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[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

 
                           MEDICARE SOLVENCY

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 20, 2001

                               __________

                           Serial No. 107-17

         Printed for the use of the Committee on Ways and Means

                    U.S. GOVERNMENT PRINTING OFFICE
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_______________________________________________________________________
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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa                     JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia                 WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio                    JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania           XAVIER BECERRA, California
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
J. D. HAYWORTH, Arizona              LLOYD DOGGETT, Texas
JERRY WELLER, Illinois               EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
                     Allison Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S

                              ----------                              
                                                                   Page
Advisory of March 13, 2001, announcing the hearing...............     2

                               WITNESSES

Health Care Financing Administration, Richard S. Foster, Chief 
  Actuary, Office of the Actuary.................................     4
Congressional Budget Office, Dan L. Crippen, Director............    14

                       SUBMISSION FOR THE RECORD

Advanced Medical Technology Association, statement...............    42

                      HEARING ON MEDICARE SOLVENCY

                              ----------                              

                        TUESDAY, MARCH 20, 2001

                          House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 12:30 p.m., in 
room 1100 Longworth House Office Building, Hon. William M. 
Thomas [Chairman of the Committee] presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE,
March 13, 2001

FC-5

             Thomas Announces Hearing on Medicare Solvency

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
Medicare solvency. The hearing will take place on Tuesday, March 20, 
2001, in the main Committee hearing room, 1100 Longworth House Office 
Building, directly following the joint Committee on Ways and Means and 
Senate Committee on Finance hearing on solvency.

    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. The sole 
witness at this hearing will be Rick Foster, Chief Actuary, Office of 
the Actuary, Health Care Financing Administration. However, any 
individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.

BACKGROUND:

    Although growth in Medicare expenditures has been flat the last 
several years, costs are expected to rise substantially in the near- 
and long-term. For example, the Congressional Budget Office estimates 
that Medicare expenditures will rise by 10.5 percent in fiscal year 
2001 and more than double over the next 10 years, from $219 billion in 
2000 to $497 billion in 2011. At that time, 77 million baby boomers 
begin to retire and the ratio of workers per beneficiary will decline 
from about 4:1 today to 2:1 in 2030. The Medicare Trustees will release 
their updated 30-year projections of Medicare expenditures and 
revenues, on Monday, March 19, 2001.

    In announcing the hearing, Chairman Thomas stated: ``Members of 
Congress must have a thorough understanding of the fiscal challenges 
that confront the Medicare program before we embark on any policies to 
modernize the program. The Chief Actuary will provide insight and 
analysis regarding the factors driving the Trustees' projections.''

FOCUS OF THE HEARING:

    The House Committee on Ways and Means and the Senate Committee on 
Finance will hold a joint hearing on the Medicare and Social Security 
Trustees' report earlier in the day. The purpose of this hearing is to 
explore in more depth the fiscal challenges confronting the Medicare 
program and current measures of Medicare solvency.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

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for the printed record of the hearing should submit six (6) single-
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April 3, 2001, to Allison Giles, 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 
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noted above.

                                

    Chairman Thomas. The Committee will come to order. The 
Chair was interested in having a Ways and Means hearing 
following the joint hearing with the Senate Finance Committee 
on the Medicare and Social Security reports for principally one 
reason. There may be other reasons that members wish to focus 
on. But when there is a change in the estimating procedure, 
especially when it is a change which increases the concerns 
about the solvency of the program, the Chair believes that it 
is useful to spend a few minutes talking about the background, 
the history of, the intention of the decision to make the 
change. There is so much in this process which is not political 
or partisan that we do not focus on that the Chair thought that 
if we would bring the Medicare Actuary before us, Mr. Foster, 
who has been very helpful to us in the past, and I do want to 
personally say, Mr. Foster, thank you for the contributions you 
made to the bipartisan Commission on the Reform of Medicare at 
the time we were grappling with what does the future look like 
and how do you predict it, to shed light on why we changed the 
way we estimate the cost of Medicare.
    With us also is Mr. Crippen of the Congressional Budget 
Office (CBO) because they had adopted the methodology prior to 
that. I would say that without objection we would move directly 
to any comments they might have and then throw it open to 
questions by members, hopefully focusing on the rationale for, 
the reason for and the consequences of the change of the 
estimating procedure for the Medicare Trust Fund. And first I 
would recognize the Chief Actuary of the Medicare Trust Fund, 
Mr. Foster.

 STATEMENT OF RICHARD S. FOSTER, CHIEF ACTUARY, OFFICE OF THE 
         ACTUARY, HEALTH CARE FINANCING ADMINISTRATION

    Mr. Foster. Thank you, Chairman Thomas. Chairman Thomas, 
distinguished members of the Committee, thank you for inviting 
me here today to testify about the financial outlook of the 
Medicare program. I welcome the opportunity to assist you in 
your efforts to ensure the future financial viability of the 
Nation's second largest social insurance program. I will 
briefly mention the most important findings of the 2001 
trustees reports that were introduced yesterday. My written 
testimony as well as the reports themselves contain substantial 
additional detail.
    I would like to note I am not much of a historian, but I do 
know the history of Medicare a little bit. I think legislative 
historians recognize that Medicare was enacted as a combination 
of competing proposals that were artfully assembled by your 
predecessor, Mr. Thomas, Wilbur Mills, in order to consolidate 
political support. As a result, there are substantial 
differences between hospital insurance, or Part A of Medicare, 
and supplementary medical insurance, or Part B of Medicare. 
These involve differences in coverage, eligibility 
requirements, benefit structures, and in particular the 
financing provisions.
    Hospital insurance is financed primarily by payroll taxes, 
and the tax rate is fixed in the law. It cannot change without 
further legislation. In contrast, supplementary medical 
insurance, or Part B, is financed about 25 percent by 
beneficiary premiums and the balance, 75 percent, by general 
revenues. These financing amounts for Part B are adjusted 
annually to match the following year's expected cost.
    I would argue that because by law these two trust funds are 
distinct financial entities, each with its own specified 
financing and benefits, that it is necessary to do a separate 
analysis of the financial status of each Part because they are 
so different. Accordingly, in the Trustees reports and in 
evaluating the financial status of Medicare, we look separately 
at the two trust funds. That is consistent with actuarial 
standards of practice and also the statutory requirements. That 
is a different issue of course, (and we may get into this in 
the discussion) than focusing on Medicare overall in terms of 
its financial requirements on society and on the economy.
    We heard a lot this morning about the mixed financial 
picture presented by the new Medicare Trustees reports. We have 
seen a moderate improvement in the short range financial 
outlook for the Part A trust fund over the next 25 to 30 years, 
and that is welcome. On the other hand, based on more realistic 
assumptions adopted for use in this year's Trustees reports, 
the long-range expenditure growth for Medicare, both Part A and 
Part B, is substantially greater than previously assumed. This 
revision in assumptions was recommended by an independent 
expert panel of actuaries and economists that was convened by 
the prior Board of Trustees in 2000 to review these 
assumptions.
    I concurred with these recommendations, as did the Board of 
Trustees, and I would note that in both the Part A and Part B 
Trustees reports, as in prior Trustees reports, the Board of 
Trustees urges prompt attention to the remaining financial 
issues facing Medicare.
    I would conclude these introductory comments by again 
thanking you for the opportunity to testify and I pledge the 
Office of the Actuary's continuing assistance with the efforts 
by the Congress and by the administration to determine 
effective solutions to the remaining financial problems facing 
Medicare. I would be happy to answer any questions that you 
have.
    [The prepared statement of Mr. Foster follows:]
 Statement of Richard S. Foster, Chief Actuary, Office of the Actuary, 
                  Health Care Financing Administration
    Chairman Thomas, Congressman Rangel, distinguished Committee 
members, thank you for inviting me to testify today about the financial 
outlook for the Medicare program as shown in the recently released 2001 
annual reports of the Medicare Board of Trustees. I welcome the 
opportunity to assist you in your efforts to ensure the future 
financial viability of the nation's second largest social insurance 
program--one that is a critical factor in the income security of the 
our aged and disabled populations.
    The financial outlook for the Medicare program presents a mixed 
picture. Over the next 10 years, the Hospital Insurance (HI) and 
Supplementary Medical Insurance (SMI) trust funds are adequately 
financed and meet the Trustees' formal tests for short-range financial 
adequacy. The depletion of the HI trust fund, which had been projected 
for 2025 in last year's Trustees Report, has been postponed to 2029 in 
the new estimates.
    Over the long range, in contrast, HI and SMI expenditures are 
projected to grow more rapidly than in previous reports as a result of 
revised long-range Medicare cost growth assumptions. The assumption 
change was recommended by the 2000 Medicare Technical Review Panel, an 
independent, expert group of actuaries and economists convened by the 
Board of Trustees to review the Medicare financial projections. HI tax 
revenues are projected after 2015 to fall increasingly short of program 
expenditures, eventually covering only one-third of estimated costs by 
the end of the Trustees' 75-year projection period. For SMI, continuing 
rapid expenditure growth would place growing financial burdens both on 
beneficiaries and on the Federal budget. The SMI trust fund would 
remain in financial balance indefinitely, however, due to the annual 
redetermination of program financing.
Background
    Roughly 39 million people were eligible for Medicare benefits in 
2000. HI, or ``Part A'' of Medicare, provides partial protection 
against the costs of inpatient hospital services, skilled nursing care, 
post-institutional home health care, and hospice care. SMI covers most 
physician services, outpatient hospital care, home health care not 
covered by HI, and a variety of other medical services such as 
diagnostic tests, durable medical equipment, and so forth.
    Only about 22 percent of HI enrollees received some reimbursable 
covered services during 2000, since hospital stays and related care 
tend to be infrequent events even for the aged and disabled. In 
contrast, the vast majority of enrollees incur reimbursable SMI costs 
because the covered services are more routine and the annual deductible 
for SMI is only $100.
    The two parts of Medicare are financed on totally different bases. 
HI costs are met primarily through a portion of the FICA and SECA 
payroll taxes.1 Of the total FICA tax rate of 7.65 percent 
of covered earnings, payable by employees and employers, each, HI 
receives 1.45 percent. Self-employed workers pay the combined total of 
2.90 percent. Following the Omnibus Budget Reconciliation Act of 1993, 
HI taxes are paid on total earnings in covered employment, without 
limit. Other HI income includes a portion of the income taxes levied on 
Social Security benefits, interest income on invested assets, and other 
minor sources.
---------------------------------------------------------------------------
    \1\ Federal Insurance Contributions Act and Self-Employment 
Contributions Act, respectively.
---------------------------------------------------------------------------
    SMI enrollees pay monthly premiums ($50.00 in 2001) that cover 
about 25 percent of program costs. The balance is paid by general 
revenue of the Federal government and a small amount of interest 
income.
    The HI tax rate is specified in the Social Security Act and is not 
scheduled to change at any time in the future under present law. Thus, 
program financing cannot be modified to match variations in program 
costs except through new legislation. In contrast, SMI premiums and 
general revenue payments are reestablished each year to match estimated 
program costs for the following year. As a result, SMI income 
automatically matches expenditures without the need for legislative 
adjustments.
    Each part of Medicare has its own trust fund, with financial 
oversight provided by the Board of Trustees. My discussion of 
Medicare's financial status is based on the actuarial projections 
contained in the Board's 2001 reports to Congress. Such projections are 
made under three alternative sets of economic and demographic 
assumptions, to illustrate the uncertainty and possible range of 
variation of future costs, and cover both a ``short range'' period (the 
next 10 years) and a ``long range'' (the next 75 years). The 
projections are not intended as firm predictions of future costs, since 
this is clearly impossible; rather, they illustrate how the Medicare 
program would operate under a range of conditions that can reasonably 
be expected to occur. The projections shown in this testimony are based 
on the Trustees' ``intermediate'' set of assumptions.
Short-range financial outlook for Hospital Insurance
    Chart 1 shows HI expenditures versus income over the last 10 years 
and projections through 2010. For most of the program's history, income 
and expenditures have been very close together, illustrating the pay-
as-you-go nature of HI financing. The taxes collected each year are 
intended to be roughly sufficient to cover that year's costs. Surplus 
revenues are invested in special Treasury securities.
                  Chart 1--HI expenditures and income 

                            (In billions)  
[GRAPHIC] [TIFF OMITTED] T4214A.001

    During 1990-97, HI costs increased at a faster rate than HI income. 
Expenditures exceeded income by a total of $17.2 billion in 1995-97. 
Prior to the Balanced Budget Act of 1997, this trend was expected to 
continue, with costs growing at about 8 percent annually, against 
revenue growth of only 5 to 6 percent. The 1995-97 shortfalls were met 
by redeeming trust fund assets, but in the absence of corrective 
legislation assets would have been depleted in about 2001. The Medicare 
provisions in the Balanced Budget Act were designed to help address 
this situation. As indicated in chart 1, these changes--together with 
subsequent lowgeneral and medical inflation and increased efforts to 
address fraud and abuse in the Medicare program--resulted in a decline 
in HI expenditures during 1998-2000 and trust fund surpluses totaling 
$61.8 billion over this period.
    The Board of Trustees has recommended maintaining HI assets equal 
to at least one year's expenditures as a contingency reserve. As 
indicated in chart 2, HI assets at the beginning of 2001 represented 
about 125 percent of estimated expenditures for the year. The HI trust 
fund is estimated to continue to experience significant surpluses for 
about the next 15 years. After 2020, however, expenditures are 
projected to again exceed income. As shown in chart 2, assets would 
initially accumulate rapidly but then be drawn down to cover the 
resulting shortfalls. The trust fund would be exhausted in 2029 under 
the Trustees' intermediate assumptions.
    The depletion date estimated in the 2001 Trustees Report represents 
a significant improvement compared to the estimate in last year's 
report (2025). The improvement arises from higher payroll tax revenues 
and income taxes on Social Security benefits in 2000 than had been 
estimated, together with assumed faster economic growth over the next 
10 years. In addition, benefit expenditures in 2000 were lower than 
estimated, and adjustments have been made to projected expenditure 
growth for the future based on this experience. The higher payroll 
taxes in 2000 resulted from robust economic growth, particularly the 
rapid growth in productivity and wages. Lower-than-expected HI 
expenditures reflected a reduction in the utilization of skilled 
nursing facility services, low increases in health care costs 
generally, and continuing efforts to combat fraud and abuse in the 
Medicare program.
                     Chart 2--HI trust fund assets

