Medicare: Observations on Program Sustainability and Strategies  
to Control Spending on Any Proposed Drug Benefit (09-APR-03,	 
GAO-03-650T).							 
                                                                 
The House Committee on Ways and Means is holding a hearing on	 
modernizing Medicare and integrating prescription drugs into the 
program. There are growing concerns about gaps in the Medicare	 
program, most notably the lack of outpatient prescription drug	 
coverage, which may leave Medicare's most vulnerable		 
beneficiaries with high out-of-pocket costs. At the same time,	 
Medicare already faces a huge projected financial imbalance that 
has worsened significantly in the past year. This statement	 
discusses the challenges of adding a drug benefit to Medicare in 
the context of the program's current and projected financial	 
condition. It also examines program design issues to be 	 
considered with respect to administering any proposed drug	 
benefit. Specifically, it discusses how private sector health	 
plans have used entities called pharmacy benefit managers (PBM)  
to control drug benefit expenditures.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-650T					        
    ACCNO:   A06611						        
  TITLE:     Medicare: Observations on Program Sustainability and     
Strategies to Control Spending on Any Proposed Drug Benefit	 
     DATE:   04/09/2003 
  SUBJECT:   Budget activities					 
	     Drugs						 
	     Future budget projections				 
	     Health care cost control				 
	     Health care programs				 
	     Health insurance					 
	     Health insurance cost control			 
	     Managed health care				 
	     Trust funds					 
	     Federal Employees Health Benefits			 
	     Program						 
                                                                 
	     Medicare Hospital Insurance Trust Fund		 
	     Medicare Program					 
	     Medicare Supplemental Medical Insurance		 
	     Program						 
                                                                 

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GAO-03-650T

Testimony Before the Committee on Ways and Means, House of Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 11: 00 a. m. Wednesday, April 9,
2003 MEDICARE

Observations on Program Sustainability and Strategies to Control Spending
on Any Proposed Drug Benefit

Statement of David M. Walker Comptroller General of the United States

GAO- 03- 650T

The recent publication of the 2003 Medicare Trustees* annual report
reminds us that Medicare in its current condition* without a prescription
drug benefit* is not sustainable. At the same time there are growing
concerns about gaps in the Medicare program, most notably the lack of
outpatient prescription drug coverage, that may leave Medicare*s most
vulnerable beneficiaries with high out- of- pocket costs.

The Hospital Insurance (HI) portion of Medicare faces a huge projected
financial imbalance that has worsened significantly in the past year.
Under the Trustees* 2003 intermediate estimates, the present value of HI*s
actuarial deficit is $6.2 trillion* a 20 percent increase over the prior
year. Beginning

in 2013, HI*s program outlays are expected to begin to exceed program tax
revenues, putting increased pressure on the federal budget to raise the
resources necessary to meet program costs. In addition, Supplementary
Medical Insurance is projected to place an increasing burden on taxpayers
and beneficiaries.

GAO*s long- term budget simulations show that, absent meaningful
entitlement reforms, demographic trends and rising health care spending
will drive escalating federal deficits and debt. Neither slowing the
growth of discretionary spending nor allowing the 2001 tax reductions to
sunset will eliminate the imbalance. While additional economic growth will
help ease our burden, the potential fiscal gap is too great to grow our
way out of the problem.

The application of basic health insurance principles to any proposed
benefit could help moderate the cost for both beneficiaries and taxpayers.
These include beneficiary protections against the risk of catastrophic
medical expenses and premium contributions and cost- sharing arrangements
that encourage beneficiaries to be cost conscious.

The private sector*s use of PBMs to control drug expenditures may be
instructive for Medicare, but the program*s unique role and nature may
moderate how such entities would be used and the potential efficiency
gains afforded in attempting to transfer PBM- like strategies to Medicare.
The House Committee on Ways and

Means is holding a hearing on modernizing Medicare and integrating
prescription drugs into

the program. There are growing concerns about gaps in the Medicare
program, most notably the lack of outpatient prescription drug coverage,
which may leave Medicare*s most vulnerable beneficiaries with high out-
of- pocket costs. At the same time, Medicare already

faces a huge projected financial imbalance that has worsened significantly
in the past year.

This statement discusses the challenges of adding a drug benefit to
Medicare in the context of the program*s current and projected financial
condition. It also examines program design issues to be considered with
respect to administering any proposed drug

benefit. Specifically, it discusses how private sector health plans have
used entities called pharmacy benefit managers (PBM) to control drug
benefit expenditures. www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 650T. To
view the full statement, click on the link

above. For more information, contact William J. Scanlon at 202 512- 7114.
Highlights of GAO- 03- 650T, a testimony

before the Committee on Ways and Means, House of Representatives

April 9, 2003

MEDICARE

Observations on Program Sustainability and Strategies to Control Spending
for Any Proposed Drug Benefit

Page 1 GAO- 03- 650T

Mr. Chairman and Members of the Committee: I am pleased to be here today
as you discuss issues related to an outpatient prescription drug benefit
for Medicare beneficiaries. There are growing concerns about gaps in the
Medicare program, most notably the lack of outpatient prescription drug
coverage, which may leave Medicare*s most vulnerable beneficiaries with
high out- of- pocket costs. Recent

estimates suggest that, at any point in time, about a third of Medicare
beneficiaries lack prescription drug coverage. The rest have at least some
drug coverage through various sources* most commonly employersponsored

health plans* although recent evidence indicates that this coverage is
beginning to erode.

At the same time, however, the recent publication of the 2003 Trustees*
annual report reminds us that Medicare in its current condition* with no
prescription drug benefit* already faces a huge projected financial
imbalance that has worsened significantly in the past year. Furthermore,
as the Medicare Trustees made clear over 10 years ago, the current
Medicare program is not fiscally sustainable in its present form.

In 10 years, Hospital Insurance (HI) Trust Fund outlays will begin to
exceed tax receipts, and by 2026 the HI trust fund will be exhausted.
However, trust fund insolvency does not mean the program will cease to
exist; program tax revenues will continue to cover a portion of projected

annual expenditures. 1 The huge fiscal pressures created by the retirement
of the baby boom generation and rising health care costs are on our 10-
year budget horizon. Between now and 2035, the number of people age 65 and
older will double. Federal health and retirement spending are expected to
surge as people live longer and spend more time in retirement. In
addition, advances in medical technology are likely to keep pushing up the
cost of providing

health care. Moreover, the baby boomers will have fewer workers to support
them in retirement.

