United States Government Accountability Office

GAO Testimony 

Before the Budget Committee, House of 

Representatives

21ST CENTURY

Addressing Long-Term 

Fiscal Challenges Must 

Include a Re-examination of 

Mandatory Spending 

Statement of David M. Walker 

Comptroller General of the United States 

For Release on Delivery

Expected at 2:00 p.m. EST 

Wednesday, February 15, 2006 

 

GAO-06-456T 
Mr. Chairman, Representative Spratt, and Members of the Committee: 

I appreciate this opportunity to talk with you about the need to look at 

entitlement and other mandatory spending programs in light of our 

nation’s long-term fiscal outlook and the challenge it poses for the budget 

and oversight processes. 

As I have said many times before, meeting our nation’s large, growing, and 

structural fiscal imbalance will require a three-pronged approach: 

• restructuring existing entitlement programs, 

• reexamining the base of discretionary and other spending, and 

• reviewing and revising existing tax policy, including tax expenditures,1

which can operate like mandatory spending programs. 

Before I turn to the major driver of the long-term spending outlook— 

rising health care costs combined with known demographic trends—I’d 

like to step back and take a broader view of the need to reexamine and 

reconsider what the federal government does, how it does it, and who 

does it. We are in the first decade of the 21st century but the basis and 

design for many of the federal government’s activities date from before I 

was born. 

In our report entitled 21st Century Challenges: Reexamining the Base of

the Federal Government,

2

 we presented illustrative questions for policy 

makers to consider as they carry out their responsibilities. These questions 

look across major areas of the budget and federal operations including 

discretionary and mandatory spending, and tax policies and programs. We 

hope that this report, among other things, will be used by various 

congressional committees as they consider which areas of government 

need particular attention and reconsideration. You will, of course, also 

 1

 Tax expenditures result in forgone revenue for the federal government due to preferential 

provisions in the tax code, such as exemptions and exclusions from taxation, deductions,

credits, deferral of tax liability, and preferential tax rates. These tax expenditures are often 

aimed at policy goals similar to those of federal spending programs; existing tax 

expenditures, for example, are intended to encourage economic development in 

disadvantaged areas, finance postsecondary education, and stimulate research and

development. See GAO, Government Performance and Accountability: Tax Expenditures 

Represent a Substantial Federal Commitment and Need to Be Reexamined, GAO-05-690 

(Washington, D.C.: Sept. 23, 2005). 

2

 GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, 

GAO-05-325SP (Washington, D.C.: February 2005). 

Page 1 GAO-06-456T 
receive more specific proposals, some of them will be presented within 

comprehensive agendas—the President’s Budget released last week is just 

one very prominent example. 

Our report provides examples of the kinds of difficult choices the nation 

faces with regard to discretionary spending; mandatory spending, 

including entitlements; as well as tax policies and compliance activities. It 

is, I think, important to recognize that tax policies and programs financing 

the federal budget can be reviewed not only with an eye toward the overall 

level of revenue provided to fund federal operations and commitments, 

but also the mix of taxes and the extent to which the tax code is used to 

promote overall economic growth and broad-based societal objectives. In

practice, some tax expenditures are very similar to mandatory spending 

programs even though they are not subject to the appropriations process 

or selected budget control mechanisms. As we reported last September, 

tax expenditures represent a significant commitment and are not typically

subjected to review or reexamination.

Mandatory spending programs—like tax expenditures—are governed by 

eligibility rules and benefit formulas, which means that funds are spent as 

required to provide benefits to those who are eligible and wish to 

participate. Since Congress and the President must change substantive law 

to change the cost of these programs, they are relatively uncontrollable on

an annual basis. Moreover, as we reported in a 1994 analysis, their cost 

cannot be controlled by the same “spending cap” mechanism used for 

discretionary spending.3

By their very nature mandatories limit budget flexibility.4 As figure 1 

shows, mandatory spending has grown as a share of the total federal 

budget. For example, mandatory spending has grown from 27 percent 

before the creation of Medicare and Medicaid to 42 percent in 1985 to 54

percent last year. (Total spending not subject to annual appropriations—

mandatory spending and net interest—has grown from 56 percent in 1985

to 61 percent last year.) Under both the Congressional Budget Office 

 3

 GAO, Budget Policy: Issues in Capping Mandatory Spending, GAO/AIMD-94-155 

(Washington, D.C.: July 18, 1994). 

