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Testimony on Preparing for the Retirement of the Baby Boom Generation by Nancy-Ann Min DeParle
Administrator, Health Care Financing Administration
U.S. Department of Health and Human Services

Before the Senate Special Committee on Aging
February 18, 1998


INTRODUCTION

Senator Breaux, thank you for the opportunity to address the Committee about the challenge facing our country as we prepare for the retirement of the baby boom generation. I want to congratulate you on your appointment as Chairman of the National Bipartisan Commission on the Future of Medicare. This Commission has been given an assignment of critical importance to us all -- preserving the Medicare program for future generations. We are also looking forward to working with Secretary Jindal in his new capacity as Executive Director of the Medicare Commission. We can expect him to apply the considerable talents he brought to the Department of Health and Hospitals in Louisiana to his role in the Commission.

We are facing a society unlike any that has ever been encountered in American experience -- a society with more old people, comparatively fewer children and adolescents, and with life expectancy for many at age 65 measured in decades. The Commission, this hearing and other public forums have an important role to play in our planning for how to deal with these changes to our society.

The Medicare program has a rich history. In 30 some years, Medicare has literally changed what it means to be old or disabled and sick in America. During this time, Medicare has meant access to health care coverage for almost 80 million Americans who would otherwise have lacked access to any kind of health care. Medicare is coverage that cannot be lost as you get older or sicker, or face other changes of status such as widowhood or retirement. It has relieved some of the financial burden of health care, which is critically important for low-income elderly persons with high medical expenses, and has given American families the assurance that they will not have to bear the full burden of health care costs for their elderly or disabled parents or relatives. Medicare has already doubled the number of people it serves.

While we must confront and cure the problems of the program, we must never forget that it has enhanced our health care system and ennobled us all. As President Lyndon B. Johnson said when he signed Medicare into law: "No longer will this nation refuse the hand of justice to those who have given a lifetime of service and wisdom and labor to the progress of this country." My priorities as Administrator are to continue this commitment by ensuring the implementation of the most significant changes made to Medicare in its history, and to continue -- and sharpen -- our focus on fraud, waste, and abuse in Medicare.

Today, Medicare is serving more than 39 million beneficiaries, including about 600,000 residents of Louisiana. The program spends more than $200 billion annually across the country. In Louisiana, Medicare spends about $3.5 billion each year. Medicare spending on home health services is particularly notable, with spending at more than $13,000 per person, more than double the national average, and the highest in the nation. Medicare also provides the State's elderly and disabled with over 1.4 million days of hospital care; 500,000 days of skilled nursing home care; and some 18 million physician visits.

The program that provides these extensive medical benefits to the citizens of Louisiana and the rest of the Nation has a complex financing mechanism: the Medicare program is financed by two Trust Funds. The Hospital Insurance (or "HI") Trust Fund, which pays for hospital, nursing home, hospice, and some home health care, is financed primarily by payroll taxes on employers and employees. The HI tax rate is specified in law, and program financing cannot be modified to match variations in program costs except through legislation. It is this Trust Fund that is projected to become insolvent in the next century as spending exceeds revenues.

The Supplementary Medical Insurance Trust Fund (or "SMI"), which pays for physician services, outpatient care, laboratory, durable medical equipment, and some home health services, is financed by general revenues and enrollee premiums. SMI premiums and general revenue payments are reestablished each year to match estimated costs for the following year. SMI income automatically matches expenditures. Thus, this Trust Fund is prevented from ever becoming insolvent.

In 1993, when the Clinton Administration first took office, the HI Trust Fund was projected to become insolvent in 1999. The Administration, together with the Congress, immediately took action and extended the life of the Trust Fund by several years. This summer, the Administration and Congress passed a sweeping reform of the Medicare program. The Balanced Budget Act is estimated to extend the life of the Trust Fund to about 2010 and puts in place major changes that modernize the program and make it ready for the 21st century. We did a number of important things in the Balanced Budget Act, including:

  • New Choices for Beneficiaries -- We added new choices for beneficiaries, so that they will have many types of health plans available to them from fee-for-service Medicare and HMOs, to PPOs, Provider Sponsored Organizations, and private indemnity plans.

  • Better Information for Beneficiaries -- We established an information program for beneficiaries so that each beneficiary will receive pamphlets telling them about their choices, giving information about local organizations that can help them, and providing a toll-free number to call for more information. Beneficiaries also can access the information through the Internet.

  • Preventive Benefits -- We expanded preventive benefits. In the past, Medicare covered only what were called "medically necessary services." At long last, we are adding to the list some of the most necessary services of all -- those that find and treat small problems before they become big ones.

  • Payment Reforms -- We reformed the way we pay health plans and providers, and gave the program modernized purchasing authorities, so that program costs per beneficiary will be reduced to less than 4 percent average annual growth rate for Fiscal Years 1997 through 2002.

  • New Anti-Fraud Tools -- We added new tools and new funding to combat fraud and abuse. We have been working aggressively with our partners in the Administration on Aging, the Office of the Inspector General, and the States to combat fraud. Our new and expanded authority will allow us to get even tougher. The only way we can maintain -- much less improve and expand -- Medicare and other public programs is if we make sure that they are responsibly managed, fiscally sound, and free from waste, fraud, and abuse.

Through Operation Restore Trust and other efforts, this Administration has already taken strong steps to weed out waste and fraud. We assigned more federal investigators and prosecutors than ever before to fight Medicare fraud. Since 1993, we increased fraud convictions by a record number, saved taxpayers more than $20 billion, and returned $1 billion to the Trust Fund last year alone.

It is also important to note that all these improvements are being made in the context of what is a highly efficient insurance program. Medicare's administrative costs are less than 2 percent of benefit payments, considerably below that of private insurers.

