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23–797 2005

BOARD OF TRUSTEES 2004 ANNUAL REPORTS 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED EIGHTH CONGRESS 

SECOND SESSION 

MARCH 24 AND APRIL 1, 2004 

Serial No. 108–69 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

BILL THOMAS, California, Chairman 

PHILIP M. CRANE, Illinois 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

AMO HOUGHTON, New York 

WALLY HERGER, California 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

JIM NUSSLE, Iowa 

SAM JOHNSON, Texas 

JENNIFER DUNN, Washington 

MAC COLLINS, Georgia 

ROB PORTMAN, Ohio 

PHIL ENGLISH, Pennsylvania 

J.D. HAYWORTH, Arizona 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

SCOTT MCINNIS, Colorado 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

ROBERT T. MATSUI, California 

SANDER M. LEVIN, Michigan 

BENJAMIN L. CARDIN, Maryland 

JIM MCDERMOTT, Washington 

GERALD D. KLECZKA, Wisconsin 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

WILLIAM J. JEFFERSON, Louisiana 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

MAX SANDLIN, Texas 

STEPHANIE TUBBS JONES, Ohio 

ALLISON H. GILES, Chief of Staff 

JANICE MAYS, Minority Chief Counsel 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 


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C O N T E N T S 

Page 

Advisories announcing the hearing ........................................................................ 2 

WITNESSES 

U.S. Department of the Treasury, Hon. John W. Snow, Secretary ..................... 7 

Congressional Budget Office, Douglas Holtz-Eakin, Director .............................. 17 

Social Security Administration, Stephen C. Goss, Chief Actuary ....................... 29 

Centers for Medicare and Medicaid Services, Rick Foster, Chief Actuary ......... 32 

Centers for Medicare and Medicaid Services, Jeff Flick, San Francisco Regional Administrator ............................................................................................ 108 

Centers for Medicare and Medicaid Services, Leslie V. Norwalk, Acting Deputy Administrator and Chief Operating Officer ................................................ 111 

SUBMISSIONS FOR THE RECORD 

American Academy of Actuaries, Cori E. Uccello, statement .............................. 126 

Physicians for a national Health Program, Chicago, IL, Don R. McCanne, 

statement .............................................................................................................. 132 


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hmoore on PROD1PC68 with HMRPT
(1) 

BOARD OF TRUSTEES 2004 ANNUAL REPORTS 

WEDNESDAY, MARCH 24, 2004 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

Washington, DC. 

The Committee met, pursuant to notice, at 1:13 p.m., in room 

1100, Longworth House Office Building, Hon. Bill Thomas (Chairman of the Committee) presiding. 

The advisory and second advisory announcing the hearing follow:] 


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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

FOR IMMEDIATE RELEASE CONTACT: 202–225–1721 

March 17, 2004 

FC–16 

Thomas Announces Hearing on Board of Trustees 

2004 Annual Reports 

Congressman Bill Thomas (R–CA), Chairman of the Committee on Ways and 

Means today announced that the Committee will hold a hearing to examine the 

findings and recommendations made by the Boards of Trustees for the Social Security Old-Age and Survivors and Disability Insurance Trust Funds and the Boards 

of Trustees for the Medicare Hospital Insurance and Supplemental Medical Insurance Trust Funds in their 2004 Annual Reports on the financial status of these trust 

funds. The hearing will take place on Wednesday, March 24, 2004, in the 

main hearing room, 1100 Longworth House Office Building, beginning at 

1:00 p.m. 

In view of the limited time available to hear witnesses, oral testimony will be 

heard from invited witnesses only. However, any individual or organization not 

scheduled for an oral appearance may submit a written statement for consideration 

by the Committee and for inclusion in the printed record of the hearing. 

BACKGROUND: 

The Social Security Act requires the Boards of Trustees for the Social Security 

and Medicare programs to report annually to the Congress on the current and projected financial condition of the Old-Age and Survivors Insurance (OASI), the Disability Insurance (DI), the Hospital Insurance (HI), and the Supplementary Medical 

Insurance (SMI) trust funds. Members of both Boards include the Secretary of the 

Treasury (who is the Managing Trustee), the Secretary of Labor, the Secretary of 

Health and Human Services, the Commissioner of Social Security, and two members 

who are appointed by the President and confirmed by the Senate to serve as public 

trustees for 4-year terms. In addition, the Deputy Commissioner of Social Security 

serves on the Board of Trustees for the Social Security programs and the Administrator of the Centers for Medicare and Medicaid Services serves on the Boards for 

the Medicare program. The 2004 Annual Reports are scheduled to be released in the 

near future. 

Ensuring the financial viability of Social Security and Medicare is one of Congress’ most important responsibilities. The annual release of the Trustees’ reports 

provides a valuable update on the programs’ fiscal well-being. 

The release of the 2004 Annual Reports on the Medicare HI and SMI trust funds 

will be particularly timely, because their findings will include an initial evaluation 

of the impact of the Medicare Prescription Drug, Improvement and Modernization 

Act of 2003 (MMA) (P.L. 108–173) on the long-term financial situation of the Medicare program. Among other items, the MMA included a provision to make available 

prescription drug coverage to Medicare beneficiaries. As the MMA is implemented, 

it will be essential to continue to evaluate the overall fiscal standing of the program. 

In addition, the report on the OASI and DI trust funds will provide fresh evidence 

of the financial challenges facing Social Security and the need to act quickly to 

strengthen the program. 

In announcing the hearing, Chairman Thomas stated, ‘‘I look forward to this hearing and to the report of the non-partisan Social Security and Medicare Trustees. As 

we approach the retirement of the baby-boom generation, it is essential that we continue to evaluate the long-term fiscal outlook for both of these important programs.’’ 


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FOCUS OF THE HEARING: 

The hearing will examine the findings and recommendations of The 2004 Annual 

Reports of the Board of Trustees of the Federal OASDI and HI/SMI Trust Funds. 

The hearing will focus on the long-term financial status of the Social Security and 

Medicare programs. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person or organization wishing to submit written comments for 

the record must send it electronically to 

hearingclerks.waysandmeans@mail.house.gov, along with a fax copy to (202) 225– 

2610, by close of business Wednesday, April 7, 2004. In the immediate future, the 

Committee website will allow for electronic submissions to be included in the printed record. Before submitting your comments, check to see if this function is available. Finally, due to the change in House mail policy, the U.S. Capitol Police will 

refuse sealed-packaged deliveries to all House Office Buildings. 

FORMATTING REQUIREMENTS: 

Each statement presented for printing to the Committee by a witness, any written statement 

or exhibit submitted for the printed record or any written comments in response to a request 

for written comments must conform to the guidelines listed below. Any statement or exhibit not 

in compliance with these guidelines will not be printed, but will be maintained in the Committee 

files for review and use by the Committee. 

1. Due to the change in House mail policy, all statements and any accompanying exhibits for 

printing must be submitted electronically to hearingclerks.waysandmeans@mail.house.gov, along 

with a fax copy to (202) 225–2610, in WordPerfect or MS Word format and MUST NOT exceed 

a total of 10 pages including attachments. Witnesses are advised that the Committee will rely 

on electronic submissions for printing the official hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. Any statements must include a list of all clients, persons, or organizations on whose behalf 

the witness appears. A supplemental sheet must accompany each statement listing the name, 

company, address, telephone and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 


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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

FOR IMMEDIATE RELEASE CONTACT: 202–225–1721 

March 30, 2004 

FC–17–Revised 

Thomas Announces a Continuation of the Hearing 

on Board of Trustees 2004 Annual Reports 

Congressman Bill Thomas (R–CA), Chairman of the Committee on Ways and 

Means today announced that, pursuant to Rule XI, Clause 2(j)(1) of the U.S. House 

of Representatives, the Committee will hold a continuation of the March 24, 2004 

hearing to examine the findings and recommendations made by the Boards of Trustees for the Social Security Old-Age and Survivors and Disability Insurance Trust 

Funds and the Boards of Trustees for the Medicare Hospital Insurance and Supplemental Medical Insurance Trust Funds in their 2004 Annual Reports on the financial status of these trust funds. The hearing will take place on Thursday, April 

1, 2004, in the main hearing room, 1100 Longworth House Office Building, 

beginning at 12:00 p.m. 

All other details of the hearing remain the same. (See full Committee advisory 

No. FC–17, dated March 17, 2004.) 

f 

Chairman THOMAS. Good afternoon. Today we welcome the Secretary of the U.S. Department of the Treasury John Snow, the 

Managing Trustee, to discuss the 2004 Annual Reports of the 

Board of Trustees of Social Security and the Medicare Trust Fund. 

In every Congress since Republicans became a majority in 1995, 

the Committee on Ways and Means has reviewed the Trustees’ 

findings on the financial future of our most significant entitlement 

programs. These reports are essential reminders to policymakers of 

the challenges we face as the baby-boom generation retires and as 

Americans live longer, healthier lives. This year’s report provides 

us with the first glance at the impact of the Medicare Modernization Act (P.L. 108–173) on the program’s future finances and reminds us, since both of these entitlement programs are tied to 

wages and salary, how much the short-term fluctuations follow the 

economy. With passage of the new law, Medicare will cover prescription drugs, the cornerstone of modern medicine, and provide 

other preventive and wellness services as well. That is why Congress intentionally included crucial reforms to balance the increased cost of these new benefits and to ultimately improve the 

solvency of Medicare if competition is allowed to occur. These efforts did not go as far as some of us would have liked, and as today’s report shows there is still more work ahead to maintain solvency. 

Turning now to the reports before us, the Hospital Insurance 

(HI) Trust Fund is moving toward insolvency sooner than expected. 

To consider a complete picture of all Medicare financing, though, 

it is useful to look at Medicare expenditures as a percentage of 

gross domestic product which are expected to grow rapidly from the 

3.4 percent in 2003 to 7.7 percent in 2035, and ultimately, once 


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again projecting out where no one believes any numbers, but 13.8 

percent by 2078. It is the trend that is alarming, not any specific 

set of figures at any particular projected point in time. Clearly 

without further cost saving reforms, Medicare will consume an ever 

increasing share of our Nation’s resources. Social Security faces 

similar changes as the Trust Fund’s outlays exceed income beginning in 2018, with Trust Fund insolvency coming in 2042. As with 

Medicare, Congress must consider thoughtful solutions to ensure 

Social Security’s viability for future generations. 

Our second panel will focus on the details behind these broad 

brush strokes. I will be pleased to welcome Douglas Holtz-Eakin, 

Director of the Congressional Budget Office (CBO), Richard Foster, 

Chief Actuary at the Centers for Medicare and Medicaid Services 

(CMS), and Stephen Goss, Chief Actuary at the Social Security Administration (SSA). Of late there has been particular interest in 

the differing cost estimates generated by the CBO and the CMS on 

the new Medicare law. Our goal, of course, is to have our witnesses 

help explain the nature of their different assumptions and the 

therefore resulting different estimates. All of us know no one has 

the right answer and time will likely show that both of the estimates are wrong. The goal is to examine the assumptions which 

produce the numbers and determine if the assumptions underlying 

the numbers are reasonable and appropriate on a comparative 

basis. I would now like to recognize the Ranking Member, Mr. Rangel, for any opening statement he might wish to make. 

[The opening statement of Chairman Thomas follows:] 

Opening Statement of The Honorable Bill Thomas, Chairman, and a 

Representative in Congress from the State of California 

Good afternoon. Today, we welcome Treasury Secretary John Snow, the managing 

Trustee, to discuss the 2004 Annual Reports of the Boards of Trustees of the Social 

Security and Medicare. In every Congress since Republicans became the majority 

in 1995, the Ways and Means Committee has reviewed the Trustees’ findings on the 

financial future of our most significant entitlement programs. These reports are essential reminders to policymakers of the challenges we face as the baby boom generation retires and as Americans live longer, healthier lives. 

The year’s report provides us with a first glance at the impact of the Medicare 

Modernization Act on the program’s future finances. With passage of the new law, 

Medicare will cover prescription drugs—the cornerstone of modern medicine—and 

provide other preventive and wellness services as well. That is why Congress intentionally included crucial reforms to balance the increased costs of these new benefits 

and to ultimately improve the solvency of Medicare. These efforts did not go as far 

as some of us would have liked, and as today’s reports show us, there is still have 

more work ahead. 

Turning now to the reports before us. The Hospital Insurance Trust Fund is moving toward insolvency sooner than expected. To consider a complete picture of all 

Medicare financing though, it is useful to look at Medicare expenditures as a percentage of GDP, which are expected to grow rapidly, from 3.4 percent in 2003, to 

7.7 percent in 2035, and to 13.8 percent by 2078. Clearly, without further cost-saving reforms, Medicare will consume an ever-increasing share of our nation’s resources. Social Security faces similar challenges as the Trust Funds’ outlays exceed 

income beginning in 2018, with Trust Fund insolvency coming in 2042. As with 

Medicare, Congress must consider thoughtful solutions to ensure Social Security’s 

viability for future generations. 

Our second panel will focus on the details behind these numbers. I am pleased 

to welcome Douglas Holtz-Eakin, Director of the Congressional Budget Office (CBO); 

Richard Foster, Chief Actuary at the Centers for Medicare and Medicaid Services 

(CMS); Stephen Goss, Chief Actuary at the Social Security Administration. Of late, 

there has been particular interest in the differing cost estimates generated by CBO 

and CMS on the new Medicare law. Our witnesses will help explain the nature of 


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their differing assumptions and the resulting estimates. Neither one has the ‘‘right 

answer.’’ And time will likely show they are both wrong, as estimates often are. 

I would now like to recognize the ranking member, Mr. Rangel, for any opening 

statement he might make. 

f 

Mr. RANGEL. Thank you. Welcome, Mr. Secretary. I am so sorry 

that we missed each other by phone because you have always been 

very courteous in talking with me and other Members prior to 

these meetings, and it certainly makes me a more gentle person 

when I get that type of accommodation from people who represent 

the Administration. This morning I am not going to ask any questions because of the limited time that you have. I am reminded 

that President Kennedy once said that sometimes the Democratic 

Party asks too much of its Members. I have known that feeling. As 

I see where the Republican Party is going today, I think at some 

point in time many Republicans are going to say that on the question of credibility, sometimes the party is really asking too much 

of us. 

We have people testifying, as we talk on the Hill, as to the credibility that our government had in terms of the quality of intelligence in declaring war and invading Iraq. We have other members of the Administration, like your predecessor, who indicated 

that the President was focused on Saddam Hussein rather than 

economic issues. We have people who truly believe in the Democratic Party that it is a mission of the Republicans to destroy Social 

Security and Medicare, but they believe that politically they cannot 

do it. So, today we have you testifying that the Social Security system is in trouble and the only way that we can repair it is through 

privatization. We also know of people in the Republican party that 

find Medicare repugnant to their beliefs. As you have said that 

maybe the way to curtail the costs would be to privatize it and to 

let the free marketplace work its will. We know that unless you 

can get the Congress to do these things, it is not going to happen. 

So, when it came time to have the crisis in prescription drugs, we 

know that Republicans and Democrats know that you would not 

have had the votes to pass this bill if the true cost of the bill was 

known. 

So, therefore, when our staffs said that we did not have access 

to the information which the law declares that Republicans and 

Democrats should have access to the actuary table. We were 

amazed that staff would tell us that it was refused. We were more 

concerned when the written record showed the intimidation and 

how far the majority party was prepared to go to keep the Congress 

of the United States in the dark. Knowing that if the Congress had 

known what the Administration knew and failed to share it at our 

request, that we would not be dealing with the problems that we 

see now with the prescription drug bill. I think, Mr. Secretary, 

there comes a time when you start looking at the whole thing, that 

it is not just the credibility of the Administration, with Democrats 

and the American people, but indeed throughout the world the 

credibility of the United States is being reviewed. This pains me as 

I know that it pains you. I do hope that your response to some 

questions as it relates to what did you know about the cost and 


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why did not we know it will make us feel a little more secure. I 

hope that we can go to the polls on the question of who they want, 

Democrats and Republicans, and not who do they trust. So, I thank 

you, Mr. Chairman, for this opportunity and I look forward to hearing from you, Mr. Secretary. 

Chairman THOMAS. Mr. Secretary, welcome once again before 

the Committee. Any written testimony you have will be made a 

part of the record. I do understand that you are scheduled to introduce the President of the United States and that we have only 

until about 1:45 p.m. So, I look forward to your statement and the 

brief opportunity for Members to ask questions and your response. 

Mr. Secretary? 

STATEMENT OF THE HONORABLE JOHN W. SNOW, 

SECRETARY, U.S. DEPARTMENT OF THE TREASURY 

Secretary SNOW. Chairman Thomas, Ranking Member Rangel, 

distinguished Members of the Committee, I want to thank you for 

the opportunity to appear before you today to talk about the Trustees’ reports on the Social Security and Medicare programs. The 

Trustees met yesterday to complete the annual financial review of 

the programs and our reports have been sent to the Congress. Let 

me review first the Social Security Trustees’ Report. This year’s is 

little changed from last year’s report, actually a little bit better in 

some ways. It shows that the Social Security program, and this is 

no surprise to any of you, is seriously underfunded and that it is 

not financially sustainable in the long run. The fundamental math 

of Social Security is simply inescapable, as the large baby-boom 

generation reaches retirement age and the number of workers that 

are paying into the system declines significantly as a proportion of 

the total retirees. 

While we have some time to fix this problem, inaction is not a 

responsible option. The President has called for bipartisan efforts 

to deal with the issue and the sooner that action is taken, the better for all concerned. I think we all know that each year that 

passes without the needed changes makes the ultimate resolution 

even more difficult. Personal accounts, in our view, are an important part of a solution to the Social Security system’s problems. 

They would enable younger workers to accumulate a nest egg toward their retirement needs. They would relieve some of the pressure on the system itself. Whatever the ultimate answer here is, 

it is clear that now is the time to take the steps to preserve and 

protect Social Security so that our commitments to seniors are kept 

and so that the needs of our children and grandchildren are met. 

I think we would all agree with that. 

Let me offer a few words on the more serious and pressing issue 

of the Medicare Trustees’ Reports. It reveals even greater challenges than those confronting the Social Security system. While 

Medicare faces the same shifting demographics that drive the numbers in Social Security, it is additionally affected by the sharp increases in underlying health care costs. You know these numbers, 

too. From 1998 to 2002, health care costs rose an astonishing 35 

percent. Health care spending is growing as a percentage of gross 

domestic product. It was 15 percent in 2002 and it is surely much 

higher today. Employer-sponsored health insurance premiums rose 


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14 percent last year. The negative impact of these rising costs is 

evident in terms of the economy’s performance, job creation, and 

Federal programs such as Medicare. 

Let me first mention the HI Trust Fund for part A. Cash flow 

for the HI Trust Fund is projected to turn negative this year, compared to 2013 in last year’s report. Let me mention at the outset 

here that the change in HI’s financial condition was not caused in 

any way by the creation of the Medicare prescription drug program 

which is separately financed, although as the report points out 

other aspects of that legislation did increase costs under part A, 

the parts dealing with rural providers and managed care and so on. 

Taking interest into account, the total Trust Fund is expected to 

exceed expenditures through 2009 and turn negative in 2010. 

While the decline in cash flow is substantial and a fairly dramatic 

change from the last few reports, we saw similar negative cash 

flows for much of the nineties. In another major finding from the 

report, the HI Fund is projected to become insolvent in 2019. That 

would be 7-years earlier than projected in last year’s report. Again, 

I hasten to add that even without the recent legislation, important 

and good legislation in our view, the fund would be insolvent in 

2021. So, the legislation accelerated by 2 of the 9 years to the insolvency point. 

It is also important, as the Chairman said in his opening comments, to realize here that the forecasts we are dealing with are 

based on assumptions whose validity cannot be known with any 

high degree of certainty. Although uncertainty in these numbers is 

inescapable, it is also inescapable that we must make public policy 

judgments given the importance of these programs to current and 

future beneficiaries. Rising health care costs are placing an enormous burden on the Medicare program which is already under 

stress from the demographics I have mentioned. In our view, controlling health care costs is the real key to the long-term fiscal sustainability of Medicare and since Medicare bulks so large in the 

Federal budget deficit, it is also key to controlling the outlook for 

the Federal budget. The President has shown real leadership in 

seeking to reduce health care costs without diminishing quality or 

access to care for our senior citizens through many initiatives he 

has put forth which you are aware of. We should not forget as well 

the important reforms in last year’s legislation which offers so 

much promise on this score of controlling health care costs as well. 

These are real reforms that will help contain health care cost and 

help to contain their growth relative to gross domestic product and 

help alleviate the pressure on the Medicare system. Those who depend on Social Security and Medicare urgently need the best efforts of all of us in public life, and those in private life as well, to 

address these long-term funding issues as laid out in the Trustees’ 

reports. These programs, I am sure you would agree, must be seen 

as a shared responsibility not a political or partisan matter. Mr. 

Chairman, thank you very much for the opportunity to appear before you and I look forward to your questions. 

[The prepared statement of Secretary Snow follows:] 


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Statement of The Honorable John W. Snow, Secretary, 

U.S. Department of the Treasury 

Chairman Thomas, Ranking Member Rangel, and distinguished members of the 

Committee, thank you for the opportunity to testify today on the 2004 Social Security and Medicare Trustees’ Reports. The Social Security and Medicare Board of 

Trustees met yesterday to complete the annual financial review of the trust funds 

and sent the Trustees’ Reports to Congress. 

Let me start first with the 2004 Social Security Trustees’ Report. This year’s report is little changed from last year’s report. It shows that the Social Security program is seriously under funded and financially unsustainable in the long run. The 

unfunded obligation is $3.7 trillion on a present value basis over the next 75 years. 

Cash flows for the trust fund will turn negative in 14 years, in 2018, while the trust 

fund will be exhausted in 38 years, 2042. Neither date has changed since last year’s 

report. 

The fundamental math of Social Security is inescapable as the large baby boom 

generation reaches retirement age and the number of workers paying into the system declines significantly relative to the number of retirees. While we have some 

time to fix the problem, inaction is not a responsible option. The President has 

called for bipartisan efforts to create a permanently sustainable system and he has 

been right to do so—and the sooner action is taken, the better for all concerned. 

Each year that passes without needed changes to the program makes the ultimate 

resolution more difficult. 

To provide some perspective on what this means—today, the cost of paying Social 

Security benefits absorbs 4.3 percent of the nation’s GDP. According to the Social 

Security actuaries, the cost will rise to 6.6 percent by 2078. This would mean that 

the share of the economy required to fund Social Security benefits would be more 

than 50 percent higher than it is today—and even that would continue to increase, 

the further out one looks. 

Personal accounts are an important part of the solution to strengthen Social Security as they will enable younger workers to accumulate a nest egg towards their retirement needs. Now is the time to take the steps to preserve and protect Social 

Security so that commitments to our seniors are kept and the needs of our children 

and grandchildren are met. 

Let me now offer a few words on the 2004 Medicare Trustees’ Report. It reveals 

even greater challenges than those confronting Social Security. While Medicare 

faces the same shifting demographics as Social Security, it is additionally burdened 

by sharp increases in underlying health care costs. From 1998 to 2002, health care 

costs rose 35 percent. Health care spending is growing as a percentage of GDP; its 

share was nearly 15 percent of our nation’s GDP in 2002 and is surely even larger 

now. Employer-sponsored health insurance premiums rose 14 percent last year 

alone. The negative impact of rising costs is evident in terms of the economy, jobs, 

and federal programs such as Medicare. 

Cash flow for the Hospital Insurance (HI) Trust Fund is projected to turn negative this year, compared to 2013 in last year’s report. At the outset, it is important 

to note that the change in HI’s financial condition was not caused in any way by 

the creation of the Medicare prescription drug program, which is separately financed. Taking interest into account, total trust fund income is expected to exceed 

expenditures through 2009. While this decline in cash flow is a substantial change 

from the last few reports, we saw similar negative cash flows for much of the 1990s. 

In another major finding from the report, the Hospital Insurance Trust Fund is projected to become insolvent in 2019, seven years earlier than projected in last year’s 

report. For the first time in five years the HI Trust Fund fails the short run test 

for financial adequacy as the ratio of assets to annual outlays falls below 100 within 

the next ten years. Again, the principal culprit here is the rising cost of health care, 

and we need to turn our attention to this underlying fundamental issue. 

The Supplementary Medical Insurance (SMI) Trust Fund does not face insolvency 

per se, because its financing is derived in large part directly from federal general 

revenues. However, it does pose serious issues for the U.S. economy and federal deficit. SMI expenditures, including those associated with the new prescription drug 

program, are projected to increase rapidly, resulting in increasing pressures on future federal budgets. General revenue financing for SMI is expected to increase from 

0.9 percent of GDP today to 6.2 percent in 2078. 

It is important to note that the forecasts we are dealing with in Medicare are 

based on assumptions whose validity cannot be known with any high degree of certainty. Although uncertainty in these numbers is inescapable, we must make public 

policy judgments given the importance of these programs to current and future 

beneficiaries and the fiscal condition of the country. 


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Rapidly rising health care costs place a great burden on the Medicare program, 

which is already under stress from the underlying shift in the age distribution of 

our nation’s population. Controlling health care costs is the real key to the long run 

fiscal sustainability of both Medicare and the federal budget. Indeed, according to 

this year’s Trustees’ Report, reducing the projected growth in per beneficiary health 

care costs to one percentage point lower than the intermediate assumption would 

reduce the 75-year actuarial imbalance for the HI program from negative 3.12 percent of taxable payroll to negative 1.05 percent. Similarly, lower growth in health 

care costs would accrue to the federal budget through reductions in projected costs 

in the SMI program, Medicaid, and other government health care programs. According to the CBO, federal spending on Medicare and Medicaid will rise to 11.5 percent 

of GDP in 2050, up from 3.9 percent in 2003. If, instead of increasing at the rate 

of growth of per capita GDP plus 1 percent as assumed, per beneficiary spending 

were to grow at the rate of per capita GDP itself over the same time period, federal 

spending on Medicare and Medicaid will rise to only 6.4 percent of GDP in 2050, 

thus freeing roughly 5 percent of GDP for other activities. Achieving a 1 percentage 

point reduction in the rate of increase in health care costs should be doable, but it 

will require the very best efforts of all of us concerned with the issue. Most importantly, I believe this slowdown in cost increases could be accomplished without sacrificing the quality and access to health care that our senior citizens deserve and 

have come to expect. 

Clearly steps must be taken to address growing costs while maintaining high 

quality care for our senior citizens and, indeed, all citizens. The President has 

shown real leadership in seeking to reduce health care costs without diminishing 

quality or access to care. This Administration is committed to helping Americans obtain improved and more affordable health care coverage. Medical liability reform is 

critical to improve health care quality and reduce costs. We need to help stop harmful costly medical errors and provide liability protection for doctors and nurses who 

report mistakes in good faith. We need to employ more fully the efficiencies of information technology in the health care sector, such as physician order entry and electronic medical records. 

Additionally, health savings accounts will help millions of Americans with medical 

expenses and encourage saving while putting individuals in charge of their own 

health care choices. The President has proposed refundable tax credits to help lowincome workers purchase health insurance coverage, and proposed allowing small 

businesses to band together through association health plans, helping America’s 

working families to have greater access to affordable health insurance. We need to 

give consumers better information to make informed decisions when choosing health 

care providers. The private sector Leapfrog Group is a leader in this area, as is 

CMS, by encouraging health care providers to report data on quality, making it 

widely available to the public. We urge Congress to act on all these important measures. 

And let’s not forget, reforms in last year’s legislation include provisions to promote 

competition and choice, encourage savings for medical expenses, bring generic drugs 

to market sooner, improve preventive care coverage, lower the costs of chronic illnesses through disease management programs, and reduce costs and medical errors 

through e-prescription services. Reductions in fraud and abuse are expected to save 

$35 billion. These are real reforms that will help contain health care costs, control 

their growth relative to GDP, and alleviate some of the pressure on the Medicare 

system. 

Moreover, with passage of the Medicare legislation last year, for the first time all 

seniors will be guaranteed access to affordable prescription drug coverage under 

Medicare. Beginning in June of 2004, beneficiaries will have access to Medicare-approved prescription drug discount cards, which will save them 10 to 25 percent off 

the retail price of most prescription drugs. Low-income beneficiaries will also receive 

$600 per year to help them purchase their medication. And all seniors will have 

more choices and better benefits under a strengthened and improved Medicare program. 

The weighty concerns raised by the Trustees’ Reports demand the attention of 

America’s policymakers and the public. Those who depend on Social Security and 

Medicare urgently need the best efforts of those of us in public life and in the private sector to address the long-term funding issues. These programs should be seen 

as a shared responsibility, not a political or partisan opportunity. 

This Administration will continue its open and honest discussion of the issues facing Social Security and Medicare and remains dedicated to working with Members 

of Congress to take the steps needed to secure the long-term strength of these vital 

programs. Thank you for having me here today, I look forward to your questions. 


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11 

Chairman THOMAS. Thank you very much. To make sure that 

those Members who do wish to question you, Mr. Secretary, I will 

be brief. My understanding from the gentleman from New York is 

that he will suspend any questions he might ask the Secretary for 

the second panel. I find it interesting to compare the question of 

solvency, or the other side of the coin, insolvency, in the 2004 report with earlier years when we were grappling with the question 

of, for example, Medicare insolvency. In 1994, the year prior to the 

Republicans becoming the majority in the House, there was a 7- 

year solvency period, projected to be insolvent in 2002. The 2004 

report indicates, as you said, 2019. That is a 15-year insolvency 

point. So, almost certainly more than double the years of previous 

periods, to just select one particular period in time. Chairman 

Greenspan came before this Committee several years ago, shortly 

after we had a Social Security Commission that looked at options 

to make sure that we could improve the solvency of the Social Security Trust Fund. Clearly, as I recall, even President Clinton 

talked about increasing the return, the rate of return on the money 

available as one of the key features. 

The Chairman indicated that he was more than willing to try to 

tackle the problem of Social Security because it was akin to an arithmetical problem. When you turn to Medicare, as no Commission 

really has except the one that I was honored to cochair with the 

gentleman from Louisiana, Mr. Breaux, you are dealing with geometric progressions and frankly nonlinear in a multiple of areas, 

not just age and money. So, it is without a doubt that as people 

try to estimate changes in the program on a prospective basis there 

will be differing assumptions. We are going to pursue that with the 

second panel. As the Secretary of the Treasury, is it any wonder 

to you that trust funds tied to wages and salaries fluctuate as the 

economy fluctuates and, as we all know, since 9/11 the economy 

has stumbled for very basic and understandable reasons, and that 

it would not then reflect itself in the revenue coming into these 

trust funds? 

Secretary SNOW. Mr. Chairman, as your question suggests, that 

is perfectly understandable. The returns, the income, is tied to the 

economy, to wages and in a period of recession and weak economic 

performance as we had in 2001 and 2002, it is perfectly understandable. In fact, it is what you would expect. 

Chairman THOMAS. I believe, as we get to the actuaries, and 

we begin looking at it fully up to 2 full years were lost off of the 

solvency table by virtue of the economic performance for part A 

Medicare. Does the gentleman from Illinois wish to inquire? 

Mr. RANGEL. Mr. Chairman, while I have said that I would 

pass my questioning, I did not mean that the Democratic side 

would not be entitled to question after you had finished yours. 

Chairman THOMAS. They certainly are. Does the gentleman 

from California wish to question? The other gentleman from California? 

Mr. MATSUI. Thank you very much, Mr. Chairman and thank 

you, Mr. Ranking Member, for allowing me to go next. Thank you, 

Secretary Snow, for being here with us. I just would like to make 


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one observation about Medicare, not in the form of a question. The 

acceleration of the unfunded part of Medicare will accelerate by 

some 7 years, or the cash flow problem. What you failed to mention 

is that 2 of the years is because of the legislation that was passed 

last December, mainly because we are shifting people away from 

the traditional Medicare system into health maintenance organizations (HMOs) by subsidizing HMOs. Second, obviously, by the rural 

health issue. So, about 30 percent of the deterioration is due to 

that legislation. I really want to focus on, however, Social Security 

because you spent your very early part of your comments regarding 

it. Assume for a minute that I favor privatizing, as the President 

does, part of the Social Security system. Assuming for a minute 

that I want to make, as he does, sure that current recipients and 

immediately future recipients will undoubtedly maintain their full 

level of benefits. There is going to be, as the three plans set forth 

in the President’s Commission recommendation, an unfunded liability. That is, it will either have to be made up in spending cuts 

or tax increases or borrowing perhaps. 

For example, plan one has a $1.5-trillion deficit in the first 10 

years. Plan two, $1.8 trillion in the first 10 years. Plan three, $1.4 

trillion in the first 10 years. Mr. Shaw’s legislation, and I would 

obviously prefer to have him comment on it, but I think it is important just to talk about it because it is offered by a Chair of our 

Subcommittee. In the first 10 years, Mr. Shaw’s plan will have an 

unfunded liability of $1.4 trillion. The borrowing peak will be in 

2048, 44 years from now, when $7.6 trillion will be, either in the 

form of deficits or tax increases or spending cuts in Social Security. 

Which one do you think that I should support? If not any of those, 

then what plan do you propose to come up with in order to make 

sure we do not increase the deficits, we do not increase the taxes 

and we do not cut benefits as the President, in fact, has promised 

to do? 

Secretary SNOW. Congressman, of course, the Administration 

has not picked one of those three or any other option at this point. 

In appointing the Commission, I think the President advanced the 

subject enormously by calling public attention to the underfunding 

and the need to find—— 

Mr. MATSUI. We all knew about it before he talked about it, so 

do not assume that we get it from him. We knew about this because we have seen actuarial reports over the last 20 years. 

Secretary SNOW. What I am saying is, he helped engender a 

broad national dialog on this vitally important subject. The issue 

you are raising of transition costs is really the recognition of the 

contingent liability. It is there. It is there, and since it is there I 

would argue it is better to make it explicit than implicit. It is better to make it transparent rather than to hide it. 

Mr. MATSUI. If I may just interrupt you, I do not think you answered my question but that is all right. It is not about a contingent liability, it is diverting money from the current payroll tax to 

private accounts. So, how are you going to make that up in the 

next 10 to 75 years, which you are going to do by talking about this 

and by advancing this if it ever became law, you are going to deteriorate the Social Security system. In fact, you are going to advance 


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the cash flow problem. you are going to actually make the problem 

that you and I are really concerned about much worse. 

Secretary SNOW. What the Commission’s plans do, and I think 

Commission plan two is laid out in some detail in the report of the 

President’s Council of Economic Advisers. What it does, of course, 

is to provide a transition mechanism to fund the loss of revenues 

to the retirement system. That takes—— 

Mr. MATSUI. Reduce benefits. 

Secretary SNOW. That is right, for some period of time. Then 

longer-term, the deficit and the budget are better. 

Mr. MATSUI. For some period of time, Mr. Secretary, means 

that those that are currently retired will have a reduction in benefits. 

Secretary SNOW. They will not. No. The President stipulated, in 

appointing the Commission, that there would not be for those who 

are retired or near retirement, any reduction in benefits. 

Mr. MATSUI. That is the President’s position. 

Chairman THOMAS. The gentleman’s time has expired. 

Mr. MATSUI. Thank you, Mr. Chairman. 

Chairman THOMAS. The gentleman from Florida, the Chairman 

of the Subcommittee on Social Security, Mr. Shaw, wish to inquire? 

Mr. SHAW. Yes, sir. Thank you, Mr. Chairman and I appreciate 

the gentleman from Illinois letting me go out of turn here in order 

to ask a couple of questions and also to respond to the Chairman 

of the Democratic Congressional Campaign Committee who just 

characterized my plan as causing a huge deficit. What the gentleman from California fails to point out, is that the funds that are 

put in the individual accounts are an investment, an investment 

that is going to stand for future payments to future beneficiaries 

of the Social Security Trust Fund. Also, my plan does not take a 

dime out of the Social Security Trust Fund, nor does it divert any 

of the payroll taxes. I might say that under Mr. Clinton, President 

Clinton, my plan was scored in the long run of over 75 years, as 

not only saving Social Security for all time, but it also was scored 

as creating about a $5-trillion surplus instead of over a $26-trillion 

deficit that we are looking at now if we do nothing. So, I think to 

characterize or to continue to play politics with Social Security is 

very bad strategy to be used, particularly at this time. 

I might also say that I think that the direction this Committee 

should be looking at, the warning signs that are being thrown up, 

whether they are correct or incorrect they are still warning signs, 

that we have a huge problem here. We need to go and start talking 

about it. The cash flow problem with Social Security is a huge 

problem and it is one that we are facing beginning in 2018. 

Mr. Secretary, I would like to ask you, the chart that is in the 

report shows Social Security clash annual flow deficits growing 

from $16 billion in 2010 to $787 billion in 2078. That is just in 1 

year. How can there be a cash flow deficit in Social Security when 

the Trust Fund balance in 2018, as represented by treasury bills, 

is $3.7 trillion in today’s dollars, the same for 2030 when the cash 

flow deficit is $256 billion, but the Trust Fund balance is $3.2 trillion? This is a chart I am referring to, that was in the report. I beg 

your pardon. I am asking that it be passed out. 

[The information follows:] 


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Secretary SNOW. Obviously, what is happening here is we have 

the baby boom starting in 2010. We have people coming out of the 

denominator of the equation and going into the numerator. The 

fundamental math there is expenditures rise and payments do not 

rise at the same rate. They rise at a much lower rate. The consequence is that wide gap that produces the unsustainability of the 

system that you are trying to address with your legislation. 

Mr. SHAW. Yes, sir. I think it is very important to realize that 

this is the plan of doing nothing. I am sorry but I think, in looking 

after my children and my grandchildren, I do not want them facing 

a $20-some trillion deficit. That is a negative cash flow and somebody is going to have to come up with the dollars beginning in 

2018. Now that is a moving target. To sit back and say well, we 

are not going to run out of Treasury bills, all right fine. You have 

to get the cash to pay the Treasury bills. This Congress and a future Congress is going to have to start coming up with it. If we 

start planning now, and start investing money and forward funding 

Social Security, we can solve this problem without cutting benefits 

and without running in the red in the long run. We have got to 

plan ahead. Mr. Secretary, you can comment in the balance of my 

time. 

Secretary SNOW. I would only comment to say that there is not 

a lot of uncertainty about these numbers. We know the names of 

the people who are in that cohort of retirees over the period 2010 

to 2030, and if they retire as we expect them to do then we are 

going to produce these numbers. There is nobody coming in behind 

them to be the workers to fund their retirement. That ratio, which 

is the all important ratio of people paying in and people drawing 

down, worsens and worsens and worsens over that long period of 


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time. We have people living longer. That combination of the baby 

boomers retirement and people living longer produces this set of 

numbers about which there cannot be much argument. This is 

basic math. 

Mr. SHAW. Thank you, Mr. Chairman. 

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

Chair understands the gentleman from Maryland, Mr. Cardin, 

wishes to inquire? 

Mr. CARDIN. That is correct, Mr. Chairman. Thank you very 

much. Secretary Snow, thank you very much for being with us. You 

have many responsibilities as Secretary of the Treasury. One of 

those, of course, is as Trustee of the Medicare Trust Funds. So, I 

am just interested in finding out the information that you knew as 

regards to the information on the impact that the Medicare bill 

that we recently passed and the President signed into law had an 

effect on the solvency of the Medicare Trust Fund. As that bill was 

working its way through Congress, it became clear to many of us 

through the financial information or the scoring we were receiving 

that the impact on solvency would be minimal since the $400 billion cost was primarily in the prescription drug provisions, because 

the other provisions had offsets. We now find, through the information that has been made available to us, that the bill will affect the 

solvency of the Medicare Trust Fund by 2 years, by the action we 

took in the last bill. 

One of the major differences in estimates is the number of Medicare beneficiaries expected to participate in private health insurance plans. That number is dramatically different than what we 

were operating with in Congress. We originally estimated that the 

current 9 percent that are in private insurance plans would go up 

to around 12 or 13 percent. We now find that the U.S. Department 

of Health and Human Services (HHS) actuaries are projecting that 

it could be as high as 32 percent, a significant difference. We also 

now know that for every person who enrolls in a private health 

care plan, it will cost the Medicare Trust Fund additional funds, 

because we are paying more than if that person would have stayed 

in traditional Medicare. My question to you is, were you aware of 

those numbers before Congress acted on it, that is the participation 

rates and cost to the Medicare Trust Fund, as Trustee of the Medicare system? If you were aware of it, were you aware that that information was not made available to Congress? 

Secretary SNOW. Congressman, I was not aware of the detailed 

information that you laid out there in your question to me. I did 

not become aware of the differing estimates in the CBO, for whom 

I have a very high regard, and the actuaries at CMS, in whom I 

also have a high regard. I did not become aware of that until sometime in January, as we began to put the President’s budget to bed. 

Mr. CARDIN. Mr. Secretary, I respect your answer to that, and 

I find that just as troubling to you as it is to us, that information 

that is important for us to make judgments was not made available 

to us. You have responsibilities as a Trustee to make recommendations to the Administration and to Congress, as to the impact that 

legislation could have on Medicare’s insolvency. This is a significant difference, a significant amount of money that, was involved 

here. I also believe that at times the department was using numVerDate Aug 31 2005 07:20 Jan 27, 2006 Jkt 023797 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 E:\HR\OC\23797.XXX 23797

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bers generated by the actuary to show participation, but then used 

CBO numbers, which were lower on cost, in order to make the bill 

appear to be less expensive than it actually was. It would seem to 

me that selecting the more generous numbers from the actuary and 

from CBO, but not being consistent in using the same information 

for all of your analysis, would be something that none of us would 

want to condone. I hope you would agree with that. 

Secretary SNOW. The fine points of the differences between 

these two estimates, I must say, are beyond my ken. I understand 

that small changes though, as you know, in those assumptions— 

for instance, CBO’s assumption on participation rates being a few 

percentage points lower than the Administration’s, than the Office 

of Management and Budget’s (OMB’s) and the actuary’s estimate 

of participation rates, produced a very substantial part of that disparity. 

Mr. CARDIN. It was not the Administration, and it was substantial, 12 percent versus 32 percent, which is a huge difference. It 

was not the Administration. The Administration, I believe, was 

with the actuaries. It was the CBO’s numbers that were substantially different than the actuarial assumption. 

Secretary SNOW. I am saying that. We used those numbers in 

the budget. We used the actuary’s numbers in doing the budget 

and that is when I became aware of the difference. 

Mr. CARDIN. Mr. Chairman, I know many of us in Congress believe that the information would have been important for us to 

have prior to action. It is important that this information get to the 

right agencies. 

Chairman THOMAS. I thank the gentleman. Mr. Secretary, we 

appreciate the time was slightly over, but to recognize the second 

Republican to balance out the questioning of the Secretary, the 

gentleman from Illinois, Mr. Crane, is recognized. 

Mr. CRANE. Thank you, Mr. Chairman. Mr. Secretary, some 

have claimed that Social Security is not going bankrupt because in 

2042 payroll tax receipts will be able to finance about three-fourths 

of the benefits due. Many of those making such claims have also 

attacked the idea that individuals should be able to invest even 

some of their payroll taxes in personal accounts. Individuals retiring in 2042 are already paying into Social Security. I am against 

cutting benefits that have been promised to people paying into the 

system. Do you see any way to preserve current benefits without 

allowing individuals to own retirement accounts that does not lead 

to a tax increase? 

Secretary SNOW. Congressman Crane, you are right that there 

is an automatic reduction in the level of payments at the point at 

which the Trust Fund can no longer pay the full level of benefits, 

and that is 2042. We cannot let that happen. That is why moving 

to these personal accounts now makes so much sense, to find a way 

to augment the financial condition of the Social Security plan and 

take some of the burden off of it. That is precisely what would happen. There is no legal obligation to pay at the current level. The 

obligation is to pay the funds that are available as benefits and 

that results in that 74 percent declining over time, level of payments. We cannot let that happen. 


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Mr. CRANE. If Congress does not make changes to Social Security, specifically no individual retirement accounts, no benefit cuts, 

no tax increases, and no increase in retirement age, what do you 

think would be the impact on the Treasury? 

Secretary SNOW. Well, if no changes are made and we hit the 

year 2042 and the benefit levels are allowed to fall in accordance 

with the income levels then it will have a very serious impact on 

the recipients who I think will feel cheated. They have made their 

payments in and they are now not able to—the retirees who made 

their payments in would not then be able to draw down the expected amount of money. If we fund it at current levels, we produce 

that horrific deficit number that you saw reflected in Congressman 

Shaw’s chart. We are the victim here of plain and simple mathematics, inescapable math. We cannot dodge it. We cannot hide from 

it. The numbers that were shown are the real numbers in that report. The only way to deal with this is to find the means to supplement the income that Social Security has, that people have who 

would otherwise draw on Social Security. That is where this idea 

of the personal accounts makes so much sense. 

Mr. CRANE. Thank you, Mr. Secretary. We appreciate your attendance here today, too. 

Secretary SNOW. Thank you. 

Chairman THOMAS. The Committee thanks you and understands the pressing engagement that you must go to and looks forward to your next testimony before the Committee. 

Secretary SNOW. Thank you, very much. 

Chairman THOMAS. The Committee would now ask Douglas 

Holtz-Eakin, the Director of the CBO; Rick Foster, Chief Actuary, 

CMS; and Stephen C. Goss, Chief Actuary, SSA, if they would 

please come forward. The Chair welcomes all of you to the Committee and each of you has written testimony which will be made 

part of the record. If you could address us briefly in your own 

words prior to Members asking questions, the Chair would ask you 

to do so. We will start with Dr. Holtz-Eakin and then move across 

the panel to Mr. Goss and Mr. Foster. Mr. Holtz-Eakin? 

STATEMENT OF DOUGLAS HOLTZ-EAKIN, PH.D., DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

Mr. HOLTZ-EAKIN. The CBO estimates that the Medicare Modernization Act will raise net outlays of the Federal Government by 

$395 billion over the period of 2004 to 2013. My written statement, 

which we submit for the record, details the underpinnings of the 

CBO estimate. It also accounts for the numerous small and technical factors that lead to a difference with the Administration’s estimate for the same legislation. The CBO has been working with 

Congress on prescription drug legislation since 1999. Dozens of 

CBO staff with advanced training in health policy, health economics, finance and budget analysis have contributed to this effort. Included among them are those with prior or subsequent experience 

with the OMB, the Health Care Financing Administration and the 

Medicare Payment Advisory Commission. Their depth and reach 

have been enhanced through regular consultation with private sector actuaries, reinsurers, financial services experts, pharmacy benefit managers and many others. Our expertise has also been enVerDate Aug 31 2005 07:20 Jan 27, 2006 Jkt 023797 PO 00000 Frm 00021 Fmt 6633 Sfmt 6602 E:\HR\OC\23797.XXX 23797

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hanced through continuous interactions with congressional staff, 

and we have benefited greatly from the generosity of our professional colleagues at CMS. 