4

 Similarly tax expenditures may limit flexibility on the revenue side; there is a tradeoff 

between tax rates and revenue lost through tax expenditures. In order to raise a given 

amount of federal revenue, tax rates must be raised higher than they otherwise need to be

due to revenue losses from tax expenditures.

Page 2 GAO-06-456T 
baseline estimates and the President’s Budget, this spending would grow 

further. 

Figure 1: Federal Spending for Mandatory and Discretionary Programs 

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1962 1970 1980 1990 2000 2005 2016

Percent of total outlays

Source: OMB and CBO.

Net interest

Discretionary

Mandatory

CBO’s January 2006

projections

Note: Projections assume discretionary spending grows with inflation after 2006. 

While the long-term fiscal outlook is driven by Medicare, Medicaid and 

Social Security, it does not mean that all other mandatory programs 

should be “given a pass.” As we have noted elsewhere, reexamination of 

the “fit” between government programs and the needs and priorities of the 

nation should be an accepted practice.5

 So in terms of budget flexibility—

the freedom of each Congress and President to allocate public resources—

we cannot ignore mandatory spending programs even if they do not drive 

the aggregate. 

 5

GAO-05-325SP. 

Page 3 GAO-06-456T 
While some might suggest that mandatory programs could be controlled 

by being converted to discretionary or annually appropriated programs, 

that seems unlikely to happen. If we look across the range of mandatories 

we see many programs have objectives and missions that contribute to the 

achievement of a range of broad-based and important public policy goals 

such as providing a floor of income security in retirement, fighting hunger, 

fostering higher education, and providing access to affordable health care. 

To these ends, these programs—and tax expenditures—were designed to 

provide benefits automatically to those who take the desired action or 

meet the specified eligibility criteria without subjecting them to an annual

decision regarding spending or delay in the provision of benefits such a 

process might entail. 

Although mandatory spending is not amenable to “caps,” that does not 

mean that mandatory programs should be permitted to be on autopilot and 

grow to an unlimited extent. Since the spending for any given entitlement 

or other mandatory program is a function of the interaction between the 

eligibility rules and the benefit formula—either or both of which may 

incorporate exogenous factors such as economic downturns—-the way to 

change the path of spending for any of these programs is to change those 

rules or formulas. We recently issued a report on “triggers”—some 

measure which, when reached or exceeded, would prompt a response 

connected to that program.6

 By identifying significant increases in the 

spending path of a mandatory program relatively early and acting to 

constrain it, Congress may avert much larger and potentially disruptive 

financial challenges and program changes in the future. 

A trigger is a measure and a signal mechanism—like an alarm clock. It 

could trigger a “soft” response—one that calls attention to the growth rate 

or the level of spending and prompts special consideration when the 

threshold or target is breached. Two examples of soft responses that could 

be triggered include requiring the relevant agency to prepare a report 

analyzing why the trigger was tripped and/or requiring the President to 

submit a proposal to change the path or explain why he thinks it should 

remain unchanged. The Medicare program already contains a “soft” 

response trigger: The President is required to submit a proposal for action 

to Congress if the Medicare Trustees determine in 2 consecutive years that

the general revenue share of Medicare spending is projected to exceed 45

 6

GAO, Mandatory Spending: Using Budget Triggers to Constrain Growth, GAO-06-276 

(Washington, D.C.: Jan. 31, 2006). 

Page 4 GAO-06-456T 
percent during a 7-year period.7

 Each year the Social Security and 

Medicare Trustees test for program financial adequacy over the next 10 

years. The results of the test are included in the respective Trustees’ 

reports to Congress, in which they note that failure to meet this test is an 

indication that action is needed. A few Social Security reform proposals 

have taken this further by including language requiring Presidential and

Congressional action if the Social Security Board of Trustees determines 

that the balance ratio of either of the Social Security trust funds will be 

zero for any calendar year during the succeeding 75 years.8

 Given the 

complexity and controversy associated with reforming entitlements, 

commissions might be one means to come up with possible triggers 

appropriate to the specific programs. 