We must also remember that Medicare has grown substantially as a percent
of the federal budget since its enactment in 1965. In addition, it is 1
Under the Trustees 2003 intermediate assumptions, revenues from the HI
payroll tax and

the taxation of certain Social Security benefits are initially projected
to cover about threefourths of projected expenditures once the trust fund
is exhausted. This ratio, however, is projected to decline rapidly.

Page 2 GAO- 03- 650T

expected to represent an increasing percentage of the federal budget in
the years ahead. After a brief slowdown in the late 1990s, Medicare
spending growth has recently accelerated. In fiscal year 2001, growth in
program spending reached nearly 9 percent, with spending on certain
services increasing much more rapidly. For example, spending for home
health services grew about 30 percent and spending for skilled nursing
facility care grew slightly over 20 percent. For the first 5 months of
fiscal year 2003, Medicare spending has been growing at 7.6 percent. 2 A
significant problem that hobbles Medicare*s ability to achieve a

desirable degree of efficiency is that the program too often pays overly
generous rates for certain services and products. For example, for certain
services, our recent work has shown substantially higher Medicare

payments relative to providers* costs* as much as 35 percent higher for
home health care and 19 percent higher for skilled nursing facility care.
3 Similarly, Medicare has overpaid for various medical products. In 2001,
we

reported that Medicare paid over $1 billion more than other purchasers in
2000 for certain outpatient drugs that the program covers. Excessive
payments hurt not only the taxpayers but also the program*s beneficiaries
or their supplemental insurers, as beneficiaries are generally liable for
copayments equal to 20 percent of Medicare*s approved fee. For certain
outpatient drugs, Medicare*s payments to providers were so high that the
beneficiaries* copayments exceeded the price at which providers could buy
the drugs. The Centers for Medicare & Medicaid Services (CMS) has not
acted on our recommendation that Medicare establish payment levels for
drugs more closely related to actual market transaction costs, using

information available to other public programs that pay at lower rates. 4
In the face of these short- term and long- term cost pressures, I continue
to maintain that substantive financing and programmatic reforms are
necessary to put Medicare on a sustainable footing for the future. These
fundamental reforms are vital to reducing the program*s growth, which
threatens to absorb ever- increasing shares of the nation*s budgetary and

2 Congressional Budget Office, Monthly Budget Review (Washington, D. C.:
Mar. 10, 2003). 3 See U. S. General Accounting Office, Medicare Home
Health Care: Payments to Home Health Agencies Are Considerably Higher than
Costs, GAO- 02- 663 (Washington, D. C: May 6, 2002) and Skilled Nursing
Facilities: Medicare Payments Exceed Costs for Most but Not All
Facilities, GAO- 03- 183 (Washington, D. C: Dec. 31, 2002). 4 U. S.
General Accounting Office, Medicare: Payments for Covered Outpatient Drugs
Exceed Providers* Costs, GAO- 01- 1118 (Washington, D. C.: Sept. 21,
2001).

Page 3 GAO- 03- 650T

economic resources. Thus, any proposals to help seniors with the costs of
prescription drugs would need to be carefully crafted to avoid further
erosion of the projected financial condition of the Medicare program.
Stated differently, it will be prudent to adopt a modified Hippocratic
oath for Medicare reform* namely, any such reform proposals should *do no

further harm* to Medicare*s already serious long- range financial
imbalance.

As you deliberate on ways to modernize Medicare*s benefit package while
striving for program sustainability, I would like to highlight several key
considerations:

 The traditional measure of HI Trust Fund solvency is a misleading gauge
of Medicare*s financial health. Long before the HI Trust Fund is projected
to be insolvent, pressures on the rest of the federal budget will grow as
HI*s projected cash flow turns negative and the gap between program tax
revenues and expenditures escalates. Moreover, a focus on the financial
status of HI ignores the increasing burden Supplemental Medical Insurance
(SMI)* Medicare part B* will place on taxpayers and beneficiaries.

 GAO*s most recent long- term budget simulations continue to show that,
absent meaningful entitlement reforms, demographic trends and rising
health care spending will drive escalating federal deficits and debt. To
obtain budget balance, massive spending cuts, tax increases, or some
combination of the two would be necessary. Neither slowing the growth of
discretionary spending nor allowing the 2001 tax reductions to sunset will
eliminate the imbalance. In addition, while additional economic growth
will help ease our burden, the potential fiscal gap is too great to grow
our way out of the problem.

 Under the huge budgetary pressures that we are sure to face in the
coming years, we must set priorities so that any benefit expansions are in
line with available resources. In this regard, the application of basic
health insurance principles to any proposed benefit could help moderate
the cost for both beneficiaries and taxpayers. Under these principles,
beneficiaries

receive protections against the risk of catastrophic medical expenses
while remaining conscious of the cost of care through their premium
contributions and cost- sharing arrangements. Given our already huge

Medicare financial imbalance, it is also important that benefit expansion
proposals include targeting mechanisms to ensure that federal support is
directed at the beneficiaries with the greatest financial risk.

Page 4 GAO- 03- 650T

 The private sector*s use of entities called pharmacy benefit managers
for controlling drug expenditures may be instructive for Medicare, but the
program*s unique role and nature may moderate how these strategies will be
used and the potential efficiency gains afforded in attempting to transfer
these strategies to Medicare. Today the Medicare program faces a long-
range and fundamental financing

problem driven by known demographic trends and projected escalation of
health care spending beyond general inflation. The lack of an immediate
crisis in Medicare financing affects the nature of the challenge, but it
does not eliminate the need for change. Within the next 10 years, the
first baby boomers will begin to retire, putting increasing pressure on
the federal

budget. From the perspectives of the program, the federal budget, and the
economy, Medicare in its present form is not sustainable. Acting sooner
rather than later would allow changes to be phased in so that the
individuals who are most likely to be affected, namely younger and future
workers, will have time to adjust their retirement planning while helping

to avoid related *expectation gaps.* Since there is considerable confusion
about Medicare*s current financing arrangements, I would like to begin by
describing the nature, timing, and extent of the financing problem.

