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[Joint House and Senate Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

                      SOCIAL SECURITY AND MEDICARE

                     TRUSTEES' 2001 ANNUAL REPORTS

=======================================================================

                             JOINT HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                                  and

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 20, 2001

                               __________

                             SERIAL 107-16

                               __________

         Printed for the use of the Committee on Ways and Means

                    U.S. GOVERNMENT PRINTING OFFICE
74-215 DTP                  WASHINGTON :  2001
_______________________________________________________________________
 For sale by the Superintendent of Documents, U.S. Government Printing 
                                 Office
 Internet: bookstore.GPO.gov Phone: (202) 512-1800 Fax: (202) 512-2250
               Mail: Stop SSOP, Washington, DC 20402-0001

                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa                     JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia                 WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio                    JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania           XAVIER BECERRA, California
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona               LLOYD DOGGETT, Texas
JERRY WELLER, Illinois               EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin

                     Allison Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S

                               __________
                                                                   Page
Advisory of March 13, 2001, announcing the hearing...............     2

                               WITNESSES

U.S. Department of the Treasury, Hon. Paul O'Neill, Secretary, 
  and Managing trustee, Social Security and Medicare Board of 
  trustees.......................................................    13

                                 ______

                       SUBMISSION FOR THE RECORD

Healthcare Leadership Council, statement.........................    41

 
       SOCIAL SECURITY AND MEDICARE TRUSTEES' 2001 ANNUAL REPORTS

                              ----------                              

                        TUESDAY, MARCH 20, 2001

             U.S. House of Representatives,
                       Committee on Ways and Means,
                         U.S. Senate, Committee on Finance,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:11 a.m., in 
room 1100 Longworth House Office Building, Hon. Bill Thomas and 
Hon. Charles E. Grassley (Chairmen of the Committees) 
presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE HOUSE COMMITTEE WAYS AND MEANS 
AND THE SENATE COMMITTEE ON FINANCE

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
March 13, 2001
FC-4

 Thomas and Grassley Announce Joint Hearing on the Social Security and 
                           Medicare Trustees'

                          2001 Annual Reports

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, and Senator Chuck Grassley (R-IA), Chairman of the Senate 
Committee on Finance, today announced that their committees will hold a 
joint hearing to examine the findings and recommendations made by the 
Board of Trustees of the Social Security and Medicare Hospital 
Insurance trust funds in its 2001 Annual Reports on the financial 
status of the trust funds. The hearing will take place on Tuesday, 
March 20, 2001, in the main Committee hearing room, 1100 Longworth 
House Office Building, beginning at 10:00 a.m.

    In view of the limited time available to hear witnesses, oral 
testimony will be heard from invited witnesses only. However, any 
individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.

BACKGROUND:

    The Board of Trustees was established under the Social Security Act 
to oversee the financial operations of the Old-Age and Survivors 
Insurance and Disability Insurance (OASDI) and the Medicare Hospital 
Insurance (HI) trust funds. The Board is composed of six members: the 
Secretary of the Treasury (who is the Managing Trustee), the Secretary 
of Labor, the Secretary of Health and Human Services, the Commissioner 
of Social Security, and two members who are appointed by the President 
and confirmed by the Senate to serve as public trustees for four-year 
terms. The Social Security Act requires that the Board of Trustees 
report annually to the Congress on the financial and actuarial status 
of the OASDI and HI trust funds. The 2001 Annual Reports are scheduled 
to be released shortly.

    Ensuring the financial viability of Medicare and Social Security is 
one of Congress' most important responsibilities. The annual release of 
the Trustees' Report provides a valuable update on the programs' fiscal 
well-being.

    Over the past few years, the Trustees' annual reports have shown an 
improvement in the financial status of the OASDI trust funds, mainly 
due to increased economic growth. The 2000 Annual Report projected that 
the combined OASDI trust funds would begin running cash flow deficits 
in 2015 and would become insolvent in 2037. In that year, annual 
payroll taxes would be sufficient to pay 72 percent of promised 
benefits. President Bush has expressed his commitment to reforming 
Social Security and has announced his intention to strengthen Social 
Security and modernize the program for young and future workers, 
beginning with a Presidential Commission on Social Security reform. The 
findings of the Trustees will provideinvaluable support to the 
Commission and the responsible committees in the House and Senate as 
proposals to save Social Security are considered.

    The release of the 2001 Annual Report on the Medicare HI trust fund 
report will be particularly timely, because its findings will establish 
the financial parameters against which Medicare modernization plans 
will be evaluated. Over the next sev-

eral months, Congress will be developing a comprehensive Medicare 
improvement package that will include a universally available 
outpatient prescription drug benefit. The Trustees' Report will help 
members evaluate new Medicare spending proposals and begin discussion 
on whether new solvency measures are needed to ascertain the program's 
overall financial standing.

    In announcing the hearing, Chairman Thomas stated: ``This historic 
joint hearing reflects our desire to work in a bipartisan and bicameral 
fashion to understand the fundamental challenges facing the long-term 
health of both Social Security and Medicare. I look forward to this 
hearing and to the report of the non-partisan Social Security and 
Medicare Trustees.''

    Chairman Grassley said, ``This joint committee hearing underscores 
the importance the Committees place on ensuring the financial viability 
of these programs. The trustees' findings will provide critical 
guidance as we work to improve and strengthen Medicare and Social 
Security for the baby boomers and beyond.''

FOCUS OF THE HEARING:

    The hearing will examine the findings and recommendations of The 
2001 Annual Reports of the Board of Trustees of the Federal OASDI and 
HI Trust Funds. The hearing will focus on the long-run financial status 
of the Social Security and Medicare HI programs.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect or MS Word format, with their name, address, 
and hearing date noted on a label, by the close of business, Tuesday, 
April 3, 2001, to Allison Giles, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Committee office, room 1102 Longworth House Office 
Building, by close of business the day before the hearing.

FORMATTING REQUIREMENTS:

    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.

    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect or 
MS Word format, typed in single space and may not exceed a total of 10 
pages including attachments. Witnesses are advised that the Committee 
will rely on electronic submissions for printing the official hearing 
record.

    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.

    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.

    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.

    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.

    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.

                                

    Chairman Thomas. If our guests could find seats, please. It 
was more than 75 years ago that the chairman of the Senate 
Finance Committee sent a note back to the chairman of the Ways 
and Means Committee with this quote, ``Thank you for the 
invitation to sit with the Ways and Means Committee in the 
consideration of this very important question.'' The question 
that was considered at that time in December 1933 was reducing 
taxes on intoxicating liquors, thereafter the one and only time 
that the two full Committees, the Ways and Means Committee of 
the House and the Finance Committee of the Senate, had held a 
joint hearing until today. With the urging of my colleague and 
chairman of the Senate Finance Committee, we are meeting today 
in joint session to hear testimony on the two great trust funds 
which form the safety net for a growing number of Americans, 
the Social Security trust funds and the Medicare trust funds. 
And today we will hear a mixed review of Medicare's long-term 
viability, the pleas that the Trustees will project from the 
Hospital Insurance Trust Fund, that it has been extended by 
another 4 years with the projected exhaustion date of 2025.
    Just 6 years ago the HI Trust Fund was projected to be 
insolvent by 2002. However, at the same time the trustees 
clearly indicate that the long-term challenges remain 
formidable. Most of us are familiar with the statistics quoted 
about the number of workers per retiree and that declining 
ratio. But in fact the long-term projections are even more 
pessimistic than last year's report because of the adoption of 
a health growth percentage greater than had been used in the 
past. But probably the most important factor that we really 
need to focus on is that the Trustees' report does not evaluate 
the fiscal health of the entire Medicare Program.
    When you look at the entire Medicare Program, growing from 
less than 2 percent of the budget today to more than 8.5 
percent of the budget just a few decades from now, that overall 
spending for Medicare, not just the HI so-called trust funds on 
Part A Medicare but the Part B supplemental medical insurance 
funds, will be growing from 40 percent of the total Medicare 
costs to almost 50 percent, yet none of those Part B funds are 
accounted for in the current measure of Medicare solvency. 
Indeed, the current test of the solvency leaves it open to 
gaming. Moving those services offered under Part A to Part B 
would greatly enhance the solvency of the Medicare Trust Fund. 
In fact, that was done in 1997. In fact, one of reasons we 
moved dramatically from a 4-year solvency to more than a 20-
year solvency was in large part due to the shifting of services 
under Part A to Part B.
    Social Security's financial outlook has improved slightly 
relative to last year's projections as well. One of the 
concerns I hope we focus on at the beginning of the argument is 
that given the recent increase in productivity gains of the 
American worker, impressive as they are, they cannot grow us 
out of our current Social Security deficit concern. Indeed, if 
we elevate it from the Trustees' 1.5 productivity percentage to 
the current 2.3 percent, that would only cover about 40 percent 
of our shortfall.
    One of the things I hope we take away from this Committee 
is a realistic assessment of where we are and, more 
importantly, where we need to go. As the elected leaders of 
this country we have a choice. We can legislate for the next 
election and leave a lasting legacy of reducing benefits or 
increasing payroll taxes, or together we can legislate for the 
next generations by taking advantage of this historic joint 
meeting to begin to work in a bipartisan, bicameral way more so 
than ever before.
    Today is the first day of spring, and I think it is a good 
day to start.
    [The opening statement of Chairman Thomas follows:]
   Opening Statement of the Hon. Bill Thomas, M.C., California, and 
                 Chairman, Committee on Ways and Means
    It was more than 77 years ago, on December 11, 1933, when the 
Chairman of the Senate Finance Committee expressed his appreciation to 
the Chairman of the Ways and Means Committee for ``the invitation to 
sit in with the Ways and Means Committee in the consideration of this 
very important question.'' The question considered that day was 
reducing taxes and excises on intoxicating liquors.
    That was the one and only time the two Committees held a joint 
hearing-- until today.
    In 1933, our Committees were faced with the urgent need to repeal 
the eighteenth amendment--prohibition. Today, our Committees are faced 
with a different type of urgency--the need to strengthen and modernize 
Medicare and Social Security for our children and future generations.
    Today, we will hear a mixed review of Medicare's long-term 
viability. I am pleased that the Trustees will project that the 
Hospital Insurance trust fund has been extended by another four years 
from last year's projection of 2025. This is due in no small part to 
the efforts of this Committee. Just six years ago, the HI trust fund 
was projected to be insolvent by 2002.
    However, the Trustees also make the case that our long-term 
challenges remain formidable. The number of workers per retiree will 
decline from about 3.9 today to about 2.3 in 2030, and HI expenditures 
as a fraction of workers earnings will more than triple from 2.7% in 
2000 to 10.7% in 2075. These longer-term projections are more 
pessimistic than last year's report.
    More importantly, the Trustees' report does not evaluate the fiscal 
health of the entire Medicare program. The Trustees project that all 
Medicare expenditures will rise dramatically as a share of the economy, 
from 2.2% in 2000 to 5.0% in 2035 and then to 8.5% in 2075. And more of 
the spending will occur in the out-patient area not accounted for in 
the HI trust fund. Over the next decade, while Medicare expenditures 
will more than double, the Part B outpatient portion of Medicare will 
grow from 40% to 47%. Yet none of these Part B expenditures are 
accounted for in our current measure of Medicare solvency.
    Indeed, the current measure of solvency is open to gaming. The 
Balanced Budget Act transferred home health care, the fastest growing 
part of Medicare at the time, from Part A to Part B to result in about 
6 more years of solvency, notwithstanding that transfer had absolutely 
no impact on spending. If we only cared about HI solvency we could 
transfer inpatient hospitalization out of Part A, and save the fund $2 
trillion over 10 years or transfer out skilled nursing facilities and 
save $300 billion over 10 years. I hope this hearing will help us begin 
to develop a more accurate measure of taxpayer obligations to other 
people's health care.
    We can and must modernize Medicare's benefits and delivery 
structure. Prescription drugs are integral to seniors' health care and 
must be integrated into Medicare. But we need to be circumspect about 
the challenges we confront and the constraints we are under.
    Social Security's financial outlook has improved slightly relative 
to last year's projections. Despite this slight improvement, the 
Trustees note that Social Security still faces a long-term financing 
crisis. The Social Security Trust Funds continue to face a financing 
``cliff'' whereby cash deficits increase with each passing year. Even 
if productivity growth remains at the extraordinary level of the last 5 
years, the Trustees note that Social Security will still face a 
significant long-term deficit. We must adhere to the advice from the 
bipartisan public trustees who emphasize we must initiate change sooner 
rather than later to address rapidly growing annual deficits that will 
occur soon after the baby boomers begin to retire.
    As the elected leaders of this country, we have a choice. We can 
legislate for the next election and leave a lasting legacy of crippling 
benefit cuts or stifling payroll tax increases to our children and to 
future generations.
    Or, together, we can legislate for the next generation by taking 
advantage of this historic joint hearing to work in a bipartisan and 
bicameral fashion to understand and remedy the fundamental challenges 
facing the long-term health of both Social Security and Medicare. I 
pray we make the right choice.

