficiary. Sy the middle of the next century, when all of the
baby boon will have retired, there will only be two covered workers
supporting each HI beneficiary, so this problem is very real and
very predictable.

The problem is so large that there isn’t any painless way at this
point to solve the problem. To place income and expenditures in
balance even over the next 25 years, which is the easy part, is
going to require either an immediate 30 percent reduction in
expenditures or an immediate 44 percent increase in the HI tax
rate, or some combination of both. And even then, the financial
problems beyond 25 years would still remain unsolved.

Some have suggested that the apparent recent slowdown in the rate
of growth in health care costs and the recent favorable experience
in the Medicare program may be enough to save the government from
having to make these decisions. That isn’t going to happen
During my twenty years as a government actuary I observed that,
when there was a threat of government action, health care costs
always behaved very well. This occurred with the wage-price


43

fashion remain within the guidelines in the trust fund called
Hospital Insurance; is that not true?

Secretary SHALALA. You are misunderstanding the unified
budget concept which—

Mr. COLLIns. I think I am very well in tune with how this pro-
gram works. Taxes are collected from every employee and employer
and from those who actually opt to be covered under Medicare.
They pay a premium, $261 a month. I believe that is the figure,
based on your report.

Those funds, they go into the general fund, but they are credited
to the Hospital Insurance Trust Funds. Any benefits that are paid
out and the cost of administration of those benefits are debited
against the trust fund.

Those trust funds, the surplus in those trust funds, can only be
used to purchase government securities. Therefore, any changes in
the Medicare Program in any shape, form, or fashion will remain
within the realms of the Medicare Program itself or the Hospital
Insurance Trust Fund; is that not true?

Secretary SHALALA. I think that——

Mr. COLLINS. Yes or no. Yes or no.

Secretary SHALALA [continuing]. We have a difference of opinion
over the unified budget.

Mr. COLLINS. Yes or no. Yes or no. Yes or no. The circle you have
been running in is just like when I used to rabbit hunt. You cannot
delay a rabbit. He will run way out and come back. That’s what
you keep doing. You keep running in circles, but the truth of the
matter is, any adjustments made within the Medicare Program or
the Medicare Trust Fund, those funds will stay in that Medicare
Trust Fund, Mr. Chairman, therefore, the budget itself is a moot
issue. You are not even talking about the budget when you talk
about the trust fund and the Medicare benefits.

Secretary SHALALA. It is not a moot issue.

Mr. COLLINS. I wish you would stop this debate of trying to di-
vide people and to threaten our seniors. I just do not like it that
you want to hold our seniors hostage to your rhetoric and your pro-
grams. It is just not fair to them. You are not being honest with
the American people and I regret that, Ms. Shalala.

Thank you for your appearance here today.

Mr. THOMAS. Mr. Payne will inquire. .

Mr. Payne. Thank you very much, Mr. Chairman, and thank
you, Madam Secretary, for being here today.

I wanted to first, since we are discussing Medicare, an issue that
is so important to all of our senior citizens in this country, to com-
mend you and the administration for the work you have done in
setting up the Conference on Aging, will be held this week. It was
a conference on aging that really laid the foundation that gave us
our Medicare system, perhaps the first conference back in the
sixties, and so these are very important conferences.

As I have talked to many people back home in my district, they
were very interested in this. Of course we all have someone who
is representing us at this conference, and this is an opportunity to
get a lot of input from our senior citizens from all over the country,
and I think this is an important part of any reform of the Medicare
system, certainly as we move forward, and I did want to comment


CONTENTS

Advisory of April 18, 1995, announcing the hearing ..

WITNESSES
U.S. Department of Health and Human Services, Donna E. Shalala,
tal

retary ..
Congressional Budget Office, June E. O'Neill, Director

Ernst & Young, Roland E. “Guy” King
Federal Hospital Insurance Trust Funi
Standard G. Ross
David M. Walker

ay,

87

76
78


66

Mr. ENGLISH. Thank you, Ms. O’Neill. I find your testimony to
be substantive and nonpartisan, and as such, an edifying contrast
with our last witness.

Mr. THomas. Mr. Portman will inquire.

Mr. PorTMAN. Thank you, Mr. Chairman.

Thank you Ms. O’Neill for your being here.

Is this your first appearance before the Committee?

Ms. O'NEILL. Yes, and I am happy to be here.

Mr. PoRTMAN. Welcome before the Committee. We are very
pleased to have you at CBO, and be so knowledgeable about this
program, which I said earlier is the budget buster because of the
magnitude of it and escalating costs that you outlined so well in
your statement.

I have just a couple of questions, can you give us a sense as to
the relationship between taxes paid and benefits received?

Often in the debate on Social Security we get into this discussion
with our constituents, at least I do, and I would like to get a sense
of what current Medicare recipients have paid in, versus what they
are projected to get out on an average basis, and if you could look
down the road some period of time, if you have that information,
10 years, 20 years.

Ms. O'NEILL. Well, in the HI Program——

Mr. PoRTMAN. I am talking about HI.

Ms. O’NEILL [continuing]. Essentially, taxes paid by current
workers provide most of the funding for the program.

Mr. PORTMAN. Which is true with Social Security as well, but the
beneficiaries have also paid in a certain amount over their working
life and—

Ms. O'NEILL. Yes.

Mt. PORTMAN [continuing]. Benefits, can you give us a sense of
that?

Ms. O’NEILL. Payroll taxes right now bring in about $100 billion.
There is also income from the taxation of benefits. Income from the
trust fund accounts for less than one-third of the total that is need-
ed to pay outlays. Outlays in 1995 run about $114 billion. So, it
is mostly coming from payroll taxes of current workers.

Mr. PorTMAN. If you could provide, in writing, to the Committee,
information as to current beneficiaries, that would be most helpful.
In other words, the average beneficiary today given that person’s
life expectancy, whether that person indeed will draw more in ben-
efits, and if so, how much more as compared to how much that per-
son would have paid in payroll taxes under the HI Program over
that person’s working life. That would be very interesting for me
and I think for other Committee Members.

If you could do a comparison with Social Security, I think we
have it from the Social Security Subcommittee, but that would be
very interesting to see just to contrast those programs.

[The following was subsequently received:]

On average, people turning 65 this year will contribute about $32,000 (in present
value terms) over their lifetime to the costs of their Medicare coverage through

payroll taxes during their working years and supplementary medical insurance pre-
miums. They will use about $95,00 in Medicare benefits.

My second question would be what do you view as the larger
problem, the impending bankruptcy of the HI Trust Fund? I know


52

Mr. McDermott. Thank you, Mr. Chairman. I just want to set
the record straight, I think, for—the Secretary has talked about the
need for the budget resolution and why it is there. The President
produces a budget, and he has done that. He has presented it to
us. Then the Congress, by law, is required by the April 15 to
produce a budget.

Now, last year the House passed the budget resolution on March
11. The year before it was on March 18. On the year before, when
Mr. Bush was President, he presented his budget, and then the
House Democrats produced their budget resolution by March 5.
That is almost a month-and-a-half, and then the year before that,
it was April 17.

Now, it is clear that when we go to make major cuts, we have
had the budget resolution before us so that we know what we are
doing, and when one reads the Speaker’s comments from yesterday
where he was asked about the use of Medicare savings, he says,
“I know nothing, go ask Tony Blankley.”

Now, that simply suggests that you are in an impossible position
to react to this, but I want to ask a question that really troubles
me, and that is this: Senior citizens, 63 percent of them, live on—
substantially on Social Security. That is the major source of their
income.

Now, this seems like really a hidden tax on them, and I wonder,
where do the additional costs get picked up if you have already cut
Medicaid? It seems to me that it is going to come out of the pockets
of their children or there is going to be an increased debt in the
system. Is that a fair analysis of what is going to happen if we do
not pay at the Medicare level?

Secretary SHALALA. Well, I think that in real life for so many of
our senior citizens who lived on fixed incomes it means less money
available for food, to pay for housing and to pay for other things.
Already they spend 21 percent of their income on average for
health care, and passing on to them additional health care costs
puts them clearly in a very difficult situation. We do not want to

lo that.

Recognizing who the program serves is very important as we
think through what can we do to make it better, to make it more
efficient, to keep our promises at the same time, but simulta-
neously to understand the impact that these large public expendi-
tures have on the budget.

Mr. McDermort. In the present situation, if they have addi-
tional out-of-pocket costs and they are of low income, it is picked
up by the Medicaid Program.

Secretary SHALALA. It is picked up by Medicaid from there.

Mr. McDermotr. Are you guaranteeing the Medicaid Program
will still have the capacity to pick up this increased out-of-pocket
costs?

Secretary SHALALA. I cannot do that because of the conversations
that are going on about the Medicaid Program in this country and
the discussions going on in terms of capping it or block grantin;
it, so the States would struggle with more ‘imited resources an
would have great difficulty handling the shift of costs that would
come from Medicare recipients.


101

the private sector and giving seniors the access to that, if when it
is multiplied out, it meets our cost test.

In other words, I do not know quite how to get around the prob-
lem of giving seniors choices of integrated systems of care without
absolutely forcing them to take capitated payments, though not all
managed care plans are capitated now, and the noncapitated ones
seem to work as well as the capitated ones. In my opinion, capita-
tion has some problems. I wouldn’t want to start from the position
that we could only have capitated managed care plans participate,
and in order to do that, you have to give seniors a premium value
and a choice of managed care plans around them.

Mr. KiNG. Yes. The approach that you mentioned, which is more
of a market-based competitive approach, could certainly result in
savings for those people who choose to enroll in the plans, and the
difficulty is in achieving a large enough penetration rate in order
to produce significant savings for the entire Medicare Program.

e problem—the financial problems of the HI program are so
large now that we can’t just rely on the carrot approach with bene-
ficiaries to induce them to enroll in managed care plans. It is going
to require not only carrots but sticks as well.

Mrs. JOHNSON. Interesting.

Mr. Walker.

Mr. WALKER. With regard to the HMO or the managed care proc-
ess we have now, competitive bidding clearly ought to be looked at
as a way to try to get the market involved in determining what—
you know, what they are willing to bid at. Right now they get
reimbursed for 95 percent or whatever.

Mr. KING. Yes.

Mr. WALKER. Therefore, let the market determine what they
would be willing to do.

Mrs. JOHNSON. Certainly competitive bidding would be appro-
riate if we followed the risk contract model. If we try to actually
‘ollow the model of opening up care options for seniors as the mar-

ket opens them up for companies currently, employers now in the
market, we wouldn’t need to manufacture the competition through
bidding and we, frankly, would get a healthier situation because it
wouldn’t be based on capitation. If you go into bidding, you are an
entirely capitated system then with all the possible problems
associated with mass capitation.

Mr. WALKER. Unfortunately, fee-for-service and capitation have
both problems, but they are exactly the opposite. One of the prob-
lems that we have right now, quite frankly, is that our fee-for-
service system, among other things, encourages additional utiliza-
tion, additional intensity——

Mrs. JOHNSON. I do not disagree with that. I am looking at the
midway that many managed care plans are using more the man-
agement controls volume that relies on a capitated payment
structure. There is a midway there, at least.

Mr. Collins.

Mr. COLLINS. Thank you, Madam Chairman. I will be very brief.

Noticing—listening to the conversation and the questioning be-
tween you gentlemen and the Chairlady, it is very interesting and
very different from the way this hearing started out earlier today.
I assume that all three of you are from the private sector, and


26

Mr. McDermott. You are saying that my parents who are living
on an $880 a month check, 89 years old and 85, when they get that
3-percent increase, this cut in Medicare is going to cut their COLA
in half?

Secretary SHALALA. Yes.

Mr. McDERMOTT. That is basically what is going to happen to
every senior citizen in this country?

Secretary SHALALA. Let me—if Medicare was cut by $250 billion
over a 7-year period, we are talking about the estimated increase
out-of-pocket expenses from about $3,000 to about $3,500.

Mr. McDERMOTT. My parents, who are living on $880 a month,
around $10,000, they are going to have an extra $3,000 coming out
of their pocket?

Secretary SHALALA. Over a 7-year period.

Mr. McDERMOTT. Oh, I see. It is about $300 a year. If they can’t
come up with it, where does it come from?

Secretary SHALALA. I do not know. For the senior citizen, it is
one pot of money. If they have to pay more for their Medicare, it
essentially comes out of their Social Security, and they understand
that and that is why, when you talk to senior citizens and to the
disabled in this country, they understand the very close relation-
ship between the Medicare Program and the Social Security Pro-

am. That is, in fact for them—the part B premium, as you well

now, is actually deducted from the Social Security check. So any
effort to increase the part B premium as a way of financing the HI
Trust Fund would, in fact, actually lower the check that people get.

Mr. McDERmoTT?. If we take—~

Chairman ARCHER. The gentleman’s time has expired.

Mr. McDERMOTT. Thank you.

Chairman ARCHER. Mr. Bunning.

Mr. BUNNING. Ms. Shalala, the President’s budget for 1996 that
he has presented to the Congress, and your trustees’ report, which
was written first?

Secretary SHALALA. The President’s budget.

Mr. BUNNING. The President’s budget was written first and then
the trustees’ report. There is nothing in the President’s budget that
addresses this problem that you all reported relating to the
shortfall in the Medicare Trust Fund. Is that correct?

Secretary SHALALA. There is nothing in his budget that directly
addresses that, though, in OBRA 1993——

Mr. BUNNING. No. Just answer my question.

Secretary SHALALA. No. The President actually wrote a letter
saying that, as we were in the process of preparing his budget, we
were making it very clear that he expected to deal with the health
care issues, including the issues of Medicare and Medicaid, as part
of a larger bipartisan discussion with Congress this year.

Mr. BUNNING. He said that in his budget?

Secretary SHALALA. He said that in a letter to Congress.

Mr. BUNNING. Letter to Congress; right.

Secretary SHALALA. In December.
piney BUNNING. Did OBRA 1993 not increase taxes by $240-plus

illion?

Secretary SHALALA. What OBRA 1993 did was combine cuts in
existing programs and some taxes to reduce the deficit over time,


22

In the last Congress, when we were the majority, didn’t we in-
crease taxes on a lot of folks that were out there in the work mar-
ket so that we could have this fund at least in better shape than
it was before?

Secretary SHALALA. We did, sir, and it was repealed under the
Contract With America, which added—which reduced the trust
fund by at least 1 year in terms of its solvency.

Mr. RANGEL. atever we did in increasing taxes to make the
fund more solvent, they decided that they would reduce the taxes
and to put it in even more serious jeopardy.

Anything that we have done and they have complained about, it
seems like they are doing it and making it worse. Now comes the
question as to where do we go from here. If I understood the con-
tract correctly, they told me, and I did believe them then, that they
would not even suggest a tax cut to this Committee until they
showed us where the savings were going to come from.

I know that a lot of savings came from the poor folks on welfare,
because they targeted them even before the campaign. Poor folks
have made more than their contribution toward balancing the

udget.

They say they have $100 billion that they are going to cut but
they won’t say what they are going to cut. Could not some of these
cuts be related to the same health delivery system that we have
to look at the whole picture of when we are talking about health
care?

Secretary SHALALA. Yes, sir.

Mr. RANGEL. How the devil can the President give them direction
as to how they can repair this part of the health delivery system
when they are hiding in the back rooms what they intend to do
with the entire health system?

I hope the President has given them a lot of direction in other
areas and I hope that they will respond with the enthusiasm that
they are waiting now to see how we are going to do this. The way
I looked at it is that they raked the increases we have had and de-
leted that with the contract and then all of a sudden, after 100
days when they cannot perform the contract because it is impos-
sible to do with all the promises they make, now on the 101st day
they come to the President of the United States and say, please get
us out of this. Give us direction because, after all, you are the
President.

I think this is a good beginning for the next hundred days and
I hope that they come back to the President of the United States
and ask exactly how they are going to pay for the tax cut, how they
are going to pay for the nutrition programs, how they are going to
cut all of these things that they are cutting and at the same time
be able to say that it is a better America.

I really appreciate the humbleness of my colleagues on this Com-
mittee because I never thought that they thought the President
had any ideas about this. They didn’t like what the President pre-
sented before, and obviously they read the American people correct
because they are hearing the numbers. You got a mandate on that
side. I remember when we were talking about——

Chairman ARCHER. The gentleman’s time is expired.

Mr. RANGEL. Oh, it has?


34

Mr. THOMAS. Over five, that still is equal to less than the short-
fall in 1 year of that 5-year period. Once again, it is a little incred-
ulous that the dollar amount would extend it 1 year when, in fact,
in 1 year the shortfall is $35 billion.

Gentlewoman from Connecticut's time is available.

Mrs. KENNELLY. Thank you, Mr. Chairman.

Thank you, Madam Secretary, for being with us this morning
and I understand this is tedious, this testimony, because we are
talking about a very difficult subject. I have been hearing all morn-
ing that this task is impossible, that the administration finds it im-
possible to go forward with addressing this program. That is not
true. It is also not true that this Committee has found it impos-
sible.

You, in your testimony, highlight very definitely what happened
in OBRA 1993, the Budget Act, where in fact a very difficult vote
was taken by this Committee to, in fact, help us get an additional
3 years in the HI Medicare Fund. That did happen. That is a fact.
It was voted on in this Committee and a number of these Members,
myself included, made that tough vote. It is not impossible, but it
will be difficult.

I would like to go on to the next year, 1994, which again illus-
trates why this is not going to be easy. All of us know it is not
going to be easy because we have been there.

In 1994, this very Committee voted on comprehensive health
care reform. Once again, a very difficult vote, and in that vote, for
those that voted for those changes and those improvements, every-
one didn’t agree on everything, there was a lot of angst to try to
get there, but the majority of the Committee felt the status quo in
the health care world is unacceptable.

In that comprehensive health care legislation that we addressed
in this Committee, which is history, $168 billion in Medicare cuts
were voted on. I just want to say to this Committee, we have al-
ways had a history of being able to take the hard choices and do
something about it, and I certainly would hope at the end of the
day, that this Committee can once again address the needs of the
elderly citizens and future elderly in this country, that the Medi-
care Program has worked and it is up to us to do something about
protecting it for the future. Let the Facts stand that difficult deci-
sions have been made in the past and only difficult decisions that
are very unpopular will have to be made in the future.

What we are trying to do this morning is try to make sure that
the difficult decisions we make do not go for tax cuts; that they go
to help the Medicare Program. That is what all this talk is about.
We are going to have to put up with each other until that is made
very clear. Where the changes will come from and where they will
go, to pay for what. That is what we are talking about.

Let’s talk about a couple of those changes that were in fact made,
Madam Secretary. In 1993, you came here and presented the idea
that we do change the tax on Social Security for some people who
had an income of a certain amount, and that change would go in
the trust fund.

History was made again, just recently, when we passed a tax bill
on the floor of the House that changed that back to 1993 and those
dollars will not go into the trust fund and therefore we won’t have


58

‘The Supplementary Medical Insurance program pays for physician and
outpatient services, Although itis optional, most individuals eligible for Medicare
enroll in SMI, Currently, premiums paid by enrollees finance about 31 percent of
SMI program costs. But that share is projected to decline significantly under current
faw--to 25 percent in 1996 and lower after 1998, General revenues finance the
remaining costs. The SMI program is not intended to accumulate funds for the
payment of future benefits. In 1994, the SMI program covered about 31 million aged
and about 4 million disabled enrollees at a total cost of $60 billion.

Payroll tax rates forthe Hl program are set at 1.45 percent of taxable earnings
‘each for workers and their employers. However, the consensus among economists
is that most of the tax charged to employers is indirectly paid by workers, whose
‘earnings are ultimately reduced by the amount of the employer's contribution. Self
employed workers pay 2.9 percent of taxable earnings. No cap is placed on taxable
‘eamings subject to the HI payroll tax. In 1994, approximately 141 million workers
{and their employers) paid $92 billion to the HI trust fund.

As the baby-boom generation reaches retirement age, the number of workers
available to support each HI ensollee is projected to drop. Currently about four
covered workers support each Hi enrollee. The trustees project that this ratio will
decline rapidly early in the next century. They expect that only two covered workers
will be available to support each enrollee by mid-century.

‘TRENDS IN SPENDING AND THE TRUST FUND BALANCE.

In 1994, the Medicare program spent $162 billion, including both Hi and SMI.
Between 1985 and 1994, Medicare expenditures increased at an average annual rate
of 9.6 percent. Under current law, CBO projects that Medicare spending will
continue to grow at a similar rate, rising from $181 billion in 1995 to $463 billion in
2005. That increase represents an average annual rate of growth of 9.8 percent. By
contrast, cash benefits for Social Security recipients will increase at only about half
that rate

Inflation in medical prices and increases in use of services account for most
of the projected rapid increase in Medicare spending. Medicare enrollment of the
elderly and disabled combined is projected to increase at an average annua! rate of
only slightly more than ! percent over the 1995-2005 period.

‘CBO projects that Medicare will absorb a growing share of the federal budget
over the next 10 years. In fact, under current law, outlays for Medicare (net of SMI
premiums) will increase from 11 percent of federal outlays in 1995 to 16 percent of
outlays in 2005.! Medicare and Medicaid are the fastest growing of the major
entitlement programs, and as such, they are major contributors to the escalating
bbudget deficits that face the country.

‘The Medicare trustees report 75-year projections of the financial status of the
HI trust fund. Projections made by the trustees of the adequacy of Hi funding to
support program costs in the future are based on three alternative sets of assumptions
about future economic and demographic trends: Jow-, intermediate-, and high-cost.
Under their intermediate-cost assumptions, the HI trust fund will be exhausted in
2002.

According to the trustees, HI outlays began to exceed income from the
payroll tax in 1992. They project that Hi outlays will begin to exceed all sources of

1 Those estimates assume tha serena spending res with eation ae 1998


76

The extraordinary prosperity of the postwar period from 1945 to,
roughly, 1972 allowed benefits to be expanded and the elderly to
share in the economic success of the immediate post war period.
The result of the matured Social Security Program and the Medi-
care Program was to remove many elderly from poverty and gen-
erally to enhance the security and well-being of workers who were
disabled or retired.

