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+
+ - BOARD OF TRUSTEES 2004 ANNUAL REPORTS
+
+[House Hearing, 108 Congress]
+[From the U.S. Government Publishing Office]
+
+
+
+
+ BOARD OF TRUSTEES 2004 ANNUAL REPORTS
+
+=======================================================================
+
+ HEARING
+
+ before the
+
+ COMMITTEE ON WAYS AND MEANS
+ U.S. HOUSE OF REPRESENTATIVES
+
+ ONE HUNDRED EIGHTH CONGRESS
+
+ SECOND SESSION
+
+ __________
+
+ MARCH 24 AND APRIL 1, 2004
+
+ __________
+
+ Serial No. 108-69
+
+ __________
+
+ Printed for the use of the Committee on Ways and Means
+
+ COMMITTEE ON WAYS AND MEANS
+
+
+
+
+
+ U.S. GOVERNMENT PRINTING OFFICE
+
+23-797 WASHINGTON : 2006
+_________________________________________________________________
+For sale by the Superintendent of Documents, U.S. Government
+Printing Office Internet: bookstore.gpo.gov Phone: toll free
+(866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2250 Mail:
+Stop SSOP, Washington, DC 20402-0001
+
+
+
+ BILL THOMAS, California, Chairman
+
+PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
+E. CLAY SHAW, JR., Florida FORTNEY PETE STARK, California
+NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
+AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
+WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
+JIM MCCRERY, Louisiana JIM MCDERMOTT, Washington
+DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
+JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
+JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
+SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York
+JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
+MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
+ROB PORTMAN, Ohio XAVIER BECERRA, California
+PHIL ENGLISH, Pennsylvania LLOYD DOGGETT, Texas
+J.D. HAYWORTH, Arizona EARL POMEROY, North Dakota
+JERRY WELLER, Illinois MAX SANDLIN, Texas
+KENNY C. HULSHOF, Missouri STEPHANIE TUBBS JONES, Ohio
+SCOTT MCINNIS, Colorado
+RON LEWIS, Kentucky
+MARK FOLEY, Florida
+KEVIN BRADY, Texas
+PAUL RYAN, Wisconsin
+ERIC CANTOR, Virginia
+
+ Allison H. Giles, Chief of Staff
+
+ Janice Mays, Minority Chief Counsel
+
+Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
+hearing records of the Committee on Ways and Means are also published
+in electronic form. The printed hearing record remains the official
+version. Because electronic submissions are used to prepare both
+printed and electronic versions of the hearing record, the process of
+converting between various electronic formats may introduce
+unintentional errors or omissions. Such occurrences are inherent in the
+current publication process and should diminish as the process is
+further refined.
+
+
+ C O N T E N T S
+
+ __________
+
+ Page
+
+Advisories announcing the hearing................................ 2
+
+ WITNESSES
+
+U.S. Department of the Treasury, Hon. John W. Snow, Secretary.... 7
+Congressional Budget Office, Douglas Holtz-Eakin, Director....... 17
+Social Security Administration, Stephen C. Goss, Chief Actuary... 29
+Centers for Medicare and Medicaid Services, Rick Foster, Chief
+ Actuary........................................................ 32
+Centers for Medicare and Medicaid Services, Jeff Flick, San
+ Francisco Regional Administrator............................... 108
+Centers for Medicare and Medicaid Services, Leslie V. Norwalk,
+ Acting Deputy Administrator and Chief Operating Officer........ 111
+
+ SUBMISSIONS FOR THE RECORD
+
+American Academy of Actuaries, Cori E. Uccello, statement........ 126
+Physicians for a national Health Program, Chicago, IL, Don R.
+ McCanne, statement............................................. 132
+
+
+ BOARD OF TRUSTEES 2004 ANNUAL REPORTS
+
+ ----------
+
+
+ WEDNESDAY, MARCH 24, 2004
+
+ U.S. House of Representatives,
+ Committee on Ways and Means,
+ Washington, DC.
+
+ The Committee met, pursuant to notice, at 1:13 p.m., in
+room 1100, Longworth House Office Building, Hon. Bill Thomas
+(Chairman of the Committee) presiding.
+ The advisory and second advisory announcing the hearing
+follow:]
+
+ADVISORY
+
+FROM THE
+COMMITTEE
+ ON WAYS
+AND
+MEANS
+
+ CONTACT: 202-225-1721
+FOR IMMEDIATE RELEASE
+March 17, 2004
+FC-16
+
+ Thomas Announces Hearing on Board of Trustees 2004 Annual Reports
+
+ Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
+and Means today announced that the Committee will hold a hearing to
+examine the findings and recommendations made by the Boards of Trustees
+for the Social Security Old-Age and Survivors and Disability Insurance
+Trust Funds and the Boards of Trustees for the Medicare Hospital
+Insurance and Supplemental Medical Insurance Trust Funds in their 2004
+Annual Reports on the financial status of these trust funds. The
+hearing will take place on Wednesday, March 24, 2004, in the main
+hearing room, 1100 Longworth House Office Building, beginning at 1:00
+p.m.
+
+ In view of the limited time available to hear witnesses, oral
+testimony will be heard from invited witnesses only. However, any
+individual or organization not scheduled for an oral appearance may
+submit a written statement for consideration by the Committee and for
+inclusion in the printed record of the hearing.
+
+
+BACKGROUND:
+
+
+ The Social Security Act requires the Boards of Trustees for the
+Social Security and Medicare programs to report annually to the
+Congress on the current and projected financial condition of the Old-
+Age and Survivors Insurance (OASI), the Disability Insurance (DI), the
+Hospital Insurance (HI), and the Supplementary Medical Insurance (SMI)
+trust funds. Members of both Boards include the Secretary of the
+Treasury (who is the Managing Trustee), the Secretary of Labor, the
+Secretary of Health and Human Services, the Commissioner of Social
+Security, and two members who are appointed by the President and
+confirmed by the Senate to serve as public trustees for 4-year terms.
