[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
                 BOARD OF TRUSTEES 2004 ANNUAL REPORTS

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

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                       MARCH 24 AND APRIL 1, 2004

                               __________

                           Serial No. 108-69

                               __________

         Printed for the use of the Committee on Ways and Means

                      COMMITTEE ON WAYS AND MEANS





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                   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               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM MCCRERY, Louisiana               JIM MCDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHIL ENGLISH, Pennsylvania           LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona               EARL POMEROY, North Dakota
JERRY WELLER, Illinois                MAX SANDLIN, Texas
KENNY C. HULSHOF, Missouri           STEPHANIE TUBBS JONES, Ohio
SCOTT MCINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

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


                            C O N T E N T S

                               __________

                                                                   Page

Advisories announcing the hearing................................     2

                               WITNESSES

U.S. Department of the Treasury, Hon. John W. Snow, Secretary....     7
Congressional Budget Office, Douglas Holtz-Eakin, Director.......    17
Social Security Administration, Stephen C. Goss, Chief Actuary...    29
Centers for Medicare and Medicaid Services, Rick Foster, Chief 
  Actuary........................................................    32
Centers for Medicare and Medicaid Services, Jeff Flick, San 
  Francisco Regional Administrator...............................   108
Centers for Medicare and Medicaid Services, Leslie V. Norwalk, 
  Acting Deputy Administrator and Chief Operating Officer........   111

                       SUBMISSIONS FOR THE RECORD

American Academy of Actuaries, Cori E. Uccello, statement........   126
Physicians for a national Health Program, Chicago, IL, Don R. 
  McCanne, statement.............................................   132


                 BOARD OF TRUSTEES 2004 ANNUAL REPORTS

                              ----------                              


                       WEDNESDAY, MARCH 24, 2004

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 1:13 p.m., in 
room 1100, Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Committee) presiding.
    The advisory and second advisory announcing the hearing 
follow:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                  CONTACT: 202-225-1721
FOR IMMEDIATE RELEASE
March 17, 2004
FC-16

   Thomas Announces Hearing on Board of Trustees 2004 Annual Reports

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means today announced that the Committee will hold a hearing to 
examine the findings and recommendations made by the Boards of Trustees 
for the Social Security Old-Age and Survivors and Disability Insurance 
Trust Funds and the Boards of Trustees for the Medicare Hospital 
Insurance and Supplemental Medical Insurance Trust Funds in their 2004 
Annual Reports on the financial status of these trust funds. The 
hearing will take place on Wednesday, March 24, 2004, in the main 
hearing room, 1100 Longworth House Office Building, beginning at 1:00 
p.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 Social Security Act requires the Boards of Trustees for the 
Social Security and Medicare programs to report annually to the 
Congress on the current and projected financial condition of the Old-
Age and Survivors Insurance (OASI), the Disability Insurance (DI), the 
Hospital Insurance (HI), and the Supplementary Medical Insurance (SMI) 
trust funds. Members of both Boards include the Secretary of the 
Treasury (who is the Managing Trustee), the Secretary of Labor, the 
Secretary of Health and Human Services, the Commissioner of Social 
Security, and two members who are appointed by the President and 
confirmed by the Senate to serve as public trustees for 4-year terms. 
In addition, the Deputy Commissioner of Social Security serves on the 
Board of Trustees for the Social Security programs and the 
Administrator of the Centers for Medicare and Medicaid Services serves 
on the Boards for the Medicare program. The 2004 Annual Reports are 
scheduled to be released in the near future.
      
    Ensuring the financial viability of Social Security and Medicare is 
one of Congress' most important responsibilities. The annual release of 
the Trustees' reports provides a valuable update on the programs' 
fiscal well-being.
      
    The release of the 2004 Annual Reports on the Medicare HI and SMI 
trust funds will be particularly timely, because their findings will 
include an initial evaluation of the impact of the Medicare 
Prescription Drug, Improvement and Modernization Act of 2003 (MMA) 
(P.L. 108-173) on the long-term financial situation of the Medicare 
program. Among other items, the MMA included a provision to make 
available prescription drug coverage to Medicare beneficiaries. As the 
MMA is implemented, it will be essential to continue to evaluate the 
overall fiscal standing of the program. In addition, the report on the 
OASI and DI trust funds will provide fresh evidence of the financial 
challenges facing Social Security and the need to act quickly to 
strengthen the program.
      
    In announcing the hearing, Chairman Thomas stated, ``I look forward 
to this hearing and to the report of the non-partisan Social Security 
and Medicare Trustees. As we approach the retirement of the baby-boom 
generation, it is essential that we continue to evaluate the long-term 
fiscal outlook for both of these important programs.''
      

FOCUS OF THE HEARING:

      
    The hearing will examine the findings and recommendations of The 
2004 Annual Reports of the Board of Trustees of the Federal OASDI and 
HI/SMI Trust Funds. The hearing will focus on the long-term financial 
status of the Social Security and Medicare programs.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person or organization wishing to submit written 
comments for the record must send it electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, by close of business Wednesday, April 7, 2004. In the 
immediate future, the Committee website will allow for electronic 
submissions to be included in the printed record. Before submitting 
your comments, check to see if this function is available. Finally, due 
to the change in House mail policy, the U.S. Capitol Police will refuse 
sealed-packaged deliveries to all House Office Buildings.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, in WordPerfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. Any statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                  CONTACT: 202-225-1721
FOR IMMEDIATE RELEASE
March 30, 2004
FC-17-Revised

  Thomas Announces a Continuation of the Hearing on Board of Trustees 
                          2004 Annual Reports

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means today announced that, pursuant to Rule XI, Clause 2(j)(1) of 
the U.S. House of Representatives, the Committee will hold a 
continuation of the March 24, 2004 hearing to examine the findings and 
recommendations made by the Boards of Trustees for the Social Security 
Old-Age and Survivors and Disability Insurance Trust Funds and the 
Boards of Trustees for the Medicare Hospital Insurance and Supplemental 
Medical Insurance Trust Funds in their 2004 Annual Reports on the 
financial status of these trust funds. The hearing will take place on 
Thursday, April 1, 2004, in the main hearing room, 1100 Longworth House 
Office Building, beginning at 12:00 p.m.
      All other details of the hearing remain the same. (See full 
Committee advisory No. FC-17, dated March 17, 2004.)

                                 

    Chairman THOMAS. Good afternoon. Today we welcome the 
Secretary of the U.S. Department of the Treasury John Snow, the 
Managing Trustee, to discuss the 2004 Annual Reports of the 
Board of Trustees of Social Security and the Medicare Trust 
Fund. In every Congress since Republicans became a majority in 
1995, the Committee on Ways and Means has reviewed the 
Trustees' findings on the financial future of our most 
significant entitlement programs. These reports are essential 
reminders to policymakers of the challenges we face as the 
baby-boom generation retires and as Americans live longer, 
healthier lives. This year's report provides us with the first 
glance at the impact of the Medicare Modernization Act (P.L. 
108-173) on the program's future finances and reminds us, since 
both of these entitlement programs are tied to wages and 
salary, how much the short-term fluctuations follow the 
economy. With passage of the new law, Medicare will cover 
prescription drugs, the cornerstone of modern medicine, and 
provide other preventive and wellness services as well. That is 
why Congress intentionally included crucial reforms to balance 
the increased cost of these new benefits and to ultimately 
improve the solvency of Medicare if competition is allowed to 
occur. These efforts did not go as far as some of us would have 
liked, and as today's report shows there is still more work 
ahead to maintain solvency.
    Turning now to the reports before us, the Hospital 
Insurance (HI) Trust Fund is moving toward insolvency sooner 
than expected. To consider a complete picture of all Medicare 
financing, though, it is useful to look at Medicare 
expenditures as a percentage of gross domestic product which 
are expected to grow rapidly from the 3.4 percent in 2003 to 
7.7 percent in 2035, and ultimately, once again projecting out 
where no one believes any numbers, but 13.8 percent by 2078. It 
is the trend that is alarming, not any specific set of figures 
at any particular projected point in time. Clearly without 
further cost saving reforms, Medicare will consume an ever 
increasing share of our Nation's resources. Social Security 
faces similar changes as the Trust Fund's outlays exceed income 
beginning in 2018, with Trust Fund insolvency coming in 2042. 
As with Medicare, Congress must consider thoughtful solutions 
to ensure Social Security's viability for future generations.
    Our second panel will focus on the details behind these 
broad brush strokes. I will be pleased to welcome Douglas 
Holtz-Eakin, Director of the Congressional Budget Office (CBO), 
Richard Foster, Chief Actuary at the Centers for Medicare and 
Medicaid Services (CMS), and Stephen Goss, Chief Actuary at the 
Social Security Administration (SSA). Of late there has been 
particular interest in the differing cost estimates generated 
by the CBO and the CMS on the new Medicare law. Our goal, of 
course, is to have our witnesses help explain the nature of 
their different assumptions and the therefore resulting 
different estimates. All of us know no one has the right answer 
and time will likely show that both of the estimates are wrong. 
The goal is to examine the assumptions which produce the 
numbers and determine if the assumptions underlying the numbers 
are reasonable and appropriate on a comparative basis. I would 
now like to recognize the Ranking Member, Mr. Rangel, for any 
opening statement he might wish to make.
    [The opening statement of Chairman Thomas follows:]
    Opening Statement of The Honorable Bill Thomas, Chairman, and a 
        Representative in Congress from the State of California
    Good afternoon. Today, we welcome Treasury Secretary John Snow, the 
managing Trustee, to discuss the 2004 Annual Reports of the Boards of 
Trustees of the Social Security and Medicare. In every Congress since 
Republicans became the majority in 1995, the Ways and Means Committee 
has reviewed the Trustees' findings on the financial future of our most 
significant entitlement programs. These reports are essential reminders 
to policymakers of the challenges we face as the baby boom generation 
retires and as Americans live longer, healthier lives.
    The year's report provides us with a first glance at the impact of 
the Medicare Modernization Act on the program's future finances. With 
passage of the new law, Medicare will cover prescription drugs--the 
cornerstone of modern medicine--and provide other preventive and 
wellness services as well. That is why Congress intentionally included 
crucial reforms to balance the increased costs of these new benefits 
and to ultimately improve the solvency of Medicare. These efforts did 
not go as far as some of us would have liked, and as today's reports 
show us, there is still have more work ahead.
    Turning now to the reports before us. The Hospital Insurance Trust 
Fund is moving toward insolvency sooner than expected. To consider a 
complete picture of all Medicare financing though, it is useful to look 
at Medicare expenditures as a percentage of GDP, which are expected to 
grow rapidly, from 3.4 percent in 2003, to 7.7 percent in 2035, and to 
13.8 percent by 2078. Clearly, without further cost-saving reforms, 
Medicare will consume an ever-increasing share of our nation's 
resources. Social Security faces similar challenges as the Trust Funds' 
outlays exceed income beginning in 2018, with Trust Fund insolvency 
coming in 2042. As with Medicare, Congress must consider thoughtful 
solutions to ensure Social Security's viability for future generations.
    Our second panel will focus on the details behind these numbers. I 
am pleased to welcome Douglas Holtz-Eakin, Director of the 
Congressional Budget Office (CBO); Richard Foster, Chief Actuary at the 
Centers for Medicare and Medicaid Services (CMS); Stephen Goss, Chief 
Actuary at the Social Security Administration. Of late, there has been 
particular interest in the differing cost estimates generated by CBO 
and CMS on the new Medicare law. Our witnesses will help explain the 
nature of their differing assumptions and the resulting estimates. 
Neither one has the ``right answer.'' And time will likely show they 
are both wrong, as estimates often are.
    I would now like to recognize the ranking member, Mr. Rangel, for 
any opening statement he might make.

                                 

    Mr. RANGEL. Thank you. Welcome, Mr. Secretary. I am so 
sorry that we missed each other by phone because you have 
always been very courteous in talking with me and other Members 
prior to these meetings, and it certainly makes me a more 
gentle person when I get that type of accommodation from people 
who represent the Administration. This morning I am not going 
to ask any questions because of the limited time that you have. 
I am reminded that President Kennedy once said that sometimes 
the Democratic Party asks too much of its Members. I have known 
that feeling. As I see where the Republican Party is going 
today, I think at some point in time many Republicans are going 
to say that on the question of credibility, sometimes the party 
is really asking too much of us.
    We have people testifying, as we talk on the Hill, as to 
the credibility that our government had in terms of the quality 
of intelligence in declaring war and invading Iraq. We have 
other members of the Administration, like your predecessor, who 
indicated that the President was focused on Saddam Hussein 
rather than economic issues. We have people who truly believe 
in the Democratic Party that it is a mission of the Republicans 
to destroy Social Security and Medicare, but they believe that 
politically they cannot do it. So, today we have you testifying 
that the Social Security system is in trouble and the only way 
that we can repair it is through privatization. We also know of 
people in the Republican party that find Medicare repugnant to 
their beliefs. As you have said that maybe the way to curtail 
the costs would be to privatize it and to let the free 
marketplace work its will. We know that unless you can get the 
Congress to do these things, it is not going to happen. So, 
when it came time to have the crisis in prescription drugs, we 
know that Republicans and Democrats know that you would not 
have had the votes to pass this bill if the true cost of the 
bill was known.
    So, therefore, when our staffs said that we did not have 
access to the information which the law declares that 
Republicans and Democrats should have access to the actuary 
table. We were amazed that staff would tell us that it was 
refused. We were more concerned when the written record showed 
the intimidation and how far the majority party was prepared to 
go to keep the Congress of the United States in the dark. 
Knowing that if the Congress had known what the Administration 
knew and failed to share it at our request, that we would not 
be dealing with the problems that we see now with the 
prescription drug bill. I think, Mr. Secretary, there comes a 
time when you start looking at the whole thing, that it is not 
just the credibility of the Administration, with Democrats and 
the American people, but indeed throughout the world the 
credibility of the United States is being reviewed. This pains 
me as I know that it pains you. I do hope that your response to 
some questions as it relates to what did you know about the 
cost and why did not we know it will make us feel a little more 
secure. I hope that we can go to the polls on the question of 
who they want, Democrats and Republicans, and not who do they 
trust. So, I thank you, Mr. Chairman, for this opportunity and 
I look forward to hearing from you, Mr. Secretary.
    Chairman THOMAS. Mr. Secretary, welcome once again before 
the Committee. Any written testimony you have will be made a 
part of the record. I do understand that you are scheduled to 
introduce the President of the United States and that we have 
only until about 1:45 p.m. So, I look forward to your statement 
and the brief opportunity for Members to ask questions and your 
response. Mr. Secretary?

   STATEMENT OF THE HONORABLE JOHN W. SNOW, SECRETARY, U.S. 
                   DEPARTMENT OF THE TREASURY

    Secretary SNOW. Chairman Thomas, Ranking Member Rangel, 
distinguished Members of the Committee, I want to thank you for 
the opportunity to appear before you today to talk about the 
Trustees' reports on the Social Security and Medicare programs. 
The Trustees met yesterday to complete the annual financial 
review of the programs and our reports have been sent to the 
Congress. Let me review first the Social Security Trustees' 
Report. This year's is little changed from last year's report, 
actually a little bit better in some ways. It shows that the 
Social Security program, and this is no surprise to any of you, 
is seriously underfunded and that it is not financially 
sustainable in the long run. The fundamental math of Social 
Security is simply inescapable, as the large baby-boom 
generation reaches retirement age and the number of workers 
that are paying into the system declines significantly as a 
proportion of the total retirees.
    While we have some time to fix this problem, inaction is 
not a responsible option. The President has called for 
bipartisan efforts to deal with the issue and the sooner that 
action is taken, the better for all concerned. I think we all 
know that each year that passes without the needed changes 
makes the ultimate resolution even more difficult. Personal 
accounts, in our view, are an important part of a solution to 
the Social Security system's problems. They would enable 
younger workers to accumulate a nest egg toward their 
retirement needs. They would relieve some of the pressure on 
the system itself. Whatever the ultimate answer here is, it is 
clear that now is the time to take the steps to preserve and 
protect Social Security so that our commitments to seniors are 
kept and so that the needs of our children and grandchildren 
are met. I think we would all agree with that.
    Let me offer a few words on the more serious and pressing 
issue of the Medicare Trustees' Reports. It reveals even 
greater challenges than those confronting the Social Security 
system. While Medicare faces the same shifting demographics 
that drive the numbers in Social Security, it is additionally 
affected by the sharp increases in underlying health care 
costs. You know these numbers, too. From 1998 to 2002, health 
care costs rose an astonishing 35 percent. Health care spending 
is growing as a percentage of gross domestic product. It was 15 
percent in 2002 and it is surely much higher today. Employer-
sponsored health insurance premiums rose 14 percent last year. 
The negative impact of these rising costs is evident in terms 
of the economy's performance, job creation, and Federal 
programs such as Medicare.
    Let me first mention the HI Trust Fund for part A. Cash 
flow for the HI Trust Fund is projected to turn negative this 
year, compared to 2013 in last year's report. Let me mention at 
the outset here that the change in HI's financial condition was 
not caused in any way by the creation of the Medicare 
prescription drug program which is separately financed, 
although as the report points out other aspects of that 
legislation did increase costs under part A, the parts dealing 
with rural providers and managed care and so on. Taking 
interest into account, the total Trust Fund is expected to 
exceed expenditures through 2009 and turn negative in 2010. 
While the decline in cash flow is substantial and a fairly 
dramatic change from the last few reports, we saw similar 
negative cash flows for much of the nineties. In another major 
finding from the report, the HI Fund is projected to become 
insolvent in 2019. That would be 7-years earlier than projected 
in last year's report. Again, I hasten to add that even without 
the recent legislation, important and good legislation in our 
view, the fund would be insolvent in 2021. So, the legislation 
accelerated by 2 of the 9 years to the insolvency point.
    It is also important, as the Chairman said in his opening 
comments, to realize here that the forecasts we are dealing 
with are based on assumptions whose validity cannot be known 
with any high degree of certainty. Although uncertainty in 
these numbers is inescapable, it is also inescapable that we 
must make public policy judgments given the importance of these 
programs to current and future beneficiaries. Rising health 
care costs are placing an enormous burden on the Medicare 
program which is already under stress from the demographics I 
have mentioned. In our view, controlling health care costs is 
the real key to the long-term fiscal sustainability of Medicare 
and since Medicare bulks so large in the Federal budget 
deficit, it is also key to controlling the outlook for the 
Federal budget. The President has shown real leadership in 
seeking to reduce health care costs without diminishing quality 
or access to care for our senior citizens through many 
initiatives he has put forth which you are aware of. We should 
not forget as well the important reforms in last year's 
legislation which offers so much promise on this score of 
controlling health care costs as well. These are real reforms 
that will help contain health care cost and help to contain 
their growth relative to gross domestic product and help 
alleviate the pressure on the Medicare system. Those who depend 
on Social Security and Medicare urgently need the best efforts 
of all of us in public life, and those in private life as well, 
to address these long-term funding issues as laid out in the 
Trustees' reports. These programs, I am sure you would agree, 
must be seen as a shared responsibility not a political or 
partisan matter. Mr. Chairman, thank you very much for the 
opportunity to appear before you and I look forward to your 
questions.
    [The prepared statement of Secretary Snow follows:]
          Statement of The Honorable John W. Snow, Secretary, 
                    U.S. Department of the Treasury
    Chairman Thomas, Ranking Member Rangel, and distinguished members 
of the Committee, thank you for the opportunity to testify today on the 
2004 Social Security and Medicare Trustees' Reports. The Social 
Security and Medicare Board of Trustees met yesterday to complete the 
annual financial review of the trust funds and sent the Trustees' 
Reports to Congress.
    Let me start first with the 2004 Social Security Trustees' Report. 
This year's report is little changed from last year's report. It shows 
that the Social Security program is seriously under funded and 
financially unsustainable in the long run. The unfunded obligation is 
$3.7 trillion on a present value basis over the next 75 years. Cash 
flows for the trust fund will turn negative in 14 years, in 2018, while 
the trust fund will be exhausted in 38 years, 2042. Neither date has 
changed since last year's report.
    The fundamental math of Social Security is inescapable as the large 
baby boom generation reaches retirement age and the number of workers 
paying into the system declines significantly relative to the number of 
retirees. While we have some time to fix the problem, inaction is not a 
responsible option. The President has called for bipartisan efforts to 
create a permanently sustainable system and he has been right to do 
so--and the sooner action is taken, the better for all concerned. Each 
year that passes without needed changes to the program makes the 
ultimate resolution more difficult.
    To provide some perspective on what this means--today, the cost of 
paying Social Security benefits absorbs 4.3 percent of the nation's 
GDP. According to the Social Security actuaries, the cost will rise to 
6.6 percent by 2078. This would mean that the share of the economy 
required to fund Social Security benefits would be more than 50 percent 
higher than it is today--and even that would continue to increase, the 
further out one looks.
    Personal accounts are an important part of the solution to 
strengthen Social Security as they will enable younger workers to 
accumulate a nest egg towards their retirement needs. Now is the time 
to take the steps to preserve and protect Social Security so that 
commitments to our seniors are kept and the needs of our children and 
grandchildren are met.
    Let me now offer a few words on the 2004 Medicare Trustees' Report. 
It reveals even greater challenges than those confronting Social 
Security. While Medicare faces the same shifting demographics as Social 
Security, it is additionally burdened by sharp increases in underlying 
health care costs. From 1998 to 2002, health care costs rose 35 
percent. Health care spending is growing as a percentage of GDP; its 
share was nearly 15 percent of our nation's GDP in 2002 and is surely 
even larger now. Employer-sponsored health insurance premiums rose 14 
percent last year alone. The negative impact of rising costs is evident 
in terms of the economy, jobs, and federal programs such as Medicare.
    Cash flow for the Hospital Insurance (HI) Trust Fund is projected 
to turn negative this year, compared to 2013 in last year's report. At 
the outset, it is important to note that the change in HI's financial 
condition was not caused in any way by the creation of the Medicare 
prescription drug program, which is separately financed. Taking 
interest into account, total trust fund income is expected to exceed 
expenditures through 2009. While this decline in cash flow is a 
substantial change from the last few reports, we saw similar negative 
cash flows for much of the 1990s. In another major finding from the 
report, the Hospital Insurance Trust Fund is projected to become 
insolvent in 2019, seven years earlier than projected in last year's 
report. For the first time in five years the HI Trust Fund fails the 
short run test for financial adequacy as the ratio of assets to annual 
outlays falls below 100 within the next ten years. Again, the principal 
culprit here is the rising cost of health care, and we need to turn our 
attention to this underlying fundamental issue.
    The Supplementary Medical Insurance (SMI) Trust Fund does not face 
insolvency per se, because its financing is derived in large part 
directly from federal general revenues. However, it does pose serious 
issues for the U.S. economy and federal deficit. SMI expenditures, 
including those associated with the new prescription drug program, are 
projected to increase rapidly, resulting in increasing pressures on 
future federal budgets. General revenue financing for SMI is expected 
to increase from 0.9 percent of GDP today to 6.2 percent in 2078.
    It is important to note that the forecasts we are dealing with in 
Medicare are based on assumptions whose validity cannot be known with 
any high degree of certainty. Although uncertainty in these numbers is 
inescapable, we must make public policy judgments given the importance 
of these programs to current and future beneficiaries and the fiscal 
condition of the country.
    Rapidly rising health care costs place a great burden on the 
Medicare program, which is already under stress from the underlying 
shift in the age distribution of our nation's population. Controlling 
health care costs is the real key to the long run fiscal sustainability 
of both Medicare and the federal budget. Indeed, according to this 
year's Trustees' Report, reducing the projected growth in per 
beneficiary health care costs to one percentage point lower than the 
intermediate assumption would reduce the 75-year actuarial imbalance 
for the HI program from negative 3.12 percent of taxable payroll to 
negative 1.05 percent. Similarly, lower growth in health care costs 
would accrue to the federal budget through reductions in projected 
costs in the SMI program, Medicaid, and other government health care 
programs. According to the CBO, federal spending on Medicare and 
Medicaid will rise to 11.5 percent of GDP in 2050, up from 3.9 percent 
in 2003. If, instead of increasing at the rate of growth of per capita 
GDP plus 1 percent as assumed, per beneficiary spending were to grow at 
the rate of per capita GDP itself over the same time period, federal 
spending on Medicare and Medicaid will rise to only 6.4 percent of GDP 
in 2050, thus freeing roughly 5 percent of GDP for other activities. 
Achieving a 1 percentage point reduction in the rate of increase in 
health care costs should be doable, but it will require the very best 
efforts of all of us concerned with the issue. Most importantly, I 
believe this slowdown in cost increases could be accomplished without 
sacrificing the quality and access to health care that our senior 
citizens deserve and have come to expect.
    Clearly steps must be taken to address growing costs while 
maintaining high quality care for our senior citizens and, indeed, all 
citizens. The President has shown real leadership in seeking to reduce 
health care costs without diminishing quality or access to care. This 
Administration is committed to helping Americans obtain improved and 
more affordable health care coverage. Medical liability reform is 
critical to improve health care quality and reduce costs. We need to 
help stop harmful costly medical errors and provide liability 
protection for doctors and nurses who report mistakes in good faith. We 
need to employ more fully the efficiencies of information technology in 
the health care sector, such as physician order entry and electronic 
medical records.
    Additionally, health savings accounts will help millions of 
Americans with medical expenses and encourage saving while putting 
individuals in charge of their own health care choices. The President 
has proposed refundable tax credits to help low-income workers purchase 
health insurance coverage, and proposed allowing small businesses to 
band together through association health plans, helping America's 
working families to have greater access to affordable health insurance. 
We need to give consumers better information to make informed decisions 
when choosing health care providers. The private sector Leapfrog Group 
is a leader in this area, as is CMS, by encouraging health care 
providers to report data on quality, making it widely available to the 
public. We urge Congress to act on all these important measures.
    And let's not forget, reforms in last year's legislation include 
provisions to promote competition and choice, encourage savings for 
medical expenses, bring generic drugs to market sooner, improve 
preventive care coverage, lower the costs of chronic illnesses through 
disease management programs, and reduce costs and medical errors 
through e-prescription services. Reductions in fraud and abuse are 
expected to save $35 billion. These are real reforms that will help 
contain health care costs, control their growth relative to GDP, and 
alleviate some of the pressure on the Medicare system.
    Moreover, with passage of the Medicare legislation last year, for 
the first time all seniors will be guaranteed access to affordable 
prescription drug coverage under Medicare. Beginning in June of 2004, 
beneficiaries will have access to Medicare-approved prescription drug 
discount cards, which will save them 10 to 25 percent off the retail 
price of most prescription drugs. Low-income beneficiaries will also 
receive $600 per year to help them purchase their medication. And all 
seniors will have more choices and better benefits under a strengthened 
and improved Medicare program.
    The weighty concerns raised by the Trustees' Reports demand the 
attention of America's policymakers and the public. Those who depend on 
Social Security and Medicare urgently need the best efforts of those of 
us in public life and in the private sector to address the long-term 
funding issues. These programs should be seen as a shared 
responsibility, not a political or partisan opportunity.
    This Administration will continue its open and honest discussion of 
the issues facing Social Security and Medicare and remains dedicated to 
working with Members of Congress to take the steps needed to secure the 
long-term strength of these vital programs. Thank you for having me 
here today, I look forward to your questions.

                                 
    Chairman THOMAS. Thank you very much. To make sure that 
those Members who do wish to question you, Mr. Secretary, I 
will be brief. My understanding from the gentleman from New 
York is that he will suspend any questions he might ask the 
Secretary for the second panel. I find it interesting to 
compare the question of solvency, or the other side of the 
coin, insolvency, in the 2004 report with earlier years when we 
were grappling with the question of, for example, Medicare 
insolvency. In 1994, the year prior to the Republicans becoming 
the majority in the House, there was a 7-year solvency period, 
projected to be insolvent in 2002. The 2004 report indicates, 
as you said, 2019. That is a 15-year insolvency point. So, 
almost certainly more than double the years of previous 
periods, to just select one particular period in time. Chairman 
Greenspan came before this Committee several years ago, shortly 
after we had a Social Security Commission that looked at 
options to make sure that we could improve the solvency of the 
Social Security Trust Fund. Clearly, as I recall, even 
President Clinton talked about increasing the return, the rate 
of return on the money available as one of the key features.
    The Chairman indicated that he was more than willing to try 
to tackle the problem of Social Security because it was akin to 
an arithmetical problem. When you turn to Medicare, as no 
Commission really has except the one that I was honored to 
cochair with the gentleman from Louisiana, Mr. Breaux, you are 
dealing with geometric progressions and frankly nonlinear in a 
multiple of areas, not just age and money. So, it is without a 
doubt that as people try to estimate changes in the program on 
a prospective basis there will be differing assumptions. We are 
going to pursue that with the second panel. As the Secretary of 
the Treasury, is it any wonder to you that trust funds tied to 
wages and salaries fluctuate as the economy fluctuates and, as 
we all know, since 9/11 the economy has stumbled for very basic 
and understandable reasons, and that it would not then reflect 
itself in the revenue coming into these trust funds?
    Secretary SNOW. Mr. Chairman, as your question suggests, 
that is perfectly understandable. The returns, the income, is 
tied to the economy, to wages and in a period of recession and 
weak economic performance as we had in 2001 and 2002, it is 
perfectly understandable. In fact, it is what you would expect.
    Chairman THOMAS. I believe, as we get to the actuaries, and 
we begin looking at it fully up to 2 full years were lost off 
of the solvency table by virtue of the economic performance for 
part A Medicare. Does the gentleman from Illinois wish to 
inquire?
    Mr. RANGEL. Mr. Chairman, while I have said that I would 
pass my questioning, I did not mean that the Democratic side 
would not be entitled to question after you had finished yours.
    Chairman THOMAS. They certainly are. Does the gentleman 
from California wish to question? The other gentleman from 
California?
    Mr. MATSUI. Thank you very much, Mr. Chairman and thank 
you, Mr. Ranking Member, for allowing me to go next. Thank you, 
Secretary Snow, for being here with us. I just would like to 
make

one observation about Medicare, not in the form of a question. 
The acceleration of the unfunded part of Medicare will 
accelerate by some 7 years, or the cash flow problem. What you 
failed to mention is that 2 of the years is because of the 
legislation that was passed last December, mainly because we 
are shifting people away from the traditional Medicare system 
into health maintenance organizations (HMOs) by subsidizing 
HMOs. Second, obviously, by the rural health issue. So, about 
30 percent of the deterioration is due to that legislation. I 
really want to focus on, however, Social Security because you 
spent your very early part of your comments regarding it. 
Assume for a minute that I favor privatizing, as the President 
does, part of the Social Security system. Assuming for a minute 
that I want to make, as he does, sure that current recipients 
and immediately future recipients will undoubtedly maintain 
their full level of benefits. There is going to be, as the 
three plans set forth in the President's Commission 
recommendation, an unfunded liability. That is, it will either 
have to be made up in spending cuts or tax increases or 
borrowing perhaps.
    For example, plan one has a $1.5-trillion deficit in the 
first 10 years. Plan two, $1.8 trillion in the first 10 years. 
Plan three, $1.4 trillion in the first 10 years. Mr. Shaw's 
legislation, and I would obviously prefer to have him comment 
on it, but I think it is important just to talk about it 
because it is offered by a Chair of our Subcommittee. In the 
first 10 years, Mr. Shaw's plan will have an unfunded liability 
of $1.4 trillion. The borrowing peak will be in 2048, 44 years 
from now, when $7.6 trillion will be, either in the form of 
deficits or tax increases or spending cuts in Social Security. 
Which one do you think that I should support? If not any of 
those, then what plan do you propose to come up with in order 
to make sure we do not increase the deficits, we do not 
increase the taxes and we do not cut benefits as the President, 
in fact, has promised to do?
    Secretary SNOW. Congressman, of course, the Administration 
has not picked one of those three or any other option at this 
point. In appointing the Commission, I think the President 
advanced the subject enormously by calling public attention to 
the underfunding and the need to find----
    Mr. MATSUI. We all knew about it before he talked about it, 
so do not assume that we get it from him. We knew about this 
because we have seen actuarial reports over the last 20 years.
    Secretary SNOW. What I am saying is, he helped engender a 
broad national dialog on this vitally important subject. The 
issue you are raising of transition costs is really the 
recognition of the contingent liability. It is there. It is 
there, and since it is there I would argue it is better to make 
it explicit than implicit. It is better to make it transparent 
rather than to hide it.
    Mr. MATSUI. If I may just interrupt you, I do not think you 
answered my question but that is all right. It is not about a 
contingent liability, it is diverting money from the current 
payroll tax to private accounts. So, how are you going to make 
that up in the next 10 to 75 years, which you are going to do 
by talking about this and by advancing this if it ever became 
law, you are going to deteriorate the Social Security system. 
In fact, you are going to advance the cash flow problem. you 
are going to actually make the problem that you and I are 
really concerned about much worse.
    Secretary SNOW. What the Commission's plans do, and I think 
Commission plan two is laid out in some detail in the report of 
the President's Council of Economic Advisers. What it does, of 
course, is to provide a transition mechanism to fund the loss 
of revenues to the retirement system. That takes----
    Mr. MATSUI. Reduce benefits.
    Secretary SNOW. That is right, for some period of time. 
Then longer-term, the deficit and the budget are better.
    Mr. MATSUI. For some period of time, Mr. Secretary, means 
that those that are currently retired will have a reduction in 
benefits.
    Secretary SNOW. They will not. No. The President 
stipulated, in appointing the Commission, that there would not 
be for those who are retired or near retirement, any reduction 
in benefits.
    Mr. MATSUI. That is the President's position.
    Chairman THOMAS. The gentleman's time has expired.
    Mr. MATSUI. Thank you, Mr. Chairman.
    Chairman THOMAS. The gentleman from Florida, the Chairman 
of the Subcommittee on Social Security, Mr. Shaw, wish to 
inquire?
    Mr. SHAW. Yes, sir. Thank you, Mr. Chairman and I 
appreciate the gentleman from Illinois letting me go out of 
turn here in order to ask a couple of questions and also to 
respond to the Chairman of the Democratic Congressional 
Campaign Committee who just characterized my plan as causing a 
huge deficit. What the gentleman from California fails to point 
out, is that the funds that are put in the individual accounts 
are an investment, an investment that is going to stand for 
future payments to future beneficiaries of the Social Security 
Trust Fund. Also, my plan does not take a dime out of the 
Social Security Trust Fund, nor does it divert any of the 
payroll taxes. I might say that under Mr. Clinton, President 
Clinton, my plan was scored in the long run of over 75 years, 
as not only saving Social Security for all time, but it also 
was scored as creating about a $5-trillion surplus instead of 
over a $26-trillion deficit that we are looking at now if we do 
nothing. So, I think to characterize or to continue to play 
politics with Social Security is very bad strategy to be used, 
particularly at this time.
    I might also say that I think that the direction this 
Committee should be looking at, the warning signs that are 
being thrown up, whether they are correct or incorrect they are 
still warning signs, that we have a huge problem here. We need 
to go and start talking about it. The cash flow problem with 
Social Security is a huge problem and it is one that we are 
facing beginning in 2018.
    Mr. Secretary, I would like to ask you, the chart that is 
in the report shows Social Security clash annual flow deficits 
growing from $16 billion in 2010 to $787 billion in 2078. That 
is just in 1 year. How can there be a cash flow deficit in 
Social Security when the Trust Fund balance in 2018, as 
represented by treasury bills, is $3.7 trillion in today's 
dollars, the same for 2030 when the cash flow deficit is $256 
billion, but the Trust Fund balance is $3.2 trillion? This is a 
chart I am referring to, that was in the report. I beg your 
pardon. I am asking that it be passed out.
    [The information follows:]
    [GRAPHIC] [TIFF OMITTED] 23797A.001
    

    Secretary SNOW. Obviously, what is happening here is we 
have the baby boom starting in 2010. We have people coming out 
of the denominator of the equation and going into the 
numerator. The fundamental math there is expenditures rise and 
payments do not rise at the same rate. They rise at a much 
lower rate. The consequence is that wide gap that produces the 
unsustainability of the system that you are trying to address 
with your legislation.
    Mr. SHAW. Yes, sir. I think it is very important to realize 
that this is the plan of doing nothing. I am sorry but I think, 
in looking after my children and my grandchildren, I do not 
want them facing a $20-some trillion deficit. That is a 
negative cash flow and somebody is going to have to come up 
with the dollars beginning in 2018. Now that is a moving 
target. To sit back and say well, we are not going to run out 
of Treasury bills, all right fine. You have to get the cash to 
pay the Treasury bills. This Congress and a future Congress is 
going to have to start coming up with it. If we start planning 
now, and start investing money and forward funding Social 
Security, we can solve this problem without cutting benefits 
and without running in the red in the long run. We have got to 
plan ahead. Mr. Secretary, you can comment in the balance of my 
time.
    Secretary SNOW. I would only comment to say that there is 
not a lot of uncertainty about these numbers. We know the names 
of the people who are in that cohort of retirees over the 
period 2010 to 2030, and if they retire as we expect them to do 
then we are going to produce these numbers. There is nobody 
coming in behind them to be the workers to fund their 
retirement. That ratio, which is the all important ratio of 
people paying in and people drawing down, worsens and worsens 
and worsens over that long period of time. We have people 
living longer. That combination of the baby boomers retirement 
and people living longer produces this set of numbers about 
which there cannot be much argument. This is basic math.
    Mr. SHAW. Thank you, Mr. Chairman.
    Chairman THOMAS. The gentleman's time has expired. The 
Chair understands the gentleman from Maryland, Mr. Cardin, 
wishes to inquire?
    Mr. CARDIN. That is correct, Mr. Chairman. Thank you very 
much. Secretary Snow, thank you very much for being with us. 
You have many responsibilities as Secretary of the Treasury. 
One of those, of course, is as Trustee of the Medicare Trust 
Funds. So, I am just interested in finding out the information 
that you knew as regards to the information on the impact that 
the Medicare bill that we recently passed and the President 
signed into law had an effect on the solvency of the Medicare 
Trust Fund. As that bill was working its way through Congress, 
it became clear to many of us through the financial information 
or the scoring we were receiving that the impact on solvency 
would be minimal since the $400 billion cost was primarily in 
the prescription drug provisions, because the other provisions 
had offsets. We now find, through the information that has been 
made available to us, that the bill will affect the solvency of 
the Medicare Trust Fund by 2 years, by the action we took in 
the last bill.
    One of the major differences in estimates is the number of 
Medicare beneficiaries expected to participate in private 
health insurance plans. That number is dramatically different 
than what we were operating with in Congress. We originally 
estimated that the current 9 percent that are in private 
insurance plans would go up to around 12 or 13 percent. We now 
find that the U.S. Department of Health and Human Services 
(HHS) actuaries are projecting that it could be as high as 32 
percent, a significant difference. We also now know that for 
every person who enrolls in a private health care plan, it will 
cost the Medicare Trust Fund additional funds, because we are 
paying more than if that person would have stayed in 
traditional Medicare. My question to you is, were you aware of 
those numbers before Congress acted on it, that is the 
participation rates and cost to the Medicare Trust Fund, as 
Trustee of the Medicare system? If you were aware of it, were 
you aware that that information was not made available to 
Congress?
    Secretary SNOW. Congressman, I was not aware of the 
detailed information that you laid out there in your question 
to me. I did not become aware of the differing estimates in the 
CBO, for whom I have a very high regard, and the actuaries at 
CMS, in whom I also have a high regard. I did not become aware 
of that until sometime in January, as we began to put the 
President's budget to bed.
    Mr. CARDIN. Mr. Secretary, I respect your answer to that, 
and I find that just as troubling to you as it is to us, that 
information that is important for us to make judgments was not 
made available to us. You have responsibilities as a Trustee to 
make recommendations to the Administration and to Congress, as 
to the impact that legislation could have on Medicare's 
insolvency. This is a significant difference, a significant 
amount of money that, was involved here. I also believe that at 
times the department was using numbers generated by the actuary 
to show participation, but then used CBO numbers, which were 
lower on cost, in order to make the bill appear to be less 
expensive than it actually was. It would seem to me that 
selecting the more generous numbers from the actuary and from 
CBO, but not being consistent in using the same information for 
all of your analysis, would be something that none of us would 
want to condone. I hope you would agree with that.
    Secretary SNOW. The fine points of the differences between 
these two estimates, I must say, are beyond my ken. I 
understand that small changes though, as you know, in those 
assumptions--for instance, CBO's assumption on participation 
rates being a few percentage points lower than the 
Administration's, than the Office of Management and Budget's 
(OMB's) and the actuary's estimate of participation rates, 
produced a very substantial part of that disparity.
    Mr. CARDIN. It was not the Administration, and it was 
substantial, 12 percent versus 32 percent, which is a huge 
difference. It was not the Administration. The Administration, 
I believe, was with the actuaries. It was the CBO's numbers 
that were substantially different than the actuarial 
assumption.
    Secretary SNOW. I am saying that. We used those numbers in 
the budget. We used the actuary's numbers in doing the budget 
and that is when I became aware of the difference.
    Mr. CARDIN. Mr. Chairman, I know many of us in Congress 
believe that the information would have been important for us 
to have prior to action. It is important that this information 
get to the right agencies.
    Chairman THOMAS. I thank the gentleman. Mr. Secretary, we 
appreciate the time was slightly over, but to recognize the 
second Republican to balance out the questioning of the 
Secretary, the gentleman from Illinois, Mr. Crane, is 
recognized.
    Mr. CRANE. Thank you, Mr. Chairman. Mr. Secretary, some 
have claimed that Social Security is not going bankrupt because 
in 2042 payroll tax receipts will be able to finance about 
three-fourths of the benefits due. Many of those making such 
claims have also attacked the idea that individuals should be 
able to invest even some of their payroll taxes in personal 
accounts. Individuals retiring in 2042 are already paying into 
Social Security. I am against cutting benefits that have been 
promised to people paying into the system. Do you see any way 
to preserve current benefits without allowing individuals to 
own retirement accounts that does not lead to a tax increase?
    Secretary SNOW. Congressman Crane, you are right that there 
is an automatic reduction in the level of payments at the point 
at which the Trust Fund can no longer pay the full level of 
benefits, and that is 2042. We cannot let that happen. That is 
why moving to these personal accounts now makes so much sense, 
to find a way to augment the financial condition of the Social 
Security plan and take some of the burden off of it. That is 
precisely what would happen. There is no legal obligation to 
pay at the current level. The obligation is to pay the funds 
that are available as benefits and that results in that 74 
percent declining over time, level of payments. We cannot let 
that happen.
    Mr. CRANE. If Congress does not make changes to Social 
Security, specifically no individual retirement accounts, no 
benefit cuts, no tax increases, and no increase in retirement 
age, what do you think would be the impact on the Treasury?
    Secretary SNOW. Well, if no changes are made and we hit the 
year 2042 and the benefit levels are allowed to fall in 
accordance with the income levels then it will have a very 
serious impact on the recipients who I think will feel cheated. 
They have made their payments in and they are now not able to--
the retirees who made their payments in would not then be able 
to draw down the expected amount of money. If we fund it at 
current levels, we produce that horrific deficit number that 
you saw reflected in Congressman Shaw's chart. We are the 
victim here of plain and simple mathematics, inescapable math. 
We cannot dodge it. We cannot hide from it. The numbers that 
were shown are the real numbers in that report. The only way to 
deal with this is to find the means to supplement the income 
that Social Security has, that people have who would otherwise 
draw on Social Security. That is where this idea of the 
personal accounts makes so much sense.
    Mr. CRANE. Thank you, Mr. Secretary. We appreciate your 
attendance here today, too.
    Secretary SNOW. Thank you.
    Chairman THOMAS. The Committee thanks you and understands 
the pressing engagement that you must go to and looks forward 
to your next testimony before the Committee.
    Secretary SNOW. Thank you, very much.
    Chairman THOMAS. The Committee would now ask Douglas Holtz-
Eakin, the Director of the CBO; Rick Foster, Chief Actuary, 
CMS; and Stephen C. Goss, Chief Actuary, SSA, if they would 
please come forward. The Chair welcomes all of you to the 
Committee and each of you has written testimony which will be 
made part of the record. If you could address us briefly in 
your own words prior to Members asking questions, the Chair 
would ask you to do so. We will start with Dr. Holtz-Eakin and 
then move across the panel to Mr. Goss and Mr. Foster. Mr. 
Holtz-Eakin?

      STATEMENT OF DOUGLAS HOLTZ-EAKIN, PH.D., DIRECTOR, 
                  CONGRESSIONAL BUDGET OFFICE

    Mr. HOLTZ-EAKIN. The CBO estimates that the Medicare 
Modernization Act will raise net outlays of the Federal 
Government by $395 billion over the period of 2004 to 2013. My 
written statement, which we submit for the record, details the 
underpinnings of the CBO estimate. It also accounts for the 
numerous small and technical factors that lead to a difference 
with the Administration's estimate for the same legislation. 
The CBO has been working with Congress on prescription drug 
legislation since 1999. Dozens of CBO staff with advanced 
training in health policy, health economics, finance and budget 
analysis have contributed to this effort. Included among them 
are those with prior or subsequent experience with the OMB, the 
Health Care Financing Administration and the Medicare Payment 
Advisory Commission. Their depth and reach have been enhanced 
through regular consultation with private sector actuaries, 
reinsurers, financial services experts, pharmacy benefit 
managers and many others. Our expertise has also been enhanced 
through continuous interactions with congressional staff, and 
we have benefited greatly from the generosity of our 
professional colleagues at CMS.
    Over the past several years, CBO has deployed this 
accumulation of skills, data and modeling capability to the 
challenges of projecting the costs of Medicare in general and 
the prescription drug legislation in particular. The CBO has 
provided testimony to Congress--to this Committee on at least 
three occasions, and to other Committees on up to eight 
occasions. We have provided nearly 15 documents and letters to 
the Members including a 2002 study on issues in the design of a 
prescription drug benefit, and have provided many cost 
estimates. In 2002, CBO provided over 50 estimates of the cost 
of drug legislation. With the daunting pace of activity in the 
past year, the total number of proposals, amendments and formal 
cost estimates is innumerable but is safely in a range that may 
approach 10 times that number. This experience has yielded a 
great respect for our professional colleagues at CMS and a 
healthy appreciation of the fundamental uncertainties 
associated with cost estimates in this area. Nevertheless, it 
is my considered professional judgment that $395 billion was 
and remains the single best estimate of the cost of this 
legislation. Chairman Thomas, Congressman Rangel and Members of 
this Committee, I thank you for the opportunity to appear today 
and look forward to answering your questions.
    [The prepared statement of Mr. Holtz-Eakin follows:]
          Statement of Douglas Holtz-Eakin, Ph.D., Director, 
                      Congressional Budget Office
    Chairman Thomas, Congressman Rangel, and Members of the Committee, 
I am pleased to be here with you today. I understand that one purpose 
of this hearing is to discuss the Trustees' 2004 reports for Social 
Security and Medicare that were released yesterday and to assess the 
impact of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) on Medicare's long-term financial 
condition. To help provide a basis for that assessment, I will focus my 
remarks on the Congressional Budget Office's (CBO's) estimate of the 
MMA's cost over the next 10 years and on the differences between that 
estimate and the Administration's estimate for that same period. The 
MMA was a very complex piece of legislation containing many provisions, 
and CBO's modeling of its costs was correspondingly complex. Rather 
than try to explain the scoring for all of its provisions, I will 
concentrate on the two sections of the act that account for nearly all 
of the net difference between those two estimates: the new prescription 
drug benefit and the revised payment system for managed care plans 
under Medicare.
CBO's Cost Estimate
    CBO has estimated that the MMA will increase mandatory outlays by 
$395 billion over the 2004-2013 period. Anytime a complex and 
substantially new program is created, predicting the outcome precisely 
is difficult, but CBO's estimate was the result of extensive analyses 
of the pharmaceutical market, the Medicare program, the costs of 
managed care plans, and the likely responses of potential enrollees. To 
date, CBO has not received any additional data or studies that would 
lead the agency to reconsider its conclusions. Therefore, CBO believes 
that its budgetary estimate is sound and has no reason to revise it.
    Table 1 shows the major components of CBO's 10-year cost estimate. 
The provisions of the MMA that established a prescription drug benefit 
under Part D of Medicare were estimated to increase mandatory spending 
by $409 billion on net. Title II of the act, which altered the payment 
system for managed care plans under Part C of Medicare--and also 
changed the name of that program from Medicare+Choice to Medicare 
Advantage--was estimated to cost $14 billion through 2013. (The net 
costs of providing the new drug benefit to enrollees in Medicare's 
managed care plans were included in the $409 billion estimate for the 
Part D provisions.) All of the legislation's other provisions, which 
primarily involve the traditional Medicare fee-for-service (FFS) 
program, were estimated to reduce net outlays by $28 billion.