                                

    Chairman Grassley. I thank very much the chairman of the 
Ways and Means Committee for organizing this joint hearing. I 
think that there are several things that we can do in the 
Congress to make our efforts more efficient and to save the 
time of a lot of cabinet people appearing on the Hill and 
expedite the business of Congress, and I hope this is a 
successful effort and will be followed.
    I welcome our Secretary of Treasury Paul O'Neill here for 
the financial release of the trustees' report. This is a 
Washington tradition that often goes unnoticed with the 
American public. Turning a discussion of things involving trust 
funds solvency and actuarial balance into quite exciting events 
is a very difficult task. Quite exciting or not, though, these 
reports do provide valuable information about the financial 
health of Social Security and Medicare and the security of our 
seniors in America not only for this decade but for decades 
well into the future.
    Today's hearing will help the public understand the 
problems facing these programs. As this year's report reveals, 
Social Security and Medicare are simply unsustainable in their 
current form. The trustees project that promised benefits will 
exceed scheduled payroll taxes and premiums by $465 trillion 
over the next 75 years, an astounding and probably not 
understandable figure.
    Some may try to tell us, well, that is not so bad. These 
people do not know what they are talking about. For example, in 
theory a portion of this shortfall will be covered by 
government bonds and Social Security and Medicare Trust Funds. 
But these bonds are merely a claim on future general revenue. 
So the government can only redeem them if it raises taxes or 
more revenues from the public. So the hope of these trust fund 
surpluses is somewhat of a fool's hope.
    Some claim that using the Social Security surplus to pay 
down the Federal debt will alleviate the funding shortfall by 
reducing interest payments to the public. But these interest 
savings will cover less than 5 percent of the shortfall. If the 
government borrows more from the public to cover the rest, it 
will only take 14 years to run the debt back up again. So that 
is no real solution.
    Even more troubling, the near term surpluses projected to 
accumulate in the Social Security and Medicare Trust Funds will 
soon exceed the amount of debt available for repayment. At that 
point the government will be forced to invest trust funds in 
nongovernmental assets. Such investment will disrupt the 
financial markets. We shouldn't do that.
    With respect to Medicare in particular, for the first time 
ever the trustees in this report have established a new section 
that looks at Medicare's financial health in toto. This is 
important considering only 22 percent of the beneficiaries 
utilized part A while 87 percent of the beneficiaries relied on 
Part B in the year 2000, and part A represents only 55 percent 
of the total spending, while part B represents 45 percent and 
is growing in double digits. When you look at Medicare as a 
whole it will grow at a much faster rate than projected 1 year 
ago. So we need to examine with caution and not worsen this 
looming financial crisis.
    Finally, there are those who suggest the magnitude of the 
problem facing Social Security and Medicare preclude any 
meaningful reduction of any Federal income tax. But tax relief 
for working men and women will promote economic growth, thereby 
making it easier to fund promised benefits. So we should 
harness the power of our economy to help us save these programs 
for tomorrow's retirees. I believe we can provide tax relief 
for hard working Americans while at the same time protecting 
and improving Social Security and Medicare, and let's meet this 
challenge.
    Once again I thank the chairman for the joint hearing, as 
historical as I now realize it is.
    [The opening statement of Chairman Grassley follows:]
    Opening Statement of the Hon. Chuck Grassley, U.S.S., Iowa, and 
                 Chairman, Senate Committee on Finance
    I would like to welcome our distinguished witness, Treasury 
Secretary Paul O'Neill. The purpose of today's hearing is to review the 
2001 Social Security and Medicare trustees reports.
    The annual release of the trustees reports is a Washington 
tradition that often goes unnoticed by the American public. Turning a 
discussion of ``trust fund solvency'' and ``actuarial balance'' into 
exciting prose is no easy task. Exciting or not, these reports do 
provide valuable information about the financial health of Social 
Security and Medicare.
    I hope that today's hearing will help the public understand the 
problems facing these programs. As this year's reports reveal, Social 
Security and Medicare are simply unsustainable in their current form. 
Let me repeat: simply unsustainable. In fact, the trustees project that 
promised benefits will exceed scheduled payroll taxes and premiums by 
$465 trillion over the next 75 years. That's an astounding number--$465 
trillion.
    Some may try to tell us that it's not as bad as it sounds. Well, 
believe me they don't know what they're talking about. For example, in 
theory, a portion of this shortfall will be covered by government bonds 
in the Social Security and Medicare Part A trust funds. But these bonds 
are merely a claim on future general revenue, so the government can 
only redeem them if it raises income taxes, or borrows from the public. 
So the hope that these trust fund surpluses will save us is a fool's 
hope.
    Some claim that using the Social Security surplus to pay down the 
Federal debt will alleviate the funding shortfall by reducing interest 
payments to the public. But these interest savings will cover less than 
5 percent of the shortfall. If the government borrows from the public 
to cover the rest, it will only take 14 years to run the debt back up 
again. So that's no real solution.
    Even more troubling, the near-term surpluses projected to 
accumulate in the Social Security and Medicare trust funds will soon 
exceed the amount of debt available for repayment. At that point, the 
government would be forced to invest Social Security and Medicare funds 
in non-governmental assets. Such investment could disrupt the financial 
markets and reduce the efficiency of our economy. We shouldn't go 
there.
    With respect to Medicare in particular, for the first time ever the 
trustees have established a new section of the report that looks at 
Medicare's financial health in total. This is important considering 
only 22% of beneficiaries utilized Part A, while 87% of beneficiaries 
relied on Part B in the year 2000. And Part A represents only 55% of 
total spending, while Part B represents 45% and is growing in double 
digits. When you look at Medicare as a whole, it will grow at a much 
faster rate than projected even one year ago! So we need to exercise 
caution in taking steps that might worsen this looming financial 
crisis.
    Finally, there are those who suggest the magnitude of the problem 
facing Social Security and Medicare precludes any meaningful reduction 
in Federal income taxes. But tax cuts will promote economic growth, 
thereby making it easier to fund promised benefits. Let's harness the 
power of our economy to help us save these programs for tomorrow's 
retirees.
    I believe we can provide tax relief to hard-working Americans while 
at the same time protecting and improving Social Security and Medicare. 
Let's meet this challenge.
    Once again, thank you for being with us today, we look forward to 
your testimony.

                                

    Chairman Thomas. I thank the chairman and now I would 
recognize the gentleman from New York, the Ranking Member of 
the Ways and Means Committee, Mr. Rangel.
    Mr. Rangel. Thank you, Mr. Chairman. I indeed feel 
privileged to be involved in this historic joint session and, 
Mr. Secretary, you have to be very tolerant and patient of the 
Democrats in the House because we are not used to the 
compassionate bipartisanship that has been expressed by the 
President of the United States. Some of us would believe that 
some of our House Republican leadership would wish that Social 
Security just never came into existence. Some of us would 
believe that others in the Republican leadership would hope 
that maybe Medicare would twist slowly on the vine and just 
disappear. There may even be a smaller number of Republicans 
that believe that maybe we can just reduce guaranteed Social 
Security and Medicare benefits and that those benefits will be 
provided by the private sector.
    Now we know that we are overly suspicious and skeptical and 
that the President will prevail, but we need the President's 
help now. That is why I am a little surprised that Secretary 
Thompson is not here because, when he was before this Committee 
recently, he made it abundantly clear to us that not only would 
every nickel of the Medicare trust funds be spent for Medicare, 
but he acknowledged that, in his opinion it would violate the 
law of the United States if something was done otherwise.
    Yet, last night I saw a television program and I heard the 
Secretary say, ``Why think about Medicare as part A and part 
B.'' ``Health care is health care and we have a crisis and we 
will have to reform the system and reform it now.''
    Well, it just seemed to me that it is hard to have a crisis 
when you have a surplus in part A that everyone agrees to, and 
I don't see how you have a crisis in part B when 75 percent of 
it is funded by general revenues, unless we are saying that 
anything that goes through appropriations and that any program 
in which you intend to have increased spending is a crisis. If 
so, we have a crisis in funding education, a crisis in funding 
defense. And while my Chairman is right as always, in at lease 
part of what he said, that what we did in the past--shift part 
of part A obligation to part B--it was only that part of home 
care for the aged that was not held in the hospital. So it 
should be in part B even though it did relieve some of the 
burdens of Part A.
    What I am saying is that we know that this administration 
does not intend to merge the obligations that come out of 
general revenue with those precious trust funds that we know it 
is against the law to think about merging into one. So you will 
be able to help us in this because if we send our old folks out 
to the private sector, God bless them, it is hard for me to 
think that private insurers will be reaching out to old sick 
folks, as people that they would want to see enrolled in their 
for-profit health delivery system. And of course the Social 
Security system that some of my colleagues think is a socialist 
experiment that should never have been created, we are anxious 
to see how we can get more of the people's money invested in 
the private sector to get a higher yield. Of course, not this 
quarter but maybe the type of quarters we experienced during 
the Clinton-Gore years will come back so we can get those 
higher yields, so we can get more benefits at less expense. We 
don't see how you can reduce the revenue that is paid into the 
trust fund in any way without reducing the benefits, and we 
really don't see where you would get the money if you are going 
to compensate for the benefits.
    So we know you have the answers and we know the President 
is going to be there to help us get over these suspicions that 
we have. But I am asking that just one Member from the Medicare 
Subcommittee and one from the Social Security Subcommittee may 
ask one question, not for an immediate answer but so that you 
might include that in your testimony and we could expedite the 
hearings. So I yield to Mr. Stark for his question and as soon 
as he completes it I would yield to Mr. Doggett for his 
question. And ahead of time I want to thank you for the great, 
great contribution we expect you to be making to bring not only 
the House and Senate closer together but the House Republicans 
and Democrats closer together because we are very, very far 
apart.
    Mr. Stark. Mr. Secretary, I thank the distinguished 
gentlemen for yielding to me. My question is to just reconfirm 
in the Bush budget outline, which is all we have seen, 
Medicare's trust fund of 526 billion has been put into a 
contingency fund that is used for defense or anything else 
outside of the Medicare field and I want to reconfirm that it 
is the administration's intention with respect to the Medicare 
surplus that it only be used for part A, not for the part B, 
not for pharmaceutical drugs or defense or anything else. But 
as Secretary Thompson said to us when he testified here last 
week, he understands it would be against the law.
    [The following was subsequently received:]

    The Budget of the United States Government, Fiscal Year 2002 
showed, in table S. 1, that the President's budget policy proposed a 
$1.4 trillion reserve for ``additional needs, debt service and 
contingencies.'' That reserve accounted for about one-fourth of the 
total projected surpluses over the 10-year budget window.
    All monies being paid into the various trust funds--including 
Social Security and Medicare--are being properly accounted for. A legal 
obligation exists to use trust fund income only for the designated 
purposes. That obligation exists and will be met as provided for by 
law. That obligation can be thought of as a liability on the 
government's balance sheet. Additions to the HI Trust Fund due to a 
positive cash flow into the fund, should be viewed as an increase in HI 
trust fund assets which represent a partial offset to projected future 
Medicare payments. The special-issue bonds held by the trust fund are 
the government's formal commitment to pay those future benefits upon 
redemption. The cash flow generated by the excess of income over 
outlays is incorporated in the projected on-budget surpluses.
    The President outlined uses of the projected on-budget surpluses in 
Table S. 1 of the budget. Aside from specific proposals to raise 
spending, including Medicare, and for debt service, the table showed a 
remainder of $841 billion as a contingency reserve. There is no formal 
accounting for the components of this reserve. Rather, this 
``contingencies'' fund represented a portion of the projected on-budget 
surpluses that will be available over the 10-year budget window to pay 
down debt to cover unforeseen events. ``Contingencies'' are by their 
nature unforeseen events or emergencies, and no specific accounting can 
be made in advance. Its ultimate use--such as to pay down debt--is 
independent of the existing legal obligations reflected in the various 
trust funds, including Medicare.

                                

    Chairman Thomas. The gentleman from New York's time has 
expired and I believe another Member was supposed to fit inside 
the Ranking Member's time.
    Mr. Rangel. Yes, Mr. Doggett.
    Mr. Doggett. Thank you. My question will concern the 
administration's intention to address the anticipated shortfall 
in the Social Security trust funds by shortening it further, 
and by removing money dedicated for guaranteed Social Security 
benefits for privatization purposes. Surely you will be able to 
tell us, regarding the approximately $600 billion that you 
propose to take from guaranteed Social Security benefits, how 
much sooner I believe it is about a decade you will be reducing 
the ability of the funds to pay off benefits, and how much 
Social Security benefits will be cut in order to implement a 
Social Security privatization plan.
    [The following was subsequently received:]

    As you are aware, on May 2 President Bush announced the formation 
of a Commission to Strengthen Social Security. He directed the 
Commission ``to submit bipartisan recommendations to modernize and 
restore fiscal soundness to the Social Security system.'' And this must 
be done in a way that does not change Social Security benefits for 
retirees or near-retirees.
    Clearly, the President's intention is to strengthen the system in a 
way that will enhance retirement security for future retirees. This 
objective can be achieved by allowing individuals to invest some of 
their payroll taxes in higher-yielding private accounts. Future 
beneficiaries will benefit directly from their own accounts and the 
American economy will benefit from increased private investments.
    Though President has laid out a set of principles for reform, a 
specific plan will be developed after the Commission has made its 
recommendations. We look forward to the Commission's report next fall.

                                