However, beginning shortly after 1972 with the oil shock,
stagflations and the more unsettled circumstances of the seventies,
the Social Security system reflected the economic and social
stresses of the time. It became clear that changes were necessary
to adapt the program to these changed circumstances and those
projected for the future. Thus major retrenchments in the program
came in the form of amendments in 1977 and 1983. On each occa-
sion, the Congress on a bipartisan basis, in a complex package of
structural changes, both raised payroll taxes and reduced benefits
in the interest of providing long-term financial stability to the
program.

The Medicare Program was subject to a series of cost contain-
ment enactments in the eighties and has repeatedly been the sub-
ject of congressional concerns over the past decade. Many changes
were enacted with the cooperation of Democratic Congresses and
the Republican administrations of Presidents Reagan and Bush.

I believe it is clear from even this briefly capsulized history that
it is entirely possible, indeed absolutely necessary, to successfully
adapt the Social Security and Medicare systems to changing cir-
cumstances, and in particular, to the social and economic condi-
tions that are anticipated to prevail in the next century.

However, the key to accomplishing needed changes is to make
programmatic changes, that is, changes in which the programs are
reformed on their own terms to provide long-term financial stabil-
ity for them. History shows that changes proposed essentially to
achieve deficit reduction or as part of any kind of a legislative pro-
gram that is not perceived to preserve and maintain these pro-
grams for the benefit of not just current beneficiaries, but workers
who will become beneficiaries in the years ahead, do not fare well.

In my judgment, deficit reduction and Social Security and Medi-
care reforms, which are both vital priorities for the nation, can best
be achieved when pursued independently of each other. Bipartisan-
ship and developing a broad consensus for change is essential to
successfully adapting the Social Security and Medicare systems. I
firmly believe that the problems these programs presently face are
serious and need to be addressed promptly.

Perhaps the most important step we can take right now is to find
ways for people of all persuasions to work together to bring these
programs into long-term financial stability, for looking at history
almost assuredly tells us that a complex package of structural
changes will be needed that involves both benefit reductions and
revenue increases, and construction of this package will require a
great deal of goodwill and trust on the part of many people in our
country.

Finally, I would submit that despite the difficulties in the last 20
years in achieving needed adaptations, our present Social Security
and Medicare Programs have continued to serve the country well.


28

Secretary SHALALA. We are not refusing to participate, Mr.
Bunning.

Mr. BUNNING. You absolutely have refused to participate in your
answers to the previous five Members on our side of the aisle.

Secretary SHALALA. Congressman Bunning, we have not refused
to participate. We have simply said, put your detailed budget on
the table.

Mr. BUNNING. We will do that.

Secretary SHALALA. Get to dealing with the Medicare Trust Fund
issue in the context of talking about incremental health care
reform and we are prepared to sit down.

Mr. BUNNING. We have heard that four times. We do not need
to hear it again.

Chairman ARCHER. The gentleman’s time has expired.

Madam Secretary, where in your budget is there a provision to
take care of this Medicare crisis?

Secretary SHALALA. Chairman Archer, as you well know, we did
not deal with the HI Trust Fund issue in our budget. What the
President did say in December in his State of the Union Message
and what Chairman—what Chief of Staff Panetta has repeated is
after the budget resolution is passed, we are committed to dealing
with the HI Trust Fund issue in a bipartisan manner within the
context of talking also about the —

Chairman ARCHER. I remember that, but you keep telling this
Committee that we have to put a budget forward before you will
do anything, but you——

Secretary SHALALA. Mr. Chairman, the law requires that you put
a budget forward.

Chairman ARCHER. You put a budget forward yourself that has
something to do with saving the HI Trust Fund. Your budget has
zero attention to that.

Secretary SHALALA. Our budget was submitted before the
trustees’ report.

Chairman ARCHER. No. Madam Secretary, we all knew last year,
because we had documentation, that the HI Trust Fund was going
to go negative in 1996 and was going to go bankrupt in 2002 by
the most optimistic actuarial projections. You knew that and we
knew it. There was nothing in your budget. You sit here before this
Committee today and say you are not going to do anything unless
it is in our budget.

Secretary SHALALA. Mr. Chairman, I didn’t say that at all. What
we said was that we are prepared to sit down in a bipartisan man-
ner after we see the Republican budget that was due, after all, on
April 15. We are prepared to deal with the HI issue and to sit down
in a bipartisan manner and work through these issues after the
budget resolution has been passed.

Chairman ARCHER. Yes, ma’am. You are suggesting then that
nothing in our budget resolution should have anything to do with
the dire straits of the HI Trust Fund as yours did. Mr. Herger may
inquire.

Secretary SHALALA. Mr. Chairman, I am not giving you any ad-
vice on your own budget resolution. I am simply saying that once
the budget resolution has passed and we see it, we are prepared


94

is expended most often by an individual for the medigap insurance
policy and look at the total dollars expended in this area. The re-
sources being expended are not in the wisest fashion.

From your perspective, in the relative short-term, is it something
that we should look at in terms of a whole new approach rather
than keeping it A, B with supplemental, or try to go to the drawing
board with a clean sheet of paper. Or, is that really more of a long-
term change?

Mr. WALKER. My personal opinion is, you need to make some in-
cremental changes that can help with the short-term problem, and
second, you need to put the process in place to be able to engage
in more comprehensive and fundamental long-range reforms. It is
more than Medicare. I do not think that we can just look at Medi-
care standing alone.

With regard to the broader range of reforms, we have to keep in
mind that we have got some other social programs. Namely, Social
Security, that is facing a long-range problem, and our health care
arena, to be addressed as well. From a political standpoint, can-
didly, You are going to have to address a number of those simulta-
neously in order to come up with a more comprehensive long-term
solution.

Mr. Ross. I would say that it is important to get the process
started as soon as possible. The problem is serious and it is going
to get worse, not better. The things you can do short term will be
incremental. There should be some kind of a Medicare reform pack-
age that both does some things and also sets in process larger
restructuring initiatives.

We didn’t get into this problem overnight and we are not going
to get out of it overnight. Unless we start to really work at it
concertedly over a continuous period, the problems will not be
sufficiently addressed.

You need to focus on what you can do through a separate pack-
age. I do not think you can do it all, but you can do some things,
and determine what things you could only do through a broader,
more complete package down the line and you shouldn’t lose sight
of the second as you do the first and as you do the first, you should
pave the way for the second. It may be a two-set process.

Mr. THOMAS. Mr. Ross, you said this was principally a political
function. I have to tell you, I lived through the 1983 Social Security
adjustments, and I agree with you, because ultimately it is all po-
litical. There are just enormous temptations, especially because of
the political volatility in dealing with this area that cries out for
a rational, long-term discussion that produces a general consensus.

For example, the discussion over moving the retirement age from
65 to 67, which was long overdue at the time we began the discus-
sion, was then prolonged for another 20 years into the 21st century
so that it probably has virtually no significant impact in actually
adjusting retirement benefits to retirement age given the way in
which retirement age is going to continue to change, one small ex-
ample that almost broke our political back in trying to achieve
some kind of a compromise of solution.

As we look at these options, it just seems to me that people such
as yourselves who have spent some time reflecting on this, people
who have no particular narrow interest to gain from one option or


9

75 percent of homes have incomes below $25,000. Let me repeat
that. About 75 percent of Medicare beneficiaries have incomes
below $25,000.

For the typical Medicare beneficiary, out-of-pocket health costs
represent 21 percent of income. Increasing out-of-pocket costs
would be the equivalent of reducing their Social Security. Attempts
to restore the solvency of the trust fund cannot undermine our
commitment to providing health security for older Americans right
now and in the future.

The administration takes seriously its responsibility to current
and future Medicare beneficiaries to insure the solvency of the
trust fund. The Health Care Financing Administration continues to
make many program changes to improve the efficiency of the Medi-
care system. As a result, on a per enrollee basis, Medicare grew at
a slower rate than the private sector between 1994 and 1991; 7.7
percent compared to the private sector’s 9.8 percent.

As we address these issues, we must remember that Medicare
does not stand alone. It is an integral part of a larger health care
system, a public/private health care system, as well as the Federal

udget.

For this reason, if the Republicans are truly serious about
strengthening the Medicare Trust Fund, they must first pass a
budget resolution that specifies how they plan to balance the budg-
et and pay for their proposed tax cuts. They must decide whether
they want to pursue the reported $300 billion in Medicare cuts over
7 years, the largest cut in Medicare in American history to pay for
a 7 year, $345 billion tax cut that goes predominantly to the well
to do Americans, and they must acknowledge that the only way to
resolve the problem surrounding Medicare is within the context of
health care reform.

The administration looks forward to working with the Congress
to develop lasting solutions to Medicare’s fiscal problems, to reach-
ing for a horizon in which all Americans enjoy long term health
security.

Thank you and I would be happy to answer any questions you
may have.

(The prepared statement follows:]


77

It is my strong belief that the Social Security and Medicare Pro-
grams are fundamentally sound and it is vital to the welfare of the
nation in the 21st century that they be adapted now in ways to
keep them sound in changing circumstances. By making relatively
small changes soon and gradually, more radical disruptive changes
can be avoided.

I will be happy to answer any questions you may have about ei-
ther our statement submitted for the record or my personal testi-
mony today. I thank you once again for the opportunity to appear
before you and commend you for your sincere commitment in hold-
ing these hearings and trying to provide leadership vital to
achieving needed reforms.

Mrs. JOHNSON. Mr. Walker, do you have a separate statement?

Mr. WALKER. That is correct.

Mrs. JOHNSON. Thank you.

STATEMENT OF DAVID M. WALKER, PARTNER, WORLDWIDE
MANAGING DIRECTOR OF COMPENSATION AND BENEFITS,
ARTHUR ANDERSEN LLP, ATLANTA, GEORGIA; AND PUBLIC
TRUSTEE, FEDERAL HOSPITAL INSURANCE TRUST FUND

Mr. WALKER. Madam Chairwoman, Members of the Committee,
I understand that each of the Committee Members have been pro-
vided with a copy of our latest joint public trustees’ statement,
therefore, I will focus my remarks on certain matters which, for the
most part, go beyond our joint statement and present and
represent my personal views.

These remarks are my personal views as an informed and con-
cerned private citizen who also happens to be a former public trust-
ee of the Social Security and Medicare Trust Funds, a former As-
sistant Secretary of Labor of Pension, Health and Welfare Pro-
grams, and head of the Pension Benefit Guaranty Corporation

In my opinion, when viewed on a combined basis, our current
Medicare and Social Security Programs promise significantly more
than this Nation can reasonably be expected to deliver in the next
century, given known demographic trends, projected health care
costs, the current national debt, projected fiscal budget deficits, the
projected financial imbalances in the Social Security and Medicare
Programs and other factors.

At the same time, the nature, timing, and magnitude of the pro-
jected financial imbalances facing the Social Security—namely the
OASI and DI—and the Medicare, the HI and SMI Programs, are
distinctly different. Clearly the projected financial balance in the
HI Program is our most serious and immediate concern, since the
projected cost rate for this program far exceeds the projected in-
come rate, and the HI Trust Fund is projected to become exhausted
in 2002.

Furthermore, the HI Trust Fund will start to experience a nega-
tive cash flow in 1996 and, in fact, already passed its peak of finan-
cial ratios. In other words, the highest trust fund balance was
achieved in 1992 and we have been going downhill since then.

In addition, the projected escalation in health care costs for both
the HI and SMI Programs is both alarming and unsustainable.
These escalating costs were caused by a variety of factors, includ-


83

A MESSAGE FROM THE PUBLIC TRUSTEES:

‘This is the fifth set of Trust Fund Reports on which we have reported as Public
‘Trustees. It is also, under the terms of our appointment, our last report, and we
use this occasion to summarize our views on some major aspects of the Social
Security and Medicare programs. As representatives of the public, our efforts
‘have been to assure the American public of the integrity of the process and the
credibility of the information in these reports. We feel privileged and honored to
have been able to take part in this important exercise in public accountability, and
want to provide our best advice on directions for change of these important
programs in the years ahead.

‘The Need For Action

During the past 5 years there has been a trend of deterioration in the long-range
financial condition of the Social Security and Medicare programs and an
acceleration in the projected dates of exhaustion in the related trust funds. To
some extent, this has been predictable because when doing annual 75-year
Projections, an additional deficit year in the 2060s is being added with each new
projection. But to some extent, the increasingly adverse projections have come
from unforeseen events and from the absence of prompt action in response 10
clear warnings that changes are necessary. These adverse trends can be expected
to continue and indicate the possibility of a future retirement crisis as the U.S.
population begins to age rapidly. We urge that concerted action be taken promptly
to address the critical public policy issues raised by the financing projections for
these programs,

Projections As A Guide To Action

We believe it is important for the public and the Congress to understand more
about what the projections in the Trust Fund Reports really mean and how they
are intended to be used. These projections represent the best estimates the
‘Trustees can make based on the best available information and methodologies. We
have, during our period of service, attempted to test assumptions, question
‘methodologies and work with the Offices of the Actuary of SSA and HCFA and
‘others in and out of government to seek improvements in the projections. We
have also stimulated thought through a symposium and publication of papers on
how methods and assumptions might be improved to better estimate the furure
income and health care needs of the elderly and disabled. Action should be taken
to continue and extend survey and other data development efforts and to improve
modeling capability regarding the income and health circumstances of future
retirees, Such information is critical to the legislative and regulatory activity that
will be required for both public and private income security and health care
programs in future years.

‘However, with even the best data and models, projections ultimately are only
estimates and must necessarily reflect the uncertainties of the furure. They are
useful if understood as a guide to a plausible range of furure results and if acted
‘on ina timely and responsible manner. They are not helpful if ignored, or if used
improperly, or if distorted. We hope that more policymakers will come to grips
with the strengths and limitations of projections such as those in the Trust Fund
Reports and how those projections can be used most productively.


5

the unique problems of Medicare this year. I hope I am wrong in
my understanding of those pronouncements.

This morning, I call upon the administration to join us in savin,
Medicare. I hope the mistakes of last year will not be compounde:
by an even bigger mistake this year. Let’s not hold America’s sen-
iors hostage to an administration-failed, big government health
care program.

Today, at the start of the 1995 White House Conference on
Aging, I hope the administration will advance proposals so we can
seek a consensus with the elderly and all Americans on positive
solutions. We are ready to work with you.

I will now yield to Mr. Gibbons for an opening statement.

Mr. GiBBoNS. Thank you, Chairman Archer, and I will yield my
time to Mr. Stark, former Chairman of the Health Subcommittee
and now Ranking Member on the Health Subcommittee.

Mr. StarK. Thank you, Mr. Gibbons and Mr. Chairman. You
know, the Republicans holding this hearing to save Medicare re-
minds me of the man who murdered his parents and begged for
mercy as an orphan. The hearing really is a blatant attempt to dis-
tract the public from a Republican tax bill that takes $87 billion
out of the Medicare Part A Trust Fund over the next 10 years and
gives it to the rich. Republicans are crying crocodile tears about the
trust fund being in danger. Talk about wake-up calls. I would say,
“hello, Earth to the Committee.” The Republican hypocrisy is
showing.

I urge the Committee Republicans to reread their minority views
on H.R. 3600, last year’s health reform bill. In that bill, Democrats
saved the Medicare Trust Fund by getting all health spending
under control. The billions we saved in Medicare helped the unin-
sured, expanded Medicare benefits, and provided a prescription
drug benefit for everyone. Democrats used Medicare savings to im-
prove the entire health care system.

Where were the Republicans? Every one of you on this Commit-
tee voted against any and all Medicare savings. In your dissent 10
months ago, Mr. Chairman, you said reimbursement levels had
reached potentially disastrous levels and additional massive cuts in
reimbursement to providers will reduce the quality of care for the
Nation’s elderly.

Now the radical right wants to cut three or four times more than
we did. How can they now say it will not hurt quality? I’m sorry,
folks, but massive cuts in Medicare without expanding coverage,
will shift cost onto younger workers and destroy the quality of
medical care.

Speaker Newt talks about reforming the system with more man-
aged care and vouchers. I must say, I resent the Republicans sug-
gesting that my mother and the Nation’s seniors are either senile
or so stupid they cannot see through that double-talk. Mother
knows that managed care costs more and it means less choice of
doctors and hospitals. She also knows that the vouchers being sug-
gested by Republicans to buy private insurance will not ever be
worth enough to pay for reasonable health care.

The Republican plan to push American seniors into plans with
less choice saying it would give them more choice is a dog who just
will not hunt. Republicans intend to disrupt people’s health plans


81

Currently about four covered workers support each HI enrollee. This ratio will begin to
decline rapidly early in the next century. By the middle of the next century, only about (wo
covered workers will support each enrollee. Not only are the anticipated reserves and
financing of the HI program inadequate to offset this demographic change, but under all the
‘sets of assumptions, the trust fund is projected to become exhausted even before the major
demographic shift begins to occur.

‘The Trustees note that some steps have been taken to reduce the rate of growth in payments
to hospitals, including the implementation of the prospective payment system for most
hospitals. Experience to date suggests that this reimbursement mechanism, together with
payment limitation provisions enacted by the Congress, has helped to constrain the growth in
hospital payments and has improved the efficiency of the hospital industry

Extension of this payment system to other providers of HI services and further legislation to
limit payment increases to all HI providers could postpone depletion of the HI trust fund for
about another 5 to 10 years. Much more substantial steps would be required, however, to
prevent trust fund depletion beyond 2010 as the baby boom generation begins to reach age 65.

We continue to believe, as we also emphasized in our 1993 and 1994 Public Trustees
Messages, that the Medicare program is clearly unsustainable in its present form. We had
hoped for several years that comprehensive health care reform would include meaningful
Medicare reforms and that comprehensive health reform would eventually reduce the rate of
growth of health care costs and thus the financing shortfall facing Medicare. However, with
the results of the last Congress, it is now clear that Medicare reform needs to be addressed
‘urgently as a distinct legislative initiative. We also believe strongly that Medicare reform
should be included as an integral part of any broader health care reform initiative which may
bbe considered in the future.

‘There are basic questions with the scale, structure and administration of the Medicare
program that need to be addressed. For example, is it appropriate to have a Part A (Hospital
Insurance) and Part B (Supplementary Medical Insurance) today, or should this legacy of the
political process that enacted Medicare in the mid-1960s be revised to create a unified
rogram? Is it appropriate to combine participants’ social insurance tax contributions for Part
A and premium payments for approximately one-quarter of Part B with general revenues? If
what should be the proper combination of beneficiary premiums, taxpayer social
insurance contributions, and general revenues? How are each of these kinds of revenue
sources to be justified and what rights to benefits and responsibilities to pay benefits are
thereby established? How can the program become more cost-effective? How can fraud,
abuse and waste be better controlled?

‘We believe that comprehensive Medicare reforms should be undertaken to make this program
financially sound now and over the long term. The idea that reductions in Medicare
expenditures should be available for other purposes. including even other health care
purposes, is mistaken. The focus should be on making Medicare itself sustainable, making it
compatible with Social Security, and making both Social Security and Medicare financially
sound in the Jong term. While Social Security is in far better financial health than Medicare
and the changes that will be required in Social Security can be relatively smal! and gradual if
they are begun in the near future, the magnitude of those changes grows each year that action
is delayed. Thus, urgent attention to Medicare's financing is critical, but itis important to
keep in mind the financing needs of both Social Security and Medicare when making any
changes because the resources that are devoted to one area will not be available to the other.

We strongly recommend that the crisis presented by the financial condition of the Medicare
Trust Funds be addressed on a comprehensive basis, including a review of the program's
financing methods, benefit provisions, and delivery mechanisms. Various groups should be
consulted and reform plans developed that will not be disruptive to beneficiaries, will be fair
to current taxpayers who will in the future become beneficiaries, and will be compatible with
government finances overall.

We have attached to our statement the four-page "Message From the Public Trustees” that is
included in the Summary of the 1995 Annual Reports, as well as our biographical
information, We thank you for the opportunity to present our views and --ill be pleased to
answer any questions you may have.


92

Mrs. JOHNSON. Thank you for your testimony. I want to recog-
nize the Chairman of the Subcommittee, Mr. Thomas.

Mr. THOMAS. Thank you very much, Madam Chairman. First of
all, I want to thank the three of you, and Guy, you do not mind
if I focus on Mr. Ross and Mr. Walker for a minute.

I believe you sat through the entire hearing today, or certainly
most of it. | was watching you sitting over there. First of all, on
behalf of the American people, I want to thank you for the time
that you put in serving as the public trustees. Second, I know that
you have been involved with an attempt to create an environment
for a solution to this problem for some time.

I have in front of me a softback called “Proceedings: Conference
on the Future Income and Health Care Needs and Resources for
the Abled,” sponsored by the public trustees of the Social Security
and Medicare Trust Fund. I believe it is a 1993 publication. This
basically gives you the parameters by which you can begin to focus
on solutions.

You heard, perhaps, then the dialog between the Health and
Human Services Secretary and Members of this Committee on both
sides.

The question I guess I would ask you is one that you can either
choose to answer or at least ponder over. Mr. Walker, you repeated
a number of times that the solution has to be bipartisan. I agree
with you, since we have got a Republican Congress and a Democrat
President, if it isn’t perceived at least as minimally bipartisan, it
isn’t going to become law, and all of us should be ashamed if some-
thing doesn’t become law, if not in this first session of the 104th
Congress, certainly in the second.

You folks have probably been as close to this issue as anyone.
You have looked at a number of options. Have either of you, or
both of you, discussed the role of service that you could perform for
the American people, for the Congress and the President in terms
of offering options, a set of solutions from your perspective
presented as both a Democrat and Republican?

It certainly hasn’t functioned that way on the public trustee role
on these trust funds, and provide an agenda for discussion rather
than this Gadsden-Alphonse business of who goes first. Have you
thought about that? Have either of you thought about offering a se-
ries of solutions? The old business of no pride of authorship, here
are some things, and you should at least consider them and we
would expect you to consider them. Either of you.