    Table 1: Major Components of CBO's Cost Estimate for the Medicare
      Prescription Drug, Improvement, and Modernization Act of 2003
                          (Billions of dollars)
------------------------------------------------------------------------
                                       Mandatory Spending, FY 2004-2013
------------------------------------------------------------------------
Prescription Drug Benefit Provisions                   409
------------------------------------------------------------------------
Medicare Advantage Provisions                           14
------------------------------------------------------------------------
All Other Provisions                                   -28
------------------------------------------------------------------------
  Total                                                395
------------------------------------------------------------------------
Source: Congressional Budget Office.
a. Includes mandatory spending for administration of Part D (in title X
  of the MMA) and interactions with the Hatch-Waxman Act and importation
  provisions in title XI; excludes the interaction of Part D with
  Medicare spending for benefits under Parts A and B (which is included
  in the estimate for ``All Other Provisions''). Those factors account
  for the difference between the $409 billion estimate for the
  prescription drug benefit provisions shown above and CBO's $410
  billion estimate for title I of the MMA.

    Although Table 1 shows the MMA's impact on mandatory spending, a 
complete estimate of the overall budgetary impact of the legislation 
must also consider its effect on revenues. CBO estimated that the 
various revenue effects of the MMA's provisions were largely 
offsetting. According to the Joint Committee on Taxation, the law would 
reduce revenues by about $7 billion over 10 years, primarily as a 
result of provisions to allow qualified taxpayers to establish health 
savings accounts. At the same time, CBO estimated that the Medicare 
drug benefit provisions would have the effect of increasing revenues by 
about $7 billion, as businesses would reduce expenditures on nontaxable 
health benefits and increase them on taxable forms of compensation. By 
contrast, the Administration estimated that the health savings account 
provisions would result in a revenue loss of about $17 billion over the 
2004-2013 period and to date has not estimated an indirect effect on 
revenues resulting from the Medicare drug benefit. While the overall 
assessment of the MMA's impact on federal deficits or surpluses must 
take into account all of its effects on spending and revenues, the 
focus today is on CBO's outlay estimates and how they differ from the 
Administration's estimates as developed by the actuaries at the Centers 
for Medicare and Medicaid Services (CMS). Accordingly, I will devote 
the remainder of my testimony to the main factors affecting estimated 
outlays for the new prescription drug benefit and for the revised 
payment system for managed care plans.
Costs for the Part D Prescription Drug Benefit
    CBO's $409 billion estimate for the net costs of providing the 
prescription drug benefit under the MMA can be separated into several 
components, as shown in Table 2. Under the law, CBO projected, stand-
alone prescription drug plans and integrated health plans under 
Medicare would incur costs of $507 billion through 2013 to provide the 
basic statutory drug benefit. Those costs would be partially offset by 
$131 billion in premium payments made by or on behalf of enrollees. 
Separate payments to employer-sponsored and union plans providing 
qualified drug coverage to Medicare-eligible retirees would amount to 
an additional $71 billion. The law also subsidizes additional drug 
coverage for certain low-income enrollees, and CBO estimated that those 
subsidies would cost $192 billion over the 2004-2013 period (including 
about $1 billion to provide assistance with drug costs in conjunction 
with the drug discount card program that will operate from mid-2004 
through December 2005).

Table 2: Components of CBO's Cost Estimate for the Medicare Prescription
                              Drug Benefit
                          (Billions of dollars)
------------------------------------------------------------------------
                                       Mandatory Spending, FY 2004-2013
------------------------------------------------------------------------
Payments to Medicare Drug Plans for                    507
 Basic Benefits
------------------------------------------------------------------------
Beneficiary Premium Payments                          -131
------------------------------------------------------------------------
Employer and Union Subsidies                            71
------------------------------------------------------------------------
Low-Income Subsidies                                   192
------------------------------------------------------------------------
Federal Medicaid Spending                             -142
------------------------------------------------------------------------
Transfers from State Medicaid                          -88
 Programs
------------------------------------------------------------------------
Effects on Other Federal Programs                       -2
------------------------------------------------------------------------
  Total                                                409
------------------------------------------------------------------------
Source: Congressional Budget Office.
Note: Numbers may not add up to totals because of rounding.

    CBO also estimated that the Part D prescription drug benefit 
provisions would reduce other federal outlays in a number of ways. 
Transferring responsibility for the prescription drug benefits of 
``dual eligibles'' from Medicaid to Medicare would save the federal 
government an estimated $152 billion in Medicaid spending through 2013. 
(Dual eligibles are Medicare beneficiaries who are also eligible for 
full Medicaid benefits.) Those savings would be partly offset by an 
additional $10 billion in federal outlays for Medicaid resulting from 
the new law's drug benefit provisions--largely owing to additional 
spending on benefits for Medicare beneficiaries who would enroll in 
Medicaid as a result of applying for the low-income drug subsidy 
program. Thus, net federal Medicaid savings were estimated at $142 
billion over 10 years. In addition, the MMA contains a provision that 
will recapture a portion of the corresponding savings for states on 
Medicaid drug expenditures, which CBO estimated would reduce federal 
costs by $88 billion. Finally, the Medicare drug benefit will on net 
reduce mandatory spending for the Federal Employees Health Benefits 
(FEHB) program and other federal programs that pay for prescription 
drugs by about $2 billion.
    CBO's cost estimates for prescription drug benefit proposals were 
based on an analytic structure and a microsimulation model that 
projects how those proposals would affect a representative sample of 
Medicare beneficiaries. CBO has used that basic approach to estimate 
the costs of proposed Medicare prescription drug benefits since 1999, 
updating it each year to account for new data and refining it to 
address new provisions. The microsimulation model contains detailed 
information about beneficiaries' spending for prescription drugs, their 
supplemental insurance coverage (both public and private), their health 
status, and their income. The information on drug spending used by CBO 
is based on data from the 1999 and 2000 Medicare Current Beneficiary 
Survey, projected forward using CBO's March 2003 economic and technical 
assumptions--including projected growth rates for drug spending that 
reflected the most recent CMS estimates for national health 
expenditures.
    Costs and Premiums for Medicare Drug Plans. Estimating the costs of 
providing the basic drug benefit under Medicare involved three basic 
steps: (1) estimating the number of beneficiaries who would enroll in a 
Medicare drug plan; (2) estimating the average costs of providing those 
enrollees with covered benefits (including the administrative costs of 
doing so); and (3) using the resulting estimate of gross costs to 
calculate the offsetting premium receipts that would result from the 
statute's subsidy formulas. Because of the myriad provisions in the law 
that could affect each of those steps--particularly the costs per 
enrollee--CBO had to develop a relatively sophisticated modeling 
capability. Even so, the primary drivers of federal costs remain the 
drug benefit's design and the premium subsidy (with that subsidy not 
only determining how gross costs are allocated between enrollees and 
the government but also affecting participation in such a voluntary 
program).
    In large measure, CBO based its estimates of program enrollment for 
the drug benefit on the experience of Medicare Part B. Part B is a 
voluntary program that has a 75 percent premium subsidy and a 
substantial penalty for late enrollment; as a result, most but not all 
Medicare beneficiaries who are eligible for Part B enroll in it. Part 
D's provisions are quite similar--it is a voluntary program with a 74.5 
percent average premium subsidy and significant late-enrollment 
penalty--and the provisions strongly encourage beneficiaries to enroll 
when they are first eligible to do so, even if their drug spending is 
relatively low at the time. Nevertheless, CBO assumed that active 
workers with drug coverage and some federal retirees would not enroll 
in Part D, even if they were enrolled in Part B, because the value of 
any additional drug benefits they would receive would be less than the 
added premiums they would pay; those projected nonparticipants 
represent about 7 percent of all Medicare beneficiaries. CBO also 
assumed that the roughly 6 percent of beneficiaries who are enrolled in 
Medicare Part A but do not elect to enroll in Part B (some of whom are 
also active workers) would generally choose not to enroll in Part D. In 
sum, CBO estimated that 87 percent of all Medicare beneficiaries would 
participate in the drug benefit in some manner--with about 68 percent 
enrolling in a Medicare prescription drug plan and the remaining 19 
percent receiving drug coverage through a former employer that would be 
subsidized directly by Medicare.
    To estimate costs per enrollee, CBO started with a projection of 
total outpatient drug spending by the Medicare population in the 
absence of a new Medicare benefit. That total was then adjusted by 
several discrete factors:

      a ``price effect'' to reflect the likelihood that average 
drug prices will be slightly higher because beneficiaries who currently 
lack drug coverage will become insulated from those prices;
      a ``use effect'' to capture changes in demand for drugs 
resulting from changes in beneficiaries' cost-sharing liabilities (so 
that their total drug use would increase somewhat if their own out-of-
pocket costs fell);
      an adjustment to reflect the degree to which Medicare 
drug plans will manage the costs of their enrollees (discussed further 
below);
      and a slight decrease in spending due to the fact that 
prices negotiated by Medicare drug plans will be exempt from the 
Medicaid ``best price'' provision--an exemption that gives those plans 
more leeway to negotiate steeper price discounts from manufacturers 
because they will not have to pass on the same discount to Medicaid.

    It is important to emphasize that, although CBO sought to model 
each of those factors separately, they have offsetting impacts and the 
net effect on drug spending or its components will reflect all of them 
simultaneously.
    In estimating the degree of cost management that Medicare drug 
plans would achieve on average, CBO focused on three main 
considerations: the incentives that plans would have to control costs 
(based on the degree of financial risk they would face); the ``tools'' 
that they could use to control spending (such as preferred drug lists 
and pharmacy networks); and the degree of competition they would face 
(as expressed through differences in beneficiary premiums and cost-
sharing levels among drug plans). Plans bearing meaningful financial 
risk would lose money if their costs of providing benefits exceeded 
expectations and thus would have strong incentives to limit those costs 
as much as possible while still attracting enrollees--but CBO assumed 
that they would also have somewhat higher administrative costs as a 
result. A plan's ability to act on those incentives will depend on what 
mechanisms it can use to secure price discounts and to encourage 
beneficiaries to use less costly therapeutic alternatives, though 
trade-offs could arise between the steps they take to control costs and 
the ease with which enrollees can obtain the drugs of their choice. The 
extent to which beneficiaries save on their premium by joining a less 
expensive drug plan is also an important consideration: it provides an 
incentive for plans to keep their costs low over time to attract and 
retain enrollees, and it encourages beneficiaries to consider whether 
the extra premium of a more costly plan is worth paying.
    To summarize the effects of incentives and tools on cost 
management, CBO estimated the ``gross drug savings'' that would be 
expected, on average, for a given proposal. Those gross drug savings 
represent the degree to which costs would be reduced compared with an 
unmanaged benefit (such as a traditional indemnity insurance plan), and 
they combine three types of savings from management: savings due to 
price discounts or rebates from manufacturers and pharmacies; savings 
from controlling overall drug use; and savings due to changing the mix 
of drugs used. For the MMA, CBO estimated that drug plans bearing the 
full level of financial risk as specified by the statute would achieve 
average gross savings of 20 percent initially, growing to 25 percent 
over the budget window. That path reflects the gradual widening of the 
statute's ``risk corridors'', which will expose plans to greater 
financial risk over time.\1\ For beneficiaries whose current drug 
spending already reflects some degree of cost management, however, that 
spending was adjusted only to capture the incremental savings that 
would be achieved. CBO also assumed that there was some probability 
that beneficiaries would be enrolled in reduced-risk or ``fallback'' 
drug plans as specified by the law; in those cases, CBO estimated lower 
gross savings owing both to the reduced financial risk those plans 
would face and to the less competitive environment in which they would 
operate.
---------------------------------------------------------------------------
    \1\ Under the MMA's risk-corridor provisions, prescription drug 
plans whose costs turn out to be somewhat higher than expected will see 
an increasing share of those costs covered by additional federal 
payments, while plans with actual benefit costs that are below expected 
levels will essentially have to reimburse Medicare for a corresponding 
share of the savings.
---------------------------------------------------------------------------
    After applying those adjustments to determine total drug spending 
by enrollees, CBO estimated the gross costs of providing the drug 
benefit by applying the statute's benefit-design provisions and adding 
an estimate of the administrative costs that drug plans would incur. 
Rather than review all aspects of the benefit design, let me focus on 
two key features. First, with certain exceptions, the benefit's 
catastrophic threshold--above which about 95 percent of drug costs are 
covered--is determined by out-of-pocket costs actually incurred by 
enrollees. That feature, which is often referred to as the ``true out-
of-pocket'' provision, has the effect of targeting federal assistance 
to those who lack additional drug coverage. By the same token, though, 
such coverage is implicitly penalized because the costs that it covers 
do not count toward reaching the catastrophic threshold.\2\ As a 
consequence, federal costs will depend in part on the extent and 
sources of any supplemental drug coverage that enrollees may have.
---------------------------------------------------------------------------
    \2\ In addition, Medigap policies that cover cost sharing for other 
Medicare benefits are prohibited from including supplemental drug 
coverage for Part D enrollees, so enrollees desiring such coverage 
would have to obtain it from another source (such as a former employer 
or their Medicare drug plan).
---------------------------------------------------------------------------
    A second key determinant of federal costs is that the standard 
benefit's deductible, initial coverage limit, and catastrophic 
threshold are indexed to the projected growth rate in per capita drug 
expenditures for the Medicare population. As a result, that benefit 
will, on average, cover about the same share of enrollees' drug costs 
each year. Table 3 shows CBO's projections for each of those benefit 
parameters through calendar year 2013 as well as the associated levels 
of beneficiaries' cost-sharing liabilities or total drug spending. As 
the table suggests, CBO estimates that per capita drug spending for 
Medicare beneficiaries will increase at an average annual rate of 
nearly 9 percent from 2006 to 2013.
    Table 3 also shows CBO's estimate of the average monthly premium 
per beneficiary for each calendar year (which reflects not only covered 
benefits but also administrative costs, and thus grows somewhat more 
slowly than the benefit parameters). Although the MMA's subsidy 
formulas are complex--specifying both a fixed ``direct'' subsidy and a 
reinsurance subsidy that varies with spending above the catastrophic 
threshold--and beneficiaries' premiums will depend on what drug plan 
they join, CBO estimated average premiums by applying the 74.5 percent 
average subsidy to average gross costs.
    Finally, by multiplying the average gross cost of providing the 
drug benefit and the average premium by the number of enrollees, CBO 
generated estimates of total calendar year obligations and receipts; 
converting those figures into fiscal year outlays yielded CBO's 
estimates of $507 billion in payments to drug plans, offset by $131 
billion in premium receipts, as shown in Table 2.\3\
---------------------------------------------------------------------------
    \3\ CBO's estimate of premium collections assumes that all 
enrollees have their Part D premiums withheld from their Social 
Security checks, but net federal outlays would be the same if 
beneficiaries chose to pay those premiums directly to their drug plans 
instead since federal payments to those plans and premium receipts 
would be reduced dollar for dollar.

                                          Table 3: Standard Drug Benefit Design and Estimated Monthly Premiums
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                   Calendar Year
                                                         -----------------------------------------------------------------------------------------------
                                                             2006        2007        2008        2009        2010        2011        2012        2013
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual Deductible                                               $250        $275        $300        $325        $350        $380        $410        $445
--------------------------------------------------------------------------------------------------------------------------------------------------------
Coinsurance Between Deductible and Initial Coverage               25          25          25          25          25          25          25          25
 Limit (Percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Initial Coverage Limit
--------------------------------------------------------------------------------------------------------------------------------------------------------
  Program spending at limit                                   $1,500      $1,646      $1,808      $1,946      $2,115      $2,115      $2,460      $2,666
--------------------------------------------------------------------------------------------------------------------------------------------------------
  Beneficiary spending at limit                                 $750        $824        $903        $974      $1,055      $1,055      $1,230      $1,334
--------------------------------------------------------------------------------------------------------------------------------------------------------
  Total spending at limit                                     $2,250      $2,470      $2,710      $2,920      $3,170      $3,170      $3,690      $4,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Coinsurance Between Initial Coverage Limit and                   100         100         100         100         100         100         100         100
 Catastrophic Threshold (Percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Catastrophic Threshold
--------------------------------------------------------------------------------------------------------------------------------------------------------
  Out-of-pocket spending at threshold                         $3,600      $3,950      $4,350      $4,650      $5,050      $5,450      $5,900      $6,400
--------------------------------------------------------------------------------------------------------------------------------------------------------
  Total spending at threshold a                               $5,100      $4,496      $6,158      $6,596      $7,165      $7,715      $8,360      $9,066
--------------------------------------------------------------------------------------------------------------------------------------------------------
Coinsurance above threshold (Percent)b                             5           5           5           5           5           5           5           5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Average Monthly Premium                                          $35         $37         $41         $43         $47         $49         $54         $58
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.
Note: Numbers may not add up to totals because of rounding. Benefit parameters shown here reflect the legislation's rounding rules.
a Represents total spending at the catastrophic threshold for individuals without other drug coverage.
b For 2006, cost sharing will be the greater of 5 percent coinsurance or a copayment of $2 (for generic and multiple-source drugs) or $5 (for single-
  source drugs); after 2005, the $2 and $5 amounts are also indexed.

    Participation and Costs for Employer and Union Subsidies. 
Currently, a substantial share of Medicare beneficiaries receive 
coverage for their drug costs through a former employer. As I have 
noted, though, the extent to which enrollees will reach the standard 
Medicare drug benefit's catastrophic threshold depends on whether they 
have such supplemental coverage for their Part D cost sharing. If 
retirees with such coverage enroll in a Medicare drug plan, therefore, 
their impact on federal costs will depend on the extent to which their 
former employer supplements that coverage. The MMA also establishes an 
additional option for employer and union plans that provide retirees 
with qualified drug coverage: employers that take that option will 
receive a tax-free payment directly from Medicare equal to 28 percent 
of total drug costs in a specified dollar range. To project what 
federal costs will be, CBO thus had to estimate not only the extent of 
the drug coverage that those retirees would have but also the mechanism 
through which that coverage would be subsidized.
    Under the MMA, CBO estimated, average federal subsidy payments on 
behalf of retirees would generally be greatest if they enrolled in a 
Medicare drug plan and received the basic drug benefit with no 
supplemental drug coverage. Medicare's average subsidy payment would be 
reduced if those retirees were instead provided generous wraparound 
coverage by their former employer; in that case, retirees would not 
likely reach the basic benefit's catastrophic threshold for out-of-
pocket costs. CBO also estimated that the direct payments from Medicare 
to employer and union plans would be about the same, on average, as the 
net subsidies that retirees would generate if they enrolled in a 
Medicare drug plan and retained a generous employer wraparound policy. 
In other words, those direct Medicare payments to employer and union 
plans would also be lower, on average, than the net subsidies for 
retirees who were enrolled in Medicare drug plans and had no additional 
drug coverage.
    Although the favorable tax treatment accorded to those direct 
payments would make that approach somewhat more attractive, CBO 
nonetheless concluded that the difference in subsidies under the MMA 
gives employers a new financial incentive to drop prescription drug 
coverage for Medicare-eligible retirees. In its estimates, CBO did not 
assume that all employers would respond to that financial incentive but 
did project that 2.7 million Medicare-eligible retirees who would have 
had more generous employer drug coverage in 2006 in the absence of a 
Medicare drug benefit would not see their former employer supplement 
the basic Part D benefit. In those cases, it would make most sense for 
those retirees to enroll in a Medicare drug plan (with their former 
employer potentially choosing to pay their Part D premium as a means of 
compensation). At the same time, CBO assumed that nearly all of the 
remaining retirees with employer-sponsored drug coverage--about 8 
million individuals in 2006--would see their employer take the direct 
subsidy payment from Medicare, both because of its tax advantages and 
for reasons of administrative simplicity. CBO's estimate of $71 billion 
in direct subsidy payments reflects the share of drug spending by those 
retirees that is projected to fall in the covered range.
    Participation and Costs for Low-Income Subsidies. The MMA 
established two levels of additional drug benefits for enrollees with 
sufficiently low income and countable assets: a more generous subsidy 
for beneficiaries who are either dually eligible for full Medicare and 
Medicaid benefits or have income below 135 percent of poverty and low 
assets; and a somewhat less generous subsidy for those with income 
below 150 percent of poverty and assets below a slightly higher limit. 
On the basis of an analysis of both administrative and survey data, CBO 
estimated that 35 percent of Medicare beneficiaries would be eligible 
for low-income subsidy benefits under the MMA; about 30 percent would 
be eligible for the more generous subsidy; and 5 percent would qualify 
for the less generous subsidy.
    At the same time, CBO projected that a significant proportion of 
the eligible population would not apply for the low-income subsidies. 
CBO's estimate of the number of people who would sign up for low-income 
subsidies was based on several factors, including historical 
participation in the Qualified Medicare Beneficiary (QMB) and Specified 
Low-Income Medicare Beneficiary (SLMB) programs. The QMB and SLMB 
programs pay some or all of the premiums and cost sharing under Parts A 
and B of Medicare for beneficiaries with incomes below 120 percent of 
the poverty level and limited assets. In those programs, many 
beneficiaries who are eligible do not enroll. CBO assumed that 
participation in the low-income subsidy would be somewhat greater than 
that for other welfare-related programs, however, because MMA allows 
individuals to enroll at offices of the Social Security Administration.
    CBO also estimated that the share of eligible beneficiaries 
receiving low-income subsidies would rise gradually after the 
implementation of the Medicare drug benefit. (Unlike the basic drug 
benefit, which penalizes individuals for late enrollment, the 
additional low-income subsidies are available at any time with no 
penalty to Part D enrollees.) Ultimately, CBO assumed that almost 70 
percent of those eligible would receive low-income subsidies under the 
MMA. About 75 percent of those eligible for the more generous subsidy 
would receive it, while about 35 percent of those eligible for the less 
generous subsidy would receive that benefit. Participation rates for 
the more generous subsidy would be much higher because they would 
include all dual eligibles, who would participate in the drug benefit 
by default.
    In estimating the costs of the subsidy payments, CBO also assumed 
that participants would generally have higher average drug costs than 
beneficiaries who were eligible for those subsidies but chose not to 
enroll--that is, some adverse selection will occur. The total estimated 
cost of $192 billion for the low-income subsidies over 10 years also 
includes the costs of covering the enrollment fees and providing up to 
$600 of assistance for certain low-income beneficiaries in conjunction 
with the Medicare drug discount card. For that transitional assistance 
program, which is scheduled to operate from mid-2004 through December 
2005, CBO assumed relatively low take-up--specifically, that about 20 
percent of eligible Medicare beneficiaries or about 3 percent of all 
beneficiaries would enroll--because of its limited benefits and 
temporary nature. (As an accounting matter, the costs of the low-income 
subsidies also include the costs of paying all or a portion of 
enrollees' Part D premiums, rather than treating those subsidy payments 
as reductions in the premium receipts specified above.)
    Offsetting Federal Savings. Although this testimony has focused on 
the various costs of providing the drug benefit under Medicare, the 
MMA's provisions will also generate offsetting federal savings, both 
implicitly and explicitly:

      Transferring responsibility for the prescription drug 
benefits of dual eligibles from Medicaid to Medicare will save the 
federal government an estimated $152 billion in Medicaid spending 
through 2013. Those savings will be partly offset by an additional $10 
billion in federal Medicaid outlays stemming from the new law's drug 
benefit provisions--largely from additional spending on benefits for 
Medicare beneficiaries who will enroll in Medicaid or the QMB and SLMB 
programs as a result of applying for the low-income drug subsidy 
program.
      Absent other provisions, those federal Medicaid savings 
would be accompanied by corresponding savings for the states on their 
Medicaid costs. The MMA's ``clawback'' provision, however, will 
recapture a substantial portion of the states' estimated drug savings, 
which CBO estimated would further reduce federal costs by $88 billion.
      Finally, CBO estimated that some federal retirees will 
enroll in a Medicare drug plan; as a result, a portion of their 
prescription drug costs will be indirectly shifted to Medicare (and is 
included in the figures provided above). Based on that impact, as well 
as small effects on other federal programs that pay for prescription 
drugs, CBO estimated that the Medicare law's drug benefit provisions 
would reduce mandatory federal spending by about $2 billion.
Costs for Medicare Advantage Plans
    The MMA's provisions affecting private health plans under Medicare 
are also quite complicated, so again I will attempt to summarize the 
key features that affected their scoring. Currently, those health 
plans--which are primarily health maintenance organizations (HMOs) 
participating on a county-by-county basis--are required to provide Part 
A and Part B benefits and are paid on the basis of a statutory formula. 
To the extent that Medicare's payments exceed their costs of providing 
the required benefits, plans must presently give the difference to 
beneficiaries through some combination of additional benefits and 
premium rebates. To the extent that plans choose to provide premium 
rebates, the Medicare program retains 20 percent of the difference and 
the beneficiaries receive the other 80 percent, but if plans provide 
additional benefits, no such ``tax'' is imposed. As a result, very few 
plans offered premium rebates in 2003 (the first year that such rebates 
were permitted) or 2004. The past few years have also seen a number of 
plans withdraw from the program, reduce their service areas, or lose 
enrollees; in part that has occurred because plan costs have grown more 
rapidly than payment rates, making it more difficult for plans that 
remain in the program to attract enrollees by offering extra benefits. 
Prior to passage of the MMA, CBO projected that the share of Medicare 
beneficiaries in private plans would decline from the current level of 
13 percent to about 8 percent.
    For 2004 and 2005, the MMA largely retained the existing payment 
system for private health plans but increased the payment rates (and 
changed the name of the program from Medicare+Choice to Medicare 
Advantage). Starting in 2006, however, a revised system will be 
instituted. The statutory payment rate will be relabeled as the 
``benchmark'' amount, and plans will submit bids that reflect the costs 
they expect to incur in providing Part A and Part B benefits. Medicare 
will pay plans their bids plus 75 percent of the amount by which the 
benchmark exceeds the bid. Plans must then return that 75 percent to 
beneficiaries, either as additional benefits or as a rebate on their 
Part B or Part D premium. Thus, the essential change from current 
requirements is that--instead of retaining part (20 percent) of the 
difference between a plan's cost and the statutory payment rate only if 
the plan returns that difference to beneficiaries as a premium rebate--
Medicare will retain part (25 percent) of that difference regardless of 
whether the plan provides additional benefits or premium rebates.
    The MMA also established new rules for preferred provider 
organizations (PPOs) that operate on a regionwide level; and to 
encourage participation by those plans, it set up a stabilization fund 
with an initial balance of $10 billion. Such plans could be offered 
starting in 2006, and they will generally be subject to the same rules 
as county-based plans (though the benchmarks for the regional PPOs will 
be a weighted average of the benchmarks for county-based plans in their 
region and the bids submitted by the PPOs). Starting in 2010, the MMA 
also authorized ``comparative cost adjustment'' demonstration projects 
in up to six areas of the country; under those demonstrations, the bids 
of private plans would affect not only the benchmark for the area but 
also the Part B premium for enrollees in the traditional fee-for-
service program in that area.
    In analyzing proposals regarding private health plans in Medicare, 
CBO focused on three factors: the costs those plans would incur, the 
payments Medicare would make, and the resulting incentives for 
beneficiaries to enroll--all of which were compared with the status 
quo. To estimate private plan costs for providing Medicare benefits, 
CBO examined data on the experience of existing HMOs in Medicare; data 
comparing payments to doctors and hospitals by private plans and by the 
Medicare FFS program; and data comparing commercial HMO and PPO costs. 
One important consideration was that, even though Medicare payment 
rates in many areas exceed the local average cost of providing benefits 
in the traditional FFS program, private plans that must negotiate fees 
with their providers are not offered in those areas. It thus seemed 
reasonable to infer that, if such plans were made available in those 
areas, their costs would probably equal or exceed both the Medicare 
payment rate and local FFS costs. CBO also projected that private plan 
costs would continue to grow somewhat more quickly than costs in the 
traditional FFS program for the next few years before converging to the 
same growth rate.
    The upshot of CBO's analysis of the MMA's provisions was that 
regional PPOs would generally have difficulty providing Medicare 
benefits at costs that were much less than the benchmarks to which they 
would be compared. Correspondingly, even in the areas where those plans 
might become available, beneficiaries would not see substantial premium 
rebates or extra benefits and thus would have only limited incentives 
to leave FFS programs and enroll in PPOs. While there would also be 
some additional enrollment in county-based plans because of the 
immediate increase in payment rates (and the correspondingly higher 
benchmarks after 2005), CBO estimated only a small increase in the 
overall share of beneficiaries enrolled in private plans as a result of 
the MMA's provisions--and did not ultimately distinguish whether those 
additional enrollees would be in county-based plans or regional PPOs. 
CBO's final cost estimate reflected not only the additional costs of 
those new enrollees (relative to their costs in the FFS program), but 
also the net costs of the higher payment rates and the revised payment 
system for beneficiaries already enrolled in private plans.
    The $14 billion cost estimate for the MMA's title II provisions 
included several other components as well. CBO projected modest savings 
($0.3 billion through 2013) from the comparative cost adjustment 
demonstration and offsetting modest costs for a set of other provisions 
(primarily affecting specific types of plans or payments). More 
significantly, CBO also assumed that the sums available in the PPO 
stabilization fund would be spent but did not explicitly model the 
effect of that spending on beneficiary enrollment (since in that case, 
estimated spending would not be a function of enrollment).\4\
---------------------------------------------------------------------------
    \4\ Recently, CBO increased its ultimate projection of private plan 
enrollment from 9 percent to about 13 percent of the Medicare 
population, but that change has only a negligible effect on federal 
costs because most of the additional enrollment is projected to occur 
in areas where the payment rates and benchmarks are based on the local 
average of costs in the FFS program; in those instances, having an 
enrollee switch from the FFS program into a private plan does not 
substantially change federal outlays.
---------------------------------------------------------------------------
Comparison with the Administration's Cost Estimate
    Having laid out the basis for CBO's estimate, I can now discuss how 
it compares with the Administration's estimate. While the differences 
between those estimates are of obvious interest to Members, they should 
not overshadow similarities in some of the assumptions underlying our 
respective projections. Regarding the drug benefit, both CBO and the 
Administration have assumed that private drug plans will be generally 
available to provide benefits starting in 2006. We have both assumed 
broad enrollment by beneficiaries in the basic drug benefit and lower 
take-up rates for the low-income subsidies. We have both assumed that a 
substantial minority of retirees who now have drug coverage through a 
former employer will see that employer choose not to supplement the 
basic Medicare benefit. And we have both assumed that the drug benefit 
and clawback provision will generate significant offsetting federal 
savings via Medicaid. Nevertheless, because the aggregate level of 
projected drug spending by Medicare beneficiaries is so large--$1.6 
trillion between 2006 and 2013, according to CBO estimates--seemingly 
small differences in the magnitude of those assumptions can translate 
into large dollar discrepancies.
    Table 4 summarizes CBO's understanding of the differences in 
outlays between the two cost estimates for the Medicare Modernization 
Act. As you know, the Administration estimated that the MMA would 
increase net federal outlays for mandatory spending by $534 billion for 
fiscal years 2004 to 2013, a difference of $139 billion from CBO's 
estimate for that period. The Administration's estimate is $101 billion 
higher than CBO's for the drug benefit provisions, and $32 billion 
higher for the Medicare Advantage provisions. While the estimates for 
other provisions may have differed somewhat, the net difference in 
mandatory outlays for those provisions (about $6 billion) is relatively 
small.
    As shown in Table 4, the difference of $101 billion in estimates 
for the drug benefit has three major components. First, about one-third 
of that discrepancy ($32 billion) is due to differences in our 
estimates of total payments to Medicare drug plans for the basic drug 
benefit (net of beneficiary premiums) and payments to qualified 
employer and union plans. CBO estimates that those net payments will 
sum to $448 billion, while the Administration's estimate (excluding 
intragovernmental transfers) is $479 billion. (The difference between 
those numbers rounds to $32 billion.)
    One source of that difference is that the Administration assumed 
higher overall participation in the drug benefit--specifically, that 94 
percent of all Medicare beneficiaries would enroll. The discrepancy 
with CBO's estimate of 87 percent participation would appear to account 
for the entire $32 billion difference in costs, but the 
Administration's participation figures include a number of federal 
retirees who would generate intragovernmental transfers that would not 
count as outlays (for example, from Medicare to FEHB). If those 
participants are subtracted to get a more comparable measure of 
enrollment, the difference between CBO's estimated participation rate 
and the Administration's is smaller--about 3 percent to 4 percent. The 
principal difference that remains appears to involve Medicare enrollees 
who decline Part B but are not active workers; CBO assumed they would 
generally not participate in Part D (for the reasons already outlined), 
but the Administration assumed that they would enroll.

                Table 4: Differences Between Cost Estimates for the Medicare  Modernization  Act
                                              (Billions of dollars)
----------------------------------------------------------------------------------------------------------------
                                                                         Mandatory Outlays, FY 2004-2013
                                                                ------------------------------------------------
                                                                                                    Difference
                                                                 Administration   CBO Estimate   (Administration
                                                                    Estimate                        minus CBO)
----------------------------------------------------------------------------------------------------------------
Drug Benefit Provisions
----------------------------------------------------------------------------------------------------------------
  Net payments to drug plans and employer/union subsidies                  479a             448               32
----------------------------------------------------------------------------------------------------------------
  Low-income subsidies                                                     239              192               47
----------------------------------------------------------------------------------------------------------------
  Federal Medicaid spending                                               -123             -142               18
----------------------------------------------------------------------------------------------------------------
  Other provisions and effects                                             -85              -89                4
----------------------------------------------------------------------------------------------------------------
  Subtotal                                                                 510              409              101
----------------------------------------------------------------------------------------------------------------
Medicare Advantage Provisions                                               46               14               32
----------------------------------------------------------------------------------------------------------------
Net, All Other Provisions                                                  -23              -28                6
----------------------------------------------------------------------------------------------------------------
  Total                                                                    534              395              139
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.
Note: Numbers may not add up to totals because of rounding. The figures shown here exclude effects of federal
  revenues, which in combination with the impact on outlays determine the total effect of the legislation on
  federal budget deficits or surpluses.
a Figures shown here for the Administration's estimate exclude $16 billion in intragovernmental transfers from
  Medicare to federal employers, which do not count as outlays.

    The Administration also estimated that per capita costs for the 
basic drug benefit would be about 4 percent higher than CBO's estimates 
throughout the period. As my testimony has indicated, costs per capita 
reflect a variety of provisions and assumptions about the effects of 
those provisions, so it is difficult to isolate any single factor as 
the basis for that difference--but CBO's understanding is that the 
Administration projected slightly lower benefit costs and slightly 
higher administrative costs. Overall, the differences in number of 
participants and costs per capita each account for about half of the 
$32 billion difference in the estimated costs of providing the basic 
drug benefit.
    The second major difference regarding the drug benefit involves the 
estimates of participation and costs for the low-income subsidies, 
which account for nearly half ($47 billion) of the overall difference. 
Here too it appears that the Administration assumed higher take-up of 
the subsidies, as well as modestly higher costs per participant. 
Specifically, the Administration estimated that the number of enrollees 
in the subsidy program after 2009 would be 13 percent to 15 percent 
higher than CBO projected. The difference is even larger (in percentage 
terms) for the initial years because CBO assumed that participation 
would increase gradually to its ultimate level while the Administration 
used a roughly constant take-up rate. The Administration's estimate of 
per capita costs is also higher than CBO's, but that disparity shrinks 
from about 7 percent to 10 percent initially to about 4 percent by 
2013.
    The third major difference regarding the drug benefit involves 
savings to Medicaid, which the Administration estimated would be $18 
billion lower than CBO's estimate. On net, that difference appears to 
reflect diverging estimates of what federal Medicaid spending on 
prescription drugs for Medicare beneficiaries would have been under 
prior law. In particular, CBO's baseline estimate included $18 billion 
in federal spending on waiver programs that provide limited drug 
coverage to low-income Medicare beneficiaries. At the same time, CBO 
assumed that federal spending on those waiver programs would end once 
the Part D benefit was implemented--both because Medicaid drug coverage 
for many of those enrollees would effectively be replaced by the 
Medicare benefit and low-income subsidies and because Medicaid would 
generally be precluded from using federal funds to supplement those 
drug benefits. Consequently, CBO's estimate of the federal savings 
resulting from the MMA was $18 billion higher than the Administration's 
estimate.
    The other major component of the $139 billion difference in cost 
estimates--payments to Medicare Advantage plans under title II of the 
MMA--accounts for $32 billion of the overall difference. That is, CBO 
estimated that those provisions would increase federal outlays by $14 
billion over the period, while the Administration projected a $46 
billion increase. As CBO understands it, the basis for the discrepancy 
lies primarily in differing estimates of the per capita costs that 
regional PPO plans would incur in providing Medicare's Part A and Part 
B benefits. The Administration's estimates appear to be based at least 
in part on a recent PPO demonstration project, in which a number of PPO 
plans offered to provide those benefits at costs close to the average 
levels seen in the FFS program for their area. CBO also examined that 
demonstration project but concluded that those plans would not be 
indicative of PPO costs generally, in part because the plans most 
likely chose to participate in areas where their costs were most 
competitive (and not in areas where their relative costs would have 
been higher). The fact that those plans were offered almost exclusively 
in areas already served by Medicare+Choice plans that have provider 
networks also suggested to CBO that their experience might not apply in 
areas where such plans and provider networks were less prevalent.
    It may seem counterintuitive that CBO estimated higher per capita 
costs for PPOs but lower overall federal costs for the legislation--and 
vice versa for the Administration--but that paradox reflects 
interactions between those costs, incentives for beneficiaries to 
enroll, and federal payments under the MMA. As we understand it, the 
Administration projected that PPO costs in many areas would be 
noticeably lower than the benchmarks against which those costs would be 
measured. Beneficiaries, who would receive three-fourths of the 
difference in the form of premium rebates and extra benefits, would 
thus have a strong incentive to enroll in those plans. As a result, the 
Administration estimated that total enrollment in private plans 
(regional and county-based plans combined) would grow quickly after 
2005 and reach 32 percent of the Medicare population by 2013.
    At the same time, the Administration apparently estimated that 
those benchmarks would, on average, exceed the local costs of providing 
services in the traditional FFS program (which is the baseline against 
which costs for new enrollees must be measured). Correspondingly, the 
Administration projected that Medicare's total payments to the PPOs--
including the rebates for beneficiaries who enrolled in them--would, on 
average, exceed the costs in the FFS program, so that federal spending 
would rise as beneficiaries switched from the FFS program into regional 
PPOs. By contrast, CBO's estimate that regional PPOs would have higher 
per capita costs led the agency to conclude that those plans are not 
likely to be widely available and would have costs close to the 
benchmarks in those areas where they were offered. Consequently, CBO 
projected that beneficiary enrollment would be limited and that--even 
though those enrollees would increase federal costs somewhat--the 
impact on federal spending would primarily be determined by use of the 
PPO stabilization fund.
Conclusion
    I hope that this explanation of the assumptions and methods used in 
generating CBO's cost estimate--and this analysis of the differences 
between that estimate and the Administration's--have been helpful to 
the Committee. Although CBO stands behind its cost estimate and has 
chosen to respectfully disagree with some of the assumptions the 
Administration used in developing its projections, CBO also 
acknowledges that it is difficult to estimate the outcome of such 
complex legislation precisely. Throughout this process, CBO has sought 
to be as open as it could about the approach used in estimating the 
costs of various proposals, both in previous testimony and in a variety 
of published studies, cost estimates, and letters. This hearing 
represents another step in that process, and I look forward to 
answering any questions the Committee Members may have.

                                 

    Chairman THOMAS. Thank you, very much. Mr. Goss?

         STATEMENT OF STEPHEN C. GOSS, CHIEF ACTUARY, 
                 SOCIAL SECURITY ADMINISTRATION

    Mr. GOSS. Mr. Chairman, Ranking Member, Members of the 
Committee, it is a pleasure to come and speak with you today 
about the 2004 Annual Report of the Social Security Board of 
Trustees. As you know, this report is required by law to 
provide to each of you an assessment of the actuarial status of 
the Social Security Trust Funds reflecting the provisions 
specified in current law. This report has been produced and 
delivered to the Congress now for 65 straight years, starting 
in 1940. The 2004 Social Security Trustees' Report reflects the 
combined judgment of the six trustees and their staffs in the 
development of a number of assumptions that underlay the 
projections. Moreover, the selection of these assumptions 
reflects the summary, advice, and research provided by experts 
from around the world in areas of economics, demography and 
actuarial science. I have certified on the last page of this 
report that I believe the assumptions to be reasonable and that 
the methods used for the projections are sound and generally 
accepted within the actuarial profession.
    The fundamental projections of the U.S. population and 
economy produced by my office are used in the Social Security 
and Medicare Trustees' reports. These provide a solid base upon 
which projections of program specific costs and income are 
built. These projections provide a realistic picture of the 
likely future state of financing of the programs if no changes 
in law are enacted in the future. The projected financial 
status of the Social Security program is in good shape in the 
near term. Both the Old Age and Survivors Insurance and the 
Disability Insurance Trust Funds are expected to meet to the 
Trustees' short-range test of financial adequacy by a wide 
margin. In the longer term, however, the current financing of 
the Social Security program is expected to be inadequate to 
permit full payment of benefits scheduled in present law. Based 
on the Trustees' intermediate assumptions, the current annual 
excess of tax income over program costs is projected to start 
declining in 2009 and to reverse in 2018, at which time net 
redemptions of the Trust Fund assets will be needed to continue 
full payment of benefits. In 2042, these assets, or reserves, 
are expected to be exhausted and there will be only sufficient 
tax income to cover 73 percent of the scheduled benefits. All 
three of these dates and this percentage are unchanged from 
last year's report.
    New data from a wide variety of sources, improvements in 
projection methods and a lowering of the ultimate Consumer 
Price Index (CPI) annual growth rate assumption from 3 percent 
to 2.8 percent have resulted in a slight reduction in the 75-
year actuarial deficit from 1.92 to 1.89 percent of taxable 
payroll. This slight improvement is also seen in this 75-year 
open group unfunded obligation of the program, which increased 
from $3.5 trillion to $3.7 trillion, only half the amount 
expected based on the change in the valuation date alone. The 
pattern of the financial outlook is seen more readily in the 
annual estimates for the program. Lower than expected real wage 
growth for 2002 and 2003 contributed to slightly smaller 
program cash flow balances through the next 10 years compared 
to the 2003 report. However, other changes in data and methods 
resulted in a net improvement in cash flow balances for years 
after about 2045.
    The result is an annual cash flow shortfall of 5.9 percent 
of taxable payroll at the end of the 75-year period compared to 
a shortfall of 6.5 percent which was projected in the 2003 
report. This reduction in cash flow shortfalls for the latter 
half of the long-range period is responsible for the small 
improvement in the actuarial balance and the unfunded 
obligations for the period as a whole. Thus, while the annual 
financial shortfalls projected for Social Security after 2045 
are improved somewhat from last year's report, the shortfalls 
are nonetheless very large. The historically low levels of 
birth rates experienced starting in the seventies make 
inevitable the expected declines in the number of workers per 
beneficiary, and thus the projected increases in the cost of 
the program as a percentage of taxable payroll. Choices are 
clear. To strengthen Social Security and maintain solvency 
beyond 2042, additional revenue can be provided, scheduled 
benefit levels can eventually be reduced, or some combination 
of these may be selected. Again, thank you for the opportunity 
to be here with you today. I will be happy to answer any 
questions. Thank you.
    [The prepared statement of Mr. Goss follows:]
             Statement of Stephen C. Goss, Chief Actuary, 
                     Social Security Administration
    Mr. Chairman, Ranking member, and members of the Committee, it is a 
pleasure to come and speak to you today about the 2004 Annual Report of 
the Social Security Board of Trustees. As you know, this Report is 
required by law to provide to you each year an assessment of the 
actuarial status of the Social Security Trust Funds reflecting the 
provisions specified in current law. This Report has been produced and 
delivered to the Congress now for 65 straight years, starting in 1940.
    The 2004 Social Security Trustees Report reflects the combined 
judgment of the six Trustees and their staffs in the development of a 
number of assumptions that underlie the projections. Moreover, the 
selection of these assumptions reflects the summation of all of the 
advice and research of experts from around the world in the areas of 
economics, demography, and actuarial science. I have certified on the 
last page of the Report that I believe these assumptions to be 
reasonable and that the methods used for projections are sound and 
generally accepted within the actuarial profession.
    The fundamental projections of the United States population and the 
economy produced by my office are used for both the Social Security and 
Medicare Trustees Reports. These provide a solid base upon which 
projections of program-specific cost and income are built. These 
projections provide a realistic picture of the likely future state of 
financing of the programs if no changes in law are enacted in the 
future.
    The projected financial status of the Social Security program is 
good in the near term. Both the Old-Age and Survivors Insurance (OASI) 
Trust Fund and the Disability Insurance (DI) Trust Fund are expected to 
meet the Trustees short-range test of financial adequacy by a wide 
margin.
    In the longer term, however, the current financing of the Social 
Security program is expected to be inadequate to permit full payment of 
benefits scheduled in present law. Based on the Trustees intermediate 
assumptions, the current annual excess of tax income over program cost 
is projected to start declining in 2009 and to reverse in 2018, at 
which time net redemptions of Trust Fund assets will be needed to 
continue full payment of benefits. In 2042, these assets, or reserves, 
are expected to be exhausted, and there will only be sufficient tax 
income to cover 73 percent of scheduled benefits. Both of these dates, 
and this percentage, are unchanged from last year's Report.
    New data from a variety of sources, improvements of projection 
methods, and a lowering of the ultimate CPI annual-growth-rate 
assumption from 3 to 2.8 percent have resulted in a slight reduction in 
the 75-year actuarial deficit from 1.92 to 1.89 percent of taxable 
payroll. This slight improvement is also seen in the 75-year open-group 
unfunded obligation of the program which increased from $3.5 to $3.7 
Trillion, only half the amount expected based on the change in the 
valuation date alone.
    The pattern of the financial outlook is seen more readily in the 
annual estimates for the program. Lower than expected real average wage 
growth for 2002 and 2003 contributed to slightly smaller program cash-
flow balances through the next 10 years, compared to the 2003 report. 
However, other changes in data and methods resulted in a net 
improvement in cash-flow balances for years after 2045. The result is 
an annual cash-flow shortfall of 5.9 percent of taxable payroll at the 
end of the 75-year period, compared to a shortfall of 6.5 percent in 
the 2003 report. This reduction in cash-flow shortfalls for the latter 
half of the long-range period is responsible for the small improvements 
in the actuarial balance and the unfunded obligations for the period as 
a whole.
    Thus, while the annual financial shortfalls projected for Social 
Security after 2045 are improved somewhat from last year's report, the 
shortfalls are still very large. The historically low levels of birth 
rates experienced starting in the 1970's make inevitable the expected 
declines in the number of workers per beneficiary and thus the 
projected increases in the cost of the program as a percentage of the 
payroll tax base. Choices are clear. To strengthen Social Security and 
maintain solvency beyond 2042, additional revenue can be provided, 
scheduled benefit levels can eventually be reduced, or some combination 
of these may be selected.
    Again, thank you for the opportunity to be here today. I will be 
happy to attempt to answer any questions you have.