Soft responses can help in alerting decision makers of potential problems 

but they do not ensure that action to decrease spending or increase 

revenue is taken. With soft responses, the fiscal path continues unless 

Congress and the President take action. In contrast, a trigger could lead to

“hard” responses requiring a predetermined, program-specific action to

take place, such as changes in eligibility criteria and benefit formulas, 

automatic revenue increases, or automatic spending cuts. With hard 

responses, spending is automatically constrained, revenue is automatically

increased, or both, unless Congress takes action to override. For example, 

this year the President’s Budget proposes to change the Medicare trigger 

from solely “soft” to providing a “hard” (automatic) response if Congress 

fails to enact the President’s proposal.9 Figure 2 below illustrates the 

conceptual differences between hard and soft responses of a budget 

trigger. 

 7

For the purpose of the Medicare trigger, general revenue is defined as the difference 

between Medicare program outlays and dedicated Medicare financing sources. Dedicated

Medicare financing sources are defined as Hospital Insurance (HI) payroll taxes, the HI

share of income taxes on Social Security benefits, state transfers for Part D prescription 

drug benefits, premiums paid under Parts A, B, and D, and any gifts received by the trust 

funds. 

8

Recently, this provision was included in the Bipartisan Retirement Security Act of 2005, 

H.R. 440, 109th Cong. § 14 (2005). 

9

 The response now would include a sequester if the Congress did not act on the President’s 

proposal. The proposed sequester would result in a four-tenths of a percent reduction in all 

payments to providers beginning in the year the threshold is exceeded. Each year the

shortfall continues to occur the reduction would grow by an additional four-tenths of a 

percent. We have not yet analyzed how this would work. 

Page 5 GAO-06-456T 
Figure 2: Conceptual Differences between Hard and Soft Responses 

Source: GAO analysis.

Hard Response

• Automatic, program-specific 

spending cuts

• Automatic revenue increases

• Changed eligibility criteria or benefit 

 formulas

Soft Response

• Points of order

• Agency reports

• Proposals to change spending path

Trigger Response

In our recent report on mandatory spending triggers, we discussed the 

kinds of responses that might be triggered and the importance of programspecific design. Proposed changes in underlying benefits structure and 

design of a mandatory program can be considered in the context both of

the factors that drive the growth of that program and the specific goals 

and objectives of the program. For example, some mandatories are 

intended to have a countercyclical effect; any triggered response in these 

programs would have to be designed not to interfere with that function. Its

design, therefore, would have to be sensitive to whether growth comes 

because the program is, in fact, working as an automatic stabilizer. 

Both near- and long-term perspectives should be considered in the design 

of triggers. For some programs, it might be appropriate to tie the trigger to

historical data—for example, to see whether spending growth was greater

than some historical average or path. For programs that expose the 

government to long-term commitments, it might be more appropriate to tie 

the trigger to projections of future spending. For “contributory” programs 

that represent a long-term commitment of future earmarked resources, 

such as Social Security, one appropriate measure could be the actuarial 

projections of the 75-year outlook. Some similar approach might be used 

for programs like pension or health insurance. 

Any discussion to create triggered responses and their design must 

recognize that unlike controls on discretionary spending, there is some 

tension between the idea of triggers and the nature of entitlement and 

other mandatory spending programs. These programs—as with tax 

Page 6 GAO-06-456T 
provisions such as tax expenditures—were designed to provide benefits 

based on eligibility formulas or actions as opposed to an annual decision 

regarding spending. This tension makes it more challenging to constrain 

costs and to design both triggers and triggered responses. At the same 

time, with only about one-third of the budget under the control of the 

annual appropriations process, considering ways to increase transparency, 

oversight, and control of mandatory programs must be part of addressing 

the nation’s long-term fiscal challenges. 

Before I turn to the largest driver of our long-term challenge—rising health 

care costs—let me note that the idea of triggers need not only apply to 

spending. The revenue side of the budget should also be addressed. If, for 

example, one option to cover the increased costs of a mandatory spending

program was a premium increase or tax increase, it would serve to 

increase public visibility and could make the American people more aware 

of how much they are paying for services. More directly analogous to 

mandatory spending programs is the extensive use of tax incentives, 

rather than direct spending authority, to address various social objectives. 

