21st Century: Addressing Long-Term Fiscal Challenges Must Include
a Re-examination of Mandatory Spending (15-FEB-06, GAO-06-456T). 
                                                                 
This testimony discusses entitlement and other mandatory spending
programs in light of our nation's long-term fiscal outlook and	 
the challenges it poses for the budget and oversight processes.  
In our report entitled 21st Century Challenges: Reexamining the  
Base of the Federal Government, we presented illustrative	 
questions for policy makers to consider as they carry out their  
responsibilities. These questions look across major areas of the 
budget and federal operations including discretionary and	 
mandatory spending, and tax policies and programs. We hope that  
this report, among other things, will be used by various	 
congressional committees as they consider which areas of	 
government need particular attention and reconsideration.	 
Congress will also receive more specific proposals, some of them 
will be presented within comprehensive agendas. Our report	 
provides examples of the kinds of difficult choices the nation	 
faces with regard to discretionary spending; mandatory spending, 
including entitlements; as well as tax policies and compliance	 
activities.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-456T					        
    ACCNO:   A46958						        
  TITLE:     21st Century: Addressing Long-Term Fiscal Challenges Must
Include a Re-examination of Mandatory Spending			 
     DATE:   02/15/2006 
  SUBJECT:   Budget controllability				 
	     Budget obligations 				 
	     Economic analysis					 
	     Entitlement programs				 
	     Federal funds					 
	     Fiscal policies					 
	     Funds management					 
	     Future budget projections				 
	     Policy evaluation					 
	     Strategic planning 				 

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GAO-06-456T

     

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Testimony

Before the Budget Committee, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 2:00 p.m. EST

Wednesday, February 15, 2006

21ST CENTURY

Addressing Long-Term Fiscal Challenges Must Include a Re-examination of
Mandatory Spending

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

GAO-06-456T

Mr. Chairman, Representative Spratt, and Members of the Committee:

I appreciate this opportunity to talk with you about the need to look at
entitlement and other mandatory spending programs in light of our nation's
long-term fiscal outlook and the challenge it poses for the budget and
oversight processes.

As I have said many times before, meeting our nation's large, growing, and
structural fiscal imbalance will require a three-pronged approach:

           o  restructuring existing entitlement programs,
           o  reexamining the base of discretionary and other spending, and
           o  reviewing and revising existing tax policy, including tax
           expenditures,1 which can operate like mandatory spending programs.

Before I turn to the major driver of the long-term spending outlook-
rising health care costs combined with known demographic trends-I'd like
to step back and take a broader view of the need to reexamine and
reconsider what the federal government does, how it does it, and who does
it. We are in the first decade of the 21st century but the basis and
design for many of the federal government's activities date from before I
was born.

In our report entitled 21st Century Challenges: Reexamining the Base of
the Federal Government,2 we presented illustrative questions for policy
makers to consider as they carry out their responsibilities. These
questions look across major areas of the budget and federal operations
including discretionary and mandatory spending, and tax policies and
programs. We hope that this report, among other things, will be used by
various congressional committees as they consider which areas of
government need particular attention and reconsideration. You will, of
course, also receive more specific proposals, some of them will be
presented within comprehensive agendas-the President's Budget released
last week is just one very prominent example.

1 Tax expenditures result in forgone revenue for the federal government
due to preferential provisions in the tax code, such as exemptions and
exclusions from taxation, deductions, credits, deferral of tax liability,
and preferential tax rates. These tax expenditures are often aimed at
policy goals similar to those of federal spending programs; existing tax
expenditures, for example, are intended to encourage economic development
in disadvantaged areas, finance postsecondary education, and stimulate
research and development. See GAO, Government Performance and
Accountability: Tax Expenditures Represent a Substantial Federal
Commitment and Need to Be Reexamined, GAO-05-690 (Washington, D.C.: Sept.
23, 2005).

