[House Hearing, 109 Congress]
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                         DOMESTIC ENTITLEMENTS:
                           MEETING THE NEEDS



                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION




                            Serial No. 109-4


           Printed for the use of the Committee on the Budget

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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
ROB PORTMAN, Ohio,                   JOHN M. SPRATT, Jr., South 
  Vice Chairman                          Carolina,
JIM RYUN, Kansas                       Ranking Minority Member
ANDER CRENSHAW, Florida              DENNIS MOORE, Kansas
ADAM H. PUTNAM, Florida              RICHARD E. NEAL, Massachusetts
ROGER F. WICKER, Mississippi         ROSA L. DeLAURO, Connecticut
KENNY C. HULSHOF, Missouri           CHET EDWARDS, Texas
JO BONNER, Alabama                   HAROLD E. FORD, Jr., Tennessee
SCOTT GARRETT, New Jersey            LOIS CAPPS, California
J. GRESHAM BARRETT, South Carolina   BRIAN BAIRD, Washington
THADDEUS G. McCOTTER, Michigan       JIM COOPER, Tennessee
MARIO DIAZ-BALART, Florida           ARTUR DAVIS, Alabama
JEB HENSARLING, Texas                WILLIAM J. JEFFERSON, Louisiana
DANIEL E. LUNGREN, California        ED CASE, Hawaii
PETE SESSIONS, Texas                 CYNTHIA McKINNEY, Georgia
PAUL RYAN, Wisconsin                 HENRY CUELLAR, Texas
MICHAEL K. SIMPSON, Idaho            ALLYSON Y. SCHWARTZ, Pennsylvania
JEB BRADLEY, New Hampshire           RON KIND, Wisconsin
PATRICK T. McHENRY, North Carolina

                           Professional Staff

                     James T. Bates, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel

                            C O N T E N T S

Hearing held in Washington, DC, February 17, 2005................     1
Statement of:
    Gail R. Wilensky, Ph.D., senior fellow, Project HOPE.........     6
    Ron Haskins, Ph.D., the Brookings Institute..................    13
    Kent A. Smetters, Ph.D., Associate Professor, the Wharton 
      School, University of Pennsylvania.........................    24
    Judith Feder, Ph.D., Dean of Policy Studies, Georgetown 
      University.................................................    33
Prepared statement of:
    Dr. Wilensky.................................................     9
    Dr. Haskins..................................................    18
    Dr. Smetters.................................................    27
    Dr. Feder....................................................    36

                         DOMESTIC ENTITLEMENTS:
                           MEETING THE NEEDS


                      THURSDAY, FEBRUARY 17, 2005

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:01 a.m., in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee), presiding.
    Present: Representatives Nussle, Barrett, Bradley, Conaway, 
Diaz-Balart, Mack, McCotter, McHenry, Portman, Putnam, Ros-
Lehtinen, Ryun, Simpson, Wicker, Allen, Baird, Capps, Case, 
Cooper, Cuellar, Davis, McKinney, Moore, Neal, Spratt, and 
    Chairman Nussle. Good morning and welcome to the Budget 
Committee hearing today to discuss the longstanding and, for 
that matter, worsening problem and challenge regarding overall 
entitlement spending in the Federal budget.
    Today we will hear from an expert panel of witnesses: Gail 
Wilensky, the senior fellow at Project HOPE; Ron Haskins of The 
Brookings Institution; Kent Smetters, an Associate Professor at 
Wharton School of the University of Pennsylvania; and Judy 
Feder, who is the Dean of Policy Studies at Georgetown 
    We welcome all of our witnesses to the Budget Committee, 
and we appreciate and look forward to hearing your testimony.
    You know, I have to remind myself when I go back home to 
Iowa from Washington, and really, for that matter, anywhere 
outside the Beltway, that not all the folks back home realize 
that we have different kinds of spending in Washington. Most 
people look at it and say, well, spending is spending; it is a 
really big budget and you guys spend a whole lot of money. We 
know that there is discretionary spending, and that is the kind 
of spending that we review on a regular basis, and on an annual 
basis; we hold hearings on it. Sometimes we debate at great 
length on the floor of the House and in committees how many tax 
dollars will go to a particular program; we argue over a 
million here and a million there. Yes, it does all add up, but 
this type of spending only adds up to 39 percent of our total 
    So we have another kind of spending that is out there, and 
that is called entitlement--or another word that we use is 
mandatory spending. In a nutshell, this kind of spending keeps 
going and growing and going and growing every year, and it is a 
relatively simple process, it just continues to grow and 
magnify. Our budget office tells us how much bigger our 
mandatory spending is expected to get in the next years; we 
pretty much just say OK and we stick to that number in the 
budget, and it keeps going and growing and going and growing. 
While that is a little simplified for the point of explanation, 
it is pretty much true, and that is the complication and the 
frustration of it all.
    I have referred to this many times as the Federal 
Government's auto pilot spending; it is spending that simply 
continues to grow year after year, largely without much review, 
modifications, or, for that matter, even oversight by the 
Congress. Many of the programs that make up our mandatory 
spending or automatic spending were created, in some instances, 
decades ago, and they still operate--without too many basic 
reforms or modernization on the very model and technology, for 
that matter, that existed at the time that they were first 
brought into existence.
    That is the kind of spending that we are here to talk about 
today--and specifically why that kind of spending has become an 
ever-growing problem and challenge and burden for the Federal 
budget. So let us take a quick look at why the sustained and 
unchecked growth of these programs has become such a problem.
    I would like to show you the chart that we have made up 
that demonstrates this. [Chart.]
    The share of the budget consumed by entitlements, 
mandatory, or automatic pilot spending, has been growing 
rapidly since the mid-1970s and now stand at about 54 percent 
of the budget. So today this makes up over half of the 
Government's spending. As you can see from the chart, 
continuing at that rate we are going now, by 2015 that portion 
will grow to 61 percent and eventually crowd out more and more 
of the other priorities that threaten really any kind of 
overall budget control.
    So as you can see here, 54 percent today of our budget is 
automatic, and now only 38 percent of the budget is 
discretionary. So during the sometimes 3-, 4-, 6-month 
appropriation process, where we haggle and debate and discuss 
the appropriation bills that come to the floor, it used to be 
13, this year we are going to try a little bit different 
process--we will argue over only that 38 percent of the budget. 
Since half of it is defense and homeland security now, really 
it is even less that gets discussed.
    Now let us take a look at why we and our predecessors have 
let this problem continue unchecked; and two, why, even now, 
when the problem is staring us in the face and putting in peril 
funding for every other program whose spending we actually 
control, why there are still very few who have not only been 
unwilling to come forward and try to get their hands around 
this problem--but, for that matter, who are even available to 
admit that there is a problem.
    To answer the first problem, by its very nature, mandatory 
spending is difficult to control, just by the nature of the 
word. This spending is tied to a variety of factors outside 
Congress's control, either political or otherwise, such as: 
demographics, economic conditions, medical prices, and so on. 
So as we talked at last week's Social Security hearing, we have 
got an aging population with longer life expectancies, 
increasing benefits, and, as we are all well aware, ever-
increasing prices and costs for medicine.
    Attached to all of this are these mandatory programs, 
particularly the larger ones, tend to have a never-ending 
labyrinth of paperwork, layers and layers of Government 
bureaucracy and, let us face it, huge sums of money that are at 
stake, and many stakeholders.
    Second, at the root of these problems are critical needs 
that must be met--we are not suggesting that these are 
challenges that shouldn't be met--such as Medicare payments, 
Social Security benefits, or other so-called unbreakable 
commitments that must be fulfilled, such as providing for the 
needs of our veterans. If the Government is there for anything, 
it is to help people who cannot help themselves, and many of 
these programs help people who cannot help themselves.
    Just as everyone in this country is somehow touched by one 
or more of these programs, either themselves, their children, 
their parents, or even their grandparents, so these programs 
are highly personal. In many cases, people associate a program 
in its totality to that one check with their name on it. Even 
talking about a program as a whole strikes a very personal 
nerve in a whole lot of people's homes that depend on that 
safety net. These factors make it especially difficult not only 
to control so-called entitlement spending, but even to discuss 
it, and getting it back under control without deserving people 
worrying that their so-called benefits will be changed, 
affected, reduced, cut, or eliminated.
    So everyone here, certainly myself included, understands 
that we have a big problem to deal with, not only in getting 
our hands around it and looking for solutions, but in doing it 
in a way that is fair to today's program recipients and all 
those who will need these programs when they get to that point 
in their particular station of life.
    I commend the President for taking steps in his budget to 
address this problem, by including savings in mandatory 
programs as part of our effort to get the growth rate under 
control and to help reduce the current deficit. These 
recommendations serve as a benchmark for Congress as we develop 
our budget.
    I think it is important to remind everyone that this 
hearing isn't happening in a vacuum. Congress has already acted 
to attempt to get our hands around some of the discretionary 
spending, reduce some of the most obvious examples of waste and 
fraudulent spending, and to keep our now strong, growing 
economy continuing to grow. However, over the long run the 
Federal burden of mandatory spending will become too great for 
us to simply grow out of the problem; or for the economy to 
grow; or to just reduce wasteful or necessary spending enough 
to be able to continue to sustain some of these larger 
    So not only with our discretionary programs, such as 
education, the environment, science, defense, get squeezed 
tighter and tighter, our strong economy--which I think we are 
all pleased to see creating jobs and helping to reduce our 
deficits--is also at peril by this growing share of mandatory 
spending. This problem becomes bigger, more serious, and even 
more difficult to control with each passing year.
    I think that there is, and should be, bipartisan 
acknowledgment that this is a growing serious problem, and that 
we hopefully will work to finding bipartisan common sense 
solutions. I am looking forward to that discussion, and I am 
certainly interested in the discussion that we have today. We 
have got some fine witnesses who can give us their perspective 
on not only the challenge, but possibly some of the solutions.
    So, with that, I will turn it over to my friend and 
colleague, Mr. Spratt, for any opening comments he would like 
to make, and I ask unanimous consent that all members be 
allowed to put an opening statement in the record at this 
point. Without objection, so ordered.
    Mr. Spratt.
    Mr. Spratt. Mr. Chairman, thank you very much. Thank you 
for calling this hearing.
    And I would like to thank each of our witnesses for the 
efforts they have made and for the time they have taken to come 
here and testify today. We look forward to hearing your 
testimony and to asking you further questions about it.
    The hearing today focuses on entitlements in the 
administration's budget for mandatory spending, as we call it, 
programs like Medicaid, Medicare, and Temporary Assistance for 
Needy Families (TANF). We don't question whether growing 
entitlements pose a problem. We do question whether the 
administration's budget provides sound solutions.
    Although we have a budget that is $427 billion in deficit, 
the administration is still pushing substantial tax cuts, $1.6 
trillion just to renew and make permanent the tax cuts passed 
in 2001 and 2003. As a consequence, we find ourselves down in 
the safety net searching for savings that will offset an 
enormous deficit for which there is little end in sight.
    Among the entitlements in the administration's budget, 
Medicaid is slated for $60 billion in gross cuts, $45 billion 
in net cuts, over the next 10 years. These cuts may not seem 
that great given the size of the program and the span of time, 
10 years, but they could do real hurt to some of the most 
vulnerable among us.
    Furthermore, as three Governors told us yesterday, Medicaid 
needs to be reformed. From their point of view, it has to be 
reformed, restructured. But as they emphasized, the 
reconfiguration cannot and should not be driven by arbitrary 
budget numbers. We need to design the kind of system we want to 
deliver the care that is needed amongst those who are the most 
needy, and then decide what it costs and change it at the 
margins so that we can fit it into the budget.
    The President's plan for our largest entitlement program 
really is beyond the scope of this hearing, but Social Security 
is a matter of great importance. Unfortunately, the full cost 
of what the President is recommending for Social Security has 
been omitted from this budget. It is one of the major omissions 
in this particular budget.
    Nevertheless, when we look at the proposal and then look at 
what the actuaries have told us about likely costs, we know 
that creating private accounts and allowing workers to divert 4 
percentage points off their FICA payments into private 
accounts, instead of into the Social Security trust fund, will 
cause the Government to add substantial amounts to national 
borrowing in the next 20, 30, 40 years.
    And the only time frame the administration has given us any 
number for, 2009 through 2015, during which they would 
implement their Social Security proposals, the cost is $754 
billion. If we look at the first 10 years of implementation and 
use the same numbers, we figure the cost over the first 10 
years of full implementation at $1.5 trillion; and over the 
second 10 years at $3.5 trillion. In other words, the first 20 
years would cost $5 trillion in additional debt for the United 
States to incur, which will inevitably send us looking again, 
even more seriously, about the safety net program.
    Now, Medicare and Medicaid costs are growing, no question 
about it. If anything, Medicare is a worse problem, long-run, 
than Social Security. But it should be acknowledged that these 
costs reflect growing enrollment and rising health-care costs; 
growing enrollment particularly for Medicaid, particularly 
because of the recession from which we are just emerging; and 
the rising health-care cost, medical care costs are not unique 
or special to Medicare or Medicaid, they reflect what is 
happening in our whole economy. So in a correct and broad 
sense, the problem before us when we talk about Medicare and 
Medicaid is not just the nature of these programs and the costs 
they are incurring, but the cost of medical care in our society 
    Both Medicare and Medicaid grew at an average annual rate 
of 6.9 percent from 2000 to 2003, while private and premiums 
grew at a rate of 12.6 percent over the same period of time. 
That should be borne in mind.
    We are open to solutions, Mr. Chairman, open to 
negotiations, because we recognize that if we are going to put 
the budget back into balance, then programs of this kind have 
to be part of the equation, if for no other reason than they 
constitute a large and growing share of the budget. But we also 
are cognizant of the fact that these programs help the neediest 
among us, they help the least of these. If we cannot help them, 
nobody else can. Consequently, we have got to be very, very 
careful about making arbitrary cuts and arbitrary reductions, 
as the three Governors we visited with yesterday told us.
    So I look forward to the testimony today and the light that 
you can shed upon these problems, why they are growing, what we 
can do to make the programs better given the substantial sums 
of money we are spending upon them. Thank you again for coming.
    Chairman Nussle. I thank my friend, Mr. Spratt. We have, as 
I said and as he said, four good witnesses to help us with this 
discussion today. I will call on them in the order we have here 
on our witness sheet. We will start with Dr. Gail Wilensky, 
senior fellow from Project HOPE.
    All witnesses' testimony as written will be put in the 
record, and you may summarize as you see fit.
    Welcome back to the committee, Dr. Wilensky. We are pleased 
to receive your testimony.



    Ms. Wilensky. Thank you very much, Mr. Chairman. As you 
have indicated, my name is Gail Wilensky. I am currently a 
senior fellow at Project HOPE, an international health 
education foundation. I am formerly an administrator of the 
Health Care Financing Administration (HCFA), now known as 
Centers for Medicare and Medicaid Services (CMS), and a former 
chair of the Medicare Payment Advisory Commission.
    My views expressed here are those of an economist, which is 
my professional training, as well as the experiences that I 
have had as HCFA administrator and MedPAC chair. They should 
not be interpreted as positions of Project HOPE.
    Most of the attention right now in Washington is being 
focused on 2006 budgetary issues, but the challenges, as you 
have indicated, for Medicare and Medicaid grow substantially 
larger over time. I am going to talk mostly about Medicare, but 
also a little about Medicaid; a little about the short-term 
issues and then more about the long-term challenges.
    The budget is providing for $346 billion in outlays for 
Medicare. This is a substantial increase. If you look at the 
2001-2006 period, you see increases that are averaging over 9 
percent. Most of the attention right now is focusing on the 
implementation of the Medicare Modernization Act. That is as it 
should be. I would like to commend you, as a former HCFA 
administrator, for including implementation money in the 
budget. That is all too frequently left out. It is an important 
part of any new legislation.
    The Congressional Budget Office (CBO) projections that were 
released last month for Medicare indicate that they expect 
Medicare to grow at an average rate of 9 percent over the 10-
year period 2006 to 2015. What it will mean during this time is 
Medicare will be growing from 2.6 percent of gross domestic 
product (GDP) to 3.9 percent by 2015. And that is an optimistic 
assumption because it assumes that the current way of paying 
physicians, which has resulted in reductions in fees, only to 
be overturned by the Congress, stays in place. So, in fact, it 
is likely that the growth in spending over the 10-year period 
will be larger than what the CBO has estimated.
    There has been a fair amount of controversy about the cost 
of the Medicare prescription drug component. Initially, the 
difference between the $395 billion that was estimated by the 
CBO, as opposed to the $534 billion by the actuary in the CMS, 
although in absolute terms substantial, represent actually a 
very small amount of total Medicare spending over a 10-year 
period. It happened because of different assumptions about how 
many people would participate in the voluntary Part D program, 
how many low-income people would sign up, and how many people 
would join Medicare Advantage during that 10-year period.
    More recently, there has been a big flap about the $720 
billion estimate of the cost of the Medicare Part D program for 
the years 2006 to 2015. The reason for the change is not very 
complicated. The first 2 years, 2004-2005, were the cheap 
years. There was a discount drug program, a low-income support, 
but not the actual drug benefit, as you well know. The current 
10-year projection now drops off those first 2 cheap years and 
it estimates the cost of the full program at 10 years. There 
are a lot of things that are difficult to understand about 
Medicare. This actually isn't one of them. It does give a 
glimpse of what the true 10-year costs of the program are 
likely to be.
    In talking about longer-term issues, I am going to be 
relying on the last trustee's report--it is actually almost 
time for the next one--but I think the issues that they raised 
are pretty much the issues that we will see again. Using 
intermediate projections, we see that Medicare is likely to be 
almost 8 percent of GDP by 2035. By 2024, Medicare will surpass 
Social Security in spending. Medicare is a program that is not 
currently as large as Social Security, but it is growing at a 
faster rate.
    Under current estimates, 2019 is the year when the trust 
fund that pays for Part A of Medicare is scheduled to be 
depleted of funds. As you probably well understand, it is going 
to be increasingly important to look at what happens to general 
revenue, because Part B of Medicare, the part that pays for 
outpatient hospital and physicians, as well as the new 
prescription drug Part D, come mostly out of general revenue, 
and general revenue is likely to start feeling exceedingly 
    The Congress will receive reports from the trustees when 
the general revenue funding of Medicare exceeds 45 percent. 
Because Part A has been growing slower than expected, the big 
guess is whether or not the 7-year window that is required for 
reporting might be triggered in 2005 or not.
    There are, I am afraid to say, no easy answers to fixing 
Medicare, yet alone Medicaid. The first thing, as you know, is 
that the population who will be going onto Medicare is going to 
be doubling over the period 2010 to 2030, as the so-called baby 
boomers retire. In addition, people are living longer, so there 
will be more people on the program, and they will be on it for 
a longer time. But it is actually more serious because the baby 
boom generation is followed by something called the baby bust 
generation, the unusually small number of cohorts who were born 
in the generation after 1965.
    We have had, at various points, discussions about how 
changing benefits or changing financing could impact Medicare, 
and, ultimately, probably some of both will occur. None of 
these options are easy, either in terms of the economics or in 
terms of the politics, and I think it is fair to say an 
important first opportunity was lost when the Medicare 
Modernization Act was passed, providing a new benefit but not 
seriously taking on the long-term funding problems of Medicare. 
I don't believe there was the will, at the time, to do that, 
but it is too bad that the carrot has already been given and 
now the hard part is ahead of us.
    There are two areas that I think get less attention, and I 
would like to talk about them as long-term strategies to help 
us reduce some of the spending pressures in Medicare. The first 
is rethinking retirement and the second is learning how to 
spend smarter.
    With regard to the rethinking retirement, we need to start 
thinking about Social Security and Medicare together. This is 
not a new concept; it received some renewed attention, however 
when Chairman Thomas of the Ways and Means Committee talked 
about it on one of the Sunday morning programs. This doesn't 
make the reform easier, but it is likely to produce better 
    More importantly is the need to rethink retirement at age 
65 as the norm. Again, as you know, this was a convention that 
was adopted at a time when people didn't normally live to or 
beyond age 65. While for some individuals, 65 is an important 
age for retirement because of increasing disabilities; 
nonetheless, far more survive now beyond 65, sometimes for 
substantial periods of time, 20 and 30 years, and with far 
lower rates of disability than used to occur. Social Security 
is slowly bringing this into acknowledgment by raising the full 
benefit age from 65 to 67. It is still an age where many people 
can be in retirement for as much as 40 or 50 percent of the 
time that they spent in the labor force.
    While there has been some increase in the number of people 
over age 55 who talk about expecting to work beyond the age of 
65, or even into their 70s, it is clearly not the norm. It is 
not the cultural expectation and it is not a policy that 
receives the full support of the Federal Government in terms of 
fiscal policies that can support continued labor force 
    Fortunately, employers will be encouraged to find ways to 
be more flexible in their employment policies because of that 
baby bust generation that I mentioned. The shortage of people 
coming into the labor force will help to encourage employers to 
find ways to bring in older workers or keep on older workers, 
just as they found ways to hire women in greater numbers in the 
1970s and 1980s.
    If the United States, in addition, can learn how to spend 
smarter on health care through strategies involving paying for 
performance, health IT, electronic medical records, and, 
importantly, changes in the tax code, it may be possible to 
reduce health-care spending growth to rates that are below 
their historic averages. If this does not happen, we are all in 
big trouble.
    As you have heard, and as I agree, it is difficult to think 
about fundamentally reforming Medicare without looking at what 
is going on in health-care spending as a whole. Not 
surprisingly, when you look over long periods of time, Medicare 
tracks overall spending pretty closely. It is a big part of 
overall spending, it is getting to be a bigger part of overall 
spending, and it represents spending by a very big and 
important powerful political block of people. It is hard to 
imagine having overall spending providing different services or 
different quality for a sustained period than is provided for 
the Medicare population.
    There are a lot of things we can do to spend smarter. The 
good news is that there are so many things we are doing wrong 
now in terms of not rewarding the providers who do it right the 
first time, and that practice in a conservative manner. We have 
a system that has very sophisticated medical devices, with a 
very cottage industry 19th century paper system of information. 
But, to be honest, we don't really know whether, if we spend 
smarter, we will just get better value for our money or whether 
we will really be able to slow down the spending growth. But 
given the alternatives that are available to us, it is an 
important step that we need to take.
    Let me just say, before I close, a few words about 
Medicaid. Medicaid involves a somewhat different set of issues, 
but there are some similarities in terms of the impact on the 
budgetary pressures that are being felt and the rates of growth 
that are occurring, annually now at about 8 percent. 
Predictions over the next decade show similar rates of growth 
as well.
    But the other reason it is important to think about 
Medicaid along with Medicare is that they cover some of the 
same or similar populations. While a majority of the people on 
Medicaid are families, the moms and kids, the majority of money 
on Medicaid goes to those who are aged and disabled.
    This is true even in the last 3-year period, where we have 
seen substantial increases in Medicaid spending, largely, as it 
has been reported, attributable to a growth in enrollment. 
While we may think that that primarily represents the effects 
of the recession, it is important to understand that even in 
this period, the impact was primarily from the growth and 
spending for the aged and disabled, even though their numbers 
were growing much slower than the growth of moms and kids or 
the families. Much of the experimentation that has been done in 
the past decade or decade and a half has involved the moms and 
kids. It is time now to see whether we can't think of better, 
smarter ways to provide support to the aged and disabled, and 
to the so-called dual-eligible?
    One last point is that the administration has raised an 
issue not just of providing flexibility, but trying to go after 
some of the financial creativity that the States have shown in 
trying to finance Medicaid expenditures. I think this is a very 
important step to take in a program that has lots of areas that 
need to be considered.
    Medicaid's primary strategy for moderating spending growth 
is the fact that it is a matching program. If and when the 
States find strategies to increase total spending by only 
increasing Federal spending, rather than by matching, you have 
fundamentally changed the nature, at least at the fiscal basis, 
of the Medicaid program. Making sure that this doesn't happen 
in the future is just one of the many things that needs to 
    On a broader level, the time is long overdue to think about 
the type of program we would like for our low-income 
populations for the 21st century. The current program leaves 
out many very poor people; it covers some people who are 
substantially above poverty; it provides extremely 
uncoordinated care for the very expensive dual-eligible 
population who are both on Medicare and Medicaid; and, finally, 
very little information is provided on the impact that this 
major program has on the health status of our most vulnerable 
low-income populations.
    Thank you.
    [The prepared statement of Gail Wilensky follows:]

