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43–695 2008

THE 2008 MEDICARE TRUSTEES REPORT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON HEALTH 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

APRIL 1, 2008 

Serial No. 110–76 

Printed for the use of the Committee on Ways and Means 

( 

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COMMITTEE ON WAYS AND MEANS 

CHARLES B. RANGEL, New York, Chairman 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

CHRIS VAN HOLLEN, Maryland 

KENDRICK MEEK, Florida 

ALLYSON Y. SCHWARTZ, Pennsylvania 

ARTUR DAVIS, Alabama 

JIM MCCRERY, Louisiana 

WALLY HERGER, California 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

SAM JOHNSON, Texas 

PHIL ENGLISH, Pennsylvania 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

RON LEWIS, Kentucky 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

DEVIN NUNES, California 

PAT TIBERI, Ohio 

JON PORTER, Nevada 

JANICE MAYS, Chief Counsel and Staff Director 

BRETT LOPER, Minority Staff Director 

SUBCOMMITTEE ON HEALTH

FORTNEY PETE STARK, California, Chairman 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

RAHM EMANUEL, Illinois 

XAVIER BECERRA, California 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

RON KIND, Wisconsin 

DAVE CAMP, Michigan 

SAM JOHNSON, Texas 

JIM RAMSTAD, Minnesota 

PHIL ENGLISH, Pennsylvania 

KENNY C. HULSHOF, Missouri 

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

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

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

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

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

is further refined. 

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C O N T E N T S 

Page 

Advisory of March 25, 2008, announcing the hearing .......................................... 2 

WITNESS 

Richard S. Foster, Chief Actuary, Centers for Medicare and Medicaid Services, Baltimore, Maryland ................................................................................... 6 

SUBMISSION FOR THE RECORD 

Thomas F. Wildsmith, statement ........................................................................... 52 

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(1) 

THE 2008 MEDICARE TRUSTEES REPORT 

TUESDAY, APRIL 1, 2008 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON HEALTH, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:00 a.m., in 

room 1100, Longworth House Office Building, Hon. Fortney Pete 

Stark (Chairman of the Subcommittee), presiding. 

[The advisory announcing the hearing follows:] 

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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON HEALTH 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–3943 

March 25, 2008 

HL–22 

Health Subcommittee Chairman Stark Announces 

a Hearing on the 2008 Medicare Trustees Report 

House Ways and Means Health Subcommittee Chairman Pete Stark (D–CA) announced today that the Subcommittee on Health will hold a hearing on the 2008 

Medicare Trustees report with Chief Actuary Richard S. Foster. The hearing will 

take place at 10:00 a.m. on Tuesday, April 1, 2008, in Room 1100, Longworth 

House Office Building. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from the invited witness only. However, any individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. 

BACKGROUND: 

The Social Security Act requires the Board of Trustees for the Medicare program 

to report annually to the Congress on the current and projected financial condition 

of the Medicare Hospital Insurance (HI) and the Supplementary Medical Insurance 

(SMI) trust funds. The Trustees, who are designated in statute, include the Secretary of the Treasury (who is the Managing Trustee), the Secretary of Labor, the 

Secretary of Health and Human Services, the Commissioner of Social Security and 

the Administrator of the Centers for Medicare and Medicaid Services (CMS). In addition, the statute requires that there be two public trustees, both of whom cannot 

be from the same political party, who are appointed by the President and confirmed 

by the Senate for 4-year terms. The CMS Office of the Actuary, led by Chief Actuary 

Richard Foster, is responsible for preparing the report. The 2008 Annual Report was released today and can be found at: http://www.treas.gov/offices/economic-policy/re- ports/medicare-report-2008.pdf. 

Ensuring the sound management of Medicare is one of Congress’ most important 

responsibilities. This annual report provides a valuable update on the program’s status and important information with respect to projections of future expenditures, enrollment and other trends. 

In addition, the 2003 Medicare legislation (P.L. 108–173) created a new mechanism designed to cap Medicare’s funding when certain criteria are met. Under the 

law, the Trustees must project whether more than 45 percent of Medicare’s funding 

will come from general revenues within seven years of the report’s date. If that projection occurs in two consecutive reports, a warning is issued. The law then requires 

the President to send legislation to Congress to reduce general revenue spending to 

less than the target within the window in question. The 2007 report contained this 

warning; consequently, President Bush sent Congress proposed legislation in February that minimally addressed the issue by increasing costs on beneficiaries. According to the 2008 report, the threshold will be crossed in the next seven-year window. 

In announcing the hearing, Chairman Stark stated, ‘‘Reviewing the Trustees’ 

Report is a core part of Congress’s oversight responsibilities, and one I 

take seriously. Medicare is critically important to the 44 million beneficiaries who rely on it for health care and financial peace of mind. While 

the program faces demographic challenges in the future, those can be dealt 

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with if there is a bipartisan commitment to preserve and improve the program. We should not succumb to alarmist claims that the sky is falling. The 

most important immediate step we can take to help Medicare’s financial 

outlook is to eliminate the Medicare Advantage overpayments. This corporate pork fattens insurance company profits while unnecessarily draining program resources. I can’t take seriously the claims of concern from 

those who protect these excessive payments at the expense of beneficiaries, 

taxpayers and the program’s future.’’ 

FOCUS OF THE HEARING: 

The hearing will focus on the 2008 Medicare Trustees’ Report. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘110th Congress’’ from the menu entitled, 

‘‘Committee Hearings’’ (http://waysandmeans.house.gov/Hearings.asp?congress=18). 

Select the hearing for which you would like to submit, and click on the link entitled, 

‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, completing all informational forms and clicking ‘‘submit’’ on the 

final page, an email will be sent to the address which you supply confirming your 

interest in providing a submission for the record. You MUST REPLY to the email 

and ATTACH your submission as a Word or WordPerfect document, in compliance 

with the formatting requirements listed below, by close of business Tuesday, April 

15, 2008. Finally, please note that due to the change in House mail policy, the U.S. 

Capitol Police will refuse sealed-package deliveries to all House Office Buildings. 

For questions, or if you encounter technical problems, please call (202) 225–1721. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

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

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

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

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

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

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

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

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

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

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

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

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4 

Chairman STARK. Good morning. Thank you for joining us. The 

Subcommittee will commence with its hearing on the 2008 Social 

Security Medicare Trustees’ Report. I thank the members for joining us, and hope you will join me in welcoming Rick Foster, who 

is the chief actuary at the Centers for Medicare and Medicaid Services. He and his staff do the analysis needed to complete the trustees’ report each year. 

We appreciate the hard work that your staff does, Rick, on advising us on the status of Medicare trust funds, and Medicare, generally. I would like to thank you, in particular, for your efforts. 

Medicare provides care for more than 44 million individuals, and 

we owe it to those beneficiaries, as well as the taxpayers, to keep 

note of the financial health of the program. 

The Bush administration likes to use the new 45 percent trigger 

as a scare tactic. It’s an arbitrary measure. We can talk more about 

that later. But it fails to indicate anything useful about the health 

of the Medicare program. We designed in the 1960s, Medicare to 

draw funding from general revenues. That’s what it’s doing. 

Part D was created by Congress and President Bush, and was intentionally designed to be predominantly financed by general revenues. The general revenues, I think, pays about three-quarters of 

the tab. The beneficiaries pay about 25 percent, through premiums. 

I think it was disingenuous of the administration to send us a 

trigger bill that only pushes the trigger back a year, and does absolutely nothing to extend the trust fund solvency date. They tucked 

in a whole lot of controversial proposals that really aren’t related 

to the funding of Medicare. 

The administration rejected their own budget, and sent us policies that, as drafted, really do nothing to improve solvency. The 

only policy that the actuaries—I guess that’s you—scored: ‘‘increases cost to beneficiaries,’’ and ‘‘undermines the universal nature of the program’’ ‘‘making wealthy people pay a higher premium’’ is kind of a double-whammy. 

They’re already paying—it’s probably the most progressive tax 

we have. They pay their 2.45 or 4.9 percent on—or is it 1.45 all 

the way up. If they make tens of millions of dollars on Wall Street, 

they pay the premium on that entire $10 million of earned income, 

and they don’t get any different benefit than somebody at the minimum wage. Why we should ask them then to pay even more escapes me. 

So, I think the trigger dance is a political exercise. Medicare is 

not in crisis, and the House did act to protect it. We passed, with 

bipartisan support, the CHAMP Act. CHAMP would have postponed the trigger by three years, a lot better job than what the 

President is suggesting in his bill. 

Basically, Medicare overpayments—Medicare Advantage overpayments—are what is causing the principal problem in Medicare 

today. It seems to ring kind of hollow when we don’t, in fact, deal 

with the real problem. 

I love to quote Republicans, and I’m going to make Mr. Camp 

guess whose quote this is. But it was written—oh, it’s yours, March 

14th. ‘‘So, where are we? Congress decided in 2003 to enhance the 

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market for high deductible indemnity insurance plans with greater 

tax subsidies for the premiums and the deductible health savings 

accounts. They also decided to spend whatever it takes to move the 

Medicare program out of HHS and into AHIP, using Medicare 

money to provide special preferences for individually owned fee-forservice indemnity insurance. The money the insurance company 

cannot make from CMS, they make from restricting access to provider networks with whom they have negotiated prices,’’ and so on. 

My former partner in crime, former Senator, Dave Derenberger 

wrote that on March 14th, and he is but he was a perceptive guy 

when we worked together years ago on the Medicare issue. 

But let me hear first from Mr. Camp, and then we will welcome 

any comments that Mr. Rick Foster cares to make about his testimony. 

Mr. CAMP. Well, thank you, Mr. Chairman, and thank you for 

holding the hearing today. I appreciate, Mr. Foster, your being 

here. Well, if any of you saw roll call, today is April Fools Day, but 

it might as well be Groundhog Day, because last year we were in 

this same room at roughly the same time, listening to Mr. Foster 

talk about how the Medicare program is going bankrupt. 

Yet, since then, Congress has failed to enact any real changes as 

program costs continue to grow, and the date of Medicare’s insolvency draws nearer. 

We will hear today that the health insurance, or HI trust fund, 

which finances Medicare Part A, is now projected to be exhausted 

by 2019. We should not be surprised that Medicare continues to 

face a funding crisis. The majority has done nothing to responsibly 

reform the program or control costs. 

Mr. Foster will also point out that the trustees’ spending projections for the supplemental medical insurance, or SMI trust fund, 

which finances both Part B and Part D, will continue to increase 

dramatically. This means that Medicare beneficiaries will continue 

to face higher premiums and lower Social Security checks, because 

Congress has failed to reduce Medicare spending. 

In fact, the problems facing the Part B program are actually 

worse than the trustees’ report would have you believe. Medicare 

spending on Part B is actually understated, because their estimates 

assume that physician payments will be reduced by 10 percent this 

year, and 5 percent every year for the next 10 years. This means 

that Part B premiums which have more than doubled since the 

year 2000 will reach unaffordable levels in just a few years. 

One lone bright spot in the trustees’ analysis should be highlighted, however. Compared to the estimate that was prepared in 

2003, Part D costs are now 37 percent lower. While some of my colleagues characterize Part D as a legislative failure, Part D is the 

only part of Medicare that has a lower-than-expected rate of 

growth. 

Drug plans have successfully negotiated deeper-than-expected 

discounts with drug companies, and are offering attractive plans to 

seniors at lower-than-expected cost. It is not a coincidence that the 

private market has been able to deliver a medical benefit below 

budget. 

If we are looking for ways to reduce program spending, we can 

certainly apply some of these market-driven and competition-based 

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reforms to the rest of the Medicare Program. This Committee is required by law to send a bill to the House floor by June 30th to protect Medicare’s solvency in the short term. As MedPac said in their 

March report, ‘‘Time is of the essence.’’ 

I hope that we can, together, take the opportunity that this presents to address the threats facing Medicare. The failure to do so 

is unacceptable, because the financial pressures threatening Medicare only grow greater with each passing year. 

Mr. Chairman, I hope that we can find a responsible bipartisan 

agreement to address this looming crisis. I yield back the balance 

of my time. 

Chairman STARK. Any other Members have statements they 

would like to appear in the record? Without objection, they will be 

placed there. 

Mr. Foster, your entire testimony will be placed in the record, 

without objection. I would like to recognize you to enlighten us, or 

expand on it in any way you are comfortable. 