As you know, Medicare consists of two parts* HI and SMI. HI, which pays
for inpatient hospital stays, skilled nursing care, hospice, and certain
home health services, is financed by a payroll tax. Like Social Security,
HI has always been largely a pay- as- you- go system. SMI, which pays for
physician and outpatient hospital services, diagnostic tests, and certain
other

medical services, is financed by a combination of general revenues and
beneficiary premiums. Beneficiary premiums pay for about one- fourth of
SMI benefits, with the remainder financed by general revenues. These
complex financing arrangements mean that current workers* taxes Outlook
Worsening

for Medicare*s LongTerm Sustainability

Demographic Trends and Expected Rise in Health Care Costs Drive Medicare*s
Long- Term Financing Problem

Page 5 GAO- 03- 650T

primarily pay for current retirees* benefits except for those financed by
SMI premiums. 5 As a result, the relative numbers of workers and
beneficiaries have a major impact on Medicare*s financing. The ratio,
however, is changing. In the future, relatively fewer workers will be
available to shoulder Medicare*s financial burden. In 2002 there were 4. 9
working- age persons (18 to 64 years) per elderly person, but by 2030,
this ratio is projected to decline to

2.8. For the HI portion of Medicare, in 2002 there were nearly 4 covered
workers per HI beneficiary. Under their intermediate 2003 estimates, the
Medicare Trustees project that by 2030 there will be only 2.4 covered
workers per HI beneficiary. (See fig. 1.)

Figure 1: Ratio of HI- Covered Workers to Beneficiaries Note: Projections
based on the intermediate assumptions of The 2003 Annual Report of the
Boards of Trustees of the Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds.

5 Another small source of funding derives from the tax treatment of Social
Security benefits. Under certain circumstances, up to 85 percent of an
individual*s or couple*s Social Security benefits are subject to income
taxes. Under present law, the Old- Age and Survivors Insurance (OASI) and
Disability Insurance (DI) Trust Funds are credited with the income taxes
attributable to the taxation of the first 50 percent of OASDI benefit
payments. The remainder of the income taxes attributable to the taxation
of up to 85 percent of OASDI benefit payments is credited to the HI Trust
Fund. Any other income taxes paid by retirees would also help finance the
general revenue contribution to SMI.

4.6 4.1 4.1 4.0

3.7 2.9

2.4 2.3 2.2 2.1 2.0

0 1

2 3

4 5

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 Workers per HI
beneficiary

Source: CMS, Office of the Actuary.

Page 6 GAO- 03- 650T

The demographic challenge facing the system has several causes. People are
retiring early and living longer. As the baby boom generation ages, the
share of the population age 65 and over will escalate rapidly. A falling
fertility rate is the other principal factor underlying the growth in the
elderly*s share of the population. In the 1960s, the fertility rate was an
average of 3 children per woman. Today it is a little over 2, and by 2030
it is expected to fall to 1.95* a rate that is below replacement. The
combination of the aging of the baby boom generation, increased longevity,
and a lower fertility rate will drive the elderly as a share of total
population from today*s 12 percent to almost 20 percent in 2030.

Taken together, these trends threaten both the financial solvency and
fiscal sustainability of this important program. Labor force growth will
continue to decline and by 2025 is expected to be less than a third of
what it is today. (See fig. 2.) Relatively fewer workers will be available
to produce the goods and services that all will consume. Without a major
increase in productivity, low labor force growth will lead to slower
growth in the economy and slower growth of federal revenues. This in turn
will only accentuate the overall pressure on the federal budget. This
slowing labor force growth is not always recognized as part of the
Medicare debate, but it is expected to affect the ability of the federal
budget and the economy to sustain Medicare*s projected spending in the
coming years.

Page 7 GAO- 03- 650T

Figure 2: Labor Force Growth

Note: GAO analysis based on the intermediate assumptions of The 2003
Annual Report of the Board of Trustees of the Federal Old- Age and
Survivors Insurance and the Federal Disability Insurance Trust Funds.
Percentage change is calculated as a centered 5- year moving average. The
demographic trends I have described will affect both Medicare and

Social Security, but Medicare presents a much greater, more complex, and
more urgent challenge. Unlike Social Security, Medicare spending growth
rates reflect not only a burgeoning beneficiary population, but also the
escalation of health care costs at rates well exceeding general rates of
inflation. The growth of medical technology has contributed to increases
in the number and quality of health care services. Moreover, the actual
costs of health care consumption are not transparent. Third- party payers
largely insulate covered consumers from the cost of health care decisions.
These factors and others contribute to making Medicare a greater and

more complex fiscal challenge than Social Security. Current projections of
future HI income and outlays illustrate the timing and severity of
Medicare*s fiscal challenge. Today, the HI Trust Fund takes in more in
taxes than it spends. Largely because of the known demographic trends I
have described, this situation will change. Under the Trustees* 2003
intermediate assumptions, program outlays are expected to begin to exceed
program tax revenues in 2013. (See fig. 3.) To finance

these cash deficits, HI will need to draw on the special- issue Treasury
securities acquired during the years of cash surpluses. For HI to *redeem*
HI*s Trust Fund Faces

Cash Flow Problems Long before the HI Trust Fund Is Projected to Be
Insolvent

0 1

2 3

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 Percentage
change (5- yr moving average)

Source: Social Security Administration, Office of the Chief Actuary, and
GAO.

Page 8 GAO- 03- 650T

its securities, the government will need to obtain cash through some
combination of increased taxes, spending cuts, and/ or increased borrowing
from the public (or, if the unified budget is in surplus, less debt
reduction than would otherwise have been the case). Neither the decline in
the cash surpluses nor the cash deficits will affect the payment of

benefits, but the negative cash flow will place increased pressure on the
federal budget to raise the resources necessary to meet the program*s
ongoing costs. This pressure will only increase when Social Security also
experiences negative cash flow and joins HI as a net claimant on the rest
of the budget. 6 Figure 3: Medicare*s HI Trust Fund Faces Cash Deficits as
Baby Boomers Retire

Note: GAO analysis based on the intermediate assumptions of The 2003
Annual Report of the Boards of Trustees of the Federal Hospital Insurance
and Federal Supplementary Medical Insurance Trust Funds.

The gap between HI income and costs shows the severity of HI*s financing
problem over the longer term. This gap can also be expressed relative to
taxable payroll (the HI Trust Fund*s funding base) over a 75- year period.

