[Senate Hearing 108-79]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 108-79
 
                        THE MEDICARE CHALLENGE:
                 IT'S NOT JUST ABOUT PRESCRIPTION DRUGS

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

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             MARCH 20, 2003

                               __________

                            Serial No. 108-7

         Printed for the use of the Special Committee on Aging




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                       SPECIAL COMMITTEE ON AGING

                      LARRY CRAIG, Idaho, Chairman
RICHARD SHELBY, Alabama              JOHN B. BREAUX, Louisiana, Ranking 
SUSAN COLLINS, Maine                     Member
MIKE ENZI, Wyoming                   HARRY REID, Nevada
GORDON SMITH, Oregon                 HERB KOHL, Wisconsin
JAMES M. TALENT, Missouri            JAMES M. JEFFORDS, Vermont
PETER G. FITZGERALD, Illinois        RUSSELL D. FEINGOLD, Wisconsin
ORRIN G. HATCH, Utah                 RON WYDEN, Oregon
ELIZABETH DOLE, North Carolina       BLANCHE L. LINCOLN, Arkansas
TED STEVENS, Alaska                  EVAN BAYH, Indiana
RICK SANTORUM, Pennsylvania          THOMAS R. CARPER, Delaware
                                     DEBBIE STABENOW, Michigan
                      Lupe Wissel, Staff Director
             Michelle Easton, Ranking Member Staff Director

                                  (ii)

  


                            C O N T E N T S

                               ----------                              
                                                                   Page
Opening Statement of Senator Larry E. Craig......................     1
Statement of Senator Ron Wyden...................................     3
Statement of Senator Ted Stevens.................................    21
Statement of Senator Gordon Smith................................    23
Prepared Statement of Senator Orrin Hatch........................    24

                                Panel I

Thomas A. Scully, Administrator, Centers for Medicare and 
  Medicaid Services, Washington, DC..............................     4
Douglas Holtz-Eakin, Director, Congressional Budget Office, 
  Washington, DC.................................................    40

                                APPENDIX

Testimony submitted by the Biotechnology Industry Organization...    63

                                 (iii)




     THE MEDICARE CHALLENGE: IT'S NOT JUST ABOUT PRESCRIPTION DRUGS

                              ----------                              --



                        THURSDAY, MARCH 20, 2003

                               U.S. Senate,
                        Special Committee on Aging,
                                            Washington, DC.
    The committee convened, pursuant to notice, at 10:33 a.m., 
in room SD-628, Dirksen Senate Office Building, Hon. Larry 
Craig (chairman of the committee) presiding.
    Present: Senators Craig, Hatch, Stevens, Smith, Talent, 
Breaux, Carper, Wyden, and Kohl.

       OPENING STATEMENT OF SENATOR LARRY CRAIG, CHAIRMAN

    The Chairman. Good morning, everyone. The Senate Special 
Committee on Aging will convene. I want to thank all of you for 
joining us this morning, but before we proceed, let me say that 
certainly our prayers today need to be with our brave men and 
women in uniform who are standing in harm's way in the Persian 
Gulf at this moment in behalf of this country and our freedom.
    We are here today to begin to review changes in Medicare. I 
think I need to begin by stressing that prescription drug 
relief for seniors is needed, is critically important, and I 
support it wholeheartedly. However, the lack of drug coverage 
is just one of Medicare's several grave and urgent problems. It 
is our purpose here today to take a look at these other deep-
seated problems, not just prescription drugs.
    Like it or not, the hard reality is Medicare is very close 
to being fundamentally broken. As the Medicare Trustees 
reported just this week, Medicare costs, even without any drug 
benefit, will more than triple over the next 75 years, placing 
a tremendous burden on our children and grandchildren. Let me 
bring that statement into perspective, and I will read from the 
Trustees' 2003 report.
    They have projected that Medicare costs will more than 
triple over the next 75 years. It sounds like a long way off, 
but it isn't. Even without any prescription drug benefit, 
growing from 2.6 percent of GDP today to 5.3 percent of GDP by 
2035, and by 9.3 percent of GDP by 2077. To put this in 
perspective, all the Federal personal income tax that is coming 
in today amounts to 9 percent of our current GDP. So they are 
predicting, without prescription drugs, Medicare currently 
projected could go to 9.3 percent of GDP by 2077.
    Moreover, the projected insolvency date for the Medicare 
Part A Trust Fund has advanced an additional 4 years. I am sure 
our colleagues will talk about that today.
    Moreover, and despite very impressive progress made by our 
current panelist, Tom Scully, and his staff out at CMS, 
Medicare remains clogged by rigid bureaucracy and by complex 
regulations, regulations which are already beginning to drive 
doctors and other providers out of the program.
    Finally, the Medicare program today is plagued by an 
outdated 1960's style benefit design that neglects not only 
prescription drugs, but also key innovations that are now 
increasingly common in the private sector, such as chronic 
disease management and protection against catastrophic 
financial costs.
    It is critically important that whatever Congress may do 
about prescription drugs this year, these steps can and must be 
accompanied by serious movement toward putting the Medicare 
program on a more secure footing as the coming baby boomer 
retirement wave looms ever closer.
    Towards this end, I am pleased that President Bush, Senator 
Frist, the ranking member of this committee, Senator John 
Breaux, and others have stepped forward with serious proposals 
aimed at doing just this. Especially attractive is the fact 
that seniors would be given the option of enrolling in a 
program similar to that currently enjoyed by Members of 
Congress and other Federal employees. Importantly, those 
seniors who are happy with their current coverage in 
traditional Medicare would be able to keep that coverage and 
their choice of doctor, but with protection against high drug 
costs and special relief to those with modest incomes.
    Of course, none of these plans before us today offer a 
silver bullet and there will be very hard choices further down 
the road, no matter what Congress does this year, but I believe 
these approaches are solid first steps.
    We are joined today by our first panelist, the 
Administrator of CMS, Tom Scully. We have our new Director of 
the CBO, Dr. Douglas Holtz-Eakin. Both are leaders on this 
current and critical debate and what they say before this 
committee and the record we build will be critically important.
    Before we recognize our first witness, I also wanted to 
recognize the former Lieutenant Governor of my State, a health 
care leader in our State, former State Senator Jack Riggs. 
Doctor, nice to have you with us at the committee today.
    First and foremost, with tremendous experience, and is 
making, as I mentioned in my opening comments, major reform 
there.
    But Tom, before I recognize you, let me turn to my 
colleague, Ron Wyden of Oregon, who I work with on a variety of 
issues. He is a member of this committee and we are pleased 
that he is here this morning. Ron.

                 STATEMENT OF SENATOR RON WYDEN

    Senator Wyden. Thank you, Mr. Chairman, and let me commend 
you both for holding this hearing and associate yourself with 
your introductory comments with respect to our troops. They are 
on the minds of all of us today and our thoughts and prayers as 
they work so valiantly to protect the interests of all 
Americans. I appreciate your comments and holding this hearing.
    I intend to work very closely with you and our colleagues, 
Mr. Chairman, on a bipartisan basis on this issue. As you know, 
Senator Olympia Snowe and I have in the last two Congresses 
introduced bipartisan prescription drug coverage legislation. I 
think it is important that we hold this hearing and look to the 
question of broader Medicare reform. The title of this hearing 
is, ``The Medicare Challenge: It's Not Just About Prescription 
Drugs'' I think probably only the minor change I would make in 
the title would be, ``Don't Forget About the Critical Need for 
Covering Prescriptions As We Try To Go Beyond It,'' and I think 
we will have the chance to discuss that today with 
Administrator Scully, who I have known for a lot of years. He 
is one of the most thoughtful people in the country with 
respect to health.
    I just have a couple of comments, if I might, Mr. Chairman. 
First, with respect to the broader question of Medicare reform, 
I am one who believes that you can have more private choices 
and more competition in the Medicare program if it is clearly 
defined within the Medicare program and accompanied by very 
strong consumer protections and vigorous oversight. I think 
that will be a big part of trying to pull together a bipartisan 
coalition here.
    I happen to think we have a model for doing it. I don't 
pretend to be completely objective about it, having been the 
author of it, but the Medigap law which was written a number of 
years ago, when older people so often would have a shoebox full 
of worthless health insurance policies and now as a general 
rule have really only one good policy, is a pretty good model 
of how you can begin to bring in private choices into the 
Medicare program as long as it is within Medicare, No. 1, and 
accompanied by very vigorous, very aggressive consumer 
protection.
    I noted just this last weekend Henry Aaron, not exactly an 
arch right-winger, said much the same thing. He wrote he is not 
unalterably opposed to private choices being a part of this, 
but that it has to have vigorous consumer protection and 
clearly defined oversight. I'd like to discuss this further 
with Administrator Scully.
    The second thing I wanted to touch on, something of great 
importance in our part of the world, the chairman and mine, is 
payment equalization. There is tremendous concern in our part 
of the world where great efforts in Idaho and Oregon and 
Washington have been made to hold down costs.
    For example, in my home town, more than 50 percent of the 
older people are in Medicare Choice. They are in plans that 
hold down the cost. What you get from patients, doctors, and 
other providers, to a person in our part of the country, which 
has been efficient is that the Federal Government penalizes you 
instead of rewarding you for holding down costs so one federal 
policies penalize efficiency and for holding down the costs in 
the Northwest. So I want to discuss with Administrator Scully 
today some ideas for how to get at this.
    One new concept that I would like to explore with the 
Administrator is something that I have been calling tentatively 
an efficiency bonus. There are parts of the country that have 
really taken steps to be more efficient, to hold down their 
costs, and maybe one way to get at this question of payment 
equalization so as to produce something tangible for those that 
really are going to great lengths to be innovative is to start 
looking at this in the context of an efficiency bonus.
    But suffice it to say, this is an important hearing. At a 
minimum, prescription drug coverage can be a bridge to long-
term Medicare reform. That is why it is so important that we 
have this hearing, Mr. Chairman, and I look forward to working 
with you as we have on so many occasions in a bipartisan way.
    The Chairman. Ron, thank you very much, and let me 
apologize for being remiss in failing to mention the work that 
you and Senator Snowe have done in that area, of change and 
modification in these critical programs. Thank you.
    Senator Wyden. Thank you.
    The Chairman. Director Scully, welcome to the committee. 
Please proceed.

