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

Before the Senate Budget Committee

Chairman Domenici, Senator Lautenberg, distinguished members of the Committee, I appreciate having the opportunity to appear before you today to discuss the future of Medicare. As you know, the Medicare Trustees projected last month that the life of the Medicare Trust Fund has been extended until 2015 ­ 7 years longer than projected in last year's report. This report affirms that the steps we have taken together in the past are paying real dividends. But it also underscores the need for additional action to strengthen and modernize the program for the future.

As we near the end of the 20th Century, we can all point with great pride to the legacy of the Medicare program. Since its enactment in 1965, Medicare has helped to lift and keep a generation of Americans out of poverty while improving and extending the quality of their lives. During this time, the average life expectancy of our senior citizens has increased by three years, from 79 to 82 years. Poverty among the elderly has dropped by nearly two-thirds. And access to care has increased by one-third.

Before Medicare was enacted, more than half of our senior citizens were uninsured at a time in their lives when their need for health care was the greatest. Today, virtually every American over the age of 65, and millions of other Americans who have disabilities, live with the security of knowing that Medicare is there for them if and when they need it. This peace of mind also is vitally important to millions and millions of working men and women in this country who worry about the well-being of their parents and their grandparents.

President Clinton has a passionate commitment to strengthening Medicare for the future. When he took office six years ago, Medicare was actually projected to go bankrupt by this year. Working with the Congress, he has supported administrative and legislative changes that, along with a strong economy, have resulted in projected trust fund solvency through 2015.  The Administration is gratified by the Medicare Trustees' recent projection. The Congress should be too.

But as the President said last month, we should not be lulled into thinking that nothing more needs to be done. Over the next 35 years, the size of the Medicare population will double from 39 million to 80 million beneficiaries. While the emergence of new technologies will improve the quality of care, they also may be costly. The Trustees' Report points out that "substantially greater changes in income and/or outlays are needed, in large part as a result of the impending retirement of the baby boom generation."

The President will submit a plan soon that builds on the work of the Bipartisan Commission on the Future of Medicare and includes real changes to modernize the program and provide a long overdue prescription drug benefit. And it also will offer an historic opportunity to begin to address the central challenge facing Medicare ­ a tremendous influx of new beneficiaries ­ through our proposal to devote 15 percent of the budget surplus to extend the solvency of the trust fund for another decade.

Mr. Chairman, before I discuss our plans for the future, allow me to report on where we are today. In our latest report, the Trustees projected that the Medicare HI trust fund spent an estimated $135.8 billion in 1998 and received $140.5 billion in income from payroll taxes and interest income. This is the first time since 1994 that income to the trust fund exceeded expenses. At the end of 1998, the trust fund's total assets had increased from $115.6 billion to $120.4 billion.

At the same time, the Supplemental Medical Insurance Trust Fund spent $77.6 billion in 1998, while it received $87.7 billion in income for a net increase of $10.1 billion in assets. Total assets in the SMI trust fund at the end of 1998 were $46.2 billion.

These figures represent a substantial improvement from 1997 and, based on current projections, they indicate that the Hospital Insurance Trust Fund should remain solvent until 2015. Taking the last two annual reports together, we have extended the life of the HI trust fund by a full 14 years and cut the 75 year actuarial deficit by 66 percent.

The reasons for this improvement are perhaps more important than the numbers. The Trustees and the Medicare actuaries found several factors contributed to the economic good news for Medicare.

First, the robust national economy with its combination of low unemployment and low inflation has helped to increase payroll tax revenue into the trust fund and hold the line on Health care costs.

Second, the Department's rigorous management of the Medicare trust fund and our historic attack on waste, fraud and abuse in the Medicare program have yielded some remarkable results. Over the last two years alone, our efforts to halt these practices have returned more than $1.2 billion to the Medicare Trust Fund. This is the first time in the history of the program that an Administration's efforts to end waste, fraud and abuse have been identified as having a positive impact on the life of the trust fund. I'd like to single out the Health Care Financing Administration (HCFA) for special praise in this area, along with the HHS Office of the Inspector General and the Department of Justice.

