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89–222 PDF 2003

S. HRG. 108–205

MEDICARE’S FINANCIAL CRISIS

HEARING

BEFORE THE

JOINT ECONOMIC COMMITTEE

CONGRESS OF THE UNITED STATES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

APRIL 10, 2003

Printed for the use of the Joint Economic Committee

(

(II)

JOINT ECONOMIC COMMITTEE

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

SENATE

ROBERT F. BENNETT, Utah, Chairman

SAM BROWNBACK, Kansas

JEFF SESSIONS, Alabama

JOHN SUNUNU, New Hampshire

LAMAR ALEXANDER, Tennessee

SUSAN COLLINS, Maine

JACK REED, Rhode Island

EDWARD M. KENNEDY, Massachusetts

PAUL S. SARBANES, Maryland

JEFF BINGAMAN, New Mexico

HOUSE OF REPRESENTATIVES

JIM SAXON, New Jersey, Vice Chairman

PAUL RYAN, Wisconsin

JENNIFER DUNN, Washington

PHIL ENGLISH, Pennsylvania

ADAM H. PUTNAM, Florida

RON PAUL, Texas

PETE STARK, California

CAROLYN B. MALONEY, New York

MELVIN L. WATT, North Carolina

BARON P. HILL, Indiana

DONALD B. MARRON, Executive Director

WENDELL PRIMUS, Minority Staff Director

(III)

CONTENTS

OPENING STATEMENTS OF MEMBERS

Page

Senator Robert F. Bennett, Chairman ................................................................... 1

Representative Pete Stark, Ranking Minority Member ....................................... 2

WITNESSES

Statement of Hon. David M. Walker, Comptroller General, U.S. General

Accounting Office ................................................................................................. 5

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

Office ..................................................................................................................... 8

Statement of Gail R. Wilensky, Ph.D., John M. Olin Senior Fellow, Center

for Health Affairs, Project HOPE ....................................................................... 19

Statement of John P. Martin, Director, Employment, Labour, and Social

Affairs, Organization for Economic Co-operation and Development ............... 22

Statement of Marilyn Moon, Ph.D., Senior Fellow, The Urban Institute ........... 24

SUBMISSIONS FOR THE RECORD

Prepared statement of Senator Robert F. Bennett, Chairman ............................ 39

Prepared statement of Representative Pete Stark, Ranking Minority Member 40

‘‘A Primer for Journalists on Medicare Reform Proposals,’’ by Uwe E.

Reinhardt, Ph.D., Princeton University ...................................................... 124

Prepared statement of Senator Edward M. Kennedy ........................................... 40

Prepared statement of Hon. David M. Walker, Comptroller General, U.S.

General Accounting Office ................................................................................... 42

Prepared statement of Dr. Douglas Holtz-Eakin, Director, Congressional

Budget Office ........................................................................................................ 69

Prepared statement of Gail R. Wilensky, Ph.D., John M. Olin Senior Fellow,

Project HOPE ....................................................................................................... 81

Prepared statement of John P. Martin, Director for Employment, Labour

and Social Affairs, Organization for Economic Cooperation and

Development ......................................................................................................... 93

Prepared statement of Marilyn Moon, Senior Fellow, The Urban Institute ...... 104

(1)

MEDICARE’S FINANCIAL CRISIS

THURSDAY, APRIL 10, 2003

CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Washington, DC.

The Committee met, pursuant to notice, at 10:30 a.m. in room

562, Dirksen Senate Office Building, the Honorable Robert F.

Bennett, Chairman of the Committee, presiding.

Present: Senators Bennett, Reed; Representative Stark.

Staff Present: Donald Marron, Michael O’Grady, Dianne Preece,

Wendell Primus, John McInerney.

OPENING STATEMENT OF SENATOR ROBERT F. BENNETT,

CHAIRMAN

Senator Bennett. The Committee will come to order. I extend

a good morning to all and welcome you to today’s hearing on the

challenges facing Medicare.

I know the focus is on Iraq and what’s going on there. That is

a serious problem and a serious challenge, but long-term.

Medicare may be a more serious problem for this Country.

As I’ve said before, Medicare is the best Blue Cross-Blue Shield

fee-for-service indemnity plan of the 1960s frozen in time. Before

we get carried away with rhetoric about what we have to protect

and not protect about Medicare, let’s understand that simple truth.

We don’t practice medicine the way we did in the 1960s. And we

should not deliver and finance medicine in the same way today.

Protecting Medicare can become a dead-end for us if we insist in

preserving Medicare in its 1960s incarnation. Congress must face

the fact that Medicare is 40 years old, whereas the practice of medicine is changing so constantly that we could say for rhetorical

flourish that it’s only 40 months old. Applying another Band-Aid to

Medicare would be malpractice. Radical surgery is what is needed.

Exhibit 1 in the case for radical reform is Medicare’s growing financial crisis. The promised benefits now exceed Medicare’s financial resources by more than $13 trillion. In other words, Medicare’s

unfunded liabilities are more than three-and-a-half times as large

as our Nation’s public debt. This imbalance will only worsen if Congress adds a prescription drug benefit to Medicare.

We have a big problem, one that gets worse every day. To bring

Medicare into long-term fiscal balance today would require either

an 83 percent increase in the Medicare payroll tax or a 42 percent

reduction in Medicare spending. If we wait, these changes would

have to be even larger. Enormous burdens on Medicare beneficiaries and on taxpayers thus appear almost inevitable.

2

We need better solutions. We need creative ideas about how to

deliver quality care to a growing population at a lower cost. We

need, in short, to start over with a clean sheet of paper. We need

to ask ourselves: ‘‘Given everything we know today, what’s the best

way to structure Medicare and, indeed, our entire health-care system?’’

Any successful reform must begin with respect for the power of

the market. Consumer choice, consumer responsibility, and market

competition have long driven the success of the U.S. economy. And

the same forces should be harnessed to deliver health care.

Properly structured, market-oriented reforms can deliver quality

health care efficiently and fairly. Market forces will increase beneficiary choice, slow the growth of beneficiary and taxpayer spending, and provide incentives for health plans, both public and private, to provide the highest quality health care.

Congress should take care to safeguard vulnerable beneficiaries

from any unintended consequences of market forces. However, it

would be foolhardy to walk away from all the benefits of market

forces for fear of these unintended consequences.

We have a problem and it’s not going to go away. Indeed, it

seems likely to get worse, given the strong desire to add a prescription drug benefit. I share that desire. Prescription drugs are essential to the health of our retirees. But as we design that new benefit,

we should keep in mind that, as noted in the new Committee report released this morning, more than three-quarters of Medicare

beneficiaries already have some sort of drug coverage. Any move to

add a drug benefit must carefully balance the needs of the beneficiaries with their current sources of coverage—and the financial

burdens on taxpayers.

We certainly do need a prescription drug benefit. Prescription

drugs do things now that were unimaginable in the 1960s. But we

shouldn’t paste that benefit into a broken system. We shouldn’t create a new set of forms and eligibilities that torment patients, frustrate doctors, and reward those skilled in the black art of Medicare

payment formulas. Let us as a Congress face the fact that we need

to start from a clean sheet of paper, all over again, with all of the

money we are putting into it and say, ‘‘Let’s create a whole new

system that really works.’’

With that, I welcome the Ranking Member, Mr. Stark, for any

opening comment that he might have.

[The prepared statement of Senator Robert F. Bennett appears

in the Submissions for the Record on page 39.]

OPENING STATEMENT OF REPRESENTATIVE PETE STARK,

RANKING MINORITY MEMBER

Representative Stark. Thank you, Chairman Bennett, for holding this hearing. I welcome our witnesses.

I had the distinct pleasure of seeing Director Holtz-Eakin and

Mr. Walker yesterday. And I’m happy to see them again today and

hear how they respond to the Chairman’s spin on the problems

with Medicare.

The title of this hearing, ‘‘Medicare’s Financial Crisis,’’ is intended, I believe, by the Republicans to be a leading suggestion

that Medicare isn’t viable and is in a horrible financial situation.

3

Thankfully the facts point out a much different picture. This is

more about ideology of the Republicans than the reality of Medicare’s current standing.

Medicare’s solvency is at the second highest point of the program’s history. I just point this out—that the Republican attack on

Medicare’s viability is a scare tactic to enable them to achieve their

real goal, which is as the Chairman just suggested, dismantling

Medicare as an entitlement program that provides benefits at guaranteed prices.

Medicare is better than private plans at controlling costs as we’ll

hear later from Marilyn Moon, who will highlight her study that

Medicare has consistently done a better job at controlling healthcare cost than the private sector. I’ll leave it to her to discuss that

analysis in greater detail.

The major problem facing Medicare’s future is basically us. Will

we in Congress be willing to make the changes necessary to insure

its viability for the future?

The most important change we could make is to add a Medicare

drug benefit. Of course, adding that drug benefit will require increased spending. The President and the Republicans don’t seem to

question increased spending when it comes to tax cuts for the

wealthy, doing away with the inheritance tax, which will only help

the Chairman’s children and mine, but certainly won’t help most

lower income seniors or children who have to make it on the own.

When it comes to a Medicare drug benefit, the response is always: ‘‘Oh, it’s too costly to do a real benefit.’’

We Democrats don’t think that’s the case. Republicans would

argue that a Medicare drug benefit can’t be added unless substantial ‘‘reform’’ is attached.

Well, I’d like to research a little what you really mean by reform.

Do you mean something like the President’s outline of a plan that

would force seniors to enroll in private managed-care plans in

order to receive decent prescription drug coverage, while those in

traditional Medicare would receive minimal drug coverage and

some Mickey Mouse discount cards?

The Faustian bargain presented to seniors is to receive the drugs

they need in exchange for giving up comprehensive health coverage

with their choice of doctors. And that’s not a fair choice—and not

one that any Member of Congress is forced to make. Seniors

shouldn’t have to make that choice either.

The GAO estimates show that foregoing additional tax cuts beyond current law would provide an additional 25-year window for

Medicare solvency while we consider how to slow health-care costs.

At a minimum, this should be done.

Dr. Holtz-Eakin has referred to the Medicare Trust Funds as

merely ‘‘bookkeeping devices’’ used by the Treasury. I’d submit to

you that a Trust Fund is more than that. It’s a promise.

It’s a promise that we made to 40 million elderly and disabled

Americans that they will receive quality health care and that Medicare will be there for people who need it, in every hamlet and every

corner of this country, so long as the House and the Senate here

in Washington are willing to keep that promise.

4

It’s up to the Republican leadership that controls the House and

the Senate to keep or break this country’s promise to our seniors.

That’s what’s before us.

We had Dr. Uwe Reinhardt with us yesterday. Mr. Chairman, he

did ‘‘A Primer for Journalists on Medicare Reform Proposals,’’ I ask

unanimous consent it be made a part of this record. As for—objection, I’ll put a Committee insert.

[The primer entitled ‘‘A Primer for Journalists on Medicare Reform Proposals,’’ by Dr. Reinhardt appears in the Submissions for

the Record on page 124.]

It was Dr. Reinhardt who challenged us in Congress. He says the

critics of Medicare, chiefly market-oriented policy analysts and policymakers, will call the program outdated. He suggests that the

President has suggested the same thing.

But the gaps in coverage are our fault. We’re the ones who could

provide the coverage—and we must. The failure to modernize Medicare is up to us, always Medicare has been a world leader in innovation in many areas and it doesn’t get credit for that. It’s the most

efficient bill-paying operation in the United States. It offers the penultimate choice in services.

And so, if there’s a shortcoming, it’s ours. We talk about choice

and competition. And I know the Chairman is an expert in this and

understands the value of entrepreneurial creativity. But you can’t

have it in health care and in Medicare.

First of all, none of us know—you or I—with any certainty as to

what medical treatments they would give to us, how much they

cost, what they are.

A doctor asks us to take a test and we take it and we hope we

pass. And we don’t know what it costs and usually neither does the

doctor.

That’s no way to have a market. If I’m going to decide whether

to buy your calendar, I can price it against the lesser quality

brands and understand that I buy a high-quality product from you.

But I can understand it.

I can get you 12 months, 52 weeks—that I can handle with my

shoes and socks on. But he wants to talk to me about various

chemotherapies, I don’t know. I trust the Chairman probably

doesn’t know and our witnesses don’t know.

So I don’t know how we could be expected in the vernacular of

buying an automobile or commercial product to have a ‘‘free market’’ when we are incapable of understanding what it is we’re buying.

Also, we can’t have a fair competition, because if you are the organization Blue Cross, you can pull out of some town in Utah if

you choose not to serve there. Medicare can’t. Medicare and Medicaid must serve every hamlet in the country. We don’t have the

luxury that private plans have to pull out of an area that they may

not choose to serve.

