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



 
                      MEDICARE'S FINANCIAL CRISIS

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

                                HEARING

                               BEFORE THE

                        JOINT ECONOMIC COMMITTEE

                     CONGRESS OF THE UNITED STATES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 10, 2003

                               __________

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                        JOINT ECONOMIC COMMITTEE


                              ----------                              


    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]


SENATE                               HOUSE OF REPRESENTATIVES
Robert F. Bennett, Utah, Chairman    Jim Saxon, New Jersey, Vice 
Sam Brownback, Kansas                    Chairman
Jeff Sessions, Alabama               Paul Ryan, Wisconsin
John Sununu, New Hampshire           Jennifer Dunn, Washington
Lamar Alexander, Tennessee           Phil English, Pennsylvania
Susan Collins, Maine                 Adam H. Putnam, Florida
Jack Reed, Rhode Island              Ron Paul, Texas
Edward M. Kennedy, Massachusetts     Pete Stark, California
Paul S. Sarbanes, Maryland           Carolyn B. Maloney, New York
Jeff Bingaman, New Mexico            Melvin L. Watt, North Carolina
                                     Baron P. Hill, Indiana



                  Donald B. Marron, Executive Director
                Wendell Primus, Minority Staff Director





                            C O N T E N T S


                              ----------                              


                     Opening Statements of Members


                                                                   Page

Senator Robert F. Bennett, Chairman..............................     1
Representative Pete Stark, Ranking Minority Member...............     2

                               Witnesses

Statement of Hon. David M. Walker, Comptroller General, U.S. 
  General 
  Accounting Office..............................................     5
Statement of Douglas Holtz-Eakin, Ph.D., Director, Congressional 
  Budget Office..................................................     8
Statement of Gail R. Wilensky, Ph.D., John M. Olin Senior Fellow, 
  Center for Health Affairs, Project HOPE........................    19
Statement of John P. Martin, Director, Employment, Labour, and 
  Social 
  Affairs, Organization for Economic Co-operation and Development    22
Statement of Marilyn Moon, Ph.D., Senior Fellow, The Urban 
  Institute......................................................    24

                       Submissions for the Record

Prepared statement of Senator Robert F. Bennett, Chairman........    39
Prepared statement of Representative Pete Stark, Ranking Minority 
  Member.........................................................    40
    ``A Primer for Journalists on Medicare Reform Proposals,'' by 
      Uwe E. Reinhardt, Ph.D., Princeton University..............   124
Prepared statement of Senator Edward M. Kennedy..................    40
Prepared statement of Hon. David M. Walker, Comptroller General, 
  U.S. General Accounting Office.................................    42
Prepared statement of Dr. Douglas Holtz-Eakin, Director, 
  Congressional Budget Office....................................    69
Prepared statement of Gail R. Wilensky, Ph.D., John M. Olin 
  Senior Fellow, Project HOPE....................................    81
Prepared statement of John P. Martin, Director for Employment, 
  Labour and Social Affairs, Organization for Economic 
  Cooperation and 
  Development....................................................    93
Prepared statement of Marilyn Moon, Senior Fellow, The Urban 
  Institute......................................................   104


                      MEDICARE'S FINANCIAL CRISIS

                              ----------                              


                        THURSDAY, APRIL 10, 2003

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:30 a.m. in 
room 562, Dirksen Senate Office Building, the Honorable Robert 
F. 
Bennett, Chairman of the Committee, presiding.
    Present: Senators Bennett, Reed; Representative Stark.
    Staff Present: Donald Marron, Michael O'Grady, Dianne 
Preece, Wendell Primus, John McInerney.

    OPENING STATEMENT OF SENATOR ROBERT F. BENNETT, CHAIRMAN

    Senator Bennett. The Committee will come to order. I extend 
a good morning to all and welcome you to today's hearing on the 
challenges facing Medicare.
    I know the focus is on Iraq and what's going on there. That 
is a serious problem and a serious challenge, but long-term.
    Medicare may be a more serious problem for this Country.
    As I've said before, Medicare is the best Blue Cross-Blue 
Shield fee-for-service indemnity plan of the 1960s frozen in 
time. Before we get carried away with rhetoric about what we 
have to protect and not protect about Medicare, let's 
understand that simple truth. We don't practice medicine the 
way we did in the 1960s. And we should not deliver and finance 
medicine in the same way today.
    Protecting Medicare can become a dead-end for us if we 
insist in preserving Medicare in its 1960s incarnation. 
Congress must face the fact that Medicare is 40 years old, 
whereas the practice of medicine is changing so constantly that 
we could say for rhetorical flourish that it's only 40 months 
old. Applying another Band-Aid to Medicare would be 
malpractice. Radical surgery is what is needed.
    Exhibit 1 in the case for radical reform is Medicare's 
growing financial crisis. The promised benefits now exceed 
Medicare's financial resources by more than $13 trillion. In 
other words, Medicare's unfunded liabilities are more than 
three-and-a-half times as large as our Nation's public debt. 
This imbalance will only worsen if Congress adds a prescription 
drug benefit to Medicare.
    We have a big problem, one that gets worse every day. To 
bring Medicare into long-term fiscal balance today would 
require either an 83 percent increase in the Medicare payroll 
tax or a 42 percent reduction in Medicare spending. If we wait, 
these changes would have to be even larger. Enormous burdens on 
Medicare beneficiaries and on taxpayers thus appear almost 
inevitable.
    We need better solutions. We need creative ideas about how 
to deliver quality care to a growing population at a lower 
cost. We need, in short, to start over with a clean sheet of 
paper. We need to ask ourselves: ``Given everything we know 
today, what's the best way to structure Medicare and, indeed, 
our entire health-care system?''
    Any successful reform must begin with respect for the power 
of the market. Consumer choice, consumer responsibility, and 
market competition have long driven the success of the U.S. 
economy. And the same forces should be harnessed to deliver 
health care.
    Properly structured, market-oriented reforms can deliver 
quality health care efficiently and fairly. Market forces will 
increase beneficiary choice, slow the growth of beneficiary and 
taxpayer spending, and provide incentives for health plans, 
both public and private, to provide the highest quality health 
care.
    Congress should take care to safeguard vulnerable 
beneficiaries from any unintended consequences of market 
forces. However, it would be foolhardy to walk away from all 
the benefits of market forces for fear of these unintended 
consequences.
    We have a problem and it's not going to go away. Indeed, it 
seems likely to get worse, given the strong desire to add a 
prescription drug benefit. I share that desire. Prescription 
drugs are essential to the health of our retirees. But as we 
design that new benefit, we should keep in mind that, as noted 
in the new Committee report released this morning, more than 
three-quarters of Medicare beneficiaries already have some sort 
of drug coverage. Any move to add a drug benefit must carefully 
balance the needs of the beneficiaries with their current 
sources of coverage--and the financial burdens on taxpayers.
    We certainly do need a prescription drug benefit. 
Prescription drugs do things now that were unimaginable in the 
1960s. But we shouldn't paste that benefit into a broken 
system. We shouldn't create a new set of forms and 
eligibilities that torment patients, frustrate doctors, and 
reward those skilled in the black art of Medicare payment 
formulas. Let us as a Congress face the fact that we need to 
start from a clean sheet of paper, all over again, with all of 
the money we are putting into it and say, ``Let's create a 
whole new system that really works.''
    With that, I welcome the Ranking Member, Mr. Stark, for any 
opening comment that he might have.

    [The prepared statement of Senator Robert F. Bennett 
appears in the Submissions for the Record on page 39.]

        OPENING STATEMENT OF REPRESENTATIVE PETE STARK, 
                    RANKING MINORITY MEMBER

    Representative Stark. Thank you, Chairman Bennett, for 
holding this hearing. I welcome our witnesses.
    I had the distinct pleasure of seeing Director Holtz-Eakin 
and Mr. Walker yesterday. And I'm happy to see them again today 
and hear how they respond to the Chairman's spin on the 
problems with Medicare.
    The title of this hearing, ``Medicare's Financial Crisis,'' 
is intended, I believe, by the Republicans to be a leading 
suggestion that Medicare isn't viable and is in a horrible 
financial situation.
    Thankfully the facts point out a much different picture. 
This is more about ideology of the Republicans than the reality 
of Medicare's current standing.
    Medicare's solvency is at the second highest point of the 
program's history. I just point this out--that the Republican 
attack on Medicare's viability is a scare tactic to enable them 
to achieve their real goal, which is as the Chairman just 
suggested, dismantling Medicare as an entitlement program that 
provides benefits at guaranteed prices.
    Medicare is better than private plans at controlling costs 
as we'll hear later from Marilyn Moon, who will highlight her 
study that Medicare has consistently done a better job at 
controlling health-care cost than the private sector. I'll 
leave it to her to discuss that analysis in greater detail.
    The major problem facing Medicare's future is basically us. 
Will we in Congress be willing to make the changes necessary to 
insure its viability for the future?
    The most important change we could make is to add a 
Medicare drug benefit. Of course, adding that drug benefit will 
require increased spending. The President and the Republicans 
don't seem to question increased spending when it comes to tax 
cuts for the wealthy, doing away with the inheritance tax, 
which will only help the Chairman's children and mine, but 
certainly won't help most lower income seniors or children who 
have to make it on the own.
    When it comes to a Medicare drug benefit, the response is 
always: ``Oh, it's too costly to do a real benefit.''
    We Democrats don't think that's the case. Republicans would 
argue that a Medicare drug benefit can't be added unless 
substantial ``reform'' is attached.
    Well, I'd like to research a little what you really mean by 
reform. Do you mean something like the President's outline of a 
plan that would force seniors to enroll in private managed-care 
plans in order to receive decent prescription drug coverage, 
while those in traditional Medicare would receive minimal drug 
coverage and some Mickey Mouse discount cards?
    The Faustian bargain presented to seniors is to receive the 
drugs they need in exchange for giving up comprehensive health 
coverage with their choice of doctors. And that's not a fair 
choice--and not one that any Member of Congress is forced to 
make. Seniors shouldn't have to make that choice either.
    The GAO estimates show that foregoing additional tax cuts 
beyond current law would provide an additional 25-year window 
for Medicare solvency while we consider how to slow health-care 
costs. At a minimum, this should be done.
    Dr. Holtz-Eakin has referred to the Medicare Trust Funds as 
merely ``bookkeeping devices'' used by the Treasury. I'd submit 
to you that a Trust Fund is more than that. It's a promise.
    It's a promise that we made to 40 million elderly and 
disabled Americans that they will receive quality health care 
and that Medicare will be there for people who need it, in 
every hamlet and every corner of this country, so long as the 
House and the Senate here in Washington are willing to keep 
that promise.
    It's up to the Republican leadership that controls the 
House and the Senate to keep or break this country's promise to 
our seniors. That's what's before us.
    We had Dr. Uwe Reinhardt with us yesterday. Mr. Chairman, 
he did ``A Primer for Journalists on Medicare Reform 
Proposals,'' I ask unanimous consent it be made a part of this 
record. As for--objection, I'll put a Committee insert.

    [The primer entitled ``A Primer for Journalists on Medicare 
Reform Proposals,'' by Dr. Reinhardt appears in the Submissions 
for the Record on page 124.]

    It was Dr. Reinhardt who challenged us in Congress. He says 
the critics of Medicare, chiefly market-oriented policy 
analysts and policymakers, will call the program outdated. He 
suggests that the President has suggested the same thing.
    But the gaps in coverage are our fault. We're the ones who 
could provide the coverage--and we must. The failure to 
modernize Medicare is up to us, always Medicare has been a 
world leader in innovation in many areas and it doesn't get 
credit for that. It's the most efficient bill-paying operation 
in the United States. It offers the penultimate choice in 
services.
    And so, if there's a shortcoming, it's ours. We talk about 
choice and competition. And I know the Chairman is an expert in 
this and understands the value of entrepreneurial creativity. 
But you can't have it in health care and in Medicare.
    First of all, none of us know--you or I--with any certainty 
as to what medical treatments they would give to us, how much 
they cost, what they are.
    A doctor asks us to take a test and we take it and we hope 
we pass. And we don't know what it costs and usually neither 
does the doctor.
    That's no way to have a market. If I'm going to decide 
whether to buy your calendar, I can price it against the lesser 
quality brands and understand that I buy a high-quality product 
from you. But I can understand it.
    I can get you 12 months, 52 weeks--that I can handle with 
my shoes and socks on. But he wants to talk to me about various 
chemotherapies, I don't know. I trust the Chairman probably 
doesn't know and our witnesses don't know.
    So I don't know how we could be expected in the vernacular 
of buying an automobile or commercial product to have a ``free 
market'' when we are incapable of understanding what it is 
we're buying.
    Also, we can't have a fair competition, because if you are 
the organization Blue Cross, you can pull out of some town in 
Utah if you choose not to serve there. Medicare can't. Medicare 
and Medicaid must serve every hamlet in the country. We don't 
have the luxury that private plans have to pull out of an area 
that they may not choose to serve.
    So there are all those impediments to what we think of as 
the standard ``competitive model'' to provide this. And I think 
we have a plan that is arguably the most popular government 
plan in the country today. And I would challenge my colleagues, 
not our witnesses and not the bureaucracy, to say: Let's do our 
job. We're the board of directors of Medicare. CMS is the 
executive cadre who should carry out the principles we give 
them.
    Let's go back to work. Let's get the Senate Finance 
Committee and the House Ways and Means Committee to do their 
job. Then I think we'll continue to have a program that we'll 
be proud of.

