Testimony 

Before the Committee on Ways and 

Means, House of Representatives 

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 11:00 a.m. 

Wednesday, April 9, 2003 MEDICARE

Observations on Program 

Sustainability and Strategies 

to Control Spending on Any 

Proposed Drug Benefit 

Statement of David M. Walker 

Comptroller General of the United States 

GAO-03-650T 
The recent publication of the 2003 Medicare Trustees’ annual report reminds 

us that Medicare in its current condition—without a prescription drug 

benefit—is not sustainable. At the same time there are growing concerns 

about gaps in the Medicare program, most notably the lack of outpatient 

prescription drug coverage, that may leave Medicare’s most vulnerable 

beneficiaries with high out-of-pocket costs. 

The Hospital Insurance (HI) portion of Medicare faces a huge projected 

financial imbalance that has worsened significantly in the past year. Under 

the Trustees’ 2003 intermediate estimates, the present value of HI’s actuarial 

deficit is $6.2 trillion—a 20 percent increase over the prior year. Beginning 

in 2013, HI’s program outlays are expected to begin to exceed program tax 

revenues, putting increased pressure on the federal budget to raise the 

resources necessary to meet program costs. In addition, Supplementary 

Medical Insurance is projected to place an increasing burden on taxpayers 

and beneficiaries. 

 

GAO’s long-term budget simulations show that, absent meaningful 

entitlement reforms, demographic trends and rising health care spending 

will drive escalating federal deficits and debt. Neither slowing the growth of 

discretionary spending nor allowing the 2001 tax reductions to sunset will 

eliminate the imbalance. While additional economic growth will help ease 

our burden, the potential fiscal gap is too great to grow our way out of the 

problem. 

The application of basic health insurance principles to any proposed benefit 

could help moderate the cost for both beneficiaries and taxpayers. These 

include beneficiary protections against the risk of catastrophic medical 

expenses and premium contributions and cost-sharing arrangements that 

encourage beneficiaries to be cost conscious. 

The private sector’s use of PBMs to control drug expenditures may be 

instructive for Medicare, but the program’s unique role and nature may 

moderate how such entities would be used and the potential efficiency gains 

afforded in attempting to transfer PBM-like strategies to Medicare. 

The House Committee on Ways and 

Means is holding a hearing on 

modernizing Medicare and 

integrating prescription drugs into 

the program. 

There are growing concerns about 

gaps in the Medicare program, 

most notably the lack of outpatient 

prescription drug coverage, which 

may leave Medicare’s most 

vulnerable beneficiaries with high 

out-of-pocket costs. 

At the same time, Medicare already 

faces a huge projected financial 

imbalance that has worsened 

significantly in the past year. 

This statement discusses the 

challenges of adding a drug benefit 

to Medicare in the context of the 

program’s current and projected 

financial condition. It also 

examines program design issues to 

be considered with respect to 

administering any proposed drug 

benefit. Specifically, it discusses 

how private sector health plans 

have used entities called pharmacy 

benefit managers (PBM) to control 

drug benefit expenditures. 

www.gao.gov/cgi-bin/getrpt?GAO-03-650T.

To view the full statement, click on the link 

above. For more information, contact William 

J. Scanlon at 202 512-7114. 

Highlights of GAO-03-650T, a testimony 

before the Committee on Ways and 

Means, House of Representatives 

April 9, 2003

MEDICARE

Observations on Program Sustainability 

and Strategies to Control Spending for 

Any Proposed Drug Benefit 
Page 1 GAO-03-650T 

Mr. Chairman and Members of the Committee: 

I am pleased to be here today as you discuss issues related to an 

outpatient prescription drug benefit for Medicare beneficiaries. There are 

growing concerns about gaps in the Medicare program, most notably the 

lack of outpatient prescription drug coverage, which may leave Medicare’s 

most vulnerable beneficiaries with high out-of-pocket costs. Recent 

estimates suggest that, at any point in time, about a third of Medicare 

beneficiaries lack prescription drug coverage. The rest have at least some 

drug coverage through various sources—most commonly employersponsored health plans—although recent evidence indicates that this 

coverage is beginning to erode. 

At the same time, however, the recent publication of the 2003 Trustees’ 

annual report reminds us that Medicare in its current condition—with no 

prescription drug benefit—already faces a huge projected financial 

imbalance that has worsened significantly in the past year. Furthermore, 

as the Medicare Trustees made clear over 10 years ago, the current 

Medicare program is not fiscally sustainable in its present form. 

In 10 years, Hospital Insurance (HI) Trust Fund outlays will begin to 

exceed tax receipts, and by 2026 the HI trust fund will be exhausted. 

However, trust fund insolvency does not mean the program will cease to 

exist; program tax revenues will continue to cover a portion of projected 

annual expenditures.1

The huge fiscal pressures created by the retirement of the baby boom 

generation and rising health care costs are on our 10-year budget horizon. 

Between now and 2035, the number of people age 65 and older will double. 

Federal health and retirement spending are expected to surge as people 

live longer and spend more time in retirement. In addition, advances in 

medical technology are likely to keep pushing up the cost of providing 

health care. Moreover, the baby boomers will have fewer workers to 

support them in retirement. 

We must also remember that Medicare has grown substantially as a 

percent of the federal budget since its enactment in 1965. In addition, it is 

 1

Under the Trustees 2003 intermediate assumptions, revenues from the HI payroll tax and 

the taxation of certain Social Security benefits are initially projected to cover about threefourths of projected expenditures once the trust fund is exhausted. This ratio, however, is 

projected to decline rapidly. 
Page 2 GAO-03-650T 

expected to represent an increasing percentage of the federal budget in 

the years ahead. After a brief slowdown in the late 1990s, Medicare 

spending growth has recently accelerated. In fiscal year 2001, growth in 

program spending reached nearly 9 percent, with spending on certain 

services increasing much more rapidly. For example, spending for home 

health services grew about 30 percent and spending for skilled nursing 

facility care grew slightly over 20 percent. For the first 5 months of fiscal 

year 2003, Medicare spending has been growing at 7.6 percent.2

A significant problem that hobbles Medicare’s ability to achieve a 

desirable degree of efficiency is that the program too often pays overly 

generous rates for certain services and products. For example, for certain 

services, our recent work has shown substantially higher Medicare 

payments relative to providers’ costs—as much as 35 percent higher for 

home health care and 19 percent higher for skilled nursing facility care.3

Similarly, Medicare has overpaid for various medical products. In 2001, we 

reported that Medicare paid over $1 billion more than other purchasers in 

2000 for certain outpatient drugs that the program covers. Excessive 

payments hurt not only the taxpayers but also the program’s beneficiaries 

or their supplemental insurers, as beneficiaries are generally liable for 

copayments equal to 20 percent of Medicare’s approved fee. For certain 

outpatient drugs, Medicare’s payments to providers were so high that the 

beneficiaries’ copayments exceeded the price at which providers could 

buy the drugs. The Centers for Medicare & Medicaid Services (CMS) has 

not acted on our recommendation that Medicare establish payment levels 

for drugs more closely related to actual market transaction costs, using 

information available to other public programs that pay at lower rates.4

In the face of these short-term and long-term cost pressures, I continue to 

maintain that substantive financing and programmatic reforms are 

necessary to put Medicare on a sustainable footing for the future. These 

fundamental reforms are vital to reducing the program’s growth, which 

threatens to absorb ever-increasing shares of the nation’s budgetary and 

 2

Congressional Budget Office, Monthly Budget Review (Washington, D.C.: Mar. 10, 2003). 