   (Assets at beginning of year as percentage of annual expenditures)
[GRAPHIC] [TIFF OMITTED] T4214A.002

2000 Medicare Technical Review Panel
    The projections in the new Trustees Reports also reflect a number 
of recommendations made by the 2000 Medicare Technical Review Panel. 
The impact of these recommendations on the HI projections for the first 
25 years were largely offsetting and had a minimal impact on the 
estimated year of asset depletion.
    The Technical Panel was convened by the Board of Trustees in 2000 
to review the financial projections in the Medicare Trustees Reports. 
It was made up of seven independent health actuaries and health 
economists, who were nominated by the prior public members of the Board 
of Trustees. The panel met from June through November 2000 and issued 
its final recommendations in December 2000.
    The panel unanimously found that the projection work of the Office 
of the Actuary at the Health Care Financing Administration was of 
excellent quality and was performed in a highly competent and 
completely professional manner. Overall, the members concluded that the 
methods and assumptions used to project the status of the Medicare 
program were reasonable, with the exception of the long-range 
expenditure growth assumption, which they believed to be too low. In 
addition to their recommendation to increase this growth rate 
assumption, the panel issued 37 other findings and recommendations.
    For the 2001 Trustees Reports, the Medicare Board of Trustees 
adopted all of the panel's recommendations that could realistically be 
incorporated within the short time available following the panel's 
report. These included the recommended long-range growth assumptions, 
corresponding adjustments to short-range ``case-mix'' growth 
assumptions, an improvement in certain assumptions relating to the 
costs for beneficiaries who switch from fee-for-service coverage to 
Medicare+Choice plans, and several recommendations regarding the 
content of the Trustees Reports. The Board will consider the panel's 
remaining recommendations for possible inclusion in future reports, as 
time and available health research knowledge permit.
    In past Trustees Reports, increases in the average HI cost per unit 
of service were assumed to gradually decline after the first 15 years 
and to equal growth in average hourly earnings during the final 50 
years of the projection. The last expert review panel, in 1991, 
concluded that the assumption was ``not unreasonable'' but recommended 
that it be monitored carefully in subsequent years. The 2000 Technical 
Panel recommended that average HI and SMI expenditures per beneficiary 
be assumed to increase at the rate of per capita GDP plus one 
percentage point. They based this recommendation primarily on the 
historical impact of advances in medical technology on health care cost 
increases, which they expected to continue indefinitely. They also 
considered other factors contributing to health care cost growth, the 
assumptions of other forecasters, and the ``sustainability'' of such 
cost increases in the very long range. Although they acknowledged the 
remaining (and considerable) uncertainty regarding health expenditure 
growth rates over very extended periods, the panel concluded that there 
is substantially greater evidence in favor of the faster growth 
assumption than there is in support of the prior HI and SMI Trustees 
Report assumptions. I concur with their conclusion, as does the Board 
of Trustees.
Long-range financial outlook for Hospital Insurance
    The interpretation of dollar amounts through time is very difficult 
over extremely long periods like the 75-year projection period used in 
the Trustees Reports. For this reason, long-range tax income and 
expenditures are expressed as a percentage of the total amount of wages 
and self-employment income subject to the HI payroll tax (referred to 
as ``taxable payroll''). The results are termed the ``income rate'' and 
``cost rate,'' respectively. Projected long-range income and cost rates 
are shown in chart 3 for the HI program.
    Past income rates have generally followed program costs closely, 
rising in a step-wise fashion as the payroll tax rates were adjusted by 
Congress. Income rate growth in the future is minimal, due to the fixed 
tax rates specified in current law. Trust fund revenue from the 
taxation of Social Security benefits increases gradually, because the 
income thresholds specified in the Internal Revenue Code are not 
indexed. Over time, an increasing proportion of Social Security 
beneficiaries will incur income taxes on their benefit payments.
Chart 3--Long-range HI income and costs under intermediate assumptions 

                 (as a percentage of taxable payroll) 
[GRAPHIC] [TIFF OMITTED] T4214A.003

    Past HI cost rates have generally increased over time but have 
periodically declined abruptly as the result of legislation to expand 
HI coverage to additional categories of workers, raise (or eliminate) 
the maximum taxable wage base, introduce new payment systems such as 
the inpatient prospective payment system, etc. Cost rates decreased 
significantly in 1998-2000 as a result of the Balanced Budget Act 
provisions together with strong economic growth. After 2002, however, 
cost rates are projected to increase steadily and accelerate 
significantly with the retirement of the baby boom, beginning in about 
2010. As a result of the revised long-range expenditure growth 
assumption, projected cost rates after 2030 are substantially greater 
than the corresponding estimates in last year's Trustees Report. In 
particular, by the end of the 75-year period, scheduled tax income 
would cover only one-third of projected expenditures.
    The average value of the financing shortfall over the next 75 
years--known as the actuarial deficit--is 1.97 percent of taxable 
payroll. This deficit could be closed by an immediate increase of 1 
percentage point in the HI payroll tax rate, payable by employees and 
employers, each. (The projected deficit could also be eliminated by 
many other revenue increases and/or expenditure reductions.) Note, 
however, that such a change would only correct the deficit ``on 
average.'' Initially, HI revenue would be significantly in excess of 
expenditures, but by the end of the period, only about one-fourth of 
the projected deficit would be eliminated.
    The effect of the baby boom's retirement on Social Security and 
Medicare is relatively well known, having been discussed at length for 
more than 25 years. Basically, by the time the baby boom cohorts have 
retired, there will be nearly twice as many HI beneficiaries as there 
are today. When the HI program began, there were 4.5 workers in covered 
employment for every HI beneficiary. As shown in chart 5, this ratio is 
currently 4.0 workers per beneficiary. With the advent of the baby 
boom's retirement, the number of beneficiaries will increase more 
rapidly than the labor force, resulting in a decline in this ratio to 
2.3 in 2030 and 2.0 in 2075 under the intermediate projections. Other 
things being equal, there would be a corresponding increase in HI costs 
as a percentage of taxable payroll.
                  Chart 4--Workers per HI beneficiary 
[GRAPHIC] [TIFF OMITTED] T4214A.004

    There are other demographic effects beyond those attributable to 
the varying number of births in past years. In particular, life 
expectancy has improved substantially in the U.S. over time and is 
projected to continue doing so. The average remaining life expectancy 
for 65-year-olds increased from 12.4 years in 1935 to 17.4 years 
currently, with an estimated further increase to about 21 years at the 
end of the long-range projection period. Medicare costs are also 
sensitive to the age distribution of beneficiaries. Older persons incur 
substantially larger costs for medical care, on average, than younger 
persons. Thus, as the beneficiary population ages over time they will 
move into higher-utilization age groups, thereby adding to the 
financial pressures on the Medicare program.
Financial outlook for Supplementary Medical Insurance
    Chart 5 presents estimates of the short-range outlook for SMI and 
is generally similar to the information presented in chart 1 for the HI 
program. Two key differences stand out: First, the income and 
expenditure curves for SMI are nearly indistinguishable in the future. 
As noted previously, SMI premiums and general revenue income are 
reestablished annually to match expected program costs for the 
following year. Thus, the program will automatically be in financial 
balance, regardless of future program cost trends. The second 
difference is--in contrast to the decline in HI expenditures during 
1998-2000--SMI expenditures increased at an average rate of 6.9 percent 
over this period.
                  Chart 5--SMI expenditures and income

                             (In billions)
[GRAPHIC] [TIFF OMITTED] T4214A.005

    Although the Balanced Budget Act contained a number of provisions 
designed to reduce the rate of growth in SMI expenditures, their impact 
was more than offset by other factors. First, the Act specified that 
home health services not associated with a prior stay in an institution 
were to be converted to Part B benefits and paid for by the SMI trust 
fund (phased in over several years). In addition, the Act provides for 
several significant new preventive or ``screening'' benefits, such as 
colorectal examinations, not previously covered by Medicare, and it 
gradually corrects an excessive level of beneficiary coinsurance for 
outpatient hospital services. As a result, SMI costs are estimated to 
increase somewhat as a result of the Balanced Budget Act. Further cost 
increases have resulted under the Balanced Budget Refinement Act of 
1999 and the Benefit Improvement and Protection Act of 2000.
    Chart 6 shows projected long-range SMI expenditures and premium 
income as a percentage of GDP. Under present law, beneficiary premiums 
will continue to cover approximately 25 percent of total SMI costs, 
with the balance drawn from general revenues. Expenditures are 
projected to increase at a significantly faster rate than GDP, for 
largely the same reasons underlying HI cost growth. After about 2030, 
the SMI costs projected in the 2001 Trustees Report are substantially 
higher than those in the 2000 report, again primarily as a result of 
the revised long-range growth rate assumption recommended by the 
Medicare Technical Review Panel.
    Although SMI is automatically in financial balance, the program's 
continuing rapid growth in expenditures places an increasing burden on 
beneficiaries and the Federal budget. In 2000, for example, about 6 
percent of a typical 65-year-old's Social Security benefit was withheld 
to pay the monthly SMI premium of $45.50, and another 8 percent was 
required to cover average deductible and coinsurance expenditures for 
the year. Twenty years later, under the intermediate assumptions, the 
same beneficiary's premium and copayment costs would average 21 percent 
of his or her benefit.2 Similarly, SMI general revenues in 
fiscal year 2000 were equivalent to 5.4 percent of the personal and 
corporate Federal income taxes collected in that year. If such taxes 
remain at their current level, relative to the national economy, then 
SMI general revenue financing in 2075 would represent 22 percent of 
total income taxes.
---------------------------------------------------------------------------
    \2\ The growth in average copayment costs over this period is 
reduced significantly by (i) the fixed $100 deductible applicable to 
SMI services, and (ii) the gradual correction of an excessive level of 
beneficiary coinsurance on outpatient hospital services, as provided 
for in the Balanced Budget Act of 1997 and subsequent legislation.
---------------------------------------------------------------------------
     Chart 6--SMI expenditures and premiums as a percentage of GDP
[GRAPHIC] [TIFF OMITTED] T4214A.006

Combined HI and SMI expenditures
    The financial status of the Medicare program is appropriately 
evaluated for each trust fund separately, as summarized in the 
preceding sections. By law, each fund is a distinct financial entity, 
and the nature and sources of financing are very different between the 
two funds. This distinction, however, frequently causes greater 
attention to the HI trust fund--its projected year of asset depletion 
in particular--and less attention to SMI, which does not face the 
prospect of depletion. It is important to consider the total cost of 
the Medicare program and its overall sources of financing, as shown in 
chart 7. Interest income is excluded since, under present law, it would 
not be a significant part of program financing in the long range.
    Combined HI and SMI expenditures are projected to increase from 2.2 
percent of GDP to about 8.5 percent in 2075, based on the Trustees' 
intermediate set of assumptions. In past years, total income from HI 
payroll taxes, income taxes on Social Security benefits, HI and SMI 
beneficiary premiums, and SMI general revenues was very close to total 
expenditures. Over the next 15 years, such Medicare revenues are 
estimated to slightly exceed program expenditures, reflecting the 
expected excess of HI tax income over expenditures. Thereafter, 
however, overall expenditures are expected to exceed aggregate 
revenues. Again, the growing difference arises from the projected 
imbalance between HI tax income and expenditures--throughout this 
period, SMI revenues would continue to approximately match SMI 
expenditures.
Chart 7--Medicare expenditures and sources of income as a percentage of 
                                  GDP
[GRAPHIC] [TIFF OMITTED] T4214A.007

    Over time, SMI premiums and general revenues would continue to grow 
rapidly, since they would keep pace with SMI expenditure growth under 
present law. HI payroll taxes are not projected to increase as a share 
of GDP, primarily because no further increases in the tax rates are 
scheduled under present law. Thus, as HI sources of revenue become 
increasingly inadequate to cover HI costs, SMI premiums and general 
revenues would represent a growing share of total Medicare income.
Conclusions
    In their 2001 reports to Congress, the Board of Trustees notes the 
significant improvement in the financial outlook for Medicare that has 
come about as a result of legislation, strong economic growth, 
relatively slow growth in health costs generally, and efforts to combat 
fraud and abuse. But they emphasize the continuing financial pressures 
facing Medicare and urge the nation's policy makers to take further 
steps to address these concerns. They also argue that consideration of 
further reforms should occur in the relatively near future. Today's 
relatively favorable conditions could change, accelerating the expected 
return to deficits in the HI trust fund. Moreover, the earlier 
solutions are enacted, the more flexible and gradual they can be. 
Finally, the Trustees note that early action increases the time 
available for affected individuals and organizations--including health 
care providers, beneficiaries, and taxpayers--to adjust their 
expectations.
    I concur with the Trustees' assessment and pledge the Office of the 
Actuary's continuing assistance to the joint effort by the 
Administration and Congress to determine effective solutions to the 
remaining financial problems facing the Medicare program. I would be 
happy to answer any questions you might have on Medicare's financial 
issues.

                                

    Chairman Thomas. Thank you very much. Mr. Crippen.