So there are all those impediments to what we think of as the

standard ‘‘competitive model’’ to provide this. And I think we have

a plan that is arguably the most popular government plan in the

country today. And I would challenge my colleagues, not our witnesses and not the bureaucracy, to say: Let’s do our job. We’re the

5

board of directors of Medicare. CMS is the executive cadre who

should carry out the principles we give them.

Let’s go back to work. Let’s get the Senate Finance Committee

and the House Ways and Means Committee to do their job. Then

I think we’ll continue to have a program that we’ll be proud of.

[The prepared statement of Representative Stark appears in the

Submissions for the Record on page 40.]

Senator Bennett. Thank you. And thank you, Mr. Stark. We

could engage this debate among ourselves, but we won’t. We’ll go

to the witnesses.

But I can’t resist responding one little bit. If I sit on the board

of this particular enterprise, I have received more criticism from

the customers about this enterprise than anything else that I sit

on the board of.

So if it’s doing so well, at least those people who have my home

phone number haven’t discovered that yet. And they are complaining bitterly about a number of things.

With that, we will stop debating amongst ourselves.

Mr. English, if we can, I would like to go directly to the witnesses. Then we will go through the round of questioning. But we

appreciate your being here.

Our first panel we have David Walker, Comptroller General of

the United States; and Douglas Holtz-Eakin, the new Director of

the Congressional Budget Office, both of whom have examined this

issue in considerable detail.

Gentlemen, we appreciate your being here and look forward to

your testimony.

Mr. Walker, we’ll start with you since seniority-wise you’ve been

in government service a little longer. But that means we give the

CBO the last word. So you can each take some comfort in the order

I’ve chosen.

OPENING STATEMENT OF HON. DAVID M. WALKER,

COMPTROLLER GENERAL, GENERAL ACCOUNTING OFFICE

Mr. Walker. Somehow, Mr. Chairman, I think you are going to

have the last word. But thank you very much. It’s a pleasure to be

here, Mr. Chairman, Ranking Member Stark, Mr. English, and

other Members of the Committee, to testify with regard to an issue

of long-standing interest to myself. That is Medicare.

As you know, Mr. Chairman, I have been involved in this issue

for many years including serving as a public trustee of both Social

Security and Medicare from 1990 to 1995. So this is not a recent

interest. It’s one of long standing.

I recognize the importance of this program to the American people. Over 10 years ago, the public Trustees of Social Security and

Medicare, including myself, stated that the Medicare program was

unsustainable in its present form.

Since that point in time, others have come to the same conclusion. The Congressional Budget Office (CBO), The Office of Management and Budget (OMB), and others have come to that same

conclusion.

The recent Trustees’ report shows that Medicare’s projected financial condition has worsened substantially in the last year. The

actual or present value of the deficit has increased approximately

6

20 percent to $6.2 trillion for HI alone, which is Medicare Part A.

That does not include SMI or Part B.

Regarding Trust Fund solvency—it’s true, the Trust Fund is projected to be solvent under the intermediate assumptions until 2026.

And there are considerable assets in the Trust Fund in the form

of non-readily marketable government securities that are backed by

the full faith and credit of the United States Government. And I

think it’s important that this be stated.

These bonds do have legal significance. They do have moral significance. They represent a priority claim on future general revenues. They do not, however, have any economic significance. This

is part of why Trust Fund solvency can be misleading.

I have been a trustee in a number of other capacities, including

dealing with pension funds and health funds in the private sector.

The Trust Funds that we have in the Federal Government, including those for Social Security and Medicare, are accounting devices.

They are not Trust Funds as defined in Webster’s dictionary.

They do not have the same fiduciary responsibilities associated

with them. And I think we need to recognize that reality.

In the year 2013, the HI program will start experiencing a negative cash-flow, at which point in time these closely held government securities, which are of value, will have to be redeemed.

But in order to redeem those securities, we’ll have to increase

taxes and/or cut spending and/or increase the debt held by the public. If we choose the borrowing approach, the deficit will grow dramatically.

In the first chart [see figure 1], which I have up here, my colleague is helping me to show how the cash-flow deficits escalate

dramatically. And this is in 2003 constant dollars, so inflation has

been taken out.

Cash is key and it’s important to keep in mind. We also need to

note that if we look at entitlement spending as a percentage of the

economy, it is continuing to grow. There’s been a significant increase in mandatory spending over the last 40 years.

As you know, in 1962 when John F. Kennedy was President, the

Congress got to decide where almost two-thirds of the Federal

budget was going to be spent every year.

Now it’s almost reversed. Congress gets to decide a little over

one-third of the Federal budget every year. And the growth in Social Security, Medicare, Medicaid [see figure 2] and interest on the

Federal debt is continuing.

At the same time, what helped finance the increase in those programs over the past 40 years were reductions in spending for national defense, from 50 percent of the Federal budget in 1962 to 17

percent in 2002 is not likely to continue in the future.

We know that there will be additional spending for national defense and now homeland security. So as a result, if we look forward

to the future, based upon the Government Accounting Office’s

(GAO) latest long-range budget simulation, which is updated twice

every year, you can see that we are headed for a troubling future—

namely, that there is a significant and growing mismatch [see figure 3] between projected revenues and projected expenditures.

This simulation assumes that the Social Security and Medicare

Trustees are correct in their intermediate best estimate assumpVerDate 03-FEB-2003 12:06 Dec 03, 2003 Jkt 089222 PO 00000 Frm 00010 Fmt 6601 Sfmt 6601 89222.TXT SSC3 PsN: SSC3
7

tions; it also assumes that discretionary spending grows by the rate

of the economy, and that the 2001 tax cuts continue out into the

future. Yes, it would help if there were additional revenues. But I

will tell you that even if the tax cuts are allowed to expire, which

is current law, there is still a significant gap. The gap is so great

that we are not going to grow our way out of the problem.

Tough choices will be required—and in fairness, not just from

Medicare, but also from Social Security, discretionary spending,

and tax policy, including tax incentives in particular. We’re going

to have to make some tough choices.

I should say, Mr. Chairman, you’re going to have to make some

tough choices to try to decide what’s the proper role of the Federal

Government in the 21st century. How should it do business? What

are the priorities? How are you going to allocate limited resources

to have the most positive effect over time? And hopefully, Mr.

Stark, yes, deliver on whatever promises are being made.

I think the problem right now is there’s a big gap between promised benefits and funded benefits. There’s a huge expectation gap

in the public. I think we have a responsibility to close that gap in

a way that’s both fiscally responsible and sustainable over time.

As you mentioned, Mr. Chairman, there’s increasing interest in

modernizing Medicare’s benefit structure. I think there is no question that if Medicare was designed and implemented today, it

would include a prescription drug benefit. There’s clearly a need for

a prescription drug benefit.

However, Medicare also needs to be modernized in many other

ways because many other things have changed since 1965 when

Medicare was created.

I think it would be prudent for Congress to consider targeting

any prescription drug benefit and including appropriate cost-containment mechanisms and other programmatic reforms that would

hopefully not worsen Medicare’s already deteriorating long-range

financial condition.

I say it would be prudent. It’s obviously not required. Ultimately

elected officials will make that choice.

It would be nice for us to have a Medicare Hippocratic oath. Let’s

don’t make the long-term problem even worse.

That will be tough. But ultimately, we’re going to have to come

to grips with this issue.

Last, let me say that I think that in reality we have three sustainability problems. One deals with the Medicare program. These

[see figure 4] long-range imbalances only deal with HI. They don’t

include SMI.

By the way, this shows how Social Security, Medicare, and Medicaid is going to increase as a percentage of the overall economy,

which is also important.

One is Medicare, HI, and SMI. The second is health care. We’ve

got a broader health-care challenge and a sustainability problem

there as well.

Third, we’ve got an overall Federal fiscal imbalance challenge.

Many of these are interrelated. We ultimately have to try to come

to solutions that will address all three.

In that regard, GAO is preparing a briefing document that

should be available within the next month or so to provide informaVerDate 03-FEB-2003 12:06 Dec 03, 2003 Jkt 089222 PO 00000 Frm 00011 Fmt 6601 Sfmt 6601 89222.TXT SSC3 PsN: SSC3
8

tion to the Congress and other interested parties on some key

trends and statistics. This document will include a series of questions that Congress may wish to consider when analyzing various

health care reform proposals.

We’ve already done this for Social Security. It’s been embraced

by the Congress. We’ve used it to analyze various Social Security

reform proposals at the request of the Congress.

By the way, this analysis will not just ask questions on cost,

which is important. It will also ask questions on access, quality, administrative matters, and other issues in order to try to come up

with a balanced perspective so that the Congress can hopefully

make more timely and informed judgments.

Thank you, Mr. Chairman. I look forward to answering questions

after my colleague has had a chance to give his statement.

[The prepared statement and charts of Mr. David M. Walker appear in the Submissions for the Record on page 42.]

OPENING STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR,

CONGRESSIONAL BUDGET OFFICE

Dr. Holtz-Eakin. Thank you very much. Let me touch on some

of the subjects in my testimony and what the implications are for

the policy going forward.

As highlighted by my colleague, under current law and without

any additional benefits such as a prescription drug benefit, Medicare spending is on a course to rise dramatically as a fraction of

our national economy, as a fraction of the Federal budget.

As shown in the chart [Figure 1 in the prepared statement],

Medicare spending currently constitutes 2.5 percent of Gross Domestic Product (GDP). Over the next several years it will rise to

something like 9.2 percent of GDP, or roughly half the size of the

current Federal Government in our economy.

It’s commonly assumed that this is all due to the aging of the

U.S. population—the retirement of the Baby Boomers and the subsequent shift in the ratio of retirees to workers in the economy.

As shown in the chart, the top portion, the lighter gray portion,

is indeed the effect of an aging population. But that constitutes

only 30 percent of the rise in Medicare spending as a fraction of

our economy. The remaining 70 percent is due to the fact that medical costs in our economy are rising faster than GDP.

As shown in the chart, we assume there will be an excess cost

growth of 1 percentage point over the forecast horizon. That pace

is indeed a bit slower than over the history of Medicare, where

spending has averaged 2.8 percent faster than the growth rate of

GDP over the period from 1970 to the present.

With that in mind, let me review the current trends in cost

growth as we see them.

The Congressional Budget Office has recently updated its baseline projections for Medicare spending. Over the next 10 years, we

continue to see Medicare costs growing 6.8 percent per year faster

than the rate of GDP growth in the economy.

And if one looks at the growth rate of prescription drug spending

by the Medicare population, that rate is projected to rise by 9 percentage points per year—again, considerably faster than the rate of

GDP growth.

9

Putting those facts together suggests the need for thinking about

policy in the years to come. At the broadest level, decisionmakers

are faced with the following rough tradeoffs.

One possibility would simply be to continue the tradition of having the government remain at roughly 18 percent of the size of the

economy. That’s the ratio of Federal receipts to GDP in the postwar period, roughly speaking.

If so, the rise in Medicare spending and the simultaneous rise in

Social Security and Medicaid outlays are currently on track to

equal about 20 percent of GDP over this horizon. Constraining the

Federal budget to the traditional level of Federal Government involvement in the economy would require severe tradeoffs within

the budget to say the least.

An alternative would be to decide to have a government that is

larger than has been traditionally the case in the scope of the economy. If that option was chosen, it would require higher taxes.

As an illustration of the magnitudes involved, if one were today

to raise the fraction of Medicare spending from 2.5 percent to 9.2

percent—if that were to happen instantaneously instead of over 75

years—it would require doubling the current payroll tax—the total

payroll tax from its current level of about 15 percent.

The cost implications of that are now clear. Another alternative

would be to hope that the economy would grow faster and as a result enlarge the economic pie from which all resources—the public

sector, Medicare, Social Security, and others as well as the private

sector—would draw.

Within Medicare, as my testimony outlines, I think, there are no

easy fixes. Among the potential policies we contemplated and displayed in our budget options document are raising the normal retirement age from 65 up to 70, instead of just up to 67. Doing so

eliminates 7/10 of 1 percent of the increase in Medicare as a fraction of GDP over the 75 year period, which is a small fraction of

the overall rise that is projected in these simulations.

Alternatively, one might double the premiums paid by beneficiaries, under Supplemental Medical Insurance [part B of Medicare] from 25 percent to 50 percent—that is, double the required

contribution. Even that large a policy change affects only 1 percentage point of this overall growth.

And so under current law, there are no easy fixes that the Congress may contemplate. Instead, as my colleague pointed out, a

much harder set of choices confronts us.

My closing remark would be that it may be the case that this Nation will choose to spend more of its increasing wealth on medical

expenses and Medicare in particular.

If so, it’s still useful to keep an eye on using those Federal dollars wisely to empower beneficiaries through the incentives and the

availability of options to control their Federal dollars and use them

wisely and get the highest quality per dollar of Federal expenditure

in Medicare as we go forward.

With those remarks, I’ll be happy to answer your questions.

[The prepared statement of Dr. Holtz-Eakin appears in Submissions for the Record on page 69.]