Over the past several years, CBO has deployed this accumulation 

of skills, data and modeling capability to the challenges of projecting the costs of Medicare in general and the prescription drug 

legislation in particular. The CBO has provided testimony to Congress—to this Committee on at least three occasions, and to other 

Committees on up to eight occasions. We have provided nearly 15 

documents and letters to the Members including a 2002 study on 

issues in the design of a prescription drug benefit, and have provided many cost estimates. In 2002, CBO provided over 50 estimates of the cost of drug legislation. With the daunting pace of activity in the past year, the total number of proposals, amendments 

and formal cost estimates is innumerable but is safely in a range 

that may approach 10 times that number. This experience has 

yielded a great respect for our professional colleagues at CMS and 

a healthy appreciation of the fundamental uncertainties associated 

with cost estimates in this area. Nevertheless, it is my considered 

professional judgment that $395 billion was and remains the single 

best estimate of the cost of this legislation. Chairman Thomas, 

Congressman Rangel and Members of this Committee, I thank you 

for the opportunity to appear today and look forward to answering 

your questions. 

[The prepared statement of Mr. Holtz-Eakin follows:] 

Statement of Douglas Holtz-Eakin, Ph.D., Director, 

Congressional Budget Office 

Chairman Thomas, Congressman Rangel, and Members of the Committee, I am 

pleased to be here with you today. I understand that one purpose of this hearing 

is to discuss the Trustees’ 2004 reports for Social Security and Medicare that were 

released yesterday and to assess the impact of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) on Medicare’s long-term financial 

condition. To help provide a basis for that assessment, I will focus my remarks on 

the Congressional Budget Office’s (CBO’s) estimate of the MMA’s cost over the next 

10 years and on the differences between that estimate and the Administration’s estimate for that same period. The MMA was a very complex piece of legislation containing many provisions, and CBO’s modeling of its costs was correspondingly complex. Rather than try to explain the scoring for all of its provisions, I will concentrate on the two sections of the act that account for nearly all of the net difference between those two estimates: the new prescription drug benefit and the revised payment system for managed care plans under Medicare. 

CBO’s Cost Estimate 

CBO has estimated that the MMA will increase mandatory outlays by $395 billion 

over the 2004–2013 period. Anytime a complex and substantially new program is 

created, predicting the outcome precisely is difficult, but CBO’s estimate was the result of extensive analyses of the pharmaceutical market, the Medicare program, the 

costs of managed care plans, and the likely responses of potential enrollees. To date, 

CBO has not received any additional data or studies that would lead the agency to 

reconsider its conclusions. Therefore, CBO believes that its budgetary estimate is 

sound and has no reason to revise it. 

Table 1 shows the major components of CBO’s 10-year cost estimate. The provisions of the MMA that established a prescription drug benefit under Part D of Medicare were estimated to increase mandatory spending by $409 billion on net. Title 

II of the act, which altered the payment system for managed care plans under Part 

C of Medicare—and also changed the name of that program from Medicare+Choice 

to Medicare Advantage—was estimated to cost $14 billion through 2013. (The net 

costs of providing the new drug benefit to enrollees in Medicare’s managed care 

plans were included in the $409 billion estimate for the Part D provisions.) All of 


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the legislation’s other provisions, which primarily involve the traditional Medicare 

fee-for-service (FFS) program, were estimated to reduce net outlays by $28 billion. 

Table 1: Major Components of CBO’s Cost Estimate for the Medicare Prescription Drug, Improvement, and Modernization Act of 

2003 (Billions of dollars) 

Mandatory Spending, 

FY 2004–2013 

Prescription Drug Benefit Provisions 409

Medicare Advantage Provisions 14

All Other Provisions ¥28

Total 395

Source: Congressional Budget Office. 

a. Includes mandatory spending for administration of Part D (in title X of the MMA) and interactions with 

the Hatch-Waxman Act and importation provisions in title XI; excludes the interaction of Part D with Medicare spending for benefits under Parts A and B (which is included in the estimate for ‘‘All Other Provisions’’). 

Those factors account for the difference between the $409 billion estimate for the prescription drug benefit provisions shown above and CBO’s $410 billion estimate for title I of the MMA. 

Although Table 1 shows the MMA’s impact on mandatory spending, a complete 

estimate of the overall budgetary impact of the legislation must also consider its effect on revenues. CBO estimated that the various revenue effects of the MMA’s provisions were largely offsetting. According to the Joint Committee on Taxation, the 

law would reduce revenues by about $7 billion over 10 years, primarily as a result 

of provisions to allow qualified taxpayers to establish health savings accounts. At 

the same time, CBO estimated that the Medicare drug benefit provisions would 

have the effect of increasing revenues by about $7 billion, as businesses would reduce expenditures on nontaxable health benefits and increase them on taxable 

forms of compensation. By contrast, the Administration estimated that the health 

savings account provisions would result in a revenue loss of about $17 billion over 

the 2004–2013 period and to date has not estimated an indirect effect on revenues 

resulting from the Medicare drug benefit. While the overall assessment of the 

MMA’s impact on federal deficits or surpluses must take into account all of its effects on spending and revenues, the focus today is on CBO’s outlay estimates and 

how they differ from the Administration’s estimates as developed by the actuaries 

at the Centers for Medicare and Medicaid Services (CMS). Accordingly, I will devote 

the remainder of my testimony to the main factors affecting estimated outlays for 

the new prescription drug benefit and for the revised payment system for managed 

care plans. 

Costs for the Part D Prescription Drug Benefit 

CBO’s $409 billion estimate for the net costs of providing the prescription drug 

benefit under the MMA can be separated into several components, as shown in 

Table 2. Under the law, CBO projected, stand-alone prescription drug plans and integrated health plans under Medicare would incur costs of $507 billion through 2013 

to provide the basic statutory drug benefit. Those costs would be partially offset by 

$131 billion in premium payments made by or on behalf of enrollees. Separate payments to employer-sponsored and union plans providing qualified drug coverage to 

Medicare-eligible retirees would amount to an additional $71 billion. The law also 

subsidizes additional drug coverage for certain low-income enrollees, and CBO estimated that those subsidies would cost $192 billion over the 2004–2013 period (including about $1 billion to provide assistance with drug costs in conjunction with 

the drug discount card program that will operate from mid-2004 through December 

2005). 


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Table 2: Components of CBO’s Cost Estimate for the Medicare 

Prescription Drug Benefit 

(Billions of dollars) 

Mandatory Spending, 

FY 2004–2013 

Payments to Medicare Drug Plans for Basic Benefits 507

Beneficiary Premium Payments ¥131

Employer and Union Subsidies 71

Low-Income Subsidies 192

Federal Medicaid Spending ¥142

Transfers from State Medicaid Programs ¥88

Effects on Other Federal Programs ¥2

Total 409

Source: Congressional Budget Office. 

Note: Numbers may not add up to totals because of rounding. 

CBO also estimated that the Part D prescription drug benefit provisions would 

reduce other federal outlays in a number of ways. Transferring responsibility for the 

prescription drug benefits of ‘‘dual eligibles’’ from Medicaid to Medicare would save 

the federal government an estimated $152 billion in Medicaid spending through 

2013. (Dual eligibles are Medicare beneficiaries who are also eligible for full Medicaid benefits.) Those savings would be partly offset by an additional $10 billion in 

federal outlays for Medicaid resulting from the new law’s drug benefit provisions— 

largely owing to additional spending on benefits for Medicare beneficiaries who 

would enroll in Medicaid as a result of applying for the low-income drug subsidy 

program. Thus, net federal Medicaid savings were estimated at $142 billion over 10 

years. In addition, the MMA contains a provision that will recapture a portion of 

the corresponding savings for states on Medicaid drug expenditures, which CBO estimated would reduce federal costs by $88 billion. Finally, the Medicare drug benefit 

will on net reduce mandatory spending for the Federal Employees Health Benefits 

(FEHB) program and other federal programs that pay for prescription drugs by 

about $2 billion. 

CBO’s cost estimates for prescription drug benefit proposals were based on an 

analytic structure and a microsimulation model that projects how those proposals 

would affect a representative sample of Medicare beneficiaries. CBO has used that 

basic approach to estimate the costs of proposed Medicare prescription drug benefits 

since 1999, updating it each year to account for new data and refining it to address 

new provisions. The microsimulation model contains detailed information about 

beneficiaries’ spending for prescription drugs, their supplemental insurance coverage (both public and private), their health status, and their income. The information on drug spending used by CBO is based on data from the 1999 and 2000 Medicare Current Beneficiary Survey, projected forward using CBO’s March 2003 economic and technical assumptions—including projected growth rates for drug spending that reflected the most recent CMS estimates for national health expenditures. 

Costs and Premiums for Medicare Drug Plans. Estimating the costs of providing the basic drug benefit under Medicare involved three basic steps: (1) estimating the number of beneficiaries who would enroll in a Medicare drug plan; (2) 

estimating the average costs of providing those enrollees with covered benefits (including the administrative costs of doing so); and (3) using the resulting estimate 

of gross costs to calculate the offsetting premium receipts that would result from 

the statute’s subsidy formulas. Because of the myriad provisions in the law that 

could affect each of those steps—particularly the costs per enrollee—CBO had to develop a relatively sophisticated modeling capability. Even so, the primary drivers of 

federal costs remain the drug benefit’s design and the premium subsidy (with that 

subsidy not only determining how gross costs are allocated between enrollees and 

the government but also affecting participation in such a voluntary program). 

In large measure, CBO based its estimates of program enrollment for the drug 

benefit on the experience of Medicare Part B. Part B is a voluntary program that 

has a 75 percent premium subsidy and a substantial penalty for late enrollment; 


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21 

as a result, most but not all Medicare beneficiaries who are eligible for Part B enroll 

in it. Part D’s provisions are quite similar—it is a voluntary program with a 74.5 

percent average premium subsidy and significant late-enrollment penalty—and the 

provisions strongly encourage beneficiaries to enroll when they are first eligible to 

do so, even if their drug spending is relatively low at the time. Nevertheless, CBO 

assumed that active workers with drug coverage and some federal retirees would 

not enroll in Part D, even if they were enrolled in Part B, because the value of any 

additional drug benefits they would receive would be less than the added premiums 

they would pay; those projected nonparticipants represent about 7 percent of all 

Medicare beneficiaries. CBO also assumed that the roughly 6 percent of beneficiaries who are enrolled in Medicare Part A but do not elect to enroll in Part B 

(some of whom are also active workers) would generally choose not to enroll in Part 

D. In sum, CBO estimated that 87 percent of all Medicare beneficiaries would participate in the drug benefit in some manner—with about 68 percent enrolling in a 

Medicare prescription drug plan and the remaining 19 percent receiving drug coverage through a former employer that would be subsidized directly by Medicare. 

To estimate costs per enrollee, CBO started with a projection of total outpatient 

drug spending by the Medicare population in the absence of a new Medicare benefit. 

That total was then adjusted by several discrete factors: 

• a ‘‘price effect’’ to reflect the likelihood that average drug prices will be slightly 

higher because beneficiaries who currently lack drug coverage will become insulated from those prices; 

• a ‘‘use effect’’ to capture changes in demand for drugs resulting from changes 

in beneficiaries’ cost-sharing liabilities (so that their total drug use would increase somewhat if their own out-of-pocket costs fell); 

• an adjustment to reflect the degree to which Medicare drug plans will manage 

the costs of their enrollees (discussed further below); 

• and a slight decrease in spending due to the fact that prices negotiated by 

Medicare drug plans will be exempt from the Medicaid ‘‘best price’’ provision— 

an exemption that gives those plans more leeway to negotiate steeper price discounts from manufacturers because they will not have to pass on the same discount to Medicaid. 

It is important to emphasize that, although CBO sought to model each of those 

factors separately, they have offsetting impacts and the net effect on drug spending 

or its components will reflect all of them simultaneously. 

In estimating the degree of cost management that Medicare drug plans would 

achieve on average, CBO focused on three main considerations: the incentives that 

plans would have to control costs (based on the degree of financial risk they would 

face); the ‘‘tools’’ that they could use to control spending (such as preferred drug lists 

and pharmacy networks); and the degree of competition they would face (as expressed through differences in beneficiary premiums and cost-sharing levels among 

drug plans). Plans bearing meaningful financial risk would lose money if their costs 

of providing benefits exceeded expectations and thus would have strong incentives 

to limit those costs as much as possible while still attracting enrollees—but CBO 

assumed that they would also have somewhat higher administrative costs as a result. A plan’s ability to act on those incentives will depend on what mechanisms it 

can use to secure price discounts and to encourage beneficiaries to use less costly 

therapeutic alternatives, though trade-offs could arise between the steps they take 

to control costs and the ease with which enrollees can obtain the drugs of their 

choice. The extent to which beneficiaries save on their premium by joining a less 

expensive drug plan is also an important consideration: it provides an incentive for 

plans to keep their costs low over time to attract and retain enrollees, and it encourages beneficiaries to consider whether the extra premium of a more costly plan is 

worth paying. 

To summarize the effects of incentives and tools on cost management, CBO estimated the ‘‘gross drug savings’’ that would be expected, on average, for a given proposal. Those gross drug savings represent the degree to which costs would be reduced compared with an unmanaged benefit (such as a traditional indemnity insurance plan), and they combine three types of savings from management: savings due 

to price discounts or rebates from manufacturers and pharmacies; savings from controlling overall drug use; and savings due to changing the mix of drugs used. For 

the MMA, CBO estimated that drug plans bearing the full level of financial risk as 

specified by the statute would achieve average gross savings of 20 percent initially, 

growing to 25 percent over the budget window. That path reflects the gradual widening of the statute’s ‘‘risk corridors’’, which will expose plans to greater financial 


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1 Under the MMA’s risk-corridor provisions, prescription drug plans whose costs turn out to 

be somewhat higher than expected will see an increasing share of those costs covered by additional federal payments, while plans with actual benefit costs that are below expected levels will 

essentially have to reimburse Medicare for a corresponding share of the savings. 2 In addition, Medigap policies that cover cost sharing for other Medicare benefits are prohibited from including supplemental drug coverage for Part D enrollees, so enrollees desiring such 

coverage would have to obtain it from another source (such as a former employer or their Medicare drug plan). 3 CBO’s estimate of premium collections assumes that all enrollees have their Part D premiums withheld from their Social Security checks, but net federal outlays would be the same 

if beneficiaries chose to pay those premiums directly to their drug plans instead since federal 

payments to those plans and premium receipts would be reduced dollar for dollar. 

risk over time.1 For beneficiaries whose current drug spending already reflects some 

degree of cost management, however, that spending was adjusted only to capture 

the incremental savings that would be achieved. CBO also assumed that there was 

some probability that beneficiaries would be enrolled in reduced-risk or ‘‘fallback’’ 

drug plans as specified by the law; in those cases, CBO estimated lower gross savings owing both to the reduced financial risk those plans would face and to the less 

competitive environment in which they would operate. 

After applying those adjustments to determine total drug spending by enrollees, 

CBO estimated the gross costs of providing the drug benefit by applying the statute’s benefit-design provisions and adding an estimate of the administrative costs 

that drug plans would incur. Rather than review all aspects of the benefit design, 

let me focus on two key features. First, with certain exceptions, the benefit’s catastrophic threshold—above which about 95 percent of drug costs are covered—is determined by out-of-pocket costs actually incurred by enrollees. That feature, which 

is often referred to as the ‘‘true out-of-pocket’’ provision, has the effect of targeting 

federal assistance to those who lack additional drug coverage. By the same token, 

though, such coverage is implicitly penalized because the costs that it covers do not 

count toward reaching the catastrophic threshold.2 As a consequence, federal costs 

will depend in part on the extent and sources of any supplemental drug coverage 

that enrollees may have. 

A second key determinant of federal costs is that the standard benefit’s deductible, initial coverage limit, and catastrophic threshold are indexed to the projected 

growth rate in per capita drug expenditures for the Medicare population. As a result, that benefit will, on average, cover about the same share of enrollees’ drug 

costs each year. Table 3 shows CBO’s projections for each of those benefit parameters through calendar year 2013 as well as the associated levels of beneficiaries’ 

cost-sharing liabilities or total drug spending. As the table suggests, CBO estimates 

that per capita drug spending for Medicare beneficiaries will increase at an average 

annual rate of nearly 9 percent from 2006 to 2013. 

Table 3 also shows CBO’s estimate of the average monthly premium per beneficiary for each calendar year (which reflects not only covered benefits but also administrative costs, and thus grows somewhat more slowly than the benefit parameters). Although the MMA’s subsidy formulas are complex—specifying both a fixed 

‘‘direct’’ subsidy and a reinsurance subsidy that varies with spending above the catastrophic threshold—and beneficiaries’ premiums will depend on what drug plan they 

join, CBO estimated average premiums by applying the 74.5 percent average subsidy to average gross costs. 

Finally, by multiplying the average gross cost of providing the drug benefit and 

the average premium by the number of enrollees, CBO generated estimates of total 

calendar year obligations and receipts; converting those figures into fiscal year outlays yielded CBO’s estimates of $507 billion in payments to drug plans, offset by 

$131 billion in premium receipts, as shown in Table 2.3


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Table 3: Standard Drug Benefit Design and Estimated Monthly Premiums 

Calendar Year 

2006 2007 2008 2009 2010 2011 2012 2013 

Annual Deductible $250 $275 $300 $325 $350 $380 $410 $445 Coinsurance Between Deductible and Initial Coverage 

Limit (Percent) 25 25 25 25 25 25 25 25 

Initial Coverage Limit 

Program spending at limit $1,500 $1,646 $1,808 $1,946 $2,115 $2,115 $2,460 $2,666 Beneficiary spending at limit $750 $824 $903 $974 $1,055 $1,055 $1,230 $1,334 Total spending at limit $2,250 $2,470 $2,710 $2,920 $3,170 $3,170 $3,690 $4,000 

Coinsurance Between Initial Coverage Limit and Catastrophic Threshold (Percent) 100 100 100 100 100 100 100 100 Catastrophic Threshold 

Out-of-pocket spending at threshold $3,600 $3,950 $4,350 $4,650 $5,050 $5,450 $5,900 $6,400 Total spending at threshold a $5,100 $4,496 $6,158 $6,596 $7,165 $7,715 $8,360 $9,066 

Coinsurance above threshold (Percent)b 5 5 5 5 5 5 5 5 Average Monthly Premium $35 $37 $41 $43 $47 $49 $54 $58 

Source: Congressional Budget Office. Note: Numbers may not add up to totals because of rounding. Benefit parameters shown here reflect the legislation’s rounding rules. a Represents total spending at the catastrophic threshold for individuals without other drug coverage. bFor 2006, cost sharing will be the greater of 5 percent coinsurance or a copayment of $2 (for generic and multiple-source drugs) or $5 (for single-source drugs); after 2005, the $2 and $5 

amounts are also indexed. 


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Participation and Costs for Employer and Union Subsidies. Currently, a 

substantial share of Medicare beneficiaries receive coverage for their drug costs 

through a former employer. As I have noted, though, the extent to which enrollees 

will reach the standard Medicare drug benefit’s catastrophic threshold depends on 

whether they have such supplemental coverage for their Part D cost sharing. If retirees with such coverage enroll in a Medicare drug plan, therefore, their impact on 

federal costs will depend on the extent to which their former employer supplements 

that coverage. The MMA also establishes an additional option for employer and 

union plans that provide retirees with qualified drug coverage: employers that take 

that option will receive a tax-free payment directly from Medicare equal to 28 percent of total drug costs in a specified dollar range. To project what federal costs will 

be, CBO thus had to estimate not only the extent of the drug coverage that those 

retirees would have but also the mechanism through which that coverage would be 

subsidized. 

Under the MMA, CBO estimated, average federal subsidy payments on behalf of 

retirees would generally be greatest if they enrolled in a Medicare drug plan and 

received the basic drug benefit with no supplemental drug coverage. Medicare’s average subsidy payment would be reduced if those retirees were instead provided 

generous wraparound coverage by their former employer; in that case, retirees 

would not likely reach the basic benefit’s catastrophic threshold for out-of-pocket 

costs. CBO also estimated that the direct payments from Medicare to employer and 

union plans would be about the same, on average, as the net subsidies that retirees 

would generate if they enrolled in a Medicare drug plan and retained a generous 

employer wraparound policy. In other words, those direct Medicare payments to employer and union plans would also be lower, on average, than the net subsidies for 

retirees who were enrolled in Medicare drug plans and had no additional drug coverage. 

Although the favorable tax treatment accorded to those direct payments would 

make that approach somewhat more attractive, CBO nonetheless concluded that the 

difference in subsidies under the MMA gives employers a new financial incentive 

to drop prescription drug coverage for Medicare-eligible retirees. In its estimates, 

CBO did not assume that all employers would respond to that financial incentive 

but did project that 2.7 million Medicare-eligible retirees who would have had more 

generous employer drug coverage in 2006 in the absence of a Medicare drug benefit 

would not see their former employer supplement the basic Part D benefit. In those 

cases, it would make most sense for those retirees to enroll in a Medicare drug plan 

(with their former employer potentially choosing to pay their Part D premium as 

a means of compensation). At the same time, CBO assumed that nearly all of the 

remaining retirees with employer-sponsored drug coverage—about 8 million individuals in 2006—would see their employer take the direct subsidy payment from Medicare, both because of its tax advantages and for reasons of administrative simplicity. 

CBO’s estimate of $71 billion in direct subsidy payments reflects the share of drug 

spending by those retirees that is projected to fall in the covered range. 

Participation and Costs for Low-Income Subsidies. The MMA established 

two levels of additional drug benefits for enrollees with sufficiently low income and 

countable assets: a more generous subsidy for beneficiaries who are either dually 

eligible for full Medicare and Medicaid benefits or have income below 135 percent 

of poverty and low assets; and a somewhat less generous subsidy for those with income below 150 percent of poverty and assets below a slightly higher limit. On the 

basis of an analysis of both administrative and survey data, CBO estimated that 

35 percent of Medicare beneficiaries would be eligible for low-income subsidy benefits under the MMA; about 30 percent would be eligible for the more generous subsidy; and 5 percent would qualify for the less generous subsidy. 

At the same time, CBO projected that a significant proportion of the eligible population would not apply for the low-income subsidies. CBO’s estimate of the number 

of people who would sign up for low-income subsidies was based on several factors, 

including historical participation in the Qualified Medicare Beneficiary (QMB) and 

Specified Low-Income Medicare Beneficiary (SLMB) programs. The QMB and SLMB 

programs pay some or all of the premiums and cost sharing under Parts A and B 

of Medicare for beneficiaries with incomes below 120 percent of the poverty level 

and limited assets. In those programs, many beneficiaries who are eligible do not 

enroll. CBO assumed that participation in the low-income subsidy would be somewhat greater than that for other welfare-related programs, however, because MMA 

allows individuals to enroll at offices of the Social Security Administration. 

CBO also estimated that the share of eligible beneficiaries receiving low-income 

subsidies would rise gradually after the implementation of the Medicare drug benefit. (Unlike the basic drug benefit, which penalizes individuals for late enrollment, 

the additional low-income subsidies are available at any time with no penalty to 


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Part D enrollees.) Ultimately, CBO assumed that almost 70 percent of those eligible 

would receive low-income subsidies under the MMA. About 75 percent of those eligible for the more generous subsidy would receive it, while about 35 percent of those 

eligible for the less generous subsidy would receive that benefit. Participation rates 

for the more generous subsidy would be much higher because they would include 

all dual eligibles, who would participate in the drug benefit by default. 

In estimating the costs of the subsidy payments, CBO also assumed that participants would generally have higher average drug costs than beneficiaries who were 

eligible for those subsidies but chose not to enroll—that is, some adverse selection 

will occur. The total estimated cost of $192 billion for the low-income subsidies over 

10 years also includes the costs of covering the enrollment fees and providing up 

to $600 of assistance for certain low-income beneficiaries in conjunction with the 

Medicare drug discount card. For that transitional assistance program, which is 

scheduled to operate from mid-2004 through December 2005, CBO assumed relatively low take-up—specifically, that about 20 percent of eligible Medicare beneficiaries or about 3 percent of all beneficiaries would enroll—because of its limited 

benefits and temporary nature. (As an accounting matter, the costs of the low-income subsidies also include the costs of paying all or a portion of enrollees’ Part D 

premiums, rather than treating those subsidy payments as reductions in the premium receipts specified above.) 

Offsetting Federal Savings. Although this testimony has focused on the various 

costs of providing the drug benefit under Medicare, the MMA’s provisions will also 

generate offsetting federal savings, both implicitly and explicitly: 

• Transferring responsibility for the prescription drug benefits of dual eligibles 

from Medicaid to Medicare will save the federal government an estimated $152 

billion in Medicaid spending through 2013. Those savings will be partly offset 

by an additional $10 billion in federal Medicaid outlays stemming from the new 

law’s drug benefit provisions—largely from additional spending on benefits for 

Medicare beneficiaries who will enroll in Medicaid or the QMB and SLMB programs as a result of applying for the low-income drug subsidy program. • Absent other provisions, those federal Medicaid savings would be accompanied 

by corresponding savings for the states on their Medicaid costs. The MMA’s 

‘‘clawback’’ provision, however, will recapture a substantial portion of the states’ 

estimated drug savings, which CBO estimated would further reduce federal 

costs by $88 billion. • Finally, CBO estimated that some federal retirees will enroll in a Medicare 

drug plan; as a result, a portion of their prescription drug costs will be indirectly shifted to Medicare (and is included in the figures provided above). Based 

on that impact, as well as small effects on other federal programs that pay for 

prescription drugs, CBO estimated that the Medicare law’s drug benefit provisions would reduce mandatory federal spending by about $2 billion. 

Costs for Medicare Advantage Plans 

The MMA’s provisions affecting private health plans under Medicare are also 

quite complicated, so again I will attempt to summarize the key features that affected their scoring. Currently, those health plans—which are primarily health 

maintenance organizations (HMOs) participating on a county-by-county basis—are 

required to provide Part A and Part B benefits and are paid on the basis of a statutory formula. To the extent that Medicare’s payments exceed their costs of providing 

the required benefits, plans must presently give the difference to beneficiaries 

through some combination of additional benefits and premium rebates. To the extent that plans choose to provide premium rebates, the Medicare program retains 

20 percent of the difference and the beneficiaries receive the other 80 percent, but 

if plans provide additional benefits, no such ‘‘tax’’ is imposed. As a result, very few 

plans offered premium rebates in 2003 (the first year that such rebates were permitted) or 2004. The past few years have also seen a number of plans withdraw 

from the program, reduce their service areas, or lose enrollees; in part that has occurred because plan costs have grown more rapidly than payment rates, making it 

more difficult for plans that remain in the program to attract enrollees by offering 

extra benefits. Prior to passage of the MMA, CBO projected that the share of Medicare beneficiaries in private plans would decline from the current level of 13 percent 

to about 8 percent. 

For 2004 and 2005, the MMA largely retained the existing payment system for 

private health plans but increased the payment rates (and changed the name of the 

program from Medicare+Choice to Medicare Advantage). Starting in 2006, however, 

a revised system will be instituted. The statutory payment rate will be relabeled as 

the ‘‘benchmark’’ amount, and plans will submit bids that reflect the costs they expect to incur in providing Part A and Part B benefits. Medicare will pay plans their 


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4 Recently, CBO increased its ultimate projection of private plan enrollment from 9 percent 

to about 13 percent of the Medicare population, but that change has only a negligible effect on 

federal costs because most of the additional enrollment is projected to occur in areas where the 

payment rates and benchmarks are based on the local average of costs in the FFS program; 

in those instances, having an enrollee switch from the FFS program into a private plan does 

not substantially change federal outlays. 

bids plus 75 percent of the amount by which the benchmark exceeds the bid. Plans 

must then return that 75 percent to beneficiaries, either as additional benefits or 

as a rebate on their Part B or Part D premium. Thus, the essential change from 

current requirements is that—instead of retaining part (20 percent) of the difference 

between a plan’s cost and the statutory payment rate only if the plan returns that 

difference to beneficiaries as a premium rebate—Medicare will retain part (25 percent) of that difference regardless of whether the plan provides additional benefits 

or premium rebates. 

The MMA also established new rules for preferred provider organizations (PPOs) 

that operate on a regionwide level; and to encourage participation by those plans, 

it set up a stabilization fund with an initial balance of $10 billion. Such plans could 

be offered starting in 2006, and they will generally be subject to the same rules as 

county-based plans (though the benchmarks for the regional PPOs will be a weighted average of the benchmarks for county-based plans in their region and the bids 

submitted by the PPOs). Starting in 2010, the MMA also authorized ‘‘comparative 

cost adjustment’’ demonstration projects in up to six areas of the country; under 

those demonstrations, the bids of private plans would affect not only the benchmark 

for the area but also the Part B premium for enrollees in the traditional fee-for-service program in that area. 

In analyzing proposals regarding private health plans in Medicare, CBO focused 

on three factors: the costs those plans would incur, the payments Medicare would 

make, and the resulting incentives for beneficiaries to enroll—all of which were compared with the status quo. To estimate private plan costs for providing Medicare 

benefits, CBO examined data on the experience of existing HMOs in Medicare; data 

comparing payments to doctors and hospitals by private plans and by the Medicare 

FFS program; and data comparing commercial HMO and PPO costs. One important 

consideration was that, even though Medicare payment rates in many areas exceed 

the local average cost of providing benefits in the traditional FFS program, private 

plans that must negotiate fees with their providers are not offered in those areas. 

It thus seemed reasonable to infer that, if such plans were made available in those 

areas, their costs would probably equal or exceed both the Medicare payment rate 

and local FFS costs. CBO also projected that private plan costs would continue to 

grow somewhat more quickly than costs in the traditional FFS program for the next 

few years before converging to the same growth rate. 

The upshot of CBO’s analysis of the MMA’s provisions was that regional PPOs 

would generally have difficulty providing Medicare benefits at costs that were much 

less than the benchmarks to which they would be compared. Correspondingly, even 

in the areas where those plans might become available, beneficiaries would not see 

substantial premium rebates or extra benefits and thus would have only limited incentives to leave FFS programs and enroll in PPOs. While there would also be some 

additional enrollment in county-based plans because of the immediate increase in 

payment rates (and the correspondingly higher benchmarks after 2005), CBO estimated only a small increase in the overall share of beneficiaries enrolled in private 

plans as a result of the MMA’s provisions—and did not ultimately distinguish 

whether those additional enrollees would be in county-based plans or regional PPOs. 

CBO’s final cost estimate reflected not only the additional costs of those new enrollees (relative to their costs in the FFS program), but also the net costs of the higher 

payment rates and the revised payment system for beneficiaries already enrolled in 

private plans. 

The $14 billion cost estimate for the MMA’s title II provisions included several 

other components as well. CBO projected modest savings ($0.3 billion through 2013) 

from the comparative cost adjustment demonstration and offsetting modest costs for 

a set of other provisions (primarily affecting specific types of plans or payments). 

More significantly, CBO also assumed that the sums available in the PPO stabilization fund would be spent but did not explicitly model the effect of that spending on 

beneficiary enrollment (since in that case, estimated spending would not be a function of enrollment).4

Comparison with the Administration’s Cost Estimate 

Having laid out the basis for CBO’s estimate, I can now discuss how it compares 

with the Administration’s estimate. While the differences between those estimates 


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are of obvious interest to Members, they should not overshadow similarities in some 

of the assumptions underlying our respective projections. Regarding the drug benefit, both CBO and the Administration have assumed that private drug plans will 

be generally available to provide benefits starting in 2006. We have both assumed 

broad enrollment by beneficiaries in the basic drug benefit and lower take-up rates 

for the low-income subsidies. We have both assumed that a substantial minority of 

retirees who now have drug coverage through a former employer will see that employer choose not to supplement the basic Medicare benefit. And we have both assumed that the drug benefit and clawback provision will generate significant offsetting federal savings via Medicaid. Nevertheless, because the aggregate level of projected drug spending by Medicare beneficiaries is so large—$1.6 trillion between 

2006 and 2013, according to CBO estimates—seemingly small differences in the 

magnitude of those assumptions can translate into large dollar discrepancies. 

Table 4 summarizes CBO’s understanding of the differences in outlays between 

the two cost estimates for the Medicare Modernization Act. As you know, the Administration estimated that the MMA would increase net federal outlays for mandatory spending by $534 billion for fiscal years 2004 to 2013, a difference of $139 billion from CBO’s estimate for that period. The Administration’s estimate is $101 billion higher than CBO’s for the drug benefit provisions, and $32 billion higher for 

the Medicare Advantage provisions. While the estimates for other provisions may 

have differed somewhat, the net difference in mandatory outlays for those provisions 

(about $6 billion) is relatively small. As shown in Table 4, the difference of $101 billion in estimates for the drug ben- efit has three major components. First, about one-third of that discrepancy ($32 billion) is due to differences in our estimates of total payments to Medicare drug plans 

for the basic drug benefit (net of beneficiary premiums) and payments to qualified 

employer and union plans. CBO estimates that those net payments will sum to $448 

billion, while the Administration’s estimate (excluding intragovernmental transfers) 

is $479 billion. (The difference between those numbers rounds to $32 billion.) 

One source of that difference is that the Administration assumed higher overall 

participation in the drug benefit—specifically, that 94 percent of all Medicare beneficiaries would enroll. The discrepancy with CBO’s estimate of 87 percent participation would appear to account for the entire $32 billion difference in costs, but the 

Administration’s participation figures include a number of federal retirees who 

would generate intragovernmental transfers that would not count as outlays (for example, from Medicare to FEHB). If those participants are subtracted to get a more 

comparable measure of enrollment, the difference between CBO’s estimated participation rate and the Administration’s is smaller—about 3 percent to 4 percent. The 

principal difference that remains appears to involve Medicare enrollees who decline 

Part B but are not active workers; CBO assumed they would generally not participate in Part D (for the reasons already outlined), but the Administration assumed 

that they would enroll. 

Table 4: Differences Between Cost Estimates for the 

Medicare Modernization Act 

(Billions of dollars) 

Mandatory Outlays, FY 2004–2013 

Administration 

Estimate 

CBO 

Estimate 

Difference 

(Administration 

minus CBO) 

Drug Benefit Provisions 

Net payments to drug plans and employer/union subsidies 479a 448 32 

Low-income subsidies 239 192 47 

Federal Medicaid spending ¥123 ¥142 18 

Other provisions and effects ¥85 ¥89 4 

Subtotal 510 409 101 

Medicare Advantage Provisions 46 14 32 


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Table 4: Differences Between Cost Estimates for the 

Medicare Modernization Act—Continued 

(Billions of dollars) 

Mandatory Outlays, FY 2004–2013 

Administration 

Estimate 

CBO 

Estimate 

Difference 

(Administration 

minus CBO) 

Net, All Other Provisions ¥23 ¥28 6 

Total 534 395 139 

Source: Congressional Budget Office. 

Note: Numbers may not add up to totals because of rounding. The figures shown here exclude effects of federal revenues, which in combination with the impact on outlays determine the total effect of the legislation on 

federal budget deficits or surpluses. a Figures shown here for the Administration’s estimate exclude $16 billion in intragovernmental transfers 

from Medicare to federal employers, which do not count as outlays. 

The Administration also estimated that per capita costs for the basic drug benefit 

would be about 4 percent higher than CBO’s estimates throughout the period. As 

my testimony has indicated, costs per capita reflect a variety of provisions and assumptions about the effects of those provisions, so it is difficult to isolate any single 

factor as the basis for that difference—but CBO’s understanding is that the Administration projected slightly lower benefit costs and slightly higher administrative 

costs. Overall, the differences in number of participants and costs per capita each 

account for about half of the $32 billion difference in the estimated costs of providing the basic drug benefit. 

The second major difference regarding the drug benefit involves the estimates of 

participation and costs for the low-income subsidies, which account for nearly half 

($47 billion) of the overall difference. Here too it appears that the Administration 

assumed higher take-up of the subsidies, as well as modestly higher costs per participant. Specifically, the Administration estimated that the number of enrollees in the 

subsidy program after 2009 would be 13 percent to 15 percent higher than CBO projected. The difference is even larger (in percentage terms) for the initial years because CBO assumed that participation would increase gradually to its ultimate level 

while the Administration used a roughly constant take-up rate. The Administration’s estimate of per capita costs is also higher than CBO’s, but that disparity 

shrinks from about 7 percent to 10 percent initially to about 4 percent by 2013. 

The third major difference regarding the drug benefit involves savings to Medicaid, which the Administration estimated would be $18 billion lower than CBO’s 

estimate. On net, that difference appears to reflect diverging estimates of what federal Medicaid spending on prescription drugs for Medicare beneficiaries would have 

been under prior law. In particular, CBO’s baseline estimate included $18 billion in 

federal spending on waiver programs that provide limited drug coverage to low-income Medicare beneficiaries. At the same time, CBO assumed that federal spending 

on those waiver programs would end once the Part D benefit was implemented— 

both because Medicaid drug coverage for many of those enrollees would effectively 

be replaced by the Medicare benefit and low-income subsidies and because Medicaid 

would generally be precluded from using federal funds to supplement those drug 

benefits. Consequently, CBO’s estimate of the federal savings resulting from the 

MMA was $18 billion higher than the Administration’s estimate. 

The other major component of the $139 billion difference in cost estimates—payments to Medicare Advantage plans under title II of the MMA—accounts for $32 

billion of the overall difference. That is, CBO estimated that those provisions would 

increase federal outlays by $14 billion over the period, while the Administration projected a $46 billion increase. As CBO understands it, the basis for the discrepancy 

lies primarily in differing estimates of the per capita costs that regional PPO plans 

would incur in providing Medicare’s Part A and Part B benefits. The Administration’s estimates appear to be based at least in part on a recent PPO demonstration 

project, in which a number of PPO plans offered to provide those benefits at costs 

close to the average levels seen in the FFS program for their area. CBO also examined that demonstration project but concluded that those plans would not be indicative of PPO costs generally, in part because the plans most likely chose to participate in areas where their costs were most competitive (and not in areas where their 

relative costs would have been higher). The fact that those plans were offered almost exclusively in areas already served by Medicare+Choice plans that have proVerDate Aug 31 2005 07:20 Jan 27, 2006 Jkt 023797 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 E:\HR\OC\23797.XXX 23797

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vider networks also suggested to CBO that their experience might not apply in 

areas where such plans and provider networks were less prevalent. 

It may seem counterintuitive that CBO estimated higher per capita costs for 

PPOs but lower overall federal costs for the legislation—and vice versa for the Administration—but that paradox reflects interactions between those costs, incentives 

for beneficiaries to enroll, and federal payments under the MMA. As we understand 

it, the Administration projected that PPO costs in many areas would be noticeably 

lower than the benchmarks against which those costs would be measured. Beneficiaries, who would receive three-fourths of the difference in the form of premium 

rebates and extra benefits, would thus have a strong incentive to enroll in those 

plans. As a result, the Administration estimated that total enrollment in private 

plans (regional and county-based plans combined) would grow quickly after 2005 

and reach 32 percent of the Medicare population by 2013. 

At the same time, the Administration apparently estimated that those benchmarks would, on average, exceed the local costs of providing services in the traditional FFS program (which is the baseline against which costs for new enrollees 

must be measured). Correspondingly, the Administration projected that Medicare’s 

total payments to the PPOs—including the rebates for beneficiaries who enrolled in 

them—would, on average, exceed the costs in the FFS program, so that federal 

spending would rise as beneficiaries switched from the FFS program into regional 

PPOs. By contrast, CBO’s estimate that regional PPOs would have higher per capita 

costs led the agency to conclude that those plans are not likely to be widely available and would have costs close to the benchmarks in those areas where they were 

offered. Consequently, CBO projected that beneficiary enrollment would be limited 

and that—even though those enrollees would increase federal costs somewhat—the 

impact on federal spending would primarily be determined by use of the PPO stabilization fund. 

Conclusion 

I hope that this explanation of the assumptions and methods used in generating 

CBO’s cost estimate—and this analysis of the differences between that estimate and 

the Administration’s—have been helpful to the Committee. Although CBO stands 

behind its cost estimate and has chosen to respectfully disagree with some of the 

assumptions the Administration used in developing its projections, CBO also acknowledges that it is difficult to estimate the outcome of such complex legislation 

precisely. Throughout this process, CBO has sought to be as open as it could about 

the approach used in estimating the costs of various proposals, both in previous testimony and in a variety of published studies, cost estimates, and letters. This hearing represents another step in that process, and I look forward to answering any 

questions the Committee Members may have. 

f 

Chairman THOMAS. Thank you, very much. Mr. Goss? 

STATEMENT OF STEPHEN C. GOSS, CHIEF ACTUARY, 

SOCIAL SECURITY ADMINISTRATION 

Mr. GOSS. Mr. Chairman, Ranking Member, Members of the 

Committee, it is a pleasure to come and speak with you today 

about the 2004 Annual Report of the Social Security Board of 

Trustees. As you know, this report is required by law to provide to 

each of you an assessment of the actuarial status of the Social Security Trust Funds reflecting the provisions specified in current 

law. This report has been produced and delivered to the Congress 

now for 65 straight years, starting in 1940. The 2004 Social Security Trustees’ Report reflects the combined judgment of the six 

trustees and their staffs in the development of a number of assumptions that underlay the projections. Moreover, the selection of 

these assumptions reflects the summary, advice, and research provided by experts from around the world in areas of economics, demography and actuarial science. I have certified on the last page 

of this report that I believe the assumptions to be reasonable and 


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that the methods used for the projections are sound and generally 

accepted within the actuarial profession. 

The fundamental projections of the U.S. population and economy 

produced by my office are used in the Social Security and Medicare 

Trustees’ reports. These provide a solid base upon which projections of program specific costs and income are built. These projections provide a realistic picture of the likely future state of financing of the programs if no changes in law are enacted in the future. 

The projected financial status of the Social Security program is in 

good shape in the near term. Both the Old Age and Survivors Insurance and the Disability Insurance Trust Funds are expected to 

meet to the Trustees’ short-range test of financial adequacy by a 

wide margin. In the longer term, however, the current financing of 

the Social Security program is expected to be inadequate to permit 

full payment of benefits scheduled in present law. Based on the 

Trustees’ intermediate assumptions, the current annual excess of 

tax income over program costs is projected to start declining in 

2009 and to reverse in 2018, at which time net redemptions of the 

Trust Fund assets will be needed to continue full payment of benefits. In 2042, these assets, or reserves, are expected to be exhausted 

and there will be only sufficient tax income to cover 73 percent of 

the scheduled benefits. All three of these dates and this percentage 

are unchanged from last year’s report. 

New data from a wide variety of sources, improvements in projection methods and a lowering of the ultimate Consumer Price Index 

(CPI) annual growth rate assumption from 3 percent to 2.8 percent 

have resulted in a slight reduction in the 75-year actuarial deficit 

from 1.92 to 1.89 percent of taxable payroll. This slight improvement is also seen in this 75-year open group unfunded obligation 

of the program, which increased from $3.5 trillion to $3.7 trillion, 

only half the amount expected based on the change in the valuation date alone. The pattern of the financial outlook is seen more 

readily in the annual estimates for the program. Lower than expected real wage growth for 2002 and 2003 contributed to slightly 

smaller program cash flow balances through the next 10 years compared to the 2003 report. However, other changes in data and 

methods resulted in a net improvement in cash flow balances for 

years after about 2045. 

The result is an annual cash flow shortfall of 5.9 percent of taxable payroll at the end of the 75-year period compared to a shortfall of 6.5 percent which was projected in the 2003 report. This reduction in cash flow shortfalls for the latter half of the long-range 

period is responsible for the small improvement in the actuarial 

balance and the unfunded obligations for the period as a whole. 

Thus, while the annual financial shortfalls projected for Social Security after 2045 are improved somewhat from last year’s report, 

the shortfalls are nonetheless very large. The historically low levels 

of birth rates experienced starting in the seventies make inevitable 

the expected declines in the number of workers per beneficiary, and 

thus the projected increases in the cost of the program as a percentage of taxable payroll. Choices are clear. To strengthen Social 

Security and maintain solvency beyond 2042, additional revenue 

can be provided, scheduled benefit levels can eventually be reduced, or some combination of these may be selected. Again, thank 


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you for the opportunity to be here with you today. I will be happy 

to answer any questions. Thank you. 

[The prepared statement of Mr. Goss follows:] 

Statement of Stephen C. Goss, Chief Actuary, 

Social Security Administration 

Mr. Chairman, Ranking member, and members of the Committee, it is a pleasure 

to come and speak to you today about the 2004 Annual Report of the Social Security 

Board of Trustees. As you know, this Report is required by law to provide to you 

each year an assessment of the actuarial status of the Social Security Trust Funds 

reflecting the provisions specified in current law. This Report has been produced 

and delivered to the Congress now for 65 straight years, starting in 1940. 

The 2004 Social Security Trustees Report reflects the combined judgment of the 

six Trustees and their staffs in the development of a number of assumptions that 

underlie the projections. Moreover, the selection of these assumptions reflects the 

summation of all of the advice and research of experts from around the world in 

the areas of economics, demography, and actuarial science. I have certified on the 

last page of the Report that I believe these assumptions to be reasonable and that 

the methods used for projections are sound and generally accepted within the actuarial profession. 

The fundamental projections of the United States population and the economy 

produced by my office are used for both the Social Security and Medicare Trustees 

Reports. These provide a solid base upon which projections of program-specific cost 

and income are built. These projections provide a realistic picture of the likely future state of financing of the programs if no changes in law are enacted in the future. 

The projected financial status of the Social Security program is good in the near 

term. Both the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund are expected to meet the Trustees short-range 

test of financial adequacy by a wide margin. 

In the longer term, however, the current financing of the Social Security program 

is expected to be inadequate to permit full payment of benefits scheduled in present 

law. Based on the Trustees intermediate assumptions, the current annual excess of 

tax income over program cost is projected to start declining in 2009 and to reverse 

in 2018, at which time net redemptions of Trust Fund assets will be needed to continue full payment of benefits. In 2042, these assets, or reserves, are expected to 

be exhausted, and there will only be sufficient tax income to cover 73 percent of 

scheduled benefits. Both of these dates, and this percentage, are unchanged from 

last year’s Report. 

