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MEDICARE AND THE FEDERAL BUDGET

HEARING

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

HEARING HELD IN WASHINGTON, DC, MAY 8, 2002

Serial No. 107–30

Printed for the use of the Committee on the Budget

(

Available on the Internet: http://www.access.gpo.gov/congress/house/house04.html 

(II)

COMMITTEE ON THE BUDGET 

JIM NUSSLE, Iowa, Chairman 

JOHN E. SUNUNU, New Hampshire 

Vice Chairman 

PETER HOEKSTRA, Michigan 

Vice Chairman 

CHARLES F. BASS, New Hampshire 

GIL GUTKNECHT, Minnesota 

VAN HILLEARY, Tennessee 

MAC THORNBERRY, Texas 

JIM RYUN, Kansas 

MAC COLLINS, Georgia 

GARY G. MILLER, California 

PAT TOOMEY, Pennsylvania 

WES WATKINS, Oklahoma 

DOC HASTINGS, Washington 

JOHN T. DOOLITTLE, California 

ROB PORTMAN, Ohio 

RAY LAHOOD, Illinois 

KAY GRANGER, Texas 

EDWARD SCHROCK, Virginia 

JOHN CULBERSON, Texas 

HENRY E. BROWN, Jr., South Carolina 

ANDER CRENSHAW, Florida 

ADAM PUTNAM, Florida 

MARK KIRK, Illinois 

[Vacancy] 

JOHN M. SPRATT, Jr., South Carolina, 

Ranking Minority Member 

JIM MCDERMOTT, Washington 

BENNIE G. THOMPSON, Mississippi 

KEN BENTSEN, Texas 

JIM DAVIS, Florida 

EVA M. CLAYTON, North Carolina 

DAVID E. PRICE, North Carolina 

GERALD D. KLECZKA, Wisconsin 

BOB CLEMENT, Tennessee 

JAMES P. MORAN, Virginia 

DARLENE HOOLEY, Oregon 

TAMMY BALDWIN, Wisconsin 

CAROLYN MCCARTHY, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

MICHAEL M. HONDA, California 

JOSEPH M. HOEFFEL III, Pennsylvania 

RUSH D. HOLT, New Jersey 

JIM MATHESON, Utah 

PROFESSIONAL STAFF

RICH MEADE, Chief of Staff 

THOMAS S. KAHN, Minority Staff Director and Chief Counsel 

(III)

C O N T E N T S

Page 

Hearing held in Washington, DC, May 8, 2002 .................................................... 1

Statement of: 

Thomas R. Saving, Ph.D., Director, Private Enterprise Research Center, 

Texas A&M University; Public Trustee, Social Security and Medicare 

Trust Funds; and Senior Fellow, National Center for Policy Analysis .... 4

Joseph R. Antos, Ph.D., Resident Scholar, American Enterprise Institute 

and Adjunct Professor, School of Public Health, University of North 

Carolina, Chapel Hill .................................................................................... 15

Judy Feder, Ph.D., Dean of Public Policy, Public Policy Institute, Georgetown University ............................................................................................. 22

Prepared statement of: 

Hon. Adam Putnam, a Representative in Congress from the State of 

Florida ............................................................................................................ 3

Dr. Saving ......................................................................................................... 9

Dr. Antos ........................................................................................................... 18

Dr. Feder ........................................................................................................... 25

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MEDICARE AND THE FEDERAL BUDGET 

WEDNESDAY, MAY 8, 2002

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The committee met, pursuant to call, at 10:04 a.m. in room 210, 

Cannon House Office Building, Hon. Jim Nussle (chairman of the 

committee) presiding. 

Members present: Representatives Nussle, Gutknecht, Collins, 

Thornberry, Culberson, Putnam, Spratt, McDermott and Davis. 

Chairman NUSSLE. Good morning. This is the full committee 

hearing on Medicare and the Federal budget, and we welcome our 

witnesses and our guests here today. Nobody would argue that improving Medicare coverage is long overdue, and not many would 

argue that Medicare has failed to keep up with health care in general or private health care coverage. At a time when medicine is 

advanced to the point where we can treat more and more conditions with medicines, Medicare’s benefit package does not even 

offer a prescription drug benefit or coverage. Nor does it provide 

consistent coverage for many preventative treatments, support coordinated management of chronic diseases, or for that matter offer 

catastrophic coverage. 

But the program also is facing huge financial liabilities leading 

to unsustainable spending levels in the Federal budget in years to 

come. If you look at Medicare as a whole, taking into account both 

the Hospital Insurance Trust Fund—HI Trust Fund—and the Supplemental Insurance Trust Fund, Medicare’s dedicated revenues 

are lower than program expenditures even today. As a result Medicare must draw increasing amounts from general revenues within 

the budget. And with increases in health care costs and demographic changes such as more beneficiaries, longer life expectancy 

and smaller workforce-to-beneficiary ratios, this problem will only 

get worse. Therefore, as we look to address the weaknesses in 

Medicare’s coverage, Congress must also ensure that the program 

is strengthened and preserved so it remains viable for generations 

to come. 

It is for that reason that in this committee a little over a month 

ago, we passed a budget that included $350 billion over the next 

10 years, including money up front, in order to preserve and 

strengthen Medicare and modernize Medicare with a prescription 

drug benefit. Let me make it clear in case anyone wasn’t paying 

attention or wasn’t listening at the time, it was to include both. It 

is not just for prescription drugs. If we only take a prescription 

drug benefit and add it to an already out-of-control Medicare proVerDate Feb 1 2002 17:03 Jul 18, 2002 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 H:\DOCS\HEARINGS\107-30\HBU128.000 HBUDGET1 PsN: DICK
2

gram which is not serving the needs of seniors or not paying the 

bills of many parts of the country, particularly mine in Iowa, we 

will do no benefit to the Medicare program or to the seniors that 

it serves. It is for that reason that we included $350 billion of new 

resources in this budget to do both, modernize, preserve and 

strengthen Medicare, and to include a prescription drug benefit, 

not one or the other. 

That is one of the purposes of today’s hearing, to review Medicare’s current condition. Start with the process of strengthening 

and preserving the program. We will specifically review the impact 

of Medicare on the Federal budget, address gaps in Medicare coverage, review the factors that will drive Medicare costs, and gain 

insight into the impact current Medicare reform proposals may 

have in the Nation’s health care system and the Medicare program. 

Testifying today we are honored to have Dr. Thomas R. Saving, 

who is a Medicare trustee; Joe Antos, who is a resident scholar at 

the American Enterprise Institute; and Judy Feder, who is the 

dean of policy studies from the Public Policy Institute, Georgetown 

University. We welcome all three of you to our hearing today. 

With that I would turn to my friend and colleague Mr. Spratt for 

any comments he would like to make. 

Mr. SPRATT. Thank you, Mr. Chairman. Let me thank our witnesses for coming and testifying to us about a topic of vital importance, particularly to 35 to 40 million Americans. Without this program I am not sure where they would be, frankly. But as the Budget Committee, when we look at the budget, the items that attract 

our attention first, are those that are spikes in the budget. Not 

only are they substantial programs, but their rate of increase is inexorably continual year to year with a few exceptions, like 1999 in 

the wake of the Balanced Budget Agreement of 1997. 

So the questions before us are numerous, and we are glad to 

have your help in sorting through them. The chairman says that 

we have provided $350 billion in a reserve account, but there are 

a number of different claims upon that account. One is Medicare 

modernization. Nobody knows what it is, much less what it will 

cost. The other is the drug benefit, and everybody’s estimate is that 

$300 billion, $350 billion is a minimal estimate of what an adequate drug coverage program would cost. And then finally, there is 

on the table before us submitted by MedPAC, our own designated 

consultants on Medicare—there is on the table a request of $174 

billion in provided payment adjustments. You can’t squeeze that 

much blood out of $350 billion worth of turnips unfortunately. 

So we have got some hard questions. What do we do? And aggravating those problems is the fact that the budget assumes that 

Medicare will cost $225-billion less than CBO assumes over the 

next 10 years. If CBO is right, not only do we have a reserve fund 

which won’t satisfy all the claims, but we also have an understatement in the Medicare accounts that is substantial. In other words, 

we have got problems, and we are going to need your help in sorting them out. 

Thank you for coming, and we look forward to your testimony. 

Chairman NUSSLE. With unanimous consent all members will 

have 7 legislative days to put a statement in the record at this 

point, an opening statement. Without objection, so ordered. 

3

[The information referred to follows:]

PREPARED STATEMENT OF HON. ADAM PUTNAM, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF FLORIDA

The 107th Congress has been tasked with securing America’s future. As Americans reach retirement their future is dependent on their health security. The Budget Committee has gathered here today in an effort to ensure personal health security for our senior citizens, while also ensuring economic security for the Medicare 

system and future generations of Medicare recipients. 

Medicare is our nationwide health insurance program for the aged and certain 

disabled persons. Over its nearly 35 year history, it has provided important protections for millions of Americans. However, the program is facing a number of problems. One concern is that Medicare’s financing mechanisms will be unable to sustain the program in the long run. Many are also concerned that the program’s structure, which in large measure reflects both the health care delivery system as well 

as political considerations in effect at the time of enactment, has failed to keep pace 

with the changes in the health care system as a whole. 

My major concern is the solvency of the Medicare program. Currently, the Medicare Hospital Insurance Trust Fund is projected to become insolvent by 2029 and 

according to the Congressional Budget Office, the total Medicare Program is already 

generating huge liabilities: in 2003, Medicare will require $71 billion in general revenues; over 10 years, Medicare will require $1.2 trillion in general revenues. Moreover, Medicare spending will eventually nearly quadruple its share of the economy. 

I recognize the need to modernize the Medicare program and endorse a balanced 

approach to strengthen and preserve this vital program. The budget resolution 

passed by the House of Representatives provides $350 billion in a reserve fund for 

Medicare modernization, including prescription drug coverage. 

We must create a fair and responsible Medicare program that has improved benefits for its current customers while remaining a stable, solvent program for the future. Medicare’s outmoded benefit does not cover prescription drugs, provide consistent coverage for many preventive treatments, support coordinated management 

of chronic diseases, or offer catastrophic coverage. 

Currently, the major focus has been on providing prescription drug coverage for 

beneficiaries. We must provide our seniors with a prescription drug plan that will 

lower the costs of prescription drugs now so senior citizens can better afford the 

medicines they need to live healthier and improve their quality of life. The plan 

must also keep all of Medicare’s benefits financially secure. Failing to provide stable 

funding for a new Medicare drug benefit is reckless policy that could have substantial adverse effects on the ability of seniors to get the prescription drugs they need. 

The fiscal year 2003 budget resolution allows for up to $5 billion to begin the implementation of prescription drug coverage. Today, I am interested to hear how the $350 billion, including the $5 billion for 

this year will be used to improve the Medicare program. I am eager to know that 

the funds allocated in the House Budget Resolution will be used to secure the future 

of American’s health. 

QUESTIONS

1. In my district, we no longer have any Medicare HMOs remaining. In the last 

3 years they have all left. The HMOs were inefficient; they could not even perform 

a proper referral. The care they provided was substandard. With no HMOs left 

though, all the patients have come back to Medicare and are creating a burden on 

the system. How will any reform plans address this problem? Are there plans to improve Medicare HMOs? Are there plans to encourage them to return to areas they 

have vacated? 

2. There is great concern regarding the Medicare physician payment formula. Currently there is legislation (HR 3351, Bilirakis) to change the conversion factor from 

5.4 percent to 0.9 percent. The legislation also calls for a Medicare Payment Advisory Commission to develop a new formula that more fully accounts for changes in 

the unit costs of providing physicians’ services. What is the projected cost to Medicare that this change would create? Is there any other possible solution? 

3. In my district, I have a group of physicians have not gotten paid by Medicare 

in the last 3 months. They are beginning to enter into dire financial situations. If 

they receive an ‘‘advance’’ on the payment there is a 15-percent charge. They are 

being charged to receive the payment they are already entitled to, and that is already late. It is no surprise that physicians are beginning to discontinue accepting 

Medicare patients. If patients do not receive care from a physician they often become sicker and end up in the hospital emergency room, which creates a bigger 

4

drain on the Medicare system than if the doctors could just get paid initially. How 

is a Medicare reform plan going to address the needs of these physicians so they 

can provide quality care to Medicare beneficiaries? 

4. There are several cases in my district, regarding the Medicare Program Safeguards Auto/Liability Department, and I have heard numerous complaints from 

local attorney’s regarding this department. Whenever the attorney has a personal 

injury/liability case they have to get subrogation lien information from Medicare. A 

process that should take a couple of days is taking a year with Medicare. The process includes: notifying all of the Medicare carriers that are involved in that particular case, getting the claim amount, when the research comes back they may 

have to get additional information from the attorney and then calculate the amount. 

Even so, 1 year is a long time for the attorney to have in his possession all of this 

money. Medicare also states that the attorney cannot issue a check to his client before they have come up with a figure, because if Medicare doesn’t get their money 

right away the attorney will be held responsible for paying Medicare along with reimbursement penalties and interest. In reality, the attorney’s are trying to reimburse Medicare, but having trouble finding out what is owed. They have no way of 

knowing what amount their client is entitled to or what the settlement will be until 

Medicare figures the lien amount. If Medicare could perform more efficiently, these 

patients could have their money before it is too late. Medicare will have $350 billion 

to improve its efficiency and modernize it systems. Is it going to be possible?