    Chairman Grassley. It is my privilege to call on Senator 
Baucus, the Democratic leader of the Senate Committee.
    Senator Baucus. Thank you very much, Mr. Chairman. My 
concerns are similar to those that have just immediately been 
expressed. Let me just say them a little bit differently. In my 
mind the Medicare Trustees' report offers both encouragement as 
well as admonition. The solvency projection to 2029 is of 
courseencouraging. Nobody can have any other view. After all I 
am sure most of us in this room today can remember back to 1997, the 
chairman has referred to it, when the part A trust fund was projected 
to be solvent to 2001. So we have made tremendous improvements now that 
the solvency projection is up to 2029.
    The report also gives us pause, pause to reflect, to think 
carefully about the impending financial burden that will be 
upon us beginning in 2010 when the baby boom generation begins 
to retire. To me that means we should proceed with caution. We 
should protect the resources that we now have, a point made by 
some of the previous speakers, and think about how best to put 
more money, not less, I repeat that, more money, not less into 
Medicare. We should use the part A surplus for part A benefits 
and we should not put that money into a contingency fund as the 
President has proposed.
    Turning to Social Security, we did have good news. The 
status of the trust funds has improved since last year's 
report. As expected, the trust funds are adequately funded in 
the short term but significant long-range problems do exist. 
The lesson I take from the Social Security report is not much 
different than the lesson I take from the Medicare report. The 
Social Security System by most accounts has been very 
successful for more than 65 years. It plays a unique role in 
retirement planning in that benefits are guaranteed--let me 
repeat that--a unique role in retirement planning in that 
benefits are guaranteed and they not subject to the ups and 
downs of the market. After the week we have just experienced on 
Wall Street, the worst for the Dow Jones since 1989, that 
guaranteed feature of Social Security seems comforting. I 
understand the desire of many to explore options for 
modernizing Social Security in the current environment of 
retirement planning, and I am open to considering a range of 
options. But like Medicare, we should proceed with caution, and 
we should look for ways to dedicate more, not less, but more 
resources to the program. The 40 million beneficiaries on 
Social Security--soon to be almost 80 million--deserve no less. 
Thank you, Mr. Chairman.
    [The opening statements of Mr. Crane and Mr. Ramstad 
follow:]
     Opening Statement of the Hon. Philip M. Crane, M.C., Illinois
    Today's historic joint hearing is timely, allowing the key 
Congressional Committees to examine the findings and recommendations 
made by the Board of Trustees of the Social Security and Medicare 
Hospital Insurance trust funds in their 2001 Annual Reports on the 
financial status of the trust funds released yesterday.
    In 1995, when Republicans took control of Congress, the Medicare 
Trust Fund was projected to go bankrupt by 2002. Through our hard work 
the Medicare Trust Fund is now solvent until 2029.
    The Medicare Trustees' projections show a mixed picture of the 
Hospital Insurance (HI) trust fund (Part A). Due to last year's strong 
economy, and low Medicare payment expenditures, the HI solvency has 
been extended by four years over last year's projections, from 2025 to 
2029. However, over the long-term, the use of improved assumptions of 
the long-range growth rate on Medicare and overall health care spending 
growing faster than Gross Domestic Product indicates a greater deficit 
than projected last year.
    It is important to point out that Medicare Part A only includes a 
portion of Medicare's benefits. The Supplementary Medical Insurance 
(SMI) Trust Fund (Part B) expenditures are expected to continue to grow 
faster than the economy as a whole. The eventual cost is much higher 
than projected last year due to the use of improved assumptions 
reflecting an expected continuing impact of advances in medical 
technology on health care costs both in Medicare and the entire health 
sector. The Medicare trustees state ``it is important to recognize the 
financial challenges facing the Medicare program as a whole.'' We 
should consider Medicare's finances in their entirety--the expenses and 
committed revenues in Medicare as a whole (Part A and Part B combined) 
show that the program is running a deficit. Given these projections on 
the HI and SMI trust funds, the current definition of Medicare solvency 
as it relates to HI is not useful.
    While some lawmakers may take the improved short-term outlook of 
the Medicare program as an indication that the Congress should not be 
so swift to act on solutions to improve the financial picture of 
Medicare, the Medicare trustees state that ``Medicare's financial 
condition has improved in recent years, but this should not lead to 
complacency. Medicare still faces financial difficulties that come 
sooner--and in many ways are more severe--than those confronting Social 
Security.'' We should be looking at solutions that allow us to continue 
to strengthen and improve the Medicare program but ensure that these 
improvements are contingent on the outlines of a Medicare reform 
proposal.
    Regarding Social Security, last year's economic growth, along with 
some minor methodological changes, have extended the date on which 
Social Security will begin to run an excess of costs over payroll tax 
revenues from last year's reported 2015 to 2016. This is the critical 
date in the debate because thereafter Social Security becomes a net 
borrower.
    Other dates you will hear include 2025, which is the first year 
that Social Security runs an absolute deficit when you include in 
income both payroll tax receipts and the ``income'' earned on the 
``assets'' held in the Social Security Trust Fund. This date is less 
important than the 2016 date because, as you know, the assets in the 
Trust Fund are meaningless, and so the interest earned on those assets 
is also meaningless.
    The other date you will hear is the ``exhaustion'' date for OASI 
(Old Age Survivors Insurance) and DI (Disability Insurance), which is 
when the Trust Funds will be fully depleted. The reported exhaustion 
date was 2037 last year and it has moved to 2038 in the most recent 
report. This change tells us the situation has gotten marginally 
better, but it is not a terribly meaningful figure otherwise since it 
presumes current law will be maintained, which is absurd. While the 
short-term financial outlook for Social Security has improved slightly, 
the program still faces a long-term financing crisis. We must act 
sooner rather than later to address the rapidly growing annual deficits 
that will occur soon after the baby boomers begin to retire.
    Most importantly, the current environment relates to the effects of 
strong economic growth on the solvency of the Social Security and 
Medicare Trust Funds. I believe the Bush economic program will cause 
the economy to be stronger than it would otherwise be and that this 
will further strengthen both Medicare and Social Security, which does 
not eliminate the need for reform, but it certainly gives us more 
options.

                                

       Opening Statement of the Hon. Jim Ramstad, M.C., Minnesota
    Mr. Chairman, thank you for scheduling this historic joint hearing 
today to discuss the most recent findings on the future of Social 
Security and Medicare--programs of vital importance to seniors and 
individuals with disabilities across our nation.
    While I am certainly pleased that the Trustees have reported that 
the insolvency date of these two programs has been extended to 2038 for 
Social Security and 2029 for Medicare, I believe the true impact of 
this Report is elsewhere.
    More importantly than the date when the programs become insolvent 
is when the programs begin to see reductions in revenue and especially 
when expenditures begin to exceed revenues. Mr. Chairman, that date is 
2016, which is why I believe we must act now to modernize and 
strengthen these two programs. In addition, the long term deficit in 
the Part A program has increased dramatically since last year.
    The Trustees have also acknowledged that the current measure of 
insolvency for Medicare seriously underestimates the magnitude of the 
problem. The current solvency measure fails to take into account the 
Supplementary Medical Insurance, or Part B, spending. I agree with the 
Trustees call for a comprehensive look at the entire Medicare program.
    The insolvency measure also falls short because programs can be 
shifted to Part B, extending the solvency of Part A. This happened in 
the Balanced Budget Act in 1997 when Home Health spending was shifted 
to Part B.
    Mr. Chairman, the long term financial difficulties of Medicare mean 
that comprehensive Medicare reform can't wait.
    Many on the other side believe that Medicare is fine and that we 
can simply add a prescription drug benefit to the program.
    I strongly disagree. Congress should only add a prescription drug 
benefit as part of a comprehensive Medicare reform package . . . a 
package that solves the long-term challenges faced by this vital 
program. A package that improves the benefits utilized by seniors. A 
package that secures Medicare for the future. Thank you again, Mr. 
Chairman for calling this hearing.

                                

    Chairman Thomas. Thank you on behalf of Chairman Grassley 
and myself. Mr. Secretary, thank you very much. I do understand 
you have a tight schedule and we are to conclude the 
presentation of the trustees' report by noon, and therefore I 
would say that if any Member has a statement they want to put 
into the report they can do so under the usual and customary 
procedures in writing, and if the Secretary has a statement in 
writing, without objection, it will be submitted for the 
record. And, Mr. Secretary, you can address us in any way you 
see fit, understanding that the mike is very unidirectional in 
terms of the sound.
    Thank you very much, Mr. Secretary, and welcome to the 
joint hearing.

 STATEMENT OF HON. PAUL O'NEILL, SECRETARY, U.S. DEPARTMENT OF 
    THE TREASURY, AND MANAGING TRUSTEE, SOCIAL SECURITY AND 
                   MEDICARE BOARD OF TRUSTEES

    Secretary O'NEILL. Well, thank you, Mr. Chairman and Mr. 
Chairman and ranking members. This is really quite a wonderful 
group to come before this morning, and I appreciate your 
invitation for me to be here. I do have a prepared statement 
and, as the Chairman has indicated, I would be happy to submit 
it for the record and maybe with just a few summary comments 
provide an opportunity for you to ask me questions about the 
report which we signed and transmitted to the Congress 
yesterday.
    I think, first of all, it is worth saying that if you look 
at the transmittal sheets which you will see there, what you 
will see there are the names of the signatories to this 
transmission and it lists myself as Managing trustee, and I 
point that out to you because I consider this an important 
characterization and distinction in the way that I am 
presenting myself to you today, not in a partisan way, but with 
the same sense of fiduciary responsibility I would have if I 
were your banker in giving up advice about the condition of 
funds that you had entrusted to my keeping.
    And with that premise and understanding of what I am here 
to accomplish this morning, I want to say to you that this 
report shows a link to the reports of the last several years, 
that if we follow the current law, including both the revenue 
raising components and the expenditure components or 
obligations that you have legislated for the American people, 
that there is a prospect down the road of our not being able to 
honor the obligation that you have made by law to the American 
people. That is a simple sum of what is here.
    You can find, you can find something positive here, if you 
like, with the actuaries' projection that says, well, maybe we 
have an extra 4 years to go for Medicare part A, maybe we have 
1 more year to go for OASDI. I would advise you not to take 
great comfort in the fact that we are going to be bankrupt 1 
year later than we thought last year. I think it is quite 
important, as we have indicated in the report, that we take 
account of the demographics that are going to happen no matter 
what else we may do. The composition of the population and that 
part that is dependent on the benefits that you have legislated 
for them will be there, and the relationship between the 
retired beneficiary population and the working population will 
change no matter what else we may do, and so my only advice to 
you would be that we take these data seriously and hopefully 
together, maybe not in a bipartisan way but in a nonpartisan 
way, we can together discharge our ongoing obligations to the 
American people.
    Thank you, Mr. Chairman.
    [The prepared statement of Secretary O'Neill follows:]
   Statement of Hon. Paul O'Neill, Secretary, U.S. Department of the 
 Treasury, and Managing Trustee, Social Security and Medicare Board of 
                                Trustees
    It is a pleasure to be here today before this unique joint hearing 
of the House Committee on Ways and Means and Senate Committee on 
Finance. I applaud Chairman Grassley and Chairman Thomas for focusing 
more than the usual attention on the Social Security and Medicare 
Trustees' reports on the financial status of these two vital programs.
    Yesterday, the Trustees met to complete our annual review of the 
trust funds and to forward the reports to Congress. While the short-
term financial status of both Social Security and Medicare has improved 
somewhat since last year's report, our long-term analysis highlights a 
real threat to the retirement security of future generations and has 
led us to conclude that both programs need to be reformed and 
strengthened at the earliest opportunity. Focusing only on the short-
term ignores the long-term impact of a rapidly aging population on both 
trust funds which results in both funds being widely out of long-term 
actuarial balance.
Medicare
    Let me first talk about Medicare. The Medicare program as a whole 
presents financial challenges that will require integrated and 
comprehensive solutions. Costs for the two Medicare program 
components--HI and SMI combined--will grow from 2.2 percent of GDP 
today to 8.5 percent in 2075. By comparison, HI tax income and SMI 
premium revenues will only grow from 1.8 percent of GDP today to 2.5 
percent in 2075, leaving a gap of 6 percentage points in 2075. Counting 
current law general revenues dedicated to SMI, the shortfall will still 
be 3 percentage points at the end of the projection period. Medicare 
spending is ultimately projected to exceed even the costs of Social 
Security. The financing gap for HI alone is larger than the gap for 
Social Security, and the HI Trust Fund will become insolvent 9 years 
sooner than the OASDI Trust Funds. HI tax income will fall short of 
outlays beginning in 2016.
    It might be tempting to ignore Medicare's problems by pointing to 
the improved short-term solvency of the HI fund and the fact that on an 
actuarial basis the Supplementary Medical Insurance (SMI) Trust Fund is 
projected to remain adequately financed into the future. Neither of 
these factors should be used as an excuse for complacency. First, 
because a panel of experts recommended changes in health cost 
assumptions to improve the accuracy of the Trustees' projections, the 
long-term cost estimates for both HI and SMI are raised substantially, 
thus worsening the long-term actuarial deficit in the Medicare HI Trust 
fund. Second, the SMI trust fund automatically relies on general 
revenues to make up the difference between its premium revenues and 
costs. This method hides the fact that the SMI trust fund will consume 
a rapidly growing share of general revenues over time and beneficiary 
premiums will be increased substantially.
    With the accounting complexities of two trust funds, it might be 
easy to lose sight of the basic fact: we need to focus on Medicare in 
its entirety. It is clear that steps should be taken now to develop a 
more accurate overall measure of Medicare's financial health, and to 
work together to improve it.
    Because I think it is so important to this discussion, I also want 
to elaborate on what I see as the tremendous potential for improvements 
in the health care sector. I raise this issue out of concern for the 
health of the American public, and particularly for the elderly and 
disabled who depend on Medicare. The recent reports of the prestigious 
Institute of Medicine on medical errors and quality of care are quite 
sobering. In 1999, the IOM reported uncovering a stunningly high rate 
of medical error--errors that resulted in death, premature disability, 
and unnecessary suffering. Earlier this month, the Institute released a 
follow-up report on the overall quality of health care in America, 
concluding that reforms could close the enormous chasm between the 
current level of health care quality and the potential we know exists.
Social Security
    Turning to the combined OASDI Trust Fund, the Trustees report a 
financial outlook that has improved a little since last year--a 
projected exhaustion date of 2038, one year later than last year. 
Still, the fund continues to be in long-term deficit--with a financing 
gap equal to 1.86 percent of payroll. Moreover, once the baby boom 
generation starts to retire, financial pressure will build and continue 
to be a factor beyond the 75-year projection period.
    The primary cause of the long-term deficit is the aging of the 
population that will occur as the baby boom generation retires and 
expected increases in longevity become reality. Annual OASDI outlays 
will exceed OASDI tax revenue beginning in 2016. Deficits are expected 
to persist and are projected to rise to more than 6 percent of taxable 
payroll by 2075. These large deficits at the end of the projection 
period are an indication that costs will almost certainly continue to 
exceed tax revenue after 2075. As a result, ensuring the sustainability 
of the system after 2075 will require larger changes than needed to 
restore the system to 75-year balance. The Trustees believe that action 
should be taken to address the financial shortfall now, as the sooner 
adjustments are made, the smaller and less abrupt they will have to be.
    This spring President Bush will form a Presidential commission to 
study how to reform Social Security. The commission could make its 
recommendations by next fall. Reform should be based on these 
principles: it should preserve the benefits of all current retirees and 
those nearing retirement and preserve the disability and survivors 
components: it should return Social Security to sound financial footing 
without increasing payroll taxes or allowing the Government itself to 
invest Social Security funds in the private economy; and it should 
offer personal retirement accounts to younger workers who want them.
    The President's goal is clear: Social Security must be safe and 
secure for this generation and for future generations. We must work now 
to preserve and protect Social Security by putting it on a firm 
financial footing so we can keep our commitment to current seniors and 
also meet the needs of our children and grandchildren.
    Finally, this is the first opportunity I have had as a Trustee to 
comment on the status of the Medicare and Social Security trust funds. 
In recent years, bipartisan reform efforts have not succeeded, and the 
Trustees have reported that minor reforms and ``improved economic 
projections'' have allowed us to add a few additional years of life to 
the trust funds-- though serious long-term structural imbalances have 
remained. This report, sadly, is similar to previous recent reports. 
However, it is my hope that this Administration and Congress can work 
together in a bipartisan way to find the necessary confluence of 
opinion, wisdom and courage to restore long-term health to these 
programs.
    Thank you for inviting me to testify today. I look forward to 
answering your questions.