10

Senator Bennett. Thank you very much. I think this economic

analysis is very helpful and it’s chilling. But there are some assumptions built into it that I’d like to explore with you.

The assumptions, Mr. Walker, if I could go back to your statement, are that this is Medicare in its present form.

Mr. Walker. That’s correct.

Senator Bennett. If we look at the role of prescription drugs for

just a minute, prescriptions save health costs. That is, you take a

pill now for something you used to go into the hospital to have an

operation for. There is an efficiency that takes place. And Medicare, as currently structured, does not recognize that efficiency—indeed, it penalizes it because, as I say, it’s the 1960s program and

therefore the benefits system that it reimburses was drawn up in

the 1960s and has been perpetuated ever since.

It’s kind of like the Endangered Species Act. Things are on it,

but when things get better, nothing ever comes off. They just keep

adding to the list, but they never take anything off when they solve

a problem.

And a careful look at Medicare would say there may be some

things that are inappropriate to reimburse at 1960s levels because

they can be solved with a different kind of treatment—again, specifically, prescription drugs.

There are plenty of examples of this. There are also examples of

screening programs, which are not covered, which, if they were

done would produce overall lower costs. The complaints get—back

to my offhand comment to Mr. Stark—the complaints I get continually are that Medicare drives us to bad medical practice.

Things are being done in order to skew them in a way that will

produce Medicare reimbursement which, if they were done in an

unfettered atmosphere, where the best product or the best result

was taken into consideration, would be done very differently.

But they are not done that way because Medicare won’t reimburse them if they are done that way. We are turning doctors into

liars so that they can somehow deliver what the patient needs and

still get some Medicare benefit for it.

Now, Mr. Walker, it’s not necessarily in GAO’s purview, but

since we’re talking about a clean sheet of paper here—at least I’m

talking about a clean sheet of paper—is the GAO equipped to do

any kind of study on this issue of how Medicare by the payment

system that it’s structured is distorting the provision of health care

and thereby, in fact, driving up costs? Or is that something that’s

not really appropriate for a group of auditors?

Mr. Walker. As you know, less than 15 percent of what GAO

does has to do with financial management. Eight-five percent-plus

has to do with program reviews, policy analyses, investigations,

legal adjudications and other types of professional services. This is

something that I think we could do possibly in conjunction with the

national academies.

We are forming partnerships quite frequently with a variety of

organizations, including strengthening our partnership with the

national academies.

I do think there’s some truth to what you’re saying, not only with

regard to Medicare, but frankly, with regard to the entire Federal

budget. We tend to assume that the base is OK and all we’re doing

11

is just adding on to what we already have rather than fundamentally reviewing and re-examining what we should be doing.

I think there is a need for that fundamental review and re-examination and we’d be happy to try to help, but we’ll have to talk with

you separately about the nature, timing, scope, et cetera.

Senator Bennett. That’s one of the advantages of the Joint Economic Committee, as Alan Greenspan pointed out to me when I became Chairman, is that we have no legislative responsibilities.

Therefore, we are released maybe from the kinds of constraints

that do hit the Ways and Means Committee and the Finance Committee, in that we can look—to use the vastly overused cliche—we

can look outside the box. We can look at new things that maybe

legislative committees don’t feel free to look at.

And given the enormity of this challenge that has been presented

both by your charts, Mr. Walker, and your charts, Dr. Holtz-Eakin,

we’ve got to think differently than we have ever thought before.

And we’ve got to look for new solutions in ways we’ve never looked

at before.

So I’d like to pursue that. I have a number of other questions.

But in respect to my colleagues, we’ll now go through the established round.

Mr. Stark, we’ll hear from you.

Representative Stark. Thank you, Mr. Chairman.

As I say, I’ve heard this testimony before. We’re basically facing

here part of a ‘‘chicken little’’ scenario. We’ve got these two distinguished experts representing the throes of Medicare, trying to gin

up a crisis where basically, none exists, while we are looking here

at protections that offer up predictions that are notoriously inaccurate and probably would not serve, certainly in any enterprise

that I can think of.

Now, for example, Mr. Walker, how many times has Medicare

reached the 75-year actuarial solvency test?

Mr. Walker. It never has to my knowledge.

Representative Stark. That’s right. This year, not the best

year, at least one of the two best years Medicare has had in terms

of solvency since it’s inception.

Mr. Walker. If you look solely at the amount of assets in the

Trust Fund, then that’s a true statement. But I believe that is misleading.

Representative Stark. I don’t believe it’s as misleading as what

you’re doing. The chart that you had I thought was prepared by Arthur Anderson, who I thought was out of business.

But the facts are Mitch Daniels suggested that when you move

to 10 years, as he said, it’s led to a lot of nonproductive and counterproductive, to base Medicare solvency on the data, that prove

flawed, but wildly misleading.

And to the CBO’s record in projecting Medicare, Dr. Holtz-Eakin

is equally miserable. If you look at CBO’s record, when you project

Medicare 5 years into the future, it overestimated Medicare costs

in every year since 1985. For example, in 1985, CBO projected that

Medicare spending in 2000 would be fully one-third higher than it

actually is.

Now, part of the reason for the reduction is the Balanced Budget

Act. But that’s the point. It is absolutely asinine to assume that the

12

Congress that follows on after we’re gone is going to allow Medicare to go broke or default on any government securities, which

ought to dispel this mania for cash accounting that Mr. Walker has

to deal with.

When we talk about forecasts, let’s talk about the President’s tax

cut. The present value over 75 years is between $12 and $14 trillion as opposed to a $6 trillion deficit in the Medicare Trust Fund.

The Social Security deficit is only $3.8 trillion, as opposed to these

irresponsible tax cuts.

So I think you have to get this thing into focus. As I say, if what

you’re trying to do is scare the seniors in this country, that’s fine.

If you’re trying to think rationally and reasonably about what we

might do to improve Medicare, there are a host of things before us.

We could, in fact, bring the benefits into the 21st century before

it’s over.

That, I would suggest, portends that we deal with prescription

drugs. We probably ought to look at—although it would be very expensive, but it’s probably a candidate for good social insurances as

is Medicare—to look at long-term care. I don’t know if the States

can sustain that much longer.

We certainly—although we have judiciously stayed out of physicians’ practice except as a secondary or a tertiary effect of what

price setting that we have done—we have directed physicians on

how to practice.

But as you look at the Dartmouth studies that show that in the

Sunbelt, in Florida, Louisiana, and places like that, and in California, we are spending five or six times as much for the same population and the same procedures that we spend in Minnesota or in

North Dakota.

It’s equally good medicine. You’d go a long way to say that the

Mayo Clinic is any better or any worse than some hospital in Texas

or Louisiana, yet they are doing things for far less.

That happens to be practice habits. It has nothing to do with our

payment structure. It is the way, I guess, people were trained to

do medicine.

But it would seem to me that it would be worth our looking into

those types of things, because if we were paying for medical care

across the country at the same rate that it costs in Minnesota,

Medicare would be solvent for centuries.

Now, it’s still controlled. And this is the only way you will do it—

is to purchase more economically, or to begin to see if the medical

profession would join with us in coming to some kind of going to

the least expensive practice.

Thank you, Mr. Chairman.

Mr. Walker. Mr. Chairman, can I respond really quickly? Because something was said that really disturbs me.

Mr. Chairman, for the record, I was a Trustee of Social Security

and Medicare from 1990 to 1995. I resent the fact that anybody

would suggest that I’m here to destroy Medicare. I care very much

about that program.

Number one, Medicare will continue to exist. There’s no question

about that. Even when the ‘‘Trust Fund’’ goes insolvent, there will

still be revenues. That’s not a question.

13

So there’s no way that Medicare is going to go away. But I think

we have to recognize reality. Are we going to play lemmings where

we are going to wait until we hit the cliff and fall off the cliff? Or

are we going to plan ahead?

There is a $6.2 trillion discounted present value unfunded gap

between what’s been promised right now and the current revenue

stream. Congress may decide to fill it with taxes, to raise taxes.

That’s your choice, but there’s a $6.2 trillion gap that increased

20 percent last year and is likely to increase in future years. The

Trustees have generally underestimated the cost growth, not overestimated the cost growth.

And, furthermore, Congress does not have a very good track

record of dealing with this type of future problem. Most of the

things that Congress is talking about doing now are going to make

things worse, not better.

We face a demographic tidal wave the likes of which this country

has never seen. We have 10-year cash-flow budget projections that

end in 10 years. But, you know what? The world is not going to

end in 10 years. So I think it’s important, and I’m just trying to

state some facts. There are differences of opinion within Congress,

but ultimately Congress has to decide how to resolve it.

But I can say for myself, there’s no way I’m talking about trying

to destroy the Medicare system. I’ve got parents, children and

grandchildren too.

Senator Bennett. Thank you.

Representative Stark. I would hope you would not be offended

if I take your pooh-poohing of these charts and give them to the

Democratic Ranking Member of the Senate Budget Committee, who

has been using these charts throughout the entire budget debate

in an attempt to trash the President’s program.

I’m glad to have you say that they’re nonsense so that we can

get Senator Conrad to stop using them.

Senator Bennett. Mr. English.

Representative English. Thank you, Chairman. I have a number of substantive questions, but if I could, I’d like to apply a

flame-thrower to any remaining straw men that have wandered

into our vision on this.

Dr. Holtz-Eakin, are you aware of any serious economist who argues that Medicare is not in a long-term crisis?

Dr. Holtz-Eakin. No.

Representative English. Do you know of anyone, Mr. Walker,

who has made that argument credibly?

Mr. Walker. No, I don’t. I also don’t know of any economist that

says that these bonds have economic substance.

Representative English. Very good. Finally, and I think we

can dispose of this quickly, Director Holtz-Eakin, is there any connection between the President’s tax cut and the solvency of Medicare?

Dr. Holtz-Eakin. In the end, as the chart was designed to illustrate, there will be demands for different programs, and they will

be financed in the way that the Congress chooses.

Representative English. Mr. Walker, anything to add to that?

14

Mr. Walker. Not directly, but indirectly there’s no question you

have to look at the revenue side and the spending side. I look at

the gap. And obviously, that contributes to the gap.

Representative English. The President’s tax cut

contributes——

Mr. Walker. To the gap and the overall fiscal imbalance, not directly to Medicare, but to the overall issue.

Representative English. I understand your point, although I

think what we’re doing a hearing on today is Medicare.

Mr. Walker. That’s correct.

Representative English. Getting more to the substantive side

of this discussion, Dr. Holtz-Eakin, what is the long-term projection

for Medicare as far as what percentage of the total medical expenditures are ultimately going to be within Medicare within this economy?

As there are more people who are utilizing Medicare who make

up more and more of the patient population as people live longer,

how do you see that trend developing? Both gentlemen.

Dr. Holtz-Eakin. At the moment, the number is a bit above 50

percent. That is, 53 percent of total health spending by the elderly

is paid for by Medicare. If you fixed the growth rate of Medicare

costs at the rate of private-sector health costs—in the long run,

they will end up running very close to each other, as they always

have—then the share paid by Medicare (under current law) should

remain about half of total health spending by the elderly. What’s

left is a shift in people across the line from private-sector health

into the Medicare program as they age.

From another perspective—how much is Medicare spending as a

share of the Nation’s total health spending—I don’t have the precise number on that, but you can see that you’re going to move upwards from today’s level of 17 percent.

Representative English. Mr. Walker, would you care to comment?

Mr. Walker. It’s likely to increase. I can’t give you a percentage.

One reason it’s likely to increase is because of the demographic

trends that Dr. Holtz-Eakin mentioned as well as trends in the private sector.

The fact of the matter is, there’s been a significant backing away

from providing retiree health insurance by employers. And, furthermore, now many employers are backing away from as generous

health plans even with regard to their active workers.

Representative English. Would it be fair to say that there will

be some point at which Medicare will represent the predominance

of spending within the medical economy without policy changes?

Dr. Holtz-Eakin. It seems a fair guess, yes.

Representative English. How would you characterize the current structure of Medicare in terms of what sorts of procedures it

favors and what impact it has on the introduction of new technologies?

Does it encourage the introduction of new technologies, which

over time improve health care and ultimately, we would hope reduce, as it has in other economies—reduce costs? Or does it tend

to retard the introduction of new technologies?

15

Dr. Holtz-Eakin. I would say there’s no easy characterization of

the broad array of different technologies and how Medicare either

promotes or discourages their use.

It is a fact that new technologies have been the prime source of

rising health care costs in Medicare and elsewhere. It is also true

that Medicare is on the whole not yet the dominant driver of new

technologies, especially relative to the role of private-sector health

care.

Representative English. Would you like to comment, Mr.

Walker?

Mr. Walker. I have not seen any evidence to show that it promotes the development of new technologies.

Representative English. What sort of impact does the current

design of Medicare services have on the introductional enhancement of preventive care?

