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Testimony on Medicare Trust Fund Depletion by The Honorable Donna E. Shalala
Secretary
U.S. Department of Health and Human Services

Before the House Ways and Means Committee
February 29, 1996


Thank you for the opportunity to address the Committee on the performance of the Medicare Hospital Insurance Trust Fund in 1995. Since coming into office, the Clinton Administration has worked continually to address the problems affecting the Trust Fund, and we are hopeful that we can find common ground with this Committee and with the Congress this year on reforms to the Medicare program that will strengthen the Fund.

It should be remembered that it was the Clinton Administration and Congressional Democrats who successfully enacted the President's 1993 five-year deficit reduction package. OBRA 1993 extended the life of the Trust Fund by an additional three years by achieving realistic Medicare savings and by stimulating economic growth in the general economy.

The Administration has continued our commitment to controlling Medicare costs in the future. As part of his comprehensive plan to balance the federal budget, the President has proposed $124 billion in specific policy changes designed to strengthen Medicare. The President's proposal extends the life of the HI Trust Fund for more than a decade from now.

To achieve these savings, the Administration plan modifies Medicare payments in a number of ways. Our plan achieves substantial savings through provider payment changes that promote greater efficiency and make Medicare a more prudent purchaser and through increased efforts to combat waste, fraud and abuse. Importantly, it does so while maintaining and strengthening key protections for the beneficiaries Medicare serves.

The Administration plan represents a balanced approach -- one that protects traditional Medicare while expanding choice and preventive benefits. First, our proposal does not impose additional costs on beneficiaries, the plan maintains Part B premiums at 25% of program costs. Second, the plan maintains important protections for low-income Medicare beneficiaries. Third, the package expands the range of private plans available under Medicare without harming the traditional fee for service program, inviting dangerous risk selection, or shifting costs to beneficiaries. Finally. the Administration maintains critical prohibitions against "balance billing", which protect the program's 37 million beneficiaries from excessive charges from providers. I am hopeful that in the weeks ahead we can all focus our efforts on positive steps to enact such proposals.

I am concerned about recent allegations of a "breach of trust" by the Administration in its oversight of the HI Trust Fund. Far from a "breach of trust", the. Administration has spent the past year focusing on the need to improve the Medicare program and uphold our commitment to current beneficiaries and future generations. v I would like to take this opportunity to clarify the process through which the Administration and the Trustees report to Congress on the Trust Fund, as I did in my letter to the Committee dated February 12, 1996, which is attached to this statement. (See Appendix A.) The Administration has consistently made information about historical and projected performance of the HI Trust Fund available to Congress and the public. Section 1817 (b) of the Social Security, Act requires the Medicare Trustees to submit their annual report on the status of the HI Trust Fund to Congress in the spring. The law specifically requires the Trustees to report on the performance of the Trust Fund in the prior fiscal year. In their report, the Trustees also make projections about future performance and solvency. The report is widely distributed. Copies are provided to each Congressional office and to many others.

In addition to the statutory requirement to issue an annual report, other specific statutory requirements ensure that Congress will be notified if the outlook for the HI Trust Fund is particularly critical. For example, under section 709 of the Social Security Act, the Trustees are required to notify Congress if the Trust Fund assets are expected to fall below 20 percent of one year's expenditures in the short term, which the Trustees have used to mean 10 years. The Trustees have sent this special notification, known as a "section 709" letter, along with their annual reports during each of the last three years. The section 709 letter sent to Congressional leaders in April 1995 indicated that the Trustees projected the HI Trust Fund would be depleted in 2002.

In addition to the annual report, the Administration prepares estimates of the financial operations of the HI program semi-annually as part of the President's budget process. Each year, the Administration releases Medicare baseline projections as part of the President's budget proposal for the upcoming fiscal year. These estimates for fiscal year 1997 will be released next month by the Office of Management and Budget as part of the President's fiscal year 1997 budget submission to the Congress.

The Treasury Department, which serves as the official "bookkeeper" of government outlays and revenues, reports retrospectively on outlays and revenues to the HI Trust Fund. These reports show actual cash flows to and from the HI Trust Fund, in contrast to the projections in the Medicare Trustees Report and the projections in the President's budget. In October 1995, the Treasury Department reported on the HI Trust Fund income and outlays together with the Fund's assets at the end of fiscal year 1995. The Treasury reports are widely distributed to the Congressional Budget Office, this Committee, the House and Senate Budget Committees, the Senate Finance Committee, each member of Congress, and others upon request.