   STATEMENT OF THOMAS A. SCULLY, ADMINISTRATOR, CENTERS FOR 
        MEDICARE AND MEDICAID  SERVICES, WASHINGTON, DC

    Mr. Scully. Thank you, Mr. Chairman and Senator Wyden. 
Thank you for having me today and thanks for having this 
hearing. I think my own opinion is there needs to be a lot more 
discussion about these unbelievably complicated Medicare issues 
and especially how we potentially add wisely a giant new 
entitlement for prescription drugs.
    Let me just start off first by saying you won't be 
surprised because we are old friends that I tend to agree with 
Senator Wyden on both counts. We should definitely have very 
strong--I think we should fix and modernize Medigap, but I 
think we definitely need very strong consumer protections and 
oversights, and obviously, we would like to have some more 
private choices for seniors. I am also very concerned and more 
than happy to get into the weeds on geographic misallocation or 
inequities in funding.
    Let me just start off first also by saying I think the 
conflict in the Middle East affects all of us. My top physician 
advisor, Bill Rodgers, was called up and left today to go. So I 
think all through the government and all across the board, we 
are finding this affects all of us and all of our agencies.
    I would also like to congratulate Doug, who I worked with a 
lot, and I think we are very lucky to have as a CBO Director. 
He was on the Council of Economic Advisors, and I can tell you, 
for a variety of reasons, we are fortunate for a lot of 
reasons, but he actually understands a lot about health care, 
which I think will hopefully make our already very good working 
relationship with CBO that much better.
    Let me just quickly run through. Mr. Chairman, I don't 
think you wanted me to get into the details of our Medicare 
plan today. I will be happy to discuss it in questions and I 
will go through it basically.
    But I think fundamentally, our concern is Medicare is a 
tremendous safety net program. There is nobody over the age of 
65 who is uninsured. There are a lot of wonderful things about 
Medicare. But it is, in our opinion, a model that has a lot of 
flaws. We fundamentally fix prices for every hospital and every 
doctor in Boise or Milwaukee or Portland. We don't talk enough 
about differences in quality and people don't have any idea who 
does the best heart bypasses in Milwaukee, where I was last 
week. It is a wonderful, terrific program, but it is 
particularly inflexible and not particularly focused on 
improving quality or making the health care system more dynamic 
and I think it has a lot of flaws.
    We are totally supportive, as obviously you know, of 
putting a prescription drug benefit in place. Adding a $40 
billion benefit, however, needs to be done carefully. We also 
think that while you are going to enhance Medicare and give 
seniors what they want most acutely, which is prescription drug 
coverage, it would be wise to fix some of the flaws in the 
Medicare program and probably try to fix a lot of what we see 
to be the flaws in it.
    Let me just run through--you mentioned the Trustees' 
Report, just to show some of the problems you have with the 
Medicare program. It is a great program, but some years we have 
1 percent growth, some years we get 12 percent growth, and 
generally, as an Administrator, I would tell you, and I think 
probably Nancy and Linda and Bruce Vladek and many of my other 
friends who have had this job in the last 10 or 15 years will 
tell you we rarely know why.
    Just to tell you a couple of the trends that came out last 
week was we calculated the numbers from 2002 which showed up in 
the Trustees' Report. Overall spending last year in Medicare 
grew by 8.5 percent, much higher than we expected a few months 
ago. Hospital spending increased by 9.8 percent in 1 year, 
about 4 percent--more than 4 percent higher than we expected 6 
months ago. There are a variety of reasons behind that, some of 
which I will get into in a minute.
    Home health care spending went up by 24 percent. There are 
some aberrations, as you know, between how we switch from Part 
A to Part B, but the baseline spending increased in home 
health, which was just reformed a couple of years ago and up 14 
percent. Hospice spending, a wonderful program for people near 
the end of their lives, went up 24 percent last year.
    Physician spending, amazingly, even though we spent a lot 
of time trying to fix and the Senate and Congress just added 
$54 billion back into the baseline, we cut the base doctor 
payments last year by 5.4 percent, obviously a huge controversy 
in the Medicare program. I happen to think it was wrong and was 
a strong advocate for fixing it. But at the same time, we 
reduced the average payment last year by 5.4 percent per 
doctor. They responded by increasing their volume of services 8 
percent. It was projected to be 2 percent. So despite that cut, 
even though we reduced their payments last year, overall 
physician spending in the program went up by 7 percent, which 
was higher than it was expected to be even if we paid the right 
amount. So behaviorally, there are some strange things going on 
there in the program.
    Durable medical equipment, long a problem in the Medicare 
program, grew by 20 percent last year, despite the fact we made 
very strong and aggressive enforcement efforts in the program 
to try to reduce that. Wheelchair sales went up by 28 percent 
last year, which does not remotely track the growth in 
beneficiary levels or acuity.
    Prescription drugs, on the part of Medicare that we pay 
for, which is about $8.7 billion, we pay for prescription drugs 
in hospital outpatient departments and in physicians' offices 
when it can't be done at home. That spending went up 25 percent 
last year--25 percent, which is obviously a model to say we 
should be concerned about how we create prescription drug 
benefits for the more traditional outpatient prescription drug 
services.
    We frequently can't track what is going on in this program, 
and I somewhat--maybe I shouldn't joke and refer to it as kind 
of ``whack-a-mole.'' We find one problem and the next one pops 
up the next day and it is a constant situation in this program.
    The most recent enormous abuse that we didn't understand 
was hospital outlier payments. We spend about $90 billion a 
year on inpatient hospital services. We set aside, with 
Congress's direction, 5.1 percent a year for high-cost, high-
acuity cases, generally for hospitals that have highly complex 
patients, because we pay on an average basis and if a patient 
is expected to stay in a hospital for 6 days and ends up being 
in the hospital for 60 days, obviously, we compensate the 
hospital more.
    Unfortunately, some hospitals found an enormous loophole in 
this program, about 325 hospitals, and we spent about $2 
billion more last year than we expected without knowing it 
until very recently, and in each of the last 4 years, we spent 
between $1 and $2 billion more than Congress expected or 
authorized us to spend without even understanding it, due to 
the fact that some hospitals--it is a very complex system. A 
number of hospitals found ways to bill us way more than they 
ever should have even remotely imagined they were going to get 
paid for.
    Just to give you one example of a hospital in California 
that received $50 million in base payments for hospital 
services last year. Had they been the average hospital in the 
country, they would have gotten $2.5 million of add-on 
payments. They actually got $75 million of add-on payments. 
This is hospital outlier payment policy.
    The point being that there are a lot of very unusual things 
going on that annex this program. It is not a particularly 
flexible program, but we frequently don't understand what is 
going on and I think there are a lot of reasons to modernize 
it, not just the new structure under what the President 
proposed, but also we need to continue to look at improving the 
Medicare program.
    Senator Wyden is an expert and obviously created a lot of 
the Medigap, knows that we already have even in the private 
existing Medicare program, the bulk of the beneficiaries, the 
89 percent of seniors and disabled that have traditional 
Medicare, Medicare covers 47 percent of their actual costs. 
Most of those people don't realize it, but they send a 
supplemental premium check for Medigap off to Blue Cross of 
Oregon or CIGNA or United Health Care or Blue Cross of 
Wisconsin, usually for $150 to $200 a month, which is the 
average range for a non-drug premium, to pay for supplemental 
benefits. So most seniors have a hybrid already where they have 
a government-run program that is the basis benefit and a 
usually not-so-well-structured supplemental private sector 
insurance program that provides their other benefits.
    So I would totally agree with Senator Wyden that what we 
need to do is look at the bottom-line cost for seniors, how we 
provide them with the best benefits, the best drug benefits 
most efficiently, and more importantly, give them even more 
consumer protections than the enhanced consumer protections, 
better than they used to be in Medigap.
    But there are a lot of ways to look at this. The President 
sent up his framework for reform, obviously without all the 
details. That was with lots of guidance from Congress. Some 
people want us to send up five talking points. Some people want 
us to send up a 40-page plan with every detail and every 
dollar, and I think the President wisely proposed the middle 
course. Congress legislates and the President decided that we 
are going to send up a framework for philosophically how we 
thought the program could be improved and that we would work 
with Congress to fill in the gaps and that sending up a 
detailed bill would not be a particularly helpful or useful way 
to get the legislation done.
    I think the bottom line for the administration is we would 
very much like to get prescription drug reform done and 
Medicare reform done, and many of us have been working on this 
for 20 years and absolutely nothing has happened. In our minds, 
the worst of all worlds would be for us to get to the end of 
this year and the end of this legislation and once again flame 
out and have nothing happen.
    So we are determined. Obviously, we have a construct that 
we think will work. The House passed one last year. There was a 
tripartisan bill and other bills in the Senate. We would like 
to work together to come up with a formulation that we think 
would work, but I would say that the President's--the one 
firmly held belief that I know he has is that adding a drug 
benefit alone without looking at the underlying structure of 
the program and improving it would be a large mistake.
    So we are committed to improving and modernizing the 
program. The basic framework, which I will just run through 
very briefly, is that the old fee-for-service program, the 
President has said repeatedly, if you like Medicare, it will 
never change. In fact, I can tell you the details, but the way 
it is structured is that the premium would also never change. 
So even if people moved out of traditional Medicare into new 
Medicare, the premium forever more will be structured as if 
nothing changed. So we are not in any way disadvantaging 
existing Medicare beneficiaries, and in fact, they would get a 
fairly substantial additional subsidy for a basic drug package 
for free.
    In addition, what we have tried to do is take the best of 
what we saw in the Federal Employee Health Benefits Plan, which 
does provide coverage for everybody. Even a postal worker in 
Alaska or rural Montana can get Federal Employee Health 
Benefits coverage, or a park range. We believe that we took the 
best that we saw in the Federal Employee Health Benefits Plan 
and Tricare, which is the Defense Department plan, and tried to 
come up with a model that would provide people with private 
PPO, fee-for-service options in the rest of the country.
    In the last 10 years, the kind of flexible fee-for-service 
PPO option has taken over the commercial sector. We have moved 
from about 20 percent of the people in those types of plans in 
under age 65 to 70 percent. It has completely taken over the 
commercial market across the country. HMOs, which are for some 
people wonderful, but not for everybody, have largely been 
static the last 10 or 15 years. But there were people who have 
demanded, both in the Federal Employee Health Benefits Plan and 
across the commercial sector, is the kind of ability to go to 
any doctor they want, any hospital they want, but to have some 
differential copayments. If you happen to go to a Blue Cross 
plan and you go to an in-network doctor, you might pay $10 or 
$15, and if you go out of network, you might have to pay a 20 
percent copyament and a higher rate. But you can go to any 
doctor you want, any hospital you want with differential 
incentives to improve behavior and improve performance of the 
plan.
    We think that is what consumers want. We think that is what 
they want when they are 64 and we think they want the same type 
of choices when they are 66. We have no desire to take away any 
of the choices that people have now and do anything to limit 
existing Medicare coverage. But we believe that if consumers 
are given these options, it will help them get better choices. 
It will improve and modernize the Medicare program and make the 
program work better.
    We also think the Medicare+Choice program, which works very 
well in Oregon, I feel very strongly it is not for everybody. 
It has been shrinking over the years for reasons I am certain 
we will get into in a few minutes. It is down to about 11 
percent of the program. It peaked at 18 percent in 1997. It is 
tremendous for people who can't afford to send a $200 Medigap 
check off to Blue Cross of Oregon. If you are relatively low-
income and you can't afford the cost, you generally get some 
drug benefit, you get drug costs, and you live with an HMO. It 
is not for everybody, but it is overwhelmingly preferred by 
people that are low-income and heavily minority population and 
we think it is a choice that needs to be preserved and enhanced 
and saved. It is never going to be for everybody. Even under 
the President's plan, we never envision it growing to more than 
about 15 percent of the program.
    So we are not talking about pushing anybody into HMOs. We 
are talking about trying to mimic what works in the best parts 
of the commercial market and give the same choices to seniors 
that we think that they are--especially younger seniors, as 
they hit 63, 64, 65, they are happy with the programs they 
have. Dropping out of that and moving into a less-flexible 
Medicare program may not be the best option for them. We also 
think it is the best way to make sure we provide a prescription 
drug benefit efficiently to people.
    But we are very--obviously, the reason the President set up 
a framework is because we believe you have to work with 
Congress to get it done. We have some strong views about how it 
should get done, but we want to work with the committees and 
with the House and the Senate to make sure that we don't end up 
getting to the end of the year with no result, which would be 
the worst outcome, we believe, for everyone.
    I have a number of things in my testimony, Mr. Chairman, 
but given the number of members that are here, I would probably 
be much more useful to answer your questions and to get into 
details on that. Thank you very much.
    The Chairman. Administrator Scully, thank you very much.
    [The prepared statement of Mr. Scully follows:]
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    The Chairman. Before we turn to questions of the 
Administrator, let me recognize my colleagues who have now 
joined us, and I will do that in order of which they entered 
the room. Senator Kohl, do you have an opening comment you 
would wish to make?
    Senator Kohl. No, Mr. Chairman.
    The Chairman. Thank you for being here. We think this is a 
very important hearing in relation to the other aspects of 
Medicare.
    My colleague from Alaska, the senior Senator from Alaska, 
Ted Stevens. Ted, do you have any opening comments?