6 Under the Trustees* intermediate 2003 projections, this will occur for
Social Security (OASDI) in 2018.

-400 -300

-200 -100

0 100

200 2000 2005 2010 2015 2020 2025 2030 2035 2040

Cash surplus Cash deficit

Billions of 2003 dollars

Source: CMS, Office of the Actuary, and GAO. Medicare HI

cash deficit 2013

Page 9 GAO- 03- 650T

This year, under the Trustees* 2003 intermediate estimates, the 75- year
actuarial deficit is projected to be 2.40 percent of taxable payroll* a
significant increase from last year*s projected deficit of 2. 02 percent.
This means that to bring the HI Trust Fund into balance over the 75- year

period, either program outlays would have to be immediately reduced by 42
percent or program income immediately increased by 71 percent, or some
combination of the two. These estimates of what it would take to achieve
75- year trust fund solvency understate the extent of the problem because
the program*s financial imbalance gets worse in the 76th and subsequent
years. As each year passes, we drop a positive year and add a much bigger
deficit year. The projected exhaustion date of the HI Trust Fund is a
commonly used

indicator of HI*s financial condition. Under the Trustees* 2003
intermediate estimates, the HI Trust Fund is projected to exhaust its
assets in 2026. This solvency indicator provides information about HI*s
financial condition, but

it is not an adequate measure of Medicare*s sustainability for several
reasons. In fact, the solvency measure can be misleading and can serve to
give a false sense of security as to Medicare*s true financial condition.

Specifically, HI Trust Fund balances do not provide meaningful information
on the government*s fiscal capacity to pay benefits when program cash
inflows fall below program outlays. As I have described, the government
would need to come up with cash from other sources to pay for benefits
once outlays exceeded program tax income.

In addition, the HI Trust Fund measure provides no information on SMI.
SMI*s expenditures, which currently account for about 43 percent of total
Medicare spending, are projected to grow even faster than those of HI in

the near future. Moreover, Medicare*s complex structure and financing
arrangements mean that a shift of expenditures from HI to SMI can extend
the solvency of the HI Trust Fund, creating the appearance of an
improvement in the program*s financial condition. For example, the
Balanced Budget Act of 1997 modified the home health benefit, which
resulted in shifting a portion of home health spending from the HI Trust
Fund to SMI. Although this shift extended HI Trust Fund solvency, it
increased the draw on general revenues and beneficiary SMI premiums while
generating little net savings.

Ultimately, the critical question is not how much a trust fund has in
assets, but whether the government as a whole and the economy can afford
the promised benefits now and in the future and at what cost to other
claims on available resources. To better monitor and communicate changes
in future total program spending, new measures of Medicare*s
sustainability

Page 10 GAO- 03- 650T

are needed. As program changes are made, a continued need will exist for
measures of program sustainability that can signal potential future fiscal
imbalance. Such measures might include the percentage of program funding
provided by general revenues, the percentage of total federal

revenues or gross domestic product (GDP) devoted to Medicare, or program
spending per enrollee. As such measures are developed, questions would
need to be asked about actions to be taken if projections showed that
program expenditures would exceed the chosen level.

Taken together, Medicare*s HI and SMI expenditures are expected to
increase dramatically, rising from about 12 percent of federal revenues in
2002 to more than one- quarter by midcentury. The budgetary challenge
posed by the growth in Medicare becomes even more significant in
combination with the expected growth in Medicaid and Social Security
spending. As shown in figure 4, Medicare, Medicaid, and Social Security
have already grown from 13 percent of federal spending in 1962 before

Medicare and Medicaid were created to 42 percent in 2002.

Figure 4: Composition of Federal Spending by Budget Function, 1962, 1982,
and 2002

Absent Reform of Medicare and Other Entitlements for the Elderly,
Budgetary Flexibility Will Disappear

1962

31% 50%

13% 6%

Defense Social Security Medicare and Medicaid Net interest All other
spending

1982

9% 34%

25% 21% 11% 19%

32% 17%

23% 9%

2002

Source: Budget of the United States Government, FY 2004, Office of
Management and Budget.

Page 11 GAO- 03- 650T

This growth in spending on federal entitlements for retirees will become
increasingly unsustainable over the longer term, compounding an ongoing
decline in budgetary flexibility. Over the past few decades, spending on

mandatory programs has consumed an ever- increasing share of the federal
budget. 7 In 1962, prior to the creation of the Medicare and Medicaid
programs, spending for mandatory programs plus net interest accounted for
about 32 percent of total federal spending. By 2002, this share had almost
doubled to approximately 63 percent of the budget. (See fig. 5.)

Figure 5: Federal Spending for Mandatory and Discretionary Programs,
Fiscal Years 1962, 1982, and 2002

In much of the past decade, reductions in defense spending helped
accommodate the growth in these entitlement programs. However, even before
the terrorist attacks of September 11, 2001, this ceased to be a

viable option. Indeed, spending on defense and homeland security will grow
as we seek to combat new threats to our nation*s security.

7 *Mandatory spending* refers to outlays for entitlement programs such as
food stamps, Medicare, and veterans* pensions; payment of interest on the
public debt; and outlays for certain nonentitlement programs such as
payments to states from Forest Service receipts.

In 2002 Social Security, Medicare, and Medicaid accounted for over 71
percent of mandatory spending.

1962 6%

68% 26%

Discretionary Mandatory Net interest

1982 45%

44% 11%

2002 9%

37% 54%

Source: Budget of the United States Government: Fiscal Year 2004, Office
of Management and Budget.

Page 12 GAO- 03- 650T

GAO prepares long- term budget simulations that seek to illustrate the
likely fiscal consequences of the coming demographic tidal wave and rising
health care costs. These simulations continue to show that to move into
the future with no changes in federal retirement and health programs is to
envision a very different role for the federal government. Assuming, for
example, that the tax reductions enacted in 2001 do not sunset and
discretionary spending keeps pace with the economy, by midcentury federal
revenues may not even be adequate to pay Social Security and interest on
the federal debt. Spending for the current Medicare program* without any
additional new benefits* is projected to account for more than one-
quarter of all federal revenues. To obtain budget balance, massive
spending cuts, tax increases, or some combination of the two would be
necessary. (See fig. 6.) Neither slowing the growth of discretionary
spending nor allowing the tax reductions to sunset eliminates the
imbalance. In addition, while additional economic growth would help ease
our burden, the projected fiscal gap is too great for us to

grow our way out of the problem.

Page 13 GAO- 03- 650T

Figure 6: Composition of Spending as a Share of GDP Assuming Discretionary
Spending Grows with GDP after 2003 and the 2001 Tax Cuts Do Not Sunset

Note: Assumes currently scheduled Social Security benefits are paid in
full throughout the simulation period. Social Security and Medicare
projections are based on the Trustees* 2003 intermediate assumptions.

Indeed, long- term budgetary flexibility is about more than Social
Security and Medicare. While these programs dominate the long- term
outlook, they are not the only federal programs or activities that bind
the future. The federal government undertakes a wide range of programs,
responsibilities, and activities that obligate it to future spending or
create an expectation for spending. A recent GAO report describes the
range and measurement of such fiscal exposures* from explicit liabilities
such as environmental cleanup requirements to the more implicit
obligations presented by lifecycle costs of capital acquisition or
disaster assistance. 8 Making government fit the challenges of the future
will require not only dealing

8 U. S. General Accounting Office, Fiscal Exposures: Improving the
Budgetary Focus on Long- Term Costs and Uncertainties, GAO- 03- 213
(Washington, D. C.: Jan. 24, 2003).