                                 
    Chairman THOMAS. Thank you, very much, Mr. Goss. Mr. 
Foster?

           STATEMENT OF RICK FOSTER, CHIEF ACTUARY, 
           CENTERS FOR MEDICARE AND MEDICAID SERVICES

    Mr. FOSTER. Chairman Thomas, Representative Rangel, 
distinguished Members of the Committee, thank you for inviting 
me to testify again about the financial outlook for the 
Medicare Program. The Medicare Modernization Act of 2003 
clearly introduces the most significant changes to the program 
since its initial or original enactment in 1965. The new 
prescription drug benefit will bring Medicare more in line with 
modern insurance coverage and medical practice, and it will 
provide a valuable new benefit for all beneficiaries who choose 
to enroll in it, especially for those with low incomes. At the 
same time, of course, the new benefit will add substantially to 
the overall cost of Medicare, we estimate by nearly one-fourth 
compared to the prior program cost initially and growing to as 
much as about one-third. I will briefly summarize the most 
important findings of the 2004 Medicare Trustees' Report and 
comment just briefly on the differences in cost estimates 
between my office and the CBO.
    You are all very familiar with the differences between the 
two parts of Medicare, HI or part A; and supplementary medical 
insurance, which now has Parts B and D in it, a number of 
differences that are well known. In particular they are 
financed in a different way by totally different methods. The 
HI is financed by a portion of the Federal Insurance 
Contribution Act and the Self-Employment Contributions Act 
payroll taxes. Those tax rates are fixed in the law and they 
cannot change without legislation. In contrast, both part B and 
Part D in the future are financed primarily by general revenues 
and beneficiary premiums. Those financing rates are adjusted 
every year by my office to match the expected cost. So, as a 
result of these different financing bases and because the 
assets cannot be interchanged, we have to evaluate the 
financial status of the HI Trust Fund and the part B and D 
accounts of the Supplementary Medical Insurance Trust Fund 
individually.
    Dr. Holtz-Eakin talked a little bit about the nature of 
projections. Let me just remind you that in our Trustees' 
Report to Congress, we project based on current law. We assume 
no changes other than what is already there in the statute. The 
projections are necessarily uncertain particularly over longer 
time horizons like 75 years. Moreover, with the new drug 
benefit, because there is no past experience to go by and only 
limited data on drug spending for Medicare beneficiaries, we 
have an even greater degree of uncertainty than usual. Despite 
these limitations in short--and long-range projections, we 
consider them useful for informing policy development. For the 
HI Trust Fund you know, based on Secretary Snow's presentation, 
that the financial status has deteriorated since the last 
report. The projected year of depletion has moved up to 2019. 
At the end of our 75-year protection period the scheduled tax 
revenues will be sufficient to cover only one-fourth of the 
projected expenditures. Only one-fourth.
    For the part B account in the Supplementary Medical 
Insurance Trust Fund the good news is, of course, that it is 
automatically in financial balance because we reset the 
financing every year. The bad news is its costs have tended to 
grow fairly quickly. For example, in the last 4 calendar years, 
the part B costs have grown at about 10 percent per year on 
average over that period. Moreover, because of the Consolidated 
Appropriations Resolution in 2003, together with higher than 
expected part B costs, we ran a fairly significant deficit in 
the Trust Fund in 2003, because the legislation came along 
after we had already set the financing. That resulted in over 
$10-billion deficit. Moreover, for this year, because of the 
Medicare Modernization Act, we again anticipate running a 
deficit with the result that we will have to raise the premium 
fairly sharply for 2005. We estimate in the Trustees' Report by 
about 17 percent.
    For the Part D account, the new drug benefit, it will be in 
financial but, again, it will have significant costs. Let me 
mention just briefly the matter concerning the CBO cost 
estimates versus ours. I am convinced I know from our end and I 
am convinced from CBO that we have both operated independently. 
We have acted independently to use the best assumptions, data 
and methods that we could to get the best possible cost 
estimate. The fact that we disagree somewhat in no way means 
that they tried to tilt their estimates or that we tried to 
tilt our estimates. It means that the future is uncertain. We 
have the highest regard for our colleagues at CBO and we value 
our occasional get-togethers for technical interchanges. Mr. 
Chairman, I pledge the Office of the Actuary's continuing 
assistance as you struggle with these financial challenges 
facing Medicare. Thank you.
    [The prepared statement of Mr. Foster follows:]
   Statement of Rick Foster, Chief Actuary, Centers for Medicare and 
                           Medicaid Services
    Chairman Thomas, Representative Rangel, distinguished Committee 
members, thank you for inviting me to testify today about the financial 
outlook for the Medicare program as shown in the newly released 2004 
annual report of the Medicare Board of Trustees. I will also provide 
information on how our cost estimates for the Medicare Prescription 
Drug, Improvement, and Modernization Act compare with those of the 
Congressional Budget Office. I welcome the opportunity to assist you in 
your efforts to ensure the future financial viability of the nation's 
second largest social insurance program--one that is a critical factor 
in the income security of our aged and disabled populations.
    The Medicare modernization act (MMA) introduces the most 
significant changes to the program since its enactment in 1965. The new 
prescription drug benefit will bring Medicare more in line with modern 
insurance coverage and medical practice, while providing a valuable new 
benefit for all beneficiaries who choose to enroll, especially those 
with low incomes. At the same time, of course, the new drug benefit 
will add substantially to the overall cost of Medicare.
    As you know from the findings in the new Trustees Report, the 
financial outlook for the Medicare program has deteriorated 
significantly since last year's report. This change is due in part to 
the impact of the new legislation, but it also reflects other, 
unassociated developments in cost and revenue trends. The financial 
status of the Medicare trust funds must be evaluated separately for 
each fund and for each account within the funds.
    The Hospital Insurance (HI) trust fund does not meet the Trustees' 
formal test for short-range financial adequacy, which had been met in 
each of the previous 5 reports. In addition, the depletion of the HI 
trust fund, which had been projected for 2026 in last year's Trustees 
Report, is projected to now occur in 2019. Beginning in 2004, HI tax 
revenues are projected to fall increasingly short of program 
expenditures, eventually covering only one-fourth of estimated costs by 
the end of the Trustees' 75-year projection period.
    The Medicare modernization act created two separate accounts within 
the Supplementary Medical Insurance (SMI) trust fund--one for Part B, 
which continues to cover the traditional SMI services, and one for the 
new Part D, which provides subsidized access to prescription drug 
coverage. Because of the annual redetermination of financing for both 
Parts B and D, each account will remain in financial balance 
indefinitely under current law. SMI costs, however, are projected to 
continue increasing at a faster rate than the national economy and 
beneficiaries' incomes, raising concerns about the long-range cost 
implications of scheduled financing.
Background
    Roughly 41 million people were eligible for Medicare benefits in 
2003. HI, or ``Part A'' of Medicare, provides partial protection 
against the costs of inpatient hospital services, skilled nursing care, 
post-institutional home health care, and hospice care. Part B of SMI 
covers most physician services, outpatient hospital care, home health 
care not covered by HI, and a variety of other medical services such as 
diagnostic tests, durable medical equipment, and so forth. SMI Part D 
will initially provide access to prescription drug discount cards and 
transitional assistance to low-income beneficiaries. In 2006 and later, 
Part D will provide subsidized access to prescription drug insurance 
coverage as well as additional drug premium and cost-sharing subsidies 
for low-income enrollees.
    Only about 22 percent of Part A enrollees received some 
reimbursable covered services during 2003, since hospital stays and 
related care tend to be infrequent events even for the aged and 
disabled. In contrast, the vast majority of enrollees incurred 
reimbursable Part B costs because the covered services are more routine 
and the annual deductible for SMI was only $100 in 2003.
    The HI and SMI components of Medicare are financed on totally 
different bases. HI costs are met primarily through a portion of the 
FICA and SECA payroll taxes.\1\ Of the total FICA tax rate of 7.65 
percent of covered earnings, payable by employees and employers, each, 
HI receives 1.45 percent. Self-employed workers pay the combined total 
of 2.90 percent. Following the Omnibus Budget Reconciliation Act of 
1993, HI taxes are paid on total earnings in covered employment, 
without limit. Other HI income includes a portion of the income taxes 
levied on Social Security benefits, interest income on invested assets, 
and other minor sources.
---------------------------------------------------------------------------
    \1\ Federal Insurance Contributions Act and Self-Employment 
Contributions Act, respectively.
---------------------------------------------------------------------------
    SMI enrollees pay monthly premiums ($66.60 for Part B in 2004, and 
an estimated average level of $37.20 for Part D starting in 2006). For 
Part B, the monthly premiums cover about 25 percent of program costs 
with the balance paid by general revenue of the Federal government and 
a small amount of interest income. For Part D, the transitional 
assistance and prescription drug discount card costs in 2004 and 2005 
will be paid through enrollment fees and general revenues. In 2006 and 
later, the Part D costs will be met through monthly premiums, which on 
average will cover 25.5 percent of the cost of the basic coverage, with 
the balance paid by Federal general revenues, certain State transfer 
payments, and a small amount of interest income.
    The Part A tax rate is specified in the Social Security Act and is 
not scheduled to change at any time in the future under present law. 
Thus, program financing cannot be modified to match variations in 
program costs except through new legislation. In contrast, the premiums 
and general revenue financing for both Parts B and D of SMI are 
reestablished each year to match estimated program costs for the 
following year. As a result, SMI income automatically matches 
expenditures without the need for legislative adjustments.
    Each component of Medicare has its own trust fund, with financial 
oversight provided by the Board of Trustees. My discussion of 
Medicare's financial status is based on the actuarial projections 
contained in the Board's 2004 report to Congress. Such projections are 
made under three alternative sets of economic and demographic 
assumptions, to illustrate the uncertainty and possible range of 
variation of future costs, and cover both a ``short range'' period (the 
next 10 years) and a ``long range'' (the next 75 years). The 
projections are not intended as firm predictions of future costs, since 
this is clearly impossible; rather, they illustrate how the Medicare 
program would operate under a range of conditions that can reasonably 
be expected to occur. It is important to note that the results shown in 
this year's report are even more uncertain than those in past reports 
due to the changes from the MMA. In particular, the Part D projections 
are estimated without any actual past program experience. The 
projections shown in this testimony are based on the Trustees' 
``intermediate'' set of assumptions.
Short-range financial outlook for Hospital Insurance
    Chart 1 shows HI expenditures versus income since 1990 and 
projections through 2013. For most of the program's history, income and 
expenditures have been very close together, illustrating the pay-as-
you-go nature of HI financing. The taxes collected each year have been 
roughly sufficient to cover that year's costs. Surplus revenues are 
invested in special Treasury securities--in effect, lending the cash to 
the rest of the Federal government, to be repaid with interest at a 
specified future date or when needed to meet expenditures.

                  Chart 1--HI expenditures and income
                             (In billions)
[GRAPHIC] [TIFF OMITTED] 23797A.002

    During 1990-97, HI costs increased at a faster rate than HI income. 
Expenditures exceeded income by a total of $17.2 billion in 1995-97. 
The Medicare provisions in the Balanced Budget Act of 1997 were 
designed to help address this situation. As indicated in Chart 1, these 
changes--together with subsequent low general and medical inflation and 
increased efforts to address fraud and abuse in the Medicare program--
resulted in a decline in Part A expenditures during 1998-2000 and trust 
fund surpluses totaling $61.8 billion over this period. After 2000, 
Part A expenditures and income converged slightly, as the Balanced 
Budget Refinement Act and the Benefit Improvement and Protection Act 
increased Part A expenditures and the 2001 economic recession resulted 
in lower payroll tax income for Part A.
    Beginning in 2004, the Medicare modernization act is also estimated 
to increase Part A expenditures, through higher payments to rural 
hospitals and to private Medicare Advantage health plans. Total HI 
income, including interest earnings, is expected to slightly exceed 
total expenditures in 2004 through 2009. (HI tax revenues alone are 
estimated to fall short of total expenditures beginning this year.) The 
slightly faster projected growth trend in outlays would result in trust 
fund deficits starting in 2010 and later. Note that even relatively 
small changes in growth trends for either income or expenditures could 
have a very significant impact on the projected difference between 
these cash flows. In particular, the onset of deficits in the HI trust 
fund could easily occur several years earlier or later than this 
intermediate projection.
    The Board of Trustees has recommended maintaining HI assets equal 
to at least one year's expenditures as a contingency reserve. As 
indicated in Chart 2, HI assets at the beginning of 2004 represented 
about 152 percent of estimated expenditures for the year. Future asset 
growth, reflecting the diminishing difference between income and 
expenditures described above, is projected to be significantly slower 
than expenditure growth in 2004 and later. After 2009, as assets are 
drawn down to cover the annual deficits, the trust fund balance would 
decline and would be exhausted in 2019 under the Trustees' intermediate 
assumptions.

                     Chart 2--HI trust fund assets
   (Assets at beginning of year as percentage of annual expenditures)
[GRAPHIC] [TIFF OMITTED] 23797A.003

    The depletion date estimated in the 2004 Trustees Report represents 
a significant deterioration of the trust fund financial condition 
compared to the estimate in last year's report (2026). About 2 years of 
the total 7-year difference are attributable to the higher Part A costs 
under the Medicare modernization act. Other factors contributing to the 
closer exhaustion date for HI are higher incurred spending and lower 
tax revenues in 2003 than previously estimated (2 years), hospital 
assumption adjustments to better reflect recent historical experience 
(1.5 years), improved data on the health status of beneficiaries in 
private health plans (1 year), and model refinements for certain 
hospital payments (0.5 year).
Long-range financial outlook for Hospital Insurance
    The interpretation of dollar amounts through time is very difficult 
over extremely long periods like the 75-year projection period used in 
the Trustees Reports. For this reason, long-range tax income and 
expenditures are expressed as a percentage of the total amount of wages 
and self-employment income subject to the HI payroll tax (referred to 
as ``taxable payroll''). The results are termed the ``income rate'' and 
``cost rate,'' respectively. Projected long-range income and cost rates 
are shown in Chart 3 for the HI program.
    Past income rates have generally followed program costs closely, 
rising in a step-wise fashion as the payroll tax rates were adjusted by 
Congress. Income rate growth in the future is minimal, due to the fixed 
tax rates specified in current law. Trust fund revenue from the 
taxation of Social Security benefits increases gradually, because the 
income thresholds specified in the Internal Revenue Code are not 
indexed. Over time, an increasing proportion of Social Security 
beneficiaries will incur income taxes on their benefit payments.

 Chart 3--Long-range HI income and costs under intermediate assumptions
                  (as a percentage of taxable payroll)
[GRAPHIC] [TIFF OMITTED] 23797A.004

    Past HI cost rates have generally increased over time but have 
periodically declined abruptly as the result of legislation to expand 
HI coverage to additional categories of workers, raise (or eliminate) 
the maximum taxable wage base, introduce new payment systems such as 
the inpatient prospective payment system, etc. Cost rates decreased 
significantly in 1998-2000 as a result of the Balanced Budget Act 
provisions together with strong economic growth. After 2000, however, 
cost rates increased, partly as a result of the Balanced Budget 
Refinement Act and the Benefit Improvement and Protection Act. After 
2003, cost rates are again expected to increase as the Medicare 
modernization act is implemented, and to accelerate significantly as 
the baby boom generation enrolls in Medicare, beginning in about 2010. 
By the end of the 75-year period, scheduled tax income would cover only 
about one-fourth of projected expenditures.
    The average value of the financing shortfall over the next 75 
years--known as the actuarial deficit--is 3.12 percent of taxable 
payroll. For illustration, this deficit could be closed by an immediate 
increase of 1.56 percentage points in the HI payroll tax rate, payable 
by employees and employers, each. If, instead, no changes were made 
until the year of asset exhaustion, then the HI payroll tax rate would 
require an increase of about 2.15 percent, payable by employees and 
employers, each. Note, however, that such changes would only correct 
the deficit ``on average.'' Initially, HI revenue would be 
significantly in excess of expenditures, but by the end of the period, 
only about one-third of the projected annual deficit would be 
eliminated. The long-range deficit could also be eliminated by many 
other approaches involving revenue increases and/or expenditure 
reductions, but its magnitude poses a very daunting challenge to policy 
makers.
    The effect of the baby boom generation on Medicare and Social 
Security is relatively well known, having been discussed at some length 
for the last 30 years. Basically, by the time the baby boom cohorts 
have enrolled in Medicare, there will be nearly twice as many HI 
beneficiaries as there are today, but the number of covered workers 
will have increased by only about 20 percent. When the HI program 
began, there were 4.5 workers in covered employment for every HI 
beneficiary. As shown in Chart 4, this ratio was nearly 4.0 workers per 
beneficiary in 2003. When the baby boom joins Medicare, the number of 
beneficiaries will increase more rapidly than the labor force, 
resulting in a decline in this ratio to about 2.4 in 2030 and 2.0 by 
2078 under the intermediate projections. Other things being equal, 
there would be a corresponding increase in HI costs as a percentage of 
taxable payroll.
    There are other demographic effects beyond those attributable to 
the varying number of births in past years. In particular, life 
expectancy has improved substantially in the U.S. over time and is 
projected to continue doing so. The average remaining life expectancy 
for 65-year-olds increased from 12.4 years in 1935 to 17.5 years 
currently, with an estimated further increase to about 22 years at the 
end of the long-range projection period. Medicare costs are also 
sensitive to the age distribution of beneficiaries. Older persons incur 
substantially larger costs for medical care, on average, than younger 
persons. Thus, as the beneficiary population ages over time they will 
move into higher-utilization age groups, thereby adding to the 
financial pressures on the Medicare program.

                  Chart 4--Workers per HI beneficiary
[GRAPHIC] [TIFF OMITTED] 23797A.005

Financial outlook for Supplementary Medical Insurance
    The financial outlook for SMI is very different than for HI, 
although rapid expenditure growth is a serious issue for both 
components of Medicare. The Medicare modernization act established a 
separate account within the SMI trust fund to handle transactions for 
the new Medicare drug benefit. Because there is no authority to 
transfer assets between the new Part D account and the existing Part B 
account, it is necessary to evaluate each account's financial adequacy 
separately.
    Chart 5 presents estimates of the short-range outlook for Part B. 
In contrast to the HI program, the income and expenditure curves for 
Part B are nearly indistinguishable in the future. As noted previously, 
Part B premiums and general revenue income are reestablished annually 
to match expected program costs for the following year. Thus, the 
program will automatically be in financial balance, regardless of 
future program cost trends.
    As shown in Chart 5, however, Part B expenditures have exceeded 
income in recent years. In particular, in 2003 the Consolidated 
Appropriations Resolution increased payments to physicians after the 
Part B financing rates had been set for 2003. For 2004, similarly, the 
Medicare modernization act increased physician and certain other Part B 
expenditures after the financing rates had been set for the year. These 
legislative changes, together with stronger than expected expenditure 
growth, have decreased Part B assets below levels considered adequate 
for contingency purposes. To restore balance between Part B income and 
expenditures, and to rebuild the Part B account assets to a more 
adequate level, the monthly Part B premium rate and the associated 
general revenue payments will have to be increased substantially for 
2005.

              Chart 5--SMI Part B expenditures and income
                             (In billions)
[GRAPHIC] [TIFF OMITTED] 23797A.006

    It should be noted that the projected Part B expenditures shown in 
the 2004 Trustees Report are unrealistically low, due to the structure 
of physician payments under current law. Future physician payment 
increases must be adjusted downward if cumulative past actual physician 
spending exceeds a statutory target. Prior to the MMA, past spending 
was already above the target level. The MMA raised the physician fee 
updates for 2004 and 2005, but without raising the target. Together, 
these factors yield projected physician updates of about--5 percent for 
7 consecutive years, beginning in 2006. Multiple years of significant 
reductions in physician payments per service are very unlikely to occur 
before legislative changes intervene, but these payment reductions are 
required under the current law payment system and are reflected in the 
Part B projections.
    Beneficiaries will obtain the new Part D prescription drug benefit 
by voluntarily purchasing insurance policies from stand-alone companies 
or through private Medicare Advantage health plans. The costs of these 
plans will be heavily subsidized by Medicare through a combination of 
direct premium subsidies and reinsurance payments. Medicare will also 
provide further support on behalf of low-income beneficiaries and a 
special subsidy to employers who provide qualifying drug coverage to 
their Medicare-eligible retirees. The financial risk associated with 
the private drug plans will be shared between the plan and Medicare. 
Medicare's cost for the various drug subsidies will be financed 
primarily from general revenues. A declining portion of the costs 
associated with beneficiaries who also qualify for full Medicaid 
benefits will be financed through special payments from State 
governments.
    For the Part D program, the financial operations in 2004 and 2005 
relate only to the prescription drug discount card and low-income 
transitional assistance. Since the general revenue subsidy for this 
benefit is expected to be drawn daily, no financial imbalance is 
likely. After 2005, when the Medicare prescription drug coverage 
begins, Part D income and outgo are expected to remain in balance as a 
result of annual adjustments of premium and general revenue income to 
match costs.
    Chart 6 shows projected long-range SMI expenditures and premium 
income as a percentage of GDP. Under present law, Part B beneficiary 
premiums will continue to cover approximately 25 percent of total Part 
B costs, with the balance drawn from general revenues. Similarly, Part 
D beneficiary premiums are designed to cover 25.5 percent of the basic 
Part D benefit, on average, with the balance paid by general revenues 
and State transfers. SMI expenditures are projected to increase at a 
significantly faster rate than GDP, for largely the same reasons 
underlying HI cost growth. For the past 10 years, prescription drug 
spending has been the fastest growing major health sector. Consistent 
with these recent trends, the Medicare prescription drug spending under 
Part D is projected to initially grow faster than either Part A or Part 
B.

     Chart 6--SMI expenditures and premiums as a percentage of GDP
[GRAPHIC] [TIFF OMITTED] 23797A.007

    Although SMI is automatically in financial balance, the program's 
continuing rapid growth in expenditures places an increasing burden on 
beneficiaries and the Federal budget. In 2010, for example, a 
representative beneficiary's Part B and D premiums would require an 
estimated 13 percent of his or her Social Security benefit, and another 
23 percent would be needed to cover average deductible and coinsurance 
expenditures for the year. By 2070, about 30 percent of a typical 
Social Security benefit would need to be withheld to pay the Part B and 
Part D premiums and about 54 percent would be required for copayment 
costs. Similarly, Part B and D general revenues in fiscal year 2010 are 
estimated to equal 19 percent of the personal and corporate Federal 
income taxes that would be collected in that year, if such taxes are 
set at their long-term, past average level, relative to the national 
economy. Under the same assumption, projected Part B and D general 
revenue financing in 2070 would represent over 50 percent of total 
income taxes.
Combined HI and SMI expenditures
    The financial status of the Medicare program is appropriately 
evaluated for each trust fund separately, as summarized in the 
preceding sections. By law, each fund is a distinct financial entity, 
and the nature and sources of financing are very different between the 
two funds. This distinction, however, frequently causes greater 
attention to the HI trust fund--and especially its projected year of 
asset depletion--and less attention to SMI, which does not face the 
prospect of depletion. It is important to consider the total cost of 
the Medicare program and its overall sources of financing, as shown in 
Chart 7. Interest income is excluded since, under present law, it would 
not be a significant part of program financing in the long range.

Chart 7--Medicare expenditures and sources of income as a percentage of 
                                  GDP
[GRAPHIC] [TIFF OMITTED] 23797A.008

    Combined HI and SMI expenditures are projected to increase from 2.6 
percent of GDP in 2003 to about 13.8 percent in 2078, based on the 
Trustees' intermediate set of assumptions. The addition of Part D is 
expected to increase total Medicare costs by nearly one-fourth in 2006. 
In past years, total income from HI payroll taxes, income taxes on 
Social Security benefits, HI and SMI beneficiary premiums, and SMI 
general revenues was very close to total expenditures. Beginning in 
2004, overall expenditures are expected to exceed aggregate non-
interest revenues, with the growing difference arising from the 
projected imbalance between HI tax income and expenditures--throughout 
this period, SMI revenues would continue to approximately match SMI 
expenditures.
    Over time, SMI premiums and general revenues would continue to grow 
rapidly, since they would keep pace with SMI expenditure growth under 
present law. HI payroll taxes are not projected to increase as a share 
of GDP, primarily because no further increases in the tax rates are 
scheduled under present law. Thus, as HI sources of revenue become 
increasingly inadequate to cover HI costs, SMI premiums and general 
revenues would represent a growing share of total Medicare income. With 
the implementation of the Part D drug benefit in 2006, general revenues 
will become the largest source of Medicare financing. The difference 
between total Medicare outlays and ``dedicated financing sources'' \2\ 
is projected to first reach 45 percent of outlays in 2012.
---------------------------------------------------------------------------
    \2\ Payroll taxes, income taxes on Social Security benefits, 
premiums, and Part D State payments.
---------------------------------------------------------------------------
Conclusions
    In their 2004 report to Congress, the Board of Trustees notes the 
significant deterioration in the financial outlook for Medicare that 
has come about as a result of the modernization legislation, higher 
spending, and lower HI payroll tax revenue. The Trustees emphasize the 
continuing financial pressures facing Medicare and urge the nation's 
policy makers to take steps to address these concerns. They also argue 
that consideration of further reforms should occur in the relatively 
near future, since the earlier solutions are enacted, the more flexible 
and gradual they can be. Finally, the Trustees note that early action 
increases the time available for affected individuals and 
organizations--including health care providers, beneficiaries, and 
taxpayers--to adjust their expectations.
    I concur with the Trustees' assessment and pledge the Office of the 
Actuary's continuing assistance to the joint effort by the 
Administration and Congress to determine effective solutions to the 
financial problems facing the Medicare program. I would be happy to 
answer any questions you might have on Medicare's financial issues.

                                Appendix

  Summary of Differences Between OACT and CBO Cost Estimates for the 
 Medicare Prescription Drug, Improvement, and Modernization Act of 2003

    The Office of the Actuary in the Centers for Medicare & Medicaid 
Services has estimated that the Medicare modernization act would 
increase net Federal costs by a total of $534 billion through fiscal 
year 2013.\1\ The corresponding estimate by the Congressional Budget 
Office is $395 billion. OACT and CBO have independently estimated the 
cost of the modernization act using the best data, assumptions, and 
methods that each organization could develop. The following points 
summarize the nature of the differences in the estimates.
---------------------------------------------------------------------------
    \1\ This estimate excludes Federal administrative costs, other than 
the $1.5 billion authorized by section 1015 of the act, and the impact 
on social insurance payroll taxes and general income taxes. An 
additional Medicare expenditure of $16 billion through 2013 would be 
made for employer drug subsidy payments to Federal employers.

      The estimates differ principally because the future is 
uncertain, and this uncertainty is reflected in somewhat different 
assumptions regarding the numerous cost and behavioral factors that 
will affect actual future costs. In this regard, the difference in 
estimates is a useful reminder of the inherent uncertainty and a rough 
indication of the sensitivity of future costs to the underlying cost 
factors.
      Of the total difference of $139 billion between the 
estimates, approximately $100 billion relates to Title I of the act, 
the Medicare prescription drug program:
          OACT estimates that about 94 percent of all Medicare 
        beneficiaries would enroll in (or otherwise benefit from) the 
        Medicare drug benefit, compared to 87 percent for CBO,\2\ and 
        we also estimate a slightly higher average, per-beneficiary 
        value for the standard drug benefit. These factors account for 
        $32 billion of the total difference.
---------------------------------------------------------------------------
    \2\ Beneficiaries in employer-sponsored retiree health benefit 
programs are included in both percentages.
---------------------------------------------------------------------------
          While OACT and CBO estimate similar numbers of 
        beneficiaries who are eligible for the low-income drug subsidy, 
        OACT estimates a significantly higher enrollment rate by these 
        individuals. In addition, our estimated average cost for the 
        low-income subsidy per beneficiary is slightly greater than 
        CBO's. Of the total difference in estimated drug costs, the 
        low-income subsidy accounts for $47 billion.
          The cost to Medicare of providing the drug benefit 
        would be partially offset by net Federal savings for Medicaid. 
        (Federal Medicaid drug expenditures for Medicare beneficiaries 
        would be eliminated, but other Federal Medicaid costs would 
        increase somewhat; as beneficiaries enroll for the Medicare 
        low-income drug subsidy, some will be found to qualify for 
        Medicaid coverage). CBO estimates a greater degree of net 
        Federal Medicaid savings, because their prior baseline 
        projections included a rapidly growing cost for ``pharmacy 
        plus'' Medicaid waivers. In total, the CBO savings estimate is 
        $18 billion greater than OACT's.
          The remaining $3 billion of the total difference in 
        Title I estimates is due to a slightly different estimate of 
        State payments on behalf of Medicare beneficiaries who also 
        qualify for full Medicaid benefits.
      $32 billion of the remaining difference in the overall 
cost estimates is associated with Title II, the Medicare Advantage 
program. OACT's estimated costs for this title are $46 billion, versus 
CBO's estimate of $14 billion:
          CBO's estimate is based on a $10 billion cost for the 
        regional PPO stabilization fund, and $4 billion for the 
        increased MA payment rates. They estimate that about 13 percent 
        of beneficiaries will enroll in private health plans, most of 
        whom would be in local HMOs. Regional PPOs are estimated to 
        have costs somewhat in excess of the prevailing ``payment 
        benchmarks,'' with the result that few such plans could 
        participate and beneficiary enrollment would be minimal.
          OACT's estimate includes $12 billion for the 
        stabilization fund and another $34 billion due to the higher 
        payment rates starting in 2004 and the restructured payment 
        formula in 2006 and later. We estimate that HMO enrollment 
        would increase from its current level of about 12 percent to 16 
        percent and that PPO enrollment would also reach 16 percent in 
        2009 and later. The latter projection is based on estimated PPO 
        costs that are generally below the payment benchmarks, with the 
        result that beneficiaries could qualify for significant premium 
        rebates and/or additional benefits. Because these estimated PPO 
        costs typically exceed fee-for-service levels, however, 
        Medicare costs for such enrollees would be higher than under 
        prior law.
      Other differences exist between the OACT and CBO 
estimates for Titles III through IX. These differences tend to be 
smaller and are also largely offsetting (with CBO sometimes higher and 
sometimes lower than our estimates). The remaining $7 billion of the 
total difference between total estimated costs is explained by these 
factors.

    It is not uncommon for OACT and CBO to differ somewhat in their 
estimates. For example, CBO's estimated Medicare savings for the 
Balanced Budget Act of 1997 totaled about $116 billion in the first 5 
fiscal years. The corresponding OACT estimate was $152 billion. 
Similarly, the BBA savings estimates over the first 10 years were $394 
billion for CBO versus $517 billion for OACT. I believe that CBO has 
prepared competent, good-faith estimates for the Medicare modernization 
act. I prefer the assumptions and methods employed in the Office of the 
Actuary, and stand behind our own estimates, while recognizing that an 
uncertain future could prove all of us wrong.

                                 

