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


 
                   THE 2008 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

                             SECOND SESSION

                               __________

                             APRIL 1, 2008

                               __________

                           Serial No. 110-76

                               __________

         Printed for the use of the Committee on Ways and Means

                               ----------
                        U.S. GOVERNMENT PRINTING OFFICE 

43-695 PDF                      WASHINGTON : 2008 

For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
Washington, DC 20402-0001 















































                      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 March 25, 2008, announcing the hearing...............     2

                                WITNESS

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

                       SUBMISSION FOR THE RECORD

Thomas F. Wildsmith, statement...................................    52


                   THE 2008 MEDICARE TRUSTEES REPORT

                              ----------                              


                         TUESDAY, APRIL 1, 2008

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

    The Subcommittee met, pursuant to notice, at 10:00 a.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
March 25, 2008
HL-22

              Health Subcommittee Chairman Stark Announces

             a Hearing on the 2008 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 2008 Medicare Trustees report with Chief Actuary Richard S. Foster. 
The hearing will take place at 10:00 a.m. on Tuesday, April 1, 2008, 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 Medicare 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 2008 Annual Report 
was released today and can be found at: http://www.treas.gov/offices/
economic-policy/reports/medicare-report-2008.pdf.
      
    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 designed to cap Medicare's funding when certain criteria 
are met. Under the law, the Trustees must project whether more than 45 
percent of Medicare's funding will come from general revenues within 
seven years of the report's date. If that projection occurs in two 
consecutive reports, a warning is issued. The law then requires the 
President to send legislation to Congress to reduce general revenue 
spending to less than the target within the window in question. The 
2007 report contained this warning; consequently, President Bush sent 
Congress proposed legislation in February that minimally addressed the 
issue by increasing costs on beneficiaries. According to the 2008 
report, the threshold will be crossed in the next seven-year window.
      
    In announcing the hearing, Chairman Stark stated, ``Reviewing the 
Trustees' Report is a core part of Congress's oversight 
responsibilities, and one I take seriously. Medicare is critically 
important to the 44 million beneficiaries who rely on it for health 
care and financial peace of mind. While the program faces demographic 
challenges in the future, those can be dealt with if there is a 
bipartisan commitment to preserve and improve the program. We should 
not succumb to alarmist claims that the sky is falling. The most 
important immediate step we can take to help Medicare's financial 
outlook is to eliminate the Medicare Advantage overpayments. This 
corporate pork fattens insurance company profits while unnecessarily 
draining program resources. I can't take seriously the claims of 
concern from those who protect these excessive payments at the expense 
of beneficiaries, taxpayers and the program's future.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the 2008 Medicare Trustees' Report.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
page of the Committee website and complete the informational forms. 
From the Committee homepage, http://waysandmeans.house.gov, select 
``110th Congress'' from the menu entitled, ``Committee Hearings'' 
(http://waysandmeans.house.gov/Hearings.asp?congress=18). Select the 
hearing for which you would like to submit, and click on the link 
entitled, ``Click here to provide a submission for the record.'' Once 
you have followed the online instructions, completing all informational 
forms and clicking ``submit'' on the final page, an email will be sent 
to the address which you supply confirming your interest in providing a 
submission for the record. You MUST REPLY to the email and ATTACH your 
submission as a Word or WordPerfect document, in compliance with the 
formatting requirements listed below, by close of business Tuesday, 
April 15, 2008. Finally, please note that due to the change in House 
mail policy, the U.S. Capitol Police will refuse sealed-package 
deliveries to all House Office Buildings. For questions, or if you 
encounter technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
including attachments. Witnesses and submitters are advised that the 
Committee relies on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons, 
and/or organizations on whose behalf the witness appears. A 
supplemental sheet must accompany each submission listing the name, 
company, address, telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman STARK. Good morning. Thank you for joining us. The 
Subcommittee will commence with its hearing on the 2008 Social 
Security Medicare Trustees' Report. I thank the members for 
joining us, and hope you will join me in welcoming Rick Foster, 
who is the chief actuary at the Centers for Medicare and 
Medicaid Services. He and his staff do the analysis needed to 
complete the trustees' report each year.
    We appreciate the hard work that your staff does, Rick, on 
advising us on the status of Medicare trust funds, and 
Medicare, generally. I would like to thank you, in particular, 
for your efforts. Medicare provides care for more than 44 
million individuals, and we owe it to those beneficiaries, as 
well as the taxpayers, to keep note of the financial health of 
the program.
    The Bush administration likes to use the new 45 percent 
trigger as a scare tactic. It's an arbitrary measure. We can 
talk more about that later. But it fails to indicate anything 
useful about the health of the Medicare program. We designed in 
the 1960s, Medicare to draw funding from general revenues. 
That's what it's doing.
    Part D was created by Congress and President Bush, and was 
intentionally designed to be predominantly financed by general 
revenues. The general revenues, I think, pays about three-
quarters of the tab. The beneficiaries pay about 25 percent, 
through premiums.
    I think it was disingenuous of the administration to send 
us a trigger bill that only pushes the trigger back a year, and 
does absolutely nothing to extend the trust fund solvency date. 
They tucked in a whole lot of controversial proposals that 
really aren't related to the funding of Medicare.
    The administration rejected their own budget, and sent us 
policies that, as drafted, really do nothing to improve 
solvency. The only policy that the actuaries--I guess that's 
you--scored: ``increases cost to beneficiaries,'' and 
``undermines the universal nature of the program'' ``making 
wealthy people pay a higher premium'' is kind of a double-
whammy.
    They're already paying--it's probably the most progressive 
tax we have. They pay their 2.45 or 4.9 percent on--or is it 
1.45 all the way up. If they make tens of millions of dollars 
on Wall Street, they pay the premium on that entire $10 million 
of earned income, and they don't get any different benefit than 
somebody at the minimum wage. Why we should ask them then to 
pay even more escapes me.
    So, I think the trigger dance is a political exercise. 
Medicare is not in crisis, and the House did act to protect it. 
We passed, with bipartisan support, the CHAMP Act. CHAMP would 
have postponed the trigger by three years, a lot better job 
than what the President is suggesting in his bill.
    Basically, Medicare overpayments--Medicare Advantage 
overpayments--are what is causing the principal problem in 
Medicare today. It seems to ring kind of hollow when we don't, 
in fact, deal with the real problem.
    I love to quote Republicans, and I'm going to make Mr. Camp 
guess whose quote this is. But it was written--oh, it's yours, 
March 14th. ``So, where are we? Congress decided in 2003 to 
enhance the market for high deductible indemnity insurance 
plans with greater tax subsidies for the premiums and the 
deductible health savings accounts. They also decided to spend 
whatever it takes to move the Medicare program out of HHS and 
into AHIP, using Medicare money to provide special preferences 
for individually owned fee-for-service indemnity insurance. The 
money the insurance company cannot make from CMS, they make 
from restricting access to provider networks with whom they 
have negotiated prices,'' and so on.
    My former partner in crime, former Senator, Dave 
Derenberger wrote that on March 14th, and he is but he was a 
perceptive guy when we worked together years ago on the 
Medicare issue.
    But let me hear first from Mr. Camp, and then we will 
welcome any comments that Mr. Rick Foster cares to make about 
his testimony.
    Mr. CAMP. Well, thank you, Mr. Chairman, and thank you for 
holding the hearing today. I appreciate, Mr. Foster, your being 
here. Well, if any of you saw roll call, today is April Fools 
Day, but it might as well be Groundhog Day, because last year 
we were in this same room at roughly the same time, listening 
to Mr. Foster talk about how the Medicare program is going 
bankrupt.
    Yet, since then, Congress has failed to enact any real 
changes as program costs continue to grow, and the date of 
Medicare's insolvency draws nearer.
    We will hear today that the health insurance, or HI trust 
fund, which finances Medicare Part A, is now projected to be 
exhausted by 2019. We should not be surprised that Medicare 
continues to face a funding crisis. The majority has done 
nothing to responsibly reform the program or control costs.
    Mr. Foster will also point out that the trustees' spending 
projections for the supplemental medical insurance, or SMI 
trust fund, which finances both Part B and Part D, will 
continue to increase dramatically. This means that Medicare 
beneficiaries will continue to face higher premiums and lower 
Social Security checks, because Congress has failed to reduce 
Medicare spending.
    In fact, the problems facing the Part B program are 
actually worse than the trustees' report would have you 
believe. Medicare spending on Part B is actually understated, 
because their estimates assume that physician payments will be 
reduced by 10 percent this year, and 5 percent every year for 
the next 10 years. This means that Part B premiums which have 
more than doubled since the year 2000 will reach unaffordable 
levels in just a few years.
    One lone bright spot in the trustees' analysis should be 
highlighted, however. Compared to the estimate that was 
prepared in 2003, Part D costs are now 37 percent lower. While 
some of my colleagues characterize Part D as a legislative 
failure, Part D is the only part of Medicare that has a lower-
than-expected rate of growth.
    Drug plans have successfully negotiated deeper-than-
expected discounts with drug companies, and are offering 
attractive plans to seniors at lower-than-expected cost. It is 
not a coincidence that the private market has been able to 
deliver a medical benefit below budget.
    If we are looking for ways to reduce program spending, we 
can certainly apply some of these market-driven and 
competition-based reforms to the rest of the Medicare Program. 
This Committee is required by law to send a bill to the House 
floor by June 30th to protect Medicare's solvency in the short 
term. As MedPac said in their March report, ``Time is of the 
essence.''
    I hope that we can, together, take the opportunity that 
this presents to address the threats facing Medicare. The 
failure to do so is unacceptable, because the financial 
pressures threatening Medicare only grow greater with each 
passing year.
    Mr. Chairman, I hope that we can find a responsible 
bipartisan agreement to address this looming crisis. I yield 
back the balance of my time.
    Chairman STARK. Any other Members have statements they 
would like to appear in the record? Without objection, they 
will be placed there.
    Mr. Foster, your entire testimony will be placed in the 
record, without objection. I would like to recognize you to 
enlighten us, or expand on it in any way you are comfortable.