                STATEMENT OF SENATOR TED STEVENS

    Senator Stevens. I do, but before I start, I want my 
colleagues to recognize the problems that are developing here 
and I would ask you all to help us. I am calling the Architect 
now. That door is closed and that door is closed. In the period 
that we are in now, we have three exits from almost every room 
as a matter of security. As chairman, I want these doors open 
today, and I would ask someone to get a hold of the Architect 
and tell him to be in my office, Room 522, in a half hour. 
There is no sense in this. These have been claimed by staff on 
either side of these doors and therefore are safety, and I want 
them open today.
    Now, nice to see you again, Mr. Scully. I am pleased the 
chairman is holding this hearing and I appreciate being here 
and your comments. I think that we have got to revamp Medicare. 
It is still a 1960 model trying to deal with the new century's 
challenges and it just won't work.
    I am one of the authors of the FEHB and I am pleased to 
hear your comments concerning that as a prospective prototype 
for dealing with the changes in Medicare. I do believe that is 
where we should start.
    But I have got a specific problem that I wanted to chat 
with you today. When I was last home, I had a meeting with a 
series of Alaska doctors, some of whom I have known since they 
were babies, and they were all responsible for a recent 
announcement in Anchorage that no family care doctor would see 
seniors. There are no seniors that can get access to family 
care practice today because of the problems that they detailed 
to me at that time.
    Medicare payments only cover about 40 percent of their 
total costs, and when a doctor in the Anchorage area sees a 
senior, they must really subsidize the system to the extent of 
60 percent of the average costs of just seeing a patient. I 
think the system is broken down when that happens.
    When I came back, I did, with my colleagues' help, we put 
some additional money in the omnibus bill. We actually started 
off with an offset for the bill itself, an across-the-board cut 
to get that matter to conference, but it doesn't come close to 
fixing the problem of access that I heard about in Alaska, and 
they still will not see seniors because they cannot afford to 
subsidize that.
    A doctor I have known--it is interesting, because her 
mother used to be part of my Alaska Senate staff--gave me the 
information about her charges for an intermediate mid-level 
exam. Medicaid pays $75 for that service. Blue Cross pays $112 
for that service. Medicare pays $42 for the same service. Now, 
I can't understand a system that was so discriminating against 
seniors. I hope that you will take a look at this and see what 
we can do.
    It may be that the fantastic problem we have is related to 
the reason that we pay civil servants in Alaska 25 percent more 
than what they get in what we call the ``South 48.'' All 
Federal civil servants in Alaska get a 25 percent bonus to base 
pay to meet the cost of living in Alaska, which is substantial. 
Everything we eat and wear and lives in comes in from what we 
call outside. It comes in by boat or by air, and the cost of 
living in Alaska is at least 25 percent higher than Seattle.
    As a consequence, though, we got the Veterans 
Administration to study the situation and they set up a special 
payment system for Alaska, which you may be involved with, I 
don't know. It is linked to private charges and it pays for 
Alaska veterans 90 percent of the private charges. Now, some of 
those are seniors, some of them aren't, but as a practical 
matter, it is a system that seems to be working now.
    But the seniors are in real difficulty. I really don't know 
what to do about this because I don't have an immediate band-
aid this year. I don't know how to get those doors open for the 
senior citizen, and we don't have a lot of them. Most of the 
people I have known, my age, that have been smart enough to 
retire, are down in the sunshine country and they don't spend 
much time in Alaska in the wintertime or year-round.
    I do hope that you can help us, though, for those people 
who are there, are unable to afford to move, to go where it 
would be easier to live, and they are now denied access to this 
primary care. It is the saddest thing I can think of and I hope 
you will work with me and ask your staff to work with all of us 
to see if there isn't some interim solution to taking care of 
the senior citizens that do seek private care through the 
family practitioners in Alaska.
    We don't have any HMOs in Alaska. There are none there. 
There are not enough of us to support an HMO in any one place. 
So I would hope that we can find some way to deal with this.
    Again, maybe we should make them eligible for FEHB or 
something, I don't know. There might be some answer somewhere 
along the line that we can take care of the system, and I would 
appreciate your help if you would help us. Thank you.
    The Chairman. Well, thank you, Mr. Chairman.
    I see Tom taking notes there, so let me turn to Gordon 
Smith for any opening comments he might have before we respond 
to those concerns.
    Before you leave, Senator, a new survey that came out with 
physicians, AMA, in January found that 50 percent of physicians 
are now saying they are planning to limit their Medicare 
participation either by not taking new patients or by dropping 
them out entirely.
    Senator Stevens. My own family practitioner for many years 
called me and said, ``I am sending you back your files. You are 
too old. I can't afford you.'' [Laughter.]
    The Chairman. Let me turn to my colleague from Oregon, 
Gordon Smith, who has joined us.

               STATEMENT OF SENATOR GORDON SMITH

    Senator Smith. Mr. Chairman, in the interest of time, I 
will put my statement in the record. I have a question 
regarding SHMOs or HMOs unique in Oregon and very helpful to 
the elderly, frail, and so I am going to ask that at the 
appropriate time.
    [The prepared statement of Senator Gordon Smith follows 
along with prepared statement of Senator Orrin Hatch:]

               Prepared Statement of Senator Gordon Smith

    Thank you, Mr. Chairman for holding this hearing today. Mr. 
Chairman, I would like to commend you for your leadership in 
recognizing the need for a global approach to Medicare reform, 
while recognizing the importance of expanding Medicare coverage 
of prescription drugs. Medicare reform must be focused on 
modernizing the program to make it more responsive to the needs 
of today's beneficiaries. That means making the program more 
responsive to chronic illness.
    The 2001 Institute of Medicine report, Crossing the Quality 
Chasm, indicated that, and I quote, ``chronic conditions should 
serve as a starting point for the restructuring of health care 
delivery because chronic conditions are now the leading cause 
of illness, disability, and death in the United States. . . 
accounting for the majority of health care resources used.''
    Most Medicare beneficiaries have at least one chronic 
condition. About a third have four or more conditions, 
accounting for 80% of all Medicare spending. If we want to 
stabilize the Medicare trust fund, we must focus on more 
effective management of the highest-cost conditions. The 
Institute of Medicine recently identified twenty priority areas 
for health care quality improvement and included specific 
interventions for improving care for those with chronic 
conditions. Priorities listed included care coordination, 
disease management, end-of-life care, co-morbidity management, 
interventions for frailty associated with age, medication 
management, and others. The same priorities are needed as we 
strengthen Medicare for future generations.
    I am fortunate to have a program in my state that offers a 
model for effective Medicare modernization and that is the 
Social HMO program. Senior Advantage II, offered by Kaiser 
Permanente's Northwest Division, is one of four Social HMO 
demonstrations. Social HMOs have the type of structure needed 
to respond effectively to chronic illness. The Social HMOs' 
trademark care coordination and disease management services and 
expanded benefits directly respond to the IOM priorities for 
improving health care quality. Further, these benefits and 
services are offered at no more than Medicare would pay under 
fee-for-service arrangements. Social HMOs have been shown to 
improve healthcare for chronically ill seniors by expanding 
access to primary care prescription drugs and supportive 
services under modest co-payment arrangements; enabling 
beneficiaries to maintain their independence by avoiding or 
delaying nursing home placement; decreasing the use of costly 
services such as emergency room, inpatient hospital and nursing 
facility services; and improving health outcomes for the 
frailest beneficiaries.
    The Social HMO model also represents an effective strategy 
for helping address the states' large and growing fiscal 
crisis. Medicaid is the second largest spending category for 
state budgets and increased over 13% last year. About 57% of 
Federal Medicaid increases related to the elderly and disabled. 
Studies show that Social HMO members are 40 to 50 percent less 
likely to have long-term nursing home admissions than 
comparison group members, potentially saving Federal and state 
governments millions of dollars in Medicaid costs. Preliminary 
analysis indicates that if the Social HMO program were 
terminated, and the 110,000 beneficiaries currently served were 
forced to find alternative coverage, it would cost Medicaid 
between $100 to $300 million in the first year alone for 
chronic care services currently covered by the Social HMOs. 
This figure does not account for the added cost of prescription 
drugs, vision, hearing and dental care, and other non-Medicare 
covered benefits provided by the program.
    The Social HMO demonstration represents a model for 
meaningful Medicare modernization. It provides comprehensive 
coverage of prescription drugs--but it does much more. It 
provides a benefit, financing and delivery structure to meet 
the needs of chronically ill seniors--the highest cost, fastest 
growing subgroup of the Medicare population. For this reason, I 
have joined with my colleagues from Oregon, Washington, New 
York, California and Nevada to make this program permanent 
under Medicare. I encourage this Committee to examine the SHMO 
as a useful model for care for the frail elderly--a model which 
will be increasingly useful as the Baby Boomers--such as 
myself-age into Medicare.
    I thank the Chairman again for holding this important 
hearing.
                                ------                                


               Prepared Statement of Senator Orrin Hatch

    Mr Chairman, I appreciate your holding this hearing today--
we have a very distinguished group of witnesses before our 
Committee. I especially want to send a warm welcome to Dr. 
Douglas Holtz-Eakin, the new Director of the Congressional 
Budget Office.
    Dr. Holtz-Eakin, I look forward to working with you on this 
and many other important issues.
    Mr. Chairman, I'll be brief. I realize that this hearing is 
focusing on the overall Medicare program but I want to take 
this opportunity to talk about Medicare prescription drug 
coverage.
    I think most of us in Congress believe that we must pass a 
Medicare prescription drug benefit this year. Medicare 
beneficiaries cannot afford to wait any longer.
    Last July, we debated this important issue on the floor of 
the Senate for close to three weeks. In the end, due to 
partisan politics, Medicare beneficiaries came up on the short 
end of the stick because we were not able to pass a Medicare 
prescription benefit.
    As one of the original authors of the Senate Tripartisan 
Medicare proposal which was considered on the Senate floor 
during that time, I was extremely disappointed in last year's 
outcome.
    This Congress, the President has said in no uncertain terms 
that providing a prescription drug benefit to Medicare 
beneficiaries is one of his top priorities.
    That is good news for beneficiaries across the country. 
However, there is a lot of work to be done before such 
legislation can be passed by the Congress and signed into law 
by the President. I believe much of that work will fall on the 
shoulders of the United States Senate.
    I am dedicated to passing a Medicare prescription drug 
benefit this year. However, in order for this to become a 
reality, I believe the following must happen: first, the 
Medicare prescription drug legislation must have bipartisan 
support. Second, any Medicare prescription drug legislation 
must include an optional benefit package that would resemble 
private health insurance.
    Third, if a beneficiary wants to remain in traditional 
Medicare, he or she must be allowed to do so. Fourth, this 
benefit must be affordable to both beneficiaries and the 
federal government. Finally, and most important, a drug benefit 
must be offered to all Medicare beneficiaries, regardless of 
whether they choose to remain in traditional Medicare or opt 
for a new, enhanced Medicare plan.
    In conclusion, I am hopeful that this year's debate on 
Medicare prescription drugs legislation will be different from 
last year's debate. I am dedicated to the passage of this 
important legislation so Medicare beneficiaries may have drug 
coverage once and for all. I know that there are many of my 
colleagues who feel the same way and that is why I believe that 
it is possible that such legislation will be signed into law 
this year.
    But I believe this needs to be a thoughtful process so, in 
the end, we provide a drug benefit to seniors that is 
affordable to the federal government.
    Mr. Chairman, I look forward to listening to our witnesses 
and thank you, again, for holding such an important hearing.