  STATEMENT OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET 
                             OFFICE

    Mr. Crippen. Mr. Chairman. We have----
    Chairman Thomas. Turn the microphone on and it is 
unidirectional.
    Mr. Crippen. Mr. Chairman, we have effectively, although 
not through any conspiracy, split our duties today. Rick has 
talked to you about the trust funds, about changes. As you 
know, the trustees assumptions on cost growth are roughly the 
same as ours now. We went up a little earlier, not because we 
were any better but frankly because we had more current 
information at the time than the actuaries had for their last 
report. So we were able to make this change last July in 
contrast to the actuaries who were not able to make it in time, 
did not have the data in time for the earlier reports.
    We are now pretty much in accord, certainly on the long-run 
cost assumptions. So instead of dwelling on that aspect, at 
least until you get to your questions, I thought I would spend 
a couple of minutes talking about different ways of analyzing 
these trust funds.
    I think part of the discussion at the earlier hearing today 
showed some confusion about the concepts behind the approaches. 
There are any number of ways of analyzing governmental 
programs, especially those that span many years and multiple 
generations. We need to be very careful about the questions we 
are attempting to answer and which analyses to apply. We also 
need to be careful not to mix the analyses and their respective 
concepts.
    In the case of Social Security and Medicare, we pay the 
benefits of our parents and grandparents through our taxes, 
both payroll and income taxes. When we retire, both programs 
will take much more from our children to fund our benefits. 
This year, Social Security and Medicare will account for 6.5 
percent of gross domestic product (GDP). By 2030, those 
programs will grow to 11 percent of GDP. Moreover, the number 
of beneficiaries will grow much faster than the number of 
workers paying taxes to support those programs.
    How we analyze these spending commitments and demographic 
changes is vitally important. One approach, the one you have 
been dealing with thus far today, is to use actuarial 
techniques to project costs and income and focus on the revenue 
specifically dedicated to the program. That approach can help 
us ascertain whether a program--when isolated from the rest of 
the budget and the program's effect on the economy--is stable 
on its face, over long periods of time.
    One measure of actuarial long-run viability is solvency--
that is, when expected revenues and expenditures are roughly 
equal over prescribed but long periods. Another measure is the 
comparison of the present value of total expected revenues and 
total expected obligations, or whether the program is 
``funded'' in some sense. Within each of those measures are 
variations on the concepts that could actually give you some 
fairly disparate results.
    In the end, actuarial analysis is limited to a relatively 
narrow analysis of one program at a time without consideration 
of the rest of the Federal budget or the economy. It can reveal 
whether a program, as designed, appears to be stable over time, 
but it cannot tell you if the program is sustainable over 
time--whether the Federal budget or the U.S. economy will 
support the program's level of transfer of resources from the 
working population to the retired population.
    A second approach to the analysis involves the program's 
interaction with the rest of the budget. In the case of 
Medicare the interactions are direct because it is on-budget 
along with the rest of the non-Social Security programs. Even 
Social Security, although technically off-budget, can have 
striking on-budget effects. But whether a program is on- or 
off-budget, it is the combined effects of all taxes and 
spending that determine the Federal Government's impact on the 
economy--for example on whether public debt is increasing or 
declining.
    Mr. Chairman, a quick example of difference between 
actuarial and budgetary accounting might help. If you choose to 
transfer general revenues, say, from the on-budget surplus to 
the Medicare part A trust fund, the two analyses--that is, 
budgetary versus actuarial, would yield very different 
conclusions. Under an actuarial approach, the trust fund 
balance, and therefore its projected solvency and unfunded 
liability, would all be improved. If the transfer is large 
enough, the trust fund could remain solvent forever. The trust 
fund looks better because there would be more official 
Committee debt credited to it. That debt and any interest on 
it, however, would have to be redeemed in the future by raising 
taxes, cutting spending elsewhere in the budget, or borrowing 
from the public, effects that are much the same as those that 
would occur if there had been no transfer at all.
    Another obvious example is the construction of the part B 
trust fund. It is actuarially sound, or adequately financed, in 
the words of the trustees, but only because it has an unlimited 
draw on the general funds of the Treasury. Again, the trust 
fund appears sound, but the growth in part B spending will have 
direct and potentially dramatic effects on the rest of the 
budget and the economy.
    Last, Mr. Chairman, these programs are susceptible to 
economic analysis--that is, the interaction of the programs and 
the economy. Let me give you one important example. The chart, 
which the Committee has seen before, represents our best 
current projection of the amount of resources we baby boomers 
will consume after we retire. We will consume in just these 
three programs almost as much of the economic output in 2030 as 
does the entire Federal Government today. That result is driven 
by the well-known fact that we will double the number of 
retirees while the number of workers barely increases.
    This measure depends on only two factors, the size of the 
economy and the amount of resources obligated for retirees. It 
has nothing to do with the existence of a trust fund or of any 
balances within the fund. It does not matter if the program is 
solvent or if it has unfunded liabilities, and the only way to 
alter this in the future is to alter one of the two factors--
that is, change the size of the economy or the amount of 
benefits.
    By way of summary, let's compare the actuarial budgetary 
and economic effects at the time when dedicated revenues to 
either of these trust funds no longer cover expenditures. The 
reports that Rick has presented to you today show that it 
happens for both programs in the year 2016. In both cases, the 
actuaries estimate that there will still be positive and, I 
believe, growing trust fund balances in 2016. Therefore, the 
actuarial analysis would suggest ample resources to meet 
obligations.
    The budgetary analysis, however, would denote the transfer 
of general revenues to the trust funds, as interest paid on 
trust fund balances. Those general revenues could not be used 
for other spending or debt reduction. Indeed, the transfers 
would have to be funded again by the usual tax increase, 
reductions in spending, or the Treasury's issuance of debt.
    Similarly, the economic analysis would pose the question, 
that you heard this morning as well. Where is the cash? The 
Treasury will have to have the cash to honor the checks sent to 
retirees and medical providers. The Committee can get the cash 
in only three ways: cut other spending, raise taxes, or borrow 
from the public. The economic analysis also suggests that it 
doesn't matter if there are balances in the trust fund or, 
indeed, if there is a trust fund at all. The cash still has to 
be generated to cover the shortfall in current revenues.
    Mr. Chairman, until now we have been discussing how to 
finance the promises made to retirees, but a clearer picture 
may emerge if we think of these long-term programs in terms of 
consumption, or how the elderly ultimately spend the money that 
is transferred through these programs. After all, facilitating 
the consumption of goods and services--including medical 
services--is the purpose of the transfers. When I retire, I 
will use Social Security funds to buy groceries, clothes, and 
transportation, most of which will be produced about the time I 
use it. In other words, I will be competing with my children 
and grandchildren for the goods they are producing. What I eat, 
what I wear, what I drive, they cannot. That is why measures 
such as program spending as a percentage of GDP may be more 
relevant and real than trust fund or actuarial balances.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Crippen follows:]
   Statement of Dan L. Crippen, Director, Congressional Budget Office
    Mr. Chairman, members of the Committee:
    There are a number of ways of analyzing governmental programs, 
especially those that span many years and multiple generations. We need 
to be careful about the question we are attempting to answer and which 
analyses to apply. We further need to be careful not to mix the 
analyses and their respective concepts.
    In the case of Social Security and Medicare, we pay the benefits of 
our parents and grandparents through taxes on current workers, on us-
both payroll and income taxes-and both programs will take much more 
from our children to fund them when we retire.
    This year, Social Security and Medicare will account for 6.5 
percent of GDP. By 2030, those programs will grow to 11.0 percent of 
GDP. Moreover, the number of beneficiaries will grow much faster than 
the number of workers paying taxes to support those programs. The ratio 
of covered workers to beneficiaries will drop from about 3.4 this year 
to about 2.3 by 2030.
    How we analyze these spending commitments and demographic changes 
is vitally important.
    One approach, the one you've been dealing with thus far today, is 
to use actuarial techniques to project costs and income, and focus on 
the revenues specifically dedicated to the program. That approach can 
help us ascertain whether a program, abstracted from the rest of the 
budget and the program's effect on the economy, is stable on its face-
usually over long periods of time.
    One measure of actuarial long-run viability is ``solvency''-are 
expected revenues and expenditures roughly equal over proscribed but 
long periods? Another measure is the comparison of the present value of 
total expected revenues and total expected obligations-whether the 
program is ``funded'' in some sense. Within each of these measures are 
variations on the concepts that can give fairly disparate results.
    In the end, actuarial analysis is limited, however, to a relatively 
narrow analysis of one program at-a-time, without consideration of the 
rest of the federal budget or the economy.
    It can reveal whether a program as designed appears to be stable 
over time. It cannot tell you, however, if the program is sustainable 
over time-whether the federal budget or the U.S. economy will support 
the level of transfer of resources from the working population to the 
retired population.
    A second approach to the analysis involves the programs' 
interaction with the rest of the budget. In the case of Medicare, the 
interactions are direct because it is ``on-budget'' with the rest of 
the non-Social Security programs. Even Social Security, although 
technically off-budget, can have striking on-budget effects. But 
whether on- or off-, it is the combined effects of all taxes and 
spending that determine the federal government's impact on the economy-
on whether public debt is increasing or decreasing, for example.
    Mr. Chairman, a quick example of the difference between actuarial 
and budgetary accounting might be helpful.
    If you chose to transfer general revenues, say from the on-budget 
surplus, to the Medicare Part A Trust Fund, the two analyses would 
yield very different conclusions. The Trust Fund balance, and therefore 
its' projected solvency and unfunded liability, would all be improved-
if the transfer is large enough, the Trust Fund could be made 
``solvent'' forever. However, the rest of the budget would be unchanged 
and unaffected and the effect of the transfer on the economy would be 
nil.
    The Trust Fund looks better because there would be more official 
government debt credited to it. That debt and any interest on it, 
however, would have to be redeemed in the future by raising taxes, 
cutting spending elsewhere in the budget, or borrowing from the public-
effects much the same as if there had been no transfer at all.
    Another obvious example is the construction of the Part B Trust 
Fund. It is actuarially sound or ``adequately financed'', but only 
because it has an unlimited draw on the general funds of the Treasury. 
Again, the trust fund appears sound, but the growth in Part B spending 
has direct and potentially dramatic effects on the rest of the budget 
and the economy.
    Last, Mr. Chairman, these programs are susceptible to economic 
analysis-the interaction of the programs and the economy.
    Let me give one important example. This chart, which the Committee 
has seen before, represents our current best projection of the amount 
of resources we baby-boomers will consume after we retire. We will 
consume in just these three programs almost as much of the economic 
output in 2030 as does the entire federal government today. This result 
is driven by the fact we will almost double the number of retirees 
while the number of workers barely increases.
    This measure depends on only two factors: the size of the economy 
and the amount of resources obligated for retirees. It has nothing to 
do with the existence of a trust fund or any balances within it. It 
does not matter if the program is solvent or has incurred unfunded 
liabilities. And, the only way to alter this future is to alter one of 
the two factors-change the size of the economy or the amount of 
benefits.
    By way of summary, let's compare the actuarial, the budgetary, and 
the economic effects of the time when dedicated revenues to either of 
these trust funds no longer covers expenditures for that year-in 
yesterday's reports that year for both programs happens to be 2016.
    In both cases, the actuaries estimate there will still be positive 
and growing trust fund balances in 2016. Therefore, the actuarial 
analysis would suggest ample resources to meet obligations.
    The budgetary analysis would denote the transfer of general 
revenues to the trust funds as an intergovernmental interest payment. 
Those general revenues could not be used for other spending or debt 
reduction-indeed, the transfers would have to be funded by a tax 
increase, reductions in other spending, or the Treasury issuance of 
debt.
    Similarly, the economic analysis would pose the question: where's 
the cash? Treasury will have to have the cash to honor the checks sent 
to retirees and medical providers. It can get the cash in only three 
ways: cut other spending, raise taxes, or borrow from the public. This 
analysis also suggests that it doesn't matter if there are balances in 
a trust fund or, indeed, if there is a trust fund at all-the cash has 
to be generated by the Treasury to cover any shortfall of revenues.
    Mr. Chairman, until now, we've been discussing how to finance the 
promises made to retirees, but a clearer picture emerges if we think of 
these long-tailed programs in terms of consumption-how the elderly 
spend the money. After all, facilitating consumption is the purpose of 
the transfers.
    When I retire, I will use Social Security funds to buy groceries, 
clothes, transportation-most of which will be produced about the time I 
use it. In other words, I will be competing with my children and 
grandchildren for the goods they are producing. What I eat, what I 
wear, what I drive, they cannot. That is why measures such as program 
spending as a percent of GDP may be more relevant and real than trust 
fund or actuarial balances.

                                

    Chairman Thomas. Thank you very much. I want to ask a 
question and I don't expect an answer today. But I would like 
one as we begin to look at this. This is difficult enough in a 
nonpolitical environment to make decisions about resources and 
clearly who gets what, when and how, oftentimes, given the 
longevity question, immediately competing with those who are 
paying in versus those who are receiving the benefits. To what 
extent does the terminology that we use; i.e., a trust fund, 
with what people would normally read into the concept of a 
trust fund, a fiduciary responsibility, people who are, quote -
unquote, managing the funds, to what extent does a term like 
``supplemental medical insurance'' create an impression that 
there is again a relationship there if you use the term 
``insurance'' when in fact if we examine what is actually going 
on, and neither the HI or the Social Security Trust Fund is a 
trust fund in that sense, nor is the supplemental insurance an 
insurance fund in that sense. Would it help us in your 
opinion--and here is where I need your help--what would be the 
terms that actuaries would use or people who have an apolitical 
interest in dealing with this issue? Would you perhaps give us 
choices of names we might begin to use so that we could deal 
with this issue away from what people read into the terms so 
that they take political positions that don't truly reflect the 
decision that is in front of us in terms of how we deal with 
the accounting problem of the Medicare and the Social Security 
Trust Funds along with the so-called part B or the supplemental 
medical insurance funds?
    And I would request that you think about that and give us 
some options. I know it is popular for large corporations now 
to rename themselves. This some way has some response out of 
the society. I just want to see what it would be that we would 
be talking about if we had actuaries and others give us the 
titles of the program rather than politicos, Mr. Foster, trying 
to put together a deal to produce a majority of votes to pass 
the House and the Nation to make something that was desirable 
law. It may have been useful at that time to create an 
appearance for purposes of creating it. I am not so sure that 
it is really helping us solve our problem today, if you sat 
through any of the earlier hearing, in trying to understand 
what it is that we are doing.
    That would be the Chair's request that you can take your 
time and respond back to.
    [The following was subsequently received:]

    There has been a long and honorable debate over proper terminology 
for social insurance programs like Medicare and Social Security and 
whether or not such programs constitute ``insurance.'' As former chief 
actuary Robert J. Myers has written, ``The [Social Security 
Administration] very definitely overstressed the insurance concept in 
the early days of the program. This was done primarily to buildup and 
maintain public support for the Social Security program--by drawing on 
the good name and reputation of private insurance.''
    Similarly, former chief actuary A. Haeworth Robertson blames some 
of the public's lack of understanding of Social Security and Medicare 
on government rhetoric. He notes that ``The use of words and phrases 
such as `insurance,' `trust fund,' `account,' `contributions,' and 
`earned right,' while not necessarily wrong, has sometimes conveyed the 
wrong impression.''
    Most experts conclude that these programs constitute ``insurance'' 
in the formal sense. As insurance professor George E. Rejda has pointed 
out, Social Security involves the classic insurance characteristics of 
risk pooling, fortuitous loss, risk transfer, and indemnification 
against loss. Medicare also contains these elements. The problem is 
more that relatively few people understand the important differences 
between social insurance and private insurance.
    On balance, the current statutory designations of ``Hospital 
Insurance'' and ``Supplementary Medical Insurance'' seem reasonable to 
me so long as the underlying nature of the Medicare program and its 
financing are clearly explained. It is interesting to note, however, 
that prior to the 1937 Supreme Court decision upholding the 
constitutionality of the Social Security program, the trust fund was 
called the ``Old-Age Reserve Account,'' rather than the ``Old-Age and 
Survivors Insurance Trust Fund.'' In fact, the original name does a 
nice job of capturing two of the most important characteristics of the 
trust funds--namely, their role as contingency reserves, and the fact 
that they exist as accounts within the U.S. Treasury. The ``reserve 
account'' terminology thus helps to explain the nature of the funds, 
rather than tending to confuse their purpose, as can occur with the 
``trust fund'' terminology.