Third, but by no means last, is the bipartisan Balanced Budget Act, which is an important legacy of this Committee and the Chairman and Ranking Member in particular. The BBA made some very important and overdue changes in the way Medicare pays doctors, hospitals, nursing homes, home health agencies, and other health care providers. As members of this Committee know, Medicare is the single largest purchaser of health care services in the United States . The way in which we pay for care often influences the entire health care system. The BBA also mandated the development of new payment systems for home health care, skilled nursing facility care, rehabilitation services, and outpatient hospital services. These new systems, while challenging to develop, will help to make Medicare a more prudent purchaser of health care services.

While we modernized our payment systems, we also modernized the Medicare benefit package to include important new prevention services, including annual screening mammograms for women over 40, prostate cancer screening, colorectal cancer screening and diabetes management. These changes made Medicare more like the benefit packages offered to working-age Americans. In the long run, these new benefits also will help to reduce Medicare spending growth by keeping beneficiaries healthier.

While the BBA played a vital role in strengthening HI solvency, it also created a major challenge for the HCFA and all of HHS. When I asked Nancy Ann Min DeParle to take the HCFA helm just after the BBA was enacted, I told her it was one of the most difficult jobs in Washington. Thanks to the BBA, that was an understatement. Working under extraordinary conditions, the men and women of HCFA have done a remarkable job of managing the implementation of this important law.

BBA implementation has been one of HHS' top priorities for the past two years. The BBA included 335 provisions affecting HCFA programs and HCFA has already fully implemented more than half of them. Many more provisions are partially implemented and are on track for full implementation according to the timetable laid out by the Act. In the last year, HCFA has published 92 regulations and Federal Register notices, including those to expand Medicare's benefit package for diabetes management, bone density measurement, colon cancer screening, pap smears, pelvic exams, mammograms, and clinical breast exams. I am especially proud of our work in this area.

In the area of payment system reforms, HCFA has issued regulations modifying inpatient hospital payment rules, established a prospective payment system for skilled nursing facilities, refined the physician payment system, and begun work on prospective payment systems for home health care, outpatient hospital services, and rehabilitation hospitals.

We have also begun to implement a very important test of market forces to help control Medicare costs for durable medical equipment.

I should remind the Committee that the agency accomplished this Herculean task at the same time it tackled some of the most difficult Year 2000 computer challenges in the federal government.

The BBA also expanded the options available to beneficiaries who choose to obtain benefits through a private health plan. New options include preferred provider organizations or PPOs, provider-sponsored organizations or PSOs, medical savings accounts or MSAs, and private fee-for-service plans. HCFA has issued regulations establishing the new Medicare-Plus-Choice program and is working with health plans and others to help them offer their products to Medicare beneficiaries.

HCFA also has recently taken several steps to address some of the concerns raised by plans and others with the initial BBA regulations. Final rules issued in February will make Medicare-Plus-Choice more flexible for plans and beneficiaries. And just this month, HCFA announced plans to move the deadline for plans' submission of their adjusted community rate applications to July 1. This will help plans by giving them more time to establish their rates. The President's FY2000 budget also announced several proposals intended to protect beneficiaries whose Medicare-Plus-Choice plans may have terminated or may have reduced their service areas. These proposals would permit certain beneficiaries the opportunity to enroll in Medigap and also would expand the Medigap options to which these specified enrollees may have access.

Mr. Chairman, we are very committed to successful implementation of Medicare-Plus-Choice. Since the Clinton Administration took office, enrollment in managed care has tripled to 6.8 million seniors. An important element of this program is beneficiary education. HCFA has launched a multi-pronged national education campaign designed to assure that beneficiaries make choices based on good, solid, unbiased information. We have developed a new Medicare handbook entitled "Medicare and You," that was tested last year in five states. We now have a national toll-free call center to answer questions and provide additional information. We have designed a consumer-friendly Internet site www.medicare.gov that includes comparative information about health plans being offered in each community. We have enhanced beneficiary outreach and counseling at the State Health Information Assistance Programs. And we participated in more than 1,000 state and local outreach events around the country in senior centers, town halls, and radio call-in shows.

