U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

87–355 PDF 2003

S. HRG. 108–79

THE MEDICARE CHALLENGE:

IT’S NOT JUST ABOUT PRESCRIPTION DRUGS

HEARING

BEFORE THE

SPECIAL COMMITTEE ON AGING 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

WASHINGTON, DC

MARCH 20, 2003

Serial No. 108–7

Printed for the use of the Special Committee on Aging

(

SPECIAL COMMITTEE ON AGING 

LARRY CRAIG, Idaho, Chairman 

RICHARD SHELBY, Alabama 

SUSAN COLLINS, Maine 

MIKE ENZI, Wyoming 

GORDON SMITH, Oregon 

JAMES M. TALENT, Missouri 

PETER G. FITZGERALD, Illinois 

ORRIN G. HATCH, Utah 

ELIZABETH DOLE, North Carolina 

TED STEVENS, Alaska 

RICK SANTORUM, Pennsylvania 

JOHN B. BREAUX, Louisiana, Ranking 

Member 

HARRY REID, Nevada 

HERB KOHL, Wisconsin 

JAMES M. JEFFORDS, Vermont 

RUSSELL D. FEINGOLD, Wisconsin 

RON WYDEN, Oregon 

BLANCHE L. LINCOLN, Arkansas 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

DEBBIE STABENOW, Michigan 

LUPE WISSEL, Staff Director 

MICHELLE EASTON, Ranking Member Staff Director 

(II) 

C O N T E N T S 

Page 

Opening Statement of Senator Larry E. Craig ..................................................... 1

Statement of Senator Ron Wyden .......................................................................... 3

Statement of Senator Ted Stevens ......................................................................... 21

Statement of Senator Gordon Smith ...................................................................... 23

Prepared Statement of Senator Orrin Hatch ........................................................ 24

PANEL I 

Thomas A. Scully, Administrator, Centers for Medicare and Medicaid Services, Washington, DC ........................................................................................... 4

Douglas Holtz-Eakin, Director, Congressional Budget Office, Washington, DC 40

APPENDIX 

Testimony submitted by the Biotechnology Industry Organization .................... 63

(III) 

(1)

THE MEDICARE CHALLENGE: IT’S NOT JUST 

ABOUT PRESCRIPTION DRUGS 

THURSDAY, MARCH 20, 2003 

U.S. SENATE, SPECIAL COMMITTEE ON AGING, WASHINGTON, DC. 

The committee convened, pursuant to notice, at 10:33 a.m., in 

room SD–628, Dirksen Senate Office Building, Hon. Larry Craig 

(chairman of the committee) presiding. 

Present: Senators Craig, Hatch, Stevens, Smith, Talent, Breaux, 

Carper, Wyden, and Kohl. 

OPENING STATEMENT OF SENATOR LARRY CRAIG, CHAIRMAN 

The CHAIRMAN. Good morning, everyone. The Senate Special 

Committee on Aging will convene. I want to thank all of you for 

joining us this morning, but before we proceed, let me say that certainly our prayers today need to be with our brave men and women 

in uniform who are standing in harm’s way in the Persian Gulf at 

this moment in behalf of this country and our freedom. 

We are here today to begin to review changes in Medicare. I 

think I need to begin by stressing that prescription drug relief for 

seniors is needed, is critically important, and I support it wholeheartedly. However, the lack of drug coverage is just one of Medicare’s several grave and urgent problems. It is our purpose here 

today to take a look at these other deep-seated problems, not just 

prescription drugs. 

Like it or not, the hard reality is Medicare is very close to being 

fundamentally broken. As the Medicare Trustees reported just this 

week, Medicare costs, even without any drug benefit, will more 

than triple over the next 75 years, placing a tremendous burden on 

our children and grandchildren. Let me bring that statement into 

perspective, and I will read from the Trustees’ 2003 report. 

They have projected that Medicare costs will more than triple 

over the next 75 years. It sounds like a long way off, but it isn’t. 

Even without any prescription drug benefit, growing from 2.6 percent of GDP today to 5.3 percent of GDP by 2035, and by 9.3 percent of GDP by 2077. To put this in perspective, all the Federal 

personal income tax that is coming in today amounts to 9 percent 

of our current GDP. So they are predicting, without prescription 

drugs, Medicare currently projected could go to 9.3 percent of GDP 

by 2077. 

Moreover, the projected insolvency date for the Medicare Part A 

Trust Fund has advanced an additional 4 years. I am sure our colleagues will talk about that today. 

2

Moreover, and despite very impressive progress made by our current panelist, Tom Scully, and his staff out at CMS, Medicare remains clogged by rigid bureaucracy and by complex regulations, 

regulations which are already beginning to drive doctors and other 

providers out of the program. 

Finally, the Medicare program today is plagued by an outdated 

1960’s style benefit design that neglects not only prescription 

drugs, but also key innovations that are now increasingly common 

in the private sector, such as chronic disease management and protection against catastrophic financial costs. 

It is critically important that whatever Congress may do about 

prescription drugs this year, these steps can and must be accompanied by serious movement toward putting the Medicare program 

on a more secure footing as the coming baby boomer retirement 

wave looms ever closer. 

Towards this end, I am pleased that President Bush, Senator 

Frist, the ranking member of this committee, Senator John Breaux, 

and others have stepped forward with serious proposals aimed at 

doing just this. Especially attractive is the fact that seniors would 

be given the option of enrolling in a program similar to that currently enjoyed by Members of Congress and other Federal employees. Importantly, those seniors who are happy with their current 

coverage in traditional Medicare would be able to keep that coverage and their choice of doctor, but with protection against high 

drug costs and special relief to those with modest incomes. 

Of course, none of these plans before us today offer a silver bullet 

and there will be very hard choices further down the road, no matter what Congress does this year, but I believe these approaches 

are solid first steps. 

We are joined today by our first panelist, the Administrator of 

CMS, Tom Scully. We have our new Director of the CBO, Dr. Douglas Holtz-Eakin. Both are leaders on this current and critical debate and what they say before this committee and the record we 

build will be critically important. 

Before we recognize our first witness, I also wanted to recognize 

the former Lieutenant Governor of my State, a health care leader 

in our State, former State Senator Jack Riggs. Doctor, nice to have 

you with us at the committee today. 

First and foremost, with tremendous experience, and is making, 

as I mentioned in my opening comments, major reform there. 

But Tom, before I recognize you, let me turn to my colleague, 

Ron Wyden of Oregon, who I work with on a variety of issues. He 

is a member of this committee and we are pleased that he is here 

this morning. Ron.

3

STATEMENT OF SENATOR RON WYDEN 

Senator WYDEN. Thank you, Mr. Chairman, and let me commend 

you both for holding this hearing and associate yourself with your 

introductory comments with respect to our troops. They are on the 

minds of all of us today and our thoughts and prayers as they work 

so valiantly to protect the interests of all Americans. I appreciate 

your comments and holding this hearing. 

I intend to work very closely with you and our colleagues, Mr. 

Chairman, on a bipartisan basis on this issue. As you know, Senator Olympia Snowe and I have in the last two Congresses introduced bipartisan prescription drug coverage legislation. I think it 

is important that we hold this hearing and look to the question of 

broader Medicare reform. The title of this hearing is, ‘‘The Medicare Challenge: It’s Not Just About Prescription Drugs’’ I think 

probably only the minor change I would make in the title would be, 

‘‘Don’t Forget About the Critical Need for Covering Prescriptions 

As We Try To Go Beyond It,’’ and I think we will have the chance 

to discuss that today with Administrator Scully, who I have known 

for a lot of years. He is one of the most thoughtful people in the 

country with respect to health. 

I just have a couple of comments, if I might, Mr. Chairman. 

First, with respect to the broader question of Medicare reform, I 

am one who believes that you can have more private choices and 

more competition in the Medicare program if it is clearly defined 

within the Medicare program and accompanied by very strong consumer protections and vigorous oversight. I think that will be a big 

part of trying to pull together a bipartisan coalition here. 

I happen to think we have a model for doing it. I don’t pretend 

to be completely objective about it, having been the author of it, 

but the Medigap law which was written a number of years ago, 

when older people so often would have a shoebox full of worthless 

health insurance policies and now as a general rule have really 

only one good policy, is a pretty good model of how you can begin 

to bring in private choices into the Medicare program as long as 

it is within Medicare, No. 1, and accompanied by very vigorous, 

very aggressive consumer protection. 

I noted just this last weekend Henry Aaron, not exactly an arch 

right-winger, said much the same thing. He wrote he is not unalterably opposed to private choices being a part of this, but that it 

has to have vigorous consumer protection and clearly defined oversight. I’d like to discuss this further with Administrator Scully. 

The second thing I wanted to touch on, something of great importance in our part of the world, the chairman and mine, is payment 

equalization. There is tremendous concern in our part of the world 

where great efforts in Idaho and Oregon and Washington have 

been made to hold down costs. 

For example, in my home town, more than 50 percent of the 

older people are in Medicare Choice. They are in plans that hold 

down the cost. What you get from patients, doctors, and other providers, to a person in our part of the country, which has been efficient is that the Federal Government penalizes you instead of rewarding you for holding down costs so one federal policies penalize 

efficiency and for holding down the costs in the Northwest. So I 

4

want to discuss with Administrator Scully today some ideas for 

how to get at this. 

One new concept that I would like to explore with the Administrator is something that I have been calling tentatively an efficiency bonus. There are parts of the country that have really taken 

steps to be more efficient, to hold down their costs, and maybe one 

way to get at this question of payment equalization so as to 

produce something tangible for those that really are going to great 

lengths to be innovative is to start looking at this in the context 

of an efficiency bonus. 

But suffice it to say, this is an important hearing. At a minimum, prescription drug coverage can be a bridge to long-term 

Medicare reform. That is why it is so important that we have this 

hearing, Mr. Chairman, and I look forward to working with you as 

we have on so many occasions in a bipartisan way. 

The CHAIRMAN. Ron, thank you very much, and let me apologize 

for being remiss in failing to mention the work that you and Senator Snowe have done in that area, of change and modification in 

these critical programs. Thank you. 

Senator WYDEN. Thank you. 

The CHAIRMAN. Director Scully, welcome to the committee. 

Please proceed. 

STATEMENT OF THOMAS A. SCULLY, ADMINISTRATOR, 

CENTERS FOR MEDICARE AND MEDICAID SERVICES, 

WASHINGTON, DC 

Mr. SCULLY. Thank you, Mr. Chairman and Senator Wyden. 

Thank you for having me today and thanks for having this hearing. 

I think my own opinion is there needs to be a lot more discussion 

about these unbelievably complicated Medicare issues and especially how we potentially add wisely a giant new entitlement for 

prescription drugs. 

Let me just start off first by saying you won’t be surprised because we are old friends that I tend to agree with Senator Wyden 

on both counts. We should definitely have very strong—I think we 

should fix and modernize Medigap, but I think we definitely need 

very strong consumer protections and oversights, and obviously, we 

would like to have some more private choices for seniors. I am also 

very concerned and more than happy to get into the weeds on geographic misallocation or inequities in funding. 

Let me just start off first also by saying I think the conflict in 

the Middle East affects all of us. My top physician advisor, Bill 

Rodgers, was called up and left today to go. So I think all through 

the government and all across the board, we are finding this affects 

all of us and all of our agencies. 

I would also like to congratulate Doug, who I worked with a lot, 

and I think we are very lucky to have as a CBO Director. He was 

on the Council of Economic Advisors, and I can tell you, for a variety of reasons, we are fortunate for a lot of reasons, but he actually 

understands a lot about health care, which I think will hopefully 

make our already very good working relationship with CBO that 

much better. 

Let me just quickly run through. Mr. Chairman, I don’t think 

you wanted me to get into the details of our Medicare plan today. 

5

I will be happy to discuss it in questions and I will go through it 

basically. 

But I think fundamentally, our concern is Medicare is a tremendous safety net program. There is nobody over the age of 65 who 

is uninsured. There are a lot of wonderful things about Medicare. 

But it is, in our opinion, a model that has a lot of flaws. We fundamentally fix prices for every hospital and every doctor in Boise 

or Milwaukee or Portland. We don’t talk enough about differences 

in quality and people don’t have any idea who does the best heart 

bypasses in Milwaukee, where I was last week. It is a wonderful, 

terrific program, but it is particularly inflexible and not particularly focused on improving quality or making the health care system more dynamic and I think it has a lot of flaws. 

We are totally supportive, as obviously you know, of putting a 

prescription drug benefit in place. Adding a $40 billion benefit, 

however, needs to be done carefully. We also think that while you 

are going to enhance Medicare and give seniors what they want 

most acutely, which is prescription drug coverage, it would be wise 

to fix some of the flaws in the Medicare program and probably try 

to fix a lot of what we see to be the flaws in it. 

