[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]


 
              STRENGTHENING HEALTH AND RETIREMENT SECURITY

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, FEBRUARY 28, 2012

                               __________

                           Serial No. 112-21

                               __________

           Printed for the use of the Committee on the Budget


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                        COMMITTEE ON THE BUDGET

                     PAUL RYAN, Wisconsin, Chairman
SCOTT GARRETT, New Jersey            CHRIS VAN HOLLEN, Maryland,
MICHAEL K. SIMPSON, Idaho              Ranking Minority Member
JOHN CAMPBELL, California            ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California              MARCY KAPTUR, Ohio
W. TODD AKIN, Missouri               LLOYD DOGGETT, Texas
TOM COLE, Oklahoma                   EARL BLUMENAUER, Oregon
TOM PRICE, Georgia                   BETTY McCOLLUM, Minnesota
TOM McCLINTOCK, California           JOHN A. YARMUTH, Kentucky
JASON CHAFFETZ, Utah                 BILL PASCRELL, Jr., New Jersey
MARLIN A. STUTZMAN, Indiana          MICHAEL M. HONDA, California
JAMES LANKFORD, Oklahoma             TIM RYAN, Ohio
DIANE BLACK, Tennessee               DEBBIE WASSERMAN SCHULTZ, Florida
REID J. RIBBLE, Wisconsin            GWEN MOORE, Wisconsin
BILL FLORES, Texas                   KATHY CASTOR, Florida
MICK MULVANEY, South Carolina        HEATH SHULER, North Carolina
TIM HUELSKAMP, Kansas                KAREN BASS, California
TODD C. YOUNG, Indiana               SUZANNE BONAMICI, Oregon
JUSTIN AMASH, Michigan
TODD ROKITA, Indiana
FRANK C. GUINTA, New Hampshire
ROB WOODALL, Georgia

                           Professional Staff

                     Austin Smythe, Staff Director
                Thomas S. Kahn, Minority Staff Director


                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, February 28, 2012................     1

    Hon. Paul Ryan, Chairman, Committee on the Budget............     1
        Prepared statement of....................................     3
    Hon. Chris Van Hollen, ranking minority member, Committee on 
      the Budget.................................................     3
        Prepared statement of....................................     5
    Richard S. Foster, FSA, MAAA, Chief Actuary, Centers for 
      Medicare & Medicaid Services...............................     7
        Prepared statement of....................................     8
    Stephen C. Goss, Chief Actuary, Social Security 
      Administration.............................................    23
        Prepared statement of....................................    26
        Response to question submitted for the record............    66
    Hon. Diane Black, a Representative in Congress from the State 
      of Tennessee, question submitted for the record............    65


                        STRENGTHENING HEALTH AND
                          RETIREMENT SECURITY

                              ----------                              


                       TUESDAY, FEBRUARY 28, 2012

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in room 
210, Cannon House Office Building, Hon. Paul Ryan, [Chairman of 
the Committee] presiding.
    Present: Representatives Ryan, Garrett, Calvert, Price, 
McClintock, Stutzman, Lankford, Black, Ribble, Flores, 
Mulvaney, Huelskamp, Young, Guinta, Woodall, Van Hollen, 
Schwartz, Doggett, Blumenauer, Yarmuth, Pascrell, Wasserman 
Schultz, Bass, Bonamici.
    Chairman Ryan. The committee will come to order. Before we 
get started I want to yield to Mr. Van Hollen for the purposes 
of introducing our newest member to the committee, Suzanne 
Bonamici. Mr. Van Hollen.
    Mr. Van Hollen. Thank you very much Mr. Chairman, I just 
wanted to add my word of welcome to our newest member who 
signed up to do duty on the Budget Committee, Suzanne Bonamici, 
a new member from Oregon who served in the state legislature 
and focused on a lot of these issues at the state level, to the 
extent they related to the state budget, but obviously has an 
understanding of how the state budget interacts with the 
federal budget. You have signed up at a time when you have to 
fasten your seat belt; we are in the middle of budget season 
here and it is great to have you on board the committee, so 
thank you Mr. Chairman.
    Chairman Ryan. Welcome. As a Wisconsin Badger fan, I will 
pause for a second here. You hit us pretty good in the Rose 
Bowl, but it is nice to have you, nevertheless.
    Let's get started. Welcome to today's important hearing 
examining the structural challenges facing the federal 
government's major health and retirement security programs. 
This is a hearing we have every year and, unfortunately, it is 
a hearing where the news just gets worse.
    We welcome back to the committee the two foremost experts 
on the financial crunch facing Medicare and Social Security, 
the chief actuaries of each of the two programs. Rick Foster, 
the chief actuary of the Center for Medicare and Medicaid 
Services. Rick's non-partisan analysis is second to none in 
illuminating the challenges in health care and the consequences 
of trying to squeeze savings from the rather blunt instrument 
of price controls.
    We also welcome Stephen Goss. We have known Steve a long 
time; he is the chief actuary at the Social Security 
Administration. Steven's analysis should be required reading 
for policy makers. We thank you for taking the time out of your 
busy schedule again to unpack the facts and to share your 
insights with us today.
    For too long, politicians in Washington have not been 
honest with the American people, and seniors in particular, 
about Medicare and Social Security. Instead of engaging in an 
honest debate about the path forward to strengthen these 
programs, too many have offered little more than false 
political attacks and trillions of dollars in empty promises. 
Today's hearing is an effort to honestly assess the challenges 
facing these two critical programs, providing the clarity to 
Congress as we work to advance sensible reforms and to ensure 
that these critical 20th century programs can fulfill their 
important mission into the 21st century.
    There is a very clear choice of two futures for both 
programs. For Medicare, we can follow the path set by the 
president's health care law, and the additional Medicare cuts 
called for in his most recent budget request. On this path, 
Medicare is rated to the tune of about $500 billion to fund a 
new, open-ended entitlement and the fate of senior's care is 
left in the hands of 15 unelected, unaccountable bureaucrats in 
Washington. These bureaucrats are in power to cut Medicare in 
ways that will result in restricted access and denied care for 
current seniors. Meanwhile, this path leaves Medicare bankrupt 
for future generations.
    We can chart a brighter future for Medicare. There is a 
growing bipartisan consensus for reforms that ensure no 
disruptions for those in, or near, retirement, while offering 
the next generation a patient-centered Medicare program that 
offers more choices and more security.
    For Social Security, we can follow the path set by 
President Obama's most recent budget request, failing to meet 
the test for leadership that he himself established, the 
president has hedged and dodged, but has yet to advance 
credible solutions to shore up Social Security's fiscal 
imbalance. As the trustees have warned, the president's 
unserious approach to Social Security will result in serious 
consequences for seniors, an across-the-board 23 percent 
benefit cut when the trust fund is exhausted, which is 
scheduled to hit when those entering the system today are in 
the heart of their retirement, or we can chart a brighter 
future for Social Security.
    Similar to Medicare, I believe that there is a growing 
bipartisan consensus for sensible, gradual reforms that ensure 
no disruptions for those in, and near, retirement for offering 
the next generation a program that reflects demographic 
reality, a more progressive benefit structure, and a solvent 
future. I thank my colleagues here at the Budget Committee for 
engaging in this spirited debate with mutual respect for one 
another, and a shared commitment to make good on the promises 
of these critical programs. The decisions we make in the next 
few years will amplify throughout this century, and will affect 
every single human being we represent.
    We look forward to the testimony of our two esteemed 
witnesses, but before I do I would like to yield to the ranking 
member Mr. Van Hollen for his opening statement.
    [The prepared statement of Chairman Paul Ryan follows:]

            Prepared Statement of Hon. Paul Ryan, Chairman,
                        Committee on the Budget

    Welcome to today's important hearing examining the structural 
challenges facing the federal government's major health and retirement 
security programs.
    We welcome back to the Committee the two foremost experts on the 
financial crunch facing Medicare and Social Security: the chief 
actuaries of each program.
    We welcome Rick Foster, the chief actuary at the Centers for 
Medicare and Medicaid Services. Rick's nonpartisan analysis is second-
to-none in illuminating the challenges in health care and the 
consequences of trying to squeeze savings from the rather blunt 
instrument of price controls.
    We also welcome Stephen Goss, the chief actuary at the Social 
Security Administration. Stephen's analyses should be required reading 
for policymakers, and we thank you for taking time out of your busy 
schedule to again unpack the facts and share your insights with us 
today.
    For too long, politicians in Washington have not been honest with 
the American people--seniors in particular--about Medicare and Social 
Security.
    Instead of engaging in an honest debate about the path forward to 
strengthen these programs, too many have offered little more than false 
political attacks and trillions of dollars in empty promises.
    Today's hearing is an effort to honestly assess the challenges 
facing these two programs, providing clarity to Congress as we work to 
advance sensible reforms and ensure that these critical 20th century 
programs can fulfill their important mission in the 21st century.
    There is a very clear choice of two futures for both programs.
    For Medicare:
     We can follow the path set by the President's health-care 
law and the additional Medicare cuts called for in his most recent 
budget request. On this path, Medicare is raided to the tune of $500 
billion to fund a new open-ended entitlement, and the fate of seniors' 
care is left in the hands of 15 unelected, unaccountable bureaucrats in 
Washington. These bureaucrats are empowered to cut Medicare in ways 
that will result in restricted access and denied care for current 
seniors. Meanwhile, this path leaves Medicare bankrupt for future 
generations.
     OR we can chart a brighter future for Medicare. There is a 
growing bipartisan consensus for reforms that ensure no disruptions for 
those in or near retirement, while offering the next generation a 
patient-centered Medicare program that offers more choices and more 
security.
    For Social Security:
     We can follow the path set by President Obama's most 
recent budget request. Failing to meet the test of leadership that he 
himself established, the President has hedged and dodged, but has yet 
to advance credible solutions to shore up Social Security's fiscal 
imbalance. As the Trustees have warned, the President's unserious 
approach to Social Security will result in serious consequences for 
seniors: an across-the-board 23 percent benefit cut when the Trust Fund 
is exhausted--scheduled to hit when those entering the system today are 
in the heart of their retirement.
     OR we can chart a brighter future for Social Security. 
Similar to Medicare, I believe there is a growing consensus for 
sensible, gradual reforms that ensure no disruptions for those in or 
near retirement, while offering the next generation a program that 
reflects demographic reality, a more progressive benefit structure, and 
a solvent future.
    I thank my colleagues here at the committee for engaging in this 
spirited debated with mutual respect and a shared commitment to make 
good on the promise of these critical programs.
    We look forward to the testimony of our two esteemed witnesses, but 
before we do, I would like to yield to Ranking Member Van Hollen for 
his opening statement.

    Mr. Van Hollen. Thank you Mr. Chairman. I want to join the 
chairman in welcoming our two witnesses today. Thank you for 
your years of dedicated public service as federal employees, 
and I look forward to your testimony on the very important 
subjects we are focusing on today.
    This committee has done a lot of work over the years to 
investigate the significant, long-term budgetary challenges 
stemming from the growing costs of Social Security, Medicare, 
and Medicaid. We know that the aging population plays a role in 
driving up those costs, as do the rising costs of health care.
    I think we can all agree that more needs to be done to 
restrain the rate of health care cost growth, not only to put 
the federal budget on a sustainable path, but also to make 
quality health care more affordable for all Americans, and to 
improve out economic competitiveness. The question is not 
whether to address these issues and the surrounding budget 
issues, but how. The long-term budgetary challenges of our 
health and retirement security programs do not exist in a 
vacuum. They are part of a larger debate that gets to some 
fundamental questions for our society.
    Which mix of revenue and spending policies will best 
fulfill our twin goals of economic vitality and meeting the 
health and retirement security needs of an aging population? 
When it comes to deficit reduction and putting the federal 
budget on a sustainable path, who should bear the burden? I 
believe strongly that we must address these issues using a 
responsible and balanced approach. We need to have shared 
responsibility as we move forward.
    The president's budget gets us off to a good start. Under 
that budget, the deficit declines as a share of the economy and 
the debt stabilizes as a percentage of the economy over the 
next decade. He reaches those targets with policies and choices 
that balance the need for wise investments to spur job growth 
and with other measures to put the budget on a fiscally 
sustainable path. It adopts cuts to discretionary spending that 
were included in the Budget Control Act. It saves over $600 
billion in mandatory spending, including changes aimed at 
improving the efficiency of Medicare and Medicaid, but it also 
eliminates many special interest tax breaks for corporations 
and for the wealthiest Americans. It asks our highest income 
earners to return to the same tax rate that was in place during 
the Clinton Administration, a period when the economy was 
booming.
    In short, the president takes a balanced approach. It is 
that balance that a lot of our Republican colleagues continue 
to object to. The overwhelming number of our colleagues on the 
Republican side have signed a pledge saying they will not close 
one special interest tax loophole for the purpose of deficit 
reduction, or ask millionaires to pay one cent more for the 
purpose of deficit reduction. Because they do not want to ask 
higher income earners to share more of the burden, it will mean 
greater cuts in education, greater cuts in investments in 
infrastructure and other drivers of economic growth, and it 
will mean that seniors have to bear more of the costs and 
burdens than under a balanced plan. I would remind my 
colleagues that the median income of seniors on Medicare is 
under $22,000.
    Now, there is a key difference in the approach that 
Republicans and Democrats have outlined when it comes to 
Medicare. The Republican approach would end the Medicare 
guarantee of a package of benefits specified in law, and place 
it with the equivalent of a voucher for the purpose of private 
insurance that would fail to keep pace with the rising costs of 
health care over a period of time. As a result, future 
beneficiaries would either have to pay thousands more out of 
their pockets, or settle for a plan that does not meet their 
health care needs. I believe that is the wrong direction; I 
believe that instead we should focus on some of the steps we 
began to take under the Affordable Care Act to try and improve 
the coordination of care, to try and eliminate a lot of the 
misaligned incentives within the Medicare program, and I think 
there is more work that can be done in that area.
    For example, 37 percent of the individuals on Medicare and 
Medicaid are what we call dual eligibles. In other words, of 
all the people who are part of Medicaid and Medicare, 37 are 
part of both programs. Excuse me, 1 in 10 are members of both 
programs, but they represent 37 percent of the costs of those 
programs. It seems to me Mr. Chairman, there are additional 
things we can do to improve the coordination of care in that 
area without sacrificing the quality of care. That is just one 
example of the many ideas that we can pursue going forward that 
results in a reduction of costs without sacrificing quality of 
care rather than simply a transfer of costs onto seniors.
    So I hope, as we move forward, we will focus on that 
approach to modernizing Medicare and Medicaid, an approach that 
improves the quality of care while we reduce the cost of care, 
rather than simply offloading those costs onto seniors. Thank 
you, Mr. Chairman.
    [The prepared statement of Chris Van Hollen follows:]

 Prepared Statement of Hon. Chris Van Hollen, Ranking Minority Member,
                        Committee on the Budget

    Thank you, Mr. Chairman. I especially want to thank our two 
witnesses for their many years of dedicated public service as federal 
employees. Thank you for joining us today. I look forward to your 
testimony on the important topic of how best to strengthen our health 
and retirement security programs.
    This Committee has done a lot of work over the years to investigate 
the significant long-term budgetary challenges stemming from the 
growing costs of Social Security, Medicare, and Medicaid. We know that 
the aging of the population plays a role, as do fast-growing health 
care costs. I think we can all agree that more needs to be done to 
restrain the rate of health care cost growth--not only to put the 
federal budget on a sustainable path, but also to make quality health 
care more affordable for all Americans and to improve our economic 
competitiveness.
    The question is not whether to address these issues, but how? The 
long-term budgetary challenges of our health and retirement security 
programs do not exist in a vacuum. They are part of a larger debate 
that gets to some fundamental questions for our society: Which mix of 
revenue and spending policies will best fulfill our twin goals of 
economic vitality and meeting the health and retirement security needs 
of an aging population? When it comes to deficit reduction and putting 
the federal budget on a sustainable path, who should bear the burden?
    I believe strongly that we must address these challenges using a 
responsible, balanced approach. We need to have shared responsibility 
as we move forward.
    President Obama's budget gets us off to a good start. Under the 
President's budget, the deficit declines as a share of the economy and 
the debt stabilizes as a percentage of the economy over the next 
decade. The President reaches these targets with policy choices that 
balance the need to make wise investments to spur job growth in the 
near term and provide security for the middle class with the need to 
put the budget on a fiscally sustainable path. The President's plan 
adopts the cuts to discretionary spending included in the Budget 
Control Act. It saves over $600 billion in mandatory spending, 
including changes aimed at improving the efficiency of Medicare and 
Medicaid spending. But it also eliminates special interest tax breaks 
for corporations and the wealthiest Americans. It asks our highest 
earners to return to the same tax rate that was in place during the 
Clinton Administration, when the economy was booming. In short, the 
President's budget takes a balanced approach.
    It is this balance that our Republican colleagues object to. The 
overwhelming majority of our Republican colleagues have signed a pledge 
saying they won't close one special interest tax loophole or ask 
millionaires to pay a cent more for deficit reduction. And because they 
don't want millionaires to pay more, they put the entire burden of 
reducing short-term deficits as well as long-term debt on the backs of 
middle-income taxpayers and seniors. Indeed, if last year's budget is 
any indication, the Republican plan will slash our investments in 
education, science and research, and infrastructure--key drivers of 
innovation and economic growth. And it will force seniors on Medicare 
to absorb the rapidly rising costs of health care, while slashing 
Medicaid assistance to low-income and disabled individuals by over $700 
billion. I would remind my colleagues that the median income of seniors 
on Medicare is under $22,000.
    There is a key difference between the Republican and Democratic 
approaches to Medicare. The Republican approach would end the Medicare 
guarantee of a package of benefits specified in law, and replace it 
with a voucher for the purchase of private insurance that would fail to 
keep pace with health care costs over time. Future beneficiaries would 
either have to pay thousands more dollars out of their own pockets on 
premiums for a plan that provides the current Medicare benefit package, 
or else buy plans that may leave them significantly underinsured.
    We have no reason to believe that unfettered market competition 
will result in affordable, acceptable coverage for seniors. Prior to 
the creation of Medicare in 1965, almost half of all American senior 
citizens had no health insurance. And health costs were rising steadily 
back then. And yet, the market didn't respond to the cost constraints 
faced by seniors and develop an affordable insurance product that 
provided them adequate protection. Insurers didn't rush to cover 
individuals over 65 years old. Since 1965, we have had several 
experiments with private competition within Medicare, through the 
Medicare Advantage program and its predecessors. And what we found is 
that in many areas of the country, private plans simply could not 
compete with traditional Medicare unless we paid them more than 
traditional Medicare.
    I firmly believe that converting Medicare into a voucher system 
that doesn't keep pace with health care costs is a huge mistake for our 
seniors. We cannot solve our budget challenge simply by unloading the 
costs and financial risk associated with health care onto elderly and 
disabled individuals. The goal of reform should be to reduce cost 
growth within the health system, while protecting the essential 
benefits that Medicare covers. The Affordable Care Act laid a solid 
foundation, through measures such as more bundling of payments, 
penalizing unnecessary hospital admissions, and giving physicians and 
other health care providers incentives to organize themselves 
differently so they can provide high quality, coordinated, efficient 
care. These kinds of reforms change Medicare to reward value and 
quality of care instead of quantity of care. But there is plenty more 
that can be done.
    For example, we need to improve the coordination of care for 
individuals who are eligible for both Medicare and Medicaid. These 
individuals account for 37 percent of combined Medicare and Medicaid 
costs, even though they represent only roughly 1 in 10 of the combined 
Medicare and Medicaid beneficiary population. They are more likely to 
live with multiple chronic conditions, and are three times more likely 
to be disabled.
    It is no surprise that these individuals make up a large share of 
Medicare and Medicaid spending, because they are, in general, sicker. 
However, some of these extra costs result from misaligned incentives 
between Medicare and Medicaid and a lack of coordination between the 
two. For example, nursing homes often can benefit financially by 
offloading certain costs onto hospitals. This is bad for the budget and 
it undermines the well-being of a vulnerable population. The Affordable 
Care Act begins to address these problems, but there may be further 
actions that Congress can take to give a boost to these reform efforts.
    We are open to other ideas that address specific sources of 
wasteful spending. What we are not open to is simply transferring all 
of those costs to seniors on Medicare without dealing with the 
underlying costs driving the entire health care system, of which 
Medicare is a very important part.
    Social Security's financial outlook also deserves our attention. It 
is not a major factor in our current deficit, but it does have a long-
term shortfall that will need to be addressed. I believe we ought to 
address it well before we face a crisis and we ought to do so in a 
bipartisan and balanced manner.
    I would also like to take a moment to clarify incorrect claims that 
were continually made by my colleagues on the other side of the aisle 
about the extension of the payroll tax cut to 160 million working 
Americans. In their opposition to this tax cut, they claimed it would 
reduce the amount in the Social Security Trust Fund. That is simply not 
true. As Mr. Goss has said before, the law is set up to make sure the 
Social Security Trust Fund is held completely harmless.
    So thank you again, Mr. Foster and Mr. Goss, for your testimony 
today. As we work to put our house in fiscal order over the long-term, 
we must ensure that our social safety nets are not shredded in the 
process. Your insight into these programs is key as we debate these 
important issues.

    Chairman Ryan. Thank you. Mr. Foster, why do we not start 
with you and then go with Mr. Goss. Floor is yours.

