[Joint House and Senate Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
SOCIAL SECURITY AND MEDICARE
TRUSTEES' 2001 ANNUAL REPORTS
=======================================================================
JOINT HEARING
before the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
and
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
MARCH 20, 2001
__________
SERIAL 107-16
__________
Printed for the use of the Committee on Ways and Means
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_______________________________________________________________________
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COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa JOHN LEWIS, Georgia
SAM JOHNSON, Texas RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania XAVIER BECERRA, California
WES WATKINS, Oklahoma KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona LLOYD DOGGETT, Texas
JERRY WELLER, Illinois EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
Allison Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
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C O N T E N T S
__________
Page
Advisory of March 13, 2001, announcing the hearing............... 2
WITNESSES
U.S. Department of the Treasury, Hon. Paul O'Neill, Secretary,
and Managing trustee, Social Security and Medicare Board of
trustees....................................................... 13
______
SUBMISSION FOR THE RECORD
Healthcare Leadership Council, statement......................... 41
SOCIAL SECURITY AND MEDICARE TRUSTEES' 2001 ANNUAL REPORTS
----------
TUESDAY, MARCH 20, 2001
U.S. House of Representatives,
Committee on Ways and Means,
U.S. Senate, Committee on Finance,
Washington, DC.
The Committee met, pursuant to notice, at 10:11 a.m., in
room 1100 Longworth House Office Building, Hon. Bill Thomas and
Hon. Charles E. Grassley (Chairmen of the Committees)
presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE HOUSE COMMITTEE WAYS AND MEANS
AND THE SENATE COMMITTEE ON FINANCE
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
March 13, 2001
FC-4
Thomas and Grassley Announce Joint Hearing on the Social Security and
Medicare Trustees'
2001 Annual Reports
Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
and Means, and Senator Chuck Grassley (R-IA), Chairman of the Senate
Committee on Finance, today announced that their committees will hold a
joint hearing to examine the findings and recommendations made by the
Board of Trustees of the Social Security and Medicare Hospital
Insurance trust funds in its 2001 Annual Reports on the financial
status of the trust funds. The hearing will take place on Tuesday,
March 20, 2001, in the main Committee hearing room, 1100 Longworth
House Office Building, beginning at 10:00 a.m.
In view of the limited time available to hear witnesses, oral
testimony will be heard from invited witnesses only. However, any
individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee and for
inclusion in the printed record of the hearing.
BACKGROUND:
The Board of Trustees was established under the Social Security Act
to oversee the financial operations of the Old-Age and Survivors
Insurance and Disability Insurance (OASDI) and the Medicare Hospital
Insurance (HI) trust funds. The Board is composed of six members: the
Secretary of the Treasury (who is the Managing Trustee), the Secretary
of Labor, the Secretary of Health and Human Services, the Commissioner
of Social Security, and two members who are appointed by the President
and confirmed by the Senate to serve as public trustees for four-year
terms. The Social Security Act requires that the Board of Trustees
report annually to the Congress on the financial and actuarial status
of the OASDI and HI trust funds. The 2001 Annual Reports are scheduled
to be released shortly.
Ensuring the financial viability of Medicare and Social Security is
one of Congress' most important responsibilities. The annual release of
the Trustees' Report provides a valuable update on the programs' fiscal
well-being.
Over the past few years, the Trustees' annual reports have shown an
improvement in the financial status of the OASDI trust funds, mainly
due to increased economic growth. The 2000 Annual Report projected that
the combined OASDI trust funds would begin running cash flow deficits
in 2015 and would become insolvent in 2037. In that year, annual
payroll taxes would be sufficient to pay 72 percent of promised
benefits. President Bush has expressed his commitment to reforming
Social Security and has announced his intention to strengthen Social
Security and modernize the program for young and future workers,
beginning with a Presidential Commission on Social Security reform. The
findings of the Trustees will provideinvaluable support to the
Commission and the responsible committees in the House and Senate as
proposals to save Social Security are considered.
The release of the 2001 Annual Report on the Medicare HI trust fund
report will be particularly timely, because its findings will establish
the financial parameters against which Medicare modernization plans
will be evaluated. Over the next sev-
eral months, Congress will be developing a comprehensive Medicare
improvement package that will include a universally available
outpatient prescription drug benefit. The Trustees' Report will help
members evaluate new Medicare spending proposals and begin discussion
on whether new solvency measures are needed to ascertain the program's
overall financial standing.
In announcing the hearing, Chairman Thomas stated: ``This historic
joint hearing reflects our desire to work in a bipartisan and bicameral
fashion to understand the fundamental challenges facing the long-term
health of both Social Security and Medicare. I look forward to this
hearing and to the report of the non-partisan Social Security and
Medicare Trustees.''
Chairman Grassley said, ``This joint committee hearing underscores
the importance the Committees place on ensuring the financial viability
of these programs. The trustees' findings will provide critical
guidance as we work to improve and strengthen Medicare and Social
Security for the baby boomers and beyond.''
FOCUS OF THE HEARING:
The hearing will examine the findings and recommendations of The
2001 Annual Reports of the Board of Trustees of the Federal OASDI and
HI Trust Funds. The hearing will focus on the long-run financial status
of the Social Security and Medicare HI programs.
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Building, Washington, D.C. 20515. If those filing written statements
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noted above.
Chairman Thomas. If our guests could find seats, please. It
was more than 75 years ago that the chairman of the Senate
Finance Committee sent a note back to the chairman of the Ways
and Means Committee with this quote, ``Thank you for the
invitation to sit with the Ways and Means Committee in the
consideration of this very important question.'' The question
that was considered at that time in December 1933 was reducing
taxes on intoxicating liquors, thereafter the one and only time
that the two full Committees, the Ways and Means Committee of
the House and the Finance Committee of the Senate, had held a
joint hearing until today. With the urging of my colleague and
chairman of the Senate Finance Committee, we are meeting today
in joint session to hear testimony on the two great trust funds
which form the safety net for a growing number of Americans,
the Social Security trust funds and the Medicare trust funds.
And today we will hear a mixed review of Medicare's long-term
viability, the pleas that the Trustees will project from the
Hospital Insurance Trust Fund, that it has been extended by
another 4 years with the projected exhaustion date of 2025.
Just 6 years ago the HI Trust Fund was projected to be
insolvent by 2002. However, at the same time the trustees
clearly indicate that the long-term challenges remain
formidable. Most of us are familiar with the statistics quoted
about the number of workers per retiree and that declining
ratio. But in fact the long-term projections are even more
pessimistic than last year's report because of the adoption of
a health growth percentage greater than had been used in the
past. But probably the most important factor that we really
need to focus on is that the Trustees' report does not evaluate
the fiscal health of the entire Medicare Program.
When you look at the entire Medicare Program, growing from
less than 2 percent of the budget today to more than 8.5
percent of the budget just a few decades from now, that overall
spending for Medicare, not just the HI so-called trust funds on
Part A Medicare but the Part B supplemental medical insurance
funds, will be growing from 40 percent of the total Medicare
costs to almost 50 percent, yet none of those Part B funds are
accounted for in the current measure of Medicare solvency.
Indeed, the current test of the solvency leaves it open to
gaming. Moving those services offered under Part A to Part B
would greatly enhance the solvency of the Medicare Trust Fund.
In fact, that was done in 1997. In fact, one of reasons we
moved dramatically from a 4-year solvency to more than a 20-
year solvency was in large part due to the shifting of services
under Part A to Part B.
Social Security's financial outlook has improved slightly
relative to last year's projections as well. One of the
concerns I hope we focus on at the beginning of the argument is
that given the recent increase in productivity gains of the
American worker, impressive as they are, they cannot grow us
out of our current Social Security deficit concern. Indeed, if
we elevate it from the Trustees' 1.5 productivity percentage to
the current 2.3 percent, that would only cover about 40 percent
of our shortfall.
One of the things I hope we take away from this Committee
is a realistic assessment of where we are and, more
importantly, where we need to go. As the elected leaders of
this country we have a choice. We can legislate for the next
election and leave a lasting legacy of reducing benefits or
increasing payroll taxes, or together we can legislate for the
next generations by taking advantage of this historic joint
meeting to begin to work in a bipartisan, bicameral way more so
than ever before.
Today is the first day of spring, and I think it is a good
day to start.
[The opening statement of Chairman Thomas follows:]
Opening Statement of the Hon. Bill Thomas, M.C., California, and
Chairman, Committee on Ways and Means
It was more than 77 years ago, on December 11, 1933, when the
Chairman of the Senate Finance Committee expressed his appreciation to
the Chairman of the Ways and Means Committee for ``the invitation to
sit in with the Ways and Means Committee in the consideration of this
very important question.'' The question considered that day was
reducing taxes and excises on intoxicating liquors.
That was the one and only time the two Committees held a joint
hearing-- until today.
In 1933, our Committees were faced with the urgent need to repeal
the eighteenth amendment--prohibition. Today, our Committees are faced
with a different type of urgency--the need to strengthen and modernize
Medicare and Social Security for our children and future generations.
Today, we will hear a mixed review of Medicare's long-term
viability. I am pleased that the Trustees will project that the
Hospital Insurance trust fund has been extended by another four years
from last year's projection of 2025. This is due in no small part to
the efforts of this Committee. Just six years ago, the HI trust fund
was projected to be insolvent by 2002.
However, the Trustees also make the case that our long-term
challenges remain formidable. The number of workers per retiree will
decline from about 3.9 today to about 2.3 in 2030, and HI expenditures
as a fraction of workers earnings will more than triple from 2.7% in
2000 to 10.7% in 2075. These longer-term projections are more
pessimistic than last year's report.
More importantly, the Trustees' report does not evaluate the fiscal
health of the entire Medicare program. The Trustees project that all
Medicare expenditures will rise dramatically as a share of the economy,
from 2.2% in 2000 to 5.0% in 2035 and then to 8.5% in 2075. And more of
the spending will occur in the out-patient area not accounted for in
the HI trust fund. Over the next decade, while Medicare expenditures
will more than double, the Part B outpatient portion of Medicare will
grow from 40% to 47%. Yet none of these Part B expenditures are
accounted for in our current measure of Medicare solvency.
Indeed, the current measure of solvency is open to gaming. The
Balanced Budget Act transferred home health care, the fastest growing
part of Medicare at the time, from Part A to Part B to result in about
6 more years of solvency, notwithstanding that transfer had absolutely
no impact on spending. If we only cared about HI solvency we could
transfer inpatient hospitalization out of Part A, and save the fund $2
trillion over 10 years or transfer out skilled nursing facilities and
save $300 billion over 10 years. I hope this hearing will help us begin
to develop a more accurate measure of taxpayer obligations to other
people's health care.
We can and must modernize Medicare's benefits and delivery
structure. Prescription drugs are integral to seniors' health care and
must be integrated into Medicare. But we need to be circumspect about
the challenges we confront and the constraints we are under.
Social Security's financial outlook has improved slightly relative
to last year's projections. Despite this slight improvement, the
Trustees note that Social Security still faces a long-term financing
crisis. The Social Security Trust Funds continue to face a financing
``cliff'' whereby cash deficits increase with each passing year. Even
if productivity growth remains at the extraordinary level of the last 5
years, the Trustees note that Social Security will still face a
significant long-term deficit. We must adhere to the advice from the
bipartisan public trustees who emphasize we must initiate change sooner
rather than later to address rapidly growing annual deficits that will
occur soon after the baby boomers begin to retire.
As the elected leaders of this country, we have a choice. We can
legislate for the next election and leave a lasting legacy of crippling
benefit cuts or stifling payroll tax increases to our children and to
future generations.
Or, together, we can legislate for the next generation by taking
advantage of this historic joint hearing to work in a bipartisan and
bicameral fashion to understand and remedy the fundamental challenges
facing the long-term health of both Social Security and Medicare. I
pray we make the right choice.
Chairman Grassley. I thank very much the chairman of the
Ways and Means Committee for organizing this joint hearing. I
think that there are several things that we can do in the
Congress to make our efforts more efficient and to save the
time of a lot of cabinet people appearing on the Hill and
expedite the business of Congress, and I hope this is a
successful effort and will be followed.
I welcome our Secretary of Treasury Paul O'Neill here for
the financial release of the trustees' report. This is a
Washington tradition that often goes unnoticed with the
American public. Turning a discussion of things involving trust
funds solvency and actuarial balance into quite exciting events
is a very difficult task. Quite exciting or not, though, these
reports do provide valuable information about the financial
health of Social Security and Medicare and the security of our
seniors in America not only for this decade but for decades
well into the future.
Today's hearing will help the public understand the
problems facing these programs. As this year's report reveals,
Social Security and Medicare are simply unsustainable in their
current form. The trustees project that promised benefits will
exceed scheduled payroll taxes and premiums by $465 trillion
over the next 75 years, an astounding and probably not
understandable figure.
Some may try to tell us, well, that is not so bad. These
people do not know what they are talking about. For example, in
theory a portion of this shortfall will be covered by
government bonds and Social Security and Medicare Trust Funds.
But these bonds are merely a claim on future general revenue.
So the government can only redeem them if it raises taxes or
more revenues from the public. So the hope of these trust fund
surpluses is somewhat of a fool's hope.
Some claim that using the Social Security surplus to pay
down the Federal debt will alleviate the funding shortfall by
reducing interest payments to the public. But these interest
savings will cover less than 5 percent of the shortfall. If the
government borrows more from the public to cover the rest, it
will only take 14 years to run the debt back up again. So that
is no real solution.
Even more troubling, the near term surpluses projected to
accumulate in the Social Security and Medicare Trust Funds will
soon exceed the amount of debt available for repayment. At that
point the government will be forced to invest trust funds in
nongovernmental assets. Such investment will disrupt the
financial markets. We shouldn't do that.