2 GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).

Our report provides examples of the kinds of difficult choices the nation
faces with regard to discretionary spending; mandatory spending, including
entitlements; as well as tax policies and compliance activities. It is, I
think, important to recognize that tax policies and programs financing the
federal budget can be reviewed not only with an eye toward the overall
level of revenue provided to fund federal operations and commitments, but
also the mix of taxes and the extent to which the tax code is used to
promote overall economic growth and broad-based societal objectives. In
practice, some tax expenditures are very similar to mandatory spending
programs even though they are not subject to the appropriations process or
selected budget control mechanisms. As we reported last September, tax
expenditures represent a significant commitment and are not typically
subjected to review or reexamination.

Mandatory spending programs-like tax expenditures-are governed by
eligibility rules and benefit formulas, which means that funds are spent
as required to provide benefits to those who are eligible and wish to
participate. Since Congress and the President must change substantive law
to change the cost of these programs, they are relatively uncontrollable
on an annual basis. Moreover, as we reported in a 1994 analysis, their
cost cannot be controlled by the same "spending cap" mechanism used for
discretionary spending.3

By their very nature mandatories limit budget flexibility.4 As figure 1
shows, mandatory spending has grown as a share of the total federal
budget. For example, mandatory spending has grown from 27 percent before
the creation of Medicare and Medicaid to 42 percent in 1985 to 54 percent
last year. (Total spending not subject to annual appropriations-mandatory
spending and net interest-has grown from 56 percent in 1985 to 61 percent
last year.) Under both the Congressional Budget Office baseline estimates
and the President's Budget, this spending would grow further.

3 GAO, Budget Policy: Issues in Capping Mandatory Spending,
GAO/AIMD-94-155 (Washington, D.C.: July 18, 1994).

4 Similarly tax expenditures may limit flexibility on the revenue side;
there is a tradeoff between tax rates and revenue lost through tax
expenditures. In order to raise a given amount of federal revenue, tax
rates must be raised higher than they otherwise need to be due to revenue
losses from tax expenditures.

Figure 1: Federal Spending for Mandatory and Discretionary Programs

Note: Projections assume discretionary spending grows with inflation after
2006.

While the long-term fiscal outlook is driven by Medicare, Medicaid and
Social Security, it does not mean that all other mandatory programs should
be "given a pass." As we have noted elsewhere, reexamination of the "fit"
between government programs and the needs and priorities of the nation
should be an accepted practice.5 So in terms of budget flexibility-the
freedom of each Congress and President to allocate public resources-we
cannot ignore mandatory spending programs even if they do not drive the
aggregate.

5 GAO-05-325SP .

While some might suggest that mandatory programs could be controlled by
being converted to discretionary or annually appropriated programs, that
seems unlikely to happen. If we look across the range of mandatories we
see many programs have objectives and missions that contribute to the
achievement of a range of broad-based and important public policy goals
such as providing a floor of income security in retirement, fighting
hunger, fostering higher education, and providing access to affordable
health care. To these ends, these programs-and tax expenditures-were
designed to provide benefits automatically to those who take the desired
action or meet the specified eligibility criteria without subjecting them
to an annual decision regarding spending or delay in the provision of
benefits such a process might entail.

Although mandatory spending is not amenable to "caps," that does not mean
that mandatory programs should be permitted to be on autopilot and grow to
an unlimited extent. Since the spending for any given entitlement or other
mandatory program is a function of the interaction between the eligibility
rules and the benefit formula-either or both of which may incorporate
exogenous factors such as economic downturns--the way to change the path
of spending for any of these programs is to change those rules or
formulas. We recently issued a report on "triggers"-some measure which,
when reached or exceeded, would prompt a response connected to that
program.6 By identifying significant increases in the spending path of a
mandatory program relatively early and acting to constrain it, Congress
may avert much larger and potentially disruptive financial challenges and
program changes in the future.