STATEMENT OF RICHARD S. FOSTER, CHIEF ACTUARY, CENTERS FOR MEDICARE AND MEDICAID SERVICES, BALTIMORE, MARYLAND 

Mr. FOSTER. Thank you very much. Chairman Stark and Representative Camp, and other distinguished Members of the Subcommittee, thank you for inviting me here to testify today about 

the financial outlook for the Medicare program. 

I will briefly summarize the most significant findings from the 

new 2008 Medicare Trustees Report that was issued a few days 

ago. 

I would also like to recognize a few folks from my office who are 

here with me today—— 

Chairman STARK. Please. 

Mr. FOSTER [continuing]. Including Clare McFarland, Suzanne 

Codespote, and John Shatto. There are also some folks from our Office of Legislation here, who have accompanied me. If it is all right, 

my presentation will take a little longer than the 5-minute limit. 

Chairman STARK. Please. 

Mr. FOSTER. Thank you, sir. First, let me start with some background. The purpose of the Trustees Report is to evaluate the financial status of the Medicare trust funds, and specifically: Are the 

income and the assets of a given trust fund sufficient to enable the 

payment of benefits and administrative expenses under that program? 

This is admittedly a somewhat narrow question. But it’s also a 

fundamentally important question, since the existence of a positive 

trust fund balance is what gives us the statutory authority to make 

the benefit payments. So, a narrow question, but an important one. 

Now, of course, it’s not the only question that can be asked. You 

often hear discussion about the long-range financial sustainability 

of Medicare. 

You also hear the question asked, ‘‘What is the impact of Medicare on the Federal budget?’’ These are important questions, also, 

but they are quite different from the issue of trust fund financial 

status. If people treat them interchangeably, which they sometimes 

do, then the results could be confusing. 

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So, I will be talking about the financial status of the trust funds, 

initially, and a little later on about the combined Medicare outlook. 

Medicare, of course, has three trust fund accounts. There is the 

Hospital Insurance, or Part A, trust fund. Then, since the Medicare 

Modernization Act, the Supplementary Medical Insurance trust 

fund has two separate accounts: one for Part B, the traditional physician services and outpatient benefit; and the other for the new 

Part D drug benefit. 

The payments that are made to Part C of Medicare, namely, the 

Medicare Advantage program, those payments are drawn from the 

Part A and the Part B accounts. There is no separate Part C for 

the Medicare Advantage trust fund. 

By law, each trust fund and each account has its own explicit 

source of financing, and there is no provision for sharing assets 

back and forth, or making loans across—from one trust fund to another, et cetera. As a result, it is necessary to evaluate the financial status of each trust fund account, individually, by itself. 

We will start with the Hospital Insurance trust fund. As you 

know, most of the financing for this trust fund comes from a portion of the FICA and SECA payroll taxes in particular, Mr. Chairman, the 1.45 percent paid by employees matched by another 1.45 

percent paid by employers. Self-employed people pay the combined 

total. 

The HI financial status shown in the new Trustees Report, overall, is quite similar to that shown in last year’s report. So, perhaps 

this is—will be fairly Groundhog Day-ish, as Mr. Camp mentioned. 

The cost for hospital insurance is expected to exceed the level of 

tax revenues in 2008 and all future years. Now, the difference between the cost and the tax revenues can be met for a while by 

using interest earnings on the assets, and for a while longer by redeeming those securities, turning them back into the treasury, and 

getting our cash back. 

However, the assets are projected to be exhausted in 2019 without corrective legislation. Now, that’s the same year as shown in 

last year’s report, but it’s now early in the year, rather than late 

in the year, as it was before. 

The slight worsening in the outlook in the short term for the HI 

trust fund is due to slightly lower projected tax revenues, and 

slightly higher projected expenditures. 

In addition, the change reflects the impact of correcting an accounting error that was discovered late in 2007. In particular, 

under a new accounting system, certain Part A hospice benefits 

were inadvertently paid from the Part B account of the SMI trust 

fund. 

That was a mistake in the design of the program. It has been 

corrected for future payments, but we will need to make a transfer, 

an adjustment, of about $12.6 billion from the HI trust fund back 

to the general fund, and then from the general fund to the Part B 

account, in order to put each account back where it would have 

been, in the absence of this problem. 

In the long run for the HI trust fund, the gap between projected 

expenditures and scheduled income just grows wider and wider. By 

the end of the 75-year projection period, the scheduled tax revenues 

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would be sufficient to cover only less than a third of the projected 

benefits. So, that’s a pretty major deficit. 

Turning now to the Part B account in the Supplementary Medical Insurance trust fund, the Part B account is financed entirely 

differently from Part A. In particular, roughly 25 percent of the financing for Part B comes from premiums paid by beneficiaries, and 

the other 75 percent, roughly, comes from Federal general revenues. 

There is an annual redetermination of the premiums and general 

revenue financing under current law. As a result, that means that 

Part B income will always match Part B expenditures. The trust 

fund account will never go broke under current law. 

It is worth noting that we have had fairly large Part B premium 

increases in recent years, and similar increases in the general revenues. That’s been in order to rebuild the Part B account assets to 

a fully adequate level. They had been far below this level for some 

time period. 

If you include the $12.6 billion transfer, or adjustment for the 

hospice payment problem, then the assets of the Part B account 

now are at a fully sufficient level, and that’s the first time that has 

happened since 2002. So, that is something we were glad to see. 

Of course, with Part B, as well as Part D and Part A, for that 

matter, the concern has to do with expenditure growth rates. For 

Part B, over the last 5 years, growth has averaged not quite 10 

percent per year. That is despite the fact that the payment updates 

for physicians, is the biggest category of Part B expenditures have 

been either zero percent or fairly low, by historical standards. 

So, despite the restrained position updates, the growth rate has 

still averaged almost 10 percent over the last 5 years. 

I believe the problems with the physician payments are well 

known to this Subcommittee. In particular, under current law, we 

estimate that in July 2008, the middle of this year, we would have 

to reduce payment rates to physicians by 10.6 percent. Then, the 

following January 2009, we would have to reduce them by another 

5 percent. Then, for each of the next seven Januaries, through 

2016, we would have to reduce them by a further 5 percent each 

year. 

It is implausible that the payment rates could be reduced so 

much for many reasons that I don’t have to explain. But certainly 

Congress has overridden the scheduled decreases in each of the last 

51⁄2 years, and I would guess that you are likely to continue doing 

that, under the circumstances. 

Therefore, the projected Part B expenditures shown in this year’s 

Trustees Report, as in the last several, understate the true likely 

cost of the program, and they probably understate it by anywhere 

between 10 to 20 percent, in the long range. 

Turning to the Part D account in the SMI trust fund, this, of 

course, is a valuable new benefit for enrollees, but it does add significantly to the cost of the Medicare Program. Part D is financed 

somewhat like Part B, in that general revenues make up the largest share, currently about 77 percent of the total revenues. Beneficiary premiums also contribute to it, and they are currently about 

9 percent of costs. 

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We also receive the special payments by states on behalf of dual 

Medicare-Medicaid beneficiaries. Currently, those are about 14 percent of the total. But that would decline over the next 10 years, as 

the percentage requirement specified in the MMA decreases. 

The good news here is that the projected cost of Part D in the 

first 10 years—I should say the next 10 years—is about 17 percent 

lower than we showed in last year’s report. So, once again, the actual costs have come in lower than we expected, and that has affected our projection for future years. 

They are also, as Representative Camp mentioned, considerably 

lower, about 37 percent lower, than our original estimates back in 

2003. If there is time later on, I would be happy to describe the 

factors underlying these updates or revisions in the cost estimates. 

Because the financing for Part D is also reset each year to match 

expected costs, then Part D will also be in financial balance indefinitely. 

On the other end, we are expecting, or projecting, Part D costs 

to grow at about 11 percent per year over the next 10 years, with 

about 3.5 percent of that being growth and further enrollment. 

I will take just a moment to talk about total Medicare. We looked 

at the three accounts individually, from a financial status standpoint. But it’s also useful to look at the total cost of Medicare, and 

how it’s financed. 

The basic challenge with financing Medicare—and this also applies to virtually any other health care program you can think of, 

public sector or private sector in the U.S. is that expenditures tend 

to grow by increases in the number of beneficiaries, of course, but 

also by growth in the wages and prices that are paid to health 

service workers and for the services that are purchased in the 

health care sector. 

In addition, beneficiaries tend to get more services over time, 

greater utilization of services. The services themselves get fancier 

over time. So, we refer to that as intensity, or the average complexity of services, which grows too, generally in ways that are 

more expensive. 

Collectively, these factors, combined, result in cost growth that is 

significantly faster than the rate of increase in workers’ average 

earnings, or in the economy at large. 

So, in addition to this ongoing problem associated with health 

cost growth rates, we also have a demographic impact. The number 

of beneficiaries, with the retirement of the Baby Boom, will increase significantly more rapidly in future years than the number 

of workers. This factor is well known, we’ve been talking about it 

for decades now. We are now on the verge of it actually happening. 

Total Medicare costs are projected to increase from their current 

level of about 3.2 percent of gross domestic product to not quite 11 

percent at the end of the 75-year projection period. 

This rapid cost growth, if it continues, will also have significant 

implications for beneficiaries. For example, beneficiary premiums 

and beneficiary cost sharing would go up, as a percentage of their 

income, for many people, to quite high levels over such a long period. 

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In addition, there are implications for the Federal budget. The 

cost of the general revenues would represent a growing share of 

Federal income taxes or other revenues. 

I will mention briefly the 45 percent trigger under section 801 of 

the Medicare Modernization Act. The way this works is if the difference between expenditures, total Medicare expenditures, and 

Medicare dedicated revenues—that’s principally payroll taxes, premiums, income taxes on Social Security benefits, and the state payments—exceeds 45 percent of total expenditures within the first 7 

years of the trustees’ projection, then the trustees have a determination of ‘‘excess general revenue Medicare funding.’’ 

If there are two successive such determinations, then that triggers a Medicare funding warning. This test was met in the 2007 

Trustees Report, and that resulted in the first Medicare funding 

warning. As well as the proposed Medicare Funding Warning Response Act of 2008, which the President sent to you folks in February of this year. 

Now, in the new Trustees Report, we once again have a projection of crossing the 45 percent within the 7 years. That ends up 

triggering a new Medicare funding warning all over again, which 

will, again, require a legislative proposal and response following 

the next budget. 

The funding warning itself and the test that underlies it, I think, 

are useful measures of the magnitude of general revenues and how 

much of the financing for Medicare comes from general revenues. 

I think that can help call attention to the impact on the Federal 

budget that is associated with the general revenue transfers to 

Medicare. 

However, despite the title, a Medicare funding warning should 

not be interpreted as an indication that trust fund financing is necessarily inadequate. Assessing the adequacy of financing can only 

be done by looking at the separate accounts, as I mentioned before. 

For that purpose, you have to look at all the sources of financing, 

including the general revenues that are provided for by current law 

and the interest income that is provided for by current law. 

Well, I will sum up by saying that, based on these projections, 

the Board of trustees has recommended prompt attention to the financial challenges facing Medicare. I can think back as part of my 

own career for 35 years now, and throughout that time the Office 

of the Actuary at CMS and at Social Security has assisted both 

Congress and the Administration in finding solutions to financing 

problems. I will pledge the Office of the Actuary’s continuing assistance on your behalf, as you continue to struggle with how best to 

meet these challenges. 

I would be happy to answer any questions. 

[The prepared statement of Richard Foster follows:] 

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Chairman STARK. Thank you. As we have discussed, we pay 

Medicare Advantage plans more than we pay fee-for-service. What 

effect, in terms of months, I guess, or years, do these Medicare Advantage overpayments have on the trust fund solvency, or on Medicare solvency? 

Mr. FOSTER. If the law were changed such that the Medicare 

Advantage benchmarks were set at the same level of cost as feefor-service, then we estimate that would extend the solvency of the 

HI trust fund by about 18 months. 

Because we are currently projected to go broke early in 2019, 

that would move us into the end of 2020. But it’s an 18-month period, much like last year. 

Chairman STARK. Okay. Because Part B premiums are based on 

the total expected expenditures for Part B, which includes the payments to Medicare Advantage plans, is it not true that people paying Part B premiums have them increased—they are increased for 

all beneficiaries, even though only maybe 20 percent actually use 

Medicare Advantage? 

Everybody else in Medicare has to pay more to cover the increased costs of these Medicare Advantage plans. Is that—and 

about how much is that? 

Mr. FOSTER. Yes, sir. That’s correct. We estimate that, as of 

2009, the additional premium for Part B associated with the higher 

benchmarks for Medicare Advantage is about $3 per month. 