With respect to Medicare in particular, for the first time
ever the trustees in this report have established a new section
that looks at Medicare's financial health in toto. This is
important considering only 22 percent of the beneficiaries
utilized part A while 87 percent of the beneficiaries relied on
Part B in the year 2000, and part A represents only 55 percent
of the total spending, while part B represents 45 percent and
is growing in double digits. When you look at Medicare as a
whole it will grow at a much faster rate than projected 1 year
ago. So we need to examine with caution and not worsen this
looming financial crisis.
Finally, there are those who suggest the magnitude of the
problem facing Social Security and Medicare preclude any
meaningful reduction of any Federal income tax. But tax relief
for working men and women will promote economic growth, thereby
making it easier to fund promised benefits. So we should
harness the power of our economy to help us save these programs
for tomorrow's retirees. I believe we can provide tax relief
for hard working Americans while at the same time protecting
and improving Social Security and Medicare, and let's meet this
challenge.
Once again I thank the chairman for the joint hearing, as
historical as I now realize it is.
[The opening statement of Chairman Grassley follows:]
Opening Statement of the Hon. Chuck Grassley, U.S.S., Iowa, and
Chairman, Senate Committee on Finance
I would like to welcome our distinguished witness, Treasury
Secretary Paul O'Neill. The purpose of today's hearing is to review the
2001 Social Security and Medicare trustees reports.
The annual release of the trustees reports is a Washington
tradition that often goes unnoticed by the American public. Turning a
discussion of ``trust fund solvency'' and ``actuarial balance'' into
exciting prose is no easy task. Exciting or not, these reports do
provide valuable information about the financial health of Social
Security and Medicare.
I hope that today's hearing will help the public understand the
problems facing these programs. As this year's reports reveal, Social
Security and Medicare are simply unsustainable in their current form.
Let me repeat: simply unsustainable. In fact, the trustees project that
promised benefits will exceed scheduled payroll taxes and premiums by
$465 trillion over the next 75 years. That's an astounding number--$465
trillion.
Some may try to tell us that it's not as bad as it sounds. Well,
believe me they don't know what they're talking about. For example, in
theory, a portion of this shortfall will be covered by government bonds
in the Social Security and Medicare Part A trust funds. But these bonds
are merely a claim on future general revenue, so the government can
only redeem them if it raises income taxes, or borrows from the public.
So the hope that these trust fund surpluses will save us is a fool's
hope.
Some claim that using the Social Security surplus to pay down the
Federal debt will alleviate the funding shortfall by reducing interest
payments to the public. But these interest savings will cover less than
5 percent of the shortfall. If the government borrows from the public
to cover the rest, it will only take 14 years to run the debt back up
again. So that's no real solution.
Even more troubling, the near-term surpluses projected to
accumulate in the Social Security and Medicare trust funds will soon
exceed the amount of debt available for repayment. At that point, the
government would be forced to invest Social Security and Medicare funds
in non-governmental assets. Such investment could disrupt the financial
markets and reduce the efficiency of our economy. We shouldn't go
there.
With respect to Medicare in particular, for the first time ever the
trustees have established a new section of the report that looks at
Medicare's financial health in total. This is important considering
only 22% of beneficiaries utilized Part A, while 87% of beneficiaries
relied on Part B in the year 2000. And Part A represents only 55% of
total spending, while Part B represents 45% and is growing in double
digits. When you look at Medicare as a whole, it will grow at a much
faster rate than projected even one year ago! So we need to exercise
caution in taking steps that might worsen this looming financial
crisis.
Finally, there are those who suggest the magnitude of the problem
facing Social Security and Medicare precludes any meaningful reduction
in Federal income taxes. But tax cuts will promote economic growth,
thereby making it easier to fund promised benefits. Let's harness the
power of our economy to help us save these programs for tomorrow's
retirees.
I believe we can provide tax relief to hard-working Americans while
at the same time protecting and improving Social Security and Medicare.
Let's meet this challenge.
Once again, thank you for being with us today, we look forward to
your testimony.
Chairman Thomas. I thank the chairman and now I would
recognize the gentleman from New York, the Ranking Member of
the Ways and Means Committee, Mr. Rangel.
Mr. Rangel. Thank you, Mr. Chairman. I indeed feel
privileged to be involved in this historic joint session and,
Mr. Secretary, you have to be very tolerant and patient of the
Democrats in the House because we are not used to the
compassionate bipartisanship that has been expressed by the
President of the United States. Some of us would believe that
some of our House Republican leadership would wish that Social
Security just never came into existence. Some of us would
believe that others in the Republican leadership would hope
that maybe Medicare would twist slowly on the vine and just
disappear. There may even be a smaller number of Republicans
that believe that maybe we can just reduce guaranteed Social
Security and Medicare benefits and that those benefits will be
provided by the private sector.
Now we know that we are overly suspicious and skeptical and
that the President will prevail, but we need the President's
help now. That is why I am a little surprised that Secretary
Thompson is not here because, when he was before this Committee
recently, he made it abundantly clear to us that not only would
every nickel of the Medicare trust funds be spent for Medicare,
but he acknowledged that, in his opinion it would violate the
law of the United States if something was done otherwise.
Yet, last night I saw a television program and I heard the
Secretary say, ``Why think about Medicare as part A and part
B.'' ``Health care is health care and we have a crisis and we
will have to reform the system and reform it now.''
Well, it just seemed to me that it is hard to have a crisis
when you have a surplus in part A that everyone agrees to, and
I don't see how you have a crisis in part B when 75 percent of
it is funded by general revenues, unless we are saying that
anything that goes through appropriations and that any program
in which you intend to have increased spending is a crisis. If
so, we have a crisis in funding education, a crisis in funding
defense. And while my Chairman is right as always, in at lease
part of what he said, that what we did in the past--shift part
of part A obligation to part B--it was only that part of home
care for the aged that was not held in the hospital. So it
should be in part B even though it did relieve some of the
burdens of Part A.
What I am saying is that we know that this administration
does not intend to merge the obligations that come out of
general revenue with those precious trust funds that we know it
is against the law to think about merging into one. So you will
be able to help us in this because if we send our old folks out
to the private sector, God bless them, it is hard for me to
think that private insurers will be reaching out to old sick
folks, as people that they would want to see enrolled in their
for-profit health delivery system. And of course the Social
Security system that some of my colleagues think is a socialist
experiment that should never have been created, we are anxious
to see how we can get more of the people's money invested in
the private sector to get a higher yield. Of course, not this
quarter but maybe the type of quarters we experienced during
the Clinton-Gore years will come back so we can get those
higher yields, so we can get more benefits at less expense. We
don't see how you can reduce the revenue that is paid into the
trust fund in any way without reducing the benefits, and we
really don't see where you would get the money if you are going
to compensate for the benefits.
So we know you have the answers and we know the President
is going to be there to help us get over these suspicions that
we have. But I am asking that just one Member from the Medicare
Subcommittee and one from the Social Security Subcommittee may
ask one question, not for an immediate answer but so that you
might include that in your testimony and we could expedite the
hearings. So I yield to Mr. Stark for his question and as soon
as he completes it I would yield to Mr. Doggett for his
question. And ahead of time I want to thank you for the great,
great contribution we expect you to be making to bring not only
the House and Senate closer together but the House Republicans
and Democrats closer together because we are very, very far
apart.
Mr. Stark. Mr. Secretary, I thank the distinguished
gentlemen for yielding to me. My question is to just reconfirm
in the Bush budget outline, which is all we have seen,
Medicare's trust fund of 526 billion has been put into a
contingency fund that is used for defense or anything else
outside of the Medicare field and I want to reconfirm that it
is the administration's intention with respect to the Medicare
surplus that it only be used for part A, not for the part B,
not for pharmaceutical drugs or defense or anything else. But
as Secretary Thompson said to us when he testified here last
week, he understands it would be against the law.
[The following was subsequently received:]
The Budget of the United States Government, Fiscal Year 2002
showed, in table S. 1, that the President's budget policy proposed a
$1.4 trillion reserve for ``additional needs, debt service and
contingencies.'' That reserve accounted for about one-fourth of the
total projected surpluses over the 10-year budget window.
All monies being paid into the various trust funds--including
Social Security and Medicare--are being properly accounted for. A legal
obligation exists to use trust fund income only for the designated
purposes. That obligation exists and will be met as provided for by
law. That obligation can be thought of as a liability on the
government's balance sheet. Additions to the HI Trust Fund due to a
positive cash flow into the fund, should be viewed as an increase in HI
trust fund assets which represent a partial offset to projected future
Medicare payments. The special-issue bonds held by the trust fund are
the government's formal commitment to pay those future benefits upon
redemption. The cash flow generated by the excess of income over
outlays is incorporated in the projected on-budget surpluses.
The President outlined uses of the projected on-budget surpluses in
Table S. 1 of the budget. Aside from specific proposals to raise
spending, including Medicare, and for debt service, the table showed a
remainder of $841 billion as a contingency reserve. There is no formal
accounting for the components of this reserve. Rather, this
``contingencies'' fund represented a portion of the projected on-budget
surpluses that will be available over the 10-year budget window to pay
down debt to cover unforeseen events. ``Contingencies'' are by their
nature unforeseen events or emergencies, and no specific accounting can
be made in advance. Its ultimate use--such as to pay down debt--is
independent of the existing legal obligations reflected in the various
trust funds, including Medicare.
Chairman Thomas. The gentleman from New York's time has
expired and I believe another Member was supposed to fit inside
the Ranking Member's time.
Mr. Rangel. Yes, Mr. Doggett.
Mr. Doggett. Thank you. My question will concern the
administration's intention to address the anticipated shortfall
in the Social Security trust funds by shortening it further,
and by removing money dedicated for guaranteed Social Security
benefits for privatization purposes. Surely you will be able to
tell us, regarding the approximately $600 billion that you
propose to take from guaranteed Social Security benefits, how
much sooner I believe it is about a decade you will be reducing
the ability of the funds to pay off benefits, and how much
Social Security benefits will be cut in order to implement a
Social Security privatization plan.
[The following was subsequently received:]
As you are aware, on May 2 President Bush announced the formation
of a Commission to Strengthen Social Security. He directed the
Commission ``to submit bipartisan recommendations to modernize and
restore fiscal soundness to the Social Security system.'' And this must
be done in a way that does not change Social Security benefits for
retirees or near-retirees.
Clearly, the President's intention is to strengthen the system in a
way that will enhance retirement security for future retirees. This
objective can be achieved by allowing individuals to invest some of
their payroll taxes in higher-yielding private accounts. Future
beneficiaries will benefit directly from their own accounts and the
American economy will benefit from increased private investments.
Though President has laid out a set of principles for reform, a
specific plan will be developed after the Commission has made its
recommendations. We look forward to the Commission's report next fall.
Chairman Grassley. It is my privilege to call on Senator
Baucus, the Democratic leader of the Senate Committee.
Senator Baucus. Thank you very much, Mr. Chairman. My
concerns are similar to those that have just immediately been
expressed. Let me just say them a little bit differently. In my
mind the Medicare Trustees' report offers both encouragement as
well as admonition. The solvency projection to 2029 is of
courseencouraging. Nobody can have any other view. After all I
am sure most of us in this room today can remember back to 1997, the
chairman has referred to it, when the part A trust fund was projected
to be solvent to 2001. So we have made tremendous improvements now that
the solvency projection is up to 2029.
The report also gives us pause, pause to reflect, to think
carefully about the impending financial burden that will be
upon us beginning in 2010 when the baby boom generation begins
to retire. To me that means we should proceed with caution. We
should protect the resources that we now have, a point made by
some of the previous speakers, and think about how best to put
more money, not less, I repeat that, more money, not less into
Medicare. We should use the part A surplus for part A benefits
and we should not put that money into a contingency fund as the
President has proposed.
Turning to Social Security, we did have good news. The
status of the trust funds has improved since last year's
report. As expected, the trust funds are adequately funded in
the short term but significant long-range problems do exist.
The lesson I take from the Social Security report is not much
different than the lesson I take from the Medicare report. The
Social Security System by most accounts has been very
successful for more than 65 years. It plays a unique role in
retirement planning in that benefits are guaranteed--let me
repeat that--a unique role in retirement planning in that
benefits are guaranteed and they not subject to the ups and
downs of the market. After the week we have just experienced on
Wall Street, the worst for the Dow Jones since 1989, that
guaranteed feature of Social Security seems comforting. I
understand the desire of many to explore options for
modernizing Social Security in the current environment of
retirement planning, and I am open to considering a range of
options. But like Medicare, we should proceed with caution, and
we should look for ways to dedicate more, not less, but more
resources to the program. The 40 million beneficiaries on
Social Security--soon to be almost 80 million--deserve no less.
Thank you, Mr. Chairman.
[The opening statements of Mr. Crane and Mr. Ramstad
follow:]
Opening Statement of the Hon. Philip M. Crane, M.C., Illinois
Today's historic joint hearing is timely, allowing the key
Congressional Committees to examine the findings and recommendations
made by the Board of Trustees of the Social Security and Medicare
Hospital Insurance trust funds in their 2001 Annual Reports on the
financial status of the trust funds released yesterday.
In 1995, when Republicans took control of Congress, the Medicare
Trust Fund was projected to go bankrupt by 2002. Through our hard work
the Medicare Trust Fund is now solvent until 2029.
The Medicare Trustees' projections show a mixed picture of the
Hospital Insurance (HI) trust fund (Part A). Due to last year's strong
economy, and low Medicare payment expenditures, the HI solvency has
been extended by four years over last year's projections, from 2025 to
2029. However, over the long-term, the use of improved assumptions of
the long-range growth rate on Medicare and overall health care spending
growing faster than Gross Domestic Product indicates a greater deficit
than projected last year.