As we reported in September 2005,10 the sum of revenue loss estimates 

associated with tax expenditures—such as tax exclusions, credits, and 

deductions—was nearly $730 billion in 2004.11 Under the most recent 

estimates, this has risen to more than $775 billion in 2005. 

Let me be clear that in suggesting application of this analysis to tax 

expenditures I am not addressing the appropriate level of taxation as a 

share of GDP. Whatever level of revenue is deemed appropriate, tax 

expenditures that seek to achieve programmatic or policy goals should—

like other federal programs or activities—be reviewed to determine their 

effectiveness, continued relevance, affordability, and sustainability. Tax 

expenditures have a significant effect on overall tax rates—in that, for any 

given level of revenue, overall tax rates must be higher to offset the 

revenue forgone through tax expenditures—as well as the budget and 

fiscal flexibility. They also contribute to the growing complexity of the 

federal tax system. Many tax expenditures operate like mandatory 

spending programs and generally are not subject to reauthorization. Such 

tax expenditures are embedded in the tax system. They are not subject to

 10See GAO-05-690. 

11Summing the individual tax expenditure estimates is useful for gauging the general 

magnitude of the federal revenue involved, but it does not take into account possible 

interactions between individual provisions. 

Page 7 GAO-06-456T 
a performance test and are off the radar screen for the most part. This is a 

concern from a budgetary standpoint because taxpayer dollars committed 

to fund these expenditures do not compete in the annual appropriations 

process and are effectively “fully funded” before any discretionary 

spending is considered. The analysis we have applied to spending would 

also be useful in examining tax expenditures. 

Among mandatory spending programs—and indeed tax expenditures—the 

health area is especially important because the long-term fiscal challenge

is largely a health care challenge. Contrary to public perceptions, health 

care is the biggest driver of the long-term fiscal challenge. While Social 

Security is important because of its size, health care spending is both large 

and projected to grow much more rapidly. 

Federal Health Care 

Spending Drives the 

Long-Term Fiscal 

Challenge 

Our most recent simulation results illustrate the importance of health care 

in the long-term fiscal outlook as well as the imperative to take action.

Simply put, our nation’s fiscal policy is on an imprudent and unsustainable 

course. These long-term budget simulations show, as do those published 

last December by the Congressional Budget Office (CBO),12 that over the 

long term we face a large and growing structural deficit due primarily to 

known demographic trends and rising health care costs and lower federal 

revenues as a percentage of the economy. Continuing on this

unsustainable fiscal path will gradually erode, if not suddenly damage, our

economy, our standard of living, and ultimately our national security. Our 

current path also will increasingly constrain our ability to address 

emerging and unexpected budgetary needs and increase the burdens that 

will be faced by future generations. 

Figures 3 and 4 present our long-term simulations under two different sets 

of assumptions. In figure 3, we start with CBO’s 10-year baseline—

constructed according to the statutory requirements for that baseline.13

Consistent with these requirements, discretionary spending is assumed to 

grow with inflation for the first 10 years and tax cuts scheduled to expire 

are assumed to expire. After 2016, discretionary spending is assumed to 

grow with the economy, and revenue is held constant as a share of GDP at 

the 2016 level. In figure 4, two assumptions are changed: (1) discretionary 

 12 CBO, The Long-Term Budget Outlook (Washington, D.C.: December 2005).

13CBO, The Budget and Economic Outlook: Fiscal Years 2007 to 2016 (Washington, D.C.: 

January 2006). 

Page 8 GAO-06-456T 
spending is assumed to grow with the economy after 2006 rather than 

merely with inflation, and (2) all expiring tax provisions are extended. For 

both simulations, Social Security and Medicare spending is based on the 

2005 Trustees’ intermediate projections, and we assume that benefits 

continue to be paid in full after the trust funds are exhausted. Medicaid 

spending is based on CBO’s December 2005 long-term projections under 

mid-range assumptions. 

Figure 3: Composition of Spending as a Share of GDP under Baseline Extended

Percent of GDP

Fiscal year

All other spending Medicare & Medicaid Social Security Net interest

Source: GAO’s January 2006 analysis.

