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43–689 2008

THE 2007 MEDICARE TRUSTEES REPORT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON HEALTH 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

APRIL 25, 2007 

Serial No. 110–33 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

CHARLES B. RANGEL, New York, Chairman 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

CHRIS VAN HOLLEN, Maryland 

KENDRICK MEEK, Florida 

ALLYSON Y. SCHWARTZ, Pennsylvania 

ARTUR DAVIS, Alabama 

JIM MCCRERY, Louisiana 

WALLY HERGER, California 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

SAM JOHNSON, Texas 

PHIL ENGLISH, Pennsylvania 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

RON LEWIS, Kentucky 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

DEVIN NUNES, California 

PAT TIBERI, Ohio 

JON PORTER, Nevada 

JANICE MAYS, Chief Counsel and Staff Director 

BRETT LOPER, Minority Staff Director 

SUBCOMMITTEE ON HEALTH 

FORTNEY PETE STARK, California, Chairman 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

RAHM EMANUEL, Illinois 

XAVIER BECERRA, California 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

RON KIND, Wisconsin 

DAVE CAMP, Michigan 

SAM JOHNSON, Texas 

JIM RAMSTAD, Minnesota 

PHIL ENGLISH, Pennsylvania 

KENNY C. HULSHOF, Missouri 

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

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

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

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

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

is further refined. 


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C O N T E N T S 

Page 

Advisory of April 18, 2007, announcing the hearing ............................................ 2 

WITNESS 

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

SUBMISSION FOR THE RECORD 

AARP, statement ..................................................................................................... 50 


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(1) 

THE 2007 MEDICARE TRUSTEES REPORT 

WEDNESDAY, APRIL 25, 2007 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON HEALTH, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:08 p.m., in room 

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

(Chairman of the Subcommittee), presiding. 

[The advisory announcing the hearing follows:] 


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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON HEALTH 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–3943 

April 18, 2007 

HL–8 

Health Subcommittee Chairman Stark Announces 

a Hearing on the 2007 Medicare Trustees Report 

House Ways and Means Health Subcommittee Chairman Pete Stark (D–CA) announced today that the Subcommittee on Health will hold a hearing on the 2007 

Medicare Trustees report. The hearing will take place at 2:00 p.m. on Wednesday, April 25, 2007, in Room 1100, Longworth House Office Building. 

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

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

BACKGROUND: 

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

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

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

trust funds. The Trustees, who are designated in statute, include the Secretary of 

the Treasury (who is the Managing Trustee), the Secretary of Labor, the Secretary 

of Health and Human Services, the Commissioner of Social Security and the Administrator of the Centers for Medicare and Medicaid Services (CMS). In addition, the 

statute requires that there be two public trustees, both of whom cannot be from the 

same political party, who are appointed by the President and confirmed by the Senate for 4-year terms. The CMS Office of the Actuary, led by Chief Actuary Richard 

Foster, is responsible for preparing the report. The 2007 Annual Report is scheduled 

to be released on Monday, April 23. 

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

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

In addition, the 2003 Medicare legislation (P.L. 108–173) created a new mechanism based on a designated threshold to cap Medicare’s funding. Accordingly, when 

the Trustees project that at least 45 percent of Medicare’s funding will come from 

general revenues within seven years, a warning is issued. The 2006 report contained 

the first official warning that the projection is in sight. If the 2007 report contains 

the second consecutive warning, President Bush will be required in 2008 to send 

Congress legislation with Medicare payment reductions to keep general revenue 

spending below the threshold. This legislation is given expedited consideration in 

the Congress. 

In announcing the hearing, Chairman Stark stated, ‘‘Medicare is a vital program that serves 44 million beneficiaries and provides peace of mind for 

them and their family members. While the program faces fiscal challenges 

due to changing demographics and special interest payments, there is no 

reason we can’t work on a bipartisan basis to protect and strengthen this 

important social compact with America’s families, just as Congress has 

done since Medicare’s creation in 1965.’’ 


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FOCUS OF THE HEARING: 

The hearing will focus on the 2007 Medicare Trustees Report. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

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

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

http://waysandmeans.house.gov, select ‘‘110th Congress’’ from the menu entitled, ‘‘Committee Hearings’’ (http://waysandmeans.house.gov/Hearings.asp?congress=18). 

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

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

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

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

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

with the formatting requirements listed below, by close of business Wednesday, 

May 9, 2007. Finally, please note that due to the change in House mail policy, the 

U.S. Capitol Police will refuse sealed-package deliveries to all House Office Buildings. For questions, or if you encounter technical problems, please call (202) 225– 

1721. 

FORMATTING REQUIREMENTS: 

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

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

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

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

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

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

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

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

hearing record. 

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

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

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

by the Committee. 

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

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

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

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

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

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

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

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

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

f 

Chairman STARK. If our guests would find a comfortable seat, 

we will commence the hearing on the 2007 Trustees’ Report on the 

financial condition of the Medicare Program. 

We have with us Mr. Richard S. Foster, Rick Foster, the chief actuary of the Centers for Medicare and Medicaid Services, from Baltimore. He is not a stranger to our Committee. He has been helping 

us for many years. 


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Thank you, Mr. Foster, for being here. 

The Trustees’ Report is a tool that helps us try and decide what 

to do about the Medicare Program, and we haven’t done much adjusting in recent years. As we review your report this year, we will 

begin to oversee Medicare and try to ensure its continued viability 

for the future. 

I would like to start by paraphrasing Mark Twain, saying that 

the report of Medicare’s demise has been greatly exaggerated, but 

despite some gloom and doom forecasts, the report of the trustees 

doesn’t show any disasters and perhaps can give us some ideas to 

keep it solvent and sustain it. While we face undeniable demographic challenges, increased cost challenges, the 45 percent trigger warning we keep hearing is, I think, little more than an attempt to both get us to turn away from Medicare as an entitlement. 

Since Medicare’s creation, we have regularly modernized the program to accommodate advances in medicine. For a growing population, one that is growing older and, in many cases in the last 

years, sicker—and we are going to return to that process—the private plans don’t have their own fund, and those payments for 

Medicare Advantage are drawn from the regular trust funds, and 

there are some major implications there. 

Overpayments are directly negatively affecting the solvency in 

the general revenues for Medicare, and it is something we will 

have to look at. 

The report does highlight a large migration in the coming years 

from the traditional fee-for-service plans, and we can see how the 

plans have overtaken physician spending, for example, and are now 

second only to hospitals in terms of the provider costs. 

The report also highlights that part B spending is artificially understated because the trustees are forced to assume continuation of 

the current law under which the physicians are scheduled to get 

a 10 percent cut next year and nearly a 5 percent cut each of the 

following 8 years. I think it is pretty clear that the political climate 

won’t allow that to happen to such an extent. 

So, we have our work cut out for us. I think most of us agree 

that all payments and all providers are going to have to be reviewed, and I look forward to working with my colleagues on both 

sides of the aisle and the administration to see if we can balance 

the competing priorities and enact a Medicare policy that is good 

for the beneficiaries, the taxpayers, and fair to the providers. 

A big job ahead of us, and I look forward to the assistance of my 

Ranking Member, Mr. Camp, and I look forward to his comments. 

Mr. CAMP. Thank you very much, Mr. Chairman, for holding today’s hearing. I also want to welcome CMS Chief Actuary Rick Foster, who will testify about the 2007 Medicare trustees Report. 

Having seen the report, which was released on Monday, the longterm solvency of Medicare isn’t getting any better. The Health Insurance Trust Fund, which finances Medicare part A, is now projected to be exhausted by 2019. The Supplementary Medical Insurance Trust Fund, which finances both part B and Part D, continues 

to grow at a rate that is greater than both the rate of growth in 

private insurance and total national health expenditures. 


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Unlike part A, part B of Medicare does not face insolvency, but 

that is only because the program gets its funding from beneficiaries’ premiums and general revenue. Because of the rapid 

growth in part B spending, beneficiary premiums have significantly 

increased over the last 4 years. Further growth in part B spending 

can only mean dramatically greater costs for both Medicare beneficiaries and taxpayers. 

I also want to briefly discuss what I believe will be a topic during 

today’s hearing, the 45 percent trigger. This is the second year 

Medicare trustees have signaled that program outlays will be comprised of at least 45 percent of general revenue funds, and under 

statute both the President and Congress must respond to this 

warning next year. 