  STATEMENT OF RICHARD S. FOSTER, CHIEF ACTUARY, CENTERS FOR 
      MEDICARE AND MEDICAID SERVICES, BALTIMORE, MARYLAND

    Mr. FOSTER. Thank you very much. Chairman Stark and 
Representative Camp, and other distinguished Members of the 
Subcommittee, thank you for inviting me here to testify today 
about the financial outlook for the Medicare program.
    I will briefly summarize the most significant findings from 
the new 2008 Medicare Trustees Report that was issued a few 
days ago.
    I would also like to recognize a few folks from my office 
who are here with me today----
    Chairman STARK. Please.
    Mr. FOSTER [continuing]. Including Clare McFarland, Suzanne 
Codespote, and John Shatto. There are also some folks from our 
Office of Legislation here, who have accompanied me. If it is 
all right, my presentation will take a little longer than the 
5-minute limit.
    Chairman STARK. Please.
    Mr. FOSTER. Thank you, sir. First, let me start with some 
background. The purpose of the Trustees Report is to evaluate 
the financial status of the Medicare trust funds, and 
specifically: Are the income and the assets of a given trust 
fund sufficient to enable the payment of benefits and 
administrative expenses under that program?
    This is admittedly a somewhat narrow question. But it's 
also a fundamentally important question, since the existence of 
a positive trust fund balance is what gives us the statutory 
authority to make the benefit payments. So, a narrow question, 
but an important one.
    Now, of course, it's not the only question that can be 
asked. You often hear discussion about the long-range financial 
sustainability of Medicare.
    You also hear the question asked, ``What is the impact of 
Medicare on the Federal budget?'' These are important 
questions, also, but they are quite different from the issue of 
trust fund financial status. If people treat them 
interchangeably, which they sometimes do, then the results 
could be confusing.
    So, I will be talking about the financial status of the 
trust funds, initially, and a little later on about the 
combined Medicare outlook.
    Medicare, of course, has three trust fund accounts. There 
is the Hospital Insurance, or Part A, trust fund. Then, since 
the Medicare Modernization Act, the Supplementary Medical 
Insurance trust fund has two separate accounts: one for Part B, 
the traditional physician services and outpatient benefit; and 
the other for the new Part D drug benefit.
    The payments that are made to Part C of Medicare, namely, 
the Medicare Advantage program, those payments are drawn from 
the Part A and the Part B accounts. There is no separate Part C 
for the Medicare Advantage trust fund.
    By law, each trust fund and each account has its own 
explicit source of financing, and there is no provision for 
sharing assets back and forth, or making loans across--from one 
trust fund to another, et cetera. As a result, it is necessary 
to evaluate the financial status of each trust fund account, 
individually, by itself.
    We will start with the Hospital Insurance trust fund. As 
you know, most of the financing for this trust fund comes from 
a portion of the FICA and SECA payroll taxes in particular, Mr. 
Chairman, the 1.45 percent paid by employees matched by another 
1.45 percent paid by employers. Self-employed people pay the 
combined total.
    The HI financial status shown in the new Trustees Report, 
overall, is quite similar to that shown in last year's report. 
So, perhaps this is--will be fairly Groundhog Day-ish, as Mr. 
Camp mentioned.
    The cost for hospital insurance is expected to exceed the 
level of tax revenues in 2008 and all future years. Now, the 
difference between the cost and the tax revenues can be met for 
a while by using interest earnings on the assets, and for a 
while longer by redeeming those securities, turning them back 
into the treasury, and getting our cash back.
    However, the assets are projected to be exhausted in 2019 
without corrective legislation. Now, that's the same year as 
shown in last year's report, but it's now early in the year, 
rather than late in the year, as it was before.
    The slight worsening in the outlook in the short term for 
the HI trust fund is due to slightly lower projected tax 
revenues, and slightly higher projected expenditures.
    In addition, the change reflects the impact of correcting 
an accounting error that was discovered late in 2007. In 
particular, under a new accounting system, certain Part A 
hospice benefits were inadvertently paid from the Part B 
account of the SMI trust fund.
    That was a mistake in the design of the program. It has 
been corrected for future payments, but we will need to make a 
transfer, an adjustment, of about $12.6 billion from the HI 
trust fund back to the general fund, and then from the general 
fund to the Part B account, in order to put each account back 
where it would have been, in the absence of this problem.
    In the long run for the HI trust fund, the gap between 
projected expenditures and scheduled income just grows wider 
and wider. By the end of the 75-year projection period, the 
scheduled tax revenues would be sufficient to cover only less 
than a third of the projected benefits. So, that's a pretty 
major deficit.
    Turning now to the Part B account in the Supplementary 
Medical Insurance trust fund, the Part B account is financed 
entirely differently from Part A. In particular, roughly 25 
percent of the financing for Part B comes from premiums paid by 
beneficiaries, and the other 75 percent, roughly, comes from 
Federal general revenues.
    There is an annual redetermination of the premiums and 
general revenue financing under current law. As a result, that 
means that Part B income will always match Part B expenditures. 
The trust fund account will never go broke under current law.
    It is worth noting that we have had fairly large Part B 
premium increases in recent years, and similar increases in the 
general revenues. That's been in order to rebuild the Part B 
account assets to a fully adequate level. They had been far 
below this level for some time period.
    If you include the $12.6 billion transfer, or adjustment 
for the hospice payment problem, then the assets of the Part B 
account now are at a fully sufficient level, and that's the 
first time that has happened since 2002. So, that is something 
we were glad to see.
    Of course, with Part B, as well as Part D and Part A, for 
that matter, the concern has to do with expenditure growth 
rates. For Part B, over the last 5 years, growth has averaged 
not quite 10 percent per year. That is despite the fact that 
the payment updates for physicians, is the biggest category of 
Part B expenditures have been either zero percent or fairly 
low, by historical standards.
    So, despite the restrained position updates, the growth 
rate has still averaged almost 10 percent over the last 5 
years.
    I believe the problems with the physician payments are well 
known to this Subcommittee. In particular, under current law, 
we estimate that in July 2008, the middle of this year, we 
would have to reduce payment rates to physicians by 10.6 
percent. Then, the following January 2009, we would have to 
reduce them by another 5 percent. Then, for each of the next 
seven Januaries, through 2016, we would have to reduce them by 
a further 5 percent each year.
    It is implausible that the payment rates could be reduced 
so much for many reasons that I don't have to explain. But 
certainly Congress has overridden the scheduled decreases in 
each of the last 5\1/2\ years, and I would guess that you are 
likely to continue doing that, under the circumstances.
    Therefore, the projected Part B expenditures shown in this 
year's Trustees Report, as in the last several, understate the 
true likely cost of the program, and they probably understate 
it by anywhere between 10 to 20 percent, in the long range.
    Turning to the Part D account in the SMI trust fund, this, 
of course, is a valuable new benefit for enrollees, but it does 
add significantly to the cost of the Medicare Program. Part D 
is financed somewhat like Part B, in that general revenues make 
up the largest share, currently about 77 percent of the total 
revenues. Beneficiary premiums also contribute to it, and they 
are currently about 9 percent of costs.
    We also receive the special payments by states on behalf of 
dual Medicare-Medicaid beneficiaries. Currently, those are 
about 14 percent of the total. But that would decline over the 
next 10 years, as the percentage requirement specified in the 
MMA decreases.
    The good news here is that the projected cost of Part D in 
the first 10 years--I should say the next 10 years--is about 17 
percent lower than we showed in last year's report. So, once 
again, the actual costs have come in lower than we expected, 
and that has affected our projection for future years.
    They are also, as Representative Camp mentioned, 
considerably lower, about 37 percent lower, than our original 
estimates back in 2003. If there is time later on, I would be 
happy to describe the factors underlying these updates or 
revisions in the cost estimates.
    Because the financing for Part D is also reset each year to 
match expected costs, then Part D will also be in financial 
balance indefinitely.
    On the other end, we are expecting, or projecting, Part D 
costs to grow at about 11 percent per year over the next 10 
years, with about 3.5 percent of that being growth and further 
enrollment.
    I will take just a moment to talk about total Medicare. We 
looked at the three accounts individually, from a financial 
status standpoint. But it's also useful to look at the total 
cost of Medicare, and how it's financed.
    The basic challenge with financing Medicare--and this also 
applies to virtually any other health care program you can 
think of, public sector or private sector in the U.S. is that 
expenditures tend to grow by increases in the number of 
beneficiaries, of course, but also by growth in the wages and 
prices that are paid to health service workers and for the 
services that are purchased in the health care sector.
    In addition, beneficiaries tend to get more services over 
time, greater utilization of services. The services themselves 
get fancier over time. So, we refer to that as intensity, or 
the average complexity of services, which grows too, generally 
in ways that are more expensive.
    Collectively, these factors, combined, result in cost 
growth that is significantly faster than the rate of increase 
in workers' average earnings, or in the economy at large.
    So, in addition to this ongoing problem associated with 
health cost growth rates, we also have a demographic impact. 
The number of beneficiaries, with the retirement of the Baby 
Boom, will increase significantly more rapidly in future years 
than the number of workers. This factor is well known, we've 
been talking about it for decades now. We are now on the verge 
of it actually happening.
    Total Medicare costs are projected to increase from their 
current level of about 3.2 percent of gross domestic product to 
not quite 11 percent at the end of the 75-year projection 
period.
    This rapid cost growth, if it continues, will also have 
significant implications for beneficiaries. For example, 
beneficiary premiums and beneficiary cost sharing would go up, 
as a percentage of their income, for many people, to quite high 
levels over such a long period.
    In addition, there are implications for the Federal budget. 
The cost of the general revenues would represent a growing 
share of Federal income taxes or other revenues.
    I will mention briefly the 45 percent trigger under section 
801 of the Medicare Modernization Act. The way this works is if 
the difference between expenditures, total Medicare 
expenditures, and Medicare dedicated revenues--that's 
principally payroll taxes, premiums, income taxes on Social 
Security benefits, and the state payments--exceeds 45 percent 
of total expenditures within the first 7 years of the trustees' 
projection, then the trustees have a determination of ``excess 
general revenue Medicare funding.''
    If there are two successive such determinations, then that 
triggers a Medicare funding warning. This test was met in the 
2007 Trustees Report, and that resulted in the first Medicare 
funding warning. As well as the proposed Medicare Funding 
Warning Response Act of 2008, which the President sent to you 
folks in February of this year.
    Now, in the new Trustees Report, we once again have a 
projection of crossing the 45 percent within the 7 years. That 
ends up triggering a new Medicare funding warning all over 
again, which will, again, require a legislative proposal and 
response following the next budget.
    The funding warning itself and the test that underlies it, 
I think, are useful measures of the magnitude of general 
revenues and how much of the financing for Medicare comes from 
general revenues. I think that can help call attention to the 
impact on the Federal budget that is associated with the 
general revenue transfers to Medicare.
    However, despite the title, a Medicare funding warning 
should not be interpreted as an indication that trust fund 
financing is necessarily inadequate. Assessing the adequacy of 
financing can only be done by looking at the separate accounts, 
as I mentioned before. For that purpose, you have to look at 
all the sources of financing, including the general revenues 
that are provided for by current law and the interest income 
that is provided for by current law.
    Well, I will sum up by saying that, based on these 
projections, the Board of trustees has recommended prompt 
attention to the financial challenges facing Medicare. I can 
think back as part of my own career for 35 years now, and 
throughout that time the Office of the Actuary at CMS and at 
Social Security has assisted both Congress and the 
Administration in finding solutions to financing problems. I 
will pledge the Office of the Actuary's continuing assistance 
on your behalf, as you continue to struggle with how best to 
meet these challenges.
    I would be happy to answer any questions.
    [The prepared statement of Richard Foster follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman STARK. Thank you. As we have discussed, we pay 
Medicare Advantage plans more than we pay fee-for-service. What 
effect, in terms of months, I guess, or years, do these 
Medicare Advantage overpayments have on the trust fund 
solvency, or on Medicare solvency?
    Mr. FOSTER. If the law were changed such that the Medicare 
Advantage benchmarks were set at the same level of cost as fee-
for-service, then we estimate that would extend the solvency of 
the HI trust fund by about 18 months.
    Because we are currently projected to go broke early in 
2019, that would move us into the end of 2020. But it's an 18-
month period, much like last year.
    Chairman STARK. Okay. Because Part B premiums are based on 
the total expected expenditures for Part B, which includes the 
payments to Medicare Advantage plans, is it not true that 
people paying Part B premiums have them increased--they are 
increased for all beneficiaries, even though only maybe 20 
percent actually use Medicare Advantage?
    Everybody else in Medicare has to pay more to cover the 
increased costs of these Medicare Advantage plans. Is that--and 
about how much is that?
    Mr. FOSTER. Yes, sir. That's correct. We estimate that, as 
of 2009, the additional premium for Part B associated with the 
higher benchmarks for Medicare Advantage is about $3 per month.
    Chairman STARK. Last year was $2.
    Mr. FOSTER. I think
    Chairman STARK. What happened?
    Mr. FOSTER. Well, these are both rounded, so the reality 
may be a little closer together.
    Chairman STARK. If Medicare Advantage rates had been 
equalized as we did in the CHAMP Act, would the 45 percent 
trigger have been tripped?
    Mr. FOSTER. No, sir. With that change, it would not have 
been tripped or triggered in this year's report. But, instead, 
we would have expected the ratio to cross 45 percent in 2016, 
rather than 2014.
    Chairman STARK. As you know, the private plans calculate 
what's called a medical loss ratio. We insisted that that be 
made part of our Medigap plans, and even though we don't pay--
the government doesn't pay--for Medigap plans.
    Now, a recent GAO report found that a third of all the 
Medicare Advantage plans appear to have loss ratios lower than 
85 percent, meaning they spent more than 15 percent of their 
revenue on overhead and profit, and less than 85 percent of 
beneficiaries.
    Do you think it would be a good idea to require Medicare 
Advantage plans to meet some minimum loss ratio standards?
    Mr. FOSTER. Possibly. I don't have a very clear-cut answer 
for you, I'm afraid.
    On the one hand, you could argue that, with the degree of 
competition out there, it's not terribly common that you would 
have very low medical loss ratios.