    [The prepared statement of Representative Stark appears in 
the Submissions for the Record on page 40.]

    Senator Bennett. Thank you. And thank you, Mr. Stark. We 
could engage this debate among ourselves, but we won't. We'll 
go to the witnesses.
    But I can't resist responding one little bit. If I sit on 
the board of this particular enterprise, I have received more 
criticism from the customers about this enterprise than 
anything else that I sit on the board of.
    So if it's doing so well, at least those people who have my 
home phone number haven't discovered that yet. And they are 
complaining bitterly about a number of things.
    With that, we will stop debating amongst ourselves.
    Mr. English, if we can, I would like to go directly to the 
witnesses. Then we will go through the round of questioning. 
But we appreciate your being here.
    Our first panel we have David Walker, Comptroller General 
of the United States; and Douglas Holtz-Eakin, the new Director 
of the Congressional Budget Office, both of whom have examined 
this issue in considerable detail.
    Gentlemen, we appreciate your being here and look forward 
to your testimony.
    Mr. Walker, we'll start with you since seniority-wise 
you've been in government service a little longer. But that 
means we give the CBO the last word. So you can each take some 
comfort in the order I've chosen.

               OPENING STATEMENT OF HON. DAVID M. WALKER,

             COMPTROLLER GENERAL, GENERAL ACCOUNTING OFFICE

    Mr. Walker. Somehow, Mr. Chairman, I think you are going to 
have the last word. But thank you very much. It's a pleasure to 
be here, Mr. Chairman, Ranking Member Stark, Mr. English, and 
other Members of the Committee, to testify with regard to an 
issue of long-standing interest to myself. That is Medicare.
    As you know, Mr. Chairman, I have been involved in this 
issue for many years including serving as a public trustee of 
both Social Security and Medicare from 1990 to 1995. So this is 
not a recent interest. It's one of long standing.
    I recognize the importance of this program to the American 
people. Over 10 years ago, the public Trustees of Social 
Security and Medicare, including myself, stated that the 
Medicare program was unsustainable in its present form.
    Since that point in time, others have come to the same 
conclusion. The Congressional Budget Office (CBO), The Office 
of Management and Budget (OMB), and others have come to that 
same conclusion.
    The recent Trustees' report shows that Medicare's projected 
financial condition has worsened substantially in the last 
year. The actual or present value of the deficit has increased 
approximately 20 percent to $6.2 trillion for HI alone, which 
is Medicare Part A. That does not include SMI or Part B.
    Regarding Trust Fund solvency--it's true, the Trust Fund is 
projected to be solvent under the intermediate assumptions 
until 2026. And there are considerable assets in the Trust Fund 
in the form of non-readily marketable government securities 
that are backed by the full faith and credit of the United 
States Government. And I think it's important that this be 
stated.
    These bonds do have legal significance. They do have moral 
significance. They represent a priority claim on future general 
revenues. They do not, however, have any economic significance. 
This is part of why Trust Fund solvency can be misleading.
    I have been a trustee in a number of other capacities, 
including dealing with pension funds and health funds in the 
private sector. The Trust Funds that we have in the Federal 
Government, including those for Social Security and Medicare, 
are accounting devices.
    They are not Trust Funds as defined in Webster's 
dictionary. They do not have the same fiduciary 
responsibilities associated with them. And I think we need to 
recognize that reality.
    In the year 2013, the HI program will start experiencing a 
negative cash-flow, at which point in time these closely held 
government securities, which are of value, will have to be 
redeemed.
    But in order to redeem those securities, we'll have to 
increase taxes and/or cut spending and/or increase the debt 
held by the public. If we choose the borrowing approach, the 
deficit will grow dramatically.
    In the first chart [see figure 1], which I have up here, my 
colleague is helping me to show how the cash-flow deficits 
escalate dramatically. And this is in 2003 constant dollars, so 
inflation has been taken out.
    Cash is key and it's important to keep in mind. We also 
need to note that if we look at entitlement spending as a 
percentage of the economy, it is continuing to grow. There's 
been a significant increase in mandatory spending over the last 
40 years.
    As you know, in 1962 when John F. Kennedy was President, 
the Congress got to decide where almost two-thirds of the 
Federal budget was going to be spent every year.
    Now it's almost reversed. Congress gets to decide a little 
over one-third of the Federal budget every year. And the growth 
in Social Security, Medicare, Medicaid [see figure 2] and 
interest on the Federal debt is continuing.
    At the same time, what helped finance the increase in those 
programs over the past 40 years were reductions in spending for 
national defense, from 50 percent of the Federal budget in 1962 
to 17 percent in 2002 is not likely to continue in the future.
    We know that there will be additional spending for national 
defense and now homeland security. So as a result, if we look 
forward to the future, based upon the Government Accounting 
Office's (GAO) latest long-range budget simulation, which is 
updated twice every year, you can see that we are headed for a 
troubling future--namely, that there is a significant and 
growing mismatch [see figure 3] between projected revenues and 
projected expenditures.
    This simulation assumes that the Social Security and 
Medicare Trustees are correct in their intermediate best 
estimate assumptions; it also assumes that discretionary 
spending grows by the rate of the economy, and that the 2001 
tax cuts continue out into the future. Yes, it would help if 
there were additional revenues. But I will tell you that even 
if the tax cuts are allowed to expire, which is current law, 
there is still a significant gap. The gap is so great that we 
are not going to grow our way out of the problem.
    Tough choices will be required--and in fairness, not just 
from Medicare, but also from Social Security, discretionary 
spending, and tax policy, including tax incentives in 
particular. We're going to have to make some tough choices.
    I should say, Mr. Chairman, you're going to have to make 
some tough choices to try to decide what's the proper role of 
the Federal Government in the 21st century. How should it do 
business? What are the priorities? How are you going to 
allocate limited resources to have the most positive effect 
over time? And hopefully, Mr. Stark, yes, deliver on whatever 
promises are being made.
    I think the problem right now is there's a big gap between 
promised benefits and funded benefits. There's a huge 
expectation gap in the public. I think we have a responsibility 
to close that gap in a way that's both fiscally responsible and 
sustainable over time.
    As you mentioned, Mr. Chairman, there's increasing interest 
in modernizing Medicare's benefit structure. I think there is 
no question that if Medicare was designed and implemented 
today, it would include a prescription drug benefit. There's 
clearly a need for a prescription drug benefit.
    However, Medicare also needs to be modernized in many other 
ways because many other things have changed since 1965 when 
Medicare was created.
    I think it would be prudent for Congress to consider 
targeting any prescription drug benefit and including 
appropriate cost-containment mechanisms and other programmatic 
reforms that would hopefully not worsen Medicare's already 
deteriorating long-range financial condition.
    I say it would be prudent. It's obviously not required. 
Ultimately elected officials will make that choice.
    It would be nice for us to have a Medicare Hippocratic 
oath. Let's don't make the long-term problem even worse.
    That will be tough. But ultimately, we're going to have to 
come to grips with this issue.
    Last, let me say that I think that in reality we have three 
sustainability problems. One deals with the Medicare program. 
These [see figure 4] long-range imbalances only deal with HI. 
They don't include SMI.
    By the way, this shows how Social Security, Medicare, and 
Medicaid is going to increase as a percentage of the overall 
economy, which is also important.
    One is Medicare, HI, and SMI. The second is health care. 
We've got a broader health-care challenge and a sustainability 
problem there as well.
    Third, we've got an overall Federal fiscal imbalance 
challenge. Many of these are interrelated. We ultimately have 
to try to come to solutions that will address all three.
    In that regard, GAO is preparing a briefing document that 
should be available within the next month or so to provide 
information to the Congress and other interested parties on 
some key trends and statistics. This document will include a 
series of questions that Congress may wish to consider when 
analyzing various health care reform proposals.
    We've already done this for Social Security. It's been 
embraced by the Congress. We've used it to analyze various 
Social Security reform proposals at the request of the 
Congress.
    By the way, this analysis will not just ask questions on 
cost, which is important. It will also ask questions on access, 
quality, administrative matters, and other issues in order to 
try to come up with a balanced perspective so that the Congress 
can hopefully make more timely and informed judgments.
    Thank you, Mr. Chairman. I look forward to answering 
questions after my colleague has had a chance to give his 
statement.

    [The prepared statement and charts of Mr. David M. Walker 
appear in the Submissions for the Record on page 42.]

      OPENING STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, 
                  CONGRESSIONAL BUDGET OFFICE

    Dr. Holtz-Eakin. Thank you very much. Let me touch on some 
of the subjects in my testimony and what the implications are 
for the policy going forward.
    As highlighted by my colleague, under current law and 
without any additional benefits such as a prescription drug 
benefit, Medicare spending is on a course to rise dramatically 
as a fraction of our national economy, as a fraction of the 
Federal budget.
    As shown in the chart [Figure 1 in the prepared statement], 
Medicare spending currently constitutes 2.5 percent of Gross 
Domestic Product (GDP). Over the next several years it will 
rise to something like 9.2 percent of GDP, or roughly half the 
size of the current Federal Government in our economy.
    It's commonly assumed that this is all due to the aging of 
the U.S. population--the retirement of the Baby Boomers and the 
subsequent shift in the ratio of retirees to workers in the 
economy.
    As shown in the chart, the top portion, the lighter gray 
portion, is indeed the effect of an aging population. But that 
constitutes only 30 percent of the rise in Medicare spending as 
a fraction of our economy. The remaining 70 percent is due to 
the fact that medical costs in our economy are rising faster 
than GDP.
    As shown in the chart, we assume there will be an excess 
cost growth of 1 percentage point over the forecast horizon. 
That pace is indeed a bit slower than over the history of 
Medicare, where spending has averaged 2.8 percent faster than 
the growth rate of GDP over the period from 1970 to the 
present.
    With that in mind, let me review the current trends in cost 
growth as we see them.
    The Congressional Budget Office has recently updated its 
baseline projections for Medicare spending. Over the next 10 
years, we continue to see Medicare costs growing 6.8 percent 
per year faster than the rate of GDP growth in the economy.
    And if one looks at the growth rate of prescription drug 
spending by the Medicare population, that rate is projected to 
rise by 9 percentage points per year--again, considerably 
faster than the rate of GDP growth.
    Putting those facts together suggests the need for thinking 
about policy in the years to come. At the broadest level, 
decisionmakers are faced with the following rough tradeoffs.
    One possibility would simply be to continue the tradition 
of having the government remain at roughly 18 percent of the 
size of the economy. That's the ratio of Federal receipts to 
GDP in the post-war period, roughly speaking.
    If so, the rise in Medicare spending and the simultaneous 
rise in Social Security and Medicaid outlays are currently on 
track to equal about 20 percent of GDP over this horizon. 
Constraining the Federal budget to the traditional level of 
Federal Government involvement in the economy would require 
severe tradeoffs within the budget to say the least.
    An alternative would be to decide to have a government that 
is larger than has been traditionally the case in the scope of 
the economy. If that option was chosen, it would require higher 
taxes.
    As an illustration of the magnitudes involved, if one were 
today to raise the fraction of Medicare spending from 2.5 
percent to 9.2 percent--if that were to happen instantaneously 
instead of over 75 years--it would require doubling the current 
payroll tax--the total payroll tax from its current level of 
about 15 percent.
    The cost implications of that are now clear. Another 
alternative would be to hope that the economy would grow faster 
and as a result enlarge the economic pie from which all 
resources--the public sector, Medicare, Social Security, and 
others as well as the private sector--would draw.
    Within Medicare, as my testimony outlines, I think, there 
are no easy fixes. Among the potential policies we contemplated 
and displayed in our budget options document are raising the 
normal retirement age from 65 up to 70, instead of just up to 
67. Doing so eliminates 7/10 of 1 percent of the increase in 
Medicare as a fraction of GDP over the 75 year period, which is 
a small fraction of the overall rise that is projected in these 
simulations.
    Alternatively, one might double the premiums paid by 
beneficiaries, under Supplemental Medical Insurance [part B of 
Medicare] from 25 percent to 50 percent--that is, double the 
required contribution. Even that large a policy change affects 
only 1 percentage point of this overall growth.
    And so under current law, there are no easy fixes that the 
Congress may contemplate. Instead, as my colleague pointed out, 
a much harder set of choices confronts us.
    My closing remark would be that it may be the case that 
this Nation will choose to spend more of its increasing wealth 
on medical expenses and Medicare in particular.
    If so, it's still useful to keep an eye on using those 
Federal dollars wisely to empower beneficiaries through the 
incentives and the availability of options to control their 
Federal dollars and use them wisely and get the highest quality 
per dollar of Federal expenditure in Medicare as we go forward.
    With those remarks, I'll be happy to answer your questions.

    [The prepared statement of Dr. Holtz-Eakin appears in 
Submissions for the Record on page 69.]