                                

    Chairman Thomas. Does the gentleman from New York have any 
questions or inquiries?
    Mr. Rangel. Mr. Chairman, in connection with your request, 
I assume when you come back with this language that the 
Chairman is suggesting it would be because you would know we 
would have to change the law in order to use different language 
than we are using now for the trust fund. Suggestions as to how 
could we improve the way we deliver services and the way we pay 
for it are always helpful. However, the Medicare Part A Trust 
Fund is in better shape now no matter what system you use than 
it has ever been. That is correct, Mr. Crippen?
    Mr. Crippen. In terms of surpluses?
    Mr. Rangel. Yes.
    Mr. Crippen. I believe that is correct.
    Mr. Foster. I would clarify slightly, Mr. Rangel.
    Mr. Rangel. I don't care. Just--whatever.
    Mr. Foster. If you go back to the beginning of Medicare----
    Mr. Rangel. No, no, we do not do that.
    Mr. Foster. Certainly in recent years, that is correct.
    Chairman Thomas. Well, not so fast okay. Go ahead.
    Mr. Rangel. It is not crippled, okay. It is in pretty good 
shape, Part A. Now some people will have us to believe, and 
some of them are pretty close to me physically, that we should 
really take Part A and Part B and just merge this thing 
together. And then of course we are dealing with a different 
situation in terms of income and payment. I am asking you that 
if Part B is paid for out of the general funds, at least 75 
percent of it, is it possible that you can call that part 
having a deficit at all? With your understanding of Committee 
spending and trust funds, is it possible to say that you have a 
deficit in Part B under existing law?
    Mr. Foster. Mr. Crippen gave a nice summary of the 
different perspectives.
    Mr. Rangel. I know that, but if he could help me, if either 
one of you could just help me understand existing law for the 
purpose of getting where we have to change it. With all of your 
expertise, can you assume any way that you could say that we 
have a deficit in Part B as long as it is being funded the way 
it is funded today?
    Mr. Foster. Under present law and focusing on the financial 
status of the Part B trust fund, I would not refer to it having 
a deficit, no, sir
    Mr. Crippen. No, sir. It runs fairly close to zero--a 
little above or a little below, depending on whether we 
misestimate the premiums, but it essentially runs at zero.
    Chairman Thomas. On that, if in fact Part B continues to 
grow in the portion of the general funds that it assumes since 
it is an entitlement program and if you would extrapolate it 
out to the future in which it goes from 20 percent to 50 
percent to 70 percent to 90 percent, and that were projected to 
take the entire general funds, which is not beyond the realm of 
possibility, and have it to be expended on the Part B 
entitlement program, you would then be forced to do what? In 
essence, it would be in deficit because you didn't have enough 
money to pay for it, given the current revenue stream; is that 
correct?
    Mr. Foster. I would differentiate between revenues that 
under present law are owed to the Part B Trust Fund and the 
means by which you come up with these revenues. Both are 
important questions. We haven't seen any current scenarios 
where in fact the revenues would get anywhere near that high
    Chairman Thomas. What percentage of the general fund have 
you looked at would be eaten up by Part B with the current 
structure?
    Mr. Foster. We have some examples in the current Trustees 
report. Let me give you one of them. In the year 2000 if you 
look at the Part B general revenues they represented 5.4 
percent of the total Federal income taxes, both personal and 
corporate, that were collected that year. Now if those income 
taxes maintain the same share in the future of GDP that they 
are currently, and SMI or Part B continues to grow as rapidly 
as it has and we project, then at the end of our long-range 
projection period the general revenues would require 22 percent 
of the total income taxes.
    Chairman Thomas. So one out of every five dollars of the 
entire Federal budget would be dedicated to the Part B 
entitlement program. At some point people would be concerned 
about the total amount consumed by this program. Whether or not 
the term deficit might be used, the crowding out of other 
programs that might be funded certainly ought to be a 
discussion matter. Without looking at changing the program, 22 
percent of the Federal budget is consumed by this one program.
    Mr. Rangel. Mr. Chairman, I think we have come a long way 
in being together. If you want me to understand the use of 
language like a crisis in terms of Part B because of the larger 
proportion of the general revenues, we can find that language. 
The problem is that you are using deficit-type language which 
is making it difficult to explain your position. And the main 
reason is that we don't have the same interpretation of the 
same word. So if what you are saying and agreeing with them 
that you can't have a deficit if you intend to pay for the 
programs out of the general revenue, but you can have a crisis 
in terms of the percentage, then I think we can understand each 
other a lot clearer if that is what you are saying.
    Chairman Thomas. What I am saying is that taking a piece of 
the Medicare program that funds up to 50 percent of it and 
never examining it, but simply paying for it because of the way 
it was originally constructed 35 years ago, is probably not a 
good way to husband the current resources or future resources 
of the taxpayers of the United States.
    Mr. Rangel. We were not debating that. I am just asking 
whether or not you are prepared to say that you can't say Part 
B is in deficit.
    Chairman Thomas. No, because it is an entitlement program 
and it is funded out of the general funds.
    Mr. Rangel. Well, I think we have come a long way. This has 
been a good discussion.
    Chairman Thomas. I thank the gentleman. Does the 
gentlewoman from Connecticut, the Chairman of the Health 
Subcommittee, wish to inquire?
    Mrs. Johnson of Connecticut. Yes, thank you. Mr. Foster or 
either one of you, could you just highlight for us briefly what 
were the differences in assumptions that made such a difference 
in cost projections?
    Mr. Foster. I would be glad to. By way of background let me 
say that periodically it is a good idea to convene an 
independent group of experts to review the financial 
projections made in the Trustees reports. It is not that I 
think we are doing a bad job, but it is a good idea to reassure 
the public and reassure us that we are using the best methods 
and the best assumptions.
    Just about a year ago, the Board of Trustees convened a 
Medicare Technical Review Panel, with seven of best known 
health actuaries and health economists in the country. They 
issued their report in December 2000 with a total of 38 
findings and recommendations for us. In general they found the 
methods and assumptions used by the Trustees were reasonable, 
but they noted the exception of the long-range Medicare growth 
rate assumption, which they thought was too low. In the past, 
and this is an assumption that goes back for many, many years, 
we have always assumed that over a long period of time it would 
not be sustainable for Medicare growth rates to continue at 
their worst level because eventually the entire economy would 
be Medicare. As I like to joke, we would all be either doctors 
or patients; there wouldn't be anything else. So we purposely 
slowed down the assumption over the next 25 years to about the 
growth rate in per capita GDP, and we have used that for some 
time.
    The last technical panel that reviewed this assumption was 
back in 1991 prior to the current one, and they concluded that 
the assumption was not unreasonable but they suggested we keep 
an eye on it and consider forthe future any possible changes. 
The new panel was specifically asked to look at this key assumption, 
which they did. They have looked at long-range historical, past 
experience. They have considered the determinants of health care 
growth, including demographic impacts, insurance availability, income 
growth, excess medical inflation, all the normal factors considered for 
why health care costs increase, and in particular the role of 
technology and improvements in medical technology. They also considered 
other forecasts of long-range growth for health spending, including the 
CBO projections. They also considered the long-term sustainability, how 
high can health spending go in the U.S. before something has to give. 
Based on all of these considerations and after a lot of hard work on 
their part, they unanimously recommended that the Trustees increase the 
assumed long-range growth rate for average per person spending from 
about per capita GDP (what it used to be) to per capita GDP plus one 
percentage point. I concurred with their recommendation. We passed the 
recommendation on to the Board of Trustees and they adopted it, and 
that is what is in the new reports.
    Mrs. Johnson of Connecticut. So the key thing was moving 
after the 25-year mark from per capita GDP to per capita GDP 
plus 1 percent.
    Mr. Foster. That is correct.
    Mrs. Johnson of Connecticut. And, Mr. Crippen, in light of 
past performance, is this a realistic assumption?
    Mr. Crippen. Well, it is certainly closer to what we have 
seen historically. As Rick said, we have both tried to come to 
a middle economic ground where economists are keen on saying, 
this can't go on forever. It can't go on forever, but it can go 
on for a long time. So GDP-plus-1 percent growth is certainly 
closer to what we have seen than just GDP growth would be. But 
we aren't assuming that policy changes will eventually drive it 
down to where, ultimately, it has to be, which is stable 
relative to the growth rate of the economy.
    Mrs. Johnson of Connecticut. Also in making estimates for 
us in Part A or Part B, which you do regularly throughout the 
process, does a change that we make in Part B often affect 
spending in Part A?
    Mr. Crippen. It would depend upon the change you made.
    Mrs. Johnson of Connecticut. Right, but does that situation 
come up of interactions between the two programs in terms of 
cost?
    Mr. Crippen. Only to a relatively small extent. It is only 
when you make programmatic changes like moving home health care 
that it dramatically changes that outlook.
    Mrs. Johnson of Connecticut. When we shortened the length 
of stay to control costs in Part A, did not we expect that it 
would increase costs in Part B?
    Mr. Crippen. It would.
    Mrs. Johnson of Connecticut. So while a policy change is 
not as blatant a corruption of the process, it is simply moving 
home health services from A to B, it really did shift costs 
from A to B?
    Mr. Crippen. Yes, ma'am, it did, because of the way we 
account for those two programs. As you know, it was a conscious 
effort to move people out of hospitals and into skilled nursing 
facilities and home health services.
    Mrs. Johnson of Connecticut. So while it was good public 
policy, it didn't in any way provide any greater solvency for 
the Medicare problem as a whole?
    Mr. Crippen. No, not as a whole.
    Mrs. Johnson of Connecticut. So one of the things that 
worries me in this debate about the HI Trust Fund, and that 
worries me a lot when I look at my colleagues from across the 
aisle's approach to this issue--it seems to be focused on 
primarily budget issues in the immediate present--is that 
unless we begin looking at both funds, A and B, and all of 
these things we are talking about and it is fair to say all the 
numbers in the Trustees reports are without prescription drugs, 
without reforming the way technology is incorporated into 
Medicare, which is 4 or 5 years behind the private sector. It 
is a totally inadequate process, particularly as we move into 
the modern era. It is without annual physicals. We will cover a 
flu vaccine, but we don't cover the visit to get it. Truly the 
program is a bizarre health care plan, but none of these 
estimates in any way take into account any of the reforms that 
we have to make that might increase the spending levels.
    Let me conclude by saying I appreciate your comment, Dr. 
Crippen, that we will consume in just Social Security, 
Medicare, Medicaid almost as much of the economic output of 
2030, that is 29 years from now, as does the entire Federal 
Government today. When you think of a year ago the U.S. General 
Accounting Office's (GAO) report that we would consume three-
quarters of the revenues, you can see how much your more 
realistic assumptions and your experience has altered the 
picture in just a single year. I don't care whether you use the 
word ``deficit'' or not, but I consider this a crisis, and I 
hope that people on both sides of the aisle in both bodies will 
appreciate the significance of our responsibility this year to 
try to impact these trend lines in such a way that we can make 
good on your promise to provide seniors with a more modern 
health care plan that is affordable to their children.
    Mr. Crippen. Mr. Chairman, I want to make one quick 
clarification. Our assumption, which matches that of the 
Trustees, of GDP-plus-1-percent is a long-term assumption. Most 
of the cost estimates we do for you cover 10 years, because 
that is the baseline we have. In that baseline, we assume more 
than GDP-plus-1-percent. We assume for example, in that next 
year it will be higher than that.
    Mrs. Johnson of Connecticut. Frankly, I thought it was 
quite shocking that the Trustees all this time have allowed 
themselves to drop back to GDP after 25 years, because we have 
not been able to stay within GDP or GDP-plus-1 for I do not 
know how long now. So thank you.
    Chairman Thomas. In that regard when was the last time 
there was an adjustment in the Actuary's estimates of this 
magnitude for the Medicare trust funds.
    Mr. Foster. For the long-range actuarial deficit for Part A 
this is one of the bigger changes. Of course when the Balanced 
Budget Act was enacted----
    Chairman Thomas. Of course not.
    Mr. Foster. That was a bigger impact. I would have to stop 
and think beyond that. I can't think of one as big as this in 
recent years.
    Chairman Thomas. I thank the gentleman. The gentleman from 
California, the ranking member on the Health Subcommittee, wish 
to inquire?
    Mr. Stark. Yes, thank you. I hate to talk to actuaries with 
my shoes and socks on because I have trouble with all these 
numbers, Mr. Foster, but I will try. Due to the more rapid 
growth of health care in general, and I assume that is for 
Medicare and non-Medicare, the cost of everybody's health care 
will go up. So it isn't just Medicare. The concerns are the 
adequacy of long-term financing for the program. And as far as 
I remember, we have got three ways to address the concerns you 
raise. We can cut benefits or increase the 
beneficiaries'payments, which are, I will submit, the same thing. We 
can reduce payments to providers, or we can increase revenue through 
increased taxes.
    I think that pretty much represents our options. The 
President's budget obviously prohibits tax increases. It is 
silent on cuts in benefits or provider payments, so we must 
assume that if we are going to do anything we have to make deep 
cuts to beneficiaries and providers. Preliminarily, that is 
uncomfortable for many of us. Could you please tell us, Rick, 
what would the 2.9 percent Medicare tax have to go up to to 
just accommodate for the 1 percent cost increase? Do you know, 
or can you estimate it?
    Mr. Foster. Sure.
    Mr. Stark. Okay.
    Mr. Foster. The HI deficit that we had before this change 
was about 1.2 percent of taxable payroll. The deficit after 
this change is not quite 2 percent of taxable payroll. There 
were other changes in addition, but this of course was the 
primary one. So I think you could argue that the increase from 
1.2 to 2.0 roughly is the gap that you are looking to address 
through your question by a higher payroll tax.
    Mr. Stark. So saying it another way, if we raise the 
payroll tax from 2.9 to approximately 3.7, or 1.85 percent for 
employers and 1.85 percent for employees, we would offset the 
change that your cost calculations have brought us right?
    Mr. Foster. Yes, that is correct on average, sir.
    Mr. Stark. Okay. I just wanted to get some idea of the 
order of magnitude that we are talking about. Let's say we went 
to 3.7 percent. How long does that solve our problems? Can we 
do that once? Are we home free for the next 20 years, or does 
that just push the soap a little farther ahead in the bathtub?
    Mr. Foster. It probably comes as no surprise to this group 
to know that the projections are quite uncertain and real life 
has a bad habit of surprising us. If the projections came true 
and if we immediately raised the HI payroll tax by the .4 
percent for employers and employees each and held it at that 
throughout the 75 years, that would balance the system on 
average. It is important to understand though that that would 
give us a higher tax now than we need but eventually a much 
lower tax than we would need at that point. On average it would 
be about right, but it wouldn't cover a very large percentage 
of the ultimate deficit in the long term.
    Mr. Stark. So put it another way, when I am accused of 
being a tax-and-spend Democrat, if I said I want to use taxes 
to solve our future Medicare problems right now, I would be 
talking about .8 percent payroll tax, right? That is about as 
bad as it can get, if raising taxes is bad. Is that another way 
to say it?
    Mr. Foster. If you did it immediately, sir----
    Mr. Stark. We are changing taxes around here pretty fast.
    Mr. Foster. Then on average that would do it. On the other 
hand, suppose you decided to raise the tax rate year by year as 
much as necessary to cover this higher projection.
    Mr. Stark. You are saying we would build up a little 
surplus in the outyears.
    Mr. Foster. Yes, much like Social Security. If you did it 
year by year--it is important to note that in the new 
projections the scheduled tax income under present law for Part 
A is only one-third of the total expenditures at the end of the 
period. If you did it year by year, you would have to pretty 
much triple the current tax rate.
    Chairman Thomas. Is that triple the current tax rate?
    Mr. Foster. Triple.
    Mrs. Johnson of Connecticut. Would the gentleman yield? I 
think you need to clarify that point. That is an extremely 
significant point. Could you go through that again?
    Mr. McCrery. May I ask a question for clarification?
    Chairman Thomas. As soon as he finishes you will get your 
time.
    Mr. McCrery. I don't think you responded. Maybe I am 
missing something, but I thought Mr. Stark was asking you to 
estimate the payroll taxes needed to solve just the 1 percent 
additional growth.
    Mr. Stark. That is right.
    Mr. Foster. That is correct.
    Mr. McCrery. Okay. And that is .8 percent, but you 
responded to his last question by saying that to solve the 
whole Medicare problem all we needed to do was .8-percent 
increase in the payroll tax, and I don't think that is correct.
    Mr. Stark. I would defer to my distinguished colleague from 
New Orleans, as I suspect he is correct as well.
    Mr. Foster. I fully agree that what I gave you just now 
with the tripling was to solve the entire deficit rather than 
just the incremental part due to the 1 percent. If I were a 
little faster mentally, I could figure that out here for you. 
But it would be on the order, we used to have a ratio that was 
on--one-half the scheduled taxes were one-half of the ultimate 
at the end of the period and now it is about one-third. So if 
you want to go on the difference there, that is what? A sixth, 
if I did that right, of the difference, which would put us more 
in the order of about a 1 percentage point each for employers 
and employees at the end of the period rather than the .4. I 
would be happy to check that arithmetic at some point and let 
you know if I made any errors.
    [The following was subsequently received:]