I think it is important that Congress not pass on an opportunity 

to bring real reform to Medicare. We can’t afford to wait any longer 

because financial pressures threatening Medicare only grow greater 

with each passing year. 

One positive item in the Trustees’ Report highlights how we can 

potentially strengthen and improve the Medicare Program. Program costs for Part D are 30 percent lower than what was projected when the Medicare Modernization Act was passed in 2003, 

and in 2007 alone plan bids came in 10 percent lower than the previous year. To me, this is evidence that competition is working. 

Participating plans have successfully negotiated with drug companies and pharmacies to offer plans to seniors at lower cost. Part 

D is the only part of Medicare that has a lower rate of growth than 

expected. 

Some commentators have suggested that with different parties 

controlling the legislative and executive branches of government it 

is unlikely that we will enact any serious health care legislation 

this year. I still recall, however, a divided Federal Government 

came together to make difficult choices in the past, and this resulted in 1997 in the Balanced Budget Act, which ultimately led to 

major reforms strengthening and improving the Medicare Program 

and extended the solvency of the HI Trust Fund. 

I certainly hope, Mr. Chairman, that we can work together again 

to address this new challenge, and I look forward to working with 

my colleagues as well on both sides of the aisle as well on this 

issue. I thank you for the opportunity to address this. Thank you. 

Chairman STARK. I want to announce that during this period 

General Petraeus is enlightening the Members on problems in Iraq, 

and the Chair is one of the few Members in Congress who hasn’t 

signed the secrecy pledge, so I can’t go. But my colleagues may be 

interested, and should be, in hearing what he has to tell us. So, you 

may notice that they are coming and going. 

I have suggested to the minority staff that if they have some 

written questions that you would like to have on the record, I 

would be glad to present them to Mr. Foster for you. The same 

would hold for Mr. Doggett, who I know has constituents who are 

interested in getting a report on General Petraeus’ comments. So, 

I will try and see that if there are any questions that my colleagues 

want to have directed to Mr. Foster, we can. 

I am again pleased to have you, Rick. I would like you to take 

as much time as you desire. Normally we talk about 5 minutes, but 


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you have got a rather major report. So, why don’t you just proceed 

to enlighten us in any way that you feel comfortable. 

STATEMENT OF RICHARD S. FOSTER, CHIEF ACTUARY, 

CENTERS FOR MEDICARE & MEDICAID SERVICES 

Mr. FOSTER. Thank you, Mr. Chairman. 

Chairman STARK. Pull the mike as close as you can to you. 

Mr. FOSTER. Yes, I remember these microphones well. 

Chairman Stark and other distinguished Members of the Committee, I really want to thank you for inviting me here to testify 

today about the financial outlook for the Medicare Program. I will 

briefly summarize the key points from the new Trustees’ Report 

that just came out this past Monday. 

By way of background, let me start off by reminding you that the 

purpose of the Trustees’ Report is to assess the ability, the adequacy of the income of a trust fund and its assets, to ensure that 

benefits can be paid on time. In particular, while this may be somewhat of a narrow question, it turns out to be a fundamentally important question because unless we have a positive asset balance 

in a trust fund, then we don’t have the statutory authority to make 

benefit payments. 

So, the two are tied together. As I said, it is a narrow, but it is 

an important one. 

It is not the only kind of question that can be asked. For example, we frequently hear questions having to do with, is Medicare 

sustainable in the long run? Or what is the impact of Medicare on 

the Federal budget? These are important questions, but they are 

fundamentally different questions than whether the trust funds are 

technically solvent or not. Unfortunately, you can’t use one answer 

for the other question because they are just independent of each 

other. 

So, what I will be talking about and what the Trustees’ Report 

is all about is the assessment of the financial status and the ability 

of a trust fund to pay benefits when they are due. 

Medicare has three trust fund accounts. There is one, the Hospital Insurance Trust Fund is well known; and then for the part 

B and Part D components of supplementary medical insurance, 

there is a separate account for each part of the program within the 

Supplementary Medical Insurance Trust Fund. 

Of course, there is a Part C of Medicare or Medicare Advantage, 

but its payments or the payments to those plans are made from the 

part A and the part B accounts for Medicare. It doesn’t have its 

own separate account. 

By law, each trust fund account is separate. In other words, 

there is no provision that allows shifting revenues or assets from 

one trust fund account to another. There is no such provision. Consequently, to evaluate the financial status of Medicare, you have to 

look at each separate account individually and assess the adequacy 

of its income and assets. 

I might add that the trustees make projections under current 

law; they don’t assume any change in the laws regulating the program, and the projections are necessarily uncertain. 

If you think about it, health care costs and their rate of increase 

from one year to the next can be somewhat volatile and, therefore, 


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hard to project. In addition, they are even more uncertain than 

normal because of the drug benefit, which is a relatively new program yet. We are starting to get actual experience on it, but it still 

is quite new. We don’t have decades of a track record like we do 

for Parts A and B. So, the projections, while uncertain, can still 

provide useful policy information and can be useful in the development of the Medicare Program itself. 

I will talk now about the individual accounts and their financial 

status as shown in the Trustees’ Report, starting with the Hospital 

Insurance Trust Fund. 

Most of the financing for this fund, as you know, comes from the 

HI payroll tax which is part of the FICA and SECA payroll taxes. 

These rates are set in law and they can’t change to accommodate 

higher or lower spending levels unless the Congress acts to change 

them. 

The hospital insurance financial status has improved slightly 

since last years Trustees’ Report, but it remains fairly poor, I have 

to say. Costs for hospital insurance are expected to exceed the tax 

revenues to the trust fund in this year, 2007, and all future years. 

The difference, the shortfall, can be met for a while by using the 

interest earnings on the invested assets and also by redeeming 

those assets themselves, but in 2019, as you mentioned, Mr. Chairman, the assets would be totally depleted, and at that point, if 

there is no corrective action, we could not pay all the benefits that 

are owed on time. The 2019 depletion date, incidentally, is estimated at 1 year later than the estimate from a year ago. 

At the end of the trustees’ long-range 75-year protection period 

the schedule tax revenues for hospital insurance are expected to be 

sufficient to cover only less than one-third of the projected HI expenditures, so that signifies a very large actuarial deficit, which we 

are seeing just the beginning tip of, currently, but it would grow 

steadily worse. 

For supplementary medical insurance and the part B account, 

here the financing is about 25 percent from beneficiary premiums, 

with the other 75 percent met by general revenues. Every year we 

reset or redetermine the premium and general revenue financing 

for part B, and as a result, income will keep pace with program expenditures and the part B accounts in the trust fund will never go 

broke. 

A concern has been raised, however, about the rate of part B expenditure growth. For example, over the last 6 years, on average, 

part B expenditures went up by about 11 percent per year. In addition, for part B, as you know, there is a major problem with the 

mechanism for paying physicians under Medicare—the sustainable 

growth rate mechanism. 

Under current law it would require us to reduce physician fees 

under Medicare by 10 percent at the start of 2008; and then at the 

start of 2009, we would have to reduce them another 5 percent; and 

at the start of 2010 another 5 percent beyond that, et cetera, for 

about another 8 or 9 years. Collectively, that would result in a reduction in physician fees of 41 percent in 2016, compared to today’s 

level, so not only no increases, but a 41 percent reduction. 

That situation is clearly implausible, and the Congress has overridden scheduled reductions for each of the last 5 years; and frankVerDate Aug 31 2005 02:32 Dec 09, 2008 Jkt 043689 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 E:\HR\OC\A689.XXX A689

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ly, I think you all are pretty likely to continue doing so in the future. What that means, however, is that the actual part B expenditures are quite likely to exceed the projected amounts shown in the 

Trustees’ Report, which are based on current law, including all 

those reductions in physician payments, and in the longer run, the 

understatement in the Trustees’ Report might well be in the range 

of 25 to 40 percent, so a fairly serious understatement. 

Turning to the Part D account in the Supplementary Medical Insurance Trust Fund, Part D financing is similar to part B in that 

it comes from enrollee premiums, which currently cover about 7 

percent of program costs; but that percentage will increase somewhat over time. General revenues provide the lion’s share of the financing, currently about 82 percent, and then the payments, special payments by the States on behalf of the dual Medicare-Medicaid beneficiaries, those currently account for about 11 percent of 

total program costs. But that share will decline somewhat over the 

next 10 years. 

