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

STRENGTHENING HEALTH AND RETIREMENT SECURITY

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

HEARING

before the

COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

__________

HEARING HELD IN WASHINGTON, DC, FEBRUARY 28, 2012

__________

Serial No. 112-21

__________

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COMMITTEE ON THE BUDGET

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

Professional Staff

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

C O N T E N T S

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

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

STRENGTHENING HEALTH AND
RETIREMENT SECURITY

----------

TUESDAY, FEBRUARY 28, 2012

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

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

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

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

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

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

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

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

STATEMENT OF RICHARD S. FOSTER

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

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

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

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

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

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

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

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

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

MEDICARE

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

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

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

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

MEDICAID

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

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

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

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

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

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

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

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

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

ENDNOTES

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

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

STATEMENT OF STEPHEN C. GOSS

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

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

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

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

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

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

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

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

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

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

(3) how are we doing so far?

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

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

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

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

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

(4) what changes do we need to make?

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

CONCLUSION

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

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

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

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

[The response from Mr. Goss follows:]

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

Securing the Future of the Social Security Disability Insurance Program

Testimony by Steve Goss, Chief Actuary, Social Security Administration

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

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

(1) the nature of disability insurance

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

(2) the financial status of the disability insurance program

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

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

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

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

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

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

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

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

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

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

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

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

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

CONCLUSION

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

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