    On the other hand, one can argue that it shouldn't be 
terribly common, either, for a plan to have that high of an 
administrative cost, or that high of a profit margin.
    There is a different argument that can be made in favor of 
the proposal, and that has to do with what I perceive as one of 
the limitations of the way Medicare Advantage is currently set 
up: that is while there is a lot of competition within Medicare 
Advantage, it's mostly directed toward who can provide the best 
benefit package, or the most attractive-looking benefit 
package.
    But it's awfully hard for beneficiaries to figure out which 
is the most efficient plan. ``Where do I get the best benefit 
package for my money?'' because it's--unless you're an actuary, 
it's awfully hard to determine the value of the different 
benefit packages.
    So, if medical loss ratios were published, it would be one 
way of signaling to beneficiaries that this plan is more 
efficient than this other plan. It would help them make an 
informed decision.
    Another, and probably much more direct way, would be to do 
what the House of Representatives did in your version of the 
MMA, which was to require the rebates to be paid directly to 
the enrollees, and the amount to be directly identified. The 
enrollees could turn right around and then spend the rebates 
them for extra coverage, if they felt like it, but then you 
would have a clear-cut price signal, and that would improve 
people's ability to choose an efficient plan.
    The other issue with publishing the MLR ratios is one that 
we're continuing to look at. It makes some of us a little 
uneasy about what this might do to the nature of competition 
among the plans, if every plan knew what every other plan's 
cost factors were. So, that's one we're still struggling with a 
bit.
    I think that's as much as I can think of on the subject.
    Chairman STARK. I couldn't help--thinking of two final 
questions--nobody has threatened to fire you in the past couple 
of years, have they?
    Mr. FOSTER. No, sir. If anybody did, I was oblivious.
    Chairman STARK. Okay.
    Mr. FOSTER. So, I think that means nobody has.
    Chairman STARK. All right, but help me. I have been 
looking--and I don't think this goes to your competence--but it 
is interesting that in 1998, 10 years ago, you reported to us 
that we were going to be broke today, in 2008.
    Now, you were just off--your current report says it will be 
2019. That means, instead of 10 years in 1998, you should have 
said 21 years. That was--you were off by a country mile.
    Now, what have you done, or what have we done, or what has 
anybody done, to suggest to folks who aren't actuaries--and I 
might add that, as we look back, we were going to go broke in 
1999, 2001, 2002--and what is it that happens, what is going to 
happen over the next 10 years to save us, as happened between 
1998 and today to save us?
    Mr. FOSTER. That's an excellent question. I can speak about 
this a little bit.
    In 1998, of course, the projections reflected the estimated 
impact of the Balanced Budget Act 1997, which, as you remember, 
was a very hard-hitting piece of legislation. So, our estimates 
were built into the 1998 projections.
    Now, in practice, some of the BBA impacts were greater than 
we estimated. In particular, you remember the provision about 
transferring certain of the home health visits from Part A to 
Part B?
    Chairman STARK. Mm-hmm.
    Mr. FOSTER. In practice, it turned out that more of these 
visits ended up qualifying as Part B, and relatively fewer as 
Part A, than we originally thought. So, that was one factor.
    Another factor was that of the home health agencies 
themselves misunderstood the interim limits. As a result, they 
cut back on their own services far more than they needed to 
under the law. That reduced costs. It was unfortunate, but the 
law was complicated, and they were acting very cautiously. So, 
for both reasons, home health costs for both reasons for Part A 
were significantly less than we had estimated at the time.
    Now, similarly, skilled nursing costs came in less than we 
had thought they would, based on the actual experience.
    Something else interesting happened following 1998, and 
that was that, for the first time in the history of Medicare, 
what we called a case mix index for Part A--this is the average 
complexity of inpatient hospital admissions went down. 
Normally, that goes up roughly by 1 percent per year, because 
hospitals treat more complicated cases over time.
    But, starting in 1998, it actually went down, and it went 
down for about 5 years in a row, to the tune of, on average, 1 
percent per year. By perhaps the strangest of coincidences, 
most of the reduction occurred in coding of cases for simple 
pneumonia versus respiratory infection, and with or without 
complications for the DRGs that were paired at that time. By 
coincidence, perhaps, and perhaps not, that's exactly what the 
Department of Justice was investigating for a major hospital 
chain at the time.
    So, one way or the other, we experienced these negative 
case mix changes, rather than positive. That helped quite a 
bit, too.
    There are probably some other factors, in addition to 
these. We will think them through and add, for the record, 
anything beyond that. But the short answer is it was not so 
much policy changes, but changes in actual experience, 
including the fraud and abuse, the BBA impacts being----
    Chairman STARK. If I could just follow on that one more 
time, I don't know whether actuaries have a range of certainty, 
as they do in political polling. They say, you know, ``This was 
within five points of being accurate.''
    When you're talking about going out 75 years, is there--are 
you--do you have the same certainty on your projections for 5 
and 10 as you do for 40 years out, or is there a cliff out 
there somewhere, where you've got more guess and less empirical 
certainty?
    Mr. FOSTER. Well, I think it's fair to say the farther out 
you go, the less certainty you can have.
    For the next few years, we hope that we can do a pretty 
good job. In real life, of course, it may be that the costs for 
any given type of service in 2008, instead of increasing by X 
percent, which we might now estimate, they could easily 
increase by, say, 2 or 3 percentage points more than that, or 2 
or 3 percentage points less than that.
    Now, over time, estimation differences like that can often 
average out, but not necessarily. You can have a sustained 
faster trend.
    The value of the long-range projections is not that we 
think we can actually predict with any kind of confidence what 
will happen. If we thought that, or if we could actually do 
that, then we would be someplace else making millions of 
dollars, I think, in the stock market, rather than being 
actuaries.
    Nonetheless, there is value to them, because it enables us, 
or the Board of Trustees, to tell you folks, the nation's 
policy makers, that, under reasonable conditions that we think 
could reasonably happen, here is what the program would look 
like. It's either okay or not okay. But we should never kid 
ourselves, or place too much emphasis or reliance on what are 
inherently uncertain projections.
    Chairman STARK. Thank you so much. Mr. Camp, would you like 
to----
    Mr. CAMP. Well, thank you, Mr. Chairman. Mr. Foster, you 
mentioned that Part B premiums would be reduced by $3 as a 
result of cutting Medicare Advantage plans. If I understood 
your testimony, if we completely limit Medicare Advantage for 
about nine million seniors, we would extend the life of the 
program about two years. Is that what you said?
    Mr. FOSTER. Yes, sir, about 18 months.
    Mr. CAMP. Well, forgive me if I don't start throwing the 
confetti; that's not very long. Can you tell me the impact on 
the Part B premium from the physical payment provision in the 
CHAMP bill that spent $67 billion over 10 years?
    Would you please tell me in your answer, how much would the 
Part B premium increase? There is a significant increase in 
Part B spending.
    Mr. FOSTER. Let me check just a second to see if we have 
that.
    Mr. CAMP. All right. Well, if you would like to get back to 
me in writing, I would appreciate an answer in writing.
    Mr. FOSTER. I will reply to you.
    Mr. CAMP. Also, Medicare Advantage plans, is it accurate to 
say about 87 percent of their dollars are used on medical 
expenses, and about 4 percent of that would be profit? Is that 
your understanding, after your analysis?
    Mr. FOSTER. Almost. In other words, the total percentage 
for administrative costs and profit margin is about 13 percent.
    Mr. CAMP. Yes. About 19 percent is administrative, which I 
would call disease management, all of those other things, and 
about 4 percent is profit.
    Mr. FOSTER. That's correct.
    Mr. CAMP. I would break those two down. The CHAMP Act 
required only 85 percent be spent on medical. So, actually, the 
CHAMP Act required less to be spent on medical than we're 
finding in reality, is that correct?
    Mr. FOSTER. Well----
    Mr. CAMP. I see nodding behind you, so----
    Mr. FOSTER. The 13 percent is an average.
    Mr. CAMP. An average, we're talking on average, yes.
    Mr. FOSTER. It's not----
    Mr. CAMP. On average, Medicare Advantage plans spend about 
87 percent on medical. The CHAMP bill, on average, required 
about 85 percent being spent on medical. So, the CHAMP bill 
required slightly less to be spent on medical than is current 
practice.
    Mr. FOSTER. I guess I would quibble just a little bit. I 
agree with you, generally, but the 85 percent was a limit, I 
thought not a average. In other words, no plans could go beyond 
the limit.
    Mr. CAMP. Yes, it was you could not go beyond that. But 
actually, in reality, we're seeing they spend about 87 percent. 
You would agree with that. So, I appreciate that.
    Mr. FOSTER. Yes.
    Mr. CAMP. On Part D--obviously, the costs on this program 
are much lower than you projected. Is that, in part, because 
plans were able to negotiate deeper discounts from drug 
manufacturers than you had anticipated?
    Mr. FOSTER. Yes, sir, it is. In particular, while we 
anticipated a vigorous level of competition among Part D plans, 
we thought that it would take a few years, 2 or 3 years, for 
that competition to be fully reflected in the lowest retail 
discounts, the best rebates, et cetera.
    So, we thought that eventually the savings off of a retail 
level from retail discounts, manufacturer rebates, and 
utilization management would increase to about 25 percent after 
a few years. In real life, in 2006, the plan started off at 
about 27 percent right off the bat, and it has since grown to 
just about 30 percent.
    Mr. CAMP. So, it's about 37 percent lower in 2008 than the 
original in 2003.
    Tell me, what are the differences between last year and 
this year, in terms of Part D's estimates? How far off are we--
were you on that?
    Mr. FOSTER. For the first 10 years, which would be 2008 
through 2017, the total projected cost over that period is 
about 17 percent lower in the new projections, compared to last 
year's.
    Mr. CAMP. All right.
    Mr. FOSTER. Now, that's due to three factors, primarily. 
First, and most important, that is the actual experience of 
plans in 2006 was lower, not only than we estimated, but also 
lower than the plans themselves had estimated in their bids. 
So, the actual costs came in lower.
    In addition, the level of rebates that the plans received 
from the drug manufacturers was about 8.6 percent in the first 
year, and is slightly higher now. We had been estimating about 
5 percent, which was a prevailing good figure at the time.
    The third factor is that, for projecting the trend growth 
rate of prescription drug costs for Medicare, we use our drug 
projections for national health spending, overall. Between last 
year and this year, we have reduced that trend slightly in the 
first few years. So, those factors together result in the 17 
percent----
    Mr. CAMP. So, it's not just because the number of low-
income beneficiaries enrolled is lower than projected. It's 
these other factors you have mentioned?
    Mr. FOSTER. That is a relevant factor, but it has more to 
do with the difference between our original estimates back in 
2003----
    Mr. CAMP. I see.
    Mr. FOSTER. And the current estimates. About 7 percentage 
points out of the 37 percent that you mentioned are 
attributable to lower enrollment, generally.
    Mr. CAMP. Okay.
    Mr. FOSTER. Much of that is due to about roughly one's 
million fewer low-income subsidized beneficiaries than we had 
originally estimated.
    Mr. CAMP. But that's not the case between your estimates 
last year and your estimates this year.
    Mr. FOSTER. No. We were much closer in that regard after 
the very first projection.
    Mr. CAMP. All right. Thank you very much. Thank you, Mr. 
Chairman.
    Chairman STARK. Mr. Doggett?
    Mr. DOGGETT. Yes. Thank you so much for your testimony and 
your work.
    In order to accurately assess the experience under Part D, 
do you believe it would be valuable for congressional support 
agencies and researchers to have access to the actual claims 
data for Part D plans?
    Mr. FOSTER. I believe it would be, if the proper controls 
were in place to limit the privacy considerations.
    Mr. DOGGETT. You're aware that CMS proposed a regulation 
way back in October 2006, but they still, after all that time, 
have not finalized a rule for the release of that data.
    Mr. FOSTER. Yes, sir, that's correct. It went out as an 
NPRM, as you say. We received comments, which I believe were 
all or almost all favorable.
    Mr. DOGGETT. Yes, sir.
    Mr. FOSTER. It has been under discussion internally since 
then.
    Mr. DOGGETT. Right. The lack of action on that is actually 
being used as an excuse for not supplying data that this 
Subcommittee has been trying to get now for almost a year on 
what appears to be CMS spending $100 million on retroactive 
drug coverage for dual eligibles that--it's unclear whether any 
benefit was obtained from it.
    Also, is there an actual overpayment to Part D plans of 
about $4 billion for plan year 2006 by CMS?
    Mr. FOSTER. Yes, sir. The way the process works is that 
plans submit bids----
    Mr. DOGGETT. Right.
    Mr. FOSTER. First Monday in June. They have to live with 
those bids; they can't go back and change them. We make 
payments to the plans that include a direct premium subsidy, 
which reflects the overall national cost the way the premium 
formula allocates it to Medicare.
    We also pay them estimated amounts for the catastrophic 
reinsurance benefits. This is just a standard monthly amount in 
advance, which later on will be reconciled against the actual 
plan costs.
    Mr. DOGGETT. Yes. Actually though, it took CMS about nine 
months after the plan year ended for 2006 before they realized 
that they had overpaid the drug plans $4 billion, did it not?
    Mr. FOSTER. It took quite a while to get the data systems 
working accurately enough----
    Mr. DOGGETT. Yes, right.
    Mr. FOSTER. In order to make the calculation.
    Mr. DOGGETT. Almost another year.
    Mr. FOSTER. We all would have liked it to have been much 
quicker----
    Mr. DOGGETT. Yes, sir. As far as any success in Part D 
being attributable to competition, that's not the main reason 
the costs had been lower than they were projected.
    Mr. FOSTER. We don't consider it the biggest reason.
    Mr. DOGGETT. In fact, when you look at dual eligible, isn't 
it true that the Part D plans have been unable to match the low 
prices that were achieved in the state Medicare programs before 
Part D ever took effect?
    Mr. FOSTER. That's correct. I would be glad to explain why, 
if you like.
    Mr. DOGGETT. If I have time, we will go back. If not, 
perhaps you can supplement in writing.
    As far as the concerns with the latest projection that 
Medicare is about to go insolvent, and the trigger, is it 
correct that the only piece of the President's trigger 
legislation that actually will have any effect from his 
proposals, in view of this projected insolvency, is any effect 
on Medicare financing is his proposal to raise drug benefit 
premiums for middle and higher income beneficiaries.
    Mr. FOSTER. Basically, yes. The Title III with the income-
related premium----
    Mr. DOGGETT. The impact of that will be to postpone the 
trigger date from 2013 to 2014.
    Mr. FOSTER. Yes, sir.
    Mr. DOGGETT. So, we have a crisis described, and the 
reaction of the administration is a significant amount of 
rhetoric, but a proposal to resolve that for at least one year 
as their answer.
    Let me ask you about a different area, which is those 
people, some of the poorest beneficiaries who receive--or 
should be receiving extra help through the LIS program.
    Is one of the reasons that the drug price that the Part D 
expenditures are less than what was originally projected, the 
fact that we have a much lower enrollment rate for those poor 