    Chairman THOMAS. Thank you, very much. Mr. Holtz-Eakin, you 
said that you believe that yours is the single best estimate. 
My assumption is that Mr. Foster believes his is the single 
best estimate. Mr. Goss, whenever we look at the Social 
Security projections, I am always struck by the fact that you 
do not really do your single best estimate. You do a high and a 
low and an intermediary. Why don't you just do the single best 
estimate? Then you would get more questions today.
    Mr. GOSS. Well, Chairman Thomas, I was wondering about the 
fact that I am sitting in the middle here.
    Chairman THOMAS. Purely by accident.
    Mr. GOSS. I would say that for the Social Security 
Trustees' report you are exactly right, we do produce an 
intermediate protection which is generally characterized as the 
Trustees' best estimate based on their best assumptions for the 
future.
    Chairman THOMAS. You bracket it.
    Mr. GOSS. We do bracket it with a high and a low cost 
estimates. In addition we have, in the last 2 years, also 
provided a stochastic range. I do believe that the Medicare 
report does also include a high and low cost estimate.
    Chairman THOMAS. Yes, it does, in the long-term because of 
the uncertainties. I do find it a little bit interesting that 
we have what I would guess is the high and the low estimate for 
this particular piece of legislation, and that it is probably 
most accurate to look at it as a range since neither one is 
going to be correct. Mr. Holtz-Eakin believes his is the single 
best estimate. Again, it is not a beauty contest. We are not 
choosing Mr. Holtz-Eakin over Mr. Foster for reasons that are 
not grounded in law. The Congressional Budget Act (P.L. 93-
344), section 308, says that the CBO is the official 
scorekeeper and, in fact, Committees are required to include a 
CBO estimate with each bill reported.
    Oftentimes, though, in the very difficult areas, and I want 
to underscore how difficult it has been for any actuary to 
attempt to make estimates in an area for which we have had no 
experience other than previous bills that failed and our re-
examination of our previous estimates, deciding that they were 
not as good as we thought they were when they were issued. So, 
that is a growth curve and we have moved forward. Oftentimes 
you will hear from me or other Members, would you two please 
get together and talk to each other to see if we can narrow the 
differences between the estimates, not because we are trying to 
affect the outcome but because it is very difficult when there 
is a significant difference for the same proposal from two 
professional groups. It makes it very difficult.
    If we are forced to choose, the law tells us very clearly 
that Mr. Holtz-Eakin wins. That is the law. That section 402 of 
the Congressional Budget Act requires estimates for bills 
reported by Committee. I think another point that needs to be 
underscored in this dynamic is that not only piece-by-piece do 
we need provisions scored by the CBO, but we need a complete 
estimate of the legislation passed by the Committee. That does 
not mean it is not going to change between Committee action and 
the floor, between the floor and going to conference, or coming 
out of conference. What the CBO does is constantly update the 
estimates. Mr. Foster, when were you able to provide a 
comprehensive, complete analysis of the legislation that was 
passed?
    Mr. FOSTER. For the total package, we were not able to 
complete those estimates in their entirety until December 23rd.
    Chairman THOMAS. Why were you not able to do that until 
late in December?
    Mr. FOSTER. The complexity of the Medicare Advantage 
provisions led to very difficult estimating challenges. It 
involved trying to anticipate the behavior of plans as to 
whether to participate or not, what their cost would be, and 
then what the premiums would be and whether beneficiaries would 
be attracted to these plans or not, in which areas, and in how 
many numbers, and then the consequences for the cost to the 
program.
    Chairman THOMAS. Would part of the time lag be that you had 
to get the bill in its entirety prior to making some of those 
interactive estimates and, in fact, the total estimate?
    Mr. FOSTER. Yes.
    Chairman THOMAS. So, the statutory underpinning of CBO 
having to be on horseback with estimates that we are required 
to accept is a slightly different job than yours, because 
although we value independent assessments, we are required to 
accept, piece-by-piece, building an overall cost. The thing 
that I find most remarkable about Mr. Holtz-Eakin's estimates 
are the fact that the CBO made an estimate at the end of the 
conference and then after the bill became law when you did; 
i.e., they had the information available of the direction that 
you were going. In their professional estimation, stayed with 
their number. That, I think, is very telling and 
notwithstanding how much someone may like your numbers or 
admire your numbers or admire your professionalism, when you go 
into the differences between the two programs I think it is 
quite telling, because as in your testimony, Mr. Foster, you 
point out that the areas of discrepancy are in the most cutting 
and problematic areas that are new. For example, the 
prescription drug benefit. You estimated what percentage of the 
seniors would enroll in Part D prescription drugs?
    Mr. FOSTER. We estimated 94 percent.
    Chairman THOMAS. Ninety-four percent. Do you know what the 
enrollment for part B, Medicare Supplement, is?
    Mr. FOSTER. It is about 91 percent of all eligible people.
    Chairman THOMAS. Ninety-one percent. Up until recently 
Medicare part B was a 75 cent on the dollar subsidy if you 
enrolled in part B, and you got a 91 percent take-up rate. You 
believe, in this expensive and growingly expensive program, 94 
percent will sign up. Mr. Holtz-Eakin, was your estimate?
    Mr. HOLTZ-EAKIN. Eighty-seven percent.
    Chairman THOMAS. Okay. So, 94, 87, no big deal, right? That 
is reasonable to assume that it is going to be somewhere 
between 87 and 94. What is the difference in cost between those 
two estimates?
    Mr. HOLTZ-EAKIN. We would estimate that contributes about 
$16 billion to the difference between the CMS estimate and 
ours.
    Chairman THOMAS. I think it is about $32 billion when you 
add the total package, in terms of the high benefit, the low 
benefit, and the other structures. So, if we are beginning to 
close the difference between the estimates, the difference 
between 94 and an 87 percent take-up rate is about $32 billion. 
The other one, which I think is difficult to estimate because 
we are moving from a mixed program for seniors, we have a 
senior health program since 1965. If you are a low-income 
senior you were treated differently in many aspects of health 
care needs through the Medicaid program. We finally, because of 
the prescription drug provision, are consolidating seniors at 
the Federal level, a uniform program for seniors finally across 
the Nation, not by the State-by-State basis. I believe this is 
an area that perhaps is the single largest dollar discrepancy 
in the two assumptions; is that correct?
    Mr. FOSTER. The low-income subsidy, yes, sir.
    Chairman THOMAS. The low-income subsidy. You estimated what 
take-up rate for the low-income subsidy, Mr. Foster?
    Mr. FOSTER. Overall, among eligible individuals, in other 
words with the right income and the right assets, we had about 
75 percent. That included all of the Medicaid beneficiaries who 
we already know about, of course. So, 100 percent for them and 
a lower percentage for everybody else.
    Chairman THOMAS. What was your estimate, Mr. Holtz-Eakin?
    Mr. HOLTZ-EAKIN. About two-thirds.
    Chairman THOMAS. So, 66 percent for CBO and----
    Mr. FOSTER. Seventy-five.
    Chairman THOMAS. Seventy-five percent. You know, 66, 75 
percent, that is ballpark. How much money difference was that?
    Mr. FOSTER. A total of $47 billion.
    Chairman THOMAS. Forty-seven billion dollars on which of 
those two numbers you choose as a take-up rate for low income 
into new programs where we are just now beginning to move 
forward. Mr. Foster, would you say that one of the assumptions 
you made on those extremely high take-up rates versus the CBO 
was that if we were not going to offer this program at the 
Federal level, the Federal Government would be more aggressive 
in advertising the programs, in making people aware of the fact 
that the new Medicare was available for them? That your 
assumptions might have been tied to a fairly aggressive 
publicity campaign?
    Mr. FOSTER. We were certainly aware of CMS's intention to 
have a good beneficiary information campaign for exactly that 
sort of purpose.
    Chairman THOMAS. Did that enter into your assumptions, in 
terms of the structure, at least as a contributing factor?
    Mr. FOSTER. In part, yes.
    Chairman THOMAS. Would you have provided a lower assumption 
if you assume that any of the advertising campaigns would have 
been significantly attacked or curtailed?
    Mr. FOSTER. In the absence of advertising for the new 
benefit, we would have assumed a lower assumption.
    Chairman THOMAS. In the absence of advertising for the new 
benefit, you would have assumed a lower take-up rate?
    Mr. FOSTER. Right.
    Chairman THOMAS. One last question, and frankly this is a 
frustrating one for me and a number of other Members. We have 
looked at areas where clearly we are going to spend more money. 
We finally decided to put some money into the rural providers 
in a way we have not in the past. You folks get out your 
pencils and all those pluses go to the bottom line. It makes 
sense because we are going to be spending more money. This 
Medicare Program also was one of the most significant 
expansions of preventive and wellness programs with disease 
management. In fact, we are going to be able to provide for the 
first time, for every senior entering Medicare, a physical. Now 
my assumption is if we can get every new entry into Medicare to 
have a physical, what we are going to be able to do is pick up 
some of those diseases or tendencies or problems which wind up 
being enormous costers if ignored. The one that we have been 
warned about is obviously diabetes, which leads to kidney 
failure which leads to end-stage renal disease, very expensive, 
very costly. If we are spending the money for a physical up 
front, how much money are the taxpayer's going to save over the 
next 10 or 20 years by not having these problems go to extreme 
cases and we can intervene early? How much money do we save for 
those preventive wellness and physicals that we now have in the 
law? Mr. Holtz-Eakin?
    Mr. HOLTZ-EAKIN. In our estimate, we have reviewed the 
peer-reviewed evidence on the success of disease management 
programs in cutting overall costs and we could not find 
comprehensive evidence of large-scale savings, so those are not 
reflected in our estimate.
    Chairman THOMAS. I understand disease management. I 
mentioned preventive, wellness and physicals.
    Mr. HOLTZ-EAKIN. We do not have a specific estimate of 
savings from those programs in our estimate.
    Chairman THOMAS. Mr. Foster.
    Mr. FOSTER. I will be glad to provide the answer for the 
record but I have not personally reviewed the estimates for 
those specific provisions so I cannot tell you. I will provide 
it for the record.
    [The information is pending.]
    Chairman THOMAS. So, significant preventive wellness and 
detection measures, which cost because you say we are going to 
spend money on the program, give us no return on savings over a 
decade or two decades? That all they are, are costers. No one 
believes that. That is why they are so strongly supported and 
included in the legislation. This is just one fundamental 
reason why estimates are estimates, and anyone who tries to 
hang their hat on it will find out that there is a lot more 
vapor than substance in the projections that are made. Thank 
you very much. Mr. Rangel, you wish to question?
    Mr. RANGEL. First, let me thank you, Mr. Chairman, for 
waiving the 5-minute rule so that we can actually get to the 
bottom of some of these serious questions that you have raised, 
as well as observations. I knew that you were good, all three 
of you. I had no idea that you could determine or guesstimate 
how much money we save by having preventive medicine. If I had 
thought that you guys could do this, I would ask you how much 
productivity could we get if we had an educated work force? How 
much savings could we have if we had preventive medicine? How 
many lives could be saved? I wish I had the foresight of the 
Chairman to even frame those questions, because it sounds like 
the Democratic national programs in terms of education and 
health and all of the things that we say cost lives in 
medicine. Having not known you were that good, let me say this: 
this may appear to be an awkward time for you but I want you to 
know how much we appreciate the fact that we are able to 
attract professionals that are nonpartisan and objective in 
providing information to guide this Congress to make the 
important legislative and political decisions.
    I am so glad that you have the integrity to make certain 
that you know that when you lean toward partisanship, you do 
not just do to personal detriment, but to detriment of the 
entire professions of which you are honored members. All of you 
have served well for a number of years. Any awkwardness that 
you have today I would want you to know it is only to maintain 
your individual integrity and the integrity of your profession 
so that this Congress and Congress' that will come would know 
that we know how to get Democrats and Republican opinions, 
liberal and conservative opinions, but what we need and we have 
to maintain are objective opinions like those which you have 
given over the years. So, Mr. Foster, when, for the first time, 
did you know that your estimates of the cost of the Medicare 
prescription drug bill were different and exceeded that of the 
renowned and respected CBO?
    Mr. FOSTER. We first had estimates, Representative Rangel, 
for the drug provisions in H.R. 1 and S. 1, actually their 
predecessor packages, in early June. Our estimates for the drug 
part were significantly greater than the $400 billion target.
    Mr. RANGEL. What was your opinion, in terms of your 
estimate of the cost of the so-called drug part?
    Mr. FOSTER. Back then the early estimates for the versions 
as reported out of the Committees were in the range of $550 
billion through fiscal year 2013, just for the drug part.
    Mr. RANGEL. You knew that your estimate differed from your 
colleagues in the CBO?
    Mr. FOSTER. I have forgotten exactly when CBO released its 
first estimates but it was around the same time, I think.
    Mr. RANGEL. You knew that they were dramatically different?
    Mr. FOSTER. I might have chosen a different word than 
dramatically, but----
    Mr. RANGEL. Strike that. You knew it was different?
    Mr. FOSTER. I knew they were different, yes, sir.
    Mr. RANGEL. Now who did you share your opinion with?
    Mr. FOSTER. That first round of estimates we gave to our 
then-Administrator, Tom Scully. I believe we also sent copies 
to Doug Badger in the White House, people at OMB, other people 
at HHS.
    Mr. RANGEL. You do believe, I hope, that your 
responsibility was to give this type of information when 
requested to Members of Congress?
    Mr. FOSTER. There has been a longstanding practice 
obviously of having the Office of the Actuary provide technical 
assistance to Congress when asked. This goes back to the 
beginning of Medicare and further than that to the beginning of 
Social Security.
    Mr. RANGEL. So, this tradition meant Members of Congress, 
whether they were Republican or Democrats?
    Mr. FOSTER. Yes, sir.
    Mr. RANGEL. Did there come a time that the staff of the 
majority Republican party asked you to share your estimate as 
to the cost of this bill with them?
    Mr. FOSTER. I am sorry, could you repeat the question.
    Mr. RANGEL. Did there come a time that the staff of the 
majority party, the party of the Chairman, asked you to share 
your estimates with them?
    Mr. FOSTER. I do not recall their asking for the overall 
package costs. They certainly sought technical assistance from 
time to time on particular issues.
    Mr. RANGEL. Did they seek technical assistance in terms of 
the cost of the prescription drug program?
    Mr. FOSTER. I do not remember their asking for the cost of 
the drug benefit, not the majority staff, sir.
    Mr. RANGEL. Then besides Mr. Scully what did you do with 
this information as related to the cost of the prescription 
drug program that you found was different, at least than the 
CBO?
    Mr. FOSTER. We gave that to the people who had requested 
it, primarily Mr. Scully and others in the Administration.
    Mr. RANGEL. You had no request, that you know of, from the 
Republican staff?
    Mr. FOSTER. Not for that, no, sir.
    Mr. RANGEL. Did you have any requests from the Democratic 
staff?
    Mr. FOSTER. Yes, sir, we did. The Democratic staff of the 
Committee on Ways and Means had asked, in around mid-June, for 
a number of specific technical analyses related to H.R. 1. As 
part of that they requested an overall cost estimate for the 
package and the impact of the provisions on the date of 
insolvency for the part A Trust Fund.
    Mr. RANGEL. Did you give that to them?
    Mr. FOSTER. No, we did not.
    Mr. RANGEL. If the Republican staff had requested that same 
information, would you have given it to them?
    Mr. FOSTER. No, I think the answer to that is no. I can 
explain if you like.
    Mr. RANGEL. Well, why did you not give it to the Democrats, 
since they were the ones that actually asked you for it?
    Mr. FOSTER. I recommended to Mr. Scully for two particular 
technical analyses which your staff had indicated were a high 
priority, I recommended to him that in fact we had completed 
these estimates and that they should be released. I thought 
that they represented legitimate technical questions and we had 
reasonable answers. Based on our decades-long experience of 
providing this technical assistance, I did not see any reason 
not to. So, I made that recommendation to Mr. Scully. By this 
point in time he had made it clear that we were not to respond 
directly to requests from Congress anymore, but instead we were 
to give any such response to him and he would decide what to do 
with it.
    Mr. RANGEL. Did you feel that this type of response from 
Mr. Scully in any way interfered with your professionalism in 
terms of what traditionally had been your job as related to 
responding to Members of Congress and their staff?
    Mr. FOSTER. Yes, sir. I thought it was inappropriate. If it 
had been an issue of our providing the response to Mr. Scully 
and him promptly providing the response to the requester, that 
would have been less of a concern. What I perceived was that 
some responses went out and some responses did not go out. It 
struck me there was a political basis for making that decision. 
I considered that inappropriate and, in fact, unethical.
    Mr. RANGEL. Let me ask the other two panelists, who are 
professional and have demonstrated their professionalism since 
they dedicated themselves to public service. Do either one of 
you disagree with the conclusions that Mr. Foster had reached, 
as it relates to his professional integrity in dealing with 
this question that he was faced with? Mr. Goss?
    Mr. GOSS. I would have to say no, I do not disagree with 
anything that Rick has said. I would suggest, however, and 
perhaps Doug is in the same situation, I do not know all the 
details of this so I cannot comment.
    Mr. RANGEL. I do not know all of the details either but 
based on what he said, and I am only talking about the 
integrity of your office, in the hypothetical if you were faced 
in the situation which I presented to him and he responded, 
would you agree with his conclusion?
    Mr. GOSS. I agree with Mr. Foster's conclusion, absolutely.
    Mr. HOLTZ-EAKIN. I know the standards of conduct for the 
CBO. If the tradition of nonpartisanship and open access to 
Congress is as described, then I would agree.
    Mr. RANGEL. Mr. Foster, since the integrity of your 
profession was on the line, what prevented you from disagreeing 
with Mr. Scully since, in fact, it was really not a Democratic 
or Republican issue but an issue of your professionalism?
    Mr. FOSTER. Nothing prevented me from disagreeing with him. 
We disagreed quite a bit, sir. I attempted on several occasions 
to have a discussion with him about the importance of providing 
the technical assistance, whether or not it might be used to 
argue against his preferred position or the Administration's 
position, on the grounds that you all are the top policymakers 
in the Nation, grappling with the biggest changes to Medicare 
since the program was enacted. These programs are very complex 
and the changes are very complex. I argued that you all ought 
to have the best and most complete technical information you 
can get. Suffice it to say I did not prevail in any of those 
attempts with Mr. Scully. I also attempted to have the same 
conversation with other folks in the Administration who were 
much more sympathetic. In the end, the new rules that Mr. 
Scully put in place prevailed. In terms of my own view of the 
professional aspect, I did consult a top attorney at CMS in 
trying to wrestle with the question. Because I knew already, 
from a professional standpoint, that we serve the public at 
large. I felt a very strong responsibility on behalf of the 
public not to withhold technical information that could be 
useful in this debate. The legal answer I got, and you should 
know, sir, is that in any conflict or difference between the 
professional standards of conduct for actuaries in this country 
and the laws on the books, the laws win. That is a known 
standard.
    Mr. RANGEL. Excuse me. I wish you would say that again 
because I have a feeling I must conclude, I have a very strong 
feeling I must conclude, and I wanted to hear your last 
response. I am so sorry.
    Mr. BECERRA. Mr. Chairman, if we could ask Mr. Foster to 
pull the mike a little closer. It is difficult to hear him.
    Chairman THOMAS. Mr. Foster, these are not unidirectional 
like the old ones, but the top of the mike pointed more toward 
your mouth might help.
    Mr. RANGEL. I want to thank the Chair for your indulgence.
    Mr. FOSTER. Can you hear me better now?
    Mr. THOMAS. Yes.
    Mr. FOSTER. From a professional standpoint, I felt then, 
and believe now, there is an obligation on behalf of the public 
for my office to give you the best advice possible when 
requested. When I consulted the attorney at CMS as to the legal 
basis, I ended up convinced that the Administrator had the 
legal right to direct our activities in the way he did. In a 
difference between a law on the books or the legal right to do 
so and a professional responsibility to the public and to a 
client, Congress in this case, the law prevails. However, I was 
not happy about that. At the point that--well, I had a 
difficult choice, sir, you can imagine. I could ignore the 
orders. I knew I would get fired. I was not afraid of that. I 
did not especially want to be fired but I was not afraid of it. 
I could comply with the orders and I could resign in protest, 
which in fact I ultimately decided to do. I ultimately decided 
to resign in protest because of the inappropriateness of the 
circumstances we were under. In the end my staff talked me out 
of that on the grounds that a resignation might make a big 
splash and have a big impact for a day or 2, but there was 
grave danger to the office and this longstanding practice in 
that situation. They convinced me, and perhaps I helped 
convince myself somewhat, I would be better off working inside 
the system to get back to the situation that I think, in fact, 
we are now in wherein Secretary Thompson has gone on record 
saying this support should be provided on a nonpartisan basis. 
Mark McClellan, our Administrator-designee, has said the same 
thing.
    Mr. RANGEL. Let me thank you for being persuaded to stay 
the course. Let me thank your two colleagues because this is 
not about Mr. Foster. It is not about Republicans and 
Democrats. This is about the integrity of the professionals 
that we depend on to give us information when we need it. You 
standing with him protects yourself, you protect your 
profession, and you make certain that we Democrats do not make 
the same mistakes because we just get carried away with our 
power. Mr. Foster, you are to be congratulated. Believe me by 
you making this decision, I am certain that the Secretary and 
the Administration will be very careful to see that this does 
not happen with other professionals. Thank you, Mr. Chairman.
    Chairman THOMAS. The gentleman's 15 minutes has expired. 
The gentleman from Illinois wish to be recognized?
    Mr. CRANE. Yes, Mr. Chairman.
    Chairman THOMAS. Would the gentleman yield briefly?
    Mr. CRANE. Certainly.
    Chairman THOMAS. Mr. Foster, I have not done this before. 
Based upon the series of questions and the answers, I would ask 
you did you and I have a telephone conversation in regard to 
the concerns on your professional integrity in this 
Administration?
    Mr. FOSTER. Yes, sir, we did.
    Chairman THOMAS. Could you convey the gist of the telephone 
conversation?
    Mr. FOSTER. Yes, sir. It was back in June, following the 
first of these instances which involved a request that your 
staff had made to me for an estimate, which was ordered to be 
withheld, which I provided anyway because I had not in fact 
received that order. My understanding is that Mr. Scully was--
well, I know that he was deeply unhappy.
    Chairman THOMAS. What was the gist of our conversation?
    Mr. FOSTER. I apologize. You called and asked me whether 
the information in the memo I had sent to you represented my 
best estimate and my best judgment. I said yes, that it did.
    Chairman THOMAS. I said what then?
    Mr. FOSTER. You also said that you would be talking with 
some folks about the threats that you had heard of toward me 
and that I should not worry about it.
    Chairman THOMAS. Did we have a similar conversation? Was 
that a bit of a deja vu for you?
    Mr. FOSTER. I am sorry?
    Chairman THOMAS. Did we have a telephone conversation on a 
similar subject matter at a previous time?
    Mr. FOSTER. Back in 1997?
    Chairman THOMAS. Yes, when there was an Administration of a 
different party putting pressure on you not to release 
information and the gist of my conversation to you at that time 
was what?
    Mr. FOSTER. That is a little further back and a little more 
forgotten.
    Chairman THOMAS. The answer was in your professional 
opinion if the information you provided was your professional 
opinion I would defend you in presenting your professional 
opinion; i.e., identical telephone conversations in two 
different Administrations. Apparently, the idea of following 
the law as you indicated, in terms of the flow of information, 
was present not only in Republican administrations but in 
Democratic administrations. As a matter of fact, if you will 
look at report language in the 1997 act, we underscored your 
ability to make those kinds of statements. So, I supported you 
then. I support you now. If you choose to continue this 
position as your professional prerogative, I will support you 
in the future. That does not mean I am always going to agree 
with their estimates, but I certainly believe the service of 
providing those estimates is a valuable assistance in making 
law. I want to thank the gentleman from Illinois for yielding.
    Mr. RANGEL. Mr. Chairman, I have a misunderstanding here. 
This exchange allows me to believe that Mr. Foster gave you his 
estimates before he was told not to do it. So, you had 
information that we Democrats could not get and did not share 
it with us.
    Chairman THOMAS. That is not what he said. The gentleman 
from Illinois.
    Mr. RANGEL. That is what it sounded like.
    Mr. CRANE. May I reclaim my time? Mr. Goss, several other 
Members have exuberantly claimed that Social Security is 
fiscally sound by citing the report's short-term projection 
that ends in 2013. That claim conveniently allows them to 
ignore the longer term projections that show that by 2018, just 
5 years later, Social Security will no longer be able to rely 
solely on its tax revenue to cover benefit payments. What would 
be the consequences of ignoring Social Security's financial 
challenges and not modernizing the program while it still has a 
surplus by putting off reform for some future Congress to deal 
with when the Trust Fund begins to shrink?
    Mr. GOSS. We clearly are at a point where we do well to 
understand that Social Security does have financial shortfalls 
coming in the future. By acting sooner we clearly have a 
greater range of possibilities that can be considered. If 
action were taken relatively soon, it would allow these 
opportunities to be put into the law so that they could grade 
in, they could phase in on a more gradual basis. A perfect 
example of this was the 1983 Social Security amendments (P.L. 
98-21) where the normal retirement age was legislated to be 
increased with a 17-year delay. The increase did not, in fact, 
start until the year 2000 even though the change was enacted in 
the year 1983. Therefore, in my judgment, the cost of delaying 
substantially a serious discussion and movement toward deciding 
on what should be done for Social Security will be to limit 
possibilities and perhaps make it more difficult to get the job 
done.
    Mr. CRANE. Thank you, Mr. Goss.
    Chairman THOMAS. Does the gentleman from California, Mr. 
Stark, wish to inquire?
    Mr. STARK. Thank you, Mr. Chairman. I want to thank the 
panel. I just wanted to----
    Chairman THOMAS. The Chair would indicate briefly, not on 
the gentleman's time, that we are going to do as much as we can 
to return from the Senate time structure to the House time 
structure. It will be a liberal 5 minutes but it is not going 
to be 15.
    Mr. STARK. I thank the Chair. You mentioned in your 
testimony, Mr. Foster, in response to Mr. Rangel's question, 
that there were others or people in the White House who 
received your June estimates of H.R. 1 and S. 1. I think you 
mentioned Mr. Badger by name. Can you tell me who the others 
were, to the best of your recollection.
    Mr. FOSTER. Yes, I believe Jim Capretta in the OMB and 
Jennifer Young, then Acting Assistant Secretary for Legislation 
at HHS. There would have been some other folks within HHS as 
well, Legislative Director, for example.
    Mr. STARK. So, it would be reasonable to assume when 
Secretary Thompson told us last month and he answered Mr. 
Rangel, he said ``we knew all along, Congressman Rangel, that 
our assumptions were higher,'' that it would not have been a 
surprise that the Secretary might have known or had an inkling 
that there were these higher estimates, as well. Is that a fair 
assumption?
    Mr. FOSTER. I do not actually know when the Secretary knew, 
sir.
    Mr. STARK. There was a question that you may have 
participated in a meeting or a teleconference or a conference 
call in the presence of or with Mr. Badger where he either 
answered for you or directed you to refrain from providing any 
cost estimates or other information to Members or staff from 
the Committees of jurisdiction. Do you recall this event or 
these events?
    Mr. FOSTER. There were, on occasion, either conference 
calls or meetings for the purpose of discussing various 
technical issues with the bill. Mr. Badger and others were 
typically present. On occasion, I remember him jumping in to 
answer a question that might have been directed toward me. I do 
not remember instances where I felt I had not been able to 
answer a question.
    Mr. STARK. I am sure you recognize my limited professional 
competence in the area of actuarial science, and I am sure you 
do appreciate our Ways and Means minority health staff's 
interest and expertise not in actuarial science but in the 
intricacies of Medicare finance. Would it be a reasonable 
assumption that somebody as naive in these areas as myself, but 
with the help of my excellent staff, if we had had your June 
estimates in the range of $550 billion, would it have been a 
huge leap for us to suspect that either H.R. 1 or S. 1 or the 
resulting conference bill would have been far higher than $400 
billion?
    Mr. FOSTER. I think that would be a reasonable conclusion. 
The drug provision, of course, was far and away the most 
expensive component. We had only rough estimates back then of 
the competition or what became the Medicare Advantage 
provisions. We generally had estimated those to be a cost of 
$30 billion to $50 billion. It was anticipated and, in fact, 
turned out to be the case that everything else, all the other 
fee-for-service provisions, had a modest overall savings in the 
neighborhood of $20 billion or $30 billion.
    Mr. STARK. So, to summarize, had you not been restrained, 
or threatened, as the case may be, that in the normal course of 
events I would have received and Mr. Rangel would have received 
and others on the Committee and our staff would have received a 
response to our request of June 17th and on June 19th and with 
the information that we would have received based on your then-
analysis, it would have been logical for us to assume that the 
cost of H.R. 1 and S. 1 and/or the result would be more in the 
neighborhood of between $500 billion and $600 billion than 
between $300 billion and $400 billion?
    Mr. FOSTER. Yes. We certainly would have had a rough 
estimate that we could have conveyed informally to that effect. 
We would not have had a final refined estimate until the same 
December 23rd date that I mentioned.
    Mr. STARK. May I take 30 seconds, Mr. Chairman. I would 
stipulate here that I was a partial author of a bill that cost 
far more, $900 billion I suspect, although I do not know where 
that estimate came from. At any rate I recognize that. The 
issue here is that I am sure people who would have opposed my 
position knew that was $900 billion. The concern that I have is 
that we can and often do disagree. We generally, for instance 
on the Joint Committee on Taxation, we operate with a great 
deal of reliability on the same set of numbers. I think that is 
my concern and I would hope it is a bipartisan concern, that in 
the future we have got to have a real level of confidence that 
at least the underlying numbers are the same on both sides, and 
we can proceed then to argue our differences as to what those 
numbers might be. I thank the Chairman for the extra time.
    Chairman THOMAS. The Chair believes that the $900 billion 
estimate was a CBO figure. Therefore, had Rick Foster estimated 
yours, it would have been $1.3 trillion or $1.4 trillion, or 
$1.5 trillion, based upon the testimony that was heard. To make 
sure that the record is clear, the Chair would call on the 
gentleman from New York to explain the information he received 
from staff about the response that Mr. Foster made to him in 
terms of the telephone conversation we had and the material 
that was to be provided.
    Mr. RANGEL. Yes, Mr. Chairman. I have been informed by 
staff and reassured by the Chair that the technical assistance 
information that Mr. Foster gave to the distinguished Chairman 
prior to the time that the restrictions were placed on you was 
not the actual estimate of the cost of the prescription drug 
sector of the bill.
    Chairman THOMAS. I thank the gentleman. So, the point that 
I made that it was not in reference to the same thing that the 
gentleman was talking about was, in fact, accurate. I 
appreciate the gentleman's clarification for the record very 
much. Does the gentleman from Florida, Mr. Shaw wish to 
inquire?
    Mr. SHAW. Thank you, Mr. Chairman. I commend Mr. Rangel for 
making that clarification. Mr. Foster, you have heard as the 
Chairman said that the $900 billion figure came from CBO. 
Perhaps I should ask Mr. Holtz-Eakin, is that correct 
information on Mr. Stark's bill?
    Mr. HOLTZ-EAKIN. I believe that is correct, yes.
    Mr. SHAW. So, his curiosity is answered on that. Mr. 
Foster, have you had an occasion to even look at that bill?
    Mr. FOSTER. No, sir.
    Mr. SHAW. Based upon what CBO came with, I would guess that 
you would score it very much higher than the CBO did; is that 
correct?
    Mr. FOSTER. Possibly, but without looking at the 
provisions----
    Mr. SHAW. I understand you cannot answer that directly but 
I would think that if you use the same assumptions that you 
used on our bill that you would raise it above the $900 billion 
because it is a much richer bill as far as benefits were 
concerned. I have this question for Mr. Holtz-Eakin. Were you 
present when Secretary Snow was testifying?
    Mr. HOLTZ-EAKIN. Yes, I was.
    Mr. SHAW. At that time you heard the gentleman from 
California, Mr. Matsui, inquire using my Social Security reform 
bill as an example in citing a deficit in that bill; is that 
correct?
    Mr. HOLTZ-EAKIN. Yes, I did.
    Mr. SHAW. What concerns me is an accounting process that 
the Federal Government uses. When you start talking about the 
accounting system, it is really a cash flow system in which any 
moneys put out, any revenues put out, can inflate the deficit 
even though it is invested, whether it is invested in a 
building or whether it is invested in a retirement account that 
will eventually be used to help fulfill the obligation of the 
SSA for the payment of benefits to future retirees. Is that not 
correct?
    Mr. HOLTZ-EAKIN. That was the conversation, yes.
    Mr. SHAW. What I am concerned about here is that I believe 
very strongly that the only sensible approach to save Social 
Security and to prevent this deficit is to start forward 
funding Social Security in some way. The problem you get into 
when you start doing that is you trip over the accounting 
process that the Federal Government uses. Even though that 
money is like putting it into a pension plan to take care of 
the future obligations of a government or of private industry. 
In the Federal system of accounting it is considered an outlay 
and that is just the way the system works. When it comes back, 
however, as you get into the out years and as people begin to 
retire and utilize their retirement account to help pay their 
benefits, that will assist the Trust Fund in the payment of the 
benefits, then that is considered a receipt; is that not 
correct?
    Mr. HOLTZ-EAKIN. This is correct.
    Mr. SHAW. It occurs to me that what we are talking about 
doing is that we should score the deficit as an outlay now so 
we can, as time goes on, start considering it a receipt. I 
think that this is a very serious flaw in our system that we 
should begin to take a look at it. If we are going to be 
responsible, if we are going to be responsible, and if we care 
about our kids and our grandkids, we have to start investing in 
Social Security with real economic assets. Those real economic 
assets can be in no safer place than they would be in 
individual retirement accounts, which would be available to 
help pay the benefits that tomorrow's seniors are looking 
forward to. Could you comment on that, and the accounting 
process, and what we might be able to do to solve this 
situation, the dilemma that we find just because of an 
irresponsible accounting system?
    Mr. HOLTZ-EAKIN. Congressman, the CBO has, for the past 
several years beginning under my predecessor Dan Crippen, been 
building the capacity to look not only at the conventional 10-
year cost estimate of Social Security proposals but also longer 
term implications from the perspective of system finances, from 
the perspective of the broader unified budget, and indeed from 
the perspective of impact on the economy as a whole. That 
capacity, although not yet complete, is nearing the ability to 
examine these proposals in quite great detail, including 
addressing some of the concerns that you have raised.
    I look forward to working with you on that. I would like to 
take the opportunity to thank Mr. Goss, since he is here today, 
for the extent of assistance that he has provided the CBO in 
this undertaking. It has been quite a big undertaking and we 
would not have gotten to the point we have without his help.
    Mr. SHAW. I also very much appreciate it because I think 
all of the alarms should be going off, not only on Medicare 
which is a more immediate problem, but in Social Security which 
also is an immediate problem because if we do not start 
investing in individual accounts for tomorrow's seniors, then 
the impact is going to be greater and it is going to be 
tougher. Because we need to get those funds into the individual 
accounts so they can start building. That is the magic. That is 
how we create a surplus over 75 years is by investing and 
letting those accounts buildup. It is the only way we are going 
to promise our kids and our grandkids at least as good a 
retirement as we have and avoid this economic disaster that 
could bring our economy down. No economy in the world could 
survive this type of pending deficit that we are looking at. I 
thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Michigan wish to inquire?
    Mr. LEVIN. Thank you. I just want to be clear what is 
really the issue here, at least a major issue. It is not which 
of the best estimates was best, but why the several so-called 
best estimates or figures were not given to us before we voted. 
The question really is what the Administration knew before the 
vote on the conference report surely, and what was not revealed 
to us. I just wanted to quickly go back over Mr. Thompson's 
testimony because there was an effort to kind of make Mr. 
Scully the scapegoat. You testified, Mr. Foster, that 
information was sent to the White House and to HHS; is that 
correct?
    Mr. FOSTER. Not all of our cost estimates were sent but in 
a number of cases yes, we sent the estimates to them.
    Mr. LEVIN. I asked Secretary Thompson, you knew your 
actuaries are estimating the cost far higher than CBO quite 
early on, well before we acted on the Medicare bill, right? You 
knew that? ``We knew that the assumptions were higher.'' You 
were told that the amount was higher? ``No, Mr. Levin,'' said 
Secretary Thompson. ``We did not know the final amount because 
the final 2 days changed the complexity and the direction of 
the bill.'' Then I say no, no, but before that your actuaries 
were saying before the last couple of days that the amount was 
higher. The Secretary, ``our preliminary estimates were higher, 
yes.'' My question, you passed that on to the White House? To 
somebody there? The Secretary, ``we passed that on to''--and 
then I interjected, somebody in the White House knew what your 
actuaries were saying? The Secretary, ``there were individuals 
in the White House who knew that ours, meaning the actuarial 
preliminary estimates, were higher, yes, based upon 
participation.'' That is the real issue here. Now the final 
estimate came later on but I think you testified, Mr. Foster, 
as to the key portions, for example, the difference in the 
take-up rate, the number of low income beneficiaries enrolled, 
that amounted to many billions. Those were not basically 
changed in the final bill, were they?
    Mr. FOSTER. Our estimates, you mean, sir?
    Mr. LEVIN. The basic material upon which you based your 
estimates. That material was known well before the final 2 days 
was it not?
    Mr. FOSTER. Yes. Our estimates changed all along as the 
proposal itself changed, and we tried to keep up with it. The 
range of our estimates that we were in for the drug cost was 
typically $500 billion to $600 billion all the way through the 
process.
    Mr. LEVIN. So, that difference cannot be simply attributed 
to the last 2 days. The difference between you and CBO was 
always substantial; is that not correct?
    Mr. FOSTER. Yes, sir, that is correct.
    Mr. LEVIN. So, I think, in a few words, there was a cover 
up of some basic information and it said the differences maybe 
were no big deal. Our having all of the facts are a big deal. 
We were not given them. We were not given those facts. The 
differential, while it somewhat shifted from time to time, was 
always there and it was always very, very substantial. We had 
the right to know. Not only the Administration. They have the 
right to tell us what they knew and they did not. They did not. 
It was not only Mr. Scully. Again, people in OMB were given 
your estimates?
    Mr. FOSTER. Some of them, yes, sir.
    Mr. LEVIN. People in the White House were given these 
assessments.
    Mr. FOSTER. Some of the estimates, yes.
    Mr. LEVIN. Also people in HHS?
    Mr. FOSTER. Yes.
    Mr. LEVIN. Thank you.
    Chairman THOMAS. Does the gentle lady from Connecticut, the 
Chairman of the Subcommittee on Health, wish to inquire?
    Mrs. JOHNSON. I would just note for the record that, Mr. 
Foster, you did earlier make very clear that the law allows Mr. 
Scully to control the flow of information and that is just the 
law. So, while you might not like it, that is where it was. Dr. 
Holtz-Eakin, did the Democrats ever submit their bill to you 
for estimation? To be estimated? Did they submit their 
alternative to you to be estimated?
    Mr. HOLTZ-EAKIN. I am sure they submitted many bills. We 
can get the details for you.
    Mrs. JOHNSON. We do have a letter back from you where you 
do estimate it as roughly $1 trillion. Mr. Foster, did the 
Democrats submit their bill to you to be estimated?
    Mr. FOSTER. No, ma'am.
    Mrs. JOHNSON. It is just interesting that, since you think 
CMS's opinion is so important, that you did not submit your 
bill to them to be estimated. So, let me just proceed on a 
couple of lines. First of all, Mr. Foster and Dr. Holtz-Eakin, 
I have enormous respect for not just you but the staffs behind 
you that work so hard on our behalf. I do say, Mr. Foster, that 
as a Member having to make judgments about your work, I have 
never seen 99 percent of any group do anything. So, to estimate 
that 99 percent would take up the drug benefit when only 91 
percent elected part B, and that is for doctors visits, does 
seem to be distant from my experience of reality. Ninety-four 
percent take-up, but in a subgroup to get to the 94 percent you 
would have to get to 99 percent. So, being the author of the 
Children's Health Bill and finding out that when we went out 
there to try to enlist children for this wonderful health 
insurance program what we found was enormous numbers of 
children not registered for Medicaid, which gave them free 
health care. So, it is very hard to get 99 percent in America 
to do anything, no matter how good the deal is. Certainly many 
think the prescription drug Part D benefit is not all that 
great and would not attract that kind of allegiance.
    My point is this, the most controversial part of this bill 
was the expansion of the private plans. In June, in a memo that 
you did and that was made public, it was very clear--in fact, 
you say in that, our preliminary estimate is that about 48 
percent of the beneficiaries will participate in HMOs and 
preferred provider organizations (PPOs). So, everybody had that 
and everybody knew that was big money. That is underneath this 
bill, the biggest, most difficult, and one of the most costly 
issues. So, there were big differences. It was well known you 
were looking at a number of these issues differently than was 
CBO, and frankly than were many of us. I thought it was really 
quite astounding that you came up with the higher estimate 
because there were going to be more Advantage plans rather than 
a lower estimate because the competition would be greater 
because you would have more plans. So, this business of 
estimating and the judgments involved is complex. Each of us 
comes to it from our own experience. I respect both of you. We 
need your work. We learn from your disagreements.
    It does concern me that neither of you seemed to take very 
seriously the portions of the bill that really are going to 
change Medicare for people with chronic illness, and remember 
that is most seniors, from an illness treatment program to a 
preventive program. Now we see Kaiser Permanente making the 
decision to invest $3 billion. They are going to save $10 
million the first year in Hawaii. The hospitals are going to 
have $6 million annually every year thereafter. Just the cost 
for medical errors cost our country $35 billion annually and we 
spend $5.4 billion in Medicare because tests that were taken 
cannot be gotten to the physician making the decision. So, if 
we go to electronic health records, if we go to electronic 
prescribing, that is going to have a big impact on costs. You 
see the private sector racing down that track at a pace not 
anticipated.
    Last week we had a hearing on quality. Everybody is doing 
it out there. PacifiCare, in a group that was 90-percent 
elderly, reduced hospital rates for one group by 98 percent for 
coronary artery disease, reduced emergency room visits, and it 
goes on. I will not go through all four of them because I do 
not have time. Basically, it saved $195 million in just these 
four programs in a group that was mostly seniors. You look at 
studies that have been done for us in the journal Heart, they 
found that heart failure patients and disease management 
programs reduced hospitalizations 87 percent. I am just 
astounded that you could cost out every dollar we spent but you 
could not cost in dollars that we saved. When we have every 
senior coming into Medicare having a physical to identify early 
diabetes, hypertension, heart problems and we build in disease 
management programs it just sort of spins my head that you give 
us practically no credit for that, essentially no credit for 
that. In the private sector they are getting lots of savings 
from that. Unfortunately, I used all my time in explaining my 
question but it is all right because you did not give us the 
credit so that is that. People ought to understand that these 
estimates do not take into account the systems changes that we 
put in place in this bill and that, coupled with what the 
private sector has learned and is doing, is going to make an 
enormous impact on the cost. Thank you.
    Chairman THOMAS. The answer is either yes or no. Does the 
gentleman from New York, Mr. Houghton, wish to inquire?
    Mr. HOUGHTON. Thank you very much, Mr. Chairman. Gentlemen, 
nice to see you. I do not want to talk about any cover ups. I 
do not want to talk about the difference in estimation between 
the CMS and the CBO. I will ask a very, very simple question to 
you, Dr. Holtz-Eakin. In your testimony you talk about the 
union plans assessing the 28-percent employer subsidy provided 
in the new Medicare law. You are quite sure unions can receive 
this subsidy? What about the State retiree plans?
    Mr. HOLTZ-EAKIN. The union plans can receive the subsidy. 
State retiree plans, I am not familiar with the provisions. I 
can certainly check and get back to you.
    Mr. HOUGHTON. If you would, I would appreciate it. Chairman 
Thomas, I am very fast. End of questions.
    Chairman THOMAS. The answer is yes, State retirement plans 
can receive the support, as well. The key was to keep those 
people in the programs they are in with a modest subsidy rather 
than assuming the full cost in whatever plan they were in, we 
believe they will remain in with a portion of the bill. Again, 
a coster, but no credit whatsoever on the assumptions about the 
dollar saved over a longer period of time, and so forth, and so 
forth. The gentleman from Georgia, Mr. Lewis, wish to inquire?
    Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman. I 
want to thank the three members of the panel for being here. 
Mr. Foster, I want to ask you several questions. I want to 
thank you for being so responsive. For the record, someone may 
come along 5 years from now or 10 years or 50 years from now 
and say what was this all about. So, I am going to ask you some 
questions and I want you to answer them pretty short and fast 
so I can get them all in. How long have you been employed by 
the Federal Government?
    Mr. FOSTER. A little over 31 years, sir.
    Mr. LEWIS OF GEORGIA. What is your present position?
    Mr. FOSTER. Chief Actuary for the CMS.
    Mr. LEWIS OF GEORGIA. Mr. Foster, would you be kind enough 
to describe your role in this position? What do you do?
    Mr. FOSTER. My office and I prepare all of the financial 
projections for Medicare and Medicaid, for the President's 
budget, and for the annual report to Congress that we are here 
for today. We estimate the cost of proposed legislation on 
behalf of the Administration and Congress. We do a number of 
functions involving current Medicare statutory requirements, 
such as setting the Part B monthly premiums, setting the 
Medicare Advantage payment rates, and setting the inpatient 
hospital deductible. We also set all the price indices that are 
used for updating Medicare payments like the Medicare economic 
index, the inpatient hospital market basket, and so forth. I am 
sure I left out something important. We do the national health 
accounts, an estimate of the total spending on health care in 
all the United States.
    Mr. LEWIS OF GEORGIA. Mr. Foster, do you enjoy your work? 
Do you enjoy your job? Is it a good job?
    Mr. FOSTER. Most days, sir, yes.
    Mr. LEWIS OF GEORGIA. How many people work under your 
direction?
    Mr. FOSTER. Right now we have 70, sir.
    Mr. LEWIS OF GEORGIA. They are good employees?
    Mr. FOSTER. Yes, they are outstanding.
    Mr. LEWIS OF GEORGIA. Let me ask you something else. Do you 
recall receiving an e-mail maybe around June 20 from the top 
aide to Mr. Scully? The e-mail said something like, do not 
share information with anyone else. The consequences for 
insubordination are extremely severe.
    Mr. FOSTER. Yes, I remember that e-mail well.
    Mr. LEWIS OF GEORGIA. When you received this e-mail, what 
did you do? What did you tell the people working with you? Did 
you say anything? Did you feel shocked?
    Mr. FOSTER. That e-mail and the conversations that went 
with it put in place a new policy regarding assistance to 
Congress. We notified the office that we should no longer 
respond directly. Instead their requests and the responses had 
to come back to me and I would turn them over to Mr. Scully for 
disposition.
    Mr. LEWIS OF GEORGIA. In all of your 30 years as an 
employee of the Federal Government or maybe in this particular 
work, have you ever received anything like this before?
    Mr. FOSTER. No, nothing really quite like that.
    Mr. LEWIS OF GEORGIA. I thank you for being so responsive 
and I thank you for being a good public servant. Thank you.
    Mr. FOSTER. Thank you, sir. We try.
    Chairman THOMAS. I thank the gentleman. The gentleman from 
California, Mr. Herger, wish to inquire?
    Mr. HERGER. Thank you, Mr. Chairman. Mr. Foster, you had 
mentioned earlier that you were following the law; is that 
correct? We have precedent but we have the law and you were 
following the law. Therefore the directives you had through 
this e-mail were still following the law; is that correct?
    Mr. FOSTER. Yes, sir.
    Mr. HERGER. Dr. Holtz-Eakin, if I could ask you a question, 
please, just on the makeup of this legislation. The Medicare 
Modernization Act includes non-interference language that 
prevents the Secretary of HHS from interfering in negotiations 
between private plans and drug manufacturers. In your opinion, 
do you believe that private plans acting independent of the HHS 
Secretary will be able to effectively negotiate drug prices for 
seniors?
    Mr. HOLTZ-EAKIN. Our estimate includes the fact that at-
risk private prescription drug plans will have both the tools 
and the incentives to negotiate aggressively and to control 
costs on behalf of their beneficiaries.
    Mr. HERGER. So, you feel that they will be able to 
effectively do that?
    Mr. HOLTZ-EAKIN. Yes. In a letter we wrote in response to 
an inquiry from Senator Fritz, we indicated that removal of 
that language would not change the basic estimate of the bill.
    Mr. HERGER. Would having the HHS Secretary involved in 
these negotiations result in lower prices, do you feel?
    Mr. HOLTZ-EAKIN. If there were to be language which 
proactively stipulated that the Secretary enter into 
negotiations, it would depend on the particular circumstances 
in which that were to occur. In a separate letter to Senator 
Wyden on this topic, we did mention that in the cost of single-
source prescription drugs, your classic blockbuster drug, and 
perhaps in fallback plans there might be some opportunity for 
the Secretary to negotiate price savings. In other 
circumstances, however, it did not appear to be the case.
    Mr. HERGER. If the HHS Secretary were allowed to negotiate 
drug prices, is it not most likely the case that the Secretary 
would end up simply setting the prices as is done with the rest 
of Medicare, rather than truly negotiating these prices where 
we would tend to get a lower price?
    Mr. HOLTZ-EAKIN. It is not possible to know without looking 
at the precise language and the authority that the Secretary 
was given in those kids of circumstances.
    Mr. HERGER. Thank you. Thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. The gentleman from 
Maryland wish to inquire?
    Mr. CARDIN. Thank you, Mr. Chairman.
    Mr. Foster, let me follow up on the information issue 
because I am, along with I think all Members of this Committee, 
quite concerned about information that did not get to Congress 
in time for us to consider it when we had to make policy 
decisions. Of course, that is where the actuarial information 
becomes important.
    I understand correctly there was a very significant 
difference between your estimate on the number of Medicare 
beneficiaries that will participate in private insurance under 
Medicare versus what the CBO assumes will be participating in 
private insurance, a difference of between 12 percent and 32 
percent approximately.
    Mr. FOSTER. Yes, sir.
    Mr. CARDIN. That difference has a dramatic impact on cost 
and could very well influence congressional action on how much 
additional funds we should make available to private insurance 
companies under the Medicare Program. Now if I understand 
correctly, you were instructed that this information, even 
though it had been requested by Congress, could not be made 
available directly by you to Congress but had to go through Mr. 
Scully; is that what happened?
    Mr. FOSTER. Yes, any estimates or analysis that we prepared 
for Congress after about early June were to go through Mr. 
Scully. We had specific requests from the Ways and Means 
Democratic staff involving some of the competition in the 
Medicare Advantage provisions including the cost and any of 
those would have gone through Mr. Scully.
    Mr. CARDIN. Are you aware of whether Congress was informed 
that this information was available but had to be gotten from 
Mr. Scully? That there was a new policy in place? Are you aware 
that that was communicated to Congress?
    Mr. FOSTER. I, myself, passed that information on to 
individual staff members when the question arose. I do not know 
if anyone in the Administration announced that more broadly.
    Mr. CARDIN. Are you aware of whether any of that 
information, the information I am referring to on the basic 
differences between CBO and the actuaries on the cost 
estimates, whether that was in fact made available to Congress 
before we were called upon to act?
    Mr. FOSTER. I would have to stop and think because, as I 
said earlier, we never had a final cost estimate for the 
Medicare Advantage provision until much later on.
    Mr. CARDIN. I appreciate that. In your answer to Mr. 
Thomas's question, you indicated the final numbers were not 
available until shortly before Christmas. The assumption 
numbers, the number of participants, and so forth, that was 
available, was it not?
    Mr. FOSTER. Yes, sir.
    Mr. CARDIN. That was not made available to Congress?
    Mr. FOSTER. In fact, that part of it was for H.R. 1 under a 
request we had from Mr. Thomas in early June. That is what, in 
fact, set off the change in policy.
    Mr. CARDIN. So, now, I guess the frustrating part here is 
this; that this information should be made available to all of 
us for policy discussions. There was a radical change in policy 
that you were basically instructed to implement. Yet there was 
no effort made to inform Congress collectively, as an 
institution, that these policy changes were being made and no 
chance for Congress to, in fact, focus on that before we were 
called upon to act on a very important piece of legislation 
without having the full information before us from the 
actuaries. Is that not a fair statement?
    Mr. FOSTER. I did my best to let folks know that in fact, I 
could no longer respond directly and that they had to talk to 
Mr. Scully on that. What happened beyond that, I am not aware 
of.
    Mr. CARDIN. I thank you. I thank you for your testimony and 
for your straight answers here before our Committee. Thank you, 
Mr. Chairman.
    Chairman THOMAS. Thank the gentleman. The gentleman from 
Louisiana wish to inquire?
    Mr. MCCRERY. Yes. Thank you, Mr. Chairman.
    Chairman THOMAS. Will the gentleman yield briefly to me?
    Mr. MCCRERY. Yes, sir.
    Chairman THOMAS. In the exchange that Mr. Cardin just had 
with you, in the terms of the information, was in fact the 
basis of the phone call that I made to you, reinforcing the 
fact that if, in your professional opinion, the answers you 
provided were the best that you could do, that I would support 
and defend your ability to do that. The same basic conversation 
I had during the Clinton Administration. I thank the gentleman.
    Mr. MCCRERY. Dr. Holtz-Eakin, when was the CBO formed? When 
did it first come into existence?
    Mr. HOLTZ-EAKIN. It was created by the Budget Act 1974 
(P.L. 93-344) and began operating in 1975.
    Mr. MCCRERY. Do you know why the CBO was created by 
Congress?
    Mr. HOLTZ-EAKIN. At that time Congress was involved in a 
dispute with then-President Nixon regarding the impoundment of 
funds Congress had appropriated, a dispute that went to the 
U.S. Supreme Court. In the aftermath of that dispute, the 
Congress decided to have an independent ability to assess 
budgetary matters.
    Mr. MCCRERY. So, in other words, Congress did not trust the 
Administration to come forward with estimates for legislation 
and other things, that they decided that they needed 
internally, so they created CBO?
    Mr. HOLTZ-EAKIN. That is my understanding, yes.
    Mr. MCCRERY. So, this is a long history of Congress wanting 
an independent source for all kinds of things, including 
estimates of the cost of legislation. In fact, Dr. Holtz-Eakin, 
is not Congress in its deliberations bound by the estimates of 
the CBO?
    Mr. HOLTZ-EAKIN. In a formal sense it is bound by the 
decisions of the budget Committees to which we deliver our 
estimates and whose Members are the ultimate arbiters of cost 
estimates.
    Mr. MCCRERY. In fact, section 308 of the Congressional 
Budget Act establishes the CBO as the scorekeeper for Congress, 
does it not?
    Mr. HOLTZ-EAKIN. Yes, it does.
    Mr. MCCRERY. When we say the scorekeeper, we mean you are 
the one who has to give us estimates of the cost of bills and 
it is those estimates on which we much rely; is that not 
correct?
    Mr. HOLTZ-EAKIN. We are obligated to deliver estimates to 
the Congress. There is the possibility for directed 
scorekeeping, which alters the official reported score.
    Mr. MCCRERY. So, bottom line, we have had estimates in the 
past from OMB which collaborated with CMS or the Health Care 
Financing Administration or any number of other government 
agencies. While some have attempted to use those numbers, 
sometimes Republicans and sometimes Democrats, for our own 
political purposes, the fact of the matter is when we are 
deliberating on legislation in Congress we are bound by the 
Budget Act to consider the estimate of the CBO in terms of 
sticking within the budget that we have passed; right?
    Mr. HOLTZ-EAKIN. That is the tradition, yes, sir.
    Mr. MCCRERY. I would submit that it is the law under the 
Congressional Budget Act.
    Mr. HOLTZ-EAKIN. It is a fine point. We are forced to 
deliver an estimate. I would pray that you would respect it 
enough not to change it, but there is the opportunity for 
them----
    Mr. MCCRERY. Certainly, we can pass a law to disregard the 
estimate, that is true. The law that is on the books says we 
have to abide by the estimates of CBO when dealing with the 
budget. So, that is what we did in the case of the Medicare 
bill. That is what we do in the case of every bill that we 
consider. If it is a tax bill, obviously the Joint Committee on 
Taxation does the estimate, but even that comes through the 
CBO. So, we are bound by that CBO estimate. Now let us get to 
the substance of the Medicare bill because some have said that 
this Medicare bill we passed will not do seniors any good, it 
will not help anybody. In fact, it may even be the end of 
Medicare. Well, we have one estimate of $395 billion, another 
of $535 billion or $550 billion, or whatever it is, so 
evidently we are spending money on somebody in the next 10 
years. I will ask both of you, Mr. Foster and Dr. Holtz-Eakin, 
in your professional opinion, will the private plan market for 
a prescription drug benefit proposed by the legislation in fact 
be in place in 2006? Mr. Foster?
    Mr. FOSTER. We believe that it will. We believe there will 
be interest in this market.
    Mr. MCCRERY. Dr. Holtz-Eakin?
    Mr. HOLTZ-EAKIN. Yes, we believe it will, as well.
    Mr. MCCRERY. In your professional opinion, will the vast 
majority of Medicare beneficiaries choose to enroll in this 
drug benefit? Mr. Foster?
    Mr. FOSTER. They should because it is a good deal for them 
and if they wait they will be hit with a late enrollment 
penalty. So, they should.
    Mr. HOLTZ-EAKIN. Our estimate indicates that 87 percent of 
eligible seniors will take it up.
    Mr. MCCRERY. Will significant numbers of low-income 
individuals elect to enroll in the low-income subsidies which 
provide comprehensive drug coverage with no gaps in coverage 
for up to only $5 per prescription? Mr. Foster?
    Mr. FOSTER. Yes, sir. We anticipate the great majority of 
such folks will take advantage of the low-income subsidy.
    Mr. HOLTZ-EAKIN. Likewise, we anticipate that.
    Mr. MCCRERY. Thank you very much, gentleman. Thank you, Mr. 
Chairman.
    Chairman THOMAS. I thank the gentleman. The gentleman from 
Michigan wish to inquire?
    Mr. CAMP. Thank you, Mr. Chairman. As my colleague 
mentioned, the CBO was formed under the 1974 Budget Act to give 
Congress an independent agency to evaluate the costs of 
legislation. Mr. Holtz-Eakin, I wonder if you could tell me if 
the estimate for the Medicare Modernization bill was provided 
to Congress in November of last year; is that correct?
    Mr. HOLTZ-EAKIN. The final cost estimate on the bill was 
delivered shortly after passage.
    Mr. CAMP. Shortly after passage. That was at $395 billion 
from 2004 to 2013; is that correct?
    Mr. HOLTZ-EAKIN. That is correct.
    Mr. CAMP. Since the time of that estimate and in the 
intervening release of the CMS data, has this caused you to 
change your estimate--or not you personally. Has this caused 
CBO to change the estimate?
    Mr. HOLTZ-EAKIN. No, it has not.
    Mr. CAMP. Have any of the assumptions underlying the 
estimate changed since that time?
    Mr. HOLTZ-EAKIN. In the course of preparing our baseline 
estimates of the outlays in the Medicare Program, we have 
revisited each aspect of the bill. We have made a modest 
adjustment in the participation in the Medicare Advantage plans 
but the adjustment had no budgetary consequence.
    Mr. CAMP. So, the budget estimate is the same as it was in 
November of last year?
    Mr. HOLTZ-EAKIN. Yes, it is.
    Mr. CAMP. I understand that CBO projects that spending on 
Medicare and Medicaid combined will total $6.9 trillion from 
2005 through 2014; is that correct?
    Mr. HOLTZ-EAKIN. I do not know the number off the top of my 
head but it sounds right.
    Mr. CAMP. Obviously your estimate of $395 billion for the 
Medicare Modernization bill affects both Medicare and Medicaid, 
represents less than 6 percent of this amount. The 
Administration's estimate at $534 billion represents less than 
8 percent of this amount. Is it fair to say whether the final 
estimate of the bill is $395 billion or $534 billion that the 
total amount of spending is really only a small portion of the 
overall spending on Medicare and Medicaid over the next decade?
    Mr. HOLTZ-EAKIN. I think that is a fair assessment of the 
overall contribution and I certainly want to take this 
opportunity to say that, while we believe we have made a good 
faith effort to estimate the cost of the bill, we certainly 
recognize that the final cost could be higher. It could also be 
lower. It is our attempt to place it in the middle of the 
plausible range.
    Mr. CAMP. On that point, CBO scored the 10-year cost of the 
initial preventive measures in this bill, the physical, the 
cardiovascular screening tests, the diabetes screening tests, 
the lower copayments for diagnostic mammograms in the hospital 
outpatient setting, that estimate was at $2.2 billion, that 
that would actually cost money, these preventive programs. The 
CMS was very close to that, scoring those same provisions at 
about $2.3 billion over 10 years. So, both organizations 
estimated that these costs would increase Medicare's costs over 
time. Yet there are benefits from early detection and treatment 
of disease and the provision in the bill was designed to detect 
diseases before they reached later stages which are more 
expensive to treat. Did any assumption of savings to Medicare 
over time due to earlier detection and treatment of diseases 
occur in your estimate?
    Mr. HOLTZ-EAKIN. I can go back and consult with my staff on 
the details of that piece of the legislation. I do know that we 
have had a great deal of effort placed internally on surveying 
the research on the degree to which one can find cost savings 
in the future from outlays in the present in this area. One of 
the difficulties is that many of these savings do not show up 
in the score of the bill because the activities are already 
occurring in the baseline and what shows up as a new additional 
preventive activity that will produce new additional savings is 
what gets scored. If there are activities on prevention going 
on in the baseline, they simply get transferred to the Federal 
budget. We can get back to you on the details and continue to 
refine our estimates.
    Mr. CAMP. I would appreciate that. Thank you very much. 
Thank you, Mr. Chairman.
    [The information is pending.]
    Chairman THOMAS. Thank the gentleman. The gentleman from 
Massachusetts wish to inquire, Mr. Neal?
    Mr. NEAL. Yes, thank you, Mr. Chairman. Mr. Holtz-Eakin, 
did you say that the final number on the prescription drug bill 
was not offered until after it had been enacted?
    Mr. HOLTZ-EAKIN. We provided estimates regularly throughout 
the year to both the House and the Senate and both parties. 
When the conference bill was passed, we produced a 67-page cost 
estimate detailing the underpinnings. We worked with the 
Committees to provide updates as they contemplated 
alternatives. With the passage of the final bill and the 
receipt of final language, we put out a short cost estimate and 
we also, at that point, began to put it into our baseline 
estimates of the cost of Medicare.
    Mr. NEAL. So, actually after it was passed you gave a final 
number?
    Mr. HOLTZ-EAKIN. Yes.
    Mr. NEAL. Here is part of the problem, I think, that we 
confront today. This is a follow-up to a couple of earlier 
assertions that were offered by the other side. I suspect part 
of this is due to the aggrieved minority here. General Shinseki 
said that what was being offered to the American people in 
terms of troop assessments was not accurate. Lawrence Lindsey 
said that the war in Iraq was going to cost $200 billion to 
$300 billion. He was fired. General Shinseki was dismissed. We 
have an Energy Task Force that we are going to have to go to 
the Supreme Court now so that the public can find out what 
actually went on inside of those deliberations with the Vice 
President. Mr. Wilson is set to determine whether or not Niger 
provided enriched uranium to the Iraqis and his wife is outed 
as a Central Intelligence Agency agent. We are told there were 
weapons of mass destruction. There were no weapons of mass 
destruction apparently. For months we were told there was a 
link between Iraq and Al Qaeda. The Vice President kept it up 
after the President said there was not.
    The ballot box in the House of Representatives is kept open 
at 3:00 a.m. in the morning until 6:00 a.m. in the morning to 
vote on a bill that we now know we did not have accurate 
numbers to assess the cost of. Television advertisements are 
utilized here to sell a bill to the American people for which 
there were faulty assumptions. An actuary, actuaries we all 
have great respect and regard in this system, people like you 
sitting here as witnesses. We have the highest regard for you. 
There are people like myself who beat people up on that side of 
the table over the Clinton health care bill and then opposed it 
because we did not get the right numbers. That never happens on 
the other side in this institution. You give them the wrong 
numbers, they go along with it. They offer incentives to a 
Member on the floor to vote for the bill, even with a faulty 
cost estimate. People wonder why we get upset on this side for 
the manner in which the minority is treated.
    Now one thing I want to say about Chairman Thomas, I know 
he would not accept false numbers from either side in the 
Administration. He has that reputation around here. I do know 
that if he were given faulty numbers he would have said 
something. The truth is we all know this today, that we were 
given faulty numbers and then told, or professionals were told 
not to give us the real numbers. Then we hear this argument 
today, well, you could be far off in your estimates. I 
understand that. There is a pattern here that has been offered 
to the American people for months now about what they should 
know and what they should not know. That is a very troubling 
aspect of this debate. I thank the Chairman.
    Chairman THOMAS. Thank the gentleman from Massachusetts. 
The gentleman from Missouri, Mr. Hulshof, wish to inquire?
    Mr. HULSHOF. I appreciate it, Mr. Chairman, and I 
appreciate the gentleman from Massachusetts making the 
political points. Let me come back and say specifically----
    Mr. NEAL. Would the gentleman yield?
    Mr. HULSHOF. The faulty----
    Mr. NEAL. Those are policy points, Mr. Hulshof. Those are 
not political points. All of the things that I described 
happened.
    Mr. HULSHOF. Well then let me get directly to the policy.
    Chairman THOMAS. The gentleman from Missouri has the time.
    Mr. HULSHOF. The quote was from you, faulty cost estimate? 
Did I state correctly? Faulty cost estimate, is that right? Mr. 
Holtz-Eakin, on November 20th of 2003 did you write a letter to 
the Chairman of this Committee in essence saying that the 
Medicare Modernization Act would cost $395 billion over the 
2004 to 2013 period?
    Mr. HOLTZ-EAKIN. Yes, I did, and I want to thank you for 
the chance to make the record correct. The cost estimate was 
available prior to the vote.
    Mr. HULSHOF. You also reiterated, ``CBO has not had an 
opportunity to review the final legislative language and this 
estimate could change upon completion of that review.'' Do you 
remember putting that in this letter to the Chairman?
    Mr. HOLTZ-EAKIN. Yes, we are always careful to make sure 
that we do not pin down an estimate until we see the final 
legislative language.
    Mr. HULSHOF. After the final legislative language was 
enacted into law, signed by the President, somewhere in that 
course of legislative activity, your office went back and 
refigured to see whether or not you were confident in the cost 
estimate that the CBO gave to this body. Is it not a fact that 
you stand by that $395 billion cost estimate today just as you 
did on November 20th, 2003?
    Mr. HOLTZ-EAKIN. Yes, I do.
    Mr. NEAL. Would the gentleman yield?
    Mr. HULSHOF. I see nothing faulty about that cost estimate, 
Dr. Holtz-Eakin. Now maybe that is just my perspective as a 
Member on the lower dais, not from Massachusetts, but certainly 
one that appreciates that Congress--and no disrespect intended, 
Mr. Foster--but Congress, our official scorekeeper is you, Dr. 
Holtz-Eakin. The CBO. Now I think it ironic that we have heard 
today this haranguing--and I respect the fact that information 
from whatever source is important, especially because as Mr. 
Stark said, we are not actuarial scientists. So, we rely upon 
you. To suggest that this $534 billion figure would somehow 
have caused the other side to come on board? Is that the 
suggestion? We have heard these complaints and criticisms that 
this bill, H.R. 1, was not generous enough. So, suddenly are we 
to believe that if this higher number of $534 billion were, in 
fact, our official number, that somehow we would have had some 
additional support on the other side of the aisle? I think that 
is ludicrous to even suggest it.
    To me, the point is among some--not all, and Mr. Neal is a 
friend and I am not specifically throwing this in your 
direction, Mr. Neal, and I will yield in a second. Without 
question we have heard the words cover up. We have heard an 
effort to score political points. So be it. It is an election 
year. To me the real story of today is not these partisan 
attacks or this issue of credibility and going into the 
discussion of Niger, about Medicare. The point is the headlines 
should read, ``Medicare, Social Security going bust if Congress 
fails to act.'' That, to me, is the headline. I will yield 
briefly to my friend because I want to get to some questions on 
the actuarial numbers on the bigger issue, not the political 
issue. Mr. Neal.
    Mr. NEAL. I believe, Mr. Foster, you are an actuary, are 
you not?
    Mr. FOSTER. Yes, sir.
    Mr. NEAL. That was my point, that the actuary is the one 
who came back to us with a long career of distinction, in 
offering numbers. The President uses the $534 billion mark in 
his budget.
    Mr. HULSHOF. I accept that, Mr. Neal.
    Mr. NEAL. That is not a political point. Mr. Hulshof, there 
is nothing wrong with coming from Massachusetts.
    Mr. HULSHOF. There is nothing wrong with Massachusetts, Mr. 
Neal. It is one of the great 50 states. I would say to the 
gentleman that somehow talking about yellow cake in Niger and 
how it relates to this ``faulty cost estimate'' I think to be a 
bit of a stretch. Nonetheless my time is running short. Simply 
to me the real issue here, Mr. Goss, is exactly why you are 
here. Let me just say this because I know time is short and I 
wanted to get actually to--and I see the light has just gone. 
Very quickly, the effect of economic growth on Social 
Security's finances, the myth out in Missouri--perhaps not in 
Massachusetts where people are much more sophisticated, Mr. 
Neal--I say that tongue-in-cheek--is can we grow our way out of 
this problem or is this an actuarial demographic reality that 
we have to come to grips with here on Capitol Hill? Mr. Goss, 
that is the only question I get to ask, and if you could answer 
it briefly.
    Mr. GOSS. Thank you very much. As we indicate in the 
sensitivity estimates provided in the Trustees' Report there 
would be a positive effect on the financial status of Social 
Security if we had stronger real wage growth. In our judgment, 
it would be fairly modest and it is hardly unlikely that there 
could be a sufficient increase in economic growth to make a 
substantial difference.
    Mr. HULSHOF. What a great actuarial answer. I appreciate 
that and I yield back my time.
    Chairman THOMAS. I thank the gentleman. The gentleman from 
Tennessee, Mr. Tanner, wish to inquire?
    Mr. TANNER. Thank you very much, Mr. Chairman. I think the 
real issue here is was there a willful, deliberate withholding 
of information from Congress about a bill pending of such 
magnitude, regardless of whether one agrees with the 
methodology used? Was there a withholding of pertinent 
information that may have been helpful? Let me ask you this, 
Mr. Foster, during your career has there been any time other 
than this incident where you have been unable to communicate 
with the Members of Congress or the Committees of jurisdiction?
    Mr. FOSTER. Yes, sir, on rare occasions.
    Mr. TANNER. Let me ask you further then, I have read the 
excerpts from the Balanced Budget Act 1997 (P.L. 105-33) that 
give to you and your office--I will just read the terms. While 
the Chief Actuary is an official within the Administration, 
this individual and his or her office must often work with the 
Committees of jurisdiction in the development of legislation. 
It goes on to talk about the tradition and also that the 
conferees consider independent analysis to be consistent with 
your duties and so forth. Were you aware of this language last 
June?
    Mr. FOSTER. Yes, sir, I was. I called that language to the 
attention of Mr. Scully and others.
    Mr. TANNER. What were you told in that regard?
    Mr. FOSTER. The polite version was that the conference 
language meant nothing.
    Mr. TANNER. I think every Democrat and Republican alike on 
this Committee ought to be outraged at the willful, deliberate, 
and I would say sinister withholding. Regardless of whether you 
agree with the methodology or the numbers. That is beside the 
point. When we write these conference reports, we expect them 
to mean something, I would hope. I do not care whether it is a 
Democrat or Republican Administration. We have three separate 
but equal branches of government in this country. If we ever 
lose sight of that fact we are in a whole lot more trouble than 
who is right and who is wrong in terms of the numbers in this 
situation. So, Mr. Chairman, I appreciate this. Maybe if it 
means nothing to the people that were there last summer, maybe 
we ought to rewrite it in the law. Thank you.
    Chairman THOMAS. I thank the gentleman. As the author of 
that language it meant something to me in 1997 when an 
Administration tried to stifle him and it means something to me 
today. The fact that we are having this hearing and providing 
this information on the record, I think, is evidence of that. 
The gentleman from California, Mr. Becerra, wish to inquire?
    Mr. BECERRA. Thank you, Mr. Chairman. Thank you to all the 
witnesses for your testimony, especially the candor with which 
you have given us that testimony. We appreciate that very much. 
Mr. Foster, let me see if I can ask you to clarify a few things 
as we go forward in this discussion about the estimates and the 
process that went forward in the passage of the Medicare bill. 
You mentioned that you had conversations with folks at CMS 
including Mr. Scully about your projections and you mentioned 
as well that at one point you had a conversation with an 
attorney at CMS who advised you that Mr. Scully did have the 
authority to keep you from disclosing some of that information 
to Congress. Do you recall the name of that attorney you spoke 
to?
    Mr. FOSTER. Yes, sir. That was our, at the time, Acting 
Deputy Administrator Leslie Norwalk.
    Mr. BECERRA. What was that name?
    Mr. FOSTER. Leslie Norwalk.
    Mr. BECERRA. The gist of that directive was that Mr. Scully 
had the authority legally to preclude you from disclosing that 
information. Did she give you which law she or Mr. Scully 
referenced to say that the authority existed for them to 
prevent you from disclosing that information?
    Mr. FOSTER. She might have, although I do not think so. I 
do not remember for sure. This hinged more on the question of 
constitutional separation of powers.
    Mr. BECERRA. I know it was a while ago perhaps that you 
were told this by the attorney. Can you paraphrase as best you 
can or can you tell us again what it was she told you that 
indicated that the law gave Mr. Scully that authority to keep 
you from disclosing that information?
    Mr. FOSTER. The general argument was that with separate 
branches of government, obviously a congressional and an 
executive branch, the congressional branch has its own 
scorekeeper, CBO of course.
    Mr. BECERRA. So, it seems to have been related to the 
separation of powers?
    Mr. FOSTER. Yes, sir.
    Mr. BECERRA. You mentioned in your earlier remarks that 
others in the Administration, I do not know if you said 
requested or received your estimate for the cost of the 
Medicare bill. Did you say requested or received?
    Mr. FOSTER. I probably said both at one time or another.
    Mr. BECERRA. Do you recall who requested that information 
from the White House?
    Mr. FOSTER. We had requests for the overall package cost 
estimate both from Mr. Scully and from Mr. Badger.
    Mr. BECERRA. Mr. Badger?
    Mr. FOSTER. In the White House.
    Mr. BECERRA. Anyone else at the White House?
    Mr. FOSTER. I do not believe so.
    Mr. BECERRA. I believe you testified that Mr. Badger did 
receive that information?
    Mr. FOSTER. Early on, when we all had only rough estimates 
for a package cost back in June, I know that information was 
sent both to Mr. Scully and to Mr. Badger.
    Mr. BECERRA. Anyone else at the Administration that you can 
think of that, to your knowledge, received the information 
about the cost of the Medicare bill, your projected cost of the 
Medicare bill.
    Mr. FOSTER. Again early on, as I think I mentioned before, 
Mr. Capretta at the OMB and Ms. Young at HHS.
    Mr. BECERRA. What was the name at OMB?
    Mr. FOSTER. Jim Capretta. Later on in the process, when we 
were closer to having a final estimate for the conference 
agreement, I had a conversation with Mr. Scully telling him the 
rough magnitude of the estimate.
    Mr. BECERRA. Was this before the bill had passed Congress?
    Mr. FOSTER. It was about 2 to 3 weeks before the final 
vote. I do not know if he passed that on to anyone else.
    Mr. BECERRA. Is it still your intention to remain as Chief 
Actuary at CMS?
    Mr. FOSTER. I have had more second thoughts lately, I 
suppose, but yes. We have many initiatives underway that I 
would like to see through.
    Mr. BECERRA. I know that this has probably been a very 
challenging time for you over the last several months, major 
legislation, a lot of duties have been asked of you as well as 
the other individuals who are here with monumental programs 
that are critical to the American public. We appreciate what 
you have done. So, the next question I ask, and I ask you just 
to give me your own personal opinion. Do you believe you 
performed professionally in your capacity as Chief Actuary at 
CMS?
    Mr. FOSTER. You are talking about last summer when all this 
came up, or in general?
    Mr. BECERRA. At any time that you have been Chief Actuary. 
At all times do you believe you have performed professionally 
as the Chief Actuary for CMS?
    Mr. FOSTER. I believe I have and I am aware that last 
summer was a difficult call. I will think about that one for a 
long time to come.
    Mr. BECERRA. I thank you for the candor. There is an 
article in today's Hill newspaper that is titled ``Bush takes 
offensive on Foster,'' by Mr. Bob Cusack. It states--I will 
just read it and ask a quick question since my time has expired 
and the Chairman is being gracious. It starts off rattled at 
the controversy over Medicare scoring shows no sign of waning. 
The Bush Administration has shifted strategies and now is going 
after the actuary at the center of what some have called 
Scoregate. It goes on to mention that at one point Tom Scully--
there are at least reports that Tom Scully may have threatened 
to fire you if you disclose this information. Can I ask one 
quick question here, and that is, do you feel threatened in 
your job at this stage?
    Mr. FOSTER. No, sir.
    Mr. BECERRA. Thank you very much. Thank you, Mr. Chairman.
    Chairman THOMAS. Certainly. The gentleman from Washington, 
Mr. McDermott, wish to inquire?
    Mr. MCDERMOTT. Thank you, Mr. Chairman? Mr. Foster, I was 
on the Budget Committee when they announced that we were going 
to spend $400 billion for the pharmaceutical benefit. We asked 
at that time for the parameters. What were the assumptions made 
about that $400 billion. It became pretty clear to at least us 
on the Committee who were not made privy to what was going on 
that they just plucked a number out of the air and put $400 
billion into the budget. Did you ever see the assumptions made 
for that $400 billion number? Did they ever submit those to you 
and ask you what your estimate was?
    Mr. FOSTER. If I remember correctly, Representative 
McDermott, the $400 billion showed up early on. This predates 
2003.
    Mr. MCDERMOTT. Yes, it does. It was in the 2002 era.
    Mr. FOSTER. In 2003, in the development of the President's 
framework for Medicare reform, my office had estimated quite a 
number of packages that would have had a cost of about $400 
billion. None of them were ultimately proposed specifically 
only the more general framework.
    Mr. MCDERMOTT. So, you had done a $400-billion package, 
this is what you can buy for $400 billion?
    Mr. FOSTER. Yes, sir.
    Mr. MCDERMOTT. So, when they went through the machinations 
here in the Congress and they wrote the bill in the Conference 
Committee without the Democrats there, did you know what 
assumptions they had changed from what you had done previously 
with your $400 billion package?
    Mr. FOSTER. Well, there were many differences in the 
proposals themselves, compared to the specific illustrative 
packages we had done for the President early on.
    Mr. MCDERMOTT. Could you help us understand how they--I 
mean, you had given them a way to give a $400 billion package. 
Apparently it was not sufficient or was deficient somewhere. 
They added things into it. Did you create the doughnut hole? 
Was that your idea?
    Mr. FOSTER. No, sir, I will take no credit for that one.
    Mr. MCDERMOTT. So, you gave a proposal for $400 billion 
that would have been across the year and people would not have 
this huge gap?
    Mr. FOSTER. No, the doughnut hole goes back years. If you 
want to go back much earlier back in the Clinton 
Administration, there was consideration given to a drug 
benefit, what the design would look like. We were asked for 
advice. For so much money what could you do? We recommended a 
catastrophic only coverage, in that regard, using standard 
classical insurance principles. Of course, with a catastrophic 
coverage relatively few beneficiaries actually get anything out 
of the benefit. There was a policy desire to have more people 
favorably affected, to get something out of the benefit, which 
meant more up front coverage. When you take the combination of 
that desire together with a limited availability of money to 
fund it, that is what led to someone, not me, inventing the 
doughnut hole.
    Mr. MCDERMOTT. So, they just used an old idea. That is 
really what they put together. They took your $400 billion 
package and put it in the waste basket and went back and said 
let us do a catastrophic program and some up fronts so we can 
attract some votes.
    Mr. FOSTER. I am not sure who the ``they'' is in your 
sentence.
    Mr. MCDERMOTT. It has to be the Republicans because we were 
not there. They never invited us to the meetings. So, the 
Conference Committee, when they did that, did they come out of 
that Conference Committee and hand you all of their assumptions 
and say this is what we have? Or did they say this is how much 
money we spent?
    Mr. FOSTER. Well, early on in the development of the 
legislation, of course, there was the Senate Finance version, 
there was the Ways and Means Chairman's mark. If I remember 
correctly both of these, because of the cost constraints, had 
the doughnut hole in the drug benefit formula. I think that 
idea stayed all the way through the conference. There was a lot 
of interest along the way in whether something could be done to 
eliminate the doughnut hole without having the costs explode. 
Nobody found a solution to that.
    Mr. MCDERMOTT. So, what set of assumptions did you do your 
whatever it is, $550 billion or $539 billion estimate? What 
assumptions did you use? The same ones they did, and just found 
more expense?
    Mr. FOSTER. Yes, sir. You say assumptions but I am hearing 
specifications for the proposal. We had access, not quite as 
quickly as CBO did, but we had access from time to time to the 
conference agreement as it was being developed. We tried to 
estimate for those specifications such that in the end our 
package estimate of $534 billion reflected the final benefit 
formula from the conference, the $250 deductible, the $2,250 
initial coverage limit, the 25-percent coinsurance, all of the 
above.
    Mr. MCDERMOTT. The Conference Committee did not have that 
estimate when they moved it out? They did not know what your 
estimate would be?
    Mr. FOSTER. I do not know if the conferees had that or not. 
We had given the information to Mr. Scully.
    Mr. MCDERMOTT. Thank you. Thank you, Mr. Chairman.
    Chairman THOMAS. Certainly. Does the gentleman from Texas 
wish to inquire?
    Mr. BRADY. Yes, Mr. Chairman.
    Chairman THOMAS. Would the gentleman yield briefly?
    Mr. BRADY. Yes, sir.
    Chairman THOMAS. Mr. Foster, is your responsibility under 
the law the same as Dr. Holtz-Eakin's?
    Mr. FOSTER. No, I would not say so, in general.
    Chairman THOMAS. So, the questions that Mr. McDermott asked 
you about whether you were provided with information at each 
step along the way to do estimates really is not your job. It 
is Mr. Holtz-Eakin's job, is it not?
    Mr. FOSTER. That is true.
    Chairman THOMAS. So, the fact that you did not receive 
those estimates is not some surprise, since it has never worked 
that way. That in fact, as was established earlier in 
testimony, that for a bill to come out of Committee, the CBO 
has to score it. For each change that is made the CBO has to 
score it. Do you have to score it?
    Mr. FOSTER. No, sir. We respond to requests. If you or 
anybody else seeks our assistance, we try our best to respond.
    Chairman THOMAS. My understanding is that under the law in 
the administrative branch, that information flows through 
responsible administrators and they make that decision; is that 
correct? As your description of the law was conveyed to you by 
the attorney?
    Mr. FOSTER. I believe that is a great description of the 
law, not necessarily the past practice for many years.
    Chairman THOMAS. I understand that and that is another 
reason why I have made phone calls to you periodically, bucking 
you up as it were, in terms of your professional 
responsibilities and our desire for the information, whether 
that Administration is Democrat or Republican. The gentleman 
from Texas, thank you for yielding.
    Mr. BRADY. Thank you, Mr. Chairman. Mr. Foster, I wish your 
information would have been made public at the time. I think 
while I am very comfortable with the CBO's scoring, I think it 
would have been helpful to the public debate to hear your view 
that this plan was more attractive and helpful for our poor 
seniors and that more of our other seniors would have chosen 
this plan than perhaps had been estimated. I think that would 
have been good for the debate to have that. Let me ask you, as 
far as the CBO scoring, in your view was the CBO estimate 
fraudulent?
    Mr. FOSTER. No, sir, not even remotely.
    Mr. BRADY. No, not even remotely?
    Mr. FOSTER. That is correct.
    Mr. BRADY. Was the CBO scoring an intentional 
misrepresentation of this bill?
    Mr. FOSTER. I am convinced it is not.
    Mr. BRADY. You are convinced it is not. Would you 
characterize the scoring by CBO as an honest interpretation of 
a very complex bill or something to that effect?
    Mr. FOSTER. Yes, sir.
    Mr. BRADY. Thank you. I think this is important because we 
get two or three estimates for many of our bills. We, by law, 
have to choose CBO. I am comfortable with that. I think this 
really gets to the heart of the debate today. Let me ask you, 
as long as you are using your actuarial skills and expertise, 
today I heard a number of comments and read them, some even by 
Senator Kerry of Massachusetts, that blame President Bush and 
his tax relief for the declining state of Medicare. Yet the 
Medicare Hospitalization Fund is paid for by payroll 
contributions and the President's tax relief had nothing to do 
with payroll contributions. The claim that President Bush's tax 
relief has accelerated the insolvency of the Medicare 
Hospitalization Fund, is that an accurate--in your actuarial 
expertise is that accurate?
    Mr. FOSTER. There is a relatively minor interaction. Some 
of our income is from income taxes paid by Social Security 
beneficiaries on their Social Security benefits. If the 
marginal tax rates change that can affect our revenue from that 
source. I would consider that only a fairly negligible impact 
on the HI Trust Fund.
    Mr. BRADY. So, the answer is for the most part it is not 
very accurate?
    Mr. FOSTER. Yes, sir.
    Mr. BRADY. It is not very accurate. The Medicare plan has 
been claimed, that Congress passed, accelerate financial 
insolvency of Medicare by 2 years is the estimate of the 
Trustees' Reports. The Democratic plan, promoted by many of the 
Ways and Means Members here today on the opposite side, was 
much larger than the plan that we passed. Is it accurate to say 
that the Democrat Medicare plan, with the higher cost, would 
have accelerated the insolvency of Medicare when compared to 
the Republican plan that was passed?
    Mr. FOSTER. It would depend entirely on how the cost was 
financed, sir. I do not remember the specific provisions and 
how that would happen.
    Mr. BRADY. Just for the record, it was financed much as the 
current one was. I appreciate, I think it is important to note 
today that the CBO scoring was an honest one, that President 
Bush's tax relief has not accelerated or changed Medicare in 
any way, and that the Republican plan was in fact much lower 
than the Democratic plan that was debated. Thank you, Mr. 
Chairman. I yield back the balance of my time.
    Chairman THOMAS. I thank the gentleman. The gentleman from 
Texas, Mr. Doggett, wish to inquire?
    Mr. MCDERMOTT. Thank you. Thank you very much for your 
integrity, sir. No one has suggested that the work of the CBO 
was fraudulent. What is fraudulent is willful interference with 
your professional judgment, secreting and hiding critical 
information, and willful disregard of the Congressional Budget 
Act. The question I would have to you is to be sure I am clear, 
Mr. Foster. Tom Scully had your best professional judgment as 
an independent actuary that the true cost of this Medicare bill 
would far exceed the $400 billion ceiling that the Bush 
Administration had established. You gave him that information 
last June?
    Mr. FOSTER. For early versions of the legislation last June 
and then for later versions from time to time.
    Mr. DOGGETT. You gave the same information to Doug Badger, 
the top White House official who occupies a position at the 
White House similar to Condoleeza Rice on security matters, he 
is the top health official who briefs President Bush. He had 
that information that the Administration's bill exceeded the 
cost of $400 billion by about a third from you back in June of 
last year?
    Mr. FOSTER. Yes, the information back in June, that is 
correct.
    Mr. DOGGETT. You provided the same information to the top 
health official at the OMB, the top legislative health 
secretary or acting secretary at HHS. You made that information 
widely available to the Bush Administration last June. Let me 
ask you if you have become aware through any source whether any 
Members of Congress or any members of the staff of this 
Committee or any other congressional staff gained access to 
your estimates before this near all-night session of the House 
that it took to cajole enough people to pass the bill?
    Mr. FOSTER. I really do not know who had access to it, sir.
    Mr. DOGGETT. You did discuss, you have indicated and the 
Chairman has indicated, participation rates with him for 
certain aspects of the plan last June, did you not?
    Mr. FOSTER. Yes.
    Mr. DOGGETT. I believe Mr. McManus, with his staff, had one 
of the additional requests for estimated participation rates 
and that you were told you would be fired if you provided it?
    Mr. FOSTER. That is correct.
    Mr. DOGGETT. Those participation rates are the building 
blocks from which you get the cost estimates, are they not?
    Mr. FOSTER. Yes, sir.
    Mr. DOGGETT. So, it is not just idle academic concern. If 
someone knows there is a great variance in participation rates, 
then it does not take a very bright person to recognize there 
is going to be a great variation in the cost; correct?
    Mr. FOSTER. Other things being equal, yes, sir.
    Mr. DOGGETT. You also testified that you attempted after 
these threats to fire you to discuss--I believe your words were 
attempted to discuss with other members of the Administration 
the demands that had been placed on you to secret what you 
considered important and vital information for the Congress to 
have but which Mr. Scully's improper order denied you the right 
to submit. Would you identify each of the individuals in the 
Administration with whom you discussed this problem and their 
titles?
    Mr. FOSTER. Sure. Following the blow up involving Mr. 
Thomas's request, Scott Whitaker, who is the HHS Chief of 
Staff, called me to express concern and support both from 
himself and on behalf of Secretary Thompson. We discussed the 
issue about the provision and what steps we could take to 
improve the situation. In addition, a few weeks after that 
Peter Urbanowitz, who at the time was the Deputy Director of 
the Office of the General Counsel at HHS, called similarly to 
express support and to help figure out what could be done.
    Mr. DOGGETT. You responded to Mr. Tanner with regard to Mr. 
Scully's comments on the responsibility as reflected I believe 
in the language that accompanied the Budget Act. Could you tell 
the Committee as best you recall what Mr. Scully's words were 
with regard to that subject?
    Mr. FOSTER. In various discussions, going back as far as 
June 2001, about the role of the Office of the Actuary in 
providing assistance to Congress, technical assistance, I had 
tried to make the case with Mr. Scully that you all valued 
this, using as one piece of evidence the conference language 
from the Balanced Budget Act where it is fairly clearly laid 
out what the expectations are and the value placed on that. I 
also tried just the logical argument that the Nation's top 
policymakers should have the best information available. When I 
say that I do not mean that the CBO information is not good. It 
is very good. There are many situations where CBO might not 
have been in a position to do a special analysis because of 
their other workloads or, in some rare cases, we might have a 
special expertise to make a contribution if requested. So, we 
had these discussions, or I had these discussions with Mr. 
Scully. He is not an easy person to have a discussion with.
    Mr. DOGGETT. I have found that to be true, also.
    Mr. FOSTER. So, he generally was not interested in what was 
in the conference language. He did early on want to maintain 
good relations with Congress and from June 2001 to June 2003 we 
had a system in place where we could respond directly to your 
requests.
    Chairman THOMAS. The gentleman's time has expired.
    Mr. DOGGETT. I just want the answer to the last question. 
What were Mr. Scully's words about the conference report, as 
best you recall them?
    Mr. FOSTER. I think, on at least one occasion his exact 
words were unprintable. I certainly would not want to repeat 
them in this setting.
    Mr. DOGGETT. Were unprintable?
    Mr. FOSTER. Yes, sir.
    Mr. DOGGETT. Thank you.
    Chairman THOMAS. The gentleman from Texas, Mr. Sandlin, 
wish to inquire?
    Mr. SANDLIN. Thank you, Mr. Chairman. Thank you, Mr. 
Foster, for coming today. Mr. Foster, I have very few questions 
about the cover up. I think that has been covered in great 
detail. You did say, in transmitting this information, or 
failing to transmit the information, you felt you were 
following the law; is that correct?
    Mr. FOSTER. As best I understood it, yes, sir.
    Mr. SANDLIN. Whether it was legal or not you felt it was 
improper to withhold that information, did you not?
    Mr. FOSTER. Yes, sir.
    Mr. SANDLIN. You felt like that was not ethical, did you 
not?
    Mr. FOSTER. Yes.
    Mr. SANDLIN. Let me ask you, did the enactment of the 
Medicare reform legislation in any way reduce the solvency of 
Medicare part A, the HI Trust Fund?
    Mr. FOSTER. Yes, sir. We have estimated that the impact of 
the higher payment rates to managed care plans and to rural 
providers in the part A Trust Fund advanced the date of 
depletion by 2 years.
    Mr. SANDLIN. By 2 years. So, a part of that, as you just 
indicated, was due to the payments to HMOs and PPOs; is that 
correct?
    Mr. FOSTER. Yes, sir.
    Mr. SANDLIN. So, giving money to these HMOs and PPOs, this 
private group, contributed to the lack of solvency in the 
Medicare Trust Fund; correct?
    Mr. FOSTER. Contributes to the earlier depletion, yes, sir.
    Mr. SANDLIN. Was there ever or is there ever a point in 
your modeling of this law in which you show a savings due to 
the managed care plans?
    Mr. FOSTER. No, sir, not as currently structured.
    Mr. SANDLIN. There is not even a savings after 75 years or 
even in the famous infinite horizon? It never shows savings; is 
that correct?
    Mr. FOSTER. After the first 25 years we lump everything 
together in our methodology and project it jointly.
    Mr. SANDLIN. In the rest of the budget we just estimate out 
about 5 years, usually; is that not correct?
    Mr. FOSTER. Five or 10.
    Mr. SANDLIN. So, it is very difficult to have any 
confidence whatsoever in numbers that are say 75 years out; is 
that not correct?
    Mr. FOSTER. The further you go the more uncertainty there 
is.
    Mr. SANDLIN. Well, 75 years is a long time, is it not?
    Mr. FOSTER. Yes, sir.
    Mr. SANDLIN. Now, is it true that under the law that the 
per-beneficiary private plan payment rates substantially exceed 
the payment rates provided to traditional fee-for-service under 
Medicare?
    Mr. FOSTER. It varies area-by-area.
    Mr. SANDLIN. Overall is that not true, though?
    Mr. FOSTER. On average, overall, yes.
    Mr. SANDLIN. I think on average it is about 25 percent more 
goes in the private pay payment plan as opposed to the 
traditional fee for payment service; is that correct?
    Mr. FOSTER. That sounds too high, sir, but we could look 
into it and provide something for the record.
    Mr. SANDLIN. Would it surprise you if that was it?
    Mr. FOSTER. It sounds too high.
    Mr. SANDLIN. You know it is more?
    Mr. FOSTER. On average, yes.
    Mr. SANDLIN. Are not the overhead costs higher in the HMOs 
and PPOs than in the traditional Medicare? Have not studies 
shown that?
    Mr. FOSTER. The administrative costs typically are higher.
    Mr. SANDLIN. Now you said, and maybe Mr. Goss or Dr. Holtz-
Eakin said that you felt there was a demand in the market for 
the private care, for the HMO or PPO care; is that correct?
    Mr. FOSTER. I believe we were talking about the drug 
companies at the time.
    Mr. SANDLIN. Demand for the drug plan under the Medicare 
bill, which is a part of the reform.
    Mr. FOSTER. Yes, sir.
    Mr. SANDLIN. Did you know that 80 percent of the Medicare 
eligible people that live in rural areas, such as I represent, 
are not even living in areas where there is any HMO coverage 
whatsoever? Did you know that?
    Mr. FOSTER. Yes, HMOs are not common in rural areas.
    Mr. SANDLIN. So, in those areas, actually reducing the 
ability of them to get this service, and actually beneficiaries 
residing in those areas where there are no private plans are 
then effectively receiving lower average Medicare subsidies 
than folks who live in areas that are covered by HMOs; is that 
not correct?
    Mr. FOSTER. I think I need to think about that a little 
bit.
    Mr. SANDLIN. If there is, in fact--if in fact there is a 
higher reimbursement to a plan, as opposed to traditional 
Medicare, if there is no plan available then the folks in the 
plan areas I will call it are getting higher reimbursements or 
higher rates than those in the non-plan areas; is that not 
correct?
    Mr. FOSTER. In a rural area where there is no private plan 
and the beneficiary is in fee-for-service traditional Medicare, 
there is a whole set of payment rules and mechanisms for the 
care they receive.
    Mr. SANDLIN. They are getting less, as you testified. Let 
me ask you one other question. As you have testified, there is 
under the bill no negotiation between the Secretary and the 
pharmaceutical industry or Medicare and the pharmaceutical 
industry on the cost of prescription drugs. Is it not true that 
in the Veterans Administration, however, they are saving about 
48 percent in costs through negotiation; is that not right?
    Mr. FOSTER. I am less familiar with the Veterans 
Administration situation.
    Mr. SANDLIN. Would that surprise you?
    Mr. FOSTER. I do not know one way or the other.
    Mr. SANDLIN. Thank you. Thank you, Mr. Chairman.
    Chairman THOMAS. The gentleman's time is expired. The 
gentleman from Wisconsin wish to inquire?
    Mr. RYAN. I do, thank you, Mr. Chairman. I guess since I am 
batting cleanup here, there are a number of points I would like 
to make. First, I want to just ask a couple of technical 
questions from the previous questions. With respect to the part 
A, the HI Trust Fund, and the acceleration of the insolvency by 
2 years, to what extent is that attributable to HMOs and/or 
rural providers? Can you segregate the amount of the 
acceleration of the insolvency attributed to rural providers 
and HMOs?
    Mr. FOSTER. Yes, sir, only very roughly right now. We could 
do a more thorough job for you. I would call it about 60 
percent due to the higher payment rates for the Medicare 
Advantage plans and roughly 40 percent for the higher payments 
to rural providers.
    Mr. RYAN. So, rural providers did get a substantial 
increase in their payments, as well as buttressing the Medicare 
Advantage program?
    Mr. FOSTER. Yes, sir.
    Mr. RYAN. It was mentioned earlier from the other gentleman 
from Texas that the HHS estimate, the CMS estimate, is the true 
estimate. Is your estimate the true estimate?
    Mr. FOSTER. If we could make true estimates, I would not 
have to be CMS Chief Actuary. I would be out there in the stock 
market or someplace.
    Mr. RYAN. Your estimate is just like somebody else's 
estimate; correct? It is a good educated guess, just as CBOs?
    Mr. FOSTER. They are all estimates. Doug may well be right. 
I may be wrong. It may be the other way around. It is quite 
possible we will both be wrong.
    Mr. RYAN. It is quite probable both of you are wrong and we 
will be somewhere in between for all we know.
    Mr. FOSTER. We hope it would be in between.
    Mr. RYAN. One thing that I think, we have just gone through 
a long hearing on all of this, and I think people may be 
confused as to the procedures around here.
    Chairman THOMAS. Would the gentleman yield briefly on that 
point?
    Mr. RYAN. Sure.
    Chairman THOMAS. The Chair recalls Dr. Holtz-Eakin 
indicating that what he provided at the $395 billion rate was 
an intermediate estimate from his ship. It could be lower or 
higher. The assumption that he is the floor and CMS is the 
ceiling is not accurate based upon the testimony provided by 
Dr. Holtz-Eakin. It could be lower than the $395 billion. Is 
that correct, Mr. Holtz-Eakin, based on your statement?
    Mr. HOLTZ-EAKIN. Yes, there is a range of uncertainty 
around all estimates we provide. It could be lower. It could be 
higher.
    Chairman THOMAS. So, when we are looking for the true 
estimate, as though someone were withholding the Holy Grail, a 
statement along those lines probably is designed to draw a 
conclusion rather than to illuminate. Thank you very much, Mr. 
Ryan, for yielding.
    Mr. RYAN. I thank the Chair. What I want to look at is the 
differences in the two estimates between CBO and CMS. It is 
also very important to note that, as has been mentioned 
earlier, Congress is required to use CBO estimates. When we 
score legislation all legislation that affects revenues and 
expenditures, we always have to get a score on its revenue 
impact or its expenditure impact for purposes of conforming 
with the budget resolution as driven by the Budget Committee. 
In each of these cases, we have to use CBO. You always have 
other scores out there, from OMB, from an independent agency. 
Nevertheless, in every single occasion, Congress has to use 
CBO. In looking at the differences between the two estimates on 
this Medicare bill, you can basically look at the fact that 
CMS--and please correct me, the two gentleman if I am wrong, 
CMS assumes a 94-percent participation rate in the drug plan 
and CBO assumes 87 percent; is that correct?
    Mr. HOLTZ-EAKIN. Correct.
    Mr. RYAN. With respect to the low-income subsidies for low-
income seniors for prescription drug benefit which the biggest 
out-of-pocket exposure is, I think, a $5 copay, CMS assumes a 
75-percent participation rate in the low-income subsidies and 
CBO assumes a 70-percent participation rate; is that correct?
    Mr. HOLTZ-EAKIN. A little bit lower, actually.
    Mr. RYAN. That is right, two-thirds. With respect to the 
Medicare Advantage programs where seniors get to choose among 
competing plans very much like we as Federal employees do with 
our own Federal Employee Health Benefit System, CMS assumes 32 
percent of seniors will choose to enroll in either these HMOs 
or PPOs and CBO assumes 13 percent; is that correct?
    Mr. HOLTZ-EAKIN. That is correct.
    Mr. RYAN. So, in essence, and those are the big differences 
between your two estimates, what CMS is simply saying is that 
more people are going to benefit from this new Medicare law? Is 
that essentially what you are saying, Mr. Foster, that more 
individuals will actually choose to benefit from the new 
prescription drug benefit and these new choices that will be 
made available to them in their areas
    Mr. FOSTER. Yes, sir.
    Mr. RYAN. So, from a beneficiary standpoint, whichever of 
these estimates are true, we have these estimates where at the 
basic rate, CBO, saying 87 percent of all seniors will benefit 
from a drug plan, where 66 percent of low-income seniors at 
least will benefit, and CMS is saying even more people will 
benefit from this new prescription drug law. I think it is 
important to point out here that what we are talking here is 
the differences in how many people will be helped from this new 
Medicare law. One thing that I think is important at the end of 
all of this is look at the big numbers we are talking about. 
Over the next 10 years is it not true that Medicare and 
Medicaid will spend about $6.9 trillion; is that correct, Mr. 
Holtz-Eakin or Mr. Foster?
    Mr. HOLTZ-EAKIN. Ballpark, yes.
    Mr. FOSTER. That is certainly the right ballpark.
    Mr. RYAN. About $6.9 trillion. So, when we are looking at a 
difference of an estimate of about $139 billion, what is the 
difference in your two estimates over the total course of the 
next 10 years in the spending of Medicare and Medicaid?
    Mr. HOLTZ-EAKIN. We can we look this up.
    Mr. FOSTER. For Medicare only, if you look at the March CBO 
baseline versus the President's budget, the total was actually 
quite close for Medicare expenditures. In the Trustees' Report, 
in part because of higher CPI assumptions, we have a somewhat 
higher level.
    Mr. RYAN. One more?
    Chairman THOMAS. One more quickly.
    Mr. RYAN. One more quick one. We have heard a lot of talk 
about the doughnut hole here today under this new benefit. 
According to CBO analysis the typical senior will spend less 
than $1,900 in prescription drugs in 2006 and will not reach 
the initial coverage limit of $2,250. One-third of the seniors 
will be eligible for low-income assistance and will have no gap 
in coverage regardless of how much they spend. Given these two 
points, Mr. Holtz-Eakin, what is your estimate of the number of 
seniors who will experience absolutely no gap in coverage or no 
doughnut hole under this new Medicare prescription drug 
benefit?
    Mr. HOLTZ-EAKIN. I do not know the number off the top of my 
head. I am happy to get it to you.
    Mr. RYAN. If you could, I would appreciate that.
    [The information is pending.]
    Chairman THOMAS. I thank the gentleman. The gentleman from 
North Dakota is recognized for a North Dakota minute.
    Mr. POMEROY. I thank the Chairman. I will be very brief. I 
have just been concerned----
    Chairman THOMAS. Time goes very slowly in North Dakota. A 
North Dakota minute lasts a while.
    Mr. POMEROY. I will be very brief. Mr. Foster, I have felt 
it very unfair that you have been attacked for bringing to 
light the fact that your cost estimates were precluded from 
being disclosed to Members of Congress even upon direct inquiry 
for those estimates. In fact, the Hill newspaper now, ``Bush 
takes offensive on Foster.'' The article indicates that an 
actuary has to have proof of assertions that the White House 
may have had knowledge of your estimates. Are you telling us 
today that you have directly sent e-mail to someone in the 
White House of the cost estimate you prepared?
    Mr. FOSTER. Yes, sir. For the estimates back in June, the 
preliminary estimates, there is such evidence.
    Mr. POMEROY. There is evidence that the White House 
received this. Now part of the chattering class, the talk show 
discussion of all of this, has raised an issue as to whether 
you are politically motivated in bringing this information to 
us. Indeed, one talk show pundit was saying ``this Foster''--I 
am quoting now from the Capital Gang program on CNN. ``This 
Foster, this actuary, is a bureaucrat but he is a Democrat. He 
is--he is very hostile to the Administration.'' Mr. Foster, are 
you actively involved with a political party?
    Mr. FOSTER. I will be happy to answer your question sir, 
but only with a brief explanation. For our work, our estimates 
for Medicare and Medicaid, we very carefully keep any political 
preferences and any political affiliation out of our work so 
that we can provide just the best neutral, nonpartisan, et 
cetera, analysis. Now having said that, I will tell you a short 
story. Back in 1972, when I was first eligible to vote, I 
registered as a Democrat so that I could vote against George 
Wallace in the Maryland primary. I never got around to changing 
my registration but I will announce to the world, I suppose, 
that I voted for every Republican presidential candidate ever 
since 1972 except the 1 year that I wrote in Jack Kemp.
    Mr. POMEROY. I am sorry to hear that.
    Chairman THOMAS. The gentleman's time is expended to both a 
North and South Dakota minute.
    Mr. POMEROY. I do think that is important to get on the 
record and the statement made by that talk show pundit that you 
are hostile to this Administration, are you hostile to this 
Administration?
    Mr. FOSTER. No, sir. I think very highly of Secretary 
Thompson and I think very highly of President Bush.
    Mr. POMEROY. Indeed, do you believe this Administration 
would have been better served by having the work of your 
actuarial team come forward in due course into this debate?
    Mr. FOSTER. Yes, I do.
    Mr. POMEROY. I do not have any other questions, Mr. 
Chairman. Thank you.
    Chairman THOMAS. I thank the gentleman and I want to thank 
all of you. I want to underscore the gentleman from Missouri's 
statement. Notwithstanding the nitpicking and the very 
microscopic examination of the job of actuaries today, when you 
take a step back and look at the overall picture, this society 
needs to make some fundamental changes to both the Social 
Security and the Medicare program if we expect those who are 
currently paying the bill to receive the benefits that those 
now enjoy. The hearing stands adjourned.
    [Whereupon, at 4:26 p.m., the hearing was adjourned.]
                                ------                                