 Prepared Statement of Gail R. Wilensky, Ph.D., Senior Fellow, Project 

    Mr. Chairman and members of the Budget Committee: Thank you for 
inviting me to appear before you. My name is Gail Wilensky. I am a 
senior fellow at Project HOPE, an international health education 
foundation. I have previously served as the Administrator of the Health 
Care Financing Administration (now the Center for Medicare and Medicaid 
Services) and also chaired the Medicare Payment Advisory Commission. My 
testimony today reflects my views as an economist and a health policy 
analyst as well as my experiences at HCFA and MedPAC. I am not here in 
any official capacity and should not be regarded as representing the 
views of Project HOPE.
    The purpose of my testimony is to consider some of the challenges 
resulting from our medical care entitlements, Medicare and Medicaid. 
While most of the attention in Washington is currently focused on 2006 
budgetary issues, the challenges from the entitlement programs grow 
even larger over time. My comments will reflect some of the short term 
challenges from the entitlements as well as longer-term challenges. The 
bulk of my testimony will be on the Medicare program but I will also 
include some observations about the Medicaid program.

                      MEDICARE'S SHORT TERM ISSUES

    The president's budget provides for $346 billion in outlays, which 
represents an increase of $50 billion or 17 percent over last year. For 
the period 2001-2006, outlays will rise at an average annual rate 
increase of 9.7%. Since the full drug benefit resulting from the 
Medicare Modernization Act begins in January of 2006, it is not 
surprising that most of the focus of this year's Medicare budget is on 
implementing the new drug benefit and that the budget includes a 
request for implementation funds. As a former HCFA Administrator, I 
have observed that including implementation funds is an aspect of new 
legislation that has been all too frequently overlooked and I commend 
the Congress for including it in the MMA.
    The Congressional Budget Office recently released its projections 
for the 10 year period, 2006 through 2015. According to CBO, Medicare 
spending is expected to grow at an average rate increase of 9 percent 
over the 10 year period, reaching $766 billion by 2015. Medicare 
spending which was 2.6 percent of GDP in 2004 is expected to be at 3.9 
percent of GDP by 2015. This substantial growth in spending may well be 
optimistic since it includes several years of reductions in physician 
fees, which resulted from the sustainable growth rate (SGR) included in 
the Balanced Budget Act. Since Congress did not let these reductions go 
into effect for the years 2003, 2004 and 2005, it is not clear how 
likely the Congress is to let these reductions go into effect over the 
next few years.
    CBO estimates Medicare Part D spending to grow from $47 billion in 
2006 which is a partial year ($75 billion in 2007) to $174 billion in 
2015, representing 23 percent of Medicare spending by that time. As the 
Committee is well aware, there has been considerable controversy about 
the differing estimates of Part D between CMS and CBO. CMS estimated 
Part D spending at $534 billion for 2004-2013 and CBO estimated $395 
billion for that same period. These differences primarily reflected 
different estimates of the percent that would enroll in the voluntary 
Part D, the percent of low income seniors that would enroll in Part D 
and the take-up rate by seniors in the new Medicare Advantage program. 
The difference, while large in absolute terms, represents slightly less 
than 3 percent of Medicare spending over the period 2004 through 2013.
    More recently, there has been a lot of attention given to the 
estimates of the cost of Part D for the period 2006 to 2015. The 
Administration estimates that cost at $720 billion. CBO's estimate of 
$796 billion is not exactly comparable because it doesn't allow for 
some of the adjustments included by the CMS actuary. CBO has also 
recently reiterated that its current estimate of the program costs for 
2004 to 2013 remains almost identical to its original estimate.
    The reason for the difference in the estimates for 2004 to 2013 and 
2006 to 2015 is not very complicated. The first 2 years of the program 
involved only the drug discount card program, some low income support 
and implementation expenses, all of which are relatively low costs. 
They were in the 10 year estimate made before passage of the bill. The 
10 years that start with the next budget, i.e. 2006, lose the first two 
``cheap'' years and add 2 years at the end. The end years are much more 
expensive because the full program will have been in force for 8 years 
and because of medical inflation and increasing numbers of seniors. 
There are a lot of difficult issues to face in Medicare but this 
difference in numbers is not one of them. However, what these numbers 
do very effectively is to give a glimpse of the true 10 year costs of 
the new drug benefit which will only continue to increase over time.

                     MEDICARE'S LONGER TERM ISSUES

    The longer term financial challenges to Medicare are documented 
annually in the annual report of the Social Security and Medicare Board 
of Trustees. While we are only about 2 months from the 2005 report, the 
2004 report lays out the issues sufficiently clearly for the purpose at 
hand. According to their intermediate projections, which includes a 
medical inflation factor less than the rate experienced, Medicare 
expenditures will grow to 7.7 percent of GDP by 2035. Medicare's 
expenditures are currently smaller than Social Security but Medicare 
costs are expected to exceed those for Social Security by 2024. Looking 
over the long haul, the full unfunded liability of Medicare has been 
estimated to be as high as $28 trillion, $8 trillion of which is 
attributable to the new drug benefit.
    The HI Trust Fund, which covers Part A of Medicare (inpatient 
hospital, nursing home and some home health care) and frequently 
receives the most attention from the public, is projected to exhaust 
its assets by 2019. HI assets are estimated to decline to 89 percent of 
annual expenditures by 2013, which would no longer meet the Trustees' 
test of short range financial adequacy.
    In many ways, however, the greater concern should be with the 
impact of Part B Medicare (which covers outpatient hospital, physician, 
lab and DME) and Part D (the new Prescription Drug benefit). There is 
not the same concern about insolvency that there is for Part A but 
rather the impact that the growth in these two areas will have on the 
budget and the Treasury. The reason is that Parts B and D are financed 
partly by premiums and co-payments by the elderly but mostly from 
general revenue.
    As a result of this concern, the Medicare Modernization Act 
requires that the Trustees monitor when they estimate general revenue 
funding of Medicare will exceed 45 percent of total Medicare outlays 
and to report if this will occur within the first 7 years of 
projections. Since CMS has just reported that Part A costs were lower 
than expected in 2004 and Part B costs were somewhat higher than 
expected, there is great interest to see if this will occur with the 
2005 report.

                      NO EASY ANSWERS FOR MEDICARE

    Diagnosing the problem with Medicare is much easier than finding 
viable solutions. There are several pressures that are driving up 
spending projections, including but not limited to the impending 
retirement of the baby-boomers. As all of you know, some 78 million 
baby-boomers will start turning 65 in 2011 and continue reaching 
retirement age over the next twenty years. This will double the over 65 
population currently covered by Medicare.
    But it is not just the increasing numbers of individuals who will 
be eligible for Medicare that becomes the issue. Those reaching 65 can 
be expected to experience increased longevity which means they will be 
on Medicare for longer periods of time than their predecessors. And 
almost as important, the baby-boomers are followed by the ``baby-bust'' 
generation, the unusually small numbers of cohorts born the generation 
after the boomers. This means that just as the ranks of seniors begins 
to surge, the ratio of workers to support them will begin to decline - 
a fiscal ``double whammy'' in the making.
    The most obvious types of options--changing benefits, changing 
eligibility or changing the financing of Medicare can affect the 
financial future of Medicare but none are easy-either in their politics 
or in their economics. An important opportunity was lost when the MMA 
was passed, providing an important new benefit to seniors, without also 
substantially modifying Medicare. But in fairness to the Congress and 
the Administration, I do not believe there was the political will at 
that time to take on these difficult issues. An important and little 
noticed component of the MMA is the provision that substantially 
reduces the Part B subsidy for higher-income seniors starting 2007, 
which could provide an important precedent for introducing other 
provisions that relate government contributions or subsidies to the 
income and/or wealth of baby-boomers.
    Two others areas may offer the potential to ease future financial 
burdens from Medicare and need to be explored further. The first is to 
rethink the whole concept of retirement and the second, is to find ways 
to ``spend smarter.''

                         RETHINKING RETIREMENT

    The notion of thinking about pensions or Social Security and 
Medicare as joint programs for retirees is not a new concept but has 
received renewed attention following a recent mentioning of it by 
Chairman Thomas of the Ways and Means Committee. This doesn't make the 
reform of Social Security and Medicare any easier but may lead to 
better results.
    Even more important, is the need to reconsider retirement at age 65 
as the norm. As you probably are aware, the choice of age 65 as an 
expected retirement age occurred at a time when longevity was far less 
than it is at present and when the disability rates of those who 
survived into their sixties and seventies was far greater than it is 
today. Social Security is in the process of moving from age 65 to age 
67 for full benefits, still an age where the time in retirement could 
approach 40 percent or more of the time spent in the work force.
    While there has been some increase in the numbers of people over 
age 50 that expect to spend some time in their sixties and even 
seventies working, it is hardly the norm. Changing this expectation 
would require changes in fiscal policies as well as cultural 
expectations regarding retirement in order to encourage continued and 
more flexible labor force participation. The scarcity of new labor 
force entrants, associated with the baby bust generation should 
encourage employers to be more creative in their treatment of seniors 
just as they were with their employment of women in the 1970s and 
1980s. But it is important to make sure that fiscal and other 
government policies are supportive of continued labor force 
participation as well.

                            SPENDING SMARTER

    Finally, if the United States can learn to spend smarter in health 
care, through strategies involving pay-for-performance, health IT, 
electronic medical records, and importantly, changes in the tax code, 
it may be possible to reduce the growth in health-care spending to 
rates that are below their historic averages. This will only happen, if 
these changes occur in all sectors of health care and not just in 
    To no surprise, over long periods of time, Medicare tracks the rest 
of health-care spending pretty closely. First, seniors spend 
substantially more per person than the younger population which means 
that even when they represented only 12 percent of the population, they 
accounted for a disproportionate share of spending on health care. As 
seniors become close to 25 percent of the population, they will have an 
even bigger effect on overall spending levels. Secondly, their relative 
growth in numbers combined with their high voting participation rates, 
will give them even greater political clout than they have had in the 
past. It is difficult to imagine this powerful group tolerating a 
health-care system that was in any important way ``lesser than'' what 
exists for the rest of the population.
    ``Spending smarter'' is a theme that has received at lot of 
attention lately. While it seems pretty clear that we can and should 
have better information on relative cost-effectiveness and clinical-
effectiveness of alternative therapies and procedures as well as better 
incentives for both patients and providers, not much is known on 
whether this will slow rates of spending growth relative to historic 
averages or just provide better value for the money spent. Similarly, 
introducing information systems in health care and making the 
information side approach the sophistication of the device and 
procedure side of medicine should provide substantial one-time savings. 
Whether these changes would reduce rates of spending over time is less 
clear. However, given the alternatives to slowing spending otherwise 
available, improving information and incentives, changes to the tax 
code and adopting modern information systems seems the most promising 
strategy available.


    Although Medicaid represents a somewhat different set of issues, 
the sustained impact of a growing Medicaid program has some similar 
effects on the budgetary pressures which will be felt by the Federal 
Government. The Federal share of Medicaid spending has increased from 
$129 billion in 2001 to $193 billion for 2006, an average annual 
increase of 8.3 percent. The CBO predicts that Medicaid will grow at an 
average rate of 8.7 percent through 2015, reaching $392 billion for the 
Federal share by 2015.
    It is important to consider the effects of Medicaid along with 
those of Medicaid for several reasons. First, the budgetary effects are 
significant and the growth rates not dissimilar. Projections by CBO 
have indicated that if Medicare and Medicaid were to continue to grow 
at a rate of 2 percentage points faster than the GDP, which is close to 
its historic average, these two programs would account for 20 percent 
of the GDP by 2040, the approximate current share represented by the 
entire Federal budget. If the rates of growth were reduced to GDP plus 
one, spending on these two entitlements would approximate 12 percent of 
GDP. Thus, the need to think hard about ways to slow their growth rate 
is crucial.
    The second reason it is important to think about Medicare and 
Medicaid together is that the majority of expenditures go to the aged 
and disabled populations even if the majority of Medicaid participants 
are neither aged nor disabled. A recent study by the Urban Institute 
indicated that much of the growth in Medicaid spending from 2000 to 
2003 was attributable to a growth in enrollment. While that might not 
sound so surprising since much of that period was characterized by slow 
job growth coming out of a recession, less attention has been given to 
the fact that even here, a majority of the spending growth was 
attributable to the aged and disabled. This was true even though the 
numbers of aged and disabled were growing more slowly than the numbers 
in families.
    So much of the experimentation with finding more efficient (or just 
cheaper) ways to provide in the past has focused on families and not on 
the aged and disabled but it is the latter two groups that represent 
the majority of spending and also spending growth. Hopefully some of 
the flexibility that the Administration is proposing for the provision 
of long term care services for the elderly and disabled will help spur 
the state's creativity in these areas.
    The states' creativity raises another issue important to a better 
understanding of Medicaid spending growth. When pressed financially, 
states have shown substantial creativity in finding ways to increase 
Federal dollars without a concomitant increase in their own spending. 
Sometimes the increased spending has gone into additional spending on 
Medicaid or other health-care programs and sometimes not. In either 
case, a program that relies on state matching as the primary mechanism 
for cost control cannot function if the states' are not contributing 
their appropriate shares. I applaud the Administration for introducing 
a series of steps to make sure the states are contribution their 
legally determined match including restricting intergovernmental 
transfers and Medicaid payments that are in excess of actual costs of 
    On a broader level, the time is long overdue to rethink the type of 
program for low-income populations that makes sense for the 21st 
Century. The current program leaves out many very poor individuals, 
covers some who are very substantially above poverty, provides very 
uncoordinated care to the so-called ``dual-eligibles'' who are on both 
Medicare and Medicaid and provides very little information on the 
impact that Medicaid and SCHIP has had on the health status of the low 
income populations being served.

    Chairman Nussle. Thank you, Dr. Wilensky.
    Next we will hear from Ron Haskins. Dr. Haskins is from The 
Brookings Institute, and Dr. Haskins has also testified before 
the Budget Committee.
    We welcome you back, and we are pleased to receive your 