    The Chairman. Thank you. Then let us turn to questions, and 
we will adhere to the 5-minute rule.
    Administrator Scully, you gave us the statistics of the 
increases that are occurring out there in all aspects of health 
care and all forms of delivery systems. You spent the last 2 
years battling Medicare regulatory complexity. You have made 
progress in all of the obstacles that are out there.
    Can you describe for us ways in which the President's 
proposed alternative choices, and especially the Federal 
employees' style Medicare program, would reduce bureaucratic 
and regulatory complexity? Part of the problem we have with 
physicians turning away is they can't do the paperwork or they 
find themselves at risk when they do do it. Please.
    Mr. Scully. Mr. Chairman, any time you run a $275 billion 
Medicare program, or my whole agency's budget, believe it or 
not, if you count both halves of Medicaid, is about $570 
billion this year, you are going to--by its nature, to avoid 
fraud and other things, you have to have a pretty tight 
oversight and require a lot of paperwork.
    But I think one of my greatest frustrations with the 
program, and I am a big fan of the Medicare program, as I said, 
``It is a fabulous safety net program'' and the reason seniors 
love it is that they are all covered, heavily subsidized 
coverage, but the biggest problem that I have with it is that 
it basically doesn't foster any kind of dynamic change or 
improvement in the system because, basically, when you are 
running a hospital, and I used to run a hospital association, 
50 percent of your revenues generally come from Medicare and 
Medicaid.
    When every hospital in, say, just to pick Washington, DC, 
when you pay Georgetown, George Washington, Sibley, and Howard 
exactly the same amount for a hip replacement with no 
information on who does the best hip replacement, you are not 
going to get a lot of dynamic change in the system to get 
people to go out and figure out who does the best hip 
replacements and the best heart bypasses.
    But when you are fixing prices like that, which we do--my 
agency fundamentally spends most of its time trying to figure 
out what the right price is to fix for family physicians in 
Anchorage or hospitals in Portland, and I think that that is 
the way the program has always been run, but I don't think in 
the long run for seniors--you know, one of the things that I 
have tried to do with the program--it is a big agency. I think 
our staff does a great job. But they have a job basically that 
is to regulate a big program and fix prices.
    The two things I have tried to do more than anything else 
is to open up the agency so that people understand more 
transparently what we are doing on the outside, whether they 
are physicians or the AARP or provider groups, and also to give 
patients a lot more information on nursing home quality, on 
home health quality, on hospital quality, because I really 
think that if we give people more information, they wouldn't be 
very happy to find out it is not the way it works in the 
Federal Employee Health Benefits Plan.
    If a senior said--when you tell most seniors, you tell me 
that I have got to pay exactly the same amount for a really bad 
nursing home versus a good nursing home from the government, or 
the same amount for a really good hospital that does the best 
bypasses in town versus a really bad hospital, and the answer 
is yes. I think the more you give people flexibility to drive 
better behavior in the health care system with Federal dollars 
and more information, the better you are going to improve the 
system.
    One of the reasons I think the Federal Employee Health 
Benefits system works better, we have no vision that Medicare 
is going to dramatically change. This is a very slow change 
over many years. Most seniors are going to stay in Medicare 
probably long after I am gone, long after I am alive probably, 
and it is going to change slowly.
    But if you are trying to change Medicare, and we believe 
that giving some seniors the type of ability to go buy a Blue 
Cross plan that is going to pay differentially for quality and 
look at it and give consumers more information, it is going to 
slowly drive change and improvements and make Medicare a more 
dynamic, responsive program. It is a wonderful program because 
it covers everybody and it provides security, safety, and very 
heavy subsidies for low-income people, which is wonderful. But 
it is very inflexible and it is a very unwieldy insurance 
product.
    The Chairman. Something that the administration, I, and I 
think our ranking member, John Breaux, agree on, and he has 
just come into the room and we welcome him, is something that 
you might express: the reasons why the administration and you 
believe it is important to link prescription drug legislation 
with accompanying Medicare structural reform, rather than doing 
just a drug benefit program.
    Mr. Scully. We spent many months on this and the President 
was incredibly involved, as some of you know, in the details. 
But I think we tried to look at it with an open mind and I 
think I started off fundamentally thinking about how we could 
bridge the gap in the Medicare Commission 2 years ago, so we 
started looking at it, No. 1, about why did we not get a 
consensus in the Medicare Commission 2 years ago which Senator 
Breaux was on. We got ten votes instead of the 11 needed to 
make a recommendation on a bipartisan basis to Congress. I 
think we started, Mark McClellan, who now runs FDA, and me and 
other staff people a year ago, saying what are the major 
hurdles to get over.
    I think one of the notable things about the President's 
plan is it does not raise the retirement age from 65 to 67, 
which was a big hurdle from the Medicare Commission, something 
that may be the right thing to do, but we didn't take it on.
    It also did not put in a premium support model. A lot of 
people were concerned that if you push people into private 
health plans or HMOs and made them compete with traditional 
Medicare, you drive up the costs of the old Medicare program. 
We very consciously did not do that. Those are the two major 
issues that avoided the 11th vote to get a consensus to make a 
recommendation to Congress.
    So we started off there, and then I think we also started 
looking at how do you make the private choices work better. 
People don't really want HMOs necessarily. They are wonderful 
in some areas, but in many areas--they are great in Oregon and 
they are great in California. They are not particularly popular 
in Philadelphia, which is where I'm from, or Milwaukee.
    Trying to give people more flexible choices that they have 
shown they want in the market is where we went. That's why we 
kind of looked at the Federal Employee Health Benefits model. 
We also looked at Tricare. But more importantly, trying to give 
seniors a prescription drug benefit that's going to work, there 
is no model to do that in a government price-fixed model.
    Having my staff and I try to go out like we do for 
hospitals and doctors and figure out what the government is 
going to pay for Celebrex and Vioxx and Nexium would be a 
nightmare. The model that works is the model that we all have 
as Federal employees, which is to buy a Blue Cross plan or a 
CIGNA plan and have them subcontract with Express Scrips or PCS 
and let them go out and put together the formularies and 
negotiate the prices to try to drive the right prices and the 
right volume in drugs.
    So we looked at how are you going to efficiently spend $400 
billion and give seniors a drug benefit. There is not an easy 
model out there to tack that kind of system on top of the old 
existing Medicare program. It is much--if you look at what 
actually exists in nature now, the thing that works most 
efficiently is private Blue Cross and other plans providing a 
drug benefit as part of an integrated overall health care 
package, and that's how FEHBP works, it is how Tricare works, 
it is how most of the models that work--and we are determined 
to try to give seniors access to drugs in all models, but one 
of the major reasons we got to this point was that we thought 
the FEHBP model, and we are not exactly designed like that, but 
it is kind of a hybrid of that, is the easiest way to give 
seniors access to an integrated plan that is not managed care 
that would also provide prescription drugs.
    The Chairman. Tom, thank you very much.
    We have been joined by our ranking member, John Breaux. 
John, you can make comments now or----
    Senator Breaux. I got here late. Why don't you go on.
    The Chairman. All right. That is fair and appropriate. Let 
me turn now to my colleague from Oregon, Ron Wyden. Senator.
    Senator Wyden. Thank you, Mr. Chairman and Senator Breaux, 
as well. Tom Scully has a long history of being willing to 
reach out and try creative approaches, the Oregon health plan 
just being one of them.
    Let me start with one that I have been looking at as a way 
to perhaps break the gridlock on this payment equalization 
issue, which is so frustrating. I think it goes to some of what 
the senior Senator from Alaska and others have said.
    Oregon seniors and providers are frustrated with Medicare 
because it is, of course, a national program. However, the 
inequities in the payment mean so often, people in Oregon in 
Medicare+Choice Plans don't get the benefit they hear other 
seniors have in other parts of the country. Seniors, because 
they hear about things that are available under Medicare in 
Florida and New York because of the huge disparity in payments. 
Payments to my State's providers in the aggregate are far lower 
than other States' providers.
    Just one example would be DSH. We get significantly less 
for DSH than a State like New York does. At the same time, our 
stay in the hospitals is far shorter and far shorter than the 
average nationally.
    What would you think, Administrator Scully, about the idea 
of our taking a fresh look at this payment equalization issue 
and look to something I have called tentatively in my mind as 
an efficiency bonus, so that in the kind of example I gave for 
our State, where our payments are lower but we also have shown 
demonstrably something that you can prove at HCFA that we have 
shorter hospital stays, we might look at a way to try to reward 
that. Is that something that you would be willing to explore?
    Mr. Scully. I am not sure, but I think probably, among 
others, Senator Grassley makes some of exactly the same points 
about Iowa as I am sure Senator Craig would about Idaho.
    The Chairman. We will make them about Idaho, but it is 
true.
    Mr. Scully. We would be happy to look at it. Secretary 
Thompson, obviously being from a relatively rural State, shares 
a lot of those views, and we try to look at the existing 
regulations any way we can to try to look at these geographic 
inequities, but a lot of it is statutory. Obviously, in the 
process of going through this year, a lot of these formulas are 
15, 20 years old and probably need to be revisited and we would 
certainly support looking at all of them.
    Senator Wyden. Let us talk about it differently than we 
have in the past. In the past, what you have had is Senators 
from Iowa and Oregon and Idaho talk to you about, my goodness, 
we are getting a raw deal, and everybody then starts jockeying. 
I think what we need to try to say is let us look at linking it 
to efficiency, and if a State can show, as I just said in this 
DSH example, that our lower payments are a problem, but we also 
can show you that we are lower in cost, because we have shorter 
hospital stays. I think we have got a shot at breaking the 
gridlock here.
    Mr. Scully. If I can just make two cautionary notes. One is 
that the Medicare program, as I said, is already growing 8.5 
percent a year, faster than anybody expected in the last couple 
years. So if it is a matter of redistributing, because I think 
there are parts of the country who certainly I wouldn't 
identify right now, who are probably over-subsidized, if we 
just spent more in certain areas, that is probably--you have to 
look, I think, across at it, which makes it painful 
politically.
    The other thing I would caution is that the last time we 
made a big adjustment effort, which was the right thing to do 
in 1997, it has basically, in my opinion, destroyed the 
Medicare+Choice program, which I think is a pretty good 
program. In 1997, if I can digress for 2 minutes, with the best 
of intentions, in some States, per capita spending, for 
instance, in Oregon, I would guess, is about $5,000 a year and 
in Louisiana it is $9,000 a year and in Pennsylvania it is 
probably $8,000. What happened in 1997 was Medicare+Choice, 
which was managed care, was very popular in a lot of urban 
areas. A lot of rural members from smaller States said, ``We 
want our fair share, too, and because we get underpaid per 
capita, we ought to disengage the HMO process for the fee-for-
service process.''
    So the problem is, if you are in an efficient State, 
Minnesota, Oregon, Washington State, Idaho, low-cost States, 
they said, ``It is unfair that we are getting paid 95 percent 
of our fee-for-service because we have very efficient 
providers, so we ought to be paid more.''
    What we did was we went to the New Yorks and the 
Philadelphias and the Pittsburghs that are very high cost and 
said, to pay for the--raise the rates of the rural areas, we 
are going to freeze the urban areas, and my concern is what we 
did is that we capped it for all the places where those plans 
are popular--Miami, New York, Philadelphia, Pittsburgh--we 
capped them at 2 percent growth for 5 years and we strangled 
them.
    So in all these low-income areas where these managed care 
plans are very popular, we basically killed them.
    Senator Wyden. Let me, if I might get one more question in. 
If we continue to reward inefficiency, which is the policy 
today, I think it is going to make it hard to deal with this 
demographic tsunami. The points you are making are very valid. 
I want to work with you on it.
    The last question I had, just in the time that remains, is 
that the centerpiece of the administration's Medicare reform is 
more private choices, more private choices and more 
competition. I have told you that I am open to this kind of 
thing as long as it is within the Medicare program and there 
are tough consumer protections. I was able to write that in the 
Medigap law.
    I would like you to tell us, what are your thoughts about 
how you would actually enforce tough consumer protections, 
tough oversight in the ideas that the President is advancing in 
terms of more private choices, because that is sort of the 
show-stopper issue. I don't think there is a real shot at a 
bipartisan compromise, and I am interested in one--I would like 
to see us get there--until we see exactly how you are going to 
enforce tough consumer protections under your vision of the 
Medicare future.
    Mr. Scully. I think we are highly sensitive to the fact 
that if you are going to give seniors more choices, you have to 
have much tougher consumer forces than even in the Medigap, and 
one of the things that is in our plan is actually to reform 
Medigap, modernize it and probably have more oversight and more 
and better plans.
    But the vision we have is to split the country up into ten 
regions. We are happy to do that any way we would like. Tricare 
has 12 regions. We think it is a better way to--the basic 
concept is that if you want to--that if you would like to sell 
a plan, much like an FEHBP in Portland, you have to take all of 
Oregon, all of Idaho, and all of Washington. That is the Region 
10 for CMS. So everybody in the smallest town would have to get 
the same plan at the same rate.
    We would only have three bidders that would prevail in each 
of those regions, and I have talked to most of the major 
insurance companies and under this format, they believe that we 
would have aggressive bidding. We think that would drive lower 
prices. We think we would have a relatively small handful of 
