Long-Term Fiscal Outlook: Action Is Needed to Avoid the 	 
Possibility of a Serious Economic Disruption in the Future	 
(29-JAN-08, GAO-08-411T).					 
                                                                 
GAO has for many years warned that our nation is on an imprudent 
and unsustainable fiscal path. During the past 3 years, the	 
Comptroller General has traveled to 25 states as part of the	 
Fiscal Wake-Up Tour. Members of this diverse group of policy	 
experts agree that finding solutions to the nation's long-term	 
fiscal challenge will require bipartisan cooperation, a 	 
willingness to discuss all options, and the courage to make tough
choices. At the request of Chairman Conrad and Senator Gregg, the
Comptroller General discussed the long-term fiscal outlook, our  
nation's huge health care challenge, and the shrinking window of 
opportunity for action. 					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-411T					        
    ACCNO:   A80234						        
  TITLE:     Long-Term Fiscal Outlook: Action Is Needed to Avoid the  
Possibility of a Serious Economic Disruption in the Future	 
     DATE:   01/29/2008 
  SUBJECT:   Budget activities					 
	     Budget administration				 
	     Budget deficit					 
	     Budgets						 
	     Economic analysis					 
	     Economic policies					 
	     Fiscal policies					 
	     Health care costs					 
	     Policy evaluation					 

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GAO-08-411T

   

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United States Government Accountability Office: 
GAO: 

Testimony: 

Before the Committee on the Budget, U.S. Senate: 

For Release on Delivery: 
Expected at 10:00 a.m. EST: 
Tuesday, January 29, 2008: 

Long-Term Fiscal Outlook: 

Action Is Needed to Avoid the Possibility of a Serious Economic 
Disruption in the Future: 

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

GAO-08-411T: 

GAO Highlights: 

Highlights of GAO-08-411T, a testimony before the Committee on the 
Budget, U.S. Senate. 

Why GAO Did This Study: 

GAO has for many years warned that our nation is on an imprudent and 
unsustainable fiscal path. 

During the past 3 years, the Comptroller General has traveled to 25 
states as part of the Fiscal Wake-Up Tour. Members of this diverse 
group of policy experts agree that finding solutions to the nationï¿½s 
long-term fiscal challenge will require bipartisan cooperation, a 
willingness to discuss all options, and the courage to make tough 
choices. 

At the request of Chairman Conrad and Senator Gregg, the Comptroller 
General discussed the long-term fiscal outlook, our nationï¿½s huge 
health care challenge, and the shrinking window of opportunity for 
action. 

What GAO Found: 

As we enter 2008, what we call the long-term fiscal challenge is not in 
the distant future. Already the first members of the baby boom 
generation have filed for early Social Security retirement benefitsï¿½and 
will be eligible for Medicare in only 3 years. Simulations by GAO, the 
Congressional Budget Office (CBO), and others all show that despite a 3-
year decline in the budget deficit, we still face large and growing 
structural deficits driven primarily by rising health care costs and 
known demographic trends. Under any plausible scenario, the federal 
budget is on an imprudent and unsustainable path. 

Figure: Federal Surpluses and Deficits Under GAOï¿½s Alternative 
Simulation: 

[See PDF for image] 

This figure is a line graph. The vertical axis of the graph represents 
percent of GDP from -20 to +5. The horizontal axis of the graph 
represents fiscal years from 2000 to 2040. A line depicting federal 
surpluses and deficits begins at about +2% of GDP in 2000, and declines 
steadily to -20% GDP in 2040. 

Source: GAO's August 2007 analysis. 

[End of figure] 

Rapidly rising health care costs are not simply a federal budget 
problem; they are our nationï¿½s number one fiscal challenge. Growth in 
health-related spending is the primary driver of the fiscal challenges 
facing the state and local governments. Unsustainable growth in health 
care spending is a systemwide challenge that also threatens to erode 
the ability of employers to provide coverage to their workers and 
undercut our ability to compete in a global marketplace. Addressing the 
unsustainability of health care costs is a 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. 

The passage of time has only worsened the situation: the size of the 
challenge has grown and the time to address it has shrunk. The longer 
we wait the more painful and difficult the choices will become, and the 
greater the risk of a very serious economic disruption. 

It is understandable that the Congress and the administration are 
focused on the need for a short-term fiscal stimulus. However, our long-
term challenge increases the importance of careful design of any 
stimulus packageï¿½it should be timely, targeted, and temporary. At the 
same time, creating a capable and credible commission to make 
recommendations to the next Congress and the next president for action 
on our longer-range and looming fiscal imbalance is called for. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.GAO-08-411T]. For more information, contact 
Susan J. Irving at (202) 512-9142 or [email protected]. 

[End of section] 

Chairman Conrad, Senator Gregg, and Members of the Committee: 

I appreciate this invitation to talk with you about our nation's long- 
term fiscal outlook as we enter 2008--and the challenge it continues to 
present for the future of America and Americans. Your decision to 
dedicate a hearing to this important issue again demonstrates the 
seriousness with which you and this Committee view our nation's large 
and growing fiscal challenge. Senators Conrad and Gregg, thank you for 
your leadership. 

