[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
                   THE 2007 MEDICARE TRUSTEES REPORT

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


                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

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

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 25, 2007

                               __________

                           Serial No. 110-33

                               __________

         Printed for the use of the Committee on Ways and Means



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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            DAVE CAMP, Michigan
JOHN LEWIS, Georgia                  JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York         PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee            JERRY WELLER, Illinois
XAVIER BECERRA, California           KENNY C. HULSHOF, Missouri
LLOYD DOGGETT, Texas                 RON LEWIS, Kentucky
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio          THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois               JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL JR., New Jersey        JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

             Janice Mays, Chief Counsel and Staff Director

                  Brett Loper, Minority Staff Director

                                 ______

                         SUBCOMMITTEE ON HEALTH

                FORTNEY PETE STARK, California, Chairman

LLOYD DOGGETT, Texas                 DAVE CAMP, Michigan
MIKE THOMPSON, California            SAM JOHNSON, Texas
RAHM EMANUEL, Illinois               JIM RAMSTAD, Minnesota
XAVIER BECERRA, California           PHIL ENGLISH, Pennsylvania
EARL POMEROY, North Dakota           KENNY C. HULSHOF, Missouri
STEPHANIE TUBBS JONES, Ohio
RON KIND, Wisconsin

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


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of April 18, 2007, announcing the hearing...............     2

                                WITNESS

Richard S. Foster, Chief Actuary, Centers for Medicare and 
  Medicaid Services, Baltimore, Maryland.........................     6

                       SUBMISSION FOR THE RECORD

AARP, statement..................................................    50


                   THE 2007 MEDICARE TRUSTEES REPORT

                              ----------                              


                       WEDNESDAY, APRIL 25, 2007

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

    The Subcommittee met, pursuant to notice, at 2:08 p.m., in 
room 1100, Longworth House Office Building, Hon. Fortney Pete 
Stark (Chairman of the Subcommittee), presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
April 18, 2007
HL-8

              Health Subcommittee Chairman Stark Announces

             a Hearing on the 2007 Medicare Trustees Report

    House Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) 
announced today that the Subcommittee on Health will hold a hearing on 
the 2007 Medicare Trustees report. The hearing will take place at 2:00 
p.m. on Wednesday, April 25, 2007, in Room 1100, Longworth House Office 
Building.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from the invited witness only. 
However, any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    The Social Security Act requires the Board of Trustees for the 
Medicare program to report annually to the Congress on the current and 
projected financial condition of the Hospital Insurance (HI) and the 
Supplementary Medical Insurance (SMI) trust funds. The Trustees, who 
are designated in statute, include the Secretary of the Treasury (who 
is the Managing Trustee), the Secretary of Labor, the Secretary of 
Health and Human Services, the Commissioner of Social Security and the 
Administrator of the Centers for Medicare and Medicaid Services (CMS). 
In addition, the statute requires that there be two public trustees, 
both of whom cannot be from the same political party, who are appointed 
by the President and confirmed by the Senate for 4-year terms. The CMS 
Office of the Actuary, led by Chief Actuary Richard Foster, is 
responsible for preparing the report. The 2007 Annual Report is 
scheduled to be released on Monday, April 23.
      
    Ensuring the sound management of Medicare is one of Congress' most 
important responsibilities. This annual report provides a valuable 
update on the program's status and important information with respect 
to projections of future expenditures, enrollment and other trends.
      
    In addition, the 2003 Medicare legislation (P.L. 108-173) created a 
new mechanism based on a designated threshold to cap Medicare's 
funding. Accordingly, when the Trustees project that at least 45 
percent of Medicare's funding will come from general revenues within 
seven years, a warning is issued. The 2006 report contained the first 
official warning that the projection is in sight. If the 2007 report 
contains the second consecutive warning, President Bush will be 
required in 2008 to send Congress legislation with Medicare payment 
reductions to keep general revenue spending below the threshold. This 
legislation is given expedited consideration in the Congress.
      
    In announcing the hearing, Chairman Stark stated, ``Medicare is a 
vital program that serves 44 million beneficiaries and provides peace 
of mind for them and their family members. While the program faces 
fiscal challenges due to changing demographics and special interest 
payments, there is no reason we can't work on a bipartisan basis to 
protect and strengthen this important social compact with America's 
families, just as Congress has done since Medicare's creation in 
1965.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the 2007 Medicare Trustees Report.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
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FORMATTING REQUIREMENTS:

      
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noted above.

                                 

    Chairman STARK. If our guests would find a comfortable 
seat, we will commence the hearing on the 2007 Trustees' Report 
on the financial condition of the Medicare Program.
    We have with us Mr. Richard S. Foster, Rick Foster, the 
chief actuary of the Centers for Medicare and Medicaid 
Services, from Baltimore. He is not a stranger to our 
Committee. He has been helping us for many years.
    Thank you, Mr. Foster, for being here.
    The Trustees' Report is a tool that helps us try and decide 
what to do about the Medicare Program, and we haven't done much 
adjusting in recent years. As we review your report this year, 
we will begin to oversee Medicare and try to ensure its 
continued viability for the future.
    I would like to start by paraphrasing Mark Twain, saying 
that the report of Medicare's demise has been greatly 
exaggerated, but despite some gloom and doom forecasts, the 
report of the trustees doesn't show any disasters and perhaps 
can give us some ideas to keep it solvent and sustain it. While 
we face undeniable demographic challenges, increased cost 
challenges, the 45 percent trigger warning we keep hearing is, 
I think, little more than an attempt to both get us to turn 
away from Medicare as an entitlement.
    Since Medicare's creation, we have regularly modernized the 
program to accommodate advances in medicine. For a growing 
population, one that is growing older and, in many cases in the 
last years, sicker--and we are going to return to that 
process--the private plans don't have their own fund, and those 
payments for Medicare Advantage are drawn from the regular 
trust funds, and there are some major implications there.
    Overpayments are directly negatively affecting the solvency 
in the general revenues for Medicare, and it is something we 
will have to look at.
    The report does highlight a large migration in the coming 
years from the traditional fee-for-service plans, and we can 
see how the plans have overtaken physician spending, for 
example, and are now second only to hospitals in terms of the 
provider costs.
    The report also highlights that part B spending is 
artificially understated because the trustees are forced to 
assume continuation of the current law under which the 
physicians are scheduled to get a 10 percent cut next year and 
nearly a 5 percent cut each of the following 8 years. I think 
it is pretty clear that the political climate won't allow that 
to happen to such an extent.
    So, we have our work cut out for us. I think most of us 
agree that all payments and all providers are going to have to 
be reviewed, and I look forward to working with my colleagues 
on both sides of the aisle and the administration to see if we 
can balance the competing priorities and enact a Medicare 
policy that is good for the beneficiaries, the taxpayers, and 
fair to the providers.
    A big job ahead of us, and I look forward to the assistance 
of my Ranking Member, Mr. Camp, and I look forward to his 
comments.
    Mr. CAMP. Thank you very much, Mr. Chairman, for holding 
today's hearing. I also want to welcome CMS Chief Actuary Rick 
Foster, who will testify about the 2007 Medicare trustees 
Report.
    Having seen the report, which was released on Monday, the 
long-term solvency of Medicare isn't getting any better. The 
Health Insurance Trust Fund, which finances Medicare part A, is 
now projected to be exhausted by 2019. The Supplementary 
Medical Insurance Trust Fund, which finances both part B and 
Part D, continues to grow at a rate that is greater than both 
the rate of growth in private insurance and total national 
health expenditures.
    Unlike part A, part B of Medicare does not face insolvency, 
but that is only because the program gets its funding from 
beneficiaries' premiums and general revenue. Because of the 
rapid growth in part B spending, beneficiary premiums have 
significantly increased over the last 4 years. Further growth 
in part B spending can only mean dramatically greater costs for 
both Medicare beneficiaries and taxpayers.
    I also want to briefly discuss what I believe will be a 
topic during today's hearing, the 45 percent trigger. This is 
the second year Medicare trustees have signaled that program 
outlays will be comprised of at least 45 percent of general 
revenue funds, and under statute both the President and 
Congress must respond to this warning next year.
    I think it is important that Congress not pass on an 
opportunity to bring real reform to Medicare. We can't afford 
to wait any longer because financial pressures threatening 
Medicare only grow greater with each passing year.
    One positive item in the Trustees' Report highlights how we 
can potentially strengthen and improve the Medicare Program. 
Program costs for Part D are 30 percent lower than what was 
projected when the Medicare Modernization Act was passed in 
2003, and in 2007 alone plan bids came in 10 percent lower than 
the previous year. To me, this is evidence that competition is 
working.
    Participating plans have successfully negotiated with drug 
companies and pharmacies to offer plans to seniors at lower 
cost. Part D is the only part of Medicare that has a lower rate 
of growth than expected.
    Some commentators have suggested that with different 
parties controlling the legislative and executive branches of 
government it is unlikely that we will enact any serious health 
care legislation this year. I still recall, however, a divided 
Federal Government came together to make difficult choices in 
the past, and this resulted in 1997 in the Balanced Budget Act, 
which ultimately led to major reforms strengthening and 
improving the Medicare Program and extended the solvency of the 
HI Trust Fund.
    I certainly hope, Mr. Chairman, that we can work together 
again to address this new challenge, and I look forward to 
working with my colleagues as well on both sides of the aisle 
as well on this issue. I thank you for the opportunity to 
address this. Thank you.
    Chairman STARK. I want to announce that during this period 
General Petraeus is enlightening the Members on problems in 
Iraq, and the Chair is one of the few Members in Congress who 
hasn't signed the secrecy pledge, so I can't go. But my 
colleagues may be interested, and should be, in hearing what he 
has to tell us. So, you may notice that they are coming and 
going.
    I have suggested to the minority staff that if they have 
some written questions that you would like to have on the 
record, I would be glad to present them to Mr. Foster for you. 
The same would hold for Mr. Doggett, who I know has 
constituents who are interested in getting a report on General 
Petraeus' comments. So, I will try and see that if there are 
any questions that my colleagues want to have directed to Mr. 
Foster, we can.
    I am again pleased to have you, Rick. I would like you to 
take as much time as you desire. Normally we talk about 5 
minutes, but you have got a rather major report. So, why don't 
you just proceed to enlighten us in any way that you feel 
comfortable.