Chairman STARK. Last year was $2. 

Mr. FOSTER. I think 

Chairman STARK. What happened? 

Mr. FOSTER. Well, these are both rounded, so the reality may 

be a little closer together. 

Chairman STARK. If Medicare Advantage rates had been equalized as we did in the CHAMP Act, would the 45 percent trigger 

have been tripped? 

Mr. FOSTER. No, sir. With that change, it would not have been 

tripped or triggered in this year’s report. But, instead, we would 

have expected the ratio to cross 45 percent in 2016, rather than 

2014. 

Chairman STARK. As you know, the private plans calculate 

what’s called a medical loss ratio. We insisted that that be made 

part of our Medigap plans, and even though we don’t pay—the government doesn’t pay—for Medigap plans. 

Now, a recent GAO report found that a third of all the Medicare 

Advantage plans appear to have loss ratios lower than 85 percent, 

meaning they spent more than 15 percent of their revenue on overhead and profit, and less than 85 percent of beneficiaries. 

Do you think it would be a good idea to require Medicare Advantage plans to meet some minimum loss ratio standards? 

Mr. FOSTER. Possibly. I don’t have a very clear-cut answer for 

you, I’m afraid. 

On the one hand, you could argue that, with the degree of competition out there, it’s not terribly common that you would have 

very low medical loss ratios. 

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On the other hand, one can argue that it shouldn’t be terribly 

common, either, for a plan to have that high of an administrative 

cost, or that high of a profit margin. 

There is a different argument that can be made in favor of the 

proposal, and that has to do with what I perceive as one of the limitations of the way Medicare Advantage is currently set up: that is 

while there is a lot of competition within Medicare Advantage, it’s 

mostly directed toward who can provide the best benefit package, 

or the most attractive-looking benefit package. 

But it’s awfully hard for beneficiaries to figure out which is the 

most efficient plan. ‘‘Where do I get the best benefit package for my 

money?’’ because it’s—unless you’re an actuary, it’s awfully hard to 

determine the value of the different benefit packages. 

So, if medical loss ratios were published, it would be one way of 

signaling to beneficiaries that this plan is more efficient than this 

other plan. It would help them make an informed decision. 

Another, and probably much more direct way, would be to do 

what the House of Representatives did in your version of the MMA, 

which was to require the rebates to be paid directly to the enrollees, and the amount to be directly identified. The enrollees could 

turn right around and then spend the rebates them for extra coverage, if they felt like it, but then you would have a clear-cut price 

signal, and that would improve people’s ability to choose an efficient plan. 

The other issue with publishing the MLR ratios is one that we’re 

continuing to look at. It makes some of us a little uneasy about 

what this might do to the nature of competition among the plans, 

if every plan knew what every other plan’s cost factors were. So, 

that’s one we’re still struggling with a bit. 

I think that’s as much as I can think of on the subject. 

Chairman STARK. I couldn’t help—thinking of two final questions—nobody has threatened to fire you in the past couple of 

years, have they? 

Mr. FOSTER. No, sir. If anybody did, I was oblivious. 

Chairman STARK. Okay. 

Mr. FOSTER. So, I think that means nobody has. 

Chairman STARK. All right, but help me. I have been looking— 

and I don’t think this goes to your competence—but it is interesting 

that in 1998, 10 years ago, you reported to us that we were going 

to be broke today, in 2008. 

Now, you were just off—your current report says it will be 2019. 

That means, instead of 10 years in 1998, you should have said 21 

years. That was—you were off by a country mile. 

Now, what have you done, or what have we done, or what has 

anybody done, to suggest to folks who aren’t actuaries—and I 

might add that, as we look back, we were going to go broke in 

1999, 2001, 2002—and what is it that happens, what is going to 

happen over the next 10 years to save us, as happened between 

1998 and today to save us? 

Mr. FOSTER. That’s an excellent question. I can speak about 

this a little bit. 

In 1998, of course, the projections reflected the estimated impact 

of the Balanced Budget Act 1997, which, as you remember, was a 

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very hard-hitting piece of legislation. So, our estimates were built 

into the 1998 projections. 

Now, in practice, some of the BBA impacts were greater than we 

estimated. In particular, you remember the provision about transferring certain of the home health visits from Part A to Part B? 

Chairman STARK. Mm-hmm. 

Mr. FOSTER. In practice, it turned out that more of these visits 

ended up qualifying as Part B, and relatively fewer as Part A, than 

we originally thought. So, that was one factor. 

Another factor was that of the home health agencies themselves 

misunderstood the interim limits. As a result, they cut back on 

their own services far more than they needed to under the law. 

That reduced costs. It was unfortunate, but the law was complicated, and they were acting very cautiously. So, for both reasons, 

home health costs for both reasons for Part A were significantly 

less than we had estimated at the time. 

Now, similarly, skilled nursing costs came in less than we had 

thought they would, based on the actual experience. 

Something else interesting happened following 1998, and that 

was that, for the first time in the history of Medicare, what we 

called a case mix index for Part A—this is the average complexity 

of inpatient hospital admissions went down. Normally, that goes up 

roughly by 1 percent per year, because hospitals treat more complicated cases over time. 

But, starting in 1998, it actually went down, and it went down 

for about 5 years in a row, to the tune of, on average, 1 percent 

per year. By perhaps the strangest of coincidences, most of the reduction occurred in coding of cases for simple pneumonia versus 

respiratory infection, and with or without complications for the 

DRGs that were paired at that time. By coincidence, perhaps, and 

perhaps not, that’s exactly what the Department of Justice was investigating for a major hospital chain at the time. 

So, one way or the other, we experienced these negative case mix 

changes, rather than positive. That helped quite a bit, too. 

There are probably some other factors, in addition to these. We 

will think them through and add, for the record, anything beyond 

that. But the short answer is it was not so much policy changes, 

but changes in actual experience, including the fraud and abuse, 

the BBA impacts being—— 

Chairman STARK. If I could just follow on that one more time, 

I don’t know whether actuaries have a range of certainty, as they 

do in political polling. They say, you know, ‘‘This was within five 

points of being accurate.’’ 

When you’re talking about going out 75 years, is there—are 

you—do you have the same certainty on your projections for 5 and 

10 as you do for 40 years out, or is there a cliff out there somewhere, where you’ve got more guess and less empirical certainty? 

Mr. FOSTER. Well, I think it’s fair to say the farther out you go, 

the less certainty you can have. 

For the next few years, we hope that we can do a pretty good 

job. In real life, of course, it may be that the costs for any given 

type of service in 2008, instead of increasing by X percent, which 

we might now estimate, they could easily increase by, say, 2 or 3 

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29 

percentage points more than that, or 2 or 3 percentage points less 

than that. 

Now, over time, estimation differences like that can often average out, but not necessarily. You can have a sustained faster trend. 

The value of the long-range projections is not that we think we 

can actually predict with any kind of confidence what will happen. 

If we thought that, or if we could actually do that, then we would 

be someplace else making millions of dollars, I think, in the stock 

market, rather than being actuaries. 

Nonetheless, there is value to them, because it enables us, or the 

Board of Trustees, to tell you folks, the nation’s policy makers, 

that, under reasonable conditions that we think could reasonably 

happen, here is what the program would look like. It’s either okay 

or not okay. But we should never kid ourselves, or place too much 

emphasis or reliance on what are inherently uncertain projections. 

Chairman STARK. Thank you so much. Mr. Camp, would you 

like to—— 

Mr. CAMP. Well, thank you, Mr. Chairman. Mr. Foster, you mentioned that Part B premiums would be reduced by $3 as a result of cutting Medicare Advantage plans. If I understood your testimony, if we completely limit Medicare Advantage for about nine 

million seniors, we would extend the life of the program about two 

years. Is that what you said? 

Mr. FOSTER. Yes, sir, about 18 months. 

Mr. CAMP. Well, forgive me if I don’t start throwing the confetti; 

that’s not very long. Can you tell me the impact on the Part B premium from the physical payment provision in the CHAMP bill that 

spent $67 billion over 10 years? 

Would you please tell me in your answer, how much would the 

Part B premium increase? There is a significant increase in Part 

B spending. 

Mr. FOSTER. Let me check just a second to see if we have that. 

Mr. CAMP. All right. Well, if you would like to get back to me 

in writing, I would appreciate an answer in writing. 

Mr. FOSTER. I will reply to you. 

Mr. CAMP. Also, Medicare Advantage plans, is it accurate to say 

about 87 percent of their dollars are used on medical expenses, and 

about 4 percent of that would be profit? Is that your understanding, after your analysis? 

Mr. FOSTER. Almost. In other words, the total percentage for 

administrative costs and profit margin is about 13 percent. 

Mr. CAMP. Yes. About 19 percent is administrative, which I 

would call disease management, all of those other things, and 

about 4 percent is profit. 

Mr. FOSTER. That’s correct. 

Mr. CAMP. I would break those two down. The CHAMP Act required only 85 percent be spent on medical. So, actually, the 

CHAMP Act required less to be spent on medical than we’re finding in reality, is that correct? 

Mr. FOSTER. Well—— 

Mr. CAMP. I see nodding behind you, so—— 

Mr. FOSTER. The 13 percent is an average. 

Mr. CAMP. An average, we’re talking on average, yes. 

Mr. FOSTER. It’s not—— 

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Mr. CAMP. On average, Medicare Advantage plans spend about 

87 percent on medical. The CHAMP bill, on average, required 

about 85 percent being spent on medical. So, the CHAMP bill required slightly less to be spent on medical than is current practice. 

Mr. FOSTER. I guess I would quibble just a little bit. I agree 

with you, generally, but the 85 percent was a limit, I thought not 

a average. In other words, no plans could go beyond the limit. 

Mr. CAMP. Yes, it was you could not go beyond that. But actually, in reality, we’re seeing they spend about 87 percent. You 

would agree with that. So, I appreciate that. 

Mr. FOSTER. Yes. 

Mr. CAMP. On Part D—obviously, the costs on this program are 

much lower than you projected. Is that, in part, because plans were 

able to negotiate deeper discounts from drug manufacturers than 

you had anticipated? 

Mr. FOSTER. Yes, sir, it is. In particular, while we anticipated 

a vigorous level of competition among Part D plans, we thought 

that it would take a few years, 2 or 3 years, for that competition 

to be fully reflected in the lowest retail discounts, the best rebates, 

et cetera. 

So, we thought that eventually the savings off of a retail level 

from retail discounts, manufacturer rebates, and utilization management would increase to about 25 percent after a few years. In 

real life, in 2006, the plan started off at about 27 percent right off 

the bat, and it has since grown to just about 30 percent. 

Mr. CAMP. So, it’s about 37 percent lower in 2008 than the original in 2003. 

Tell me, what are the differences between last year and this 

year, in terms of Part D’s estimates? How far off are we—were you 

on that? 

Mr. FOSTER. For the first 10 years, which would be 2008 

through 2017, the total projected cost over that period is about 17 

percent lower in the new projections, compared to last year’s. 

Mr. CAMP. All right. 

Mr. FOSTER. Now, that’s due to three factors, primarily. First, 

and most important, that is the actual experience of plans in 2006 

was lower, not only than we estimated, but also lower than the 

plans themselves had estimated in their bids. So, the actual costs 

came in lower. 

In addition, the level of rebates that the plans received from the 

drug manufacturers was about 8.6 percent in the first year, and is 

slightly higher now. We had been estimating about 5 percent, 

which was a prevailing good figure at the time. 

The third factor is that, for projecting the trend growth rate of 

prescription drug costs for Medicare, we use our drug projections 

for national health spending, overall. Between last year and this 

year, we have reduced that trend slightly in the first few years. So, 

those factors together result in the 17 percent—— 

Mr. CAMP. So, it’s not just because the number of low-income 

beneficiaries enrolled is lower than projected. It’s these other factors you have mentioned? 

Mr. FOSTER. That is a relevant factor, but it has more to do 

with the difference between our original estimates back in 

2003—— 

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Mr. CAMP. I see. 

Mr. FOSTER. And the current estimates. About 7 percentage 

points out of the 37 percent that you mentioned are attributable to 

lower enrollment, generally. 

Mr. CAMP. Okay. 

Mr. FOSTER. Much of that is due to about roughly one’s million 

fewer low-income subsidized beneficiaries than we had originally 

estimated. 

Mr. CAMP. But that’s not the case between your estimates last 

year and your estimates this year. 