Mr. WALKER. I will go first, Mr. Chairman. There are two dimen-
sions of the problem. One dimension is short term and what type
of things can and should be done in the short term until we have
had time to conduct the massive public education campaign to edu-
cate the American people as to the nature and need for the
dramatic reform.

With regard to the more dramatic reforms, which is the second
element, I think we need to do something similar to what was done
in 1983. I think we need a Greenspan-type commission.

With regard to the short-term issues, Stan and I probably both
have personal views as to some things that should be considered
and are more than willing to answer questions in that regard. We
have not specifically talked about whether we should come up with


60

slowdown was mostly the result of sharply lower growth for hospital inpatient costs
cover the five-year period immediately following implementation of the prospective
payment sysiem. The growth rate for hospital inpatient spending rose somewhat
after 1990

By contrast, the freezes on and cuts in physicians’ fees that took place during
the latter part of the 1980s had little effect on the growth rate in spending for
physicians’ services because those measures were largely offset by an increase in the
volume of services. Although the rate of growth in physicians’ costs was lower
between 1990 and 1995 than it had been before the fee schedule and its volume-
based update system were intraduced, the slowdown may reflect the low level at
which the intial rates under the fee schedule were set. Projections for the 1995-2000
period assume a return to pre-1990 rates of growth.

‘Another significant change 1o Medicare during the 1980s was development
of a mechanism whereby health maintenance organizations (HMOs) could enroll
Medicare beneficiaries on a risk basis--receiving a capitation payment from Medicare
Jor each enrollee. Until then, HMOs were able to serve Medicare enrollees only on
‘a cost basis--a payment system not consistent with the way HMOs operate. Since
1985, Medicare enrollment in risk-based HMOs has grown steadily, increasing more
rapidly than private-sector HMO enrollment has since 1989. Nevertheless,
Medicare's risk-based HMO enrollment rate is still low--at 7 percent~compared with
the privately insured population. In 1992, almost 20 percent of people with private
insurance were in HMOs.

‘Currently, Medicare beneficiaries pay no mote to enroll in fee-for-service
‘Medicare than to enroll in an HMO. They often, however, receive supplementary
benefits-such as prescription drug coverage and waiver of cost-sharing
requirements--for litle or no extra premium if they enroll in an HMO, whereas they
pay a substantial premium for medigap coverage to receive those benefits in the fee-
for-service sector. For some Medicare beneficiaries, those financial incentives
appear to be outweighed by the desire to be able to choose physicians outside the
HMO's network. Others may not enroll in managed care plans simply because they
are unaware of all the options that are available to them, In the future, both stronger
financial incentives and better information would be necessary to encourage more
Medicare beneficiaries to enroll in managed care plans.

‘The most effective HMOs share the insurance risk for enrollees with their
providers, thereby reversing or counteracting the incentive providers have to provide
‘unnecessary services that is characteristic of the fee-for-service sector. Asa result,
an HMO's cost of caring for a given patient is generally lower than the costs incurred
by an indemnity plan in the fee-for-service sector.

Despite apparent evidence that the overall resource cost of services used by
Medicare beneficiaries falls when they move from the fee-for-service sector to an
effective HMO, higher HMO enrollment may have the perverse effect of increasing
Medicare's costs--not lowering them—-under Medicare's current payment system.
‘That effect occurs for two reasons. First, risk-based HMOs are paid 95 percent of
Medicare's fee-for-service cost to provide care to a beneficiary, as measured by the
average adjusted per capita cost (AAPCC). That link to fee-for-service costs means
that Medicare pays a fixed capitation amount for each Medicare beneficiary enrolled
in an HMO, regardless of the actual resource cost of the services provided. Second,
Medicare's capitation rates do not fully adjust for the generally healthier group of
people who are likely to choose the HMO option compared with those who remain
in fee-for-service, nor do they account forthe greater efficiency of managed care. If
the service costs are lower than the capitation amount, Medicare does not recover any
ofthe savings. The fee-for-service link also means that Medicare payments to HMOs



56

There are two broad approaches for achieving slower growth of
Medicare outlays, budgetary reductions and program restructuring.
The two approaches are not mutually exclusive. With or without a
tax increase, a combination would probably be needed to achieve
immediate savings and longer term goals.

Examples of budgetary reduction options are included in CBO’s
1995 report, “Reducing the Deficit: Spending and Revenue Op-
tions.” They represent a traditional approach to containing Medi-
care costs. Such options which typically reduce payments for pro-
viders or raise the amounts that Beneficiaries must pay, can offer
immediate short-term savings in the Medicare Program. They are
not necessarily designed to improve the efficiency of the program
or to address the underlying long-term structural problems of
spending growth.

Slowing the long-term rate of growth of Medicare spending and
ensuring the solvency of the HI Trust Fund will probably require
a major restructuring of Medicare. Three basic tenets underlie
most redesigned proposals. One is that Medicare beneficiaries
would have meaningful choices among a range of health plans,
including fee-for-service options.

Two, beneficiaries would also have financial incentives to select
efficient health plans.

Three, health plans would have strong incentives to compete for
Medicare beneficiaries.

Several possible models for structuring the Medicare Program
along those lines have been proposed. Frequently, competitive mar-
ket approaches offer participants more choices and clearer financial
incentives to choose less costly options.

A key feature of these approaches is the notion of Medicare mak-
ing a defined contribution on behalf of each beneficiary. Partici-
pants could then put those contributions toward the cost of a
health plan of their choice.

Beneficiary choice and limits on the government’s contribution,
for example, are important elements of the design of the existing
health insurance program for Federal employees.

A competitive redesign of Medicare is a possible strategy for ad-
dressing the fiscal problems of the program. Establishing a com-
petitive system could be a major undertaking requiring time to de-
velop. Moreover, full implementation all at one time could be dif-
ficult, a phased-in approach starting with younger Medicare
beneficiaries might be more feasible.

For these reasons, a structural change could not be counted on
to deliver substantial immediate savings, although considerable
savings might well accrue as time goes on.

One thing is certain, postponing decisions on Medicare’s financ-
ing will only make the necessary policy actions in the future more
severe. Without a tax increase, ensuring that the HI Trust Fund
remains solid will require immediate spending cuts as well as re-
ductions in the underlying rate of growth of spending.

Any delay will require more dramatic cuts and program changes
in the future.

Thank you.

I would be happy to take any questions you may have.

(The prepared statement follows:]


18

the Medicare Program, that it ought to be part of an incremental
health care reform discussion because of its implications on the pri-
vate sector, and continuing the extenders was part of the current
budget. We do think that there are things that we can do within
the system, but we do not think that these big numbers that have
been talked about and asking the Medicare recipients and the pro-
viders to take $300 billion in cuts is anything more than a very
dangerous approach to this country’s commitment to its elderly and
disabled.

Mr. CRANE. Madam Secretary, you are talking about the Presi-
dent’s proposal, and my question was about that $118 billion rec-
ommendation you made last year; Do you especially as a trustee,
continue to support that proposition?

Secretary SHALALA. I’m sorry. You are referring to last year’s
health care reform budget. Let me simply say that we made those
proposals within the context of health care reform. What the Presi-
dent has said is that any proposals to slow down the growth of
Medicare, such as those that we recommended as part of his own
health care reform proposal, ought to be discussed this year within
the context of incremental health care reform, some steps that we
can take to both slow down the growth, but simultaneously make
sure that we have looked at issues like coverage and affordability
and quality and choice. While I can’t speak specifically to those rec-
ommendations, we certainly would consider them as part of a
broader discussion of how to strengthen both the trust fund as well
as make certain that we maintain a quality health care system,
both in the private sector as well as the public sector in this
country.

But again, the President this year has made very clear in his let-
ter, we are talking about incremental reforms, taking steps toward
what we hope will be a goal of every American having affordable
health care available to them.

Mr. CRANE. Madam Secretary, since you as a trustee perhaps
know better than anyone the compelling nature of the bankruptey

roblem with the Medicare Trust Fund and the real effect of de-

yed action, can you, first of all, explain why you haven’t sent us
a plan to address this problem; and second, when might you be
sending us a proposal to save the Medicare Program?
retary SHALALA. Mr. Crane, what we have said is—and what
the chief of staff said very clearly in his letter, is that when your
party Puts a detailed budget on the table, when you tell us how you
intend to keep your promise to balance the budget and to provide
a large tax cut for the well-off, when you explain to all of us how
you are not slashing Medicare to do that, we are anxious to sit
down in a bipartisan way, as long as the context is real health care
reform. the first steps toward health care reform, that we want to
do it in that context because of the implications for the private sec-
tor health care system of making changes in the public health care
system.

Mr. CRANE. Well, we have been waiting patiently for specific pro-
posals to address the pending bankruptcy of that program, and we
would hope and pray that you as one of the trustees might give us
some guidelines since you have a specialized form of expertise. It
hasn’t been forthcoming to date andi think——


47

In 1975, Medicare was at $12 billion. Now, it is at about $178,
$180 billion. This past month, CBO told us that the figure is going
to be $345 billion in 7 short years, by 2002, which is a $167 billion
increase. That is a huge budget issue.

In addition to that, of course, we have the HI Trust Fund sol-
vency issue in 7 years, and no more money to pay the beneficiaries.
Whether you deal with it as a budget issue—broad-based budget
issue or as a trust fund issue, we have a crisis and we need to re-
solve it. I would hope that with the administration, we can at least
set some targets.

You told us when you came forward on the budget, you thought
Medicare was going to be increasing at 10, maybe up to 11 percent
per year over the next 5 years. As we all know, that is unaccept-
able. Perhaps we should start with saying, let’s get our Medicare
funding within a reasonable range over that 5-year period or 7-year
period, maybe it is 7 percent, maybe it is 6 percent, maybe it is 8
percent, but I would hope we could agree on some targets and then
work together in a constructive way to address it.

I am at a loss on the logic of not sitting down with us until we
doa budget. I do not know if that means you want us to do Medi-
care in the budget or you do not want us to do Medicare in the
budget. We can go back and forth on that, but I am disappointed
and I hope we can work on together.

Let me ask you a couple specific questions, if I could.

We started to get into some specifics. It is my view that you pret-
ty much shot down the means testing idea, the HMO issue. As you
indicated, there is sort of full HMO coverage now and there is fee
for service now. Many of us have talked about something in be-
tween, a PPO, preferred provider organization, or some other kind
of provider.

Secretary SHALALA. Come forward with one.

Mr. PoRTMAN. If, you are continuing to be interested in that, this
may be an area we can work together.

How would this notion of continued employer coverage, where
you would have the employer providing managed care now and
under some arrangement through the government would be able to
continue that same managed care under Medicare? How do you feel
about that idea?

Secretary SHALALA. I think, Congressman, all of the issues that
you are talking about, the additional HMO ideas, PPOs, point-of-
service options, are things that we have been working on for quite
awhile and have introduced some new—have tried to get some bet-
ter coverage. We are clearly interested in the competition idea. It
is difficult to do. It has required a major conceptual effort within
the Department. All of the above ought to be part of our discus-
sions as we sit down on a bipartisan manner so we can fill you in
on all of the things we are already doing.

What I wanted to do was send a clear message that we are not
locked into the old Medicare fee-for-service plan. The President
said from the moment we walked in that this program has to get
some discipline, we have got to provide some other options, we
have to preserve choice, we have got to look at more efficiencies.
We have collapsed our computer system. We have done all sorts of
things, so—


51

Mr. NEAL. I would like to offer you an opportunity for a construc-
tive opinion as well. The panacea that is being suggested in the
halls of the Congress today, is we simply herd everybody into
HMOs or managed care, that at the end of the day, we will recog-
nize and witness considerable cost savings in Medicare.

Is that your understanding of the program if it were to be initi-
ated on that basis? Would you care to, at least from a conceptual
view, offer a suggestion at this time?

Secretary SHALALA. We believe that choice is absolutely critical
to the Medicare system that—and that we ought to continue choice
and that people ought not to be shoved into HMOs. There is no evi-
dence thus far that there would be huge savings from putting large
numbers of people into HMOs.

While there have been some initial savings which have been
identified, most people believe it is because of the first group that
went into HMOs from Medicare actually were a healthier group.
We have to be extremely careful as we add—as more people choose
HMOs not to assume that there will be substantial cost savings in
the short—in the short run, or even in the long run, and I think
both the administration and the CBO and other health care experts
are being very careful in their language not to promise something
that we are not sure initially that we can deliver.

That does not mean in any way we do not think people ought to
have choices of HMOs or that we shouldn’t make reforms in the
system to make it more efficient, to bring down unnecessary utili-
zation, and to be very hard-nosed about our administration of the
program. We simply do not wish to overstate the effect of moving
millions of people into HMOs in this country.

Mr. NEAL. Just a quick followup to that. Would you suggest that
if we were to proceed down that road, that it ought to be done on
an experimental basis?

Secretary SHALALA. Well, we have, as you know, increased the
number of options available to senior citizens. Seventy-five percent
of the Medicare population now has access to HMOs. The ones that
do not actually live in rural areas where there are no HMOs. We
think in addition to what we already have, we ought to have point-
of-service options and some PPOs, but there ought to be more
choices out there, and that those choices ought to, if possible,
improve the efficiency of the system.

Mr. NEAL. Thank you. I have a quick anecdote to share. Yester-
day morning, I went along to get a cup of coffee and there were
some booths, and in three successive booths three different couples
said to me, do not let them touch Medicare, do not let them destroy
our Medicare system; and, indeed, at the end of the day we are
counting on folks like you if we have to make changes, make
changes, but certainly we intend not to let them destroy the
system. Thank you.

Secretary SHALALA. Thank you very much, Congressman.

Mr. HOUGHTON. Madam Secretary, you have been through a real
wringer this morning. Do you have time for one more inquiry from
Mr. McDermott?

Secretary SHALALA. I do indeed.

Mr. HouGHTon. OK. Mr. McDermott.



80

STATEMENTS OF STANFORD G. ROSS
AND DAVID M. WALKER, PUBLIC TRUSTEES,
‘SOCIAL SECURITY AND MEDICARE BOARDS OF TRUSTEES

MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE:

It is our privilege to testify regarding the financial status of the Medicare Hospital Insurance
‘Trust Fund as shown in the 1995 Annual Report of the Board of Trustees of that fund. As
‘you know, the Public Trustees are part-time officials appointed by the President and
‘confirmed by the Senate to represent the public interest in this important process of public
accountability. In our normal activities, Mr. Ross is a lawyer and consultant and Mr. Walker
is a CPA and consultant, both with extensive public and private experience in tax, financial
and retirement security matters. Pursuant to law, our terms as Public Trustees ended with
issuance of the 1995 Trustees Reports on April 3, 1995. Our joint statement reflects the
positions we took in those reports.

Role of the Public Trustees

‘As Public Trustees, our primary activities were directed at assuring that the Annual Trust
Fund Reports fully and fairly present the current and projected financial condition of the trust
funds. During preparation of the Annual Reports over the last 5 years, we participated in the
review of the proposed short-range and long-range economic and demographic assumptions
and in the decisions made on those assumptions. We attempted to test assumptions, question
methodologies and work with the Offices of the Actuary of the Social Security
Administration and the Health Care Financing Administration and others in and out of
‘government fo seek improvements in the projections. Specifically, we sponsored roundtable
discussions with expert panels on key assumptions, including the rate of change in fertility,
mortality and real wages. We also sponsored a symposium and publication of papers on how
methods and assumptions might be improved to better estimate the furure income and health
care needs of the elderly and disabled. The goal of these efforts was (0 assure the American
Public of the integrity of the process and credibility of the information in these reports.

In addition to our efforts to ensure the integrity of the projections in the trust fund reports,
‘we also worked to improve communications with the Congress and the public regarding these
important programs. We are particularly pleased to have provided leadership in returning to
one set of imermediate projections, or "best estimates," in the reports, and in conceiving and
instituting the increasingly popular Summary of the Annual Reports, including an annual
"Message From the Public Trustees,” as an important part of the reporting process. We also
testified before congressional committees and other governmental commissions, and gave
speeches and briefings to congressional staffs and other interested parties. Our goal in these
activities has been to enhance understanding of the current and projected financial condition
of the Social Security and Medicare programs.

A key point we have stressed is that projections ultimately are only estimates and must
necessarily reflect the uncertainties of the future. Nevertheless, the projections in the
Trustees Reports are useful if understood as a guide to a plausible range of funure results and
if acted on in a timely and responsible manner. With this purpose in mind, we now turn to
the projections in the 1995 report on the Hospital Insurance (HI) Trust Fund but will also
‘mention the status of the Supplementary Medical Insurance (SMI) Trust Fund.

Medicare Program

‘The 1995 reports on both the HI Trust Fund and the SMI Trust Fund show alarming
financial results. While the financial status of the HI program improved somewhat in 1994,
the HI Trust Fund continues to be severely out of financial balance and is projected to be
‘exhausted in about 7 years. The SMI Trust Fund, while in balance on an annual basis, shows
a rate of growth of costs which is clearly unsustainable. Moreover, this fund is projected to
be 75 percent or more financed by general revenues, so that given the general budget deficit
problem, it is a major contributor to the larger fiscal problems of the nation.


13

As we address these 4:
does not stand alone. It is
care systen, and its solvenc
context of that larger system, Broader health care reform will
occur only if we work on a bipartisan basis. The Administration
looks forward to working with the Congress to develop lasting
solutions to Medicare's fiscal problems.

S, We must remember that Medicare



55

In 1992, almost 20 percent of people with private insurance were
in HMOs. Currently, Medicare beneficiaries pay no more to enroll
in fee-for-service Medicare than they do to enroll in a HMO. They
often receive supplementary benefits, such as reduction in cost-
sharing or prescription drug coverage if they enroll in a HMO.

They would have to pay a substantial premium for Medigap cov-
erage to receive these benefits in the fee-for-service sector. For
some Medicare beneficiaries, the financial incentives appear to be
outweigh ed by the desire to choose physicians outside the HMO
network. Others may not enroll in managed care programs simply
because they are unaware of all the options available to them.

In the future, however, both stronger financial incentives to
beneficiaries and better information will be necessary to encourage
more Medicare enrollees to sign on for managed care programs.

Despite apparent evidence that the overall cost of services used
by Medicare beneficiaries falls when they move from the fee-for-
service sector to a HMO, higher HMO enrollment does not reduce
Medicare’s costs, and it may even increase them under Medicare’s
current payment system.

This effect occurs—and it is complicated partly because HMOs
are paid 95 percent of Medicare’s fee-for-service cost to provide care
to a beneficiary, regardless of the actual resource cost of the serv-
ices provided to the HMO.

Many analysts attribute the recent slow down in the rate of
growth of private health insurance spending to more aggressive
price competition among health programs. Between 1990 and 1993,
private health insurance spending grew at an average annual rate
of 7.7 percent, compared with 11.2 percent for Medicare.

As it is currently structured, the Medicare Program cannot take
advantage of the recent competitive developments in the private
health care market. If nothing is done and Medicare continues to
grow at its current rate, the program will consume an increasing
share of the Nation’s resources. In part, that outcome reflects im-
provements in health services for the elderly, but it also raises con-
cern about efficient resource allocation.

If Medicare absorbed less of the Nation’s output, more could be
spent on investment to improve the productivity of current and fu-
ture workers. Moreover, a growing economy could be more depend-
ably counted on to pay for the benefits of current and future
retirees.

Fixing Medicare’s financing problems will not be easy. As the re-
ports of the trustees make clear, the problems begin in the short
term and will only escalate in the long term as the baby boomers
start to retire.

Either taxes must be increased or expenditures reduced or both,
and the orders of magnitude involved are large. The tax alternative
taken in isolation would require an increase in the HI payroll tax
of 1.3 percentage points. That is a more than 40-percent increase
over the next 25 years to ensure that HI financing covers program
costs.

However, while an increase in the HI payroll tax would secure
the HI portion of Medicare outlays, it would do nothing to secure
the funding of SMI or to improve the overall efficiency of the
Medicare Program.


ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

FOR IMMEDIATE RELEASE CONTACT: (202) 225-1721
April 18, 1995
No, FC-6

PI
Report Shows Trust Fund Will Start Going Broke In 1996-

Congressman Bill Archer (R-TX), Chairman of the Committee on Ways and Means,
today announced that the Committee will hold hearings to review the Report of the Trustees
of the Federal Hospital Insurance Trust Fund and the recommendations of the Trustees. The
hearing will take place on Tuesday, May 2, 1995, in the main committee hearing room,
1100 Longworth House Office Building, beginning at 10:00 a.m.

The Committee will receive testimony from Federal Hospital Insurance Trust Fund
Trustees and expert witnesses.

BACKGROUND:

The payroll taxes paid by working Americans and employers into the Federal Hospital
‘Trust Fund (HI Trust Fund) pay for about sixty percent of the medical care for Medicare
beneficiaries. ‘The Hospital Insurance program (Medicare Part A) is obligated to cover the
costs of inpatient hospital care and other related services for those Americans who are entitled
to insurance coverage under Medicare Part A.

The 1995 report of the Trustees of the HI Trust Fund indicates that the fund is in
financial imbalance for both its short and long range projections. Beginning in 1996, the HI
Trust Fund will for the first time, spend more in outlays than it receives in income.
According to the Trustees report, if payroll taxes alone were raised to ensure fund balance
into the future, those taxes would have to be nearly tripled from current levels.

Currently, payroll taxes from about four workers cover the Medicare Part A costs on
average for each beneficiary. This ratio worsens over time, and drops precipitously when the
baby boomers become eligible for Medicare after the year 2010. It is noteworthy, however,
that the financial imbalance in the HI Trust Fund occurs prior to the eligibility of baby
boomers. As the Trustees report states: "Not only are the anticipated reserves and finances of
the HI program inadequate to offset the demographic change, but under all of the sets of
assumptions the HI Trust Fund is projected to become exhausted before the demographic shift
has even begun to occur."

“The report on the Hi Trust Fund is an early warning signal that cries out for
immediate Congressional attention. Despite the fact that President Clinton ignored the
precarious state of the Trust Fund in his budget, it is now time for him to join with the
Congress and face this issue squarely. We need to work together to keep the promises of the
past while meeting the needs of the current and future Medicare beneficiaries," Archer said.