+In addition, the Deputy Commissioner of Social Security serves on the
+Board of Trustees for the Social Security programs and the
+Administrator of the Centers for Medicare and Medicaid Services serves
+on the Boards for the Medicare program. The 2004 Annual Reports are
+scheduled to be released in the near future.
+
+ Ensuring the financial viability of Social Security and Medicare is
+one of Congress' most important responsibilities. The annual release of
+the Trustees' reports provides a valuable update on the programs'
+fiscal well-being.
+
+ The release of the 2004 Annual Reports on the Medicare HI and SMI
+trust funds will be particularly timely, because their findings will
+include an initial evaluation of the impact of the Medicare
+Prescription Drug, Improvement and Modernization Act of 2003 (MMA)
+(P.L. 108-173) on the long-term financial situation of the Medicare
+program. Among other items, the MMA included a provision to make
+available prescription drug coverage to Medicare beneficiaries. As the
+MMA is implemented, it will be essential to continue to evaluate the
+overall fiscal standing of the program. In addition, the report on the
+OASI and DI trust funds will provide fresh evidence of the financial
+challenges facing Social Security and the need to act quickly to
+strengthen the program.
+
+ In announcing the hearing, Chairman Thomas stated, ``I look forward
+to this hearing and to the report of the non-partisan Social Security
+and Medicare Trustees. As we approach the retirement of the baby-boom
+generation, it is essential that we continue to evaluate the long-term
+fiscal outlook for both of these important programs.''
+
+
+FOCUS OF THE HEARING:
+
+
+ The hearing will examine the findings and recommendations of The
+2004 Annual Reports of the Board of Trustees of the Federal OASDI and
+HI/SMI Trust Funds. The hearing will focus on the long-term financial
+status of the Social Security and Medicare programs.
+
+
+DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
+
+
+ Please Note: Any person or organization wishing to submit written
+comments for the record must send it electronically to
+[email protected], along with a fax copy to
+(202) 225-2610, by close of business Wednesday, April 7, 2004. In the
+immediate future, the Committee website will allow for electronic
+submissions to be included in the printed record. Before submitting
+your comments, check to see if this function is available. Finally, due
+to the change in House mail policy, the U.S. Capitol Police will refuse
+sealed-packaged deliveries to all House Office Buildings.
+
+
+FORMATTING REQUIREMENTS:
+
+
+ Each statement presented for printing to the Committee by a
+witness, any written statement or exhibit submitted for the printed
+record or any written comments in response to a request for written
+comments must conform to the guidelines listed below. Any statement or
+exhibit not in compliance with these guidelines will not be printed,
+but will be maintained in the Committee files for review and use by the
+Committee.
+
+ 1. Due to the change in House mail policy, all statements and any
+accompanying exhibits for printing must be submitted electronically to
+[email protected], along with a fax copy to
+(202) 225-2610, in WordPerfect or MS Word format and MUST NOT exceed a
+total of 10 pages including attachments. Witnesses are advised that the
+Committee will rely on electronic submissions for printing the official
+hearing record.
+
+ 2. Copies of whole documents submitted as exhibit material will not
+be accepted for printing. Instead, exhibit material should be
+referenced and quoted or paraphrased. All exhibit material not meeting
+these specifications will be maintained in the Committee files for
+review and use by the Committee.
+
+ 3. Any statements must include a list of all clients, persons, or
+organizations on whose behalf the witness appears. A supplemental sheet
+must accompany each statement listing the name, company, address,
+telephone and fax numbers of each witness.
+
+
+ Note: All Committee advisories and news releases are available on
+the World Wide Web at http://waysandmeans.house.gov.
+
+
+ The Committee seeks to make its facilities accessible to persons
+with disabilities. If you are in need of special accommodations, please
+call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
+business days notice is requested). Questions with regard to special
+accommodation needs in general (including availability of Committee
+materials in alternative formats) may be directed to the Committee as
+noted above.
+
+ADVISORY
+
+FROM THE
+COMMITTEE
+ ON WAYS
+AND
+MEANS
+
+ CONTACT: 202-225-1721
+FOR IMMEDIATE RELEASE
+March 30, 2004
+FC-17-Revised
+
+ Thomas Announces a Continuation of the Hearing on Board of Trustees
+ 2004 Annual Reports
+
+ Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
+and Means today announced that, pursuant to Rule XI, Clause 2(j)(1) of
+the U.S. House of Representatives, the Committee will hold a
+continuation of the March 24, 2004 hearing to examine the findings and
+recommendations made by the Boards of Trustees for the Social Security
+Old-Age and Survivors and Disability Insurance Trust Funds and the
+Boards of Trustees for the Medicare Hospital Insurance and Supplemental
+Medical Insurance Trust Funds in their 2004 Annual Reports on the
+financial status of these trust funds. The hearing will take place on
+Thursday, April 1, 2004, in the main hearing room, 1100 Longworth House
+Office Building, beginning at 12:00 p.m.
+ All other details of the hearing remain the same. (See full
+Committee advisory No. FC-17, dated March 17, 2004.)
+
+
+
+ Chairman THOMAS. Good afternoon. Today we welcome the
+Secretary of the U.S. Department of the Treasury John Snow, the
+Managing Trustee, to discuss the 2004 Annual Reports of the
+Board of Trustees of Social Security and the Medicare Trust
+Fund. In every Congress since Republicans became a majority in
+1995, the Committee on Ways and Means has reviewed the
+Trustees' findings on the financial future of our most
+significant entitlement programs. These reports are essential
+reminders to policymakers of the challenges we face as the
+baby-boom generation retires and as Americans live longer,
+healthier lives. This year's report provides us with the first
+glance at the impact of the Medicare Modernization Act (P.L.
+108-173) on the program's future finances and reminds us, since
+both of these entitlement programs are tied to wages and
+salary, how much the short-term fluctuations follow the
+economy. With passage of the new law, Medicare will cover
+prescription drugs, the cornerstone of modern medicine, and
+provide other preventive and wellness services as well. That is
+why Congress intentionally included crucial reforms to balance
+the increased cost of these new benefits and to ultimately
+improve the solvency of Medicare if competition is allowed to
+occur. These efforts did not go as far as some of us would have
+liked, and as today's report shows there is still more work
+ahead to maintain solvency.