It is important to point out that Medicare Part A only includes a
portion of Medicare's benefits. The Supplementary Medical Insurance
(SMI) Trust Fund (Part B) expenditures are expected to continue to grow
faster than the economy as a whole. The eventual cost is much higher
than projected last year due to the use of improved assumptions
reflecting an expected continuing impact of advances in medical
technology on health care costs both in Medicare and the entire health
sector. The Medicare trustees state ``it is important to recognize the
financial challenges facing the Medicare program as a whole.'' We
should consider Medicare's finances in their entirety--the expenses and
committed revenues in Medicare as a whole (Part A and Part B combined)
show that the program is running a deficit. Given these projections on
the HI and SMI trust funds, the current definition of Medicare solvency
as it relates to HI is not useful.
While some lawmakers may take the improved short-term outlook of
the Medicare program as an indication that the Congress should not be
so swift to act on solutions to improve the financial picture of
Medicare, the Medicare trustees state that ``Medicare's financial
condition has improved in recent years, but this should not lead to
complacency. Medicare still faces financial difficulties that come
sooner--and in many ways are more severe--than those confronting Social
Security.'' We should be looking at solutions that allow us to continue
to strengthen and improve the Medicare program but ensure that these
improvements are contingent on the outlines of a Medicare reform
proposal.
Regarding Social Security, last year's economic growth, along with
some minor methodological changes, have extended the date on which
Social Security will begin to run an excess of costs over payroll tax
revenues from last year's reported 2015 to 2016. This is the critical
date in the debate because thereafter Social Security becomes a net
borrower.
Other dates you will hear include 2025, which is the first year
that Social Security runs an absolute deficit when you include in
income both payroll tax receipts and the ``income'' earned on the
``assets'' held in the Social Security Trust Fund. This date is less
important than the 2016 date because, as you know, the assets in the
Trust Fund are meaningless, and so the interest earned on those assets
is also meaningless.
The other date you will hear is the ``exhaustion'' date for OASI
(Old Age Survivors Insurance) and DI (Disability Insurance), which is
when the Trust Funds will be fully depleted. The reported exhaustion
date was 2037 last year and it has moved to 2038 in the most recent
report. This change tells us the situation has gotten marginally
better, but it is not a terribly meaningful figure otherwise since it
presumes current law will be maintained, which is absurd. While the
short-term financial outlook for Social Security has improved slightly,
the program still faces a long-term financing crisis. We must act
sooner rather than later to address the rapidly growing annual deficits
that will occur soon after the baby boomers begin to retire.
Most importantly, the current environment relates to the effects of
strong economic growth on the solvency of the Social Security and
Medicare Trust Funds. I believe the Bush economic program will cause
the economy to be stronger than it would otherwise be and that this
will further strengthen both Medicare and Social Security, which does
not eliminate the need for reform, but it certainly gives us more
options.
Opening Statement of the Hon. Jim Ramstad, M.C., Minnesota
Mr. Chairman, thank you for scheduling this historic joint hearing
today to discuss the most recent findings on the future of Social
Security and Medicare--programs of vital importance to seniors and
individuals with disabilities across our nation.
While I am certainly pleased that the Trustees have reported that
the insolvency date of these two programs has been extended to 2038 for
Social Security and 2029 for Medicare, I believe the true impact of
this Report is elsewhere.
More importantly than the date when the programs become insolvent
is when the programs begin to see reductions in revenue and especially
when expenditures begin to exceed revenues. Mr. Chairman, that date is
2016, which is why I believe we must act now to modernize and
strengthen these two programs. In addition, the long term deficit in
the Part A program has increased dramatically since last year.
The Trustees have also acknowledged that the current measure of
insolvency for Medicare seriously underestimates the magnitude of the
problem. The current solvency measure fails to take into account the
Supplementary Medical Insurance, or Part B, spending. I agree with the
Trustees call for a comprehensive look at the entire Medicare program.
The insolvency measure also falls short because programs can be
shifted to Part B, extending the solvency of Part A. This happened in
the Balanced Budget Act in 1997 when Home Health spending was shifted
to Part B.
Mr. Chairman, the long term financial difficulties of Medicare mean
that comprehensive Medicare reform can't wait.
Many on the other side believe that Medicare is fine and that we
can simply add a prescription drug benefit to the program.
I strongly disagree. Congress should only add a prescription drug
benefit as part of a comprehensive Medicare reform package . . . a
package that solves the long-term challenges faced by this vital
program. A package that improves the benefits utilized by seniors. A
package that secures Medicare for the future. Thank you again, Mr.
Chairman for calling this hearing.
Chairman Thomas. Thank you on behalf of Chairman Grassley
and myself. Mr. Secretary, thank you very much. I do understand
you have a tight schedule and we are to conclude the
presentation of the trustees' report by noon, and therefore I
would say that if any Member has a statement they want to put
into the report they can do so under the usual and customary
procedures in writing, and if the Secretary has a statement in
writing, without objection, it will be submitted for the
record. And, Mr. Secretary, you can address us in any way you
see fit, understanding that the mike is very unidirectional in
terms of the sound.
Thank you very much, Mr. Secretary, and welcome to the
joint hearing.
STATEMENT OF HON. PAUL O'NEILL, SECRETARY, U.S. DEPARTMENT OF
THE TREASURY, AND MANAGING TRUSTEE, SOCIAL SECURITY AND
MEDICARE BOARD OF TRUSTEES
Secretary O'NEILL. Well, thank you, Mr. Chairman and Mr.
Chairman and ranking members. This is really quite a wonderful
group to come before this morning, and I appreciate your
invitation for me to be here. I do have a prepared statement
and, as the Chairman has indicated, I would be happy to submit
it for the record and maybe with just a few summary comments
provide an opportunity for you to ask me questions about the
report which we signed and transmitted to the Congress
yesterday.
I think, first of all, it is worth saying that if you look
at the transmittal sheets which you will see there, what you
will see there are the names of the signatories to this
transmission and it lists myself as Managing trustee, and I
point that out to you because I consider this an important
characterization and distinction in the way that I am
presenting myself to you today, not in a partisan way, but with
the same sense of fiduciary responsibility I would have if I
were your banker in giving up advice about the condition of
funds that you had entrusted to my keeping.
And with that premise and understanding of what I am here
to accomplish this morning, I want to say to you that this
report shows a link to the reports of the last several years,
that if we follow the current law, including both the revenue
raising components and the expenditure components or
obligations that you have legislated for the American people,
that there is a prospect down the road of our not being able to
honor the obligation that you have made by law to the American
people. That is a simple sum of what is here.
You can find, you can find something positive here, if you
like, with the actuaries' projection that says, well, maybe we
have an extra 4 years to go for Medicare part A, maybe we have
1 more year to go for OASDI. I would advise you not to take
great comfort in the fact that we are going to be bankrupt 1
year later than we thought last year. I think it is quite
important, as we have indicated in the report, that we take
account of the demographics that are going to happen no matter
what else we may do. The composition of the population and that
part that is dependent on the benefits that you have legislated
for them will be there, and the relationship between the
retired beneficiary population and the working population will
change no matter what else we may do, and so my only advice to
you would be that we take these data seriously and hopefully
together, maybe not in a bipartisan way but in a nonpartisan
way, we can together discharge our ongoing obligations to the
American people.
Thank you, Mr. Chairman.
[The prepared statement of Secretary O'Neill follows:]
Statement of Hon. Paul O'Neill, Secretary, U.S. Department of the
Treasury, and Managing Trustee, Social Security and Medicare Board of
Trustees
It is a pleasure to be here today before this unique joint hearing
of the House Committee on Ways and Means and Senate Committee on
Finance. I applaud Chairman Grassley and Chairman Thomas for focusing
more than the usual attention on the Social Security and Medicare
Trustees' reports on the financial status of these two vital programs.
Yesterday, the Trustees met to complete our annual review of the
trust funds and to forward the reports to Congress. While the short-
term financial status of both Social Security and Medicare has improved
somewhat since last year's report, our long-term analysis highlights a
real threat to the retirement security of future generations and has
led us to conclude that both programs need to be reformed and
strengthened at the earliest opportunity. Focusing only on the short-
term ignores the long-term impact of a rapidly aging population on both
trust funds which results in both funds being widely out of long-term
actuarial balance.
Medicare
Let me first talk about Medicare. The Medicare program as a whole
presents financial challenges that will require integrated and
comprehensive solutions. Costs for the two Medicare program
components--HI and SMI combined--will grow from 2.2 percent of GDP
today to 8.5 percent in 2075. By comparison, HI tax income and SMI
premium revenues will only grow from 1.8 percent of GDP today to 2.5
percent in 2075, leaving a gap of 6 percentage points in 2075. Counting
current law general revenues dedicated to SMI, the shortfall will still
be 3 percentage points at the end of the projection period. Medicare
spending is ultimately projected to exceed even the costs of Social
Security. The financing gap for HI alone is larger than the gap for
Social Security, and the HI Trust Fund will become insolvent 9 years
sooner than the OASDI Trust Funds. HI tax income will fall short of
outlays beginning in 2016.
It might be tempting to ignore Medicare's problems by pointing to
the improved short-term solvency of the HI fund and the fact that on an
actuarial basis the Supplementary Medical Insurance (SMI) Trust Fund is
projected to remain adequately financed into the future. Neither of
these factors should be used as an excuse for complacency. First,
because a panel of experts recommended changes in health cost
assumptions to improve the accuracy of the Trustees' projections, the
long-term cost estimates for both HI and SMI are raised substantially,
thus worsening the long-term actuarial deficit in the Medicare HI Trust
fund. Second, the SMI trust fund automatically relies on general
revenues to make up the difference between its premium revenues and
costs. This method hides the fact that the SMI trust fund will consume
a rapidly growing share of general revenues over time and beneficiary
premiums will be increased substantially.
With the accounting complexities of two trust funds, it might be
easy to lose sight of the basic fact: we need to focus on Medicare in
its entirety. It is clear that steps should be taken now to develop a
more accurate overall measure of Medicare's financial health, and to
work together to improve it.
Because I think it is so important to this discussion, I also want
to elaborate on what I see as the tremendous potential for improvements
in the health care sector. I raise this issue out of concern for the
health of the American public, and particularly for the elderly and
disabled who depend on Medicare. The recent reports of the prestigious
Institute of Medicine on medical errors and quality of care are quite
sobering. In 1999, the IOM reported uncovering a stunningly high rate
of medical error--errors that resulted in death, premature disability,
and unnecessary suffering. Earlier this month, the Institute released a
follow-up report on the overall quality of health care in America,
concluding that reforms could close the enormous chasm between the
current level of health care quality and the potential we know exists.
Social Security
Turning to the combined OASDI Trust Fund, the Trustees report a
financial outlook that has improved a little since last year--a
projected exhaustion date of 2038, one year later than last year.
Still, the fund continues to be in long-term deficit--with a financing
gap equal to 1.86 percent of payroll. Moreover, once the baby boom
generation starts to retire, financial pressure will build and continue
to be a factor beyond the 75-year projection period.
The primary cause of the long-term deficit is the aging of the
population that will occur as the baby boom generation retires and
expected increases in longevity become reality. Annual OASDI outlays
will exceed OASDI tax revenue beginning in 2016. Deficits are expected
to persist and are projected to rise to more than 6 percent of taxable
payroll by 2075. These large deficits at the end of the projection
period are an indication that costs will almost certainly continue to
exceed tax revenue after 2075. As a result, ensuring the sustainability
of the system after 2075 will require larger changes than needed to
restore the system to 75-year balance. The Trustees believe that action
should be taken to address the financial shortfall now, as the sooner
adjustments are made, the smaller and less abrupt they will have to be.
This spring President Bush will form a Presidential commission to
study how to reform Social Security. The commission could make its
recommendations by next fall. Reform should be based on these
principles: it should preserve the benefits of all current retirees and
those nearing retirement and preserve the disability and survivors
components: it should return Social Security to sound financial footing
without increasing payroll taxes or allowing the Government itself to
invest Social Security funds in the private economy; and it should
offer personal retirement accounts to younger workers who want them.
The President's goal is clear: Social Security must be safe and
secure for this generation and for future generations. We must work now
to preserve and protect Social Security by putting it on a firm
financial footing so we can keep our commitment to current seniors and
also meet the needs of our children and grandchildren.
Finally, this is the first opportunity I have had as a Trustee to
comment on the status of the Medicare and Social Security trust funds.
In recent years, bipartisan reform efforts have not succeeded, and the
Trustees have reported that minor reforms and ``improved economic
projections'' have allowed us to add a few additional years of life to
the trust funds-- though serious long-term structural imbalances have
remained. This report, sadly, is similar to previous recent reports.
However, it is my hope that this Administration and Congress can work
together in a bipartisan way to find the necessary confluence of
opinion, wisdom and courage to restore long-term health to these
programs.
Thank you for inviting me to testify today. I look forward to
answering your questions.
Chairman Thomas. Thank you, Mr. Secretary. And in
cognizance of the shortness of the time, the Chair will forego
any questioning and recognize the ranking Republican, the
gentleman from Illinois, Mr. Crane.
Mr. Crane. Thank you, Mr. Chairman. Mr. Secretary, the Bush
tax program will strengthen the economy. If it were to
permanently increase the economy's real rate of growth by two-
tenths of a percentage point a year, which is a very
conservative estimate, would you not expect such a change to
extend the solvency of the Social Security?
Secretary O'Neill. Prospectively it could, sure.
Mr. Crane. And starting from your intermediate assumptions
and building in the effect of the Bush tax cuts, do you have
any sense of how many additional years we would gain before the
trust funds were exhausted?
Secretary O'Neill. I guess without actuarial equations I
wouldn't hazard a guess, but there would be some addition.
Mr. Crane. The Medicare Trustees' report shows by 2016
total Medicare expenditures will begin to exceed general
revenues. In terms of dollars how big do you expect the gap for
financing revenues to grow?