Focus:

This hearing will review the Report of the Trustees of the Federal Hospital Insurance
Trust Fund and the recommendations of the Trustees.


72

down to it, we are all searching for ways to make this trust fund
viable past 2002. We just may disagree on which particular method
to use to do that.

Mr. Tuomas. The gentleman’s time has expired.

Mr. Levin will inquire.

Mr. LEvIN. I hear you, and the challenge is to spell out a better
way.

Remember that you are digging the hole deeper if you repeal the
tax on benefits—there have been savings from proposals spelled
out by Ms. O'Neill that were initiatives from Republican adminis-
trations, regulating both hospital and physician reimbursement.

Anyway, Ms. O’Neill, welcome. I thought your testimony was
really candid.

As mentioned, you have a great tradition in which you follow. We
have had your predecessors come here and they have rather suc-
cessfully walked the line and not let partisanship twist their testi-
mony. That is true of this testimony. I congratulate you on it.

Could I ask in that regard a couple of questions about your
comments on managed care?

Before I do that, do you know offhand, if not, maybe you could
supply us, what percentage of the projected increase in Medicare
expenditures in the next years would come from increased numbers
of beneficiaries, and which would come from projected increases in
hospital/physician costs?

Ms. O'NEILL. About 80 percent of the increase comes from in-
creases in expenditures per beneficiary, and about 20 percent from
increases in the number of beneficiaries. It is approximately of
those orders of magnitude.

Mr. LevIN. If you want to just—as you do recheck figures, and
if there is any basic change in that, let us know?

[The following was subsequently received:]

CBO estimates that increases in caseload—that is, the number of beneficiaries—
will increase Medicare spending by about 10 percent between 1995 and 2002. That
estimate does not take into account possible changes in the demographic composi-
tion or health status of the beneficiary population.

Mr. Levin. Let me ask you about your testimony on managed
care, because clearly there is increased discussion about there
being more managed care in Medicare, and I think it is worthy of
discussion as long as nobody thinks we are just finding an easy
answer there.

You talk about it in your prepared statement. You say in the fu-
ture both stronger financial incentives and better information
would be necessary to encourage more Medicare beneficiaries to en-
roll in managed care plans. You go on to say that higher HMO en-
rollment may have a perverse effect of increasing Medicare costs
not lowering them under Medicare’s current payment system.

Then you take that issue right on, and there you say, but signifi-
cant savings would not be generated unless the payment link be-
tween fee-for-service and managed care was broken.

Give us a clue how we would break that? I know mechanically
how we would do that, but how would we implement a breakage
in that linkage?


27

and that had an impact on the HI Trust Fund of increasing the sol-
vency for three more years.

Mr. BUNNING. That is according to the trustees’ account. What
did the trustees’ report say last year, relating to the expected
termination or exhaustion of the trust fund?

Secretary SHALALA. We have added a year in the last

year.

Mr. BUNNING. One year. That is what I thought, OK.

Do you recommend fixing the Part A Trust Fund solvency prob-
lem by increasing payroll taxes?

Secretary SHALALA. We do not.

Mr. BUNNING. You do not. Can you give us an indication of the
extent of the cost growth reductions necessary to achieve a 10-year
solvency, 15, 20, or just like we did in Social Security, a solvency
for 75 years?

Secretary SHALALA. Let me, if you will give me one moment, see
whether I have got it with me. I do not believe that I have it with
me, but I would be happy to provide it for the record.

I think, Mr. Bunning, the point I want to make back to you is
that we are not putting anything specific on the table at this point
in time. What we have said very clearly is that we would like to
see the detailed Republican budget, see the budget resolution, and
that we are committed to dealing with Medicare in the context of
a bipartisan discussion about health care reform.

r. BUNNING. I have heard that about four times now. We do not
need to repeat that since we only have 5 minutes.

Since the Congress, under your control, rejected a comprehensive
reform of health care, and since our side of the aisle always was
for incremental change in the health care system, there ought to
be some mutual ground that we can agree on to achieve that. I
would suspect that the President and the administration would
come forth with an incremental suggestion. They have not.

Secretary SHALALA. Congressman Bunning, what we have said is
to put forward an incremental approach——

Mr. BUNNING. Well, we have attempted to address the problem,
too, for 2 years, but we didn’t get any cooperation from the admin-
istration. They said, you are going to take this or leave it. That is
exactly what you said, Ms. Shalala.

Secretary SHALALA. In December, the President sent a letter to
Congress, to the congressional leadership, and made it very
clear——

Mr. BUNNING. This year. Only after the defeat of the one that
was going to be stuffed down our throats.

Secretary SHALALA. Mr. Bunning, the President has committed
himself, both in that letter and in his State of the Union Address
and his subsequent statements, to sitting down——

Mr. BUNNING. We are not going to hold our seniors hostage to
the fact that you failed in passing your health care plan when we
have a Medicare problem and we have got to save it. If you do not
want to suggest anything, then we are going to do it ourselves
without your assistance, and I am not like some of my other col-
leagues. I think we are very capable of doing it without your assist-
ance. We have asked you to participate. You are refusing to partici-
pate.


70

We are going to have to look at some of those kinds of things.
The fact that some of the most efficient providers in the State of
California, like Kaiser, are seventh or eighth on the efficiency list,
have to be looked at, and we have to look at what the implications
will be for the future if we achieve that kind of thing.

In other words, we may have to project out on the basis of a dif-
ferent level of experience or different kind of experience rather
than the data we have collected that are always 2 years old.

Ms. O’NEILL. There is considerable uncertainty because of these
changes, in constructing our projections. We have worried about
these issues and we feel that for both Medicare and Medicaid there
probably is a larger degree of uncertainty about what will actually
happen, in part because changes have been rapid.

In the Medicare Program, the managed care situation is not real-
ly the same as that which exists in the private sector. In the pri-
vate sector you could safely assume that the reason that people are
moving rapidly into managed care plans is that the plans cost less
and people believe they are getting more for their money.

How much that would translate into for an elderly population is
truly not known. There is a presumption that that could be true,
and there is some evidence that that is true, but we do not know
for sure.

One of the benefits of a private situation is that you do not have
to guess what will be provided and what people will do, because
you know that the situation really establishes itself. People do
what is to their best advantage. That is not the way the Medicare
system is currently structured. That can’t really happen.

Mrs. JOHNSON. It might be necessary to have a number of projec-
tions, if that percentage moved, that would be the outcome, if this
percentage moved, this would be the outcome, and if this percent-
age made that choice, this would be the outcome. So that we at
least understand a fiscal implication of various choices within the
senior community in terms of choosing a more even integrated
system of care.

Ms. O’NEILL. That is true.

Mrs. JOHNSON. Thank you.

Mr. THomas. Mr. McCrery will inquire.

Mr. McCrery. Thank you, Mr. Chairman.

Mrs. O'Neill, I have some questions about the budget and how
Medicare fits into the budget, kind of following up on Mr. Cardin’s
questioning.

Let’s skip to part B Medicare for a minute. As I understand it,
part B Medicare is subsidized, if you will, by general revenues, to
the tune of about 70 percent, 70 to 75 percent.

Ms. O'NEILL. Yes.

Mr. McCrery. What is the mechanism by which we divert gen-
eral revenues to make up the difference in part B, is that not an
annual appropriation?

Ms. O'NEILL. The program is an entitlement so that there is a
kind of trust fund—not exactly in the same sense as HI, since it
is not a trust fund that accumulates. There is a trust fund and it
also is a mandatory program so that spending is not appropriated.


63

Mr. THomas. Thank you very much, Director.

Ms. O'Neill, we have heard testimony from people who have said
we have been there before and do not worry about it, things will
somehow work themselves out.

In fact, in your testimony you indicated that at one time the out-
lays exceeded income, in 1992, and once again will reach the tip
point in 1996.

I do not think anyone has really directly addressed the problem
if we do nothing.

If, in fact, the Congress and the President do not agree on what
you have described as what I would call relatively far reaching and
fundamental changes to Medicare, what would happen in 2002 and
into 2003, if we do nothing and we play out this funding scenario,
what would actually occur?

Ms. O’NEILL. If no legislative action was taken at all, in that
year—according to our projections, and we agree substantially with
the trustees—the trust fund would be depleted, which means that
there would not be enough financing to cover what expenditures
are likely to be in that year.

Mr. THomas. But what would happen?

Ms. O’NEILL. What would happen? I guess either some emer-
gency infusions would have to be made at that point or spending
would be cut off. Some type of rationing would have to occur at
that point.

Mr. THOMAS. Since we have a relatively short lead time, and I
guess in these areas actuaries would tell us a 6- or 7-year lead time
is a relatively short lead time, decisions postponed really do have
a significant impact on our options, isn’t that true?

Ms. O'NEILL. That is true. You know, as I mentioned, the longer
we wait, the spending proceeds will increase at a much higher rate
than one might wish, making the problem harder to deal with. The
longer you wait, the deeper the cuts you all have to make when you
get there.

Mr. Tuomas. All of us are aware that the baby boomers are com-
ing into a retirement period. That is going to affect the Social Secu-
rity, OASI, Old-Age and Survivors Insurance, Fund. It is going to
clearly affect the Medicare Fund. My understanding is that the
wave, that demographic structure really will not hit the HIF, Hos-
pital Insurance Fund, in the timeframe that we have been discuss-
ing. Is that accurate?

Ms. O'NEILL. We are talking about the easy years. The deficit in
the trust fund account is growing and will, therefore, be depleting
the trust fund. This is occurring during a slow period when the De-
pression babies and World War II babies are coming to retirement
age. The baby-bust cohort was a very small one.

Mr. THOMAS. We have several problems in front of us, not just
a short-term funding problem but the long term problem of the de-
mographic shift that we would have to deal with. Is it possible in
terms of the models that you have been looking at to make adjust-
ments in this short-term period that will also help us in that
demographic longer term problem period?

Ms. O’NEILL. The kinds of budgetary changes that would lead to
expenditure reductions in the programs outlined in our options
book are things that could be done right away. Significant savings


20

Secretary SHALALA. I am not sure that I shouldn’t provide a more
comprehensive answer for the record. When we are talking
about——

Mr. THomas. If you will do that in writing. I have 5 minutes and
I have several more questions, but I guess my question was pretty
particular. Is there anything that was done in the OASI Trust
Fund on demographic factors that hasn’t been done in the HITF?

Secretary SHALALA. Let me simply say that the HITF and what
we are paying for is the growth of health costs in this country. I
made the point that private sector health costs per capita——

Mr. THoMas. Madam Secretary, what age triggers the HI Trust
Fund eligibility?

Secretary SHALALA. Oh, you mean you are talking about the dif-
ference between——

Mr. THomas. In the HI Trust Fund, when are you eligible to re-
ceive benefits from the trust fund?

Secretary SHALALA. At 65.

Mr. THOMAS. Sixty-five. In the OASI Trust Fund, through the
year 2030, what is the eligibility?

Secretary SHALALA. We are—I believe, if I remember correctly,
that it is a graduated age base, that Congress changed the dates.

Mr. THOMAS. What is the age by 2030 that people are eligible?

Secretary SHALALA. It is 67.

Mr. THomas. Sixty-seven. So, there is a different age eligibility
in the Social Security Trust Fund as opposed to the Health Insur-
ance Trust Fund. Would you, as a trustee of these trust funds, per-
haps recommend that the Health Insurance Fund in the OASI fund
be conformed in that regard?

Would that be a suggestion of the trustee?

Secretary SHALALA. It has not been a suggestion of the trustees
and let me give you some concerns that we would have about that,
and that is that——

Mr. THOMAS. So, that would not be something that you would
support?

Secretary SHALALA [continuing]. What that may well do is add
to the number of uninsured in this country. As you well know, the
number of people, because of the reorganization of companies, that
are being pushed out of the insurance market because of what is
happening to their jobs is increasing among people 55 and older
and we would have some concern that we would add to the number
of people who are uninsured in this country.

Mr. Tuomas. Madam Secretary, on page four, you indicate that
the trust fund actually increased at a slower rate than the private
sector. Interestingly enough, the years you chose were 1984-91.
Does this mean then that you have no figures available to you be-
tween the years 1992 and today, or was this merely an example of
picking a timeframe in which you appeared pretty good? Do you
have any 1992-94 figures?

Secretary SHALALA. I do not think we have—what has happened
after that, if I remember the numbers correctly, what happens
after that is the fundamental point that we are making that public
health care per capita growth is not out of line with private health
care per capita growth.


37

Medicaid and in Medicare, people are moving rapidly to managed
care. In Medicare alone, at a rate of 1.5 percent a month. Individ-
ual plans are offering incentives for people to move in. In some
cases, they are being taken. In other cases, they are not.

We are preserving choice. We are committed to choice, but simul-
taneously, we believe that the choices that Medicare recipients
have ought to be expanded. We have already announced that we
are discussing, in addition to the HMO range that are available—
and 75 percent of all Medicare recipients now have access to
HMOs, point of service options, PPOs.

Mr. RamstaD. Madam Secretary, is it your plan to deal with this
problem with increased incentives?

b Secretary SHALALA. There is—let me simply say this. It could
e—_—_

Mr. RaAMsTaD. My time is almost up. I have two more important
questions.

Does the administration support vouchers for seniors to purchase
private health care insurance, again, as a way to move more sen-
iors into private health care plans to avert the Medicare bank-
ruptcy?

Secretary SHALALA. Mr. Ramstad, I am not sure I can answer
that question as quickly as you would like. We have deep concerns
about proposals that we have seen for vouchers.

Essentially what you are saying is that 37 million people, most
of whom have preexisting conditions by the nature of their age, be
tossed into the individual insurance market in this country to sink
or swim, and J think that most of us, including the market itself,
would have some deep concerns about whether they could be ab-
sorbed as such. We have made a commitment to a benefit package,
to a series of benefits.

Mr. RaMSTAD. Madam Secretary, we have heard that, please. I’m
sorry. I do not mean to be rude at all, but the time is obviously
waning.

Mr. THOMAS. The gentleman’s time has expired.

Mr. Zimmer.

Mr. Ramstap. I would have asked about medical savings
accounts, but we will save that for another day.

Thank you.

Secretary SHALALA. I think I am on the record about that one,
too, Mr. Ramstad.

Mr. ZIMMER. Thank you, Mr. Chairman.

Whether we like it or not, for the next—for the better part of the
next 2 years, this country is going to be governed by a Republican
Congress and a Democratic President, and we really have to try to
figure out how we can try to work together. This relationship is be-
ginning to remind me of a bad marriage. As with a lot of bad
marriages, the problem is one of communication.

Secretary SHALALA. Where do I get a divorce?

Go ahead, Congressman Zimmer. I apologize.

Mr. ZIMMER. The administration says it is asking for a bipartisan
dialog, but it won’t start the dialog, and you are saying that you
will talk to us when we do certain things first, and I just do not
understand why we can’t talk about the trust fund before you see
the final Republican budget, and I do not understand why we can’t


57

STATEMENT OF JUNE E. O'NEILL, DIRECTOR
CONGRESSIONAL BUDGET OFFICE

‘Mr. Chairman and Members of the Committee, itis my pleasure to be here today to
discuss the financial status of the Medicare program. Continuing growth in the cost
of providing Medicare coverage to each beneficiary, coupled with a steady increase
in the number of beneficiaries, is eroding the financial viability of the program. If
left unchecked, those trends will create a problem of major proportions when the
baby-boom generation begins to reach retirement age in the year 2010. Addressing
the short-term and long-term financing problems of the Medicare program presents
a serious challenge for the nation.

The 1995 Annual Report of the Board of Trustees of the Federal Hospital
Insurance Trust Fund, released last month, indicates that under intermediate
assumptions, the Hospital Insurance (HI) Trust Fund will be depleted in 2002. In
other words, unless changes in policy are made, the HI program will only be able to
pay fully for services provided to beneficiaries for about the next seven years.
Indeed, even under the trustees’ most optimistic assumptions, the HI trust fund will
be exhausted by 2006-11 years from now.

Based on the Congressional Budget Office's (CBO's) analysis of the trustees’
projections and our independent analysis of the Medicare program, we find ample
reason to agree with the broad conclusions of the trustees regarding the short-range
adequacy of HI funding. But those projections of HI insolvency address only part
of Medicare's overall financial outlook. The Supplementary Medical Insurance
(SMD program, which pays for physician and outpatient services for Medicare
beneficiaries, is also experiencing rapid growih in costs.

Moreover, the Medicare program is absorbing a growing share of the nation's
resources. Combined spending for HI and SMI has increased from 0.8 percent of
gross domestic product (GDP) in 1974 to 2.4 percent of GDP in 1994. It is expected
to increase to about 3.5 percent of GDP by 2002. Program revenues, however, are
‘ot increasing nearly as rapidly. The evidence strongly supports the conclusion of
the trustees that "prompt, effective, and decisive action is necessary" by the Congress
to avert a financial crisis in the Medicare program.

My statement today covers four topics:

0 Anoverview of the Medicare program,

© Trends in program spending and in the trust fund balance,

© Medicare's cost containment measures to date, and.

© Options for responding (othe fiscal crisis in the Medicare program.

OVERVIEW OF THE MEDICARE PROGRAM

Medicare is the nation's major program providing medical services to the elderly and
disabled populations. It offers two different types of insurance coverage, which are
financed and administered separately.

‘The Hospital Insurance program pays for inpatient hospital carc and related
care for people 65 and older and for the long-term disabled. Payroll taxes primarily
finance the program, with the taxes being paid by current workers and their
employers. Those tax receipts are mainly used to pay for benefits to current
beneficiaries. Income not currently needed to pay for benefits and related expenses
is credited to the HI trust fund. In 1994, the HI program covered about 32 million
aged and about 4 million disabled enrollees at a cost of $103 billion.


23

Chairman ARCHER. Long time. Long time expired.

Mr. RANGEL. Let me congratulate my majority for recognizing
that there is a White House and we will give you something to
work on.

Chairman ARCHER. Mr. Shaw.

Mr. SHaw. Thank you. Thank you, Mr. Chairman.

The gentleman from New York always tries to kill us with his
levity, and I always enjoy listening to him. I think when you look
at something as potentially disastrous as the collapse of Medicare,
you have to at some time take a little bit of a break to try to find
something that is amusing in what is said.

I would like to take his example of having a water pump broken
on the car, and we have invited the administration in to give us
their position, and their position is, unless you change the whole
engine, we are not going to play. It seems to be that this hearing
is rapidly becoming a total waste of time. If we did not ask the ad-
ministration here to give us their direction, then we would have
been severely and justifiably criticized because the President is the
leader of this country and the President should definitely be a
player.

What you have told us, Madam Secretary, is that unless we take
some significant steps forward toward a comprehensive health care
plan, you have nothing to tell us. Am I misinterpreting something
here, or is that exactly what you have told us?

Secretary SHALALA. It is not what I have said at all, Mr. Shaw,
and I have not used the word comprehensive. The point I have
made about Medicare—

Mr. SHAw. Incremental. Let’s define incremental steps toward
health care reform. Would you, in about 30 seconds, just tick off
a couple of incremental steps that you feel are necessary in order
for you to be a player in this whole thing of trying to salvage
Medicare?

Secretary SHALALA. The President has made very clear in his let-
ter in December and in his subsequent comments, and most re-
cently Mr. Panetta made clear in his letter to the Speaker, that we
clearly believe that there continues to be a health care crisis in this
country, that it is a crisis both of coverage, of affordability ——

Mr. SHaw. Excuse me for interrupting. I only have 5 minutes.
Would you tell us specifically what incremental steps? I took that
out of your testimony on questioning by one of the Members here.
You said incremental steps for health care reform. What is your
minimum standard of incremental steps that are necessary in order
for you to come in and be a player and join with us, as the Chair-
man has suggested, in a bipartisan way of trying to solve
Medicaid?

Secretary SHALALA. We have talked about the necessity to look
at insurance reforms, to look at coverage issues, particularly for
children. As you well know, the difficulty of moving people from
welfare into the work force without health care coverage, we have
talked about our concerns about simply taking sharp cuts, the big-
gest Medicare cuts in American history out of the Medicare system
to finance tax cuts is not an adequate way for dealing with the
health care crisis in this country.


90

Tf some adjustments had been made to the SMI program years ago,
this problem would never have developed to the size it is today.
For example, if the SMI deductible had been indexed to increases in
per capita program costs, and steps had been taken to ensure that
Medicare supplemental plans did not neutralize the cost-saving
features of the SMI deductible, then the outlays of the SMI program
would be tore than 25 percent lower than they are today. This
would have allowed maintaining the SMI premium at $4.00 instead of
the $46.10 it is today. At the same time, the government
contribution to the program could have been nearly $5 billion less
than it ia today.

The outlays of the SMI program are excessive today due to two
design features of the program which interact with each other to
result in significant waste and abuse. These are the same two
factors that are driving up health care costs for private sector
health care plans.

The first factor is third party payment. When patients and
providers are spending other peoples money, they don’t concern
themselves with either the price or the quantity of services
provided. Today, even the very modest cost sharing provisions of
the original SMI Program have been eroded because they were not
indexed to keep up with costs and because health care is, in
effect, free for the 80 percent of SMI enrollees who buy Medicare
supplemental policies or are eligible for Medicaid. Research
conducted by HCFA’s Office of the Actuary on the Medicare Current
Beneficiary Survey found that, even when controlled for self-
reported health status, Medicare beneficiaries who did not have
Medigap plans, and who thus were subjected just to the (severely
eroded) cost sharing provisions which exist in the Medicare program
today, have significantly lower overall health expenditures.
Moreover, an important research paper which will be published in

; coauthored by Mark Freeland, Ph.D. and Al Pedon,
Ph.D., shows that the acceleration in the rate of growth in health
care expenditures in the United States has been highly correlated
with the shift toward third party payments. Their research shows
roughly that every ten percentage point shift from out-of-pocket
payments to third party payments results in an increase in the rate
of growth of health care costs of about two percent, and this
accelerated rate of growth persists for about ten years. In my
opinion, thie is the most important research conducted yet on
health care costs because it explains the reason for the rapid
growth in health care costs in the United States

The second factor contributing to rapid growth in health care costs
is fee-for-eervice medicine. This factor interacts with third
party payments to allow for unlimited increases in the volume and
intensity of services provided to patients, without regard for the
efficacy or cost effectiveness of those services. During the
entire history of the SMI Program, most of the increase in per-
capita costs have arisen from increases in the volume and intensity
of services rather than price increases. During the ten year
period ending in 1992, over three fourths of the increases in
Payments to physicians arose from volume and intensity increases.