New data from a variety of sources, improvements of projection methods, and a 

lowering of the ultimate CPI annual-growth-rate assumption from 3 to 2.8 percent 

have resulted in a slight reduction in the 75-year actuarial deficit from 1.92 to 1.89 

percent of taxable payroll. This slight improvement is also seen in the 75-year opengroup unfunded obligation of the program which increased from $3.5 to $3.7 Trillion, only half the amount expected based on the change in the valuation date alone. 

The pattern of the financial outlook is seen more readily in the annual estimates 

for the program. Lower than expected real average wage growth for 2002 and 2003 

contributed to slightly smaller program cash-flow balances through the next 10 

years, compared to the 2003 report. However, other changes in data and methods 

resulted in a net improvement in cash-flow balances for years after 2045. The result 

is an annual cash-flow shortfall of 5.9 percent of taxable payroll at the end of the 

75-year period, compared to a shortfall of 6.5 percent in the 2003 report. This reduction in cash-flow shortfalls for the latter half of the long-range period is responsible 

for the small improvements in the actuarial balance and the unfunded obligations 

for the period as a whole. 

Thus, while the annual financial shortfalls projected for Social Security after 2045 

are improved somewhat from last year’s report, the shortfalls are still very large. 

The historically low levels of birth rates experienced starting in the 1970’s make inevitable the expected declines in the number of workers per beneficiary and thus 

the projected increases in the cost of the program as a percentage of the payroll tax 

base. Choices are clear. To strengthen Social Security and maintain solvency beyond 

2042, additional revenue can be provided, scheduled benefit levels can eventually be 

reduced, or some combination of these may be selected. 

Again, thank you for the opportunity to be here today. I will be happy to attempt 

to answer any questions you have. 


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Chairman THOMAS. Thank you, very much, Mr. Goss. Mr. 

Foster? 

STATEMENT OF RICK FOSTER, CHIEF ACTUARY, 

CENTERS FOR MEDICARE AND MEDICAID SERVICES 

Mr. FOSTER. Chairman Thomas, Representative Rangel, distinguished Members of the Committee, thank you for inviting me to 

testify again about the financial outlook for the Medicare Program. 

The Medicare Modernization Act of 2003 clearly introduces the 

most significant changes to the program since its initial or original 

enactment in 1965. The new prescription drug benefit will bring 

Medicare more in line with modern insurance coverage and medical 

practice, and it will provide a valuable new benefit for all beneficiaries who choose to enroll in it, especially for those with low incomes. At the same time, of course, the new benefit will add substantially to the overall cost of Medicare, we estimate by nearly 

one-fourth compared to the prior program cost initially and growing to as much as about one-third. I will briefly summarize the 

most important findings of the 2004 Medicare Trustees’ Report and 

comment just briefly on the differences in cost estimates between 

my office and the CBO. 

You are all very familiar with the differences between the two 

parts of Medicare, HI or part A; and supplementary medical insurance, which now has Parts B and D in it, a number of differences 

that are well known. In particular they are financed in a different 

way by totally different methods. The HI is financed by a portion 

of the Federal Insurance Contribution Act and the Self-Employment Contributions Act payroll taxes. Those tax rates are fixed in 

the law and they cannot change without legislation. In contrast, 

both part B and Part D in the future are financed primarily by 

general revenues and beneficiary premiums. Those financing rates 

are adjusted every year by my office to match the expected cost. So, 

as a result of these different financing bases and because the assets 

cannot be interchanged, we have to evaluate the financial status of 

the HI Trust Fund and the part B and D accounts of the Supplementary Medical Insurance Trust Fund individually. 

Dr. Holtz-Eakin talked a little bit about the nature of projections. 

Let me just remind you that in our Trustees’ Report to Congress, 

we project based on current law. We assume no changes other than 

what is already there in the statute. The projections are necessarily 

uncertain particularly over longer time horizons like 75 years. 

Moreover, with the new drug benefit, because there is no past experience to go by and only limited data on drug spending for Medicare beneficiaries, we have an even greater degree of uncertainty 

than usual. Despite these limitations in short—and long-range projections, we consider them useful for informing policy development. 

For the HI Trust Fund you know, based on Secretary Snow’s presentation, that the financial status has deteriorated since the last 

report. The projected year of depletion has moved up to 2019. At 

the end of our 75-year protection period the scheduled tax revenues 

will be sufficient to cover only one-fourth of the projected expenditures. Only one-fourth. 


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For the part B account in the Supplementary Medical Insurance 

Trust Fund the good news is, of course, that it is automatically in 

financial balance because we reset the financing every year. The 

bad news is its costs have tended to grow fairly quickly. For example, in the last 4 calendar years, the part B costs have grown at 

about 10 percent per year on average over that period. Moreover, 

because of the Consolidated Appropriations Resolution in 2003, together with higher than expected part B costs, we ran a fairly significant deficit in the Trust Fund in 2003, because the legislation 

came along after we had already set the financing. That resulted 

in over $10-billion deficit. Moreover, for this year, because of the 

Medicare Modernization Act, we again anticipate running a deficit 

with the result that we will have to raise the premium fairly sharply for 2005. We estimate in the Trustees’ Report by about 17 percent. 

For the Part D account, the new drug benefit, it will be in financial but, again, it will have significant costs. Let me mention just 

briefly the matter concerning the CBO cost estimates versus ours. 

I am convinced I know from our end and I am convinced from CBO 

that we have both operated independently. We have acted independently to use the best assumptions, data and methods that we 

could to get the best possible cost estimate. The fact that we disagree somewhat in no way means that they tried to tilt their estimates or that we tried to tilt our estimates. It means that the future is uncertain. We have the highest regard for our colleagues at 

CBO and we value our occasional get-togethers for technical interchanges. Mr. Chairman, I pledge the Office of the Actuary’s continuing assistance as you struggle with these financial challenges 

facing Medicare. Thank you. 

[The prepared statement of Mr. Foster follows:] 

Statement of Rick Foster, Chief Actuary, Centers for Medicare and 

Medicaid Services 

Chairman Thomas, Representative Rangel, distinguished Committee members, 

thank you for inviting me to testify today about the financial outlook for the Medicare program as shown in the newly released 2004 annual report of the Medicare 

Board of Trustees. I will also provide information on how our cost estimates for the 

Medicare Prescription Drug, Improvement, and Modernization Act compare with 

those of the Congressional Budget Office. I welcome the opportunity to assist you 

in your efforts to ensure the future financial viability of the nation’s second largest 

social insurance program—one that is a critical factor in the income security of our 

aged and disabled populations. 

The Medicare modernization act (MMA) introduces the most significant changes 

to the program since its enactment in 1965. The new prescription drug benefit will 

bring Medicare more in line with modern insurance coverage and medical practice, 

while providing a valuable new benefit for all beneficiaries who choose to enroll, especially those with low incomes. At the same time, of course, the new drug benefit 

will add substantially to the overall cost of Medicare. 

As you know from the findings in the new Trustees Report, the financial outlook 

for the Medicare program has deteriorated significantly since last year’s report. This 

change is due in part to the impact of the new legislation, but it also reflects other, 

unassociated developments in cost and revenue trends. The financial status of the 

Medicare trust funds must be evaluated separately for each fund and for each account within the funds. 

The Hospital Insurance (HI) trust fund does not meet the Trustees’ formal test 

for short-range financial adequacy, which had been met in each of the previous 5 

reports. In addition, the depletion of the HI trust fund, which had been projected 

for 2026 in last year’s Trustees Report, is projected to now occur in 2019. Beginning 

in 2004, HI tax revenues are projected to fall increasingly short of program expendiVerDate Aug 31 2005 07:20 Jan 27, 2006 Jkt 023797 PO 00000 Frm 00037 Fmt 6633 Sfmt 6621 E:\HR\OC\23797.XXX 23797

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1Federal Insurance Contributions Act and Self-Employment Contributions Act, respectively. 

tures, eventually covering only one-fourth of estimated costs by the end of the Trustees’ 75-year projection period. 

The Medicare modernization act created two separate accounts within the Supplementary Medical Insurance (SMI) trust fund—one for Part B, which continues to 

cover the traditional SMI services, and one for the new Part D, which provides subsidized access to prescription drug coverage. Because of the annual redetermination 

of financing for both Parts B and D, each account will remain in financial balance 

indefinitely under current law. SMI costs, however, are projected to continue increasing at a faster rate than the national economy and beneficiaries’ incomes, raising concerns about the long-range cost implications of scheduled financing. 

Background 

Roughly 41 million people were eligible for Medicare benefits in 2003. HI, or ‘‘Part 

A’’ of Medicare, provides partial protection against the costs of inpatient hospital 

services, skilled nursing care, post-institutional home health care, and hospice care. 

Part B of SMI covers most physician services, outpatient hospital care, home health 

care not covered by HI, and a variety of other medical services such as diagnostic 

tests, durable medical equipment, and so forth. SMI Part D will initially provide access to prescription drug discount cards and transitional assistance to low-income 

beneficiaries. In 2006 and later, Part D will provide subsidized access to prescription 

drug insurance coverage as well as additional drug premium and cost-sharing subsidies for low-income enrollees. 

Only about 22 percent of Part A enrollees received some reimbursable covered 

services during 2003, since hospital stays and related care tend to be infrequent 

events even for the aged and disabled. In contrast, the vast majority of enrollees 

incurred reimbursable Part B costs because the covered services are more routine 

and the annual deductible for SMI was only $100 in 2003. 

The HI and SMI components of Medicare are financed on totally different bases. 

HI costs are met primarily through a portion of the FICA and SECA payroll taxes.1

Of the total FICA tax rate of 7.65 percent of covered earnings, payable by employees 

and employers, each, HI receives 1.45 percent. Self-employed workers pay the combined total of 2.90 percent. Following the Omnibus Budget Reconciliation Act of 

1993, HI taxes are paid on total earnings in covered employment, without limit. 

Other HI income includes a portion of the income taxes levied on Social Security 

benefits, interest income on invested assets, and other minor sources. SMI enrollees pay monthly premiums ($66.60 for Part B in 2004, and an esti- mated average level of $37.20 for Part D starting in 2006). For Part B, the monthly 

premiums cover about 25 percent of program costs with the balance paid by general 

revenue of the Federal government and a small amount of interest income. For Part 

D, the transitional assistance and prescription drug discount card costs in 2004 and 

2005 will be paid through enrollment fees and general revenues. In 2006 and later, 

the Part D costs will be met through monthly premiums, which on average will 

cover 25.5 percent of the cost of the basic coverage, with the balance paid by Federal 

general revenues, certain State transfer payments, and a small amount of interest 

income. 

The Part A tax rate is specified in the Social Security Act and is not scheduled 

to change at any time in the future under present law. Thus, program financing 

cannot be modified to match variations in program costs except through new legislation. In contrast, the premiums and general revenue financing for both Parts B and 

D of SMI are reestablished each year to match estimated program costs for the following year. As a result, SMI income automatically matches expenditures without 

the need for legislative adjustments. 

Each component of Medicare has its own trust fund, with financial oversight provided by the Board of Trustees. My discussion of Medicare’s financial status is based 

on the actuarial projections contained in the Board’s 2004 report to Congress. Such 

projections are made under three alternative sets of economic and demographic assumptions, to illustrate the uncertainty and possible range of variation of future 

costs, and cover both a ‘‘short range’’ period (the next 10 years) and a ‘‘long range’’ 

(the next 75 years). The projections are not intended as firm predictions of future 

costs, since this is clearly impossible; rather, they illustrate how the Medicare program would operate under a range of conditions that can reasonably be expected 

to occur. It is important to note that the results shown in this year’s report are even 

more uncertain than those in past reports due to the changes from the MMA. In 

particular, the Part D projections are estimated without any actual past program 

experience. The projections shown in this testimony are based on the Trustees’ ‘‘intermediate’’ set of assumptions. 


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Short-range financial outlook for Hospital Insurance 

Chart 1 shows HI expenditures versus income since 1990 and projections through 

2013. For most of the program’s history, income and expenditures have been very 

close together, illustrating the pay-as-you-go nature of HI financing. The taxes collected each year have been roughly sufficient to cover that year’s costs. Surplus revenues are invested in special Treasury securities—in effect, lending the cash to the 

rest of the Federal government, to be repaid with interest at a specified future date 

or when needed to meet expenditures. 

Chart 1—HI expenditures and income 

(In billions) 

During 1990–97, HI costs increased at a faster rate than HI income. Expenditures 

exceeded income by a total of $17.2 billion in 1995–97. The Medicare provisions in 

the Balanced Budget Act of 1997 were designed to help address this situation. As 

indicated in Chart 1, these changes—together with subsequent low general and 

medical inflation and increased efforts to address fraud and abuse in the Medicare 

program—resulted in a decline in Part A expenditures during 1998–2000 and trust 

fund surpluses totaling $61.8 billion over this period. After 2000, Part A expenditures and income converged slightly, as the Balanced Budget Refinement Act and 

the Benefit Improvement and Protection Act increased Part A expenditures and the 

2001 economic recession resulted in lower payroll tax income for Part A. 

Beginning in 2004, the Medicare modernization act is also estimated to increase 

Part A expenditures, through higher payments to rural hospitals and to private 

Medicare Advantage health plans. Total HI income, including interest earnings, is 

expected to slightly exceed total expenditures in 2004 through 2009. (HI tax revenues alone are estimated to fall short of total expenditures beginning this year.) The 

slightly faster projected growth trend in outlays would result in trust fund deficits 

starting in 2010 and later. Note that even relatively small changes in growth trends 

for either income or expenditures could have a very significant impact on the projected difference between these cash flows. In particular, the onset of deficits in the 

HI trust fund could easily occur several years earlier or later than this intermediate 

projection. 

The Board of Trustees has recommended maintaining HI assets equal to at least 

one year’s expenditures as a contingency reserve. As indicated in Chart 2, HI assets 

at the beginning of 2004 represented about 152 percent of estimated expenditures 

for the year. Future asset growth, reflecting the diminishing difference between income and expenditures described above, is projected to be significantly slower than 

expenditure growth in 2004 and later. After 2009, as assets are drawn down to 

cover the annual deficits, the trust fund balance would decline and would be exhausted in 2019 under the Trustees’ intermediate assumptions. 


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Chart 2—HI trust fund assets 

(Assets at beginning of year as percentage of annual expenditures) 

The depletion date estimated in the 2004 Trustees Report represents a significant 

deterioration of the trust fund financial condition compared to the estimate in last 

year’s report (2026). About 2 years of the total 7-year difference are attributable to 

the higher Part A costs under the Medicare modernization act. Other factors contributing to the closer exhaustion date for HI are higher incurred spending and 

lower tax revenues in 2003 than previously estimated (2 years), hospital assumption 

adjustments to better reflect recent historical experience (1.5 years), improved data 

on the health status of beneficiaries in private health plans (1 year), and model refinements for certain hospital payments (0.5 year). 

Long-range financial outlook for Hospital Insurance 

The interpretation of dollar amounts through time is very difficult over extremely 

long periods like the 75-year projection period used in the Trustees Reports. For this 

reason, long-range tax income and expenditures are expressed as a percentage of 

the total amount of wages and self-employment income subject to the HI payroll tax 

(referred to as ‘‘taxable payroll’’). The results are termed the ‘‘income rate’’ and ‘‘cost 

rate,’’ respectively. Projected long-range income and cost rates are shown in Chart 

3 for the HI program. 

Past income rates have generally followed program costs closely, rising in a stepwise fashion as the payroll tax rates were adjusted by Congress. Income rate growth 

in the future is minimal, due to the fixed tax rates specified in current law. Trust 

fund revenue from the taxation of Social Security benefits increases gradually, because the income thresholds specified in the Internal Revenue Code are not indexed. 

Over time, an increasing proportion of Social Security beneficiaries will incur income taxes on their benefit payments. 


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Chart 3—Long-range HI income and costs under intermediate assumptions 

(as a percentage of taxable payroll) 

Past HI cost rates have generally increased over time but have periodically declined abruptly as the result of legislation to expand HI coverage to additional categories of workers, raise (or eliminate) the maximum taxable wage base, introduce 

new payment systems such as the inpatient prospective payment system, etc. Cost 

rates decreased significantly in 1998–2000 as a result of the Balanced Budget Act 

provisions together with strong economic growth. After 2000, however, cost rates increased, partly as a result of the Balanced Budget Refinement Act and the Benefit 

Improvement and Protection Act. After 2003, cost rates are again expected to increase as the Medicare modernization act is implemented, and to accelerate significantly as the baby boom generation enrolls in Medicare, beginning in about 2010. 

By the end of the 75-year period, scheduled tax income would cover only about onefourth of projected expenditures. 

The average value of the financing shortfall over the next 75 years—known as the 

actuarial deficit—is 3.12 percent of taxable payroll. For illustration, this deficit 

could be closed by an immediate increase of 1.56 percentage points in the HI payroll 

tax rate, payable by employees and employers, each. If, instead, no changes were 

made until the year of asset exhaustion, then the HI payroll tax rate would require 

an increase of about 2.15 percent, payable by employees and employers, each. Note, 

however, that such changes would only correct the deficit ‘‘on average.’’ Initially, HI 

revenue would be significantly in excess of expenditures, but by the end of the period, only about one-third of the projected annual deficit would be eliminated. The 

long-range deficit could also be eliminated by many other approaches involving revenue increases and/or expenditure reductions, but its magnitude poses a very 

daunting challenge to policy makers. 

The effect of the baby boom generation on Medicare and Social Security is relatively well known, having been discussed at some length for the last 30 years. Basically, by the time the baby boom cohorts have enrolled in Medicare, there will be 

nearly twice as many HI beneficiaries as there are today, but the number of covered 

workers will have increased by only about 20 percent. When the HI program began, 

there were 4.5 workers in covered employment for every HI beneficiary. As shown 

in Chart 4, this ratio was nearly 4.0 workers per beneficiary in 2003. When the baby 

boom joins Medicare, the number of beneficiaries will increase more rapidly than 

the labor force, resulting in a decline in this ratio to about 2.4 in 2030 and 2.0 by 

2078 under the intermediate projections. Other things being equal, there would be 

a corresponding increase in HI costs as a percentage of taxable payroll. 

There are other demographic effects beyond those attributable to the varying 

number of births in past years. In particular, life expectancy has improved substantially in the U.S. over time and is projected to continue doing so. The average remaining life expectancy for 65-year-olds increased from 12.4 years in 1935 to 17.5 


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years currently, with an estimated further increase to about 22 years at the end of 

the long-range projection period. Medicare costs are also sensitive to the age distribution of beneficiaries. Older persons incur substantially larger costs for medical 

care, on average, than younger persons. Thus, as the beneficiary population ages 

over time they will move into higher-utilization age groups, thereby adding to the 

financial pressures on the Medicare program. 

Chart 4—Workers per HI beneficiary 

Financial outlook for Supplementary Medical Insurance 

The financial outlook for SMI is very different than for HI, although rapid expenditure growth is a serious issue for both components of Medicare. The Medicare 

modernization act established a separate account within the SMI trust fund to handle transactions for the new Medicare drug benefit. Because there is no authority 

to transfer assets between the new Part D account and the existing Part B account, 

it is necessary to evaluate each account’s financial adequacy separately. 

Chart 5 presents estimates of the short-range outlook for Part B. In contrast to 

the HI program, the income and expenditure curves for Part B are nearly indistinguishable in the future. As noted previously, Part B premiums and general revenue 

income are reestablished annually to match expected program costs for the following 

year. Thus, the program will automatically be in financial balance, regardless of future program cost trends. 

As shown in Chart 5, however, Part B expenditures have exceeded income in recent years. In particular, in 2003 the Consolidated Appropriations Resolution increased payments to physicians after the Part B financing rates had been set for 

2003. For 2004, similarly, the Medicare modernization act increased physician and 

certain other Part B expenditures after the financing rates had been set for the 

year. These legislative changes, together with stronger than expected expenditure 

growth, have decreased Part B assets below levels considered adequate for contingency purposes. To restore balance between Part B income and expenditures, and 

to rebuild the Part B account assets to a more adequate level, the monthly Part B 

premium rate and the associated general revenue payments will have to be increased substantially for 2005. 


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Chart 5—SMI Part B expenditures and income 

(In billions) 

It should be noted that the projected Part B expenditures shown in the 2004 

Trustees Report are unrealistically low, due to the structure of physician payments 

under current law. Future physician payment increases must be adjusted downward 

if cumulative past actual physician spending exceeds a statutory target. Prior to the 

MMA, past spending was already above the target level. The MMA raised the physician fee updates for 2004 and 2005, but without raising the target. Together, these 

factors yield projected physician updates of about—5 percent for 7 consecutive years, 

beginning in 2006. Multiple years of significant reductions in physician payments 

per service are very unlikely to occur before legislative changes intervene, but these 

payment reductions are required under the current law payment system and are reflected in the Part B projections. 

Beneficiaries will obtain the new Part D prescription drug benefit by voluntarily 

purchasing insurance policies from stand-alone companies or through private Medicare Advantage health plans. The costs of these plans will be heavily subsidized by 

Medicare through a combination of direct premium subsidies and reinsurance payments. Medicare will also provide further support on behalf of low-income beneficiaries and a special subsidy to employers who provide qualifying drug coverage 

to their Medicare-eligible retirees. The financial risk associated with the private 

drug plans will be shared between the plan and Medicare. Medicare’s cost for the 

various drug subsidies will be financed primarily from general revenues. A declining 

portion of the costs associated with beneficiaries who also qualify for full Medicaid 

benefits will be financed through special payments from State governments. 

For the Part D program, the financial operations in 2004 and 2005 relate only 

to the prescription drug discount card and low-income transitional assistance. Since 

the general revenue subsidy for this benefit is expected to be drawn daily, no financial imbalance is likely. After 2005, when the Medicare prescription drug coverage 

begins, Part D income and outgo are expected to remain in balance as a result of 

annual adjustments of premium and general revenue income to match costs. 

Chart 6 shows projected long-range SMI expenditures and premium income as a 

percentage of GDP. Under present law, Part B beneficiary premiums will continue 

to cover approximately 25 percent of total Part B costs, with the balance drawn from 

general revenues. Similarly, Part D beneficiary premiums are designed to cover 25.5 

percent of the basic Part D benefit, on average, with the balance paid by general 

revenues and State transfers. SMI expenditures are projected to increase at a significantly faster rate than GDP, for largely the same reasons underlying HI cost 

growth. For the past 10 years, prescription drug spending has been the fastest growing major health sector. Consistent with these recent trends, the Medicare prescription drug spending under Part D is projected to initially grow faster than either 

Part A or Part B. 


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Chart 6—SMI expenditures and premiums as a percentage of GDP 

Although SMI is automatically in financial balance, the program’s continuing 

rapid growth in expenditures places an increasing burden on beneficiaries and the 

Federal budget. In 2010, for example, a representative beneficiary’s Part B and D 

premiums would require an estimated 13 percent of his or her Social Security benefit, and another 23 percent would be needed to cover average deductible and coinsurance expenditures for the year. By 2070, about 30 percent of a typical Social Security benefit would need to be withheld to pay the Part B and Part D premiums 

and about 54 percent would be required for copayment costs. Similarly, Part B and 

D general revenues in fiscal year 2010 are estimated to equal 19 percent of the personal and corporate Federal income taxes that would be collected in that year, if 

such taxes are set at their long-term, past average level, relative to the national 

economy. Under the same assumption, projected Part B and D general revenue financing in 2070 would represent over 50 percent of total income taxes. 

Combined HI and SMI expenditures 

The financial status of the Medicare program is appropriately evaluated for each 

trust fund separately, as summarized in the preceding sections. By law, each fund 

is a distinct financial entity, and the nature and sources of financing are very different between the two funds. This distinction, however, frequently causes greater 

attention to the HI trust fund—and especially its projected year of asset depletion— 

and less attention to SMI, which does not face the prospect of depletion. It is important to consider the total cost of the Medicare program and its overall sources of 

financing, as shown in Chart 7. Interest income is excluded since, under present 

law, it would not be a significant part of program financing in the long range. 


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Chart 7—Medicare expenditures and sources of income as a percentage of 

GDP 

Combined HI and SMI expenditures are projected to increase from 2.6 percent of 

GDP in 2003 to about 13.8 percent in 2078, based on the Trustees’ intermediate set 

of assumptions. The addition of Part D is expected to increase total Medicare costs 

by nearly one-fourth in 2006. In past years, total income from HI payroll taxes, income taxes on Social Security benefits, HI and SMI beneficiary premiums, and SMI 

general revenues was very close to total expenditures. Beginning in 2004, overall 

expenditures are expected to exceed aggregate non-interest revenues, with the growing difference arising from the projected imbalance between HI tax income and expenditures—throughout this period, SMI revenues would continue to approximately 

match SMI expenditures. 

Over time, SMI premiums and general revenues would continue to grow rapidly, 

since they would keep pace with SMI expenditure growth under present law. HI 

payroll taxes are not projected to increase as a share of GDP, primarily because no 

further increases in the tax rates are scheduled under present law. Thus, as HI 

sources of revenue become increasingly inadequate to cover HI costs, SMI premiums 

and general revenues would represent a growing share of total Medicare income. 

With the implementation of the Part D drug benefit in 2006, general revenues will 

become the largest source of Medicare financing. The difference between total Medicare outlays and ‘‘dedicated financing sources’’ 2 is projected to first reach 45 percent 

of outlays in 2012. 

Conclusions 

In their 2004 report to Congress, the Board of Trustees notes the significant deterioration in the financial outlook for Medicare that has come about as a result of 

the modernization legislation, higher spending, and lower HI payroll tax revenue. 

The Trustees emphasize the continuing financial pressures facing Medicare and 

urge the nation’s policy makers to take steps to address these concerns. They also 

argue that consideration of further reforms should occur in the relatively near future, since the earlier solutions are enacted, the more flexible and gradual they can 

be. Finally, the Trustees note that early action increases the time available for affected individuals and organizations—including health care providers, beneficiaries, 

and taxpayers—to adjust their expectations. 

I concur with the Trustees’ assessment and pledge the Office of the Actuary’s continuing assistance to the joint effort by the Administration and Congress to determine effective solutions to the financial problems facing the Medicare program. I 

would be happy to answer any questions you might have on Medicare’s financial 

issues. 


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1This estimate excludes Federal administrative costs, other than the $1.5 billion authorized 

by section 1015 of the act, and the impact on social insurance payroll taxes and general income 

taxes. An additional Medicare expenditure of $16 billion through 2013 would be made for employer drug subsidy payments to Federal employers. 2 Beneficiaries in employer-sponsored retiree health benefit programs are included in both percentages. 

Appendix 

Summary of Differences Between OACT and CBO Cost Estimates for the 

Medicare Prescription Drug, Improvement, and Modernization Act of 2003 

The Office of the Actuary in the Centers for Medicare & Medicaid Services has 

estimated that the Medicare modernization act would increase net Federal costs by 

a total of $534 billion through fiscal year 2013.1 The corresponding estimate by the Congressional Budget Office is $395 billion. OACT and CBO have independently estimated the cost of the modernization act using the best data, assumptions, and 

methods that each organization could develop. The following points summarize the 

nature of the differences in the estimates. 

• The estimates differ principally because the future is uncertain, and this uncertainty is reflected in somewhat different assumptions regarding the numerous 

cost and behavioral factors that will affect actual future costs. In this regard, 

the difference in estimates is a useful reminder of the inherent uncertainty and 

a rough indication of the sensitivity of future costs to the underlying cost factors. 

• Of the total difference of $139 billion between the estimates, approximately 

$100 billion relates to Title I of the act, the Medicare prescription drug program: 

• OACT estimates that about 94 percent of all Medicare beneficiaries would enroll in (or otherwise benefit from) the Medicare drug benefit, compared to 87 

percent for CBO,2 and we also estimate a slightly higher average, per-beneficiary value for the standard drug benefit. These factors account for $32 billion of the total difference. 

• While OACT and CBO estimate similar numbers of beneficiaries who are eligible for the low-income drug subsidy, OACT estimates a significantly higher 

enrollment rate by these individuals. In addition, our estimated average cost 

for the low-income subsidy per beneficiary is slightly greater than CBO’s. Of 

the total difference in estimated drug costs, the low-income subsidy accounts 

for $47 billion. 

• The cost to Medicare of providing the drug benefit would be partially offset 

by net Federal savings for Medicaid. (Federal Medicaid drug expenditures for 

Medicare beneficiaries would be eliminated, but other Federal Medicaid costs 

would increase somewhat; as beneficiaries enroll for the Medicare low-income 

drug subsidy, some will be found to qualify for Medicaid coverage). CBO estimates a greater degree of net Federal Medicaid savings, because their prior 

baseline projections included a rapidly growing cost for ‘‘pharmacy plus’’ Medicaid waivers. In total, the CBO savings estimate is $18 billion greater than 

OACT’s. 

• The remaining $3 billion of the total difference in Title I estimates is due to 

a slightly different estimate of State payments on behalf of Medicare beneficiaries who also qualify for full Medicaid benefits. 

• $32 billion of the remaining difference in the overall cost estimates is associated 

with Title II, the Medicare Advantage program. OACT’s estimated costs for this 

title are $46 billion, versus CBO’s estimate of $14 billion: 

• CBO’s estimate is based on a $10 billion cost for the regional PPO stabilization fund, and $4 billion for the increased MA payment rates. They estimate 

that about 13 percent of beneficiaries will enroll in private health plans, most 

of whom would be in local HMOs. Regional PPOs are estimated to have costs 

somewhat in excess of the prevailing ‘‘payment benchmarks,’’ with the result 

that few such plans could participate and beneficiary enrollment would be 

minimal. 

• OACT’s estimate includes $12 billion for the stabilization fund and another 

$34 billion due to the higher payment rates starting in 2004 and the restructured payment formula in 2006 and later. We estimate that HMO enrollment 

would increase from its current level of about 12 percent to 16 percent and 

that PPO enrollment would also reach 16 percent in 2009 and later. The latter projection is based on estimated PPO costs that are generally below the 

payment benchmarks, with the result that beneficiaries could qualify for sigVerDate Aug 31 2005 07:20 Jan 27, 2006 Jkt 023797 PO 00000 Frm 00046 Fmt 6633 Sfmt 6621 E:\HR\OC\23797.XXX 23797

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nificant premium rebates and/or additional benefits. Because these estimated 

PPO costs typically exceed fee-for-service levels, however, Medicare costs for 

such enrollees would be higher than under prior law. • Other differences exist between the OACT and CBO estimates for Titles III 

through IX. These differences tend to be smaller and are also largely offsetting 

(with CBO sometimes higher and sometimes lower than our estimates). The remaining $7 billion of the total difference between total estimated costs is explained by these factors. 

It is not uncommon for OACT and CBO to differ somewhat in their estimates. For 

example, CBO’s estimated Medicare savings for the Balanced Budget Act of 1997 

totaled about $116 billion in the first 5 fiscal years. The corresponding OACT estimate was $152 billion. Similarly, the BBA savings estimates over the first 10 years 

were $394 billion for CBO versus $517 billion for OACT. I believe that CBO has 

prepared competent, good-faith estimates for the Medicare modernization act. I prefer the assumptions and methods employed in the Office of the Actuary, and stand 

behind our own estimates, while recognizing that an uncertain future could prove 

all of us wrong. 

f 

Chairman THOMAS. Thank you, very much. Mr. Holtz-Eakin, 

you said that you believe that yours is the single best estimate. My 

assumption is that Mr. Foster believes his is the single best estimate. Mr. Goss, whenever we look at the Social Security projections, I am always struck by the fact that you do not really do your 

single best estimate. You do a high and a low and an intermediary. 

Why don’t you just do the single best estimate? Then you would get 

more questions today. 

Mr. GOSS. Well, Chairman Thomas, I was wondering about the 

fact that I am sitting in the middle here. 

Chairman THOMAS. Purely by accident. 

Mr. GOSS. I would say that for the Social Security Trustees’ report you are exactly right, we do produce an intermediate protection which is generally characterized as the Trustees’ best estimate 

based on their best assumptions for the future. 

Chairman THOMAS. You bracket it. 

Mr. GOSS. We do bracket it with a high and a low cost estimates. In addition we have, in the last 2 years, also provided a 

stochastic range. I do believe that the Medicare report does also include a high and low cost estimate. 

Chairman THOMAS. Yes, it does, in the long-term because of the 

uncertainties. I do find it a little bit interesting that we have what 

I would guess is the high and the low estimate for this particular 

piece of legislation, and that it is probably most accurate to look 

at it as a range since neither one is going to be correct. Mr. HoltzEakin believes his is the single best estimate. Again, it is not a 

beauty contest. We are not choosing Mr. Holtz-Eakin over Mr. Foster for reasons that are not grounded in law. The Congressional 

Budget Act (P.L. 93–344), section 308, says that the CBO is the official scorekeeper and, in fact, Committees are required to include 

a CBO estimate with each bill reported. 

Oftentimes, though, in the very difficult areas, and I want to underscore how difficult it has been for any actuary to attempt to 

make estimates in an area for which we have had no experience 

other than previous bills that failed and our re-examination of our 

previous estimates, deciding that they were not as good as we 

thought they were when they were issued. So, that is a growth 

curve and we have moved forward. Oftentimes you will hear from 


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me or other Members, would you two please get together and talk 

to each other to see if we can narrow the differences between the 

estimates, not because we are trying to affect the outcome but because it is very difficult when there is a significant difference for 

the same proposal from two professional groups. It makes it very 

difficult. 

If we are forced to choose, the law tells us very clearly that Mr. 

Holtz-Eakin wins. That is the law. That section 402 of the Congressional Budget Act requires estimates for bills reported by Committee. I think another point that needs to be underscored in this 

dynamic is that not only piece-by-piece do we need provisions 

scored by the CBO, but we need a complete estimate of the legislation passed by the Committee. That does not mean it is not going 

to change between Committee action and the floor, between the 

floor and going to conference, or coming out of conference. What the 

CBO does is constantly update the estimates. Mr. Foster, when 

were you able to provide a comprehensive, complete analysis of the 

legislation that was passed? 

Mr. FOSTER. For the total package, we were not able to complete those estimates in their entirety until December 23rd. 

Chairman THOMAS. Why were you not able to do that until late 

in December? 

Mr. FOSTER. The complexity of the Medicare Advantage provisions led to very difficult estimating challenges. It involved trying 

to anticipate the behavior of plans as to whether to participate or 

not, what their cost would be, and then what the premiums would 

be and whether beneficiaries would be attracted to these plans or 

not, in which areas, and in how many numbers, and then the consequences for the cost to the program. 

Chairman THOMAS. Would part of the time lag be that you had 

to get the bill in its entirety prior to making some of those interactive estimates and, in fact, the total estimate? 

Mr. FOSTER. Yes. 

Chairman THOMAS. So, the statutory underpinning of CBO having to be on horseback with estimates that we are required to accept is a slightly different job than yours, because although we 

value independent assessments, we are required to accept, pieceby-piece, building an overall cost. The thing that I find most remarkable about Mr. Holtz-Eakin’s estimates are the fact that the 

CBO made an estimate at the end of the conference and then after 

the bill became law when you did; i.e., they had the information 

available of the direction that you were going. In their professional 

estimation, stayed with their number. That, I think, is very telling 

and notwithstanding how much someone may like your numbers or 

admire your numbers or admire your professionalism, when you go 

into the differences between the two programs I think it is quite 

telling, because as in your testimony, Mr. Foster, you point out 

that the areas of discrepancy are in the most cutting and problematic areas that are new. For example, the prescription drug benefit. 

You estimated what percentage of the seniors would enroll in Part 

D prescription drugs? 

Mr. FOSTER. We estimated 94 percent. 

Chairman THOMAS. Ninety-four percent. Do you know what the 

enrollment for part B, Medicare Supplement, is? 


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Mr. FOSTER. It is about 91 percent of all eligible people. 

Chairman THOMAS. Ninety-one percent. Up until recently Medicare part B was a 75 cent on the dollar subsidy if you enrolled in 

part B, and you got a 91 percent take-up rate. You believe, in this 

expensive and growingly expensive program, 94 percent will sign 

up. Mr. Holtz-Eakin, was your estimate? 

Mr. HOLTZ-EAKIN. Eighty-seven percent. 

Chairman THOMAS. Okay. So, 94, 87, no big deal, right? That 

is reasonable to assume that it is going to be somewhere between 

87 and 94. What is the difference in cost between those two estimates? 

Mr. HOLTZ-EAKIN. We would estimate that contributes about 

$16 billion to the difference between the CMS estimate and ours. 

Chairman THOMAS. I think it is about $32 billion when you add 

the total package, in terms of the high benefit, the low benefit, and 

the other structures. So, if we are beginning to close the difference 

between the estimates, the difference between 94 and an 87 percent take-up rate is about $32 billion. The other one, which I think 

is difficult to estimate because we are moving from a mixed program for seniors, we have a senior health program since 1965. If 

you are a low-income senior you were treated differently in many 

aspects of health care needs through the Medicaid program. We finally, because of the prescription drug provision, are consolidating 

seniors at the Federal level, a uniform program for seniors finally 

across the Nation, not by the State-by-State basis. I believe this is 

an area that perhaps is the single largest dollar discrepancy in the 

two assumptions; is that correct? 

Mr. FOSTER. The low-income subsidy, yes, sir. 

Chairman THOMAS. The low-income subsidy. You estimated 

what take-up rate for the low-income subsidy, Mr. Foster? 

Mr. FOSTER. Overall, among eligible individuals, in other words 

with the right income and the right assets, we had about 75 percent. That included all of the Medicaid beneficiaries who we already know about, of course. So, 100 percent for them and a lower 

percentage for everybody else. 

Chairman THOMAS. What was your estimate, Mr. Holtz-Eakin? 

Mr. HOLTZ-EAKIN. About two-thirds. 

Chairman THOMAS. So, 66 percent for CBO and—— 

Mr. FOSTER. Seventy-five. 

Chairman THOMAS. Seventy-five percent. You know, 66, 75 percent, that is ballpark. How much money difference was that? 

Mr. FOSTER. A total of $47 billion. 

Chairman THOMAS. Forty-seven billion dollars on which of 

those two numbers you choose as a take-up rate for low income into 

new programs where we are just now beginning to move forward. 

Mr. Foster, would you say that one of the assumptions you made 

on those extremely high take-up rates versus the CBO was that if 

we were not going to offer this program at the Federal level, the 

Federal Government would be more aggressive in advertising the 

programs, in making people aware of the fact that the new Medicare was available for them? That your assumptions might have 

been tied to a fairly aggressive publicity campaign? 


hmoore on PROD1PC68 with HMRPT
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Mr. FOSTER. We were certainly aware of CMS’s intention to 

have a good beneficiary information campaign for exactly that sort 

of purpose. 

Chairman THOMAS. Did that enter into your assumptions, in 

terms of the structure, at least as a contributing factor? 

Mr. FOSTER. In part, yes. 

Chairman THOMAS. Would you have provided a lower assumption if you assume that any of the advertising campaigns would 

have been significantly attacked or curtailed? 

Mr. FOSTER. In the absence of advertising for the new benefit, 

we would have assumed a lower assumption. 

Chairman THOMAS. In the absence of advertising for the new 

benefit, you would have assumed a lower take-up rate? 

Mr. FOSTER. Right. 

Chairman THOMAS. One last question, and frankly this is a 

frustrating one for me and a number of other Members. We have 

looked at areas where clearly we are going to spend more money. 

We finally decided to put some money into the rural providers in 

a way we have not in the past. You folks get out your pencils and 

all those pluses go to the bottom line. It makes sense because we 

are going to be spending more money. This Medicare Program also 

was one of the most significant expansions of preventive and 

wellness programs with disease management. In fact, we are going 

to be able to provide for the first time, for every senior entering 

Medicare, a physical. Now my assumption is if we can get every 

new entry into Medicare to have a physical, what we are going to 

be able to do is pick up some of those diseases or tendencies or 

problems which wind up being enormous costers if ignored. The one 

that we have been warned about is obviously diabetes, which leads 

to kidney failure which leads to end-stage renal disease, very expensive, very costly. If we are spending the money for a physical 

up front, how much money are the taxpayer’s going to save over 

the next 10 or 20 years by not having these problems go to extreme 

cases and we can intervene early? How much money do we save for 

those preventive wellness and physicals that we now have in the 

law? Mr. Holtz-Eakin? 

Mr. HOLTZ-EAKIN. In our estimate, we have reviewed the peerreviewed evidence on the success of disease management programs 

in cutting overall costs and we could not find comprehensive evidence of large-scale savings, so those are not reflected in our estimate. 

Chairman THOMAS. I understand disease management. I mentioned preventive, wellness and physicals. 

Mr. HOLTZ-EAKIN. We do not have a specific estimate of savings from those programs in our estimate. 

Chairman THOMAS. Mr. Foster. 

Mr. FOSTER. I will be glad to provide the answer for the record 

but I have not personally reviewed the estimates for those specific 

provisions so I cannot tell you. I will provide it for the record. 

[The information is pending.] 

Chairman THOMAS. So, significant preventive wellness and detection measures, which cost because you say we are going to spend 

money on the program, give us no return on savings over a decade 

or two decades? That all they are, are costers. No one believes that. 


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That is why they are so strongly supported and included in the legislation. This is just one fundamental reason why estimates are estimates, and anyone who tries to hang their hat on it will find out 

that there is a lot more vapor than substance in the projections 

that are made. Thank you very much. Mr. Rangel, you wish to 

question? 

Mr. RANGEL. First, let me thank you, Mr. Chairman, for 

waiving the 5-minute rule so that we can actually get to the bottom 

of some of these serious questions that you have raised, as well as 

observations. I knew that you were good, all three of you. I had no 

idea that you could determine or guesstimate how much money we 

save by having preventive medicine. If I had thought that you guys 

could do this, I would ask you how much productivity could we get 

if we had an educated work force? How much savings could we 

have if we had preventive medicine? How many lives could be 

saved? I wish I had the foresight of the Chairman to even frame 

those questions, because it sounds like the Democratic national 

programs in terms of education and health and all of the things 

that we say cost lives in medicine. Having not known you were 

that good, let me say this: this may appear to be an awkward time 

for you but I want you to know how much we appreciate the fact 

that we are able to attract professionals that are nonpartisan and 

objective in providing information to guide this Congress to make 

the important legislative and political decisions. 

I am so glad that you have the integrity to make certain that you 

know that when you lean toward partisanship, you do not just do 

to personal detriment, but to detriment of the entire professions of 

which you are honored members. All of you have served well for 

a number of years. Any awkwardness that you have today I would 

want you to know it is only to maintain your individual integrity 

and the integrity of your profession so that this Congress and Congress’ that will come would know that we know how to get Democrats and Republican opinions, liberal and conservative opinions, 

but what we need and we have to maintain are objective opinions 

like those which you have given over the years. So, Mr. Foster, 

when, for the first time, did you know that your estimates of the 

cost of the Medicare prescription drug bill were different and exceeded that of the renowned and respected CBO? 

Mr. FOSTER. We first had estimates, Representative Rangel, for 

the drug provisions in H.R. 1 and S. 1, actually their predecessor 

packages, in early June. Our estimates for the drug part were significantly greater than the $400 billion target. 

Mr. RANGEL. What was your opinion, in terms of your estimate 

of the cost of the so-called drug part? 

Mr. FOSTER. Back then the early estimates for the versions as 

reported out of the Committees were in the range of $550 billion 

through fiscal year 2013, just for the drug part. 

Mr. RANGEL. You knew that your estimate differed from your 

colleagues in the CBO? 

Mr. FOSTER. I have forgotten exactly when CBO released its 

first estimates but it was around the same time, I think. 

Mr. RANGEL. You knew that they were dramatically different? 

Mr. FOSTER. I might have chosen a different word than dramatically, but—— 


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Mr. RANGEL. Strike that. You knew it was different? 

Mr. FOSTER. I knew they were different, yes, sir. 

Mr. RANGEL. Now who did you share your opinion with? 

Mr. FOSTER. That first round of estimates we gave to our thenAdministrator, Tom Scully. I believe we also sent copies to Doug 

Badger in the White House, people at OMB, other people at HHS. 

Mr. RANGEL. You do believe, I hope, that your responsibility 

was to give this type of information when requested to Members 

of Congress? 

Mr. FOSTER. There has been a longstanding practice obviously 

of having the Office of the Actuary provide technical assistance to 

Congress when asked. This goes back to the beginning of Medicare 

and further than that to the beginning of Social Security. 

Mr. RANGEL. So, this tradition meant Members of Congress, 

whether they were Republican or Democrats? 

Mr. FOSTER. Yes, sir. 

Mr. RANGEL. Did there come a time that the staff of the majority Republican party asked you to share your estimate as to the 

cost of this bill with them? 

Mr. FOSTER. I am sorry, could you repeat the question. 

Mr. RANGEL. Did there come a time that the staff of the majority party, the party of the Chairman, asked you to share your estimates with them? 

Mr. FOSTER. I do not recall their asking for the overall package 

costs. They certainly sought technical assistance from time to time 

on particular issues. 

Mr. RANGEL. Did they seek technical assistance in terms of the 

cost of the prescription drug program? 

Mr. FOSTER. I do not remember their asking for the cost of the 

drug benefit, not the majority staff, sir. 

Mr. RANGEL. Then besides Mr. Scully what did you do with this 

information as related to the cost of the prescription drug program 

that you found was different, at least than the CBO? 

Mr. FOSTER. We gave that to the people who had requested it, 

primarily Mr. Scully and others in the Administration. 

Mr. RANGEL. You had no request, that you know of, from the 

Republican staff? 

Mr. FOSTER. Not for that, no, sir. 

Mr. RANGEL. Did you have any requests from the Democratic 

staff? 

Mr. FOSTER. Yes, sir, we did. The Democratic staff of the Committee on Ways and Means had asked, in around mid-June, for a 

number of specific technical analyses related to H.R. 1. As part of 

that they requested an overall cost estimate for the package and 

the impact of the provisions on the date of insolvency for the part 

A Trust Fund. 

Mr. RANGEL. Did you give that to them? 

Mr. FOSTER. No, we did not. 

Mr. RANGEL. If the Republican staff had requested that same 

information, would you have given it to them? 

Mr. FOSTER. No, I think the answer to that is no. I can explain 

if you like. 