A trigger is a measure and a signal mechanism-like an alarm clock. It
could trigger a "soft" response-one that calls attention to the growth
rate or the level of spending and prompts special consideration when the
threshold or target is breached. Two examples of soft responses that could
be triggered include requiring the relevant agency to prepare a report
analyzing why the trigger was tripped and/or requiring the President to
submit a proposal to change the path or explain why he thinks it should
remain unchanged. The Medicare program already contains a "soft" response
trigger: The President is required to submit a proposal for action to
Congress if the Medicare Trustees determine in 2 consecutive years that
the general revenue share of Medicare spending is projected to exceed 45
percent during a 7-year period.7 Each year the Social Security and
Medicare Trustees test for program financial adequacy over the next 10
years. The results of the test are included in the respective Trustees'
reports to Congress, in which they note that failure to meet this test is
an indication that action is needed. A few Social Security reform
proposals have taken this further by including language requiring
Presidential and Congressional action if the Social Security Board of
Trustees determines that the balance ratio of either of the Social
Security trust funds will be zero for any calendar year during the
succeeding 75 years.8 Given the complexity and controversy associated with
reforming entitlements, commissions might be one means to come up with
possible triggers appropriate to the specific programs.

6GAO, Mandatory Spending: Using Budget Triggers to Constrain Growth,
GAO-06-276 (Washington, D.C.: Jan. 31, 2006).

Soft responses can help in alerting decision makers of potential problems
but they do not ensure that action to decrease spending or increase
revenue is taken. With soft responses, the fiscal path continues unless
Congress and the President take action. In contrast, a trigger could lead
to "hard" responses requiring a predetermined, program-specific action to
take place, such as changes in eligibility criteria and benefit formulas,
automatic revenue increases, or automatic spending cuts. With hard
responses, spending is automatically constrained, revenue is automatically
increased, or both, unless Congress takes action to override. For example,
this year the President's Budget proposes to change the Medicare trigger
from solely "soft" to providing a "hard" (automatic) response if Congress
fails to enact the President's proposal.9 Figure 2 below illustrates the
conceptual differences between hard and soft responses of a budget
trigger.

7For the purpose of the Medicare trigger, general revenue is defined as
the difference between Medicare program outlays and dedicated Medicare
financing sources. Dedicated Medicare financing sources are defined as
Hospital Insurance (HI) payroll taxes, the HI share of income taxes on
Social Security benefits, state transfers for Part D prescription drug
benefits, premiums paid under Parts A, B, and D, and any gifts received by
the trust funds.

8Recently, this provision was included in the Bipartisan Retirement
Security Act of 2005, H.R. 440, 109th Cong. S: 14 (2005).

9 The response now would include a sequester if the Congress did not act
on the President's proposal. The proposed sequester would result in a
four-tenths of a percent reduction in all payments to providers beginning
in the year the threshold is exceeded. Each year the shortfall continues
to occur the reduction would grow by an additional four-tenths of a
percent. We have not yet analyzed how this would work.

Figure 2: Conceptual Differences between Hard and Soft Responses

In our recent report on mandatory spending triggers, we discussed the
kinds of responses that might be triggered and the importance of
program-specific design. Proposed changes in underlying benefits structure
and design of a mandatory program can be considered in the context both of
the factors that drive the growth of that program and the specific goals
and objectives of the program. For example, some mandatories are intended
to have a countercyclical effect; any triggered response in these programs
would have to be designed not to interfere with that function. Its design,
therefore, would have to be sensitive to whether growth comes because the
program is, in fact, working as an automatic stabilizer.

Both near- and long-term perspectives should be considered in the design
of triggers. For some programs, it might be appropriate to tie the trigger
to historical data-for example, to see whether spending growth was greater
than some historical average or path. For programs that expose the
government to long-term commitments, it might be more appropriate to tie
the trigger to projections of future spending. For "contributory" programs
that represent a long-term commitment of future earmarked resources, such
as Social Security, one appropriate measure could be the actuarial
projections of the 75-year outlook. Some similar approach might be used
for programs like pension or health insurance.