I wish I could say the long-term outlook is different than when I last 
appeared before you on Halloween--but as all of you know, it is not. 
Under any plausible scenario, the federal budget is on an imprudent and 
unsustainable path. Long-term fiscal simulations by GAO, the 
Congressional Budget Office (CBO), and others all show that despite a 3-
year decline in the federal government's unified budget deficit, we 
still face large and growing structural deficits driven primarily by 
rising health care costs and known demographic trends. The passage of 
time only serves to worsen this situation: the size of the challenge 
has grown and the time to address it has shrunk. Already the first 
members of the baby boom generation have filed for early Social 
Security retirement benefits--and will be eligible for Medicare in only 
3 years. Although Social Security is important because of its size, the 
real driver of the long-term fiscal outlook is health care spending. 
Medicare and Medicaid are both large and projected to continue growing 
rapidly in the future. 

Everyone on this Committee is well aware of the nature and importance 
of the challenge we face. Today, therefore, I will emphasize a few key 
points: 

* Although recent declines in the annual budget deficit are good news, 
our longer-term fiscal outlook is worse--and absent meaningful action 
we will face spiraling levels of debt. 

* Our long-term fiscal challenge is primarily a health-care challenge. 

* We face an increasing need and yet a shrinking window of opportunity 
for action. 

My remarks are based on GAO's previous work, including various reports 
and testimonies on our nation's long-term fiscal challenges, health 
care, and the need for budget process reform. These efforts were 
conducted in accordance with generally accepted government auditing 
standards. 

Despite Several Years of Declining Annual Budget Deficits, the Long- 
Term Outlook Has Worsened: 

Between fiscal years 2003 and 2007 the unified budget deficit declined. 
Certainly declining deficits are better than rising deficits. But this 
decline in the unified deficit is not an indicator that our challenge 
has eased. First, even this short-term deficit is understated: It masks 
the fact that the federal government has been using the Social Security 
surplus to offset spending in the rest of government for many years. If 
we exclude that Social Security surplus, the on-budget deficit--what I 
call the operating deficit--in fiscal year 2007 was more than double 
the size of the unified deficit. For example, the Department of the 
Treasury (Treasury) reported a unified deficit of $163 billion and an 
on-budget deficit of $344 billion in fiscal year 2007. The accrual- 
based net operating deficit reported in the Financial Report of the 
United States Government was also significantly higher than the unified 
deficit--$276 billion for fiscal year 2007. This measure provides more 
information on the longer-term implications of today's policy decisions 
and operations than does either cash-based figure, but it too offers an 
incomplete picture of the long-term fiscal challenge.[Footnote 1] 

As we recently reported,[Footnote 2] several countries have begun 
preparing fiscal sustainability reports to help assess the implications 
of their public pension and health care programs and other challenges 
in the context of overall sustainability of government finances. 
European Union members also annually report on longer-term fiscal 
sustainability. The goal of these reports is to increase public 
awareness and understanding of the long-term fiscal outlook in light of 
escalating health care cost growth and population aging, to stimulate 
public and policy debates, and to help policymakers make more informed 
decisions. These countries used a variety of measures, including 
projections of future revenue and spending and summary measures of 
fiscal imbalance and fiscal gaps, to assess fiscal sustainability. Last 
year, we recommended that the United States should prepare and publish 
a long-range fiscal sustainability report every 2 to 4 years.[Footnote 
3] 

Despite these improvements in short-term deficits, the long-term 
outlook continued to move in the wrong direction. Even in 2001--in a 
time of annual surpluses--GAO's long-term simulations showed a long- 
term challenge, but at that time it was more than 40 years out. 
Although an economic slowdown, decisions driven by the attacks of 9/11, 
and the need to respond to natural disasters have contributed to the 
change in outlook, they do not account for the dramatic worsening in 
the long-term outlook since 2001. Subsequent tax cuts and the passage 
of the Medicare prescription drug benefit in 2003 were also major 
factors, but they are not the only actions that challenge fiscal 
discipline. For example, one might also question the current farm bill 
in the face of reported record farm income. 

As the Committee knows, CBO's latest projections show the deficit 
rising in response to a weakening economy. Neither this increase nor 
the recent declines tell us much about our long-term path. Rather, our 
long-term path must inform how we deal with the near-term weakness. 

Our real challenge then is not this year's deficit or even next year's; 
it is how to change our current path so that growing deficits and debt 
levels do not swamp our ship of state. Health care costs are still 
growing much faster than the economy and our population is still aging. 
The retirement of the baby boom generation and the rising health care 
costs will soon place unprecedented and long-lasting stress on the 
federal budget, raising debt held by the public to unsustainable 
levels. 

Figure 1 shows GAO's simulation of the deficit path based on recent 
trends and policy preferences. In this we assume that the expiring tax 
cuts are extended through 2017--and then revenues are brought to their 
historical level as a share of gross domestic product (GDP)--that 
discretionary spending grows with the economy and no structural changes 
are made to Social Security, Medicare, or Medicaid.[Footnote 4] 

Figure 1: Unified Federal Surpluses and Deficits Under GAO's 
Alternative Simulation: 

[See PDF for image] 

This figure is a line graph. The vertical axis of the graph represents 
percent of GDP from -20 to +5. The horizontal axis of the graph 
represents fiscal years from 2000 to 2040. A line depicting federal 
surpluses and deficits begins at about +2% of GDP in 2000, and declines 
steadily to -20% GDP in 2040. 

Source: GAO's August 2007 analysis. 