Secretary O'Neill. If you look at the projections through
this whole 75-year period, we are talking from the Medicare
side moving to 2.5 percentage points to 8 percentage points. So
we are talking about a monumental change, and I don't know
whether you have had a chance to work your way through the
details of the report, but if you look at the details there are
in this report with the Medicare assumptions, projection from
the outside panel that was convened last year, an extension of
the logic says in the year 2075 one-third or about one-third of
our total gross national product would be consumed by health
and medical care. So the prospects that are embedded in this
report are really quite a huge change from where we have been.
Mr. Crane. Some lawmakers might take the Trustees'
projection of 4 more years of Medicare solvency as a sign that
we should not address the fundamental reforms to the Medicare
program, but rather focus on adding additional benefits to the
program like a prescription drug benefit. In your opinion, if
the Congress were to simply add on a prescription drug benefit
to the existing program, how would that change the outlook of
the program?
Secretary O'Neill. Well, I think it would falsely assume
that we have room to provide an expansion of benefits without
accepting the fiscal responsibility to pay for it. There is
nothing in this report that suggests that we have that money to
spend. Quite the contrary, it says we need, I believe,
fundamental changes in order to secure the long-term financial
certainty of the benefits that have been voted by the Congress.
Mr. Crane. Thank you, Mr. Secretary. Mr. Chairman, I yield
back the balance of my time.
Chairman Thomas. Thank you very much, Mr. Crane. Mr.
Chairman.
Chairman Grassley. Mr. Secretary, during my time I will
only have two issues to discuss with you. I am going to start
with the fact that a number of people have suggested that we
should lock away every penny of Social Security and Medicare
surplus to pay down the debt. Now, according to data that we
have, however, from the actuaries, Social Security and Medicare
benefits will exceed payroll taxes and premiums by $465
trillion over the next 57 years. It is my understanding that
locking away all the Medicare and Social Security surplus to
pay down the debt does not solve the massive shortfalls that I
have just mentioned in both of these programs, as some would
argue. So I would like to have your thoughts on that from your
position not only as economic advisor to the President but also
as from the standpoint of your trusteeship.
Secretary O'Neill. Well, you have mentioned that we have a
concept of a lockbox and I think without exception so far as I
can tell every Member of Congress has indicated together that
we should not use--funds that come to the Federal Government
through the application of the Social Security tax or through
the Medicare tax should not be used for other purposes, and I
don't find anyone that disagrees with that. Now, I think at the
same time most people understand that when the money comes in
for those programs and it is in excess of the amounts that are
required to discharge the responsibility for a particular
period of time, for a particular year for example, that the
books of the Federal Government, that is to say, the financial
statements of the Federal Government show an obligation on the
part of the Federal Government to hold and protect that money
and to use it for the purpose that it was collected. And so
there is a, for certain accounting, recognition of an ongoing
obligation as to how those funds will be used. At the same time
when the funds are collected by the Federal Government, they
flow into the Treasury and they do not have names on them that
are associated with the source that produced them. And so as we
have bills that come due because of legislation passed by the
Congress, we send checks from the Federal Government to those
who have an obligation against the Federal Government; and to
the degree that we have cash in excess of the need to service
the direct financial obligation of the Federal Government, we
reduce the outstanding debt held by the public. And so there is
no doubt that we are going to use these funds for the stated
purpose because we have a clear recording of the obligation to
do so.
At the same time, Mr. Chairman, to your question, there is
no way, at least in the opinion of the Trustees, that there is
no way when one looks at the projected obligations of the
Federal Government and the expected revenues associated with
Social Security and Medicare, that we are going to be able to
discharge the benefits that have been legislated by the
Congress when one gets to 2016, the year for Social Security,
and at 2029 for Medicare, and so, no, it is not possible to
hold that. We are going to be OK if only we do not spend the
money for something else, because we are going to spend the
money only for these purposes.
Chairman Grassley. Now, I want your thoughts on a couple of
quotes from the Trustees' report. Quote, We highlight the most
significant implications of these findings, which is that both
Social Security and Medicare needs to be reformed and
strengthened at the earliest opportunity. End of quote. Second
quote about Medicare, quote, The need for further long-term
reform has not substantially abated despite improvements
brought aboutin recent years, end of quote.
Do you agree with the statements and what are the
implications of these findings for Congress as we consider
whether to pursue both prescription drug coverage and Medicare
reform this year?
Secretary O'Neill. Certainly I agree with both of those
observations. The implication of not acting early is really
important and it is different from many other things we in the
United States face. I think it is probably correct to
characterize us as a people who respond well to crises but find
it difficult to make anticipatory changes, and for lots of
things that is all right, it is okay not to be prepared. And I
would argue in the case of a national defense we would not want
to wait and decide whether we should support a military until
we are confronted with the military situation. Then by our
actions we collectively indicated that we agree with that
concept.
It seems harder for us to deal with the reality that is
confronting us in Social Security and Medicare because it is
out there a ways. The difficulty with waiting until we have a
crisis condition; that is to say that we were effectively in
bankruptcy, is that there is no way to climb back up on the
cliff after you have gone over it when it comes to Social
Security and Medicare. If we don't take preventative measures,
we are going to create a real crisis, and the depth of the
crisis will become more and more extreme as we have approached
the precipice of nonsolvency. Because of the magic of
compounding, if you will, the earlier we can take action, the
easier and simpler and less painful it is going to be to
sustain good benefit levels for the aged and the disabled and
those who are entitled to medical benefits.
Chairman Grassley. Thank you very much.
Chairman Thomas. The gentleman from New York, Mr. Rangel,
wish to inquire?
Mr. Rangel. Mr. Chairman, because there has been some
concern that I have deliberately----
Chairman Thomas. I will tell the gentleman there is no
concern.
Mr. Rangel. Violated the privilege of the opening
statement, in order to shatter that idea, I yield back the
balance of my time.
Chairman Thomas. I will tell the gentleman there was no
concern and the chairman himself yielded his time to another
member. Does the gentleman from California, Mr. Stark, have
more than the one question that he had proffered?
Mr. Stark. Thank you, Mr. Chairman. Mr. Secretary, as I
indicated earlier, if you take the $526 billion out of the
Medicare surplus and put it in a contingency fund where it is
suggested it could be spent on other than Medicare, you would
exasperate any problem that Medicare has. But there is also the
question that Medicare in the abstract is inadequate now
because it does not provide a drug benefit to the seniors. So I
think that is generally agreed upon. The Bush budget had set
aside $153 billion. I might add that is less than about one-
tenth of the amount earmarked for tax cuts. It is not even as
much as giving back the inheritance tax, which would be $50
billion a year. But if you take $48 billion away from this
projected $153 billion in the immediate helping hands block
grant, which is neither immediate, I might add, or much help,
you only leave $100 billion for a drug benefit. That is a
little over $10 billion a year and by all standards that we
know a decent drug benefit might cost $40 billion a year.
Interestingly enough, that is just what getting rid of the
inheritance tax costs.
If we have got enough money to give back the estate tax or
give back $40 billion a year, why cannot we hold that and use
that $40 billion for a drug benefit which would benefit every
senior, 30 or 40 million seniors, as opposed to just a couple
of thousand extremely rich Americans? Why isn't that a better
use of our money?
Secretary O'Neill. Well, I think the President has
indicated that he believes we should have a drug benefit. And
he said more broadly to all the Members of Congress that he
thinks we should do and work together on substantial Medicare
reform, and so I don't see an inconsistency in what he said we
should do. And I don't--I guess I am still not able to
articulate the difference between cash flow and how we account
for the sources of funds in describing what happens to Medicare
and Social Security funds when they come into the government
and they are not required for immediate discharge of Federal
obligations. I am struggling with how I can help to make that
clearer because I keep hearing these questions about
contingency funds, and it is a misunderstanding and I suppose a
weakness on my part in not being able to clarify the difference
between balance sheets----
Mr. Stark. If you yield. Secretary Thompson didn't have any
trouble distinguishing. He said before this Committee that,
yes, they had added the $526 billion in Medicare trust. They
were counting that in the line on page 17, I believe it is, for
this contingency. They did not do that with Social Security.
That is up there as a separate item. That trust fund was
protected. But the Medicare part A trust fund is buried in that
$820 billion contingency fund. We call that three-card monte
where I come from, Mr. Secretary, but you might call it a shell
game or however you might want to define it. I know where the
President hid that and in his understanding the suggestion is
that that money for Medicare could be spent on other things,
and that is not preserving a trust fund in my book.
Secretary O'Neill. The funds that were sourced from a
Medicare tax will be recorded on the books of the United States
as an obligation of the Federal Government to be discharged as
beneficiaries present themselves for Medicare entitlement
programs, without a doubt.
Mr. Stark. Then how does it get in the contingency fund?
Then there is no contingency funds. That is all right with me.
We just misnamed the contingency fund. That should have been
named the Medicare part A reserve fund.
Secretary O'Neill. I don't know if we really want to go to
this question, but I think most of the American people
understand that we have a growing obligation account for
Medicare and for Social Security and that that obligation is
reflected by entries in bookkeeping statements. It is not
reflected by a physical asset that someone can go and draw out.
Those obligations represent representation by Members of
Congress that when the bills come due they will be paid, and
there should be no doubt that that is the case. But the
conventions that we use from an accounting point of view to
talk about trust funds are frankly I think not well understood
because they will suggest something quite different from what
they are in fact.
Chairman Thomas. Senator Baucus.
Senator Baucus. Thank you, Mr. Chairman. Mr. Secretary,
with all respect, I don't think that the average American
listening to Mr. Stark's questions and your answers would think
that you answered the question, because if the basic question
is where is the $526 billion, is it still in Part A or is it in
the contingency fund. I will not delve into that any more
because quite frankly I don't think your answer will be
different, but I don't think you answered the question.
I want to ask a different question; namely, the merging,
the administration's not the trustees, but the administration's
merging Part A with Part B surpluses I think is a kind of bait
and switch tactic that is trying to show that there is a much
greater problem than there actually is in order to justify,
quote, reform. And reform means different things in the eyes of
the beholder. To some people reform means one thing, to some
people reform means something else. I think to most people
reform means solvency. How do we better assure that the dollars
are there? To some people reform means competition models, and
those are very important discussions.
But my question is, where in the administration do you, how
do you propose to close the gap between excessive expenditures
and revenues, even given your, I think, incorrect merging of
the two funds? Your chart page 21 shows this gap. How do you
propose to close that gap? What ideas do you have for providing
more dollars to Medicare? I don't see them and I would like to
learn about them.
Secretary O'Neill. Well, again the President has indicated
that he is prepared to work with the Congress on a total
Medicare reform that I think we in the administration stand
ready to do that. I guess I would argue that conceptually at
least merging the ideas of health insurance and the
supplemental medical insurance is a sensible thing to do
because out there in the real world where many of us have
parents and family Members who are drawing on these benefits, I
think it is awfully hard for them to understand why we make a
distinction between what is in SMI and what is in HI, and I
think frankly probably most of them don't care and wish they
did not have to take the trouble to understand why do I have
these different things that I have got to deal with. And from a
medical care concept, actual point of view, it is hard to
imagine that medical care is really practiced in the artificial
way we have designed it from an accounting point of view.
So putting these things together in the way the real world
works, at least conceptually if we can't do it artificially,
seems to be a perfectly logical thing to do.
And then to your question about how do we solve it.
Senator Baucus. Where is the money? That is the question.
Where is the money?
Secretary O'Neill. Well, you know, again, I think there are
a number of things that we can do and maybe I will go back to
my previous incarnation and talk a little bit about what I have
been doing the last 5 years to demonstrate what I believe to be
the case, which is that we can, we in this country can
substantially improve the value equation of health and medical
care. But it will take systemic reform in the way care is
practiced. It will take attention to the last two reports that
have been issued by the Institutes of Medicine. I don't know
how many Members have seen the two reports from the Institutes
of Medicine. The one last year called attention to the fact
that 100,000 people a year are being killed by medical mistakes
and attest to the level of mistake-making that takes place in
the delivery of care. If we could capture the potential that
exists to do it right the first time we would probably reduce
health and medical care costs 30 to 50 percent. And if you
would like witnesses on that, I would suggest Dr. Donald
Berwick from Harvard, who is the Director of the Institute of
Health Care Improvement, and Lucy Ann Leap, who is the first
who identified the huge gap between where we are and where we
could be.
Part of what I am saying is as much as we may try here to
sort out and deal with these complex issues in health and
medical care, if we are really going to receive substantial
improvement it is going to take place in places like the
Intermountain Health Care System in Salt Lake City, where they
are working on these important ideas. They will take place at
Deaconness Glover in Boston, where they are working on these
ideas.
Senator Baucus. Mr. Secretary, I appreciate that but as I
hear you, you are not really answering the question. The
question is where is the money and where is the
administration's proposal to close the gap. With all due
respect, there is none. The talk of reform and the competition
models and everybody who has analyzed the competition models
has concluded they don't yield much money, they don't address
the solvency part of the problem that we are attempting to
address and I just suggest frankly that the administration be
more forthcoming; so far it has not been. Then the
administration can perhaps be able to have a dialogue with this
Congress. Otherwise until it has a proposal detailing where the
money is coming from I don't know why this exercise really
makes much difference.
Chairman Thomas. Does the gentleman from Florida, Mr. Shaw,
the chairman of the Social Security Subcommittee, wish to
inquire?
Mr. Shaw. Yes, I do, Mr. Chairman, and I thank you for
yielding the time to me. I am sitting here drowning in
frustration. I think from some of the comments that have been
thrown out without being answered here at this hearing and all
over Washington, sometimes I think for the new symbol of
Congress, we should remove the eagle and put in the ostrich
with his head under the ground. It is absolutely incredible
when I think of so many people thinking that we have until 2038
until we solve this problem.