Mr. FOSTER. No. We were much closer in that regard after the 

very first projection. 

Mr. CAMP. All right. Thank you very much. Thank you, Mr. 

Chairman. 

Chairman STARK. Mr. Doggett? 

Mr. DOGGETT. Yes. Thank you so much for your testimony and 

your work. 

In order to accurately assess the experience under Part D, do you 

believe it would be valuable for congressional support agencies and 

researchers to have access to the actual claims data for Part D 

plans? 

Mr. FOSTER. I believe it would be, if the proper controls were 

in place to limit the privacy considerations. 

Mr. DOGGETT. You’re aware that CMS proposed a regulation 

way back in October 2006, but they still, after all that time, have 

not finalized a rule for the release of that data. 

Mr. FOSTER. Yes, sir, that’s correct. It went out as an NPRM, 

as you say. We received comments, which I believe were all or almost all favorable. 

Mr. DOGGETT. Yes, sir. 

Mr. FOSTER. It has been under discussion internally since then. 

Mr. DOGGETT. Right. The lack of action on that is actually 

being used as an excuse for not supplying data that this Subcommittee has been trying to get now for almost a year on what 

appears to be CMS spending $100 million on retroactive drug coverage for dual eligibles that—it’s unclear whether any benefit was 

obtained from it. 

Also, is there an actual overpayment to Part D plans of about $4 

billion for plan year 2006 by CMS? 

Mr. FOSTER. Yes, sir. The way the process works is that plans 

submit bids—— 

Mr. DOGGETT. Right. 

Mr. FOSTER. First Monday in June. They have to live with 

those bids; they can’t go back and change them. We make payments to the plans that include a direct premium subsidy, which 

reflects the overall national cost the way the premium formula allocates it to Medicare. 

We also pay them estimated amounts for the catastrophic reinsurance benefits. This is just a standard monthly amount in advance, which later on will be reconciled against the actual plan 

costs. 

Mr. DOGGETT. Yes. Actually though, it took CMS about nine 

months after the plan year ended for 2006 before they realized that 

they had overpaid the drug plans $4 billion, did it not? 

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Mr. FOSTER. It took quite a while to get the data systems working accurately enough—— 

Mr. DOGGETT. Yes, right. 

Mr. FOSTER. In order to make the calculation. 

Mr. DOGGETT. Almost another year. 

Mr. FOSTER. We all would have liked it to have been much 

quicker—— 

Mr. DOGGETT. Yes, sir. As far as any success in Part D being 

attributable to competition, that’s not the main reason the costs 

had been lower than they were projected. 

Mr. FOSTER. We don’t consider it the biggest reason. 

Mr. DOGGETT. In fact, when you look at dual eligible, isn’t it 

true that the Part D plans have been unable to match the low 

prices that were achieved in the state Medicare programs before 

Part D ever took effect? 

Mr. FOSTER. That’s correct. I would be glad to explain why, if 

you like. 

Mr. DOGGETT. If I have time, we will go back. If not, perhaps 

you can supplement in writing. 

As far as the concerns with the latest projection that Medicare 

is about to go insolvent, and the trigger, is it correct that the only 

piece of the President’s trigger legislation that actually will have 

any effect from his proposals, in view of this projected insolvency, 

is any effect on Medicare financing is his proposal to raise drug 

benefit premiums for middle and higher income beneficiaries. 

Mr. FOSTER. Basically, yes. The Title III with the income-related premium—— 

Mr. DOGGETT. The impact of that will be to postpone the trigger date from 2013 to 2014. 

Mr. FOSTER. Yes, sir. 

Mr. DOGGETT. So, we have a crisis described, and the reaction 

of the administration is a significant amount of rhetoric, but a proposal to resolve that for at least one year as their answer. 

Let me ask you about a different area, which is those people, 

some of the poorest beneficiaries who receive—or should be receiving extra help through the LIS program. 

Is one of the reasons that the drug price that the Part D expenditures are less than what was originally projected, the fact that we 

have a much lower enrollment rate for those poor people that are 

entitled to extra help, or the low-income subsidy? 

Mr. FOSTER. That is one of the factors, sir. It’s not the only 

one—— 

Mr. DOGGETT. I think—— 

Mr. FOSTER. One of the factors. 

Mr. DOGGETT. It has been very difficult to ascertain which excuse the CMS would rely on to explain that. But what is the current projection of how many people are eligible for extra help, 

versus how many people are receiving it? 

Mr. FOSTER. The current projection and I will look it up for you, 

so I don’t get it wrong—is 12 million. But, John, do you remember 

12 point what? 

Mr. DOGGETT. Well, it went down from—— 

Mr. FOSTER. Yes, 12.5 million is the current estimate. 

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Mr. DOGGETT. Right. That is down from 13.2 million people 

that were eligible in the previous projections. 

Mr. FOSTER. That is correct. 

Mr. DOGGETT. Other than making CMS look better about a job 

it’s not doing very well, is there any other good explanation for why 

the number has decreased? 

Mr. FOSTER. Well, let me tell you where the numbers come 

from, and you can decide for yourself, sir. 

Mr. DOGGETT. Thank you. 

Mr. FOSTER. In our original estimates, back in 2003, we used 

the Current Population Survey. It was at a time that a recession 

was going on. We estimated actually more than 14 million eligible. 

A year or two later, we converted to using a different data source 

that is considered more accurate. Still a survey, but more accurate. 

That lowered it to the 13.2 million that you mentioned. 

Most recently, this past fall, we have used an update of that Survey of Income and Program Participation data, and for a later year, 

as well. That has lowered it to the 12.5. 

Now, any time we quote any of these figures we like to say we 

believe it’s about 12.5, plus or minus a lot, plus or minus maybe 

another 2 million, because of the uncertainties associated. 

It is true enough. I won’t try to make excuses for CMS or for Social Security—everybody is sensitive about the charge that we 

haven’t done enough to find these people who are eligible. I think, 

in fact, there has been a good faith effort. I am much more confident there has been a good faith effort than I am about exactly 

whether it’s 12.5 or 10.5 or 14.5. 

Mr. DOGGETT. How many people do you think are eligible who 

are not receiving extra help today? 

Mr. FOSTER. Well, our best estimate right now is the total eligible is the 12.5 million. We estimate the number in 2008 who will 

get the extra help, to be 9.8 million. So, the answer differences between those two. 

Mr. DOGGETT. Thank you. Thank you, Mr. Chairman. 

Chairman STARK. Mr. Johnson, would you like to inquire? 

Mr. JOHNSON. Thank you, Mr. Chairman. He didn’t let you answer that question concerning the differences between state and 

Federal. Can you answer it now? 

Mr. FOSTER. Certainly, sir. It’s clear enough that the Part D 

plans with pharmacy benefit managers had negotiated very effective rebates from manufacturers. They’re doing just as well as anybody else in the industry doing this. 

It is tough to compare that to the rebates that are provided by 

law under the Medicaid program. In particular I am going to give 

you a couple of examples generic drugs, under the Medicaid rules, 

get an automatic 11 percent rebate. Almost never in the private 

sector do you have rebates paid on generic drugs. They are so inexpensive to begin with, it’s just not done. So, that’s a statutory advantage that Medicaid has. 

In addition, the rules for the rules for Medicaid indicate over 

time, if the average manufacturer price of a particular drug increases faster than the CPI, then that difference above the rate of 

CPI growth has to be rebated back to these state Medicaid programs. 

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Over time, that accumulates to be a lot. So, if you look at the 

total value of rebates for Medicaid compared to total spending for 

drugs, it’s over 30 percent. You can’t negotiate your way to that 

level. 

Mr. JOHNSON. Okay, thank you. Well, you indicate that Medicare Part B premiums doubled over the last 6 years, while D premiums remain stable. 

Why do these two programs behave so differently? Can we learn 

any lessons from Part D and apply them to Part B? 

Mr. FOSTER. A good part of the difference, sir, is that Part B 

is a well-established, long-standing program; Part D is quite new. 

With Part B, we have the ability to have a pretty good understanding of how much the premiums will go up by, and how much 

they need to go up by. For a mature program, for health care generally, you would expect that to be in the range, per person, of anywhere from 5 to 8 percent. That’s what they have been, other than 

our acceleration to rebuild the trust fund account assets, which 

raise the increases somewhat. 

For Part D, when the plans first came in to bid on this, many 

of them didn’t have a lot of data on drug costs for older people. 

Some did; some didn’t. In particular, right about the same time 

that Part D got started actually, a couple of years before we had 

a sudden slow-down in the growth trend for prescription drugs, 

generally. Prescription drugs had been increasing at double-digit 

rates for about a decade-and-a-half. In 2004 and 2005, it suddenly 

slowed down to only in the 5 to 7 percent range, about half of what 

it had been. 

In addition, the competition has helped, in terms of getting the 

greater discounts, et cetera. So, these factors combined, so far, have 

resulted in quite low premium increases for Part D. That will probably change in the next few years. 

Mr. JOHNSON. Do you think that a defined contribution system 

might help, or not? 

Mr. FOSTER. Well, that’s a tough one, sir. Let me give you kind 

of a necessarily general answer. 

First of all, let me say it would represent, of course, a quantum 

change, compared to what we have now. 

Mr. JOHNSON. I know. 

Mr. FOSTER. We stay out of the policy aspects: ‘‘Is this a good 

idea?’’ ‘‘Is this a bad idea?’’ 

But the biggest factor that results in health care costs increasing 

faster than the economy is technology. Most medical technology is 

cost-increasing, because the people developing it know that there is 

a ready market for any better technology, even if it is quite a bit 

higher cost. They know that insurance will pay for most of it, and 

they know it will be adopted. So, most of the research out there is 

directed toward new technology that would be better and cost 

more. 

If you went to a defined contribution, or a global budget sort of 

approach, there would be many concerns associated with it. You 

can look in Canada, you can look in England, you can look at other 

countries with long waiting lines for many kinds of services, and 

you can say, ‘‘I don’t want that for me.’’ 

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But if you did that, nonetheless, would you then have the possibility of changing the nature of the technology development? Most 

technology results in lower costs, over time. We have fancier cars, 

fancier computers, and the cost hasn’t gone up to the same degree 

as the utility. So, if a defined contribution approach led to technology development that turns to cost decreases, we would have a 

fighting chance, but only a chance, of reducing the growth rate of 

health care costs. 

Mr. JOHNSON. Thank you for your responses. Thank you, Mr. 

Chairman. 

Chairman STARK. Thank you. Mr. Thompson? 

Mr. THOMPSON. I thank you, Mr. Chairman. Thank you, Mr. 

Foster, for being here. 

I just want to touch on, for a moment, the greater issue, and that 

is that the growth in health care costs are a bigger problem than 

just as it pertains to the public programs, such as Medicare. 

The local newspaper in my district recently reported that in and 

I will quote ‘‘In both public and private sectors, health care costs 

are escalating at rates far above inflation. On average, between 

1970 and 2006, Medicare spending increased by 8.7 percent per 

person each year, while private health insurance spending increased by 9.7 percent per person.’’ So, this is a much bigger issue 

that we need to figure out how to get our arms around. 

The newspaper went on to editorialize that the next President 

and congress must address a host of issues if we’re going to be able 

to fix this. They mention three: the fact that the Medicare payroll 

tax has not been increased since 1985; the flawed structure of the 

prescription drug benefits begun in 2006 means that private insurance companies in the program are paid 13 percent more on average than under regular Medicare; and that the Bush tax cuts of 

2001 and 2003 are straining the Federal budget, including the portion of Medicare that’s paid out of general revenues. Those tax cuts 

expire in 2008 and 2010, providing room for discussion of the future of the government health spending programs. 

Just—I think it is important to note that I don’t think we are 

ready to fall off the cliff, but I think it’s a bigger problem than 

some before me have mentioned. I think this lays a pretty good 

road map as to how we got there, and what we need to do. 

Mr. Stark had mentioned the issue regarding Medicare Advantage plans. I want to follow up on that, if I could, for just a second. 

In terms of the dollar amounts of Medicare payments, Medicare 

Advantage plans are now the second largest provider group, after 

inpatient hospitals, and they even bypass physicians. 

So, since the MA plan is paid out of both the hospital insurance 

and the supplementary medical insurance trust funds, should we 

think about adding information to future trustees reports that captures the effects of Medicare Advantage payments on the trust 

funds, and the program’s financial outlook? 

Mr. FOSTER. I think that would be useful, sir. 