                                

    Chairman Thomas. Thank you, Mr. Secretary. And in 
cognizance of the shortness of the time, the Chair will forego 
any questioning and recognize the ranking Republican, the 
gentleman from Illinois, Mr. Crane.
    Mr. Crane. Thank you, Mr. Chairman. Mr. Secretary, the Bush 
tax program will strengthen the economy. If it were to 
permanently increase the economy's real rate of growth by two-
tenths of a percentage point a year, which is a very 
conservative estimate, would you not expect such a change to 
extend the solvency of the Social Security?
    Secretary O'Neill. Prospectively it could, sure.
    Mr. Crane. And starting from your intermediate assumptions 
and building in the effect of the Bush tax cuts, do you have 
any sense of how many additional years we would gain before the 
trust funds were exhausted?
    Secretary O'Neill. I guess without actuarial equations I 
wouldn't hazard a guess, but there would be some addition.
    Mr. Crane. The Medicare Trustees' report shows by 2016 
total Medicare expenditures will begin to exceed general 
revenues. In terms of dollars how big do you expect the gap for 
financing revenues to grow?
    Secretary O'Neill. If you look at the projections through 
this whole 75-year period, we are talking from the Medicare 
side moving to 2.5 percentage points to 8 percentage points. So 
we are talking about a monumental change, and I don't know 
whether you have had a chance to work your way through the 
details of the report, but if you look at the details there are 
in this report with the Medicare assumptions, projection from 
the outside panel that was convened last year, an extension of 
the logic says in the year 2075 one-third or about one-third of 
our total gross national product would be consumed by health 
and medical care. So the prospects that are embedded in this 
report are really quite a huge change from where we have been.
    Mr. Crane. Some lawmakers might take the Trustees' 
projection of 4 more years of Medicare solvency as a sign that 
we should not address the fundamental reforms to the Medicare 
program, but rather focus on adding additional benefits to the 
program like a prescription drug benefit. In your opinion, if 
the Congress were to simply add on a prescription drug benefit 
to the existing program, how would that change the outlook of 
the program?
    Secretary O'Neill. Well, I think it would falsely assume 
that we have room to provide an expansion of benefits without 
accepting the fiscal responsibility to pay for it. There is 
nothing in this report that suggests that we have that money to 
spend. Quite the contrary, it says we need, I believe, 
fundamental changes in order to secure the long-term financial 
certainty of the benefits that have been voted by the Congress.
    Mr. Crane. Thank you, Mr. Secretary. Mr. Chairman, I yield 
back the balance of my time.
    Chairman Thomas. Thank you very much, Mr. Crane. Mr. 
Chairman.
    Chairman Grassley. Mr. Secretary, during my time I will 
only have two issues to discuss with you. I am going to start 
with the fact that a number of people have suggested that we 
should lock away every penny of Social Security and Medicare 
surplus to pay down the debt. Now, according to data that we 
have, however, from the actuaries, Social Security and Medicare 
benefits will exceed payroll taxes and premiums by $465 
trillion over the next 57 years. It is my understanding that 
locking away all the Medicare and Social Security surplus to 
pay down the debt does not solve the massive shortfalls that I 
have just mentioned in both of these programs, as some would 
argue. So I would like to have your thoughts on that from your 
position not only as economic advisor to the President but also 
as from the standpoint of your trusteeship.
    Secretary O'Neill. Well, you have mentioned that we have a 
concept of a lockbox and I think without exception so far as I 
can tell every Member of Congress has indicated together that 
we should not use--funds that come to the Federal Government 
through the application of the Social Security tax or through 
the Medicare tax should not be used for other purposes, and I 
don't find anyone that disagrees with that. Now, I think at the 
same time most people understand that when the money comes in 
for those programs and it is in excess of the amounts that are 
required to discharge the responsibility for a particular 
period of time, for a particular year for example, that the 
books of the Federal Government, that is to say, the financial 
statements of the Federal Government show an obligation on the 
part of the Federal Government to hold and protect that money 
and to use it for the purpose that it was collected. And so 
there is a, for certain accounting, recognition of an ongoing 
obligation as to how those funds will be used. At the same time 
when the funds are collected by the Federal Government, they 
flow into the Treasury and they do not have names on them that 
are associated with the source that produced them. And so as we 
have bills that come due because of legislation passed by the 
Congress, we send checks from the Federal Government to those 
who have an obligation against the Federal Government; and to 
the degree that we have cash in excess of the need to service 
the direct financial obligation of the Federal Government, we 
reduce the outstanding debt held by the public. And so there is 
no doubt that we are going to use these funds for the stated 
purpose because we have a clear recording of the obligation to 
do so.
    At the same time, Mr. Chairman, to your question, there is 
no way, at least in the opinion of the Trustees, that there is 
no way when one looks at the projected obligations of the 
Federal Government and the expected revenues associated with 
Social Security and Medicare, that we are going to be able to 
discharge the benefits that have been legislated by the 
Congress when one gets to 2016, the year for Social Security, 
and at 2029 for Medicare, and so, no, it is not possible to 
hold that. We are going to be OK if only we do not spend the 
money for something else, because we are going to spend the 
money only for these purposes.
    Chairman Grassley. Now, I want your thoughts on a couple of 
quotes from the Trustees' report. Quote, We highlight the most 
significant implications of these findings, which is that both 
Social Security and Medicare needs to be reformed and 
strengthened at the earliest opportunity. End of quote. Second 
quote about Medicare, quote, The need for further long-term 
reform has not substantially abated despite improvements 
brought aboutin recent years, end of quote.
    Do you agree with the statements and what are the 
implications of these findings for Congress as we consider 
whether to pursue both prescription drug coverage and Medicare 
reform this year?
    Secretary O'Neill. Certainly I agree with both of those 
observations. The implication of not acting early is really 
important and it is different from many other things we in the 
United States face. I think it is probably correct to 
characterize us as a people who respond well to crises but find 
it difficult to make anticipatory changes, and for lots of 
things that is all right, it is okay not to be prepared. And I 
would argue in the case of a national defense we would not want 
to wait and decide whether we should support a military until 
we are confronted with the military situation. Then by our 
actions we collectively indicated that we agree with that 
concept.
    It seems harder for us to deal with the reality that is 
confronting us in Social Security and Medicare because it is 
out there a ways. The difficulty with waiting until we have a 
crisis condition; that is to say that we were effectively in 
bankruptcy, is that there is no way to climb back up on the 
cliff after you have gone over it when it comes to Social 
Security and Medicare. If we don't take preventative measures, 
we are going to create a real crisis, and the depth of the 
crisis will become more and more extreme as we have approached 
the precipice of nonsolvency. Because of the magic of 
compounding, if you will, the earlier we can take action, the 
easier and simpler and less painful it is going to be to 
sustain good benefit levels for the aged and the disabled and 
those who are entitled to medical benefits.
    Chairman Grassley. Thank you very much.
    Chairman Thomas. The gentleman from New York, Mr. Rangel, 
wish to inquire?
    Mr. Rangel. Mr. Chairman, because there has been some 
concern that I have deliberately----
    Chairman Thomas. I will tell the gentleman there is no 
concern.
    Mr. Rangel. Violated the privilege of the opening 
statement, in order to shatter that idea, I yield back the 
balance of my time.
    Chairman Thomas. I will tell the gentleman there was no 
concern and the chairman himself yielded his time to another 
member. Does the gentleman from California, Mr. Stark, have 
more than the one question that he had proffered?
    Mr. Stark. Thank you, Mr. Chairman. Mr. Secretary, as I 
indicated earlier, if you take the $526 billion out of the 
Medicare surplus and put it in a contingency fund where it is 
suggested it could be spent on other than Medicare, you would 
exasperate any problem that Medicare has. But there is also the 
question that Medicare in the abstract is inadequate now 
because it does not provide a drug benefit to the seniors. So I 
think that is generally agreed upon. The Bush budget had set 
aside $153 billion. I might add that is less than about one-
tenth of the amount earmarked for tax cuts. It is not even as 
much as giving back the inheritance tax, which would be $50 
billion a year. But if you take $48 billion away from this 
projected $153 billion in the immediate helping hands block 
grant, which is neither immediate, I might add, or much help, 
you only leave $100 billion for a drug benefit. That is a 
little over $10 billion a year and by all standards that we 
know a decent drug benefit might cost $40 billion a year. 
Interestingly enough, that is just what getting rid of the 
inheritance tax costs.
    If we have got enough money to give back the estate tax or 
give back $40 billion a year, why cannot we hold that and use 
that $40 billion for a drug benefit which would benefit every 
senior, 30 or 40 million seniors, as opposed to just a couple 
of thousand extremely rich Americans? Why isn't that a better 
use of our money?
    Secretary O'Neill. Well, I think the President has 
indicated that he believes we should have a drug benefit. And 
he said more broadly to all the Members of Congress that he 
thinks we should do and work together on substantial Medicare 
reform, and so I don't see an inconsistency in what he said we 
should do. And I don't--I guess I am still not able to 
articulate the difference between cash flow and how we account 
for the sources of funds in describing what happens to Medicare 
and Social Security funds when they come into the government 
and they are not required for immediate discharge of Federal 
obligations. I am struggling with how I can help to make that 
clearer because I keep hearing these questions about 
contingency funds, and it is a misunderstanding and I suppose a 
weakness on my part in not being able to clarify the difference 
between balance sheets----
    Mr. Stark. If you yield. Secretary Thompson didn't have any 
trouble distinguishing. He said before this Committee that, 
yes, they had added the $526 billion in Medicare trust. They 
were counting that in the line on page 17, I believe it is, for 
this contingency. They did not do that with Social Security. 
That is up there as a separate item. That trust fund was 
protected. But the Medicare part A trust fund is buried in that 
$820 billion contingency fund. We call that three-card monte 
where I come from, Mr. Secretary, but you might call it a shell 
game or however you might want to define it. I know where the 
President hid that and in his understanding the suggestion is 
that that money for Medicare could be spent on other things, 
and that is not preserving a trust fund in my book.
    Secretary O'Neill. The funds that were sourced from a 
Medicare tax will be recorded on the books of the United States 
as an obligation of the Federal Government to be discharged as 
beneficiaries present themselves for Medicare entitlement 
programs, without a doubt.
    Mr. Stark. Then how does it get in the contingency fund? 
Then there is no contingency funds. That is all right with me. 
We just misnamed the contingency fund. That should have been 
named the Medicare part A reserve fund.
    Secretary O'Neill. I don't know if we really want to go to 
this question, but I think most of the American people 
understand that we have a growing obligation account for 
Medicare and for Social Security and that that obligation is 
reflected by entries in bookkeeping statements. It is not 
reflected by a physical asset that someone can go and draw out. 
Those obligations represent representation by Members of 
Congress that when the bills come due they will be paid, and 
there should be no doubt that that is the case. But the 
conventions that we use from an accounting point of view to 
talk about trust funds are frankly I think not well understood 
because they will suggest something quite different from what 
they are in fact.
    Chairman Thomas. Senator Baucus.
    Senator Baucus. Thank you, Mr. Chairman. Mr. Secretary, 
with all respect, I don't think that the average American 
listening to Mr. Stark's questions and your answers would think 
that you answered the question, because if the basic question 
is where is the $526 billion, is it still in Part A or is it in 
the contingency fund. I will not delve into that any more 
because quite frankly I don't think your answer will be 
different, but I don't think you answered the question.
    I want to ask a different question; namely, the merging, 
the administration's not the trustees, but the administration's 
merging Part A with Part B surpluses I think is a kind of bait 
and switch tactic that is trying to show that there is a much 
greater problem than there actually is in order to justify, 
quote, reform. And reform means different things in the eyes of 
the beholder. To some people reform means one thing, to some 
people reform means something else. I think to most people 
reform means solvency. How do we better assure that the dollars 
are there? To some people reform means competition models, and 
those are very important discussions.
    But my question is, where in the administration do you, how 
do you propose to close the gap between excessive expenditures 
and revenues, even given your, I think, incorrect merging of 
the two funds? Your chart page 21 shows this gap. How do you 
propose to close that gap? What ideas do you have for providing 
more dollars to Medicare? I don't see them and I would like to 
learn about them.
    Secretary O'Neill. Well, again the President has indicated 
that he is prepared to work with the Congress on a total 
Medicare reform that I think we in the administration stand 
ready to do that. I guess I would argue that conceptually at 
least merging the ideas of health insurance and the 
supplemental medical insurance is a sensible thing to do 
because out there in the real world where many of us have 
parents and family Members who are drawing on these benefits, I 
think it is awfully hard for them to understand why we make a 
distinction between what is in SMI and what is in HI, and I 
think frankly probably most of them don't care and wish they 
did not have to take the trouble to understand why do I have 
these different things that I have got to deal with. And from a 
medical care concept, actual point of view, it is hard to 
imagine that medical care is really practiced in the artificial 
way we have designed it from an accounting point of view.
    So putting these things together in the way the real world 
works, at least conceptually if we can't do it artificially, 
seems to be a perfectly logical thing to do.
    And then to your question about how do we solve it.
    Senator Baucus. Where is the money? That is the question. 
Where is the money?
    Secretary O'Neill. Well, you know, again, I think there are 
a number of things that we can do and maybe I will go back to 
my previous incarnation and talk a little bit about what I have 
been doing the last 5 years to demonstrate what I believe to be 
the case, which is that we can, we in this country can 
substantially improve the value equation of health and medical 
care. But it will take systemic reform in the way care is 
practiced. It will take attention to the last two reports that 
have been issued by the Institutes of Medicine. I don't know 
how many Members have seen the two reports from the Institutes 
of Medicine. The one last year called attention to the fact 
that 100,000 people a year are being killed by medical mistakes 
and attest to the level of mistake-making that takes place in 
the delivery of care. If we could capture the potential that 
exists to do it right the first time we would probably reduce 
health and medical care costs 30 to 50 percent. And if you 
would like witnesses on that, I would suggest Dr. Donald 
Berwick from Harvard, who is the Director of the Institute of 
Health Care Improvement, and Lucy Ann Leap, who is the first 
who identified the huge gap between where we are and where we 
could be.
    Part of what I am saying is as much as we may try here to 
sort out and deal with these complex issues in health and 
medical care, if we are really going to receive substantial 
improvement it is going to take place in places like the 
Intermountain Health Care System in Salt Lake City, where they 
are working on these important ideas. They will take place at 
Deaconness Glover in Boston, where they are working on these 
ideas.
    Senator Baucus. Mr. Secretary, I appreciate that but as I 
hear you, you are not really answering the question. The 
question is where is the money and where is the 
administration's proposal to close the gap. With all due 
respect, there is none. The talk of reform and the competition 
models and everybody who has analyzed the competition models 
has concluded they don't yield much money, they don't address 
the solvency part of the problem that we are attempting to 
address and I just suggest frankly that the administration be 
more forthcoming; so far it has not been. Then the 
administration can perhaps be able to have a dialogue with this 
Congress. Otherwise until it has a proposal detailing where the 
money is coming from I don't know why this exercise really 
makes much difference.
    Chairman Thomas. Does the gentleman from Florida, Mr. Shaw, 
the chairman of the Social Security Subcommittee, wish to 
inquire?
    Mr. Shaw. Yes, I do, Mr. Chairman, and I thank you for 
yielding the time to me. I am sitting here drowning in 
frustration. I think from some of the comments that have been 
thrown out without being answered here at this hearing and all 
over Washington, sometimes I think for the new symbol of 
Congress, we should remove the eagle and put in the ostrich 
with his head under the ground. It is absolutely incredible 
when I think of so many people thinking that we have until 2038 
until we solve this problem.
    Mr. O'Neill, you were absolutely correct in what you said, 
the closer we get to the cliff the more likelihood we will drop 
off and the more likelihood we will not sustain the benefits. 
But we have an opportunity now to do something. The word 
``solvency'' has been I think dramatically misused during this 
entire debate because as far as I am concerned the solvency 
ends in 2016, when we no longer have enough money to come in in 
order to take care of our obligations.
    Mr. Secretary, you show the assets of the Social Security 
trust funds in your report. Those assets I assume include the 
government obligations, which are nothing more than an IOU from 
the government to the government, is that correct?
    Secretary O'Neill. That is exactly right.
    Mr. Shaw. Now you are doing this under existing law, and I 
wanted to make that very, very clear. But if a private company, 
if Alcoa, when you were CEO if you were to show those 
obligations of yourself in the balance sheets to the 
stockholders or to the bankers, what would happen?
    Secretary O'Neill. Well, it depends on how serious the 
problem was. If the problem was as serious as the one we have 
here, they would probably withdraw support for us. One 
distinction between the private sector and the public sector 
that gives momentum and sustenance to where we are is you all 
have the ability to raise taxes in the financial systems of the 
world and the people who believe they are going to be able to 
collect benefits assume you will raise taxes to pay for your 
obligations.
    Mr. Shaw. Precisely, so the assumption is we are going to 
raise taxes and tax the people who have already paid into the 
system in order to pay them their obligations; is that correct?
    Secretary O'Neill. That is correct.
    Mr. Shaw. So beginning in 2016 in the existing system we 
will not have sufficient assets coming in in the form of 12.4 
percent payroll tax in order to pay the benefits. I would like 
to submit for the record the definition of bankruptcy as it 
appears in Black's Law Dictionary: The state or condition of 
one who is unable to pay his debts as they become due.
    [The information follows:]