0 10

20 30

40 50

2000 2015 2030 2050 Fiscal year Percentage of GDP

Net interest Social Security

Medicare and Medicaid All other spending

Revenue Source: GAO*s March 2003 analysis.

Page 14 GAO- 03- 650T

with the drivers* such as entitlements for the elderly* but also looking
at the range of other federal activities. A fundamental review of what the
federal government does and how it does it will be needed. This involves
looking at the base of all major spending and tax policies to assess their
appropriateness, priority, affordability, and sustainability in the years
ahead.

At the same time, it is important to look beyond the federal budget to the
economy as a whole. Figure 7 shows the total future draw on the economy
represented by Medicare, Medicaid, and Social Security. Under the 2003
Trustees* intermediate estimates and the Congressional Budget Office*s
(CBO) most recent long- term Medicaid estimates, spending for these
entitlement programs combined will grow to 14 percent of GDP in 2030 from
today*s 8.4 percent. Taken together, Social Security, Medicare, and
Medicaid represent an unsustainable burden on future generations.

Figure 7: Social Security, Medicare, and Medicaid Spending as a Percentage
of GDP

Note: Projections based on the intermediate assumptions of the 2003
Trustees* Reports, CBO*s March 2003 short- term Medicaid estimates, and
CBO*s June 2002 Medicaid long- term projections under midrange
assumptions.

Although real incomes are projected to continue to rise, they are expected
to grow more slowly than has historically been the case. At the same time,
the demographic trends and projected rates of growth in health care
spending I have described will mean rapid growth in entitlement spending.
Medicare Is Projected

to Absorb EverIncreasing Shares of the Economy

0 5

10 15

20 25

2000 2010 2020 2030 2040 2050 2060 2070 Percentage of GDP

Social Security Medicaid

Medicare

Source: CMS, Office of the Actuary, SSA, Office of the Actuary, CBO and
GAO.

Page 15 GAO- 03- 650T

Taken together, these projections raise serious questions about the
capacity of the relatively smaller number of future workers to absorb the
rapidly escalating costs of these programs.

As HI trust fund assets are redeemed to pay Medicare benefits and SMI
expenditures continue to grow, the program will constitute a claim on real
resources in the future. As a result, taking action now to increase the
future pool of resources is important. To echo Federal Reserve Chairman
Alan Greenspan, the crucial issue of saving in our economy relates to our
ability to build an adequate capital stock to produce enough goods and

services in the future to accommodate both retirees and workers in the
future. 9 The most direct way the federal government can raise national
saving is by increasing government saving; that is, as the economy returns
to a higher growth path, a balanced fiscal policy that recognizes our
longterm challenges can help provide a strong foundation for economic
growth and can enhance our future budgetary flexibility. It is my hope
that we will think about the unprecedented challenge facing future
generations in our aging society. Putting Medicare on a sustainable path
for the future would help fulfill this generation*s stewardship
responsibility to succeeding generations. It would also help to preserve
some capacity for future generations to make their own choices for what
role they want the federal government to play.

As with Social Security, both sustainability and solvency considerations
drive us to address Medicare*s fiscal challenges sooner rather than later.
HI Trust Fund exhaustion may be more than 20 years away, but the squeeze
on the federal budget will begin as the baby boom generation begins to
retire. This will begin as early as 2008, when the leading edge of the
baby boom generation becomes eligible for early retirement. 10 CBO*s
current 10- year budget and economic outlook reflects this. CBO projects
that economic growth will slow from an average of 3.2 percent a year from
2005 through 2008 to 2.7 percent from 2009 through 2013, reflecting slower
labor force growth. At the same time, annual rates of growth in
entitlement spending will begin to rise. Annual growth in Social Security
outlays is projected to accelerate from 5.2 percent in 2007 to 6.6 percent
in 2013. Annual growth in Medicare enrollees is expected to accelerate
from 1.1

9 Testimony before the Senate Committee on Banking, Housing, and Urban
Affairs, July 24, 2001. 10 In 2008, the first baby boomers will reach age
62 and become eligible for Social Security benefits; in 2011, they will
reach age 65 and become eligible for Medicare benefits.

Page 16 GAO- 03- 650T

percent today to 2.9 percent in 2013. Acting sooner rather than later is
essential to ease future fiscal pressures and also provide a more
reasonable planning horizon for future retirees. We are now at a critical
juncture. In less than a decade, the profound demographic shift that is a
certainty will have begun. Despite a common awareness of Medicare*s
current and future fiscal

plight, pressure has been building to address recognized gaps in Medicare
coverage, especially the lack of a prescription drug benefit and
protection against financially devastating medical costs. Filling these
gaps could add significant expenses to an already fiscally overburdened
program. Under

the Trustees* 2003 intermediate assumptions, the present value of HI*s
actuarial deficit is $6.2 trillion, a 20- percent increase from the prior
year. 11 This difficult situation argues for tackling the greatest needs
first and for

making any benefit additions part of a larger structural reform effort.
The Medicare benefit package, largely designed in 1965, provides virtually
no outpatient drug coverage. Beneficiaries may fill this coverage gap in
various ways. According to the Medicare Current Beneficiary Survey, nearly
two- thirds of Medicare beneficiaries had some form of drug coverage from
a supplemental insurance policy, health plan, or public program at some
point during 1999. All beneficiaries have the option to purchase
supplemental policies* Medigap* when they first become eligible for
Medicare at age 65. Those policies that include drug coverage tend to be
expensive and provide only limited benefits. Some beneficiaries

have access to coverage through employer- sponsored policies or private
health plans that contract to serve Medicare beneficiaries. In recent
years, coverage through these sources has become more expensive and less
widely available. Beneficiaries whose incomes fall below certain
thresholds may qualify for Medicaid or other public programs. More than
one- third may lack drug coverage altogether.