3

See U.S. General Accounting Office, Medicare Home Health Care: Payments to Home 

Health Agencies Are Considerably Higher than Costs, GAO-02-663 (Washington, D.C: 

May 6, 2002) and Skilled Nursing Facilities: Medicare Payments Exceed Costs for Most 

but Not All Facilities, GAO-03-183 (Washington, D.C: Dec. 31, 2002). 

4

U.S. General Accounting Office, Medicare: Payments for Covered Outpatient Drugs 

Exceed Providers’ Costs, GAO-01-1118 (Washington, D.C.: Sept. 21, 2001). 
Page 3 GAO-03-650T 

economic resources. Thus, any proposals to help seniors with the costs of 

prescription drugs would need to be carefully crafted to avoid further 

erosion of the projected financial condition of the Medicare program. 

Stated differently, it will be prudent to adopt a modified Hippocratic oath 

for Medicare reform—namely, any such reform proposals should “do no 

further harm” to Medicare’s already serious long-range financial 

imbalance. 

As you deliberate on ways to modernize Medicare’s benefit package while 

striving for program sustainability, I would like to highlight several key 

considerations: 

• The traditional measure of HI Trust Fund solvency is a misleading gauge of 

Medicare’s financial health. Long before the HI Trust Fund is projected to 

be insolvent, pressures on the rest of the federal budget will grow as HI’s 

projected cash flow turns negative and the gap between program tax 

revenues and expenditures escalates. Moreover, a focus on the financial 

status of HI ignores the increasing burden Supplemental Medical 

Insurance (SMI)—Medicare part B—will place on taxpayers and 

beneficiaries. 

• GAO’s most recent long-term budget simulations continue to show that, 

absent meaningful entitlement reforms, demographic trends and rising 

health care spending will drive escalating federal deficits and debt. To 

obtain budget balance, massive spending cuts, tax increases, or some 

combination of the two would be necessary. Neither slowing the growth of 

discretionary spending nor allowing the 2001 tax reductions to sunset will 

eliminate the imbalance. In addition, while additional economic growth 

will help ease our burden, the potential fiscal gap is too great to grow our 

way out of the problem. 

• Under the huge budgetary pressures that we are sure to face in the coming 

years, we must set priorities so that any benefit expansions are in line with 

available resources. In this regard, the application of basic health 

insurance principles to any proposed benefit could help moderate the cost 

for both beneficiaries and taxpayers. Under these principles, beneficiaries 

receive protections against the risk of catastrophic medical expenses 

while remaining conscious of the cost of care through their premium 

contributions and cost-sharing arrangements. Given our already huge 

Medicare financial imbalance, it is also important that benefit expansion 

proposals include targeting mechanisms to ensure that federal support is 

directed at the beneficiaries with the greatest financial risk. 
Page 4 GAO-03-650T 

• The private sector’s use of entities called pharmacy benefit managers for 

controlling drug expenditures may be instructive for Medicare, but the 

program’s unique role and nature may moderate how these strategies will 

be used and the potential efficiency gains afforded in attempting to 

transfer these strategies to Medicare. 

Today the Medicare program faces a long-range and fundamental financing 

problem driven by known demographic trends and projected escalation of 

health care spending beyond general inflation. The lack of an immediate 

crisis in Medicare financing affects the nature of the challenge, but it does 

not eliminate the need for change. Within the next 10 years, the first baby 

boomers will begin to retire, putting increasing pressure on the federal 

budget. From the perspectives of the program, the federal budget, and the 

economy, Medicare in its present form is not sustainable. Acting sooner 

rather than later would allow changes to be phased in so that the 

individuals who are most likely to be affected, namely younger and future 

workers, will have time to adjust their retirement planning while helping 

to avoid related “expectation gaps.” Since there is considerable confusion 

about Medicare’s current financing arrangements, I would like to begin by 

describing the nature, timing, and extent of the financing problem. 

As you know, Medicare consists of two parts—HI and SMI. HI, which pays 

for inpatient hospital stays, skilled nursing care, hospice, and certain home 

health services, is financed by a payroll tax. Like Social Security, HI has 

always been largely a pay-as-you-go system. SMI, which pays for physician 

and outpatient hospital services, diagnostic tests, and certain other 

medical services, is financed by a combination of general revenues and 

beneficiary premiums. Beneficiary premiums pay for about one-fourth of 

SMI benefits, with the remainder financed by general revenues. These 

complex financing arrangements mean that current workers’ taxes 

Outlook Worsening 

for Medicare’s LongTerm Sustainability 

Demographic Trends and 

Expected Rise in Health 

Care Costs Drive 

Medicare’s Long-Term 

Financing Problem 
Page 5 GAO-03-650T 

primarily pay for current retirees’ benefits except for those financed by 

SMI premiums.5

As a result, the relative numbers of workers and beneficiaries have a major 

impact on Medicare’s financing. The ratio, however, is changing. In the 

future, relatively fewer workers will be available to shoulder Medicare’s 

financial burden. In 2002 there were 4.9 working-age persons (18 to 64 

years) per elderly person, but by 2030, this ratio is projected to decline to 

2.8. For the HI portion of Medicare, in 2002 there were nearly 4 covered 

workers per HI beneficiary. Under their intermediate 2003 estimates, the 

Medicare Trustees project that by 2030 there will be only 2.4 covered 

workers per HI beneficiary. (See fig. 1.) 

Figure 1: Ratio of HI-Covered Workers to Beneficiaries 

Note: Projections based on the intermediate assumptions of The 2003 Annual Report of the Boards of 

Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust 

Funds. 

 5

Another small source of funding derives from the tax treatment of Social Security benefits. 