Any discussion to create triggered responses and their design must
recognize that unlike controls on discretionary spending, there is some
tension between the idea of triggers and the nature of entitlement and
other mandatory spending programs. These programs-as with tax provisions
such as tax expenditures-were designed to provide benefits based on
eligibility formulas or actions as opposed to an annual decision regarding
spending. This tension makes it more challenging to constrain costs and to
design both triggers and triggered responses. At the same time, with only
about one-third of the budget under the control of the annual
appropriations process, considering ways to increase transparency,
oversight, and control of mandatory programs must be part of addressing
the nation's long-term fiscal challenges.

Before I turn to the largest driver of our long-term challenge-rising
health care costs-let me note that the idea of triggers need not only
apply to spending. The revenue side of the budget should also be
addressed. If, for example, one option to cover the increased costs of a
mandatory spending program was a premium increase or tax increase, it
would serve to increase public visibility and could make the American
people more aware of how much they are paying for services. More directly
analogous to mandatory spending programs is the extensive use of tax
incentives, rather than direct spending authority, to address various
social objectives. As we reported in September 2005,10 the sum of revenue
loss estimates associated with tax expenditures-such as tax exclusions,
credits, and deductions-was nearly $730 billion in 2004.11 Under the most
recent estimates, this has risen to more than $775 billion in 2005.

Let me be clear that in suggesting application of this analysis to tax
expenditures I am not addressing the appropriate level of taxation as a
share of GDP. Whatever level of revenue is deemed appropriate, tax
expenditures that seek to achieve programmatic or policy goals should-like
other federal programs or activities-be reviewed to determine their
effectiveness, continued relevance, affordability, and sustainability. Tax
expenditures have a significant effect on overall tax rates-in that, for
any given level of revenue, overall tax rates must be higher to offset the
revenue forgone through tax expenditures-as well as the budget and fiscal
flexibility. They also contribute to the growing complexity of the federal
tax system. Many tax expenditures operate like mandatory spending programs
and generally are not subject to reauthorization. Such tax expenditures
are embedded in the tax system. They are not subject to a performance test
and are off the radar screen for the most part. This is a concern from a
budgetary standpoint because taxpayer dollars committed to fund these
expenditures do not compete in the annual appropriations process and are
effectively "fully funded" before any discretionary spending is
considered. The analysis we have applied to spending would also be useful
in examining tax expenditures.

10See GAO-05-690 .

11Summing the individual tax expenditure estimates is useful for gauging
the general magnitude of the federal revenue involved, but it does not
take into account possible interactions between individual provisions.

       Federal Health Care Spending Drives the Long-Term Fiscal Challenge

Among mandatory spending programs-and indeed tax expenditures-the health
area is especially important because the long-term fiscal challenge is
largely a health care challenge. Contrary to public perceptions, health
care is the biggest driver of the long-term fiscal challenge. While Social
Security is important because of its size, health care spending is both
large and projected to grow much more rapidly.

Our most recent simulation results illustrate the importance of health
care in the long-term fiscal outlook as well as the imperative to take
action. Simply put, our nation's fiscal policy is on an imprudent and
unsustainable course. These long-term budget simulations show, as do those
published last December by the Congressional Budget Office (CBO),12 that
over the long term we face a large and growing structural deficit due
primarily to known demographic trends and rising health care costs and
lower federal revenues as a percentage of the economy. Continuing on this
unsustainable fiscal path will gradually erode, if not suddenly damage,
our economy, our standard of living, and ultimately our national security.
Our current path also will increasingly constrain our ability to address
emerging and unexpected budgetary needs and increase the burdens that will
be faced by future generations.