  STATEMENTS OF RICHARD S. FOSTER, CHIEF ACTUARY, CENTER FOR 
MEDICARE AND MEDICAID SERVICES, STEPHEN C. GOSS, CHIEF ACTUARY, 
                 SOCIAL SECURITY ADMINISTRATION

                 STATEMENT OF RICHARD S. FOSTER

    Mr. Foster. Thank you. Chairman Ryan, Representative Van 
Hollen, and other distinguished members of the committee, thank 
you for inviting me here to testify today. I am appearing in my 
role as an independent, technical adviser to Congress and my 
statements may not necessarily reflect positions of the 
Department of Health and Human Services where I work. I am 
accompanied today by three people: Chris Truffer, who is a 
fellow at the Society of Actuaries, Aaron Catlin, who has a 
master's of science in management, specializing in health care, 
and my special assistant Catherine Curtis, Ph.D.
    My written testimony has probably far too much detail about 
the financial outlook for Medicare, Medicaid, and total 
national health expenditures. For now, I will concentrate 
primarily on one aspect. In particular, if we can get the first 
chart up, this will show a comparison of the factors underlying 
growth in personal health care in the U.S. compared to economic 
growth or the GDP.
    This is a long-term average set of growth rates over the 
period of 1960 to 2010. I will start on the left with personal 
health care, and work our way up from the bottom. Personal 
health care grows because we have more population growth, and 
that is averaged about 1 percent per year; so 1 percent out of 
our growth in health care expenditures is due to population. 
General economic inflation contributes another 4 percent on 
average during this period.
    Now, medical prices tend to be higher than general economic 
prices for a variety of reasons, and that so-called excess 
medical price inflation has added another 1.4 percent to this 
long-term average. Demographic changes in the population, or 
the age and gender mix, has not had a big impact over this 
period, this is about .4 percent, but then we come to growth in 
the volume and the intensity, or the average complexity of 
health care services per person, and that has contributed on 
average 2.9 percent, mostly as a result of more and better 
medical technology over time. Those add up to a total of 9.6 
percent per year on average over the last 50 years.
    Now, for comparison, let's look at GDP. You get a stronger 
or bigger economy if you have more employees; and employment 
over this period has contributed 1.7 percent to the overall 
growth in the economy. General inflation contributes the same 4 
percent that we saw before to nominal GDP growth; and then you 
have real GDP, inflation adjusted GDP, per worker, which is a 
measure of productivity, which has been about 1.2 percent. 
Collectively, those add up to 6.9 percent, which is quite a bit 
less than we saw for the personal health care expenditures.
    This differential has been somewhat smaller in recent 
years, but is likely to continue, and in particular, economic 
productivity is not likely to be enough to cover the health 
care costs associated with the excess medical price inflation, 
and volume and intensity of services.
    If I can have the second chart please.
    The second chart just shows the past and projected total 
national health expenditures as a percentage of GDP, that is 
the top curve, and we also show the Medicare and Medicaid 
components of that. Back in 1960, national health expenditures 
were about 5.2 percent of the total economy. In 2010, that has 
increased to just under 18 percent, and we project by 2020, the 
cost will be just under 20 percent.
    Medicare and Medicaid have grown similarly during this 
period and have actually come to represent a somewhat greater 
share of the total over time. So, what can you do about slowing 
down the rate of health care cost growth? Is it hopeless, or 
can something actually be done? Well, a lot of things have been 
tried. In particular, over the years we have had prospective 
payment systems and other forms of bundled payments. We have 
had managed care plans introduced and become widespread like 
HMOs and PPOs. There has been an attempt to get more prudent 
use of health care on the part of patients and individuals 
through consumer-driven health care plans and medical savings 
accounts. We have also seen lean production techniques in 
facilities like hospitals and skilled nursing facilities. Most 
recently, there has been a raft of ideas, including accountable 
care organizations, medical homes, and disease management. All 
of these have had some success in reducing the level of costs, 
but in terms of their impact on cost growth, they have not had 
a large effect.
    One of the key drivers of health care costs that I mention 
is new technology, and most new technology, medical technology 
to date has been so-called cost increasing. It comes in, and it 
costs a lot more than what we used to do. The importance of 
efforts to refocus the nation's research and development 
community into looking at new technology that would reduce 
costs, while providing the same or better care, those efforts 
cannot be under emphasized.
    There are other things going on like new innovations just 
starting in the works and delivery systems and payment methods. 
There is a lot of potential here for these to improve quality 
for the payments we make already, and there is some potential 
for reducing cost growth rate.
    Well, that is the brief summary of the 18 pages in my 
written testimony. I hope it is helpful. As you all, and your 
colleagues, tackle the financial challenges posed to the U.S. 
by health care cost growth, I pledge the Office of the 
Actuary's continuing assistance in these efforts, and in a 
minute I will be happy to answer any questions you have. Thank 
you.
    [The prepared statement of Richard S. Foster follows:]

   Prepared Statement of Richard S. Foster, FSA, MAAA, Chief Actuary,
                Centers for Medicare & Medicaid Services

    Chairman Ryan, Representative Van Hollen, distinguished Committee 
members: Thank you for inviting me to testify today about the outlook 
for health spending in the U.S., including the Medicare and Medicaid 
programs. I welcome the opportunity to assist you in your efforts to 
ensure the future financial viability of Medicare (the nation's second 
largest social insurance program) and Medicaid (the largest government 
health program in terms of the number of people covered). Together, 
these programs are a critical factor in the income security of our 
aged, disabled, and low-income populations.
    I would like to begin by saying a little about the role of the 
Office of the Actuary at the Centers for Medicare & Medicaid Services 
(CMS). We have the responsibility to provide actuarial, economic, and 
other technical assistance to policy makers in the Administration and 
Congress on an independent, objective, and nonpartisan basis. Our 
highest priority is to help ensure that policy makers have the most 
reliable technical information possible as they work to sustain and 
improve Medicare, Medicaid, and health care in the U.S. overall. The 
Office of the Actuary has performed this role on behalf of Congress and 
the Administration since the enactment of these programs over 45 years 
ago.
    I am appearing before your Committee today in my role as an 
independent technical advisor to Congress. My factual statements, 
estimates, and other information provided in this testimony are drawn 
from the 2011 Medicare Trustees Report, the forthcoming 2011 Actuarial 
Report on the Financial Outlook for Medicaid, and our most recent 
historical and projected National Health Expenditure accounts; any 
opinions offered are my own and do not represent an official position 
of the Department of Health & Human Services or the Administration.
    In view of your Committee's interest in budgetary impacts, and the 
Office of the Actuary's traditional role in assessing the financial 
outlook for health programs, my testimony will focus on the cost of 
Medicare and Medicaid, both in the past and as projected for the 
future. This focus, however, should not obscure the value of these 
programs. The health insurance coverage available to Medicare 
beneficiaries is obviously very valuable to them as individuals, with 
an estimated average benefit this year of more than $12,000 per person. 
Similarly, low-income individuals and families under Medicaid receive 
benefits worth, on average, $2,900 per child, $17,300 per disabled 
enrollee, $15,700 per aged enrollee, and $4,700 for other covered 
adults. There is also substantial value to society from the orderly 
provision of health care for the nation's older, sicker, and poorer 
populations.
    I would also like to caution the Committee about the uncertainty of 
financial projections for health insurance programs. Certain aspects of 
projections, such as the demographic characteristics of the population, 
are relatively predictable.\1\ Projections of health cost trends, 
however, are much more uncertain and depend critically on future 
economic developments, advances in medical technology, and other 
factors. Medicaid cost growth, in particular, has been more volatile 
than most other forms of health coverage, due to the impact of economic 
cycles on the number of enrollees, frequent legislative changes, and 
the efforts by the individual States to expand coverage or control 
costs. For these reasons, it is important to recognize that actual 
future Medicare, Medicaid, and total national health expenditures can--
and generally do--differ from any specific projection. The projections 
are not intended as firm predictions of future costs, since this is 
clearly impossible; rather, they illustrate how these programs would 
operate under a range of conditions that can reasonably be expected to 
occur and thus serve a useful role in providing guidance to policy 
makers.
    It is helpful to consider Medicare and Medicaid in the context of 
overall national health expenditures, since many of the factors 
affecting expenditure growth are common to all forms of health 
insurance. Chart 1 shows total health expenditures in the U.S. as a 
percentage of gross domestic product (GDP) from 1960 through 2010, the 
latest year for which we have complete historical data. The portions of 
total spending attributable to Medicare and Medicaid are also shown.


    Health spending in the U.S. has generally increased at a 
significantly faster pace than the economy, rising from 5.2 percent of 
GDP in 1960 to 17.9 percent in 2010. The upward trend has fluctuated 
somewhat, depending on the business cycle (which affects GDP growth) 
and on faster or slower periods of health cost growth. For example, 
national health expenditures represented about 13.8 percent of GDP for 
much of the 1990s, reflecting stronger-than-average real economic 
growth during much of this period and the widespread adoption of 
managed care health plans. Conversely, the share of GDP devoted to 
health care accelerated sharply in the early 2000s in part as a result 
of the public backlash against health care utilization controls and the 
economic recession that began in 2001.
    From their enactment in 1965, Medicare and Medicaid costs have also 
grown faster in most years than the economy. Medicare expenditures 
represented 0.6 percent of GDP in 1967 and 3.6 percent in 2010. The 
corresponding percentages for Medicaid are 0.4 percent, increasing to 
2.8 percent. The ``all other'' category in chart 1 is composed 
primarily of expenditures by private health insurance and individuals' 
direct out-of-pocket payments for health services.
    Chart 2 shows the proportion of total U.S. health expenditures by 
source of payment for 1976 compared to 2010.\2\ Medicare and Medicaid 
have been growing as a share of total expenditures. Over this period, 
Medicare increased from 13 percent of all U.S. health spending to 20 
percent currently, and Medicaid grew from 10 percent to 15 percent. 
Payments by private health insurance have also increased as a share of 
the total, reaching 33 percent in 2010, although this level is a little 
lower than the maximum of 35 percent experienced in 2003 through 2005.
    Out-of-pocket costs for health care services have declined 
substantially, from 27 percent of total expenditures in 1976 to 12 
percent in 2010, reflecting private health insurance and Medicaid 
coverage expansions during this period.

         CHART 2.--DISTRIBUTION OF NATIONAL HEALTH EXPENDITURES
                  [By source of payment, 1976 and 2010]
------------------------------------------------------------------------
                   Source of payment                      1976     2010
------------------------------------------------------------------------
Individual's out-of-pocket costs......................      27%      12%
Private health insurance..............................      24%      33%
Medicare..............................................      13%      20%
Medicaid (Federal, State, and local)..................      10%      15%
Veterans Admin., Dept. of Defense, and CHIP...........       4%       4%
Other third-party payers and programs.................      11%       7%
Public health.........................................       2%       3%
Investment............................................       9%       6%
------------------------------------------------------------------------

    Medicare and Medicaid spending has increased as a share of total 
expenditures for several reasons:
     The Medicare benefit package has expanded since 1976 
through such factors as a Part B deductible that was increased only 
twice during 1976 through 2004 and the introduction of the Part D 
prescription drug benefit in 2006. Eligibility for Medicaid was 
expanded by higher income thresholds for child and adult enrollees and 
the States' use of waivers to extend eligibility to other populations. 
In addition, the Medicaid proportion in 2010 reflects the impact of the 
2008-2009 economic recession, which led to a significant increase in 
the number of enrollees.
     Expenditures by private health insurance plans grew at a 
somewhat slower rate as a result of the widespread adoption of managed 
care plans, including health maintenance organizations and preferred 
provider organizations. In addition, many employers sought to reduce 
cost growth by taking advantage of competition among insurers and 
through more frequent adjustments in employee cost-sharing 
requirements. Also, the proportion of the population with employer-
sponsored insurance has declined over time.
     Contrary to popular conceptions, the aging of the post-
World War II ``baby boom'' generation did not have a large impact on 
the increase in Medicare or Medicaid costs during this period. It will 
do so in the future, however, since the first members of this 
generation began reaching age 65 in 2011.
    Chart 3 helps to explain why health care costs tend to increase at 
a faster rate than the overall economy. As indicated, health care cost 
growth averaged 9.6 percent per year from 1965 to 2010. About 1.0 
percentage point is attributable to the growing population (more 
people, more health expenditures, all else equal). General, economy-
wide inflation contributes to higher medical prices, adding about 4.0 
percentage points on average over this period.
    In addition, medical prices tend to grow at a somewhat faster pace 
than general economic inflation, since (i) a greater proportion of 
health care is produced by human capital than in the economy at large, 
and (ii) productivity improvement is lower for health care providers, 
reflecting their higher labor share and the individualized nature of 
many health services. Together, these factors have increased medical 
prices by about 1.4 percent annually above the level of economy-wide 
price growth, as measured by the GDP implicit price deflator.
    Over time, people tend to use more health care services, and the 
services tend to be more complex and expensive as new technology is 
developed. The ``volume and intensity'' of services per person has 
added about 2.9 percentage points per year to personal health care 
expenditure growth. Together, the increases in population, general 
prices, excess medical-specific prices, and volume and intensity, plus 
a small contribution from changes in the age and gender distribution of 
the population, have resulted in an overall average growth rate for 
personal health care expenditures of 9.6 percent over the last 45 
years.
    Similarly, growth in the economy can be decomposed into several 
roughly corresponding factors. The first of these is the increase in 
the number of workers, which has averaged 1.7 percent during 1965 to 
2010--aided in part by the entry of the baby boom generation into the 
labor force.
    The impact of general economic inflation, at 4.0 percent, is the 
same for both health expenditures and nominal economic growth. The 
increase in real (inflation-adjusted) GDP per worker occurs primarily 
as a result of productivity gains and has averaged 1.2 percent over 
this period.
    Collectively, these economic growth factors add up to 6.9 percent, 
which has been well below the 9.6-percent growth in health 
expenditures. (As suggested by the trend variations shown in chart 1, 
the differential between health cost growth and economic growth has not 
been constant over time.) Going forward, employment growth is likely to 
be somewhat slower than overall population growth as the baby boom 
generation leaves the work force. The effect of general inflation is 
the same for both categories, but, based on past trends, labor 
productivity growth is unlikely to keep pace with continuing increases 
in excess medical prices plus the volume and intensity of services per 
person.


    Another way to assess the causes of rapid health care expenditure 
growth is through an economic analysis of the key factors leading to 
increased demand for services and higher costs. Chart 4 summarizes the 
most recent research in this area, as published by Sheila Smith and 
Mark Freeland from the Office of the Actuary together with Joseph 
Newhouse of Harvard University.\3\

 CHART 4.--CAUSAL FACTORS FOR GROWTH IN HEALTH CARE SPENDING, 1960-2010
------------------------------------------------------------------------
                                                       Contribution to
                      Factor                          growth (percent)
------------------------------------------------------------------------
Income effects....................................                 28-41
Relative medical price inflation..................                  8-21
Demographic effects...............................                     7
Change in insurance coverage......................                    10
Technology........................................                 26-45
------------------------------------------------------------------------

    Income growth has long been identified as a primary contributor to 
higher health spending. As individuals, or nations, become ``richer,'' 
they tend to spend an increasing amount on health care. Smith et al. 
estimate that real per capita income growth during 1960 to 2010 was 
responsible for between 28 and 41 percent of the increase in real per 
capita health expenditures.
    Relative medical price inflation (above and beyond economy-wide 
inflation) was found to have contributed between 8 and 21 percent. 
Demographic effects were not substantial over this period, but they 
explain about 7 percent of total health cost growth, while broader 
availability and higher levels of health insurance account for another 
10 percent.
    The impact of technology on health cost growth is usually measured 
as the residual, after all of the factors above have been estimated. In 
the Smith et al. analysis, technology is estimated to account for 
between 26 and 45 percent of historical real health expenditure growth 
per person. (In practice, other factors that are not separately 
estimated will also be included in the residual category. Such factors 
are believed to have only a small effect.) Technological advances 
contribute to expenditure growth both through the adoption of new 
treatments, devices, and drugs, such as implantable defibrillators, and 
through the ability of the health sector to apply existing services to 
a broader group of people, for example heart bypass and hip replacement 
operations to older patients. Although some new technologies enable the 
provision of existing services at lower costs, historically most 
technology has been cost-increasing. Growing incomes and the widespread 
availability of health insurance facilitate a ready market for new 
developments, even if their cost is much higher than existing 
treatments.

                                MEDICARE

    Medicare expenditures are projected under current law to increase 
at a much lower rate than usual during 2012 through 2020, due to the 
combined effects of (i) continuing slow general inflation, (ii) a sharp 
reduction in physician payment rates required under the sustainable 
growth rate (SGR) formula, and (iii) the impact of the savings 
provisions in the Affordable Care Act. Most of these latter savings 
will occur as a result of the slower provider payment rate updates for 
most non-physician providers\4\ and a downward adjustment in Medicare 
Advantage payment benchmarks and rebate percentages. Collectively, 
these factors contribute to a projected average annual cost growth rate 
of 5.9 percent during 2012 through 2020, despite the advent of the baby 
boom generation reaching age 65 and qualifying for HI benefits during 
this period. About 3 percentage points of this increase are due to 
growth in the number of HI beneficiaries. For comparison, the average 
annual growth rate over the last 10 years was 8.6 percent, with 
enrollment growth contributing 2 percentage points to this average. Put 
another way, the per beneficiary growth rate for the next 10 years is 
expected to be less than half of the rate over the last 10 years, 
principally as a result of the SGR payment reduction and the savings 
provisions in the Affordable Care Act.
    As the Trustees and I have cautioned, it is important to note that 
the actual future costs for Medicare are likely to exceed those shown 
by the current-law projections. Congress is almost certain to override 
the approximately 30-percent reduction in Medicare payment rates to 
physicians that is scheduled to take place in 2013. In addition, it is 
doubtful that other providers will be able to improve their efficiency 
and productivity sufficiently to match the downward adjustments to 
Medicare payment updates based on economy-wide productivity. Since the 
provision of health services tends to be labor-intensive and is often 
customized to match individuals' specific needs, most categories of 
health providers have not been able to improve their productivity to 
the same extent as the economy at large. Over time, the productivity 
adjustments mean that the prices paid for health services by Medicare 
will grow in all future years by about 1.1 percentage point per year 
more slowly than the increase in input prices that providers must pay 
to purchase the goods and services they use to furnish health care to 
beneficiaries. Unless providers could reduce their cost per service 
correspondingly, through productivity improvements or other steps, they 
would eventually become unwilling or unable to treat Medicare 
beneficiaries. In this event, Congress would likely override the 
adjustments, much as they have done for 2003 through 2012 to prevent 
the reductions in physician payment rates otherwise required by the SGR 
formula in current law.
    Medicare has been financed by a somewhat eclectic set of dedicated 
and general revenues. The amounts of these financing sources are shown 
in chart 5, together with total expenditures, all expressed as a 
percentage of GDP. In total, Medicare revenues have been relatively 
close to expenditures, illustrating the ``pay-as-you-go'' nature of 
Medicare financing. (Most other forms of health insurance are also 
financed on a pay-as-you-go basis.)



    The primary sources of financing for the Medicare program are as 
follows:
     Payroll taxes--Part A of Medicare is financed primarily 
through a portion of the FICA and SECA payroll taxes.\5\ Employees and 
employers each pay 1.45 percent of covered earnings, while self-
employed workers pay the combined total of 2.90 percent. Following the 
Omnibus Budget Reconciliation Act of 1993, Part A payroll taxes are 
paid on total earnings in covered employment, without limit. The 
Affordable Care Act introduced an additional 0.9-percent Part A payroll 
tax on individuals and couples with earnings above $200,000 or 
$250,000, respectively, starting in 2013.\6\ Because these earnings 
thresholds are not indexed, over time a growing proportion of all 
workers will be subject to this additional tax rate. By 2085, for 
example, an estimated 80 percent of workers would be subject to the 
additional 0.9-percent HI payroll tax. The Part A tax rate is specified 
in the Social Security Act and is not scheduled to change at any time 
in the future under present law. Thus, program financing cannot be 
modified to match variations in program costs except through new 
legislation. Until recently, payroll taxes were the largest source of 
financing for Medicare.
     Income taxes on Social Security benefits--Up to 85 percent 
of an individual's or married couple's Social Security benefits may be 
countable as taxable income for Federal income taxes. Any taxes payable 
on the taxable portion of benefits between 50 and 85 percent are 
allocated to the Part A trust fund. Because the income thresholds are 
not indexed, a growing percentage of Social Security beneficiaries are 
becoming subject to such taxes.
     Beneficiary premiums--Parts B and D of Medicare are 
financed in part by beneficiary premiums, which currently represent 
about 25 percent of Part B financing and 13 percent of Part D. These 
amounts are adjusted each year to keep pace with the cost of benefits; 
as a result, premiums have been a growing share of total financing for 
Medicare. In addition, premiums for higher-income beneficiaries are 
adjusted to cover a greater proportion of the average cost of Part B 
and Part D coverage.
     Payments by States--With the transfer of prescription drug 
costs for dual Medicare-Medicaid beneficiaries to Part D of Medicare, 
States are required to pay a portion of their forgone Medicaid costs to 
the Part D trust fund account. These payments currently cover about 10 
percent of Part D financing and serve to reduce the amount of general 
revenues otherwise required.
     Fees on prescription drugs--Starting in 2011, 
manufacturers and importers of brand-name prescription drugs are 
required to pay annual fees, with the payments credited to the Part B 
trust fund account. These payments reduce the premiums and general 
revenues otherwise required to finance Part B.
     Federal general revenues--Roughly three-fourths of Part B 
and Part D costs are met by the general fund of the Treasury. As with 
beneficiary premiums, general revenues for these programs are reset 
annually and increase at the same rate as program expenditures. 
Consequently, income for Parts B and D automatically matches 
expenditures without the need for legislative adjustments. As a result 
of this financing basis, and the slowdown in payroll tax receipts due 
to the 2008-2009 recession, general revenues recently became the 
largest source of Medicare financing.
     Interest--Any Medicare revenues that are not needed for 
the immediate payment of benefits and other costs are invested in 
Treasury securities. Interest earnings on these assets are credited to 
the associated trust fund account and may be used to pay program costs. 
Currently, interest represents about 4 percent of Part A income, 1 
percent for Part B, and a negligible share of Part D revenues. 
(Interest is not shown in chart 5, since it is not a significant source 
of financing.)
    In the early years of Medicare, beneficiary out-of-pocket costs for 
Part B premiums and cost-sharing requirements represented about 6 
percent of an average Social Security benefit. Currently, Part B and 
Part D out-of-pocket costs for an average beneficiary are about 26 
percent of an average Social Security benefit. Similarly, general 
revenue transfers to Medicare have increased from about 0.8 percent of 
total Federal personal and corporate income tax receipts in 1970 to 
about 18 percent currently. As Part B expenditures increase faster than 
the GDP or people's incomes, financing these costs represents an 
increasing share of available resources for both beneficiaries and the 
Federal government.
    Chart 6 shows past and projected Medicare expenditures as a 
percentage of GDP. The past trend has been generally increasing, with 
the exception of the first 3 years following the Balanced Budget Act of 
1997. The subsequent Balanced Budget Refinement Act of 1999 and the 
Benefits Improvement and Protection Act of 2000 eased certain of the 
BBA provisions, and cost growth continued to exceed economic growth. 
The addition of Part D prescription drug coverage in 2006 increased 
Medicare costs by about 12 percent. With the economic recession of 
2008-2009, GDP declined and Medicare costs increased rapidly as a share 
of GDP, from 3.1 percent in 2007 to 3.6 percent in 2011.



    Medicare expenditures are projected to remain fairly level at about 
3.6 percent of GDP from 2011 through 2015.\7\ This pattern reflects 
both faster assumed growth in GDP and slower Medicare cost growth as a 
result of the savings provisions in the Affordable Care Act and the 
large reduction in physician payment rates required under the statutory 
SGR formula. Expenditures are projected to increase as a share of GDP 
thereafter, but at a slower rate than historically as noted previously.
    Together, the SGR formula and the reduced payment updates under the 
Affordable Care Act are estimated to permanently reduce Medicare 
expenditure growth rates by over 1.1 percentage points annually. In 
practice, however, Congress has overridden the physician payment 
reductions otherwise required by the SGR for every year 2003 through 
2012, and further legislative action to prevent substantial payment 
reductions is probable. Also, as I and others have cautioned, the 
cumulative effect of the payment update reductions for other providers 
may lead to inadequate payment rates in the long range. In discussing 
strategies for reducing health care costs, former Office of Management 
and Budget (OMB) Director Peter Orszag wrote the following:
    The first approach is to simply reduce payments to providers--
hospitals, doctors, and pharmaceutical companies. This blunt strategy 
can work, often quite well, in the short run. It is inherently limited 
over the medium and long term, however, unless accompanied by other 
measures to reduce the underlying quantity of services provided. If 
only Medicare and Medicaid payments were reduced, for example, 
providers would shift the costs to other patients and also accept fewer 
Medicare and Medicaid patients. This would make the approach 
politically nonviable.\8\
    If the SGR provision continued to be overridden and the 
productivity adjustments to other provider payment updates became 
unworkable, then future Medicare costs would be substantially higher 
than those projected under current law.\9\
    Chart 7 shows the long-range projection of Medicare expenditures 
from the 2011 Medicare Trustees Report, together with the projected 
cost under an illustrative alternative to current law.\10\ In 2010, 
total Medicare expenditures were $523 billion or about 3.6 percent of 
GDP. Under current law and based on the Trustees' intermediate set of 
economic and demographic assumptions, costs are initially projected to 
level off and decline slightly as a percentage of GDP as the economy 
recovers and unemployment returns to more normal levels. Costs will 
increase as the baby boom generation becomes eligible for HI benefits 
in 2011-2030 but are projected to largely level off thereafter at 
roughly 6 percent of GDP. This pattern results primarily from the 
accumulating effect of the productivity adjustments.