Let me just run through—you mentioned the Trustees’ Report, 

just to show some of the problems you have with the Medicare program. It is a great program, but some years we have 1 percent 

growth, some years we get 12 percent growth, and generally, as an 

Administrator, I would tell you, and I think probably Nancy and 

Linda and Bruce Vladek and many of my other friends who have 

had this job in the last 10 or 15 years will tell you we rarely know 

why. 

Just to tell you a couple of the trends that came out last week 

was we calculated the numbers from 2002 which showed up in the 

Trustees’ Report. Overall spending last year in Medicare grew by 

8.5 percent, much higher than we expected a few months ago. Hospital spending increased by 9.8 percent in 1 year, about 4 percent—

more than 4 percent higher than we expected 6 months ago. There 

are a variety of reasons behind that, some of which I will get into 

in a minute. 

Home health care spending went up by 24 percent. There are 

some aberrations, as you know, between how we switch from Part 

A to Part B, but the baseline spending increased in home health, 

which was just reformed a couple of years ago and up 14 percent. 

Hospice spending, a wonderful program for people near the end of 

their lives, went up 24 percent last year. 

Physician spending, amazingly, even though we spent a lot of 

time trying to fix and the Senate and Congress just added $54 billion back into the baseline, we cut the base doctor payments last 

year by 5.4 percent, obviously a huge controversy in the Medicare 

program. I happen to think it was wrong and was a strong advocate for fixing it. But at the same time, we reduced the average 

payment last year by 5.4 percent per doctor. They responded by increasing their volume of services 8 percent. It was projected to be 

2 percent. So despite that cut, even though we reduced their payments last year, overall physician spending in the program went up 

by 7 percent, which was higher than it was expected to be even if 

6

we paid the right amount. So behaviorally, there are some strange 

things going on there in the program. 

Durable medical equipment, long a problem in the Medicare program, grew by 20 percent last year, despite the fact we made very 

strong and aggressive enforcement efforts in the program to try to 

reduce that. Wheelchair sales went up by 28 percent last year, 

which does not remotely track the growth in beneficiary levels or 

acuity. 

Prescription drugs, on the part of Medicare that we pay for, which is about $8.7 billion, we pay for prescription drugs in hospital outpatient departments and in physicians’ offices when it 

can’t be done at home. That spending went up 25 percent last 

year—25 percent, which is obviously a model to say we should be 

concerned about how we create prescription drug benefits for the 

more traditional outpatient prescription drug services. 

We frequently can’t track what is going on in this program, and 

I somewhat—maybe I shouldn’t joke and refer to it as kind of ‘‘whack-a-mole.’’ We find one problem and the next one pops up the 

next day and it is a constant situation in this program. 

The most recent enormous abuse that we didn’t understand was 

hospital outlier payments. We spend about $90 billion a year on inpatient hospital services. We set aside, with Congress’s direction, 

5.1 percent a year for high-cost, high-acuity cases, generally for 

hospitals that have highly complex patients, because we pay on an 

average basis and if a patient is expected to stay in a hospital for 

6 days and ends up being in the hospital for 60 days, obviously, we 

compensate the hospital more. 

Unfortunately, some hospitals found an enormous loophole in this program, about 325 hospitals, and we spent about $2 billion 

more last year than we expected without knowing it until very recently, and in each of the last 4 years, we spent between $1 and 

$2 billion more than Congress expected or authorized us to spend 

without even understanding it, due to the fact that some hospitals—it is a very complex system. A number of hospitals found 

ways to bill us way more than they ever should have even remotely 

imagined they were going to get paid for. 

Just to give you one example of a hospital in California that received $50 million in base payments for hospital services last year. 

Had they been the average hospital in the country, they would 

have gotten $2.5 million of add-on payments. They actually got $75 

million of add-on payments. This is hospital outlier payment policy. 

The point being that there are a lot of very unusual things going 

on that annex this program. It is not a particularly flexible program, but we frequently don’t understand what is going on and I 

think there are a lot of reasons to modernize it, not just the new 

structure under what the President proposed, but also we need to 

continue to look at improving the Medicare program. 

Senator Wyden is an expert and obviously created a lot of the 

Medigap, knows that we already have even in the private existing 

Medicare program, the bulk of the beneficiaries, the 89 percent of 

seniors and disabled that have traditional Medicare, Medicare covers 47 percent of their actual costs. Most of those people don’t realize it, but they send a supplemental premium check for Medigap 

off to Blue Cross of Oregon or CIGNA or United Health Care or 

7

Blue Cross of Wisconsin, usually for $150 to $200 a month, which 

is the average range for a non-drug premium, to pay for supplemental benefits. So most seniors have a hybrid already where they 

have a government-run program that is the basis benefit and a 

usually not-so-well-structured supplemental private sector insurance program that provides their other benefits. 

So I would totally agree with Senator Wyden that what we need 

to do is look at the bottom-line cost for seniors, how we provide 

them with the best benefits, the best drug benefits most efficiently, 

and more importantly, give them even more consumer protections 

than the enhanced consumer protections, better than they used to 

be in Medigap. 

But there are a lot of ways to look at this. The President sent 

up his framework for reform, obviously without all the details. That 

was with lots of guidance from Congress. Some people want us to 

send up five talking points. Some people want us to send up a 40-

page plan with every detail and every dollar, and I think the President wisely proposed the middle course. Congress legislates and 

the President decided that we are going to send up a framework 

for philosophically how we thought the program could be improved 

and that we would work with Congress to fill in the gaps and that 

sending up a detailed bill would not be a particularly helpful or 

useful way to get the legislation done. 

I think the bottom line for the administration is we would very 

much like to get prescription drug reform done and Medicare reform done, and many of us have been working on this for 20 years 

and absolutely nothing has happened. In our minds, the worst of 

all worlds would be for us to get to the end of this year and the 

end of this legislation and once again flame out and have nothing 

happen. 

So we are determined. Obviously, we have a construct that we 

think will work. The House passed one last year. There was a 

tripartisan bill and other bills in the Senate. We would like to work 

together to come up with a formulation that we think would work, 

but I would say that the President’s—the one firmly held belief 

that I know he has is that adding a drug benefit alone without 

looking at the underlying structure of the program and improving 

it would be a large mistake. 

So we are committed to improving and modernizing the program. 

The basic framework, which I will just run through very briefly, is 

that the old fee-for-service program, the President has said repeatedly, if you like Medicare, it will never change. In fact, I can tell 

you the details, but the way it is structured is that the premium 

would also never change. So even if people moved out of traditional 

Medicare into new Medicare, the premium forever more will be 

structured as if nothing changed. So we are not in any way 

disadvantaging existing Medicare beneficiaries, and in fact, they 

would get a fairly substantial additional subsidy for a basic drug 

package for free. 

In addition, what we have tried to do is take the best of what 

we saw in the Federal Employee Health Benefits Plan, which does 

provide coverage for everybody. Even a postal worker in Alaska or 

rural Montana can get Federal Employee Health Benefits coverage, 

or a park range. We believe that we took the best that we saw in 

8

the Federal Employee Health Benefits Plan and Tricare, which is 

the Defense Department plan, and tried to come up with a model 

that would provide people with private PPO, fee-for-service options 

in the rest of the country. 

In the last 10 years, the kind of flexible fee-for-service PPO option has taken over the commercial sector. We have moved from 

about 20 percent of the people in those types of plans in under age 

65 to 70 percent. It has completely taken over the commercial market across the country. HMOs, which are for some people wonderful, but not for everybody, have largely been static the last 10 or 

15 years. But there were people who have demanded, both in the 

Federal Employee Health Benefits Plan and across the commercial 

sector, is the kind of ability to go to any doctor they want, any hospital they want, but to have some differential copayments. If you 

happen to go to a Blue Cross plan and you go to an in-network doctor, you might pay $10 or $15, and if you go out of network, you 

might have to pay a 20 percent copyament and a higher rate. But 

you can go to any doctor you want, any hospital you want with differential incentives to improve behavior and improve performance 

of the plan. 

We think that is what consumers want. We think that is what 

they want when they are 64 and we think they want the same type 

of choices when they are 66. We have no desire to take away any 

of the choices that people have now and do anything to limit existing Medicare coverage. But we believe that if consumers are given 

these options, it will help them get better choices. It will improve 

and modernize the Medicare program and make the program work 

better. 

We also think the Medicare+Choice program, which works very 

well in Oregon, I feel very strongly it is not for everybody. It has 

been shrinking over the years for reasons I am certain we will get 

into in a few minutes. It is down to about 11 percent of the program. It peaked at 18 percent in 1997. It is tremendous for people 

who can’t afford to send a $200 Medigap check off to Blue Cross 

of Oregon. If you are relatively low-income and you can’t afford the 

cost, you generally get some drug benefit, you get drug costs, and 

you live with an HMO. It is not for everybody, but it is overwhelmingly preferred by people that are low-income and heavily minority 

population and we think it is a choice that needs to be preserved 

and enhanced and saved. It is never going to be for everybody. 

Even under the President’s plan, we never envision it growing to 

more than about 15 percent of the program. 

So we are not talking about pushing anybody into HMOs. We are 

talking about trying to mimic what works in the best parts of the 

commercial market and give the same choices to seniors that we 

think that they are—especially younger seniors, as they hit 63, 64, 

65, they are happy with the programs they have. Dropping out of 

that and moving into a less-flexible Medicare program may not be 

the best option for them. We also think it is the best way to make 

sure we provide a prescription drug benefit efficiently to people. 

But we are very—obviously, the reason the President set up a 

framework is because we believe you have to work with Congress 

to get it done. We have some strong views about how it should get 

done, but we want to work with the committees and with the 

9

House and the Senate to make sure that we don’t end up getting 

to the end of the year with no result, which would be the worst outcome, we believe, for everyone. 

I have a number of things in my testimony, Mr. Chairman, but 

given the number of members that are here, I would probably be 

much more useful to answer your questions and to get into details 

on that. Thank you very much. 

The CHAIRMAN. Administrator Scully, thank you very much. 

[The prepared statement of Mr. Scully follows:]

10


87355.001
11


87355.002
12


87355.003
13


87355.004
14


87355.005
15


87355.006
16


87355.007
17


87355.008
18


87355.009
19


87355.010
20


87355.011
21

The CHAIRMAN. Before we turn to questions of the Administrator, 

let me recognize my colleagues who have now joined us, and I will 

do that in order of which they entered the room. Senator Kohl, do 

you have an opening comment you would wish to make? 

Senator KOHL. No, Mr. Chairman. 

The CHAIRMAN. Thank you for being here. We think this is a 

very important hearing in relation to the other aspects of Medicare. 

My colleague from Alaska, the senior Senator from Alaska, Ted 

Stevens. Ted, do you have any opening comments? 

STATEMENT OF SENATOR TED STEVENS 

Senator STEVENS. I do, but before I start, I want my colleagues 

to recognize the problems that are developing here and I would ask 

you all to help us. I am calling the Architect now. That door is 

closed and that door is closed. In the period that we are in now, 

we have three exits from almost every room as a matter of security. 

As chairman, I want these doors open today, and I would ask someone to get a hold of the Architect and tell him to be in my office, 

Room 522, in a half hour. There is no sense in this. These have 

been claimed by staff on either side of these doors and therefore 

are safety, and I want them open today. 

Now, nice to see you again, Mr. Scully. I am pleased the chairman is holding this hearing and I appreciate being here and your 

comments. I think that we have got to revamp Medicare. It is still 

a 1960 model trying to deal with the new century’s challenges and 

it just won’t work. 

I am one of the authors of the FEHB and I am pleased to hear 

your comments concerning that as a prospective prototype for dealing with the changes in Medicare. I do believe that is where we 

should start. 

But I have got a specific problem that I wanted to chat with you 

today. When I was last home, I had a meeting with a series of 

Alaska doctors, some of whom I have known since they were babies, and they were all responsible for a recent announcement in 

Anchorage that no family care doctor would see seniors. There are 

no seniors that can get access to family care practice today because 

of the problems that they detailed to me at that time. 

Medicare payments only cover about 40 percent of their total 

costs, and when a doctor in the Anchorage area sees a senior, they 

must really subsidize the system to the extent of 60 percent of the 

average costs of just seeing a patient. I think the system is broken 

down when that happens. 

When I came back, I did, with my colleagues’ help, we put some 

additional money in the omnibus bill. We actually started off with 

an offset for the bill itself, an across-the-board cut to get that matter to conference, but it doesn’t come close to fixing the problem of 

access that I heard about in Alaska, and they still will not see seniors because they cannot afford to subsidize that. 