+ Turning now to the reports before us, the Hospital
+Insurance (HI) Trust Fund is moving toward insolvency sooner
+than expected. To consider a complete picture of all Medicare
+financing, though, it is useful to look at Medicare
+expenditures as a percentage of gross domestic product which
+are expected to grow rapidly from the 3.4 percent in 2003 to
+7.7 percent in 2035, and ultimately, once again projecting out
+where no one believes any numbers, but 13.8 percent by 2078. It
+is the trend that is alarming, not any specific set of figures
+at any particular projected point in time. Clearly without
+further cost saving reforms, Medicare will consume an ever
+increasing share of our Nation's resources. Social Security
+faces similar changes as the Trust Fund's outlays exceed income
+beginning in 2018, with Trust Fund insolvency coming in 2042.
+As with Medicare, Congress must consider thoughtful solutions
+to ensure Social Security's viability for future generations.
+ Our second panel will focus on the details behind these
+broad brush strokes. I will be pleased to welcome Douglas
+Holtz-Eakin, Director of the Congressional Budget Office (CBO),
+Richard Foster, Chief Actuary at the Centers for Medicare and
+Medicaid Services (CMS), and Stephen Goss, Chief Actuary at the
+Social Security Administration (SSA). Of late there has been
+particular interest in the differing cost estimates generated
+by the CBO and the CMS on the new Medicare law. Our goal, of
+course, is to have our witnesses help explain the nature of
+their different assumptions and the therefore resulting
+different estimates. All of us know no one has the right answer
+and time will likely show that both of the estimates are wrong.
+The goal is to examine the assumptions which produce the
+numbers and determine if the assumptions underlying the numbers
+are reasonable and appropriate on a comparative basis. I would
+now like to recognize the Ranking Member, Mr. Rangel, for any
+opening statement he might wish to make.
+ [The opening statement of Chairman Thomas follows:]
+ Opening Statement of The Honorable Bill Thomas, Chairman, and a
+ Representative in Congress from the State of California
+ Good afternoon. Today, we welcome Treasury Secretary John Snow, the
+managing Trustee, to discuss the 2004 Annual Reports of the Boards of
+Trustees of the Social Security and Medicare. In every Congress since
+Republicans became the majority in 1995, the Ways and Means Committee
+has reviewed the Trustees' findings on the financial future of our most
+significant entitlement programs. These reports are essential reminders
+to policymakers of the challenges we face as the baby boom generation
+retires and as Americans live longer, healthier lives.
+ The year's report provides us with a first glance at the impact of
+the Medicare Modernization Act on the program's future finances. With
+passage of the new law, Medicare will cover prescription drugs--the
+cornerstone of modern medicine--and provide other preventive and
+wellness services as well. That is why Congress intentionally included
+crucial reforms to balance the increased costs of these new benefits
+and to ultimately improve the solvency of Medicare. These efforts did
+not go as far as some of us would have liked, and as today's reports
+show us, there is still have more work ahead.
+ Turning now to the reports before us. The Hospital Insurance Trust
+Fund is moving toward insolvency sooner than expected. To consider a
+complete picture of all Medicare financing though, it is useful to look
+at Medicare expenditures as a percentage of GDP, which are expected to
+grow rapidly, from 3.4 percent in 2003, to 7.7 percent in 2035, and to
+13.8 percent by 2078. Clearly, without further cost-saving reforms,
+Medicare will consume an ever-increasing share of our nation's
+resources. Social Security faces similar challenges as the Trust Funds'
+outlays exceed income beginning in 2018, with Trust Fund insolvency
+coming in 2042. As with Medicare, Congress must consider thoughtful
+solutions to ensure Social Security's viability for future generations.
+ Our second panel will focus on the details behind these numbers. I
+am pleased to welcome Douglas Holtz-Eakin, Director of the
+Congressional Budget Office (CBO); Richard Foster, Chief Actuary at the
+Centers for Medicare and Medicaid Services (CMS); Stephen Goss, Chief
+Actuary at the Social Security Administration. Of late, there has been
+particular interest in the differing cost estimates generated by CBO
+and CMS on the new Medicare law. Our witnesses will help explain the
+nature of their differing assumptions and the resulting estimates.
+Neither one has the ``right answer.'' And time will likely show they
+are both wrong, as estimates often are.
+ I would now like to recognize the ranking member, Mr. Rangel, for
+any opening statement he might make.
+
+
+
+ Mr. RANGEL. Thank you. Welcome, Mr. Secretary. I am so
+sorry that we missed each other by phone because you have
+always been very courteous in talking with me and other Members
+prior to these meetings, and it certainly makes me a more
+gentle person when I get that type of accommodation from people
+who represent the Administration. This morning I am not going
+to ask any questions because of the limited time that you have.
+I am reminded that President Kennedy once said that sometimes
+the Democratic Party asks too much of its Members. I have known
+that feeling. As I see where the Republican Party is going
+today, I think at some point in time many Republicans are going
+to say that on the question of credibility, sometimes the party
+is really asking too much of us.
+ We have people testifying, as we talk on the Hill, as to
+the credibility that our government had in terms of the quality
+of intelligence in declaring war and invading Iraq. We have
+other members of the Administration, like your predecessor, who
+indicated that the President was focused on Saddam Hussein
+rather than economic issues. We have people who truly believe
+in the Democratic Party that it is a mission of the Republicans
+to destroy Social Security and Medicare, but they believe that
+politically they cannot do it. So, today we have you testifying
+that the Social Security system is in trouble and the only way
+that we can repair it is through privatization. We also know of
+people in the Republican party that find Medicare repugnant to
+their beliefs. As you have said that maybe the way to curtail
+the costs would be to privatize it and to let the free
+marketplace work its will. We know that unless you can get the
+Congress to do these things, it is not going to happen. So,
+when it came time to have the crisis in prescription drugs, we
+know that Republicans and Democrats know that you would not
+have had the votes to pass this bill if the true cost of the
+bill was known.