    Bankrupt. The state or condition of one who is unable to 
pay his debts as they are, or become, due. Amenability to the 
bankruptcy laws. The condition of one who (under the Bankruptcy 
Act of 1898) has committed an ``act of bankruptcy'' (q.v.), and 
is liable to be proceeded against by his creditors therefor, or 
of one whose circumstances are such that he is entitled, on his 
voluntary application, to take the benefit of the bankruptcy 
laws. The term includes a person against whom an involuntary 
petition has been filed, or who has filed a voluntary petition, 
or who has been adjudged a bankrupt. Person or municipality 
referred to as a ``debtor'' under Bankruptcy Act, Sec. 101(12). 
See Act of bankruptcy; Arrangement with creditors; Bankruptcy 
Act; Bankruptcy proceedings; Composition in bankruptcy; 
Composition with creditors: Contemplation of bankruptcy; 
Insolvency; Wage earner's plan.

                                

    Chairman Thomas. Without objection.
    Mr. Shaw. We will not be able to do it unless we raise 
taxes and tax people again or cut benefits. So by doing nothing 
we are simply putting ourselves in that position where we are 
going to have to totally depend on, or in good part at least, a 
third of the taxpayers in order to get the necessary funds to 
hold the benefits to where we are today. Is that close to being 
correct?
    Secretary O'Neill. That is exactly right.
    Mr. Shaw. It is tremendously frustrating, particularly when 
I see that Social Security is becoming a worse deal over time 
and it will continue to get worse without change. Young and 
future workers will get a very bad deal. People disagree about 
exactly how the Social Security rate of return is calculated, 
but according to the administration, young people entering the 
work force today can expect a return of less than 1.8 percent 
of the contributions that they and their employers have paid 
into the system. That is illustrated on the chart that is to 
your right, Mr. Secretary.
    Do you disagree with that? What we show is the date of 
birth of the population, which is along the bottom of the 
chart, and it shows a percentage where people born in 1880, for 
instance, and were retiring in 1945, they were getting 25 
percent return and now it is down to 1.8 percent. That is 
absolutely disgraceful. As a matter of fact, I think probably 
what we should do is to adopt this as a symbol for Social 
Security for the young people of this country. It is absolutely 
unconscionable that we are allowing this to continue and 
allowing this charade and the corrupt type of the accounting, 
which is required by law and which you are dutifully following 
as you have to, and I understand your frustration that you must 
feel by inheriting this system.
    President Roosevelt said when he signed this thing to the 
effect that more was being put out of the reach of the 
politicians. It has never been out of reach of the politicians, 
and it is disgraceful the way we are handling this thing, and I 
would hope that the Members of Congress would join some of the 
leadership on both sides of the aisle, and I include Senator 
Breaux in there, who has been very forthcoming in trying to put 
together solutions, which I don't totally agree with but I 
agree in principle, and it is time we move forward and solve 
this system for the next generation. It is tremendously 
important, and I think it is tremendously important to this 
country. Social Security will be going into the red in 2015, 
and it is time we quit talking about 2038.
    Thank you, Mr. Secretary. Thank you, Mr. Chairman.
    [The chart follows:] 
    [GRAPHIC] [TIFF OMITTED] T4215A.001
    
                                

    Chairman Thomas. Thank you. The gentlewoman from 
Connecticut, Mrs. Johnson, the chairman of the Health 
Subcommittee, wish to inquire?
    Mrs. Johnson of Connecticut. Yes, I do. Thank you, Mr. 
Chairman.
    Secretary O'Neill, I am very pleased that you are focusing 
today on the long-term solvency of Social Security and 
Medicare. There are no two programs that are more important to 
every senior in America and every person under 65 in America. 
They are not only important to our parents, but they are 
important to ourselves and our children, and if we do not start 
taking the long view we will destroy these programs and the 
very fabric of our society, in our estimation.
    I notice that you do mention in your report that to bring 
just the HI Program into solvency over 75 years we would have 
to increase the payroll tax 60 percent or reduce the benefits 
37 percent. Now that is serious business, and I regret the 
focus on this short-term budget controversy. We all know the 
politics of that. When the urgency of the long-term view is so 
great, and anyone sitting on this Committee or Member of the 
Congress, House or Senate, could read last year's GAO report, 
which says that by 2030, this was a year ago and so it is a 
different figure and I understand that, but even then they were 
talking by 2030 that Social Security, Medicare, and Medicaid 
would absorb all together 75 percent, three-quarters, of all 
available revenues, 75 percent. So it is urgent that we not 
only look at the problems in Social Security and Medicare, but 
that we adopt more modern management techniques so that the 
growth in these programs will be sustainable.
    We talk about sustainable development in urban areas. A lot 
of my Democratic colleagues are interested in that.I am 
interested in sustainable growth in Medicare and Medicaid, and in order 
to get there, in Social Security at least, we do have a pretty good 
idea of what it would cost. So we have a number of proposals developed 
in the Congress about how to deal with it, and we hope now with 
leadership from the executive branch we will be able to do it. But in 
the area of Medicare we have made it harder to understand what our 
total program obligations are rather than easier.
    Two years ago, when the administration proposed moving home 
health from A to B, of course A looked better. Great. What an 
accomplishment. B looked worse. We didn't notice that. There is 
no report required about B. So we can't just shift costs from 
one fund to another. We could do that forever. We could get $2 
trillion if we shifted some big things out of part A and it 
would look great, but our problem would be exactly the same.
    So have you given much thought as to how we develop a 
solvency standard that would give us an understanding of the 
total program costs in Medicare, their growth rate, and what we 
could expect in terms of solvency as a whole so we can better 
focus on how do we manage this growth so it can be sustainable 
and we can deliver not only today's Medicare benefits but 
prescription drugs, terribly important, turn the program into 
preventive health? It is absurd that you can't get a physical 
exam under Medicare.
    We have big work to do, but we can't do it unless we have 
some help with understanding when the program is solvent and 
when it is going to be insolvent and those kinds of very basic 
issues, what are we spending and how much money do we have 
coming in. And to say it will come in more and more from 
general revenues is absolutely absurd, and I hope we won't talk 
about that because, sure, if we do that, by 2030 three-quarters 
of all revenues would go to these programs. What a disservice 
to our children and grandchildren. It is outrageous to imagine 
that we could so rob them of the resources to have a good 
education system, good roads and bridges, adequate national 
defense.
    So on this issue of a solvency measure, so we can know 
where we are going and what we are doing, have you given, have 
the Trustees given any thought to how we go about this?
    Secretary O'Neill. Well, we are a new group of Trustees 
save for the two public Trustees. We had our first formal 
opportunity to meet yesterday and to review these figures, and 
I think we were unanimous in our view of being struck by the 
enormity of what these projections for Medicare suggest for 
both the composition of our economy in broader sense, the 
notion that more than 30 percent of our gross national product 
would be consumed by health and medical care, and the 
consequence of the composition, as you suggest, for Federal tax 
and Federal benefits is really quite awe-inspiring, to say the 
least.
    We have resolved we will meet together as Trustees to think 
about and talk about these subjects going forward, but I would 
say again I think the Trustees have by statute a very clear 
demarcation of their role in being the financial, fiduciary 
area that you all can rely on to tell you in a nonpartisan way 
what the financial condition is and what it will be if the laws 
are not changed, either with regard to taxes or benefits. And 
so I think it is fair to expect the initiative for suggesting 
changes and working with a Congress, with the administration 
rather, so we don't muddy the role of the Trustees in 
discharging their very clear financial responsibility.
    Secretary O'Neill. In that regard, the President has 
already indicated to you that he intends to appoint a 
commission on Social Security; and he is ready to begin working 
with the Congress on the fundamental reform of Medicare. And I 
think that is where the impetus will come from, those thrusts, 
rather than from the Trustees themselves.
    Chairman Grassley. The Chair recognizes Senator 
Rockefeller, the Senator from West Virginia.
    Senator Rockefeller. Thank you, Mr. Chairman.
    Mr. Secretary, I want to go back to what our ranking member 
on the Senate side indicated in his questioning because I 
didn't really hear an answer. He didn't, I didn't, and I think 
it is a very important question.
    First I want to say, though, that when you--every time you 
talk about a prescription drug benefit, like the President, you 
also talk about reforming Medicare, those two things. Are you 
saying that unless there is reform of Medicare--and I would 
posit to you that there is no consensus within the Congress to 
make that happen, general reform of Medicare; are you saying 
that unless there is a general reform of Medicare, that you 
would oppose a prescription drug benefit?
    Secretary O'Neill. Quite the contrary, Senator. I think the 
President has said he would be very happy to have his 
prescription drug proposal active on a stand-alone basis. But 
what he has heard, and I thought it was a bipartisan hearing, 
is a preference on the part of the Members to undertake a 
broader reform of Medicare and not settle just for prescription 
drugs.
    Senator Rockefeller. That is--the point I am making is that 
you are making the assumption if we are going to have one we 
are going to have the other. And what I am just positing to you 
for the sake of this discussion is that I don't think that the 
consensus is anywhere near to the point in Congress where we 
can, on a broad basis, reform Medicare as most people would 
interpret that to be. Therefore, we are left with the question 
of can there be a prescription drug benefit if there is not 
broad Medicare reform in the eyes of the President and the 
Secretary of the Treasury?
    Secretary O'Neill. I guess I would defer to the judgment of 
the Senator as to whether or not the Senate is interested in 
doing a stand-alone change. My sense is, that is not where the 
will of the Senate is.
    Senator Rockefeller. And Senator Baucus asked you to try 
and talk about where the money came from, how the 
administration proposed closing the gap on Medicare A and B. 
And he made the point, as I would, that none of the reform 
proposals really addresses the long-term solvency question. And 
I again would ask, what are your proposals with respect to 
closing that gap?
    Secretary O'Neill. All right. I guess I am not prepared to 
give you a full-fledged range of proposals for how we close the 
gap in Medicare. And the President has said we are going to, or 
he is going to appoint the commission to work on how we close 
the gap in OASDI, and I think you will see that happening in 
the next few weeks.
    I frankly don't know anyone who has, until yesterday maybe, 
except for insiders, seen the size of the Medicare projections 
that we are facing if we don't do anything, because this work 
was completed in December under the previous administration, 
asked for the formation of a special panel to evaluate the 
assumptions about the growth of medical care obligations going 
forward. And it was in December when Secretary Summers was 
still here that they got a report with the panel members 
agreeing that for the Trustees' purposes we should use an 
assumption that medical care expenses in the United States 
would grow not at the rate of gross domestic product, but at 
the rate of gross domestic product plus one. And the 
consequence of that, as I have said before, is to suggest that 
if we don't do anything different, that more than 30 percent of 
the gross national product of the United States is going to be 
consumed by health and medical care in the year 2075.
    I think in 1965 or 1970, we were at 6 percent, and we have 
doubled since then. And this suggests another doubling. And I 
don't know anyone who has contemplated that prospect and 
created a set of proposals to either change that outcome or 
figure out how we are going to pay for it.
    [The following was subsequently received:]

    President Bush is committed to protecting Social Security 
for current and future retirees through bipartisan reform. 
Social Security is much more than a retirement program. It also 
provides critical benefits to survivors and disabled workers. 
One of the basic principles of the President's approach is that 
Social Security modernization must preserve the disability and 
survivors components of the program. I would expect the 
President's Commission on Social Security reform would 
carefully evaluate the effect on the Disability Insurance 
program of all reform proposals they consider, and make certain 
that the President's commitment is fulfilled.