    Senator Bennett. Thank you very much. I think this economic 
analysis is very helpful and it's chilling. But there are some 
assumptions built into it that I'd like to explore with you.
    The assumptions, Mr. Walker, if I could go back to your 
statement, are that this is Medicare in its present form.
    Mr. Walker. That's correct.
    Senator Bennett. If we look at the role of prescription 
drugs for just a minute, prescriptions save health costs. That 
is, you take a pill now for something you used to go into the 
hospital to have an operation for. There is an efficiency that 
takes place. And Medicare, as currently structured, does not 
recognize that efficiency--indeed, it penalizes it because, as 
I say, it's the 1960s program and therefore the benefits system 
that it reimburses was drawn up in the 1960s and has been 
perpetuated ever since.
    It's kind of like the Endangered Species Act. Things are on 
it, but when things get better, nothing ever comes off. They 
just keep adding to the list, but they never take anything off 
when they solve a problem.
    And a careful look at Medicare would say there may be some 
things that are inappropriate to reimburse at 1960s levels 
because they can be solved with a different kind of treatment--
again, specifically, prescription drugs.
    There are plenty of examples of this. There are also 
examples of screening programs, which are not covered, which, 
if they were done would produce overall lower costs. The 
complaints get--back to my offhand comment to Mr. Stark--the 
complaints I get continually are that Medicare drives us to bad 
medical practice.
    Things are being done in order to skew them in a way that 
will produce Medicare reimbursement which, if they were done in 
an unfettered atmosphere, where the best product or the best 
result was taken into consideration, would be done very 
differently.
    But they are not done that way because Medicare won't 
reimburse them if they are done that way. We are turning 
doctors into liars so that they can somehow deliver what the 
patient needs and still get some Medicare benefit for it.
    Now, Mr. Walker, it's not necessarily in GAO's purview, but 
since we're talking about a clean sheet of paper here--at least 
I'm talking about a clean sheet of paper--is the GAO equipped 
to do any kind of study on this issue of how Medicare by the 
payment system that it's structured is distorting the provision 
of health care and thereby, in fact, driving up costs? Or is 
that something that's not really appropriate for a group of 
auditors?
    Mr. Walker. As you know, less than 15 percent of what GAO 
does has to do with financial management. Eight-five percent-
plus has to do with program reviews, policy analyses, 
investigations, legal adjudications and other types of 
professional services. This is something that I think we could 
do possibly in conjunction with the national academies.
    We are forming partnerships quite frequently with a variety 
of organizations, including strengthening our partnership with 
the national academies.
    I do think there's some truth to what you're saying, not 
only with regard to Medicare, but frankly, with regard to the 
entire Federal budget. We tend to assume that the base is OK 
and all we're doing is just adding on to what we already have 
rather than fundamentally reviewing and re-examining what we 
should be doing.
    I think there is a need for that fundamental review and re-
examination and we'd be happy to try to help, but we'll have to 
talk with you separately about the nature, timing, scope, et 
cetera.
    Senator Bennett. That's one of the advantages of the Joint 
Economic Committee, as Alan Greenspan pointed out to me when I 
became Chairman, is that we have no legislative 
responsibilities. Therefore, we are released maybe from the 
kinds of constraints that do hit the Ways and Means Committee 
and the Finance Committee, in that we can look--to use the 
vastly overused cliche--we can look outside the box. We can 
look at new things that maybe legislative committees don't feel 
free to look at.
    And given the enormity of this challenge that has been 
presented both by your charts, Mr. Walker, and your charts, Dr. 
Holtz-Eakin, we've got to think differently than we have ever 
thought before. And we've got to look for new solutions in ways 
we've never looked at before.
    So I'd like to pursue that. I have a number of other 
questions. But in respect to my colleagues, we'll now go 
through the established round.
    Mr. Stark, we'll hear from you.
    Representative Stark. Thank you, Mr. Chairman.
    As I say, I've heard this testimony before. We're basically 
facing here part of a ``chicken little'' scenario. We've got 
these two distinguished experts representing the throes of 
Medicare, trying to gin up a crisis where basically, none 
exists, while we are looking here at protections that offer up 
predictions that are notoriously inaccurate and probably would 
not serve, certainly in any enterprise that I can think of.
    Now, for example, Mr. Walker, how many times has Medicare 
reached the 75-year actuarial solvency test?
    Mr. Walker. It never has to my knowledge.
    Representative Stark. That's right. This year, not the best 
year, at least one of the two best years Medicare has had in 
terms of solvency since it's inception.
    Mr. Walker. If you look solely at the amount of assets in 
the Trust Fund, then that's a true statement. But I believe 
that is misleading.
    Representative Stark. I don't believe it's as misleading as 
what you're doing. The chart that you had I thought was 
prepared by Arthur Anderson, who I thought was out of business.
    But the facts are Mitch Daniels suggested that when you 
move to 10 years, as he said, it's led to a lot of 
nonproductive and counterproductive, to base Medicare solvency 
on the data, that prove flawed, but wildly misleading.
    And to the CBO's record in projecting Medicare, Dr. Holtz-
Eakin is equally miserable. If you look at CBO's record, when 
you project Medicare 5 years into the future, it overestimated 
Medicare costs in every year since 1985. For example, in 1985, 
CBO projected that Medicare spending in 2000 would be fully 
one-third higher than it actually is.
    Now, part of the reason for the reduction is the Balanced 
Budget Act. But that's the point. It is absolutely asinine to 
assume that the Congress that follows on after we're gone is 
going to allow Medicare to go broke or default on any 
government securities, which ought to dispel this mania for 
cash accounting that Mr. Walker has to deal with.
    When we talk about forecasts, let's talk about the 
President's tax cut. The present value over 75 years is between 
$12 and $14 trillion as opposed to a $6 trillion deficit in the 
Medicare Trust Fund. The Social Security deficit is only $3.8 
trillion, as opposed to these irresponsible tax cuts.
    So I think you have to get this thing into focus. As I say, 
if what you're trying to do is scare the seniors in this 
country, that's fine.
    If you're trying to think rationally and reasonably about 
what we might do to improve Medicare, there are a host of 
things before us. We could, in fact, bring the benefits into 
the 21st century before it's over.
    That, I would suggest, portends that we deal with 
prescription drugs. We probably ought to look at--although it 
would be very expensive, but it's probably a candidate for good 
social insurances as is Medicare--to look at long-term care. I 
don't know if the States can sustain that much longer.
    We certainly--although we have judiciously stayed out of 
physicians' practice except as a secondary or a tertiary effect 
of what price setting that we have done--we have directed 
physicians on how to practice.
    But as you look at the Dartmouth studies that show that in 
the Sunbelt, in Florida, Louisiana, and places like that, and 
in California, we are spending five or six times as much for 
the same population and the same procedures that we spend in 
Minnesota or in North Dakota.
    It's equally good medicine. You'd go a long way to say that 
the Mayo Clinic is any better or any worse than some hospital 
in Texas or Louisiana, yet they are doing things for far less.
    That happens to be practice habits. It has nothing to do 
with our payment structure. It is the way, I guess, people were 
trained to do medicine.
    But it would seem to me that it would be worth our looking 
into those types of things, because if we were paying for 
medical care across the country at the same rate that it costs 
in Minnesota, Medicare would be solvent for centuries.
    Now, it's still controlled. And this is the only way you 
will do it--is to purchase more economically, or to begin to 
see if the medical profession would join with us in coming to 
some kind of going to the least expensive practice.
    Thank you, Mr. Chairman.
    Mr. Walker. Mr. Chairman, can I respond really quickly? 
Because something was said that really disturbs me.
    Mr. Chairman, for the record, I was a Trustee of Social 
Security and Medicare from 1990 to 1995. I resent the fact that 
anybody would suggest that I'm here to destroy Medicare. I care 
very much about that program.
    Number one, Medicare will continue to exist. There's no 
question about that. Even when the ``Trust Fund'' goes 
insolvent, there will still be revenues. That's not a question.
    So there's no way that Medicare is going to go away. But I 
think we have to recognize reality. Are we going to play 
lemmings where we are going to wait until we hit the cliff and 
fall off the cliff? Or are we going to plan ahead?
    There is a $6.2 trillion discounted present value unfunded 
gap between what's been promised right now and the current 
revenue stream. Congress may decide to fill it with taxes, to 
raise taxes.
    That's your choice, but there's a $6.2 trillion gap that 
increased 20 percent last year and is likely to increase in 
future years. The Trustees have generally underestimated the 
cost growth, not overestimated the cost growth.
    And, furthermore, Congress does not have a very good track 
record of dealing with this type of future problem. Most of the 
things that Congress is talking about doing now are going to 
make things worse, not better.
    We face a demographic tidal wave the likes of which this 
country has never seen. We have 10-year cash-flow budget 
projections that end in 10 years. But, you know what? The world 
is not going to end in 10 years. So I think it's important, and 
I'm just trying to state some facts. There are differences of 
opinion within Congress, but ultimately Congress has to decide 
how to resolve it.
    But I can say for myself, there's no way I'm talking about 
trying to destroy the Medicare system. I've got parents, 
children and grandchildren too.
    Senator Bennett. Thank you.
    Representative Stark. I would hope you would not be 
offended if I take your pooh-poohing of these charts and give 
them to the Democratic Ranking Member of the Senate Budget 
Committee, who has been using these charts throughout the 
entire budget debate in an attempt to trash the President's 
program.
    I'm glad to have you say that they're nonsense so that we 
can get Senator Conrad to stop using them.
    Senator Bennett. Mr. English.
    Representative English. Thank you, Chairman. I have a 
number of substantive questions, but if I could, I'd like to 
apply a flame-thrower to any remaining straw men that have 
wandered into our vision on this.
    Dr. Holtz-Eakin, are you aware of any serious economist who 
argues that Medicare is not in a long-term crisis?
    Dr. Holtz-Eakin. No.
    Representative English. Do you know of anyone, Mr. Walker, 
who has made that argument credibly?
    Mr. Walker. No, I don't. I also don't know of any economist 
that says that these bonds have economic substance.
    Representative English. Very good. Finally, and I think we 
can dispose of this quickly, Director Holtz-Eakin, is there any 
connection between the President's tax cut and the solvency of 
Medicare?
    Dr. Holtz-Eakin. In the end, as the chart was designed to 
illustrate, there will be demands for different programs, and 
they will be financed in the way that the Congress chooses.
    Representative English. Mr. Walker, anything to add to 
that?
    Mr. Walker. Not directly, but indirectly there's no 
question you have to look at the revenue side and the spending 
side. I look at the gap. And obviously, that contributes to the 
gap.
    Representative English. The President's tax cut 
contributes----
    Mr. Walker. To the gap and the overall fiscal imbalance, 
not directly to Medicare, but to the overall issue.
    Representative English. I understand your point, although I 
think what we're doing a hearing on today is Medicare.
    Mr. Walker. That's correct.
    Representative English. Getting more to the substantive 
side of this discussion, Dr. Holtz-Eakin, what is the long-term 
projection for Medicare as far as what percentage of the total 
medical expenditures are ultimately going to be within Medicare 
within this economy?
    As there are more people who are utilizing Medicare who 
make up more and more of the patient population as people live 
longer, how do you see that trend developing? Both gentlemen.
    Dr. Holtz-Eakin. At the moment, the number is a bit above 
50 percent. That is, 53 percent of total health spending by the 
elderly is paid for by Medicare. If you fixed the growth rate 
of Medicare costs at the rate of private-sector health costs--
in the long run, they will end up running very close to each 
other, as they always have--then the share paid by Medicare 
(under current law) should remain about half of total health 
spending by the elderly. What's left is a shift in people 
across the line from private-sector health into the Medicare 