  STATEMENT OF RICHARD S. FOSTER, CHIEF ACTUARY, CENTERS FOR 
                  MEDICARE & MEDICAID SERVICES

    Mr. FOSTER. Thank you, Mr. Chairman.
    Chairman STARK. Pull the mike as close as you can to you.
    Mr. FOSTER. Yes, I remember these microphones well.
    Chairman Stark and other distinguished Members of the 
Committee, I really want to thank you for inviting me here to 
testify today about the financial outlook for the Medicare 
Program. I will briefly summarize the key points from the new 
Trustees' Report that just came out this past Monday.
    By way of background, let me start off by reminding you 
that the purpose of the Trustees' Report is to assess the 
ability, the adequacy of the income of a trust fund and its 
assets, to ensure that benefits can be paid on time. In 
particular, while this may be somewhat of a narrow question, it 
turns out to be a fundamentally important question because 
unless we have a positive asset balance in a trust fund, then 
we don't have the statutory authority to make benefit payments.
    So, the two are tied together. As I said, it is a narrow, 
but it is an important one.
    It is not the only kind of question that can be asked. For 
example, we frequently hear questions having to do with, is 
Medicare sustainable in the long run? Or what is the impact of 
Medicare on the Federal budget? These are important questions, 
but they are fundamentally different questions than whether the 
trust funds are technically solvent or not. Unfortunately, you 
can't use one answer for the other question because they are 
just independent of each other.
    So, what I will be talking about and what the Trustees' 
Report is all about is the assessment of the financial status 
and the ability of a trust fund to pay benefits when they are 
due.
    Medicare has three trust fund accounts. There is one, the 
Hospital Insurance Trust Fund is well known; and then for the 
part B and Part D components of supplementary medical 
insurance, there is a separate account for each part of the 
program within the Supplementary Medical Insurance Trust Fund.
    Of course, there is a Part C of Medicare or Medicare 
Advantage, but its payments or the payments to those plans are 
made from the part A and the part B accounts for Medicare. It 
doesn't have its own separate account.
    By law, each trust fund account is separate. In other 
words, there is no provision that allows shifting revenues or 
assets from one trust fund account to another. There is no such 
provision. Consequently, to evaluate the financial status of 
Medicare, you have to look at each separate account 
individually and assess the adequacy of its income and assets.
    I might add that the trustees make projections under 
current law; they don't assume any change in the laws 
regulating the program, and the projections are necessarily 
uncertain.
    If you think about it, health care costs and their rate of 
increase from one year to the next can be somewhat volatile 
and, therefore, hard to project. In addition, they are even 
more uncertain than normal because of the drug benefit, which 
is a relatively new program yet. We are starting to get actual 
experience on it, but it still is quite new. We don't have 
decades of a track record like we do for Parts A and B. So, the 
projections, while uncertain, can still provide useful policy 
information and can be useful in the development of the 
Medicare Program itself.
    I will talk now about the individual accounts and their 
financial status as shown in the Trustees' Report, starting 
with the Hospital Insurance Trust Fund.
    Most of the financing for this fund, as you know, comes 
from the HI payroll tax which is part of the FICA and SECA 
payroll taxes. These rates are set in law and they can't change 
to accommodate higher or lower spending levels unless the 
Congress acts to change them.
    The hospital insurance financial status has improved 
slightly since last years Trustees' Report, but it remains 
fairly poor, I have to say. Costs for hospital insurance are 
expected to exceed the tax revenues to the trust fund in this 
year, 2007, and all future years. The difference, the 
shortfall, can be met for a while by using the interest 
earnings on the invested assets and also by redeeming those 
assets themselves, but in 2019, as you mentioned, Mr. Chairman, 
the assets would be totally depleted, and at that point, if 
there is no corrective action, we could not pay all the 
benefits that are owed on time. The 2019 depletion date, 
incidentally, is estimated at 1 year later than the estimate 
from a year ago.
    At the end of the trustees' long-range 75-year protection 
period the schedule tax revenues for hospital insurance are 
expected to be sufficient to cover only less than one-third of 
the projected HI expenditures, so that signifies a very large 
actuarial deficit, which we are seeing just the beginning tip 
of, currently, but it would grow steadily worse.
    For supplementary medical insurance and the part B account, 
here the financing is about 25 percent from beneficiary 
premiums, with the other 75 percent met by general revenues. 
Every year we reset or redetermine the premium and general 
revenue financing for part B, and as a result, income will keep 
pace with program expenditures and the part B accounts in the 
trust fund will never go broke.
    A concern has been raised, however, about the rate of part 
B expenditure growth. For example, over the last 6 years, on 
average, part B expenditures went up by about 11 percent per 
year. In addition, for part B, as you know, there is a major 
problem with the mechanism for paying physicians under 
Medicare--the sustainable growth rate mechanism.
    Under current law it would require us to reduce physician 
fees under Medicare by 10 percent at the start of 2008; and 
then at the start of 2009, we would have to reduce them another 
5 percent; and at the start of 2010 another 5 percent beyond 
that, et cetera, for about another 8 or 9 years. Collectively, 
that would result in a reduction in physician fees of 41 
percent in 2016, compared to today's level, so not only no 
increases, but a 41 percent reduction.
    That situation is clearly implausible, and the Congress has 
overridden scheduled reductions for each of the last 5 years; 
and frankly, I think you all are pretty likely to continue 
doing so in the future. What that means, however, is that the 
actual part B expenditures are quite likely to exceed the 
projected amounts shown in the Trustees' Report, which are 
based on current law, including all those reductions in 
physician payments, and in the longer run, the understatement 
in the Trustees' Report might well be in the range of 25 to 40 
percent, so a fairly serious understatement.
    Turning to the Part D account in the Supplementary Medical 
Insurance Trust Fund, Part D financing is similar to part B in 
that it comes from enrollee premiums, which currently cover 
about 7 percent of program costs; but that percentage will 
increase somewhat over time. General revenues provide the 
lion's share of the financing, currently about 82 percent, and 
then the payments, special payments by the States on behalf of 
the dual Medicare-Medicaid beneficiaries, those currently 
account for about 11 percent of total program costs. But that 
share will decline somewhat over the next 10 years.
    The good news about Part D is that the cost estimates have 
come down significantly, and over the first 10 years of the 
projection, they are now 13 percent lower, or about $127 
billion, than what we estimated for the same period a year ago. 
I can describe for you the reasons for this difference in the 
estimates once we get to the questions and answers.
    Part D will also be an automatic financial balance, like 
part B, because we have this annual redetermination of the 
beneficiary premiums and the general revenue financing, so we 
won't have this trust fund going broke either. But it is 
important to note that we do project costs to grow fairly 
quickly in Part D over the next 10 years, averaging about 12.6 
percent per year, with a bit over a third of that due to more 
enrollment and the balance due to increases in the per capita 
cost.
    There is a basic challenge in financing Medicare or health 
insurance plans of just about any kind. It is not unique to 
Medicare, but that is, if you think about how the expenditures 
increase, health care costs grow if you have more people who 
are eligible for the coverage, for the benefits. They also grow 
based on increases in the price per medical service performed, 
and that typically reflects wages and price increases. But 
beyond that, as well, beneficiaries tend to use more services 
over time. The utilization goes up, and moreover, the intensity 
of those services or the average complexity goes up also. That 
is a function largely of technology.
    Every year smart people invent new services, new 
techniques, new drugs, whatever, and we as the consumers of 
them want those because they make us in better health.
    So, for all of those reasons, health care costs tend to 
increase at a faster rate, say, than our incomes or the 
national economy, and that causes a financing pressure. It 
makes it harder and harder over time to pay for the health 
insurance programs.
    On top of that, of course, we have the demographic problems 
that are fairly well known at this point. With the retirement 
of the baby boom population, the number of beneficiaries will 
increase much faster than the number of workers, and in 
addition, as the baby boom generation ages, they will move into 
the higher ages where health care costs grow the fastest or are 
the highest. That will contribute also.
    For Medicare, in total, currently the expenditures 
represent about 3.1 percent of gross domestic product, or the 
total size of the economy; but by the end of the trustees' 
long-range projection period that cost level has grown to 11 
percent under their intermediate assumptions.
    Let me say just a couple words about the 45 percent trigger 
that has gotten so much attention this year. This was enacted 
as part of the Medicare Modernization Act in section 801, and 
the next couple sections as well, and it works as follows:
    If the difference between Medicare expenditures and what is 
referred to as the ``dedicated revenue sources''--and by that, 
I mean the payroll taxes, the premiums, the State payments, and 
the small amount of revenue we get from income taxes on Social 
Security benefits--so if those four dedicated revenue sources 
fall short of total expenditures to the extent of 45 percent, 
if the difference is at least 45 percent and is projected to 
get there within the first 7 years of the projection, then that 
prompts a determination by the trustees of excess general 
revenue Medicare funding.
    Now if that determination is made in two consecutive 
Trustees' Reports, as it was--for example, the 2006 report had 
such a determination of excess general revenue Medicare 
funding, and we have now had a second consecutive determination 
in the 2007 report. When that happens, it triggers a, quote, 
``Medicare funding warning.'' So, this funding warning is now 
met or triggered for the first time with this report.
    The Medicare funding warning requires that the President 
submit legislation designed to respond to the warning, and he 
has 15 days after the next budget submission to do that. In 
this case, that would be the fiscal year 2009 budget that comes 
out in early February 2008. So, either as a part of that budget 
or within 15 days afterward the President must submit the 
legislation, and then Congress is required to consider the 
legislation on an expedited basis under special rules.
    The test itself is a little more complicated, perhaps, than 
I might prefer, but I would characterize it as a useful 
measure, useful indication of the magnitude of the general 
revenue financing that is provided under current law for 
Medicare.
    For many years, hospital insurance always got the attention 
because the HI Trust Fund was always going broke or threatening 
to go broke. The Parts B and D of Medicare, which were, in 
fact, increasing at a faster rate than part A, got relatively 
little attention.
    So, I think the intent of this new test, this new funding 
warning, was to call more attention to the magnitude of the 
general revenue financing and to the impact on the Federal 
budget; and I think it useful in that regard.
    We have to be careful, however, because a Medicare funding 
warning, despite its title, should not be interpreted as an 
indication that trust fund financing is inadequate. It is not 
that kind of measure. That sort of assessment can only be made, 
as I mentioned, by looking at each account individually and 
assessing the adequacy of its financing and assets.
    Let me finish up by saying that based on the projections in 
the 2007 Trustees' Report, the Medicare board of trustees 
recommends prompt attention to the financial challenges facing 
Medicare.
    Chairman Stark, as you well know, for many, many years, 
really, many decades, the Office of the Actuary at CMS has 
helped Congress and the administration in analyzing the 
financial situation and what might be done about it; and I 
would just like to pledge the Office of the Actuary's 
continuing assistance to Congress as you continue to strive to 
solve these challenges.
    I would happy to answer any questions that you might have.
    [The prepared statement of Mr. Foster follows:]

