COMMITTEE ON WAYS AND MEANS BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois E. CLAY SHAW, Jr., Florida NANCY L. JOHNSON, Connecticut AMO HOUGHTON, New York WALLY HERGER, California JIM MCCRERY, Louisiana DAVE CAMP, Michigan JIM RAMSTAD, Minnesota JIM NUSSLE, Iowa SAM JOHNSON, Texas JENNIFER DUNN, Washington MAC COLLINS, Georgia ROB PORTMAN, Ohio PHIL ENGLISH, Pennsylvania J.D. HAYWORTH, Arizona JERRY WELLER, Illinois KENNY C. HULSHOF, Missouri SCOTT MCINNIS, Colorado RON LEWIS, Kentucky MARK FOLEY, Florida KEVIN BRADY, Texas PAUL RYAN, Wisconsin ERIC CANTOR, Virginia	CHARLES B. RANGEL, New York FORTNEY PETE STARK, California ROBERT T. MATSUI, California SANDER M. LEVIN, Michigan BENJAMIN L. CARDIN, Maryland JIM MCDERMOTT, Washington GERALD D. KLECZKA, Wisconsin JOHN LEWIS, Georgia RICHARD E. NEAL, Massachusetts MICHAEL R. MCNULTY, New York WILLIAM J. JEFFERSON, Louisiana JOHN S. TANNER, Tennessee XAVIER BECERRA, California LLOYD DOGGETT, Texas EARL POMEROY, North Dakota MAX SANDLIN, Texas STEPHANIE TUBBS JONES, Ohio
Allison H. Giles, Chief of Staff Janice Mays, Minority Chief Counsel
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process is further refined.

Advisories announcing the hearing

WITNESSES

Congressional Budget Office, Douglas Holtz-Eakin, Ph.D., Director

U.S. General Accounting Office, Hon. David M. Walker, Comptroller General

Pauly, Mark V., University of Pennsylvania

Reinhardt, Uwe E., Princeton University

Stuart, Bruce, University of Maryland School of Pharmacy

SUBMISSIONS FOR THE RECORD

American Academy of Actuaries, Cori E. Uccello and John M. Bertko, statement

American Health Quality Association, David G. Shulke, statement

Long Term Care Pharmacy Alliance, John F. Jonas, letter

National Association of Chain Drug Stores, Alexandria, VA, statement

EXPANDING COVERAGE OF PRESCRIPTION DRUGS IN MEDICARE

U.S. House of Representatives,
Committee on Ways and Means
Washington, DC.

The Committee met, pursuant to notice, at 11:10 a.m., in room 1100 Longworth House Office Building, Hon. Bill Thomas (Chairman of the Committee) presiding.

[The advisory and revised advisory announcing the hearing follow:]

Chairman THOMAS. The Chair considers this one of the more important hearings the full Committee will have as we consider how to modernize Medicare and, obviously, the importance of Medicare and the improvements it has made in millions of seniors' lives, especially as we notice that seniors are living longer and actually healthier lives than any generation in history. Although one of the reasons we are holding the hearing is because we think Medicare can do better. It really isn't 21st century-ready; it isn't even the last quarter of the 20th century-ready, because it doesn't provide a meaningful prescription drug coverage to seniors, who, coincidentally, are the largest group of consumers of the pharmaceuticals. In modern health care, prescription drugs are often the health care solution of choice. They prevent, treat, or manage diseases more effectively and less invasively than hospitals.

However, as we all know, Medicare provides extremely limited coverage for what are today vital medicines. That means the typical senior will spend about $1450 out of pocket on prescription drugs this year. Unfortunately, notwithstanding that amount, seniors often pay the highest price because about a third of the seniors have no prescription drug coverage. However, as we all know, Medicare provides extremely limited coverage for what are today vital medicines. That means the typical senior will spend about $1450 out of pocket on prescription drugs this year. Unfortunately, notwithstanding that amount, seniors often pay the highest price because about a third of the seniors have no prescription drug coverage.

Clearly something has to be done. Change cannot occur in a vacuum. You have to consider the context. This March, the Medicare trustees issued their annual report, which said that Medicare will start running deficits in about 10 years, and will go broke in 2026. This is complicated by the Congressional Budget Office's (CBO) projection that annual spending on Medicare will more than double over the next 10 years, while spending on prescription drugs will triple.

Analysis by the Centers for Medicare & Medicaid Services (CMS) Actuary also shows that Medicare spending last year spiked. Hospital spending was up 10 percent; home health up 14 percent; skilled nursing facilities up 9 percent; durable medical equipment up 20 percent. All of these increases occurred with the backdrop of inflation at about 2.4 percent.

Integrating a prescription drub benefit to Medicare will clearly improve seniors' health and is long overdue. Hopefully, it can also reduce what would otherwise be Medicare's cost over time because we can substitute drugs as a more effective and less expensive alternative than some other treatment options. Also hopefully, we can integrate drugs around a disease management program that would provide a more comprehensive package for seniors when they are on multiple drugs, which is becoming more the pattern than not.

Steps must be taken when crafting the prescription drug benefit into other changes to ensure the sustainability of Medicare over the long haul. To simply take current Medicare and add prescription drugs is not the solution. The Medicare Payment Advisory Commission (MEDPAC), the non-partisan panel of experts that advise this Congress, has made a number of recommendations which would slow the growth of Medicare and which this Committee will examine very carefully.

History, and especially recent history, shows that we can deliver. In the last two Congresses, this Committee has produced, and the House has approved, legislation to modernize Medicare. As we know, those bills did not become law. They did not become law with a Democratic Senate and they did not become law with a Republican Senate. This year, the President has indicated he is willing to provide an additional $400 billion over 10 years to improve Medicare. The House and the Senate has passed a budget agreeing that that money would be utilized for Medicare.

We should not squander this opportunity to deliver prescription drugs for seniors while improving and strengthening Medicare for future generations. Shortly we will hear from the Director of the Congressional Budget Office, Dr. Douglas Holtz-Eakin, who I believe is in his first appearance in front of the Committee on Ways and Means, and David Walter, the Comptroller General of the General Accounting Office, who has been before us previously and who plays a significant role both in producing documents that assist us in making decisions and in making sure that those institutions which advise us are professionally structured and maintained.

Prior to doing that, I will recognize the Ranking Member from New York, Mr. Rangel, for any comments he would like to make.

[The opening statement of Chairman Thomas follows:]

Mr. RANGEL. Thank you, Mr. Chairman, and thank you for bringing the Committee together on this most important subject matter. It has been almost a year since when we last we visited it. I agree with you that this serious national issue demands and screams for some type of relief and solution, and everybody who campaigned, campaigned that they would do that. I do hope that you would agree, however, that this matter, there is no Democrat or Republican or presidential solution, that we should be working together. I understand that we have not been doing that. We have no bill, we have no direction.

We welcome a hearing from the witnesses, and I would like to yield to the Ranking Member on the Subcommittee on Health so that he can share with us what progress has been made by the Committee on this important subject. Mr. Stark.

Mr. STARK. Well, thank you, Mr. Rangel.

Mr. Chairman, thank you for holding this hearing. I notice from the comments today in the Congress Daily, that this hearing is to be the launch pad for getting started on a Medicare prescription drug benefit, that your approach will be comprehensive, dealing with Medicare as a whole and not just as a prescription drug benefit. I am hopeful that this morning we will hear more about what you really mean. The answer to that question outlines, I think, the entire debate.

Are we going to move ahead to add a prescription drug benefit in Medicare in order to improve the Medicare program for seniors and people with disabilities, or will we use the allure of a prescription drug benefit as a tool to achieve fundamental restructuring--I would call it dismantling--of the Medicare program? Will the addition of long-overdue drug benefits come at the cost of ending Medicare as we know it, as an entitlement program that guarantees all seniors and people with disabilities access to the same set of benefits for the same costs? These are the questions that need to be answered.

I note that this hearing has no witness from the Administration. I would comment that the Energy and Commerce hearing yesterday, another hearing today, and a Joint Economic Committee hearing scheduled for tomorrow--no Administration witnesses. Now, I don't know if that is because they have refused to come, or they have not been invited. It leaves us all wondering what direction you plan to go, Mr. Chairman, with the Medicare prescription drug benefit. Are you going to proceed with a plan that is similar to that passed last year in the House, or will you take into account the policy the President has put forth? I think the American public, and especially America's seniors, would like to see that answered. Certainly, we on our side of the aisle would be better able to proceed in a bipartisan manner if we had some indication of what you had in mind.

Finally, I hope this is not the only hearing that we have prior to moving a Medicare bill through our Committee onto the House floor. Having a bill completed, as I know you want to, by the end of May is an ambitious agenda when the American public has never seen or been able to have any input in what you may plan to do. This is a program that covers 40 million lives and will cover many more than that before long. Change to this needs to be made in the open, and the seniors need to know what your plan will really mean for them.

So, once your plan is announced, I hope we will have more hearings that will allow representatives of the seniors organizations and others affected by the changes to come before our Committee and provide their counsel to this major change.

I look forward to hearing from the witnesses today and want to especially welcome Professor Uwe Reinhardt, who has come to share with us a bit of wisdom with regard to the Medicare reform. I thank the Chair again.

Chairman THOMAS. Thank the gentlemen. The Ranking Member of the Subcommittee on Health posed a number of questions, and to make sure that people don't think they were rhetorical, the Chair will respond briefly prior to recognizing the first panel.

The Ranking Member from New York indicated that all Members had taken a position on this issue during campaigns--therefore setting a clear political tone--but then indicated there were Democrat or Republican solutions. The Chair finds it interesting, then, that the Ranking Member of the Subcommittee, from California, indicated that before they could proceed in a bipartisan manner, they needed the majority to commit to a partisan position so they could therefore react in a bipartisan way.

I tell the gentlemen that, just as in the last two Congresses, the plan that passes this Committee and will pass the House will be a Medicare plan under Medicare. The attempt to characterize the plans that have been passed as not under Medicare may in fact revert back to that campaign position that the gentleman from New York referred to. No plan has been offered and no plan has passed that does not come under Medicare. It is not outside of Medicare, it isn't a privatization; it is a Medicare program.

The reason we are holding a hearing is to try to ask basic questions, not to flak for any particular plan on either side of this dais. It is to inquire about the best estimate of cost of proposals that have been presented in the past, as a guide to helping us make decisions in the future. I think the panel will provide us with some basic understandings, so that as we begin to examine bills we have more of a common knowledge base in which to address the options that might be presented to us. The Chair believes that is the best way to pursue a program that has the best chance of not bankrupting Medicare, but providing prescription drugs for seniors.

With that, the Chair is once again pleased to recognize Dr. Holtz-Eakin, who is the new head of Congressional Budget Office, been in place for just a few months. I am sure that you have already fully appreciated the stress and cross-purposes for which that position was delightfully created. I am always amazed that people with brilliant academic backgrounds and successful work experience say yes to putting themselves in the kind of position that the Director of the Congressional Budget Office finds himself shortly after saying yes.

Also, to David Walker, who has a very difficult job in which Members ask the General Accounting Office to produce any number of documents, which are done in a timely fashion and in a scholarly way. If they don't conform to preconceived notions of what the report should have been, they aren't given the credence they should be. I have been pleased to say that, notwithstanding where the outcome of the research might fall, that the research itself has been impeccable. For that, I do want to compliment Mr. Walker. He, for this Committee, performs another service, and that is tends to oversee, as the landlord, the MEDPAC Commission, which is critical to assisting us in evaluating what is going on in the medical world so that we can make very difficult decisions across the broad spectrum of providers.

With that--

Mr. RANGEL. Mr. Chairman, would you yield--

Chairman THOMAS. Certainly.

Mr. RANGEL. For purposes of allowing me to join in welcoming our new Director. He brings a lot of credibility and prestige to this most important job. We look forward to working with you in a bipartisan way. Of course, I have always been a great supporter of U.S. General Accounting Office (GAO) and the great work that you do for the Congress and the country. We look forward to working with you. Thank you, Mr. Chairman.

Chairman THOMAS. Thank the gentleman very much for his comments.

Any written presentation you may have, gentlemen, will be made a part of the record, and you can address us in any way that you see fit in the time that you have available to you. These microphones are 1950s era. The Chair hopes we will remodel this room soon. It has great ambiance, but we also need decent acoustics. So, if you will address directly into the mike, Members and the audience will have a chance to hear you. Dr. Holtz-Eakin.

[The opening statement of Mr. Ramstad follows:]

Dr. HOLTZ-EAKIN. Well, thank you, Mr. Chairman, thank you, Mr. Rangel, both, for the chance to be here and for the gracious welcome. I really do appreciate it and look forward to working with you.

You have my written testimony. Let me take my time and pull out what I think are key facts that may be of some use to the Committee in thinking about the issues that face us today.

One message that I hope comes through clearly is that the entitlement programs of Medicare, Medicaid, and Social Security, as currently structured, are on a trajectory to overwhelm the Federal budget. Currently, these three programs constitute 8 percent of gross domestic product (GDP). By the year 2030, they will rise to 14 percent of GDP--a bit under the size of the Federal budget at the moment; and by the year 2075, they will rise to fully 21 percent of GDP, a share larger than that of the Federal budget.

Medicare is the largest part of that rise. The chart that we have pulled out of the testimony to display shows this rapid rise in Medicare as a fraction of GDP from 2.4 percent today to about 9.2 percent in 2075. As you can see on the chart, that rise comes in two different components. The first is a component that just is due to the aging-of-the-population phenomenon, with which you are quite familiar. That is a smaller component, about 30 percent of the overall increase. The larger component comes from the rapid rise in health care costs above the growth in GDP. That excess cost growth is not unique to Medicare, but is at the source of the large run-up in this entitlement program as a fraction of GDP.

Now, if we turn to cost growth in Medicare per se, CBO projects that over the next 10 years in the budget window, Medicare will continue to grow faster than GDP, at about 6.8 percent per year. As we detailed in the testimony, there are limited direct tools at the Congress's disposal to control that growth. It is a phenomenon that exists not only in Medicare, but in the health care area as a whole.

Now, for the purpose of this hearing, an interesting piece of information is the growth in prescription drug spending. On that front, there is both good news and bad news. CBO's baseline projections for prescription drug spending by the Medicare population indicate that the good news is that spending in the baseline is up by only 4 percent from last year. Typically, one might expect a larger increase in baseline spending. The 4-percent increase comes from the net effect of dropping a relatively inexpensive year at the beginning of the budget window and adding a relatively expensive year at the end of the budget window--that is the typical story. This year, we also learned, after looking into the research, that we had less underreporting of prescription drug spending than had previously been thought and slower growth in prescription drug prices than had been anticipated.

The net effect of that is a modest increase in our baseline estimates of prescription drug spending by this population, making it easier to compare cost proposals. Although they won't all be 4 percent higher--it depends on the details of the proposals--it does make year-to-year comparisons a bit easier, perhaps, than in the past.

Now, the bad news is that prescription drug spending continues to rise faster even than overall Medicare spending itself. We project that over the 10-year budget horizon, it will rise by 9 percent per year, for a total of $1.8 trillion.

The final piece that I would like to pull out of the testimony is the composition of some of that prescription drug spending. For purposes of this hearing, we put together three charts, the first of which shows who is covered by drug coverage at the moment and who is not. If you look at the chart, what the bars show you are the coverage for different income levels, each measured as a fraction of the poverty level, so the first bar is from 0 to 100 percent of the Federal poverty level and the others rise to 400 percent of the poverty level or more. Shown in the chart are lighter gray areas, which are the fraction of beneficiaries in each income area who do not have drug coverage, and darker gray shading, for those who do have drug coverage. Roughly speaking, the population as a whole has about a 25 percent share, in our estimate, that does not have prescription drug coverage, and the share does not vary much by income class--from 22 percent to 32 percent.

If we turn from who has coverage to how much individuals are spending, we get roughly the same story. The second chart looks at average prescription drug spending by Medicare beneficiaries. The bottom lighter gray area shows how much is paid out of pocket--about three-eighths is paid out of pocket--and that share does not vary much by income. The top darker gray part shows the share paid by third parties, including other Federal programs. The average spending is about $1,500.

If you put those two pieces together, coverage and average spending by individuals, we can show the total spending, in the final chart, for the Medicare population. Here, again, we can find total drug spending by income class, with the lighter gray area showing the fraction that is actually paid out of pocket--and that turns out to be roughly the three-eighths I mentioned before--and the darker gray area, which has been covered by third parties already. The basic message, again, in this chart is that there is not much difference across income levels in the degree to which these costs come from out of pocket.

So, I close with these pieces of information, which we think will be useful in framing the important issues that this Committee will face. I look forward to answering your questions.

[The prepared statement of Dr. Holtz-Eakin follows:]

Chairman THOMAS. Thank you very much, Doctor. Mr. Walker?

Mr. WALKER. Thank you, Mr. Chairman, Ranking Member Rangel. It is a pleasure to be back before the full Committee on Ways and Means to discuss Medicare's financial condition and proposals to add an outpatient prescription drug benefit. I will hit the highlights, if I can, Mr. Chairman.

There are growing concerns about gaps in the Medicare program, most notably the lack of outpatient prescription drug coverage, which can leave Medicare's most vulnerable beneficiaries with high out-of-pocket costs. At the same time, however, the recent publication of the 2003 Trustees Annual Report reminds us that Medicare, based on its current design, with no prescription drug benefit, already faces a huge projected financial imbalance and 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 fact, that was done in the year that I was a trustee of Social Security and Medicare. In 10 years, Hospital Insurance (HI) Trust Fund outlays will begin to exceed tax revenues, and by 2026, the HI trust fund will be exhausted. However, trust fund insolvency does not mean that the program will cease to exist. Program tax revenues will cover a portion of projected annual expenditures thereafter.

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. The Trustees' intermediate projections in the 2003 report show that program outlays are expected to begin to exceed program tax revenues in 2013. That is when we go negative cash flow. Cash is key, not trust fund solvency. In fact, trust fund solvency can be misleading and give people a false sense of security as to not only the state of this program, but also Social Security.

To finance these cash deficits, HI will have to draw on special issue Treasury securities acquired during the years of surpluses. To redeem those securities, the government will have to obtain cash through a combination of increased taxes, spending cuts, and/or increased borrowing from the public, through publicly held debt. Neither the decline in the cash surpluses nor the cash deficits will affect the payment of benefits for a member of years. The negative cash flow will place increased pressure on the Federal budget to raise resources necessary to meet the program's ongoing costs. This pressure will only increase when Social Security begins to experience a negative cash flow just a few short years after the Medicare program.

Importantly, the HI trust fund measure provides no information on Supplemental Medical Insurance (SMI), or Part B, SMI. The SMI's expenditures, which currently account for about 43 percent of total Medicare spending, are projected to grow even faster than HI.

Ultimately, the critical question is not how much the trust fund has in assets, but whether the government as a whole and the economy at large can afford the promised benefits now and in the future, and at what cost to other claims on available resources. As shown in the next chart, Medicare, Medicaid, and Social Security have already grown from 13 percent of Federal spending in 1962--again, before Medicare and Medicaid were enacted into law--to 42 percent of Federal spending in 2002. These percentages are expected to continue to increase in future years.

As the next chart shows, GAO prepares long-term budget simulations twice a year, based upon CBO data and then going out much further, that seek to illustrate the likely fiscal consequences of the coming demographic tidal wave and rising health care cost. 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. In addition, while additional economic growth would help to ease our burden, the projected fiscal gap is too great for us to grow our way out of the problem.

At the same time, it is important to look beyond the Federal budget to the economy as a whole. If we look at the next chart, we will see that Medicare, Medicaid, and Social Security are projected to represent an ever-increasing percentage of the overall economy. Under the 2003 Trustees' intermediate estimates and the CBO's most recent long-term Medicare estimates, spending for these entitlement programs combined will grow to 14 percent of GDP in 2030 from today's 8.4 percent.