The cost of health care can theoretically be controlled by
removing either of the two offending factors---third party payments
or fee-for-service medicine Increasing coinsurance and
deductibles is an example of dealing with the third party payment
factor; introducing capitated services, as in the TEFRA Medicare
Risk Program, is an example of dealing with the fee-for-service
factor.

‘The problem that I have observed with the second approach is that
the TEFRA risk sharing program is structured in such a way that,
even if there were no risk segmentation, and with a 10 percent
capitated penetration rate the most that could have been saved
would have been 1/2 of one percent. However, because of risk
segmentation, the TEFRA risk program has increased expenditures of
the Medicare Program rather than reducing them.


44

on that and commend you for your work and the administration for
that.

Secretary SHALALA. Thank you very much, Congressman Payne.

Mr. Payne. I understand from your testimony and from what I
am seeing here in terms of the tables that were presented to us
that the reduction in income from the taxation of benefits to the
trust fund, in other words, the tax cuts that were passed as part
of the Contract With America, have not been considered in the re-
port of the trustees, so that if, in fact, that was considered, that
it would not be a 7-year period of time, but rather something less
than seven, maybe as short as six or fewer years that we now have
to act as a result of that action that was taken. Is that correct?

Secretary SHALALA. Yes. Something—six plus I think it is. I
think it is closer to about 8 months that that would knock it out.

Mr. Payne. So that the one action that this Congress has taken
generally regarding this issue has actually exacerbated that prob-
lem to the extent that there is some $31 billion less that will be
flowing into the trust fund.

Secretary SHALALA. That is exactly right, Congressman Payne.
The point we were making is that it is going exactly in the opposite
direction, all the steps that the administration and the Democratic
leadership took previous to that was to extend the number of years
to protect the HI fund and the contract actually reversed that for
a number of months.

Mr. PayNE. Now, in trying to understand this and putting aside
partisan politics, just to understand where this is and what needs
to be done, as I understand it, there are two different trust funds
associated with Medicare, one the Part A and the other, the Part
B Trust Fund. Why do we have two different trust funds? What
was the purpose of setting that up that way and has any consider-
ation been given to or has there been talk about making that a
single trust fund?

Secretary SHALALA. There have been some conversations about
making it a single trust fund over the years. One was set up obvi-
ously with payroll financing and the other, which has some cost
sharing and some premiums paid by individuals, and I think that
there have been some very thoughtful people who believe very
strongly they ought to be combined, particularly as we begin to go
to other kinds of vehicles, HMOs and other kinds of choices for peo-
ple, and I would think that a thoughtful discussion on that subject
would be worthwhile.

Mr. PayNeE. But, there is not yet--——

Secretary SHALALA. There is not a proposal any place, and one
obviously has payroll taxes deposited directly and the other has out
of pocket and discretionary money allocated for it.

Mr. PAYNE. I understand there has also, in the past, been some
discussion about the need for a trust fund at all. Is that something
that the trustees have discussed at all?

Secretary SHALALA. Not during my term as a trustee; we have
not had a discussion about that.

Mr. Payne. So, that there is no recommendation that it be——

Secretary SHALALA. There is no discussion on that.


85

‘We feel strongly that comprehensive Medicare reforms should be undertaken to
make this program financially sound now and over the long term. The idea that
reductions in Medicare expenditures should be available for other purposes,
including even other health care purposes, is mistaken. The focus should be on
making Medicare itself sustainable, making it compatible with OASDI, and
making both Social Security and Medicare financially sound in the long term.

‘mechanisms. Various groups should be consulted and reform plans developed that
will not be disruptive to beneficiaries, will be fair to current taxpayers who will
in the future become beneficiaries, and will be compatible with government
finances overall.

Institutional Considerations

We have as Public Trustees tried over the past 5 years to provide continuity and
improve the institutional framework surrounding the Social Security and Medicare
programs. We have bridged two Administrations (one Republican and one
Democratic), two Advisory Councils (one appointed by a Republican
‘Administration and one by a Democratic Administration), and many changes in
the ex officio Trustees. We have consulted with each of the Advisory Councils,
as well as the working group of the prior Public Trustees, the Bipartisan
Entitlement Commission, the Notch Commission and many other government
entities. We have testified before both the House Ways and Means Committee and
the Senate Finance Committee and held regular briefings for Congressional staff
on the Trust Fund Reports. We know that with the advent of the new Social
Security Administration as an independent agency, many of the institutional
relationships in these areas will change. We hope that the Public Trustees in the
future will continue to make a contribution towards a coherent institutional
structure that serves the interests of the public.

Finally, we note that although the statute provides that one of the Public Trustees
‘must be from each of the major political parties, we have operated as independent
professionals on a nonpartisan basis. Every statement we have made over 5 years
hhas been joint and consensual, and without partisan content or political
dissonance. We believe these programs are too important to be politicized and
urge that a highly professional, nonpartisan approach continue to be followed in
future reports to the Congress and the public.

Stanford G. Ross David M. Walker
‘Trustee Trustee


62

policies are likely to be part of a more thorough reform of Medicare, they are not
necessarily designed to improve the efficiency of the program or to address the
underlying long-term structural problems of spending growth.

Slowing the long-term rate of growth of overall Medicare spending and
ensuring the solvency ofthe Hf trust fund would probably require major restructuring
of the Medicare program. Three basic tenets underlie most redesign proposals:
Medicare beneficiaries would have meaningful choices among a range of health
plans, including a fee-for-service option; beneficiaries would also have financial
incentives to select efficient health plans; and health plans would have strong
incentives to compete for Medicare beneficiaries

Several possible models for restructuring the Medicare program along those
lines have been proposed. Frequently, such competitive market approaches offer
beneficiaries more choices and clear financial incentives to choose less costly
options. A key feature of those approaches is the notion of Medicare making @
defined contribution on behalf of each beneficiary. Beneficiaries could then put
those contributions toward the cost of the health plan of their choice. Beneficiary
choice and limits on the government's contribution are important elements of the
design of the health insurance program for federal employees.

A competitive redesign of Medicare is a possible strategy for addressing the
long-term fiscal problems of the program. Major restructuring, however, would take
time to develop and could not therefore address the short-term financing issues.
Establishing a competitive system could be a major undertaking. Moreover, full
implementation all at one time would be difficult; a phased-in approach, starting with
younger Medicare beneficiaries, might be more feasible. But potential savings would
‘acerue more slowly under that approach,

One thing is certain: postponing decisions about Medicare's financing will
only make the necessary policy actions in the future more severe. Without a tax
increase, ensuring that the Hf trust fund remains solvent will almost certainly require
immediate spending cuts as well as reductions in the underlying rate of growth of
spending. Any delay will require more dramatic cuts and program changes in the
future,


86

Mrs. JOHNSON. We will hear from Mr. King.

STATEMENT OF ROLAND E. “GUY” KING, CONSULTING
ACTUARY, ERNST & YOUNG, WASHINGTON, DC, FORMER
CHIEF ACTUARY, HEALTH CARE FINANCE ADMINISTRATION

Mr. Kinc. Thank you, Madam Chairman. I have a statement for
the record and I would like to make a brief statement summarizing
that testimony with your permission.

We have heard today, there seems to be general agreement that
the Hospital Insurance Trust Fund is going to be depleted or bank-
rupt in 2002, and there seems to be general agreement that the
rate of growth after that period of time is going to be very high,
high enough so that by 2025, the tax rate is going to double if noth-
ing is done to control costs, and that by 2065, the tax rate will have
had to have tripled in order to pay for the cost of the program.

But of course, these tax rate increases are not the result of some
extremely pessimistic assumptions about the rate of increase in
health care costs because we have heard testimony regarding the
impact of the baby boomers on the future costs, so the problem is
very real, very predictable. The baby boomers are alive today and
we have a very good idea what their mortality rates are and how
long it is going to be before they retire.

One of the things I would like to talk about is that the HI Pro-

‘am isn’t just a budget problem. Solving the HI problem is a prob-

lem of solving the problem in a way that is fair to both current and

future generations of beneficiaries. We can define generational eq-
uity by calculating and comparing each generation’s contributions
to the program with the benefits that they receive from the pro-
gram. When we do that and then look at the cohort of beneficiaries
retiring in 1994, 2014, and 2034, and then look at the timing and
the way in which we solve the problem, we are led to two
conclusions.

First of all, it is more fair to take action earlier rather than later
in order to solve the problem because the current generation of re-
tirees is going to receive back over $5 in benefits for each dollar
they pay into the program. Second, it is more fair to solve the prob-
lem by reducing the rate of growth in the outlays of the HI Pro-
gram than in taxing future generations to pay for current benefits
today.

While we are talking about the financial problems of the HI Pro-

am, let’s not forget about the SMI Program. It is not in imme-

iate danger of becoming insolvent because of the way it is fi-
nanced, but the rate of growth here is also unsustainable. The SMI
Program as a percent of GDP in 1994 is 0.93 percent and that will
triple as a percent of GDP by 2020, and then it will have quad-
rupled by the middle of the next century. We can’t solve the prob-
lems in the HI Program merely by shifting costs to the SMI Pro-

‘am.

The outlays of both the HI and SMI programs are growing at ex-
cessive rates today because of two primary factors. The first factor
is third-party payments and the second factor is fee-for-service
medicine. Removing either one of these factors which interact with
each other in order to produce the rate of growth we are seeing
today is a way of dealing with the problem.


31

uired, we then put the situation on the private sector through cost
shifts. Anybody elementary can figure that out if they understood
the health care system.

All we will be doing is cost shifting $50 billion a year onto the
private sector, thereby increasing premiums. You need a com-
prehensive approach. You can’t do this piecemeal. We are not talk-
ing about little tubes that go into engines. We are talking about the
engine itself.

Let me just make another observation. I think it is very impor-
tant. I noticed panic on the other side of the aisle. I have never
seen quite the panic the first hundred days. We are seeing it now.

I do not think the panic is because of the Medicare Trust Fund.
I think it is because all of a sudden, with those individual bills they
passed over the last hundred days, they can’t balance the budget.
They got a $640 billion tax cut. They, at the same time, won’t make
cuts in domestic programs, even though the Budget Committee
chair almost every week comes up with another illustration of
where he is going to cut $100 billion out of discretionary programs,
but we know he is not going to be able to do it because they won't

lo it.

They won't do it on agriculture subsidies, they won’t do it on any-
thing that they want to protect in their own program. They are
going to have to use Medicare in order to balance the Federal budg-
et, and we are not going to let them do that without the American
public knowing it.

Let me make this observation in terms of all this. If, in fact, we
make these cuts and we do this, whatever amount of money they
are looking at here, you indicated that we are basically going to be
cutting back on the overall lifestyle of the average senior citizen.
Now, what did you say that was, $3,500 over 10 years or do you
have the actual statistics?

Secretary SHALALA. No. The actual numbers, $250 billion over 7
years would increase out-of-pocket costs 30—about $3,000 to $3,500
over 7 years.

Mr. MatsuI. OK. Now, let me also make one final comment be-
cause my time is running out here. Under this report, and I do not
think this has been brought up yet, under this report, you are basi-
cally saying that the Medicare Trust Fund has an extra year,
right? An extra year before it goes insolvent. Instead of 2001, it is
2002?

Secretary SHALALA. Right.

Mr. Matsul. Now, I do not understand why the Members on the
other side of the aisle, when it was 2001, didn’t panic out then.
Why didn’t you panic out last year when we were trying to do com-

rehensive health care reform? That is what I can’t understand.

‘ou are sure of that? In other words, we have gained an extra year
on solvency through this report and through what we have done
over the last year; is that correct?

Secretary SHALALA. Yes, but that would be lost if the tax cuts
that the Republicans have proposed takes effect.

Mr. Matsut. Exactly. But the panic should have been last year,
because we gained some time; is that correct?

Secretary SHALALA. Well, that is correct, and as I pointed out,
the year was 1999 when we came into the administration, which


7

waste-ridden program to a secure, strong program for today’s seniors and those of
tomorrow.

Chairman ARCHER. Madam Secretary, welcome again to the
Committee. We will be pleased to receive your presentation. Should
you wish to restrict it in your oral comments, your entire printed
statement will be entered into the record.

You may proceed.

STATEMENT OF DONNA E. SHALALA, SECRETARY, HEALTH
AND HUMAN SERVICES

Secretary SHALALA. Thank you, Chairman Archer.

Let me say, Mr. Chairman, Members of the Committee, I will put
my complete statement in the record with your permission and
read a much briefer statement.

Thank you for the opportunity to testify this morning on the HI,
Hospital Insurance, Trust Fund. I would like to begin by quoting
the words of Franklin Delano Roosevelt who gave voice and vision
to America’s desire to provide income and health security to older
Americans. Roosevelt said, “We always hope there is a better life,
a better world beyond the horizon.” It is reaching that horizon and
protecting our older Americans that brings us here today.

As on know, my fellow Medicare trustees and I recently re-
ported that the HI Trust Fund will be depleted in 2002. The Clin-
ton administration believes that this is a major problem that de-
serves serious bipartisan attention. Let me begin by describing the
HI Trust Fund and the services it supports for older Americans.

The HI Trust Fund primarily pays for inpatient hospital care. It
also covers expenditures for home health services, for skilled nurs-
ing care, and for hospice care. In 1994, it paid for $104.5 billion in
services for 32 million aged and 4 million disabled beneficiaries.
The trust fund is financed primarily by payroll taxes.

Employees contribute 1.5 percent and there is a matching con-
tribution by employers. However, in the years to come, trust fund
expenditures are projected to rise more rapidly than trust fund rev-
enues. This is because of a current and anticipated future increase
in the number and complexity of medical services. Driving the ex-
pected imbalance between expenditures and revenues is the demo-
graphic shift that will occur with the aging of the baby boom gen-
eration. As that shift occurs, a larger percentage of our population
will be eligible for Medicare and a correspondingly smaller percent-
age will pay the taxes that support the trust fund.

What does all of this mean? The 1995 HI trustees’ report projects
roughly another 7 years of solvency; the fund is exhausted in 2002.
These are well understood trends. Over the past 15 years, the
trustees have projected the date of insolvency to be anywhere from
1987 to 2005, and each year they recommended that Congress take
action to protect the fund.

When the President took office on January 20, 1993, he inherited
an escalating deficit and a Medicare Trust Fund that was projected
to be insolvent in 1999. Twenty-seven days later, he proposed and
then helped to pass a historic deficit reduction plan, the Omnibus
Budget Reconciliation Act of 1993.

That included several strong policies to strengthen the economy
and the trust fund. Indeed, these proposals pushed out the insol-


46

The Congress and the executive are the trustees of the system,
and we have, in fact, done our job as advisors to all of you. We
have come and said that the HI Trust Fund has only a few more
years and we need to make some thoughtful proposals together.

‘ith the split between who are the new majority in the Congress
and the executive, we have said that we should do it together, not
that I should independently truck out some ideas.

As to your proposal about Medicare and whether we should try
some things that we tried on Medicaid, I think that the programs
have two different histories. Medicaid has always been a State-
Federal partnership. Medicare has not. The general point, and that
is, should we try some things, competitive bidding, for instance, is
one, on a regional basis, should we try different kinds of dem-
onstrations for delivering care?

I have not been in Nebraska recently but I have been in South
Carolina recently where we are trying, with the State, some dif-
ferent ways of delivering adult day care, for example; that we are
using the Medicare system and the Medicaid system, sometimes in
combination to try different approaches to health care.

That is precisely what we ought to be doing in an innovative
way, trying to fit these programs together with Governors, within
regions sometimes, so that they work better and so that we get
more bang for the buck in the business sense.

Mr. CHRISTENSEN. I guess, Ms. Shalala, that we are talking
about here, the advisors, and I am not so much in disagreement
that we are going to go ahead and put together a plan.

Now, we would like to have your input. We would like to have
a dialog so that we can work on together in a bipartisan fashion,
but thus far, from what I have heard from your answers, it has
been quite a one-sided discussion. We pretty much know your pat
answers. What we would like to do is work together as much as
we can and that is why I threw out the idea of what ideas would
you have to come to the table with, and I guess this is a start.

‘hank you for your testimony here today.

Mr. THOMAS. The gentleman's time has expired. Mr. Portman
will inquire.

Mr. PorrMaN. I thank the Chairman. Isn’t this nice? We are at
the lower rung, everybody is gone, the cameras are turned off. Now
we can roll up our sleeves and really get into it.

Mr. THomas. Have her whisper her answer.

Mr. PorTMAN. I won’t tell anybody.

During your budget presentation, you and I had a dialog about
Medicare. At the time, you indicated you were looking forward to
working with those of us on this panel who thought that not ad-
dressing Medicare in the budget was irresponsible, that based on
the magnitude of the program, its cost increases, it couldn’t be ig-
nored, and is probably the single largest budget buster. I am dis-
appointed, as are many of my colleagues, that we do not have a
more forthcoming dialog yet. I hope we will get to that point.

Just very briefly, one of my colleagues, I wish he were here, Mr.
Stark, said that, he wants us to stew in our juices for awhile, that
he thought the program, and I quote him, “has been running right
well.” You know the statistics very well, but I think we have a need
to back up maybe for purposes of the bigger picture for a minute.


6

and push them into managed care, and they know it will save little
or nothing. Last week, the CBO, Congressional Budget Office, told
the Committee that under the current laws, quote, “it is believed
that Medicare spends more for managed care enrollees than it
would have spent on them had they remained in the fee-for-service
sector, about 5.7 percent more.”

Until we know more about how to pay for seniors in managed
care, you are just whistling in the dark and playing fast and loose
with the sacred trust of Medicare. We Democrats have always
worked with responsible Republicans to improve Medicare and re-
form the entire health care system. But $300 billion in cuts for the
sake of tax cuts for the rich not only destroys Medicare, but harms
the entire system.

We are about to hear from Secretary Shalala. I expect, she will
ask to work with all of us to reform the U.S. health care system.
We must not only preserve Medicare, but we must provide coverage
to 42 million Americans who are today without coverage. Nobody
is thinking about them on the Republican side of the aisle.

You proved your political dominance over the House in the past
4 months. Why not show us you stand for something besides insur-
ance company profits and tax cuts for the very rich? You are in
complete control of this Committee and you will be judged by your
ability to legislate fairly for all Americans.

Thank you, Mr. Chairman.

[The opening statement of Mr. Christensen follows:]

OPENING STATEMENT OF HON. JON CHRISTENSEN

Medicare is going broke. It is on a crash course with reality and we've got to turn
it around. We must have the courage to transform it.

It is a little-reported fact that Medicare's roaring growth has left a 1960s program
on the verge of disaster in the 1990s. Medicare grew by almost 11 percent last year,
more than twice as fast as private-sector health care spending. That gap alone is
proof that something is dreadfully wrong with the program.

‘That is not the worst news. According to the Trustees of the Medicare Program,
including three Clinton cabinet secretaries, the Medicare Program will spend more
than it takes in next year—and by 2002 the Federal Hospital Insurance Trust Fund
established to secure Medicare’s future will be bankrupt. Worse still, by law, no dis-
bursements may be made for Medicare if that fund is emptied. President Clinton's
own officers admit that Medicare is going bankrupt—and will cease to exist when
it collapses. To make sure our nation’s seniors have access to adequate health care,
we simply must save Medicare.

How much do we have to cut? Not a dime. The way to save Medicare is to allow
the program to continue to grow, just at a slower rate. After we reform it, Medicare
will still be growing faster than any other program in the Federal Government.
Many groups, including tax-and-spend liberals seeking to relive the school lunch de-
bate and score political points, will argue that Medicare is being “cut.” Only in
Washington can letting a program growing faster than any other government pro-
gram be called a cut.

The Clinton administration's lack of any plan to salvage the broken program is
unacceptable to our seniors. In his disastrous attempted government take-over of
the Nation's health care system, Bill Clinton called for $118 billion in changes to
Medicare, knowing that the program was headed for fiscal disaster. However, since
his proposal was rejected the president has been silent on how to save Medicare.
His marathon State of the Union Address did not even mention the Medicare crisis.
His budget also ignores the problem altogether. Seeing the program was sbout to
crash, he has taken his hands off the controls, forcing Republicans to take the lead-
ership role once more.

I care deeply about our seniors, and so I will fight to defend Medicare. We need
to work together in a bipartisan fashion to transform Medicare from an inefficient,


40

Say what you mean. That is good public policy, and it is bad pub-
lic policy for you to say the other party will say what you mean
when you run into some promise you may not be able to keep. That
is why we are waiting. There is a political dimension, but there is
also a public policy dimension.

People in the district I represent are disillusioned by people in
public life who have made promises and then do not say how they
will keep them. Say it. Tell us specifically, what you plan to do.
Then, just do it. do not wait for anybody else. I think that is what
the Secretary is saying. That is what the President is saying, and
then you try to change the subject. You talked about $158 billion
in Medicare cuts last time. I voted for those, and it wasn’t an easy
vote, but the vote for Medicare cuts were for cuts that plowed
money back into the health system. That was what it was, and we
took some money out of the Medicare system, for example, indirect
medical education, or direct medical education, and we put it back
so that hospitals would be compensated for uncompensated care.

Just do it. Do not look to the other person or blame the other
person or look to the White House when you want to be bipartisan
only when it suits your needs. You were not the first hundred days.
Some of us tried, for example, on welfare reform.

Let me ask the Secretary a question about the testimony of June
O'Neill about one possible response to this problem, and I think
there is a problem with the Medicare Fund. There is no use dis-
guising it. At least there is potential.