Chairman NUSSLE. Our witnesses today, your entire statements 

will be made part of the record as well, and you may summarize 

your testimony as you see fit. 

With that, I believe we are going to begin with Dr. Saving. We 

welcome your testimony at this time. 

STATEMENT OF THOMAS R. SAVING, PH.D., MEDICARE 

TRUSTEE 

Mr. SAVING. Thank you, Mr. Chairman. I want to get the right 

set of slides up here. As Congress considers legislation to add a 

prescription drug benefit to Medicare, it is important to understand 

the financial condition of current Medicare. Both of you have alluded to that condition, and in the recently released 2002 trustees’ 

report even though we show slightly better short-term news coupled with slightly worse long-term news from the perspective of the 

total Federal budget, part of that is trust fund exhaustion dates 

that have been extended by a small amount. But those things really hide the reality of the demands that these programs, the elderly 

entitlement programs in general, are going to place on the Federal 

budget. And what I want to do is to review briefly some things that 

you can get out of the trustees’ report, if you spend the time. If you 

don’t spend the time, you might miss some of these things. 

One is the whole idea of the three elderly programs together. Let 

me give you a feel for that, because these three programs together—in spite of the fact that 78 percent of Part B expenditures, 

Medicare Part B expenditures, last year were paid by general revenue transfers, as you know, the idea of the premiums is to be 25 

percent of—but we only set those premiums at the beginning of the 

year. We estimate what is going to happen in Part B. The cost of 

Part B rose significantly last year, greater than we expected, so as 

it turns out, premiums only covered roughly 22 percent of Part B. 

But in spite of the fact that 78 percent of Part B expenditures were 

paid by general revenue, surpluses in Social Security and Medicare 

Part A were sufficient so that the three programs together—Social 

Security, Medicare Part A and Medicare Part B—made net contributions to the U.S. Treasury that were equal to 2.5 percent of 

5

Federal income tax revenues, and you can see that if you look at 

this chart. 

You can see that the cost ratio—that the revenues are above the 

costs of these programs, and, in fact, those surpluses are going to 

continue to rise. They are going to peak in 2004, just 2 years from 

now. Then they are going to start to fall very rapidly so that by 

2010, these three programs together are going to be requiring a 

transfer of resources from the general revenue of the Treasury. 

And, in fact, that transfer is going to grow very rapidly, and I will 

give you an idea of where that is headed. 

Here we have the Social Security and Medicare funding shortfalls as a percent of Federal income tax revenues, and you can see 

a couple of the things that are very important. In fact, by 2015 we 

are going to be transferring more than 6.5 percent of all projected 

Federal income tax revenues to these three programs, and 2015 is 

1 year before the Social Security program goes into deficit. So these 

three programs together already are going to be reacquiring 6.5 

percent of Federal income tax revenues, whereas in 2004 they are 

going to be contributing an amount equal to 3 percent of Federal 

income tax revenues. So you are going to go from a set of programs 

which basically contribute to the Treasury, 3 percent of Federal income tax revenues, to programs that are going to be taking 6.5 percent of Federal income tax revenues. By 2020, they are going to be 

taking 16 percent of Federal income tax revenues; and by 2030, 

that is the year that we project that the HI Trust Fund is going 

to be exhausted, these programs are going to be taking 35 percent 

of Federal income tax revenues. By 2040, the year before we say 

the Social Security Trust Fund is going to be exhausted, these programs are going to be requiring more than 44 percent of all Federal 

income tax revenues. 

Clearly these programs are out of control, and you can see from 

just looking at this chart that the three programs together are 

going to be taking by 2075, in the end, the way the trustees think 

about it, some 75 percent of all Federal income tax revenues. Clearly that can’t happen, and the question is: What do we do about it? 

Another way of thinking about this problem, I think a useful way 

of looking at it, is to ask yourself the commitments that we made 

under current law, what are the value of these commitments if we 

consider them in the same way we consider the commitments to 

pay the government debt? And if you calculate the accrued benefits, 

the future promises that we have made, you can see that the Social 

Security benefits are equivalent of almost $13 trillion and Medicare 

benefits are almost $18 trillion of debt. In contrast, the currently 

held public debt is about $3.4 trillion. The Social Security debt, and 

since this is a Medicare hearing, the Social Security debt—while a 

lot of the press is about Social Security, and we are saying that Social Security is in dire straits, the Medicare problem is bigger than 

the Social Security problem. 

Mr. MCDERMOTT. Mr. Chairman, may I ask a question to clarify? You said $18 trillion. Over what period? 

Mr. SAVING. If we just look at current people who are going to 

ultimately be eligible to receive Medicare, and we estimate using 

the 2002 trustees’ report what those payments are going to be, that 

is a promise in a sense, if we treat that as a promise we made to 

6

people, and now we are calculating what is the present value of 

that promise and how much we would have to have as an asset 

right now to be able to pay the promises that we have made in the 

future. That is what this is, and that is really what—go ahead. I 

am sorry. 

Mr. MCDERMOTT. For what period; is that $18 billion a year? 

Mr. SAVING. No. I am sorry. This is the current value. If you had 

$18 billion in real assets right now, you could pay the projected 

Medicare costs of all the people who are currently alive and eligible 

for Medicare, their future payments. That is what this is. It says, 

let us take everyone who is currently eligible for Medicare. Let us 

forget about everyone else that is coming after them. Let us just 

take those people. Let us calculate what we project they are going 

to use as Medicare expenditures in the future, and ask ourselves 

how much would we have to have in our bank account to actually 

cover their expenses, and that is a number like $18 trillion. 

Mr. SPRATT. Mr. Saving, if you back out the existing payroll tax 

revenues, what is the net present value? 

Mr. SAVING. In a sense—talking about the unfunded number, but 

the—we will see it in a moment. This is really just what the debt 

is, and part of the debt is paid, of course, by revenues. One way 

to pay for this debt is to increase revenues, as we will see later on, 

and I think we will want to do that. 

The unfunded liability is smaller than that, and I don’t have the 

number. Maybe my associate has it. 

No. I can get that for you. At the moment I don’t have it right 

here. 

Mr. SPRATT. This is the gross liability. 

Mr. SAVING. Exactly. These are the gross liabilities, just the way 

the Federal debt is a gross liability in a sense. These are the gross 

liabilities in the systems, not the unfunded liabilities. The unfunded liabilities are significant, as you can see as we get further 

along. 

Here is the situation with current Medicare. You have got three 

sources of revenue for Medicare. You have got payroll taxes, you 

have that portion of the tax on Social Security benefits that goes 

to Medicare, and then we have the premiums. And you have two 

sources of premiums, although one of those is very small, and that 

is the premiums for individuals who are not eligible for Medicare 

Part A, but choose to take Part A as if it were some insurance program. They are allowed to do that. 

The primary premium source that we are discussing here, of 

course, is the Part B premium, and you can see that Medicare is 

already in deficit. As you look at this, and this comes right from 

the 2002 trustees’ report, you will see that the costs of Medicare 

A and B together are going to fall slightly over the next 2 years. 

Now, you might say if this thing is going so badly, where is that 

fall going to come from? Part of that fall is our programming in of 

reduced physician reimbursements, and we recognize as trustees, 

and this came up in the trustees meeting in March, this is already 

having an impact on the availability of physicians’ services for 

Medicare beneficiaries, and we recognize that we are programming 

in—we are just going to pay physicians less and ignore the impact 

7

that is going to have on supply of physician services for Medicare 

patients. 

It is clear that that is not any kind of a long-run solution, and 

that is where this reduction in expenditures—a very brief one—is 

coming from, but you can see what is going to happen. At the point 

where we say the HI Trust Fund is going to be exhausted, 2030, 

you can see 20-something percent of Federal income tax revenues 

are going to have to be transferred to Medicare. Right now Medicare is taking about 5 percent of Federal income tax revenues. We 

are transferring to Medicare Parts A and B, and we already know 

that Medicare is in deficit. That is going to rise very slowly actually 

between now and 2010, and looking at the graph, it is only going 

to be 6 percent, we estimate, in 2010. 

Then it is going to start to rise rapidly. It will be 81⁄2 percent of 

Federal income tax revenues by 2015, 12 percent by 2020, and by 

2030 again, the year in which we say the HI Trust Fund is going 

to be exhausted, more than a fifth of all the Federal income tax 

revenues are going to have to be transferred to this program. 

So over the next 20 years the benefits as a percent of earnings 

are expected to grow 50 percent, implying a contemporaneous tax 

rate. If you were to actually pay the Medicare system through—

and this comes back to the issue of revenues—a tax rate of 6.33 

percent in 2022 would be enough to fund Medicare in that year on 

a pay-as-you-go kind of basis. By 2030 all the baby boomers will 

have retired, and the Medicare tax necessary to make these payments would be 8.12 percent, and they will continue to rise, reaching 10 percent by 2040 and 18.3 percent by 2080. 

We are talking about very significant effects of the current Medicare program, and all this time, of course, tax revenues are going 

to be rising, that is premium revenues, because premiums right 

now are $648 a year. That is about 6.3 percent of an average retiree’s Social Security benefit, and they are going to rise to $3,000 by 

2070, and that will be about 13 percent of scheduled Social Security benefits. 

So the premium burden—and that doesn’t mean we shouldn’t 

have a premium burden, but the premium burden is going to be 

rising, but that comes from the fact that our current forecasts are 

that medical care expenditures are going to be rising at 1 percentage point faster than per capita gross domestic product, and that 

pretty much says what has been happening. That is, seniors consume—when their income goes up—a lot more medical care, and 

perhaps because a lot of things have become available that allow 

for quality of life enhancement, and I think quality of life enhancement is important. And as I said, some of the times I look at people, and I tell them I actually even have a Medicare card even 

though I am still employed by the university. It is a secondary 

payer; so I have never collected anything from Medicare, but it is 

a card. 

And I see nothing wrong in trying to maintain quality of life as 

we know, but currently elderly entitlement payments are out of 

control. If nothing is done, and I think this is an important point, 

the combination of Social Security and Medicare are going to exhaust more than 72 percent of the Federal budget that remains at 

the current budget share of gross domestic product. These proVerDate Feb 1 2002 17:03 Jul 18, 2002 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 H:\DOCS\HEARINGS\107-30\HBU128.000 HBUDGET1 PsN: DICK
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grams today only account for 37 percent of that Federal budget. So 

you are looking at these programs doubling in size relative to the 

Federal budget. 

Now, in spite of those funding changes, Medicare offers kind of 

second-rate coverage, and I think that point was made here. The 

role of pharmaceuticals in health outcomes is much more important 

than it was when Medicare was established. There isn’t any doubt 

about that, and in spite of the increased efficacy of pharmaceuticals 

in health outcomes, current Medicare makes non-pharmaceutical 

components cheaper than pharmaceuticals, and if we are trying to 

do an efficient outcome, we would want people to consume more 

pharmaceuticals and less physician care. But the way Medicare is 

structured, it encourages them to actually do things that are more 

expensive than pharmaceuticals, so as a result, Medicare recipients 

have incentives to substitute physician and other covered components of health care for what would be less expensive and more efficient pharmaceutical treatment. 

Essentially the current structure of Medicare discriminates 

against pharmaceuticals and results in more costly and less effective health care. That said, given the bleak financial future of 

Medicare, what can be done to bring the pharmaceutical coverage 

into the program without further endangering the financial future 

of the program? And that is the issue that this committee is discussing today. You have to take steps that make both providers 

and beneficiaries care about the cost of care. That is important. 

One approach toward this end is to combine Parts A and B of 

current Medicare into one program. This new program should include pharmaceutical coverage, just as the standard health care 

coverage for the working population does. You would want to include catastrophic coverage. The latter issue would eliminate the 

need for beneficiaries to purchase Medigap, and if you could get rid 

of first dollar coverage, you could have a very significant effect on 

health care costs. In fact, I have argued before that the competition 

for the first dollars of Medicare patients is a huge market, and that 

kind of competition by providers would reduce costs for everyone. 

I have a dream—often when I drive to Dallas to visit my children, I see these signs, billboards, and those signs are for LASIK 

surgery. If you have seen those signs yourself, you know that the 

biggest number on the sign is the price, what LASIK surgery costs. 

And I keep dreaming of the day when I am going to see a billboard 

for a doctor or a hospital where the most dominant thing on the 

billboard is the price to try to attract people by lowering prices. 

And if you see a billboard for a hospital, which you do, price is 

never mentioned because nobody cares what it costs, and if the customers don’t care what it costs, you can be sure that the providers 

don’t care what it costs. They love to provide high-cost services for 

patients who don’t care what it costs. 

And then third, we must increase the premium of health care 

markets to work. In our current approach of fixing the price of 

medical services—MedPAC was just mentioned—MedPAC essentially circumvents normal market forces. If we give beneficiaries a 

greater role in the choice of health care plan in a way similar to 

the FEHBP, we can increase provider competition. And we have to 

make a greater effort to make all Medicare beneficiaries equally deVerDate Feb 1 2002 17:03 Jul 18, 2002 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 H:\DOCS\HEARINGS\107-30\HBU128.000 HBUDGET1 PsN: DICK
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sirable to providers, and that is a real issue: how do we keep skimming individuals? 