Figures 3 and 4 present our long-term simulations under two different sets
of assumptions. In figure 3, we start with CBO's 10-year
baseline-constructed according to the statutory requirements for that
baseline.13 Consistent with these requirements, discretionary spending is
assumed to grow with inflation for the first 10 years and tax cuts
scheduled to expire are assumed to expire. After 2016, discretionary
spending is assumed to grow with the economy, and revenue is held constant
as a share of GDP at the 2016 level. In figure 4, two assumptions are
changed: (1) discretionary spending is assumed to grow with the economy
after 2006 rather than merely with inflation, and (2) all expiring tax
provisions are extended. For both simulations, Social Security and
Medicare spending is based on the 2005 Trustees' intermediate projections,
and we assume that benefits continue to be paid in full after the trust
funds are exhausted. Medicaid spending is based on CBO's December 2005
long-term projections under mid-range assumptions.

12 CBO, The Long-Term Budget Outlook (Washington, D.C.: December 2005).

13CBO, The Budget and Economic Outlook: Fiscal Years 2007 to 2016
(Washington, D.C.: January 2006).

Figure 3: Composition of Spending as a Share of GDP under Baseline
Extended

Note: In addition to the expiration of tax cuts, revenue as a share of GDP
increases through 2016 due to (1) real bracket creep, (2) more taxpayers
becoming subject to the alternative minimum tax (AMT), and (3) increased
revenue from tax-deferred retirement accounts. After 2016, revenue as a
share of GDP is held constant.

Figure 4: Composition of Spending as a Share of GDP Assuming Discretionary
Spending Grows with GDP after 2006 and All Expiring Tax Provisions Are
Extended

Note: This includes certain tax provisions that expired at the end of
2005, such as the increased AMT exemption amount.

As these simulations illustrate, absent significant policy changes on the
spending and/or revenue side of the budget, the growth in mandatory
spending on federal retirement and especially health entitlements will
encumber an escalating share of the government's resources. Indeed, when
we assume that all the temporary tax reductions are made permanent and
discretionary spending keeps pace with the economy, our long-term
simulations suggest that by 2040 federal revenues may be adequate to pay
only some Social Security benefits and interest on the federal debt.
Neither slowing the growth in discretionary spending nor allowing the tax
provisions to expire-nor both together-would eliminate the imbalance.
Although revenues will be part of the debate about our fiscal future,
assuming no changes to Social Security, Medicare, Medicaid, and other
drivers of the long-term fiscal gap would require at least a doubling of
taxes-and that seems highly implausible. Economic growth is essential, but
we will not be able to simply grow our way out of the problem. The numbers
speak loudly: our projected fiscal gap is simply too great. Closing the
current long-term fiscal gap would require sustained economic growth far
beyond that experienced in U.S. economic history since World War II. Tough
choices are inevitable, and the sooner we act the better.

Accordingly, substantive reform of the major health programs and Social
Security is critical to recapturing our future fiscal flexibility.
Ultimately, the nation will have to decide what level of federal benefits
and spending it wants and how it will pay for these benefits. Our current
fiscal path will increasingly constrain our ability to address emerging
and unexpected budgetary needs and increase the burdens that will be faced
by future generations. Continuing on this path will mean escalating and
ultimately unsustainable federal deficits and debt that will serve to
threaten our future national security as well as the standard of living
for the American people.

The aging population and rising health care spending will have significant
implications not only for the budget, but also the economy as a whole.
Figure 5 shows the total future draw on the economy represented by Social
Security, Medicare, and Medicaid. Under the 2005 Trustees' intermediate
estimates and CBO's 2005 long-term Medicaid estimates under mid-range
assumptions, spending for these entitlement programs combined will grow to
15.7 percent of gross domestic product (GDP) in 2030 from today's 8.4
percent. It is clear that, taken together, Social Security, Medicare, and
Medicaid represent an unsustainable burden on future generations.