[End of figure] 

Rapidly rising health care costs are not simply a federal budget 
problem; they are our nation's number one fiscal challenge. As shown in 
figure 2, GAO's fiscal model demonstrates that state and local 
governments--absent policy changes--will also face large and growing 
fiscal challenges beginning within the next few years.[Footnote 5] As 
is true for the federal budget, growth in health-related spending-- 
Medicaid and health insurance for state and local employees and 
retirees--is the primary driver of the fiscal challenges facing the 
state and local governments. 

Figure 2: State and Local Fiscal Imbalance: 

[See PDF for image] 

This figure is a line graph. The vertical axis of the graph represents 
percent of GDP from -6 to +2. The horizontal axis of the graph 
represents fiscal years from 1980 to 2050. A line depicting state and 
local fiscal imbalance begins at about 0% of GDP in 1980, and declines 
steadily to about -4% GDP in 2050. 

Source: Historical data from National Income and Product Accounts; GAO 
analysis. 

Note: The state and local net lending/net borrowing measure is similar 
to the federal unified budget surplus/deficit in that it includes all 
governmental receipts and all expenditures. 

[End of figure] 

For the federal government increased spending and rising deficits will 
drive a rising debt burden. At the end of fiscal year 2007, debt held 
by the public exceeded $5.0 trillion. Figure 3 shows that this growth 
in our debt cannot continue unabated without causing serious harm to 
our economy. But this is only part of the story. The federal government 
has been spending the surpluses in the Social Security and other trust 
funds for years; if we include debt held by those funds, our total debt 
is much higher--$9.0 trillion. On September 29, 2007, the statutory 
debt limit had to be raised for the third time in 4 years; between the 
end of fiscal year 2003 and the end of fiscal year 2007 the debt limit 
had to be increased by one-third. Although borrowing by one part of the 
federal government from another may not have the same economic and 
financial implications as borrowing from the public, it represents a 
claim on future resources and hence a burden on future taxpayers and 
the future economy. 

Figure 3: Debt Held by the Public Under GAO's Alternative Simulation: 

[See PDF for image] 

This figure is a line graph. The vertical axis of the graph represents 
percent of GDP from 0 to 200. The horizontal axis of the graph 
represents fiscal years from 2000 to 2040. A line depicting debt held 
by the public under GAOï¿½s alternative simulation begins at about 40% of 
GDP in 2000, and increases steadily to above 200% GDP in 2040. 

Source: GAOï¿½s August 2007 analysis. 

[End of figure] 

As alarming as the size of our current debt is, it excludes many items, 
including the gap between future promised and funded Social Security 
and Medicare benefits, veterans' health care, and a range of other 
commitments and contingencies that the federal government has pledged 
to support. If these items are factored in, the total burden in present 
value dollars is estimated to be about $53 trillion.[Footnote 6] I know 
it is hard to make sense of what "trillions" means. One way to think 
about it is this: Imagine we decided to put aside and invest today 
enough to cover these promises tomorrow. It would take approximately 
$455,000 per American household--or $175,000 for every man, woman, and 
child in the United States. 

Clearly, despite some progress in addressing our short-term deficits, 
we have not made progress on our long-term fiscal challenge. In fact, 
we have lost and continue to lose ground absent meaningful action (see 
fig. 4). 

Figure 4: Short-Term Fiscal Position versus Long-Term Fiscal Exposures: 

[See PDF for image] 

This figure is a multiple line graph. The left vertical axis of the 
graph represents Unified budget deficit, operating deficit, and net 
operating cost (billions). The right vertical axis of the graph 
represents fiscal exposures (trillions). The horizontal axis of the 
graph represents years 2004 through 2007. The following data is 
depicted (amounts are approximated from the graphical representation): 

Long-term fiscal exposures: 
Unified budget deficit, operating deficit, and net operating cost 
(billions): steady increase from $700+ billion in 2004 to $800+ billion 
in 2007; 
Fiscal exposures (trillions): steady increase from $45+ trillion in 
2004 to $52+ trillion in 2007. 

Net operating cost: 
Unified budget deficit, operating deficit, and net operating cost 
(billions): steady increase from $600+ billion in 2004 to $700+ billion 
in 2005, then a steady decline to about $300 billion in 2007. 
Fiscal exposures (trillions): steady increase from $40+ trillion in 
2004 to $45+ trillion in 2005, then a steady decline to about $15+ 
trillion in 2007. 

Operating deficit: 
Unified budget deficit, operating deficit, and net operating cost 
(billions): steady decline from $550+ billion in 2004 to $350+ billion 
in 2007; 
Fiscal exposures (trillions): steady decline from $30+ trillion in 2004 
to $20+ trillion in 2007. 

Unified deficit: 
Unified budget deficit, operating deficit, and net operating cost 
(billions): steady decline from $400+ billion in 2004 to $200+ billion 
in 2007; 
Fiscal exposures (trillions): steady decline from $20+ trillion in 2004 
to $10+ trillion in 2007. 

Source: GAO analysis. 

Notes: Data are from CBO and Treasury. Estimates of the federal 
government's long-term fiscal exposures are based on the Financial 
Report of the United States Government. These estimates include the 
present value of future social insurance obligations over a 75-year 
time horizon as of January 1. These estimates have not been adjusted 
for inflation. 