0

10

20

30

40

50

2005 2015 2040 2030

Revenue

Note: In addition to the expiration of tax cuts, revenue as a share of GDP increases through 2016 due

to (1) real bracket creep, (2) more taxpayers becoming subject to the alternative minimum tax (AMT), 

and (3) increased revenue from tax-deferred retirement accounts. After 2016, revenue as a share of 

GDP is held constant. 

Page 9 GAO-06-456T 
Figure 4: Composition of Spending as a Share of GDP Assuming Discretionary 

Spending Grows with GDP after 2006 and All Expiring Tax Provisions Are Extended

Percent of GDP

Fiscal year

All other spending Medicare & Medicaid Social Security Net interest

Source: GAO’s January 2006 analysis.

0

10

20

30

40

50

2005 2015 2040 2030

Revenue

● ● ● ●

Note: This includes certain tax provisions that expired at the end of 2005, such as the increased AMT

exemption amount. 

As these simulations illustrate, absent significant policy changes on the 

spending and/or revenue side of the budget, the growth in mandatory 

spending on federal retirement and especially health entitlements will 

encumber an escalating share of the government’s resources. Indeed, 

when we assume that all the temporary tax reductions are made 

permanent and discretionary spending keeps pace with the economy, our 

long-term simulations suggest that by 2040 federal revenues may be 

adequate to pay only some Social Security benefits and interest on the 

federal debt. Neither slowing the growth in discretionary spending nor 

allowing the tax provisions to expire—nor both together—would eliminate 

the imbalance. Although revenues will be part of the debate about our 

fiscal future, assuming no changes to Social Security, Medicare, Medicaid,

and other drivers of the long-term fiscal gap would require at least a 

doubling of taxes—and that seems highly implausible. Economic growth is 

essential, but we will not be able to simply grow our way out of the 

problem. The numbers speak loudly: our projected fiscal gap is simply too 

great. Closing the current long-term fiscal gap would require sustained 

economic growth far beyond that experienced in U.S. economic history 

since World War II. Tough choices are inevitable, and the sooner we act 

the better. 

Page 10 GAO-06-456T 
Accordingly, substantive reform of the major health programs and Social 

Security is critical to recapturing our future fiscal flexibility. Ultimately, 

the nation will have to decide what level of federal benefits and spending it 

wants and how it will pay for these benefits. Our current fiscal path will 

increasingly constrain our ability to address emerging and unexpected 

budgetary needs and increase the burdens that will be faced by future 

generations. Continuing on this path will mean escalating and ultimately 

unsustainable federal deficits and debt that will serve to threaten our 

future national security as well as the standard of living for the American 

people. 

The aging population and rising health care spending will have significant 

implications not only for the budget, but also the economy as a whole. 

Figure 5 shows the total future draw on the economy represented by 

Social Security, Medicare, and Medicaid. Under the 2005 Trustees’ 

intermediate estimates and CBO’s 2005 long-term Medicaid estimates 

under mid-range assumptions, spending for these entitlement programs 

combined will grow to 15.7 percent of gross domestic product (GDP) in

2030 from today’s 8.4 percent. It is clear that, taken together, Social 

Security, Medicare, and Medicaid represent an unsustainable burden on 

future generations. 

Furthermore, most of the long-term growth is in health care. While Social

Security in its current form will grow from 4.3 percent of GDP today to 6.4 

percent in 2080, Medicare’s burden on the economy will quintuple—from 

2.7 percent to 13.8 percent of the economy—and these projections assume 

a growth rate for Medicare spending that is below historical experience! 

As figure 5 shows, unlike Social Security which grows larger as a share of 

the economy and then levels off, within this projection period we do not 

see Medicare growth abating. Whether or not the President’s Budget 

proposals on Medicare are adopted, they should serve to raise public 

awareness of the importance of health care costs to both today’s budget 

and tomorrow’s. This could serve to jump start a discussion about 

appropriate ways to control the major driver of our long-term fiscal 

outlook—health care spending. 

Page 11 GAO-06-456T 
Figure 5: Social Security, Medicare, and Medicaid Spending as a Percent of GDP 

5

2000 2010 2020 2030 2040 2050 2060 2070 2080

Percent of GDP

Source: GAO analysis based on data from the Office of the Chief Actuary, Social Security Administration, Office of the Actuary,

Centers for Medicare and Medicaid Services, and the Congressional Budget Office.