A doctor I have known—it is interesting, because her mother 

used to be part of my Alaska Senate staff—gave me the information about her charges for an intermediate mid-level exam. Medicaid pays $75 for that service. Blue Cross pays $112 for that service. Medicare pays $42 for the same service. Now, I can’t underVerDate 0ct 09 2002 12:00 Aug 13, 2003 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 C:\DOCS\87355.TXT SAGING1 PsN: JOYCE
22

stand a system that was so discriminating against seniors. I hope 

that you will take a look at this and see what we can do. 

It may be that the fantastic problem we have is related to the 

reason that we pay civil servants in Alaska 25 percent more than 

what they get in what we call the ‘‘South 48.’’ All Federal civil 

servants in Alaska get a 25 percent bonus to base pay to meet the 

cost of living in Alaska, which is substantial. Everything we eat 

and wear and lives in comes in from what we call outside. It comes 

in by boat or by air, and the cost of living in Alaska is at least 25 

percent higher than Seattle. 

As a consequence, though, we got the Veterans Administration to 

study the situation and they set up a special payment system for 

Alaska, which you may be involved with, I don’t know. It is linked 

to private charges and it pays for Alaska veterans 90 percent of the 

private charges. Now, some of those are seniors, some of them 

aren’t, but as a practical matter, it is a system that seems to be 

working now. 

But the seniors are in real difficulty. I really don’t know what 

to do about this because I don’t have an immediate band-aid this 

year. I don’t know how to get those doors open for the senior citizen, and we don’t have a lot of them. Most of the people I have 

known, my age, that have been smart enough to retire, are down 

in the sunshine country and they don’t spend much time in Alaska 

in the wintertime or year-round. 

I do hope that you can help us, though, for those people who are 

there, are unable to afford to move, to go where it would be easier 

to live, and they are now denied access to this primary care. It is 

the saddest thing I can think of and I hope you will work with me 

and ask your staff to work with all of us to see if there isn’t some 

interim solution to taking care of the senior citizens that do seek 

private care through the family practitioners in Alaska. 

We don’t have any HMOs in Alaska. There are none there. There 

are not enough of us to support an HMO in any one place. So I 

would hope that we can find some way to deal with this. 

Again, maybe we should make them eligible for FEHB or something, I don’t know. There might be some answer somewhere along 

the line that we can take care of the system, and I would appreciate your help if you would help us. Thank you. 

The CHAIRMAN. Well, thank you, Mr. Chairman. 

I see Tom taking notes there, so let me turn to Gordon Smith for 

any opening comments he might have before we respond to those 

concerns. 

Before you leave, Senator, a new survey that came out with physicians, AMA, in January found that 50 percent of physicians are 

now saying they are planning to limit their Medicare participation 

either by not taking new patients or by dropping them out entirely. 

Senator STEVENS. My own family practitioner for many years 

called me and said, ‘‘I am sending you back your files. You are too 

old. I can’t afford you.’’ [Laughter.] 

The CHAIRMAN. Let me turn to my colleague from Oregon, Gordon Smith, who has joined us. 

23

STATEMENT OF SENATOR GORDON SMITH 

Senator SMITH. Mr. Chairman, in the interest of time, I will put 

my statement in the record. I have a question regarding SHMOs 

or HMOs unique in Oregon and very helpful to the elderly, frail, 

and so I am going to ask that at the appropriate time. 

[The prepared statement of Senator Gordon Smith follows along 

with prepared statement of Senator Orrin Hatch:] 

PREPARED STATEMENT OF SENATOR GORDON SMITH

Thank you, Mr. Chairman for holding this hearing today. Mr. Chairman, I would 

like to commend you for your leadership in recognizing the need for a global approach to Medicare reform, while recognizing the importance of expanding Medicare 

coverage of prescription drugs. Medicare reform must be focused on modernizing the 

program to make it more responsive to the needs of today’s beneficiaries. That 

means making the program more responsive to chronic illness. 

The 2001 Institute of Medicine report, Crossing the Quality Chasm, indicated 

that, and I quote, ‘‘chronic conditions should serve as a starting point for the restructuring of health care delivery because chronic conditions are now the leading 

cause of illness, disability, and death in the United States. . . accounting for the 

majority of health care resources used.’’

Most Medicare beneficiaries have at least one chronic condition. About a third 

have four or more conditions, accounting for 80% of all Medicare spending. If we 

want to stabilize the Medicare trust fund, we must focus on more effective management of the highest-cost conditions. The Institute of Medicine recently identified 

twenty priority areas for health care quality improvement and included specific 

interventions for improving care for those with chronic conditions. Priorities listed 

included care coordination, disease management, end-of-life care, co-morbidity management, interventions for frailty associated with age, medication management, and 

others. The same priorities are needed as we strengthen Medicare for future generations. 

I am fortunate to have a program in my state that offers a model for effective 

Medicare modernization and that is the Social HMO program. Senior Advantage II, 

offered by Kaiser Permanente’s Northwest Division, is one of four Social HMO demonstrations. Social HMOs have the type of structure needed to respond effectively 

to chronic illness. The Social HMOs’ trademark care coordination and disease management services and expanded benefits directly respond to the IOM priorities for 

improving health care quality. Further, these benefits and services are offered at no 

more than Medicare would pay under fee-for-service arrangements. Social HMOs 

have been shown to improve healthcare for chronically ill seniors by expanding access to primary care prescription drugs and supportive services under modest copayment arrangements; enabling beneficiaries to maintain their independence by 

avoiding or delaying nursing home placement; decreasing the use of costly services 

such as emergency room, inpatient hospital and nursing facility services; and improving health outcomes for the frailest beneficiaries. 

The Social HMO model also represents an effective strategy for helping address 

the states’ large and growing fiscal crisis. Medicaid is the second largest spending 

category for state budgets and increased over 13% last year. About 57% of Federal 

Medicaid increases related to the elderly and disabled. Studies show that Social 

HMO members are 40 to 50 percent less likely to have long-term nursing home admissions than comparison group members, potentially saving Federal and state governments millions of dollars in Medicaid costs. Preliminary analysis indicates that 

if the Social HMO program were terminated, and the 110,000 beneficiaries currently 

served were forced to find alternative coverage, it would cost Medicaid between $100 

to $300 million in the first year alone for chronic care services currently covered by 

the Social HMOs. This figure does not account for the added cost of prescription 

drugs, vision, hearing and dental care, and other non-Medicare covered benefits provided by the program. 

The Social HMO demonstration represents a model for meaningful Medicare modernization. It provides comprehensive coverage of prescription drugs—but it does 

much more. It provides a benefit, financing and delivery structure to meet the needs 

of chronically ill seniors—the highest cost, fastest growing subgroup of the Medicare 

population. For this reason, I have joined with my colleagues from Oregon, Washington, New York, California and Nevada to make this program permanent under 

Medicare. I encourage this Committee to examine the SHMO as a useful model for 

24

care for the frail elderly—a model which will be increasingly useful as the Baby 

Boomers—such as myself-age into Medicare. 

I thank the Chairman again for holding this important hearing. 

PREPARED STATEMENT OF SENATOR ORRIN HATCH

Mr Chairman, I appreciate your holding this hearing today—we have a very distinguished group of witnesses before our Committee. I especially want to send a 

warm welcome to Dr. Douglas Holtz-Eakin, the new Director of the Congressional 

Budget Office. 

Dr. Holtz-Eakin, I look forward to working with you on this and many other important issues. 

Mr. Chairman, I’ll be brief. I realize that this hearing is focusing on the overall 

Medicare program but I want to take this opportunity to talk about Medicare prescription drug coverage. 

I think most of us in Congress believe that we must pass a Medicare prescription 

drug benefit this year. Medicare beneficiaries cannot afford to wait any longer. 

Last July, we debated this important issue on the floor of the Senate for close to 

three weeks. In the end, due to partisan politics, Medicare beneficiaries came up on 

the short end of the stick because we were not able to pass a Medicare prescription 

benefit. 

As one of the original authors of the Senate Tripartisan Medicare proposal which 

was considered on the Senate floor during that time, I was extremely disappointed 

in last year’s outcome. 

This Congress, the President has said in no uncertain terms that providing a prescription drug benefit to Medicare beneficiaries is one of his top priorities. 

That is good news for beneficiaries across the country. However, there is a lot of 

work to be done before such legislation can be passed by the Congress and signed 

into law by the President. I believe much of that work will fall on the shoulders 

of the United States Senate. 

I am dedicated to passing a Medicare prescription drug benefit this year. However, in order for this to become a reality, I believe the following must happen: first, 

the Medicare prescription drug legislation must have bipartisan support. Second, 

any Medicare prescription drug legislation must include an optional benefit package 

that would resemble private health insurance. 

Third, if a beneficiary wants to remain in traditional Medicare, he or she must 

be allowed to do so. Fourth, this benefit must be affordable to both beneficiaries and 

the federal government. Finally, and most important, a drug benefit must be offered 

to all Medicare beneficiaries, regardless of whether they choose to remain in traditional Medicare or opt for a new, enhanced Medicare plan. 

In conclusion, I am hopeful that this year’s debate on Medicare prescription drugs 

legislation will be different from last year’s debate. I am dedicated to the passage 

of this important legislation so Medicare beneficiaries may have drug coverage once 

and for all. I know that there are many of my colleagues who feel the same way 

and that is why I believe that it is possible that such legislation will be signed into 

law this year. 

But I believe this needs to be a thoughtful process so, in the end, we provide a 

drug benefit to seniors that is affordable to the federal government. 

Mr. Chairman, I look forward to listening to our witnesses and thank you, again, 

for holding such an important hearing.

The CHAIRMAN. Thank you. Then let us turn to questions, and 

we will adhere to the 5-minute rule. 

Administrator Scully, you gave us the statistics of the increases 

that are occurring out there in all aspects of health care and all 

forms of delivery systems. You spent the last 2 years battling Medicare regulatory complexity. You have made progress in all of the 

obstacles that are out there. 

Can you describe for us ways in which the President’s proposed 

alternative choices, and especially the Federal employees’ style 

Medicare program, would reduce bureaucratic and regulatory complexity? Part of the problem we have with physicians turning away 

is they can’t do the paperwork or they find themselves at risk when 

they do do it. Please. 

25

Mr. SCULLY. Mr. Chairman, any time you run a $275 billion 

Medicare program, or my whole agency’s budget, believe it or not, 

if you count both halves of Medicaid, is about $570 billion this 

year, you are going to—by its nature, to avoid fraud and other 

things, you have to have a pretty tight oversight and require a lot 

of paperwork. 

But I think one of my greatest frustrations with the program, 

and I am a big fan of the Medicare program, as I said, ‘‘It is a fabulous safety net program’’ and the reason seniors love it is that they 

are all covered, heavily subsidized coverage, but the biggest problem that I have with it is that it basically doesn’t foster any kind 

of dynamic change or improvement in the system because, basically, when you are running a hospital, and I used to run a hospital association, 50 percent of your revenues generally come from 

Medicare and Medicaid. 

When every hospital in, say, just to pick Washington, DC, when 

you pay Georgetown, George Washington, Sibley, and Howard exactly the same amount for a hip replacement with no information 

on who does the best hip replacement, you are not going to get a 

lot of dynamic change in the system to get people to go out and figure out who does the best hip replacements and the best heart bypasses. 

But when you are fixing prices like that, which we do—my agency fundamentally spends most of its time trying to figure out what 

the right price is to fix for family physicians in Anchorage or hospitals in Portland, and I think that that is the way the program 

has always been run, but I don’t think in the long run for seniors—

you know, one of the things that I have tried to do with the program—it is a big agency. I think our staff does a great job. But 

they have a job basically that is to regulate a big program and fix 

prices. 

The two things I have tried to do more than anything else is to 

open up the agency so that people understand more transparently 

what we are doing on the outside, whether they are physicians or 

the AARP or provider groups, and also to give patients a lot more 

information on nursing home quality, on home health quality, on 

hospital quality, because I really think that if we give people more 

information, they wouldn’t be very happy to find out it is not the 

way it works in the Federal Employee Health Benefits Plan. 

If a senior said—when you tell most seniors, you tell me that I 

have got to pay exactly the same amount for a really bad nursing 

home versus a good nursing home from the government, or the 

same amount for a really good hospital that does the best bypasses 

in town versus a really bad hospital, and the answer is yes. I think 

the more you give people flexibility to drive better behavior in the 

health care system with Federal dollars and more information, the 

better you are going to improve the system. 

One of the reasons I think the Federal Employee Health Benefits 

system works better, we have no vision that Medicare is going to 

dramatically change. This is a very slow change over many years. 