                    STATEMENT OF RON HASKINS

    Mr. Haskins. Thank you very much, Chairman Nussle. And 
Ranking Member Spratt and members of the committee, as a former 
congressional staffer for the Ways and Means Committee, and as 
a citizen, as kind of a cranky budget analyst, I am very 
pleased to come before the committee today. I am also pleased 
to be of somewhat advanced age, because I think in this debate 
that we are going to have now, for the fourth time in three 
decades, about how we are going to get the Federal books in 
order, it is necessary for everybody to be extremely frank and 
honest, and it is good to have people involved who don't 
necessarily have a political future and can call them the way 
they see them. So I would like to do that.
    Chairman Nussle. Can we ask what your age is? And do we 
need to swear you in before we----
    Mr. Haskins. You probably should swear me in, but my age is 
    Chairman Nussle. OK. Thank you.
    Mr. Haskins. Thanks to a program that I am about to 
condemn, though, I am doing OK.
    For the last 2 years at Brookings we have been studying the 
budget deficit, and I think you can put almost all of us down, 
both left of center and right of center, as being in the 
alarmist camp. We think something definitely has to be done 
about the deficit.
    This year we decided to include a political chapter, which 
Alice Rivlin, a former head of the Congressional Budget Office 
and Office of Management and Budget (OMB), and Belle Sawhill, a 
noted scholar, economist, and also a former official in the 
Clinton administration at the Office of Management and Budget, 
and we decided to do some interviews. So we talked with 20 
budget experts, Washington insiders, people who have been 
involved in budget deals in the past; people like Bob 
Reischauer, Rudy Penner, Bill Frenzel, Tom Downey, and several 
others, 10 Republicans and 10 Democrats.
    I would like to tell you, Mr. Chairman, Mr. Spratt, and 
members of the committee, that there were three factors that 
all of them saw as crucial to the previous big bargains that 
involved taxes and spending the Congress has put together, in 
1983 for Social Security; in 1986 the big tax reform measure; 
and the budget deals of 1990, 1993, and 1997. The first is 
Presidential leadership, the second is bipartisanship, and the 
third is some external threat that the Members of the Congress 
saw as saying to them we better do something or there will be 
serious consequences.
    We are, this year, I think for the first time in an obvious 
way, seeing Presidential leadership. And the President has, for 
the first time, put a budget on the table that does contain 
serious cuts, as you can tell. If you read the editorial page 
of The Washington Post and New York Times, the sky is falling 
and so forth, which always happens whenever you have a serious 
budget proposal. But the President's leadership is somewhat 
limited because the President would be expected to provide 
leadership for spending cuts only, not for tax increases.
    So this brings us to the second important ingredient of a 
budget deal, which is bipartisanship. And I think, frankly 
speaking, that the possibility of next fall, when we pass some 
huge bill of 2,000 pages, that contains all of our provisions, 
that they will be almost exclusively cuts. There possibly could 
be some loophole closings, but I certainly don't think that 
there is a groundswell of support among Republicans or in the 
White House for any kind of major tax increases. So that means 
that the possibility of a bipartisan agreement and substantial 
deficit reduction that involve both tax increases and spending 
cuts is probably quite modest.
    And, finally, the external threat. Unfortunately, our 
budget situation is such that these external threats, people 
talk about them incessantly, but so far nobody has really been 
hit by them. It is reputed that the Vice President once said in 
the White House that no one ever lost an election because of a 
budget deficit. I don't know if that is true or not, but I 
think that does accurately reflect that the threats are 
possible in the future. They are not things that we can measure 
easily. We can't say that this State or this group of people 
are going to have a serious problem if we don't do something.
    The only person that we interviewed that really thought 
that the threats were about to hit us--by the way, everybody 
thought there were threats, but they couldn't tell when they 
would hit. Alice Rivlin, however, was somewhat confident that 
within the next couple of years, that the markets are going to 
go, to use her term, wobbly. And when that happens, Members of 
Congress, Republicans and Democrats, and members of the 
administration are going to get calls from businessmen, from 
people on Wall Street, and they are going to say, you need to 
do something about the deficit.
    The other possibilities, of course, are huge falls in the 
stock market, if the Chinese woke up one morning, decided not 
to buy our debt anymore. You know, there are a number of 
external threats that could really drive the Congress to 
    So we have leadership for budget cuts and I think a very 
low possibility of tax increases. So we probably will not have 
a bipartisan deal. I think an external threat would be a good 
thing, but I hope the threat doesn't actually come true before 
we do something.
    Now, the President's plan, as nearly as I can tell, is to 
do something like cut around $20 billion next year. And the 
head of OMB, Mr. Bolten, was reluctant to say what a 5-year 
figure was, because he thinks estimates are not very accurate, 
which I think we all agree with, but it is probably something 
on the order of $300 to $350 billion.
    The main point of my testimony is that this should be the 
absolute minimum goal for the Congress, whether it is 
bipartisan or done primarily by Republicans. I am inclined to 
think it will be the latter. So you all are looking for at 
least $20 billion in cuts, not necessarily the ones the 
President recommended, but I think that is the place to start.
    Now, how do we get there? First, I want to make a couple of 
procedural comments. The first one is that I think that most 
scholars agree the PAYGO was a good innovation and served its 
purpose. Congress figured out eventually how to find its way 
around PAYGO after the 1997 agreement, but PAYGO was a pretty 
good procedure and it helped people who were intent on cutting 
the deficit. You know very well that we have had kind of a 
lively discussion about PAYGO recently, and there is a great 
deal of willingness to have PAYGO apply to cuts but not to tax 
increases, so I don't know exactly how you are going to resolve 
that, but PAYGO of either form would be helpful.
    The second thing, and by far the most important, is 
reconciliation. I believe we have not done reconciliation since 
1997, but reconciliation is definitely a powerful weapon for 
people who want to cut spending or increase taxes in order to 
reduce the deficit. And it is especially powerful because it 
can get around the 60 volt problem in the Senate. So this puts 
the House on an even par with the Senate when it comes to 
whatever actions we decide to take, and I think that is 
    So reconciliation I think is something the Budget Committee 
should examine very carefully, and it probably would not go 
unnoticed in this room that reconciliation would give the 
members of the Budget Committee a lot of leverage that they 
otherwise would not have, because they can give instructions to 
the committees of jurisdiction.
    And, third, I think we should take another run at the line-
item veto. The Congress passed the line-item veto on a 
bipartisan basis during the Clinton administration. The first 
time Clinton used it, the Supreme Court found it to be 
unconstitutional, but there are lots of ways to do a line item 
veto, and I think the Budget Committee should look for ways and 
we should try a new way to have a line item veto.
    Now as for specific cuts. I have been asked to talk 
primarily today about entitlements, like everybody else, and to 
focus on income security. I present lots of information about 
past spending and projections in the future among income 
security programs, but let me bring a few things to your 
    First of all, compared with Dr. Wilensky's testimony, I 
think what I am about to tell you could be accurately called 
cats and dogs, because the spending in question here, compared 
to Medicare and Medicaid and Social Security is quite modest. 
But, nonetheless, if we are going to try to get a minimum of 
$20 billion, this is a good place to start. There are some good 
ideas here.
    There has been huge growth in recent years, but that is 
misleading, I believe. If you look at the projections, the 
growth in income security is going to level off quite a bit; 
not completely, but will level off quite a bit.
    So where would we look if we want to have some cuts in 
income security? The first place I would look is Federal 
retirement. Now, I fully realize that sitting before me are 
Members of Congress who themselves are someday going to be the 
beneficiaries of Government retirement programs, so I will be 
cautious in my remarks.
    However, the concept that people should be able to retire 
at age 40, 41, 42, or 43 and get a substantial benefit is part 
of what is driving our retirement programs off the cliff. We 
ought to at least have a lively discussion about why don't we 
wait until people are at least 50, 55, or 60, before they can 
start drawing these benefits? That alone would dramatically 
reduce the Federal deficit in the future, and we need to think 
about the future. The big problems that Dr. Wilensky talked 
about are coming 10 and 20 and 30 and 40 years down the road.
    Second, we could do a lot of things with the COLA. I will 
talk more about that in just a minute. The cost of living 
adjustment could be done on a different basis.
    And, third, there are other changes that we could make. For 
example, we could have a new procedure for defining the 
original benefit. We could use, for example, rather than 3 
years, which is now used, the average of the highest 3 years to 
establish the benefit. We could use the highest 5 years, and 
that would automatically reduce everybody's benefit, and that 
would save benefits of dollars. There is a table in my 
testimony that shows how much it would save.
    Secondly, unemployment insurance. I was with the Ways and 
Means Committee for many years, where I studied unemployment 
and we had lots of hearings. Unemployment is a program that is 
far too generous. Now, here is what we have. We have a welfare 
system now, after 1996, that is hell on wheels requiring people 
to work. If they don't work, they lose their benefit. And it 
had a dramatic impact; the roles have declined 60 percent.
    And, yet, in unemployment insurance, with people with work 
history, more education, much more experience in the labor 
market, the work requirement, which we have in the law but it 
is observed in the breach, we don't have strong work 
requirements. If we had a strong work requirement in 
unemployment insurance, we would save a lot of money. So that 
would be one thing that we should do, is have a much stronger 
work requirement in unemployment insurance. There is no reason 
people should be able to sit around for 6 months and draw an 
unemployment insurance check, or even longer than that during a 
    Third, Supplemental Security Income (SSI). I want to point 
out to the members of this committee I urge you to go back and 
look at the changes that we made in 1996. We made a whole 
series of changes. I had no doubt that those changes would save 
at least $50 billion over 10 years. The Rand Corporation 
studied just the changes in the child SSI program, which I 
think were quite reasonable and passed Congress on a bipartisan 
basis and were signed by President Clinton. The Rand 
Corporation estimates that we saved $24 billion over 10 years 
just on the changes in the child SSI program. And I would point 
out to you that SSI is one of the most rapidly growing programs 
within the income security super function, so it bears careful 
    Next, child nutrition. We all know and love the child 
nutrition programs, and I am going to say something in just a 
moment about programs for low-income families. But there is a 
part of the child nutrition program that provides a subsidy for 
school lunches for people who are not low-income, they are over 
$28,000 a year. Now, that could lead to some extreme 
administrative difficulty, the schools certainly would not like 
it, there would be all kinds of lobbying, like there would be 
for any cut, but the principle of subsidizing school lunches 
for families earning $50,000, $60,000, or $70,000 is something 
that some Americans might think is not a wise thing to do.
    And finally let me say that the wonderful Congressional 
Budget Office every 2 years publishes a volume that used to be 
called ``Spending and Revenue Options''; it is now called 
``Budget Options.'' And as luck would have it, a brand new one 
came out just this week, and it is full of options for cutting 
spending; also for raising revenues, which might go somewhat 
unused on the right side of this aisle.
    There are all kinds of great suggestions, and in the area 
of income security, there are 13. They left one out from 2 
years ago, which I don't know why, but I have a table in my 
testimony that shows you that if we picked up on all the 
options that they lay out--they are not recommendations from 
the Congressional Budget Office, but options--we would really 
save a tremendous amount of money: over 5 years, almost $26 
billion, and over 10 years almost $76 billion. So that gets you 
a long ways toward what I think ought to be the absolute 
minimum that we should try to do.
    Now, let me just say I, for most of my adult life, was a 
researcher, and then I was with the Ways and Means Committee 
and I was the head of the Welfare Subcommittee, the staff 
director of the Welfare Subcommittee of Ways and Means. And I 
am at Brookings now, and the project that I work on is called 
Welfare Reform and Beyond. So although I am conservative, I do 
have a special concern with programs for low-income Americans, 
and, to my way of thinking, low-income Americans, millions of 
them, have an even greater claim on public concern at this 
point because so many of them now work, and work at low-wage 
    So I am hoping that, in making budget cuts, you would look 
carefully at programs that support low-income Americans, and 
cut where there is waste and abuse and so forth, but be 
cautious, because these programs support lots of low-income 
working families that are really dependent on the benefit, and 
many, many of those families, disproportionately those families 
are raising the next generation of Americans. So I urge 
    In conclusion, I think we are on the right path at last. I 
wish we had started several years ago, but we are on the path 
of deficit reduction. And under the leadership of this 
committee, and specially with strong reconciliation 
recommendations from this committee, Congress and the President 
could significantly reduce spending. If taxes were on the 
table, we could do more, and we could do it in a bipartisan 
fashion, but that is likely not to be the case. But even 
without taxes we can get at least part of the way there, and 
that would be better than nothing.
    Thank you.
    [The prepared statement of Ron Haskins follows:]

Prepared Statement of Ron Haskins, Senior Fellow, Economic Studies, the 
                         Brookings Institution

    Chairman Nussle, Ranking Member Spratt, and Members of the Budget 
Committee, I consider myself fortunate to address the members of the 
House Budget Committee. Along with the Appropriations Committee, this 
committee has the toughest but most important job in Congress this 
year. Our Nation faces a budget crisis that will soon be of historic 
proportions. Something must be done--and the buck stops here. As a 
citizen, a scholar, and a former Congressional staffer, I am honored to 
have the opportunity to provide some humble advice to you who must make 
momentous decisions.
    The budget problem has two dimensions. First, the short-term 
deficit is too high. This year the deficit is expected to be around 
$427 billion according to the Office of Management and Budget (OMB). 
Adding the costs of the war in Iraq would push the deficit still 
higher. If Congress extends the tax cuts, enacts a reasonable 
adjustment of the Alternative Minimum Tax, and allows domestic 
discretionary spending to increase in proportion to population growth 
and inflation, the deficit will average more than $500 billion over the 
next decade. Some observers take comfort from the fact that deficits 
associated with the recessions of the mid-1970s, the early 1980s, and 
the early 1990s were higher as a percentage of Gross Domestic Product 
than the current deficit. However, in all these cases Congress and the 
president took very strong action to reduce the deficits, both by 
cutting spending and by increasing taxes. But so far in this new 
century, neither Congress nor the president has taken serious action to 
reduce the near-term deficits. Worse, the current deficit could be 
considered more threatening than the former deficits because we are now 
on the cusp of baby boom retirement, an unfolding event that will place 
huge strains on federal finances in the decades ahead.
    The lack of action on the deficit is perplexing for those of us who 
played a role in the Republican assault on the deficit after capturing 
the House and the Senate in the elections of 1994. As Bill Thomas of 
California, now the Chairman of the Ways and Means Committee said, ``We 
can no longer tolerate mere promises of fiscal restraint. To do so 
would saddle our children, and children's children, with uncontrollable 
and runaway deficits'' (Congressional Record, 1995). How can it be that 
in 1995 Republicans believed deficits to be the governmental version of 
the apocalypse and now many Republicans can muster little more than a 
yawn when the deficit figures are recited?
    Nor do the figures I have presented so far give a complete picture 
of the magnitude of the deficit threat. The second budget problem we 
face is the long-term deficit. The leading edge of baby boom retirement 
begins in 2008 and intensifies in subsequent decades. The Medicare 
trust fund will be the first to go belly up as a result of additional 
spending on retirees. According to its trustees in last year's report, 
Medicare will be in the red by 2019, seven years earlier than the 
trustees predicted in their annual report just one year earlier. Once 
Medicare goes broke, its financial imbalance will intensify 
dramatically in subsequent years. Social Security, again according to 
its trustees, is in better financial shape, but only in the sense that 
it goes broke later than Medicare. The Medicare Trustee's report 
informs us that the additional resources needed to meet the projected 
expenditures of Social Security, Medicare, and Medicaid over the next 
15 years is $33.2 trillion (Board of Trustees, 2004, p. 183).
    One of the more alarming perspectives on the condition of the 
federal budget is that if Congress makes the tax cuts permanent, enacts 
a reasonable fix on the Alternative Minimum Tax, and increases domestic 
discretionary spending to keep pace with inflation, Gene Steuerle of 
the Urban Institute and a former Treasury official in the Reagan 
administration calculates that interest on the debt, Medicaid, 
Medicare, Social Security, and Defense will consume all federal 
revenues by 2015, leaving no remaining funds to operate the rest of 
government (Steuerle, 2003).
    These are deeply troubling scenarios that serious and nonpartisan 
analysts have assured us will occur during our lifetime. We're eating 
cake, playing our fiddles, and maximizing consumption while passing the 
bill to our children and grandchildren. Something must be done.
    The President has proposed the toughest budget since Republicans 
and Democrats reached an agreement to balance the budget in 1997. Its 
cuts in social programs have been widely criticized, often in language 
of the most alarmist sort (Krugman, 2005). But here is the main point 
of my testimony: the deficit reduction achieved by the president's 
budget is the least Congress should do this year. I hope there will be 
bipartisan agreement on this point, but even if there is not, then 
Republicans, as the majority party, must accept responsibility for 
achieving at least the $20 billion in spending cuts next year and 
perhaps on the order of $300 billion over 5 years proposed by the 
president (Andrews, 2005). Given the size of the deficit and the burden 
it promises to impose on our children and grandchildren, the Bush cuts 
which have been so widely criticized are not much more than a promising 
down payment on the cuts that will be needed to reduce the deficit by 
half on a permanent basis.
    The action needed to cut the deficit by half on a permanent basis 
would be much easier if Republicans were willing to consider tax 
increases--or at least consider not extending all the tax cuts put in 
place since in 2001. Even former Senator Nickles, the immediate past 
chair of the Senate Budget Committee and one of the strongest 
supporters of tax cuts, recently told the Washington Post that some 
``adjustments'' might need to be made in tax cuts and other Republican 
policies (Weisman and Baker, 2005). Most of those who follow politics 
in Washington seem to believe that it is exceptionally unlikely that 
Republicans in Congress or President Bush will seriously consider tax 
cuts. So be it. Republicans are in control of both ends of Pennsylvania 
Avenue and, if they can hold their votes, they can protect their tax 
cuts and make them permanent. But if Republicans want to reestablish 
themselves as the party of fiscal rectitude and to alter the Nation's 
current course of simply writing checks that our children and 
grandchildren must cover, it follows that their spending cuts will have 
to be all the deeper. It would be inconsistent with family values to do 
any less than prepare for the retirement of the baby boom by getting 
our fiscal House in order--in this case through truly remarkable cuts 
in spending.
    Last year, for a book on the fiscal crisis published by the 
Brookings Institution, along with Alice Rivlin, the former head of both 
OMB and the Congressional Budget Office (CBO), and Isabel Sawhill, a 
senior official at OMB in the Clinton administration, I wrote a chapter 
exploring the level of spending cuts that would be necessary to bring 
the budget into balance within a decade (Haskins et al., 2004). Our 
search for spending cuts was driven by principles supported by the 
Republican party; namely, smaller government, minimal government 
interference in the economy, more power and control at the state level, 
and a minimum of reliance on new revenues. Figure 1 shows the levels of 
spending cuts and increased revenues required to balance the budget 
within 10 years under our budget assumptions. Our spending cuts 
     $138 billion in commercial subsidies such as the Export-
Import Bank, the Federal Aviation Administration, and various Energy 
Department programs,
     $123 billion in devolution of programs such as the entire 
Department of Education to the state and local level,
     $7 billion from the list of wasteful spending originated 
by this committee last year,
     $58 billion from non-defense discretionary programs, and
     $74 billion from entitlement programs.
    After making this spectacular level of cuts, we still needed $134 
billion in revenues to achieve the $534 billion in combined spending 
cuts and revenue increases required to balance the budget in 2014 under 
our baseline assumptions. To comply at least in part with Republican 
goals, the revenue raisers did not include any changes in the personal 
income tax rates. Rather, revenue was obtained primarily by improved 
enforcement of the tax code, freezing the estate tax at its 2009 level, 
and increasing taxes on cigarettes, alcohol, and motor fuels.

    A major purpose of the Brookings exercise was to demonstrate the 
drastic, unprecedented level of spending cuts that would be necessary 
to actually balance the budget within a decade. Although we did not 
realize it when we put the deficit balancing plan together last year, 
this exercise also shows how modest are the cuts proposed by President 
Bush this year. I would not minimize the difficulty of actually 
enacting the cuts proposed by the president, as shown by the bitter 
response they have provoked from advocates, editorial writers, and a 
number of Democrats in Congress. But perhaps members of this Committee 
who are preparing to withstand severe criticism for being fiscally 
responsible will take some comfort from the much greater level of cuts 
outlined in Figure 1.
    In turning to the search for specific places to cut spending, I 
have been asked by the Chairman to report to the Committee about 
potential cuts in the Income Security function of the federal budget. 
Based on the Historical Tables volume from the President's 2006 budget 
(U.S. Office of Management and Budget, 2005, pp. 53-70), Figure 2 
presents changes in spending within each of the six subfunctions that 
comprise the Income Security function. All the figures are expressed in 
inflation-adjusted 2004 dollars. Several points are notable. First, the 
General Retirement subfunction, which consists primarily of railroad 
retirement, is the least interesting because it is low (under $10 
billion every year) and declining. Second, Unemployment Insurance and 
Nutrition move in rough accord with the economy--they go up when the 
economy is in recession and down in times of expansion. Both grew quite 
considerably during and following the brief recession of 2001 but their 
growth is now moderating. Housing has grown throughout the period, 
especially in the mid-1990s and since 2000. Between 1980 and 2004, 
housing expenses increased from around $11 billion to over $36 billion.
    Federal Retirement, which includes federal civilian and military 
retirement and disability programs, has been growing relentlessly. Over 
the nearly 25 year period, it grew from $53 billion to nearly $89 
billion. Retirement policy for federal employees deserves special 
attention. Spending is huge and growing, and given the high level of 
government employment, this account will continue to be very high in 
the future. Although controversial, it could be argued that providing 
retirement benefits to someone who is 42 years old because they have 
worked for 20 years is somewhat extravagant. Perhaps retirement 
benefits should not begin until recipients reach 55 or even 60 or 65 
years of age. Those currently receiving retirement benefits could 
continue under the current rules, but those who retire after some 
future date could be phased in a year at a time to delay their receipt 
of retirement benefits.

    The remaining subfunction is the ``Other'' category. Figure 3, 
which portrays the spending history since 1980 of several of the most 
important constituent programs in the Other subfunction (U.S. Office of 
Management and Budget, 2005, pp. 135-140), shows that growth is 
beginning to moderate in Supplemental Security Income (SSI) and foster 
care/adoption. The only program that appears to be growing rapidly is 
the Earned Income Tax Credit (EITC), although more recent data show 
that the rapid growth of EITC has now ended as well. In fact, as the 
projections in Historical Tables show, all the programs in the Other 
category moderate their recent rapid growth rates and several actually 
decline in constant dollars (including the EITC) between 2005 and 2010.

    There are at least three lessons emerging from these program trends 
within the Income Security function that can prove instructive to 
anyone interested in controlling federal spending. The first is 
represented by SSI. The 1996 welfare reform legislation and associated 
legislation made very substantial reforms in the SSI program. These 
included removing drug and alcohol addiction from the list of 
qualifying conditions for SSI; reducing the number of children 
receiving SSI by changing the definition of childhood disability and 
terminating one of the major procedures for determining whether a child 
was disabled; and ending SSI benefits for noncitizens who enter the 
country after 1996. The Rand corporation has estimated that just the 
reforms of the SSI program for children saved nearly $22 billion over 
the 10-year period between 1996 and 2005 (Rogowski, 2002). As this 
example illustrates, Congress can enact modifications to programs by 
limiting eligibility to produce considerable savings over the years. It 
should be noted that in the case of SSI, the primary rationale for 
enacting the program changes that resulted in savings was not to save 
money but to remove benefits from individuals who, under a reasonable 
set of criteria, should not be eligible for benefits. It is possible to 
imagine that the Budget Committee or committees of jurisdiction for SSI 
and a host of other programs would carefully examine all the programs 
under their jurisdiction to determine whether program integrity is 
being maintained.
    A second lesson on ways to save money is illustrated by the Family 
Support line item. The major program in this line item is the Temporary 
Assistance for Needy Families (TANF) program, formerly Aid to Families 
with Dependent Children (AFDC). AFDC was an open-ended entitlement 
welfare program that cost more money almost every year. In the 30 years 
between 1962 and 1992, enrollment and spending grew in all but 7 years 
(U.S. Department of Health and Human Services, 2004, p. A9). The 
authors of the 1996 welfare reform legislation, based largely on 
principles that suffuse Republican thinking about welfare programs, 
believed that too many young people who could support themselves were 
relying on public welfare. AFDC and other welfare programs were, in 
short, luring people into dependency. In 1996 the program was converted 
to a block grant with fixed funding and states were required both to 
limit adults receiving welfare to a maximum of 5 years of benefits and 
to impose strong work requirements on their caseload. The block grant 
has kept expenditures on the TANF program flat for nine years. Taking 
inflation into account, federal spending on TANF, as measured by budget 
authority, has actually decreased every year. In large part because of 
the time limit and work requirements (plus a hot economy), families 
left welfare as never before and took jobs. As a result, cash welfare 
payments to families dropped from $12.0 billion in 1995 to $4.6 billion 
in 2002, a drop of over 60 percent (U.S. Department of Health and Human 
Services, 2004, p. A12); and states used most of the money saved to pay 
for child care and other work supports that helped families stay in 
jobs (there were also substantial savings on food stamps and Medicaid). 
Perhaps the best part of the story is that throughout this period, the 
average total income of these families increased every year and child 
poverty declined every year. In fact, the decline in child poverty was 
the first sustained decline since the early 1970s and poverty among 
black children reached its lowest level ever. Thus, by working rather 
than remaining on welfare, families had more money, children benefited 
from reduced poverty rates, and taxpayer payments for welfare declined 
substantially. Under some circumstances block grants to states 
constitute both good policy and an effective tool for saving money 
(Haskins, forthcoming).
    A third point illustrated by spending developments in income 
security programs is that a good economy causes spending in many 
programs for low-income families to fall. The number of mothers leaving 
welfare for employment was undoubtedly boosted both by the sweeping 
changes in welfare programs and by a growing economy that produced jobs 
these mothers could fill. The fact that mothers were earning money 
rather than receiving welfare reduced welfare spending on the TANF 
program. Similarly, outlays on food stamps, the biggest program within 
the nutrition subfunction in Figure 2, fell substantially as the 
economy grew between 1995 and 2000. When the economy fell into 
recession after 2000, spending on food stamps began to rise again. The 
unemployment insurance program shows an even greater responsiveness to 
the economy than TANF and food stamps. In 2000, the year before the 
mild recession of 2001 hit, about $21 billion was spent for 
unemployment insurance benefits. After the brief 2001 recession, 
spending on unemployment benefits jumped to $27 billion, $49 billion, 
and $51 billion in 2002, 2003, and 2004 respectively. As the pattern of 
outlays in these three programs demonstrates convincingly, spending 
leaps dramatically during recessions. It follows that federal 
policies--including low tax rates and modest regulations--that 
stimulate the economy will have a major impact on helping reduce the 
deficit. Conversely, if the Nation enters a recession in the next 
decade or so, federal spending and as a result the federal deficit will 
leap far beyond the projections in the CBO baseline.
    In pursuing the analysis of potential savings from Income Security 
programs, I turn now to the very useful volume on Budget Options 
published by the Congressional Budget Office (Congressional Budget 
Office, 2005). This volume of possible cuts in spending and increases 
in revenues is undoubtedly well known to members of the Committee. Of 
course, CBO does not endorse any of the spending cuts or revenue 
raisers in the volume, but the volume is tailor-made for a committee 
looking for ways to reduce spending. Figure 4 summarizes the thirteen 
possibilities for reducing spending in Income Security programs from 
CBO's 2005 volume and one from their 2003 volume. Enacting all these 
cuts would save almost $26 billion over 5 years and nearly $76 billion 
over 10 years.