                 BOARD OF TRUSTEES 2004 ANNUAL REPORTS

                              ----------                              


                        THURSDAY, APRIL 1, 2004

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 12:10 p.m., in 
room 1100 Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Committee) presiding.
                                ------                                

    Chairman THOMAS. Good afternoon. Today, we continue the 
Committee's review of the 2004 Annual Reports of the Board of 
Trustees of the Social Security and Medicare Trust Funds. 
Pursuant to U.S. House of Representatives Rule XI, clause 
2(j)(1), at the insistence of the minority, four additional 
witnesses have been called before us to offer testimony on the 
Trustees' Report on Medicare. The minority is fully within its 
rights under Rule XI and the Chair has no discretion in that 
regard. Before us today, one of the witnesses that was 
requested, Leslie Norwalk, who is the Acting Deputy 
Administrator for the CMS, and Jeff Flick, who today is the San 
Francisco Regional Administrator for CMS. Doug Badger, Special 
Assistant to the President for Economic Policy, had been 
requested by the minority to appear, and White House Counsel 
Alberto Gonzales has provided the Committee a letter of 
explanation on executive privilege. Therefore, Mr. Badger will 
not appear. Tom Scully, former CMS Administrator, has provided 
a letter of explanation to the Committee outlining the reasons 
for his declining the invitation, as well. Without objection, I 
ask that both letters be entered into the record. The clerks 
will make sure that Members have copies of those letters. With 
that, I would recognize the Ranking Member, Mr. Rangel, for any 
opening statement he may wish to make.
    [The opening statement of Chairman Thomas follows:]
    [The information follows:]
    Opening Statement of The Honorable Bill Thomas, Chairman, and a 
        Representative in Congress from the State of California
    Good afternoon. Today we continue the Committee's review of the 
2004 Annual Reports of the Boards of Trustees of the Social Security 
and Medicare.
    Pursuant to Rule XI, Clause 2(j)(1) >of the U.S. House of 
Representatives four additional witnesses have been called before us to 
offer testimony on the Trustees Report on Medicare.
    Leslie Norwalk, Acting Deputy Administrator for the Centers for 
Medicare and Medicaid Services (CMS) and Jeff Flick, San Francisco 
Regional Administrator for CMS will provide testimony to us today. Doug 
Badger, Special Assistant to the President for Economic Policy, will 
not appear. White House Counsel Alberto Gonzales has provided a letter 
of explanation on executive privilege. Tom Scully, former CMS 
Administrator, has also declined to testify, and has provided a letter 
of explanation to the Committee. Without objection, I ask that both 
letters be entered into the record.
    I would now like to recognize the ranking member, Mr. Rangel, for 
any opening statement he might make.