[End of figure] 

Our Long-Term Fiscal Outlook Is Driven by Health Care: 

Although Social Security is a major part of the fiscal challenge, it is 
far from our biggest challenge. Spending on Medicare and Medicaid 
represents a much larger, faster growing, and more immediate problem. 
In fact, the federal government's obligations for Medicare Part D alone 
exceed the unfunded obligations for Social Security. Health care 
spending systemwide continues to grow at an unsustainable pace, eroding 
the ability of employers to provide coverage to their workers and 
undercutting their ability to compete internationally. Finally, despite 
spending far more of our economy on health care than other nations, the 
United States has above average infant mortality, below average life 
expectancy, and the largest percentage of uninsured individuals. In 
short, our health care system is badly broken. 

Medicare and Medicaid spending threaten to consume an untenable share 
of the budget and economy in the coming decades. The federal government 
has essentially written a "blank check" for these programs. In 
contrast, other industrialized nations have put their health care 
programs on a budget, even ones with national health care plans. We 
should consider imposing limits on federal spending for health care 
sooner rather than later. Figure 5 shows the total future draw on the 
economy represented by Social Security, Medicare, and Medicaid. 
Although Social Security in its current form will grow from 4.2 percent 
of GDP today to 6.3 percent in 2080, Medicare and Medicaid's burden on 
the economy will almost quadruple--from 4.7 percent to 17.7 percent of 
the economy. Unlike Social Security, which grows larger as a share of 
the economy and then levels off, Medicare and Medicaid continue to grow 
during this projection period. Furthermore, these projections assume 
growth in Medicare and Medicaid spending of GDP per capita plus about 1 
percent on average--a rate that is significantly below recent 
historical experience of about 2.5 percent above GDP per capita. But 
even with this "optimistic" assumption, the outlook is daunting. It is 
clear that health care is the main driver of our long-term challenge. 
In fact, if there is one thing that could bankrupt America, it's 
runaway health care costs. We must not allow that to happen. 

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

[See PDF for image] 

This is a line graph with three stacked lines (Social Security, 
Medicaid, and Medicare). The vertical axis represents Percent of GDP 
and the horizontal axis represents fiscal years 2000 through 2080. 
The following data is depicted: 

2000: 
Social Security: 4.229; 
Medicaid: 1.23; 
Medicare: 2.277. 

2001: 
Social Security: 4.334; 
Medicaid: 1.322; 
Medicare: 2.433. 

2002: 
Social Security: 4.409; 
Medicaid: 1.44; 
Medicare: 2.523. 

2003: 
Social Security: 4.371; 
Medicaid: 1.501; 
Medicare: 2.56. 

2004: 
Social Security: 4.283; 
Medicaid: 1.516; 
Medicare: 2.629. 
		
2005:	
Social Security: 4.254; 
Medicaid: 1.457; 
Medicare: 2.7. 

2006:	
Social Security: 4.28; 
Medicaid: 1.383; 
Medicare: 3.072. 

2007:	
Social Security: 4.29; 
Medicaid: 1.401; 
Medicare: 3.185. 

2008: 
Social Security: 4.24; 
Medicaid: 1.449; 
Medicare: 3.255. 

2009:	
Social Security: 4.26; 
Medicaid: 1.490; 
Medicare: 3.333. 

2010:	
Social Security: 4.32; 
Medicaid: 1.531; 
Medicare: 3.414. 

2011:	
Social Security: 4.36; 
Medicaid: 1.578; 
Medicare: 3.49. 

2012:	
Social Security: 4.44; 
Medicaid: 1.630; 
Medicare: 3.588. 

2013:	
Social Security: 4.54; 
Medicaid: 1.683; 
Medicare: 3.694. 

2014:	
Social Security: 4.65; 
Medicaid: 1.739; 
Medicare: 3.806. 

2015:	
Social Security: 4.76; 
Medicaid: 1.799; 
Medicare: 3.918. 

2016:	
Social Security: 4.86; 
Medicaid: 1.864; 
Medicare: 4.044. 

2017:	
Social Security: 4.976; 
Medicaid: 1.930 
Medicare: 4.183. 

2018:	
Social Security: 5.08; 
Medicaid: 2.2; 
Medicare: 4.331. 

2019:	
Social Security: 5.2; 
Medicaid: 2.2; 
Medicare: 4.483. 

2020:	
Social Security: 5.31; 
Medicaid: 2.3; 
Medicare: 4.642. 

2021:	
Social Security: 5.41; 
Medicaid: 2.3; 
Medicare: 4.809. 

2022:	
Social Security: 5.22; 
Medicaid: 2.4; 
Medicare: 4.988. 

2023: 	
Social Security: 5.61; 
Medicaid: 2.4; 
Medicare: 5.173. 
		
2024:	
Social Security: 5.71; 
Medicaid: 2.5; 
Medicare: 5.359. 

2025:	
Social Security: 5.8; 
Medicaid: 2.6; 
Medicare: 5.547. 

2026:	
Social Security: 5.89; 
Medicaid: 2.6; 
Medicare: 5.739. 

2027:	
Social Security: 5.97; 
Medicaid: 2.7; 
Medicare: 5.935. 

2028:	
Social Security: 6.05; 
Medicaid: 2.7; 
Medicare: 6.131. 

2029:	
Social Security: 6.12; 
Medicaid: 2.8; 
Medicare: 6.322. 

2030:	
Social Security: 6.17; 
Medicaid: 2.8; 
Medicare: 6.505. 

2031:	
Social Security: 6.22; 
Medicaid: 2.9; 
Medicare: 6.682. 

2032:	
Social Security: 6.27; 
Medicaid: 2.9; 
Medicare: 6.851. 

2033:	
Social Security: 6.3; 
Medicaid: 3; 
Medicare: 7.017. 