So basically, in the debate concerning changes in Medicare, we 

allow an addition of prescription drug benefits, it is important to 

consider how these changes will impact on current Medicare’s precarious financial condition, and we are projecting these huge deficits as trustees. We don’t like to present bad news. Unfortunately, 

the way these programs are structured, they are heading toward 

a real financial crisis. It is not clear how we are going to accomplish adding something which I think is important, drug benefits, 

in order to change the pricing structure so that people will have incentives to buy the efficient combination of pharmaceuticals, physicians and hospitalization; and to accomplish that at the same time 

finding a way to pay for the costs that are down the road, are coming down the road, that are going to take a huge share of the Federal budget. 

Thank you. 

Chairman NUSSLE. Thank you, Doctor. 

[The prepared statement of Dr. Saving follows:]

PREPARED STATEMENT OF THOMAS R. SAVING, PH.D., MEDICARE TRUSTEE

As Congress considers legislation to add a prescription drug benefit to Medicare, 

it is important to understand the financial condition of current Medicare. In less 

than a decade the combined Social Security and Medicare programs will go from 

providing net revenue to the Treasury to requiring a revenue transfer. Even though 

this year’s Trustees’ Report shows slightly better short-term news coupled with 

slightly worse long-term news, from the perspective of the total Federal budget, 

these programs will impose significant costs even in the near term. The fact that 

the Trustees 2002 estimates of Trust Fund exhaustion dates are 3 years later for 

Social Security and 1 year later for Medicare HI has obscured the reality that the 

demands of these programs on the rest of the budget will begin in just a few years. 

A total budget perspective is important because though Social Security and Medicare HI have Trust Funds, when revenues into the combined system fall below expenditures, real resources must come from somewhere else in the Federal budget. 

The total budget perspective good news is that, in spite the fact that last year 

almost 78 percent of Medicare Part B expenditures were paid by general revenue 

transfers, surpluses in Social Security and Medicare Part A were sufficient so that 

these three programs, Social Security, Medicare Part A and Medicare Part B, made 

a net contribution to the U.S. Treasury that was equal to more than 2.5 percent 

of total Federal income tax receipts. By 2004, the contribution of these programs 

to Federal coffers will grow to more than 3 percent of projected Federal income tax 

receipts. 

The bad news that is after 2004, in just two short years, this net surplus will 

begin an accelerating decline. By 2010, just 8 years from now, the 2004 contribution 

of 3 percent of total income tax receipts to the U.S. Treasury will become a deficit. 

Rather than providing funds that add to Federal income tax revenues, these programs will require a transfer from these same Federal income tax receipts and 

begin to impinge on other Federal programs. Moreover, the magnitude of the required transfer from Federal income tax receipts will grow rapidly so that by 2015 

more than 6.5 percent of all Federal income tax receipts will have to be transferred 

to meet program expenditures. 

The problem doesn’t end in 2015 because the required transfers will continue to 

grow rapidly. By 2020, in order to maintain current program benefits, these three 

programs will require a transfer from the Treasury of almost 16 percent of all Federal income tax receipts. The transfer will grow to more than 35 percent of Federal 

income tax revenues by 2030 and by 2040, a year before the current estimate of Social Security Trust Fund exhaustion and almost 10 years before newly entered 

workers will retire, these programs will require almost 44 percent of total Federal 

income tax receipts. 

In spite of Social Security’s problems getting most of the press, Medicare is already in deficit and its’ financing future is much more ominous. Last year, Medicare 

Part A and Medicare Part B together, required a transfer from the U.S. Treasury 

10

that was equal to more than 5 percent of total Federal income tax receipts. By 2010, 

just 8 years from now, and at the front end of the baby boomer retirement wave, 

Medicare will require the transfer of more than 6 percent of all Federal income tax 

receipts to pay benefits forecast by the Trustees under current law. This transfer 

will grow rapidly so that by 2015, the year before the Trustees forecast that HI expenditures will exceed HI revenues, 8.5 percent of all Federal income tax receipts 

will have to be transferred to Medicare. 

Because of the expected growth in health care cost, the required transfers will 

continue to grow rapidly. By 2020, in order to maintain current program benefits, 

Medicare will require a transfer from the Treasury of 11.9 percent of all Federal 

income tax receipts. The transfer will grow to more than 21 percent of Federal income tax revenues by 2030, the year before the Trustee’s forecast the exhaustion 

of the Medicare HI Trust Fund. By 2040, a year before the current Trustees estimate of Social Security Trust Fund exhaustion and almost 10 years before newly 

entered workers reach retirement age, Medicare will require a transfer of more than 

28 percent of total Federal income tax receipts in order to maintain current law benefits. 

Over the next 20 years, forecast Medicare benefits as a percent of earnings will 

grow 50 percent implying a contemporaneous tax rate of 6.33 percent in 2022. By 

2030, all the baby boomers will have retired, and the tax rate necessary to pay their 

benefits in that year is 8.12 percent. If the status quo intergenerational financing 

of Medicare is maintained, tax rates will continue to rise reaching 10.0 percent of 

payroll in 2040 and 18.13 percent of payroll in 2080. All during this time premiums 

for Part B will also be rising, from their 2002 level of $648 per year, or about 6.3 

percent of an average retiree’s Social Security benefit to premiums will rise to 

$3,000 in 2075, about 13 percent of average scheduled Social Security benefits. 

As these figures make clear, Medicare, as it is currently structured, is going to 

become more and more of a general revenue transfer financed program. In 2001, 25 

percent of Medicare expenditures were financed from general revenues. This proportion rapidly rises as the baby boomers retire. In 2010 more than 27 percent of Medicare expenditures will be general revenue financed and by 2015 more than one-third 

of all Medicare expenditures will be financed via general revenue transfers. The size 

of the required general revenue transfer continues to rise rapidly reaching almost 

40 percent of expenditures by 2020, and 47 percent by 2025. By 2030, the year before we as Trustees forecast that the Medicare HI Trust Fund will be exhausted, 

more than 52 percent of all Medicare expenditures will be financed by transfers 

from general revenues and by 2040 almost 60 percent of all Medicare expenditures 

will be financed via transfers from general revenues. 

Clearly, elderly entitlement programs are out of control. If nothing is done, by 

2060, the combination of Social Security and Medicare will exhaust more than 72 

percent of a Federal budget that remains at the current budget’s share of the nation’s gross domestic product. By way of comparison, these two programs today account for only 37 percent of Federal expenditures. 

The promises implied by the Social Security and Medicare programs are essentially debts that must be paid by future taxpayers. Using the estimated costs of Social Security and Medicare from the 2002 Trustees Reports, we can calculate the 

size of Social Security and Medicare debt. This exercise is useful because it points 

out the staggering size of the promises we have made compared to what we usually 

refer to as the public debt. In 2001, the value of U.S. Treasury debt held by the 

public was $3.32 trillion. In contrast, the present value of Social Security promises 

was $12.92 trillion and the present value of Medicare promises was a staggering 

$17.4 trillion. Between now and the time it takes for the baby boomers to move 

through retirement, we will have to pay off all of this Medicare and Social Security 

debt. In doing so we must bear in mind that the retired baby boomers are going 

to eat real food, live in real houses, drive real cars and use real hospitals, doctors 

and nurses. The young will have to produce all this output, essentially paying off 

the huge debt by consuming less while the retired baby boomers consume more of 

the nation’s output. 

These numbers, while staggering, are not meant to frighten, although they are 

frightening. They are based on the best estimates that we as Trustees of the Social 

Security and Medicare trust funds are able to put together. If not meant to frighten, 

they surely represent a sobering reality. The question to ask as you consider changing Medicare is: How any changes will impact on Medicare’s already dismal financial future? 

11

CHANGING MEDICARE FOR THE 21ST CENTURY

In spite of the substantial funding challenges facing Medicare, as it is currently 

structured, Medicare offers second rate coverage of health related episodes. The role 

of pharmaceuticals in health outcomes is much more important than it was at the 

inception of Medicare. In spite of the increased efficacy of pharmaceuticals in health 

outcomes, current Medicare makes non-pharmaceutical components of care cheaper 

than pharmaceuticals. As a result, Medicare recipients have incentives to substitute 

physician and other covered components of health care for what would be less expensive and more efficient pharmaceutical treatment. Essentially, the current structure of Medicare discriminates against pharmaceuticals and results in more costly 

and less effective health care. 

This said, given the bleak financial future of Medicare, what can be done to bring 

pharmaceutical coverage into the program without further endangering the financial 

future of the program? 

First, we must take steps to make both providers and beneficiaries care about the 

cost of care. One approach toward this end is to combine both Parts A & B of current Medicare into one program. This new program should include pharmaceutical 

coverage just as standard health coverage for the working population does. 

Second, we must include catastrophic coverage. This latter issue would eliminate 

the need for beneficiaries to purchase Medi-Gap coverage. In fact, Medi-Gap would 

disappear from the market because of adverse selection. Without Medi-Gap’s first 

dollar coverage, users of the health care system would begin to care about cost. Importantly, if users care about cost, providers would quickly begin to care about costs. 

These incentives would result from a single, higher deductible on the unified package. Suddenly, cost reducing technological developments would begin to have the 

same benefits to providers as they do in other industries. We might begin to see 

billboards for health procedures similar to those we see for LASIK surgery, where 

price plays the dominant role. I dream of the day when I will see a billboard for 

a doctor or hospital where the most dominant thing is the price of the service being 

offered. 

Third, we must increase the freedom of health care markets to work. Our current 

approach of fixing the price of medical services through MedPac essentially circumvents normal market forces. If we give beneficiaries a greater role in the choice 

of health care plan in a way similar to the Federal Employee Health Benefit Plan 

approach, we can increase provider competition. To do so, however, requires that we 

make a greater effort to make all Medicare beneficiaries equally desirable to providers. 

THE CHOICE BETWEEN TAX FINANCING AND SAVING

As we have seen, Medicare will require substantial transfers from the rest of the 

Federal budget. Without substantial restructuring, simply adding prescription drug 

coverage will increase Medicare’s costs. Medicare’s funding gap, even as projected 

without a prescription drug benefit, gives rise to considering other funding alternatives. One such alternative to have people save more for their retirement. Additional savings now can be used to lessen the tax burden required under the present 

financing arrangement. 

Comprehensive Social Security reform proposals often include increased savings 

as a key component, but in the context of Medicare reform, increased saving is seldom mentioned. Because Medicare is an in-kind benefit conditional on use of the 

health care system, benefit growth is affected by both changing preferences and 

changing technology. As a result, identifying the right amount of additional saving 

is difficult. But regardless of the difficulty in forecasting, funding future Medicare 

will require imaginative ways to meet its costs. 

Current Medicare reform proposals address Medicare’s growing financial burden 

by advocating increased competition in the delivery of care. In the longer term, Congress will need to think about funding alternatives including incentives to save for 

retirement health care. 

CONCLUSION

In the debate concerning changes in Medicare that will allow the addition of a 

prescription drug benefit, it is important to consider how these changes will impact 

on current Medicare’s precarious financial condition. The deficits projected by the 

Trustees in the 2002 Annual Report of the Boards of Trustees are especially significant. If no changes are made in Medicare, it will rapidly become the tail that wags 

the Federal budget dog. By 2030, Medicare alone will require more than 21 percent 

of all Federal income tax revenues. When coupled with the transfers to pay curVerDate Feb 1 2002 17:03 Jul 18, 2002 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6621 H:\DOCS\HEARINGS\107-30\HBU128.000 HBUDGET1 PsN: DICK
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rently scheduled Social Security benefits, total transfers of general revenues to keep 

these programs intact will require more than 35 percent of Federal income tax revenues in 2030. If other Federal programs are to remain at anything like their current 

size, dramatic action will be required. 

Thus, as we change Medicare to update its coverage, we should introduce incentives for market forces to work toward controlling the future cost of care. The impetus to incorporate prescription drugs into Medicare presents a unique opportunity 

to bring Medicare into the 21st century. Redo Medicare so that the need for beneficiaries to purchase Medi-Gap will be eliminated. The elimination of Medi-Gap will 

increase incentives for users and providers alike to care about cost. We should 

rethink both the structure and financing of Medicare. A new Medicare that combines Parts A & B and includes both prescription drug and catastrophic coverage 

into a single entity with a combination of premium and tax financing is a start. We 

must then make the market for this new Medicare one where the normal forces of 

competition work to control the cost of medical care. This can be accomplished if 

both users and providers care about cost. 

SLIDES PRESENTED AT HEARING


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Chairman NUSSLE. Next is Dr. Joe Antos, and we welcome you 

to the committee, and pleased to receive your testimony. 

STATEMENT OF JOSEPH R. ANTOS, PH.D., RESIDENT 

SCHOLAR, AMERICAN ENTERPRISE INSTITUTE 

Mr. ANTOS. Thank you, Mr. Chairman. 


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Chairman NUSSLE. There is a microphone button you need to 

push. 

Mr. ANTOS. Thank you, Mr. Chairman, for that reminder. 

Medicare is a vitally important program. It has given seniors access to affordable, high-quality health care. But Medicare is in crisis. As the latest report from the Medicare trustees makes clear, 

Medicare spending is projected to grow rapidly for the foreseeable 

future, outstripping growth in the economy and in Federal revenues. Yet Medicare has not met—could we have a blank screen 

there for a while? Thanks. Yet Medicare has not met the needs of 

beneficiaries nor the concerns of health care providers. 