Despite a common awareness of Medicare's current and future fiscal plight, pressure has been building to address recognized gaps in Medicare's coverage, especially the lack of a prescription drug benefit and protection against financially devastating medical costs. Filling these gaps would add expenses to an already fiscally overburdened program. Under the trustees' 2003 intermediate assumptions, the present value of HI's Part A's actuarial deficit in current dollars is $6.2 trillion. We would have to have $6.2 trillion today invested at Treasury rates in order to fund the gap for Part A alone, a 20-percent increase from last year.

As a result, it would be prudent for the Congress to consider tackling the greatest needs first and for making any benefit additions part of a larger structural reform effort. In addition, Congress may want to adopt a Medicare Hippocratic oath, namely, do not make Medicare's already huge financial imbalance worse.

In closing, Medicare's financial challenge is very real and growing. The 21st century has arrived, and our demographic tidal wave is on the horizon. Frankly, we know that incorporating a prescription drug benefit in the existing Medicare program will add hundreds of billions of dollars to the program spending just over 10 years.

Finally, in my view, Congress should consider the estimated discounted present value of any major tax or spending actions like this as an integral part of any related discussion and debate and prior to enactment of any related legislation. This information is critical in light of our long-range fiscal challenge and the Congress's overall stewardship obligations to the American people.

Thank you, Mr. Chairman. I am happy to answer any questions you may have.

[The prepared statement of Mr. Walker follows:]

Chairman THOMAS. I thank both of you very much.

It has sometimes been said, notwithstanding the charts, that the solvency of Medicare is probably greater than in previous periods and that we really shouldn't worry all that much about it because when the pressure increases on us, historically we have always done something. One of the concerns that the Chair has is that some of the easy choices were taken early.

For example, when this Committee engages--and it will--in discussion of Social Security and the solvency of that trust fund, we are all mindful that currently the payroll tax is capped at a particular dollar amount. The HI trust fund already does not have the cap that could be removed.

So, notwithstanding that 2013 and 2016 still seems like some time away, do you believe we have luxury of arguing that since we probably have as great a front-loaded number of years of solvency as we have had at any time in the past, that that is a comfort that we should wait awhile over?

Mr. WALKER. We should not focus on the trust fund balance, for reasons that I articulated. I think we have three basic sustainability problems: At the lowest level, Medicare; at the next level, our health care system; and at the top level, our overall fiscal imbalance.

Chairman THOMAS. Well, I tell you that I feel a little bit about Medicare as I probably feel even more about the health care system, because frankly when you compare us with other countries--and sometimes you can't do it on an absolute base, you have to look at other humans in the human condition and what they do--it isn't so much how much spend for health care in this country, and underscored as well for some of the government support programs like Medicare, it is how we spend it. One of the reasons we have been so concerned about wanting to try to make some fundamental modernizations or changes to Medicare is because without those, Medicare as a support structure isn't fashioned in the best way to receive a major prescription drug addition--something as simple as the historical creation of the A and the so-called B, one from a dedicated trust fund, the other one from the general fund; and the fact that it doesn't look much like an insurance policy or any provisions that would give us comfort that some of the things that we have seen work in other systems simply won't work here by virtue of the way it was created and the failure to keep it up to date.

Throwing on a prescription drug benefit doesn't solve the underlying concerns over Medicare. Is that a fair statement?

Mr. WALKER. I think it is fair to say that if the conditions that exist today had existed in 1965, you probably would have included a prescription drug benefit in Medicare to begin with. On the other hand, you probably also would have included a number of other cost-containment mechanisms that you do not have today. So, on one hand you are talking about adding a prescription drug benefit, which most employers have added since 1965, but they have also changed their health insurance coverage in many other ways, with targeting, deductibles, copays, and things of that nature, and Medicare has not.

Chairman THOMAS. Let me just briefly, then, ask you some questions about the Medicare Payment Advisory Commission. They perform a very important role. We attempted to create a commission made up of professionals who have a broad background in health care touching any number of areas, along with some consumer advocates--who examine current conditions and make recommendations on assistance to various providers and other decisions that we need to make.

One of the major changes that was made recently was to require MEDPAC, as we call it, to vote--because they have a chance to influence public policy, we thought it might be useful to require public votes so that people could see how the interests that may represent particular areas of health care voted on particular issues. I know MEDPAC recently made 17 recommendations to the House and specifically this Committee. What I found most striking about those recommendations, that where the 17 members--I believe it was 19 recommendations--where the 17 members made 19 recommendations, if you added up all the individual votes, and of course certain things happen in the House if it is a voice vote versus a recorded vote versus how many people are in opposition, we handle issues differently based upon the votes. When you add up all the votes of MEDPAC on those 19 recommendations, there were collectively 300 ayes for the position taken, and 2 nays.

Given the depth and breadth of the professionalism and history of experience of MEDPAC, should this Committee be impressed by, ignore--how should we deal with recommendations that are presented to us by that body with a vote of 300 to 2?

Mr. WALKER. Mr. Chairman, I have tried very hard to work with this Committee and others as Comptroller General of the United States to appoint MEDPAC members. I believe that we have significantly upgraded MEDPAC in the last several years. I believe that you need to give serious consideration to the recommendations that you receive from MEDPAC. They are hampered with a problem that this Committee, GAO, and many others have in that they don't have an adequate amount of timely, accurate and useful health care information. Their basic recommendations are consistent with the work that GAO has done, and I think that you need to seriously consider their recommendations.

I also think it was appropriate to increase the transparency and accountability of the votes associated with MEDPAC members. I think that was appropriate, given their substantial responsibilities and the sums involved.

Chairman THOMAS. Have you had any feedback from the MEDPAC members themselves about their willingness and comfortableness with the transparency in the recorded votes, as a process, as opposed to what they used to do?

Mr. WALKER. Well, initially there was some apprehension. I have not heard any concerns. I think there generally is an understanding that it was the right thing to do.

Chairman THOMAS. I thank the gentlemen. Dr. Holtz-Eakin, it is always difficult to ask a new director of CBO about estimates that have been made in the past, although I assume you have a moral obligation to accept all of the product of previous CBOs and directors. Sometimes when people focus on the debate on the floor of the House example, with amendments or substitutes to bills, the discussion is couched in ways in which people can't fairly judge or discrimination between approaches taken by various bills. One of the things I hope to do with this hearing is to at least begin the record with a clear understanding that there are consequences to choices that are made in the way you structure bills. I know this may be uncomfortable for some folk, but I don't really know any other way to begin a process of talking about building a bill without asking some fairly direct questions, and asking you if you have the ability to compare particular structures.

For example, included in the bill that passed the House last year was a provision that we called the best price policy, which would have required a degree of negotiation on discounts from pharmaceutical manufacturers without regard to an artificial so-called best price structure that is located in Medicare. I am always fearful when someone tells me they are going to give me the best price, especially if it is a structured best price.

In looking at last year's bill--and it is true, as was commented, there is no bill for the majority in yet. We are looking at these issues and want to make some decisions. In comparison, the gentleman from California, for example, Mr. Stark, does have a bill in this year--I believe it is H.R. 1199. Have you been able to score that bill yet, Doctor?

Dr. HOLTZ-EAKIN. We do not yet have a score on the bill this year. We did, in fact, do work in previous years on these issues.

Chairman THOMAS. Okay. So, we might be comparing last year's bills rather than the current edition.

Did the idea of negotiating discounts save money over a best price--first part of the question. Second part, for example, a tool that was utilized, I believe, in the previous bill, where you allow physicians to override formularies and provide an any-willing-provider structure for pharmacies. Those are two ways to deal with pricing. Can you comment on each in a comparison between them?

Dr. HOLTZ-EAKIN. With the caveat that I am new to the job and may have to get back to you with particular details, I can say a couple of things on those issues. The first is that in looking at incentives and outcomes on cost containment, one really wants to look at incentives and the opportunity to undertake cost containment. So, with regard to the best-price provision, that leads to a greater incentive to try to negotiate a lower price from a manufacturer, and as a result, CBO did in fact, score that in previous legislation as saving about $18 billion. We would undertake to update that estimate this year. I am not sure exactly what the precise number would be.

With regard to physician override, that clearly limits the ability to control costs and to undertake the control of the lowest possible source of a pharmaceutical. As a result, it would lead to higher costs, other things being equal.

Chairman THOMAS. One of the debates, and I am sure it will ensue again this year, over models that might be constructed is the idea of creating a catastrophic or so-called stop-loss structure, where there is some exposure which most people believe that if you have co-payments or other arrangements in which beneficiaries share in the costs, that there might be some savings over the long run by decisions that are made in part because of out-of-pocket costs in which the beneficiary is not insulated from all costs associated with the cost of pharmaceuticals.

We provided a structure in the last bill which created a stop-loss arrangement. My understanding is, again comparing two specific solutions to in essence the same problem, that H.R. 1199 has a very low stop-loss structure, which might deal with so-called--price induction, is the phrase that is used--if you are dealing with, say, a $2000 catastrophic as opposed to the structure that we had offered.

What is your analysis of those different approaches to the question of exposure of beneficiaries to costs in an overall attempt to reduce the exposure to the Medicare trust fund?

Dr. HOLTZ-EAKIN. Well, I again go back to the rules of thumb, which are incentive and opportunity. To the extent that beneficiaries have an incentive to control costs, you will get greater cost savings. Regarding larger subsidies, other things being equal, if you subsidize 90 percent of any insurance product versus, say, 70 percent, the larger subsidy will lead to a lower incentive to control costs and will lead to higher prices and higher spending.

Chairman THOMAS. So, the idea of an assistance to individuals to shield them to any cost exposure ironically would wind up with an overall higher price because the so-called incentive that was there is no incentive at all?

Dr. HOLTZ-EAKIN. The key thing is to look comprehensively. To get total costs, you want to look comprehensively. So, you would want to look at incentives and opportunities for individuals as well as for providers. Focusing on the individual's part, having limited incentives to control costs will lead to higher costs and higher prices.

Chairman THOMAS. Then the bottom line of all of this questioning is that last year the bill that passed the House, along with the modernization of prescription drug and provider portions, cost somewhere in the vicinity of $350 billion, I believe, and the bill that was purported to meet essentially the same argument from the minority's perspective cost what in last year's dollars?

Dr. HOLTZ-EAKIN. The CBO score last year was roughly $970 billion.

Chairman THOMAS. So, $350 billion to $970 billion. Of course that is the direct result of having a catastrophic, which in fact does not induce the appropriate behavior and therefore costs more and does not have competition, such as we indicated in not accepting some formulaic best price but rather requiring actually a negotiated process to produce best price.

These are the kinds of questions that I think are important to understand why bills contain certain provisions. When you add up all the particulars, it does produce a product that either brings about particular results at a cost that is afforded under a budget proposal, or you get something that is up to three times as expensive and, ironically in terms of the way it is built, produces cost increases rather than cost savings.

With that, I want to thank both of you for what you have done and, obviously as we move into a more formal discussion of solutions, what you are going to do for us. Does the gentleman from New York wish to inquire?

Mr. RANGEL. Thank you, Mr. Chairman. Let me thank both of you for pointing out expertly the degree and the serious nature of the problem. Am I to assume that both of you studied the House-passed bill in preparation for your testimony today?

Dr. HOLTZ-EAKIN. I am familiar with the House-passed bill. I would not say that I am intimately familiar with all the details.

Mr. WALKER. I am somewhat familiar with it, but I did not study it before today.

Mr. RANGEL. Well, have you been privy to any draft of a bill that the majority intends to offer for our consideration at some point in time in the future?

Dr. HOLTZ-EAKIN. We have to date not scored any particular bills at CBO. We have talked at the staff level in discussions about ideas, and no more.

Mr. WALKER. I have not seen any proposed bill or framework for a bill.

Mr. RANGEL. Do you think that professionally you could be of better assistance to this Committee if you had before you a bill as to the direction that we were going?

Dr. HOLTZ-EAKIN. It will in the end be the Committee's judgement whether I am of assistance or not. I will tell you that, in our experience at CBO, the details of proposals do in fact matter a great deal, and the greater specificity of an actual bill allows us to give a more precise answer, without question.

Mr. WALKER. Obviously if you have a specific proposal, you can make more targeted comments as to what the likely pros and cons of that proposal are.

Mr. RANGEL. That makes a lot of sense to me. I get the impression from the past conduct of this Committee that we are seeing both of you for the last time on this subject matter.

[Laughter.]

Mr. RANGEL. Not having the slightest clue as to which direction the majority is going to take us, we may ask you, in an impartial way, to meet with--if we don't have a formal meeting, to share your opinions of whatever comes from the majority, wherever it comes from, so that we might be able to again visit with you and have a better understanding of the impact of the decisions that we will be making. I do hope that before we vote on this bill, assuming the bill comes back to this Committee and not go straight to the suspension calendar, that we would have an opportunity to discuss this further.

Let me thank you for this meeting, Mr. Chairman.

Chairman THOMAS. Thank the gentleman. I think you will find that oftentimes the most useful examination of an issue is in comparison with alternatives rather than examining it in some absolute environment, because then you have the opportunity to weigh real choices between real alternatives. The Chair hopes that as a plan is presented from the majority side that we will have an opportunity to examine one from the minority side as well.

Does the gentleman from Illinois wish to inquire?

Mr. CRANE. Thank you, Mr. Chairman.

Now, Mr. Walker, I have in front of me the GAO Medicare Hospital Insurance Trust Fund projected deficit between 2010, starting roughly 2010 going on into 2040. Is that projection based on constant dollar value?

Mr. WALKER. Yes, 2003 dollars. So, it is adjusted for inflation. It is the HI program alone. It does not include SMI.

Mr. CRANE. The reason I ask that is I came to Congress in 1969 and the dollar is worth about 10 cents today of what it was when I came here. You have a 30-year period here, and that 30-year period would result in a $300 billion deficit. Is that a $300 billion probable deficit or a $3 trillion deficit?

Mr. WALKER. No, it is a $300 billion, based upon 2003 dollars. So, in other words--

Mr. CRANE. I know, constant dollars.

Mr. WALKER. That is correct.

Mr. CRANE. Would you honestly expect that to happen?

Mr. WALKER. Well--

Mr. CRANE. How would you expect that to happen based on our performance here for the last 35 years?

Mr. WALKER. We rely upon the Trustees' assumptions as to what they expect inflation is going to be when we end up coming up with the discount factors. I think if you look in the past at how the Trustees have done in projecting what cost will be, if anything, their intermediate assumptions have been low, not high. So, I think it is a realistic picture, and I think the bottom line is it shows you have a serious problem.

Mr. CRANE. Well, I remember when we worried about billions and now we are talking trillions, and it will be quadrillions in another 30 years at the rate we are going. Governments always have a way of resolving those problems by just escalating the quantity of money out there. That is something that has me troubled about any of these kinds of projections, based upon our performance over the past generation.

Mr. WALKER. What I would suggest, Mr. Crane, if you also looked at it as a percentage of the budget or as a percentage of the GDP, which we also presented information on, that may be a more useful way for you to look at it. Either way, it is a problem.

Mr. CRANE. Oh, yeah. Oh, no question about it, it is a problem.

I would like to also ask you, Mr. Walker, in your testimony you say 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. Given these estimates, it seems that it will be difficult to modernize Medicare that includes prescription drugs. If a modest drug benefit program that costs $400 billion is going to be hard to create due to budget constraints, wouldn't a $1 trillion plan be next to impossible without massive tax increases, slashing other valuable Federal programs, cutting provider payments, and forcing seniors to pay large premiums an deductibles?

Mr. WALKER. I think it is important, whether you are dealing on the spending side or the tax side, that you look at not just the 10-year costs but also the long-range implications, including discounted present value amounts. Obviously, to the extent that you are talking about adding a benefit that costs a lot more money, that is going to worsen the long-range imbalance. We look at the bottom line, what is the bottom line.

Mr. CRANE. One final question I would like to put to you, either one or both of you, and that has to do with the recognizing Medicare's current benefit costs are escalating and to obtain ideas from CBO to slow that cost growth. The CBO projects that, absent any change in the law, annual spending on Medicare will more than double in 10 years to nearly $460 billion. An analysis by the Centers for Medicare and Medicaid Services Office of the Actuary demonstrates that Medicare spending last year spiked dramatically. What recommendations have you regarding controlling costs of the current program, and have you examined the recent MEDPAC recommendations and what do you think of those?

Dr. HOLTZ-EAKIN. Congressman, it is not CBO's role to make specific recommendations on how to control Medicare costs. I would be happy to discuss with you the implications of adopting any of the MEDPAC recommendations. We look forward to working with you on that.

Mr. CRANE. Very good. Thank you. I yield back the balance of my time.

Mr. MCCRERY. [Presiding.] Mr. Stark.

Mr. STARK. Thank you, Mr. Chairman. I want to thank the witnesses. Mr. Walker, I wonder if you could comment on the effect on Medicare if the tax cuts were not extended and, instead of repealing the estate tax, we had merely gone with a fairly large exemption, say $3 or $4 million, as was suggested in an alternative plan; and that the taxes would rise as a share of the GDP. What kind of doomsday scenario--how would that change it, in effect?

Mr. WALKER. We have done an overall budget simulation under several sets of assumptions. One set is the tax cut does not sunset; the other assumption is that it does sunset. Obviously, if it does sunset, then that makes the gap less in the outer years. At the same point in time, it does not come close to closing the gap. There is still a long-range problem irrespective of what the Congress decides to do there.

Mr. STARK. Is the difference in those 2 scenarios about 25 years till implosion or explosion, is that correct?

Mr. WALKER. It makes a bigger difference when you are starting to deal with the 2030 to 2050 period. You know, either way, you have really escalating deficits, but the timing in which you start seeing those deficits, obviously, is different.

Mr. STARK. Did you do any studies on the change needed in the--if you assumed that we did not extend the 2001 tax cut or the inheritance tax demise, what kind of a payroll tax increase would be needed to--

Mr. WALKER. We didn't do that. We looked at the larger fiscal picture, which is what the long-range budget simulation is intended to be. Mr. Stark, the trustees' latest report for 2003 would show that if you wanted to solve the problem merely through increasing the tax rate for HI, you would have to increase the HI tax rate by 83 percent today in order to solve it just through that. That would only solve it for the next 75 years. Every year we have a big deficit beyond the 75 year horizon that has to be dealt with.

Mr. STARK. Well, I might ask the same question, Dr. Holtz-Eakin. It is my understanding that we could pass the 75 year solvency test--which we have never achieved, I might add--if we increase the payroll tax by about 1.2 percent on both sides. Is that a number with which you gentlemen would concur?

Mr. WALKER. Yes, 2.4 percent of taxable payroll. You are correct, 1.2 percent on each side, which would be an 83-percent increase.

Mr. STARK. In a sense, that would pretty much solve, given what we know now about the increased spending on health care, that would solve this problem financially speaking for all time.

Mr. WALKER. No, it does not.

Mr. STARK. Seventy-five years.

Mr. WALKER. That solves Part A, HI, for 75 years; it doesn't do anything about SMI, it doesn't do anything about the broader health care challenge or the long-range fiscal problem.

Mr. STARK. Okay, so that is on the HI and the Part A side. The worst-case scenario for 75 years, which is about as far ahead as we care to plan. That is fair. Now, how much would it take in--have you then to solve the Part B side to provide enough additional general revenues to cover the 75 percent that we fund now. If this were done, how much more than not extending the 2001 tax cut and not eliminating the inheritance tax, how much more revenue would that-- My understanding, that this total tax cut, including the interest cost, is about a $2 trillion loser.

Mr. WALKER. Well, first, I think it is important--

Mr. STARK. Is that correct?

Mr. WALKER. I don't have the number. I can provide it for the record. I can tell you that--in fact CBO would probably be the right place to get that number, since they are the ones that are supposed to be doing the projections. I--

Mr. STARK. Give it to CBO.

Mr. WALKER. I would say for the record, though, Mr. Stark, that the 2.4 percent is not worst-case. That is based on the intermediate assumptions. The trustees have low-cost, high-cost, and intermediate cost estimates. So, it is not worst-case, and again, it only deals with HI, not SMI.