Under certain circumstances, up to 85 percent of an individual’s or couple’s Social Security 

benefits are subject to income taxes. Under present law, the Old-Age and Survivors 

Insurance (OASI) and Disability Insurance (DI) Trust Funds are credited with the income 

taxes attributable to the taxation of the first 50 percent of OASDI benefit payments. The 

remainder of the income taxes attributable to the taxation of up to 85 percent of OASDI 

benefit payments is credited to the HI Trust Fund. Any other income taxes paid by retirees 

would also help finance the general revenue contribution to SMI. 

4.6

4.1 4.1 4.0

3.7

2.9

2.4 2.3 2.2 2.1 2.0

0

1

2

3

4

5

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070

Workers per HI beneficiary

Source: CMS, Office of the Actuary.
Page 6 GAO-03-650T 

The demographic challenge facing the system has several causes. People 

are retiring early and living longer. As the baby boom generation ages, the 

share of the population age 65 and over will escalate rapidly. A falling 

fertility rate is the other principal factor underlying the growth in the 

elderly’s share of the population. In the 1960s, the fertility rate was an 

average of 3 children per woman. Today it is a little over 2, and by 2030 it 

is expected to fall to 1.95—a rate that is below replacement. The 

combination of the aging of the baby boom generation, increased 

longevity, and a lower fertility rate will drive the elderly as a share of total 

population from today’s 12 percent to almost 20 percent in 2030. 

Taken together, these trends threaten both the financial solvency and 

fiscal sustainability of this important program. Labor force growth will 

continue to decline and by 2025 is expected to be less than a third of what 

it is today. (See fig. 2.) Relatively fewer workers will be available to 

produce the goods and services that all will consume. Without a major 

increase in productivity, low labor force growth will lead to slower growth 

in the economy and slower growth of federal revenues. This in turn will 

only accentuate the overall pressure on the federal budget. This slowing 

labor force growth is not always recognized as part of the Medicare 

debate, but it is expected to affect the ability of the federal budget and the 

economy to sustain Medicare’s projected spending in the coming years. 
Page 7 GAO-03-650T 

Figure 2: Labor Force Growth 

Note: GAO analysis based on the intermediate assumptions of The 2003 Annual Report of the Board 

of Trustees of the Federal Old-Age and Survivors Insurance and the Federal Disability Insurance 

Trust Funds. Percentage change is calculated as a centered 5-year moving average. 

The demographic trends I have described will affect both Medicare and 

Social Security, but Medicare presents a much greater, more complex, and 

more urgent challenge. Unlike Social Security, Medicare spending growth 

rates reflect not only a burgeoning beneficiary population, but also the 

escalation of health care costs at rates well exceeding general rates of 

inflation. The growth of medical technology has contributed to increases 

in the number and quality of health care services. Moreover, the actual 

costs of health care consumption are not transparent. Third-party payers 

largely insulate covered consumers from the cost of health care decisions. 

These factors and others contribute to making Medicare a greater and 

more complex fiscal challenge than Social Security. 

Current projections of future HI income and outlays illustrate the timing 

and severity of Medicare’s fiscal challenge. Today, the HI Trust Fund takes 

in more in taxes than it spends. Largely because of the known 

demographic trends I have described, this situation will change. Under the 

Trustees’ 2003 intermediate assumptions, program outlays are expected to 

begin to exceed program tax revenues in 2013. (See fig. 3.) To finance 

these cash deficits, HI will need to draw on the special-issue Treasury 

securities acquired during the years of cash surpluses. For HI to “redeem” 

HI’s Trust Fund Faces 

Cash Flow Problems Long 

before the HI Trust Fund Is 

Projected to Be Insolvent 

0

1

2

3

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Percentage change (5-yr moving average)

Source: Social Security Administration, Office of the Chief Actuary, and GAO.
Page 8 GAO-03-650T 

its securities, the government will need to obtain cash through some 

combination of increased taxes, spending cuts, and/or increased 

borrowing from the public (or, if the unified budget is in surplus, less debt 

reduction than would otherwise have been the case). Neither the decline 

in the cash surpluses nor the cash deficits will affect the payment of 

benefits, but the negative cash flow will place increased pressure on the 

federal budget to raise the resources necessary to meet the program’s 

ongoing costs. This pressure will only increase when Social Security also 

experiences negative cash flow and joins HI as a net claimant on the rest 

of the budget.6

Figure 3: Medicare’s HI Trust Fund Faces Cash Deficits as Baby Boomers Retire 

Note: GAO analysis based on the intermediate assumptions of The 2003 Annual Report of the 

Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance 

Trust Funds. 

The gap between HI income and costs shows the severity of HI’s financing 

problem over the longer term. This gap can also be expressed relative to 

taxable payroll (the HI Trust Fund’s funding base) over a 75-year period. 

 6

Under the Trustees’ intermediate 2003 projections, this will occur for Social Security 

(OASDI) in 2018. 

-400

-300

-200

-100

0

100

200

2000 2005 2010 2015 2020 2025 2030 2035 2040

Cash surplus

Cash deficit

Billions of 2003 dollars

Source: CMS, Office of the Actuary, and GAO.

Medicare HI

cash deficit

2013
Page 9 GAO-03-650T 

This year, under the Trustees’ 2003 intermediate estimates, the 75-year 

actuarial deficit is projected to be 2.40 percent of taxable payroll—a 

significant increase from last year’s projected deficit of 2.02 percent. This 

means that to bring the HI Trust Fund into balance over the 75-year 

period, either program outlays would have to be immediately reduced by 

42 percent or program income immediately increased by 71 percent, or 

some combination of the two. These estimates of what it would take to 

achieve 75-year trust fund solvency understate the extent of the problem 

because the program’s financial imbalance gets worse in the 76th and 

subsequent years. As each year passes, we drop a positive year and add a 

much bigger deficit year. 

The projected exhaustion date of the HI Trust Fund is a commonly used 

indicator of HI’s financial condition. Under the Trustees’ 2003 intermediate 

estimates, the HI Trust Fund is projected to exhaust its assets in 2026. This 

solvency indicator provides information about HI’s financial condition, but 

it is not an adequate measure of Medicare’s sustainability for several 

reasons. In fact, the solvency measure can be misleading and can serve to 

give a false sense of security as to Medicare’s true financial condition. 

Specifically, HI Trust Fund balances do not provide meaningful 

information on the government’s fiscal capacity to pay benefits when 

program cash inflows fall below program outlays. As I have described, the 

government would need to come up with cash from other sources to pay 

for benefits once outlays exceeded program tax income. 