Mr. RANGEL. Well, why did you not give it to the Democrats, 

since they were the ones that actually asked you for it? 


hmoore on PROD1PC68 with HMRPT
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Mr. FOSTER. I recommended to Mr. Scully for two particular 

technical analyses which your staff had indicated were a high priority, I recommended to him that in fact we had completed these 

estimates and that they should be released. I thought that they 

represented legitimate technical questions and we had reasonable 

answers. Based on our decades-long experience of providing this 

technical assistance, I did not see any reason not to. So, I made 

that recommendation to Mr. Scully. By this point in time he had 

made it clear that we were not to respond directly to requests from 

Congress anymore, but instead we were to give any such response 

to him and he would decide what to do with it. 

Mr. RANGEL. Did you feel that this type of response from Mr. 

Scully in any way interfered with your professionalism in terms of 

what traditionally had been your job as related to responding to 

Members of Congress and their staff? 

Mr. FOSTER. Yes, sir. I thought it was inappropriate. If it had 

been an issue of our providing the response to Mr. Scully and him 

promptly providing the response to the requester, that would have 

been less of a concern. What I perceived was that some responses 

went out and some responses did not go out. It struck me there 

was a political basis for making that decision. I considered that inappropriate and, in fact, unethical. 

Mr. RANGEL. Let me ask the other two panelists, who are professional and have demonstrated their professionalism since they 

dedicated themselves to public service. Do either one of you disagree with the conclusions that Mr. Foster had reached, as it relates to his professional integrity in dealing with this question that 

he was faced with? Mr. Goss? 

Mr. GOSS. I would have to say no, I do not disagree with anything that Rick has said. I would suggest, however, and perhaps 

Doug is in the same situation, I do not know all the details of this 

so I cannot comment. 

Mr. RANGEL. I do not know all of the details either but based 

on what he said, and I am only talking about the integrity of your 

office, in the hypothetical if you were faced in the situation which 

I presented to him and he responded, would you agree with his 

conclusion? 

Mr. GOSS. I agree with Mr. Foster’s conclusion, absolutely. 

Mr. HOLTZ-EAKIN. I know the standards of conduct for the 

CBO. If the tradition of nonpartisanship and open access to Congress is as described, then I would agree. 

Mr. RANGEL. Mr. Foster, since the integrity of your profession 

was on the line, what prevented you from disagreeing with Mr. 

Scully since, in fact, it was really not a Democratic or Republican 

issue but an issue of your professionalism? 

Mr. FOSTER. Nothing prevented me from disagreeing with him. 

We disagreed quite a bit, sir. I attempted on several occasions to 

have a discussion with him about the importance of providing the 

technical assistance, whether or not it might be used to argue 

against his preferred position or the Administration’s position, on 

the grounds that you all are the top policymakers in the Nation, 

grappling with the biggest changes to Medicare since the program 

was enacted. These programs are very complex and the changes 

are very complex. I argued that you all ought to have the best and 


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most complete technical information you can get. Suffice it to say 

I did not prevail in any of those attempts with Mr. Scully. I also 

attempted to have the same conversation with other folks in the 

Administration who were much more sympathetic. In the end, the 

new rules that Mr. Scully put in place prevailed. In terms of my 

own view of the professional aspect, I did consult a top attorney at 

CMS in trying to wrestle with the question. Because I knew already, from a professional standpoint, that we serve the public at 

large. I felt a very strong responsibility on behalf of the public not 

to withhold technical information that could be useful in this debate. The legal answer I got, and you should know, sir, is that in 

any conflict or difference between the professional standards of conduct for actuaries in this country and the laws on the books, the 

laws win. That is a known standard. 

Mr. RANGEL. Excuse me. I wish you would say that again because I have a feeling I must conclude, I have a very strong feeling 

I must conclude, and I wanted to hear your last response. I am so 

sorry. 

Mr. BECERRA. Mr. Chairman, if we could ask Mr. Foster to pull 

the mike a little closer. It is difficult to hear him. 

Chairman THOMAS. Mr. Foster, these are not unidirectional like 

the old ones, but the top of the mike pointed more toward your 

mouth might help. 

Mr. RANGEL. I want to thank the Chair for your indulgence. 

Mr. FOSTER. Can you hear me better now? 

Mr. THOMAS. Yes. 

Mr. FOSTER. From a professional standpoint, I felt then, and believe now, there is an obligation on behalf of the public for my office to give you the best advice possible when requested. When I 

consulted the attorney at CMS as to the legal basis, I ended up 

convinced that the Administrator had the legal right to direct our 

activities in the way he did. In a difference between a law on the 

books or the legal right to do so and a professional responsibility 

to the public and to a client, Congress in this case, the law prevails. However, I was not happy about that. At the point that— 

well, I had a difficult choice, sir, you can imagine. I could ignore 

the orders. I knew I would get fired. I was not afraid of that. I did 

not especially want to be fired but I was not afraid of it. I could 

comply with the orders and I could resign in protest, which in fact 

I ultimately decided to do. I ultimately decided to resign in protest 

because of the inappropriateness of the circumstances we were 

under. In the end my staff talked me out of that on the grounds 

that a resignation might make a big splash and have a big impact 

for a day or 2, but there was grave danger to the office and this 

longstanding practice in that situation. They convinced me, and 

perhaps I helped convince myself somewhat, I would be better off 

working inside the system to get back to the situation that I think, 

in fact, we are now in wherein Secretary Thompson has gone on 

record saying this support should be provided on a nonpartisan 

basis. Mark McClellan, our Administrator-designee, has said the 

same thing. 

Mr. RANGEL. Let me thank you for being persuaded to stay the 

course. Let me thank your two colleagues because this is not about 

Mr. Foster. It is not about Republicans and Democrats. This is 


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about the integrity of the professionals that we depend on to give 

us information when we need it. You standing with him protects 

yourself, you protect your profession, and you make certain that we 

Democrats do not make the same mistakes because we just get carried away with our power. Mr. Foster, you are to be congratulated. 

Believe me by you making this decision, I am certain that the Secretary and the Administration will be very careful to see that this 

does not happen with other professionals. Thank you, Mr. Chairman. 

Chairman THOMAS. The gentleman’s 15 minutes has expired. 

The gentleman from Illinois wish to be recognized? 

Mr. CRANE. Yes, Mr. Chairman. 

Chairman THOMAS. Would the gentleman yield briefly? 

Mr. CRANE. Certainly. 

Chairman THOMAS. Mr. Foster, I have not done this before. 

Based upon the series of questions and the answers, I would ask 

you did you and I have a telephone conversation in regard to the 

concerns on your professional integrity in this Administration? 

Mr. FOSTER. Yes, sir, we did. 

Chairman THOMAS. Could you convey the gist of the telephone 

conversation? 

Mr. FOSTER. Yes, sir. It was back in June, following the first 

of these instances which involved a request that your staff had 

made to me for an estimate, which was ordered to be withheld, 

which I provided anyway because I had not in fact received that 

order. My understanding is that Mr. Scully was—well, I know that 

he was deeply unhappy. 

Chairman THOMAS. What was the gist of our conversation? 

Mr. FOSTER. I apologize. You called and asked me whether the 

information in the memo I had sent to you represented my best estimate and my best judgment. I said yes, that it did. 

Chairman THOMAS. I said what then? 

Mr. FOSTER. You also said that you would be talking with some 

folks about the threats that you had heard of toward me and that 

I should not worry about it. 

Chairman THOMAS. Did we have a similar conversation? Was 

that a bit of a deja vu for you? 

Mr. FOSTER. I am sorry? 

Chairman THOMAS. Did we have a telephone conversation on a 

similar subject matter at a previous time? 

Mr. FOSTER. Back in 1997? 

Chairman THOMAS. Yes, when there was an Administration of 

a different party putting pressure on you not to release information 

and the gist of my conversation to you at that time was what? 

Mr. FOSTER. That is a little further back and a little more forgotten. 

Chairman THOMAS. The answer was in your professional opinion if the information you provided was your professional opinion 

I would defend you in presenting your professional opinion; i.e., 

identical telephone conversations in two different Administrations. 

Apparently, the idea of following the law as you indicated, in terms 

of the flow of information, was present not only in Republican administrations but in Democratic administrations. As a matter of 

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scored your ability to make those kinds of statements. So, I supported you then. I support you now. If you choose to continue this 

position as your professional prerogative, I will support you in the 

future. That does not mean I am always going to agree with their 

estimates, but I certainly believe the service of providing those estimates is a valuable assistance in making law. I want to thank the 

gentleman from Illinois for yielding. 

Mr. RANGEL. Mr. Chairman, I have a misunderstanding here. 

This exchange allows me to believe that Mr. Foster gave you his 

estimates before he was told not to do it. So, you had information 

that we Democrats could not get and did not share it with us. 

Chairman THOMAS. That is not what he said. The gentleman 

from Illinois. 

Mr. RANGEL. That is what it sounded like. 

Mr. CRANE. May I reclaim my time? Mr. Goss, several other 

Members have exuberantly claimed that Social Security is fiscally 

sound by citing the report’s short-term projection that ends in 

2013. That claim conveniently allows them to ignore the longer 

term projections that show that by 2018, just 5 years later, Social 

Security will no longer be able to rely solely on its tax revenue to 

cover benefit payments. What would be the consequences of ignoring Social Security’s financial challenges and not modernizing the 

program while it still has a surplus by putting off reform for some 

future Congress to deal with when the Trust Fund begins to 

shrink? 

Mr. GOSS. We clearly are at a point where we do well to understand that Social Security does have financial shortfalls coming in 

the future. By acting sooner we clearly have a greater range of possibilities that can be considered. If action were taken relatively 

soon, it would allow these opportunities to be put into the law so 

that they could grade in, they could phase in on a more gradual 

basis. A perfect example of this was the 1983 Social Security 

amendments (P.L. 98–21) where the normal retirement age was 

legislated to be increased with a 17-year delay. The increase did 

not, in fact, start until the year 2000 even though the change was 

enacted in the year 1983. Therefore, in my judgment, the cost of 

delaying substantially a serious discussion and movement toward 

deciding on what should be done for Social Security will be to limit 

possibilities and perhaps make it more difficult to get the job done. 

Mr. CRANE. Thank you, Mr. Goss. 

Chairman THOMAS. Does the gentleman from California, Mr. 

Stark, wish to inquire? 

Mr. STARK. Thank you, Mr. Chairman. I want to thank the 

panel. I just wanted to—— 

Chairman THOMAS. The Chair would indicate briefly, not on 

the gentleman’s time, that we are going to do as much as we can 

to return from the Senate time structure to the House time structure. It will be a liberal 5 minutes but it is not going to be 15. 

Mr. STARK. I thank the Chair. You mentioned in your testimony, Mr. Foster, in response to Mr. Rangel’s question, that there 

were others or people in the White House who received your June 

estimates of H.R. 1 and S. 1. I think you mentioned Mr. Badger 

by name. Can you tell me who the others were, to the best of your 

recollection. 


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Mr. FOSTER. Yes, I believe Jim Capretta in the OMB and Jennifer Young, then Acting Assistant Secretary for Legislation at 

HHS. There would have been some other folks within HHS as well, 

Legislative Director, for example. 

Mr. STARK. So, it would be reasonable to assume when Secretary Thompson told us last month and he answered Mr. Rangel, 

he said ‘‘we knew all along, Congressman Rangel, that our assumptions were higher,’’ that it would not have been a surprise that the 

Secretary might have known or had an inkling that there were 

these higher estimates, as well. Is that a fair assumption? 

Mr. FOSTER. I do not actually know when the Secretary knew, 

sir. 

Mr. STARK. There was a question that you may have participated in a meeting or a teleconference or a conference call in the 

presence of or with Mr. Badger where he either answered for you 

or directed you to refrain from providing any cost estimates or 

other information to Members or staff from the Committees of jurisdiction. Do you recall this event or these events? 

Mr. FOSTER. There were, on occasion, either conference calls or 

meetings for the purpose of discussing various technical issues with 

the bill. Mr. Badger and others were typically present. On occasion, 

I remember him jumping in to answer a question that might have 

been directed toward me. I do not remember instances where I felt 

I had not been able to answer a question. 

Mr. STARK. I am sure you recognize my limited professional 

competence in the area of actuarial science, and I am sure you do 

appreciate our Ways and Means minority health staff’s interest and 

expertise not in actuarial science but in the intricacies of Medicare 

finance. Would it be a reasonable assumption that somebody as 

naive in these areas as myself, but with the help of my excellent 

staff, if we had had your June estimates in the range of $550 billion, would it have been a huge leap for us to suspect that either 

H.R. 1 or S. 1 or the resulting conference bill would have been far 

higher than $400 billion? 

Mr. FOSTER. I think that would be a reasonable conclusion. The 

drug provision, of course, was far and away the most expensive 

component. We had only rough estimates back then of the competition or what became the Medicare Advantage provisions. We generally had estimated those to be a cost of $30 billion to $50 billion. 

It was anticipated and, in fact, turned out to be the case that everything else, all the other fee-for-service provisions, had a modest 

overall savings in the neighborhood of $20 billion or $30 billion. 

Mr. STARK. So, to summarize, had you not been restrained, or 

threatened, as the case may be, that in the normal course of events 

I would have received and Mr. Rangel would have received and 

others on the Committee and our staff would have received a response to our request of June 17th and on June 19th and with the 

information that we would have received based on your then-analysis, it would have been logical for us to assume that the cost of 

H.R. 1 and S. 1 and/or the result would be more in the neighborhood of between $500 billion and $600 billion than between $300 

billion and $400 billion? 

Mr. FOSTER. Yes. We certainly would have had a rough estimate that we could have conveyed informally to that effect. We 


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would not have had a final refined estimate until the same December 23rd date that I mentioned. 

Mr. STARK. May I take 30 seconds, Mr. Chairman. I would stipulate here that I was a partial author of a bill that cost far more, 

$900 billion I suspect, although I do not know where that estimate 

came from. At any rate I recognize that. The issue here is that I 

am sure people who would have opposed my position knew that 

was $900 billion. The concern that I have is that we can and often 

do disagree. We generally, for instance on the Joint Committee on 

Taxation, we operate with a great deal of reliability on the same 

set of numbers. I think that is my concern and I would hope it is 

a bipartisan concern, that in the future we have got to have a real 

level of confidence that at least the underlying numbers are the 

same on both sides, and we can proceed then to argue our differences as to what those numbers might be. I thank the Chairman 

for the extra time. 

Chairman THOMAS. The Chair believes that the $900 billion estimate was a CBO figure. Therefore, had Rick Foster estimated 

yours, it would have been $1.3 trillion or $1.4 trillion, or $1.5 trillion, based upon the testimony that was heard. To make sure that 

the record is clear, the Chair would call on the gentleman from 

New York to explain the information he received from staff about 

the response that Mr. Foster made to him in terms of the telephone 

conversation we had and the material that was to be provided. 

Mr. RANGEL. Yes, Mr. Chairman. I have been informed by staff 

and reassured by the Chair that the technical assistance information that Mr. Foster gave to the distinguished Chairman prior to 

the time that the restrictions were placed on you was not the actual estimate of the cost of the prescription drug sector of the bill. 

Chairman THOMAS. I thank the gentleman. So, the point that 

I made that it was not in reference to the same thing that the gentleman was talking about was, in fact, accurate. I appreciate the 

gentleman’s clarification for the record very much. Does the gentleman from Florida, Mr. Shaw wish to inquire? 

Mr. SHAW. Thank you, Mr. Chairman. I commend Mr. Rangel 

for making that clarification. Mr. Foster, you have heard as the 

Chairman said that the $900 billion figure came from CBO. Perhaps I should ask Mr. Holtz-Eakin, is that correct information on 

Mr. Stark’s bill? 

Mr. HOLTZ-EAKIN. I believe that is correct, yes. 

Mr. SHAW. So, his curiosity is answered on that. Mr. Foster, 

have you had an occasion to even look at that bill? 

Mr. FOSTER. No, sir. 

Mr. SHAW. Based upon what CBO came with, I would guess 

that you would score it very much higher than the CBO did; is that 

correct? 

Mr. FOSTER. Possibly, but without looking at the provisions—— 

Mr. SHAW. I understand you cannot answer that directly but I 

would think that if you use the same assumptions that you used 

on our bill that you would raise it above the $900 billion because 

it is a much richer bill as far as benefits were concerned. I have 

this question for Mr. Holtz-Eakin. Were you present when Secretary Snow was testifying? 

Mr. HOLTZ-EAKIN. Yes, I was. 


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Mr. SHAW. At that time you heard the gentleman from California, Mr. Matsui, inquire using my Social Security reform bill as 

an example in citing a deficit in that bill; is that correct? 

Mr. HOLTZ-EAKIN. Yes, I did. 

Mr. SHAW. What concerns me is an accounting process that the 

Federal Government uses. When you start talking about the accounting system, it is really a cash flow system in which any moneys put out, any revenues put out, can inflate the deficit even 

though it is invested, whether it is invested in a building or whether it is invested in a retirement account that will eventually be 

used to help fulfill the obligation of the SSA for the payment of 

benefits to future retirees. Is that not correct? 

Mr. HOLTZ-EAKIN. That was the conversation, yes. 

Mr. SHAW. What I am concerned about here is that I believe 

very strongly that the only sensible approach to save Social Security and to prevent this deficit is to start forward funding Social 

Security in some way. The problem you get into when you start 

doing that is you trip over the accounting process that the Federal 

Government uses. Even though that money is like putting it into 

a pension plan to take care of the future obligations of a government or of private industry. In the Federal system of accounting 

it is considered an outlay and that is just the way the system 

works. When it comes back, however, as you get into the out years 

and as people begin to retire and utilize their retirement account 

to help pay their benefits, that will assist the Trust Fund in the 

payment of the benefits, then that is considered a receipt; is that 

not correct? 

Mr. HOLTZ-EAKIN. This is correct. 

Mr. SHAW. It occurs to me that what we are talking about doing 

is that we should score the deficit as an outlay now so we can, as 

time goes on, start considering it a receipt. I think that this is a 

very serious flaw in our system that we should begin to take a look 

at it. If we are going to be responsible, if we are going to be responsible, and if we care about our kids and our grandkids, we have to 

start investing in Social Security with real economic assets. Those 

real economic assets can be in no safer place than they would be 

in individual retirement accounts, which would be available to help 

pay the benefits that tomorrow’s seniors are looking forward to. 

Could you comment on that, and the accounting process, and what 

we might be able to do to solve this situation, the dilemma that we 

find just because of an irresponsible accounting system? 

Mr. HOLTZ-EAKIN. Congressman, the CBO has, for the past 

several years beginning under my predecessor Dan Crippen, been 

building the capacity to look not only at the conventional 10-year 

cost estimate of Social Security proposals but also longer term implications from the perspective of system finances, from the perspective of the broader unified budget, and indeed from the perspective of impact on the economy as a whole. That capacity, although not yet complete, is nearing the ability to examine these 

proposals in quite great detail, including addressing some of the 

concerns that you have raised. 

I look forward to working with you on that. I would like to take 

the opportunity to thank Mr. Goss, since he is here today, for the 

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taking. It has been quite a big undertaking and we would not have 

gotten to the point we have without his help. 

Mr. SHAW. I also very much appreciate it because I think all of 

the alarms should be going off, not only on Medicare which is a 

more immediate problem, but in Social Security which also is an 

immediate problem because if we do not start investing in individual accounts for tomorrow’s seniors, then the impact is going to 

be greater and it is going to be tougher. Because we need to get 

those funds into the individual accounts so they can start building. 

That is the magic. That is how we create a surplus over 75 years 

is by investing and letting those accounts buildup. It is the only 

way we are going to promise our kids and our grandkids at least 

as good a retirement as we have and avoid this economic disaster 

that could bring our economy down. No economy in the world could 

survive this type of pending deficit that we are looking at. I thank 

you, Mr. Chairman. 

Chairman THOMAS. I thank the gentleman. Does the gentleman 

from Michigan wish to inquire? 

Mr. LEVIN. Thank you. I just want to be clear what is really the 

issue here, at least a major issue. It is not which of the best estimates was best, but why the several so-called best estimates or figures were not given to us before we voted. The question really is 

what the Administration knew before the vote on the conference report surely, and what was not revealed to us. I just wanted to 

quickly go back over Mr. Thompson’s testimony because there was 

an effort to kind of make Mr. Scully the scapegoat. You testified, 

Mr. Foster, that information was sent to the White House and to 

HHS; is that correct? 

Mr. FOSTER. Not all of our cost estimates were sent but in a 

number of cases yes, we sent the estimates to them. 

Mr. LEVIN. I asked Secretary Thompson, you knew your actuaries are estimating the cost far higher than CBO quite early on, 

well before we acted on the Medicare bill, right? You knew that? 

‘‘We knew that the assumptions were higher.’’ You were told that 

the amount was higher? ‘‘No, Mr. Levin,’’ said Secretary Thompson. 

‘‘We did not know the final amount because the final 2 days 

changed the complexity and the direction of the bill.’’ Then I say 

no, no, but before that your actuaries were saying before the last 

couple of days that the amount was higher. The Secretary, ‘‘our 

preliminary estimates were higher, yes.’’ My question, you passed 

that on to the White House? To somebody there? The Secretary, 

‘‘we passed that on to’’—and then I interjected, somebody in the 

White House knew what your actuaries were saying? The Secretary, ‘‘there were individuals in the White House who knew that 

ours, meaning the actuarial preliminary estimates, were higher, 

yes, based upon participation.’’ That is the real issue here. Now the 

final estimate came later on but I think you testified, Mr. Foster, 

as to the key portions, for example, the difference in the take-up 

rate, the number of low income beneficiaries enrolled, that amounted to many billions. Those were not basically changed in the final 

bill, were they? 

Mr. FOSTER. Our estimates, you mean, sir? 


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Mr. LEVIN. The basic material upon which you based your estimates. That material was known well before the final 2 days was 

it not? 

Mr. FOSTER. Yes. Our estimates changed all along as the proposal itself changed, and we tried to keep up with it. The range of 

our estimates that we were in for the drug cost was typically $500 

billion to $600 billion all the way through the process. 

Mr. LEVIN. So, that difference cannot be simply attributed to 

the last 2 days. The difference between you and CBO was always 

substantial; is that not correct? 

Mr. FOSTER. Yes, sir, that is correct. 

Mr. LEVIN. So, I think, in a few words, there was a cover up 

of some basic information and it said the differences maybe were 

no big deal. Our having all of the facts are a big deal. We were not 

given them. We were not given those facts. The differential, while 

it somewhat shifted from time to time, was always there and it was 

always very, very substantial. We had the right to know. Not only 

the Administration. They have the right to tell us what they knew 

and they did not. They did not. It was not only Mr. Scully. Again, 

people in OMB were given your estimates? 

Mr. FOSTER. Some of them, yes, sir. 

Mr. LEVIN. People in the White House were given these assessments. 

Mr. FOSTER. Some of the estimates, yes. 

Mr. LEVIN. Also people in HHS? 

Mr. FOSTER. Yes. 

Mr. LEVIN. Thank you. 

Chairman THOMAS. Does the gentle lady from Connecticut, the 

Chairman of the Subcommittee on Health, wish to inquire? 

Mrs. JOHNSON. I would just note for the record that, Mr. Foster, you did earlier make very clear that the law allows Mr. Scully 

to control the flow of information and that is just the law. So, while 

you might not like it, that is where it was. Dr. Holtz-Eakin, did the 

Democrats ever submit their bill to you for estimation? To be estimated? Did they submit their alternative to you to be estimated? 

Mr. HOLTZ-EAKIN. I am sure they submitted many bills. We 

can get the details for you. 

Mrs. JOHNSON. We do have a letter back from you where you 

do estimate it as roughly $1 trillion. Mr. Foster, did the Democrats 

submit their bill to you to be estimated? 

Mr. FOSTER. No, ma’am. 

Mrs. JOHNSON. It is just interesting that, since you think 

CMS’s opinion is so important, that you did not submit your bill 

to them to be estimated. So, let me just proceed on a couple of 

lines. First of all, Mr. Foster and Dr. Holtz-Eakin, I have enormous 

respect for not just you but the staffs behind you that work so hard 

on our behalf. I do say, Mr. Foster, that as a Member having to 

make judgments about your work, I have never seen 99 percent of 

any group do anything. So, to estimate that 99 percent would take 

up the drug benefit when only 91 percent elected part B, and that 

is for doctors visits, does seem to be distant from my experience of 

reality. Ninety-four percent take-up, but in a subgroup to get to the 

94 percent you would have to get to 99 percent. So, being the author of the Children’s Health Bill and finding out that when we 


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went out there to try to enlist children for this wonderful health 

insurance program what we found was enormous numbers of children not registered for Medicaid, which gave them free health care. 

So, it is very hard to get 99 percent in America to do anything, no 

matter how good the deal is. Certainly many think the prescription 

drug Part D benefit is not all that great and would not attract that 

kind of allegiance. 

My point is this, the most controversial part of this bill was the 

expansion of the private plans. In June, in a memo that you did 

and that was made public, it was very clear—in fact, you say in 

that, our preliminary estimate is that about 48 percent of the beneficiaries will participate in HMOs and preferred provider organizations (PPOs). So, everybody had that and everybody knew that was 

big money. That is underneath this bill, the biggest, most difficult, 

and one of the most costly issues. So, there were big differences. 

It was well known you were looking at a number of these issues 

differently than was CBO, and frankly than were many of us. I 

thought it was really quite astounding that you came up with the 

higher estimate because there were going to be more Advantage 

plans rather than a lower estimate because the competition would 

be greater because you would have more plans. So, this business 

of estimating and the judgments involved is complex. Each of us 

comes to it from our own experience. I respect both of you. We need 

your work. We learn from your disagreements. 

It does concern me that neither of you seemed to take very seriously the portions of the bill that really are going to change Medicare for people with chronic illness, and remember that is most 

seniors, from an illness treatment program to a preventive program. Now we see Kaiser Permanente making the decision to invest $3 billion. They are going to save $10 million the first year in 

Hawaii. The hospitals are going to have $6 million annually every 

year thereafter. Just the cost for medical errors cost our country 

$35 billion annually and we spend $5.4 billion in Medicare because 

tests that were taken cannot be gotten to the physician making the 

decision. So, if we go to electronic health records, if we go to electronic prescribing, that is going to have a big impact on costs. You 

see the private sector racing down that track at a pace not anticipated. 

Last week we had a hearing on quality. Everybody is doing it out 

there. PacifiCare, in a group that was 90-percent elderly, reduced 

hospital rates for one group by 98 percent for coronary artery disease, reduced emergency room visits, and it goes on. I will not go 

through all four of them because I do not have time. Basically, it 

saved $195 million in just these four programs in a group that was 

mostly seniors. You look at studies that have been done for us in 

the journal Heart, they found that heart failure patients and disease management programs reduced hospitalizations 87 percent. I 

am just astounded that you could cost out every dollar we spent 

but you could not cost in dollars that we saved. When we have 

every senior coming into Medicare having a physical to identify 

early diabetes, hypertension, heart problems and we build in disease management programs it just sort of spins my head that you 

give us practically no credit for that, essentially no credit for that. 

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fortunately, I used all my time in explaining my question but it is 

all right because you did not give us the credit so that is that. People ought to understand that these estimates do not take into account the systems changes that we put in place in this bill and 

that, coupled with what the private sector has learned and is 

doing, is going to make an enormous impact on the cost. Thank 

you. 

Chairman THOMAS. The answer is either yes or no. Does the 

gentleman from New York, Mr. Houghton, wish to inquire? 

Mr. HOUGHTON. Thank you very much, Mr. Chairman. Gentlemen, nice to see you. I do not want to talk about any cover ups. 

I do not want to talk about the difference in estimation between 

the CMS and the CBO. I will ask a very, very simple question to 

you, Dr. Holtz-Eakin. In your testimony you talk about the union 

plans assessing the 28-percent employer subsidy provided in the 

new Medicare law. You are quite sure unions can receive this subsidy? What about the State retiree plans? 

Mr. HOLTZ-EAKIN. The union plans can receive the subsidy. 

State retiree plans, I am not familiar with the provisions. I can certainly check and get back to you. 

Mr. HOUGHTON. If you would, I would appreciate it. Chairman 

Thomas, I am very fast. End of questions. 

Chairman THOMAS. The answer is yes, State retirement plans 

can receive the support, as well. The key was to keep those people 

in the programs they are in with a modest subsidy rather than assuming the full cost in whatever plan they were in, we believe they 

will remain in with a portion of the bill. Again, a coster, but no 

credit whatsoever on the assumptions about the dollar saved over 

a longer period of time, and so forth, and so forth. The gentleman 

from Georgia, Mr. Lewis, wish to inquire? 

Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman. I want to thank the three members of the panel for being 

here. Mr. Foster, I want to ask you several questions. I want to 

thank you for being so responsive. For the record, someone may 

come along 5 years from now or 10 years or 50 years from now and 

say what was this all about. So, I am going to ask you some questions and I want you to answer them pretty short and fast so I can 

get them all in. How long have you been employed by the Federal 

Government? 

Mr. FOSTER. A little over 31 years, sir. 

Mr. LEWIS OF GEORGIA. What is your present position? 

Mr. FOSTER. Chief Actuary for the CMS. 

Mr. LEWIS OF GEORGIA. Mr. Foster, would you be kind 

enough to describe your role in this position? What do you do? 

Mr. FOSTER. My office and I prepare all of the financial projections for Medicare and Medicaid, for the President’s budget, and for 

the annual report to Congress that we are here for today. We estimate the cost of proposed legislation on behalf of the Administration and Congress. We do a number of functions involving current 

Medicare statutory requirements, such as setting the Part B 

monthly premiums, setting the Medicare Advantage payment rates, 

and setting the inpatient hospital deductible. We also set all the 

price indices that are used for updating Medicare payments like 

the Medicare economic index, the inpatient hospital market basket, 


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and so forth. I am sure I left out something important. We do the 

national health accounts, an estimate of the total spending on 

health care in all the United States. 

Mr. LEWIS OF GEORGIA. Mr. Foster, do you enjoy your work? 

Do you enjoy your job? Is it a good job? 

Mr. FOSTER. Most days, sir, yes. 

Mr. LEWIS OF GEORGIA. How many people work under your 

direction? 

Mr. FOSTER. Right now we have 70, sir. 

Mr. LEWIS OF GEORGIA. They are good employees? 

Mr. FOSTER. Yes, they are outstanding. 

Mr. LEWIS OF GEORGIA. Let me ask you something else. Do 

you recall receiving an e-mail maybe around June 20 from the top 

aide to Mr. Scully? The e-mail said something like, do not share information with anyone else. The consequences for insubordination 

are extremely severe. 

Mr. FOSTER. Yes, I remember that e-mail well. 

Mr. LEWIS OF GEORGIA. When you received this e-mail, what 

did you do? What did you tell the people working with you? Did 

you say anything? Did you feel shocked? 

Mr. FOSTER. That e-mail and the conversations that went with 

it put in place a new policy regarding assistance to Congress. We 

notified the office that we should no longer respond directly. Instead their requests and the responses had to come back to me and 

I would turn them over to Mr. Scully for disposition. 

Mr. LEWIS OF GEORGIA. In all of your 30 years as an employee of the Federal Government or maybe in this particular work, 

have you ever received anything like this before? 

Mr. FOSTER. No, nothing really quite like that. 

Mr. LEWIS OF GEORGIA. I thank you for being so responsive 

and I thank you for being a good public servant. Thank you. 

Mr. FOSTER. Thank you, sir. We try. 

Chairman THOMAS. I thank the gentleman. The gentleman 

from California, Mr. Herger, wish to inquire? 

Mr. HERGER. Thank you, Mr. Chairman. Mr. Foster, you had 

mentioned earlier that you were following the law; is that correct? 

We have precedent but we have the law and you were following the 

law. Therefore the directives you had through this e-mail were still 

following the law; is that correct? 

Mr. FOSTER. Yes, sir. 

Mr. HERGER. Dr. Holtz-Eakin, if I could ask you a question, 

please, just on the makeup of this legislation. The Medicare Modernization Act includes non-interference language that prevents the 

Secretary of HHS from interfering in negotiations between private 

plans and drug manufacturers. In your opinion, do you believe that 

private plans acting independent of the HHS Secretary will be able 

to effectively negotiate drug prices for seniors? 

Mr. HOLTZ-EAKIN. Our estimate includes the fact that at-risk 

private prescription drug plans will have both the tools and the incentives to negotiate aggressively and to control costs on behalf of 

their beneficiaries. 

Mr. HERGER. So, you feel that they will be able to effectively 

do that? 


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Mr. HOLTZ-EAKIN. Yes. In a letter we wrote in response to an 

inquiry from Senator Fritz, we indicated that removal of that language would not change the basic estimate of the bill. 

Mr. HERGER. Would having the HHS Secretary involved in 

these negotiations result in lower prices, do you feel? 

Mr. HOLTZ-EAKIN. If there were to be language which 

proactively stipulated that the Secretary enter into negotiations, it 

would depend on the particular circumstances in which that were 

to occur. In a separate letter to Senator Wyden on this topic, we 

did mention that in the cost of single-source prescription drugs, 

your classic blockbuster drug, and perhaps in fallback plans there 

might be some opportunity for the Secretary to negotiate price savings. In other circumstances, however, it did not appear to be the 

case. 

Mr. HERGER. If the HHS Secretary were allowed to negotiate 

drug prices, is it not most likely the case that the Secretary would 

end up simply setting the prices as is done with the rest of Medicare, rather than truly negotiating these prices where we would 

tend to get a lower price? 

Mr. HOLTZ-EAKIN. It is not possible to know without looking 

at the precise language and the authority that the Secretary was 

given in those kids of circumstances. 

Mr. HERGER. Thank you. Thank you, Mr. Chairman. 

Chairman THOMAS. I thank the gentleman. The gentleman 

from Maryland wish to inquire? 

Mr. CARDIN. Thank you, Mr. Chairman. 

Mr. Foster, let me follow up on the information issue because I 

am, along with I think all Members of this Committee, quite concerned about information that did not get to Congress in time for 

us to consider it when we had to make policy decisions. Of course, 

that is where the actuarial information becomes important. 

I understand correctly there was a very significant difference between your estimate on the number of Medicare beneficiaries that 

will participate in private insurance under Medicare versus what 

the CBO assumes will be participating in private insurance, a difference of between 12 percent and 32 percent approximately. 

Mr. FOSTER. Yes, sir. 

Mr. CARDIN. That difference has a dramatic impact on cost and 

could very well influence congressional action on how much additional funds we should make available to private insurance companies under the Medicare Program. Now if I understand correctly, 

you were instructed that this information, even though it had been 

requested by Congress, could not be made available directly by you 

to Congress but had to go through Mr. Scully; is that what happened? 

Mr. FOSTER. Yes, any estimates or analysis that we prepared 

for Congress after about early June were to go through Mr. Scully. 

We had specific requests from the Ways and Means Democratic 

staff involving some of the competition in the Medicare Advantage 

provisions including the cost and any of those would have gone 

through Mr. Scully. 

Mr. CARDIN. Are you aware of whether Congress was informed 

that this information was available but had to be gotten from Mr. 


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Scully? That there was a new policy in place? Are you aware that 

that was communicated to Congress? 

Mr. FOSTER. I, myself, passed that information on to individual 

staff members when the question arose. I do not know if anyone 

in the Administration announced that more broadly. 

Mr. CARDIN. Are you aware of whether any of that information, 

the information I am referring to on the basic differences between 

CBO and the actuaries on the cost estimates, whether that was in 

fact made available to Congress before we were called upon to act? 

Mr. FOSTER. I would have to stop and think because, as I said 

earlier, we never had a final cost estimate for the Medicare Advantage provision until much later on. 

Mr. CARDIN. I appreciate that. In your answer to Mr. Thomas’s 

question, you indicated the final numbers were not available until 

shortly before Christmas. The assumption numbers, the number of 

participants, and so forth, that was available, was it not? 

Mr. FOSTER. Yes, sir. 

Mr. CARDIN. That was not made available to Congress? 

Mr. FOSTER. In fact, that part of it was for H.R. 1 under a request we had from Mr. Thomas in early June. That is what, in fact, 

set off the change in policy. 

Mr. CARDIN. So, now, I guess the frustrating part here is this; 

that this information should be made available to all of us for policy discussions. There was a radical change in policy that you were 

basically instructed to implement. Yet there was no effort made to 

inform Congress collectively, as an institution, that these policy 

changes were being made and no chance for Congress to, in fact, 

focus on that before we were called upon to act on a very important 

piece of legislation without having the full information before us 

from the actuaries. Is that not a fair statement? 

Mr. FOSTER. I did my best to let folks know that in fact, I could 

no longer respond directly and that they had to talk to Mr. Scully 

on that. What happened beyond that, I am not aware of. 

Mr. CARDIN. I thank you. I thank you for your testimony and 

for your straight answers here before our Committee. Thank you, 

Mr. Chairman. 

Chairman THOMAS. Thank the gentleman. The gentleman from 

Louisiana wish to inquire? 

Mr. MCCRERY. Yes. Thank you, Mr. Chairman. 

Chairman THOMAS. Will the gentleman yield briefly to me? 

Mr. MCCRERY. Yes, sir. 

Chairman THOMAS. In the exchange that Mr. Cardin just had 

with you, in the terms of the information, was in fact the basis of 

the phone call that I made to you, reinforcing the fact that if, in 

your professional opinion, the answers you provided were the best 

that you could do, that I would support and defend your ability to 

do that. The same basic conversation I had during the Clinton Administration. I thank the gentleman. 

Mr. MCCRERY. Dr. Holtz-Eakin, when was the CBO formed? 

When did it first come into existence? 

Mr. HOLTZ-EAKIN. It was created by the Budget Act 1974 (P.L. 

93–344) and began operating in 1975. 

Mr. MCCRERY. Do you know why the CBO was created by Congress? 


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Mr. HOLTZ-EAKIN. At that time Congress was involved in a 

dispute with then-President Nixon regarding the impoundment of 

funds Congress had appropriated, a dispute that went to the U.S. 

Supreme Court. In the aftermath of that dispute, the Congress decided to have an independent ability to assess budgetary matters. 

Mr. MCCRERY. So, in other words, Congress did not trust the 

Administration to come forward with estimates for legislation and 

other things, that they decided that they needed internally, so they 

created CBO? 

Mr. HOLTZ-EAKIN. That is my understanding, yes. 

Mr. MCCRERY. So, this is a long history of Congress wanting an 

independent source for all kinds of things, including estimates of 

the cost of legislation. In fact, Dr. Holtz-Eakin, is not Congress in 

its deliberations bound by the estimates of the CBO? 

Mr. HOLTZ-EAKIN. In a formal sense it is bound by the decisions of the budget Committees to which we deliver our estimates 

and whose Members are the ultimate arbiters of cost estimates. 

Mr. MCCRERY. In fact, section 308 of the Congressional Budget 

Act establishes the CBO as the scorekeeper for Congress, does it 

not? 

Mr. HOLTZ-EAKIN. Yes, it does. 

Mr. MCCRERY. When we say the scorekeeper, we mean you are 

the one who has to give us estimates of the cost of bills and it is 

those estimates on which we much rely; is that not correct? 

Mr. HOLTZ-EAKIN. We are obligated to deliver estimates to the 

Congress. There is the possibility for directed scorekeeping, which 

alters the official reported score. 

Mr. MCCRERY. So, bottom line, we have had estimates in the 

past from OMB which collaborated with CMS or the Health Care 

Financing Administration or any number of other government 

agencies. While some have attempted to use those numbers, sometimes Republicans and sometimes Democrats, for our own political 

purposes, the fact of the matter is when we are deliberating on legislation in Congress we are bound by the Budget Act to consider 

the estimate of the CBO in terms of sticking within the budget that 

we have passed; right? 

Mr. HOLTZ-EAKIN. That is the tradition, yes, sir. 

Mr. MCCRERY. I would submit that it is the law under the Congressional Budget Act. 

Mr. HOLTZ-EAKIN. It is a fine point. We are forced to deliver 

an estimate. I would pray that you would respect it enough not to 

change it, but there is the opportunity for them—— 

Mr. MCCRERY. Certainly, we can pass a law to disregard the estimate, that is true. The law that is on the books says we have to 

abide by the estimates of CBO when dealing with the budget. So, 

that is what we did in the case of the Medicare bill. That is what 

we do in the case of every bill that we consider. If it is a tax bill, 

obviously the Joint Committee on Taxation does the estimate, but 

even that comes through the CBO. So, we are bound by that CBO 

estimate. Now let us get to the substance of the Medicare bill because some have said that this Medicare bill we passed will not do 

seniors any good, it will not help anybody. In fact, it may even be 

the end of Medicare. Well, we have one estimate of $395 billion, another of $535 billion or $550 billion, or whatever it is, so evidently 


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we are spending money on somebody in the next 10 years. I will 

ask both of you, Mr. Foster and Dr. Holtz-Eakin, in your professional opinion, will the private plan market for a prescription drug 

benefit proposed by the legislation in fact be in place in 2006? Mr. 

Foster? 

Mr. FOSTER. We believe that it will. We believe there will be 

interest in this market. 

Mr. MCCRERY. Dr. Holtz-Eakin? 

Mr. HOLTZ-EAKIN. Yes, we believe it will, as well. 

Mr. MCCRERY. In your professional opinion, will the vast majority of Medicare beneficiaries choose to enroll in this drug benefit? 

Mr. Foster? 

Mr. FOSTER. They should because it is a good deal for them and 

if they wait they will be hit with a late enrollment penalty. So, 

they should. 

Mr. HOLTZ-EAKIN. Our estimate indicates that 87 percent of eligible seniors will take it up. 

Mr. MCCRERY. Will significant numbers of low-income individuals elect to enroll in the low-income subsidies which provide comprehensive drug coverage with no gaps in coverage for up to only 

$5 per prescription? Mr. Foster? 

Mr. FOSTER. Yes, sir. We anticipate the great majority of such 

folks will take advantage of the low-income subsidy. 

Mr. HOLTZ-EAKIN. Likewise, we anticipate that. 

Mr. MCCRERY. Thank you very much, gentleman. Thank you, 

Mr. Chairman. 

Chairman THOMAS. I thank the gentleman. The gentleman 

from Michigan wish to inquire? 

Mr. CAMP. Thank you, Mr. Chairman. As my colleague mentioned, the CBO was formed under the 1974 Budget Act to give 

Congress an independent agency to evaluate the costs of legislation. Mr. Holtz-Eakin, I wonder if you could tell me if the estimate 

for the Medicare Modernization bill was provided to Congress in 

November of last year; is that correct? 

Mr. HOLTZ-EAKIN. The final cost estimate on the bill was delivered shortly after passage. 

Mr. CAMP. Shortly after passage. That was at $395 billion from 

2004 to 2013; is that correct? 

Mr. HOLTZ-EAKIN. That is correct. 

Mr. CAMP. Since the time of that estimate and in the intervening release of the CMS data, has this caused you to change your 

estimate—or not you personally. Has this caused CBO to change 

the estimate? 

Mr. HOLTZ-EAKIN. No, it has not. 

Mr. CAMP. Have any of the assumptions underlying the estimate changed since that time? 

Mr. HOLTZ-EAKIN. In the course of preparing our baseline estimates of the outlays in the Medicare Program, we have revisited 

each aspect of the bill. We have made a modest adjustment in the 

participation in the Medicare Advantage plans but the adjustment 

had no budgetary consequence. 

Mr. CAMP. So, the budget estimate is the same as it was in November of last year? 

Mr. HOLTZ-EAKIN. Yes, it is. 


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Mr. CAMP. I understand that CBO projects that spending on 

Medicare and Medicaid combined will total $6.9 trillion from 2005 

through 2014; is that correct? 

Mr. HOLTZ-EAKIN. I do not know the number off the top of my 

head but it sounds right. 

Mr. CAMP. Obviously your estimate of $395 billion for the Medicare Modernization bill affects both Medicare and Medicaid, represents less than 6 percent of this amount. The Administration’s 

estimate at $534 billion represents less than 8 percent of this 

amount. Is it fair to say whether the final estimate of the bill is 

$395 billion or $534 billion that the total amount of spending is 

really only a small portion of the overall spending on Medicare and 

Medicaid over the next decade? 

Mr. HOLTZ-EAKIN. I think that is a fair assessment of the overall contribution and I certainly want to take this opportunity to say 

that, while we believe we have made a good faith effort to estimate 

the cost of the bill, we certainly recognize that the final cost could 

be higher. It could also be lower. It is our attempt to place it in 

the middle of the plausible range. 

Mr. CAMP. On that point, CBO scored the 10-year cost of the initial preventive measures in this bill, the physical, the cardiovascular screening tests, the diabetes screening tests, the lower copayments for diagnostic mammograms in the hospital outpatient 

setting, that estimate was at $2.2 billion, that that would actually 

cost money, these preventive programs. The CMS was very close to 

that, scoring those same provisions at about $2.3 billion over 10 

years. So, both organizations estimated that these costs would increase Medicare’s costs over time. Yet there are benefits from early 

detection and treatment of disease and the provision in the bill was 

designed to detect diseases before they reached later stages which 

are more expensive to treat. Did any assumption of savings to 

Medicare over time due to earlier detection and treatment of diseases occur in your estimate? 

Mr. HOLTZ-EAKIN. I can go back and consult with my staff on 

the details of that piece of the legislation. I do know that we have 

had a great deal of effort placed internally on surveying the research on the degree to which one can find cost savings in the future from outlays in the present in this area. One of the difficulties 

is that many of these savings do not show up in the score of the 

bill because the activities are already occurring in the baseline and 

what shows up as a new additional preventive activity that will 

produce new additional savings is what gets scored. If there are activities on prevention going on in the baseline, they simply get 

transferred to the Federal budget. We can get back to you on the 

details and continue to refine our estimates. 

Mr. CAMP. I would appreciate that. Thank you very much. 

Thank you, Mr. Chairman. 

[The information is pending.] 

Chairman THOMAS. Thank the gentleman. The gentleman from 

Massachusetts wish to inquire, Mr. Neal? 

Mr. NEAL. Yes, thank you, Mr. Chairman. Mr. Holtz-Eakin, did 

you say that the final number on the prescription drug bill was not 

offered until after it had been enacted? 


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Mr. HOLTZ-EAKIN. We provided estimates regularly throughout 

the year to both the House and the Senate and both parties. When 

the conference bill was passed, we produced a 67-page cost estimate detailing the underpinnings. We worked with the Committees 

to provide updates as they contemplated alternatives. With the 

passage of the final bill and the receipt of final language, we put 

out a short cost estimate and we also, at that point, began to put 

it into our baseline estimates of the cost of Medicare. 