+ So, therefore, when our staffs said that we did not have
+access to the information which the law declares that
+Republicans and Democrats should have access to the actuary
+table. We were amazed that staff would tell us that it was
+refused. We were more concerned when the written record showed
+the intimidation and how far the majority party was prepared to
+go to keep the Congress of the United States in the dark.
+Knowing that if the Congress had known what the Administration
+knew and failed to share it at our request, that we would not
+be dealing with the problems that we see now with the
+prescription drug bill. I think, Mr. Secretary, there comes a
+time when you start looking at the whole thing, that it is not
+just the credibility of the Administration, with Democrats and
+the American people, but indeed throughout the world the
+credibility of the United States is being reviewed. This pains
+me as I know that it pains you. I do hope that your response to
+some questions as it relates to what did you know about the
+cost and why did not we know it will make us feel a little more
+secure. I hope that we can go to the polls on the question of
+who they want, Democrats and Republicans, and not who do they
+trust. So, I thank you, Mr. Chairman, for this opportunity and
+I look forward to hearing from you, Mr. Secretary.
+ Chairman THOMAS. Mr. Secretary, welcome once again before
+the Committee. Any written testimony you have will be made a
+part of the record. I do understand that you are scheduled to
+introduce the President of the United States and that we have
+only until about 1:45 p.m. So, I look forward to your statement
+and the brief opportunity for Members to ask questions and your
+response. Mr. Secretary?
+
+ STATEMENT OF THE HONORABLE JOHN W. SNOW, SECRETARY, U.S.
+ DEPARTMENT OF THE TREASURY
+
+ Secretary SNOW. Chairman Thomas, Ranking Member Rangel,
+distinguished Members of the Committee, I want to thank you for
+the opportunity to appear before you today to talk about the
+Trustees' reports on the Social Security and Medicare programs.
+The Trustees met yesterday to complete the annual financial
+review of the programs and our reports have been sent to the
+Congress. Let me review first the Social Security Trustees'
+Report. This year's is little changed from last year's report,
+actually a little bit better in some ways. It shows that the
+Social Security program, and this is no surprise to any of you,
+is seriously underfunded and that it is not financially
+sustainable in the long run. The fundamental math of Social
+Security is simply inescapable, as the large baby-boom
+generation reaches retirement age and the number of workers
+that are paying into the system declines significantly as a
+proportion of the total retirees.
+ While we have some time to fix this problem, inaction is
+not a responsible option. The President has called for
+bipartisan efforts to deal with the issue and the sooner that
+action is taken, the better for all concerned. I think we all
+know that each year that passes without the needed changes
+makes the ultimate resolution even more difficult. Personal
+accounts, in our view, are an important part of a solution to
+the Social Security system's problems. They would enable
+younger workers to accumulate a nest egg toward their
+retirement needs. They would relieve some of the pressure on
+the system itself. Whatever the ultimate answer here is, it is
+clear that now is the time to take the steps to preserve and
+protect Social Security so that our commitments to seniors are
+kept and so that the needs of our children and grandchildren
+are met. I think we would all agree with that.
+ Let me offer a few words on the more serious and pressing
+issue of the Medicare Trustees' Reports. It reveals even
+greater challenges than those confronting the Social Security
+system. While Medicare faces the same shifting demographics
+that drive the numbers in Social Security, it is additionally
+affected by the sharp increases in underlying health care
+costs. You know these numbers, too. From 1998 to 2002, health
+care costs rose an astonishing 35 percent. Health care spending
+is growing as a percentage of gross domestic product. It was 15
+percent in 2002 and it is surely much higher today. Employer-
+sponsored health insurance premiums rose 14 percent last year.
+The negative impact of these rising costs is evident in terms
+of the economy's performance, job creation, and Federal
+programs such as Medicare.
+ Let me first mention the HI Trust Fund for part A. Cash
+flow for the HI Trust Fund is projected to turn negative this
+year, compared to 2013 in last year's report. Let me mention at
+the outset here that the change in HI's financial condition was
+not caused in any way by the creation of the Medicare
+prescription drug program which is separately financed,
+although as the report points out other aspects of that
+legislation did increase costs under part A, the parts dealing
+with rural providers and managed care and so on. Taking
+interest into account, the total Trust Fund is expected to
+exceed expenditures through 2009 and turn negative in 2010.
+While the decline in cash flow is substantial and a fairly
+dramatic change from the last few reports, we saw similar
+negative cash flows for much of the nineties. In another major
+finding from the report, the HI Fund is projected to become
+insolvent in 2019. That would be 7-years earlier than projected
+in last year's report. Again, I hasten to add that even without
+the recent legislation, important and good legislation in our
+view, the fund would be insolvent in 2021. So, the legislation
+accelerated by 2 of the 9 years to the insolvency point.
+ It is also important, as the Chairman said in his opening
+comments, to realize here that the forecasts we are dealing
+with are based on assumptions whose validity cannot be known
+with any high degree of certainty. Although uncertainty in
+these numbers is inescapable, it is also inescapable that we
+must make public policy judgments given the importance of these
+programs to current and future beneficiaries. Rising health
+care costs are placing an enormous burden on the Medicare
+program which is already under stress from the demographics I
+have mentioned. In our view, controlling health care costs is
+the real key to the long-term fiscal sustainability of Medicare
+and since Medicare bulks so large in the Federal budget
+deficit, it is also key to controlling the outlook for the
+Federal budget. The President has shown real leadership in
+seeking to reduce health care costs without diminishing quality
+or access to care for our senior citizens through many
+initiatives he has put forth which you are aware of. We should
+not forget as well the important reforms in last year's
+legislation which offers so much promise on this score of
+controlling health care costs as well. These are real reforms
+that will help contain health care cost and help to contain
+their growth relative to gross domestic product and help
+alleviate the pressure on the Medicare system. Those who depend
+on Social Security and Medicare urgently need the best efforts
+of all of us in public life, and those in private life as well,
+to address these long-term funding issues as laid out in the
+Trustees' reports. These programs, I am sure you would agree,
+must be seen as a shared responsibility not a political or
+partisan matter. Mr. Chairman, thank you very much for the
+opportunity to appear before you and I look forward to your
+questions.