2034:	
Social Security: 6.32; 
Medicaid: 3.1; 
Medicare: 7.279. 

2035:	
Social Security: 6.33; 
Medicaid: 3.1; 
Medicare: 7.34. 

2036:	
Social Security: 6.34; 
Medicaid: 3.2; 
Medicare: 7.498. 

2037:	
Social Security: 6.34; 
Medicaid: 3.3; 
Medicare: 7.643. 

2038:	
Social Security: 6.34; 
Medicaid: 3.3; 
Medicare: 7.774. 

2039:	
Social Security: 6.33; 
Medicaid: 3.4; 
Medicare: 7.894. 

2040:	
Social Security: 6.31; 
Medicaid: 3.4; 
Medicare: 8.01. 

2041:	
Social Security: 6.3; 
Medicaid: 3.5; 
Medicare: 8.121. 

2042:	
Social Security: 6.28; 
Medicaid: 3.6; 
Medicare: 8.229. 

2043: 
Social Security: 6.27; 
Medicaid: 3.6; 
Medicare: 8.334. 

2044:	
Social Security: 6.25; 
Medicaid: 3.7; 
Medicare: 8.437. 

2045:	
Social Security: 6.24; 
Medicaid: 3.7; 
Medicare: 8.54. 

2046:	
Social Security: 6.23; 
Medicaid: 3.8; 
Medicare: 8.64. 

2047:	
Social Security: 6.22; 
Medicaid: 3.8; 
Medicare: 8.737. 

2048:	
Social Security: 6.21; 
Medicaid: 3.9; 
Medicare: 8.829. 

2049:	
Social Security: 6.2; 
Medicaid: 3.9; 
Medicare: 8.916. 

2050:	
Social Security: 6.2; 
Medicaid: 4; 
Medicare: 9.002. 

2051:	
Social Security: 6.19; 
Medicaid: 4.063; 
Medicare: 9.008. 

2052:	
Social Security: 6.19; 
Medicaid: 4.127; 
Medicare: 9.172. 

2053:	
Social Security: 6.19; 
Medicaid: 4.192; 
Medicare: 9.256. 

2054:	
Social Security: 6.2; 
Medicaid: 4.258; 
Medicare: 9.344. 

2055:	
Social Security: 6.2; 
Medicaid: 4.325; 
Medicare: 9.439. 

2056:	
Social Security: 6.21; 
Medicaid: 4.393; 
Medicare: 9.538. 

2057:	
Social Security: 6.21; 
Medicaid: 4.462; 
Medicare: 9.634. 

2058:	
Social Security: 6.22; 
Medicaid: 4.533; 
Medicare: 9.728. 

2059:	
Social Security: 6.23; 
Medicaid: 4.604; 
Medicare: 9.82. 

2060:	
Social Security: 6.23; 
Medicaid: 4.676; 
Medicare: 9.91. 

2061:	
Social Security: 6.24; 
Medicaid: 4.75; 
Medicare: 10. 

2062:	
Social Security: 6.24; 
Medicaid: 4.825; 
Medicare: 10.087. 

2063:	
Social Security: 6.24; 
Medicaid: 4.901; 
Medicare: 10.175. 

2064:	
Social Security: 6.25; 
Medicaid: 4.978; 
Medicare: 10.262. 

2065:	
Social Security: 6.25; 
Medicaid: 5.056; 
Medicare: 10.349. 

2066:	
Social Security: 6.25; 
Medicaid: 5.136; 
Medicare: 10.429. 

2067:	
Social Security: 6.25; 
Medicaid: 5.217; 
Medicare: 10.502. 

2068:	
Social Security: 6.26; 
Medicaid: 5.299; 
Medicare: 10.574. 

2069:	
Social Security: 6.26; 
Medicaid: 5.383; 
Medicare: 10.648. 

2070:	
Social Security: 6.26; 
Medicaid: 5.467; 
Medicare: 10.718. 

2071:	
Social Security: 6.27; 
Medicaid: 5.553; 
Medicare: 10.784. 

2072:	
Social Security: 6.27; 
Medicaid: 5.641; 
Medicare: 10.845. 

2073:	
Social Security: 6.27; 
Medicaid: 5.73; 
Medicare: 10.906. 

2074:	
Social Security: 6.27; 
Medicaid: 5.82; 
Medicare: 10.964. 

2075:	
Social Security: 6.27; 
Medicaid: 5.912; 
Medicare: 11.022. 

2076:	
Social Security: 6.27; 
Medicaid: 6.005; 
Medicare: 11.079. 

2077:	
Social Security: 6.27; 
Medicaid: 6.099; 
Medicare: 11.134. 

2078:	
Social Security: 6.28; 
Medicaid: 6.195; 
Medicare: 11.187. 

2079:	
Social Security: 6.28; 
Medicaid: 6.293; 
Medicare: 11.239. 

2080:	
Social Security: 6.28; 
Medicaid: 6.392; 
Medicare: 11.29. 

Source: GAO analysis based on data from the Office of the Chief 
Actuary, Social Security Administration, Office of the Actuary, Centers 
for Medicare and Medicaid Services, and the Congressional Budget 
Office. 

Notes: Social Security and Medicare projections based on the 
intermediate assumptions of the 2006 Trusteesï¿½ Reports. Medicaid 
projections based on CBOï¿½s August 2006 short-term Medicaid estimates 
and CBOï¿½s December 2005 long-term Medicaid projections under mid-range 
assumptions. 