Most seniors are going to stay in Medicare probably long after I am 

gone, long after I am alive probably, and it is going to change slowly. 

26

But if you are trying to change Medicare, and we believe that 

giving some seniors the type of ability to go buy a Blue Cross plan 

that is going to pay differentially for quality and look at it and give 

consumers more information, it is going to slowly drive change and 

improvements and make Medicare a more dynamic, responsive program. It is a wonderful program because it covers everybody and 

it provides security, safety, and very heavy subsidies for low-income people, which is wonderful. But it is very inflexible and it is 

a very unwieldy insurance product. 

The CHAIRMAN. Something that the administration, I, and I 

think our ranking member, John Breaux, agree on, and he has just 

come into the room and we welcome him, is something that you 

might express: the reasons why the administration and you believe 

it is important to link prescription drug legislation with accompanying Medicare structural reform, rather than doing just a drug 

benefit program. 

Mr. SCULLY. We spent many months on this and the President 

was incredibly involved, as some of you know, in the details. But 

I think we tried to look at it with an open mind and I think I started off fundamentally thinking about how we could bridge the gap 

in the Medicare Commission 2 years ago, so we started looking at 

it, No. 1, about why did we not get a consensus in the Medicare 

Commission 2 years ago which Senator Breaux was on. We got ten 

votes instead of the 11 needed to make a recommendation on a bipartisan basis to Congress. I think we started, Mark McClellan, 

who now runs FDA, and me and other staff people a year ago, saying what are the major hurdles to get over. 

I think one of the notable things about the President’s plan is it 

does not raise the retirement age from 65 to 67, which was a big 

hurdle from the Medicare Commission, something that may be the 

right thing to do, but we didn’t take it on. 

It also did not put in a premium support model. A lot of people 

were concerned that if you push people into private health plans 

or HMOs and made them compete with traditional Medicare, you 

drive up the costs of the old Medicare program. We very consciously did not do that. Those are the two major issues that avoided the 11th vote to get a consensus to make a recommendation to 

Congress. 

So we started off there, and then I think we also started looking 

at how do you make the private choices work better. People don’t 

really want HMOs necessarily. They are wonderful in some areas, 

but in many areas—they are great in Oregon and they are great 

in California. They are not particularly popular in Philadelphia, 

which is where I’m from, or Milwaukee. 

Trying to give people more flexible choices that they have shown 

they want in the market is where we went. That’s why we kind of 

looked at the Federal Employee Health Benefits model. We also 

looked at Tricare. But more importantly, trying to give seniors a 

prescription drug benefit that’s going to work, there is no model to 

do that in a government price-fixed model. 

Having my staff and I try to go out like we do for hospitals and 

doctors and figure out what the government is going to pay for 

Celebrex and Vioxx and Nexium would be a nightmare. The model 

that works is the model that we all have as Federal employees, 

27

which is to buy a Blue Cross plan or a CIGNA plan and have them 

subcontract with Express Scrips or PCS and let them go out and 

put together the formularies and negotiate the prices to try to drive 

the right prices and the right volume in drugs. 

So we looked at how are you going to efficiently spend $400 billion and give seniors a drug benefit. There is not an easy model out 

there to tack that kind of system on top of the old existing Medicare program. It is much—if you look at what actually exists in nature now, the thing that works most efficiently is private Blue 

Cross and other plans providing a drug benefit as part of an integrated overall health care package, and that’s how FEHBP works, 

it is how Tricare works, it is how most of the models that work—

and we are determined to try to give seniors access to drugs in all 

models, but one of the major reasons we got to this point was that 

we thought the FEHBP model, and we are not exactly designed 

like that, but it is kind of a hybrid of that, is the easiest way to 

give seniors access to an integrated plan that is not managed care 

that would also provide prescription drugs. 

The CHAIRMAN. Tom, thank you very much. 

We have been joined by our ranking member, John Breaux. John, 

you can make comments now or——

Senator Breaux. I got here late. Why don’t you go on. 

The CHAIRMAN. All right. That is fair and appropriate. Let me 

turn now to my colleague from Oregon, Ron Wyden. Senator. 

Senator WYDEN. Thank you, Mr. Chairman and Senator Breaux, 

as well. Tom Scully has a long history of being willing to reach out 

and try creative approaches, the Oregon health plan just being one 

of them. 

Let me start with one that I have been looking at as a way to 

perhaps break the gridlock on this payment equalization issue, 

which is so frustrating. I think it goes to some of what the senior 

Senator from Alaska and others have said. 

Oregon seniors and providers are frustrated with Medicare 

because it is, of course, a national program. However, the inequities in the payment mean so often, people in Oregon in 

Medicare+Choice Plans don’t get the benefit they hear other seniors have in other parts of the country. Seniors, because they hear 

about things that are available under Medicare in Florida and New 

York because of the huge disparity in payments. Payments to my 

State’s providers in the aggregate are far lower than other States’

providers. 

Just one example would be DSH. We get significantly less for 

DSH than a State like New York does. At the same time, our stay 

in the hospitals is far shorter and far shorter than the average nationally. 

What would you think, Administrator Scully, about the idea of 

our taking a fresh look at this payment equalization issue and look 

to something I have called tentatively in my mind as an efficiency 

bonus, so that in the kind of example I gave for our State, where 

our payments are lower but we also have shown demonstrably 

something that you can prove at HCFA that we have shorter 

hospital stays, we might look at a way to try to reward that. Is 

that something that you would be willing to explore? 

28

Mr. SCULLY. I am not sure, but I think probably, among others, 

Senator Grassley makes some of exactly the same points about 

Iowa as I am sure Senator Craig would about Idaho. 

The CHAIRMAN. We will make them about Idaho, but it is true. 

Mr. SCULLY. We would be happy to look at it. Secretary Thompson, obviously being from a relatively rural State, shares a lot of 

those views, and we try to look at the existing regulations any way 

we can to try to look at these geographic inequities, but a lot of it 

is statutory. Obviously, in the process of going through this year, 

a lot of these formulas are 15, 20 years old and probably need to 

be revisited and we would certainly support looking at all of them. 

Senator WYDEN. Let us talk about it differently than we have in 

the past. In the past, what you have had is Senators from Iowa and 

Oregon and Idaho talk to you about, my goodness, we are getting 

a raw deal, and everybody then starts jockeying. I think what we 

need to try to say is let us look at linking it to efficiency, and if 

a State can show, as I just said in this DSH example, that our 

lower payments are a problem, but we also can show you that we 

are lower in cost, because we have shorter hospital stays. I think 

we have got a shot at breaking the gridlock here. 

Mr. SCULLY. If I can just make two cautionary notes. One is that 

the Medicare program, as I said, is already growing 8.5 percent a 

year, faster than anybody expected in the last couple years. So if 

it is a matter of redistributing, because I think there are parts of 

the country who certainly I wouldn’t identify right now, who are 

probably over-subsidized, if we just spent more in certain areas, 

that is probably—you have to look, I think, across at it, which 

makes it painful politically. 

The other thing I would caution is that the last time we made 

a big adjustment effort, which was the right thing to do in 1997, 

it has basically, in my opinion, destroyed the Medicare+Choice program, which I think is a pretty good program. In 1997, if I can digress for 2 minutes, with the best of intentions, in some States, per 

capita spending, for instance, in Oregon, I would guess, is about 

$5,000 a year and in Louisiana it is $9,000 a year and in Pennsylvania it is probably $8,000. What happened in 1997 was 

Medicare+Choice, which was managed care, was very popular in a 

lot of urban areas. A lot of rural members from smaller States said, 

‘‘We want our fair share, too, and because we get underpaid per 

capita, we ought to disengage the HMO process for the fee-for-service process.’’

So the problem is, if you are in an efficient State, Minnesota, 

Oregon, Washington State, Idaho, low-cost States, they said, ‘‘It is 

unfair that we are getting paid 95 percent of our fee-for-service because we have very efficient providers, so we ought to be paid 

more.’’

What we did was we went to the New Yorks and the Philadelphias and the Pittsburghs that are very high cost and said, to pay 

for the—raise the rates of the rural areas, we are going to freeze 

the urban areas, and my concern is what we did is that we capped 

it for all the places where those plans are popular—Miami, New 

York, Philadelphia, Pittsburgh—we capped them at 2 percent 

growth for 5 years and we strangled them. 

29

So in all these low-income areas where these managed care plans 

are very popular, we basically killed them. 

Senator WYDEN. Let me, if I might get one more question in. If 

we continue to reward inefficiency, which is the policy today, I 

think it is going to make it hard to deal with this demographic tsunami. The points you are making are very valid. I want to work 

with you on it. 

The last question I had, just in the time that remains, is that the 

centerpiece of the administration’s Medicare reform is more private 

choices, more private choices and more competition. I have told you 

that I am open to this kind of thing as long as it is within the 

Medicare program and there are tough consumer protections. I was 

able to write that in the Medigap law. 

I would like you to tell us, what are your thoughts about how you 

would actually enforce tough consumer protections, tough oversight 

in the ideas that the President is advancing in terms of more private choices, because that is sort of the show-stopper issue. I don’t 

think there is a real shot at a bipartisan compromise, and I am interested in one—I would like to see us get there—until we see exactly how you are going to enforce tough consumer protections 

under your vision of the Medicare future. 

Mr. SCULLY. I think we are highly sensitive to the fact that if you 

are going to give seniors more choices, you have to have much 

tougher consumer forces than even in the Medigap, and one of the 

things that is in our plan is actually to reform Medigap, modernize 

it and probably have more oversight and more and better plans. 

But the vision we have is to split the country up into ten regions. 

We are happy to do that any way we would like. Tricare has 12 

regions. We think it is a better way to—the basic concept is that 

if you want to—that if you would like to sell a plan, much like an 

FEHBP in Portland, you have to take all of Oregon, all of Idaho, 

and all of Washington. That is the Region 10 for CMS. So everybody in the smallest town would have to get the same plan at the 

same rate. 

We would only have three bidders that would prevail in each of 

those regions, and I have talked to most of the major insurance 

companies and under this format, they believe that we would have 

aggressive bidding. We think that would drive lower prices. We 

think we would have a relatively small handful of plans to oversee, 

and I think we would have a very interactive—you can imagine if 

you only had three private PPO plans in the Northwest, in those 

three States, that were participating, which is far less than we 

have in Medigap, you would have a pretty active and interactive, 

I would say, ‘‘Role with the Federal Government as the overseer 

and the plan that are providing it.’’

For instance, right now in the Federal Employee Health Benefits 

Plan, a little over 50 percent of the people in that plan are in the 

Blue Cross plan, and I would—we envision as a much more active 

oversight role than OPM has with the Federal Employee Health 

Benefits Plan. We are very sensitive to the fact that if you are 

going to give seniors more options, and by the way, they would be 

required to get exactly the same benefits they have under existing 

Medicare, that we obviously envision very active engagement with 

30

the Federal Government as an overseer than clearly at least our 

model sees it under the existing Medicare program. 

The CHAIRMAN. Ron, thank you very much, and let me turn to 

our colleague, Senator Kohl. Herb. 

Senator KOHL. Thank you very much, Senator Craig. 

Mr. Scully, I just would like to ask you as an add-on to what 

Senator Wyden said, I know you are always a person who looks for 

solutions to honest problems, and with respect to this inequity, it 

is well and good and accurate for you to say that we just cannot 

pay out more without getting something back for it, but it is not 

really fair to say that, either, because then you just, in a sense, 

perpetuate what is admittedly an unfair system. 

So are there some constructive thoughts and hopes that you can 

give those of us who are in those States where the inequities exist 

about the things that you may be doing to address those inequities, 

or are you—I know you don’t want to do this, but are you simply 

saying, ‘‘Well, it is too bad?’’ What can we look to by way of hope 

from this administration to address the inequity problem? 

Mr. SCULLY. Well, within our ability within our statutes, we have 

been looking at lots of things, and I would say that if you look at 

the regulations in the last, like I happen to believe and I think the 

Secretary believes that as a general measure, probably rural areas 

tend to get for a lot of these formulas the short end of the stick, 

and I think if you look at the hospital outpatient rule last year 

where we made all the adjustments we could, where rural reimbursement went up about 8.5 percent and urban went up about 1.5, 

all across the board, we have had flux in the way we have looked 

at it. 

It sounds boring, but, for instance, in the hospital wage index, 

which affects $94 billion a year payment, if you went and looked 

at the Wisconsin facilities versus New York or Pittsburgh, the No. 

1 variable is a—it sounds like a mundane thing called the hospital 

wage index. We are looking at how to fix that and adjust it to make 

it fair, but obviously, any time you make fixes that might help a 

rural area, they have an impact in Philadelphia, where I am from, 

or someplace else. 