+ [The prepared statement of Secretary Snow follows:]
+ Statement of The Honorable John W. Snow, Secretary,
+ U.S. Department of the Treasury
+ Chairman Thomas, Ranking Member Rangel, and distinguished members
+of the Committee, thank you for the opportunity to testify today on the
+2004 Social Security and Medicare Trustees' Reports. The Social
+Security and Medicare Board of Trustees met yesterday to complete the
+annual financial review of the trust funds and sent the Trustees'
+Reports to Congress.
+ Let me start first with the 2004 Social Security Trustees' Report.
+This year's report is little changed from last year's report. It shows
+that the Social Security program is seriously under funded and
+financially unsustainable in the long run. The unfunded obligation is
+$3.7 trillion on a present value basis over the next 75 years. Cash
+flows for the trust fund will turn negative in 14 years, in 2018, while
+the trust fund will be exhausted in 38 years, 2042. Neither date has
+changed since last year's report.
+ The fundamental math of Social Security is inescapable as the large
+baby boom generation reaches retirement age and the number of workers
+paying into the system declines significantly relative to the number of
+retirees. While we have some time to fix the problem, inaction is not a
+responsible option. The President has called for bipartisan efforts to
+create a permanently sustainable system and he has been right to do
+so--and the sooner action is taken, the better for all concerned. Each
+year that passes without needed changes to the program makes the
+ultimate resolution more difficult.
+ To provide some perspective on what this means--today, the cost of
+paying Social Security benefits absorbs 4.3 percent of the nation's
+GDP. According to the Social Security actuaries, the cost will rise to
+6.6 percent by 2078. This would mean that the share of the economy
+required to fund Social Security benefits would be more than 50 percent
+higher than it is today--and even that would continue to increase, the
+further out one looks.
+ Personal accounts are an important part of the solution to
+strengthen Social Security as they will enable younger workers to
+accumulate a nest egg towards their retirement needs. Now is the time
+to take the steps to preserve and protect Social Security so that
+commitments to our seniors are kept and the needs of our children and
+grandchildren are met.
+ Let me now offer a few words on the 2004 Medicare Trustees' Report.
+It reveals even greater challenges than those confronting Social
+Security. While Medicare faces the same shifting demographics as Social
+Security, it is additionally burdened by sharp increases in underlying
+health care costs. From 1998 to 2002, health care costs rose 35
+percent. Health care spending is growing as a percentage of GDP; its
+share was nearly 15 percent of our nation's GDP in 2002 and is surely
+even larger now. Employer-sponsored health insurance premiums rose 14
+percent last year alone. The negative impact of rising costs is evident
+in terms of the economy, jobs, and federal programs such as Medicare.
+ Cash flow for the Hospital Insurance (HI) Trust Fund is projected
+to turn negative this year, compared to 2013 in last year's report. At
+the outset, it is important to note that the change in HI's financial
+condition was not caused in any way by the creation of the Medicare
+prescription drug program, which is separately financed. Taking
+interest into account, total trust fund income is expected to exceed
+expenditures through 2009. While this decline in cash flow is a
+substantial change from the last few reports, we saw similar negative
+cash flows for much of the 1990s. In another major finding from the
+report, the Hospital Insurance Trust Fund is projected to become
+insolvent in 2019, seven years earlier than projected in last year's
+report. For the first time in five years the HI Trust Fund fails the
+short run test for financial adequacy as the ratio of assets to annual
+outlays falls below 100 within the next ten years. Again, the principal
+culprit here is the rising cost of health care, and we need to turn our
+attention to this underlying fundamental issue.
+ The Supplementary Medical Insurance (SMI) Trust Fund does not face
+insolvency per se, because its financing is derived in large part
+directly from federal general revenues. However, it does pose serious
+issues for the U.S. economy and federal deficit. SMI expenditures,
+including those associated with the new prescription drug program, are
+projected to increase rapidly, resulting in increasing pressures on
+future federal budgets. General revenue financing for SMI is expected
+to increase from 0.9 percent of GDP today to 6.2 percent in 2078.
+ It is important to note that the forecasts we are dealing with in
+Medicare are based on assumptions whose validity cannot be known with
+any high degree of certainty. Although uncertainty in these numbers is
+inescapable, we must make public policy judgments given the importance
+of these programs to current and future beneficiaries and the fiscal
+condition of the country.
+ Rapidly rising health care costs place a great burden on the
+Medicare program, which is already under stress from the underlying
+shift in the age distribution of our nation's population. Controlling
+health care costs is the real key to the long run fiscal sustainability
+of both Medicare and the federal budget. Indeed, according to this
+year's Trustees' Report, reducing the projected growth in per
+beneficiary health care costs to one percentage point lower than the
+intermediate assumption would reduce the 75-year actuarial imbalance
+for the HI program from negative 3.12 percent of taxable payroll to
+negative 1.05 percent. Similarly, lower growth in health care costs
+would accrue to the federal budget through reductions in projected
+costs in the SMI program, Medicaid, and other government health care
+programs. According to the CBO, federal spending on Medicare and
+Medicaid will rise to 11.5 percent of GDP in 2050, up from 3.9 percent
+in 2003. If, instead of increasing at the rate of growth of per capita
+GDP plus 1 percent as assumed, per beneficiary spending were to grow at
+the rate of per capita GDP itself over the same time period, federal
+spending on Medicare and Medicaid will rise to only 6.4 percent of GDP
+in 2050, thus freeing roughly 5 percent of GDP for other activities.
+Achieving a 1 percentage point reduction in the rate of increase in
+health care costs should be doable, but it will require the very best
+efforts of all of us concerned with the issue. Most importantly, I
+believe this slowdown in cost increases could be accomplished without
+sacrificing the quality and access to health care that our senior
+citizens deserve and have come to expect.