                                

    Senator Rockefeller. My time is about to run out. I have a 
final quick question.
    About 10 years ago we started--or more, we started in 
Senate Finance debating managed care, managed cost, whatever 
you want to call it, plans. And there was at that time a rather 
broad agreement by a surprising array of people that managed 
care, managed cost plans, however you want to--what they do is 
they save money for the first couple of years except for those 
that have very long histories, but after that they stop saving 
money. Do you disagree with that?
    Secretary O'Neill. No, I think that is the correct reading 
of the evidence. And I guess I would like to make clear, in my 
earlier remarks, that is not what I had in mind. What I had in 
mind and what I think I could demonstrate to you, maybe with a 
field trip to southwestern Pennsylvania, is that it is possible 
to achieve a level of health outcome performance that is so 
wonderfully better than what we have accomplished that there is 
a way that we can both pay for obligations that we would like 
to undertake on behalf of the American people and, if you wish 
to, expand the scope of care by a very substantial amount and 
reduce the price at the same time. Because if one examines the 
range of non-value-added work, if you can characterize it that 
way, that occurs in the delivery of health and medical care, it 
is truly amazing how much room there is for improvement to the 
benefit of patients and to human beings. But it is going to 
take very systemic reform.
    I will give you one indication of a kind of reform, because 
I know you all have your own connections to your health and 
medical care system out there; and next time you have an 
opportunity, I would urge you to go to your local doctors or 
your local hospital and talk to them about what it feels like 
to be a provider these days. Many of them--at least the ones 
that I know, and I know hundreds, if not thousands of them--
feel that they are the enemy because the signal they get from 
here is that they are people who are out there only to make 
money.
    Most of these people are so altruistic, they have dedicated 
their lives to helping others; and the signals they get from 
the way we reimburse and the way we talk about medical service 
delivery personnel is that they are the enemy. And we have so 
structured the process so that it is very difficult for medical 
professionals to tell each other when they have made a mistake 
and therefore to learn from it, because if they do so, they 
risk the danger of losing their right to provide medical care.
    And this is a tip of an iceberg of the systemic problems 
that we have created out there, with the very best of 
intentions, since we began moving further and further into 
reimbursement systems and ways of characterizing those service 
providers as the bad people in our society.
    With a change in that attitude, we can make a fundamental 
change in the value of delivery that we capture out there in 
health and medical care.
    Senator Rockefeller. Thank you, Mr. Secretary. Thank you, 
Mr. Chairman.
    Chairman Thomas. Does the gentleman from New York, Mr. 
Houghton, wish to inquire?
    Mr. Houghton. Thank you, Mr. Chairman.
    Mr. Secretary, good to have you here. Thanks very much for 
your honest answers. You know, I can understand why the Joint 
Committee, the Finance Committee and Ways and Means only meet 
every 75 years. If I were Secretary of the Treasury, I wouldn't 
want to be facing this panel.
    People asked, where does the money come from? This is not a 
complicated question. It doesn't come from the sky. It comes 
from us. And we here will decide where that money and in what 
proportions it is directed.
    We have got a great system; we have got to keep funding it. 
There are huge numbers involved. It will require changes. We 
have got to get at it soon, and it is our problem. But as 
General Marshall used to say, Let's not fight the problem.
    And so maybe you could describe a little bit about this 
commission and what you hope it will accomplish.
    Secretary O'Neill. Thank you.
    The charter hasn't been written yet, but there are some 
drafts working in the present thinking about the compositional 
structure and the timing to be provided, but always true to the 
idea that beneficiaries, both current and near-term 
prospective, can count on the Federal Government to discharge 
the obligation that all of you have said they should expect to 
see.
    I guess aside from that very important baseline idea is an 
idea that this undertaking may be the most important thing this 
administration can do in domestic and social policy to finally 
provide leadership and create some nonpartisan agreement to 
solve this problem while there is still time to do it in a 
reasonably graceful way, but with a real determination on the 
part of the President that he may and will deliver on the 
commitment that he made in the course of his campaign for the 
office, that he will help to produce a solution that the 
American people can count on and believe in, and that he will 
deliver the benefits that are promised and, at the same time, 
hopefully, move us into an era where we have more--we have more 
wealth creation and asset accumulation on the part of 
individuals to help with their own retirement and medical care 
needs than they would under traditional concepts.
    Mr. Houghton. Thank you very much.
    Chairman Thomas. Does the gentleman from California, Mr. 
Herger, wish to inquire?
    Mr. Herger. Thank you, Mr. Chairman.
    And I join in welcoming you to our Committee this historic 
time, Mr. O'Neill.
    The trustees' report tells us that, absent reform, general 
revenue transfers will ultimately constitute the largest single 
source of income to the Medicare program as a whole and would 
place a large burden on the Federal budget. What does this 
increasing dependence on general revenues mean for the program, 
and how useful is a solvency definition that only uses payroll 
taxes and which will ultimately constitute minority program 
revenues.
    Secretary O'Neill. Well, if we--as we move; I should not 
say ``if''--as we move to a greater degree of general revenue 
financing, we are really saying that these program entitlements 
are a general draw on the tax revenues of the American people, 
independent of anything else; and that whatever obligations may 
be voted and entitlements may be written into law, that there 
is no connection between the source of the revenues and the 
people that use them. So, in effect, we are destroying any 
linkage of those who pay and those who receive the benefits.
    And I suppose one could say, as we do, that we are becoming 
in this area an income transfer program; or I guess--not to use 
a pejorative term, but to say it in the way most would say it--
becoming a welfare program rather than a self-supporting 
contributory program.
    Mr. Herger. I thank you, Mr. Secretary. No further 
questions, Mr. Chairman.
    Chairman Thomas. Does the Senator from Louisiana, Mr. 
Breaux, wish to inquire.
    Senator Breaux. Thank you, Mr. Chairman. And thank you for 
helping to convene a historic joint hearing with the House and 
the Senate. I take it that a joint markup session on the tax 
bill is probably not likely?
    Chairman Thomas. I will tell the gentleman if we could pull 
this off, we will try.
    Senator Breaux. Thank you, Mr. Secretary, for being with 
us. I think tomorrow--and, in fact, today and probably tomorrow 
as well--many of headlines in the newspaper will basically say 
something along the lines that Medicare is in pretty good 
shape. And I think that those headlines would be terribly 
misleading.
    I sort of compared it to a person going to his doctor for 
his physical and having the doctor tell him he is in pretty 
good shape after only taking his blood pressure. Because what 
we have done is to--in the Trustees' report is essentially 
focus in on Part A, which covers only about 55 percent of the 
Medicare costs. So of course it is going to look good. Had it 
not been for what we did in 1997 in transferring a portion of 
home health care to Part B, plus other changes that we made, we 
would be insolvent today.
    So, I mean, the report, while it is valuable and people are 
here to get the results of it, I think it can tend to be 
incredibly misleading because it basically looks at Part A and 
says, Pretty good shape, folks; it is a little bit better than 
last year; in fact, for 3 years, it has run a surplus.
    So the question is, how do we get serious about talking 
about the condition of Medicare by looking not only at one part 
of it, but both parts of it? I mean, you have to do more than 
just take the blood pressure of Medicare. You have to look at 
everything, including home health care and doctors and 
everything that we shifted over to Part B. Obviously, if we put 
hospitals into Part B, Medicare would be in good shape for 
eternity; it would be fine because everything is in Part B and 
nothing is left in Part A.
    In the Breaux-Frist bill that we have pending over on the 
Senate side, we said there should be a point when you look at 
the general revenues being spent on this program in determining 
whether it is in good shape or not. Now it is about 34 percent 
of all of Medicare costs to pay for out of the general 
Treasury; and we suggested that when it gets to be 40 percent--
pick a number, we said 40 percent--that you ought to have a 
relook at what we are doing with this program and recalculate 
whether we want to continue just to shift more of it into 
general revenues.
    Does this administration have an idea about that concept? 
Because I think this is--while it is valuable, it is like not 
reading the rest of the story. We are only looking at part of 
it. We look at Part A when Part B becomes larger and larger.
    Do you have any comments on that?
    Secretary O'Neill. Senator, I welcome your question. As I 
indicated, yesterday is the first time that the Trustees have 
met together since this administration was formed. And we 
agreed that we will have another meeting fairly soon, but 
partly at the request of myself, the Chair, to provide an 
opportunity for us to talk about exactly the kinds of things 
you are suggesting that we could bring to our work in the next 
year.
    But I am very mindful of wanting to stay within a strict 
interpretation of what the law tells the Trustees they are 
supposed to do.
    Senator Breaux. I understand that. What do you think about 
the proposed change, though?
    Secretary O'Neill. I think it would be helpful to ask the 
Trustees to think about helping medical care, without regard to 
A and B, in the context of what it is we have obligated 
ourselves to do for that population; and to give some advice to 
the Members of this Committee, more broadly to the Congress and 
the American people. Because I think the context is clearly 
more appropriate and doing it that way could reduce the 
misunderstanding that people have that we have already seen in 
today's headlines, celebrating that things are better, which 
suggests a pretty superficial reading.
    Senator Breaux. Let me ask a second question on Social 
Security.
    You saw a chart up there. It talked about the recent rate 
of return on Social Security being invested in Treasuries; it 
was 1.8. I think it is probably closer to 3 percent or slightly 
under 3 percent.
    Some of us have suggested the concept of allowing Social 
Security folks to be--that is a 1994 chart? Don't you all have 
anything more modern than that? Whose chart was that? That is 7 
years old; I think it is probably different.
    Anyway, the concept of doing what we all can do up here and 
putting a portion of our payroll into a retirement account that 
we own; and we suggested 2 percent. And some said, Look, the 
market is going down the last couple of days, it is a terrible 
idea, although over a 20-year period, which is a normal period 
that people invest in retirement, we have never had a negative 
rate of return in the market.
    How would you comment as to the concept of allowing 
potential retirees to put a portion of their payroll tax into a 
private retirement account?
    Secretary O'Neill. It is a very good question, and I think 
you provided exactly the right indication of how to think about 
this thing.
    If you look at the rate of return on equity investments in 
the United States back to, I guess I would say recorded 
history, let's say back to 1875--I don't care when you choose a 
start period or end period, unless it is yesterday--you can 
find any reasonable period of time, 20 years or 30 years or 40 
years, where the rate of return on equity investments was not 
greater than 4 percent. Again, the long run rate of return on 
risk-free investments--which, let's say, are Treasury 
securities--is something on the order of 2.5.
    And so there is not a question about the difference in the 
rate of return between risk-free investments and long-term 
investments and the equities of the U.S. Economy as a general 
matter. And it is true, if you look at the last 6 months, you 
couldn't make that claim.
    But even if you extend yourself back 3 years or so, or 4 
years, you will find that equity investments always win. And 
when one is planning a retirement account, especially as we put 
people into their first employment engagement in the United 
States, say at age 20 or 21, and look forward for 40 or 45 
years, there is no question, at least not in recorded history, 
that one would be better off invested in the general equities 
of the United States than in risk-free returns.
    Senator Breaux. Thank you.
    Mr. Shaw. If I could say to the Senator, this is the latest 
data that is available to the Social Security Administration.
    Senator Breaux. Does that show a rate of return in risk-
free of 1.8?
    Mr. Shaw. That is as to what is put into the system and 
what is getting out of the system as far as retirement 
benefits.
    Chairman Thomas. Tell the gentlemen, as you go out in 
outyears, rather than look at actual wages and conditions of 
the market, they run a percentage in the outyears. And we are 
comparing obviously significantly different periods, but return 
on it is a percentage. And as you can see, it went from 25 
percent in the early years to 1.8. And that line continues to 
narrow to just slightly above 1 percent out around 2030, 2037.
    Does the gentleman from Louisiana wish to inquire?
    Mr. McCrery. Yes, Mr. Chairman.
    Mr. Secretary, the discussion from today has been somewhat 
revealing, I think. There has been a lot of talk about Part A 
and Part B and the trust fund and the solvency; and the bottom 
line is, Part A and Part B represent an anachronistic structure 
that was created 35 years ago and has little relevance to 
today's health care system, and we ought to junk it. That ought 
to be our goal, to junk Part A, Part B, and come up with an 
overarching reform of the system which will change some of 
these horrendous figures that we have been hearing.
    And I want to follow up on Ms. Johnson's line, looking at 
Social Security Medicare and Medicaid costs vis-a-vis the 
budget of the United States. She used the year 2030. If you go 
out to 2075, and look at these costs, they will consume about 
100 percent of the budget if we keep spending at the Federal 
level about 18 percent of GDP, which is what it has been 
historically--100 percent of the budget. That means we don't 
get to pay any interest on the debt. We don't get to pay 
anything for defense, for highways, for environmental 
protection, nothing.
    So clearly we have a problem that is bigger than Part A or 
Part B or who gets what. We have got to figure out a way to 
stop these programs from growing so rapidly. Never mind Social 
Security; I think we can take care of that fairly easily. 
Medicare and Medicaid are much bigger problems and much more 
difficult to solve. But if we don't, I believe--look at the 
entire health care system and get away from this notion of 
trying to solve Medicare. I am not sure we can solve it, Mr. 
Secretary.
    I hope the administration will look beyond just Medicare 
and Medicaid and show a little more vision, frankly, than has 
been shown in this town for the last few years when it comes to 
health care. Because if we don't, I don't think we can change 
these numbers significantly, and the result will be a 
tremendous increase in taxes to cover the costs.
    And probably part of that answer will be to simply expand 
Medicare for everybody so that we have one health care system 
controlled by the government and paid for through the tax 
system. That is where we are headed, and these numbers are 
undeniable in that regard. This is exactly where we are headed 
if we don't show some vision and come up with a different path 
to follow that will avert this kind of situation.
    So, I urge you, Mr. Secretary, to use some of the thinking 
that I heard you say here today about some different ways to 
deliver health care and pay for health care. We have got to 
start thinking outside the box on this question or we are going 
to be in a box, big time, and there is no way out except for 
the government taking over health care and establishing a 
budget and rationing health care. That will be the answer that 
we come up with, and I certainly want to avoid that if at all 
possible.
    Would you comment?
    Secretary O'Neill. Well, thank you. I certainly agree with 
you.
    To maybe deepen the notion with a few facts that you are 
talking about, I suppose most of you know about the concept 
call Six Sigma. What it means, in a million events, a million 
repetitive events, that there will be 3.4 mistakes in a million 
events. And to put it in context where we are in medical care, 
if you look at medications in the United States, one in every 
2,000 medications is wrong. Think about that in the context of 