    I would not refer to the cuts in Income Security programs outlined 
by CBO as low-hanging fruit, but they are all reasonable reforms that 
would do minimum damage to those who would have additional costs 
imposed on them. Some of the cuts would be criticized because the costs 
are imposed on low-income individuals or families. However, many of the 
options could be tailored so that they impose low or even no costs on 
families below some income criterion, say, the federal poverty line (in 
which case the savings would be reduced). A few of the options, such as 
reducing foster care administrative and training costs, limiting the 
cost-of-living adjustment for federal retirees, and increasing the 
insurance rate on pension plans would impose no direct costs on poor 
    As this brief analysis of potential spending cuts in the Income 
Security function demonstrates, there are no painless spending 
reductions to be made in the federal budget. In policymaking, fool's 
gold is the search for policies that have all benefits and no costs. 
The task of budget balancing in which Congress should engage this year 
is almost always a zero-sum game. My personal view is that, although 
the pain cannot be avoided, Congress should do its best to distribute 
the pain across demographic groups and regions of the country. 
Moreover, as someone who has worked on programs for poor and low-income 
families for most of my adult life, I think Congress should minimize 
reductions in benefits for poor families, especially those that work.
    But regardless of the specific criteria followed by the Budget 
Committee and the authorizing committees that must make final 
decisions, there is no escaping the heavy burden now being imposed on 
the Nation's future by the federal deficit. We are in the early stages 
of something very much like a crisis, except that it will last for many 
decades and will impose costs of uncertain magnitude and timing. The 
prudent course is to begin making the tough decisions this year that 
will put the budget on a path that leads to substantial deficit 
reduction and that will maintain the deficit at an acceptably low 
level. The minimum level of spending control that Congress should 
undertake as a first step on this path of fiscal responsibility is to 
equal the savings in the president's budget.
    Many wise budget experts, including noted Republicans (Penner and 
Steuerle, 2003), believe the Nation is in the early stages of a budget 
crisis and that the longer we wait, the more pain Congress will inflict 
on the Nation when it makes the major decisions needed to reduce the 
deficit--as inevitably it must. We are now entering crisis, but far too 
many people are delaying action until we--or more likely, our 
children--are hit by chaos.


Andrews, Edmund L. 2005. ``White House Budget Projections Suggest Pain, 
        Much of it Political,'' New York Times, February 11, 2005, p. 
Board of Trustees of the Federal Old-Age and Survivors Insurance and 
        Disability Trust Funds. 2004. The 2004 Annual Report of the 
        Board of Trustees of the Federal Old-Age and Survivors 
        Insurance and Disability Trust Funds. Social Security 
Congressional Budget Office. 2005. Budget Options. Washington, DC: 
Congressional Record. 1995. 104th Congress, 1st session, January 26, 
        1995, 141, no. 16: H777.
Haskins, Ron, Alice M. Rivlin, and Isabel Sawhill. 2004. ``Getting to 
        Balance: Three Alternative Plans.'' In Restoring Fiscal Sanity, 
        edited by Alice M. Rivlin and Isabel Sawhil, pp. 31-55, 
        Brookings Institution Press.
Haskins, Ron. Forthcoming. ``Welfare Reform: The Biggest Accomplishment 
        of the Revolution.'' In Republican Revolution Ten Years Later, 
        edited by Chris Edwards. Washington, DC: Cato.
Krugman, Paul. 2005. ``Bush's Class-War Budget.'' New York Times, 
        February 11, 2005, p. A25.
Penner, Rudolph G, and C. Eugene Steuerle. 2003. Budget Crisis at the 
        Door. Washington, DC: Urban Institute.
Rogowski, Jeannette, and others. 2002. Final Report for Policy 
        Evaluation of the Effect of the 1996 Welfare Reform Legislation 
        on SSI Benefits for Disabled Children. Santa Monica, CA: RAND.
Steuerle, C. Eugene. 2003. The Incredible Shrinking Budget for Working 
        Families and Children. National Budget Issues, No. 1. 
        Washington, DC: Urban Institute.
U.S. Department of Health and Human Services. 2004. Indicators of 
        Welfare Dependence: Annual Report to Congress 2004. Washington, 
        DC: Author.
U.S. Office of Management and Budget. 2005. Budget of the United States 
        Government, Fiscal Year 2006, Historical Tables. Government 
        Printing Office.
Weisman, Jonathan and Peter Baker. 2005. ``After Bush Leaves Office, 
        His Budget's Costs Balloon,'' Washington Post, February 14, 
        2005, p. A1.

    Chairman Nussle. Thank you, Dr. Haskins.
    Next we will hear from Dr. Kent Smetters, who is a 
professor at the Wharton School at the University of 
    We welcome you to the committee, and we are pleased to 
receive your testimony.


    Mr. Smetters. Thank you, Chairman. I am younger and I am 
even more cranky, as you will see. Thank you, as well as the 
rest of the committee, for the opportunity to talk, to speak on 
the challenges of meeting the Nation's future obligations in 
domestic entitlement programs. While these programs are a vital 
source of resources to many families, they also represent huge 
financial shortfalls over the next couple decades.
    Figure 1 in my testimony, which is very similar to the pie 
chart that you had started out with, Mr. Chairman, which is 
based on the President's budget, shows that the Nation's three 
largest entitlement programs--Medicare, Social Security, and 
Medicaid--will grow rapidly over time and absorb all Federal 
revenue within the lifetime of a young person today. In fact, 
by 2075, virtually all Federal tax receipts will go to just 
these three programs.
    In fact, this is an optimistic projection. The reason why, 
it assumes, consistent with the President's budget, there is no 
fixed in the Alternative Minimum Tax (AMT), which we all know 
is a problem. Consistent with the Medicare trustee's 
assumptions, it assumes that health-care costs grow much slower 
than they have historically, and these shortfalls, more 
importantly, don't show the huge shortfalls after 2075, as the 
baby boomers retire from the Social Security and Medicare 
    There is an alternative way of looking at this, and that is 
to use present value analysis, to take the present value of all 
the future cash flow deficits for the Government as a whole, 
and I present this in Table 2 in the appendix of my testimony. 
I won't attempt to go into it in detail. But how this works is 
that the future cash flows are discounted, that is, reduced, by 
the Government's borrowing rate in order to demonstrate how 
much money that we needed today if hypothetically invested 
would place Government policy on a sustainable path.
    In the year 2005, based on the President's current budget, 
the Government currently faces a present value imbalance of $65 
trillion, of which the prescription drug bill comprises $17 
trillion alone. To put it in this context, the total value of 
all the capital stock in the United States, including all 
buildings, home, land, is about $45 trillion. So we owe a lot 
of money.
    Now, how could we deal with this $65 trillion? Well, 
hypothetically, one way is we could increase payroll taxes, the 
Medicare payroll tax, an uncapped earnings, immediately and 
forever by 22.4 percentage points, thereby more than doubling 
the current taxes on both employees and employers. Of course, 
this would send the economy into a tailspin; you wouldn't 
collect any revenue. This would be obviously a very difficult 
    So obviously we have to control the growth rate of these 
payments over time, it is the only way to avoid an economic 
collapse. If you delayed action--suppose that we just waited 5 
years before we did this, we started to do something--this $65 
trillion shortfall in present value increases to $79 trillion, 
because it grows with interest just like other Government debt.
    So the question is why do we have these huge shortfalls 
today. And the reason why is because the current budget 
framework used by the Federal Government encourages 
policymakers to over-commit. So the obvious example is look at 
the 5-year or the 10-year budget window. It really 
substantially underestimates the costs for entitlement program.
    A good example of this is the Medicare prescription drug 
benefit. When it was first before Congress and the President 
signed it, it was scored at $400 billion, and there was a 
controversy that erupted after it was signed and we realized 
the real cost was going to be $535 billion. Today the cost is 
$724 billion; and that is assuming considerable cost savings 
actually materialize. That difference between the $535 billion 
and the $724 billion comes simply from moving that 10-year 
window 2 years. So it just shows the problem with even a 10-
year budget horizon.
    Now, 75 years may seem like a good horizon too, that is 
what Social Security and Medicare trustees focus on. As the 
President's budget, however, points out, even 75-year actuarial 
calculations on a present-value basis emit large deficits that 
happen outside that 75-year window.
    So a good story to really understand this is back in 1983 
we supposedly balanced Social Security for 75 years, and at 
that point the 75th year was 2057. Now, 22 years later we now 
face another big problem with Social Security on a 75-year 
basis. That 75-year window now is 2079; that is when the 75th 
year ends. Over 60 percent of the shortfalls that we have today 
in the 75-year calculation comes from simply moving that 75-
year window from 2057 to 2079.
    Suppose that we were to hypothetically balance Social 
Security for 75 years today, either--not my preferred 
approach--increase taxes or control the growth rate of benefits 
on a 75-year basis. Then in not 75 years, but just 20 years we 
will have the same problem that we see today. On the 75-year 
basis we will have the same 75-year shortfall. So 75 years 
sounds like a long time, but it really is not.
    So a new Federal budget framework that includes the present 
value of all future Federal sources of revenue and outlays are 
needed, and not just over a limited time horizon. In my 
testimony I have a table that shows how that will work. I don't 
have time to go into that in all detail, but it is basically 
giving a present value of all sources of Government revenue and 
    These types of measures have recently been included just 
for the Social Security and Medicare programs by the Social 
Security and Medicare trustees' reports starting in 2003 and 
now 2004. A technical panel composed of leading economists and 
actuaries appointed by the independent and bipartisan Social 
Security Advisory Board has strongly endorsed inclusion of 
these measures. Yesterday, Chairman Greenspan also endorsed 
looking at this new approach and also criticized 75-year 
    By the way, pay-as-you-go rules, as good as they are, are 
not going to get around this problem. You can have a pay-as-
you-go Social Security or a pay-as-you-go Medicare program that 
transfers enormous wealth between generations, yet still 
satisfies those pay-as-you-go rules. You really have to do 
honest present-value analysis.
    Fortunately, the President's budget proposes new measures, 
to quote them, to ``prevent the enactment of legislation that 
worsens the long-term unfunded obligations of the Federal 
entitlement programs.'' Now, the budget doesn't explicitly 
state what these new measures are, but they are very similar, 
from their analysis, it appears to be very similar to Table 2 
that is your testimony. Senator Lieberman, in 2003, introduced 
the Honest Government Accounting Act that would help ensure 
that the Government fully accounts for its implicit and 
explicit liabilities on this present-value basis.
    Although my invitation letter was mainly to focus on the 
large entitlement programs, let me also talk about a couple of 
things I was asked to talk about, and that is some of the 
contingent liabilities in the Federal Government, things like 
the Pension Benefit Guarantee Corporation, the Terrorism Risk 
and Insurance Act, FDIC, and so forth. There are arguments pro 
and con for those programs.
    The main thing is that the real liabilities of those 
programs do not currently show up in the budget. For example, 
the PBGC right now has $39 billion in assets but has about $62 
billion in liabilities, so it is going to face very large 
shortfalls. The President has introduced some ideas for trying 
to reduce that risk, but still that program faces large risks. 
The TRIA, the Terrorism Risk and Insurance Act, exposes the 
Federal Government to up to $100 billion in losses.
    But the fair-market value of neither of those programs 
shows up in the budget, nor does it for FDIC. In fact, just the 
opposite. To the extent that the PBGC and FDIC collect some 
revenue, it actually shows up as a revenue gain to the budget. 
The actual fair value of those programs, the costs, do not show 
    Under the 1990 Credit Reform Act, which only applies to 
direct loans and guaranteed loans, there is some present-value 
analysis that shows up for those programs, like the student 
loan program, on the budget. But even that is limited, because 
it is only done on an expected value basis, it doesn't include 
the market value of risk. Presumably, students default on their 
loans when it is a bad economy, and there is market risk 
associated with that. The private sector would charge a lot 
more. So things like option pricing techniques and things like 
that which give you the real-market value should be used for 
these different programs, and they can be used in order to take 
away the appearance of a zero-cost program that makes it easier 
for policymakers to just hand out stuff.
    I wasn't going to give you my hit list, but given I have 30 
seconds, what would I do? If I were in charge, I would just 
point out that the prescription drug benefit that we just 
passed, a benefit that not many people are happy with, I should 
point out, a benefit that we just passed, the present-value 
cost of that is 1.7 times larger than the entire imbalance in 
the Social Security system. So we are talking about reforming 
Social Security today and we just passed something that is 1.7 
times larger. It seems to me, if you want to reduce cost, now 
is the time to do it, before the benefits start to get paid.
    Secondly, I think you have to control the growth rate of 
benefits in the Social Security program. We can argue about 
whether you increase the retirement age or whether you go to 
price index, and there are different economic effects of both, 
but the Social Security program places a $10.4 trillion 
shortfall, much smaller than the Medicare program, but still a 
large shortfall.
    Then, finally, regarding the Medicare program, I think 
health savings accounts are not the magic bullet, but they are 
certainly a step in the right direction in terms of helping to 
reform Medicare. But there are still going to be very tough 
charges required for Medicare.
    Thank you for the time to talk.
    [The prepared statement of Kent Smetters follows:]

  Prepared Statement of Kent A. Smetters, Ph.D., the Wharton School, 
                       University of Pennsylvania

    Thank you, Chairman Nussle, and members of the Committee for the 
opportunity to speak on the challenges in meeting the Nation's future 
obligations in its domestic entitlement programs. While these programs 
provide vital resources to many American households, these programs 
also face enormous financial shortfalls during the next several 
    The purpose of this testimony is three fold. First, it documents 
the looming financial problems in the Nation's entitlement programs. 
Second, it demonstrates how the current Federal budget framework 
encourages the U.S. Congress to promise more in the form of future 
entitlement spending than can actually be afforded; conversely, the 
Federal budget makes it difficult to reduce these unfunded obligations. 
Third, this testimony shows how various budget frameworks and rules are 
ineffective at controlling entitlement spending. A new framework is 
then recommended.


    As you can see from Figure 1 (also see Table 1 in Appendix) that is 
based on the President's 2006 Budget, the Nation's largest three 
entitlement programs--Medicare, Social Security, and Medicaid--will 
grow rapidly over time and absorb almost all projected Federal revenue 
within the lifetime of young people alive today. Medicare represents 
the largest problem at the Federal level, followed by Social Security 
and then Medicaid. However, unlike the other two, Medicaid is shared 
between the Federal Government and the states, and represents a growing 
problem at the state level.

                                FIGURE 1

Source: The President's 2006 Budget, Analytical Perspectives, p. 209; 
also see Table 1 in Appendix

    Figure 1 is, in fact, fairly optimistic for several reasons. First, 
it assumes no fix of the Alternative Minimum Tax (AMT). The AMT will 
continue to tax an increasing number of households over time since the 
AMT's thresholds are not indexed to prices. Second, consistent with the 
Medicare Trustees' assumptions, these calculations assume that health-
care costs in the future grow at a much slower rate than they have in 
the past. Third, these calculations don't show the shortfalls after 
2075; these financial problems do not subside after the baby boomers 
generation passes on.
    Table 2 in the Appendix presents an alternative perspective that 
shows the present value of all future cash flow deficits for the 
government as a whole as well as specifically for the Social Security 
and Medicare programs. Future cash flow deficits are discounted--that 
is, reduced--by the government's borrowing rate in order to demonstrate 
the amount of money needed today (if invested with interest) that would 
place government policy on a sustainable course. For 2005, the Federal 
Government currently faces a present value imbalance equal to about $65 
trillion, of which Medicare alone contributes $63 trillion. The new 
prescription drug benefit alone costs about $17 trillion.
    This $65 trillion imbalance is about $20 trillion more than the 
value of all U.S. corporations, homes, and land in the United States. 
This imbalance could, in theory, be eliminated by increasing uncapped 
(HI) payroll taxes immediately and permanently by an additional 22.4 
percentage points, thereby more than doubling the current employer and 
employee combined payroll tax of 15.4 percent. Of course, such a policy 
would first send the U.S. economy into a tailspin and collect little 
revenue. Instead, the growth of entitlement spending must be controlled 
in order to avoid economic collapse.
    Delaying action will place an even larger burden on the economy. 
Table 2 shows that in 2010, or just 5 years from now, the Nation's 
present value imbalance will increase to over $79 trillion if no action 
is taken. Such an imbalance could, in theory, be eliminated by 
increasing uncapped (HI) payroll taxes immediately and permanently by 
an additional 23.9 percentage points. In other words, the required 
payroll tax increase would increase by 1.5 percent points in just 5 
years if no action is taken. Clearly, quick action is needed to avoid a 
disintegration of the standard of living in the United States.

                            BUDGET HORIZONS

    Why do we face such a large shortfalls today? The answer is very 
straightforward: The current Federal budget framework encourages 
policymakers to over-commit to future entitlement spending because the 
true long-term costs are not properly tracked in the budget.
    The standard 5-year or 10-year projection window, in particular, 
substantially underestimates the costs of entitlement programs. For 
example, before Medicare Part D (prescription drugs) was passed by 
Congress toward the end of 2003, it was scored as having a 10-year cost 
of $400 billion between 2004 and 2013. Controversy erupted when it was 
learned, after the bill was signed into law, that the cost would be 
closer to $535 billion over this same time period. Today, the cost of 
Part D is estimated to equal $724 billion over the 10-year period 
between 2006 and 2015, assuming that the cost savings assumed in the 
score actually materializes. Virtually all of the increase in cost of 
Medicare Part D, from $535 billion to $724 billion, comes from simply 
shifting the 10-year window to include 2014 and 2015.
    In their annual reports, the Social Security and Medicare Trustees 
have traditionally focused on the ``actuarial deficit'' that includes 
the present value of the program's shortfall over the subsequent 75 
years. While 75 years might seem like a long projection window, it is 
also inadequate:
    ``Doing the calculations for a 75-year horizon understates the 
deficiencies, because the 75-year actuarial calculations omit the large 
deficits that continue to occur beyond the 75th year. The 
understatement is significant, even though values in the distant future 
are discounted by a large amount.'' (President's 2006 Budget, 
Analytical Perspectives, p. 217)
    For example, the 1983 Social Security reforms were designed to 
eliminate Social Security's shortfall over the subsequent 75 years, 
that is, until 2057. Today, only 22 years later, Social Security faces 
another multi-trillion dollar deficit calculated over 75 years, that 
is, until 2079. Over 60 percent of the Social Security shortfall we see 
today consists simply of moving the 75-year window to include the new 
cash flow deficits in the years between 2057 and 2079. The ``moving-
window problem'' is even worse today. If a reform today balanced Social 
Security for just 75 years, then in just two decades, the new 75-year 
imbalance would equal the 75-year shortfall that we face today. In 
other words, attempting to balance Social Security for 75 years only 
provides about 20 years of actual progress.
    In response to this problem, Social Security's chief actuary, when 
scoring a proposed piece of legislation, will often determine whether 
it will allow the Social Security program to become ``sustainably 
solvent.'' In particular, he determines whether a proposed legislation 
eliminates the 75-year imbalance and produces time path of values for 
the Social Security trust fund that is increasing toward the end of the 
75-year window. The critical assumption is that the trust fund will 
continue to increase in value after the 75th year. This joint 
criterion, though, has two problems. First, it cannot be used for 
programs like Medicare that are not self-financing. Second, the joint 
criterion is easy to ``game'' with a vast array of different policy 
reforms that produce additional revenue inside of the 75-year window 
but require larger outlays after the 75th year, e.g., increasing Social 
Security's maximum taxable earnings. In other words, the assumption 
that the trust fund continues to increase after year 75 simply because 
it is increasing before year 75 is often incorrect.