First, beneficiaries are increasingly vocal about gaps in Medicare’s benefit package, particularly the failure to offer coverage for 

prescription drugs. In addition, Medicare leaves beneficiaries exposed to potentially unlimited costs because it does not offer catastrophic protection. Beneficiaries obviously want greater insurance 

coverage since many of them purchase expensive Medigap policies, 

but the Medicare program has been unable to respond to these 

clear consumer demands. 

Second, providers criticize what they view as inadequate payments for services. Payment issues, as we know, are on the top of 

Congress’ ‘‘to do’’ list. The furor over mandated cuts in physician 

payment has led to reports that doctors would drop out of Medicare. It is not entirely clear how significant a problem that is right 

now, but obviously it is a danger. In any event, Medicare’s payment 

formulas often do not reflect actual conditions in the local health 

care market. It can take years to make changes in the formulas despite clear evidence that there is a problem. 

Third, Medicare’s administration is unnecessarily complex and 

inflexible. The proliferation of regulations, manual instructions and 

other guidance is meant to clarify how to satisfy program requirements in specific real world circumstances. But the process breeds 

errors, uncertainty and mistrust on all sides. 

Medicare’s crisis is not just a financial problem that will occur 

sometime in the distant future. The crisis is pervasive, reflecting 

longstanding defects and rigidities in the Medicare program, and it 

is happening now. How can we transform Medicare to be responsive to beneficiaries and to provide better value for the taxpayer? 

The Federal Employees Health Benefit Program offers an example 

of what could be achieved. Such an approach could provide more 

meaningful health plan choices to beneficiaries than are now available under Medicare+Choice with safeguards to assure reliability 

and high quality. Micromanagement and formula-driven payment 

rates could be replaced by a flexible approach to administration 

based on negotiation and market information. It would be a big 

change. 

A competitive strategy, even one based on an operating model 

such as the Federal employees health program, must be developed 

carefully and will take time. Congress is likely to take more immediate steps to address some of the deficiencies of the current program. A risk of that approach, in other words doing temporary actions now, is that some policy decisions could hinder subsequent restructuring efforts, or at least forego an opportunity to foster reform. 

17

Medicare drug prescription benefit is a case in point. Adding a 

stand alone drug benefit could retard progress on broader reform 

and reduce the program’s financial liability in the long term unless 

other program changes also remain to improve incentives in the 

program. A drug benefit ideally would be part of the broader reform and the benefit, that benefit, would be part of an integrated 

package of benefits provided by health plans participating in the 

Medicare program. 

Let us consider the long-run impact of a stand alone drug benefit 

on Medicare’s finances. And how do I get this started? I want the 

first slide. That slide. OK. Thank you. 

The first slide plots Medicare spending in revenue as a percentage of GDP. Dedicated revenue, which is the bottom line there, 

counts funds specifically earmarked for Medicare. That includes the 

Medicare payroll tax, part of the tax on Social Security benefits 

and premium revenues. According to Medicare trustees, I copied 

from their report, program spending will climb from about 2.3 percent of GDP—no, go back. 

Mr. SAVING. I am trying to be your assistant. 

Mr. ANTOS. Thank you. Of course, you are worth what you are 

paid. 

Program spending will climb from 2.3 percent of GDP in 2000 to 

4.5 percent of GDP in 2003. You can see that top red line. That 

is doubling costs for the program in real terms. That is roughly 

equivalent to a Medicare program costing $450 billion this year 

rather than the $250 billion that is expected in 2002. 

What about that gap? The gap between spending and dedicated 

revenue represents the amount of general revenues that would go 

into Medicare. As you can see, general revenue transfers to Medicare would rise to 2.4 percent of GDP by 2030. 

Now let us add a drug benefit. The example I use is the Clinton 

drug proposal. According to the latest estimate from the Congressional Budget Office, the Clinton proposal would increase Federal 

spending by $512 billion between 2005 and 2012. Premiums would 

be about $29.50 a month in the first year, 2005. I might add that 

when you look at this slide, the solid lines are the lines you just 

saw showing the current law program and the dotted lines indicate 

what happens when you add the benefit. And forgive me, my computer drawing skills aren’t that great. The program really does 

start in my calculation in 2005, in spite of the way it might look. 

In 2010, CBO estimates that the proposal would increase Medicare spending by about $100 billion, which is about six-tenths of a 

percent of GDP. Premium revenue would equal about $24 billion in 

that year, or less than two-tenths of a percent of GDP, and you can 

see that even with a quite generous drug benefit, the near-term impact on Medicare finances is relatively modest. However, by 2030 

the cost of the drug benefit could grow dramatically. 

I had to make an arbitrary assumption, and I assumed that per 

capita drug spending in this program would grow at a constant 10 

percent a year, which is roughly the rate of growth of per capita 

drug spending that CBO estimates this proposal would have in the 

last 2 years of the program—in their estimate, 2011 and 2012. 

Under that assumption total Medicare spending would jump to 6.6 

percent of GDP in 2030. That is roughly equivalent to increasing 

18

the size of today’s Medicare program by an additional $400 billion, 

an increase larger than the budget for all non-defense discretionary 

programs combined. 

Premiums from the drug benefit would grow more slowly, increasing Medicare revenue by about four-tenths of a percent of 

GDP. As a result, Medicare’s financing gap would increase to about 

4.1 percent of GDP in 2030, nearly doubling the draw on general 

revenues that was projected for that year by the Medicare trustees. 

This calculation demonstrates the potential financial consequences 

of adding a generous but underfunded benefit to Medicare without 

additional reforms. 

Of course, it is impossible to predict actual spending patterns 30 

years in advance or, for that matter, 1 year in advance, but I think 

the example does give an indication of the power this kind of proposal could have on the Medicare financing problem. 

We clearly have a dilemma on our hands. On one hand, even 

though a full reform package is not ready, Congress has an opportunity to provide some needed help to Medicare beneficiaries by enacting a stand alone drug benefit. On the other hand, such a benefit could substantially increase the financial pressures on Medicare and could seriously impede future efforts to resolve other fundamental problems in the program. 

As I said earlier, a drug benefit should be an integral part of the 

broader reform rather than an add-on to the current program, but 

there are policy options that could minimize the risks of a stand 

alone benefit. In my written statement I sketch out one such option, which combines a drug discount card with a cash subsidy for 

low-income people, a tax-deferred saving option for others, and catastrophic insurance protection. Such an approach might provide an 

opportunity to test a market-based approach in Medicare without 

having to resolve some very difficult issues that are at the heart 

of broader reform efforts. 

That completes my statement, Mr. Chairman. Thank you. 

[The prepared statement of Dr. Antos follows:]

PREPARED STATEMENT OF JOSEPH R. ANTOS, PH.D., RESIDENT SCHOLAR, AMERICAN

ENTERPRISE INSTITUTE

Mr. Chairman and members of the committee, thank you for inviting me to testify 

today. My name is Joseph Antos. I am a resident scholar at the American Enterprise Institute for Public Policy Research in Washington, where I concentrate on 

health economics. I am also an adjunct professor at the University of North Carolina, Chapel Hill, School of Public Health. Previously I was the assistant director 

for health and human resources at the Congressional Budget Office, where much 

of my work addressed the challenges facing the Medicare program. 

My testimony will focus on the need to modernize and reform Medicare. The program enjoys broad popularity for its success in making high quality medical care 

affordable for seniors. But Medicare is also widely criticized for offering inadequate 

benefits, being unresponsive to the concerns of health care providers regarding both 

payment for services and administrative complexity, and rapidly rising program 

costs. Congress is considering actions that could improve Medicare in some of those 

dimensions. The decisions that are made this year particularly decisions on a prescription drug benefit could have a significant impact on the long-term viability of 

the program. 

CHALLENGES FACING MEDICARE

The financial challenges facing Medicare are well known, and were recently reemphasized by the annual report of the Medicare trustees. The program will spend 

$250 billion this year for hospital, physician, and other health services provided to 

19

40 million elderly and disabled Americans. Over the next decade, Medicare spending 

is expected to grow about 7 percent a year, outstripping growth in the economy and 

in Federal revenues. That projection does not reflect increases in provider payments 

that may be enacted this year, nor does it include the cost of a Medicare prescription drug benefit. 

The long-term outlook for Medicare financing is driven by demographics and the 

increasing use of health services among Medicare beneficiaries. By 2030, about 78 

million people will be enrolled in the program when most baby boomers will have 

become eligible for Medicare, and as longevity continues to increase. At the same 

time, the working age population will grow more slowly, resulting in a drop in the 

ratio of workers to beneficiaries. Thus Medicare spending will rise more rapidly 

than the resources available to finance it. 

According to the Medicare trustees, program spending will climb from 2.3 percent 

of GDP in 2000 to 4.5 percent of GDP in 2030 (see figure 1). In today’s dollars, each 

percentage point of GDP is equal to about $100 billion. Medicare’s budgetary impact 

in 2030 would be roughly equivalent to additional program spending of about $200 

billion in 2002.

The rapid growth in program spending will not be matched by a similar growth 

in revenues that are specifically dedicated to Medicare. Those dedicated revenues 

consist of payroll taxes, taxes on Social Security benefits, and premiums paid by 

beneficiaries. According to the Medicare trustees, the discrepancy between total 

Medicare expenditures and dedicated revenues was 0.5 percent of GDP in 2000. By 

2030, the gap is projected to rise to 2.4 percent of GDP. The funding gap is currently 

made up through transfers from general revenues; such transfers will rise sharply 

over the next few decades unless significant changes are made to the structure of 

Medicare. 

Other developments have given strong impetus to Medicare reform. The public 

has grown increasingly vocal about the inadequacies of Medicare’s benefits, which 

reflect what a reasonable health insurance policy covered in 1965. Unlike most comprehensive insurance products available today, Medicare does not cover outpatient 

prescription drugs and provides no protection against very large medical costs. 

Many beneficiaries find that they have less health insurance coverage once they 

reach 65 than when they were covered by a health plan at work. 

Beneficiaries often purchase supplemental private insurance to fill in some of the 

gaps in Medicare coverage, and to reduce the uncertainty they have about paying 

their share of the cost of Medicare-covered services. Such coverage can be a significant financial burden, however, costing thousands of dollars in annual premiums. 

Some beneficiaries find a low-cost alternative to Medigap by enrolling in a 


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Medicare+Choice plan. But many health plans have dropped out of Medicare+Choice 

in recent years, and the remaining plans have pared back their benefits. 

The provider community has become outspoken about the perceived inadequacy 

of Medicare payment. Physician payment rates were cut 5.4 percent in 2002, and 

are expected to drop a total of 18.2 percent by 2005. That has spurred a backlash 

from the physician community, with the possibility that seniors in some locales 

could have difficulty finding a doctor. Payment add-ons for skilled nursing facilities 

are scheduled to expire over the next 6 months, and the 15 percent reduction in 

home health payments that Congress has delayed for several years is scheduled to 

take effect in October. Those payment changes have raised concerns about access 

to appropriate care for seniors, although there is little evidence thus far to suggest 

that access has become a significant problem. 

Providers have been vocal about what they see as the unnecessary complexity and 

inflexibility of Medicare administration. According to a recent study by the General 

Accounting Office (GAO), for example, Medicare contractors provide information to 

physicians that is often difficult to use, out of date, inaccurate, and incomplete. The 

carriers provide telephone and Web-based information to physicians, but only 15 

percent of the test questions fielded by GAO were answered completely and accurately. The Centers for Medicare and Medicaid Services (CMS) was criticized for 

failing to provide sufficient performance standards or oversight for contractors. 

Medicare+Choice plans also have experienced payment and administrative difficulties that have contributed to the exodus of health plans from the program in 

the past several years. Because of payment formulas intended to reduce the geographic variation in payments to health plans and encourage plans to expand into 

underserved markets, most Medicare+Choice plans received 2-percent annual increases in their payment rates since 1999 even though their costs were rising 8 percent a year or more. In addition, uncertainty about future payment policy changes 

and a heavy regulatory burden has made Medicare+Choice an unattractive market 

for many health plans. 

RISKS OF PIECEMEAL POLICY CHANGES

The problems facing Medicare seem to have mushroomed in the past few years, 

but they reflect defects and rigidities in the design of the program that have persisted since 1965. Changing the Medicare benefit package literally requires an act 

of Congress. Consequently, Medicare has not kept up with rapid advances in medical care. Medicare payment rates often do not reflect conditions facing providers 

and health plans in their local markets, and rate setting mechanisms are slow to 

adapt to new economic realities. The formal regulatory process is complex, and the 

proliferation of manual instructions and other guidance in the shadow regulatory 

process meant to clarify how the regulations should apply in specific real world circumstances often lead to errors, uncertainty, and mistrust. 

Restructuring Medicare to give beneficiaries realistic choices among competing 

health plans, similar to the way the Federal Employees Health Benefit Program 

(FEHBP) operates, could alleviate many of the problems in the current system. Such 

an approach could provide more meaningful health plan choices to beneficiaries 

than are now available under Medicare+Choice, with safeguards to assure reliability 

and high quality. Micromanagement and formula-driven payment rates could be replaced by a flexible approach to administration based on negotiation and market information. 

A competitive strategy, even one based on an operating model such as FEHBP, 

must be developed carefully. The administration has indicated an intention to 

present such a plan in the future. Until then, Congress is likely to take other steps 

to address some of the most important deficiencies of the current Medicare program. 

A risk of that approach is that some policy actions could hinder subsequent restructuring efforts, or at least forego an opportunity to foster reform. 