Six Sigma.
    And, again, it is not to be accusatory nor to find fault in 
the consequence of lots of practices, many of which are now 
being replaced. But if you think about the scribble on a little 
white pad and the error potential that exists with that 
scribble not turning into the right medication; or maybe in a 
broader sense, that scribble not being integrated in an 
information system with other medications a patient is taking 
so that the formulary and the computer can tell you when there 
is a contraindication about combining drugs.
    Then you begin to see the potential of the number of people 
who wouldn't have to be in the hospital except for the fact 
that they have a medication error, or those who are there for 
an extended stay because once they got to the hospital, they 
got what is called--the so-called nosocomial infection, more 
commonly known as a staph infection; and you begin to put 
number values on how much money we could save by doing things 
right the first time.
    In my mind there is no doubt that we can simultaneously 
improve outcomes for Americans, but make the medical profession 
more rewarding for those who are in it and simultaneously deal 
with the financial considerations which have been the focus of 
most of a national involvement in health and medical care over 
the last 35 years.
    Chairman Thomas. The gentleman's time has expired. Does the 
gentleman from Michigan wish to inquire?
    Mr. Camp. Thank you, Mr. Chairman.
    Just to follow up a little bit on what my colleague, Mr. 
McCrery, said, in the Balanced Budget Act 1997, home health 
coverage was shifted from Part A to Part B and that extended 
the life of the trust fund by 6 years. And if we took some 
other items, for example--and no one is seriously proposing 
that we do that, but for example, if skilled nursing were 
shifted from Part A to Part B, that would impact the trust fund 
by almost $300 billion.
    I guess my point is that these mere bookkeeping changes 
have significant ramifications for the solvency of the fund. 
And I think--a comprehensive look at the viability of Medicare 
as a whole, I think is needed, and I think that his point is 
well taken. I guess I would be interested in your comment on 
that, and then I have one other question.
    Secretary O'Neill. I agree completely with what you have 
said.
    Mr. Camp. All right. The trustees' report tells us that 
without reform general revenue transfers will really be the 
largest single source of income to Medicare, and obviously that 
would have significant effect on the Federal budget. What do 
you think this means for the program and how useful is a 
solvency definition that only uses payroll taxes which will--
actually will not be a majority of the program revenues?
    Secretary O'Neill. My own view, as you can probably tell 
from the things that I have said this morning, is that we need 
to look at the substance of what it is we are paying for. 
Because I am convinced that no matter how hard we may try, 
making even well-intentioned modifications to reimbursement 
formulas doesn't get at the need to, or even the system toward, 
creating value instead of responding to signals from Washington 
that are an economic model that assumes--that we can devise 
signals to health care providers, to hospitals and doctors, 
that somehow will keep the costs down and simultaneously 
produce good results.
    I think all the evidence we have for 35 years now is to the 
contrary. In fact, if I have time, I would give you an example 
of the perversion that occurs because of our reimbursement 
systems. If you are a bypass patient and you go into a 
hospital, and one looks at the reimbursement performance or you 
look at the discharge performance, what you find is that the 
average discharge date after surgery is 5.9 days. And so the 
reimbursement formulas reward institutions that discharge 
people before 5.9 days and they penalize institutions that keep 
people longer than that. And so the reimbursement formula is 
economically designed to get people to do what the data say the 
average should be.
    The thing that data don't show you, unless you look at 
individual patient experience, is this: that 20 percent of the 
people who are discharged in a way that rewards people for 
getting out early are readmitted to another hospital within the 
next week, many of them with complications, and many of them 
die. But because of the way the reimbursement system is 
designed, that is OK.
    Our signal to the system is, get out early and if it causes 
to you have complications or death, it is a new event. And so, 
from a financial point of view, this is what we reward. It is 
not what we intended, but it is because we are not designing 
our systems to be human-being, patient oriented. We are 
designing them to make sure that somebody doesn't stay too long 
or some doctor doesn't charge us too much.
    It is only an illustration of the problems that we have 
created with the very best of intentions as we have become less 
oriented toward health, medical care, and more oriented toward 
accounting as we are being eaten up by program costs that come 
here that have to be paid for somehow.
    Mr. Camp. Thank you very much. I yield back.
    Chairman Thomas. Does the gentleman from Michigan, Mr. 
Levin, wish to inquire?
    Mr. Levin. Thank you.
    You get Michigan twice in row, Mr. Secretary. Welcome. I 
just wanted to be clear, so we are all talking from the same 
figures; I want to go back to discussions about the surplus and 
the contingency fund.
    On page 185 of this blue budget book, it has a figure of 
842 across from Contingencies. Now, is it your understanding 
that the 842 includes the projected Part A surplus of 526 
billion?
    Secretary O'Neill. I am sorry, I don't have that book with 
me. Here we are. The way that this table is constructed, it is 
in that number. Yes, it is in that.
    Mr. Levin. So the 842 includes the 526?
    Secretary O'Neill. And one could argue it is partly in the 
417. Because, again, Mr. Levin, it is----
    Mr. Levin. I mean, does the 842 include essentially the 
526? The part A----
    Secretary O'Neill. I would say it is arguably all in the 
debt service. This is a table that shows distribution of funds. 
It doesn't deal at all with the ongoing obligation to use funds 
that are collected by Medicare and Social Security taxes for 
the purposes that they were collected.
    This is a question of funds flow. There is not a question 
of what the obligation of the United States is to the people 
who sent in funds for Medicare and Social Security. And so it 
is----
    Mr. Levin. So you are saying, you don't think that the Part 
A surplus of 526, which is more than 417, is debt service that 
relates to the increased amount of debt service because of the 
use of funds other than for debt service.
    Secretary O'Neill. It is arguably--you know, because of the 
way the table is constructed, you have Social Security surplus, 
and that is a number and that number is generated by how much 
money is going to be paid in for Social Security. And as 
everyone has said, we should subtract that from the 5.6 and 
then the proposed number for tax relief.
    Mr. Levin. I understand that. But, please, because 
Secretary Thompson was here and we went through this, your 
position is that the 526, which is the projected Part A 
surplus, is or is not part of the 842?
    Secretary O'Neill. It is arguably a debt service and indeed 
because debt service of 417 is arguably part of the 
contingencies. But again it is a mixing of concepts between 
what are the obligations of the Federal Government and what is 
the available flow of cash that we have available.
    Mr. Levin. The Social Security surplus is listed 
separately. That is a cash flow thing too, so why don't you 
list the Part A?
    Secretary O'Neill. You could put--if you would like, you 
could put the 526 in additional needs debt service and 
contingencies. I think it is----
    Mr. Levin. Let me ask you then, is it your position or not 
that the projected Part A surplus should be used only for Part 
A purposes?
    Secretary O'Neill. Absolutely. There is no doubt, by law, 
money that is collected from the people for Social Security and 
Medicare benefits can only be used for those purposes.
    Mr. Levin. Could I ask you, as a key Member of the 
administration, within the next few days, to submit a revised 
table S-1 that lists separately the Part A surplus, like you do 
the Social Security surplus. Will you do that?
    Secretary O'Neill. Indeed. I will give you a table that 
differentiates in the clearest way I know how from a cash 
flow--the thing to me, this continuing discussion is a 
misunderstanding of the difference between cash flows and the 
balance sheet of the Federal Government, which includes 
accruing liabilities. And I would be very happy to give you 
those statements so that you will have them.
    Mr. Levin. OK.
    Chairman Thomas. I am sure there were not that many people 
who followed that discussion. I just want to make----
    Mr. Levin. It is an important discussion.
    Chairman Thomas. It is, and that is why I wanted to make 
the point because it was not as clear as it needed to be. 
Because we are discussing trust funds and surplus and a 
Contingency Fund. The problem of course is Trust Fund is 
misnomered and the Contingency Fund is a misnomer. But I 
believe the impression has been left thus far that the only 
Trust Fund in surplus in the Contingency Fund is the Part A 
Trust Fund. It is my understanding that there may be as many as 
three dozen or more other trust funds that are in surplus that 
are also covered in that Contingency Fund.
    Is that correct, Mr. Secretary?
    Secretary O'Neill. Yeah, that is right.
    Chairman Thomas. So we have between 30 and 40 trust funds 
that are in surplus that are included, not just the Part A. And 
the assumption that you are to break out the Part A implies 
that there is only the Part A Trust Fund that is in surplus in 
the Contingency Fund when, in fact, there are more than three 
dozen.
    Mr. Levin. Could I just say, then, we need a figure as to 
how the 842 is derived and what trust funds are included within 
the 842. Because then you are saying if you are not going to 
use Part A except for Part A, then you are going to use other 
trust funds.
    So we should get from you, if I might say respectfully, and 
from the administration, a clear outline of table S and what in 
the world is in that Contingency Fund.
    Chairman Thomas. I told you what I heard from the Secretary 
was the Medicare Trust Funds and the Social Security Trust 
Funds should be used only for Medicare purposes and Social 
Security purposes. That is what I heard the Secretary say.
    Mr. Levin. But then they wouldn't be included in the 847.
    Chairman Thomas. Does the gentlewoman from Washington, Ms. 
Dunn, wish to inquire?
    Ms. Dunn. Thank you, Mr. Chairman.
    Mr. Secretary, we like it when you return to be with us so 
often. It is really a pleasure to have you. I too worry about, 
referring to what Mr. McCrery said as thinking outside the 
box--as we reform Medicare and Social Security, I worry a lot 
about the Medicare system being a typical bumbling bureaucratic 
agency that is nonresponsive to the needs of the real world and 
lagging way behind it, becoming like a stone around the neck of 
what we are really doing out there in health care these days.
    I think, for example, of innovative technology that 
Medicare is so slow in being able to accept when new devices 
and new drugs provide a choice for seniors and add no greater 
expense. So I am sympathetic on that discussion.
    I wanted to ask you a question, Mr. Secretary, with regard 
to Social Security and with regard to the gender inequity 
problems that we run into in Social Security. As I began to 
study this system over the last few years, I learned time after 
time that there are inequities that arise from the systems 
having been written in the mid-thirties when women stayed at 
home. In fact, married women could rarely get jobs out of the 
Depression. Single women, including my own mother, had to go to 
Alaska to get a job teaching.
    So it was written in a way that protects women who stay at 
home--certainly a massive safety net, more I think than we 
needed to.
    The system currently continues to discriminate against 
married working women to the extent that where their salaries 
generally during their lifetimes are less than their husbands, 
and often they take time away from work to stay at home caring 
for children or elderly parents or for one reason or another. 
At the time of retirement, most women are going to get as their 
Social Security benefit 50 percent of their husband's Social 
Security. And so, during the time that the woman is working, if 
she is married, she is continually giving out of her paycheck 
month after month after month large amounts of money that are 
being wasted if you figure that a stay-at-home mom, who never 
goes into the workplace, will get exactly the same 50 percent 
of her husband's Social Security. That is one example.
    I am wondering if there is any thought as we move toward 
reform in your shop about how this works? I am wondering if you 
could just give us some of your thoughts on these problems and 
if there are ways to find solutions to them.
    Secretary O'Neill. Well, you know, I think you put your 
finger on a problem that we see even in the broader tax system 
with the convention of the so-called ``marriage penalty.'' We 
have got lots of artifacts of the change in the way we really 
live, compared to when these things were started 65 years ago. 
And it does seem to me that we need to begin to treat human 
beings as human beings, independent of their gender.
    And we clearly have not gotten around to that completely 
yet. But it is something we should have high on our priority 
list, that we not penalize people based on a convention that 
existed long ago that no longer holds for most of us and our 
families.
    Ms. Dunn. Thank you very much, Mr. Secretary. Thank you, 
Mr. Chairman.
    Chairman Thomas. Thank you. Does the gentleman from 
Maryland, Mr. Cardin, wish to inquire?
    Mr. Cardin. Thank you, Mr. Chairman, I do. Then I will 
yield to one of my colleagues.
    Let me make an observation: I don't think there is a 
disagreement from the Trustees' report or from the experiences 
I have heard on both sides of the aisle that we have serious, 
long-term problems in both Social Security and Medicare that 
need to be addressed. I guess my disappointment is that there 
isn't more attention paid to the one solution that I think 
would be the best at this point, and that is a bipartisan 
budget, so we have agreement as to what the economic plan of 
our Nation should be.
    And we are moving forward, I regret, in a partisan way, Mr. 
Secretary. We have already passed some bills out of this 
Committee that speak to taxes without speaking to an overall 
game plan, and in the Budget Committee it looks like we are 
moving toward a Republican budget and a Democratic substitute. 
And personally, I think the best thing we could do now is to 
reach bipartisan agreement on the budget that speaks not only 
to tax cuts but also speaks to Social Security and Medicare.
    And the second point I would raise as we talk about 
efficiency within the Medicare system is that the trustees' 
report contains a very interesting observation. And that is 
that 17 percent of our Medicare beneficiaries are in a 
Medicare+Choice managed care plan, and 17 percent of the trust 
fund is spent in those plans. So I would say to those who think 
that the private sector plans are bringing about savings, that 
doesn't bear out.
    So we really do need to take a look at what we are going to 
do to deal with the Medicare system itself, rather than just 
throwing seniors into managed care and believing that will be 
the solution.
    Let me, if I might, yield the balance of my time to Mr. 
McDermott.
    Mr. McDermott. Thank you, Mr. Cardin.
    I sit on the Budget Committee. This evening we are going to 
get a document and tomorrow we are going to mark it up. So I 
have a very important question to ask you and that is about the 
assumptions made by the trustees and by the President's budget. 
Because you sit with two hats, I want to know which one of the 
Paul O'Neills I should believe.
    We have a trustees' report here on page 54 on last year's 
Medicare Trustee Report that says that the real GDP is assumed 
to average 2.3 percent over the short-range projection, 1999 to 
2009. Now, if you go to this blue book on which we are supposed 
to write a budget tonight, on page 199 it says that the 
assumption for real GDP growth is 3.1 percent. Now, that is a 
conflict for me; 2.3 versus 3.1 is a whole bunch of money. I 
made the mistake of reading the Washington Post this morning 
before I came in here.
    What they say is that the surpluses would virtually 
disappear under the economic predictions used by the Trustees.
    So which prediction of growth are you going to use, 3.1 or 
2.3, so that tomorrow when we mark up, I will know what to tell 
Mr. Nussle in the Budget Committee.
    Secretary O'Neill. Well, as I am sure you appreciate, these 
are separate preparations and the Trustees' report is a 
consequence of decisions that were put in place by the last 
administration. And----
    Mr. McDermott. You had a chance to look at them and change 
them.
    Secretary O'Neill. But in order not to create even the 
possibility of someone thinking that these matters that are 
reported by the Trustees are political or that we would change 
in a way without having an opportunity to examine the 
underlying assumptions which have been worked on by some of the 
best economists in the world for 61 years now, it didn't seem 
to me it was appropriate to change the assumptions.
    Do I have a question about long-run assumptions about rates 