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    Chairman STARK. Rick, thank you very much. My staff deeply 
appreciates your offer of helping us, because as we try and 
reconcile whatever savings we will have to find in the Medicare 
Program this year, we are going to need a lot of help 
estimating a figure that, whatever changes we make, will create 
in the overall.
    I have got a couple of questions that I would like to get 
through and then a couple on your testimony.
    A chart on page 148 shows that growing enrollment and 
expenditures; that we are getting growing enrollment and 
expenditure in Medicare Advantage. It seems to me we are 
spending more, not less, on these private plans than we would 
spend in the traditional program. Is that a correct assumption?
    Mr. FOSTER. Yes, sir. Under the current payment mechanism 
for Medicare Advantage plans, except in rare circumstances, we 
end up paying more for those enrollees than we would for the 
traditional fee-for-service enrollee in the same area.
    Chairman STARK. That would be the case during the whole 75-
year window? You don't see any way of growing out of this?
    Mr. FOSTER. We don't see any change under current law in 
that regard. The degree of the higher payments would change 
somewhat, but they would remain higher than the fee-for-service 
cost.
    Chairman STARK. So, in your opinion, if we followed 
MedPAC's recommendations with respect to the Medicare Advantage 
plans, the financial condition or outlook for Medicare would be 
improved?
    Mr. FOSTER. Yes. If you mean, by that, their discussion of 
setting the Medicare Advantage benchmarks equal to the fee-for-
service cost in the area, yes, that would reduce costs.
    Chairman STARK. Because the part B premiums are based on 
total part B expenditures, which include payments to the 
Medicare Advantage plans, isn't it true that the part B 
premiums are raised for all beneficiaries even though 80 
percent of the beneficiaries aren't in Medicare Advantage 
plans? In other words, we have to raise the part B premiums on 
all Medicare beneficiaries to pay for the slightly less than 20 
percent who are in Medicare Advantage plans; is that a correct 
assumption?
    Mr. FOSTER. Yes, sir, it is. There is a standard premium 
for all beneficiaries; and as you know, of course, starting 
this year, there is also an income-related premium for certain 
high-income beneficiaries. But the premium is the same for each 
income category regardless of whether you are in a Medicare 
Advantage plan or not; and we have estimated that the 
additional payments to Medicare Advantage plans above and 
beyond what the fee-for-service cost would have been adds about 
$2 per month to the standard part B premium.
    Chairman STARK. If the Advantage rates had been equalized, 
do you know whether or not we would have hit the 45 percent 
trigger in the past 2 years?
    Mr. FOSTER. Well, we wouldn't have hit the trigger in the 
past 2 years because if you had lower expenditures, then the 
ratio would go down and that would extend when you hit the 
trigger.
    I misunderstood your question. You are saying, would we in 
fact have
    Chairman STARK. Been under the 45 percent?
    Mr. FOSTER [continuing]. Been under 45 percent within the 7 
years? We might not have. In other words, we might have stayed 
below the 45 percent.
    We could figure that out for you, but we have not actually 
done the calculation.
    Chairman STARK. If it is easy to figure out, I would be 
curious to know it, but I am not sure that it is a bit of 
information that will sway a lot of votes.
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    Mr. FOSTER. I would tend to think that--because in 2013, in 
the projection currently, we are only slightly above the 45 
percent threshold, it is my guess that the lower payments, if 
the law were changed in that way, would reduce us below that 
threshold for 2013--maybe for not a lot longer.
    Chairman STARK. If we had lowered the Advantage payments to 
equalize the fee-for-service rates, what would have been the 
effect on the solvency projections? Do you know that?
    Mr. FOSTER. Yes, sir. If we set the benchmarks at the fee-
for-service level, that would reduce part A payments to 
Medicare Advantage plans, just like part B payments; and we 
have estimated that would extend the insolvency date for about 
2 years.
    Chairman STARK. You mentioned in the Part D that the costs 
were about 13 percent below the estimate. Can you tell me 
what--how much of that reduction, or cost savings, maybe it is 
figured in, would come because there was lower enrollment than 
was anticipated?
    Mr. FOSTER. I can provide the specific answer for you for 
the record. I can tell you less quantitatively that is one of 
the factors behind the lower estimated cost, but it is also one 
of the smaller factors.
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    Chairman STARK. Are generic drugs one of the factors, 
higher utilization of generics?
    Mr. FOSTER. That is one of the factors actually in two 
different respects.
    If I may elaborate on that, the biggest factor underlying 
the lower cost estimates that we have today, compared to our 
original ones from 2003, far and away the biggest factor is 
that in 2004, 2005 and 2006 the cost growth for prescription 
drugs per capita in the country at large, not just Medicare, 
but that cost growth was suddenly only about 5 to 6 percent per 
year; and that is really only about half, less than half of 
what it had been for more than a decade prior to that.
    So, that was a dramatic slowdown in the rate of cost growth 
for prescription drugs, and that affected the Part D program as 
well. So, that is the biggest factor.
    Part of that is that the private sector plans--in fact, all 
drug plans--had a big push to increase the use of inexpensive 
generic equivalents and to cut back on the use of more 
expensive brand-name drugs. So, that contributed to this slower 
growth rate, along with other factors.
    In addition to that, another one of the significant 
differences between the cost estimates had to do with the 
savings that Part D plans could generate by negotiating 
favorable retail price discounts, also manufacturer rebates. 
Through utilization management, we had originally expected such 
savings could represent 25 percent savings off of a retail 
level, but we thought it would take competition among plans a 
few years to reach that ultimate 25 percent. We were pleasantly 
surprised to find that the plans anticipated about 27 percent 
in the very first year and again in 2007. So, their savings 
from the retail discounts, the rebates, and the utilization 
management were bigger than we thought they would be initially, 
and similar thereafter.
    The last factor has to do with the 10 percent reduction in 
the bids that you mentioned, Mr. Chairman. This was, again, a 
welcome surprise and somewhat startling. Drug plan costs 
generally increase over time, and so when we discovered that 
the bids, on average, had actually gone down 10 percent in 2007 
compared to 2006, it was, as I said, quite a surprise.
    Now many of the plans are continuing to push the generic 
use as a way to keep their costs as low as possible and to be 
competitive. In addition, we saw many plans in 2006 that had 
not bid terribly competitively, and as a result, they had 
relatively high premiums and they weren't competitive. They 
didn't get much enrollment. Most of those plans came in trying 
a lot harder in 2007, and in fact, they mostly were able to 
reduce their bids to a more competitive level.
    Chairman STARK. Along that line, however, isn't it correct 
that the government, if they are overly aggressive in lowering 
their bids, then Health and Human Services comes in and gives 
them a subsidy to cover some of the costs so that, in effect, 
if I am running a drug plan, if I understand this system, if I 
do a low-ball bid, then I will get extra money from Health and 
Human Services to cover some of the costs that may result from 
my bidding too low.
    Is that not the way the system works?
    Mr. FOSTER. That is pretty close to the way it works.
    Chairman STARK. How much would you guess that we are going 
to end up spending on these so-called risk sharing payments?
    Mr. FOSTER. Well, we have had to think about exactly that 
issue, Mr. Chairman. Because the bids for 2007 were so low, you 
have to ask yourself, are they overly aggressive, can the plans 
actually fulfill this level of cost that they are expecting? We 
decided that at least for some of the plans, on average, they 
probably cannot for the 2007 bids.
    Now, we estimate--based on what are frankly some relatively 
crude assumptions about how many plans and by how much, we 
estimate that for the next couple of years, based on the 2007 
and 2008 experience, that we will have to pay back to the plans 
about $1 billion per year, roughly $1 billion.