people that are entitled to extra help, or the low-income 
subsidy?
    Mr. FOSTER. That is one of the factors, sir. It's not the 
only one----
    Mr. DOGGETT. I think----
    Mr. FOSTER. One of the factors.
    Mr. DOGGETT. It has been very difficult to ascertain which 
excuse the CMS would rely on to explain that. But what is the 
current projection of how many people are eligible for extra 
help, versus how many people are receiving it?
    Mr. FOSTER. The current projection and I will look it up 
for you, so I don't get it wrong--is 12 million. But, John, do 
you remember 12 point what?
    Mr. DOGGETT. Well, it went down from----
    Mr. FOSTER. Yes, 12.5 million is the current estimate.
    Mr. DOGGETT. Right. That is down from 13.2 million people 
that were eligible in the previous projections.
    Mr. FOSTER. That is correct.
    Mr. DOGGETT. Other than making CMS look better about a job 
it's not doing very well, is there any other good explanation 
for why the number has decreased?
    Mr. FOSTER. Well, let me tell you where the numbers come 
from, and you can decide for yourself, sir.
    Mr. DOGGETT. Thank you.
    Mr. FOSTER. In our original estimates, back in 2003, we 
used the Current Population Survey. It was at a time that a 
recession was going on. We estimated actually more than 14 
million eligible.
    A year or two later, we converted to using a different data 
source that is considered more accurate. Still a survey, but 
more accurate. That lowered it to the 13.2 million that you 
mentioned.
    Most recently, this past fall, we have used an update of 
that Survey of Income and Program Participation data, and for a 
later year, as well. That has lowered it to the 12.5.
    Now, any time we quote any of these figures we like to say 
we believe it's about 12.5, plus or minus a lot, plus or minus 
maybe another 2 million, because of the uncertainties 
associated.
    It is true enough. I won't try to make excuses for CMS or 
for Social Security--everybody is sensitive about the charge 
that we haven't done enough to find these people who are 
eligible. I think, in fact, there has been a good faith effort. 
I am much more confident there has been a good faith effort 
than I am about exactly whether it's 12.5 or 10.5 or 14.5.
    Mr. DOGGETT. How many people do you think are eligible who 
are not receiving extra help today?
    Mr. FOSTER. Well, our best estimate right now is the total 
eligible is the 12.5 million. We estimate the number in 2008 
who will get the extra help, to be 9.8 million. So, the answer 
differences between those two.
    Mr. DOGGETT. Thank you. Thank you, Mr. Chairman.
    Chairman STARK. Mr. Johnson, would you like to inquire?
    Mr. JOHNSON. Thank you, Mr. Chairman. He didn't let you 
answer that question concerning the differences between state 
and Federal. Can you answer it now?
    Mr. FOSTER. Certainly, sir. It's clear enough that the Part 
D plans with pharmacy benefit managers had negotiated very 
effective rebates from manufacturers. They're doing just as 
well as anybody else in the industry doing this.
    It is tough to compare that to the rebates that are 
provided by law under the Medicaid program. In particular I am 
going to give you a couple of examples generic drugs, under the 
Medicaid rules, get an automatic 11 percent rebate. Almost 
never in the private sector do you have rebates paid on generic 
drugs. They are so inexpensive to begin with, it's just not 
done. So, that's a statutory advantage that Medicaid has.
    In addition, the rules for the rules for Medicaid indicate 
over time, if the average manufacturer price of a particular 
drug increases faster than the CPI, then that difference above 
the rate of CPI growth has to be rebated back to these state 
Medicaid programs.
    Over time, that accumulates to be a lot. So, if you look at 
the total value of rebates for Medicaid compared to total 
spending for drugs, it's over 30 percent. You can't negotiate 
your way to that level.
    Mr. JOHNSON. Okay, thank you. Well, you indicate that 
Medicare Part B premiums doubled over the last 6 years, while D 
premiums remain stable.
    Why do these two programs behave so differently? Can we 
learn any lessons from Part D and apply them to Part B?
    Mr. FOSTER. A good part of the difference, sir, is that 
Part B is a well-established, long-standing program; Part D is 
quite new.
    With Part B, we have the ability to have a pretty good 
understanding of how much the premiums will go up by, and how 
much they need to go up by. For a mature program, for health 
care generally, you would expect that to be in the range, per 
person, of anywhere from 5 to 8 percent. That's what they have 
been, other than our acceleration to rebuild the trust fund 
account assets, which raise the increases somewhat.
    For Part D, when the plans first came in to bid on this, 
many of them didn't have a lot of data on drug costs for older 
people. Some did; some didn't. In particular, right about the 
same time that Part D got started actually, a couple of years 
before we had a sudden slow-down in the growth trend for 
prescription drugs, generally. Prescription drugs had been 
increasing at double-digit rates for about a decade-and-a-half. 
In 2004 and 2005, it suddenly slowed down to only in the 5 to 7 
percent range, about half of what it had been.
    In addition, the competition has helped, in terms of 
getting the greater discounts, et cetera. So, these factors 
combined, so far, have resulted in quite low premium increases 
for Part D. That will probably change in the next few years.
    Mr. JOHNSON. Do you think that a defined contribution 
system might help, or not?
    Mr. FOSTER. Well, that's a tough one, sir. Let me give you 
kind of a necessarily general answer.
    First of all, let me say it would represent, of course, a 
quantum change, compared to what we have now.
    Mr. JOHNSON. I know.
    Mr. FOSTER. We stay out of the policy aspects: ``Is this a 
good idea?'' ``Is this a bad idea?''
    But the biggest factor that results in health care costs 
increasing faster than the economy is technology. Most medical 
technology is cost-increasing, because the people developing it 
know that there is a ready market for any better technology, 
even if it is quite a bit higher cost. They know that insurance 
will pay for most of it, and they know it will be adopted. So, 
most of the research out there is directed toward new 
technology that would be better and cost more.
    If you went to a defined contribution, or a global budget 
sort of approach, there would be many concerns associated with 
it. You can look in Canada, you can look in England, you can 
look at other countries with long waiting lines for many kinds 
of services, and you can say, ``I don't want that for me.''
    But if you did that, nonetheless, would you then have the 
possibility of changing the nature of the technology 
development? Most technology results in lower costs, over time. 
We have fancier cars, fancier computers, and the cost hasn't 
gone up to the same degree as the utility. So, if a defined 
contribution approach led to technology development that turns 
to cost decreases, we would have a fighting chance, but only a 
chance, of reducing the growth rate of health care costs.
    Mr. JOHNSON. Thank you for your responses. Thank you, Mr. 
Chairman.
    Chairman STARK. Thank you. Mr. Thompson?
    Mr. THOMPSON. I thank you, Mr. Chairman. Thank you, Mr. 
Foster, for being here.
    I just want to touch on, for a moment, the greater issue, 
and that is that the growth in health care costs are a bigger 
problem than just as it pertains to the public programs, such 
as Medicare.
    The local newspaper in my district recently reported that 
in and I will quote ``In both public and private sectors, 
health care costs are escalating at rates far above inflation. 
On average, between 1970 and 2006, Medicare spending increased 
by 8.7 percent per person each year, while private health 
insurance spending increased by 9.7 percent per person.'' So, 
this is a much bigger issue that we need to figure out how to 
get our arms around.
    The newspaper went on to editorialize that the next 
President and congress must address a host of issues if we're 
going to be able to fix this. They mention three: the fact that 
the Medicare payroll tax has not been increased since 1985; the 
flawed structure of the prescription drug benefits begun in 
2006 means that private insurance companies in the program are 
paid 13 percent more on average than under regular Medicare; 
and that the Bush tax cuts of 2001 and 2003 are straining the 
Federal budget, including the portion of Medicare that's paid 
out of general revenues. Those tax cuts expire in 2008 and 
2010, providing room for discussion of the future of the 
government health spending programs.
    Just--I think it is important to note that I don't think we 
are ready to fall off the cliff, but I think it's a bigger 
problem than some before me have mentioned. I think this lays a 
pretty good road map as to how we got there, and what we need 
to do.
    Mr. Stark had mentioned the issue regarding Medicare 
Advantage plans. I want to follow up on that, if I could, for 
just a second. In terms of the dollar amounts of Medicare 
payments, Medicare Advantage plans are now the second largest 
provider group, after inpatient hospitals, and they even bypass 
physicians.
    So, since the MA plan is paid out of both the hospital 
insurance and the supplementary medical insurance trust funds, 
should we think about adding information to future trustees 
reports that captures the effects of Medicare Advantage 
payments on the trust funds, and the program's financial 
outlook?
    Mr. FOSTER. I think that would be useful, sir.
    Mr. THOMPSON. How do we do that? Can we just----
    Mr. FOSTER. Well, we start----
    Mr. THOMPSON. Serve as notice that that's what we want to 
do, or----
    Mr. FOSTER. We will start by my apologizing to you, because 
I read through the transcript of last year's hearing, and you 
raised exactly the same question. You asked, if you should 
write to the Board of Trustees, and I said, ``That would be 
fine, or you can write to us, and we will pass it on, or you 
can just ask us.'' You said, ``Like, right now?'' I said, 
``Sure.'' Then I forgot. So, I apologize. Normally, I do better 
than that.
    Mr. THOMPSON. I was further down the dais then.
    Mr. FOSTER. No, sir. We are equal opportunity, in terms of 
requests from Congress.
    However, let us consider this as a reiteration of your 
interest in this. This time I promise we will not forget. We 
will bring this up with the Board of Trustees on your behalf, 
and see where it takes us.
    Mr. THOMPSON. Okay, thank you. The Chairman doesn't have to 
crack his gavel or anything?
    Mr. FOSTER. Well, if the Chairman wanted to give me a call 
in about January of next year, that would be helpful. But, 
otherwise, we will try our best to remember.
    Mr. THOMPSON. Well, I would hope that we could make that 
happen this year.
    The--I want to talk a little bit about the 45 percent 
trigger. Is there any rationale for setting the threshold of 
general revenue financing for Medicare at 45 percent?
    Mr. FOSTER. I'm not aware of any technical rationale for 
it. I believe it was set primarily in answer to the questions, 
``When might this first be triggered? What level would it have 
to be?''
    Mr. THOMPSON. Is there any reason for me or anyone else to 
think that the 45 percent is the right amount of general fund 
revenue financing?
    Mr. FOSTER. Clearly, Medicare has been financed, in 
significant part, from general revenues from the very 
beginning, in 1965. If it's a collective judgment as to at what 
level should be concerned, that's, I think, about all you can 
say for it.
    Mr. THOMPSON. The 2006 report projected the 45 percent 
threshold would be crossed in 2012. In the 2007 report, the 
date was pushed back to 2013. In this year's report, the data 
is again pushed back to 2014.
    How much volatility is there in this calculation, and can 
you say with any certainty that the 45 percent general revenue 
warning won't be pushed back yet again next year?
    Mr. FOSTER. There is a certain amount of variability in it, 
obviously. Measures such as, the 45 percent test, or even the 
hospital insurance trust fund depletion date can be fairly 
sensitive, certainly, to changes in legislation, but even to 
changes in actual experience, the most recent data, changes in 
assumptions, et cetera.
    I would say the 2014 expectation in the current report, if 
we've done our job well, would have a 50/50 chance of being 
either later or earlier.
    Mr. THOMPSON. So, it's safe to say that the language 
created in the trigger--in the statutes--is filled with 
ideology. Or at least I will--maybe you can't, but I will say 
that.
    Do you think it is helpful to be throwing around terms like 
``funding warning,'' ``crossing the threshold,'' ``cause for 
alarm''?
    Mr. FOSTER. I don't think it's cause for alarm. I would 
prefer a different title, myself. But I think the test itself 
has some use.
    Mr. THOMPSON. Thank you very much.
    Chairman STARK. Ms. Tubbs Jones, would you like to inquire?
    Ms. TUBBS JONES. Mr. Chairman, thank you very much. Mr. 
Foster, good afternoon or good morning, still, okay. How are 
you?
    Mr. FOSTER. I am doing pretty well, thank you.
    Ms. TUBBS JONES. Good. I want to focus in on Part D for a 
moment, sir, and talk to you about initially, when Part D was 
implemented, there was a whole discussion around whether or not 
the Secretary of Health and Human Services should have the 
ability to negotiate best price on behalf of recipients of Part 
D under Medicare.
    I am wondering whether, in the Trustees' Report and the 
work you have done over this past year, can you discuss with 
us, is there a reduction in cost under Part D for prescription 
drugs for Medicare beneficiaries. If there is not, is there, in 
fact, the ability--or would you believe that you ought--the 
Secretary should have the ability--to negotiate best price, and 
would it have an impact on the costs that Medicare 
beneficiaries are paying right now?
    Mr. FOSTER. A couple of thoughts here. The first is that 
the Part D plans themselves are, without question, negotiating 
a pretty favorable level of discounts and rebates, et cetera. 
As I think I mentioned earlier, compared to a regular retail 
level of drug costs, in Part D plans, the average reduction off 
that is over 30 percent. So, that's pretty good.
    Now, part of your question is: could CMS, could the 
Secretary, do a better job than that? I would have to give you 
a conditional response on that, because it depends on what 
tools they would have.
    With some of the legislation that has been introduced in 
the last couple of years to give the Secretary such authority, 
there have also been very significant constraints on what tools 
would be available for the negotiation.
    For example, if you go to a drug manufacturer and suggest, 
``I will put your drug in a favored place in my formulary in 
exchange for this very good rebate,'' then you will probably 
get a decent rebate out of it.
    But if you didn't have a national formulary of some kind, 
and you just had to negotiate on the good will of the 
companies, and the hopes that they would give you a good rebate 
because of public attention, or whatever, it wouldn't be nearly 
as effective, in our view, as what's happening currently. So, 
we didn't see any savings from that kind of proposal.
    Alternatively, if you used the power of the 800-pound 
gorilla, the Federal Government power, and mandated prices, 
then, much as we've seen with Medicaid, where that sort of 
thing happens by law, you could certainly get a deeper 
discount, a greater level of rebates.
    Ms. TUBBS JONES. Is there any disadvantage to that, using 
the 800-pound gorilla?
    Mr. FOSTER. There are a couple of disadvantages that occur 
to me. One is that it's hard to know where to stop.
    We have seen many instances of national price setting over 
the years that just don't work for very long. Right away, 
people try to get around it. Right away, whatever we, in our 
collective wisdom, think might be the right level turns out not 
to be the right level after very long.
    A good example of that was the Part B-covered drugs under 
Medicare. For many years, the prices that were set by law were 
way too high. The actual transaction prices were much lower, 
and that was addressed in recent legislation.
    So, the other problem is, if you do get a little carried 
away, and you force a very low level of drug prices on the 
manufacturers, then do you risk their not being willing to sell 
you the drugs, or do you risk the research and development the 
standard sorts of arguments you hear that might have an impact 
on the development of future drugs?
    Ms. TUBBS JONES. Well, my concern is, taking in 
consideration all the things that you have laid out, and also 