The data provided in the Treasury reports are analyzed by a variety of public and private agencies and organizations. For example, in November of last year, the Congressional Budget Office reported on the Treasury data for fiscal year 1995 in a report entitled, "Analysis of the September Treasury Statement." In addition, CBO used the data to update their Medicare baseline in December 1995 which reflects the higher growth in Part A and lower growth in Part B. Furthermore, the American Academy of Actuaries noted in its December 1995 report, "Comments and Recommendations on Medicare Reform" that 'expenditures exceeded income for the Hospital Insurance Trust Fund in 1995. On February 12, 1996, in a bulletin released by the Senate Budget Committee, Chairman Domenici acknowledged having received the Treasury data in October, and noted that, "the recent changes in projections do not significantly affect the long-run Medicare situation." (See Appendix B.)

I would now like to talk specifically about how one should interpret the information that is provided in the Trustees Report.

The primary purpose of the Trustees Report is to provide estimates of the future financial status of the Trust Fund for use by Congress in making decisions about the Medicare program. Because of the uncertainty inherent in projections, the future status of the Trust Fund is examined under three alternative sets of assumptions: "intermediate," "low cost" and "high cost." The intermediate set of assumptions represents the Trustees' best estimate of the expected future economic and demographic trends that will affect the financial status of the Trust Fund.

Health care expenditures tend to exhibit much more volatile rates of change than expenditures for many other private and social insurance programs. As the Trustees Report notes, projections are intended to illustrate how the HI program would operate under specified, reasonable assumptions concerning trends in employment, wage increases, health care prices, utilization, and other factors. Actual future Trust Fund operations will almost always differ somewhat from specific projections.

Each year the Trustees Report projections are updated using the most recent available information on several factors, including inflation, wages, and utilization. One of the factors is actual experience in the past year. For example, the Treasury report released in October provided actual cash revenues and outlays from the HI Trust Fund for fiscal year 1995; this information on actual experience will be incorporated into future projections.

In summary, projections in the Trustees Report are routinely updated to reflect actual experience and new economic data, but the projections themselves remain estimates of the future of the Medicare HI Trust Fund. Any given projection of Trust Fund status, by its very nature, cannot be expected to exactly mirror actual experience. The Trustees construct our projections with the best and most recent information available, and continually benchmark projections against actual results to obtain feedback for improving our methodology. Consequently the Trustees' projections provide the most useful guides available to decision makers in addressing the issues of an uncertain future.

The 1995 Trustees Report projected that the HI Trust Fund would be depleted in 2002 under the intermediate assumptions. This depiction date was one year later than was projected in the 1994 Report. The estimates under the "low cost" and "high cost" alternative ranged from 2001 to 2006. The Trustees estimated that HI Trust Fund income would exceed expenditures by $4.7 billion in fiscal year 1995, income would approximately equal expenditures in fiscal year 1996, and income would fall short of expenditures by approximately $5 billion in fiscal year 1997. However, as you know, actual expenditures exceeded revenues for fiscal year 1995 by $36 million.

The 1995 Trustees projections were within a reasonable range of variation, as they have been over the past several years. In each of the past ten years, actual HI income has been within approximately 1.5 percent of projections in either direction. Actual HI expenditures exceeded projections in six of the last ten years by amounts ranging from 0.4 percent in 1993 to 5.6 percent in 1992. Projections were higher than actual experience in four of the last ten years, by amounts ranging up to 2 percent. This past year, in fiscal year 1995, total HI income was 1.2 percent less than projected and expenditures were 3.1 percent greater than projected. Thus, the 1995 variation was within a normal range of variation.

Considering the complexity of the projections at stake, the Office of the Actuary has a pretty good track record with its estimates. By way of comparison, the Congressional Budget Office's March 1995 baseline projections for HI were very comparable to the Trustees Report projections, and estimated a surplus in fiscal year 1995. Moreover, a comparison of Trustee Report and Congressional Budget Office projections of total Medicare spending, when the projections were made during the actual year in question, shows similar ranges of differences between projections and actual spending. Over the period 1987 to 1994, the Trustee Report overestimated same year spending four times, underestimated same year spending two times, and came within a billion dollars twice; CBO overestimated spending three times, underestimated spending three times and came within a billion dollars on two occasions.

I know that you are very interested in having the most up-to-date projections of HI Trust Fund depletion, and the Trustees will provide them as soon as they become available. As I described earlier, the performance of the Trust Fund in fiscal year 1995 is just one of the factors upon which the HCFA actuaries base their projection of the Fund's performance over the longer term. The HCFA actuaries are in the process of completing the analyses they need to make these projections. Their projections will be included in the 1996 Trustees Report.

