59

whenever the threat of government intervention in the health care
delivery system was there, that health care costs behaved very
well. Then, when the threat is gone, health care costs increase
again.

This happened during the early 1970s with wage price controls.
It happened during the late 1970s with the threatened enactment
of hospital cost containment legislation. And it happened once
again in 1993 and 1994 with the debate over health care reform.

The SMI program, even though it is not in financial danger, be-
cause of the way it is funded, is still growing at an unsustainable
rate. The cost of the program as a percent of GDP in 1994 was
0.89 percent, and it is projected to increase to 3.27 percent of GDP
by the year 2020, when the post-World War II baby boom begins
to retire. It will grow further to 4.5 percent of GDP by the middle
of the next century, when the baby boom is fully retired. These are
in the 1994 trustees’ report.

The sad thing is, if some changes, seemingly minor changes, had
been made in the SMI program many years ago, this problem
wouldn’t be nearly as large as it is. If the deductible, for example,
for the SMI program had been indexed to the per capita costs for
the program, then the SMI premium—first of all, outlays of the
program would be 25 percent lower than they are today. The SMI
premium could have been held at $4 instead of the $42.80 that it
is today, and the government contributions to the program could
still be $5 billion less than they are today.

In my opinion, there are two reasons why the outlays of the Med-
icare program are excessive today, and these are the same two rea-
sons why they are excessive in the private health care system. That.
is the combination of two factors. One is third-party payments and
the other is the fee-for-service system.

Of course, third-party payments, when patients and providers
are spending other people’s money, they don’t worry as much about
either the price or the quantity of the services provided. Our re-
search in the Office of the Actuary in HCFA showed that even the
modest cost-sharing provisions which remain today in the Medicare
program, when they are allowed to work, have a substantial dis-
incentive to overutilization,

When the health expenditures of people who faced even the mod-
est cost sharing of today’s Medicare program was compared with
those who had Medigap policies that filled in that cost sharing so
that their services were essentially free, then the utilization was
substantially lower for those people who just faced today’s modest.
cost sharing.

More importantly, not only is the level of health expenditures re-
lated to third-party payments, but also the rate of growth in health
expenditures is related to third-party payments. In a research

aper which will be published in “Health Affairs” coauthored b:

ark Freeland and Al Pedon, they show that not only is the healt!
care cost higher, but the rate of increase in health care costs is
higher as the Nation has shifted from out-of-pocket payments to
third-party payments.

Their research shows that, roughly, as a rule of thumb, for eve
10 percentage-point shift from out-of-pocket payments to third-
party payments, there is an increase in the rate of increase in


123

Table 1 offers a suggestive, if partial answer to this question. It shows the projected
future cost of Social Security and Medicare as a percent of the FICA-laxable wages of all
U.S. workers covered by the programs. Two official projections (intermediate cost and high
cost) are tabulated here. "*

Table 1:
Annual Cost of Social Security and Medicare
(Parts A and B) as a Percent of Workers’ Taxable Payroll

Intermediate High-
Calendar Cost Cost
Year Projection Projection
1993 16.5% 16.5 %
2010 2.4 & 26.7%
2025 30.5% 3.0%

2040 MOH 55.1%

Strictly speaking, not all of the costs tabulated in Table 1 will be borne by workers.
A relatively small portion will be financed by taxation of benefits and by general taxation
(which is borne by capital as well as labor income). But the worker share is so dominant --
well over 90 percent of the total in 2040 under any scenario -- that this is a distinction
without a difference. Moreover, this table does not include all of the public costs (¢.g..
long-term care covered by Medicaid) associated with the age wave. Even so, the numbers
point to a breath-taking climb in the effective tax rate required to fund these two major
programs over the next 30 to 45 years: a doubling under the intermediate-cost scenario and a
tripling under the high-cost scenario. By 2040, the spread between these two projections
implies a likely “tax load” equivalent to somewhere between one-third to one-half of the
typical worker's taxable wages.

. WHAT HAPPENS TO AFTER-TAX EARNINGS?

Few politicians actually advocate burdening future workers with costs of this
magnitude. When forced to confront the issue, most voters’ first inclination is to declare that,
such tax hikes would be unfair if not unthinkable. Defenders of the entitlement status quo,
however, have long labored to change the terms of the debate and to make the unthinkable
seem really pretty decent after all. Even if the tax rate on future worker earnings must
ultimately climb, they argue, real pretax earnings will still grow swiftly enough to allow
future workers to enjoy a steady rise in real after-tax pay. In other words, they claim,


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COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois 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 MCCRERY, 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 L.F. 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
PHILLIP D. MOSELEY, Chief of Stoff
JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON HEALTH
BILL THOMAS, California, Chairman

NANCY L. JOHNSON, Connecticut FORTNEY PETE STARK, California
JIM MCCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
JOHN ENSIGN, Nevada JIM McDERMOTT, Washington
JON CHRISTENSEN, Nebraska GERALD D. KLECZKA, Wisconsin
PHILIP M. CRANE, Ilinois JOHN LEWIS, Georgia

AMO HOUGHTON, New York
SAM JOHNSON, Texas

ay


119

WV. Narionat Taxpayers UNION
FOUNDATION

“18 Mumuso Wee, Norm Wowserow.DC 20092 + (202) 548.1908 © Fas (202) 546.2086

POLICY PAPER NO. 10 December 30, 1994

‘Why the Graying of the Welfare State
Threatens to Flatten the American Dream — or Worse

by Neil Howe

Despite overwhelming evidence that the cost of major senior benefit programs is due
to explode over the next half-century, the notion persists that they are sustainable without
‘major cost-cutting reform. Although tax rates may rise, this argument runs, a growing
economy will still allow workers to enjoy steady gains in real after-tax earnings. However,
‘an examination of the likely future fiscal and tax impact of three major senior programs —-
Social Security, Medicare, and Medicaid for persons age 65 and over -- demonstrates that
this argument is clearly wrong. Projections based on a model that incorporates all of the
official (scenario It and TI) assumptions used by the Social Security and Health Care
Financing Administrations in calculating the growth of three programs, show that, absent
major reform, che graying of the welfare state is likely to have catastrophic consequences for
the after-tax living standards of most working-age Americans. In particular:

© Under the official scenario Il (the so-called "best-estimateTM case), after-tax
earnings per U.S. worker in 1993 dollars will remain unchanged over the 4S
years between 1995 and 2040, In 1995, real after-tax earnings will amount to
$19,221. By 2040, they will reach $19,346 ~ less than one percent coral growth
over nearly half a century, At an annual rate, this growth is negligible by any
statistical standard.

© Under the official scenario IIT (whose less optimistic assumptions are closer to
recent experience), after-tax earnings per U.S. worker in 1993 dollars will decline
steeply and steadily between 1995 and 2040. In 1995, they will amount to $19,000.
By 2040, they will fall to $7,821 -- a devasrating 59 percent fall in real terms.
Incredibly, this would be a much faster annual rate of decline than the annual rate at
which after-tax earnings rose between 1951 and 1970.

© —_Under both scenarios, total government spending will grow steadily as a percent
of GDP. From 34.4 percent of GDP in 1995, it will grow 10 43.9 percent in 2040



68

Chairman THOMAS. So when you deal with what is going into the
system versus, currently, what people are getting out of the sys-
tem, Mr. King, as you indicate, from a 4-to-1 pay-in to a 2-to-1 pay-
in, and, of course, this is not projecting the increased lifespan. I
went through a fight here in 1983 in which we extended the retire-
ment age 2 years in 2027, which was certainly shorter than it
should ave been, based upon the battle that was a difficult one
to fight.

It is just very easy to look at the time line and get into a discus-
sion of a couple of months or even a couple of years. That isn’t the
point, I think, that you folks are trying to stress. You've pet to fun-
damentally change the system, because if you continue the way we
are, regardless of the changes in the private sector, regardless of
anything else that may intervene, wish, hope, or otherwise, if we
don't change the system, is it inevitable? Is that what you are say-
Ing:

Mr. Kine. I would say it is inevitable, Mr. Chairman, yes.

Chairman THomas. So we can’t avoid it? We have to do some-
thing about it?

Mr. MYERS. Yes.

Mr. KING. It is a system that is so far out of balance in the long
run, between the revenues and the outlays of the program, that a
fundamental restructuring of the hospital insurance program is
going to be necessary. You can’t just cut the costs of the program
by 34 percent by cutting prices. You have to make fundamental re-
structuring of the program in order to do that.

Mr. Myers. Yes, Mr. Chairman, I agree that it is inevitable, but
I think that the changes can be made on the financing side because
I think that costs are going to be there anyhow. People are going
to have the health care costs. They are going to have hospitaliza-
tion costs. It is a question of how these are going to be met. Should
they be met out of pocket, or through an insurance system, or how
much in each way?

Chairman THomas. And from an actuarial point of view, since
you folks have been dealing with these societal concepts, how much
time is 5 or 7 years to make these kind of adjustments that we
need to make? Is that a short timeframe, from your perspective?
Is that a reasonable timeframe?

Mr. Myers. I think it is barely reasonable. Changes should have
been made sooner. But the sooner we get to it now, the better it

1s.
Chairman THomas. But, clearly, if we don’t do anything this year
or next year, we are outside of. the reasonable frame for adjust-
ment?

Mr. Myers. I believe so.

Mr. Kina. Yes. Mr. Chairman, if I could be allowed to, I am al-
ways reluctant to disagree with Mr. Myers, because we agree on so
many things, but I don’t believe it is feasible to make the changes
on the financing side for the hospital insurance program. By the
middle of the next century, the tax rate of the hospital insurance

rogram would have to triple if we didn’t make changes in the out-
ays. The tax rate would have to triple.

What essentially is happening with the hospital insurance pro-
gram now is that we are shifting an enormous burden for the over-


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79

Chairman THoMas. Thank you, Mr. Hopkins.
Ms. Lamm.

STATEMENT OF HEATHER LAMM, NATIONAL POLICY
COORDINATOR, THIRD MILLENNIUM

Ms. Lamm. Thank you, Mr. Chairman and members of the sub-
committee for inviting Third Millennium to participate on this dis-
tinguished panel.

s we have heard already this morning, Mr. Chairman, the ques-
tion before us is not whether or not the Medicare program will be-
come insolvent. The facts speak for themselves. From Alan Green-
span to the Congressional Budget Office to the public trustees of
Medicare, the experts agree that Medicare is on a 6-year collision
course with bankruptcy.

By 2001, the Medicare part A trust fund is projected to simply
run out of money. As one of the Nation’s fastest-growing Federal
programs, we are already feeling the impact of Medicare’s deficits.
The actual point of bankruptcy for the program may be 6 years off,
but it is draining our country’s resources today.

Thus, the question before us is when and how we act to change
the course of Medicare. If this Congress acts soon, the changes can
be relatively incremental and minor, but if the Congress waits, the
solutions, out of necessity, will be draconian.

I come before you as a member of a group of people born after
1960 who are concerned about the future of America. Third Millen-
nium’s mission is to convince our Nation and its leaders to begin
looking beyond the next election cycle and toward the next
generational cycle.

The issue before us today is not about what size piece of the
American entitlement pie one generation gets compared to the
next, and it is not about generational warfare. The issue before us
is about looking toward the future and realizing the severity of the
problems out there. It is about dealing with those facts and those
problems now before they deal with us.

Every year we wait, the problem compounds. As we have heard
already this morning, unfortunately, in his 1996 budget, President
Clinton and the administration punted on Medicare. It is impera-
tive that this Congress not do the same thing. The pending insol-
vency of Medicare cannot be pushed off the table. The year 2001
is no longer a futuristic fantasy. To my generation, it is a reality
that is literally just around the corner.

Imagine, for a moment, that we are in the year 2001. The Denver
International Airport has just opened and the baseball strike has
finally ended. For 6 years, Congress and the President have tossed
the idea of Medicare reform back and forth. The President offered
insubstantial reforms year after year, and Congress, while con-
demning such weak-kneed approaches, also ultimately became
bogged ‘down by special interests and partisan bickering.

Medicare is now 1 month away from running out of money. The
Nation is faced with a horrendous decision. We must raise payroll
taxes on young people by nearly 4.5 percent immediately to balance
the program, or we must slash all benefit checks dramatically,
leaving many needy seniors unprepared and without vital health
care.


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128

‘The incidence of taxation is distributed in a standard fashion. Specifically, the
mode! assumes that payroll taxes are entirely borne by workers; that corporate taxes
are entirely borne by capital; and that all other direct and indirect taxation is
distributed among three groups -- recipients of labor income, capital income, and
benefit income -- according to each group's share of the relevant total. In deference
to the prevailing consensus of economists (about the supply elasticity of capital and
labor to taxation), the model then shifts three-quarters of the tax on capital to
workers. To incorporate the shift, the model "grosses up" the historical and scenario
values for pre-tax worker earnings and compensation. This assumption seems
appropriate given the very long-term equilibrium under consideration.” (See below,
“Appendix Ill: Calculating the Tax Burden.)

‘The tax increases required to finance the growth of elderly benefits will have no
adverse impacts on economic growth. Remarkably, both scenarios envision that the
rate of pre-tax income growth will actually increase relative to recent experience,
despite a dramatic rise in the total tax rate on worker compensation. It is at least
equally plausable that economic growth would suffer under such crushing tax burdens.

Findings

The major findings of our model are the following. All per-worker figures are

translated into constant 1993 dollars.

L

Under the "best estimate" scenario II, real after-tax earnings per U.S. worker
will remain virtually unchanged over the 45 years between 1995 and 2040. In
1995, after-tax earnings will amount to $19,221. By 2040, they will reach $19,346
less than one percent roral growth over nearly half a century. At an annual rate,
growth is negligible by any statistical standard. (See Charts | and 2.)

Under the "high cost" scenario III, real after-tax earnings per U.S. worker will
decline steeply and steadily between 1995 and 2040, In 1995, they will amount to
$19,000. By 2040, they will fall to $7,821 -- a devastating 59 percent fall in real
terms. Incredibly, this would be a much faster annual rate of decline than the annual
rate at which after-tax earnings rose between 1951 and 1970. (See Charts 3 and 4.)

Runaway health-care benefits are clearly not the only force behind the rising tax
take on worker pay. Under scenario II, fully 62 percent of the pre-tax earnings
growth between 1995 and 2040 will be wiped out by general government, Social
Security, and budget balance. (Medicare will take another 27 percent; and Medicaid
for seniors, 10 percent.) Under scenario III, remarkably, 95 percent of pre-tax
earnings growth will be wiped out by general government, Social Security, and
budget balance alone. Under scenario II, in other words, after-tax earnings would
stagnate even if all levels of government could immediately and permanently restrain
real healsh-benefit outlay growth to the growth rate of employment (which would


184

Table 2:
Official 1994 SSA Scenarios Versus Actual Historical Experience

‘Assumed Long-Term Trends ‘Actual
(After 2010) Historical
Under Scenarios I and Itt Experience:
Scenario I Scenario IIL 1973-1993

‘Average Annual Rate of

Real Wage Growth

(in percent) +0.98% +0.52% 40.1%

‘Average Annual Growth in

Longevity at Age 65

{in years per decade) +0.43 $0.83 +0.98

Average Total

Fertility Rate

(im lifetime births per female) + 1.90 +160 +187



74

Mr. HouGuTow. It is too bad we can’t devise a system that would
threaten the Federal Government the way the private system is
threatened and keep costs down that way. Maybe you can devise
something like that.

Thank you.

Chairman THomas. Thank you, Mr. Houghton.

I would say that even if you phased it in gradually, the impact
on employment in the rest of an 8.5-percent employment tax, just
for a portion of the health care costs, frankly, is unacceptable to
me. To say that the costs are going to be there anyway is also un-
acceptable to me, so I am going to try to attack it from both ends.
I may not be successful, but I am sure going to try.

I thank this panel very much. Your testimony was enlightening.
Actuaries are some of those folks that you don’t want to sit down
and talk with oftentimes because they tell you what you don’t want
to hear, but I believe that this particular subcommittee and this
Congress needs to hear what we don’t want to hear more often
rather than less often.

Thank you very much.

Will the next panel come forward, please? From the Seniors Coa-
lition, Jay Hopkins; from the Third Millennium, Heather Lamm;
and from the National Taxpayers Union, Paul Hewitt.

I would say to all of you, if you have any written testimony for
the record, it will be sul mitted, without objection. You may begin
and, for 5 minutes, inform, instruct, and enlighten the subcommit-
tee in any way you see fit.

Mr. Hopkins, we will start with you.

STATEMENT OF JAY HOPKINS, SENIOR ANALYST, SENIORS
COALITION, ON BEHALF OF JAKE HANSEN, DIRECTOR OF
GOVERNMENT AFFAIRS

Mr. Hopkins. Thank you.

The Seniors Coalition is the Nation’s third largest senior citizens
advocacy organization, with over 1 million members across Amer-
ica. As a seniors organization that strongly supports the Medicare
program, the Seniors Coalition must take the responsible step of
recognizing that the program is broken and badly needs fixing.

Our Medicare system was designed in the 1960s, a time when
America had fewer seniors, health care costs were relatively low,
and many expensive medical wonders simply did not exist.

The very nature of our society has changed over the past 30
years, yet, Medicare has not changed with the times. In its current
form, Medicare’s costs are increasing too rapidly for the govern-
ment and its citizens to bear. Medicare must be reformed now, or
it will certainly perish.

The crisis cannot be exaggerated. Today, more than 32 million
seniors depend on the protection provided by Medicare part A. By
the turn of the century, that number will have increased dramati-
cally. Without bold and immediate action, the health of America’s
seniors will be at grave risk.

Reforming Medicare will be a daunting, yet not insurmountable
task. When people of good will come together, joined in a common
cause, mountains can truly be moved. Such a monumental task


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103

Health Care Financing Administration. It would be a matter of lan-
guage change.

ir. CARDIN. I would assume, on the first point, you would want
to extend the period to greater than 1 year. Is that what you would
be seeking, a longer time period?

Mr. WINSLOW. The court ruling didn’t say 1 year. It just said
that they were bound by the filing deadlines in the contract. We
would want to clarify that the Federal Government shouldn’t be
bound by those.

Mr. CarDIN. Would not be bound at all?

Mr. WINSLOW. Would not be bound by them.

Mr. CaRDIN. You don’t want any of the contractual limitations to
apply? You don’t want to put a limit on what those contractual lim-
itations could be?

Mr. WINSLOw. Right, because, for example, the data match takes,
I think my colleagues were saying, 2 years.

Mr. CarDIN. at are your limitations now? If you don’t have
contractual limitations, what would the limitations be?

Mr. WINSLOW. I really can’t say for sure. I am sure there is a
statute of limitations, perhaps, but I don’t know what it is.

Mr. CarDIN, I think it would be useful if we knew what that lim-
itation was. If you are asking us to eliminate any contractual re-
strictions, we should know what the limits are.

Mr. WINSLOW. I will be glad to get back to you.

Mr. Carvin. I can understand that this just occurred and you
don’t have a specific bill before us.

On the second point, you would want the ability to go against the
organization rather than against each employer, is that what you
are basically asking?

Ms. Jaccar, The third party administrators pay claims for a
number of individuals, for a number of employers. For HCFA to go
to each individual employer to try to get those recoveries would Be
extremely costly and time consuming and be a big burden on it.

Mr. CarDIN. I would think that your point there is very well
taken, and we would like to see the specifics there, also.

The chairperson is not only chairing today’s hearing, but she also
chairs our Oversight Subcommittee, and this question may be bet-
ter suited for that subcommittee. I can appreciate the importance
of the match program. It does bring in moneys to the Federal
Treasury.

You brought in, I think, $400 million, you indicated, over a pe-
riod of time, and it cost $100 million to recover. That seems like
a large overhead cost, $100 million for $400 million. We don’t want
to lose $300 million, but it seems to me that it is an expensive col-
lection process.

Ms. JAGGaR. Perhaps I could clarify that. In fact, $1.6 billion in
repayment demands have been made and $400 million has been re-
turned, but because of this court case or for any number of other
reasons, it may well be that insurance companies were, in fact,
waiting to see whether they would have to return that money.

So I don’t believe that it is possible yet to say exactly what the
administrative costs are. In addition, those administrative costs
cover the activity that allows for cost avoidance. That is the identi-
fication of individuals who have this insurance coverage. Essen-


39

Ms. STEELMAN. Clearly, Medicare ought to try to get to a price
level, inflation level, more like the private sector. That is how I
concluded my opening testimony. I think there is a way you can do
that, and it is called an open integrated bidding system, or a
voucher-type system. That is how you get to that price.

In the private sector, one of the things that has helped the cost
crash that has occurred over the last 5 years is fully integrated sys-
tems. You used to have this fee-for-service, unsupervised, things
happening all over the place. Now you have an integrated system,
where a hospital bid for a bed day is part of an integrated bid,

In Medicare, of course, Medicare is an extremely fractured pro-
gram. What you do in part A pushes out into part B, as we talked
about earlier in terms of the premium and the dollars and the flow.
What you price for an inpatient bed is different than what you
price for an outpatient bed is different than what you price for this
or that or the other.

For Medicare to succeed in getting the same prices that the pri-
vate sector gives, Medicare has to adopt the tactics and the tech-
niques of the private sector, and that means an integrated bid.
Clearly, if you gave beneficiaries a voucher or a certificate, however
you want to do it, and said to the beneficiaries, here is an amount
of money. Go out into the private sector and see what kind of a bid
you can get, or if HCFA conducted a bid process, there is no ques-
tion that prices would fall and bids would fall and that Medicare
beds would cost the same as private sector beds.

But you can’t simply march in and say, let us have an all-payer
system for the whole United States that isn’t just as countercyclical
and just as regulatory and just as confusing as the current Medi-
care system.

To get that kind of price, you have to move away from the way
Medicare prices today and go into a new structure, and I think it
can be done fairly easily.

Mr. CHRISTENSEN. Th subcommittee, a couple weeks ago, we
heard, Mr. Vladeck never did really give us a very good reason why
Medicare Select should not been extended.

It is my opinion that Medicare Select, in one of your points, talk-
ing about trying to open up HMOs, expanding it further, might be
the direction to go. You have had some experience in this area. Fif-
teen States currently offer Medicare Select. I think only one has
pulled out of that.

What is your feeling as far as extending it permanently and of-
fering it throughout the whole country?

Ms. STEELMAN, There is no question Medicare Select is a great
idea and a way for a beneficiary to rationalize their economies in
their retirement years. Right now, as we have already talked
about, the beneficiary has to pay about $520 on a part B premium,
at least $700-plus on a part A deductible, probably $700 to $1,200
for a Medigap plan. We ought to be able to give the beneficiary a
way to rationalize and reduce those expenditures.

That is what Medicare Select does. Medicare Select allows the
beneficiary to buy one product, get everything covered at an inte-
grated, discounted rate, and save some money and get some extra
benefits. That is a step on the road directly to the kind of program
that Medicare to has become. The HMO risk contract law is one


64

Chairman THomas. Thank you.

I mentioned earlier that the President’s budget contains three
provisions which are extenders in terms of a kind of cost contain-
ment, at least, a modest cost containment. In your opinion, Mr.
King, does this have any impact on the budgetary concerns? Do we
buy 1 year? Do we buy 2 years? Do we buy anything with the
President's proposal?

Mr. KING. The proposals that are in the President’s budget will,
at most, increase the life of the trust fund by several months.

Chairman THOMAS. Several months?

Mr. Kine. That is right.

Chairman THoMas. Mr. Myers, you commented about the fun-
damental difference between part A and part B, and, of course,

art B is general revenues, approximately 75 cents of every dollar.
Why do we rely so heavily on the general fund of the Treasury for
this particular program? Was there a historical reason?

Mr. Myers. Yes, there was, Mr. Chairman, and it occurred in
this very room. When part B, which had not been proposed by the
Johnson administration, was adopted, as a result of Congressman
John Byrnes pushing for something like this to the program out,
it was thought that it should be on a voluntary, individual basis.
The question then arose, could you charge a uniform premium rate
and could it be paid all by the enrollee? The answer was, “no,” be-
cause the good risks, the low-cost risks would not participate, and
the high-cost ones would, so there had to be some other source of
financing.

I was asked by the committee about this, and it was my opinion
that roughly 50:50 cost sharing would do the job. In other words,
if the general fund paid 50 percent, it would be a good buy for even
the healthiest person aged 65 and over. Therefore, there would be
no anti-selection against the program. Everybody would have an in-
centive to come in it.

That 50:50 basis worked for a while, but then the premium rates
started rising faster than the cash benefits did, which only went up
at the rate of the consumer price index, roughly. It was decided
that the premium rate for the enrollees should not rise more rap-
idly than the CPI, and as a result, the share of the general fund
increased steadily until it approached 75 percent.

At that point, it seeMevieare ato Congress that that level is
about as far as it should go, so we have had these artificial limits—
not meaning this in a bad sense of the term—that the enrollees
should pay at least 25 percent of the cost. That is one of the ex-
tenders in the President’s budget proposal.

So it was purely an accident of history that we went to this 25-
percent figure from the original 50-percent basis.

Chairman THomas. So as the cost went up, instead of trying to
change the program or relationships, you just began to dip into the
general fund to make sure that the individual recipient didn’t pay
more than whatever a “fair share” amount should have been?

Mr. Myers. Yes.

Chairman THomas. And when it began, it was a 50:50 fair
share?

Mr. Myers. Yes, Mr. Chairman. There was a good reason for the
50:50 basis, so that everybody at least got their money’s worth.


148

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35

Chairman THomaS. I thank both of you very much for a dis-
course in which you have obviously spent a lot of time and you
have a lot of knowledge.

Mr. Ensign will inquire.

Mr. ENSIGN. Thank you, Mr. Chairman.

Ms. Steelman, people say that Medicare has worked well for the
last 25 years. Why won't it work well for the next 25 years?

Ms. STEELMAN. I am not sure Medicare has worked well for the
last 25 years. Obviously, the program was designed with a need in
mind and on a stable financing structure. Over time, over the last
25 years, nothing in this country has stayed the same, especially
not in the delivery of health care in the private sector.

The next 25 years for Medicare aren’t so much a matter of mak-
ing it stay the same as making it work well, and to do that, we
have to get away from the kind of proposals that we have ad-
dressed here over the last 15 years, which are purely price cuts.
and we have to talk about what is really going on in Medicare and
how to make Medicare work better, how to make it secure for peo-
ple, how to make sure it is there for all beneficiaries.

The obvious thing is, the place we are not controlling Medicare
costs is in volume. The cost of Medicare goes up in three ways, the
number of people in the program, the price of the services, and the
utilization of the services. lization has gone through the roof in
the last 15 years, unlike in the private sector, where tools are now
routine to get that under control. Those are the kinds of things, I
think, we need to do to make sure the program is there for the next.
25 years and continues to work well, even though the guts of the
Program, obviously, have to work differently.

r. ENSIGN. When you are talking about the increase in volume,
a lot of people say that we are talking about rationing in cutting
down the amount of volume. If, in fact, we are talking about trying
to decrease the volume, how do we allow the patient to make those
choices instead of the government?

Ms. STEELMAN. Volume is not the same thing as rationing at all.
Rationing gives the connotation that a needed service will not be
provided. In health care, we have learned a lot over the last decade
in the private sector on how to make sure needed services are pro-
vided and unneeded services are not provided. That is the basic les-
son Medicare has not accommodated.

Mr. ENSIGN. Mr. Scully, if we move all these seniors into the pri-
vate plans and managed care, how do you avoid the cherry picking
or risk selection in these plans?

Mr, ScuLLy. I would anticipate that Mr. Stark and others would
bring that up. I think if you go to a more private sector-driven,
privatized Medicare system, where people choose private plans, the
single biggest problem you are going to have is risk selection.

We have been looking at that for 4 or 5 years. We did a very
large study on that in the Bush administration. I know that the
Ways and Means staff has looked at it. 1 know HCFA has looked
at it. There is no perfect answer for risk selection and that is one
of the problems in HMO risk contracts now.

I personally believe there are ways to get at it. If you are going
to look at a structured system that is a model for it, either FEHBP
or a privatized Medicare system where the Federal Government



67

TABLE 5. LIFETIME MEDICARE BENEFITS, TAXES, PREMIUMS, AND
TRANSFERS
(in thousands of constant 1993 dollars)

PERSONS TURNING 65 IN 1995
Single Male | Single Female |  One-earner Two-earner
couple couple
BENEFITS 5.0 110.7 185.7 185.7
TAXES & 34.7 45.6 59.0 68.5
PREMIUMS
NeT TRANSFER 40.3 65.1 126.7 1172

NOTE: All amounts are discounted to present value at age 65 using a2 % real interest rate.
Adjusts for chance of death in all years after age 21. “Taxes and premiums" include the
actuarial value of all employer and employee HI payroll taxes, all SMI premiums, and
estimated portion of federal income tax burden devoted to financing SMI. Projections are
based on HCFA 1993 intermediate assumptions, adjusted for the estimated impact of 1993
enactments. SMI premiums are assumed to remain tied to 25% of program costs after 1995.
Recipients are assumed to receive Medicare insurance protection, in each year after age 65,
which equals in value the average Medicare outlay per enrollee in that year. Individuals are
assumed to earn average wages for their cohort.

Source: Based on Steuerle, E.C, and J.M. Bakija. Retooling Social Security for the 2lst
Century: Right and Wrong Approaches to Reform. Urban Institute Press, 1994.



104

tially, a flag is set in the computer and then you don’t have to re-
cover because you don’t make the mistaken ayments from the out-
set. That is estimated at approximately $3 bi lion for 1994. So the
$94 million against the $400 million is not quite the full story.

Mr. CarRDIN. I appreciate that clarification. Thank you.

Mrs. JOHNSON. As you come back to us with specific rec-
ommendations, and clearly, we are all interested in that, I think
open-ended legislation is really not a good idea. We have timely fil-
ing requirements for Rood reason. But I think we could have, in
this case, the timely filing period start from the availability of the
data that you need to match and that you would have 1 year from
the time that the information was available, rather than an open-
ended opportunity to collect.

Ms. JAGGan. It certainly would be possible to narrow it to a rea-
sonable timeframe. The process is an arduous one. Once the data
are obtained from IRS and SSA, it is matched, and then letters are
sent to the employers to find out whether it was accurate. So it
takes a while, but I do agree that it wouldn’t need to be open-ended
indefinitely.

Mr. CarDIN. Would the gentlelady yield on that point?

Mrs. JOHNSON. Yes.

Mr. CarDIN. I think it is important that we nail down a specific
time period. That is why I would like to know what the general
limits would be.

It is clear that contractual time limits make very little sense for
the work that you are doing. That is a contractual limit between
the policyholder and the company and it relates to what the policy-
holder should know. You don’t know that until you get the informa-
tion. So, clearly, the interpretation of the court is not acceptable for
purposes of what we are trying to do and collect under Medicare.

But I do think it is important to come up with a limitation that
is reasonable and not to keep it open-ended, so that we are fair to
the agency but also fair to the company.

Ms. JAGGar. We thought it was important to bring to your atten-
tion because it is so much money. Of course, there is a question,
ultimately, of whether past collections would have to be returned,
and there is some issue associated with that. So it is a significant
amount of money.

Mrs. JOHNSON. We certainly would want to clarify all those
things, but recognizing the pressure which we would be under re-
gardless who is in control, these are the kinds of things that you
can do in fairness to all, the taxpayers, the beneficiaries, and the
government. We do need to clean up this act, and it is a legitimate
thing to try to do in the very near future. Any help you can give
us and send that word back, between GAO and HGRA, we ought
to be able to fix this.

Mr. CarDIN. We could have a problem on retroactivity, so you
probably would want to get something to us as quickly as possible.

Ms. Jaccar. Yes, sir.

Mrs. JOHNSON. Thank you. We look forward to working with you.

Ms. JaGcar. Thank you.

Mrs. JOHNSON. The earing is adjourned.

[Whereupon, at 1:07 p.m., the hearing was adjourned.]

{Submissions for the record follow:]


126

‘Average real after-tax earnings is intended as a measure of the average “privately
consumable” purchasing power of worker earnings. It does not include everything that
contributes to every worker's living standard. Some contributions -- such as dividends and
interest, goverment benefits and services, and employer-paid fringes -- are left out. It
does, however, encompass all of the “eared” resources over which most Americans can
exercise personal control. As such, it constitutes a time-honored political and cultural
standard by which most Americans have always judged whether they are “doing better" or
achieving the “American Dream.”

Assumptions

Wherever possible, the model relies strictly on the SSA and HCFA scenarios for all
of our quantitative assumptions.” ‘These include future economic data, such as GDP,
inflation, labor productivity, total compensation, and earnings. They include future

ic data, such as future employment and hours worked. And they include all future
dollar outlays for the two of the three of the major programs in question: Social Security
(OASDI) and Medicare (HI and SMD).

To derive after-tax earnings continuously into the future, certain assumptions were
in addition to those provided by SSA and HCFA. Most of them are not only
plausible but even conservative:

1. When the OASDI or HI trust fund goes bust,” it immediately switches over to
ure "pay-as-you-go" financing. In other words, the model assumes that Congress
-- during the year in which OASDI or HI reaches its projected bankruptcy date -~ will
immediately raise the program's earmarked payroll tax so that total revenues equal
total outlays for that program. Each year thereafter, payroll taxes will be readjusted
so that program balance is exactly maintained (and the trust funds remain empty).
Given the historical “self-funding” tradition of OASDI and HI -- and absent any
changes in benefit policy -- this appears to be what is intended by current law.

2, Any increase in any payroll tax rate on employers will come at the expense of
worker earnings. According to standard economic analysis, the only other place it
could come from would be employer-paid benefits. But these benefits are too small
to absorb more than a tiny fraction of the increase. Moreover, since they are
generally tax-exempt, they will tend to grow, not shrink, in an environment of steady
payroll and income tax hikes. Our modest compromise: To assume that projected
employer-paid benefits remain unchanged in both scenarios -- and thus to require that
the full payroll tax hike be bome by earnings.

3. SMI will continue indefinitely to receive premium income from beneficiaries
equal to 25 percent of gross SMI outlays. OBRA 1993 specifies that SMI
premiums be pegged at roughly 25 percent of gross outlays through 1998; the model
assumes that ratio remains unchanged. (Note that SMI outlays refer to ner outlays,


45

trimming their own utilization, and yet find some mechanism to
adjust so that government or insurance companies, don’t get stuck
with all the bad risks.

Ms. STEELMAN. I should say, I don’t even think managed care
has finished evolving and that managed care will find a connection
with higher deductibles or Medisave-type ideas.

In managed care, one of their chief problems, obviously, with
first-dollar coverage, is utilization for unnecessary cuts and bruises
or things that you should have stayed home to take care of. So I
think we will see a marriage over time. I don’t think the market
is anywhere close to being fully evolved. As the chairman indicated.
we have to make sure that none of these options are prejudice
until we see how beneficiaries direct things.

Mr. McCrery. Thank you, Mr. Chairman.

Chairman THOMAS. To conclude the second round, the gentleman
from New York, Mr. Houghton.

Mr. HoucutTon. No questions, Mr. Chairman.

Chairman THOMAS. Mr. Stark, for a second bite of the apple?

Mr. Stark. Thank you, Mr. Chairman.

I just want to make a few attempts to straighten out the spin,
at least, on the record. In the last decade——

Chairman THOMAS. The gentleman’s time has expired. [Laugh-
ter.