Dr. Holtz-Eakin. We don’t really have a bottom line on that, although it’s actively under study. It’s a great research question that

applies to preventive care as well as prescription drugs—whether

they will, on balance, lower costs in total.

Representative English. Thank you, Mr. Chairman.

Representative Stark. Quick comment. Medicare right now is

about 20 percent of total medical spending in the country according

to something or other here—Medpath—if that’s helpful.

Dr. Holtz-Eakin. So the record is clear, Medicare correctly accounts for about 17 percent of our Nation’s total health spending.

I misunderstood the question.

Senator Bennett. Ms. Maloney.

Representative Maloney. Thank you, Mr. Chairman. I thank

both of our panelists for your testimony and your public service.

Dr. Holtz-Eakin, I’d like to follow up on my colleague, Mr. English’s question. Isn’t there a connection between revenues and

Medicare? And if we cut revenues, will we not cut our ability to

deal with Medicare?

And to get specific about the budgets that are before us, the

President’s budget asks that the $1.35 trillion 2001 tax cut be

made permanent. At the same time, there is a debate before Congress right now over an additional $700 billion tax cut over 10

years.

And over 75 years, these tax cuts could account for roughly 2.2

percent of the GDP, enough to wipe out the entire health insurance

fund shortfall, which would be roughly 1.1 percent of GDP over 75

years.

In light of demographics that we are facing with the Baby

Boomers coming up, do you believe that it’s wise policy to make the

2001 tax cut permanent and adding new tax cuts on top of that to

those that have already been approved?

Dr. Holtz-Eakin. It’s not my role as the CBO Director to make

policy recommendations.

The point I was trying to make, in which I think the math is

fairly compelling, is that Medicare, Social Security, and Medicaid—

if they continue to grow under current law—will become large demands on our economy as a whole.

If the Congress chooses to finance that 9 percent of GDP that

Medicare is projected to account for over the long term, such fiVerDate 03-FEB-2003 12:06 Dec 03, 2003 Jkt 089222 PO 00000 Frm 00019 Fmt 6601 Sfmt 6601 89222.TXT SSC3 PsN: SSC3
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nancing will require higher taxes or enormous borrowing or both.

The math on that is inescapable.

Representative Maloney. Basically what you’re saying is that

if we lower our revenues, that will definitely increase our long-term

deficits. We’re now at $308 billion and galloping forward with deficits. Will that not impair our Medicare obligations?

Dr. Holtz-Eakin. I think it’s well within the power of the Congress to choose to continue to finance each dollar of this projected

Medicare spending if it chose to raise taxes or borrow more. I

would argue that if such spending levels continued, a policy of borrowing the funds would not be sustainable.

Representative Maloney. So it’s not sustainable if we continue

on the current road we’re on, which is cutting revenues, running

up deficits?

Dr. Holtz-Eakin. In the absence of other policy changes, this

gap will widen to the point where it cannot be financed by borrowing alone.

Representative Maloney. You’ve also testified that economic

growth is the biggest key for long-term health of the Medicare program. In your view, what are the best ways to achieve economic

growth?

Dr. Holtz-Eakin. Whether it’s the best hope or not, it does raise

the chances that the economic pie will be larger and more capable

of financing Medicare and all other demands on the economy.

In the end, the degree to which public policies can improve longterm economic growth depends on whether they on balance promote saving at the expense of current consumption.

Economies grow over the long term by accumulating capital,

labor and skills, and new technologies. Broadly speaking, that requires sacrificing the use of resources for present consumption in

favor of saving for the future.

Representative Maloney. To get back to the specifics, what are

the current CBO’s long-term economic growth projections factoring

in the tax cut? And has the 2001 tax cut affected CBO’s long-term

economic projections?

Dr. Holtz-Eakin. CBO’s most recent economic projections are

the January baseline projections, which go out 10 years. In those

projections, the broad, underlying long-term growth rate is determined by the rate of growth of the labor force, which is a bit under

1 percent, and the rate of growth of technology and production,

which is on the order of 2 percent or so.

So the long-term economic potential growth to the U.S. economy

is on the order of 3 percent to 3.2 percent.

Representative Maloney. Do you see the deficit projections

harmful to Medicare’s stability?

Dr. Holtz-Eakin. There’s no automatic link from the difference

between receipts and outlays to Medicare’s stability. Any particular

program within the outlay structure lies within the province of policymakers to finance the total outlays in any way they choose.

Representative Maloney. But we know that we have these

deficits and we know that they are projected to grow. Is that going

to impact on Medicare’s stability?

17

In other words, where can we find the revenues then for Medicare if we continue to lower revenues and run up the deficit?

Where is the money going to come from?

Dr. Holtz-Eakin. That, in the end, will be a decision that the

Congress makes. I point out as a matter of record that in CBO’s

baseline projections and in its analysis of the President’s budget,

the pattern of deficits is one in which they are not ever increasing.

In fact, under the baseline projections, the unified budget balance moves into surplus in about 2008. And under our analysis of

the President’s budgetary proposals, the deficit peaks in fiscal year

2004 and then declines thereafter and becomes smaller.

Senator Bennett. Senator Reed.

Senator Reed. Thank you very much, Mr. Chairman. You were

talking about the 10-year projections you are doing. I understand

you also do simulations that go out much further that underscore

these models.

Dr. Holtz-Eakin. Yes.

Senator Reed. In the context of simulation, there’s basically two

ways we can address this crisis: one, raise revenues; or two, you

cut benefits. Is that conceptually fair?

Raising revenues—we used to have a surplus, so we had up until

recently the possibility of using surplus funds. That would be a permissible way to provide some relief to Medicare. Is that true?

Dr. Holtz-Eakin. If it were possible to carry those surpluses forward in a meaningful way.

Senator Reed. If we have them, we keep them, and can carry

them forward. So I guess that is possible.

But now we’re really left with two options to raise revenues then:

increase taxes or borrowing. Is that your estimate?

Dr. Holtz-Eakin. The math end is overwhelming. If you’re going

to spend money, you either raise taxes or borrow.

Senator Reed. In your analysis, do you assume different levels

of borrowing and taxation in your analysis which leads you to the

question which I don’t want to hide: Have you done any sort of

analysis at the rate of borrowing that begins to influence interest

rates in the contrary?

Dr. Holtz-Eakin. For this analysis, our projections come in two

parts: one, our long-term projections for economic growth, which I

described in my answer to the Congresswoman; and two, our projections of Medicare spending. We have a combination of demographic components as well as cost increases. Those are outlay

streams that represent the burden of that program on the economy.

How it is financed is not addressed.

Senator Reed. Like most economies, there’s a certain circularity

here. If we choose, for example, to finance this deficit with borrowing, I presume that has an impact on interest, which has an

impact on economic growth, which goes back to your point. The

best way to preserve or grow or save ourselves this problem is economic growth.

Have you done any analysis with respect to that interaction?

Dr. Holtz-Eakin. We have not specifically done an interaction

that tries to debt-finance this sort of an outlay stream. I would

argue that that alternative does not produce a pattern of public

deficit that’s sustainable.

18

To do a simulation that raises the annual deficit to 9 percent of

GDP is something CBO has not done.

Senator Reed. Well, no, but the possibility exists from your crisis scenario that if we don’t raise taxes dramatically or we don’t

curtail benefits dramatically, the final option is to borrow the

money, which would have a significant impact on interest rates and

economic growth. Is that fair?

Dr. Holtz-Eakin. Yes.

Senator Reed. I think the other question I want to raise is

many people have proposed different sort of structural approaches

to this problem: medical savings accounts, HMOs, Medicare HMOs,

et cetera. Do you see those structural approaches as relieving us

from this dark choice between raising revenue or cutting benefits?

Dr. Holtz-Eakin. I see those approaches as variations on a

theme in which you attempt to provide the incentive and the opportunity for both providers and for beneficiaries to undertake cost

controls that they see as in their interests. And even if they do not

lower total spending—but they do give greater quality per dollar

and make people happier with those Federal dollars—it may be the

case that we continue to spend more as a Nation, as I mentioned

in my opening remarks.

But the degree to which those dollars are used wisely and satisfy

the needs of the ultimate beneficiary, I think, is the question.

And the degree to which alternative institutional arrangements

allow that to happen is really, I think, the core question.

Senator Reed. There are some that would suggest that the alternative institutional arrangements don’t provide higher quality,

in fact, provide higher frustration levels for people who claim they

need the service.

They go to their insurer or their health-care provider and find

that they can’t have it unless they go through 15 different appeals

and 16 different—in fact, it adds sort of dead-weight cost to the

whole system.

Is that a reality that you’ve thought about? It would be nice if

we could design a system that is absolutely efficient and everybody

gets exactly what they need exactly when they need it.

But some of these systems are designed in some respects perhaps

simply to deny maybe legitimate costs because that provides benefits to the organization that’s controlling the process.

Dr. Holtz-Eakin. In the narrow role of CBO’s job in the scoring

of bills, we are focused entirely on costs. Your question is about

what’s the value per cost.

As an economist, I can tell you that the broad lesson, to be honest, is that the more choices individuals have to reveal what they

value, the greater the opportunity for them to be satisfied with

their experience.

Senator Reed. My time has expired, but the reality that I see

in health care, you don’t have that many choices. If your employer

gives you Blue Cross that’s great. But if he doesn’t give you Blue

Cross, then a lot of times your choices are next to nil.

In the Medicare context at least people do have a guaranteed

level of service.

Thank you very much, gentlemen. And I’m sorry I didn’t get a

chance—I also have to recognize my colleague friend, Sue Urban,

19

who went to the Kennedy school with me along with her husband.

That’s why you all sound very bright.

[Laughter.]

Senator Bennett. Thank you very much. I think we’ve reached

the point where we can thank you and dismiss you because the debate is shifting away from the economics and the economic impact

of what’s happening to the internal kind of thing.

While I’m sure you have a contribution to make here, I think our

next panel is probably geared in that direction. So instead of having another round of questioning, we will thank you both and look

forward to hearing from you both.

This is obviously not something that’s going to go away. And the

Congress is going to have to deal with it.

So we’ll move to the second panel, where we hope to get further

insights on how the Congress might address Medicare’s financial

challenges as well as some of the service challenges.

We’re privileged to have with us three outstanding witnesses: Dr.

Gail Wilensky, Senior Fellow at Project HOPE; Director John P.

Martin, Director for Employment, Labor, and Social Affairs at the

OECD; and Dr. Marilyn Moon, who is the Senior Fellow—or a Senior Fellow—at the Urban Institute.

Dr. Wilensky, we will start with you.

[Pause.]

I should point out that Dr. Wilensky is a former administrator

of the Medicare program. That’s why we’re starting with her.

With that level of expertise you may not want to admit that credential by the time the questioning is through. But we do appreciate your willingness to appear.

OPENING STATEMENT OF GAIL R. WILENSKY,

JOHN M. OLIN SENIOR FELLOW,

CENTER FOR HEALTH AFFAIRS, PROJECT HOPE

Ms. Wilensky. Thank you, Mr. Chairman, members of the Joint

Economic Committee. I’m pleased to be here.

As you’ve indicated, I’m a former HCFA Administrator, now

called Centers for Medicare and Medicaid Services. I also chaired

the Medicare Payment Advisory Commission from 1997 to 2001.

I’m currently a Senior Fellow at Project HOPE and I also cochair the President’s Task Force to Improve Health Care Delivery

for our Nation’s veterans, which has proven to be an even greater

challenge than reforming Medicare. I am, of course, here speaking

as an individual, drawing on my experiences from HCFA.

I’d like to spend a few minutes talking about the financial liability of Medicare—I know you’ve heard a great deal about that—talk

briefly about adding the effects of adding a drug benefit, and then

to talk also about how well Medicare has restrained spending compared to the private sector and also to other large purchasing

groups.

First, the financial challenges of Medicare are well documented

and well known. The Medicare Social Security Trustees release a

report about its solvency every year, as they did recently. It has indicated that things are not quite as good as they were last year

with cash deficits in the Trust Fund, starting in 2013 rather than

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2016, but even more importantly, continued rapid growth in Part

B, the Supplementary Medical Insurance, which by the end of the

decade is going to be almost 46 percent of total Medicare spending.

We frequently give a lot of consideration to what is going on in

the Trust Fund. But because three-quarters of the Part B funding

comes out of general revenue, it is at least as important to keep

our minds on what is going on with Part B or SMI.

The effect of the economy on the Trust Fund is important. But

basically, as we all know, the well-being of the Trust Fund is being

driven by demographics.

The 78 million Baby Boomers, who are going to start retiring at

the end of this decade will put significant financial pressure not

only on Medicare, but also on Social Security, the Social Security

Trust Fund, and on many of the services provided to seniors. At

the same time, there is a bust generation following the Baby

Boomers, so that we have the double whammy of having more people who will be retiring with fewer people who will be in the labor

force supporting them.

Again, all of these facts are well known to you.