She says on page 15 about major restructuring, “major restruc-
turing, however, would take time to develop and could not there-
fore address the short-term financing issues.” You want to com-
ment on this statement? Because, there is a lot of discussion about
managed care, I think we are going to have to take a look at it.
Some people look there and see a magic bullet. You have less than
a minute. I] am sorry, but if you would.

Secretary SHALALA. OK, thank you. I have great respect for Dr.
O’Neill. The point she is making is that one of the alternatives that
is being looked at, certainly by the administration as well, is a com-
petitive system, and the point she makes is that the competitive re-
design of Medicare is a major restructuring. It is not something
that could be done quickly. It would have to be phased in, perhaps
as demonstrations, and it is not something that someone could
count on for potential savings in the short run, but it is something
that ought to be looked at.

We have said publicly that we would like to look at it. It has to
do, for those of you who have not followed this detailed discussion,
with the pricing of HMOs in parts of the country, to go to a more
competitive design as opposed to what we have been doing, and
that is using fee for service as the base. It requires a great deal
of conceptualization. We have done a lot of it already in the De-
partment, but it is not a short run solution.

Mr. THOMAS. The gentleman’s time has expired. Ms. Dunn.

Ms. DUNN. Thank you, Mr. Chairman. Madam Secretary, I am
very troubled by the hearing that we are participating in today. I
hoped, as a newcomer to this Committee, we could gather together
and discuss really solid ideas on how we could solve this major
problem. I see a huge crisis in leadership by the executive branch,


19

Secretary SHALALA. Congressman Crane, we have waited pa-
tiently, expecting on April 15, for the budget resolution to be
passed. The President has committed himself to a bipartisan ap-
proach to health care reform in this country, to taking the first in-
cremental steps. We expect the HI Trust Fund issue to be part of
that discussion, and—but it has to be part of a broader discussion,
because of our clear understanding, and this Congress’, too, that if
you do something on the public side of the system, it has implica-
tions for the health care infrastructure, for beneficiaries, for how
much they actually get in their Social Security check, and it must
be part of a larger discussion.

Mr. CRANE. Well, Madam Secretary, one final point, and this is
a quote out of the Hospital Insurance Trustees’ Report; “The fact
that exhaustion would occur under a broad range of future eco-
nomic conditions and is expected to occur in the relatively near fu-
ture indicates the urgency of addressing the health insurance trust
fund’s financial imbalance.” We are counting on input heavily from
you and the other experts on the Hospital Insurance Trust Fund.

Thank you.

Secretary SHALALA. I appreciate that, Mr. Crane, and just let me
repeat that when we inherited this government in 1990—the date
of the trust fund bankruptcy was scheduled for 1991—1999, and
everything we have done since then has added years on to protect
the solvency of the trust fund. We are committed to that but it
must be part of a larger discussion.

Chairman ARCHER. Mr. Thomas will inquire.

Mr. THomas. Thank you, Mr. Chairman. You have used the term
incremental, Madam Secretary, twice now, in referring to health
care reform, and that is real progress. The Ranking Member of the
Health Subcommittee talked about our positions in the 103d Con-
gress. The administration’s position in the 103d Congress on their
comprehensive health care plan basically had three problems with
it; I think you will agree. A majority of Republicans were opposed
to it. A majority of Democrats were opposed to it, and a majority
of the American people were opposed to it.

We can now set aside the 103d Congress. I think we are all in
agreement that the American people did not want a government
takeover of their health care system and that we are committed to
incremental reform.

When I look at the Board of Trustees of the Federal Hospital In-
surance Trust Fund, I see six names. Four of them are members
appointed by the President; in fact, three of them are secretaries
of Cabinet positions. Four of the six trustees are Clinton’s leader-
ship team, similarly on the OASI, Old-Age and Survivors Insur-
ance, same Board of Trustees.

In your initial statement, Madam Secretary, you indicated that
there were demographic factors which were shaping the trust fund.
Isn’t it true that the same demographic factors are shaping the
OASI Trust Fund, and if both are subject to the demographic fac-
tors, why is the insurance fund running out in 2002 and the Social
Security Fund seems to be secure to 2030? Is there anything that
was done in the Social Security Trust Fund structure that hasn't
been done in the, HITF, Health Insurance Trust Fund, structure?


14

Chairman ARCHER. Thank you, Madam Secretary. And I must
say, I am not surprised at your presentation. It has the tone of a
very appealing political ring to it. We could go into a long debate
about com] rehensive health reform, which you mention is the an-
swer to Medicare problems, but the American people turned
thumbs down on your plan for the Federal Government to take
over the entire health care system in this country in the last Con-

gress.

I think it should be clear to you and to the President that, that
is not going to occur again in this Congress. Therefore, we are con-
fronted directly with the problems of the Medicare Trust Fund,
which will begin to run short of money next year and according to
your trustees’ report, will go broke in 2002.

Isn’t that your interpretation of your actuary’s same conclusion
to the trustees’ 1995 report where he states, “although the assump-
tions used are reasonable, much of the available evidence suggests
that they may not be optimal. In particular, the likelihood of a fu-
ture result that is more adverse than the intermediate projection
may exceed the likelihood of a more favorable result. Similarly, an
outcome more adverse than the high cost projection may be more
probable than one that is better than the low cost projection.”

In other words, you are more likely to err on the losing side rath-
er than on the gain side. The crisis we face could happen before
7 years are up, and that is very troubling to me. It tells me that
we need to act soon to respond to this threat, to the insurance cov-
erage retired Americans and the disabled now depend on, and
workers paying payroll taxes rightfully expect that they will get
the benefits when they retire. Clearly, we must assure the Amer-
ican people a solvent Medicare now.

What solvency test do you think the HI Trust Fund should meet
in 10, 25, or 75 years, and what approach do you think we should
take to insure solvency? Should taxes be raised or should spending
growth be curbed?

Secretary SHALALA. Mr. Chairman, we have made it very clear
that we believe that, number one, the problems of the Medicare
Trust Fund cannot be solved by simply looking at the Medicare
Trust Fund, because anything we do to the current Medicare Pro-
gram has implications for the rest of the American health care sys-
tem, because the public part is such an important part of that sys-
tem.

Second, the President in his letter to the Speaker, has made it
very clear that we believe that you ought to put a detailed budget
on the table to tell us how you intend to keep your promise to bal-
ance the budget and to provide a large tax cut for the well-off and
to explain to the American people that you are not slashing Medi-
care to pay for those tax cuts.

Obviously, we are prepared to sit down in a bipartisan manner,
but only after we have seen the budget proposals of the current
majority, and only in the context of larger health care reform be-
cause we do not believe that the Medicare problem can be solved
by simply narrowly looking at Medicare.

Chairman ARCHER. You, in effect, are telling this Committee that
you will have no proposal to solve the Medicare Trust Fund short-
age, which will bankrupt the system by 2002 or earlier according


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69

months. I believe the Secretary was accurate in her last statement
in regard to this issue, that it would shorten it for some months.

Mr. CarRDIN. Would the Chairman yield?

Mr. THOMAS. Certainly.

Mr. CarpIn. I appreciate that.

The 5 years under CBO’s projections cost the HI Fund $26 bil-
lion. If after 7 years we are going to be insolvent at $30 billion, it
seems to me we could easily project that by the seventh year the
loss in the HI Trust Fund revenues would exceed a full year’s defi-
cit or at least fiscal, year 2002’s deficit. Therefore, the $30 billion
that you had projected in 2002, in fact, would not be there.

b Ms. O'NEILL. I haven't followed everything that you have said
yut——

Mr. THOMAS. The point is that there is quite possibly some pro-
jected capability to cross once again a fiscal year structure. It
seems to me that this is exactly the thing that we shouldn’t be ar-
guing, whether it is 6 months, whether it is 9 months, whether it
is a year. That is no solution.

The gentleman from Nevada.

Mr. ENSIGN. No questions.

Mr. THoMaS. Does the gentlewoman from Connecticut wish to
inquire?

Mrs. JOHNSON. I am sorry I had to miss your testimony. I want-
ed to welcome you here, and I appreciate your comments, which I
did skim.

I did want to inquire in a general sense, one of the things that
has been a difficulty in the past has been that the reorganization
of the delivery system in health care has been moving so rapidly
that it is hard to get good numbers on which one can predict any
reduction in costs; in other words, by the time you have numbers
they are outdated in terms of the pace of change in today’s world.

Are you going to be able to work with us on those issues, look
at the pace of change and the pace of cost savings when a company
has gone from nonmanaged care to managed care, where an area
of the country has gone from nonmanaged care to managed care,
to help us understand the impact of seniors moving into integrated
care systems on Medicare costs?

Ms. O'NEILL. We certainly would be. What you say is quite true,
that it is very difficult to get data, partly because the changes have
really been happening very fast. For example, I do not think that
we know for sure what proportion of people in private health plans
are in HMOs. This year, 1995, we do not know that.

We have some idea based on particular insurers who have pro-
vided some information, but that is only partial, it doesn’t cover the
whole United States. It takes a number of years. Our firmest data
are actually for 1992.

Mrs. JOHNSON. For instance, in California where now managed
care is a larger proportion of the care structure than any other
State, we are beginning to see evidence that the slowing of growth
in the health care costs in the private sector has also affected
health care cost growth in the public sector.

While those figures are in a sense theoretical, nonetheless, they
may indicate a trend.


24

Mr. SHaw. Can I assume that you do not have an answer to my
question? You know, in the last Congress, we had the Democrats
controlling the House, the Democrats controlling the White House,
the Democrats controlling the Senate. You did not get a vote on
your health care plan. It never came up. It was changed in the
Subcommittee. It was not even voted on, as I recall, in the Full
Committee.

It was never brought to the House floor. In fact, nothing was
ever brought to the House floor. When we tried to move welfare re-
form, we were told that we couldn’t do that unless we had com-
prehensive health care. What in the world do you people do down
there? Just waiting on health care? You have got to come forward
and give this country some leadership.

I have got a great deal of respect for you, but you are getting
some marching orders which are very inconsistent with the talent
that you could bring to this Committee.

Secretary SHALALA. Congressman Shaw, we have provided exten-
sive leadership, from OBRA 1993 when we made the major propos-
als to cut the deficit in this country, to the President’s own health
care debate when he made it very clear that we could not fix the
problems in the public sector health care system without simulta-
neously talking about some of the needs in the private sector sys-
tem, particularly those needs for coverage and affordability.

Mr. SHaw. Let me ask you a question. Do you still believe that
welfare reform is dependent upon health care reform, that we can-
not have welfare reform unless we have health care reform, as the
President said last year?

Secretary SHALALA. We still believe that it is difficult to move
young mothers from welfare to the workplace without child care
and without addressing the health care needs of their children,
whether it is through public sector changes or through the private
sector reaching out and providing affordable health care to low
income folks.

Mr. SHaw. Mr. Chairman, I am absolutely amazed that we are
not getting any answers from this particular witness. I had looked
forward, as you said in your very nonpartisan opening statement,
in reaching out to the Democrats, and then you were answered in
a very partisan manner by Mr. Stark, and then the statement of
the Secretary in saying that the administration was not going to
play ball unless they had comprehensive health care. I think that
is an affront to the senior citizens of this country who are depend-
ing so vitally on Medicare.

Chairman ARCHER. The gentleman’s time has expired.

Mr. Stark.

Mr. STARK. Well, Mr. Chairman, thank you. I guess in the few
minutes it would be difficult to educate the Republicans, Madam
Secretary, to the complexities of this system which obviously they
have been ignoring for 40 years. They didn’t need any help when
it came to figuring out a tax system, which is arguably pretty com-
plex. They figured out how to give hundreds of billions of dollars
to rich people in the first 100 days. They didn’t need any help fig-
uring out how to destroy school lunches and lead to more abortions
and destroy the welfare system. That they could do in 100 days.


10

STATEMENT OF DONNA E. SHALALA
SECRETARY OF HEALTH AND HUMAN SERVICES.

MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE:

‘Thank you for the opportunity to testify before you on the
Hospital Insurance (HI) and Supplementary Medical Insurance (SMI)
trust funds.

As you know, my fellow Medicare trustees and I recently
reported that the HI trust fund will be depleted in 2002. While
the HI truet fund financial balance is a significant problem and
deserves our serious attention, let me also remind you that (1)
thia is not a new problem and (2) the projected life of the trust
fund has been extended for three years since 1993.

1@ to the actions taken in the Omnibus Budget
Reconeliintion Act of 1953, {OBRA 93) and a stronger-than-expected
economy in 1994, Trust Fund depletion has been delayed from 1999
to 2002. Even with these improvements, however, the Trustees
continue to foresee financial problens’ in the future for the HI
‘Trust Fund.

As I noted, the Trustee's trends and projections have
occurred before and are not surprising. In the course of the
past 15 years, the Trustees have predicted near-term financial |
Problems for the trust funds and recommended that Congre:
Etelonto slow ene groweh of Medicare spending to ceucre crust,
fund solvency. While we have worked with Congress to improve the
outlook of the trust fund, broader issues of health care cost and
access limit how much more we can accomplish through Medicare
reductions in growth alone.

We are concerned solutions focused solely on Medicare would
severely strain many of our fragile health care delivery systens
in rural and inner-city communities and could result in cost
shifting to small businesses and individuals. We must therefore
consider this issue in the context of health reforn.

Today, I will focus primarily on the solvency of the HI
trust fund. Although the Trustees Report addi
in both the HI and the SMI trust funds, the i
concern is the HI trust fund's solvency. I look forward to
working with Congress to strengthen the Medicare program in the
context of broader reforns to assure that Medicare remains stable
now and in the future.

Description and Backsround Information on the Trust Funds.

Let me begin by describing the HI trust fund and the
services it supports for Medicare beneficiaries. The HI Trust
Fund primarily pays for inpatient hospital care, but it also
covers expenditures for home health services, skilled nursing
nd hospice care. In 1994, the HI Trust Fund paid for
$ billion in services for 32 million aged and 4 million
disabled beneficiaries.

‘The HI Trust Fund is financed primarily by payroll taxes.
Euployees contribute 2-45 percent of wages, and there ie a
matching contribution by employers.
contribute 2.9 percent of
removed the ceiling on the amount of
consequently, this tax applies to 9
also reced come from interest earnings on its assets
ravenue from taxation of Social Security benefits, and from
miscellaneous sources.

‘Trust Fund expenditures are projected to rise more rapidly
than Trust Fund revenues. Anticipated increases in the number
and complexity of medical services are expected to continue to
increase expenditure growth rates. Driving the expected



29

to sit down in a bipartisan manner and to discuss the Medicare
Trust Fund within the context of incremental health care reform.

Chairman ARCHER. Ms. Secretary, I agree with one of my col-
leagues. I have a great deal of respect for you, but your marching
orders merely become a broken record in response to every question
that is being asked.

Mr. Herger may inquire.

Mr. HERGER. Thank you very much, Mr. Chairman.

Madam Secretary, the trustees’ report, this report which I have
in my hand, the 1995 annual report of the Board of Trustees of the
Federal Hospital Insurance Fund, is a Clinton administration docu-
ment and as a matter of fact, three of the trustees who have signed
it are Cabinet secretaries.

Secretary SHALALA. In the same way that in 1992, three of the
trustees would have been Bush administration Cabinet secretaries.
There is nothing different about trustee reports. They all have
Cabinet secretaries as trustees of the system.

Mr. HERGER. That is correct. Let me just continue.

In this report, on which we are meeting here today, the trustees
say that Medicare will be broke by 2002. As a matter of fact, by
that date, there will be no more money for seniors to receive their
health benefits.

Now, even if the budget was in surplus and if health care was
perfect, Medicare would still go broke by this report, of which,
again, you are a signatory. The issue cannot be ignored, and I
guess I have to ask the question, does the administration feel a re-
sponsibility to be involved in this process, and if you do, can you
come forward now and help us out with some of what your
thoughts and what you feel the direction should be.

Secretary SHALALA. Congressman, I have said very clearly that
we are prepared to sit down in a bipartisan manner after we see
the budget resolution, but let me remind you of what the trustees
said about the context in which the HI Trust Fund ought to be
reviewed.

They said, “With the magnitude of the projected actuarial deficit
in the HI Program and the high probability that the HI Trust Fund
will be exhausted in less than 11 years, the trustees urge the Con-
gress to take additional actions designed to control the HI Program
costs and to address the projected financial imbalance in both the
short range and the long range through specific program legislation
as part of broad-based health care reform. The trustees believe that
prompt, effective and decisive action is necessary.”

Those are both the public, as well as the administration trustees
saying that. That is what we are committed to, and all the admin-
istration has said is put your detailed budget on the table, commit
to dealing with Medicare in the context of health care reform as
the trustees recommend, and that we will sit down in a bipartisan
manner and work through these issues.

Mr. HERGER. OK. In essence, you are saying to me, as you have
said to many of the questioners before, that we are not going to see
anything prior to that time. Now, we will have our plan out. I
puess what I am asking, is that we would like to also see some
leadership, some involvement at this time on an issue which is
clearly and certainly, I would say you accept as being the case, one


98

I mean, I can give you one example that is close to home. My
grandfather had open heart surgery when he was 89, Ibelieve it
cost hundreds of thousands of dollars. The current incentives in the
system were to say yes. Obviously, the family wanted to say yes.
I mean, we love him and we obviously would like him to be with
us for as long as he can.

The doctors obviously are going to say yes because they are going
to get paid. The health care facility, even though we are funding
it, you know, wanted to say yes because they wanted to keep him
around a little bit longer, OK? The Medicare construct incentive
was to say yes, but yet that procedure did not extend his lifespan
very much, did not improve his quality of life, and after it hap-
pened, he wished it hadn’t happened.

There are things we can do within the existing structure to be
more economically rational and, frankly, more humane in some
cases to the people involved.

Mrs. JOHNSON. Mr. Christensen.

Mr. CHRISTENSEN. Thank you, Madam Chairwoman.

I want to thank this panel. This panel has been worth waitin,
for. After this morning’s testimony by the Secretary, I want to tell
you how appreciative I am of your attendance and really sharing
with us some very important points. I would like to spend a lot of
time asking some questions, but I just have one brief question I
would like to ask you.

We have heard from some of our friends on the other side of the
aisle that there is not really a problem here, that why are we doing
all this, why are we rushing to solutions, and I just want to know,
if Congress fails to do anything to solve the Medicare situation,
what will happen in 2002?

Mr. WALKER. You will not be able to pay benefits on a timely
basis in 2002 because you can only, under the law, under present
law, you have to use trust fund assets to pay benefits, and if you
have a shortfall, you won’t be able to pay benefits in a timely basis.
It gets much worse every year after that.

ne thing real quick if I may, Madam Chairwoman. See this
chart? That is the roller coaster ride we are on. We started going
downhill and it goes underground and it gets real deep real fast.

Mr. CHRISTENSEN. If payments are not rendered on timely action,
what will happen in terms of the consumer?

Mr. WALKER. Coverage will have to be denied. Something will
have to be done either—to put it in balance, either you will raise
taxes, you cut benefits, or you do a combination thereof. You fur-
ther mortgage the children’s future. There are only so many
options you have.

Mr. CHRISTENSEN. Mr. Ross, any further comments?

Mr. Ross. Well, to me the great danger here is because that will
not be allowed to happen. Just, for example, last year, the disabil-
ity fund was reaching the point where if you did not take action,
benefits couldn’t be paid. What happened? You reallocated funds
from the Old Age and Survivors Fund into disability, which
hastens the day which we will run out of money in that fund.

These last minute sort of actions to sort of not allow Armageddon
to happen simply deepen the long-term problems. That is why it is
wise to begin now so that you are not faced with doing one of these


91

If the costs of the Medicare Program were going to be controlled by
using managed care, then the structure of the program would have to
be changed so that savings accrue to Medicare. This would have to
be done in a way that didn’t discourage managed care plans from
participation in the program. Because of the extreme difficulty of
balancing these conflicting goals, managed care alone cannot be
relied upon to control costs in the Medicare program.

This concludes my formal remarks and I’1l be pleased to answer any
questions you may have.


1

imbalance between expenditures and revenues is tha demographic
shift that will occur with the aging of the baby boom generation.
A larger percentage of our population will be eligible for
Medicars correspondingly smaller percentage will be paying
the taxes that support the Trust Fund.

What does this mean? The 1995 HI Trustees Report projects
roughly another 7 years of solvency. The fund is exhausted in
2002. over the 75 year long-range projection period, the incone

percent of taxable payroll remains relatively level while
the cost rate rises eteauiiy.

These are well-understood trends; there is nothing new in
this most recent Trustees Report. Over the past 15 years, the
Trustees have projected the date of insolvency to be anywhere
from 1987 to 2005, and each year they recommend that Congress
take action to protect the fund. As I noted earlier, in part due
to provisions in OBRA 93, Trust Fund depletion has been delayed
to 2002.

OBRA 93 eliminated the maximum earnings cap for the HI
program, so that the HI tax now applies to all earnings. It also
achieved $55 billion in savings from the Medicare program, about
$30 billion of which came from providers who are paid through the
HI Trust Fund. In addition, OBRA 93 increased the maximun
proportion of Old-Age, Survivors, and Disability Insurance
(OASDI) benefits subject to Federal income taxes from 50 percent
to 85 percent, only those beneficiaries with the highest

generated by this provieion are dedicated
LY, a8 part of it
to repeal the change
in the taxation of OASDI benefits. It is ironic that those who
are suddenly interested in the plight of the Medicare trust fund
have advocated policies that exacerbate the insolvency of the
Medicare trust fund.

Effective Solutions Require Broader Health Care Reform

Any significant changes in the Medicare program, whether in
the financing, eligibility, benefit provisions or payment rates,
will effect the entire health care systen. Therefore, this
administration believes that strong action to avoid depletion of
the Hospital Insurance Trust Fund should not be undertaken by
looking at Medicare alone.

Reductions in payments to providers vould have significant
fects on providers’ overall financial condition.

pecially true for providers whose patients are predominantly
Medicare beneficiaries or providers who also treat uninsured
Persons, whether located in inner cities or rural areas.