the things that are in your report, is to operate in the best 
interests of the seniors in America, who are out here, 
struggling to pay for health care, struggling to pay for gas, 
struggling to pay for food in the economy that we're operating 
in, and still being able to purchase their prescription drug 
benefit. What operates best for them?
    Mr. FOSTER. Well, what's best for them, of course, may not 
be best for other people or organizations. But what's best for 
the beneficiaries, obviously, is the lowest premiums possible.
    Ms. TUBBS JONES. Exactly. So, how do we get what's best for 
them?
    Mr. FOSTER. I think I would suggest that we are pretty far 
along the way toward what's best for them, already. It's not 
necessarily optimal, if you speak in big pictures.
    For example, we had the suggestion earlier about a defined 
contribution plan. If you're willing to make quantum changes in 
the nature of a program, and you essentially start from scratch 
in some respects, there might be other ways.
    But what's happening right now, with these good discounts 
and rebates that are negotiated is a vast improvement for 
anybody who didn't have drug coverage beforehand. The prices 
they now have access to are much, much better. It's a 
subsidized benefit, of course, so their premiums are quite low, 
generally speaking.
    Ms. TUBBS JONES. Mr. Chairman, if you would just allow me 
to ask this question, and perhaps get a written response, I am 
interested in--in light of the fact that we have a doughnut 
hole in the prescription--in the Part D coverage, what's 
happening to the seniors out here who fall into the doughnut 
hole, who pay the premium and their drug costs continue, they 
still have to pay the drug costs?
    I would like to have a written response, Mr. Foster, at 
some point, around that issue. I am sure my colleagues, as 
well, would like to know what's happening to the senior citizen 
doughnut hole.
    Mr. FOSTER. We would be happy to----
    Ms. TUBBS JONES. Thank you, Mr. Chairman.
    Chairman STARK. Mr. Kind, if you----
    Mr. KIND. Thank you, Mr. Chairman. Thank you, Mr. Foster, 
for being here and offering this update on where we're going, 
fiscally.
    Just to dovetail into where Ms. Stephanie Tubbs Jones has 
left off with you, over the recess, I, like many of my 
colleagues, were holding listening sessions. It kept coming up 
in the course of these--because I was really probing some of 
the seniors out there participating in Part D, and the new 
prescription drug plan, how they were faring in it.
    Some of the county aging officers there were telling me 
that they were noticing more and more people hitting this 
doughnut hole sooner in the year, and more of them being 
captured under it. At that point, a couple of the other seniors 
spoke up and said, ``Yes, you know, I hit the doughnut hole 
last year,'' and I asked them, ``Well, what did you do when you 
encountered that?''
    They said, ``Well, it came down to a choice of making my 
home mortgage payment, my heating oil, or the prescription 
drugs. Of course, we decided to stop taking the prescription 
medications, in light of these other choices that we were 
facing.''
    Were you able to determine in the trustees' report how much 
of an impact reduction in the Part D drug costs were due to the 
fact of seniors hitting the doughnut hole, and not hitting the 
catastrophic level, and therefore, incurring those expenses?
    Mr. FOSTER. We always model the proportion of drug expenses 
that we expect to be below the deductible, or between the 
deductible and the initial coverage limit, in the doughnut 
hole, in the catastrophic area, et cetera.
    I don't think--and I am going to check with John Shatto 
here, momentarily--that we have yet had time to do any person-
by-person analysis, other than looking at aggregate amounts, 
and seeing how they shape up, in order to do the projections.
    Mr. KIND. Yes, I think that would be helpful, if there was 
a way for--maybe in the next trustees' report, if you're able 
to go back and try to capture that data for us, as well.
    It really hearkens back to an additional problem, or 
frustration, that we have had with the MA plans, generally, and 
that is, you know, we're just having a hard time getting any 
information on the utilization of these plans.
    Obviously, we're offering a higher reimbursement rate. That 
was one of my chief concerns in the passage of the Medicare 
Modernization Act. This new Part D aspect, as you're talking 
about, is the largest expansion of entitlement spending since 
the 1960s, with no ability to pay for it.
    Now we're having a hard time even finding out what the 
patient is receiving. We are determining under the plans what 
they're offering, and they claim that, because of the higher 
reimbursement rate, they're able to offer more. But we're not 
sure what that means to the typical patient, what type of 
utilization that they're receiving.
    Would that aspect be helpful for CMS to have, and to be 
able to report back, as well, to us what type of utilization or 
outcomes these patients are receiving under the MA plans?
    Mr. FOSTER. Yes, sir. I think, for the policy making 
community at large, broader access to the claims data would be 
a good thing. We have access to it ourselves. But, for example, 
the research office at CMS does not. So, it could only help, I 
think.
    Mr. KIND. Yes. Obviously, we will have some confidentiality 
issues to deal with there, but I think those could be easily 
addressed.
    I mean, if we are going to get a real grip on where these 
expenses are going, and what the real value or benefit is going 
to be, I think that would be quite crucial to obtain.
    Finally, again, Ms. Tubbs Jones talked about the 
negotiating power that we may have in the Federal Government 
under the Part D plan. In the state of Wisconsin, we have had a 
very popular bipartisan senior care program that does allow 
some negotiation within, and it's resulting in huge cost 
savings.
    I would assume--and I think I heard from your testimony--
that if some of the similar tools are used that are currently 
being utilized under Medicaid programs, that might be an 
additional area of cost savings under Part D, as well. Is that 
correct?
    Mr. FOSTER. They are already being used very effectively. 
The question is, could they be even more effective?
    It's not clear to me, absent a national formulary, without 
those tools applied nationally, that you could do any better.
    Mr. KIND. All right. Thank you, Mr. Foster. Thank you, Mr. 
Chairman.
    Chairman STARK. Mr. Becerra, would you like to inquire?
    Mr. BECERRA. Thank you, Mr. Chairman. Mr. Foster, thank you 
very much for being with us. I know most--much of what we 
talked about is really an estimate, projections of what we 
think will happen. Obviously, things can change. We know that 
the solvency of the Medicare Trust Fund has fluctuated over the 
years. It is always difficult to get precise measurements.
    Can you give me a sense? I know in your report you talk 
about our costs to administer our different Medicare programs. 
What are the administrative costs to administer Medicare's Part 
A or Part B programs?
    Mr. FOSTER. For administering the fee-for-service, or 
actually, for administering Medicare overall, I should say all 
aspects, all administrative costs that Medicare pays directly 
that percentage is about 1.5 percent.
    Mr. BECERRA. Let's make sure we understand what we're 
talking about.
    To administer the fee-for-service program, where we 
reimburse doctors or hospitals for providing the direct care to 
Medicare beneficiaries, the cost of administering that health 
care program under Medicare is about 1.5 percent?
    Mr. FOSTER. Yes, that is correct. It is also correct to say 
for Medicare at large. It is a subtle factor that we make 
certain statutory payments to Medicare Advantage plans and to 
Part D plans. These plans themselves have administrative costs, 
but our payments under the law only reflect administration in a 
very minor way. They are not directly allocated and identified 
as administrative.
    Mr. BECERRA. Okay. So, those are the costs that the 
government, in essence, pays in administering the Medicare 
program, about a percent and a half. You mentioned there are 
other costs: the Part C program, Medicare Advantage, which is 
operated by the health plans, the insurance industry.
    Do we have a sense of what their administrative costs are?
    Mr. FOSTER. Yes, sir. Currently, for the Medicare Advantage 
plans, the average administrative cost, including the gain/loss 
margin, or so-called profit margin, is about 13 percent. So, 
about 9 percent admin and about 4 percent for a gain/loss.
    Mr. BECERRA. So, about 13 percent?
    Mr. FOSTER. Thirteen.
    Mr. BECERRA. Thirteen percent to administer, in essence, a 
parallel program of health care under Medicare that uses a 
different format. The insurance industry offers a plan, versus 
the fee-for-service model, which is the more traditional model.
    Mr. FOSTER. Yes, sir.
    Mr. BECERRA. If we were to expand the Medicare Advantage 
program, the health insurance industry plan that provides 
Medicare fully out to reflect the size of the current fee-for-
service program, what would that 13 percent amount to, in terms 
of dollars?
    Mr. FOSTER. The first rough approximation would be about 13 
percent of total Medicare expenditures, which are in the $450 
billion range these days.
    Mr. BECERRA. So, over--about 50 billion or so dollars? If 
it's 13 percent, and it's $450 billion, 13 percent is--10 
percent would be $45 billion, so something over $45 billion to 
$50 billion?
    Mr. FOSTER. Yes. Now, let me put one caveat on that. One of 
the key reasons that the Medicare administrative cost 
percentage is so low is that we have a giant economy of scale.
    Mr. BECERRA. Yes.
    Mr. FOSTER. We process over a billion claims every year, or 
people do it on our behalf. If you had a national Medicare 
Advantage system of some kind, then each of the Medicare 
Advantage plans would be a lot bigger than it is today.
    Mr. BECERRA. Right. So, they could reduce their costs----
    Mr. FOSTER. Yes, sir.
    Mr. BECERRA. Because the economies have scaled, as well.
    Mr. FOSTER. Yes, sir. Probably not to the 1.5 percent 
range, but----
    Mr. BECERRA. If they were to keep their profit margin at 4 
percent, just the profit margin exceeds by a factor of about 
three, the costs the total cost of administering fee-for-
service through the government system.
    Mr. FOSTER. Yes, sir. Of course, for Medicare, the 
government program, we don't have a profit margin.
    Mr. BECERRA. Right.
    Mr. FOSTER. In fact, I live in fear of the day that we 
introduce a profit and loss-sharing arrangement for employees.
    Mr. BECERRA. Well, so we're talking about Medicare living 
on the edge these days, because of the increasing cost of 
providing medicine and medical services. We take a look at the 
cost differential in providing services through traditional 
fee-for-service, which most seniors are accustomed to, versus 
through the health insurance plans.
    My sense is that, unless the insurance plans can get their 
costs down, or reduce their profit margins some as well, of 
what they expect to make, their administrative costs will 
continue to far exceed the costs that traditional Medicare, 
fee-for-service Medicare, has running through the government to 
give people access to their private doctors and private 
hospitals.
    So, you haven't said to me anything that would make me 
believe that the insurance plans, under Medicare Advantage, 
will at any point be able to compete, at least 
administratively, in terms of cost, with what we have through 
traditional fee-for-service Medicare.
    Mr. FOSTER. Well, let me say that, under current law, 
because of the nature of the benchmarks, and the way the 
payment formula works, clearly we are spending more on 
beneficiaries in Medicare Advantage plans, on average, than we 
would if they were in fee-for-service.
    But your question really goes to the issue of whether the 
private health plans can come in with a lower cost than 
Medicare fee-for-service normally attains. In certain parts of 
the country, they can, and they routinely do. Generally, the 
urban areas, which have relatively high fee-for-service costs, 
many of the HMOs and PPOs can have a plan cost that is less 
than the prevailing fee-for-service level.
    Now, of course, they have to offset their relatively high 
administrative and profit portion of their cost by either 
negotiating lower payment rates for the health care services 
than Medicare fee-for-service rates, or by managing utilization 
and trying to avoid unnecessary costs, or by getting the most 
cost-effective services. In some parts of the country, they can 
do that, but certainly not all in parts.
    Mr. BECERRA. Thank you. I see my time has expired, so I 
will end with the final comment that I think--I appreciate your 
point, that there are ways that a plan can try to figure out 
how to be competitive, and perhaps reduce the costs so that 
they are less than what the traditional Medicare fee-for-
service program costs us to run.
    But I still figure that, unless those profit margins are 
reduced, it's going to be difficult, at any point, for a 
private plan to compete with the traditional fee-for-service 
plan, when your cost--given the scale of the economy here--for 
the government is a 1.5 percent cost. But I appreciate the 
point. I yield back.
    Chairman STARK. Mr. Emanuel, would you like to inquire?
    Mr. EMANUEL. Thank you, Mr. Chairman. If Xavier wants to 
stay, because my question is similar--and feel to jump in at 
any point. I want to press this point, because I think it's 
important, as we look at the trust fund issue.
    You had answered, I think earlier, one of the questions I 
wanted to ask, which was about the fact that you could add 
about 18 months to the trust fund if you paid the Medicare 
Advantage plans similar--rather than have 113 percent of fee 
for service, or 150 being the high end, if you paid them on the 
same level, you would add about 18 months, I think, was your 
answer, a year-and-a-half.
    Mr. FOSTER. Yes, sir.
    Mr. EMANUEL. Okay. On this point and I think it's valuable 
if you're trying to compare apples to apples, would you so 
there would be no dispute in the future if we're all citing you 
and I think you don't want to be cited any more but if you were 
to compare that, is it still 1.5 percent to 13 percent?
    Where can you--how do we get to a point that you can tell 
us that their administrative costs are 13 percent and 
traditional Medicare is X? Okay?
    Mr. FOSTER. I'm not sure I follow the question, entirely, 
Mr. Emanuel. But if I'm understanding correctly, it's certainly 
true enough that these smaller plans that are not nationwide--
--
    Mr. EMANUEL. Right.
    Mr. FOSTER [continuing]. That don't have the economy of 
scale, that have to pay marketing expenses, have to have a 
profit margin----
    Mr. EMANUEL. Right.
    Mr. FOSTER [continuing]. Et cetera, their administrative 
costs will be higher than what we typically experience for 
Medicare fee-for-service.
    If those plans can achieve savings in other ways that more 
than offset the higher administrative cost, then maybe they can 
still be competitive directly against fee-for-service, and have 
a lower cost, overall. Some plans clearly do; many don't.
    Mr. EMANUEL. Well, go ahead, then, Xavier.
    Mr. BECERRA. I thank the gentleman for yielding. But, in a 
way, these plans can reduce their costs and be more 
competitive, compared to traditional fee-for-service, if they, 
in essence, cherry pick. They go after healthier seniors, they 
go after younger seniors, and reduce their overall costs of 
providing service, because there is a threshold at which no one 
can go under, in terms of the cost.
    One of the reasons why it costs us so little, providing 
traditional fee for service, is because--but you said, it's 
economy of scale, and we don't ask for profit. We don't ask 
seniors to pay for the government to make a profit off of 
providing health care.
    Mr. EMANUEL. Let me say what I was trying to get at, and 
it's not, obviously, hidden here, which is if you were trying 
to extend the life of the trust fund, and make sure Medicare is 
healthy, everything should be on the table, whether that's 
overpaying for a service, where you're paying sometimes 113 to 
150 percent of fee-for-service. Or, B, if your administrative 
costs between 1 entity is 13 percent and another entity is 1.5 
percent, that would be another place where you could look 
before we do anything else to the beneficiaries--not that that 
is to say exclusive.
    Now, when we had a debate the other day, four Democrats and 
four Republicans--Congressman Ryan from Wisconsin acknowledged 
that maybe, you know, the actual Medicare Advantage notion that 
we're paying over what we should be paying over is a place to 
look for savings.
    So, my whole point in asking you for a fair comparison was, 