Mr. MCCRERY. Before--

Mr. STARK. Could I--Mr. Chairman, I just the indulgence to hear Dr. Holtz--

Mr. MCCRERY. If Dr. Holtz-Eakin would like to answer, that is fine.

Dr. HOLTZ-EAKIN. Briefly, I am not privy to the simulations that Mr. Walker has discussed. In the chart that I showed you, what we displayed was a rise in Medicare costs from about 2.5 percent of GDP to in excess of 9 percent of GDP over the 75 year horizon you are discussing. Those costs will have to be financed somehow. Spending is ultimately a burden on the economy. I would also point out to you that these are projections made under the assumption that health care costs rise 1 percentage point faster than GDP. Historically, Medicare costs have risen 2.8 percentage points faster than GDP. So, these projections actually contain the assumption that there will be steps taken to bring cost growth down. To the extent that that does not happen, these numbers would be, in fact, dramatically larger than the estimates that are in my written testimony. The particulars of the financing which you have been discussing, I would argue, are secondary to the ultimate observation that the outlays will rise as a fraction of the economic resources in this economy that are available to finance those programs and any others.

Mr. MCCRERY. Dr. Holtz-Eakin, do these numbers include the addition of a prescription drug benefit?

Dr. HOLTZ-EAKIN. No, they do not.

Mr. MCCRERY. How much difference would it make if we were to add a $400 billion or trillion--

Dr. HOLTZ-EAKIN. We would have to do a careful set of estimates. I would be happy to work with you on that. Four hundred billion dollars is roughly $50 billion a year over the 8 years of the budget window in which a drug benefit would be in effect. That is a number that is well under 1 percent of GDP. However, as I pointed out in my remarks, prescription drug spending has been growing more rapidly than Medicare spending as a whole, and so the long-term outlook would certainly be worse, other things being equal. The precise numbers--we could work with you to develop an estimate.

Mr. MCCRERY. Mr. Walker?

Mr. WALKER. I would hope that there would be an effort to come up with what would be the discounted present value of what the cost of the program would be, not just looking at the 10-year numbers, because they can be very misleading. I think it is important to look beyond that, because we don't really start to hit the major part of the demographic tidal wave until beyond the 10 year point. Therefore, you can get a false sense of security if you just looked at 10-year numbers. They can explode beyond that.

Mr. MCCRERY. Mr. Shaw.

Mr. SHAW. Mr. Walker, I want to go back to a point that you covered in your testimony. This goes back to the first graph that you had up there, in which you talk about Medicare going into a cash deficit in the year 2013. In that regard, of course, we have Treasury bills that are in there, and they won't be exhausted until what year?

Mr. WALKER. The year 2026 is when the special issue Treasury securities will exhaust.

Mr. SHAW. Does the fact that we are going through the process of cashing in Treasury bills, do they have any real economic value to the program?

Mr. WALKER. I am not a Ph.D. economist, but I would say no, they don't have an economic value. They have a legal significance, they have a moral significance, they represent a priority claim on future general revenues, but they do not have an economic value.

Mr. SHAW. You may not be an economist, but you are certainly a well-versed certified public accountant (CPA). As such, you certainly know the difference between a real economic asset and one that is not. I certainly accept your explanation. So, what you are talking about and what you are telling this Committee is that 2013 is the year in which, really, the system is going to have to--we are going to have to find other ways to pay benefits if we are going to keep taxes at their present level and not cut benefits. Is that correct?

Mr. WALKER. Correct. You are either going to have to raise taxes, cut spending, or go into more public debt financing in order to convert these bonds into cash.

Mr. SHAW. Now, the same thing applies to Social Security, doesn't it? What year is that?

Mr. WALKER. I believe it is 2018, Mr. Shaw.

Mr. SHAW. It just changed recently, and I believe you are right. It was 2016. I think it has been changed. So, the same thing applies in Social Security, where there are not real--those Treasury bills are no real economic assets. It is simply evidence of a moral obligation that a future Congress is going to have to figure out how they are going to pay the benefits and how they are going to pay off those Treasury bills. Is that not correct?

Mr. WALKER. That is true, and personally I think that Congress has a stewardship obligation. You need to look beyond just today. You need to look to future generations and what type of burdens are being passed on to them.

Mr. SHAW. So, I guess regardless of what particular road the Congress may decide to go on eventually, we are going to have to, if we want to do something, we are going to have to start building up in some way real economic assets that the Social Security Administration as well as Medicare will have some type of a call on, unless we drastically restructure the system. Is that not correct?

Mr. WALKER. Well, we are going to have to do something. There are different ways to reform Social Security and Medicare. The fact is, the Medicare problem is multiple times worse than the Social Security problem.

Mr. CRANE. Will the gentleman yield?

Mr. SHAW. I yield.

Mr. CRANE. Is not one alternative solution also to increase the money supply?

Dr. HOLTZ-EAKIN. No, sir. Over the long term, what will serve as resources to pay these obligations of the Federal Government and finance the private sector as a whole will be the real (inflation-adjusted) economic resources. Those will develop independently of movements of the money supply in the short term.

Mr. CRANE. Well, no, my point is that is what we have been doing for the last 30 years, is just increasing the money supply. We have a steady erosion of the integrity of our dollar, and we have had it going on for 30, 35 years.

Dr. HOLTZ-EAKIN. The evolution of inflation in the United States is certainly one that we can discuss at length. I would point out that in both the presentations we have adjusted for that. We have taken out the inflation components and have isolated just the part that has to do with real economic growth.

Mr. CRANE. Oh, I know you have in your projections, but what I'm saying is that is one of the alternatives that, sad to say, government can fall back on.

Mr. SHAW. Let me reclaim my time, as it is about to expire. Again, as Mr. McCrery asked, on the previous chart that was up there, you have not built in any prescription drugs into your prediction?

Mr. WALKER. No, this is the current program. It does not include any potential prescription drug benefit.

Mr. SHAW. I thank you both for your testimony. I wish you could have brought us better news, but you have to tell us what you think and there is no sense in going after the messenger because the real problem lies with us right here. Thank you. Yield back.

Mr. MCCRERY. Mr. Shaw makes an excellent point about the savings that we have in the trust fund. To make it crystal clear, it is kind of like me telling myself I am going to save for my son's college education, and I am going to save 3 percent of my income. I write a check for 3 percent of my income, but instead of putting it in savings, I spend it on a car or a house or whatever and I write myself an IOU and put it in the drawer. So, that when my son gets to college age, I take those IOUs out and spend them on his college education. Well, clearly, I have to come up with the money somewhere to pay those IOUs.

Mr. SHAW. Or he doesn't go to college.

Mr. MCCRERY. Or he doesn't go to college. So, it is an excellent point that Mr. Shaw makes. It is not the trust fund that we need to worry about so much as it is the cash flow. Mr. Levin.

Mr. LEVIN. Welcome. I was going to ask you about deficits, but I have decided not to do so. It is interesting that people shift in terms of their attitudes towards deficits. When it comes to tax cuts, we have been hearing deficits don't matter. Then some of the same people who said that, when it comes to their desire to restructure Medicare, deficits are supremely important. It seems to me there needs to be some consistency in position. Some of us who have thought deficits have mattered and acted that way for the last 20 years have tried to be consistent.

It is also interesting, when it comes to estimates, there is also kind of the same pragmatic approach, to put it charitably. When people want to accomplish a certain purpose--in this case Medicare and restructuring it--they talk about these estimates as if they are divinely decreed. Then, if they are defending a so-called growth package, they say what Mitch Daniels said just a month ago or 2 months ago, that these estimates, 10-year estimates are not just flawed but wildly misleading, to quote him exactly.

So, I think I won't pursue these issues here, but just talk about a few other things. By the way, in terms of projection in Medicare spending--maybe this isn't fair to the new Director, but I think CBO's estimates on Medicare spending the last 6 or 7 years, as I see the data, those estimates have not been very accurate, have they? They have overestimated actual spending in their projections. Or maybe you don't have that data.

Dr. HOLTZ-EAKIN. I don't have the history in front of me. I will be happy to provide the history, if you would like that. I will point out that in doing its projections, CBO is constrained to project current law. In those circumstances, if after the projection is made the Congress chooses to alter physician payments or other attributes of the Medicare program, we will of necessity have our numbers be wrong after the fact. It is the nature of the projection process. We can happily go back and examine the history and find those situations where we might be able to improve it, given that we are constrained to project current law.

Mr. LEVIN. Okay, if you would do that and provide us the information. I don't mean to minimize the problem for 1 minute. I just think there needs to be a consistency and we should not be using these figures to suit our particular purpose and then the next week take the opportunity position.

Let me ask Mr. Walker about your statements on page 2 about Medicare's overly generous rates. I just saw some material from southeast Michigan hospitals that talked about $40 million losses. Would it be possible--I am not sure this is within your authority--for you to come to Southeast Michigan and sit down with the hospitals and determine what the true picture is? Is that something consistent with your--

Mr. WALKER. Well, Mr. Levin, I don't know that it is consistent. I would be happy to talk to you about what may or may not be appropriate for us to do. The reimbursement rates can vary based upon the type of provider involved, the locality involved, and a variety of factors. So, we have to be careful when we talk about averages because there can be significant variances from averages.

Mr. LEVIN. Okay, let us do that. By the way, when you talk about overly generous rates for certain services and products, has that applied in some instances, some substantial instances to reimbursements or payments to Health Maintenance Organization (HMOs), to managed care organizations?

Mr. WALKER. We have reported on that, we have reported on skilled nursing, and a variety of things--

Mr. LEVIN. You have reported on overly generous payments to HMOs?

Mr. WALKER. We have done some work on that and I would be happy to provide it to you.

Mr. LEVIN. Thank you.

Mr. WALKER. Again, one has to be careful, because there can be big variances from the average.

Mr. LEVIN. That applies to HMOs, to various payment structures, right?

Mr. WALKER. Correct.

Mr. LEVIN. Thank you.

Mr. MCCRERY. Mrs. Johnson.

Mrs. JOHNSON OF CONNECTICUT. Thank you, Mr. Chairman, and thanks to both of you for laying out very clearly and quite starkly the problem that confronts us with the entitlements. It is absolutely clear that we have to add prescription drugs to Medicare with that information in mind. It would be very helpful, because Members on both sides of the aisle, whether they are on this Committee or the Committee on Commerce, in this body or the other body, whether on the major committees or off the major committees, are trying to think this through. I think it would be helpful if you took the charts that you did for us today, the primary ones having to do with out-year growth, and accommodated them for the assumption of $400 billion spent on increase in Medicare spending for the drug bill, 500, 600, 700, 800, 900, and a trillion. There was a trillion-dollar proposal last year that had some significant Members behind it, and all Members on both sides of the aisle need to see what the out-year impact of those different breaks would be.

Then you both testified in one way or another to the minimum tools that Medicare has to control spending. So, it would be very useful if you could kind of do an analysis for us of the major plans, taking primarily the other body's Democratic plan--because I think it is fair to say it was the best developed. Now, that may not be true, and I would certainly allow my Democrat House colleagues to determine what plan you should take. For instance, our plan last year had a lot of tools in it. Some of them were very controversial. We need to see what impact those tools would have on spending growth.

For example, we allowed negotiating below the best price. The CBO gave us $18 billion credit for that. We required people to actually spend their own money to reach the catastrophic threshold--not they're employer's money, not their insurance company's money, their own money. That actually, I think, saved us, as I recall, $40 billion.

So, Members on both sides need to see what are some of the tools that are employed in the major bills that are out there to control spending, and what has been the consequence. For example, if you write the premium in law, then you no longer have the ability for efficient plans that negotiate a better drug benefit for lower cost, to be able to charge less. You know, what are the implications of that?

So, I think we need to get a better grasp, I think all Members need to have at their disposal a better grasp of what you can do. What happens if you change Medigap law so that Medigap is not allowed to cover the deductible and copayaments in Medicare? My understanding is that one tool that has worked is first dollar responsibility.

So, I would like you to comment on particularly tools that we don't have in Medicare that you think it would be advisable for us to consider having because of their impact on cost growth. As you comment on that, I would remind you, Dr. Holtz-Eakin, that we sent you a letter about prescription drugs and specific drugs that if people take they stay out of the hospital, they don't get in an emergency room, they don't even see the doctor as much. Where are we in the science--and you might want to comment on this, too, Mr. Walker--the science of being able to determine what portion of the prescription drug effort will actually reduce hospital and other costs, and how could we structure our bills to focus on those drugs in those diseases that are most likely to have the effect on the rest of the plan of reducing costs. Are any of you doing any analysis on the small percentage of seniors that have five chronic illnesses and are eating up the majority of the money, and how would--so that you can begin helping us think through, how do we focus on that? If we focus on the people with chronic illnesses, with five chronic illnesses, we should be able to reduce costs and at the same time improve quality of care.

So, I have just laid out some tools here. We will be sending you--in fact, I delivered today to you, Dr. Holtz-Eakin, a binder on the issue of chronic disease management and if we are able to feed in the seniors that meet that criteria, do we have a potential, and what is that potential in dollar amounts, to constrain cost growth and at the same time improve the quality of care.

So, what ideas would you commend to us, what tools would you urge us to give Medicare to bend this cost curve?

Dr. HOLTZ-EAKIN. Well, Congresswoman, if I could take those in reverse order. First of all, thank you for the information you provided to CBO. We will add it to the wealth of studies that we are examining.

With regard to the ability to identify high-cost patients in Medicare, we are looking at the degree to which those high-cost patients are high-cost patients not just for 1 year, but for many years thereafter, and also, the degree to which they are identified with particular diagnoses and chronic illnesses. These are areas of active study at CBO. We look forward to working with you. We have not yet reached firm conclusions on the ability to move forward with a specific program to identify individuals and estimate cost savings from those kinds of approaches, but it is certainly under study.

On the question before that, the degree to which prescription drugs will lower costs elsewhere, we have investigated this at some length. To date, while there are cases of specific diagnoses--particularly heart disease--where one can identify a trade-off between prescription drugs and traditional therapies, on balance, the peer-reviewed literature and the research community has not yet reached any kind of an indication that we get an overall saving from providing prescription drugs. It is an area in which CBO has a lot of interest, and we will continue to study it.

On your first question regarding tools for cost containment, I would point you to the broad mantra of incentives and opportunity. To the extent that a prescription drug provider has incentives to control costs by being at risk for the insurance risk in a program and has tools available--opportunities to control costs by negotiating with manufacturers, by picking a single drug out of a class of drugs, and a variety of mechanisms of that type--one will get better cost containment from providers. The same lesson would apply on the beneficiary side as well. I would be happy to work with you on the particulars of those lists.

Mr. WALKER. Mrs. Johnson, we have already done a fair amount of work on this and we have other work under way. We look forward to working with you and others on it.

I think you make a good point. The Congress may well decide that it wants to update Medicare to include a prescription drug benefit because, had you designed Medicare today, you would undoubtedly have included a prescription drug benefit. However, it is also important to learn the lessons from what has happened since 1965 in the design of insurance, of health insurance. You need to learn those lessons and try to design this benefit in a way that provides incentives to control cost. I think you also, frankly, in time are going to have to do the same thing for the whole Medicare program. I think you are going to have to fundamentally reassess the entire Medicare program because as it is presently designed it is unsustainable. We don't have the right type of incentives, transparency and accountability mechanisms in place, and you are ultimately going to have to do it for the whole program.

Mrs. JOHNSON OF CONNECTICUT. Thank you.

Mr. MCCRERY. Dr. McDermott.

Mr. MCDERMOTT. Mr. Chairman, I think we ought to have some truth in advertising here. This says this is going to be a Committee hearing on expanding coverage on prescription drugs. We don't have any plan before us, neither one of the witnesses are talking about a plan that anybody is putting forward. So, I think what we are talking about is how to get rid of Medicare. So, I want to talk a little bit about Medicare.

Mr. MCCRERY. You may proceed.

Mr. MCDERMOTT. Dr. Reinhardt in his testimony suggests that there is data from the Dartmouth Study that in Texas they spend $9000 per patient, or in Miami, $7800 per patient, and in Oregon they spend $3600 per patient. Now, there is a recent study that came out of the group up at Dartmouth that suggests there is no advantage, health-wise or satisfaction-wise, from either a double or a triple expenditure in Miami. Where are you with a proposal? Now, I say that I look at what happens with doctors' fees, where we have set a global budget, and we said we were going to control how much money and therefore we figure out through the scheme how much we are going to pay. The thing we didn't control was utilization. Utilization is out of control.

The same is true in the South, or in many parts of the country. I wouldn't just say the South, because it is not only in Baton Rouge and in Miami that you get these big expenditures, but it is other places. What you find is, it is longer hospital stays and it is more specialists seeing patients.

I come from a place where if we were running a health care system like the State of Washington or Oregon or Minnesota, there would be no Medicare problem here. I wonder what you guys have as suggestions of how we fix the present system. What answer do you have to the utilization problem? We get as good results in Washington State as they get in Miami and Baton Rouge, for less than half the amount of money.

Now, what is the solution? You are both supposed to have some ideas here for us, how we are supposed to fix the Medicare plan.

Dr. HOLTZ-EAKIN. You are first.

Mr. WALKER. Well, first let me say there are probably four things primarily driving the overall cost. There's the number of persons involved; inflation--both overall inflation, and then health care costs in excess of that; there is utilization, which you properly point out; and there is intensity, the intensity of care. All these factors end up increasing the top line on health care costs.

I would respectfully suggest, for any system to work, whether it be health care, whatever system it is, you have to have incentives for people to do the right thing, including controlling cost, reasonable transparency to make sure somebody's looking; and appropriate accountability mechanisms if somebody tries to abuse the system. I would respectfully suggest our Medicare system does not meet any of those criteria. I would be more than happy to provide some information for consideration by the Congress.

Mr. MCDERMOTT. I realize you have made a diagnosis, but what is the cure? Tell me the economic--see, I am not an economist like you guys are. I don't understand dollars and cents. So, I am looking to you to tell me what mechanism you put in place for this incentive program.

Mr. WALKER. Well, for one thing, I think that ultimately the Congress is going to need to reconsider fundamentally what is the promise. What is the promise in Medicare? Let me give you an example.

If you look at health care, there are several important elements. One is guaranteed access at group rates. The second is the affordability of that. The third is protection against financial ruin due to catastrophic illness. There is room in-between. You can have guaranteed access to insurance at group rates. You could end up providing significant protection against financial ruin. You could end up having more cost-sharing, which is where you need more cost-sharing. Where you don't have enough incentives to control cost. I also don't think that we have adequate, timely, and useful information to analyze what is going on out there. The data that we have for health care is often 2 and 3 years old. Health care is a huge percentage of our economy. A lot of the data that MEDPAC and you have to rely upon to make decisions is old data and it is provided by providers, who have a fundamental conflict of interest.

So, I would be happy to be able to provide some information for you to consider. It would be a fundamental review and assessment of the current system. You need a comprehensive review but will probably need to act incrementally.

Mr. MCDERMOTT. Do you think the 52 percent that beneficiaries already pay is not enough incentive to control cost? Do you think that they are the ones--is that who? It sounds like they are the ones that you think ought to be controlling the costs, not the professionals.

Mr. WALKER. No, I think there is clearly room, both on behalf of those who are being paid as well as the beneficiaries. So, I don't think it is one side or the other. I think there are issues both ways. I would be happy to have a conversation with you about it. It is a large subject.

Mr. MCCRERY. Mr. Ramstad.

Mr. RAMSTAD. Thank you, Mr. Chairman. Thank you, gentlemen.

Dr. Holtz-Eakin, I just want to try to get my arms around Medicare spending, putting it in a contextual basis, if you will. You stated that your projections show at CBO that overall Medicare spending is expected to quadruple by the year 2075 to more than 9 percent of GDP. I believe that the assumption was that we make no major changes to Medicare. Today the size of our GDP is roughly at $10 trillion. What does CBO estimate the GDP to be in 2075? If it is $10 trillion today, what is it going to be in 2075?