Mr. Stark [continuing]. From 1984 to 1993, the growth in hos-
pital and physician expenditures per enrollee were lower for Medi-
care than they were with private health insurance, both for hos-
pitals and physicians.

Second, I know that both the witnesses know this and even the
Higgins analyst for the recent study that has been touted for the
lower costs have warned us, don’t get too optimistic, because what
they basically know is that a shift to managed care or HMOs gives
you a one-time savings, and that as far as we know and any evi-
dence points out, there is no follow on and that costs after the one-
time savings continue to increase as rapidly as the average.

Third, I have nothing against Medicare Select except that we
have found that the growth of managed care plans in the unregu-
lated atmosphere of Medicare have led to a lot of gouging and
deaths in low-quality care.

Prudential, for example, has stolen $3 billion from its customers
and has been indicted and convicted of felonies and fined over $300
million. I would say, are those the people you want to run your
health care program?

Humana, in a recent HCFA study, is shown to have four or five
times the number of reverse complaints, where people have asked
for medical care, Humana has denied it, and it has been reversed
by HCFA.

Most recently, in December 1994 in the Sun Sentinel, they have
run their third exposé of the HMO systems. The national search for
a workable, efficient health care system looked to Florida’s HMO
system as a role model, and something was wrong, terribly wrong.

hey have had a five-part series. They say the basic idea was
sound, but the fact is that they found enrollment fraud, inadequate
medical services, rampant profiteering by promoters who took ad-
vantage of the dearth of legislative regulation.


87

Chairman THOMAS. Thank you very much, Ms. Lamm.
Mr. Hewitt.

STATEMENT OF PAUL S. HEWITT, EXECUTIVE DIRECTOR,
NATIONAL TAXPAYERS UNION FOUNDATION

Mr. Hewitt. Thank you, Mr. Chairman.

The National Taxpayers Union Foundation and our sister organi-
zation, the National Taxpayers Union, have been trying for years
to draw attention to the need to stem the runaway cost of the Med-
icare program. We appreciate, at long last, that some policymakers
are listening, but we note that President Clinton is not among
them. His budget seems to suggest that the hospital insurance pro-
gram can continue running on autopilot. And that, clearly, is
wrong.

The system’s problems are extraordinary. Exploding costs threat-
en to impose unthinkable debt and tax burdens on our children.
Past efforts to contain costs through capitated payment schemes
are creating a two-tiered health system in which some providers no
longer accept Medicare patients. These same measures are shifting
enormous costs onto private payers, which, in turn, provide fuel for
the administration’s misguided efforts to enact national price con-
trols, and to nationalize the health insurance system.

Mr. Chairman, we believe that Medicare’s problems are solvable
without higher taxes and without bigger government. But to
achieve these ends, Congress will have to bite the bullet. You will
have to tell today’s elders that Medicare, in its current form, can-
not be saved. You will have to insist that some beneficiaries, main-
ly the well-off, get less. And to those of us who are not yet retired,
you must make it clear that, if we expect to have the very best
medical care money can buy, we will have to save more toward that
cost ourselves.

In their most recent actuarial report, the Hospital Insurance
Trustees painted a very bleak picture. They predicted that the sys-
tem’s trust fund would go bankrupt at the turn of the century, pro-
vided that we can avoid a recession in the meantime. HI at ‘eady
costs more than its 2.9-percent payroll tax brings in, and, in this
way, is adding billions to this year’s budget deficit.

As a percentage of the wage base, HI surpassed 3 percent of pay-
roll in 1992. By the year 2000, it will be close to 4 percent. By
2040, as my grandchildren enter the labor force, HI is projected to
claim somewhere between 9.6 and 18.5 percent of payroll—and I
would refer you to Mr. King’s testimony in which, he said that 9.6
percent was very optimistic.

Together with Social Security and other health entitlements, HI
will create enormous pressure for higher taxes. By 2040, the Social
Security and Medicare programs alone are projected to cost be-
tween 35 and 55 percent of taxable payroll—35 percent is the opti-
mistic number—up to four times their current combined tax bur-
den. If it is the latter, the take-home pay of the average American
worker will decline by 59 percent from today’s levels. Even if eco-
nomic and demographic circumstances turn out to be very favor-
able, the living standard for the average working family in 45 years
will be no better than it is today.


8

aged care, that cost shifting is rapidly disappearing. There is not
much opportunity to do it anymore.

I think if you go and ask your physicians or hospitals what their
various rates are on Medicare versus private payers, the private
payer side has been pretty significantly squeezed the last few years
and there just isn’t any cost shifting or is not much cost shifting
left to do.

So can you save? Yes, I think you probably can save some money.
Can you save the $100 to $150 billion over 5 years that many on
the Republican leadership have said you can save? You can try, but
I think you are going to have a massive meltdown all across the
health care system if you try to take that kind of money out of it.

As I mentioned in my written testimony, I think if you get that
kind of level of cuts, you are going to have the same kind of reac-
tion that we had in the catastrophic in 1989. You can take mone:
out of the system, but if you want your seniors, your hospital ad-
ministrators, your patients, and your physicians meeting you at the
airport every Friday, very unhappy because the health care system
is melting down, at that level of cut, I think that is what you are
going to get.

I think, realistically and objectively, if you look at the last two
big budget deals we had, the 1990 budget deal, which I was very
involved in negotiating, along with Mr. Stark and others on the
committee, that budget deal, the original conference report came
out of the conference with $56 billion in cuts over 5 years. The
major reason that failed was because now Speaker Gingrich, along
with a number of other members, thought the Medicare cuts were
too big, and they were scaled back to $43 billion.

That bill very barely passed, and the single most controversial
issue in that bill in the 1990 budget agreement, other than the tax
increases, was Medicare cuts. So it wasn’t pleasant to cut $43 bil-
lion out then.

In 1993, the level of cuts in President Clinton’s budget package
was $56 billion, and that was highly controversial. There wasn’t a
single Republican vote for that package. Those votes were largely
against taxes, but I think the second most controversial issue in
that package was Medicare cuts, $56 billion. They were perceived
as being rather large and rather painful.

So when you look at taking much bigger numbers out. this year,
Medicare inflation, health care inflation is much, much lower. The
baseline is lower. The pot is smaller. You are talking about taking
somewhere between three and five times as much money out of the
system as anyone has ever tried before, from a system that is grow-
ing more slowly, the baseline is not as fat, and the cuts are much
more painful.

Obviously, if you are going to take money out of the system, can
you find ways that reasonable budget targets and reasonable

ealth care policy can meet and we can all find results that we can
live with? I think there probably are. I happen to believe there are
a lot of different ways to do it. I am sure we will discuss them this
morning in medicheck or privatizing or voucherizing the system. I
happen to believe, and our hospitals happen to believe, that
privatizing the system can save a lot of money and get rid of a lot
of the perverse incentives that exist in Medicare now.


MEDICARE PROVISIONS IN THE PRESIDENT’S
BUDGET

THURSDAY, FEBRUARY 23, 1995

House OF REPRESENTATIVES,
CoMMITTEE ON WAYS AND MEANS,
SUBCOMMITTEE ON HEALTH,
Washington, D.C.
The subcommittee met, pursuant to notice, at 9:33 a.m., in room
1100, Longworth House Office Building, Hon. Bill Thomas (chair-
man of the subcommittee) presiding.
[The advisory announcing the hearing follows:]

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42

of the money back in savings, and I think that is the real missing
ingredient that has kept seniors, in my opinion, from voluntarily
choosing managed care a lot more aggressively.

Mrs. JOHNSON. Is there any problem in your mind, since we are
only at the yellow light, between allowing seniors to get a discount
back and still being able to have the oversight capability to assure
that they do get the full bundle of Medicare benefits? Is that going
to be difficult?

Mr. ScuLLy. I don’t think there is a problem there. I think if you
went to a pure voucher system, which I, personally, do not think
is a good idea, right off the bat, where you gave every senior a
voucher to go out and buy whatever they want, you might have
that problem. But if you have an FEHBP-like system where, say,
in Hartford, you went out and had 10 or 11 or 12 HCFA-certified
contractors initially going in, obviously, you would have fairly tight
oversight over what they offer and an ability to make sure you
have a range of products offered to seniors that gave them a choice
of everything that you have as a Federal employee.

Mrs. JOHNSON. Thank you.

Ms. STEELMAN. But even today, I think it would be fairly eas
to structure a rebate to a beneficiary in their Social Security checl
right off the HMO risk contract system. Right now, the part B pre-
mium is, of course, deducted from your Social Security check. It
shows up, $46.10. Right now, the HMO only has the opportunity
to build on benefits. If we structure a way that the HMO can route
that money back through the government to a rebate in the Social
Security check, you haven’t changed anything about current law in
terms of oversight or quality or anything else. You have simply
given the beneficiary a tool that they can use to make sense.

Chairman THOMAS. Mr. McCrery.

Mr. McCrery. Thank you, Mr. Chairman,

I thank both of you for joining us today. I don’t really have any
more questions that I want to ask right now, because I am afraid
of what you will say, but I do look forward to both of you contribut-
ing to our discussions. We are just starting this, as you know, and
it is going to be a while before we reach any conclusions, so we will
have more opportunities to get together and talk.

Again, thanks for coming today.

Chairman THomas. Thank you.

Let me ask you a question. In looking at Medicare as a nation-
wide structure and looking at the way in which managed care has
caught on, that is, it tends to be coastal and in particular areas,
it is clear that if we try to move Medicare into a managed care
structure, in some areas, it will be a “follower.” In other areas, it
will be a “leader,” in the Midwest, in certain areas.

Does that cause us some concern in trying to create a national
program, or should we begin looking at ways in which we can re-
gionalize it or create opportunities to let it follow more of the lead
of whatever the health care direction is going in a particular area?
Is it old fashioned to talk about a fundamental national program?

Mr. ScuLLy. No. For instance, it will probably surprise you, most
of the hospitals I work with are not wild about managed care. I
don’t necessarily look at this as moving to managed care. I look at
it as moving to privatization. Up in Bakersfiel , I am sure that


73

ple, those who are near 65 and are healthy, would not have joined
the plan. They would have said, “We will wait until later,” so there
would have been antiselection, and the cost would have been much
higher than if everybody were in the plan, either compulsorily or
if all elected to come in.

So some proportion of the cost had to come from somewhere else
if you were going to attract the vast majority of the people to par-
ticipate. The only place that could come from was the general fund.
Unfortunately, over the years, that 50 percent has deteriorated to
the present 25 percent because of a provision that was put in the
law to say that the premium rate per enrollee should not rise more
than the consumer price index.

So, that was the basis for it. In other words, if you had a vol-
untary program, you had to make the rate attractive for everybody,
including the most healthy people.

Mr. CHRISTENSEN. Thank you.

Thank you, Mr. Chairman.

Chairman Tuomas. Mr. Crane.

Mr. CRANE. I have no questions.

Chairman THoMaSs. Mr. Houghton.

Mr. HOUGHTON. Very specifically, you have indicated that in
order to keep this fund solvent, and with no dramatic differences
in usage and cost, that you would have to have about a 52-percent
increase as far as your rate is concerned. What would that mean?
We now have a 15-percent shared rate as far as our FICA taxes.
What would that do to the FICA taxes over the next 25 years?

Also, if you could take it another step beyond that, because you
said there are going to be even greater problems. What are we talk-
ing about? What is the range?

Mr. Kinc. The FICA tax is currently 2.9 percent-—

Mr. HouGuTon. So you are increasing that by half?

Mr. Kinc. Yes, so that would be an additional 1.45 percent of
taxable payroll.

Mr. HouGHTON. So you are getting up to around 20 percent as
far as your FICA taxes, then, is that right? Then what about be-
yond that?

Mr. KING. By the middle of the next century, the tax rate would
have to triple, so that instead of being——

Mr. HoucuTon. In addition to the 52 percent, you are saying——

Mr. KING. No. This is—

Mr. HoucHTon. Including that 52 percent?

Mr. KING. Yes. So instead of being the 2.9 percent combined that
it is now, it would have to be around 8.7 percent.

Mr. HOUGHTON. Thank you very much.

Thank you, Mr. Chairman.

Mr. Myers. If I might say, just looking at it on the surface, if
this were done all of a sudden, it would be unbearable. But I think
that it can be done if the increases in the tax rate is graded in
slowly over the decades.

I think one thing that must be kept in mind is these costs are
going to be there anyhow. I think it is better to meet them through
a directly visible payroll tax than to have them come out of general
revenues for Medicaid.


82

Testimony of Heather Lamm, National Policy Coordinator for Third Millennium,

before the Subcommittee on Health of the Committee on Ways and Means

Thursday, February 23, 1995
1100 Longworth House Office Building

Thank you Mr. Chairman and members of the Committee for inviting Third
Millennium to participate on this distinguished panel. My name is Heather Lamm. | am
the National Policy Coordinator for Third Millennium. Mr. Chairman, the question
before us this moming is not whether or not the Medicare program will become insolvent.
The facts speak for themselves. From Alan Greenspan to the Congressional Budget
Offfice to the Public Trustees of Medicare.- the experts agree that Medicare is on a six
year collision course with bankruptcy. By 2001, the Medicare Part A Trust Fund is
projected to simply run out of money. As one of the nation's fastest growing Federal
program, we are already feeling the impact of Medicare's deficits. The actual point of
bankruptcy for the program may be six years off, but it is draining our country's resources

today.

Thus the question before us is when and how we act to change the course of
Medicare. If this Congress acts soon. the changes can be relatively incremental and

minor. But if Congress waits. the solutions, out of necessity, will be Draconian.

I come before you as a member of a group of people born after 1960 who are
concemed about the future of America. Third Millennium's mission is to convince our
nation and its leaders to begin looking beyond the next election cycle, and toward the
next generational cycle. The issue before us today is not about what size piece of the

American entitlement pie one generation gets compared to the next. It is not about


MEDICARE PROVISIONS IN THE PRESIDENT’S
BUDGET

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

FEBRUARY 23, 1995

Serial 104-31

Printed for the use of the Committee on Ways and Means

a

U.S. GOVERNMENT PRINTING OFFICE
90-602 CC WASHINGTON = 1996

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

ISBN 0-16-052389-3



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131

As for the additional assumptions needed to complete analysis presented here, these are
either uncontroversial, have limited impact on the quantitative result, or both. Yes, economists
can quarrel over the “true” incidence of taxation on labor and capital. But few economists
would contest the basic thrust of our approach -- that, in a long-term equilibrium framework,
most taxes are borne by workers. True, the "balanced budget” proviso may seem heroic. But
even if one rejects the argument that a balanced budget is necessary to achieve the projected
productivity performance, the goal remains so universally popular that few political leaders
would want to plan a long-term future without it.

Some conservatives may object to the assumption that discretionary spending stays
constant as a share of GDP. But in the realm of what's likely, three stubborn facts remain.
First, no lawmaker (Democrat or Republican) has yet devised a plan that balances the budget
for even a single year through discretionary spending reductions alone.” Second, conservatives
themselves remain profoundly conflicted about long-term spending priorities. In some well-
known areas of the budget, they want to cut; but in others (from military preparedness to
immigration control to crime fighting) many look forward to spending more. Third, much "rest
of government” spending is going to be enlarged by the same demographic and health-care
multipliers that are projected to hit the three largest senior programs. Lives are getting longer
for public-sector pensioners as well as Social Security retirees. A low-income Alzheimer victim
typically needs special social services as well as Medicaid. Health costs are rising at VA and
military hospitals as well as among patients with Medicare cards. It is reasonable to assume that
the same political consensus that sustains the major entitlement programs will also support
continuance of other health and aging services.

Meanwhile, of special concern to conservatives should be the virtual certainty, in the
absense of serious entitlement reform, that the total tax rate on worker compensation will have
to rise sharply early in the next century. It is a basic tenet of "supply side” economics that
lower tax rates boost economic growth -- and likewise, that higher tax rates suppress economic
growth. It follows, therefore, that scenario I! is internally inconsistent: How can our economy
possibly improve its productivity growth performance (with or without a balanced budget) while
raising taxes? Indeed, if the large tax increases envisioned in scenario II depress economic
growth to the level envisioned in scenario Il, the result will be even higher tax rates, which may
make even scenario [If unattainable -- and so on.

The practical bottom line of our analysis speaks for itself. America’s political leaders
cannot continue in good faith to advocate balanced budgets, tax cuts, and leaner government --
to say nothing of defending the long-term viability of the American Dream -- without also
talking about major, structural reforms in “untouchable” senior entitlements. Everything must
be on the table.

Yes, touching the untouchables is politically dangerous. Any leader who brings up the
subject of Social Security or health-care for the elderly had better be ready to discuss such gut-
level issues as early retirement, “spending down" for Medicaid, the function of the extended
family, second liver transplants versus student loans, Lee lacocca's Social Security check, who


159

STATEMENT TO THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HEALTH

Subject: Hearing held on February 23, 1995 on the failure of
the President's fiscal year 1996 budget proposals to address
the pending insolvency of the Medicare trust fund.

Person, submits ing statement
Geral

Il Shore Acre Drive
Old Greenwich. c? 06870

Capacity

Retired citizen, age 78, with 30 years experience in health
ansurance management with The Guardian Life insurance
Company of America

Representing
Himself only

With respect to Part A, the hospital deductible and co~
payments are already indexed annually. 1 see no benefit
pattern modification that would be helpful in saving money
and practical to administer. The hospitals have been subject
for years to price controls that ensure that they will care
for Medicare patients at a loss which is then shifted on to
othey patients and their insurers. There is no profit in
further squeezing the hospitals and their patients. That
leaves means testing.

The professional advocates for the elderly keep
trumpeting the fallacy that " You paid for these henefits and
earned them. Don't let the Congress take them away from you."
To be fair, much of the blame for that misunderstanding ies
at the door of Congress, which made that sort cf assertion
for years in its determination to capture the elderly vote.
But it was never true, never intended to be true, and is now
a complete falsehood of which the organized advocates should
be ashamed. T am sure they know the truth!

Nevertheless, regardless of how many advocates foo tie
elderly descend on the hearings bearing petitions au pleas
to Congress tu “save medicare” or “save Social Sec
action must be taken soon, and the longer st is delayed ‘i
worse will be the pain when the problem is finally fa

The working population can no longer be

all the cost of Medicare for those of us who
beneficiaries. Those of us who can must also azcept sur
share, And Congress should keep in mind that thero arz vary
more of them than there are of us!

It seems to me that a reasonable approach would be to
make a charge, deductible from Social security monthly
pension benefits like the charge for Part B, to people wito
can afford it. It could be levied on taxable incomes of, for
example, $40,000 or $50,000 or more and perhaps graded up
somewhat for those with taxable incomes exceeding $100,000
$150,000 and $200,009.

Charges could be made for Part A, and perhaps higher
charges for Part B also if they are needed, And at that
level, the impoverished elderly and the lower income halt of
the "middle class” would escape must of it. if taxable
incomes would be too difficult to keep track of, adjusted
gross incomes could be used, beginning at somewhat highes
levels, Consideration could be given to higher income floors
for couples

ie)




ims

109

Atlachment B
MEDICARE DEPENDENT HOSPITALS
Based on 1992 Medicare Cost Reports
Medicare Percent of Total Patients §0- 65% 65% andover Total
Number of Hospitals 512 918 1430
Rural Hospitals with 0-99 beds' 208 555 761
Urban Hospitals and Rurals with over 100 beds? 306 363 669

The rural hospitals with 0 to 99 beds have previously qualified for a special adjustment,
based on their dependence on Medicare, if they had a minimum of 60% Medicare patient
days or inpatient revenues. This adjustment expired in September 1994.

This group has never received any adjustment in recognition of their Medicare dependent
status. The former smallrural adjustment was based on these hospitals showing lower
Medicare margins. Most recent reports from HCFA and ProPAC now show performance
for rural and urban hospitals to be basically equal.

Doe #2086


30

CHART 7

Figure 4. Average Annual Growth Rate of
Real Per Capita Medicare and Personal
Health Care Spending, 1970-1993

Percent

8%

7%

6%

5%

4%

3%

2%

1%

0% as
Sru-iyi> 1p s0-L¥dU 1981-1985 1986-1990 1991-1993

Source: Figure prepared by CRS, based on National Health Expenditure data, Office of the
‘Actuary, Health Care Financing Administration
NOTE: All real expenditures calculated using implicit price deflator for GDP


89

Statement of
Paul S. Hewitt
Executive Director
National Taxpayers Union Foundation
before the
Committee on Ways and Means, Subcommittee on Health

February 22, 1995

Mr, Chairman, members of the Committee, thank you for
inviting me to testify on behalf of the National Taxpayers Union
Foundation concerning the Medicare provisions of the President's
fiscal 1996 budget proposal.

NTUF and its 300,000 member sister organization, the
National Taxpayers Union, have been trying for years to draw
public attention to the need for fundamental reforms to the
Medicare program. We very much appreciate that, at long last,
some policy makers appear to be listening. But we are sad that
the President still is not among them. From what we can see, his
budget seems to suggest that the system can continue running on
autopilot. And that clearly is wrong.

Medicare's problems are extraordinary. Exploding costs --
under both the Hospital Insurance and Supplementary Medical
Insurance systems -- threaten to impose unthinkable debt and tax
burdens on our children, Past efforts to contain costs through
capitated payment schemes are creating a two-tier health system,
in which some providers no longer accept Medicare patients.
These same measures are shifting enormous costs onto private
payers, which, in turn, fuels the administration's misguided
initiative to’ institute national price controls.

Mr. Chairman, we believe that Medicare's problems are
solvable without higher taxes or bigger government. But to
achieve these ends, Congress will have to bite the bullet. You
will have to tell today's elders that Medicare, in its current
form, cannot be saved. You will have to insist that some
beneficiaries, mainly the well-off, get less. And to those of us
who are not yet retired, you must make it clear that, if we
expect to have the best medical care money can buy, we will have
to save more toward the inevitable costs of our own old age.

Hospital Insurance

In their most recent actuarial report, the HI trustees
painted a bleak picture, indeed. They predicted that the
system's trust fund will go bankrupt at the turn of the century -
= provided, of course, that we can avoid another recession in the
meantime. HI already costs more than its 2.7 percent payroll tax

brings in -~ and in this way it contributes to this year's
unified budget deficit. As a percentage of the wage base, HI
surpassed 3 percent of payroll in 1992. By the year 2000, its
cost will be close to 4 percent. By 2040, as my grandchildren
enter the labor force, HI is projected to claim somewhere between
9.6 percent and 18.5 percent of payroll. "

Together with Social security and Part B of Medicare, the
program will create enormous pressures for higher taxes. ‘By
2040, these three programs are projected to cost between 34.5
percent of total taxable payroll -~ or between

their current combined tax burden. If it is
the latter, the take-home pay of the average American worker will
decline by 59 percent from today's levels. Even if economic and
demographic circumstances are highly favorable, the standard of
living for the average working family will be no better in 45
years than it is today.



84

Commission on Entitlement and Tax Reform

When Medicare Part A was enacted, it was a self-supporting system. financed
solely by payroll tax contributions. Today. the average enrollee pays only about 32% of
the cost. As a result. the average enrollee collects benefits equaling approximately three
times the amount contributed during his or her working life. The Medicare Part B
program has undergone similar changes. When Medicare Part B began. the enrollee and
the Federal government each paid 50% of costs. Today. the Federal government pays
70% of Part B costs, and that share is projected to increase to 92% by 2030. To address

these inequities, Third Millennium advocates the following:

© Comprehensive means-testing of Medicare

© Adding a graduated Part A premium for beneficiaries with incomes above 150% of

poverty.

© Indexing the Part B premium to program costs to maintain the 30% share of the costs

currently paid by enrollees.

© Raising the Part B deductible from $100 to $300 and indexing it

© Adding a 20% coinsurance payment for clinical lab services and home health care

services costing in excess of $10.

© Reducing Medicare Provider Payments

In addition, to adapt to changing demographics caused by longer life expectancies and
the aging of the Baby Boom generation we suggest raising the Medicare eligibility age to
70. Seniors would still have the option to enroll at age 62 with a charge for early

retirement.


12

1) Punt, and scream about “protecting Medicare;”

2) Work creatively to restructure and improve Medicare, and capture the
resultant cost savings: or

3) Treat Medicare as the “Bank” for tax cuts and deficit reduction
and cut too far based on budget driven (not health care driven) policy.

Option 2 seems to be the rational course. We'd like to work with
Congress to get there. If the 3rd option prevails, I'll have laryngitis -- as
will lots of hospital administrators, doctors and patients -- long before
September.

Attachments


54

beneficiaries by introducing daily cost sharing for all days, and not
wait until the 61st day.

For part B of Medicare, I believe that certain changes should be
made to make the program less costly as a governmental program
and shift some of the cost back to individuals. I would raise the ini-
tial deductible from $100 per year up to about $250, so as to make
it comparable with what $50, the original amount, was in 1965
when the program was enacted.

Also, I think that the enrollee premium should bear somewhat
more than 25 percent of the cost. It is not possible to move it back
to the original 50 percent, but it certainly should be moved up that.
way, but, again, slowly.

I believe that these changes are feasible and affordable, espe-
cially if done gradually.

Thank you, Mr. Chairman.
(The prepared statement follows:]


96

tions, HCFA will be unable to recover on previously paid Medicare
claims, resulting in an estimated lost savings of at least $600 mil-
lion over the next 5 years.

Further, according to HCFA officials, there is now an open ques-
tion as to whether Medicare will have to refund to insurers
amounts already recovered under the data match program. As you
can see, this court ruling has serious implications for the cost of
and funding for the Medicare program.

In conclusion, Mr. Chairman, our work suggests that several ac-
tions are needed to protect the savings available under the MSP
program. First, the MSP program’s recovery efforts for previously
paid Medicare claims have been shown to be cost effective, result-
ing in $400 million in recoveries thus far. However, this effort has,
in effect, been negated by the recent appeals court ruling, and as
a result, at least $600 million of expected recoveries over the next
5 years will be lost. Legislation is needed to prevent this. We would
be happy to work with your staff to develop suggested language to
remedy this problem.

Second, we have earlier made a recommendation that funding for
what is known as the Medicare and Medicaid data bank be delayed
until its potential value and benefits can be demonstrated, and we
continue to support that recommendation.

This concludes my statement. We will be happy to answer any
questions you may have.

[The prepared statement follows:]


15

must be undertaken in an atmosphere of good faith and coopera-
tion.

The Seniors Coalition was profoundly disappointed that Presi-
dent Clinton did not provide any measure of leadership or direction
regarding the Medicare crisis in his budget for fiscal year 1996.
While extending a few provisions that were scheduled to expire in
1998, the President’s budget does nothing to change the Medicare
system, as it stands now. In taking a dive on the issue, the Presi-
dent is shortchanging Medicare of the bipartisan attention it so
desperately needs.

The Seniors Coalition urges President Clinton to join those who
are actively looking for positive solutions to ensure Medicare’s con-
tinued survival. In this time of crisis, neither party should use
Medicare as a football to score political points.

The Seniors Coalition intends to take an active role in developing
Medicare solutions and bringing them to the attention of America
and America’s seniors. Change can be an uncomfortable process,
fraught with potential hazards. But in this case, change is both in-
evitable and necessary.

Mr. Chairman, we encourage all the other seniors organizations
to roll up their sleeves and join us in the process. In tackling Medi-
care’s problems, we must be careful to avoid the wrong solutions.

The recent national health care debate was a good example of
good intentions run amuck. President Clinton was right in his at-
tempt to focus national attention on health care reform, but his le-
gitimate concern over serious medical problems that face the Na-
tion did not justify his dramatic proposal for social engineering on
a massive scale. Indeed, his plan would have created the sort of
health care crisis, particularly for Medicare, that he said he wanted
to forestall. Under any one-size-fits-all government plan, seniors
would end up with less choice and poorer care.

Some policymakers favor making deep cuts in Medicare as a sim-
ple solution. The Seniors Coalition will not accept any cutbacks in
Medicare without implementation of systems that would allow sen-
iors improved access and choice in their health care.

Amidst all this peril, we find opportunities for seniors. Real Med-
icare reform must involve financially honest mechanisms that pro-
mote choice and market competition. Medicare reform is more than
a theoretical notion. Right now, several intriguing proposals cur-
rently are in circulation and are well worth consideration.

Medicare Select. right now is before Congress. We think it should
be extended to all 50 States and made permanent. Medicare
HMOs, given the proper funding formula, have the have the poten-
tial to shave health care costs. Voucher plans should be considered.
In certain geographical areas, they can be very effective.

Without any doubt, many more alternatives will be proposed in
the coming months. We can agree to disagree on what the best ap-
proaches might be, but we cannot afford to ignore this issue an-
other day.

Mr. Chairman, thank you for bringing this matter of such impor-
tance to seniors before the American public.

[The prepared statement follows:]


36

has a relatively small group of carriers that it selects, that it basi-
call has control over the rate payment to, is probably a good
lel to figure out how to avoid risk selection.

put there is no doubt that you are going to have risk selection
problems in any kind of system that you move to in a privatized
system and there is a danger there. My view is that HCFA has the
tools to find a way to adjust the capitated payments of Medicare
now to make sure that that is limited. My view is that there are
a_lot of ways to adjust the structure of the payments to private
plans in Medicare that can improve on the current—I don’t know
if you are familiar with the AAPCC in Medicare now—that can im-
prove on the current payment system to make sure that that
doesn’t happen.

I think the dangers of risk selection, which are clearly there, are
nowhere big enough to justify not moving forward to a more effi-
cient privatized system. Clearly, you need to experiment, and clear-
ly, you have to be careful, but I have been looking at it for 5 years
and I am convinced that there are ways around it, especially in
Medicare. If you are going to experiment with these kinds of sys-
tems, Medicare is the place to do it.

Mr. ENsIGN. Thank you, Mr. Chairman.

Chairman THomaS. Mr. Stark, do you wish to inquire?

Mr. Stark. Yes. I have just a couple of questions.

One of the things, I suppose, we could do, and we are not sure
yet how much it would save, but if we required hospitals to charge
Medicare no higher than their lowest price in town, we would save
a lot of money.

Would your group support that, Mr. Scully? There is some anec-
dotal evidence that some hospitals, particularly in some States, are
giving discounts about 30 percent below Medicare rates to groups
to get managed care plans in. It has been an old approach, to say,
look, you are a hospital. You can’t charge Medicare any higher than
you charge your lowest rate. We would save a lot of money that

y. The hospitals, of course, have fought it, but maybe that is one
oft the things they would accept.

Mr. SCULLY. I personally don’t think that would work. In my ex-
perience, the closest thing we have to that is the Medicaid drug re-
bate language that I, unfortunately, helped through——

Mr. Stark. Why should I pay more than some insurance com-
pany for the same procedure? Why should the taxpayers do that?

Mr. Scutty. I am not sure what you mean. I guess my view is
the market system delivers the most efficient care, eventually. The
problem you have is if you, as an individual, are out there buy-

ing——

tr. Stark. I mean the government. I am sorry. Why should the
Federal Government pey more than Prudential at the Sisters of
Mercy Hospital? If they are giving a 30-percent discount—Ms.
Steelman has the answer, but you may figure it out. Go ahead.

Mr. SCULLY. My suggestion is basically that——

Mr. Stark. No, why wouldn’t the hospitals accept that? Why isn’t
that fair? That is all I want to know.

Mr. ScuuLy. Because, I think, what the Federal Government.
should be doing, more likely, is to take 33 million beneficiaries, or,


48

I think the risks are lower than most people think. I think HCFA
could do a lot better job than most people think of trying to figure
out a way to do a risk adjustment process, but I think you have
to go in with your eyes open.

T remember in 1989 when RBRVS came up, and everybody said
the same thing about the Hsiao schedule—we can’t possibly figure
out what we should pay at different rates. It wasn’t perfect then
and it is not perfect now, but they did a prett; od job of bal-
ancing off the payment scale. I think they tould doa pretty good
job of balancing off the payment scale as far as an amended
AAPCC or some kind of a risk-adjusted payment system goes. It
may not be perfect, but I think it would be a great improvement
over the current system.

Mrs. JOHNSON. Thank you.

Chairman THOma~S. Mr. Ensign.

Mr. ENSIGN. Thank you, Mr. Chairman.

Ms. Steelman, we have talked some in the past about the
Medisave accounts, and I just wanted to get into it a little more.
Some of the benefits, I think, of the Medisave accounts aren’t
brought up a lot of times in discussion.

As you Know, with my background in veterinary medicine, one of
the aspects of that is that people actually have something at stake
because they are paying out of their own pocket. But also, what
comes of that is that the veterinarian has to explain to the client
when they come in exactly what they are paying for, why they are
paying for it, why they should choose plan A or plan B, get an x
ray, get a blood test, or whatever it is, and has to justify it to the
client. Because of that, you have a very good doctor-client relation-
ship there.

ne of the problems we have in our health care delivery system
today is the deterioration of that doctor-patient relationship. So I
see one of the side benefits with the Medisave accounts is that you
are getting the patient back into more of the mode where they are
accountable, and also, you would put the doctor into a mode to be-
come more of the patient advocate and say, hey, you should go over
here and get an MRI for $1,800 or over here for $300 and help
them justify why that person should shop in the marketplace.

1 think that that is the key to the Medisave accounts, not only
the benefits that it can bring to the patient by having them use
less services—I don’t even see that as the benefit as much as I see
them actually shopping at that point, and, therefore, bringing the
market forces back into the health care field.

As a veterinarian, if you look at the whole field of veterinary
medicine, we have held our costs way below inflation for a long,
long time, as far back as, I think, there are probably statistics held
on veterinary medicine. We offer a lot more services, and yet we
have the same education, we have a lot of the same drugs, the
same technology and everything, we just don’t have a lot of the
government involvement that they have in the human health care

ield.

Ms. STEELMAN. In restructuring Medicare, I think we do have to
take advantage of those same incentives. It is completely unclear
to me how we technically incorporate a Medisave idea into a privat-
ization and a voucher across the whole range of services. The idea


117

The simplest solution would be to remove portable x-rays from the physicians’ fee
schedule, where they never belonged, and return them to the portable x-ray fee schedule, which,
as I have said, was not “broke” and worked quite well for all concemed. That fee schedule could
be simplified to make it easier and more streamlined for Medicare to administer.

Alternatively, changes could be made within the physicians’ fee schedule to address
portable x-rays more sensibly. When the physicians’ fee schedule moves to a resource-based
practice expense system in 1997, the unique practice expenses of portable x-ray suppliers must
be taken into account. More specifically, consistent with the concept of a fully resource-based
system, Medicare could establish a payment level for the portable x-ray "set-up" code that is
more truly commensurate with the difference in cost involved in providing this service versus a
physician's office x-ray. Similarly, the Medicare system could restore the "after-hours" code to
recognize the higher costs of operating at nights and on weekends, when a substantial demand for
emergency portable x-rays occurs. Medicare could also easily recognize the fact that doing a
portable x-ray in a patient's home is more costly because of the nature of the treatment setting.
This problem could be solved through the simple addition of a home-care code. Such changes
would conform to the resource-based principle of the fee schedule and provide the same fine-
tuning that is provided for physicians’ services, for example, through existing codes that
recognize unusual complications in surgical services and extra time required for anesthesia.