    A new Federal budget framework, therefore, is needed that includes 
the present value of all future Federal sources of revenues and 
outlays, and not just over a limited time horizon. Table 2 provides a 
summary of a new Federal budget framework that accurately includes the 
present value of all of the Federal Government's sources of revenues 
and outlays into the indefinite future, thereby removing any incentive 
to over-commit.\1\ Table 2 is decomposed into the major spending 
categories, including Medicare, Social Security, and the rest of 
Government. Additional details could also be provided within this 
framework. For example, the present value of Medicaid's shortfalls and 
defense spending could be listed under ``Fiscal Imbalance in the Rest 
of Federal Government.''
    For the major entitlement programs, Table 2 also decomposes the 
present value shortfalls in Medicare and Social Security into the 
present value of overspending on past and living generations (those age 
15 and over as well as the deceased) and the present value of 
overspending on current and future generations (those age 14 and 
younger as well as the unborn). This generational decomposition is 
important because major entitlement programs are mostly financed on a 
pay-as-you-go basis where taxes on workers are distributed almost 
immediately as benefits to retirees. Currently, Medicare and Social 
Security face shortfalls because future tax revenue doesn't equal 
outlays in present value.
    An entitlement program that is financed on a strict pay-as-you-go 
basis would not produce cash flow deficits and, hence, would not lead 
to present value imbalances. Nonetheless, it would transfer 
considerable wealth between generations. The reason is that retirees 
and near-retirees alive at the time that this policy is enacted are 
given resources for which they paid little or nothing during their 
working years. These resources are paid for by younger workers and 
future generations who must pay additional taxes instead of investing 
their money and earning investment income. The generational 
decomposition shown in Table 2 would indicate this transfer.\2\
    These types of new measures have been recently included in their 
annual reports by the Social Security and Medicare Trustees for those 
specific programs. The Social Security Trustees began reporting Social 
Security's present value imbalance, along with its breakdown between 
generations, in its 2003 Report, and continued with its 2004 Report. A 
technical panel composed of leading economists and actuaries who were 
appointed by the independent, bipartisan Social Security Advisory Board 
``strongly endorsed'' the inclusion of these newer measures.\3\ The 
Medicare Trustees began including these measures in their 2004 Report.
    Present value projections of the type shown in Table 2 have 
sometimes been criticized as being ``sensitive'' to the underlying 
demographic and economic assumptions. While it is true that the dollar 
value of these imbalances are sensitive to different assumptions, the 
values of the imbalances relative to the present value of tax receipts 
or outlays is generally not that sensitive, since both the numerator 
and denominator move in similar directions.\4\ In other words, the size 
of the policy reform that is needed to balance entitlement programs is 
not very sensitive to the key underlying assumptions.

                        CURRENT REFORM PROPOSALS

    The President's 2006 Budget proposes the reenactment of various 
pay-as-you-go rules on mandatory spending that were formerly in the 
Budget Enforcement Act, ``except that it does not apply to tax 
legislation. It also does not permit mandatory spending increases to be 
offset by tax increases.'' (President's 2006 Budget, Analytical 
Perspectives, p. 238). It is unclear whether Congress will impose this 
set of asymmetric constraints on future budget authority. Without these 
asymmetric constraints, however, the pay-as-you-go requirement would 
still allow pay-as-you-go entitlement programs to transfer large sums 
of resources from workers and future generations toward retirees. The 
pay-as-you-go rule would also prevent positive reforms to entitlement 
programs that required an upfront investment but produced long-run 
reductions in unfunded obligations in present value.
    The President's 2006 Budget also proposes ``new measures to prevent 
enactment of legislation that worsens the long-term unfunded 
obligations of Federal entitlement programs.'' (President's 2006 
Budget, Analytical Perspectives, p. 240). The Budget does not 
explicitly define these measures but its own analysis suggests 
something close to Table 2. However, the Budget's focus on just 
entitlement programs could allow for some ``gaming'' vis-a-vis general 
revenue transfers unless those transfers are explicitly excluded when 
calculating the entitlement program's present value imbalance, as in 
Table 2. Senator Joe Lieberman introduced the Honest Government 
Accounting Act of 2003 (S. 1915) into the 108th Congress (1st Session) 
that would help ensure that the government fully accounts for its 
explicit debt and implicit unfunded obligations. It deserves careful 


    Although my invitation letter asked me to testify before the 
Committee on my views ``on our challenges in meeting the obligations of 
domestic entitlement programs,'' let me close with a few words about 
the budgetary treatment of several Federal programs with contingent 
liabilities that represent a non-trivial risk to the budget, including 
the Pension Benefit Guarantee Corporation (PBGC) and the Terrorism and 
Risk Insurance Act of 2002 (TRIA). Currently, the PBGC has about $39 
billion in assets and so it can meet its obligations for several years. 
But the PBGC also has about $62 billion in liabilities and so it will 
face large funding shortfalls in the future.\5\ The Administration has 
proposed a set of new reforms that will reduce the PBGC's likely 
shortfall, but risks still remain. TRIA exposes the Federal Government 
to $100 billion in possible losses after a terrorist act. The fair 
market values of neither of these contingent liabilities appear in the 
President's budget.\6\ Instead, these programs, along with other 
Federal programs such as the FDIC, are treated on a cash flow basis. In 
fact, quite perversely, premium income collected by the PBGC and FDIC 
often appears to provide revenue.
    Under The 1990 Credit Reform Act, the cost of direct loans and loan 
guarantees must be recorded in the Budget. This cost is calculated as 
the present value of all cash flows over the life of the loan, 
discounted using the interest rates on Treasury securities of the same 
maturity. This Act, for example, covers the Federal Government's 
student loan program but does not cover the contingent liabilities 
noted above. While Credit Reform was a step in the right direction, it 
still falls short because the true economic costs of the loans and loan 
guarantees, as reflected in the values that the market would place on 
the underlying risks, are not incorporated.
    Options pricing and other pricing techniques should be used to 
determine the market value for the contingent liabilities in the PBGC, 
TRIA, and FDIC program as well as for the programs covered under Credit 
Reform. A ``zero'' cost (or, in some cases, a negative cost)--which is 
currently assumed in the Budget for many of these program--currently 
encourages policymakers to create seemingly ``free'' contingent 
liabilities.\7\ Requiring that the market values of these programs be 
included in the budget would remove this bias.
    Mr. Chairman, thank you again for the opportunity to share my views 
with you and the Committee.

                                TABLE 1.--LONG-RUN FEDERAL BUDGET RANGE ESTIMATES
                                              (As a percent of GDP)
                   Fiscal years                      2005     2015     2025     2045     2055     2065     2075
Receipts.........................................     16.8     18.5     19.1     20.2     20.9     21.5     22.0
Outlays..........................................     20.3     19.4     21.8     27.6     30.8     35.1     40.4
  Discretionary..................................      7.9      5.9      5.9      5.9      5.9      5.9      5.9
  Mandatory......................................     10.9     11.6     13.8     16.9     18.0     19.5     21.2
    Social Security..............................      4.2      4.4      5.4      6.0      6.1      6.2      6.4
    Medicare.....................................      2.4      3.3      4.6      7.0      7.9      9.1     10.4
    Medicaid.....................................      1.5      1.9      2.1      2.6      2.8      3.0      3.3
    Other........................................      2.8      2.0      1.7      1.3      1.2      1.1      1.0
  Net Interest...................................      1.5      1.9      2.0      4.8      6.9      9.7     13.3
Surplus or Deficit (-)...........................     -3.5     -0.9     -2.7     -7.4    -10.0    -13.6    -18.4
Source: The Presidents 2006 Budget, Analytical Perspectives, p. 209

                                      (Billions of constant 2004 dollars)*
        Fiscal years             2004        2005        2006        2007        2008        2009        2010
Total Fiscal Imbalance--U.S.      63,220      65,861      68,564      71,245      73,893      76,570      79,337
 Federal Government.........
  Social Security...........       8,006       8,352       8,710       9,067       9,423       9,784      10,158
  Medicare..................      60,822      63,315      65,805      68,249      70,641      73,044      75,518
  Rest of Federal Government      -5,608      -5,805      -5,951      -6,071      -6,171      -6,258      -6,339
Fiscal Imbalance in Social         8,006       8,352       8,710       9,067       9,423       9,784      10,158
  Future Benefits less             9,549       9,899      10,256      10,610      10,958      11,311      11,676
   Taxes, those age 15 and
   over (and deceased)......
    Future Net Benefits of        11,182      11,686      12,205      12,729      13,255      13,787      14,338
     Living Generations.....
    Trust Fund..............      -1,634      -1,787      -1,949      -2,120      -2,297      -2,476      -2,662
  Future Benefits less            -1,543      -1,547      -1,547      -1,543      -1,535      -1,527      -1,518
   Taxes, those age 14 and
   below (and unborn).......
Fiscal Imbalance in Medicare      60,822      63,315      65,805      68,249      70,641      73,044      75,518
  Future Benefits less Taxes      24,094      25,430      26,777      28,130      29,483      30,860      32,287
   and Premiums, age 15+ (+
    Future Net Benefits of        24,375      25,725      27,097      28,465      29,834      31,226      32,668
     Living Generations.....
    Trust Fund..............        -282        -295        -320        -335        -350        -366        -381
  Future Benefits less Taxes      36,728      37,885      39,028      40,118      41,158      42,184      43,231
   and Premiums, age 14- (+
Fiscal Imbalance in the Rest      -5,608      -5,805      -5,951      -6,071      -6,171      -6,258      -6,339
 of Federal Government......
  Future Outlays............      81,323      83,402      85,537      87,576      89,492      91,375      93,304
  Future Revenues...........     -93,266     -96,013     -98,675    -101,168    -103,500    -105,770    -108,055
    Living Generations......     -34,939     -36,156     -37,325     -38,417     -39,431     -40,405     -41,364
    Future Generations......     -58,327     -59,857     -61,350     -62,751     -64,069     -65,365     -66,691
  Excess Future Outlays Over     -11,943     -12,611     -13,138     -13,591     -14,008     -14,395     -14,751
  Liabilities to Social            1,915       2,082       2,269       2,454       2,648       2,842       3,043
   Security and Medicare
   Trust Funds..............
  Debt Held by the Public...       4,421       4,724       4,918       5,066       5,190       5,294       5,368
MEMO Items:
  Present value of GDP......     762,921     772,260     790,733     812,819     834,656     855,240     874,525
  Present Value of uncapped      291,063     294,436     301,354     309,630     317,783     325,432     332,577
*Positive numbers add to the imbalance and negative numbers reduce it.

Source: Gokhale and Smetters (2005), ``Measuring Social Security's Financial Problems'' NBER Working Paper No.
  11060, 2005. Based on FY2005 budget information obtained from the Office of Management and Budget and
  calculated under OMB economic assumptions.


    1. See Jagadeesh Gokhale and Kent Smetters (2003), Generational and 
Fiscal Imbalances, AEI, 2003, updated in Gokhale and Smetters (2005), 
``Measuring Social Security's Financial Problems,'' NBER Working Paper 
#11060. These calculations are based on the President's 2005 FY Budget 
assumptions and are currently being updating for the 2006 FY.
    2. Similarly, a tax cut in the short term that is financed by an 
equal present value tax increase in the long term would also change the 
generational decomposition.
    3. 2003 Technical Panel on Assumptions and Methods, Social Security 
Advisory Board [available at: http://www.ssab.gov/NEW/documents/
2003TechnicalPanelRept.pdf, check on 2/13/05]
    4. See Gokhale and Smetters (2003), op cited. One exception is the 
assumed growth rate in health-care spending relative to GDP. Following 
the Medicare Trustees, we used very optimistic projections over the 
first 75 years (1 percent over GDP); after year 75, we made the even 
more optimistic assumption of identical growth with GDP. Despite these 
optimistic assumptions, Medicare still faces a very large present value 
    5. President's 2006 Budget, Analytical Perspectives, p. 104.
    6. Currently, the CBO includes an estimate for TRIA in its baseline 
but OMB does not.
    7. See, for example, CBO, ``Estimating the Value of Subsidies for 
Federal Loans and Loan Guarantees,'' August 2004.

    Chairman Nussle. Thank you, Dr. Smetters.
    Mr. Cooper. Mr. Chairman? I have a parliamentary inquiry. 
Where are the administration witnesses?
    Chairman Nussle. The gentleman is not recognized for that 
    The last witness for the panel today is the very 
distinguished Dr. Judy Feder, who has testified before our 
committee before. She is the Dean of Policy Studies at 
Georgetown University.
    We are very pleased to have you back before the committee, 
and we are pleased to receive your testimony. Thank you.

                     GEORGETOWN UNIVERSITY

    Ms. Feder. Thank you, Mr. Chairman.
    Mr. Chairman, Mr. Spratt, members of the committee, I am 
delighted to be with you today, and will try not to be cranky. 
I am going to round out our discussion by bringing us back to 
the health-care issues that Dr. Wilensky so ably handled, 
because that is the area of my expertise.
    Medicare and Medicaid expenditures loom large in the 
conversation on the budget because of the resources they 
require, both now and in the future. But this committee's 
appropriate focus on fiscal concerns should not obscure two 
truths about these programs.
    First, they make health care affordable and long-term care 
available for millions of older, disabled, and low-income 
Americans who would otherwise lack access to care when they 
need it. Second, the fiscal challenges facing these programs 
reflect factors beyond their control: growth in the populations 
they serve--elderly, disabled, and especially, for Medicaid, 
low-and modest-income families without health insurance--and 
growth in the Nation's health-care costs.
    Therefore, cuts in Federal funds or structural changes in 
Federal financing, like arbitrary caps or fixed appropriations 
or block grants, cannot be justified as promoting efficiency or 
personal responsibility when it comes to health-care financing. 
On the contrary, they would cut benefits for or shift cost to 
the Nation's most vulnerable citizens. Let me talk a little bit 
about Medicare and Medicaid in turn.
    I want to start with a very brief reminder of how much 
Medicare accomplishes.
    In July 2005 we will celebrate the 40th anniversary of 
Medicare's enactment. The program's explicit goal in 1965 was 
to assure access to mainstream medical care for the Nation's 
senior citizens, a promise later extended to some people with 
disabilities. Medicare has been enormously successful in 
achieving these goals, and is credited both with extending and 
enhancing life for older Americans and, equally important, 
alleviating financial burdens on their families.
    These achievements have not been inexpensive. Increases in 
program costs have actually been a problem for this program, or 
a political issue, from the program's inception. But again, it 
is important to note, as Dr. Wilensky said, Medicare's record 
in containing health-care costs has been at least as strong as, 
if not stronger than, the record for private health insurance. 
Both Medicare and private insurance purchase health care in the 
same market, and both struggle to balance the need for 
containing costs with people's need for ever more costly care. 
Medicare has actually been a leader in promoting that balance, 
tough as it is.
    Rising Medicare costs have not been a function of benefits 
that are too generous in Medicare. Medicare benefits have been, 
and even with the newly enacted prescription drug benefit will 
be, less comprehensive than the benefits in employer-sponsored 
health insurance provided to the working age population. As a 
result, beneficiaries face substantial out-of-pocket cost. The 
typical senior today is estimated to spend more than 20 percent 
of income on health care, both to receive and supplement 
Medicare's benefits.
    Does Medicare face a fiscal challenge? Absolutely. From its 
inception, Medicare has been financed through a combination of 
payroll taxes on the working age population, premiums from 
beneficiaries, and we must not forget, from the beginning, 
general revenues. Part A resembles Social Security with a 
payroll tax-generated trust fund that is dedicated to financing 
its benefits. And as others have described, the aging of the 
population will pose a problem for Medicare, as it does for 
Social Security: it will lead to shortfalls in this trust fund 
as a larger number of older persons rely on financing from a 
smaller number of working age taxpayers.
    But Part A is the only part of Medicare to which the 
concept of shortfall applies. It makes no more sense to talk 
about shortfalls in general revenue-funded portions of Medicare 
than it does to talk about shortfalls in defense spending or 
other kinds of spending supported by general revenues. What is 
important is whether we provide the revenues to meet our needs. 
They are demands, but not shortfalls.
    Now, what makes Medicare's financing challenge different 
from Social Security's is the growth in its per capita costs. 
Both programs face an increasing number of seniors; Medicare 
also faces an increase in health-care cost per senior. Health-
care cost growth, however, is not a problem unique to Medicare; 
it is a problem that faces the entire health-care system. 
Therefore, any measure that reduces Federal spending on 
Medicare without slowing growth in the Nation's health-care 
costs will undermine, not strengthen, the health insurance 
protection and security that Medicare provides.
    Arbitrary caps on Medicare funding would not eliminate the 
costs of health care, nor would shifts from guaranteed benefits 
to premium contributions that might be fixed in advance. It 
would simply shift these costs from the program and from the 
taxpayers to the individuals who need health care and their 
    Now let me turn to challenges and choices in Medicaid, 
which will also celebrate the 40th anniversary of enactment in 
July 2005, and has become the Nation's largest public health 
insurance program, serving 52 million children, low-income 
working adults, primarily parents, people with disabilities, 
and elderly people.
    Medicaid's protections, like Medicare's, come at 
considerable expense not only to Federal, but also to State 
governments. But again, cost growth is not a problem, or the 
cost of the services they buy is not a problem that is unique 
to the Medicaid program; it is, again, a function of the entire 
health-care system. Nor can it be attributed to Medicaid 
inefficiency. Rather than reflecting excessive payments to 
providers, Medicaid is criticized far more frequently for 
paying too little than too much. Medicaid expenditure growth 
often reflects increases in the number and kinds of people it 
    It is clear from an Urban Institute analysis of Medicaid 
spending between 2000 and 2003, that recent Medicaid cost 
increases have been largely a function of enrollment increases. 
In this period, Medicaid spending increased by about a third, 
not because of expansions of eligibility or dramatic increases 
in payment, but because of increased demand for Medicaid 
services largely as a result of the recession. Without 
expansion of the Medicaid safety net in that period, the Nation 
would likely have experienced an increase in the number of 
children without health insurance and an even larger increase 
than otherwise occurred in uninsured adults.
    And for people of all ages who need long-term care, 
Medicaid is the Nation's safety net. Long-term care is not only 
expensive--hence, the high per capita costs in Medicaid for 
older and disabled beneficiaries--but, sadly, its provision is 
inadequate, as an estimated one in five of the Nation's 
citizens who need long-term care report getting inadequate 
service and suffer serious consequences as a result.
    It is critical to remember that it is the Medicaid 
entitlement that makes Medicaid's safety net role possible. The 
entitlement means that the program serves any individual who 
qualifies for eligibility. To support these services, the 
Federal Government provides States open-ended matching funds. 
The more people who are eligible for service and the more 
service costs, the more health-care costs, the more States 
receive in Federal matching funds; the fewer people eligible, 
the less States receive. Open-ended matching funds enable 
States to respond to increased need that comes with recession 
or public-health emergencies, or to support newly available and 
often expensive treatments like pharmaceuticals, for example, 
expensive AIDS medications.
    Concerns about the costs of Medicaid have historically, and 
today, led to calls for so-called Medicaid reform. Too often, 
these proposals would limit the entitlement by imposing 
arbitrary caps on Federal Medicaid payments or substituting 
fixed allotments or block grants for open-ended matching 
financing. Without offering a specific proposal, the 
President's budget refers to a ``modernized Medicaid system'' 
that will give States greater flexibility to serve more people 
for the same amount of money by changing delivery systems, 
targeting populations, and providing what is referred to as 
``appropriate benefit packages.''
    However, no creativity in delivery can offset likely 
increase in numbers of people in need and increases in the 
costs of services over which Medicaid has little, if any, 
control. With capped funds, States' ability to flexibly expand 
coverage, provide coverage to currently ineligible, uninsured 
populations, or to continue to expand home-and community-based 
long-term care services would be hampered, not enhanced, given 
the need to cover the inevitably rising costs of existing 
    Indeed, with capped Federal funds, so-called flexibility is 
nothing more than a euphemism for cuts in protections that 
Federal rules currently do not allow: creating waiting lists 
for enrollment, favoring some parts of States over others, 
charging even the poorest beneficiaries out-of-pocket payments 
for service, and limiting access to any and all services based 
on fiscal concerns.
    As it is sometimes proposed that such limits apply only to 
what are referred to in Medicaid as optional populations, 
populations that States are not required to cover, but may 
choose to cover, it is important to remember that in this 
category are elderly and disabled people with incomes below the 
Federal poverty level, but above three-fourths of the Federal 
poverty level; the majority of elderly Medicaid nursing home 
residents; pregnant women with incomes above 133 percent of the 
Federal poverty level; near-poor children and very poor 
parents. To States, under such a proposal, coverage would 
become an option, but to the affected population, care would 
remain a necessity they could not afford.
    President Bush has characterized Medicare as, and I quote 
again, ``the binding commitment of a caring Nation.'' The 
language, in my view, should also apply to Medicaid. Yet the 
administration has offered no proposals to secure these 
essential commitments. Increasing health-care costs that affect 
Medicare and Medicaid along with the rest of the health-care 
system cannot be addressed through caps on malpractice awards 
or the creation of health savings accounts. Malpractice costs 
are estimated to count for a very small portion of health-care 
costs; the caps hurt damaged patients and provide virtually no 
relief from health-insurance costs, less than half a percent.
    Individuals cannot own responsibility for their own health 
care by managing limited accounts when the bulk of health-care 
costs are catastrophic and decisions are driven by health-care 
providers. Meager tax credits for the purchase of private 
health insurance policies can assure few, if any, of the 45 
million uninsured Americans affordable and adequate insurance 
protection, and cuts in Federal funds for Medicaid do not 
eliminate the cost of care to vulnerable populations, they 
shift the burden of bearing those costs to States and to the 
population at risk.
    In 2005, after 40 years of experience with Medicare and 
Medicaid, we should recognize that investment of our collective 
resources to protect those among us who become ill or need 
long-term care enhances the quality of our lives and our 
strength as a Nation. This is the time to renew and extend 
their commitment, not to explore ways to abandon it.
    Thank you, Mr. Chairman.
    [The prepared statement of Judith Feder follows:]

    Prepared Statement of Judith Feder, Ph.D., Professor and Dean, 
       Georgetown Public Policy Institute, Georgetown University

    Mr. Chairman, Congressman Spratt, and members of the committee, 
thank you for inviting me to discuss entitlement programs and the 
Federal budget. My remarks will focus on the health entitlements--most 
prominently, Medicare and Medicaid, which are my particular area of 
    The Medicare and Medicaid programs loom large in discussions of the 
budget, both because of the resources they currently require and the 
greater resource demands they will make in the future. However, this 
committee's focus on fiscal concerns should not obscure two ``truths'' 
about these programs.
    First, they make health care affordable and long-term care 
available for millions of older, disabled, and low income Americans who 
would otherwise lack access to care when they need it. Second, the 
fiscal challenges facing these programs reflect factors beyond their 
control--growth in the populations they serve (elderly, disabled and, 
for Medicaid, low and modest income families without health insurance) 
and in the Nation's health-care costs.
    Cuts in Federal funds or structural changes in the structure of 
Federal financing (like arbitrary caps or fixed appropriations-block 
grants) cannot be justified as promoting efficiency or personal 
responsibility in the Medicare or Medicaid programs. On the contrary, 
they would represent an abdication of the Nation's responsibility to 
care for its most vulnerable citizens.