There is considerable discussion now about a Medicare prescription drug enacted anytime significantly after 1965, it would undoubtedly have included a drug benefit because that is a modern

part of therapeutics.

The real question is what kind of a benefit we should have and

how much other reform should go on at the same time. And I say

that because as important as I think the drug benefit is for Medicare, it is not the only problem that Medicare faces.

When we look at the various drug benefit proposals we see, for

example, that they range considerably in terms of how they might

cost from approximately as little—and we didn’t used to think of

this as little numbers—as $190 billion over 10 years to possibly as

much as $800 or $900 billion over 10 years.

Obviously, with these kinds of differences, there are large differences in the kinds of benefits that are being proposed, who administers them and how that might affect seniors.

I also think it’s important that we recognize that, if history is

any guide, whatever we think the drug benefit will cost when we

passed it, it will probably cost significantly more. This was certainly our experience with the end-stage renal disease program.

If we look at our experience with Medicare and Medicaid itself,

if we look at what happened between the time that the Medicare

catastrophic bill was passed and the time it was repealed, there

was a significant increase in spending estimates associated with

the bill even though the benefits were actually never implemented.

We ought to at least pause to realize that as large as these numbers seem now, before the benefits are enacted, the increase in

spending probably will actually be significantly greater. But the absence of a drug benefit is not Medicare’s only problem.

And that’s why I have long advocated a drug benefit in the context of broader Medicare reform. And I continue to believe that is

important. There are large cross subsidies in Medicare and a lot of

inequities in spending.

21

Your State in particular is well-known because it is such a low

spending State. Yet, the Medicare Part B premium is exactly the

same for your beneficiaries as for your neighbors’ beneficiaries.

Senator Bennett. We are penalized for the fact that we have a

healthy population.

Ms. Wilensky. And because your physicians have a conservative

practice style. Both. Yes, absolutely.

Senator Bennett. That’s another subject I’ll get into.

Ms. Wilensky. There are also administrative complexities. I

know that the House has recently—the committees of jurisdiction—

have recently voted out a reform bill. This is as serious for many

providers as the payment level issues.

The point is that the Medicare drug benefit is not the only problem with Medicare. And I would strongly urge Members who are

considering a drug benefit to not only do that which adds money,

but to look at the picture more broadly speaking.

You are the Joint Economic Committee and I’m an economist although I don’t often wear that hat anymore. And so I’d like to close

by talking a little bit about what we know about moderating spending in Medicare as well as spending outside of Medicare.

As you well know, Medicare is an administered pricing system,

which means that reimbursement are not set by the market. They

are set by the government. And it is a reimbursement system that

primarily attempts to control spending by putting all the pressure

on providers.

The reason is that most seniors have insurance coverage that

covers the 20 percent co-payment in Part B, which might otherwise

influence their behavior.

If you look at the comparison of Medicare to health spending in

other areas, your assessment depends mostly on what period you

look at and what you are comparing Medicare to—in general—not

surprisingly, because Medicare is a big middle-class entitlement

program.

Medicare and other measures of health care spending don’t look

that different over the long haul. This statement is least true if you

compare Medicare to private insurance directly. But that’s probably

the least relevant comparison.

The first reason it is the least relevant comparison is that over

the last 30 years, the share of spending that private insurance covers in terms of hospital and physician spending, has increased dramatically.

So what is being bought with private insurance has changed at

the same time spending has changed?

If you actually look at a unit of private insurance coverage, the

cost per unit has not changed very much.

What’s more important though for this discussion is a comparison with large public purchasing groups. Most discussions of reform are not suggesting Medicare be converted just to private insurance. Most reform discussions make use of large public purchasing groups like the Federal employees’ health-care plan or like

CALPERS.

When you look at those comparisons, Medicare has done more or

less as well—slightly better than FEHB according to some numbers, not quite as well as FEHB if you look at the after-negotiated

22

numbers, and definitely not as well as CALPERS, at least in the

last 10 years.

I don’t want to claim that the large groups are great savers relative to Medicare, but I think if you look at the experience of Medicare compared to the large public purchasing groups, you can’t

make the claim on Medicare’s side either that Medicare is much

better.

To me, the conclusion is that if you want to look at administered

pricing programs as a way of constraining spending, I think you

can say Medicare has not done a bad job. But it has frequently

done so, by huge shocks to the system.

The biggest shock came from the 1997 Balanced Budget Act,

where Medicare spending declined from a 10 or 12 percent growth

per year in the mid-1990s to a small absolute negative increase

to—0.5—a little negative a couple of years later.

That’s a pretty big shock for the system. You’ve heard lots of

complaints from the provider community about what BBA was

doing to them.

If you are willing to continue very tight controls like the sustainable growth rate (SGR) in physician payment that ties overall physician spending to the growth of the economy, if you have the political will to do that, if you don’t think that causes a real unfairness

since it hits the conservatively practicing physicians the hardest, I

think administered pricing systems can restrain spending about as

well as any other physician.

Personally, it makes a lot more sense to me to put pressure on

beneficiaries as well as on providers rather than only on providers.

Otherwise, it seems a little bit like depressing the gas pedal and

slamming on the brake at the same time.

So for me, reforms that try to change the behavior of both seniors

and providers make more sense than those that only focus on providers. A final note—the future beneficiaries are going to be quite

different than the current beneficiaries, especially the women.

Most of the women will have considerable times in the labor

force. They will have a lot more experience with insurance plans.

They may have more income. And they will be better educated.

We’ll have to protect the existing seniors, but we shouldn’t make

future decisions about Medicare based only on our existing senior

population.

Thank you very much.

[The prepared statement of Gail R. Wilensky appears in Submissions for the Record on page 81.]

OPENING STATEMENT OF JOHN P. MARTIN, DIRECTOR,

EMPLOYMENT, LABOUR AND SOCIAL AFFAIRS,

ORGANIZATION FOR ECONOMIC COOPERATION

AND DEVELOPMENT

Director Martin. Chairman Bennett, ladies and gentlemen, it’s

a great pleasure for me in my capacity as OECD Director for Employment, Labour, and Social Affairs to testify before you today on

some of the findings from ongoing OECD research into how the different member countries of the OECD are seeking to deal with the

common problem of rising health-care costs.

23

I would hope that this ongoing research would provide some useful lessons for your deliberations as you wrestle with the task of

how to insure Medicare’s long-term financial viability. I have attempted to summarize some of the lessons in my written testimony,

which was submitted beforehand. I won’t repeat them now.

I would like, however, to highlight a few crucial points that need

to be considered when reviewing the lessons from other countries

and attempting to decide how they might be applicable or not, as

the case may be, to the United States situation.

The first point I think it’s important to emphasize is that the

U.S. health-care system is unique in the OECD area. This uniqueness, I would submit, is reflected in the following ways:

The United States has no national health insurance program and

does not provide universal coverage to its population.

A second unique feature is that it spends the most on health

care, whether in terms of GDP or per capita, but its population

health status is about average.

A third unique feature is it’s a very responsive system as viewed

from abroad, adapting very quickly to shifts in consumer preferences, much more so than the health-care systems in many

OECD countries.

It fosters innovation in medical technology and seems to be able

to disseminate this medical technology much more rapidly than is

the case in other OECD countries.

A final feature of uniqueness is it’s an extremely diverse system—highly decentralized and assigning a very large role to the

private sector, which means that there are fewer policy levers at

the Federal level to change health-care delivery directly than is the

case in many OECD countries.

Thus, the U.S. system is really unique among OECD countries

in its heavy reliance on competition across health-care insurers and

providers in order to meet health-policy goals.

Now, I would submit that because of these unique features, it’s

obvious that there’s no simple way to transfer lessons about what

works and what doesn’t work in other countries’ health-care systems to the United States as a whole.

However, there may be lessons that are particularly relevant to

Medicare, a program that has much in common, I would submit,

with the publicly financed social-insurance-based health programs

which are common in many OECD countries.

A second point to bear in mind is the stark fact that all OECD

countries are facing a common challenge of rising health-care costs,

just as is the United States. Health-care spending is absorbing a

growing share of GDP in all countries despite one to two decades

of cost-containment efforts in many of them that resulted in temporary successes in a few countries, especially in the early 1990s.

In addition, there is widespread agreement that these spending

pressures on health care are likely to increase in the coming decades. Recent OECD projections of health-care spending in many

member countries and those reported by the CBO in its written

testimony for this hearing concord in their conclusions. Health

spending is likely to represent a growing share of GDP over the

coming decades in the United States and in virtually all other

OECD countries.

24

Demands for health care will increase with improvements in

medical technology and also with population aging. This immediately raises a question: Should we be worried by this trend?

The answer is not obvious. Spending more on health care as a

society gets richer is not necessarily an inappropriate social choice.

But we have to admit that it’s extremely hard to judge what is the

appropriate level of health spending in democratic societies.

There are clear risks of excess spending arising from the market

failures which are associated with health care. And the government

interventions in our societies that aim to remediate these market

failures often result in other distortions elsewhere.

At the same time we’re faced with much evidence across all

OECD countries that it may be possible to obtain equivalent health

outcomes for less spending and that there are obvious opportunities

to improve health outcomes in many areas.

It’s for this reason that there has been much emphasis recently

in OECD countries on the need for health-sector reforms to promote efficiency—but efficiency not coming at the expense of effectiveness or quality care.

Now, while many reforms have been tried and some of them are

described in my written testimony, I think it’s fair to conclude that

the scope for potential improvement is still very large.

But choices about further reform are hampered by the lack of

comparable and up-to-date information about the impacts of the

many reforms that have been enacted by OECD countries to date.

The OECD, the organization to which I belong, with the active

support of many of its member governments, including the United

States, has recently launched a major research program to try to

fill in some of these gaps in knowledge. And we will be submitting

a major report to OECD ministers in about a year’s time seeking

to draw some lessons from this work.

I hope this report, when it appears, will be helpful to the work

of this Committee.

Thank you very much.

[The prepared statement of John P. Martin appears in Submissions for the Record on page 93.]

OPENING STATEMENT OF MARILYN MOON, SENIOR FELLOW,

THE URBAN INSTITUTE

Ms. Moon. Thank you, Mr. Chairman and Mr. Stark and other

Members of the Committee. It’s a privilege to be here today to

speak to you about this important issue.

My understanding is the hearing is to look at the issue of the viability of Medicare. And my overall conclusion is that Medicare is

indeed a viable program.

There are important challenges that face the Medicare program,

but I wouldn’t characterize them as a crisis. I would rather characterize them as important challenges that we’re going to have to

meet.

We are not going to do away with an aging society by any waving

of the hands. And the notion that there will be more people over

the age of 65 in the United States is a fact of life.

We are going to be living with that essentially forever. It’s not

even the pig in the python. It’s the python in the python—that is,

25

once we go up to a higher share of older persons we will stay there

over time.

So there are going to be important adjustments that need to be

made in the interim. This is not a short-term challenge by any

means.

I’ll try to make five points in my testimony today. And I’m going

to go over several of them very quickly and concentrate on just a

couple.

First, as some of those testifying earlier have said, the challenges

of health-care spending are essentially the same in Medicare as

they are in the rest of the health-care system. It’s technology and

improvements in health care that have largely driven higher

spending. And in many ways, people are getting value for their dollars through these new activities.

Medicare has been and should remain part of the mainstream.

And that’s a challenge that needs to be kept in mind as well.

Second, Medicare, while a challenge for the future, is not a crisis,

I believe, for reasons of looking a little bit more broadly than some

people do in terms of what the challenges are for the future on the

economy.

Part A is in pretty good shape and has been for the last 4 years,

in part because of, as Gail Wilensky said, the Balanced Budget Act,

but also because of the growth in the economy. And economic

growth is a very important part of that.

Moreover, Medicare Part A, for example, over the next 10 years will contribute $500 million more in revenues than in spending,

something that people often forget when they talk about the future

problems of this program.

There is interest in combining Part A and B in terms of looking

at the financial burdens. But I think that’s a valid thing to look

at. People have sometimes looked at it in the context of worker-toretiree ratios, or the share of GDP that goes to the program. And

both of those look to important aspects of the issue.

But it’s also the size of the pie that will matter over time. To say

that the share of GDP that’s going to health care will undoubtedly

grow as it will grow from health-care spending elsewhere in the

economy, I think, is pretty much a given.

Americans have indicated that they like health care. They want

to spend more on health care. And that’s undoubtedly what’s going

to happen.

What does that mean in terms of Medicare? If you look at it in

terms of Medicare as we often do and talk about burdens on workers for Medicare and look at the size of the pie, there is a chart

in my testimony that essentially tries to make the point that the

size of the pie is going to grow so much over time that actually

there are going to be plenty of resources if we have the will to use

them for that purpose.

As figure 2 indicates, the per-worker GDP, even after you control

for inflation, will rise by 54 percent, or thereabouts, over the next

33 years. That growth is largely due to growth in expected productivity, based on relatively modest assumptions by the Medicare

trustees.