Mr. THOMPSON. How do we do that? Can we just—— 

Mr. FOSTER. Well, we start—— 

Mr. THOMPSON. Serve as notice that that’s what we want to 

do, or—— 

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Mr. FOSTER. We will start by my apologizing to you, because I 

read through the transcript of last year’s hearing, and you raised 

exactly the same question. You asked, if you should write to the 

Board of Trustees, and I said, ‘‘That would be fine, or you can write 

to us, and we will pass it on, or you can just ask us.’’ You said, 

‘‘Like, right now?’’ I said, ‘‘Sure.’’ Then I forgot. So, I apologize. 

Normally, I do better than that. 

Mr. THOMPSON. I was further down the dais then. 

Mr. FOSTER. No, sir. We are equal opportunity, in terms of requests from Congress. 

However, let us consider this as a reiteration of your interest in 

this. This time I promise we will not forget. We will bring this up 

with the Board of Trustees on your behalf, and see where it takes 

us. 

Mr. THOMPSON. Okay, thank you. The Chairman doesn’t have 

to crack his gavel or anything? 

Mr. FOSTER. Well, if the Chairman wanted to give me a call in 

about January of next year, that would be helpful. But, otherwise, 

we will try our best to remember. 

Mr. THOMPSON. Well, I would hope that we could make that 

happen this year. 

The—I want to talk a little bit about the 45 percent trigger. Is 

there any rationale for setting the threshold of general revenue financing for Medicare at 45 percent? 

Mr. FOSTER. I’m not aware of any technical rationale for it. I 

believe it was set primarily in answer to the questions, ‘‘When 

might this first be triggered? What level would it have to be?’’ 

Mr. THOMPSON. Is there any reason for me or anyone else to 

think that the 45 percent is the right amount of general fund revenue financing? 

Mr. FOSTER. Clearly, Medicare has been financed, in significant 

part, from general revenues from the very beginning, in 1965. If it’s 

a collective judgment as to at what level should be concerned, 

that’s, I think, about all you can say for it. 

Mr. THOMPSON. The 2006 report projected the 45 percent 

threshold would be crossed in 2012. In the 2007 report, the date 

was pushed back to 2013. In this year’s report, the data is again 

pushed back to 2014. 

How much volatility is there in this calculation, and can you say 

with any certainty that the 45 percent general revenue warning 

won’t be pushed back yet again next year? 

Mr. FOSTER. There is a certain amount of variability in it, obviously. Measures such as, the 45 percent test, or even the hospital 

insurance trust fund depletion date can be fairly sensitive, certainly, to changes in legislation, but even to changes in actual experience, the most recent data, changes in assumptions, et cetera. 

I would say the 2014 expectation in the current report, if we’ve 

done our job well, would have a 50/50 chance of being either later 

or earlier. 

Mr. THOMPSON. So, it’s safe to say that the language created 

in the trigger—in the statutes—is filled with ideology. Or at least 

I will—maybe you can’t, but I will say that. 

Do you think it is helpful to be throwing around terms like 

‘‘funding warning,’’ ‘‘crossing the threshold,’’ ‘‘cause for alarm’’? 

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Mr. FOSTER. I don’t think it’s cause for alarm. I would prefer 

a different title, myself. But I think the test itself has some use. 

Mr. THOMPSON. Thank you very much. 

Chairman STARK. Ms. Tubbs Jones, would you like to inquire? 

Ms. TUBBS JONES. Mr. Chairman, thank you very much. Mr. 

Foster, good afternoon or good morning, still, okay. How are you? 

Mr. FOSTER. I am doing pretty well, thank you. 

Ms. TUBBS JONES. Good. I want to focus in on Part D for a moment, sir, and talk to you about initially, when Part D was implemented, there was a whole discussion around whether or not the 

Secretary of Health and Human Services should have the ability to 

negotiate best price on behalf of recipients of Part D under Medicare. 

I am wondering whether, in the Trustees’ Report and the work 

you have done over this past year, can you discuss with us, is there 

a reduction in cost under Part D for prescription drugs for Medicare beneficiaries. If there is not, is there, in fact, the ability—or 

would you believe that you ought—the Secretary should have the 

ability—to negotiate best price, and would it have an impact on the 

costs that Medicare beneficiaries are paying right now? 

Mr. FOSTER. A couple of thoughts here. The first is that the 

Part D plans themselves are, without question, negotiating a pretty 

favorable level of discounts and rebates, et cetera. As I think I 

mentioned earlier, compared to a regular retail level of drug costs, 

in Part D plans, the average reduction off that is over 30 percent. 

So, that’s pretty good. 

Now, part of your question is: could CMS, could the Secretary, 

do a better job than that? I would have to give you a conditional 

response on that, because it depends on what tools they would 

have. 

With some of the legislation that has been introduced in the last 

couple of years to give the Secretary such authority, there have 

also been very significant constraints on what tools would be available for the negotiation. 

For example, if you go to a drug manufacturer and suggest, ‘‘I 

will put your drug in a favored place in my formulary in exchange 

for this very good rebate,’’ then you will probably get a decent rebate out of it. 

But if you didn’t have a national formulary of some kind, and 

you just had to negotiate on the good will of the companies, and 

the hopes that they would give you a good rebate because of public 

attention, or whatever, it wouldn’t be nearly as effective, in our 

view, as what’s happening currently. So, we didn’t see any savings 

from that kind of proposal. 

Alternatively, if you used the power of the 800-pound gorilla, the 

Federal Government power, and mandated prices, then, much as 

we’ve seen with Medicaid, where that sort of thing happens by law, 

you could certainly get a deeper discount, a greater level of rebates. 

Ms. TUBBS JONES. Is there any disadvantage to that, using the 

800-pound gorilla? 

Mr. FOSTER. There are a couple of disadvantages that occur to 

me. One is that it’s hard to know where to stop. 

We have seen many instances of national price setting over the 

years that just don’t work for very long. Right away, people try to 

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get around it. Right away, whatever we, in our collective wisdom, 

think might be the right level turns out not to be the right level 

after very long. 

A good example of that was the Part B-covered drugs under 

Medicare. For many years, the prices that were set by law were 

way too high. The actual transaction prices were much lower, and 

that was addressed in recent legislation. 

So, the other problem is, if you do get a little carried away, and 

you force a very low level of drug prices on the manufacturers, then 

do you risk their not being willing to sell you the drugs, or do you 

risk the research and development the standard sorts of arguments 

you hear that might have an impact on the development of future 

drugs? 

Ms. TUBBS JONES. Well, my concern is, taking in consideration 

all the things that you have laid out, and also the things that are 

in your report, is to operate in the best interests of the seniors in 

America, who are out here, struggling to pay for health care, struggling to pay for gas, struggling to pay for food in the economy that 

we’re operating in, and still being able to purchase their prescription drug benefit. What operates best for them? 

Mr. FOSTER. Well, what’s best for them, of course, may not be 

best for other people or organizations. But what’s best for the beneficiaries, obviously, is the lowest premiums possible. 

Ms. TUBBS JONES. Exactly. So, how do we get what’s best for 

them? 

Mr. FOSTER. I think I would suggest that we are pretty far 

along the way toward what’s best for them, already. It’s not necessarily optimal, if you speak in big pictures. 

For example, we had the suggestion earlier about a defined contribution plan. If you’re willing to make quantum changes in the 

nature of a program, and you essentially start from scratch in some 

respects, there might be other ways. 

But what’s happening right now, with these good discounts and 

rebates that are negotiated is a vast improvement for anybody who 

didn’t have drug coverage beforehand. The prices they now have access to are much, much better. It’s a subsidized benefit, of course, 

so their premiums are quite low, generally speaking. 

Ms. TUBBS JONES. Mr. Chairman, if you would just allow me 

to ask this question, and perhaps get a written response, I am interested in—in light of the fact that we have a doughnut hole in 

the prescription—in the Part D coverage, what’s happening to the 

seniors out here who fall into the doughnut hole, who pay the premium and their drug costs continue, they still have to pay the drug 

costs? 

I would like to have a written response, Mr. Foster, at some 

point, around that issue. I am sure my colleagues, as well, would 

like to know what’s happening to the senior citizen doughnut hole. 

Mr. FOSTER. We would be happy to—— 

Ms. TUBBS JONES. Thank you, Mr. Chairman. 

Chairman STARK. Mr. Kind, if you—— 

Mr. KIND. Thank you, Mr. Chairman. Thank you, Mr. Foster, for 

being here and offering this update on where we’re going, fiscally. 

Just to dovetail into where Ms. Stephanie Tubbs Jones has left 

off with you, over the recess, I, like many of my colleagues, were 

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holding listening sessions. It kept coming up in the course of 

these—because I was really probing some of the seniors out there 

participating in Part D, and the new prescription drug plan, how 

they were faring in it. 

Some of the county aging officers there were telling me that they 

were noticing more and more people hitting this doughnut hole 

sooner in the year, and more of them being captured under it. At 

that point, a couple of the other seniors spoke up and said, ‘‘Yes, 

you know, I hit the doughnut hole last year,’’ and I asked them, 

‘‘Well, what did you do when you encountered that?’’ 

They said, ‘‘Well, it came down to a choice of making my home 

mortgage payment, my heating oil, or the prescription drugs. Of 

course, we decided to stop taking the prescription medications, in 

light of these other choices that we were facing.’’ 

Were you able to determine in the trustees’ report how much of 

an impact reduction in the Part D drug costs were due to the fact 

of seniors hitting the doughnut hole, and not hitting the catastrophic level, and therefore, incurring those expenses? 

Mr. FOSTER. We always model the proportion of drug expenses 

that we expect to be below the deductible, or between the deductible and the initial coverage limit, in the doughnut hole, in the catastrophic area, et cetera. 

I don’t think—and I am going to check with John Shatto here, 

momentarily—that we have yet had time to do any person-by-person analysis, other than looking at aggregate amounts, and seeing 

how they shape up, in order to do the projections. 

Mr. KIND. Yes, I think that would be helpful, if there was a way 

for—maybe in the next trustees’ report, if you’re able to go back 

and try to capture that data for us, as well. 

It really hearkens back to an additional problem, or frustration, 

that we have had with the MA plans, generally, and that is, you 

know, we’re just having a hard time getting any information on the 

utilization of these plans. 

Obviously, we’re offering a higher reimbursement rate. That was 

one of my chief concerns in the passage of the Medicare Modernization Act. This new Part D aspect, as you’re talking about, is the 

largest expansion of entitlement spending since the 1960s, with no 

ability to pay for it. 

Now we’re having a hard time even finding out what the patient 

is receiving. We are determining under the plans what they’re offering, and they claim that, because of the higher reimbursement 

rate, they’re able to offer more. But we’re not sure what that 

means to the typical patient, what type of utilization that they’re 

receiving. 

Would that aspect be helpful for CMS to have, and to be able to 

report back, as well, to us what type of utilization or outcomes 

these patients are receiving under the MA plans? 

Mr. FOSTER. Yes, sir. I think, for the policy making community 

at large, broader access to the claims data would be a good thing. 

We have access to it ourselves. But, for example, the research office 

at CMS does not. So, it could only help, I think. 

Mr. KIND. Yes. Obviously, we will have some confidentiality 

issues to deal with there, but I think those could be easily addressed. 

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I mean, if we are going to get a real grip on where these expenses are going, and what the real value or benefit is going to be, 

I think that would be quite crucial to obtain. 

Finally, again, Ms. Tubbs Jones talked about the negotiating 

power that we may have in the Federal Government under the 

Part D plan. In the state of Wisconsin, we have had a very popular 

bipartisan senior care program that does allow some negotiation 

within, and it’s resulting in huge cost savings. 

I would assume—and I think I heard from your testimony—that 

if some of the similar tools are used that are currently being utilized under Medicaid programs, that might be an additional area 

of cost savings under Part D, as well. Is that correct? 

Mr. FOSTER. They are already being used very effectively. The 

question is, could they be even more effective? 

It’s not clear to me, absent a national formulary, without those 

tools applied nationally, that you could do any better. 

Mr. KIND. All right. Thank you, Mr. Foster. Thank you, Mr. 

Chairman. 

Chairman STARK. Mr. Becerra, would you like to inquire? 

Mr. BECERRA. Thank you, Mr. Chairman. Mr. Foster, thank 

you very much for being with us. I know most—much of what we 

talked about is really an estimate, projections of what we think will 

happen. Obviously, things can change. We know that the solvency 

of the Medicare Trust Fund has fluctuated over the years. It is always difficult to get precise measurements. 