A Long-Term Problem

Although the Balanced Budget Act eliminated the HI Trust Fund problem in the short run, we still are facing insolvency down the road due to imminent demographic changes. [Chart 1]

In the very near future, a substantial portion of our population will be elderly. The proportion will rise from about 13 percent in 2010 to almost 20 percent of the population in 2030. [Chart 2]

The steady improvement in life expectancy, coupled with a decline in birth rates, will result in major increases in the number of older persons relative to those of working age. Currently, about four workers paying HI taxes support each HI enrollee, a ratio which will begin to decline rapidly early in the next century. By the middle of the next century, only about two workers will support each enrollee. [Chart 3]

In addition, because of continuing improvements in life expectancy, the ratio does not return to current levels once the subsequent "baby bust" generation reaches retirement age.

It should be pointed out, however, that while the size of the 65-and-over population relative to those aged 20-64 is expected to increase, the size and associated costs of the child and adolescent population will be relatively lower in the future. Of course we need to recognize that public expenditures on children are considerably lower than for aged persons, and the financing for such expenditures is very different. However, it would be a mistake to focus on the public finance implications of the growing elderly population without also recognizing the concomitant reduction in the proportion of children and adolescents.

Nonetheless, the major underlying problem facing us is that in the future this country's growing elderly population will consume health care services that will need to be financed in some way. If their costs are not met by Medicare, then it will fall upon the individuals themselves, their families, States, or employers to bear the cost of care. Even today, Medicare only pays about half of the health care costs of the elderly. [Chart 4]

It is important to note that although the economic status of the elderly as a group has improved over the past thirty years, many elderly individuals continue to have lower incomes than the non-elderly, and because of their lower incomes and higher health care needs, they already spend a significant portion of their income on health care. [Chart 5]

Thus, we face a growing elderly population, many of whom will not be well-off. Their primary source of health care coverage will be through a program that today covers only one-half of an elderly person's health care costs, since Medicare does not cover long-term nursing home stays, outpatient prescription drugs, and has no catastrophic cap on beneficiary liability. This means that in facing this challenge, we have to look at it far differently than we might have in the past.

I believe that there are two key principles that should guide us.

Medicare and the Larger Society

First, Medicare is a large part of a complex health care system, and a major component of the overall economy. We cannot plan changes to the program in isolation. The issues related to Medicare's role in planning for the retirement of the baby boom generation need to be discussed and understood in a very broad context. We need to take into account policies and issues related to labor supply, personal savings, economic growth, and Social Security. The format of today's hearing bringing together representatives of Social Security, Medicare, and the Administration on Aging is consistent with this more expansive view.

Medicare cannot be viewed in isolation from the other structures that support America's seniors. A diversified approach to meeting the health care and retirement income needs of the aged is critical to preparing for the future. The magnitude of the needs, and the importance of ensuring that they are met, suggests the continued desirability of the traditional American approach of a balanced, diversified collection of social insurance programs, private group insurance and pension plans, and individual savings efforts what some have referred to as the "three legs of the stool" that support the elderly in their retirement years.

The future demographic trends have significant implications for more than just entitlement programs. They are intrinsically related to the nation's economic well being. Sufficiently robust economic growth can help in providing the resources to meet future retirement and health care needs while securing the living standard of the non-aged.

A Broad Agenda

In approaching the challenge of meeting the health care needs of future elders, the second principle to guide us is that the agenda from which we choose should be as broad as possible. We need to be open to a whole range of options, and not approach this from a limited perspective. While preserving the basic architecture of Medicare, we must recognize the need to take action to ensure its continued strength. We need to explore a wide variety of areas such as eligibility, financing, benefit design, and work force related issues. The complexity of the problem deserves our most creative thinking, not constrained by traditional frameworks.

We look forward to working with the Commission to help identify the problems and potential solutions. Some of the fundamental questions that will need to be addressed include:

  • What benefits should Medicare offer?

    In the budget agreement, we took a step forward by expanding the benefit package to cover important services like flu shots and mammography. As the population ages and the number of retirees increases, the mix of services that Medicare beneficiaries may need will also change, affecting the rates of chronic and long-term care.

  • How will we control the cost of the Medicare program?

    Specifically, we will need to scrutinize how Medicare's per capita costs are influenced by inefficiencies in the program, and the overall cost growth of health care. How can we better track and predict potential changes in technology, disability rates, and other factors affecting these per capita costs?

  • Should we raise the age of eligibility for Medicare?

    The Commission needs to look beyond the aging of the population to other societal changes, such as the length of time people work, and the numbers of uninsured workers in the population, which leads us to the next question:

  • How will we finance these costs?

    Once again, we will need to take a very broad look at our options. For example, do we have the proper mix of premiums, cost-sharing, payroll, and general revenue? Other questions may involve the amount enrollees contribute to the program, the split between Part A and Part B, and the future resources of our State and Federal governments. We also need to remember that not all seniors enjoy the same financial status; we need to pay particular attention to vulnerable segments of the elderly, especially beneficiaries with the lowest incomes.

Some of the answers to these questions may be controversial, and many are still evolving. And, they will be best answered by the Commission, whose mandate is clear -- to educate both the public and the policy makers.

CONCLUSION

In the 1950s and 1960s, our country had to find a way to house and educate the "baby boom" generation. In the 1970s and 1980s we had to integrate this generation into the labor force. In the next century, we will have to support them in their old age and provide for their health care. As we confront the challenge, difficult choices will have to be made. Recently, an important first step was made with the passage of the Balanced Budget Act of 1997, extending the life of the Trust Fund.

The Congress also established The National Bipartisan Commission on the Future of Medicare as the next important phase of our effort. I look forward to working with the Commission in meeting the challenge.


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