© Large reductions in Medicare payments would have a
devastating effect on a significant number of urban eafety-
net hospitals. These hospitals already are bearing a
disproportionate share of the nation's growing burden of
uncompensated care.

- For large urban public hospitals, which are heavily
used by Medicaid and self-pay patients, Medicare is an
important source of adequate payment. ‘According to the
1994 Special Report of the National Association of
Public Hospitals, while Medicare in 1991 was the payer
for only 11 percent of discharges in these
Anstitutions, it accounted for almost 20 percent of net
operating revenus

- For these hospitals on average, in 1991 Medicare
accounted for a bigger share of net operating revenus
than private payers.



97

of the codes and start speaking in specifics. Perhaps you can supply
this Committee with some specific suggestions for incremental re-
forms, leading to more broad-based reforms and what those might

e.

Frankly, I do not think we have time for incremental reforms.
We have been incrementaling this thing to death throughout the
eighties, chipping away here and there and squeezing providers
here and there, and I just think we are about out—you said it
yourself, we have about exhausted those. I do not know what you
mean by incremental if it is not more of the same, which you said
we are out of.

I wish you would get more specific and tell us what kind of incre-
mental reforms you are talking about that could save—or that
could buy us some more time to get these more broad-based re-
forms, and then tell us what the broad-based reforms ought to be.

In my opinion, Mr. King is closer to the solution than anybody
else I have heard speak before this Committee. I do not know if you
have had a chance to examine his testimony or listen. He did not
get very far today in his oral presentation, but, you know, basically
Mr. King says we offer something for nothing. Any time you do
that, you are going to have a supply problem, and that is what we
are doing with the Medicare system.

Mr. Ross. Could I just add one point, though? One of the great
complexities of dealing with this problem is that one of the things
that has to be done, as the Congressional Budget Office witness,
Ms. O'Neill, said, was to change the incentives, which by definition
means that a lot of the public needs to understand what the
changes are and how they are expected to react or not to react to
a different set of incentives provided by the program.

Therefore, somehow a process has to be started where no matter
how technically accurate some of these solutions would be in terms
of producing the savings, they have to be shown to the people so
that people can understand them.

I was on a panel with Mr. King at the AEI, American Enterprise
Institute, recently and it was mainly experts in the field. They of-
fered a great deal of information using phrases like, “risk adjusted
vouchers.” As I sat there, I said to myself, half of this audience is
having trouble understanding all these highly technical ideas.
What about the general public that is going to be asked to respond
to these changes?

Somehow this process was not properly executed. You need some
way of getting these proposed solutions, technical and nontechnical,
more broadly exposed, so that people can understand the new re-
gime that they will be asked to be a part of, and that process really
needs to start just as soon as possible.

Mr. WALKER. It is important to note that the incentives have to
be fundamentally changed, because you have got several things
driving health care cost as relates to Medicare, not only the infla-
tionary costs and the costs in excess of inflation; you have got utili-
zation, utilization of procedures, intensity of care, the aging society,
and longer lifespans. You have got a number of different factors
and, frankly, right now most of the incentives in our system are to
do more, in many cases where it is totally economically irrational,
or not in the interest of the person receiving the care.


102

based on the fact that other members of the trust, which I believe
Mr. Ross and Mr. Walker are members of the Board of Trustees,
but looking at the other members of the Board of Trustees for the
Health Insurance Trust Fund, I see public officials or appointees of
the President, no matter who the President is, whether it be Demo-
crat or Republican, which puts politics right in the middle of the
trust fund.

This gets right to the heart of politics, especially having, I be-
lieve, three members of the Cabinet serve on the Board of Trustees.
My question to you, each of you, is this; Would you advise the Con-
gress to look at changing the makeup of the board of trustees for
this type of trust fund?

Mr. WALKER. You ought to consider an independent board. In
1983, the Congress took part of the step and it created two inde-
pendent public trustees, one Democrat and one Republican. At that
time you had three ex-officio trustees, now you have four. This is
no reflection on current or past ex-officio trustees let me make that
very clear. The fact is, if you want to try to depoliticize this, if you
want to try to get professional bipartisan opinion that is separate
and distinct with a separate trustee fiduciary hat on rather than
dual hats, that is one way to do it.

Mr. CoL.ins. Thank you, sir.

Mr. Ross. When we testified before the Senate Finance Commit-
tee, Senator Kerry came and made that suggestion. Senator Simp-
son was chairing the Committee and they are working on a pro-
posal for at least addressing the long-term problems of the Social
Security system and perhaps the Medicare system too. I do not

OW.

The Committee suggested they were considering that, and my re-
sponse was that in part, when the Congress created these public
trustee positions in 1983, they could look at it as an experiment to
see whether there were values added by having two private citi-
zens, and you could look especially at the last 5 years of the things
Mr. Walker and I have done to see whether there has been real
value added.

We believe there has been and there is a track record that could
be looked at to determine whether you would want to go to the
next step and make it independent. You are thinking along the
lines that I would be thinking, if I were in your position.

Mr. COLLINS. Thank you, sir. Mr. King, do you have a comment?

Mr. KinG. I can remember joking when the—when I was chief ac-
tuary at HCFA and the positions of the two public trustees were
created in 1983. They said that there was too much politics in-
volved in the development of the trustees reports and they solved
the problem by injecting two more politicians into their process, de-
spite that, Mr. Walker and Mr. Hoss have made significant con-
tributions to getting rid of the politics in the report, but I do not
think that an independently constituted Board of Trustees would
go very far toward solving the financial problems in the Medicare
Program without giving that Board of Trustees considerably more
power to solve the problems than the current Board of Trustees
does. All the Board of Trustees can do now is report on the prob-
lem. They have very little wherewithal in order to actually solve
the problems of the program.


65

Ms. O'NEILL. That could well be because the problem is explo-
sive. I could supply that for the record, but more than a 40-percent
increase is needed for the first 25-year period. It would be signifi-
cantly greater later on when the rate of increase in the elderly pop-
ulation is extraordinarily large.

Mr. ENGLISH. Thank you, Ms. O’Neill.

Can the Medicare Program as it is currently structured take ad-
vantage of managed care savings, and if not, why?

Ms. O'NEILL. The problem here stems from a number of factors
that are quite complicated.

From the beneficiary's side, the incentive to go into a HMO is not
exactly the same as it would be for private persons who face an
array of costs and choose among the plans on the basis of the real
costs of providing those resources.

In Medicare, the cost to the beneficiary is the same. The main
difference would come from provision of services that might be of-
fered by a HMO. Presumably it costs the HMOs less to provide the
care because the managed care system allows them to take advan-
tage of factors that a fee-for-service plan cannot. Those cost savings
can’t really be passed on.

A big factor there is that HMOs are paid 95 percent of the cost
of a fee-for-service plan. It is not based on the actual costs. Even
if it were, that would not be revealed to the beneficiaries.

You really do have an odd system. You can offer HMOs. More of
the elderly have been moving into HMOs, possibly because many
retirees have been in a HMO before and are used to the concept.
Also, because HMOs do not compete in price, and their lower costs
makes it possible to provide supplementary benefits, such as pre-
scription drugs, no copayments, no deductibles, things of that sort.

Mr. ENGLISH. Ms. O’Neill, if we do not restructure the Medicare
Program and we reduce spending growth through traditional budg-
etary approaches, in your view, what will be the likely result?

Ms. O’NEILL. I am sorry, I didn’t——

Mr. ENGLISH. If we do not restructure the program as it is now
and we reduce spending growth through the traditional budgetary
approaches like we did during the eighties, in your view, what will
be the likely result?

Ms. O’NEILL. There are a couple of changes that may have pro-
duced some reductions in the rate of growth, for example, the pro-
spective payment system that is now used for the payment of inpa-
tient services in hospitals. Of course, some of those may be shifted.
every time you try to control provider charges in some way. That
is probably a better way because it doesn’t allow for inpatient serv-
ices. If it were just charges—the daily charge that was controlled—
there would always be the option of increasing services. That con-
trols the whole bundle in a prospective way, and it does appear to
be a slow down in patient services, but it led to more outpatient
services which are not controlled, and increasing use of home
health care and other services that may be covered.

That is the reason we do not get very big savings; because most
of the kinds of things that you can think of within the current sys-
tem are forms of price controls.


71

Mr. McCrery. Not appropriated annually, we just by law say we
will spend whatever it takes to make good the Medicare Part B
Trust Fund.

Ms. O'NEILL. Premiums cover about 30 percent and the rest
comes from general revenues.

Mr. McCreryY. What about part A? If we were to reach 2002 with
no changes and suddenly the trust fund is insufficient to pay the
dependents of part A, is there some automatic mechanism that
would fall into place to mandate that general revenues be used to
supplement the trust fund money to make good on part A?

's. O'NEILL. I do not believe there is. It would require legisla-
tion. Of course, legislation could also put in an infusion from gen-
eral revenues. That would require a change in the law.

Mr. McCrery. Even though Medicare Part A is also an entitle-
ment, there is nothing—-

Ms. O'NEILL. It has the complicated structure of an accumulating
trust fund. I could check that further. Maybe I shouldn’t be so
quick to speak.

Mr. MCCRERY. I do not know either——

Ms. O'NEILL. I do not believe there is any automatic authority to
use general revenues to pay for the HI expenditures.

Mr. McCrery. If that were the case, then at such time as we
reached a negative balance in the trust fund and do not have to
pay obligations under part A, that providers would go without pay-
ment if no further action were taken by the Congress?

Ms. O'NEILL. Or services would be rationed in some fashion. It
is hard to say.

Mr. McCrery. OK. Right now, we have a positive balance in the
trust fund; is that correct?

Ms. O'NEILL. Yes, that is true.

Mr. McCrery. Isn't that trust fund balance covered in the
unified budget calculation?

Ms. O’NEILL. The trust fund balance is counted in the sense that
it offsets. Not the trust fund accumulation. It is the incoming tax
dollars that are earmarked for the trust fund that is in fact merged
with other revenues when we calculate the net budget deficit. Not
the funds in the trust fund. Those are really parenthetical to the
budget calculation.

Mr. McCrery. Any interest that the trust fund earns would be
counted as income?

Ms. O’NEILL. It is counted as income.

Mr. McCrery. OK.

When you get right down to it, Mr. Cardin and the Majority last
year, or 2 years ago, chose to shore up the, if you will, the Medicare
Part A Trust Fund by increasing taxes on Social Security
recipients; is that correct?

Ms. O’NEILL. That is correct.

Mr. McCrery. We are saying there ought to be a better way to
shore up that trust fund and make Medicare Part A pay for itself
and that we choose not to raise taxes on Social Security recipients
to do that. We choose some other way—which might be cutting
spending in some other program or making programmatic changes
in Medicare, but certainly, in our view, it was not a wise thing to
do to raise taxes on Social Security recipients. Really, when you get


16

by members of the administration and by our Democrat colleagues
up here, but the reality is that irrespective of what has happened
in the past, we have a big problem today. Your trustees’ report
shows that.

It is probably bigger, based on the actuarial statement that I just
read, than the trustees’ report even admits. We have the respon-
sibility to do something about that, not talk about what we did in
the past or the budget, but to talk about Medicare, and I, for the
life of me, do not understand how reducing payments to the medi-
cal profession in the area that is not under Medicare is going to
help you save money under Medicare. If you reduce the income
flow on this comprehensive program that you proposed last year,
then you certainly are going to off-load more responsibilities if you
are going to keep hospitals open and doctors functioning from the
Medicare standpoint.

The reality is that the bill that was presented to our Committee
and voted out of our Committee in the last Congress, which was
primarily conceived by our colleague, Mr. Stark, was supported by

our administration, people who sat right at that desk, and that
Bil took $490 billion in the next 5 years out of Medicare and Med-
icaid, $490 billion of cuts out of Medicare and Medicaid endorsed
by your administration.

Clearly comprehensive reform, as you see it, is not going to re-
move the slashing of Medicare and Medicaid, as evidenced by the
bill you endorsed.

We need to focus on the fact that the HI Part A Trust Fund is
going to go broke by 2002 or earlier and do something about it to
assure the senior citizens and working Americans that we have
measured up to our responsibility.

I yield to the minority ranking member, Mr. Gibbons, for ques-
tions.

Mr. GIBBONS. Well, thank you, Mr. Chairman. First of all, let me
say that if anybody can make any suggestions as to how to improve
Medicare, its services and its cost, I am willing to listen. I do not
get panicky about any trustees’ report. I think I have heard every
trustees’ report brought before this Committee since 1965 and I
was here on—in Congress in 1965 and I think I am the only Mem-
ber here who voted for the program in 1965.

There has been a constant stream of people appearing on this
Committee and before this Committee predicting that Medicare
was going out of existence, never would work, and I just am not
impressed by that. I know there is a profession of people that make
a good living around Washington telling you that everything is
going busted and going broke, but as I look at the Medicare Trust
Fund, it is about as sound as it has ever been and I believe it will
remain sound and I believe that any changes that must be made
are minor changes. I just do not hit the panic button when we
begin to talk about this.

I want to say that when I first came on the Committee, there
were some changes we had to make in the Medicare Trust Fund.
We simply did not change the overall rate of taxation for Medicare
and Medicaid; we simply shifted some of the Medicare money into
the Medicaid system and it made the system completely sound and
it did not disrupt the Social Security system. All those options are


99

last-minute things in 2001 whenever you are looking over the prec-
ipice, which do not really solve anything but just put it off for a
little bit longer.

The spirit of what I am hearing here today, which is that you
want to get the process going to try to really address the problems,
is absolutely the right thing. Obviously, in a country this size, and
with millions and millions of beneficiaries, you are not simply going
to say, we are going to stop paying benefits and people will have
to start scurrying around with what resources they have. It just
won’t happen. You will do something last minute that may rob
Peter to pay Paul and get you through another couple years.

Mr. CHRISTENSEN. I agree 100 percent, and the testimony I
heard this morning did nothing but produce a lot of bickering and
presented no positive alternatives. I am looking forward to working
with my colleagues to try to come up with an answer. Congressman
McCrery is right. We can’t tinker with this. We have to have a real
long-term solution, and coming up with suggestions like Secretary
Shalala suggested to help keep the system alive for two more years
is the wrong approach.

We need something that is going to secure the system for not
only our senior citizens, but for those people who are going to be
depending on the system in years to come, and I truly believe that
the administration has abdicated responsibility and leadership in
providing ideas. They do not have to lead if they do not want to,

yut they can produce some ideas so we can work together in a bi-
partisan fashion, because this is an area where the American peo-
ple want a solution, and we are going to go ahead and figure out
what we can do.

I am open for suggestions, Mr. Walker, Mr. Ross, and Mr. King.
Send them our way, because I want to do the right thing, and if
you can help, we would like to know what you think. Thank you
very much for being here all day.

Mrs. JOHNSON. Thank you. I would like to note, Mr. King, that
in your testimony, you do make very clear that to reach balance in
25 years—I mean, we are talking about trying to balance the Fed-
eral Government’s budget in 7 years—to get this program balanced
over 25 years, you would have to increase HI taxes 44 percent im-
mediately or cut expenditures 30 percent immediately or some com-
bination thereof; is that correct?
pe. Kinc. Yes. That statement is contained in the Trustees’

port.

Mrs. JOHNSON. It just shows what a dramatic effort is needed.
Every year we wait, those figures are going to go up. It will be a
40-percent cut or a 50-percent increase in taxes. We are really talk-
ing about decimating health care services for seniors or an extraor-
dinary new burden on their grandchildren, and that is exactly
where we are.

I was pleased that at the end of your testimony, Mr. King, you
mentioned that if the costs of the Medicare Program are to be con-
trolled by using managed care, then the structure of the program
has to be changed so that savings accrue to Medicare.

Well, what we are really trying to do is just slow the growth of
costs, and according to another study that was done, we are spend-
ing about $3,500 per capita per year now, and over the next 7


21

Mr. Tuomas. I think you will find if you had used, Madam Sec-
retary, 1992-94 numbers, you would have found an accelerating re-
duction in the private sector and that, in fact, the public sector was
significantly higher percentagewise. I believe you were trying to
make your point. The problem is, you stopped in 1991.

Last question.

Secretary SHALALA. Let me, if I might respond to that, Mr.
Thomas, let me point out that the longer the period of time, the
more accurate the statistics are, and that no one that I know is
projecting the down trend in private sector health costs as rapidly
as it has been over the last couple of years. I think the general
point of private and public sector per capita growth rates being
about the same holds.

Mr. THomas. Just let me say, in conclusion, Mr. Chairman, that
I would take your argument that you are not making partisan
statements more seriously if you didn’t carefully select years to
make your points and have them, in fact, leave the 1992-95 period
out. I think that weakens your argument that you are not making
partisan statements frankly.

Chairman ARCHER. Mr. Rangel will inquire.

Mr. RANGEL. Thank you, Mr. Chairman.

Madam Secretary, I do not know whether you understand what
my Republican friends are saying. They are here waiting for direc-
tion from the President of the United States to tell them what to
do about repairing the solvency of the Medicare Trust Fund, and
they are now frozen like deer in the headlights of cars. They can’t
move. They are immobilized. I do not know why you are just not
getting that.

It is true that they have the votes to do anything they want to
do, but they do not want to move now because—well, like the
Chairman said, do not we have a plan to give them?

Now, as I recall, the President did have a plan in the last ses-
sion, but they did not have the majority and I am not going to at-
tribute statements to any of my Republican friends because I am
flexible, too, depending on whether I am in the majority. I certainly
recall that one of our major leaders on this Committee said, one
thing you can depend on is that we are not going to use Medicare
to fund any tax cuts. As a matter of fact, he said that “I would pre-
fer to wait to do that in thinking about reform.”

Now, I do not think that it is any big surprise that Medicare is
just a part of a big health system. In my community, it is the Cad-
illac of reimbursement for the number of poor people we have. You
take a car in and you tell them just to fix the water pump and they
will tell you that the water pump is connected with this and con-
nected with that and you know what mechanics do. That is the
same thing the hospitals do.

If they want to reduce this massive $780 billion tax cut over 10
years, just reduce it so that our old folks can rely on the trust fund.
Is that one vehicle that they might consider? I am not suggesting
that the President will tell them how to do everything, but could
they not do this on their own?

Secretary SHALALA. They obviously could.

Mr. RANGEL. Let’s try another thing.


50

Secretary SHALALA. Well, it could be going both ways, though,
Mr. Ensign. There is some evidence now, and some of the hospitals
have indicated this, that Medicare has become the better payer, so
that there may be some cost shifting going back the other way. To
give you a precise answer at this point in time is very difficult.

Mr. ENsIGN. OK. Let me get to this, to a further definition, and
that is, if a company saves dollars in a particular program, they
have efficiencies through management techniques, technologies,
and the next year they actually spend less money on one particular
program than they did on that previously, do you define that as a
cut or savings?

Secretary SHALALA. True efficiency, I would count it as savings,
not-——

Mr. ENSIGN. OK. So in Medicare, if we are able through effi-
ciencies, through management techniques, through whatever we
are able to do, to save money, is that going to be defined by the
administration as a cut or savings?

Secretary SHALALA. It depends on the impact it has on quality,
whether we are cutting out benefits in the process.

Mr. ENSIGN. That is what I am saying. I am saying delivering
the same quality, through more efficient means. That would be con-
sidered a savings?

Secretary SHALALA. That would be counted a savings, if we could
maintain quality and benefit coverage.

Mr. ENsIGN. If that savings is applied to the deficit or whatever
it is, is that calling a cut in Medicare to apply to the deficit? Is that
the way the administration will define it?

Secretary SHALALA. I would hope that we would be very precise
in what changes we thought we could make in whatever the public
system was, and the difference between changes that will save us
money and maintain quality and changes that actually will reduce
benefits, reduce coverage and increase costs to other parts of the
health care system.

Mr. ENSIGN. I agree with that. I just want to make sure that we
are precise in our definition and credit goes to savings and not
called a cut. We have to distinguish between cuts and savings, be-
cause in the past, there have actually been cuts in Medicare, where
in the future, hopefully, some of the things we are going to be
doing will be savings, like American business. American business
has transformed itself so that it can save money in some of its
programs.

Thank you, Mr. Chairman. Thank you for your testimony.

Mr. HOUGHTON [presiding]. Mr. Neal will inquire.

Mr. NEAL. Thank you very much, Mr. Chairman.

As always, I want to welcome you here, thank you today, Madam
Chairperson. I thought one of the purposes of these hearings in the
form of this setting was to allow the panelists to answer the ques-
tions. I know you haven’t been given that opportunity this morn-
ing. Generally, as you have asserted yourself, somebody has inter-
rupted you to state another opinion, but we do thank you and wel-
come you here in the true spirit of what these hearings are
supposed to be about.

Secretary SHALALA. Thank you.


95

another, need to help all of us, and a commission or an advisory
group of some sort to—clearly blue ribbon, to present a solution
which, if we are going to reject it, would require the unification of
Democrats and Republicans for a positive alternative to reject it,
which I guess is the best kind of rejection. Short of that, I frankly
do not see us coming to either a short term, or depending upon
what the future brings, a long term solution.

I am very, very concerned about our ability to fundamentally re-
adjust a piece of the Federal budget which, as the Kerry-Danforth
Commission clearly laid out, is a long—an increased path which
cannot be tolerated. Frankly, I see the HI Trust Fund as a warning
flag that allows us to begin to make these fundamental adjust-
ments sooner than we would otherwise.

I would hope that you folks could think about what other kind
of a structure that will help us in terms of a solution.

Guy, you have any comments at all about where we are going?
Do you think the commission route, some kind of a blue ribbon,
third-party professional option is something that will work once
again?

Mr. KING. Yes. It is something that could work. It is very good
that you are getting started 7 years in advance of the projected
date of bankruptcy, because the problems relating to the HI Pro-
gram are really much more complicated than those that related to
Social Security in 1983 and they require a longer lead time.

Now, the other thing I might say is that, technically, it is not a
difficult problem. I am a technician. I am not answerable to the
voters, so I could probably think of 100 different ways to solve the
problem, but it becomes much more difficult when you are trying
to solve the problem and be answerable to the voters as well.