[End of figure] 

Changing the path of health care spending is much more complicated than 
dealing with Social Security. 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 volume and complexity of health care 
services, and information on the cost and quality of health care is not 
readily available. 

Systemwide Growth in Health Care Spending Driven by Certain Factors: 

Public and private health care spending continues to rise because of 
increased medical prices and increased utilization due to growth in the 
number, or volume, of services per capita, and use of more intense, or 
complex, 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. As shown in 
figure 6, total health care spending is absorbing an increasing share 
of our nation's GDP. From 1976 through 2006, total public and private 
spending on health care grew from about 8 percent to 16 percent of GDP. 
Total health care spending is projected to grow to about 20 percent of 
GDP by 2016. 

Figure 6: Health Care Spending as a Percent of GDP: 

[See PDF for image] 

This figure is a vertical bar graph. The vertical axis of the graph 
represents percent from 0 to 25. The horizontal axis of the graph 
represents years 1976, 1986, 1996, 2006, and 2016 (projected). The 
following data is depicted: 

Year: 1976; 
Health Care Spending as a Percent of GDP: 8.4%. 

Year: 1986; 
Health Care Spending as a Percent of GDP: 10.6%. 

Year: 1996; 
Health Care Spending as a Percent of GDP: 13.7%. 

Year: 2006; 
Health Care Spending as a Percent of GDP: 16.0%. 

Year: 2016; 
Health Care Spending as a Percent of GDP: 19.6%. 

Source: Centers for Medicare and Medicaid Services, Office of the 
Actuary. 

Notes: The figure for 2016 is projected. The most current data 
available on health care spending are for 2006. 

[End of figure] 

Addressing the unsustainability of health care costs is 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 very expensive but offer no 
advantage over their alternatives. 

Medical technology is a major contributor to growth in health care 
spending. For example, one study found that the average amount spent 
per heart attack case increased nearly $10,000 per case after 
controlling for inflation, or 4.2 percent real growth per year between 
1984 and 1998.[Footnote 7] Nearly half of the cost increases resulted 
from people getting more intensive technologies--such as cardiac 
catheterization--over time. In some cases, new technology can lead to 
overdiagnosis and the excessive use of resources. One study cites the 
use of spinal magnetic resonance imaging (MRI) as one example.[Footnote 
8] Researchers find that diagnostic spinal MRI sometimes reveals 
abnormalities having no clinical relevance. According to the study, 
some physicians act on this information and perform unnecessary surgery 
that can lead to complications. 

Obesity, smoking, and other population risk factors can lead to 
expensive chronic conditions; the increased prevalence of such 
conditions--for example, diabetes and heart disease--drives growth in 
the utilization of health care resources and therefore in spending. 
Obesity has been the subject of several recent studies focusing on 
associated health care cost increases. For example, one study 
attributes 27 percent of the growth in inflation-adjusted per capita 
spending between 1987 and 2001 to the rising prevalence of obesity and 
higher relative per capita spending among obese individuals.[Footnote 
9] 

Fundamental Challenges in Containing Health Care Spending Growth: 

Both public and private payers face fundamental challenges in the 
struggle to contain health care spending growth. One of the challenges 
involves the unbridled use of technology and society's unmanaged 
expectations. Experts note that the nation's general tendency is to 
treat patients with available technology when there is the slightest 
chance of benefit to the patient, even though the costs may far 
outweigh the benefit to society as a whole. They note that the 
discipline of technology assessment has not kept pace with technology 
advancements.[Footnote 10] 

Today's employers, which finance a substantial share of the health care 
of the privately insured population, are seeking more information on 
health care technology costs and benefits. Although the Food and Drug 
Administration (FDA), for example, evaluates new medical products based 
on safety and efficacy data submitted by manufacturers, it does not 
evaluate whether the new products are cost-effective compared with 
existing products used for the same treatment indications. In turn, 
Medicare, which generally relies on FDA approval decisions, does not 
evaluate whether new technologies are superior, either clinically or 
economically, compared with technologies already covered and paid for 
by the program. Further exacerbating the situation, consumers, spurred 
by advertising and the Internet, demand access to new medical 
technology without knowledge of its value, safety, or efficacy. 

Another cost containment challenge for all payers relates to the market 
dynamics of health care compared with other economic sectors. In an 
ideal market, informed consumers prod competitors to offer the best 
value. However, without reliable comparative information on medical 
outcomes, quality of care, and cost, consumers are less able to 
determine the best value. Insurance masks the actual costs of goods and 
services, providing little incentive for consumers to be cost- 
conscious. Similarly, clinicians must often make decisions in the 
absence of universal medical standards of practice. Under these 
circumstances, medical practices vary across the nation, as evidenced 
by wide geographic variation in per capita spending and outcomes, even 
after controlling for patient differences in health status. 

Solutions to Health Care Cost Growth Are Likely to Be Incremental: 

In recent years, policy analysts have discussed a number of incremental 
reforms aimed at moderating health care spending, in part by unmasking 
health care's true costs. Some call for devising new insurance 
strategies 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. 

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. 

Proposals have been made to better target tax preferences to low-income 
individuals and to change the tax treatment to allow consumers the same 
tax advantages whether they receive their health insurance through 
their employers or purchase it on their own. 