    After the hearing, as I offered to do, I checked my 
arithmetic and provide the following clarification: The Latter 
would be on the order of about 2 percentage points each for 
employers and employees at the end of the period rather than 
the .4.

                                

    Chairman Thomas. And rather than a third party assessing 
whether it is too much we ought to ask the people who are 
paying it. The gentleman has one more question.
    Mr. Stark. If I may, Mr. Chairman. Again, to Mr. Foster in 
terms of reform, in both last year's report and this year's 
report you indicated, though in somewhat different ways, that 
Medicare+Choice is costly or does not save money for the 
Medicare system. In fairness, you have also indicated that we 
are losing less currently but you did not tell me how much 
less. We were still losing money but how much less this year 
than last year, half as much?
    Mr. Foster. You are correct, Mr. Stark, that we estimate 
that--under present law with the way we pay managed care plans 
under Medicare--that on average (not necessarily plan by plan 
but on average) we pay on behalf of these beneficiaries amounts 
more than they would cost us under fee-for-service. There is a 
well-known selection impact that has occurred. The Balanced 
Budget Act requires risk adjustment in order to help us adjust 
this, and we believe in fact that once full risk adjustment can 
be implemented that can help a lot. Risk adjustment would 
reduce payments compared to where they are now on the order of 
7, 8 or 9 percent. But it wouldn't eliminate the entire 
difference.
    Mr. Stark. So it would be fair to say that encouraging 
people to join managed care-plus-choice is not going to save 
Medicare any money?
    Mr. Foster. That is our expectation under present law 
because what we pay the managed care plans--the capitation rate 
is determined off of what was originally an average fee-for-
service cost with fee-for-service growth thereafter. If we 
change the reimbursement mechanism, I think there is the 
potential for savings.
    Mr. Stark. How would you change it?
    Mr. Foster. If we went to something that reflected the 
plan's actual cost more so than what happens now, perhaps in 
the context of competitive bidding, I think the potential is 
there.
    Mr. Stark. Thank you.
    Chairman Thomas. Thank you. My assumption is it wasn't a 
rhetorical question that he asked at the beginning because if 
you look at some of the recent changes we have made in the area 
of prevention and wellness, that in fact if some of these 
managed programs were moving forward on prevention and 
wellness, notwithstanding the fact you would not count the 
savings, we probably could see a benefit which might accrue to 
savings, productivity, technology, error rate reduction, fraud 
and abuse reduction. All of these are ways in which we can 
continue to get, if you will, more bang for your buck; i.e., 
savings in the program, which by the way would probably produce 
a healthier America.
    The gentleman from Louisiana wish to inquire?
    Mr. McCrery. Yes, thank you, Mr. Chairman. Mr. Crippen, on 
your graph over here, in the year 2030 it appears that Social 
Security expenditures and Medicare expenditures are roughly 
equal in that year. But you do not show beyond 2030. Isn't it 
true that beyond 2030 the Social Security expenditures level 
off as a percent of GDP and the Medicare expenditures continue 
to rise at a fairly sharp rate?
    Mr. Crippen. Yes.
    Mr. McCrery. So if you extend the graph out to 2075, which 
is the end of the window that the trustees have to look at, 
those colors would be in different proportions, in fact 
dramatically different proportions, wouldn't they?
    Mr. Crippen. They would. We assume, just as the trustees 
do, that Medicare will continue to grow faster than the economy 
in the long run, even if you have a steady number of people in 
the program. That is not the case with Social Security. So 
Medicare grows faster than Social Security, and after the lines 
cross, it continues to grow faster.
    Mr. McCrery. And correct me if I am wrong, but I believe 
that your graph and the extension of that graph, it would show 
Medicare expenditures rising at a much faster rate than Social 
Security, that does not include prescription drug expenditures, 
does it?
    Mr. Crippen. It does not. This is our attempt to look at 
current law.
    Mr. McCrery. So if we were to add a new entitlement 
component to Medicare, prescription drugs, that red section of 
your graph would be even larger than it is today?
    Mr. Crippen. Yes.
    Mr. McCrery. I don't know exactly what the Ranking Member 
of the Committee is getting at with his line of questioning 
about the deficit and whether part B is in a technical deficit 
or not, but I assume he is trying to tell us that there is 
really no hurry here, that there is no crisis and we do not 
need to do much with Medicare right now because gosh, 
everything is OK. We have a surplus in Part A, Part B has a 
surplus, so no problem.
    Well, if that is the case I would refer my good friend from 
New York to the Trustees report, this little summary. It is in 
the back message from the Trustees and they say, quote, Thus, 
rather than providing net revenue to the Treasury, after 2016 
the combined trust funds will require rapidly growing infusions 
from revenues from the Treasury to pay benefits projected under 
current law. It is at this point and not at later dates when 
trust fund assets are technically exhausted, that Social 
Security and Medicare will begin to be in direct competition 
with other Federal programs for resources of the Treasury, 
requiring either growing tax increases or debt financing to pay 
the benefits promised under current Federal law. And again that 
is not even counting prescription drugs.
    And they go on to say, It is important that changes in 
Social Security and Medicare be initiated sooner rather than 
later that address the rapidly growing annual deficits these 
programs are projected to incur beginning with the retirement 
of the baby boom population.
    Mr. Crippen, Mr. Foster, do you concur in the assessment of 
the trustees as I just read it?
    Mr. Crippen. I do, yes.
    Mr. Foster. I think it is important to address these longer 
range issues. I might note that the current Board of trustees 
made these statements regarding the need for action sooner 
rather than later. If you look at prior reports you will find 
that language is the same language used by the prior trustees 
as well.
    Mr. McCrery. Yes, their language hasn't changed. It appears 
to me at least in the reading of this trustees report that the 
years in the immediacy of years past is still there regardless 
of the fact that we can say some trust fund has been extended 
by 4 years or another one is still in technical surplus. Isn't 
that right? Isn't that a correct reading of this year's report? 
It is still an immediate concern?
    Mr. Foster. Yes, the trustees I think are pretty clear that 
the need remains.
    Mr. McCrery. To sum up, the sooner that we put in place 
changes that over time will give us positive results in terms 
of expenditures or revenues or whichever approach we take, then 
the easier it will be to solve this problem. The longer we wait 
the more drastic the solutions that we will have to put in 
place. Is that accurate? Is that in keeping with the trustees' 
words?
    Mr. Foster. Yes, it is. Part of the message is that if you 
act sooner rather than later you have more options and the 
changes can be introduced more gradually and give greater 
warning time to affected parties, whether it is beneficiaries 
or taxpayers or health care providers.
    Mr. McCrery. To use a historical analogy, the longer we 
fiddle the more Rome is going to burn, and I think we are 
burning right now and we are fiddling and we ought to be 
acting. Thank you.
    Chairman Thomas. Does the gentleman from Michigan wish to 
inquire?
    Mr. Levin. Let me, if I might, pick up that theme, because, 
you know, I think all of us tend to use optimism or pessimism, 
I said we tend to, to drive a policy result, and so we can put 
on our optimistic or our pessimistic hat depending on the 
conclusion we want to reach. And I want to pick up that issue 
because the Secretary of Treasury touched on this kind of issue 
earlier today.
    Mr. Crippen, I am not sure if I understood what you said 
here and I am sorry the page number is not here but you say at 
the bottom of, it is quite far back, and the only way to alter 
this future is to alter one of two factors, change the size of 
the economy or the amounts of benefits. I am not sure the 
context is clear. What is not included there are program 
changes.
    Mr. Crippen. What I was trying to say, Mr. Levin, is that 
to change the outlook on this chart--which is based on how 
large these programs are as a percentage of the economy--you 
only really have two moving parts: one is how big the economy 
which you are dividing by is and the other is how many benefits 
you are dedicating to the retirees.
    Mr. Levin. Well, I think it has been suggested another way 
to do it is not to change the benefits or the size of economy 
but the content and the quality of the program. And I didn't 
get a chance to ask the Secretary this. I was struck by his 
statements about the defects in the present system and the need 
for systemic reform and how--and then you talked about the 
error of the medical error rate and said something about we 
could cut costs 30 to 50 percent and our system would be 
wonderfully better. And I didn't really understand that at all. 
I mean, and he talked about his experience with Alcoa, but--and 
this somewhat relates to Mr. Stark's question about how we 
handle care in managed care and fee for service. But if there 
are these savings, these efficiency savings that are just right 
here to pick up off the tree, we do not need this kind of 
dramatic reform, whether you favor it or not, whatever it is.
    Now, do you in your work, either of you, have you come up 
with any information that would give you optimism that we can 
dramatically change the cost of health care through these 
efficiency reforms? I don't mean to pit you against the 
Secretary of the Treasury and I am sorry I didn't ask him that. 
But in your testimony you do not seem to give any substantial 
weight to a dramatic reduction in costs through such changes. 
Am I wrong?
    Mr. Foster. I like your analogy, sir, of the low hanging 
fruit or the easy picking fruit. But in fact I think the 
potential is there, but I think it is a lot further up that 
tree and it is hiding behind some pretty big branches. There 
was a RAND study from a few years ago that suggested roughly 30 
percent of medical services are unnecessary, that they don't 
accomplish anything. So the potential is there if we could find 
a magical way of avoiding doing those.
    Mr. Levin. Is there a magical way?
    Mr. Foster. That is the thing because the RAND study also 
showed after the fact you can often identify unnecessary 
services. But you can almost never identify them before the 
fact.
    Mr. Levin. If we could just legislate after the fact around 
here, we might even have some bipartisanship.
    Chairman Thomas. Actually I thought we do that more often 
than not.
    Mr. Levin. But seriously, I mean, to talk about something 
wonderfully better and it wouldn't take 40 years, 50 years to 
do this, right? I mean if the potential is there, I assume it 
is there not next year but over a decade, we ought to be able 
to squeeze that kind of excess, if it is real, but----
    Mr. Crippen. I don't know, Mr. Levin, who the Secretary was 
directly referring to. There are probably some subsets of the 
Medicare population among whom you could, through case 
management or some other innovation that we know about today, 
save substantial amounts of money and maybe have better health 
care outcomes. But at this point, the subset that we could 
think about applying that to is probably small. If we could 
expand those techniques, then maybe there would be systemic 
savings, but my guess is that what he was referring to was some 
unusual techniques applied to a very small number of people.
    Chairman Thomas. I will tell the gentleman, it also, as I 
have had discussions with the Secretary, deals in the way we 
could reduce error. The problem is it is easy to talk about it, 
but when you say it is something we should be able to pick up 
immediately what we are dealing with is the fundamental shift 
in the mindset of those who deliver health care. And you look 
at someone in a white coat with a stethoscope around their 
neck, there is a conspiracy of silence to discuss what is going 
on. If you put them in a blue uniform with epaulets, they are 
anxious to get on the stand to talk about all of the errors 
that were made in the crash they are examining. It is a 
fundamental way that health care has been delivered in the 
relationship between health care providers that if we could 
change it to create a punishment free assessment of decisions 
that are made and how they are made from a systemic point of 
view rather from the heroic artist healing, a physician point 
of view--I don't mean that in a pejorative sense, but that is 
the way the system is structured today--you could get 
significant reductions in errors and in unnecessary operations. 
But to say that and then to do it means you fundamentally have 
to change the culture and the character of those who 
participate in the delivery of health care today, and that is 
the problem.
    Does the gentlewoman from Florida wish to be inquire?
    Mrs. Thurman. Thank you, Mr. Chairman. Mr. Foster, I need 
to get some clarification here because I know there has been a 
lot of conversation about the GDP-plus-1, and in reference to 
the chairlady of the Health Care Subcommittee, and rightfully 
so, there is a concern about what is going to happen with 
medical technology and our seniors being able to participate in 
any technology that comes. Is that not a part though of your 
assumptions, your growth assumptions, did you not use medical 
technology as one of the components?
    Mr. Foster. Yes, ma'am. In fact, it is the primary 
component of the recommendation from the technical panel. They 
have measured the historical contribution of medical technology 
improvement to health care cost increases and they assumed that 
that level of impact would continue indefinitely.
    Mrs. Thurman. So the technology issue is really already in 
here; it is just how do we implement it as being part of the 
issue. What it doesn't have is the prescription drug benefit. 
That is not a part of the technology then, and change and new 
medicine, or anything of that nature.
    Mr. Foster. In a sense it is part of it because what has 
happened with prescription drugs has an impact on Medicare 
beneficiaries and their Medicare costs because we do not pay--
--
    Mrs. Thurman. Because of the in-hospital drug----
    Mr. Foster. Hospitalization rates, other issues.
    Mrs. Thurman. Okay.
    Mrs. Thurman. Okay. One of the areas that--and this goes to 
the Medicare reform issue because we are hearing an awful lot 
of that. I mean, I am not even sure I know what a reform is 
anymore because it keeps changing on me, and I think it kind of 
fits whoever wants to make it fit.
    But, you know, we hear about how this is a 35-year-old 
program and we need to make changes. But some of the changes 
that we have made in the past were specifically on the managed 
care program and for Medicare+Choice. And in your report, you 
actually make an assumption that reductions in the projected 
levels of managed care enrollment resulted actually in a 
positive 30 percent change in the actuarial balance because of 
people pulling out of these plans, suggesting to them fee-for-
service is a lesser cost.
    So then let me take a step further: When you talked about--
you thought that potentially those numbers would switch if we 
had something that was more--get active, I think is what you 
said. Let me ask this question, then, if that is true; and then 
I need to find out, do you think that the Federal Employees 
Health Benefits Plan (FEHBP) is a competitive program? Do you 
think private pay is a competitive program, and if so, what I 
have understood to believe is that over the last 20 years the 
costs have been about the same in all of those programs, 
including Medicare?
    Mr. Foster. There is competition in private health 
insurance, for example, starting back when, about the early 
1990's, employers got fed up with the rising cost of health 
care for their employees, and they started shopping around for 
better premiums. And this did lead to a degree of competition 
that I think did help get to a lower cost than would otherwise 
have occurred.
    Mrs. Thurman. But in saying that, we have seen Medicare and 
all of these others maintain about the same cost over the last 
20 years, so no real significant savings.
    Mr. Foster. That is correct. If you look over a long time 
period, say the last 30 years perhaps, and you look at the 
average cost increase over that whole period per person insured 
or per beneficiary for Medicare, if you make the comparison 
between Medicare and private health insurance, the average 
increases are pretty similar. Medicare is actually a little bit 
lower, but overall over the whole period they are pretty 
similar.
    Within subperiods, you can find some fairly large 
differences. For example, when the inpatient prospective 
payment system was introduced for Medicare back in 1984, the 
Medicare growth rates were quite a bit lower than private 
health insurance for some period. More recently, with the 
managed care revolution, it was the other way around; the 
private health insurance rates were much lower. Most recently, 
with the Balanced Budget Act and the strong economy, et cetera, 
Medicare has been doing a lot better.
    On a long-term average, they are similar.
    Mrs. Thurman. So then if we look at this report and based 
on the conversations that we are going to have over the next 
couple of years of solvency, nonsolvency, whatever, and the 
guess the President has taken off, which, quite frankly, I 
probably rightfully think so, on the payroll taxes, what does 