Mr. O'Neill, you were absolutely correct in what you said,
the closer we get to the cliff the more likelihood we will drop
off and the more likelihood we will not sustain the benefits.
But we have an opportunity now to do something. The word
``solvency'' has been I think dramatically misused during this
entire debate because as far as I am concerned the solvency
ends in 2016, when we no longer have enough money to come in in
order to take care of our obligations.
Mr. Secretary, you show the assets of the Social Security
trust funds in your report. Those assets I assume include the
government obligations, which are nothing more than an IOU from
the government to the government, is that correct?
Secretary O'Neill. That is exactly right.
Mr. Shaw. Now you are doing this under existing law, and I
wanted to make that very, very clear. But if a private company,
if Alcoa, when you were CEO if you were to show those
obligations of yourself in the balance sheets to the
stockholders or to the bankers, what would happen?
Secretary O'Neill. Well, it depends on how serious the
problem was. If the problem was as serious as the one we have
here, they would probably withdraw support for us. One
distinction between the private sector and the public sector
that gives momentum and sustenance to where we are is you all
have the ability to raise taxes in the financial systems of the
world and the people who believe they are going to be able to
collect benefits assume you will raise taxes to pay for your
obligations.
Mr. Shaw. Precisely, so the assumption is we are going to
raise taxes and tax the people who have already paid into the
system in order to pay them their obligations; is that correct?
Secretary O'Neill. That is correct.
Mr. Shaw. So beginning in 2016 in the existing system we
will not have sufficient assets coming in in the form of 12.4
percent payroll tax in order to pay the benefits. I would like
to submit for the record the definition of bankruptcy as it
appears in Black's Law Dictionary: The state or condition of
one who is unable to pay his debts as they become due.
[The information follows:]
Bankrupt. The state or condition of one who is unable to
pay his debts as they are, or become, due. Amenability to the
bankruptcy laws. The condition of one who (under the Bankruptcy
Act of 1898) has committed an ``act of bankruptcy'' (q.v.), and
is liable to be proceeded against by his creditors therefor, or
of one whose circumstances are such that he is entitled, on his
voluntary application, to take the benefit of the bankruptcy
laws. The term includes a person against whom an involuntary
petition has been filed, or who has filed a voluntary petition,
or who has been adjudged a bankrupt. Person or municipality
referred to as a ``debtor'' under Bankruptcy Act, Sec. 101(12).
See Act of bankruptcy; Arrangement with creditors; Bankruptcy
Act; Bankruptcy proceedings; Composition in bankruptcy;
Composition with creditors: Contemplation of bankruptcy;
Insolvency; Wage earner's plan.
Chairman Thomas. Without objection.
Mr. Shaw. We will not be able to do it unless we raise
taxes and tax people again or cut benefits. So by doing nothing
we are simply putting ourselves in that position where we are
going to have to totally depend on, or in good part at least, a
third of the taxpayers in order to get the necessary funds to
hold the benefits to where we are today. Is that close to being
correct?
Secretary O'Neill. That is exactly right.
Mr. Shaw. It is tremendously frustrating, particularly when
I see that Social Security is becoming a worse deal over time
and it will continue to get worse without change. Young and
future workers will get a very bad deal. People disagree about
exactly how the Social Security rate of return is calculated,
but according to the administration, young people entering the
work force today can expect a return of less than 1.8 percent
of the contributions that they and their employers have paid
into the system. That is illustrated on the chart that is to
your right, Mr. Secretary.
Do you disagree with that? What we show is the date of
birth of the population, which is along the bottom of the
chart, and it shows a percentage where people born in 1880, for
instance, and were retiring in 1945, they were getting 25
percent return and now it is down to 1.8 percent. That is
absolutely disgraceful. As a matter of fact, I think probably
what we should do is to adopt this as a symbol for Social
Security for the young people of this country. It is absolutely
unconscionable that we are allowing this to continue and
allowing this charade and the corrupt type of the accounting,
which is required by law and which you are dutifully following
as you have to, and I understand your frustration that you must
feel by inheriting this system.
President Roosevelt said when he signed this thing to the
effect that more was being put out of the reach of the
politicians. It has never been out of reach of the politicians,
and it is disgraceful the way we are handling this thing, and I
would hope that the Members of Congress would join some of the
leadership on both sides of the aisle, and I include Senator
Breaux in there, who has been very forthcoming in trying to put
together solutions, which I don't totally agree with but I
agree in principle, and it is time we move forward and solve
this system for the next generation. It is tremendously
important, and I think it is tremendously important to this
country. Social Security will be going into the red in 2015,
and it is time we quit talking about 2038.
Thank you, Mr. Secretary. Thank you, Mr. Chairman.
[The chart follows:]
[GRAPHIC] [TIFF OMITTED] T4215A.001
Chairman Thomas. Thank you. The gentlewoman from
Connecticut, Mrs. Johnson, the chairman of the Health
Subcommittee, wish to inquire?
Mrs. Johnson of Connecticut. Yes, I do. Thank you, Mr.
Chairman.
Secretary O'Neill, I am very pleased that you are focusing
today on the long-term solvency of Social Security and
Medicare. There are no two programs that are more important to
every senior in America and every person under 65 in America.
They are not only important to our parents, but they are
important to ourselves and our children, and if we do not start
taking the long view we will destroy these programs and the
very fabric of our society, in our estimation.
I notice that you do mention in your report that to bring
just the HI Program into solvency over 75 years we would have
to increase the payroll tax 60 percent or reduce the benefits
37 percent. Now that is serious business, and I regret the
focus on this short-term budget controversy. We all know the
politics of that. When the urgency of the long-term view is so
great, and anyone sitting on this Committee or Member of the
Congress, House or Senate, could read last year's GAO report,
which says that by 2030, this was a year ago and so it is a
different figure and I understand that, but even then they were
talking by 2030 that Social Security, Medicare, and Medicaid
would absorb all together 75 percent, three-quarters, of all
available revenues, 75 percent. So it is urgent that we not
only look at the problems in Social Security and Medicare, but
that we adopt more modern management techniques so that the
growth in these programs will be sustainable.
We talk about sustainable development in urban areas. A lot
of my Democratic colleagues are interested in that.I am
interested in sustainable growth in Medicare and Medicaid, and in order
to get there, in Social Security at least, we do have a pretty good
idea of what it would cost. So we have a number of proposals developed
in the Congress about how to deal with it, and we hope now with
leadership from the executive branch we will be able to do it. But in
the area of Medicare we have made it harder to understand what our
total program obligations are rather than easier.
Two years ago, when the administration proposed moving home
health from A to B, of course A looked better. Great. What an
accomplishment. B looked worse. We didn't notice that. There is
no report required about B. So we can't just shift costs from
one fund to another. We could do that forever. We could get $2
trillion if we shifted some big things out of part A and it
would look great, but our problem would be exactly the same.
So have you given much thought as to how we develop a
solvency standard that would give us an understanding of the
total program costs in Medicare, their growth rate, and what we
could expect in terms of solvency as a whole so we can better
focus on how do we manage this growth so it can be sustainable
and we can deliver not only today's Medicare benefits but
prescription drugs, terribly important, turn the program into
preventive health? It is absurd that you can't get a physical
exam under Medicare.
We have big work to do, but we can't do it unless we have
some help with understanding when the program is solvent and
when it is going to be insolvent and those kinds of very basic
issues, what are we spending and how much money do we have
coming in. And to say it will come in more and more from
general revenues is absolutely absurd, and I hope we won't talk
about that because, sure, if we do that, by 2030 three-quarters
of all revenues would go to these programs. What a disservice
to our children and grandchildren. It is outrageous to imagine
that we could so rob them of the resources to have a good
education system, good roads and bridges, adequate national
defense.
So on this issue of a solvency measure, so we can know
where we are going and what we are doing, have you given, have
the Trustees given any thought to how we go about this?
Secretary O'Neill. Well, we are a new group of Trustees
save for the two public Trustees. We had our first formal
opportunity to meet yesterday and to review these figures, and
I think we were unanimous in our view of being struck by the
enormity of what these projections for Medicare suggest for
both the composition of our economy in broader sense, the
notion that more than 30 percent of our gross national product
would be consumed by health and medical care, and the
consequence of the composition, as you suggest, for Federal tax
and Federal benefits is really quite awe-inspiring, to say the
least.
We have resolved we will meet together as Trustees to think
about and talk about these subjects going forward, but I would
say again I think the Trustees have by statute a very clear
demarcation of their role in being the financial, fiduciary
area that you all can rely on to tell you in a nonpartisan way
what the financial condition is and what it will be if the laws
are not changed, either with regard to taxes or benefits. And
so I think it is fair to expect the initiative for suggesting
changes and working with a Congress, with the administration
rather, so we don't muddy the role of the Trustees in
discharging their very clear financial responsibility.
Secretary O'Neill. In that regard, the President has
already indicated to you that he intends to appoint a
commission on Social Security; and he is ready to begin working
with the Congress on the fundamental reform of Medicare. And I
think that is where the impetus will come from, those thrusts,
rather than from the Trustees themselves.
Chairman Grassley. The Chair recognizes Senator
Rockefeller, the Senator from West Virginia.
Senator Rockefeller. Thank you, Mr. Chairman.
Mr. Secretary, I want to go back to what our ranking member
on the Senate side indicated in his questioning because I
didn't really hear an answer. He didn't, I didn't, and I think
it is a very important question.
First I want to say, though, that when you--every time you
talk about a prescription drug benefit, like the President, you
also talk about reforming Medicare, those two things. Are you
saying that unless there is reform of Medicare--and I would
posit to you that there is no consensus within the Congress to
make that happen, general reform of Medicare; are you saying
that unless there is a general reform of Medicare, that you
would oppose a prescription drug benefit?
Secretary O'Neill. Quite the contrary, Senator. I think the
President has said he would be very happy to have his
prescription drug proposal active on a stand-alone basis. But
what he has heard, and I thought it was a bipartisan hearing,
is a preference on the part of the Members to undertake a
broader reform of Medicare and not settle just for prescription
drugs.
Senator Rockefeller. That is--the point I am making is that
you are making the assumption if we are going to have one we
are going to have the other. And what I am just positing to you
for the sake of this discussion is that I don't think that the
consensus is anywhere near to the point in Congress where we
can, on a broad basis, reform Medicare as most people would
interpret that to be. Therefore, we are left with the question
of can there be a prescription drug benefit if there is not
broad Medicare reform in the eyes of the President and the
Secretary of the Treasury?
Secretary O'Neill. I guess I would defer to the judgment of
the Senator as to whether or not the Senate is interested in
doing a stand-alone change. My sense is, that is not where the
will of the Senate is.
Senator Rockefeller. And Senator Baucus asked you to try
and talk about where the money came from, how the
administration proposed closing the gap on Medicare A and B.
And he made the point, as I would, that none of the reform
proposals really addresses the long-term solvency question. And
I again would ask, what are your proposals with respect to
closing that gap?
Secretary O'Neill. All right. I guess I am not prepared to
give you a full-fledged range of proposals for how we close the
gap in Medicare. And the President has said we are going to, or
he is going to appoint the commission to work on how we close
the gap in OASDI, and I think you will see that happening in
the next few weeks.
I frankly don't know anyone who has, until yesterday maybe,
except for insiders, seen the size of the Medicare projections
that we are facing if we don't do anything, because this work
was completed in December under the previous administration,
asked for the formation of a special panel to evaluate the
assumptions about the growth of medical care obligations going
forward. And it was in December when Secretary Summers was
still here that they got a report with the panel members
agreeing that for the Trustees' purposes we should use an
assumption that medical care expenses in the United States
would grow not at the rate of gross domestic product, but at
the rate of gross domestic product plus one. And the
consequence of that, as I have said before, is to suggest that
if we don't do anything different, that more than 30 percent of
the gross national product of the United States is going to be
consumed by health and medical care in the year 2075.
I think in 1965 or 1970, we were at 6 percent, and we have
doubled since then. And this suggests another doubling. And I
don't know anyone who has contemplated that prospect and
created a set of proposals to either change that outcome or
figure out how we are going to pay for it.
[The following was subsequently received:]
President Bush is committed to protecting Social Security
for current and future retirees through bipartisan reform.
Social Security is much more than a retirement program. It also
provides critical benefits to survivors and disabled workers.
One of the basic principles of the President's approach is that
Social Security modernization must preserve the disability and
survivors components of the program. I would expect the
President's Commission on Social Security reform would
carefully evaluate the effect on the Disability Insurance
program of all reform proposals they consider, and make certain
that the President's commitment is fulfilled.
Senator Rockefeller. My time is about to run out. I have a
final quick question.
About 10 years ago we started--or more, we started in
Senate Finance debating managed care, managed cost, whatever
you want to call it, plans. And there was at that time a rather
broad agreement by a surprising array of people that managed
care, managed cost plans, however you want to--what they do is
they save money for the first couple of years except for those
that have very long histories, but after that they stop saving
money. Do you disagree with that?
Secretary O'Neill. No, I think that is the correct reading
of the evidence. And I guess I would like to make clear, in my
earlier remarks, that is not what I had in mind. What I had in
mind and what I think I could demonstrate to you, maybe with a
field trip to southwestern Pennsylvania, is that it is possible
to achieve a level of health outcome performance that is so
wonderfully better than what we have accomplished that there is
a way that we can both pay for obligations that we would like
to undertake on behalf of the American people and, if you wish
to, expand the scope of care by a very substantial amount and
reduce the price at the same time. Because if one examines the
range of non-value-added work, if you can characterize it that
way, that occurs in the delivery of health and medical care, it
is truly amazing how much room there is for improvement to the
benefit of patients and to human beings. But it is going to
take very systemic reform.