In recent years, prescription drug expenditures have grown substantially,
both in total and as a share of all heath care outlays. Prescription drug
spending grew an average of 15. 9 percent per year from 1996 to 2001, more

11 This estimate represents the present value of HI*s future expenditures
less future tax income, taking into account the amount of HI trust fund
assets at hand at the beginning of the projection period and adjusting for
the ending target trust fund balance. Excluding the ending target trust
fund balance, HI*s unfunded obligation is estimated to be $5.9 trillion

over the 75- year period under the Trustees* 2003 intermediate
assumptions. As Bleak Fiscal Future Looms, Efforts to Address Medicare

Coverage Gaps Are Being Considered

Page 17 GAO- 03- 650T

than double the 6.5 percent average growth rate for health care
expenditures overall. (See table 1.) As a result, prescription drugs
account for a growing share of health care spending, rising from 6.5
percent in 1996 to 9.9 percent in 2001. By 2012, prescription drug
expenditures are expected to account for almost 15 percent of total health
expenditures.

Table 1: National Expenditures for Prescription Drugs and Health Care,
1996 to 2001 Year Prescription

drug expenditures (in

billions) Annual growth in prescription

drug expenditures from previous year (percent)

Annual growth in health care expenditures from previous year (percent)

2001 $140.6 15.4 8. 7 2000 121.8 17.3 6. 9 1999 103.9 19.2 5. 7 1998 87.2
15.1 5. 4 1997 75.7 12.8 4. 9 1996 67.2 10.5 5. 0 Average annual growth
from 1996 through 2001 15.9 6. 5 Source: CMS, Office of the Actuary.

In 2002, CBO projected that the average Medicare beneficiary would use
$2,440 worth of prescription drugs in 2003. This is a substantial amount
considering that some beneficiaries lack any drug coverage and others may
have less coverage than in previous years. Moreover, significant numbers
of beneficiaries have drug expenses much higher than those of the average
beneficiary. CBO also estimated that, in 2005, 12 percent of

Medicare beneficiaries would have expenditures above $6, 000. In focusing
on the need for prescription drug coverage, we should not forget that
Medicare does not provide complete protection from catastrophic losses.
Under Medicare, beneficiaries have no limit on their out- of- pocket costs
attributable to cost sharing. The average beneficiary who obtained
services had a total liability for Medicare- covered services

of $1,700, consisting of $1,154 in Medicare copayments and deductibles in
addition to the $546 in annual part B premiums in 1999, the most recent
year for which data are available on the distribution of these costs. For
beneficiaries with extensive health care needs, the burden can be much
higher. In 1999, about 1 million beneficiaries were liable for more than
$5,000, and about 260,000 were liable for more than $10,000 for covered
services. In contrast, employer- sponsored health plans for active workers

Page 18 GAO- 03- 650T

typically limited maximum annual out- of- pocket costs for covered
services to less than $2,000 per year for single coverage. 12 Recently,
several proposals have been made to add a prescription drug

benefit to the Medicare program. While different in scope and detail, the
proposals have certain features in common* including use of a third- party
entity to administer the new drug benefit. The remainder of my remarks
will focus on the lessons learned from our work regarding the private
sector*s use of such an entity to manage the drug benefits of insurers*
policyholders and health plans* enrollees.

Some proposals to add a Medicare outpatient prescription drug benefit look
to private sector strategies as a means to administer a drug benefit and
control costs. Most employer- sponsored health plans contract with

private entities, known as pharmacy benefit managers (PBM), to administer
their prescription drug benefits, and those that do not contract with PBMs
may have units in their organizations that serve the same administrative
purpose. Typically, on behalf of the health plans, PBMs

negotiate drug prices with pharmacies, negotiate rebates with drug
manufacturers, process drug claims, operate mail- order pharmacies, and
employ various cost- control techniques, such as formulary management and
drug utilization reviews. In 2001, nearly 200 million Americans had their
prescription drug benefits administered through PBMs. This year, we
reported on the use of PBMs by health plans in the Federal Employees*
Health Benefits Program (FEHBP). 13 In considering the application of
these findings to Medicare, we are reminded that Medicare*s unique role
and nature may temper how the strategies and potential efficiency gains
afforded by private sector PBMs may be transferred to benefit the program.

12 The Kaiser Family Foundation and Health Research and Education Trust,
Employer Health Benefits: 2000 Annual Survey (Menlo Park, Calif. and
Chicago: 2000). 13 U. S. General Accounting Office, Federal Employees*
Health Benefits: Effects of Using Pharmacy Benefit Managers on Health
Plans, Enrollees, and Pharmacies, GAO- 03- 196 (Washington, D. C.: Jan.
10, 2003). FEHBP covered about 8.3 million federal employees,

retirees, and their dependents as of July 2002, and the three FEHBP plans
we reviewed accounted for about 55 percent of FEHBP enrollment. The FEHBP
plans and PBMs we reviewed were Blue Cross and Blue Shield, which
contracted with AdvancePCS for retail pharmacy services and Medco Health
Solutions for mail- order services; Government Employees Hospital
Association, which contracted with Medco Health Solutions; and PacifiCare
of California, which contracted with Prescription Solutions, another
subsidiary of PacifiCare Health Systems. Private Sector Strategies for

Controlling Drug Expenditures May Be Instructive for Medicare

Page 19 GAO- 03- 650T

PBMs use purchasing volume to leverage their negotiations with pharmacies
and drug manufacturers in seeking favorable prices in the form of
discounts, rebates, or other advantages. Through negotiations, PBMs create
networks of participating retail pharmacies, promising the pharmacies a
greater volume of customers in exchange for discounted prices. PBMs may be
able to secure larger discounts by limiting the number of network
pharmacies. However, smaller networks provide beneficiaries fewer choices
of retailers, thereby limiting convenient access. These are trade- offs
health plans must consider in deciding how extensive a pharmacy network
they want their PBMs to offer beneficiaries. The health plans we reviewed
in our FEHBP study generally provided broad retail pharmacy networks. The
average discounted prices PBMs obtained for drugs from retail pharmacies
were about 18 percent below the average prices cash- paying customers
without drug coverage would have paid for 14 selected widely used brand-
name drugs. For 4 selected generic drugs, the PBM- negotiated retail
pharmacy prices were 47 percent below the price paid by cash- paying
customers.