Without the detailed analysis that these projections involve, it is too soon to draw firm conclusions about the extent to which the performance of the Trust Fund in fiscal year 1995, or how the many other factors that affect the Fund. will affect the Trust Fund's estimated depletion date. Despite the fact that these projections are not yet available, the HCFA actuaries have provided an interim calculation, using the (no longer current) assumptions from the 1995 intermediate Trustees Report estimate. but reflecting actual Fund operations in fiscal year 1995. Based on this incomplete information, the projected depletion date would move back from 2002. as projected in 1995. to 2001, as projected in our 1994 Trustees Report. However, this projection is preliminary and incomplete since it does not take into account any other changes in the data or assumptions that are currently being reviewed. Finally, this projection is subject to change -- at a substantially lengthened time frame -- if the Congress acts soon to adopt the constructive Medicare reforms that this Administration has recommended.

In closing, I appreciate the opportunity to appear before you today to set the record straight regarding the status of the HI Trust Fund. Although the status of the HI Trust Fund may be slightly worse than projected last year, the long term outlook for Medicare has not changed and requires action. Without intervention. the Trust Fund will be exhausted within the next five years or so. To meet this challenge, the President has submitted a balanced budget proposal that ensures the Trust Fund will remain solvent for more than a decade from now, and provides us with an opportunity to tackle the longer term issues in a measured fashion. We must move forward in a responsible, bipartisan manner to enact the President's balanced budget proposal as the Medicare program requires and as the citizens we serve expect.



Appendix A

Feb 12 1996

The Honorable Bill Archer
Chairman
Committee on Ways and Means
House of Representatives
Washington, D.C. 20515-6348

Dear Mr. Chairman:

Thank you for your letter of Febriary 5, 1996, regarding the status of the Hospital Insurance (HI) Trust Fund. As you know. the Clinton Administration has always been and remains committed to the fiscal integrity of the Medicare trust funds and to the health security of all our elderly. For this reason, I welcome the opportunity to set the record straight

Your letter states that the HI Trust Fund "went broke" in 1995. This is simply not true. Far from being "broke. the Trust Fund's balance at the end of fiscal year 1995 was over $129,000,000,000 - sufficient under current law to carry the Fund past the end of the decade. During fiscal year 1995, expenditures from the Fund ($114.883 billion) slightly exceeded total income($114.847 billion). The resulting $36 mil1ion deficit reduced the Fund's net assets from $129.555 billion at the beginning of fiscal year 1995 to $129.520 Mon at the end of the year.

Almost a year ago in the 1995 HI Trustees Report, I and the other HI Trust Fund trustees pointed out that, without further action, the HI Fund would be depleted early in the next decade. Based upon the intermediate projections prepared by the HCFA actuary at that time, depletion was estimated to occur in the year 2002 (a slight change from the previous year's estimate of 2001). The Administration responded last summer by proposing a series of measures to extend the Fund. We have proposed additional steps in the President's budget for fiscal year 1997.- Taken together, these proposals should extend the HI Fund for more than a decade from now.

As you know, each year the HCFA actuary and the Trustees develop projections of the future status of the Trust Fund. These projections cover a period of 75 years into the future. To reflect the uncertainty inherent in projection, the future of the Trust Fund is examined under three alternative sets of assumptions: "intermediate," "low cost," and "high cost". The intermediate set of assumptions represents the Trustees' best estimate of the future economic and demographic trends that will affect the financial status of the program Estimates of future health care expenditures are inherently less certain than estimates for many other Federal programs because so many factors affect expenditures: changes in the number of beneficiaries, changes in the age and health status of beneficiaries. trends in health care inflation, increasing use of new technologies. and changes in the use of health services, among other factors.

Based on the intermediate set of assumptions, the 1995 Trustees Report published last April estimated a fund exhaustion date of 2002. The individual estimates for the next several years were as follows: (1) HI Trust Fund income would exceed expenditures by $4.7 billion in fiscal year 1995; (2) income would approximately equal expenditures in fiscal year 1996; and (3) income would fall short of expenditures by approximately $5 billion in fiscal year 1997.

The Congressional Budget Office also estimates the future operations of the Trust Fund. The Congressional Budget Office estimates were very similar to the intermediate Trustees Report estimates, and also projected a fiscal year 1995 surplus. For comparison purposes, the Congressional Budget Office estimates for fiscal year 1995 are shown below together with the intermediate estimates from the 1995 Trustees Report (amounts in billions).