The changes I am suggesting are relatively minor, Such changes represent very small
expenditures, since portable x-rays, by HCFA's estimate, are less than 2% even of Medicare
radiology services ~ a tiny, tiny fraction of Part B as a whole, Moreover, the net effect of such
changes to maintain or increase the availability of portable x-rays would be better than budget
neutral: it would produce substantial savings on ambulance and hospital services. Refining the
Medicare payment system So that the distinct nature of the portable x-ray service is adequately
recognized and there are adequate incentives to permit suppliers to remain in business will not
alter the fact that the portable x-ray service is extremely cost-effective with respect to the
alternative. Making changes along these lines would simply be an outcome-oriented way of
seeing that the Medicare system gets the biggest bang for the taxpayers’ buck.

We thank you for the opportunity to present our views to the Subcommittee.

995
Doe «20775


53

in my opinion, if it is managed for the sake of the beneficiary or
the patient. However, if health care is managed primarily for the
sake of the insurer, so as to cut out services that really are nec-
essary but maybe are not so clearly necessary, I think that is not
a good idea. That is more like controlled care.

come down to the fact that the real solution to the problem is
to provide adequate financing. I know that it is unpopular to sa
that we should have higher premiums or higher taxes, but I thinl
that people, particularly when they need medical care, do not con-
sider the cost as the primary element.

The second thing that I want to mention is in connection with
the accuracy of some past actuarial estimates for Medicare. Often,
in the debate about what should be done about health care in this
country, the actuarial estimates are denigrated, and the estimates
are always said to be too optimistic.

This is not necessarily the case, and I refer to the original esti-
mates for Medicare, where the comparisons that are made show
that the costs were 10 times understated, that is just not correct.

I also discuss in my testimony the relationship between Medicare
and Social Security programs and the general budget.

Getting now to the major subject, the future operations of the
hospital insurance program, as you well know, the trust fund is

oing to run out of money in about 5 or 6 years. It should be noted
that, when the trust fund runs out of money, the program does not
come to a halt. What happens is that the payments to the providers
of services are delayed more and more, and the program does not
just stop.

The President's 1996 budget proposal, unfortunately, did nothing
in this long-term area. It merely extended several temporary provi-
sions, such as that the part B premium rate for the enrollees
should never be more than 25 percent of the average per capita
cost.

For some years, I have been saying that something ought to be
done about the long-range financing problem of the hospital insur-
ance program. If nothing else, a tax rate schedule should be put in
the law. horrendous as it might seem, that will make the program
self-supporting over the next 75 years and will, thus, draw real at-
tention to the problem.

I think that something should be done about this immediately.
Five years off is not far away, and it is much better to plan in ad-
vance and take action carefully than to have a last-minute crisis
solution.

Any changes should be made primarily for the sake of the pro-
gram, rather than for the general budget, other than as to part B,
where the general budget really is paying some of the costs. As to
part A, changes should be made one way or the other, and they do
not affect the budget. I develop that further in my prepared testi-
mony.

Finally, as to the recommended changes for part A, I would do
it by the traditional method, a little on the financing side and a lit-
tle on the benefits side. In other words, I believe that the payroll
tax rate for HI could well be raised, gradually, over the years, be-
yond its present level of 2.9 percent for employer and employee
combined. At the same time, I would put some of the pain on the


138

© One-quarter of BUSTAX is attributed to CAPITAL, the rest is attributed to
EARNINGS.

© SSTAX is attributed all to BENEFITS.

* PAYTAX is attributed to FRINGE to the extent that it lies within (a) the employer-
paid OASDHI according to the scenario, plus (b) the 1993 value of PAYTAX minus
OASDHI as a share of GDP. All PAYTAX in excess of this amount is attributed to
EARNINGS,

© INCOMETAX is attributed to EARNINGS, CAPITAL, and TAXBENEFITS according to
the proportional share of each item in the sum of all three items. Three-quarters
of the CAPITAL share is then transferred to EARNINGS.

© SALESTAX is attributed to EARNINGS, CAPITAL, and BENEFITS according to the
proportional share of each item in the sum of all three items. Three-quarters of
the CAPITAL share is then transferred to EARNINGS.

Note that the shift of capital taxes to labor requires us to gross up the scenario
definition of “earnings.” Historical EARNINGS in our model equals scenario “earnings” plus
the total shift of capital taxes to labor. Future EARNINGS in our model equals the historical
value for 1993 EARNINGS times the scenario growth rate for “earnings” thereafter. Thus
historical EARNINGS exceeds “earnings” by the historical tax shift; future EARNINGS exceed
“earnings” by a fixed multiple -- reflecting the implicit SSA assumption that the relative
magnitude of such a tax shift would not change in future years. For all years, our measure
of "worker compensation” is grossed up by the same dollar figure.

As mentioned earlier, the share of total taxes attributed to both EARNINGS and FRINGE
(i.e., to total worker compensation) by these formulas is just under 80 percent throughout the
projection period; of the remainder, the BENEFITS share rises and the CAPITAL share declines
over time.

The total tax rate figures displayed in Charts 10 and 11 are derived by taking the total
tax attributed to each bearer and dividing it by the total “income” in question. The total tax

rate on worker compensation equals the tax on EARNINGS plus the tax on FRINGE, all divided
by EARNINGS plus FRINGE. The total tax rate on capital equals the tax on CAPITAL divided by
CAPITAL, The total tax rate on benefits equals the tax on BENEFITS divided by BENEFITS.



49

behind a voucher would be to give people the ability to make
choices for themselves. Some people would rather have an HMO.
Some people might want a high-deductible policy. I am not sure
they would necessarily make that decision on their health status.
I think there are a lot of other factors involved.

But how do we make sure that works? For example, if the
Medisave or medical IRA is a tax-advantaged product, how do we
make sure it works with a voucher? Do you lower the voucher level
to compensate for the tax advantages this product gets? I think
there is a lot of work that needs to be done to refine this idea, and
I would urge you, when talking to the various proponents of medi-
cal IRAs, to try to get some of that work underway, because, to my
knowledge, it isn’t.

Mr. ENSIGN. Thank you, Mr. Chairman.

Chairman Tuomas. Mr. McDermott.

Mr. McDermott. Thank you, Mr. Chairman.

I am not sure I want my father’s health care determined on the
basis of what we do in veterinary medicine, but I would like to ask
a question. As I know of it, there are only two studies——

Mr. ENSIGN. Would the gentleman yield for a second?

Mr. McDERMoTT. Mathematica and GAO have done the only
studies on the effectiveness of managed care in Medicare. They say
when you control for risk assessment that there is no savings in
managed care, both studies.

Can you give me any study, not anecdotes—I don’t want to hear
one case at a time, I want to hear a study, that there has been any
real study of this issue?

Mr. ScuLty. I am not sure that—not to disagree with you, but
you can draw the conclusions. I am familiar with the studies. I
can’t think of an additional one, but what those studies basically
say is that 95 percent of the AAPCC, because of the fact that
HMOs, given the current structure, happen to draw younger,
healthier patients, for the most part, that, in fact, the government
does not save money under that current structure at 95 percent of
the AAPCC. I wouldn't necessarily disagree with that.

I would strongly disagree with the fact that you can’t save money
under a capitated network system, the changes and the incentives
of the system. I just think that there is no doubt in my mind, and
I used to look at it in the past, that 95 percent of the AAPCC—
is the government saving money on that? Probably not. Is it costing
them something? I think you can have a good debate about that.

But I think that is a fundamental flaw in the structure of the
way we do Medicare risk contracts now. It doesn’t mean that man-
aged care doesn’t work.

Mr. McDERMoTT. Now that we have talked generally that there
is no study that suggests there is a savings, at least, you haven’t
given me a name of one—

Mr. ScuLLy. I am not sure there is one that suggests there
aren’t, either, but——

Mr. McDERMoTT. Until you produce one, we will stipulate to the
fact there isn’t one. Let us go to the individual case. My father is
89 and my mother is 85. My father had an endarterectomy about
10 years ago. He had a stroke about 4 years ago. He has had chron-


18

Medicare Select is an experimental Medicare supplement plan that has helped
seniors realize considerable savings while increasing their health care
choices. A bill to make Medicare Select permanent and extend it to all 50
states is now under consideration by Congress.

Medicare HMOs, given the proper funding formola, has the potential to shave
health care costs in arcas with higher density populations of seniors. With
only eight percent of the nation's seniors enrotled in managed health care
plans, the potential for growth is considerable.

‘A voucher plan would give seniors credits equivalent to the average cost of
annual medical expenses in their geographical area. Seniors would be free to
choose their own provider from the private sector.

\out a doubt, many more alternatives will be proposed in the coming months.

We can agree to disagree on what the best approaches might be, but we cannot
afford to ignore this issue another day. Mr. Chairman, thank you for bringing this
matter of such importance to seniors before the American public.


88

I would note with dismay, Mr. Chairman, that some members of
this subcommittee have argued, in light of these problems, that we
dare not pass a balanced budget amendment. They say that we
must keep open the option of deficit financing some or all of the
spending grow! .

Yet, Office of Management and Budget Director Alice Rivlin’s in-
famous leaked budget memo from last October belies this hope. Her
missive to President Clinton points out that under current taxing
and spending policies, the budget deficit could soar to $4.1 trillion
per year by 2030. Clearly, we cannot incur debt, or, for that matter,
incur taxes on this scale. By risking such a course, we would ruin
the American dream for generations to come.

If taxes and deficits are not the solution, then it follows that
Congress must take decisive steps, and the sooner the better, to
reign in the growth of the hospital insurance program.

The task is not as lonely as some of the interest groups who
come before you would have you believe. You will have surprisingly
strong support from the public.

In a September 1994 survey of working-aged Americans, we
found that 94 percent agreed that the impending bankruptcy of the
HI trust fund is a “serious” or wey serious” problem. There were
74 percent that said they would think more favorably of elected
representatives who addressed the need for reform. Also, 69 per-
cent favored reducing benefits to the affluent, and 88 percent fa-
vored shielding retirement savings from taxation.

We urge you to draw on this good will to fundamentally redesi
the program. We recommend that you merge HI with the SMI sub-
sidy and convert them into a single voucher that can be used to
purchase private insurance. We recommend that these vouchers be
means tested, based on the recipient’s household wealth and in-
come. We further recommend that you significantly expand the
concept of the individual retirement account, so that working
Americans who want to save and avoid dependency on the govern-
ment can do so.

Let me say, in conclusion, that we at the National Taxpayers
Union recognize the terrible, desperate dependency that has been
created by social insurance. Many Americans have failed to prepare
adequately for their old age, precisely because the government has
told them: Don’t save, we will fund these costs by taxing your chil-
dren and grandchildren.

We must follow through on our obligations to the truly depend-
ent. But at the same time, we must take immediate steps to im-
prove the efficiency of our health benefit programs, and to cut their
costs. And over time, we must convert these subsidies into true in-
surance systems that minimize dependency on government and in-
crease national savings. Thank you.

[The prepared statement follows:]


43

managed care is limited, but I don’t see why HCFA, for instance,
should be the only carrier in Bakersfield. I think you could let
Aetna or CIGNA or Blue Cross of whatever offer an indemnity
package.

I think what you are really talking about is how the Federal
Government now runs Medicare as a cost-plus contract, where they
pay the Blue Cross plans, mainly, around the country to administer
a federally run insurance program. I think, aside from looking at
it as managed care, it is moving toward a risk-based situation
where you pay a private contractor to deliver services more effi-
ciently, where it becomes a risk contract instead of a cost-plus con-
tract.

Outside of areas where managed care isn’t strong, that doesn’t
mean that you can’t get better services at lower prices out of pri-
vately delivered indemnity plans. I don’t think it necessarily has to
be managed care.

Chairman THomaS. Just let me respond. You quite rightly gave
the answer that you were required to give, in part. The reason that
I did not raise it that way is that I am just amazed at the growth
in managed care. In California, every time I turn around, the sta-
tistic is another 5 percent higher than I thought it was. It literally
is reaching 65, 70 percent.

So I was not correct in the way in which I phrased the question,
in terms of focusing narrowly on managed care, but, frankly, in
some areas of the country, the debate is already over. You were
correct in terms of your response. I was simply reflecting the
knowledge of the local changes that I have been familiar with.

Ms. Steelman, do you want to respond?

Ms. STEELMAN. Just to suggest that there are a number of inno-
vative products in the health care delivery system. Very often, we
end up focusing on managed care because it has made the most dif-
ference in the private sector. As managed care enrollees have gone
up, health care inflation has gone down.

But, there are other innovative products, such as high-deductible
plans. Clearly, medical IRAs have been an idea talked about for
some time. High-deductible plans are being experimented with in
a variety of Fortune 500 settings and have reached a great deal of
success,

Can we use those kinds of ideas in a Medicare reform? I think
it is up to us to allow the market to decide and to open the range
of choices to the market and to the beneficiaries.

In an area like where I am from, Southern Missouri, where there
is practically no penetration of managed care in my rural home
town of 3,000 people, we need to make available the whole range
of innovative products and see which one takes off and see which
one the local area citizenship seems to sign on to.

Having said that, there may also be some ways to increase the
tools of managed care in some of those areas. Clearly, the hospital
in Springfiel , which is the hospital closest to my home town,
which is 2 hours away, has already made some inroads in terms
of bundling tertiary care services and that sort of thing.

So I think the market is slowly but surely moving in directions
that that regional area supports, and all of the movement should


129

Tequire truly Draconian real cuts per beneficiary in order to compensate for the
adverse demographics).

The grim after-tax earnings trends are clearly not the result of pessimistic
economic assumptions. Quite the opposite: The optimism of the most important
‘economic assumption -- pre-tax earnings -- is very visible in Charts | and 3, From
the early 1970s to the early 1990s, pre-tax earnings hardly grew at all -- in fact, by
no more than 0.2 percent annually, no matter which end year you choose. Even
during the much-vaunted 1979-1989 decade, pre-tax earnings only grew by 0.4
percent annually. (See Chart 12.) Yet from 1995 to 2040, pre-tax earnings are
expected to accelerate to an average of 1.0 percent annually under scenario I or 0.5
percent annually under scenario If, Little of this tumabout is expected to come from
changes in the various linkages between real National Income per worker hour --
worker productivity -- and real earnings per worker year. (See Charts 13 through
16.) Instead, it is expected to come from an underlying improvement in worker
productivity itself. Everyone agrees that such improvement is possible. The
question, of course, is whether it constitutes the prudent foundation for public
promises on which people base their lives.

Trust-fund financing mechanisms make little difference in the magnitude or
timing of the cost burden on workers. Under scenario II, Social Security is
expected to run ever-larger operating deficits from 2012 until 2029 -- at which time
the trust funds go bankrupt and the program switches over to pay-as-you-go. What's
the impact of this switchover on workers? As Chart I indicates, very little. Between
2025 and 2030, the bite from general revenues narrows and the bite from Social
Security payroll taxes widens. The total bite also widens, since workers are assumed
to bear the full incidence of payroll taxes, but only slightly -- since the burden of
general revenues also falls mainly on workers. The same is true for the other
bankruptcies scheduled in the two scenarios.

Under scenario II, total government benefit spending will rise by nearly 10
percentage points of GDP by 2040. In 1995. benefits will amount to 14.0 percent
of GDP; by 2040, 23.5 percent of GDP, nearly what the entire federal government
spends today. Meanwhile, total government spending will rise from 34.4 to 43.9
percent of GDP. In order to balance the budget, total tax revenue will rise even
faster. In fact, it will rise more than nvice as much between today and 2040 (13
percent of GDP) as it did between 1955 and today. (See Charts 5, 6, and 7.)"

Under scenario III, total government benefit spending will rise by nearly 20
percentage points of GDP by 2040. In 1995, benefits will amount to 14.0 percent
of GDP; by 2040, 34.1 percent of GDP, roughly what all levels of government spend
today. Meanwhile, total government spending will rise from 34.4 to 54.5 percent of
GDP. Again, in order to balance the budget, total tax revenue will rise even faster.
It will rise more than four times as much between today and 2040 (24 percent of


118

technologists higher salaries than those paid to hospital or physicians’ office technicians to
compensate for the higher level of training and the disadvantageous working conditions.

Portable X-Rays and Cost-Effectiveness

There are two aspects of the portable x-ray service that are critical to the principle of cost-
effective health care spending. The first is that the portable x-ray service provides a highly cost-
effective altemative to the other method of providing x-rays for nursing home patients:
transporting the patient in an ambulance to a hospital emergency room. We estimate
conservatively that the portable x-ray service generally costs Medicare one-third to one-fifth as
much as this hospital/ambulance delivery method. Attachment 1 to this testimony provides a
specific cost comparison for selected states.

‘And, in this case, what is cost-effective is also quality-effective, When very old, very frail
persons are moved out of their beds and into and out of ambulances or other vehicles, they often
sustain fractures. If the weather is harsh -- as it is for many months in my home state of
Connecticut -- patients can get respiratory illnesses. And the many elderly patients who suffer
from depression, Alzheimer's disease, or both, can become disoriented and traumatized when
they are moved. Portable x-rays, by allowing patients to stay in their own beds, spare patients
the physical injury and mental trauma that can occur when they are sent to the hospital
Additionally, the portable x-ray service also provides a faster tumaround of films to the
attending physician than the ambulance alternative, thus speeding diagnosis and treatment of
injuries, We do not believe that saving costs necessarily requires sacrificing quality, and our
service illustrates that point very well.

The second aspect of the portable x-ray service that is critical to the principle of cost-
effective health spending has to do with treatment settings. Many of the conditions that portable
x-rays identify, such as pneumonia, chronic obstructive pulmonary disease and simple fractures,
ccan be treated entirely in the nursing home. In contrast, when the same nursing home patient is
taken to the hospital for an x-ray and the same condition appears, the patient will likely be
admitted to the hospital for treatment. Generally, the hospital is the more expensive treatment
setting. Thus, wherever portable x-rays identify simple conditions, patients receive treatment in
the nursing home setting, the one that is least costly for the payor. That payor, in most cases, is
Medicare.

Ineffective Medicare Treatment of Portable X-Rays: Fixing A System That Wasn't Broke

‘The legislators and regulators who shape Medicare have worked throughout the 1980s and
1990s to restrain the growth of expenditures in the Medicare system. Mr. Viadeck, in his
testimony before this Subcommittee, pointed out that Medicare has pioneered the use of payment
mechanisms that stress cost-effectiveness and feature incentives for efficiency, and Medicare has
led other payors in establishing measures to combat the waste, fraud, and abuse that so
unconscionably increase our nation’s health care costs. The architects and administrators of the
Medicare program are 1o be complimented for those successes. Other witnesses before this
Subcommittee, however, have pointed out that Medicare lags behind the private-sector health
care marketplace in significant respects, and that some of Medicare's payment mechanisms are
ill-suited to the goals of cost-effective service and choice that the nation’s leading health care
insurer should achieve. The treatment of portable x-rays under the Medicare fee schedule for
physicians’ services" illustrates the problem.

We do not quarrel with the concept of fee schedule payment. Indeed, portable x-rays were
addressed under a portable x-ray fee schedule in 1989-1991 before the implementation of the
physicians’ fee schedule -- and neither Medicare administrators, Medicare carriers, Members of
Congress, nor our industry ever found this system overgenerous, unworkable, or otherwise
seriously flawed, In other words, the system wasn't broke. Nonetheless, the Health Care
Financing Administration ("HCFA"), in the interest of uniformity, “fixed” it by rolling non-
physician portable x-rays into the physicians’ fee schedule beginning in 1992. And now the
system, for portable x-ray services, does not work. It does not serve the goals of cost-
effectiveness and appropriateness of care,

2


122

trends in immigration or the birthrate. But all this is small potatoes at best," especially
since there has been no actuarially favorable change in trends in labor productivity or
longevity -- the two assumptions which totally dominate the cost outcome well past the year
2040.” ‘So that means the “intermediate cost” projection had better be taken seriously.

Indeed, Americans should also pay close attention to the official “high cost" scenario
-- whose critical assumptions are closer to (but still more optimistic than) recent experience
if for no other reason than to avoid the absurdity of regarding a continuation of current
trends as unthinkably dismal. Accordingly, in this report, all findings for the “intermediate
cost” scenario are followed by findings for the "high cost” scenario. While both scenarios
are perfectly plausible, the former may be regarded as a best-case -- rather than most likely
= outcome, the latter as a worst-case outcome. (See below, “Appendix I: Official Economic
and Demographic Assumptions.")

What about health care? Everyone agrees that health-care benefits are a major part of
the projection equation, constituting much of the expected growth in total benefits. Almost
everyone agrees that policy changes could do something to control that growth. What's
doubtful, however, is whether either political party is likely to champion any change that
might make a real difference. On the left, there is much talk tough about draconian “cost
containment” -- but few members have ever identified a single benefit, service, or subsidy in
Medicare or Medicaid that ought to be cut. To the contrary, health reforms offered by
liberals point toward vast cost increases beyond current projections -- including a wider
safety net for low-income families and new senior citizen benefits covering prescription
rugs, at-home, and long-term care. Conservatives are not as tied to benefit expansion. But
neither have they shown much interest in means-testing or rationing publicly funded health
services.

The outlook for health-care spending is made even bleaker by another little-known
fact: The official long-term projections for Medicare and Medicaid already assume shat a
vigorous program of cost control will commence early in the next century. Specifically, they
all assume that the “extraordinary” rate of real cost growth per beneficiary wil! decline by
three-quarters between 2000 and 2020."” Partly for this reason, many experts doubt that
any now-discussable reform option is likely to bring health-care benefits down much beneath
their currently projected trajectory. And even if they could, the savings are likely to be
offset by the extra cost of better or additional public coverage (either at the state or federal
level). Bottom line: Until the political standard of "touchability" changes dramatically,
Americans should consider themselves lucky if public health costs do not rise faster than
currently projected. (See below, “Appendix il: Official Health Care Benefit Assumptions.")

Given the weakness of the first and second propositions, 2 iot rides on the third: Just
raise future taxes and pray that they don’t have to be raised too much. At the very least, the
prevailing inertia on entitlement reform makes this possibility of serious interest to all
Americans. What happens to taxes if we leave all currently-legislated benefit provisions on
auto-pilot? Specifically, how high will taxes rise on future workers?


4.

127

that is, gross outlays net of premiums.)

SMI outlays, under scenario II, will exceed their scenario II path by the same
multiple by which HI under II exceeds HI under If. As it tums out, the SMI
trustees do not calculate a projection III for their program. Since the influence of
demographic and medical trends on SMI are essentially similar to their influence on
HI, this seems like a plausible assumption.

Medicaid outlays for persons age 65 and over will grow, under both scenarios, at
a rate determined strictly by demographic change and the Medicare inflation
rate. That is, the age-specific utilization of Medicaid is assumed (quite
optimistically) to remain constant over time, The Medicaid inflation factor is
assumed to be the combined factor for both parts of Medicare.”

All other government spending (federal, state, and local) besides Sociat Security,
Medicare, and Medicaid for seniors will continue to rise each year at the same
rate as GDP. Since our object is to calculate total after-tax earnings, we need to
make some assumption about the rest of government. GDP neutrality is a
conservative hypothesis -- even if it does reflect a gradual growth in real government
spending per capita. Many government services 2re resistant to productivity growth
and thus tend to require a constant share of GDP just to maintain their current
delivery (“Baumol's Law"). More importantly, the same demographic forces
pushing up the cost of Social Security, Medicare, and Medicaid for seniors after the
year 2010 will be pushing up the cost of many other government programs.

Between the years 1995 and 2010, the net consolidated public-sector budget will
move to balance; every year after 2010 revenues will be adjusted so that they will
continue to equal outlays; all types of general revenues (i.e., all revenues
excluding payroll taxes) will be adjusted proportionally. Any realistic projection
of the tax burden has to put some limit on the public sector's ability to borrow.
Either that, or it would have to reflect the negative feedbacks of rising public-sector
deficits on savings, investment, productivity growth, interest rates, and budgetary
debt-service charges. Our model avoids this set of issues (which clearly cannot be
handled within the framework of the fixed SSA scenarios) by assuming that the public
sector moves linearly to budget balance between 1995 and 2010. While this “budget-
balance” assumption may seem heroic in light of recent experience, it's worth noting
that the prospect of a constitutional amendment requiring a balancing of the
consolidated federal budget are becoming increasingly favorable, Moreover, the
future productivity growth rates projected under both SSA scenarios exceed our
historical record over the last twenty years. The extra national savings generated by a
balanced budget may be necessary to achieve this performance. As for timing, the
1995-2010 demographic window before the Baby Boom generations’ retirement seems
ideal. In any case, a more lenient assumption (e.g., keeping public indebtedness
constant as a share of GDP) would not significantly change the results.”


151

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CONTENTS

Advisory of February 16, 1995, announcing the hearing ...

WITNESSES

US. General Accounting Office, Sarah F. Jaggar, Director, Health Financing
and Policy Issues, Health, Education, and Human Services Division; accom-
panied by Frank Pasquier, Assistant Director, and Craig Winslow, Office
of the General Counsel ... a

Federation of American Health Systems, Thomas A. Scully .
King, Roland E. “Guy,” Washington, D.C ..
Myers, Robert J., Silver Spring, Md

National Taxpayers Union Foundation, Paul S, Hewitt
Seniors Coalition, Jay Hopkins, on behalf of Jake Hansen
Steelman, Deborah, Washington, D.C
Third Millennium, Heather

SUBMISSIONS FOR THE RECORD

National Association of Medicare Dependent Hospitals, John Forsman, state-
ment and attachments

National Association of Portable X-Ray Providers, Jefirey Burgess, statement
and attachment.

National Taxpayers Union Foundation, Neil Howe, statement and attach:

ments .....
Parker, Gerald S., Old Greenwich, Conn., statement

att

Page

105
112

119
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106

hospitals’ Medicare margins averaged +0.3%. But there is great variation among hospitals and
groups of hospitals. The 1992 cost report database shows that hospitals’ profits and losses on
Medicare can range from profits as great as 12% to losses as great as 17%. Medicare dependent
hospitals, those with unusually large Medicare loads, incur losses well beyond the average. In
effect, these hospitals pay a penalty for theie service to the elderly.

Medicare Dependent Hospitals

Who are the Medicare dependent hospitals? Our group defines them as those with
Medicare patient loads of 60% or more on a regular basis. Often, these high Medicare patient
populations are a creature of demographics, as in my own area, Ocean County, New Jersey.
There, a large community of senior citizens began developing about 30 years ago. Senior
citizens are generally not mobile in a demographic sense; in other words, they tend to age in
place, This has been true of my county and my health system's patient population, which once
consisted of a large population of fairly healthy 65-year olds, and now has a very large group in
their 80's -- no longer generally healthy, but plagued with the chronic problems that very old age
inevitably brings.

A visit to my hospital would reveal to you what Medicare dependent hospitals know well.
Very, very old people need help with many basic activities that younger ones do not, such as.
bathing, eating, going back and forth to the bathroom, dressing, personal grooming, taking
‘medication, even, in some cases, simply tuning in bed. They have longer hospital stays, on
average, because they heal more slowly than younger people, and are more susceptible to
incurring secondary conditions in the hospital, such as pressure sores, respiratory infections, and
others. In other words, a very old patient needs extra help with a lot of little things, most of
which are not medical in nature, and none of which results in extra reimbursement under the
PPS. But this essential extra help for my very old patients requires extra labor for my staff, and
thus extra costs on our expense statement. Because Medicare dependent hospitals have a greater
share of Medicare patients than others, they also have a correspondingly greater share of these
very old Medicare patients that are more costly to serve, but without any additional
reimbursement.

‘There are approximately 1400 Medicare dependent hospitals nationwide. Of these 1400,
more than 900, or 65%, treat a Medicare patient mix greater than 65% (Att. B), with some
approaching 80% Medicare. Approximately 600 of the 1400 Medicare dependent hospitals in
the nation have mever received any adjustment for IME, DME, DSH, or anything else. The rest
are small rural hospitals that previously received a small rural adjustment which expired in
September 1994. Thus, today, the overwhelming majority of Medicare dependent hospitals
receive no adjustments under the PPS.

‘As ProPAC has observed, PPS payments have dropped much more steeply than other
payors’ in the last decade, so that hospitals om average lost 3% from Medicare in 1992.
Consequently, "hospitals that cannot generate revenue from private payors ate increasingly
disadvantaged." ProPAC, id. at 24-25; see also, ProPAC, March 1994 Report to Congress at 5;
March 1995 Report to Congress at 5 ("Medicare's payments...continue to be below those of most
private payers."). Moreover, ProPAC has noted, the medical education and DSH adjustments
have “substantially affected PPS margins," so that hospitals without these adjustments have been
“disadvantaged...relative to others." ProPAC, June 1993 Report to Congress at $5. With no
Medicare adjustments, and a much smaller poot of private pay patients to rely on for cost-
shifling, Medicare dependent hospitals have suffered more than others during the last decade.

‘The reimbursement squeeze from their major payor, Medicare, has forced Medicare
dependent hospitals to become more efficient. But, notwithstanding efficiency, Medicare
dependent hospitals, with much less ability to make up Medicare losses from other payors, lose
‘much more than others on Medicare and have lower overall margins. 1992 cost report data show
that on Medicare alone, Medicare-dependent hospitals lost about 5%, while non-Medicare-
dependent hospitals that qualify for GME/IME and/or DSH had about a 4% Medicare profit.
Overall margins for non-Medicare dependent hospitals averaged nearly 5%, but for most
Medicare dependent hospitals, overall margins averaged barely more than 2%. (Atts. C and D.)


66

Mr. Stark. So, then, if I said to you, under these Medicare Select
ans, which have no cost sharing, we can anticipate far higher uti-
Fization, would that not be the case?

Mr. KING. With any Medigap policy filling in the coinsurance and
deductibles of the Medicare program, the utilization is going to be
higher when the beneficiary doesn’t face any cost sharing.

Mr. Stark. Significantly higher?

Mr. Kine. Yes.

Mr. Stark. Thank you.

Chairman THomas. Thank you, Mr. Stark.

It is also obvious that, since Medicare Select is a Medigap pro-
gram, the argument you just made applies to the entire Medigap
area in terms of cost sharing.

Mr. Stark. Yes.

Chairman THomas. In addition to that——

Mr. StTaRK. Would the gentleman yield?

Chairman THomas. Certainly.

Mr. STARK. But Medigap is purchased by 90 percent and most of
the Medicare Select cither are free or at much lower, so the tend
is to make the copayments less there.

Chairman Tuomas. I understand.

I would enter into the record, and we are going to need to revisit
this issue time and time again, a chart which talks about the life-
time Medicare benefits, taxes, premiums, and transfers. For exam-
ple, for a person turning 65 in 1995, and these are constant 1993
dollars, a single male gets benefits of about $75,000, pays taxes
and premiums of about $34,700, and gets a net transfer of $40,000.
When you look at a two-earner couple in terms of the benefits of
about $185,000, taxes and premiums of $68,000, the net transfer
is about $117,000.

[The chart follows:]


52

Chairman THomas. The chairman is going to exercise his prerog-
ative and thank this panel.

Mr. ScuLLy. Thank you, Mr. Chairman.

Ms. STEELMAN. Thank you.

Chairman THomas. One of the things that I do want to under-
score is that this is a thinking person’s game. We do need to look
at options available to, and that only underscores, I think, the fail-
ure of the President’s budget to participate in this debate at all.

I thank the panel very much.

The second panel will be Roland E. “Guy” King, who was former
Chief Actuary with the Health Care Financing Administration; and
Robert Myers, who was the former Chief Actuary of the Social Se-
curity Administration.

I am anxious to get these actuaries in front of us so that we can
discuss trust funds, pay ins, pay outs, and that sort of thing.

Mr. Myers, why don’t you begin? Without objection, all of the
written statements will be made a part of the record and you may
proceed as you see fit to inform us, Mr. Myers. Thank you.

STATEMENT OF ROBERT J. MYERS, SILVER SPRING, MD.,
FORMER CHIEF ACTUARY, SOCIAL SECURITY ADMINISTRA-
TION

Mr. Myers. Thank you, Mr. Chairman. It is always a pleasure
and a privilege to testify before the Committee on Ways and

leans,

Before getting into the matter of the Medicare provisions in the
President's budget, what they are and what I believe they should
have been, I would like to discuss, briefly, three other matters.

First, what should be done about hea th care costs? We all know
that, over the years, health care costs have been rising rapidly for
a number of reasons—namely, the greater presence of insurance, so
there was less out-of-pocket cost—although in the last few years,
that, perhaps, has slackened off—the increasing utilization and the
better analytical procedures and techniques that have been made
available for health care generally.

There are three ways that this problem can be handled. First,
costs can be contained by reducing the remuneration of providers.
Second, costs can be reduced by limiting the services available, and
third, the rising costs can be met by additional financing, either di-
rectly or indirectly.

In my view, although the remuneration of the providers of serv-
ices can be subject to some control, this can be overdone. I think
that this is well evidenced by what happened when the DRGs were
instituted by the 1983 amendments. What resulted, primarily, was
reduced cost for the Medicare program, but cost shifting to the pri-
vate sector. Now, there appears to be some reversal going on in
this area. But these procedures to me, is not the real solution.

Similarly, I do not believe that services should be limited. I be-
lieve that people should, in general, be provided good medical care
and should have it readily available. Again, there are some in-
stances where completely unnecessary services should be con-
trolled.

Currently, there is the buzzword, “managed care.” This means
many different things to different people. Managed care is just fine,


101

APPENDIX I APPENDIX T

RELATED GAO PRODUCTS
(GAO/HRD-87-43, Jan 29.1987),
Sere CEL
HEIRS cohecaeas (GaoTaepea Te oee ae SDE
Contractors (GA0/T-HaD-91-8, Feb. 26, 1991)-
Insurers (GA0/HRD-92-52, Feb. 21, 1992)
Other Insurers (GAO/HENS-94-147, May 6, 1594)

Qther Insurers (GAO/T-HEHS-94-162, May 6, 1994).


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However, even the VPS, while successful in restraining the growth in
physician fees, has allowed spending to rise at rates beyond inflation
Chart 4 shows that spending on physician services is projected to rise at
10% per year between now and 2000 -- and itis the slowest growing
component of Part B.

HCFA has made little real effort to incorporate modern cost-reducing technology
into the Medicare program. (Chart 5). The agency has made no effort to adapt the
success stories of the private sector. We must

We know what works in the private sector to contain costs and ensure quality. We
are not reinventing the wheel. ‘The private sector has turned toward managed care to
contain costs because managed care arrangements do a better job of giving the beneficiary
something in return for organizational structure: a lower premium

Over 50% of private sector, insured employees were enrolled in managed
care arrangements in 1993 (see Chart 5); preliminary 1994 figures indicate
that private sector managed care enrollment will exceed 60%.

‘The consulting firm Foster Higgins reports that for the first time in a
decade, private employers have actually lowered the costs of employee
insurance. The apparent relationship between increased managed care
enroliment and lower health inflation is striking (see Chart 6).

Chart 7 displays per capita rates of growth in Federal health care spending;
per capita Medicare spending is rising 3/% faster than private sector costs

FOR GOVERNMENT TO SPEND WITHIN ITS MEANS, MEDICARE’

RESOURCES MUST BE SPENT MORE.

ISELY.

Entitlement spending consumes two-thirds of the Federal budget

Medicare alone takes one of every ten dollars the Federal government
spends, and Medicare and Medicaid will eat up 16% of the Federal budget
in 1995. See Chart 8.

By 2002, the two major health programs will consume nearly one-quarter
of Federal outlays, with Medicare alone costing over $325 billion, See
Chart 9.

By 2003, Medicare will be the second largest Federal program, behind Social
Security, greater than Defense and exceeding the combined total of all domestic
discretionary programs (Chart 10).