    Chairman STARK. For how long?
    Mr. FOSTER. Well, for the experience coming out of 2007 
and, again, for the experience coming out of 2008.
    For 2006, we actually expect to get money back from the 
plans because the risk sharing works both ways. If they do 
better than their bids, they have to share with us on the same 
terms their extra profits. So, in the first year, for 2006, we 
expect to receive a modest amount of returned amounts from the 
plans, but thereafter, about--a little over a billion dollars 
for 2 years. There is a table in the Trustees' Report that 
shows these estimates.
    Chairman STARK. How about over a longer period of time?
    Mr. FOSTER. We expect it to gradually decrease.
    It is reasonable to think that there will continue to be a 
very heavy degree of competition among plans, intense 
competition, as we have seen so far; and there might continue 
then to be some degree of either excess optimism, or over 
aggression or whatever you might want to call it, such that, on 
average, they might continue bidding a little lower than they 
can actually achieve in practice.
    Now, starting in 2008, the risk-sharing arrangements, the 
risk corridors, are no longer as favorable from the plan 
standpoint, so if they lose money from bidding too 
aggressively, they have to retain more of the loss than they do 
for 2006 and 2007.
    Chairman STARK. Do you want to give me an aggregate figure 
guess for 10 years?
    Mr. FOSTER. We can add it up for you, but it starts off at 
a little over a billion a year and then quickly goes down to 
about 0.4 billion. Hang on a second; we will look up the year-
by-year figures for you.
    Chairman STARK. I have one more question, and I will let my 
colleagues jump in here.
    Mr. FOSTER. Let me go ahead and answer this one for you.
    On page 158 of this year's Trustees' Report, we have a 
table that shows, in the next-to-the-last column, the net 
amount of risk-sharing payments made by Medicare. For 2007, we 
expect to pay on behalf--I am sorry, to receive on behalf of--
plans experienced in 2006 about $1.2 billion that they have to 
pay us back.
    Within the next year, we estimate having to pay them 
another 1.2 billion as loss sharing; then 1.1 billion; then 
0.9, 0.8, et cetera, and in the tenth year, about 0.7 billion.
    Chairman STARK. For a total of----
    Mr. FOSTER. I can add it up.
    Chairman STARK. Around 7 billion, I am willing to bet you. 
I can't do that with my shoes and socks on.
    Mr. FOSTER. 6.9 billion.
    I should introduce who is behind me. This is Paul Patalnek, 
who is the director of our Part C and D actuarial group, a 
position created by the MMA.
    This is Clare McFarland, the deputy director of our 
Medicare and Medicaid cost estimates group.
    Chairman STARK. Welcome.
    Mr. FOSTER. Elizabeth Hall, who I am sure you know.
    Chairman STARK. I hope we can see more of you.
    Let me just do something on part B, because as I mentioned, 
we are going do have to deal with the physician reimbursement. 
But you mentioned that physicians, under current law, which is 
what you used to base your estimate of the 11 percent per year 
growth, that their income would have to drop 10 percent.
    Now, my guess is that you don't mean income, but you mean 
their rates per procedure would drop 10 percent.
    Mr. FOSTER. Yes. If I said income, I should have said rates 
per procedure.
    Chairman STARK. Therefore, if we are going to have an 11 
percent per year growth, unless you assume you are going to get 
a 10 percent a year increase in the number of docs, is it fair 
to assume that even in the face of a per-procedure cut, that 
the physicians may be receiving at least as much or more gross 
payments or income from the Medicare part B system under fee-
for-service?
    Mr. FOSTER. It is certainly true that a physician's revenue 
from Medicare reflects not only the payment per service, but 
how many services they perform. It also depends on the type of 
service they perform.
    So, for example--and let me mention, 11 percent is the 
actual historical growth rate on average over the last 6 
years--under current law we project--and that was for part B in 
total, not just physicians, but part B--we project for total 
part B spending over the next 10 years an average growth rate 
of 6.6 percent, but that reflects the current law reductions in 
physician payments.
    If Congress continues to override the payment reductions 
for physicians, then the growth rate would probably be more 
like 8 to 9 percent.
    Chairman STARK. Thank you. Thank you very much.
    I am going to recognize, with Mr. English's concurrence, 
Mr. Doggett, and then Mr. English.
    Mr. DOGGETT. Thank you very much. I am glad you are here 
under less contentious circumstances than your last testimony 
to the Committee.
    If I understand your testimony and the way this 45 percent 
trigger works, next February we should be receiving a report 
from the President outlining the steps that he recommends we 
take, perhaps the cuts in Medicare he had in his budget this 
time. Or he could propose changing the eligibility age of 
people, any number of things that would reduce the likelihood 
of the general revenue needs exceeding this amount.
    Mr. FOSTER. That is correct.
    Mr. DOGGETT. As to that 45 percent number, my recollection 
is that we never had a hearing in the House or the Senate to 
establish it, we never had anyone discuss it, that it was snuck 
in in the dead of night, or the light of day behind closed 
doors, in a conference Committee.
    Isn't it a rather arbitrary number? Have there been any 
studies or expert testimony to say that 45 percent is an 
appropriate trigger figure?
    Mr. FOSTER. I, too, was not part of the development of that 
particular threshold, so I am not in a good position to 
comment. I will say that it clearly must be judgmental; there 
is no scientific----
    Mr. DOGGETT. Just as the 2 consecutive years is arbitrary 
and judgmental.
    Mr. FOSTER. Yes.
    I wouldn't say any of it is unreasonable. I think it is for 
a worthwhile purpose, but clearly it is judgmental.
    Mr. DOGGETT. You discussed this a little with the Chairman 
about the lower enrollment and the impact that it had on lower-
than-expected costs in Part D. Do you have data available on 
how many of those, as far as the decrease in enrollment, are 
the low-income, subsidy-eligible or extra-help-eligible 
individuals?
    Mr. FOSTER. Relatively few out of the total difference that 
has come about between what we originally thought and the 
actual enrollees, relatively few of those people are in the 
low-income-subsidy category. We knew, of course, going into it 
that all of the Medicare-Medicaid dual beneficiaries would be 
auto-enrolled or facilitated into the program, and we had a 
pretty good idea about the additional number who would come in. 
So, that is not a large number.
    Mr. DOGGETT. As far as the group that is not automatically 
enrolled, but entitled to extra help, people that are not in 
Medicaid, are the number that have participated--how do they 
compare with the number that you estimated in your actuarial 
estimates originally?
    Mr. FOSTER. Currently, the total number of Part D enrollees 
who qualify for the low-income assistance is about 9.5 million, 
and we have estimated at one time or another that the total 
universe of people who we think would be eligible is about 13 
million.
    I always have to caution everybody that estimates like that 
are very hard to do.
    Mr. DOGGETT. Of the 13 million, did you estimate originally 
how many you thought would take advantage of the program, would 
actually be enrolled?
    Mr. FOSTER. Yes, we did; and I don't remember the figure 
off the top of my head.
    Mr. DOGGETT. Is that something you could forward to our 
staff, because we have a hearing next week that relates to this 
subject, and I would appreciate getting the number by then.
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    Mr. DOGGETT. Then on the question of the efficiency of 
Medicare in fee-for-service, have Medicare's administrative 
costs remained low?
    Mr. FOSTER. Yes, sir. If you look at the total 
administrative costs for Medicare, including everything that we 
incur at CMS, as well as what we pay for our intermediaries and 
carriers and other contractors to help process the claims and 
all, that total cost is a bit under 2 percent of total 
expenditures.
    Mr. DOGGETT. Is there any private plan in Medicare that 
comes close to that level of administrative costs?
    Mr. FOSTER. No. Virtually no health insurance plan would be 
that low. We have a giant economy of scale, which helps a lot. 
We don't have to earn a profit as a government entity, which 
helps some.
    But the other part of it is, we are probably not spending 
enough. I don't want this to sound like a blatant appeal for 
more funding, it is not that, but if you look at the private 