But if it is the right thing to do, we have been looking at fixing 

them and we are having a very thorough review, for instance, of 

the hospital wage index and how that is calculated right now. That 

probably will move more money around in the country in the Medicare program than any other adjustment, and it has been done the 

same way for 25 years and that is not always the way it necessarily should be done and we are going to have a third debate 

about it in the hospital rule. 

The physician payment system, which is a little more equitable, 

believe it or not, is done a little differently based on geographic 

variations, is a little fairer and results in somewhat fewer variations and we are looking at that, as well. It may sound mundane, 

but I think we are looking at all the underlying causes. 

I would also say that if you are looking at geographic variations, 

the way that the President’s plan works where everybody would get 

paid the same amount—every plan would get the same amount, for 

instance, Wisconsin is in the same geographic area under our 

guide, and we are willing to look at anything, as Ohio, Indiana, 

31

Illinois, Michigan, Wisconsin, and Minnesota are in one region and 

they would all be under one plan, and three plans would pay the 

same amount every place. So that alone would have a huge geographic blending all across the Midwest and reduce a lot of the inequitable barriers in payment and reimbursement all across the 

Midwest because you would be basically blending all the payments 

from Wisconsin across all those other large industrial Midwestern 

States. 

In the traditional Medicare program, there are a lot of things we 

are looking at, but I also think in a reformed Medicare program, 

there are a lot of ways to make some of the geographic disparities 

that are built into the program a little fairer, and Senator Wyden 

very accurately pointed out, one of the problems is if you are in 

Minnesota, or Oregon, or Washington or a low-cost State, you get 

in this kind of spiral where, congratulations, you are low-cost so 

you keep getting reimbursed at low costs. The same thing happens 

in Iowa and you just keep spiraling down, where if you are in a 

high-cost State, you keep getting reimbursed more and it keeps 

going up. 

I’m not sure there’s an easy way to fix that other than to go back 

and tinker with the formulas, which we are looking at doing to 

make them fairer. 

Senator KOHL. OK. Thanks. 

The CHAIRMAN. Thank you very much, Senator. 

Now let me turn to our other colleague from Oregon, Senator 

Smith. Gordon. 

Senator SMITH. Thank you, Mr. Chairman, and Tom, good to see 

you, appreciate your being here. I mentioned before my interest in 

the social HMOs. These are currently enjoyed in Oregon, California, Nevada, and New York, and they actually save a lot of 

money, and their clients prefer SMHOs but the States have a considerable state in SHMOs. Given the crisis in State budgets, we 

need to think about how SHMOs can actually save money for 

states by keeping frail elderly out of nursing homes. 

I understand you appreciate the value of the SHMOs, as they are 

called. I along with some others are trying to get them reauthorized. Their authorization is about to run out and I wonder if you 

can speak to the prospects for SHMOs and whether they will be allowed to continue or if there is something the Federal Government 

can do to maintain them through this State budget crisis. 

Mr. SCULLY. I have spent a lot of time looking at SHMOs and 

philosophically, I like them. They are different every place. There 

are a number of different—they are demonstration programs that 

theoretically run out the end of this year. I think I have already 

told them that I am planning to extend them administratively, 

which I can for another year. I think it certainly would be helpful 

to have Congress look at it and I would love to work with you to 

fine-tune them. 

Some of them are great. As you probably know, the GAO did a 

report on SHMOs and my staff has done a number of its own reports, and to be honest, they are a little skeptical about some of 

the SHMOs because they do cost about 10 percent more and some 

places they have done exactly what they expect to do. But in other 

places, it has not turned out, and I will just point out—I won’t pick 

32

on any company, but, for instance, in Las Vegas, where the biggest 

one operates, essentially the company that does that has turned 

their entire Medicare+Choice plan into a SHMO and they get 10 

percent more reimbursement and it really hasn’t worked out the 

way it was intended. 

So I think from the purely technical side of the staff, they think 

there are some flaws in some places where it has been taken 

advantage of. 

I personally think for the SHMO program, while they have some 

flaws here and there, it is greatly liked by the people in it. I think 

that the structure of the Medicare+Choice plan has pushed a lot of 

people out of these plans that would like to stay in them, and so 

at least for now, I am all for keeping the SHMOs as they are and 

extending them, but I do think that they can use some fine tuning 

and there have been some places where it has been abused a little 

bit. Oregon is not one of them, by the way. 

Senator SMITH. I know. I have only heard good things, and where 

there are problems, if you have ideas that you would like us to include in the legislation, I would love to hear it because we want 

to make them work. The truth is, if these close everywhere, I have 

estimates that an additional $100 to $300 million in the first year 

alone will be added to the cost when these people are pushed into 

nursing homes, where a majority of costs are funded by Medicaid. 

So we are not helping the States. We are not helping the Federal 

Government. We are reducing no costs. We are just taking away 

an option and simply making everybody miserable. So if you can 

help us to further craft this legislation and extend these SHMOs. 

Mr. SCULLY. I would be happy to. 

Senator SMITH. I think it is really important, because I think it 

gives seniors a less expensive and more enjoyable choice. 

Mr. SCULLY. I would be happy to come up and go through the 

details with you. I think in the places where it has worked as intended, it has worked out great. The concern my staff has, in looking at other places where the financing mechanism has been used 

to basically do non-SHMO patients, it has actually cost the government more and I think we can get the best of both. But I would 

be more than happy to come go through it with you. 

Senator SMITH. Thank you, sir. 

Mr. SCULLY. Thanks. 

The CHAIRMAN. Gordon, thank you. 

We have been joined by our colleague, Orrin Hatch. Before I turn 

to you, Orrin, though, let me go to our ranking member who arrived just a few minutes ago for comments and questions. We are 

going to have to, for the sake of our next panelist, this will be the 

last round we can do, I think, with Tom, so please proceed. 

Senator BREAUX. Thank you, Mr. Chairman. It is sort of like a 

mini-Finance Committee here, and I think the subject is no less 

important than the subjects we deal with in this area at the 

Finance Committee. 

Tom, thank you very much. I had the privilege of speaking this 

morning to your old employers, the Federation of American 

Hospitals, and they asked me to convey a message to you, but I 

can’t do that in this forum. [Laughter.] 

Mr. SCULLY. They are much happier since I left, probably. 

33

The CHAIRMAN. If we ask the court reporter not to record it and 

folks to put their hands over their ears? 

Senator BREAUX. It has something to do with not enough, not 

enough, not enough. [Laughter.] 

Mr. SCULLY. They used to say that when I worked for them, I 

think. [Laughter.] 

Senator BREAUX. I have got three points that I would like you 

to respond to as briefly as you can. The three points against the 

proposed new Medicare reform system with prescription drugs, as 

I understand it, are, first, you will force seniors into HMOs. We are 

patterning the new reform after the Federal Employee Health Benefits Plan. The point I answer in response to the fact that we are 

forcing seniors in HMOs is I am not in an HMO. I have prescription drug coverage. I have hospital coverage. I have doctor coverage. My choice is Blue Cross-Blue Shield, which is a preferred 

provider program. You can have an HMO if you choose to, but you 

don’t have to. 

Under the President’s proposal, is that essentially correct, or can 

you elaborate on that answer? 

Mr. SCULLY. That is exactly—I mean, we have no intention—in 

fact, it is the opposite. We have no desire to push them in HMOs 

and I think the realization we have is that most people don’t like 

HMOs. They are great for some people, but as I said, ‘‘In the commercial markets for people under 65, we have 70 percent of people 

in PPO kind of hybrid fee-for-service plans, about 25 percent of 

people in HMOs, and about 5 percent of people in fee-for-service, 

and the PPO kind of private fee-for-service option has been exploding, and so we are just trying to provide that option.’’

Senator BREAUX. So the full coverage of a Medicare recipient 

under the new proposed plan under enhanced Medicare, they would 

have full array of health benefits without having to go to an HMO 

if they decide something else is better for them? 

Mr. SCULLY. They could go to any doctor or hospital they wished, 

yes. 

Senator BREAUX. The second is that, well, there is a problem, 

and it is a legitimate concern from our colleagues who represent 

rural areas. Obviously, Louisiana has a lot of rural areas and some 

of our members, their State is almost all rural and they say, ‘‘Look, 

that is fine if you are in Philadelphia, or New Orleans, or Miami, 

but it is not going to work in a rural county.’’ My response to that is you pick the most rural county in America 

and there has got to be at least one Federal employee in that rural 

county. Maybe he or she works for the Fish and Wildlife Service 

or USDA as a cattle inspector or what have you, in that most rural 

county who is a Federal employee who is in the FEHBP, Federal 

insurance program, that that person has health insurance. They 

may not have a choice of ten different providers because there may 

only be one provider. But if there is only one provider, that Federal 

employee, in essence, is in a fee-for-service plan. Is that not the 

same concept that we have under the new enhanced Medicare proposal? 

Mr. SCULLY. That is exactly why we designed it that way and exactly what I would have said. That is exactly the way it works and 

precisely the reason we designed it that way. 

34

Senator BREAUX. So that Federal employee in rural county USA 

that works for the Fish and Wildlife Service, when they go to their 

doctor, if there is one in the county, or the community hospital or 

get their drugs filled at a local drug store, maybe the only one in 

the county, the reimbursement that we pay for as a Federal insurance program is basically a fee-for-service type of program. 

Mr. SCULLY. Absolutely, and most of these plans, as I said, the 

51 percent of the Federal employees are in a Blue Cross plan, and 

once you get outside of a big city, it is almost always fee-for-service 

and that is just the way it works. 

Senator BREAUX. That would be available for Medicare recipients 

in these rural areas? 

Mr. SCULLY. At least three different plans that offer that type of 

exact fee-for-service reimbursement in rural areas. 

Senator BREAUX. OK. The final point is that some would argue 

that, well, I may consider this as long as the prescription drugs 

that are available for people who want to stay in the whole Medicare program is exactly the same as what we are offering in the 

new program. My point is that you can’t do that if you want to give 

people choice. If there is no difference, there is, in fact, no choice. 

The fact that we are somehow giving people who stay in fee-forservice much less because we are giving them only a discount card 

which would, hopefully, get the discount down 10, 25 percent, and 

we are giving them 100 percent coverage after they reach a certain 

catastrophic level, which is yet to be determined, the government 

would pay 100 percent after that, plus the discount card, I point 

out that we have given them both of those extra benefits on the 

fee-for-service, an old system, without any additional premium 

charge. 

I mean, those things have to be looked at in the context that we 

are giving them a discount card plus catastrophic prescription drug 

coverage and there is no projected increase in the premium that is 

being recommended, for the same exact premium. Then for the people who want to go into the new system, the enhanced Medicare, 

which would be an integrated prescription drug program, that they 

may well be paying more for it. But you still have a difference. You 

have one program that may be a little bit better, but you are paying a little bit more, whereas if you stay in fee-for-service, you are 

getting a discount card plus catastrophic coverage, but not a single 

dollar of extra premium charge. Is that essentially correct? 

Mr. SCULLY. That is exactly correct, precisely, and there are a 

couple of reasons that we did that, two very different reasons of 

many reasons. One is that there was no really easy way, as I mentioned earlier, to design a drug benefit that adds on to the old 

Medicare program because it doesn’t exist in nature. It is much 

easier to design one that works like your Federal Employee Health 

Benefits one, that is integrated into an entire kind of Blue Cross 

package. So it was easier and more rational to design it that way. 

No. 2 is, to get enough people into the new enhanced fee-for-service, to make the competitive dynamics enough to save money and 

drive the competition, you have to get some large enough number 

of people into that to actually drive the competitive bidding and get 

the price efficiencies that we are looking for, and so that is the second reason why we did it. 

35

But there are really two reasons that we got to that conclusion. 

One was the design of the drug benefit. 

Senator BREAUX. I thank you for your responses and I will bring 

back the message to the Federated Hospitals that you said hello. 

Mr. SCULLY. They don’t want me back, huh? [Laughter.] 

Senator BREAUX. Thank you. 

The CHAIRMAN. You are also a pretty good straight man for the 

administration’s program proposal. 

Senator BREAUX. It is really mine—— The CHAIRMAN. I know that. 

Mr. SCULLY. We stole his ideas. 

The CHAIRMAN. The art of plagiarism. We love it around here. 

[Laughter.] 

Anyway, thank you very much. 

Let me turn to my colleague from Utah, Orrin Hatch. 

Senator HATCH. I am glad you are stealing some of his ideas. 