I will give you one indication of a kind of reform, because
I know you all have your own connections to your health and
medical care system out there; and next time you have an
opportunity, I would urge you to go to your local doctors or
your local hospital and talk to them about what it feels like
to be a provider these days. Many of them--at least the ones
that I know, and I know hundreds, if not thousands of them--
feel that they are the enemy because the signal they get from
here is that they are people who are out there only to make
money.
Most of these people are so altruistic, they have dedicated
their lives to helping others; and the signals they get from
the way we reimburse and the way we talk about medical service
delivery personnel is that they are the enemy. And we have so
structured the process so that it is very difficult for medical
professionals to tell each other when they have made a mistake
and therefore to learn from it, because if they do so, they
risk the danger of losing their right to provide medical care.
And this is a tip of an iceberg of the systemic problems
that we have created out there, with the very best of
intentions, since we began moving further and further into
reimbursement systems and ways of characterizing those service
providers as the bad people in our society.
With a change in that attitude, we can make a fundamental
change in the value of delivery that we capture out there in
health and medical care.
Senator Rockefeller. Thank you, Mr. Secretary. Thank you,
Mr. Chairman.
Chairman Thomas. Does the gentleman from New York, Mr.
Houghton, wish to inquire?
Mr. Houghton. Thank you, Mr. Chairman.
Mr. Secretary, good to have you here. Thanks very much for
your honest answers. You know, I can understand why the Joint
Committee, the Finance Committee and Ways and Means only meet
every 75 years. If I were Secretary of the Treasury, I wouldn't
want to be facing this panel.
People asked, where does the money come from? This is not a
complicated question. It doesn't come from the sky. It comes
from us. And we here will decide where that money and in what
proportions it is directed.
We have got a great system; we have got to keep funding it.
There are huge numbers involved. It will require changes. We
have got to get at it soon, and it is our problem. But as
General Marshall used to say, Let's not fight the problem.
And so maybe you could describe a little bit about this
commission and what you hope it will accomplish.
Secretary O'Neill. Thank you.
The charter hasn't been written yet, but there are some
drafts working in the present thinking about the compositional
structure and the timing to be provided, but always true to the
idea that beneficiaries, both current and near-term
prospective, can count on the Federal Government to discharge
the obligation that all of you have said they should expect to
see.
I guess aside from that very important baseline idea is an
idea that this undertaking may be the most important thing this
administration can do in domestic and social policy to finally
provide leadership and create some nonpartisan agreement to
solve this problem while there is still time to do it in a
reasonably graceful way, but with a real determination on the
part of the President that he may and will deliver on the
commitment that he made in the course of his campaign for the
office, that he will help to produce a solution that the
American people can count on and believe in, and that he will
deliver the benefits that are promised and, at the same time,
hopefully, move us into an era where we have more--we have more
wealth creation and asset accumulation on the part of
individuals to help with their own retirement and medical care
needs than they would under traditional concepts.
Mr. Houghton. Thank you very much.
Chairman Thomas. Does the gentleman from California, Mr.
Herger, wish to inquire?
Mr. Herger. Thank you, Mr. Chairman.
And I join in welcoming you to our Committee this historic
time, Mr. O'Neill.
The trustees' report tells us that, absent reform, general
revenue transfers will ultimately constitute the largest single
source of income to the Medicare program as a whole and would
place a large burden on the Federal budget. What does this
increasing dependence on general revenues mean for the program,
and how useful is a solvency definition that only uses payroll
taxes and which will ultimately constitute minority program
revenues.
Secretary O'Neill. Well, if we--as we move; I should not
say ``if''--as we move to a greater degree of general revenue
financing, we are really saying that these program entitlements
are a general draw on the tax revenues of the American people,
independent of anything else; and that whatever obligations may
be voted and entitlements may be written into law, that there
is no connection between the source of the revenues and the
people that use them. So, in effect, we are destroying any
linkage of those who pay and those who receive the benefits.
And I suppose one could say, as we do, that we are becoming
in this area an income transfer program; or I guess--not to use
a pejorative term, but to say it in the way most would say it--
becoming a welfare program rather than a self-supporting
contributory program.
Mr. Herger. I thank you, Mr. Secretary. No further
questions, Mr. Chairman.
Chairman Thomas. Does the Senator from Louisiana, Mr.
Breaux, wish to inquire.
Senator Breaux. Thank you, Mr. Chairman. And thank you for
helping to convene a historic joint hearing with the House and
the Senate. I take it that a joint markup session on the tax
bill is probably not likely?
Chairman Thomas. I will tell the gentleman if we could pull
this off, we will try.
Senator Breaux. Thank you, Mr. Secretary, for being with
us. I think tomorrow--and, in fact, today and probably tomorrow
as well--many of headlines in the newspaper will basically say
something along the lines that Medicare is in pretty good
shape. And I think that those headlines would be terribly
misleading.
I sort of compared it to a person going to his doctor for
his physical and having the doctor tell him he is in pretty
good shape after only taking his blood pressure. Because what
we have done is to--in the Trustees' report is essentially
focus in on Part A, which covers only about 55 percent of the
Medicare costs. So of course it is going to look good. Had it
not been for what we did in 1997 in transferring a portion of
home health care to Part B, plus other changes that we made, we
would be insolvent today.
So, I mean, the report, while it is valuable and people are
here to get the results of it, I think it can tend to be
incredibly misleading because it basically looks at Part A and
says, Pretty good shape, folks; it is a little bit better than
last year; in fact, for 3 years, it has run a surplus.
So the question is, how do we get serious about talking
about the condition of Medicare by looking not only at one part
of it, but both parts of it? I mean, you have to do more than
just take the blood pressure of Medicare. You have to look at
everything, including home health care and doctors and
everything that we shifted over to Part B. Obviously, if we put
hospitals into Part B, Medicare would be in good shape for
eternity; it would be fine because everything is in Part B and
nothing is left in Part A.
In the Breaux-Frist bill that we have pending over on the
Senate side, we said there should be a point when you look at
the general revenues being spent on this program in determining
whether it is in good shape or not. Now it is about 34 percent
of all of Medicare costs to pay for out of the general
Treasury; and we suggested that when it gets to be 40 percent--
pick a number, we said 40 percent--that you ought to have a
relook at what we are doing with this program and recalculate
whether we want to continue just to shift more of it into
general revenues.
Does this administration have an idea about that concept?
Because I think this is--while it is valuable, it is like not
reading the rest of the story. We are only looking at part of
it. We look at Part A when Part B becomes larger and larger.
Do you have any comments on that?
Secretary O'Neill. Senator, I welcome your question. As I
indicated, yesterday is the first time that the Trustees have
met together since this administration was formed. And we
agreed that we will have another meeting fairly soon, but
partly at the request of myself, the Chair, to provide an
opportunity for us to talk about exactly the kinds of things
you are suggesting that we could bring to our work in the next
year.
But I am very mindful of wanting to stay within a strict
interpretation of what the law tells the Trustees they are
supposed to do.
Senator Breaux. I understand that. What do you think about
the proposed change, though?
Secretary O'Neill. I think it would be helpful to ask the
Trustees to think about helping medical care, without regard to
A and B, in the context of what it is we have obligated
ourselves to do for that population; and to give some advice to
the Members of this Committee, more broadly to the Congress and
the American people. Because I think the context is clearly
more appropriate and doing it that way could reduce the
misunderstanding that people have that we have already seen in
today's headlines, celebrating that things are better, which
suggests a pretty superficial reading.
Senator Breaux. Let me ask a second question on Social
Security.
You saw a chart up there. It talked about the recent rate
of return on Social Security being invested in Treasuries; it
was 1.8. I think it is probably closer to 3 percent or slightly
under 3 percent.
Some of us have suggested the concept of allowing Social
Security folks to be--that is a 1994 chart? Don't you all have
anything more modern than that? Whose chart was that? That is 7
years old; I think it is probably different.
Anyway, the concept of doing what we all can do up here and
putting a portion of our payroll into a retirement account that
we own; and we suggested 2 percent. And some said, Look, the
market is going down the last couple of days, it is a terrible
idea, although over a 20-year period, which is a normal period
that people invest in retirement, we have never had a negative
rate of return in the market.
How would you comment as to the concept of allowing
potential retirees to put a portion of their payroll tax into a
private retirement account?
Secretary O'Neill. It is a very good question, and I think
you provided exactly the right indication of how to think about
this thing.
If you look at the rate of return on equity investments in
the United States back to, I guess I would say recorded
history, let's say back to 1875--I don't care when you choose a
start period or end period, unless it is yesterday--you can
find any reasonable period of time, 20 years or 30 years or 40
years, where the rate of return on equity investments was not
greater than 4 percent. Again, the long run rate of return on
risk-free investments--which, let's say, are Treasury
securities--is something on the order of 2.5.
And so there is not a question about the difference in the
rate of return between risk-free investments and long-term
investments and the equities of the U.S. Economy as a general
matter. And it is true, if you look at the last 6 months, you
couldn't make that claim.
But even if you extend yourself back 3 years or so, or 4
years, you will find that equity investments always win. And
when one is planning a retirement account, especially as we put
people into their first employment engagement in the United
States, say at age 20 or 21, and look forward for 40 or 45
years, there is no question, at least not in recorded history,
that one would be better off invested in the general equities
of the United States than in risk-free returns.
Senator Breaux. Thank you.
Mr. Shaw. If I could say to the Senator, this is the latest
data that is available to the Social Security Administration.
Senator Breaux. Does that show a rate of return in risk-
free of 1.8?
Mr. Shaw. That is as to what is put into the system and
what is getting out of the system as far as retirement
benefits.
Chairman Thomas. Tell the gentlemen, as you go out in
outyears, rather than look at actual wages and conditions of
the market, they run a percentage in the outyears. And we are
comparing obviously significantly different periods, but return
on it is a percentage. And as you can see, it went from 25
percent in the early years to 1.8. And that line continues to
narrow to just slightly above 1 percent out around 2030, 2037.
Does the gentleman from Louisiana wish to inquire?
Mr. McCrery. Yes, Mr. Chairman.
Mr. Secretary, the discussion from today has been somewhat
revealing, I think. There has been a lot of talk about Part A
and Part B and the trust fund and the solvency; and the bottom
line is, Part A and Part B represent an anachronistic structure
that was created 35 years ago and has little relevance to
today's health care system, and we ought to junk it. That ought
to be our goal, to junk Part A, Part B, and come up with an
overarching reform of the system which will change some of
these horrendous figures that we have been hearing.
And I want to follow up on Ms. Johnson's line, looking at
Social Security Medicare and Medicaid costs vis-a-vis the
budget of the United States. She used the year 2030. If you go
out to 2075, and look at these costs, they will consume about
100 percent of the budget if we keep spending at the Federal
level about 18 percent of GDP, which is what it has been
historically--100 percent of the budget. That means we don't
get to pay any interest on the debt. We don't get to pay
anything for defense, for highways, for environmental
protection, nothing.
So clearly we have a problem that is bigger than Part A or
Part B or who gets what. We have got to figure out a way to
stop these programs from growing so rapidly. Never mind Social
Security; I think we can take care of that fairly easily.
Medicare and Medicaid are much bigger problems and much more
difficult to solve. But if we don't, I believe--look at the
entire health care system and get away from this notion of
trying to solve Medicare. I am not sure we can solve it, Mr.
Secretary.
I hope the administration will look beyond just Medicare
and Medicaid and show a little more vision, frankly, than has
been shown in this town for the last few years when it comes to
health care. Because if we don't, I don't think we can change
these numbers significantly, and the result will be a
tremendous increase in taxes to cover the costs.
And probably part of that answer will be to simply expand
Medicare for everybody so that we have one health care system
controlled by the government and paid for through the tax
system. That is where we are headed, and these numbers are
undeniable in that regard. This is exactly where we are headed
if we don't show some vision and come up with a different path
to follow that will avert this kind of situation.
So, I urge you, Mr. Secretary, to use some of the thinking
that I heard you say here today about some different ways to
deliver health care and pay for health care. We have got to
start thinking outside the box on this question or we are going
to be in a box, big time, and there is no way out except for
the government taking over health care and establishing a
budget and rationing health care. That will be the answer that
we come up with, and I certainly want to avoid that if at all
possible.
Would you comment?
Secretary O'Neill. Well, thank you. I certainly agree with
you.
To maybe deepen the notion with a few facts that you are
talking about, I suppose most of you know about the concept
call Six Sigma. What it means, in a million events, a million
repetitive events, that there will be 3.4 mistakes in a million
events. And to put it in context where we are in medical care,
if you look at medications in the United States, one in every
2,000 medications is wrong. Think about that in the context of
Six Sigma.
And, again, it is not to be accusatory nor to find fault in
the consequence of lots of practices, many of which are now
being replaced. But if you think about the scribble on a little
white pad and the error potential that exists with that
scribble not turning into the right medication; or maybe in a
broader sense, that scribble not being integrated in an
information system with other medications a patient is taking
so that the formulary and the computer can tell you when there
is a contraindication about combining drugs.
Then you begin to see the potential of the number of people
who wouldn't have to be in the hospital except for the fact
that they have a medication error, or those who are there for
an extended stay because once they got to the hospital, they
got what is called--the so-called nosocomial infection, more
commonly known as a staph infection; and you begin to put
number values on how much money we could save by doing things
right the first time.
In my mind there is no doubt that we can simultaneously
improve outcomes for Americans, but make the medical profession
more rewarding for those who are in it and simultaneously deal
with the financial considerations which have been the focus of
most of a national involvement in health and medical care over
the last 35 years.
Chairman Thomas. The gentleman's time has expired. Does the
gentleman from Michigan wish to inquire?
Mr. Camp. Thank you, Mr. Chairman.
Just to follow up a little bit on what my colleague, Mr.