health insurance plans, they put a lot of resources behind 
tracking their claims experience monthly, or even weekly in 
some cases, to see how it develops. If they spot something 
funny involving potential fraud, for example, they are able to 
act on it very quickly.
    CMS is doing a much better job than, say, 5 or 10 years 
ago, but I would argue we are not doing enough in that regard.
    Mr. DOGGETT. Do you have an estimate of what additional 
amount would be cost productive to expend there?
    Mr. FOSTER. No. We don't have such an estimate, but past 
exercises have indicated you generally get a multiple return on 
your administrative dollars in this respect.
    Mr. DOGGETT. Mainly in looking for fraud?
    Mr. FOSTER. Fraud, but also what I would consider abuse.
    Let me give you an example. In my office a few years ago we 
were trying to understand why durable medical equipment costs 
were going up so quickly. That was the unit that we measured 
for that category of expenditures, durable medical equipment, 
and it was increasing much more rapidly than it had been.
    So, we looked at the subcategories, and in the process, we 
discovered that powered wheelchairs, the expenditures on such 
devices were increasing at about 40 to 50 percent per year for 
4 years. So, we called this to the attention of other folks at 
CMS, and everybody dug into it a bit to see what was happening, 
and they revised the rules and so forth.
    Ideally, somebody--we or somebody else--would have 
discovered that problem in the first year, not the fifth year, 
before we had already spent a billion dollars, perhaps 
excessively, on the devices.
    Mr. DOGGETT. Well, could we enlist the assistance of your 
office in talking to the Congressional Budget Office and 
working to get some scoreable services on antifraud and abuse 
investments?
    Mr. FOSTER. We would be happy to talk with them and show 
them some examples of specific initiatives that have worked 
well.
    Mr. DOGGETT. I think that would be helpful. We are trying 
to find all the savings that we can in order to address some of 
the needs here.
    Then just, finally--and thank you for your consideration on 
this, Mr. Chairman--we don't have anything in your report, 
understandably, on the efficiency and administrative expenses 
of Medicare Advantage plans. Are there any estimates on what 
their administrative costs are?
    Mr. FOSTER. Yes. In fact, I do have some data here for 
Medicare Advantage plans, and these are broad averages of the 
plans participating in Medicare, the overall administrative 
cost, including profits, averages out about 13 percent.
    Mr. DOGGETT. So, we probably afford all of the antifraud, 
antiabuse changes that you could ever conceive of with 
Medicare's less than 2 percent expense and still have 
substantial savings over those Medicare Advantage plans.
    Mr. FOSTER. Substantial savings?
    Mr. DOGGETT. In terms of the administrative costs.
    Mr. FOSTER. But there are other components that go into it.
    In fact, if it is all right, I will mention just briefly, 
the private plans have the potential to have a lower cost for 
the Medicare covered services than fee-for-service if they can 
do the following:
    If they can negotiate more favorable prices for the 
services they get from their own providers than the Medicare 
payment rates, or if they can manage care so you avoid some of 
the unnecessary or harmful services, they can reduce money 
compared to Medicare fee-for-service. But they have to reduce 
it enough to offset their disadvantage on the administrative 
cost, because they have to make a profit and they don't have 
the economy of scale.
    Mr. DOGGETT. Thank you so much for your testimony and your 
service.
    Mr. FOSTER. You are welcome, sir.
    Chairman STARK. Mr. English, would you like to inquire?
    Mr. ENGLISH. Thank you, Mr. Chairman.
    Mr. Foster, thank you for the opportunity to examine a 
program that obviously has been challenged as long as I have 
been in the House of Representatives, but with some wrinkles.
    Mr. Foster, this year the Trustees' Report significantly 
lowered their expenditure projections for Part D. I think you 
have testified that they are 13 percent lower than last year.
    How much lower is the 2008 estimate of Part D cost as 
compared to the original estimate in 2003?
    Mr. FOSTER. That I can provide for you for the record. I 
don't have the figures with me. It would be roughly on the 
order of 30 percent.
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    Mr. ENGLISH. Maybe more.
    As you see it, what was the most significant factor for the 
trustees in their consistently lowering their cost projections 
for this part of the program?
    Mr. FOSTER. The biggest factor is actual data over time.
    When you go back to 2003--the latest survey data we had on 
drug use by Medicare beneficiaries dated back to either 1998 or 
1999, so we had to project forward from the late nineties to 
2006 as to how the cost would increase over that time.
    I think we did a good job of that at the time, but then, as 
I mentioned earlier, starting in 2004, the annual cost increase 
per capita dropped abruptly, taking us and virtually everybody 
else by surprise.
    Mr. ENGLISH. I understand your analysis, but isn't it also 
true that Part D plans were able to actually negotiate deeper 
discounts from drug manufacturers than the trustees had 
originally anticipated?
    Mr. FOSTER. Yes, sir, that is correct.
    Mr. ENGLISH. By what dimension?
    Mr. FOSTER. We originally estimated--really, it was an 
assumption--that ultimately the pharmacy benefit managers, 
working on behalf of the drug plans, would be able to achieve 
savings off of retail level of about 25 percent. That 
represented, roughly, the best experience in PBMs that occurred 
at the time.
    We thought, initially, plans would not get there 
immediately. We thought the competition would take a few years 
to develop. So, we had an assumed savings of about 15 percent 
in the first year, building up to the 25 percent level over a 
few years.
    In real life, when we got the bids for 2006, the actual 
savings for retail discounts, utilization management, and 
manufacturer rebates came in at 27 percent, so a little higher 
than our ultimate assumption was.
    Mr. ENGLISH. Mr. Foster, on a different point, the 
Trustees' Report estimates part B premiums, and it appears to 
me at least that the estimates are unrealistically low on the 
strength of the fact that built in is a assumption that current 
law will not be overridden. That would require Medicare 
payments to physicians to, in effect, be cut by 10 percent in 
2008 and 5 percent for the next 8 years.
    I don't think that is going to happen. If Congress modifies 
these changes, beneficiary premiums necessarily will have to 
increase.
    If Congress were to provide a 1-year fix for physicians, 
what would the impact be on part B premiums for next year? 
Looking beyond that, if the SGR were to be eliminated 
altogether, what would be the consequences for part B premiums 
paid by seniors to participate in this program?
    Mr. FOSTER. Yes, let me give you a specific example to 
answer your question.
    The premium this year, 2007, the standard part B premium is 
$93.50 per month. We anticipate under current law in the 
Trustees' Report, as you suggested, that if nothing is done 
about the physician payments, the premium would have to 
increase modestly to $96.40 per month for next year. That is 
about a 3 percent increase.
    Now, if instead Congress acts to avoid the 10 percent 
reduction in physician fees that would occur otherwise under 
current law and if you avoid that by providing a zero percent 
update--in other words, freezing the payment rates at current 
levels--then the premium would have to increase to $100.50, so 
about a $4 increase compared to current law.
    If instead of the zero percent update, if the update were, 
say, equal to the Medicare economic index, which is a measure 
of input costs for physicians, then the premium--and it would 
be about a 2 or 2.5-percent increase for physicians in that 
scenario--then the premium would be $101.40. In other words, 
about a $5 increase.
    Mr. ENGLISH. I think that is extremely useful information, 
because undoubtedly we are going to be under pressure to 
consider precisely those sorts of changes.
    I yield back my time. Thank you, Mr. Chairman.
    [3:09 p.m.]
    Chairman STARK. Thank you, Mr. English.
    Ms. Tubbs Jones, would you like to inquire?
    Ms. TUBBS JONES. Thank you, Mr. Chairman. Yes. I would.
    Good afternoon, Mr. Foster. How are you?
    Mr. FOSTER. Good.
    Ms. TUBBS JONES. I want to go back to an area that my 
colleague from Pennsylvania asked you about earlier with regard 
to claims information on the Medicare prescription drug 
program, Medicare Part D. We implemented Medicare Part D. Some 