+ Clearly steps must be taken to address growing costs while
+maintaining high quality care for our senior citizens and, indeed, all
+citizens. The President has shown real leadership in seeking to reduce
+health care costs without diminishing quality or access to care. This
+Administration is committed to helping Americans obtain improved and
+more affordable health care coverage. Medical liability reform is
+critical to improve health care quality and reduce costs. We need to
+help stop harmful costly medical errors and provide liability
+protection for doctors and nurses who report mistakes in good faith. We
+need to employ more fully the efficiencies of information technology in
+the health care sector, such as physician order entry and electronic
+medical records.
+ Additionally, health savings accounts will help millions of
+Americans with medical expenses and encourage saving while putting
+individuals in charge of their own health care choices. The President
+has proposed refundable tax credits to help low-income workers purchase
+health insurance coverage, and proposed allowing small businesses to
+band together through association health plans, helping America's
+working families to have greater access to affordable health insurance.
+We need to give consumers better information to make informed decisions
+when choosing health care providers. The private sector Leapfrog Group
+is a leader in this area, as is CMS, by encouraging health care
+providers to report data on quality, making it widely available to the
+public. We urge Congress to act on all these important measures.
+ And let's not forget, reforms in last year's legislation include
+provisions to promote competition and choice, encourage savings for
+medical expenses, bring generic drugs to market sooner, improve
+preventive care coverage, lower the costs of chronic illnesses through
+disease management programs, and reduce costs and medical errors
+through e-prescription services. Reductions in fraud and abuse are
+expected to save $35 billion. These are real reforms that will help
+contain health care costs, control their growth relative to GDP, and
+alleviate some of the pressure on the Medicare system.
+ Moreover, with passage of the Medicare legislation last year, for
+the first time all seniors will be guaranteed access to affordable
+prescription drug coverage under Medicare. Beginning in June of 2004,
+beneficiaries will have access to Medicare-approved prescription drug
+discount cards, which will save them 10 to 25 percent off the retail
+price of most prescription drugs. Low-income beneficiaries will also
+receive $600 per year to help them purchase their medication. And all
+seniors will have more choices and better benefits under a strengthened
+and improved Medicare program.
+ The weighty concerns raised by the Trustees' Reports demand the
+attention of America's policymakers and the public. Those who depend on
+Social Security and Medicare urgently need the best efforts of those of
+us in public life and in the private sector to address the long-term
+funding issues. These programs should be seen as a shared
+responsibility, not a political or partisan opportunity.
+ This Administration will continue its open and honest discussion of
+the issues facing Social Security and Medicare and remains dedicated to
+working with Members of Congress to take the steps needed to secure the
+long-term strength of these vital programs. Thank you for having me
+here today, I look forward to your questions.
+
+
+ Chairman THOMAS. Thank you very much. To make sure that
+those Members who do wish to question you, Mr. Secretary, I
+will be brief. My understanding from the gentleman from New
+York is that he will suspend any questions he might ask the
+Secretary for the second panel. I find it interesting to
+compare the question of solvency, or the other side of the
+coin, insolvency, in the 2004 report with earlier years when we
+were grappling with the question of, for example, Medicare
+insolvency. In 1994, the year prior to the Republicans becoming
+the majority in the House, there was a 7-year solvency period,
+projected to be insolvent in 2002. The 2004 report indicates,
+as you said, 2019. That is a 15-year insolvency point. So,
+almost certainly more than double the years of previous
+periods, to just select one particular period in time. Chairman
+Greenspan came before this Committee several years ago, shortly
+after we had a Social Security Commission that looked at
+options to make sure that we could improve the solvency of the
+Social Security Trust Fund. Clearly, as I recall, even
+President Clinton talked about increasing the return, the rate
+of return on the money available as one of the key features.
+ The Chairman indicated that he was more than willing to try
+to tackle the problem of Social Security because it was akin to
+an arithmetical problem. When you turn to Medicare, as no
+Commission really has except the one that I was honored to
+cochair with the gentleman from Louisiana, Mr. Breaux, you are
+dealing with geometric progressions and frankly nonlinear in a
+multiple of areas, not just age and money. So, it is without a
+doubt that as people try to estimate changes in the program on
+a prospective basis there will be differing assumptions. We are
+going to pursue that with the second panel. As the Secretary of
+the Treasury, is it any wonder to you that trust funds tied to
+wages and salaries fluctuate as the economy fluctuates and, as
+we all know, since 9/11 the economy has stumbled for very basic
+and understandable reasons, and that it would not then reflect
+itself in the revenue coming into these trust funds?
+ Secretary SNOW. Mr. Chairman, as your question suggests,
+that is perfectly understandable. The returns, the income, is
+tied to the economy, to wages and in a period of recession and
+weak economic performance as we had in 2001 and 2002, it is
+perfectly understandable. In fact, it is what you would expect.
+ Chairman THOMAS. I believe, as we get to the actuaries, and
+we begin looking at it fully up to 2 full years were lost off
+of the solvency table by virtue of the economic performance for
+part A Medicare. Does the gentleman from Illinois wish to
+inquire?
+ Mr. RANGEL. Mr. Chairman, while I have said that I would
+pass my questioning, I did not mean that the Democratic side
+would not be entitled to question after you had finished yours.
+ Chairman THOMAS. They certainly are. Does the gentleman
+from California wish to question? The other gentleman from
+California?
+ Mr. MATSUI. Thank you very much, Mr. Chairman and thank
+you, Mr. Ranking Member, for allowing me to go next. Thank you,
+Secretary Snow, for being here with us. I just would like to
+make
+
+one observation about Medicare, not in the form of a question.
+The acceleration of the unfunded part of Medicare will
+accelerate by some 7 years, or the cash flow problem. What you
+failed to mention is that 2 of the years is because of the
+legislation that was passed last December, mainly because we
+are shifting people away from the traditional Medicare system
+into health maintenance organizations (HMOs) by subsidizing
+HMOs. Second, obviously, by the rural health issue. So, about
+30 percent of the deterioration is due to that legislation. I
+really want to focus on, however, Social Security because you
+spent your very early part of your comments regarding it.