Dr. HOLTZ-EAKIN. That is a number we could get for you. It is going to grow over the long term at an average annual rate of somewhere between 3 percent and 3¼ percent, and over long periods that will add tremendously to the overall size of the economy. I can get back to you with the precise number.

Mr. RAMSTAD. Yeah, because I would like to know if we don't make changes to Medicare, then according to your statement one can deduce that Medicare spending in 2075 would be 9 percent of--

Dr. HOLTZ-EAKIN. A very large number.

Mr. RAMSTAD. A very large number.

Dr. HOLTZ-EAKIN. We can get both large numbers for you, if you would like.

Mr. RAMSTAD. Okay. I think that context is important, certainly. Then to follow up your colloquy with Mrs. Johnson, did I understand you to say that a prescription drug benefit for Medicare seniors should not be enacted without overall Medicare reform?

Dr. HOLTZ-EAKIN. In the end, the Congress will decide the best path to go forward. My discussion with Mrs. Johnson was about the extent to which prescription drugs--the introduction of prescription drugs into a therapy--would provide cost saving elsewhere in the medical system. The evidence thus far does not indicate automatic cost saving so that you get an offset from traditional therapies when you introduce prescription drugs.

Mr. WALKER. I said that I believed that it would be prudent to address both at the same time.

Mr. RAMSTAD. That is right, it was your colloquy with Mrs. Johnson. Excuse me.

Mr. WALKER. That is correct, that it would be prudent to engage in reforms of the program, not just to add on a prescription drug benefit. Congress ultimately can do whatever it wants, whether it is prudent or not.

Mr. RAMSTAD. Again, Mr. Walker, asking you the question, is it a fair assessment of your statement that a prescription drug benefit for Medicare seniors should not be enacted without comprehensive Medicare reform?

Mr. WALKER. My statement says, first, that I think it is evident that you are going to do something on prescription drugs, and it is arguably needed at this point in time. You should be careful about how you design that program, and you should also couple it with more comprehensive reforms--not just make the long-term situation worse.

Mr. RAMSTAD. That certainly is responsive to the question. I very much appreciate that answer. I think that is what most of us believe, at least on this Committee, that to do it without the context, not within the context of overall Medicare reform is making a serious mistake, for the reasons you cited and alluded to.

I just want to ask in my remaining couple of minutes, Dr. Holtz-Eakin, let me also say that I think Congress is fortunate to have an economist of your caliber at the helm. You do not have an easy job, either one of you gentlemen, and we appreciate your good work.

Most of us, I think, who support a prescription drug benefit for seniors do see a cost saving to Medicare. Won't there be a cost savings if seniors have greater access to prescription drug therapies rather than the more--what is documented is more costly and intrusive inpatient and outpatient treatments that are currently covered by Medicare?

Dr. HOLTZ-EAKIN. While I applaud your intuition, in the end, when we do the cost estimates, we rely on the evidence that is available in the research community as a whole. While we have found specific instances in which there are cost savings, as a broad statement for the health care system as a whole, there is not evidence yet that that is taking place. So, I cannot offer that hope to you.

Mr. RAMSTAD. Well, you are right. My intuition is based more on anecdotal experience than empirical data. I would like to see the study you allude to.

Dr. HOLTZ-EAKIN. We will be happy to work with you on that and would look forward to any information you might be able to provide to CBO.

Mr. RAMSTAD. It just seems counter-intuitive to me, but again, I defer to your empirical data. I would like to see those studies, if I could.

Mr. WALKER. If I can, the evidence is that is not the case. The evidence is, is that but for a few exceptions where there may be a savings, that he has referred to, that in the aggregate there is not a savings.

Mr. RAMSTAD. Again, to me that seems counter-intuitive, but I would like to explore that further. I thank you very much for being here today and your responsiveness to my questions.

Mr. MCCRERY. On the next panel we have some health care economists, so maybe they can explore that with us at greater length. Generally, I think the response given by the two witnesses before us comports with what we have been told by health care economists before. Maybe part of the reason for that is that most of the medical expense for seniors occurs in the last 6 months of their lives. Regardless of the fact that we give them preventive care or medications or whatever, eventually they are going to get sick and die, and that means they are going to have the last 6 months of life which is going to be expensive. So, quality of life is one thing, but saving money is another. I am not sure the evidence, unfortunately, points to significant, if any, savings because of preventive care or a health care regimen. Mr. Kleczka?

Mr. KLECZKA. Thank you, Mr. Chairman. I have a few concerns. Let me start with Mr. Walker. Could we put that chart back up on the trust fund deficit?

My question, Mr. Walker, is if I were preparing a net worth statement for myself, I would naturally list the cash, right? If I had a promissory note due me, would that be listed as my asset?

Mr. WALKER. If it was a good promissory note, yes.

Mr. KLECZKA. No, don't--good, bad, indifferent. It is a promise we made. We will make the judgment, not you. If it is a promissory note, that would be part of my asset base and end up in my net worth, would it not?

Mr. WALKER. Yes, it would be considered.

Mr. KLECZKA. Okay, that is why I think this chart is very disingenuous, to say the least, because you might contend that cash is king, but nevertheless it is not a true picture of the entire net worth of the HI fund. The fact that we have promissory notes in the fund is Congress's doing. At the time the cash, King Cash, is running out, this Congress or whatever Congress is going to have to make the judgment whether or not to make it whole. By presenting this chart, and your comments, you indicate, well, the money is gone, folks, and let us not kid each other, Congress is not going to raise taxes to replace it. You know, that is a decision we will make, not the comptroller general or the GAO.

In 2013, if I were to include the trust fund balance, the money that is in treasuries, what would be the actual fiscal portrayal? In 2013. Right now you have it at almost zero.

Mr. WALKER. No, at 2013, what happens is you have--the annual income that you get from payroll taxes and other revenues is not adequate to pay current benefits.

Mr. KLECZKA. I am fully aware of that. Now, we have been amassing a balance over the years because we saw this day coming years ago.

Mr. WALKER. That is correct.

Mr. KLECZKA. There is in fact a surplus. You chose not to reflect it because you are only doing a cash portrayal here.

Mr. WALKER. No, I have reflected it. If you want to use real accounting here, Mr. Kleczka, real accounting, it is a $6.2 trillion deficit. That is real accounting.

Mr. KLECZKA. Okay, now--no, no, no, no. Is there not a balance in a trust fund that is not cash, that is promissory notes?

Mr. WALKER. That has value--it has legal significance.

Mr. KLECZKA. What is that amount?

Mr. WALKER. The amounts in the HI trust fund, let me see.

Mr. KLECZKA. No, I am looking for a comparison in 2013.

Mr. WALKER. Two hundred and eight billion dollars--

Mr. KLECZKA. Two hundred and eight billion dollars?

Mr. WALKER. In the HI trust fund--

Mr. KLECZKA. For what year?

Mr. WALKER. At the end of 2001, so at the end of 2002, $234.8 billion.

Mr. KLECZKA. All right, so that blue line would be much higher, and by the time you got to the red line, if you did an accurate accounting, that red would occur further out and would not be as dramatic if you did a true accounting using the entire trust fund balance that is in promissory notes.

Mr. WALKER. Oh, we have that information. I have provided that before.

Mr. KLECZKA. Could you possibly provide it again, maybe in an updated form?

Mr. WALKER. I would be happy to.

[The information follows:]

Medicare's Hospital Insurance Trust Fund Balances 2002-25

Below are the Medicare Trustees' 2003 intermediate estimates for all years in which the HI Trust Fund is shown to have a positive balance.

Estimates are provided in nominal and real (2003) dollars as of the end of calendar years. 

Source:  GAO analysis and data from the Office of the Actuary, Centers for Medicare & Medicaid Services.

Mr. KLECZKA. So, at least we can honestly portray this. No one is talking cash-only, even though you might contend cash is king. I think you have to look at the total picture. If you are right, in year 2013 Congress shies away from making whole the trust fund and we don't want to cut spending or whatever to make the money whole, we will put up with a riot from those who put money into the fund, but nevertheless that is a congressional not a GAO decision.

Let me ask Dr. Holtz-Eakin a question about his chart. This is the one that is entitled Medicare Beneficiaries by Income Level and Drug Coverage.

Now, as I look at this chart, at all income levels, the blue line is pretty hefty, indicating that seniors have drug coverage. Did you do an analysis of what type of coverage we are talking about? Is this a moderate policy, is it a Cadillac plan, is this a couple of generics, is it a Medicare Choice-type thing--which naturally they are dropping the drug coverage. Is there an analysis of what the blue means? Is that decent coverage?

Dr. HOLTZ-EAKIN. Underneath those numbers are a wide variety of plans, in fact--some programs, which are employer--

Mr. KLECZKA. Medicare is in there also?

Dr. HOLTZ-EAKIN. This is coverage of any type. So, it is also employer-provided plans and Medigap policies. To the extent that they have coverage from any source, it is reflected in this--

Mr. KLECZKA. So, it goes from low to high. So, it is not really an indicator for the Committee or for the Congress that there is adequate coverage out there, or sufficient, or a decent benefit being provided to seniors? It is just who has anything?

Dr. HOLTZ-EAKIN. To the extent that we were trying to capture that, it is in the other graphs that show the degree to which beneficiaries would face out-of-pocket expenses versus covered expenses.

Mr. KLECZKA. Have either or both of you gentlemen looked at the President's drug plan that he submitted to the Congress?

Mr. WALKER. I have not analyzed the President's plan.

Dr. HOLTZ-EAKIN. The President provided insufficient evidence for CBO to do any real analysis of it, as we discussed in our analysis of the President's budget that we put out in March.

Mr. STARK. Would the gentleman yield?

Mr. MCCRERY. The gentleman's time has expired. Ms. Dunn?

Mr. STARK. I guess not.

Ms. DUNN. Thank you very much, Mr. Chairman. Thank you for being here gentlemen. Mr. Walker, I want to go to a point that Mr. McDermott touched on briefly. In your testimony you stated that Medicare pays overly generous rates. That is not, we feel in my State of Washington, necessarily close to the truth. You also mentioned that Medicare's payments are based on averages. I am very concerned about the variation in payments from one region to another. I am wondering if you come to us with any recommendations to create more equity in these payments. For example, do you have recommendations on the formula that is used to determine these payments?

Mr. WALKER. Not today, Ms. Dunn. Let me say that what is in my testimony talks about the fact that GAO has done work that in some cases there are over-generous payments, not in all cases. We have also done work to show that there can be significant differences in what reimbursement rates are in different regions of the country, and also the reasonableness of what those reimbursements are between different types of providers. So, it is not a one-size-fits-all. I would be more than happy to follow up with you after the hearing, if you want.

Ms. DUNN. Yeah, I would appreciate that. It is a continuing problem in our State, where we believe we produce the best medical care available in the country, and yet we are having a hard time holding onto our doctors and keeping our hospital doors open because the reimbursement aren't there at the same rate that they are in many other States whose quality of care is not any better than ours.

Mr. Walker, let me ask you, too, about a GAO report that was released in January. It was on the role of the pharmaceutical benefits managers (PBM) in the Federal Employee Health Benefits program. I am wondering if you can summarize your findings in that report. Did beneficiaries, for example, have sufficient access, do you think, to retail pharmacies?

Mr. WALKER. I think the bottom line in that report is that PBMs are a tool that had been used, including by the Federal Employees Health Benefit Plan. It is a mechanism that the Congress may well want to consider in conjunction with providing a prescription drug benefit under Medicare. There are, however, some differences between how Medicare historically has been arranged--any willing provider, et cetera. There is an opportunity for cost savings here with regard to PBMs, but there are some adjustments that are going to need to be made if you're thinking about doing it under Medicare.

Ms. DUNN. Your comment on access to retail pharmacies?

Mr. WALKER. Most have a broad network. It can vary, but yes, there are access to retail pharmacies in some circumstances, yes.

Ms. DUNN. Thank you. Thank you, Mr. Chairman.

Mr. MCCRERY. Mr. Portman.

Mr. PORTMAN. Thank you, Mr. Chairman. Let me start off, if I could, by following up on Ms. Dunn's question. Your GAO report with regard to pharmacy benefit managers, it seems to me, gave us some good information with regard to the so-called brick-and-mortar or retail pharmacies. Many of them were quite concerned with the bill that was enacted--not enacted, but passed by this Committee and by the House of Representatives last year. Despite the fact that we did not allow direct-mail pharmacies to have a dominant position, still they were concerned that they might not be accessed by the Medicare prescription drug plan we put forward. So, I think to the extent you can provide us this new information in relation to this new legislation we are hoping to put together this year, it would be very helpful.

What I took from it was that in the experience of the Federal Employee Health Plan, that in fact there was access to retail pharmacies. Perhaps that is a good example for us to use and to try to allay some of those concerns, because all of us have them, particularly those of us who represent small towns where you have pharmacies that really provide more than just the prescription drug, but also more health maintenance and preventive health for beneficiaries.

I would like to go back, though, if I could, to some of your earlier testimony. I apologize that you have to sit here and be told by some of our Committee Members that you are coming here to tell us how to get rid of Medicare. I feel just the opportunity about it. I think that is offensive to you, two professionals who, in the case of Mr. Walker, I know has spent a lot of time on this issue, and to our newest CBO Director.

I appreciate the fact that you are giving us what I view as straight talk. This is a very politically charged issue, as you have seen here this morning. Again, Mr. Walker knows that from working on it in the past. We need to good data. I thought you were responsible in terms of how you presented the solvency issue because it is true that the lines do cross at 2013. It is true that then Congress has choices to make. You laid out those choices very specifically, including borrowing, including tax increases, including reducing benefits. These are tough choices that, in my view, Congress will have a very tough time making in 10 short years.

So, I thank you for bringing focus on that. We constantly hear that the year is 2027 or, now, 2026. So, I think, if anything, we need to bring more focus on the fact that we have a fiscal crisis that is more imminent. So, I appreciate that. I also appreciate the fact, again, you laid out what the options are at that point. So, I thank you for that.

I guess my question for you, Mr. Walker, would be, when you talk about "true accounting," you said in fact there would be a deficit--I believe you indicated that in response to Mr. Kleczka's question--at 2013. What did you mean by that?

Mr. WALKER. Well, what I meant by that was, if you were actually preparing a net worth statement and you were using accrual concepts, where you were trying to estimate what the discounted present value of what your future promises are and you look at what is the discounted present value of the revenue stream that you have to meet those promises, what is the gap, there is a $6.2 trillion gap for HI. I am just trying to provide the facts. Congress is elected, Congress has to make the judgments on what to do with the facts. Sometimes people don't like the facts, but they are nonetheless the facts.

Secondly, as you properly point out, and I appreciate it, I was a trustee in Medicare for 5 years. I care very deeply about Social Security and Medicare. I was a trustee of Social Security as well. We have to start dealing with the facts.

Mr. PORTMAN. Well, I appreciate that and I think, again, I view it just the opportunity. We are not talking about how to get rid of Medicare, we are talking about how to save Medicare. When you look at the demographic challenge we face with people living longer and with more and more baby boomers retiring--and I appreciate also the fact that your charts today indicate that, how much of it is due to the Medicare health care cost increases and that inflation is still, in my view, way too high to be sustained, but also just the aging population. My 98 year old grandmother, who is right now back in Cincinnati--if C-SPAN was on, she would probably be watching this, still very sharp--God bless her, but there are more and more people in that situation. Eighty-year-olds are our fastest growing group. So, it is important that you lay that out, too. It is not just the fact that health care costs are increasing at unsustainable levels; it is this aging population.

Quickly to CBO: Your challenge is to help us determine whether some of these competition models really save money. I know that you have looked at some of these proposals. You indicated you hadn't looked at the President's proposal. My understanding is you have done some preliminary analysis of some of the proposals that they have for competition, and you have indicated they do not have significant savings. Is that not accurate?

Dr. HOLTZ-EAKIN. To date, we have had staff-level discussions on a variety of prototypes and thoughts. It is an overstatement to say that CBO has scored any specific proposal, the President's or otherwise.

Mr. PORTMAN. Well, we appreciate your focusing on that over the next several months, because it is going to be critical to us to figure out how to keep high quality of care and deal with this huge challenge. I know you will look at it creatively, because some of the existing models, I think, are inadequate. Maybe the Federal Employee Health Benefits Plan that GAO looked at is one model. Any models out there with regard to competition--choice, which is something that our seniors want--we certainly look forward to, because the existing model is not one that can be sustained. Therefore it is a failed model.

Thank you, Mr. Chairman.

Mr. MCCRERY. Mr. Pomeroy.

Mr. POMEROY. Thank you, Mr. Chairman. I would like to begin by yielding such time as he may consume, but I hope it is not much, to Mr. Stark.

Mr. STARK. I just want to go back, Dr. Holtz-Eakin. You said that there wasn't adequate information on the President's plan for you to estimate it. Did I hear that in response to a question back one or two?

Dr. HOLTZ-EAKIN. In March, CBO conducted its traditional analysis of the President's budgetary proposals. The information we had at that time was that there was to be a Medicare prescription drug proposal that would cost $400 billion over 10 years. That was the extent of the information.

Mr. STARK. I did want to, and I heard Mr. Portman allude to this, too, that there was, according to the Wall Street Journal's weekly gossip sheet here, a very high-ranking government official who recently told some Members of the other body that the Medicare overhaul plan could add hundreds of billions of dollars in costs and that the Administration's cost-savings claims for its plan were disputed by the early data of a demonstration project. Small savings from encouraging seniors to opt for private plans would be offset by high administrative costs. I presume that--of course, that was just a shot in the dark by somebody who obviously didn't have adequate information on the President's plan.

Mr. MCCRERY. In court we would call that hearsay. Mr. Pomeroy.

Mr. POMEROY. Thank you. First of all, I want to salute each of you for your work. In particular, David Walker I have had a chance to work together for years. I think we really have a winner with the comptroller general, a top-flight account, manager, and a health policy guru besides. So, you can certainly make a very important contribution going forward. I look forward to working with you in that regard.

I think your testimony on page 14 is very interesting. Well, your testimony is interesting throughout, Mr. Walker, but I really like on page 14, you talk about basically, Making government fit the challenges of the future will require not only dealing with the drivers, such as entitlements for the elderly, but looking at the range of other government activities. Fundamental review of what the Federal Government does and how well it does it will be needed. This involves--and this is the most important part in my opinion, relative to what faces this Congress at this day: 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.

So, we had some discussion today about addressing prescription drugs in the context of an overall Medicare package, but it seems to me we ought to talk about Medicare much more in the context of the overall budget, especially the tax cuts that are the centerpiece of the Administration's, the House-passed plan.

Clearly a diminished revenue picture in light of the tax cuts proposed--first the growth package and follow along making the tax cuts permanent--will have what effect, Mr. Walker, on the ability of the Federal Government to meet these Medicare payments on a cash-flow basis as they come in in the next decade?

Mr. WALKER. It will reduce the revenues available. I try to be an equal opportunity fact-provider. That is generally to be consistent and to be transparent. We have done a simulation that shows what the effect would be if Congress decided not to extend the tax cuts. It would have an effect, but it is not enough of an effect to solve the problem. We are still going to need to do what you read in my testimony. The difference may be less, but there is still a significant gap in--

Mr. POMEROY. Absolutely. I am certainly not suggesting it is simply a matter of just not doing tax cuts, everything is rosy. I think we also have to come to grips with the fact that we are making a difficult situation a great deal worse, are quite possibly putting us in a framework where we really can't prudently commit the long-term commitment of a Medicare reform, including prescription drugs, if we would so significantly reduce the Federal revenue base.

Mr. WALKER. I think you need to consider it in the broader context. I think there are three levels--the overall fiscal challenge, health care, and Medicare. I believe you need to look at all of those.

Mr. POMEROY. Mr. Walker, because we operate in a 10-year budget window, but that really misses just around the corner what happens when the baby boomers retire and the costs hit, is there some analysis that you could do, or CBO could do, that would somehow help us as we look at revenue issues now what that means in terms of impact next decade relative to meeting these existing commitments, the Social Security and Medicare?

