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

                    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

                                 ______

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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
JOHN E. SUNUNU, New Hampshire        JOHN M. SPRATT, Jr., South 
  Vice Chairman                          Carolina,
PETER HOEKSTRA, Michigan               Ranking Minority Member
  Vice Chairman                      JIM McDERMOTT, Washington
CHARLES F. BASS, New Hampshire       BENNIE G. THOMPSON, Mississippi
GIL GUTKNECHT, Minnesota             KEN BENTSEN, Texas
VAN HILLEARY, Tennessee              JIM DAVIS, Florida
MAC THORNBERRY, Texas                EVA M. CLAYTON, North Carolina
JIM RYUN, Kansas                     DAVID E. PRICE, North Carolina
MAC COLLINS, Georgia                 GERALD D. KLECZKA, Wisconsin
GARY G. MILLER, California           BOB CLEMENT, Tennessee
PAT TOOMEY, Pennsylvania             JAMES P. MORAN, Virginia
WES WATKINS, Oklahoma                DARLENE HOOLEY, Oregon
DOC HASTINGS, Washington             TAMMY BALDWIN, Wisconsin
JOHN T. DOOLITTLE, California        CAROLYN McCARTHY, New York
ROB PORTMAN, Ohio                    DENNIS MOORE, Kansas
RAY LaHOOD, Illinois                 MICHAEL E. CAPUANO, Massachusetts
KAY GRANGER, Texas                   MICHAEL M. HONDA, California
EDWARD SCHROCK, Virginia             JOSEPH M. HOEFFEL III, 
JOHN CULBERSON, Texas                    Pennsylvania
HENRY E. BROWN, Jr., South Carolina  RUSH D. HOLT, New Jersey
ANDER CRENSHAW, Florida              JIM MATHESON, Utah
ADAM PUTNAM, Florida
MARK KIRK, Illinois
[Vacancy]

                           Professional Staff

                       Rich Meade, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel

                            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

 
                    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 program 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.
    [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 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 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 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 
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 8\1/
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 programs 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 desirable 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 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?

                 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 currently 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

    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.
    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.
    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 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 re-emphasized 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 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 
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 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 one that attempts to resolve every 
problem at the outset. A carefully designed prescription 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 Nation'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 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.
    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 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 years\1\ 
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\

      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, 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 beneficiaries 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 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.
    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.
    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.
    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.
    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 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 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, 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.
    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 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.
    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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