In addition, the HI Trust Fund measure provides no information on SMI. 

SMI’s expenditures, which currently account for about 43 percent of total 

Medicare spending, are projected to grow even faster than those of HI in 

the near future. Moreover, Medicare’s complex structure and financing 

arrangements mean that a shift of expenditures from HI to SMI can extend 

the solvency of the HI Trust Fund, creating the appearance of an 

improvement in the program’s financial condition. For example, the 

Balanced Budget Act of 1997 modified the home health benefit, which 

resulted in shifting a portion of home health spending from the HI Trust 

Fund to SMI. Although this shift extended HI Trust Fund solvency, it 

increased the draw on general revenues and beneficiary SMI premiums 

while generating little net savings. 

Ultimately, the critical question is not how much a trust fund has in assets, 

but whether the government as a whole and the economy can afford the 

promised benefits now and in the future and at what cost to other claims 

on available resources. To better monitor and communicate changes in 

future total program spending, new measures of Medicare’s sustainability 
Page 10 GAO-03-650T 

are needed. As program changes are made, a continued need will exist for 

measures of program sustainability that can signal potential future fiscal 

imbalance. Such measures might include the percentage of program 

funding provided by general revenues, the percentage of total federal 

revenues or gross domestic product (GDP) devoted to Medicare, or 

program spending per enrollee. As such measures are developed, 

questions would need to be asked about actions to be taken if projections 

showed that program expenditures would exceed the chosen level. 

Taken together, Medicare’s HI and SMI expenditures are expected to 

increase dramatically, rising from about 12 percent of federal revenues in 

2002 to more than one-quarter by midcentury. The budgetary challenge 

posed by the growth in Medicare becomes even more significant in 

combination with the expected growth in Medicaid and Social Security 

spending. As shown in figure 4, Medicare, Medicaid, and Social Security 

have already grown from 13 percent of federal spending in 1962 before 

Medicare and Medicaid were created to 42 percent in 2002. 

Figure 4: Composition of Federal Spending by Budget Function, 1962, 1982, and 2002 

Absent Reform of 

Medicare and Other 

Entitlements for the 

Elderly, Budgetary 

Flexibility Will Disappear 

1962

31%

50%

13%

6%

Defense

Social Security

Medicare and Medicaid

Net interest

All other spending

1982

9%

34%

25%

21%

11%

19%

32%

17%

23%

9%

2002

Source: Budget of the United States Government, FY 2004, Office of Management and Budget.
Page 11 GAO-03-650T 

This growth in spending on federal entitlements for retirees will become 

increasingly unsustainable over the longer term, compounding an ongoing 

decline in budgetary flexibility. Over the past few decades, spending on 

mandatory programs has consumed an ever-increasing share of the federal 

budget.7

 In 1962, prior to the creation of the Medicare and Medicaid 

programs, spending for mandatory programs plus net interest accounted 

for about 32 percent of total federal spending. By 2002, this share had 

almost doubled to approximately 63 percent of the budget. (See fig. 5.) 

Figure 5: Federal Spending for Mandatory and Discretionary Programs, Fiscal Years 1962, 1982, and 2002 

In much of the past decade, reductions in defense spending helped 

accommodate the growth in these entitlement programs. However, even 

before the terrorist attacks of September 11, 2001, this ceased to be a 

viable option. Indeed, spending on defense and homeland security will 

grow as we seek to combat new threats to our nation’s security. 

 7

“Mandatory spending” refers to outlays for entitlement programs such as food stamps, 

Medicare, and veterans’ pensions; payment of interest on the public debt; and outlays for 

certain nonentitlement programs such as payments to states from Forest Service receipts. 

In 2002 Social Security, Medicare, and Medicaid accounted for over 71 percent of 

mandatory spending. 

1962

6%

68%

26%

Discretionary

Mandatory

Net interest

1982

45%

44%

11%

2002

9%

37%

54%

Source: Budget of the United States Government: Fiscal Year 2004, Office of Management and Budget.
Page 12 GAO-03-650T 

GAO prepares long-term budget simulations that seek to illustrate the 

likely fiscal consequences of the coming demographic tidal wave and 

rising health care costs. These simulations continue to show that to move 

into the future with no changes in federal retirement and health programs 

is to envision a very different role for the federal government. Assuming, 

for example, that the tax reductions enacted in 2001 do not sunset and 

discretionary spending keeps pace with the economy, by midcentury 

federal revenues may not even be adequate to pay Social Security and 

interest on the federal debt. Spending for the current Medicare program—

without any additional new benefits—is projected to account for more 

than one-quarter of all federal revenues. To obtain budget balance, 

massive spending cuts, tax increases, or some combination of the two 

would be necessary. (See fig. 6.) Neither slowing the growth of 

discretionary spending nor allowing the tax reductions to sunset 

eliminates the imbalance. In addition, while additional economic growth 

would help ease our burden, the projected fiscal gap is too great for us to 

grow our way out of the problem. 
Page 13 GAO-03-650T 

Figure 6: Composition of Spending as a Share of GDP Assuming Discretionary 

Spending Grows with GDP after 2003 and the 2001 Tax Cuts Do Not Sunset 

Note: Assumes currently scheduled Social Security benefits are paid in full throughout the simulation 

period. Social Security and Medicare projections are based on the Trustees’ 2003 intermediate 

assumptions. 

Indeed, long-term budgetary flexibility is about more than Social Security 

and Medicare. While these programs dominate the long-term outlook, they 

are not the only federal programs or activities that bind the future. The 

federal government undertakes a wide range of programs, responsibilities, 

and activities that obligate it to future spending or create an expectation 

for spending. A recent GAO report describes the range and measurement 

of such fiscal exposures—from explicit liabilities such as environmental 

cleanup requirements to the more implicit obligations presented by lifecycle costs of capital acquisition or disaster assistance.8

 Making 

government fit the challenges of the future will require not only dealing 

 8

U.S. General Accounting Office, Fiscal Exposures: Improving the Budgetary Focus on 

Long-Term Costs and Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003). 

0

10

20

30

40

50

2000 2015 2030 2050

Fiscal year

Percentage of GDP

Net interest

Social Security

Medicare and Medicaid

All other spending

Revenue

Source: GAO’s March 2003 analysis.
Page 14 GAO-03-650T 

with the drivers—such as entitlements for the elderly—but also looking at 

the range of other federal activities. A fundamental review of what the 

federal government does and how it does it will be needed. This involves 

looking at the base of all major spending and tax policies to assess their 

appropriateness, priority, affordability, and sustainability in the years 

ahead. 