    In July, 2005, we will celebrate the 40th anniversary of Medicare's 
enactment. This program's explicit goal was to assure access to 
mainstream medical care for the Nation's senior citizens--a promise 
later extended to some people with disabilities. Medicare has been 
enormously successful in achieving those goals, and is credited both 
with extending and enhancing life for older Americans and alleviating 
financial burdens on their families.
    These achievements have not been inexpensive. Increases in program 
costs have been a significant concern from the program's inception. 
However, Medicare's record in containing health-care costs has been as 
strong if not stronger than the record of private health insurance. 
Medicare and private health insurers purchase health care in the same 
health-care system and face the same pressure to balance access to care 
against controlling the cost of care. Medicare has been a leader in 
promoting that balance, ahead of the private sector in adopting 
provider payment methods that promote value for the dollar in the 
purchase of care.
    Although beneficiaries have benefited significantly from the access 
to health care that Medicare provides, they too have faced significant 
costs. Medicare benefits have been and, even with the newly enacted 
prescription drug benefit, will remain less comprehensive than 
employer-sponsored insurance benefits. As a result, beneficiaries incur 
substantial out-of-pocket spending and in traditional Medicare have no 
``stop-loss'' or ceiling to protect them against catastrophic costs. 
The typical senior is estimated to spend more than 20 percent of income 
on health care, to receive and supplement Medicare's benefits.
    From its inception, Medicare has been financed through a 
combination of payroll taxes on the working aged population, premiums 
from beneficiaries, and general revenues. Part A resembles Social 
Security, with a payroll-tax-generated trust fund that is dedicated to 
financing its benefits. As is true with Social Security, the aging of 
the population will lead to shortfalls in this trust fund, as a larger 
number of older persons rely for financing on a smaller number of 
working-aged taxpayers. (Part A is the only part of Medicare to which 
the concept of shortfall applies; it makes no more sense to talk about 
shortfalls for general-revenue-funded portions of Medicare than it does 
to talk about shortfalls in defense spending.)
    What makes Medicare's financing challenge different from Social 
Security's is the growth in its per capita costs, alongside growth in 
the number of beneficiaries. Health-care cost growth is not a problem 
unique to Medicare, however. It is a problem facing the Nation's entire 
health-care system.
    Securing the adequacy of Medicare financing (the Trustees estimate 
exhaustion of the trust fund in 2019) is an important policy objective. 
But any measure that reduces Federal spending on Medicare without 
slowing growth in the Nation's health-care costs will undermine, not 
strengthen, the security that Medicare provides. Arbitrary caps on 
Medicare funding would not eliminate the costs of health care; it would 
simply shift them from the program to the individuals who need health 
care and their families. Moving from Medicare's guaranteed benefits to 
``premium support'' or contributions to purchase private health 
insurance would similarly shift risk. Claims that more competition 
across health plans can slow cost growth have simply not been supported 
by the evidence. The strongest competition among health plans seems to 
be to enroll people perceived to have fewer and less costly health 
needs and to avoid (or disenroll) people with greater, more costly 
needs. In the absence of mechanisms to overcome this ``selection'' 
problem, government pays private insurers more to serve beneficiaries 
than it would under the traditional system, and individuals who need 
the most care receive insufficient support.
    This problem would be exacerbated if government were to limit its 
contributions to premiums, regardless of the growth in health-care 
costs. In these circumstances, not only would those needing the most 
care face the highest risk, but all beneficiaries would face the burden 
of even greater out-of-pocket spending. In other words, reliance on 
private plans does not contain health-care costs; it shifts the risk of 
bearing them from Medicare to individuals and their families.
    Medicare has been enormously successful in assuring access to 
mainstream medical care for its beneficiaries. Our goal should be to 
secure the protection it provides, not to shift risks back to the very 
individuals it aims to protect.


    July 2005 will also mark the 40 anniversary of enactment of the 
federal-state Medicaid program. As a safety net for low income 
Americans who otherwise lack health insurance and the Nation's primary 
safety net for long-term care, Medicaid has become the Nation's largest 
public health insurance program. In 2003, Medicaid provided coverage 
for 25 million children, 14 million adults (primarily low-income 
working parents), 5 million seniors and 8 million people without 
disabilities. In the absence of Medicaid, the vast majority of its 
beneficiaries would be uninsured--and lack the access to medical and 
long-term care that Medicaid provides.
    Medicaid's protections, like Medicare's, come at considerable 
expense to Federal and state governments. But cost growth cannot be 
attributed to Medicaid inefficiency. Rather than reflecting excessive 
payments to providers (Medicaid is criticized far more often for paying 
too little than too much), Medicaid expenditure growth typically 
reflects increases in the number and kinds of people it serves.
    Urban Institute analysis of Medicaid spending between 2000 and 2003 
illustrates the critical role of the Medicaid health insurance safety 
net. In this period of recession and rising health-care costs, Medicaid 
spending increased by about a third--not because of expansions of 
eligibility or dramatic increases in payment. Rather, the increased 
spending reflected substantial increases in enrollment, as people's 
incomes declined and employer-sponsored health insurance disappeared. 
Without expansion of the Medicaid safety net, the Nation would have an 
experienced an increase in the number of children without insurance and 
an even larger increase than otherwise occurred in uninsured adults.
    Although three quarters of Medicaid enrollees are children or their 
parents, about 70 percent of Medicaid's expenditures are for low income 
elderly people. Low income people with disabilities do not qualify for 
private health insurance. And few Americans have insurance for long-
term care--the costs for which exceed the incomes of most American 
families. Responsible for half the revenues received by nursing homes 
and providing full or partial support for more than half of all nursing 
home patients, Medicaid is the Nation's only safety net for long-term 
    It is the Medicaid entitlement that makes Medicaid's safety net 
role possible. The entitlement means that the program serves any 
individual who qualifies for eligibility. To support these services, 
the Federal Government provides states open-ended matching funds: the 
more people who are eligible for service and the more services costs, 
the more states receive in Federal matching funds; the fewer people 
eligible, the less states receive. Open-ended matching funds enable 
states to respond to increased need that comes with recession or public 
health emergencies or to support newly available treatments, like ever-
improving AIDS medications. Medicaid covers an estimated 55 percent of 
persons living with AIDS and 90 percent of all children living with 
AIDS. When the number of people affected increases or the costs of 
treatment rise, Federal funds automatically increase to share the 
    Concerns about the costs of Medicaid have historically generated 
policy proposals to limit this entitlement by imposing arbitrary caps 
on Federal Medicaid payments or substituting fixed allotments or 
``block grants'' for open-ended matching financing. Without offering a 
specific proposal, the President's budget, refers to a ``modernized 
Medicaid system'' that will give state greater flexibility to serve 
more people for the same amount of money--by changing delivery systems, 
targeting populations and providing ``appropriate benefit packages''. 
However, no creativity in delivery can offset likely increases in 
numbers of people in need and increases in the cost of services over 
which Medicaid has little if any control. With capped funds, states' 
ability to ``flexibly'' expand coverage--provide coverage to currently 
ineligible uninsured populations or continue to expand home and 
community-based long-term care services--will be hampered, not 
enhanced, given the need to cover the inevitably rising cost of 
existing obligations. Either that, or expansions will come at the 
expense of people already in need. Jeanne Lambrew's recent Milbank 
Quarterly analysis makes abundantly clear that replacing open-ended 
Federal matching with fixed growth rates or allotments in Federal 
spending will inevitably fail to provide funds adequate to meet changes 
in need or changes in cost, leaving people without care.
    Indeed, with capped Federal funds, ``flexibility'' is nothing more 
than a euphemism for cuts in protection that Federal rules currently do 
not allow: creating waiting lists for enrollment, favoring some parts 
of states over others, charging even the poorest beneficiaries out-of-
pocket payments for service, and limiting access to any and all 
services based on fiscal concerns. Previous proposals have limited new 
``flexibility'' to Medicaid's so-called ``optional'' populations, 
keeping Federal requirements in place for ``mandatory'' population 
groups--primarily poor children, and elderly and disabled people 
eligible for Supplemental Security Income (SSI) (that is, with incomes 
below 74 percent of the Federal poverty level). Without these 
protections, coverage would likely decline for ``optional'' 
populations, which that include elderly and disabled people with 
incomes below poverty but above 74 percent of the Federal poverty 
level, the majority of elderly Medicaid nursing home residents, 
pregnant women with incomes above 133 percent of the Federal poverty 
level, near poor children and very poor parents. To states, coverage 
would become an option; to the affected population, care would remain a 

                          POLICY PRESCRIPTIONS

    President Bush has characterized Medicare as ``the binding 
commitment of a caring Nation.'' The same language should apply to 
Medicaid. Yet the administration has offered no proposals to secure 
these essential commitments.
    Increasing health costs that affect Medicare and Medicaid along 
with the rest of the health-care system cannot be addressed through 
caps on malpractice awards or the creation of ``health savings 
accounts''. Malpractice costs are estimated to account for about 2 
percent of all health-care costs; caps hurt damaged patients and 
provide virtually no relief from health insurance costs (less than half 
a percent). Individuals cannot ``own'' responsibility for their own 
health care by managing limited accounts, when the bulk of health-care 
costs are catastrophic and decisions driven by health-care providers. 
Meager tax credits for the purchase of private health insurance 
policies can assure few if any of the 45 million uninsured Americans 
affordable and adequate insurance protection. And cuts in Federal funds 
for Medicaid do not eliminate the costs of care to vulnerable 
populations; they shift the burden of bearing these costs to states and 
the population at risk.
    In 2005, after forty years of experience with Medicare and 
Medicaid, we should recognize that investment of our collective 
resources to protect those among us who become ill or need long-term 
care enhances the quality of our lives and our strength as a Nation. 
This is the time to renew and extend our commitment, not explore ways 
to abandon it.