In other words, if Medicare doesn't spend its resources more wisely, its appetite
will consume more money than the combined total of every education, transportation,
environmental, arts grant, occupational training, and public health program in the Federal

budget


105

STATEMENT OF
NATIONAL ASSOCIATION OF MEDICARE DEPENDENT HOSPITALS
BEFORE THE COMMITTEE ON WAYS AND MEANS,
SUBCOMMITTEE ON HEALTH
HOUSE OF REPRESENTATIVES
FEBRUARY 23, 1995

Introduction

MR. CHAIRMAN AND MEMBERS OF THE SUBCOMMITTEE: | am John Forsman,
Chief Financial Officer of the Community/Kimball Health Care System of Ocean County, New
Jersey, and Chairman of the National Association of Medicare Dependent Hospitals, a national
trade association representing hospitals with unusually high Medicare patient loads. I am also a
past member of the Health Care Financial Management Association's National Board Matrix.

‘We appreciate this opportunity to submit testimony on the Medicare program. The stated
purpose of this hearing is proposals for Medicare changes in the President's FY 1996 budget, and
proposals for Medicare that were not included in that budget. Our comments address the latter
area, recommendations for change mot proposed by the Administration, but that we believe
would significantly improve the performance of the Medicare program for hospitals.

Medicare Reimbursement and Medicare Dependent Hospitals

‘My remarks will focus on flaws in the Medicare hospital prospective payment system
("PPS"). I recognize that, eventually, Medicare may need a broad and perhaps radical
transformation toward a system based on managed care rather than fee-for-service. Frankly, |
will welcome the change, because, as a Medicare-dependent health system, I have already been
forced to become very efficient and am well-positioned to compete in the new world. In the
short term, however, Medicare's fee-for-service sector, and the hospital PPS, will continue to
exist. While the new Medicare system of the future is being built, the current structure should
undergo some minor, but much-needed, repairs.

Let me preface my suggestions with a bit of context concerning the PPS and its evolution.
‘Until 1983, Medicare reimbursed hospitals on the basis of the "reasonable cost" of providing
services. In 1983-1988, Congress phased in the PPS to give hospitals incentives for efficiency
by establishing fair payments at predetermined levels. Under the PPS, the unit of payment is the
“diagnostic related group" ("DRG"). Payment is based on each patient's diagnosis, and the
amount of payment, or DRG rate, varies with the complexity of the case.

The DRG rates are national, but vary around the country according to a geographical
wage index. The DRG rates are also subject to two major adjustments: medical education
(°GME" and "IME") and “disproportionate share” ("DSH"). GME and IME are intended to
recognize additional costs incurred by teaching hospitals in training physicians. DSH is intended
to compensate for additional costs incurred by hospitals that serve an unusually high proportion
of low-income patients. Together, these add-ons cost $7.5 billion ($5 billion for GME and IME,
$2.5 billion for DSH) (Att. A). As the Prospective Payment Assessment Commission
(*ProPAC") has reported, these adjustments have been implemented “budget neutrally" --
shifting funds away from basic care for the elderly toward more specialized policy goals such as
training doctors and caring for the indigent. See ProPAC, March 1993 Report to Congress at 20.
Over time, the combination of these adjustments and the wage index has produced some
dramatic variations in PPS payments, causing the PPS to move away from its original purpose to
establish fair payments with incentives for efficiency, and causing the Medicare system to move
away from its original purpose to provide hospital care for the elderly.

Using the same hospital cost report database that the Health Care Financing
Administration ("HCFA") uses, we have conducted an extensive analysis of profits and losses.
We discovered from this analysis that, on the whole, Medicare is not as poor a payer as the
annual ratcheting down of PPS payments might suggest. On average, in fact, hospitals do
reasonably well under the PPS, Our analysis of the 1992 database shows that, on average,
hospital Medicare margins were -3% (a 3% loss); ProPAC has recently reported that in 1993,


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115

» Weed, CA

+ Yreka, CA
Hilliard, FL

+ Miami, FL

+ Atlanta, GA

* Atchison, KS
* Southfield, MI
+ Hamilton, MO
+ Maryville, MO
+ Mound City, MO
+ Cleveland, OH
+ Columbus, OH
+ Dayton, OH

+ Toledo, OH and
+ Houston, TX,

affecting approximately 67,000 nursing home beds. The net result of all this is a decline in the
availability of portable x-ray services, even though demographics would predict exactly the
opposite.

‘There will also be an offsetting increase in the number of hospital x-rays of nursing home
and homebound patients that Medicare must pay for. The bottom line on cost will be a greater
net outflow of Medicare dollars to provide necessary diagnostic radiology services to nursing
home and homebound patients, plus more costly hospital admissions to treat the conditions these
radiology services identify. The bottom line on quality and access will be an increase in
potential injuries for patients who have to be moved to get x-rays and increased mental anguish
for patients and their families when these patients have to be shifted in and out of hospitals
instead of staying in the familiar environment of the home or nursing home.

Data from the Physician Payment Review Commission ("PPRC") suggests that there may
be an access problem already. Data in the PPRC's 1993 report to Congress on access to care
demonstrate that portable x-rays and other "routine diagnostic radiology” services are among
only two categories of physicians’ services that did not increase in volume after the imposition of
the physicians’ fee schedule. The average across all services for quantity of care per beneficiary
increased 5.2% from 1991 to 1992. In contrast, "routine diagnostic radiology,” including
portable x-rays, dropped 6.6% in quantity of care per beneficiary during that period. PPRC,
Report No. 93-2, Monitoring Access of Medicare Beneficiaries (June 4, 1993) at 15, Table 2-1.
Notably, the time period addressed in this report was one when portable x-ray payments from
Medicare were higher than they are now, since payments in most localities have fallen as the
physicians’ fee schedule moves toward full implementation.

Significantly, PPRC research also reveals “cause for concern” about reductions in access
to care for that population group most typically served by portable x-ray providers: the "oldest
‘old (those over 85).” Id. at 23. The PPRC's June 4, 1993 Report states:

‘The Oldest Old. Patterns of service use by the oldest old (those
‘over age 85) may also generate some cause for concem. The
differentials between the oldest old and the remainder of the
beneficiary population show a series of new lows for total use of

4


136

than GDP per capita, the assumption of the increases in costs per enrollee declining to the same
rate as GDP per capita may be considered optimistic...” This sanguine methodology also
explains why the extraordinary cost growth rate in scenario III ultimately falls beneath the
growth rate in scenario Il: the former scenario has a slower ultimate rate of real GDP growth
per capita than the latter. It's as though the Trustees have already determined that if we become
a less affluent country than otherwise we will be stingier in what we offer to Medicare patients
than otherwise. Enormous policy choices have been built right into the “current-law*
projections.

Table 3:
Official 1994 HCFA Assumptions Versus Actual Historical Experience

Assumed Extraordinary
Annual Real Growth in

Medicare (Parts A and B) Actual
Historical
Scenario Il Scenario II Experience
1970-75 4.6 %
1975-80 5.9%
1980-85 6.3 %
1985-90 3.0%
1990-95 5.0%
1998-00 5.2% 4.9%
2000-05 5.0% 5.9%
2005-10 4.2% 49%
2010-15 2.9 % 3.9%
2015-20 14% 2.5%
2020-25 1.0 % 19%
2025-30 11% 15%
2030-35 12% 0.9%
2035-40 11% 0.4 %



58

Chairman THOMAS. Thank you, Mr. Myers.
Mr. King.

STATEMENT OF ROLAND E. “GUY” KING, CONSULTING
ACTUARY, ERNST & YOUNG, WASHINGTON, D.C.; AND
FORMER CHIEF ACTUARY, HEALTH CARE FINANCING
ADMINISTRATION

Mr. Kine. Thank you, Mr. Chairman.

I would like to give you a little bit of perspective on my 15 years
as Chief Actuary of HOPA and how the program has grown during
that time. I just recently left to become a consulting actuary with
the firm of Ernst & Young, so I have had an opportunity to Observe
the rate of growth in this program for a long time.

Back in 1978, the hospital insurance trust fund was projected to
be bankrupt by the year 1990. Today, it is projected to be bankrupt
by 2001, and the reason for the change, of course, is that there
have been two tax rate increases, there has been additional reve-
nue injected into the program by raising the wage base, and there
have been some price cuts in part A. But with the possible excep-
tion of the DRG reform, there has really been no reforms in the
hospital insurance program.

The coming bankruptcy of the program, though, is really just the
tip of the iceberg. After the date when the trust fund is depleted,
the hole is just going to get deeper and deeper and it is going to
continue to get deeper and it is going to accelerate for many years.

I know that there are people who have said that these projec-
tions are a red herring, and they have suggested that we should
just sit back and wait and see whether these dire projections really
materialize before we decide to do anything.

But the financial problems that are being projected now in the
hospital insurance program aren’t the result of very pessimistic as-
sumptions about the growth in health care costs. I actually con-
sider the economic assumptions underlying the projections in the
HI trustees’ report to be very optimistic.

The real problem now is the coming post-World War II baby
boom. When the post-World War II baby boom begins to reach age
65, the growth in the number of workers paying taxes is going to
decline and, of course, the growth in the number of beneficiaries is
going to accelerate. Currently, about four taxpayers support each
HI beneficiary, but by the middle of the next century, only two tax-
payers will support each HI beneficiary.

‘his problem has gotten so large that it is not going to be pos-
sible to solve it painlessly at this point. To place income and ex-
penditures in balance, even over the next 25 years, is going to re-
quire either a 34-percent immediate reduction in benefits or an im-
mediate 52-percent increase in the HI tax rate, or some combina-
tion of the two. Even then, that only solves the problems through
the next 25 years, and the years beyond that, which are even
tougher to deal with, will still remain.

Some people have suggested that the recent apparently slow-
down in growth in the rate of health care costs would suggest that
there is going to be favorable experience in the HI program and
that we ought to wait and see if this continues. This isn’t going to
happen, in my opinion. My observations over the years is that


112

STATEMENT OF THE
NATIONAL ASSOCIATION OF PORTABLE X-RAY PROVIDERS
BEFORE THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HEALTH
HOUSE OF REPRESENTATIVES
FEBRUARY 23, 1995

Introduction

MR. CHAIRMAN AND MEMBERS OF THE SUBCOMMITTEE: 1 am Jeffrey
Burgess, President of Burgess Health Associates of Middletown, Connecticut and President of
the National Association of Portable X-Ray Providers ("NAPXP"), a national trade association
representing suppliers of portable x-ray and portable electrocardiogram ("EKG") services.

We appreciate this opportunity to submit testimony on the Medicare program. The stated
purpose of the hearing was proposals for Medicare changes in the President's FY 1996 budget,
and proposals for Medicare that were not included in that budget. Our comments address the
latter area, recommendations for change mot proposed by the Administration, but that we believe
would significantly improve the performance of the program and especially its cost-
effectiveness

Portable X-Ray Suppliers: Who We Are and What We Do

I would like 10 preface these comments with some background about the service our
inembers provide to elderly Americans. The portable x-ray is a relatively little-known service,
although Americans should become more familiar with it in the coming years as the population
continues to age and long-term care coverage expands. Portable x-ray suppliers are companies
that bring x-rays and EKGs to the bedsides of elderly patients in homes or nursing homes.
Historically, these suppliers have been small, local, literally "Mom-and-Pop" firms run by former
x-ray technicians, but during the 1990s some consolidation has occurred, adding larger, multi-
state firms that have been able to achieve economies of scale and introduce technological
‘raprovements to enhance the quality of our industry. Portable x-rays are performed entirely by
ray cechnologists, with no physician involvement in the taking of the x-ray or the transportation
‘of portable x-ray equipment to patients. Thus, portable x-rays are not physicians’ services.
(After portable x-rays are taken, the films are transported to outside, unrelated radiologists for
interpretation only.)

Ninety percent or more of portable x-ray procedures are covered by Medicare. As a
result, the structure of the Medicare reimbursement system has dramatic impact on the portable
x-ray industry. Indeed, the way in which the incentives created by the Medicare system have
affected the portable x-ray industry -- a point I will discuss later -- illustrates the enormous effect
of health care reimbursement systems on market incentives.

Portable x-rays are functionally different from physicians’ office x-rays and much costlier
to provide. This is largely because portable x-rays entail special difficulties associated with a
geriatric, infirm clientele, The technologist must position the patient in his/her bed for the x-ray
and in the process, often deal with senility, orthopedic frailty, deafness, incontinence or
uncooperativeness. (Sometimes these problems produce motion during the x-ray and,
consequently, @ flawed film. In these cases, we repeat the procedure without any additional
reimbursement.) The technologist must also transport the x-ray equipment to the home or
nursing home and then assemble, dismantle, and reassemble it for each patient who is x-rayed.

Taken together, these circumstances mean that, whereas a stationary x-ray technician can
take about 40 x-rays per day, a competent portable x-ray technologist can take about six to seven
x-rays per day. These circumstances also require special training for the technologists who
perform portable x-rays and make the job relatively unattractive by comparison to x-ray
technician jobs in hospitals or physicians’ offices. Additionally, Medicare's Conditions for
Coverage of Portable X-Ray Services require ponable x-ray technologists to satisfy training and
‘experience requirements that technicians in hospitals and doctors’ offices do not have to meet.
Consequently, it is NAPXP members’ experience that portable x-ray suppliers must pay their


76

Protecting the Future You Have Earned =

TESTIMONY OF JAKE HANSEN
DIRECTOR OF GOVERNMENT AFFAIRS,
THE SENIORS COALITION

PRESENTED TO THE
U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HEALTH

It's time to reform Medicare

‘The Seniors Coalition is the nation’s third largest senior citizen advocacy
organization with over one million members across America. AS a seniors
‘organization that strongly supports the Medicare program, The Seniors Coalition
must take the responsible step of recognizing that the program is broken and badly
aceds fixing.

According to last year’s report by the Health Insurance Trust Fund's Board of
‘Trustees. funding for Medicare Part A will completely dry up sometime between
2000 and 2004, depending on various sets of economic assumptions.

Right now, it takes the payroll tuxes of four working Americans to support
Medicare coverage for just one Medicare beneficiary. Before the end of this
decade, fewer working Americans will be expected to provide Medicare coverage 10
even more beneficiaries, The ratio of Medicare beneficiaries to workers is expected
to grow so dramatically that by the end of the century, beneficiaries will be
spending between $2 to $5 for every dollar workers put into the system, By the
middle of the century, only two workers will be available to support each
beneficiary. But the Trustees tel) us that Medicare's trust fund will be long empty
before the major changes even occur.

Our Medicare system was designed in the 1960s, a time when America had fewer
seniors, health care costs were relatively low and many expensive medical wonders
simply did not exist. The very nature of our society has changed over the past 35
years, yet Medicare has not changed with the times. In its current form, Medicare's
costs are increasing too rapidly for the government and is citizens to bear. It does
not take the wisdom of Solomon to recognize that Medicare must be reformed now
or it will certainly perish.

The crisis cannot be exaggerated. Today, more than 32 million seniors depend on
the protection provided by Medicare Part A. By the turn of the century, that number
will have increased dramatically. Without bold and immediate action, the health of
America's seniors will be at grave risk.

tow DC Mersw OMhice 11166 Main Sereet, Suite 302 # Faurax, Virginis 22030 « Phone (703) 591-066)


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94

cause the hospital is going to get basically the same reimbursement
rate. There is no difference. We have no cost shifting from one seg-
ment to the other.

When Maryland started this system in the 1970s, our costs were
25 percent above the national average on a per-admission basis.
We are now about 15 percent below the national average, so we
have brought our costs down considerably. We have been able to
save Medicare money, save our companies money, and save costs
for taxpayers generally.

I guess my point is that we are able to do that through develop-
ing a rational system for hospital reimbursement, a fair system.

at concerns me in some of the testimony we have heard today
is that there is at least the thought that, perhaps, Medicare could
just pay less and that will mean we save money. That is not the
case in my State. There is no discounting in Maryland. HMOs pay
the same as a fee-for-service plan, as far as their hospital costs are
concerned.

So I would hope that we would look for innovative ways to bring
down Medicare costs rather than just slashing budgets and slash-
ing provider fees. Yes, we should took at beneficiaries paying in a
more rational way for what they receive, but we also should be
looking at ways of delivering the product in a more cost-effective
environment.

I would appreciate if anyone would like to make a comment
about that in the moment or two that is left.

Ms. Lam. I think that the concern over cost shifting is ve
valid, indeed. In what Third Millennium advocates, we must real-
ize that it is part of an entire package. I would certainly not sug-
gest that we simply reduce Medicare provider payments and that
that would solve the problem. I think that, in the context of this
package, it is one proposal that balances out some of the other pro-
posals and that it must be taken as part of that package. But I cer-
tainly understand the cost shifting concern.

Mr. CarDIN. Thank you.

Thank you, Madam Chairman.

Mrs. JOHNSON. I thank the panel for your participation today
and for your patience during our voting period.

Mrs. JOHNSON. I would like to call now the representative from
the GAO, Sarah Jaggar, our last witness.

Welcome, Ms. Jaggar.

STATEMENT OF SARAH F. JAGGAR, DIRECTOR, HEALTH
FINANCING AND POLICY ISSUES, HEALTH, EDUCATION, AND
HUMAN SERVICES DIVISION, U.S. GENERAL ACCOUNTING
OFFICE; ACCOMPANIED BY FRANK PASQUIER, ASSISTANT
DIRECTOR, AND CRAIG WINSLOW, OFFICE OF THE GENERAL
COUNSEL

Ms. JAGGAR. Thank you. Madam Chairman and members of the
subcommittee, we are very pleased to be here today to highlight a
recent development specifically related to the Medicare secondary
payer (MSP) program. This is a narrow focus compared to the
broad focus that you have had this morning, but it is something
that we feel needs to be brought to your attention right away.


9

General Motors, 3M, and any other large company you will find,
basically goes out and buys in the private system and private
plans. the Federal Employees Health Benefits Plan goes out and
uses private contractors to efficiently buy health care. It works in
the private sector and, I think, it can work for the public programs.

Medicare is a great program, but I think that you will find that
it is a dinosaur as far as payment systems go. We have been trying
to reform it for 15 years. There have been a lot of problems any-
time you touch Medicare, but, if you look at the private delivery
system, there are an awful lot of very rational, easy fixes you can
make in Medicare that will make hospitals, physicians, and other
providers perform a lot more rationally.

If you privatize, can you restrain growth? I think the answer to
that is, yes. Can you get budget savings? I think the answer to that
is, yes. Can you get BO to score it, which, I assume, we will get
into a little bit today? I don’t think there is any question, if you
do it right, CBO has no choice but to score it.

Can you get lower prices through quality and competition be-
tween private payers? I believe the answer to that is, yes, and, I
think, from our Hospital standpoint, we would much rather deal
with the private sector and competition squeezing us, and the issue
here is definitely squeezing, than having the government continue
to regulate us with perverse incentives and having a squeeze that
is not fair across the board.

It looks like my time is up.

Chairman THOMAS. The gentleman’s time is expired.

Mr. SCULLY. The issue, I guess, for us is it is not always how you
cut or how much you cut; it is how you do it. I think that, basically,
we prefer to have private sector cuts.

e thing that concerns us is that if you treat Medicare as a
bank for tax cuts and for deficit reduction for the next 5 years, you
are going to drive terrible health care policy. If you look at Medi-
care as a resource to solve part of the problem, to get some of the
money to solve the problems that you have, then, I think, we can
work together, and we would like to work together, to get reason-
able amounts of money out of a restructured system.

But if Medicare policy and health care policy is driven solely by
budget policy this year, I think Congress is going to have a prob-
lem, I think you are going to have a big problem with your hos-
pitals and your people in your home districts, and I think we could
have a very ugly year with a lot of screaming and yelling.

We would ke to avoid that and we would like to work with you
to get reasonable budget policy, reasonable health policy, and help

‘ou meet your goals, but I personally don’t think Medicare and
Medicaid alone are a big enough pot or a big enough bank to pay
for all the things you want to do, and | think you will find that,
as well.

Thank you, Mr. Chairman.

(The prepared statement and attachments follow:]


77

Reforming Medicare will be a daunting, yet not insurmountable task. When people
of good will come together, joined in a common cause, mountains can truly be
moved. But such a monumental task must be undertaken in an atmosphere of good
faith cooperation. The Seniors Coalition was profoundly disappointed that President
Clinton did not provide any measure of leadership or direction regarding the
Medicare crisis in his budget for fiscal year 1996, While extending a few provisions
that were scheduled to expire in 1998, the President's budget does nothing to change
Medicare as it stands now. In taking a dive on the issue, the President is,
shortchanging Medicare of the bipastisan attention it so desperately needs. The
Seniors Coalition urges President Clinton to join those who are actively looking for
positive solutions to ensure Medicare's continued survival. In this time of crisis,
neither party should use Medicare as a football to score political points.

‘The Seniors Coitition intends to take an active roll in developing Medicare sotutions
and bringing them to the attention of America's seniors, Change can be an
uncomfortable process, fraught with potential hazards. But in this case change is
both inevitable and necessary. That's why, Mr. Chairman, we encourage all the
other seniors organizations to roll up their sleeves and join us in the process

In tackling Mcdicare's problems, we must be caretul to avoid the wrong solutions.
The reecnt national health care debate was a good example of good intentions run
amok. President Clinton was right in his attempt to focus national attention on:
health care reform. But his legitimate concern over the serious medical problems
that face the nation did not justify his dramatic proposal for social engineering on a
massive scale. Indeed, his plan would have created the sort of health care crisis,
particularly for Medicare, that he said he wanted to forestall. Under any one-size-
fits-all government plan, seniors would end up with less personal choice, higher
bills, and poorer care.

In recent years, Medicare has turned to cost-shifting as a means of controlling the
escalating cost of the program. While the results were partially successful on the
surface, overall medical costs accelerated. The American public and Medicare
beneficiaries suffered alike as a result,

‘Some policymakers may favor making deep cuts in Medicare as a simple solution.
The Seniors Coalition will not accept any cutbacks in Medicare without the
implementation of systems that would allow seniors improved access and choice in
their health care. Others favor simply boosting the level of payroll taxes to the HI
trust fund. In order to fill the gap, such an increase would need to be substantial.
Such an increase, however, would harm our economy and ultimately push health
care costs further out of reach for seniors

Amidst all the peril, we find important opportunities for seniors. Real Medicare
reform must include financially honest mechanisms that promote choice and market
competition. A system can be designed to give seniors more choice in determining
how their health care dollars are spent. As a result, seniors will receive better health
care at a lower cost.

Medicare reform is more than a theoretical notion, Several intriguing proposals
currently in circulation are well worth consideration:


83

generational warfare. The issue before us is about looking toward the future and realizing
the severity of the problems out there. It is about dealing with those facts and those

problems now. before they deal with us.

Every year we wait, the problem compounds. Unfortunately. in his 1996 budget.
President Clinton and the administration punted on Medicare. It is imperative. Mr.
Chairman, that this Congress not do the same thing. The pending insolvency of Medicare
cannot be pushed “off the table". The year 2001 is no longer a futuristic fantasy. To my

generation it is a reality that is literally just around the corner.

Imagine for a moment that we are in the year 2001. The Denver International
Airport has just opened and the baseball strike has finally ended. For six years Congress
and the President have tossed the idea of Medicare reform back and forth. The President
offered insubstantial reforms year after year, and Congress, while condemning such
weak-kneed approaches, also ultimately became bogged down by special interests and
partisan bickering, Medicare is now one month away from running out of money. The
nation is faced with a horrendous decision. We must raise payroll taxes on young people
by nearly 4.5% immediately to balance the program, or, we must slash all benefit checks
dramatically, leaving many needy seniors unprepared and without vital health care. The
nation is of course outraged. Why must a country as great and wealthy as America have
to choose between burdening its workers with unbearable tax rates, and denying poor

senior citizens health care?

Mr. Chairman, we will not have to make that drastic decision if we act soon. We
can ensure that Medicare continues to provide benefits to those who need them and we
can maintain reasonable tax rates if we have the courage to face the situation today, rather

than tomorrow.

Third Millennium's suggestions for reforming Medicare follow the approach
advanced by Senator Bob Kerrey and former Senator Jack Danforth of the Bipartisan


5

We are supposed to focus on Medicare provisions in the Presi-
dent’s budget, and if the experience of our hearing on February 10
is evidence, we will hear from the majority criticizing the President
for not proposing more cuts and, as the chairman has done, point-
ing with alarm to the crisis in the part A trust fund.

t us deal with the second issue first. The insolvency of the
trust fund is a serious problem and we must pay attention to it,
but the last people who have any right to say anything about it are

colleagues on the Republican side. As I have pointed out repeat-
edly, the Republicans are the only ones who have on the table a
proposal which takes money out of the part A trust fund, through
a reduction in the amount of Social Security benefits subject to tax-
ation. Some $15 billion would be removed from the trust fund over
5 years, $48.2 billion over 10 years.

It is very disingenuous to complain that the President’s proposal
doesn’t do enough when you have a proposal on the table that
takes you in the wrong direction.

The other reason my Republican colleagues’ newfound concern
about the trust fund is ironic is that the last year they had the
chance to help us enact the largest Medicare savings proposal ever
proposed, it included, in the Ways and Means Committee reported
version of health reform, that which would have done more than
any proposal to improve the long-range fiscal health of the trust

ne

Nevertheless, during the full committee markup, the Republicans
offered an amendment to remove all of the Medicare savings out
of the proposal, and every Republican member voted for this spe-
cific proposal.

So I hope, Mr. Chairman, if I report to you that your newfound
concern sounds a little phony to this side of the aisle, that we have
good reason to be rather skeptical.

The last point is that we have been here before. As you men-
tioned, I am going to mention it, that the trustees in 1977 reported
that the fund would become insolvent in 1987. By my calculation,
that was about 8 years ago. By the time President Carter left of-
fice, the insolvency date was extended to 1994. Today, the insol-
vency date is 2001. I understand the next trustees’ report will push
the insolvency date out a few years further, not through anything
we have done.

So years of reform in Medicare, through the creation of the DRG
system for hospitals, through the resource-based relative value sys-
tem for physicians, has kept the trust fund solvent far longer than
expected. In maintaining the program solvency, there were abso-
lutely no magic bullets. It has been hard work, something the Re-
publicans don’t seem to know much about.

We have been successful in strengthening the Medicare program
and have done so without merely shifting costs to beneficiaries.
Democrats have done this for one reason. We made a contract, a
contract with Americans, not a contract with people who contribute
to Newt Gingrich’s GOPAC, not a contract with the big insurance
companies who put their hired guns on Republican staffs and who
buy out elected officials to bring big profits to for-profit hospitals
and insurance companies while withholding needed care to the poor
and to the seniors. Over the past 30 years, we have maintained a


lll

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81

Mr. Chairman, no generation in American history has been left
with the tail-end of so many dysfunctional systems as the genera-
tion currently graduating from college and entering the workplace.

My generation and those after me will pay large amounts of our
paychecks into programs that the experts tell us will be bankrupt
when we retire. We are on the verge of inheriting a world of crum-
bling entitlement programs, a burgeoning national debt, decreased
national savings, and an increasing number of retirees who expect
to be generously "supported.

As a generation, we cannot face this tremendous fiscal burden
and still lead this Nation into greatness. Thank you.

(The prepared statement follows!]


107

With such low margins, and payments from all payors ratcheting down, Medicare
dependent hospitals face two choices now: either close or reduce service. In either case, who
really loses? The ultimate losers will be the Medicare beneficiaries these hospitals serve. When
their community hospital closes, elderly persons must find another -- one which will certainly be
Jess familiar and will almost certainly be farther away, a serious problem for elderly persons who
are not as mobile as younger people. When hospitals are forced to reduce services, the first to go
will be those programs that maintain the dignity of the elderly — but represent costs not
reimbursed by Medicare: transportation and feeding assistance, community outreach centers, and
social services. Next on the chopping block will be labor costs -- reducing the hospital staff on
whom the elderly depend for the special care they need, such as monitoring medication,
preventing falls, and help with dressing, feeding, and other basic activities. All of these service
reductions cause elderly patients to suffer and require family members to step in and provide the
labor-intensive service that the hospital can no longer furnish.

Such results make no sense for Medicare, a program that was designed to serve the
elderly. Such results also make no sense at a time in the nation's history when middle-class
families are already shouldering more burdens to hold down jobs, raise children, and care for
elderly relatives than ever before. Both the “Contract with America” and the Clinton
Administration have pledged tax relief for the middle class and senior citizens. In light of these
goals, the Medicare system should not be distorted by reimbursement inequities that
unnecessarily compromise health care for the elderly and complicate life for their families.

A Modest Solution That Meets ProPAC’s Goals

We fully recognize that the projected insolvency of the Medicare hospital trust fund and
the prospect of a balanced budget amendment will result in even further PPS cuts. It is not our
objective to stem that tide. What we recommend, instead, is a small correction within the
system. A minor, budget-neutral adjustment in the PPS would resolve the inequity that
handicaps Medicare dependent hospitals and threatens their patients. In order to approach a
level playing field with the rest of the hospital industry, Medicare dependent hospitals seck a
modest correction in the PPS update system. This correction would recognize Medicare
dependent hospitals as a class and adjust PPS updates so that the update for this class annually
was sufficient to bring their average Medicare margins to the level of the average for all
hospitals. We would leave it to the experts at ProPAC to recommend the specific annual updates
based on their data,

This modest shift to restore Medicare equity would cost the U.S. Treasury nothing. It
‘would follow the pattem of update differentials used by Medicare in the past, and currently, to
equalize margins between rural hospitals and others, and to create reimbursement equity for
primary care physicians. Restoring some equity for Medicare dependent bospitals is also
consistent with ProPAC's recent recommendations that Congress

continue to modify PPS payment policies to ensure the equitable
distribution of payments among hospitals. Payment adjustments
are necessary to recognize appropriate variations in costs across
hospitals..and reflect the broader responsibilities of the Medicare
program to maintain access to quality care,

ProPAC, March 1993 Report to Congress, Recommendation #2 at 9.
We thank you for the opportunity to present our views to the Subcommittee.

Doc. 23818


92

people as we can. The important part is recognizing that there is
a problem so that everybody can work on it together.

Mrs. JOHNSON. Thank you. I appreciate that, and I appreciate
your support of Medicare Select. It is a useful move. It is a very
teeny, tiny action in the face of the enormity of this problem, but
I do hope that we will be able to get that bill out of subcommittee
and through the House in fairly rapid order, because it will, for the
first time, make permanent a more flexible preferred provider op-
tion for seniors.

There is nothing mandatory about it. As you say, nobody on this
side of the aisle, and, I dare say, no one on the other side of the
aisle has any interest at all in forcing seniors into any plan they
don’t elect or in keeping them in any plan that they aren’t happy

in,

With that clear, I do look forward to working with you on re-
forms of HMO risk contracts and those kinds of vehicles to help
seniors have greater choice. It is going to be their primary avenue
to expanded benefits.

Ms. Lamm, I was very pleased to see in your testimony that you
have picked up on some of the tougher recommendations made by
some of my colleagues in the other body. The House Republicans
have now, in two budgets, introduced and voted on means testing
Medicare premiums. We have not gone through in the detail that
you have, and I appreciate your putting on the record and talking
through a little bit the specific recommendations that you are mak-
ing to make Medicare more sensitive to the extraordinary variation
in economic power that is typical in our seniors community.

Ms. Lamm. I will go ahead and do that, but I will start by saying,
again, the recommendations that we make, and we realize, are just
a few of many out there. We also realize that, after all is said and
done, they might not be the best ones that could be made. Again,
I say that it is most important that this body get together and act
to solve the problem.

We believe, again, in the means testing of Medicare, simply be-
cause, as a group, Third Millennium believes that the elderly have
gone from among the poorest in the country to the most wealthy
in the country. It is important, when I say that, to begin by saying,
the elderly are a very diverse group. Obviously, there are very
many senior citizens who rely on Medicare and who need it, and
that should not be taken away from them. But there are also very
many wealthy seniors who, we believe, could pay a greater share
of the Medicare costs.

That is followed by the second proposal that we had here, adding
a graduated part A premium for beneficiaries with incomes above
150 percent of poverty. Again, I forward this by saying that the av-
erage enrollee only pays about 32 percent of the cost today. We feel
that it would be a good move to add that premium.

The part B proposals that we recommend are, again, on similar
lines, because when Medicare part B began, the share was really
50:50 and that has shifted significantly since the program began.
We feel that it is only fair to make sure that we maintain the 30-
percent share paid by enrollees today and that that is not de-
creased even further to 25 or 20 or even 15 percent.


60

health care costs of 2 percentage points. This 2-percentage-point
rate of increase in health care costs persists for about 8 to 10 years.

As I mentioned, the second factor is fee-for-service medicine. It
interacts with the third factor to allow unlimited increases in the
volume and intensity of services. We all know that the primary
driving force behind increases in Medicare expenditures are not
price increases—we can control those—but it is volume and inten-

sity.

Bor example, during the 10-year period ending in 1992, over
three-fourths of the increases in payments to physicians rose be-
cause of increases in volume and intensity, not because of price in-
creases.

The cost of health care can theoretically be controlled by either
one of these, by eliminating either one of these. Of course, introduc-
ing cost sharing is the way to control it by affecting third-party
payments, and managed care is the way to remove the factor of fee-
for-service medicine.

I am not so sure—you have heard testimony earlier about the
implications of the TEFRA Medicare risk sharing program, and I
am not so sure that that has as great a promise as some People
think it has for controlling costs, and the reason is because of the
difficulty of balancing the need for allowing a higher payment level
in order to get plans and beneficiaries to participate against the
need for lower payments so that Medicare can save on it.

Thank you.

(The prepared statement follows:)


s the greatest hoax -- even fraud -- that has been imposed on the American public
is the information that the federal government has given about the relationship between the
General Budget and the various trust-lund programs, such as Medicare and Social Security.

Under the so-called Unified Budget procedure, the operations of these programs are
Included within the general operations of the federal government. Thus, any excess of income
from sources oulside of the federal government are shown as reducing the General Budget
deficit, which does not really happen because such excesses are invested in government bonds
and other obligations which are part of the National Debt. If the trust funds had not had such
excesses to invest in government obligations, the general public would have had to have
purchased obligations of similar amount, and the National Debt would have been exactly the
same size. Thus in fiscal year 1994, the real General Budget deficit was $293 billion, or $80
billion higher than the deficit shown under the Unified Budget procedure.

Further, under the Unified Budget procedure, the interest paid to the trust funds on their
investments is not counted as interest, but rather merely as an intergovernmental transaction.
However, such interest is real interest and adds to the General Budget deficit and the National
Debt in just the same manner as any other interest paid on obligations of the federal government.
Thus, the interest on the National Debt is now running at about $300 billion per year, rather than
the horrendous $200 billion quoted under the Unified Budget procedure.

The operations of the Social Security trust funds and the Hospital Insurance Trust Fund,
which are with respect to self-supporting payroll-taxcinanced programs, should not be
considered in connection with the great deficit problems of the General Budget. The operations
‘of the Supplementary Medical Insurance Trust Fund do, however, affect the General Budget,
because about 75% of the contribution income comes from the General Fund of the Treasury
and.is thus a true expenditure of the federal government.

In summary then, changes in the Hospital Insurance program, as well as the Social
Security program, should be made solely for the sake of such programs, and not at all far the
sake of the General Budget deficit.