Our decision to test these materials and processes in a small number of states last year has proven to be a very wise move. Despite the complications created by health plan decisions to withdraw from some Medicare markets, these tests have given us valuable information that will make our 1999 efforts even more successful.

Mr. Chairman, we know that members of Congress are hearing from a variety of providers in their states and districts about the effects of some of the payment reforms included in BBA. Ms. DeParle and I have received literally thousands of letters, and have discussed these issues at great length with members of Congress, providers and their trade association representatives. Through administrative actions, we will continue to address these concerns where appropriate and to make sure that beneficiaries continue to have access to the care they need. At the same time, we must recognize that changes in the BBA would require offsetting cuts elsewhere or new revenues. These changes also could adversely affect the progress we have made together in extending the life of the trust fund. As we continue to monitor the effects of BBA, we look forward to working in a bipartisan fashion to ensure that Medicare beneficiaries continue to receive quality health care services.

Now, I would like to turn to the future and discuss both the work of the Bipartisan Commission on the Future of Medicare and the President's plan to strengthen and modernize the program.

First, let me say that we appreciate the hard work of Senator Breaux and Congressman Thomas, as well as the thoughtful contributions of the other Commission members. In particular, I want to recognize Senators Gramm and Frist, with whom I consult often on a broad range of health care issues. While there was not a sufficient number of votes to report out a set of recommendations, the Commission's work helped to highlight the challenges that we face as we move forward to address Medicare's future. The Breaux-Thomas proposal has advanced the debate about Medicare in important ways and recommends a number of ideas worthy of consideration.

The proposal calls for making the traditional Medicare program more competitive by adopting many of the competitive management tools that are used in the private sector. Per capita spending growth in Medicare has closely tracked growth in the private sector over the years. All of us should be interested in making sure that the traditional program has the tools widely used by the private sector and Medicare managed care (or Medicare-Plus-Choice) plans to ensure continued restraint in spending growth, while recognizing that growth in health care spending has historically exceeded growth in GDP.

The Breaux-Thomas proposal also would rationalize Medicare's complicated, confusing cost sharing and proposes doing so in important ways such as eliminating cost sharing for preventive services.

The proposal also recognizes the need for expanded coverage of prescription drugs. Using the Medicaid program, it contains a modest but positive step toward providing drug coverage to low income Medicare beneficiaries.

However, the Breaux-Thomas proposal falls short in a number of key areas and therefore, we cannot support it. First and foremost, the proposal does not address Medicare's long term solvency and ignores the need for new revenues to finance care for the growing numbers of new beneficiaries. Commission staff estimated that the plan would produce net Medicare savings of only $102 billion over 10 years, less than one third of the savings assumed under the BBA. And, according to Commission staff, more than $35 billion of those Medicare savings would come from shifting the cost of Medicare Direct Medical Education to other areas of the budget. The lack of financing in the Breaux-Thomas proposal would make Medicare's financial problems much harder to solve in the future.

Second, the plan derives a substantial portion of its savings from increasing costs for Medicare beneficiaries. For example, the proposals to raise the eligibility age from 65 to 67 and to impose unlimited per visit home health copays achieve significant savings in the Breaux-Thomas plan. The proposal to raise the eligibility age includes no workable policy to prevent an increase in the number of uninsured Americans among this vulnerable population.

Under the name of "competition," the centerpiece of the Breaux-Thomas proposal ­ premium support ­ also derives a substantial portion of its savings from shifting costs to beneficiaries in the form of higher premiums for traditional Medicare relative to current law. The independent Medicare actuary estimated that under the Breaux-Thomas proposal that was presented in February, traditional program (fee for service) premiums would rise by 18 to 30 percent, or 10 to 20 percent if Congress enacted the traditional program reforms. Since the Breaux-Thomas premium support design implicitly increases premiums for the traditional fee-for-service program, states paying Medicare premiums for low-income beneficiaries also would bear an added cost burden to simply maintain the current level of Medicare services.