+Assume for a minute that I favor privatizing, as the President
+does, part of the Social Security system. Assuming for a minute
+that I want to make, as he does, sure that current recipients
+and immediately future recipients will undoubtedly maintain
+their full level of benefits. There is going to be, as the
+three plans set forth in the President's Commission
+recommendation, an unfunded liability. That is, it will either
+have to be made up in spending cuts or tax increases or
+borrowing perhaps.
+ For example, plan one has a $1.5-trillion deficit in the
+first 10 years. Plan two, $1.8 trillion in the first 10 years.
+Plan three, $1.4 trillion in the first 10 years. Mr. Shaw's
+legislation, and I would obviously prefer to have him comment
+on it, but I think it is important just to talk about it
+because it is offered by a Chair of our Subcommittee. In the
+first 10 years, Mr. Shaw's plan will have an unfunded liability
+of $1.4 trillion. The borrowing peak will be in 2048, 44 years
+from now, when $7.6 trillion will be, either in the form of
+deficits or tax increases or spending cuts in Social Security.
+Which one do you think that I should support? If not any of
+those, then what plan do you propose to come up with in order
+to make sure we do not increase the deficits, we do not
+increase the taxes and we do not cut benefits as the President,
+in fact, has promised to do?
+ Secretary SNOW. Congressman, of course, the Administration
+has not picked one of those three or any other option at this
+point. In appointing the Commission, I think the President
+advanced the subject enormously by calling public attention to
+the underfunding and the need to find----
+ Mr. MATSUI. We all knew about it before he talked about it,
+so do not assume that we get it from him. We knew about this
+because we have seen actuarial reports over the last 20 years.
+ Secretary SNOW. What I am saying is, he helped engender a
+broad national dialog on this vitally important subject. The
+issue you are raising of transition costs is really the
+recognition of the contingent liability. It is there. It is
+there, and since it is there I would argue it is better to make
+it explicit than implicit. It is better to make it transparent
+rather than to hide it.
+ Mr. MATSUI. If I may just interrupt you, I do not think you
+answered my question but that is all right. It is not about a
+contingent liability, it is diverting money from the current
+payroll tax to private accounts. So, how are you going to make
+that up in the next 10 to 75 years, which you are going to do
+by talking about this and by advancing this if it ever became
+law, you are going to deteriorate the Social Security system.
+In fact, you are going to advance the cash flow problem. you
+are going to actually make the problem that you and I are
+really concerned about much worse.
+ Secretary SNOW. What the Commission's plans do, and I think
+Commission plan two is laid out in some detail in the report of
+the President's Council of Economic Advisers. What it does, of
+course, is to provide a transition mechanism to fund the loss
+of revenues to the retirement system. That takes----
+ Mr. MATSUI. Reduce benefits.
+ Secretary SNOW. That is right, for some period of time.
+Then longer-term, the deficit and the budget are better.
+ Mr. MATSUI. For some period of time, Mr. Secretary, means
+that those that are currently retired will have a reduction in
+benefits.
+ Secretary SNOW. They will not. No. The President
+stipulated, in appointing the Commission, that there would not
+be for those who are retired or near retirement, any reduction
+in benefits.
+ Mr. MATSUI. That is the President's position.
+ Chairman THOMAS. The gentleman's time has expired.
+ Mr. MATSUI. Thank you, Mr. Chairman.
+ Chairman THOMAS. The gentleman from Florida, the Chairman
+of the Subcommittee on Social Security, Mr. Shaw, wish to
+inquire?
+ Mr. SHAW. Yes, sir. Thank you, Mr. Chairman and I
+appreciate the gentleman from Illinois letting me go out of
+turn here in order to ask a couple of questions and also to
+respond to the Chairman of the Democratic Congressional
+Campaign Committee who just characterized my plan as causing a
+huge deficit. What the gentleman from California fails to point
+out, is that the funds that are put in the individual accounts
+are an investment, an investment that is going to stand for
+future payments to future beneficiaries of the Social Security
+Trust Fund. Also, my plan does not take a dime out of the
+Social Security Trust Fund, nor does it divert any of the
+payroll taxes. I might say that under Mr. Clinton, President
+Clinton, my plan was scored in the long run of over 75 years,
+as not only saving Social Security for all time, but it also
+was scored as creating about a $5-trillion surplus instead of
+over a $26-trillion deficit that we are looking at now if we do
+nothing. So, I think to characterize or to continue to play
+politics with Social Security is very bad strategy to be used,
+particularly at this time.
+ I might also say that I think that the direction this
+Committee should be looking at, the warning signs that are
+being thrown up, whether they are correct or incorrect they are
+still warning signs, that we have a huge problem here. We need
+to go and start talking about it. The cash flow problem with
+Social Security is a huge problem and it is one that we are
+facing beginning in 2018.
+ Mr. Secretary, I would like to ask you, the chart that is
+in the report shows Social Security clash annual flow deficits
+growing from $16 billion in 2010 to $787 billion in 2078. That
+is just in 1 year. How can there be a cash flow deficit in
+Social Security when the Trust Fund balance in 2018, as
+represented by treasury bills, is $3.7 trillion in today's
+dollars, the same for 2030 when the cash flow deficit is $256
+billion, but the Trust Fund balance is $3.2 trillion? This is a
+chart I am referring to, that was in the report. I beg your
+pardon. I am asking that it be passed out.
+ [The information follows:]
+ [GRAPHIC] [TIFF OMITTED] 23797A.001
+
+
+ Secretary SNOW. Obviously, what is happening here is we
+have the baby boom starting in 2010. We have people coming out
+of the denominator of the equation and going into the
+numerator. The fundamental math there is expenditures rise and
+payments do not rise at the same rate. They rise at a much
+lower rate. The consequence is that wide gap that produces the
+unsustainability of the system that you are trying to address
+with your legislation.