program as they age.
    From another perspective--how much is Medicare spending as 
a share of the Nation's total health spending--I don't have the 
precise number on that, but you can see that you're going to 
move upwards from today's level of 17 percent.
    Representative English. Mr. Walker, would you care to 
comment?
    Mr. Walker. It's likely to increase. I can't give you a 
percentage. One reason it's likely to increase is because of 
the demographic trends that Dr. Holtz-Eakin mentioned as well 
as trends in the private sector.
    The fact of the matter is, there's been a significant 
backing away from providing retiree health insurance by 
employers. And, furthermore, now many employers are backing 
away from as generous health plans even with regard to their 
active workers.
    Representative English. Would it be fair to say that there 
will be some point at which Medicare will represent the 
predominance of spending within the medical economy without 
policy changes?
    Dr. Holtz-Eakin. It seems a fair guess, yes.
    Representative English. How would you characterize the 
current structure of Medicare in terms of what sorts of 
procedures it favors and what impact it has on the introduction 
of new technologies?
    Does it encourage the introduction of new technologies, 
which over time improve health care and ultimately, we would 
hope reduce, as it has in other economies--reduce costs? Or 
does it tend to retard the introduction of new technologies?
    Dr. Holtz-Eakin. I would say there's no easy 
characterization of the broad array of different technologies 
and how Medicare either promotes or discourages their use.
    It is a fact that new technologies have been the prime 
source of rising health care costs in Medicare and elsewhere. 
It is also true that Medicare is on the whole not yet the 
dominant driver of new technologies, especially relative to the 
role of private-sector health care.
    Representative English. Would you like to comment, Mr. 
Walker?
    Mr. Walker. I have not seen any evidence to show that it 
promotes the development of new technologies.
    Representative English. What sort of impact does the 
current design of Medicare services have on the introductional 
enhancement of preventive care?
    Dr. Holtz-Eakin. We don't really have a bottom line on 
that, although it's actively under study. It's a great research 
question that applies to preventive care as well as 
prescription drugs--whether they will, on balance, lower costs 
in total.
    Representative English. Thank you, Mr. Chairman.
    Representative Stark. Quick comment. Medicare right now is 
about 20 percent of total medical spending in the country 
according to something or other here--Medpath--if that's 
helpful.
    Dr. Holtz-Eakin. So the record is clear, Medicare correctly 
accounts for about 17 percent of our Nation's total health 
spending. I misunderstood the question.
    Senator Bennett. Ms. Maloney.
    Representative Maloney. Thank you, Mr. Chairman. I thank 
both of our panelists for your testimony and your public 
service.
    Dr. Holtz-Eakin, I'd like to follow up on my colleague, Mr. 
English's question. Isn't there a connection between revenues 
and Medicare? And if we cut revenues, will we not cut our 
ability to deal with Medicare?
    And to get specific about the budgets that are before us, 
the President's budget asks that the $1.35 trillion 2001 tax 
cut be made permanent. At the same time, there is a debate 
before Congress right now over an additional $700 billion tax 
cut over 10 years.
    And over 75 years, these tax cuts could account for roughly 
2.2 percent of the GDP, enough to wipe out the entire health 
insurance fund shortfall, which would be roughly 1.1 percent of 
GDP over 75 years.
    In light of demographics that we are facing with the Baby 
Boomers coming up, do you believe that it's wise policy to make 
the 2001 tax cut permanent and adding new tax cuts on top of 
that to those that have already been approved?
    Dr. Holtz-Eakin. It's not my role as the CBO Director to 
make policy recommendations.
    The point I was trying to make, in which I think the math 
is fairly compelling, is that Medicare, Social Security, and 
Medicaid--if they continue to grow under current law--will 
become large demands on our economy as a whole.
    If the Congress chooses to finance that 9 percent of GDP 
that Medicare is projected to account for over the long term, 
such financing will require higher taxes or enormous borrowing 
or both. The math on that is inescapable.
    Representative Maloney. Basically what you're saying is 
that if we lower our revenues, that will definitely increase 
our long-term deficits. We're now at $308 billion and galloping 
forward with deficits. Will that not impair our Medicare 
obligations?
    Dr. Holtz-Eakin. I think it's well within the power of the 
Congress to choose to continue to finance each dollar of this 
projected Medicare spending if it chose to raise taxes or 
borrow more. I would argue that if such spending levels 
continued, a policy of borrowing the funds would not be 
sustainable.
    Representative Maloney. So it's not sustainable if we 
continue on the current road we're on, which is cutting 
revenues, running up deficits?
    Dr. Holtz-Eakin. In the absence of other policy changes, 
this gap will widen to the point where it cannot be financed by 
borrowing alone.
    Representative Maloney. You've also testified that economic 
growth is the biggest key for long-term health of the Medicare 
program. In your view, what are the best ways to achieve 
economic growth?
    Dr. Holtz-Eakin. Whether it's the best hope or not, it does 
raise the chances that the economic pie will be larger and more 
capable of financing Medicare and all other demands on the 
economy.
    In the end, the degree to which public policies can improve 
long-term economic growth depends on whether they on balance 
promote saving at the expense of current consumption.
    Economies grow over the long term by accumulating capital, 
labor and skills, and new technologies. Broadly speaking, that 
requires sacrificing the use of resources for present 
consumption in favor of saving for the future.
    Representative Maloney. To get back to the specifics, what 
are the current CBO's long-term economic growth projections 
factoring in the tax cut? And has the 2001 tax cut affected 
CBO's long-term economic projections?
    Dr. Holtz-Eakin. CBO's most recent economic projections are 
the January baseline projections, which go out 10 years. In 
those projections, the broad, underlying long-term growth rate 
is determined by the rate of growth of the labor force, which 
is a bit under 1 percent, and the rate of growth of technology 
and production, which is on the order of 2 percent or so.
    So the long-term economic potential growth to the U.S. 
economy is on the order of 3 percent to 3.2 percent.
    Representative Maloney. Do you see the deficit projections 
harmful to Medicare's stability?
    Dr. Holtz-Eakin. There's no automatic link from the 
difference between receipts and outlays to Medicare's 
stability. Any particular program within the outlay structure 
lies within the province of policymakers to finance the total 
outlays in any way they choose.
    Representative Maloney. But we know that we have these 
deficits and we know that they are projected to grow. Is that 
going to impact on Medicare's stability?
    In other words, where can we find the revenues then for 
Medicare if we continue to lower revenues and run up the 
deficit? Where is the money going to come from?
    Dr. Holtz-Eakin. That, in the end, will be a decision that 
the Congress makes. I point out as a matter of record that in 
CBO's baseline projections and in its analysis of the 
President's budget, the pattern of deficits is one in which 
they are not ever increasing.
    In fact, under the baseline projections, the unified budget 
balance moves into surplus in about 2008. And under our 
analysis of the President's budgetary proposals, the deficit 
peaks in fiscal year 2004 and then declines thereafter and 
becomes smaller.
    Senator Bennett. Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman. You were 
talking about the 10-year projections you are doing. I 
understand you also do simulations that go out much further 
that underscore these models.
    Dr. Holtz-Eakin. Yes.
    Senator Reed. In the context of simulation, there's 
basically two ways we can address this crisis: one, raise 
revenues; or two, you cut benefits. Is that conceptually fair?
    Raising revenues--we used to have a surplus, so we had up 
until recently the possibility of using surplus funds. That 
would be a permissible way to provide some relief to Medicare. 
Is that true?
    Dr. Holtz-Eakin. If it were possible to carry those 
surpluses forward in a meaningful way.
    Senator Reed. If we have them, we keep them, and can carry 
them forward. So I guess that is possible.
    But now we're really left with two options to raise 
revenues then: increase taxes or borrowing. Is that your 
estimate?
    Dr. Holtz-Eakin. The math end is overwhelming. If you're 
going to spend money, you either raise taxes or borrow.
    Senator Reed. In your analysis, do you assume different 
levels of borrowing and taxation in your analysis which leads 
you to the question which I don't want to hide: Have you done 
any sort of analysis at the rate of borrowing that begins to 
influence interest rates in the contrary?
    Dr. Holtz-Eakin. For this analysis, our projections come in 
two parts: one, our long-term projections for economic growth, 
which I described in my answer to the Congresswoman; and two, 
our projections of Medicare spending. We have a combination of 
demographic components as well as cost increases. Those are 
outlay streams that represent the burden of that program on the 
economy. How it is financed is not addressed.
    Senator Reed. Like most economies, there's a certain 
circularity here. If we choose, for example, to finance this 
deficit with borrowing, I presume that has an impact on 
interest, which has an impact on economic growth, which goes 
back to your point. The best way to preserve or grow or save 
ourselves this problem is economic growth.
    Have you done any analysis with respect to that 
interaction?
    Dr. Holtz-Eakin. We have not specifically done an 
interaction that tries to debt-finance this sort of an outlay 
stream. I would argue that that alternative does not produce a 
pattern of public deficit that's sustainable.
    To do a simulation that raises the annual deficit to 9 
percent of GDP is something CBO has not done.
    Senator Reed. Well, no, but the possibility exists from 
your crisis scenario that if we don't raise taxes dramatically 
or we don't curtail benefits dramatically, the final option is 
to borrow the money, which would have a significant impact on 
interest rates and economic growth. Is that fair?
    Dr. Holtz-Eakin. Yes.
    Senator Reed. I think the other question I want to raise is 
many people have proposed different sort of structural 
approaches to this problem: medical savings accounts, HMOs, 
Medicare HMOs, et cetera. Do you see those structural 
approaches as relieving us from this dark choice between 
raising revenue or cutting benefits?
    Dr. Holtz-Eakin. I see those approaches as variations on a 
theme in which you attempt to provide the incentive and the 
opportunity for both providers and for beneficiaries to 
undertake cost controls that they see as in their interests. 
And even if they do not lower total spending--but they do give 
greater quality per dollar and make people happier with those 
Federal dollars--it may be the case that we continue to spend 
more as a Nation, as I mentioned in my opening remarks.
    But the degree to which those dollars are used wisely and 
satisfy the needs of the ultimate beneficiary, I think, is the 
question.
    And the degree to which alternative institutional 
arrangements allow that to happen is really, I think, the core 
question.
    Senator Reed. There are some that would suggest that the 
alternative institutional arrangements don't provide higher 
quality, in fact, provide higher frustration levels for people 
who claim they need the service.
    They go to their insurer or their health-care provider and 
find that they can't have it unless they go through 15 
different appeals and 16 different--in fact, it adds sort of 
dead-weight cost to the whole system.
    Is that a reality that you've thought about? It would be 
nice if we could design a system that is absolutely efficient 
and everybody gets exactly what they need exactly when they 
need it.
    But some of these systems are designed in some respects 
perhaps simply to deny maybe legitimate costs because that 
provides benefits to the organization that's controlling the 
process.
    Dr. Holtz-Eakin. In the narrow role of CBO's job in the 
scoring of bills, we are focused entirely on costs. Your 
question is about what's the value per cost.
    As an economist, I can tell you that the broad lesson, to 
be honest, is that the more choices individuals have to reveal 
what they value, the greater the opportunity for them to be 
satisfied with their experience.
    Senator Reed. My time has expired, but the reality that I 
see in health care, you don't have that many choices. If your 
employer gives you Blue Cross that's great. But if he doesn't 
give you Blue Cross, then a lot of times your choices are next 
to nil.
    In the Medicare context at least people do have a 
guaranteed level of service.
    Thank you very much, gentlemen. And I'm sorry I didn't get 
a chance--I also have to recognize my colleague friend, Sue 
Urban, who went to the Kennedy school with me along with her 
husband. That's why you all sound very bright.