Can you give me a sense? I know in your report you talk about 

our costs to administer our different Medicare programs. What are 

the administrative costs to administer Medicare’s Part A or Part B 

programs? 

Mr. FOSTER. For administering the fee-for-service, or actually, 

for administering Medicare overall, I should say all aspects, all administrative costs that Medicare pays directly that percentage is 

about 1.5 percent. 

Mr. BECERRA. Let’s make sure we understand what we’re talking about. 

To administer the fee-for-service program, where we reimburse 

doctors or hospitals for providing the direct care to Medicare beneficiaries, the cost of administering that health care program under 

Medicare is about 1.5 percent? 

Mr. FOSTER. Yes, that is correct. It is also correct to say for 

Medicare at large. It is a subtle factor that we make certain statutory payments to Medicare Advantage plans and to Part D plans. 

These plans themselves have administrative costs, but our payments under the law only reflect administration in a very minor 

way. They are not directly allocated and identified as administrative. 

Mr. BECERRA. Okay. So, those are the costs that the government, in essence, pays in administering the Medicare program, 

about a percent and a half. You mentioned there are other costs: 

the Part C program, Medicare Advantage, which is operated by the 

health plans, the insurance industry. 

Do we have a sense of what their administrative costs are? 

Mr. FOSTER. Yes, sir. Currently, for the Medicare Advantage 

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gin, or so-called profit margin, is about 13 percent. So, about 9 percent admin and about 4 percent for a gain/loss. 

Mr. BECERRA. So, about 13 percent? 

Mr. FOSTER. Thirteen. 

Mr. BECERRA. Thirteen percent to administer, in essence, a 

parallel program of health care under Medicare that uses a different format. The insurance industry offers a plan, versus the feefor-service model, which is the more traditional model. 

Mr. FOSTER. Yes, sir. 

Mr. BECERRA. If we were to expand the Medicare Advantage 

program, the health insurance industry plan that provides Medicare fully out to reflect the size of the current fee-for-service program, what would that 13 percent amount to, in terms of dollars? 

Mr. FOSTER. The first rough approximation would be about 13 

percent of total Medicare expenditures, which are in the $450 billion range these days. 

Mr. BECERRA. So, over—about 50 billion or so dollars? If it’s 13 

percent, and it’s $450 billion, 13 percent is—10 percent would be 

$45 billion, so something over $45 billion to $50 billion? 

Mr. FOSTER. Yes. Now, let me put one caveat on that. One of 

the key reasons that the Medicare administrative cost percentage 

is so low is that we have a giant economy of scale. 

Mr. BECERRA. Yes. 

Mr. FOSTER. We process over a billion claims every year, or people do it on our behalf. If you had a national Medicare Advantage 

system of some kind, then each of the Medicare Advantage plans 

would be a lot bigger than it is today. 

Mr. BECERRA. Right. So, they could reduce their costs—— 

Mr. FOSTER. Yes, sir. 

Mr. BECERRA. Because the economies have scaled, as well. 

Mr. FOSTER. Yes, sir. Probably not to the 1.5 percent range, 

but—— 

Mr. BECERRA. If they were to keep their profit margin at 4 percent, just the profit margin exceeds by a factor of about three, the 

costs the total cost of administering fee-for-service through the government system. 

Mr. FOSTER. Yes, sir. Of course, for Medicare, the government 

program, we don’t have a profit margin. 

Mr. BECERRA. Right. 

Mr. FOSTER. In fact, I live in fear of the day that we introduce 

a profit and loss-sharing arrangement for employees. 

Mr. BECERRA. Well, so we’re talking about Medicare living on 

the edge these days, because of the increasing cost of providing 

medicine and medical services. We take a look at the cost differential in providing services through traditional fee-for-service, which 

most seniors are accustomed to, versus through the health insurance plans. 

My sense is that, unless the insurance plans can get their costs 

down, or reduce their profit margins some as well, of what they expect to make, their administrative costs will continue to far exceed 

the costs that traditional Medicare, fee-for-service Medicare, has 

running through the government to give people access to their private doctors and private hospitals. 

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So, you haven’t said to me anything that would make me believe 

that the insurance plans, under Medicare Advantage, will at any 

point be able to compete, at least administratively, in terms of cost, 

with what we have through traditional fee-for-service Medicare. 

Mr. FOSTER. Well, let me say that, under current law, because 

of the nature of the benchmarks, and the way the payment formula 

works, clearly we are spending more on beneficiaries in Medicare 

Advantage plans, on average, than we would if they were in feefor-service. 

But your question really goes to the issue of whether the private 

health plans can come in with a lower cost than Medicare fee-forservice normally attains. In certain parts of the country, they can, 

and they routinely do. Generally, the urban areas, which have relatively high fee-for-service costs, many of the HMOs and PPOs can 

have a plan cost that is less than the prevailing fee-for-service 

level. 

Now, of course, they have to offset their relatively high administrative and profit portion of their cost by either negotiating lower 

payment rates for the health care services than Medicare fee-forservice rates, or by managing utilization and trying to avoid unnecessary costs, or by getting the most cost-effective services. In some 

parts of the country, they can do that, but certainly not all in parts. 

Mr. BECERRA. Thank you. I see my time has expired, so I will 

end with the final comment that I think—I appreciate your point, 

that there are ways that a plan can try to figure out how to be 

competitive, and perhaps reduce the costs so that they are less 

than what the traditional Medicare fee-for-service program costs us 

to run. 

But I still figure that, unless those profit margins are reduced, 

it’s going to be difficult, at any point, for a private plan to compete 

with the traditional fee-for-service plan, when your cost—given the 

scale of the economy here—for the government is a 1.5 percent 

cost. But I appreciate the point. I yield back. 

Chairman STARK. Mr. Emanuel, would you like to inquire? 

Mr. EMANUEL. Thank you, Mr. Chairman. If Xavier wants to 

stay, because my question is similar—and feel to jump in at any 

point. I want to press this point, because I think it’s important, as 

we look at the trust fund issue. 

You had answered, I think earlier, one of the questions I wanted 

to ask, which was about the fact that you could add about 18 

months to the trust fund if you paid the Medicare Advantage plans 

similar—rather than have 113 percent of fee for service, or 150 

being the high end, if you paid them on the same level, you would 

add about 18 months, I think, was your answer, a year-and-a-half. 

Mr. FOSTER. Yes, sir. 

Mr. EMANUEL. Okay. On this point and I think it’s valuable if 

you’re trying to compare apples to apples, would you so there would 

be no dispute in the future if we’re all citing you and I think you 

don’t want to be cited any more but if you were to compare that, 

is it still 1.5 percent to 13 percent? 

Where can you—how do we get to a point that you can tell us 

that their administrative costs are 13 percent and traditional Medicare is X? Okay? 

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Mr. FOSTER. I’m not sure I follow the question, entirely, Mr. 

Emanuel. But if I’m understanding correctly, it’s certainly true 

enough that these smaller plans that are not nationwide—— 

Mr. EMANUEL. Right. 

Mr. FOSTER [continuing]. That don’t have the economy of scale, 

that have to pay marketing expenses, have to have a profit margin—— 

Mr. EMANUEL. Right. 

Mr. FOSTER [continuing]. Et cetera, their administrative costs 

will be higher than what we typically experience for Medicare feefor-service. 

If those plans can achieve savings in other ways that more than 

offset the higher administrative cost, then maybe they can still be 

competitive directly against fee-for-service, and have a lower cost, 

overall. Some plans clearly do; many don’t. 

Mr. EMANUEL. Well, go ahead, then, Xavier. 

Mr. BECERRA. I thank the gentleman for yielding. But, in a 

way, these plans can reduce their costs and be more competitive, 

compared to traditional fee-for-service, if they, in essence, cherry 

pick. They go after healthier seniors, they go after younger seniors, 

and reduce their overall costs of providing service, because there is 

a threshold at which no one can go under, in terms of the cost. 

One of the reasons why it costs us so little, providing traditional 

fee for service, is because—but you said, it’s economy of scale, and 

we don’t ask for profit. We don’t ask seniors to pay for the government to make a profit off of providing health care. 

Mr. EMANUEL. Let me say what I was trying to get at, and it’s 

not, obviously, hidden here, which is if you were trying to extend 

the life of the trust fund, and make sure Medicare is healthy, everything should be on the table, whether that’s overpaying for a 

service, where you’re paying sometimes 113 to 150 percent of feefor-service. Or, B, if your administrative costs between 1 entity is 

13 percent and another entity is 1.5 percent, that would be another 

place where you could look before we do anything else to the beneficiaries—not that that is to say exclusive. 

Now, when we had a debate the other day, four Democrats and 

four Republicans—Congressman Ryan from Wisconsin acknowledged that maybe, you know, the actual Medicare Advantage notion that we’re paying over what we should be paying over is a 

place to look for savings. 

So, my whole point in asking you for a fair comparison was, what 

are the dollars there that you think are available, and that nobody 

can say, ‘‘Well, you’re really comparing apples and oranges here?’’ 

What are the dollars that are available, and how much dollars 

would come if you could—were comparing apples to apples? That’s 

what I’m trying to get at. 

Mr. FOSTER. Yes, sir. I see. I don’t think, as a practical matter, 

you could just look at the relatively high administrative cost of MA 

plans and say, ‘‘Okay, we’re going to force them to have lower administrative costs.’’ You could do that to a point, but at some point 

the plans would say, ‘‘We can’t.’’ 

Mr. EMANUEL. I understand. That would be repeating, like, the 

1990s. Got that. 

Mr. FOSTER. Somewhat, yes. 

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Mr. EMANUEL. Right. 

Mr. FOSTER. Now, you could do it through the following way. 

This, again, is a bit of a quantum change. But if you implemented 

competition between the private plans without the relatively highlevel benchmarks the competition of the private plans, with benchmarks based on their bids and combined that in with fee-for-service 

Medicare as well, then what we think you would find is that in 

some parts of the country, the private plans would actually be 

quite competitive, and would be a cheaper cost than fee-for-service 

is now. 

In many other parts of the country, it would be the other way 

around. The private plans could not compete effectively against the 

fee-for-service level of cost. 

But if you did that, and were willing to live with what are nontrivial consequences—— 

Mr. EMANUEL. Yes. 

Mr. FOSTER. Then you would take advantage of whichever form 

of health care delivery is more effective in a given area by area, 

you would get a lower cost, overall. 

Mr. EMANUEL. Mr. Chairman, I know my time is up, but at 

some point I would love to have a discussion about: A, looking at 

fee-for-service; and then B, kind of patient wholeness and doctors, 

and a different way of paying for a service, and what we could see 

for savings. I know we don’t have time for that type of discussion, 

but I think it’s worthy, as we look at changes. Okay? 

Chairman STARK. I think that makes sense. 

Mr. CAMP. If the gentleman would yield? 

Chairman STARK. Yes. 

Mr. CAMP. I do think there is a difference between private fee 

for service and coordinated care, which we often call ultimate Medicare Advantage, which—there is a difference there. Coordinated 

care actually bids below traditional Medicare. But that’s why we 

kind of lump all this together sometimes when we talk about them. 

I think there is a difference. 

Mr. FOSTER. Well, and I might add, typically there are bids that 

are, in fact, somewhat higher than traditional fee-for-service because of the admin cost. 

Mr. EMANUEL. They have to do certain things, administratively, and pay for certain things that Medicare, because of the 

size, doesn’t. 

On the other hand, I do think one of the things that one day 

we’re going to look at is, rather than fee-for-service as a payment 

method, is a different type of structure that will save on health 

care costs because a doctor and a hospital have a different type 

of—a way to see the way they would take care of a patient as another way to control costs. 

Mr. FOSTER. It has great potential. 

Mr. EMANUEL. Yes. You are a man of few words. Thank you. 

Chairman STARK. Would you have some further inquiry, Mr. 

Camp? 

Mr. CAMP. Well, just to ask, we had sort of this discussion about 

the profit margins. I do think it’s important to say that Medicare 

plans have, on average, a 4 percent profit margin. 

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But I do think it’s important to say that the nursing homes and 

home health organizations, on average, have what profit margin? 

Mr. FOSTER. I can provide that for the record; I don’t have it 

handy. 

Mr. CAMP. I believe it is in double digits, though, is it not? 

Around 11 percent? 

Mr. FOSTER. It wouldn’t surprise me. 