                                 

                                                    The White House
                                               Washington, DC 20500
                                                     March 31, 2004
Hon. Bill Thomas
U.S. House of Representatives
Committee on Ways and Means
1102 Longworth House Office Building
Washington, DC 20515-0548

Dear Chairman Thomas:

    I am writing in response to your letter of yesterday inviting Doug 
Badger, Special Assistant to the President for Economic Policy, to 
appear before the House Committee on Ways and Means tomorrow.
    It is longstanding White House policy, applied during 
administrations of both parties, that members of the White House staff 
should decline invitations to testify at congressional hearings. 
Accordingly, on Mr. Badger's behalf, I respectfully decline the 
invitation to him to testify before the Committee on Ways and Means.
            Sincerely,
                                                Alberto R. Gonzales
                                           Counsel to the President
                                 ______
                                 
                                                      April 1, 2004
Honorable William M. Thomas,
Chairman
Committee on Ways and Means
U.S. House of Representatives
Washington, D.C. 20515-6348

Dear Mr. Chairman:

    Thank you for your invitation to appear at a hearing you have 
scheduled to begin at noon, Thursday, April 1. Unfortunately, for the 
past ten days I have been traveling, both domestically and abroad, and 
so I am unable to appear. However, I do have some comments that I 
believe are relevant to the Committee's inquiry.
    I am very proud of my tenure as Administrator of the Centers for 
Medicare and Medicaid Services (CMS). Among other accomplishments, we 
worked feverishly with consumer and patient groups, as well as unions 
and providers, to produce the first health quality measures for nursing 
homes and home health agencies--and published them in every major paper 
in the country. We started on the same mission with hospitals. We also 
greatly expanded 1 800 MEDICARE and educated millions of seniors about 
the terrific Medicare and Medicaid benefits to which they are entitled. 
These are but a few of the accomplishments of which I'm most proud.
    Most significantly, with the Administration's help, you and your 
colleagues on the Committee passed an EXCELLENT Medicare bill that will 
stand the test of time. Long after the November elections are over, 
your collective historic achievement will remain. The goal of this 
Administration and Congress has always been to help low-income seniors. 
As a result of the action of the Committee, millions of seniors will no 
longer have to choose between the drugs they need to sustain themselves 
and their rental payments. This generation of low-income seniors will 
receive enormous relief, and the next generation of seniors will be far 
better served by a much more dynamic and consumer-responsive Medicare 
program that will better meet the health needs of seniors and the 
disabled of all incomes.
    As we all know, there have been longstanding differences between 
CMS budget assumptions and those articulated by the Congressional 
Budget Office (CBO). Virtually everyone engaged in the Medicare reform 
effort knew that these assumptions differed and was also aware of 
multiple meetings between CMS and CBO to reconcile these differences. 
In fact, I testified before the Senate Finance Committee in June, 2003, 
about the differing assumptions generated by CBO and CMS, noting that 
``it's a fundamental disagreement between our actuaries . . . there are 
seven or eight fundamental differences.``
    As Administrator of CMS, it was my responsibility to determine when 
and how the CMS Chief Actuary should respond to Congressional requests. 
From the very beginning of my tenure at CMS, Mr. Richard Foster 
expressed his strongly held view that he, as the head of the Office of 
Chief Actuary, was independent of me or anyone else within the 
Executive Branch. Accordingly, Mr. Foster believed that he was free to 
make decisions about when or how to respond to Congressional inquiries 
relating to CMS cost estimates generally, and, in particular, the 
Medicare Reform bill.
    Simply put, I disagreed, and there is no question whatsoever that I 
made it very clear to Mr. Foster, both directly and indirectly, that I, 
as his supervisor, would decide when he would communicate with 
Congress. It is a position that I also made very clear to the 
Republican and Democratic Leadership of the three CMS oversight 
Committees, beginning with meetings that occurred in the spring of 
2001. Moreover, it is also worth noting that even Mr. Foster, in his 
testimony before this Committee on March 24, admitted that my position 
was accurate as a matter of law. He indicated during his appearance 
that he sought legal advice about my view and was told that I was 
correct.
    I believe that I dealt with Mr. Foster, and all other CMS employees 
under my supervision, openly and fairly during my entire tenure. 1 
remain proud of my twenty-five years of strong, bipartisan relations 
with the Congress, of my personal commitment to improving health care 
for America's seniors, and of the role I played in assisting with the 
passage of what I believe will prove to be an achievement of historic 
proportions.
            Sincerely,
                                                   Thomas A. Scully

                                 

    Mr. RANGEL. Thank you, Mr. Chairman. Even though you said 
that you had no discretion in extending the hearing, I want to 
thank you on behalf of the minority for the spirit in which you 
did extend it and know that we have your support in trying to 
make certain that the integrity of the professional staff of 
any administration, Republican or Democrat, is not tainted by 
partisanship. Even at the last hearing, you demonstrated by 
reflecting on the past that you have given assurances to staff 
that when they were coerced into not cooperating with Members 
of Congress, that you would support them in their effort to 
come forward. Having said that, we really think that the 
executive branch on this issue does not enjoy the executive 
privilege claimed today. The question is whether the executive 
branch of government actually withheld the information that the 
true cost of the Medicare bill was up to $450 billion rather 
than $400 billion.
    With the legal interpretations of executive privilege that 
have been given to us, it is clear that there has to be some 
conversation that the staff had with the President that they 
would believe that his testimony would be entitled to executive 
privilege. If Mr. Badger did not discuss it with the President, 
then, of course, there is no need to raise the question. If he 
did discuss it with the President, Members of Congress ought to 
know whether the President of the United States knew what the 
facts were and through his subservients said that we shouldn't 
get that information.
    We do know that a lawyer for the Administration did 
indicate to Mr. Foster that if he shared this information with 
Members of Congress, that he could get fired. We do know that 
Mr. Scully has informed us that he talked with the President 
about these issues. We do know that Mr. Scully apparently 
ordered Foster to share at least his testimony for us to 
believe that you could share this information with Republicans 
but not with Democrats. This is a very serious issue, not just 
for this hearing but for the integrity of the U.S. House of 
Representatives and for this Committee.
    There are a variety of things at this time, after caucusing 
with our Members, that I will be asking you. One is to make 
certain that it is not without discretion but that you would 
support this inquiry until we get the answers that we need; 
two, that you subpoena Mr. Badger here; three, that if you see 
fit not to do that, that we should vote to be able to have him 
here. I just got a copy of Mr. Scully's letter. I don't know 
what privilege he has, but he is certainly a key person between 
the Congress, Mr. Foster, the President, and Mr. Badger, so I 
would hope that he, too, would be subject to a subpoena, and 
that at the end of the day, we would know whatever information 
was withheld, and would know it was not willingly withheld from 
the Congress. So, knowing that you have demonstrated in 1997 an 
interest in this subject, I hope that it would not be a 
minority request but would come from the Chair for the full 
Committee and, therefore, for the House.
    Chairman THOMAS. Does the gentleman wish a response?
    Mr. RANGEL. I certainly do.
    Chairman THOMAS. I thank the gentleman. The question really 
hinges on the statement the gentleman made about information 
that we need or want. The Chair is certainly concerned about 
information that the Chair and the Committee needs to carry out 
our legal obligation. When the desire shifts to want, it turns 
into a question of curiosity. I will tell the gentleman that 
the letter from the counsel to the President, which I believe 
he has a copy of, is very brief. It is two short paragraphs, 
and the operative portion of that, I believe, it is 
longstanding White House policy applied during administrations 
of both parties that members of the White House staff should 
decline invitations to testify at congressional hearings. It is 
true that at the time this letter is presented indicating that 
the executive branch wishes to exercise longstanding decisions 
regarding executive privilege, that at the same time, they have 
allowed a member of the Administration, notwithstanding the 
executive privilege, to testify. So, I don't believe the answer 
is found in the counsel to the President's letter based upon, 
of course, a decision that they made. They could choose to or 
not.
    In Mr. Scully's letter, which we also just received this 
morning, I notice on page 2 that Mr. Scully in his letter 
declining the invitation of the Committee to appear before it 
on this issue, in the second paragraph on page 2 says, 
``Moreover, it is also worth noting that even Mr. Foster in his 
testimony before this Committee on March 24 admitted that my 
position,'' Mr. Scully's position, ``was accurate as a matter 
of law. He indicated during his appearance that he sought legal 
advice about my view and was told that I was correct.'' One of 
the reasons I was pleased Ms. Norwalk was able to appear before 
us for questioning on this issue is that in the questioning by 
the minority Members, Mr. Foster indicated that Ms. Norwalk in 
her position at the time was the one who supplied the decision 
in regard to whether or not Mr. Scully was operating within his 
legal bounds. That, I believe, is a worthwhile area to examine. 
Mr. Flick was kind enough to come, and I understand now is the 
Western Regional CMS, that you had to fly out to make this 
appearance. We appreciate it.
    Mr. Rangel is right. There was a requirement under Rule XI 
that we have a second hearing, but time, place, and manner is 
within the purview of the Chair and the Chair wanted to try to 
respond in as reasonable time as possible so that we could have 
some continuity in front of us on this issue. Since Mr. Foster 
appeared to believe that the law allowed Mr. Scully to make the 
decision the way he did it, I believe the Committee's concern 
should turn on whether or not that was an appropriate or legal 
decision, i.e., the need argument. If it is just because of 
curiosity as to who said what to whom, notwithstanding the fact 
Mr. Scully was perfectly legal in the decisions that he made, 
then the Chair would be concerned about simply pursuing a line 
of questioning on the basis of curiosity.
    So, the Chair is here to examine that difference stated 
very succinctly by the gentleman from New York. Is it a 
question of need or is it a question of want? The Chair stands 
ready to exercise the full legal power of the Committee if 
there is a need. If it is a want, then the Chair would have to 
examine the level of concern over the want to simply continue 
to inquire who said what to whom, when, and how, 
notwithstanding the fact that they had every legal right to 
make the decision that was made, and that would be the Chair's 
position in listening to the testimony to determine whether it 
actually is a need of this Committee or if it is a want of some 
of the Members of the Committee.
    Mr. RANGEL. Mr. Chairman, by your actions in 1997, I think 
you have proven my position that there is a need that we have 
integrity with professional actuaries and that they can report 
the information as needed, not wanted, by the Congress. So, the 
significance of the legal opinion provided by Ms. Norwalk 
really doesn't matter. Lawyers can be wrong, and if this person 
was threatened that you could be fired when they had a legal 
obligation to inform the Congress, you can dismiss that. Now 
comes the question, who told the lawyer, who told Mr. Scully 
that he was authorized to threaten the person who had the legal 
right to tell us the information we wanted? Of course, when Mr. 
Badger, who was involved in these conversations, refuses to 
come to testify exercising executive privilege, then what he is 
saying is, or implying, is that it was the President that said 
that you cannot divulge the discussion that we had.
    I would like to say, in concluding my arguments here, that 
there are so many examples of the executive, not just Ms. 
Condoleezza Rice, but in the last Administration, Erskine 
Bowles, Chief of Staff of the President, McLaughley, Podesta, 
Ruff, Nolan, Quinn, all counsel to the President, assistants to 
the President, 45 top-rank Clinton people testified under oath. 
So, we don't want to get into the argument as to the rights of 
executive privilege. The one question I am asking you, I guess, 
is that before I ask for a vote on the issue, are you prepared 
to exercise your discretion as the Chairman of this 
distinguished Committee to subpoena Mr. Badger to testify?
    Chairman THOMAS. Would the gentleman yield once again?
    Mr. RANGEL. Yes. Sure.
    Chairman THOMAS. I thank the gentleman. As an admitted non-
attorney, the Chair is examining not narrow legal points but 
broader fundamental constitutional points. The legislative 
powers derive from Article I. The executive power is derived 
from Article II. There has been a long and colorful legal 
history of the ability of those who derive their constitutional 
powers from Article I being able to require those who draw 
their powers from Article II to do things that those who draw 
their powers from Article I want them to do. There are those 
who draw their powers from Article II who have a long and 
colorful history of trying to get those who draw their powers 
from Article I to do what those in Article II want them to do, 
and all of it is refereed by those who derive their 
constitutional powers from Article III.
    Again, the Chair would consider entertaining what I 
consider to be a significant power not exercised by this 
Committee in the time of this Chairman's tenure. If we are in 
pursuit of a legal need, if, in fact, Mr. Scully was operating 
outside the legal bounds in telling someone under his 
jurisdiction that the information was information that the 
executive branch could choose to share or not share, rather 
than the way the gentleman from New York stated that we had a 
legal or constitutional right to the information, 
notwithstanding the Article II provisions which gives rise to 
the executive privilege, if there was a violation of the law, 
the Chair stands ready to use whatever tools necessary to get 
to the bottom of the violation of the law. If it is a question 
of style in terms of Administration or someone who is 
frustrated because they aren't an independent operator within 
an administrative hierarchy, that, then, I don't think reaches 
the level of the need for a subpoena of testimony.
    We have people in front of us who were directly, 
intimately, and first-person involved in shaping the decisions 
and the opinions that Mr. Foster exercised at the last hearing. 
If, in fact, there is a comfort level on the part of the 
Committee that Mr. Scully exercised the decisions he made well 
within the law, then the need question, the Chair believes, has 
been answered. The want question is something that very often 
doesn't get fulfilled, but the Chair doesn't believe that the 
powers under Article I extend to simply whims and wants 
fulfilled using what I consider to be a powerful legal tool. 
The Chair will go to any lengths to make sure that the law is 
followed. The Chair is not ready to go to any lengths to 
satisfy someone's whim or curiosity.
    Mr. MCCRERY. Mr. Chairman.
    Mr. RANGEL. Mr. Chairman, I concur with the direction in 
which the Chair is going in terms of determining whether he is 
satisfied there is a need to exercise the awesome power of the 
subpoena. I have been advised that my ability to call the 
question for a subpoena has to be at the beginning of a 
hearing, and further, that we have to have a quorum for that to 
happen. So, while you are searching for the need, I don't want 
to lose my rights as a Member to be able to raise the motion. 
If you can give some type of assurances that the motion to 
request the subpoena for witnesses and the fact that it would 
be done in a timely manner when we have a quorum, I have no 
problem with you searching for the need.
    Chairman THOMAS. I ask if the gentleman believes there is a 
quorum present.
    Mr. RANGEL. I would then ask----
    Chairman THOMAS. If the gentleman wishes to exercise that 
right, the Chair would like to make the decision after he has 
been informed by virtue of the testimony of the witnesses.
    Mr. RANGEL. I am saying I have no problem with that as long 
as you also indicate that I reserve the right to raise the 
motion without violating the House rules which gives me the 
right to do it----
    Chairman THOMAS. I tell the gentleman the Chair would be 
somewhat concerned that we may, in fact, lose a quorum and the 
Chair would not want to deny the gentleman's right based on a 
quorum call. So, if the gentleman feels that he wants to have 
the maximum protection of the rules, he probably ought to move 
the question now, knowing we have a quorum, and hopefully the 
information that is presented will support the Chair in the 
belief that this is not a legal need but a want or curiosity.
    Mr. RANGEL. In the event that I fail in my motion, I hope 
if the Chair is satisfied that it is a need and not a want for 
curiosity, that you still would have the power to exercise----
    Chairman THOMAS. If the gentleman would yield, my search 
for the truth is not influenced by the mere exercise of 
democratic authority.
    Mr. MCCRERY. Mr. Chairman, would you yield?
    Chairman THOMAS. Certainly.
    Mr. MCCRERY. It seems to me----
    Chairman THOMAS. I believe, actually, the gentleman from 
New York has the time.
    Mr. MCCRERY. He is running the clock.
    Chairman THOMAS. Notice there is no clock running.
    [Laughter.]
    Mr. MCCRERY. It seems to me when you come to the question 
of need versus want, you reference Article I of the 
Constitution, and one of the responsibilities of the House of 
Representatives is to allocate money. We were given the power 
to appropriate. In order to appropriate on behalf of the 
American people, we have to have the best information 
available. It seems to me that it is not a want on our part, it 
is to establish a precedent here about whether or not we are 
entitled to the information that is being developed in the 
government by Federal employees as we carry out our role of 
oversight. That is what the question here, our need for it, is. 
It is not to find out the exact number or anything else. It is 
to find out what is there so that we can make a reasoned 
judgment. We very often take varying opinions about what the 
number is and ignore one of them and go with another one. That 
is not the issue here. The issue is whether we can be barred 
from knowing that a competent professional has created a model 
that gives him a number which is at major variance with what 
was put before us. We were told $400 million--$400 billion, and 
then we find out that $534 billion was floating around. That is 
almost--well, I don't know. I am not going to give a 
percentage. It is a big difference. I think that that is why we 
need--we could have argued that. We would have had a big 
argument in here if we had known that other number.
    Chairman THOMAS. Well, we had one.
    Mr. RANGEL. I yield to the gentleman from Texas.
    Mr. DOGGETT. Thank you.
    Chairman THOMAS. Does he want an answer, or was that a 
statement?
    Mr. RANGEL. I yield to the Chair to respond.
    Chairman THOMAS. I thank the gentleman for yielding. What 
the gentleman from Washington is asking for was not available 
because he was looking for facts. What was available was an 
estimate based upon assumptions which, frankly, when Mr. Foster 
was in front of us, were challenged by a number of Members of 
the Committee, especially, as I recall, the gentlewoman from 
Connecticut, the Chair of the Subcommittee on Health in terms 
of the take-up rates. In addition to that, Mr. Foster's talents 
are not unique nor is his model unique. There are others who 
carry out those various functions. The desire of Congress to 
get the best information can be provided from a number of 
sources. If the only factual source was a member of the 
Administration, in determining a legal decision, the Chair 
would then be looking at the question of subpoenaing the 
individual who had the fact which Congress desperately needed.
    I do not believe the attempt to subpoena someone to find 
out if they were within their legal rights to indicate in an 
administrative hierarchy that an individual was not free to 
exercise whatever judgment they felt free to exercise absent 
supervision reaches that level. The gentleman's point is, 
people who make decisions either had the legal authority or 
didn't have the legal authority to make them. It is not whether 
you liked his style in doing it. That wouldn't raise it to a 
level of subpoena. What we have in front of us is an ability to 
determine whether or not Mr. Scully operated under the law. 
That would be the point at which the Chair would make the 
decision of exercising the subpoena, and the decision of 
calling it need or want was not the Chair's. It was framed that 
way by the Ranking Member from New York, and the Chair thanks 
the gentleman for once again yielding.
    Mr. RANGEL. I yield to the gentleman from Texas.
    Mr. DOGGETT. There appear to be two different individuals 
here and two different situations. As I understand with 
reference to Mr. Badger, the Condoleezza Rice of health care 
policy at the White House, as we learned last week, it may be 
that since they are stonewalling that the subpoena is the only 
route. With reference to Mr. Scully, as I read his letter, and 
he, of course, does not enjoy any executive privilege 
concerning his conversations with the President, but Mr. Scully 
is not refusing to come, as I understand it. He has simply said 
that he is tired today. He says, ``I have been traveling these 
past 10 days.'' Whether we interfered with his nap time or 
whatever might be the case, perhaps it is just a matter short 
of a subpoena of simply rescheduling at a time when he is more 
well-rested and my inquiry would be whether the Chair, perhaps 
short of going to the extreme of a subpoena, could simply 
continue this hearing to a time when Mr. Scully is well rested 
and could come and tell us about his conversations with the 
President and others on this very important matter.
    Mr. RANGEL. I yield to the Chair.
    Chairman THOMAS. I thank the gentleman for yielding, and 
his time is nearly expired. I tell the gentleman from Texas 
that trying to screen through what I assume to be somewhat 
facetious remarks that the Chair especially is concerned about 
issuing a subpoena against a private citizen. Dealing with 
individuals who are carrying out functions of office under the 
law is one question, but now simply to find out, as the 
gentleman characterized, who said what to whom and when, and 
compelling them to appear before this Committee when what they 
did was legal is an extension of the power of this Committee 
that I believe would verge on abuse of the power.
    The gentleman declined the invitation which the minority 
has under Rule XI to extend the hearing. The Chair has complied 
with that in what I believe was the most efficacious time, 
place, and manner of response. We have before us two 
individuals who have direct personal knowledge of decisions 
that affected Mr. Scully and affected Mr. Foster, and it seems 
to me that that ought to be something that we would listen to 
if at the end of the testimony and the questioning period, if 
there is--it is clear that he operated under the law in 
exercising his decision, then again, I think it reverts to a 
manner of style. I am quite sure that Mr. Scully's style 
doesn't meet the level of desired stylistic behavior that 
either the gentleman from Washington or the gentleman from 
Texas would prefer. That does not trigger, in the Chair's 
opinion, a need to issue a subpoena. That is yet to be 
determined based upon the testimony and the questions that lie 
before this second half of the hearing on the Trustees' Report.
    Mr. DOGGETT. Mr. Chairman, I am not asking about issuing a 
subpoena to Mr. Scully. I am just asking if the Chair is 
declining to extend an invitation to him to come at a time that 
is more convenient to Mr. Scully to be here, since he is the 
actor and the person involved rather than one of his 
assistants.
    Chairman THOMAS. Might I respond?
    Mr. RANGEL. Yes. I yield to the Chair to respond.
    Chairman THOMAS. In looking at the nearly expired time of 
the Ranking Member, I tell the gentleman that the minority has 
requested an extension of the hearing under Rule XI. That 
extension has been granted. The gentleman now seeks to figure 
out a way to bounce the ball down the street with a 
continuation of a continuation of a continuation. The Chair's 
reading of Mr. Scully's letter is he ain't coming.
    Mr. RANGEL. Mr. Chairman, in order to protect my right in 
being timely in raising the motions to subpoena both Mr. Scully 
and Mr. Badger, I, under House Rule I (1)(2)(k)(6), I move that 
the Committee issue a subpoena to a witness, Special Assistant 
to the President for Economic Policy, Doug Badger, to testify 
before the Committee on Ways and Means as soon as possible at a 
mutually agreeable time following the upcoming district work 
period on the subject of cost estimates on the Medicare 
prescription bill passed by the Congress in 2003 and to provide 
the Committee by at least 5 days prior to the hearing with 
documents relevant to this subject.
    Mr. MCCRERY. Mr. Chairman.
    Chairman THOMAS. The gentleman from Louisiana.
    Mr. MCCRERY. Mr. Chairman, I move to table the motion of 
the gentleman from New York.
    Chairman THOMAS. Motion to table is before us. It is not 
debatable.
    Mr. RANGEL. There is not a debate on that?
    Chairman THOMAS. It is not debatable on his second. If the 
gentleman from Louisiana----
    Mr. LEVIN. Are we going to shut off debate on this?
    Mr. RANGEL. Yes.
    Chairman THOMAS. Can the Chair finish his statement? In an 
attempt to try to create and maintain comity, notwithstanding 
the gentleman from Louisiana's parliamentary privilege, on a 
procedural motion, which is not debatable, the underlying 
motion is. So, the Chair will recognize for a brief period of 
time the gentleman from Michigan with what the Chair will call 
a timely request, notwithstanding it came after the motion, to 
discuss briefly his concerns about the motion.
    Mr. LEVIN. Would the Chairman yield?
    Chairman THOMAS. The gentleman from Michigan.
    Mr. KLECZKA. It seems that other Members also want to talk 
about the motion. Is the Chairman only restricting the debate 
on the motion to the gentleman from Michigan?
    Chairman THOMAS. The Chair indicated that in an attempt to 
maintain comity, the Chair would allow the gentleman from 
Michigan, notwithstanding the fact that the motion to table was 
timely presented and there is no debate on that motion. If the 
gentleman from Wisconsin indicates that every Member of the 
minority is going to debate this, notwithstanding----
    Mr. KLECZKA. Well, I am not saying every Member. I am 
saying more than one Member would possibly like to be heard on 
the motion.
    Chairman THOMAS. The Chair has indicated his willingness to 
offer comity because the gentleman from Michigan intervened, 
not timely, but the Chair is willing to entertain that request. 
If the gentleman from Wisconsin wishes to push his point that 
the Chair is not following parliamentary procedure because the 
motion to table was timely presented, the Chair will move to 
the vote on the motion to table.
    Mr. KLECZKA. So, that is a threat, that if I insist on 
talking on the motion, then Sandy Levin from Michigan doesn't 
talk? That is----
    Chairman THOMAS. I tell the gentleman it is not a threat. 
It is an attempt by the Chair to follow parliamentary 
procedure.
    Mr. KLECZKA. That is not comity, it is comedy.
    Chairman THOMAS. The Committee has before it the motion to 
table the gentleman from New York's motion, and all those in 
favor of tabling----
    Mr. LEVIN. Mr. Chairman----
    Chairman THOMAS. Say aye.
    [Chorus of ayes.]
    Mr. LEVIN. Mr. Chairman----
    Chairman THOMAS. Those opposed?
    [Chorus of noes.]
    Mr. LEVIN. Mr. Chairman, you recognized me.
    Chairman THOMAS. In the opinion of the Chair, the motion to 
table has passed and the motion----
    Mr. RANGEL. I ask for a recorded vote.
    Chairman THOMAS. From the gentleman from New York is laid 
upon the table.
    Mr. RANGEL. I ask for a roll call.
    Chairman THOMAS. A sufficient number of hands. The clerk 
will call the roll on the motion to table the gentleman from 
New York's motion on the subpoena.
    Mr. LEVIN. Mr. Chairman, point of information before the 
vote. I thought you were going to recognize me.
    Chairman THOMAS. I tell the gentleman the Chair was willing 
as a matter of comity to recognize the gentleman, 
notwithstanding he did not have parliamentary standing. It was 
clear that other Members on his side of the aisle were not 
willing to allow the Chair to exercise that comity, and so the 
Chair was more than willing to exercise the parliamentary right 
to move to the procedural motion.
    Mr. LEVIN. Mr. Chairman, I just want to say that you 
recognized the gentleman from Louisiana. I don't think you were 
surprised by the motion he was going to submit. There is no way 
you are going to shut down discussion of these issues, and you 
can do it now through this device----
    Mr. MCCRERY. Mr. Chairman, I do not believe that this 
discussion is in order in the middle of a----
    Chairman THOMAS. It is not in order----
    Mr. LEVIN. It isn't in order----
    Chairman THOMAS. It is not in order. A point of information 
is not the correct reference, but the Chair was allowing the 
gentleman to express himself in an attempt to continue to 
maintain comity.
    Mr. LEVIN. Comity, then let us have discussion of the 
motion.
    Chairman THOMAS. I tell the gentleman that the Chair 
attempted to do that, notwithstanding the timely notice of the 
motion to table. There were Members on his side of the aisle 
that indicated that the attempt to provide comity by the Chair 
was not sufficient, which meant the Chair would then not be 
able to follow parliamentary procedure and the Chair is 
concerned about that and believes we should.
    Mr. LEVIN. Stonewalling won't work. We will state our----
    Chairman THOMAS. I tell the gentleman we are in the middle 
of a roll call----
    Mr. RAMSTAD. Regular order.
    Chairman THOMAS. The Chair will indicate that he has 
continued to provide a reasonable opportunity, and since a roll 
call by a show of hands was called by the minority, the rules 
indicate that we should now have that roll call.
    Mr. RANGEL. I ask unanimous consent that the gentleman from 
Michigan be allowed to express himself.
    Chairman THOMAS. I tell the gentleman that it is not in 
order during a roll call for anyone to express their position 
and the clerk will call the roll.
    Mr. RANGEL. It was my understanding that unanimous 
consent----
    Mr. RAMSTAD. Regular order.
    Mr. RANGEL. Suspend all of the rules. I have asked for 
unanimous consent----
    Chairman THOMAS. Not in the middle of a roll call.
    CLERK. Mr. Crane?
    Mr. CRANE. Aye.
    CLERK. Mr. Crane votes aye. Mr. Shaw?
    Mr. SHAW. Aye.
    CLERK. Mr. Shaw votes aye. Mrs. Johnson?
    Mrs. JOHNSON. Aye.
    CLERK. Mrs. Johnson votes aye. Mr. Houghton?
    Mr. HOUGHTON. Aye.
    CLERK. Mr. Houghton votes aye. Mr. Herger?
    Mr. HERGER. Aye.
    CLERK. Mr. Herger votes aye. Mr. McCrery?
    Mr. MCCRERY. Aye.
    CLERK. Mr. McCrery votes aye. Mr. Camp?
    Mr. CAMP. Aye.
    CLERK. Mr. Camp votes aye. Mr. Ramstad?
    Mr. RAMSTAD. Aye.
    CLERK. Mr. Ramstad votes aye. Mr. Nussle?
    Mr. NUSSLE. Aye.
    CLERK. Mr. Nussle votes aye. Mr. Johnson?
    Mr. JOHNSON. Aye.
    CLERK. Mr. Johnson votes aye. Ms. Dunn?
    [No response.]
    Mr. Collins?
    Mr. COLLINS. Yes.
    CLERK. Mr. Collins votes yes. Mr. Portman?
    Mr. PORTMAN. Aye.
    CLERK. Mr. Portman votes aye. Mr. English?
    Mr. ENGLISH. Aye.
    CLERK. Mr. English votes aye. Mr. Hayworth?
    Mr. HAYWORTH. Aye.
    CLERK. Mr. Hayworth votes aye. Mr. Weller?
    Mr. WELLER. Aye.
    CLERK. Mr. Weller votes aye. Mr. Hulshof?
    [No response.]
    Mr. McInnis. Mr. McInnis?
    Mr. MCINNIS. Yes.
    CLERK. Mr. McInnis votes yes. Mr. Lewis of Kentucky?
    Mr. LEWIS OF KENTUCKY. Aye.
    CLERK. Mr. Lewis of Kentucky votes aye. Mr. Foley?
    Mr. FOLEY. Aye.
    CLERK. Mr. Foley votes aye. Mr. Brady?
    Mr. BRADY. Aye.
    CLERK. Mr. Brady votes aye. Mr. Ryan?
    Mr. RYAN. Aye.
    CLERK. Mr. Ryan votes aye. Mr. Cantor?
    Mr. CANTOR. Aye.
    CLERK. Mr. Cantor votes aye. Mr. Rangel?
    Mr. RANGEL. No.
    CLERK. Mr. Rangel votes no. Mr. Stark?
    Mr. STARK. No.
    CLERK. Mr. Stark votes no. Mr. Matsui?
    Mr. MATSUI. No.
    CLERK. Mr. Matsui votes no. Mr. Levin?
    Mr. LEVIN. No.
    CLERK. Mr. Levin votes no. Mr. Cardin?
    Mr. CARDIN. No.
    CLERK. Mr. Cardin votes no. Mr. McDermott?
    Mr. MCDERMOTT. No.
    CLERK. Mr. McDermott votes no. Mr. Kleczka?
    Mr. KLECZKA. No.
    CLERK. Mr. Kleczka votes no. Mr. Lewis of Georgia?
    Mr. LEWIS OF GEORGIA. No.
    CLERK. Mr. Lewis of Georgia votes no. Mr. Neal?
    Mr. NEAL. No.
    CLERK. Mr. Neal votes no. Mr. McNulty?
    Mr. MCNULTY. No.
    CLERK. Mr. McNulty votes no. Mr. Jefferson?
    [No response.]
    Mr. Tanner?
    Mr. TANNER. No.
    CLERK. Mr. Tanner votes no. Mr. Becerra. Mr. Becerra?
    Mr. BECERRA. Pass.
    CLERK. Mr. Becerra passes. Mr. Doggett?
    Mr. DOGGETT. No.
    CLERK. Mr. Doggett votes no. Mr. Pomeroy?
    Mr. POMEROY. No.
    CLERK. Mr. Pomeroy votes no. Mr. Sandlin?
    Mr. SANDLIN. No.
    CLERK. Mr. Sandlin votes no. Ms. Tubbs Jones? Ms. Tubbs 
Jones?
    Ms. TUBBS JONES. No.
    CLERK. Ms. Tubbs Jones votes no. Ms. Dunn?
    Ms. DUNN. Yes.
    CLERK. Ms. Dunn votes yes. Mr. Hulshof?
    [No response.]
    Mr. Jefferson?
    [No response.]
    Mr. Becerra?
    Mr. BECERRA. No.
    CLERK. Mr. Becerra votes no. Mr. Thomas?
    Chairman THOMAS. Yes.
    CLERK. Mr. Thomas votes yes.
    Chairman THOMAS. The clerk will announce the vote.
    CLERK. Twenty-three aye, 16 no.
    Chairman THOMAS. There being 23 ayes and 16 noes, the 
motion of the gentleman from New York, Mr. Rangel, is laid on 
the table.
    Mr. RANGEL. Mr. Chairman, under House Rule I (1)(2)(k)(6), 
I move that the Committee issue a subpoena to a witness, former 
CMS Administrator, Mr. Thomas Scully, to testify before the 
Committee on Ways and Means as soon as possible following the 
upcoming district work period on the subject of cost estimates 
on the Medicare prescription drug bill passed by the Congress 
in 2003 and to provide the Committee with all the documents 
relevant to this subject at least 5 days prior to the hearing--
--
    Mr. KLECZKA. Mr. Chairman, on the motion----
    Mr. RANGEL. In support of this motion, Mr. Chair, let me 
say this. I think that you have extended yourself beyond the 
mandatory discretion decisions in this Committee. I think you 
have done it because you feel as a Member of this Committee and 
certainly as the Chairman that what we do today may in the 
future dictate how we are treated by Administration officials, 
and to that extent, I apologize to the witnesses that are here 
patiently waiting----
    Mr. KLECZKA. Will Mr. Rangel yield?
    Mr. LEVIN. Mr. Chairman.
    Mr. KLECZKA. Mr. Rangel, would you yield, please?
    Mr. LEVIN. Mr. Chairman.
    Chairman THOMAS. Prior to the Chair----
    Mr. RANGEL. I just wanted to complete my thought, and that 
is while we recognize that the majority has the right to table 
this motion, I hope they recognize that the damage they are 
doing is not to me as the Ranking Member or to the minority, 
but to this Committee as we seek to determine at this hearing 
what right the executive branch has to deny us information 
which we are entitled to know. Furthermore, though the 
decisions may appear to be partisan, I would hope that the 
majority Members would recognize that this Committee has a 
longstanding reputation of integrity and of protecting our 
jurisdiction and making certain that our constitutional rights 
are not abused.
    Mr. LEVIN. Mr. Rangel, would you yield?
    Mr. RANGEL. I yield to Mr. Levin, who was denied the 
opportunity----
    Mr. MCCRERY. Point of order, Mr. Chairman.
    Mr. RANGEL. To express himself.
    Mr. MCCRERY. Point of order, Mr. Chairman.
    Chairman THOMAS. The gentleman from Louisiana will state 
the point of order.
    Mr. MCCRERY. The gentleman was recognized for a motion.
    Chairman THOMAS. That is correct.
    Mr. MCCRERY. He cannot yield time during offering a motion 
to the Committee.
    Chairman THOMAS. That is correct. The gentleman was 
recognized for the purpose of offering a motion. He has offered 
a motion----
    Mr. RANGEL. I move the----
    Chairman THOMAS. He has explained to a degree the motion, 
and the Chair would indicate that all we are trying to do is 
get the facts before we make a decision. The gentleman from New 
York has every right to make a decision before he gets the 
facts, and that is evidenced by the motion that he has offered.
    Mr. LEVIN. Mr. Chairman----
    Chairman THOMAS. The Chair would be willing for the purpose 
of comity to allow the gentleman from Michigan to make some 
brief points, notwithstanding the fact that the Chair has the 
ability to recognize except for the structure of in the middle 
of a roll call vote, and then the Chair would not exercise the 
recognition but rather to carry out the roll call vote and that 
is what occurred on the last request by the gentleman from New 
York.
    Mr. RANGEL. Well, I recognize----
    Chairman THOMAS. The Chair would attempt to allow a 
reasonable dialog by recognizing the gentleman from Michigan 
for any comments he may wish to make on the motion by the 
gentleman from New York requesting a subpoena for the former 
Administrator. The gentleman from Michigan?
    Mr. LEVIN. Thank you, Mr. Chairman. We need to understand 
what the question is, what the issue is. It was not when Mr. 
Foster was here who was right, whether it was $400 billion that 
was as stated when we were voting on this or $530-some billion 
that was the actuarial figure. That, there was disagreement. 
The issue isn't legally whether Mr. Scully had the right to 
tell Mr. Foster he could not tell people. That is an issue. The 
main issue is who knew about the actuarial figure? Why wasn't 
it disclosed in a timely fashion? That is the issue. We voted 
in this Congress on major legislation while there was 
information that was hidden from us by some in the 
Administration and we have a right to know why and who knew. 
That is the issue. To say this question, therefore, is a matter 
of curiosity or a whim or a style is absolutely incorrect. It 
is the knowledge that is the right of the public and the need 
for there to be truthfulness. I said when Mr. Foster was here 
that there was a cover-up of this information and we want to 
know how high up the cover-up went. Mr. Scully says something 
by his letter. We have a right to have him right here in front 
of us, under oath, to ask him what he knew, whom he talked to 
within the White House, under what circumstances and why he did 
not tell us, the representatives of the people, the information 
that he knew. That is the issue. So, anybody here can 
stonewall, and I am sorry my other colleagues cannot speak. 
They will do it when they inquire of these witnesses. We will 
find a way, because as we have found out on other occasions, 
and I close with this, there is no way to hide the truth. I 
just want to say, I have great respect for Mr. McCrery. For you 
to move to table and quash discussion of this motion is not 
going to work. We are going to get this information out one way 
or the other.
    Mr. RANGEL. I move the question, Mr. Chairman.
    Mr. MCCRERY. Mr. Chairman.
    Chairman THOMAS. The Chair recognizes the gentleman from 
Louisiana.
    Mr. MCCRERY. Mr. Chairman, before I make the motion to 
table, I would just refer----
    Mr. RANGEL. A point of order, Mr. Chairman.
    Mr. MCCRERY. Everyone to Mr. Scully's letter----
    Mr. RANGEL. Point of order.
    Mr. MCCRERY. Which points out clearly----
    Mr. RANGEL. Is recognized----
    Mr. MCCRERY. That information was available----
    Chairman THOMAS. The gentleman from Louisiana will suspend. 
The Chair recognized the gentleman from Louisiana. He did not 
recognize the gentleman from Louisiana for the purpose of 
offering a motion. He recognized the gentleman from Louisiana.
    Mr. RANGEL. I'll withdraw my point of order.
    Chairman THOMAS. The time is the gentleman from 
Louisiana's. Would the gentleman like to continue----
    Mr. MCCRERY. Thank you, Mr. Chairman. I think the Chairman 
has been quite generous with allowing the minority to explore 
this question during Mr. Rangel's presentation early on in this 
hearing and then by allowing Mr. McDermott and Mr. Levin. 
Frankly, we could argue about this all day long and some may 
conclude that that is, in fact, the point of the minority. The 
facts are that there was information available to the public 
which would have led any knowledgeable person to conclude that 
OMB's ultimate assumptions and ultimate estimate of the cost of 
the Medicare bill were going to be higher than CBO's. Mr. 
Scully, in fact, according to his letter, testified before the 
Senate Finance Committee to the fact that his assumptions were 
different. If you had looked at those assumptions and been 
familiar with how the estimate on the bill was going to work, 
you would know that it was going to be higher. You add to that 
the fact that the minority repeatedly introduced, supported, 
talked about Medicare bills that cost a lot more than either 
one of the CBO's estimate or the OMB estimate and I think you 
see this debate for what it is.
    Mr. NEAL. Would the gentleman yield?
    Mr. MCCRERY. I will be glad to yield.
    Mr. NEAL. Mr. McCrery, is it your position that the 
Medicare prescription drug bill would have passed in the House 
of Representatives had the true figure been known?
    Mr. MCCRERY. My position is that many more Democrats, 
according to their rhetoric, would have voted for a bill with a 
much higher price tag.
    [Laughter.]
    Well, then I suppose you were just introducing things out 
of folly that cost twice as much. I mean, come on, get real 
here.
    Chairman THOMAS. The gentleman from Louisiana has the time.
    Mr. MCCRERY. Let us just get down to what this is all 
about. This is a lot about politics. We understand that. 
Everybody in the audience understands that. We have spent 
enough time on it. We have two witnesses here at the behest of 
the minority operating fully under the rules of the House, 
which we recognize, to extend a hearing which we called to try 
to explore this subject. Under your rights in the minority, we 
now have extended the hearing and two of the witnesses which 
you invited to appear are here and we are waiting to hear their 
testimony. Enough of the politics. Let's get on with the 
hearing and then you can all make your remarks----
    Mr. SHAW. Mr. Chairman.
    Mr. MCCRERY. To try to get that out. I move----
    Mr. SHAW. Mr. Chairman.
    Chairman THOMAS. I tell the gentleman from Louisiana----
    Mr. MCCRERY. I move to table the motion of the gentleman 
from New York.
    Chairman THOMAS. In the opinion of the Chair, the gentleman 
from Louisiana is debating the point, probably would be 
considered a preface to his motion, and since the Chair had 
recognized the gentleman from New York and the gentleman from 
Michigan, two Members of the minority, the Chair wishes to 
recognize a second Member of the majority, and the Chair 
recognizes the gentleman from Florida, Mr. Shaw.
    Mr. SHAW. Mr. Chairman, I move to table the motion of the 
gentleman from New York.
    Chairman THOMAS. The gentleman from Florida moves to table 
the motion of the gentleman from New York. All those in favor?
    [Chorus of ayes.]
    Those opposed?
    [Chorus of noes.]
    In the opinion of the Chair, the ayes have it.
    Mr. LEVIN. Roll call.
    Chairman THOMAS. The Chair will recognize the right of the 
minority to call the roll, with the understanding that we would 
like to have the roll call without attempts to gain recognition 
during the roll call. Will the clerk call the roll?
    CLERK. Mr. Crane.
    Mr. CRANE. Aye.
    CLERK. Mr. Crane votes aye. Mr. Shaw?
    Mr. SHAW. Aye.
    CLERK. Mr. Shaw votes aye. Mrs. Johnson?
    Mrs. JOHNSON. Aye.
    CLERK. Mrs. Johnson votes aye. Mr. Houghton?
    [No response.]
    Mr. Herger?
    Mr. HERGER. Aye.
    CLERK. Mr. Herger votes aye. Mr. McCrery?
    Mr. MCCRERY. Aye.
    CLERK. Mr. McCrery votes aye. Mr. Camp?
    Mr. CAMP. Aye.
    CLERK. Mr. Camp votes aye. Mr. Ramstad?
    Mr. RAMSTAD. Aye.
    CLERK. Mr. Ramstad votes aye. Mr. Nussle?
    Mr. NUSSLE. Aye.
    CLERK. Mr. Nussle votes aye. Mr. Johnson?
    Mr. JOHNSON. Aye.
    CLERK. Mr. Johnson votes aye. Ms. Dunn?
    Ms. DUNN. Aye.
    CLERK. Ms. Dunn votes aye. Mr. Collins?
    Mr. COLLINS. Yes.
    CLERK. Mr. Collins votes yes. Mr. Portman?
    Mr. PORTMAN. Aye.
    CLERK. Mr. Portman votes aye. Mr. English?
    Mr. ENGLISH. Aye.
    CLERK. Mr. English votes aye. Mr. Hayworth?
    Mr. HAYWORTH. Aye.
    CLERK. Mr. Hayworth votes aye. Mr. Weller?
    Mr. WELLER. Aye.
    CLERK. Mr. Weller votes aye. Mr. Hulshof?
    [No response.]
    Mr. McInnis?
    Mr. MCINNIS. Yes.
    CLERK. Mr. McInnis votes yes. Mr. Lewis of Kentucky?
    Mr. LEWIS OF KENTUCKY. Aye.
    CLERK. Mr. Lewis of Kentucky votes aye. Mr. Foley?
    Mr. FOLEY. Aye.
    CLERK. Mr. Foley votes aye. Mr. Brady?
    Mr. BRADY. Aye.
    CLERK. Mr. Brady votes aye. Mr. Ryan?
    Mr. RYAN. Aye.
    CLERK. Mr. Ryan votes aye. Mr. Cantor?
    Mr. CANTOR. Aye.
    CLERK. Mr. Cantor votes aye. Mr. Rangel. Mr. Rangel?
    Mr. RANGEL. No.
    CLERK. Mr. Rangel votes no. Mr. Stark?
    Mr. STARK. No.
    CLERK. Mr. Stark votes no. Mr. Matsui?
    Mr. MATSUI. No.
    CLERK. Mr. Matsui votes no. Mr. Levin?
    Mr. LEVIN. No.
    CLERK. Mr. Levin votes no. Mr. Cardin?
    Mr. CARDIN. No.
    CLERK. Mr. Cardin votes no. Mr. McDermott?
    Mr. MCDERMOTT. No.
    CLERK. Mr. McDermott votes no. Mr. Kleczka?
    Mr. KLECZKA. No.
    CLERK. Mr. Kleczka votes no. Mr. Lewis of Georgia?
    Mr. LEWIS OF GEORGIA. No.
    CLERK. Mr. Lewis of Georgia votes no. Mr. Neal?
    Mr. NEAL. No.
    CLERK. Mr. Neal votes no. Mr. McNulty?
    Mr. MCNULTY. No.
    CLERK. Mr. McNulty votes no. Mr. Jefferson?
    [No response.]
    Mr. Tanner?
    Mr. TANNER. No.
    CLERK. Mr. Tanner votes no. Mr. Becerra?
    Mr. BECERRA. No.
    CLERK. Mr. Becerra votes no. Mr. Doggett?
    Mr. DOGGETT. No.
    CLERK. Mr. Doggett votes no. Mr. Pomeroy?
    Mr. POMEROY. No.
    CLERK. Mr. Pomeroy votes no. Mr. Sandlin?
    Mr. SANDLIN. No.
    CLERK. Mr. Sandlin votes no. Ms. Tubbs Jones?
    Ms. TUBBS JONES. No.
    CLERK. Ms. Tubbs Jones votes no. Mr. Houghton?
    Mr. HOUGHTON. Aye.
    CLERK. Mr. Houghton votes aye. Mr. Hulshof?
    [No response.]
    Mr. Jefferson?
    [No response.]
    Mr. Thomas?
    Chairman THOMAS. Aye.
    CLERK. Mr. Thomas votes aye.
    Chairman THOMAS. The clerk will announce the vote.
    CLERK. Twenty-three ayes, 16 no.
    Chairman THOMAS. There being 23 ayes and 16 noes, the 
motion of the gentleman from New York is laid upon the table. 
The Chair is prepared to allow the witnesses to begin 
testimony. The Chair will indicate that because this hearing 
was requested as an extension of the previous hearing, the 
Chair, to try to accommodate in a timely fashion, called the 
hearing for today at 12:00 p.m. A previously scheduled hearing 
in this room is to begin at 2:00 p.m. and the Chair intends not 
to disrupt the previously scheduled hearing, which was ordered 
for 2:00 p.m. The Chair will now, first of all, thank Ms. 
Norwalk and Mr. Flick for appearing before us----
    Mr. DOGGETT. Parliamentary inquiry, Mr. Chairman.
    Chairman THOMAS. The gentleman from Texas?
    Mr. DOGGETT. Do I understand, then, that the testimony from 
the witnesses and the questions from all Members of this 
Committee will be limited to a total of 59 minutes or however 
much is left before 2:00 p.m.?
    Chairman THOMAS. I tell the gentleman, no, it was the 2 
hours that we had available when the Committee began.
    Mr. DOGGETT. At this point, without the Chair having made 
any prior announcement on this topic, you may not even reach 
all the Members of this Committee and permit them a right to 
question. Is that my understanding? I mean, I can just count 5 
minutes per person down here, and if everyone takes their time, 
some Members of the Committee will not be permitted to ask any 
questions.
    Chairman THOMAS. The gentleman is usually very persuasive 
and perhaps he can persuade some Members not to utilize their 
full time so he can have a chance----
    Mr. KLECZKA. Mr. Chairman, parliamentary inquiry.
    Chairman THOMAS. The gentleman from Wisconsin.
    Mr. KLECZKA. Mr. Chairman, is it not true that the most 
powerful Committee in Congress, the Committee on Ways and 
Means, has other hearing rooms, that we have not only this main 
hearing room, but there are other rooms throughout the Capitol 
complex where the next hearing could be conducted? Is that not 
true so we can continue with this?
    Chairman THOMAS. I tell the gentleman, this room was chosen 
because of the importance and the number of people who are 
going to attend that hearing. It was on the schedule prior to 
this, scheduled for 2:00 p.m., and the Chair intends to honor 
the previously scheduled hearing.
    Mr. KLECZKA. Isn't this the same----
    Chairman THOMAS. The sooner we can begin, the better we 
have----
    Mr. KLECZKA. Isn't this the same Committee hearing that was 
scheduled for 10:00 a.m. this morning and it never occurred at 
10:00 a.m.?
    Chairman THOMAS. No.
    Mr. KLECZKA. Are you sure?
    Chairman THOMAS. The Chair is willing to recognize the 
witnesses----
    Mr. RANGEL. A parliamentary inquiry, Mr. Chairman.
    Chairman THOMAS. The gentleman from New York.
    Mr. RANGEL. Does the Chair intend to place the witnesses 
under oath?
    Chairman THOMAS. As long as the Chairman's tenure to this 
point, no witness has been placed under oath and the Chair 
would probably begin the inquiry as to the necessity of the 
oath to inquire both of Ms. Norwalk and Mr. Flick, are you 
currently employed by the Federal Government?
    Ms. NORWALK. Yes.
    Mr. FLICK. Yes.
    Chairman THOMAS. I believe the answer to that would be yes. 
In the procedure of being employed, were you required to swear 
or affirm an oath of allegiance to the United States and its 
Constitution?
    Ms. NORWALK. Yes.
    Mr. FLICK. Yes.
    Chairman THOMAS. The answer is yes. Beyond that, your goal 
here is to pursue the truth? The Chair feels comfortable, I 
will tell the gentleman from New York, that based upon their 
prior swearing or affirming and their current role, that the 
Chair believes the testimony by these people who voluntarily 
have appeared before the Committee who had a choice not to 
appear will be truthful without the need to push it to an oath-
taking procedure.
    Mr. RANGEL. Further parliamentary inquiry, Mr. Chairman. In 
view of the fact that the Chair has now interpreted the need or 
lack of need for an oath before congressional Committees, would 
it be in order that the Ranking Member be allowed to have a 
motion that the witnesses be placed under oath?
    Chairman THOMAS. I tell the gentleman that the decision 
that the Chair made was based upon the same one in terms of 
need or wants. If the gentleman is questioning witnesses who 
voluntarily appeared before us who have in their current place 
of employment sworn an oath of allegiance to the Constitution, 
the Chair finds virtually no difference between the position of 
the witness and the position of every Member on this Congress. 
We, too, are employed by the Federal Government, and we, too, 
have taken an oath of office. If the gentleman believes that 
the witnesses, or the concern over the witnesses rises to the 
point of requiring an oath, the Chair may be prepared for every 
Member of the Committee to rise and also reaffirm their oath, 
so that we are all on the same level of concern about our 
willingness to take oaths and the voracity of our statements.
    Mr. RANGEL. Well, I exclude the Members of this Committee, 
but I move that the witnesses be placed under oath.
    Mr. MCCRERY. Mr. Chairman.
    Chairman THOMAS. The gentleman from Louisiana?
    Mr. MCCRERY. Knowing that it is a violation of Federal law 
to knowingly tell a falsehood to a government official, I think 
it would be duplicative, unnecessary, and perhaps even diminish 
the possibility in the future of getting good witnesses to 
appear before the Committee. I therefore move to table the 
motion of the gentleman from New York.
    Chairman THOMAS. The gentleman from Louisiana has moved to 
table the gentleman from New York's----
    Mr. DOGGETT. Mr. Chairman, parliamentary----
    Chairman THOMAS. Motion. All those in favor, say aye.
    [Chorus of ayes.]
    Those opposed?
    [Chorus of noes.]
    In the opinion of the Chair, the ayes have it. The ayes 
have it and the motion is tabled.
    Mr. RANGEL. Record vote.
    Chairman THOMAS. A sufficient number of hands. The clerk 
will call the roll.
    CLERK. Mr. Crane?
    Mr. CRANE. Aye.
    CLERK. Mr. Crane votes aye. Mr. Shaw?
    Mr. SHAW. Aye.
    CLERK. Mr. Shaw votes aye. Mrs. Johnson?
    Mrs. JOHNSON. Aye.
    CLERK. Mrs. Johnson votes aye. Mr. Houghton?
    Mr. HOUGHTON. Aye.
    CLERK. Mr. Houghton votes aye. Mr. Herger?
    Mr. HERGER. Aye.
    CLERK. Mr. Herger votes aye. Mr. McCrery?
    Mr. MCCRERY. Aye.
    CLERK. Mr. McCrery votes aye. Mr. Camp?
    Mr. CAMP. Aye.
    CLERK. Mr. Camp votes aye. Mr. Ramstad?
    Mr. RAMSTAD. Aye.
    CLERK. Mr. Ramstad votes aye. Mr. Nussle?
    Mr. NUSSLE. Aye.
    CLERK. Mr. Nussle votes aye. Mr. Johnson?
    Mr. JOHNSON. Aye.
    CLERK. Mr. Johnson votes aye. Ms. Dunn?
    [No response.]
    Mr. Collins?
    Mr. COLLINS. Yes.
    CLERK. Mr. Collins votes yes. Mr. Portman?
    Mr. PORTMAN. Aye.
    CLERK. Mr. Portman votes aye. Mr. English?
    Mr. ENGLISH. Aye.
    CLERK. Mr. English votes aye. Mr. Hayworth?
    Mr. HAYWORTH. Aye.
    CLERK. Mr. Hayworth votes aye. Mr. Weller?
    Mr. WELLER. Aye.
    CLERK. Mr. Weller votes aye. Mr. Hulshof?
    [No response.]
    Mr. McInnis?
    [No response.]
    Mr. Lewis of Kentucky?
    Mr. LEWIS OF KENTUCKY. Aye.
    CLERK. Mr. Lewis of Kentucky votes aye. Mr. Foley?
    [No response.]
    Mr. Brady?
    Mr. BRADY. Aye.
    CLERK. Mr. Brady votes aye. Mr. Ryan?
    Mr. RYAN. Aye.
    CLERK. Mr. Ryan votes aye. Mr. Cantor?
    Mr. CANTOR. Aye.
    CLERK. Mr. Cantor votes aye. Mr. Rangel. Mr. Rangel?
    Mr. RANGEL. No.
    CLERK. Mr. Rangel votes no. Mr. Stark?
    Mr. STARK. No.
    CLERK. Mr. Stark votes no. Mr. Matsui?
    Mr. MATSUI. No.
    CLERK. Mr. Matsui votes no. Mr. Levin?
    Mr. LEVIN. No.
    CLERK. Mr. Levin votes no. Mr. Cardin?
    Mr. CARDIN. No.
    CLERK. Mr. Cardin votes no. Mr. McDermott?
    Mr. MCDERMOTT. No.
    CLERK. Mr. McDermott votes no. Mr. Kleczka?
    Mr. KLECZKA. No.
    CLERK. Mr. Kleczka votes no. Mr. Lewis of Georgia?
    Mr. LEWIS OF GEORGIA. No.
    CLERK. Mr. Lewis of Georgia votes no. Mr. Neal?
    Mr. NEAL. No.
    CLERK. Mr. Neal votes no. Mr. McNulty?
    Mr. MCNULTY. No.
    CLERK. Mr. McNulty votes no. Mr. Jefferson?
    [No response.]
    Mr. Tanner?
    Mr. TANNER. No.
    CLERK. Mr. Tanner votes no. Mr. Becerra?
    Mr. BECERRA. No.
    CLERK. Mr. Becerra votes no. Mr. Doggett?
    Mr. DOGGETT. No.
    CLERK. Mr. Doggett votes no. Mr. Pomeroy?
    Mr. POMEROY. No.
    CLERK. Mr. Pomeroy votes no. Mr. Sandlin?
    Mr. SANDLIN. No.
    CLERK. Mr. Sandlin votes no. Ms. Tubbs Jones?
    Ms. TUBBS JONES. No.
    CLERK. Ms. Tubbs Jones votes no. Ms. Dunn?
    [No response.]
    Mr. Hulshof?
    [No response.]
    Mr. McInnis?
    [No response.]
    Mr. Foley?
    [No response.]
    Mr. Jefferson?
    [No response.]
    Mr. Thomas?
    Chairman THOMAS. Aye.
    CLERK. Mr. Thomas votes aye.
    Chairman THOMAS. The clerk will announce the vote.
    CLERK. Twenty aye, 16 no.
    Chairman THOMAS. There being 20 ayes, 16 noes, the motion 
of the gentleman from New York is laid upon the table. The 
Chair is prepared to allow the witnesses to present testimony 
at this point.
    Mr. DOGGETT. Point of order, Mr. Chairman.
    Chairman THOMAS. The Chair----
    Mr. DOGGETT. I have a point of order.
    Chairman THOMAS. Point of order?
    Mr. DOGGETT. Yes, sir.
    Chairman THOMAS. The gentleman from Texas on his point of 
order.
    Mr. DOGGETT. Solely. Mr. Chairman, House Rule XI, Clause 
(2)(j)(2), provides that, quote, ``each Committee shall apply 
the 5-minute rule during the questioning of witnesses in any 
hearing until such time as each Member of the Committee who so 
desires has had an opportunity to question each witness.'' 
House Rule XI, Clause (2)(j)(1) is the rule of the House to 
which the Chairman referred that gives him no discretion to 
deny this hearing. My point of order is that the Chair, by his 
ruling limiting the time of this hearing to less than an hour 
and denying me and other Members of the Committee an 
opportunity to ask any questions is in violation of both House 
Rule XI, Clause (2)(j)(2) and House Rule XI, Clause (2)(j)(1), 
since he has converted this appearance of a hearing into a 
total sham hearing, denying the minority their right to ask 
questions of these witnesses. I would urge my point of order.
    Chairman THOMAS. I tell the gentleman that my ability to 
reach the level the gentleman from Texas described these 
hearings pales in comparison. The Chair will indicate that 
there are many occasions in which hearings that are called have 
not been successful in exhausting the opportunities of each and 
every Member. The Chair indicates the time, place, and manner, 
oftentimes controls the circumstances we find ourselves in. The 
Chair would like to start the process because the gentleman 
from Texas has come to a conclusion without the process ever 
yet having been allowed to begin. He has reached a conclusion 
which is not yet warranted nor can the point of order be made 
since the hearing has not ended and every Member has not had 
their chances for the 5 minutes. So, if the gentleman wants to 
continue to attempt to make his point so that, in fact, there 
is no time for any Member, the Chair would consider that 
dilatory and, therefore, would rule that the Chair would not 
recognize the gentleman to make a point of order----
    Mr. DOGGETT. The Chair has no choice----
    Chairman THOMAS. When the point of order might be timely--
--
    Mr. DOGGETT. To recognize me to make a point of order----
    Chairman THOMAS. The Chair indicates----
    Mr. DOGGETT. I urge my point of order, Mr. Chairman.
    Chairman THOMAS. The Chair indicates the gentleman from 
Texas's inquiry is not timely as a point of order.
    Mr. DOGGETT. Mr. Chairman, I urge my point of order----
    Chairman THOMAS. It is not timely. The Chair recognizes----
    Mr. DOGGETT. If you want to overrule it, fine, but 
otherwise, I want to appeal this ruling of the Chair.
    Chairman THOMAS. The Chair recognizes the witnesses----
    Mr. DOGGETT. Mr. Chairman, I urge my point of order and I 
urge it now. I want a----
    Chairman THOMAS. I tell the gentleman----
    Mr. DOGGETT. Is there a ruling on the order?
    Chairman THOMAS. I tell the gentleman that the Chair 
recognized the gentleman for a point of order. The point of 
order----
    Mr. DOGGETT. The point of order has been made and the Chair 
refuses to rule on it----
    Chairman THOMAS. The gentleman from Texas made----
    Mr. DOGGETT. Since the Chair is acting totally improperly--
--
    Chairman THOMAS. The gentleman's point was not timely.
    Mr. DOGGETT. Mr. Chairman, I urge my point of order.
    Chairman THOMAS. The point was not timely and the gentleman 
is now----
    Mr. DOGGETT. I take that as a denial----
    Chairman THOMAS. Carrying out dilatory tactics.
    Mr. DOGGETT. I appeal the ruling of the Chair and I urge--
--
    Mr. MCCRERY. Mr. Chairman.
    Chairman THOMAS. I tell the gentleman----
    Mr. DOGGETT. I ask for a vote on----
    Chairman THOMAS. He was not recognized----
    Mr. DOGGETT. The ruling of the Chair.
    Chairman THOMAS. For that purpose.
    Mr. DOGGETT. Mr. Chairman, you have no discretion when a 
point of order is made but to entertain that point of order. If 
you are denying the point of order as not timely, then please 
do so and I will appeal respectfully your ruling and show you 
the respect to which you are entitled. I am entitled to a 
ruling on my point of order. It is privileged and you do not 
have the discretion to ignore it.
    Chairman THOMAS. I tell the gentleman----
    Mr. MCCRERY. Mr. Chairman.
    Chairman THOMAS. I tell the gentleman on his point of 
order, which was a conclusion based upon Rule XI, that every 
Member gets to exercise the 5-minute rule, has not yet ripened.
    Mr. DOGGETT. I urge my point of order. If----
    Chairman THOMAS. No Member has been denied the right to 
question. Therefore, Rule XI is not now in violation and the 
gentleman's point of order is not timely.
    Mr. DOGGETT. Mr. Chairman, you have denied my point of 
order as not ripe and I appeal the ruling of the Chair, 
respectfully.
    Chairman THOMAS. The gentleman was recognized for a point 
of order. The Chair is telling the gentleman his point of order 
is not ripe----
    Mr. DOGGETT. The Chair is denying----
    Chairman THOMAS. Therefore there is no ability to appeal 
the decision of the Chair.
    Mr. DOGGETT. My point of order while attempting to avoid 
making a ruling which he knows will be appealed. I appeal the 
ruling of the Chair denying my point of order to have a fair 
opportunity to ask these witnesses questions.
    Chairman THOMAS. I tell the gentleman that he will have a 
fair opportunity, and until he is denied, his point of order is 
not timely.
    Mr. DOGGETT. Mr. Chairman, I appeal the ruling of the 
Chair. The Chair has ruled that the point of order is not ripe. 
That is a denial of the point of order as the Chair clearly 
knows.
    Chairman THOMAS. I will accept the gentleman's argument 
that the Chair's ruling of the fact that not every Member has 
been able to exercise their 5 minutes as a point of order is 
not timely. The Chair believes that point of order is not 
timely. The gentleman from Texas believes it is and, therefore, 
appeals the decision of the Chair.
    Mr. DOGGETT. Thank you, Mr. Chairman.
    Mr. MCCRERY. Mr. Chairman, I don't believe that is 
debatable, but just in case it is, I move to table the motion 
of the gentleman to appeal the ruling of the Chair.
    Chairman THOMAS. The gentleman's move to table the motion 
is timely and appropriate. All those in favor of tabling the 
motion, say aye.
    [Chorus of ayes.]
    Those opposed?
    [Chorus of noes.]
    In the opinion of the Chair, the ayes have it----
    Mr. DOGGETT. Mr. Chairman, record vote.
    Chairman THOMAS. The motion to appeal the decision of the 
Chair is tabled.
    Mr. DOGGETT. Record vote.
    Chairman THOMAS. A sufficient number for a record vote. The 
clerk will call the roll.
    CLERK. Mr. Crane?
    Mr. CRANE. Aye.
    CLERK. Mr. Crane votes aye. Mr. Shaw?
    Mr. SHAW. Aye.
    CLERK. Mr. Shaw votes aye. Mrs. Johnson?
    Mrs. JOHNSON. Aye.
    CLERK. Mrs. Johnson votes aye. Mr. Houghton?
    Mr. HOUGHTON. Aye.
    CLERK. Mr. Houghton votes aye. Mr. Herger?
    Mr. HERGER. Aye.
    CLERK. Mr. Herger votes aye. Mr. McCrery?
    Mr. MCCRERY. Aye.
    CLERK. Mr. McCrery votes aye. Mr. Camp?
    Mr. CAMP. Aye.
    CLERK. Mr. Camp votes aye. Mr. Ramstad?
    Mr. RAMSTAD. Aye.
    CLERK. Mr. Ramstad votes aye. Mr. Nussle?
    Mr. NUSSLE. Aye.
    CLERK. Mr. Nussle votes aye. Mr. Johnson?
    Mr. JOHNSON. Aye.
    CLERK. Mr. Johnson votes aye. Ms. Dunn?
    [No response.]
    Mr. Collins?
    Mr. COLLINS. Yes.
    CLERK. Mr. Collins votes yes. Mr. Portman?
    Mr. PORTMAN. Aye.
    CLERK. Mr. Portman votes aye. Mr. English?
    Mr. ENGLISH. Aye.
    CLERK. Mr. English votes aye. Mr. Hayworth?
    Mr. HAYWORTH. Aye.
    CLERK. Mr. Hayworth votes aye. Mr. Weller?
    Mr. WELLER. Aye.
    CLERK. Mr. Weller votes aye. Mr. Hulshof?
    [No response.]
    Mr. McInnis?
    [No response.]
    Mr. Lewis of Kentucky? Mr. Lewis of Kentucky? Mr. Lewis?
    Mr. LEWIS OF KENTUCKY. Aye.
    CLERK. Mr. Lewis of Kentucky votes aye. Mr. Foley?
    [No response.]
    Mr. Brady?
    Mr. BRADY. Aye.
    CLERK. Mr. Brady votes aye. Mr. Ryan?
    Mr. RYAN. Aye.
    CLERK. Mr. Ryan votes aye. Mr. Cantor?
    Mr. CANTOR. Aye.
    CLERK. Mr. Cantor votes aye. Mr. Rangel. Mr. Rangel?
    Mr. RANGEL. No.
    CLERK. Mr. Rangel votes no. Mr. Stark?
    Mr. STARK. No.
    CLERK. Mr. Stark votes no. Mr. Matsui?
    Mr. MATSUI. No.
    CLERK. Mr. Matsui votes no. Mr. Levin?
    Mr. LEVIN. No.
    CLERK. Mr. Levin votes no. Mr. Cardin?
    Mr. CARDIN. No.
    CLERK. Mr. Cardin votes no. Mr. McDermott?
    Mr. MCDERMOTT. No.
    CLERK. Mr. McDermott votes no. Mr. Kleczka?
    Mr. KLECZKA. No.
    CLERK. Mr. Kleczka votes no. Mr. Lewis of Georgia?
    Mr. LEWIS OF GEORGIA. No.
    CLERK. Mr. Lewis of Georgia votes no. Mr. Neal?
    Mr. NEAL. No.
    CLERK. Mr. Neal votes no. Mr. McNulty?
    Mr. MCNULTY. No.
    CLERK. Mr. McNulty votes no. Mr. Jefferson?
    [No response.]
    Mr. Tanner?
    Mr. TANNER. No.
    CLERK. Mr. Tanner votes no. Mr. Becerra?
    Mr. BECERRA. No.
    CLERK. Mr. Becerra votes no. Mr. Doggett?
    Mr. DOGGETT. No.
    CLERK. Mr. Doggett votes no. Mr. Pomeroy?
    Mr. POMEROY. No.
    CLERK. Mr. Pomeroy votes no. Mr. Sandlin?
    Mr. SANDLIN. No.
    CLERK. Mr. Sandlin votes no. Ms. Tubbs Jones?
    Ms. TUBBS JONES. No.
    CLERK. Ms. Tubbs Jones votes no. Ms. Dunn?
    [No response.]
    Mr. Hulshof?
    [No response.]
    Mr. McInnis?
    [No response.]
    Mr. Foley?
    [No response.]
    Mr. Jefferson?
    [No response.]
    Mr. Thomas?
    Chairman THOMAS. Aye.
    CLERK. Mr. Thomas votes aye.
    Mr. MCINNIS. Mr. Chairman, how am I recorded?
    Chairman THOMAS. How is the gentleman from Colorado 
recorded?
    CLERK. Mr. McInnis is not recorded.
    Mr. MCINNIS. Yes.
    CLERK. Mr. McInnis votes yes.
    Ms. DUNN. Mr. Chairman, how am I recorded?
    Chairman THOMAS. How is the gentlewoman from Washington 
recorded?
    CLERK. Ms. Dunn is not recorded.
    Ms. DUNN. Aye.
    CLERK. Ms. Dunn votes aye.
    Chairman THOMAS. The clerk will announce the vote.
    CLERK. Twenty-two aye, 16 no.
    Chairman THOMAS. There being 22 ayes and 16 noes, the 
motion of the gentleman from Texas is laid on the table. The 
Chair is ready to allow the witnesses to present their 
testimony. The Chair would indicate that if you have any 
written testimony, it will be made a part of the record and you 
can inform us in any way you see fit in the time that you have. 
I would begin with Mr. Flick and, again, would have Ms. 
Norwalk.
    Mr. Flick.