PBMs also use their leverage to negotiate with drug manufacturers for
rebates. Rebates generally depend on the volume of a manufacturer*s
products purchased. Health plans and PBMs can add to that volume by
concentrating beneficiaries* purchases for particular types of drugs with
certain manufacturers. Health plans can steer their beneficiaries*
purchases to specific drugs through the use of a formulary* that is, a
list of prescription drugs that health plans encourage physicians to
prescribe and beneficiaries to use. Determining whether a drug should be
on the formulary involves clinical evaluations based on a drug*s safety
and effectiveness, and decisions on whether several drugs are
therapeutically equivalent. 14 Restricting the formulary to fewer drugs
within a therapeutic class can provide the PBMs with greater leverage in
negotiating higher rebates because they can help increase the
manufacturer*s market share for certain drugs. However, a restricted
formulary provides beneficiaries with fewer preferred drug alternatives
and makes the policies governing

14 A pharmacy and therapeutics committee within the health plan or a PBM
typically makes decisions about whether to include particular brand- name
or generic drugs on the plan*s formulary. Private Sector Uses PBMs to
Leverage Price

Negotiations through Volume Purchasing

Page 20 GAO- 03- 650T

coverage of nonformulary drugs or the cost sharing for them critical to
beneficiaries. 15 The FEHBP plans and PBMs we reviewed provided enrollees
with

generally nonrestrictive drug formularies across a broad range of drugs
and therapeutic categories. 16 The manufacturer rebates that the PBMs
passed through to the FEHBP plans effectively reduced plans* annual

spending on prescription drugs by a range of 3 percent to 9 percent. The
share of rebates PBMs passed through to the FEHBP plans varied subject to
contractual agreements negotiated between the plans and the PBMs.

PBMs also assisted the FEHBP plans by providing a less expensive mailorder
drug option. Mail- order prices for the FEHBP plans we reviewed averaged
about 27 percent lower than cash- paying customers would pay for the same
quantity at retail pharmacies for 14 brand- name drugs and 53 percent
lower for 4 generic drugs. The FEHBP plans generally had lower cost-
sharing requirements for drugs purchased through mail order, particularly
for more expensive brand- name drugs or maintenance medications for
chronic conditions.

The claims and information processing capabilities PBMs offered also
helped the FEHBP plans to manage drug costs and monitor quality of care.
PBMs maintain a centralized database on each enrollee*s drug history that
can be used to review for potential adverse drug interactions or
potentially less expensive alternative medications. They also use claims
data to

monitor patterns of patient use, physician prescribing practices, and
pharmacy dispensing practices. Their systems provide *real- time* claims
adjudication capabilities that allow a customer*s claim for a drug
purchase

to be approved or denied at the time the pharmacist begins the process of
filling a prescription. Two plans in our FEHBP study reported savings
ranging from 6 to 9 percent of the plan*s annual drug spending; the
savings

15 Plans generally encourage the use of formulary drugs by having lower
cost sharing or requiring special approval of a nonformulary drug. For
example, health plans have increasingly adopted three- tiered cost-
sharing strategies whereby enrollees incur the lowest out- of- pocket
costs for using generic drugs, higher costs for brand- name drugs on the
formulary, and the highest costs for brand- name drugs not included on the
formulary. 16 Our report compared the FEHBP plans* formularies to the
Department of Veterans Affairs

(VA) National Formulary, considered by the Institute of Medicine to be not
overly restrictive. Each FEHBP plan we reviewed included over 90 percent
of the drugs listed on the VA formulary or therapeutically equivalent
alternatives, and included at least one drug in 93 percent to 98 percent
of the therapeutic classes covered by VA.

Page 21 GAO- 03- 650T

were associated primarily with real- time claims denials preventing early
drug refills and safety advisories cautioning pharmacists about potential
adverse interactions or therapy duplications.

While Medicare*s sheer size would provide it with significant leverage in
negotiating with pharmacies and drug manufacturers, doing so would
represent a departure from traditional Medicare. Medicare beneficiaries
represent less than 15 percent of the population but a disproportionately
higher share* about 40 percent* of prescription drug spending. However,
because of Medicare*s design and obligations as a public program, its
current purchasing strategies vary considerably from those of the private
sector.

 Any willing provider. In contrast with private payers* reliance on
selective contracting with providers and suppliers, the traditional
Medicare program has generally allowed any hospital, physician, or other
provider willing to accept Medicare*s reimbursements and requirements to
participate in the program. With respect to drug purchasing in particular,
private plans determine the extent of their enrollees* access by the
choices they make about the size of their participating pharmacy network
and breadth of their drug formulary. Allowing any pharmacy willing to meet
Medicare*s terms to participate or allowing all therapeutically equivalent
drugs equal coverage on a formulary would restrict the program*s ability
to secure advantageous prices. Moreover, health plans and PBMs currently

make formulary determinations privately. In contrast, Medicare*s policies
have historically been open to public comment.

 Administrative rate- setting. Whereas private health plans typically
rely on price negotiations to establish payment rates, Medicare generally
establishes payment rates administratively. As discussed earlier,
Medicare*s rates often exceed market prices and this is the case for some
of the few outpatient prescription drugs covered by Medicare. 17 The

program*s method of paying for these drugs is prescribed in statute: In
essence, Medicare pays 95 percent of a drug*s *average wholesale price*
(AWP). Despite its name, however, AWP is not necessarily a price that
wholesalers charge and is not based on the price of any actual sale of
drugs by a manufacturer. AWPs are published by manufacturers in drug price
compendia, and Medicare bases providers* payments on these published AWPs.
Other public and private purchasers typically use the

17 GAO- 01- 1118. Use of Private- Sector

Strategies in Medicare Would Represent Departure from Traditional Policies
and Practices

Page 22 GAO- 03- 650T

leverage of volume and competition to secure better prices. By statute,
Medicaid, the nation*s health insurance program for certain low- income
Americans, is guaranteed manufacturers* rebates based on prices charged
other purchasers. 18 Certain other public payers can pay at rates set in
the

federal supply schedule, which uses verifiable confidential information on
the prices drug manufacturers charge their *most favored* private
customers. Manufacturers agree to these prices, in part, in exchange for
the right to sell drugs to the more than 40 million Medicaid
beneficiaries.

 Low- budget program administration. Duplicating the type of controls
PBMs have exercised over private- sector drug benefits would likely
involve devoting a larger share of total expenditures to administration
than is spent by Medicare currently. Medicare*s administrative costs
historically have been extremely low, averaging about 2 percent of the
cost of the services themselves. 19 This level of expenditure may not be
consistent with the level needed to review the volumes of claims data
associated with prescription drugs for the elderly or acquire and maintain
the on- line systems and databases PBMs use to employ such utilization

controls as real- time claims adjudication. The number of prescriptions
for Medicare beneficiaries could easily exceed the current number of
claims for all other services combined, or over 1 billion annually.