The good news about Part D is that the cost estimates have come 

down significantly, and over the first 10 years of the projection, 

they are now 13 percent lower, or about $127 billion, than what we 

estimated for the same period a year ago. I can describe for you the 

reasons for this difference in the estimates once we get to the questions and answers. 

Part D will also be an automatic financial balance, like part B, 

because we have this annual redetermination of the beneficiary 

premiums and the general revenue financing, so we won’t have this 

trust fund going broke either. But it is important to note that we 

do project costs to grow fairly quickly in Part D over the next 10 

years, averaging about 12.6 percent per year, with a bit over a 

third of that due to more enrollment and the balance due to increases in the per capita cost. 

There is a basic challenge in financing Medicare or health insurance plans of just about any kind. It is not unique to Medicare, but 

that is, if you think about how the expenditures increase, health 

care costs grow if you have more people who are eligible for the 

coverage, for the benefits. They also grow based on increases in the 

price per medical service performed, and that typically reflects 

wages and price increases. But beyond that, as well, beneficiaries 

tend to use more services over time. The utilization goes up, and 

moreover, the intensity of those services or the average complexity 

goes up also. That is a function largely of technology. 

Every year smart people invent new services, new techniques, 

new drugs, whatever, and we as the consumers of them want those 

because they make us in better health. 

So, for all of those reasons, health care costs tend to increase at 

a faster rate, say, than our incomes or the national economy, and 

that causes a financing pressure. It makes it harder and harder 

over time to pay for the health insurance programs. 

On top of that, of course, we have the demographic problems that 

are fairly well known at this point. With the retirement of the baby 

boom population, the number of beneficiaries will increase much 

faster than the number of workers, and in addition, as the baby 

boom generation ages, they will move into the higher ages where 


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health care costs grow the fastest or are the highest. That will contribute also. 

For Medicare, in total, currently the expenditures represent 

about 3.1 percent of gross domestic product, or the total size of the 

economy; but by the end of the trustees’ long-range projection period that cost level has grown to 11 percent under their intermediate assumptions. 

Let me say just a couple words about the 45 percent trigger that 

has gotten so much attention this year. This was enacted as part 

of the Medicare Modernization Act in section 801, and the next couple sections as well, and it works as follows: 

If the difference between Medicare expenditures and what is referred to as the ‘‘dedicated revenue sources’’—and by that, I mean 

the payroll taxes, the premiums, the State payments, and the small 

amount of revenue we get from income taxes on Social Security 

benefits—so if those four dedicated revenue sources fall short of 

total expenditures to the extent of 45 percent, if the difference is 

at least 45 percent and is projected to get there within the first 7 

years of the projection, then that prompts a determination by the 

trustees of excess general revenue Medicare funding. 

Now if that determination is made in two consecutive Trustees’ 

Reports, as it was—for example, the 2006 report had such a determination of excess general revenue Medicare funding, and we have 

now had a second consecutive determination in the 2007 report. 

When that happens, it triggers a, quote, ‘‘Medicare funding warning.’’ So, this funding warning is now met or triggered for the first 

time with this report. 

The Medicare funding warning requires that the President submit legislation designed to respond to the warning, and he has 15 

days after the next budget submission to do that. In this case, that 

would be the fiscal year 2009 budget that comes out in early February 2008. So, either as a part of that budget or within 15 days 

afterward the President must submit the legislation, and then Congress is required to consider the legislation on an expedited basis 

under special rules. 

The test itself is a little more complicated, perhaps, than I might 

prefer, but I would characterize it as a useful measure, useful indication of the magnitude of the general revenue financing that is 

provided under current law for Medicare. 

For many years, hospital insurance always got the attention because the HI Trust Fund was always going broke or threatening to 

go broke. The Parts B and D of Medicare, which were, in fact, increasing at a faster rate than part A, got relatively little attention. 

So, I think the intent of this new test, this new funding warning, 

was to call more attention to the magnitude of the general revenue 

financing and to the impact on the Federal budget; and I think it 

useful in that regard. 

We have to be careful, however, because a Medicare funding 

warning, despite its title, should not be interpreted as an indication 

that trust fund financing is inadequate. It is not that kind of measure. That sort of assessment can only be made, as I mentioned, by 

looking at each account individually and assessing the adequacy of 

its financing and assets. 


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Let me finish up by saying that based on the projections in the 

2007 Trustees’ Report, the Medicare board of trustees recommends 

prompt attention to the financial challenges facing Medicare. 

Chairman Stark, as you well know, for many, many years, really, 

many decades, the Office of the Actuary at CMS has helped Congress and the administration in analyzing the financial situation 

and what might be done about it; and I would just like to pledge 

the Office of the Actuary’s continuing assistance to Congress as you 

continue to strive to solve these challenges. 

I would happy to answer any questions that you might have. 

[The prepared statement of Mr. Foster follows:] 


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Chairman STARK. Rick, thank you very much. My staff deeply 

appreciates your offer of helping us, because as we try and reconcile whatever savings we will have to find in the Medicare Program this year, we are going to need a lot of help estimating a figure that, whatever changes we make, will create in the overall. 

I have got a couple of questions that I would like to get through 

and then a couple on your testimony. 

A chart on page 148 shows that growing enrollment and expenditures; that we are getting growing enrollment and expenditure in 

Medicare Advantage. It seems to me we are spending more, not 

less, on these private plans than we would spend in the traditional 

program. Is that a correct assumption? 

Mr. FOSTER. Yes, sir. Under the current payment mechanism 

for Medicare Advantage plans, except in rare circumstances, we 

end up paying more for those enrollees than we would for the traditional fee-for-service enrollee in the same area. 

Chairman STARK. That would be the case during the whole 75- 

year window? You don’t see any way of growing out of this? 

Mr. FOSTER. We don’t see any change under current law in that 

regard. The degree of the higher payments would change somewhat, but they would remain higher than the fee-for-service cost. 

Chairman STARK. So, in your opinion, if we followed MedPAC’s 

recommendations with respect to the Medicare Advantage plans, 

the financial condition or outlook for Medicare would be improved? 

Mr. FOSTER. Yes. If you mean, by that, their discussion of setting the Medicare Advantage benchmarks equal to the fee-for-service cost in the area, yes, that would reduce costs. 

Chairman STARK. Because the part B premiums are based on 

total part B expenditures, which include payments to the Medicare 


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Advantage plans, isn’t it true that the part B premiums are raised 

for all beneficiaries even though 80 percent of the beneficiaries 

aren’t in Medicare Advantage plans? In other words, we have to 

raise the part B premiums on all Medicare beneficiaries to pay for 

the slightly less than 20 percent who are in Medicare Advantage 

plans; is that a correct assumption? 

Mr. FOSTER. Yes, sir, it is. There is a standard premium for all 

beneficiaries; and as you know, of course, starting this year, there 

is also an income-related premium for certain high-income beneficiaries. But the premium is the same for each income category regardless of whether you are in a Medicare Advantage plan or not; 

and we have estimated that the additional payments to Medicare 

Advantage plans above and beyond what the fee-for-service cost 

would have been adds about $2 per month to the standard part B 

premium. 

Chairman STARK. If the Advantage rates had been equalized, do 

you know whether or not we would have hit the 45 percent trigger 

in the past 2 years? 

Mr. FOSTER. Well, we wouldn’t have hit the trigger in the past 

2 years because if you had lower expenditures, then the ratio would 

go down and that would extend when you hit the trigger. 

I misunderstood your question. You are saying, would we in fact 

have 

Chairman STARK. Been under the 45 percent? 

Mr. FOSTER [continuing]. Been under 45 percent within the 7 

years? We might not have. In other words, we might have stayed 

below the 45 percent. 

We could figure that out for you, but we have not actually done 

the calculation. 

Chairman STARK. If it is easy to figure out, I would be curious 

to know it, but I am not sure that it is a bit of information that 

will sway a lot of votes. 

