[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
----------
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COMMITTEE ON WAYS AND MEANS
CHARLES B. RANGEL, New York, Chairman
FORTNEY PETE STARK, California JIM McCRERY, Louisiana
SANDER M. LEVIN, Michigan WALLY HERGER, California
JIM McDERMOTT, Washington DAVE CAMP, Michigan
JOHN LEWIS, Georgia JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts SAM JOHNSON, Texas
MICHAEL R. McNULTY, New York PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee JERRY WELLER, Illinois
XAVIER BECERRA, California KENNY C. HULSHOF, Missouri
LLOYD DOGGETT, Texas RON LEWIS, Kentucky
EARL POMEROY, North Dakota KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon DEVIN NUNES, California
RON KIND, Wisconsin PAT TIBERI, Ohio
BILL PASCRELL, Jr., New Jersey JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama
Janice Mays, Chief Counsel and Staff Director
Brett Loper, Minority Staff Director
______
Subcommittee on Health
FORTNEY PETE STARK, California, Chairman
LLOYD DOGGETT, Texas DAVE CAMP, Michigan
MIKE THOMPSON, California SAM JOHNSON, Texas
RAHM EMANUEL, Illinois JIM RAMSTAD, Minnesota
XAVIER BECERRA, California PHIL ENGLISH, Pennsylvania
EARL POMEROY, North Dakota KENNY C. HULSHOF, Missouri
STEPHANIE TUBBS JONES, Ohio
RON KIND, Wisconsin
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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
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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.
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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.