Medicare

Medicaid

Social Security

0

5

10

15

20

25

30

Note: Social Security and Medicare projections are based on the intermediate assumptions of the 

2005 Trustees’ Reports. Medicaid projections are based on CBO’s January 2006 short-term Medicaid 

estimates and CBO’s December 2005 long-term Medicaid projections under mid-range assumptions. 

As noted, unlike Social Security, Medicare spending growth rates reflect 

not only a burgeoning beneficiary population, but also the escalation of 

health care costs at rates well exceeding general rates of inflation. The 

growth of medical technology has contributed to increases in the number 

and quality of health care services. Moreover, the actual costs of health 

care consumption are not transparent. Consumers are largely insulated by

third-party payers from the cost of health care decisions. 

The health care spending problem is particularly vexing for the federal 

budget, affecting not only Medicare and Medicaid but also other important 

federal health programs, such as for our military personnel and veterans.

For example, Department of Defense health care spending rose from 

about $12 billion in 1990 to about $30.4 billion in 2004—in part, to meet 

additional demand resulting from program eligibility expansions for 

military retirees, reservists, and the dependents of those two groups and 

for the increased needs of active duty personnel involved in conflicts in 

Page 12 GAO-06-456T 
Iraq, Bosnia, and Afghanistan. Expenditures by the Department of 

Veterans Affairs have also grown—from about $12 billion in 1990 to about

$26.8 billion in 2004—as an increasing number of veterans look to federal 

programs to supply their health care needs. 

The challenge to rein in health care spending is not limited to public 

payers, however, as the phenomenon of rising health care costs associated 

with new technology exists system-wide. This means that addressing the 

unsustainability of health care costs is also a major competitiveness and 

societal challenge that calls for us as a nation to fundamentally rethink 

how we define, deliver, and finance health care in both the public and the 

private sectors. A major difficulty is that our current system does little to 

encourage informed discussions and decisions about the costs and value

of various health care services. These decisions are very important when it 

comes to cutting-edge drugs and medical technologies, which can be 

incredibly expensive but only marginally better than other alternatives. As

a nation, we are going to need to weigh unlimited individual wants against 

broader societal needs and decide how responsibility for financing health

care should be divided among employers, individuals, and government. 

Ultimately, we may need to define a set of basic and essential health care 

services to which every American is ensured access. Individuals wanting 

additional services, and insurance coverage to pay for them, might be 

required to allocate their own resources. Clearly, such a dramatic change 

would require a long transition period—all the more reason to act sooner

rather than later. 

In recent years, policy analysts have discussed a number of incremental 

reforms that take aim at moderating health care spending, in part by 

unmasking health care’s true costs. (See fig. 6 for a list of selected 

reforms.) Among these reforms is to devise additional cost-sharing 

provisions to make health care costs more transparent to patients. 

Currently, many insured individuals pay relatively little out of pocket for 

care at the point of delivery because of comprehensive health care 

coverage—precluding the opportunity to sensitize these patients to the 

cost of their care. 

Page 13 GAO-06-456T 
Figure 6: Selected Reforms Aimed at Moderating Health Care Spending

• Develop a set of national practice standards to help avoid unnecessary 

care, improve outcomes, and reduce litigation. 

• Encourage case management approaches for people with expensive 

acute and chronic conditions to improve the quality and efficiency of 

care delivered and avoid inappropriate care. 

• Foster the use of information technology to increase consistency, 

transparency, and accountability in health care. 

• Emphasize prevention and wellness care, including nutrition.

• Leverage the government’s purchasing power to control costs for 

prescription drugs and other health care services.

• Revise certain federal tax preferences for health care to encourage the 

more efficient use of appropriate care. 

• Create an insurance market that adequately pools risk and offers 

alternative levels of coverage. 

• Develop a core set of basic and essential services with supplemental 

coverage being available as an option but at a cost. Use the Federal 

Employees Health Benefits Program (FEHBP) model as a possible 

means to experiment and see the way forward. 

• Limit spending growth for government-sponsored health care 

programs (e.g., percentage of the budget and/or the economy). 