    For comparison, costs under the illustrative alternative 
projections increase rapidly throughout the long-range period, reaching 
10.7 percent of taxable payroll in 2085, compared to 6.2 percent under 
current law. Thus, depending on the long-range feasibility of the SGR 
provision and the slower payment updates for other providers, Medicare 
expenditures could be about three-fourths higher than projected under 
current law.
    It is possible that providers can improve their productivity, 
reduce wasteful expenditures, and take other steps to keep their cost 
growth within the bounds imposed by the Medicare price limitations. The 
implementation of payment and delivery system reforms, facilitated by 
the aggressive research and development program implemented by the 
Affordable Care Act, could help constrain cost growth to a level 
consistent with the lower Medicare payments. These outcomes are far 
from certain, however. As specific reforms have not yet been designed, 
tested, or evaluated, their ability to reduce costs cannot be estimated 
at this time, and thus no specific savings have been reflected in the 
Trustees Report projections for the initiative.
    The effect of the baby boom generation on Medicare and Social 
Security is relatively well known, having been discussed by actuaries 
and others for almost 40 years. In brief, by 2030 when the baby boom 
cohorts have enrolled in Medicare, there will be about 65 percent more 
Medicare beneficiaries than there are today, but the number of covered 
workers will have increased by only about 15 percent. There are other 
demographic effects beyond those attributable to the varying number of 
births in past years. In particular, life expectancy has improved 
substantially in the U.S. and is projected to continue doing so. The 
average remaining life expectancy for 65-year-olds increased from 12.4 
years in 1935 to 19 years currently, with an estimated further increase 
to about 23 years at the end of the long-range projection period. 
Medicare costs are sensitive to the age distribution of beneficiaries. 
Older persons incur substantially larger costs for medical care, on 
average, than do younger persons. Thus, as the beneficiaries age, over 
time they will move into higher-utilization age groups, thereby adding 
to the financial pressures on the Medicare program.

                                MEDICAID

    Historically, total (Federal plus State) expenditures on behalf of 
Medicaid enrollees have increased faster than the U.S. economy in most 
years, as shown in chart 8. Costs as a percentage of GDP have 
fluctuated with the business cycles, since higher unemployment both 
adds to the number of Medicaid enrollees and decreases GDP, with 
economic recoveries having the opposite effects. Medicaid expenditures 
increased dramatically between 1988 and 1995, doubling as a share of 
GDP from 1 percent to 2 percent, in part as a result of eligibility 
expansions for children but more so from the enactment of ``tax and 
donation'' schemes by States to increase the Federal share of Medicaid 
financing. Medicaid costs decreased in 2006 with the implementation of 
the Medicare Part D prescription drug benefit, which transferred drug 
costs for dual beneficiaries from Medicaid to Medicare. Most recently, 
costs increased significantly as a result of the recent economic 
recession. These trends also reflect States' recent efforts to 
constrain cost growth through limits on provider payment rates, tighter 
eligibility standards, and increasing use of managed care plans.



    Medicaid cost growth should decelerate somewhat over the next 
several years as the economy recovers and many enrollees regain jobs 
and employer-sponsored private health insurance. Beginning in 2014, the 
number of enrollees is expected to increase substantially as a result 
of the Affordable Care Act provisions to (i) increase the income 
threshold to (effectively) 138 percent of the Federal poverty limits, 
(ii) eliminate asset limits, and (iii) expand eligibility to all low-
income adults regardless of family or disability status. We estimate 
that enrollment in 2014 will increase by about 14.9 million, or 26 
percent, but Medicaid expenditures are expected to increase by a much 
lower amount--7 percent--since most of the new enrollees will be non-
disabled adults, with relatively low health care costs compared to the 
average for current enrollees.
    Chart 9 shows Federal, State, and total Medicaid outlays in fiscal 
year 2010, by category of payment. Acute-care benefits remain the 
largest category of outlays, although payments made under capitated 
arrangements have been an increasing share of the total. Outlays for 
long term care services have increased more slowly than the historical 
average in recent years.\11\

                       CHART 9.--MEDICAID OUTLAYS FOR FISCAL YEAR 2010 BY TYPE OF PAYMENT
                                                  [In billions]
----------------------------------------------------------------------------------------------------------------
                   Title XIX outlays--2010\1\                      Federal share    State share        Total
----------------------------------------------------------------------------------------------------------------
Medical assistance payments (MAP):
    Acute care benefits\2\......................................           $98.5           $44.2          $142.7
    Long-term care benefits\2\..................................            76.3            36.7           113.0
    Capitation payments\2\......................................            71.5            32.4           103.9
    DSH payments\2\.............................................             8.7             6.5            15.2
    Adjustments\3\..............................................             4.7             3.6             8.3
                                                                 -----------------------------------------------
      Subtotal MAP..............................................           259.7           123.4           383.1
----------------------------------------------------------------------------------------------------------------
Administration payments.........................................            10.1             8.0            18.1
Vaccines For Children program...................................             3.8             0.0             3.8
                                                                 -----------------------------------------------
      Gross outlays.............................................           273.5           131.4           404.9
----------------------------------------------------------------------------------------------------------------
Collections.....................................................            -0.8            -0.1            -0.9
Net outlays.....................................................           272.8           131.3           404.1
----------------------------------------------------------------------------------------------------------------
Source: 2011 Actuarial Report on the Financial Outlook for Medicaid (forthcoming).

\1\ Outlays do not include Title XIX share of State Children's Health Insurance Program.
\2\ Benefit expenditures by category from CMS-64.
\3\ Adjustments include collections, prior period adjustments, and difference between expenditures and outlays.

    Medicaid costs are met primarily by Federal and State general 
revenues, on an as-needed basis; the States may also rely on local 
government revenues to finance a portion of their share of Medicaid 
costs. Other than a very small amount of premium revenue from enrollees 
and certain other sources of State revenue (such as provider taxes), 
there are no dedicated revenue sources comparable to the Medicare Part 
A payroll tax. Federal financing for Medicaid is authorized through an 
annual appropriation by Congress. These funds are then spent through 
daily draws from the general fund of the Treasury in the amounts 
required to pay that day's Federal matching amounts on the State 
program expenditures. As a result, Federal Medicaid outlays and 
revenues are automatically in financial balance.
    Chart 10 presents the distribution of Medicaid enrollees and costs 
by enrollee category as of 2010. About half of all enrollees were 
children; due to their relatively low level of per capita health care 
costs, Medicaid expenditures on behalf of children represented only 
about 20 percent of the total. Conversely, aged and disabled Medicaid 
enrollees were only about one-fourth of the total number, but their per 
capita Medicaid costs were about two-thirds of total costs, despite the 
fact that most of the aged enrollees, and many of the disabled, are 
also eligible for Medicare, which is the primary payer for dual 
beneficiaries.



    Total Medicaid enrollment in 2010 averaged about 54 million, 
representing 17.4 percent of the total U.S. population. As shown 
previously, Medicaid paid about 15 percent of all health care costs in 
2010, or somewhat less than might be expected based on the percentage 
of the population covered by the program. The difference occurs 
primarily because Medicaid provider payment rates are much lower than 
average, and the proportion of children enrolled in Medicaid is 
significantly higher than the overall enrollment percentage. In 
addition, as noted above, Medicare pays a majority of health care costs 
for most aged Medicaid enrollees and for many of the disabled.
    As indicated in chart 11, Medicaid's share of total U.S. health 
expenditures varies significantly depending on the type of service. In 
particular, Medicaid is the largest payer of the costs of nursing home 
care. Other categories, such as physician, other professional, and 
prescription drugs have lower percentages for the reasons given above.
    States have taken many steps in recent years to try to reduce 
Medicaid costs, which have become one of the largest categories of 
State expenditures. The primary means has been to limit or reduce 
payment rates to physicians, hospitals, and other fee-for-service 
health care providers. Although such steps have been effective at 
holding down per person cost growth, an increasing number of enrollees 
report that they have difficulty in finding physicians (specialists in 
particular) who are willing to see new patients with Medicaid.



                               conclusion
    Chart 12 shows projected Medicare, Medicaid, and other health 
expenditures for the next 10 years.\12\ Total national health 
expenditures are estimated to increase from their 2010 level of 17.9 
percent of GDP to 19.8 percent in 2020, reflecting an average annual 
growth rate in health expenditures of 6.0 percent and average growth in 
nominal GDP of 4.8 percent.



    My final graph (chart 13) illustrates the level of national health 
expenditures as a percentage of GDP under several hypothetical cost 
growth rates in the long-range future. On average during 1960 through 
2010, per capita health care spending increased at the rate of growth 
in per capita GDP plus another 2.6 percentage points. If that long-
range past trend continued in the long-range future, national health 
expenditures would represent more than 100 percent of GDP--an obviously 
impossible situation. The pursuit of better health will continue to be 
extremely important, but it cannot crowd out food, clothing, housing, 
and all other necessities and desires of life.



    Over the last 20 years, health spending has increased at the rate 
of GDP plus 1.9 percent. Even if this rate continued into the 
indefinite future, health care would represent an untenable proportion 
of total economic production. As the late economist Herb Stein once 
quipped, ``If something cannot go on forever, it will stop.'' 
Accordingly, something will occur and cause slower growth in health 
care in the future.
    Most people would agree that certain developments, which could 
reduce the rate of health spending growth, would be very undesirable. 
For example, if individuals' premiums and cost-sharing liabilities were 
to increase significantly faster than their incomes for a sustained 
period, then many might find these costs unaffordable and have to drop 
out of their insurance plans and forgo needed services. Health 
expenditure growth would slow--but only because an increasing amount of 
appropriate care would be forgone. A similar situation could occur if 
employers continue to face cost increases for their group health 
insurance plans that outstrip their revenue increases, forcing them to 
scale back or drop their employee coverage to remain financially 
viable. Alternatively, if payment rates to health care providers were 
reduced or slowed too much, as may have already occurred for some State 
Medicaid plans and as may be the case in the future for Medicare 
physician and other provider payments, providers could become unable or 
unwilling to continue treating patients in these programs.
    Many ideas have been developed and tried over the years in an 
effort to reduce health care cost growth. Examples include the 
development of prospective payment systems and other bundled-payment 
mechanisms; the widespread adoption of managed care plans; efforts to 
facilitate more prudent use of health care services through consumer-
driven health plans and medical savings accounts; use of ``lean 
production'' techniques by hospitals and other facilities; and, most 
recently, the development of accountable care organizations, medical 
homes, disease management, and other efforts to better integrate the 
delivery of care. Most of these efforts have had some positive impact 
on lowering the level of health care costs, but there is relatively 
little evidence that they have succeeded in reducing cost growth rates.
    As indicated by the Smith, Newhouse, and Freeland analysis of the 
causal factors underlying health care cost growth, the two largest 
contributors have been rising incomes and new medical technology. It is 
not surprising that increasing incomes prompt both individuals and 
nations alike to seek better health care. This trend could persist for 
many years, although demand for continually more and better health care 
services would presumably slow if meeting that demand could be 
accomplished only by reduced consumption of other necessities or high-
priority goods and services.
    The development and adoption of new medical technology may prove to 
be pivotal in future efforts to slow health care cost growth. Numerous 
studies have found that most new health technology has been cost-
increasing, encouraged by comprehensive insurance coverage that shields 
individuals from most of the additional direct costs of using the new 
technology. Over time, as all payers continue to seek ways to reduce 
costs and as providers can no longer be assured of revenue flows that 
will automatically adjust to their higher cost levels, the medical 
research and development community may direct their efforts more toward 
new treatments, devices, and drugs that can provide health outcomes 
that are equal to or better than those provided by existing technology 
but at a lower cost.
    Signs of such a change in focus are already apparent. For example, 
efforts are underway to produce a one-time-use implantable 
defibrillator, which would be just as effective in an emergency as the 
existing multiple-use devices but would cost far less. In overseas 
health markets, most developing nations cannot afford the expensive 
health technology produced in the U.S., and a market is developing for 
somewhat less effective--but far less expensive--technology, such as 
fewer-slice/lower-field-strength MRI machines. As this market grows, 
U.S. providers, payers, and developers may join in.
    A related area of policy consideration is ``comparative 
effectiveness research.'' While controversial, the potential benefits 
of these efforts are significant. There have been many examples of new 
drugs and devices that have offered only a limited improvement (if any) 
over existing treatments but that cost substantially more. The 
introduction of the proton pump inhibitor drug Nexium, when the nearly 
identical drug Prilosec was about to lose patent protection, is a well-
known example.\13\ It is reasonable to expect that science can be 
applied to assess whether a new technology's minor gains justify what 
might be a major increase in expenditure.
    Finally, public and private efforts to research alternative health 
care delivery systems and payment methods could lead to innovative new 
approaches with the ability to improve the quality of care and/or 
reduce the cost of care. The program authorized by the Affordable Care 
Act, through the new Center for Medicare and Medicaid Innovation at 
CMS, is a comprehensive example of innovations research and testing, 
with the potential to identify effective ways of achieving these twin 
goals.
    Thank you for this opportunity to meet with your Committee. I 
applaud your efforts to strengthen Medicare and Medicaid and to find 
ways to help ensure the financial viability of these important health 
care programs. And as you work to determine effective means by which to 
ensure the availability of high-quality health care in the U.S., at a 
cost the nation can afford, I pledge the Office of the Actuary's 
continuing assistance. I would be happy to answer any questions you 
might have.

                                ENDNOTES

    \1\ For example, in 1957 noted actuary and demographer T.N.E. 
Greville projected that the ``Social Security area'' population in 2000 
would be 302 million; the actual number, 43 years later, was 288 
million or less than 5 percent lower than the estimate. More 
importantly for purposes of social insurance financial analysis, he 
projected that there would be 5.2 working-age people for every person 
at age 65 and over; the actual ratio was 4.8 to 1.
    \2\ The National Health Expenditure accounts also track health care 
spending by type of service (such as hospital care, physician services, 
and prescription drugs) and by source of financing (governments, 
businesses, and households). The historical and projected NHE accounts 
are available at http://www.cms.gov/NationalHealthExpendData/01--
Overview.asp .
    \3\ See Smith, S., Newhouse, J., and Freeland, M., ``Income, 
Insurance, and Technology: Why Does Health Spending Outpace Economic 
Growth?'' Health Affairs, September/October 2009. The estimates shown 
in chart 4 have been updated through 2010 using the authors' 
methodology; the results are very similar to those shown in the article 
for 1960-2007.
    \4\ For hospitals, skilled nursing facilities, home health 
agencies, diagnostic laboratories, and most other providers of health 
services, Medicare payment updates will be set at the increase in 
provider input prices (or the CPI, in certain cases) less the increase 
in private, non-farm business multifactor productivity in the economy 
overall. In addition, the Affordable Care Act requires additional 
payment update reductions in 2010-2019 for specified provider 
categories. For hospitals, these additional reductions total 3.6 
percent.
    \5\ Federal Insurance Contributions Act and Self-Employment 
Contributions Act, respectively.
    \6\ The Affordable Care Act also specifies that individuals with 
incomes greater than $200,000 per year and couples above $250,000 will 
pay an additional ``Medicare contribution'' of 3.8 percent on some or 
all of their non-work income (such as investment earnings). However, 
the revenues from this tax are not allocated to the Medicare trust 
funds.
    \7\ These projections are drawn from the 2011 Medicare Trustees 
Report and thus do not reflect the Budget Control Act of 2011, the 
Temporary Payroll Tax Cut Continuation Act of 2011, or the Middle Class 
Tax Relief and Job Creation Act of 2012. The forthcoming 2012 Trustees 
Report will incorporate these impacts.
    \8\ Orszag, Peter R., ``How Health Care Can Save or Sink America,'' 
Foreign Affairs Vol. 90, No. 4, July/August 2011.
    \9\ As described in my July 13, 2011 testimony before the House 
Committee on the Budget, Medicare payment rates for inpatient hospital 
care in 2009 were about 67 percent of those paid by private health 
insurance for their commercial plans. Under current law, Medicare 
payment rates are projected to decline relative to private health 
insurance payment rates over the next 75 years. The increasing 
differential between Medicare and private payment rates is due to the 
productivity adjustments in 2012 and later for the Medicare payment 
updates (and, to a lesser degree, to the other, smaller downward 
adjustments in 2010-2019 specified by the Affordable Care Act in 
addition to the productivity adjustments). By the end of the long-range 
projection period, Medicare payment rates for inpatient hospital 
services would represent roughly 33 percent of the average level for 
private health insurance and about one-half of the current relative 
level for Medicaid.
    Somewhat similarly, Medicare physician payment levels in 2009 were 
about 80 percent of private health insurance payment rates. Medicare 
physician payment rates would decline to about 57 percent of private 
health insurance payment levels due to the mandated reduction in the 
Medicare physician fee schedule of roughly 30 percent under the SGR 
formula in current law. (As noted, Congress is very likely to override 
this reduction, as it has consistently for 2003 through 2012.) Under 
current law, the Medicare rates would eventually fall to 27 percent of 
private health insurance levels by 2085, which would be less than half 
of the current relative level of Medicaid physician payment rates. The 
continuing slower growth would occur as a result of negative update 
adjustment factors caused by growth in the volume and intensity of 
physician services that exceeds the real per capita GDP increase factor 
specified by the SGR formula.
    \10\ To help illustrate the degree to which the current-law 
projections potentially understate actual future costs, the Board of 
Trustees asked the Office of the Actuary to prepare short- and long-
range projections under an illustrative alternative to current law that 
assumes (i) all future physician payment updates are based on the 
increase in the Medicare Economic Index, and (ii) the productivity 
adjustments for most other categories of providers are gradually phased 
out during 2020 to 2035. No endorsement of such changes by the Office 
of the Actuary or the Board of Trustees should be inferred. The 
illustrative alternative projections are available at http://
www.cms.gov/ReportsTrustFunds/Downloads/2011TRAlternativeScenario.pdf.
    \11\ The forthcoming 2011 Actuarial Report on the Financial Outlook 
for Medicaid will have a comprehensive discussion of past and projected 
trends in Medicaid spending.
    \12\ ``National Health Spending Projections Through 2020: Economic 
Recovery and Reform Drive Faster Spending Growth,'' Health Affairs Vol. 
30, No 8 (2011). http://www.cms.gov/NationalHealthExpendData/01--
Overview.asp .
    \13\ See, for example, Dr. Marcia Angel, The Truth About Drug 
Companies: How They Deceive Us and What To Do About It, Random House, 
2007.

    Chairman Ryan. Thank you. For an actuary that was 
remarkably brief. Mr. Goss.

                  STATEMENT OF STEPHEN C. GOSS

    Mr. Goss. Chairman Ryan, ranking member Van Hollen, thank 
you very much. I will try to be as brief. Last July you asked 
Rick and me to come and talk to you, and we talked about the 
fiscal facts of Social Security and Medicare. The title for 
today's hearing I took very much to heart: Strengthening Health 
and Retirement Security. If I may, I would like to be a little 
bit broader in the discussion rather than just Social Security 
and Medicare.
    If we can flip to the next slide please.
    I would suggest there are two really fundamental issues 
that are facing us as a nation going forward into the medium 
and long-term future. One is one that I think we are all 
familiar with, and we talked about much last July, the 
demographic population aging issue, which is to a great extent 
due to the fact that birth rates have dropped from three 
children per woman down to two children per woman. To see, very 
simply, what that means, imagine that we were all being taken 
care of by our kids; if you had three kids there is a lot more 
sharing going on in what they have to do for you than if you 
have two kids, and fundamentally, that is what is going on in 
our society. The only good news here is that we are not alone. 
Every other economically developed nation in the world is 
facing this or worse situation in terms of the demographics.
    There is another fundamental challenge that we are facing 
in this country, and if we flip to the second chart, still 
channeling on the idea of the lower birth rates and the 
changing age distribution, of course what that means is that we 
have a drop not only in the number of children, but in the 
number of works available for each beneficiary. That is also 
dropping over the next 20 years from three workers per 
beneficiary down to two workers per beneficiary. So whatever we 
choose to provide for retirees and for beneficiaries in 
general, whether it is Social Security or Medicare, that burden 
is going to have to be shared amongst fewer workers to pay for 
it.
    You go to the next slide, the other fundamental challenge I 
want to suggest is something we are all very familiar with, and 
I think Mr. Van Hollen alluded to this also, is the shrinking 
world and the competitiveness around the world, which is a 
great thing.
    Every economist will tell us over and over, that having 
better trade, better opportunities all around the world is good 
for everybody, but the particular position that the United 
States has been in with its highly competitive situation will 
be under stress in the future. In order to retain the kinds of 
jobs, the kinds of high-paying jobs, and the level of 
productivity in our economy that our projections from our 
trustees, OMB, and CBO, are assuming for the future is going to 
require that we do things in the future to meet these global 
challenges, and that we make sure that we have the best 
trained, educated, and skilled work force, and that we invest 
appropriately in this country to make sure that jobs on our 
shores are high paid, highly productive because after all GDP, 
gross domestic product, is what counts, and that is the source 
of getting all the revenue we have for, not only everything 
that the government does, but everything that we do for people 
in our economy in their retirement. Go to the next slide.
    So, those are the two fundamental challenges, how does this 
play into what we want for the future: again, this idea of 
strengthening health and retirement income security into the 
future. Well, we can see on this little chart something that 
you have seen before about the past and the projected future 
cost of Social Security and Medicare under the most recent 2011 
trustee's report, and Social Security is averaged at about 4.5 
percent of GDP cost over the past 20 years or so. Medicare has 
been rising, and was most recently around 3.5 percent of GDP. 
Both are projected, over the next 25 years, to go up to about 6 
percent of GDP. That is a big increase. That is almost double 
for Medicare, and for Social Security it is an increase of 
about one-third, in terms of the cost of the programs.
    The real question is, how are we going to meet these costs? 
If we want to strengthen, or even maintain the level of 
security, and the level of benefits provided under these 
programs, we would have to find a way to be able to fund that 
level.
    Now, in terms of retirement security, if we can flip to the 
next chart.
    The old saw that I am sure you all have heard too many 
times about the three-legged stool, Social Security and 
Medicare are not the only sources of retirement income and 
health coverage. There is also personal savings and there are 
private pensions. Dallas Salisbury over at EBRI, and others, 
have shared with us the kind of graph that you see here, which 
shows that over the last 25, 30 years we have had a dramatic 
drop in the number of defined benefit pensions, which 
typically, historically had provided lifetime annuities to 
folks, which is a pretty good definition of retirement income 
security where we have been moving more towards defined 
contribution plans. There is all kinds of reasons for that, 
obviously, but more and more, people have been taking just lump 
sum distributions and not getting annuities out of defined 
contributions. So the ability of the other two legs of the 
stool to really provide lifetime income retirement security has 
really been called into question and has been diminishing over 
time.
    So if we look on the next slide at what Social Security 
actually has provided and what it is projected to provide under 
scheduled benefits for the future, which are not fully financed 
of course, for 65-year-old retirees, we show on this little 
chart what we call these replacement rates; it is just the 
level of benefit that a person would be expecting to get, as 
compared to the lifetime earnings level that they were used to 
having in the past.
    For relatively low earners, retiring at 65, who had earned 
about $20,000 per year throughout their lifetime, and that is 
at about the 25th percentile of our career average earners, 
they would get a little bit less than half of what they had 
been earning throughout their career from Social Security, 
which means probably people would like to live on more than 
that, so we really do need the other legs of the stool. People 
with higher earnings obviously get a lower percentage of their 
lifetime earnings replaced by Social Security.
    If we flip to the next slide, you can see if we look now at 
a little bit more of a reality, which is that most people who 
are not disabled actually take the benefits earlier than 65.
    In fact, about half who are eligible take the benefits 
right at 62; and at 62 the benefit levels are about 20 percent 
less than are available at 65 for a retiree under Social 
Security, and so these replacement rates are about 20 percent 
less. The 50 percent drops to 40 percent for that $20,000 a 
year worker. All of this just indicating that Social Security 
provides what it provides under scheduled benefits now, we have 
pay attention to the future to how much it is going to provide, 
but also the other two legs of the stool, what they will 
provide in terms of retirement income security.
    On the next slide is a picture now of how are doing so far.
    How we are doing so far on Social Security is not as well 
as we would like, obviously as Chairman Ryan and ranking member 
Van Hollen indicated we need reforms, and we need changes for 
Social Security. We are projecting by 2036 for the trust fund 
reserves for Social Security to become exhausted. The DI, 
disability insurance, program alone is on a faster trajectory, 
by 2018 actually because of the large cost-of-living adjustment 
we had last year, which is almost 3 percentage points higher 
than we had estimated because of things that had happened over 
in the Middle East last spring, that we are all familiar with, 
ran up the cost of oil, and ran up the cost-of-living 
adjustments, and increased the cost of our program; and 
therefore, we expect the DI program actually will end up 
running out its reserves before the beginning of 2018; 2017 is 
likely, and maybe even 2016. So time is not on our side in 
terms of making these changes.
    On the next slide, this shows on a sort of a year-by-year 
cash flow basis, that we are now running into the period 
because of this demographic change of having our costs on the 
blue line rise up above the tax income to the program, and as a 
result of that, we are using up those trust fund reserves.
    By 2036 when they are gone, we will have to live off, as I 
think Chairman Ryan indicated, something like 77 cents worth of 
tax income still coming in for every dollar of scheduled 
benefits; so if we do not do something, that is what is going 
to hit, and hit very directly at that point in time.
    On the next slide, just a very brief look at what we are 
facing in the relatively near-term, which I know you all on the 
Budget Committee have to pay attention to, in addition to the 
long-term issues which are so important.
    The little blue bars here indicate what is really happening 
with the Social Security trust fund with all sources of income. 
We still have more income coming in than we have outgo, so the 
dollar level of the trust fund is still rising through 2020. 
However, looked at from a different point of view, or looked at 
from a cash flow where we exclude interest, which of course 
balances out in the overall unified budget, we see the sort of 
pink lines here that we are running negative already as of 
2010, and project those negatives to continue.
    The darker pink, or red lines, in 2011 and 2012 show a 
little bit bigger drop by simply reflecting the impact of the 
payroll tax holidays that we had, while the trust funds were 
immune from any effect from that, obviously, as you all know so 
well the unified budget backfilled it, reimbursed the trust 
funds for that money, and so the general fund had to put that 
money on the table. That is what fiscal stimulus, I guess, 
looks like to run deficits on the near-term.
    On the last little slide I have got, and if we get into 
some discussion of this, which I hope, is really looking 
forward in the positive sense of some of the kinds of things 
that you all, other members of Congress, and other policy 
makers, have considered for possible changes.
    The first several items here under Strengthening Retirement 
Income are things that many people have considered: bringing 
more revenue to the table, ways of promoting better use of 
people's savings, and other accumulations in pensions to try to 
bolster the strength of retirement income.
    Finally, at the bottom is another possibility also, which 
is even if we do not have more revenue, we can shift and 
reorient the money we have and how it would be spent. Many 
proposals have come to floor that would suggest that we should 
reduce the benefit levels to higher-income folks, so that we 
can be in a better position to make good on as much as possible 
of the commitments to the lower-income folks.
    Thank you very much for the opportunity to come and talk to 
you today, and I look forward to any questions you might have.
    [The prepared statement of Stephen C. Goss follows:]