Mr. WALKER. Well, I think one of the graphics that I showed was the long-range budget simulation gives you a feel for that. One of the things I believe Congress needs to consider before it enacts legislation is that you need to consider the discounted present value cost of both spending and tax sides before you make the decisions. You need to consider what the bottom-line impact is. I believe that is very important, and should be consistent on both sides.

I should also say one last thing. I think this Committee, Ways and Means, also needs to look very hard at existing tax incentives for health care. I would respectfully suggest that they are making many consumers less aware of the cost of health care and maybe fueling health care cost increases.

Mr. MCCRERY. Thank the gentleman for that astute comment. Mr. Hulshof.

Mr. HULSHOF. Thanks, Mr. Chairman. Those that will examine this record will examine the entire record, I feel compelled to respond to some of those who commented earlier, specifically to the Ranking Member and the gentleman from Washington State. It seems interesting, Mr. Chairman, that when the full Committee meets to consider a Chairman's mark, we hear protestations about the fact we have not held hearings. Today we are holding hearings, and the objection from the other side, the lament, is that we don't have a bill to consider. Which reminds me of an old law school axiom: When the facts are against you, you argue the law; when the law is against you, you argue the facts; and when the facts and the law are against you, you pound the podium.

I would also say to the gentleman from North by-gosh Dakota, my friend--and even to Mr. Levin of Michigan earlier--who were talking about 10-year projection numbers. Mr. Levin specifically decried "the use of figures for particular political interests." I think I jotted his comment down adequately. As recently as 1997, when this full Committee considered the Balanced Budget Act, there was never a hint or argument about a 10-year projection. There were 5 year numbers, because the House operates under 5-year numbers. It is only since then that not only do we talk about 10-year implications, but now 15 and 20 and 30 year implications about tax cuts and the like. So, I think I just wanted to insert that editorial comment of my own and then get to a question.

Dr. Holtz-Eakin, I am also privileged to serve on the Committee on the Budget along with this Committee. As we debated the Medicare proposal, prescription drug and modernization--and I do include those worlds equally, I would say that I think the CBO estimate alone may not fully inform us of the consequences of various prescription drug proposals. Let me ask your comments on that.

We could have a $400 billion proposal that might lead to lower costs for purchasing prescription drugs, it could lead to more marketplace competition, it could lead to more innovative drugs being introduced into the marketplace. Or we could have a $400 billion proposal that could lead to no additional innovation, no price stabilization. So, really, what we choose to do--we can have this $400 billion new proposal, and yet depending on which direction we go, and each of you talked about innovations and incentives and consequences of those incentives, how critical is it from an economist's perspective that any Medicare modernization bill or prescription drug bill encourage competition among private firms, increase access by new firms and encourage innovation for new drugs and technologies?

Dr. HOLTZ-EAKIN. Speaking as an economist, it may be the case that, consistent with the charts we showed you, this Nation chooses to spend an increasing fraction of its wealth on medical care broadly defined. However, for those dollars to be used wisely, one must give participants the incentives and opportunity to channel those dollars to those particular drugs or therapies that are the ones that they value the most highly, and that is the traditional economic route to getting high value per dollar.

Mr. HULSHOF. To go even--and to look at our current Medicare program, the current fee for service program is an any willing provider program. If we perpetuate that structure in a prescription drug program and we put aside the use of formularies or select contracting with pharmacies, what impact would that have on our ability to control costs? Maybe another way to ask you the question is, what incentives are there to control costs if the government holds 100 percent of the risk?

Dr. HOLTZ-EAKIN. I think a concrete way to answer the question is to look back at previous CBO analyses of prescription drug proposals in previous Congresses and look at those situations in which there were perceived to be cost-containment incentives and opportunities on the part of providers--whether they were at risk for the insurance losses, whether they had tools available to choose low-priced drugs, whether there were price signals sent to beneficiaries to choose among providers on the basis of costs. All of those things figured into CBO's cost estimates.

Mr. HULSHOF. I appreciate both of you gentlemen, especially with the charts, which I think are quite telling. I have back in Missouri a fairly substantial town meeting coming up, and would ask the opportunity to use these charts that you have shown to us today to help explain some of the challenges that we have because I think they are quite telling.

Mr. MCCRERY. Mr. English?

Mr. ENGLISH. Mr. Chairman, will yield my time to Mr. Portman.

Mr. PORTMAN. Well, thank you, Mr. English. I didn't know I would have this opportunity, but let me go back to some of the earlier questions and some of the legitimate concerns that were raised on proposals that might be before this Committee and just make what is maybe an obvious point.

Medicare and Social Security, as well as some other major controversial and, as I said earlier, politically controversial issues should be handled on a bipartisan basis, really have to be to be successful. I think it was President Jefferson who said a big issue should be more of a point of consensus rather than a bare minority or a bare majority.

One of my concerns is that, as we criticize the various proposals, we are not hearing alternatives from the other side of the aisle as to what they would do with regard to these I think now well-defined solvency issues.

So, I would just urge my colleagues on the other side give us your best ideas. We could always come up with a Medicare prescription drug coverage plan that costs $1 trillion a year or $1 trillion over the 10-year period, and Mrs. Johnson talked about that, that would be politically popular in certain circles. It would not be the responsible thing to do.

We, instead, are trying to both provide this needed coverage which, in the modern day, must be there, but also modernize the program itself so that it can be sustained over time. So, I would just make the obvious point that, while it is easy to criticize and to poke holes in the various proposals that are going to come up, the responsible thing would be to offer alternative proposals.

In the area of Social Security, we have the 75 year solvency standard criteria. I would suggest here the criteria might be some of the challenges you have faced us with today, including the crossing of the line, as I said earlier, between the revenue coming in, and the benefits being paid out in 2013 or even pushing it back to 2026, coming up with some way to fund that interim period, but we need to have some standards, and I wonder if the two of you could perhaps comment on that, putting you on the spot here of, maybe Dr. Holtz-Eakin, you could go first. What should the standards be for Medicare modernization and prescription drug proposals that we could compare, instead of apples to oranges, apples to apples? What would you say would be the appropriate criteria?

Dr. HOLTZ-EAKIN. In that area, I guess I would offer two thoughts. The first is that we presented our analysis of the long-run trajectory for Medicare looking at the current program relative to the size of the economy, and I think that is a useful baseline to use because it makes the point that in the end, the economy is the ultimate source of all of the resources to be devoted to health care and other needs. The second point is that the financing mechanisms that the Congress might choose to meet those needs are at their disposal. It could be debt financing; it could be tax financing or we could choose to lower the trajectory for Medicare outlays.

So, I think that the right standard is to compare programs relative to the economy--especially over the long term--when making decisions in the present that have long-term consequences.

With respect to comparing proposals on an apples-to-apples basis, the traditional way to do so is to attempt to make sure that proposals have the same value per dollar, and I can offer you only small comfort in that regard because whether a proposal is "worth it" in the eyes of the Congress will ultimately be your decision. We can provide you with the dollars and allow you to compare the dollars on an equal basis. Whether their proposals are worth it or not is a larger question.

Mr. PORTMAN. Mr. Walker?

Mr. WALKER. Mr. Portman, the GAO did some work in conjunction with Social Security, where we came up with a list of questions that we recommended that the Congress consider in deliberating any Social Security reform proposal. We are in the process of doing the same thing for health care, and I expect that that will be done within the next month. I would respectfully suggest that this Committee and the Congress as a whole may want to consider these questions in analyzing various proposals. We can be helpful in that regard, but in the final analysis, you are the elected officials. You have to make the judgments as to what is appropriate to do.

I will agree with Doug to say that I think looking at things as a percentage of the economy, a percentage of the budget in different ways, moving beyond trust funds, which are really not trust funds in Webster's Dictionary. They are accounting devices. That is what they are, nothing more, nothing less.

Mr. PORTMAN. I think you have made that point clearly today early in your testimony, and I would just respectfully say that if you look at, as a percentage of our economy or as a percentage of our budget, what mandatory spending is, in general, of course, we have seen dramatic increases, and the projections are for even greater increases, I am not sure that that criteria is one that we would adhere to as Members.

So, anything you can give us, in terms of those questions or even in terms of just establishing some criteria to be able to compare the various proposals on a fiscal basis would be very helpful.

Mr. WALKER. Ours cover much more than cost. They cover access administration, quality and other issues.

Mr. PORTMAN. Right, quality issues.

Mr. WALKER. It is a much more balanced approach. It is not just focused on cost because in the end you need to consider more than just cost.

Mr. PORTMAN. Right. Thank you, Mr. Chairman.

Mr. MCCRERY. Mr. Becerra?

Mr. BECERRA. Thank you, Mr. Chairman, and thank you to the two of you for your testimony and your time.

I would like to, if I can actually for 1 second, refer back to the GAO chart. I want to make sure I am clear on something. In terms of the out-years, in 2050, the largest component that you identified there is net interest, and I am assuming that means the interest we pay on the national debt.

Mr. WALKER. That is correct.

Mr. BECERRA. It seems that it is not much smaller than the combined costs of Medicare, Medicaid and Social Security come 2050. I know that the Congressman from North Dakota was asking some questions with regards to this, and I would like to follow up on what Mr. Pomeroy was asking.

If we believe that the size of the debt, which will require interest payments larger than any other of these other programs and almost as large as three of our greatest programs combined, would it not seem that we would want to be making decisions today that help us decrease the size of the national debt, and therefore decrease not just for this year, but in the out-years the amount of interest payments we will be making on that debt?

Mr. WALKER. I think a different way of saying it is deficits do matter. It is important. Obviously, the amount of the deficit, the nature of the deficit, the timing of the deficit--is it a time of war or recession--should be considered, but ultimately you need to get back into balance over the long term.

Mr. BECERRA. If I am correct, the President's budget proposal would have us with a deficit for each of the 10 years, in the succeeding 10 years of his plan, and thereby increasing the size of the national debt. If we were to eliminate his proposals to, one, permanently extend the 2001 tax cut, which is factored into this chart, but also eliminate the other proposed tax cut that he has of some $700 billion over 10 years, principally with regards to dividend repeal, tax repeal, would we see that very dark blue and large box under the year 2050 that represents net interest also come down?

Mr. WALKER. That is correct. We have done that. It would come down, and it would come down significantly. It would still be significantly higher than it is today, and you would still have a significant long-range problem to deal with.

Mr. BECERRA. So, even if we were to cut all of the President's tax cuts, we still have a lot of work to do because there is a lot more that goes into making the national debt and the annual deficits that we are facing than just the tax cut. I think most folks understand that, but we have got to, at some point as you said, start to bring this budget back into balance.

Certainly, if we are going to see a net interest payment that large, representing that high a percentage of our GDP, it would seem that we would want to start now to move towards that road of fiscal responsibility.

Let me ask another question. Dr. Holtz-Eakin, I think you mentioned this in earlier testimony that about 70 percent of Medicare's growth is due to excess health care cost growth which, as I think you have mentioned in the past, is not unique to Medicare. The private sector has faced this as well.

If the private sector isn't doing much better or any better, and some people would say it is doing worse, but if it is not doing any better than Medicare at controlling the growth and its costs, and in fact I think most people would agree that Medicare has done a better job than the private insurers in curtailing costs, how do we expect a program that would turn over, as the President proposes in his plan, Medicare or prescription drug benefits to private plans, in essence, privatizing senior's health care, at least for prescription drugs, how would that help us reduce costs under Medicare?

Dr. HOLTZ-EAKIN. There are really two answers to your questions. The first is that if one looks historically, if one goes back and looks at growth of costs for private-sector payers and growth of costs under Medicare, while on a year-to-year basis Medicare may be above or below the private sector, but on balance, they tend to end up in roughly the same place.

Mr. BECERRA. Pretty close.

Dr. HOLTZ-EAKIN. So, I wouldn't characterize one as being faster or slower than the other in any sustained way.

Then with respect to any proposals on prescription drugs and their cost-containment features, I would refer back to the things that I have mentioned already in my testimony.

The degree to which there will be cost containment depends on--in many, many detailed ways--on the particulars of the proposal and the degree to which there are features such as providers who are at risk and have incentives to control their costs, beneficiaries who are responsive to price signals and face some incentive to minimize costs, and a wide variety of other features of the proposal. As a blanket statement, it is impossible to characterize how that comes out.

Mr. BECERRA. Mr. Chairman, I know my time has expired, if I could ask one last quick question. Do either of you believe that we could try to maintain the cost in a private-sector plan, when it comes to administrative costs at least, or those costs that are ancillary to the actual provision of health care. So, in the case of Medicare, we are talking about administrative costs, and in the case of a private plan, the administrative costs would probably be complemented with marketing costs and profit that would have to be added for the private plan.

Is there any way that we could try to corral those costs for any private plan so that they are about what Medicare currently pays in administrative costs, which I understand is about 3 percent?

Dr. HOLTZ-EAKIN. The evidence is, thus far, for existing private plans versus Medicare, is that administrative costs are higher for HMOs and Preferred Provider Organizations (PPOs) that we see. Going forward, how that would play out remains to be seen.

Mr. MCCRERY. Mr. Cardin?

Mr. CARDIN. Thank you, Mr. Chairman, and let me thank both of our witnesses. I am not sure we are asking the right question. So, let me see if I can at least get your view on this. We are looking at this to try to save the Federal Government money in the Medicare system, which I understand are the growth of the cost to the Federal taxpayer, but it seems to me that we are talking about health care costs increasing. To the extent that we put in these so-called reforms or deal with the changes as to what the Federal Government will pay, we may very well be adding to the burden of the individual and not really dealing with reducing health care costs or the growth of health care costs in the country.

I am looking at MEDPAC's study, which indicates today that for all beneficiaries, including institutionalized, and those in Medicare+Choice (M+C), Medicare covers 52 percent of the total cost. So, a large part is already being paid for by the beneficiaries directly and not by the Federal taxpayer.

Then according to MEDPAC analysis of Medicare Current Beneficiary Survey (MCBS), growth in out-of-pocket costs for fee-for-service beneficiaries living in the community has outpaced growth and their income. The largest source of out-of-pocket growth has been for non-covered services.

I could also go into those that are in some form of a managed care plan. The coverage for non-covered service has been shrinking. So, it seems to me that when you put that all together, we run a real danger of putting a lot of pressure here to reduce the Federal taxpayer share, but in fact will be placing more burdens on the individual. I would just appreciate your comments. Are we looking at this the wrong way?

Mr. WALKER. Well, first, I think you have to keep in mind that that 52 percent number, as I understand it, just talks about Medicare, that you have Medigap paying costs--

Mr. CARDIN. That, in many cases, is 100 percent of the costs--

Mr. WALKER. No, it is not 100 percent, but you have got to consider that Medigap is paying costs, and employers are paying costs with regard to retiree health care.

Mr. CARDIN. On every one of those cases, the individual beneficiary is paying for that. It may be paying for it in salary compensation, may be paying for it in full cost of the Medigap premiums. They might have some help through their prior employment arrangement--

Mr. WALKER. Right.

Mr. CARDIN. Low-income people of course get some help. As far as the Medicare system, it is not paying it.

Mr. WALKER. I understand, but the other thing you have to keep in mind with those numbers is that they also include nursing home costs, and one could debate whether that is solely a health care cost. I don't believe that is solely a health care cost. Some of the services that are provided are not health-care related services when you are in a nursing home; housing or basic food, subsistence--

Mr. CARDIN. I think that is a good point on the 52 percent, but it still points out that if we are just shifting who is paying the cost here, the seniors, as a class, are already burdened in their out-of-pocket costs as it affects their standard of living that they have to pay for health care.

Mr. WALKER. Mr. Cardin, you might not have been here when I mentioned that GAO is preparing a briefing report that I think would be helpful to this Committee and the Congress on what has happened in health care in the last number of years. I think you will be surprised to see that in the aggregate, the individual's portion of health care costs has gone down dramatically in the last 40 years, the percentage being paid by individuals, in the aggregate, of overall health care costs, but that varies by--

Mr. CARDIN. Does that include seniors? Are you saying seniors' costs have gone down?

Mr. WALKER. It varies by age group, but in the aggregate, if you look at who was paying health care costs back years ago--

Mr. CARDIN. Well, I would be curious to see how that breaks down by seniors.

Mr. WALKER. Sure.

Mr. CARDIN. That is what we are talking about today.

Mr. WALKER. I understand that. No, I understand that.

Mrs. JOHNSON OF CONNECTICUT. Will the gentleman yield a minute?

Mr. CARDIN. I would be glad to.

Mrs. JOHNSON OF CONNECTICUT. I think the point of your question was does people taking first-dollar coverage have an impact on utilization or is it just shifting who pays?

Mr. CARDIN. Well, I am not sure about that because the utilization issue is a separate issue, and there has been no demonstration that we will get, there are over-utilizations adding to the cost here.

Let me ask one more question, if I might, because my time is running short. The Chairman mentioned in the beginning $400 billion is in the budget for a Medicare prescription drug plan. Can you tell us just very quickly is that anywhere near enough money, in the ballpark, to cover a prescription drug plan which is typical for those under 65 that they have in commercial insurance, such as what Members of Congress would have in the Federal Employees Health Benefit plans? Would $400 billion come close the covering those types of costs? Just so we have some yardstick here as to the monies that are being put on the table.

Dr. HOLTZ-EAKIN. Mr. Congressman, I guess if I could ask a little clarification. When you say "those costs," which costs do you refer to? Our baseline has about--

Mr. CARDIN. If we were going to provide the benefits of a typical plan provided those under 65, such as the Federal Employees Health Benefit Plan prescription drug coverage, how much money would it cost over 10 years?

Dr. HOLTZ-EAKIN. The reason I asked is that if you go back to the charts we pointed out, out of a baseline of, say, $1.8 trillion, roughly three-eighths, or about $600 billion is currently out-of-pocket. If those costs are what you are trying to cover, then $400 billion is two-thirds of that.

If you are trying to construct a prescription benefit plan that would replace current sources of insurance coverage for prescription drugs, then the number would be much larger. So, it really depends upon the objective that you have in mind.

Mr. CARDIN. In any case, it would be much larger than $400 billion. If we had no deductibles and 25 percent co-pays, I am just looking at the Blue Cross Standard Option Plan, which has a 25 percent co-insurance, no gaps in coverage, stop loss for all medical benefits, that would cost well in excess of $400 billion, I take it.

Dr. HOLTZ-EAKIN. Clearly.

Mr. CARDIN. Thank you, Mr. Chairman.

Mr. MCCRERY. Mr. Stark, you have a quick follow-up?

Mr. STARK. I just wanted to comment on Dr. Holtz-Eakin's statement previously that the difference in increasing costs between Medicare and private plans. I am not sure that that is quite correct.

Dr. Moon's study recently indicated that over the previous 30 years, health care cost increases for private insurance was 41 percent higher than Medicare. Now, for the first 15 years, approximately, they were almost identical, but that was prior to our putting any real cost controls into Medicare, and since we have put cost controls into Medicare, the rate of increase of the private insurers has been far higher in the last part of that 30-year period in every year and to a significant degree, and I would not want the record to suggest that private plans come anywhere close to the Medicare system insofar as controlling increase in costs.

Dr. HOLTZ-EAKIN. I am not familiar with the details of that study. We would appreciate getting a copy.

Mr. STARK. Yes, you certainly should be.

Dr. HOLTZ-EAKIN. I would caution that, in making these comparisons, making sure that you compare apples with apples is usually the hard part.

Mr. STARK. She adjusted this to age and, indeed, this was adjusted to compare exactly because there are two different populations, and this was thus adjusted.

Mr. MCCRERY. Well, I appreciate the gentleman bringing that to our attention. I wonder if she included, though, things like compliance costs that the Medicare program imposes on the private sector that they have to comply with, and that is probably not accounted for in her numbers or certainly not in the 3-percent figure that we hear all the time, as far as the administrative costs of the Medicare system. I wonder if our witnesses would like to comment on whether the Medicare compliance costs are figured in when we talk about administrative costs.