STATEMENT OF JEFF FLICK, SAN FRANCISCO REGIONAL ADMINISTRATOR, 
  CENTERS FOR MEDICARE AND MEDICAID SERVICES, SAN FRANCISCO, 
                           CALIFORNIA

    Mr. FLICK. Mr. Chairman, Members of the Committee on Ways 
and Means, good afternoon. My name is Jeff Flick. I am 
currently serving as the Regional Administrator for the CMS in 
the San Francisco Regional Office. I am a career civil servant 
and my employment with CMS began in January 2001. Shortly after 
starting work in Washington, D.C., I was detailed into the 
Office of the Acting Administrator. I worked for a couple of 
months as a Special Assistant to the Acting Administrator, 
Michael McMullen. I was working in the Office of the 
Administrator when Tom Scully was sworn in as the CMS 
Administrator in May 2001. I continued my work as Special 
Assistant, working directly with Administrator Scully until 
September 2003, when I assumed my current role as Regional 
Administrator in San Francisco.
    I am pleased to be with you today and I assume that you are 
interested in talking with me regarding an e-mail I sent to 
Rick Foster in June of 2003 in my capacity as Special Assistant 
to the Administrator. As Special Assistant to the 
Administrator, I was largely involved in the day-to-day work of 
the Administrator. Some people would describe this as keeping 
the trains running. I tried to make sure that the schedules 
made sense, appropriate briefing materials were prepared, and 
so forth, the important work of the agency was accomplished, 
and yes, I tried to keep the Administrator on schedule. I was 
rarely, if ever, involved in the details of the work. In fact, 
it was more than a full-time job simply keeping up with the 
daily work flow in the Office of the Administrator. In June of 
2003, I prepared an e-mail that I sent to Rick Foster. The e-
mail was sent to Rick after I had at least one conversation 
with Rick and after I had several conversations with the 
Administrator. The e-mail focused on a request from a minority 
staff member for an impact analysis on a specific provision in 
the bill. As I recall, the Administrator was very concerned 
about the analysis and the request for the analysis.
    This particular request caught his attention in a way 
others did not. He suggested to me that at least some of the 
information that was requested involved provisions that were no 
longer in the bill. He asked me to contact Rick Foster, 
requesting that Mr. Foster work up the numbers and send them 
directly to the Administrator. The Administrator was very 
clear, ``Have Rick send them to me prior to sharing with anyone 
else.'' The Administrator indicated to me that he would 
probably be talking with Rick about this and he emphasized to 
me that Rick should not release the numbers until I, the 
Administrator, have a chance to review the information and 
until I, Tom Scully, explicitly talk with Rick authorizing the 
release.
    Chairman THOMAS. Mr. Flick, let me indicate that normally 
we would allow witnesses to finish their statements, but we are 
under the 5-minute rule. The red light has come on. If you 
could wrap it up in a sentence or two so no one could accuse 
you of unduly prolonging your testimony.
    Mr. FLICK. I see. I relayed the message to Rick through a 
phone call. I was not convinced that Rick would comply with the 
request. Later that day, I retrieved an e-mail and gave it to 
the Administrator. Administrator Scully authorized the release 
of some information but asked me to contact Rick a second time, 
confirming the initial instructions, and the Administrator 
emphasized that if Rick did not adhere to these instructions, 
it would be outright insubordination and insubordination 
carries serious consequences. The language in this statement is 
not exact. I am recalling this from memory to the best of my 
ability. The actual language may have been more colorful than 
the text. I was not able to reach Rick by telephone. I 
comprised an e-mail to communicate the message that the 
Administrator asked me to convey to Rick. I believe the e-mail 
I sent to Rick Foster was an accurate reflection of the message 
I was instructed by Administrator Scully to convey. Thank you, 
Mr. Chairman. This concludes my remarks.
    [The prepared statement of Mr. Flick follows:]
Statement of Jeff Flick, San Francisco Regional Administrator, Centers 
     for Medicare and Medicaid Services, San Francisco, California
    Mr. Chairman, members of the Ways and Means Committee. Good 
afternoon--my name is Jeff Flick. I am currently serving as the 
Regional Administrator for the Centers for Medicare & Medicaid Services 
(CMS) in the San Francisco Regional Office. I am a career civil servant 
and my employment with CMS began in January 2001. Shortly after 
starting work in Washington, D.C., I was detailed into the Office of 
the Acting Administrator. I worked for a couple of months as a special 
assistant to the Acting Administrator, Michael McMullan. I was working 
in the Office of the Administrator when Tom Scully was sworn in as the 
CMS Administrator in May 2001. I continued my work as a special 
assistant, working directly with Administrator Scully until September 
2003, when I assumed my current role as Regional Administrator in San 
Francisco.
    I am pleased to be with you today and I assume that you are 
interested in talking with me regarding an email I sent to Rick Foster 
in June of 2003 in my capacity as special assistant to the 
Administrator. As special assistant to the Administrator, I was largely 
involved in the day-to-day work of the Administrator. Some people would 
describe this as keeping the trains running. I tried to make sure the 
schedules made sense, appropriate briefing materials were prepared, 
etc. The important work of the Agency was accomplished and, yes, I 
tried to keep the Administrator on schedule. I was rarely, if ever, 
involved in the details of the work. In fact, it was more than full-
time job simply keeping up with the daily workflow in the Office of the 
Administrator.
    In June of 2003, I prepared an email that I sent to Rick Foster. 
This email was sent to Rick after I had at least one conversation with 
Rick, and after I had several conversations with the Administrator. The 
email focused on a request from a minority staff member for an impact 
analysis on a specific provision in the bill. As I recall, the 
Administrator was very concerned about the analysis, and the request 
for the analysis. This particular request caught his attention in a way 
others did not. He suggested to me that at least some of the 
information that was requested involved provisions that were no longer 
in the bill. He asked me to contact Rick Foster--requesting that Mr. 
Foster work up the numbers and send them directly to the Administrator. 
The Administrator was very clear--have Rick send them to me prior to 
sharing with anyone else. The Administrator indicated to me that he 
would probably be talking with Rick about this and he emphasized to me 
that Rick should not release the numbers until I (the Administrator) 
have a chance to review the information, and until I (Tom Scully) 
explicitly talk with Rick authorizing the release.
    I relayed this message to Rick (through a phone call) but I was not 
convinced that Rick would comply with the request of the Administrator. 
Rick sent an email directly to the Administrator after my conversation 
with Rick, asking that he (Rick) be allowed to release the information 
immediately. I retrieved the email and gave it to the Administrator. 
Administrator Scully authorized the release of some information but he 
asked me to contact Rick a second time, confirming the initial 
instructions, and the Administrator emphasized that if Rick does not 
adhere to these instructions, it is outright insubordination and 
insubordination carries serious consequences. The language in this 
statement is not exact. I am recalling this from memory to the best of 
my ability and the actual language may have been more colorful than the 
text in this statement.
    I was not able to reach Rick by telephone and I comprised an email 
to communicate the message that the Administrator asked me to convey to 
Rick Foster. I believe the email I sent to Rick Foster was an accurate 
reflection of the message I was instructed by Administrator Scully to 
convey. I believe I shared a copy of the email with Administrator 
Scully.
    Thank you, Mr. Chairman; this concludes my remarks.

                                 

    Chairman THOMAS. I thank the gentleman.
    Ms. Norwalk.

STATEMENT OF LESLIE V. NORWALK, ACTING DEPUTY ADMINISTRATOR AND 
  CHIEF OPERATING OFFICER, CENTERS FOR MEDICARE AND MEDICAID 
                            SERVICES

    Ms. NORWALK. Good afternoon, Chairman Thomas and Members of 
the Committee on Ways and Means. My name is Leslie Norwalk. 
Since November 2001, I have officially served as Counselor to 
the Administrator at the CMS. For the past year, I have been 
the Acting Deputy Administrator and Chief Operating Officer of 
CMS. In this role, I direct the day-to-day operations of CMS. 
On March 25, 2004, Richard Foster, CMS's Chief Actuary, 
mentioned my name and referred to me as a, quote, ``top 
attorney at CMS,'' unquote, in his testimony before this 
Committee. I understand that the Committee is interested in 
hearing my recollection about a meeting I had with Mr. Foster 
and any advice I gave him. On June 13, 2003, Mr. Foster came to 
see me to discuss a difficult situation and to ask for my help 
to resolve it. While Mr. Foster sought my advice, I believe 
that it was in my capacity as Deputy and Chief Operating 
Officer and not in my capacity as a lawyer. I believe this 
because my interactions with Mr. Foster in 2003 focused on 
helping him manage the incredible workload that the Office of 
the Actuary had from a CMS management perspective. 
Nevertheless, in discussing his concerns last August, I gave 
Mr. Foster my opinion about the interplay of the Constitution, 
the Balanced Budget Act 1997, and its accompanying report 
language.
    During our June 13 meeting, Mr. Foster described the 
history of his office in providing actuarial support to 
Congress, including the history surrounding the Balanced Budget 
Act 1997 legislation and the accompanying report language, as 
well as his professional responsibilities. Under these 
authorities, he believed that he had an obligation to report 
his actuarial analysis to Congress without informing the 
Administrator of the specifics of the congressional request or 
his analysis in response to the request. He believed that 
providing this information to the Administrator compromised his 
ability to function as he believed the Chief Actuary should. 
During the meeting, I reviewed the statutory language, which 
states, quote, ``The Chief Actuary shall be appointed by and in 
direct line of authority to the Administrator,'' end quote. The 
accompanying Conference Report language highlights the 
importance of actuarial analysis in drafting legislation. 
However, neither the statutory text nor Conference Report 
language on its face requires the Office of the Actuary to 
report to or provide internal executive branch information to 
Congress. While Mr. Foster noted the emphasis in the Conference 
Report of sharing information with Congress, I explained to him 
that the Conference Report language does not require sharing 
information. In any event, the Conference Report language does 
not have the force of law.
    I further explained that a statutory requirement that would 
mandate the Chief Actuary report directly to Congress would 
raise serious separation of powers issues under the 
Constitution. While I am an attorney, my interpretation and 
advice was provided in my capacity as the Acting Deputy 
Administrator and Chief Operating Officer, not as an attorney 
for the agency. Of course, on a daily basis, all executive 
branch officials interpret the statutes under which we operate. 
Furthermore, I have consulted with the attorneys in the HHS 
Office of General Counsel and they have informed me that they 
concur in my interpretation. Mr. Foster is a highly regarded 
actuary, and consequently, it is not surprising that Members of 
Congress and the executive branch are interested in his 
actuarial analysis of items impacting the Medicare, Medicaid, 
and State Children's Health Insurance Program, programs. 
Finally, I had no knowledge of any analysis by the Office of 
the Actuary that scored a complete bill until I returned from 
Christmas vacation this January. It is my understanding that 
the only request that was delayed was an impact analysis of an 
early version of the premium support provision. Thank you.
    [The prepared statement of Ms. Norwalk follows:]
     Statement of Leslie V. Norwalk, Acting Deputy Administrator, 
               Centers for Medicare and Medicaid Services
    Good afternoon. Chairman Thomas and Members of the Ways and Means 
Committee, my name is Leslie Norwalk. Since November 2001, I have 
officially served as Counselor to the Administrator at the Centers for 
Medicare & Medicaid Services. For the past year, I have been the Acting 
Deputy Administrator and Chief Operating Officer of CMS. In this role I 
direct the day-to-day operations of CMS.
    On March 25, 2004, Richard Foster, CMS's Chief Actuary, mentioned 
my name and referred to me as a ``top attorney at CMS'' in his 
testimony before this Committee. I understand that the Committee is 
interested in hearing my recollection about a meeting I had with Mr. 
Foster and any advice I gave him.
    On June 13, 2003, Mr. Foster came to see me to discuss a difficult 
situation for him and to ask for my help to resolve it. While Mr. 
Foster sought my advice, I believe that it was in my capacity as the 
Deputy and Chief Operating Officer, and not in my capacity as a lawyer. 
I believe this because my interactions with Mr. Foster in 2003 focused 
on helping him manage the incredible workload that the Office of the 
Actuary had from a CMS-management perspective. Nevertheless, in 
discussing his concerns last June, I gave Mr. Foster my opinion about 
the interplay of the Constitution, the Balanced Budget Act of 1997 and 
its accompanying report language.
    During our June 13th meeting, Mr. Foster described the history of 
his office in providing actuarial support to Congress, including the 
history surrounding the Balanced Budget Act of 1997 legislation and 
accompanying Conference Report language and his professional 
responsibilities. Under these authorities, he believed that he had an 
obligation to report his actuarial analysis to Congress, without 
informing the Administrator of the specifics of the Congressional 
request or his analysis in response to the request. He believed that 
providing this information to the Administrator compromised his ability 
to function as he believed the Chief Actuary should.
    During the meeting, I reviewed the statutory language, which 
states, ``The Chief Actuary shall be appointed by, and in direct line 
of authority to, the Administrator. . . .'' 42 U.S.C.  1317(b)(1). The 
accompanying Conference Report language highlights the importance of 
actuarial analysis in drafting legislation. However, neither the 
statutory text nor Conference Report language on its face requires the 
Office of the Actuary to report to or provide internal Executive Branch 
information to Congress. While Mr. Foster noted the emphasis in the 
Conference Report of sharing information with Congress, I explained to 
him that the Conference Report language does not require sharing 
information. In any event, the Conference Report language does not have 
the force of law. I further explained that a statutory requirement that 
would mandate the Chief Actuary report directly to Congress would raise 
serious Separation of Powers issues under the Constitution. While I am 
an attorney, my interpretation and advice was provided in my capacity 
as Acting Deputy Administrator and Chief Operating Officer for CMS, and 
not as an attorney for the agency. Of course, on a daily basis all 
Executive Branch officials interpret the statutes under which we 
operate. Furthermore, I have consulted with the attorneys in the HHS 
Office of General Counsel, and they have informed me that they concur 
in my interpretation.
    Mr. Foster is a very highly regarded actuary, and consequently, it 
is not surprising that Members of Congress and the Executive Branch are 
interested in his actuarial analysis of items impacting the Medicare, 
Medicaid and SCHIP programs.
    Finally, I had no knowledge of any analysis by the Office of the 
Actuary that scored a complete bill until I returned from my Christmas 
vacation this January. It is my understanding that the only request 
that was delayed was an impact analysis of an early version of the 
premium support provision.
    Thank you.

                                 

