Mr. Chairman, Members of the Committee, thank you for the
opportunity to address the Committee on the 1996 Annual Report of
the Board of Trustees of the Federal Hospital Insurance (HI)
Trust Fund and Supplementary Medical Insurance (SMI) Trust Fund.
Each spring, the Medicare Trustees submit their annual report on
the status of the Trust Funds to Congress. The report, which was
released yesterday, projected that under Intermediate assumptions
the HI Trust Fund would be depleted in 2001.
We should not alarm our Medicare beneficiaries. The Trust
Fund contained nearly $130 billion in assets at the end of 1995.
The balance is currently near an all-time high, and there is no
imminent danger that claims will not be paid. There is time for
us to act but let me emphasize that we should act now to ensure
the solvency of the HI Trust Fund. We are hopeful that we can
find common ground with this Committee and with the Congress on
Medicare reforms that will strengthen the HI Trust Fund in the
short-term, and provide us with sufficient time to carefully
consider approaches to preserving the fund's long-term solvency.
Let me remind you that this report is consistent with our
three previous reports. In fact, over the past 15 years, the
Trustees have projected the date of insolvency to be anywhere
from 1987 to 2005, and each year they recommended that Congress
take action to protect the HI Trust Fund. Each time, the
Congress and the Executive branch have always been able to
respond to short-term challenges, improve the short-term
longevity of the HI Trust Fund, and ensure continued Medicare
protection for beneficiaries.
Only a few years ago, when the Clinton Administration took
office, the HI trust fund was projected to become insolvent in
1999. We immediately took action, proposing a package of $56
billion in Medicare savings that extended the solvency of that
trust fund for another three years. I believe that our record
reflects our unwavering commitment to ensuring that the trust
fund remains solvent.
Summary of the 1996 Report and Recommendations.
Let me begin by describing the HI Trust Fund and the services
it supports for Medicare beneficiaries. The HI Trust Fund pays
for inpatient hospital care, as well as expenditures for home
health services., skilled nursing care, and hospice care. In
1995, the HI Trust Fund paid for $1 16.4 billion in services for
33 million aged and 4 million disabled beneficiaries.
The HI Trust Fund is financed primarily by payroll taxes.
Employees contribute 1.45 percent of wages, and there is a
matching contribution by employers. Self-employed individuals
contribute 2.9 percent of self-employment income. OBRA 93
removed the ceiling on the amount of earnings that are taxable;
consequently, this tax applies to all earnings. The Trust Fund
also receives income from interest earnings on its assets,
revenue from taxation of Social Security benefits, and income
from miscellaneous sources.
Supplemental Medical insurance (SMI) or Part B covers
physician services, along with outpatient hospital services,
laboratory services and durable medical equipment. The SMI trust
fund is financed by general revenues and premiums paid by
enrollees and it covers Part B services. Part B premiums are
deducted directly out of the monthly checks of Social Security
beneficiaries. In 1996, premiums are $42.50 per month.
While SMI or Part B growth affects the federal budget
deficit, unlike the HI Trust Fund, the SMI Trust Fund could never
become insolvent. In the 1996 report, the Medicare Trustees note
that the financing established for the SMI program for calendar
year 1996 is estimated to be sufficient to cover program
expenditures and preserve an adequate contingency reserve. Trust
fund income is projected to equal expenditures for all future
years -- but only because beneficiary premiums and government
general revenue contributions are automatically increased to meet
expected costs each year.
Medicare Trust Fund expenditures are driven by increases in
enrollment, the complexity of medical services, and health care
inflation generally. In the future, Trust Fund expenditures are
projected to rise more rapidly than Trust Fund revenues.
Anticipated increases in the number and complexity of medical
services are expected to continue to result in expenditure growth
rates in excess of payroll growth. Beginning in 201 0, the
demographic shift that will occur with the retirement of the baby
boom generation is projected to drive the expected imbalance
between expenditures and revenues. After that point, a larger
proportion of our population will be eligible for Medicare, and a
correspondingly smaller percentage will be paying the taxes that
support the Trust Fund. Over the 75 year long-range projection
period, trust fund income as a percent of taxable payroll remains
relatively level, while the expenditure rate rises steadily.
The 1996 Trustees Report projects about 5 years of HI Trust
Fund solvency. Unless the Congress acts, the HI Trust Fund will
be exhausted in 2001 using the Trustees' intermediate
assumptions. These intermediate assumptions represent the
Trustees' best estimate of the expected future economic and
demographic trends that will affect the financial status of the
HI Trust Fund. There are several reasons why the 1996 projection.
differs from the 1995 projection. First, actual 1995 Trust Fund
experience was somewhat worse than expected, and three main
factors, involving Trust Fund expenditures, Trust Fund income,
and economic assumptions, contributed to this estimating
- Actual expenditures were 3.1 percent greater than the
Trustees had projected last year, primarily because hospital
patients were somewhat sicker and more costly, and because
hospitals billed Medicare more rapidly in 1995 than we had
projected at the outset of last year.