Mr. CAMP. Yes. Well, if we could, get that in the record. So, I 

think we need to look at, you know, all of this together, and not 

just say that because Medicare Advantage plans are at 4 percent, 

that that’s unacceptable, when we have other sectors that are 

much, much higher than that, which we’re not addressing in the 

same way. I’m not suggesting we should. 

Mr. EMANUEL. Would my colleague yield for a second? 

Mr. CAMP. Yes. 

Mr. EMANUEL. As we look at places of savings—and, again, Mr. 

Chairman, this would be one area I would be interested in—is 

whether Medicare could ever provide data to if we dealt earlier 

with chronic illnesses—heart, diabetes, et cetera, some of the basic 

3 or 4—earlier than 65, what savings could we see in Medicare? 

You could say the overall health care system, but your purview is 

Medicare. 

What savings could there be resulted to Medicare if people—I 

don’t know, call it 58 to 64, 55 to 65—were put into and required, 

as a participation in Medicare years later, were part of a chronic 

illness management? What savings could be looked at? Can I ask 

that question, or no? 

Mr. CAMP. Yes, I have yielded. 

Chairman STARK. I am pretty sure you already did. So—— 

Mr. EMANUEL. That doesn’t mean the Chairman allowed me. 

Mr. CAMP. It’s on my time, I would like to hear the answer. 

Mr. FOSTER. Sure, I think—— 

Mr. EMANUEL. Right, I understand. 

Mr. FOSTER. Potentially, it would have favorable impacts. 

Mr. EMANUEL. This is like Agatha Christie. ‘‘Then There Were 

None.’’ So, there are only four of us, so don’t worry about it. 

Mr. FOSTER. It would be tough to estimate the financial impact 

of that. It’s not to say we couldn’t try. It would be tough, because 

you have this classic trade-off. On the one hand, people would be 

in better health, as a result of some of the kinds of steps you talked 

about, and for some period of time they have lower per-person costs 

than they probably would have, otherwise. 

On the other hand, they would tend to live longer, and incur 

more services over their full lifetime, as a result. When you look 

at it on that basis, many of these studies indicate that perhaps you 

would not really save anything. 

Now, the world would be a better place, and that’s a good thing, 

even if you did not have savings. But it’s that kind of trade-off that 

makes it very difficult to estimate. 

Mr. EMANUEL. Can I ask one question? 

Mr. CAMP. Yes, yes. 

Mr. EMANUEL. The fact is and I understand the trade-off I 

mean, one of the before somebody gets into Medicare, and given all 

the advantages and I don’t mean Medicare Advantage plans, but 

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all the advantages of Medicare if part of participation was an earlier improvement of one’s health, I think you would see the financial health in Medicare because if we’re looking at savings, and 

given we know the costs associated with the three or four chronic 

illnesses are huge, I think that should be a place that we look—— 

Mr. CAMP. Just reclaiming my time, as we’re talking about savings, what are the top three reasons Part D costs are lower than 

you had projected? 

Mr. FOSTER. Well, generally speaking, the first of the top three 

reasons is that the drug cost growth, overall, has been a lot less 

than we estimated, following a decade-and-a-half of double-digit 

growth rates. That was partly attributable to a lot of efforts to 

steer people to use generic equivalents, rather than brand-name 

drugs. The efforts have been very successful, and the generic rate 

is now over 60 percent in Part D, and in the country, generally. 

The second reason we talked about a little bit before, about the 

negotiated retail discounts and rebates, et cetera. 

Mr. CAMP. Their ability to negotiate discounts—— 

Mr. FOSTER. Yes—— 

Mr. CAMP [continuing]. From the drug manufacturers. 

Mr. FOSTER. The third reason—and this was the smallest of the 

three—was that there were somewhat fewer enrollees than we had 

originally estimated. 

Mr. CAMP. All right. Thank you. Thank you, Mr. Chairman. 

Chairman STARK. Did you have a second inquiry? 

Rich, if you would, just—the—we have heard—you have heard 

Mr. Doggett on some other issues, but we are having a difficult 

time determining what Medicare Advantage plans actually provide, 

as if I can make that difference, as opposed to offer. 

You could offer something that only a small percentage of the 

plan enrollees take, and you’re not giving them much. Or, you can 

offer them $50 in dental care, and we know that that ain’t going 

to get you very far toward getting your teeth cleaned. 

Could we—don’t you think that we should get actual data on 

these Medicare Advantage plans, in terms of the actual provision 

of benefits? 

I know there is an anti-competitive issue, but it seems to me that 

that could be dealt with in some kind of confidential sense, at least 

with the Committee. 

Mr. FOSTER. I think it would be useful and informative in the 

bigger picture, which is what you’re describing—— 

Chairman STARK. Yes. 

Mr. FOSTER. A GAO study or analysis, for example, that kind 

of thing. 

Let me mention what we do already, which is a cousin of this. 

By law, my office has to review all the bid submissions for all the 

MA plans and all the Part D plans, and that’s about 9,000 individual bids in the course of a year. 

For the MA plans, when they indicate their expected cost experience for the coming year, they’re supposed to be estimating that 

based on their actual past experience, not only for the standard 

covered benefits under Medicare, but also for any supplemental 

coverage that they offer. 

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So, we look to see whether their bid for the cost is consistent 

with their actual past experience. For the bid review, we can do 

that only on a kind of a cursory basis, but we periodically audit 

these plans in much greater detail, and that’s one of the things we 

look at. 

So, if you had a plan, for example, that offered half-a-dozen different kinds of extra services or care, but in real life they were not 

providing them—— 

Chairman STARK. Those people weren’t taking them. They 

would provide them. 

Mr. FOSTER. Either way. 

Chairman STARK. People signed up. 

Mr. FOSTER. Exactly right. Either way. Then we would see a 

mismatch between their claimed cost for the coming year, and their 

actual past experience—and we would investigate that. 

Chairman STARK. Well then, is there enough data, and would 

it be available to GAO? We don’t have to get into this issue of anticompetitive stuff. 

For GAO to do a report for us using the data that you would 

have in these bid submissions, and comparing it with previous 

years’ costs so that we could begin to get some idea of what actually was being provided is would you say there is enough broad 

data around so that we could go ahead with that? 

Mr. FOSTER. Probably. 

Chairman STARK. Maybe. 

Mr. FOSTER. Yes. Well, I would say probably. 

Chairman STARK. Okay. 

Mr. FOSTER. I hesitate only because we don’t get individual 

claims level data from the MA plans. 

Chairman STARK. No, but you get the aggregate. 

Mr. FOSTER. We get their aggregate data, yes. 

Chairman STARK. So, if they say they’re going to offer $50 for 

a pair of eyeglasses each year, whatever, they have an aggregate 

amount in their bid, you’d know about how many people they had 

in last year. Could you find out how much they actually spent the 

year before on eyeglasses? 

Mr. FOSTER. Yes, that would be the way it could be done. 

Chairman STARK. Okay. Well, from that, I think we could then 

begin to see which benefits were used, what they cost, and get 

some better understanding than just this idea that there is lots of 

benefits. That’s pretty hard for either of us to know. 

Mr. CAMP. Well, I think that you get this data, but CMS doesn’t. 

I don’t quite understand why GAO can’t get that from you, but 

they apparently can’t. 

Chairman STARK. They can’t? Can they? 

Mr. FOSTER. Well, here we’re talking about for the MA plans, 

not Part D. For Part D, there was an explicit statutory prohibition 

of the broader use of the Part D data. It has to be for payment purposes, which is why we get it. 

Mr. CAMP. I see. So, they can’t get that. 

Mr. FOSTER. Right. For the MA data, I don’t see any reason 

why they couldn’t. Now, some of my staff may yell at me after this 

hearing about: ‘‘Do you realize what you said?’’ But I think it could 

be done. 

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Chairman STARK. We might, then, to get around this—let GAO 

provide some review, even of Part D, as long as it was not able to 

identify any particular competitive plans, and get a little bit better 

idea of what we’re doing. That would be very useful. 

Have—at any point in your 75-year estimates, did you see, or do 

you—or did your reports show that the Medicare Advantage would 

cost less on a per-beneficiary basis than traditional fee-for-service? 

Mr. FOSTER. No, sir, not under current law. 

Chairman STARK. Okay. I guess my last request is for a table. 

In—you used to produce a table in the trustees’ report that showed 

Medicare cost sharing as a percentage of Social Security, and now 

you just have a graph. Could you give us a—give us that in kind 

of a tabular form, as you—as has shown up in the past? 

Mr. FOSTER. Yes, sir. That would be no problem. 

Chairman STARK. Would you send that on to us? I would appreciate it very much. 

I guess, unless anybody else wants to chime in, we could let Mr. 

Foster go to lunch with our deep and abiding thanks to you and 

your staff, with the sad reflection that you have generated enough 

questions here that we are probably going to flood you with inquiries over the next month. But we appreciate much your participating with us this morning. 

Unless—with Mr. Pomeroy’s concurrence, we—the hearing is adjourned. 

Mr. FOSTER. Thank you, sir. 

[Whereupon, at 11:45 a.m., the hearing was adjourned.] 

[Questions for the Record follow:] 

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[Submissions for the Record follow:] 

Statement of Thomas F. Wildsmith 

The American Academy of Actuaries is a national organization formed in 1965 to 

bring together, in a single entity, actuaries of all specializations within the United 

States. A major purpose of the Academy is to act as a public information organization for the profession. Academy committees, task forces and work groups regularly 

prepare testimony and provide information to Congress and senior federal policymakers, comment on proposed federal and state regulations, and work closely with 

the National Association of Insurance Commissioners and state officials on issues 

related to insurance, pensions and other forms of risk financing. The Academy establishes qualification standards for the actuarial profession in the United States 

and supports two independent boards. The Actuarial Standards Board promulgates 

standards of practice for the profession, and the Actuarial Board for Counseling and 

Discipline helps to ensure high standards of professional conduct are met. The Academy also supports the Joint Committee for the Code of Professional Conduct, which 

develops standards of conduct for the U.S. actuarial profession. The American Academy of Actuaries’ Medicare Steering Committee appreciates the opportunity to provide comments on the 2008 Medicare Trustees Report. Each year, the Boards of 

Trustees of the Federal Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) Trust Funds report to Congress on the Medicare program’s financial condition. The Medicare program provides health coverage for the aged and for certain 

individuals with disabilities. The trustees’ report is the primary source of information on the financial status of the Medicare program, and the American Academy 

of Actuaries proudly recognizes the contribution that members of the actuarial profession have made in preparing the report and educating the public about this important issue. 

The projections of Medicare’s financial status in the 2008 Medicare trustees’ report are consistent with the projections in the 2007 report. The HI trust fund, which 

pays for hospital services, will be depleted slightly earlier in 2019 than was previously projected. HI expenditures will again exceed HI non-interest income this 

year. In addition, Medicare expenditures will continue to consume an increasing 

share of federal outlays and GDP. The trustees conclude, ‘‘The projections shown in 

[the] report continue to demonstrate the need for timely and effective action to address Medicare’s financial challenges—both the long-range financial imbalance facing the HI trust fund and the heightened problem of rapid growth in expenditures.’’ 

The following statement examines more closely the findings of the trustees’ report. 

The American Academy of Actuaries’ Medicare Steering Committee concludes that 

the Medicare program faces serious short-term and long-term financing problems. 

As highlighted in the 2008 Medicare trustees’ report: 

• The HI trust fund fails to meet the test of short-range financial adequacy because HI trust fund assets will fall below annual expenditures within the 

next 10 years. 

• The HI trust fund also fails to meet the test of long-range actuarial balance. 

HI expenditures will exceed HI non-interest income this year. By 2019, when 

trust fund assets are projected to be depleted, tax revenues would cover only 

78 percent of program costs, and this share will decrease rapidly thereafter. 

The trust fund depletion date is projected to arrive slightly earlier in 2019 

than was projected last year, due in part to slightly lower projected payroll 

tax income and slightly higher expenditures than previously estimated. 

• The value in today’s dollars of the HI deficit over the next 75 years is $13 

trillion. Eliminating this deficit would require an immediate 122 percent increase in payroll taxes or an immediate 51 percent reduction in benefits, or 

some combination of the two. Delaying action would require more drastic tax 

increases or benefit reductions. 

• The SMI trust fund includes accounts for the Part B program, which covers 

physician and outpatient hospital costs, and for the Part D program, which 

covers the prescription drug benefit. The SMI trust fund is expected to remain solvent only because its financing is reset each year to meet projected 

future costs. Projected increases in SMI expenditures will require significant 

increases in beneficiary premiums and general revenue contributions over 

time. 