Mr. NEAL. So, actually after it was passed you gave a final number? 

Mr. HOLTZ-EAKIN. Yes. 

Mr. NEAL. Here is part of the problem, I think, that we confront 

today. This is a follow-up to a couple of earlier assertions that were 

offered by the other side. I suspect part of this is due to the aggrieved minority here. General Shinseki said that what was being 

offered to the American people in terms of troop assessments was 

not accurate. Lawrence Lindsey said that the war in Iraq was 

going to cost $200 billion to $300 billion. He was fired. General 

Shinseki was dismissed. We have an Energy Task Force that we 

are going to have to go to the Supreme Court now so that the public can find out what actually went on inside of those deliberations 

with the Vice President. Mr. Wilson is set to determine whether or 

not Niger provided enriched uranium to the Iraqis and his wife is 

outed as a Central Intelligence Agency agent. We are told there 

were weapons of mass destruction. There were no weapons of mass 

destruction apparently. For months we were told there was a link 

between Iraq and Al Qaeda. The Vice President kept it up after the 

President said there was not. 

The ballot box in the House of Representatives is kept open at 

3:00 a.m. in the morning until 6:00 a.m. in the morning to vote on 

a bill that we now know we did not have accurate numbers to assess the cost of. Television advertisements are utilized here to sell 

a bill to the American people for which there were faulty assumptions. An actuary, actuaries we all have great respect and regard 

in this system, people like you sitting here as witnesses. We have 

the highest regard for you. There are people like myself who beat 

people up on that side of the table over the Clinton health care bill 

and then opposed it because we did not get the right numbers. 

That never happens on the other side in this institution. You give 

them the wrong numbers, they go along with it. They offer incentives to a Member on the floor to vote for the bill, even with a 

faulty cost estimate. People wonder why we get upset on this side 

for the manner in which the minority is treated. 

Now one thing I want to say about Chairman Thomas, I know 

he would not accept false numbers from either side in the Administration. He has that reputation around here. I do know that if he 

were given faulty numbers he would have said something. The 

truth is we all know this today, that we were given faulty numbers 

and then told, or professionals were told not to give us the real 

numbers. Then we hear this argument today, well, you could be far 

off in your estimates. I understand that. There is a pattern here 

that has been offered to the American people for months now about 

what they should know and what they should not know. That is 

a very troubling aspect of this debate. I thank the Chairman. 


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Chairman THOMAS. Thank the gentleman from Massachusetts. 

The gentleman from Missouri, Mr. Hulshof, wish to inquire? 

Mr. HULSHOF. I appreciate it, Mr. Chairman, and I appreciate 

the gentleman from Massachusetts making the political points. Let 

me come back and say specifically—— 

Mr. NEAL. Would the gentleman yield? 

Mr. HULSHOF. The faulty—— 

Mr. NEAL. Those are policy points, Mr. Hulshof. Those are not 

political points. All of the things that I described happened. 

Mr. HULSHOF. Well then let me get directly to the policy. 

Chairman THOMAS. The gentleman from Missouri has the time. 

Mr. HULSHOF. The quote was from you, faulty cost estimate? 

Did I state correctly? Faulty cost estimate, is that right? Mr. HoltzEakin, on November 20th of 2003 did you write a letter to the 

Chairman of this Committee in essence saying that the Medicare 

Modernization Act would cost $395 billion over the 2004 to 2013 

period? 

Mr. HOLTZ-EAKIN. Yes, I did, and I want to thank you for the 

chance to make the record correct. The cost estimate was available 

prior to the vote. 

Mr. HULSHOF. You also reiterated, ‘‘CBO has not had an opportunity to review the final legislative language and this estimate 

could change upon completion of that review.’’ Do you remember 

putting that in this letter to the Chairman? 

Mr. HOLTZ-EAKIN. Yes, we are always careful to make sure 

that we do not pin down an estimate until we see the final legislative language. 

Mr. HULSHOF. After the final legislative language was enacted 

into law, signed by the President, somewhere in that course of legislative activity, your office went back and refigured to see whether 

or not you were confident in the cost estimate that the CBO gave 

to this body. Is it not a fact that you stand by that $395 billion cost 

estimate today just as you did on November 20th, 2003? 

Mr. HOLTZ-EAKIN. Yes, I do. 

Mr. NEAL. Would the gentleman yield? 

Mr. HULSHOF. I see nothing faulty about that cost estimate, Dr. 

Holtz-Eakin. Now maybe that is just my perspective as a Member 

on the lower dais, not from Massachusetts, but certainly one that 

appreciates that Congress—and no disrespect intended, Mr. Foster—but Congress, our official scorekeeper is you, Dr. Holtz-Eakin. 

The CBO. Now I think it ironic that we have heard today this haranguing—and I respect the fact that information from whatever 

source is important, especially because as Mr. Stark said, we are 

not actuarial scientists. So, we rely upon you. To suggest that this 

$534 billion figure would somehow have caused the other side to 

come on board? Is that the suggestion? We have heard these complaints and criticisms that this bill, H.R. 1, was not generous 

enough. So, suddenly are we to believe that if this higher number 

of $534 billion were, in fact, our official number, that somehow we 

would have had some additional support on the other side of the 

aisle? I think that is ludicrous to even suggest it. 

To me, the point is among some—not all, and Mr. Neal is a 

friend and I am not specifically throwing this in your direction, Mr. 

Neal, and I will yield in a second. Without question we have heard 


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the words cover up. We have heard an effort to score political 

points. So be it. It is an election year. To me the real story of today 

is not these partisan attacks or this issue of credibility and going 

into the discussion of Niger, about Medicare. The point is the headlines should read, ‘‘Medicare, Social Security going bust if Congress 

fails to act.’’ That, to me, is the headline. I will yield briefly to my 

friend because I want to get to some questions on the actuarial 

numbers on the bigger issue, not the political issue. Mr. Neal. 

Mr. NEAL. I believe, Mr. Foster, you are an actuary, are you 

not? 

Mr. FOSTER. Yes, sir. 

Mr. NEAL. That was my point, that the actuary is the one who 

came back to us with a long career of distinction, in offering numbers. The President uses the $534 billion mark in his budget. 

Mr. HULSHOF. I accept that, Mr. Neal. 

Mr. NEAL. That is not a political point. Mr. Hulshof, there is 

nothing wrong with coming from Massachusetts. 

Mr. HULSHOF. There is nothing wrong with Massachusetts, Mr. 

Neal. It is one of the great 50 states. I would say to the gentleman 

that somehow talking about yellow cake in Niger and how it relates to this ‘‘faulty cost estimate’’ I think to be a bit of a stretch. 

Nonetheless my time is running short. Simply to me the real issue 

here, Mr. Goss, is exactly why you are here. Let me just say this 

because I know time is short and I wanted to get actually to—and 

I see the light has just gone. Very quickly, the effect of economic 

growth on Social Security’s finances, the myth out in Missouri— 

perhaps not in Massachusetts where people are much more sophisticated, Mr. Neal—I say that tongue-in-cheek—is can we grow our 

way out of this problem or is this an actuarial demographic reality 

that we have to come to grips with here on Capitol Hill? Mr. Goss, 

that is the only question I get to ask, and if you could answer it 

briefly. 

Mr. GOSS. Thank you very much. As we indicate in the sensitivity estimates provided in the Trustees’ Report there would be a 

positive effect on the financial status of Social Security if we had 

stronger real wage growth. In our judgment, it would be fairly 

modest and it is hardly unlikely that there could be a sufficient increase in economic growth to make a substantial difference. 

Mr. HULSHOF. What a great actuarial answer. I appreciate that 

and I yield back my time. 

Chairman THOMAS. I thank the gentleman. The gentleman 

from Tennessee, Mr. Tanner, wish to inquire? 

Mr. TANNER. Thank you very much, Mr. Chairman. I think the 

real issue here is was there a willful, deliberate withholding of information from Congress about a bill pending of such magnitude, 

regardless of whether one agrees with the methodology used? Was 

there a withholding of pertinent information that may have been 

helpful? Let me ask you this, Mr. Foster, during your career has 

there been any time other than this incident where you have been 

unable to communicate with the Members of Congress or the Committees of jurisdiction? 

Mr. FOSTER. Yes, sir, on rare occasions. 

Mr. TANNER. Let me ask you further then, I have read the excerpts from the Balanced Budget Act 1997 (P.L. 105–33) that give 


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to you and your office—I will just read the terms. While the Chief 

Actuary is an official within the Administration, this individual 

and his or her office must often work with the Committees of jurisdiction in the development of legislation. It goes on to talk about 

the tradition and also that the conferees consider independent 

analysis to be consistent with your duties and so forth. Were you 

aware of this language last June? 

Mr. FOSTER. Yes, sir, I was. I called that language to the attention of Mr. Scully and others. 

Mr. TANNER. What were you told in that regard? 

Mr. FOSTER. The polite version was that the conference language meant nothing. 

Mr. TANNER. I think every Democrat and Republican alike on 

this Committee ought to be outraged at the willful, deliberate, and 

I would say sinister withholding. Regardless of whether you agree 

with the methodology or the numbers. That is beside the point. 

When we write these conference reports, we expect them to mean 

something, I would hope. I do not care whether it is a Democrat 

or Republican Administration. We have three separate but equal 

branches of government in this country. If we ever lose sight of 

that fact we are in a whole lot more trouble than who is right and 

who is wrong in terms of the numbers in this situation. So, Mr. 

Chairman, I appreciate this. Maybe if it means nothing to the people that were there last summer, maybe we ought to rewrite it in 

the law. Thank you. 

Chairman THOMAS. I thank the gentleman. As the author of 

that language it meant something to me in 1997 when an Administration tried to stifle him and it means something to me today. The 

fact that we are having this hearing and providing this information 

on the record, I think, is evidence of that. The gentleman from 

California, Mr. Becerra, wish to inquire? 

Mr. BECERRA. Thank you, Mr. Chairman. Thank you to all the 

witnesses for your testimony, especially the candor with which you 

have given us that testimony. We appreciate that very much. Mr. 

Foster, let me see if I can ask you to clarify a few things as we 

go forward in this discussion about the estimates and the process 

that went forward in the passage of the Medicare bill. You mentioned that you had conversations with folks at CMS including Mr. 

Scully about your projections and you mentioned as well that at 

one point you had a conversation with an attorney at CMS who advised you that Mr. Scully did have the authority to keep you from 

disclosing some of that information to Congress. Do you recall the 

name of that attorney you spoke to? 

Mr. FOSTER. Yes, sir. That was our, at the time, Acting Deputy 

Administrator Leslie Norwalk. 

Mr. BECERRA. What was that name? 

Mr. FOSTER. Leslie Norwalk. 

Mr. BECERRA. The gist of that directive was that Mr. Scully 

had the authority legally to preclude you from disclosing that information. Did she give you which law she or Mr. Scully referenced 

to say that the authority existed for them to prevent you from disclosing that information? 


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Mr. FOSTER. She might have, although I do not think so. I do 

not remember for sure. This hinged more on the question of constitutional separation of powers. 

Mr. BECERRA. I know it was a while ago perhaps that you were 

told this by the attorney. Can you paraphrase as best you can or 

can you tell us again what it was she told you that indicated that 

the law gave Mr. Scully that authority to keep you from disclosing 

that information? 

Mr. FOSTER. The general argument was that with separate 

branches of government, obviously a congressional and an executive branch, the congressional branch has its own scorekeeper, 

CBO of course. 

Mr. BECERRA. So, it seems to have been related to the separation of powers? 

Mr. FOSTER. Yes, sir. 

Mr. BECERRA. You mentioned in your earlier remarks that others in the Administration, I do not know if you said requested or 

received your estimate for the cost of the Medicare bill. Did you say 

requested or received? 

Mr. FOSTER. I probably said both at one time or another. 

Mr. BECERRA. Do you recall who requested that information 

from the White House? 

Mr. FOSTER. We had requests for the overall package cost estimate both from Mr. Scully and from Mr. Badger. 

Mr. BECERRA. Mr. Badger? 

Mr. FOSTER. In the White House. 

Mr. BECERRA. Anyone else at the White House? 

Mr. FOSTER. I do not believe so. 

Mr. BECERRA. I believe you testified that Mr. Badger did receive that information? 

Mr. FOSTER. Early on, when we all had only rough estimates 

for a package cost back in June, I know that information was sent 

both to Mr. Scully and to Mr. Badger. 

Mr. BECERRA. Anyone else at the Administration that you can 

think of that, to your knowledge, received the information about 

the cost of the Medicare bill, your projected cost of the Medicare 

bill. 

Mr. FOSTER. Again early on, as I think I mentioned before, Mr. 

Capretta at the OMB and Ms. Young at HHS. 

Mr. BECERRA. What was the name at OMB? 

Mr. FOSTER. Jim Capretta. Later on in the process, when we 

were closer to having a final estimate for the conference agreement, 

I had a conversation with Mr. Scully telling him the rough magnitude of the estimate. 

Mr. BECERRA. Was this before the bill had passed Congress? 

Mr. FOSTER. It was about 2 to 3 weeks before the final vote. I 

do not know if he passed that on to anyone else. 

Mr. BECERRA. Is it still your intention to remain as Chief Actuary at CMS? 

Mr. FOSTER. I have had more second thoughts lately, I suppose, 

but yes. We have many initiatives underway that I would like to 

see through. 

Mr. BECERRA. I know that this has probably been a very challenging time for you over the last several months, major legislation, 


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a lot of duties have been asked of you as well as the other individuals who are here with monumental programs that are critical to 

the American public. We appreciate what you have done. So, the 

next question I ask, and I ask you just to give me your own personal opinion. Do you believe you performed professionally in your 

capacity as Chief Actuary at CMS? 

Mr. FOSTER. You are talking about last summer when all this 

came up, or in general? 

Mr. BECERRA. At any time that you have been Chief Actuary. 

At all times do you believe you have performed professionally as 

the Chief Actuary for CMS? 

Mr. FOSTER. I believe I have and I am aware that last summer 

was a difficult call. I will think about that one for a long time to 

come. 

Mr. BECERRA. I thank you for the candor. There is an article 

in today’s Hill newspaper that is titled ‘‘Bush takes offensive on 

Foster,’’ by Mr. Bob Cusack. It states—I will just read it and ask 

a quick question since my time has expired and the Chairman is 

being gracious. It starts off rattled at the controversy over Medicare scoring shows no sign of waning. The Bush Administration 

has shifted strategies and now is going after the actuary at the 

center of what some have called Scoregate. It goes on to mention 

that at one point Tom Scully—there are at least reports that Tom 

Scully may have threatened to fire you if you disclose this information. Can I ask one quick question here, and that is, do you feel 

threatened in your job at this stage? 

Mr. FOSTER. No, sir. 

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

Chairman THOMAS. Certainly. The gentleman from Washington, Mr. McDermott, wish to inquire? 

Mr. MCDERMOTT. Thank you, Mr. Chairman? Mr. Foster, I was 

on the Budget Committee when they announced that we were 

going to spend $400 billion for the pharmaceutical benefit. We 

asked at that time for the parameters. What were the assumptions 

made about that $400 billion. It became pretty clear to at least us 

on the Committee who were not made privy to what was going on 

that they just plucked a number out of the air and put $400 billion 

into the budget. Did you ever see the assumptions made for that 

$400 billion number? Did they ever submit those to you and ask 

you what your estimate was? 

Mr. FOSTER. If I remember correctly, Representative 

McDermott, the $400 billion showed up early on. This predates 

2003. 

Mr. MCDERMOTT. Yes, it does. It was in the 2002 era. 

Mr. FOSTER. In 2003, in the development of the President’s 

framework for Medicare reform, my office had estimated quite a 

number of packages that would have had a cost of about $400 billion. None of them were ultimately proposed specifically only the 

more general framework. 

Mr. MCDERMOTT. So, you had done a $400-billion package, this 

is what you can buy for $400 billion? 

Mr. FOSTER. Yes, sir. 


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Mr. MCDERMOTT. So, when they went through the machinations here in the Congress and they wrote the bill in the Conference Committee without the Democrats there, did you know 

what assumptions they had changed from what you had done previously with your $400 billion package? 

Mr. FOSTER. Well, there were many differences in the proposals 

themselves, compared to the specific illustrative packages we had 

done for the President early on. 

Mr. MCDERMOTT. Could you help us understand how they—I mean, you had given them a way to give a $400 billion package. 

Apparently it was not sufficient or was deficient somewhere. They 

added things into it. Did you create the doughnut hole? Was that 

your idea? 

Mr. FOSTER. No, sir, I will take no credit for that one. 

Mr. MCDERMOTT. So, you gave a proposal for $400 billion that 

would have been across the year and people would not have this 

huge gap? 

Mr. FOSTER. No, the doughnut hole goes back years. If you 

want to go back much earlier back in the Clinton Administration, 

there was consideration given to a drug benefit, what the design 

would look like. We were asked for advice. For so much money 

what could you do? We recommended a catastrophic only coverage, 

in that regard, using standard classical insurance principles. Of 

course, with a catastrophic coverage relatively few beneficiaries actually get anything out of the benefit. There was a policy desire to 

have more people favorably affected, to get something out of the 

benefit, which meant more up front coverage. When you take the 

combination of that desire together with a limited availability of 

money to fund it, that is what led to someone, not me, inventing 

the doughnut hole. 

Mr. MCDERMOTT. So, they just used an old idea. That is really what they put together. They took your $400 billion package and 

put it in the waste basket and went back and said let us do a catastrophic program and some up fronts so we can attract some votes. 

Mr. FOSTER. I am not sure who the ‘‘they’’ is in your sentence. 

Mr. MCDERMOTT. It has to be the Republicans because we 

were not there. They never invited us to the meetings. So, the Conference Committee, when they did that, did they come out of that 

Conference Committee and hand you all of their assumptions and 

say this is what we have? Or did they say this is how much money 

we spent? 

Mr. FOSTER. Well, early on in the development of the legislation, of course, there was the Senate Finance version, there was 

the Ways and Means Chairman’s mark. If I remember correctly 

both of these, because of the cost constraints, had the doughnut 

hole in the drug benefit formula. I think that idea stayed all the 

way through the conference. There was a lot of interest along the 

way in whether something could be done to eliminate the doughnut 

hole without having the costs explode. Nobody found a solution to 

that. 

Mr. MCDERMOTT. So, what set of assumptions did you do your 

whatever it is, $550 billion or $539 billion estimate? What assumptions did you use? The same ones they did, and just found more 

expense? 


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Mr. FOSTER. Yes, sir. You say assumptions but I am hearing 

specifications for the proposal. We had access, not quite as quickly 

as CBO did, but we had access from time to time to the conference 

agreement as it was being developed. We tried to estimate for those 

specifications such that in the end our package estimate of $534 

billion reflected the final benefit formula from the conference, the 

$250 deductible, the $2,250 initial coverage limit, the 25-percent 

coinsurance, all of the above. 

Mr. MCDERMOTT. The Conference Committee did not have that 

estimate when they moved it out? They did not know what your 

estimate would be? 

Mr. FOSTER. I do not know if the conferees had that or not. We 

had given the information to Mr. Scully. 

Mr. MCDERMOTT. Thank you. Thank you, Mr. Chairman. 

Chairman THOMAS. Certainly. Does the gentleman from Texas 

wish to inquire? 

Mr. BRADY. Yes, Mr. Chairman. 

Chairman THOMAS. Would the gentleman yield briefly? 

Mr. BRADY. Yes, sir. 

Chairman THOMAS. Mr. Foster, is your responsibility under the 

law the same as Dr. Holtz-Eakin’s? 

Mr. FOSTER. No, I would not say so, in general. 

Chairman THOMAS. So, the questions that Mr. McDermott 

asked you about whether you were provided with information at 

each step along the way to do estimates really is not your job. It 

is Mr. Holtz-Eakin’s job, is it not? 

Mr. FOSTER. That is true. 

Chairman THOMAS. So, the fact that you did not receive those 

estimates is not some surprise, since it has never worked that way. 

That in fact, as was established earlier in testimony, that for a bill 

to come out of Committee, the CBO has to score it. For each change 

that is made the CBO has to score it. Do you have to score it? 

Mr. FOSTER. No, sir. We respond to requests. If you or anybody 

else seeks our assistance, we try our best to respond. 

Chairman THOMAS. My understanding is that under the law in 

the administrative branch, that information flows through responsible administrators and they make that decision; is that correct? 

As your description of the law was conveyed to you by the attorney? 

Mr. FOSTER. I believe that is a great description of the law, not 

necessarily the past practice for many years. 

Chairman THOMAS. I understand that and that is another reason why I have made phone calls to you periodically, bucking you 

up as it were, in terms of your professional responsibilities and our 

desire for the information, whether that Administration is Democrat or Republican. The gentleman from Texas, thank you for yielding. 

Mr. BRADY. Thank you, Mr. Chairman. Mr. Foster, I wish your 

information would have been made public at the time. I think 

while I am very comfortable with the CBO’s scoring, I think it 

would have been helpful to the public debate to hear your view 

that this plan was more attractive and helpful for our poor seniors 

and that more of our other seniors would have chosen this plan 

than perhaps had been estimated. I think that would have been 


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good for the debate to have that. Let me ask you, as far as the CBO 

scoring, in your view was the CBO estimate fraudulent? 

Mr. FOSTER. No, sir, not even remotely. 

Mr. BRADY. No, not even remotely? 

Mr. FOSTER. That is correct. 

Mr. BRADY. Was the CBO scoring an intentional misrepresentation of this bill? 

Mr. FOSTER. I am convinced it is not. 

Mr. BRADY. You are convinced it is not. Would you characterize 

the scoring by CBO as an honest interpretation of a very complex 

bill or something to that effect? 

Mr. FOSTER. Yes, sir. 

Mr. BRADY. Thank you. I think this is important because we get 

two or three estimates for many of our bills. We, by law, have to 

choose CBO. I am comfortable with that. I think this really gets to 

the heart of the debate today. Let me ask you, as long as you are 

using your actuarial skills and expertise, today I heard a number 

of comments and read them, some even by Senator Kerry of Massachusetts, that blame President Bush and his tax relief for the declining state of Medicare. Yet the Medicare Hospitalization Fund is 

paid for by payroll contributions and the President’s tax relief had 

nothing to do with payroll contributions. The claim that President 

Bush’s tax relief has accelerated the insolvency of the Medicare 

Hospitalization Fund, is that an accurate—in your actuarial expertise is that accurate? 

Mr. FOSTER. There is a relatively minor interaction. Some of 

our income is from income taxes paid by Social Security beneficiaries on their Social Security benefits. If the marginal tax rates 

change that can affect our revenue from that source. I would consider that only a fairly negligible impact on the HI Trust Fund. 

Mr. BRADY. So, the answer is for the most part it is not very 

accurate? 

Mr. FOSTER. Yes, sir. 

Mr. BRADY. It is not very accurate. The Medicare plan has been 

claimed, that Congress passed, accelerate financial insolvency of 

Medicare by 2 years is the estimate of the Trustees’ Reports. The 

Democratic plan, promoted by many of the Ways and Means Members here today on the opposite side, was much larger than the 

plan that we passed. Is it accurate to say that the Democrat Medicare plan, with the higher cost, would have accelerated the insolvency of Medicare when compared to the Republican plan that was 

passed? 

Mr. FOSTER. It would depend entirely on how the cost was financed, sir. I do not remember the specific provisions and how that 

would happen. 

Mr. BRADY. Just for the record, it was financed much as the 

current one was. I appreciate, I think it is important to note today 

that the CBO scoring was an honest one, that President Bush’s tax 

relief has not accelerated or changed Medicare in any way, and 

that the Republican plan was in fact much lower than the Democratic plan that was debated. Thank you, Mr. Chairman. I yield 

back the balance of my time. 

Chairman THOMAS. I thank the gentleman. The gentleman 

from Texas, Mr. Doggett, wish to inquire? 


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Mr. MCDERMOTT. Thank you. Thank you very much for your 

integrity, sir. No one has suggested that the work of the CBO was 

fraudulent. What is fraudulent is willful interference with your 

professional judgment, secreting and hiding critical information, 

and willful disregard of the Congressional Budget Act. The question I would have to you is to be sure I am clear, Mr. Foster. Tom 

Scully had your best professional judgment as an independent actuary that the true cost of this Medicare bill would far exceed the 

$400 billion ceiling that the Bush Administration had established. 

You gave him that information last June? 

Mr. FOSTER. For early versions of the legislation last June and 

then for later versions from time to time. 

Mr. DOGGETT. You gave the same information to Doug Badger, 

the top White House official who occupies a position at the White 

House similar to Condoleeza Rice on security matters, he is the top 

health official who briefs President Bush. He had that information 

that the Administration’s bill exceeded the cost of $400 billion by 

about a third from you back in June of last year? 

Mr. FOSTER. Yes, the information back in June, that is correct. 

Mr. DOGGETT. You provided the same information to the top 

health official at the OMB, the top legislative health secretary or 

acting secretary at HHS. You made that information widely available to the Bush Administration last June. Let me ask you if you 

have become aware through any source whether any Members of 

Congress or any members of the staff of this Committee or any 

other congressional staff gained access to your estimates before this 

near all-night session of the House that it took to cajole enough 

people to pass the bill? 

Mr. FOSTER. I really do not know who had access to it, sir. 

Mr. DOGGETT. You did discuss, you have indicated and the 

Chairman has indicated, participation rates with him for certain 

aspects of the plan last June, did you not? 

Mr. FOSTER. Yes. 

Mr. DOGGETT. I believe Mr. McManus, with his staff, had one 

of the additional requests for estimated participation rates and that 

you were told you would be fired if you provided it? 

Mr. FOSTER. That is correct. 

Mr. DOGGETT. Those participation rates are the building blocks 

from which you get the cost estimates, are they not? 

Mr. FOSTER. Yes, sir. 

Mr. DOGGETT. So, it is not just idle academic concern. If someone knows there is a great variance in participation rates, then it 

does not take a very bright person to recognize there is going to 

be a great variation in the cost; correct? 

Mr. FOSTER. Other things being equal, yes, sir. 

Mr. DOGGETT. You also testified that you attempted after these 

threats to fire you to discuss—I believe your words were attempted 

to discuss with other members of the Administration the demands 

that had been placed on you to secret what you considered important and vital information for the Congress to have but which Mr. 

Scully’s improper order denied you the right to submit. Would you 

identify each of the individuals in the Administration with whom 

you discussed this problem and their titles? 


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Mr. FOSTER. Sure. Following the blow up involving Mr. Thomas’s request, Scott Whitaker, who is the HHS Chief of Staff, called 

me to express concern and support both from himself and on behalf 

of Secretary Thompson. We discussed the issue about the provision 

and what steps we could take to improve the situation. In addition, 

a few weeks after that Peter Urbanowitz, who at the time was the 

Deputy Director of the Office of the General Counsel at HHS, 

called similarly to express support and to help figure out what 

could be done. 

Mr. DOGGETT. You responded to Mr. Tanner with regard to Mr. 

Scully’s comments on the responsibility as reflected I believe in the 

language that accompanied the Budget Act. Could you tell the 

Committee as best you recall what Mr. Scully’s words were with regard to that subject? 

Mr. FOSTER. In various discussions, going back as far as June 

2001, about the role of the Office of the Actuary in providing assistance to Congress, technical assistance, I had tried to make the case 

with Mr. Scully that you all valued this, using as one piece of evidence the conference language from the Balanced Budget Act 

where it is fairly clearly laid out what the expectations are and the 

value placed on that. I also tried just the logical argument that the 

Nation’s top policymakers should have the best information available. When I say that I do not mean that the CBO information is 

not good. It is very good. There are many situations where CBO 

might not have been in a position to do a special analysis because 

of their other workloads or, in some rare cases, we might have a 

special expertise to make a contribution if requested. So, we had 

these discussions, or I had these discussions with Mr. Scully. He 

is not an easy person to have a discussion with. 

Mr. DOGGETT. I have found that to be true, also. 

Mr. FOSTER. So, he generally was not interested in what was 

in the conference language. He did early on want to maintain good 

relations with Congress and from June 2001 to June 2003 we had 

a system in place where we could respond directly to your requests. 

Chairman THOMAS. The gentleman’s time has expired. 

Mr. DOGGETT. I just want the answer to the last question. 

What were Mr. Scully’s words about the conference report, as best 

you recall them? 

Mr. FOSTER. I think, on at least one occasion his exact words 

were unprintable. I certainly would not want to repeat them in this 

setting. 

Mr. DOGGETT. Were unprintable? 

Mr. FOSTER. Yes, sir. 

Mr. DOGGETT. Thank you. 

Chairman THOMAS. The gentleman from Texas, Mr. Sandlin, 

wish to inquire? 

Mr. SANDLIN. Thank you, Mr. Chairman. Thank you, Mr. Foster, for coming today. Mr. Foster, I have very few questions about 

the cover up. I think that has been covered in great detail. You did 

say, in transmitting this information, or failing to transmit the information, you felt you were following the law; is that correct? 

Mr. FOSTER. As best I understood it, yes, sir. 

Mr. SANDLIN. Whether it was legal or not you felt it was improper to withhold that information, did you not? 


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Mr. FOSTER. Yes, sir. 

Mr. SANDLIN. You felt like that was not ethical, did you not? 

Mr. FOSTER. Yes. 

Mr. SANDLIN. Let me ask you, did the enactment of the Medicare reform legislation in any way reduce the solvency of Medicare 

part A, the HI Trust Fund? 

Mr. FOSTER. Yes, sir. We have estimated that the impact of the 

higher payment rates to managed care plans and to rural providers 

in the part A Trust Fund advanced the date of depletion by 2 

years. 

Mr. SANDLIN. By 2 years. So, a part of that, as you just indicated, was due to the payments to HMOs and PPOs; is that correct? 

Mr. FOSTER. Yes, sir. 

Mr. SANDLIN. So, giving money to these HMOs and PPOs, this 

private group, contributed to the lack of solvency in the Medicare 

Trust Fund; correct? 

Mr. FOSTER. Contributes to the earlier depletion, yes, sir. 

Mr. SANDLIN. Was there ever or is there ever a point in your 

modeling of this law in which you show a savings due to the managed care plans? 

Mr. FOSTER. No, sir, not as currently structured. 

Mr. SANDLIN. There is not even a savings after 75 years or 

even in the famous infinite horizon? It never shows savings; is that 

correct? 

Mr. FOSTER. After the first 25 years we lump everything together in our methodology and project it jointly. 

Mr. SANDLIN. In the rest of the budget we just estimate out 

about 5 years, usually; is that not correct? 

Mr. FOSTER. Five or 10. 

Mr. SANDLIN. So, it is very difficult to have any confidence 

whatsoever in numbers that are say 75 years out; is that not correct? 

Mr. FOSTER. The further you go the more uncertainty there is. 

Mr. SANDLIN. Well, 75 years is a long time, is it not? 

Mr. FOSTER. Yes, sir. 

Mr. SANDLIN. Now, is it true that under the law that the perbeneficiary private plan payment rates substantially exceed the 

payment rates provided to traditional fee-for-service under Medicare? 

Mr. FOSTER. It varies area-by-area. 

Mr. SANDLIN. Overall is that not true, though? 

Mr. FOSTER. On average, overall, yes. 

Mr. SANDLIN. I think on average it is about 25 percent more 

goes in the private pay payment plan as opposed to the traditional 

fee for payment service; is that correct? 

Mr. FOSTER. That sounds too high, sir, but we could look into 

it and provide something for the record. 

Mr. SANDLIN. Would it surprise you if that was it? 

Mr. FOSTER. It sounds too high. 

Mr. SANDLIN. You know it is more? 

Mr. FOSTER. On average, yes. 


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Mr. SANDLIN. Are not the overhead costs higher in the HMOs 

and PPOs than in the traditional Medicare? Have not studies 

shown that? 

Mr. FOSTER. The administrative costs typically are higher. 

Mr. SANDLIN. Now you said, and maybe Mr. Goss or Dr. HoltzEakin said that you felt there was a demand in the market for the 

private care, for the HMO or PPO care; is that correct? 

Mr. FOSTER. I believe we were talking about the drug companies at the time. 

Mr. SANDLIN. Demand for the drug plan under the Medicare 

bill, which is a part of the reform. 

Mr. FOSTER. Yes, sir. 

Mr. SANDLIN. Did you know that 80 percent of the Medicare eligible people that live in rural areas, such as I represent, are not 

even living in areas where there is any HMO coverage whatsoever? 

Did you know that? 

Mr. FOSTER. Yes, HMOs are not common in rural areas. 

Mr. SANDLIN. So, in those areas, actually reducing the ability 

of them to get this service, and actually beneficiaries residing in 

those areas where there are no private plans are then effectively 

receiving lower average Medicare subsidies than folks who live in 

areas that are covered by HMOs; is that not correct? 

Mr. FOSTER. I think I need to think about that a little bit. 

Mr. SANDLIN. If there is, in fact—if in fact there is a higher reimbursement to a plan, as opposed to traditional Medicare, if there 

is no plan available then the folks in the plan areas I will call it 

are getting higher reimbursements or higher rates than those in 

the non-plan areas; is that not correct? 

Mr. FOSTER. In a rural area where there is no private plan and 

the beneficiary is in fee-for-service traditional Medicare, there is a 

whole set of payment rules and mechanisms for the care they receive. 

Mr. SANDLIN. They are getting less, as you testified. Let me ask 

you one other question. As you have testified, there is under the 

bill no negotiation between the Secretary and the pharmaceutical 

industry or Medicare and the pharmaceutical industry on the cost 

of prescription drugs. Is it not true that in the Veterans Administration, however, they are saving about 48 percent in costs through 

negotiation; is that not right? 

Mr. FOSTER. I am less familiar with the Veterans Administration situation. 

Mr. SANDLIN. Would that surprise you? 

Mr. FOSTER. I do not know one way or the other. 

Mr. SANDLIN. Thank you. Thank you, Mr. Chairman. 

Chairman THOMAS. The gentleman’s time is expired. The gentleman from Wisconsin wish to inquire? 

Mr. RYAN. I do, thank you, Mr. Chairman. I guess since I am 

batting cleanup here, there are a number of points I would like to 

make. First, I want to just ask a couple of technical questions from 

the previous questions. With respect to the part A, the HI Trust 

Fund, and the acceleration of the insolvency by 2 years, to what 

extent is that attributable to HMOs and/or rural providers? Can 

you segregate the amount of the acceleration of the insolvency attributed to rural providers and HMOs? 


hmoore on PROD1PC68 with HMRPT
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Mr. FOSTER. Yes, sir, only very roughly right now. We could do 

a more thorough job for you. I would call it about 60 percent due 

to the higher payment rates for the Medicare Advantage plans and 

roughly 40 percent for the higher payments to rural providers. 

Mr. RYAN. So, rural providers did get a substantial increase in 

their payments, as well as buttressing the Medicare Advantage 

program? 

Mr. FOSTER. Yes, sir. 

Mr. RYAN. It was mentioned earlier from the other gentleman 

from Texas that the HHS estimate, the CMS estimate, is the true 

estimate. Is your estimate the true estimate? 

Mr. FOSTER. If we could make true estimates, I would not have 

to be CMS Chief Actuary. I would be out there in the stock market 

or someplace. 

Mr. RYAN. Your estimate is just like somebody else’s estimate; 

correct? It is a good educated guess, just as CBOs? 

Mr. FOSTER. They are all estimates. Doug may well be right. I 

may be wrong. It may be the other way around. It is quite possible 

we will both be wrong. 

Mr. RYAN. It is quite probable both of you are wrong and we will 

be somewhere in between for all we know. 

Mr. FOSTER. We hope it would be in between. 

Mr. RYAN. One thing that I think, we have just gone through 

a long hearing on all of this, and I think people may be confused 

as to the procedures around here. 

Chairman THOMAS. Would the gentleman yield briefly on that 

point? 

Mr. RYAN. Sure. 

Chairman THOMAS. The Chair recalls Dr. Holtz-Eakin indicating that what he provided at the $395 billion rate was an intermediate estimate from his ship. It could be lower or higher. The 

assumption that he is the floor and CMS is the ceiling is not accurate based upon the testimony provided by Dr. Holtz-Eakin. It 

could be lower than the $395 billion. Is that correct, Mr. HoltzEakin, based on your statement? 

Mr. HOLTZ-EAKIN. Yes, there is a range of uncertainty around 

all estimates we provide. It could be lower. It could be higher. 

Chairman THOMAS. So, when we are looking for the true estimate, as though someone were withholding the Holy Grail, a statement along those lines probably is designed to draw a conclusion 

rather than to illuminate. Thank you very much, Mr. Ryan, for 

yielding. 

Mr. RYAN. I thank the Chair. What I want to look at is the differences in the two estimates between CBO and CMS. It is also 

very important to note that, as has been mentioned earlier, Congress is required to use CBO estimates. When we score legislation 

all legislation that affects revenues and expenditures, we always 

have to get a score on its revenue impact or its expenditure impact 

for purposes of conforming with the budget resolution as driven by 

the Budget Committee. In each of these cases, we have to use CBO. 

You always have other scores out there, from OMB, from an independent agency. Nevertheless, in every single occasion, Congress 

has to use CBO. In looking at the differences between the two estimates on this Medicare bill, you can basically look at the fact that 


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CMS—and please correct me, the two gentleman if I am wrong, 

CMS assumes a 94-percent participation rate in the drug plan and 

CBO assumes 87 percent; is that correct? 

Mr. HOLTZ-EAKIN. Correct. 

Mr. RYAN. With respect to the low-income subsidies for low-income seniors for prescription drug benefit which the biggest out-ofpocket exposure is, I think, a $5 copay, CMS assumes a 75-percent 

participation rate in the low-income subsidies and CBO assumes a 

70-percent participation rate; is that correct? 

Mr. HOLTZ-EAKIN. A little bit lower, actually. 

Mr. RYAN. That is right, two-thirds. With respect to the Medicare Advantage programs where seniors get to choose among competing plans very much like we as Federal employees do with our 

own Federal Employee Health Benefit System, CMS assumes 32 

percent of seniors will choose to enroll in either these HMOs or 

PPOs and CBO assumes 13 percent; is that correct? 

Mr. HOLTZ-EAKIN. That is correct. 

Mr. RYAN. So, in essence, and those are the big differences between your two estimates, what CMS is simply saying is that more 

people are going to benefit from this new Medicare law? Is that essentially what you are saying, Mr. Foster, that more individuals 

will actually choose to benefit from the new prescription drug benefit and these new choices that will be made available to them in 

their areas 

Mr. FOSTER. Yes, sir. 

Mr. RYAN. So, from a beneficiary standpoint, whichever of these 

estimates are true, we have these estimates where at the basic 

rate, CBO, saying 87 percent of all seniors will benefit from a drug 

plan, where 66 percent of low-income seniors at least will benefit, 

and CMS is saying even more people will benefit from this new 

prescription drug law. I think it is important to point out here that 

what we are talking here is the differences in how many people 

will be helped from this new Medicare law. One thing that I think 

is important at the end of all of this is look at the big numbers we 

are talking about. Over the next 10 years is it not true that Medicare and Medicaid will spend about $6.9 trillion; is that correct, 

Mr. Holtz-Eakin or Mr. Foster? 

Mr. HOLTZ-EAKIN. Ballpark, yes. 

Mr. FOSTER. That is certainly the right ballpark. 

Mr. RYAN. About $6.9 trillion. So, when we are looking at a difference of an estimate of about $139 billion, what is the difference 

in your two estimates over the total course of the next 10 years in 

the spending of Medicare and Medicaid? 

Mr. HOLTZ-EAKIN. We can we look this up. 

Mr. FOSTER. For Medicare only, if you look at the March CBO 

baseline versus the President’s budget, the total was actually quite 

close for Medicare expenditures. In the Trustees’ Report, in part 

because of higher CPI assumptions, we have a somewhat higher 

level. 

Mr. RYAN. One more? 

Chairman THOMAS. One more quickly. 

Mr. RYAN. One more quick one. We have heard a lot of talk 

about the doughnut hole here today under this new benefit. According to CBO analysis the typical senior will spend less than $1,900 


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in prescription drugs in 2006 and will not reach the initial coverage 

limit of $2,250. One-third of the seniors will be eligible for low-income assistance and will have no gap in coverage regardless of how 

much they spend. Given these two points, Mr. Holtz-Eakin, what 

is your estimate of the number of seniors who will experience absolutely no gap in coverage or no doughnut hole under this new 

Medicare prescription drug benefit? 

Mr. HOLTZ-EAKIN. I do not know the number off the top of my 

head. I am happy to get it to you. 

Mr. RYAN. If you could, I would appreciate that. 

[The information is pending.] 

Chairman THOMAS. I thank the gentleman. The gentleman 

from North Dakota is recognized for a North Dakota minute. 

Mr. POMEROY. I thank the Chairman. I will be very brief. I 

have just been concerned—— 

Chairman THOMAS. Time goes very slowly in North Dakota. A 

North Dakota minute lasts a while. 

Mr. POMEROY. I will be very brief. Mr. Foster, I have felt it 

very unfair that you have been attacked for bringing to light the 

fact that your cost estimates were precluded from being disclosed 

to Members of Congress even upon direct inquiry for those estimates. In fact, the Hill newspaper now, ‘‘Bush takes offensive on 

Foster.’’ The article indicates that an actuary has to have proof of 

assertions that the White House may have had knowledge of your 

estimates. Are you telling us today that you have directly sent email to someone in the White House of the cost estimate you prepared? 

Mr. FOSTER. Yes, sir. For the estimates back in June, the preliminary estimates, there is such evidence. 

Mr. POMEROY. There is evidence that the White House received 

this. Now part of the chattering class, the talk show discussion of 

all of this, has raised an issue as to whether you are politically motivated in bringing this information to us. Indeed, one talk show 

pundit was saying ‘‘this Foster’’—I am quoting now from the Capital Gang program on CNN. ‘‘This Foster, this actuary, is a bureaucrat but he is a Democrat. He is—he is very hostile to the Administration.’’ Mr. Foster, are you actively involved with a political 

party? 

Mr. FOSTER. I will be happy to answer your question sir, but 

only with a brief explanation. For our work, our estimates for 

Medicare and Medicaid, we very carefully keep any political preferences and any political affiliation out of our work so that we can 

provide just the best neutral, nonpartisan, et cetera, analysis. Now 

having said that, I will tell you a short story. Back in 1972, when 

I was first eligible to vote, I registered as a Democrat so that I 

could vote against George Wallace in the Maryland primary. I 

never got around to changing my registration but I will announce 

to the world, I suppose, that I voted for every Republican presidential candidate ever since 1972 except the 1 year that I wrote in 

Jack Kemp. 

Mr. POMEROY. I am sorry to hear that. 

Chairman THOMAS. The gentleman’s time is expended to both 

a North and South Dakota minute. 


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Mr. POMEROY. I do think that is important to get on the record 

and the statement made by that talk show pundit that you are hostile to this Administration, are you hostile to this Administration? 

Mr. FOSTER. No, sir. I think very highly of Secretary Thompson 

and I think very highly of President Bush. 

Mr. POMEROY. Indeed, do you believe this Administration 

would have been better served by having the work of your actuarial 

team come forward in due course into this debate? 

Mr. FOSTER. Yes, I do. 

Mr. POMEROY. I do not have any other questions, Mr. Chairman. Thank you. 

Chairman THOMAS. I thank the gentleman and I want to thank 

all of you. I want to underscore the gentleman from Missouri’s 

statement. Notwithstanding the nitpicking and the very microscopic examination of the job of actuaries today, when you take a 

step back and look at the overall picture, this society needs to 

make some fundamental changes to both the Social Security and 

the Medicare program if we expect those who are currently paying 

the bill to receive the benefits that those now enjoy. The hearing 

stands adjourned. 

[Whereupon, at 4:26 p.m., the hearing was adjourned.] 

BOARD OF TRUSTEES 2004 ANNUAL REPORTS 

THURSDAY, APRIL 1, 2004 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

Washington, DC. 

The Committee met, pursuant to notice, at 12:10 p.m., in room 

1100 Longworth House Office Building, Hon. Bill Thomas (Chairman of the Committee) presiding. 

Chairman THOMAS. Good afternoon. Today, we continue the 

Committee’s review of the 2004 Annual Reports of the Board of 

Trustees of the Social Security and Medicare Trust Funds. Pursuant to U.S. House of Representatives Rule XI, clause 2(j)(1), at the 

insistence of the minority, four additional witnesses have been 

called before us to offer testimony on the Trustees’ Report on Medicare. The minority is fully within its rights under Rule XI and the 

Chair has no discretion in that regard. Before us today, one of the 

witnesses that was requested, Leslie Norwalk, who is the Acting 

Deputy Administrator for the CMS, and Jeff Flick, who today is the 

San Francisco Regional Administrator for CMS. Doug Badger, Special Assistant to the President for Economic Policy, had been requested by the minority to appear, and White House Counsel 

Alberto Gonzales has provided the Committee a letter of explanation on executive privilege. Therefore, Mr. Badger will not appear. Tom Scully, former CMS Administrator, has provided a letter 

of explanation to the Committee outlining the reasons for his declining the invitation, as well. Without objection, I ask that both 

letters be entered into the record. The clerks will make sure that 


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Members have copies of those letters. With that, I would recognize 

the Ranking Member, Mr. Rangel, for any opening statement he 

may wish to make. 

[The opening statement of Chairman Thomas follows:] 

[The information follows:] 

Opening Statement of The Honorable Bill Thomas, Chairman, and a 

Representative in Congress from the State of California 

Good afternoon. Today we continue the Committee’s review of the 2004 Annual 

Reports of the Boards of Trustees of the Social Security and Medicare. 

Pursuant to Rule XI, Clause 2(j)(1) >of the U.S. House of Representatives four 

additional witnesses have been called before us to offer testimony on the Trustees 

Report on Medicare. 

Leslie Norwalk, Acting Deputy Administrator for the Centers for Medicare and 

Medicaid Services (CMS) and Jeff Flick, San Francisco Regional Administrator for 

CMS will provide testimony to us today. Doug Badger, Special Assistant to the 

President for Economic Policy, will not appear. White House Counsel Alberto 

Gonzales has provided a letter of explanation on executive privilege. Tom Scully, 

former CMS Administrator, has also declined to testify, and has provided a letter 

of explanation to the Committee. Without objection, I ask that both letters be entered into the record. 