that leave us? If we have got a similar program other than we 
now talk about Breaux-Frist, which seems to be the competitive 
mode, but yet based on your answer that really doesn't give us 
much savings in the long run.
    I think there might be some things that could happen. But 
other than decreasing benefits, Mr. Crippen, what do we do?
    Mr. Foster. I will let Mr. Crippen answer that one.
    Mr. Crippen. Fortunately, we don't deal in policy. But I 
will suggest one approach that you might think about, and this 
is not a math solution either. Since the outset of these 
programs we have been thinking about a set of benefits that we 
provide to the elderly population and the financing of them as 
the problem we have to worry about, and rightly so. But one 
could also think about the issue as an insurance pool. I mean 
that in the generic sense--not private or public, but just an 
insurance pool with 39 million people. In that pool, there is a 
significant amount of risk, both health risk and financial 
risk.
    You can think about apportioning that risk perhaps 
differently than we do now, so that there is some risk borne by 
the recipients, the providers, and by the taxpayers. And in the 
division of that risk you may create a set of incentives that 
produces a much more efficient, better health care system. But 
it is just a different way of thinking about it rather than 
considering it as a set of benefits that we have to finance for 
a given population.
    Mrs. Thurman. However, Mr. Crippen, back to the Trust Fund 
report, it actually uses an implementation of an improved risk 
in it. That is part of the statement that I just pulled out on 
the point 30, so I am not sure.
    On the benefit issue when you talk to me then about 
managed--management of a person's health and those kinds of 
things, those are also benefits that actually increase other 
than decrease. So then we have a trade-off of what do we give 
to a beneficiary based on some of those assumptions as well.
    Mr. Crippen. This is an example I have used before, so the 
numbers are no longer right because they are now 2 years old. 
But if you were going to get a liver transplant and you were a 
Medicare recipient in the New York City area, you would 
probably go to the nearest hospital that would perform that 
operation for you and that Medicare would reimburse for that 
surgery. If, however, you wanted to get the best liver 
transplant available, the one that would let you live the 
longest or not be rehospitalized--the most successful--you 
would go to the Mayo Clinic.
    It turns out that Mayo charges about half of what the 
hospital in Manhattan would charge. What we are talking about 
here is $150,000 versus $300,000--those are the kinds of 
numbers. So, clearly, you could afford to pay for a plane 
ticket to send somebody to the Mayo Clinic.
    In that kind of a system hospitals would compete against 
each other on not only price but outcomes. Because we can 
measure outcomes on some of these things pretty clearly: Does 
the patient survive?
    On that basis, you have a better outcome in quality, and 
you have a lower price. So you could allow people to take 
advantage of the lower price and the better outcome. They could 
still go to the hospital next door to them if they wanted to, 
but they would pay a higher price.
    What you are doing is changing the nature of the risk in 
the overall pool by taking out some of these very big payments.
    And if you think about the nature of that risk, you may be 
able to restructure the pools in a way that we haven't thought 
of thus far. I don't know if that makes any sense.
    Mrs. Thurman. But that wouldn't mean just necessarily going 
to some kind of managed care program. That would actually work 
within the Medicare program as we know it today.
    Mr. Crippen. You could take solid-organ transplants out of 
any payment system, whether it be managed care or fee-for-
service, and do what we were just talking about.
    Chairman Thomas. I tell the gentlelady, though, a couple of 
points with that colloquy. One is, to be able to measure 
outcomes and have the taxpayers' dollars spent for the highest 
and best result will require the ability tocollect data. We 
don't have a patient confidentiality statistical structure available to 
us, and to the degree it is done on a State basis, it becomes a crazy 
quilt. That is a thing that we have tried to work on here.
    Also, in terms of prescription drugs, remember the Part A 
Trust Fund is the part A Trust Fund; and the only really 
significant portion of prescription drugs in that would be in 
the in-hospital, diagnostic-related group provision. Your 
party, your President's proposal, was a part B which was 
outside of Part A. And the successes of using higher technology 
on drugs where the associated costs really are largely going to 
be influencing the General Fund portion of Medicare, rather 
than the hospital Part A. So their adjustment, from a 
technology point of view on drugs, is in that area of the 
hospitalization portion.
    Mrs. Thurman. And I would agree with you. I was trying to 
get to that point, though, that--you know, that the technology 
with that GDP-plus-1 was--there were some purposes in that. And 
so we can't just say that that has not been included in this 
growth that is being looked at as we look at changes in 
Medicare.
    Chairman Thomas. Right, to the extent that drugs are in the 
Part A program. But the idea of getting to outcomes so that we 
could compare costs and quality is something I think that would 
advance the debate far beyond where we are now in making sure 
that we can get the best product for the dollar spent. It won't 
necessarily reduce costs, of course, but it can reduce the 
amount of the increase, which is, after all, one of the things 
we are looking for.
    Does the gentleman from Texas wish to inquire?
    Mr. Doggett. Thank you, Mr. Chairman.
    Gentlemen, frankly I have to tell you that I was planning 
my questions today for Secretary Thompson, who I had been 
advised would be back here. I gather that after some of his 
answers last week, he is in reeducation camp today.
    So I am going to try to focus my questions--since there is 
no one here from the administration to discuss policy--just on 
the numbers since Mr. Crippen said that your focus is on the 
numbers.
    If I understand correctly, if by law, as Secretary Thompson 
told the Committee last week, all of Part A must be used for 
Part A, and that the commitment of the administration, 
according to what you might call the ``Thompson oral lockbox'' 
on Part A, is to use it only for that purpose, then is it not 
true that it is not available for the contingency fund for 
other purposes that the President proposed in his budget?
    Mr. Crippen. The answer depends on how you analyze the 
program.
    Legally, you may be absolutely correct that if you look 
just at Part A, that analysis can tell you what kind of 
financial shape the program is in. What I was suggesting is 
that to look at Part A alone, outside the rest of the Federal 
budget or the economy, could be misleading.
    You may want to change Part A, even if it looks all right, 
simply because you have other budgetary constraints. The 
extreme example is that you could either increase spending or 
cut taxes by $5.6 trillion over the next 10 years, and the 
actuarial analysis in the trustees' report, would not change.
    So if you think of the issue as Part A, then yes, in an 
actuarial sense, your statement is absolutely right. If you 
think of it in the context of a larger budget or of the 
economy, you may get a different answer.
    Mr. Doggett. If it is by law for Part A only, it can't be 
used for the Contingency Fund for something else, can it?
    Mr. Crippen. It depends on what you mean by ``used.'' For 
years we've used the Social Security Trust Fund for other 
things.
    Mr. Doggett. Fortunately, we are not doing that. You are 
not proposing that we do that again, are you?
    Mr. Crippen. No, I am not. All I am saying is that because 
of the way the Federal budget works and the way the program's 
financing works, the money that flows through the Part A trust 
fund leaves behind Committee debt but also provides cash out 
the other side, which can----
    Mr. Doggett. So unless we want to use it in the way the 
Social Security surplus was once used, then Part A is for Part 
A, and it is not an available for the Contingency Fund for 
other things.
    Mr. Crippen. Again, in the actuarial and legal senses, I am 
sure that the words you are using are right. In a budgetary 
sense, it doesn't matter.
    Mr. Doggett. Let me ask you about prescription drugs then.
    Your CBO came out with a new estimate that seniors, I 
believe, will be paying about a third more for prescription 
drugs over the next 10 years than had been previously 
estimated. That is a total, I believe, of about $1.5 trillion, 
which is the best estimate your number crunchers have been able 
to come up with on that.
    Mr. Crippen. Right.
    Mr. Doggett. The President has proposed in his budget that 
we allocate $105 billion over 10 years to meeting the 
prescription drug needs of seniors; isn't that correct?
    Mr. Crippen. I believe that is right, yes.
    Mr. Doggett. So American seniors need to know that while 
they were promised a kind of ``we can have it all'' budget in 
the President's speech, in fact, what the President is 
proposing in his budget is to give seniors a little less than a 
dime on the dollar--I think it works out to about 7.5 percent--
to meet their prescription drug cost over the next 10 years if 
your numbers are accurate and the sticks with his budget figure 
of $105 billion.
    Mr. Crippen. Certainly, what you have just said is true. I 
would add, however, that a portion of the $1.5 trillion is 
currently being paid by employers, by other insurance. We are 
using----
    Mr. Doggett. There are a few seniors that are fortunate to 
have their prescription drugs met. Maybe instead of 7.5 
percent, they will get a dime. But it is clearly not a dollar 
of their prescription drug needs. It is not anywhere close to 
meeting the prescription drug expenses that you think seniors 
will have over the next 10 years, is it?
    Mr. Crippen. It would depend upon how you spent the money. 
We don't know exactly what the gap is, what the need is. For 
seniors without insurance, you have to define how many more 
pharmaceuticals they need than they are getting now and what 
that would cost. We don't know, so we can't tell you whether 
the input you mentioned meets the need.
    I can't disagree with the numbers you use, but if you 
targeted the money, presumably you could provide more than a 
dime to those who don't have prescription drug coverage.
    Mr. Doggett. So you could give nothing to other people or 
you could give it all to some. Their helping-hand program seems 
to be more like a helping-little-finger program than a helping-
hand.
    But if you look at it just in terms of your numbers and the 
President's number, he is proposing to give about 7.5 percent 
on their dollar of prescription drug costs over the next 10 
years. Thank you very much.
    Chairman Thomas. Does the gentleman from North Dakota wish 
to inquire?
    Mr. Pomeroy. Yes. Thank you.
    Mr. Foster, you are the Health Care Financing 
Administration (HCFA) actuary?
    Mr. Foster. That is correct.
    Mr. Pomeroy. Mr. Crippen, we know you.
    Mr. Crippen. For good or ill.
    Mr. Pomeroy. I think the North Dakota basketball teams 
whomped South Dakota again this year.
    Mr. Crippen. Are you sure?
    Mr. Pomeroy. I am a little--I am heartened by the 
discussion today, because I think it is extraordinarily 
important to talk about the entitlement programs and their 
long-term consequence. And I think that sometimes the 10-year 
focus ignores what is going to happen to us in the next decade, 
and the decade I call the ``troublesome teens.''
    GAO Comptroller General David Walker has said that even on 
a unified budget basis the Social Security program, entitlement 
program, and the Medicare program, the General Fund program, we 
are in a deficit position by the year 2019 without a dime of 
tax cuts.
    Mr. Crippen, do you have any knowledge of whether that is 
accurate?
    Mr. Crippen. I know that on the spending side GAO uses our 
numbers, so presumably that is pretty close. The question is 
what level you assume for revenues--that is, whether you change 
the tax laws or not. Historically revenues have been 18 or 19 
percent of GDP; today, we are at 21 percent of output.
    If you assumed that revenues would remain at 21 percent of 
GDP for a long period, you might not be in deficit then. If you 
assumed the historical average of 18 percent or 18 percent-
plus, then you might be. The conclusion you draw depends on 
what you assume revenues are going to do even under current 
law.
    Mr. Pomeroy. Actually I think that there is no debate about 
the exploding costs of entitlements as baby boomers move into 
retirement years; is that correct?
    Mr. Crippen. It is. We boomers start retiring in 2010, so 
between 2010 and 2030, you get the most demographic impact
    Mr. Pomeroy. I suppose from time to time there have been 
demographic changes, substantially demographic changes across 
cohorts within the American population.
    Mr. Foster, do you know?
    Mr. Foster. Well, the statistics going back for very long 
periods are not too good, as you can imagine.
    Mr. Pomeroy. We know what we are dealing with now. We have 
three workers per retiree today, and we are going to have two 
workers per retiree by the year 2030, a very substantial shift 
and a very rapidly aging population if you look at the total 
picture. Is that correct from an actuarial standpoint?
    Mr. Foster. That is correct. What really happens is not 
only the retirement of the baby boomers, but you also have the 
low-birth cohorts during the Depression years; and then you 
have, subsequent to the baby boom, the relatively low-birth 
cohorts. There has been a long downward trend in U.S. fertility 
for the last two centuries.
    Mr. Pomeroy. Because my time is limited, I completely agree 
with you. You and I are agreeing on the same point; that is, we 
have a rapidly aging population, a significantly greater 
proportion of our population moving into entitlement program 
eligibility, the over-65 age group.
    This will be the first time in the history of our country--
irrespective of whether this has happened before or not, it 
will be the first time that it has happened when you have those 
seniors, each one of those 65-year-olds and over, with an 
absolute right to entitlement program support, Social Security 
and Medicare. Is that correct?
    Mr. Foster. It is the first time we have had this sort of 
demographic change, an adverse change in that sense. In the 
past we have had a favorable situation.
    Mr. Pomeroy. You have an aging population, but this time an 
aging population with Medicare and Social Security, which means 
the next decade is going to be something like we have never 
seen before. That would tell me that this decade we ought to be 
doing everything we can to prepare for the next decade.
    The President has said this surplus is the American 
people's surplus, but a good chunk of that surplus is also 
essentially the prefunding of the entitlement programs that has 
been written into the program. The FICA taxes collect more 
today than is paid out today, and that difference has all piled 
into calculation of the surplus; is that correct, Mr. Foster?
    Mr. Foster. It is essentially correct. Let me caution you 
that it was not so much by design as by accident.
    Mr. Pomeroy. I would say on the Social Security side it was 
very deliberately by design.
    Mr. Foster. I would disagree with you respectfully, sir.
    Mr. Pomeroy. I think the heart of the 1983 reforms was to 
bring a dimension of prefunding in. I used to be an insurance 
commissioner; whenever I argued with actuaries, I lost. But I 
do think that the demographic was anticipated. It is not a 
surprise that suddenly the population is as it is by age 
cohort, and therefore, prefunding was built into the program.
    When we talk about the dramatically expanding obligations 
and we talk about basically trying to stabilize them through 
reform, reform essentially is cutting benefits, increasing the 
tax burden to pay for the benefits, or laying off a 
significantly greater cost than is presently laid off on the 
beneficiaries. In other words, higher Medicare premiums, 
something of that nature, is that basically the range of 
alternatives?
    Mr. Crippen. Again, it depends on which of the analyses you 
are using. If it is an actuarial analysis, then you are right. 
If it is one, however, that includes or, rather, looks at the 
effect on the economy, there are only twomoving parts in the 
macroeconomic analysis: you can reduce benefits--that is, the promises 
made to the baby boomers, not the current retirees--or you can grow the 
economy faster, then you will get a different result.
    Mr. Pomeroy. I subject there is a third. Can I make my 
suggestion?
    Chairman Thomas. Move to the third.
    Mr. Pomeroy. If this country moves into the next decade 
having made the most rapid advance in debt retirement possible, 
bringing us to--literally to the point without debt, we have as 
Secretary Summers used to say, ``recharged the fiscal cannon of 
the United States of America.'' We have bequeathed to--the next 
generation has got to pay for our entitlement costs, virtually 
the entire borrowing capacity of the United States; and in the 
event there are some deficits encountered in some future 
Congresses, God forbid, we have got a lot of borrowing capacity 
to deal with that.
    Would you agree with that from a budgetary standpoint?
    Mr. Crippen. Yes, but I would argue that paying down the 
debt might actually grow the economy faster and is thus even 
more important.
    Mr. Pomeroy. It is a two-fer. Win-win. Thank you.
    Chairman Thomas. I thank the gentleman.
    Without objection, the Chair will place in the record a 
letter addressed today--dated today from the Secretary of 
Health and Human Services.
    [The information follows:]