At the same time, it is important to look beyond the federal budget to the 

economy as a whole. Figure 7 shows the total future draw on the economy 

represented by Medicare, Medicaid, and Social Security. Under the 2003 

Trustees’ intermediate estimates and the Congressional Budget Office’s 

(CBO) most recent long-term Medicaid estimates, spending for these 

entitlement programs combined will grow to 14 percent of GDP in 2030 

from today’s 8.4 percent. Taken together, Social Security, Medicare, and 

Medicaid represent an unsustainable burden on future generations. 

Figure 7: Social Security, Medicare, and Medicaid Spending as a Percentage of GDP 

Note: Projections based on the intermediate assumptions of the 2003 Trustees’ Reports, CBO’s 

March 2003 short-term Medicaid estimates, and CBO’s June 2002 Medicaid long-term projections 

under midrange assumptions. 

Although real incomes are projected to continue to rise, they are expected 

to grow more slowly than has historically been the case. At the same time, 

the demographic trends and projected rates of growth in health care 

spending I have described will mean rapid growth in entitlement spending. 

Medicare Is Projected 

to Absorb EverIncreasing Shares of 

the Economy 

0

5

10

15

20

25

2000 2010 2020 2030 2040 2050 2060 2070

Percentage of GDP

Social Security

Medicaid

Medicare

Source: CMS, Office of the Actuary, SSA, Office of the Actuary, CBO and GAO.
Page 15 GAO-03-650T 

Taken together, these projections raise serious questions about the 

capacity of the relatively smaller number of future workers to absorb the 

rapidly escalating costs of these programs. 

As HI trust fund assets are redeemed to pay Medicare benefits and SMI 

expenditures continue to grow, the program will constitute a claim on real 

resources in the future. As a result, taking action now to increase the 

future pool of resources is important. To echo Federal Reserve Chairman 

Alan Greenspan, the crucial issue of saving in our economy relates to our 

ability to build an adequate capital stock to produce enough goods and 

services in the future to accommodate both retirees and workers in the 

future.9

 The most direct way the federal government can raise national 

saving is by increasing government saving; that is, as the economy returns 

to a higher growth path, a balanced fiscal policy that recognizes our longterm challenges can help provide a strong foundation for economic growth 

and can enhance our future budgetary flexibility. It is my hope that we will 

think about the unprecedented challenge facing future generations in our 

aging society. Putting Medicare on a sustainable path for the future would 

help fulfill this generation’s stewardship responsibility to succeeding 

generations. It would also help to preserve some capacity for future 

generations to make their own choices for what role they want the federal 

government to play. 

As with Social Security, both sustainability and solvency considerations 

drive us to address Medicare’s fiscal challenges sooner rather than later. 

HI Trust Fund exhaustion may be more than 20 years away, but the 

squeeze on the federal budget will begin as the baby boom generation 

begins to retire. This will begin as early as 2008, when the leading edge of 

the baby boom generation becomes eligible for early retirement.10 CBO’s 

current 10-year budget and economic outlook reflects this. CBO projects 

that economic growth will slow from an average of 3.2 percent a year from 

2005 through 2008 to 2.7 percent from 2009 through 2013, reflecting slower 

labor force growth. At the same time, annual rates of growth in entitlement 

spending will begin to rise. Annual growth in Social Security outlays is 

projected to accelerate from 5.2 percent in 2007 to 6.6 percent in 2013. 

Annual growth in Medicare enrollees is expected to accelerate from 1.1 

 9

Testimony before the Senate Committee on Banking, Housing, and Urban Affairs, July 24, 

2001. 

10In 2008, the first baby boomers will reach age 62 and become eligible for Social Security 

benefits; in 2011, they will reach age 65 and become eligible for Medicare benefits. 
Page 16 GAO-03-650T 

percent today to 2.9 percent in 2013. Acting sooner rather than later is 

essential to ease future fiscal pressures and also provide a more 

reasonable planning horizon for future retirees. We are now at a critical 

juncture. In less than a decade, the profound demographic shift that is a 

certainty will have begun. 

Despite a common awareness of Medicare’s current and future fiscal 

plight, pressure has been building to address recognized gaps in Medicare 

coverage, especially the lack of a prescription drug benefit and protection 

against financially devastating medical costs. Filling these gaps could add 

significant expenses to an already fiscally overburdened program. Under 

the Trustees’ 2003 intermediate assumptions, the present value of HI’s 

actuarial deficit is $6.2 trillion, a 20-percent increase from the prior year.11

This difficult situation argues for tackling the greatest needs first and for 

making any benefit additions part of a larger structural reform effort. 

The Medicare benefit package, largely designed in 1965, provides virtually 

no outpatient drug coverage. Beneficiaries may fill this coverage gap in 

various ways. According to the Medicare Current Beneficiary Survey, 

nearly two-thirds of Medicare beneficiaries had some form of drug 

coverage from a supplemental insurance policy, health plan, or public 

program at some point during 1999. All beneficiaries have the option to 

purchase supplemental policies—Medigap—when they first become 

eligible for Medicare at age 65. Those policies that include drug coverage 

tend to be expensive and provide only limited benefits. Some beneficiaries 

have access to coverage through employer-sponsored policies or private 

health plans that contract to serve Medicare beneficiaries. In recent years, 

coverage through these sources has become more expensive and less 

widely available. Beneficiaries whose incomes fall below certain 

thresholds may qualify for Medicaid or other public programs. More than 

one-third may lack drug coverage altogether. 

In recent years, prescription drug expenditures have grown substantially, 

both in total and as a share of all heath care outlays. Prescription drug 

spending grew an average of 15.9 percent per year from 1996 to 2001, more 

 11This estimate represents the present value of HI’s future expenditures less future tax 

income, taking into account the amount of HI trust fund assets at hand at the beginning of 

the projection period and adjusting for the ending target trust fund balance. Excluding the 

ending target trust fund balance, HI’s unfunded obligation is estimated to be $5.9 trillion 

over the 75-year period under the Trustees’ 2003 intermediate assumptions. 

As Bleak Fiscal 

Future Looms, Efforts 

to Address Medicare 

Coverage Gaps Are 

Being Considered 
Page 17 GAO-03-650T 

than double the 6.5 percent average growth rate for health care 

expenditures overall. (See table 1.) As a result, prescription drugs account 

for a growing share of health care spending, rising from 6.5 percent in 1996 

to 9.9 percent in 2001. By 2012, prescription drug expenditures are 

expected to account for almost 15 percent of total health expenditures. 