If you then subtract the per-worker burden that Medicare will

impose upon individuals from these resources and ask, will workers

26

continue to be better off after what we sometimes hear as an enormous burden for Medicare; the answer is that growth will decline.

But it will decline from 54 percent to 51 percent.

I believe that indicates that the resources are there. The question

is: Is the will there to deal with those resources?

Medicare will create an additional burden because we’ll have a

doubling of the population and we’ll have nearly one in every four

Americans covered by this program.

Third, I believe it’s also important to use caution in assuming

that beneficiaries can absorb fully the new burdens that will come

along in the future. Even without changes in the program, a greater share of income of people 65 and over and who are disabled will

be devoted to their health-care needs because health care will grow

faster than the incomes of this population.

While they may be challenged to pay for part of the future costs,

I think we have to be realistic in terms of raising that share too

much.

Fourth, I believe that private plans are not the magic bullet answer. I would not argue that the work that Cristina Boccuti and

I have done, where we show that Medicare has grown at a slower

rate on a per capita basis than private insurance, indicates that

Medicare is vastly better, but rather, if Medicare were turned over

to the private sector, we would not suddenly find the answer to the

problems that face Medicare in the future. That is, both private insurance and Medicare face the same problems of greater demands

for health care over time.

Those who think that the private sector is the answer and will

take us out of having to deal with higher costs are implicitly relying upon private plans to impose either very strict controls or raise

premiums on beneficiaries over time.

That approach would be a second-hand way of solving the problem, but I think that people would be at your doorstep complaining

just as surely as if we keep reliance on traditional Medicare programs in place.

Finally, because I believe there are important challenges facing

Medicare, we should not shirk from thinking about changes in the

basic Medicare program itself. Such changes should be a major consideration over time.

We should not, as Gail Wilensky has said, rely only on price controls. Indeed, the Medicare program over time has changed considerably, relying on payment policies that are both prospective and

go beyond per visit or per unit of service basis.

We need to think more critically about areas to improve these

payment systems, as well as ways, for example, to expand coordination of care activities through the basic Medicare program, because one way or the another, it’s going to be there.

We haven’t seen the kinds of innovation that we had hoped for

from the private sector in the area of coordinated care. Everyone

needs to work on this problem: the private sector, the public sector.

And together, I believe that it can be there for people like me, a

Baby Boomer who is part of the problem.

I hope we’ll also be able to continue to benefit from the many

things that Medicare has given seniors of today into the future.

Thank you.

27

[The prepared statement of Marilyn Moon appears in Submissions for the Record on page 104.]

Senator Bennett. Thank you very much. May I say I agree, Dr.

Moon, absolutely that many of the problems that I have with Medicare also apply to what’s happening in the private sector. This is

not the place, but at some point, we might have this discussion.

I think the primary driver of problems in health care is the concept of a third-party payer, whether the third-party payer is a private insurance company that has been chosen by an employer or

a Medicare system, where the provider is chosen by the government or endorsed by the government.

In each case, you remove from the customer any economic power

to influence the outcome. Mr. Stark would insist that I’m too stupid

as a customer to participate in that. We can have that debate between the two of us at some future time. But I think that is a

major part of the escalating health-care costs in this country, both

in the private sector and in the public sector. However, I find

that—back to Mr. Stark’s comment about we’re the board of directors—I get far more complaints from the customers of the system

that are under Medicare than I do from those that are in the private sector.

Indeed, when I turned 65, I was told by virtually everybody that

knew anything about it: ‘‘Do not—do not—sign up for Medicare.

Run for another term. Stay a Federal employee as long as you possibly can. Emulate Strom Thurmond if you can. But stay away

from Medicare as long as you possibly can.’’

My ego is such that I respond to that kind of recommendation

and I will run for another term, not only to avoid Medicare, but to

continue to enjoy my job. And I think we’re reaching the point

where seniors need to do that and not look at automatic retirement

at age 65.

The Balanced Budget Act has produced the economic results that

you have given us. It has produced most of the complaints I get.

And that the complaints do not exclusively come from providers.

There are a number of providers who simply say, ‘‘I will no

longer see Medicare patients. That’s the way I deal with the price

controls, the cost controls that are put on providers. I simply drop

out and cease to be a provider.’’

Interestingly enough, that was part of the debate in my first

campaign for the Senate in 1992. There were at that time people

saying, ‘‘I will not see Medicare patients.’’ And Medicare patients

were coming to me and saying: ‘‘If you get elected Senator, will you

force the doctor to see them?’’

And then, the Balanced Budget Amendment came in—or Act—

came in in 1997. Instead of going to increased—well, instead of

solving the problem, it exacerbated it. It made it much worse.

Now there are doctors who are saying to me, ‘‘Absolutely I will

not see Medicare patients’’ or doctors who say to me, ‘‘I signed up

to help people get better. I’m still going to do that,’’ which means,

‘‘I will continue to see Medicare patients even though I am doing

so at a loss with every single patient who comes into my office.’’

And, ‘‘I have been forced out of my practice because my partners

say having me as a partner in the overall group practice is hurting

everybody. So I am personally, out of a sense of determination for

28

what I learned in medical school, subsidizing all of the Medicare

patients that I see, that none of my former partners will see, by

what I’m charging the other patients.’’

I don’t know that that’s just an anecdotal example that doesn’t

hold up. But I think it’s one of the things we ought to address.

But as I say, not all of the complaints I get are from providers.

I get the kinds of complaints I indicated when I talked about my

own situation from people who say, ‘‘Do I absolutely have to go to

Medicare at 65? Can’t you fix it? You and the government who can

fix everything—can’t you fix it so that I can keep what I’ve got

now? I’m willing to pay for it. My financial situation is such that

I can handle it. I do not want to go into Medicare because the restrictions are so heavy that I want to stay exactly where I am.’’

So we’ve got ourselves in a situation where the customer satisfaction is going down and the costs are going up. And if the charts

we saw earlier are correct, the costs are really going up.

That’s why I’ve called this hearing. I think this is an area we

need to address and think about. I’ll be happy to get any response

that any of you have. Or if you think about it, write to us. Keep

those cards and letters coming. This is not a hearing that will end

and we go away. This is a problem that the Congress faces and

that I think has a major, major impact on the economy long term.

And if we are the Joint Economic Committee, we ought to provide the Congress with as much expertise on these problems as we

possibly can as far away from political bickering as we can get.

Now, we can’t avoid that because we’re political animals. But

let’s do the best we can.

I appreciate this panel. Dr. Wilensky, let me respond to just a

couple of issues you’ve raised.

I agree that the traditional Medicare program in some ways is

going to be with us for a long time yet. That’s where most of the

seniors are. Whatever else we do, we need to make some changes

so it operates in a more sensible way.

It penalizes conservatively-practicing physicians, because in its

interest on restraining spending on physicians, it either lowers or

raises the physician payment rates in accordance to physician

spending in the whole country.

That hurts people who are conservatively practicing. Utah,

among other places, is a conservatively-practicing State. That

makes no sense. It doesn’t treat chronic diseases very well.

So one of the things that we’re going to have to do is recognize

that traditional Medicare is going to be around for probably about

as far as the eye can see. We need to do things to improve how reimbursement is paid to reward quality, to have measures for chronic disease.

Having said that, I very much agree that particularly with the

people who are going to be coming into this area, although I have

confidence in a lot of the seniors I know as well, that they ought

to have other choices in their Medicare program.

That’s why I personally have believed in the Federal employees’

health-care plan as a good model. It allows a variety of health-care

plans to be present, including some that would have a much smaller part of the third-party payer problem.

29

As an economist, I certainly don’t disagree that a lot of the difficulties that we face in health care are related to the fact that

somebody else is paying the bill. Health care does have some problems that it’s going to always have, a significant portion of a thirdparty payer at least beyond some point.

We basically excluded any possibility of having plans that have

more economically sensible kinds of cost-sharing mechanisms associated with it. That doesn’t make any sense.

Neither does it make sense to force somebody who is continuing

to work—which I hope more and more seniors will do—than not to

be able to continue with their private health-care plan.

So I think we need to recognize the realities, at least as I see

them, which is traditional Medicare is going to continue. Make that

a more sensible program, but to move to a structure that allows for

different kinds of plans and different kinds of cost-sharing as well.

We will end up spending more on health care because we have

a huge change in the demographics. I don’t think we sensibly can

argue, especially because we are also a wealthy, and hopefully, increasingly wealthy society—the real question is how much more

and how do we distribute that financing burden.

Those are not small issues. They have huge ramifications on the

growth in the economy as well as on equity and distributional

issues, so there are many questions. But it will have a very large

impact on the economic growth on this country as to the kinds of

responses we make to those challenges.

So I don’t think it’s particularly useful to say: Are we going to

spend more on health care? The answer is: Of course. The answer

is how much more and does that make sense.

Senator Bennett. Dr. Moon.

Dr. Moon. Thank you. A number of issues that you raised are

important and interesting issues. When you look at all the data,

Medicare beneficiaries report that they are happier with Medicare

than do privately covered, insured individuals.

It is an interesting conundrum, because a lot of people’s frustrations with Medicare is with the lack of what is covers in its benefit

package. It is inadequate and has been for some time.

For example, about 82 percent of all people in private insurance

have better benefit packages than Medicare beneficiaries do, which

is also why beneficiaries rely on supplemental insurance, which

causes coverage to be very complicated for this group. Hopefully,

Medicare could be improved by expanding basic coverage and eliminating some of the need for the supplemental insurance.

The other issue that is important to stress is the lack of good information for a consumer on what’s necessary care and the credibility of the people telling them that.

Sometimes, people in managed care, when told they are not getting access to a particular test, immediately assume that it’s for financial reasons only. Sometimes they are correct, but other cases

it may be that the test was unnecessary.

If we are going to talk about empowering consumers, which we

certainly are doing a lot of right now, we have to give them the real

tools to empower them. That is, we have to have credible sources

of information.

30

Actually, the European countries have a lot to teach us about

providing information. They do a lot of work on assessing appropriateness and spend time on that. That’s one area where I think

Medicare can contribute as well, because providing that kind of information represents a public good.

Finally, I would mention that I believe that another important

thing to talk about in terms of Medicare’s future is the issue of

whether or not individuals will have choices.

I think it’s fine to have private plans, but I don’t think we should

force people not to have traditional Medicare if that’s what they

want.

Personally speaking, my husband works for the University of

Maryland, so we have 14 plans to choose from. But the realities are

that we have four physicians that we rely on substantially, none

of whom are in any of the managed care plans.

And the only one where we get any coverage at all is Care First

of Maryland, in which I see my internist out of network. She

charges me $75, a very reasonable amount, for 20 minutes in

downtown Washington. She charges that $75 to me. I pay it. Care

First says that’s worth $32.10 and pays 80 percent of that. Medicare pays her $58 for the same visit.

Medicare is the only insurance program she takes, because my

physician is being squeezed much harder by private insurers in

this area. It varies around the country. But it’s a problem that we

don’t have a good solution to.

I would also add that I think a lot of attention needs to be paid

to finding ways to get physicians and consumers to work together

in a concerted way to this as they are both in it together—and

work together. And I think that means some major changes in policy.

Senator Bennett. Mr. Stark.

Representative Stark. Mr. Chairman, thank you. We’ve had

votes called on the House floor, so I’m afraid Ms. Maloney and

I——

Senator Bennett. I apologize.

Representative Stark. That’s all right. The bells just went off.

But I just wanted to say quickly before I dash out the door that

I’m particularly glad to see Gail here. She’s one of the few Republicans that I’ve worked with for more than 18 years on Medicare

issues that I really truly believe does not want to destroy Medicare

as an entitlement.

We often disagree, but I don’t distrust her. Actually, you at least

hold out the possibility that I do not want to.

[Laughter.]

Representative Stark. Mr. Chairman, as long as you raised the

issue, I wanted to encourage the idea that you are at least five or

ten times smarter than I am.

But I do believe that what Ms. Wilensky was getting at, and that

Dr. Moon just pointed out, is that for most of us, medical technology and procedures are confusing.

And when, Gail, you talk about providers and beneficiaries being

involved, I don’t see how a woman—and I’ve had acquaintances

who have dealt with breast cancer and the variety of protocols that

are available for treating it—and, yes, you can go on the Internet.

31

But it does seem to me that when you are scared and sick and

concerned, that making the kinds of rational decisions become even

more difficult. And it isn’t out there.

How do you decide? This is something—I’m one of the very few

Medicare beneficiaries that goes through the problems of having to

decide whether our family should be involved in the C-section or

a vaginal delivery.

[Laughter.]

Representative Stark. But I’ll tell you that this makes a great

difference in the cost of medical care, not so much to Medicare, but

most beneficiaries are somewhat more prudent than I am in that

regard.

Nonetheless, women are faced all the time with the habits of

what doctors do in a community. So one community does two or

three times more C-sections than the other. The problems are the

same.