Dr. HOLTZ-EAKIN. With regard to the comparisons that are on the table, the compliance costs I can get back to--I do not know the details there. The CBO looked at the study, and we have a different interpretation of the historical data. In particular, the apples-to-apples comparison requires comparable benefits. I would be happy to work with the Congressman in making that comparison as clean as possible.

Mr. MCCRERY. One question to Dr. Holtz-Eakin. On the question of whether we should write into law the premium dollar amount for the pharmaceutical plans, do you believe that a prescription drug plan, which does a very good job at negotiating with pharmaceutical manufacturers and others in the distribution chain, should have the same premium as a plan that doesn't do a great job in those negotiations?

Dr. HOLTZ-EAKIN. In looking at and evaluating such a plan, the degree to which plans can offer different prices sends a clear signal to beneficiaries to pursue lower-cost plans if those plans also meet the other parts of their desires. To the extent that mechanism is available, we will facilitate cost containment. On the other hand, it also presents the possibility that different beneficiaries will face different prices if they reside in different regions. Those are the elements that we considered in looking at those plans.

Mr. MCCRERY. If we put the dollar amount in law, the incentive for a plan to do a better job would go away, wouldn't it?

Dr. HOLTZ-EAKIN. That is true.

Mr. MCCRERY. Thank you. Thank you, gentlemen, very much for your testimony and your responses to our questions. I call the next panel.

Ms. TUBBS JONES. Mr. Chairman--

Mr. MCCRERY. If you wish, you may inquire, although you missed the entire hearing, you may--

Ms. TUBBS JONES. Mr. Chairman, for the record, I did not miss the entire hearing. I had been here before, but I had to leave for another meeting.

Mr. MCCRERY. Okay, you may inquire.

Ms. TUBBS JONES. Just so the record is clear. I don't want to make a big deal, but I did hear their testimony.

Mr. MCCRERY. You did?

Ms. TUBBS JONES. I did hear their testimony.

Mr. MCCRERY. According to your staff, not here at the beginning.

Ms. TUBBS JONES. Well, take my word, not my staff, okay?

Mr. MCCRERY. You may inquire.

Ms. TUBBS JONES. Thank you, Mr. Chairman. Mr. Walker, earlier in your testimony today, you were talking about percentages with regard to GDP. Do you recall that testimony?

Mr. WALKER. Yes, I do.

Ms. TUBBS JONES. My question goes to, and your responsibility as the U.S. Comptroller General, you are looking at all costs in the government, not just particularly in the health care, as we are talking about today.

Mr. WALKER. That is correct, among other things.

Ms. TUBBS JONES. Among other things, yes.

What percentage of the GDP are the dollars that we have expended so far in the deployment of the military, the expenses in terms of machinery, et cetera, and the war in Iraq? What percentage of the GDP is that?

Mr. WALKER. Well, just back of the envelope, the current request is I think $80 billion, if I am not mistaken.

Ms. TUBBS JONES. Correct.

Mr. WALKER. Sixty-billion dollars for the U.S. Department of Defense (DOD), but I think--

Ms. TUBBS JONES. It is $80 billion, the pack. The supplemental was $80--.

Mr. WALKER. The DOD was $60--.

Ms. TUBBS JONES. Right.

Mr. WALKER. So, you take $60 billion, and the overall economy is, about $11 trillion. So, less than 1 percent.

Ms. TUBBS JONES. Less than 1 percent. What percent of the GDP would the proposed--there is a proposal by the Democrats to fund a prescription drug benefit for senior citizens in conjunction with the existing Medicare program. Do you have any idea what percentage of the GDP that proposal is?

Mr. WALKER. I am not familiar with any proposal that is on the table right now for a prescription drug benefit, but if you mean last year's, last year's was what, $900 billion, roughly, over 10 years?

I don't recall how much it is per year, but if you assume that it was about the same per year--

Ms. TUBBS JONES. Assume $900 billion.

Mr. WALKER. Ninety-billion dollars, it would be less than 1 percent of GDP.

Mr. STARK. Would the gentle-lady yield for just a moment?

Ms. TUBBS JONES. Absolutely.

Mr. STARK. The $80 billion for the Defense was 6 months, and ours was for 12 months--our drug benefit--so I would suspect that you would have to--

Mr. WALKER. We don't know what the cost is going to be. Frankly, I have got a son who is a company commander with the Marine Corps in Iraq right now. So, we don't know how long they are going to be there, and we don't know what the cost is going to be.

Ms. TUBBS JONES. You know what, my heart goes out to you having a son over there. I have lost two of my constituents, and the point is not to argue our patriotism. What I wanted to bring to the attention of the Committee and to those who are listening is the fact that previously Secretary Snow said it doesn't matter what the cost of the war, it is minor in terms of the GDP.

If you assume his statement is correct, and you assume that the 1 percent of GDP is what you are suggesting the Democratic plan, though you are not familiar with it, would cost, that is minor, compared to the GDP, to pay for the cost of a prescription drug benefit for all seniors. Would you agree with that, sir?

Mr. WALKER. I think you are comparing apples and oranges, though, with all due respects.

Ms. TUBBS JONES. What are the apples from your perspective?

Mr. WALKER. Let me tell you why I say that. You may or may not agree.

Ms. TUBBS JONES. We have a short amount of time, just so you know that.

Mr. WALKER. I understand that. The cost of the war is not going to be forever. We are not going to be in Iraq forever. However, the cost of a prescription drug benefit, unless Congress decides to rescind that benefit, after it passes, will be forever.

Ms. TUBBS JONES. I understand the forever language, but the people that would be covered by the prescription drug benefit for as long as they live. They have been forever, most of them paying into our--are paying taxes, and they are forever our people. They are our mothers, our fathers, our sisters and brothers, and we are going to be forever grateful to them for the work that they have done to allow us to be sitting where they are sitting today. Fair?

Mr. WALKER. I would agree with that.

Ms. TUBBS JONES. Thank you. Dr. Holtz-Eakin, I am sorry. I would have asked you a question, but I can't. I have run out of time. I am on yellow. At another juncture, I hope to be able to engage with you and ask you a few questions, and I yield back my time, Mr. Chairman, and I thank you for the opportunity to ask questions.

Mr. MCCRERY. You are quite welcome. Thank you very much, gentlemen, for your testimony and your responses, and now I would like to call up our next panel; three Ph.D.'s, Dr. Stuart, Dr. Pauly and Dr. Reinhardt.

We have testifying on our next panel--I am going to let Mr. Cardin introduce his constituent. Before I do that, I will say the other two witnesses are Dr. Uwe Reinhardt, who is a professor of Economics and Public Affairs, the Department of Economics and Woodrow Wilson School of Public and International Affairs at Princeton University; Dr. Mark Pauly, professor, Health Care Systems, the Wharton School, University of Pennsylvania.

Mr. Cardin, if you would honor us with your--

Mr. CARDIN. We are very pleased to have Dr. Bruce Stuart with us today from the University of Maryland School of Pharmacy, the Peter Lamy Center on Drug Therapy and Aging. Dr. Stuart has been a tremendous help for us locally, as well as nationally, on these issues and it is a pleasure to have him here for the Committee on Ways and Means.

Mr. MCCRERY. Thank you, Mr. Cardin, and thank all of you, gentlemen, for appearing today. Your written testimony will be submitted for the record. If you could, in about 5 minutes, summarize your testimony, we would appreciate it. Dr. Stuart, we will start with you.

[Questions submitted to Mr. Walker from Mr. Houghton, and his responses follow:]

Question:  I understand that historically when Congress has added a new benefit or when CMS makes a national coverage determination, all other insurance becomes secondary to Medicare regardless of whether it is offered through supplemental insurance, a private plan, or Medicaid.  Is this correct?  Is this coordinated sufficiently under current law and regulations so that all people, regardless of their coverage, understand the rules?

Response:  Whether Medicare would be the primary or secondary payer depends on the type of other coverage the beneficiary has.  In general, Medicare is the primary payer for covered services when a Medicare beneficiary has any of the following sources of supplemental coverage:

1. Medigap insurance, which is designed to supplement Medicare by paying certain cost-sharing requirements or non-covered services (42 U.S.C. § 1395ss),
2. Medicaid, which statutorily is always the insurer of last resort (42 U.S.C. § 1902(a)(25)), or
3. employer-sponsored health coverage when the beneficiary and spouse are no longer employed.

In general, Medicare is the secondary payer for covered services when a Medicare beneficiary is:

1. working and has employer-sponsored group health coverage  (42 U.S.C. § 1395y(b)),
2. not working but is covered by a working spouse’s employer group health plan,
3. treated for a condition or an injury where a third party may be liable for medical services provided, or
4. afflicted with end stage renal disease during the 30-month coordination period.

The liability for Medicare or other payers to pay for these services depends on coverage determinations by CMS and the plans.  One would have to look to the terms of the other plan’s coverage to determine how that plan’s coverage will be affected by a Medicare decision.  For example, if Medicare began covering a health care service for which it would be the primary payer, a beneficiary’s other plan would either provide secondary coverage or no coverage depending on the terms of that plan.  Alternatively, if an employer’s group health insurance is the primary payer but does not pay in full for certain Medicare-covered services, Medicare may provide secondary coverage; however, if the group plan denies payment for these services, Medicare may pay as primary payer.

Accurately determining whether Medicare is the primary or the secondary payer and effectively coordinating these benefits requires that the CMS have timely information on any other sources of health coverage that a beneficiary may have both at the time of initial eligibility for Medicare and when any changes occur.  CMS provides information to beneficiaries and providers about coordination of benefits, the need to provide accurate insurance information, and Medicare's role as primary or secondary payer on its web site (http://www.cms.hhs.gov/medicare/cob/) and through other means. 

There is no question that this issue is complex and making it understandable to everyone is challenging.  Fortunately, the number of instances where confusion will arise is small relative to the numbers of Medicare beneficiaries and services.  Medicare covers a broad variety of services, including inpatient hospital care, skilled nursing facility care, certain home health and hospice care, physician and outpatient services, diagnostic services, outpatient physical and occupational therapy, ambulance services, and other medical services and supplies.  Coverage policies impose some limitations, but such policies are important as they seek to assure that Medicare only pays for necessary valued services.

Question:  If we were to enact a drug benefit that allows employers the option to continue retiree coverage and tap into the Medicare drug subsidy, do you think it will be confusing for Medicare beneficiaries, especially if the “Medicare plan(s)” differs from the employer-sponsored plan?  For example, a beneficiary may not know who pays each time they go to the pharmacy (whether it is the federal government, private insurer or paid out of pocket).  Obviously we need a structure that retirees understand, can you make recommendations on how to avoid confusion in layering a Medicare benefit with employer sponsored coverage?

Response:  I agree that it will be very important to provide Medicare beneficiaries with clear and comprehensive information about any choices they would have under a proposed Medicare drug benefit.  As I stressed in my statement, if multiple private entities were selected to administer drug benefits, a means to ensure that beneficiaries receive comprehensive user-friendly information about policy and benefit differences among competing entities would be necessary.  Similarly, such comprehensive information will be necessary to help beneficiaries determine how any new Medicare covered drugs would coordinate with existing sources of drug coverage, such as employer-sponsored group health plans and Medigap, as well as the effect on beneficiaries out-of-pocket payments.  Beneficiaries will need such information to make informed decisions regarding whether to maintain or opt out of current supplemental coverage—an especially important decision as the availability of employer-sponsored retiree health benefits has generally declined over the last decade and many employer-sponsored group health plans have increased cost-sharing requirements.

One option that you may consider to reduce confusion for Medicare beneficiaries maintaining employer coverage is to provide a subsidy for premiums of a private plan offering a drug benefit rather than having dual coverage through both a private plan and Medicare.  Then each beneficiary with drug coverage would only be affected by one set of coverage and copayment rules.  This would also avoid the situation we have now where supplementary insurance, like Medigap, ends up making beneficiaries less sensitive to the costs of services and contributes to the fiscal challenges the Medicare program faces today.

STATEMENT OF BRUCE STUART, PH.D., PROFESSOR AND DIRECTOR, PETER LAMY CENTER ON DRUG THERAPY AND AGING, UNIVERSITY OF MARYLAND SCHOOL OF PHARMACY, BALTIMORE, MARYLAND

Dr. STUART. Thank you, Mr. Chairman, and Members of the Committee. I would like to use my brief remarks to address what I think is the most important question underlying the debate over a Medicare drug benefit, which is what will happen to beneficiaries if Congress fails to act. I hope to show you that recent trends in coverage put future beneficiaries at risk of having significantly reduced options for meaningful prescription benefits if legislative action is not taken soon.

Although a higher proportion of beneficiaries had some form of prescription coverage in 2000 than ever before, the growth is unsustainable. It is due to two phenomena, a rise in Medicare HMO enrollments and a rapidly growing segment of beneficiaries with ill-defined and overlapping benefits.

In fact, since 1995, there has been a slight decline in rates of drug coverage among beneficiaries who rely on a single prescription plan from an employer, a Medigap policy, Medicaid or other public program. By examining changes in these sources of coverage, we can develop a reasonably accurate forecast of what beneficiaries will face in the near future.

Retiree health benefits offered by employers and unions represent the most generous private source of prescription coverage available to Medicare beneficiaries. Data from the MCBS show that the number of beneficiaries with prescription coverage from employer plans has remained steady at 34 percent from 1996 through the latest data release for 2000.

This is actually a very surprising statistic, in light of the pull-back in retiree health benefits reported by employers. According to annual Mercer/Foster Higgins surveys, the number of large employers offering employer coverage has dropped from 57 percent in 1987 to just 23 percent in 2001.

Why haven't we seen a comparable decline in the MCBS data? Preliminary results from a study my colleagues and I are conducting for the Commonwealth Fund suggests that the answer lies in beneficiary demographics. We find that the proportion of younger beneficiaries with employee-sponsored health benefits dropped dramatically between 1996 and 2000, while there was a small increase in coverage for beneficiaries 70 and older. This pattern does not auger well for future retirees.

The advent of Medicare+Choice in 1997 was followed by a major expansion in HMO enrollments. At the program's peak in 1999, more than 7.5 million beneficiaries had enrolled, yet 22 percent of them left their plans that year, presumably for better coverage elsewhere.

The HMO enrollees represent a large fraction of the beneficiary population with shifting sources of prescription benefits and gaps in coverage. Today, M+C enrollment has declined by a quarter and the drug coverage offered by the remaining plans is less generous than it was 4 years ago.

Beyond M+C and employer coverage, the only other private source of prescription benefits available to beneficiaries is self-purchased coverage through a Medigap plan. In most States private carriers are permitted to offer three standardized plans with very limited benefit provisions that have not been updated in over a decade. Even this limited coverage may appeal to older people who have no other options.

The catch is that many carriers do not sell these policies and those that do generally charge high premiums. In some cases, the premiums exceed the maximum value of the prescription coverage itself. In other words the market for Medigap plans is ill-equipped to provide meaningful coverage to Medicare beneficiaries who lose benefits because of pull-backs in HMOs and employer plans.

The poorest elderly typically do not qualify for employer-sponsored health insurance and cannot afford the premiums for individual Medigap policies. Medicaid is available to those who meet stringent Federal and State means tests for income and assets. Some States have responded to the needs of those too poor to afford adequate medications, but not poor enough to qualify for traditional Medicaid by extending full Medicaid coverage to beneficiaries enrolled in the Federal Qualified Medicare Beneficiaries and Specified Low-Income Medicare Beneficiary programs.

Thirty other States have enacted pharmaceutical assistance programs that subside prescription drug expenses for selected low-income populations. The latest development is the CMS Pharmacy Plus waiver program that encourages States to develop drug-assistance plans paid for through savings in traditional Medicaid. Five States have approved Pharmacy Plus Programs and 10 others are in the process of developing waiver applications.

This flurry of activity at the State level might lead one to conclude that the needs of low-income Medicare beneficiaries are being adequately addressed. That would be a mistake. According to the MCBS, less than half of beneficiaries below the Federal poverty level are enrolled in Medicaid or another public program offering drug benefits during 2000. Only 1 in 5 beneficiaries, between 100 and 150 percent of the poverty line, was enrolled in a public plan.

The current patchwork of State programs is extremely fragile. Four of the 30 States that enacted pharmaceutical assistance programs have put them on indefinite hold because of budgetary problems. Massachusetts has frozen enrollments in its assistance plan. Some of the larger plans, including the Pennsylvania Program of All-Inclusive Care for the Elderly program are seriously underfunded.

Let me rephrase the central question I posed at the beginning of my remarks. What should Congress learn from these recent trends as it prepares to enact a meaningful drug benefit. The first lesson is that strong action must be taken to avoid further erosion in retiree health benefits. Subsidizing prescription coverage will reduce the burden on employers, but additional steps will be necessary to assure that firms maintain or, better yet, improve upon current coverage.

Second, while managed care plans have clearly failed to provide meaningful drug benefits in the absence of government payment, it is just possible that covering drug costs in plan capitation rates may actually save the M+C program.

Finally, as important as State programs can be in filling the gaps in prescription coverage, present circumstances call for a unified national program of prescription benefits available to all Medicare beneficiaries.

Thank you very much.

[The prepared statement of Dr. Stuart follows:]

Mr. MCCRERY. Dr. Pauly?

Dr. PAULY. Thank you, Mr. Chairman and Members of the Committee. I have directed my prepared remarks at the issue of prescription drug coverage, but I would be happy to comment on the general issue of Medicare reform.

The absence of outpatient prescription drug coverage for the quarter to a third of Medicare beneficiaries who don't get such coverage poses for them a serious risk of both high out-of-pocket payments and the risk that they will fail to use drugs that are effective for their health and so be of concern to their fellow citizens. Are there ways to improve the situation?

I believe that there are and that the best design for improvement that pays attention to the budget constraints for Medicare as a whole is one that builds on two important principles of public policy. First, that protection against financial risk should be based on a correct theory of insurance and, second, that coverage of concern for public policy should help people with low incomes pay for drugs they might otherwise forego, but that concern need not extend to beneficiaries with lower levels of spending and higher incomes who are able to pay for their drugs.

I, first, consider the design of insurance coverage to maximize value. That is what we are trying to do here. This design is based on the common-sense principle that underlies all insurance. The purpose of insurance is to provide benefits when they are most needed.

For the financial protection dimension of insurance, it is obvious that benefits are most needed when losses are greatest, since in such cases the threat to wealth and future standard of living is greatest. In contrast, insurance coverage is of low value, if it pays for low or below-average levels of expense. Since insurance itself always carries an administrative cost, such budgetable expenses usually should not be insured at the real cost of using resources to review claims and write checks.

Insurance is supposed to pay for the rare high-cost event that spells financial disaster and not for the modest expense most people could reasonably expect year-after-year and could afford if it did occur. Insurance which did pay for small, predictable expenses would be insurance in name only. For the Medicare population, it would be roughly equivalent to an increase in Social Security payments, but made in a less transparent and less-efficient way.

What about people who, because of the absence of insurance, failed to use beneficial care? We know for certain that the volume of drug use and drug spending is increased when insurance coverage is greater. This phenomenon of moral hazard mentioned earlier occurs for people at all income levels. In effect, insurance makes expensive drugs look cheap and inexpensive drugs look dirt cheap.

This lower price appears to have an amazingly strong effect on everyone's behavior. For example, our research indicated that lowering the co-payment for prescription from $10 to $2 could produce up to a 65-percent increase in drug expenditure for people under age 65 who are middle class, privately insured, and the same order of magnitude is probably true for seniors.

The evaluation, of course, of the increase in spending is uncertain. Some portion of it represents increase in spending that would receive social approbation. Other portions though, may represent the use of products which, even if of positive value, were not really worth what they cost.

These two principles can be made highly consistent if we assume that lower income is associated with a lower use of drugs, other things equal, and that such low use is a matter of social concern. Then, the socially optimal coverage policy in a budget constraint world would provide virtually complete financial protection for those beneficiaries with incomes just above the Medicaid limit.