plans to oversee, and I think we would have a very 
interactive--you can imagine if you only had three private PPO 
plans in the Northwest, in those three States, that were 
participating, which is far less than we have in Medigap, you 
would have a pretty active and interactive, I would say, ``Role 
with the Federal Government as the overseer and the plan that 
are providing it.''
    For instance, right now in the Federal Employee Health 
Benefits Plan, a little over 50 percent of the people in that 
plan are in the Blue Cross plan, and I would--we envision as a 
much more active oversight role than OPM has with the Federal 
Employee Health Benefits Plan. We are very sensitive to the 
fact that if you are going to give seniors more options, and by 
the way, they would be required to get exactly the same 
benefits they have under existing Medicare, that we obviously 
envision very active engagement with the Federal Government as 
an overseer than clearly at least our model sees it under the 
existing Medicare program.
    The Chairman. Ron, thank you very much, and let me turn to 
our colleague, Senator Kohl. Herb.
    Senator Kohl. Thank you very much, Senator Craig.
    Mr. Scully, I just would like to ask you as an add-on to 
what Senator Wyden said, I know you are always a person who 
looks for solutions to honest problems, and with respect to 
this inequity, it is well and good and accurate for you to say 
that we just cannot pay out more without getting something back 
for it, but it is not really fair to say that, either, because 
then you just, in a sense, perpetuate what is admittedly an 
unfair system.
    So are there some constructive thoughts and hopes that you 
can give those of us who are in those States where the 
inequities exist about the things that you may be doing to 
address those inequities, or are you--I know you don't want to 
do this, but are you simply saying, ``Well, it is too bad?'' 
What can we look to by way of hope from this administration to 
address the inequity problem?
    Mr. Scully. Well, within our ability within our statutes, 
we have been looking at lots of things, and I would say that if 
you look at the regulations in the last, like I happen to 
believe and I think the Secretary believes that as a general 
measure, probably rural areas tend to get for a lot of these 
formulas the short end of the stick, and I think if you look at 
the hospital outpatient rule last year where we made all the 
adjustments we could, where rural reimbursement went up about 
8.5 percent and urban went up about 1.5, all across the board, 
we have had flux in the way we have looked at it.
    It sounds boring, but, for instance, in the hospital wage 
index, which affects $94 billion a year payment, if you went 
and looked at the Wisconsin facilities versus New York or 
Pittsburgh, the No. 1 variable is a--it sounds like a mundane 
thing called the hospital wage index. We are looking at how to 
fix that and adjust it to make it fair, but obviously, any time 
you make fixes that might help a rural area, they have an 
impact in Philadelphia, where I am from, or someplace else.
    But if it is the right thing to do, we have been looking at 
fixing them and we are having a very thorough review, for 
instance, of the hospital wage index and how that is calculated 
right now. That probably will move more money around in the 
country in the Medicare program than any other adjustment, and 
it has been done the same way for 25 years and that is not 
always the way it necessarily should be done and we are going 
to have a third debate about it in the hospital rule.
    The physician payment system, which is a little more 
equitable, believe it or not, is done a little differently 
based on geographic variations, is a little fairer and results 
in somewhat fewer variations and we are looking at that, as 
well. It may sound mundane, but I think we are looking at all 
the underlying causes.
    I would also say that if you are looking at geographic 
variations, the way that the President's plan works where 
everybody would get paid the same amount--every plan would get 
the same amount, for instance, Wisconsin is in the same 
geographic area under our guide, and we are willing to look at 
anything, as Ohio, Indiana, Illinois, Michigan, Wisconsin, and 
Minnesota are in one region and they would all be under one 
plan, and three plans would pay the same amount every place. So 
that alone would have a huge geographic blending all across the 
Midwest and reduce a lot of the inequitable barriers in payment 
and reimbursement all across the Midwest because you would be 
basically blending all the payments from Wisconsin across all 
those other large industrial Midwestern States.
    In the traditional Medicare program, there are a lot of 
things we are looking at, but I also think in a reformed 
Medicare program, there are a lot of ways to make some of the 
geographic disparities that are built into the program a little 
fairer, and Senator Wyden very accurately pointed out, one of 
the problems is if you are in Minnesota, or Oregon, or 
Washington or a low-cost State, you get in this kind of spiral 
where, congratulations, you are low-cost so you keep getting 
reimbursed at low costs. The same thing happens in Iowa and you 
just keep spiraling down, where if you are in a high-cost 
State, you keep getting reimbursed more and it keeps going up.
    I'm not sure there's an easy way to fix that other than to 
go back and tinker with the formulas, which we are looking at 
doing to make them fairer.
    Senator Kohl. OK. Thanks.
    The Chairman. Thank you very much, Senator.
    Now let me turn to our other colleague from Oregon, Senator 
Smith. Gordon.
    Senator Smith. Thank you, Mr. Chairman, and Tom, good to 
see you, appreciate your being here. I mentioned before my 
interest in the social HMOs. These are currently enjoyed in 
Oregon, California, Nevada, and New York, and they actually 
save a lot of money, and their clients prefer SMHOs but the 
States have a considerable state in SHMOs. Given the crisis in 
State budgets, we need to think about how SHMOs can actually 
save money for states by keeping frail elderly out of nursing 
homes.
    I understand you appreciate the value of the SHMOs, as they 
are called. I along with some others are trying to get them 
reauthorized. Their authorization is about to run out and I 
wonder if you can speak to the prospects for SHMOs and whether 
they will be allowed to continue or if there is something the 
Federal Government can do to maintain them through this State 
budget crisis.
    Mr. Scully. I have spent a lot of time looking at SHMOs and 
philosophically, I like them. They are different every place. 
There are a number of different--they are demonstration 
programs that theoretically run out the end of this year. I 
think I have already told them that I am planning to extend 
them administratively, which I can for another year. I think it 
certainly would be helpful to have Congress look at it and I 
would love to work with you to fine-tune them.
    Some of them are great. As you probably know, the GAO did a 
report on SHMOs and my staff has done a number of its own 
reports, and to be honest, they are a little skeptical about 
some of the SHMOs because they do cost about 10 percent more 
and some places they have done exactly what they expect to do. 
But in other places, it has not turned out, and I will just 
point out--I won't pick on any company, but, for instance, in 
Las Vegas, where the biggest one operates, essentially the 
company that does that has turned their entire Medicare+Choice 
plan into a SHMO and they get 10 percent more reimbursement and 
it really hasn't worked out the way it was intended.
    So I think from the purely technical side of the staff, 
they think there are some flaws in some places where it has 
been taken advantage of.
    I personally think for the SHMO program, while they have 
some flaws here and there, it is greatly liked by the people in 
it. I think that the structure of the Medicare+Choice plan has 
pushed a lot of people out of these plans that would like to 
stay in them, and so at least for now, I am all for keeping the 
SHMOs as they are and extending them, but I do think that they 
can use some fine tuning and there have been some places where 
it has been abused a little bit. Oregon is not one of them, by 
the way.
    Senator Smith. I know. I have only heard good things, and 
where there are problems, if you have ideas that you would like 
us to include in the legislation, I would love to hear it 
because we want to make them work. The truth is, if these close 
everywhere, I have estimates that an additional $100 to $300 
million in the first year alone will be added to the cost when 
these people are pushed into nursing homes, where a majority of 
costs are funded by Medicaid. So we are not helping the States. 
We are not helping the Federal Government. We are reducing no 
costs. We are just taking away an option and simply making 
everybody miserable. So if you can help us to further craft 
this legislation and extend these SHMOs.
    Mr. Scully. I would be happy to.
    Senator Smith. I think it is really important, because I 
think it gives seniors a less expensive and more enjoyable 
choice.
    Mr. Scully. I would be happy to come up and go through the 
details with you. I think in the places where it has worked as 
intended, it has worked out great. The concern my staff has, in 
looking at other places where the financing mechanism has been 
used to basically do non-SHMO patients, it has actually cost 
the government more and I think we can get the best of both. 
But I would be more than happy to come go through it with you.
    Senator Smith. Thank you, sir.
    Mr. Scully. Thanks.
    The Chairman. Gordon, thank you.
    We have been joined by our colleague, Orrin Hatch. Before I 
turn to you, Orrin, though, let me go to our ranking member who 
arrived just a few minutes ago for comments and questions. We 
are going to have to, for the sake of our next panelist, this 
will be the last round we can do, I think, with Tom, so please 
proceed.
    Senator Breaux. Thank you, Mr. Chairman. It is sort of like 
a mini-Finance Committee here, and I think the subject is no 
less important than the subjects we deal with in this area at 
the Finance Committee.
    Tom, thank you very much. I had the privilege of speaking 
this morning to your old employers, the Federation of American 
Hospitals, and they asked me to convey a message to you, but I 
can't do that in this forum. [Laughter.]
    Mr. Scully. They are much happier since I left, probably.
    The Chairman. If we ask the court reporter not to record it 
and folks to put their hands over their ears?
    Senator Breaux. It has something to do with not enough, not 
enough, not enough. [Laughter.]
    Mr. Scully. They used to say that when I worked for them, I 
think. [Laughter.]
    Senator Breaux. I have got three points that I would like 
you to respond to as briefly as you can. The three points 
against the proposed new Medicare reform system with 
prescription drugs, as I understand it, are, first, you will 
force seniors into HMOs. We are patterning the new reform after 
the Federal Employee Health Benefits Plan. The point I answer 
in response to the fact that we are forcing seniors in HMOs is 
I am not in an HMO. I have prescription drug coverage. I have 
hospital coverage. I have doctor coverage. My choice is Blue 
Cross-Blue Shield, which is a preferred provider program. You 
can have an HMO if you choose to, but you don't have to.
    Under the President's proposal, is that essentially 
correct, or can you elaborate on that answer?
    Mr. Scully. That is exactly--I mean, we have no intention--
in fact, it is the opposite. We have no desire to push them in 
HMOs and I think the realization we have is that most people 
don't like HMOs. They are great for some people, but as I said, 
``In the commercial markets for people under 65, we have 70 
percent of people in PPO kind of hybrid fee-for-service plans, 
about 25 percent of people in HMOs, and about 5 percent of 
people in fee-for-service, and the PPO kind of private fee-for-
service option has been exploding, and so we are just trying to 
provide that option.''
    Senator Breaux. So the full coverage of a Medicare 
recipient under the new proposed plan under enhanced Medicare, 
they would have full array of health benefits without having to 
go to an HMO if they decide something else is better for them?
    Mr. Scully. They could go to any doctor or hospital they 
wished, yes.
    Senator Breaux. The second is that, well, there is a 
problem, and it is a legitimate concern from our colleagues who 
represent rural areas. Obviously, Louisiana has a lot of rural 
areas and some of our members, their State is almost all rural 
and they say, ``Look, that is fine if you are in Philadelphia, 
or New Orleans, or Miami, but it is not going to work in a 
rural county.''
    My response to that is you pick the most rural county in 
America and there has got to be at least one Federal employee 
in that rural county. Maybe he or she works for the Fish and 
Wildlife Service or USDA as a cattle inspector or what have 
you, in that most rural county who is a Federal employee who is 
in the FEHBP, Federal insurance program, that that person has 
health insurance. They may not have a choice of ten different 
providers because there may only be one provider. But if there 
is only one provider, that Federal employee, in essence, is in 
a fee-for-service plan. Is that not the same concept that we 
have under the new enhanced Medicare proposal?
    Mr. Scully. That is exactly why we designed it that way and 
exactly what I would have said. That is exactly the way it 
works and precisely the reason we designed it that way.
    Senator Breaux. So that Federal employee in rural county 
USA that works for the Fish and Wildlife Service, when they go 
to their doctor, if there is one in the county, or the 
community hospital or get their drugs filled at a local drug 
store, maybe the only one in the county, the reimbursement that 
we pay for as a Federal insurance program is basically a fee-
for-service type of program.
    Mr. Scully. Absolutely, and most of these plans, as I said, 
the 51 percent of the Federal employees are in a Blue Cross 
plan, and once you get outside of a big city, it is almost 
always fee-for-service and that is just the way it works.
    Senator Breaux. That would be available for Medicare 
recipients in these rural areas?
    Mr. Scully. At least three different plans that offer that 
type of exact fee-for-service reimbursement in rural areas.
    Senator Breaux. OK. The final point is that some would 
argue that, well, I may consider this as long as the 
prescription drugs that are available for people who want to 
stay in the whole Medicare program is exactly the same as what 
we are offering in the new program. My point is that you can't 
do that if you want to give people choice. If there is no 
difference, there is, in fact, no choice.
    The fact that we are somehow giving people who stay in fee-
for-service much less because we are giving them only a 
discount card which would, hopefully, get the discount down 10, 
25 percent, and we are giving them 100 percent coverage after 
they reach a certain catastrophic level, which is yet to be 
determined, the government would pay 100 percent after that, 
plus the discount card, I point out that we have given them 
both of those extra benefits on the fee-for-service, an old 
system, without any additional premium charge.
    I mean, those things have to be looked at in the context 
that we are giving them a discount card plus catastrophic 
prescription drug coverage and there is no projected increase 
in the premium that is being recommended, for the same exact 
premium. Then for the people who want to go into the new 
system, the enhanced Medicare, which would be an integrated 
prescription drug program, that they may well be paying more 
for it. But you still have a difference. You have one program 
that may be a little bit better, but you are paying a little 