I don’t think it’s fair unless, Gail, you are talking about costsharing on beneficiaries to reduce or increase utilization. And I get

a little more cautious when I go down that road, because we started out years ago talking—you and I and Mr. Gradison—about outcomes research. And I think that’s where Mr. Martin would agree

with us.

And I think you would agree that we’re not doing enough—and

the Federal Government is the only one who can do outcome research, because everybody else is saying, ‘‘I ain’t going to tell you.’’

Blue Cross won’t talk to anyone. They won’t talk to Kaiser because

they all think they’ve got some kind of special treatment situation.

So there are some areas where I think we could add to the body

of knowledge and figure out how to pay physicians based on outcomes—not based on outcomes on a per case basis, but based on

outcomes that procedures would warrant because of the historical

value.

So Uwe Reinhardt mentioned yesterday that we spent 2 percent—and we brag on that—for HCFA. But you spent like 300-

some percent on research on outcomes. HCFA could do that and we

could do a whole lot.

If we want to get into competitive bidding, I have no quarrel with

that. The places we tried it didn’t like it. The providers, they hated

it.

So it’s easy to say let’s have competitive bidding. But you find

the hospitals or the doctors that are going to let us get away with

that and I’ll be right there with you.

So I appreciate your calling these hearings. And I want you to

talk more to these witnesses. And I wish I could stay here and hear

more of what Mr. Martin has to say.

But I thank you again for having these hearings. And I think we

should do more on it.

Senator Bennett. That’s all right, sir. We will do our best.

You’re in trouble now because you have only one man here who

doesn’t need to worry about the clock.

[Laughter.]

Representative Stark. Will you run for re-election even if I’m

chair in the next Congress?

32

Senator Bennett. You are making an assumption there, Mr.

Stark.

[Laughter.]

Senator Bennett. I don’t know how much more productive time

we can spend together, but let’s just take advantage of your being

here to talk about this question of the third-party payer. Let me

go farther than that.

Clearly, a third-party payer is necessary in any situation where

there is a clear financial emergency. I will give you a rough analogy, which I recognize, like every analogy, is flawed, but which I

hope will make the point.

We talk about this as health insurance. And I think that is a distortion of the word ‘‘insurance’’ and the concept of the word ‘‘insurance’’ because it is not insurance. It is a payment system that we

call insurance.

Here’s the analogy. I have a homeowner’s insurance policy. And

it’s a wonderful policy. If my home burns down, it will replace everything. It will replace the silverware in the drawers. It will replace the linens in the closet. It will replace the pictures hanging

on the walls, as well as the Steinway piano and the valuable

things.

As I examine the policy, however, no matter how carefully I look

for it, I cannot find a clause in the policy that covers the cost of

mowing the lawn or repainting the front door when the dog

scratches it, or replacing the furnace filters when they get dirty.

But our attitude toward health insurance—and I in this case put

the word ‘‘insurance’’ in quotes—is that somehow everything related to health must be reimbursed by the insurance company.

Obviously, we have to have a third-party payer if I’m going to

have a quadruple bypass. I can’t handle that.

But just as I handle the replacement of the furnace filter in my

house and the big expense when my wife says to me, ‘‘There are

too many scars on the wall and we’ve got to repaint the place,’’ and

that’s a $2,500-$3,000 hit to repaint the place, but my insurance

won’t pay for that. It will only pay if I have a catastrophic event

in the house.

Now, we’ve gotten away from that concept of insurance in health

care. We are not insuring against a catastrophe. We are using the

insurance company as the channel through which we funnel payments for everyday kinds of activities.

And when that gets too expensive, then we use the government

and other countries. So the government in the analogy reimburses

me for mowing the lawn.

And then they say, ‘‘Well, it’s costing us too much, so we’ll have

a co-pay.’’ So I have to keep the records of what I pay, the teenage

boy next door, and then file a form so the government can reimburse for its share—the government, if it is Medicare, the private

insurer if I’m not on Medicare, for its share of the cost of mowing

the lawn.

And that to me makes absolutely no sense. I have talked to insurance companies and said, ‘‘What would happen if you had a

$3,000 deductible, a true deductible?’’—not the kind of deductible

that we’ve built in to health insurance where you keep all your little chips, add then up, and then you go in and say, ‘‘Ahah, I’ve the

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magic number and you pay everything over this.’’ A deductible like

my car insurance deductible that says I’ve got $1,000 deductible

and if I get into a $900 accident, I have to pay the full $900. And

if a week later, my wife gets in a $900 accident, she has to pay the

full $900.

But somebody totals the car, the whole car is paid for, minus

that $1,000. Insurance companies I talked to said if we had a

$3,000 deductible, we could cut the cost of insurance almost to the

level of your homeowner’s policy.

In the emergency room, they said 90 percent of the people that

walk into this hospital in the emergency room cost less than

$3,000. Indeed, 80 percent cost less than $1,500.

If for people who came in for an emergency that costs less than

$1,500 and simply hand us a VISA card and check them off and

sent them forward, we could fire half our staff involved in filling

out all those forms. And then the checking, and then the looking

for fraud, and the backwards and forwards, and was this really

done, and so on and so forth. The customer knows what was done.

The customer gives you his credit card. The customer leaves.

And if there is a true medical emergency, if you are talking about

we are going to have a C-section or we are going to—all of these

other problems—OK, now you sit down and say, ‘‘Let’s get the medical advice we need.’’

But I break my finger, which I did. It’s practically a commodity

to go in, set it, and look at it. Now, to be true, after I broke my

finger, I then went to a friend of mine who is a hand specialist in

Utah. And he looked at the way it was done at Bethesda Naval

Hospital and says, ‘‘Let’s do it again.’’ And he changed it a little.

But there was nothing wrong with the way it was done at Bethesda. I just happened to have a friend who specialized in sports

medicine and has repaired the fingers of people like Steve Young

and other people who get their fingers broken.

I understand that the $1,500—if we made a $1,500 deductible—

is a challenge. But I’m currently spending—my employer and I—

in excess of $500 a month to pay for the present system. My employer pays over $350 and I pay over $150. It’s $5-$600 every

month.

If I could take a portion of that and buy a catastrophic policy

with a $1,500 deductible and put the rest of it in a medical savings

account that did not get taxed, I would very quickly have $1,500

available to cover any deductible that would come along.

And I would have an incentive to take care of myself so that I

wouldn’t have to spend that $1,500, because it would be available

to me to spend on something else if I didn’t get sick.

Now, react to that. Tell me what’s wrong with it.

Ms. Wilensky. We’re in a country where people have gotten so

used to having insurance that is prepayment as opposed to insurance that’s insurance. One of the difficulties you have trying to get

people to think differently about health care.

Senator Bennett. I understand that.

Ms. Wilensky. I personally think that we should use insurance

as insurance, that is, paying for a high cost, low probability event.

People who want to prepay because they don’t want to deal with

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issues of price need to put themselves in a system where somebody

else is dealing with the cost of care.

That was initially the idea behind HMOs and managed care. Of

course, people then decided that they didn’t like it if somebody was

restricting their use once they had gotten into managed care.

We are in a very difficult position, because with employer-sponsored insurance, many employees don’t think about the employers’

contribution as their money, although it is. So when they think

about what it’s costing, it’s only the amount they see directly.

So the question is: How can we proceed from here?

It strikes me that since we are where we are, the best we can

do is to make sure that both employers and seniors who want a

system where insurance is being used as insurance with less involvement by others have that opportunity. Whenever you have

third party payment covering expenses, the third party is rightly

going to say, ‘‘We want to have some say in where you go, how you

spend and what you spend. And we want records and we want to

make sure you’re not ripping us off.’’

In order to at least try this as an option, as well as to make sure

that there are other options available, both the under-65 employer

level and for seniors, we have to find a way to treat major or catastrophic expenses. I don’t want to diminish the importance of having individuals more involved in their own health-care decisions,

because even small percentage changes in a $1.3 trillion sector can

make a big difference.

But health care is notorious for having concentrations of spending—relatively small numbers of people, spending large shares of

the health care money.

What this does is push this issue that Mr. Stark raised: Are we

getting better information now about what works when?

Rewarding individual physicians is hard; it’s much easier if a

physician is part of a plan—rewarding physicians who practice better, who do the things that count and don’t do the things that don’t

count, reward them for being conservatively practicing physicians.

Interesting studies have been coming out in 2003, both ranking

States as best they can about the quality improvement using Medicare data, and another one looking at what high-spending areas actually buy. And it’s mostly discretionary spending that neither improves quality nor quantity of life.

The question is what to do in Medicare, since we let local physicians make decisions about how they practice Medicare controls,

prices, and physician reimbursement. But Medicare doesn’t interfere in how Medicare is practiced as long as it fits with broadly defined concepts of being medically apportioned.

We know there are huge variations in spending across the country and it’s not clear what the country is getting for this. So I’d

agree with you, but I think we need to recognize that in health

care we also have to think about what we’ve going to do for those

relatively small numbers of people who spend huge amounts of

money, much of which may not be particularly medically beneficial

and to do so in ways that will make us all comfortable that these

are good medical decisions.

35

They’re not financial credentialing, or economic credentialing as

doctors like to call it, but that what is being done clinically makes

sense. There’s a huge range out there.

I’m not as confident as Marilyn that we can look to you to figure

this out. I don’t think we know very much yet about what works

when. We’ve been reasonably aggressive in the public health service in investing in that. But nothing compared to what we should

be doing.

Senator Bennett. Dr. Moon.

Ms. Moon. I see three practical issues in talking about this for

Medicare. In addition to the issue Gail raised about getting from

here to there, which is hard to do, the first is the issue of risk.

If you have two different plans in which people can choose one

with a high deductible while the other is more comprehensive,

you’re going to tend to have people flow into the more comprehensive program who are sicker. There’s a real problem of how to do

that fairly in terms of payments to plans.

Second is an issue that needs to be taken into account anywhere,

but in particular in Medicare. The issue is income. What is a high

deductible for me is very different than what’s a high deductible for

an average 80 year old lady on the Medicare program.

Senator Bennett. I’m not describing this as Medicare.

Ms. Moon. The third issue relates to the chronically ill. That is,

some people will ring the bell in spending by going in and having

heart bypass surgery who have never had any symptoms, et cetera.

Other people have to see the doctor once or twice, every couple of

weeks, and do a lot of testing that can be very expensive to maintain chronic conditions.

In these examples, the first person would reach the deductible

and get help. But after you have 30 or 40 physician visits a year

and 60 very sophisticated tests you will also have spent a great

deal, but never have met the deductible.

I understand your goal. And I think it’s an admirable one. Speaking as a consumer, not to have to keep track of all those bills would

be nice as well. But it also means that when there’s a high deductible the way it works now—and I understand the distinction you

were making—I have to keep track of everything. And then my insurance plan has to go back and make sure that I’ve spent $1,000

before I hit that deductible.

So, insurance companies tend not to like it—the way it’s normally characterized. The way you’re talking about it, I understand,

would be different.

But because of the chronically ill and the need to really look at

cumulative expenditures, I’m not sure you could do it your way.

Senator Bennett. Yes, sir.

Mr. Martin. I think this is a very fascinating question that

you’ve posed to us, Senator. There are a lot of issues. Let me just

try to make a few points.

First of all, I think it’s correct. It’s very clear that if you wanted

to move to a system like the one you were describing, you need to

worry a lot about the appropriate regulation of the insurance markets that would accompany it, because you have a classic problem

of cream-skimming. How are you going to develop appropriate riskadjustment factors that will insure that you achieve adequate covVerDate 03-FEB-2003 12:06 Dec 03, 2003 Jkt 089222 PO 00000 Frm 00039 Fmt 6601 Sfmt 6601 89222.TXT SSC3 PsN: SSC3
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erage? This is a problem that you see in many OECD countries because many of them are committed to achieving and maintaining

universal coverage.

Let me just give you an example from one country. Switzerland

has mandatory private insurance combined with universal coverage

of the population. It moved to mandatory private insurance in

1994, but at the same time it combines this with very extensive

regulation of the many private health insurance schemes which operate in Switzerland.

It does so because it wants to maintain the goal of universal coverage. Therefore, it imposes various rules regarding community

risk-pooling and risk-adjustment in order to insure that you can

maintain that coverage.

Now, the interesting thing that comes out of this is that there

is some competition between the private insurance schemes in

Switzerland. They do charge different premiums across the country.

And the interesting thing is that for the moment, there isn’t

much response by the average Swiss consumer to these different

premiums and these different incentives. There’s actually relatively

little flows between schemes.

You can interpret this fact in a number of different ways. One

I think is very much to the point that Gail and Marilyn have been

making and one that I would also emphasize.

Consumers, that is, people like us, are not that well-informed

about the advantages and disadvantages of different private insurance schemes. We have great attachment to the things that we

know, especially where health care is concerned.