I would now like to recognize the ranking member, Mr. Rangel, for any opening 

statement he might make. 

f 

The White House 

Washington, DC 20500 

March 31, 2004 

Hon. Bill Thomas 

U.S. House of Representatives 

Committee on Ways and Means 

1102 Longworth House Office Building 

Washington, DC 20515–0548 

Dear Chairman Thomas: 

I am writing in response to your letter of yesterday inviting Doug Badger, Special 

Assistant to the President for Economic Policy, to appear before the House Committee on Ways and Means tomorrow. 

It is longstanding White House policy, applied during administrations of both parties, that members of the White House staff should decline invitations to testify at 

congressional hearings. Accordingly, on Mr. Badger’s behalf, I respectfully decline 

the invitation to him to testify before the Committee on Ways and Means. 

Sincerely, 

Alberto R. Gonzales 

Counsel to the President 

April 1, 2004 

Honorable William M. Thomas, 

Chairman 

Committee on Ways and Means 

U.S. House of Representatives 

Washington, D.C. 20515–6348 

Dear Mr. Chairman: 

Thank you for your invitation to appear at a hearing you have scheduled to begin 

at noon, Thursday, April 1. Unfortunately, for the past ten days I have been traveling, both domestically and abroad, and so I am unable to appear. However, I do 

have some comments that I believe are relevant to the Committee’s inquiry. 

I am very proud of my tenure as Administrator of the Centers for Medicare and 

Medicaid Services (CMS). Among other accomplishments, we worked feverishly with 

consumer and patient groups, as well as unions and providers, to produce the first 

health quality measures for nursing homes and home health agencies—and published them in every major paper in the country. We started on the same mission 


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with hospitals. We also greatly expanded 1 800 MEDICARE and educated millions 

of seniors about the terrific Medicare and Medicaid benefits to which they are entitled. These are but a few of the accomplishments of which I’m most proud. 

Most significantly, with the Administration’s help, you and your colleagues on the 

Committee passed an EXCELLENT Medicare bill that will stand the test of time. 

Long after the November elections are over, your collective historic achievement will 

remain. The goal of this Administration and Congress has always been to help lowincome seniors. As a result of the action of the Committee, millions of seniors will 

no longer have to choose between the drugs they need to sustain themselves and 

their rental payments. This generation of low-income seniors will receive enormous 

relief, and the next generation of seniors will be far better served by a much more 

dynamic and consumer-responsive Medicare program that will better meet the 

health needs of seniors and the disabled of all incomes. 

As we all know, there have been longstanding differences between CMS budget 

assumptions and those articulated by the Congressional Budget Office (CBO). Virtually everyone engaged in the Medicare reform effort knew that these assumptions 

differed and was also aware of multiple meetings between CMS and CBO to reconcile these differences. In fact, I testified before the Senate Finance Committee in 

June, 2003, about the differing assumptions generated by CBO and CMS, noting 

that ‘‘it’s a fundamental disagreement between our actuaries . . . there are seven 

or eight fundamental differences.‘‘ 

As Administrator of CMS, it was my responsibility to determine when and how 

the CMS Chief Actuary should respond to Congressional requests. From the very 

beginning of my tenure at CMS, Mr. Richard Foster expressed his strongly held 

view that he, as the head of the Office of Chief Actuary, was independent of me or 

anyone else within the Executive Branch. Accordingly, Mr. Foster believed that he 

was free to make decisions about when or how to respond to Congressional inquiries 

relating to CMS cost estimates generally, and, in particular, the Medicare Reform 

bill. 

Simply put, I disagreed, and there is no question whatsoever that I made it very 

clear to Mr. Foster, both directly and indirectly, that I, as his supervisor, would decide when he would communicate with Congress. It is a position that I also made 

very clear to the Republican and Democratic Leadership of the three CMS oversight 

Committees, beginning with meetings that occurred in the spring of 2001. Moreover, 

it is also worth noting that even Mr. Foster, in his testimony before this Committee 

on March 24, admitted that my position was accurate as a matter of law. He indicated during his appearance that he sought legal advice about my view and was told 

that I was correct. 

I believe that I dealt with Mr. Foster, and all other CMS employees under my 

supervision, openly and fairly during my entire tenure. 1 remain proud of my twenty-five years of strong, bipartisan relations with the Congress, of my personal commitment to improving health care for America’s seniors, and of the role I played in 

assisting with the passage of what I believe will prove to be an achievement of historic proportions. 

Sincerely, 

f 

Thomas A. Scully 

Mr. RANGEL. Thank you, Mr. Chairman. Even though you said 

that you had no discretion in extending the hearing, I want to 

thank you on behalf of the minority for the spirit in which you did 

extend it and know that we have your support in trying to make 

certain that the integrity of the professional staff of any administration, Republican or Democrat, is not tainted by partisanship. 

Even at the last hearing, you demonstrated by reflecting on the 

past that you have given assurances to staff that when they were 

coerced into not cooperating with Members of Congress, that you 

would support them in their effort to come forward. Having said 

that, we really think that the executive branch on this issue does 

not enjoy the executive privilege claimed today. The question is 

whether the executive branch of government actually withheld the 

information that the true cost of the Medicare bill was up to $450 

billion rather than $400 billion. 


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With the legal interpretations of executive privilege that have 

been given to us, it is clear that there has to be some conversation 

that the staff had with the President that they would believe that 

his testimony would be entitled to executive privilege. If Mr. Badger did not discuss it with the President, then, of course, there is 

no need to raise the question. If he did discuss it with the President, Members of Congress ought to know whether the President 

of the United States knew what the facts were and through his 

subservients said that we shouldn’t get that information. 

We do know that a lawyer for the Administration did indicate to 

Mr. Foster that if he shared this information with Members of Congress, that he could get fired. We do know that Mr. Scully has informed us that he talked with the President about these issues. We 

do know that Mr. Scully apparently ordered Foster to share at 

least his testimony for us to believe that you could share this information with Republicans but not with Democrats. This is a very serious issue, not just for this hearing but for the integrity of the 

U.S. House of Representatives and for this Committee. 

There are a variety of things at this time, after caucusing with 

our Members, that I will be asking you. One is to make certain 

that it is not without discretion but that you would support this inquiry until we get the answers that we need; two, that you subpoena Mr. Badger here; three, that if you see fit not to do that, that 

we should vote to be able to have him here. I just got a copy of 

Mr. Scully’s letter. I don’t know what privilege he has, but he is 

certainly a key person between the Congress, Mr. Foster, the President, and Mr. Badger, so I would hope that he, too, would be subject to a subpoena, and that at the end of the day, we would know 

whatever information was withheld, and would know it was not 

willingly withheld from the Congress. So, knowing that you have 

demonstrated in 1997 an interest in this subject, I hope that it 

would not be a minority request but would come from the Chair for 

the full Committee and, therefore, for the House. 

Chairman THOMAS. Does the gentleman wish a response? 

Mr. RANGEL. I certainly do. 

Chairman THOMAS. I thank the gentleman. The question really 

hinges on the statement the gentleman made about information 

that we need or want. The Chair is certainly concerned about information that the Chair and the Committee needs to carry out our 

legal obligation. When the desire shifts to want, it turns into a 

question of curiosity. I will tell the gentleman that the letter from 

the counsel to the President, which I believe he has a copy of, is 

very brief. It is two short paragraphs, and the operative portion of 

that, I believe, it is longstanding White House policy applied during administrations of both parties that members of the White 

House staff should decline invitations to testify at congressional 

hearings. It is true that at the time this letter is presented indicating that the executive branch wishes to exercise longstanding 

decisions regarding executive privilege, that at the same time, they 

have allowed a member of the Administration, notwithstanding the 

executive privilege, to testify. So, I don’t believe the answer is 

found in the counsel to the President’s letter based upon, of course, 

a decision that they made. They could choose to or not. 


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In Mr. Scully’s letter, which we also just received this morning, 

I notice on page 2 that Mr. Scully in his letter declining the invitation of the Committee to appear before it on this issue, in the second paragraph on page 2 says, ‘‘Moreover, it is also worth noting 

that even Mr. Foster in his testimony before this Committee on 

March 24 admitted that my position,’’ Mr. Scully’s position, ‘‘was 

accurate as a matter of law. He indicated during his appearance 

that he sought legal advice about my view and was told that I was 

correct.’’ One of the reasons I was pleased Ms. Norwalk was able 

to appear before us for questioning on this issue is that in the 

questioning by the minority Members, Mr. Foster indicated that 

Ms. Norwalk in her position at the time was the one who supplied 

the decision in regard to whether or not Mr. Scully was operating 

within his legal bounds. That, I believe, is a worthwhile area to examine. Mr. Flick was kind enough to come, and I understand now 

is the Western Regional CMS, that you had to fly out to make this 

appearance. We appreciate it. 

Mr. Rangel is right. There was a requirement under Rule XI that 

we have a second hearing, but time, place, and manner is within 

the purview of the Chair and the Chair wanted to try to respond 

in as reasonable time as possible so that we could have some continuity in front of us on this issue. Since Mr. Foster appeared to 

believe that the law allowed Mr. Scully to make the decision the 

way he did it, I believe the Committee’s concern should turn on 

whether or not that was an appropriate or legal decision, i.e., the 

need argument. If it is just because of curiosity as to who said what 

to whom, notwithstanding the fact Mr. Scully was perfectly legal 

in the decisions that he made, then the Chair would be concerned 

about simply pursuing a line of questioning on the basis of curiosity. 

So, the Chair is here to examine that difference stated very succinctly by the gentleman from New York. Is it a question of need 

or is it a question of want? The Chair stands ready to exercise the 

full legal power of the Committee if there is a need. If it is a want, 

then the Chair would have to examine the level of concern over the 

want to simply continue to inquire who said what to whom, when, 

and how, notwithstanding the fact that they had every legal right 

to make the decision that was made, and that would be the Chair’s 

position in listening to the testimony to determine whether it actually is a need of this Committee or if it is a want of some of the 

Members of the Committee. 

Mr. RANGEL. Mr. Chairman, by your actions in 1997, I think 

you have proven my position that there is a need that we have integrity with professional actuaries and that they can report the information as needed, not wanted, by the Congress. So, the significance of the legal opinion provided by Ms. Norwalk really doesn’t 

matter. Lawyers can be wrong, and if this person was threatened 

that you could be fired when they had a legal obligation to inform 

the Congress, you can dismiss that. Now comes the question, who 

told the lawyer, who told Mr. Scully that he was authorized to 

threaten the person who had the legal right to tell us the information we wanted? Of course, when Mr. Badger, who was involved in 

these conversations, refuses to come to testify exercising executive 

privilege, then what he is saying is, or implying, is that it was the 


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President that said that you cannot divulge the discussion that we 

had. 

I would like to say, in concluding my arguments here, that there 

are so many examples of the executive, not just Ms. Condoleezza 

Rice, but in the last Administration, Erskine Bowles, Chief of Staff 

of the President, McLaughley, Podesta, Ruff, Nolan, Quinn, all 

counsel to the President, assistants to the President, 45 top-rank 

Clinton people testified under oath. So, we don’t want to get into 

the argument as to the rights of executive privilege. The one question I am asking you, I guess, is that before I ask for a vote on the 

issue, are you prepared to exercise your discretion as the Chairman 

of this distinguished Committee to subpoena Mr. Badger to testify? 

Chairman THOMAS. Would the gentleman yield once again? 

Mr. RANGEL. Yes. Sure. 

Chairman THOMAS. I thank the gentleman. As an admitted 

non-attorney, the Chair is examining not narrow legal points but 

broader fundamental constitutional points. The legislative powers 

derive from Article I. The executive power is derived from Article 

II. There has been a long and colorful legal history of the ability 

of those who derive their constitutional powers from Article I being 

able to require those who draw their powers from Article II to do 

things that those who draw their powers from Article I want them 

to do. There are those who draw their powers from Article II who 

have a long and colorful history of trying to get those who draw 

their powers from Article I to do what those in Article II want 

them to do, and all of it is refereed by those who derive their constitutional powers from Article III. 

Again, the Chair would consider entertaining what I consider to 

be a significant power not exercised by this Committee in the time 

of this Chairman’s tenure. If we are in pursuit of a legal need, if, 

in fact, Mr. Scully was operating outside the legal bounds in telling 

someone under his jurisdiction that the information was information that the executive branch could choose to share or not share, 

rather than the way the gentleman from New York stated that we 

had a legal or constitutional right to the information, notwithstanding the Article II provisions which gives rise to the executive 

privilege, if there was a violation of the law, the Chair stands 

ready to use whatever tools necessary to get to the bottom of the 

violation of the law. If it is a question of style in terms of Administration or someone who is frustrated because they aren’t an independent operator within an administrative hierarchy, that, then, I 

don’t think reaches the level of the need for a subpoena of testimony. 

We have people in front of us who were directly, intimately, and 

first-person involved in shaping the decisions and the opinions that 

Mr. Foster exercised at the last hearing. If, in fact, there is a comfort level on the part of the Committee that Mr. Scully exercised 

the decisions he made well within the law, then the need question, 

the Chair believes, has been answered. The want question is something that very often doesn’t get fulfilled, but the Chair doesn’t believe that the powers under Article I extend to simply whims and 

wants fulfilled using what I consider to be a powerful legal tool. 

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lowed. The Chair is not ready to go to any lengths to satisfy someone’s whim or curiosity. 

Mr. MCCRERY. Mr. Chairman. 

Mr. RANGEL. Mr. Chairman, I concur with the direction in 

which the Chair is going in terms of determining whether he is satisfied there is a need to exercise the awesome power of the subpoena. I have been advised that my ability to call the question for 

a subpoena has to be at the beginning of a hearing, and further, 

that we have to have a quorum for that to happen. So, while you 

are searching for the need, I don’t want to lose my rights as a 

Member to be able to raise the motion. If you can give some type 

of assurances that the motion to request the subpoena for witnesses and the fact that it would be done in a timely manner when 

we have a quorum, I have no problem with you searching for the 

need. 

Chairman THOMAS. I ask if the gentleman believes there is a 

quorum present. 

Mr. RANGEL. I would then ask—— 

Chairman THOMAS. If the gentleman wishes to exercise that 

right, the Chair would like to make the decision after he has been 

informed by virtue of the testimony of the witnesses. 

Mr. RANGEL. I am saying I have no problem with that as long 

as you also indicate that I reserve the right to raise the motion 

without violating the House rules which gives me the right to do 

it—— 

Chairman THOMAS. I tell the gentleman the Chair would be 

somewhat concerned that we may, in fact, lose a quorum and the 

Chair would not want to deny the gentleman’s right based on a 

quorum call. So, if the gentleman feels that he wants to have the 

maximum protection of the rules, he probably ought to move the 

question now, knowing we have a quorum, and hopefully the information that is presented will support the Chair in the belief that 

this is not a legal need but a want or curiosity. 

Mr. RANGEL. In the event that I fail in my motion, I hope if the 

Chair is satisfied that it is a need and not a want for curiosity, that 

you still would have the power to exercise—— 

Chairman THOMAS. If the gentleman would yield, my search for 

the truth is not influenced by the mere exercise of democratic authority. 

Mr. MCCRERY. Mr. Chairman, would you yield? 

Chairman THOMAS. Certainly. 

Mr. MCCRERY. It seems to me—— 

Chairman THOMAS. I believe, actually, the gentleman from New 

York has the time. 

Mr. MCCRERY. He is running the clock. 

Chairman THOMAS. Notice there is no clock running. 

[Laughter.] 

Mr. MCCRERY. It seems to me when you come to the question 

of need versus want, you reference Article I of the Constitution, 

and one of the responsibilities of the House of Representatives is 

to allocate money. We were given the power to appropriate. In 

order to appropriate on behalf of the American people, we have to 

have the best information available. It seems to me that it is not 

a want on our part, it is to establish a precedent here about whethVerDate Aug 31 2005 07:20 Jan 27, 2006 Jkt 023797 PO 00000 Frm 00092 Fmt 6633 Sfmt 6602 E:\HR\OC\23797.XXX 23797

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er or not we are entitled to the information that is being developed 

in the government by Federal employees as we carry out our role 

of oversight. That is what the question here, our need for it, is. It 

is not to find out the exact number or anything else. It is to find 

out what is there so that we can make a reasoned judgment. We 

very often take varying opinions about what the number is and ignore one of them and go with another one. That is not the issue 

here. The issue is whether we can be barred from knowing that a 

competent professional has created a model that gives him a number which is at major variance with what was put before us. We 

were told $400 million—$400 billion, and then we find out that 

$534 billion was floating around. That is almost—well, I don’t 

know. I am not going to give a percentage. It is a big difference. 

I think that that is why we need—we could have argued that. We 

would have had a big argument in here if we had known that other 

number. 

Chairman THOMAS. Well, we had one. 

Mr. RANGEL. I yield to the gentleman from Texas. 

Mr. DOGGETT. Thank you. 

Chairman THOMAS. Does he want an answer, or was that a 

statement? 

Mr. RANGEL. I yield to the Chair to respond. 

Chairman THOMAS. I thank the gentleman for yielding. What 

the gentleman from Washington is asking for was not available because he was looking for facts. What was available was an estimate 

based upon assumptions which, frankly, when Mr. Foster was in 

front of us, were challenged by a number of Members of the Committee, especially, as I recall, the gentlewoman from Connecticut, 

the Chair of the Subcommittee on Health in terms of the take-up 

rates. In addition to that, Mr. Foster’s talents are not unique nor 

is his model unique. There are others who carry out those various 

functions. The desire of Congress to get the best information can 

be provided from a number of sources. If the only factual source 

was a member of the Administration, in determining a legal decision, the Chair would then be looking at the question of subpoenaing the individual who had the fact which Congress desperately needed. 

I do not believe the attempt to subpoena someone to find out if 

they were within their legal rights to indicate in an administrative 

hierarchy that an individual was not free to exercise whatever 

judgment they felt free to exercise absent supervision reaches that 

level. The gentleman’s point is, people who make decisions either 

had the legal authority or didn’t have the legal authority to make 

them. It is not whether you liked his style in doing it. That 

wouldn’t raise it to a level of subpoena. What we have in front of 

us is an ability to determine whether or not Mr. Scully operated 

under the law. That would be the point at which the Chair would 

make the decision of exercising the subpoena, and the decision of 

calling it need or want was not the Chair’s. It was framed that way 

by the Ranking Member from New York, and the Chair thanks the 

gentleman for once again yielding. 

Mr. RANGEL. I yield to the gentleman from Texas. 

Mr. DOGGETT. There appear to be two different individuals 

here and two different situations. As I understand with reference 


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to Mr. Badger, the Condoleezza Rice of health care policy at the 

White House, as we learned last week, it may be that since they 

are stonewalling that the subpoena is the only route. With reference to Mr. Scully, as I read his letter, and he, of course, does 

not enjoy any executive privilege concerning his conversations with 

the President, but Mr. Scully is not refusing to come, as I understand it. He has simply said that he is tired today. He says, ‘‘I have 

been traveling these past 10 days.’’ Whether we interfered with his 

nap time or whatever might be the case, perhaps it is just a matter 

short of a subpoena of simply rescheduling at a time when he is 

more well-rested and my inquiry would be whether the Chair, perhaps short of going to the extreme of a subpoena, could simply continue this hearing to a time when Mr. Scully is well rested and 

could come and tell us about his conversations with the President 

and others on this very important matter. 

Mr. RANGEL. I yield to the Chair. 

Chairman THOMAS. I thank the gentleman for yielding, and his 

time is nearly expired. I tell the gentleman from Texas that trying 

to screen through what I assume to be somewhat facetious remarks 

that the Chair especially is concerned about issuing a subpoena 

against a private citizen. Dealing with individuals who are carrying 

out functions of office under the law is one question, but now simply to find out, as the gentleman characterized, who said what to 

whom and when, and compelling them to appear before this Committee when what they did was legal is an extension of the power 

of this Committee that I believe would verge on abuse of the power. 

The gentleman declined the invitation which the minority has 

under Rule XI to extend the hearing. The Chair has complied with 

that in what I believe was the most efficacious time, place, and 

manner of response. We have before us two individuals who have 

direct personal knowledge of decisions that affected Mr. Scully and 

affected Mr. Foster, and it seems to me that that ought to be something that we would listen to if at the end of the testimony and 

the questioning period, if there is—it is clear that he operated 

under the law in exercising his decision, then again, I think it reverts to a manner of style. I am quite sure that Mr. Scully’s style 

doesn’t meet the level of desired stylistic behavior that either the 

gentleman from Washington or the gentleman from Texas would 

prefer. That does not trigger, in the Chair’s opinion, a need to issue 

a subpoena. That is yet to be determined based upon the testimony 

and the questions that lie before this second half of the hearing on 

the Trustees’ Report. 

Mr. DOGGETT. Mr. Chairman, I am not asking about issuing a 

subpoena to Mr. Scully. I am just asking if the Chair is declining 

to extend an invitation to him to come at a time that is more convenient to Mr. Scully to be here, since he is the actor and the person involved rather than one of his assistants. 

Chairman THOMAS. Might I respond? 

Mr. RANGEL. Yes. I yield to the Chair to respond. 

Chairman THOMAS. In looking at the nearly expired time of the 

Ranking Member, I tell the gentleman that the minority has requested an extension of the hearing under Rule XI. That extension 

has been granted. The gentleman now seeks to figure out a way to 

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ation of a continuation. The Chair’s reading of Mr. Scully’s letter 

is he ain’t coming. 

Mr. RANGEL. Mr. Chairman, in order to protect my right in 

being timely in raising the motions to subpoena both Mr. Scully 

and Mr. Badger, I, under House Rule I (1)(2)(k)(6), I move that the 

Committee issue a subpoena to a witness, Special Assistant to the 

President for Economic Policy, Doug Badger, to testify before the 

Committee on Ways and Means as soon as possible at a mutually 

agreeable time following the upcoming district work period on the 

subject of cost estimates on the Medicare prescription bill passed 

by the Congress in 2003 and to provide the Committee by at least 

5 days prior to the hearing with documents relevant to this subject. 

Mr. MCCRERY. Mr. Chairman. 

Chairman THOMAS. The gentleman from Louisiana. 

Mr. MCCRERY. Mr. Chairman, I move to table the motion of the 

gentleman from New York. 

Chairman THOMAS. Motion to table is before us. It is not debatable. 

Mr. RANGEL. There is not a debate on that? 

Chairman THOMAS. It is not debatable on his second. If the 

gentleman from Louisiana—— 

Mr. LEVIN. Are we going to shut off debate on this? 

Mr. RANGEL. Yes. 

Chairman THOMAS. Can the Chair finish his statement? In an 

attempt to try to create and maintain comity, notwithstanding the 

gentleman from Louisiana’s parliamentary privilege, on a procedural motion, which is not debatable, the underlying motion is. So, 

the Chair will recognize for a brief period of time the gentleman 

from Michigan with what the Chair will call a timely request, notwithstanding it came after the motion, to discuss briefly his concerns about the motion. 

Mr. LEVIN. Would the Chairman yield? 

Chairman THOMAS. The gentleman from Michigan. 

Mr. KLECZKA. It seems that other Members also want to talk 

about the motion. Is the Chairman only restricting the debate on 

the motion to the gentleman from Michigan? 

Chairman THOMAS. The Chair indicated that in an attempt to 

maintain comity, the Chair would allow the gentleman from Michigan, notwithstanding the fact that the motion to table was timely 

presented and there is no debate on that motion. If the gentleman 

from Wisconsin indicates that every Member of the minority is 

going to debate this, notwithstanding—— 

Mr. KLECZKA. Well, I am not saying every Member. I am saying more than one Member would possibly like to be heard on the 

motion. 

Chairman THOMAS. The Chair has indicated his willingness to 

offer comity because the gentleman from Michigan intervened, not 

timely, but the Chair is willing to entertain that request. If the 

gentleman from Wisconsin wishes to push his point that the Chair 

is not following parliamentary procedure because the motion to 

table was timely presented, the Chair will move to the vote on the 

motion to table. 


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Mr. KLECZKA. So, that is a threat, that if I insist on talking on 

the motion, then Sandy Levin from Michigan doesn’t talk? That 

is—— 

Chairman THOMAS. I tell the gentleman it is not a threat. It 

is an attempt by the Chair to follow parliamentary procedure. 

Mr. KLECZKA. That is not comity, it is comedy. 

Chairman THOMAS. The Committee has before it the motion to 

table the gentleman from New York’s motion, and all those in favor 

of tabling—— 

Mr. LEVIN. Mr. Chairman—— 

Chairman THOMAS. Say aye. 

[Chorus of ayes.] 

Mr. LEVIN. Mr. Chairman—— 

Chairman THOMAS. Those opposed? 

[Chorus of noes.] 

Mr. LEVIN. Mr. Chairman, you recognized me. 

Chairman THOMAS. In the opinion of the Chair, the motion to 

table has passed and the motion—— 

Mr. RANGEL. I ask for a recorded vote. 

Chairman THOMAS. From the gentleman from New York is laid 

upon the table. 

Mr. RANGEL. I ask for a roll call. 

Chairman THOMAS. A sufficient number of hands. The clerk 

will call the roll on the motion to table the gentleman from New 

York’s motion on the subpoena. 

Mr. LEVIN. Mr. Chairman, point of information before the vote. 

I thought you were going to recognize me. 

Chairman THOMAS. I tell the gentleman the Chair was willing 

as a matter of comity to recognize the gentleman, notwithstanding 

he did not have parliamentary standing. It was clear that other 

Members on his side of the aisle were not willing to allow the 

Chair to exercise that comity, and so the Chair was more than willing to exercise the parliamentary right to move to the procedural 

motion. 

Mr. LEVIN. Mr. Chairman, I just want to say that you recognized the gentleman from Louisiana. I don’t think you were surprised by the motion he was going to submit. There is no way you 

are going to shut down discussion of these issues, and you can do 

it now through this device—— 

Mr. MCCRERY. Mr. Chairman, I do not believe that this discussion is in order in the middle of a—— 

Chairman THOMAS. It is not in order—— 

Mr. LEVIN. It isn’t in order—— 

Chairman THOMAS. It is not in order. A point of information is 

not the correct reference, but the Chair was allowing the gentleman to express himself in an attempt to continue to maintain 

comity. 

Mr. LEVIN. Comity, then let us have discussion of the motion. 

Chairman THOMAS. I tell the gentleman that the Chair attempted to do that, notwithstanding the timely notice of the motion 

to table. There were Members on his side of the aisle that indicated 

that the attempt to provide comity by the Chair was not sufficient, 

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tary procedure and the Chair is concerned about that and believes 

we should. 

Mr. LEVIN. Stonewalling won’t work. We will state our—— 

Chairman THOMAS. I tell the gentleman we are in the middle 

of a roll call—— 

Mr. RAMSTAD. Regular order. 

Chairman THOMAS. The Chair will indicate that he has continued to provide a reasonable opportunity, and since a roll call by a 

show of hands was called by the minority, the rules indicate that 

we should now have that roll call. 

Mr. RANGEL. I ask unanimous consent that the gentleman from 

Michigan be allowed to express himself. 

Chairman THOMAS. I tell the gentleman that it is not in order 

during a roll call for anyone to express their position and the clerk 

will call the roll. 

Mr. RANGEL. It was my understanding that unanimous consent—— 

Mr. RAMSTAD. Regular order. 

Mr. RANGEL. Suspend all of the rules. I have asked for unanimous consent—— 

Chairman THOMAS. Not in the middle of a roll call. 

CLERK. Mr. Crane? 

Mr. CRANE. Aye. 

CLERK. Mr. Crane votes aye. Mr. Shaw? 

Mr. SHAW. Aye. 

CLERK. Mr. Shaw votes aye. Mrs. Johnson? 

Mrs. JOHNSON. Aye. 

CLERK. Mrs. Johnson votes aye. Mr. Houghton? 

Mr. HOUGHTON. Aye. 

CLERK. Mr. Houghton votes aye. Mr. Herger? 

Mr. HERGER. Aye. 

CLERK. Mr. Herger votes aye. Mr. McCrery? 

Mr. MCCRERY. Aye. 

CLERK. Mr. McCrery votes aye. Mr. Camp? 

Mr. CAMP. Aye. 

CLERK. Mr. Camp votes aye. Mr. Ramstad? 

Mr. RAMSTAD. Aye. 

CLERK. Mr. Ramstad votes aye. Mr. Nussle? 

Mr. NUSSLE. Aye. 

CLERK. Mr. Nussle votes aye. Mr. Johnson? 

Mr. JOHNSON. Aye. 

CLERK. Mr. Johnson votes aye. Ms. Dunn? 

[No response.] 

Mr. Collins? 

Mr. COLLINS. Yes. 

CLERK. Mr. Collins votes yes. Mr. Portman? 

Mr. PORTMAN. Aye. 

CLERK. Mr. Portman votes aye. Mr. English? 

Mr. ENGLISH. Aye. 

CLERK. Mr. English votes aye. Mr. Hayworth? 

Mr. HAYWORTH. Aye. 

CLERK. Mr. Hayworth votes aye. Mr. Weller? 

Mr. WELLER. Aye. 

CLERK. Mr. Weller votes aye. Mr. Hulshof? 


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[No response.] 

Mr. McInnis. Mr. McInnis? 

Mr. MCINNIS. Yes. 

CLERK. Mr. McInnis votes yes. Mr. Lewis of Kentucky? 

Mr. LEWIS OF KENTUCKY. Aye. 

CLERK. Mr. Lewis of Kentucky votes aye. Mr. Foley? 

Mr. FOLEY. Aye. 

CLERK. Mr. Foley votes aye. Mr. Brady? 

Mr. BRADY. Aye. 

CLERK. Mr. Brady votes aye. Mr. Ryan? 

Mr. RYAN. Aye. 

CLERK. Mr. Ryan votes aye. Mr. Cantor? 

Mr. CANTOR. Aye. 

CLERK. Mr. Cantor votes aye. Mr. Rangel? 

Mr. RANGEL. No. 

CLERK. Mr. Rangel votes no. Mr. Stark? 

Mr. STARK. No. 

CLERK. Mr. Stark votes no. Mr. Matsui? 

Mr. MATSUI. No. 

CLERK. Mr. Matsui votes no. Mr. Levin? 

Mr. LEVIN. No. 

CLERK. Mr. Levin votes no. Mr. Cardin? 

Mr. CARDIN. No. 

CLERK. Mr. Cardin votes no. Mr. McDermott? 

Mr. MCDERMOTT. No. 

CLERK. Mr. McDermott votes no. Mr. Kleczka? 

Mr. KLECZKA. No. 

CLERK. Mr. Kleczka votes no. Mr. Lewis of Georgia? 

Mr. LEWIS OF GEORGIA. No. 

CLERK. Mr. Lewis of Georgia votes no. Mr. Neal? 

Mr. NEAL. No. 

CLERK. Mr. Neal votes no. Mr. McNulty? 

Mr. MCNULTY. No. 

CLERK. Mr. McNulty votes no. Mr. Jefferson? 

[No response.] 

Mr. Tanner? 

Mr. TANNER. No. 

CLERK. Mr. Tanner votes no. Mr. Becerra. Mr. Becerra? 

Mr. BECERRA. Pass. 

CLERK. Mr. Becerra passes. Mr. Doggett? 

Mr. DOGGETT. No. 

CLERK. Mr. Doggett votes no. Mr. Pomeroy? 

Mr. POMEROY. No. 

CLERK. Mr. Pomeroy votes no. Mr. Sandlin? 

Mr. SANDLIN. No. 

CLERK. Mr. Sandlin votes no. Ms. Tubbs Jones? Ms. Tubbs 

Jones? 

Ms. TUBBS JONES. No. 

CLERK. Ms. Tubbs Jones votes no. Ms. Dunn? 

Ms. DUNN. Yes. 

CLERK. Ms. Dunn votes yes. Mr. Hulshof? 

[No response.] 

Mr. Jefferson? 

[No response.] 


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Mr. Becerra? 

Mr. BECERRA. No. 

CLERK. Mr. Becerra votes no. Mr. Thomas? 

Chairman THOMAS. Yes. 

CLERK. Mr. Thomas votes yes. 

Chairman THOMAS. The clerk will announce the vote. 

CLERK. Twenty-three aye, 16 no. 

Chairman THOMAS. There being 23 ayes and 16 noes, the motion of the gentleman from New York, Mr. Rangel, is laid on the 

table. 

Mr. RANGEL. Mr. Chairman, under House Rule I (1)(2)(k)(6), I 

move that the Committee issue a subpoena to a witness, former 

CMS Administrator, Mr. Thomas Scully, to testify before the Committee on Ways and Means as soon as possible following the upcoming district work period on the subject of cost estimates on the 

Medicare prescription drug bill passed by the Congress in 2003 and 

to provide the Committee with all the documents relevant to this 

subject at least 5 days prior to the hearing—— 

Mr. KLECZKA. Mr. Chairman, on the motion—— 

Mr. RANGEL. In support of this motion, Mr. Chair, let me say 

this. I think that you have extended yourself beyond the mandatory 

discretion decisions in this Committee. I think you have done it because you feel as a Member of this Committee and certainly as the 

Chairman that what we do today may in the future dictate how we 

are treated by Administration officials, and to that extent, I apologize to the witnesses that are here patiently waiting—— 

Mr. KLECZKA. Will Mr. Rangel yield? 

Mr. LEVIN. Mr. Chairman. 

Mr. KLECZKA. Mr. Rangel, would you yield, please? 

Mr. LEVIN. Mr. Chairman. 

Chairman THOMAS. Prior to the Chair—— 

Mr. RANGEL. I just wanted to complete my thought, and that 

is while we recognize that the majority has the right to table this 

motion, I hope they recognize that the damage they are doing is 

not to me as the Ranking Member or to the minority, but to this 

Committee as we seek to determine at this hearing what right the 

executive branch has to deny us information which we are entitled 

to know. Furthermore, though the decisions may appear to be partisan, I would hope that the majority Members would recognize 

that this Committee has a longstanding reputation of integrity and 

of protecting our jurisdiction and making certain that our constitutional rights are not abused. 

Mr. LEVIN. Mr. Rangel, would you yield? 

Mr. RANGEL. I yield to Mr. Levin, who was denied the opportunity—— 

Mr. MCCRERY. Point of order, Mr. Chairman. 

Mr. RANGEL. To express himself. 

Mr. MCCRERY. Point of order, Mr. Chairman. 

Chairman THOMAS. The gentleman from Louisiana will state 

the point of order. 

Mr. MCCRERY. The gentleman was recognized for a motion. 

Chairman THOMAS. That is correct. 

Mr. MCCRERY. He cannot yield time during offering a motion 

to the Committee. 


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Chairman THOMAS. That is correct. The gentleman was recognized for the purpose of offering a motion. He has offered a motion—— 

Mr. RANGEL. I move the—— 

Chairman THOMAS. He has explained to a degree the motion, 

and the Chair would indicate that all we are trying to do is get the 

facts before we make a decision. The gentleman from New York 

has every right to make a decision before he gets the facts, and 

that is evidenced by the motion that he has offered. 

Mr. LEVIN. Mr. Chairman—— 

Chairman THOMAS. The Chair would be willing for the purpose 

of comity to allow the gentleman from Michigan to make some brief 

points, notwithstanding the fact that the Chair has the ability to 

recognize except for the structure of in the middle of a roll call 

vote, and then the Chair would not exercise the recognition but 

rather to carry out the roll call vote and that is what occurred on 

the last request by the gentleman from New York. 

Mr. RANGEL. Well, I recognize—— 

Chairman THOMAS. The Chair would attempt to allow a reasonable dialog by recognizing the gentleman from Michigan for any 

comments he may wish to make on the motion by the gentleman 

from New York requesting a subpoena for the former Administrator. The gentleman from Michigan? 

Mr. LEVIN. Thank you, Mr. Chairman. We need to understand 

what the question is, what the issue is. It was not when Mr. Foster 

was here who was right, whether it was $400 billion that was as 

stated when we were voting on this or $530-some billion that was 

the actuarial figure. That, there was disagreement. The issue isn’t 

legally whether Mr. Scully had the right to tell Mr. Foster he could 

not tell people. That is an issue. The main issue is who knew about 

the actuarial figure? Why wasn’t it disclosed in a timely fashion? 

That is the issue. We voted in this Congress on major legislation 

while there was information that was hidden from us by some in 

the Administration and we have a right to know why and who 

knew. That is the issue. To say this question, therefore, is a matter 

of curiosity or a whim or a style is absolutely incorrect. It is the 

knowledge that is the right of the public and the need for there to 

be truthfulness. I said when Mr. Foster was here that there was 

a cover-up of this information and we want to know how high up 

the cover-up went. Mr. Scully says something by his letter. We 

have a right to have him right here in front of us, under oath, to 

ask him what he knew, whom he talked to within the White House, 

under what circumstances and why he did not tell us, the representatives of the people, the information that he knew. That is 

the issue. So, anybody here can stonewall, and I am sorry my other 

colleagues cannot speak. They will do it when they inquire of these 

witnesses. We will find a way, because as we have found out on 

other occasions, and I close with this, there is no way to hide the 

truth. I just want to say, I have great respect for Mr. McCrery. For 

you to move to table and quash discussion of this motion is not 

going to work. We are going to get this information out one way 

or the other. 

Mr. RANGEL. I move the question, Mr. Chairman. 

Mr. MCCRERY. Mr. Chairman. 


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Chairman THOMAS. The Chair recognizes the gentleman from 

Louisiana. 

Mr. MCCRERY. Mr. Chairman, before I make the motion to 

table, I would just refer—— 

Mr. RANGEL. A point of order, Mr. Chairman. 

Mr. MCCRERY. Everyone to Mr. Scully’s letter—— 

Mr. RANGEL. Point of order. 

Mr. MCCRERY. Which points out clearly—— 

Mr. RANGEL. Is recognized—— 

Mr. MCCRERY. That information was available—— 

Chairman THOMAS. The gentleman from Louisiana will suspend. The Chair recognized the gentleman from Louisiana. He did 

not recognize the gentleman from Louisiana for the purpose of offering a motion. He recognized the gentleman from Louisiana. 

Mr. RANGEL. I’ll withdraw my point of order. 

Chairman THOMAS. The time is the gentleman from Louisiana’s. Would the gentleman like to continue—— 

Mr. MCCRERY. Thank you, Mr. Chairman. I think the Chairman has been quite generous with allowing the minority to explore 

this question during Mr. Rangel’s presentation early on in this 

hearing and then by allowing Mr. McDermott and Mr. Levin. 

Frankly, we could argue about this all day long and some may conclude that that is, in fact, the point of the minority. The facts are 

that there was information available to the public which would 

have led any knowledgeable person to conclude that OMB’s ultimate assumptions and ultimate estimate of the cost of the Medicare bill were going to be higher than CBO’s. Mr. Scully, in fact, 

according to his letter, testified before the Senate Finance Committee to the fact that his assumptions were different. If you had 

looked at those assumptions and been familiar with how the estimate on the bill was going to work, you would know that it was 

going to be higher. You add to that the fact that the minority repeatedly introduced, supported, talked about Medicare bills that 

cost a lot more than either one of the CBO’s estimate or the OMB 

estimate and I think you see this debate for what it is. 

Mr. NEAL. Would the gentleman yield? 

Mr. MCCRERY. I will be glad to yield. 

Mr. NEAL. Mr. McCrery, is it your position that the Medicare 

prescription drug bill would have passed in the House of Representatives had the true figure been known? 

Mr. MCCRERY. My position is that many more Democrats, according to their rhetoric, would have voted for a bill with a much 

higher price tag. 

[Laughter. 

Well, then I suppose you were just introducing things out of folly 

that cost twice as much. I mean, come on, get real here. 

Chairman THOMAS. The gentleman from Louisiana has the 

time. 

Mr. MCCRERY. Let us just get down to what this is all about. 

This is a lot about politics. We understand that. Everybody in the 

audience understands that. We have spent enough time on it. We 

have two witnesses here at the behest of the minority operating 

fully under the rules of the House, which we recognize, to extend 

a hearing which we called to try to explore this subject. Under your 


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rights in the minority, we now have extended the hearing and two 

of the witnesses which you invited to appear are here and we are 

waiting to hear their testimony. Enough of the politics. Let’s get on 

with the hearing and then you can all make your remarks—— 

Mr. SHAW. Mr. Chairman. 

Mr. MCCRERY. To try to get that out. I move—— 

Mr. SHAW. Mr. Chairman. 

Chairman THOMAS. I tell the gentleman from Louisiana—— 

Mr. MCCRERY. I move to table the motion of the gentleman 

from New York. 

Chairman THOMAS. In the opinion of the Chair, the gentleman 

from Louisiana is debating the point, probably would be considered 

a preface to his motion, and since the Chair had recognized the 

gentleman from New York and the gentleman from Michigan, two 

Members of the minority, the Chair wishes to recognize a second 

Member of the majority, and the Chair recognizes the gentleman 

from Florida, Mr. Shaw. 

Mr. SHAW. Mr. Chairman, I move to table the motion of the gentleman from New York. 

Chairman THOMAS. The gentleman from Florida moves to table 

the motion of the gentleman from New York. All those in favor? 

[Chorus of ayes.] 

Those opposed? 

[Chorus of noes.] 

In the opinion of the Chair, the ayes have it. 

Mr. LEVIN. Roll call. 

Chairman THOMAS. The Chair will recognize the right of the 

minority to call the roll, with the understanding that we would like 

to have the roll call without attempts to gain recognition during 

the roll call. Will the clerk call the roll? 

CLERK. Mr. Crane. 

Mr. CRANE. Aye. 

CLERK. Mr. Crane votes aye. Mr. Shaw? 

Mr. SHAW. Aye. 

CLERK. Mr. Shaw votes aye. Mrs. Johnson? 

Mrs. JOHNSON. Aye. 

CLERK. Mrs. Johnson votes aye. Mr. Houghton? 

[No response.] 

Mr. Herger? 

Mr. HERGER. Aye. 

CLERK. Mr. Herger votes aye. Mr. McCrery? 

Mr. MCCRERY. Aye. 

CLERK. Mr. McCrery votes aye. Mr. Camp? 

Mr. CAMP. Aye. 

CLERK. Mr. Camp votes aye. Mr. Ramstad? 

Mr. RAMSTAD. Aye. 

CLERK. Mr. Ramstad votes aye. Mr. Nussle? 

Mr. NUSSLE. Aye. 

CLERK. Mr. Nussle votes aye. Mr. Johnson? 

Mr. JOHNSON. Aye. 

CLERK. Mr. Johnson votes aye. Ms. Dunn? 

Ms. DUNN. Aye. 

CLERK. Ms. Dunn votes aye. Mr. Collins? 

Mr. COLLINS. Yes. 


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CLERK. Mr. Collins votes yes. Mr. Portman? 

Mr. PORTMAN. Aye. 

CLERK. Mr. Portman votes aye. Mr. English? 

Mr. ENGLISH. Aye. 

CLERK. Mr. English votes aye. Mr. Hayworth? 

Mr. HAYWORTH. Aye. 

CLERK. Mr. Hayworth votes aye. Mr. Weller? 

Mr. WELLER. Aye. 

CLERK. Mr. Weller votes aye. Mr. Hulshof? 

[No response.] 

Mr. McInnis? 

Mr. MCINNIS. Yes. 

CLERK. Mr. McInnis votes yes. Mr. Lewis of Kentucky? 

Mr. LEWIS OF KENTUCKY. Aye. 

CLERK. Mr. Lewis of Kentucky votes aye. Mr. Foley? 

Mr. FOLEY. Aye. 

CLERK. Mr. Foley votes aye. Mr. Brady? 

Mr. BRADY. Aye. 

CLERK. Mr. Brady votes aye. Mr. Ryan? 

Mr. RYAN. Aye. 

CLERK. Mr. Ryan votes aye. Mr. Cantor? 

Mr. CANTOR. Aye. 

CLERK. Mr. Cantor votes aye. Mr. Rangel. Mr. Rangel? 

Mr. RANGEL. No. 

CLERK. Mr. Rangel votes no. Mr. Stark? 

Mr. STARK. No. 

CLERK. Mr. Stark votes no. Mr. Matsui? 

Mr. MATSUI. No. 

CLERK. Mr. Matsui votes no. Mr. Levin? 

Mr. LEVIN. No. 

CLERK. Mr. Levin votes no. Mr. Cardin? 

Mr. CARDIN. No. 

CLERK. Mr. Cardin votes no. Mr. McDermott? 

Mr. MCDERMOTT. No. 

CLERK. Mr. McDermott votes no. Mr. Kleczka? 

Mr. KLECZKA. No. 

CLERK. Mr. Kleczka votes no. Mr. Lewis of Georgia? 

Mr. LEWIS OF GEORGIA. No. 

CLERK. Mr. Lewis of Georgia votes no. Mr. Neal? 

Mr. NEAL. No. 

CLERK. Mr. Neal votes no. Mr. McNulty? 

Mr. MCNULTY. No. 

CLERK. Mr. McNulty votes no. Mr. Jefferson? 

[No response.] 

Mr. Tanner? 

Mr. TANNER. No. 

CLERK. Mr. Tanner votes no. Mr. Becerra? 

Mr. BECERRA. No. 

CLERK. Mr. Becerra votes no. Mr. Doggett? 

Mr. DOGGETT. No. 

CLERK. Mr. Doggett votes no. Mr. Pomeroy? 

Mr. POMEROY. No. 

CLERK. Mr. Pomeroy votes no. Mr. Sandlin? 

Mr. SANDLIN. No. 


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CLERK. Mr. Sandlin votes no. Ms. Tubbs Jones? 

Ms. TUBBS JONES. No. 

CLERK. Ms. Tubbs Jones votes no. Mr. Houghton? 

Mr. HOUGHTON. Aye. 

CLERK. Mr. Houghton votes aye. Mr. Hulshof? 

[No response.] 

Mr. Jefferson? 

[No response.] 

Mr. Thomas? 

Chairman THOMAS. Aye. 

CLERK. Mr. Thomas votes aye. 

Chairman THOMAS. The clerk will announce the vote. 

CLERK. Twenty-three ayes, 16 no. 

Chairman THOMAS. There being 23 ayes and 16 noes, the motion of the gentleman from New York is laid upon the table. The 

Chair is prepared to allow the witnesses to begin testimony. The 

Chair will indicate that because this hearing was requested as an 

extension of the previous hearing, the Chair, to try to accommodate 

in a timely fashion, called the hearing for today at 12:00 p.m. A 

previously scheduled hearing in this room is to begin at 2:00 p.m. 

and the Chair intends not to disrupt the previously scheduled hearing, which was ordered for 2:00 p.m. The Chair will now, first of 

all, thank Ms. Norwalk and Mr. Flick for appearing before us—— 

Mr. DOGGETT. Parliamentary inquiry, Mr. Chairman. 