Mr. Scully, I was wondering if you could share with the committee members any data that the administration may have on the 

differences of provider reimbursement rates for the Federal Employee Health Plan and the Medicare program, and if not, do you 

know if such data is even available? 

Mr. SCULLY. I have a fairly significant amount of data on it that 

varies massively, some higher, some lower. The FEHBP tracks 

some of the better private sector health plans, and in some cases, 

it depends on the State, it is lower. In some cases, it is higher. But 

I would be happy to give you a lot for Utah, if you would like, or 

other States. 

Senator HATCH. That would be great. The President’s framework—I will just have my staff get with you and we will get what 

we need. The President’s framework is based on a new option 

called preferred provider organizations, and I think that is an 

attractive idea for beneficiaries. It is my understanding that the 

administration relied heavily on the demonstration projects involving PPOs. Am I right about that? 

Mr. SCULLY. Well, we thought it was a good start, but there are 

some fundamental structural differences that we think the new 

plan will work a lot better because it will be better financed. 

Senator HATCH. What evidence do you have that you can replicate these PPOs across the country if more than 90 percent of the 

people in the demonstrations were in a county with 

Medicare+Choice enrollment and payment rates in excess for what 

fee-for-service will pay? One thing I am concerned about is a little 

bit like the senior Senator from Louisiana. How is this going to 

work in a rural State like Utah, where we don’t have any 

Medicare+Choice plans? 

Mr. SCULLY. It is totally different, Senator, from Medicare+ 

Choice. Medicare+Choice is basically you have to have an HMO. 

You have to be able to deliver an HMO. There are no networks. In 

most rural counties in Utah, there is one hospital and probably a 

small doctor group and there is no way to put together an HMO. 

So even though the rates have been massively escalating in the last 

10 years on the theory that that would draw private plans out into 

the rural areas, no one has shown up generally because there is no 

way to put together an HMO. 

36

On the other hand, PPOs exist all over the country in all types 

of rural areas, and as Senator Breaux has mentioned, a postal 

worker or a forest ranger in Montana or in Utah can get one of the 

most rural areas. 

The fundamental structural difference is that we are not trying 

to draw HMOs, but the other issue is if you want to offer a health 

plan in Utah right now, you pick your counties and there are constructs, and I am trying to remember which region Utah is in, but 

I believe it is in the Rocky Mountain Region. If you are Blue Cross 

or CIGNA, you would have to offer a plan to everybody in Utah. 

So to sell in Salt Lake City, you would have to sell the identical 

plan for the same price all through the State, all through Colorado, 

Wyoming, Montana, the whole mountain region. That would be the 

same plan at the same price with the same premium. 

So, essentially, what the insurers, and we found this through 

FEHBP and through Tricare, is that the bulk of the people they get 

in the urban areas just—they are required to provide the same 

level of service in a fee-for-service context in rural areas. So if you 

are in rural Utah, you wouldn’t be in managed care. You would 

effectively be in a fee-for-service benefit package. 

Senator HATCH. As you know, the structure isn’t in place in 

Utah, and I think probably in many other places throughout the 

country, and I just wonder what it is going to cost to put that into 

effect. 

Mr. SCULLY. I would argue that for Federal employees, and this 

basically mimics FEHBP and for Tricare, which is the Defense 

dependents program, it works very well. Effectively, you are in a 

rural area of Utah as either a Federal employee or a military person, you go to any doctor you want, and you are already in essentially their Blue Cross or CIGNA plan, and I think it will work exactly that way. 

It is definitely not intended to be HMOs. We totally are aware 

that there are no HMOs in almost any rural area once you get outside of large cities. 

Senator HATCH. Do you have any idea how much something like 

that is going to cost? 

Mr. SCULLY. Our actuaries, who, I am proud to say, are 

extremely independent and generally are perceived in the government as being totally nonpartisan and kind of the most trusted 

people in health care scoring—CBO’s are, as well, but I think generally, more than most agencies, our actuaries have been perceived 

to be very independent, they believe that the competitive bidding 

process for these ten regions would be able to offer the same benefit package for Medicare through competitive bidding for a slightly 

lower price and a slightly lower premium than commercial Medicare, and we did not come up with a detailed plan. Obviously, we 

read lots and lots and lots of options before we came up with our 

framework. 

We have had our actuaries up talking to people in Congress and 

I think their very highly regarded judgment is that the cost of this 

would be slightly less than the competing premium for the identical 

benefits of Medicare. 

Senator HATCH. Mr. Chairman, my time is almost up, but I am 

very interested in CBO’s opinion, as well, on this because I think 

37

it is an important set of issues. So I hope if I can’t be there, that 

CBO cover that. 

Mr. SCULLY. I am not sure CBO agrees. We have been talking 

about it, but we are in the beginning stages. [Laughter.] 

Senator HATCH. OK. 

Mr. SCULLY. But I will tell you that I think they would agree, 

as would most people in health care on the Democratic and Republican side, that the HCFA CMS actuaries are generally perceived 

to be completely independent. Sometimes that doesn’t work out 

well for me, but I can tell you they are completely independent. 

[Laughter.] 

The CHAIRMAN. Administrator Scully, thank you very much for 

your willingness to be here today, your openness, your candidness 

about this. This is one of the big hurdles that we know that this 

Congress has got to attempt to face, and certainly the administration has led with a proposal. You have not been timid and you 

shouldn’t be. All of these models need to interact. We need to see 

the different approaches. 

There needs to be this kind of discussion and debate before we 

decide, because what is significant is that the Ron Wydens and the 

Larry Craigs and the Orrin Hatches and the Gordon Smiths of this 

world all agree about the problem in general and all agree there 

needs to be a solution, and that in itself is a major step toward 

that solution, especially when we begin to narrow it to certain models that we think might fit. I think, clearly, what the administration is doing and what you are doing helps us narrow that playing 

field significantly. 

Senator WYDEN. Mr. Chairman, just for 30 seconds, I want to follow up on my interest in working with you and the Administrator 

on this point. I think when you talk about Federal employees and 

making a link, which I am attracted to and have made it myself, 

there is a difference between a 40-year-old Federal employee who 

is a Fish and Wildlife employee in rural Utah or rural Oregon and 

a 75-year-old elderly woman who there was a history, particularly 

with Medigap until we wrote the law, of people exploiting that person. 

I think if we can work together with you to make sure that these 

choices are inside Medicare and recognize the vulnerability of people and the need for the oversight and the consumer protection so 

that people won’t be ripped off by being part of a modernized Medicare program, I think we can get through it. I am going to follow 

up with you, Mr. Administrator, on this point and work with you 

on it and I thank you for that extra time. 

Mr. SCULLY. I will be very brief, but I would make one point I 

hadn’t made, which is the fact is there are a couple million people 

that are Federal Employee Health Benefits retirees who already 

get Medicare and they wrap around Medicare and to them, they 

don’t know the difference. So there is already pretty substantial 

evidence that in Medicare alone, this already works. Thanks. 

The CHAIRMAN. Thank you, Mr. Administrator. We do appreciate 

it. 

We appreciate also the patience of our next panelist, but we felt 

it was tremendously important that we get Dr. Douglas HoltzEakin——

38

Senator TALENT. Mr. Chairman, may I trespass on your patience 

just to ask him one question. 

The CHAIRMAN. Yes, please. Please be seated. 

Excuse me. We have been joined by Senator Talent, another 

colleague of ours, a member of this committee, and yes, please do. 

Senator TALENT. Mr. Chairman, thank you. Once again, Mr. 

Chairman, you have scheduled an extremely important and relevant hearing to all of us, especially to Missouri. We have a population that is more elderly than most States. About 14 percent of 

our people are 65 years old or older. 

I am certain that there have been a lot of discussions about funding Medicare for the future. I am not going to ask questions that 

I imagine have been asked, although we may submit something to 

you later on in writing. 

There is a subject, though, that I want to get into and just get 

your comment on, because I think it presents a possibility for really 

improving the quality of the health care that we offer seniors 

through Medicare while also enabling us to save dollars that we 

can then direct in treatment, and that is the question of information technology in health care in general, and particularly for Medicare providers. 

My sense anecdotally, and I tour a lot and talk a lot to people 

who are providers in Medicare, hospitals, physicians, et cetera, and 

I also think the data indicates this pretty clearly, is that health 

care, for one reason or another, is behind other parts of the economy in information technology. I am not talking about treatment 

technology, the new CAT scan, the new chemo method. I think we 

are at a cutting edge there. I am talking about providers getting 

and sharing information through computers or electronic medical 

records that will reduce medical errors and permit them to save 

dollars that now go into keeping hard copy and paper. 

An example, I had sinus surgery 3 weeks ago, Mr. Chairman, 

and the first three people who talked to me took down the same 

information from me about my history and put it on hard copy. You 

are going to go into a physician’s office and they all have a back 

room with all this hard copy stuff. When I go to the Jiffy Lube to 

get my oil changed, I give them a card that they have given me. 

They put it in a computer and they can see everything that they 

have done to my car, at least in the Jiffy Lube system. 

So what I am saying, and I know providers are out there trying 

to update these systems, what can we do through Medicare? Could 

we change some reimbursement formulas and maybe provide a little extra money to encourage them to get this architecture in place 

with all the promise that it holds for allowing us to invest dollars 

in what we ought to invest it in, not paperwork and not accumulating things we don’t need, but putting it into solid care for seniors? I just want Mr. Scully to comment on it. Thank you for allowing me an extra moment to do that. 

The CHAIRMAN. You bet. 

Mr. SCULLY. I don’t want to push Chairman Craig’s patience. I 

could talk to this for hours. You are completely right. Secretary 

Thompson is going to have a fairly big announcement about this 

in Detroit tomorrow. We had about 50 of the leading IT people in 

meeting with me and the head of ARC on Monday to talk about 

39

this and I think the issue is that health care, and Secretary 

Thompson’s pet project is 20 years behind, and Jiffy Lube is a great 

example. We are not as good as Jiffy Lube. 

Providers want to do it. I think we can really provide some tremendously positive incentives in Medicare and I hope in the process working with the Finance Committee and you this year we can 

do that, to encourage people to do that. But we are way behind. We 

are trying to—the main thing the Federal Government can do is 

put out standards so people are working on the same set of railroad 

tracks and talk to each other, and we also need creative financial 

incentives, and I am a big advocate of doing that and I hope I can 

work with the committees to do it this year. 

Senator TALENT. I would be very interested in helping you and 

the Secretary with that. The potential for this, I think, is much 

greater than we may know, to improve this system. If there are 

some problems—some people have said to me, well, the privacy regulations make it difficult to get this in place. I don’t know that I 

totally believe that, but if they need some help here or in your 

agency to fashion these regulations to permit them to do it, we certainly ought to. 

Mr. SCULLY. I would love your help. 

Senator TALENT. This is a total up-side. 

Mr. SCULLY. You may have noticed the FDA came out with bar 

coding for drugs the other day. This is Secretary Thompson’s, next 

to bioterrorism, probably favorite subject. 

Senator TALENT. I am glad to hear that and I thank you for your 

indulgence, Mr. Chairman. 

The CHAIRMAN. Thank you again, Tom. 

Mr. SCULLY. Thanks. 

The CHAIRMAN. We do appreciate it. 

Now, let me turn to our next witness, Dr. Douglas Holtz-Eakin, 

who has just last month become our new Director for the Congressional Budget Office. I understand that today’s testimony will be 

his first before Congress since taking office. We are not such a 

daunting committee. We are really kind of a friendly sort of crew 

here, Doctor. 

Dr. Holtz-Eakin comes to this post most recently from the President’s Council on Economic Advisors, where he served as Chief 

Economist. He is also, needless to say, a distinguished economist 

and is currently on leave from Syracuse University. 

Doctor, we welcome you before the committee. An economist just 

wouldn’t and couldn’t be present without a chart, and so I see you 

haven’t disappointed us. Please proceed.

40

STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE, WASHINGTON, DC 

Dr. HOLTZ-EAKIN. Thank you very much, Mr. Chairman. It is a 

pleasure to have the opportunity to talk about the future of the 

Medicare program. 

Medicare is the Federal Government’s largest health care financ- ing program and, with projected outlays of roughly $280 billion this 

year, the second-largest Federal program overall. It is the principal 

payer of medical bills for some 40 million elderly and disabled people, with payments per enrollee currently averaging $7,000 a year. 

I have prepared a much longer written statement, which I will 

submit for the record. Here, let me confine myself to a few brief 

points and then we can take some questions. 