We like our doctor. We like our local hospital. We are very fond

of our long-standing private health insurance scheme.

In order to change that you really do need to have as a Nation

an effective system of information-gathering and dissemination on

effective practices, that is, disseminated well to both providers and

to the consumers.

And that is a very difficult task. I would not agree with Marilyn

that many European countries do it better than the United States

actually.

I think Gail is right. All OECD countries, in my view, do this

very badly. They are not good at collecting and disseminating good

information on best practices and the utilization of best practices

and then creating incentives for individuals or companies to use

that information appropriately in the market for purchasing

health-care services.

That’s a real challenge. It might be—and we’ve heard some interesting arguments—that maybe one can design new savings accounts, medical savings accounts, that would create sufficient incentives for consumers and providers. But I think that requires a

lot more information and a lot more experimentation to be absolutely certain.

The potential gains are quite large. I agree with you on that, Mr.

Chairman. And I think that that kind of experimentation is very

worthwhile.

And I submit in the context of a health care system like the

United States, one which is so diverse and which is so open to

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these kind of innovations, it would seem to me to be very worthy

of experimentation.

I know that other countries would be extremely interested in seeing whether it’s possible to design new insurance and savings accounts here that really will encourage much more effective valuebased health insurance actions on the part of providers and clients.

That’s a real big challenge for us.

Ms. Wilensky. Let me just speak a moment, if I may, to the

risks election issue. It is certainly, in theory—or at least potentially, out there anytime you have a significant amount of choice

among health-care plans.

And the greater the difference in either coverage or benefits, the

more you ought to think about it.

It is a little encouraging that a recent study that Kent Dorba and

others reported on, the FEHB program, showed very little actual

risk segmentation going on in the FEHB program, although the

FEHB program does not do any risk adjustment at all, which

strikes me as asking for trouble.

There are a variety of reasons he gives as to why he thinks that’s

happened. I don’t argue that as a rationale for not doing risk adjustment, for example, Medicare—I think we need to do risk adjustment and we’re about to start using some risk adjustment.

It’s also possible to use a partial capitation system, where most,

but not all of the payment to the plan is fixed ahead of time, but

a portion of the payment reflects actual use.

That not only gives you a little cushion in case you don’t get the

risk adjustment exactly right. But even if you did get the risk adjustment right, you still have this problem—that if you have zero

marginal revenue for a big user, the plan itself has some incentive

to skip on services provided.

So if at least part of the payment is directly related to the use—

not too much, but part of the payment—there are some positive

gains. I only say that to say these are problems that I think can

be handled. And I think they can’t be handled perfectly.

But we don’t need to handle them perfectly, just reasonably well.

I also hope, with Director Martin, that the United States tries a

little more seriously some of these options, because we are one of

the few places you can imagine demonstrations of this sort going

on.

It’s very hard to imagine in these very centralized European

countries that they would even be willing to contemplate such

changes.

Ms. Moon. I would just like to add that either I overstated or

Director Martin didn’t understand what I was trying to say.

I don’t believe that the European countries have solved all the

problems of providing information. But I think a number of them

have made a commitment to investing and gathering that information and making the first steps.

Great Britain, Australia, Canada are all working very hard I

know. And I assume some of the other countries are also trying to

do head-to-head comparisons of drugs and techniques that are

going to be useful in the future. And we’re not doing very much

about that.

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Senator Bennett. Thank you very much. This is outside the

scope of the hearing, because most of this conversation has to do

with pre-Medicare kinds of insurance and private coverage. But I

couldn’t resist, having these three experts in front of me, to explore

that.

Let me thank you for your willingness to indulge me in this conversation and for your participation in the hearing today.

The hearing is adjourned.

[Whereupon, at 12:45 p.m., the hearing was adjourned.]

(39)

Submissions for the Record

PREPARED STATEMENT OF SENATOR ROBERT F. BENNETT, CHAIRMAN,

JOINT ECONOMIC COMMITTEE

Good morning and welcome to today’s hearing on the challenges facing Medicare.

Medicare is the best Blue Cross/Blue Shield fee-for-service indemnity plan of the

1960s—frozen in time. Before we get carried away with rhetoric about what we have

to protect and not protect about Medicare, let’s understand that simple truth. We

don’t practice medicine the way we did in the 1960s; we shouldn’t deliver and finance medicine the same way either.

Congress must face the fact that Medicare is 40 years old, whereas the practice

of medicine is changing so constantly that we could say it is only 40 months old.

Applying another Band-Aid to Medicare would be malpractice when radical surgery

is what’s needed.

Exhibit 1 in the case for radical reform is Medicare’s growing financial crisis.

Promised benefits now exceed Medicare’s financial resources by more than $13 trillion. In other words, Medicare’s unfunded liabilities are more than three-and-half

times as large as our Nation’s public debt. This imbalance will only worsen if Congress adds a prescription drug benefit to Medicare.

We have a big problem—one that gets worse every day. To bring Medicare into

long-term fiscal balance today would require either an 83 percent increase in the

Medicare payroll tax or a 42 percent reduction in Medicare spending. If we wait,

these changes would have to be even larger. Enormous burdens on Medicare beneficiaries and on taxpayers thus appear almost inevitable.

We need better solutions. We need creative ideas about how to deliver quality care

to a growing population while keeping costs under control. We need, in short, to

start over with a clean sheet of paper. We need to ask ourselves—‘‘Given everything

we know today, what’s the best way to structure Medicare and, indeed, our entire

health care system?’’

Any successful reform must begin with respect for the power of the market. Consumer choice, consumer responsibility, and market competition have long driven the

success of the U.S. economy. The same forces should be harnessed to deliver health

care.

Properly structured, market-oriented reforms can deliver quality health care efficiently and fairly. Market forces will increase beneficiary choice, slow the growth of

beneficiary and taxpayer spending, and provide strong incentives for health plans,

both public and private, to provide the highest quality health care.

Congress should take care to safeguard vulnerable beneficiaries from any unintended consequences of market forces. However, it would be foolhardy to walk away

from all the benefits of market forces for fear of these unintended consequences.

We have a problem and it’s not going to go away. Indeed, it seems likely to get

worse, given the strong desire to add a prescription drug benefit. I share that desire—prescription drugs are essential to the health of our retirees. But as we design

that new benefit, we should keep in mind that—as noted in a new Committee report

released this morning—more than three-quarters of Medicare beneficiaries already

have some sort of drug coverage. Any move to add a drug benefit must carefully

balance the needs of the beneficiaries with their current sources of coverage and the

financial burden on taxpayers.

We certainly do need a prescription drug benefit—prescription drugs do things

now that were unimaginable in the 1960s. But we shouldn’t paste that benefit onto

a broken system. We shouldn’t create a new set of forms and eligibilities that torment patients, frustrate doctors, and reward those skilled in the black art of Medicare payment formulas. Let us as a Congress face the fact that we need to start

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from a clean sheet of paper, all over again, with all of the money we are putting

into it, and say ‘‘Let’s create a whole new system.’’

PREPARED STATEMENT OF REPRESENTATIVE PETE STARK,

RANKING MINORITY MEMBER

Thank you Chairman Bennett for holding this hearing. I would like to welcome

our witnesses and thank them for testifying here today about Medicare’s finances.

The title of this hearing, ‘‘Medicare’s Viability and Financial Situation,’’ is intended by the Republicans to be a leading suggestion that Medicare isn’t viable and

is in a horrible financial situation. Thankfully, the facts point out a much different

picture. This is more about the ideology of Republicans than the reality of Medicare’s current standing.

Medicare’s solvency is at the second highest point in the program’s history. Right

now, Medicare is solvent until 2026. In 1997, before we passed the Balanced Budget

Act, the program was to become insolvent in 2001—just 4 years into the future! Yet,

Medicare is still here. I just say this to point out that the Republican attack on

Medicare’s viability is a scare tactic to enable them to achieve their real goal: dismantling Medicare as entitlement program that provides guaranteed benefits at

guaranteed prices.

Medicare is better than private plans at controlling costs. A recent analysis by

Urban Institute Economist and former Medicare Trustee Marilyn Moon, who will be

a witness at our hearing today, highlights that Medicare has consistently done a

better job at controlling health care cost growth than the private sector has. I’ll

leave it for her to discuss that analysis in greater detail.

The major problem facing Medicare’s future is whether we in Congress are willing

to make the changes necessary to assure its viability for the future. The most important change we can make in that regard is to add a Medicare drug benefit. Of course

adding a drug benefit will require increased spending. The President and Republicans don’t seem to question increased spending when it comes to tax cuts for the

wealthy. But when it comes to a Medicare drug benefit, the response is always ‘‘it

is too costly to do a real drug benefit.’’ I don’t think that is the case.

Republicans also argue that a Medicare drug benefit can’t be added to the program unless substantial ‘‘reform’’ is attached. My question is what do they mean by

reform? Do they mean something like the President’s outline of a plan that would

force seniors to enroll in private managed care plans in order to receive decent prescription drug coverage, while those in traditional Medicare would receive minimal

drug coverage. The Faustian bargain presented to seniors is to receive the drugs

they need in exchange for giving up comprehensive health coverage with their

choice of doctors. That’s not a fair choice at all—and not one any of us in Congress

are forced to make. Seniors shouldn’t be forced to either.

Government Accounting Office estimates show that foregoing additional tax cuts

beyond current law would provide an additional 25-year window for Medicare solvency while we consider how to slow health care costs. At a minimum, this should

be done.

Dr. Holtz-Eakin has referred to the Medicare Trust Funds as merely ‘‘bookkeeping

devices’’ used by the Treasury. I would submit to you that a ‘‘trust’’ fund is much

more than that. A Trust Fund is a promise—Medicare is a promise to 40 million

elderly and disabled Americans that they will receive quality health care. Medicare

will be there for people who need it, so long as politicians here in Washington keep

that promise.

I look forward to the testimony of our witnesses.

PREPARED STATEMENT OF SENATOR EDWARD M. KENNEDY

I commend The Chairman for calling today’s hearing on the 2003 Medicare Trustees Report, the long-term viability of Medicare, proposals for a prescription drug

benefit, and other reforms. But the title of the hearing is misleading—‘‘Medicare’s

Financial Crisis.’’ It’s easy to use that phrase to try to privatize Medicare and force

seniors into HMOs. But the reality is that Medicare is far from failing.

In fact, in recent years, its solvency has improved dramatically. The 2003 Medicare Trustees Report says that the Trust Fund will be solvent through 2026, almost

a quarter century from now. That’s a slight drop from last year’s projection, but it

is still much better than a few years ago, when the Trust Fund was expected to

become insolvent in 4 years. In fact, the 23 years of solvency in this year’s report

are among the longest in the Trust Fund’s history.

41

All of us want to improve Medicare, and there are many areas where we should

be working together. Most important, Medicare should have a prescription drug benefit. We should also be working to improve the quality of care under Medicare and

for others too. Often, there are unacceptably wide gaps between the best practices

and the care that patients actually receive. Improving care for patients with chronic

illnesses such as diabetes and congestive heart failure will mean large improvements in health care and large savings for Medicare too.

We need to improve the use of information technology in Medicare and the health

system as a whole to reduce costs and improve quality. WE need adequate payments

to hospitals, physicians, and other providers, so that they can provide high quality

care under Medicare and for all other Americans.

Many of these changes will produce savings in the long-term, but require significant investment in the short-term. Health care for seniors is obviously more important than large new tax breaks for the wealthy. These important health improvements should be a top priority. But that’s far from saying there’s a Medicare crisis,

and no justification for the extreme changes that would reduce benefits or force senior citizens into HMOs.

I am particularly pleased that Marilyn Moon is here today. Dr. Moon wrote an

important recent article on Medicare called ‘‘Solvency or Affordability? Ways to

Measure Medicare’s Financial Health.’’ We all know that as the Baby Boom generation retires, the ratio of active workers to retirees will fall. Today, there are 3.9

workers for each retiree, but by 2035, the number is expected to fall to 2.2. Opponents of Medicare often use this fact to support their claim that major changes are

needed in Medicare now.

Dr. Moon points out that the declining ration of active to retired workers is only

half the story. The other half—the more important half—is the impact that supporting Medicare will have on active workers’ living standards. Dr. Moon’s article

finds that even using the conservative assumptions in the Medicare trustees’ report,

workers’ real incomes in 2035 will be 57 percent higher than they are today. After

the cost of supporting Medicare is taken into account, their incomes will still be 54

percent higher than they are today. Far from being unsustainable, Medicare will actually be easier to support for tomorrow’s workers than today’s workers. So there

are problems like prescription drugs that have to be solved. But let’s not cry ‘‘wolf’’

about a crisis in Medicare—it’s not even a mini-crisis. It’s not a crisis at all, and

it’s certainly not a justification to privatize Medicare and push senior citizens into

HMOs.

I thank all of the witnesses for appearing today and look forward to hearing their

testimony.

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