In fiscal year 1994, the Hospital Insurance Trust Fund increased by about $3.4 billion, to
$1296 billion at the end of the year. However, under the Unified Budget concept, these
‘operations contributed about $10 billion to the budget deficit, because receipts from the general
public fell short of disbursements.

In the next year or two, the balance of the Hospital Insurance Trust Fund will peak and
wilt then decrease rapidly unti! becoming exhausted, likely at some time in 2001. During this
period, the operations of this trust fund will result in increasing amounts being added to the
budget deficit under the Unified Budget concept, but nothing at all under the real budget deficit
basis, because the bonds being redeemed by the trust fund will, most likely, be purchased by
the general public indirectly through new public issues.

It should be noted that, i the trust-fund balance is ever exhausted, the program does not
come to a halt and go out of existence. Rather, payments to the suppliers of services are
delayed, and increasingly so as time goes by.

In fiscal year 1994, the Supplementary Medical Insurance Trust Fund decreased by about
$2.4 billion, to $20.9 billion at the end of the year. In subsequent years, the fund balance will
fluctuate around this level (or perhaps somewhat lower), but Is unlikely that it will ever be
exhausted, because the premium rate is determined annually so as to maintain the solvency of
the program. Both the real budget deficit and the deficit under the Unified Budget concept are
significantly affected by the operations of this trust fund, because about 75% of the cost of the
program is borne by the General Fund of the Treasury.

Unfortunately, the President's 1996 budget proposal does not address the financing
problems of the Medicare program -- the impending exhaustion of the Hospital insurance Trust
Fund, which will very likely occur in about 5 years, and the high, ever-rising cost of the
‘Supplementary Medical insurance program. Instead, the budget proposal merely extends
Certain financing and reimbursement provisions which were of a temporary nature.


18

Number three, open up interim steps like Medicare Select or the
current risk contract law to try to create benefit packages that
make more economic and rational sense to the beneficiary.

And number four, really try to restructure the program in some
sort of certificate-based or voucher-based context to allow bene-
ficiaries to use their market power to compensate for the obvious
inabilities of government. Government pricing will always be coun-
tercyclical to the private sector. If we allow beneficiaries and their
power in the private sector, we will be successful in getting Medi-
care’s growth rate closer to that of the private sector. We will help
beneficiaries, we will help the budget, and it won’t be the kinds of
screaming and pain that Tom has articulated, if we just step up to
the plate now.

Thank you, Mr. Chairman.

[The prepared statement and attachments follow:]


47

to do that. If you want to get into this issue of quality and who
does quality better and why the quality problems have been so big
in the publicly run programs, that certainly is a good topic for us
to discuss and it would Be worth a whole hearing itself.

I did want to point out that these articles are all about
government-run HMOs and government has known about the prob-
lems and has been completely incompetent to solve them over a
number of years.

Mr. STaRK. Would the gentlelady yield?

Mrs. JOHNSON. In just a moment. Let me ask my question.

My question goes to the issue of risk selection as we move Medi-
care into a system in which the individual has more choice. We had
testimony 2 weeks ago to the effect that where 25 to 30 percent of
the people in an area are in managed care, there is no problem of
risk selection and companies that can medically underwrite don’t,
even for the senior population.

This says to me that medical savings accounts are a perfectly
comfortable option for the private sector, as long as we have
reached some critical mass of participation in integrated system
care.

Would you agree or disagree? Are we reaching an era where
medical underwriting isn’t going to be a problem, anyway, and we
can accelerate that through action that we might take, particularl:
as we look at bringing seniors into this system? We certainly can’t
allow seniors to be discriminated against.

Ms. STEELMAN. I agree very much with your observation, that as
the market evolves, risk selection issues diminish. Much of the dis-
cussion about risk selection reminds me, unfortunately, a lot of the
debate we had last year, on trying to anticipate every single prob-
lem associated with some massive restructuring, down to the 100th
degree, and if we can’t solve that, then we can’t do anything.

I think we do need to turn this over to the market, where these
problems are diminishing, and, step by step, watch it very care-
fully. Do we have a spiral that is out of control? We have a policy
process here every year, of which this hearing is simply the begin-
ning, in which we can go back and address those issues.

We cannot, sitting in Washington, anticipate how the market will
behave or how beneficiaries will choose to use their dollars. We can
only know that it cannot possibly be worse than what we have done
the last 15 years, trying to run it from government.

So I think these things should not be barriers to action but
should be carefully watched, try to track the private sector, try to
make sure that the incentives are such that the integration of
these plans does move up at some predictable simultaneous kind
of level, so you don’t have a massive insurgence into one kind and
no availability in another area. But I think these problems are do-
able and we just have to do it over time.

Mr. SCULLY. If I could throw in for one brief second, I think, in
a situation where we have guaranteed issue, guaranteed renewabil-
ity, every plan that accepts seniors would have to take everybody,
the opportunities for medical underwriting are a Jot less.

Nevertheless, 1 think the one serious risk of going to an FEHBP-
like program in Medicare, and I don’t think there are any risks ex-
cept this, are risk selection. I think the options for it are limited.


51

Mr. McDERMoTT. These would just be the scumbags of the deliv-
ery system. But if they can live up to minimal Federal standards,
there is absolute choice under Medicare.

Mr. SCULLY. I think it would be virtually impossible to find a city
in this country where Medicare beneficiaries have the choice of as
many polices as anybody in the Federal Employees Health Benefits
Program.

Mr. McDermorr. Seventy percent of the Medicare beneficiaries
live in an area with HMO service availability. Seventy percent of
the Medicare beneficiaries live in an area that has available to the
Medicare beneficiary a managed care or HMO.

Mr. SCULLY. Maybe one, and it is probably a risk contract, and
I will bet if you looked in those areas, the Federal Employees plan
would probably have 10 or 12 choices, if not more.

Chairman THOMAS. The gentleman’s time has expired.

Ms. STEELMAN. There are a number of questions that have been
raised here, though, that are worth pursuing, because this is a
thinking person's debate. How you structure this so that Medicare
can work over the next 25 years, can be secure, is a thinking per-
son's debate.

Chairman Tuomas. Absolutely, and I just want to ask the gen-
tleman—

Mr. McDeErwmorr. It can’t be done on a galloping horse in the
next 35 days. Do you agree with that?

Ms. STEELMAN. I don’t know that anyone is suggesting that.

Mr. McDermott. OK, as long as that doesn’t happen.

Chairman THomas. The gentleman from Washington should seri-
ously consider the idea of a sitcom based upon a psychiatrist in Se-
attle whose father has an interesting lifestyle that he is trying to
determine what he ought to do.

Also, this afternoon, the gentleman from Washington has an op-
portunity, as we mark up Medicare Select, to provide us with more
data as we move the Medicare Select program to a national pro-
gram, so that we can better determine what is going on.

The gentlewoman from Connecticut does want just a moment.

Mrs. JOHNSON. I think it is important, because I do think that,
in the end, what we are involved in here is a thinking person’s de-
bate. If we don’t come out with the right answer, we are going to
do great harm to our seniors.

I think it is important to clarify what choices seniors currently
have. Seniors currently have primarily a fee-for-service choice. The
only HMO choice they have is where an HMO has a risk contract
with the government. So the fact that 70 percent of people live in
an area where there is an HMO option in the market doesn’t mean
they have access to it, and I think that we have to be very clear
about that.

Mr. STARK. Why don’t they?

Mrs. JOHNSON. Because those managed care plans do not have
a risk contract with the government. One of the reasons——

Mr. StarK. I said, 70 percent of them have risk contracts or
other Medicare-approved contracts available to them in their area.
Seventy percent of Medicare beneficiaries have it available and
only less than 10 percent take it.


80

The Nation is, of course, outraged. Why must a country as great.
end wealthy as America have to choose between burdening its
workers with unbearable tax rates and denying poor senior citizens
health care?

Mr. Chairman, we will not have to make that drastic decision if
we act soon. We can ensure that Medicare continues to provide
benefits for those who need them and we can maintain reasonable
tax rates if we have the courage to face the situation today rather
than tomorrow.

Third Millennium’s suggestions for reforming Medicare follow the
approach advanced by Senator Bob Kerrey and Senator Jack
Danforth of the Bipartisan Commission on Entitlement and Tax
Reform. My written testimony outlines those proposals and I won't
go into them further, but I will say that there are many ways to
substantially reform Medicare and our solutions are just a few
common sense approaches.

What is important, Mr. Chairman, is that something be done.
Tais Congress must realize the problem and act in a bipartisan
way to solve it. Congress must ensure Medicare’s long-term sol-
vency and not just slap a Band-Aid over it to get us through the
next 2 years.

Congress must also begin to address the similar insolvency prob-
lems facing Social Security. Last year, Third Millennium commis-
sioned a national survey that found that nearly twice as many
young adults believe in the existence of UFOs as believe that Social
Security will exist by the time they retire.

The crisis of confidence in Federal retirement programs among
young people is astounding. With this in mind, we will be watching
to see how the Nation’s leaders confront the Medicare dilemma,
with an eye to how they will confront the much larger problem of
Social Security. From my generation’s perspective, inaction on ei-
ther of these fronts is not a justifiable alterative. Not to act now
is public policy malpractice.

Young people are willing to sacrifice because we know the con-
sequences to our generation and to future generations if we do not.
In 1998, people born in the 1960s and the 1970s will represent the
largest potential voting block in the country. So the good news is
that doing the right thing, averting disaster in Medicare and Social
Security quickly will become the politically rewarding thing to do,
as well.

I believe the ultimate challenge of this Congress is one of far-
sightedness. Would a private business, knowing that financial dis-
aster is pending, wait until tomorrow to deal with the situation?
Would an individual family, realizing it is running into financial
troubles, wait until tomorrow to change course? Why, then, should
the Federal Government be held to any lower standard?

I realize I am out of time, so I will conclude simply by saying
that every generation of Americans has its own assets and liabil-
ities, and I truly don’t believe that people in my generation are
whining about the future we are inhering. But, we can no longer
sit idly by as politicians compromise our economic future, and more
importantly, the future of our children to pacify powerful special
interest groups.


142

‘out of other budget functions to cut.

33. For an up-to-date survey of these issues, see Richard Jackson, “An Analysis of Social Security and Medicare

Long-Term Cost Projections,” an unpublished submission to the Bipartisan Commission on Entitlement and Tax
Reform at the request of Peter G. Peterson.


135
APPENDIX I: OFFICIAL HEALTH CARE BENEFIT ASSUMPTIONS

The cost and revenue projections for Medicare depend, to a large extent, on the three
economic and demographic scenarios prepared by the Social Security Trustees. ‘These scenarios
specify the real tax base from which Hospital Insurance will derive most of its revenue as well
as the total number and age composition of all of the HI and SMI beneficiaries who will be
receiving benefits. Yet the cost projections for Medicare clearly require something more -- some
extra set of assumptions about how fast health benefit costs will rise even if general inflation,
beneficiary numbers, and beneficiary age are held constant. HCFA calculates these extra
assumptions according to a complex and interacting array of variables, including “labor forces,"
“nonlabor forces,” "input intensity,” and “volume of services.” None of these variables are very
helpful in trying to understand the plausibility of the underlying assumptions.

A conceptually simpler approach is to take the future cost projections for Medicare and
to disaggregate their annual growth into four separate components: first, the cost growth due to
a greater number of beneficiaries; second, the cost growth due to the higher age composition of
beneficiaries; third, the cost growth due to economy-wide inflation; and fourth, the cost rate due
to “extraordinary” causes. The first three of these assumptions are all determined by the Social
Security scenarios. Together, they answer the question: How much must Medicare spend each
year to give the same amount of inflation-adjusted care to each beneficiary at each age? What
they leave unanswered is the extent to which Medicare spending may rise above and beyond any
consideration of inflation, population, or age. This is the “extraordinary” cost growth. Its past
history and future projected values are shown in Table 3

Ever since Medicare got started in the mid-1960s; this extraordinary cost growth has
always been a very important (and explosive) component of total cost growth. From 1970
through 1993, for instance, it has averaged over 5.0 percent annually. Yet what's especially
interesting is the projected future trend in extraordinary cost growth. Until the year 2005, it
stays close to its recent rate. It begins to slow down, however, over the following decade -- just
when the Boomers are beginning to retire. Past the year 20/5, it recedes to roughly one-quarter
of its average historical rate. In other words, the explosive historical cost trend is supposed to
cool off just when a very large generation (with a notorious habit of bidding up the prices of
whatever they need throughout their collective lifecycle) begins to exert unprecedented pressure
on the demand for every variety of health care, Curiously. the cost difference between the two
scenarios narrows over time. Past 2030, the extraordinary growth rate under the "pessimistic"
scenario Hl is actually less than under scenario Il.

What accounts for these anomalies is. basically, an ad-hoc projection methodology that
pays little attention to underlying assumptions. To generate scenario Il, HCFA simply assumes
that, after the year 2018 (25 years from now), extraordinary program cost growth will slow all
the way down to real hourly earings growth (for Medicare Part A) or real GDP per capita
growth (for Medicare Part B). In small print. the Trustees do at one point concede the optimism
of this assumption: “Given the historical experience of SMI costs per enrollee increasing faster


13

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137
APPENDIX HI: CALCULATING THE TAX BURDEN

‘Our model determines the distribution of taxation according to a few simple formulas.
The goal is to approximate the attribution of total taxation to worker earnings and compensation
-- while avoiding the complexity of simultaneous equations or inappropriate attempts at
precision. Given the fixed “scenario” framework, any dynamic assumptions are of course out
of the question.

Following the familiar NIPA categories, our model identifies five types of taxation for
all levels of government. To each, we add here our shorthand label in parentheses: (1) personal
tax and nontax receipts, exclusive of federal taxation of Social Security benefits (INCOMETAX);
(2) federal taxation of Social Security (SsTax); (3) indirect business tax and nontax accruals
(SALESTAX); (4) Corporate earings taxation (BUSTAX); and (5) contributions for social insurance
(PAYTAX). GENREV equals the sum of the above, minus all payroll tax revenue to the Social
Security and Medicare trust funds (PAYOASDHI) and minus the employer-paid share of all
remaining PAYTAX, Future values for SsTAX are determined by the scenario. Otherwise, the
model assumes that GENREV (both the total and each type) remains constant as a share of 1993
GDP in all future years, except to the extent that GENREV must increase to meet the budget-
balance condition (which must be met through a linear reduction of the nominal deficit between
1995 and 2010 and through a continuous balance thereafter). If GENREV increases, the model
assumes that each type within GENREV increases proportionally. The model assumes that all
PAYOASDHI follow’ the official scenarios until trust fund bankruptcy, when (for each trust fund)
pay-as-you-go financing requires that PAYOASDHI be raised to cover the current trust fund deficit.
The model assumes that any PAYTAX not included in GENREV or PAYOASDHI remains constant
at its 1993 GDP share; in order to avoid a trivial complexity, the model assumes that increases
in SSTAX above the scenario values are not credited to the Social Security trust funds.

The above account describes how the amount of each type of taxation is determined for
ail years. Now we move on to the incidence of taxation. To begin with, we identify four
potential bearers of the tax burden. Again, we add here our shorthand label in parentheses:
worker eamings (EARNINGS); employer-paid compensation minus earnings (FRINGE); retum on
capital (CAPITAL); and total government transfer payments (BENEFITS). the model assumes taxes
on EARNINGS and FRINGE are both borne by workers, but we separate the two in order to isolate
the tax reduction in earnings alone. While taxes on BENEFITS may be bome by anyone,
including workers or capital owners, it makes sense to treat them as a separate category -- since
they usually aren't regarded as a tax on market activity, but more as a government clawback of
its own outlays. A useful subset of BENEFITS is taxable benefits (TAXBENEFITS), which consists
of the major benefits other than Social Security (i.e., all local, state, and federal employee
pension programs) on which many or most recipients have to pay income taxes. In all future
years, BENEFITS (excluding Social Security, Medicare, and Medicaid for seniors) and
TAXBENEFITS are assumed to remain constant at its 1993 GDP share.

For each type of taxation, the incidence is attributed to different bearers as follows.


55

STATEMENT BY ROBERT J. MYERS PRESENTED TO
THE SUBCOMMITTEE ON HEALTH OF THE COMMITTEE
ON WAYS AND MEANS, HOUSE OF REPRESENTATIVES,
FEBRUARY 23, 1995, WITH REGARD TO THE MEDICARE

PROVISIONS IN THE PRESIDENT’S BUDGET

Mr. Chairman and Members of the Subcommittee: My name is Robert J. Myers. | served
in various actuarial capacities with the Social Securily Administration and its predecessor
agencies during 1934-70, being Chief Actuary for the last 23 of those years. In 1981-82, | was
Deputy Commissioner of Social Security, and in 1982-83, | was Executive Director of the National
Commission on Social Security Reform. in 1994, | was a member of the Commission on the
Social Secu "Notch" sue. am currenty a member o the Prospective Payment Assessment

mmission,

Before discussing the Medicare provisions in the President's 1996 budget proposal, |
should like to deal with three other matlers. The first one Is the all-important subject of what
should be done about the continually-ising health-care costs. The second relates to the
accuracy of actuarial estimates for the Medicare program, particularly those made in 1965, when
it was initiated. The third is the relationship between the Medicare and Social Security programs.
and the General Budget.

What Should Be Done About Health-Care Costs

For many years, health-care costs have been rising more rapidly than the general price
level. This has been due to a number of factors, such as increasing ulilzation as more and more
people,until recently, have had less out-ol-pocket cost due to insurance (including Medicare)
and such as the availability of new, although costly, techniques and medicines.

Hf costs are to bo contained ~- i.e., lowered, at least in relative terms ~ this can be
accomplished by either limiting the services available or reducing relatively the remuneration of
the suppliers of services. Services can be limited by rationing, requiring tong waits, or so-called
managed care (however that may be defined and practiced). As to managed care, this may be
beneficial to the individual if it is done primarily for her or his interests, but the reverse is the
case if it is done primarily for the insurer's sake. Certainly, the procedure under managed care
should not be that the managing physician requires the individual to use more generic drugs,
have fewer lab tests, and less frequent physician and specialist visits than he or she would want
for his or her own family under similar circumstances.

| believe that the problem of rising health-care costs should not be handled by reducing
services, excep! when it is completely clear that unnecessary ones are being rendered. Nor do
I believe that legislative limits should be imposed on the providers of services unless itis clear
that excessive charges are being made. Certainly, as to the Medicare program, the type of cost-
shifting that has occurred as a result of legislative action was most unfair and was not in
accordance with the intent of the original law. No more of such cost-shifting should occur, and
it would even be desirable It the present degree thereof were lessened.

‘Thus, | have no solution to the problem of rising health-care costs, There should be great
cost-effectiveness without reducing or unduly limiting services, as well as increased cooperation
among patients, insurers, and suppliers of services -- and not head-on adversarial and
antagonistic relationships. So, in the end, it comes down to the matter of increased financing,
rather than reduction of services.

Quite naturally, nobody likes paying more for things like health services that are not
necessarily enjoyable at the moment. However, | believe that people should, and will, do this
rather than spend the money on creature comforts, such as more luxurious homes, more cars,
and more entertainment. And, because of the uneven incidence of health-care cosls, the risk
must be spread around by some insurance mechanism.

Accuracy of Actuarial Estimates for Medicare

Some ctilics of health care reform have cited the variation of the actual experience under
the Medicare program from the estimates for it which were made in 1965 as evidence that any
estimates for new proposals may be far too low. In particular, some point out that the estimate
for Medicare costs in 1990 which was made in 1965 was $9 billion, whereas the actual
experience was $111 billion, or over 12 times higher. Such comparisons are invalid for a number
of reasons, including the changing value of the dollar and new benefit provisions being added.
For details on this matter, see my arlicle, “How bad were the original actuarial estimates for
Medicare's hospital insurance program?", The Actuary (Sociely of Actuaries), February 1994.


ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE CONTACT: (202) 225-3943
February 16, 1995
No. Hl-4

THOMAS ANNOUNCES HEARINGS ON
MEDICARE PROVISIONS IN THE PRESIDENT’S BUDGET

Congressman Bill Thomas (R-CA), Chairman of the Subcommittee on Health of the
‘Committee on Ways and Means, today announced that the Subcommittee will hold a hearing
‘on Medicare provisions contained in the President's fiscal year 1996 budget proposal. The
hearing will take place on Thursday, February 23, 1995, in the main Committee hearing
room, 1100 Longworth House Office Building, beginning at 9:30 a.m.

In view of the limited time available to hear witnesses, oral testimony at this hearing
will be heard from invited witnesses only. Invited witnesses include representatives from the
Administration, budget experts and actuaries, as well as other interested parties. However,
any individual or organization not scheduled for an oral appearance may submit a written
statement for consideration by the Committee and for inclusion in the printed record of the
heating.

BACKGROU

Medicare Part A pays for inpatient hospital care, certain is
skilled nursing facilities, home health care and hospice care. Last year, the President
submitted an ambitious health care plan which included significant savings in the Medicare
program. This year, the President's budget does not contain proposals on Medicare-related
budget issues. In addition, the budget does not address a pressing problem facing the
Medicare program, the pending insolvency of the Medicare Part A trust fund. According to
the Department of Health and Human Services summary of the President's budget, the fiscal
year 1996 budget for Medicare benefits anticipates the enactment of legislation to extend
Certain current law policies that will otherwise expire. The summary states: “These are not
new Medicare cuts; rather, these are policies that are currently part of the Medicare program."
This hearing will review the Medicare provisions included in the President's Fiscal Year 1996
budget.

In announcing the hearing, Thomas said: “The Administration has chosen to ignore the
fact that the Part A trust fund starts spending more money than it takes in during 1996 and
will become insolvent in 200}. This Subcommittee will attempt to determine the
Administration's rationale behind the limited provisions included in the President’s budget in
the face of this pending crisis for the beneficiaries and taxpayers."

FOCUS OF THE HEARING:

This hearing will focus on the Medicare proposals included in the Pi
year 1996 budget and their impact on the Part A trust fund.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

‘Any person or organization wishing to submit a written statement for the printed
record of the hearing should submit at least six (6) copies of their statement, with their
address and date of hearing noted, by the close of business, Friday, March 10, 1995, to
Phillip D. Moseley, Chief of Staff, Committee on Ways and Means, U.S. House of
Representatives, 1102 Longworth House Office Building, Washington, D.C. 20515. If those
filing written statements wish to have their statements distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this purpose to the
Subcomminee on Health office, room 1136 Longworth House Office Building, at least one
hour before the hearing begins.



72

fact is, we cannot afford, as a society, to provide everybody a BMW,
nor can we afford, as a society, to provide everybody everything
they might want or think they need in health care. Yet, that is
what we are trying to do.

I really appreciate your driving this point home, Mr. King. Un-
fortunately, we can’t get very many people to listen. So I think
what is going to happen, unless we make some drastic changes in
how we pay for health care in this country, is that we are going
to end up with Mr. McDermott’s system, which is a single-payer
system. He thinks that system is going to do the same thing, pro-
vide everything to everybody, when, in fact, what we are going to
end up with is a single-payer system that provides the lowest com-
mon denominator to everybody.

1 hope that you will continue, Mr. King, to sing that song and
to tell people the underlying, fundamental reasons why we can’t
control costs, either in the Medicare system or in the private health
care system. Maybe, if you do, you will get enough people to listen
so we can turn this boat around before it is too Tate, but I am not
very optimistic.

Mr. McDermott. Will the gentleman yield?

Mr. McCrery. I will be glad to yield.

Mr. McDermott. I would admit that Congress made one serious
mistake in setting up Medicare. It was almost the last amendment
they accepted, was allowing the fee-for-service system in the Medi-
care system at the end, to get the doctors to back off their opposi-
tion. That was a serious mistake. That gave away the store, and
they have been chasing it ever since. We really have never—it
didn’t make any difference whether we had a Democratic President
or a Republican President, nobody wanted to take on the American
Medical Association. Therefore, that part has just run wild.

Mr. McCrery. But it goes back even further than that, Mr.
McDermott, to when the government got in bed with insurance
companies and said, we are going to give employers a break and
encourage them to provide Cadillac benefits for their employees of
first-dollar-coverage insurance. That is where the fundamental
problem is in our health care system. Yes, the government
compounded that by creating Medicare and Medicaid and just run-
ning right along with the same kind of system.

So, Mr. King, thank you very much for your testimony. It is very
enlightened, in my opinion, and I hope you will continue to tell peo-
ple about it.

Chairman THOMAS. Mr. Christensen.

Mr. CHRISTENSEN. Thank you, Mr. Chairman.

J just have a quick question for Mr. Myers. I wanted to find out
the underlying reason for the general fund of the Treasury. Why
should the general fund of the Treasury finance such a large part
of the cost of part B Medicare?

Mr. Myers. As you know, initially, the general fund financed half
of the cost of part B, so that the enrollee premium met 50 percent
of the cost and the general fund met the other 50 percent. The rea-
son for this was that it was decided that every enrollee should pay
the same premium rate, in dollars. If that were done and if there
were no other source of financing than the enrollee premiums and
the program is on an individual, voluntary basis, the low-cost peo-


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70

is actually directed into the health care delivery system because of
the third-party payments and the fee-for-service medicine.

Mr. McDERMOTT. You are not suggesting that technology has not.
extended lifespan, or caused people to seek procedures, are you?

Mr. KING. No, I am not suggesting that at all. The technology
growth——

Mr. McDERMOTT. When I look at my own professional career, I
graduated from medical school about 2 years before Medicare came
in. The things that they do now compared to what I was trained
to do are now totally out of my realm. I feel uneasy going in to a
coronary care unit. I don’t know how to perform these new proce-
dures. All of that has happened in the last 30 years, during the life
of Medicare, and it is hard for me to see how you can say that it
is just a factor that gets kind of sucked in. An industry was cre-
ated. How can a doctor not use it?

Mr. Kina. I am not suggesting that—I think you are misunder-
standing me. I am not suggesting that this growth in technology
is bad, nor am I suggesting that it wouldn’t have occurred. It
wouldn’t have occurred as rapidly, and the technology wouldn’t
have been as expensive if it hadn’t been for the fact that we had
this combination of factors that would pay for virtually anything.

Mr. McDerRMOTT. So basically, what you are suggesting is that
we ought to set up a system where we limit access to technology
only to those people who have the money to buy the high-cost
health care. The rest of the people ought to be relegated, as people
fear, to what the British have, where they decide when they can
have a kidney transplant or whatever. Is that what you are saying,
a two-tiered system?

Mr. Kino. No, actually, not at all. The kind of deductibles and
copayments that would act as a deterrent to excess utilization are
the kind of deductibles and copayments that most people can afford
to pay today. Of course, there are safety nets for poor people. The
Medicaid program would still fill in the deductible and copayments
for people who couldn’t afford to pay those.

Mr. McDermott. Let me ask one other question in the time re-
maining and that is, is it your understanding that the managed
care plan that people are talking about would put people into a
plan where they would then be under the rules of the insurance
company and out from under the Federal rules? In other words, the
senior citizens would go with their voucher and buy into some pri-
vate HMO. They would then be under the HMO’s rules, not the
Federal Government's rules, right?

Mr. KING. That is basically what a managed care plan is, yes.

Mr. McDERMoTT. In your view of that, would that mean that the
patients, then, would no longer have the protection from balance

illing?

Mr. KING. Actually, in most managed care plans, the copayments
are lower.

Mr. McDermott. There are a lot of different kinds of managed
care plans.

Mr. KING. They use a different mechanism in order to control uti-
lization. In most managed care plans, the copayments are lower
than they are in Medicare fee-for-service.


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63

of growth of health care costs of about two percent, and this
accelerated rate of growth persists for about ten years. In ny
opinion, this 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-service medicine. This factor interacts with third
party payments to allow for unlimited increases in the volume and
intensity of services provided to patient ithout 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 rick
segmentation, the TEFRA risk program has increased expenditures of
the Medicare Program rather than reducing them.

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, I’m not optimistic that managed
care is a viable option for controlling costs in the Medicare
program.

This concludes my formal remarks and 1/11 be pleased to answer any
questions you may have.


20

Unless Congress acts, beneficiaries have little ability to change this pattern of
escalating expenses and inadequate coverage. The ability of beneficiaries to lower their
out-of-pocket burdens through managed care -- an option afforded millions of people in
the private sector -- will continue to be limited

Absent reform, beneficiaries will have to contend with an increasingly
anachronistic, fractured Medicare program falling further and further behind the private
sector with each passing year. Eventually, the discrepancy between private care and
Medicare will produce a two-tier system: the high-quality, cost-effective private tier, and
the low-quality, high-cost Medicare tier

Itis time to provide Medicare beneficiaries with some options At a field hearing
held by the 1991 Advisory Council on Social Security, one person suggested the need for
a different future “I think that it is time that we started looking at choices in
Medicare. Medicare has gone on a single program and although there have been
many reforms that have looked at reforming the payment methods to providers,
there have not been reforms that have looked at making choices available and also
traditional Medicare that is available today. We might well find that the business of
managing the delivery of health care to the elderly is as susceptible to some cost-
savings as we think the management of that care in the employment setting is. That
has not been explored sufficiently in our opinion, and we believe that a choice
product in the Medicare arena is something that we should look into as well.”

TOMORROW'S MEDICARE BENEFICIARIES DESERVE A MEDICARE
PR

The problems experienced by current beneficiaries are not the only reason for
reform, Current estimates suggest that by 2002, the Hospital Insurance Trust Fund will be
broke. This year may vary by one or two, but the bottom line remains: the financing of the
program is unstable, the costs are escalating too quickly, and future beneficiaries are at
risk.

Absent reform of the program, Medicare's Part A Trust Fund will no longer be
able to pay the bills. The time to reform the program is not when a crisis is upon us,
forcing a choice between driving up already high tax rates, depriving the nation’s elderly
of their primary source of health care coverage, or forcing the Federal government to
assume massive deficits to provide for their coverage.

The need to avoid this future has long been acknowledged by people in both
parties in the Congress and the Administration, Yet the current Administration proposes
no Medicare reforms in its 1996 Budget. This is especially curious given the fact that no
fewer than three Cabinet Secretaries recommended prompt action in last year’s Social
Security Trustees Report, and the President himself has supported Medicare reforms.

Current Administration officials have said that the Medicare program is growing at
an unsustainable rate, and in particular, that the Hospital Insurance program (Part A),
requires decisive action in the short-term to prevent bankruptcy

In April of 1994, less than a year ago, Secretaries Shalala and Reich, then-
Secretary Bentsen, and HCFA Administrator Vladeck all signed the Social Security
Trustees’ Report that concluded

“\.. the present financing (of Medicare Part A) is sufficient to ensure the payment
of benefits only over the next 7 years.”

the HI program is severely out of fmancial balance and 1s unsustainable in its
present form.”



37

let us say, in Baltimore, why shouldn’t the Federal Government go
with Prudential in Baltimore with 100,000 beneficiaries——

Mr. STARK. They can. Seventy percent of the beneficiaries have
an HMO available to them. I am talking about us spending Uncle
Sam’s money. Why should I pay a hospital more than what they
are willing to take from other payers? In Maryland, they don’t do
that. You get one price for everybody, and they are doing a lot bet-
ter job than any other place in the country.

What is wrong as an attempt to save the taxpayers money, to
say, look, we will pay the Medicare price or the lowest price you
charge for a procedure. Why is that unfair to the government? We
would save some money, wouldn’t we?

Mr. SCULLY. The government, for many years, was the lowest
payer, and in many places, still is.

r. STARK. But we aren't now.

Mr. ScuLLY. It depends on the area, but it is a fundamental be-
lief in whether you prefer markets or regulation. I, as we have dis-
cussed for years, do not think fee-for-service rate regulation works.

Mr. Stark. Suppose I prefer markets. What if we go out and bid,
which we are about to do, for procedures?

Mr. ScuLLy. I think that is great. If the Federal Government
goes out in a private payment plan and uses Prudential or uses

‘iser——

Mr. Stark. Why can’t I bid directly? We do it when we build air-
planes. Why can’t Medicare bid in a market to set a rate?

Mr. ScuLLy. If Medicare is operating as an actual market player,
for instance, in centers of excellence where Medicare goes out and
says, we will pay x number of dollars to a center of excellence for
certain types of procedures, I think that is fine.

Mr. STARK. But you don’t think it is fine for me just to bid in
the market in a particular area and say, we wil] take the lowest.
price in town?

Mr. SCULLY. If you say, we will take the lowest price in town and
providers are willing to do that with you and they can operate eco-
nomically that way, then you are, in fact, operating in the market,
and that is fine with me. But for the Federal Government to go out
and say, as we did in Medicaid rebates, we will pay the lowest drug
price or we will pay the lowest—when you look at the Medicaid re-

ate, it was a disaster, because——

Mr. Stark. Why should we pay a higher price than Prudential
in the market?

Mr. SCULLY. You shouldn’t, but just again to use Medicaid as an
example—

Mr. STARK. Then what is wrong with my passing a law that says
we won’t? We will pay whatever a hospital is willing to charge
somebody else.

Mr. SCULLY. Because what will happen is exactly what happened
in the Medicaid rebate. There will be no more low price, because
what will happen is you will go into the market and say, we will
pay the lowest price that everybody charges. Guess what? They
won't charge that low price anymore.

Mr. STARK. So you are saying you want to let your crowd shift
costs onto Medicare and we should pick up the slack. That is what
you are saying.


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57

‘Changes should be made in the near future to solve these problems before we get any
closer to the brink of disaster. Such changes as to the Hospital Insurance program should be
solely for the sake of the program's solvency, and not for the sake of the deficit under the Unified
Budget concept. However, changes in the Supplementary Medical Insurance program that are
made for the sake of the program will also significantly reduce the real budgel deficit (and also
the deficit under the Unified Budget concept).

As to the Hospital Insurance program, | belleve that no changes should be made in either
the reimbursement-of-supptiers provisions or in the quantily or quality of health-care services
furnished to the beneficiaries, but rather additional financing should be provided. This can be
done either by increasing the payroll tax rate or by payments from the beneficlarles. The latter
can be done through increased cost-sharing amounts or, for middle- and high-income
beneficiaries, by income taxation on the value of the benefit protection which was not
"purchased! by their own alter-tax payroll contributions during thelr working years. Also, the
minimum eligibility age for non-disabled beneficiaries should be increased from age 65 when the
corresponding age for unreduced Social Security benellis fs so ralsed (L¢., beginning in 2003,
on a gradual basis). Preferably, a combination of several of these allematives should be used.

Increased payments from the beneficiarles through increased cost-sharing amounts could
be accomplished by instituling relatively small dally co-payments for tho first 60 days of
hospitalization. income taxation of the benelit protection could be done by the inclusion ol, sey,
75% of the average value of the protection for the entire covered population in taxable Income;
the 75% faclor amply allows for the amount “purchased’ by the beneficiary's own payroll taxes.
Note thal making the benefit protection be subject to income taxation does not mean that
income tax would be payable (because low-income persons do not have any income-tax flabllly
now, and would not have any even with the value of the protection included).

As to the Supplementary Medical Insurance program, again ! believe that no changes
should be make in either the reimbursement-of-suppliers provisions or In the quantity or qualily
of services. The overall cost of the program could properly be reduced by Increasing the initial
deductible from $100 to $250 per year, So as to make it be much more comparable In real terms
to the $50 which it was when the program began operations in 1966. Further, this amount
should be automatically changed in the future as per capila program costs rise. Also, the
trinimum eligibiiily age for non-disabled beneficiarles could be increased in the same way as was
suggested for the Hospital insurance program.