Furthermore, most of the long-term growth is in health care. While Social
Security in its current form will grow from 4.3 percent of GDP today to
6.4 percent in 2080, Medicare's burden on the economy will quintuple-from
2.7 percent to 13.8 percent of the economy-and these projections assume a
growth rate for Medicare spending that is below historical experience! As
figure 5 shows, unlike Social Security which grows larger as a share of
the economy and then levels off, within this projection period we do not
see Medicare growth abating. Whether or not the President's Budget
proposals on Medicare are adopted, they should serve to raise public
awareness of the importance of health care costs to both today's budget
and tomorrow's. This could serve to jump start a discussion about
appropriate ways to control the major driver of our long-term fiscal
outlook-health care spending.

Figure 5: Social Security, Medicare, and Medicaid Spending as a Percent of
GDP

Note: Social Security and Medicare projections are based on the
intermediate assumptions of the 2005 Trustees' Reports. Medicaid
projections are based on CBO's January 2006 short-term Medicaid estimates
and CBO's December 2005 long-term Medicaid projections under mid-range
assumptions.

As noted, 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. Consumers are largely insulated by
third-party payers from the cost of health care decisions.

The health care spending problem is particularly vexing for the federal
budget, affecting not only Medicare and Medicaid but also other important
federal health programs, such as for our military personnel and veterans.
For example, Department of Defense health care spending rose from about
$12 billion in 1990 to about $30.4 billion in 2004-in part, to meet
additional demand resulting from program eligibility expansions for
military retirees, reservists, and the dependents of those two groups and
for the increased needs of active duty personnel involved in conflicts in
Iraq, Bosnia, and Afghanistan. Expenditures by the Department of Veterans
Affairs have also grown-from about $12 billion in 1990 to about $26.8
billion in 2004-as an increasing number of veterans look to federal
programs to supply their health care needs.

The challenge to rein in health care spending is not limited to public
payers, however, as the phenomenon of rising health care costs associated
with new technology exists system-wide. This means that addressing the
unsustainability of health care costs is also a major competitiveness and
societal challenge that calls for us as a nation to fundamentally rethink
how we define, deliver, and finance health care in both the public and the
private sectors. A major difficulty is that our current system does little
to encourage informed discussions and decisions about the costs and value
of various health care services. These decisions are very important when
it comes to cutting-edge drugs and medical technologies, which can be
incredibly expensive but only marginally better than other alternatives.
As a nation, we are going to need to weigh unlimited individual wants
against broader societal needs and decide how responsibility for financing
health care should be divided among employers, individuals, and
government. Ultimately, we may need to define a set of basic and essential
health care services to which every American is ensured access.
Individuals wanting additional services, and insurance coverage to pay for
them, might be required to allocate their own resources. Clearly, such a
dramatic change would require a long transition period-all the more reason
to act sooner rather than later.

In recent years, policy analysts have discussed a number of incremental
reforms that take aim at moderating health care spending, in part by
unmasking health care's true costs. (See fig. 6 for a list of selected
reforms.) Among these reforms is to devise additional cost-sharing
provisions to make health care costs more transparent to patients.
Currently, many insured individuals pay relatively little out of pocket
for care at the point of delivery because of comprehensive health care
coverage-precluding the opportunity to sensitize these patients to the
cost of their care.

Figure 6: Selected Reforms Aimed at Moderating Health Care Spending

      o  Develop a set of national practice standards to help avoid           
      unnecessary care, improve outcomes, and reduce litigation.              
      o  Encourage case management approaches for people with expensive acute 
      and chronic conditions to improve the quality and efficiency of care    
      delivered and avoid inappropriate care.                                 
      o  Foster the use of information technology to increase consistency,    
      transparency, and accountability in health care.                        
      o  Emphasize prevention and wellness care, including nutrition.         
      o  Leverage the government's purchasing power to control costs for      
      prescription drugs and other health care services.                      
      o  Revise certain federal tax preferences for health care to encourage  
      the more efficient use of appropriate care.                             
      o  Create an insurance market that adequately pools risk and offers     
      alternative levels of coverage.                                         
      o  Develop a core set of basic and essential services with supplemental 
      coverage being available as an option but at a cost. Use the Federal    
      Employees Health Benefits Program (FEHBP) model as a possible means to  
      experiment and see the way forward.                                     
      o  Limit spending growth for government-sponsored health care programs  
      (e.g., percentage of the budget and/or the economy).                    