Medicare would undoubtedly need assistance from external entities to
administer a drug benefit, just as it has used insurers to process claims
in the traditional program and Medicare+ Choice plans to go further by
also managing services and assuming risk. Decisions about the roles
assigned an entity or entities and the latitude allowed them in carrying
out those roles would be critical. These decisions would undoubtedly
affect the benefit*s value to beneficiaries and the efficiencies and
savings secured for both beneficiaries and taxpayers. Some of these
decisions parallel those made by FEHBP plans that I discussed* trade- offs
about beneficiaries* interests in broad pharmacy networks and formularies
versus potential savings. Others stem from the uniqueness of Medicare, its
likely

18 Since the enactment of the Omnibus Budget Reconciliation Act of 1990,
drug manufacturers are required to provide rebates to state Medicaid
programs on outpatient drugs based on the *lowest* or *best* prices they
charged other purchasers or a minimum of 15.1 percent of the average
manufacturers* price (AMP) for brand- name drugs. Rebates must be at least
11 percent of AMP for generic drugs.

19 U. S. General Accounting Office, Medicare: HCFA Faces Challenges to
Control Improper Payments, GAO/ T- HEHS- 00- 74, (Washington, D. C.: Mar.
9, 2000). Decisions about the Extent

of Latitude and Competition Allowed Are Critical to Administering a
Medicare Drug Benefit

Page 23 GAO- 03- 650T disproportionate share of the drug market, and its
position as a public program requiring transparency and fairness.

Insurers and PBMs have been successful in securing some savings on drug
purchases by leveraging their volume to move market share from one product
to another. Medicare*s leverage, given that purchases by the elderly
constitute about 40 percent of the drug market, could be considerable. Yet
the large market share may also be likely to attract considerable
attention. The administration of a Medicare drug benefit could then be
subject to the same intensity of external pressures from

interested parties regarding program prices and rules that can often
inhibit the program from operating efficiently today. The potential for
micromanagement could compromise trying to use the very flexibility PBMs
have employed in negotiating prices and selecting preferred providers in
order to generate savings. An alternative would be to sacrifice some of
the program*s leverage and grant flexibility to multiple PBMs or similar
entities so that any one entity would be responsible for administering
only a share of the market.

Contracting with multiple PBMs or similar entities, however, would pose
other challenges. If each had exclusive responsibility for a geographic
area, beneficiaries who wanted certain drugs could be advantaged or
disadvantaged merely because they lived in a particular area. To minimize
inequities, Medicare could, like some private sector purchasers, specify
core benefit characteristics or maintain clinical control over formulary
decisions instead of delegating those decisions to its contractors.

If multiple PBMs or similar entities operated in a designated area,
beneficiaries could choose among them to administer their drug benefits.
These organizations would compete for consumers directly on the basis of
differences in their drug benefit offerings and administration. This
contrasts with the private sector where drug benefits are typically part
of an overall insurance plan, and PBMs typically compete for contracts
with insurers or other purchasers. Competition could be favorable to
beneficiaries if they were adequately informed about differences among

competing entities offering drug benefits and shared in the savings.
However, adequate oversight would need to be in place to ensure that fair
and effective competition was maintained. For example, a means to ensure
that beneficiaries received comprehensive user- friendly information about
policy and benefit differences among competing entities would be
necessary. Monitoring marketing and customer recruitment strategies and
holding entities accountable for complying with federal requirements would
require adequate investment. The contracting entities could need

Page 24 GAO- 03- 650T

protections as well. Some mechanism would be needed to risk adjust
payments for differences in beneficiaries* health status so that those
entities enrolling a disproportionate share of high- use beneficiaries
would not be disadvantaged.

Medicare*s financial challenge is very real and growing. The 21st century
has arrived and our demographic tidal wave is on the horizon. Within 5
years, individuals in the vanguard of the baby boom generation will be
eligible for Social Security and 3 years after that they will be eligible
for Medicare. The future costs of serving the baby boomers are already
becoming a factor in CBO*s short- term cost projections.

Frankly, we know that incorporating a prescription drug benefit into the
existing Medicare program will add hundreds of billions of dollars to
program spending over just the next 10 years. For this reason, I cannot
overstate the importance of adopting meaningful reforms to ensure that
Medicare remains viable for future generations. Adding a drug benefit to
Medicare requires serious consideration of how that benefit will affect

overall program spending. If competing private entities are to be used to
administer a drug benefit, it is important to understand how these
entities can be used in the Medicare context to provide a benefit that
balances

beneficiary needs and cost containment. Medicare reform would be done best
with considerable lead time to phase in changes and before the changes
that are needed become dramatic and disruptive. Given the size of
Medicare*s financial challenge, it is only realistic to expect that
reforms intended to bring down future costs will have to proceed
incrementally. We should begin this now, when retirees are still a far
smaller proportion of the population than they will be in the future. The
sooner we get started, the less difficult the task will be.

We must also be mindful that health care costs compete with other
legitimate priorities in the federal budget, and their projected growth
threatens to crowd out future generations* flexibility to decide which
competing priorities will be met. In making important fiscal decisions for
our nation, policymakers need to consider the fundamental differences
among wants, needs, and what both individuals and our nation can afford.
This concept applies to all major aspects of government, from major

weapons system acquisitions to issues affecting domestic programs. It also
points to the fiduciary and stewardship responsibility that we all share
to ensure the sustainability of Medicare for current and future
generations Concluding

Observations

Page 25 GAO- 03- 650T

within a broader context of providing for other important national needs
and economic growth.

The public sector can play an important role in educating the nation about
the limits of public support. Currently, there is a wide gap between what
patients and providers expect and what public programs are able to
deliver. Moreover, there is insufficient understanding about the terms and
conditions under which health care coverage is actually provided by the
nation*s public and private payers. In this regard, GAO is preparing a
health care framework that includes a set of principles to help
policymakers in their efforts to assess various health financing reform
options. This framework will examine health care issues systemwide and

identify the interconnections between public programs that finance health
care and the private insurance market. The framework can serve as a tool
for defining policy goals and ensuring the use of consistent criteria for
evaluating changes. By facilitating debate, the framework can encourage
acceptance of changes necessary to put us on a path to fiscal
sustainability. I fear that if we do not make such changes and adopt

meaningful reforms, future generations will enjoy little flexibility to
fund discretionary programs or make other valuable policy choices.

Mr. Chairman, this concludes my prepared statement. I will be happy to
answer any questions you or other committee members may have.

For future contacts regarding this testimony, please call William J.
Scanlon, Director, Health Care Issues, at (202) 512- 7114. Other
individuals who made key contributions include Rashmi Agarwal, Linda
Baker, John

Dicken, Hannah Fein, Kathryn Linehan, James McTigue, Jennifer Rellick, and
Melissa Wolf. Contacts and

Acknowledgments

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