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Mr. FOSTER. I would tend to think that—because in 2013, in 

the projection currently, we are only slightly above the 45 percent 


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threshold, it is my guess that the lower payments, if the law were 

changed in that way, would reduce us below that threshold for 

2013—maybe for not a lot longer. 

Chairman STARK. If we had lowered the Advantage payments 

to equalize the fee-for-service rates, what would have been the effect on the solvency projections? Do you know that? 

Mr. FOSTER. Yes, sir. If we set the benchmarks at the fee-forservice level, that would reduce part A payments to Medicare Advantage plans, just like part B payments; and we have estimated 

that would extend the insolvency date for about 2 years. 

Chairman STARK. You mentioned in the Part D that the costs 

were about 13 percent below the estimate. Can you tell me what— 

how much of that reduction, or cost savings, maybe it is figured in, 

would come because there was lower enrollment than was anticipated? 

Mr. FOSTER. I can provide the specific answer for you for the 

record. I can tell you less quantitatively that is one of the factors 

behind the lower estimated cost, but it is also one of the smaller 

factors. 

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Chairman STARK. Are generic drugs one of the factors, higher 

utilization of generics? 


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Mr. FOSTER. That is one of the factors actually in two different 

respects. 

If I may elaborate on that, the biggest factor underlying the 

lower cost estimates that we have today, compared to our original 

ones from 2003, far and away the biggest factor is that in 2004, 

2005 and 2006 the cost growth for prescription drugs per capita in 

the country at large, not just Medicare, but that cost growth was 

suddenly only about 5 to 6 percent per year; and that is really only 

about half, less than half of what it had been for more than a decade prior to that. 

So, that was a dramatic slowdown in the rate of cost growth for 

prescription drugs, and that affected the Part D program as well. 

So, that is the biggest factor. 

Part of that is that the private sector plans—in fact, all drug 

plans—had a big push to increase the use of inexpensive generic 

equivalents and to cut back on the use of more expensive brandname drugs. So, that contributed to this slower growth rate, along 

with other factors. 

In addition to that, another one of the significant differences between the cost estimates had to do with the savings that Part D 

plans could generate by negotiating favorable retail price discounts, 

also manufacturer rebates. Through utilization management, we 

had originally expected such savings could represent 25 percent 

savings off of a retail level, but we thought it would take competition among plans a few years to reach that ultimate 25 percent. We 

were pleasantly surprised to find that the plans anticipated about 

27 percent in the very first year and again in 2007. So, their savings from the retail discounts, the rebates, and the utilization management were bigger than we thought they would be initially, and 

similar thereafter. 

The last factor has to do with the 10 percent reduction in the 

bids that you mentioned, Mr. Chairman. This was, again, a welcome surprise and somewhat startling. Drug plan costs generally 

increase over time, and so when we discovered that the bids, on average, had actually gone down 10 percent in 2007 compared to 

2006, it was, as I said, quite a surprise. 

Now many of the plans are continuing to push the generic use 

as a way to keep their costs as low as possible and to be competitive. In addition, we saw many plans in 2006 that had not bid terribly competitively, and as a result, they had relatively high premiums and they weren’t competitive. They didn’t get much enrollment. Most of those plans came in trying a lot harder in 2007, and 

in fact, they mostly were able to reduce their bids to a more competitive level. 

Chairman STARK. Along that line, however, isn’t it correct that 

the government, if they are overly aggressive in lowering their 

bids, then Health and Human Services comes in and gives them a 

subsidy to cover some of the costs so that, in effect, if I am running 

a drug plan, if I understand this system, if I do a low-ball bid, then 

I will get extra money from Health and Human Services to cover 

some of the costs that may result from my bidding too low. 

Is that not the way the system works? 

Mr. FOSTER. That is pretty close to the way it works. 


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Chairman STARK. How much would you guess that we are going 

to end up spending on these so-called risk sharing payments? 

Mr. FOSTER. Well, we have had to think about exactly that 

issue, Mr. Chairman. Because the bids for 2007 were so low, you 

have to ask yourself, are they overly aggressive, can the plans actually fulfill this level of cost that they are expecting? We decided 

that at least for some of the plans, on average, they probably cannot for the 2007 bids. 

Now, we estimate—based on what are frankly some relatively 

crude assumptions about how many plans and by how much, we estimate that for the next couple of years, based on the 2007 and 

2008 experience, that we will have to pay back to the plans about 

$1 billion per year, roughly $1 billion. 

Chairman STARK. For how long? 

Mr. FOSTER. Well, for the experience coming out of 2007 and, 

again, for the experience coming out of 2008. 

For 2006, we actually expect to get money back from the plans 

because the risk sharing works both ways. If they do better than 

their bids, they have to share with us on the same terms their 

extra profits. So, in the first year, for 2006, we expect to receive 

a modest amount of returned amounts from the plans, but thereafter, about—a little over a billion dollars for 2 years. There is a 

table in the Trustees’ Report that shows these estimates. 

Chairman STARK. How about over a longer period of time? 

Mr. FOSTER. We expect it to gradually decrease. 

It is reasonable to think that there will continue to be a very 

heavy degree of competition among plans, intense competition, as 

we have seen so far; and there might continue then to be some degree of either excess optimism, or over aggression or whatever you 

might want to call it, such that, on average, they might continue 

bidding a little lower than they can actually achieve in practice. 

Now, starting in 2008, the risk-sharing arrangements, the risk 

corridors, are no longer as favorable from the plan standpoint, so 

if they lose money from bidding too aggressively, they have to retain more of the loss than they do for 2006 and 2007. 

Chairman STARK. Do you want to give me an aggregate figure 

guess for 10 years? 

Mr. FOSTER. We can add it up for you, but it starts off at a little over a billion a year and then quickly goes down to about 0.4 

billion. Hang on a second; we will look up the year-by-year figures 

for you. 

Chairman STARK. I have one more question, and I will let my 

colleagues jump in here. 

Mr. FOSTER. Let me go ahead and answer this one for you. 

On page 158 of this year’s Trustees’ Report, we have a table that 

shows, in the next-to-the-last column, the net amount of risk-sharing payments made by Medicare. For 2007, we expect to pay on behalf—I am sorry, to receive on behalf of—plans experienced in 2006 

about $1.2 billion that they have to pay us back. 

Within the next year, we estimate having to pay them another 

1.2 billion as loss sharing; then 1.1 billion; then 0.9, 0.8, et cetera, 

and in the tenth year, about 0.7 billion. 

Chairman STARK. For a total of—— 

Mr. FOSTER. I can add it up. 


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Chairman STARK. Around 7 billion, I am willing to bet you. I 

can’t do that with my shoes and socks on. 

Mr. FOSTER. 6.9 billion. 

I should introduce who is behind me. This is Paul Patalnek, who 

is the director of our Part C and D actuarial group, a position created by the MMA. 

This is Clare McFarland, the deputy director of our Medicare and 

Medicaid cost estimates group. 

Chairman STARK. Welcome. 

Mr. FOSTER. Elizabeth Hall, who I am sure you know. 

Chairman STARK. I hope we can see more of you. 

Let me just do something on part B, because as I mentioned, we 

are going do have to deal with the physician reimbursement. But 

you mentioned that physicians, under current law, which is what 

you used to base your estimate of the 11 percent per year growth, 

that their income would have to drop 10 percent. 

Now, my guess is that you don’t mean income, but you mean 

their rates per procedure would drop 10 percent. 

Mr. FOSTER. Yes. If I said income, I should have said rates per 

procedure. 

Chairman STARK. Therefore, if we are going to have an 11 percent per year growth, unless you assume you are going to get a 10 

percent a year increase in the number of docs, is it fair to assume 

that even in the face of a per-procedure cut, that the physicians 

may be receiving at least as much or more gross payments or income from the Medicare part B system under fee-for-service? 

Mr. FOSTER. It is certainly true that a physician’s revenue from 

Medicare reflects not only the payment per service, but how many 

services they perform. It also depends on the type of service they 

perform. 

So, for example—and let me mention, 11 percent is the actual 

historical growth rate on average over the last 6 years—under current law we project—and that was for part B in total, not just physicians, but part B—we project for total part B spending over the 

next 10 years an average growth rate of 6.6 percent, but that reflects the current law reductions in physician payments. 

If Congress continues to override the payment reductions for 

physicians, then the growth rate would probably be more like 8 to 

9 percent. 