    [Laughter.]

    Senator Bennett. Thank you very much. I think we've reached 
the point where we can thank you and dismiss you because the 
debate is shifting away from the economics and the economic 
impact of what's happening to the internal kind of thing.
    While I'm sure you have a contribution to make here, I 
think our next panel is probably geared in that direction. So 
instead of having another round of questioning, we will thank 
you both and look forward to hearing from you both.
    This is obviously not something that's going to go away. 
And the Congress is going to have to deal with it.
    So we'll move to the second panel, where we hope to get 
further insights on how the Congress might address Medicare's 
financial challenges as well as some of the service challenges.
    We're privileged to have with us three outstanding 
witnesses: Dr. Gail Wilensky, Senior Fellow at Project HOPE; 
Director John P. Martin, Director for Employment, Labor, and 
Social Affairs at the OECD; and Dr. Marilyn Moon, who is the 
Senior Fellow--or a Senior Fellow--at the Urban Institute.
    Dr. Wilensky, we will start with you.

    [Pause.]

    I should point out that Dr. Wilensky is a former 
administrator of the Medicare program. That's why we're 
starting with her.
    With that level of expertise you may not want to admit that 
credential by the time the questioning is through. But we do 
appreciate your willingness to appear.

                 OPENING STATEMENT OF GAIL R. WILENSKY,

                      JOHN M. OLIN SENIOR FELLOW,

                CENTER FOR HEALTH AFFAIRS, PROJECT HOPE

    Ms. Wilensky. Thank you, Mr. Chairman, members of the Joint 
Economic Committee. I'm pleased to be here.
    As you've indicated, I'm a former HCFA Administrator, now 
called Centers for Medicare and Medicaid Services. I also 
chaired the Medicare Payment Advisory Commission from 1997 to 
2001.
    I'm currently a Senior Fellow at Project HOPE and I also 
co-chair the President's Task Force to Improve Health Care 
Delivery for our Nation's veterans, which has proven to be an 
even greater challenge than reforming Medicare. I am, of 
course, here speaking as an individual, drawing on my 
experiences from HCFA.
    I'd like to spend a few minutes talking about the financial 
liability of Medicare--I know you've heard a great deal about 
that--talk briefly about adding the effects of adding a drug 
benefit, and then to talk also about how well Medicare has 
restrained spending compared to the private sector and also to 
other large purchasing groups.
    First, the financial challenges of Medicare are well 
documented and well known. The Medicare Social Security 
Trustees release a report about its solvency every year, as 
they did recently. It has indicated that things are not quite 
as good as they were last year with cash deficits in the Trust 
Fund, starting in 2013 rather than 2016, but even more 
importantly, continued rapid growth in Part B, the 
Supplementary Medical Insurance, which by the end of the decade 
is going to be almost 46 percent of total Medicare spending.
    We frequently give a lot of consideration to what is going 
on in the Trust Fund. But because three-quarters of the Part B 
funding comes out of general revenue, it is at least as 
important to keep our minds on what is going on with Part B or 
SMI.
    The effect of the economy on the Trust Fund is important. 
But basically, as we all know, the well-being of the Trust Fund 
is being driven by demographics.
    The 78 million Baby Boomers, who are going to start 
retiring at the end of this decade will put significant 
financial pressure not only on Medicare, but also on Social 
Security, the Social Security Trust Fund, and on many of the 
services provided to seniors. At the same time, there is a bust 
generation following the Baby Boomers, so that we have the 
double whammy of having more people who will be retiring with 
fewer people who will be in the labor force supporting them.
    Again, all of these facts are well known to you.
    There is considerable discussion now about a Medicare 
prescription drug enacted anytime significantly after 1965, it 
would undoubtedly have included a drug benefit because that is 
a modern part of therapeutics.
    The real question is what kind of a benefit we should have 
and how much other reform should go on at the same time. And I 
say that because as important as I think the drug benefit is 
for Medicare, it is not the only problem that Medicare faces.
    When we look at the various drug benefit proposals we see, 
for example, that they range considerably in terms of how they 
might cost from approximately as little--and we didn't used to 
think of this as little numbers--as $190 billion over 10 years 
to possibly as much as $800 or $900 billion over 10 years.
    Obviously, with these kinds of differences, there are large 
differences in the kinds of benefits that are being proposed, 
who administers them and how that might affect seniors.
    I also think it's important that we recognize that, if 
history is any guide, whatever we think the drug benefit will 
cost when we passed it, it will probably cost significantly 
more. This was certainly our experience with the end-stage 
renal disease program.
    If we look at our experience with Medicare and Medicaid 
itself, if we look at what happened between the time that the 
Medicare catastrophic bill was passed and the time it was 
repealed, there was a significant increase in spending 
estimates associated with the bill even though the benefits 
were actually never implemented.
    We ought to at least pause to realize that as large as 
these numbers seem now, before the benefits are enacted, the 
increase in spending probably will actually be significantly 
greater. But the absence of a drug benefit is not Medicare's 
only problem.
    And that's why I have long advocated a drug benefit in the 
context of broader Medicare reform. And I continue to believe 
that is important. There are large cross subsidies in Medicare 
and a lot of inequities in spending.
    Your State in particular is well-known because it is such a 
low spending State. Yet, the Medicare Part B premium is exactly 
the same for your beneficiaries as for your neighbors' 
beneficiaries.
    Senator Bennett. We are penalized for the fact that we have 
a healthy population.
    Ms. Wilensky. And because your physicians have a 
conservative practice style. Both. Yes, absolutely.
    Senator Bennett. That's another subject I'll get into.
    Ms. Wilensky. There are also administrative complexities. I 
know that the House has recently--the committees of 
jurisdiction--have recently voted out a reform bill. This is as 
serious for many providers as the payment level issues.
    The point is that the Medicare drug benefit is not the only 
problem with Medicare. And I would strongly urge Members who 
are considering a drug benefit to not only do that which adds 
money, but to look at the picture more broadly speaking.
    You are the Joint Economic Committee and I'm an economist 
although I don't often wear that hat anymore. And so I'd like 
to close by talking a little bit about what we know about 
moderating spending in Medicare as well as spending outside of 
Medicare.
    As you well know, Medicare is an administered pricing 
system, which means that reimbursement are not set by the 
market. They are set by the government. And it is a 
reimbursement system that primarily attempts to control 
spending by putting all the pressure on providers.
    The reason is that most seniors have insurance coverage 
that covers the 20 percent co-payment in Part B, which might 
otherwise influence their behavior.
    If you look at the comparison of Medicare to health 
spending in other areas, your assessment depends mostly on what 
period you look at and what you are comparing Medicare to--in 
general--not surprisingly, because Medicare is a big middle-
class entitlement program.
    Medicare and other measures of health care spending don't 
look that different over the long haul. This statement is least 
true if you compare Medicare to private insurance directly. But 
that's probably the least relevant comparison.
    The first reason it is the least relevant comparison is 
that over the last 30 years, the share of spending that private 
insurance covers in terms of hospital and physician spending, 
has increased dramatically.
    So what is being bought with private insurance has changed 
at the same time spending has changed?
    If you actually look at a unit of private insurance 
coverage, the cost per unit has not changed very much.
    What's more important though for this discussion is a 
comparison with large public purchasing groups. Most 
discussions of reform are not suggesting Medicare be converted 
just to private insurance. Most reform discussions make use of 
large public purchasing groups like the Federal employees' 
health-care plan or like CALPERS.
    When you look at those comparisons, Medicare has done more 
or less as well--slightly better than FEHB according to some 
numbers, not quite as well as FEHB if you look at the after-
negotiated numbers, and definitely not as well as CALPERS, at 
least in the last 10 years.
    I don't want to claim that the large groups are great 
savers relative to Medicare, but I think if you look at the 
experience of Medicare compared to the large public purchasing 
groups, you can't make the claim on Medicare's side either that 
Medicare is much better.
    To me, the conclusion is that if you want to look at 
administered pricing programs as a way of constraining 
spending, I think you can say Medicare has not done a bad job. 
But it has frequently done so, by huge shocks to the system.
    The biggest shock came from the 1997 Balanced Budget Act, 
where Medicare spending declined from a 10 or 12 percent growth 
per year in the mid-1990s to a small absolute negative increase 
to--0.5--a little negative a couple of years later.
    That's a pretty big shock for the system. You've heard lots 
of complaints from the provider community about what BBA was 
doing to them.
    If you are willing to continue very tight controls like the 
sustainable growth rate (SGR) in physician payment that ties 
overall physician spending to the growth of the economy, if you 
have the political will to do that, if you don't think that 
causes a real unfairness since it hits the conservatively 
practicing physicians the hardest, I think administered pricing 
systems can restrain spending about as well as any other 
physician.
    Personally, it makes a lot more sense to me to put pressure 
on beneficiaries as well as on providers rather than only on 
providers. Otherwise, it seems a little bit like depressing the 
gas pedal and slamming on the brake at the same time.
    So for me, reforms that try to change the behavior of both 
seniors and providers make more sense than those that only 
focus on providers. A final note--the future beneficiaries are 
going to be quite different than the current beneficiaries, 
especially the women.
    Most of the women will have considerable times in the labor 
force. They will have a lot more experience with insurance 
plans. They may have more income. And they will be better 
educated.
    We'll have to protect the existing seniors, but we 
shouldn't make future decisions about Medicare based only on 
our existing senior population.
    Thank you very much.

    [The prepared statement of Gail R. Wilensky appears in 
Submissions for the Record on page 81.]

             OPENING STATEMENT OF JOHN P. MARTIN, DIRECTOR,

                 EMPLOYMENT, LABOUR AND SOCIAL AFFAIRS,

                 ORGANIZATION FOR ECONOMIC COOPERATION

                            AND DEVELOPMENT

    Director Martin. Chairman Bennett, ladies and gentlemen, 
it's a great pleasure for me in my capacity as OECD Director 
for Employment, Labour, and Social Affairs to testify before 
you today on some of the findings from ongoing OECD research 
into how the different member countries of the OECD are seeking 
to deal with the common problem of rising health-care costs.
    I would hope that this ongoing research would provide some 
useful lessons for your deliberations as you wrestle with the 
task of how to insure Medicare's long-term financial viability. 
I have attempted to summarize some of the lessons in my written 
testimony, which was submitted beforehand. I won't repeat them 
now.
    I would like, however, to highlight a few crucial points 
that need to be considered when reviewing the lessons from 
other countries and attempting to decide how they might be 
applicable or not, as the case may be, to the United States 
situation.
    The first point I think it's important to emphasize is that 
the U.S. health-care system is unique in the OECD area. This 
uniqueness, I would submit, is reflected in the following ways:
    The United States has no national health insurance program 
and does not provide universal coverage to its population.
    A second unique feature is that it spends the most on 
health care, whether in terms of GDP or per capita, but its 
population health status is about average.
    A third unique feature is it's a very responsive system as 
viewed from abroad, adapting very quickly to shifts in consumer 
preferences, much more so than the health-care systems in many 
OECD countries.
    It fosters innovation in medical technology and seems to be 
able to disseminate this medical technology much more rapidly 
than is the case in other OECD countries.
    A final feature of uniqueness is it's an extremely diverse 
system--highly decentralized and assigning a very large role to 
the private sector, which means that there are fewer policy 
levers at the Federal level to change health-care delivery 
directly than is the case in many OECD countries.
    Thus, the U.S. system is really unique among OECD countries 
in its heavy reliance on competition across health-care 
insurers and providers in order to meet health-policy goals.
    Now, I would submit that because of these unique features, 
it's obvious that there's no simple way to transfer lessons 
about what works and what doesn't work in other countries' 
health-care systems to the United States as a whole.
    However, there may be lessons that are particularly 
relevant to Medicare, a program that has much in common, I 
would submit, with the publicly financed social-insurance-based 
health programs which are common in many OECD countries.
    A second point to bear in mind is the stark fact that all 
OECD countries are facing a common challenge of rising health-
care costs, just as is the United States. Health-care spending 
is absorbing a growing share of GDP in all countries despite 
one to two decades of cost-containment efforts in many of them 
that resulted in temporary successes in a few countries, 
especially in the early 1990s.
    In addition, there is widespread agreement that these 
spending pressures on health care are likely to increase in the 
coming decades. Recent OECD projections of health-care spending 
in many member countries and those reported by the CBO in its 
written testimony for this hearing concord in their 
conclusions. Health spending is likely to represent a growing 
share of GDP over the coming decades in the United States and 
in virtually all other OECD countries.
    Demands for health care will increase with improvements in 
medical technology and also with population aging. This 
immediately raises a question: Should we be worried by this 
trend?
    The answer is not obvious. Spending more on health care as 
a society gets richer is not necessarily an inappropriate 
social choice. But we have to admit that it's extremely hard to 
judge what is the appropriate level of health spending in 
democratic societies.
    There are clear risks of excess spending arising from the 
market failures which are associated with health care. And the 
government interventions in our societies that aim to remediate 
these market failures often result in other distortions 
elsewhere.
    At the same time we're faced with much evidence across all 
OECD countries that it may be possible to obtain equivalent 
health outcomes for less spending and that there are obvious 
opportunities to improve health outcomes in many areas.
    It's for this reason that there has been much emphasis 
recently in OECD countries on the need for health-sector 
reforms to promote efficiency--but efficiency not coming at the 
expense of effectiveness or quality care.
    Now, while many reforms have been tried and some of them 
are described in my written testimony, I think it's fair to 
conclude that the scope for potential improvement is still very 
large.
    But choices about further reform are hampered by the lack 
of comparable and up-to-date information about the impacts of 
the many reforms that have been enacted by OECD countries to 
date.
    The OECD, the organization to which I belong, with the 
active support of many of its member governments, including the 
United States, has recently launched a major research program 
to try to fill in some of these gaps in knowledge. And we will 
be submitting a major report to OECD ministers in about a 
year's time seeking to draw some lessons from this work.
    I hope this report, when it appears, will be helpful to the 
work of this Committee.
    Thank you very much.

    [The prepared statement of John P. Martin appears in 
Submissions for the Record on page 93.]

       OPENING STATEMENT OF MARILYN MOON, SENIOR FELLOW, 
                      THE URBAN INSTITUTE

    Ms. Moon. Thank you, Mr. Chairman and Mr. Stark and other 
Members of the Committee. It's a privilege to be here today to 
speak to you about this important issue.
    My understanding is the hearing is to look at the issue of 
the viability of Medicare. And my overall conclusion is that 
Medicare is indeed a viable program.
    There are important challenges that face the Medicare 
program, but I wouldn't characterize them as a crisis. I would 
rather characterize them as important challenges that we're 
going to have to meet.
    We are not going to do away with an aging society by any 
waving of the hands. And the notion that there will be more 
people over the age of 65 in the United States is a fact of 
life.
    We are going to be living with that essentially forever. 
It's not even the pig in the python. It's the python in the 
python--that is, once we go up to a higher share of older 
persons we will stay there over time.
    So there are going to be important adjustments that need to 
be made in the interim. This is not a short-term challenge by 
any means.
    I'll try to make five points in my testimony today. And I'm 
going to go over several of them very quickly and concentrate 
on just a couple.
    First, as some of those testifying earlier have said, the 
challenges of health-care spending are essentially the same in 
Medicare as they are in the rest of the health-care system. 
It's technology and improvements in health care that have 
largely driven higher spending. And in many ways, people are 
getting value for their dollars through these new activities.
    Medicare has been and should remain part of the mainstream. 
And that's a challenge that needs to be kept in mind as well.
    Second, Medicare, while a challenge for the future, is not 
a crisis, I believe, for reasons of looking a little bit more 
broadly than some people do in terms of what the challenges are 
for the future on the economy.
    Part A is in pretty good shape and has been for the last 4 
years, in part because of, as Gail Wilensky said, the Balanced 
Budget Act, but also because of the growth in the economy. And 
economic growth is a very important part of that.
    Moreover, Medicare Part A, for example, over the next 10 
years will contribute $500 million more in revenues than in 
spending, something that people often forget when they talk 
about the future problems of this program.
    There is interest in combining Part A and B in terms of 
looking at the financial burdens. But I think that's a valid 
thing to look at. People have sometimes looked at it in the 
context of worker-to-retiree ratios, or the share of GDP that 
goes to the program. And both of those look to important 
aspects of the issue.
    But it's also the size of the pie that will matter over 
time. To say that the share of GDP that's going to health care 
will undoubtedly grow as it will grow from health-care spending 
elsewhere in the economy, I think, is pretty much a given.
    Americans have indicated that they like health care. They 
want to spend more on health care. And that's undoubtedly 
what's going to happen.
    What does that mean in terms of Medicare? If you look at it 
in terms of Medicare as we often do and talk about burdens on 
workers for Medicare and look at the size of the pie, there is 
a chart in my testimony that essentially tries to make the 
point that the size of the pie is going to grow so much over 
time that actually there are going to be plenty of resources if 
we have the will to use them for that purpose.
    As figure 2 indicates, the per-worker GDP, even after you 
control for inflation, will rise by 54 percent, or thereabouts, 
over the next 33 years. That growth is largely due to growth in 
expected productivity, based on relatively modest assumptions 
by the Medicare trustees.
    If you then subtract the per-worker burden that Medicare 
will impose upon individuals from these resources and ask, will 
workers continue to be better off after what we sometimes hear 
as an enormous burden for Medicare; the answer is that growth 
will decline. But it will decline from 54 percent to 51 
percent.
    I believe that indicates that the resources are there. The 
question is: Is the will there to deal with those resources?
    Medicare will create an additional burden because we'll 
have a doubling of the population and we'll have nearly one in 
every four Americans covered by this program.
    Third, I believe it's also important to use caution in 
assuming that beneficiaries can absorb fully the new burdens 
that will come along in the future. Even without changes in the 
program, a greater share of income of people 65 and over and 
who are disabled will be devoted to their health-care needs 
because health care will grow faster than the incomes of this 
population.
    While they may be challenged to pay for part of the future 
costs, I think we have to be realistic in terms of raising that 
share too much.
    Fourth, I believe that private plans are not the magic 
bullet answer. I would not argue that the work that Cristina 
Boccuti and I have done, where we show that Medicare has grown 
at a slower rate on a per capita basis than private insurance, 
indicates that Medicare is vastly better, but rather, if 
Medicare were turned over to the private sector, we would not 
suddenly find the answer to the problems that face Medicare in 
the future. That is, both private insurance and Medicare face 
the same problems of greater demands for health care over time.
    Those who think that the private sector is the answer and 
will take us out of having to deal with higher costs are 
implicitly relying upon private plans to impose either very 
strict controls or raise premiums on beneficiaries over time.
    That approach would be a second-hand way of solving the 
problem, but I think that people would be at your doorstep 
complaining just as surely as if we keep reliance on 
traditional Medicare programs in place.
    Finally, because I believe there are important challenges 
facing Medicare, we should not shirk from thinking about 
changes in the basic Medicare program itself. Such changes 
should be a major consideration over time.
    We should not, as Gail Wilensky has said, rely only on 
price controls. Indeed, the Medicare program over time has 
changed considerably, relying on payment policies that are both 
prospective and go beyond per visit or per unit of service 
basis.
    We need to think more critically about areas to improve 
these payment systems, as well as ways, for example, to expand 
coordination of care activities through the basic Medicare 
program, because one way or the another, it's going to be 
there.
    We haven't seen the kinds of innovation that we had hoped 
for from the private sector in the area of coordinated care. 
Everyone needs to work on this problem: the private sector, the 
public sector. And together, I believe that it can be there for 
people like me, a Baby Boomer who is part of the problem.
    I hope we'll also be able to continue to benefit from the 
many things that Medicare has given seniors of today into the 
future.
    Thank you.