what are the dollars there that you think are available, and 
that nobody can say, ``Well, you're really comparing apples and 
oranges here?''
    What are the dollars that are available, and how much 
dollars would come if you could--were comparing apples to 
apples? That's what I'm trying to get at.
    Mr. FOSTER. Yes, sir. I see. I don't think, as a practical 
matter, you could just look at the relatively high 
administrative cost of MA plans and say, ``Okay, we're going to 
force them to have lower administrative costs.'' You could do 
that to a point, but at some point the plans would say, ``We 
can't.''
    Mr. EMANUEL. I understand. That would be repeating, like, 
the 1990s. Got that.
    Mr. FOSTER. Somewhat, yes.
    Mr. EMANUEL. Right.
    Mr. FOSTER. Now, you could do it through the following way. 
This, again, is a bit of a quantum change. But if you 
implemented competition between the private plans without the 
relatively high-level benchmarks the competition of the private 
plans, with benchmarks based on their bids and combined that in 
with fee-for-service Medicare as well, then what we think you 
would find is that in some parts of the country, the private 
plans would actually be quite competitive, and would be a 
cheaper cost than fee-for-service is now.
    In many other parts of the country, it would be the other 
way around. The private plans could not compete effectively 
against the fee-for-service level of cost.
    But if you did that, and were willing to live with what are 
non-trivial consequences----
    Mr. EMANUEL. Yes.
    Mr. FOSTER. Then you would take advantage of whichever form 
of health care delivery is more effective in a given area by 
area, you would get a lower cost, overall.
    Mr. EMANUEL. Mr. Chairman, I know my time is up, but at 
some point I would love to have a discussion about: A, looking 
at fee-for-service; and then B, kind of patient wholeness and 
doctors, and a different way of paying for a service, and what 
we could see for savings. I know we don't have time for that 
type of discussion, but I think it's worthy, as we look at 
changes. Okay?
    Chairman STARK. I think that makes sense.
    Mr. CAMP. If the gentleman would yield?
    Chairman STARK. Yes.
    Mr. CAMP. I do think there is a difference between private 
fee for service and coordinated care, which we often call 
ultimate Medicare Advantage, which--there is a difference 
there. Coordinated care actually bids below traditional 
Medicare. But that's why we kind of lump all this together 
sometimes when we talk about them. I think there is a 
difference.
    Mr. FOSTER. Well, and I might add, typically there are bids 
that are, in fact, somewhat higher than traditional fee-for-
service because of the admin cost.
    Mr. EMANUEL. They have to do certain things, 
administratively, and pay for certain things that Medicare, 
because of the size, doesn't.
    On the other hand, I do think one of the things that one 
day we're going to look at is, rather than fee-for-service as a 
payment method, is a different type of structure that will save 
on health care costs because a doctor and a hospital have a 
different type of--a way to see the way they would take care of 
a patient as another way to control costs.
    Mr. FOSTER. It has great potential.
    Mr. EMANUEL. Yes. You are a man of few words. Thank you.
    Chairman STARK. Would you have some further inquiry, Mr. 
Camp?
    Mr. CAMP. Well, just to ask, we had sort of this discussion 
about the profit margins. I do think it's important to say that 
Medicare plans have, on average, a 4 percent profit margin.
    But I do think it's important to say that the nursing homes 
and home health organizations, on average, have what profit 
margin?
    Mr. FOSTER. I can provide that for the record; I don't have 
it handy.
    Mr. CAMP. I believe it is in double digits, though, is it 
not? Around 11 percent?
    Mr. FOSTER. It wouldn't surprise me.
    Mr. CAMP. Yes. Well, if we could, get that in the record. 
So, I think we need to look at, you know, all of this together, 
and not just say that because Medicare Advantage plans are at 4 
percent, that that's unacceptable, when we have other sectors 
that are much, much higher than that, which we're not 
addressing in the same way. I'm not suggesting we should.
    Mr. EMANUEL. Would my colleague yield for a second?
    Mr. CAMP. Yes.
    Mr. EMANUEL. As we look at places of savings--and, again, 
Mr. Chairman, this would be one area I would be interested in--
is whether Medicare could ever provide data to if we dealt 
earlier with chronic illnesses--heart, diabetes, et cetera, 
some of the basic 3 or 4--earlier than 65, what savings could 
we see in Medicare? You could say the overall health care 
system, but your purview is Medicare.
    What savings could there be resulted to Medicare if 
people--I don't know, call it 58 to 64, 55 to 65--were put into 
and required, as a participation in Medicare years later, were 
part of a chronic illness management? What savings could be 
looked at? Can I ask that question, or no?
    Mr. CAMP. Yes, I have yielded.
    Chairman STARK. I am pretty sure you already did. So----
    Mr. EMANUEL. That doesn't mean the Chairman allowed me.
    Mr. CAMP. It's on my time, I would like to hear the answer.
    Mr. FOSTER. Sure, I think----
    Mr. EMANUEL. Right, I understand.
    Mr. FOSTER. Potentially, it would have favorable impacts.
    Mr. EMANUEL. This is like Agatha Christie. ``Then There 
Were None.'' So, there are only four of us, so don't worry 
about it.
    Mr. FOSTER. It would be tough to estimate the financial 
impact of that. It's not to say we couldn't try. It would be 
tough, because you have this classic trade-off. On the one 
hand, people would be in better health, as a result of some of 
the kinds of steps you talked about, and for some period of 
time they have lower per-person costs than they probably would 
have, otherwise.
    On the other hand, they would tend to live longer, and 
incur more services over their full lifetime, as a result. When 
you look at it on that basis, many of these studies indicate 
that perhaps you would not really save anything.
    Now, the world would be a better place, and that's a good 
thing, even if you did not have savings. But it's that kind of 
trade-off that makes it very difficult to estimate.
    Mr. EMANUEL. Can I ask one question?
    Mr. CAMP. Yes, yes.
    Mr. EMANUEL. The fact is and I understand the trade-off I 
mean, one of the before somebody gets into Medicare, and given 
all the advantages and I don't mean Medicare Advantage plans, 
but all the advantages of Medicare if part of participation was 
an earlier improvement of one's health, I think you would see 
the financial health in Medicare because if we're looking at 
savings, and given we know the costs associated with the three 
or four chronic illnesses are huge, I think that should be a 
place that we look----
    Mr. CAMP. Just reclaiming my time, as we're talking about 
savings, what are the top three reasons Part D costs are lower 
than you had projected?
    Mr. FOSTER. Well, generally speaking, the first of the top 
three reasons is that the drug cost growth, overall, has been a 
lot less than we estimated, following a decade-and-a-half of 
double-digit growth rates. That was partly attributable to a 
lot of efforts to steer people to use generic equivalents, 
rather than brand-name drugs. The efforts have been very 
successful, and the generic rate is now over 60 percent in Part 
D, and in the country, generally.
    The second reason we talked about a little bit before, 
about the negotiated retail discounts and rebates, et cetera.
    Mr. CAMP. Their ability to negotiate discounts----
    Mr. FOSTER. Yes----
    Mr. CAMP [continuing]. From the drug manufacturers.
    Mr. FOSTER. The third reason--and this was the smallest of 
the three--was that there were somewhat fewer enrollees than we 
had originally estimated.
    Mr. CAMP. All right. Thank you. Thank you, Mr. Chairman.
    Chairman STARK. Did you have a second inquiry?
    Rich, if you would, just--the--we have heard--you have 
heard Mr. Doggett on some other issues, but we are having a 
difficult time determining what Medicare Advantage plans 
actually provide, as if I can make that difference, as opposed 
to offer.
    You could offer something that only a small percentage of 
the plan enrollees take, and you're not giving them much. Or, 
you can offer them $50 in dental care, and we know that that 
ain't going to get you very far toward getting your teeth 
cleaned.
    Could we--don't you think that we should get actual data on 
these Medicare Advantage plans, in terms of the actual 
provision of benefits?
    I know there is an anti-competitive issue, but it seems to 
me that that could be dealt with in some kind of confidential 
sense, at least with the Committee.
    Mr. FOSTER. I think it would be useful and informative in 
the bigger picture, which is what you're describing----
    Chairman STARK. Yes.
    Mr. FOSTER. A GAO study or analysis, for example, that kind 
of thing.
    Let me mention what we do already, which is a cousin of 
this. By law, my office has to review all the bid submissions 
for all the MA plans and all the Part D plans, and that's about 
9,000 individual bids in the course of a year.
    For the MA plans, when they indicate their expected cost 
experience for the coming year, they're supposed to be 
estimating that based on their actual past experience, not only 
for the standard covered benefits under Medicare, but also for 
any supplemental coverage that they offer.
    So, we look to see whether their bid for the cost is 
consistent with their actual past experience. For the bid 
review, we can do that only on a kind of a cursory basis, but 
we periodically audit these plans in much greater detail, and 
that's one of the things we look at.
    So, if you had a plan, for example, that offered half-a-
dozen different kinds of extra services or care, but in real 
life they were not providing them----
    Chairman STARK. Those people weren't taking them. They 
would provide them.
    Mr. FOSTER. Either way.
    Chairman STARK. People signed up.
    Mr. FOSTER. Exactly right. Either way. Then we would see a 
mismatch between their claimed cost for the coming year, and 
their actual past experience--and we would investigate that.
    Chairman STARK. Well then, is there enough data, and would 
it be available to GAO? We don't have to get into this issue of 
anti-competitive stuff.
    For GAO to do a report for us using the data that you would 
have in these bid submissions, and comparing it with previous 
years' costs so that we could begin to get some idea of what 
actually was being provided is would you say there is enough 
broad data around so that we could go ahead with that?
    Mr. FOSTER. Probably.
    Chairman STARK. Maybe.
    Mr. FOSTER. Yes. Well, I would say probably.
    Chairman STARK. Okay.
    Mr. FOSTER. I hesitate only because we don't get individual 
claims level data from the MA plans.
    Chairman STARK. No, but you get the aggregate.
    Mr. FOSTER. We get their aggregate data, yes.
    Chairman STARK. So, if they say they're going to offer $50 
for a pair of eyeglasses each year, whatever, they have an 
aggregate amount in their bid, you'd know about how many people 
they had in last year. Could you find out how much they 
actually spent the year before on eyeglasses?
    Mr. FOSTER. Yes, that would be the way it could be done.
    Chairman STARK. Okay. Well, from that, I think we could 
then begin to see which benefits were used, what they cost, and 
get some better understanding than just this idea that there is 
lots of benefits. That's pretty hard for either of us to know.
    Mr. CAMP. Well, I think that you get this data, but CMS 
doesn't. I don't quite understand why GAO can't get that from 
you, but they apparently can't.
    Chairman STARK. They can't? Can they?
    Mr. FOSTER. Well, here we're talking about for the MA 
plans, not Part D. For Part D, there was an explicit statutory 
prohibition of the broader use of the Part D data. It has to be 
for payment purposes, which is why we get it.
    Mr. CAMP. I see. So, they can't get that.
    Mr. FOSTER. Right. For the MA data, I don't see any reason 
why they couldn't. Now, some of my staff may yell at me after 
this hearing about: ``Do you realize what you said?'' But I 
think it could be done.
    Chairman STARK. We might, then, to get around this--let GAO 
provide some review, even of Part D, as long as it was not able 
to identify any particular competitive plans, and get a little 
bit better idea of what we're doing. That would be very useful.
    Have--at any point in your 75-year estimates, did you see, 
or do you--or did your reports show that the Medicare Advantage 
would cost less on a per-beneficiary basis than traditional 
fee-for-service?
    Mr. FOSTER. No, sir, not under current law.
    Chairman STARK. Okay. I guess my last request is for a 
table. In--you used to produce a table in the trustees' report 
that showed Medicare cost sharing as a percentage of Social 
Security, and now you just have a graph. Could you give us a--
give us that in kind of a tabular form, as you--as has shown up 
in the past?
    Mr. FOSTER. Yes, sir. That would be no problem.
    Chairman STARK. Would you send that on to us? I would 
appreciate it very much.
    I guess, unless anybody else wants to chime in, we could 
let Mr. Foster go to lunch with our deep and abiding thanks to 
you and your staff, with the sad reflection that you have 
generated enough questions here that we are probably going to 
flood you with inquiries over the next month. But we appreciate 
much your participating with us this morning.
    Unless--with Mr. Pomeroy's concurrence, we--the hearing is 
adjourned.
    Mr. FOSTER. Thank you, sir.
    [Whereupon, at 11:45 a.m., the hearing was adjourned.]
    [Questions for the Record follow:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    [Submissions for the Record follow:]
                    Statement of Thomas F. Wildsmith
    The American Academy of Actuaries is a national organization formed 
in 1965 to bring together, in a single entity, actuaries of all 
specializations within the United States. A major purpose of the 
Academy is to act as a public information organization for the 
profession. Academy committees, task forces and work groups regularly 
prepare testimony and provide information to Congress and senior 
federal policy-makers, comment on proposed federal and state 
regulations, and work closely with the National Association of 
Insurance Commissioners and state officials on issues related to 
insurance, pensions and other forms of risk financing. The Academy 
establishes qualification standards for the actuarial profession in the 
United States and supports two independent boards. The Actuarial 
Standards Board promulgates standards of practice for the profession, 
and the Actuarial Board for Counseling and Discipline helps to ensure 
high standards of professional conduct are met. The Academy also 
supports the Joint Committee for the Code of Professional Conduct, 
which develops standards of conduct for the U.S. actuarial profession. 
The American Academy of Actuaries' Medicare Steering Committee 
appreciates the opportunity to provide comments on the 2008 Medicare 
Trustees Report. Each year, the Boards of Trustees of the Federal 
Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) Trust 
Funds report to Congress on the Medicare program's financial condition. 
The Medicare program provides health coverage for the aged and for 
certain individuals with disabilities. The trustees' report is the 
primary source of information on the financial status of the Medicare 
program, and the American Academy of Actuaries proudly recognizes the 
contribution that members of the actuarial profession have made in 
preparing the report and educating the public about this important 
issue.
    The projections of Medicare's financial status in the 2008 Medicare 
trustees' report are consistent with the projections in the 2007 
report. The HI trust fund, which pays for hospital services, will be 
depleted slightly earlier in 2019 than was previously projected. HI 
expenditures will again exceed HI non-interest income this year. In 
addition, Medicare expenditures will continue to consume an increasing 
share of federal outlays and GDP. The trustees conclude, ``The 
projections shown in [the] report continue to demonstrate the need for 
timely and effective action to address Medicare's financial 
challenges--both the long-range financial imbalance facing the HI trust 
fund and the heightened problem of rapid growth in expenditures.''
    The following statement examines more closely the findings of the 
trustees' report. The American Academy of Actuaries' Medicare Steering 
Committee concludes that the Medicare program faces serious short-term 
and long-term financing problems. As highlighted in the 2008 Medicare 
trustees' report:

          The HI trust fund fails to meet the test of short-
        range financial adequacy because HI trust fund assets will fall 
        below annual expenditures within the next 10 years.
          The HI trust fund also fails to meet the test of 
        long-range actuarial balance. HI expenditures will exceed HI 
        non-interest income this year. By 2019, when trust fund assets 
        are projected to be depleted, tax revenues would cover only 78 
        percent of program costs, and this share will decrease rapidly 
        thereafter. The trust fund depletion date is projected to 
        arrive slightly earlier in 2019 than was projected last year, 
        due in part to slightly lower projected payroll tax income and 
        slightly higher expenditures than previously estimated.
          The value in today's dollars of the HI deficit over 
        the next 75 years is $13 trillion. Eliminating this deficit 
        would require an immediate 122 percent increase in payroll 
        taxes or an immediate 51 percent reduction in benefits, or some 
        combination of the two. Delaying action would require more 
        drastic tax increases or benefit reductions.
          The SMI trust fund includes accounts for the Part B 
        program, which covers physician and outpatient hospital costs, 
        and for the Part D program, which covers the prescription drug 
        benefit. The SMI trust fund is expected to remain solvent only 
        because its financing is reset each year to meet projected 
        future costs. Projected increases in SMI expenditures will 
        require significant increases in beneficiary premiums and 
        general revenue contributions over time.
          Medicare's demand on the federal budget, measured as 
        the HI income shortfall and the general revenue contribution to 
        SMI, is projected to increase rapidly.
          For the third year in a row, the difference between 
        Medicare outlays and dedicated revenues exceeds 45 percent 
        within the next seven years, thereby again triggering the 
        Medicare funding warning. As a result, the next president must 
        propose legislation to reduce this share within 15 days of the 
        next budget submission. Congressional action is not guaranteed, 
        however, and depending on what action, if any, is taken, other 
        financing problems could remain.
          Medicare expenditures are also projected to increase 
        rapidly as a share of GDP and of total federal revenues, 
        thereby threatening Medicare's long-term sustainability.
          The increasing costs of the Medicare program reflect 
        the increasing costs of the health care system as a whole. 
        Efforts to control spending in the Medicare program should be 
        considered within the broader context of the entire health care 
        system.