Further, the proportion of the program's cost paid by the benelictary should be gradually
increased [rom the presont 25% to, say, 35%; this is still far below the 50% proportion which was
present when the program began. Also, the Part B enrollee premiums could vary with the
income of the beneficiary, so that high-income ones would pay 75% of the program's cost:
however, the Iransilion should be developed so that no sharp breaks or notches occur as te
income tises. Alternatively, for each covered person, the amount contributed on her or his behalf
by the General Fund of the Treasury could be made subject to income taxation.

Conclusion

The choices to be made in solving the financing problems of the Medicare program are
nol al all easy. However, | believe that they should be make as soon as possible, no matter how
painful they may be. To postpone any longer will make matters much more dillicult tater. 1
strongly believe that no reductions in quantity or quality of health-care services should be made,
either directly or indirectly, or in the reimbursement bases for providers of services. Any changes
made should be in the financing area or in the benelit cost-sharing or coverage provisions.


23

IF MEDICARE REFORM IS SUCH COMMON SENSE, WHY DOES EVERYONE
WANT TO AVOID IT?

The road to a better Medicare program is clear and there is nothing very dramatic about it
except the results and satisfaction real reform will produce over time.

* Bring Medicare per capita inflation in line with that recently experienced in the
private sector (Chart 11),

Reduce prices to mirror private sector prices.

* Increase managed care enrollments by changing antiquated Medicare law and
regulations to increase the availability of managed care to all beneficiaries who
would prefer it

* Increase beneficiary participation and lower utilization by opening the Medicare
program to the variety of private sector innovations in health care financing and
delivery, giving beneficiaries the ability to customize their benefit package and
decide how best to improve their coverage.

This cannot be accomplished overnight, and will in fact will probably require the
entire seven years now suggested by the Medicare Trust Fund's impending bankruptcy.
Beneficiaries -- current and future -- would prefer the job finally get done right. A
Congress that does not pave the way for a modern and secure Medicare program will have
much to regret.


144

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90

I would note, with dismay, that some members of Congress
have argued that, in light of these problems, we dare not pass
the balanced budget amendment. They say that we must keep open
the option of deficit financing some, or all, of this spending
growth. Yet, OMB Director Alice Rivlin's infamous leaked budget
memo of last October belies this hope. Her missive to President
Clinton points out that, under current taxing and spending
policies, the budget deficit could soar to $4.1 trillion per year
by 2030. Clearly, we cannot incur debt -- or, for that matter,
taxes -- on this scale. By risking such a course, we would ruin
the American dream for many generations to come.

Reform Recommendations

If taxes and deficits are not the solution, then it follows
that Congress must take decisive steps -- and do so soon -- to
rein in the future cost growth of the Hospital Insurance program.
‘The task is not as lonely as the special interest groups who come
before this Committee would have you believe.

You will have surprisingly strong support from the public.
In a September 1994 survey of working aged Americans, 94 percent
agreed that the impending bankruptcy of the HI trust fund is a
"serious" or "very serious" problem, Seventy-four percent said
they would think more favorably of elected representatives who
discussed the need for reform. Sixty-nine percent favored
reducing benefits to affluent households. Eighty-eight percent
favored shielding retirement savings from taxation.

‘The National Taxpayers Union Foundation urges Congress to
listen to the American people. We recommend that you merge the
HI with the SMI subsidy, and convert them into a single voucher
that can be used to purchase private health insurance. We
recommend that these vouchers be means-tested, based on the
recipient's household wealth and income. We further recommend
that you significantly expand the Individual Retirement Account,

so that working aged Americans who want to save, and avoid
dependency on government, can do 80.

This approach has important advantages. It would cut
federal spending, and pressure on deficits and taxes. It would
harness the market forces of consumer choice to contain costs.

It would dispense with the Byzantine price controls and claims
Processing systems that currently plague HI. It would raise our
national savings rate -- and thereby help America to retain its
share of global markets in the next century. And it would remove
much of Medicare's regressivity. It is beyond me, Mr. Chairman,
how Congress can levy taxes on low income workers, for a program
that has no future, to subsidize retired doctors and accountants.

Mr. Chairman, let me say, in conclusion, that we recognize
the terrible dependency created by social insurance, Many people
have failed to prepare adequately for their old age precisely
because governnent promised to fund these costs by taxing their
children and grandchildren. We must follow through on our
obligations to the truly dependent. But at the same time, we
must take immediate steps to improve the efficiency of our health
benefit programs, and to cut their costs. Over time we must
convert them into systems that minimize dependency on governnent.

Thank you for soliciting our views. I will be Pleased to
answer your questions.


44

be supported, whether or not it is specifically and only managed
care.

Chairman THoMA~S. You are correct, and my concern is that we
do not lock the government into a particular profile of programs.
Had we done that 25 years ago, which we did in terms of the fee-
for-service, you would not have taken advantage of the innovations
in the private sector. I want to make sure that that synergism is
always available, that we don’t make the same mistake twice in
terms of locking into a time structure which, over time, will clearly
change because of the dynamics of the private sector.

Mr. McCrery. If the gentleman will yield, since Ms. Steelman
mentioned it, I will get into the concept of medical savings accounts
or medical IRAs. It relates to what Mr. Scully was saying about
some kind of rebate—some way to rebate savings.

In Mr. Scully’s comments, though, I gather that he thought it
would best work in some kind of up-front savings like in an
FEHBP-style or cafeteria plan—in which you choose a lower priced
plan and you get some rebate from purchasing a lower priced plan,
as opposed to what Ms. Steelman brought up with the medical IRA
concept—where you don’t know what your rebate is going to be
until the end of the year. You create your rebate by lowering your
utilization,

Did I misread you, Mr. Scully? Do you think that it has to be
some kind of up-front, guaranteed, agreed to savings, or can it be
a more wide-open medical IRA-type setting?

Mr. ScuLLy. I think you can do it both ways. I think if you went,
out and you give the senior, a 67-year-old, the opportunity to pick
a Medisave account with a $2,000 deductible and they et to put
the money in an account and save it to lower the utilization, I
think you could do it that way and I think you could structure it
that way, as long as there is a clear option.

I guess what I was referring to is if you wanted to go out and
give somebody the choice of a tight point-of-service contract so they
were going to lower the cost of the plan by 25 percent, the more
effective way to draw them into that is to say, you are going to
save the Federal Government $1,000 out of the trust funds but we
will give you $700 of that back in a rebate. That is more likely
than additional eyeglass benefits or drug benefits or something
else, in many cases, to draw them into the plan.

I think you can structure it in a number of different ways, if you
give people 10 or 12 choices.

My bigger concern about Medisave accounts, since you brought it
up, is I think Medisave accounts are great. I also think Medisave
accounts are going to bring out the purest, rawest form of risk se-
lection there are. So if you are a fan of Medisave accounts, which
I am, I think it is naive to think Medisave accounts are a good idea
unless you are willing to look at and take head-on the issue of risk
selection, because it is very obvious that healthier people are going
to pick the lower cost plan.

Mr. McCrery. That is why I didn’t bring it up a few minutes
ago.

Mr. SCULLY. I am sorry.

Mr. McCrery. But I am hopeful that we can talk and maybe dis-
cover some way to harness that energy in individuals, as far as


85

There are many ways to substantially reform Medicare. The above solutions are just
a few common sense approaches. What is important, Mr. Chairman, is that something be
done. This Congress must realize the problem and act in a bipartisan way to solve it
Congress must ensure Medicare's long term solvency. and not just slap a Band-Aid over it

to get us through the next two years

Congress must also begin to address the similar insolvency problems facing Social
Security. Last year Third Millennium commissioned a national survey that found that
nearly nwice as many young adults believe in the existence of UFOs as believe Social
Security will exist by the time they retire. The crisis of confidence in Federal retirement
programs among young people is astounding. With this in mind, we will be watching to
see how the nation’s leaders confront the Medicare dilemma. with an eye to how they will
confront the much larger problem of Social Security. From my generation's perspective.
inaction on either of these fronts is not a justifiable alternative. Not to act now is public

policy malpractice.

Young people are willing to sacrifice because we know the consequences to our
generation and to future generations if we do not. In 1998. people bon in the 1960s and
1970s will represent the largest potential voting block in the country. They will remain
that way until well after the Medicare and Social Security systems are in the red. So the
good news is that doing the right thing -- averting disaster in Medicare and Social

Security -- quickly will become the politically rewarding thing to do as well.

I believe the ultimate challenge of this Congress is one of farsightedness. Would a
private business, knowing that financial disaster is pending. wait until tomorrow to deal
with the situation? Would an individual family. realizing it is running into financial
troubles. wait until tomorrow to change course? Why. then, should the federal

government be held to any lower standard?

Every generation of Americans has its own assets and liabilities and I truly don't


62

always behaved very well. This occurred with the wage-price
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 1993 and 1994. Once the
perceived threat is past, the rate of increase in expenditures once
again accelerates.

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 ny
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 .89 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 favorable, expenditures by the program have increased 59
percent in the aggregate and 45 percent per enrollee. According to
the 1994 SMI Trustees report, SMI expenditures will be 3.27 percent
of GDP by 2020 when the Post World War II Baby Boom has begun to
reach age 65 and will be 4.05 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 Boon rather than pessimistic
health care cost projections.

If 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 more than 25 percent lower than they are today. This
would have allowed maintaining the SMI premium at $4.00 instead of
the $42.80 it is today. At the same time, the government
contribution to the program could have been nearly $5 billion less
than it is today.

The outlays of the SMI program are excessive today due to two
design features of the program which interact with each other to
resuit 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 more than 80 percent of SMI enrollees who buy
Medicare supplemental policies. 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 Health Affairs,
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


86

believe that most people in my generation are whining about the future we are inheriting.
But we can no longer sit idly by as politicians compromise our economic future and,
more importantly, the future of our children. to pacify powerful special interest groups.
Young people have an obligation, both as citizens and as the parents of the next
generation. to offer solutions, to have a voice. to be prepared to sacrifice, and to demand

action.

Mr. Chairman, no generation in American history has been left with the tail end of so
many dysfunctional systems as the generation currently graduating from college and
entering the workplace. My generation and those after me will pay large amounts of our
paychecks into programs that the experts tells us will be bankrupt by the time we retire.
We are on the verge of inheriting a world of crumbling entitlement programs. a
burgeoning national debt, decreased national savings, and an increasing number of
retirees who expect to be generously supported. As a generation, we cannot face this

tremendous fiscal burden and still lead this nation into greatness. Thank you.


121

Security system, 64 percent of American adults say it's a “very serious” problem; 29 percent
say it's “somewhat serious.” Asked the same question about the impact of runaway health
costs on the survival of Medicare, 78 percent say it’s “very serious”; 19 percent say it’s
“somewhat serious.” To either question, only about 5 percent say “not too serious,” “not at
all a problem,” or “don't know."> Fifty-eight percent of adults now think that “the next
generation's future will be worse than life today”; only 18 percent think it will be better.*
What's more, Boomers realize they are in line to take the hit: 85 percent of Boomers agree
that “government has made financial promises to my generation that it will not be able to
keep.”

Many say they're ready to face up. Although Americans are understandably
ambivalent about cutting benefits that flow to just over half of all U.S. households, neither
have they become irredeemable entitlement addicts. Asked about “the financial problems of
the Social Security and Medicare systems,” 78 percent of all adults (83 percent of everyone
under age 50) agree that the problems are “so severe that major reforms are needed now” in
both programs.” A large and growing majority favors imposing a strict means test on major
federal entitlements programs.”

Why Politicians Don’t Act

But if voters are rousing themselves, most of our national political leaders are still
running for cover. Even in the wake of November's stunning anti-big-government message
from voters, members of Congress in both parties quickly lined up to declare that the vast
senior share of the federal budget remains undiscussable. Many remain convinced that the
“age wave" forecasts are overblown, that the public talks bolder than it walks, and that
America in the end will be able to muddle through without "tough choices" or “major
reforms.” Hence their claim that economizers need only cut domestic discretionary programs
~- and that the political risks of attempting surgery on senior benefits far outweigh the risks
of doing nothing.

To the extent there is a rational justification for this position, the logic tends to
gravitate around three propositions. First, it is said that the assumptions underlying the
official benefit forecasts are too pessimistic, Second, it is said that the cost explosion in
health-care benefits will recede due to relatively painless “comprehensive” reforms. And
third -- if one and two don’t explain things away -- it is said that a tolerable tax hike can be
levied on future workers to fund whatever health and cash benefit growth remains

The first proposition, alas, is not an argument at all -- but an attitude. Many
legislators chafe at the political inexpedience of rules that force them to take long-term costs
into account, But no one presses a comprehensive case that the official "intermediate cost”
economic and demographic scenario -- offered by the Social Security trustees as their “best
estimate" -- is overly pessimistic."° The reason is simple: For most of the important
variables, these assumptions are decidedly more optimistic than actual U.S. experience over
the past quarter century. Yes, one does hear the occasional “eureka” remark about recent


124

tomorrow's workers will be so well-off that they can afford to fork over a larger share of
their income to government and still be a lot better off than today's workers.

‘The importance of this claim to the case against cost-cutting can hardly be
‘overemphasized. If true, it means that the current policy drift is less alarming than portrayed
by the reformers. Even if the official projections are right on the mark, in the end our kids
can easily afford to take up the slack. If true, it also strengthens other arguments that tend
to legitimize today’s institutional arrangements. For example, the often-cited “lifecycle”
defense of Social Security and Medicare (which reassures the rising generation that even if
they now feel fleeced by the old, they'll someday be able to fleece a new rising generation in
their turn) depends critically on the programs’ permanence. Most people would probably
doubt this permanence if the programs did not allow workers to enjoy a significant growth
rate in after-tax living standards.

Small wonder that the claim about how our kids will be better off anyway (so why
worry) crops up so often.

© “Don’t shed too many tears for generations who will be working and retiring in the
2ist century,” says Nobel-Prize winning economist James Tobin. "They will be
living higher than we did and do...""5

© According to former Social Security Administration Commissioner Robert Ball, the
extra taxes necessary to fund Social Security in the next century are "not trivial, but
easily supportable” by future workers -- and “not really a big deal.” He then goes on
to calculate that the extra taxes needed by 2025 would only “offset about 8 percent of
the growth in earnings projected between now and then."

© _ National columnist Michael Kinsley echoes the same line in reference to Social
Security: “Even if it amounts to a large transfer from today's workers to today's
retirees, and an even larger transfer from future workers to future retirees, so what?
{T]he younger generation will still be richer than the older one, even after the
transfer takes place.””

© _ Brookings Economic Studies Director Henry Aaron makes the same point even more
succinctly: “Even if we do nothing to change present policies, modest economic
growth will produce increases in consumption that dwarf the added cost of caring for
the Baby Boom Generation in retirement."!*

© In its blanket apologia on behalf of all federal entitlements, the American Association
of Retired Persons notes that Social Security, Medicare, and related senior programs
“are affordable” in the year 2065 because "{fluture growth of the aging population
does not necessarily impose an unsustainable burden on future generations if the
economy grows at a moderate rate."!?


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7

ally the number one targets of Medicare cuts. So the biggest chunk
and the biggest portion of Medicare is Medicare part A, which is
mostly hospital payments. Obviously, any time Medicare is on the
table, we are the ones who generally get operated on.

It is a little bit of an unusual position. However, I do think that,
realistically, there are ways to take money out of Medicare, and 1
think there are ways, if it is done constructively, that we can all
win, that Congress can get the savings it needs, that seniors can
have a much better, much improved Medicare system, and that
hospitals, which is what our hospitals are interested in, can get a
rational, gradual transition to more of a market-based system that
gets rid of some of the perverse incentives that are in the Medicare
system right now.

The first problem which the chairman asked us to come talk
about today, which is pretty obvious, is the fact that the Medicare
trust fund is going broke, again, and, I think, depending on what
Guy King and others will testify on this morning, the trust fund
will go broke somewhere between 2001 and 2004.

Obviously, we could sit around and complain about the adminis-
tration’s budget not taking enough cuts out of Medicare. Clearly,
hospitals would love it if you took nothing out of Medicare. I am
sure my members would all be thrilled if there was nothing done
to Medicare this year.

But given the public demand for deficit reduction and given the
demand for straightening out the public programs in health care,
1 think that is fairly unrealistic, and my view is and my organiza-
tion’s view is that there are going to be changes in Medicare, that
there are going to be cuts in the program, and that we should prob-
ably deal with that and find a way to work with you to come up
with rational solutions.

I don’t think the administration, obviously, did—it is not, I don’t
think, a particularly partisan view. Senator Exon, the Senate
Budget Committee, Time Magazine, and everybody else, said the
administration essentially punted on Medicare policies in their
budget. I can’t say that I blame them. If I had been in their shoes,
politically, I might have done the same thing.

But the fact is, they have pretty much left it to the Ways and
Means, and Finance Committee, obviously, to come up with major
changes in the Medicare program this year. My organization, at
least, has chosen, instead of saying, let us just oppose all Medicare
cuts, to hopefully sit down with you and try to work out some ra-
tional ways to restructure Medicare and to save some money.

I don’t think it is going to be easy. Can you take money out of
Medicare? You definitely can. It is not easy; it never has been. It
is not fun. It is not pleasant when you go home to your districts.
It is not going to be pleasant for anybody—hospitals, physicians,
labs, anybody. Is it a lot tougher than it was in the past? I think

1;

it is.

I think the fact is that cost shifting, which was pretty apparent
a few years ago, has largely disappeared. In any major metropoli-
tan area, if you go out and look at hospitals or physicians, in the
past, when Medicare cut its reimbursement rate, providers essen-
tially shifted money over to the private side and charged the pri-
vate payers more. With the advent and explosive growth of man-


139

ENDNOTES,

1. “Generational Perspectives” in U.S. Office of Management and Budget, Budger of the United States Government,
Fiscal Year 1995: Analytical Perspectives (1994), pp. 21-31.

2. Board of Trustees. Federal Old-Age and Survivors Insurance and Disability Trust Funds, 1994 Annual Report
of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Trust Funds (1994), p. 124
See also the 1988 Annual Report (1988). p. 84.

3. Bipartisan Commission on Entitlement and Tax Reform, Interim Report to the President (1994), p. 6.
4. Congressional Budget Office, Reducing Entitlement Spending (1994), p. ix

5. See results to survey questions 24 and 25 in Matthew Greenwald & Associates, Inc.. Entitlement Survey,
‘commissioned by the Congressional Institute for the Future and the National Taxpayers Union Foundation (1994).

6. Results of New York Times/CBS News Poll, as reported in New York Times (November 6, 1994).
7. Merrill Lynch & Co., Inc, Saving the American Dream: An Economic and Public Opinion Study (1994).

8, See results to survey question 26 (and unpublished cross-tabulations) in Matthew Greenwald & Associates, Inc.,
op. cit.

9. See results to survey questions 14, 15, and 27a in Matthew Greenwald & Associates, Inc., op. cit. See also the
‘Survey on Retirement Confidence, conducted by the Employee Benefits Research Institute and Matthew Greenwald
& Associates, Inc. (1994), p. 39; ts summary of four years (1990-1994) of answers to this question shows growing
support for benefits means-testing.

10. Interestingly. amid all the negative or hedging remarks that have been made about the “interim findings” of the
Bipartisan Commission on Entitlement and Tax Reform, virtually nothing has been said to contest the official
“intermediate cost” scenario upon which nearly all of the Commission's quantitative projections are based. One
‘exception is the claim of Commission member Richard Trumka that the SSA official labor force projections are too
low. Trumka prefers the more buoyant BLS projections--a dubious point for him to raise since the BLS optimism
about the furure labor force is more than compensated by the (possibly related) BLS. pessimism about productivity
growth. The furure growth rates for real GDP and real covered wages are actually lower in the BLS scenario than
in the intermediate-cost SSA scenario!

11. Even by the year 2030, immugration and fertility combined only explain 16 percent of the difference between
scenarios Il and il. That same year. real wage growth and longevity explain $9 percent of the difference.

12, See discussion in Appendix I. When applied to longevity, the phrase “actuarially favorable” means tending to
Jower cost-and is “unfavorable” in any broader sense. Most people consider longer lifespans to be very good news
indeed. Although the ~root-canal” crowd who raise the issue of long-term benefit costs are sometimes labeled
~pessimusts,” many of the trends they point to (such as longer lifespans or earlier retirements) are unambiguously
positive--so long as Amenca can afford them.

13. See discussion in Appendix I


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46

The bottom line, the HMO reform effort in Florida has evolved
into a separate and dangerously unequal care system. The fraud
system cost taxpayers $650 million a year. Florida’s booming HMO
industry is fraught with problems. Earlier projects led State and
Federal officials to order corrections in HMO plans. Sadly, the lat-
est investigation found even worse abuses, and it goes on.

The problem is that you cannot allow these people to steal, deny
care, and go unregulated. I am not suggesting that the Federal
Government ought to necessarily be the regulator, but what HCFA
has proposed and what many of us have proposed is standards,
then, if the States do not have regulations to protect patients who
are not capable of making a market-based decision because they
are inadequately trained and it is very confusing and the insurance
salesmen are generally not very honest people.

Without adequate protection, we would be putting at risk the
most fragile of our citizens, whether they are rich or poor, Repub-
lican or Democrat. You cannot do this, experience has shown us,
in an unregulated manner.

So as soon as we can agree that there will be reasonable stand-
ards and regulations to protect the patients from underutilization,
to protect unscrupulous operators who are rampant in the HMO in-
dustry today from stealing money and escaping to Spain or wher-
ever they are now hiding out, until we can get some sense that
there is a stewardship of the health of the seniors and the govern-
ment’s money, we should not trust this industry. Their record is
fraught with fraud, abuse, and no one, in good conscience, can ac-
cept the responsibility for the obscene treatment in which this
profit-dominated enterprise has used the sickness of elderly Ameri-
cans for obscene profits.

Once we realize that we have a responsibility, not only to them
to make profits but to the people who we represent, we can proceed
to expand the coverage available to the seniors.

Mr. McCrery. Would the gentleman yield?

Chairman THomas. The gentleman’s time has expired. The Chair
is in doubt. Is that a question?

Mr. McCrery. I was going to ask a question.

Mr. STARK. It was a major question about the efficacy of the
HMO industry, as it exists today. I would be happy for them to re-
spond.

Chairman THomas. It is going to have to be on somebody else’s
time.

The gentlewoman from Connecticut.

Mrs, JOHNSON. I think it is very instructive that the article you
are quoting, Mr. Stark, is about Medicaid HMOs and touches on
some experience with Medicare HMOs. Both government-run sys-
tems, and we have no analogous degree of fraud in the privately
run HMO systems. Furthermore, HCFA knew about the fraud
problems in the Medicare HMO system in Florida in 1990 and did
nothing. So this is hardly an advertisement for how we are goin
to save seniors from the dangers of the system. In fact, the big ad-
vances in quality oversight and quality monitoring have come in re-
cent years from the private sector, not from the public sector.

But my question poes to two things and goes back to the issue
of risk assessment that was raised earlier, because I think we have


6

commitment to the American people and we plan to keep that com-
mitment.

I would offer a word of caution, and that is, don’t rely on quick
fixes. You can send the beneficiaries a check. You can call it a
medicheck or anything else, but that would not be in the long-term
interests of the seniors nor of average Americans in this country.

I look forward to listening to a witness list that is probabl
picked by the CATO Institute and other right-wing think tanks. I
must say, it appears to be me to be a waste of time, but I will lis-
ten.

Chairman THoMas, I thank the gentleman for his comments.
Perhaps the record should show that we asked the Director of the
Office of Management and Budget if she would appear before this
subcommittee of the Ways and Means Committee and her answer
was, basically, she doesn’t “do” subcommittees. We asked; she did
not come. We asked the AARP if they would like to testify. They
declined to testify.

I would tell the gentleman, in terms of bragging about his efforts
in terms of health care reform last year, that a jury-rigged plan to
try to salvage the President’s ill-conceived proposal passed this
committee. I don’t recall voting for it on the floor when you con-
trolled the Rules Committee, the floor, and both houses.

So when you talk about honesty and sincerity, let us examine
who was asked and who didn’t come to appear before this particu-
lar subcommittee.

The first panel consists of two individuals who formerly were in
the operation of the Office of Management and Budget and, frank-
ly, I believe, have extremely impressive credentials. Deborah
Steelman is the former Director, Human Resources, Veterans and
Labor, Office of Management and Budget, and she chaired the 1991
Advisory Council on Social Security. Tom Scully is the former Dep-
uty Assistant to the President for Domestic Policy and former Asso-
ciate Director of the Office of Management and Budget.

We are very pleased to have both of you in front of us. Any writ-
ten testimony that you might have will be made a part of the
record, without objection. You may proceed as you see fit.

Mr. Scully, why don’t you begin?

STATEMENT OF THOMAS A. SCULLY, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, FEDERATION OF AMERICAN HEALTH
SYSTEMS; AND FORMER DEPUTY ASSISTANT TO THE
PRESIDENT FOR DOMESTIC POLICY AND FORMER
ASSOCIATE DIRECTOR, OFFICE OF MANAGEMENT AND
BUDGET

Mr. ScuLty. Thank you, Mr. Chairman, and members of the sub-
committee for having us here today.

Obviously, I think, as my testimony states in the beginning, I am
in a little Bit of a strange position. I spent a lot of time working
with many of you on both sides of the aisle over the years, propos-
ing four different budgets that President Bush sent up, many of
which proposed just. ‘about every way to take money out of Medi-
care that anybody can imagine.

I have gone from the position of being on the slash proposing side
to working for the hospitals now, in which, obviously, we are usu-


40

step. Medicare Select is another step. There are some things that
we ought to do to expand Medicare Select and HMO risk contracts,
but we also need to recognize that those are steps on the path.

The ultimate goal is to try to make sure Medicare can operate
like the private sector in an integrated product that has all the
benefits people need, including pharmaceutical and others, at an
integrated price that is going to be a lot lower than buying this
stuff piecemeal.

Mr. CHRISTENSEN. Mr. Scully, do you want to comment on that?
Mr. ScuLLy. Yes. I spent a lot of time on Medicare. I personal);
think Medicare Select is great, but it is a baby step. It is a small
step. Medicare Select is a very limited, very structured managed
care Medigap plan, and, basically, it is a sliver of what you reall
could do. Fyn look at what people below 65 have a choice of, all
kinds of hybrids, of PPOs, point-of-service contracts, managed care
plans, indemnity plans. If you are under 65, you can go out and
buy any kind of hybrid contract you want. If you are over 65, you
either get an HMO risk contract, a very structured Medicare Select

contract.

It is a step in the right direction, but you can do an awful lot
more. I think that seniors have nowhere near the ability to choose
between different hybrids of plans and types of plans that people
under 65 do, and I think what we are talking about, really, with
more of an FEHBP-like system is to give you alot more choice than
just Medicare Select.

Medicare Select is a good start, but I think it doesn’t go any-
where near far enough, personally.

Mr. CHRISTENSEN. Thank you, ir. Chairman.

Chairman Tuomas. Mrs. Johnson.

Mrs. JOHNSON. Thank you very much for your testimony this
morning.

To get from where we are today to where we clearly need to go,
if we are going to both control costs and expand benefits, because
the current Medicare benefit package is really tragically out of
touch with good medical practice, what are some of the things that
we could do immediately?

This year, there are money problems, but there are also some
proposals in the President’s budget, the kind of things we have tra-
ditionally done that won’t impose any new costs but will be scored
nicely and so on and so forth, so there are some manageable as-
pects to this year’s program. But there are a number of barriers in
the law that we could eliminate.

Would either of you like to talk about a few of those barriers that
we could eliminate right now to begin making change and moving
in the direction we need to go, and then some of the bigger issues
that we might have to face as we reform Medicare?

Ms. STEELMAN. On Medicare Select, one of the main barriers is
the fact that it is not renewed for any appreciable length of time
so that nobody knows whether they can count on it or not or
whether the product will exist. So obviously, we need to do things
that beneficiaries can plan on.

Mrs, JOHNSON. That is right.

Ms. STEELMAN. Retirement is not a short-term, 6-month type of
deal for Medicare retirees. They want to plan on products that are


120

under scenario II or to $4.5 percent under scenario III. Likewise, the total tax rate
on worker compensation will climb steadily. From 41 percent in 1994, it will
climb to 57 percent by 2040 under scenario II or to 69 percent under scenario III.

‘The practical bottom line of this analysis speaks for itself. America's political leaders
‘cannot continue in good faith to advocate balanced budgets, tax cuts, and leaner government
== to say nothing of defending the long-term viability of the American Dream -- without also
talking about major, structural reforms in "untouchabie” senior entitlements. Everything
must be on the table

4, THE UNPLEASANT FACTS

In 1994, the American public was bombarded by a spate of official warnings about
the crushing public cost that will accompany the rapid aging of the U.S. population early in
the next century.

© In February. the Office of Management and Budget inciuded in its FY 1995 Budget a
“special analysis” suggesting that baseline budget policies will crush younger
generations beneath prohibitive tax-and-transfer rates.

© In April, the Social Security trustees issued an annual report announcing that their
‘combined cash-benefit trust funds would all go belly up in 2029 -- 7 years earlier than
they had reported in 1993 and 19 years earlier than they had reported in 1988.

© In August, a bipartisan presidential commission agreed by a 30-to-1 vote that "the
government must act now" to prevent just five benefit programs (Social Security,
Medicare, Medicaid, and federal civilian and military pensions) from consuming total
federal revenues by the year 2030.’

© In September, the Congressional Budget Office confirmed that over the next decade
entitlements will grow from roughly half to two-thirds of all federal spending. “The
aging of the baby-boom generation,” added the CBO, “will continue to drive that
share higher over succeeding decades.“*

© And in October, Office of Management and Budget Director Alice Rivlin's leaked
budget options memo illustrated how annual budget deficits would soar above $4.1
trillion by 2030 under current tax and spending policies.

By now, the public has little problem comprehending the overall arithmetic of the
situation. Itis widely understood that retirement, disability, and (especially) health benefits
outlays are already among the fastest-growing categories of government spending

‘Asked about the growing numerical imbalance of retirees to workers in the Social


19

TESTIMONY OF DEBORAH STEELMAN, ESQ.
WASHINGTON, D.C.

Thank you for the opportunity to appear before you today Since my years in the
Executive Branch, J have had the opportunity to work in the private sector as it
revolutionizes beneficiary participation and health care delivery. 1 believe Medicare needs
to be improved, and can best be improved by incorporating the type of approaches that
have been innovated by the private sector.

DAY'S MEDICARE BENEFICIARIES DESERVE A BETTER PROGRA:

Put plainly, Medicare needs to be a better program. It has failed to keep pace with
the needs of beneficiaries and its financing is no longer stable. On these two issues, the
President and Members of Congress in both parties agree. Yet the weaknesses persist.

Without reform, Medicare beneficiaries face a future of rising costs, and no
ability to reduce their Part B premium or other costs.

* Today, the Part B premium costs $552 per year, by 2000, beneficiaries will
have to pay over $700 per year for Part B coverage. Current premium
costs equal a litle over 6% of an average beneficiaries’ Social Security
check. According to technical work done by the 1991 ACSS, the Part B
premium would rise to $310.50 per month, or over 13% of the average
beneficiaries Social Security check. See Chart 1

. The Part A deductible will rise from $716 this year to $872 by the year
2000. See Chart 1,

The typical beneficiary will also incur coinsurance liabilities for physician
services as well, raising the potential out-of-pocket liability to well over
$2,000

. Add these amounts to other out-of-pocket expenses typically paid by a

beneficiary ~- expenses for non-covered services, Medigap protection, and
other routine costs - and beneficiaries pay mightily for the crazy quilt
system built on and around the inflexible and outdated Medicare program.

Without reform, Medicare beneficiaries will have only limited or no opportunity
to improve their coverage.

© The ability of a beneficiary to choose a health care plan is severely limited
by the rigidity of Medicare's statutory and regulatory structure and by
HCFA's failure to make information about choices available. Allowing,
Medicare to continue as currently designed does a disservice to both
current and future senior citizens

= Some beneficiaries seek to lower their out-of-pocket burdens through
managed care arrangements, but HCFA does little to provide them with a
choice of health plans or information about their options.

* The only way most beneficiaries can improve their coverage is to purchase
Medigap coverage that is rigid and rarely as cost-effective as a more
integrated policy would be


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Note: All Committee advisories and news releases are now available over the Internet at
GOPHER. HOUSE.GOV, under "HOUSE COMMITTEE INFORMATION’.


132

should care for other people's wayward children, and how to balance the rightful claims of the
young and the old on our public fisc. These are issues that force most Americans to rethink
their own ideals and institutions.

On the other hand, leaving the untouchables ajone is also dangerous. Much of the
‘American electorate is convinced that government has played some enormous scam with theit
future that no one is willing to talk about. And if the leaders in power do not solve this problem
by the time the bills come due, the electorate will surely engage in some heavy retribution -- not
against who did speak up, but against who didn’t. Indeed, the willingness of either party to pay
attention to these issues is probably an excellent indicator of whether that party has any serious
intention of governing the nation for long.

Neil Howe, Chief Economist of the National Taxpayers Union Foundation, is the author of
numerous books and studies on entitlements, including, with Peter G. Peterson,

On Borrowed
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69

payments and the overpromises that we are making now onto fu-
ture generations. Unless we triple the taxes on them, those prom-
ises that we are making now are not going to be kept.

Chairman THomas. If there are no further questions—that was
going to be a perfect segue into the next panel.

Mrs. Johnson.

Mrs. JOHNSON. Mr. King, and Mr. Myers, your testimony is sim-
ply astounding. I mean, that Medicare is in as bad shape as it is
and that this Congress knew that and has received these reports
every year and paid no attention is truly tragic.

I want to quote from your testimony and ask you to look back.
You say, I know that many people view these projections as a red
herring. Clearly, we did, because we haven’t done anything. But if
you look back at your projections in the past, 20 years ago, 15

ears ago, have your projections on the whole materialized, or
ave, in the past, your projections turned out to be red herrings?
In other words, by projecting problems, we addressed them and so
they didn’t come true.
b What is the history here? How accurate have your projections
een?

Mr. KING. No, the history of the projections is that they have, in
fact, materialized when adjustments are made for legislation that
occurred subsequent to the initial projections that either increased
the revenue or decreased the outlays by making price cuts. Yes,
these projections have been basically accurate.

Mrs. JOHNSON. So you feel quite confident that when you tell us
Medicare is on the ‘absolute brink of bankruptcy and that in order
to provide the benefits promised by the year 2020, we will have to
triple the tax rate, you believe that will absolutely happen unless
we take steps to prevent it?

Mr. KING. Yes.

Mrs. JOHNSON. Thank you.

Chairman THomas. Mr. McDermott.

Mr. McDermott. Thank you, Mr. Chairman.

Mr. King, I want to ask a question. The two factors you raise
make some sense, the third-party payments and the fee-for-service
system. But how do you separate the parts caused by the growth
in technology and the aging of the population. You don’t even men-
tion them, and I am sure you have thought about them.

Mr. KING. Yes, I have thought about them, sir. The aging of the
population on a year-to-year basis has very little effect on the
growth in costs in Medicare, either in the Medicare program or in
private sector programs. The aging of the population only adds a
few tenths of 1 percent to the costs.

Mr. McDERMOTT. How about technology?

Mr. KiNG. Technology is really a symptom of the problem rather
than a cause of the problem. In other words, because of this com-
bination of third-party payments and fee-for-service medicine,
where we will pay for anything as long as it is effective—it doesn’t
have to be cost effective, it doesn’t even have to be medically effec-
tive, really. We will pay for anything.