    Mr. Portman [assuming Chair]. I thank all the witnesses for 
their testimony. We have a lot of questions for you all, and I 
will try to be as brief as I can, starting with saying that the 
information you are giving us today as experts is extremely 
helpful as we look at the big picture, which is not just the 
domestic discretionary spending, which is a smaller and smaller 
part of our budget, but also on the mandatory side.
    I would like to start, if I could, just laying out the 
problem. We know from the projections we have that mandatory 
spending is projected to rise at about 5.6 percent just over 
the next 5 years. And as Dr. Wilensky has reminded us, there 
are some longer-term growth rates that are even higher. I 
think, if you look at the President's budget fully adopted, 
mandatory spending would be about 5.5 percent; and that is the 
chart you see here. So just to put this in a little 
perspective, given Dr. Feder's comments at the end, I think it 
is important to note that we are not talking about major 
    With regard to Medicaid in particular--could we put a chart 
up on Medicaid?
    The President is talking about 60 billion over 10 years in 
changes. The growth rates under Medicare are projected over 10 
years, 7.6 percent. We are talking about substantial growth 
even under the Bush reforms, to 7.3 percent. In fact, if you 
look at the Bush budget that we got, there are actually, on the 
health-care side--and Dr. Feder makes a good point that this is 
related to general health care, not just to Medicaid--there is 
about $142 billion in new spending on health-care initiatives.
    Subtracting from that the $60 billion in Medicaid that is 
reflected here, you end up with actually net new spending of 
about $82 billion, as compared to current law, including the 
entitlement programs. And that new $142 billion is not in 
Medicaid, but it is health care, including expanding some of 
Medicaid, about $16.5 billion more, the Cover the Kids outreach 
campaign and so on.
    So just to put that in some perspective, at the same time 
we hear from Dr. Wilensky, which I think is pretty well 
established now, that Medicaid and Medicare alone could be 20 
percent of our gross domestic product by the year roughly 2040, 
which is what our entire budget is now. So all of our spending 
on the domestic side, all of our military spending, all of our 
entitlement spending now is about 20 percent, including 
interest on the debt; and Medicare and Medicaid alone, by 2040, 
would consume all of that. And this is why we need your input.
    And, Dr. Feder, again, I agree with you that the Medicaid 
increases, which, as we have seen here, is over 7 percent, and 
therefore difficult to sustain, in my view, is reflective of 
health-care cost increases generally. But when you go through 
the list you think liability reform isn't going to help, HSAs 
and more competition and transparency is not going to help, tax 
credits aren't going to help; we just need to invest more. I 
don't know how we can invest more if it, over the next 35 
years, is going to consume, with Medicare, all of our current 
    I guess I would just ask Dr. Wilensky and Dr. Feder to 
comment on that, and the other two witnesses feel free to as 
well. What would the impact be on our economy if we don't begin 
to figure out a way not to reduce spending, but to restrain and 
    And when the President talks about more flexibility, and I 
think about skilled nursing facilities back home and the degree 
to which, increasingly, Medicaid is being relied upon, it is a 
very inefficient way to offer health care, and for families to 
have to go through this process of disgorging their assets and 
so on, and nursing facilities not getting full reimbursement, 
but relying more and more Medicaid, certainly there should be 
some opportunities for some improvements.
    And maybe, Dr. Feder, you can answer first, then Dr. 
Wilensky, and then I will turn to my colleague, Dr. Spratt, to 
address the witnesses.
    Dr. Feder.
    Dr. Feder. Thank you, Mr. Chairman. Let me respond to your 
bigger points first.
    When we look at the projected growth in Federal funding for 
Medicaid, as for health care in general, one has to look at it 
always relative to the cost of care. So even if it is growing, 
we need to know how it is growing relative to the demand of the 
population, a demand of Medicaid and the cost of services. Any 
cut in Medicaid, facing a growing demand, is a problem to that 
program's capacity to provide service, as we can hear from the 
States. And I don't have to tell you what they are saying about 
the kinds of pressures they are facing to cut services.
    The second point, you are absolutely right about--and I am 
glad we agree--on the importance of health-care costs. And I 
would support the suggestions that Dr. Wilensky made with 
respect to smarter purchasing; not just for Medicare, I think 
for the entire health-care system. There is no excuse for not 
getting value for the dollar in the entire health-care system. 
My concern is focusing only on public programs, rather than the 
system as a whole; and I think we need to do that.
    A third issue, how can we possibly sustain this. I think it 
is a mistake--and a number of economists have made this 
argument--to look at our resources as a fixed pie. We are a 
growing economy. It is nicer when we grow faster and when low-
income people are benefitting more, but we are a growing 
economy, and when we look out into the future, our capacity to 
support a growing elderly population grows, and we mustn't 
forget that.
    Finally, in that respect, it is important to remember that 
what we take in from those resources in taxes is not a fixed 
pie. I believe that we are at about the lowest tax rate, at 
this time in this Nation, that we have experienced in a long 
time. Revealing what might be a conflict of interest, I am 
proud to say I am at the lead of the baby boom generation. And 
I believe, though I hope my earnings are still going up, that I 
am at the peak of my earning years. So my plea is: tax me now. 
I can give now. It would reduce burdens on future generations, 
and the resources would be there to help my generation when we 
are older.
    Finally, I said it before, but you asked a very specific 
question or mentioned something specific about long-term care. 
If I could rephrase or state somewhat differently what you 
said, there is a tremendous concern about a long-term care 
system that is focused so heavily on nursing home care, rather 
than on care at home and in the community, where most people 
would rather receive it. We have made strides in Medicaid in 
recent years in redressing that balance and community-based 
care has expanded substantially. Indeed, some of those 
expansions are threatened by fiscal constraints at the moment. 
But that is a direction in which I believe that we, as a 
Nation, would like to go.
    I would urge you, however, based on a great deal of 
evidence, not to be optimistic that that will save money, in 
part because we have a larger number of people in need than are 
now receiving care in nursing homes. In fact, the bulk of 
people who need long-term care now receive it in their home, 
however inadequately. So I believe we should serve a larger 
population at home, but I am skeptical that it will actually 
save money.
    Mr. Portman. Thank you.
    Dr. Wilensky.
    Ms. Wilensky. The area that is the most promising in 
reducing growth rates in health-care spending is to learn how 
to spend smarter. Think about Medicare for a moment. We have 
spent the last 20 years--and I was Medicare director during 
this period, so I am including myself in this statement--
reimbursing exactly wrong in terms of trying to spend smarter.
    Why do I say that? Well, you get exactly the same payment 
if you are a physician or if you are a hospital and you are 
best in class or you are just barely above the indictable 
level. That is fundamentally a bad idea. Trying to change 
reimbursement so that institutions and individuals who do it 
right, do it right the first time, get more money and those who 
don't do it very well get less is very different from the 
current system.
    This is not very different from what goes on in the private 
sector. There are small demonstrations, under what is called 
pay-for-performance that are being started by Medicare. There 
is a lot of activity going on in the private sector right now 
where corporations are attempting to start changing how 
providers are paid. Information systems are another issue, 
although there are questions about whether Medicare should 
actually pay physicians or hospitals to adopt new information 
systems or should change the incentives associated with 
    I would caution before we go down the road of direct 
reimbursement. First, it would move us back to a cost-based 
reimbursement system, which we have now spent 20 years trying 
to move away from. Secondly, we don't need to pay hospitals to 
set up cath labs and open heart surgery centers; the 
reimbursement system drives hospitals to set them up whenever 
and wherever they can. Some people might say maybe too often.
    What we need to think about is how can we change the 
reimbursement system in the public sector, and in the private 
sector as well, so that you drive the kinds of changes you 
want. Sure, you might need to help rural institutions and rural 
providers who can't easily access the capital they would need 
in order to make these changes.
    We also have a lot of new technology that is going to be 
coming online, in part thanks to the doubling of the NIH 
budget. The question is whether we can get information out 
about comparative cost-effectiveness and comparative clinical 
effectiveness of these technologies so payors and patients and 
providers have some idea about what really works when.
    Finally, some of the issues that Dr. Feder raised about 
malpractice or changes in the tax code I think are also 
important. They are certainly not silver bullets. But, as long 
as physicians and institutions worry that if they have a bad 
outcome, they will be subject to liability claims, there will 
be unhelpful drivers of health-care spending. Maybe introducing 
patient safety measures into the system would be the ``quid pro 
quo'' to bring the warring parties in the Congress together to 
limit liability, but to do so while providing additional safety 
to patients.
    The notion that only 1 or 2 percent of health-care spending 
may be attributable to malpractice first is based on a couple 
of very small studies in the 1980s and, second, denies the fact 
that 1 or 2 percent of $1.8 trillion is still a very big 
    Mr. Portman. Plus it doesn't take into account all the 
defensive medicine.
    Ms. Wilensky. It is very difficult to try to measure 
defensive medicine. Asking institutions and individuals to put 
themselves at financial risk, if they have a bad outcome, and 
at the same time berate them for not practicing in a 
conservative practice style makes no sense. We have got to take 
this issue on.
    Mr. Portman. I would love to hear from Dr. Smetters and my 
friend, Dr. Haskins, but in the interest of getting to the 
other committee members, you will have the opportunity to 
respond to their questions.
    With that, I would like to have the ranking member, Mr. 
Spratt, inquire.
    Mr. Spratt. Thank you, Mr. Chairman.
    Once again to our witnesses, thanks for your testimony.
    Could we compare charts? Chart No. 1, which differs 
significantly from the chart the chairman just showed us, 
assumes a $45 billion cut in Medicaid over a 10-year period of 
time. In truth, the gross cut is $60 billion. It is not clear 
to me from reading the President's budget where the other $15 
billion goes. But, in any event, we have taken the $45 billion 
net number, and it spreads down over the period of 10 years 
resulting in an $8 billion cut in 2015.
    Mr. Chairman, as I recall, the two bar graphs you showed 
were for 1 year, and it was a minor amount, like the amount 
that is assigned there for 2006, but the cut gets deeper and 
deeper. Yesterday three Governors came over to meet with us and 
told us that this was the biggest problem they faced, and they 
implored us not to force them to redesign the system according 
to a certain arbitrary budget cost reduction number, but let us 
work together to reconfigure, restructure, reform the system. 
Then estimate its costs, then change it at the margins with 
copays or other provisions in order to shoehorn it into the 
budget once it is reconfigured and redesigned, but not let the 
redesign be driven by an arbitrary number.
    Would you disagree with that, Dr. Wilensky?
    Ms. Wilensky. That is a better way to go, to redesign the 
whole system. I object to some of the fiscal strategies that 
States have used that circumvent the need for them to put up 
additional funding.
    Mr. Spratt. Upper payment limits and provider taxes, and 
things of this kind.
    Ms. Wilensky. Exactly. I sympathize with the States that 
they would prefer to have these strategies available, but I 
believe it fundamentally circumvents the matching intention of 
the Congress in setting up the Medicaid program. So I don't 
disagree that Medicaid is desperately in need to be redesigned. 
I don't put those changes in quite the same category.
    Mr. Spratt. Let me say, as one State which has been an 
active user of creative accounting when it comes to Medicare--
    Ms. Wilensky. But not the worst.
    Mr. Spratt. No. Thank you very much. It is done for good 
motives, too, because the devices that South Carolina uses, and 
other States which have done the same thing, are mainly to deal 
with the problem of small rural hospitals, typically, or large 
urban hospitals, and the devices they use are proxies for some 
other device that would funnel money to those institutions that 
serve Medicare and Medicaid population and, therefore, get the 
lowest rates of reimbursement and need something to stay 
solvent, frankly.
    Let me ask you, Dr. Wilensky, about MedPAC. Are you still 
on the board?
    Ms. Wilensky. No. My term ended in 2001.
    Mr. Spratt. Are you familiar with their report? And for 
this year applying the sustainable growth rate----
    Ms. Wilensky. Yes.
    Mr. Spratt (continuing). They indicate that physicians' 
fees will be reduced by 5 percent.
    Ms. Wilensky. Correct.
    Mr. Spratt. And as I understand it, the President's budget 
assumes in its cost estimates for the Medicare program that 
that 5 percent will be implemented and not overturned by 
Congress. Can you give us an idea of the consequences of that? 
How does this mechanism work?
    Ms. Wilensky. This was an unfortunate piece of the Balance 
Budget Act passed in 1997. I was chairing the Physician Payment 
Review Commission at the time--one of the two predecessor 
commissions to MedPAC. The problem is that the sustainable 
growth rate looks only at total spending on physician services. 
If physician spending is growing faster than allowed for in the 
budget, the SGR ratchets down fees across the board, which is 
particularly unfair and inequitable. The conservatively 
practicing physicians get hit as hard as anyone else.
    The concern by the Congress has been, and I think with some 
cause, that if repeated 5-percent reductions in fees were to go 
into place, seniors would have trouble getting in to see their 
physicians. In fact, there is not any such evidence available 
yet and in fact, the Government Accountability Office (GAO) 
just released a study that says it does not appear that in 2002 
when the 5-percent reduction went into effect, there was a 
measurable problem.
    But the notion of having repeated 5-percent reductions in 
fees, which is what the law has in place for the next several 
years, is troublesome, nevertheless.
    Mr. Spratt. Do you think Congress should intercede and 
reverse that change?
    Ms. Wilensky. I wish they would redesign the whole system 
of physician payment.
    Mr. Spratt. Only as part of a complete redesign of the 
whole health system, the whole Medicare system?
    Ms. Wilensky. No, I would do it now. I think they need to 
redesign the physician payment system. The physician relative 
value scale is front and center in this notion of paying the 
same for best in class and worst in class. It is a very 
disaggregated payment system, unlike the way we pay hospitals 
on a discharge basis and it is capped with the sustainable 
growth rate. The way we pay physicians just isn't very smart.
    Mr. Spratt. Wasn't the problem as we bore down on rates as 
we did in 1990, 1993, and 1997, there was no increase at all in 
the Medicare Program in 1998 as a result of the BBA of 1997, a 
phenomenon we haven't seen repeated but there was none. The 
problem was as we bore down on rates, volume tended to increase 
to make up for the lower rates. How do you handle that problem 
if you don't have even this cumbersome thing called a 
sustainable growth factor?
    Ms. Wilensky. What helped in 1998 is that the economy was 
booming, so you could have substantial increases in 
reimbursements without exceeding the sustainable growth rate. 
The question of whether or not the growth in the economy as a 
whole ought to govern what we spend on physician spending in 
the narrow is something else. We don't know if physician 
spending goes up whether it is a good thing or a bad thing. In 
part, it depends on what happens to the outpatient hospital 
spending and what happens to nursing home and home care. To try 
to put an arbitrary cap on one area of Medicare spending has 
never made any sense.
    Mr. Spratt. Could I ask Dr. Feder for her opinion about the 
sustainable growth factor and what we should do with the 
otherwise automatically implemented 5 percent cut in physician 
payment rates?
    Ms. Feder. I think I agree with most of what Gale had to 
say in terms of the need for refinements in the system and the 
difficulties with arbitrary caps. That said, you rightly say we 
have an issue of balancing in the relationship between changes 
and fees and changes in volume. I think that greater refinement 
in the system, and I would like to be more precise for you 
right now but can't, might help us find smarter ways to do that 
but it has always been a concern, and I don't know where they 
are now with the Congressional Budget Office, giving you 
difficulties as I recall in scoring changes you wanted to make 
because volume increases offset payment reductions.
    I think you have rightly identified and I think more work 
on reimbursement is necessary.
    Mr. Spratt. I am sort of uncovering an irony here in that 
all of you have sort of decried the increasing cost of 
providing medical care in our society and in these programs in 
particular, but testimony we have supports a pretty substantial 
increase. That has a pretty significant dollar impact on the 
budget for next year.
    Ms. Wilensky. The dollar impact depends in part on whether 
or not you are willing to pay less for those who perform 
poorly. Most of the pay for performance strategies look at add-
ons. Practitioners get what they were going to get and those 
that do it better, get a little more. One question is whether 
people willing to start to think about spending more for what 
works, spending less for what doesn't or for institutions that 
don't provide good outcomes. That is a whole different way to 
do it.
    Mr. Spratt. Another question about the MedPAC report. It is 
my understanding that it also indicates that hospitals and 
Medicare patients are experiencing a negative operating return 
of -1.5 percent. Do you think that DRG, hospital rates of 
reimbursement ought to be adjusted because of that negative 
operating margin?
    Ms. Wilensky. It depends on what you think will happen to 
the hospitals if you let payments drop to minus 1 or 2 percent. 
The same with regard to the physicians. You asked me do I think 
there would be a problem for repeated -5 percent reductions and 
the answer is repeated -5 percent reductions will start to get 
into access problems. Will a single -5 percent reduction or -2 
percent reduction? Probably not. It is really the same response 
with regard to the hospitals either across the board or for a 
year whether or not reductions will cause any problems with 
regard to access for seniors.
    We tend to focus what happens to institutions. Will some of 
them close? They may. The real question is what happens to 
access to care for seniors? Does that negatively impact them or 
    Mr. Spratt. Let me ask you something about the Medicare 
Modernization Act which you mentioned in your testimony. Buried 
in that, for the purposes of most observers because most people 
were focused on the prescription drug coverage, are provisions 
that deal with competition for traditional fee-for-service 
Medicare. In particular, there are subsidies provided to 
managed care firms offering capitated fees and taking on 
Medicare patients supposedly at a savings to the traditional 
program but in fact, these managed care outfits have been 
making about 107 percent according to GAO, spending about 107 
percent according to GAO more than the fee-for-service plan 
pays. GAO suggests that if you adjusted the profile of the 
patients who tend to be healthier, they are really spending 
about 110 percent more.
    Nevertheless, because the HMOs were pulling out of 
Medicare, this bill, as I understand it, subsidizes the 
continued competition with fee-for-service Medicare. In light 
of the swelling cost to this program, do you think that subsidy 
is justifiable?
    Ms. Wilensky. I would like to see them get no more or no 
less than fee-for-service groups. I think the question is 
whether so many problems were created by the Balanced Budget 
Act that it led to the withdrawal of substantial numbers of 
plans from the Medicare Program. If so, it could justify having 
1 or 2 years of extra payment to get them back to Medicare. But 
there is no question in any long-term period, these groups 
ought to play on the same ground and by the same rules, the 
same reporting requirements as fee-for-service institutions. I 
wish that the direct head-to-head competitive provisions that 
had been initially in the House bill had made it to the final 
bill. They did not.
    There is an area that we haven't spoken about. It is hard 
to resolve but important nonetheless; that is, there is 
tremendous variation in spending in the Medicare Program. 
Analysts have observed, including Elliott Fisher, a physician 
at Dartmouth, who looked at what services people get in the 
areas that are high spenders in Medicare. The answer is not 
much either in the way of beneficial services or satisfaction 
to the patient. How to drive down spending in the high spending 
areas of the country, by which I mean the county-level spending 
would help enormously but would require rethinking how we 
reimburse in Medicare. It would also cause a lot of push back 
politically from those States and counties that now are high 
spending. This type of change couldn't happen in a single year 
but it could be done over a 2- or 3-year period.
    Mr. Spratt. Looking at the numbers we have seen here 
presented for Medicare and Medicaid, it appears they are not 
exactly run away but they are soaring, increasing at a rapid 
rate. In fact, when you unpack the reason for their rise in 
recent times, there are some policy actions that Congress has 
taken and the administration has supported which have caused 
it. For example, the Federal Medicaid Assistance Percentage 
(FMAP), the additional amount of money that was funneled into 
Medicaid as a counter recessionary move on our part to sort of 
strengthen the safety net and secondly, Medicare prescription 
drugs. There has been a fundamental change so this is not 
something in the system that suddenly has gone out of control, 
this was something added intentionally. The costs now appear to 
be more than those expected who voted for it but there are a 
couple of provisions in there which I wonder are still 
justified in light of the additional costs. I think you know 
what I am talking about.
    One is the black letter provision that prohibits the 
Federal Government from negotiating the price of drugs, the 
first time in the 22 years I have been in Congress that I have 
been asked to vote on a provision that would say to an officer 
of the Government, you are not obligated to cut the best deal 
you possibly can for the American taxpayer. Do you think it is 
justifiable particularly now in light of the soaring cost of 
the Medicare prescription drug coverage?
    Ms. Wilensky. Let us at least use language honestly. 
Government doesn't negotiate prices, Government sets prices in 
Medicare. There is no negotiation with the physicians, no 
negotiations with the hospitals. So the question is should we 
have administered pricing or Government price setting for 
prescription drugs as Medicare does elsewhere?
    I can only tell you that your CBO and now the CMS Actuary 
have both said that at least in the near term, they don't 
believe you would get additional savings over what you will get 
at least ``in the near term'' from having a competitive 
environment. Whether that will hold for 3 or 4 years I think is 
a real question. I am not sure whether it will or not.
    So, let us not talk about negotiation, let us at least just 
say should we have Government administered pricing or not?
    Mr. Spratt. Let me ask a couple questions and I will let 
everyone else go. I am sorry, I just have a lot of questions 
from the testimony you have given.
    Mr. Haskins and Mr. Smetters, your testimony struck me 
because you frankly seemed to be ignoring the elephant in the 
room. You are worried about the increase in the deficit both 
recognized and unrecognized because we have cash basis books 
instead of accrual books and the programs that are increasing 
at a fast clip but you didn't mention what is now being 
proposed for the biggest entitlement of all, Social Security.
    If I could have Chart No. 8 on the screen, this is what we 
extrapolate to be the cost of additional borrowing by the 
Federal Government. If today's workers are allowed to divert 4 
percentage points off FICA into private accounts and away from 
the Public Trust Fund, as you can see there in 2028, the total 
addition to the national debt is about $4.9 trillion to the 
unified deficit. That is in 2028 and you aren't even half way 
up the slope at that point. That is an enormous amount of 
borrowing which neither of you mention in your testimony. Do 
you not regard this as significant or is it just something you 
happened not to notice?
    Mr. Smetters. In fact, your chart makes the perfect point. 
It is very misleading. In particular, the reason why it appears 
there are transition costs the way you have shown is because 
the Federal budget is very misleading. It doesn't give the full 
present-value calculation.
    In the President's plan, people who put $1 into their 
personal account will receive a benefit reduction discounted by 
a 3 percent rate of return. Those personal accounts do not 
require any additional money in present value. You are right, 
the way you are looking at it.
    Mr. Spratt. It would require the Government to borrow and 
require the Government to pay debt service on the amounts we 
    Mr. Smetters. It increases the explicit debt but decreases 
the implicit debt dollar for dollar. It is a perfect offset. 
The problem is that the Federal budget looks at the explicit 
debt, ignores the much large implicit debt and therefore you 
say there is a transition cost, whereas in the President's 
budget, the President's personal account plan, it would require 
no additional money in present value. I am glad you showed that 
    Mr. Spratt. Budgetarily though, we are still faced with the 
fact that this is debt, real debt. The Federal Government has 
to go into the bond markets, the capital markets, squeeze out, 
crowd out other borrowers, borrow $4.9 trillion over this 
period of time. Once it is borrowed, semi-annually interest has 
to be paid. Debt service soars along with debt itself and as a 
consequence, more and more things the Government traditionally 
supports have to be crowded out.
    Mr. Smetters. No, that is incorrect.
    Mr. Spratt. Who is going to pay the debt service then?
    Mr. Smetters. Public debt goes up by $1, private saving 
goes up for $1, it is a complete wash.
    Mr. Spratt. You can't dip into that $1 on the private side 
to pay the debt service or to pay the bond when it comes due.
    Mr. Smetters. The debt service is, in fact, calculated in 
the amounts of the benefit reduction in the President's plan. 
This is why he discounts future benefits at a 3 percent rate of 
return. In other words, in your personal account, if you make a 
3 percent rate of return after inflation, you just meet the 
benefit reduction in the personal account. That includes the 
debt service, so it is a complete wash.
    Mr. Spratt. You have different timing periods for incurring 
of the debt.
    Mr. Smetters. No, it is the exact same present-value 
    Mr. Spratt. I won't take up the committee's time to argue 
with you further except to say that the Director of CBO 
disagreed with you when he testified the other day.
    Mr. Smetters. The CBO doesn't do the budget correctly 
    Mr. Spratt. It is real debt, it has to be borrowed, it has 
to be paid and it has to be services and all of that becomes a 
burden upon the Federal Government. It becomes almost 
insuperable in the out years of the President's projections.
    Additionally, you barely talked about tax cuts. I guess you 
have ruled them out as a political possibility but bear in mind 
2010, 2011--December 31, 2010, most of these tax cuts expire by 
design, they sunset. To renew them between 2011 and 2015 costs 
$1.66 trillion. That is about a 5-year period of time, so the 
10 year cost of renewal is really over $3 trillion.
    Mr. Haskins I believe mentioned several times the fact that 
no provision was made to fix the alternative minimum tax. That 
is $650 billion over the budget time frame. Not a dime even to 
patch it for 1 year even though the number of tax filings will 
go up from 4 million to 17 million according to CBO, there is 
not a dime in the budget to fix that. Finally, the $322 billion 
worth of other tax provisions not enacted in 2001, the R&E tax 
credit, for example, that had to be renewed too, how can we 
accommodate all these tax cuts, Mr. Haskins, Mr. Smetters, and 
ever dream of balancing the budget again?
    Mr. Haskins. We can't.
    Mr. Spratt. That is fine. I will take that and rest my 
    Mr. Haskins. That is what I said in my testimony but 
nonetheless, even if we don't do anything about taxes.
    Mr. Spratt. You still have huge problems?
    Mr. Haskins. Absolutely, but it is still worthwhile to do 
as much as you can on the spending side. I realize the 
Democrats won't particularly like that, but if we are worried 
about the deficit, there are only two ways to do something 
about it, raise revenues or cut spending. If we can't raise 
revenues because the votes aren't there, then cut spending.
    Mr. Spratt. Mr. Smetters, do you want to respond to that?
    Mr. Smetters. Suppose you didn't extend the tax cuts and on 
the spending side, suppose we got rid of the Department of 
Defense, the Department of Homeland Security, and all Federal 
agencies except payments for Social Security and Medicare and 
Medicaid? We still would not have enough money. The magnitude 
of the Social Security, Medicare and Medicaid problems are 
huge. This is a crucial point. When making the projections for 
Medicare, they already are assuming huge cost savings. They 
assume this program grows at 1 percent faster than GDP which is 
almost hilarious. There are incorporating already enormous cost 
savings into the program. The program has never grown at 1 
percent faster than GDP. It is much, much faster. So we are 
talking about huge, huge problems here.
    Mr. Spratt. Thank you again for your testimony.
    Mr. Portman. Mr. Wicker, the patient one.
    Mr. Wicker. Thank you. I am really not very patient but it 
is nice of you to think that I am.
    Along the lines of the overall increase in health-care 
costs outside of the Federal programs, Dr. Wilensky commented a 
little about that. Let me ask a twofold question. Are there any 
industrialized countries that are not experiencing this very 
same problem? And what about a major factor being the lack of 
competition in health care?
    Dr. Smetters likes health savings accounts. Let me ask you 
as economists, when you send a lot of money anywhere, the cost, 
the price seems to go up. To what extent has the cost of health 
care risen because over time with Medicare, Medicaid, almost 
universal health insurance, employment-based, without 
competition in choices, been a major factor in this overall 
increase in health care?
    Ms. Wilensky. Let me respond to the first part of your 
question, are we having a problem other or different from 
problems other countries have had? We tend to look at what we 
spend per person in this country relative to what other 