bit more, whereas if you stay in fee-for-service, you are 
getting a discount card plus catastrophic coverage, but not a 
single dollar of extra premium charge. Is that essentially 
correct?
    Mr. Scully. That is exactly correct, precisely, and there 
are a couple of reasons that we did that, two very different 
reasons of many reasons. One is that there was no really easy 
way, as I mentioned earlier, to design a drug benefit that adds 
on to the old Medicare program because it doesn't exist in 
nature. It is much easier to design one that works like your 
Federal Employee Health Benefits one, that is integrated into 
an entire kind of Blue Cross package. So it was easier and more 
rational to design it that way.
    No. 2 is, to get enough people into the new enhanced fee-
for-service, to make the competitive dynamics enough to save 
money and drive the competition, you have to get some large 
enough number of people into that to actually drive the 
competitive bidding and get the price efficiencies that we are 
looking for, and so that is the second reason why we did it.
    But there are really two reasons that we got to that 
conclusion. One was the design of the drug benefit.
    Senator Breaux. I thank you for your responses and I will 
bring back the message to the Federated Hospitals that you said 
hello.
    Mr. Scully. They don't want me back, huh? [Laughter.]
    Senator Breaux. Thank you.
    The Chairman. You are also a pretty good straight man for 
the administration's program proposal.
    Senator Breaux. It is really mine----
    The Chairman. I know that.
    Mr. Scully. We stole his ideas.
    The Chairman. The art of plagiarism. We love it around 
here. [Laughter.]
    Anyway, thank you very much.
    Let me turn to my colleague from Utah, Orrin Hatch.
    Senator Hatch. I am glad you are stealing some of his 
ideas.
    Mr. Scully, I was wondering if you could share with the 
committee members any data that the administration may have on 
the differences of provider reimbursement rates for the Federal 
Employee Health Plan and the Medicare program, and if not, do 
you know if such data is even available?
    Mr. Scully. I have a fairly significant amount of data on 
it that varies massively, some higher, some lower. The FEHBP 
tracks some of the better private sector health plans, and in 
some cases, it depends on the State, it is lower. In some 
cases, it is higher. But I would be happy to give you a lot for 
Utah, if you would like, or other States.
    Senator Hatch. That would be great. The President's 
framework--I will just have my staff get with you and we will 
get what we need. The President's framework is based on a new 
option called preferred provider organizations, and I think 
that is an attractive idea for beneficiaries. It is my 
understanding that the administration relied heavily on the 
demonstration projects involving PPOs. Am I right about that?
    Mr. Scully. Well, we thought it was a good start, but there 
are some fundamental structural differences that we think the 
new plan will work a lot better because it will be better 
financed.
    Senator Hatch. What evidence do you have that you can 
replicate these PPOs across the country if more than 90 percent 
of the people in the demonstrations were in a county with 
Medicare+Choice enrollment and payment rates in excess for what 
fee-for-service will pay? One thing I am concerned about is a 
little bit like the senior Senator from Louisiana. How is this 
going to work in a rural State like Utah, where we don't have 
any Medicare+Choice plans?
    Mr. Scully. It is totally different, Senator, from 
Medicare+ Choice. Medicare+Choice is basically you have to have 
an HMO. You have to be able to deliver an HMO. There are no 
networks. In most rural counties in Utah, there is one hospital 
and probably a small doctor group and there is no way to put 
together an HMO. So even though the rates have been massively 
escalating in the last 10 years on the theory that that would 
draw private plans out into the rural areas, no one has shown 
up generally because there is no way to put together an HMO.
    On the other hand, PPOs exist all over the country in all 
types of rural areas, and as Senator Breaux has mentioned, a 
postal worker or a forest ranger in Montana or in Utah can get 
one of the most rural areas.
    The fundamental structural difference is that we are not 
trying to draw HMOs, but the other issue is if you want to 
offer a health plan in Utah right now, you pick your counties 
and there are constructs, and I am trying to remember which 
region Utah is in, but I believe it is in the Rocky Mountain 
Region. If you are Blue Cross or CIGNA, you would have to offer 
a plan to everybody in Utah. So to sell in Salt Lake City, you 
would have to sell the identical plan for the same price all 
through the State, all through Colorado, Wyoming, Montana, the 
whole mountain region. That would be the same plan at the same 
price with the same premium.
    So, essentially, what the insurers, and we found this 
through FEHBP and through Tricare, is that the bulk of the 
people they get in the urban areas just--they are required to 
provide the same level of service in a fee-for-service context 
in rural areas. So if you are in rural Utah, you wouldn't be in 
managed care. You would effectively be in a fee-for-service 
benefit package.
    Senator Hatch. As you know, the structure isn't in place in 
Utah, and I think probably in many other places throughout the 
country, and I just wonder what it is going to cost to put that 
into effect.
    Mr. Scully. I would argue that for Federal employees, and 
this basically mimics FEHBP and for Tricare, which is the 
Defense dependents program, it works very well. Effectively, 
you are in a rural area of Utah as either a Federal employee or 
a military person, you go to any doctor you want, and you are 
already in essentially their Blue Cross or CIGNA plan, and I 
think it will work exactly that way.
    It is definitely not intended to be HMOs. We totally are 
aware that there are no HMOs in almost any rural area once you 
get outside of large cities.
    Senator Hatch. Do you have any idea how much something like 
that is going to cost?
    Mr. Scully. Our actuaries, who, I am proud to say, are 
extremely independent and generally are perceived in the 
government as being totally nonpartisan and kind of the most 
trusted people in health care scoring--CBO's are, as well, but 
I think generally, more than most agencies, our actuaries have 
been perceived to be very independent, they believe that the 
competitive bidding process for these ten regions would be able 
to offer the same benefit package for Medicare through 
competitive bidding for a slightly lower price and a slightly 
lower premium than commercial Medicare, and we did not come up 
with a detailed plan. Obviously, we read lots and lots and lots 
of options before we came up with our framework.
    We have had our actuaries up talking to people in Congress 
and I think their very highly regarded judgment is that the 
cost of this would be slightly less than the competing premium 
for the identical benefits of Medicare.
    Senator Hatch. Mr. Chairman, my time is almost up, but I am 
very interested in CBO's opinion, as well, on this because I 
think it is an important set of issues. So I hope if I can't be 
there, that CBO cover that.
    Mr. Scully. I am not sure CBO agrees. We have been talking 
about it, but we are in the beginning stages. [Laughter.]
    Senator Hatch. OK.
    Mr. Scully. But I will tell you that I think they would 
agree, as would most people in health care on the Democratic 
and Republican side, that the HCFA CMS actuaries are generally 
perceived to be completely independent. Sometimes that doesn't 
work out well for me, but I can tell you they are completely 
independent. [Laughter.]
    The Chairman. Administrator Scully, thank you very much for 
your willingness to be here today, your openness, your 
candidness about this. This is one of the big hurdles that we 
know that this Congress has got to attempt to face, and 
certainly the administration has led with a proposal. You have 
not been timid and you shouldn't be. All of these models need 
to interact. We need to see the different approaches.
    There needs to be this kind of discussion and debate before 
we decide, because what is significant is that the Ron Wydens 
and the Larry Craigs and the Orrin Hatches and the Gordon 
Smiths of this world all agree about the problem in general and 
all agree there needs to be a solution, and that in itself is a 
major step toward that solution, especially when we begin to 
narrow it to certain models that we think might fit. I think, 
clearly, what the administration is doing and what you are 
doing helps us narrow that playing field significantly.
    Senator Wyden. Mr. Chairman, just for 30 seconds, I want to 
follow up on my interest in working with you and the 
Administrator on this point. I think when you talk about 
Federal employees and making a link, which I am attracted to 
and have made it myself, there is a difference between a 40-
year-old Federal employee who is a Fish and Wildlife employee 
in rural Utah or rural Oregon and a 75-year-old elderly woman 
who there was a history, particularly with Medigap until we 
wrote the law, of people exploiting that person.
    I think if we can work together with you to make sure that 
these choices are inside Medicare and recognize the 
vulnerability of people and the need for the oversight and the 
consumer protection so that people won't be ripped off by being 
part of a modernized Medicare program, I think we can get 
through it. I am going to follow up with you, Mr. 
Administrator, on this point and work with you on it and I 
thank you for that extra time.
    Mr. Scully. I will be very brief, but I would make one 
point I hadn't made, which is the fact is there are a couple 
million people that are Federal Employee Health Benefits 
retirees who already get Medicare and they wrap around Medicare 
and to them, they don't know the difference. So there is 
already pretty substantial evidence that in Medicare alone, 
this already works. Thanks.
    The Chairman. Thank you, Mr. Administrator. We do 
appreciate it.
    We appreciate also the patience of our next panelist, but 
we felt it was tremendously important that we get Dr. Douglas 
Holtz-Eakin----
    Senator Talent. Mr. Chairman, may I trespass on your 
patience just to ask him one question.
    The Chairman. Yes, please. Please be seated.
    Excuse me. We have been joined by Senator Talent, another 
colleague of ours, a member of this committee, and yes, please 
do.
    Senator Talent. Mr. Chairman, thank you. Once again, Mr. 
Chairman, you have scheduled an extremely important and 
relevant hearing to all of us, especially to Missouri. We have 
a population that is more elderly than most States. About 14 
percent of our people are 65 years old or older.
    I am certain that there have been a lot of discussions 
about funding Medicare for the future. I am not going to ask 
questions that I imagine have been asked, although we may 
submit something to you later on in writing.
    There is a subject, though, that I want to get into and 
just get your comment on, because I think it presents a 
possibility for really improving the quality of the health care 
that we offer seniors through Medicare while also enabling us 
to save dollars that we can then direct in treatment, and that 
is the question of information technology in health care in 
general, and particularly for Medicare providers.
    My sense anecdotally, and I tour a lot and talk a lot to 
people who are providers in Medicare, hospitals, physicians, et 
cetera, and I also think the data indicates this pretty 
clearly, is that health care, for one reason or another, is 
behind other parts of the economy in information technology. I 
am not talking about treatment technology, the new CAT scan, 
the new chemo method. I think we are at a cutting edge there. I 
am talking about providers getting and sharing information 
through computers or electronic medical records that will 
reduce medical errors and permit them to save dollars that now 
go into keeping hard copy and paper.
    An example, I had sinus surgery 3 weeks ago, Mr. Chairman, 
and the first three people who talked to me took down the same 
information from me about my history and put it on hard copy. 
You are going to go into a physician's office and they all have 
a back room with all this hard copy stuff. When I go to the 
Jiffy Lube to get my oil changed, I give them a card that they 
have given me. They put it in a computer and they can see 
everything that they have done to my car, at least in the Jiffy 
Lube system.
    So what I am saying, and I know providers are out there 
trying to update these systems, what can we do through 
Medicare? Could we change some reimbursement formulas and maybe 
provide a little extra money to encourage them to get this 
architecture in place with all the promise that it holds for 
allowing us to invest dollars in what we ought to invest it in, 
not paperwork and not accumulating things we don't need, but 
putting it into solid care for seniors? I just want Mr. Scully 
to comment on it. Thank you for allowing me an extra moment to 
do that.
    The Chairman. You bet.
    Mr. Scully. I don't want to push Chairman Craig's patience. 
I could talk to this for hours. You are completely right. 
Secretary Thompson is going to have a fairly big announcement 
about this in Detroit tomorrow. We had about 50 of the leading 
IT people in meeting with me and the head of ARC on Monday to 
talk about this and I think the issue is that health care, and 
Secretary Thompson's pet project is 20 years behind, and Jiffy 
Lube is a great example. We are not as good as Jiffy Lube.
    Providers want to do it. I think we can really provide some 
tremendously positive incentives in Medicare and I hope in the 
process working with the Finance Committee and you this year we 
can do that, to encourage people to do that. But we are way 
behind. We are trying to--the main thing the Federal Government 
can do is put out standards so people are working on the same 
set of railroad tracks and talk to each other, and we also need 
creative financial incentives, and I am a big advocate of doing 
that and I hope I can work with the committees to do it this 
year.
    Senator Talent. I would be very interested in helping you 
and the Secretary with that. The potential for this, I think, 
is much greater than we may know, to improve this system. If 
there are some problems--some people have said to me, well, the 
privacy regulations make it difficult to get this in place. I 
don't know that I totally believe that, but if they need some 
help here or in your agency to fashion these regulations to 
permit them to do it, we certainly ought to.
    Mr. Scully. I would love your help.
    Senator Talent. This is a total up-side.
    Mr. Scully. You may have noticed the FDA came out with bar 
coding for drugs the other day. This is Secretary Thompson's, 
next to bioterrorism, probably favorite subject.
    Senator Talent. I am glad to hear that and I thank you for 
your indulgence, Mr. Chairman.
    The Chairman. Thank you again, Tom.
    Mr. Scully. Thanks.
    The Chairman. We do appreciate it.
    Now, let me turn to our next witness, Dr. Douglas Holtz-
Eakin, who has just last month become our new Director for the 
Congressional Budget Office. I understand that today's 
testimony will be his first before Congress since taking 
office. We are not such a daunting committee. We are really 
kind of a friendly sort of crew here, Doctor.
    Dr. Holtz-Eakin comes to this post most recently from the 
President's Council on Economic Advisors, where he served as 
Chief Economist. He is also, needless to say, a distinguished 
economist and is currently on leave from Syracuse University.
    Doctor, we welcome you before the committee. An economist 
just wouldn't and couldn't be present without a chart, and so I 
see you haven't disappointed us. Please proceed.

   STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL 
                 BUDGET OFFICE, WASHINGTON, DC

    Dr. Holtz-Eakin. Thank you very much, Mr. Chairman. It is a 
pleasure to have the opportunity to talk about the future of 
the Medicare program.
    Medicare is the Federal Government's largest health care 
financing program and, with projected outlays of roughly $280 
billion this year, the second-largest Federal program overall. 
It is the principal payer of medical bills for some 40 million 
elderly and disabled people, with payments per enrollee 
currently averaging $7,000 a year.
    I have prepared a much longer written statement, which I 
will submit for the record. Here, let me confine myself to a 
few brief points and then we can take some questions.
    If Medicare continues to operate as it is currently 
structured, its costs will rise significantly, even in the 
absence of any program initiatives, such as a new prescription 
drug benefit. In the base case outlined in my written 
testimony, the Congressional Budget Office (CBO) estimates that 
Medicare's costs will rise from 2.4 percent of gross domestic 
product (GDP) today to 9.2 percent in 2075. Another way of 
looking at this growth is to consider what would happen if it 
just simply occurred today. If Medicare's program costs today 
were 9.2 percent of GDP, they would account for one-half of 
what is now spent on the entire Federal budget.
    The program will grow for two reasons, outlined in the 
chart that I brought along with me so as to fulfill my 
reputation of being an economist. There are really two drivers 
in the cost of Medicare. First, is simply the aging society in 
which we reside. Aging will account for about 30 percent of the 
increase in Medicare's costs over the next 75 years.
    The second major reason for the rising costs of Medicare is 
simply the excess growth in health costs nationally above the 
growth rate of GDP, and that contributes the remaining 70 
percent. That is the large dark area at the bottom. The aging 
is simply the 30 percent gray area at the top. Those two will 
add up to substantial growth, nearly quadrupling the overall 
costs of Medicare as a fraction of our national economy.
    In the absence of any kind of changes in the program, the 
future growth of Medicare is going to force two broad types of 
tradeoffs. The first is that if we are to keep Federal 
receipts, which are currently about 18 percent of national 
income, at this roughly historical level, the rising costs of 
Medicare will entail broad tradeoffs within the Federal budget 
against other programs and initiatives that the Congress may be 
interested in. The second broad tradeoff would be that if the 
Congress decided to let the overall level of receipts as a 
share of national income rise, the costs of Medicare would 
compete against private uses for those same resources. So the 
underlying trends that we see in the graph will force two broad 
tradeoffs in the future as the program continues to grow under 
current law.
    These observations suggest a two-part framework for 
thinking about the future of Medicare policy. First, 
ultimately, the costs of Medicare and other forms of future 
retirement income services as well as the consumption of the 
working age population will be drawn from the U.S. economy as a 
whole. The larger the economy is, the more easily retirement-
related costs can be covered without cramping the lifestyles of 
workers. In that light, it would be useful to structure the 
overall budget policies and, to the extent possible, increases 
in Medicare programs to minimize the incentives for people to 
consume more at the expense of resources for investment in the 
economy.
    Medicare and related Federal entitlement programs are 
heavily oriented toward consumption, and as their costs rise, 
they generate pressures at odds with the savings and investment 
that will constitute the core of economic growth. Program 
expansions by themselves would only increase the extent to 
which those pressures impinged on faster economic growth. If 
major changes to Medicare's benefits are to be undertaken, both 
their value to program recipients and the strains that will 
place on the economy must be considered.
    Second, regardless of the fraction of the Federal budget 
and the economy ultimately devoted to Medicare, it will be 
desirable to utilize Medicare funds as efficiently as possible 
to purchase the highest-value care per dollar. Medicare 
beneficiaries, their families, and providers are best 
positioned to guide the use of additional dollars and to choose 
those services that meet their therapeutic demands and match 
their individual tastes. Providing those parties with a broader 
range of choices and improved information, and ensuring their 
sensitivity to the costs of these services, should facilitate 
better decisionmaking. At the same time, an appropriate balance 
must be struck between providing stronger financial signals to 
beneficiaries on the costs of their care and also protection 
against greater financial exposure.
    Another point I would like to make is that, as with any 
long-term projection, the CBO base case is subject to some 
risks and uncertainty. To pick only one, the rate of excess 
cost growth in our base case is 1 percent above the growth rate 
of GDP. If excess cost growth turned out to be even half a 
percentage point higher, the implication would be that 
Medicare's costs would rise not to 9.2 percent of GDP but even 
higher, to 13.2 percent. Alternatively, if excess cost growth 
was half a percentage point slower, or half a percentage point 
above the rate of growth of GDP, the rise would only be to 6.4 
percent of GDP.
    Regardless of which side of that you might come down, on 
two observations are, I think, in order. The first is that, 
historically, over roughly the life of the Medicare program, 
the excess cost growth has been 2.8 percent of GDP, and second, 
Medicare's costs are going to rise regardless of the band of 
the uncertainty that you put around them.
    My final point is that the aging component will arrive 
soon. Between the birth of Medicare in roughly 1970 and 2030, 
the ratio of retirees to workers is going to roughly double, 
and that aging component argues that moving sooner as opposed 
to waiting will make any adjustments to the Medicare program 
easier.
    I will close with that and be happy to take your questions.
    The Chairman. Doctor, thank you.
    [The prepared statement of Dr. Holtz-Eakin follows:]
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    The Chairman. All that you laid before us, and as the facts 
come in, it is clear to any of us that the sooner we make these 
adjustments, the better off we are going to be, and the 
recipient of the service provided by these programs is probably 
going to be better off, also. But projected outward, you use 
those figures. I used similar figures in opening comments this 
morning. That is unsustainable.
    Congress will not put itself through those two alternatives 
of choice that you talk about, either forcing the consuming 
public to make considerably larger or different choice, private 
sacrifice or choice, and we are not going to, at least under 
the current Congress, and past records would also demonstrate 
that, make those kinds of choices to offset discretionary 
spending.
    You project on page six of your testimony that Medicare by 
2075 will consume the staggering 9.2 percent of GDP. If a high-
end universal drug benefit with a 10-year price tag of $800 
billion to $1 trillion is to be enacted this year, what kind of 
an effect would that have on the projections you have quoted?
    Dr. Holtz-Eakin. Well, if you will forgive me for doing the 
math in my head and not hold me to it precisely, $800 billion 
to $1 trillion over 8 years is less than percentage point of 
GDP at the outset; with compound growth over 65 years it could 
grow to be as much as another 2 percentage points of GDP. So we 
would be looking at an excess of 11 percent of GDP by 2075.
    The Chairman. The one thing that is obvious to us when you 
project Medicare outward, and you made a reasonable 
extrapolation based on those figures, is that we have never 
been able to control those figures or costs to be accurate in 
our projections. You can do that in Social Security. The 
demographics are there. We understand where people are in their 
aging and all of that. But the one thing that we cannot 
incorporate into all of this is the dynamics of health care as 
clearly a dynamic economy today, and we never could and 
haven't, obviously, factored the change in care delivery and 
prescription drugs and we are now there trying to struggle with 
that.
    So I have to assume that if you are talking 11 percent, you 
are probably off 20 percent. Is that reasonable? I am not an 
economist.
    Dr. Holtz-Eakin. It is perfectly reasonable to suspect that 
the variation is at least 20 percent. I gave you a variation--
simply from moving one-half of a percentage point up--of 7 
percentage points of GDP. It is enormous.
    The Chairman. You state on page ten of your testimony that 
stimulating private health care plans to compete through 
premiums might reduce costs through greater efficiency and 
negotiated rates. First, I am correct to assume here that you 
are referring to a competitive model along the lines of the 
Federal Employees program?
    Dr. Holtz-Eakin. I think it is fair to say that I am simply 
talking about the large range of experience in economics, where 
having competitive pressures with a reward to efficiency on the 
supplier side and with a reward to matching purchased services 
to your preferences on the demand side will have a payoff for 
society as a whole. It is not intended to point to any 
particular competitive system that might be designed.
    The Chairman. Second, could you elaborate a bit more on how 
such enhanced efficiencies might come about in such an 
environment where it applied to Medicare.
    Dr. Holtz-Eakin. I think in that regard, I would make two 
observations. The first is that with specific proposals for 
introducing competitive elements into Medicare, the ultimate 
impacts both in terms of quality of care, cost to the Federal 
Government, and cost to beneficiaries will depend importantly 
on the details and the degree to which incentives are embedded 
in the system. Without seeing those details, it would be 
premature for me to make any particular judgment.
    The broader point that I would like to make is that 
Medicare resides within the private health care system. It is 
17 percent of national health care spending, and the degree to 
which that larger private health care system is responsive to 
incentives will control the kind of cost growth that we see in 
this chart.
    The Chairman. One of the factors of the consumption of GDP 
into these programs that is of concern, and my question is of 
that, total Federal taxes today absorb about 18 percent of GDP. 
By 2075, however, you say taxes as a share of GDP would be 
about an additional 7 percentage points higher if Medicare's 
projected higher cost were to be covered by taxes. What would 
be the effect on the economic growth if Federal taxes were to 
rise that much in that context?
    Dr. Holtz-Eakin. I think it is important to be careful 
about how those taxes would be raised. To the extent that those 
taxes were levied on saving, investment, risk taking--on 
capital accumulation, broadly speaking--economic growth would 
be impeded. Growth occurs through the accumulation of quality 
and quantity of skills, skilled labor, capital, and 
technologies. To the extent that those taxes were levied on the 
consumption that is at odds with savings and investment, then 
the impact would be minimized.
    The Chairman. Let me turn to my colleague from Missouri, 
Senator Talent.
    Senator Talent. Thank you, Mr. Chairman. It is pretty clear 
from the information you have presented that the current 
situation, business as usual, if you will, is not likely to be 
politically or economically viable in the out years. Obviously, 
you are presenting the facts and then we have to decide what it 
is we want to do.
    Clearly, if we could reduce the costs of traditional 
Medicare without impairing or even improving care, that would 
obviously help a lot. I am going to suggest something to you, 
but I want to just make a general comment first.
    My concern is that as we approach this cliff, Congress is 
going to react the way it has reacted in the past when it wants 
Medicare savings. It is going to basically tighten the lid and 
reduce reimbursement rates and, in effect, pretend that we can 
get the savings we need and still get the services we want by 
just reducing the amount that we are paying for the services.
    Then in order to justify that, what happens is the 
Congress--and let us face it, politicians are very good at 
this--scapegoats the providers. Well, the problem is all this 
waste, fraud, and abuse and people out there, and that is what 
we did with BBA 1997 basically, and it saved money, but it 
really hasn't worked.
    Now, the other alternative is to take costs out of the 
system that aren't delivering anything in terms of care. I just 
talked about technology. Let me add one other one and then you 
can add your comments about it.
    I think it is the case, Mr. Chairman, isn't it, that about 
5 percent of the folks on Medicare are generating about 50 
percent of the costs.
    The Chairman. Something near that.
    Senator Talent. Now, that is a small enough group of people 
that it seems to me, at least on a pilot basis, we could try, 
particularly if we get the information systems up to where they 
need to be, identifying them when they come into the system and 
having some pretty good case managers work with their providers 
to try and reduce those costs in those cases and pull some of 
those costs out of the system.
    I don't know, I probably should have asked this of Mr. 
Scully as well, but aren't there opportunities to pull costs 
out of this system in traditional Medicare so we can flat-line 
some of that growth a little bit, and isn't that a logical 
thing that we should begin trying to do?
    Dr. Holtz-Eakin. I can suggest a couple of things. The 
first is that one of the points that I tried to make in my 
written testimony was that to the extent that you can build 
incentives in for providers to actually reap some of the 
benefits of identifying those costs, the system itself will 
identify and take them out to the extent possible, and that is 
something that is desirable to get into a system.
    The second is on the specific benefits of case management 
and disease management and identification of high-cost Medicare 
beneficiaries. The Congressional Budget Office has undertaken 
some preliminary investigation into these issues, which is far 
from complete, and it is really trying to take a hard look at 
data that track Medicare beneficiaries over a long period of 
time to try to identify the degree to which a small number are 
responsible not just for the costs in any single year but the 
costs over a long number of years, and the degree to which 
those costs can be traced to particular diagnoses and chronic 
conditions. Then the questions is. Can a system be designed 
that would, in fact, be useful for identifying, such 
beneficiaries controlling costs, and providing the quality of 
care that would be of interest to the Medicare program?
    We would be happy to share that work, with you as it is 
completed and work with you in----
    Senator Talent. Perhaps in doing that work, you could look 
at the costs generated from those cases and make some 
assumptions. Let us suppose that we reduce those costs by 10 
percent, by 15 or 20 percent. What does that do to the overall 
picture if we put this into place?
    These are the kinds of things I am interested in doing, 
because personally, I think that there are ways--I talked about 
technology, we have talked about case management. If we could 