       U.S. Department of Health and Human Services
                                       Washington, DC 20201
                                                     March 20, 2001
Hon. Bill Thomas,
Chairman, Committee on House Ways and Means
Rayburn House Office Building
Room 2208
Washington, DC 20515.
    Dear Mr. Chairman:
    Thank you for the invitation to testify before the Committee on 
Ways and Means last week. It was a great honor to present the 
President's Budget blueprint for the Department of Health and Human 
Services to you and the Members of your Committee.
    As Secretary of Health and Human Services, I was encouraged to be 
reminded of your strong support and leadership in reforming the 
Medicare Program by improving the current benefits package and adding a 
prescription drug benefit for Medicare beneficiaries. As you know, I 
share your commitment to true Medicare modernization. A 21st Century 
Medicare program must catch up to the rest of health care by 
recognizing that all modes of treatment--hospitalization, outpatient 
care, home care and prescription medications--must be integrated if 
patients are to receive quality care.
    Modernizing and improving Medicare must rank among our most urgent 
priorities. Reform, however, must not be limited to improving the 
benefit package but must also establish an accurate measure of solvency 
to ensure the program is financially stable for generations to come. To 
this end, we must ensure that all Medicare money must be used for 
Medicare and Medicare reform. I know that you share this goal.
    I look forward to working with you in the coming months to address 
these important issues. Your knowledge of the Medicare Program and your 
history of leadership in reform is essential to our success.
            Sincerely,
                                         Tommy G. Thompson,
                                                         Secretary.

                                