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• Medicare’s demand on the federal budget, measured as the HI income shortfall and the general revenue contribution to SMI, is projected to increase rapidly. 

• For the third year in a row, the difference between Medicare outlays and 

dedicated revenues exceeds 45 percent within the next seven years, thereby 

again triggering the Medicare funding warning. As a result, the next president must propose legislation to reduce this share within 15 days of the next 

budget submission. Congressional action is not guaranteed, however, and depending on what action, if any, is taken, other financing problems could remain. 

• Medicare expenditures are also projected to increase rapidly as a share of 

GDP and of total federal revenues, thereby threatening Medicare’s long-term 

sustainability. 

• The increasing costs of the Medicare program reflect the increasing costs of 

the health care system as a whole. Efforts to control spending in the Medicare 

program should be considered within the broader context of the entire health 

care system. 

The committee recommends that policymakers implement changes to improve 

Medicare’s financial outlook. The sooner such corrective measures are enacted, the 

more flexible the approach and the more gradual the implementation can be. Failure to act now may necessitate far more onerous actions later. 

SHORT–TERM FINANCING OF MEDICARE 

To assure short-range financial adequacy of the HI trust fund, the Medicare trustees recommend that trust fund assets equal or exceed annual expenditures for each 

of the next 10 years. This level would serve as an adequate contingency reserve in 

the event of adverse economic or other conditions. For the next several years, the 

trust fund assets are expected to significantly exceed annual expenditures. However, 

trust fund assets are projected to fall below annual expenditures during 2012. As 

a result, the HI trust fund fails the test of short-range financial adequacy. 

LONG–TERM FINANCING OF MEDICARE 

The Medicare program has three fundamental long-range financing problems: 

1. Income to the HI trust fund will soon become inadequate to fund the HI portion of Medicare benefits; 

2. Medicare’s demands on the federal budget are increasing; and 

3. Paying currently promised Medicare benefits will place an increasing strain 

on the U.S. economy. 

Each of these problems is discussed in more detail below. 

Medicare HI Trust Fund Income Will Soon Become Inadequate to Fund HI 

Benefits 

In terms of trust fund accounting, Medicare consists of two parts, each of which 

is financed separately. Hospital Insurance (HI) pays primarily for inpatient hospital 

care (Part A); Supplementary Medical Insurance (SMI) pays primarily for physician 

and outpatient care (Part B) and prescription drugs (Part D). Like the Social Security program, Medicare makes use of trust funds to account for all income and expenditures, and the HI and SMI programs operate separate trust funds. Taxes, premiums, and other income are credited to the trust funds, which are used to pay benefits and administrative costs. Any unused income is added to the trust fund assets, 

which are invested, as required by law, in U.S. government securities, for use in 

future years. Note, however, that the trust fund assets represent loans to the U.S. 

Treasury’s general fund. As a result, the buildup of Medicare trust funds is essentially used to fund other government spending. 

The 2008 Medicare trustees’ report highlights the long-term financing problems 

facing the program: 

• The HI program is funded primarily through earmarked payroll taxes. From 

1998 through 2004, HI payroll taxes and other non-interest income exceeded 

HI expenditures, and the trust fund accumulated assets. In 2005, however, 

HI non-interest income fell below HI expenditures and has continued to fall 

short since then. Beginning in 2010, HI expenditures are projected to exceed 

all HI income, including interest. At that point, the HI trust fund will need 

to begin redeeming its assets—U.S. government securities—in order to pay 

for benefits. If the federal government is experiencing unified budget deficits 

at the time these securities need to be redeemed, either additional taxes will 

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1Part B beneficiaries pay monthly premiums covering about 25 percent of program costs (beginning in 2007, Part B premiums became income-related, with higher income enrollees paying 

more than 25 percent of costs); general revenues cover the remaining 75 percent of costs. Part 

D premiums will be set at about 25 percent of Part D costs. However, because of low-income 

premium subsidies, beneficiary premiums will cover only about 9 percent of total Part D costs 

in 2008. State payments on behalf of certain beneficiaries will cover about 14 percent of costs 

and general revenues will cover the remaining 77 percent of costs. 

need to be levied to fund the redemptions, or additional money will need to 

be borrowed from the public, thereby increasing the public debt. 

• By 2019, HI trust fund assets are projected to be depleted. At that time, tax 

revenues are projected to cover only 78 percent of program costs, with the 

share decreasing further thereafter. The HI trust fund depletion date is projected to arrive a little earlier in 2019 than projected in the 2007 Medicare 

trustees’ report, due in part to slightly lower projected payroll tax income and 

slightly higher expenditures than previously estimated. 

• The value in today’s dollars of the HI deficit over the next 75 years is $13 

trillion, or 3.5 percent of taxable payroll over the same time period. Eliminating this deficit would require an immediate 122 percent increase in payroll 

taxes or an immediate 51 percent reduction in benefits, or some combination 

of the two. Delaying action would require more drastic tax increases or benefit reductions. Projections over an infinite time horizon would increase the 

shortfall to $34 trillion, or 6.1 percent of taxable payroll. Given the uncertainty of projections 75 years into the future, however, extending these projections into the infinite future can only increase the uncertainty, so that these 

results can have only limited value for policymakers. 

• The SMI program is financed through beneficiary premiums that cover about 

a quarter of the cost. Federal general tax revenues cover the remaining three 

quarters.1 The SMI trust fund is expected to remain solvent, but only because 

its financing is reset each year to meet projected future costs. Projected increases in SMI expenditures, therefore, will require increases in beneficiary 

premiums and general revenue contributions over time. 

Medicare’s Demand on the Federal Budget Is Increasing 

Another way to gauge Medicare’s financial condition is to view it from a federal 

budget perspective. In particular, this assessment determines whether Medicare receipts from the public (e.g., payroll taxes, beneficiary premiums) exceed or fall short 

of outlays to the public. Under this approach, interest income on the HI trust fund 

assets and contributions from general revenues to the SMI program are ignored, because they are essentially intragovernmental transfers between the general fund 

and the Medicare trust funds. As a result, the difference between public receipts 

and public expenditures for Medicare reflects any HI income shortfall and the general revenue share of SMI. 

Table 1 reports the HI income shortfall and the general revenue contribution to 

the SMI program in 2007 and projections over the next 10 years. Recall that the 

SMI program is designed for about three-quarters of its expenditures to be funded 

through general revenues. In 2007, Medicare expenditures already exceeded public 

receipts by $174 billion. This amount is expected to grow over the next 10 years; 

the cumulative difference between Medicare expenditures and public receipts is projected to total $2.9 trillion over this period. 

Beginning in 2010, when HI expenditures are projected to exceed HI public receipts plus interest income on trust fund assets, the HI trust fund will need to begin 

drawing down its assets, further increasing Medicare’s demand on the federal budget. Unless payroll taxes are increased or benefits reduced, HI trust fund assets are 

projected to be depleted in 2019. There is no current provision allowing for general 

fund transfers to cover HI expenditures in excess of payroll tax revenues. 

For a longer-term view of Medicare’s demand on the federal budget, Table 2 reports the HI income shortfall and the SMI general revenue contribution over the 

next several decades, as a share of GDP. The HI income shortfall and SMI general 

revenue contribution are projected to grow dramatically—from 1.4 percent of GDP 

in 2008 to 7.8 percent of GDP in 2080. This will increase considerably the pressures 

on the federal budget, unless HI income shortfalls or SMI general revenue contributions are reduced. 

A provision of the Medicare Prescription Drug, Improvement, and Modernization 

Act of 2003 (MMA) intends to address these financial challenges. Basically, if in two 

consecutive trustees’ reports general funding sources are projected to account for 

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2More specifically, a determination of ‘‘excess general funding’’ is triggered if for two consecutive trustees’ reports the difference between Medicare outlays and dedicated financing sources 

(HI payroll taxes, HI share of income taxes on Social Security benefits, Part D state transfers, 

and beneficiary premiums) exceeds 45 percent of Medicare outlays within seven years of the projection. 

istration is required to recommend ways to reduce this percentage.2 Options would 

include reducing spending (e.g., benefit cuts, delayed eligibility, reduced provider 

payments), increasing revenues (e.g., raising payroll taxes, raising beneficiary premiums), or some combination thereof. The president’s proposal must come within 15 

days of the next budget submission. The provision was first triggered in 2007, and 

in response President Bush submitted legislation in February 2008. Congress is now 

required to consider the legislation on an expedited basis. There is no requirement, 

however, that any legislation be enacted. 

The 2008 Medicare Trustees’ Report projects that the 45 percent threshold will 

first be reached in 2014. Because last year’s report also projected that the threshold 

would be reached within seven years, the requirement is triggered again this year. 

The triggering of this provision draws attention to the need to manage the demand 

Medicare places on the federal budget, and provides policymakers the opportunity 

to address the financial situation of the program and to limit the burden the program places on the federal budget. Congressional action is not guaranteed, however, 

and depending on what action, if any, is taken, other financing problems could remain. For instance, legislative changes reducing general revenue funding might 

have no impact on HI solvency. 

Medicare Is Projected to Place Increasing Strains on the Economy 

A broader issue related to Medicare’s financial condition is whether the economy 

can sustain Medicare spending in the long run. To gauge the future sustainability 

of the Medicare program, we examine the share of GDP that will be consumed by 

Medicare. As shown in Table 3, total Medicare spending is projected to consume a 

greater share of GDP over time. In 2007, total Medicare spending was 3.2 percent 

of GDP. Spending is expected to rise to 6.3 percent of GDP in 2030 and 10.7 percent 

of GDP in 2080. (Notably, this measure understates the share of the economy devoted to health spending among the elderly and disabled, because Medicare imposes 

cost sharing and does not cover all health products and services utilized.) 

Considering Medicare spending in conjunction with Social Security spending further highlights the strain these programs place on the economy. Social Security 

spending as a share of GDP increases more modestly than Medicare over the next 

several decades, and as a result, Medicare spending is expected to exceed that of 

Social Security in 2028. Combined, Medicare and Social Security expenditures 

equaled 7.5 percent of GDP in 2007. This share of GDP is projected to increase to 

12.3 percent in 2030 and 16.5 percent in 2080. 

Medicare and Social Security expenditures are even more striking when considered relative to total federal revenues. The trustees report that total federal revenues have historically averaged about 18 percent of GDP. Using this average, about 

40 percent of all federal revenues in 2008 will be used to pay Medicare and Social 

Security benefits. If no changes are made to either program and federal revenues 

remain at 18 percent of GDP, this share is expected to increase to nearly 80 percent 

in 2050, and by 2080, Medicare and Social Security spending would equal over 90 

percent of total federal revenues. 

These projections highlight the increasing strains that Medicare, especially in conjunction with Social Security, will place on the U.S. economy. Moreover, increased 

spending for Medicare may crowd out the share of funds available for other federal 

programs. 

If we are to avoid this trend, reforms must be made to address the rapid growth 

in Medicare expenditures. It is important to recognize that the problem of rising 

health care spending in the Medicare program reflects spending growth in the U.S. 

health system as a whole. Therefore, unless spending in the health system as a 

whole is addressed, implementing options to control Medicare spending may have 

limited long-term effectiveness. 

CONCLUSION 

The American Academy of Actuaries’ Medicare Steering Committee continues to 

be very concerned about Medicare’s long-range financing problems. HI non-interest 

income is already falling short of outlays this year and the HI trust fund is projected to be depleted as soon as 2019. Medicare will likely place increasing demands 

on the federal budget, even with the provision that alerts Congress when the program’s reliance on general revenue sources is becoming large. The program’s susrfrederick on PROD1PC67 with HEARING

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tainability is also called into question as currently promised benefits will require increasing shares of both GDP and total federal revenues. 

The committee recommends that policymakers implement changes to improve 

Medicare’s financial outlook. We agree with the 2008 trustees, who state in their 

report: 

‘‘The sooner the solutions are enacted, the more flexible and gradual they 

can be. Moreover, the early introduction of reforms increases the time available for affected individuals and organizations—including health care providers, beneficiaries, and taxpayers—to adjust their expectations.’’ 

The Academy’s Medicare Steering Committee is ready to provide the analysis and 

technical expertise of our member health actuaries in responding to issues regarding 

the future of the Medicare system. Other Academy publications include Medicare 

Reform Options, How Is Medicare Financed? What Is the Role of the Medicare Actuary? and Evaluating the Fiscal Soundness of Medicare. These and other Academy 

publications are available at www.actuary.org/medicare/index.htm. 

Æ 

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