The Medicare prescription drug benefit is a case in point. Adding a stand alone 

drug benefit could retard progress on broader reform and reduce the program’s financial viability in the long term unless other program changes also were made to 

improve incentives in the program. A drug benefit ideally would be part of the 

broader reform, and the benefit would be part of an integrated package of benefits 

provided by health plans participating in the Medicare program. 

To illustrate the possible long-run impact of a stand alone drug benefit, I estimated how much Medicare costs and revenues might increase over the next 30 

years under the Clinton prescription drug proposal (see figure 2). The benefits under 

the proposal are fairly generous: no deductible, 50 percent co-insurance for the first 

$2,000 of spending, and stop-loss above $5,000 of total spending. According to the 

latest estimate from the Congressional Budget Office (CBO), the Clinton proposal 

21

would increase Federal spending by $512 billion between 2005 and 2012. Premiums 

would be $29.50 a month in 2005.

In 2010, CBO estimates that the proposal would increase Medicare spending by $100 billion, or about 0.6 percent of GDP. Premium revenue would equal $24 billion 

in that year, or less than 0.2 percent of GDP. Even with a generous drug benefit, 

the near-term impact on Medicare finances is quite modest, widening the gap between total program spending and dedicated revenues by 0.4 percent of GDP. 

By 2030, however, the cost of the drug benefit could grow dramatically. I assumed 

that per capita drug spending would grow at a constant 10 percent a year. Under 

that assumption, total Medicare spending would jump to 6.6 percent of GDP in 

2030. That is roughly equivalent to increasing the size of today’s Medicare program 

by an additional $400 billion larger than the budget for all non-defense discretionary programs combined. 

Premiums from the drug benefit would grow more slowly, increasing Medicare 

revenue by about 0.4 percent of GDP. As a result, Medicare’s financing gap would 

increase to about 4.1 percent of GDP in 2030 nearly doubling the draw on general 

revenues that was projected by the Medicare trustees. 

This calculation demonstrates the potential financial consequences of adding a 

generous but underfunded benefit to Medicare without additional reforms. The actual impact of adding such a benefit depends on the specific design of the proposal 

and on other factors that cannot be foreseen with any accuracy, including the future 

path of pharmaceutical innovation, the impact of drug coverage on the use of other 

health care services, and changes in the incidence of specific diseases among the 

Medicare population. Those factors might reduce the long-run fiscal impact of a drug 

benefit but they might also increase that impact. 

DRUG BENEFIT AS A STEP TO REFORM

Medicare reform will probably not be accomplished in one sweeping action. As we 

have seen with other attempts to reform the health system, it is difficult to obtain 

consensus from health policy experts on the best approach to reform. It may be even 

more difficult to convince the public that a massive change in the way they obtain 

health care will (eventually) be good for them. Moreover, we cannot foresee all of 

the developments and reactions that might occur in response to major system 

change. 

Phasing in reform can provide information about market reactions and allows 

mid-course corrections. A reform plan that has flexibility to accommodate to changing circumstances in the health care market has a greater chance of success than 

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scription drug benefit could provide an opportunity to test market-based approaches 

to Medicare reform. 

There are clear risks associated with a stand alone prescription drug benefit. But 

there are policy options that could minimize those risks, and might also serve as 

a transition to broader reform. One approach, called the Prescription Drug Security 

(PDS) Card program, combines a drug discount card with insurance protection from 

high-end drug expenses. Low-income Medicare beneficiaries would be eligible for an 

annual cash subsidy perhaps as much as $600 toward the cost of their first-dollar 

drug expenditures. Their premiums for catastrophic drug coverage would also be 

subsidized. Higher-income beneficiaries would not receive a subsidy. They would be 

able to contribute to their own prescription drug cash account on a tax-deductible 

basis and participate in catastrophic drug insurance. They would also receive any 

discounts for pharmaceutical purchases that are available from their plan. 

The PDS card account would work like a debit card, allowing beneficiaries to draw 

down their deposit when they make prescription purchases. The account could be 

augmented with contributions from relatives, religious organizations, or other charitable groups. Beneficiaries would be able to keep any unspent funds in their accounts for health expenses in subsequent years. 

Such a program would allow Medicare beneficiaries to select from a number of 

competing plans that offer drug coverage. Plans would have the flexibility to offer 

a variety of benefit and premium options. The program would target assistance to 

the most needy, i.e., low-income beneficiaries without other drug coverage. By providing a fixed subsidy rather than an open entitlement to benefits, the program 

gives enrollees an incentive to shop wisely. 

Unlike a traditional Medicare benefit, administration of the PDS card program 

would be modeled after FEHBP. The administering agency would provide broad direction on required benefits and other policies, negotiate premium offers with plans, 

and provide information to Medicare beneficiaries on their options and the performance of individual plans. 

A prescription drug program of this sort could be a laboratory for development 

of broader Medicare reform. Unlike a pure discount card approach, it would provide 

a subsidy for low-income beneficiaries and true insurance protection against unforeseeable, large drug costs. Such a program would create an administrative infrastructure that is flexible and consumer-focused. Since it would initially be a stand alone 

benefit, a competitive drug program could be implemented without having to resolve 

some difficult issues that are at the heart of proposals to restructure Medicare. 

Nonetheless, lessons from a competitive drug program could fruitfully be applied to 

the larger reform. 

CONCLUSION

The Medicare trustees have once again reminded us that the Medicare program 

is on an unsustainable trajectory. Decisions made by Congress this year will have 

consequences well beyond the 10-year budget window. There is an opportunity this 

year to provide some needed help to Medicare beneficiaries through a prescription 

drug benefit, but there is the risk that such a benefit could increase long-run fiscal 

pressures and retard progress on the broader reform that is needed. A well designed 

prescription drug plan, however, could be a step toward that reform.

Chairman NUSSLE. Dr. Feder, welcome, and we are pleased to receive your testimony at this time. 

STATEMENT OF JUDY FEDER, PH.D., DEAN OF PUBLIC POLICY, 

PUBLIC POLICY INSTITUTE, GEORGETOWN UNIVERSITY 

Ms. FEDER. Thank you, Mr. Chairman and members of the committee. It is a pleasure to be with you this morning to testify on 

behalf of myself and my George Washington University colleague 

Jeanne Lambrew. 

My goal today is to remind you that Medicare is one of our Nation’s greatest achievements, and that as a Nation, we have the obligation and the capacity to sustain and extend that achievement 

to provide affordable health insurance, including prescription 

drugs, to seniors and to people with disabilities. 

First and foremost, Medicare is not broke or broken, nor in crisis. 

Medicare works. It provides affordable health insurance for the NaVerDate Feb 1 2002 17:03 Jul 18, 2002 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6602 H:\DOCS\HEARINGS\107-30\HBU128.000 HBUDGET1 PsN: DICK
23

tion’s elderly and some of its disabled citizens without the problems 

that plague health insurance for younger Americans, and it is as 

good or better than the private sector in managing health care cost 

growth. Faced with high rates of expenditure growth and trust 

fund concerns in the 1990s, policymakers responded with payment 

rate changes that dramatically slowed Medicare cost growth and 

kept its per beneficiary cost increases lower than those in the Federal Employees Health Benefit Program and the private sector. 

Health care costs are a problem for the Nation, not just Medicare, but recent experience demonstrates that policymakers have 

the tools they need to manage Medicare costs. Indeed the Congressional Budget Office and the Office of Management and Budget 

showed confidence in these tools with their estimates of the relatively low growth rates for Medicare costs in the future. And as 

we have heard from Dr. Saving, the report on the Medicare trust 

fund found solvency through the year 2030, one of the longest periods of solvency for the trust fund in the program’s history. 

The strengths of Medicare financing must be looked at well beyond the situation of the trust fund. What the security of financing 

really rests on is the strength of our economy. A recent analysis by 

Marilyn Moon of the Urban Institute shows how much better off 

future taxpayers will be, even taking Medicare cost growth and 

necessary spending into account. By Dr. Moon’s estimates, the 

gross domestic product per worker will rise by more than 50 percent between the year 2000 and the year 2035. Or, another way to 

say it is people will be 50-percent richer than they are today, and 

that growth is only 3 percentage points lower when Medicare needs 

are taken into account than when they are ignored. So they would 

be 53-plus percent richer if we didn’t meet Medicare’s needs. They 

will be 50-percent richer if we do. That seems hardly a problem, 

let alone a crisis. Stated simply, the Nation’s economy is strong 

enough to pay for Medicare beneficiaries’ future health care costs. 

What then is Medicare’s most pressing need? It is not a change 

in managing what Medicare already covers. It is, rather, a change 

to cover what Medicare currently excludes, and we are focusing 

here on the gap in prescription drug coverage. I would argue that 

it is a travesty that the population that is over the age of 65 and 

people with disabilities who most need prescription drug coverage 

are without that protection when the working-age population has 

it available to them. 

Over the next decade, Medicare beneficiaries will spend an estimated $1.8 trillion on prescription drugs. Those costs and needs 

are there with or without a Medicare prescription drug benefit. The 

issue is who is going to bear those costs. Although there is widespread agreement on the need for Medicare’s prescription drug benefit, as you know, there is considerable disagreement on what constitutes an adequate benefit, that is, what should be the distribution of prescription costs between seniors and taxpayers; on its affordability; and on the priority it ought to have in our public spending. 

As I said, seniors’ drug costs are estimated at about $1.8 trillion 

over the next 10 years. A Medicare drug benefit designed similar 

to the benefit that you have—and I have as the wife of a Federal 

retiree—in the Federal Employees Health Benefit Program would 

24

cost an estimated $750 billion over the next 10 years, covering less 

than half benificiaries’ actual prescription drug costs. This committee, Mr. Chairman, as you indicated earlier, has endorsed a 

benefit and additional Medicare spending of $350 billion, woefully 

short of meeting beneficiaries needs in the future. 

Can we do better? The administration has testified elsewhere on 

this subject and has implied that we cannot, as have the previous 

speakers; that the resources are not there to meet the needs of the 

current Medicare program and of a new prescription drug benefit. 

But the fact is that what is missing is not resources, it is the priority that we give to meeting these needs. In fact, combining what 

the President’s budget would spend in new dollars on Medicare 

with the proposed spending on tax cuts that is in the budget, the 

budget already includes the $750 billion that could be applied fully 

to a Medicare drug benefit. Moreover, according to analyses performed by the Center on Budget and Policy Priorities, proposed extensions of the tax cut beyond 2010 would cost $4.1 trillion in that 

second decade compared to the $1.2 trillion cost of the additional 

amount of drug coverage. In other words, the cost of the proposed 

tax cuts that some feel are a priority exceed by more than threefold 

the cost of a prescription drug benefit. It is hard to reconcile the 

claim that a prescription drug benefit is a priority while at the 

same time eliminating the revenues needed to support it. 

On the source of funding, there is also an issue: what ought to 

be the appropriate financing mechanism for a Medicare prescription drug benefit? The administration has challenged the use of 

both the Hospital Insurance Trust Fund as a source of funding—

that is, the existing trust fund—and general revenue financing. No 

one has proposed the first, and the administration itself has used 

the second. 

It is important to remember when we look at the financing system of Medicare that general revenues have always been a part of 

Medicare spending. It is inappropriate to consider the need for such 

revenues as a ‘‘financing gap.’’ General revenues are a longstanding 

appropriate and progressive source of financing both for the existing Medicare program and for a new benefit, prescription drugs. 

In conclusion, the facts suggest that the biggest challenge facing 

Medicare today is not its cost growth or even its long-term affordability, but the lack of a prescription drug benefit. Medicare has 

contributed, and will in the immediate future continue to contribute, to longer and healthy lives for our Nation’s elderly and 

some of its disabled citizens. But its historical protection against 

the economic consequences of high health care costs is now threatened by rising drug costs and its lack of a drug benefit. By 2012, 

Medicare beneficiaries are projected to spend more on prescription 

drugs than Medicare is projected to spend on all Part B services 

combined, according to the Congressional Budget Office. A $750 billion prescription benefit would cover less than half of prescription 

drug costs of Medicare beneficiaries, but would certainly be meaningful support for the seniors and disabled people who are bearing 

those burdens. It costs far less over time than the extension of the 

tax cut. 

The question here, I would urge you to recognize, is not a matter 

of affordability, it is a matter of our priorities. Thank you. 

25

Chairman NUSSLE. Thank you. 

[The prepared statement of Dr. Feder follows:]

PREPARED STATEMENT OF JUDITH FEDER, DEAN OF PUBLIC POLICY, GEORGETOWN

UNIVERSITY

Chairman Nussle, Congressman Spratt, and distinguished committee members, 

thank you for the opportunity to offer this testimony about Medicare and the Federal budget. My goal today is to remind you that Medicare is one of our Nation’s 

greatest achievements and that, as a nation, we have both the obligation and capacity to sustain and extend that achievement to provide affordable health insurance, 

including prescription drugs to seniors and to people with disabilities. 

MEDICARE WORKS

The issue of Medicare reform is neither new nor simple. Defining Medicare’s problems, let alone coming to consensus over solutions, has been controversial. Discussions of Medicare and the Federal budget often define the ‘‘problem’’ as the gap between projected payroll tax revenues and health care spending that will result from 

the aging of the population. An all-too-common reaction is to declare Medicare fiscally ‘‘unsustainable’’ and to call for a retraction of government responsibilities for 

the health care of the elderly. But this approach obscures the real challenge of an 

aging population and ignores Medicare’s fundamental purpose. 