         Prepared Statement of Stephen C. Goss, Chief Actuary,
                     Social Security Administration

    Chairman Ryan, Ranking Member Van Hollen, members of the committee: 
thank you for the opportunity to discuss with you today how we can 
strengthen the health and retirement systems that provide security for 
the population of the United States. In July of last year, we talked 
about the ``Fiscal Facts'' specifically for Social Security and 
Medicare. However, today's topic is broader than just those two 
programs. If we are to succeed in providing a secure future for 
retirees, and for all Americans, we need to: (1) understand the 
challenges we are facing; (2) decide on what we want for future 
retirees; (3) assess how we are doing so far; and (4) determine what 
changes we need to make.
           (1) two fundamental challenges we face as a nation
    The near term fiscal challenges of the Federal budget must be 
considered in the context of the two longer-term challenges we face as 
a nation. First, our population is aging due largely to the drop in 
birth rates that began over 40 years ago and continues today. Second, 
the world has shrunk and we now compete for jobs directly with other 
populations around the globe.

Our Aging Population
    Prior to 1970, women in the US had about three children who 
survived to adulthood. Since 1970, our birth rate has dropped to a new 
level of two children per woman.



    This decline in birth rate affects the age composition of the 
population. All else equal, we will have one-third fewer working age 
people for every elder in the future. This shift started around 2010 
and will be complete around 2030. Even with projected increases in 
employment of our older population, the number of workers for each 
Social Security and Medicare beneficiary will drop from three to two 
over the next 20 years.



    Virtually all other economically developed countries are facing a 
similar or worse aging of the population. Therefore, we are not alone 
in this challenge. What this aging means, however, is that retirees 
will be a larger portion of the population, and so will consume a 
larger portion of the economic output of our economy. Whether through 
government programs or other means, a greater share of GDP will go to 
elders for food, shelter, and services, including health services, if 
we are to maintain the same relative standard of living in retirement 
in the future as in the past.

Shrinking World and Competitiveness
    Capital and technology, and products and services, flow across 
borders more readily than ever before. Yet we support our population, 
and particularly our retirees, mainly from the earnings of workers 
within our borders.
    Our projections for Social Security and Medicare assume real 
increases in output per hour worked of 1.7 percent per year, and real 
increases in average earnings of 1.2 percent per year in the future. 
OMB and CBO make similar, if not more optimistic, assumptions. If we 
are to achieve these gains, we need a highly skilled, highly educated 
workforce in the future and must invest accordingly.
           (2) retirement income and health services we want
    Retirement income provides for the most basic needs of food and 
shelter. These are essential. We have become sufficiently productive to 
afford many other things, such as the most extensive health care system 
in the world. Maintaining this level of retirement security in the 
future will require a greater share of gross domestic product (GDP) 
than in the past, simply because of the aging of the population. Social 
Security and Medicare are only two of many components of this security, 
but the projected trend in their cost parallels the trend in cost for 
all other sources of retirement security.
    Over the next 20 to 30 years, the Social Security and Medicare 
Boards of Trustees project that the cost of Social Security will 
increase by about one-third, from 4.5 percent of GDP to 6 percent of 
GDP, and that the cost of Medicare will nearly double from 3.5 percent 
of GDP to 6 percent of GDP. If we desire to maintain the same relative 
retirement income and health care, these increased costs as a share of 
GDP will have to be met. The alternative is reduced relative retirement 
income and health care.



    Social Security benefits were never intended to provide all we need 
in retirement. Employer-sponsored pensions and personal savings are the 
other two legs of the ``three-legged stool.'' Pensions and savings have 
not kept up with retirement needs. Roughly one-half of workers retire 
with pension accumulations; however, these pensions have increasingly 
been ``defined contribution'' plans, where most retirees take lump-sum 
distributions instead of annuities. Annuities, like Social Security 
benefits, provide guaranteed monthly income for the rest of retirees' 
lives. Even many traditional ``defined benefit'' plans have begun 
offering lump-sum options.



    Efforts to encourage and promote purchase of annuities with private 
savings and pension accumulations could help. However, we have 
succeeded so well in emphasizing the importance of accumulating a 
``nest egg,'' few are willing to part with their accumulation to 
purchase an annuity. The ``floor of protection'' provided by Social 
Security is more needed than ever.
    In this context, Social Security benefit levels require careful 
consideration. Even assuming retirement at age 65, Social Security 
monthly benefits will replace less than 50 percent of career-average 
earnings for those who made about $20,000 per year, and only about 30 
percent for those who made $70,000 per year.



    For those retiring at 62, as over half do, the percent of career-
average earnings is even lower, at less than 40 percent for the $20,000 
earner, and less than 25 percent for the $70,000 earner.



                      (3) how are we doing so far?

    Scheduled payroll tax and benefit taxation revenue for Social 
Security amount to about 4.5 percent of GDP. However, the cost of 
scheduled benefits will rise to 6 percent of GDP over the next 20 
years. This growing shortfall will, over the next 25 years, gradually 
use up the $2.7 trillion in reserves now held in the Social Security 
Trust Funds.



    If no action is taken, the Disability Insurance (DI) Trust Fund 
reserves will be depleted soon. For the 2011 Trustees Report issued 
last May, we projected DI reserves would be exhausted early in 2018. 
With the surge in oil prices due to Middle East issues since last 
spring, the COLA for December 2011 was 3.6 percent, almost 3 percentage 
points higher than projected. As a result, the DI reserves will more 
likely be depleted early in 2017 or late in 2016. The immediate DI 
problem can be fixed with a tax-rate reallocation between the OASI and 
DI programs, as was done in 1994. However, exhaustion of combined OASDI 
Trust Fund reserves will still face us by 2036, or sooner. If we do not 
act, benefit levels will be reduced automatically by about 25 percent 
by 2036.

   OASDI COST, INCOME, AND EXPENDITURES AS PERCENT OF TAXABLE PAYROLL



    In the very near term, the dollar level of combined OASDI Trust 
Fund reserves is still rising. Total income, including interest, is 
projected to exceed program cost through 2020.


    However, cost began to exceed non-interest income in 2010 due to 
the economic downturn and is projected to remain higher than non-
interest income in the future.
    In addition, payroll tax rates have been used as a mechanism for 
fiscal stimulus with the HIRE Act for 2010, and with 2-percent payroll-
tax holidays for 2011 and 2012. None of these temporary stimulus 
measures has had a negative effect on the actuarial status of Social 
Security, because the General Fund of the Treasury has reimbursed the 
Trust Funds for every dollar of reduced payroll tax. The temporary 
payroll-tax rate reductions have, however, added to unified budget 
deficits, as a part of the fiscal stimulus measures to promote more 
consumer demand and economic growth.

                  (4) what changes do we need to make?

    With Social Security scheduled benefits replacing less than half of 
earnings for workers earning $20,000, and replacing even less for 
higher earners, and the prospect of even these levels being cut by 25 
percent automatically by 2036, we need to consider the following 
options:
    (a) Provide added revenue to maintain Social Security benefits at 
currently scheduled levels;
    (b) Provide even more revenue to increase scheduled benefits;
    (c) Provide universal alternative means for guaranteed lifetime 
retirement income to supplement Social Security;
    (d) Promote purchase of life annuities with a larger share of 
savings and pension accumulations at retirement; or
    (e) All of the above.
    Several proposals have recommended substantial increases in revenue 
to help pay for scheduled Social Security benefits.
    (i) Both the Simpson-Bowles Commission and the Rivlin-Domenici Plan 
recommended increasing the maximum level of annual earnings subject to 
payroll tax by enough to eliminate about 25 percent of the long-range 
actuarial deficit.
    (ii) Representative Deutch proposed to eliminate the limit on 
earnings taxed, as was done for Medicare, in order to completely 
eliminate the 75-year actuarial deficit.
    (iii) Chairman Ryan and the Rivlin-Domenici Plan proposed to 
eliminate the exclusion of premiums for employer-sponsored group health 
plans from earnings subject to payroll tax. This change would eliminate 
about 50 percent of the long-range actuarial deficit.
    Several proposals would increase the level of benefits for at least 
some beneficiaries.
    (i) Both the Simpson-Bowles Commission and the Rivlin-Domenici Plan 
recommended enhancements to the current minimum benefit provisions of 
Social Security
    (ii) Representative Deutch proposed using the Consumer Price Index 
designed for the elderly to determine COLAs, rather than the index 
designed for urban workers. This change would provide increased benefit 
adequacy at the oldest ages where poverty is greater. (Census 2009 
Poverty: 8% for 65-74, 10% for 75 and over.)
    Several proposals would provide workers with an option to redirect 
a portion of their payroll tax to personal accounts in return for lower 
benefits from Social Security.
    (i) Chairman Ryan has recommended a plan for a voluntary personal 
account with a minimum guaranteed rate of return.
    (ii) Representative Landry has proposed that workers have an option 
to reduce their payroll tax rate by 2 percent for any year in return 
for an increase in their normal retirement age by 1 month.
    Several proposals would alter the structure of Social Security 
benefits in order to encourage workers to work longer and start 
benefits later.
    (i) Representatives Kolbe and Stenholm, and others, have 
recommended increasing the size of reductions for taking benefits 
early, thus encouraging later benefit claiming.
    (ii) The Simpson-Bowles Commission recommended an increase in the 
earliest age at which benefits could be started in order to keep 
monthly benefit levels as high as possible, even if payable for fewer 
years. This proposal also offered a waiver of the increased retirement 
age for low-paid, long career workers.
    Many proposals have recommended targeted reductions in scheduled 
benefits, particularly for higher earners, so that currently scheduled 
revenue will be able to pay for more of the benefits now scheduled for 
lower earners.
    Finally, we could promote the purchase of life annuities or 
``longevity insurance'' with personal savings and pension 
accumulations. For example, a sum of $100,000 at 65 could provide 
inflation-indexed retirement income in several different ways, 
including:
    (i) Without purchasing an annuity, spend $324 per month to make 
sure the $100,000 will last until age 110.
    (ii) Buy a life annuity at 65 paying $544 per month for life.
    (iii) Buy a 20-year deferred annuity and spend the remainder of the 
$100,000 until age 85, for $475 per month.

                               CONCLUSION

    We are at the beginning of a substantial and permanent shift in the 
age distribution of our population. This shift was caused by the drop 
in birth rates from the long-time average level of about three children 
per woman through 1965, to just two children per woman since 1975. By 
2040, there will be only two workers for every OASDI beneficiary, down 
from three workers per beneficiary throughout the period 1975 through 
2008. As a result, the cost of Social Security will shift from about 
4.5 percent of GDP to a stable level of 6 percent of GDP by 2040. 
Currently scheduled tax revenue will remain at about 4.5 percent of 
GDP. Making Social Security solvency sustainable will therefore require 
a choice to:
     Increase revenue by 33 percent after 2035,
     Reduce benefits by 25 percent after 2035, or
     Enact some combination of these changes
    In the absence of legislation, the combined OASDI Trust Fund 
reserves are projected to become exhausted in 2036, with only 75 
percent of presently scheduled benefits payable thereafter through 
2085.
    In addition, we are facing a global challenge for the best high-
paying jobs. It is critical that we invest in the workers of the future 
to assure that they will have the highest possible level of skill, 
training, and education. Without this investment, we will not achieve 
the level of real productivity and earnings growth needed to pay for 
retirement income and health costs in the future.
    Members of Congress and various Commissions have laid out a wide 
range of possible approaches for financing and altering currently 
scheduled Social Security benefits to meet the challenges of the 
future. However, Social Security cannot achieve these goals alone. We 
also need personal savings and private pensions to contribute more to 
lifetime guaranteed retirement income.
    Chairman Ryan, Ranking Member Van Hollen, and members of the 
committee, all in my office look forward to continued work with you and 
all members of the Congress in the development of legislation that will 
restore long-range sustainable solvency for the Social Security Trust 
Funds and strengthen the retirement and health security of our 
population.