Chairman THOMAS. The gentleman from Texas? 

Mr. DOGGETT. Do I understand, then, that the testimony from 

the witnesses and the questions from all Members of this Committee will be limited to a total of 59 minutes or however much is 

left before 2:00 p.m.? 

Chairman THOMAS. I tell the gentleman, no, it was the 2 hours 

that we had available when the Committee began. 

Mr. DOGGETT. At this point, without the Chair having made 

any prior announcement on this topic, you may not even reach all 

the Members of this Committee and permit them a right to question. Is that my understanding? I mean, I can just count 5 minutes 

per person down here, and if everyone takes their time, some Members of the Committee will not be permitted to ask any questions. 

Chairman THOMAS. The gentleman is usually very persuasive 

and perhaps he can persuade some Members not to utilize their 

full time so he can have a chance—— 

Mr. KLECZKA. Mr. Chairman, parliamentary inquiry. 

Chairman THOMAS. The gentleman from Wisconsin. 

Mr. KLECZKA. Mr. Chairman, is it not true that the most powerful Committee in Congress, the Committee on Ways and Means, 

has other hearing rooms, that we have not only this main hearing 

room, but there are other rooms throughout the Capitol complex 

where the next hearing could be conducted? Is that not true so we 

can continue with this? 

Chairman THOMAS. I tell the gentleman, this room was chosen 

because of the importance and the number of people who are going 

to attend that hearing. It was on the schedule prior to this, scheduled for 2:00 p.m., and the Chair intends to honor the previously 

scheduled hearing. 

Mr. KLECZKA. Isn’t this the same—— 


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Chairman THOMAS. The sooner we can begin, the better we 

have—— 

Mr. KLECZKA. Isn’t this the same Committee hearing that was 

scheduled for 10:00 a.m. this morning and it never occurred at 

10:00 a.m.? 

Chairman THOMAS. No. 

Mr. KLECZKA. Are you sure? 

Chairman THOMAS. The Chair is willing to recognize the witnesses—— 

Mr. RANGEL. A parliamentary inquiry, Mr. Chairman. 

Chairman THOMAS. The gentleman from New York. 

Mr. RANGEL. Does the Chair intend to place the witnesses 

under oath? 

Chairman THOMAS. As long as the Chairman’s tenure to this 

point, no witness has been placed under oath and the Chair would 

probably begin the inquiry as to the necessity of the oath to inquire 

both of Ms. Norwalk and Mr. Flick, are you currently employed by 

the Federal Government? 

Ms. NORWALK. Yes. 

Mr. FLICK. Yes. 

Chairman THOMAS. I believe the answer to that would be yes. 

In the procedure of being employed, were you required to swear or 

affirm an oath of allegiance to the United States and its Constitution? 

Ms. NORWALK. Yes. 

Mr. FLICK. Yes. 

Chairman THOMAS. The answer is yes. Beyond that, your goal 

here is to pursue the truth? The Chair feels comfortable, I will tell 

the gentleman from New York, that based upon their prior swearing or affirming and their current role, that the Chair believes the 

testimony by these people who voluntarily have appeared before 

the Committee who had a choice not to appear will be truthful 

without the need to push it to an oath-taking procedure. 

Mr. RANGEL. Further parliamentary inquiry, Mr. Chairman. In 

view of the fact that the Chair has now interpreted the need or 

lack of need for an oath before congressional Committees, would it 

be in order that the Ranking Member be allowed to have a motion 

that the witnesses be placed under oath? 

Chairman THOMAS. I tell the gentleman that the decision that 

the Chair made was based upon the same one in terms of need or 

wants. If the gentleman is questioning witnesses who voluntarily 

appeared before us who have in their current place of employment 

sworn an oath of allegiance to the Constitution, the Chair finds virtually no difference between the position of the witness and the position of every Member on this Congress. We, too, are employed by 

the Federal Government, and we, too, have taken an oath of office. 

If the gentleman believes that the witnesses, or the concern over 

the witnesses rises to the point of requiring an oath, the Chair may 

be prepared for every Member of the Committee to rise and also 

reaffirm their oath, so that we are all on the same level of concern 

about our willingness to take oaths and the voracity of our statements. 

Mr. RANGEL. Well, I exclude the Members of this Committee, 

but I move that the witnesses be placed under oath. 


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Mr. MCCRERY. Mr. Chairman. 

Chairman THOMAS. The gentleman from Louisiana? 

Mr. MCCRERY. Knowing that it is a violation of Federal law to 

knowingly tell a falsehood to a government official, I think it would 

be duplicative, unnecessary, and perhaps even diminish the possibility in the future of getting good witnesses to appear before the 

Committee. I therefore move to table the motion of the gentleman 

from New York. 

Chairman THOMAS. The gentleman from Louisiana has moved 

to table the gentleman from New York’s—— 

Mr. DOGGETT. Mr. Chairman, parliamentary—— 

Chairman THOMAS. Motion. All those in favor, say aye. 

[Chorus of ayes.] 

Those opposed? 

[Chorus of noes.] 

In the opinion of the Chair, the ayes have it. The ayes have it 

and the motion is tabled. 

Mr. RANGEL. Record vote. 

Chairman THOMAS. A sufficient number of hands. The clerk 

will call the roll. 

CLERK. Mr. Crane? 

Mr. CRANE. Aye. 

CLERK. Mr. Crane votes aye. Mr. Shaw? 

Mr. SHAW. Aye. 

CLERK. Mr. Shaw votes aye. Mrs. Johnson? 

Mrs. JOHNSON. Aye. 

CLERK. Mrs. Johnson votes aye. Mr. Houghton? 

Mr. HOUGHTON. Aye. 

CLERK. Mr. Houghton votes aye. Mr. Herger? 

Mr. HERGER. Aye. 

CLERK. Mr. Herger votes aye. Mr. McCrery? 

Mr. MCCRERY. Aye. 

CLERK. Mr. McCrery votes aye. Mr. Camp? 

Mr. CAMP. Aye. 

CLERK. Mr. Camp votes aye. Mr. Ramstad? 

Mr. RAMSTAD. Aye. 

CLERK. Mr. Ramstad votes aye. Mr. Nussle? 

Mr. NUSSLE. Aye. 

CLERK. Mr. Nussle votes aye. Mr. Johnson? 

Mr. JOHNSON. Aye. 

CLERK. Mr. Johnson votes aye. Ms. Dunn? 

[No response.] 

Mr. Collins? 

Mr. COLLINS. Yes. 

CLERK. Mr. Collins votes yes. Mr. Portman? 

Mr. PORTMAN. Aye. 

CLERK. Mr. Portman votes aye. Mr. English? 

Mr. ENGLISH. Aye. 

CLERK. Mr. English votes aye. Mr. Hayworth? 

Mr. HAYWORTH. Aye. 

CLERK. Mr. Hayworth votes aye. Mr. Weller? 

Mr. WELLER. Aye. 

CLERK. Mr. Weller votes aye. Mr. Hulshof? 

[No response.] 


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Mr. McInnis? 

[No response.] 

Mr. Lewis of Kentucky? 

Mr. LEWIS OF KENTUCKY. Aye. 

CLERK. Mr. Lewis of Kentucky votes aye. Mr. Foley? 

[No response.] 

Mr. Brady? 

Mr. BRADY. Aye. 

CLERK. Mr. Brady votes aye. Mr. Ryan? 

Mr. RYAN. Aye. 

CLERK. Mr. Ryan votes aye. Mr. Cantor? 

Mr. CANTOR. Aye. 

CLERK. Mr. Cantor votes aye. Mr. Rangel. Mr. Rangel? 

Mr. RANGEL. No. 

CLERK. Mr. Rangel votes no. Mr. Stark? 

Mr. STARK. No. 

CLERK. Mr. Stark votes no. Mr. Matsui? 

Mr. MATSUI. No. 

CLERK. Mr. Matsui votes no. Mr. Levin? 

Mr. LEVIN. No. 

CLERK. Mr. Levin votes no. Mr. Cardin? 

Mr. CARDIN. No. 

CLERK. Mr. Cardin votes no. Mr. McDermott? 

Mr. MCDERMOTT. No. 

CLERK. Mr. McDermott votes no. Mr. Kleczka? 

Mr. KLECZKA. No. 

CLERK. Mr. Kleczka votes no. Mr. Lewis of Georgia? 

Mr. LEWIS OF GEORGIA. No. 

CLERK. Mr. Lewis of Georgia votes no. Mr. Neal? 

Mr. NEAL. No. 

CLERK. Mr. Neal votes no. Mr. McNulty? 

Mr. MCNULTY. No. 

CLERK. Mr. McNulty votes no. Mr. Jefferson? 

[No response.] 

Mr. Tanner? 

Mr. TANNER. No. 

CLERK. Mr. Tanner votes no. Mr. Becerra? 

Mr. BECERRA. No. 

CLERK. Mr. Becerra votes no. Mr. Doggett? 

Mr. DOGGETT. No. 

CLERK. Mr. Doggett votes no. Mr. Pomeroy? 

Mr. POMEROY. No. 

CLERK. Mr. Pomeroy votes no. Mr. Sandlin? 

Mr. SANDLIN. No. 

CLERK. Mr. Sandlin votes no. Ms. Tubbs Jones? 

Ms. TUBBS JONES. No. 

CLERK. Ms. Tubbs Jones votes no. Ms. Dunn? 

[No response.] 

Mr. Hulshof? 

[No response.] 

Mr. McInnis? 

[No response.] 

Mr. Foley? 

[No response.] 


hmoore on PROD1PC68 with HMRPT
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Mr. Jefferson? 

[No response.] 

Mr. Thomas? 

Chairman THOMAS. Aye. 

CLERK. Mr. Thomas votes aye. 

Chairman THOMAS. The clerk will announce the vote. 

CLERK. Twenty aye, 16 no. 

Chairman THOMAS. There being 20 ayes, 16 noes, the motion 

of the gentleman from New York is laid upon the table. The Chair 

is prepared to allow the witnesses to present testimony at this 

point. 

Mr. DOGGETT. Point of order, Mr. Chairman. 

Chairman THOMAS. The Chair—— 

Mr. DOGGETT. I have a point of order. 

Chairman THOMAS. Point of order? 

Mr. DOGGETT. Yes, sir. 

Chairman THOMAS. The gentleman from Texas on his point of 

order. 

Mr. DOGGETT. Solely. Mr. Chairman, House Rule XI, Clause 

(2)(j)(2), provides that, quote, ‘‘each Committee shall apply the 5- 

minute rule during the questioning of witnesses in any hearing 

until such time as each Member of the Committee who so desires 

has had an opportunity to question each witness.’’ House Rule XI, 

Clause (2)(j)(1) is the rule of the House to which the Chairman referred that gives him no discretion to deny this hearing. My point 

of order is that the Chair, by his ruling limiting the time of this 

hearing to less than an hour and denying me and other Members 

of the Committee an opportunity to ask any questions is in violation of both House Rule XI, Clause (2)(j)(2) and House Rule XI, 

Clause (2)(j)(1), since he has converted this appearance of a hearing 

into a total sham hearing, denying the minority their right to ask 

questions of these witnesses. I would urge my point of order. 

Chairman THOMAS. I tell the gentleman that my ability to 

reach the level the gentleman from Texas described these hearings 

pales in comparison. The Chair will indicate that there are many 

occasions in which hearings that are called have not been successful in exhausting the opportunities of each and every Member. The 

Chair indicates the time, place, and manner, oftentimes controls 

the circumstances we find ourselves in. The Chair would like to 

start the process because the gentleman from Texas has come to 

a conclusion without the process ever yet having been allowed to 

begin. He has reached a conclusion which is not yet warranted nor 

can the point of order be made since the hearing has not ended and 

every Member has not had their chances for the 5 minutes. So, if 

the gentleman wants to continue to attempt to make his point so 

that, in fact, there is no time for any Member, the Chair would consider that dilatory and, therefore, would rule that the Chair would 

not recognize the gentleman to make a point of order—— 

Mr. DOGGETT. The Chair has no choice—— 

Chairman THOMAS. When the point of order might be timely—— 

Mr. DOGGETT. To recognize me to make a point of order—— 

Chairman THOMAS. The Chair indicates—— 

Mr. DOGGETT. I urge my point of order, Mr. Chairman. 


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Chairman THOMAS. The Chair indicates the gentleman from 

Texas’s inquiry is not timely as a point of order. 

Mr. DOGGETT. Mr. Chairman, I urge my point of order—— 

Chairman THOMAS. It is not timely. The Chair recognizes—— 

Mr. DOGGETT. If you want to overrule it, fine, but otherwise, 

I want to appeal this ruling of the Chair. 

Chairman THOMAS. The Chair recognizes the witnesses—— 

Mr. DOGGETT. Mr. Chairman, I urge my point of order and I 

urge it now. I want a—— 

Chairman THOMAS. I tell the gentleman—— 

Mr. DOGGETT. Is there a ruling on the order? 

Chairman THOMAS. I tell the gentleman that the Chair recognized the gentleman for a point of order. The point of order—— 

Mr. DOGGETT. The point of order has been made and the Chair 

refuses to rule on it—— 

Chairman THOMAS. The gentleman from Texas made—— 

Mr. DOGGETT. Since the Chair is acting totally improperly—— 

Chairman THOMAS. The gentleman’s point was not timely. 

Mr. DOGGETT. Mr. Chairman, I urge my point of order. 

Chairman THOMAS. The point was not timely and the gentleman is now—— 

Mr. DOGGETT. I take that as a denial—— 

Chairman THOMAS. Carrying out dilatory tactics. 

Mr. DOGGETT. I appeal the ruling of the Chair and I urge—— 

Mr. MCCRERY. Mr. Chairman. 

Chairman THOMAS. I tell the gentleman—— 

Mr. DOGGETT. I ask for a vote on—— 

Chairman THOMAS. He was not recognized—— 

Mr. DOGGETT. The ruling of the Chair. 

Chairman THOMAS. For that purpose. 

Mr. DOGGETT. Mr. Chairman, you have no discretion when a 

point of order is made but to entertain that point of order. If you 

are denying the point of order as not timely, then please do so and 

I will appeal respectfully your ruling and show you the respect to 

which you are entitled. I am entitled to a ruling on my point of 

order. It is privileged and you do not have the discretion to ignore 

it. 

Chairman THOMAS. I tell the gentleman—— 

Mr. MCCRERY. Mr. Chairman. 

Chairman THOMAS. I tell the gentleman on his point of order, 

which was a conclusion based upon Rule XI, that every Member 

gets to exercise the 5-minute rule, has not yet ripened. 

Mr. DOGGETT. I urge my point of order. If—— 

Chairman THOMAS. No Member has been denied the right to 

question. Therefore, Rule XI is not now in violation and the gentleman’s point of order is not timely. 

Mr. DOGGETT. Mr. Chairman, you have denied my point of 

order as not ripe and I appeal the ruling of the Chair, respectfully. 

Chairman THOMAS. The gentleman was recognized for a point 

of order. The Chair is telling the gentleman his point of order is 

not ripe—— 

Mr. DOGGETT. The Chair is denying—— 

Chairman THOMAS. Therefore there is no ability to appeal the 

decision of the Chair. 


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Mr. DOGGETT. My point of order while attempting to avoid 

making a ruling which he knows will be appealed. I appeal the ruling of the Chair denying my point of order to have a fair opportunity to ask these witnesses questions. 

Chairman THOMAS. I tell the gentleman that he will have a fair 

opportunity, and until he is denied, his point of order is not timely. 

Mr. DOGGETT. Mr. Chairman, I appeal the ruling of the Chair. 

The Chair has ruled that the point of order is not ripe. That is a 

denial of the point of order as the Chair clearly knows. 

Chairman THOMAS. I will accept the gentleman’s argument that 

the Chair’s ruling of the fact that not every Member has been able 

to exercise their 5 minutes as a point of order is not timely. The 

Chair believes that point of order is not timely. The gentleman 

from Texas believes it is and, therefore, appeals the decision of the 

Chair. 

Mr. DOGGETT. Thank you, Mr. Chairman. 

Mr. MCCRERY. Mr. Chairman, I don’t believe that is debatable, 

but just in case it is, I move to table the motion of the gentleman 

to appeal the ruling of the Chair. 

Chairman THOMAS. The gentleman’s move to table the motion 

is timely and appropriate. All those in favor of tabling the motion, 

say aye. 

[Chorus of ayes.] 

Those opposed? 

[Chorus of noes.] 

In the opinion of the Chair, the ayes have it—— 

Mr. DOGGETT. Mr. Chairman, record vote. 

Chairman THOMAS. The motion to appeal the decision of the 

Chair is tabled. 

Mr. DOGGETT. Record vote. 

Chairman THOMAS. A sufficient number for a record vote. The 

clerk will call the roll. 

CLERK. Mr. Crane? 

Mr. CRANE. Aye. 

CLERK. Mr. Crane votes aye. Mr. Shaw? 

Mr. SHAW. Aye. 

CLERK. Mr. Shaw votes aye. Mrs. Johnson? 

Mrs. JOHNSON. Aye. 

CLERK. Mrs. Johnson votes aye. Mr. Houghton? 

Mr. HOUGHTON. Aye. 

CLERK. Mr. Houghton votes aye. Mr. Herger? 

Mr. HERGER. Aye. 

CLERK. Mr. Herger votes aye. Mr. McCrery? 

Mr. MCCRERY. Aye. 

CLERK. Mr. McCrery votes aye. Mr. Camp? 

Mr. CAMP. Aye. 

CLERK. Mr. Camp votes aye. Mr. Ramstad? 

Mr. RAMSTAD. Aye. 

CLERK. Mr. Ramstad votes aye. Mr. Nussle? 

Mr. NUSSLE. Aye. 

CLERK. Mr. Nussle votes aye. Mr. Johnson? 

Mr. JOHNSON. Aye. 

CLERK. Mr. Johnson votes aye. Ms. Dunn? 

[No response.] 


hmoore on PROD1PC68 with HMRPT
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Mr. Collins? 

Mr. COLLINS. Yes. 

CLERK. Mr. Collins votes yes. Mr. Portman? 

Mr. PORTMAN. Aye. 

CLERK. Mr. Portman votes aye. Mr. English? 

Mr. ENGLISH. Aye. 

CLERK. Mr. English votes aye. Mr. Hayworth? 

Mr. HAYWORTH. Aye. 

CLERK. Mr. Hayworth votes aye. Mr. Weller? 

Mr. WELLER. Aye. 

CLERK. Mr. Weller votes aye. Mr. Hulshof? 

[No response.] 

Mr. McInnis? 

[No response.] 

Mr. Lewis of Kentucky? Mr. Lewis of Kentucky? Mr. Lewis? 

Mr. LEWIS OF KENTUCKY. Aye. 

CLERK. Mr. Lewis of Kentucky votes aye. Mr. Foley? 

[No response.] 

Mr. Brady? 

Mr. BRADY. Aye. 

CLERK. Mr. Brady votes aye. Mr. Ryan? 

Mr. RYAN. Aye. 

CLERK. Mr. Ryan votes aye. Mr. Cantor? 

Mr. CANTOR. Aye. 

CLERK. Mr. Cantor votes aye. Mr. Rangel. Mr. Rangel? 

Mr. RANGEL. No. 

CLERK. Mr. Rangel votes no. Mr. Stark? 

Mr. STARK. No. 

CLERK. Mr. Stark votes no. Mr. Matsui? 

Mr. MATSUI. No. 

CLERK. Mr. Matsui votes no. Mr. Levin? 

Mr. LEVIN. No. 

CLERK. Mr. Levin votes no. Mr. Cardin? 

Mr. CARDIN. No. 

CLERK. Mr. Cardin votes no. Mr. McDermott? 

Mr. MCDERMOTT. No. 

CLERK. Mr. McDermott votes no. Mr. Kleczka? 

Mr. KLECZKA. No. 

CLERK. Mr. Kleczka votes no. Mr. Lewis of Georgia? 

Mr. LEWIS OF GEORGIA. No. 

CLERK. Mr. Lewis of Georgia votes no. Mr. Neal? 

Mr. NEAL. No. 

CLERK. Mr. Neal votes no. Mr. McNulty? 

Mr. MCNULTY. No. 

CLERK. Mr. McNulty votes no. Mr. Jefferson? 

[No response.] 

Mr. Tanner? 

Mr. TANNER. No. 

CLERK. Mr. Tanner votes no. Mr. Becerra? 

Mr. BECERRA. No. 

CLERK. Mr. Becerra votes no. Mr. Doggett? 

Mr. DOGGETT. No. 

CLERK. Mr. Doggett votes no. Mr. Pomeroy? 

Mr. POMEROY. No. 


hmoore on PROD1PC68 with HMRPT
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CLERK. Mr. Pomeroy votes no. Mr. Sandlin? 

Mr. SANDLIN. No. 

CLERK. Mr. Sandlin votes no. Ms. Tubbs Jones? 

Ms. TUBBS JONES. No. 

CLERK. Ms. Tubbs Jones votes no. Ms. Dunn? 

[No response.] 

Mr. Hulshof? 

[No response.] 

Mr. McInnis? 

[No response.] 

Mr. Foley? 

[No response.] 

Mr. Jefferson? 

[No response.] 

Mr. Thomas? 

Chairman THOMAS. Aye. 

CLERK. Mr. Thomas votes aye. 

Mr. MCINNIS. Mr. Chairman, how am I recorded? 

Chairman THOMAS. How is the gentleman from Colorado recorded? 

CLERK. Mr. McInnis is not recorded. 

Mr. MCINNIS. Yes. 

CLERK. Mr. McInnis votes yes. 

Ms. DUNN. Mr. Chairman, how am I recorded? 

Chairman THOMAS. How is the gentlewoman from Washington 

recorded? 

CLERK. Ms. Dunn is not recorded. 

Ms. DUNN. Aye. 

CLERK. Ms. Dunn votes aye. 

Chairman THOMAS. The clerk will announce the vote. 

CLERK. Twenty-two aye, 16 no. 

Chairman THOMAS. There being 22 ayes and 16 noes, the motion of the gentleman from Texas is laid on the table. The Chair 

is ready to allow the witnesses to present their testimony. The 

Chair would indicate that if you have any written testimony, it will 

be made a part of the record and you can inform us in any way 

you see fit in the time that you have. I would begin with Mr. Flick 

and, again, would have Ms. Norwalk. 

Mr. Flick. 

STATEMENT OF JEFF FLICK, SAN FRANCISCO REGIONAL ADMINISTRATOR, CENTERS FOR MEDICARE AND MEDICAID 

SERVICES, SAN FRANCISCO, CALIFORNIA 

Mr. FLICK. Mr. Chairman, Members of the Committee on Ways 

and Means, good afternoon. My name is Jeff Flick. I am currently 

serving as the Regional Administrator for the CMS in the San 

Francisco Regional Office. I am a career civil servant and my employment with CMS began in January 2001. Shortly after starting 

work in Washington, D.C., I was detailed into the Office of the Acting Administrator. I worked for a couple of months as a Special Assistant to the Acting Administrator, Michael McMullen. I was 

working in the Office of the Administrator when Tom Scully was 

sworn in as the CMS Administrator in May 2001. I continued my 

work as Special Assistant, working directly with Administrator 


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Scully until September 2003, when I assumed my current role as 

Regional Administrator in San Francisco. 

I am pleased to be with you today and I assume that you are interested in talking with me regarding an e-mail I sent to Rick Foster in June of 2003 in my capacity as Special Assistant to the Administrator. As Special Assistant to the Administrator, I was largely involved in the day-to-day work of the Administrator. Some people would describe this as keeping the trains running. I tried to 

make sure that the schedules made sense, appropriate briefing materials were prepared, and so forth, the important work of the 

agency was accomplished, and yes, I tried to keep the Administrator on schedule. I was rarely, if ever, involved in the details of 

the work. In fact, it was more than a full-time job simply keeping 

up with the daily work flow in the Office of the Administrator. In 

June of 2003, I prepared an e-mail that I sent to Rick Foster. The 

e-mail was sent to Rick after I had at least one conversation with 

Rick and after I had several conversations with the Administrator. 

The e-mail focused on a request from a minority staff member for 

an impact analysis on a specific provision in the bill. As I recall, 

the Administrator was very concerned about the analysis and the 

request for the analysis. 

This particular request caught his attention in a way others did 

not. He suggested to me that at least some of the information that 

was requested involved provisions that were no longer in the bill. 

He asked me to contact Rick Foster, requesting that Mr. Foster 

work up the numbers and send them directly to the Administrator. 

The Administrator was very clear, ‘‘Have Rick send them to me 

prior to sharing with anyone else.’’ The Administrator indicated to 

me that he would probably be talking with Rick about this and he 

emphasized to me that Rick should not release the numbers until 

I, the Administrator, have a chance to review the information and 

until I, Tom Scully, explicitly talk with Rick authorizing the release. 

Chairman THOMAS. Mr. Flick, let me indicate that normally we 

would allow witnesses to finish their statements, but we are under 

the 5-minute rule. The red light has come on. If you could wrap it 

up in a sentence or two so no one could accuse you of unduly prolonging your testimony. 

Mr. FLICK. I see. I relayed the message to Rick through a phone 

call. I was not convinced that Rick would comply with the request. 

Later that day, I retrieved an e-mail and gave it to the Administrator. Administrator Scully authorized the release of some information but asked me to contact Rick a second time, confirming the 

initial instructions, and the Administrator emphasized that if Rick 

did not adhere to these instructions, it would be outright insubordination and insubordination carries serious consequences. The 

language in this statement is not exact. I am recalling this from 

memory to the best of my ability. The actual language may have 

been more colorful than the text. I was not able to reach Rick by 

telephone. I comprised an e-mail to communicate the message that 

the Administrator asked me to convey to Rick. I believe the e-mail 

I sent to Rick Foster was an accurate reflection of the message I 

was instructed by Administrator Scully to convey. Thank you, Mr. 

Chairman. This concludes my remarks. 


hmoore on PROD1PC68 with HMRPT
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[The prepared statement of Mr. Flick follows:] 

Statement of Jeff Flick, San Francisco Regional Administrator, Centers for 

Medicare and Medicaid Services, San Francisco, California 

Mr. Chairman, members of the Ways and Means Committee. Good afternoon—my 

name is Jeff Flick. I am currently serving as the Regional Administrator for the 

Centers for Medicare & Medicaid Services (CMS) in the San Francisco Regional Office. I am a career civil servant and my employment with CMS began in January 

2001. Shortly after starting work in Washington, D.C., I was detailed into the Office 

of the Acting Administrator. I worked for a couple of months as a special assistant 

to the Acting Administrator, Michael McMullan. I was working in the Office of the 

Administrator when Tom Scully was sworn in as the CMS Administrator in May 

2001. I continued my work as a special assistant, working directly with Administrator Scully until September 2003, when I assumed my current role as Regional 

Administrator in San Francisco. 

I am pleased to be with you today and I assume that you are interested in talking 

with me regarding an email I sent to Rick Foster in June of 2003 in my capacity 

as special assistant to the Administrator. As special assistant to the Administrator, 

I was largely involved in the day-to-day work of the Administrator. Some people 

would describe this as keeping the trains running. I tried to make sure the schedules made sense, appropriate briefing materials were prepared, etc. The important 

work of the Agency was accomplished and, yes, I tried to keep the Administrator 

on schedule. I was rarely, if ever, involved in the details of the work. In fact, it was 

more than full-time job simply keeping up with the daily workflow in the Office of 

the Administrator. 

In June of 2003, I prepared an email that I sent to Rick Foster. This email was 

sent to Rick after I had at least one conversation with Rick, and after I had several 

conversations with the Administrator. The email focused on a request from a minority staff member for an impact analysis on a specific provision in the bill. As I recall, 

the Administrator was very concerned about the analysis, and the request for the 

analysis. This particular request caught his attention in a way others did not. He 

suggested to me that at least some of the information that was requested involved 

provisions that were no longer in the bill. He asked me to contact Rick Foster—requesting that Mr. Foster work up the numbers and send them directly to the Administrator. The Administrator was very clear—have Rick send them to me prior 

to sharing with anyone else. The Administrator indicated to me that he would probably be talking with Rick about this and he emphasized to me that Rick should not 

release the numbers until I (the Administrator) have a chance to review the information, and until I (Tom Scully) explicitly talk with Rick authorizing the release. 

I relayed this message to Rick (through a phone call) but I was not convinced that 

Rick would comply with the request of the Administrator. Rick sent an email directly to the Administrator after my conversation with Rick, asking that he (Rick) 

be allowed to release the information immediately. I retrieved the email and gave 

it to the Administrator. Administrator Scully authorized the release of some information but he asked me to contact Rick a second time, confirming the initial instructions, and the Administrator emphasized that if Rick does not adhere to these 

instructions, it is outright insubordination and insubordination carries serious consequences. The language in this statement is not exact. I am recalling this from 

memory to the best of my ability and the actual language may have been more 

colorful than the text in this statement. 

I was not able to reach Rick by telephone and I comprised an email to communicate the message that the Administrator asked me to convey to Rick Foster. I believe the email I sent to Rick Foster was an accurate reflection of the message I 

was instructed by Administrator Scully to convey. I believe I shared a copy of the 

email with Administrator Scully. 

Thank you, Mr. Chairman; this concludes my remarks. 

f 

Chairman THOMAS. I thank the gentleman. 

Ms. Norwalk. 


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STATEMENT OF LESLIE V. NORWALK, ACTING DEPUTY ADMINISTRATOR AND CHIEF OPERATING OFFICER, CENTERS FOR 

MEDICARE AND MEDICAID SERVICES 

Ms. NORWALK. Good afternoon, Chairman Thomas and Members of the Committee on Ways and Means. My name is Leslie Norwalk. Since November 2001, I have officially served as Counselor 

to the Administrator at the CMS. For the past year, I have been 

the Acting Deputy Administrator and Chief Operating Officer of 

CMS. In this role, I direct the day-to-day operations of CMS. On 

March 25, 2004, Richard Foster, CMS’s Chief Actuary, mentioned 

my name and referred to me as a, quote, ‘‘top attorney at CMS,’’ 

unquote, in his testimony before this Committee. I understand that 

the Committee is interested in hearing my recollection about a 

meeting I had with Mr. Foster and any advice I gave him. On June 

13, 2003, Mr. Foster came to see me to discuss a difficult situation 

and to ask for my help to resolve it. While Mr. Foster sought my 

advice, I believe that it was in my capacity as Deputy and Chief 

Operating Officer and not in my capacity as a lawyer. I believe this 

because my interactions with Mr. Foster in 2003 focused on helping 

him manage the incredible workload that the Office of the Actuary 

had from a CMS management perspective. Nevertheless, in discussing his concerns last August, I gave Mr. Foster my opinion 

about the interplay of the Constitution, the Balanced Budget Act 

1997, and its accompanying report language. 

During our June 13 meeting, Mr. Foster described the history of 

his office in providing actuarial support to Congress, including the 

history surrounding the Balanced Budget Act 1997 legislation and 

the accompanying report language, as well as his professional responsibilities. Under these authorities, he believed that he had an 

obligation to report his actuarial analysis to Congress without informing the Administrator of the specifics of the congressional request or his analysis in response to the request. He believed that 

providing this information to the Administrator compromised his 

ability to function as he believed the Chief Actuary should. During 

the meeting, I reviewed the statutory language, which states, 

quote, ‘‘The Chief Actuary shall be appointed by and in direct line 

of authority to the Administrator,’’ end quote. The accompanying 

Conference Report language highlights the importance of actuarial 

analysis in drafting legislation. However, neither the statutory text 

nor Conference Report language on its face requires the Office of 

the Actuary to report to or provide internal executive branch information to Congress. While Mr. Foster noted the emphasis in the 

Conference Report of sharing information with Congress, I explained to him that the Conference Report language does not require sharing information. In any event, the Conference Report 

language does not have the force of law. 

I further explained that a statutory requirement that would 

mandate the Chief Actuary report directly to Congress would raise 

serious separation of powers issues under the Constitution. While 

I am an attorney, my interpretation and advice was provided in my 

capacity as the Acting Deputy Administrator and Chief Operating 

Officer, not as an attorney for the agency. Of course, on a daily 

basis, all executive branch officials interpret the statutes under 

which we operate. Furthermore, I have consulted with the attorVerDate Aug 31 2005 07:20 Jan 27, 2006 Jkt 023797 PO 00000 Frm 00115 Fmt 6633 Sfmt 6602 E:\HR\OC\23797.XXX 23797

hmoore on PROD1PC68 with HMRPT
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neys in the HHS Office of General Counsel and they have informed 

me that they concur in my interpretation. Mr. Foster is a highly 

regarded actuary, and consequently, it is not surprising that Members of Congress and the executive branch are interested in his actuarial analysis of items impacting the Medicare, Medicaid, and 

State Children’s Health Insurance Program, programs. Finally, I 

had no knowledge of any analysis by the Office of the Actuary that 

scored a complete bill until I returned from Christmas vacation 

this January. It is my understanding that the only request that 

was delayed was an impact analysis of an early version of the premium support provision. Thank you. 

[The prepared statement of Ms. Norwalk follows:] 

Statement of Leslie V. Norwalk, Acting Deputy Administrator, 

Centers for Medicare and Medicaid Services 

Good afternoon. Chairman Thomas and Members of the Ways and Means Committee, my name is Leslie Norwalk. Since November 2001, I have officially served 

as Counselor to the Administrator at the Centers for Medicare & Medicaid Services. 

For the past year, I have been the Acting Deputy Administrator and Chief Operating Officer of CMS. In this role I direct the day-to-day operations of CMS. 

On March 25, 2004, Richard Foster, CMS’s Chief Actuary, mentioned my name 

and referred to me as a ‘‘top attorney at CMS’’ in his testimony before this Committee. I understand that the Committee is interested in hearing my recollection 

about a meeting I had with Mr. Foster and any advice I gave him. 

On June 13, 2003, Mr. Foster came to see me to discuss a difficult situation for 

him and to ask for my help to resolve it. While Mr. Foster sought my advice, I believe that it was in my capacity as the Deputy and Chief Operating Officer, and not 

in my capacity as a lawyer. I believe this because my interactions with Mr. Foster 

in 2003 focused on helping him manage the incredible workload that the Office of 

the Actuary had from a CMS-management perspective. Nevertheless, in discussing 

his concerns last June, I gave Mr. Foster my opinion about the interplay of the Constitution, the Balanced Budget Act of 1997 and its accompanying report language. 

During our June 13th meeting, Mr. Foster described the history of his office in 

providing actuarial support to Congress, including the history surrounding the Balanced Budget Act of 1997 legislation and accompanying Conference Report language 

and his professional responsibilities. Under these authorities, he believed that he 

had an obligation to report his actuarial analysis to Congress, without informing the 

Administrator of the specifics of the Congressional request or his analysis in response to the request. He believed that providing this information to the Administrator compromised his ability to function as he believed the Chief Actuary should. 

During the meeting, I reviewed the statutory language, which states, ‘‘The Chief 

Actuary shall be appointed by, and in direct line of authority to, the Administrator. . . .’’ 42 U.S.C. § 1317(b)(1). The accompanying Conference Report language 

highlights the importance of actuarial analysis in drafting legislation. However, neither the statutory text nor Conference Report language on its face requires the Office of the Actuary to report to or provide internal Executive Branch information to 

Congress. While Mr. Foster noted the emphasis in the Conference Report of sharing 

information with Congress, I explained to him that the Conference Report language 

does not require sharing information. In any event, the Conference Report language 

does not have the force of law. I further explained that a statutory requirement that 

would mandate the Chief Actuary report directly to Congress would raise serious 

Separation of Powers issues under the Constitution. While I am an attorney, my interpretation and advice was provided in my capacity as Acting Deputy Administrator and Chief Operating Officer for CMS, and not as an attorney for the agency. 

Of course, on a daily basis all Executive Branch officials interpret the statutes 

under which we operate. Furthermore, I have consulted with the attorneys in the 

HHS Office of General Counsel, and they have informed me that they concur in my 

interpretation. 

Mr. Foster is a very highly regarded actuary, and consequently, it is not surprising that Members of Congress and the Executive Branch are interested in his 

actuarial analysis of items impacting the Medicare, Medicaid and SCHIP programs. 

Finally, I had no knowledge of any analysis by the Office of the Actuary that 

scored a complete bill until I returned from my Christmas vacation this January. 


hmoore on PROD1PC68 with HMRPT
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It is my understanding that the only request that was delayed was an impact analysis of an early version of the premium support provision. 

Thank you. 

f 

Chairman THOMAS. Thank you very much, Ms. Norwalk. My 

understanding, Mr. Flick, and the gist of your comments are that 

you believe you carried out a ministerial function in not being able 

to physically communicate to Mr. Foster, but by e-mailing him the 

Administrator’s position on the issue, and that basically was the 

point, is that correct? 

Mr. FLICK. That is correct, Mr. Chairman. 

Chairman THOMAS. Ms. Norwalk, you indicated that although 

Rick Foster in his testimony before us indicated that he saw you 

as an attorney and you were providing advice to him, he accepted 

your interpretation and you believe you were providing an understanding of the administrative relationship under the law. I happen 

to believe that your interpretation of report language is accurate. 

It does not carry the force of law. I am pleased to know that you 

have double-checked with the people who have on their door the official title of making sure that the legal decisions are correct, and 

they have provided you with a comfort level that the decision you 

made in your capacity as an administrator was, in fact, the correct 

one had you performed an attorney-client relationship with Mr. 

Foster. So, what Mr. Scully did in indicating that he did not want 

information to be released, which, in fact, probably would not have 

enlightened Congress as much as confused Congress, because my 

understanding is that with the statement that Mr. Flick made, 

some of the assumptions that were currently in the model at that 

time of CMS were positions that had been abandoned by the Congress and, therefore, any cost estimate based on positions abandoned by the Congress would not be accurate and that that was 

one of the primary motives that Mr. Scully chose not to allow Rick 

under his administrative capacity to provide that information to 

Congress. Is that correct? 

Ms. NORWALK. That is correct; I did receive counsel from the 

Office of General Counsel and my understanding is consistent with 

your explanation of why it was that Mr. Scully did not want the 

information to be provided at that particular time. 

Chairman THOMAS. Does the gentleman from New York wish 

to inquire? 

Mr. RANGEL. Let me once again thank you for your patience. 

I apologize for the process. Counselor, are you familiar with Public 

Law 108–199 that, one, prohibits or prevents or attempts—it sanctions the payment of salary of any officer or employee of the Federal Government who prohibits or prevents or attempts to threaten 

to prohibit or prevent any other office or employee of the Federal 

Government from having any direct oral or written communication 

or contact with any Member, Committee, or Subcommittee of the 

Congress in connection with any matter pertaining to the employment of such other office or employee and pertaining to the department or agency of such office or employee, or in any way, irrespective of whether such communication or contact is initiated of each 

other office or employee of response or the request or inquiry of 


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such Member, committee, or Subcommittee. This is included in 

every appropriation bill and provides sanctions against anyone that 

interferes from a Federal employee giving information to the Congress. Are you familiar with that? 

Ms. NORWALK. I don’t believe I have ever read that particular 

language before. 

Mr. RANGEL. Do you believe that the Actuary professionally had 

an obligation to respond to any Member of the Congress within the 

four corners of their professional, non-political position, such as the 

one that was held by Mr. Foster? 

Ms. NORWALK. Well, I believe that the statutory language requires that the Chief Actuary is in direct line of authority to the 

Administrator, so—— 

Mr. RANGEL. I don’t think that is responsive, Counselor. 

Ms. NORWALK. Can you restate the question, please? 

Mr. RANGEL. Do you believe that the Actuary had a professional responsibility, that was really outlined by the language inserted by Chairman Thomas, that he had a professional responsibility to respond to inquiries made by Members of Congress? 

Ms. NORWALK. I believe that Mr. Foster believes he has a professional responsibility, but I do not believe that he has a legal obligation to report. 

Mr. RANGEL. So, were you informed by Mr. Scully that the language that was in the Budget Committee report had no legal significance? 

Ms. NORWALK. I am sorry? 

Mr. RANGEL. The language which was put into the report as related to the Actuary is to provide prompt, impartial, authoritative, 

and confidential information with respect to the effects of legislative proposals, are you familiar with the language which is in 

there? 

Ms. NORWALK. I am familiar with the language in the Conference Report, yes. 

Mr. RANGEL. Do you believe it has no legal merit? 

Ms. NORWALK. I believe that it is instructive and helpful, but 

it does not have any legal weight. 

Mr. RANGEL. Therefore, you believe that Mr. Foster had no 

legal or professional obligation to respond to Members of Congress? 

Ms. NORWALK. I believe that Mr. Foster had no legal obligation 

to report to Congress. 

Mr. RANGEL. That if he did report to Congress, you believe that 

Mr. Scully could have fired this public servant, this civil servant? 

Ms. NORWALK. I have not looked into whether or not. One 

other thing that is actually in the Balanced Budget Act statutory 

language is that he may only be removed for cause, or for good 

cause. I have not ever explored whether or not—— 

Mr. RANGEL. Do you believe that if he had given the information requested by Members of Congress, that Mr. Scully would 

have had legal cause to fire him? 

Ms. NORWALK. I don’t know whether or not insubordination 

rises to good cause. 

Mr. RANGEL. Well, what advice did you give to Mr. Foster that 

allowed him to believe that you were supporting Mr. Scully and 


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that he could be fired if he shared the information that was requested by—— 

Ms. NORWALK. It was actually not a part of our discussion. Mr. 

Foster and I only discussed what he thought was his professional 

obligation and I pointed out to him that the Conference Report language and the statutory language—first of all, did not require him 

to report to Congress, and if it had, it may raise separation of powers issues. We did not discuss whether or not his actions which 

hadn’t occurred would have been—— 

Mr. RANGEL. Well, Mr. Flick, you are not an attorney, right? 

Mr. FLICK. That is correct. I am not an attorney. 

Mr. RANGEL. You said in colorful and uncolorful language that 

you thought that it would have reached a point of insubordination 

and that he could have been fired if he had given that information 

as requested? 

Mr. FLICK. Congressman, I didn’t necessarily have an opinion. 

What I was stating was what the Administrator had instructed me. 

It was the Administrator who clearly indicated that if Mr. Foster 

were to ignore clear instructions, that is outright insubordination. 

That was the Administrator. 

Mr. RANGEL. So, you were only in a position of a messenger. 

You did not know whether he had the right to do it or not. You 

were just saying that your boss told you to tell him that he is out 

of there if he did give the information. 

Mr. FLICK. That my boss, who was Administrator Scully, clearly 

indicated that if the instructions, which I believe were clear—— 

Mr. RANGEL. Okay. 

Mr. FLICK. Were ignored, that that is outright insubordination—— 

Mr. RANGEL. Did you have any discussions with anyone above 

Mr. Scully—did you discuss this or were you present when Mr. 

Scully discussed this with the Secretary, Secretary Thompson? 

Mr. FLICK. Congressman, I did not. 

Mr. RANGEL. Do you know whether or not Mr. Scully discussed 

this with the President of the United States? 

Mr. FLICK. I do not. 

Mr. RANGEL. Did you have any discussions with Mr. Scully 

where he shared with you who else in the White House he discussed this ban on Mr. Foster? 

Mr. FLICK. Mr. Congressman, I don’t recall any discussions like 

that. That is not the typical kind of discussion that I would have 

with Administrator Scully. 

Mr. RANGEL. My last question, if I may. Let me congratulate 

you on your promotion. You do good work and you earned it. Do 

you believe that it is necessary, or that there is a need for legislators to know when passing a historic Medicare bill—such as the 

one that was before us—that we know what the actuarial, what the 

executive branch, believes the cost of that bill would be? Do you believe, based on your past experience, that it is necessary that we 

have the information as relates to estimates of the costs of such 

legislation? 

Mr. FLICK. Mr. Congressman, I don’t personally have an opinion 

on that. I do know that there was a good bit of discussion about 


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a set of professional actuaries in CBO and the fact that there is another set of—— 

Mr. RANGEL. How long have you worked for the Federal Government? 

Mr. FLICK. For just over 3 years. 

Mr. RANGEL. How long have you interacted with the Congress? 

Mr. FLICK. My interaction with the Congress was not very often. 

Mr. RANGEL. So, you really don’t know what we want and what 

we need? 

Mr. FLICK. That is correct. 

Mr. RANGEL. Thank you, Mr. Chairman. 

Chairman THOMAS. Certainly. The Chair would indicate the 

gentleman consumed 7 minutes and 50 seconds. 

Mr. RANGEL. You are so kind, Mr. Chairman. I can’t tell you 

how much I feel obligated to you. 

Chairman THOMAS. Seven minutes and 56 seconds. 

Mr. RANGEL. I am obligated to you. 

Chairman THOMAS. Eight minutes. Does the gentlewoman from 

Connecticut wish to inquire? 

Mrs. JOHNSON. Thank you, Mr. Chairman. Mr. Flick, in the 

time that you worked closely with Mr. Scully, did it ever come to 

your attention that Members of the House from the Democrat side 

asked Mr. Foster for an estimate of their Medicare prescription 

drug in its entirety? 

Mr. FLICK. No, Congresswoman. That never came to my attention. 

Mrs. JOHNSON. Ms. Norwalk, you have worked with Mr. Scully 

at the top levels of running the agency that is responsible for Medicare for many, many months now, several years. Did you ever see 

a request from the Democrats or hear about a request from the 

Democrats to Mr. Foster to estimate the cost of their bill? 

Ms. NORWALK. I never saw requests or heard of a request to 

estimate the cost of an entire bill. 

Mrs. JOHNSON. You know, I just want those watching this 

hearing to understand the extraordinary hypocrisy of what is happening. Some Members have said, don’t you think it is necessary 

to know what the executive branch thinks the cost of a bill is? The 

very gentleman who just made that statement never thought it was 

necessary to know what the executive branch thought was the cost 

of their bill. Never did they make the request to CMS to cost out 

their bill, even though they brought it to the floor of the U.S. 

House of Representatives, several different complete bills, which 

we voted on. They always asked the CBO what the CBO thought 

was the cost of their bill, as did we because we are, by law, bound 

by what the CBO thought. Now, they did not think enough of Mr. 

Foster to ask for his opinion. They did not think enough of what 

the Administration thought would be the cost of their bill to ask 

for their opinion. I would have to say, I put in the record some of 

my great disagreements with Mr. Foster at the last hearing because actuaries do numbers and then they make judgments. I disagree with Mr. Foster that 99 percent of a subgroup would join a 

government program. I have never seen it happen in my 28 years 

in government. 