of us like it, some of us don't, some of us say it is doing a 
great job. But your job is to do projections moving forward to 
help us understand what type of shape the fund is going to be 
in, right?
    Mr. FOSTER. Yes, ma'am.
    Ms. TUBBS JONES. So, do you have any numbers at all with 
regard to Medicare Part D, claims numbers?
    Mr. FOSTER. We are only--we being the Office of the 
Actuaries----
    Ms. TUBBS JONES. I understand.
    Mr. FOSTER [continuing]. We are now only starting to get 
the individual claims itself, the individual drug-by-drug claim 
data. We now have access to it, and we are now starting to look 
at it and assess its quality. We have other data. We have 
actual data on enrollments.
    Ms. TUBBS JONES. Actual data on what? I am sorry, sir.
    Mr. FOSTER. Enrollments. How many people have signed up, 
what type of people, et cetera. We also have the data from the 
bids that the Part D plan submit.
    Ms. TUBBS JONES. The bids?
    Mr. FOSTER. Yes, the bids. As part of the process for the 
competition, they have to submit a bid by the first Monday or 
whatever it is in June, and that is the bid. They can't go back 
and change it. They live or die by how good a bid that is 
competitively against the other plans.
    Now, the bids themselves are their expectations. They are 
still estimates. They give us a bid in early June, which is 
their estimate for the following calendar year's cost, but they 
have a pretty good idea of what those costs ought to be.
    So, we have that kind of data, but insofar as what is 
happening in 2006 so far, we are only now really getting the 
data we have been wanting.
    Ms. TUBBS JONES. Then back when this whole discussion about 
Medicare Part D began and there were projections, there was a 
big deal about what the real cost of Medicare Part D was really 
going to be. Back then it was--I guess the administration had 
some amount, and somebody else within the administration had a 
bigger amount, and supposedly that guy ended up losing his job 
because he said that amount was different than what the 
administration had originally planned.
    I say all that to say that actuaries are pretty--you are 
pretty--what is the word? You do projections, but you are 
pretty accurate with those projections. That is why we use 
actuaries, right?
    Mr. FOSTER. Sort of.
    Ms. TUBBS JONES. Sort of. Now, wait a minute. If I had you 
on a witness stand in a case, I wouldn't want you to answer 
``sort of.'' What kind of expert would you be, sort of?
    Mr. FOSTER. I would be glad to elaborate, ma'am.
    Ms. TUBBS JONES. I am saying that to say that the job of 
actuaries and the reason that we as a nation and a world have 
come to rely on you is because of the ability you have to take 
numbers and make some projections.
    Mr. FOSTER. It is partly that. It is partly perhaps our 
foolhardy willingness to undertake such projects. The reality 
is, of course, the future is uncertain, the future is 
unknowable. We do the best job we can to try to figure out what 
costs will be, what trends will be, and in some cases it is 
easy. If you ask us what would the savings be if we reduced a 
particular provider of market basket update by 1 percentage 
point, we can tell you the answer to that quite precisely. On 
the other hand, if you ask us something like Part D, a new drug 
benefit, no past experience because the program hasn't existed, 
it is voluntary, not everybody will sign up, and we don't know 
how many plans we will get, with all those behavioral 
questions, that is really hard to estimate.
    Ms. TUBBS JONES. So, then you would be better--or we would 
be better spent, then, to have a section of the report say, 
well, we are unable to really give you any good projections 
about Part D right now. Let us--give us another year when we 
have some real numbers and some real expectations then to be 
able to make the projections of what kind of shape Medicare or 
Medicaid is in based on Part D versus all the hoopla we are 
getting about this is the best program in the world, you know, 
seniors are real happy, they are getting drug treatment--not 
drug treatment, maybe they need that, too--but prescription 
drug coverage and the like.
    I am just trying to understand as I try and swallow or 
understand the report that there are factors such as I am 
relating to you with regard to Medicare Part D that you really 
can't tell us what is going on.
    Mr. FOSTER. We certainly can't tell you with certainty. The 
best we can do or the best any actuary can do is to give you an 
idea, a reasonable idea, of what the cost might be under normal 
kinds of circumstances. That is a good thing for policymakers 
like yourself to know about as opposed to saying it is 
hopeless, let's not even try.
    Ms. TUBBS JONES. If you could just give me 1 more second, 
Mr. Chairman. I know my time is up.
    Is there anything else that I should be, as a policymaker, 
be concerned about that you can't put your arm around on a 
number, other than Medicare Part D? What else is there that I 
need to be concerned about?
    Mr. FOSTER. The farther we go out with the projections, the 
less certain they become. We can predict maybe the next 5 years 
pretty nicely in most cases, but the further out you go, the 
more opportunity there is for health care costs, health care 
service and delivery, and the nature of medical practice to 
change in ways that we can't anticipate now.
    Ms. TUBBS JONES. So, you are saying there could be included 
in this other group of some uncertainty the cost of equipment, 
the doctors' fees, I don't know what.
    Mr. FOSTER. There are literally dozens and dozens of such 
factors we have to take into account to make these projections. 
Again, I think they are reasonable to help you in policymaking, 
but you don't want to bet the farm on our projections being 
exactly right in 5, 10 years or let alone 50 or 75.
    Ms. TUBBS JONES. Mr. Foster, I am a former judge, and I had 
a lot of experts. You are the most honest actuary I have ever 
heard from in my life. Thank you very, very much for your 
testimony.
    Mr. FOSTER. Thank you very much, ma'am.
    Chairman STARK. Mr. Thompson, would like to inquire?
    Mr. THOMPSON. Thank you, Mr. Chairman. I would.
    I have a couple of questions for the honest actuary. Thank 
you for being here.
    In your testimony you mentioned that the Part D plans, bids 
were 10 percent lower in 2007 than in 2006. Are you suggesting 
that this decrease could be attributed to the plans 
underbidding their actual cost in an attempt to gain market 
share?
    Mr. FOSTER. It is possible. In other words, it is 
conceivable that one or more plans would figure out the best 
they could do and possibly bid a little lower than that in an 
effort to get the lowest possible premium and to get market 
share, and knowing that they can rely on the risk-sharing 
arrangement to keep from losing too much money.
    However, they can't get too carried away with this because 
my staff and I review these bids to make sure that they are 
plausible, to make sure that they are reasonable. If we spot 
what looks like a low-ball bid, we go back to them and we give 
them a hard time, we make them explain it, and often we don't 
accept it.
    Mr. THOMPSON. Given that follow-up or that review, what are 
your assumptions on future plan bid increases or decreases?
    Mr. FOSTER. We expect starting in 2008--and this is more of 
an assumption than a solid fact of any kind--but we expect 
starting in 2008 that we will see a more normal kind of 
increase in the bids.
    Mr. THOMPSON. A more normal what?
    Mr. FOSTER. Sort of increase in the bids. It would be 
startling to have another decrease in the bids; not 
inconceivable, but startling.
    When they first went into this in 2006, of course, the 
plans themselves did not know for a fact what their costs would 
be. This was a new program for them as well. They might have 
been a little on the conservative side to make sure they didn't 
lose too much money. But now that they are getting some amount 
of experience in their first year, they had a better idea of 
where their costs would be in the second and later years, and 
they will get better with their bidding over time and dial it 
in.
    Mr. THOMPSON. Thank you.
    What portion of the decrease in Part D expenditures is due 
to a lower-than-expected enrollment? If that is the case, how 
many of those are low-income, subsidy-eligible individuals, 
your lack of data notwithstanding?
    Mr. FOSTER. Right. I will provide a detailed answer for the 
record, sir. I will give you more of a qualitative answer right 
now.
    Out of the three or four major factors explaining the 
difference in the cost estimates, the difference in enrollment 
is the smallest contributing factor. Within that, the low-
income subsidy figures on the number of enrollees are not a big 
factor. But we will provide a more specific answer for you.
    [The information follows:]