  1995 TrusteesReport CBO March 1995 Actual baseline
Income $116.2 $116.6 $114.8
Expenditures 111.5 113.6 114.9
Net change in assets 4.7 3.0 -0.036
Assets at end of year 134.3 131.7 129.5

Actual expenditures in the Trust Fund were 3.1 percent higher and income was 1.2 percent lower than estimated by the HCFA actuaries. Such differences are within the range of normal variation.

In your letter, you asked when the Administration became aware of the performance of the Trust Fund in fiscal year 1995, and why the Administration did not make this information public until February 5th. The Administration became aware of the Fundžs performance, and reported these results, more than three months ago.

Each month, the Treasury Department issues public reports that track cash income and outlays and the balance of the Trust Fund. Information on the HI Trust Fund income and outlays together with the Fundžs invested assets at the end of fiscal year 1995 was reported in the "Final Monthly Treasury Statement of Receipts and Outlays of the United States Government". This information was released publicly by the Treasury Department on October 27, 1995.

The Treasury Department and the Office of Management and Budget distributed nearly four thousand copies of the October report to the public, including individual copies for every Member of Congress, with extra copies to the House and Senate Budget. Appropriations and Banking Committees, the Senate Finance Committee, the Congressional Budget Office, and to your Committee.

Furthermore, we know that interested parties read these reports. The American Academy of Actuaries noted the HI Fundžs 1995 results in its "Comments and Recommendations on Medicare Reformž on December 21, 1995. Medicare outlays were also reported on by the Congressional Budget Office ("Analysis of the September Treasury Statetement,ž November 7, 1995.)

In late November, the HCFA actuaries received more detailed information on the components of the income, outlays and Fund balance from the Treasury Department based on this report. The actuaries informed HCFA administrator Bruce Vladeck of the Trust Fundžs status on December 2, 1995. The Administrator subsequently briefed me on these findings in a meeting on December 9, 1995. The Administrator, as Secretary to the Board of Trustees, provided an interim report on the Trust Fundžs performance for fiscal year 1995 at the Trusteesž regular meeting on December 13, 1995.

Your letter also asked for the latest projections for the Trust Fund. The projections you described in your letter are made annually by the HCFA actuaries and included in the annual Trustees Report. It is importent to note that the performance of the Trust Fund in fiscal year 1995 is just one of many factors upon which the HCFA actuaries; base their projection of the Fundžs performance over the longer term, and its projected depletion date. In making these projections, the HCFA actuaries not only analyze data concerning the actual experience in 1995, but also the additional experience. in the current fiscal year, new analyses of the factors affecting HI benefit growth during fiscal years 1990-1995, updated projections of HI payroll tax income and revenue from the taxation of OASDI benefits and current interest rate expectations.

They are currently engaged in this very activity, and their projections will be included in the 1996 Trustees Report, as they are each year. Although the report is typically issued in April, the HCFA actuaries have informed me that this year's report may be delayed by about six weeks because of the government furlough and snow storms. We will of course make it available to your Committee, all Members of Congress, and the public as soon as it is completed.

Without the detailed analysis that these projections involve, it is too soon to draw firm conclusions about the extent to which the performance of the Trust Fund in fiscal year 1995, or the many other factors that affect the Fund, will affect the Trust Fundžs estimated depletion date. Despite the fact that these projections are not yet available, the HCFA actuaries provided the following calculation: using the (no longer current) assumptions from the 1995 intermediate Trustees Report estimate, and reflecting only the actual Fund operations in fiscal year 1995, they calculate that under those outdated assumptions the projected depletion date would move back from 2002, as estimated in 1995, to 2001, as estimated in 1994. This estimate does not take into account changes in any of the many other data and assumptions that are being reviewed, including such obviously important factors as economic performance, current interest rate expectations, health care costs, HI payroll tax income and revenue from the taxation of OASDI benefits.

In closing, let me emphasize that the most important issue is for the Congess, working with the Administration, to take the steps necessary to strengthen the Medicare trust fimds. One yearžs results will not change the need to strengthen the HI Trust Fund. As you know, the Presidentžs 1993 Economic Plan added three years to the life of the Fund. The President, in his seven-year balanced budget plan, has proposed additional measures. The Congress, too, has made proposals in this area. I am hopeful that, working together, we can agree upon necessary changes to the Medicare program, which is so essential to the security of all Americans.

A similar letter is being sent to the co-signers of your letter.

Sincerely,

Donna E. Shalala

cc: The Honorable Sam M. Gibbons



Appendix B

[Not included: Budget Bulletin of February 12, 1996 cited previously in this testimony]


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