Chairman STARK. Thank you. Thank you very much. 

I am going to recognize, with Mr. English’s concurrence, Mr. 

Doggett, and then Mr. English. 

Mr. DOGGETT. Thank you very much. I am glad you are here 

under less contentious circumstances than your last testimony to 

the Committee. 

If I understand your testimony and the way this 45 percent trigger works, next February we should be receiving a report from the 

President outlining the steps that he recommends we take, perhaps 

the cuts in Medicare he had in his budget this time. Or he could 

propose changing the eligibility age of people, any number of things 

that would reduce the likelihood of the general revenue needs exceeding this amount. 

Mr. FOSTER. That is correct. 


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Mr. DOGGETT. As to that 45 percent number, my recollection is 

that we never had a hearing in the House or the Senate to establish it, we never had anyone discuss it, that it was snuck in in the 

dead of night, or the light of day behind closed doors, in a conference Committee. 

Isn’t it a rather arbitrary number? Have there been any studies 

or expert testimony to say that 45 percent is an appropriate trigger 

figure? 

Mr. FOSTER. I, too, was not part of the development of that particular threshold, so I am not in a good position to comment. I will 

say that it clearly must be judgmental; there is no scientific—— 

Mr. DOGGETT. Just as the 2 consecutive years is arbitrary and 

judgmental. 

Mr. FOSTER. Yes. 

I wouldn’t say any of it is unreasonable. I think it is for a worthwhile purpose, but clearly it is judgmental. 

Mr. DOGGETT. You discussed this a little with the Chairman 

about the lower enrollment and the impact that it had on lowerthan-expected costs in Part D. Do you have data available on how 

many of those, as far as the decrease in enrollment, are the lowincome, subsidy-eligible or extra-help-eligible individuals? 

Mr. FOSTER. Relatively few out of the total difference that has 

come about between what we originally thought and the actual enrollees, relatively few of those people are in the low-income-subsidy 

category. We knew, of course, going into it that all of the MedicareMedicaid dual beneficiaries would be auto-enrolled or facilitated 

into the program, and we had a pretty good idea about the additional number who would come in. So, that is not a large number. 

Mr. DOGGETT. As far as the group that is not automatically enrolled, but entitled to extra help, people that are not in Medicaid, 

are the number that have participated—how do they compare with 

the number that you estimated in your actuarial estimates originally? 

Mr. FOSTER. Currently, the total number of Part D enrollees 

who qualify for the low-income assistance is about 9.5 million, and 

we have estimated at one time or another that the total universe 

of people who we think would be eligible is about 13 million. 

I always have to caution everybody that estimates like that are 

very hard to do. 

Mr. DOGGETT. Of the 13 million, did you estimate originally 

how many you thought would take advantage of the program, 

would actually be enrolled? 

Mr. FOSTER. Yes, we did; and I don’t remember the figure off 

the top of my head. 

Mr. DOGGETT. Is that something you could forward to our staff, 

because we have a hearing next week that relates to this subject, 

and I would appreciate getting the number by then. 

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Mr. DOGGETT. Then on the question of the efficiency of Medicare in fee-for-service, have Medicare’s administrative costs remained low? 

Mr. FOSTER. Yes, sir. If you look at the total administrative 

costs for Medicare, including everything that we incur at CMS, as 

well as what we pay for our intermediaries and carriers and other 

contractors to help process the claims and all, that total cost is a 

bit under 2 percent of total expenditures. 

Mr. DOGGETT. Is there any private plan in Medicare that comes 

close to that level of administrative costs? 

Mr. FOSTER. No. Virtually no health insurance plan would be 

that low. We have a giant economy of scale, which helps a lot. We 

don’t have to earn a profit as a government entity, which helps 

some. 

But the other part of it is, we are probably not spending enough. 

I don’t want this to sound like a blatant appeal for more funding, 

it is not that, but if you look at the private health insurance plans, 

they put a lot of resources behind tracking their claims experience 

monthly, or even weekly in some cases, to see how it develops. If 

they spot something funny involving potential fraud, for example, 

they are able to act on it very quickly. 

CMS is doing a much better job than, say, 5 or 10 years ago, but 

I would argue we are not doing enough in that regard. 

Mr. DOGGETT. Do you have an estimate of what additional 

amount would be cost productive to expend there? 

Mr. FOSTER. No. We don’t have such an estimate, but past exercises have indicated you generally get a multiple return on your 

administrative dollars in this respect. 

Mr. DOGGETT. Mainly in looking for fraud? 

Mr. FOSTER. Fraud, but also what I would consider abuse. 

Let me give you an example. In my office a few years ago we 

were trying to understand why durable medical equipment costs 

were going up so quickly. That was the unit that we measured for 

that category of expenditures, durable medical equipment, and it 

was increasing much more rapidly than it had been. 

So, we looked at the subcategories, and in the process, we discovered that powered wheelchairs, the expenditures on such devices 

were increasing at about 40 to 50 percent per year for 4 years. So, 

we called this to the attention of other folks at CMS, and everybody 

dug into it a bit to see what was happening, and they revised the 

rules and so forth. 

Ideally, somebody—we or somebody else—would have discovered 

that problem in the first year, not the fifth year, before we had already spent a billion dollars, perhaps excessively, on the devices. 

Mr. DOGGETT. Well, could we enlist the assistance of your office 

in talking to the Congressional Budget Office and working to get 

some scoreable services on antifraud and abuse investments? 

Mr. FOSTER. We would be happy to talk with them and show 

them some examples of specific initiatives that have worked well. 

Mr. DOGGETT. I think that would be helpful. We are trying to 

find all the savings that we can in order to address some of the 

needs here. 

Then just, finally—and thank you for your consideration on this, 

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ably, on the efficiency and administrative expenses of Medicare Advantage plans. Are there any estimates on what their administrative costs are? 

Mr. FOSTER. Yes. In fact, I do have some data here for Medicare 

Advantage plans, and these are broad averages of the plans participating in Medicare, the overall administrative cost, including profits, averages out about 13 percent. 

Mr. DOGGETT. So, we probably afford all of the antifraud, 

antiabuse changes that you could ever conceive of with Medicare’s 

less than 2 percent expense and still have substantial savings over 

those Medicare Advantage plans. 

Mr. FOSTER. Substantial savings? 

Mr. DOGGETT. In terms of the administrative costs. 

Mr. FOSTER. But there are other components that go into it. 

In fact, if it is all right, I will mention just briefly, the private 

plans have the potential to have a lower cost for the Medicare covered services than fee-for-service if they can do the following: 

If they can negotiate more favorable prices for the services they 

get from their own providers than the Medicare payment rates, or 

if they can manage care so you avoid some of the unnecessary or 

harmful services, they can reduce money compared to Medicare feefor-service. But they have to reduce it enough to offset their disadvantage on the administrative cost, because they have to make 

a profit and they don’t have the economy of scale. 

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

service. 

Mr. FOSTER. You are welcome, sir. 

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

Mr. ENGLISH. Thank you, Mr. Chairman. 

Mr. Foster, thank you for the opportunity to examine a program 

that obviously has been challenged as long as I have been in the 

House of Representatives, but with some wrinkles. 

Mr. Foster, this year the Trustees’ Report significantly lowered 

their expenditure projections for Part D. I think you have testified 

that they are 13 percent lower than last year. 

How much lower is the 2008 estimate of Part D cost as compared 

to the original estimate in 2003? 

Mr. FOSTER. That I can provide for you for the record. I don’t 

have the figures with me. It would be roughly on the order of 30 

percent. 

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Mr. ENGLISH. Maybe more. 


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As you see it, what was the most significant factor for the trustees in their consistently lowering their cost projections for this part 

of the program? 

Mr. FOSTER. The biggest factor is actual data over time. 

When you go back to 2003—the latest survey data we had on 

drug use by Medicare beneficiaries dated back to either 1998 or 

1999, so we had to project forward from the late nineties to 2006 

as to how the cost would increase over that time. 

I think we did a good job of that at the time, but then, as I mentioned earlier, starting in 2004, the annual cost increase per capita 

dropped abruptly, taking us and virtually everybody else by surprise. 

Mr. ENGLISH. I understand your analysis, but isn’t it also true 

that Part D plans were able to actually negotiate deeper discounts 

from drug manufacturers than the trustees had originally anticipated? 