    Chairman Ryan. Thank you Steve. Since we ended with Social 
Security, why do I not pick up on Social Security. If you could 
bring up Mr. Goss's second-to-last chart: OASDI costs, income, 
and expenditures as a percent of the taxable payroll. I want to 
ask you about the cliff that occurs in 2036. We have heard 
people advance, here in Congress, that the trust fund is fine 
until 2036, and we do not have to do anything until then, so 
why worry about it now? I want to get at the nature of that. 
Correct me if I am wrong, but if we do that then we have an 
across-the-board cut of about 23 percent that occurs in 
benefits, is that correct?
    Mr. Goss. Exactly.
    Chairman Ryan. And does that hit everybody equally? 
Meaning, does the 23 percent cut hit a low-income worker just 
as much as it hits a high-income individual?
    Mr. Goss. Well, as we understand it, our general counsel at 
Social Security across several administrations, has indicated 
that the law actually does not speak explicitly to this. The 
commissioner, standing at that time, would simply have 77 cents 
available for every dollar of scheduled benefits, and would not 
be permitted to spend more than that. We do not have borrowing 
authority, so a decision would have to be made about who would 
get the money. We could have an across-the-board 23 percent cut 
immediately, or a commissioner could say, well we are not going 
to pay the March benefits in March, we will wait until April, 
or wait until more revenue has come in to allow full payment a 
month late. After a few months we would, perhaps, and then have 
to start paying benefits two months late, so this would be a 
way that it could be handled; of course, if people have to pay 
rent on time, that would be a difficulty. So there is no easy 
way out on this. One could channel this towards having bigger 
reductions for people with higher benefits.
    Chairman Ryan. That would be up to Congress at the time, 
right?
    Mr. Goss. We hope, and pray, that Congress would indeed act 
well before we ever hit the trust fund reserve exhaustion.
    Chairman Ryan. Let me get to that. So given that we have 
this abrupt 23 percent cut that occurs in law, that is current 
law, is it not wise to start reforming now, sooner, so that the 
distribution of the change is spread more broadly and evenly 
across income cohorts. Let me ask it this way, does that abrupt 
23 percent cut hit current senior cohorts, like a person who is 
turning 62 or 65 today, that affects them as well, correct?
    Mr. Goss. It certainly would. They would be at older age at 
that time, but clearly it would affect them. That is assuming 
that we wait and do absolutely nothing until that point.
    Chairman Ryan. Right, so if one provides reform soon, could 
you not prevent these kinds of effects from hitting those 
current cohorts, or could you not phase reforms in gradually 
that prevent that 23 percent cut from happening so it does not 
affect people who are currently in or near retirement? Could 
you structure reforms that prevent that from happening if you 
act sooner?
    Mr. Goss. Absolutely. We have a number of proposals, 
including yours Chairman Ryan, and many other proposals that 
would take exactly that approach. Our trustees, and everybody 
who speaks on this, has opined extensively about the value of 
acting sooner rather than later, so that we can have gradual 
changes phased in, and we have more options if we act 
relatively soon.
    Chairman Ryan. What was life expectancy when Social 
Security was created?
    Mr. Goss. Life expectancy when Social Security was created, 
where it is about 20 years at age 65 now, it was substantially 
less than that, I believe. I would have to get back to you with 
the precise numbers.
    Chairman Ryan. You are an actuary, I thought you guys had 
this stuff off the cuff.
    Mr. Goss. Well, some stuff. It was probably somewhere on 
the order, I believe, over the last 30 years or so, life 
expectancy in general has increased by about five years, life 
expectancy at birth. The more important life expectancy 
probably is life expectancy at something like 65 because that 
is the point at which you start to get benefits, and it has 
increased significantly. We are projecting that it will 
increase somewhat slower in the future, but continue to 
increase. The real factor we believe, though, the big shift, 
what we see on this cost curve over the next 20 years, that is 
not because of life expectancy.
    Chairman Ryan. It is demographics.
    Mr. Goss. It is demographics, but it is demographics, 
really, switching from having two kids paying the bills instead 
of having three kids.
    Now, we have some continuing increase in the cost 
thereafter because of increasing life expectancy. We are 
hopeful, as all of you I know, that with increasing life 
expectancy that will be coupled with increasing health at any 
given age, and people will be able to work longer, and our 
estimates for revenues for both Social Security and Medicare do 
incorporate that aspect; but it is the shift to having only two 
kids instead of three kids that really is the fundamental 
demographic shift facing us.
    Chairman Ryan. Okay, so Mr. Foster, let's introduce these 
points into the Medicare conversation. In your written 
testimony, you address the need for Medicare reforms that lower 
cost growth rather than just levels of spending. To that end 
you suggest delivery system reforms that could be effective. 
You have testified previously that as a general rule, a system 
set up along the lines of premium support for providers to 
compete against each other for patients' business, where 
society is most vulnerable, the poor and the sick receive more 
assistance while the wealthy receive less, would achieve 
savings in Medicare while continuing to provide a basic 
Medicare benefit. Do you still believe that that is the case, 
that that kind of a system can be designed?
    Mr. Foster. Yes, many people have talked about premium 
support in different varieties of form for many years now, and 
it does have the potential to introduce competition among 
insurers for the Medicare business, and it does have the 
potential to lower the level of cost as well. There is some 
potential to lower the growth rate, but that is harder to do. 
Competition, itself, generally gets you the bottom dollar cost 
consistent with good quality, but then the growth rate beyond 
that bottom dollar cost may have to be addressed through other 
items in addition to the competition.
    Chairman Ryan. Right, so in and of itself, cost-growth 
reform, and growth rate reform in Medicare is not enough, you 
had to deal with health care reform, itself, that goes to the 
broader issues of the root cause of health inflation. Is that, 
more or less, what you are saying? It is not enough just to 
reform Medicare; you have to have profound health care reforms 
that get at root cause of health inflation?
    Mr. Foster. Yes, I would agree with that because if you 
think about it, the same reasons that cause Medicare costs to 
grow fairly quickly, same thing for Medicaid, same thing for 
other private health insurance, and if you tried to fix these 
underlying factors in just one sector of the health economy, it 
probably would not work. You really need to attack all of them.
    Chairman Ryan. So I want to get into competitive bidding. 
As you may know, that I have been working across the aisle with 
a member of the Oregon delegation from the Senate on a premium 
support plan that uses competitive bidding to help determine 
the contribution. Competitive bidding, we have seen, has worked 
well in Part D in Medicare Advantage. I would like to get your 
thoughts on choice and competition as it relates to these 
previous successful reform plans. Given what we have seen in 
these aspects of Medicare, do you believe that competitive 
bidding is a process that can be successfully applied Medicare 
wide?
    Mr. Foster. Yes, I think it can. Obviously it would 
represent a large change from the status quo, but I think it 
could work. We have seen signs of this. You mentioned the Part 
D prescription drug program, for example, where the different 
drug plans compete against each other on the quality of their 
benefit package and the premium level, and we have seen every 
year since Part D started, migration of beneficiaries to more 
efficient plans with lower premiums, so that can help. We have 
also seen for durable medical equipment, when we had the 
demonstration, that competitive bidding in this particular area 
of fee-for-service Medicare reduced prices that we had to pay 
by 40 percent.
    Chairman Ryan. By 40 percent?
    Mr. Foster. 40 percent, that is right.
    Chairman Ryan. Those are the kinds of cost savings we are 
going to have to achieve if we want to continue to make good on 
the promise of the Medicare guarantee. This is what I am trying 
to get at, which is this should not be a partisan issue. 
Competitive bidding is something that Alice Rivlin has been a 
champion of, Ron Wyden's been talking about, the bipartisan 
policy center; there is a lot of data out there that 
competitive bidding, when applied Medicare wide, can achieve 
the benefit of keeping these benefits going while attacking 
root cause of cost growth. What I am trying to get at is we 
have had CBO in here that says they cannot analyze it. They do 
not have the tools in the toolbox, I think is the word they 
use, to quantify competitive bidding. Do you feel more 
comfortable now that we have had about a decade's worth of 
history on how competitive bidding has worked in aspects of 
Medicare, like you just suggested, which if applied throughout 
the Medicare system could actually replicate those kinds of 
cost-growth improvements.
    Mr. Foster. We have done a lot of work over the years 
estimating the financial effects of premium support proposals 
and other proposals. A good place to start is the current 
Medicare Advantage program because we have data for every 
single plan in the country, and what their costs are for the 
standard Medicare benefit package, and we can compare that to, 
say, corresponding fee-for-service costs in the area. So we 
have a pretty good idea of the cost levels, and if the premiums 
reflect that difference in cost, then it is not hard to model 
with some uncertainty, obviously, how people would make 
decisions to go with this package or stay in a fee-for-service 
or do something else; in some cases fee-for-service would be 
the least expensive plan in parts of the country. So we can 
estimate those, we have done it, and there is potential for 
savings there.
    Chairman Ryan. That is helpful to know because we do not 
see this as a big stretch, and we are applying finite dollars 
because of pending bankruptcy, we believe that those dollars 
ought to go the people who need it the most, the poor, the 
sick, middle-income individuals, and less toward higher-income 
individuals, and if applying this you can preserve the Medicare 
guarantee while also expanding patient choice and competition 
to try and get at excess cost growth. It is encouraging that 
this data exists. I would just simply say that we need to 
improve our ability to get this kind of analysis going because 
we do not have it here in Congress, we do not have it at CBO, 
and it would be fantastic to see if your office could work with 
CBO so that they, too, could glean the kind of analysis that 
you are providing.
    Mr. Foster. We provide a lot of technical assistance to 
them, and they provide some to us; we would be happy to work 
with them. Let me just mention one other thing, Chairman Ryan. 
You mentioned two things that are almost two separable issues. 
One is the competitive bidding, the premium support. You can 
apply that to everybody, regardless of their income. If beyond 
that you want to do other things to increase coverage for low 
income and decrease it for high income, you can do that to, and 
in fact several such steps have been done in recent years. The 
two are almost different issues entirely.
    Chairman Ryan. Sure. I totally agree with that. Thank you 
very much. Mr. Van Hollen.
    Mr. Van Hollen. Thank you, Mr. Chairman, and thank you both 
for your testimony this morning. I am just going to start with 
you Mr. Goss on the Social Security. First of all, thank you 
for your good advice on many issues relating to Social 
Security, and let me just say in response to the chairman, I 
think count me among those who think that we should tackle this 
issue sooner rather than later. In fact, I think we should get 
to it right away, and I think we should take a balanced 
approach. I think President Reagan and Tip O'Neill outlined the 
way forward in dealing with that question on a bipartisan 
basis.
    Let me just go back to the letter that you wrote on 
February 17th, I think, which was reinforced by your testimony 
this morning because there has been some misinformation with 
respect to the impact of the payroll tax cut legislation that 
was just passed on the Social Security trust funds. I am just 
reading from your letter of February 17th saying, ``the trust 
funds would be unaffected by enactment of this provision. 
Future benefit levels would be unaffected because the reduced 
payroll tax rate would not affect the amount of covered 
earnings that is credited for benefit purposes.''
    I take it you stand by your letter, and if you could just 
elaborate for a moment on that issue, just to put that issue to 
rest once and for all.
    Mr. Goss. Thank you, Mr. Van Hollen. That is exactly 
correct, and the good news is that is not opinion; that is the 
law. That is what was enacted and the president signed. In 
fact, the law is very explicit and it says, ``Any of the 
payroll tax reductions are reimbursed immediately exactly as 
though the payroll taxes were not reduced.'' In fact, our 
office actually generates the numbers that the Department of 
Treasury then transfers to the trust funds, and we simply 
indicate to Treasury for this transfer that the money should be 
transferred to the trust funds exactly as though this had never 
gone into effect.
    Mr. Van Hollen. Thank you, thank you Mr. Goss. I hope we 
will not be hearing any more of that misinformation going 
forward now that you have laid it out very clearly.
    Mr. Goss. And you were also exactly correct on the fact 
that people's benefits are not affected.
    Mr. Van Hollen. Thank you, Mr. Goss. Mr. Foster, I want to 
pick up where the chairman left off in your testimony, with 
respect to the difference between reducing the base level of 
health care costs, whether it is in Medicare or in the private 
system, and addressing the rate of growth, the increase in 
health care costs, and I just want to read from a MedPAC report 
from 2009:
    ``While private and public programs differ in their 
coverage and financing, over the long term their rates of per-
capita growth have been similar when comparing spending for 
benefits that private insurance and Medicare have in common, 
Medicare spending per enrollee grew at a rate about 1 
percentage point per year lower than that for private insurance 
from 1970 to 2006.''
    And in your own 2011 trustees report on Page 87, you state, 
``over long historical periods average, demographically 
adjusted per-capita growth rates for common benefits had been 
somewhat lower for Medicare than for private health insurance. 
That was in 2011, do you stand by that statement today?
    Mr. Foster. Yes, the trustees report and the MedPAC 
statements are correct.
    Mr. Van Hollen. Okay, because this gets to the fundamental 
question of how we address the rising costs of Medicare and 
health care in general. If you are simply transferring a 
Medicare beneficiary from the Medicare system into the private 
health market, and the growth in costs in the private health 
market is the same or higher than Medicare, they are not going 
to be paying any less, are they?
    Mr. Foster. Other things being equal, that is correct. Now, 
one important thing to understand is that over the historical 
period Medicare payment rates came down quite a lot 
legislatively from being, essentially, much too high and today 
perhaps to being too low, or getting to that direction. So that 
1 percent differential is at least partly attributable to the 
slower payment updates for Medicare compared to what private 
health plans could negotiate.
    Mr. Van Hollen. Right, and we got into this at the hearing 
last time and I will put it in the record again, surveys from 
individuals who are in the private health care system compared 
to surveys who are on the Medicare system, with regard to their 
current access to doctors and providers, and across the board, 
my colleagues may remember the Medicare surveys turned out to 
have higher levels of confidence support than in the private 
market. So this gets to the fundamental question because 
sometimes I think people forget that back in 1965, when we 
created Medicare, we had the experiment of private health care 
insurance for people over 65. They were older, they were 
sicker. About 45 percent of older Americans had no health 
insurance. We had a free market system for those seniors at 
that time, and it just turns out that health insurers did not 
see a big market in making a profit on providing health care to 
seniors, which is why the pooling benefits of Medicare help 
drive down those costs, as we just discussed.
    Now, I want to talk about the one experiment we have had 
with respect to the private insurance within the Medicare 
system. You mentioned Medicare Advantage, and you specifically 
mentioned that in some markets fee-for-service is less 
expensive. That is true today, is it not still?
    Mr. Foster. That is correct.
    Mr. Van Hollen. Okay, and in fact, before the Affordable 
Care Act, we were subsidizing those private plans in some cases 
up to about 140 percent of fee-for-service, were we not?
    Mr. Foster. Correct.
    Mr. Van Hollen. Just so everyone understands, that means 
for those enrollees in the private plans, we were paying $1.45 
per enrollee compared to $1 in the fee-for-service plan. Even 
today, after the Affordable Care Act, we are still subsidizing 
some of those private plans up to 115 percent, is that not 
right?
    Mr. Foster. Yes, once it is fully phased in.
    Mr. Van Hollen. So once it is fully phased in, and the 
chairman mentioned reductions in the Medicare. So some of the 
savings we achieved, a significant amount of savings we 
achieved, were in reducing these overpayments, these huge 
subsidies, to the private Medicare Advantage plans. That is one 
of the things that was done in the Affordable Care Act, right?
    Mr. Foster. I would word it a little bit differently, but 
your basic point is correct. Because of the prior law Medicare 
could pay more than a typical fee-for-service cost to most 
Medicare Advantage plans per person, and that enabled the plans 
to offer extra benefits and lower premiums and so forth.
    Mr. Van Hollen. That is right, and the impact of that is 
that, not only tax payers, but other Medicare beneficiaries who 
are paying premiums in the fee-for-service program are actually 
cross-subsidizing the seniors on Medicare in the Medicare 
Advantage plans, is that not true too?
    Mr. Foster. Yes, Part B premiums were higher because of the 
higher payments to Medicare Advantage plans, and that was true 
for all beneficiaries, including those in fee-for-service.
    Mr. Van Hollen. Okay, now I also want to get at a 
fundamental distinction between a pure, market-based premium 
support system, and one where you have a voucher, or some 
equivalent of a voucher, that is linked to some other 
artificial measure because those have very different impacts. 
For example, the federal employee health benefit system, which 
every member of Congress is on, is targeted to the market 
price, but members of Congress are guaranteed a certain share 
of their premiums will be paid for the federal government, is 
that not right?
    Mr. Foster. That is correct.
    Mr. Van Hollen. Okay, and there is a big difference between 
that, in terms of economic security, between that and a system 
where the amount of the voucher, or premium support, or 
whatever you want to call it, is not linked to the market 
price, but could be linked to an indice that actually does not 
rise at the same rate, cost wise, as the market, right?
    Mr. Foster. Yes, this is one of the fundamental design 
principles when you are considering a competitive bidding or 
premium support approach. In the traditional premium support, 
you set the premium support itself as a function of the average 
bid of all the competing plans, including fee-for-service. Over 
time, as the cost of health care goes up, that average bid 
tends to go up with it. Now, people migrate to the cheaper 
plans, the more efficient plans with lower premiums, so this 
benchmark bid, or average bid, would not increase as fast as 
health care costs generally over a transition period.
    Other versions would impose, also, in addition to the 
bidding aspect, an overall or global amount of increase that is 
allowed for the funding, and several of the more recent plans 
have included that feature.
    Mr. Van Hollen. And in fact, just to close out, Mr. 
Chairman, in your testimony you point out that in those cases 
where your support, the amount of your voucher does not keep 
pace with the market costs of health care, you may have to 
choose to either pay a lot more out of pocket, or not get a 
health care plan that covers all your needs, is that not 
correct?
    Mr. Foster. That is certainly a risk, and it is a pretty 
important risk. The real question is by initiating such a 
system that is so different where there is a limited growth 
rate, does that send a signal to the people who develop the new 
medical technology, and will they act in such a way as to come 
up with devices and treatments and drugs that are just as good 
as the existing ones, but they are cheaper? Now, that would be 
a good thing for the country if it could apply the same 
techniques that you see every day in manufacturing and other 
sectors to health care, but it is not easy to do, and as I 
said, it is a risk.
    Mr. Van Hollen. Okay, and that of course was the world we 
were in before 1965.
    Mr. Foster. There is one other difference too, let me just 
add because you are entirely correct, there is no meaningful 
private health insurance market for people over 65 before 
Medicare. Now, the difference between then and today is back 
then there were no federal subsidies in support of it. If there 
were no subsidies for Part D of Medicare, it would not be 
working nearly so well, because there are subsidies, a viable 
market is not only possible, it is thriving.
    Mr. Van Hollen. Right, and I will close out Mr. Chairman, 
but the question is whether the market will respond to provide 
the health care at below the current market price because 
individuals are income constrained; and in 1965 they were 
income constrained with vouchers, and the fact is you did not 
see the market adjust to take care of people over 65.
    Chairman Ryan. This is fantastic. I think that was one of 
the best explanations of competitive bidding and how to 
structure this so we get at cost growth, and our point is 
subsidize the people who need it the most, people who are low 
income, people who are sicker, than people who are higher 
income. That is the smartest way to go, and it puts on a 
virtuous cycle of trying to attack the root cause of health 
inflation, medical device cost growth. Get us on that virtuous 
cycle, like in manufacturing where new technologies actually 
served to reduce costs, not escalate costs, like we have seen 
in health care.
    So to us it is about getting the right incentive structures 
in place so that we can have a program of genuine security for 
health care for people in old age. While we do that we want to 
make sure that those who had the least ability to take care of 
themselves, the sick and the poor, are totally taken care of, 
and not people who have extra disposable income, so that they 
can absorb the greater cost if that is going to be a result of 
these kinds of processes. So this is a fantastic conversation, 
I could go on and on, but we have got a lot of members here. 
Mr. Garrett.
    Mr. Garrett. So there is some perception by some that there 
is not a big problem, either with Social Security or with 
Medicare, but I think the consensus of this panel is that there 
is a need for reform in both of these entities. I see you are 
shaking your head at that. The reform should come sooner rather 
than later, and I guess both panelists would agree with that as 
well. When I say ``some'' because I have seen reports that 
Senator Reid has indicated that he is willing to tackle these 
issues as well on a bipartisan matter, but he is one that wants 
to wait the 20 years before we actually get to it. Again, does 
either panelist think either Social Security or Medicare that 
would it would be appropriate management plan to wait 20 years 
to make any reforms to these systems?
    Mr. Foster. I would just comment that I just had my 39th 
anniversary in the federal government, and Steve yours is 
coming up in a few months, I believe. Over that time we have 
both seen an awful lot of proposals, and crises, and plans that 
give a lot of advance notice, and plans that gave no advance 
notice. I know I would vote every time for earlier action, 
which not only can be less disturbing to whatever market we are 
dealing with, but you have more options at that point because 
it is earlier in the process, and also to the extent you have 
to change something. You give more notice to whoever it might 
be, whether it is beneficiaries or health care providers, tax 
payers, or whoever is involved.
    Mr. Garrett. Right, and Mr. Goss, I thought I heard in your 
testimony, and on one of the charts to this point, that it is 
not 30 years down the road, or 20 years down the road, but when 
it comes to SSDI, the disability insurance, that it could be as 
early as 2016, did I hear that is when that program could 
potentially, I will use the term, bankrupt?
    Mr. Goss. Exactly. Certainly not bankrupt, but that is the 
point at which the reserves might be exhausted, and at that 
point we estimate about 86 cents for every dollar.
    Mr. Garrett. What does that mean to my constituent in 2016 
or 2017, if nothing is done to that program and he is currently 
on it, how does his benefits change?
    Mr. Goss. That could mean that failure of this body to act 
could leave us in a position where the Social Security 
commissioner only has 86 cents for every dollar of scheduled 
benefits for the disability insurance program with no ability 
to borrow, so we would have a serious problem. Fortunately, the 
good news is this body has never failed to act under such 
circumstances, and we have always made it through.
    If I could just add one thing to Rick's comment, I just 
would like to make a distinction between enactment of changes 
and the implementation, or effective date, of changes. One of 
the really amazing successes, I think, of the 1983 Social 
Security amendments was that a change in the increase in the 
normal retirement age was enacted in 1983. It did not begin to 
become implemented until 17 years later in 2000. Here is a 
perfect example of how we can enact a change, put it on the 
books so people have the opportunity to see what is coming, and 
to be able to plan for it, and get plenty of advance notice for 
that purpose. This, I think, is the real positive of enacting 
changes relatively soon. Even if they do not actually become 
implemented and start to have effect until some years later.
    Mr. Garrett. That is interesting. One of the areas that 
this Congress did pass a law, where you might say where they 
enacted something and had an effective date, was with the 
Medicare program and the proverbial Medicare trigger to say 
that when spending versus revenue became more than 45 percent, 
there would be a trigger, so there we might say we enacted 
something so that something would occur in the future, right?
    Now, under that trigger that is in place, since this 
administration has been in office, that trigger has been 
triggered, or pulled, approximately six times, I believe. What 
have we seen from the administration as far as their proposals 
or their requirements under that trigger? Have they submitted 
any legislation?
    Mr. Foster. In the first year, yes. Since then, I believe, 
there has been a more general statement that the budget 
proposals from the president would be sufficient to address the 
so-called funding warning.
    Mr. Garrett. Well, let's take a look at those funding 
proposals and what have you. Last year's Medicare trustees 
report shows that Medicare, the Part A program for hospitals, 
would be exhausted in 2029, right?
    Mr. Foster. That was the 2010 report, that is correct.
    Mr. Garrett. Okay, and this year it has shortened down to 
2024?
    Mr. Foster. Right.
    Mr. Garrett. So as far as the administration's proposal, if 
they are doing anything, they are going in the wrong direction, 
we would say. It is shortening the amount of time as far as the 
life projections of Medicare.
    Mr. Foster. I would not say that any proposals had an 
effect on the earlier year of exhaustion projected for the 
hospital insurance trust fund from 2029 to 2024. That was 
mostly economic developments.
    Mr. Garrett. Thanks.
    Chairman Ryan. Mr. Blumenauer.
    Mr. Blumenauer. Thank you very much. Some context here, I 
really appreciate, Mr. Goss, your pointing out, first of all, 
that Social Security will be severely stressed, benefits will 
be reduced, and it will not go bankrupt. Nothing compared to 
what is happening with many private pension programs that get 
thrown into the pension guarantee board and give a fraction. I 
mean, there are lots of people who would take the 74 percent 
solution. I do think it might be fun to explore, a little bit, 
because the notion about Senator Reid and 20 years, I think is 
in the context of what you said about the last reform. With 
Democrats in Congress and President Reagan, that was 17 years 
before the revenues started kicking in, before the benefits 
were modified, and I think that is a model for what we should 
be doing.
    I do not know anybody and I will defer to my good friend 
the chairman later, about the people who are saying we do not 
have a problem and let it run out. I do not know anybody in 
Congress, and there are some goofy people around here, but I do 
not know anybody that says we are going to be on automatic 
pilot, wait 20 or 30 years, or wait until 2036. I think there 
is a big distinction about people who want to have something 
that is bipartisan and balanced and phased in over time in a 
thoughtful fashion, as opposed to people who want to 
precipitate an artificial crisis and not do it in a careful and 
managed fashion. I think that is a big divide. I think we ought 
to be careful and deliberate, and do it right because you point 
out how people depend on it, and the more that people are 
playing politics with this, the less likely we are going to 
have something that is balanced, thoughtful, bipartisan, and 
within that timeframe.
    I continue to believe that this is something that we could 
do around this table with this committee if we wanted to get 
serious and generate some proposals, and move forward, rather 
than the talking points and stuff that occupies our time, but I 
appreciate you establishing the context.
    Mr. Foster, I posed a series of questions to you when you 
were last here requesting some information you said you would 
get back to me on the differential in terms of the payments. To 
my knowledge I have not received that, I do not know that the 
committee has; I am very serious your assessment of those 
questions and being able to do a deeper dive into the 
difference between private insurance and what happened with 
Medicare.
    I would like to zero in on one specific item that you 
mentioned in interacting with my friend, Mr. Van Hollen, about 
the cross-subsidization that is taking place right now for 
Medicare Advantage that is imposing higher costs on the 80 
percent of the people who do not have Medicare Advantage. My 
friend Mr. Ryan has a proposal that will, theoretically, hold 
harmless everybody 55 and over? What happens to their premiums? 
They will be paying this under the existing Medicare system; 
they will have the right to do this for 10 years, 20 years, 40 
years, some of them may be well beyond that. What happens to 
their premiums as a result of this shift to a smaller and 
smaller, and older and older, and sicker and sicker base? What 
is going to happen to what they pay each month?
    Mr. Foster. Yes, sir. There are two issues here. The first 
one is the differential, the higher Part B premium that people 
have to pay currently because Medicare pays a greater than fee-
for-service amount on behalf of Medicare Advantage enrollees. 
That differential is going to go away on its own because of the 
Affordable Care Act, which reduces the payment rates to the 
Medicare Advantage plans, so that is one issue.
    Mr. Blumenauer. That is not what I am talking about. I am 
talking about what would be the cost.
    Mr. Foster. No, I understand the second issue, which I am 
getting to; and that is a different question entirely, which is 
how is it structured so that you do not end up with a closed 
group of older and older people whose premium is at 25 percent 
of their cost, would skyrocket as their cost skyrocket. 
Chairman Ryan, you may wish to comment on the nature of your 
proposal, for example, of how that would be addressed.
    Chairman Ryan. Yeah, so CBO's analysis, because of the 
reforms we have put in the plans, there would not be any added 
burden to those remaining seniors. So there are ways of making 
sure that those who are staying in the current system do not 
see that sticker shock that you are talking about, and we 
included those reforms in our plan and CBO suggested as much. 
Dr. Price.
    Mr. Price. Thank you. Thank you, Mr. Chairman, and welcome. 
As a physician I can tell you that, regardless of what the 
ranking member says, the access care is in fact being 
compromised out there. Anybody who holds any town halls with 
seniors and asks if anybody is having trouble finding a 
physician to take new Medicare patients with 10,000 Americans 
reaching Medicare age every single day; the answer is yes. So 
access is already compromised.
    Mr. Foster, on your chart that is on Page 5 in your written 
testimony, this differential of cost in health care, the rising 
cost in health care, and there is a 2.7 percent difference 
between gross domestic product increase and health costs. You 
said in your testimony that that was innovation and intensity 
use of the system, which is access, right? I mean, it is 
basically access to a higher quality of care.
    Mr. Foster. That is correct. It also includes the excess 
medical price component.
    Mr. Price. Now, the president's law that was passed, one of 
the major goals was to decrease costs in the health care arena, 
and was to get that delta down, get that difference down, and 
one of the major entities charged with doing that is the 
independent payment advisory board, correct?
    Mr. Foster. Yes, sir.
    Mr. Price. And that independent payment advisory board 
would be comprised of 15 members, unelected folks paid by the 
federal government, none of which have to be actively 
practicing physicians, is that not correct?
    Mr. Foster. That provision I do not remember. I am sure you 
are right.
    Mr. Price. That is correct, none of them have to be 
actively practicing physicians. Last year I asked you before 
this committee what the effect was decreasing payments to 
physicians in terms of access, which is the way that the 