As figure 7 shows, in 2006 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 2006: 

[See PDF for image] 

This figure is a stacked vertical bar graph. The vertical axis of the 
graph represents revenue loss estimates (dollars in billions). The 
horizontal axis of the graph represents top tax expenditures. The 
following data is depicted: 

Exclusion of employer contributions for medical insurance premiums and 
medical care: 
Approximate payroll tax revenue losses: $62.5; 
Treasury estimated income tax revenue losses: $125; 
Total: $187.4[A]. 

Net exclusion of employer-sponsored pension contributions and earnings: 
Treasury estimated income tax revenue losses: $89.8[A]. 

Deductibility of mortgage interest on owner-occupied homes: 
Treasury estimated income tax revenue losses: $68.3. 

Capital gains (except agriculture, timber, iron ore, and coal): 
Treasury estimated income tax revenue losses: $48.6. 

Deductibility of nonbusiness state and local taxes other than on owner-
occupied homes: 
Treasury estimated income tax revenue losses: $43.1. 

Source: GAO analysis of OMB, Analytical Perspectives, Budget of the 
United States Government, Fiscal Year 2008. 

[A] The value of employer-provided health insurance is excluded from 
Medicare and Social Security payroll taxes. Some researchers have 
estimated that payroll tax revenue losses amounted to more than half of 
the income tax revenue losses in 2004, and we use this estimate for 
2006. The research we are aware of dealt only with health care, 
therefore the 50 percent figure may not apply to other items that are 
excluded from otherwise applicable income and payroll taxes. 

[End of figure] 

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 
better clinically and more 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 more cost-effective treatments designed to achieve the same 
outcomes. 

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 systemwide puts us 
on the right path for correcting the long-term fiscal problems posed by 
the nation's health care entitlements. I have suggested in the past 
that we consider four elements as pillars of any major health care 
reform effort: 

* Provide universal access to basic and essential health care. 

* Impose limits on federal spending for health care. 

* Implement national, evidence-based medical practice standards to 
improve quality, control costs, and reduce litigation risks. 

* Take steps to ensure that all Americans assume more personal 
responsibility and accountability for their own health and wellness. 

As a nation, we 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 in an affordable and sustainable manner. 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, would have that 
choice but would 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. 

The Window of Opportunity Is Narrowing: 

As we enter 2008, what we call the long-term fiscal challenge is not in 
the distant future. In fact, the first baby boomers already have filed 
for early retirement benefits and will be eligible for Medicare 
benefits in less than 3 years. The budget and economic implications of 
the baby boom generation's retirement have already become a factor in 
CBO's 10-year baseline projections and that impact will only intensify 
as the baby boomers age. As the share of the population over 65 climbs, 
demographics will interact with rising health care costs. The longer we 
wait, the more painful and difficult the choices will become. Simply 
put, our nation is on an imprudent and unsustainable long-term fiscal 
path that is getting worse with the passage of time. 

The financial markets are noticing. Approximately 3 years ago, Standard 
and Poor's issued a publication stating that absent policy changes, the 
U.S. government's debt-to-GDP ratio was on track to mirror ratios 
associated with speculative-grade sovereigns. Within the last month, 
Moody's Investors Service issued its annual report on the United 
States. In that report, they noted their concern that absent Medicare 
and Social Security reforms, the long-term fiscal health of the United 
States and our current Aaa bond rating were at risk. These not too 
veiled comments serve to note the significant longer-term interest rate 
risk that we face absent meaningful action to address our longer-range 
challenge as well. Higher longer-term interest costs would only serve 
to complicate our fiscal, economic, and other challenges in future 
years. 

As you are aware, during the past 3 years, I have traveled to 25 states 
as part of the Fiscal Wake-Up Tour. During the tour, it has become 
clear that the American people are starved for two things from their 
elected officials--truth and leadership. 

Last fall, I was pleased to join you when you announced your proposal 
to create a Bipartisan Task Force for Responsible Fiscal 
Action.[Footnote 11] As I said at the time, I believe it offers one 
potential means to achieve an objective we all should share: taking 
steps to make the tough choices necessary to keep America great and to 
help make sure that our country's, children's, and grandchildren's 
future is better than our past. By introducing your proposal to create 
a Bipartisan Task Force for Responsible Fiscal Action, you have shown 
the kind of leadership that is essential for us to successfully address 
the long-term fiscal challenge that lies before us. And I want to note 
you are not alone. Several other members on both sides of the political 
aisle and on both sides of Capitol Hill have also introduced 
legislation seeking to accomplish similar objectives.[Footnote 12] 

But we do need to act. The passage of time is shrinking the window for 
action. Albert Einstein said the most powerful force in the universe is 
compound interest and today the miracle of compounding is working 
against us. After 2009 the Social Security cash surplus--which has 
cushioned and masked the impact of our imprudent fiscal policy--will 
begin to shrink, putting pressure on the rest of the budget. The 
Medicare Hospital Insurance trust fund is already in a negative cash 
flow situation. I hope we do not wait to act until the Social Security 
trust fund turns to negative cash flow in 2017. Demographics narrow the 
window for other reasons as well. People need time to prepare for and 
adjust to changes in benefits. There has been general agreement that 
there should be no change in Social Security benefits for those 
currently in or near retirement. If we wait until the baby boom 
generation has retired, that becomes much harder and much more 
expensive. 