    [GRAPHIC] [TIFF OMITTED] 43689A.101
    


    [GRAPHIC] [TIFF OMITTED] 43689A.102
    
    [GRAPHIC] [TIFF OMITTED] 43689A.103
    

    Mr. THOMPSON. Okay. Thank you.
    Then in regard to Medicare Advantage plans, should you 
expand your work to include more information about--I am 
talking about the Trustees' Reports, future Trustees' Reports. 
Should those be expanded to try to capture more information 
about the Medicare Advantage plans and their impact on the 
trust funds?
    Mr. FOSTER. Yes. I think that would be helpful.
    Mr. THOMPSON. How do we do that? Could you just do that? Do 
I have to ask Mr. Stark to tell you to do that? What do we do?
    Mr. FOSTER. Sooner or later we have to ask the Board of 
trustees just because we write the words for them, just because 
we make the projections, we draw the graphs and print the 
report.
    Mr. THOMPSON. So, should we send a Subcommittee letter to 
the Board or something?
    Mr. FOSTER. You certainly could.
    Mr. THOMPSON. What is the most effective way to get that? 
Put it in a bill someplace or----
    Mr. FOSTER. Well, ultimately if you put it in the bill and 
it became law, of course, we would follow exactly that. But I 
think the easiest and best thing to do would be if you would 
like to send a letter to the Board of trustees asking for 
specific kinds of information, I am sure the Board would 
consider it. An even easier way is you just tell me. Have your 
staff send me a note about the kinds of things you would like 
to see in there.
    Mr. THOMPSON. Could you consider my questioning, then, you 
being told?
    Mr. FOSTER. I beg your pardon?
    Mr. THOMPSON. You said tell you. Would you consider my 
questioning as me telling you?
    Mr. FOSTER. Works for me, sir.
    Mr. THOMPSON. Thank you. Thank you very much.
    I have no further questions, Mr. Stark.
    Chairman STARK. Thank you.
    I would add to Mr. Thompson's request in that as it--I 
guess it is now our second largest expenditure group. It is 
going to become more important for us to know how those 
expenditures are broken down and what is comprised in them.
    I wanted to ask just one other thing that I missed again. 
We have just started to income-relate the premiums. For the 
record, it is something to which I objected only because I 
think the system is already as progressive as it can be. You 
pay the tax on your income without limit. So, if you make $10 
million a year, you pay a huge tax, and you get the same 
benefit as somebody making $10,000 a year. I don't know why we 
should make it superprogressive.
    But relative to the part B premium change, a couple of 
questions. Could you tell me how many beneficiaries are being 
charged higher premium amounts? Do you have any idea of whether 
or not people are dropping out of Medicare because of the 
higher premiums? Then just other consequences to the plan that 
I am not aware of. So, I mean, relative to this kind of new 
procedure, do we know how many are getting charged? Is there 
any indication that they are dropping out because of this? Is 
it behavioral? What does it mean for--I don't suppose it adds 
much to the part B--it doesn't change--or will it change what 
other people will pay? I don't know. Could you enlighten me on 
that?
    Mr. FOSTER. Yes, sir, to an extent. We don't have actual 
data yet on the number of people paying the higher premium. We 
will down the road a ways. What we have right now are our 
estimates of the number of people who would be affected by the 
income-related premium. Also we do estimate that some people 
would drop out or have dropped out either because they don't 
think financially it is a good deal for them, or they are just 
irritated.
    For 2007, the first year of operation for income-related 
premium, we are estimating that about 2.2 million beneficiaries 
are subject to the higher premium rate, and that is a little 
over 5 percent of all the beneficiaries. We further estimate 
that figure would grow over time, such that in 2016 it would be 
about 3.2 million, and that is about a little over 6 percent of 
beneficiaries for that year.
    We don't anticipate a large-scale dropout of people from 
part B as a result of this for many reasons, but we have 
estimated that initially for 2007 about 11,000 beneficiaries 
would drop out, and that would increase over time, reaching 
about 46,000 in 2016.
    Chairman STARK. Total or per year?
    Mr. FOSTER. That is total, total that would have dropped 
out.
    Chairman STARK. Well, I gather, then, that just the 
philosophical effect probably would be more than the financial 
effect on the system.
    I want to thank you for most generously offering to be 
involved in helping us wind our way through. I was talking to 
Mr. Camp earlier, and I don't know that any of my colleagues on 
this Subcommittee have gone through the production of a 
reconciliation bill, and I would have a few senior moments 
remembering the last time I did. So, we are going to have a 
learning process here as we try to come to grips with whatever 
the budget will require us to save, and your staff could be 
most helpful to us in helping us come to grips with how we 
gather these numbers.
    We, of course, are going to have to sit after some kind of 
a budget target for our Subcommittee and find those areas that 
we can dial up or dial down. Let's say we are going to change 
hospital payments. Then within that, as you recall, we have to 
deal with rural hospitals a disproportionate share, and 
teaching. All of those adjustments in kind of a zero-sum game 
are politically difficult, but they are somewhat easier if we 
have some idea, particularly in those areas where it is linear, 
we just have a market basket minus or plus, does it just go up 
and down in the straight line, or do we have to watch out for 
unintended consequences on the rest of the closed system.
    So, we will take you up on your offer. It was very gracious 
of you to do that, and we have been having some seminars for 
the Members and staff, and I think we might--if you and some of 
your staff would be willing to have you come by and be our 
instructors for an hour or two when we meet again to get some 
idea of what we are faced with as we try to make this budget 
come into balance.
    Thank you. Thank your staff. Look forward to working with 
you the rest of the year. Thanks very much.
    Mr. FOSTER. Thank you, Mr. Chairman.
    Chairman STARK. The hearing is adjourned.
    [Whereupon, at 3:25 p.m., the hearing was adjourned.]
    [Submission for the Record follows:]
                           Statement of AARP
    On behalf of AARP's 38 million members we thank you for holding 
this hearing on the 2007 Medicare Trustees' Report. The annual Report 
of the Trustees offers an important opportunity for members of Congress 
to closely examine the financial health of the Medicare program.
Hospital Insurance (HI) Trust Fund
    The new insolvency date for the Hospital Insurance (HI) Trust Fund 
is one year later than projected in last year's report, which means 
that Medicare beneficiaries' coverage is not in immediate jeopardy. It 
is important to note that predicting solvency over the long term is 
very difficult since it depends on estimates of both payroll tax income 
and health care spending. Part A solvency has averaged 12 years since 
the program began 36 years ago. In the past, Congress has stepped in to 
either increase Trust Fund income or decrease spending from the Trust 
Fund so that the reserves are not depleted.
    The Trustees' findings are not unusual for Medicare Part A which 
has averaged a 12 year solvency projection since the program began 36 
years ago (see Chart 1, p. 52).
    The HI Trustees' report can be viewed as an early warning system--
providing Congress with ample opportunity to act judiciously to 
strengthen and improve the Medicare program for current and future 
beneficiaries. This report is no different, but it does highlight the 
urgent need to control rising costs across the entire health care 
system--not just within Medicare.
Supplementary Medical Insurance (SMI) Trust Fund
    Because the SMI or Medicare Part B Trust Fund is funded by premiums 