countries, G-7 countries, spend and observe we spend a lot 
more. We spend less time looking at rates of increase in 
spending in the United States compared to rates of increase in 
spending in other G-7 countries. Here we actually look far more 
similar than we look dissimilar.
    A lot of the increased spending probability has to do with 
increasing medical capabilities as well as other factors such 
as increasing income and wealth. So in part, this is an issue 
that all of the developed countries are struggling with because 
they are all having aging populations. More importantly, they 
are also all struggling with how to try to take appropriate 
advantage of new medical technologies.
    I am more positive than many of my colleagues in health 
economics and health policy about health savings accounts but 
only within a certain venue. I think it is important to give 
people part of the decision-making with regard to who they see 
and to understand that quality and price can differ.
    As Dr. Feder mentioned early on, there is an unfortunate 
fact of life about health-care spending and that is it tends to 
be very concentrated. Spending is very concentrated in 
relatively small numbers, 1 percent, 10 percent of the 
population. If you want to really stretch, you can go out to 
the top 20 percent but basically the top 1 to 10 percent of 
spenders account for a lot of money. People will blow through 
any deductible that is in place as soon as they encounter a 
hospital, certainly by day two and generally by day one.
    The question is whether you think health savings accounts 
and changing the tax treatment of health care to make it 
neutral for those with employer-sponsored insurance, maybe also 
cap the tax subsidy for those with extensive employer-sponsored 
insurance, a favorite remedy for most economists, will change 
behavior. Whether by getting people involved in the decision-
making with the early dollars, you might have them more willing 
and amenable to have real care coordination for the expensive, 
``back'' dollars, if applicable, there was better information 
about what really works when, and if there was a change in 
reimbursement so that those institutions that do it well, do it 
right the first time are rewarded. Together, would that help?
    I think it would but I would be dishonest to say that tax 
savings or tax changes alone will drive the kind of change that 
is needed because of the very concentrated spending in health 
    Mr. Smetters. I agree, HSAs are not a magic bullet. In 
terms of other countries, if you actually look at the level of 
spending as a percentage of GDP, it is not hugely different 
than the United States. It is higher partly because health care 
is a luxury good and you spend more as you get richer. As just 
pointed out, the growth rates are very similar. That means they 
are going to converge over time.
    If you look at what is provided in the Canadian or the UK 
system, if Hilary Clinton had succeeded in nationalizing the 
health-care system, President Clinton would not be alive today. 
Look at the UK or Canadian system, when you need open heart 
surgery, you don't get it in 3 or 4 days. Their average que is 
9 months. The average person dies in the United Kingdom waiting 
for open heart surgery. Yet what have they achieved with it? 
Similar growth rates, a smaller level of spending, so we are 
talking about not much progress for just a very little amount 
of money.
    Ms. Feder. I actually would make a different point about 
the international comparisons. First, it is very important to 
note that all the other industrialized nations have everybody 
in their health-care coverage systems. We have 45 million 
people who don't have coverage. I think that is an important 
    Also I think it is absolutely true that every nation is 
grappling with health-care costs and trying to get value for 
the dollars. As I understand it, actually Great Britain is 
making some great strides in trying to build the kinds of 
information systems perhaps similar to what Dr. Wilensky was 
talking about to enable them to get greater value for the 
dollar in their systems.
    The other point to make I suppose is that all of these 
systems view their health-care spending as a budgetary decision 
and politically engage in the choices they want to make about 
what they want to spend for their Nation's health care. We 
don't do that. As I have argued in my testimony, I don't want 
to do it for the most vulnerable populations and not the whole 
health-care system but every other nation is trying to do that 
and do it directly. It might behoove us to make some of those 
decisions as well.
    Mr. Portman. Mr. Wicker, would you like to sum up?
    Ms. McKinney for 5 minutes.
    Ms. McKinney. Thank you.
    Actually the question I have doesn't really pertain to the 
subject matter of today but because we have four economists, 
PhDs sitting here, I feel compelled to ask this question that 
has been asked of me that I have not been able to answer.
    One of the benefits of serving on the House Budget 
Committee, this is my first time on this committee, is that you 
get to view a lot of charts. These charts are really impressive 
with the nice color and a lot of red ink lately. My Democratic 
leader talks about millions and billions and trillions and I 
cannot fathom millions and billions and trillions. I know that 
my next door neighbor who has a 22-year-old daughter can't 
fathom those numbers either. It was Dr. Haskins, I believe, who 
said we won't balance the budget.
    Could each of you explain for me what the impact is on my 
next door neighbor who has a 22-year-old daughter of deficits 
and national debt in the trillions of dollars?
    Ms. Wilensky. It depends and the reason it depends is it 
depends on the economy and it depends on who holds the debt and 
it depends on whether or not they are willing to continue 
holding the debt. Most economist in the 1990s thought there 
would be a real drag on the economy from the deficit and that 
our interest rates would go up and slow down the economy but it 
actually didn't happen. As you know, in the 1990s, there was 
rather robust growth. Other countries were exceedingly willing 
to hold our debt, did not appear to be a drag. I don't know 
that I am in a position what would have happened had we been in 
a different fiscal position but when you are looking at the 
impact of a deficit as I look at it, although my colleagues may 
have other answers, it depends in part on the debt relative to 
the rest of the economy, who is holding the debt, whether they 
are continually willing to hold the debt and if not, do they 
engage in activities that drive up the interest rate so as to 
try to attract people to hold that debt and does that then put 
a drag on the economy.
    Starting in the mid-1980s, there had been predictions of 
dire results of having continuing deficits that actually did 
not, as best I can tell, turn out to happen. Having said that, 
when you look out at what happens when you start looking far 
into our future with regard to mandatory spending, the 
entitlement programs and with regard to the revenues likely to 
come in, it is hard not to feel concerned. That would be my 
translation in terms of how I would regard the answer.
    Ms. McKinney. But I need it in like a 30 second sound bite.
    Ms. Wilensky. I am not sure right now she is impacted. For 
right now, I am not sure she has any impact.
    Ms. McKinney. OK.
    Yes, Dr. Feder.
    Ms. Feder. Let me give it a shot and it will be clear from 
my answer I am not a Ph.D. in economics. I am a Ph.D. in 
political science.
    I don't remember whether you were the mother or talking to 
your friend's daughter but I guess if I were speaking to my 
friend's daughter, I would say that the problem right now is 
that the Goverment is not taxing your mom and me and we are 
spending money without the tax revenue to support it as a 
nation. That would be as if I went on a spending spree, went to 
Las Vegas, went to the Caribbean, had a hell of a time and 
didn't put money away to help you, 22-year-old, as you are 
starting out in your life, as you start building a career, 
making modest wages, need some help getting a house, with your 
education and building your family.
    What is happening to the Nation is that we are borrowing 
this money and we are going to have to pay the piper. Not only 
are we not helping you with your new home and your education 
and your child's needs, we are borrowing the hell out of the 
world's resources. Some day we are going to have to pay for 
that. It is you who are going to have to pay; and you are also 
going to have to pay for me because I am going to be old and 
sick and I am going to need your help.
    Ms. McKinney. That is beautiful.
    Ms. Feder. I would like a different story to tell.
    Mr. Smetters. I agree basically with what was said with one 
modification. I would say we shouldn't be going to Las Vegas. 
The problem is not the amount of money. The problem is we don't 
need to increase taxes, I believe. I think that would have a 
very detrimental impact on our economy, especially the 
effective tax rates on U.S. companies are much higher than they 
are even in Europe. I think the problem is we are over spending 
and part of that over spending is the prescription drug bill 
again that we completely unfunded, completely a large burden to 
future generations.
    Ms. McKinney. So you would recommend going to Las Vegas and 
having a darned good time?
    Mr. Smetters. No, I would recommend not going to Las Vegas.
    Ms. McKinney. Oh, don't have a good time?
    Mr. Smetters. Don't have a good time. We should live within 
our means.
    Mr. Haskins. I think the main message is in the long run 
someone has to pay. The problems that Dr. Wilensky brought up 
about interest rates, I was a staffer in the Congress in the 
1980s and 1990s and everybody was in a panic about the interest 
rates and it turned out to be the sky is falling, the sky is 
falling. The sky didn't fall.
    Still, if your income is 17 percent gross domestic product 
and your spending is 20 percent of gross domestic product, 
which that looks like the direction in which we are heading, 
eventually it is going to bite you. So we are spending too much 
or taxing too little, one of the two. Some people think we are 
spending too much, some people think we ought to both reduce 
spending and increase taxes, but the point I have tried to make 
to this committee is, we are probably not going to raise taxes 
this year because people like you don't have the votes, so let 
us at least cut spending.
    Ms. McKinney. What does that mean? Does that mean 
depression? What does it mean?
    Mr. Smetters. If we increase taxes?
    Ms. McKinney. No. When the bill comes due?
    Mr. Smetters. Sure, but ultimately that means tax increases 
on future generations. So as I pointed out, suppose we were to 
try to tax our way out of it and suppose we implemented this 
tax today, we didn't even pass it along completely to future 
generations, it would require increasing payroll taxes on 
uncapped earnings, talking about the Medicare payroll tax, 
taxes everything by 22 percentage points. That is over a 146 
percent tax increase relative to the tax rate today on 
employers and employees forever. That is assuming we don't just 
kick the whole can down the road to future generations. I think 
most economists would agree, that would have an extraordinarily 
detrimental impact and again, that is assuming all these cost 
savings the trustees are assuming in terms of Medicare costs 
only growing 1 percent faster than GDP. This is a very 
difficult situation that we are in and it could mean economic 
    Ms. McKinney. I thank you for your indulgence.
    Mr. Bradley. Thank you, Mr. Chairman.
    Given the lateness of the hour and the fact we have votes 
in just a few moments, I will pass on any questions.
    Mr. McHenry [assumes Chair]. Congressman Davis.
    Mr. Davis. Thank you.
    Let me try to be brief given the fact we do have votes 
coming up.
    As we sit here, Chairman Greenspan is testifying before the 
Financial Services Committee right now. He said something that 
may be a little surprising coming from the Chairman but it is a 
very, very eloquent and powerful point. He said the last time 
he testified before this committee that ``Equity and the 
perception of equity are important pillars in our society.'' I 
happen to believe that, I know that certainly John Spratt 
believes that and a lot of others in the room believe and I am 
glad Alan Greenspan believes it.
    I want to touch on that for a moment because what strikes 
me is the constant theme, whether we are looking at HSAs as 
opposed to a different approach to health care, whether we are 
looking at partial privatization of Social Security versus a 
more egalitarian approach, whether we are looking at the 
President's tax cuts versus a more egalitarian set of tax cuts, 
whether we are looking at the President's budget choices versus 
a more egalitarian set of budget choices, there is a constant 
theme. On issue after issue, what we see is a set of policies 
that are arguably skewed toward some people in society and not 
    Again, HSAs are a great example. Most of the uninsured in 
this country aren't paying taxes, so therefore any kind of 
system that is geared around the amount of taxes they can take 
isn't going to do them a lot of good or allow them to earn in 
the 15 percent bracket.
    Obviously partial privitization of Social Security will 
reward the savvy who know something about earnings and 
investments and probably won't be as impactful for people who 
don't have that kind of knowledge. The President's tax cuts 
were enormously generous to people in the top end of our 
society. The average person in my district got about $38 a 
    I would like to hear from Dr. Wilensky on that general 
point because I am concerned as we talk about reform in a 
number of areas, this persistent inequity and this drive toward 
policies that favor the few at the expense of the many, that 
there seems to be a real constancy to that theme in this 
administration. Do you agree with that, Dr. Wilensky?
    Ms. Wilensky. I don't think I would characterize it that 
    Mr. Davis. Do you disagree substantively with any of the 
examples I laid out?
    Ms. Wilensky. I think the tax cut that was passed initially 
was a very important factor in jump starting the economy.
    Mr. Davis. Should it have been more egalitarian or more 
geared toward the middle class in your opinion?
    Ms. Wilensky. I am not here as a tax expert although public 
finance is my background. I think how you gear and particularly 
what happens to the renewal is a serious issue but I think to 
just blanketedly dismiss the notion.
    Mr. Davis. I am not being blanket, I am asking a specific 
question. The tax burden on the middle class has stayed 
relatively constant and it has actually gone up to some degree 
in the last several years whereas the tax burden on people on 
the upper end has had a significant amount of decrease. Dr. 
Feder, you are nodding your head. Do you want to weigh in on 
    Mr. Smetters. Could I? A couple of points. I agree with you 
in terms of equity. I would simply say also look between 
generations in terms of equity and I don't think we are being 
equitable that way.
    The second point is I am surprised you would be opposed to 
personal accounts for Social Security. Personal accounts aren't 
going to help you or not because we already have access to an 
equity market but look at the bottom 20 percent of people in 
the income distribution, 9 percent of them have some access to 
capital markets, one-third of African Americans have some 
investment in the capital markets. That to the personal 
accounts helps. It is those people who have finally had a 
chance to build wealth that don't have access right now.
    The personal account system the President is talking about 
would make it very, very easy to do so.
    Mr. Davis. The only thing I would add, Mr. Smetters, that 
may be a little bit of difference is I think if you were to 
poll the democratic side of the aisle, if we had a blank check 
to write, I think a lot of us would like the idea of private 
accounts assuming people could leave it to their children which 
the President would not allow them to do, assuming a number of 
other factors but the reality is we don't have a blank check, 
we have a prospect of trillions of dollars worth of borrowing.
    You make a very important and good point about inter-
generational equity. Is there a deeper inequity in one 
generation passing on the cost of what is yet another 
government reform to the next generation?
    Ms. Feder. I would also say there is a real difference 
between enhancing the capacity of younger people to invest and 
have accounts on top of protections that we now have in Social 
Security as opposed to eliminating some of the Social Security 
protections and substituting something that is much riskier to 
individuals. Social security is a kind of insurance, it is 
about spreading risk and we must hold on to that concept in any 
policy changes as we move forward.
    Mr. Davis. If I can just close.
    Mr. McHenry. The gentleman's time has expired. We have 
votes and there are others who would like to ask questions, me 
included. Thank you.
    I too am part of the Financial Services Committee and heard 
Chairman Greenspan testify this morning. I want to read you a 
portion of his opening statement that is pertinent to our 
discussion here today. ``Beyond the near term, benefits 
promised to an ever increasing retirement aged population under 
mandatory entitlement programs, most notably Social Security 
and Medicare, threaten to strain the resources of the working 
age population in the years ahead. Real progress on these 
issues will unavoidably entail many difficult choices but the 
demographics are inexorable and call for action before the 
leading edge of baby boomer retirement becomes evident in 2008. 
This is especially the case because long-term problems, if not 
addressed, could begin to effect longer dated debt issues, the 
value of which is based partly on the expectations of 
developments many years in the future.''
    Certainly it is much easier to hear Alan Greenspan read 
that because he actually understands what those words mean. 
However, I think it is a pertinent question here today, what 
are the long-term liabilities that we face with entitlement 
programs going to do to our long-term economic ability to 
sustain the Government spending we have today, programs 
accounting for roughly 20 percent of GDP. If that continues on 
track, that will be 40 percent of GDP just a decade down the 
road. My question to you, Dr. Smetters is what is the answer? 
Is it perhaps with Social Security, increasing private savings 
while reducing long-term unfunded liabilities for the 
Government? Is it looking at ways to create cost savings 
through greater efficiency or is it cuts?
    Mr. Smetters. It has to come in the form of controlling the 
growth through the benefit increases. In particular, I will be 
the first to tell you that the personal accounts themselves are 
not a magic solution. They don't add to the problem, they don't 
make the problem smaller. You really have to control the growth 
rate of benefits themselves.
    The alternative is to increase taxes and that would 
collapse the economy. Controlling the growth through the 
benefits would not collapse the economy and the reason why is 
because we can still afford under Social Security to pay future 
generations the same inflation adjusted value of benefits that 
we pay current retirees. What we cannot afford, which is what 
current law promises, is to grow the benefits at a rate faster 
than inflation. That is the problem.
    The reason we have this problem is because current law is 
actually promising future generations a level of benefits that 
is actually higher than what current retirees are getting even 
after you adjust for inflation. We just can't do that with 
either Social Security or Medicare.
    Mr. McHenry. But isn't it true with Social Security the 
demographic shift in this country, the fact we have fewer 
workers per retiree and getting fewer and fewer and fewer in 
outlying years means that it is not a sustainable system on a 
pay-as-you-go basis?
    Mr. Smetters. That is correct. Even after the baby boomers 
are out of the system, it still has huge cash flow problems. So 
we do have to think about reducing those benefit sizes. The 
best approach too would be to increase personal savings I 
believe through personal accounts because we have a paltry 
level of personal saving in this country already. That 
certainly is going to contribute to future economic problems.
    Mr. McHenry. Thank you.
    Mr. Haskins. May I make a brief comment? Mr. Spratt 
referred to the elephant in the room. The real elephant in the 
room is that the Congress won't cut spending. That is the 
elephant in the room. You could say we ought to increase taxes 
somewhat but we just spend too much money and we're going to 
spend too much money in the future. We complicated the problem 
when we passed the drug benefit. At some point, the Congress is 
really going to have to do something about spending. That is 
the elephant in the room as far as I am concerned.
    Mr. McHenry. I hope to reach out to Ranking Democrat Spratt 
so we can come up with ways to cut spending and actually fully 
restrain Government spending. I think that would be a positive 
thing if we could reach across the aisle and look at ways we 
could find real cuts.
    Chairman Nussle.
    Chairman Nussle. Yes. Thank you, Mr. Chairman.
    First, I would like to thank the gentleman from North 
Carolina for chairing the hearing and for giving us the chance 
to ask the panel. I had to step out for a moment so I didn't 
hear all of the answers so I may retread some ground here.
    I wanted to bring to you and other members attention a 
meeting that Mr. Spratt alluded to and that was with myself and 
Mr. Spratt and as it turns out, Governors met yesterday with 
members of the Senate to talk a bit about the challenges 
regarding Medicaid. The headline from the New York Times I just 
had a chance to look at is interesting. It says, ``Governors in 
Capital to Talk about Medicaid.'' The opening paragraph says, 
``Congress, Governors and the Secretary of Health and Human 
Services began negotiations Wednesday on the future of Medicaid 
with a view toward making fundamental changes in the program to 
control its costs.'' I can tell you that was not what happened 
yesterday. There was a lot of whining, there was a lot of 
complaining, there was a lot of my not in my backyard, please 
don't cut me, not this year, oh my gosh the sky is falling but 
I can tell you there was no Congress, Governors and the 
Secretary of Health and Human Services beginning any 
negotiations yesterday about a view to fundamental changes in 
the program to control its cost.
    In fact, interestingly enough, they said, we will come back 
to you with a plan for next year. My Governor was here, 
Governor Tom Vilsack of Iowa is quoted. A Democrat said, ``The 
current Medicare system is not sustainable'' and goes on to 
say, ``Governors desperately want to slow the growth of 
Medicaid which they say is eating up State tax revenues they 
want to use for education.''
    Going to Mr. Haskins' point, this whole issue or the notion 
of is there some outside force? I don't think there is any 
question that the outside force is there. I think you are 
right. The outside force to control costs, the realization of 
what it is doing to the Federal budget, to the State budgets, 
to family budgets, to business budgets, to everything across 
the board, the out of control costs and nature of health care 
is an outside pressure that is just growing and is enormous.
    What troubles me about not only the article but more than 
the article, the meeting, maybe they had a different meeting 
with the Senate but I can tell you that there was no discussion 
about doing anything this year. They all basically said please 
wait until next year. As my father always said, tomorrow never 
comes because by the time you get there it is either today or 
tomorrow is the next day. Tomorrow never comes. They basically 
were saying please do this tomorrow was their first message and 
my message back to them is why are you here then?
    My guess is the reason why they are here is because of the 
``R'' word that has crept up which was your second point or 
another point you made Dr. Haskins and that is reconciliation. 
The fact that the President has proposed savings of any kind 
for any reason, and the fact that I have used the term and 
Senator Gregg, the Chairman of the Budget Committee has used 
the term, our leadership has used the term and we are starting 
to hear people talking about reconciliation which is a real 
process different than PAYGO as it is often called which is I 
think an illusory process, a way if you want to do it you use 
it, if you don't want to do it you waive it.
    Reconciliation, as we all know, is real and that has forced 
Governors to come here and basically take that reality and say 
OK, now we have to talk. We are glad they are here. They should 
have been here last year, they should have been here the year 
before. None of this information is new. We know it is 
unsustainable and I would guess that is a unanimous view of the 
four of you. Even Dr. Feder, I can't believe you are here 
saying that the current programs are sustainable. You may have 
a different opinion on what we do next, that is a different 
issue but the fact we have a problem, the fact the program is 
broke and the fact it is not sustainable, I don't think there 
is any argument. Is there really? You think the program is 
    Ms. Feder. I think when one uses the kind of language as 
unsustainable and broke, and you went on to say broken----
    Chairman Nussle. All right, I won't say broken.
    Ms. Feder. Don't say broken. What I think is that the 
financing needs attention.
    Chairman Nussle. It is unsustainable.
    Ms. Feder. I won't say it that way.
    Chairman Nussle. I will let you argue with my Governor 
then. He says it is unsustainable.
    Ms. Feder. I think the difficulty with that language is 
that it implies that we lack the resources to support our 
commitments. I do not believe that. Whether they are there 
under existing tax structures or existing Federal/State 
arrangements, that is another story.
    Chairman Nussle. All right. That is fair.
    Ms. Feder. We usually agree when we fight it out.
    Chairman Nussle. It is a difference of context. If the 
context is we could do away with our military; we could do away 
with Homeland Security, we could do away with lots of things or 
we could raise taxes on the rich, just tax the rich, we could 
do all those things. I understand there are options but at its 
current rate, is it sustainable? The answer is obviously no.
    Ms. Feder. We have discussed it and I would not use the 
same language.
    Chairman Nussle. I will let you argue with my Governor.
    Mr. Haskins. Chairman Nussle, could I add something 
briefly? Mr. Smetters made the point that by 20--I forget the 
year--that just Medicaid, Medicare and Social Security, just 
those three, would require 20 percent of GNP.
    Chairman Nussle. Which is what our total budget is also.
    Mr. Haskins. You are talking at least 30 percent. Can 
anybody, including the Democrats in this room, imagine a tax 
system that is going to take 30 or 35 percent of GNP? It is not 
going to happen.
    Chairman Nussle. That may be possible. You can imagine it 
but is it realistic is a different issue. It is not realistic 
and it is not sustainable.
    Ms. Feder. If you were to speak differently, talking about 
health-care programs----
    Chairman Nussle. I am talking about my Governor. I am not 
speaking differently.
    Ms. Feder. I will stop if you want but where I wanted to go 
was to say that if you want to talk about the entire health-
care system which is not simply imposing costs on public 
programs but also on families who are relying on private health 
insurance and on jobs, it really poses a problem.
    When we talk about whether we want to change the rate of 
growth in our health-care system, I am ready to talk.
    Chairman Nussle. Thank you and that is my last question to 
Dr. Wilensky. Could you help us figure out how we can allow the 
Medicaid program to grow at 5.5 percent a year as opposed to 
5.7 percent a year or 7.5 as opposed to 7.4? Is it possible 
just to slow this down a bit and still deliver a quality 
product to the people that we want to help? Can we slow down 
the rate just a little bit? That is what we are asking.
    The things you mentioned and have mentioned so many times 
in the past, can they be employed so that we can continue to 
spend more money and continue to increase the program but just 
slow it down just a little bit so we can save a little bit of 
money over the long term?
    Ms. Wilensky. You probably can. The difficulty with 
Medicaid is that it tends to be a residual pick-up for 
populations that aren't picked up in other programs. That 
really is what makes it hurt.
    The reason I say maybe you can is we have done less 
thinking about how to try to help get a little better deal, a 
little better value for the aged disabled population. If what 
sometimes happens is you get a little more efficient, so you 
bring a few more people in to get services, then you are not 
going to be any better off.
    What we did find when managed care and other strategies 
were introduced to the moms and kids, the families part, there 
were some savings that were available but they weren't 5 
percent over the time. The question is, could you get .2 of a 
percent down? Maybe, but there are a lot of other people who 
might want to come in and receive some of the services who are 
not quite eligible now or who aren't being brought in by their 
own States and the big problem is they may well soak up any 
additional savings that you might have with the current 
population. That kind of number you ought to be able to do. It 
is the residual population that we are not taking care of that 
you don't know what it will do to the Medicaid spending.
    Chairman Nussle. One of the Governors we met with yesterday 
on the one hand said, please don't cut, let us do this next 
year and almost the day before, I think 24 hours before, was 
announcing the fact they were increasing Medicaid for 20,000 
new recipients. It was interesting, please don't cut us, we 
will work on Medicaid reform, we will do it next year, we will 
do it tomorrow, but oh, in the meantime, we are going to 
continue to increase the people who are eligible. It is a fair 
concern but it is kind of hypocritical or at least it is 
certainly not consistent with the message.
    Lastly, I would ask, there have been some who have 
suggested that we need a Medpac so to speak advisory committee 
for Medicaid, that we need some type of an organization who can 
give us similar advice the way you did when you were on Medpac 
for Medicare. Would that be an idea that you could endorse or 
suggest or do you have a better idea of how we could approach 
    Ms. Wilensky. The problem with a Medpac counterpart for 
Medicaid is the Federal Government doesn't run Medicaid, it 
runs Medicare and prescription drugs excluded, it sets the 
prices, the reimbursement for everything in Medicare and 
monitors quality.
    The States do all of that, so unless you are thinking about 
changing that arrangement, I am not sure what a Medpak 
counterpart would do.
    A group could try to rethink the issue if we think there 
are problems with the existing Medicaid program, what would a 
different Medicaid program look like? That is more of a one-
time commission and if it was the Federal Government that would 
be making the decisions rather than the State, of course a 
Medpak type of commission would be fine but under the current 
power sharing which is basically the States run the program 
with some Federal oversight and a whole lot of Federal money, I 
am not sure what a commission would do advising the Congress.
    Chairman Nussle. What about with dual eligibles?
    Ms. Wilensky. I think dual eligibles are really a program 
that absolutely needs to have reconsideration. It is not a big 
number but it is a whole lot of money. The worse part is they 
don't get very good care. They spend a lot of money, get better 
care than if they weren't dual eligibles, but for the kind of 
money that is being spent, it is incredibly uncoordinated for 
the people who have the most complex medical problems.
    Chairman Nussle. Thank you, Mr. Chairman.
    Mr. McHenry. Thank you, Mr. Chairman.
    Thank you all for being here today and I appreciate you 
taking the time to spend a few lovely hours with the House 
Budget Committee. Thank you again for your testimony. Thank 
you, Mr. Chairman, for the honor of serving as chairman for a 
    This meeting is adjourned.
    [Whereupon, at 12:30 p.m., the committee was adjourned.]