Mr. Chairman, Senator Gregg, Members of the Committee, meeting this 
long-term fiscal challenge overarches everything. It is our nation's 
largest sustainability challenge, but it is not our only one. If we 
want to position the United States to meet the challenges of this 
century both abroad and at home, we must also tackle other challenges, 
including reexamining what government does and how it does business. 
Last month, we published a new report that lays out a possible path for 
change. The report is entitled A Call for Stewardship: Enhancing the 
Federal Government's Ability to Address Key Fiscal and Other 21ST 
Century Challenges.[Footnote 13] It provides 13 potential tools for 
Congress and the administration to use to begin to confront our long- 
term fiscal and other challenges. I hope you find this report useful in 
facilitating discussions and decisions about various challenges facing 
our great nation in the 21ST century. 

Today it is understandable that many Americans and their elected 
representatives are concerned about recent market declines and a 
slowing economy. We have an obligation, however, to look at both the 
short term and the long term. Whatever Congress and the President 
decide to do in response to our current economic weakness, it is 
important to be mindful of the danger posed by our long-term fiscal 
path. This long-term challenge increases the importance of careful 
design of any stimulus package--it should be timely, targeted, and 
temporary. 

Budgets, deficits, and long-term fiscal and economic outlooks are not 
just about numbers, they are also about values. It is time for all 
Americans, especially baby boomers to recognize our collective 
stewardship obligation for the future. In doing so, we need to act soon 
because time is working against us. We 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 that sent the 
bill for its conspicuous consumption to its children and grandchildren. 

Thank you Mr. Chairman, Mr. Gregg, 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. 

Contacts and Acknowledgments: 

For further information on this testimony, please contact Susan J. 
Irving at (202) 512-9142 or [email protected]. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this testimony. Individuals making key contributions 
to this testimony include Jay McTigue, Assistant Director, and Melissa 
Wolf. 

[End of section] 

Footnotes: 

[1] For a discussion of how the accrual and cash deficits relate to 
each other, see GAO, Understanding Similarities and Differences between 
Accrual and Cash Deficits, GAO-07-117SP (Washington, D.C.: December 
2006) and forthcoming update. 

[2] GAO, Budget Issues: Accrual Budgeting Useful in Certain Areas but 
Does Not Provide Sufficient Information for Reporting on Our Nation's 
Longer-Term Fiscal Challenge, GAO-08-206 (Washington, D.C.: Dec. 20, 
2007). 

[3] GAO, Long-Term Fiscal Challenge: Additional Transparency and 
Controls Are Needed, GAO-07-1144T (Washington, D.C.: July 25, 2007), 
and Long-Term Budget Outlook: Deficits Matter--Saving Our Future 
Requires Tough Choices Today, GAO-07-389T (Washington, D.C.: Jan. 23, 
2007). 

[4] Social Security and Medicare spending are based on the 2007 
Trustees' intermediate projections. Medicare spending is adjusted using 
the Centers for Medicare and Medicaid Services' estimates assuming that 
physician payments are not reduced as required under current law. 
Medicaid spending is based on CBO's December 2005 long-term projections 
under midrange assumptions. Additional information about GAO's 
simulation model, assumptions, data, and results can be found at 
[hyperlink, http://www.gao.gov/special.pubs/longterm/]. 

[5] See GAO, State and Local Governments: Growing Fiscal Challenges 
Will Emerge During the Next 10 Years, GAO-08-317 (Washington D.C.: Jan. 
22, 2008), and State and Local Governments: Persistent Fiscal 
Challenges Will Likely Emerge within the Next Decade, GAO-07-1080SP 
(Washington, D.C.: July 18, 2007). 

[6] The total burden is estimated based on the federal government's 
liabilities, commitments, and contingencies, including the present 
value of future Social Security and Medicare benefits as reported in 
the fiscal year 2007 Financial Report of the United States Government. 

[7] David M. Cutler and Mark McClellan, "Is Technological Change in 
Medicine Worth It?" Health Affairs, vol. 20, no. 5 (September/October 
2001). 

[8] See Richard A. Deyo, "Cascade Effects of Medical Technology," 
Annual Review of Public Health, vol. 23 (May 2002). 

[9] Kenneth E. Thorpe et al., "The Impact of Obesity on Rising Medical 
Spending," Health Affairs Web Exclusive, [hyperlink, 
http://content.healthaffairs.org/cgi/content/abstract/hlthaff.w4.480] 
(Oct. 20, 2004). 

[10] GAO, Health Care: Unsustainable Trends Necessitate Comprehensive 
and Fundamental Reforms to Control Spending and Improve Value, GAO-04-
793SP (Washington, D.C.: May 2004). 

[11] The Bipartisan Task Force for Responsible Fiscal Action Act of 
2007 (S. 2063, Sept. 18, 2007) would establish a task force to address, 
and report to the President and Congress on, the nation's long-term 
fiscal imbalances, including those attributable to the Medicare and 
Social Security programs and the gap between their projected revenues 
and expenditures. Representatives Cooper and Wolf have also introduced 
a companion bill to the Conrad-Gregg proposal (H.R. 3655, Sept. 25, 
2007). 

[12] Senator Voinovich introduced The Securing America's Future Economy 
Commission Act (S. 304, Jan. 16, 2007), or SAFE Commission Act that 
would establish a commission, among other things, to develop 
legislation to address the imbalance between long-term federal spending 
commitments and projected revenues. Representatives Cooper and Wolf 
have also introduced a companion bill to the Voinovich proposal (H.R. 
3654, Sept. 25, 2007). 

[13] GAO-08-93SP (Washington, D.C.: Dec. 17, 2007). 

[End of section] 

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