and general tax revenues, it faces cost pressure, but not insolvency. 
As in the private sector, Part B growth still outpaces the growth in 
the Gross Domestic Product (GDP) due in large part to growth in 
physician and hospital outpatient spending. Estimating conventions 
require the Trustees' baseline to reflect current law, which include 
significant cuts in physician payments scheduled to take effect as a 
result of the Sustainable Growth Rate (SGR) formula. Congress has 
consistently voted to override these mandated reductions since 2003. 
CMS actuaries have estimated that continuous overrides of the SGR would 
result in $300-$400 billion in aggregate expenditures in the Part B 
program over ten years.
    Each time Congress overrides the SGR there is a direct cost for 
Medicare beneficiaries. That's because by law, the monthly Part B 
premium is set at 25 percent of Part B spending. The Part B premium has 
doubled since 2000--due in large part to increases in physician 
spending. The Trustees estimate that premium increases could be as much 
as 20 percent higher over 10 years if Congress prevents projected 
reductions in physician payments. Medicare beneficiaries would also pay 
higher copayments for physician care as payments to physicians 
increase.
    Congress must address the physician payment issue in order to 
control Part B expenditures and protect Medicare beneficiaries from 
burdensome out-of-pocket costs. Short-term fixes simply exacerbate 
spending growth and only delay needed discussions about how to slow 
rising expenditures. A new Medicare physician payment system should be 
designed with the beneficiary in mind by holding cost-sharing and 
premium increases down and improving the care beneficiaries receive. 
AARP believes Medicare's physician payment system should be changed 
from one that rewards quantity to one that rewards quality.
Medicare Advantage
    Because Medicare Advantage (Part C) plans are required to offer all 
Part A and Part B benefits, they are paid for from both the HI and SMI 
trust funds.
    The Medicare Trustees note that in 2006 there was a substantial 
increase in MA enrollment due to higher payments for MA plans provided 
under the Medicare Modernization Act (MMA). Ultimately, the solvency of 
the Medicare Trust Funds is negatively affected by current excess 
payment policies to MA plans.
    AARP believes Medicare payments should be neutral with respect to 
coverage options. Therefore, AARP urges Congress to more closely align 
MA plan payments with payments for traditional Medicare.
    Currently, Medicare payments clearly favor the MA program over 
traditional Medicare, which is unfair to the majority of beneficiaries 
who participate in the traditional program. All taxpayers and all 
Medicare beneficiaries--not just the 18 percent of Medicare 
beneficiaries enrolled in private MA plans--are funding these excess 
payments.
    When private plans were introduced to Medicare, they were expected 
to provide extra benefits to beneficiaries by achieving greater 
efficiencies at a lower cost to the program than traditional Medicare 
through the use of care coordination, negotiated prices, provider 
networks and other strategies. Given the fact that MA plans have 
control over hospital and physician services, as well as the 
opportunity to manage and coordinate care, it is reasonable for 
Congress to hold MA plans to payment levels that are no more than those 
for the fee-for-service program.
    In order to minimize the disruption to beneficiaries who rely on MA 
plans for their health care, AARP believes Congress should phase out MA 
plan payments that exceed fee-for-service costs over a period of time. 
Because geographic variations in spending continue to be a problem in 
the Medicare program, including within in the MA program, AARP believes 
it is important that Congress address the payment areas with the 
largest discrepancies first. It is important that those areas of the 
country that provide care most efficiently are not penalized.
Medicare Funding Warning
    The Trustees' report includes the second ``funding warning'' in 
this year's annual report. The Medicare Modernization Act requires the 
Trustees to issue this warning if general revenues account for 45 
percent of combined HI and SMI expenditures at any period during a 
seven-year window.
    AARP believes the 45 percent trigger is an arbitrary limit and 
provides a false alarm about Medicare's funding situation. General 
revenues have always financed a significant portion of Medicare Part B.
    Moreover, because of the way the trigger is designed, policy 
options to avoid the trigger are limited and may do little to help 
long-run cost growth. For example, while researchers have documented 
worrisome trends in obesity rates and chronic conditions for current 
and future Medicare beneficiaries, efforts to improve preventive 
services may reduce Part A costs, but increase Part B costs, thereby 
setting off the trigger. Similarly, shifting services from inpatient to 
outpatient settings has the same effect.
    AARP believes the 45 percent trigger should ultimately be repealed 
so that Congress is not distracted from the real issue--runaway health 
costs in the entire health care system. Runaway costs burden not only 
Medicare and other federal health care programs, but negatively impact 
state and local governments, employers, and individuals. Congress must 
begin to address the problem of system wide health care cost growth--it 
is not just a Medicare problem, and it cannot be addressed in Medicare 
alone.
Medicare Part D
    Because Part D is financed similarly to Part B, it too faces cost 
pressure, but not insolvency. The Trustees' Part D cost estimates are 
substantially lower than those reported last year, primarily due to 
lower prescription drug plan bid submissions. However, the Trustees are 
projecting the average annual increases in spending to be nearly 13 
percent--due mainly to increases in per capita drug costs (about \2/3\) 
and enrollment (about \1/3\).
    The projected increase in Part D spending is clear evidence of the 
need for Congress to enact policies to further help lower drug costs.
    AARP supports legislation to:

      Remove the prohibition on the Secretary of HHS from 
negotiating with pharmaceutical manufacturers on behalf of Medicare 
beneficiaries (H.R. 4, S. 3);
      Allow for a pathway for the approval of lower cost, safe, 
comparable, and interchangeable versions of biologic drugs (H.R. 1038, 
S. 623);
      Legalize personal and wholesale importation of 
prescription drugs, starting with Canada (H.R. 380, S. 242);
      Prevent abuses in patent settlements between generic and 
brand name prescription drug manufacturers (S.316); and
      Provide full funding for comparative effectiveness 
research authorized in the MMA.
Conclusion
    The Medicare program is vitally important to tens of millions of 
Americans and their families. Each year, the Trustees' Report presents 
the challenges faced by the program and offers the opportunity to make 
some improvements for the future.
    AARP believes Congress must make changes to the way Medicare pays 
physicians and Medicare Advantage plans to keep the program strong for 
the future. In addition, Congress can take important steps to help 
reduce the price of prescription drugs for all Americans. Ultimately, 
however, it must address the underlying rate of growth of health care 
costs in the entire health system--not just Medicare--if we are truly 
to achieve meaningful reform.

       Chart 1. Projections of Part A Solvency Have Varied Widely
       Average number of years until insolvency is 12 (1970-2007)
[GRAPHIC] [TIFF OMITTED] 43689A.301


Source: Derived from CRS, April 1995, and the Annual Reports of the 
Board of Trustees of the Hospital Insurance Trust Fund, 1996-2007.

Notes:

      No insolvency dates indicated in 1973 and 1974.
      No long-range projection in 1989.
      Range reported, as indicated by the white bars: 1975 
Report--late 1990s; 1976 Report--early 1990s; 1977 Report--late 1980s.

                                 
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