Table 1: National Expenditures for Prescription Drugs and Health Care, 1996 to 2001 

Year 

Prescription 

drug 

expenditures (in 

billions)

Annual growth 

in prescription 

drug 

expenditures 

from previous 

year (percent)

Annual growth in 

health care 

expenditures 

from previous 

year (percent)

2001 $140.6 15.4 8.7

2000 121.8 17.3 6.9

1999 103.9 19.2 5.7

1998 87.2 15.1 5.4

1997 75.7 12.8 4.9

1996 67.2 10.5 5.0

Average annual growth from 

1996 through 2001 15.9 6.5

Source: CMS, Office of the Actuary. 

In 2002, CBO projected that the average Medicare beneficiary would use 

$2,440 worth of prescription drugs in 2003. This is a substantial amount 

considering that some beneficiaries lack any drug coverage and others 

may have less coverage than in previous years. Moreover, significant 

numbers of beneficiaries have drug expenses much higher than those of 

the average beneficiary. CBO also estimated that, in 2005, 12 percent of 

Medicare beneficiaries would have expenditures above $6,000. 

In focusing on the need for prescription drug coverage, we should not 

forget that Medicare does not provide complete protection from 

catastrophic losses. Under Medicare, beneficiaries have no limit on their 

out-of-pocket costs attributable to cost sharing. The average beneficiary 

who obtained services had a total liability for Medicare-covered services 

of $1,700, consisting of $1,154 in Medicare copayments and deductibles in 

addition to the $546 in annual part B premiums in 1999, the most recent 

year for which data are available on the distribution of these costs. For 

beneficiaries with extensive health care needs, the burden can be much 

higher. In 1999, about 1 million beneficiaries were liable for more than 

$5,000, and about 260,000 were liable for more than $10,000 for covered 

services. In contrast, employer-sponsored health plans for active workers 
Page 18 GAO-03-650T 

typically limited maximum annual out-of-pocket costs for covered services 

to less than $2,000 per year for single coverage.12

Recently, several proposals have been made to add a prescription drug 

benefit to the Medicare program. While different in scope and detail, the 

proposals have certain features in common—including use of a third-party 

entity to administer the new drug benefit. The remainder of my remarks 

will focus on the lessons learned from our work regarding the private 

sector’s use of such an entity to manage the drug benefits of insurers’ 

policyholders and health plans’ enrollees. 

Some proposals to add a Medicare outpatient prescription drug benefit 

look to private sector strategies as a means to administer a drug benefit 

and control costs. Most employer-sponsored health plans contract with 

private entities, known as pharmacy benefit managers (PBM), to 

administer their prescription drug benefits, and those that do not contract 

with PBMs may have units in their organizations that serve the same 

administrative purpose. Typically, on behalf of the health plans, PBMs 

negotiate drug prices with pharmacies, negotiate rebates with drug 

manufacturers, process drug claims, operate mail-order pharmacies, and 

employ various cost-control techniques, such as formulary management 

and drug utilization reviews. In 2001, nearly 200 million Americans had 

their prescription drug benefits administered through PBMs. This year, we 

reported on the use of PBMs by health plans in the Federal Employees’ 

Health Benefits Program (FEHBP).13 In considering the application of 

these findings to Medicare, we are reminded that Medicare’s unique role 

and nature may temper how the strategies and potential efficiency gains 

afforded by private sector PBMs may be transferred to benefit the 

program. 

 12The Kaiser Family Foundation and Health Research and Education Trust, Employer 

Health Benefits: 2000 Annual Survey (Menlo Park, Calif. and Chicago: 2000). 

13U.S. General Accounting Office, Federal Employees’ Health Benefits: Effects of Using 

Pharmacy Benefit Managers on Health Plans, Enrollees, and Pharmacies, GAO-03-196

(Washington, D.C.: Jan. 10, 2003). FEHBP covered about 8.3 million federal employees, 

retirees, and their dependents as of July 2002, and the three FEHBP plans we reviewed 

accounted for about 55 percent of FEHBP enrollment. The FEHBP plans and PBMs we 

reviewed were Blue Cross and Blue Shield, which contracted with AdvancePCS for retail 

pharmacy services and Medco Health Solutions for mail-order services; Government 

Employees Hospital Association, which contracted with Medco Health Solutions; and 

PacifiCare of California, which contracted with Prescription Solutions, another subsidiary 

of PacifiCare Health Systems. 

Private Sector 

Strategies for 

Controlling Drug 

Expenditures May Be 

Instructive for 

Medicare 
Page 19 GAO-03-650T 

PBMs use purchasing volume to leverage their negotiations with 

pharmacies and drug manufacturers in seeking favorable prices in the 

form of discounts, rebates, or other advantages. Through negotiations, 

PBMs create networks of participating retail pharmacies, promising the 

pharmacies a greater volume of customers in exchange for discounted 

prices. PBMs may be able to secure larger discounts by limiting the 

number of network pharmacies. However, smaller networks provide 

beneficiaries fewer choices of retailers, thereby limiting convenient 

access. These are trade-offs health plans must consider in deciding how 

extensive a pharmacy network they want their PBMs to offer beneficiaries. 

The health plans we reviewed in our FEHBP study generally provided 

broad retail pharmacy networks. The average discounted prices PBMs 

obtained for drugs from retail pharmacies were about 18 percent below 

the average prices cash-paying customers without drug coverage would 

have paid for 14 selected widely used brand-name drugs. For 4 selected 

generic drugs, the PBM-negotiated retail pharmacy prices were 47 percent 

below the price paid by cash-paying customers. 

PBMs also use their leverage to negotiate with drug manufacturers for 

rebates. Rebates generally depend on the volume of a manufacturer’s 

products purchased. Health plans and PBMs can add to that volume by 

concentrating beneficiaries’ purchases for particular types of drugs with 

certain manufacturers. Health plans can steer their beneficiaries’ 

purchases to specific drugs through the use of a formulary—that is, a list 

of prescription drugs that health plans encourage physicians to prescribe 

and beneficiaries to use. Determining whether a drug should be on the 

formulary involves clinical evaluations based on a drug’s safety and 

effectiveness, and decisions on whether several drugs are therapeutically 

equivalent.14 Restricting the formulary to fewer drugs within a therapeutic 

class can provide the PBMs with greater leverage in negotiating higher 

rebates because they can help increase the manufacturer’s market share 

for certain drugs. However, a restricted formulary provides beneficiaries 

with fewer preferred drug alternatives and makes the policies governing 

 14A pharmacy and therapeutics committee within the health plan or a PBM typically makes 

decisions about whether to include particular brand-name or generic drugs on the plan’s 

formulary. 