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

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

    Each of these problems is discussed in more detail below.

Medicare HI Trust Fund Income Will Soon Become Inadequate to Fund HI 
Benefits

    In terms of trust fund accounting, Medicare consists of two parts, 
each of which is financed separately. Hospital Insurance (HI) pays 
primarily for inpatient hospital care (Part A); Supplementary Medical 
Insurance (SMI) pays primarily for physician and outpatient care (Part 
B) and prescription drugs (Part D). Like the Social Security program, 
Medicare makes use of trust funds to account for all income and 
expenditures, and the HI and SMI programs operate separate trust funds. 
Taxes, premiums, and other income are credited to the trust funds, 
which are used to pay benefits and administrative costs. Any unused 
income is added to the trust fund assets, which are invested, as 
required by law, in U.S. government securities, for use in future 
years. Note, however, that the trust fund assets represent loans to the 
U.S. Treasury's general fund. As a result, the buildup of Medicare 
trust funds is essentially used to fund other government spending.
    The 2008 Medicare trustees' report highlights the long-term 
financing problems facing the program:

          The HI program is funded primarily through earmarked 
        payroll taxes. From 1998 through 2004, HI payroll taxes and 
        other non-interest income exceeded HI expenditures, and the 
        trust fund accumulated assets. In 2005, however, HI non-
        interest income fell below HI expenditures and has continued to 
        fall short since then. Beginning in 2010, HI expenditures are 
        projected to exceed all HI income, including interest. At that 
        point, the HI trust fund will need to begin redeeming its 
        assets--U.S. government securities--in order to pay for 
        benefits. If the federal government is experiencing unified 
        budget deficits at the time these securities need to be 
        redeemed, either additional taxes will need to be levied to 
        fund the redemptions, or additional money will need to be 
        borrowed from the public, thereby increasing the public debt.
          By 2019, HI trust fund assets are projected to be 
        depleted. At that time, tax revenues are projected to cover 
        only 78 percent of program costs, with the share decreasing 
        further thereafter. The HI trust fund depletion date is 
        projected to arrive a little earlier in 2019 than projected in 
        the 2007 Medicare trustees' report, due in part to slightly 
        lower projected payroll tax income and slightly higher 
        expenditures than previously estimated.
          The value in today's dollars of the HI deficit over 
        the next 75 years is $13 trillion, or 3.5 percent of taxable 
        payroll over the same time period. Eliminating this deficit 
        would require an immediate 122 percent increase in payroll 
        taxes or an immediate 51 percent reduction in benefits, or some 
        combination of the two. Delaying action would require more 
        drastic tax increases or benefit reductions. Projections over 
        an infinite time horizon would increase the shortfall to $34 
        trillion, or 6.1 percent of taxable payroll. Given the 
        uncertainty of projections 75 years into the future, however, 
        extending these projections into the infinite future can only 
        increase the uncertainty, so that these results can have only 
        limited value for policymakers.
          The SMI program is financed through beneficiary 
        premiums that cover about a quarter of the cost. Federal 
        general tax revenues cover the remaining three quarters.\1\ The 
        SMI trust fund is expected to remain solvent, but only because 
        its financing is reset each year to meet projected future 
        costs. Projected increases in SMI expenditures, therefore, will 
        require increases in beneficiary premiums and general revenue 
        contributions over time.
---------------------------------------------------------------------------
    \1\ Part B beneficiaries pay monthly premiums covering about 25 
percent of program costs (beginning in 2007, Part B premiums became 
income-related, with higher income enrollees paying more than 25 
percent of costs); general revenues cover the remaining 75 percent of 
costs. Part D premiums will be set at about 25 percent of Part D costs. 
However, because of low-income premium subsidies, beneficiary premiums 
will cover only about 9 percent of total Part D costs in 2008. State 
payments on behalf of certain beneficiaries will cover about 14 percent 
of costs and general revenues will cover the remaining 77 percent of 
costs.

---------------------------------------------------------------------------
Medicare's Demand on the Federal Budget Is Increasing

    Another way to gauge Medicare's financial condition is to view it 
from a federal budget perspective. In particular, this assessment 
determines whether Medicare receipts from the public (e.g., payroll 
taxes, beneficiary premiums) exceed or fall short of outlays to the 
public. Under this approach, interest income on the HI trust fund 
assets and contributions from general revenues to the SMI program are 
ignored, because they are essentially intragovernmental transfers 
between the general fund and the Medicare trust funds. As a result, the 
difference between public receipts and public expenditures for Medicare 
reflects any HI income shortfall and the general revenue share of SMI.
    Table 1 reports the HI income shortfall and the general revenue 
contribution to the SMI program in 2007 and projections over the next 
10 years. Recall that the SMI program is designed for about three-
quarters of its expenditures to be funded through general revenues. In 
2007, Medicare expenditures already exceeded public receipts by $174 
billion. This amount is expected to grow over the next 10 years; the 
cumulative difference between Medicare expenditures and public receipts 
is projected to total $2.9 trillion over this period.
    Beginning in 2010, when HI expenditures are projected to exceed HI 
public receipts plus interest income on trust fund assets, the HI trust 
fund will need to begin drawing down its assets, further increasing 
Medicare's demand on the federal budget. Unless payroll taxes are 
increased or benefits reduced, HI trust fund assets are projected to be 
depleted in 2019. There is no current provision allowing for general 
fund transfers to cover HI expenditures in excess of payroll tax 
revenues.
    For a longer-term view of Medicare's demand on the federal budget, 
Table 2 reports the HI income shortfall and the SMI general revenue 
contribution over the next several decades, as a share of GDP. The HI 
income shortfall and SMI general revenue contribution are projected to 
grow dramatically--from 1.4 percent of GDP in 2008 to 7.8 percent of 
GDP in 2080. This will increase considerably the pressures on the 
federal budget, unless HI income shortfalls or SMI general revenue 
contributions are reduced.
    A provision of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) intends to address these financial 
challenges. Basically, if in two consecutive trustees' reports general 
funding sources are projected to account for more than 45 percent of 
Medicare spending within the next seven years, the administration is 
required to recommend ways to reduce this percentage.\2\ Options would 
include reducing spending (e.g., benefit cuts, delayed eligibility, 
reduced provider payments), increasing revenues (e.g., raising payroll 
taxes, raising beneficiary premiums), or some combination thereof. The 
president's proposal must come within 15 days of the next budget 
submission. The provision was first triggered in 2007, and in response 
President Bush submitted legislation in February 2008. Congress is now 
required to consider the legislation on an expedited basis. There is no 
requirement, however, that any legislation be enacted.
---------------------------------------------------------------------------
    \2\ More specifically, a determination of ``excess general 
funding'' is triggered if for two consecutive trustees' reports the 
difference between Medicare outlays and dedicated financing sources (HI 
payroll taxes, HI share of income taxes on Social Security benefits, 
Part D state transfers, and beneficiary premiums) exceeds 45 percent of 
Medicare outlays within seven years of the projection.
---------------------------------------------------------------------------
    The 2008 Medicare Trustees' Report projects that the 45 percent 
threshold will first be reached in 2014. Because last year's report 
also projected that the threshold would be reached within seven years, 
the requirement is triggered again this year. The triggering of this 
provision draws attention to the need to manage the demand Medicare 
places on the federal budget, and provides policymakers the opportunity 
to address the financial situation of the program and to limit the 
burden the program places on the federal budget. Congressional action 
is not guaranteed, however, and depending on what action, if any, is 
taken, other financing problems could remain. For instance, legislative 
changes reducing general revenue funding might have no impact on HI 
solvency.

Medicare Is Projected to Place Increasing Strains on the Economy

    A broader issue related to Medicare's financial condition is 
whether the economy can sustain Medicare spending in the long run. To 
gauge the future sustainability of the Medicare program, we examine the 
share of GDP that will be consumed by Medicare. As shown in Table 3, 
total Medicare spending is projected to consume a greater share of GDP 
over time. In 2007, total Medicare spending was 3.2 percent of GDP. 
Spending is expected to rise to 6.3 percent of GDP in 2030 and 10.7 
percent of GDP in 2080. (Notably, this measure understates the share of 
the economy devoted to health spending among the elderly and disabled, 
because Medicare imposes cost sharing and does not cover all health 
products and services utilized.)
    Considering Medicare spending in conjunction with Social Security 
spending further highlights the strain these programs place on the 
economy. Social Security spending as a share of GDP increases more 
modestly than Medicare over the next several decades, and as a result, 
Medicare spending is expected to exceed that of Social Security in 
2028. Combined, Medicare and Social Security expenditures equaled 7.5 
percent of GDP in 2007. This share of GDP is projected to increase to 
12.3 percent in 2030 and 16.5 percent in 2080.
    Medicare and Social Security expenditures are even more striking 
when considered relative to total federal revenues. The trustees report 
that total federal revenues have historically averaged about 18 percent 
of GDP. Using this average, about 40 percent of all federal revenues in 
2008 will be used to pay Medicare and Social Security benefits. If no 
changes are made to either program and federal revenues remain at 18 
percent of GDP, this share is expected to increase to nearly 80 percent 
in 2050, and by 2080, Medicare and Social Security spending would equal 
over 90 percent of total federal revenues.
    These projections highlight the increasing strains that Medicare, 
especially in conjunction with Social Security, will place on the U.S. 
economy. Moreover, increased spending for Medicare may crowd out the 
share of funds available for other federal programs.
    If we are to avoid this trend, reforms must be made to address the 
rapid growth in Medicare expenditures. It is important to recognize 
that the problem of rising health care spending in the Medicare program 
reflects spending growth in the U.S. health system as a whole. 
Therefore, unless spending in the health system as a whole is 
addressed, implementing options to control Medicare spending may have 
limited long-term effectiveness.
CONCLUSION
    The American Academy of Actuaries' Medicare Steering Committee 
continues to be very concerned about Medicare's long-range financing 
problems. HI non-interest income is already falling short of outlays 
this year and the HI trust fund is projected to be depleted as soon as 
2019. Medicare will likely place increasing demands on the federal 
budget, even with the provision that alerts Congress when the program's 
reliance on general revenue sources is becoming large. The program's 
sustainability is also called into question as currently promised 
benefits will require increasing shares of both GDP and total federal 
revenues.
    The committee recommends that policymakers implement changes to 
improve Medicare's financial outlook. We agree with the 2008 trustees, 
who state in their report:

          ``The sooner the solutions are enacted, the more flexible and 
        gradual they can be. Moreover, the early introduction of 
        reforms increases the time available for affected individuals 
        and organizations--including health care providers, 
        beneficiaries, and taxpayers--to adjust their expectations.''

    The Academy's Medicare Steering Committee is ready to provide the 
analysis and technical expertise of our member health actuaries in 
responding to issues regarding the future of the Medicare system. Other 
Academy publications include Medicare Reform Options, How Is Medicare 
Financed? What Is the Role of the Medicare Actuary? and Evaluating the 
Fiscal Soundness of Medicare. These and other Academy publications are 
available at www.actuary.org/medicare/index.htm.

                                  