In contrast, for the elderly middle class, who are about half of the elderly, the insurance of concern to government should cover expenses more generously as expenses rise, but should provide no coverage for small expenses, with the point of which coverage begins to take effect related to household income and wealth. A very simple version of such a scheme would involve insurance that provides full coverage of a deductible, with the deductible stated as a percentage of household income.

There are two objections to this simple, but powerful model:

First, because drug expenditures are not evenly spread over the population, some people criticize this model because most people will not collect from their insurance, but will either have to pay something or, even if the insurance is fully paid by taxes, will be miffed at not getting an equal slice of government largesse.

As suggested earlier, if those unlucky people who have low drug expenses in a given time period need to receive a political payoff, providing low deductible or first-dollar coverage is an inefficient and inequitable (to those with zero expenses) way to do so; just increase Social Security with a cost of living adjustment that includes drug spending as a component.

Of course, whether low risks are in or out, a somewhat more respectable argument is one that views front-end coverage as a way of dealing with adverse selection. The main problem with the argument here is that adverse selection only helps the high risks if the low risks can be induced to pay more than the value of their benefits, but because the benefits for low risk are so small and so predictable, there is very little willingness to pay extra.

I will also make just a few comments on how to pay for drugs. I have talked about the form of insurance coverage. The general principle of insurance here is pretty straightforward. The idea would be to pay an indemnity benefit that would cover products that are sold in competitive markets, and that might be a reasonable principle for generic drugs, although the Federal Trade Commission should continue to be vigilant about pricing of those products.

The most serious problem arises, however, for products protected by patents. Society offers patents in order to induce drug firms to invest in research & development for new products. Once products are invented and fixed costs have been incurred, however, it is desirable to get final selling prices down. So, our choice, actually, is between cheap products now and good products later, but not between cheap, good products now and cheap, good products later.

Thus, the part of the government that wants to contain medical costs is at war with the part that wants to foster medical progress. It is certain that if research & development is undertaken by rational profit-maximizing firms, lower prospective prices and payments will mean fewer good, new products. The key, obviously, is what are the nature of the good products that would be foregone. They would probably include orphan drugs and some things of substantial value.

In the face of such uncertainty about what public policy might affirmatively do, in my judgment, the best policy is to try again to replicate as much as possible markets with patents that are otherwise competitive. This situation would be best accomplished if individuals could choose from a large number of different health plans, with the plans having different policies as to which drugs they pay for, what prices they pay and what advice and assistive services they provide.

When there is a choice of plans, those plans must be allowed to differ in both coverage policies and premiums paid by the insured for choice to be meaningful. It does not help if there are multiple contractors administering exactly the same coverage at the same beneficiary premium.

Competition between different plans cannot be guaranteed to yield lowest possible price, I think it is important to emphasize, but it probably will lead to the best price and the best trade-off between price and quality that reflects the trade-offs beneficiaries are willing to make between the different types of cost containment that provides incentives to squeeze out any insurer profit and that best deals with government-granted patent monopolies.

My final comment, and in some ways saving the worst for last or, in some ways, the best for last, we know that the primary reason why health care costs rise in this country is because of the addition of beneficial, but costly, new technology. I think there are serious doubts about our ability to afford, certainly for public programs, and perhaps even privately, the rate of growth of beneficial, but new, technology that we have become used to over time. We live and will live in a world of limited resources, some technology should not be made available to all who will benefit from it, but we have found no institutional structure for saying, "No." There is no institutional structure for making such cost-benefit tradeoffs and especially not for government-funded coverage like Medicare.

So, three policy questions remain:

First, how low a deductible at any given income level represents the appropriate combination of financial protection for seniors, appropriate incentives to use, but not overuse, drugs, and tax burdens on present and future taxpayers?

Second, what tradeoffs should we make between inexpensive drugs today and better drugs for the future?

Third, and most importantly, what rate of increase in spending for higher quality, but more costly, products we think is appropriate for the growing number of elders in our country.

Thank you very much.

[The prepared statement of Dr. Pauly follows:]

Mr. MCCRERY. On that sobering note, we will go to Dr. Reinhardt.

Dr. REINHARDT. Thank you, Mr. Chairman, and Members of this Committee for inviting me to share my views on Medicare reform. I will concentrate mainly on Medicare reform and not on the prescription drug coverage. I am working on a paper on it. I haven't totally through. Once I have, I will be happy to share on that.

Now, my testimony grew out of a primer I had written for journalists who always kept asking the same questions and to be efficient, I just wrote this up and said call me back if it is not clear.

The questions I was asked: What are the deficiencies of the traditional program and who is responsible for those deficiencies?

The second question: What form should the competition between traditional Medicare and private insurance plans take?

The third one was what are actually the goals of Medicare reform and are these achievable?

Finally, what are some of the technical and political obstacles?

Now, with respect to the shortcomings, the interesting thing is Medicare is a highly popular program. Survey after survey shows that if you array public and private insurance products, Medicare usually is among the top or the winner. So, you are trying to reform a program that is highly popular among not only the old, but also the young. It has shortcomings, and we have heard these. It has a strange insurance structure. It has no stop-loss protection, no catastrophic protection, doesn't cover prescription drugs.

I am asked who is responsible for it? The culture and language is bureaucracy. The word "bureaucracy" in America is a little bit like the word "French" is these days. It is always not good.

I analyzed it, and I would defy anyone to prove me different. All of the shortcomings of the traditional Medicare program are the Congress's responsibility. Think of Medicare as an insurance company. The management is the Health Care Financing Administration (HCFA) and now CMS. You are the board of directors. Then look down what good governance would require, and you would find the fault likes in the board of directors.

If Medicare doesn't have prescription drugs, that is Congress's fault. If there has never been successful competitive bidding, that is Congress's fault.

I noticed Mr. Walker said that Medicare overpays for prescription drugs for oncologists, but straight shooter that he is, he points out on page 20, that it is in the statute. There is nothing CMS can really do about it. So, that is the first thing. There is no reason why this body, the board of directors, could not fix the deficiencies that are in Medicare, and there are many proposals around on the shelf to do this. This is not rocket science.

The next question that gets asked is: What should be the nature of the competition? I think the reasons why some people feel that the proposals now before the Congress are actually out to destroy the existing Medicare is the idea to put $400 billion of taxpayer money and give that only to the private health plans as a come-on and not to put a drug benefit also in the traditional Medicare.

That would, of course, be a policy quite consciously designed to destroy the old Medicare. Maybe that should be done, but it should be openly discussed as such. I think camouflaging that with pretty language does seem to me to be not proper in a democracy.

The next question comes: What are actually the objectives of this reform? Here I have the most difficult problems with journalists. I, myself, I have heard again many times this morning that we need to reform Medicare. What are we really talking about?

I list on page 7 of my testimony several goals, but let me pick on just two. If the idea is that Medicare reform will lower total health spending per elderly from all sources, I would almost assure you that will not be achieved. I have a chart on page 8 where I say, "Where could those savings come from?"

Would you believe that private health plans can get lower fees than the traditional Medicare? I don't think so.

Would you believe that you can reduce volume more than the traditional Medicare? Well, we have the managed care backlash. We have just been through it, and the Supreme Court now completely killed HMOs by having this "any willing provider" provision.

So, the idea that you think you can reduce volume with private health plans in Dade County, Miami, and not trigger a backlash among the elderly, I doubt it. I think you will find there isn't that much volume, unless Congress really gets control, unless you get into it.

When it comes to SG&A, savings and administration, Medicare now spends less than 2 percent of the total expenditure on administration. I will put to you the proposition there is no insurance company in America that could run an insurance program this complex and spend only 2 percent on administration. In addition, they would have to market individually to the elderly, which Medicare does not, and they would have to give profits to shareholders, which Medicare does not.

So, I believe there is no source of saving in SG&A. I think in chart A, I can ask my colleague here to audit it, I don't think I have left anything out. This is, again, not rocket science. I put it all out there, and anyone who would argue that you can save total spending would have to tell me where in this map would you do it.

Now if, on the other hand, the idea is to let total spending go where it may, but to limit just the taxpayers' exposure, that of course you could do. The idea there would be to lighten the burden on the working population who pays payroll taxes and shift it to the elderly themselves. I think that could be debated, but I would think, in a democracy, that should be put honestly on the table for all the young and the elderly to see, so that one could have a forthright, democratic debate on this--democrat "small"--rather than hiding that under some other goal.

There are some obstacles that I see. The CMS--or HCFA formerly--has never succeeded to experiment with competitive bidding, yet competitive bidding is a core of this reform. So, ask yourself how would the health plans ever play along? They like administered prices because they can manipulate them. I don't think they would like competitive bids.

We don't have a good risk-adjustment mechanism. The Dutch don't, we don't, the Germans don't, and yet having a good risk adjuster is the sine qua non of a competitive insurance structure. We heard about the Winberg variations this morning.

Finally, I do ask Medicare can't ever really compete fairly with private plans because, say, Humana can pull out of Iowa if they don't like it, but Medicare has to stay as the insurer of last resort. So, it will be very difficult ever to have a really level playing field in this field.

Those are my remarks. Thank you.

[The prepared statement of Dr. Reinhardt follows:]

Mr. MCCRERY. Thank you, Dr. Reinhardt, and thank all of you for your testimony. I am going to turn, first, to the Chairman of the Subcommittee on Health, Mrs. Johnson.

Mrs. JOHNSON OF CONNECTICUT. Thank you all for your thoughts and your very thoughtful testimony.

Dr. Reinhardt, under program shortcomings, you mentioned prescription drugs, no stop loss and cost-sharing issues, but you don't mention almost total lack of preventive, coverage of preventive benefits under Medicare, and more importantly, Medicare has no capability to provide management of chronic illness. Structurally, it doesn't have that capability, and yet about 32 percent of the seniors that have 5 or more chronic illnesses are using 78 percent of the resources.

So, when you say what could plans offer us, the private sector is far more advanced than is the public sector in managing care, not managing care in the old HMO model; managing care in the integrated disease protocols models.

When you look at the number of people retiring and the length of time they are living, and the number of multiple diseases they are living with, do you think that there is no opportunity to save money in Medicare by better managing chronic disease?

Dr. REINHARDT. Oh, no, I do believe--that is on page 10, my goal 3. I said it could be that we assume we get better value for the dollar, in particular, disease management, which is also I mentioned in the--

Mrs. JOHNSON OF CONNECTICUT. It is very much of an aside, and, to me, if 32 percent are using 78 percent of your resources, and that type of patient is going to grow, this is not an aside.

If we want to bend long-term spending in Medicare, we can do exactly what has happened in other sectors of our economy. Through more integrated teamwork, through better use of technology, we have reduced costs and improved quality, and that is really what disease management does. It improves the quality of care for the individual patient, but it reduces the overall cost by reducing hospitalizations, emergency room visits, and in many instances even physician visits.

If this were aggressively pursued in the near term, with CMS identifying these patients and giving them incentives to join such plans, the issue really isn't would this save money, in my mind; the issue is how do you do it? How do you let both private-sector plans that have demonstrated that they are doing this well do this for our seniors, and how do you provide access to coordination of care, management of diabetes, management of heart disease, these kinds of things in rural areas where there is no plan?

There almost invariably is some small hospital or medical practice that, with the resources, particularly the technology, could do this. This is springing up from the medical community, and it is better quality and lower cost.

So, your analysis is interesting, but it is too focused on where we are now and the way we have always viewed care. If we are going to view care more holistically and more proactively, we will get higher-quality care, and we will be able to, in the long run, keep people out of dialysis. That will save us money.

Dr. REINHARDT. Yes, Congresswoman Johnson, I agree there is some experiment or some initial experiments with disease management, but I think it would not be accurate to say that disease management is now widely practiced in the private sector. They, too, are only just beginning, and usually the mechanism they use is to contract/subcontract with specialized niche companies who do that.

There is no reason the traditional Medicare couldn't do that, too. It could deal with Centers of Excellence, it could do selective contracting. It could do almost all of it that a health plan can do. The real issue is it needs the authority from the Congress to do it.

I think you might want to invite people like Marilyn Moon, who have thought much about this, who would tell you, you don't necessarily have to join a private health plan to get disease management.

Mrs. JOHNSON OF CONNECTICUT. My time is about to expire, and I want to see if anyone else has a comment. I agree with that, but I don't think you want to exclude those systems that have more advanced capability than we do. I think you need to do both.

Dr. REINHARDT. Not at all. In fact, I say I welcome always competition. Every public program, where feasible, should have competition from the private sector, whether it is Federal Express and the U.S. Post Office or health plans and Medicare. I totally agree with you on that.

Mrs. JOHNSON OF CONNECTICUT. Dr. Pauly and Dr. Stuart. Do you have any comment?

Dr. STUART. I am sorry?

Mrs. JOHNSON OF CONNECTICUT. Do either of you have any comment on this aspect of cost control and Medicare?

Dr. STUART. I was going to say that I have trouble hearing, and so if I ask you to repeat your question. I also might note that Medicare does not cover hearing aids.

[Laughter.]

Dr. STUART. Let me make a point about disease management. Disease management, actually, as it is practiced by these niche companies, typically plays a heavy role in terms of prescription drug therapy. So, it would be very, very difficult for Medicare, as it is currently constructed, to encourage disease management, because one of the central elements of disease management in the private sector is simply not available to Medicare. So, I think that simply making prescription drugs available would actually make it feasible to develop disease management approaches.

Dr. PAULY. Well, I am both more and less optimistic than Professor Reinhardt. I think if we judge from the competition between managed care and fee-for-service in the private sector, although we don't have any definitive estimates, my entry in the office pool is that managed care saved about 15 percent. Now, that was a one-time saving, but it was what resulted in very low rates of growth for private sector spending from about 1994 to 2000. You might be able to see that same sort of saving within Medicare, but it would require what managed care required in the private sector, which is limitation, greater limitations on patients and providers, and that would fly in the face of what people love about today's Medicare. I will say though I am, in 4 years, contemplating being eligible for Medicare, and one of the things I worry about is a point that Chairman Thomas made this morning. I worry about the relevant comparator, you need to have the relevant comparator. My judgment is today's Medicare is not sustainable. I am not sure whether it is sustainable for the next 4 years, but is certainly not for as long as I hope to be around and a burden on my children. So, I think the affection that people feel for a very generous program, of whose cost they pay less than 10 percent, is not something that we can continue to hold out for future generations of elderly people, so we need to think about how to change that.

The good news is that some private sector plans may be able to save money, although they will probably require some restrictions that Medicare beneficiaries are not used to. The bad news is that potentially the savings that private sector plans can achieve, which in part result from obtaining lower prices and discounts to providers, Medicare may have already achieved. So, at least the part about better negotiation with providers, at least to judge from the complaints of hospitals and physicians these days, Medicare may have already made those cuts, so there may not be as much of a gain.

In keeping with the tradition of economists as professional wet blankets, I guess what I see as the main advantage of competition in Medicare is that when the inevitable restrictions come, I would rather have a choice of how to have those restrictions imposed on me, rather than have them decided unilaterally and in a monopolistic way.

Mrs. JOHNSON OF CONNECTICUT. Thank you.

Dr. PAULY. It is a kind of name your poison phenomenon.

Mrs. JOHNSON OF CONNECTICUT. Thank you. My time has well expired. Sorry.

Mr. MCCRERY. Mr. Stark?

Mr. STARK. Thank you, Mr. Chairman. I am confused about what it is we are trying to hear today. I wanted to ask Dr. Reinhardt some questions, but I would ask Dr. Pauly, if he would be so good--he mentions the research about lowering the co-payment produces a 65-percent increase, and if you could at some point after the hearing or subsequently just give me a reference to that, I would be interested in looking into that further.

I wanted to get to why we are talking about Medicare reform, as in quotation marks, and that is, what are we trying to do? I am going to ask Dr. Reinhardt to give me what my choices are, and also to comment on this often stated theory that competition and free enterprise are what is missing in controlling the delivery of health care, medical care, to particularly seniors. For one thing, I am confused when people talk about choice in prescriptions. I don't know if anybody in this room, including some of the physicians, could tell me what half the prescription drugs that are advertised in People Magazine do for you or to you. I am sure that none of us are apt to go off and buy some just for the hell of it if we don't know what is going to drop off or quit working if we take this stuff. I don't know any of us that know the cost of any of these tests. I have often stated that if I offered witnesses a half-price proctological examination at George Washington this afternoon, would you run up and take it? No, you wouldn't. Only if your doctor told you to you might.

So, what is this market based on? I went to a school where they taught marketing, and they had some economists there and they talked about having to have a knowledge of the market and how do consumers decide if they don't know what the hell they are buying?

So, I wonder, Dr. Reinhardt, if you could elaborate for us a little bit about what--accepting your challenge that we have to fix it, what in broad terms are our options in fixing it, which is to provide a proper amount of medical care to all Americans, and what factors would help us most, free market, complete competitive bidding? Go ahead.

Dr. REINHARDT. Well, starting with the latter, the competitive bidding, California Public Employees Retirement Syste, which is the biggest purchaser of health care in California, your state, last year had 25-percent premium increase. These were highly competitive plans, and the question of course you have to ask yourself in Congress, is that the kind of cost control that we can afford; is that sustainable, or how do you make this sustainable? I think your only option is to roll that responsibility over on the elderly, which maybe should be done, but I think that should be openly discussed to what extent that is the goal of Medicare reform.

I think whenever you hear people say the people should have more "skin in the game," as the language is, fiscal skin in the game, what is actually really being talked about though--and again, maybe that should be done--you want to ration health care by price and ability to pay, and it is the lower half of the income distribution who should carry the burden because think of someone in the top first or second percentile of the income distribution, someone making more than $200,000. What does it actually mean for them? I'm in that position. Cost sharing doesn't mean a thing to me. Whatever it is, I'll pay it. So, it has zero effect on people like me, but if you were a gas station attendant, cost sharing has a major effect. So, we are saying like food is rationed and like housing and clothes, we would like to ration health care. That way the burden would mainly be borne by the lower half of the income distribution.

There is no reason why a Nation might not choose that as long as you are honest about it, that is what markets--or cost sharing, that is what it really achieves. I am not--I think I am more inclined, as Mark says, to have some choice as always, because most airlines are the same, lousy food, lousy planes, but it does give you some pleasure to be able to tell one airline to go to hell. I have often done it, just the last minute I have rebooked, and I think that is sort of what Mark--pick your own poison, so to speak. There is some virtue in that, and that is why some competition is obviously very good. When the President talks about enhancement Medicare, which is essentially PPOs, which is essentially warmed-over fee-for-service, unmanaged. I cannot imagine where the savings would come from, other than this ability, Mark says, to have some choice is always a good thing.

Again, I want to emphasize I am not at all against it; I am for it. I would worry about having a popular program such as Medicare--which is not more expensive, as Marilyn Moon's research shows--abolished simply because some people don't like the esthetics of it.

Mr. STARK. Thank you.

Mrs. JOHNSON OF CONNECTICUT. [Presiding.] Mr. McDermott.

Mr. MCDERMOTT. Dr. Reinhardt, knowing the injunction about not casting pearls before swine--there are very few of us left--but I would like to give you a Blue Book question. If a country can for 120 years provide a guaranteed set of benefits, including prescription drugs, as Germany has done, what is it that is wrong with Medicare that--or what do we need to change in Medicare to make the same thing possible for the elderly in this country?

Dr. REINHARDT. Well, you would need to modernize the benefit package. It is sometimes overlooked that until 1990, Medicare was the more innovative program that kept step. Medicare covered renal dialysis when it was technically feasible. Medicare introduced diagnosis related groups. Medicare introduced the fee schedule. It was only after 1990, when the private plans introduced prescription drugs, that Medicare fell behind. Those plans also didn't cover preventive care until about 1992. So, when you talk about modernizing, mainly it is that you have to have a modern benefit package.

What makes Germany cheap are two things. One, simplicity. It is a very simple program. It has very low administration. There was a McKinsey Global Institute study that showed in 1990 Americans actually got $390 less health care--doctor visits, pills, et cetera. So, we were clinically more efficient, they said, because we spent less. Ninety percent of that was spent on administration.