independent payment advisory board will gain the savings that 
they are charged with gaining. You said the potential access 
problem could be very serious. Do you still believe that?
    Mr. Foster. Yes, sir. Under current law, with everybody's 
favorite sustainable growth rate formula, a reduction in 
physician payment rates for Medicare of about 30 percent will 
be required in about a year. Now, you just narrowly avoided one 
at the end of this month. If that sort of payment reduction 
were actually to occur, then I think there would be very 
serious consequences for access to physicians.
    Mr. Price. Even if the sustainable growth rate, or that 
cliff does not occur, the independent payment advisory board 
has the power in current law, correct, if it is fully 
implemented, to decrease payments to physicians for services 
rendered, in fact that is how they are charged with decreasing 
the cost of health care, right?
    Mr. Foster. Yes, within limits.
    Mr. Price. And that limit, at this point, is 1 percent of 
gross domestic product, as opposed to 2.7 which is the current 
difference, correct?
    Mr. Foster. Not exactly. They do not have to address a 
growth rate differential to the tune of more, I believe, it is 
1 percent initially, then 1.5 percent. In the longer term, the 
target rate for growth rate is gross domestic product plus 1 
percent.
    Mr. Price. Plus 1 percent, that is correct. Has anything 
changed since you were here last year in the president's 
recommendations regarding that? Are you aware?
    Mr. Foster. One of the president's budget proposals would 
lower that to make it GDP plus .5 percent.
    Mr. Price. So that would be a lower potential payment to 
providers?
    Mr. Foster. If the IPAB, the Independent Payment Advisory 
Board, chose to address the excess growth by further reductions 
in provider payment rates.
    Mr. Price. And if they were to do that, the president has 
recommended that more money be saved in the health care arena. 
If they were to do that by decreasing payment to providers 
then, in fact, that would compromise access even more, would it 
not?
    Mr. Foster. It has the potential. As you know, I have been 
worried under current law, with the changes in the long term of 
the payment rates, the effect that could have on access and 
quality of care.
    Mr. Price. As my former colleagues, and physician 
colleagues, who are having real problems currently taking care 
of seniors. I want to revisit in my few short seconds 
remaining, what you said about the difference between now and 
pre-1965, and that is that there is a subsidy, there is a 
federal subsidy for health care. You said, quote, ``There is a 
viable market currently present, and it is not only present, 
but thriving.'' That is the kind of subsidy that we have been 
recommending on our side of the aisle for saving Medicare, is 
that not correct?
    Mr. Foster. Well, yes, there have been many Republican 
proposals to emphasize more private health plans, such as the 
Part D prescription drug plans.
    Mr. Price. And the subsidy changes the whole dynamic, does 
it not?
    Mr. Foster. Yes, if it is voluntary, you cannot make it 
work without a subsidy.
    Mr. Price. Thank you.
    Chairman Ryan. Thank you. Mr. Yarmuth.
    Mr. Yarmuth. Thank you Mr. Chairman. Thank you both for 
your testimony. By the way, for the record I checked life 
expectancy in 1965 was right at 70 years old, just for the 
record. Mr. Foster, have you calculated how much money would be 
saved by Medicare with the death panel?
    Mr. Foster. With the death panel.
    Mr. Yarmuth. I am just kidding. I am just kidding of 
course. He was asking about the IPAB, so I thought I would 
throw that in. Mr. Goss, just some informational questions. 
What is the impact on both the cash flow of Social Security and 
the potential impact on the longevity of the early retirement 
system we now allow people to take partial benefits starting at 
62 and a half?
    Mr. Goss. Thank you, excellent question. If I might just 
add per chairman's earlier question, life expectancy at 65 in 
1940 for people 65 in that year was 14 years. By the year 2010, 
life expectancy for 65 year olds is now 20 years, and we 
estimate that by the year 2085 that will grow to 24 years.
    Currently the Social Security program has, what we call, 
the full retirement age or normal retirement age where you get 
your full standard benefit paid to you on a monthly basis from 
that point forward for life; right now that full age is 66. 
People are allowed to begin receiving their benefits, and start 
receiving as early as 62. If they do that, then the benefit 
they receive is 75 percent of what they could get on a monthly 
basis if they waited the extra four years. That 25 percent 
reduction, and for every age in between, and even up to 70 we 
have such increments, are calculated on a quote unquote 
actuarial basis, so the trust funds are essentially held 
harmless regardless of the age at which people select.
    Mr. Yarmuth. Okay, and it does not matter on cash flow 
either?
    Mr. Goss. Well, cash flow does matter. If people were, for 
example, right now, the roughly half of individuals who start 
receiving benefits at age 62, if next year nobody started at 62 
and they all waited until 66, we would have a four year period 
in which we would not have any new beneficiaries, so we would 
have a cash flow positive effect during that period, but over 
the longer term, throughout the totality of their lifetimes, 
the trust funds would be affected, exactly.
    Mr. Yarmuth. The projections that we see out to the 
longevity of the trust fund and so forth, up to 2036 and so 
forth, what kind of GDP growth rate are those based on, and 
what would, say, an additional percent of growth in GDP mean to 
the longevity of the trust fund?
    Mr. Goss. Very good question. We do not really project GDP 
per se, all by itself. We really project the amount of output 
per hour worked, and the reason that that is so important is 
because the growth rate in our population, the growth rate in 
our working age, the growth rate in our workers changes over 
time, and has decelerated quite substantially. Back in the time 
the Baby Boomers were entering the work force, we had the work 
force rising at 3 percent a year and that could allow us to 
sustain gross domestic product rates at very high rates if you 
add on another percent and a half for output per hour worked. 
We are now moving into a period where the growth rate in the 
labor force is about a percent now, and will be dropping down 
towards much less than a percent in the future. So as we go on 
to the future we project a gross domestic product, even 
maintaining the same level of productivity increase per hour 
worked by our workers, will drop down to less than 2 percent 
per year on average, and that is not a bad result; that is just 
what happens from having a slower growth rate in the number of 
workers in our workforce.
    Mr. Yarmuth. Okay, Mr. Foster, quick question on Medicare 
Advantage. Do you have figures on the actual expenditures per 
beneficiary in Medicare Advantage versus standard Medicare, or 
conventional Medicare? It is 12,000 I know, I assume in 
conventional Medicare that is the number we are dealing with. 
What is the Medicare Advantage number?
    Mr. Foster. Prior to the changes in the Affordable Care 
Act, as I believe Representative Van Hollen mentioned, the 
differentials could be as high as 40 percent, even higher in 
Puerto Rico, but anywhere between 100 and 140 percent would be 
the Medicare Advantage payment rates, and it varied around the 
country by particular area.
    Mr. Yarmuth. Is there any evidence of cherry-picking as a 
cause of some of that, or all of that differential?
    Mr. Foster. Back in the days before there was risk 
adjustment, that was a major problem, that plans could attract 
healthier than average beneficiaries, but get paid for average 
ones. With risk adjustment, that reduces, substantially, that 
ability. Now, there is still some ability, and we have to work 
hard at CMS to prevent benefit formulas that would tend to 
steer people away from that plan, if for example, they have a 
high likelihood of developing cancer or having cancer. So we 
have to make sure that these are not discriminatory benefit 
formulas, but the problem is greatly reduced compared to what 
it had been.
    Mr. Yarmuth. Thank you Mr. Chairman.
    Chairman Ryan. Mrs. Black.
    Mrs. Black. Thank you Mr. Chairman. Mr. Goss, I want to 
turn to the subject that has not been discussed very much, but 
your testimony on disability insurance because that program, 
and, obviously, the other programs are out there to be 
concerned about, but this program is going to be affected much 
sooner than the others. I think it is interesting to note that 
it was created back in 1956 when physical labor was greater, 
and we now have more technology, and so you would anticipate 
that maybe those rolls would have shrunk a little bit; however, 
we have seen the opposite occur. As a matter of fact, I see 
here that since 1990, which is 21 years, spending on disability 
insurance outlays have grown by 420 percent, which is just 
remarkable, faster than Social Security as a whole. Can you 
give me any idea about why this program has grown so much?
    Mr. Foster. Absolutely. This is a topic that we actually 
explored with the House Ways and Means Committee a couple of 
months ago and looked at quite carefully. It is really quite a 
remarkable story, and thank you for raising it. Over the last 
25 years, two things have fundamentally happened that are quite 
dramatic. The probability of women in our workforce working, 
and working consistently, has expanded tremendously, and with 
that the percentage of women in our country who are insured to 
potentially receive disability insurance benefits, should they 
become impaired, has increased to a level of virtual parity 
with men. In addition, at the same time, the probability for an 
insured woman to become disabled and start to receive our 
benefits, which used to be much lower than the probability for 
men who are insured, has also moved up to virtual parity with 
men. The combination of these two has resulted over the last 25 
years, if you look at the curve, of the cost of the disability 
insurance program, it has risen quite dramatically.
    The good news on this, though, is now that women are 
virtually at parity in terms of both insured status, and 
probability of becoming disabled with men, that we have 
realized that that massive increase in cost for disability and 
we do not expect women to continue up above men; we expect that 
they will remain at about the levels they are at in the future.
    The other really important factor about disability is that 
exactly what we talked about regarding the effect of the drop 
in the birth rates making the baby boom loom so large for 
retirement over the next 20 years, and that has already 
happened. Because the Baby Boomers now are centered between 
about ages 45 to 65, which is the prime disability beneficiary 
age. So right now we are kind of at the peak of the disability 
program regarding the effects from the demographics going 
forward.
    Mrs. Black. So given that, and we are looking at it going 
bankrupt in 2016, can you give me some idea of what we can 
expect there, are the beneficiaries just going to get less? 
What is your recommendation for the future?
    Mr. Goss. Well, the Congress has had a very interesting 
approach, and we do have separately the OASI, Old Age Survivors 
Insurance Fund, and the Disability Insurance Trust Fund, and 
that was set up specifically to make sure that you all would be 
monitoring what is happening in the disability insurance 
program, and that is really important. Back in 1994 we were 
approaching a point where the disability insurance programs 
reserves were about to run out. Exactly the same situation we 
are now facing, somewhere between 2016 and 2018. At that time, 
the Congress said, well, let's not let that happen because the 
OASI insurance trust fund was in much better shape, so they 
simply passed a very simple reallocation of some of our tax 
rates between the two funds that brought the financial status 
of the two funds back into closer parity. That same option 
certainly will be on the table as we approach 2016, 2017, 2018 
to potentially do that, in effect buy us time until 2030 to 
have major reforms really impact the system as a whole. If that 
is not done we will face, in a very short period of time, the 
situation where we could be in a position of not having the 
reserves, taxes only accounting for about 86 percent of the 
cost of the program.
    Mrs. Black. And it seems again, what we are doing is 
robbing Peter to pay Paul, which I do not have time because I 
know I am going to run out here, but looking at the payroll tax 
bill that was just passed, you said that by law the money had 
to be moved from the general fund, but then what happens to the 
general fund? Where does that money come from? Is that put on 
the bottom line of, again, a debt?
    Mr. Goss. Well in a current year where, on the margin, we 
are running a substantial general fund, unified budget deficit 
because the payroll tax holidays are worth something slightly 
in excess of $100 billion per year, that simply adds to the 
unified budget deficit, and it requires that much more of 
borrowing, but that is, I guess, what fiscal stimulus looks 
like in a down economy.
    Mrs. Black. Yeah, and I say again, we move one to the 
other, robbing Peter to pay Paul. Thank you.
    Chairman Ryan. Thank you. Ms. Bonamici.
    Ms. Bonamici. Thank you Mr. Chairman. Mr. Foster, thank you 
for your testimony today. I think that we all can agree that 
the more we can contain costs, the more we can preserve 
benefits. I wanted to ask you about Part D and prescription 
drug benefits. We have seen the Department of Veterans Affairs, 
for example, successfully negotiate drug prices with some 
estimates showing that the VA's drug prices are up to 48 
percent lower than Part D prices. So as Congress looks for ways 
to address cost containment while preserving the Medicare 
guarantee for seniors current and future, should we be looking 
at providing the Medicare program disability to negotiate drug 
prices, and if so how much can we save?
    Mr. Foster. The Department of Veterans Affairs has a 
special deal where for their programs they get the lowest drug 
prices of any that is out there by law. So they may negotiate 
pretty well in addition, but they also get the benefit of the 
statutory provision. It is tough for Part D, which is a 
straight negotiation, to match that kind of level.
    Now, the Part D plans do negotiate very effectively, but it 
is not the same thing as an administratively price set, for 
example, for most of fee-for-service Medicare services. Now, 
there could be ways to do this. For example, the law expressly 
prohibits negotiation by the part of the government for Part D 
drug prices. If we had that authority to negotiate with 
manufacturers directly, then you have to ask, okay, what can we 
offer the manufacturers? Can we, at the federal level, offer 
them a drug formulary that will include this company's drugs at 
a preferred tier? Now, that happens that all the times with the 
individual Part D plans, but for us to do it, we would 
essentially have to pull the rug out from underneath the 
individual plans. Not to say it could not be done, but it would 
be challenging. Without that option, to include the formulary, 
the promise of what do you get in for return, our negotiation 
probably would not accomplish much.
    Ms. Bonamici. But if we could replicate what the VA is 
doing, we could see significant savings, is that correct?
    Mr. Foster. Maybe. That is a tough one, too, because for a 
small slice of the market, the drug companies have to provide 
their best price of anywhere in the country to the VA. If they 
now have to do the same thing on behalf of another 30, 40 
million Medicare beneficiaries, can they still afford to offer 
that best price wherever it is going, or would they have to 
raise it? We would probably get some savings out of it, but 
maybe not as much as might be apparent at first glance.
    Ms. Bonamici. Thank you, and Mr. Goss, in your testimony 
you referenced various options for addressing Social Security's 
long-term funding challenges, and it is critical that we make 
the point here that there are responsible ways to address these 
challenges that truly protect Social Security without putting 
our seniors at risk, but I wanted to focus on the issue of the 
payroll tax cut for a moment. Now, over the past year there has 
been a lot of discussion throughout our many communities about 
the growing income gap, and the stagnant, or in some cases, 
even shrinking wages seen by the lower and middle-income 
levels, while at the same time we have seen our top wage 
earners take home larger paychecks. So in light of the fact 
that currently about 85 percent, rather than the traditional 90 
percent, of earnings is covered, how is this growing wage 
inequality impacting our Social Security revenues?
    Mr. Goss. Well, there is no question, but that has had a 
negative effect and it was back around 1983, 1984 where, 
indeed, as you indicated, roughly 90 percent of all the covered 
earnings of our workers were in fact under the taxable maximum. 
What is interesting is that since that time the taxable maximum 
has been indexed to rise with the average wage, but exactly, as 
you indicate, there has been a growing, sometimes referred to 
as dispersion of earnings, so that we are now back to a level 
of about 83 percent of all the earnings that are covered by 
Social Security actually falling below the taxable maximum.
    A number of proposals have been put forth, including the 
Simpson-Bowles Commission, the Rivlin-Domenici, bipartisan 
policy center plan, and many others have put forth proposals to 
raise the taxable maximum, and those cases both to raise it 
very gradually up to get back to the 90 percent of covered 
earnings being taxable, and that would alleviate approximately 
one-fourth of the long-term, 75 year problem that Social 
Security is facing.
    Ms. Bonamici. Just to clarify, if we went up to 90 percent.
    Mr. Goss. If we went up to 90 percent, actually over very 
gradual period that would be between now and about 2050.
    Ms. Bonamici. Thank you. I yield back my time, Mr. 
Chairman.
    Chairman Ryan. Thank you. Mr. Flores.
    Mr. Flores. Thank you Mr. Chairman. Gentlemen, thank you 
for joining us today. I have a macro question I would like each 
of you to answer, if you could, before we get into some of the 
weeds. The assumptions that have come out in each of your 
reports assume a virtually unlimited ability of the federal 
government to finance the unified deficits. In other words, 
that we are going to have to take, in order to call on trust 
funds, we have got to be able to issue more debt to be held by 
the public. I think each of your reports assume that, but you 
are not charged with any sort of qualitative analysis as to 
whether or not that can actually be done, is that correct?
    Mr. Foster. That is essentially correct. The law provides 
for considerable general revenue financing for Medicare, and we 
assume that the law will be followed.
    Mr. Flores. Right.
    Mr. Foster. We do not do a separate analysis, generally, of 
the implications for the economy at large.
    Mr. Flores. Okay, Mr. Goss?
    Mr. Goss. I would want to add that for the entirety of the 
Social Security trust funds, and for Part A of Medicare, in 
fact the law is explicit that if we reach the point where the 
trust fund reserves exhaust, then unlike budget scoring 
convention, which is held by CBO and by OMB, the excess cost 
over the revenue coming in would simply not be met.
    Mr. Flores. So the bottom line is the law says that they 
will be financed, the federal law, but we have not taken into 
account the laws of economics, which says that there is a 
natural limit above which a country, just like a family or 
business, can no longer finance itself.
    Mr. Goss. But if I may, in the case of Social Security 
trust funds and Medicare Part A, actually the law says that it 
would not be financed. If we reached the point in 2036 where 
the reserves are exhausted and we only have 77 cents coming for 
each dollar, that is all we will be able to spend. We do not 
have the borrowing authority to get the other 23 cents.
    Mr. Flores. Okay, so with respect to part of the trust 
funds, we could be violating the laws of economics even though 
the federal law says we are going to behave in a certain way. 
Let me go on, Mr. Foster, you were thoughtful enough to provide 
an alternative scenario to tell us what our actuarial 
liabilities would be in 2010. Do you have that number of the 
infinite time frame? What is the most updated number that you 
have for 2011? $34.8 trillion in 2010, what is that number 
today?
    Mr. Foster. I can get that for you, I do not have it at the 
top of my head.
    Mr. Flores. Okay.
    Mr. Foster. Let me tell you a different number that is at 
least similar.
    Mr. Flores. Okay.
    Mr. Foster. Which I do have.
    Mr. Flores. Equally scary, I assume.
    Mr. Foster. Well, it goes not in the happy direction, let's 
just put it that way.
    Mr. Flores. Okay.
    Mr. Foster. Currently, in the long range we project that 
Medicare costs would rise to about 6.2 percent of GDP and 
largely level off there under current law. If current law turns 
out not to be viable in the long range, under the illustrative 
alternative to current law, the cost of the program would rise 
to 10.7 percent of GDP.
    Mr. Flores. Thank you. If we could bring up chart three 
from Mr. Foster's testimony on Page 5.
    I will go ahead and start my question. I think the 
implication, and may have been explicitly said, but the problem 
we have with Medicare is the health care use and intensity part 
of the total health care inflation. Continuing the line of 
questioning from Mr. Van Hollen, let me give you some 
background. Our access and quality of health care is due to a 
continued investment in technology, drugs, medical schools, 
people, hospitals, equipment. You had expressed the view that 
there could be some uncertainty in the continuing desire of the 
private sector to invest in those resources under a premium 
support plan. Let's talk about the alternative that has been 
proposed in the Affordable Care Act; and that is you are going 
to have this unelected, unaccountable board called IPAB that is 
going to artificially determine what providers get paid. What 
does that do to the uncertainty of the private sector, wanting 
to invest in those? Think about it this way: What would it 
cause an 18-year-old to decide when they have graduated from 
high school who wanted to go to medical school when, at the end 
of the day, their compensation is going to be set by this 
unelected board? So tell me what uncertainty you see coming in 
to the investment cycle and to access quality of health care 
with an IPAB scenario?
    Mr. Foster. Well, that is a good question. I do not think 
anybody has a good answer to it.
    Mr. Flores. Well, let's ask it this way. Would it be better 
or worse than the premium support alternative?
    Mr. Foster. The IPAB, by its nature, does not give you a 
certain outcome. Now, under current law, with the existing 
productivity adjustments and other provisions, we project that 
the IPAB will not have a big effect because everything else 
already lowers the cost rate so much. That may end up not being 
sustainable, and if it does end up being unsustainable, then 
the IPAB would have to take effect, and then you have the 
uncertainty you talk about.
    The big question you have for premium support or under the 
IPAB, or under the current law payment update reductions, all 
of which sends a fairly clotty signal to the world out there: 
What is the future of health care going to be like? Nobody 
knows the answer to that. That certainly increases the 
uncertainty associated with what should we be doing? If I am a 
developer of new medical devices, do I want to assume I will 
have a guaranteed market no matter how expensive my new device 
is going to be, or should I think differently and think the 
pressure is going to be on, I need to develop something that is 
really pretty good and costs a lot less than what is currently 
being done. That remains to be played out.
    Mr. Flores. I think the logic of the American people would 
suggest that private sector solution will be much better than a 
government-imposed solution. Thank you, I yield back.
    Chairman Ryan. Thank you. Mr. Pascrell.
    Mr. Pascrell. Thank you for having the hearing Mr. 
Chairman. Thank you two gentlemen for your great service. Let 
me start by saying this. Projected Medicare costs over the next 
75 years, I do not know how reliable that is, by the way, when 
we see what happened in the last 10 years, but those projected 
costs are about 25 percent lower because of provisions in the 
Patient Protection and the Affordable Care Act; that was the 
purpose.
    So I made this point several times that changing the 
entitlement was part of one-third of the whole health care act; 
so we have addressed it, and the argument that we have not 
started that process is absolutely erroneous. We have to come 
down to this: Are entitlements essentially good? Do they need 
changes? Well, we have done that. We have changed Social 
Security, we have changed Medicare, but we did not throw out 
the essential part of guaranteed benefits. Now, I am hearing 
that apparently the only way we can sustain Social Security and 
Medicare, although, the dates we can argue over, but dates will 
be coming in the future, is to change the essential parts. This 
is what this argument is all about, and I would say to you that 
this is all in an effort to change how we look at these 
guaranteed benefits, so that we can sustain both of those 
programs.
    When I talk to the seniors in my district, they appreciate 
the way Medicare and Social Security work, and as a member of 
the Ways and Means Committee, I take what they say into account 
when we reform Medicare and Medicaid. I cannot reiterate this 
enough: health care reform was entitlement reform. Not only was 
it good for the Medicare program and saving money, but it also 
reduced costs for beneficiaries. The only action this majority 
has taken on entitlement reform was to vote to repeal health 
care reform. That is it. Case closed.
    On the other hand, the other side has a plan to turn 
Medicare into a voucher program which would hurt beneficiaries, 
in every report that I have seen would increase the cost of 
out-of-pocket money needed.
    Here is my question, Mr. Foster. Health care reform, which 
is fully paid for, very different than what happened back in 
2003 with your prescription drug bill, which was not paid for, 
well you did not pay for anything back in those days, is not to 
blame for Medicare's solvency issues, and that it actually 
extended the life of Medicare for eight years. In stark 
contrast to the savings in the Affordable Care Act, the other 
side's Medicare bill in 2003 cost $400 billion, and that was 
not paid for.
    So let's be clear, while we may disagree on many issues, we 
can all agree that the status quo is not sustainable. That is 
why health care reform started to give Medicare new tools, 
tools like delivery system reforms, some of which have been 
outlined by the ranking member, and payment reforms are going 
to be tested by Medicare, and not only will the best tools be 
used by Medicare, but the private sector will likely adopt 
these same strategies. Mr. Foster, can you tell me how health 
care reform is already helping Medicare to test new strategies 
like the accountable care organization in order to change the 
incentives built into the current system?
    Mr. Foster. Sure, I would be glad too. Let me first say 
that I am a great believer in the activities and the actions, 
and the debates, of men and women of good will working 
together, despite different philosophies, to achieve solutions 
for the different problems that face the country. Anybody would 
only have to look at the example of Senator Bob Dole and 
Senator Pat Moynihan to see one of the very best such 
practices. I will get off my soapbox now and answer your 
question. Under the Affordable Care Act, of course, there are a 
lot of provisions designed to set up, encourage the design, the 
testing, the evaluation of innovations and delivery systems and 
payment methods. A number of these are just getting underway. 
For example, the Medicare Shared Savings program for 
accountable care organizations, and the medical homes. In the 
new center for Medicare and Medicaid innovation, almost 
anything is potentially triable. It cannot continue if it is 
not working, but you can try different innovations, different 
techniques, and see if they might have some hope of reducing 
the cost of Medicare or increasing the quality of care or both. 
That is at the early stages, and I think it is a good thing; 
but the country needs to figure out how we can achieve these 
goals, even though so many things we have tried to date have 
not worked in the past.
    Chairman Ryan. Thank you. Mr. Huelskamp.
    Mr. Huelskamp. Thank you, Mr. Chairman. A couple questions, 
I guess, first for Mr. Foster. I had a follow-up question from 
last year, we discussed a little bit, I am sure you do not 
recall, but a number of providers that would likely disappear 
in the next few years because of the president's health care 
system. Can you remind us what those figures are and have they 
changed since your testimony last year?
    Mr. Foster. Yes, I would be happy to do that. No, the 
projection has not changed. We simulated, taking all existing 
hospitals, home health agencies, and skilled nursing facilities 
in the country, what would happen to their total facility 
margin, that is basically their profit margin for the entire 
organization, not just off their Medicare revenues. We 
simulated what would happen as a consequence of the slower 
payment updates for Medicare under the Affordable Care Act. 
What we found was that by 2019 another 15 percent of all of 
these facilities would end up with total facility margins below 
zero, other things being equal, solely as a result of the 
slower payment updates. We extended the projection and by 2050 
the answer was 40 percent, and would go to a negative margin. 
Now, they can do some other things, they can try to clean up 
inefficiencies, they can try to be more productive, but if 
nothing else changed, that is what would happen.
    Mr. Huelskamp. And those are nationwide figures.
    Mr. Foster. Yes.
    Mr. Huelskamp. I asked you last year a little bit. Do you 
have that data to extrapolate that to rural areas where we 
actually lack providers and are losing providers already? Do 
you have the data to provide that in a future response to me?
    Mr. Foster. Yes, if your staff could get together with us 
so we could do that.
    Mr. Huelskamp. Okay, well I appreciate that. Second line of 
questions would be in reference to the funding warning from the 
board of trustees. They issued a funding warning last year 
again, is that correct?
    Mr. Foster. That is correct.
    Mr. Huelskamp. Okay, and under federal law it is a 
requirement that presidents should submit suggested corrections 
within 15 days after submitting his budget. Did he do that?
    Mr. Foster. Not to my knowledge. That is not to say it did 
not happen, but not to my knowledge.
    Mr. Huelskamp. Okay, well not to my knowledge either. I do 
not know if you participate or listen in, but are you present 
at the board of trustees meetings?
    Mr. Foster. I am present, yes.
    Mr. Huelskamp. Okay, and that would include Secretary 
Geithner, Secretary Sebelius, Secretary Solis, and four others. 
Have they expressed any concern why the president has failed to 
lead and provide what is required under the law which is give 
us some solutions. What has been the discussion amongst those 
members of the board of Medicare trustees?
    Mr. Foster. To the best of my recollection, the discussion 
has not involved the statutory requirement on the reaction to a 
Medicare funding warning. It is much more focused on the 
financial status of the Medicare and Social Security trust 
funds.
    Mr. Huelskamp. So they have expressed no concern, at least 
in those meetings, as far as the failure of the rest of the 
administration for not meeting the requirements of the law and 
giving some direction on how to solve this serious funding 
warning?
    Mr. Foster. That is correct.
    Mr. Huelskamp. That is pretty disappointing to me. Again, 
we have seven members of this board of trustees, Secretary of 
the Treasury, who has been before our committee, Secretary 
Sebelius as well, Secretary of Labor and four others, and we 
still fail to have any solutions being provided by them, which 
is a very serious warning. I know others in the committee have 
mentioned that there have been few, if any people, that are 
concerned about the future and are not recognizing the problem. 
Well, apparently the administration is not. Not only not 
recognizing the problem, but refusing to follow the law and 
provide some corrective suggestions, corrective legislation. Do 
we anticipate, Mr. Foster, or have you heard anything within 
the Medicare board of trustees whether they might provide a 
solution this year from the administration?
    Mr. Foster. The board of trustees traditionally has not 
acted in policy matters to come up with recommendations to 
specific things to change. They call attention to the financial 
status, they call attention to the need for change, but they do 
not make recommendations. Now, others in the administration, of 
course, the president's budget that was just released has a 
number of Medicare proposals in it, but these tend to stem more 
from OMB, and from CMS, and from HHS, and not from the board of 
trustees.
    Mr. Huelskamp. Okay, but again, you recognize the board of 
trustees, obviously, are folks that, like Secretary Sebelius, 
who have a responsibility for overseeing these programs and are 
presenting no solutions. I am just frustrated by that, and I am 
just curious if that came up in a board of trustees. The folks 
that are supposed to oversee that for millions and millions of 
elderly retirees, and we know we have a problem, but we just do 
not see a solution come out of the administration. I appreciate 
the testimony. I will get back to you on the loss of providers, 
particularly in rural areas, and I look forward to the 
research. Thank you.
    Chairman Ryan. Thank you. Ms. Schwartz.
    Ms. Schwartz. Thank you, Mr. Chairman, and I appreciate the 
testimony. Mr. Foster, I just wanted to follow up on some of 
the discussion we have already had about Medicare and about 
some of the potential cost savings. You certainly did point 
out, as did Mr. Goss, the demographic challenges we have with 
so many Baby Boomers coming online. It is a challenge for us to 
meet our commitment to our seniors, both on Social Security and 
on Medicare, but the real question seems to me, as we look at 
the demographic challenges, and the cost challenges, 
particularly under Medicare, I believe that we start with the 
principle that we are going to meet our commitments to our 
seniors and to our future seniors to provide health care 
coverage which is called Medicare. It has been one of the most 
successful programs we have ever had in this country, and 
keeping seniors out of poverty and able to access health 
coverage, so that is the beginning. The work is how do we 
actually contain the rate of growth in costs, and meet this 
obligation? How do we get better value for our dollars?