That has a tendency to literally suck technology into health care,
because it will be paid for in health care. So technology that might
be directed in other directions where it might be more productive


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10

Federation of American Health Systems
——————
Thomas A. Scully, President and CEO
Federation of American Health Systems
Testimony on Medicare Provisions Contained in
The President's Fiscal Year 1996 Budget Proposal
Before The Subcommittee on Health

Committee on Ways and Means
February 23, 1995

Mr. Chairman and Members of the Subcommittee, thank you for
inviting me. to testify today. I am in an admittedly awkward -- but
interesting -- position. As a former Medicare budget slasher (as Deputy
Assistant to President Bush and Associate Director of OMB), some of you
know me as something of an expert on proposing big Medicare cuts, But
now, as President of an association of the nation’s 1,700 investor-owned and
managed hospitals, I'm leading the charge for the #1 “slashes” --
hospitals. Seems like something of a dilemma?

Maybe. But maybe there is a way that we can all win: Congress and the
nation get needed savings; seniors get more and better choices and
incentives to pick more cost effective health plans; and hospitals and other
providers get a gradual transition to a more rational system that rewards
them for providing quality, cost effective care.

But First, The Problem: Medicare Is Going Broke.

Even without the need to reduce the deficit, the Medicare program's
growth is unsustainable. The Medicare actuaries project that, at current
rates, the fund will be insolvent by the year 2001 -- maybe 2003 or 2004
with more optimistic assumptions. Doing nothing is not a rational policy
option.

Would hospitals love it if there were no Medicare cuts this year?
Absolutely! _Is that likely to happen given the drive for deficit reduction,
the growth of Medicare and the pending insolvency of the trust fund? No.

So what are the options? Can you contro! spending and help solve the
Medicare trust fund problem without ruining the system? Yes-- if you're
careful.

Can You Save Money In Medicare? -- Yep, But It’s Not Fun

Traditional provider cuts of the past won't do it. Hospitals and
facilities used to shift costs to private payers to make up for reduced
Medicare payments -- but that can’t happen much any more. Managed care
and stronger employers have squeezed private payment rates so there is no
place left to shift. The health care market is beginning to work, but
Congress must recognize those implications -- cost shifting is dying.

Can you save some money without huge tremors in the provider
system, and its senior patients? Yes -- but not the $100 to $150 billion over
five years that some have claimed could be cut.

Can you try? Sure, but former Chairman Rostenkowski's 1989 hood
ornaments could soon be yours. Seniors and health providers will rebel at
cuts far beyond anything before attempted -- much less accomplished.


41

25. Although the data used in our model are always consistent with the official scenarios, a few terms had to be
redefined. Our treatment of capital taxation (see below), for instance, requires us to gross up the official pre-tax
worker “earnings” and “compensation” measures by the amount of the tax shift. Some of the official scenario
sumbers are publisbed in the OASDI, Hi, and SMI annual reports. Most of the annual figures are unpublished and
are available from the SSA and HCFA actuarial offices.

2. OASI and DI are separate trust funds, But to simplify the analysis (and given that the two trust funds have
historically borrowed from each other), we will regard them here as one. According to scenario I in the 1994
trustees’ annual reports, OASDI is expected to become insolvent in 2029; HI in 2001. According to scenario Il,
‘OASDI is expected to become insolvent in 2014; HI in 2000.

27. That is, anual Medicaid cost growth is determined as a product of: (a) the Medicaid demographic multiplier,
(b) the GDP deflator, and (c) the extraordinary cost multiplier for Medicare (see Appendix If). The Medicaid
demographic wuliplier is calculated, each five years into the future, by multiplying the population in each age
bracket (over age 65) in the future with the per-capita Medicaid cost of that age-bracket in 992. It is optimistic
to assume unchanged utilization rates because such a large share (roughly two-thirds) of Medicaid benefits to the
elderly consists of long-term care. Unlike acute care, the utilization of long-term care is very sensitive tothe share
of eligibles living alone or without family nearby (which we know will rise among the future elderly population)
and to broader definitions of disability (which are already factored into Disability Insurance cost projections).

27. “The cost disease of the personal services” is the term William J. Baumol originally used for his analysis of
‘how many personal services resist productivity improvement. It has since become known as ~Baumol’s Law” and
thas been often been observed to work with great stubborness in the public sector. For a provocative essay on the
issue, see Daniel P. Moynihan, “Don't Blame Democracy: The Socialization of Slow-Growth Jobs,” Washington
Post (Sune 6, 1993).

28. It is true that a balanced budget would lead to a steady reduction of public debt-service charges as a share of
GDP. But it is assumed that this reduction would be approximately compensated by per-GDP spending growth in
other government functions.

30. There is of course no consensus among economists on the incidence of taxes on the return to capital. Some
analysts (¢.g., the Congressional Budget Office) split the difference by presenting the results both ways--shifting
the burden all to capital and then all to labor. For a long-term equilibrium framework (especially one that
anticipates the expected future trend toward integrated global capital markets), we think that most economists would
‘agree that most capital taxes are shifted to labor. Hence our choice of the three-quarters fraction. Although capital
‘can also shed its tax burden by passing it on to consumers in the form of higher prices, it is generally believed that
this shift 1s less important--since product markets are more competitive and integrated than labor markets. a our
‘model, in any event, switching the assumption from shifting through wages to shifting through prices would hardly
make any difference im the quantitative result for real after-tax earnings

30, Here “benefit payments” refer to “transfer payments” as defined in the National Income and Product Accounts
for all levels of government. At the federal level. this term is somewhat more restrictive than ~ federal entitlements”
as defined by the Congressional Budget Office or “benefit payments for individuals” as defined by the Office of
Management and Budget.

32. The plan proposed by Rep. Jerry Solomon. Chatrman of the Balanced Budget Task Force. is one of the very
few plans (if not the only extant plan) that meets the first two critena~1.c., balancing the budget without raising
taxes. But it does not meet the third. Even after including every fine item anyone can think of, Solomon is still
compelled to seek out massive reductions ($154 billion. or 22 percent of the cumulative five-year savings) 1m
Medicare and Medicaid. If the goal is to keep the budget balanced over time. not merely to balance it once, then
the need to reduce the growth in senior benefits 1s even more compelling: otherwise, Congress will ultimately run



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98

The MSP provisions are intended to assure that Medicare is the
secondary payer, that is, other insurers pay claims before Medicare.
As a result, Medicare claims processing contractors have two
interrelated responsibilities: (1) to identify beneficiaries with
other insurance coverage and thus avoid paying claims that other
insurers should pay and (2) to identify and recover mistaken
payments that were made before it was determined that the
beneficiary had other insurance coverage.

‘The MSP provisions apply to a relatively small portion of the
total number of Medicare-eligible persons. Last year, we estimated
that no more than 3 million Medicare beneficiaries have other
insurance that is primary to Medicare. Nevertheless, because of the
size of the Medicare program, the dollar value of Medicare claims
subject to the MSP provisions is substantial.

The majority of beneficiaries who are covered by the MSP
provisions are the working aged and their spouses. Contractors
often must rely on health care providers to identify beneficiaries
with other insurance coverage and thus may experience difficulties
in screening medical claims when such information is missing. Even
more arduous and costly are the contractors’ attempts to recover
Medicare payments after a claim has been paid. Contractors must
search their records, often dating back several years, to determine
whether Medicare paid claims for which another insurer was the
primary payer and, if so, seek recovery.

EUDURE RECOVERIES THROUGH THE DATA
MATCH PROGRAM WILL NOT BE REALIZED

To help Medicare identify and also recover costs that other
insurers are responsible for paying, the Congress provided for HCFA
to establish a data match process. ‘The data match process,
originally authorized under the Omnibus Budget Reconciliation act of
1989, allows HCFA to match data contained in several federal
information systems--including IRS and SSA files--to identity
beneficiaries that have the potential for health insurance coverage
through their own or a spouse's employer. Section 13561 of Omnibus
Budget Reconciliation Act of 1993 (OBRA-93) extended HHS's authority
to conduct data match activities through September 30, 1998. The
President's fiscal year 1996 budget proposes legislation that would
permanently extend the provision.

To date, the data match program has been cost effective. HCFA
records show that an initial data match of IRS/SSA records for the
1987-90 time period has resulted in $1.6 billion in demand notices
to insurers for payment to Medicare, of which about $400 million has
been collected. In seeking these recoveries, Medicare contractors
have incurred about $94 million in administrative costs through
fiscal year 1994. However, a May 1994 a federal court ruling
invalidated two MSP regulations that HCFA officials view as critical
to their continued recovery of MSP mistaken payments.’

The first regulation deals with the time frame for recovering
MSP mistaken payments. HCFA regulations (42 C.F.R. 411.24(£))
provide that Medicare contractors may recover such payments without
regard to any insurer imposed requirements to file a Claim within a
certain time period. The court ruled that in seeking recoveries
from insurers, Medicare must adhere to insurers’ "timely filing”
requirements that are imposed on other claimants. Generally, this
means that claims for reimbursement of health care services must be
filed within 1 year after the date of service. However, the data
match process does not permit HCFA to meet these time filing
requirements. IRS data are for prior tax years and must be matched
against SSA wage information. Thus, the data by nature are over a
year old before HCFA can begin processing them to identify MSP

‘Health Ins. Ass'n of Amv. Shalala, 23 F.3d 412 (D.c. Cir. 1994)
cert. denied, 63 U.S.L.W. 3439 (U.S. Feb, 21, 1995) (No. 94-919).


140

414. Both parts of Medicare (HI and SMI) are included here. SMI outlays are net of premiums paid by beneficiaries.
Although the payroll tax denominator for HI is slightly larger than the denominator for OASDI. the SSA actuaries
have traditionally ignored this discrepancy when adding the two together. In the same spirit, this calculation for
‘SMI uses the OASDI denominator and adds it on to the other two without adjustment. The “intermediate cost” and
“high cost” projections are equivalent to the official “scenario II" and “scenario Ill." Since there is no official long
term scenario III projection for SMI. we calculate this projection (as in the model described below) by assuming
‘that SMI outlays will exceed their scenario Il path by the same multiple by which HI under III exceeds HI under
ut.

15. James Tobin, in “An Exchange on Social Security.” The New Republic (May 18, 1987), p. 22.
16. Robert Ball (with Henry Aaron), “Social Security: It Is Affordable,” Washington Post (February 15, 1994)
17, Michael Kinsley, “Back From the Future,” The New Republic (March 21, 1994), p. 6.

18, Henry Aaron, Proceedings of “Children at Risk: Who Will Support Our Aging Society?" (Conference sponsored
by Americans for Generational Equity and Center for Public Policy and Contemporary Issues; Denver, Colorado;
May 13, 1988.)

19. American Association of Retired Persons, Entitlements and the Federal Budget Deficit: Setting the Record
Straight (1994), pp. 2. 15.

20. Henry 3. Aaron, Barry P. Bosworth, and Gary Burtless, Can America Afford to Grow Old? (1989), with its
long-term macro model based on SSA assuraptions, promises to be an exception. Unfortunately, neither SMI nor
Medicaid are modeled, and (even for just OASDHI) the authors’ extensive discussion of the tax burden always skirts
any direct presentation of real after-tax earnings numbers. In any event, their overall tone is far from optimistic:
“These (programs'] burdens will be manageable if productivity growth recovers to the pre-1973 rate, but they will
be very heavy if the improvement in general living standards continues at the recent dismal pace.” (p. 97).

21. Using out-of-date trustees" reports improves the outlook because the official assumptions have changed in &
pessimistic direction in recent years. Looking only at Social Security cash benefits obviously improves the outlook
‘even though several other programs transfer resources between generally the same two populations (from working
age adults to retirees), are subject to the same demographic pressures (the Boomer-led age wave), and are even
more resistant to cost control. We include two of the these programs, Medicare and senior benefits under Medicaid,
in our analysis, As for failing to account for the tolal tax burden on earnings (say, by just looking at earnings after
deductions for payroll taxes), this misses the basic political issue that matters to most Americans: Where do I stand
personally after all of my transactions with government are complete?

22. HL is financed mostly by an earmarked payroll tax, SMi by general federal revenues: together they are known
as Parts A and B of Medicare.

23. Although we generated numbers to 2070, we limit our discussions to the pre-2040 period for the purpose of
brevity and policy relevance None of the conclusions reached here would be materially altered by including the
2040-2070 penod.

24, Also left out is the historical and projected trend toward fewer average hours of work per week (see Charts 15
and 16), which may be regarded as yet another component of a higher living standard to the extent xt reflects less
“effort” cequired from each worker to obtain the same market basket of real goods and services.


91

Chairman Tuomas. Thank you very much, Mr. Hewitt, and I
want to thank the panel.

We have a vote on now, so we are going to recess to go over and
vote. If the panel will be kind enough to wait, we will come back
and then we will continue our inquiry.

Thank you very much.

[Recess.]

Mrs. JOHNSON [presiding]. Mr. Thomas has asked me to resume
the hearing. While I was waiting for some of my colleagues to re-
turn, I think that, given the hour and the work ahead of us, I am
going to resume the hearing without them. I am sure that they will

e joining me shortly.

First of all, I want to thank this panel for their input. I am very
disappointed that neither AARP nor the Committee to Preserve So-
cial ecurity came today. I think that is extremely unfortunate,
that they chose not to come. I do not know why, but there could
be no greater threat to either the seniors of America or the younger
generation than the impending bankruptcy of the system on which
they depend for medical care. It is not just seniors who depend on
that system, it is their children and offspring, it is the larger fam-
ily. 1 do regret their not being here.

I very much regret the administration’s decision not to allow
Alice Rivlin to be here, because, while, in fact, we are only a sub-
committee and often the administration doesn’t send people of that
rank to subcommittees, and I appreciate that general policy, none-
theless, we are the only subcommittee dealing with one of the most
explosive, difficult, dangerous problems that we face. If we don’t fix
Medicare, it could rend the very fabric of families and communities.

I just Appreciate your testimony very much.

Mr. Hopkins, you recognize in your testimony the challenge of
educating seniors. What plans has your group made to begin deal-
ing with this? In my experience among members of the public,
when I speak to seniors at senior centers, they are among the most.
rational of my constituents and also amongst the best informed.
But you are right. The seniors need to understand what is at stake
and how many very positive options there are.

What work has the Seniors Coalition done, or what work are you
planning to do? What kind of broader coalitions can you build?
Have you talked to RSVP about this? What is happening out there
to help seniors understand what is at stake?

Mr. HopKINS. Right now, we are in the process of coalition build-
ing, as you suggested, because it is going to take a lot of work from
a lot of people. We don’t have all the answers. We are looking at
a lot of ideas out there. Your idea with expanding Medicare Select
is an absolutely wonderful, necessary step, and we are supporting
that actively.

But beyond that, we are exploring the idea of Medicare savings
accounts. We are giving that some very serious looks. We are look-
ing at reforming Medicare HMOs to actually make them work a lit-
tle bit better and actually save some money while retaining choice
and the ability to opt out. Certainly, we don’t want seniors herded
into one plan in which they are stuck.

We are in the building process right now. Again, we recognize
that we won't have all the answers. We want to talk to as many


i

In the 1990 Budget deal, the Conference originally approved $56
billion in Medicare cuts over five years. That proposal went down to defeat
largely because of the key defection of now Speaker Gingrich who thought
the cuts were too big, The eventual cut was $43 billion over five years.

In the 1993 Budget deal, the Medicare cut was $56 billion over five
years. This was enough to cause significant political pain, and was one of the
most controversial parts of the package. Not a single Republican voted for
the plan -- largely because of new taxes, but Medicare cuts were an oft-cited
reason as well.

And these cuts were done when health inflation was higher, the
baseline was much fatter, and each dollar cut had less of an impact. So how
do you do it without a war with seniors and providers?

Reasonable Budget Goals Can Mesh With Good Health Policy -
Restructuring Medicare

Reasonable budget savings can be had through Medicare restructuring.
In fact, the budget pressures may provide an incentive to push through
much-needed programmatic reforms that might otherwise never happen.
Congress can gradually privatize the Medicare system, providing seniors
with options/incentives to join more cost effective plans.

The federal government can pay. per capita rates to private plans --
just like GM or 3M, or another large purchasing group that efficiently uses
private plans, the Federal Employees Health Benefit Plan. Medicare is a
wonderful system for seniors, but it is a payment dinosaur. All hospitals and
other providers receive roughly the same payment -- regardless of actual
price or quality. The incentives and pressures to operate efficiently are far
less than they are under private payment schemes. It's no one's fault, but
you get what you ask for -- good quality with a lot of wasted dollars.

By privatizing the system you can restrain the growth of payments.
You can get significant budget savings.

You can get CBO to score it.

And you can create a better system without destroying the one
we have.

You can get much of the savings you need, but through a private
payment/voucher/certificate system, the market will adjust gradually to the
payment squeeze -- with providers competing on price and quality for
Medicare business. Instead of making arbitrary cuts in the physicians’
Medicare Volume Performance Standard (MVPS), or the Hospital Market
Basket, Medicare would slow cost growth the same way private employers
have -- through competition over price and quality.

It's Not Always How Much You Cut -- It's How You Do It

If Congress tries to take $100 to $150 billion out of the system over
five years, our hospitals will be leading the charge against you. That's simply
too much money to take without major damage to hospitais. patients,
communities and lots of would-be former employees. fll be driving patients
to the demonstrations.

But, if the cuts are in a reasonable range, we'll roll up our sleeves to
work with you to find creative ways to restructure the system. We can work
to change behavior -- both individual and provider behavior -- to save money.


97

‘TESTIMONY OF SARAH F. JAGGAR, DIRECTOR
HEALTH FINANCING AND POLICY ISSUES
HEALTH, EDUCATION, AND HUMAN SERVICES DIVISION
UNITED STATES GENERAL ACCOUNTING OFFICE

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to highlight recent
developments related to the Medicare Secondary Payer (MSP) program
that could cost the Medicare trust fund hundreds of millions of
dollars. Your Subcommittee recently held several hearings on the
Medicare program to identify ways to avoid excessive or unnecessary
spending. As you are aware, there are a number of legislative
initiatives that are intended to improve the MSP program, which is
administered by the Health Care Financing Administration (HCFA), an
agency within che Department of Health and Human Services (HHS).

‘The MSP program helps assure that other health and accident
insurers pay medical costs for certain covered beneficiaries before
Medicare. To do so, Medicare must obtain data on a beneficiary's
private health insurance coverage so that its claims processing
systems can assure that other insurers, whose coverage is primary,
pay Claims before Medicare. This enables Medicare to avoid
incurring unnecessary costs. In addition, Medicare retrospectively
recovers mistaken payments that should have been paid by other
health insurers. Thus, MSP 1s a major Medicare cost containment
measure, saving about $3 billion in fiscal year 1994,

Historically, Medicare has faced many obstacles in carrying out
the MSP provisions. When Medicare pays claims that other insurers
should have paid, Medicare must recover its costs from the liable
insurers. This is difficult. For the past decade, our reports (see
Appendix I) and those issued by HHS‘s Inspector General have shown
problems with efforts to identify and collect from insurers that are
responsible for paying ahead of Medicare.

I now would like to focus on three specific legislative
initiatives intended to improve Medicare's MSP program that T will
discuss are the following:

-- The HCFA data match which relies on Internal Revenue Service
(IRS), Social Security Administration (SSA), and Medicare
records. The anticipated recovery of hundreds of millions
of dollars of mistaken payments has been negated by a recent
appeals court ruling that invalidates two HCFA regulations
that are critical to MSP recoveries.

-- The Medicare/Medicaid data bank. As we previously testified
and reported, we believe that the data bank will be
expensive and add an unnecessary administrative burden to
the nation's employers while achieving little or no savings
because there is no assurance that the increased record-
keeping requirements would provide needed or additional
information on beneficiaries’ health insurance coverage.

-- A beneficiary enrollment questionnaire. While this
initiative has strong potential for identifying Medicare
beneficiaries with other health insurance coverage, it will
be some time before HCFA can assess its overall
effectiveness.

BACKGROUND

Medicare provides health insurance coverage for over 36 million
elderly and disabled Americans. Its coverage is quite extensive,
including physician, hospital, home health, skilled nursing home,
and various other services.

In enacting the Medicare program in 1965, the Congress made
Medicare the secondary payer for expenses also covered by workers’
compensation programs. Concerned about escalating costs in the
Medicare program, the Congress made several statutory changes during
the 1980s that also made Medicare the secondary payer to certain
employer-sponsored group health insurance plans and to automobile
and other liability insurance plans.


102

Mrs. JOHNSON. Ms. Jaggar, what was the logic of the committee’s
ruling in regard to Medicare’s right to collect from third-party ad-
ministrators?

Ms. JAGGAR. Madam Chairman, when Medicare was put in place
in 1965, the early program decided that for Workers’ Compensation
claims, Medicare would be the secondary payer. In the early 1980s,
there was an expansion of the Medicare secondary payer coverage
to include other individuals who met certain selected conditions, so
this has been in place for a number of years and is not a new deci-
sion.

Mrs. JOHNSON. It is not a new decision, but now it is interfering
with your ability to collect?

Ms. JAGGAR. What is at question now is a court ruling which es-
sentially says that Medicare—it doesn’t say that Medicare can’t
make the collection for these mistaken payments. It says that Med-
icare must do it within a year’s timeframe, or within the timeframe
that the insurance companies have set. The insurance companies
have wanted that timeframe—it is normally within a 6-month to
1-year timeframe that insurance companies ciose out——

Mrs. JOHNSON. I understand the time problem.

Ms. Jaccar. OK.

Mrs. JOHNSON. It is the second one that you bring up, the court
ruling that invalidated the HCFA regulation that allowed Medicare
contractors to recover from TPAs. What was their logic in denying
your right to recover in that court decision?

Ms. Jaccar. I have with me a gentleman from our Office of the
General Counsel.

Mrs. JOHNSON. We would be happy to hear from him.

Ms. JaGcar. His name is Craig Winslow.

Mrs. JOHNSON. Mr. Winslow, welcome, and thank you.

Mr. WINSLow. Thank you. It was based on interpretation of the
statutory language. The language says, basically, they can recover
from those who are required to or have a responsibility to pay. The
court accepted the argument that TPAs, although they are paying
claims on behalf of insurers and others, because they don’t have ul-
timate financial responsibility, that they are not required or re-
sponsible to pay, in the context of this language.

Mrs. JOHNSON. So you believe a clarification of the law would re-
store your right to deal with the TPAs?

Mr. WINSLow. Exactly, yes, ma'am.

Mrs. JOHNSON. Thank you.

Mr. Cardin.

Mr. CarDIN. Could you elaborate a little bit more specifically as
to what type of legislation you would like us to consider?

Ms. JAGGAR. Mr. Cardin, the Supreme Court’s decision not to
hear the case occurred on Tuesday of this week. As you can imag-
ine, the people at the Health Care Financing Administration who
are responsible for conducting the MSP and Fave been involved in
the litigation over the years are working on legislation.

Our understanding is that the changes that would be required
basically go to clarifying the timeframes and the responsibility, and
that what we would lke to do for the subcommittee, if the sub-
committee would find it helpful, is work with the lawyers at the


118

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PATIENTS & MEULAMCEAOSPITAL X-RAY OWRGES

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65

But the deterioration to 25 percent was, unfortunately, at least in
hindsight, the easy way out. That is always, I think, the difficulty
with general revenue financing. People think there is an unlimited
amount there, whereas we know what there really is, is mammoth
deficits.

Chairman THomas. I appreciate the gentleman’s statement be-
cause it appears that we have always taken the easy way out. In
taking a look at where we need to be in 5 to 6 years, in looking
at the President’s budget and the responses that he has offered to
where we are, at least from an actuarial point of view, 5 or 6 years
out, it looks like those folks are still taking the easy way out.

Mr. Stark, do you wish to inquire?

Mr. Stark. Thank you, Mr. Chairman.

Mr. Myers, it was your testimony, or included in your testimony,
that changes in the hospital insurance program as well as the So-
cial Security program should be made solely for the sake of those
programs and not at all for the sake of the general budget deficit.
Is that correct?

Mr. Myers, That is correct, Mr. Stark. I think that, these days,
there is really a great hoax being perpetrated on the American
public by counting excesses of income over outgo of the Social Secu-
rity and hospital insurance programs as reducing the general budg-
et deficit.

Mr. Stark. So in the sense that if the President’s budget falls
short of moving toward the solvency of the trust fund that should
be enough, or this committee should look to keeping the Medicare
trust fund solvent rather than looking to pay for Star Wars or pav-
ing roads or something like that. That would be your testimony?

Mr. Myers. Absolutely, Mr. Stark.

Mr. STARK. Further, would it be your testimony that an individ-
ual entering the work force today and paying into the Medicare
trust funds through his tax contributions, on average, will those
people pay in more or less than they are anticipated to draw out
in their retirement years?

Mr. Myers. To answer your question, Mr. Stark, first of all, I
think we should consider whether we are talking about the com-
bined employer-employee tax rate or just the tax rate that the em-
ployee pays.

Mr. Stark. I have a hunch the answer is the same. I have a
hunch that taxes into the trust funds for a person entering today
are not enough to cover the anticipated cost of that person’s medi-
cal care 45 years hence.

Mr. MYERS. It is quite likely that that is the case, although it is
very difficult to predict that matter—unlike, say, the cash-benefits
program of Social Security.

Mr. Stark. Given the trend lines you are talking about, if they
were, it wouldn’t go bankrupt, it seems to me. So if you are sug-
gesting that, at some point beyond that.

Mr. King, I heard you say that without cost sharing, utilization
goes up significantly. You get far higher utilization when you do
not have cost sharing. Was that your testimony?

Mr. KING. Yes.


71

Mr. McDermoTt. But balance billing, if a patient does something
in a managed care plan where the physician is paid a certain
amount for a procedure, then the doctor can bill the patient for the
balance? There is no prohibition in the private sector on that?

Mr. Kinc. No, but under a managed care plan, the doctor doesn’t
bill the patient on a fee-for-service basis.

Mr. McDERMOTT. Yet.

Mr. Kina. In the closed panel HMO, he is on a salaried basis and
he doesn’t charge fee-for-service.

Mr. McDERMOTT. I would suggest that that is a “yet.”

Thank you, Mr. Chairman.

Chairman THomaS. Thank you.

There is just one point I want to make. The characterization of
technology that was just presented is the first time I have really
heard it explained that way, not as an outside driver but as par-
tially driven by the system. The only analogy that came imme-
diately to mind was the situation in the space race between the So-
viet Union and the United States, and the fact that we did not
have high-thrust rockets and the Soviets did.

The high-thrust rockets of the Soviets didn’t require miniaturiza-
tion. The low-thrust of the United States drove the miniaturization,
the technology. That is not to say that miniaturization was bad and
not to say that technology is not good. It is good but it was driven
by something else, that is, our inability to lift large objects, so it
forced the miniaturization.

The ability to bill for anything is driving the technology, to a cer-
tain extent. I had not heard it put quite that way. There is clearly
a two-way street there, and I have only seen it one way. I appre-
ciate the gentleman’s clarification on that point.

Mr. McDermorr. If the gentleman will yield, I went through this
when I was in the State legislature with the University of Wash-
ington saying they wanted to have a heart transplant unit. I ar-
gued, as a State legislator, we shouldn’t waste our money on that.
They should send all the patients down to Stanford. The argument
was, oh, no, but to be a first-class university, we must have it here
at. the University of Washington. Our under-used capacity then was
sold to the Canadians, because we didn’t have enough patients. The
British Columbians bought from us the capacity to do heart trans-
plants. That is how the system has operated.

Chairman THoMa~S. I thank the gentleman.

Mr. McCrery.

Mr. McCrery. Thank you, Mr. Chairman.

Mr. King and Mr. Myers, both, you had excellent testimony, I
particularly liked Mr. King’s because I think he has put his finger
on the problem in our system, which started back around World
War II with the growth of health insurance. This problem is gov-
ernment getting involved in putting wage and price controls on the
private sector and allowing them to increase benefits, thereby ex-
panding the third-party payment system in this country, until we
have our system today, where almost nobody pays for their health
care. Some third party pays the bill.

You are exactly right. We cannot expect people to control their
consumption of anything if somebody else is paying for the items
to be consumed. I don’t care if it is health care or automobiles. The


16

Chairman THomas. I thank the gentleman.
Ms. Steelman.

STATEMENT OF DEBORAH STEELMAN, WASHINGTON, D.C.
FORMER ASSOCIATE DIRECTOR, HUMAN RESOURCES,
VETERANS AND LABOR, OFFICE OF MANAGEMENT AND
BUDGET; AND CHAIR, 1991 ADVISORY COUNCIL ON SOCIAL
SECURITY

Ms. STEELMAN. Thank you, Mr. Chairman.

It is really a privilege to come here today to talk about Medicare,
because Medicare reform is a thinking person’s debate and has
been for a long time. Presidents in both parties have previously
sent up a number of proposals to try to deal with the unacceptable

‘owth in the program. Members of Congress in both parties have
long accepted the fact that this program needs to be reformed.

We have tried a number of different mechanisms over the last 10
years. I think this year is a very important year to continue what
the Congress has worked on for the last decade, to ty to get the
program’s cost down and to try to improve it for the beneficiaries
and to try to stabilize its financing. This year is no different than
any in the last decade, regardless of what this President’s budget.
contains.

I think there are three reasons to talk about Medicare reform.
All have budget relationships, but they are not all relationships to
the Federal budget. A lot of them are relationships to beneficiaries’

udgets.

For example, current beneficiaries today pay a part B premium
and a part A deductible. If we don’t do something to constrain the

‘owth in the program, those costs will go up for beneficiaries, as
those costs are tied to the costs of the program. In a brief 5 years
the part A deductible will go from $716 to $872, In that same time-
frame, the part B premium will go from $552 per year to over $700
per year.

If you take a look at just extending that out to, for example, the
year 2020, the year in which I turn 65, you end up at a part B pre-
mium that is obviously beyond the means of any beneficiary. In the
Advisory Council on Social Security, which I chaired a couple of
years ago, we did a calculation that if the part B premium remains
fixed at 25 percent of program costs, it will no longer consume
about 6 percent of the beneficiary’s check, which is what it con-
sumes today. Right now, the part B premium, of course, is de-
ducted from the Social Security check. It will consume over 13 per-
cent, over twice as much a portion of the beneficiary’s check.

The part B premium in the year 2020, unless this Congress acts,
will be $310.50 a month. This isn’t doable. So there are many rea-
sons to take a look at Medicare’s budget that have a lot to do with
the way the program functions in people’s lives, and for that rea-
son, we owe the reform debate a serious effort this year.

Of course, there are also future beneficiaries involved. The trust-
ees, as the chairman quoted earlier, were very clear in their in-
structions to the Congress last year on both part A and part B, spe-
cifically, the trustees, Secretaries Shalala, Reich, then-Secretary
Bentsen, and Administrator Vladeck urged the Congress to take
additional actions designed to control HI program costs through


99

situations. HCFA‘s process involves mailing questionnaires to
employers, searching Medicare paid claims data, and providing
contractors with lists of mistaken payments that must be researched.
As a result, Medicare claims are at least 2 years old before HCFA
can initiate recovery acticns. For example, HCFA has just recently
initiated efforts to recover mistaken payments that were identified
by the 1991-92 data match. HCFA estimates that these claims could
result in additional recoveries of about $200 million.

The second regulation deals with Medicare recoveries from third
party administrators (TPA). The court ruling invalidated a HCFA
regulation (42 C.F.R.411.24(e)) that allows Medicare contractors to
recover from TPAS. TPAS typically adjudicate claims and write
benefit checks for employers that self-insure. Most self-insured
health plans operated by medium and large employers use TPAS.
Because one TPA may serve hundreds of employers, they often
represent the most efficient entity from which to seek recoveries.
Because of the ruling, HCFA will now have to identify the specific
employer that provides coverage and separately pursue recovery trom
each employer. HCFA officials told us that they will face serious
administrative complications in recovering Medicare mistaken
payments if they are prohibited from recovering directly from 7PAs.

‘The Federal government appealed the court's decision to the
Supreme Court, but this week the Court declined to hear the case,
leaving the appeals court decision intact. Therefore, without
legislative intervention to reinstate these MSP regulations,
continued and effective recovery of Medicare mistaken payments from
the data match process is not possible. Not being able to
effectively recover on previously paid Medicare claims will result
in estimated lost savings of at least $600 million over the next
five years. Specifically, in regard to the fiscal 1996 budget, HHS
estimated that the matches performed in fiscal 1996 could yield $400
million in MSP savings and projected savings of $430 million if the
data match is extended beyond 1998. About half of these savings
represent recoveries of previously paid claims that will not be
collected because of the appeals court decision. In addition,
according to HCFA officials, there is now an open question as to
whether Medicare will have to refund to insurers amounts already
recovered under the data match program since 1993

LEGISLATION NEEDED 10 DELAY
DATA BANK IMPLEMENTATION

Another MSP initiative that could have a significant impact on
WHS fiscal year 1996 administrative costs for Medicare is the
Medicare/Medicaid data bank. Section 13581 of OBRA-93 directed HHS
to establish a data bank, beginning in February 1995, that would
contain information on about 160 million workers, spouses, and
dependents covered by employer group plans. Its purpose is to save
millions by (1) identifying the approximately 7 million Medicare and
Medicaid beneficiaries who have other health insurance coverage that
should pay medical bills ahead of the Medicare and Medicaid programs
and (2) ensuring that this insurance is appropriately applied to
reduce Medicare and Medicaid costs. This information would then be
used to recover mistaken payments.

In May 1994 we issued a report and testified that the proposed
data bank would create an avalanche of unnecessary paperwork for
both HCFA and employers and will likely achieve little or no savings
While costing millions. ‘The cost to HCFA of establishing and
maintaining the data bank over 5 years was estimated by the agency
at over $100 million. As a result, we recommended that the data
bank be delayed until its potential benefit could be clearly
demonstrated.?

May

1994.


21

“the Trustees urge the Congress to take additional actions designed to control
HI program costs through specific program legislation... The Trustees believe
that prompt, effective, and decisive action is necessary.”

Similarly, Part B, the Supplementary Medical Insurance program, has been a
constant drain on Federal revenues, As Chart 2 shows, the burden is expected to
accelerate in the years to come, I would again refer to the most recent report by
Secretaries Shalala, Reich, and then-Secretary Bentsen.

“Given the past and projected cost of the program, the Trustees urge the
Congress to promptly take additional actions designed to control SMI costs
through specific program legislation.... The Trustees believe that prompt,
effective, and decisive action is necessary.”

Although few were effective, proposals to rectify the inflation problem in Medicare
have been proposed by both parties throughout the last decade, in both the Congress and
the Executive Branch.

In fact, in September of 1992, then-Governor Clinton noted that government
health care costs were rising at nearly three times the rate of inflation, a refrain he
continued to echo throughout the health care reform debate. His proposal to reduce
health care inflation was to institute “fallback” price controls in the private sector, and his
proposal to reduce Medicare inflation was to lower Medicare reimbursement schedules
and payments to the tune of $118 billion in Medicare cuts over five years.

President Clinton's $118 billion cut focused, like many past efforts, almost
exclusively on the price of Medicare services. The primary method of delivering care to
Medicare enrollees has not changed substamially since 1967, the year of Medicare's
implementation, Care is largely uncoordinated fee-for-service, free from appropriate
utilization and quality reviews. Had the President’s cuts been enacted, they probably
would have suffered the fate of its predecessors: evaporation as volume increases
overwhelmed any reduction in prices.