Mr. FOSTER. Yes, sir, that is correct. 

Mr. ENGLISH. By what dimension? 

Mr. FOSTER. We originally estimated—really, it was an assumption—that ultimately the pharmacy benefit managers, working on 

behalf of the drug plans, would be able to achieve savings off of retail level of about 25 percent. That represented, roughly, the best 

experience in PBMs that occurred at the time. 

We thought, initially, plans would not get there immediately. We 

thought the competition would take a few years to develop. So, we 

had an assumed savings of about 15 percent in the first year, 

building up to the 25 percent level over a few years. 

In real life, when we got the bids for 2006, the actual savings for 

retail discounts, utilization management, and manufacturer rebates 

came in at 27 percent, so a little higher than our ultimate assumption was. 

Mr. ENGLISH. Mr. Foster, on a different point, the Trustees’ Report estimates part B premiums, and it appears to me at least that 

the estimates are unrealistically low on the strength of the fact 

that built in is a assumption that current law will not be overridden. That would require Medicare payments to physicians to, in 

effect, be cut by 10 percent in 2008 and 5 percent for the next 8 

years. 

I don’t think that is going to happen. If Congress modifies these 

changes, beneficiary premiums necessarily will have to increase. 

If Congress were to provide a 1-year fix for physicians, what 

would the impact be on part B premiums for next year? Looking 

beyond that, if the SGR were to be eliminated altogether, what 

would be the consequences for part B premiums paid by seniors to 

participate in this program? 

Mr. FOSTER. Yes, let me give you a specific example to answer 

your question. 

The premium this year, 2007, the standard part B premium is 

$93.50 per month. We anticipate under current law in the Trustees’ 

Report, as you suggested, that if nothing is done about the physician payments, the premium would have to increase modestly to 

$96.40 per month for next year. That is about a 3 percent increase. 

Now, if instead Congress acts to avoid the 10 percent reduction 

in physician fees that would occur otherwise under current law and 


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if you avoid that by providing a zero percent update—in other 

words, freezing the payment rates at current levels—then the premium would have to increase to $100.50, so about a $4 increase 

compared to current law. 

If instead of the zero percent update, if the update were, say, 

equal to the Medicare economic index, which is a measure of input 

costs for physicians, then the premium—and it would be about a 

2 or 2.5-percent increase for physicians in that scenario—then the 

premium would be $101.40. In other words, about a $5 increase. 

Mr. ENGLISH. I think that is extremely useful information, because undoubtedly we are going to be under pressure to consider 

precisely those sorts of changes. 

I yield back my time. Thank you, Mr. Chairman. 

[3:09 p.m.] 

Chairman STARK. Thank you, Mr. English. 

Ms. Tubbs Jones, would you like to inquire? 

Ms. TUBBS JONES. Thank you, Mr. Chairman. Yes. I would. 

Good afternoon, Mr. Foster. How are you? 

Mr. FOSTER. Good. 

Ms. TUBBS JONES. I want to go back to an area that my colleague from Pennsylvania asked you about earlier with regard to 

claims information on the Medicare prescription drug program, 

Medicare Part D. We implemented Medicare Part D. Some of us 

like it, some of us don’t, some of us say it is doing a great job. But 

your job is to do projections moving forward to help us understand 

what type of shape the fund is going to be in, right? 

Mr. FOSTER. Yes, ma’am. 

Ms. TUBBS JONES. So, do you have any numbers at all with regard to Medicare Part D, claims numbers? 

Mr. FOSTER. We are only—we being the Office of the Actuaries—— 

Ms. TUBBS JONES. I understand. 

Mr. FOSTER [continuing]. We are now only starting to get the 

individual claims itself, the individual drug-by-drug claim data. We 

now have access to it, and we are now starting to look at it and 

assess its quality. We have other data. We have actual data on enrollments. 

Ms. TUBBS JONES. Actual data on what? I am sorry, sir. 

Mr. FOSTER. Enrollments. How many people have signed up, 

what type of people, et cetera. We also have the data from the bids 

that the Part D plan submit. 

Ms. TUBBS JONES. The bids? 

Mr. FOSTER. Yes, the bids. As part of the process for the competition, they have to submit a bid by the first Monday or whatever 

it is in June, and that is the bid. They can’t go back and change 

it. They live or die by how good a bid that is competitively against 

the other plans. 

Now, the bids themselves are their expectations. They are still 

estimates. They give us a bid in early June, which is their estimate 

for the following calendar year’s cost, but they have a pretty good 

idea of what those costs ought to be. 

So, we have that kind of data, but insofar as what is happening 

in 2006 so far, we are only now really getting the data we have 

been wanting. 


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Ms. TUBBS JONES. Then back when this whole discussion 

about Medicare Part D began and there were projections, there was 

a big deal about what the real cost of Medicare Part D was really 

going to be. Back then it was—I guess the administration had some 

amount, and somebody else within the administration had a bigger 

amount, and supposedly that guy ended up losing his job because 

he said that amount was different than what the administration 

had originally planned. 

I say all that to say that actuaries are pretty—you are pretty— 

what is the word? You do projections, but you are pretty accurate 

with those projections. That is why we use actuaries, right? 

Mr. FOSTER. Sort of. 

Ms. TUBBS JONES. Sort of. Now, wait a minute. If I had you 

on a witness stand in a case, I wouldn’t want you to answer ‘‘sort 

of.’’ What kind of expert would you be, sort of? 

Mr. FOSTER. I would be glad to elaborate, ma’am. 

Ms. TUBBS JONES. I am saying that to say that the job of actuaries and the reason that we as a nation and a world have come 

to rely on you is because of the ability you have to take numbers 

and make some projections. 

Mr. FOSTER. It is partly that. It is partly perhaps our foolhardy 

willingness to undertake such projects. The reality is, of course, the 

future is uncertain, the future is unknowable. We do the best job 

we can to try to figure out what costs will be, what trends will be, 

and in some cases it is easy. If you ask us what would the savings 

be if we reduced a particular provider of market basket update by 

1 percentage point, we can tell you the answer to that quite precisely. On the other hand, if you ask us something like Part D, a 

new drug benefit, no past experience because the program hasn’t 

existed, it is voluntary, not everybody will sign up, and we don’t 

know how many plans we will get, with all those behavioral questions, that is really hard to estimate. 

Ms. TUBBS JONES. So, then you would be better—or we would 

be better spent, then, to have a section of the report say, well, we 

are unable to really give you any good projections about Part D 

right now. Let us—give us another year when we have some real 

numbers and some real expectations then to be able to make the 

projections of what kind of shape Medicare or Medicaid is in based 

on Part D versus all the hoopla we are getting about this is the 

best program in the world, you know, seniors are real happy, they 

are getting drug treatment—not drug treatment, maybe they need 

that, too—but prescription drug coverage and the like. 

I am just trying to understand as I try and swallow or understand the report that there are factors such as I am relating to you 

with regard to Medicare Part D that you really can’t tell us what 

is going on. 

Mr. FOSTER. We certainly can’t tell you with certainty. The best 

we can do or the best any actuary can do is to give you an idea, 

a reasonable idea, of what the cost might be under normal kinds 

of circumstances. That is a good thing for policymakers like yourself to know about as opposed to saying it is hopeless, let’s not even 

try. 

Ms. TUBBS JONES. If you could just give me 1 more second, Mr. 

Chairman. I know my time is up. 


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Is there anything else that I should be, as a policymaker, be concerned about that you can’t put your arm around on a number, 

other than Medicare Part D? What else is there that I need to be 

concerned about? 

Mr. FOSTER. The farther we go out with the projections, the less 

certain they become. We can predict maybe the next 5 years pretty 

nicely in most cases, but the further out you go, the more opportunity there is for health care costs, health care service and delivery, and the nature of medical practice to change in ways that we 

can’t anticipate now. 

Ms. TUBBS JONES. So, you are saying there could be included 

in this other group of some uncertainty the cost of equipment, the 

doctors’ fees, I don’t know what. 

Mr. FOSTER. There are literally dozens and dozens of such factors we have to take into account to make these projections. Again, 

I think they are reasonable to help you in policymaking, but you 

don’t want to bet the farm on our projections being exactly right 

in 5, 10 years or let alone 50 or 75. 