    [The prepared statement of Marilyn Moon appears in 
Submissions for the Record on page 104.]

    Senator Bennett. Thank you very much. May I say I agree, 
Dr. Moon, absolutely that many of the problems that I have with 
Medicare also apply to what's happening in the private sector. 
This is not the place, but at some point, we might have this 
discussion.
    I think the primary driver of problems in health care is 
the concept of a third-party payer, whether the third-party 
payer is a private insurance company that has been chosen by an 
employer or a Medicare system, where the provider is chosen by 
the government or endorsed by the government.
    In each case, you remove from the customer any economic 
power to influence the outcome. Mr. Stark would insist that I'm 
too stupid as a customer to participate in that. We can have 
that debate between the two of us at some future time. But I 
think that is a major part of the escalating health-care costs 
in this country, both in the private sector and in the public 
sector. However, I find that--back to Mr. Stark's comment about 
we're the board of directors--I get far more complaints from 
the customers of the system that are under Medicare than I do 
from those that are in the private sector.
    Indeed, when I turned 65, I was told by virtually everybody 
that knew anything about it: ``Do not--do not--sign up for 
Medicare. Run for another term. Stay a Federal employee as long 
as you possibly can. Emulate Strom Thurmond if you can. But 
stay away from Medicare as long as you possibly can.''
    My ego is such that I respond to that kind of 
recommendation and I will run for another term, not only to 
avoid Medicare, but to continue to enjoy my job. And I think 
we're reaching the point where seniors need to do that and not 
look at automatic retirement at age 65.
    The Balanced Budget Act has produced the economic results 
that you have given us. It has produced most of the complaints 
I get. And that the complaints do not exclusively come from 
providers.
    There are a number of providers who simply say, ``I will no 
longer see Medicare patients. That's the way I deal with the 
price controls, the cost controls that are put on providers. I 
simply drop out and cease to be a provider.''
    Interestingly enough, that was part of the debate in my 
first campaign for the Senate in 1992. There were at that time 
people saying, ``I will not see Medicare patients.'' And 
Medicare patients were coming to me and saying: ``If you get 
elected Senator, will you force the doctor to see them?''
    And then, the Balanced Budget Amendment came in--or Act--
came in in 1997. Instead of going to increased--well, instead 
of solving the problem, it exacerbated it. It made it much 
worse.
    Now there are doctors who are saying to me, ``Absolutely I 
will not see Medicare patients'' or doctors who say to me, ``I 
signed up to help people get better. I'm still going to do 
that,'' which means, ``I will continue to see Medicare patients 
even though I am doing so at a loss with every single patient 
who comes into my office.'' And, ``I have been forced out of my 
practice because my partners say having me as a partner in the 
overall group practice is hurting everybody. So I am 
personally, out of a sense of determination for what I learned 
in medical school, subsidizing all of the Medicare patients 
that I see, that none of my former partners will see, by what 
I'm charging the other patients.''
    I don't know that that's just an anecdotal example that 
doesn't hold up. But I think it's one of the things we ought to 
address.
    But as I say, not all of the complaints I get are from 
providers. I get the kinds of complaints I indicated when I 
talked about my own situation from people who say, ``Do I 
absolutely have to go to Medicare at 65? Can't you fix it? You 
and the government who can fix everything--can't you fix it so 
that I can keep what I've got now? I'm willing to pay for it. 
My financial situation is such that I can handle it. I do not 
want to go into Medicare because the restrictions are so heavy 
that I want to stay exactly where I am.''
    So we've got ourselves in a situation where the customer 
satisfaction is going down and the costs are going up. And if 
the charts we saw earlier are correct, the costs are really 
going up.
    That's why I've called this hearing. I think this is an 
area we need to address and think about. I'll be happy to get 
any response that any of you have. Or if you think about it, 
write to us. Keep those cards and letters coming. This is not a 
hearing that will end and we go away. This is a problem that 
the Congress faces and that I think has a major, major impact 
on the economy long term.
    And if we are the Joint Economic Committee, we ought to 
provide the Congress with as much expertise on these problems 
as we possibly can as far away from political bickering as we 
can get.
    Now, we can't avoid that because we're political animals. 
But let's do the best we can.
    I appreciate this panel. Dr. Wilensky, let me respond to 
just a couple of issues you've raised.
    I agree that the traditional Medicare program in some ways 
is going to be with us for a long time yet. That's where most 
of the seniors are. Whatever else we do, we need to make some 
changes so it operates in a more sensible way.
    It penalizes conservatively-practicing physicians, because 
in its interest on restraining spending on physicians, it 
either lowers or raises the physician payment rates in 
accordance to physician spending in the whole country.
    That hurts people who are conservatively practicing. Utah, 
among other places, is a conservatively-practicing State. That 
makes no sense. It doesn't treat chronic diseases very well.
    So one of the things that we're going to have to do is 
recognize that traditional Medicare is going to be around for 
probably about as far as the eye can see. We need to do things 
to improve how reimbursement is paid to reward quality, to have 
measures for chronic disease.
    Having said that, I very much agree that particularly with 
the people who are going to be coming into this area, although 
I have confidence in a lot of the seniors I know as well, that 
they ought to have other choices in their Medicare program.
    That's why I personally have believed in the Federal 
employees' health-care plan as a good model. It allows a 
variety of health-care plans to be present, including some that 
would have a much smaller part of the third-party payer 
problem.
    As an economist, I certainly don't disagree that a lot of 
the difficulties that we face in health care are related to the 
fact that somebody else is paying the bill. Health care does 
have some problems that it's going to always have, a 
significant portion of a third-party payer at least beyond some 
point.
    We basically excluded any possibility of having plans that 
have more economically sensible kinds of cost-sharing 
mechanisms associated with it. That doesn't make any sense.
    Neither does it make sense to force somebody who is 
continuing to work--which I hope more and more seniors will 
do--than not to be able to continue with their private health-
care plan.
    So I think we need to recognize the realities, at least as 
I see them, which is traditional Medicare is going to continue. 
Make that a more sensible program, but to move to a structure 
that allows for different kinds of plans and different kinds of 
cost-sharing as well.
    We will end up spending more on health care because we have 
a huge change in the demographics. I don't think we sensibly 
can argue, especially because we are also a wealthy, and 
hopefully, increasingly wealthy society--the real question is 
how much more and how do we distribute that financing burden.
    Those are not small issues. They have huge ramifications on 
the growth in the economy as well as on equity and 
distributional issues, so there are many questions. But it will 
have a very large impact on the economic growth on this country 
as to the kinds of responses we make to those challenges.
    So I don't think it's particularly useful to say: Are we 
going to spend more on health care? The answer is: Of course. 
The answer is how much more and does that make sense.
    Senator Bennett. Dr. Moon.
    Dr. Moon. Thank you. A number of issues that you raised are 
important and interesting issues. When you look at all the 
data, Medicare beneficiaries report that they are happier with 
Medicare than do privately covered, insured individuals.
    It is an interesting conundrum, because a lot of people's 
frustrations with Medicare is with the lack of what is covers 
in its benefit package. It is inadequate and has been for some 
time.
    For example, about 82 percent of all people in private 
insurance have better benefit packages than Medicare 
beneficiaries do, which is also why beneficiaries rely on 
supplemental insurance, which causes coverage to be very 
complicated for this group. Hopefully, Medicare could be 
improved by expanding basic coverage and eliminating some of 
the need for the supplemental insurance.
    The other issue that is important to stress is the lack of 
good information for a consumer on what's necessary care and 
the credibility of the people telling them that.
    Sometimes, people in managed care, when told they are not 
getting access to a particular test, immediately assume that 
it's for financial reasons only. Sometimes they are correct, 
but other cases it may be that the test was unnecessary.
    If we are going to talk about empowering consumers, which 
we certainly are doing a lot of right now, we have to give them 
the real tools to empower them. That is, we have to have 
credible sources of information.
    Actually, the European countries have a lot to teach us 
about providing information. They do a lot of work on assessing 
appropriateness and spend time on that. That's one area where I 
think Medicare can contribute as well, because providing that 
kind of information represents a public good.
    Finally, I would mention that I believe that another 
important thing to talk about in terms of Medicare's future is 
the issue of whether or not individuals will have choices.
    I think it's fine to have private plans, but I don't think 
we should force people not to have traditional Medicare if 
that's what they want.
    Personally speaking, my husband works for the University of 
Maryland, so we have 14 plans to choose from. But the realities 
are that we have four physicians that we rely on substantially, 
none of whom are in any of the managed care plans.
    And the only one where we get any coverage at all is Care 
First of Maryland, in which I see my internist out of network. 
She charges me $75, a very reasonable amount, for 20 minutes in 
downtown Washington. She charges that $75 to me. I pay it. Care 
First says that's worth $32.10 and pays 80 percent of that. 
Medicare pays her $58 for the same visit.
    Medicare is the only insurance program she takes, because 
my physician is being squeezed much harder by private insurers 
in this area. It varies around the country. But it's a problem 
that we don't have a good solution to.
    I would also add that I think a lot of attention needs to 
be paid to finding ways to get physicians and consumers to work 
together in a concerted way to this as they are both in it 
together--and work together. And I think that means some major 
changes in policy.
    Senator Bennett. Mr. Stark.
    Representative Stark. Mr. Chairman, thank you. We've had 
votes called on the House floor, so I'm afraid Ms. Maloney and 
I----
    Senator Bennett. I apologize.
    Representative Stark. That's all right. The bells just went 
off. But I just wanted to say quickly before I dash out the 
door that I'm particularly glad to see Gail here. She's one of 
the few Republicans that I've worked with for more than 18 
years on Medicare issues that I really truly believe does not 
want to destroy Medicare as an entitlement.
    We often disagree, but I don't distrust her. Actually, you 
at least hold out the possibility that I do not want to.

    [Laughter.]

    Representative Stark. Mr. Chairman, as long as you raised 
the issue, I wanted to encourage the idea that you are at least 
five or ten times smarter than I am.
    But I do believe that what Ms. Wilensky was getting at, and 
that Dr. Moon just pointed out, is that for most of us, medical 
technology and procedures are confusing.
    And when, Gail, you talk about providers and beneficiaries 
being involved, I don't see how a woman--and I've had 
acquaintances who have dealt with breast cancer and the variety 
of protocols that are available for treating it--and, yes, you 
can go on the Internet.
    But it does seem to me that when you are scared and sick 
and concerned, that making the kinds of rational decisions 
become even more difficult. And it isn't out there.
    How do you decide? This is something--I'm one of the very 
few Medicare beneficiaries that goes through the problems of 
having to decide whether our family should be involved in the 
C-section or a vaginal delivery.

    [Laughter.]