- Income to the Trust Fund was 1.2 percent lower than
projected, primarily because of slower than expected wage growth
and because of our lack of experience in estimating the income
resulting from the payroll tax changes made in OBRA 1993.
- Each year the Trustees use more current data and update
their assumptions as they evaluate the performance and solvency
of the Hi Trust Fund.
In addition to actual 1995 Trust Fund experience, other
factors contributed to our new projection that the long-term
financial balance of the Trust Fund will be less favorable than
we had projected last year.
Use of skilled nursing facility and home health services
is now projected to grow at a faster rate in the future than we
had projected last year.
- We now project future hospital patients will be somewhat
sicker and more costly than previously projected.
- We have updated our long range economic and demographic
- The new 75 year window on which we base our long range
projections includes 2070, an additional year of poor
performance, but no longer includes 1995, a year of relatively
Based on our projections, the Trustees make two
recommendations. First, we recommend prompt, decisive, effective
action to ensure short term HI Trust Fund solvency. Such action
is required so that Medicare services continue smoothly, as
beneficiaries expect. It also is required to ensure sufficient
time for consideration of options to ensure long run Trust Fund
Our second recommendation is related to Medicare's long term
financial concerns. The Trustees recommend the establishment of
an advisory group to address long term solvency. The advisory
group for Medicare recommended by the Trustees will contribute to
the development and thoughtful consideration of policy options in
response to this unprecedented demographic shift.
The President Has a Plan to Ensure the Short-Term Solvency of
the Trust Fund.
Since taking office, the President has worked to improve Hi
Trust Fund solvency and has taken concrete action to strengthen
As I mentioned earlier, the President's 1993 five-year
deficit reduction package (OBRA 93) extended the life of the
Trust Fund by an additional three years by achieving realistic
Medicare savings and by stimulating general growth in the
economy. In addition, the President's health care reform plan,
the Health Security Act, would have extended the life of the HI
Trust Fund for an additional five years.
This Administration continues its commitment to controlling
Medicare costs in the future. As part of his comprehensive plan
to balance the Federal budget, the President has proposed $116
billion as scored by CBO in specific policy changes designed to
strengthen Medicare. The President's proposal will ensure the
life of the HI Trust Fund for about ten years from now, as both
our actuaries and CBO have estimated.
To achieve these savings, the Administration's plan modifies
Medicare provider payments in a number of ways that promote
greater efficiency and make Medicare a more prudent purchaser.
Our plan also achieves savings through increased efforts to
combat waste, fraud and abuse. We also propose to move part of
the financing of the home health benefit to Part B so that under
Part A it returns to the acute- care benefit that it was intended
to be. Importantly, we would achieve these savings and extend
the life of the HI Trust Fund while maintaining and strengthening
key protections for the beneficiaries Medicare serves.
The primary HI savings achieved in the President's proposal
are derived from specific provider payment provisions and by
shifting the financing of the post-hospital aspect of the home
health benefit back to Part B. The plan provides incentives to
hospitals for efficiency by constraining updates for hospital
operating costs, reimbursing reasonable levels of capital costs,
reforming medical education payments, and reforming the rules
governing transfers from a hospital to a post-acute care
facility. It also reforms payments to home health agencies and
skilled nursing facilities by establishing prospective payment
systems for these providers.
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 percent of program costs. Second, our plan does
not contain dangerous changes -- like MSAs that cost money and
undermine the HI Trust Fund by encouraging new plans to engage in
"cherry picking" of healthier beneficiaries. Third, the
Administration also would maintain critical limits on 'balance
billing,' which protect the program's 37 million beneficiaries
from excessive charges from providers. Fourth, our plan
maintains important protections for low-income Medicare
beneficiaries. Fifth, our package expands the range of private
plans available under Medicare without harming the traditional
fee-for-service program or shifting new, burdensome cost
responsibilities onto beneficiaries. Finally, coverage of key
preventive benefits like mammograms are improved under our
As the Trustees have recommended, action is needed in the
short- run to gain sufficient time for an advisory group to make
recommendations on approaches to long-term solvency. It would be
irresponsible not to take action.
While we have major concerns with elements in the Republican
budget proposal that are threatening to the Medicare program and
to its beneficiaries, we do acknowledge areas of commonality. We
note that CBO has estimated that both the Republican and the
Administration's balanced budget proposals would have the effect
of extending the HI Trust Fund solvency for about the next
decade. It is time to set aside the controversial elements in
the competing Medicare proposals to fashion a Medicare package of
changes that can be enacted and that can extend the HI Trust Fund
sufficiently in the short-term to enable us to face the
challenges of the future.
This Administration believes in Medicare. We take seriously
our responsibility to current and future Medicare beneficiaries
to ensure the solvency of the HI Trust Fund. The Trustees Report
is a call to action, but it should not be cause for unnecessary
alarm to beneficiaries, present or future. We can and must move
forward in a responsible, bipartisan manner to quickly enact
reasonable Medicare reforms that will address short-term
solvency, providing us with sufficient time to carefully consider
approaches to preserving Medicare for the long-term.