provide some liability relief to take some of the defensive 
medicine that is currently being practiced in both the public 
and the private sector, take that cost out of the system, I 
think there are billions of dollars being spent on things in 
health care that aren't related at all to health care, and it 
is not waste, fraud, and abuse. It is things in the system that 
are causing providers to do this in order to relieve other 
stresses that are being put on them that doesn't have anything 
to do with care. We may be able to get our way largely out of 
this that way.
    I would love to see--you can at least look at top lines and 
make some assumptions and provide some data, and if you do, I 
would love to see it.
    Dr. Holtz-Eakin. If I could make two comments about that, 
the first is, that as an economist, I am a great believer in 
the power of incentives, and the good news part of the comments 
you just made would be that perhaps incentives could help us to 
control this excess cost growth.
    The bad news that I will put on your radar screen is that 
CBO's base-case projection assumes that costs grow faster than 
GDP by 1 percentage point. Historically, they have grown faster 
by 2.8 percentage points. There is an enormous gap between 
those two figures, which we have not built into these 
particular projections. So the degree to which incentives can 
rectify the entire problem remains to be seen.
    Senator Talent. Why is health care as a whole, the cost of 
health care in the private as well as the public sector, why is 
that growing--first of all, it is growing faster than costs in 
other areas, isn't it?
    Dr. Holtz-Eakin. Yes.
    Senator Talent. What, in your judgment, is that 
attributable to?
    Dr. Holtz-Eakin. Many people have looked at this, and I 
would say the broad consensus is that innovation and new 
technology are the key drivers of health care costs, followed 
by a range of other factors that you could rank in a variety of 
different orders--increased insurance, subsidies to that 
insurance, and a variety of other things, including aging of 
the population. But the technology component seems to be the 
common element that most investigators arrive at, and the 
degree to which we adopt the right technologies and spend our 
money as a nation wisely on those technologies is obviously 
crucial.
    The second thing, as an economist, that I would warn you 
about is that cost is not the only way to measure those 
technologies. You would also want to assess the benefits in 
terms of their therapeutic value, and simply measuring cost 
doesn't tell you whether we are getting the right value for our 
dollar.
    Senator Talent. Yes, I understand that. You are saying what 
I think of as treatment or therapeutic technology, you know, 
the new form of oncology or whatever that costs a lot of 
dollars but is more effective in treating people, what you 
understand is that that is what is driving the cost in health 
care?
    Dr. Holtz-Eakin. New technologies.
    Senator Talent. But you see, there are new technologies 
being introduced all across the rest of the economy and they 
are not driving costs that much, and in some cases, they are 
reducing costs. I mean, the new technology is permitting people 
to be more productive. Is that phenomenon helping, or is it 
occurring in health care, and if not, why not?
    Dr. Holtz-Eakin. On a case-by-case basis, the CBO staff has 
looked, for example, has looked at some of the new prescription 
drugs and the degree to which they could substitute for older 
treatments and therapies and, as a result, perhaps result in 
cost savings. There is no clear conclusion on that particular 
front as yet. In some particular diagnoses, it appears that it 
is possible. In others, there doesn't appear to be any cost 
saving, but rather that drugs are an additional treatment that 
adds to total cost yet may yield greater patient satisfaction, 
and if so, then the lack of cost savings is worth it from an 
economic point of view. On balance, it is not obvious that 
these things break in the direction of saving costs in total.
    Senator Talent. Is it, and stop me, Mr. Chairman, if I have 
gone too far----
    The Chairman. Complete your thought.
    Senator Talent. Is it inherent maybe in the nature of a 
system where payment is so predominately third-party pay? I 
mean, is that the problem in health care, that there is always 
somebody else who is paying for the health care and so you 
have, in effect, an unchained demand? Is that driving the 
costs?
    Dr. Holtz-Eakin. Senator, as an economist, I am sure it 
would be a dangerous thing for me to assign any single cause to 
the rising cost of health care, and I won't do it. But I will 
point out that one of the key incentives in any economic 
problem is to make sure that the individual making the decision 
has the proper financial inducement to weigh benefits and 
costs, and ignoring one side of that equation leads to bad 
decisions on the whole.
    Senator Talent. But, you see, I am not sure what we can do 
about that, because we can't have a system--I can't think of a 
system of reimbursement or payment that would be just and would 
produce health care for everybody that was not largely third-
party pay. I mean, I think you could probably try and give 
people incentives to be more responsible for their primary 
care, the costs, the lower-level costs in health care. But once 
you get into acute care, we are going to have a system where 
you have either got an insurance company or the government or 
somebody doing third-party pay.
    So really, on the highest level, it seems to me one of the 
things we have to do is try and figure out a way to reintroduce 
the right incentives, given that we have a third-party pay 
system. Is there any model out there that you know of that we 
can look at to try and accomplish that?
    Dr. Holtz-Eakin. I don't have a specific policy 
recommendation. It would be inappropriate for me to make one at 
this point----
    Senator Talent. Right.
    Dr. Holtz-Eakin [continuing]. But I would be happy to work 
with you if you had particular ideas that you wanted to try 
out. We could have a dialog and see which ones seem most 
promising.
    Senator Talent. OK. Thank you, Mr. Chairman.
    The Chairman. Well, thank you for those questions. I think 
that when we get into that business of defensive medicine and 
all the other things that are driving health care costs 
external to health care itself--certainly, the tort reform we 
are attempting here and that States are touching on a State-by-
State basis is going to have some impact, also, on those 
overall costs.
    We have been joined by our colleague, Senator Carper. We 
are pleased to have you with us. I would turn to you for any 
opening comment you would like to make. We just finished with 
Administrator Scully and we are now with our new Director of 
the Congressional Budget Office, Dr. Holtz-Eakin.
    Senator Carper. Good luck.
    Dr. Holtz-Eakin. Thank you, sir.
    Senator Carper. I just came here to wish you good luck. You 
take over with a budget deficit that is soaring past $300 
billion and we are into a war that we have not paid for and are 
anticipating further tax cuts----
    The Chairman. This has been a real upbeat place until you 
got here. [Laughter.]
    Senator Carper. You are a better man than I am to take this 
on at this time.
    I apologize for arriving at this hour. It is my fourth 
hearing that I have been to and I have had some other things 
added to my morning, so I apologize for not being here earlier.
    I am not going to give a statement but I would just ask, 
for you to take a minute and tell me one thing you would like 
for me to remember when I leave here either in response to 
questions or your statement.
    Dr. Holtz-Eakin. Asking an ex-professor to restrict himself 
to one thing is asking a lot. [Laughter.]
    But one thing to remember is the current program is broken, 
and I can give you three things on top of that if you would 
like.
    Senator Carper. Give me three.
    Dr. Holtz-Eakin. The current system is broken. It will 
involve, as a result, trying to tradeoff either other smaller 
programs within the government budget or making the government 
budget larger and having a smaller private sector. The fourth 
thing I would point out is that Medicare is embedded within a 
larger private health care system. It is only 17 percent of our 
national health care spending. So to focus on Medicare alone is 
to run the risk of missing the larger picture.
    Senator Carper. Folks over at the Progressive Policy 
Institute, including a fellow named Jeff Lemieux, have given a 
fair amount of thought to these issues. I don't know if you 
have had any chance to spend time with him and to get the 
benefit of his thinking, but I have and I find it always 
refreshing and, frankly, valuable. He thinks outside the box 
and we need some of that as we approach the issue of Medicare 
in the 21st century and what to do with respect to the 
prescription drug program.
    Mr. Chairman, I am sorry again to be late. I am glad that I 
got here before you finished and good luck. We look forward to 
working with you.
    Dr. Holtz-Eakin. Thank you.
    The Chairman. Tom, I thank you for taking the time to drop 
by. We have all had busy schedules this morning and it is kind 
of you to come by and say hello to our new Director.
    Let me ask a question on behalf of Senator Hatch, who had 
asked it of Mr. Scully and I think you were picking up on it 
prior to his leaving. The question that was asked of Mr. 
Scully, again, he says, ``Again, it is my understanding that 
the administration relied heavily on the demonstration projects 
involving PPOs.'' I am interested in your opinion on whether or 
not you can replicate these PPOs across the country if more 
than 90 percent of the people in the demonstrations are in 
counties where Medicare+Choice enrollment and payment rates are 
in excess of what fee-for-service will pay. Which details drive 
the cost of the PPO options? Are you prepared to respond to 
that?
    Dr. Holtz-Eakin. Well, I can't speak to how the 
administration prepared any estimates. I have not seen the 
details of any plans, so that would be premature. I can make 
some general observations that----
    The Chairman. Please do.
    Dr. Holtz-Eakin [continuing]. Compared with Medicare fee-
for-service, the wide range of private options available at the 
moment are in some cases cheaper and in some cases more 
expensive than Medicare. We heard several Senators remark that 
Medicare was the lowest payer in their area. Those are examples 
of situations in which the private options would be more 
expensive.
    The second general comment I can make is that in any 
demonstration project that economists have tried to study--
government training programs come to mind as an example--an 
important issue to be cognizant of is the degree to which the 
participants really pick the most opportune places and times to 
take advantage of such a demonstration project. To the extent 
that the PPOs we see in the demonstration are only located in 
those places where they are going to have their greatest 
advantage, they will not be representative of any nationwide 
PPO system that one might put in place. The same lesson has 
been learned in training programs, where those most likely to 
take advantage of training are those who can get the largest 
return from it, which skews the estimated returns to the 
training program.
    The Chairman. Doctor, your table on page nine shows that if 
Congress were to try to address Medicare fiscal problems by 
either raising the eligibility age or by increasing beneficiary 
cost sharing, the resulting fiscal benefit would be remarkably 
small. Why is that the case?
    Dr. Holtz-Eakin. Well, in both cases, the options are 
actually relatively small. In the first case, moving the 
retirement age up by 2 years doesn't change the fundamental 
demographic shift of doubling the number of retirees per 
worker, and it also takes away the cheapest Medicare 
beneficiaries--the lowest 10 percent of the population--but not 
10 percent of the cost.
    In the second case moving the Supplemental Medical 
Insurance premiums up as much as is shown in that option really 
just changes the overall subsidy from 90 percent to about 80 
percent, and as a whole doesn't change the basic financial 
structure very much.
    The Chairman. You had given a scenario, and you spoke again 
to it with Senator Carper, of the long-term future of Medicare 
and the impact it has and choices, such as ultimately reducing 
benefit levels, raising taxes, reducing other spending or for 
increasing Federal borrowing--and all of these by very 
significant amounts.
    I am confident we are going to make some changes, but I am 
not confident we are going to make them in such a significant 
way--I mean, I think we cannot say that that is our trajectory.
    So as an economist, looking at this from an economic growth 
perspective, which of these four directions would have the 
least amount of harm on the country from a long-term economic 
growth perspective?
    Dr. Holtz-Eakin. I would characterize the problem slightly 
differently. The Congress will, in its deliberations this year 
and in the future, pick a structure not just for Medicare but 
for Medicare, Social Security, and Medicaid--the entitlement 
programs, all of which have this same basic characteristic 
growth path--and for the budget as a whole, which will or will 
not encourage consumption at the expense of saving, or will 
allow the country to accumulate greater resources in capital, 
labor, and technology. That is the fundamental tradeoff that 
these choices will influence. To the extent that the overall 
structure of the government budget is one that provides 
consumption in the present at the expense of saving for the 
future, other things being equal, we will see lower growth, and 
the question for the Congress will be, is that worth it in 
terms of providing those necessary benefits in the government 
budget that we want today and giving up some smaller amount of 
growth in the future.
    The Chairman. I could see lurking in the back of your mind 
the Japanese model.
    Dr. Holtz-Eakin. I won't speak to that. I don't know what 
the Japanese model is----
    The Chairman. No, I mean the current Japanese economy----
    Dr. Holtz-Eakin. I do not want the current Japanese 
economy, sir.
    The Chairman. Thank you, because it is, in essence, that 
burdened economy, if you will, that is so consumptive of its 
productivity that it can't begin to produce again, it seems, 
and it is sitting out there for the last 10 years with almost 
no growth, or very little growth.
    Dr. Holtz-Eakin. I will spare you a long dissertation on my 
views on the Japanese economy. No one here deserves that this 
morning. One chart is probably enough.
    I will say that you have hit the nail on the head when you 
point to productivity. Maintaining a rapid rate of productivity 
growth is the key to long-run living standards in the United 
States, and that is another way to pose the basic problem: to 
ensure that we grow large enough as an economy requires rapid 
productivity growth, and that larger economy will provide the 
resources for all such programs, public and private.
    The Chairman. That really is the key. I am through with my 
questioning. Is there any further?
    Doctor, thank you very much for taking time to be with us 
this morning. This is an area that I am quite confident you are 
going to be spending a lot of time on in the future, as are we, 
as we should, to create these new models that are so critical 
to the population of our country and in the overall economics 
of our country, the dynamics that we have talked about here 
just in the last few minutes. So we will stay connected, as I 
know you will, and I thank you very much for being here this 
morning.
    The committee will stand adjourned.
    [Whereupon, at 12:19 p.m., the committee was adjourned.]


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