. As shown in Chart 3, increases in utilization and intensity accounts for
most of Medicare's spending growth. Price reductions only increase the
incentive for over-utilization

© Roughly 64% of the increase in Medicare spending between 1995-1999
stems from greater and greater intensity and service utilization,

So, after over a decade of "slash prices" proposals, the lesson should be clear: such
methods can achieve very short-term reductions in cost, at best, and if no reform that
includes beneficiary choice and utilization is enacted, Medicare costs will return to levels
much higher than those incurred by the private sector where such tools have become
routine.

Mammoth price cuts to Medicare payment rates such as those President Clinton
proposed last year are not "reforms." True Medicare reform addresses beneficiary choice,
price, and volume,

HCFA's sole exception in the “only slash prices" method of reducing Medicare
costs was a proposal in the Bush Administration to create a volume performance standard
(VPS) for physicians


50

ic heart disease since he was 72 years old. He has skin cancer and
several other problems.

What HMO is going to want to give my father a policy and
charge him the same as a 65-year-old who is playing golf everyday
at some nice place and in good shape and has no problems at all?

Mr. ScuLLy. First of all, under the current system, they don’t
have any choice. They would have to cover him.

Second, the AAPCC is geographically and age adjusted, so if he
is 89, he ‘would get a payment based on the fact that he is 89 and
not 65, So it is not all that disadvantageous for them to take him,
and, in fact, they do get a capitated rate based on the fact that he
is 89 and where he lives.

Mr. McDermott. That is with government regulation. Remem-
ber, we are getting rid of big government. This proposal for vouch-
ers is just to hand my father $2,000 or $3,000 and send him out
into the market.

Ms. STEELMAN. No.

Mr. SCULLY. That is certainly not what I understand it to be and
not what I would——

Mr. -McDrnmorr. What kind of consumer protection would you
put in?

Ms. STEELMAN. There is no question that the rate and age ad-
justments would have to be maintained under any system that we
are discussing. The voucher is not something like food stamps. The
voucher is where——

Mr. McDermott. Oh, This is not community rating? You are
going to allow underwriting on the basis of age even inside the —

Mr. ScuLLy. No.

Ms. STEELMAN. No.

Mr. SCULLY, It is community rated on the basis of age. What you
are saying is——

Ms. STEELMAN. The voucher, the value of the voucher, is linked
to the individual qualities of the individual, just like in the AAPCC
today. That could not change. It wouldn’t work if you changed it.

Mr. McDERMOTT. So you are saying that it won’t be e any problem.
My father is going to get, with his voucher, enough so that he
doesn’t wind up coming to me and my brothers and sister for his
out-of-pocket costs?

Ms. STEELMAN. I think we need to make this clear. A voucher is
not a specified amount for every individual in the country. A vouch-
er is a mechanism into a system. The individual can enroll any-
place, and the government’s payment will have the same kinds of
factors engaged as you do in the AAPCC.

Mr. McDermorr. Can’t they do that under Medicare now?

Mr. ScuLty. No.

Mr. McDErMoTT. Why? What prevents them?

Ms. STEELMAN. How would a PPO qualify under Medicare now?

Mr. Scu.ty. If the plan qualifies, in most areas of the country,
there are very few and they are pure HMO risk contracts.

Mr. McDermott. If they have a qualified plan, Medicare has
more choice than any plan in the country. If the plan is so bad it
can’t qualify, you probably don’t want people in it, anyway.

Mr. ScuLty. I think it would be virtually impossible to find——


95

With me today is Frank Pasquier, who has been responsible for
much of our Medicare secondary payer, or MSP, work over the
years. We would like to have our full statement put into the record
and I would like to present a summary.

First, a bit of background on the MSP program. By law, Medicare
is to be the secondary payer for certain covered beneficiaries when
they have other private health insurance coverage. To be the sec-
ondary payer, Medicare must know about a beneficiary’s other cov-
erages so its claims processing systems can assure that other insur-
ers pay claims before Medicare. This enables Medicare to avoid in-
curring unnecessary costs.

A second part of MSP is when Medicare retrospectively recovers
mistaken payments that should have been paid by other health in-
surers. This is called recovery of mistaken payments. This is a dif-
ficult and costly process.

MSP is a major Medicare cost containment measure. HCFA, the
Health Care Financing Administration, estimates that it saved tax-
payers about $3 billion in fiscal year 1994. Today, I would like to
focus on two areas that affect the ability of the MSP program to
realize savings. These are the HCFA data match and the Medicare/
Medicaid data bank.

First, the HCFA data match. The HCFA data match allows Med-
icare to match data contained in IRS and Social Security Adminis-
tration files to identify beneficiaries that have health insurance
coverage through their own or a spouse’s employer. To date, the
data match Program has been cost effective. The data match for the
1987 through 1990 time period has resulted in $1.6 billion in de-
mand notices to insurers for payment to Medicare, of which about
$400 million has been collected. In seeking these recoveries, Medi-
care contractors have incurred about $94 million in administrative
costs through fiscal year 1994.

However, a May 1994 Federal court ruling invalidated two MSP
regulations that HCFA officials view as critical to continuing this
program. The first deals with the timeframe for recovering MSP
mistaken payments. The court ruled that Medicare must adhere to
insurers’ timely filing requirements in seeking recoveries from in-
surers, generally meaning that claims must be filed within 1 year
after the date of service.

However, the data match process, because it uses IRS and SSA
data, does not permit HCFA to meet these timeframes. Medicare
claims are usually at least 2 years old before recovery actions can
be initiated. This limitation would basically eliminate HCFA’s abil-
ity to recover mistaken payments, at the loss to Medicare of hun-
dreds of millions of dollars annually.

The second ruling invalidates a HCFA regulation that allows
Medicare to make recoveries from third-party administrators,
which typically adjudicate claims and write benefit checks for em-
ployers that self-insure. Because one third-party administrator may
serve hundreds of employers, HCFA officials told us they will face
serious administrative complications if they must pursue recovery
from each employer.

This week, the Supreme Court declined to hear the Federal Gov-
ernment’s appeal of this case, leaving the appeals court’s decision
intact. Without legislative intervention to reinstate these regula-


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133

APPENDIX I: OFFICIAL ECONOMIC AND DEMOGRAPHIC ASSUMPTIONS

Every spring, the Trustees of the OASDI (Social Security) Trust Funds publish an annual
report which includes an actuarial analysis of future projected expenses and revenues. These
projections are computed by SSA on the, basis of long-term economic and demographic
assumptions that are approved yearly by the Trustees. The same assumptions are used by the
Trustees of the HI (Medicare Part A) and SMI (Medicare Part B) Trust Funds in the expense
and revenue projections included in their reports. Currently, the OASDI Trustees produce three
sets of assumptions, or "scenarios": low cost (1), intermediate cost (II), and high cost (III) -- of
which the second is considered the Trustees’ “best estimate” and is used to report the official
actuarial balances to Congress as required by law.

Each scenario consists of future projections for at least two dozen separate economic and
demographic variables, including inflation, unemployment, labor force participation, real
earings growth, fertility, longevity, immigration, disability rates, and so on. Just two
assumptions, however, dominate the cost projections early in the next century: real earnings
growth and longevity. By the year 2020, these two assumptions account for 63 percent of the
cost difference between scenarios II and Ill. Further into the future, fertility assumptions begin
to play a significant role. By 2040, when fertility alone accounts for 18 percent of the cost
difference, all three assumptions together account for 72 percent of the cost difference. Any
effort to assess the plausibility of the official scenarios, then, can usefully focus on the
plausibility of these three assumptions, Table 2 shows their ultimate long-term values, along
with a 1973-93 historical average to provide a standard of comparison, Scenario | is omitted
here because its assumptions are so optimistic as to put it out of the running as a prudent
forecast.

As Table 2 indicates, what is most striking about the two most dominant assumptions
real earnings growth and longevity -- is thar recent historical experience is more “pessimistic”
than even the highest-cost projection assumption. Scenario {I1, for instance, posits a higher
long-term growth rate of real earnings than we experienced according to any fair trend analysis
of the last 10 years, 20 years, or 30 years. Likewise, both scenarios assume that gains in
longevity will slow down sharply in future decades, perhaps on the supposition that there are
strict natural limits on the human lifespan. Recent research is casting doubt on this assumption,
In fact, the demographers on the technical panel of the current Quadrennial Commission of
Social Security may suggest that the official "best estimate” for longevity at age 65 be greatly
accelerated, perhaps by as much as one year by 2000 and five years by 2060. As for fertility,
though the long-term trend has been downward (for over two centuries in the United States), a
plausible case can be made for scenario II. Since the late 1980s, the total fertility rate has risen
Just above 2.0. Itis likely, however, that this spurt reflects nothing more than changes in birth
timing. Surveys of expected lifetime births per woman have changed very little over the past
two decades and are entirely consistent with the scenario II value of 1.9.”



17

specific program legislation. The trustees believe that prompt, ef-
fective, decisive action is necessary.

Again, I refer you to the trustees’ report on SMI costs:

Given the past and projected costs of the program, the trustees urge Congress to
promptly take additional ‘actions designed to control SMI costs through specific pro-
gram legislation. The trustees believe that prompt, effective, and decisive action is
necessary.

The President’s current budget is the most recent policy proposal
of the administration that follows this trustees’ report. This trust-
ees’ report was issued in April. This budget document should have
responded to the trustees’ urgings. It didn’t. It is, therefore, up to
the Congress to do so.

Clearly, part A and part B matter to beneficiaries, not always in
ways that are obvious in our inside-the-Beltway discussions. An-
other piece of pressure that is on the part B premium is how much
of the program now goes through part B versus how much goes
through part A. Part A, as you know, is paid for through a payroll
tax. Part B is paid for by general revenues and by the part B pre-
mium.

When this program was enacted, part A was about 80 percent of
the program. Part B only was about 20 percent of the program.
Today, that ratio is more like 60:40. So when you say that you are
limiting the part B premium to 25 percent of program costs, obvi-
ously, it really matters what program costs are. If part A is shifting
into part B, beneficiaries’ costs, general revenue costs, taxpayer
costs are going up. That is why we have to have this discussion as
a part of the budget.

Why is it that we keep avoiding the question of Medicare reform?
Why is it? Why is it we keep going back to price slashes? Why is
it we don’t talk about the structural reform that is necessary to re-
duce the volume, that is necessary to reduce the program cost
growth for current beneficiaries, for future beneficiaries, for trust
fund balances, for allowing government to spend its resources more
wisely and, therefore, spend within its means?

I think it is because we have been scared to face, all the unpleas-
ant town meetings. In fact, reform can be more a matter of common
sense if thinking people will engage in it.

If, for example, we were able to reduce Medicare simply to the
rate of inflation in the private sector, we could save all the budget
targets you need to save and we could make a part B and a part
A deductible that was more in keeping with private sector levels.
You can’t do it by just going to old fashioned proposals. We know
that after 15 years. You know how ineffective these proposals have
been. They have been stop-gap, budget-driven measures.

Can we build on those to really try to stabilize the program at
an inflation rate more akin to the private sector? I think, yes, if
you do four things.

Number one, try to get prices to more clearly mirror private sec-
tor.

Number two, try to open up HMOs to try to give more bene-
ficiaries the availability of purchasing managed care, if they prefer
it.


61

TESTIMONY BY
Guy King
Former Chief Actuary for HCFA
before the

House Committee on Ways and Means

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 a
Chief Actuary, the expenditures for both the HI 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 futur

Mospital 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 1994 Trustees Report
projects that the HI fund will be bankrupt by 2001. Thus, during
my 15 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 continue 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 middle of the next century. Even by the
year 2020 the tax rate necessary to support the cost of the program
will have more than doubled.

I know that many 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 II
Baby Boom begins to reach age 65, the growth in the number of
workers paying taxes is 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. By the middle of the next century, when all of the
baby boom will have retired, there will only be two covered workers
supporting each HI beneficiary, so this problem is very real and
very predictable.

The problen 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 34 percent reduction in
expenditures or an immediate 52 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


130

GDP) as it did between 1955 and today. (See Chants 5, 8, and 9.)

8. Under both scenarios, the total tax rate on worker compensation grows steadily.
From 41 percent in 1994, it climbs to 57 percent by 2040 under scenario Il and to 69
percent by 2040 under scenario III. Tax rates on return to capital and benefits also
rise, but not as sharply. Under both scenarios, taxes on worker compensation
comprise just under 80 percent of total tax revenue throughout the projection period.
Of the remainder, the capital share gradually declines over time and the benefit share
gradually rises. (See Charts 10 and 11.)

TH. DISCUSSION

The foregoing analysis suggests that, absent major reform, the graying of the welfare
state is likely to have catastrophic consequences for the after-tax living standards of most
working-age Americans.

It has long been known that current-law spending from major entitlement programs is
projected to grow considerably faster than our economy under all of the official scenarios. If
budgets must be balanced at some point in the future, these scenarios imply an even steeper
growth in total tax revenues as a share of GDP and in total tax rates on most definitions of
income. Some observers have maintained, however. that higher cost as a share of GDP or
payroll does not rule out a comfortable growth rate in real after-tax earings. We have shown
that it does. According to the official “best estimate" scenario of the Social Security and
Medicare trustees, real after-tax earnings will remain entirely stagnant over the next half
century, According to a more prudent scenario that better reflects recent history, after-tax
earings will decline drastically over the next half century.

Few Americans would willingly or knowingly embrace either of these visions of the
future, For defenders of the entitlement status quo, then, the challenge is not so much to defend
the results described here as to question the assumptions that lead to them.

But there really isn’t much opening for direct rebuttal. The most critical assumptions,
after all, are embodied in the officiai economic and demographic scenarios. And while it is easy
to imagine a brighter future than scenarios II or II], 1t would be difficult to argue that we should
count on such a brighter future on the basis of past experience. Another key set of assumptions
are the official “health-care cost multipliers” -- and these too are demonstrably optimistic relative
to past experience. Remember: The age wave is going to generate a huge rise in health-care
benefit costs even in the absence of a significant health-care multiplier. To illustrate, let's
assume (implausibly, of course) that future Medicare spending per age-adjusted beneficiary were
to grow no faster than GDP per worker from now on. This is on the order of about one percent
per year under scenario IT, The result? Medicare spending would still more rhan double as a
share of taxable payroll by the year 2040 -- as opposed to tripling under the official scenario.


114

The physicians’ fee schedule paints portable x-ray services with a broad governmental
brush. ‘The system includes non-physician services, such as portable x-rays, in a payment
methodology designed almost solely for physicians’ services and based solely on data concerning,
physicians’ services. Currently, the system pays 100 little attention to the distinction between
portable x-rays and physicians’ services, and, most critically, the distinction between the different
patient populations they serve

‘As I mentioned earlier, the inherent difficulties emailed in dealing with the nation's
‘growing population of very old, home-bound persons make it much more costly on a unit basis to
provide a portable x-ray than to provide an x-ray to an ambulatory patient in a hospital or
physician's office. HCFA at the urging of our industry has recognized this difference, in
principle at least. Although reimbursement for the technical component of the portable x-ray
service, or the taking of the x-ray itself, is exactly the same for portable x-rays as for physicians’
office x-rays, HCFA has established a unique code that is billed with every portable x-ray
technical component and attempts to capture the cost difference between the two types of service.
However, the level of payment for this "set-up" code has not kept pace with the severe drop in
technical component payment levels that portable x-ray suppliers will experience by full
implementation in 1996, even with annual updates in 1992-1996.

The payment levels that portable x-ray suppliers will confront in 1996 will, very simply,
be insufficient to cover the costs of providing services in many instances. In anticipation of this
reality, portable x-ray suppliers are scrambling to make whatever changes they can, simply to
remain in business. Many portable x-ray suppliers have already reached their limits in terms of
squeezing economies out of their operations. Consequently, the choices that remain are to cut
back on services so that Medicare revenues stretch the farthest. In some cases, cutting back
means cutting out services on nights and weekends, when technologists must be paid overtime to
work and interpreting physicians are harder to contact. Sometimes, cutting back may mean
coming to nursing homes only according to a specified schedule to maximize the number of
patients that can be seen at any given time. In some cases, cutting back may mean eliminating
services altogether in certain localities -- such as the most rural, where driving distances and
times between nursing homes are the greatest, or the most highly concentrated urban afeas,
where traffic waiting time is longest and the risks of vehicle damage and theft are highest. In
some cases, cutting back means going out of business entirely in an area of the country where the
business simply is no longer profitable -- or foregoing expansion to new geographic areas
because the projected reimbursement is insufficient to justify the investment required.

At our 1994 Annual Meeting, we tried to assess the extent of these changes. A survey of
just those NAPXP members present revealed the following. Companies had eliminated service
in:

+ Lompoc, CA

‘+ Lompol, CA

© Clewiston, FL

‘+ Maryland's Eastern Shore

© Corpus Christi, TX.

‘+ Rio Grande, TX

* Blackstone, VA and

+ Irvington, VA,

affecting approximately 1700 nursing home beds. Companies had reduced service (e.g., from
five days per week to two, or through the elimination of "after hours" work) in:

+ Mt Shasta, CA

+ Red Bluff, CA


116

services, primary care services, and selected other categories of
services, including high-tech services, electrocardiograms (EKGs),
cataract surgery, and radiology. (Emphasis added.)

Id, The “oldest old” are portable x-ray suppliers’ major clients for both EKGs and radiology
procedures.

Returning to the point made by other witnesses before this Subcommittee, that the
Medicare program needs to be more closely aligned with the private health care marketplace, 1
cannot help observing that the problems of declining access to portable x-ray services and
stagnation in this industry would not exist if our services were offered in an open, competitive
marketplace, rather than to a single, government payor. For example, a buyer of x-ray services
for nursing home and homebound patients in the private market would look at the alternatives
available: purchase the services from a portable x-ray supplier, or send patients back and forth to
the hospital in ambulances for their x-rays. On the issue of cost, the choice would be clear: even
in those areas of the United States where reimbursement is the highest, the portable x-ray service
is far cheaper. On the issue of quality, the choice is also clear: our x-rays provide physicians
with the same accuracy of diagnostic information as hospital or physician's office x-rays, and
sive patients and their families far greater comfort and lower physical risk. Given such strong
cost and quality incentives to use portable x-ray services, in a marketplace consisting of private-
sector buyers, one would expect that most nursing homes would use portable x-ray services, as
would most organizations supplying services to homebound patients. Purchasers would
negotiate payment rates with portable x-ray suppliers that would create sufficient incentives for
suppliers to provide the service, while maintaining the buyer's cost advantage of portable x-rays
over the hospital/ambulance alternative.

But in the world of Medicare, as I have explained, this situation does not exist. Medicare
has no policy requiring a nursing home administrator to use the cheaper portable x-ray service
where it is available, And since Medicare is paying for the x-ray, it makes no difference to the
physician ordering the x-ray or the nursing home administrator making arrangements for the
service whether it is provided by a hospital or by a portable x-ray supplier. (And, if low
reimbursement has kept a portable x-ray supplier from entering a locality or staying in it, then the
alternative is simply not available at all.)

‘Additionally, in a private marketplace, purchasers of portable x-ray services and suppliers
of those services would negotiate payment rates that fit the circumstances of the service and its
cost. Our costs are significantly greater to provide service on nights, weekends and holidays,
ecause federal wage and hour laws require us to pay technologists time and a half, or the
equivalent, for service at those times. Yet Medicare payment rates make no allowance for the
difference. Similarly, our costs are higher in the home care setting, where we typically have to
use two technologists instead of one in the nursing home, since in the home, there are no nursing
staff to assist us in dealing with frail or difficult patients, and there are often stairs (and never
elevators), requiring two people to hau! portable equipment. Yet again, Medicare's payment rates
do not address this difference either -- whereas, in the private marketplace, the supplier and
purchaser of portable x-ray service would negotiate a payment rate more sensitive to both the
supplier's costs and the demands made by the buyer.

‘The unfortunate irony is that, if Medicare reimbursement were better attuned to the costs
and circumstances of the portable x-ray service, portable x-rays would be available to more of
the nursing homes and homes that need them, and Medicare would save significant sums on its
costs for providing diagnostic x-rays to homebound and nursing home patients.

‘Small Changes for Big Benefits

In the long term, we recognize, Medicare may undergo a complete transformation. But in
the short term, Le, as long as the program maintains a fee-for-service component, there is an
urgent need for some fine-tuning. Minor changes, consistent with the resource-based payment
principle of the physicians’ fee schedule, could solve the problems J have described and
consequently allow the Medicare system to reap the full benefits in cost-effectiveness and quality
‘care that the portable x-ray service offers.


4

Chairman THomas. Good morning. Today’s subcommittee hear-
ing will focus on the Medicare provisions contained within the
President’s budget. We will examine the issues that were included
in his budget and those which may have been omitted.

The President’s budget includes three Medicare policies. First, it
permanently sets part B premiums at 25 percent of program cost.
Second, it maintains the freeze on home health and skilled nursing
facility payments. The final. policy extends Medicare secondary
payer provisions, which expire in 1998.

Today, the subcommittee will discuss the part B premium and
the Medicare secondary payer. The areas of home health and
skilled nursing facility payment policies were covered in an earlier

earing.

It is important to note that the administration, in recommending
these policy extensions, stressed that these proposals are “not new
Medicare cuts.” The President chose to take a hands-off, leave-
it-as-it-is approach to Medicare. The President chose not to recog-
nize, much less plan for, the deteriorating financial condition of the
Medicare part A trust fund.

According to the most recent Medicare trustees report, as early
as 1996, the part A trust fund will begin to pay out more for medi-
cal care than it receives from revenue. Furthermore, the trustees
report that the trust fund will not only lack funds to cover its obli-
gations for the Medicare beneficiaries by 2001, but it will be com-
pletely exhausted sometime later that year.

Now, some may scoff and say, this is not a crisis. They will cite
the possibility that the trustees report, due April 1995, will predict
that the bankruptcy of the trust fund will occur a year or so later
than 2001 because of the recent decrease in the growth of medical
costs. They may try to trivialize the issue by pointing to the experi-
ence of the last 15 years, where predictions of bankruptcy for the
trust fund, they say, were premature.

I think the subcommittee, through testimony today, will learn,
however, that the past is not prelude in this instance. Increases in
taxes, reductions in the growth of Medicare payment to hospitals,
and generally good economic conditions did prevent insolvency in
the 1990s. But more than piecemeal fixes are needed now. Rising
medical costs and the aging of the baby boomers is catching up
with the trust fund. When the fund finally goes bust, it will be in
the red by almost $50 billion in the first year alone.

It is unfortunate the President chose not to provide leadership on
this issue. The year 1996 marks the start of the spend-down of the
trust fund. This action sends off warning signals that this sub-
committee will not ignore. If we don’t act decisively, if we continue
to mortgage the future, our children will be forced to bear a heavy
burden. We must summon the courage to act, gentlemen, and pro-
tect the futures of our children, as well as ensure that promises
made to the elderly are, in fact, kept.

The gentleman from California, Mr. Stark.

Mr. STARK. I hardly know what to say. Facing this list of right-
wing lunacy that qualifies as a witness list, I am not sure whether
to be amused or cry at the thought that these folks would talk to
us about keeping the trust fund solvent.


93

Mrs. JOHNSON. The interesting thing about these kinds of pro-
posals is that they could be done immediately. These are not mys-
terious. In my experience, actually, I have never met a senior in
America who wasn’t willing, in the upper-income brackets, to pay
more of their Medicare premium ‘and. didn’t understand how fair
and reasonable it was.

I think, it is my hope, at least, that as we look at this crisis short
term, we at least do some of those things that are fair and that are
relatively easy to do right now. Medicare Select is among them.
There are some other things that we can do, but means testing pre-
miums is certainly one of them.

Mr. Hewitt, I thought that your laying out the costs in 2040 was
very helpful, that payroll taxes could go as high as 18.5 percent,
that we would be well into more than $4 trillion deficit spending
per year. It is simply extraordinary.

So it is imperative that we come to grips with the significance
of the problems we face in Medicare, and then, ultimately, in Social

ecurity.

c I thank you for your testimony, and I yield to my colleague, Mr.
ardin.

Mr. Carpin. Thank you, Mrs. Johnson.

Let me apologize for not being here to listen to your testimony.
I have tried to read, quickly, the summary of your statements. I
was speaking downtown on Health care on what is likely to be the
type of health care bills to come out of this session of Congress,
from the Democratic point of view. There was a Republican also
there.

I know that we all share a commitment te deal with the Medi-
care system, to reduce the Federal cost, but, more importantly, to
reduce the cost of health care growth in this country and to make
it more available to all of our people.

Reading your statements, there is little to quarrel with from the
point of view of trying to get a fairer financing structure for those
who benefit from Medicare, and we need to take a look at that. But
we also need to reduce the costs of health care and the costs of the
Medicare system itself.

The problem that we confront, and I would appreciate your re-
sponse to, at least, my assessment of how the problem has devel-
oped and what we can do about it, is the problem that we usually
look simply to cutting provider fees. I notice in one of the state-
ments here, from Ms. Lamm, you have reducing Medicare provider
payments. When we reduced Medicare provider payments in the
past, we have just seen it has been cost-shifted over to the private
sector without really any reduction of the overall medical cost
growth in this country.

The anomaly of it, though, is that on total, Medicare pays less
than its fair share on the per-unit cost, but that if you could have
a better organization for the delivery of health care, you could save
money in the managing of the health care cost per beneficiary.

My State of Maryland has an all-payer rate system, where hos-
pital rates are set for all payers to pay the same amount. So if you
go to a hospital in Maryland, they really don’t care whether you
are a Medicare person or a Medicaid person or Blue Cross/Blue
Shield or Prudential, or for that matter, a self-insured plan, be-


38

Mr. SCULLY. No, 1 am——

Mr. STarK. I think the honeymoon is over. You can’t have it both
ways. If we are expected to be cautious with the public’s money,
there is no reason on God’s green Earth that I should pay Humana
any more than they are willing to take from Prudential for the
same procedure. It would be, in my mind, absolutely a dereliction
of duty and there is no good reason.

Mr. Scuuty. I would agree with you, and in 1990, I helped put
the Medicaid rebate law in place on the same theory, and it turned
out to be a disaster because what happened was everybody dropped
their best price and it hasn’t worked.

Mr. Stark. Medicaid is run by a series of States. It has no rela-
tionship to Medicare. What you did in 1990 has nothing to do with
what we are going to do in 1995 or 1996. I am just suggesting that
where hospitals are commonly charging other people less than they
are charging Medicare, we kind of look like patsies if we don’t get
that same low rate.

None of your clients would allow any of their purchasing agents
to buy ambulances at a higher price than they could get if they
walked down the street and got a bid from the other ambulance
company. Why, in the best sense of private enterprise, which none
of the witnesses have ever been connected with, I might add,
shouldn't we get the lowest price that is being offered in the mar-

et?

Mr. ScuLLY. I think you should, and I think the way to do it is
through private carriers. I think the way the market has worked
is for you not to go out and set rates through government regula-
tion, but——

Mr. Stark. Why shouldn’t we get it any way we can?

Mr. SCULLY [continuing]. In a market driven system, I am all for
it. I think it is great.

Mr. SrarK. But you are not for it under the current system? You
would just as soon see Medicare waste money if we are in the cur-
rent system?

Mr. SCULLY. I am very anxious to see Medicare save money, to
restructure the system. I just think that going out and, essentially,
having Federal Government rate regulation and price setting is
very negative for the market. You have a market that is beginning
to work and beginning to squeeze. We don’t like the squeeze; no-
body likes the squeeze. But we would rather be squeezed by the
market than by an inefficient fee-for-service system that sets per-
verse incentives,

Chairman THomas. The subcommittee will recess until we get
this vote and then come back.

[Recess.]

Chairman THomas. The subcommittee will reconvene.

Mr. Christensen may inquire.

Mr. CHRISTENSEN. Thank you, Mr. Chairman.

Ms. Steelman, earlier, my colleague from California, Mr. Stark,
asked a question about pricing and shouldn’t the Medicare pricing
be similar or the same as others in terms of the private market.
He took a couple of jabs at you, and I would like to hear what your
response to that question would be.


158

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125

‘One might expect that a claim so often repeated would be carefully researched.
Surprisingly, this not the case.” Most often, the claim comes with no supporting evidence;
when it does, the calculations are out of date, look only at cash benefits, or fail to account
for the total tax burden on earnings.”!

So is the claim, in fact, true? A computerized study of the govemment’s own long-
term projections reveals that it almost certainly is not. An analysis of the official
intermediate- and high-cost scenarios shows that raising taxes to cover the cost growth of
three major programs -- Social Security, Medicare, and Medicaid benefits to seniors -- will
have a devastating impact on future after-tax wage growth. These scenarios indicate that
over the next 45 years, real after-tax earnings will stagnate at best. Quite possibly (again,
assuming no major reform), they will plunge steeply.

Incomes Model

‘These conclusions are derived from a computer model of future after-tax earnings that
are consistent with the official Social Security Administration (SSA) and Health Care
Financing Administration (HCFA) scenarios I and III, as calculated for the 1994 annual
reports of the Old-Age, Survivors, and Disabitity Insurance (OASDI) Trustees, the Hospital
Insurance (HI) Trustees, and the Supplementary Medical Insurance (SMI) Trustees.” The
model isolates the historical and projected future growth of three programs: Social Security,
Medicare, and Medicaid benefits received by persons aver age 65. These data, in turn,
used to generate historical values for every year from 1951 to 1993, and two sets of future
values for every fifth year from 1995 to 2070” -- which is the scenario horizon of the 1994
annual reports.

A few definitions help explain the scope and purpose of this model.

EARNINGS refers to annual cash paid for productive labor services throughout the market
economy. AVERAGE EARNINGS is the annual cash paid per person engaged in
production. Earnings is broader than WAGES (or SALARIES), since it includes self-
employed persons. It is also different from COMPENSATION, which includes
‘employer-paid payroll taxes and noncash fringe benefits as well as cash wages
paid to employees.

AFTER-TAX EARNINGS refers to the earnings left over after subtracting all taxes imposed
‘on eamers by all levels of goverment. This includes not only payroll, income,
and property taxes that are directly payable by the earner, but also the fees,
excise taxes, and retail taxes that are indirectly payable when something is bought
or sold.

ScENARIO II refers to the official “intermediate cost” (or “best estimate”) scenario.
SCENARIO III refers to the official “high cost” scenario.


100

while the Congress did prevent HCFA from using fiscal year 1995
appropriated funds for implementing the data bank, this restriction
expires at the beginning of fiscal year 1996. At that time, the
OBRA-93 provision would apply, and HCFA would be required to
implement the data bank with fiscal year 1996 funds. We believe our
1994 recommendation is still appropriate and that the Congress
should continue to delay the implementation of the data bank until
its potential value and benefit can be clearly shown

ENROLLMENT QUESTIONNAIRE
HAS POTENTIAL TO STRENGTHEN
MSP PROCESSES

MSP works best when Medicare has accurate, up-to-date
information that enables it to keep from paying claims for which
other insurers are responsible for paying. To enhance this ability,
section 151(a) of the Social Security Act Amendments of 1994
directed HCFA to develop and mail questionnaires co Medicare
beneficiaries upon enrollment. The questionnaires are to obtain
information on whether the individual is covered by a health plan
that should pay claims ahead of Medicare. HCFA anticipates mailing
about 200,000 questionnaires a month. As of February 2, 1995, the
first mailing was in process. In fiscal year 1996, HHS has budgeted
$3.6 million to continue this activity.

While the questionnaire has strong potential to strengthen the
MSP process and improve savings, it also has several built-in
limitations. First, consistent with the statute, completing the
questionnaire is essentially voluntary, so the extent to which
beneficiaries will return it is not yet known. Second, because the
questionnaire is administered only once, the information is accurate
only as long as there is no change in the beneficiaries’ health
insurance coverage

As a result, more experience with the questionnaire will be
needed before HCFA can assess whether the questionnaire's results
will provide sufficient information that will result in additional
MSP savings

CONCLUSIONS

Mr. Chairman, our work suggests that several actions are needed
to maximize the savings available under the MSP program. First,
because MSP recovery efforts of previously paid Medicare claims
have, in effect, been negated by a recent appeals court ruling,
legislation is needed to assure effective recovery of MSP mistaken
payments. We would be happy to work with your staff to develop
Suggested language to remedy this problem. Second, we continue to
support our earlier recommendation that funding for the
Medicare/Medicaid data bank be delayed until its potential value and
benefits can be demonstrated

This concludes my prepared remarks. We will be happy to answer any
questions you may have.

For more information on this testimony, please call Frank
Pasquier, Assistant Director, at (206) 287-4861. Other major
contributors included Alfred schnupp and Craig Winslow, Office
of the General Counsel.



41

going to be there, so that is point on. Reauthorize some of these
innovative things in a long-term format that can make a difference
to people, so they know it is going to be there.

Second, obviously, one of the problems in the HMO risk contracts
are the 50:50 rule and the construction of the average area per
capita costs. The 50:50 rule uses a relatively arbitrary share of
Medicare beneficiaries to commercial beneficiaries as some sort of
a surrogate for a quality determination. I think there are a lot of
quality determinations that could be made much more easily and
much more productively that the private sector is actively engaged
in, in terms of ranking HMOs and patient satisfaction, access to
technology, and the like.

So if you open up HMOs to allow HMOs to specialize in Medicare
beneficiaries and services, to bring in, perhaps, some of the social
services that Medicare beneficiaries need more often, some of the
sort of discharge services, after-hospitalization help with things
around the house and that sort of thing, then you would have
HMOs that cater much better and a much higher quality of medi-
cine and much more likely to Medicare beneficiaries.

You also, of course, have the county-by-county problems and the
rate determination. The AAPCC rate fluctuates wildly across the
country because it is pegged to Medicare. It shadow-prices Medi-
care, so you don’t really get the savings that you ought to. It over-
pays in some areas. It underpays in other areas. The AAPCC sim-
ply needs a fundamental reassessment to try to make it a better
payment mechanism.

OF course, over time, I think any government payment mecha-
nism is going to be countercyclical and probably off the point, so
xeo need to get to a bid process of some kind to make sure that

iedicare can match the private market.

Mrs. JOHNSON. I am not sure that trying to reform the AAPCC
is worth it. It may be just flipping ourselves around it.

Ms. STEELMAN. I think there are some short-term things that
could be assessed, but there is no question, your assessment of the
difficulty is correct.

Mr. SCULLY. Debbie covered an awful lot. One thing I personally
think would drive people much more—I think if you are going to
go to more managed care, more capitation, more networks, what-
ever you want to call them, which, I think, is where the system is
moving, you have to find incentives to do that.

The one incentive that I have always thought was missing in
Medicare is the fact that most seniors, the vast bulk of them, are
relatively low-income or modest-income people. If you want to give
somebody a $5,000 AAPCC in Hartford, if they want to go out and
limit their choice—Senator Gramm says he doesn’t want anybody
to limit his mama’s choice. If she could get some money back for
choosing to go to a more limited network, she is much more likely
to go in it.

Right now, the way the Medicare risk contracts work is if you get
a $5,000 capitated payment, you have to spend every dollar of it
on a plan, which means more drug benefits, and more eyeglasses.
Frequently, a lot of seniors would much rather say, if I saved the
government $700, $800, $1,000 a year by choosing a tighter net-
work or a more structured plan, they would just as soon get some