We also are concerned about the potential effect of this proposal on beneficiaries in rural areas. The Breaux-Thomas plan would protect against fee for service premium hikes for beneficiaries who live in an area with no Medicare managed care offering. But if one private plan comes to their area ­ and that plan does not include their physician ­ they would have to pay a much higher premium to stay in the traditional program and keep their physician. This approach would lead to an unprecedented situation in which Medicare beneficiaries in different counties could pay substantially different amounts for the same fee for service benefit package.

The Breaux-Thomas plan includes a modest prescription drug benefit; however, because it is administered only as a means tested Medicaid benefit, nearly 60 percent of Medicare beneficiaries without drug coverage would not qualify. And experience with Medicare premium assistance programs shows that only about half of people eligible for these Medicaid benefits actually enroll.

A final concern with the Breaux-Thomas plan is its call for creation of a new bureaucracy to oversee the premium support program. This board would approve health plan benefit packages and rates, decide on service areas, and enforce financial and quality standards among other activities. Not only is this new bureaucracy unneeded, but it could remove billions of dollars from traditional government oversight and accountability since it is not subject to Executive branch rules. This could be particularly problematic in our fight against waste, fraud and abuse.

In light of his concerns with the Breaux-Thomas proposal, the President has pledged to come forward with his own recommendations to strengthen and modernize the Medicare program. We are committed to working with the Congress to develop and pass a plan this year to strengthen Medicare for the next century. We are working to develop a plan that conforms to the principles he outlined in January:

                    * Make the program more efficient and competitive;

* Maintain and improve Medicare's guaranteed benefits, including a prescription drug benefit, and;

                    *Assure adequate financing by dedicating 15% of the surplus to Medicare.

To make the traditional program more efficient, we believe that Medicare should be allowed to use the same effective practices that private health insurers use to constrain costs, including selective contrActing with lower cost, higher quality providers, and competitive bidding for services like medical supplies. We are examining other options to reduce fraud, constrain costs, and make payments more competitive and efficient.

Our proposal also will ensure that Medicare's guarantee of benefits is strong. Medicare provides coverage for some of our most vulnerable citizens. We must strengthen the program but not do so at the expense of a clear, defined set of benefits.

One of the President's top priorities is to provide a long overdue prescription drug benefit. Nearly all beneficiaries use prescription drugs and the cost they pay for those drugs is three times as high as that paid by of other adults. Yet less than 25 percent of beneficiaries have private retiree or Medigap coverage and these numbers are declining. Beneficiaries without drug coverage typically pay much higher prices than insurers do ­ exacerbating the problem.

Finally, the President's proposal will put Medicare on sounder financial footing by dedicating 15% of the budget surplus to the program for the next 15 years. This infusion of much needed revenues would extend the HI trust fund for another decade. The plan does not create an unlimited tap on general revenues, but instead invests a fixed portion of the surplus in Medicare to cover the temporary but overwhelming influx of retirees. The surplus was largely created by the baby boom generation and makes sense as a one-time funding source for Medicare.

Mr. Chairman, members of the Committee, by working together we have made remarkable progress in keeping our promise of high-quality, affordable health care for the 39 million beneficiaries of the Medicare program today. And we have made important progress toward assuring such access to future beneficiaries. But we still face a difficult challenge. Despite our progress, the Medicare program must be strengthened, modernized, and put on a strong financial footing to address the needs of future generations of senior citizens. The President and his Administration are committed to working with the Congress to achieve that result.

Mr. Chairman, 34 years ago, our nation made a promise to some of our most vulnerable citizens. We promised that if they worked hard and saved for their retirement, we would make sure that they have access to the high-quality, affordable care they need to live their later years in security. Our parents and grandparents kept their end of the bargain. Now it is time for us to do the same. I look forward to working with the Members of this Committee and both Houses of Congress to make sure that we keep our word.

I'd be happy to answer any questions. Thank you.

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