For more than 30 years, Medicare—with some significant help from Medicaid for 

low-income elderly and for long-term care—has provided affordable health insurance 

of the Nation’s elderly citizens without the problems that plague health insurance 

for younger Americans. Medicare is nearly universal, avoids dividing the healthy 

from the sick and the poor from the better-off, and provides reliable coverage with 

a choice of providers. 

Limiting the government’s liabilities for health care will not make those liabilities 

go away. Rather, it will shift them back to elderly, people with disabilities and their 

families. And Medicare’s signal advantages—its ability to spread risk and to make 

insurance affordable—will be lost. That is not solving the problem; it is abdicating 

responsibility. Instead our goal should be to assure that Medicare has adequate financing to provide effective health insurance in the future as it does today.

Our ability to achieve that goal is enhanced by Medicare’s fiscal performance. 

Health care is expensive. But Medicare is as good and often better than the private 

sector in managing cost growth. Faced with high rates of expenditure growth and 

trust fund problems in the 1990s, policy makers responded with payment rate 


feder1.eps
26

changes that dramatically slowed Medicare cost growth. In the past 5 years, Medicare’s average growth rate per beneficiary was significantly lower than that of the 

private sector or the Federal Employees’ Health Benefits Plan (FEHBP) (Figure 1). 

Although the cost of health care is an issue for the entire Nation (not Medicare 

alone) and there will always be controversy about whether Medicare is paying too 

much or too little, recent experience demonstrates that policymakers have the tools 

they need to manage Medicare’s costs. 

The Medicare baseline projections for the next 10 years recognize the effectiveness 

of these tools for the future as well as the past. Both the Congressional Budget Office (CBO) and the Office of Management and Budget (OMB) are projecting average 

Medicare growth rates per beneficiary that are low: 4.8 and 3.6 percent for the next 

10 years1 at or below medical inflation (4.4 percent from March 2001 through 2002) 

and well below projected private premium growth projections (6.1 percent for 2002 

through 2010) (Figure 2). Medicare has not grown this slowly for any past 10-year 

period.2 Similarly, in its most recent report, the Medicare Trustees project that the 

Hospital Insurance Trust Fund will be solvent through 2030. Few previous Trustees’ 

projections have been more optimistic than this.

Our ability to support the Medicare program goes well beyond the strength of the 

Trust Fund. Most critical to that support is the strength of our economy. A recent 

analysis by Marilyn Moon suggests how important it is to examine projected Medicare cost growth in the context of overall economic growth. Her analysis demonstrates that future taxpayers will be substantially better off than current taxpayers, even taking Medicare cost growth into account. By her estimates, GDP per 

worker will rise by 53.8 percent between 2000 and 2035, even taking into account 

Medicare spending projections. Without Medicare, this projected increase in GDP 

per worker would be 57 percent (Figure 3). Stated simply, this Nation’s economy 

will likely grow strongly enough to pay for Medicare beneficiaries’ future health care 

costs.3


feder2.eps
27

A PRESCRIPTION DRUG BENEFIT IS MEDICARE’S MOST PRESSING NEED

Medicare’s biggest challenge is not better managing what it already covers; instead, it is covering what it currently excludes: prescription drugs. Prescription 

drugs have become an integral part of modern medicine, often preventing disease, 

managing chronic illness and even curing certain conditions. Seniors and people 

with disabilities disproportionately rely on prescription drugs. According to recent 

CBO testimony, Medicare beneficiaries account for 15 percent of the population but 

40 percent of the spending on outpatient prescription drug spending. The average 

Medicare beneficiary will spend over $2,400 on prescription drugs next year, and 

nearly one-in-five beneficiaries (17 percent) are expected to spend more than $5,000 

by 2005. Over the next decade, Medicare beneficiaries are projected to spend $1.8 

trillion on prescription drugs; with or without a Medicare drug benefit.4

Not only do Medicare beneficiaries have a greater need for prescription drugs; 

they also disproportionately lack coverage for it. Depending on how one counts, anywhere from 25 to 42 percent of Medicare beneficiaries lack prescription drug coverage for all or part of the year.5 This problem is worse for older and rural beneficiaries. Over time, most experts suggest that the proportion of beneficiaries who 

lack drug coverage will grow as the cost of Medigap policies with drug coverage 

rises, the drug benefits in Medicare managed care plans become less generous and 

more scarce, and employers continue to cut back on retiree health coverage. 

A PRESCRIPTION DRUG BENEFIT IS AFFORDABLE

There is a widespread consensus on the need for a Medicare prescription drug 

benefit. What is lacking is agreement on what constitutes an adequate benefit, the 

distribution of prescription drug costs between seniors and taxpayers, its affordability, and its priority. 

Substantial differences exist in the scope of proposed prescription drug benefits. 

This committee allocated $350 billion over 10 years for a benefit; the Senate Budget 

Committee allocated $500 billion. And it would cost an estimated $750 billion over 

10 years to provide seniors with a benefit comparable to the benefit Members of 

Congress receive through the Federal Employees Health Benefits Program. 

Recently, administration testimony implied that the Nation cannot afford a $750 

billion drug benefit: ‘‘The excess costs of $400 billion in the first 10 years would balloon to $1.2 trillion in the next ten, just when the baby boomers are counting on 

Medicare.’’ The testimony continues to claim that a drug benefit of this size would, 


feder3.eps
28

by 2030, be ‘‘equivalent to a tax of $2,170 (in today’s dollars) on every working 

American.’’6

But, the administration’s analysis suggests that its concern is not affordability, 

it is priorities. In fact, combining what the President’s budget spends on Medicare 

and its tax cuts, the budget already includes $750 billion that could be applied fully 

to a Medicare drug benefit.7 Moreover, in the second decade, the extension of the 

tax cut would cost, according to the Center on Budget and Policy Priorities,8 $4.1 

trillion, compared to the administration’s estimated $1.2 trillion cost of the additional amount of drug coverage (Figure 4). And, it is not until well after 2020 that 

the cost per worker of a drug benefit exceeds that of the cost per worker of a tax 

cut, according to a forthcoming analysis by the Center on Budget and Policy Priorities; in 2020, the average tax cut cost per worker ($1,579 in 2002 dollars) would 

still exceed that of the cost per worker of the entire $750 billion drug benefit 

($1,064). Thus, it is hard to reconcile the claimed priority given to a prescription 

drug benefit with the proposal to eliminate the revenues needed to support it.

On the source of funding, the administration has challenged the use of both the 

Hospital Insurance Trust Fund and general revenue financing. Specifically, it claims 

that funding a prescription drug benefit from the Trust Fund would cut its insolvency in half, and that funding it through a mechanism like the Supplemental Medical Insurance Trust Fund represents ‘‘accounting gimmicks.’’9 Corroborating this 

concern, the administration omitted general revenue funding from its displays of the 

current Medicare program’s financial health in its budget documents, despite its 

legal, 35-year history of supporting Part B services. On prescription drug financing, 

no one has proposed the first, and the administration itself has used the second. 

General revenue funding supports outpatient services in Medicare today; it is a 

more progressive way to finance benefits than a payroll tax increase; and, while 

weakened, the budget outlook is strong enough to support this use of funds. The 

fact that the administration’s own $190 billion Medicare allocation is drawn from 

general revenues raises the question of where and, more importantly, why the administration is drawing lines about legitimacy of the funding of this critical benefit. 

CONCLUSION

The facts suggest that the biggest challenge facing Medicare today is not its cost 

growth or even its long-term affordability but its lack of a prescription drug benefit. 

Medicare has contributed and will, in the immediate future, continue to contribute 

to longer and healthier lives for our Nation’s elderly. But its historical protection 

of seniors against the economic consequences of high health care costs is now threatened by rising drug costs and its lack of a drug benefit. By 2012, Medicare beneVerDate Feb 1 2002 17:03 Jul 18, 2002 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 H:\DOCS\HEARINGS\107-30\HBU128.000 HBUDGET1 PsN: DICK

feder4.eps
29

ficiaries are projected to spend more on prescription drugs than Medicare is projected to spend on all Part B services combined, according to CBO. A $750 billion 

prescription drug benefit would cover less than half of prescription drug costs of 

Medicare beneficiaries. It costs far less, over time, than the extension of the tax cut. 

The question here is not affordability, it is priorities. 

ENDNOTES

The views expressed in this paper do not represent those of Georgetown or George 

Washington University.

1. From Crippen DL. (March 7, 2002). Projections of Medicare and Prescription 

Drug Spending. Testimony before the Committee on Finance, U.S. Senate. Washington, DC: Congressional Budget Office. Assumes projected beneficiary growth of 

1.7 percent over the 2003–12 period. 

2. Reischauer R. (March 2002). Presentation at the American Enterprise Institute. 

3. Moon M, Storeygard M. (March 2002). Solvency or Affordability? Ways to Measure Medicare’s Financial Health. Menlo Park, CA: The Henry J. Kaiser Family 

Foundation. 

4. Crippen, 2002. 

5. CBO defines uninsured as lacking drug coverage throughout the year (25 percent); Laschober MA, Kitchman M, Neuman P, Stabic AA. ‘‘Trends in Medicare supplemental insurance and prescription drug coverage, 1996–1999,’’ Health Affairs. 

February 27, 2002, Web Exclusive, pp. W127–W138 define coverage as point in time 

(38 percent); and Briesacher B, Stuart B, Shea D. Drug Coverage for Medicare 

Beneficiaries: Why Protection May be in Jeopardy. New York (NY), The Commonwealth Fund, January 2002 define it as the number who lack drug coverage for part 

or all of the year (42 percent). 

6. McClellan M. (April 17, 2002). ‘‘Creating a Medicare Prescription Drug Benefit: 

Assessing Efforts to Help America’s Low-Income Seniors.’’ Testimony before the 

Committee on Energy and Commerce, U.S. House of Representatives. Washington, 

DC: White House Council of Economic Advisors. 

7. The President’s budget includes $603 billion for tax cuts and $169 billion for 

Medicare for fiscal year 2003–12, according to CBO’s Analysis of the President’s 

Budget. 

8. Friedman J; Greenstein R; Kogan R. (April 16, 2002). The administration’s Proposal to Make the Tax Cut Permanent. Washington, DC: Center on Budget and Policy Priorities. 

9. McClellan, 2002.

Chairman NUSSLE. I had some questions, but I guess to start off 

with, I am tempted to allow rebuttal. It seems it is pretty rare 

where we have a hearing where we have such a difference of opinion on the panel over the state of Medicare and its future. I am 

not going to paraphrase Dr. Feder’s testimony, but suffice it to say 

it appears that what you are suggesting is that you don’t necessarily believe there is a crisis in Medicare, and that if we would 

merely repeal the tax cut, that everything would seem to work out 

just fine. 

That having been said, Dr. Antos or Dr. Saving, do you want to 

respond to that at all? My understanding from your testimony is 

that the general revenue transfers to Medicare would far exceed a 

simple repeal of the so-called tax cut. So, Dr. Saving——

Mr. SAVING. I think that is correct, Mr. Chairman. The real issue 

here—and the estimates that I have made of the general revenue 

transfers as a percent of projected Federal income tax revenues 

allow Federal income tax revenues to stay at the same percentage 

of the gross domestic product they are now, so they really don’t account for any of the tax cut that is going to occur later on, assuming that that tax cut would reduce the share of Federal income tax 

revenues or gross domestic product. 

So in effect our estimate from the trustees report is that that 

share of Federal income tax revenues in 2030—and I should say 

that the deficits that we are discussing stay the same no matter 

30

what the trust fund is. I mean, if you could arbitrarily make the 

trust fund 100 million times what it is so that it would never run 

out, you would have to transfer exactly the same amount of money 

from income tax revenues because there isn’t anything in the trust 

fund. It is just an accounting entry that says that—and legally, of 

course, you can’t pay benefits unless the trust fund has these accounting entries, but in the end they are accounting entries. They 

are not real output. 

And I think it is important to understand that when the baby 

boomer—and this is an issue of two things. One of them is increased longevity, and the second one is population shock, meaning 

that the baby boomers moving through the population, providing a 

huge amount of resources when they were working, and consuming 

a huge amount of resources when they retire. When that happens, 

and if Dr. Antos is right in his estimates of what the drug benefit 

is going to cost, and I am a person—I think all three of us here 

are saying that an efficient Medicare system should include a drug 

benefit. So that is not really at issue here. 

What is at issue here is what are the funding issues that have 

to be dealt with if you are going to do this. And if we are accepting 

Dr. Antos’ numbers, currently from the trustees we would estimate 

that by 2030, 21 percent of all Federal income tax revenues are 

going to have to be transferred to Medicare. That is four times 

what we are now transferring to Medicare off of Federal income tax 

revenues. 

Chairman NUSSLE. Just so we are clear, that is compared today 

at what percent? 

Mr. SAVING. Five percent. Right now an amount equal to 5 percent. We are going to be at 21 percent. If Dr. Antos is right, that 

number is going to be 36 percent, and coupled with the Social Security transfer, one-half of all Federal income tax revenues are going 

to have to be transferred to these elderly entitlement programs. 

And right now, remember, these three programs together are actually contributing an amount equal to 2.5 percent of Federal income 

tax revenues. So we are going to go from being able to spend this 

money on fighting terrorism or anything else to having to take half 

of all the Federal income tax revenues and transfer them to these 

programs. All the other programs are going to be much smaller, 

and if you would add Medicaid to that, then you would have almost 

nothing left over for anything else that the Federal Government 

does. 