Private Sector Uses PBMs 

to Leverage Price 

Negotiations through 

Volume Purchasing 
Page 20 GAO-03-650T 

coverage of nonformulary drugs or the cost sharing for them critical to 

beneficiaries.15

The FEHBP plans and PBMs we reviewed provided enrollees with 

generally nonrestrictive drug formularies across a broad range of drugs 

and therapeutic categories.16 The manufacturer rebates that the PBMs 

passed through to the FEHBP plans effectively reduced plans’ annual 

spending on prescription drugs by a range of 3 percent to 9 percent. The 

share of rebates PBMs passed through to the FEHBP plans varied subject 

to contractual agreements negotiated between the plans and the PBMs. 

PBMs also assisted the FEHBP plans by providing a less expensive mailorder drug option. Mail-order prices for the FEHBP plans we reviewed 

averaged about 27 percent lower than cash-paying customers would pay 

for the same quantity at retail pharmacies for 14 brand-name drugs and 53 

percent lower for 4 generic drugs. The FEHBP plans generally had lower 

cost-sharing requirements for drugs purchased through mail order, 

particularly for more expensive brand-name drugs or maintenance 

medications for chronic conditions. 

The claims and information processing capabilities PBMs offered also 

helped the FEHBP plans to manage drug costs and monitor quality of care. 

PBMs maintain a centralized database on each enrollee’s drug history that 

can be used to review for potential adverse drug interactions or potentially 

less expensive alternative medications. They also use claims data to 

monitor patterns of patient use, physician prescribing practices, and 

pharmacy dispensing practices. Their systems provide “real-time” claims 

adjudication capabilities that allow a customer’s claim for a drug purchase 

to be approved or denied at the time the pharmacist begins the process of 

filling a prescription. Two plans in our FEHBP study reported savings 

ranging from 6 to 9 percent of the plan’s annual drug spending; the savings 

 15Plans generally encourage the use of formulary drugs by having lower cost sharing or 

requiring special approval of a nonformulary drug. For example, health plans have 

increasingly adopted three-tiered cost-sharing strategies whereby enrollees incur the 

lowest out-of-pocket costs for using generic drugs, higher costs for brand-name drugs on 

the formulary, and the highest costs for brand-name drugs not included on the formulary. 

16Our report compared the FEHBP plans’ formularies to the Department of Veterans Affairs 

(VA) National Formulary, considered by the Institute of Medicine to be not overly 

restrictive. Each FEHBP plan we reviewed included over 90 percent of the drugs listed on 

the VA formulary or therapeutically equivalent alternatives, and included at least one drug 

in 93 percent to 98 percent of the therapeutic classes covered by VA. 
Page 21 GAO-03-650T 

were associated primarily with real-time claims denials preventing early 

drug refills and safety advisories cautioning pharmacists about potential 

adverse interactions or therapy duplications. 

While Medicare’s sheer size would provide it with significant leverage in 

negotiating with pharmacies and drug manufacturers, doing so would 

represent a departure from traditional Medicare. Medicare beneficiaries 

represent less than 15 percent of the population but a disproportionately 

higher share—about 40 percent—of prescription drug spending. However, 

because of Medicare’s design and obligations as a public program, its 

current purchasing strategies vary considerably from those of the private 

sector. 

• Any willing provider. In contrast with private payers’ reliance on 

selective contracting with providers and suppliers, the traditional 

Medicare program has generally allowed any hospital, physician, or other 

provider willing to accept Medicare’s reimbursements and requirements to 

participate in the program. With respect to drug purchasing in particular, 

private plans determine the extent of their enrollees’ access by the choices 

they make about the size of their participating pharmacy network and 

breadth of their drug formulary. Allowing any pharmacy willing to meet 

Medicare’s terms to participate or allowing all therapeutically equivalent 

drugs equal coverage on a formulary would restrict the program’s ability to 

secure advantageous prices. Moreover, health plans and PBMs currently 

make formulary determinations privately. In contrast, Medicare’s policies 

have historically been open to public comment. 

• Administrative rate-setting. Whereas private health plans typically rely 

on price negotiations to establish payment rates, Medicare generally 

establishes payment rates administratively. As discussed earlier, 

Medicare’s rates often exceed market prices and this is the case for some 

of the few outpatient prescription drugs covered by Medicare.17 The 

program’s method of paying for these drugs is prescribed in statute: In 

essence, Medicare pays 95 percent of a drug’s “average wholesale price” 

(AWP). Despite its name, however, AWP is not necessarily a price that 

wholesalers charge and is not based on the price of any actual sale of 

drugs by a manufacturer. AWPs are published by manufacturers in drug 

price compendia, and Medicare bases providers’ payments on these 

published AWPs. Other public and private purchasers typically use the 

 17GAO-01-1118. 

Use of Private-Sector 

Strategies in Medicare 

Would Represent 

Departure from Traditional 

Policies and Practices 
Page 22 GAO-03-650T 

leverage of volume and competition to secure better prices. By statute, 

Medicaid, the nation’s health insurance program for certain low-income 

Americans, is guaranteed manufacturers’ rebates based on prices charged 

other purchasers.18 Certain other public payers can pay at rates set in the 

federal supply schedule, which uses verifiable confidential information on 

the prices drug manufacturers charge their “most favored” private 

customers. Manufacturers agree to these prices, in part, in exchange for 

the right to sell drugs to the more than 40 million Medicaid beneficiaries. 

• Low-budget program administration. Duplicating the type of controls 

PBMs have exercised over private-sector drug benefits would likely 

involve devoting a larger share of total expenditures to administration 

than is spent by Medicare currently. Medicare’s administrative costs 

historically have been extremely low, averaging about 2 percent of the 

cost of the services themselves.19 This level of expenditure may not be 

consistent with the level needed to review the volumes of claims data 

associated with prescription drugs for the elderly or acquire and maintain 

the on-line systems and databases PBMs use to employ such utilization 

controls as real-time claims adjudication. The number of prescriptions for 

Medicare beneficiaries could easily exceed the current number of claims 

for all other services combined, or over 1 billion annually. 

Medicare would undoubtedly need assistance from external entities to 

administer a drug benefit, just as it has used insurers to process claims in 

the traditional program and Medicare+Choice plans to go further by also 

managing services and assuming risk. Decisions about the roles assigned 

an entity or entities and the latitude allowed them in carrying out those 

roles would be critical. These decisions would undoubtedly affect the 

benefit’s value to beneficiaries and the efficiencies and savings secured for 

both beneficiaries and taxpayers. Some of these decisions parallel those 

made by FEHBP plans that I discussed—trade-offs about beneficiaries’ 

interests in broad pharmacy networks and formularies versus potential 

savings. Others stem from the uniqueness of Medicare, its likely 

 18Since the enactment of the Omnibus Budget Reconciliation Act of 1990, drug 

manufacturers are required to provide rebates to state Medicaid programs on outpatient 

drugs based on the “lowest” or “best” prices they charged other purchasers or a minimum 

of 15.1 percent of the average manufacturers’ price (AMP) for brand-name drugs. Rebates 

must be at least 11 percent of AMP for generic drugs. 