    Representative Stark. But I'll tell you that this makes a 
great difference in the cost of medical care, not so much to 
Medicare, but most beneficiaries are somewhat more prudent than 
I am in that regard.
    Nonetheless, women are faced all the time with the habits 
of what doctors do in a community. So one community does two or 
three times more C-sections than the other. The problems are 
the same.
    I don't think it's fair unless, Gail, you are talking about 
cost-sharing on beneficiaries to reduce or increase 
utilization. And I get a little more cautious when I go down 
that road, because we started out years ago talking--you and I 
and Mr. Gradison--about outcomes research. And I think that's 
where Mr. Martin would agree with us.
    And I think you would agree that we're not doing enough--
and the Federal Government is the only one who can do outcome 
research, because everybody else is saying, ``I ain't going to 
tell you.'' Blue Cross won't talk to anyone. They won't talk to 
Kaiser because they all think they've got some kind of special 
treatment situation.
    So there are some areas where I think we could add to the 
body of knowledge and figure out how to pay physicians based on 
outcomes--not based on outcomes on a per case basis, but based 
on outcomes that procedures would warrant because of the 
historical value.
    So Uwe Reinhardt mentioned yesterday that we spent 2 
percent--and we brag on that--for HCFA. But you spent like 300-
some percent on research on outcomes. HCFA could do that and we 
could do a whole lot.
    If we want to get into competitive bidding, I have no 
quarrel with that. The places we tried it didn't like it. The 
providers, they hated it.
    So it's easy to say let's have competitive bidding. But you 
find the hospitals or the doctors that are going to let us get 
away with that and I'll be right there with you.
    So I appreciate your calling these hearings. And I want you 
to talk more to these witnesses. And I wish I could stay here 
and hear more of what Mr. Martin has to say.
    But I thank you again for having these hearings. And I 
think we should do more on it.
    Senator Bennett. That's all right, sir. We will do our 
best. You're in trouble now because you have only one man here 
who doesn't need to worry about the clock.

    [Laughter.]

    Representative Stark. Will you run for re-election even if 
I'm chair in the next Congress?
    Senator Bennett. You are making an assumption there, Mr. 
Stark.

    [Laughter.]

    Senator Bennett. I don't know how much more productive time 
we can spend together, but let's just take advantage of your 
being here to talk about this question of the third-party 
payer. Let me go farther than that.
    Clearly, a third-party payer is necessary in any situation 
where there is a clear financial emergency. I will give you a 
rough analogy, which I recognize, like every analogy, is 
flawed, but which I hope will make the point.
    We talk about this as health insurance. And I think that is 
a distortion of the word ``insurance'' and the concept of the 
word ``insurance'' because it is not insurance. It is a payment 
system that we call insurance.
    Here's the analogy. I have a homeowner's insurance policy. 
And it's a wonderful policy. If my home burns down, it will 
replace everything. It will replace the silverware in the 
drawers. It will replace the linens in the closet. It will 
replace the pictures hanging on the walls, as well as the 
Steinway piano and the valuable things.
    As I examine the policy, however, no matter how carefully I 
look for it, I cannot find a clause in the policy that covers 
the cost of mowing the lawn or repainting the front door when 
the dog scratches it, or replacing the furnace filters when 
they get dirty.
    But our attitude toward health insurance--and I in this 
case put the word ``insurance'' in quotes--is that somehow 
everything related to health must be reimbursed by the 
insurance company.
    Obviously, we have to have a third-party payer if I'm going 
to have a quadruple bypass. I can't handle that.
    But just as I handle the replacement of the furnace filter 
in my house and the big expense when my wife says to me, 
``There are too many scars on the wall and we've got to repaint 
the place,'' and that's a $2,500-$3,000 hit to repaint the 
place, but my insurance won't pay for that. It will only pay if 
I have a catastrophic event in the house.
    Now, we've gotten away from that concept of insurance in 
health care. We are not insuring against a catastrophe. We are 
using the insurance company as the channel through which we 
funnel payments for everyday kinds of activities.
    And when that gets too expensive, then we use the 
government and other countries. So the government in the 
analogy reimburses me for mowing the lawn.
    And then they say, ``Well, it's costing us too much, so 
we'll have a co-pay.'' So I have to keep the records of what I 
pay, the teenage boy next door, and then file a form so the 
government can reimburse for its share--the government, if it 
is Medicare, the private insurer if I'm not on Medicare, for 
its share of the cost of mowing the lawn.
    And that to me makes absolutely no sense. I have talked to 
insurance companies and said, ``What would happen if you had a 
$3,000 deductible, a true deductible?''--not the kind of 
deductible that we've built in to health insurance where you 
keep all your little chips, add then up, and then you go in and 
say, ``Ahah, I've the magic number and you pay everything over 
this.'' A deductible like my car insurance deductible that says 
I've got $1,000 deductible and if I get into a $900 accident, I 
have to pay the full $900. And if a week later, my wife gets in 
a $900 accident, she has to pay the full $900.
    But somebody totals the car, the whole car is paid for, 
minus that $1,000. Insurance companies I talked to said if we 
had a $3,000 deductible, we could cut the cost of insurance 
almost to the level of your homeowner's policy.
    In the emergency room, they said 90 percent of the people 
that walk into this hospital in the emergency room cost less 
than $3,000. Indeed, 80 percent cost less than $1,500.
    If for people who came in for an emergency that costs less 
than $1,500 and simply hand us a VISA card and check them off 
and sent them forward, we could fire half our staff involved in 
filling out all those forms. And then the checking, and then 
the looking for fraud, and the backwards and forwards, and was 
this really done, and so on and so forth. The customer knows 
what was done. The customer gives you his credit card. The 
customer leaves.
    And if there is a true medical emergency, if you are 
talking about we are going to have a C-section or we are going 
to--all of these other problems--OK, now you sit down and say, 
``Let's get the medical advice we need.''
    But I break my finger, which I did. It's practically a 
commodity to go in, set it, and look at it. Now, to be true, 
after I broke my finger, I then went to a friend of mine who is 
a hand specialist in Utah. And he looked at the way it was done 
at Bethesda Naval Hospital and says, ``Let's do it again.'' And 
he changed it a little.
    But there was nothing wrong with the way it was done at 
Bethesda. I just happened to have a friend who specialized in 
sports medicine and has repaired the fingers of people like 
Steve Young and other people who get their fingers broken.
    I understand that the $1,500--if we made a $1,500 
deductible--is a challenge. But I'm currently spending--my 
employer and I--in excess of $500 a month to pay for the 
present system. My employer pays over $350 and I pay over $150. 
It's $5-$600 every month.
    If I could take a portion of that and buy a catastrophic 
policy with a $1,500 deductible and put the rest of it in a 
medical savings account that did not get taxed, I would very 
quickly have $1,500 available to cover any deductible that 
would come along.
    And I would have an incentive to take care of myself so 
that I wouldn't have to spend that $1,500, because it would be 
available to me to spend on something else if I didn't get 
sick.
    Now, react to that. Tell me what's wrong with it.
    Ms. Wilensky. We're in a country where people have gotten 
so used to having insurance that is prepayment as opposed to 
insurance that's insurance. One of the difficulties you have 
trying to get people to think differently about health care.
    Senator Bennett. I understand that.
    Ms. Wilensky. I personally think that we should use 
insurance as insurance, that is, paying for a high cost, low 
probability event. People who want to prepay because they don't 
want to deal with issues of price need to put themselves in a 
system where somebody else is dealing with the cost of care.
    That was initially the idea behind HMOs and managed care. 
Of course, people then decided that they didn't like it if 
somebody was restricting their use once they had gotten into 
managed care.
    We are in a very difficult position, because with employer-
sponsored insurance, many employees don't think about the 
employers' contribution as their money, although it is. So when 
they think about what it's costing, it's only the amount they 
see directly.
    So the question is: How can we proceed from here?
    It strikes me that since we are where we are, the best we 
can do is to make sure that both employers and seniors who want 
a system where insurance is being used as insurance with less 
involvement by others have that opportunity. Whenever you have 
third party payment covering expenses, the third party is 
rightly going to say, ``We want to have some say in where you 
go, how you spend and what you spend. And we want records and 
we want to make sure you're not ripping us off.''
    In order to at least try this as an option, as well as to 
make sure that there are other options available, both the 
under-65 employer level and for seniors, we have to find a way 
to treat major or catastrophic expenses. I don't want to 
diminish the importance of having individuals more involved in 
their own health-care decisions, because even small percentage 
changes in a $1.3 trillion sector can make a big difference.
    But health care is notorious for having concentrations of 
spending--relatively small numbers of people, spending large 
shares of the health care money.
    What this does is push this issue that Mr. Stark raised: 
Are we getting better information now about what works when?
    Rewarding individual physicians is hard; it's much easier 
if a physician is part of a plan--rewarding physicians who 
practice better, who do the things that count and don't do the 
things that don't count, reward them for being conservatively 
practicing physicians.
    Interesting studies have been coming out in 2003, both 
ranking States as best they can about the quality improvement 
using Medicare data, and another one looking at what high-
spending areas actually buy. And it's mostly discretionary 
spending that neither improves quality nor quantity of life.
    The question is what to do in Medicare, since we let local 
physicians make decisions about how they practice Medicare 
controls, prices, and physician reimbursement. But Medicare 
doesn't interfere in how Medicare is practiced as long as it 
fits with broadly defined concepts of being medically 
apportioned.
    We know there are huge variations in spending across the 
country and it's not clear what the country is getting for 
this. So I'd agree with you, but I think we need to recognize 
that in health care we also have to think about what we've 
going to do for those relatively small numbers of people who 
spend huge amounts of money, much of which may not be 
particularly medically beneficial and to do so in ways that 
will make us all comfortable that these are good medical 
decisions.
    They're not financial credentialing, or economic 
credentialing as doctors like to call it, but that what is 
being done clinically makes sense. There's a huge range out 
there.
    I'm not as confident as Marilyn that we can look to you to 
figure this out. I don't think we know very much yet about what 
works when. We've been reasonably aggressive in the public 
health service in investing in that. But nothing compared to 
what we should be doing.
    Senator Bennett. Dr. Moon.
    Ms. Moon. I see three practical issues in talking about 
this for Medicare. In addition to the issue Gail raised about 
getting from here to there, which is hard to do, the first is 
the issue of risk.
    If you have two different plans in which people can choose 
one with a high deductible while the other is more 
comprehensive, you're going to tend to have people flow into 
the more comprehensive program who are sicker. There's a real 
problem of how to do that fairly in terms of payments to plans.
    Second is an issue that needs to be taken into account 
anywhere, but in particular in Medicare. The issue is income. 
What is a high deductible for me is very different than what's 
a high deductible for an average 80 year old lady on the 
Medicare program.
    Senator Bennett. I'm not describing this as Medicare.
    Ms. Moon. The third issue relates to the chronically ill. 
That is, some people will ring the bell in spending by going in 
and having heart bypass surgery who have never had any 
symptoms, et cetera. Other people have to see the doctor once 
or twice, every couple of weeks, and do a lot of testing that 
can be very expensive to maintain chronic conditions.
    In these examples, the first person would reach the 
deductible and get help. But after you have 30 or 40 physician 
visits a year and 60 very sophisticated tests you will also 
have spent a great deal, but never have met the deductible.
    I understand your goal. And I think it's an admirable one. 
Speaking as a consumer, not to have to keep track of all those 
bills would be nice as well. But it also means that when 
there's a high deductible the way it works now--and I 
understand the distinction you were making--I have to keep 
track of everything. And then my insurance plan has to go back 
and make sure that I've spent $1,000 before I hit that 
deductible.
    So, insurance companies tend not to like it--the way it's 
normally characterized. The way you're talking about it, I 
understand, would be different.
    But because of the chronically ill and the need to really 
look at cumulative expenditures, I'm not sure you could do it 
your way.
    Senator Bennett. Yes, sir.
    Mr. Martin. I think this is a very fascinating question 
that you've posed to us, Senator. There are a lot of issues. 
Let me just try to make a few points.
    First of all, I think it's correct. It's very clear that if 
you wanted to move to a system like the one you were 
describing, you need to worry a lot about the appropriate 
regulation of the insurance markets that would accompany it, 
because you have a classic problem of cream-skimming. How are 
you going to develop appropriate risk-adjustment factors that 
will insure that you achieve adequate coverage? This is a 
problem that you see in many OECD countries because many of 
them are committed to achieving and maintaining universal 
coverage.
    Let me just give you an example from one country. 
Switzerland has mandatory private insurance combined with 
universal coverage of the population. It moved to mandatory 
private insurance in 1994, but at the same time it combines 
this with very extensive regulation of the many private health 
insurance schemes which operate in Switzerland.
    It does so because it wants to maintain the goal of 
universal coverage. Therefore, it imposes various rules 
regarding community risk-pooling and risk-adjustment in order 
to insure that you can maintain that coverage.
    Now, the interesting thing that comes out of this is that 
there is some competition between the private insurance schemes 
in Switzerland. They do charge different premiums across the 
country.
    And the interesting thing is that for the moment, there 
isn't much response by the average Swiss consumer to these 
different premiums and these different incentives. There's 
actually relatively little flows between schemes.
    You can interpret this fact in a number of different ways. 
One I think is very much to the point that Gail and Marilyn 
have been making and one that I would also emphasize.
    Consumers, that is, people like us, are not that well-
informed about the advantages and disadvantages of different 
private insurance schemes. We have great attachment to the 
things that we know, especially where health care is concerned.
    We like our doctor. We like our local hospital. We are very 
fond of our long-standing private health insurance scheme.
    In order to change that you really do need to have as a 
Nation an effective system of information-gathering and 
dissemination on effective practices, that is, disseminated 
well to both providers and to the consumers.
    And that is a very difficult task. I would not agree with 
Marilyn that many European countries do it better than the 
United States actually.
    I think Gail is right. All OECD countries, in my view, do 
this very badly. They are not good at collecting and 
disseminating good information on best practices and the 
utilization of best practices and then creating incentives for 
individuals or companies to use that information appropriately 
in the market for purchasing health-care services.
    That's a real challenge. It might be--and we've heard some 
interesting arguments--that maybe one can design new savings 
accounts, medical savings accounts, that would create 
sufficient incentives for consumers and providers. But I think 
that requires a lot more information and a lot more 
experimentation to be absolutely certain.
    The potential gains are quite large. I agree with you on 
that, Mr. Chairman. And I think that that kind of 
experimentation is very worthwhile.
    And I submit in the context of a health care system like 
the United States, one which is so diverse and which is so open 
to these kind of innovations, it would seem to me to be very 
worthy of experimentation.
    I know that other countries would be extremely interested 
in seeing whether it's possible to design new insurance and 
savings accounts here that really will encourage much more 
effective value-based health insurance actions on the part of 
providers and clients. That's a real big challenge for us.
    Ms. Wilensky. Let me just speak a moment, if I may, to the 
risks election issue. It is certainly, in theory--or at least 
potentially, out there anytime you have a significant amount of 
choice among health-care plans.
    And the greater the difference in either coverage or 
benefits, the more you ought to think about it.
    It is a little encouraging that a recent study that Kent 
Dorba and others reported on, the FEHB program, showed very 
little actual risk segmentation going on in the FEHB program, 
although the FEHB program does not do any risk adjustment at 
all, which strikes me as asking for trouble.
    There are a variety of reasons he gives as to why he thinks 
that's happened. I don't argue that as a rationale for not 
doing risk adjustment, for example, Medicare--I think we need 
to do risk adjustment and we're about to start using some risk 
adjustment.
    It's also possible to use a partial capitation system, 
where most, but not all of the payment to the plan is fixed 
ahead of time, but a portion of the payment reflects actual 
use.
    That not only gives you a little cushion in case you don't 
get the risk adjustment exactly right. But even if you did get 
the risk adjustment right, you still have this problem--that if 
you have zero marginal revenue for a big user, the plan itself 
has some incentive to skip on services provided.
    So if at least part of the payment is directly related to 
the use--not too much, but part of the payment--there are some 
positive gains. I only say that to say these are problems that 
I think can be handled. And I think they can't be handled 
perfectly.
    But we don't need to handle them perfectly, just reasonably 
well.
    I also hope, with Director Martin, that the United States 
tries a little more seriously some of these options, because we 
are one of the few places you can imagine demonstrations of 
this sort going on.
    It's very hard to imagine in these very centralized 
European countries that they would even be willing to 
contemplate such changes.
    Ms. Moon. I would just like to add that either I overstated 
or Director Martin didn't understand what I was trying to say.
    I don't believe that the European countries have solved all 
the problems of providing information. But I think a number of 
them have made a commitment to investing and gathering that 
information and making the first steps.
    Great Britain, Australia, Canada are all working very hard 
I know. And I assume some of the other countries are also 
trying to do head-to-head comparisons of drugs and techniques 
that are going to be useful in the future. And we're not doing 
very much about that.
    Senator Bennett. Thank you very much. This is outside the 
scope of the hearing, because most of this conversation has to 
do with pre-Medicare kinds of insurance and private coverage. 
But I couldn't resist, having these three experts in front of 
me, to explore that.
    Let me thank you for your willingness to indulge me in this 
conversation and for your participation in the hearing today.
    The hearing is adjourned.
    [Whereupon, at 12:45 p.m., the hearing was adjourned.]
                       Submissions for the Record