I think this is a significant problem. It is not going to be solved 

by the trust fund. I think we need a prescription drug benefit for 

efficiency purposes, but we also have to recognize reality. Putting 

our head in the sand and saying these resources are going to come 

from somewhere is not going to do it. It is real resources the elderly are going to consume—when I was on the commission, the baby 

boomers when they retire are going to eat real food, drive real cars, 

and live in real houses and use real hospitals and doctors when 

they consume medical care. Somebody is going to have to produce 

that stuff. We have to find a way to get resources to provide the 

elderly with what they are going to be consuming and to let workers keep something for themselves. That is the challenge, and it is 

a tough one. 

31

Chairman NUSSLE. Dr. Antos. 

Mr. ANTOS. I would add to that, I think, an obvious point. We 

all agree that the Medicare benefit isn’t adequate, and it became 

inadequate because of the structure of the program in the first 

place. One of the goals of reform is to make it possible for consumer demand to be satisfied. There is no question where consumer demand is on prescription drugs. There is very little question on where consumer demand is on wanting additional insurance protection, but we have a program that is locked in concrete. 

Part of the idea of reform is to make it possible for what consumers want to actually materialize on less than a glacial basis. 

Furthermore, it is perfectly clear that with a virtual doubling over 

the next 30 years of the number of people in the Medicare program, 

we are going to be spending more money. There is no question 

about that, and I don’t think any of us disagree with that. The 

question is are we going to have the program that we really want? 

I am speaking personally now. Unlike Tom, when I reach 65, I will 

be using Medicare. Is that program going to be a good program, or 

am I going to find that my insurance protection suddenly dropped 

through the floor? That is our goal. 

Chairman NUSSLE. Dr. Feder. 

Ms. FEDER. First a clarification, Mr. Chairman. The slide that 

was up earlier and my comments on comparing the costs of a tax 

cut with the costs of a drug benefit were not addressed at repealing 

tax cuts that Congress has enacted. They focus on new tax cuts 

that are proposed in the President’s budget or the extension—this 

particular slide is making the tax cut permanent, extending the tax 

cut into the next decade. I haven’t even addressed repeal; that 

would make additional revenues available to meet these needs. 

The second issue I would like to raise, I think you are quite 

right: there are tremendous differences in the way we, as speakers, 

see the Medicare financing situation. I think that differences reflect 

how we compare rising Medicare costs to other changes. There is 

no question that health care costs are rising, and that the costs per 

beneficiary are rising, and the number of beneficiaries is increasing. But to asses whether we face an ‘‘affordability crisis,’’ we have 

to look at these costs in the context of the rest of the economy. And 

what I have indicated to you, which is not present in others’ comments, is that the economy is growing substantially even when we 

assume moderate growth assumptions. As a result, we as a Nation 

will be, as I indicated to you, 50 percent richer in 30 years and consequently have the resources to decide how we want to spend those 

resources and how we want to provide quality of life for our Nation’s seniors. 

Finally, on the issue of the benefit problem which Dr. Antos just 

mentioned, the absence of prescription drug benefits in Medicare is, 

I would argue, not a function of Medicare’s structure. It, again, is 

a question of choices and political priorities. We have a good prescription drug benefit in the Federal Employees Health Benefits 

Program because that is what Congress chooses to provide Federal 

employees and Members of Congress, and it includes prescription 

drugs. We have the capacity to make a similar political choice for 

Medicare beneficiaries. We have just not done so. 

32

Chairman NUSSLE. I am dying to ask who ‘‘we’’ is when you say 

we haven’t done so. I don’t recall my last 8 years seeing a White 

House prescription drug benefit that has been proposed. A couple 

of nice lofty goals that came down, but I think there are a lot of 

political choices being made. 

I would suggest to you that I believe the costs are out of control, 

and that in my area in Iowa, it is not serving as good a program, 

and it is not paying its bills the way that it may be in the area 

that you live. So that is part of the reason why we not only wanted 

to include in this budget, as we have the last number of budgets, 

a prescription drug benefit, but also an ability to modernize the 

program and to strengthen it, because it is just not paying the bills 

in Iowa. Maybe it is in your area, but it isn’t in our area. And I 

understand why seniors may not recognize that, but the people providing the care certainly do realize that, and it is going to become 

pretty difficult to keep and, as both of our other witnesses said, attract and continue to keep these physicians and hospitals and other 

health care providers in some of these underserved areas if the program continues as it is. 

So with that, Mr. Spratt. 

Mr. SPRATT. Dr. Feder, I thought I saw you wanting to respond 

when the chairman said he had not seen a proposal for prescription 

drugs floated by the White House in the last 8 years. 

Ms. FEDER. I was tempted to respond, but I wasn’t sure it was 

necessarily totally wise. But as a member of the Clinton administration——

Chairman NUSSLE. You are welcome to respond to that. 

Ms. FEDER. I didn’t think it was unwelcome on your part, sir. I 

just wasn’t sure I needed to mention it. 

A prescription drug benefit was most definitely a part of the 

Clinton Health Security Act. And in more recent years, before the 

Clinton administration ended, we had a prescription drug benefit 

on the table. 

So I was surprised that you had said it wasn’t mentioned. 

Chairman NUSSLE. Well, if I could—just so I understand. Was 

this in bill form? Was this written in bill form? 

Ms. FEDER. The Medicare prescription drug coverage was part of 

the Clinton Health Security Act. 

Chairman NUSSLE. I understand. But was this a proposal in bill 

form? 

Ms. FEDER. In bill form. It was in the bill. 

Chairman NUSSLE. In what bill? We are going to have to go back 

to the record here, because I served on the Ways and Means Committee. We never got a bill. Now, we got some goals. 

The same criticism currently exists for this administration, I 

would hasten to add. 

Ms. FEDER. And when you asked who ‘‘we’’ is, it is all of us as 

a nation that have not made this a priority, when you said that 

earlier. 

Chairman NUSSLE. You mentioned it was Congress. I just wanted to make sure that the record reflected that it was more than 

just Congress who made that political decision. 

Ms. FEDER. That is a fair point, in general. 

Chairman NUSSLE. I am sorry to interrupt. 

33

Mr. SPRATT. Dr. Feder, for the record, would you like to briefly 

outline what the Clinton prescription drug package contained? 

Ms. FEDER. It would be a challenge for me to remember the bill 

as it was proposed in 1993. But I believe the more recent proposal 

resembled proposals that have been on the table, that are being 

discussed today. The one that—actually that Dr. Antos used as the 

basis for his cost projections was the proposal toward the end of the 

Clinton administration. 

Mr. SPRATT. There is a premium of about how much? 

Mr. ANTOS. It is a no-deductible plan, 50 percent co-insurance for 

the first $2,000 of drug spending; no coverage between $2,000 and 

$5,000 of drug spending, where most of the drug spending is; and 

then what we economists call stop-loss coverage above $5,000, in 

other words, the program would pay for the whole cost above 

$5,000. 

The premium would start in the first year, 2005, at $29 a month. 

And like all comprehensive proposals, the premium grows every 

year. 

Mr. SPRATT. In all of these proposals, a couple of things have 

been lacking in the cost estimates. Number one, only modest assumptions are made about what can be attained through the use 

of the government’s clout as the purchasing agent, in effect, for 35 

to 40 million people, a huge coalition of purchasers. 

How do we measure that? What can we reasonably expect can be 

accomplished in the way of price reduction from the government’s 

collective efforts to purchase on behalf of 35 to 40 million beneficiaries? 

Mr. ANTOS. Mr. Spratt, that is a very good question, a question 

that CBO has struggled with for the last several years and will 

continue to struggle with. 

I think the issue has to do with how much flexibility and leeway 

the particular benefit allows for the management of those prescription drug costs. Not just prices, but even more importantly, the actual use of drugs. The latest figures strongly suggest that more 

than half of the increase in total prescription drug cost in this 

country stems from increases in the use of drugs, moving to newer, 

more expensive drugs, using more drugs. Price is a lesser issue. 

And so it seems like only a few months ago I remember discussing this very question with my colleagues at CBO. The issue 

was: Did an individual bill allow drug plans use the tools that they 

now have at their disposal to aggressively manage costs, or were 

there going to be restrictions on what they could do? I believe 

that—I believe CBO should speak for itself here, but I believe that 

the estimate that the CBO had done for the Clinton-style plan assumed that there would be restrictions, fairly rigid restrictions, on 

how costs could be managed and how consumer demand could be 

directed. 

The House-passed bill from last year, on the other hand, is a bill 

that places drug plans at risk for costs. It does provide reinsurance, 

but it does put them at risk. And it gives them more ability to use 

tools such as multi-tiered co-payments, formularies, mail order and 

the like. 

A lot depends on the structure of the benefit. 

34

Mr. SPRATT. The second thing that we don’t hear much about, or 

see in these cost estimate systems, is a kind of dynamic scoring, 

which we discussed last week. We seldom get any calculation of the 

savings that might be realized in inpatient care, the most expensive form of health care as a result of having adequate maintenance drugs and other acute care drugs available for outpatients. 

Surely there is some savings to be realized there, or otherwise 

why are we taking these medications? 

Nevertheless, you never see that calculation factored into any of 

the estimates. Can you give us an idea of what you think realistically, over a period of years, ought to be factored in to account for 

the inpatient savings if you have a drug program? Any of you? 

Mr. ANTOS. Let me try that first, if you don’t mind. It is a very 

tough question, of course. Let me explain a little about CBO’s 

thinking about this question, which isn’t going to be all that helpful 

to any of us on this, I don’t think. 

The issue for CBO is: What is the incremental effect of a drug 

benefit? As we know—from data collected from Medicare beneficiaries—that somewhere around two-thirds of Medicare beneficiaries have some form of prescription drug coverage. Some of 

them have very good coverage now through employer plans, for example, and some of them have coverage through Medigap plans, 

and that is pretty bad. 

If there is a comprehensive drug benefit enacted, then the question that CBO confronts is, how much will actual drug usage increase, given that a lot of people now have coverage, and the people 

who don’t have coverage use about two-thirds of the prescription 

drugs that people with coverage use today. And so this is really an 

incremental kind of calculation. 

As a result, while they are very, very concerned and interested 

in this issue, they have, in particular, been focusing on some work 

by Frank Lichtenberg at Columbia University, who has demonstrated some pretty impressive results along these lines. Nonetheless, they have to bring those results down to this kind of incremental scoring. 

So I would say the bottom line here for me is that there is no 

question that a drug benefit will bring real medical benefits to 

Medicare beneficiaries in terms of better outcomes, more sensible 

approaches to health care and, ultimately, in terms of some potential cost savings. But in terms of bill scoring, I agree with my 

former colleagues. It is really tough to know right now how much 

of an impact that would have in the short run. In the long run, it 

could be quite large. 

Ms. FEDER. I wish I could give you an estimate, Congressman. 

I can’t do that. But I can give you an example that is, I believe, 

supportive of your concern that it ought to be addressed. 

There was a study some years ago following a cutback in drug 

coverage in Medicaid, I believe in Connecticut, that examined its 

effect on Medicaid spending. And the finding was, that—Steve 

Sumerai was the author—the finding was that a reduction in the 

availability of prescription drugs led to—I don’t remember the magnitude—but an increase in nursing home costs, another area of considerable concern. And I do think we are seeing a decline in the 

availability of prescription drug coverage for seniors, which would 

35

have the kind of effect I just described, as well as effects on hospital use and whatever. 

And with due respect—Joe knows I am sympathetic to the problems of cost estimating—but CBO does take on a number of challenges with great boldness; this would not seem to be beyond its 

capacity. 

Mr. SPRATT. Dr. Saving. You have got a fit name for a conservative economist, by the way. 

Mr. SAVING. Economists tend to be what you would refer to as 

conservative, because economists understand constraints. 

Other people may live in unconstrained worlds, but the real 

world appears to have real constraints attached to it. And I think—

as my testimony argued, I think that a prescription drug benefit 

is important to have efficiency in medical outcomes. There is no 

question that pharmaceuticals are playing a much larger role than 

they used to, and we need to do this. 

The issue is, who is going to pay for it, when the individuals who 

are consuming the medical care, which is now happening, and once 

you give them a benefit and make these things cost much less, we 

know they are going to consume more of them. That is the simplest 

idea. Then your point is, to what extent is this efficiency gain that 

I have addressed—and I think we all have, actually—going to offset 

some of that? 

Secondly, those individuals that used to pay for the pharmaceuticals—and now the general taxpayers are going to pay for 

them—they are actually better off. And so you might justify, in a 

sense, raising premiums or other kinds of sources of revenue for 

this system, because you are simply transferring current expenditures from one group of people to another. And the question is, who 

should pay? And is there an efficiency gain? 

We certainly know from anything that we have done in the past, 

where we decided to make something free that wasn’t free before, 

we almost always underestimate what it is going to cost us, that 

the increase in expenditures is going to be significant. 

Mr. SPRATT. You showed us a big spike—$18 billion, as I recall—

as probably the gross liability, present value, for all benefits that 

would be drawn by those who are now eligible for them if the system were to take no new entrants in the future. 

If we don’t have additional tax transfers to meet some of that, 

do you have any estimation of how much cost would have to be 

wrung out of the program over a period of 10 years, 15 years, 20 

years, in order to accomplish solvency by cost reduction alone? 