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So, I disagree with the judgment he made, not necessarily the 

numbers, but the judgment that proceeded them and caused the 

numbers. I disagreed with his judgment that there would be 48 

percent of people, of seniors, joining the Medicare plans when at 

their height and their most generous moment, no more than 16 did. 

I see that my time has not quite run out, but I know it will run 

out. What I want to put on the record is that we are besmirching 

the reputations of people who have served our country as administrators at great sacrifice. Mr. Scully has young children. He has a 

wife. I never saw anyone work harder. He was the very first administrator in our Nation’s history to develop health quality measures for nursing homes and publish them, health quality measures 

for home health and publish them. Don’t they care about that? 

They did not care enough about Mr. Scully’s agencies, and Mr. 

Scully’s actuaries’ cost of the bill to ask for it, but it is time to say, 

we need to move forward. We need to remember that all actuaries 

testify that the majority of seniors are going to get new benefits, 

are going to sign up for those new benefits under the new Medicare 

program, and that one-half of the retired women in America will 

have no deductibles, no premiums, $1 or $2 for generics and $3 or 

$5 for copayment for brand name drugs. If that isn’t progress, I 

don’t know what it is. I am sorry you had to sit here almost an 

hour-and-a-half while what was basically a totally partisan political process went on that rests on fundamentally a hypocritical 

view of whose numbers mattered. Thank you, Mr. Chairman. 

Chairman THOMAS. The gentlewoman consumed 4 minutes and 

30 seconds. 

Mrs. JOHNSON. I yield back the balance. 

Chairman THOMAS. Does the gentleman from California wish to 

inquire? 

Mr. STARK. Thank you, Mr. Chairman. Mr. Flick, we are talking 

generally here about estimates that Mr. Foster prepared sometime 

between May and maybe November of last year. 

Mr. FLICK. Yes, sir. 

Mr. STARK. Just so you understand what I am about to ask, I 

asked Mr. Foster if we had had your June estimate in the range 

of $550 billion, would it have been a leap of faith for us to suspect 

that H.R. 1 or S. 1 or the resultant conference bill would have been 

far higher than $400 billion, and Mr. Foster replied, I think that 

would be a reasonable conclusion. So, basically I am asserting and 

I want to know if you agree, that there were some estimates that 

might have led us to think that the total cost would be above $400 

billion. Is that a reasonable assumption to your knowledge? 

Mr. FLICK. Mr. Congressman, I don’t think I can speak specifically to your question. 

Mr. STARK. I am speaking generally, that there was some information that might have led to a higher estimate than $400 billion. 

Mr. FLICK. The only thing that I can tell you for sure that I was 

aware of, is that there were a number of impact analyses performed on specific provisions in the bill. 

Mr. STARK. In your role, and I suspect you would only know 

this of Mr. Scully, both Secretary Thompson and Mr. Scully have 

been quoted numerous times asserting that they shared information with Members or staff involved in the conference throughout 


hmoore on PROD1PC68 with HMRPT
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the year. Indeed, my distinguished colleague from Connecticut, 

Mrs. Johnson, confirmed in March in the New York Times that she 

had seen such estimates, quoting ‘‘absolutely we knew about these 

numbers,’’ but that she disagreed with the assumptions and disregarded the analysis. To your knowledge, or are you aware 

through anybody else, and I will just ask you about a series of people here, and of paper or e-mails that you may have transmitted 

to or from Administrator Scully, and whether any of these people 

might have received these estimates that were created by Mr. Foster or his staff. Would Speaker Hastert or his staff? You can just 

say yes or no unless you know that they received some information. 

Mr. FLICK. Congressman, it is my understanding that there was 

a great deal of e-mail traffic regarding estimates of the impact of 

specific provisions of the bill, and I believe some of those e-mails 

went to people other than Administrator Scully. 

Mr. STARK. Would you be aware of Speaker Hastert or his staff? 

Mr. FLICK. I am not aware of Speaker Hastert or his staff. 

Mr. STARK. Majority Leader DeLay or his staff? 

Mr. FLICK. I don’t—I am not aware. 

Mr. STARK. Chairman Thomas and our Ways and Means staff? 

Mr. FLICK. I am not aware. 

Mr. STARK. Chairman Tauzin and his staff? 

Mr. FLICK. I am not—— 

Mr. STARK. Do any of these names—— 

Mr. FLICK. Congressman, I am not aware of any e-mail traffic 

going directly to Members of Congress. 

Mr. STARK. No, are you aware that they may have received 

these estimates, whether it was through e-mail or—— 

Mr. FLICK. I don’t know. 

Mr. STARK. By hand or over the phone or any other way? Okay. 

Chairman Johnson or her staff? 

Mr. FLICK. No, sir. 

Mr. STARK. Majority Leader Frist? Would he have—— 

Mr. FLICK. Again, I am not aware. 

Mr. STARK. Are those e-mails—is there record of that e-mail 

traffic? Does that exist? 

Mr. FLICK. Well, there was a record of the e-mail traffic. I am 

not sure what the current status is. 

Mr. STARK. Fax? Would there be copies of faxes sent back and 

forth to all these people concerning Mr. Foster’s estimates? 

Mr. FLICK. There were some faxes sent back and forth. Again, 

I can’t speak to the availability of that information today. 

Mr. STARK. So, there were e-mails and faxes regarding estimates and sent to the Hill or to the White House and various 

places? 

Mr. FLICK. There was a good bit of e-mail traffic that involved 

Administrator Scully. 

Mr. STARK. Mr. Chairman, it would certainly seem to me, and 

I am sure you are one step ahead of me on this, that we should 

request to see the record of the faxes and the e-mails. That would 

give us some definitive understanding of who received these estimates and when they received them, and I would ask the Chair if 

you might consider requesting those or supporting a resolution of 

inquiry. In other words, you do have these that you mentioned in 


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your memo, that Chairman Thomas received one and Mr. 

McManus received one. So, we know from this copy of your e-mail 

to Mr. Foster that some of these people received this information. 

I guess that is what we are really trying to find out is, how widely 

this information was disseminated and what we can assume about 

it. Mr. Chair, if the gentleman would respond. 

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

Chair would indicate that if, in fact, the question rises to the level 

of legal carrying out of duties under the law, the Chair is always 

interested in looking at information. If it is simply to see who said 

what to whom from an administrative prerogative, the Chair does 

not believe that the gentleman’s desire to demand information 

reaches that level. Does the gentleman from Illinois wish to inquire? 

Mr. CRANE. No. 

Chairman THOMAS. Does the gentleman from Florida wish to 

inquire? 

Mr. SHAW. No. I yield my time. 

Chairman THOMAS. Does the gentleman from California, Mr. 

Matsui, wish to inquire? 

Mr. MATSUI. Yes. Thank you very much, Mr. Chairman. I just 

have a few questions. Mr. Flick, you were the Administrator for the 

agency, is this correct? 

Mr. FLICK. No, Congressman. I was the Special Assistant to the 

Administrator—— 

Mr. MATSUI. To the Administrator. I am sorry. You were the 

Special Assistant to the Administrator—— 

Mr. FLICK. That is correct. 

Mr. MATSUI. So, you made sure that the operation ran on time 

and all this stuff, is this correct? 

Mr. FLICK. That is largely what I did—— 

Mr. MATSUI. With the exception of the times when either you 

or Mr. Scully were out of town, you were probably in contact with 

him quite regularly, in view of the opening statement you made 

that you made sure he was kept on time, as well? 

Mr. FLICK. That is correct, Congressman. 

Mr. MATSUI. So, you were in the car with him when he came 

to testify, perhaps? You were with him pretty much? Your office 

was right next door to him? 

Mr. FLICK. Occasionally, I was with him when he testified. Most 

of the time, I was back at the office trying to keep things going. 

Mr. MATSUI. Keep things going. Now, when he and you talked 

about the fact that Mr. Foster had this additional information that 

he was requested to communicate to the Congress, particularly the 

minority staff of the Committee on Ways and Means, when you had 

that conversation with him, did he express some regret that he had 

to do this? 

Mr. FLICK. No. He expressed concern regarding the request. 

Mr. MATSUI. What was his concern? 

Mr. FLICK. The indication that he gave to me is that the request 

involved information, or at least some information, that wasn’t 

even in the bill anymore. 

Mr. MATSUI. Okay. Now, did he at some subsequent time before 

you left in September for San Francisco, because this request was 


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continuing, I would imagine, did he express any regret like, I am 

really sorry I have to do this, but unfortunately, I just have to do 

this? 

Mr. FLICK. No, Congressman, I don’t recall any expression of regret. 

Mr. MATSUI. Did he at any time talk with you about the fact 

that the President was concerned about having this information revealed or perhaps the information being sent down to the Democratic staff of the Committee on Ways and Means? 

Mr. FLICK. No, Mr. Congressman. We generally didn’t talk 

about whatever conversations he may have had with the President. 

It wasn’t really part of what I do. 

Mr. MATSUI. Now, are you saying no—— 

Mr. FLICK. No. 

Mr. MATSUI. You never heard that conversation, I mean, he 

never talked about the President with you? 

Mr. FLICK. That is correct. 

Mr. MATSUI. You said generally, he did not discuss this with 

you at all, about what the President might have thought or anything about the $534 billion? 

Mr. FLICK. The only conversation that I recall having with Administrator Scully regarding the President was not business-related. It was simply Administrator Scully expressing that the 

President was very engaged and cares about Medicare a lot. 

Mr. MATSUI. Did he say anything to you about the fact that the 

President wanted numbers, or was aware of the numbers? 

Mr. FLICK. No, he didn’t. 

Mr. MATSUI. Was there anybody in the White House that he 

might have made that suggestion to, about the fact that the information should or should not be communicated to the minority staff, 

the Democratic staff of the Committee on Ways and Means, or any 

Democratic Member of the House? 

Mr. FLICK. No. Congressman, we didn’t have those kinds of discussions. The only incident that involved some expression of concern on the part of Administrator Scully was, I think, clearly described in my written statement. 

Mr. MATSUI. Is that the only time you talked to him about the 

fact that he did not want this information transmitted to any 

Democratic Member or Democratic staff? 

Mr. FLICK. Yes. As I recall, Congressman, there were, I think, 

a fairly large number of requests for technical assistance. Most of 

the time, those requests were processed quickly and without any 

concern. This one request was the only time that I was involved in 

communications of the sort that I described with Mr. Foster. 

Mr. MATSUI. Okay. Thank you very much. 

Mr. FLICK. Thank you. 

Mr. MATSUI. Thank you. 

Chairman THOMAS. I thank the gentleman. Does the gentleman 

from New York, Mr. Houghton, wish to inquire? 

Mr. HOUGHTON. No. 

Chairman THOMAS. Does the gentleman from Louisiana, Mr. 

McCrery, wish to inquire? 

Mr. MCCRERY. No. 


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Chairman THOMAS. Does the gentleman from Michigan, Mr. 

Levin, wish to inquire? 

Mr. LEVIN. No, I will pass. 

Chairman THOMAS. Does the gentleman from Michigan wish to 

inquire? 

Mr. CAMP. No. 

Chairman THOMAS. Does the gentleman from Minnesota wish 

to inquire? 

Mr. RAMSTAD. No. 

Chairman THOMAS. Does the gentleman from Maryland, Mr. 

Cardin, wish to inquire? 

Mr. CARDIN. Thank you, Mr. Chairman. I do. First, let me 

thank both of you for your testimony. I regret we don’t have Mr. 

Badger or Mr. Scully here because the concern here is that the 

change in the way information was handled from the actuary to 

Congress was an effort to affect the vote in Congress rather than 

a matter of good management or separation of powers, and that is 

the concern that we have. We passed legislation anticipating that 

we would have access to the Chief Actuary, to the actuaries, and 

we would be able to get information. The information involved was 

important. It affected the final cost of a bill that we had to vote 

on in Congress. The Democratic substitute that we sought was intended to make a point about where we thought we should go, but 

it would not have a chance in a vote in Congress. It, H.R. 1, was 

a bill that was going to become law, the vote was very close in Congress, and the actuary’s estimates were key. I just really want to 

give each of you a chance. Again, we don’t have Mr. Badger or Mr. 

Scully, but do you have any information that this policy was, in 

fact, aimed at affecting a vote in Congress by denying information, 

information that was important that would affect not only votes of 

Democrats, but votes of Republicans. Clearly, Congress thought it 

was getting access to the actuary. We thought that is what the law 

that we passed required. Do you have any information that the intentions here were to affect the vote in Congress? 

Mr. FLICK. Mr. Congressman, I can share this much information 

with you. Now, please understand, this is my personal opinion, but 

I believe Administrator Scully very much believed in the idea of 

providing technical assistance. He favored that, and I believe that 

happened on a very regular basis at CMS. There was one occasion, 

which is what I described in my written statement, where there 

was concern expressed. Outside of that one situation, I believe Administrator Scully very much shared your views and, in fact, was 

active in trying to make sure that we provided the technical assistance that people were seeking. 

Mr. CARDIN. That is why it is troublesome that the information 

was not made available to Congress. Clearly, the CBO disagreed 

with some of these numbers, and we could have had a healthy debate about that here. The problem is, when you withhold the information and we have a very close vote and some estimates are what 

Members who voted for the bill thought was different, it raises serious questions. Additionally, when we have passed a law that we 

thought required information to be provided freely to Congress, and 

yet we don’t get the information, it raises questions as to whether 

there was not more involved—— 


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Chairman THOMAS. Would the gentleman yield briefly on that 

point? 

Mr. CARDIN. I would be glad to. 

Chairman THOMAS. It won’t come out of the gentleman’s time. 

We had testimony from Mr. Foster that he was not able to provide 

a complete estimate on the bill that we voted on until well into December. So, the idea that the Administration would have a number 

on the entire bill as we voted on it at the time that we voted on 

it simple is not creditable based upon the time and the manner in 

which CMS made the estimates, and I thank the gentleman for 

yielding. 

Mr. CARDIN. I understand that they did not make their final estimates until December. It is the specific information regarding 

participation in private health care plans and number of people 

who would go into Part D, it is those differences from CBO that 

drove additional costs that I think would have been crucial during 

the debate of the Medicare bill. As you know, the Medicare bill 

passed by one vote. It was a very close vote on the floor. There are 

Members who voted for it saying, well, maybe it won’t cost $400 

billion. Maybe it will be less. We know now that there was information that indicated it would cost far more, at least from the actuary. We can debate whether that is accurate or not, but that information was not made unobstructably available as we thought it 

would be to Congress and we anticipated. 

Ms. NORWALK. If I may comment, Congressman, as Mr. Scully 

said in his statement from today, he did testify before the Senate 

Finance Committee in June that there is a fundamental disagreement between our actuaries and the CBO. There are seven or eight 

fundamental differences regarding the assumptions generated by 

the actuary’s office and the CBO. Senator Baucus in reply, I believe, stated that, ‘‘there are clearly differences of opinion, but in 

some sense that is irrelevant because we go by CBO. That is the 

organization that decides what these costs are or not.’’ Finally, if 

I may, please, now on September 30, prior to the vote on the bill, 

the Wall Street Journal reported that the CBO and Medicare actuaries at CMS remain far apart in how they score the early impact 

of the provisions. In fact, the article goes on to say that since the 

CBO expects fewer insurers to participate in Medicare, it tends to 

minimize the government’s cost of helping the plans establish 

themselves. The CMS is more bullish about the likelihood of plans 

participating, but this optimism requires its actuaries to warn that 

up front costs to Medicare could be substantial. It goes on to say, 

in fact, that there is—— 

Mr. CARDIN. Ms. Norwalk, I understand what you are saying, 

and there is no question that CBO and the actuaries disagree. That 

is not the point. The point is whether there was an intentional effort to deny this information to Congress so that we could have a 

healthy debate on this issue. There is no question that there were 

different views here. 

Ms. NORWALK. Well, my point is that this article was written 

in September of last year, not since the bill passed, actually beforehand, and so it was clear that I think there was significant information already in the public, not just between the actuaries—— 


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Mr. CARDIN. Information from the Chief Actuary to Congress 

has a different credibility level here. 

Ms. NORWALK. Right, and as far as I am aware, Congressman, 

no Member of Congress ever followed-up on this particular article, 

for example, to ask, because I have never seen any particular letter, for example—— 

Mr. CARDIN. It was requested—— 

Ms. NORWALK. To look at this—— 

Mr. CARDIN. We were going through normal channels. 

Chairman THOMAS. The gentleman’s time has expired. 

Mr. CARDIN. Thank you, Mr. Chairman. 

Chairman THOMAS. The Chair understands we are currently 

with less than 5 minutes to go on a vote on the floor of the House 

with possibility of a second vote following. So, the Chair would indicate that the Committee will stand in recess until 10 minutes 

after the last vote on the floor. 

[Recess.] 

Does the gentleman from Texas wish to inquire? 

Mr. JOHNSON. Thank you, Mr. Chairman. Not at this time. 

Chairman THOMAS. Does the gentleman from Ohio wish to inquire? 

Mr. PORTMAN. Mr. Chairman, I have appreciated the testimony 

this morning and I have no questions. 

Chairman THOMAS. Does the gentleman from Washington wish 

to inquire? 

Mr. MCDERMOTT. Thank you, Mr. Chairman. Mr. Flick, well, 

actually both of you have asserted there was only one Democratic 

request that was denied or delayed. You further implied at the suggestion of Mr. Scully that the request in question was on a provision that is no longer relevant. Mr. Foster’s testimony here last 

week directly contradicts that, as does Mr. Flick’s e-mail. Last 

week, Mr. Foster said—where are we here—I will find his quote in 

a second—that none of the information had been provided. There 

were a whole series of things that had been asked and none of 

them were provided. Your e-mail shows that the request was 

framed in terms of a policy that was included in the Chairman’s 

mark, which was the most current piece of legislation when the request was made. Now, the response was delayed, arguably to reflect what was considered on the floor, but it is patently false to 

assert it was on a provision no longer in the bill. Equally important, your e-mail, Mr. Flick, describes request number three, which 

has still not been provided. The request was for an estimated 

change in beneficiary/government financing share. That has still 

not been done. I think you can see it is a little tiresome to keep 

correcting the record, but I am sure you understand that this is relevant and goes directly to the question of Administration 

stonewalling. Now, I have a question, and you are not a lawyer—— 

Mr. FLICK. That is correct. 

Mr. MCDERMOTT. You said, I think that what you are doing, 

Mr. Foster, is rising to the level of insubordination and you will be 

fired. Is that what you communicated to him? 

Mr. FLICK. Excuse me, Mr. Congressman. I don’t believe I did 

say that. What—— 


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Mr. MCDERMOTT. You said severe consequences, I think was 

the term, was it? 

Mr. FLICK. I was relating directly to a comment by Administrator Scully—— 

Mr. MCDERMOTT. So, Mr. Scully had made that determination, 

that this was grounds for firing him? 

Mr. FLICK. Excuse me, Congressman. Mr. Scully indicated to me 

that if Mr. Foster does not follow the very clear instructions, it is 

outright insubordination and insubordination carries serious consequences. 

Mr. MCDERMOTT. Now, serious consequences. Here we are, 

talking about words again. Are you talking about firing him? 

Mr. FLICK. I don’t know the answer to that, Congressman. I did 

not ask Administrator Scully exactly what he meant when he said 

consequences. I—— 

Mr. MCDERMOTT. Was it intended, do you think, to imply to 

him that he was going to be fired? 

Mr. FLICK. The only thing that I can tell you is I believe it was 

intended to imply that this is a serious matter, and Administrator 

Scully wanted Mr. Foster to comply with the instructions. 

Mr. MCDERMOTT. Ms. Norwalk, you said earlier in your testimony here that you did not know whether or not his releasing that 

information to the House against the instructions of the Administrator would rise to the level of insubordination and, therefore, 

cause for firing. 

Ms. NORWALK. I believe my testimony, Congressman, was that 

I was unsure of whether or not such insubordination, if it had occurred, would rise to the level of good cause, consequently—— 

Mr. MCDERMOTT. You have never given an opinion to Mr. 

Scully that he could fire—— 

Ms. NORWALK. That is correct. 

Mr. MCDERMOTT. Mr. Foster. So, he made that—whatever 

threats he made or implied to the people that he contacted over 

here was made on the basis of his judgment. Now, he is a lawyer, 

I guess. 

Ms. NORWALK. That is correct. 

Mr. MCDERMOTT. He has read the law, presumably. He knows 

what his power is? 

Ms. NORWALK. I can’t speak to what he read or what he knows, 

but I would presume. 

Mr. MCDERMOTT. Do you think it would be wise to ask the 

counsel who works for you where you stand on an issue like that? 

Ms. NORWALK. If he were to ask the counsel, it would not have 

been me because the person who provides legal advice to the department at all levels of the department is, in fact, the HHS Office 

of the General Counsel. So, he would not have asked me. 

Mr. MCDERMOTT. Why did Mr. Foster come to you, then? 

Ms. NORWALK. Mr. Foster came to me, I believe, in my capacity 

as the Deputy Administrator and Chief Operating Officer because 

he wanted to have me help him solve what he saw as perhaps a 

management problem. He did not come to me, as far as I recall, 

seeking legal advice. 

Mr. MCDERMOTT. He says, I mean, Mr. Scully says that he indicated during his testimony, meaning Mr. Foster, he sought legal 


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advice about my view and was told I was correct. Now, is that talking about the conversation he had with you? 

Ms. NORWALK. I presume that that is what Mr. Foster referred 

to. However, it is my understanding from my discussion with Mr. 

Foster that, in fact, when he came to speak to me, it was not in 

my capacity as an attorney but in my capacity as the Chief Operating Officer, which was typical of our relationship because I managed the day-to-day operations of CMS. 

Mr. MCDERMOTT. I thought Mr. Flick did. 

Ms. NORWALK. No, I am the Chief Operating Officer and Deputy Administrator, or at least acting in that capacity. Mr. Flick, if 

I may say, ran the Office of the Administrator as opposed to the 

entire organization. 

Mr. MCDERMOTT. So, he is really irrelevant to what went on 

in the department? He really was just a scheduler? 

Mr. FLICK. Just? Congressman, I will be happy to try to respond 

to that. I don’t know about the word ‘‘just,’’ but clearly, that was 

a big part of my responsibilities, to stay on top of the day-to-day 

work flow in the Office of the Administrator. 

Mr. MCDERMOTT. What did you do before you came to Mr. 

Scully? 

Mr. FLICK. Before coming to government, I spent most of my career in the private health care sector, working in hospitals as both 

a vice president and a chief operating officer, working as the president of a medical group, and working as a president of a physician 

hospital organization. 

Mr. MCDERMOTT. So, you came into this office with that kind 

of a background, but they put you at sort of managing his office? 

Mr. FLICK. That is correct. 

Mr. MCDERMOTT. I still say, Mr. Chairman, we really need to 

have Mr. Scully come here so we can find out where he got his 

opinion, whether he actually read the law and thought he could fire 

him or just could threaten him. I really have the feeling he was 

threatening him. 

Chairman THOMAS. The gentleman’s time has expired. He consumed 7 minutes. The gentleman from Pennsylvania? 

Mr. ENGLISH. Thank you, Mr. Chairman. I would like to thank 

the witnesses for their exhaustive and candid testimony today. Mr. 

Chairman, pursuant to Rule XI, Clause (2)(k)(8), I move that the 

Committee now adjourn. 

Chairman THOMAS. The motion before the Committee is to adjourn. All those in favor, say aye. 

[Chorus of ayes.] 

Those opposed? In the opinion of the Chair, the ayes have it. The 

ayes have it and the hearing stands adjourned. 

[Whereupon, at 2:40 p.m., the hearing was adjourned.] 

[Question submitted from Mr. Cantor to the Honorable Jo Anne 

B. Barnhart, and her response follows:] 

Question: 

• Does the SSA support or oppose waiving the 5-month waiting period 

for receiving disability benefits in cases that the Commissioner determines the waiting period would cause undue hardship to terminally ill 

beneficiaries? 


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1The following statement focuses on the 2004 Medicare Trustees’ Report and does not address 

the Social Security Trustees’ Report. 2Other members of the Medicare Trustees Subgroup who were involved in the development 

of this statement include: P. Anthony Hammond, ASA, MAAA, Chairperson; Roland E.King, 

FSA, MAAA; Gordon R. Trapnell, FSA, MAAA; and Lynette L. Trygstad, FSA, MAAA. 3The American Academy of Actuaries is the public policy organization for actuaries practicing 

in all specialties within the United States. A major purpose of the Academy is to act as the 

public information organization for the profession. The Academy is non-partisan and assists the 

public policy process through the presentation of clear actuarial analysis. The Academy regularly prepares testimony for Congress, provides information to federal elected officials, comments on proposed federal regulations, and works closely with state officials on issues related 

to insurance. The Academy also develops and upholds actuarial standards of conduct, qualification and practice, and the Code of Professional Conduct for all actuaries practicing in the United 

States. 

• What is the potential impact of waiving the 5-month waiting period for 

terminally ill beneficiaries on the Social Security System? How many 

recipients would this impact? 

• Are there alternatives to present law that Congress should consider 

changing in order to provide those who are terminally ill with relief 

from the 5-month waiting period? 

Answer: This is in response to your letter asking questions that you would have 

asked had you been able to attend the March 24, 2004 hearing at which Chief Actuary Goss testified. The questions concern waiving the 5-month waiting period for receiving disability benefits in cases where the Commissioner determines that the 

waiting period would cause undue hardship to applicants who are terminally ill. Unfortunately, significant costs are involved with such a proposal. 

We are sensitive to the potential hardships that the 5-month waiting period may 

cause for terminally ill applicants and their families. We have procedures in place 

to ensure that their applications are processed as quickly as possible. In addition, 

people with disabilities whose income and resources do not go over certain limits 

may be eligible for supplemental security income payments during those 5 months. 

Congress has periodically considered legislation to waive the 5-month waiting period requirement for people with terminal illnesses. Several such bills with slightly 

different approaches have been introduced in the 108th Congress, including a bill 

you have cosponsored, H.R. 2598. 

Our Office of the Chief Actuary has estimated the additional benefit payments 

that would be made under a similar proposal—one that would eliminate the 5- 

month waiting period for disability benefits for persons who die, or are expected to 

die, within 6 months of the onset of their disabling impairment. Payments for 

months in the waiting period would be made to disabled beneficiaries initially diagnosed as terminally ill but who actually live for more than 6 months after disability 

onset, with no attempt to recover such payments. Additionally, for beneficiaries expected to survive more than 6 months from disability onset who in fact die from 

their illness within the 6-month period, a retroactive payment for the waiting period 

would be due. Assuming such a proposal was effective for applications filed after 

September 30, 2004, we estimate 5-year program costs of $650 million and 10-year 

costs of $1,540 million. The estimated number of persons who do not receive Social 

Security disability benefits in the current year because they do not survive the waiting period is approximately 25 thousand and is projected to increase slightly each 

year in the future. 

Assuming that the 5-month waiting period was automatically waived as causing 

an undue hardship for all eligible applicants who are terminally ill, the above estimate would be about the same for your proposal. Assuming that the 5-month waiting period was waived for 50 percent of eligible applicants who are terminally ill, 

and assuming that this half of the population was similar in nature to the total affected population, then the estimated 10-year costs of such a proposal would be $785 

million. 

[Submissions for the record follow:] 

Statement of Cori E. Uccello, American Academy of Actuaries 

Hearing on Board of Trustees 2004 Annual Reports 1

American Academy of Actuaries 2, 3

The American Academy of Actuaries’ Medicare Trustees Subgroup appreciates the 

opportunity to provide comments on the 2004 Medicare Trustees’ Report. The Academy is the non-partisan public policy organization for actuaries of all specialties in 

the United States. 


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INTRODUCTION AND SUMMARY 

Each year, the Boards of Trustees of the federal Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) trust funds report to Congress on the trust 

funds’ financial condition. Together, these programs make up the Medicare program 

for the elderly and for certain disabled Americans. The Trustees’ Report is the primary source of information on the financial status of the Medicare program, and the 

American Academy of Actuaries proudly recognizes the contribution that members 

of the actuarial profession have made in preparing the report and educating the 

public about this important issue. 

According to the projections in the 2004 Medicare Trustees’ Report, Medicare’s financial status has deteriorated considerably since last year. The HI trust fund, 

which pays for hospital services, will be depleted earlier than previously expected 

and HI expenditures are projected to exceed HI non-interest income this year. In 

addition, Medicare expenditures will continue to consume an increasing share of federal outlays and GDP. The trustees conclude that ‘‘the projections shown in [the] 

report continue to demonstrate the need for timely and effective action to address 

Medicare’s financial challenges—both the long-range financial imbalance facing the 

HI trust fund and the heightened problem of rapid growth in expenditures.’’ 

This statement examines more closely the findings of the Trustees’ Report. The 

AmericanAcademy of Actuaries’ Medicare Trustees Subgroup concludes that the 

Medicare program faces serious short-term and long-term financing problems. As 

highlighted in the 2004 Medicare Trustees’ Report: 

• The HI trust fund fails to meet the test of short-range financial adequacy because HI trust fund assets will fall below annual expenditures within the next 

10 years. 

• The HI trust fund also fails to meet the test of long-range actuarial balance. 

HI expenditures are projected to start exceeding HI non-interest income this 

year. By 2019, when trust fund assets are projected to be depleted, tax revenues 

would cover only about 80 percent of program costs, and this share will decrease rapidly thereafter. The trust fund depletion date is projected to arrive 

seven years sooner than projected last year, due in part to higher hospital expenditures, lower payroll taxes, and the increased payments to rural hospitals 

and private health plans enacted under the new Medicare legislation. Notably, 

the new prescription drug program does not impact the HI trust fund, because 

it is included in the SMI trust fund. 

• The SMI trust fund, which includes spending for the newly enacted Medicare 

prescription drug benefit, is expected to remain solvent, but only because its financing is reset each year to meet projected future costs. Projected increases 

in SMI expenditures, therefore, will require increases in beneficiary premiums 

and general revenue contributions over time. 

• Without payroll tax increases or benefit decreases, Medicare’s demand on the 

federal budget, measured as the HI income shortfall and the general revenue 

contribution to SMI, is increasing rapidly. 

• Medicare expenditures as a share of GDP and of total federal revenues are also 

increasing rapidly, especially when considered in conjunction with Social Security expenditures, thereby threatening Medicare’s long-term sustainability. 

We recommend that policymakers implement changes to improve Medicare’s financial outlook. The sooner such corrective measures are enacted, the more flexible 

the approach and the more gradual the implementation can be. Failure to act now 

may necessitate far more onerous actions later. 

SHORT-TERM FINANCING OF MEDICARE 

To assure short-range financial adequacy of the HI trust fund, the Medicare trustees recommend that trust fund assets equal or exceed annual expenditures for each 

of the next 10 years. This level would serve as an adequate contingency reserve in 

the event of adverse economic or other conditions. For the next several years, the 

trust fund assets are expected to significantly exceed annual expenditures. However, 

trust fund assets are projected to fall below annual expenditures in 2012. As a result, the HI trust fund fails the test of short-range financial adequacy. 

LONG-TERM FINANCING OF MEDICARE 

The Medicare program has fundamental long-range financing problems of three 

kinds: 

1. HI trust fund income will soon become inadequate to fund the HI portion of 

Medicare benefits; 

2. Medicare’s demands on the federal budget are increasing; and 


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4 According to the 2004 Medicare Trustees’ Report, 2.0 years of the change are attributable 

to the new Medicare law, 2.0 years to higher spending and lower tax revenues, 1.5 years to assumption adjustments, 1.0 year to improved data on the health status of beneficiaries in HMOs, 

and 0.5 years to model refinements for certain hospital payments. 

3. Paying currently promised Medicare benefits will place an increasing strain on 

the U.S. economy. 

Each of these problems is discussed in more detail below. Note that the expenditure numbers cited in this statement include the impact of the new Medicare prescription drug plan and other changes to be implemented under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. 

Medicare HI Trust Fund Income Will Soon Become Inadequate to Fund HI 

Benefits 

In terms of trust fund accounting, Medicare consists of two parts, each of which 

is financed separately: Hospital Insurance (HI) pays primarily for inpatient hospital 

care and Supplementary Medical Insurance (SMI) pays primarily for physician and 

outpatient care, as well as the new Medicare prescription drug benefit. Like the Social Security program, Medicare makes use of trust funds to account for all income 

and expenditures, and the HI and SMI programs operate separate trust funds. 

Taxes, premiums, and other income are credited to the trust funds, and are used 

to pay benefits and administrative costs. Any unused income is added to the trust 

fund assets, which are invested by law in U.S. government securities for use in future years. 

The 2004 Medicare Trustees’ Report highlights the long-term financing problems 

facing the program: 

• The HI program is funded primarily through earmarked payroll taxes. Over the 

last several years, HI payroll taxes and other non-interest income have exceeded benefits paid, and the trust fund has been accumulating assets. Beginning 

this year, however, HI expenditures are projected to exceed HI non-interest income. And beginning in 2010, HI expenditures are projected to exceed all HI 

income, including interest. At that point, the HI trust fund will need to begin 

redeeming its assets—U.S. government securities—in order to pay for benefits. 

If the federal government is experiencing unified budget deficits at the time 

these securities need to be redeemed, either additional taxes will need to be levied to fund the redemptions, or additional money will need to be borrowed from 

the public, thereby increasing the public debt. 

• By 2019, HI trust fund assets are projected to be depleted. At that time, tax 

revenues are projected to cover only about 80 percent of program costs, with the 

share decreasing further thereafter. The HI trust fund depletion date is seven 

years earlier than that projected in last year’s Medicare Trustees’ Report, due 

in part to higher hospital expenditures, lower payroll taxes, and the increased 

payments to rural hospitals and private health plans enacted under the new 

Medicare legislation.4 Notably, the new prescription drug program does not impact the HI trust fund, because it is included in the SMI trust fund. 

• The value in today’s dollars of HI shortfalls over the next 75 years is $8.2 trillion, or 3.1 percent of taxable payroll over the same time period. For the first 

time, the 2004 Medicare Trustees’ Report includes projections over an infinite 

time horizon, which increases the shortfall to $21.8 trillion, or 5.3 percent of 

taxable payroll. Nevertheless, given the uncertainty of projections 75 years into 

the future, extending these projections into the infinite future can only increase 

the uncertainty, so that these results can have only limited value for policymakers. 

• The SMI program is financed through beneficiary premiums that cover about 

a quarter of the cost. Federal general tax revenues covers the remaining three 

quarters. The SMI trust fund is expected to remain solvent, but only because 

its financing is reset each year to meet projected future costs. Projected increases in SMI expenditures, therefore, will require increases in beneficiary premiums and general revenue contributions over time. 

Medicare’s Demand on the Federal Budget Is Increasing 

Another way to gauge Medicare’s financial condition is to view it from a federal 

budget perspective. In particular, this assessment determines whether Medicare receipts from the public (e.g. payroll taxes, beneficiary premiums) exceed or fall short 

of its outlays to the public. Under this approach, income from general revenues to 

the SMI program, which are essentially intragovernmental transfers between the 

general fund and the Medicare trust funds, are ignored. As a result, the difference 


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between public receipts and public expenditures for Medicare reflects any HI income 

shortfall and the general revenue share of SMI. 

Table 1 reports the HI income shortfall and the general revenue contribution to 

the SMI program in 2003 and over the next 10 years. In 2003, the HI trust fund 

ran a surplus (i.e. a negative shortfall) that offset to some extent the general revenue financing of SMI. (Recall that the SMI program is designed such that threequarters of its expenditures are funded through general revenues.) Nevertheless, 

Medicare expenditures already exceeded public receipts by $81 billion in 2003. Beginning this year, however, HI expenditures are expected to exceed HI public receipts by about $8 billion, and this HI shortfall plus the SMI general revenue contribution is expected to total $111 billion. Over the next 10 years the cumulative 

difference between Medicare expenditures and public receipts will total $2.3 trillion. 

Beginning in 2010, when HI expenditures are projected to exceed HI public receipts plus interest income on trust fund assets, the HI trust fund will need to begin 

drawing down its assets, further increasing Medicare’s demand on the federal budget. Unless payroll taxes are increased or benefits reduced, HI trust fund assets are 

projected to be depleted in 2019, and there is no current provision allowing for general fund transfers to cover HI expenditures in excess of payroll tax revenues. 

For a longer-term view of Medicare’s demand on the federal budget, table 2 reports the HI income shortfall and the SMI general revenue contribution over the 

next several decades, as a share of GDP. The HI income shortfall and SMI general 

revenue contribution are projected to grow dramatically—from less than 1 percent 

of GDP in 2004 to more than 10 percent of GDP in 2078. This will increase considerably the pressures on the federal budget, unless HI income shortfalls or SMI general 

revenue contributions are reduced. 


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5More specifically, a determination of ‘‘excess general funding’’ is triggered if the difference 

between Medicare outlays and dedicated financing sources (HI payroll taxes, HI share of income 

taxes on Social Security benefits, Part D state transfers, and beneficiary premiums) exceeds 45 

percent of Medicare outlays within seven years of the projection. 

(Although an appendix in the Trustees’ Report includes a discussion of the impact 

of the Medicare trust funds on the federal budget, the long-term projections of the 

HI income shortfall and SMI general revenue contribution are available only in the 

Social Security and Medicare Boards of Trustees’ summary of the 2004 annual reports. It would be useful if the projections were also presented in the Medicare 

Trustees’ Report.) 

The new Medicare law includes a provision intended to address these financial 

challenges. Basically, if general funding sources account for more than 45 percent 

of Medicare spending within the next seven years, the administration will be required to recommend ways to reduce this share.5 Options would include reducing 

benefits, raising beneficiary premiums, or raising payroll taxes. Congress could then 

implement the recommendations, but would not be required to do so. 

This provision draws attention to the need to manage the demand Medicare 

places on the federal budget, and sets the stage for future congressional debate over 

corrective action to limit the burden the program places on general tax revenues. 

Congressional action is not guaranteed, however, and other financing problems remain. 

The 2004 Medicare Trustees’ Report projects that the 45 percent threshold will 

first be reached in 2012, more than seven years into the projection period. Therefore, the administration requirement would not be triggered this year, but could be 

as soon as two years from now. 

Medicare Will Place Increasing Strains on the Economy 

A broader issue related to Medicare’s financial condition is whether the economy 

can sustain Medicare spending in the long run. To gauge the future sustainability 

of the Medicare program, we examine the share of GDP that will be consumed by 

Medicare. As shown in Table 3, total Medicare spending will consume greater 


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shares of GDP over time. In 2003, total Medicare spending was 2.6 percent of GDP. 

This share is expected to increase to 3.4 percent in 2006, due in large part to the 

addition of the prescription drug benefit. It is expected to rise to 7.0 percent of GDP 

in 2030 and 10.9 percent of GDP in 2060. 

(Notably, the Centers for Medicare and Medicaid Services (CMS) estimate that 

Medicare pays for only about half of the total health spending of the elderly and 

disabled. As a result, this measure understates the share of the economy devoted 

to total health spending among these groups.) 

Considering Medicare spending in conjunction with Social Security’s further highlights the strain these programs place on the economy. Social Security spending as 

a share of GDP increases more modestly than Medicare over the next several decades, and by 2030, Medicare spending exceeds that of Social Security. Combined, 

Medicare and Social Security expenditures equaled 7.0 percent of GDP in 2003. This 

share of GDP will increase considerably to a projected 13.3 percent in 2030 and 17.4 

percent in 2060. 

Medicare and Social Security expenditures are even more striking when considered relative to total federal revenues. The trustees report that total federal revenues have historically averaged about 19 percent of GDP. Using this average, about 

40 percent of all federal revenues were used to pay Medicare and Social Security 

benefits in 2003. If no changes are made to either program and federal revenues 

remain at 19 percent of GDP, this share is expected to increase to 70 percent in 

2030, and by 2070, Medicare and Social Security spending would about equal total 

federal revenues. 


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These projections highlight the increasing strains that Medicare, especially in conjunction with Social Security, will place on the U.S. economy. Moreover, increased 

spending for Medicare may crowd out funds for other federal programs. It is unclear 

whether the nation will be willing to make these tradeoffs in the future. 

If we are to avoid this strain, reforms must be made to address the rapid growth 

in Medicare expenditures. It is important to recognize, however, that unless the 

growth in total health expenditures of the elderly and disabled is reduced—not just 

the share borne by the Medicare program—health expenditures will continue to consume a large and growing share of the economy. Shifting more program costs to 

workers through increased payroll taxes or to beneficiaries through higher premiums or increased cost sharing may reduce federal outlays for Medicare, but it will 

not reduce the share of the economy devoted to health expenditures. 

CONCLUSION 

The American Academy of Actuaries’ Medicare Trustees Subgroup continues to be 

very concerned about Medicare’s long-range financing problems. With HI non-interest income expected to start falling short of outlays this year, the HI trust fund is 

expected to be depleted as soon as 2019, seven years earlier than projected last year. 

In addition, Medicare will likely exact increasing demands on the federal budget, 

even with the recently enacted provision that alerts Congress when the program’s 

reliance on general revenue sources is becoming unduly large. The program’s sustainability is also in question as currently promised benefits will make up increasing shares of both GDP and total federal revenues. 

We recommend that policymakers implement changes to improve Medicare’s financial outlook. We agree with the 2004 trustees, who state in their report: 

‘‘The sooner the solutions are enacted, the more flexible and gradual they can 

be. Moreover, the early introduction of reforms increases the time available for 

affected individuals and organizations . . . to adjust their expectations.’’ 

* * * 

The Academy is ready to provide the analysis and technical expertise of our member health actuaries in responding to issues regarding the future of the Medicare 

system. Recent Academy issue briefs include How Is Medicare Financed? and What 

Is the Role of the Medicare Actuary? In addition, Evaluating the Fiscal Soundness 

of Medicare, an Academy monograph, outlines how several reform measures could 

address Medicare’s long-term financing problems. The monograph concludes that 

promising options to improve Medicare’s financing problems include increased cost 

sharing by beneficiaries and increased use of managed care and competitive bidding. 

Less promising options include lowering payments to providers and increasing the 

eligibility age for Medicare. These and other Academy publications are available at 

www.actuary.org/medicare/index.htm. 

f 

Statement of Don R. McCanne, Physicians for a National Health Program, 

Chicago, Illinois 

The 2004 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds describes the projected imbalances between the anticipated revenues and the expected growth in expenditures of the Medicare program. The Trustees call for prompt, effective, and decisive action to address this challenge. 

As expected, a highly charged political debate rages over the causes of these anticipated net deficits in Medicare funding. Although we will hear much about factors 

such as the generous payments to Medicare Advantage plans, and the decline in tax 

revenues supporting the program, one factor predominates above all others: health 

care costs continue to escalate well beyond the level of inflation. 

Health care cost increases are related to expanding and ever more expensive technological advances, along with unrestrained expansion in the capacity of our health 

care delivery system. We are spending more because we find more ways to spend 

health care dollars, and because we continue to expand the capacity that allows us 

to do it. 

Approaching the Medicare deficit as an isolated problem will not address the fundamental cause of health cost increases. Rather, the integrity of the Medicare program would be threatened because solutions would be narrowly directed to substantially increasing revenues and/or dramatically reducing benefits. Either a reduction 

in benefits or an increase in cost sharing by the beneficiary would threaten to imVerDate Aug 31 2005 07:20 Jan 27, 2006 Jkt 023797 PO 00000 Frm 00136 Fmt 6633 Sfmt 6621 E:\HR\OC\23797.XXX 23797

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pair access to care because of lack of affordability for the individual beneficiary. The 

alternative of asking taxpayers to fund the increase in Medicare costs would be 

problematic when considering that they would also be facing the same escalating 

health care costs. 

We already know that regions with higher health care capacity have increased intensity of services but without a commensurate improvement in medical outcomes. 

Hospitals with greater bed capacity in their intensive care units provide costly and 

relatively inhumane end-of-life care when less expensive and more compassionate 

care would be provided in a hospice environment. Physician owned specialty hospitals and medical group owned imaging systems significantly increase capacity and 

the level of services although there is negligible data available to demonstrate improved outcomes. 

Other nations have demonstrated that planning and capital budgeting of capacity 

can prevent excessive utilization while ensuring adequate capacity to prevent unnecessary queues. The 15.5% of our Gross Domestic Product that we are currently 

spending on health care is more than enough to ensure appropriate capacity plus 

fund the operating expenses of our system, with the proviso that we do not waste 

resources on some of the current excesses of our system. Although health care planning declined after prior efforts, the current level of spending has reached a threshold that now makes it imperative. 

The administrative costs of private health plans are significantly greater than 

those of public programs such as Medicare. But an even greater problem is the profound administrative burden placed on our health care delivery system by our fragmented system of a great multitude of private plans, large public programs, and, 

for some, no programs at all. In 2003 numbers, an estimated $286 billion in these 

administrative costs could be recovered and utilized for the deficiencies in health 

care coverage today. Eliminating administrative waste must be a part of our solution to rising costs. 

Although our national policies protect and promote technological development, 

there is a pressing need to demand value for our private and public investment. 

Pharmaceutical firms that develop copycat drugs merely for the purpose of restarting the patent clock should no longer be disproportionately rewarded for such noninnovative efforts. Only new products with demonstrated value should be rewarded 

with higher prices. Also new products developed with public funding should return 

that investment to the taxpayer through lower prices. We should require that new 

technological innovations provide both significant medical benefit and value before 

funding them. And there is ample evidence to demonstrate that prices are much 

higher in the United States than in other nations. We clearly need a method of negotiating rates and prices to be sure that we are receiving a fair value for our health 

care investment while allowing a fair but not excessive profit for the manufacturer 

or provider. 

To bring the level of health care cost increases down to near the rate of inflation, 

we need to control capacity and pay fair prices. Medicare alone cannot have a significant influence on capacity. Although Medicare does have some regulatory control 

over prices, acting alone inevitably results in inequitable results through cost shifting and unfairness in pricing, while failing to control global costs. And Medicare 

cannot further reduce administrative waste when it is adding to the administrative 

burden by being an additional player in our fragmented system. 

Replacing our inefficient and wasteful system of funding care with a single public 

payer would control costs through global budgeting, planning and budgeting of capital improvements, and negotiation of rates and prices. And with the administrative 

savings made possible by eliminating the waste of the private bureaucracies, we 

could afford to fund care for everyone while controlling costs on into the infinite horizon. Instead of limiting Medicare reform considerations to revenue increases and 

benefit reductions, let us adopt systemic reforms that will enable the enactment of 

comprehensive, affordable coverage for everyone. 

Æ 


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