Source: GAO 

Other steps include reforming the policies that give tax preferences to 

insured individuals and their employers. These policies permit the value of 

employees’ health insurance premiums to be excluded from the 

calculation of their taxable earnings and exclude the value of the premium 

from the employers’ calculation of payroll taxes for both themselves and 

employees. Tax preferences also exist for health savings accounts and 

other consumer-directed plans. These tax exclusions represent a 

significant source of forgone federal revenue and work at cross-purposes

to the goal of moderating health care spending. As figure 7 shows, in 2005 

the tax expenditure responsible for the greatest revenue loss was that for 

Page 14 GAO-06-456T 
the exclusion of employer contributions for employees’ insurance 

premiums and medical care. 

Figure 7: Health Care Was the Nation’s Top Tax Expenditure in Fiscal Year 2005 

0

20

40

60

80

100

120

140

Estimated dollars in billions

Source: Office of Management and Budget (OMB), Analytical Perspectives, Budget of the United States Government,

Fiscal Year 2007.

Exclusion of employer contributions for insurance premiums and medical care

Deductibility of mortgage interest on owner-occupied dwellings

Exclusion of pension contributions and earnings: employer-sponsored defined benefit plans

Child tax credit

Exclusion of pension contributions and earnings: employer-sponsored 401(K) plans

118.4a

62.2

50.6

41.8b

37.4

Note: “Tax expenditures” refers to the special tax provisions that are contained in the federal income 

taxes on individuals and corporations. OMB does not include forgone revenue from other federal 

taxes such as Social Security and Medicare payroll taxes. 

a

If the payroll tax exclusion were also counted here, the total tax expenditure for employer 

contributions for health insurance premiums would be about 50 percent higher or $177.6 billion. 

b

This is the revenue loss and does not include associated outlays of $14.6 billion. 

Another area conducive to incremental change involves provider payment

reforms. These reforms are intended to induce physicians, hospitals, and

other health care providers to improve on quality and efficiency. For 

example, studies of Medicare patients in different geographic areas have

found that despite receiving a greater volume of care, patients in higher 

use areas did not have better health outcomes or experience greater 

satisfaction with care than those living in lower use areas. Public and 

Page 15 GAO-06-456T 
private payers are experimenting with payment reforms designed to foster 

the delivery of care that is proven to be both clinically and cost effective.

Ideally, identifying and rewarding efficient providers and encouraging 

inefficient providers to emulate best practices will result in better value 

for the dollars spent on care. The development of uniform standards of 

practice could lead to ensuring that people with chronic illnesses, a small 

but expensive population, received more and cost-effective and patientcentered care while reducing unwarranted medical malpractice litigation.

The problem of escalating health care costs is complex because 

addressing federal programs such as Medicare and the federal-state 

Medicaid program will need to involve change in the health care system of 

which they are a part—not just within federal programs. This will be a 

major societal challenge that will affect all age groups. Because our health

care system is complex, with multiple interrelated pieces, solutions to 

health care cost growth are likely to be incremental and require a number 

of extensive efforts over many years. In my view, taking steps to address 

the health care cost dilemma system-wide puts us on the right path for 

correcting the long-term fiscal problems posed by the nation’s health care 

entitlements. 

I have focused today on health care because it is a driver of our fiscal 

outlook. Indeed, health care is already putting a squeeze on the federal 

budget. 

Health care is the dominant but not the only driver of our long-term fiscal 

challenge. Today it is hard to think of our fiscal imbalances as a big 

problem: the economy is healthy and interest rates seem low. We, 

however, have an obligation to look beyond today. Budgets, deficits, and 

long-term fiscal and economic outlooks are not just about numbers: they 

are also about values. It is time for all of us to recognize our stewardship 

obligation for the future. We should act sooner rather than later. We all 

must make choices that may be difficult and unpleasant today to avoid

passing an even greater burden on to future generations. Let us not be the 

generation who sent the bill for its consumption to its children and 

grandchildren. 

Thank you Mr. Chairman, Mr. Spratt, and members of the Committee for 

having me today. We at GAO, of course, stand ready to assist you and your 

colleagues as you tackle these important challenges. 

Page 16 GAO-06-456T (450473) 
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