19U.S. General Accounting Office, Medicare: HCFA Faces Challenges to Control Improper 

Payments, GAO/T-HEHS-00-74, (Washington, D.C.: Mar. 9, 2000). 

Decisions about the Extent 

of Latitude and 

Competition Allowed Are 

Critical to Administering a 

Medicare Drug Benefit 
Page 23 GAO-03-650T 

disproportionate share of the drug market, and its position as a public 

program requiring transparency and fairness. 

Insurers and PBMs have been successful in securing some savings on drug 

purchases by leveraging their volume to move market share from one 

product to another. Medicare’s leverage, given that purchases by the 

elderly constitute about 40 percent of the drug market, could be 

considerable. Yet the large market share may also be likely to attract 

considerable attention. The administration of a Medicare drug benefit 

could then be subject to the same intensity of external pressures from 

interested parties regarding program prices and rules that can often inhibit 

the program from operating efficiently today. The potential for 

micromanagement could compromise trying to use the very flexibility 

PBMs have employed in negotiating prices and selecting preferred 

providers in order to generate savings. An alternative would be to sacrifice 

some of the program’s leverage and grant flexibility to multiple PBMs or 

similar entities so that any one entity would be responsible for 

administering only a share of the market. 

Contracting with multiple PBMs or similar entities, however, would pose 

other challenges. If each had exclusive responsibility for a geographic 

area, beneficiaries who wanted certain drugs could be advantaged or 

disadvantaged merely because they lived in a particular area. To minimize 

inequities, Medicare could, like some private sector purchasers, specify 

core benefit characteristics or maintain clinical control over formulary 

decisions instead of delegating those decisions to its contractors. 

If multiple PBMs or similar entities operated in a designated area, 

beneficiaries could choose among them to administer their drug benefits. 

These organizations would compete for consumers directly on the basis of 

differences in their drug benefit offerings and administration. This 

contrasts with the private sector where drug benefits are typically part of 

an overall insurance plan, and PBMs typically compete for contracts with 

insurers or other purchasers. Competition could be favorable to 

beneficiaries if they were adequately informed about differences among 

competing entities offering drug benefits and shared in the savings. 

However, adequate oversight would need to be in place to ensure that fair 

and effective competition was maintained. For example, a means to ensure 

that beneficiaries received comprehensive user-friendly information about 

policy and benefit differences among competing entities would be 

necessary. Monitoring marketing and customer recruitment strategies and 

holding entities accountable for complying with federal requirements 

would require adequate investment. The contracting entities could need 
Page 24 GAO-03-650T 

protections as well. Some mechanism would be needed to risk adjust 

payments for differences in beneficiaries’ health status so that those 

entities enrolling a disproportionate share of high-use beneficiaries would 

not be disadvantaged. 

Medicare’s financial challenge is very real and growing. The 21st century 

has arrived and our demographic tidal wave is on the horizon. Within 5 

years, individuals in the vanguard of the baby boom generation will be 

eligible for Social Security and 3 years after that they will be eligible for 

Medicare. The future costs of serving the baby boomers are already 

becoming a factor in CBO’s short-term cost projections. 

Frankly, we know that incorporating a prescription drug benefit into the 

existing Medicare program will add hundreds of billions of dollars to 

program spending over just the next 10 years. For this reason, I cannot 

overstate the importance of adopting meaningful reforms to ensure that 

Medicare remains viable for future generations. Adding a drug benefit to 

Medicare requires serious consideration of how that benefit will affect 

overall program spending. If competing private entities are to be used to 

administer a drug benefit, it is important to understand how these entities 

can be used in the Medicare context to provide a benefit that balances 

beneficiary needs and cost containment. 

Medicare reform would be done best with considerable lead time to phase 

in changes and before the changes that are needed become dramatic and 

disruptive. Given the size of Medicare’s financial challenge, it is only 

realistic to expect that reforms intended to bring down future costs will 

have to proceed incrementally. We should begin this now, when retirees 

are still a far smaller proportion of the population than they will be in the 

future. The sooner we get started, the less difficult the task will be. 

We must also be mindful that health care costs compete with other 

legitimate priorities in the federal budget, and their projected growth 

threatens to crowd out future generations’ flexibility to decide which 

competing priorities will be met. In making important fiscal decisions for 

our nation, policymakers need to consider the fundamental differences 

among wants, needs, and what both individuals and our nation can afford. 

This concept applies to all major aspects of government, from major 

weapons system acquisitions to issues affecting domestic programs. It also 

points to the fiduciary and stewardship responsibility that we all share to 

ensure the sustainability of Medicare for current and future generations 

Concluding 

Observations 
Page 25 GAO-03-650T 

within a broader context of providing for other important national needs 

and economic growth. 

The public sector can play an important role in educating the nation about 

the limits of public support. Currently, there is a wide gap between what 

patients and providers expect and what public programs are able to 

deliver. Moreover, there is insufficient understanding about the terms and 

conditions under which health care coverage is actually provided by the 

nation’s public and private payers. In this regard, GAO is preparing a 

health care framework that includes a set of principles to help 

policymakers in their efforts to assess various health financing reform 

options. This framework will examine health care issues systemwide and 

identify the interconnections between public programs that finance health 

care and the private insurance market. The framework can serve as a tool 

for defining policy goals and ensuring the use of consistent criteria for 

evaluating changes. By facilitating debate, the framework can encourage 

acceptance of changes necessary to put us on a path to fiscal 

sustainability. I fear that if we do not make such changes and adopt 

meaningful reforms, future generations will enjoy little flexibility to fund 

discretionary programs or make other valuable policy choices. 

Mr. Chairman, this concludes my prepared statement. I will be happy to 

answer any questions you or other committee members may have. 

For future contacts regarding this testimony, please call William J. 

Scanlon, Director, Health Care Issues, at (202) 512-7114. Other individuals 

who made key contributions include Rashmi Agarwal, Linda Baker, John 

Dicken, Hannah Fein, Kathryn Linehan, James McTigue, Jennifer Rellick, 

and Melissa Wolf. 

Contacts and 

Acknowledgments 

(290286)