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

      Prepared Statement of Senator Robert F. Bennett, Chairman, 
                        Joint Economic Committee
    Good morning and welcome to today's hearing on the challenges 
facing Medicare.
    Medicare is the best Blue Cross/Blue Shield fee-for-service 
indemnity plan of the 1960s--frozen in time. Before we get carried away 
with rhetoric about what we have to protect and not protect about 
Medicare, let's understand that simple truth. We don't practice 
medicine the way we did in the 1960s; we shouldn't deliver and finance 
medicine the same way either.
    Congress must face the fact that Medicare is 40 years old, whereas 
the practice of medicine is changing so constantly that we could say it 
is only 40 months old. Applying another Band-Aid to Medicare would be 
malpractice when radical surgery is what's needed.
    Exhibit 1 in the case for radical reform is Medicare's growing 
financial crisis. Promised benefits now exceed Medicare's financial 
resources by more than $13 trillion. In other words, Medicare's 
unfunded liabilities are more than three-and-half times as large as our 
Nation's public debt. This imbalance will only worsen if Congress adds 
a prescription drug benefit to Medicare.
    We have a big problem--one that gets worse every day. To bring 
Medicare into long-term fiscal balance today would require either an 83 
percent increase in the Medicare payroll tax or a 42 percent reduction 
in Medicare spending. If we wait, these changes would have to be even 
larger. Enormous burdens on Medicare beneficiaries and on taxpayers 
thus appear almost inevitable.
    We need better solutions. We need creative ideas about how to 
deliver quality care to a growing population while keeping costs under 
control. We need, in short, to start over with a clean sheet of paper. 
We need to ask ourselves--``Given everything we know today, what's the 
best way to structure Medicare and, indeed, our entire health care 
system?''
    Any successful reform must begin with respect for the power of the 
market. Consumer choice, consumer responsibility, and market 
competition have long driven the success of the U.S. economy. The same 
forces should be harnessed to deliver health care.
    Properly structured, market-oriented reforms can deliver quality 
health care efficiently and fairly. Market forces will increase 
beneficiary choice, slow the growth of beneficiary and taxpayer 
spending, and provide strong incentives for health plans, both public 
and private, to provide the highest quality health care.
    Congress should take care to safeguard vulnerable beneficiaries 
from any unintended consequences of market forces. However, it would be 
foolhardy to walk away from all the benefits of market forces for fear 
of these unintended consequences.
    We have a problem and it's not going to go away. Indeed, it seems 
likely to get worse, given the strong desire to add a prescription drug 
benefit. I share that desire--prescription drugs are essential to the 
health of our retirees. But as we design that new benefit, we should 
keep in mind that--as noted in a new Committee report released this 
morning--more than three-quarters of Medicare beneficiaries already 
have some sort of drug coverage. Any move to add a drug benefit must 
carefully balance the needs of the beneficiaries with their current 
sources of coverage and the financial burden on taxpayers.
    We certainly do need a prescription drug benefit--prescription 
drugs do things now that were unimaginable in the 1960s. But we 
shouldn't paste that benefit onto a broken system. We shouldn't create 
a new set of forms and eligibilities that torment patients, frustrate 
doctors, and reward those skilled in the black art of Medicare payment 
formulas. Let us as a Congress face the fact that we need to start from 
a clean sheet of paper, all over again, with all of the money we are 
putting into it, and say ``Let's create a whole new system.''
                               __________
           Prepared Statement of Representative Pete Stark, 
                        Ranking Minority Member
    Thank you Chairman Bennett for holding this hearing. I would like 
to welcome our witnesses and thank them for testifying here today about 
Medicare's finances.
    The title of this hearing, ``Medicare's Viability and Financial 
Situation,'' is intended by the Republicans to be a leading suggestion 
that Medicare isn't viable and is in a horrible financial situation. 
Thankfully, the facts point out a much different picture. This is more 
about the ideology of Republicans than the reality of Medicare's 
current standing.
    Medicare's solvency is at the second highest point in the program's 
history. Right now, Medicare is solvent until 2026. In 1997, before we 
passed the Balanced Budget Act, the program was to become insolvent in 
2001--just 4 years into the future! Yet, Medicare is still here. I just 
say this to point out that the Republican attack on Medicare's 
viability is a scare tactic to enable them to achieve their real goal: 
dismantling Medicare as entitlement program that provides guaranteed 
benefits at guaranteed prices.
    Medicare is better than private plans at controlling costs. A 
recent analysis by Urban Institute Economist and former Medicare 
Trustee Marilyn Moon, who will be a witness at our hearing today, 
highlights that Medicare has consistently done a better job at 
controlling health care cost growth than the private sector has. I'll 
leave it for her to discuss that analysis in greater detail.
    The major problem facing Medicare's future is whether we in 
Congress are willing to make the changes necessary to assure its 
viability for the future. The most important change we can make in that 
regard is to add a Medicare drug benefit. Of course adding a drug 
benefit will require increased spending. The President and Republicans 
don't seem to question increased spending when it comes to tax cuts for 
the wealthy. But when it comes to a Medicare drug benefit, the response 
is always ``it is too costly to do a real drug benefit.'' I don't think 
that is the case.
    Republicans also argue that a Medicare drug benefit can't be added 
to the program unless substantial ``reform'' is attached. My question 
is what do they mean by reform? Do they mean something like the 
President's outline of a plan that would force seniors to enroll in 
private managed care plans in order to receive decent prescription drug 
coverage, while those in traditional Medicare would receive minimal 
drug coverage. The Faustian bargain presented to seniors is to receive 
the drugs they need in exchange for giving up comprehensive health 
coverage with their choice of doctors. That's not a fair choice at 
all--and not one any of us in Congress are forced to make. Seniors 
shouldn't be forced to either.
    Government Accounting Office estimates show that foregoing 
additional tax cuts beyond current law would provide an additional 25-
year window for Medicare solvency while we consider how to slow health 
care costs. At a minimum, this should be done.
    Dr. Holtz-Eakin has referred to the Medicare Trust Funds as merely 
``bookkeeping devices'' used by the Treasury. I would submit to you 
that a ``trust'' fund is much more than that. A Trust Fund is a 
promise--Medicare is a promise to 40 million elderly and disabled 
Americans that they will receive quality health care. Medicare will be 
there for people who need it, so long as politicians here in Washington 
keep that promise.
    I look forward to the testimony of our witnesses.
                               __________
            Prepared Statement of Senator Edward M. Kennedy
    I commend The Chairman for calling today's hearing on the 2003 
Medicare Trustees Report, the long-term viability of Medicare, 
proposals for a prescription drug benefit, and other reforms. But the 
title of the hearing is misleading--``Medicare's Financial Crisis.'' 
It's easy to use that phrase to try to privatize Medicare and force 
seniors into HMOs. But the reality is that Medicare is far from 
failing.
    In fact, in recent years, its solvency has improved dramatically. 
The 2003 Medicare Trustees Report says that the Trust Fund will be 
solvent through 2026, almost a quarter century from now. That's a 
slight drop from last year's projection, but it is still much better 
than a few years ago, when the Trust Fund was expected to become 
insolvent in 4 years. In fact, the 23 years of solvency in this year's 
report are among the longest in the Trust Fund's history.
    All of us want to improve Medicare, and there are many areas where 
we should be working together. Most important, Medicare should have a 
prescription drug benefit. We should also be working to improve the 
quality of care under Medicare and for others too. Often, there are 
unacceptably wide gaps between the best practices and the care that 
patients actually receive. Improving care for patients with chronic 
illnesses such as diabetes and congestive heart failure will mean large 
improvements in health care and large savings for Medicare too.
    We need to improve the use of information technology in Medicare 
and the health system as a whole to reduce costs and improve quality. 
WE need adequate payments to hospitals, physicians, and other 
providers, so that they can provide high quality care under Medicare 
and for all other Americans.
    Many of these changes will produce savings in the long-term, but 
require significant investment in the short-term. Health care for 
seniors is obviously more important than large new tax breaks for the 
wealthy. These important health improvements should be a top priority. 
But that's far from saying there's a Medicare crisis, and no 
justification for the extreme changes that would reduce benefits or 
force senior citizens into HMOs.
    I am particularly pleased that Marilyn Moon is here today. Dr. Moon 
wrote an important recent article on Medicare called ``Solvency or 
Affordability? Ways to Measure Medicare's Financial Health.'' We all 
know that as the Baby Boom generation retires, the ratio of active 
workers to retirees will fall. Today, there are 3.9 workers for each 
retiree, but by 2035, the number is expected to fall to 2.2. Opponents 
of Medicare often use this fact to support their claim that major 
changes are needed in Medicare now.
    Dr. Moon points out that the declining ration of active to retired 
workers is only half the story. The other half--the more important 
half--is the impact that supporting Medicare will have on active 
workers' living standards. Dr. Moon's article finds that even using the 
conservative assumptions in the Medicare trustees' report, workers' 
real incomes in 2035 will be 57 percent higher than they are today. 
After the cost of supporting Medicare is taken into account, their 
incomes will still be 54 percent higher than they are today. Far from 
being unsustainable, Medicare will actually be easier to support for 
tomorrow's workers than today's workers. So there are problems like 
prescription drugs that have to be solved. But let's not cry ``wolf'' 
about a crisis in Medicare--it's not even a mini-crisis. It's not a 
crisis at all, and it's certainly not a justification to privatize 
Medicare and push senior citizens into HMOs.
    I thank all of the witnesses for appearing today and look forward 
to hearing their testimony.
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