Mr. SAVING. Yes, in fact, I do. I have what percentage of these 

programs are—I have got it right here somewhere; I will find it in 

a moment—are going to actually be funded by transfers. Because 

that is actually what the question is. 

Right now, we are 25 percent of—in 2001, 25 percent of Medicare 

expenditures were financed from general revenues. In 2010, it will 

be like 27 percent. By 2020, 40 percent of all of the expenditures 

are going to be financed by general revenues. 

Mr. SPRATT. You are speaking with a sense of inevitability. 

Mr. SAVING. Well, these are our trustees’ estimates. These are 

the best estimates that we have of what is going to happen. Nothing is inevitable. We don’t pretend, as trustees, that what we put 

36

in the trustees report is what the numbers have to be, but they are 

our best estimates of what is going to happen. And we will be—

under the current program we will be financing some 40 percent 

of Medicare with general revenue transfers. This is 2020; 47 percent by 2025. 

Mr. SPRATT. By 2025, 47 percent——

Mr. SAVING. Of these things are going to be financed with general revenue transfers. So you would have to cut the program in 

half in a little over 20 years to——

Mr. SPRATT. That is not realistic, in your estimation? 

Mr. SAVING. I don’t think it is realistic. I think we need to—but 

we have to understand that these programs are significantly underfunded for the future. 

Mr. SPRATT. Which means, if you can wring some of the costs 

out, so much the better. If you can get more efficiency——

Mr. SAVING. If you can raise revenue. 

Mr. SPRATT. There is a high probability that we will make substantial additional transfers from general revenues to sustain the 

program? 

Mr. SAVING. That is exactly right. That is going to happen. You 

will be doing that. I don’t think you can avoid it. You may be able 

to, by some of the reforms that perhaps have been suggested for 

Social Security, finding ways to prepay some of this to make the 

current working—to get the current working population to pay for 

some of their future medical care, to set something aside to pay for 

their own medical care in the future. That has been suggested for 

Social Security. And Social Security has gotten a good bit of the 

press, sort of, on reform. 

But we may want to think about this at some point down the 

road for Medicare, which is really part and parcel of taking care 

of the elderly. I mean, it is actually part of the retirement program. 

I mean, it is all one piece of a thing. We have just decided to separate out one little piece of what the elderly consume. 

Actually, it is a very big piece that the elderly consume. That is 

medical care. I mean, we haven’t done that for bread; for cars; or 

for houses, but we have done it for medical care. We could just as 

well have one big, elderly entitlement number, and people could decide whether they wanted a fancier house or more medical care. 

But we are not doing that. We are giving them an ‘‘in-kind’’ kind 

of a benefit. 

Mr. SPRATT. So if we make the tax cut permanent in 2012, it will 

be a very short-lived accomplishment because, you are telling me, 

in 2024 we will need 47 percent of all tax revenues collected? 

Mr. SAVING. No. Be careful. No. 

What I said was that 47 percent of the Medicare program will 

be funded by general revenue transfers. That is not a percentage 

of Federal income tax revenue. 

Mr. SPRATT. Excuse me. I misstated it. But still it is a substantial amount. 

Mr. SAVING. It is going to be a substantial number. And the Federal income tax revenues that I am using to project this don’t account for any tax cuts. I mean, they are really letting Federal income tax revenues remain at the same percentage of gross domestic product they are today, they were last year—actually, last year, 

37

so before any real tax cuts took place basically, because most of 

those tax cuts are in the future. We are keeping that the same. 

So it also accounts for all of the growth in the economy that we 

are projecting. We are not assuming that Federal income tax revenues are static; they are going to grow with the economy. But these 

programs are just going to grow much faster than the economy. 

And, of course, the increased longevity is not bad. I am certainly 

a person that is all for increased longevity. But it is expensive for 

these programs. We have to recognize that and prepare for it. I 

think we would be remiss in our duty if we don’t prepare and understand the facts, even though the facts may be frightening. We 

need to know what those are and be ready for them, so that we 

can keep those programs in place as we go forward. 

Mr. SPRATT. Thank you very much. 

Chairman NUSSLE. Mr. Collins. 

Just before Mr. Collins begins, this is a vote on the previous 

question on the floor, which at least puts the possibility forward we 

may have to adjourn the hearing in order to vote on the passage 

of this rule to consider the steel disposition on the floor. 

Mr. Collins. 

Mr. COLLINS. Thank you, Mr. Chairman. 

Ms. Feder, in your comments, I may have misunderstood what 

you were saying. But I thought you did indicate that the actual 

savings in health care costs would exceed the prescription drug 

benefit cost. 

Ms. FEDER. I mean to say that. The comparison that I have made 

several times is a comparison of the cost of the proposed additional 

tax cuts to the cost of a drug benefit. 

Mr. COLLINS. This was prior to even mentioning the word ‘‘tax’’? 

Ms. FEDER. I am sorry that I can’t identify what is concerning 

you. I didn’t mean to say that. 

Mr. COLLINS. Maybe I just misunderstood you. But I thought you 

did say something about the savings based on the requirement of 

health care, based on having the prescription drug available, those 

savings would exceed the actual cost. 

Ms. FEDER. No, I did not say that. 

Mr. COLLINS. Well, I misunderstood you there. 

But there are some savings to be gained; is that not kind of the 

rationale? 

Ms. FEDER. I think that was in our conversation with Congressman Spratt, yes. 

Mr. COLLINS. But is that not some of the reason, probably, that 

the private sector—and you mentioned the Federal Employees 

Health Benefit Program—do have prescription drug programs, because it does keep a person current with medicine that will enable 

them to maybe not have to have certain procedures in either outpatient or inpatient. 

Ms. FEDER. Well, I think that the way to look at the structure 

of benefits in the private sector is that benefits for workers, including Federal employees, are designed to attract workers and have 

consequently responded to changes in medicine. Adding drugs is a 

way of providing better benefits for workers. With Medicare, a direct choice has to be made by the executive and the Congress to 

include a new benefit. 

38

Mr. COLLINS. Well, you are getting right to my point. The private 

sector insurance, whether it be a private policy, an HMO policy, or 

whatever it may be, is a private sector. They do make choices about 

offering prescription drugs, whether it is additional benefit for an 

employee or what. 

But it does have a positive effect on the health care of the individuals, as you mentioned. You enjoy, and I do, too, the prescription drug coverage that we have. 

That is somewhat different, quite different, from Medicare, even 

though Medicare is basically structured like an HMO. But it is run 

by the Congress. The policy is set by the Congress. We have to set 

policy to adapt to new medicines, new procedures, and we are way 

behind the curve for doing all of those—quite different from private 

sector insurance. 

Now, we have tried to do some of this with Medigap. We have 

tried do some of it with the Medicare+Choice. But where we have 

fallen short is that we don’t have the same type or same ratio of 

payment as the private sector, because we are a government-run 

HMO, the most inefficiently run HMO in the country, policy set by 

Congress. A lot of it is set by politics rather than just plain reality 

and need. 

And I am going to vote. Thank you. 

Chairman NUSSLE. Just to inform members, there are three 

votes on the floor. We will go to Mr. McDermott’s questions and 

then we will adjourn the hearing for those votes. 

Mr. McDermott. 

Mr. MCDERMOTT. I wanted to commend the chairman for having 

this hearing. And I am sorry there are so few members here, because I think it is one of the biggest issues we face. 

I came out of medical school in 1963. I remember that every senior citizen at that time was in the private insurance industry. And 

we came along with this government program and ripped them out 

of the private sector and put them into this awful Socialist program, which has now obviously got some concerns. 

One of the things that I listened to here, and I have been listening—I was on the Medicare Commission, and I have been listening 

to this for the last 4 or 5 years, ever since Newt Gingrich said he 

wanted Medicare to wither on the vine. I know now, in Seattle, 

people cannot get physicians to accept more people into their practice. 

The wife of the first Asian judge in the State of Washington 

came up to me at a meeting and said, ‘‘I turned 65 and no one will 

take me into their practice as a Medicare patient.’’ So we have done 

quite a lot of fixing here in the last 6 or 8 years. 

But I hear the one that you are talking about. And you keep 

talking about this Federal Employees Health Benefit program and 

what a good program that is. I had a little discussion with my 

mother the other day. A few months ago I turned 65, and my mother is 92. 

Now, what you are telling me is that the solution to Medicare is 

to put my mother into the Federal Employees Health Benefit program with me, because I have a drug benefit. I pay for my pharmaceuticals through my plan, and all my mother has to do now, she 

gets this voucher from the government, and she puts it in and she 

39

pays like I do, about $45 or $65 or $70 a month. If she pays $70 

a month, she would have the same thing I do in the Federal Employees Health Benefit Plan. 

Is that what you are you telling me? You are seriously sitting 

there and talking about bringing my 92-year-old mother in on the 

same basis that I am, on there? 

Mr. ANTOS. Mr. McDermott, no. 

Mr. MCDERMOTT. Oh, you are not? 

Mr. ANTOS. No, I am not. 

Mr. MCDERMOTT. Tell me what—because you keep talking about 

the Federal Employees Health Benefit program, like that is the one 

we are going to stick people into. Are you are going to adjust this, 

because my mother is 92 and I am—you know—are we going in 

that same program together, hand in hand? 

Mr. ANTOS. Mr. McDermott, you are raising a very important 

point. What I was trying to say was that I believe Medicare needs 

to be a program, it needs to be on its own, but it needs to find a 

better way to manage itself, manage its physicians, its other providers of health care; and manage its benefits and find a way to 

make it possible for people to actually get some satisfaction of their 

real health care needs. 

Mr. MCDERMOTT. Let me stop you. You are talking about a 

voucher system, right? Are you? That is what I have. I have a 

voucher system as a Federal employee. 

Mr. ANTOS. Yes. And your voucher is a somewhat adjustable 

voucher. It depends to some extent on what health plan you take. 

Mr. MCDERMOTT. But my mother would get a fixed amount of 

money from Federal Government, and she would go out on the 

street with me, buying a policy. 

Mr. ANTOS. That is not at all clear that that is the way it would 

work. 

Mr. MCDERMOTT. Well, how would a voucher system work for all 

of those old people? 

Mr. ANTOS. First of all, it would be implausible to start such a 

program by immediately requiring that everybody now in Medicare 

change what they are doing. That is unreasonable. And I don’t 

think any of us would support that. 

Instead, this is—the idea behind this is to gradually, over time, 

phase in a system that will allow people to make their wishes 

known and use the resources that they, in fact, are using now in 

a more sensible way, in a way that gives them the kind of health 

care that they actually need and want. 

Mr. MCDERMOTT. I understand you are phasing in. We phased 

in working longer under Social Security from 65 to 67. So you are 

saying that in the year 2020 or 2015, at that point, every senior 

citizen will get a voucher. Up to that point, folks will have the 

same program that we have today. 

In 2015, when you are 65, you will then just get a voucher to go 

out and buy whatever you can. That is how you would have to 

phase it in. 

Mr. ANTOS. It is a pretty complicated issue. 

There are lots of ways to phase a program like this in. One way 

to do it is to allow people to voluntarily—to go into that type of a 

program. 

40

But we are not just talking about a voucher. I mean, in some 

sense, the Medicare+Choice program is kind of a voucher program, 

it is just that beneficiaries don’t hold the piece of paper in their 

hand. 

We are talking about a fundamental change in the way that the 

Medicare program would look at its own operation, a reduction in 

the kind of micromanagement that we now see, a reduction or an 

increase in the—in the interaction, the positive interactions that 

are possible between health plans, providers and the program. 

It would require a new kind of agency, the kind of agency that 

you heard—as you said, you have heard this for many years—the 

kind of agency that the commission recommendation suggested, 

that would have a different approach, a less heavy-handed approach to the benefit. 

Mr. MCDERMOTT. Thank you very much. 

I want to thank the chairman. And I hope that this won’t be the 

last time we discuss this issue, because I think there—that the 

Members need to hear you go through what the circumstances and 

the nuances of this really are. Because it sounds like you can manage this all by cutting costs, by sort of giving everybody a fixed 

amount. Everybody will be in the Medicare+Choice, when, in fact, 

80 percent of the people in the country don’t have Medicare+Choice 

available to them. 

So the question then is how—I mean, that is what I hope we can 

come back and talk another time about. 

Thank you, Mr. Chairman. 

Chairman NUSSLE. I agree with the gentleman. I would hope we 

can, too. We have done that today, I think calmly and respectfully. 

That is what we need in order to solve this. I would agree this is 

probably the most profound issue we are facing here on the committee, long-term. 

I had indicated that we were going to come back. We have been 

told by members that we don’t have any that are able to come back 

after the three votes on the floor. So I will thank our panelists for 

their fine testimony today and the great discussion that we have 

had. 

Mr. McDermott and others are correct. We will need to revisit 

this issue many times in the future. 

Parenthetically, Dr. Feder, I appreciate your clarification on 

1993. I was speaking about—we were talking past one another. So 

you are correct. I apologize for that. 

Ms. FEDER. I was going to run home and make sure it was in 

there. 

Chairman NUSSLE. Well, I have checked with my staff. And I 

don’t like the record to reflect inappropriately. 

We appreciate the testimony of all three of you. With that, the 

committee is adjourned. 

[Whereupon, at 11:30 a.m., the committee was adjourned.]

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