If Medicare continues to operate as it is currently structured, its 

costs will rise significantly, even in the absence of any program initiatives, such as a new prescription drug benefit. In the base case 

outlined in my written testimony, the Congressional Budget Office 

(CBO) estimates that Medicare’s costs will rise from 2.4 percent of 

gross domestic product (GDP) today to 9.2 percent in 2075. Another 

way of looking at this growth is to consider what would happen if 

it just simply occurred today. If Medicare’s program costs today 

were 9.2 percent of GDP, they would account for one-half of what 

is now spent on the entire Federal budget. 

The program will grow for two reasons, outlined in the chart that 

I brought along with me so as to fulfill my reputation of being an 

economist. There are really two drivers in the cost of Medicare. 

First, is simply the aging society in which we reside. Aging will account for about 30 percent of the increase in Medicare’s costs over 

the next 75 years. 

The second major reason for the rising costs of Medicare is simply the excess growth in health costs nationally above the growth 

rate of GDP, and that contributes the remaining 70 percent. That 

is the large dark area at the bottom. The aging is simply the 30 

percent gray area at the top. Those two will add up to substantial 

growth, nearly quadrupling the overall costs of Medicare as a fraction of our national economy. 

In the absence of any kind of changes in the program, the future 

growth of Medicare is going to force two broad types of tradeoffs. 

The first is that if we are to keep Federal receipts, which are currently about 18 percent of national income, at this roughly historical level, the rising costs of Medicare will entail broad tradeoffs 

within the Federal budget against other programs and initiatives 

that the Congress may be interested in. The second broad tradeoff 

would be that if the Congress decided to let the overall level of receipts as a share of national income rise, the costs of Medicare 

would compete against private uses for those same resources. So 

the underlying trends that we see in the graph will force two broad 

tradeoffs in the future as the program continues to grow under current law. 

These observations suggest a two-part framework for thinking 

about the future of Medicare policy. First, ultimately, the costs of 

Medicare and other forms of future retirement income services as 

well as the consumption of the working age population will be 

drawn from the U.S. economy as a whole. The larger the economy 

41

is, the more easily retirement-related costs can be covered without 

cramping the lifestyles of workers. In that light, it would be useful 

to structure the overall budget policies and, to the extent possible, 

increases in Medicare programs to minimize the incentives for people to consume more at the expense of resources for investment in 

the economy. 

Medicare and related Federal entitlement programs are heavily 

oriented toward consumption, and as their costs rise, they generate 

pressures at odds with the savings and investment that will constitute the core of economic growth. Program expansions by themselves would only increase the extent to which those pressures impinged on faster economic growth. If major changes to Medicare’s 

benefits are to be undertaken, both their value to program recipients and the strains that will place on the economy must be considered. 

Second, regardless of the fraction of the Federal budget and the 

economy ultimately devoted to Medicare, it will be desirable to utilize Medicare funds as efficiently as possible to purchase the highest-value care per dollar. Medicare beneficiaries, their families, and 

providers are best positioned to guide the use of additional dollars 

and to choose those services that meet their therapeutic demands 

and match their individual tastes. Providing those parties with a 

broader range of choices and improved information, and ensuring 

their sensitivity to the costs of these services, should facilitate better decisionmaking. At the same time, an appropriate balance must 

be struck between providing stronger financial signals to beneficiaries on the costs of their care and also protection against greater financial exposure. 

Another point I would like to make is that, as with any long-term 

projection, the CBO base case is subject to some risks and uncertainty. To pick only one, the rate of excess cost growth in our base 

case is 1 percent above the growth rate of GDP. If excess cost 

growth turned out to be even half a percentage point higher, the 

implication would be that Medicare’s costs would rise not to 9.2 

percent of GDP but even higher, to 13.2 percent. Alternatively, if 

excess cost growth was half a percentage point slower, or half a 

percentage point above the rate of growth of GDP, the rise would 

only be to 6.4 percent of GDP. 

Regardless of which side of that you might come down, on two 

observations are, I think, in order. The first is that, historically, 

over roughly the life of the Medicare program, the excess cost 

growth has been 2.8 percent of GDP, and second, Medicare’s costs 

are going to rise regardless of the band of the uncertainty that you 

put around them. 

My final point is that the aging component will arrive soon. 

Between the birth of Medicare in roughly 1970 and 2030, the ratio 

of retirees to workers is going to roughly double, and that aging 

component argues that moving sooner as opposed to waiting will 

make any adjustments to the Medicare program easier. 

I will close with that and be happy to take your questions. 

The CHAIRMAN. Doctor, thank you. 

[The prepared statement of Dr. Holtz-Eakin follows:]

42


87355.012
43


87355.013
44


87355.014
45


87355.015
46


87355.016
47


87355.017
48


87355.018
49


87355.019
50


87355.020
51


87355.021
52


87355.022
53


87355.023
54

The CHAIRMAN. All that you laid before us, and as the facts come 

in, it is clear to any of us that the sooner we make these adjustments, the better off we are going to be, and the recipient of the 

service provided by these programs is probably going to be better 

off, also. But projected outward, you use those figures. I used similar figures in opening comments this morning. That is 

unsustainable. 

Congress will not put itself through those two alternatives of 

choice that you talk about, either forcing the consuming public to 

make considerably larger or different choice, private sacrifice or 

choice, and we are not going to, at least under the current Congress, and past records would also demonstrate that, make those 

kinds of choices to offset discretionary spending. 

You project on page six of your testimony that Medicare by 2075 

will consume the staggering 9.2 percent of GDP. If a high-end universal drug benefit with a 10-year price tag of $800 billion to $1 

trillion is to be enacted this year, what kind of an effect would that 

have on the projections you have quoted? 

Dr. HOLTZ-EAKIN. Well, if you will forgive me for doing the math 

in my head and not hold me to it precisely, $800 billion to $1 trillion over 8 years is less than percentage point of GDP at the outset; with compound growth over 65 years it could grow to be as 

much as another 2 percentage points of GDP. So we would be looking at an excess of 11 percent of GDP by 2075. 

The CHAIRMAN. The one thing that is obvious to us when you 

project Medicare outward, and you made a reasonable extrapolation based on those figures, is that we have never been able to 

control those figures or costs to be accurate in our projections. You 

can do that in Social Security. The demographics are there. We understand where people are in their aging and all of that. But the 

one thing that we cannot incorporate into all of this is the dynamics of health care as clearly a dynamic economy today, and we 

never could and haven’t, obviously, factored the change in care delivery and prescription drugs and we are now there trying to struggle with that. 

So I have to assume that if you are talking 11 percent, you are 

probably off 20 percent. Is that reasonable? I am not an economist. 

Dr. HOLTZ-EAKIN. It is perfectly reasonable to suspect that the 

variation is at least 20 percent. I gave you a variation—simply 

from moving one-half of a percentage point up—of 7 percentage 

points of GDP. It is enormous. 

The CHAIRMAN. You state on page ten of your testimony that 

stimulating private health care plans to compete through premiums might reduce costs through greater efficiency and negotiated rates. First, I am correct to assume here that you are referring to a competitive model along the lines of the Federal Employees program? 

Dr. HOLTZ-EAKIN. I think it is fair to say that I am simply talking about the large range of experience in economics, where having 

competitive pressures with a reward to efficiency on the supplier 

side and with a reward to matching purchased services to your 

preferences on the demand side will have a payoff for society as a 

whole. It is not intended to point to any particular competitive system that might be designed. 

55

The CHAIRMAN. Second, could you elaborate a bit more on how 

such enhanced efficiencies might come about in such an environment where it applied to Medicare. 

Dr. HOLTZ-EAKIN. I think in that regard, I would make two observations. The first is that with specific proposals for introducing 

competitive elements into Medicare, the ultimate impacts both in 

terms of quality of care, cost to the Federal Government, and cost 

to beneficiaries will depend importantly on the details and the degree to which incentives are embedded in the system. Without seeing those details, it would be premature for me to make any particular judgment. 

The broader point that I would like to make is that Medicare resides within the private health care system. It is 17 percent of national health care spending, and the degree to which that larger 

private health care system is responsive to incentives will control 

the kind of cost growth that we see in this chart. 

The CHAIRMAN. One of the factors of the consumption of GDP 

into these programs that is of concern, and my question is of that, 

total Federal taxes today absorb about 18 percent of GDP. By 2075, 

however, you say taxes as a share of GDP would be about an additional 7 percentage points higher if Medicare’s projected higher cost 

were to be covered by taxes. What would be the effect on the economic growth if Federal taxes were to rise that much in that context? 

Dr. HOLTZ-EAKIN. I think it is important to be careful about how 

those taxes would be raised. To the extent that those taxes were 

levied on saving, investment, risk taking—on capital accumulation, 

broadly speaking—economic growth would be impeded. Growth occurs through the accumulation of quality and quantity of skills, 

skilled labor, capital, and technologies. To the extent that those 

taxes were levied on the consumption that is at odds with savings 

and investment, then the impact would be minimized. 

The CHAIRMAN. Let me turn to my colleague from Missouri, Senator Talent. 

Senator TALENT. Thank you, Mr. Chairman. It is pretty clear 

from the information you have presented that the current situation, business as usual, if you will, is not likely to be politically or 

economically viable in the out years. Obviously, you are presenting 

the facts and then we have to decide what it is we want to do. 

Clearly, if we could reduce the costs of traditional Medicare without impairing or even improving care, that would obviously help a 

lot. I am going to suggest something to you, but I want to just 

make a general comment first. 

My concern is that as we approach this cliff, Congress is going 

to react the way it has reacted in the past when it wants Medicare 

savings. It is going to basically tighten the lid and reduce reimbursement rates and, in effect, pretend that we can get the savings 

we need and still get the services we want by just reducing the 

amount that we are paying for the services. 

Then in order to justify that, what happens is the Congress—and 

let us face it, politicians are very good at this—scapegoats the providers. Well, the problem is all this waste, fraud, and abuse and 

people out there, and that is what we did with BBA 1997 basically, 

and it saved money, but it really hasn’t worked. 

56

Now, the other alternative is to take costs out of the system that 

aren’t delivering anything in terms of care. I just talked about technology. Let me add one other one and then you can add your comments about it. 

I think it is the case, Mr. Chairman, isn’t it, that about 5 percent 

of the folks on Medicare are generating about 50 percent of the 

costs. 

The CHAIRMAN. Something near that. 

Senator TALENT. Now, that is a small enough group of people 

that it seems to me, at least on a pilot basis, we could try, particularly if we get the information systems up to where they need to 

be, identifying them when they come into the system and having 

some pretty good case managers work with their providers to try 

and reduce those costs in those cases and pull some of those costs 

out of the system. 

I don’t know, I probably should have asked this of Mr. Scully as 

well, but aren’t there opportunities to pull costs out of this system 

in traditional Medicare so we can flat-line some of that growth a 

little bit, and isn’t that a logical thing that we should begin trying 

to do? 

Dr. HOLTZ-EAKIN. I can suggest a couple of things. The first is 

that one of the points that I tried to make in my written testimony 

was that to the extent that you can build incentives in for providers to actually reap some of the benefits of identifying those 

costs, the system itself will identify and take them out to the extent possible, and that is something that is desirable to get into a 

system. 

The second is on the specific benefits of case management and 

disease management and identification of high-cost Medicare beneficiaries. The Congressional Budget Office has undertaken some 

preliminary investigation into these issues, which is far from complete, and it is really trying to take a hard look at data that track 

Medicare beneficiaries over a long period of time to try to identify 

the degree to which a small number are responsible not just for the 

costs in any single year but the costs over a long number of years, 

and the degree to which those costs can be traced to particular diagnoses and chronic conditions. Then the questions is. Can a system be designed that would, in fact, be useful for identifying, such 

beneficiaries controlling costs, and providing the quality of care 

that would be of interest to the Medicare program? 

We would be happy to share that work, with you as it is completed and work with you in——

Senator TALENT. Perhaps in doing that work, you could look at 

the costs generated from those cases and make some assumptions. 

Let us suppose that we reduce those costs by 10 percent, by 15 or 

20 percent. What does that do to the overall picture if we put this 

into place? 

These are the kinds of things I am interested in doing, because 

personally, I think that there are ways—I talked about technology, 

we have talked about case management. If we could provide some 

liability relief to take some of the defensive medicine that is currently being practiced in both the public and the private sector, 

take that cost out of the system, I think there are billions of dollars 

being spent on things in health care that aren’t related at all to 

57

health care, and it is not waste, fraud, and abuse. It is things in 

the system that are causing providers to do this in order to relieve 

other stresses that are being put on them that doesn’t have anything to do with care. We may be able to get our way largely out 

of this that way. 

I would love to see—you can at least look at top lines and make 

some assumptions and provide some data, and if you do, I would 

love to see it. 