McCrery, said, in the Balanced Budget Act 1997, home health
coverage was shifted from Part A to Part B and that extended
the life of the trust fund by 6 years. And if we took some
other items, for example--and no one is seriously proposing
that we do that, but for example, if skilled nursing were
shifted from Part A to Part B, that would impact the trust fund
by almost $300 billion.
I guess my point is that these mere bookkeeping changes
have significant ramifications for the solvency of the fund.
And I think--a comprehensive look at the viability of Medicare
as a whole, I think is needed, and I think that his point is
well taken. I guess I would be interested in your comment on
that, and then I have one other question.
Secretary O'Neill. I agree completely with what you have
said.
Mr. Camp. All right. The trustees' report tells us that
without reform general revenue transfers will really be the
largest single source of income to Medicare, and obviously that
would have significant effect on the Federal budget. What do
you think this means for the program and how useful is a
solvency definition that only uses payroll taxes which will--
actually will not be a majority of the program revenues?
Secretary O'Neill. My own view, as you can probably tell
from the things that I have said this morning, is that we need
to look at the substance of what it is we are paying for.
Because I am convinced that no matter how hard we may try,
making even well-intentioned modifications to reimbursement
formulas doesn't get at the need to, or even the system toward,
creating value instead of responding to signals from Washington
that are an economic model that assumes--that we can devise
signals to health care providers, to hospitals and doctors,
that somehow will keep the costs down and simultaneously
produce good results.
I think all the evidence we have for 35 years now is to the
contrary. In fact, if I have time, I would give you an example
of the perversion that occurs because of our reimbursement
systems. If you are a bypass patient and you go into a
hospital, and one looks at the reimbursement performance or you
look at the discharge performance, what you find is that the
average discharge date after surgery is 5.9 days. And so the
reimbursement formulas reward institutions that discharge
people before 5.9 days and they penalize institutions that keep
people longer than that. And so the reimbursement formula is
economically designed to get people to do what the data say the
average should be.
The thing that data don't show you, unless you look at
individual patient experience, is this: that 20 percent of the
people who are discharged in a way that rewards people for
getting out early are readmitted to another hospital within the
next week, many of them with complications, and many of them
die. But because of the way the reimbursement system is
designed, that is OK.
Our signal to the system is, get out early and if it causes
to you have complications or death, it is a new event. And so,
from a financial point of view, this is what we reward. It is
not what we intended, but it is because we are not designing
our systems to be human-being, patient oriented. We are
designing them to make sure that somebody doesn't stay too long
or some doctor doesn't charge us too much.
It is only an illustration of the problems that we have
created with the very best of intentions as we have become less
oriented toward health, medical care, and more oriented toward
accounting as we are being eaten up by program costs that come
here that have to be paid for somehow.
Mr. Camp. Thank you very much. I yield back.
Chairman Thomas. Does the gentleman from Michigan, Mr.
Levin, wish to inquire?
Mr. Levin. Thank you.
You get Michigan twice in row, Mr. Secretary. Welcome. I
just wanted to be clear, so we are all talking from the same
figures; I want to go back to discussions about the surplus and
the contingency fund.
On page 185 of this blue budget book, it has a figure of
842 across from Contingencies. Now, is it your understanding
that the 842 includes the projected Part A surplus of 526
billion?
Secretary O'Neill. I am sorry, I don't have that book with
me. Here we are. The way that this table is constructed, it is
in that number. Yes, it is in that.
Mr. Levin. So the 842 includes the 526?
Secretary O'Neill. And one could argue it is partly in the
417. Because, again, Mr. Levin, it is----
Mr. Levin. I mean, does the 842 include essentially the
526? The part A----
Secretary O'Neill. I would say it is arguably all in the
debt service. This is a table that shows distribution of funds.
It doesn't deal at all with the ongoing obligation to use funds
that are collected by Medicare and Social Security taxes for
the purposes that they were collected.
This is a question of funds flow. There is not a question
of what the obligation of the United States is to the people
who sent in funds for Medicare and Social Security. And so it
is----
Mr. Levin. So you are saying, you don't think that the Part
A surplus of 526, which is more than 417, is debt service that
relates to the increased amount of debt service because of the
use of funds other than for debt service.
Secretary O'Neill. It is arguably--you know, because of the
way the table is constructed, you have Social Security surplus,
and that is a number and that number is generated by how much
money is going to be paid in for Social Security. And as
everyone has said, we should subtract that from the 5.6 and
then the proposed number for tax relief.
Mr. Levin. I understand that. But, please, because
Secretary Thompson was here and we went through this, your
position is that the 526, which is the projected Part A
surplus, is or is not part of the 842?
Secretary O'Neill. It is arguably a debt service and indeed
because debt service of 417 is arguably part of the
contingencies. But again it is a mixing of concepts between
what are the obligations of the Federal Government and what is
the available flow of cash that we have available.
Mr. Levin. The Social Security surplus is listed
separately. That is a cash flow thing too, so why don't you
list the Part A?
Secretary O'Neill. You could put--if you would like, you
could put the 526 in additional needs debt service and
contingencies. I think it is----
Mr. Levin. Let me ask you then, is it your position or not
that the projected Part A surplus should be used only for Part
A purposes?
Secretary O'Neill. Absolutely. There is no doubt, by law,
money that is collected from the people for Social Security and
Medicare benefits can only be used for those purposes.
Mr. Levin. Could I ask you, as a key Member of the
administration, within the next few days, to submit a revised
table S-1 that lists separately the Part A surplus, like you do
the Social Security surplus. Will you do that?
Secretary O'Neill. Indeed. I will give you a table that
differentiates in the clearest way I know how from a cash
flow--the thing to me, this continuing discussion is a
misunderstanding of the difference between cash flows and the
balance sheet of the Federal Government, which includes
accruing liabilities. And I would be very happy to give you
those statements so that you will have them.
Mr. Levin. OK.
Chairman Thomas. I am sure there were not that many people
who followed that discussion. I just want to make----
Mr. Levin. It is an important discussion.
Chairman Thomas. It is, and that is why I wanted to make
the point because it was not as clear as it needed to be.
Because we are discussing trust funds and surplus and a
Contingency Fund. The problem of course is Trust Fund is
misnomered and the Contingency Fund is a misnomer. But I
believe the impression has been left thus far that the only
Trust Fund in surplus in the Contingency Fund is the Part A
Trust Fund. It is my understanding that there may be as many as
three dozen or more other trust funds that are in surplus that
are also covered in that Contingency Fund.
Is that correct, Mr. Secretary?
Secretary O'Neill. Yeah, that is right.
Chairman Thomas. So we have between 30 and 40 trust funds
that are in surplus that are included, not just the Part A. And
the assumption that you are to break out the Part A implies
that there is only the Part A Trust Fund that is in surplus in
the Contingency Fund when, in fact, there are more than three
dozen.
Mr. Levin. Could I just say, then, we need a figure as to
how the 842 is derived and what trust funds are included within
the 842. Because then you are saying if you are not going to
use Part A except for Part A, then you are going to use other
trust funds.
So we should get from you, if I might say respectfully, and
from the administration, a clear outline of table S and what in
the world is in that Contingency Fund.
Chairman Thomas. I told you what I heard from the Secretary
was the Medicare Trust Funds and the Social Security Trust
Funds should be used only for Medicare purposes and Social
Security purposes. That is what I heard the Secretary say.
Mr. Levin. But then they wouldn't be included in the 847.
Chairman Thomas. Does the gentlewoman from Washington, Ms.
Dunn, wish to inquire?
Ms. Dunn. Thank you, Mr. Chairman.
Mr. Secretary, we like it when you return to be with us so
often. It is really a pleasure to have you. I too worry about,
referring to what Mr. McCrery said as thinking outside the
box--as we reform Medicare and Social Security, I worry a lot
about the Medicare system being a typical bumbling bureaucratic
agency that is nonresponsive to the needs of the real world and
lagging way behind it, becoming like a stone around the neck of
what we are really doing out there in health care these days.
I think, for example, of innovative technology that
Medicare is so slow in being able to accept when new devices
and new drugs provide a choice for seniors and add no greater
expense. So I am sympathetic on that discussion.
I wanted to ask you a question, Mr. Secretary, with regard
to Social Security and with regard to the gender inequity
problems that we run into in Social Security. As I began to
study this system over the last few years, I learned time after
time that there are inequities that arise from the systems
having been written in the mid-thirties when women stayed at
home. In fact, married women could rarely get jobs out of the
Depression. Single women, including my own mother, had to go to
Alaska to get a job teaching.
So it was written in a way that protects women who stay at
home--certainly a massive safety net, more I think than we
needed to.
The system currently continues to discriminate against
married working women to the extent that where their salaries
generally during their lifetimes are less than their husbands,
and often they take time away from work to stay at home caring
for children or elderly parents or for one reason or another.
At the time of retirement, most women are going to get as their
Social Security benefit 50 percent of their husband's Social
Security. And so, during the time that the woman is working, if
she is married, she is continually giving out of her paycheck
month after month after month large amounts of money that are
being wasted if you figure that a stay-at-home mom, who never
goes into the workplace, will get exactly the same 50 percent
of her husband's Social Security. That is one example.
I am wondering if there is any thought as we move toward
reform in your shop about how this works? I am wondering if you
could just give us some of your thoughts on these problems and
if there are ways to find solutions to them.
Secretary O'Neill. Well, you know, I think you put your
finger on a problem that we see even in the broader tax system
with the convention of the so-called ``marriage penalty.'' We
have got lots of artifacts of the change in the way we really
live, compared to when these things were started 65 years ago.
And it does seem to me that we need to begin to treat human
beings as human beings, independent of their gender.
And we clearly have not gotten around to that completely
yet. But it is something we should have high on our priority
list, that we not penalize people based on a convention that
existed long ago that no longer holds for most of us and our
families.
Ms. Dunn. Thank you very much, Mr. Secretary. Thank you,
Mr. Chairman.
Chairman Thomas. Thank you. Does the gentleman from
Maryland, Mr. Cardin, wish to inquire?
Mr. Cardin. Thank you, Mr. Chairman, I do. Then I will
yield to one of my colleagues.
Let me make an observation: I don't think there is a
disagreement from the Trustees' report or from the experiences
I have heard on both sides of the aisle that we have serious,
long-term problems in both Social Security and Medicare that
need to be addressed. I guess my disappointment is that there
isn't more attention paid to the one solution that I think
would be the best at this point, and that is a bipartisan
budget, so we have agreement as to what the economic plan of
our Nation should be.
And we are moving forward, I regret, in a partisan way, Mr.
Secretary. We have already passed some bills out of this
Committee that speak to taxes without speaking to an overall
game plan, and in the Budget Committee it looks like we are
moving toward a Republican budget and a Democratic substitute.
And personally, I think the best thing we could do now is to
reach bipartisan agreement on the budget that speaks not only
to tax cuts but also speaks to Social Security and Medicare.
And the second point I would raise as we talk about
efficiency within the Medicare system is that the trustees'
report contains a very interesting observation. And that is
that 17 percent of our Medicare beneficiaries are in a
Medicare+Choice managed care plan, and 17 percent of the trust
fund is spent in those plans. So I would say to those who think
that the private sector plans are bringing about savings, that
doesn't bear out.
So we really do need to take a look at what we are going to
do to deal with the Medicare system itself, rather than just
throwing seniors into managed care and believing that will be
the solution.
Let me, if I might, yield the balance of my time to Mr.
McDermott.
Mr. McDermott. Thank you, Mr. Cardin.
I sit on the Budget Committee. This evening we are going to
get a document and tomorrow we are going to mark it up. So I
have a very important question to ask you and that is about the
assumptions made by the trustees and by the President's budget.
Because you sit with two hats, I want to know which one of the
Paul O'Neills I should believe.
We have a trustees' report here on page 54 on last year's
Medicare Trustee Report that says that the real GDP is assumed
to average 2.3 percent over the short-range projection, 1999 to
2009. Now, if you go to this blue book on which we are supposed
to write a budget tonight, on page 199 it says that the
assumption for real GDP growth is 3.1 percent. Now, that is a
conflict for me; 2.3 versus 3.1 is a whole bunch of money. I
made the mistake of reading the Washington Post this morning
before I came in here.
What they say is that the surpluses would virtually
disappear under the economic predictions used by the Trustees.
So which prediction of growth are you going to use, 3.1 or
2.3, so that tomorrow when we mark up, I will know what to tell
Mr. Nussle in the Budget Committee.
Secretary O'Neill. Well, as I am sure you appreciate, these
are separate preparations and the Trustees' report is a
consequence of decisions that were put in place by the last
administration. And----
Mr. McDermott. You had a chance to look at them and change
them.
Secretary O'Neill. But in order not to create even the
possibility of someone thinking that these matters that are
reported by the Trustees are political or that we would change
in a way without having an opportunity to examine the
underlying assumptions which have been worked on by some of the
best economists in the world for 61 years now, it didn't seem
to me it was appropriate to change the assumptions.
Do I have a question about long-run assumptions about rates
of productivity and real growth? I do. But it frankly didn't
seem appropriate to bring--to change the assumptions of the
Democratic administration without careful, considered,
deliberate thought process.
And so I am here to represent to you, I think if one looks
at the numbers that you have in front of you from this report
for a 75-year period, they make the point very clearly--and it
is not a partisan point, I hope--that we, the people who are
supposed to be doing the business of the American people, have
a serious need to make substantial modifications in Social
Security and Medicare.
In the budget documents that you got, you got our best
judgment about what the near-term rates of growth are, and
there is no doubt that there is an expectation that they are
going to be better than the numbers that were used by the last
administration to calculate forward 75 years' worth of
prospective obligations and benefits for the American people. I
don't find it remarkable at all that for these two very
different purposes, one near-term and one very long-term, that
you have different things in front of you.