    Chairman Thomas. Does the gentleman from Wisconsin wish to 
inquire?
    Mr. Ryan. Yes, thank you, Mr. Chairman.
    Gentlemen, I just wanted to bring up some key timing 
points. Is it not true--and I will ask each of you--that the 
first year the outgo exceeds income, excluding interest, in the 
HI Trust Fund in the year 2016? Correct?
    Mr. Foster. That is correct.
    Mr. Ryan. Payroll taxes will not meet the demand of the 
time?
    Mr. Foster. Payroll and other taxes.
    Mr. Ryan. So the problem is not in the year 2029, as some 
would say; the problem really begins in the year 2016, correct?
    Mr. Foster. Well, there are lots of problems out there. 
That is one of them.
    Mr. Ryan. In looking at your spend-out rates--and I think 
it is very exciting and interesting to see this--you are using 
current-law assumptions in determining your spend-out rates, 
correct?
    Mr. Foster. That is correct.
    Mr. Ryan. Based on the fee-for-service program exclusively?
    Mr. Foster. Well, fee-for-service and Medicare+Choice.
    Mr. Ryan. Which is based on fee-for-service.
    It is pegged to the fee-for-service rate, correct?
    Mr. Foster. The payments, that is correct.
    Mr. Ryan. Mr. Crippen, is it not the case that the 
Congressional Budget Office has estimated the premium support 
commission plan as saving more money in the long run when you 
switch your estimates from not just exclusively fee-for-
service, but fee-for-service plus private rates as well?
    So it is my understanding that CBO's projections of 
Medicare spending under the premium support system would grow 
more slowly than Medicare spending under current law based on 
the current fee-for-servicespending modeling; is that correct?
    Mr. Crippen. I think you are right. I can't say for sure. I 
think that is right.
    Mr. Ryan. That is my recollection. And Mr. Foster----
    Mr. Crippen. That is correct.
    Mr. Ryan. Mr. Foster, that is not the case with HCFA, 
though, as well, correct?
    Mr. Foster. Referring to the premium support estimates?
    Mr. Ryan. That is right. Yes.
    Mr. Foster. We have had different versions of this proposal 
going back to the bipartisan Medicare Commission and also the 
last administration's proposal. And what we have found is that 
there is the potential for savings. It tends not to be 
dramatic, not of the same order of magnitude as the long-range 
costs that we project, for example.
    Mr. Ryan. I find that there is a decent-size discrepancy 
between HCFA modeling and CBO modeling, and that the important 
qualifying difference here is that the Congressional Budget 
Office has looked at the price competition issue and has 
concluded that it does exist and that savings can be accrued so 
that when you apply the price competition model to your spend-
out rates, you can actually save a considerable amount of money 
in the end.
    So the point I am trying to get around to is, it has often 
been said here in the Committee that the only way to reform or 
fix Medicare, to address that chart, is to either raise taxes 
or cut benefits. My colleague, who just left, said, ``or draw 
down debts so that we can raise debt later.''
    I just don't see it that way.
    The third way is, reform Medicare. And reform Medicare 
doesn't necessarily mean cut taxes or raise benefits. Reform 
Medicare can necessarily mean inject price competition into the 
system as has been measured by the Congressional Budget Office, 
which ends up saving more money in the long run; and it does a 
great deal of good toward limiting that liability that we see 
on these charts in the outyears. Is that not correct, Mr. 
Crippen?
    Mr. Crippen. Yes, but we would not say it as generally as 
you have; that is, the details of these things make a dramatic 
amount of difference.
    Rick hasn't had the opportunity to look at all of the plans 
that we have--not that he would change HCFA's estimating 
methods, as the differences in our methods aren't the major 
issue. An economic proposition, I think we agree that if you 
can introduce competition, as Rick said earlier, you have the 
prospect of having some savings.
    Mr. Ryan. So what you are saying is that that is the 
possibility, that in addressing this issue there is a third way 
other than raising taxes and cutting benefits, and that is to 
enact Medicare reforms that inject price competition into the 
system--the devil is in the details--but there is a possibility 
of doing that whereby Medicare expenditures would slow relative 
to current law; is that correct?
    Mr. Foster. I would argue that price competition can get 
you to your bottom-dollar cost, and more effectively than price 
administration that we currently do or other methods. I tend to 
believe--and Dan and I might differ just a little bit on this; 
I tend to believe that once you are at the bottom-dollar price, 
through competition or whatever means, that the factors 
affecting health care growth, including technology, higher 
incomes, insurance availability, et cetera--that the factors 
affecting this growth tend to be the same.
    So what a premium support proposal can do for you is get 
you to a lower cost, but then the growth of the future won't be 
a lot different than fee-for-service. It is just you are down 
here instead of up here, but growing at similar rates.
    Mr. Ryan. Growing at similar rates.
    But it is my opinion from reading the CBO analysis that you 
would actually incur some savings; that, yes, costs will incur, 
new technologies will be hopefully evolving, and that those new 
expenditures will occur, but that under current law those 
expenditures growth rates would be higher than under the price 
competition premium support model if constructed properly? 
Correct?
    Mr. Crippen. I think that is right, yes.
    Mr. Ryan. Thank you.
    Chairman Thomas. I thank the gentleman.
    You might recall that the last Congress, in putting out 
prescription drug programs, the way in which the President's 
plan was constructed and the way in which the plan that passed 
the House of Representatives was constructed, there was 
literally twice as much savings in a particular area because of 
the way the competition was structured.
    So I think the gentleman is correct that you can get, based 
upon the plan, a reduction in the cost; but another way of 
saying that is, you simply slow the growth curve. Eventually 
you wind up having to talk about increased costs. But after 
all, what we are doing is trying to make sure that we get out 
into the future the best possible quality at the lowest 
possible price. All of those factors would contribute to that.
    If there are no further questions--the gentleman from 
Louisiana.
    Mr. McCrery. I would just like to clear up something, 
because there may be some people watching, maybe even some 
press listening, that are confused about the part A Trust Fund 
and the Contingency Fund in the budget. And I am not accusing 
any of our colleagues of trying to mislead the public on this, 
but just to make it crystal clear:
    The Part A--Medicare Part A Trust Fund, under current law, 
will be spent on Medicare. Regardless of what we do with the 
cash flow excess, at this time or next year or the year after, 
the Part A Trust Fund is dedicated to Medicare. And when those 
bills, those IOUs become due, the general Treasury has an 
obligation, the full faith and credit of the United States is 
behind that obligation to pay those IOUs. Regardless of what 
kind of budget you set up for a tax cut or a contingency fund 
or funding education or defense, that trust fund is dedicated 
under current law and nobody is suggesting changing the current 
law on Medicare, end of discussion. Not the administration, not 
this Committee, nobody has suggested changing current law so 
that the Part A Trust Fund is spent on anything other than 
Medicare.
    Does anybody on the panel disagree with that?
    Mr. Foster. I would agree with you. You said ``under 
present law,'' which is the critical factor here. Under present 
law, not only is it spent only on Medicare, but it is only 
spent on Part A Medicare.
    Mr. McCrery. That is correct, only on Part A Medicare. That 
is current law.
    Mr. Crippen. I would say, as I said once before, that even 
if you utilize for tax cuts or other spending, what we estimate 
to be the entire surplus over the next 10 years that would not 
change the actuarial reporting in this report at all. It would 
still be reported as a surplus in the Medicare Part A trust 
fund.
    Mr. McCrery. That is correct. I just wanted to clear that 
up, Mr. Chairman
    Chairman Thomas. Or perhaps another way of saying it, do we 
anticipate a Part A Trust Fund surplus beyond the 10-year--Mr. 
Foster, as the actuary--beyond the 10-year window, Mr. Crippen, 
that we require for our budgetary purposes?
    Mr. Foster. Yes, we do.
    Chairman Thomas. So if the surplus that has to be due and 
payable when it is due and payable is outside the 10-year 
window, we basically can deal with that surplus in any way we 
want prior to being obligated to have to spend it. So if we 
create a fund for 10 years or less, which is called a 
contingency fund, travel fund, a help-mate fund, whatever we 
call that, that money is not due and payable until we are 
required to pay it. And if it is outside the 10-year window, no 
one should be concerned about where or how it is structured 
within that 10-year window, so long as it is not spent.
    Mr. Stark. Would the Chairman yield?
    Chairman Thomas. Sure.
    Mr. Stark. I think what you are saying, or maybe not, is 
that the Contingency Fund for other than Medicare purposes is 
then really only approximately 300, instead of 800.
    Chairman Thomas. Actually, it is more than 40 different 
trust funds that are currently in surplus. So that it is a 
number of trust funds, again because of the description as to 
what the trust fund really is, from an actuarial point of view, 
comprising the Contingency Fund. It is not just the Part A 
Trust Fund.
    Mr. Stark. If in 1 year you tried to spend $800 billion out 
of the Trust Fund on defense, that would be spending Part A 
Trust Fund money on something other than Medicare, right?
    Mr. McCrery. That is incorrect.
    Chairman Thomas. We have enough surplus to pay the bills 
due and payable on Medicare Part A, clear through, outside the 
10-year window. We are not spending that money.
    Mr. Stark. My understanding, all you could do with that 
Trust Fund money is buy certain Committee notes.
    Mr. McCrery. No. No. No. No. No.
    Initially that is correct. The Treasury Department is 
obligated to put into the Trust Fund IOUs just so that 
everybody out there will understand IOU--paper IOUs, go into 
the Trust Fund and they stack up. No money. No cash.
    That would be stupid, wouldn't it, to put the cash under 
the mattress? But the Treasury Department has to do something 
with the cash that it gets from the trustees.
    What did we do with the cash? When you guys were in control 
of Congress, we spent it on everything from defense to 
education to anything else you can think of. We spent every 
penny of it, plus some. We went out to the markets and borrowed 
even more money.
    Now, thankfully, we have reversed that and we are not 
spending it; we are using it to buy down debt. The Treasury 
Department takes that cash from the Trustees and buys down 
debt.
    Some of us would like to give it back in the form of a tax 
cut to let the economy grow more so these trust funds may get 
in even better shape.
    Mr. Stark. The same thing is true with the Social Security 
Trust Fund? Could you do the same with Social Security?
    Mr. McCrery. We could. Just as you all spend it for years 
and years, we could give a tax cut.
    But the gentleman's statement that we are spending the 
Medicare Trust Fund on defense, or anything else, was 
incorrect. You are not spending the Trust Fund. You are 
spending the excess in cash flow that comes into the Trustees.
    And we have to spend that somewhere. You can't stuff it 
under a mattress. So you can pay down debt, you can spend it, 
or you can cut taxes. We are going to do probably some of each.
    Chairman Thomas. Actually, this entire discussion is an 
accounting discussion since there is no Trust Fund; it is 
merely an entry. And hopefully we have made accounting far more 
exciting than most people think it is, and we await our 
friend's return visit to us.
    I do think these discussions are important because frankly 
perceptions govern; and some people's perception of what we are 
doing hopefully is misguided. Because if they understand 
exactly what we are doing, but make the accusations that they 
are, it makes it much more difficult to resolve the problems 
that already are extremely difficult to resolve for this 
society. But we are going to resolve them.
    I want to thank both of you for your time and more 
importantly for your devotion and expertise in working with us 
to make sure that the Social Security, the Medicare Trust Funds 
are sound and will be sounder.
    This hearing is adjourned.
    [Whereupon, at 2:05 p.m., the hearing was adjourned.]
    [Submission for the record follows:]
          Statement of Advanced Medical Technology Association
    AdvaMed, is pleased to present this testimony on behalf of the 
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serve. As the largest medical technology trade association in the 
world, AdvaMed is committed to ensuring that patients have timely 
access to the advanced medical technologies that can save and improve 
their lives and help reduce health care costs.
    AdvaMed represents more than 800 medical device, diagnostic 
products, and health information systems manufacturers of all sizes, 
from small start-ups to global leaders. AdvaMed member firms provide 
nearly 90 percent of the $68 billion of health care technology products 
purchased annually in the U.S. and nearly 50 percent of the $159 
billion purchased annually around the world.
    AdvaMed shares the concerns of the Members of Congress, the 
Administration and seniors across the country about the financial state 
of the Medicare program. It is critically important to take steps to 
make sure this program remains strong for today's seniors and people 
with disabilities and future generations as well.
    The annual Medicare Trustees' Report released yesterday offers 
important insights to Congress as it addresses this issue. However, the 
long-term cost increases projected in this report tell only part of the 
story and must not be used by Medicare as a pretense for delaying or 
denying patients' access to lifesaving and life-improving advances in 
medicine.
    In fact, AdvaMed believes that medical technology offers the 
solution to rising health care costs. As such, ensuring timely adoption 
of medical advances by Medicare is crucial not only for the health of 
America's seniors and people with disabilities covered by the program, 
but for the fiscal health of the program itself.
    America is on the cusp of a revolution in medical technology. 
Through advances in technology we can detect diseases earlier when they 
are easier and less costly to treat, provide more effective and less 
invasive treatment options, reduce recovery times and enable people to 
return to work much more quickly.
    The Trustees' Report does not account for this revolution in 
medical technology. As a result, it overlooks a paradigm shift that is 
already taking place to a New Health Economy. Medical technology has 
advanced to the point where it is fundamentally transforming our health 
care system in ways that improve quality and reduce costs.
    For example:
     Angioplasty and other minimally invasive heart procedures, 
for example, have greatly reduced the need for riskier, more expensive 
heart bypass procedures. An angioplasty procedure costs $20,960 on 
average, compared to $49,160 for open-heart surgery. Surgeons can 
complete an angioplasty procedure in 90 minutes compared to 2-4 hours 
for open bypass surgery. Patients can leave the hospital in one day 
instead of 5-6 days, and recovery only takes one week rather than 4-6 
weeks for bypass.
     Total knee replacement produces an average one-time health 
care cost savings of $50,000 per patient; a savings of $11.5 billion in 
1994 alone, according to the American Academy of Orthopedic Surgeons 
(AAOS).
     Three types of laparoscopic surgery have generated 
approximately $1.9 billion annually in increased productivity by 
enabling people to return to work more quickly, according to a study by 
DRI-McGraw Hill.
    A story in Sunday's Washington Post highlights another of the many 
advances transforming health care delivery: a health care information 
system that alerts doctors at Brigham and Women's hospital to 
potentially dangerous medical decisions. The system has cut the 
medication error rate at Brigham by 86% compared to 10 years ago.
    Information systems like these can dramatically improve the safety 
and efficiency of health care delivery and help reduce health care 
costs. Automation in the insurance industry alone could save an 
estimated $20 billion. That is why both the President's Information 
Technology Advisory Committee and the Institute of Medicine in its 
recent report on health care quality have stressed the need for a new 
health information infrastructure.
    Steady declines in mortality rates, medical procedure times, 
hospital stays and patient recovery times all illustrate the emergence 
of the New Health Economy. Gains in workforce productivity and 
accelerating declines in disability rates point to this shift as well.
    In order to reap these benefits, advanced medical technologies must 
be rapidly assimilated into the health care system. The Institute of 
Medicine's recent report, ``Crossing the Quality Chasm,'' underscored 
this point, stating: ``Narrowing the quality chasm will make it 
possible to bring the benefits of medical science and technology to all 
Americans in every community . . . and this in turn will mean less pain 
and suffering, less disability, greater longevity, and a more 
productive workforce.''
    In a statement yesterday on the Trustees' Report, Treasury 
Secretary and Medicare Trustee Paul O'Neill cited this IOM report in 
highlighting ``tremendous potential for improvements in the health care 
sector.'' AdvaMed shares this concern, as well as Secretary O'Neill's 
understanding of the importance of adopting new technologies and 
medical practices that can transform the health care sector by 
improving quality and reducing costs. As Chairman of Alcoa, O'Neill 
championed the adoption of so-called ``disruptive'' technologies as the 
solution to rising health care costs. In a recent Forbes article, 
O'Neill stated: ``It is possible to improve the health and medical care 
value equation by as much as 50%.''
    AdvaMed also applauds HHS Secretary Thompson for pointing out the 
need to improve health care quality, stating in March 7 testimony that 
his department's goal is ``to build a healthier America by improving 
the quality of health care, the quality of life for all Americans and 
reduce health care costs.'' Secretary Thompson recognized during his 
confirmation hearings that ``Medicare is failing to meet the needs of 
our seniors and is not allowing them to reap the benefits of the 
tremendous advances in medicine and technology we are witnessing 
today.'' AdvaMed looks forward to working with the Secretary to achieve 
his department's goal. One important step towards improved health care 
quality is reducing Medicare delays in the adoption of advanced medical 
technology.
    The steps Congress took in the Balanced Budget Refinement Act of 
1999 (BBRA) and the Benefits Improvement and Protection Act (BIPA) of 
2000 will help ensure that advanced medical technologies are adopted by 
Medicare in a timely manner. The technology access provisions in these 
bills help move us into the New Health Economy of higher quality and 
lower costs.
    These bills made important changes to streamline HCFA's coverage, 
coding and payment procedures, including: requiring HCFA to report 
annually to Congress on the timeliness of its coverage, coding and 
payment decisions; streamlining the Medicare Coverage Advisory 
Committee process; establishing transitional payment mechanisms to 
support adoption of breakthrough technologies used in the hospital 
inpatient and outpatient settings; and reducing delays in establishing 
codes and reimbursement rates for new diagnostic tests.
    HCFA should rapidly and fully implement these important measures to 
improve health care quality by eliminating roadblocks to patient access 
to innovative medical technologies. The agency and Congress should 
examine additional steps that should be taken to ensure that Medicare 
patients have access to 21st century medicine.
    The BBRA and BIPA legislation enacted by Congress help move HCFA 
toward a leadership role in supporting timely patient access to 
quality-enhancing innovations. AdvaMed believes it is critically 
important for the agency to take the lead in this area, and can do so 
by achieving the following goals:
     Eliminate delays in coverage coding and payment for new 
technologies. BBRA and BIPA legislation will help accomplish this goal. 
HCFA and Congress should take additional steps to reduce access delays, 
such as issuing codes on quarterly basis and establishing coverage 
requirements that recognize broad range of reliable data that can 
support coverage decisions.
     Establish payment incentives that support quality health 
care. BBRA and BIPA help eliminate payment policies that discriminate 
against advances in care by systematically under-reimbursing for them 
for two to three years after they are introduced.
     Support creation of an integrated health care information 
infrastructure.
     Give patients more control over health care decisions. 
HCFA should set coverage policies that give doctors and patients 
flexibility to make their own medical decisions.
     Develop policies and methodologies that recognize the full 
benefits of medical technology.
    Again, AdvaMed applauds Congress for recognizing the value of 
technology in improving the quality and efficiency of the health care 
system, and taking steps to reduce the barriers patients face to 
accessing these innovations. Recent reforms continue to improve the 
system and AdvaMed encourages additional changes to make coverage, 
coding and payment decisions more predictable, transparent and timely.
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