I am on the board of the Duke University health system. We consolidated our billing, and I was told we have 900 people in the billing department. I got kind of angry, and I said, well, is that Medicare--Medicare compliance? The answer, no. For the most part it is because we have 60 different plans, each with their own rules, they don't pay. Medicare pays within 20 days, it is electronic. Private is still all paper.

So, Germans save a lot of money on administration by having standard billing forms, standard fee schedules, and those kind of things; where here there are no fee schedules. We have a market without prices. I defy anyone to give me the website in Washington, DC where I could find out what different physicians cost. Each fee schedule has 9000 items in it. How would you technically even do this? You need somebody to negotiate these things for you. I think that is, of course, Medicare's advantage. It is a simple program. Prices could be negotiated, too. You set them, but they could be negotiated, the way Germans do it, and make the program a lot simpler.

There is no question, Germany's population today is as old as ours will be only in the year 2020. Yet Germany's spending per capita is about 57 percent of ours. There is no discernable difference in health status.

Mr. MCDERMOTT. What is their mechanism by which they control the pharmaceutical industry? The pharmaceutical industry is as big in Germany as it is in this country, I think, on some relative scale. How did they deal with the cost of pharmaceuticals?

Dr. REINHARDT. They use what I think both Professor Pauly and I would call a market approach called reference pricing, where they classify groups into therapeutically equivalent classes of drugs, reimburse fully--not the cheapest, but sort of the third way up drug--and then tell the patient if you want a more expensive drug, you have to pay the whole difference between that benchmark, the reference price, and that brand-name price, out of pocket. That has really worked, substantially, in Germany.

In addition, though, they also put a budget on top of drug spending. Reference pricing is very much hated by the pharmaceutical industry, because in Germany the prices of brand names tended to collapse to the reference price. The pharmaceutical industry then fears that there won't be enough of a margin for innovation. That has been the argument.

Mr. MCDERMOTT. Do you agree to that, that if we put reference pricing in our system, suddenly there would be not enough money in the system for innovation?

Dr. REINHARDT. I think what you need to do to build those groups is to have absolutely first-rate science to make sure that really better drugs actually don't get penalized, that it is only the me-too drugs that you push down. That is where there might be some controversy.

I think as a general rule, if you take money away from the pharmaceutical industry, every item in their income will probably go down. They are spending 13 percent of revenue goes for research and development (R&D). If you took a buck away, there might be maybe 13 cents of R&D might disappear. Marketing would disappear, too, and other things as well. When you take a dollar away from a drug company, I don't think Mark and I would say you lose a dollar R&D. That is not true.

Mr. MCDERMOTT. Thank you.

Mrs. JOHNSON OF CONNECTICUT. Mr. Becerra.

Mr. BECERRA. Thank you, Madam Chair. Thank you to the three of you for your testimony. If I can, I would like to just follow up on a couple of things that Dr. Reinhardt mentioned earlier.

First, Dr. Reinhardt, you mentioned that Congress as the board of directors, as you said, could, if it chose, address some of the concerns that we have with the current system of Medicare. Let me ask you this--and I would pose this to the three of you. Should we, if we end up with a privatized system of health care for our seniors, whether it is for prescription drugs or general for Medicare, should we require attributes all providers, private insurers, in the case of a private plan, be required to offer a plan in all geographic parts of the country? Which is something that, I think, Dr. Reinhardt, you mentioned that Medicare doesn't have a choice in Iowa or anywhere else, it has to offer to that senior. Should we impose that as a requirement on any private insurer if we go towards a privatized system of Medicare?

Dr. PAULY. No, I don't think so. I think some insurers, the Blue Cross insurers, although it is changing, wouldn't be capable of offering something country-wide. I think it would do a lot of violence to the current structure of insurance markets.

Mr. BECERRA. Who would then cover--

Dr. PAULY. Let me say what I think, what--

Mr. BECERRA. Dr. Pauly, if I could ask you, who would then cover, if it wouldn't be Blue Cross or any other private insurer--

Dr. PAULY. Well, it doesn't have to be every insurer in every location. If--and this is the next point I wanted to make--if insurers are not willing to enter Iowa or wherever, or Ohio, where I came from, or Pennsylvania, where I am now, that is a sign that the current payment rates are inadequate. The solution to that is not to force them to enter areas where they are sure to lose money. Even if you are able to be effective, they will de-market their services and provide very poor service. The solution is to adjust the payment rates so that it is equally profitable, at least as much as you can approximate it, for insurers to enter in all parts of the country. That will surely mean, as we heard some discussion this morning, paying more in some areas than others because in rural areas you can't have the same kind of economies of scale as you can have in urban areas, but on the other hand, you are not paying big-city prices, either.

Mr. BECERRA. That doesn't seem to reduce the cost overall of Medicare if we are having to increase the costs that we pay in certain parts of the country to encourage the private sector to go into those areas that Medicare currently services.

Dr. PAULY. No, I think this would be an attempt to be more equitable and even-handed in providing access.

Mr. BECERRA. It would increase costs?

Dr. PAULY. I am not sure it would increase costs. That depends--

Mr. BECERRA. Well, if it doesn't increase costs, why can't we keep the level of reimbursement as it is, what Medicare currently is receiving, or what we are providing it to offer these services?

Dr. PAULY. You would lower it in some places and raise it in others if you thought access was currently unequal.

Mr. BECERRA. I see. I see. I don't know, Dr. Stuart, if you wish add anything to that?

Dr. STUART. No.

Mr. BECERRA. A question with regard to what Dr. Reinhardt said in terms of the total health care spending and how you come up with that calculation, the fees times the volume plus your costs. Do any of the other panelists disagree with what Dr. Reinhardt has identified as the variables, the factors that we would take into consideration, that formula for determining overall costs? Dr. Stuart or Dr. Pauly? Any disagreement? I don't want you to go into it, just to--I wonder if you agree or disagree.

Dr. STUART. Well, I think it is an accounting framework, and the elements of the accounts are there. So, one might disagree in terms of where savings might be obtained in one of the elements as opposed to another element. I think, certainly, the model itself is complete.

Mr. BECERRA. Can anyone identify for me a private insurer which today administrative costs that are lower than what Medicare spends? There, Medicare doesn't market, so it doesn't have marketing expenses. It also doesn't seek to secure a profit. So, if we could factor in marketing and profit into that cost of administration, can anyone name for me a private insurer that right now offers a health plan and benefits for a lower administrative cost as I have defined it than does Medicare?

Dr. PAULY. Well, the literature says--actually, it doesn't identify private insurers by name, but the traditional estimates in the literature on group insurance are that large group insurance, say the General Motors-type firm, would have administrative costs of around 5 percent.

Mr. BECERRA. That is still higher than Medicare.

Dr. PAULY. It is still higher than Medicare, but the difference, as you mentioned is that Medicare raises its money via compulsory taxes and private insurers don't have that luxury or that privilege. To my understanding, the pure cost of claims processing is not terribly different between Medicare and private insurers. The primary difference, the thing that explains why Medicare is at 3 percent and private insurance on average is at around 13 percent, are those selling costs. You have to talk people into private insurance. You don't have to talk them into Medicare because it is 10 percent subsidized--only paying 10 percent of the price, and also billing costs. When people buy private insurance, somebody has to remind them to pay their bill every year.

So, there are a lot of good things to say about Medicare, but I actually think the administrative cost saving is somewhat of a red herring. If you compared kind of equivalent costs for doing equivalent things, the people up on Security Boulevard are wonderful people, but I don't think they are any better or worse than the private sector.

Mr. BECERRA. I think that is a very good point in terms of the marketing, that as a mandated program you don't have marketing costs, you don't have to try to go out there and solicit business. Dr. Stuart, did you want--

Dr. STUART. I think there are a couple of other elements here on, actually, both sides of the argument. One of the arguments behind the difference in measuring administrative costs in a public program and a private program is that although what you count as an administrative cost in a private program might show up in terms of higher prices or in terms of inefficiencies in the public program. So, you have to be careful when you are just looking at that stratum that goes to administration on the balance sheet, or on the income statement.

The other thing that I might note is that the administrative costs under Medicare are managed. Those costs are determined by budgets. You determine how much Medicare spends on administration by how much you are willing to give CMS to carry out its mandate.

Mr. BECERRA. My time has expired. I would just like to make sure that--I didn't hear anybody mention a particular private plan in place that offers its services for a lower administrative cost than does Medicare. I think the point is well taken, though, in terms of marketing. There may be some value in having a mandated system which doesn't require marketing nor the profit element in terms of costs that ultimately seniors have to absorb in order to be provided with a health care benefit.

I thank you very much, and thank you, Madam Chairman.

Mrs. JOHNSON OF CONNECTICUT. Thank you. Before I recognize the next speaker, I would like to point out that Medicare's administrative costs do not include Treasury's costs of collecting the Medicare tax nor the inspector general's cost of their portion of overseeing Medicare with the fraud and abuse function, which the private sector covers.

In addition, I don't know, and I will ask the experts, has anyone ever done any study of the combined administrative costs by the government and the administrative costs that the payor pays on the provider? For instance, Medicare imposes much heavier costs on home care providers than private sector providers impose on home care providers. That is one of the reasons why I am trying to eliminate the Outcomes Assessment Information System form for private-care patients. So, has there been any combined look at administrative costs of both the government and those on its providers that it has imposed, versus the private sector's administrative costs and the administrative costs that they impose on providers?

Dr. REINHARDT. I think that is a good point and worth a study. There are compliance costs with Medicare, particularly when you have a corporate integrity agreements, which is one of those letters that oblige you to be audited and so on. What struck me in the Duke example--and I have asked in the other company on whose board I am, too--the unbelievable back-and-forth to get a claim paid, that goes back several times.

Mrs. JOHNSON OF CONNECTICUT. In Medicare, you mean?

Dr. REINHARDT. In the private plan, where your payment days outstanding may be 90 or 100 days. So, if you take Duke, for example, we have a float of $250 million a year that has to be financed. I asked, well, why aren't we getting paid? They told me, well, Medicare is not the problem; we get paid in 20 days.

Mrs. JOHNSON OF CONNECTICUT. Dr. Reinhardt, if I may interrupt you, if you have ever been to a doctor trying to get paid for comprehensive physical versus a detailed physical with very different payment rates, you can see exactly this long paper trail. I have one hospital that has an intensivist overseeing their intensive care unit. It is saving Medicare money. We have a code for this and never, ever have they been able to get paid under the code. They just provide more and more documentation.

So, frankly, I am loaded with examples of that kind of problem going on over months or years. At one point, Medicare stopped paying for all partial hospitalizations in my State and it took us 9 months to straighten it out. So, I would have to have a study show me that there were more serious payment controversies in the private sector than those in the public sector.

Dr. REINHARDT. Well, as I said, it really would be worth studying.

Mrs. JOHNSON OF CONNECTICUT. It would be worth it.

Dr. REINHARDT. I would include an administrative cost on the private side; also, of course, the claims processing. I don't do it. I just refuse. My wife does it. She tells me that her claims processing is worse than doing the income tax. She does the income tax, too. So, we have a good apple-to-apple. She says dealing with the insurance is a lot worse.

Mrs. JOHNSON OF CONNECTICUT. On the other hand, having just broken my ankle about a year ago and being a Medicare recipient, I can tell you the number of mailings that I received for a simple broken ankle was scandalous, from Medicare, scandalous. So, I do think we should try to find that, and any of you--and let me let the others comment and then we will let the other two Members question before we have to go. So, briefly.

Dr. PAULY. Just two comments. First, there are estimates of the administrative cost at hospitals for third-party payment and they run around 20 percent. So, they are certainly not trivial. I haven't ever seen any Medicare versus private sector. Of course, if it is hopeless to try to get money out of Medicare, there is no point in a doctor wasting administrative costs.

Mrs. JOHNSON OF CONNECTICUT. We do have only 13 minutes left, and I have two questioners--

Dr. PAULY. Some physicians feel that way. The other point I wanted to make, though, I think an important, often neglected to mention, administrative cost to the Medicare system is, well, the slogan is one-size-fits-all. I don't much like that sloganeering, but people buy Medigap coverage to tailor Medicare to their own desires. So, really, the administrative costs of Medigap plans ought to be attributed to Medicare. If you did that, you would end up with a lot more than 3 percent.

Mrs. JOHNSON OF CONNECTICUT. A very valid point. I am sorry, Dr. Stuart, since we only have 15--

Dr. STUART. Let me just take 1 minute to suggest an area in which administrative costs are going to be a major concern for Congress as it considers the Medicare drug benefit, and that is the administrative costs that are imposed on the private sector by private plans developing wildly different formularies. I can tell you that this is very costly to medical practices, because the physicians can't figure out which patients are covered under which plan and which drugs they should get. It is particularly costly on pharmacies because the patient comes in and the drug is not covered under the formulary--

Mrs. JOHNSON OF CONNECTICUT. That is a very important consideration. We may get back to you on that. Mr. Pomeroy.

Mr. POMEROY. My time is very brief, but I want to ensure my colleague, Ms. Tubbs Jones, also has time. So, I think that I will pull back out of the weeds a little bit of how we restructure Medicare. I will note consensus across the panel that some work is needed here, even though there may be substantial difference in terms of how we proceed.

The thing that I am wondering about is regardless of what we have by way of exact delivery of benefit mechanism under the name of Medicare, how we pay for it in the next decade if we don't do some preparatory work this decade to strengthen the financial position of our country to prepare for the entitlement hit of baby boomers. It would seem to me specifically that paying down the debt this decade would make more sense than adding to it significantly, because I believe borrowing in the next decade will absolutely be essential to cash flow the requirements that we see in the Medicare trust fund.

If we could run across the panel and give us your counsel on that one. Would it be better to increase the debt or decrease the debt for purposes of preparing to meet the entitlement challenge of baby boomers, or is it your position that we should simply back off of those entitlement commitments. Dr. Reinhardt?

Dr. REINHARDT. Well, I would have been in favor of not increasing the deficit, actually try as much as possible to have a surplus and buy back the debt. That is really supply side economics. How would that work? You could imagine the Medicare trust fund just buying through the Treasury, buying back bonds. Those bonds would be owned by pension funds. They would have to recycle that money into the private sector. That is the clearest way to get 100 percent of that money into investment. If you instead give it in tax cuts to individuals, like myself, who benefits from these tax cuts, I might buy a new Mercedes--in fact, I have--with the money and it might not yield productivity.

So, I believe going the route of having less of a deficit. Once the day will come when Europeans may not wish to hold dollars or other nations, they may wish to hold euros. That seems already to be happening. It could be happening throughout the Middle East. You will see interest rates skyrocket in the United States

So, I think the fiscal policy we are now on, to my mind is not the right path.

Dr. PAULY. Well, I would risk controversy by saying I prefer a smaller debt to a larger debt. I don't think that is the most important thing that will determine the future viability of the Medicare and other entitlement programs. I think it is the overall economic health of the economy, so that the rate of growth of gross national product (GNP) and the level of real GNP is a lot more important than the level of debt. Other things equal, lower debt is better than larger debt, but if the economy can be made to operate better, that is going to be much more important. That is the first thing I would do to save Medicare.

Mr. POMEROY. Significantly higher debt could even interfere, perhaps, with some of the economic--

Dr. PAULY. Well, it is the ratio of debt to GNP that you ought to pay attention to, not the absolute level of debt. I would rather work on the GNP side than--

Mr. POMEROY. I accept that, but for the known fiscal hit we all know about--lives in being with existing entitlement commitments--that it seems to me should also be factored in, unless we are straight-up talking about diminishing those entitlement commitments.

Dr. PAULY. Well, I personally think we ought to start talking about diminishing those entitlement commitments because, given the demographics, I don't see any way to avoid that. I guess that is the other solution--this is only my own personal solution--have more grandchildren. That would help a lot.

Mr. POMEROY. Thank you. Thank you very much, Dr. Pauly.

Dr. STUART. Well, I will make it three in terms of reducing the debt. I happen to believe that the absolute level of the debt is important as well as the relative level of the debt, and I am concerned to see the debt rising as fast as it is.

I do think, however, that when one makes decisions about Medicare, it is going to be very difficult, if not impossible, to make a decision about the entire program. I really believe that is true. So, what that means is that you are going to have to deal with incremental changes within that program. So, when we, each of us received the invitation to talk today about modernization in Medicare with a prescription drug benefit, I think the prescription drug benefit should be treated on its own merits. What you really need to do is you need to say is this something a modern Medicare program should have--and I believe you will say yes--and then the question is how best to do it.

Mrs. JOHNSON OF CONNECTICUT. All but 8 seconds of the gentleman's time has expired, so if we may move on to Ms. Tubbs Jones. We have 5 minutes before the vote.

Ms. TUBBS JONES. Five minutes?

Mrs. JOHNSON OF CONNECTICUT. Five minutes. You can take 4 minutes.

Ms. TUBBS JONES. I won't take that long, probably. Dr. Pauly, you say you are from Ohio. Where?

Dr. PAULY. Cincinnati.

Ms. TUBBS JONES. Cincinnati, oh, the other end of the state. They say it is like Cleveland and Cincinnati are in two different states. All joking aside, one of the biggest problems we have had with health care in Ohio is the fact that the private insurers have not been required to contract, that they could just give notice and say "I'm gone" and in 30 days the people having health care under the HMOs in Ohio have just run away. So, then we end up with people with no health care coverage. That is why I have a real dilemma with pushing Medicare into the HMOs, based on the experience that my Medicaid constituents have had with the HMOs.

Real short: How do I resolve that problem? If I agree I want to go with private insurers, how do I resolve the running away from my constituents?

Dr. PAULY. Well, you have to pay them enough to make it worth their while to stay.

Ms. TUBBS JONES. Except when they enter into the contract, they know what I am going to pay them.

Dr. PAULY. Presumably, they run away when the contract is expired, not before.

Ms. TUBBS JONES. Well, we have had it as terrible as 30 days. I am not going to argue that. That is my dilemma with the private insurers.

Dr. PAULY. Then I would say write more iron-clad contracts. The fundamental aspect of private firms is that they need to be able to cover their costs in order to remain in business.

Ms. TUBBS JONES. Dr. Reinhardt, how do I resolve this issue as we reform Medicare?

Dr. REINHARDT. Well, one is to pay more. Then Congress, of course, loses any sense of budgetary control, have even less than they have now. Or the alternative is to make sure the old Medicare is always there as a fallback position, which would be my--my favoring that program is because it is a fallback position.

Ms. TUBBS JONES. Why do we always have to worry about deficit spending when it comes to programs such as Medicare and Medicaid, and we don't ever worry about deficit spending when it comes to things like military spending and the other issues? I voted for the Supplemental, and I support the military. I am just wondering why that number always comes up. Dr. Pauly?

Dr. PAULY. Well, I don't worry about deficit spending for Medicade, at least the part of it that pays for children, because I view you are making an investment in children and that is as good as an investment in national security. I think for senior citizens, in a way, it is more difficult because it is less easy to make the argument that the spending will yield returns.

Ms. TUBBS JONES. If I was sitting at the table and I had to decide whether you got services, and you would live or not live, you would want me to let you live, wouldn't you? Or give you the treatment that was necessary for you to hang around for a little while?

Dr. PAULY. Well, certainly, but those are presumably not the services that we are talking about rationing or not rationing.

Ms. TUBBS JONES. In your prior testimony, you alluded to it. I am going to end my time, Madam Chairman. Thank you, gentlemen, for giving us this opportunity.

Mrs. JOHNSON OF CONNECTICUT. Thank you very much for being here. I appreciate it very much. I do hope we will get a chance to pursue this conversation later on as the bill develops. Thank you.

[Whereupon, at 2:41 p.m., the hearing was adjourned.]
[Submissions for the record follow:]

American Academy of Actuaries, Cori E. Uccello and John M. Bertko, statement

American Health Quality Association, David G. Shulke, statement

Long Term Care Pharmacy Alliance, John F. Jonas, letter

National Association of Chain Drug Stores, Alexandria, VA, statement