    So, Mr. Foster, you actually have pointed out that there is 
good work being done already under the Affordable Care Act, and 
that these important steps in advancing payment structures, 
different models, that give providers really incentives to 
provide greater quality for less cost; well, many of them are 
out there, they are working, and they are being evaluated in a 
way that potentially was not true, nor did we have that data, a 
year, two, or three years ago. I know that you have said it is 
difficult sometimes to assess the actual cost savings, but I 
wanted to just point out a few that you have pointed out 
yourself.
    We see innovative payment and delivery service models in 
the accountable care organizations, in patients that are in 
medical homes, and there are models all across the country 
there, in improved care coordination for individuals, 
particularly with multiple chronic health conditions, the cost 
savings there, and the highest cost cohort of patients, if we 
are going to call it that, is significant. Improvements of 
coordination post acute care is one of the areas that we know 
is extremely ripe, if you want to say, for cost savings, 
bundling of payments, and pay for performance. You have made 
comments, and I have seen in the press about the Partnership 
for Patients, reducing the hospital-acquired infections and 
improving transitions of care, again, post acute care, and 
assisting individuals in making informed health choices.
    I did want to point out one particular program that has 
shown such strong cost savings as to be a model for us to move 
on. This is part of the innovation models; it is called 
Independence at Home. It is a program that reduces spending by 
providing coordinated care in patients' homes. The model for 
this initiative comes out of the veteran's home-based primary 
care program that operates in 200 locations in every state, 
including the District of Columbia. We have seen 11,000 
patients show, and these are veterans, after they have been 
moved to this Independence at Home model, the hospital days 
dropped by 62 percent. This is not a cost saving on the 
margins. This is substantial, this is 62 percent. Nursing home 
days went down by 88 percent. Again, this is not on the 
margins, this is really substantial savings. The overall costs 
fell by 24 percent.
    So it are these kind of initiatives, and actually, a 
research at the University of Pennsylvania said if we could 
implement this model across Medicare you could save $30 billion 
annually. So this is just one, and I have not even given the 
numbers for some of the other models.
    So as we look at this commitment that we have made to 
seniors in this country, and the alternative model that was 
presented in the Ryan budget last year, we do not know yet 
exactly what is going to be presented in this year's budget, 
that basically said we cannot do this, we cannot achieve the 
kind of savings, instead we are going to have to shift costs to 
our seniors to take many of the burden on increase in cost. 
Could you just speak to our ability, or the capacity, for us to 
move some of these innovative homes, to scale them up, to make 
them more universal under Medicare and save tens of billions of 
dollars and meet our commitment to our seniors?
    Mr. Foster. As you ran down your list, it is a good 
reminder of how many different initiatives are out there, and 
how many promising efforts there are, many of which may turn 
out to be successful. I remain optimistic, and hope that turns 
out to be the case.
    Under current law, if these initiatives either improve the 
quality of care without raising costs, or reduce costs without 
harming the quality of care, then Secretary Sebelius can move 
them to the national scale without any further legislation.
    Mr. Schwartz. And moving to the national scale could be 
huge cost savings. Thank you.
    Chairman Ryan. Thank you. Mr. Stutzman.
    Mr. Stutzman. Thank you Mr. Chairman, and thank you to both 
of you for being here. I think this is probably one of the most 
important issues that we can discuss, as far as the federal 
budget, because of the size of both of these programs, 
including Medicaid. So I appreciate your input today, it has 
been very helpful.
    I guess I would like to start on the Social Security side. 
Mr. Goss, if you could talk a little bit about how the payroll 
tax cut has affected Social Security in the short-term, and the 
outlook, if that particular rate would stay the same. Then also 
if you could touch on what was the largest general fund 
reimbursement the Social Security trust fund had received, and 
then also what is the combined amount for the past two years?
    Mr. Goss. Thank you. As discussed earlier, the nature of 
the laws that have been enacted, both for the 2011 payroll tax 
holiday, and now the one that was been extended through the 
full calendar year of 2012, do require that all of the 
reductions on the payroll taxes get reimbursed fully from the 
general fund of the Treasury, so Social Security's financial 
status and the trust funds are indeed unaffected by it. The 
unified budget, the overall budget of the country, however, is 
clearly not unaffected, and this is to the tune of between $100 
and $110 billion is the extent to which the payroll taxes were 
reduced for 2011, and will also be for 2012. Again, those 
reductions in payroll tax rates will not cause the trust funds 
to get a penny less because they will be reimbursed from the 
general fund of the Treasury and that does, on the margin, mean 
that there will be that much more borrowing from the public in 
this period, as would be true for any fiscal stimulus approach 
that we might use to take.
    Mr. Stutzman. It is a squeeze either way. It squeezes the 
general federal budget because of the reimbursement back to the 
Social Security trust fund, is that correct?
    Mr. Goss. It certainly does, I mean, presuming that the 
intent of the payroll tax holiday was not really to just cut 
money going to Social Security, which it did not do, quite 
explicitly, but rather to have the general fund of the Treasury 
provide money into the pockets of the 150 million workers in 
the United States. It has succeeded in doing that last year, 
and is succeeding in doing it this year, too.
    Mr. Stutzman. In your analysis of the middle-class tax 
relief and Job Creation Act, states that it would have been a 
negligible effect on the long-range actuarial balance. It says 
this because of the general fund transfer to the Social 
Security trust fund makes up for the lost revenue. Could the 
federal government just issue bonds to the Social Security 
trust fund and eliminate the long-term actuarial deficit?
    Mr. Goss. In theory, it certainly could, and I am sure Rick 
would agree with me on this, basically what that would do is in 
effect put the Social Security OASI and DI trust funds in 
essentially the same position as we now have for the Medicare 
SMI funds, which are guaranteed to receive general revenues on 
an as-needed basis to pay the bills. Social Security, the OASI 
and DI trust funds and the Medicare Part A trust funds are 
really special and different in that they do not have that kind 
of authority now, which does create extra pressure for members 
of Congress and every president to really pay even closer 
attention to the cost of those programs in the future.
    Mr. Stutzman. Thank you. Mr. Foster, I appreciate your 
testimony and a couple of the examples that you had 
illustrated. I have heard from doctors back home that they are 
going to just not take Medicare, Medicaid patients, and go to 
just self paid, whether it is self-insured or cash patients. 
Could you talk a little bit about that? I know it is in your 
testimony, but what does that do long term? I understand that 
Medicare has to keep its costs down, but that cost does get 
passed on to someone else. I was interested in your chart, and 
I will go back and look at it later, but the increase in those 
who are self-insured and self-pay is going up faster, is that 
because of the cost of Medicare and Medicaid is staying lower 
because the government can control that, so that cost gets 
transferred to the upper side.
    Mr. Foster. I am sorry, tell me again the self-insured you 
were talking about?
    Mr. Stutzman. Doctors who are not taking Medicare and 
Medicaid patients are now going to be taking just self-insured, 
they are seeing that as a benefit to their particular practice. 
My question is are we driving more cost to those physicians who 
are still taking Medicare and Medicaid patients to those who 
are self-insured and those who self pay because we are keeping 
costs down? That cost is getting transferred to those other 
patients.
    Mr. Foster. That is very hard to measure, but it is almost 
certainly happening in hospitals and other providers, including 
physicians, and to the extent that if Medicare rates become 
inadequate over time you would expect to see more of that. We 
have already seen that to a much greater degree for the 
Medicaid program where there is a lot of evidence that 
individual enrollees can have trouble finding doctors in 
particular, specialists in particular.
    Mr. Stutzman. Thank you.
    Chairman Ryan. Thanks. Ms. Wasserman Schultz.
    Ms. Wasserman Schultz. Thank you Mr. Chairman, and it is 
good to be with both of you, thank you so much for joining us. 
Mr. Foster, I want to focus on the out-of-pocket costs for 
Medicare beneficiaries related to the Affordable Care Act and 
the effect that it has on those out-of-pocket costs. Our 
colleagues on the other side of the aisle talk about how they 
want to reduce costs for seniors, but it is hard to see how 
they really mean that when we know that the Affordable Care 
Act, at least by your projections, will actually bring costs 
down in terms of seniors out-of-pocket costs. Can you describe, 
in Medicare fee for service, whether and how the Affordable 
Care Act reduced out-of-pocket costs for seniors over the next 
few years?
    Mr. Foster. Sure, I would be happy to. Under the Affordable 
Care Act, of course, payment rates to almost all fee-for-
service provider categories are reduced, and what beneficiaries 
have to pay for deductibles and co-insurance are tied to the 
prices that Medicare pays for the service, so if that price is 
lower, then the co-insurance or the cost-sharing requirements 
are also lower. For beneficiaries in fee-for-service Medicare, 
that makes a pretty big difference over time. I have the 
numbers but not with me, but we have a memo on this subject if 
you would like to see it, and the reductions are in the 
hundreds of dollars per year, so it is not trivial.
    It is only fair to add that for Medicare Advantage 
beneficiaries the opposite is true, because the payment rates 
are coming down, that means the extra benefits that plans have 
been able to offer are also going to come down, and that means 
that the beneficiaries or the enrollees will have to pay more 
out of pocket, and that could also be in the hundreds.
    Ms. Wasserman Schultz. But right now, all Medicare 
beneficiaries are paying for those benefits that Medicare 
Advantage beneficiaries are receiving, and so with the costs 
for non-Medicare Advantage beneficiaries would be reduced as a 
result of that shift?
    Mr. Foster. Yes, the Part B premium, in particular, is 
roughly $4 a month higher than it would otherwise have been 
because of the higher cost associated with the law for Medicare 
Advantage plans prior to the Affordable Care Act.
    Ms. Wasserman Schultz. So in Medicare Advantage, you have 
Medicare beneficiaries who may well be benefiting from extra 
programs, and benefits, but you have people who are not getting 
those benefits paying for it?
    Mr. Foster. Yes, although there are different numbers of 
people, so the extra benefits are typically worth far more than 
the $4 a month that everybody has to pay in addition. Now, that 
is a policy issue, what you do about that, the law has already 
been decided. That will change over time, but your main point 
was that for fee-for-service beneficiaries, their out-of-pocket 
costs for premiums and cost-sharing requirements are coming 
down. For Medicare Advantage enrollees, they are going up.
    Ms. Wasserman Schultz. The numbers that I have seen, and if 
you remember these, or if you can confirm their accuracy, Part 
B premiums would decline by more than $200 per beneficiary by 
2019, co-insurance declines by more than $200 per beneficiary 
on average by 2019, and while Part D, the prescription drug 
beneficiaries will see a slight increase in premiums, those are 
substantially offset by the closure of the doughnut hole, which 
saves the average senior, I know in my district, more than 
$3,000. Is that about right?
    Mr. Foster. For people affected by the doughnut hole, that 
is right.
    Ms. Wasserman Schultz. Right, okay.
    Mr. Foster. And I would just want to emphasize, those are 
annual figures.
    Ms. Wasserman Schultz. Yes.
    Mr. Foster. Not monthly.
    Ms. Wasserman Schultz. Oh, yes, right, of course, but when 
you are living on a fixed income, several hundred dollars a 
year is a big deal. Women in my district who are seniors are 
living on about $12,000 on average a year, total, which a few 
hundred dollars matters a lot.
    Mr. Goss, just really quickly, I only have a minute to ask 
you this question, but the Ryan Republican road map released 
last year that would have proposed setting up private accounts 
by diverting Social Security payroll taxes, what was your 
estimate of the cost of diverting those payroll tax 
contributions and also how would that have impacted benefits?
    Mr. Goss. The design of the plan that Chairman Ryan put 
forth was to offer an option to individuals to accept a scaled 
amount of money going into personal accounts, and the offset to 
that was that they would be giving up on a portion of the 
benefits going forward, so it would be an option for 
individuals.
    Ms. Wasserman Schultz. It would have been a reduction in 
benefits?
    Mr. Goss. Well, in the design of the plan there would be a 
reduction in the general scheduled level of benefits overall 
under Social Security by altering the primary insurance 
formula, especially for higher income folks.
    Ms. Wasserman Schultz. As I said, as my time expires, when 
you only have about $12,000 available to you all year, any 
benefit cut is a serious impact on your life, and another 
example of how privatization of Social Security would be 
irresponsible. Thank you Mr. Chairman.
    Chairman Ryan. Thank you. Since I was invoked I will simply 
say the plan that I personally authored, it was not in a 
budget, increases the minimum benefit to make sure that no 
senior citizen falls beneath the poverty line, so those people 
at $12,000 a year would actually have an increased minimum 
benefit. More to the point, for a dollar that comes out of 
person's personal account, that was voluntary, that is made up 
for. Meaning if they lose a scheduled benefit, they get it on 
the upside for the money they get in their personal account, 
and at the end of the day they will end up with better benefits 
if they exceed the rate of return that they would otherwise 
have gotten in Social Security. The whole purpose of this idea 
is to improve and enhance people's benefits and to improve the 
floor of benefits so that no senior citizen falls below the 
poverty line, which is unlike current law.
    Ms. Wasserman Schultz. But Mr. Chairman, it may not have 
been in your budget. It was offered by your leadership as 
legislation, Mr. Sessions has introduced that legislation, so 
it certainly still on the table.
    Chairman Ryan. It improves and saves Social Security. Mr. 
Young.
    Mr. Young. Thank you Mr. Chairman. Thank you very much Mr. 
Foster and Goss for being here today, I have to say last year 
this was one of my favorite hearings, and same thing has 
applied this year, a lot of fact-based conversation and 
testimony. I thank you for your service to our president, to 
the Congress, and to the American people.
    First, I want to associate myself with the comments of some 
of my colleagues related to this trigger under the Medicare 
Modernization Act of 2003. Current law definitely indicates 
that when that 45 percent threshold is breached, meaning 45 
percent of financing for Medicare is no longer coming out of 
the dedicated Medicare funding stream and instead coming out of 
general revenues, then it is the president's duty under the law 
to provide some sort of corrective legislation. Did I fairly 
represent that from the expert here, Mr. Foster?
    Mr. Foster. Yes, sir.
    Mr. Young. Okay, and I also want to indicate that that 
deadline is in fact today, 15 days after submission of the 
president's budget, so that would be February 28th, which is 
today, correct?
    Mr. Foster. I will assume your calendar math is just fine.
    Mr. Young. So that is disappointing to me, and we need the 
president to lead on this area as much as any other area with 
costs going up 6 percent per year, and the Part A program 
scheduled to go bankrupt by 2024.
    Moving on to Social Security, Mr. Goss, I read an article 
not too long ago, the Senate majority leader indicated that 
within a couple of decades, 20 years he said, he would take a 
look at reforming this program. I know that other members of 
Congress have expressed that belief that they could wait until 
2036 before any action would be necessary. I want to be fair 
here, our ranking member earlier today indicated that we do 
need to embark upon reform in this area, make Social Security 
sustainable so that it is around for current and future 
generations. Could you indicate the cost of waiting, please? 
Just articulate what would happen if we waited until 2036 and 
its impact on all seniors, but also speak to specific cohorts 
please.
    Mr. Goss. First of all, we simply cannot wait until 2036, 
specifically because of the disability insurance program. We 
have to have something to address that issue in the much nearer 
term, over the next three or four years. Looking at the Social 
Security OASI and DI programs on a combined basis, if we were 
to do nothing, we would hit this rather substantial and 
enormous problem in the year of 2036 as we now project it, 
where we would have this sudden 23 percent reduction in 
benefits, which I do not think anybody would be interested in 
doing. If we wait a substantial amount of time before we enact 
changes that can be graded in over some period of time, then we 
would clearly and severely limit the options that would be 
available at that time. I think many people have suggested if 
we were to wait, literally, until the last minute it would be 
difficult to raise enough revenue instantly at that point, or 
to lower benefits instantly at that point in order to make the 
financing and Social Security work on an appropriate basis. It 
would be a very dramatic and drastic situation to put ourselves 
into, to wait that long. I personally would doubt that anybody 
has an interest in doing that, and appreciate both Chairman 
Ryan and Ranking Member Van Hollen both indicating a strong 
interest in getting to this sooner rather than later.
    Mr. Young. I appreciate that as well, and thank you so much 
for your comments, and I yield back.
    Chairman Ryan. Mr. Ribble.
    Mr. Ribble. Thank you Mr. Chairman. Thank you both for 
being here, and I know it has been a long morning already. Mr. 
Foster, I would like to, first of all, thank you for a 
statement in your testimony. I would like to read it back to 
you so you would know how much I appreciate it.
    ``I applaud your efforts to strengthen Medicare and 
Medicaid and to find ways to insure the financial viabilities 
of these important health care programs.'' You know, we are 
kind of entering silly season in the political world where 
there are all these conversations about ending Medicare as we 
know it, and how everybody in Congress hates seniors, and they 
want to use it for political gain, and your very unbiased 
statement is particularly rewarding to me because we want to 
find solutions here.
    Following up a little bit what my colleague from Florida 
was talking about regarding the costs of Medicare and costs to 
seniors. We know that there are going to be changes in an 
effort to control costs by paying providers differently, a 
reduction in payment to providers. What effect do you think the 
payment cuts to providers contained in current law will have on 
access to care?
    Mr. Foster. It is a serious issue and one I have spoken 
about before. Over a long period of time the lower payment rate 
updates for most categories of providers accumulate, and they 
do not end up just being 5 percent or 10 percent lower, they 
end up being 30 percent, 40 percent, 50 percent lower. It 
strikes me as unlikely that that is viable in the long term, 
and that these payment rates would be so far below provider 
costs for providing the services that it just would not work. 
The providers would either have to stop providing services for 
Medicare beneficiaries or shift costs to somebody else with 
better paying coverage, or possible go out of business, or 
possibly merge with other companies. More likely, I think you 
all would step in and say this is not what Medicare is all 
about, we would have to adjust those payment rates to make them 
more adequate.
    Mr. Ribble. Which is what Congress has done over and over 
again, has it not?
    Mr. Foster. Well, certainly for physicians, every year 2003 
through this year.
    Mr. Ribble. Ultimately if care goes away we have not really 
benefited seniors at all if we are not careful. I also want to 
ask you about something in your testimony that struck me. 
Reading on Page 17, ``The two largest contributors have been 
rising income'' it is talking about factors that have caused 
health care costs to go up, ``The two largest contributors have 
been rising incomes and new medical technology.'' I am struck 
by that, then later you go on to say, ``Numerous studies have 
found that most new health technology has been cost 
increasing,'' and then you follow up by saying, ``Encouraged by 
comprehensive insurance coverage that shields individuals from 
most of the additional direct costs from using the new 
technology.'' Could you talk to us a little bit about rising 
incomes, why technology has not driven costs down like it has 
almost every other place, and then this idea about shielding 
individuals from the real costs?
    Mr. Foster. Right, because of the prevalence of health 
insurance, and this is true for Medicare and pretty much 
everything else too, a typical beneficiary or an individual 
does not see the full cost of the service they are getting. 
They have to pay a copayment or a co-insurance rate, so if a 
new device or procedure comes along that might be quite 
expensive, they are only going to see a portion of that new, 
more expensive cost. Deciding well, yes, I would really like to 
get this procedure as opposed to something else that does not 
sound quite as nice and I only have to pay this much, and the 
procedure seems to be worth far more, it is a no brainer and we 
all go for it. In some cases, I mentioned in the testimony the 
classic case of Nexium replacing Prilosec. Even if the benefit 
is not even better, if it is almost exactly the same drug or 
other technology, we tend to go for it anyway.
    Mr. Ribble. Well, is not the way that Medicare currently 
operates, almost the ultimate shield, where seniors really do 
not feel the cost at all and there is not a lot of incentive 
for them to help drive costs down?
    Mr. Foster. In many cases I guess I would have to agree 
with that. First of all, let me say that Medicare does not have 
catastrophic protection. Most beneficiaries, the great 
majority, 90 percent of them have other supplemental coverage 
of one form or another, either Medigap supplemental policies, 
or Medicare Advantage, or Medicaid, and as a result, especially 
with people with Medigap, like, coverages C and F, I think they 
are; they cover first dollar. Then at the point of service the 
Medicare beneficiaries sees no cost at all for the service. Now 
the premiums that they have to pay, sooner or later, will go 
up, but at the point of service they see no cost-sharing 
requirement.
    Mr. Ribble. Thank you very much. Mr. Chairman, I yield 
back.
    Chairman Ryan. Mr. Woodall.
    Mr. Woodall. Thank you Mr. Chairman. Thank you gentlemen 
for sticking with us until the bitter end. I also appreciate 
your service. As I was doing the math in my head Mr. Foster, 
what is that, a combined 70 years, or more than 70 years 
between the two of you. I want to call on some of that 
experience because I go back to the letter that you sent, Mr. 
Goss, to Secretary Geithner last fall that said the level of 
the trust funds would be unaffected by payroll tax holiday 
legislation. I certainly defer to your actuarial expertise. I 
am worried about the integrity of the trust fund. In your 70-
plus years of collective experience, is it your testimony that 
funding sources that come out of general revenues are equally 
secure as funding sources that come out of trust fund deposits, 
or have you seen over your years of service differences in the 
stability of those two revenue streams, Mr. Goss?
    Mr. Goss. Well, certainly we have seen that there seems to 
be an absolute sense that money once in the trust funds, 
putting aside arguments about economic impact and 
meaningfulness of trust funds, once money is in the trust funds 
that does represent a liability on the general fund of the 
Treasury, and that money will be produced and will be provided 
to that program.
    Mr. Woodall. A distinction without a difference then, that 
it is coming from the general revenues instead out of payroll 
taxes?
    Mr. Goss. Well, once the money has been generated in a 
given year and put into the trust funds, it is not easy, and it 
is not really possible to just determine how much of that money 
came from taxes in the past, from general revenue contributions 
in the past, from interest in the past. The money is just there 
and it is owed. On an ongoing basis in the future, though, I 
believe perhaps your distinction is there has always been the 
concept of Social Security as the earned right to benefits, and 
having payroll taxes on people's individual earnings provides 
the sense of the earned right which gives the American people 
the strong hold that they have on the fact that the Social 
Security is owed. If there were a very long sustained period of 
time in which, for reasons other than just temporary fiscal 
stimulus, we were to have a substantial portion of the program 
paid for, rather than by payroll taxes, instead by general 
fund, then people would undoubtedly begin to view the program 
somewhat different.
    Mr. Woodall. It was just one year, now it is two years. We 
are heading down that road towards that long period of time. 
What about you Mr. Foster, do you feel that same sense that 
payments into trust funds from individuals give a sense of 
ownership that transfers from general revenues do not?
    Mr. Foster. I think that is correct, and I would agree with 
what Steve said just now. As a practical matter, over the years 
we have seen that in a budgetary context, as opposed to a trust 
fund context, that the payroll tax revenues for both Social 
Security and hospital insurance, Part A of Medicare, are sort 
of off limits. It is a dedicated source of revenue; nobody is 
talking about let's take a portion of these payroll taxes and 
use them for some other purpose. That just is not considered. 
Whereas, for the general revenues, you all have to fight and 
worry about that every day that you are here, pretty much, 
because of all the competing requirements.
    Mr. Woodall. I think that is exactly right. No, that is 
what one of our Social Security trustees, Dr. Charles Blahous, 
was talking about. I want to quote him directly because I do 
not want to misstate his point. He says, ``Social Security was 
not established to be a source of temporary stimulus funds. The 
idea that its payroll tax rates should be moved up and down 
with economic events is highly dangerous to the program's 
financial future.'' I mean, folks have been citing the letter 
that you wrote, Mr. Goss, to say that the trust fund levels 
would be unaffected, that is true, but the integrity of the 
program, at least so says one of your trustees is highly 
affected.
    As a fellow who came here to solve problems rather than 
point fingers and blame, I am actually struck by the fact that 
you refer to this major piece of legislation dealing with 
Social Security and its trust fund as leaving the trust fund 
levels unaffected because I would tell you that is a failure, 
that we have all sat here around the table all morning talking 
about the challenges that are facing us, and we pass a major 
piece of legislation that does not one thing to solve the 
problem. Are you familiar with my freshman colleague Jeff 
Landry's Spice Act, it is HR3551, that would have said if we 
need this holiday for stimulus, let's do it, but let's 
establish personal choice on the backside that you will delay 
your personal receipt so that you can collect your trust fund 
rebate today, as it were. My understanding is that bill would 
have actually affected trust fund levels by reducing liability 
some $2 trillion over the three generational window. Can you 
speak briefly to that Mr. Goss?
    Mr. Goss. That is correct. Mr. Landry's proposal, and I 
believe he has some cosponsors, would make voluntary on a 
permanent basis the 2 percent payroll tax reduction that 
workers could choose to have, and in any one year in which a 
person chose to take that, they would have their normal 
retirement age, or their basic retirement age for benefits, 
increased by one month. If they did it for 10 years, their 
basic retirement age would increase by 10 months. That change 
in the retirement age for the people who chose this option 
would accrue to a positive to improving the financial status of 
Social Security, but most particularly that would occur because 
the cost of the reduced payroll taxes would be reimbursed from 
the general fund of the Treasury on an ongoing basis in the 
future, as it has been for 2011 and 2012.
    Mr. Woodall. Thank you very much. Thank you both.
    Chairman Ryan. Mr. McClintock.
    Mr. McClintock. To follow up on that point then, by linking 
the cost with the benefits we would be giving every American 
family the choice of whether the year's worth of tax relief is 
worth the actual cost of that to the system one month delay in 
retiring, and they could make that every year depending upon 
their own circumstances, desires, wishes, and needs, is that 
correct?
    Mr. Goss. That is exactly correct. In fact, we calculated, 
in working with Mr. Landry and his staff, one month for each 
year as being approximately an average neutral effect for the 
trust funds. If you keep 2 percent of your payroll taxes in one 
year, and have your normal retirement age go up by one month, 
the trust funds over the very long haul, would be about 
neutral, but the trust funds actually turn out to be better 
because the cost of the tax reduction then is reimbursed by the 
general public.
    Mr. McClintock. So we are reducing the payroll taxes coming 
into the system, at the same time, we are reducing the 
obligations of the system going out. Now, when we do not do 
that, we end up, as you pointed out now in response to 
questions from Mr. Van Hollen, Mr. Stutzman, and Mr. Woodall, 
we end up reimbursing the Social Security fund from the general 
Treasury. The general Treasury, of course, has basically one 
source of income, and that is the taxpayers, is that correct? 
Either through their taxes or to the extent that government has 
to borrow through their future taxes, but one way or another, 
it comes out of their taxes, is that correct?
    Mr. Goss. That is absolutely correct. That was true in the 
2011 and 2012, but that is also true for the tax reductions.
    Mr. McClintock. So would it be fair to say that cutting the 
payroll tax without reducing the obligations that the payroll 
tax pays for is simply playing a shell game over which taxes 
are going to pay for those obligations?
    Mr. Goss. I certainly would not use the word shell game, 
but I think there is no question, but if, indeed, the intent of 
the reduced payroll taxes was simply to put more dollars in 
people's hands as a stimulus measure, the payroll tax 
undoubtedly was utilized just because it was a readily 
available.
    Mr. McClintock. Certainly general taxes will have to make 
up for the difference either now or in the future, is that 
correct?
    Mr. Goss. Absolutely.
    Mr. McClintock. I would call that a shell game. Mr. Foster, 
wanted a little bit more about the IPAB. How would you compare 
that with the U.K.'s National Institute for Health and Clinical 
Excellence; I believe that the smarmy acronym is NICE?
    Mr. Foster. There are potentially some similarities with 
the NICE group in the U.K. Much of what they are doing is what 
we refer to as comparative effectiveness, and that has been a 
controversial topic, I am sorry that is the case because I 
think there actually is potential there.
    Mr. McClintock. The IPAB has that same authority?
    Mr. Foster. Somewhat. The IPAB can look into different 
approaches. They do not have to just reduce provider payment 
rates.
    Mr. McClintock. Can they said we will provide this service, 
but not that. We will provide this service, but only under 
certain circumstances?
    Mr. Foster. They cannot fundamentally change the benefit 
structure and the coverage for Medicare. It is a little bit of 
a gray area; could they get into issues of this new procedure 
that is now available and which costs 10 times as much as the 
old procedure, it is not really any more effective.
    Mr. McClintock. But, for example, in the U.K. there is a 
drug, called Ipilimumab. Essentially it doubles the one and two 
year survival rates for malignant melanoma. NICE said at 80,000 
pounds per year that is just too expensive. Could the IPAB 
issue a similar decree?
    Mr. Foster. That I do not know. I think the intention is 
not to do that.
    Mr. McClintock. The intention, but do they have the 
authority?
    Mr. Foster. Not having studied the law carefully enough for 
that question, I will give you an answer later on. I think the 
intention is that they not do that kind of thing.
    Mr. McClintock. Well, again, the intention and the 
authority are two different things. I am sure they intend only 
good. NICE intends only good, but through that single decree, 
that that is just too expensive for a new procedure, and you 
just said that the IPAB has the authority to say it is a new 
procedure, it is too expensive, we just do not want to deal 
with it, that has been called a death sentence for those with 
malignant melanoma, particularly those of younger age in the 
U.K.
    Mr. Foster. Well, and that is why I believe that the IPAB 
does not have the authority. The analysis and the support for 
comparative effectiveness under the Affordable Care Act is also 
very limited because of concerns of that type.
    Mr. McClintock. Well, NICE has also said with respect to 
Lucentis, which is a drug that has been cited for an 
unprecedented ability to reverse macular degeneration. NICE 
said, well, that is pretty expensive. We will allow the 
treatment, but only after the patient has already lost sight in 
one eye. Is that something conceivably the IPAB could decree?
    Mr. Foster. I do not think so.
    Mr. McClintock. Okay, thank you.
    Chairman Ryan. Okay, gentlemen, thank you for coming again. 
Thank you for spending your time, this has been very 
enlightening. This hearing is adjourned.
    [Question submitted for the record from Mrs. Black 
follows:]