    Chairman THOMAS. Thank you very much, Ms. Norwalk. My 
understanding, Mr. Flick, and the gist of your comments are 
that you believe you carried out a ministerial function in not 
being able to physically communicate to Mr. Foster, but by e-
mailing him the Administrator's position on the issue, and that 
basically was the point, is that correct?
    Mr. FLICK. That is correct, Mr. Chairman.
    Chairman THOMAS. Ms. Norwalk, you indicated that although 
Rick Foster in his testimony before us indicated that he saw 
you as an attorney and you were providing advice to him, he 
accepted your interpretation and you believe you were providing 
an understanding of the administrative relationship under the 
law. I happen to believe that your interpretation of report 
language is accurate. It does not carry the force of law. I am 
pleased to know that you have double-checked with the people 
who have on their door the official title of making sure that 
the legal decisions are correct, and they have provided you 
with a comfort level that the decision you made in your 
capacity as an administrator was, in fact, the correct one had 
you performed an attorney-client relationship with Mr. Foster. 
So, what Mr. Scully did in indicating that he did not want 
information to be released, which, in fact, probably would not 
have enlightened Congress as much as confused Congress, because 
my understanding is that with the statement that Mr. Flick 
made, some of the assumptions that were currently in the model 
at that time of CMS were positions that had been abandoned by 
the Congress and, therefore, any cost estimate based on 
positions abandoned by the Congress would not be accurate and 
that that was one of the primary motives that Mr. Scully chose 
not to allow Rick under his administrative capacity to provide 
that information to Congress. Is that correct?
    Ms. NORWALK. That is correct; I did receive counsel from 
the Office of General Counsel and my understanding is 
consistent with your explanation of why it was that Mr. Scully 
did not want the information to be provided at that particular 
time.
    Chairman THOMAS. Does the gentleman from New York wish to 
inquire?
    Mr. RANGEL. Let me once again thank you for your patience. 
I apologize for the process. Counselor, are you familiar with 
Public Law 108-199 that, one, prohibits or prevents or 
attempts--it sanctions the payment of salary of any officer or 
employee of the Federal Government who prohibits or prevents or 
attempts to threaten to prohibit or prevent any other office or 
employee of the Federal Government from having any direct oral 
or written communication or contact with any Member, Committee, 
or Subcommittee of the Congress in connection with any matter 
pertaining to the employment of such other office or employee 
and pertaining to the department or agency of such office or 
employee, or in any way, irrespective of whether such 
communication or contact is initiated of each other office or 
employee of response or the request or inquiry of such Member, 
committee, or Subcommittee. This is included in every 
appropriation bill and provides sanctions against anyone that 
interferes from a Federal employee giving information to the 
Congress. Are you familiar with that?
    Ms. NORWALK. I don't believe I have ever read that 
particular language before.
    Mr. RANGEL. Do you believe that the Actuary professionally 
had an obligation to respond to any Member of the Congress 
within the four corners of their professional, non-political 
position, such as the one that was held by Mr. Foster?
    Ms. NORWALK. Well, I believe that the statutory language 
requires that the Chief Actuary is in direct line of authority 
to the Administrator, so----
    Mr. RANGEL. I don't think that is responsive, Counselor.
    Ms. NORWALK. Can you restate the question, please?
    Mr. RANGEL. Do you believe that the Actuary had a 
professional responsibility, that was really outlined by the 
language inserted by Chairman Thomas, that he had a 
professional responsibility to respond to inquiries made by 
Members of Congress?
    Ms. NORWALK. I believe that Mr. Foster believes he has a 
professional responsibility, but I do not believe that he has a 
legal obligation to report.
    Mr. RANGEL. So, were you informed by Mr. Scully that the 
language that was in the Budget Committee report had no legal 
significance?
    Ms. NORWALK. I am sorry?
    Mr. RANGEL. The language which was put into the report as 
related to the Actuary is to provide prompt, impartial, 
authoritative, and confidential information with respect to the 
effects of legislative proposals, are you familiar with the 
language which is in there?
    Ms. NORWALK. I am familiar with the language in the 
Conference Report, yes.
    Mr. RANGEL. Do you believe it has no legal merit?
    Ms. NORWALK. I believe that it is instructive and helpful, 
but it does not have any legal weight.
    Mr. RANGEL. Therefore, you believe that Mr. Foster had no 
legal or professional obligation to respond to Members of 
Congress?
    Ms. NORWALK. I believe that Mr. Foster had no legal 
obligation to report to Congress.
    Mr. RANGEL. That if he did report to Congress, you believe 
that Mr. Scully could have fired this public servant, this 
civil servant?
    Ms. NORWALK. I have not looked into whether or not. One 
other thing that is actually in the Balanced Budget Act 
statutory language is that he may only be removed for cause, or 
for good cause. I have not ever explored whether or not----
    Mr. RANGEL. Do you believe that if he had given the 
information requested by Members of Congress, that Mr. Scully 
would have had legal cause to fire him?
    Ms. NORWALK. I don't know whether or not insubordination 
rises to good cause.
    Mr. RANGEL. Well, what advice did you give to Mr. Foster 
that allowed him to believe that you were supporting Mr. Scully 
and that he could be fired if he shared the information that 
was requested by----
    Ms. NORWALK. It was actually not a part of our discussion. 
Mr. Foster and I only discussed what he thought was his 
professional obligation and I pointed out to him that the 
Conference Report language and the statutory language--first of 
all, did not require him to report to Congress, and if it had, 
it may raise separation of powers issues. We did not discuss 
whether or not his actions which hadn't occurred would have 
been----
    Mr. RANGEL. Well, Mr. Flick, you are not an attorney, 
right?
    Mr. FLICK. That is correct. I am not an attorney.
    Mr. RANGEL. You said in colorful and uncolorful language 
that you thought that it would have reached a point of 
insubordination and that he could have been fired if he had 
given that information as requested?
    Mr. FLICK. Congressman, I didn't necessarily have an 
opinion. What I was stating was what the Administrator had 
instructed me. It was the Administrator who clearly indicated 
that if Mr. Foster were to ignore clear instructions, that is 
outright insubordination. That was the Administrator.
    Mr. RANGEL. So, you were only in a position of a messenger. 
You did not know whether he had the right to do it or not. You 
were just saying that your boss told you to tell him that he is 
out of there if he did give the information.
    Mr. FLICK. That my boss, who was Administrator Scully, 
clearly indicated that if the instructions, which I believe 
were clear----
    Mr. RANGEL. Okay.
    Mr. FLICK. Were ignored, that that is outright 
insubordination----
    Mr. RANGEL. Did you have any discussions with anyone above 
Mr. Scully--did you discuss this or were you present when Mr. 
Scully discussed this with the Secretary, Secretary Thompson?
    Mr. FLICK. Congressman, I did not.
    Mr. RANGEL. Do you know whether or not Mr. Scully discussed 
this with the President of the United States?
    Mr. FLICK. I do not.
    Mr. RANGEL. Did you have any discussions with Mr. Scully 
where he shared with you who else in the White House he 
discussed this ban on Mr. Foster?
    Mr. FLICK. Mr. Congressman, I don't recall any discussions 
like that. That is not the typical kind of discussion that I 
would have with Administrator Scully.
    Mr. RANGEL. My last question, if I may. Let me congratulate 
you on your promotion. You do good work and you earned it. Do 
you believe that it is necessary, or that there is a need for 
legislators to know when passing a historic Medicare bill--such 
as the one that was before us--that we know what the actuarial, 
what the executive branch, believes the cost of that bill would 
be? Do you believe, based on your past experience, that it is 
necessary that we have the information as relates to estimates 
of the costs of such legislation?
    Mr. FLICK. Mr. Congressman, I don't personally have an 
opinion on that. I do know that there was a good bit of 
discussion about a set of professional actuaries in CBO and the 
fact that there is another set of----
    Mr. RANGEL. How long have you worked for the Federal 
Government?
    Mr. FLICK. For just over 3 years.
    Mr. RANGEL. How long have you interacted with the Congress?
    Mr. FLICK. My interaction with the Congress was not very 
often.
    Mr. RANGEL. So, you really don't know what we want and what 
we need?
    Mr. FLICK. That is correct.
    Mr. RANGEL. Thank you, Mr. Chairman.
    Chairman THOMAS. Certainly. The Chair would indicate the 
gentleman consumed 7 minutes and 50 seconds.
    Mr. RANGEL. You are so kind, Mr. Chairman. I can't tell you 
how much I feel obligated to you.
    Chairman THOMAS. Seven minutes and 56 seconds.
    Mr. RANGEL. I am obligated to you.
    Chairman THOMAS. Eight minutes. Does the gentlewoman from 
Connecticut wish to inquire?
    Mrs. JOHNSON. Thank you, Mr. Chairman. Mr. Flick, in the 
time that you worked closely with Mr. Scully, did it ever come 
to your attention that Members of the House from the Democrat 
side asked Mr. Foster for an estimate of their Medicare 
prescription drug in its entirety?
    Mr. FLICK. No, Congresswoman. That never came to my 
attention.
    Mrs. JOHNSON. Ms. Norwalk, you have worked with Mr. Scully 
at the top levels of running the agency that is responsible for 
Medicare for many, many months now, several years. Did you ever 
see a request from the Democrats or hear about a request from 
the Democrats to Mr. Foster to estimate the cost of their bill?
    Ms. NORWALK. I never saw requests or heard of a request to 
estimate the cost of an entire bill.
    Mrs. JOHNSON. You know, I just want those watching this 
hearing to understand the extraordinary hypocrisy of what is 
happening. Some Members have said, don't you think it is 
necessary to know what the executive branch thinks the cost of 
a bill is? The very gentleman who just made that statement 
never thought it was necessary to know what the executive 
branch thought was the cost of their bill. Never did they make 
the request to CMS to cost out their bill, even though they 
brought it to the floor of the U.S. House of Representatives, 
several different complete bills, which we voted on. They 
always asked the CBO what the CBO thought was the cost of their 
bill, as did we because we are, by law, bound by what the CBO 
thought. Now, they did not think enough of Mr. Foster to ask 
for his opinion. They did not think enough of what the 
Administration thought would be the cost of their bill to ask 
for their opinion. I would have to say, I put in the record 
some of my great disagreements with Mr. Foster at the last 
hearing because actuaries do numbers and then they make 
judgments. I disagree with Mr. Foster that 99 percent of a 
subgroup would join a government program. I have never seen it 
happen in my 28 years in government.
    So, I disagree with the judgment he made, not necessarily 
the numbers, but the judgment that proceeded them and caused 
the numbers. I disagreed with his judgment that there would be 
48 percent of people, of seniors, joining the Medicare plans 
when at their height and their most generous moment, no more 
than 16 did. I see that my time has not quite run out, but I 
know it will run out. What I want to put on the record is that 
we are besmirching the reputations of people who have served 
our country as administrators at great sacrifice. Mr. Scully 
has young children. He has a wife. I never saw anyone work 
harder. He was the very first administrator in our Nation's 
history to develop health quality measures for nursing homes 
and publish them, health quality measures for home health and 
publish them. Don't they care about that? They did not care 
enough about Mr. Scully's agencies, and Mr. Scully's actuaries' 
cost of the bill to ask for it, but it is time to say, we need 
to move forward. We need to remember that all actuaries testify 
that the majority of seniors are going to get new benefits, are 
going to sign up for those new benefits under the new Medicare 
program, and that one-half of the retired women in America will 
have no deductibles, no premiums, $1 or $2 for generics and $3 
or $5 for copayment for brand name drugs. If that isn't 
progress, I don't know what it is. I am sorry you had to sit 
here almost an hour-and-a-half while what was basically a 
totally partisan political process went on that rests on 
fundamentally a hypocritical view of whose numbers mattered. 
Thank you, Mr. Chairman.
    Chairman THOMAS. The gentlewoman consumed 4 minutes and 30 
seconds.
    Mrs. JOHNSON. I yield back the balance.
    Chairman THOMAS. Does the gentleman from California wish to 
inquire?
    Mr. STARK. Thank you, Mr. Chairman. Mr. Flick, we are 
talking generally here about estimates that Mr. Foster prepared 
sometime between May and maybe November of last year.
    Mr. FLICK. Yes, sir.
    Mr. STARK. Just so you understand what I am about to ask, I 
asked Mr. Foster if we had had your June estimate in the range 
of $550 billion, would it have been a leap of faith for us to 
suspect that H.R. 1 or S. 1 or the resultant conference bill 
would have been far higher than $400 billion, and Mr. Foster 
replied, I think that would be a reasonable conclusion. So, 
basically I am asserting and I want to know if you agree, that 
there were some estimates that might have led us to think that 
the total cost would be above $400 billion. Is that a 
reasonable assumption to your knowledge?
    Mr. FLICK. Mr. Congressman, I don't think I can speak 
specifically to your question.
    Mr. STARK. I am speaking generally, that there was some 
information that might have led to a higher estimate than $400 
billion.
    Mr. FLICK. The only thing that I can tell you for sure that 
I was aware of, is that there were a number of impact analyses 
performed on specific provisions in the bill.
    Mr. STARK. In your role, and I suspect you would only know 
this of Mr. Scully, both Secretary Thompson and Mr. Scully have 
been quoted numerous times asserting that they shared 
information with Members or staff involved in the conference 
throughout the year. Indeed, my distinguished colleague from 
Connecticut, Mrs. Johnson, confirmed in March in the New York 
Times that she had seen such estimates, quoting ``absolutely we 
knew about these numbers,'' but that she disagreed with the 
assumptions and disregarded the analysis. To your knowledge, or 
are you aware through anybody else, and I will just ask you 
about a series of people here, and of paper or e-mails that you 
may have transmitted to or from Administrator Scully, and 
whether any of these people might have received these estimates 
that were created by Mr. Foster or his staff. Would Speaker 
Hastert or his staff? You can just say yes or no unless you 
know that they received some information.
    Mr. FLICK. Congressman, it is my understanding that there 
was a great deal of e-mail traffic regarding estimates of the 
impact of specific provisions of the bill, and I believe some 
of those e-mails went to people other than Administrator 
Scully.
    Mr. STARK. Would you be aware of Speaker Hastert or his 
staff?
    Mr. FLICK. I am not aware of Speaker Hastert or his staff.
    Mr. STARK. Majority Leader DeLay or his staff?
    Mr. FLICK. I don't--I am not aware.
    Mr. STARK. Chairman Thomas and our Ways and Means staff?
    Mr. FLICK. I am not aware.
    Mr. STARK. Chairman Tauzin and his staff?
    Mr. FLICK. I am not----
    Mr. STARK. Do any of these names----
    Mr. FLICK. Congressman, I am not aware of any e-mail 
traffic going directly to Members of Congress.
    Mr. STARK. No, are you aware that they may have received 
these estimates, whether it was through e-mail or----
    Mr. FLICK. I don't know.
    Mr. STARK. By hand or over the phone or any other way? 
Okay. Chairman Johnson or her staff?
    Mr. FLICK. No, sir.
    Mr. STARK. Majority Leader Frist? Would he have----
    Mr. FLICK. Again, I am not aware.
    Mr. STARK. Are those e-mails--is there record of that e-
mail traffic? Does that exist?
    Mr. FLICK. Well, there was a record of the e-mail traffic. 
I am not sure what the current status is.
    Mr. STARK. Fax? Would there be copies of faxes sent back 
and forth to all these people concerning Mr. Foster's 
estimates?
    Mr. FLICK. There were some faxes sent back and forth. 
Again, I can't speak to the availability of that information 
today.
    Mr. STARK. So, there were e-mails and faxes regarding 
estimates and sent to the Hill or to the White House and 
various places?
    Mr. FLICK. There was a good bit of e-mail traffic that 
involved Administrator Scully.
    Mr. STARK. Mr. Chairman, it would certainly seem to me, and 
I am sure you are one step ahead of me on this, that we should 
request to see the record of the faxes and the e-mails. That 
would give us some definitive understanding of who received 
these estimates and when they received them, and I would ask 
the Chair if you might consider requesting those or supporting 
a resolution of inquiry. In other words, you do have these that 
you mentioned in your memo, that Chairman Thomas received one 
and Mr. McManus received one. So, we know from this copy of 
your e-mail to Mr. Foster that some of these people received 
this information. I guess that is what we are really trying to 
find out is, how widely this information was disseminated and 
what we can assume about it. Mr. Chair, if the gentleman would 
respond.
    Chairman THOMAS. The gentleman's time has expired. The 
Chair would indicate that if, in fact, the question rises to 
the level of legal carrying out of duties under the law, the 
Chair is always interested in looking at information. If it is 
simply to see who said what to whom from an administrative 
prerogative, the Chair does not believe that the gentleman's 
desire to demand information reaches that level. Does the 
gentleman from Illinois wish to inquire?
    Mr. CRANE. No.
    Chairman THOMAS. Does the gentleman from Florida wish to 
inquire?
    Mr. SHAW. No. I yield my time.
    Chairman THOMAS. Does the gentleman from California, Mr. 
Matsui, wish to inquire?
    Mr. MATSUI. Yes. Thank you very much, Mr. Chairman. I just 
have a few questions. Mr. Flick, you were the Administrator for 
the agency, is this correct?
    Mr. FLICK. No, Congressman. I was the Special Assistant to 
the Administrator----
    Mr. MATSUI. To the Administrator. I am sorry. You were the 
Special Assistant to the Administrator----
    Mr. FLICK. That is correct.
    Mr. MATSUI. So, you made sure that the operation ran on 
time and all this stuff, is this correct?
    Mr. FLICK. That is largely what I did----
    Mr. MATSUI. With the exception of the times when either you 
or Mr. Scully were out of town, you were probably in contact 
with him quite regularly, in view of the opening statement you 
made that you made sure he was kept on time, as well?
    Mr. FLICK. That is correct, Congressman.
    Mr. MATSUI. So, you were in the car with him when he came 
to testify, perhaps? You were with him pretty much? Your office 
was right next door to him?
    Mr. FLICK. Occasionally, I was with him when he testified. 
Most of the time, I was back at the office trying to keep 
things going.
    Mr. MATSUI. Keep things going. Now, when he and you talked 
about the fact that Mr. Foster had this additional information 
that he was requested to communicate to the Congress, 
particularly the minority staff of the Committee on Ways and 
Means, when you had that conversation with him, did he express 
some regret that he had to do this?
    Mr. FLICK. No. He expressed concern regarding the request.
    Mr. MATSUI. What was his concern?
    Mr. FLICK. The indication that he gave to me is that the 
request involved information, or at least some information, 
that wasn't even in the bill anymore.
    Mr. MATSUI. Okay. Now, did he at some subsequent time 
before you left in September for San Francisco, because this 
request was continuing, I would imagine, did he express any 
regret like, I am really sorry I have to do this, but 
unfortunately, I just have to do this?
    Mr. FLICK. No, Congressman, I don't recall any expression 
of regret.
    Mr. MATSUI. Did he at any time talk with you about the fact 
that the President was concerned about having this information 
revealed or perhaps the information being sent down to the 
Democratic staff of the Committee on Ways and Means?
    Mr. FLICK. No, Mr. Congressman. We generally didn't talk 
about whatever conversations he may have had with the 
President. It wasn't really part of what I do.
    Mr. MATSUI. Now, are you saying no----
    Mr. FLICK. No.
    Mr. MATSUI. You never heard that conversation, I mean, he 
never talked about the President with you?
    Mr. FLICK. That is correct.
    Mr. MATSUI. You said generally, he did not discuss this 
with you at all, about what the President might have thought or 
anything about the $534 billion?
    Mr. FLICK. The only conversation that I recall having with 
Administrator Scully regarding the President was not business-
related. It was simply Administrator Scully expressing that the 
President was very engaged and cares about Medicare a lot.
    Mr. MATSUI. Did he say anything to you about the fact that 
the President wanted numbers, or was aware of the numbers?
    Mr. FLICK. No, he didn't.
    Mr. MATSUI. Was there anybody in the White House that he 
might have made that suggestion to, about the fact that the 
information should or should not be communicated to the 
minority staff, the Democratic staff of the Committee on Ways 
and Means, or any Democratic Member of the House?
    Mr. FLICK. No. Congressman, we didn't have those kinds of 
discussions. The only incident that involved some expression of 
concern on the part of Administrator Scully was, I think, 
clearly described in my written statement.
    Mr. MATSUI. Is that the only time you talked to him about 
the fact that he did not want this information transmitted to 
any Democratic Member or Democratic staff?
    Mr. FLICK. Yes. As I recall, Congressman, there were, I 
think, a fairly large number of requests for technical 
assistance. Most of the time, those requests were processed 
quickly and without any concern. This one request was the only 
time that I was involved in communications of the sort that I 
described with Mr. Foster.
    Mr. MATSUI. Okay. Thank you very much.
    Mr. FLICK. Thank you.
    Mr. MATSUI. Thank you.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from New York, Mr. Houghton, wish to inquire?
    Mr. HOUGHTON. No.
    Chairman THOMAS. Does the gentleman from Louisiana, Mr. 
McCrery, wish to inquire?
    Mr. MCCRERY. No.
    Chairman THOMAS. Does the gentleman from Michigan, Mr. 
Levin, wish to inquire?
    Mr. LEVIN. No, I will pass.
    Chairman THOMAS. Does the gentleman from Michigan wish to 
inquire?
    Mr. CAMP. No.
    Chairman THOMAS. Does the gentleman from Minnesota wish to 
inquire?
    Mr. RAMSTAD. No.
    Chairman THOMAS. Does the gentleman from Maryland, Mr. 
Cardin, wish to inquire?
    Mr. CARDIN. Thank you, Mr. Chairman. I do. First, let me 
thank both of you for your testimony. I regret we don't have 
Mr. Badger or Mr. Scully here because the concern here is that 
the change in the way information was handled from the actuary 
to Congress was an effort to affect the vote in Congress rather 
than a matter of good management or separation of powers, and 
that is the concern that we have. We passed legislation 
anticipating that we would have access to the Chief Actuary, to 
the actuaries, and we would be able to get information. The 
information involved was important. It affected the final cost 
of a bill that we had to vote on in Congress. The Democratic 
substitute that we sought was intended to make a point about 
where we thought we should go, but it would not have a chance 
in a vote in Congress. It, H.R. 1, was a bill that was going to 
become law, the vote was very close in Congress, and the 
actuary's estimates were key. I just really want to give each 
of you a chance. Again, we don't have Mr. Badger or Mr. Scully, 
but do you have any information that this policy was, in fact, 
aimed at affecting a vote in Congress by denying information, 
information that was important that would affect not only votes 
of Democrats, but votes of Republicans. Clearly, Congress 
thought it was getting access to the actuary. We thought that 
is what the law that we passed required. Do you have any 
information that the intentions here were to affect the vote in 
Congress?
    Mr. FLICK. Mr. Congressman, I can share this much 
information with you. Now, please understand, this is my 
personal opinion, but I believe Administrator Scully very much 
believed in the idea of providing technical assistance. He 
favored that, and I believe that happened on a very regular 
basis at CMS. There was one occasion, which is what I described 
in my written statement, where there was concern expressed. 
Outside of that one situation, I believe Administrator Scully 
very much shared your views and, in fact, was active in trying 
to make sure that we provided the technical assistance that 
people were seeking.
    Mr. CARDIN. That is why it is troublesome that the 
information was not made available to Congress. Clearly, the 
CBO disagreed with some of these numbers, and we could have had 
a healthy debate about that here. The problem is, when you 
withhold the information and we have a very close vote and some 
estimates are what Members who voted for the bill thought was 
different, it raises serious questions. Additionally, when we 
have passed a law that we thought required information to be 
provided freely to Congress, and yet we don't get the 
information, it raises questions as to whether there was not 
more involved----
    Chairman THOMAS. Would the gentleman yield briefly on that 
point?
    Mr. CARDIN. I would be glad to.
    Chairman THOMAS. It won't come out of the gentleman's time. 
We had testimony from Mr. Foster that he was not able to 
provide a complete estimate on the bill that we voted on until 
well into December. So, the idea that the Administration would 
have a number on the entire bill as we voted on it at the time 
that we voted on it simple is not creditable based upon the 
time and the manner in which CMS made the estimates, and I 
thank the gentleman for yielding.
    Mr. CARDIN. I understand that they did not make their final 
estimates until December. It is the specific information 
regarding participation in private health care plans and number 
of people who would go into Part D, it is those differences 
from CBO that drove additional costs that I think would have 
been crucial during the debate of the Medicare bill. As you 
know, the Medicare bill passed by one vote. It was a very close 
vote on the floor. There are Members who voted for it saying, 
well, maybe it won't cost $400 billion. Maybe it will be less. 
We know now that there was information that indicated it would 
cost far more, at least from the actuary. We can debate whether 
that is accurate or not, but that information was not made 
unobstructably available as we thought it would be to Congress 
and we anticipated.
    Ms. NORWALK. If I may comment, Congressman, as Mr. Scully 
said in his statement from today, he did testify before the 
Senate Finance Committee in June that there is a fundamental 
disagreement between our actuaries and the CBO. There are seven 
or eight fundamental differences regarding the assumptions 
generated by the actuary's office and the CBO. Senator Baucus 
in reply, I believe, stated that, ``there are clearly 
differences of opinion, but in some sense that is irrelevant 
because we go by CBO. That is the organization that decides 
what these costs are or not.'' Finally, if I may, please, now 
on September 30, prior to the vote on the bill, the Wall Street 
Journal reported that the CBO and Medicare actuaries at CMS 
remain far apart in how they score the early impact of the 
provisions. In fact, the article goes on to say that since the 
CBO expects fewer insurers to participate in Medicare, it tends 
to minimize the government's cost of helping the plans 
establish themselves. The CMS is more bullish about the 
likelihood of plans participating, but this optimism requires 
its actuaries to warn that up front costs to Medicare could be 
substantial. It goes on to say, in fact, that there is----
    Mr. CARDIN. Ms. Norwalk, I understand what you are saying, 
and there is no question that CBO and the actuaries disagree. 
That is not the point. The point is whether there was an 
intentional effort to deny this information to Congress so that 
we could have a healthy debate on this issue. There is no 
question that there were different views here.
    Ms. NORWALK. Well, my point is that this article was 
written in September of last year, not since the bill passed, 
actually beforehand, and so it was clear that I think there was 
significant information already in the public, not just between 
the actuaries----
    Mr. CARDIN. Information from the Chief Actuary to Congress 
has a different credibility level here.
    Ms. NORWALK. Right, and as far as I am aware, Congressman, 
no Member of Congress ever followed-up on this particular 
article, for example, to ask, because I have never seen any 
particular letter, for example----
    Mr. CARDIN. It was requested----
    Ms. NORWALK. To look at this----
    Mr. CARDIN. We were going through normal channels.
    Chairman THOMAS. The gentleman's time has expired.
    Mr. CARDIN. Thank you, Mr. Chairman.
    Chairman THOMAS. The Chair understands we are currently 
with less than 5 minutes to go on a vote on the floor of the 
House with possibility of a second vote following. So, the 
Chair would indicate that the Committee will stand in recess 
until 10 minutes after the last vote on the floor.
    [Recess.]
    Does the gentleman from Texas wish to inquire?
    Mr. JOHNSON. Thank you, Mr. Chairman. Not at this time.
    Chairman THOMAS. Does the gentleman from Ohio wish to 
inquire?
    Mr. PORTMAN. Mr. Chairman, I have appreciated the testimony 
this morning and I have no questions.
    Chairman THOMAS. Does the gentleman from Washington wish to 
inquire?
    Mr. MCDERMOTT. Thank you, Mr. Chairman. Mr. Flick, well, 
actually both of you have asserted there was only one 
Democratic request that was denied or delayed. You further 
implied at the suggestion of Mr. Scully that the request in 
question was on a provision that is no longer relevant. Mr. 
Foster's testimony here last week directly contradicts that, as 
does Mr. Flick's e-mail. Last week, Mr. Foster said--where are 
we here--I will find his quote in a second--that none of the 
information had been provided. There were a whole series of 
things that had been asked and none of them were provided. Your 
e-mail shows that the request was framed in terms of a policy 
that was included in the Chairman's mark, which was the most 
current piece of legislation when the request was made. Now, 
the response was delayed, arguably to reflect what was 
considered on the floor, but it is patently false to assert it 
was on a provision no longer in the bill. Equally important, 
your e-mail, Mr. Flick, describes request number three, which 
has still not been provided. The request was for an estimated 
change in beneficiary/government financing share. That has 
still not been done. I think you can see it is a little 
tiresome to keep correcting the record, but I am sure you 
understand that this is relevant and goes directly to the 
question of Administration stonewalling. Now, I have a 
question, and you are not a lawyer----
    Mr. FLICK. That is correct.
    Mr. MCDERMOTT. You said, I think that what you are doing, 
Mr. Foster, is rising to the level of insubordination and you 
will be fired. Is that what you communicated to him?
    Mr. FLICK. Excuse me, Mr. Congressman. I don't believe I 
did say that. What----
    Mr. MCDERMOTT. You said severe consequences, I think was 
the term, was it?
    Mr. FLICK. I was relating directly to a comment by 
Administrator Scully----
    Mr. MCDERMOTT. So, Mr. Scully had made that determination, 
that this was grounds for firing him?
    Mr. FLICK. Excuse me, Congressman. Mr. Scully indicated to 
me that if Mr. Foster does not follow the very clear 
instructions, it is outright insubordination and 
insubordination carries serious consequences.
    Mr. MCDERMOTT. Now, serious consequences. Here we are, 
talking about words again. Are you talking about firing him?
    Mr. FLICK. I don't know the answer to that, Congressman. I 
did not ask Administrator Scully exactly what he meant when he 
said consequences. I----
    Mr. MCDERMOTT. Was it intended, do you think, to imply to 
him that he was going to be fired?
    Mr. FLICK. The only thing that I can tell you is I believe 
it was intended to imply that this is a serious matter, and 
Administrator Scully wanted Mr. Foster to comply with the 
instructions.
    Mr. MCDERMOTT. Ms. Norwalk, you said earlier in your 
testimony here that you did not know whether or not his 
releasing that information to the House against the 
instructions of the Administrator would rise to the level of 
insubordination and, therefore, cause for firing.
    Ms. NORWALK. I believe my testimony, Congressman, was that 
I was unsure of whether or not such insubordination, if it had 
occurred, would rise to the level of good cause, consequently--
--
    Mr. MCDERMOTT. You have never given an opinion to Mr. 
Scully that he could fire----
    Ms. NORWALK. That is correct.
    Mr. MCDERMOTT. Mr. Foster. So, he made that--whatever 
threats he made or implied to the people that he contacted over 
here was made on the basis of his judgment. Now, he is a 
lawyer, I guess.
    Ms. NORWALK. That is correct.
    Mr. MCDERMOTT. He has read the law, presumably. He knows 
what his power is?
    Ms. NORWALK. I can't speak to what he read or what he 
knows, but I would presume.
    Mr. MCDERMOTT. Do you think it would be wise to ask the 
counsel who works for you where you stand on an issue like 
that?
    Ms. NORWALK. If he were to ask the counsel, it would not 
have been me because the person who provides legal advice to 
the department at all levels of the department is, in fact, the 
HHS Office of the General Counsel. So, he would not have asked 
me.
    Mr. MCDERMOTT. Why did Mr. Foster come to you, then?
    Ms. NORWALK. Mr. Foster came to me, I believe, in my 
capacity as the Deputy Administrator and Chief Operating 
Officer because he wanted to have me help him solve what he saw 
as perhaps a management problem. He did not come to me, as far 
as I recall, seeking legal advice.
    Mr. MCDERMOTT. He says, I mean, Mr. Scully says that he 
indicated during his testimony, meaning Mr. Foster, he sought 
legal advice about my view and was told I was correct. Now, is 
that talking about the conversation he had with you?
    Ms. NORWALK. I presume that that is what Mr. Foster 
referred to. However, it is my understanding from my discussion 
with Mr. Foster that, in fact, when he came to speak to me, it 
was not in my capacity as an attorney but in my capacity as the 
Chief Operating Officer, which was typical of our relationship 
because I managed the day-to-day operations of CMS.
    Mr. MCDERMOTT. I thought Mr. Flick did.
    Ms. NORWALK. No, I am the Chief Operating Officer and 
Deputy Administrator, or at least acting in that capacity. Mr. 
Flick, if I may say, ran the Office of the Administrator as 
opposed to the entire organization.
    Mr. MCDERMOTT. So, he is really irrelevant to what went on 
in the department? He really was just a scheduler?
    Mr. FLICK. Just? Congressman, I will be happy to try to 
respond to that. I don't know about the word ``just,'' but 
clearly, that was a big part of my responsibilities, to stay on 
top of the day-to-day work flow in the Office of the 
Administrator.
    Mr. MCDERMOTT. What did you do before you came to Mr. 
Scully?
    Mr. FLICK. Before coming to government, I spent most of my 
career in the private health care sector, working in hospitals 
as both a vice president and a chief operating officer, working 
as the president of a medical group, and working as a president 
of a physician hospital organization.
    Mr. MCDERMOTT. So, you came into this office with that kind 
of a background, but they put you at sort of managing his 
office?
    Mr. FLICK. That is correct.
    Mr. MCDERMOTT. I still say, Mr. Chairman, we really need to 
have Mr. Scully come here so we can find out where he got his 
opinion, whether he actually read the law and thought he could 
fire him or just could threaten him. I really have the feeling 
he was threatening him.
    Chairman THOMAS. The gentleman's time has expired. He 
consumed 7 minutes. The gentleman from Pennsylvania?
    Mr. ENGLISH. Thank you, Mr. Chairman. I would like to thank 
the witnesses for their exhaustive and candid testimony today. 
Mr. Chairman, pursuant to Rule XI, Clause (2)(k)(8), I move 
that the Committee now adjourn.
    Chairman THOMAS. The motion before the Committee is to 
adjourn. All those in favor, say aye.
    [Chorus of ayes.]
    Those opposed? In the opinion of the Chair, the ayes have 
it. The ayes have it and the hearing stands adjourned.
    [Whereupon, at 2:40 p.m., the hearing was adjourned.]
    [Question submitted from Mr. Cantor to the Honorable Jo 
Anne B. Barnhart, and her response follows:]
Question:
      Does the SSA support or oppose waiving the 5-month 
waiting period for receiving disability benefits in cases that the 
Commissioner determines the waiting period would cause undue hardship 
to terminally ill beneficiaries?
      What is the potential impact of waiving the 5-month 
waiting period for terminally ill beneficiaries on the Social Security 
System? How many recipients would this impact?
      Are there alternatives to present law that Congress 
should consider changing in order to provide those who are terminally 
ill with relief from the 5-month waiting period?

    Answer: This is in response to your letter asking questions that 
you would have asked had you been able to attend the March 24, 2004 
hearing at which Chief Actuary Goss testified. The questions concern 
waiving the 5-month waiting period for receiving disability benefits in 
cases where the Commissioner determines that the waiting period would 
cause undue hardship to applicants who are terminally ill. 
Unfortunately, significant costs are involved with such a proposal.
    We are sensitive to the potential hardships that the 5-month 
waiting period may cause for terminally ill applicants and their 
families. We have procedures in place to ensure that their applications 
are processed as quickly as possible. In addition, people with 
disabilities whose income and resources do not go over certain limits 
may be eligible for supplemental security income payments during those 
5 months.
    Congress has periodically considered legislation to waive the 5-
month waiting period requirement for people with terminal illnesses. 
Several such bills with slightly different approaches have been 
introduced in the 108th Congress, including a bill you have 
cosponsored, H.R. 2598.
    Our Office of the Chief Actuary has estimated the additional 
benefit payments that would be made under a similar proposal--one that 
would eliminate the 5-month waiting period for disability benefits for 
persons who die, or are expected to die, within 6 months of the onset 
of their disabling impairment. Payments for months in the waiting 
period would be made to disabled beneficiaries initially diagnosed as 
terminally ill but who actually live for more than 6 months after 
disability onset, with no attempt to recover such payments. 
Additionally, for beneficiaries expected to survive more than 6 months 
from disability onset who in fact die from their illness within the 6-
month period, a retroactive payment for the waiting period would be 
due. Assuming such a proposal was effective for applications filed 
after September 30, 2004, we estimate 5-year program costs of $650 
million and 10-year costs of $1,540 million. The estimated number of 
persons who do not receive Social Security disability benefits in the 
current year because they do not survive the waiting period is 
approximately 25 thousand and is projected to increase slightly each 
year in the future.
    Assuming that the 5-month waiting period was automatically waived 
as causing an undue hardship for all eligible applicants who are 
terminally ill, the above estimate would be about the same for your 
proposal. Assuming that the 5-month waiting period was waived for 50 
percent of eligible applicants who are terminally ill, and assuming 
that this half of the population was similar in nature to the total 
affected population, then the estimated 10-year costs of such a 
proposal would be $785 million.
    [Submissions for the record follow:]
      Statement of Cori E. Uccello, American Academy of Actuaries
    Hearing on Board of Trustees 2004 Annual Reports \1\
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    \1\ The following statement focuses on the 2004 Medicare Trustees' 
Report and does not address the Social Security Trustees' Report.
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    American Academy of Actuaries \2,\ \3\
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    \2\ Other members of the Medicare Trustees Subgroup who were 
involved in the development of this statement include: P. Anthony 
Hammond, ASA, MAAA, Chairperson; Roland E.King, FSA, MAAA; Gordon R. 
Trapnell, FSA, MAAA; and Lynette L. Trygstad, FSA, MAAA.
    \3\ The American Academy of Actuaries is the public policy 
organization for actuaries practicing in all specialties within the 
United States. A major purpose of the Academy is to act as the public 
information organization for the profession. The Academy is non-
partisan and assists the public policy process through the presentation 
of clear actuarial analysis. The Academy regularly prepares testimony 
for Congress, provides information to federal elected officials, 
comments on proposed federal regulations, and works closely with state 
officials on issues related to insurance. The Academy also develops and 
upholds actuarial standards of conduct, qualification and practice, and 
the Code of Professional Conduct for all actuaries practicing in the 
United States.
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    The American Academy of Actuaries' Medicare Trustees Subgroup 
appreciates the opportunity to provide comments on the 2004 Medicare 
Trustees' Report. The Academy is the non-partisan public policy 
organization for actuaries of all specialties in the United States.
INTRODUCTION AND SUMMARY
    Each year, the Boards of Trustees of the federal Hospital Insurance 
(HI) and Supplementary Medical Insurance (SMI) trust funds report to 
Congress on the trust funds' financial condition. Together, these 
programs make up the Medicare program for the elderly and for certain 
disabled Americans. The Trustees' Report is the primary source of 
information on the financial status of the Medicare program, and the 
American Academy of Actuaries proudly recognizes the contribution that 
members of the actuarial profession have made in preparing the report 
and educating the public about this important issue.
    According to the projections in the 2004 Medicare Trustees' Report, 
Medicare's financial status has deteriorated considerably since last 
year. The HI trust fund, which pays for hospital services, will be 
depleted earlier than previously expected and HI expenditures are 
projected to exceed HI non-interest income this year. In addition, 
Medicare expenditures will continue to consume an increasing share of 
federal outlays and GDP. The trustees conclude that ``the projections 
shown in [the] report continue to demonstrate the need for timely and 
effective action to address Medicare's financial challenges--both the 
long-range financial imbalance facing the HI trust fund and the 
heightened problem of rapid growth in expenditures.''
    This statement examines more closely the findings of the Trustees' 
Report. The AmericanAcademy of Actuaries' Medicare Trustees Subgroup 
concludes that the Medicare program faces serious short-term and long-
term financing problems. As highlighted in the 2004 Medicare Trustees' 
Report:

      The HI trust fund fails to meet the test of short-range 
financial adequacy because HI trust fund assets will fall below annual 
expenditures within the next 10 years.
      The HI trust fund also fails to meet the test of long-
range actuarial balance. HI expenditures are projected to start 
exceeding HI non-interest income this year. By 2019, when trust fund 
assets are projected to be depleted, tax revenues would cover only 
about 80 percent of program costs, and this share will decrease rapidly 
thereafter. The trust fund depletion date is projected to arrive seven 
years sooner than projected last year, due in part to higher hospital 
expenditures, lower payroll taxes, and the increased payments to rural 
hospitals and private health plans enacted under the new Medicare 
legislation. Notably, the new prescription drug program does not impact 
the HI trust fund, because it is included in the SMI trust fund.
      The SMI trust fund, which includes spending for the newly 
enacted Medicare prescription drug benefit, is expected to remain 
solvent, but only because its financing is reset each year to meet 
projected future costs. Projected increases in SMI expenditures, 
therefore, will require increases in beneficiary premiums and general 
revenue contributions over time.
      Without payroll tax increases or benefit decreases, 
Medicare's demand on the federal budget, measured as the HI income 
shortfall and the general revenue contribution to SMI, is increasing 
rapidly.
      Medicare expenditures as a share of GDP and of total 
federal revenues are also increasing rapidly, especially when 
considered in conjunction with Social Security expenditures, thereby 
threatening Medicare's long-term sustainability.

    We recommend that policymakers implement changes to improve 
Medicare's financial outlook. The sooner such corrective measures are 
enacted, the more flexible the approach and the more gradual the 
implementation can be. Failure to act now may necessitate far more 
onerous actions later.
SHORT-TERM FINANCING OF MEDICARE
    To assure short-range financial adequacy of the HI trust fund, the 
Medicare trustees recommend that trust fund assets equal or exceed 
annual expenditures for each of the next 10 years. This level would 
serve as an adequate contingency reserve in the event of adverse 
economic or other conditions. For the next several years, the trust 
fund assets are expected to significantly exceed annual expenditures. 
However, trust fund assets are projected to fall below annual 
expenditures in 2012. As a result, the HI trust fund fails the test of 
short-range financial adequacy.
LONG-TERM FINANCING OF MEDICARE
    The Medicare program has fundamental long-range financing problems 
of three kinds:

    1.  HI trust fund income will soon become inadequate to fund the HI 
portion of Medicare benefits;
    2.  Medicare's demands on the federal budget are increasing; and
    3.  Paying currently promised Medicare benefits will place an 
increasing strain on the U.S. economy.

    Each of these problems is discussed in more detail below. Note that 
the expenditure numbers cited in this statement include the impact of 
the new Medicare prescription drug plan and other changes to be 
implemented under the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003.
Medicare HI Trust Fund Income Will Soon Become Inadequate to Fund HI 
        Benefits
    In terms of trust fund accounting, Medicare consists of two parts, 
each of which is financed separately: Hospital Insurance (HI) pays 
primarily for inpatient hospital care and Supplementary Medical 
Insurance (SMI) pays primarily for physician and outpatient care, as 
well as the new Medicare prescription drug benefit. Like the Social 
Security program, Medicare makes use of trust funds to account for all 
income and expenditures, and the HI and SMI programs operate separate 
trust funds. Taxes, premiums, and other income are credited to the 
trust funds, and are used to pay benefits and administrative costs. Any 
unused income is added to the trust fund assets, which are invested by 
law in U.S. government securities for use in future years.
    The 2004 Medicare Trustees' Report highlights the long-term 
financing problems facing the program:

      The HI program is funded primarily through earmarked 
payroll taxes. Over the last several years, HI payroll taxes and other 
non-interest income have exceeded benefits paid, and the trust fund has 
been accumulating assets. Beginning this year, however, HI expenditures 
are projected to exceed HI non-interest income. And beginning in 2010, 
HI expenditures are projected to exceed all HI income, including 
interest. At that point, the HI trust fund will need to begin redeeming 
its assets--U.S. government securities--in order to pay for benefits. 
If the federal government is experiencing unified budget deficits at 
the time these securities need to be redeemed, either additional taxes 
will need to be levied to fund the redemptions, or additional money 
will need to be borrowed from the public, thereby increasing the public 
debt.
      By 2019, HI trust fund assets are projected to be 
depleted. At that time, tax revenues are projected to cover only about 
80 percent of program costs, with the share decreasing further 
thereafter. The HI trust fund depletion date is seven years earlier 
than that projected in last year's Medicare Trustees' Report, due in 
part to higher hospital expenditures, lower payroll taxes, and the 
increased payments to rural hospitals and private health plans enacted 
under the new Medicare legislation.\4\ Notably, the new prescription 
drug program does not impact the HI trust fund, because it is included 
in the SMI trust fund.
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    \4\ According to the 2004 Medicare Trustees' Report, 2.0 years of 
the change are attributable to the new Medicare law, 2.0 years to 
higher spending and lower tax revenues, 1.5 years to assumption 
adjustments, 1.0 year to improved data on the health status of 
beneficiaries in HMOs, and 0.5 years to model refinements for certain 
hospital payments.
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      The value in today's dollars of HI shortfalls over the 
next 75 years is $8.2 trillion, or 3.1 percent of taxable payroll over 
the same time period. For the first time, the 2004 Medicare Trustees' 
Report includes projections over an infinite time horizon, which 
increases the shortfall to $21.8 trillion, or 5.3 percent of taxable 
payroll. Nevertheless, given the uncertainty of projections 75 years 
into the future, extending these projections into the infinite future 
can only increase the uncertainty, so that these results can have only 
limited value for policymakers.
      The SMI program is financed through beneficiary premiums 
that cover about a quarter of the cost. Federal general tax revenues 
covers the remaining three quarters. The SMI trust fund is expected to 
remain solvent, but only because its financing is reset each year to 
meet projected future costs. Projected increases in SMI expenditures, 
therefore, will require increases in beneficiary premiums and general 
revenue contributions over time.
Medicare's Demand on the Federal Budget Is Increasing
    Another way to gauge Medicare's financial condition is to view it 
from a federal budget perspective. In particular, this assessment 
determines whether Medicare receipts from the public (e.g. payroll 
taxes, beneficiary premiums) exceed or fall short of its outlays to the 
public. Under this approach, income from general revenues to the SMI 
program, which are essentially intragovernmental transfers between the 
general fund and the Medicare trust funds, are ignored. As a result, 
the difference between public receipts and public expenditures for 
Medicare reflects any HI income shortfall and the general revenue share 
of SMI.
    Table 1 reports the HI income shortfall and the general revenue 
contribution to the SMI program in 2003 and over the next 10 years. In 
2003, the HI trust fund ran a surplus (i.e. a negative shortfall) that 
offset to some extent the general revenue financing of SMI. (Recall 
that the SMI program is designed such that three-quarters of its 
expenditures are funded through general revenues.) Nevertheless, 
Medicare expenditures already exceeded public receipts by $81 billion 
in 2003. Beginning this year, however, HI expenditures are expected to 
exceed HI public receipts by about $8 billion, and this HI shortfall 
plus the SMI general revenue contribution is expected to total $111 
billion. Over the next 10 years the cumulative difference between 
Medicare expenditures and public receipts will total $2.3 trillion.
[GRAPHIC] [TIFF OMITTED] 23797A.009

    Beginning in 2010, when HI expenditures are projected to exceed HI 
public receipts plus interest income on trust fund assets, the HI trust 
fund will need to begin drawing down its assets, further increasing 
Medicare's demand on the federal budget. Unless payroll taxes are 
increased or benefits reduced, HI trust fund assets are projected to be 
depleted in 2019, and there is no current provision allowing for 
general fund transfers to cover HI expenditures in excess of payroll 
tax revenues.
    For a longer-term view of Medicare's demand on the federal budget, 
table 2 reports the HI income shortfall and the SMI general revenue 
contribution over the next several decades, as a share of GDP. The HI 
income shortfall and SMI general revenue contribution are projected to 
grow dramatically--from less than 1 percent of GDP in 2004 to more than 
10 percent of GDP in 2078. This will increase considerably the 
pressures on the federal budget, unless HI income shortfalls or SMI 
general revenue contributions are reduced.
[GRAPHIC] [TIFF OMITTED] 23797A.010

    (Although an appendix in the Trustees' Report includes a discussion 
of the impact of the Medicare trust funds on the federal budget, the 
long-term projections of the HI income shortfall and SMI general 
revenue contribution are available only in the Social Security and 
Medicare Boards of Trustees' summary of the 2004 annual reports. It 
would be useful if the projections were also presented in the Medicare 
Trustees' Report.)
    The new Medicare law includes a provision intended to address these 
financial challenges. Basically, if general funding sources account for 
more than 45 percent of Medicare spending within the next seven years, 
the administration will be required to recommend ways to reduce this 
share.\5\ Options would include reducing benefits, raising beneficiary 
premiums, or raising payroll taxes. Congress could then implement the 
recommendations, but would not be required to do so.
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    \5\ More specifically, a determination of ``excess general 
funding'' is triggered if the difference between Medicare outlays and 
dedicated financing sources (HI payroll taxes, HI share of income taxes 
on Social Security benefits, Part D state transfers, and beneficiary 
premiums) exceeds 45 percent of Medicare outlays within seven years of 
the projection.
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    This provision draws attention to the need to manage the demand 
Medicare places on the federal budget, and sets the stage for future 
congressional debate over corrective action to limit the burden the 
program places on general tax revenues. Congressional action is not 
guaranteed, however, and other financing problems remain.
    The 2004 Medicare Trustees' Report projects that the 45 percent 
threshold will first be reached in 2012, more than seven years into the 
projection period. Therefore, the administration requirement would not 
be triggered this year, but could be as soon as two years from now.
Medicare Will Place Increasing Strains on the Economy
    A broader issue related to Medicare's financial condition is 
whether the economy can sustain Medicare spending in the long run. To 
gauge the future sustainability of the Medicare program, we examine the 
share of GDP that will be consumed by Medicare. As shown in Table 3, 
total Medicare spending will consume greater shares of GDP over time. 
In 2003, total Medicare spending was 2.6 percent of GDP. This share is 
expected to increase to 3.4 percent in 2006, due in large part to the 
addition of the prescription drug benefit. It is expected to rise to 
7.0 percent of GDP in 2030 and 10.9 percent of GDP in 2060.
    (Notably, the Centers for Medicare and Medicaid Services (CMS) 
estimate that Medicare pays for only about half of the total health 
spending of the elderly and disabled. As a result, this measure 
understates the share of the economy devoted to total health spending 
among these groups.)
[GRAPHIC] [TIFF OMITTED] 23797A.011

    Considering Medicare spending in conjunction with Social Security's 
further highlights the strain these programs place on the economy. 
Social Security spending as a share of GDP increases more modestly than 
Medicare over the next several decades, and by 2030, Medicare spending 
exceeds that of Social Security. Combined, Medicare and Social Security 
expenditures equaled 7.0 percent of GDP in 2003. This share of GDP will 
increase considerably to a projected 13.3 percent in 2030 and 17.4 
percent in 2060.
    Medicare and Social Security expenditures are even more striking 
when considered relative to total federal revenues. The trustees report 
that total federal revenues have historically averaged about 19 percent 
of GDP. Using this average, about 40 percent of all federal revenues 
were used to pay Medicare and Social Security benefits in 2003. If no 
changes are made to either program and federal revenues remain at 19 
percent of GDP, this share is expected to increase to 70 percent in 
2030, and by 2070, Medicare and Social Security spending would about 
equal total federal revenues.
    These projections highlight the increasing strains that Medicare, 
especially in conjunction with Social Security, will place on the U.S. 
economy. Moreover, increased spending for Medicare may crowd out funds 
for other federal programs. It is unclear whether the nation will be 
willing to make these tradeoffs in the future.
    If we are to avoid this strain, reforms must be made to address the 
rapid growth in Medicare expenditures. It is important to recognize, 
however, that unless the growth in total health expenditures of the 
elderly and disabled is reduced--not just the share borne by the 
Medicare program--health expenditures will continue to consume a large 
and growing share of the economy. Shifting more program costs to 
workers through increased payroll taxes or to beneficiaries through 
higher premiums or increased cost sharing may reduce federal outlays 
for Medicare, but it will not reduce the share of the economy devoted 
to health expenditures.
CONCLUSION
    The American Academy of Actuaries' Medicare Trustees Subgroup 
continues to be very concerned about Medicare's long-range financing 
problems. With HI non-interest income expected to start falling short 
of outlays this year, the HI trust fund is expected to be depleted as 
soon as 2019, seven years earlier than projected last year. In 
addition, Medicare will likely exact increasing demands on the federal 
budget, even with the recently enacted provision that alerts Congress 
when the program's reliance on general revenue sources is becoming 
unduly large. The program's sustainability is also in question as 
currently promised benefits will make up increasing shares of both GDP 
and total federal revenues.
    We recommend that policymakers implement changes to improve 
Medicare's financial outlook. We agree with the 2004 trustees, who 
state in their report:
          ``The sooner the solutions are enacted, the more flexible and 
        gradual they can be. Moreover, the early introduction of 
        reforms increases the time available for affected individuals 
        and organizations . . . to adjust their expectations.''

                                 * * *

    The Academy is ready to provide the analysis and technical 
expertise of our member health actuaries in responding to issues 
regarding the future of the Medicare system. Recent Academy issue 
briefs include How Is Medicare Financed? and What Is the Role of the 
Medicare Actuary? In addition, Evaluating the Fiscal Soundness of 
Medicare, an Academy monograph, outlines how several reform measures 
could address Medicare's long-term financing problems. The monograph 
concludes that promising options to improve Medicare's financing 
problems include increased cost sharing by beneficiaries and increased 
use of managed care and competitive bidding. Less promising options 
include lowering payments to providers and increasing the eligibility 
age for Medicare. These and other Academy publications are available at 
www.actuary.org/medicare/index.htm.

                                 

Statement of Don R. McCanne, Physicians for a National Health Program, 
                           Chicago, Illinois
    The 2004 Annual Report of the Boards of Trustees of the Federal 
Hospital Insurance and Federal Supplementary Medical Insurance Trust 
Funds describes the projected imbalances between the anticipated 
revenues and the expected growth in expenditures of the Medicare 
program. The Trustees call for prompt, effective, and decisive action 
to address this challenge.
    As expected, a highly charged political debate rages over the 
causes of these anticipated net deficits in Medicare funding. Although 
we will hear much about factors such as the generous payments to 
Medicare Advantage plans, and the decline in tax revenues supporting 
the program, one factor predominates above all others: health care 
costs continue to escalate well beyond the level of inflation.
    Health care cost increases are related to expanding and ever more 
expensive technological advances, along with unrestrained expansion in 
the capacity of our health care delivery system. We are spending more 
because we find more ways to spend health care dollars, and because we 
continue to expand the capacity that allows us to do it.
    Approaching the Medicare deficit as an isolated problem will not 
address the fundamental cause of health cost increases. Rather, the 
integrity of the Medicare program would be threatened because solutions 
would be narrowly directed to substantially increasing revenues and/or 
dramatically reducing benefits. Either a reduction in benefits or an 
increase in cost sharing by the beneficiary would threaten to impair 
access to care because of lack of affordability for the individual 
beneficiary. The alternative of asking taxpayers to fund the increase 
in Medicare costs would be problematic when considering that they would 
also be facing the same escalating health care costs.
    We already know that regions with higher health care capacity have 
increased intensity of services but without a commensurate improvement 
in medical outcomes. Hospitals with greater bed capacity in their 
intensive care units provide costly and relatively inhumane end-of-life 
care when less expensive and more compassionate care would be provided 
in a hospice environment. Physician owned specialty hospitals and 
medical group owned imaging systems significantly increase capacity and 
the level of services although there is negligible data available to 
demonstrate improved outcomes.
    Other nations have demonstrated that planning and capital budgeting 
of capacity can prevent excessive utilization while ensuring adequate 
capacity to prevent unnecessary queues. The 15.5% of our Gross Domestic 
Product that we are currently spending on health care is more than 
enough to ensure appropriate capacity plus fund the operating expenses 
of our system, with the proviso that we do not waste resources on some 
of the current excesses of our system. Although health care planning 
declined after prior efforts, the current level of spending has reached 
a threshold that now makes it imperative.
    The administrative costs of private health plans are significantly 
greater than those of public programs such as Medicare. But an even 
greater problem is the profound administrative burden placed on our 
health care delivery system by our fragmented system of a great 
multitude of private plans, large public programs, and, for some, no 
programs at all. In 2003 numbers, an estimated $286 billion in these 
administrative costs could be recovered and utilized for the 
deficiencies in health care coverage today. Eliminating administrative 
waste must be a part of our solution to rising costs.
    Although our national policies protect and promote technological 
development, there is a pressing need to demand value for our private 
and public investment. Pharmaceutical firms that develop copycat drugs 
merely for the purpose of restarting the patent clock should no longer 
be disproportionately rewarded for such non-innovative efforts. Only 
new products with demonstrated value should be rewarded with higher 
prices. Also new products developed with public funding should return 
that investment to the taxpayer through lower prices. We should require 
that new technological innovations provide both significant medical 
benefit and value before funding them. And there is ample evidence to 
demonstrate that prices are much higher in the United States than in 
other nations. We clearly need a method of negotiating rates and prices 
to be sure that we are receiving a fair value for our health care 
investment while allowing a fair but not excessive profit for the 
manufacturer or provider.
    To bring the level of health care cost increases down to near the 
rate of inflation, we need to control capacity and pay fair prices. 
Medicare alone cannot have a significant influence on capacity. 
Although Medicare does have some regulatory control over prices, acting 
alone inevitably results in inequitable results through cost shifting 
and unfairness in pricing, while failing to control global costs. And 
Medicare cannot further reduce administrative waste when it is adding 
to the administrative burden by being an additional player in our 
fragmented system.
    Replacing our inefficient and wasteful system of funding care with 
a single public payer would control costs through global budgeting, 
planning and budgeting of capital improvements, and negotiation of 
rates and prices. And with the administrative savings made possible by 
eliminating the waste of the private bureaucracies, we could afford to 
fund care for everyone while controlling costs on into the infinite 
horizon. Instead of limiting Medicare reform considerations to revenue 
increases and benefit reductions, let us adopt systemic reforms that 
will enable the enactment of comprehensive, affordable coverage for 
everyone.

                                  
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