Ms. TUBBS JONES. Mr. Foster, I am a former judge, and I had 

a lot of experts. You are the most honest actuary I have ever heard 

from in my life. Thank you very, very much for your testimony. 

Mr. FOSTER. Thank you very much, ma’am. 

Chairman STARK. Mr. Thompson, would like to inquire? 

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

I have a couple of questions for the honest actuary. Thank you 

for being here. 

In your testimony you mentioned that the Part D plans, bids 

were 10 percent lower in 2007 than in 2006. Are you suggesting 

that this decrease could be attributed to the plans underbidding 

their actual cost in an attempt to gain market share? 

Mr. FOSTER. It is possible. In other words, it is conceivable that 

one or more plans would figure out the best they could do and possibly bid a little lower than that in an effort to get the lowest possible premium and to get market share, and knowing that they can 

rely on the risk-sharing arrangement to keep from losing too much 

money. 

However, they can’t get too carried away with this because my 

staff and I review these bids to make sure that they are plausible, 

to make sure that they are reasonable. If we spot what looks like 

a low-ball bid, we go back to them and we give them a hard time, 

we make them explain it, and often we don’t accept it. 

Mr. THOMPSON. Given that follow-up or that review, what are 

your assumptions on future plan bid increases or decreases? 

Mr. FOSTER. We expect starting in 2008—and this is more of 

an assumption than a solid fact of any kind—but we expect starting in 2008 that we will see a more normal kind of increase in the 

bids. 

Mr. THOMPSON. A more normal what? 

Mr. FOSTER. Sort of increase in the bids. It would be startling 

to have another decrease in the bids; not inconceivable, but startling. 

When they first went into this in 2006, of course, the plans themselves did not know for a fact what their costs would be. This was 

a new program for them as well. They might have been a little on 


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the conservative side to make sure they didn’t lose too much 

money. But now that they are getting some amount of experience 

in their first year, they had a better idea of where their costs would 

be in the second and later years, and they will get better with their 

bidding over time and dial it in. 

Mr. THOMPSON. Thank you. 

What portion of the decrease in Part D expenditures is due to a 

lower-than-expected enrollment? If that is the case, how many of 

those are low-income, subsidy-eligible individuals, your lack of data 

notwithstanding? 

Mr. FOSTER. Right. I will provide a detailed answer for the 

record, sir. I will give you more of a qualitative answer right now. 

Out of the three or four major factors explaining the difference 

in the cost estimates, the difference in enrollment is the smallest 

contributing factor. Within that, the low-income subsidy figures on 

the number of enrollees are not a big factor. But we will provide 

a more specific answer for you. 

[The information follows:] 


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Mr. THOMPSON. Okay. Thank you. 


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Then in regard to Medicare Advantage plans, should you expand 

your work to include more information about—I am talking about 

the Trustees’ Reports, future Trustees’ Reports. Should those be expanded to try to capture more information about the Medicare Advantage plans and their impact on the trust funds? 

Mr. FOSTER. Yes. I think that would be helpful. 

Mr. THOMPSON. How do we do that? Could you just do that? 

Do I have to ask Mr. Stark to tell you to do that? What do we do? 

Mr. FOSTER. Sooner or later we have to ask the Board of trustees just because we write the words for them, just because we 

make the projections, we draw the graphs and print the report. 

Mr. THOMPSON. So, should we send a Subcommittee letter to 

the Board or something? 

Mr. FOSTER. You certainly could. 

Mr. THOMPSON. What is the most effective way to get that? 

Put it in a bill someplace or—— 

Mr. FOSTER. Well, ultimately if you put it in the bill and it became law, of course, we would follow exactly that. But I think the 

easiest and best thing to do would be if you would like to send a 

letter to the Board of trustees asking for specific kinds of information, I am sure the Board would consider it. An even easier way 

is you just tell me. Have your staff send me a note about the kinds 

of things you would like to see in there. 

Mr. THOMPSON. Could you consider my questioning, then, you 

being told? 

Mr. FOSTER. I beg your pardon? 

Mr. THOMPSON. You said tell you. Would you consider my 

questioning as me telling you? 

Mr. FOSTER. Works for me, sir. 

Mr. THOMPSON. Thank you. Thank you very much. 

I have no further questions, Mr. Stark. 

Chairman STARK. Thank you. 

I would add to Mr. Thompson’s request in that as it—I guess it 

is now our second largest expenditure group. It is going to become 

more important for us to know how those expenditures are broken 

down and what is comprised in them. 

I wanted to ask just one other thing that I missed again. We 

have just started to income-relate the premiums. For the record, it 

is something to which I objected only because I think the system 

is already as progressive as it can be. You pay the tax on your income without limit. So, if you make $10 million a year, you pay a 

huge tax, and you get the same benefit as somebody making 

$10,000 a year. I don’t know why we should make it superprogressive. 

But relative to the part B premium change, a couple of questions. 

Could you tell me how many beneficiaries are being charged higher 

premium amounts? Do you have any idea of whether or not people 

are dropping out of Medicare because of the higher premiums? 

Then just other consequences to the plan that I am not aware of. 

So, I mean, relative to this kind of new procedure, do we know how 

many are getting charged? Is there any indication that they are 

dropping out because of this? Is it behavioral? What does it mean 

for—I don’t suppose it adds much to the part B—it doesn’t 


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change—or will it change what other people will pay? I don’t know. 

Could you enlighten me on that? 

Mr. FOSTER. Yes, sir, to an extent. We don’t have actual data 

yet on the number of people paying the higher premium. We will 

down the road a ways. What we have right now are our estimates 

of the number of people who would be affected by the income-related premium. Also we do estimate that some people would drop 

out or have dropped out either because they don’t think financially 

it is a good deal for them, or they are just irritated. 

For 2007, the first year of operation for income-related premium, 

we are estimating that about 2.2 million beneficiaries are subject 

to the higher premium rate, and that is a little over 5 percent of 

all the beneficiaries. We further estimate that figure would grow 

over time, such that in 2016 it would be about 3.2 million, and that 

is about a little over 6 percent of beneficiaries for that year. 

We don’t anticipate a large-scale dropout of people from part B 

as a result of this for many reasons, but we have estimated that 

initially for 2007 about 11,000 beneficiaries would drop out, and 

that would increase over time, reaching about 46,000 in 2016. 

Chairman STARK. Total or per year? 

Mr. FOSTER. That is total, total that would have dropped out. 

Chairman STARK. Well, I gather, then, that just the philosophical effect probably would be more than the financial effect on 

the system. 

I want to thank you for most generously offering to be involved 

in helping us wind our way through. I was talking to Mr. Camp 

earlier, and I don’t know that any of my colleagues on this Subcommittee have gone through the production of a reconciliation bill, 

and I would have a few senior moments remembering the last time 

I did. So, we are going to have a learning process here as we try 

to come to grips with whatever the budget will require us to save, 

and your staff could be most helpful to us in helping us come to 

grips with how we gather these numbers. 

We, of course, are going to have to sit after some kind of a budget target for our Subcommittee and find those areas that we can 

dial up or dial down. Let’s say we are going to change hospital payments. Then within that, as you recall, we have to deal with rural 

hospitals a disproportionate share, and teaching. All of those adjustments in kind of a zero-sum game are politically difficult, but 

they are somewhat easier if we have some idea, particularly in 

those areas where it is linear, we just have a market basket minus 

or plus, does it just go up and down in the straight line, or do we 

have to watch out for unintended consequences on the rest of the 

closed system. 

So, we will take you up on your offer. It was very gracious of you 

to do that, and we have been having some seminars for the Members and staff, and I think we might—if you and some of your staff 

would be willing to have you come by and be our instructors for 

an hour or two when we meet again to get some idea of what we 

are faced with as we try to make this budget come into balance. 

Thank you. Thank your staff. Look forward to working with you 

the rest of the year. Thanks very much. 

Mr. FOSTER. Thank you, Mr. Chairman. 

Chairman STARK. The hearing is adjourned. 


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[Whereupon, at 3:25 p.m., the hearing was adjourned.] 