        Questions Submitted for the Record by Hon. Diane Black,
        a Representative in Congress From the State of Tennessee

    During the hearing, I asked Mr. Goss about the sharp increase in 
the costs of the Social Security Disability Insurance (SSDI) program in 
the past fifteen years. He explained that this was largely the result 
of two changes. First, the baby boomer generation entered the prime 
years (ages 45-65) for submitting applications to the SSDI program. 
Second, the gap in application rates between males and females 
normalized.
    Mr. Goss, can you elaborate in more detail on the changes in female 
application rates to the SSDI program and how this affected the SSDI 
trust fund in the past fifteen years?

    [The response from Mr. Goss follows:]

                                   Social Security,
                               Office of the Chief Actuary,
                                    Washington, DC, March 15, 2012.
Hon. Diane Black,
House of Representatives, Washington, DC 20515.
    Dear Mrs. Black: On March 9, I received your question related to 
our discussion at the Committee on the Budget Hearing on February 28, 
2012. Thank you very much for the question. The cost of the Social 
Security Disability Insurance program has increased significantly over 
the past 15 to 20 years and it is important that we all understand why 
this increase occurred, and what is likely to happen in the future.
    Question: During the hearing, I asked Mr. Goss about the sharp 
increase in the costs of the Social Security Disability Insurance 
(SSDI) program in the past fifteen years. He explained that this was 
largely the result of two changes. First, the baby boomer generation 
entered the prime years (ages 45-65) for submitting applications to the 
SSDI program. Second, the gap in application rates between males and 
females normalized.
    Mr. Goss, can you elaborate in more detail on the changes in female 
application rates to the SSDI program and how this affected the SSDI 
trust fund in the past fifteen years?
    The drivers of the cost of the Disability Insurance program was the 
topic of a hearing on December 2, 2011 before the House Ways and Means 
Subcommittee on Social Security. I have attached my written testimony 
from that hearing, where I testified specifically on the increase in 
the cost of the program. There are two very significant changes for 
women that have contributed to increased disability benefits, and thus 
to cost.
    Figure 6 (on page 4 of the written Ways and Means testimony) shows 
a very substantial increase in the percentage of women who are insured 
for potential receipt of Social Security disabled worker benefits. 
Disability insured status requires both: (1) earning at least one 
quarter of coverage for each year elapsed since attaining age 22; and 
(2) earning at least 20 quarters of coverage during the most recent 10 
years. In 1970, the percentage of women at working ages who met these 
requirements was only half as high as the percentage for men. Today, 
the percentage of working-age women who are disability insured is 
nearly as high as for men, having roughly doubled since 1970.
    Figure 7 (on page 5 of the written Ways and Means testimony) shows 
a very substantial increase in the percentage of disability-insured 
women who become disabled and file for benefits. This ``disability 
incidence rate'' for women rose from 3.5 new benefit awards per 
thousand exposed population (those insured for disabled worker benefits 
but not already receiving benefits) in the early 1980s to about 6 per 
thousand now. After the recovery from the recent recession is complete, 
we expect the disability incidence rate for women will settle at around 
5 per thousand, just below the level for men, but far above the level 
of the 1980s for women. Over this same period, disability incidence 
rates for men have fluctuated around a relatively stable base level of 
just over 5 per thousand exposed population.
    These very substantial increases in both the percentage of working 
age women who are disability insured, and the percentage of those 
insured women who become disabled and apply for Disability Insurance 
benefits, have contributed to the rapid rise in the cost of the 
Disability Insurance program over the past 15 to 20 years. Just as 
important, however, is that both of these increases for women have 
moved their rates close to those for men, who have had fairly stable 
rates of disability insured status and disability incidence for several 
decades. For this reason, we assume that disability insured and 
disability incidence rates by age will remain close to recent levels 
for both men and women in the future. With this stabilization of these 
rates, and the movement of the baby-boom generations from disability 
ages to retirement ages, we project that the cost of the Disability 
Insurance program as a percentage of gross domestic product will not 
only stabilize, but will actually decline slightly in the future (see 
Figure 3 on page 3 of the written Ways and Means testimony).
    I hope this analysis and the attached testimony will be helpful. 
Please let me know if we can be helpful in any other way.
            Sincerely,
                                           Stephen C. Goss,
                                                     Chief Actuary.
Enclosure.

Securing the Future of the Social Security Disability Insurance Program

 Testimony by Steve Goss, Chief Actuary, Social Security Administration

  House Committee on Ways and Means, Subcommittee on Social Security, 
                            December 2, 2011

    Chairman Johnson, Ranking Member Becerra, and members of the 
subcommittee, thank you very much for the opportunity to speak to you 
today about the Social Security Disability Insurance program. I would 
like to share thoughts on three topics: (1) the nature of disability 
insurance; (2) the financial status of the Disability Insurance 
program; and (3) the ``drivers'' of the cost of the Disability 
Insurance program.

                 (1) the nature of disability insurance

    Disability insurance is arguably the most difficult form of 
insurance to administer. It is easy to determine whether an insured 
person has reached retirement age or has died. It is also easy to 
determine whether a car is wrecked or a house destroyed. It is even 
relatively easy to determine if health insurance should cover doctor 
and hospital bills. However, disability is by nature a very subjective 
concept. Whether a ``medically determinable impairment'' eliminates the 
ability to engage in any ``substantial gainful activity'' depends on a 
myriad of issues related to a person's residual functional capacity, 
past job experience, desire to work, and availability of suitable jobs. 
All of these issues differ among individuals, across geographic 
regions, and over time.
    The determination of whether a person is disabled is a highly 
complex process subject to human judgment by the claimant, their 
representative, the claim examiner, and the medical consultant. 
Becoming disabled can be a gradual process. A person may not qualify 
when they initially apply, but may ``cross the threshold'' of 
disability during the appellate process or at a subsequent age 
resulting in reapplication. Initial disability determinations and 
periodic continuing disability reviews make administration of the 
Disability Insurance program an enormous challenge. The Social Security 
Administration meets this challenge effectively and efficiently. 
Accuracy rates in determinations are high, and multiple appeal steps 
are available to claimants. Yet, less than 2.5 percent of program 
expenditures are for administrative expense.

      (2) the financial status of the disability insurance program

    The Disability Insurance Trust Fund assets expressed as a percent 
of annual program cost peaked in 2003. The 2011 Trustees Report 
projects assets to become exhausted in 2018, with continuing tax 
revenue sufficient to pay 86 percent of scheduled benefits thereafter. 
The unexpectedly large COLA for December 2011 and a lower-than-expected 
increase in average earnings for 2010 may exhaust trust fund reserves 
even earlier. For 2085, the Trustees Report projects continuing tax 
revenue will be sufficient to pay 83 percent of scheduled benefits.



    Sustainable solvency can be restored for the Disability Insurance 
program with a 16-percent reduction in benefits, a 20-percent increase 
in revenue, or some combination of these changes. Even in the absence 
of such change, a simple tax-rate reallocation between OASI and DI, as 
was done in 1994, could equalize the financial prospects of the trust 
funds. We estimate that temporarily raising the Disability Insurance 
program's share of the 12.4-percent OASDI payroll tax rate from 1.8 to 
2.2 percent for 2012 through 2024 and to 2.0 percent for 2025 through 
2029 would make scheduled benefits payable for both OASI and DI 
beneficiaries until 2036.
    Overall OASDI cost will rise over the next 20 years as the baby 
boomers retire and are replaced in the working ages with lower-birth-
rate generations born after 1965. The drop in birth rates after 1965 
will cause a permanent shift in the age distribution of the population 
with fewer workers to support more elderly retirees.



    However, the baby boomers already moved from young ages (25-44) in 
1990, where few were disabled, to older ages (45-64) in 2010, where 
many more are disabled. Thus, the 20-year demographic shift in the age-
distribution of the population has already occurred for DI.
    Lower birth rates slow population growth at all ages. We project 
similar but slower growth rates in both the workforce and DI 
beneficiaries for the future.



    As a result, the number of workers per DI beneficiary is expected 
to be relatively stable in the future. This means that restoring 
sustainable solvency for the DI program will not require continually 
greater benefit cuts or revenue increases. A one-time change to offset 
the drop in birth rate is all that is needed to sustain the DI program 
for the foreseeable future.





  (3) the ``drivers'' of the cost of the disability insurance program
    Several drivers specific to DI program cost will be changing in the 
future. The first important driver is the size of the disability-
insured population. Since 1970, this population grew explosively as 
increasing numbers of women worked consistently and stayed insured.



    In the future, we project that men will be less likely to be 
insured, reflecting increased restrictions on undocumented aliens after 
2001, and insured rates for women will stabilize close to men. This 
change will substantially slow the growth in the cost of the DI 
program.
    The second important driver of DI cost is rate at which insured 
workers become newly disabled. Changes in the rate of disability 
incidence are best seen by excluding the effects of any change in the 
age-distribution of the general population. For men, this age-adjusted 
incidence rate has averaged somewhat over five new disability awards 
per thousand exposed (insured but not already disabled) workers and has 
seldom been below this level. Since 1980, the age-adjusted incidence 
rate for women has been moving up to a level much closer to men. We 
expect that male and female age-adjusted disability incidence rates 
will be fairly stable in the future.



    A more careful look at past fluctuations in the overall age-sex-
adjusted disability incidence rate reveals a number of specific 
economic and policy drivers that have influenced disability cost. 
Periodic economic recessions, as illustrated by the civilian 
unemployment rate in bright orange in the figure below, have been 
associated with temporary increases in disability incidence.



    The very recent recession of 2008-2009 resulted in an increase in 
disability incidence that was exceeded only by the incidence rate in 
1975. One apparent exception to the relationship between disability 
incidence and economic recessions is the strong recession of 1981-1982. 
Here the effect of the recession appears to have been offset by the net 
effects of the 1980 Amendments, which: (1) sharply increased the levels 
of pre-effectuation review of disability allowances and continuing 
disability reviews of current beneficiaries; (2) introduced the 
extended period of disability to encourage work; and (3) lowered the 
maximum family benefit for DI beneficiaries.
    Additional policy changes over the years had significant effects on 
disability incidence. Double-digit ad-hoc benefit increases in 1970 
through 1974 made disability benefits more attractive. The 1984 
Amendments may have countered the effects of a strong economic recovery 
with increased emphasis on multiple impairments and mental listings, 
and requirement to show medical improvement for benefit cessation. The 
SSI outreach to disabled adults likely added to the effects of the 
1990-1991 recession. Also, the 1996 Amendments may have partially 
counteracted the effects of a strong economic recovery with elimination 
of drug addiction and alcoholism as disabling impairments, and 
effecting a 7-year plan to eliminate a backlog of continuing disability 
reviews. Future policy changes and economic cycles will undoubtedly 
continue to cause fluctuations in disability incidence rates.
    Disability incidence rates tell us the rate at which healthy 
workers become newly disabled. The cost of providing benefits to 
disabled workers also depends on how long their disability lasts. 
Disability incidence and length of the period of disability can be 
combined by considering the number of insured workers who are currently 
disabled at each age, regardless of how long ago they became newly 
disables. Disability prevalence rates are simply the percent of the 
insured population at a given age that is currently receiving disabled 
worker benefits, regardless of when benefits started. Age-sex-adjusted 
disability prevalence rates eliminate the effects of changing 
population age distribution and isolate the effects of disability-
specific drivers.



    The figure above shows that the age-sex adjusted disability 
prevalence rate for men increased by about a third between 1990 and 
2010, even though age-sex-adjusted incidence rates were fairly stable 
over the observed period 1970-2010. Female prevalence rates increased 
even more because their age-sex-adjusted incidence rates did increase 
over the observed period.
    The reason for the rise in male age-sex-adjusted disability 
prevalence between 1990 and 2010 lies in the age distribution of 
disability incidence rates. While the overall age-sex-adjusted 
incidence rate was fairly stable for men, a relative shift toward new 
disabled-worker awards at younger ages explains the prevalence 
increase. All else being equal, shifting new disability incidence from 
ages 45-64 to ages 25-44 will increase the total number of 
beneficiaries, or prevalence, because the younger awardees may remain 
disabled for many more years.
    The figure below illustrates the degree to which disability 
incidence rates at ages 25-44 grew relative to incidence rates at ages 
45-64, both for men and women, between 1980 and 2010. The shift toward 
relatively lower ages of disability incidence was even stronger for 
women than for men. This, combined with the age-sex-adjusted increase 
in disability incidence for women, largely explains the historical 
increase in prevalence rates for women.



    The shift toward relatively lower ages in disability incidence 
rates stabilized after 2000. We expect that the relative incidence 
rates by age will continue to be stable in the future. This, combined 
with stable age-sex-adjusted overall incidence rates, explains our 
relatively stable projection of future age-sex-adjusted disability 
prevalence rates.
    While we feel fairly confident about projections for the future, 
two questions remain about the past: (1) why did disability incidence 
grow at younger ages relative to older ages; and (2) are there any 
special characteristics of the additional, younger disabled worker 
awards?
    Due to the complexity of the disability criteria and determination 
process, and the nature of disability, it is very difficult to 
determine why incidence rates at younger ages rose from the levels in 
1975-1985 to the levels in 2000-2010. However, we can gain some insight 
into both questions by considering the characteristics of younger 
versus older disability beneficiaries over time. For example, we can 
consider (a) relative benefit levels across ages and (b) the 
distribution of primary diagnosis for younger versus older disabled 
worker awards.



    The chart below provides an interesting comparison of benefit 
levels for younger versus older disabled worker beneficiaries in 1985 
and 2010. For each group, the average benefit level is expressed as a 
percentage of the national average wage index (AWI) for the year.



    In 1985, the average benefit level for all younger beneficiaries 
(age 25-44) was very close to the average benefit level of older 
beneficiaries (45-64). By 2010, the average benefit level for younger 
beneficiaries was 24 percent lower than that for older beneficiaries. 
The change is similar for men and women considered separately. This 
suggests that the increase in younger disabled worker awards between 
1985 and 2010 came from insured workers with low career-average 
earnings levels, either because they were low paid workers or because 
they had intermittent employment. The implication for future average 
benefit levels is also interesting. As the recent younger beneficiaries 
with low benefit levels age, they will gradually restrain the growth in 
the average benefit level for older beneficiaries in 2030 and later. 
Thus, the increase in disability prevalence from younger disabled 
worker awards will be partly mitigated by lower future benefit levels.



    A second characteristic we can consider regarding younger versus 
older disabled worker beneficiaries is any change in awards by category 
of medically determinable impairment (primary diagnosis code). The 
figure below shows that even though the number of female disabled 
worker awards at younger ages has risen rapidly, the distribution by 
diagnosis has remained very stable. The pattern for younger men is very 
similar.
    At higher ages, female disabled worker awards show increases in 
musculoskeletal diagnoses and decreases in circulatory diagnoses. The 
patterns for males are also similar at these older ages. These effects 
do not appear to explain the increase in young awards.

                               CONCLUSION

    Disability insurance is highly complex and challenging to 
administer. General demographic changes have increased the cost of the 
DI program over the past 20 years in much the same way that 
demographics will raise OASI and Medicare costs over the next 20 years. 
Disability insured rates have increased substantially for women, as 
have age-sex-adjusted incidence rates for younger insured women, 
further contributing to higher DI cost. However, all of these trends 
have stabilized or are expected to do so in the future.
    We project that the number of DI beneficiaries will continue to 
increase in the future, but only at about the rate of increase in 
workers. Thus, the current shortfall in tax income compared to DI 
program cost is projected to be stable in the future. Restoring 
sustainable solvency for the DI program requires about a 16-percent 
reduction in benefits, a 20-percent increase in revenue, or some 
combination of these changes. Even if such changes are not effected 
soon, a modest reallocation of the total OASDI payroll tax can be 
enacted prior to 2018 that would equalize the actuarial status of the 
OASI and DI programs, allowing both to pay full scheduled benefits 
until 2036.

    [Whereupon, at 12:21 p.m., the Committee was adjourned.]

                                  
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