of productivity and real growth? I do. But it frankly didn't 
seem appropriate to bring--to change the assumptions of the 
Democratic administration without careful, considered, 
deliberate thought process.
    And so I am here to represent to you, I think if one looks 
at the numbers that you have in front of you from this report 
for a 75-year period, they make the point very clearly--and it 
is not a partisan point, I hope--that we, the people who are 
supposed to be doing the business of the American people, have 
a serious need to make substantial modifications in Social 
Security and Medicare.
    In the budget documents that you got, you got our best 
judgment about what the near-term rates of growth are, and 
there is no doubt that there is an expectation that they are 
going to be better than the numbers that were used by the last 
administration to calculate forward 75 years' worth of 
prospective obligations and benefits for the American people. I 
don't find it remarkable at all that for these two very 
different purposes, one near-term and one very long-term, that 
you have different things in front of you.
    Chairman Thomas. The gentleman from Maryland's time has 
expired. Our last inquiry will be the gentleman from Georgia, 
Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman.
    Welcome, Mr. Secretary. It is always refreshing to have a 
witness that talks about cash flow, because that is what this 
whole system is about. That is what each one of these programs 
is about, cash flow, individual cash flow. That is where it 
originates. That is where the money comes from.
    There have been several questions, the same question asked 
several times this morning: Where does the money come from, 
whether it is closing the gap from Part B to Part A in Medicare 
or whether it is Social Security or what. But let's take a look 
at it. Where does Social Security insurance funding come from, 
Mr. Secretary?
    Secretary O'Neill. It comes right from the American people.
    Mr. Collins. In the form of a payroll tax, sir?
    Secretary O'Neill. That is right.
    Mr. Collins. And the Social Security insurance program that 
we have today is formally known as a pay-as-you-go system; is 
that not true?
    Secretary O'Neill. That is true.
    Mr. Collins. What is the definition of a pay-as-you-go 
system, Mr. Secretary?
    Secretary O'Neill. In this case what it means is that we 
are collecting money from the working population and we are 
using it to pay benefits for people who are already 
beneficiaries.
    Mr. Collins. And that has been the system all along, has it 
not?
    Secretary O'Neill. Yes, sir, it has.
    Mr. Collins. What has happened in the past when we ran 
short of funds in the pay-as-you-go system, in the payroll tax?
    Secretary O'Neill. We raise taxes.
    Mr. Collins. Yes, sir. And that is possibly what could 
happen again if we don't address the system itself.
    As Chairman Alan Greenspan, whom we all hope to hear some 
good words from this afternoon, stated in this Committee--it 
was January the 20th of 1999--if you are ever going to solve 
the Social Security problem, you have to end the pay-as-you-go 
system and devise a new system.
    But where does the Medicare Part A come from Mr. Secretary? 
Where does that cash flow come from?
    Secretary O'Neill. It also comes from the payroll tax.
    Mr. Collins. And what has happened in the past when we had 
a shortfall of cash flow there?
    Secretary O'Neill. We either raised taxes or we moved 
objects of expenditure out of the fund into another fund.
    Mr. Collins. What happened in 1993? Was that not the last 
tax increase on Medicare Part A, for Medicare Part A?
    Secretary O'Neill. I believe, yes.
    Mr. Collins. It raised the tax liability on Social Security 
receipts as well as took the cap off of earnings; did it not?
    Secretary O'Neill. That is right.
    Mr. Collins. I believe we also had a report along the same 
time, around 1994-95, that we would have a negative cash flow 
and the Medicare Part A fund would be bankrupt prior to this 
date; is that not true?
    Secretary O'Neill. That is right.
    Mr. Collins. In the 1997 Balanced Budget Act I believe we 
had some measures in there that revised some of the Medicare 
system, it extended the life of it; did it not?
    Secretary O'Neill. Right.
    Mr. Collins. If hasn't hurt one benefit, has it?
    Secretary O'Neill. No.
    Mr. Collins. What about Part B, Mr. Secretary? Where do 
those funds come from?
    Secretary O'Neill. A little piece of it comes from the 
payroll tax and the rest comes from the general revenue and--
that is to say, from the taxpayers, from all of the taxpayers.
    Mr. Collins. I believe 25 percent of it is deducted from 
Social Security checks; is that not true?
    Secretary O'Neill. That is right.
    Mr. Collins. The other 75 percent comes from general 
taxation, general funds right?
    Secretary O'Neill. Correct.
    Mr. Collins. Those are all entitlement programs, are they 
not?
    Secretary O'Neill. They are.
    Mr. Collins. What is the definition of an entitlement 
program, Mr. Secretary?
    Secretary O'Neill. It means--as I understand the term, it 
means you will get it.
    Mr. Collins. If you fit the criteria to the plan, you are 
entitled to the funds; is that not true?
    Secretary O'Neill. That is right.
    Mr. Collins. It has been said that we should move with 
caution, Mr. Secretary. Do you agree with that? I do.
    Secretary O'Neill. I believe we ought to move with 
deliberate speed caution.
    Mr. Collins. I agree with that, speed but with caution.
    But I am also reminded of the cash flow of this system in 
1995. In January of 1995 the Congressional Budget Office 
estimated over the 10 years from 1995 to the year 2004 we would 
have a $200 billion a year negative cash flow and that was 
above and beyond the payroll tax. In fact, it was equivalent to 
over $3 trillion in the 10-year gap.
    Now, I believe Mr. Crippen back there has testified before 
this Committee on the budget, and we hear reports that over the 
next 10 years, we will have over $5 trillion positive cash 
flow; is that not true?
    Secretary O'Neill. That is true.
    Mr. Collins. That includes Social Security and Medicare, as 
well as other taxation?
    Secretary O'Neill. It does.
    Mr. Collins. So there are plenty of funds in this cash flow 
that we could do and meet all of these programs, but we would 
have to revise some of the systems themselves in order for it 
to be long-range solvency of each, right?
    Secretary O'Neill. That is true.
    Mr. Collins. We can also give tax relief to those who are 
paying out of their cash flow into this Treasury, with the 
funds to meet all these programs. Sir, I believe fully if we 
look after the cash flow of individuals at home, the cash flow 
of the Treasury will take care of itself. Thank you for being 
here. Thank you for your common-sense approach to government.
    Secretary O'Neill. Thank you.
    Chairman Thomas. I thank the gentleman.
    I do want to thank the Secretary. I want to thank all 
members and apologize to those who were not able to inquire at 
this particular hearing. But we will have additional hearings.
    And I especially want to thank the chairman of the Senate 
Finance Committee for his willingness to go forward for the 
first time in more than 75 years with a joint hearing. My hope 
is that we found this useful and would do it again, Mr. 
Chairman.
    Chairman Grassley. I found it very useful and I do look for 
an opportunity to do it again when it is convenient for both of 
us.
    Thank you very much for your hospitality. I look forward to 
this process and other communications we have to bringing a 
closer working relationship between the Ways and Means 
Committee and the Senate Finance Committee and, in turn, 
between the U.S. Senate and the U.S. House of Representatives 
on the substance of the issue of Social Security and Medicare.
    I would use Medicare as an example, when ladies--usually 
ladies that are older--come up to you in your town meetings and 
say, ``Just leave my Social Security alone,'' and that is 
generally not said in anger. But we can no longer allow the 
idea to be out there that if you just leave my Social Security 
alone, everything will be all right.
    We have to take that opportunity to explain that probably 
as far as that lady today is concerned we can leave her Social 
Security alone and she will be okay. But we have to ask the 
question, does that lady want Social Security for her children 
and grandchildren that are coming on; if that is the case, we 
must do something and the sooner we do it, the better.
    Thank you for your hospitality.
    Chairman Thomas. We can't escape the fact that we are both 
going to have to do it together, or it doesn't get done. I 
thank the gentleman. This hearing is adjourned.
    [Whereupon, at 12:08 p.m., the hearing were adjourned.]
    [Submission for the record follows:]
             Statement of the Healthcare Leadership Council
    The Healthcare Leadership Council (HLC) thanks the House Committee 
on Ways and Means and the Senate Committee on Finance for the 
opportunity to submit this statement for today's hearing on the 2001 
Medicare Hospital Insurance Trustees' Report.
    The 2001 Trustees' report, at first glance, sends a positive 
message that the exhaustion of the Hospital Insurance Trust Fund is 
being pushed further and further off into Medicare's future. Indeed, 
Medicare solvency through 2029 reduces the urgency we felt just five 
years ago when bankruptcy was anticipated by 2002.
    But, unfortunately, while lawmakers are relieved of the immediate 
pressure to reformulate Medicare for longevity, current and future 
beneficiaries are being deprived of the potential that a revitalized 
Medicare program has to offer.
    While focusing on the financial health of the Medicare program 
today, we believe there are two important points to keep in mind. 
First, there are numerous accounting and other caveats to consider 
before giving the HI Trust Fund an absolute clean bill of health, 
several of which the Trustees wisely acknowledge in their report. And 
second, trust fund solvency, no matter how extensive, does not 
translate into value for Medicare beneficiaries or taxpayers.
I. The Reality of the Numbers
    There are a number of contributing factors to Medicare's increased 
life span. They include recent and temporary program changes, the likes 
of which cannot sustain Medicare solvency forever, as well as--what may 
be--tenuous estimates of economic growth and medical inflation.
(1) Major program changes affecting the life of the trust fund include:
    The Balanced Budget Act. Provider payment reductions resulting from 
passage of the BBA has dramatically slowed Medicare spending--more so 
than was projected at the time of passage. From 1998 to 2002, annual 
spending growth is expected to average only 3 percent. The substantial 
documented hardship these reductions have created demonstrate that 
continuing provider cuts in the current Medicare program cannot be 
depended on to sustain Medicare in the long run. While the Medicare, 
Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA) and 
the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 
Act of 2000 (BIPA) slightly eased some of these provisions, ``the 
overall net impact of all these Acts still reduces HI expenditures 
substantially,'' according to the Trustees' report.
    Transfer of Home Health Benefits from Part A to Part B. Immediately 
upon passage of the BBA, the Medicare trust fund bankruptcy projection 
was changed from 2001 to 2007. What many do not realize is that barely 
two of these additional years were attributed to provider cuts. The 
majority of the solvency extension was due the transfer of $174 billion 
in home health spending over 10 years from the Part A trust fund to the 
Part B trust fund.
    Relieving the Part A trust fund of this high cost item--has 
contributed significantly to the healthy appearance of the Hospital 
Insurance Trust Fund. However, transferring the responsibilities of the 
Part A trust fund to the mostly tax-payer funded Part B trust fund is 
not an option for ensuring that the Medicare program can continue to 
provide high quality health care benefits in the future.
    ``Fraud and Abuse''. Major fraud and abuse enforcement efforts, 
including expensive lawsuits, have led providers to billing Medicare 
even less than they legitimately could. The Chairwomen of the Medicare 
Payment Advisory Commission expressed strong concern before this 
committee last week that evidence of hospital ``downcoding''--or 
billing Medicare below the cost of their services in order to avoid 
investigations--could be very harmful to both hospitals and patients in 
the long term.
(2) Economic factors that could affect Medicare's projected life span:
    Range of Trustees' Assumptions. The Trustees note in their report 
that under a less promising, higher cost economy, Medicare bankruptcy 
could occur as early as 2016 instead of the 2029 predicted under the 
intermediate economic scenario. By the Trustees' own admission, 
projecting the health of the trust fund, even a short time into the 
future, can yield precarious estimates.
    CBO Cost Assumptions. In its recent Long-Term Budget Outlook, the 
Congressional Budget Office noted that the Medicare Trustees' 
assumptions regarding health care expenditures were far more optimistic 
than their own: ``The Medicare trustees remain more optimistic: they 
assume that cost growth in excess of wages and demographic changes will 
slow not by half [as CBO predicts] but to zero in 2025 and 
thereafter.''
    Trust Fund Revenues. Today's robust economy means higher wages and 
more employment. For Medicare, this means that the 2.9% Medicare tax 
has applied to a much larger base of payroll in recent years. 
Employment taxes flowing into the HI trust fund increased dramatically 
by 8% in 2000 (from $132.3 billion in 1999 to $144.3 billion in 2000). 
Such revenue increases cannot be depended on in the coming years. 
Besides the possibility of the economy slowing down, the number of 
people working and paying the Medicare tax will soon begin declining as 
baby boomers begin retiring in 2010. Once the baby boom generation has 
fully entered retirement by 2030, workers paying the Medicare tax for 
each beneficiary will decrease from the current 4.0 to 2.3.
    Medicare Part B Expenditures. The Hospital Insurance trust fund 
report paints only a fraction of the picture of Medicare's overall well 
being. The expenditures described in this report represent little more 
than half of overall Medicare program spending, the other portion of 
which is derived from over $100 billion in general tax revenues and 
beneficiary premiums. Unlike the Hospital Insurance Trust Fund 
spending, Medicare Part B spending is not policed for solvency and 
therefore is allowed to grow unrestrained.
II. Solvency Does Not Equal Value for Beneficiaries
    The optimistic trust fund numbers reported this week give no 
indication of the value these Medicare expenditures are providing to 
Medicare beneficiaries. An important question to ask is: Should the 
delay in Medicare's bankruptcy placate the need to improve this program 
for Medicare beneficiaries now? While the trust fund report provides a 
warning for the beneficiaries of the future, it indicates nothing about 
whether today's beneficiaries are receiving the best health care that 
can be purchased with the expenditures indicated by the Trustees.
    Even more dire than Medicare's budgetary problems is Medicare's 
inability to keep up with private insurance coverage or with advances 
in health care technology. An explosion in research has made the 
control and prevention of disease more veritable than ever. Yet 
Medicare beneficiaries do not have access to prescription drugs, limits 
on catastrophic out-of-pocket spending, many preventive benefits, and a 
number of other health care products and services that are now 
enhancing and saving the lives of those with employer health insurance 
including those enrolled in the Federal Employees Health Benefits 
Program.
    Despite the optimism expressed in the Hospital Insurance Trustees' 
Report, comprehensive Medicare reform is still necessary to ensure high 
quality of care for today's and tomorrow's Medicare beneficiaries. 
Today's dated Medicare program needs to be replaced with a private, 
value-based, competitive system. Under such a system, plans and 
providers would compete with one another to offer the most efficient, 
high quality, and user friendly care. By embracing the innovations in 
health care delivery, benefit design, and cost management techniques 
that have occurred in the private sector, Medicare can expand its 
benefit package and still serve the huge number of enrollees that will 
come with the baby boom retirement.
    The Healthcare Leadership Council urges the Committees overseeing 
Medicare to work in a bipartisan manner to develop a plan for 
restructuring Medicare for the long term. The members of the Healthcare 
Leadership Council stand ready to assist in your efforts to move 
Medicare toward assuring that, in the near future, its beneficiaries 
are able to take advantage of the full potential our health care system 
has to offer.
    The Healthcare Leadership Council is a coalition of chief 
executives of the nation's leading health care innovators including 
teaching hospitals and other hospital systems, pharmaceutical 
manufacturers and benefit managers, medical technology companies, and 
insurance companies. The HLC was formed in 1988 to give leaders across 
the health care industry the opportunity to work together to achieve a 
health care system that fosters quality and innovation and provides 
access for all Americans to affordable coverage and high quality health 
care.
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