Dr. HOLTZ-EAKIN. If I could make two comments about that, the 

first is, that as an economist, I am a great believer in the power 

of incentives, and the good news part of the comments you just 

made would be that perhaps incentives could help us to control this 

excess cost growth. 

The bad news that I will put on your radar screen is that CBO’s 

base-case projection assumes that costs grow faster than GDP by 

1 percentage point. Historically, they have grown faster by 2.8 percentage points. There is an enormous gap between those two figures, which we have not built into these particular projections. So 

the degree to which incentives can rectify the entire problem remains to be seen. 

Senator TALENT. Why is health care as a whole, the cost of 

health care in the private as well as the public sector, why is that 

growing—first of all, it is growing faster than costs in other areas, 

isn’t it? 

Dr. HOLTZ-EAKIN. Yes. 

Senator TALENT. What, in your judgment, is that attributable to? 

Dr. HOLTZ-EAKIN. Many people have looked at this, and I would 

say the broad consensus is that innovation and new technology are 

the key drivers of health care costs, followed by a range of other 

factors that you could rank in a variety of different orders—increased insurance, subsidies to that insurance, and a variety of 

other things, including aging of the population. But the technology 

component seems to be the common element that most investigators arrive at, and the degree to which we adopt the right technologies and spend our money as a nation wisely on those technologies is obviously crucial. 

The second thing, as an economist, that I would warn you about 

is that cost is not the only way to measure those technologies. You 

would also want to assess the benefits in terms of their therapeutic 

value, and simply measuring cost doesn’t tell you whether we are 

getting the right value for our dollar. 

Senator TALENT. Yes, I understand that. You are saying what I 

think of as treatment or therapeutic technology, you know, the new 

form of oncology or whatever that costs a lot of dollars but is more 

effective in treating people, what you understand is that that is 

what is driving the cost in health care? 

Dr. HOLTZ-EAKIN. New technologies. 

Senator TALENT. But you see, there are new technologies being 

introduced all across the rest of the economy and they are not driving costs that much, and in some cases, they are reducing costs. I 

mean, the new technology is permitting people to be more productive. Is that phenomenon helping, or is it occurring in health care, 

and if not, why not? 

58

Dr. HOLTZ-EAKIN. On a case-by-case basis, the CBO staff has 

looked, for example, has looked at some of the new prescription 

drugs and the degree to which they could substitute for older treatments and therapies and, as a result, perhaps result in cost savings. There is no clear conclusion on that particular front as yet. 

In some particular diagnoses, it appears that it is possible. In others, there doesn’t appear to be any cost saving, but rather that 

drugs are an additional treatment that adds to total cost yet may 

yield greater patient satisfaction, and if so, then the lack of cost 

savings is worth it from an economic point of view. On balance, it 

is not obvious that these things break in the direction of saving 

costs in total. 

Senator TALENT. Is it, and stop me, Mr. Chairman, if I have gone 

too far——

The CHAIRMAN. Complete your thought. 

Senator TALENT. Is it inherent maybe in the nature of a system 

where payment is so predominately third-party pay? I mean, is 

that the problem in health care, that there is always somebody else 

who is paying for the health care and so you have, in effect, an unchained demand? Is that driving the costs? 

Dr. HOLTZ-EAKIN. Senator, as an economist, I am sure it would 

be a dangerous thing for me to assign any single cause to the rising 

cost of health care, and I won’t do it. But I will point out that one 

of the key incentives in any economic problem is to make sure that 

the individual making the decision has the proper financial inducement to weigh benefits and costs, and ignoring one side of that 

equation leads to bad decisions on the whole. 

Senator TALENT. But, you see, I am not sure what we can do 

about that, because we can’t have a system—I can’t think of a system of reimbursement or payment that would be just and would 

produce health care for everybody that was not largely third-party 

pay. I mean, I think you could probably try and give people incentives to be more responsible for their primary care, the costs, the 

lower-level costs in health care. But once you get into acute care, 

we are going to have a system where you have either got an insurance company or the government or somebody doing third-party 

pay. 

So really, on the highest level, it seems to me one of the things 

we have to do is try and figure out a way to reintroduce the right 

incentives, given that we have a third-party pay system. Is there 

any model out there that you know of that we can look at to try 

and accomplish that? 

Dr. HOLTZ-EAKIN. I don’t have a specific policy recommendation. 

It would be inappropriate for me to make one at this point——

Senator TALENT. Right. 

Dr. HOLTZ-EAKIN [continuing]. But I would be happy to work 

with you if you had particular ideas that you wanted to try out. We 

could have a dialog and see which ones seem most promising. 

Senator TALENT. OK. Thank you, Mr. Chairman. 

The CHAIRMAN. Well, thank you for those questions. I think that 

when we get into that business of defensive medicine and all the 

other things that are driving health care costs external to health 

care itself—certainly, the tort reform we are attempting here and 

59

that States are touching on a State-by-State basis is going to have 

some impact, also, on those overall costs. 

We have been joined by our colleague, Senator Carper. We are 

pleased to have you with us. I would turn to you for any opening 

comment you would like to make. We just finished with Administrator Scully and we are now with our new Director of the Congressional Budget Office, Dr. Holtz-Eakin. 

Senator CARPER. Good luck. 

Dr. HOLTZ-EAKIN. Thank you, sir. 

Senator CARPER. I just came here to wish you good luck. You take over with a budget deficit that is soaring past $300 billion and 

we are into a war that we have not paid for and are anticipating 

further tax cuts—— The CHAIRMAN. This has been a real upbeat place until you got 

here. [Laughter.] 

Senator CARPER. You are a better man than I am to take this 

on at this time. 

I apologize for arriving at this hour. It is my fourth hearing that 

I have been to and I have had some other things added to my 

morning, so I apologize for not being here earlier. 

I am not going to give a statement but I would just ask, for you 

to take a minute and tell me one thing you would like for me to 

remember when I leave here either in response to questions or your 

statement. 

Dr. HOLTZ-EAKIN. Asking an ex-professor to restrict himself to 

one thing is asking a lot. [Laughter.] 

But one thing to remember is the current program is broken, and 

I can give you three things on top of that if you would like. 

Senator CARPER. Give me three. 

Dr. HOLTZ-EAKIN. The current system is broken. It will involve, 

as a result, trying to tradeoff either other smaller programs within 

the government budget or making the government budget larger 

and having a smaller private sector. The fourth thing I would point 

out is that Medicare is embedded within a larger private health 

care system. It is only 17 percent of our national health care spending. So to focus on Medicare alone is to run the risk of missing the 

larger picture. 

Senator CARPER. Folks over at the Progressive Policy Institute, 

including a fellow named Jeff Lemieux, have given a fair amount 

of thought to these issues. I don’t know if you have had any chance 

to spend time with him and to get the benefit of his thinking, but 

I have and I find it always refreshing and, frankly, valuable. He 

thinks outside the box and we need some of that as we approach 

the issue of Medicare in the 21st century and what to do with respect to the prescription drug program. 

Mr. Chairman, I am sorry again to be late. I am glad that I got 

here before you finished and good luck. We look forward to working 

with you. 

Dr. HOLTZ-EAKIN. Thank you. 

The CHAIRMAN. Tom, I thank you for taking the time to drop by. 

We have all had busy schedules this morning and it is kind of you 

to come by and say hello to our new Director. 

Let me ask a question on behalf of Senator Hatch, who had 

asked it of Mr. Scully and I think you were picking up on it prior 

60

to his leaving. The question that was asked of Mr. Scully, again, 

he says, ‘‘Again, it is my understanding that the administration 

relied heavily on the demonstration projects involving PPOs.’’ I am 

interested in your opinion on whether or not you can replicate 

these PPOs across the country if more than 90 percent of the people in the demonstrations are in counties where Medicare+Choice 

enrollment and payment rates are in excess of what fee-for-service 

will pay. Which details drive the cost of the PPO options? Are you 

prepared to respond to that? 

Dr. HOLTZ-EAKIN. Well, I can’t speak to how the administration 

prepared any estimates. I have not seen the details of any plans, 

so that would be premature. I can make some general observations 

that——

The CHAIRMAN. Please do. 

Dr. HOLTZ-EAKIN [continuing]. Compared with Medicare fee-forservice, the wide range of private options available at the moment 

are in some cases cheaper and in some cases more expensive than 

Medicare. We heard several Senators remark that Medicare was 

the lowest payer in their area. Those are examples of situations in 

which the private options would be more expensive. 

The second general comment I can make is that in any demonstration project that economists have tried to study—government 

training programs come to mind as an example—an important 

issue to be cognizant of is the degree to which the participants really pick the most opportune places and times to take advantage of 

such a demonstration project. To the extent that the PPOs we see 

in the demonstration are only located in those places where they 

are going to have their greatest advantage, they will not be representative of any nationwide PPO system that one might put in 

place. The same lesson has been learned in training programs, 

where those most likely to take advantage of training are those 

who can get the largest return from it, which skews the estimated 

returns to the training program. 

The CHAIRMAN. Doctor, your table on page nine shows that if 

Congress were to try to address Medicare fiscal problems by either 

raising the eligibility age or by increasing beneficiary cost sharing, 

the resulting fiscal benefit would be remarkably small. Why is that 

the case? 

Dr. HOLTZ-EAKIN. Well, in both cases, the options are actually 

relatively small. In the first case, moving the retirement age up by 

2 years doesn’t change the fundamental demographic shift of doubling the number of retirees per worker, and it also takes away the 

cheapest Medicare beneficiaries—the lowest 10 percent of the population—but not 10 percent of the cost. 

In the second case moving the Supplemental Medical Insurance 

premiums up as much as is shown in that option really just 

changes the overall subsidy from 90 percent to about 80 percent, 

and as a whole doesn’t change the basic financial structure very 

much. 

The CHAIRMAN. You had given a scenario, and you spoke again 

to it with Senator Carper, of the long-term future of Medicare and 

the impact it has and choices, such as ultimately reducing benefit 

levels, raising taxes, reducing other spending or for increasing Federal borrowing—and all of these by very significant amounts. 

61

I am confident we are going to make some changes, but I am not 

confident we are going to make them in such a significant way— I mean, I think we cannot say that that is our trajectory. 

So as an economist, looking at this from an economic growth perspective, which of these four directions would have the least 

amount of harm on the country from a long-term economic growth 

perspective? 

Dr. HOLTZ-EAKIN. I would characterize the problem slightly differently. The Congress will, in its deliberations this year and in the 

future, pick a structure not just for Medicare but for Medicare, Social Security, and Medicaid—the entitlement programs, all of which 

have this same basic characteristic growth path—and for the budget as a whole, which will or will not encourage consumption at the 

expense of saving, or will allow the country to accumulate greater 

resources in capital, labor, and technology. That is the fundamental 

tradeoff that these choices will influence. To the extent that the 

overall structure of the government budget is one that provides 

consumption in the present at the expense of saving for the future, 

other things being equal, we will see lower growth, and the question for the Congress will be, is that worth it in terms of providing 

those necessary benefits in the government budget that we want 

today and giving up some smaller amount of growth in the future. 

The CHAIRMAN. I could see lurking in the back of your mind the 

Japanese model. 

Dr. HOLTZ-EAKIN. I won’t speak to that. I don’t know what the 

Japanese model is—— The CHAIRMAN. No, I mean the current Japanese economy—— Dr. HOLTZ-EAKIN. I do not want the current Japanese economy, 

sir. 

The CHAIRMAN. Thank you, because it is, in essence, that burdened economy, if you will, that is so consumptive of its productivity that it can’t begin to produce again, it seems, and it is sitting 

out there for the last 10 years with almost no growth, or very little 

growth. 

Dr. HOLTZ-EAKIN. I will spare you a long dissertation on my 

views on the Japanese economy. No one here deserves that this 

morning. One chart is probably enough. 

I will say that you have hit the nail on the head when you point 

to productivity. Maintaining a rapid rate of productivity growth is 

the key to long-run living standards in the United States, and that 

is another way to pose the basic problem: to ensure that we grow 

large enough as an economy requires rapid productivity growth, 

and that larger economy will provide the resources for all such programs, public and private. 

The CHAIRMAN. That really is the key. I am through with my 

questioning. Is there any further? 

Doctor, thank you very much for taking time to be with us this 

morning. This is an area that I am quite confident you are going 

to be spending a lot of time on in the future, as are we, as we 

should, to create these new models that are so critical to the population of our country and in the overall economics of our country, 

the dynamics that we have talked about here just in the last few 

minutes. So we will stay connected, as I know you will, and I thank 

you very much for being here this morning. 

62

The committee will stand adjourned. 

[Whereupon, at 12:19 p.m., the committee was adjourned.] 

(63)

A P P E N D I X 


87355.024
64


87355.025
65

Æ


87355.026