[Submission for the Record follows:] 

Statement of AARP 

On behalf of AARP’s 38 million members we thank you for holding this hearing 

on the 2007 Medicare Trustees’ Report. The annual Report of the Trustees offers 

an important opportunity for members of Congress to closely examine the financial 

health of the Medicare program. 

Hospital Insurance (HI) Trust Fund 

The new insolvency date for the Hospital Insurance (HI) Trust Fund is one year 

later than projected in last year’s report, which means that Medicare beneficiaries’ 

coverage is not in immediate jeopardy. It is important to note that predicting solvency over the long term is very difficult since it depends on estimates of both payroll tax income and health care spending. Part A solvency has averaged 12 years 

since the program began 36 years ago. In the past, Congress has stepped in to either increase Trust Fund income or decrease spending from the Trust Fund so that 

the reserves are not depleted. 

The Trustees’ findings are not unusual for Medicare Part A which has averaged 

a 12 year solvency projection since the program began 36 years ago (see Chart 1, 

p. 52). 

The HI Trustees’ report can be viewed as an early warning system—providing 

Congress with ample opportunity to act judiciously to strengthen and improve the 

Medicare program for current and future beneficiaries. This report is no different, 

but it does highlight the urgent need to control rising costs across the entire health 

care system—not just within Medicare. 

Supplementary Medical Insurance (SMI) Trust Fund 

Because the SMI or Medicare Part B Trust Fund is funded by premiums and general tax revenues, it faces cost pressure, but not insolvency. As in the private sector, 

Part B growth still outpaces the growth in the Gross Domestic Product (GDP) due 

in large part to growth in physician and hospital outpatient spending. Estimating 

conventions require the Trustees’ baseline to reflect current law, which include significant cuts in physician payments scheduled to take effect as a result of the Sustainable Growth Rate (SGR) formula. Congress has consistently voted to override 

these mandated reductions since 2003. CMS actuaries have estimated that continuous overrides of the SGR would result in $300-$400 billion in aggregate expenditures in the Part B program over ten years. 

Each time Congress overrides the SGR there is a direct cost for Medicare beneficiaries. That’s because by law, the monthly Part B premium is set at 25 percent 

of Part B spending. The Part B premium has doubled since 2000—due in large part 

to increases in physician spending. The Trustees estimate that premium increases 

could be as much as 20 percent higher over 10 years if Congress prevents projected 

reductions in physician payments. Medicare beneficiaries would also pay higher copayments for physician care as payments to physicians increase. 

Congress must address the physician payment issue in order to control Part B expenditures and protect Medicare beneficiaries from burdensome out-of-pocket costs. 

Short-term fixes simply exacerbate spending growth and only delay needed discussions about how to slow rising expenditures. A new Medicare physician payment 

system should be designed with the beneficiary in mind by holding cost-sharing and 

premium increases down and improving the care beneficiaries receive. AARP believes Medicare’s physician payment system should be changed from one that rewards quantity to one that rewards quality. 

Medicare Advantage 

Because Medicare Advantage (Part C) plans are required to offer all Part A and 

Part B benefits, they are paid for from both the HI and SMI trust funds. 

The Medicare Trustees note that in 2006 there was a substantial increase in MA 

enrollment due to higher payments for MA plans provided under the Medicare Modernization Act (MMA). Ultimately, the solvency of the Medicare Trust Funds is negatively affected by current excess payment policies to MA plans. 

AARP believes Medicare payments should be neutral with respect to coverage options. Therefore, AARP urges Congress to more closely align MA plan payments 

with payments for traditional Medicare. 

Currently, Medicare payments clearly favor the MA program over traditional 

Medicare, which is unfair to the majority of beneficiaries who participate in the traditional program. All taxpayers and all Medicare beneficiaries—not just the 18 perVerDate Aug 31 2005 02:32 Dec 09, 2008 Jkt 043689 PO 00000 Frm 00054 Fmt 6633 Sfmt 6621 E:\HR\OC\A689.XXX A689

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cent of Medicare beneficiaries enrolled in private MA plans—are funding these excess payments. 

When private plans were introduced to Medicare, they were expected to provide 

extra benefits to beneficiaries by achieving greater efficiencies at a lower cost to the 

program than traditional Medicare through the use of care coordination, negotiated 

prices, provider networks and other strategies. Given the fact that MA plans have 

control over hospital and physician services, as well as the opportunity to manage 

and coordinate care, it is reasonable for Congress to hold MA plans to payment levels that are no more than those for the fee-for-service program. 

In order to minimize the disruption to beneficiaries who rely on MA plans for 

their health care, AARP believes Congress should phase out MA plan payments that 

exceed fee-for-service costs over a period of time. Because geographic variations in 

spending continue to be a problem in the Medicare program, including within in the 

MA program, AARP believes it is important that Congress address the payment 

areas with the largest discrepancies first. It is important that those areas of the 

country that provide care most efficiently are not penalized. 

Medicare Funding Warning 

The Trustees’ report includes the second ‘‘funding warning’’ in this year’s annual 

report. The Medicare Modernization Act requires the Trustees to issue this warning 

if general revenues account for 45 percent of combined HI and SMI expenditures 

at any period during a seven-year window. 

AARP believes the 45 percent trigger is an arbitrary limit and provides a false 

alarm about Medicare’s funding situation. General revenues have always financed 

a significant portion of Medicare Part B. 

Moreover, because of the way the trigger is designed, policy options to avoid the 

trigger are limited and may do little to help long-run cost growth. For example, 

while researchers have documented worrisome trends in obesity rates and chronic 

conditions for current and future Medicare beneficiaries, efforts to improve preventive services may reduce Part A costs, but increase Part B costs, thereby setting off 

the trigger. Similarly, shifting services from inpatient to outpatient settings has the 

same effect. 

AARP believes the 45 percent trigger should ultimately be repealed so that Congress is not distracted from the real issue—runaway health costs in the entire 

health care system. Runaway costs burden not only Medicare and other federal 

health care programs, but negatively impact state and local governments, employers, and individuals. Congress must begin to address the problem of system wide 

health care cost growth—it is not just a Medicare problem, and it cannot be addressed in Medicare alone. 

Medicare Part D 

Because Part D is financed similarly to Part B, it too faces cost pressure, but not 

insolvency. The Trustees’ Part D cost estimates are substantially lower than those 

reported last year, primarily due to lower prescription drug plan bid submissions. 

However, the Trustees are projecting the average annual increases in spending to 

be nearly 13 percent—due mainly to increases in per capita drug costs (about 2⁄3) 

and enrollment (about 1⁄3). 

The projected increase in Part D spending is clear evidence of the need for Congress to enact policies to further help lower drug costs. 

AARP supports legislation to: 

• Remove the prohibition on the Secretary of HHS from negotiating with pharmaceutical manufacturers on behalf of Medicare beneficiaries (H.R. 4, S. 3); 

• Allow for a pathway for the approval of lower cost, safe, comparable, and interchangeable versions of biologic drugs (H.R. 1038, S. 623); 

• Legalize personal and wholesale importation of prescription drugs, starting with 

Canada (H.R. 380, S. 242); 

• Prevent abuses in patent settlements between generic and brand name prescription drug manufacturers (S.316); and 

• Provide full funding for comparative effectiveness research authorized in the 

MMA. 

Conclusion 

The Medicare program is vitally important to tens of millions of Americans and 

their families. Each year, the Trustees’ Report presents the challenges faced by the 

program and offers the opportunity to make some improvements for the future. 

AARP believes Congress must make changes to the way Medicare pays physicians 

and Medicare Advantage plans to keep the program strong for the future. In addition, Congress can take important steps to help reduce the price of prescription 


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drugs for all Americans. Ultimately, however, it must address the underlying rate 

of growth of health care costs in the entire health system—not just Medicare—if we 

are truly to achieve meaningful reform. 

Chart 1. Projections of Part A Solvency Have Varied Widely 

Average number of years until insolvency is 12 (1970–2007) 

Source: Derived from CRS, April 1995, and the Annual Reports of the Board of 

Trustees of the Hospital Insurance Trust Fund, 1996–2007. 

Notes: 

• No insolvency dates indicated in 1973 and 1974. 

• No long-range projection in 1989. 

• Range reported, as indicated by the white bars: 1975 Report—late 1990s; 1976 

Report—early 1990s; 1977 Report—late 1980s. 

Æ 


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