Chairman Thomas. The gentleman from Maryland's time has
expired. Our last inquiry will be the gentleman from Georgia,
Mr. Collins.
Mr. Collins. Thank you, Mr. Chairman.
Welcome, Mr. Secretary. It is always refreshing to have a
witness that talks about cash flow, because that is what this
whole system is about. That is what each one of these programs
is about, cash flow, individual cash flow. That is where it
originates. That is where the money comes from.
There have been several questions, the same question asked
several times this morning: Where does the money come from,
whether it is closing the gap from Part B to Part A in Medicare
or whether it is Social Security or what. But let's take a look
at it. Where does Social Security insurance funding come from,
Mr. Secretary?
Secretary O'Neill. It comes right from the American people.
Mr. Collins. In the form of a payroll tax, sir?
Secretary O'Neill. That is right.
Mr. Collins. And the Social Security insurance program that
we have today is formally known as a pay-as-you-go system; is
that not true?
Secretary O'Neill. That is true.
Mr. Collins. What is the definition of a pay-as-you-go
system, Mr. Secretary?
Secretary O'Neill. In this case what it means is that we
are collecting money from the working population and we are
using it to pay benefits for people who are already
beneficiaries.
Mr. Collins. And that has been the system all along, has it
not?
Secretary O'Neill. Yes, sir, it has.
Mr. Collins. What has happened in the past when we ran
short of funds in the pay-as-you-go system, in the payroll tax?
Secretary O'Neill. We raise taxes.
Mr. Collins. Yes, sir. And that is possibly what could
happen again if we don't address the system itself.
As Chairman Alan Greenspan, whom we all hope to hear some
good words from this afternoon, stated in this Committee--it
was January the 20th of 1999--if you are ever going to solve
the Social Security problem, you have to end the pay-as-you-go
system and devise a new system.
But where does the Medicare Part A come from Mr. Secretary?
Where does that cash flow come from?
Secretary O'Neill. It also comes from the payroll tax.
Mr. Collins. And what has happened in the past when we had
a shortfall of cash flow there?
Secretary O'Neill. We either raised taxes or we moved
objects of expenditure out of the fund into another fund.
Mr. Collins. What happened in 1993? Was that not the last
tax increase on Medicare Part A, for Medicare Part A?
Secretary O'Neill. I believe, yes.
Mr. Collins. It raised the tax liability on Social Security
receipts as well as took the cap off of earnings; did it not?
Secretary O'Neill. That is right.
Mr. Collins. I believe we also had a report along the same
time, around 1994-95, that we would have a negative cash flow
and the Medicare Part A fund would be bankrupt prior to this
date; is that not true?
Secretary O'Neill. That is right.
Mr. Collins. In the 1997 Balanced Budget Act I believe we
had some measures in there that revised some of the Medicare
system, it extended the life of it; did it not?
Secretary O'Neill. Right.
Mr. Collins. If hasn't hurt one benefit, has it?
Secretary O'Neill. No.
Mr. Collins. What about Part B, Mr. Secretary? Where do
those funds come from?
Secretary O'Neill. A little piece of it comes from the
payroll tax and the rest comes from the general revenue and--
that is to say, from the taxpayers, from all of the taxpayers.
Mr. Collins. I believe 25 percent of it is deducted from
Social Security checks; is that not true?
Secretary O'Neill. That is right.
Mr. Collins. The other 75 percent comes from general
taxation, general funds right?
Secretary O'Neill. Correct.
Mr. Collins. Those are all entitlement programs, are they
not?
Secretary O'Neill. They are.
Mr. Collins. What is the definition of an entitlement
program, Mr. Secretary?
Secretary O'Neill. It means--as I understand the term, it
means you will get it.
Mr. Collins. If you fit the criteria to the plan, you are
entitled to the funds; is that not true?
Secretary O'Neill. That is right.
Mr. Collins. It has been said that we should move with
caution, Mr. Secretary. Do you agree with that? I do.
Secretary O'Neill. I believe we ought to move with
deliberate speed caution.
Mr. Collins. I agree with that, speed but with caution.
But I am also reminded of the cash flow of this system in
1995. In January of 1995 the Congressional Budget Office
estimated over the 10 years from 1995 to the year 2004 we would
have a $200 billion a year negative cash flow and that was
above and beyond the payroll tax. In fact, it was equivalent to
over $3 trillion in the 10-year gap.
Now, I believe Mr. Crippen back there has testified before
this Committee on the budget, and we hear reports that over the
next 10 years, we will have over $5 trillion positive cash
flow; is that not true?
Secretary O'Neill. That is true.
Mr. Collins. That includes Social Security and Medicare, as
well as other taxation?
Secretary O'Neill. It does.
Mr. Collins. So there are plenty of funds in this cash flow
that we could do and meet all of these programs, but we would
have to revise some of the systems themselves in order for it
to be long-range solvency of each, right?
Secretary O'Neill. That is true.
Mr. Collins. We can also give tax relief to those who are
paying out of their cash flow into this Treasury, with the
funds to meet all these programs. Sir, I believe fully if we
look after the cash flow of individuals at home, the cash flow
of the Treasury will take care of itself. Thank you for being
here. Thank you for your common-sense approach to government.
Secretary O'Neill. Thank you.
Chairman Thomas. I thank the gentleman.
I do want to thank the Secretary. I want to thank all
members and apologize to those who were not able to inquire at
this particular hearing. But we will have additional hearings.
And I especially want to thank the chairman of the Senate
Finance Committee for his willingness to go forward for the
first time in more than 75 years with a joint hearing. My hope
is that we found this useful and would do it again, Mr.
Chairman.
Chairman Grassley. I found it very useful and I do look for
an opportunity to do it again when it is convenient for both of
us.
Thank you very much for your hospitality. I look forward to
this process and other communications we have to bringing a
closer working relationship between the Ways and Means
Committee and the Senate Finance Committee and, in turn,
between the U.S. Senate and the U.S. House of Representatives
on the substance of the issue of Social Security and Medicare.
I would use Medicare as an example, when ladies--usually
ladies that are older--come up to you in your town meetings and
say, ``Just leave my Social Security alone,'' and that is
generally not said in anger. But we can no longer allow the
idea to be out there that if you just leave my Social Security
alone, everything will be all right.
We have to take that opportunity to explain that probably
as far as that lady today is concerned we can leave her Social
Security alone and she will be okay. But we have to ask the
question, does that lady want Social Security for her children
and grandchildren that are coming on; if that is the case, we
must do something and the sooner we do it, the better.
Thank you for your hospitality.
Chairman Thomas. We can't escape the fact that we are both
going to have to do it together, or it doesn't get done. I
thank the gentleman. This hearing is adjourned.
[Whereupon, at 12:08 p.m., the hearing were adjourned.]
[Submission for the record follows:]
Statement of the Healthcare Leadership Council
The Healthcare Leadership Council (HLC) thanks the House Committee
on Ways and Means and the Senate Committee on Finance for the
opportunity to submit this statement for today's hearing on the 2001
Medicare Hospital Insurance Trustees' Report.
The 2001 Trustees' report, at first glance, sends a positive
message that the exhaustion of the Hospital Insurance Trust Fund is
being pushed further and further off into Medicare's future. Indeed,
Medicare solvency through 2029 reduces the urgency we felt just five
years ago when bankruptcy was anticipated by 2002.
But, unfortunately, while lawmakers are relieved of the immediate
pressure to reformulate Medicare for longevity, current and future
beneficiaries are being deprived of the potential that a revitalized
Medicare program has to offer.
While focusing on the financial health of the Medicare program
today, we believe there are two important points to keep in mind.
First, there are numerous accounting and other caveats to consider
before giving the HI Trust Fund an absolute clean bill of health,
several of which the Trustees wisely acknowledge in their report. And
second, trust fund solvency, no matter how extensive, does not
translate into value for Medicare beneficiaries or taxpayers.
I. The Reality of the Numbers
There are a number of contributing factors to Medicare's increased
life span. They include recent and temporary program changes, the likes
of which cannot sustain Medicare solvency forever, as well as--what may
be--tenuous estimates of economic growth and medical inflation.
(1) Major program changes affecting the life of the trust fund include:
The Balanced Budget Act. Provider payment reductions resulting from
passage of the BBA has dramatically slowed Medicare spending--more so
than was projected at the time of passage. From 1998 to 2002, annual
spending growth is expected to average only 3 percent. The substantial
documented hardship these reductions have created demonstrate that
continuing provider cuts in the current Medicare program cannot be
depended on to sustain Medicare in the long run. While the Medicare,
Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA) and
the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection
Act of 2000 (BIPA) slightly eased some of these provisions, ``the
overall net impact of all these Acts still reduces HI expenditures
substantially,'' according to the Trustees' report.
Transfer of Home Health Benefits from Part A to Part B. Immediately
upon passage of the BBA, the Medicare trust fund bankruptcy projection
was changed from 2001 to 2007. What many do not realize is that barely
two of these additional years were attributed to provider cuts. The
majority of the solvency extension was due the transfer of $174 billion
in home health spending over 10 years from the Part A trust fund to the
Part B trust fund.
Relieving the Part A trust fund of this high cost item--has
contributed significantly to the healthy appearance of the Hospital
Insurance Trust Fund. However, transferring the responsibilities of the
Part A trust fund to the mostly tax-payer funded Part B trust fund is
not an option for ensuring that the Medicare program can continue to
provide high quality health care benefits in the future.
``Fraud and Abuse''. Major fraud and abuse enforcement efforts,
including expensive lawsuits, have led providers to billing Medicare
even less than they legitimately could. The Chairwomen of the Medicare
Payment Advisory Commission expressed strong concern before this
committee last week that evidence of hospital ``downcoding''--or
billing Medicare below the cost of their services in order to avoid
investigations--could be very harmful to both hospitals and patients in
the long term.
(2) Economic factors that could affect Medicare's projected life span:
Range of Trustees' Assumptions. The Trustees note in their report
that under a less promising, higher cost economy, Medicare bankruptcy
could occur as early as 2016 instead of the 2029 predicted under the
intermediate economic scenario. By the Trustees' own admission,
projecting the health of the trust fund, even a short time into the
future, can yield precarious estimates.
CBO Cost Assumptions. In its recent Long-Term Budget Outlook, the
Congressional Budget Office noted that the Medicare Trustees'
assumptions regarding health care expenditures were far more optimistic
than their own: ``The Medicare trustees remain more optimistic: they
assume that cost growth in excess of wages and demographic changes will
slow not by half [as CBO predicts] but to zero in 2025 and
thereafter.''
Trust Fund Revenues. Today's robust economy means higher wages and
more employment. For Medicare, this means that the 2.9% Medicare tax
has applied to a much larger base of payroll in recent years.
Employment taxes flowing into the HI trust fund increased dramatically
by 8% in 2000 (from $132.3 billion in 1999 to $144.3 billion in 2000).
Such revenue increases cannot be depended on in the coming years.
Besides the possibility of the economy slowing down, the number of
people working and paying the Medicare tax will soon begin declining as
baby boomers begin retiring in 2010. Once the baby boom generation has
fully entered retirement by 2030, workers paying the Medicare tax for
each beneficiary will decrease from the current 4.0 to 2.3.
Medicare Part B Expenditures. The Hospital Insurance trust fund
report paints only a fraction of the picture of Medicare's overall well
being. The expenditures described in this report represent little more
than half of overall Medicare program spending, the other portion of
which is derived from over $100 billion in general tax revenues and
beneficiary premiums. Unlike the Hospital Insurance Trust Fund
spending, Medicare Part B spending is not policed for solvency and
therefore is allowed to grow unrestrained.
II. Solvency Does Not Equal Value for Beneficiaries
The optimistic trust fund numbers reported this week give no
indication of the value these Medicare expenditures are providing to
Medicare beneficiaries. An important question to ask is: Should the
delay in Medicare's bankruptcy placate the need to improve this program
for Medicare beneficiaries now? While the trust fund report provides a
warning for the beneficiaries of the future, it indicates nothing about
whether today's beneficiaries are receiving the best health care that
can be purchased with the expenditures indicated by the Trustees.
Even more dire than Medicare's budgetary problems is Medicare's
inability to keep up with private insurance coverage or with advances
in health care technology. An explosion in research has made the
control and prevention of disease more veritable than ever. Yet
Medicare beneficiaries do not have access to prescription drugs, limits
on catastrophic out-of-pocket spending, many preventive benefits, and a
number of other health care products and services that are now
enhancing and saving the lives of those with employer health insurance
including those enrolled in the Federal Employees Health Benefits
Program.
Despite the optimism expressed in the Hospital Insurance Trustees'
Report, comprehensive Medicare reform is still necessary to ensure high
quality of care for today's and tomorrow's Medicare beneficiaries.
Today's dated Medicare program needs to be replaced with a private,
value-based, competitive system. Under such a system, plans and
providers would compete with one another to offer the most efficient,
high quality, and user friendly care. By embracing the innovations in
health care delivery, benefit design, and cost management techniques
that have occurred in the private sector, Medicare can expand its
benefit package and still serve the huge number of enrollees that will
come with the baby boom retirement.
The Healthcare Leadership Council urges the Committees overseeing
Medicare to work in a bipartisan manner to develop a plan for
restructuring Medicare for the long term. The members of the Healthcare
Leadership Council stand ready to assist in your efforts to move
Medicare toward assuring that, in the near future, its beneficiaries
are able to take advantage of the full potential our health care system
has to offer.
The Healthcare Leadership Council is a coalition of chief
executives of the nation's leading health care innovators including
teaching hospitals and other hospital systems, pharmaceutical
manufacturers and benefit managers, medical technology companies, and
insurance companies. The HLC was formed in 1988 to give leaders across
the health care industry the opportunity to work together to achieve a
health care system that fosters quality and innovation and provides
access for all Americans to affordable coverage and high quality health
care.