Source: GAO

Other steps include reforming the policies that give tax preferences to
insured individuals and their employers. These policies permit the value
of employees' health insurance premiums to be excluded from the
calculation of their taxable earnings and exclude the value of the premium
from the employers' calculation of payroll taxes for both themselves and
employees. Tax preferences also exist for health savings accounts and
other consumer-directed plans. These tax exclusions represent a
significant source of forgone federal revenue and work at cross-purposes
to the goal of moderating health care spending. As figure 7 shows, in 2005
the tax expenditure responsible for the greatest revenue loss was that for
the exclusion of employer contributions for employees' insurance premiums
and medical care.

Figure 7: Health Care Was the Nation's Top Tax Expenditure in Fiscal Year
2005

Note: "Tax expenditures" refers to the special tax provisions that are
contained in the federal income taxes on individuals and corporations. OMB
does not include forgone revenue from other federal taxes such as Social
Security and Medicare payroll taxes.

aIf the payroll tax exclusion were also counted here, the total tax
expenditure for employer contributions for health insurance premiums would
be about 50 percent higher or $177.6 billion.

bThis is the revenue loss and does not include associated outlays of $14.6
billion.

Another area conducive to incremental change involves provider payment
reforms. These reforms are intended to induce physicians, hospitals, and
other health care providers to improve on quality and efficiency. For
example, studies of Medicare patients in different geographic areas have
found that despite receiving a greater volume of care, patients in higher
use areas did not have better health outcomes or experience greater
satisfaction with care than those living in lower use areas. Public and
private payers are experimenting with payment reforms designed to foster
the delivery of care that is proven to be both clinically and cost
effective. Ideally, identifying and rewarding efficient providers and
encouraging inefficient providers to emulate best practices will result in
better value for the dollars spent on care. The development of uniform
standards of practice could lead to ensuring that people with chronic
illnesses, a small but expensive population, received more and
cost-effective and patient-centered care while reducing unwarranted
medical malpractice litigation.

The problem of escalating health care costs is complex because addressing
federal programs such as Medicare and the federal-state Medicaid program
will need to involve change in the health care system of which they are a
part-not just within federal programs. This will be a major societal
challenge that will affect all age groups. Because our health care system
is complex, with multiple interrelated pieces, solutions to health care
cost growth are likely to be incremental and require a number of extensive
efforts over many years. In my view, taking steps to address the health
care cost dilemma system-wide puts us on the right path for correcting the
long-term fiscal problems posed by the nation's health care entitlements.

I have focused today on health care because it is a driver of our fiscal
outlook. Indeed, health care is already putting a squeeze on the federal
budget.

Health care is the dominant but not the only driver of our long-term
fiscal challenge. Today it is hard to think of our fiscal imbalances as a
big problem: the economy is healthy and interest rates seem low. We,
however, have an obligation to look beyond today. Budgets, deficits, and
long-term fiscal and economic outlooks are not just about numbers: they
are also about values. It is time for all of us to recognize our
stewardship obligation for the future. We should act sooner rather than
later. We all must make choices that may be difficult and unpleasant today
to avoid passing an even greater burden on to future generations. Let us
not be the generation who sent the bill for its consumption to its
children and grandchildren.

Thank you Mr. Chairman, Mr. Spratt, and members of the Committee for
having me today. We at GAO, of course, stand ready to assist you and your
colleagues as you tackle these important challenges.

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