Mr. THomas. I do think though that there is perhaps some alter-
natives or some hierarchy, structuring of alternatives, that provide
a better solution for certain problems that do not make it a fun-
damental political choice. Probably the ultimate mix in the package
in terms of who gets impacted in the larger question is clearly a
political one, but it seems to me that the changes, the fundamental
restructuring in the system, those that give us more mileage for a
given dollar do not necessarily have to be partisan.

You said you had 100 of them. I believe that late at night you
know that one is better than the other and you can prioritize them
along a return on investment, societal investment, in what is given
to us in terms of benefits and the rest. That is the kind of help we
need to get started in making choices, because without something
between us to discuss, as you saw today, we didn’t make a whole
lot of progress, and that is very frustrating to me as someone who
is charged with trying to solve what is a very real problem for a
growing number of Americans, and I want to thank you for your
past contributions and, hopefully, we can get some more mileage
out of you.

Thank you very much.

Mrs. JOHNSON. Mr. McCrery.

Mr. McCrery. I thank the Chairlady for recognizing me, and I
really enjoyed your testimony, however vague it was. Let me just
ask you a few questions and then get into some more general dis-
cussion following Mr. Thomas. Let me begin by making a comment,


33

Mr. HANCOCK. Would you recommend some tax increases on the
well-off then?

Secretary SHALALA. I have not suggested that. I have simply
said, let’s see your detailed budget. Tell us how you intend to keep
your promise to balance the budget, and to pay for tax cuts for the
wealthy.

Mr. HANCOCK. We are going to balance the budget and we will
do it without the administration, if necessary. We would like to ask
them to cooperate. We would like to ask them to get this idea out
of their head that you have got to have more money.

That is the only thing they can think about. In fact, let’s go back
to Harry Truman of the State of Missouri. He talked about the “do
nothing” Congress. Well, I think we ought to be talking about the
“do nothing” presidency. The only thing that Bill Clinton can do is
attempt to put us in a position where we are going to have to raise
taxes, and that is exactly opposite of what the American public, in-
cluding the senior citizens of this country, want done. They know
that those methods have gotten us into this position in the first
place and it is time we address it based on the existing tax that
we have got set up now and we can do it if, in fact, we get some
cooperation.

Mr. THoMas. Gentleman’s time has expired.

Madam Secretary, a number has been repeated a couple of times
and I just want to make sure, as we go through this, that we try
to at least remain as accurate as possible in terms of numbers. The
repeal of the phase-in on taking Social Security taxes and funding
HI unprecedentedly, according to Joint Tax, was $15.6 billion over
5 years. Is that a figure that the administration agrees with?

Secretary SHALALA. I simply will have to provide that for the
record, which I will, sir.

[The information was not available at the time of printing.]

Mr. THOMAS, Well, it is in relation to the statement the Sec-
retary has made several times, that removing this unprecedented
tax shift would reduce the solvency of the fund by 1 year, and Joint
Tax has indicated that the cost of this will be a $15.6 billion cost
over 5 years. When in 2000, the shortfall in the HI Fund alone, in
just that 1 year, will be more than $35 billion.

The funding of this over 5 years is less than one-half of the cost
of the shortfall in even just 1 year. I am concerned that the Sec-
retary, in continuing to repeat the statement that it shortfalls for
1 year, perhaps is not accurate according to the numbers.

Secretary SHALALA. We are probably—I have to determine
whether you are using CBO numbers versus Joint Tax.

Mr. THOMAS. Using the Joint Tax number.

Secretary SHALALA. Which we will review, sir, and provide for
the record.

Mr. THOMAS. Although it seems a little ludicrous to the American
people, I am sure our arguing over several months shifting into an-
other fiscal year as to whether or not any change saved is 1 year
or not, they are looking at ultimate solvency, but I do want us to
be accurate.

Secretary SHALALA. The CBO numbers that we were using is 26
over 5 and 87 over 10.


17

available today and I think if anybody has any proposals, I would
be glad to listen to them and thoughtfully try to think them out.

Chairman Archer, as I recall, the health care reform program
that we presented last year would have reduced Medicare expendi-
tures over a 7-year period by the tune of $168 billion. That is a
large amount of money, but not real large when you compare it to
the overall size of the program.

I do not think we want to get Medicare and Medicaid mixed up
in this discussion today. Medicaid, as everyone knows, is a low-in-
come program, it is a charity program. Of course, if the health care
proposal that we put forward last year had been enacted, we would

ave saved a lot of money in Medicaid because there would not
have been any Medicaid Program left, just about. All of it would
have been subsumed in the program we put forward last year. The
figure that Democrats proposed to cut out of Medicare last year for
the aged was the $168 billion, not $410 billion, as was said here.

Madam Secretary, I looked over your report and I notice you had
a chart in the back of it tracing the solvency of the trust fund, and
it seemed to me that the solvency of the trust fund and the length
of the solvency of the trust fund to a certain extent tracked the
U.S. economy. As unemployment goes up, the solvency of the trust
fund tends to go down, and vice versa in this picture.

It also seems to me that the solvency of the trust fund tends to
follow the Projected line of what medical costs, particularly hospital
costs, will be in the future. All of us know that the number of days
of stay in a hospital paid by Medicaid—Medicare patients, and all

atients today, is much less than it was just a few years ago. In
Fact, as I recall, the average daily residency in hospitals 15 years
ago was about 1.3 million a day, and the average daily residency
in hospitals today is down to about 750,000 people per day. There
has been a substantial drop in the use of hospitals. There has not
been the concomitant drop in hospital costs, unfortunately, despite
the fact that residencies in hospitals are much shorter than they
used to be, even for Medicare patients.

I say again, if anyone has got a proposal about how to improve
this program and how to make it more secure, I am open, willing
to listen. I do not think the program is in dire danger. I do not
think the trustees’ report is anything that I haven’t heard on this
Committee numerous times as trustees have come before us to tes-
tify about the condition of the Medicare Trust Fund. I am really
mystified by all this scare talk, unless they are just trying to carve
more money out of programs for old folks and give it away in tax
breaks for people who I do not think particularly deserve it.

If anybody has got a suggestion, I am here to listen and thank
you very much, Madam Secretary.

Chairman ARCHER. Mr. Crane.

Mr. CRANE. Thank you, Mr. Chairman.

Madam Secretary, last year you agreed that program expendi-
tures should be slowed and you proposed to reduce the rate of
growth by about $118 billion. Do you continue to support those
proposals?

Secretary SHALALA. We do. I think the point I was making ear-
lier is that the President believes, when we are talking about look-
ing at the Medicare Program and our need to slow the growth of


61

‘would increase if per capita costs in the fee-for-service sector rose, even if HMO per
capita costs fell.

‘Medicare's HMO enrollment could generate savings, however, if the method
of setting capitation rates was changed. A number of possible alternatives exist. But
significant savings would not be generated unless the payment link between fee-for-
service and managed care was broken. One way to break the link would be to allow
the capitation rates to be set by competitive bidding in areas with enough HMOs to
‘make that approach viable. That market-based approach could encourage stronger
price competition among Medicare risk-based HMOs in a market area. However,
generating more savings for the Medicare program could reduce the additional
benefits that HMOs currently offer to beneficiaries, blunting incentives to enroll in
HMOs.

Many analysts attribute the recent slowdown in the rate of growth of private
health insurance spending to more aggressive price competition among health plans.
Between 1990 and 1993, private health insurance spending grew at an average annual
rate of 7.7 percent compared with 11.2 percent for Medicare. As it is currently
structured, the Medicare program cannot take advantage of the recent competitive
developments in the private health care market.

OPTIONS FOR RESPONDING TO THE FISCAL CRISIS IN MEDICARE.

1f nothing is done and Medicare continues to grow at its current rate, the program
will consume an increasing share of the nation's resources. It will also continue to
'be a major cause ofthe rising federal budget deficit and the increasingly burdensome
federal debt. Those outcomes raise concem about the efficient allocation of the
nation's scarce resources and about the long-run prosperity of the nation. If Medicare
absorbed less of the nation’s output, more could be spent on investment to improve
the productivity of current and future workers, Moreover, a growing economy could
‘be more dependably counted on to pay for the benefits of current and future retirees.

Fixing Medicare's financing problems will aot be easy. As the reports of the
trustees make clear, those problems are of both a short-term and a long-term nature,
Either taxes must be increased, expenditures reduced, or both, and the orders of
‘magnitude involved are large. (A third approach that is sometimes suggested to
address shortfalls in the HI trust fund would be to transfer funds to it from the Old-
‘Age and Survivors Insurance (OASI) trust fund. That strategy, however, would
merely postpone rather than address the funding shortfall and would hasten the
depletion of the OASI trust fund.)

‘The tax alternative, in isolation, would require an increase in the HI payroll
tax of 1.3 percentage points--more than 40 percent--over the next 25 years to ensure
that HI financing covered program costs. Although such an increase in the HI
payroll tax would secure the HI portion of Medicare outlays, it would do nothing to
improve the overall efficiency of the Medicare program.

‘Two broad approaches would achieve slower growth in Medicare outlays:
budgetary reductions and program restructuring, Those approaches are not mutually
exclusive. With or without a tax increase, a combination of them would probably
be needed to address Medicare's immediate and longer-term financing problems.

Budgetary reductions--exemplified by the options included in CBO's 1995
report Reducing the Deficit: Spending and Revenue Options--represent the traditional
approach to containing Medicare's costs. Such options, which typically lower
payments for providers or raise the amounts that beneficiaries must pay, offer
immediate short-term savings in the Medicare program. Although both types of


4

Chairman ARCHER. The Committee will come to order.

Will guests and staff please take their seats? The Committee will
commence just as soon as everybody is seated and audible con-
versation ceases. Surely everyone can find a seat and not continue
to walk around in the middle of the Committee room.

Today, the Ways and Means Committee conducts one of its most
important hearings of the year because we will examine the finan-
cial condition of the Federal Hospital Insurance Trust Fund Medi-
care Part A. The report we will examine today is essentially a
Clinton administration document.

Three trustees are Cabinet secretaries. Their very own report
shows that the trust fund will begin to go broke next year and will
be bankrupt by 2002. Their report provides a wake-up call that this
Committee and the Congress must not ignore.

Madam Secretary, welcome again to the Committee and I hope
the administration also will not ignore its own report. Thirty-seven
million Americans depend upon the trust fund for hospital care and
the other part A benefits covered under Medicare.

At the same time, working Americans are paying hard-earned
dollars in payroll taxes to finance Medicare and they rightfully ex-
pect that Medicare will be there for them when they retire or be-
come disabled. It is essential that we begin today a conversation
with the American people about the condition of their Medicare
and the dire necessity to work together to make it solvent.

Frankly, it will not be easy to bring Medicare finances in line.
The trustees’ report tells us that simply to ensure solvency for the
next 25 years, Congress would have to immediately increase pay-
roll taxes by 44 percent or reduce growth in expected spending by
nearly one-half. For the trust fund to remain solvent through the
retirement years for the baby boom generation, the trustees’ report
indicates taxes would have to be tripled; that is, if restraint in
spending increases does not occur.

Raising taxes would only postpone the need to curb medical cost
growth and would simply pour fuel on the fire of medical cost infla-
tion. Besides, it is bad economics and plain wrong to raise taxes
further on this generation of working Americans.

It is our responsibility to begin the task of tempering growth in
Medicare costs to preserve the program for current and future
beneficiaries. I know the American people expect us to meet this
challenge in a bipartisan manner. Medicare solvency is neither a
Republican issue nor a Democrat issue and I will work to seek so-
lutions for the full participation of Democrats on the Committee
and with the administration, along with our Republican Members.

We begin today a two-part process to save Medicare. The first
part is a careful examination of the causes behind Medicare’s loom-
ing insolvency. Only after we understand the problem can we begin
to advance solutions, and that will be the second part of the
process.

Madam Secretary, I am growing increasingly concerned about
the administration’s lack of an approach to saving Medicare. The
administration’s public pronouncements appear to say that since
the American people rejected a big government solution to health
care reform last year, the administration will refuse to talk about


93

a package on our own for formal or informal submission to the Con-
gress as a basis for the Congress to begin debate on this issue. I
think it is critical that something be done and I will let Stan re-
spond, and I am open-minded to anything that is reasonable, quite
frankly, to get this thing moving.

Mr. Ross. I would point out, first of all, that our role as public
trustees is to oversee the integrity of the reports and to make sure
they were timely and accurate; and this year was not only difficult,
but there have been difficulties in the past over issues like the dis-
ability program where our role was to require that studies be done
before we would agree to recommend the reallocation that was
done.

We have very little staff resources. These are part-time jobs in
which we have spent limited time —I have spent about 40 days a
year the past 5 years.

Frankly, these are political judgments that are involved and I
think that unless a process can be set up, such as a 1983 Green-
span-type commission, where political leaders themselves can be
brought together with experts like Mr. Walker and I in a frame-
work in which everybody is going to try to exercise their skills and
best. judgments, I do not see a way out of the impasse that is
presented.

I personally believe that it is more important to focus on the pro-
cedural vehicle than trying to get particular substantive ideas, be-
cause there are a lot of substantive ideas out there, but until you
see how the public reacts to them, it is very hard to make the
political judgments.

How will ordinary beneficiaries, workers, doctors, hospitals,
pharmaceutical manufacturers, medical device manufacturers
react? There are just a whole range of interests as we know from
the comprehensive health care reform debate, and in order to make
the right political judgments, I think the public needs to see
proposals out there.

Something like a national commission might be the way to begin
to let the public understand the dimensions of the problem; I think
they will get some things out of this hearing, but not the difficulty
of the solutions, it is necessary to begin to see which proposals
seem to have some staying power and which ones would just be
totally unacceptable.

Like Mr. Walker, this job was my fourth stint in government and
I would do anything I personally could within the limits of my time
and capacities to try to help end this impasse which I think is real-
ly not good for the program, not good for our political system, much
less for the Nation.

Mr. THomas. Thank you very much. One of the more frustrating
things that I have been engaged in is looking at the question of
Medicare. Mr. Walker, you talked about educating the American

eople, especially seniors and others, including, to a certain extent,
Members of Congress about just what this program is. There is a
lot of confusion about it.

One of the more frustrating things, as I have said, is to look at
the dollar amounts expended in the HI Trust Fund and part B, the
Supplemental Medical Insurance Trust Fund, and the government
contribution along with the individual contribution. Examine what


38

talk about the trust fund without a discussion of some unspecified
health care reform, that you won’t get into. The administration has
punted on the issue of the budget. It has not fulfilled its own prom-
ise to half the deficit, let alone eliminating the deficit and in the
budget, it doesn’t deal at all with the HI problem, and the adminis-
tration has punted at least in this session on the issue of health
care reform, incremental or comprehensive, by not proposing
specific ideas.

If, as somebody said on the other side of the aisle, the intent is
to have Republicans stew in our own juices, that may be a politi-
cally desirable objective from your point of view, but it certainly
doesn’t help deal with what is a major and pressing problem.

I just want to express my dismay at this situation and I won’t
try to ask the same questions that have been asked over and over
again because I would anticipate getting the same canned re-
sponse, but let me just ask you, Madam Secretary, whether you
agree with a couple of the statements that were made by some of
the Democratic Members of this Committee.

The Ranking Democrat, Mr. Gibbons, said that the cuts that
were proposed as part of the administration’s health care reform
program last year, $168 billion, “were not real large in the context
of the entire program.” Do you agree that 168 billion dollars’ worth
of cuts aren’t real large?

Secretary SHALALA. Only if you continue the sentence in the
context of the program.

Mr. ZIMMER. I did.

Secretary SHALALA. That was a comprehensive health care re-
form proposal which balanced off some of the cuts, or slowing down
the growth of the Medicare Program with slowing down the growth
in the private sector at the same time. All we have said is that the
context for dealing with the HI Trust Fund, with Medicare and
Medicaid, must be the broader context of the entire health care sys-
tem, because what we do not want to do is to create terrible prob-
lems for the private health care system because of what we do with
the public health system.

Mr. ZIMMER. Then that leads me to something that Mr.
McDermott said. He said, without universal coverage, you can’t
control costs. Do you agree with that statement?

Secretary SHALALA. Yes. The point that Dr. McDermott was mak-
ing is that large numbers of people without insurance are both put-
ting off health care, which means that when they do finally go to
the doctor, they are sicker, or using the most expensive parts of the
health care system, the emergency rooms. Until we can get every-
body into some kind of insurance, it will be very difficult for us to
control overall spending in this country.

It means that we cost shift to cover some of that, as we—and one
of the difficulties that rural hospitals have in America is they are
very dependent upon Medicare because they are the payer and that
Medicare money helps them to pay for the uninsured at the same
time. The large public hospitals have the same kind of problem.
That coverage is important as part of the equation.

The President has made it very clear that he fully understands
that we are not going to again take on a comprehensive approach,
but incremental discussions that include coverage as one of the


100

years, we could afford to spend $5,000 per capita per year. That
takes into account the new numbers, but also allows almost a 50-
percent increase. We just can’t allow an increase to $6,000 per
capita.

e are really talking about allowing a rational increase, actually
more than the increase of the past 7 years. This is not draconian
if we do it now. It can be done responsibly now. It can allow an
increase that is still 50 percent of what we are spending on every
individual senior now and still bring us to balance.

In this portion of your testimony, Mr. King, wouldn’t it be pos-
sible if we were able to, for instance, dissect the amount of money
that actually pays for senior care from both the hospital reimburse-
ment and the physician portion, Medicare part B, and use that
money to allow seniors to buy a plan in the private sector that
would give them prescription drugs and other things if they chose
that, if we did not allow that premium to grow nearly as rapidly
as costs are growing now, couldn’t that achieve our goal of reducing
costs but assuring seniors current services and also some oppor-
tunity to get better coverage through managed care systems?
Theoretically.

Mr. KING. Yes. There are different approaches to managed care.
There is the approach where every Medicare beneficiary is given a
voucher and then that certainly gives you the wherewithal to con-
trol the rate of increase in per capita cost in the Medicare Program.

The other approach, I am not—it could work also, the approach
where Medicare beneficiaries are allowed to decide whether they
want to go into a managed care program or stay in fee-for-service
Medicare, has a difficult problem to overcome, and that is the prob-
lem of favorable selection where the healthier beneficiaries are in-
duced to enroll in an HMO and the HMO is given the average pay-
ment for fee-for-service Medicare. Then we are paying too much.

Mrs. JOHNSON. Of course it depends on how you set that
capitated reimbursement rate, and under the Medicare risk pro-
grams, that capitated rate has been set high because the companies
have only been willing to participate in risk programs where the
spread between cost and capitated rate is high.

Mr. KING. Yes, that is true. The capitated rate would have to be
set lower in order to produce savings, and that produces a difficulty
in the fact that the lower the payment rate to the capitated plans,
then the less attractive those plans are, both to the beneficiaries
and to the plans themselves, because the way it is right now with
these generous payments, they are used to finance the extra bene-
fits that are used as an inducement to the beneficiaries.

Mrs. JOHNSON. Correct. But couldn’t you take, for instance, man-
aged care plans in an area, because these will have to be geo-
graphically variable, and take an average of those plans that pro-
vide the general Medicare benefits and see what that premium is,
and if that premium is affordable for Medicare, then that would be
the choice of plans that the Medicare recipients would have.

I am trying to think of some shorter way to this than actually
factoring down what we spend in Medicare to kind of identify what
is cost related, drawing the premium from that and then moving
that premium into the private sector. I do not know whether there
is a way of looking at what is the average managed care plan in


41

and I should think that you personally would feel very, very con-
cerned coming to this Committee without a proposal for how to
solve this crisis. I would think you would find that your plan to
wait until we propose our budget-balancing plan is very reactive.
I think it brings in the question of relevancy of the Presidency.

We are dealing with real reasons and good reasons, and I would
simply like to know the real reason the President and the adminis-
tration have not come forth with a plan to solve this crisis. For ex-
ample, you and Secretary Rubin have been here with some ideas
that were considered during our debate, proposals and our passage
of that bill on the House side. This dearth of leadership is very sad.
It is certainly not what the people I represent want to see out of
the executive branch, and I would like to know the real reason you
are not coming forth with some ideas.

Secretary SHALALA. Congresswoman Dunn, I think your com-
ments are unfair. All I have said here is that we fully expect to see
a detailed budget. The credibility issue, given what the law says,
is not on our side. We fully expected a detailed budget because we
were told that within that budget you would keep your promise to
balance the budget, to provide a tax cut for the well off, and
that——

Ms. DUNN. Madam Secretary, if you will excuse me, the budget
is not the question. Your proposed ideas for reform of the health
care system and reform of this system that we are talking about,
Medicare, is the topic of today’s debate. Where are the answers?
Where are you going to provide some solution that we can put
together in a bipartisan way and solve this crisis?

‘We know what your trustees have said. I know what I am hear-
ing in the communities around my district where I just spent 2
weeks holding 13 townhalls in 13 different communities. They
want us working together to solve this problem. They do not want
this sort of rhetoric that we have heard during this debate and—
excuse me, Madam Secretary, I would like to know when you are
going to come up with this proposal. I would like to have it discon-
nected from the budget because we have got to work on this now.
It was the number one priority in all my townhall meetings. They
want us to solve this problem. They do not want you or anybody
from the executive branch giving an excuse that we will wait until
you propose the plan. Leadership should rest with the President.
Where is it?

Secretary SHALALA. Congresswoman Dunn, the leadership of
Congress is now in the hands of your party and we are waiting to
see your budget. We have said-——

Ms. DuNN. Have you completely given up, then, on the fact that
the executive branch should be offering leadership in this and
every other major debate we are going through in the House of
Representatives?

Secretary SHALALA. Absolutely not, but it is fully acceptable for
us to wait to see the detailed budget in which you have promised
to deal with these issues, and we have said as soon as we see that
detailed budget, we are prepared to sit down and to deal in a bipar-
tisan manner with the health care portion of that budget, specifi-
cally——