+ Mr. SHAW. Yes, sir. I think it is very important to realize
+that this is the plan of doing nothing. I am sorry but I think,
+in looking after my children and my grandchildren, I do not
+want them facing a $20-some trillion deficit. That is a
+negative cash flow and somebody is going to have to come up
+with the dollars beginning in 2018. Now that is a moving
+target. To sit back and say well, we are not going to run out
+of Treasury bills, all right fine. You have to get the cash to
+pay the Treasury bills. This Congress and a future Congress is
+going to have to start coming up with it. If we start planning
+now, and start investing money and forward funding Social
+Security, we can solve this problem without cutting benefits
+and without running in the red in the long run. We have got to
+plan ahead. Mr. Secretary, you can comment in the balance of my
+time.
+ Secretary SNOW. I would only comment to say that there is
+not a lot of uncertainty about these numbers. We know the names
+of the people who are in that cohort of retirees over the
+period 2010 to 2030, and if they retire as we expect them to do
+then we are going to produce these numbers. There is nobody
+coming in behind them to be the workers to fund their
+retirement. That ratio, which is the all important ratio of
+people paying in and people drawing down, worsens and worsens
+and worsens over that long period of time. We have people
+living longer. That combination of the baby boomers retirement
+and people living longer produces this set of numbers about
+which there cannot be much argument. This is basic math.
+ Mr. SHAW. Thank you, Mr. Chairman.
+ Chairman THOMAS. The gentleman's time has expired. The
+Chair understands the gentleman from Maryland, Mr. Cardin,
+wishes to inquire?
+ Mr. CARDIN. That is correct, Mr. Chairman. Thank you very
+much. Secretary Snow, thank you very much for being with us.
+You have many responsibilities as Secretary of the Treasury.
+One of those, of course, is as Trustee of the Medicare Trust
+Funds. So, I am just interested in finding out the information
+that you knew as regards to the information on the impact that
+the Medicare bill that we recently passed and the President
+signed into law had an effect on the solvency of the Medicare
+Trust Fund. As that bill was working its way through Congress,
+it became clear to many of us through the financial information
+or the scoring we were receiving that the impact on solvency
+would be minimal since the $400 billion cost was primarily in
+the prescription drug provisions, because the other provisions
+had offsets. We now find, through the information that has been
+made available to us, that the bill will affect the solvency of
+the Medicare Trust Fund by 2 years, by the action we took in
+the last bill.
+ One of the major differences in estimates is the number of
+Medicare beneficiaries expected to participate in private
+health insurance plans. That number is dramatically different
+than what we were operating with in Congress. We originally
+estimated that the current 9 percent that are in private
+insurance plans would go up to around 12 or 13 percent. We now
+find that the U.S. Department of Health and Human Services
+(HHS) actuaries are projecting that it could be as high as 32
+percent, a significant difference. We also now know that for
+every person who enrolls in a private health care plan, it will
+cost the Medicare Trust Fund additional funds, because we are
+paying more than if that person would have stayed in
+traditional Medicare. My question to you is, were you aware of
+those numbers before Congress acted on it, that is the
+participation rates and cost to the Medicare Trust Fund, as
+Trustee of the Medicare system? If you were aware of it, were
+you aware that that information was not made available to
+Congress?
+ Secretary SNOW. Congressman, I was not aware of the
+detailed information that you laid out there in your question
+to me. I did not become aware of the differing estimates in the
+CBO, for whom I have a very high regard, and the actuaries at
+CMS, in whom I also have a high regard. I did not become aware
+of that until sometime in January, as we began to put the
+President's budget to bed.
+ Mr. CARDIN. Mr. Secretary, I respect your answer to that,
+and I find that just as troubling to you as it is to us, that
+information that is important for us to make judgments was not
+made available to us. You have responsibilities as a Trustee to
+make recommendations to the Administration and to Congress, as
+to the impact that legislation could have on Medicare's
+insolvency. This is a significant difference, a significant
+amount of money that, was involved here. I also believe that at
+times the department was using numbers generated by the actuary
+to show participation, but then used CBO numbers, which were
+lower on cost, in order to make the bill appear to be less
+expensive than it actually was. It would seem to me that
+selecting the more generous numbers from the actuary and from
+CBO, but not being consistent in using the same information for
+all of your analysis, would be something that none of us would
+want to condone. I hope you would agree with that.
+ Secretary SNOW. The fine points of the differences between
+these two estimates, I must say, are beyond my ken. I
+understand that small changes though, as you know, in those
+assumptions--for instance, CBO's assumption on participation
+rates being a few percentage points lower than the
+Administration's, than the Office of Management and Budget's
+(OMB's) and the actuary's estimate of participation rates,
+produced a very substantial part of that disparity.
+ Mr. CARDIN. It was not the Administration, and it was
+substantial, 12 percent versus 32 percent, which is a huge
+difference. It was not the Administration. The Administration,
+I believe, was with the actuaries. It was the CBO's numbers
+that were substantially different than the actuarial
+assumption.
+ Secretary SNOW. I am saying that. We used those numbers in
+the budget. We used the actuary's numbers in doing the budget
+and that is when I became aware of the difference.
+ Mr. CARDIN. Mr. Chairman, I know many of us in Congress
+believe that the information would have been important for us
+to have prior to action. It is important that this information
+get to the right agencies.
+ Chairman THOMAS. I thank the gentleman. Mr. Secretary, we
+appreciate the time was slightly over, but to recognize the
+second Republican to balance out the questioning of the
+Secretary, the gentleman from Illinois, Mr. Crane, is
+recognized.
+ Mr. CRANE. Thank you, Mr. Chairman. Mr. Secretary, some
+have claimed that Social Security is not going bankrupt because
+in 2042 payroll tax receipts will be able to finance about
+three-fourths of the benefits due. Many of those making such
+claims have also attacked the idea that individuals should be
+able to invest even some of their payroll taxes in personal
+accounts. Individuals retiring in 2042 are already paying into
+Social Security. I am against cutting benefits that have been
+promised to people paying into the system. Do you see any way
+to preserve current benefits without allowing individuals to
+own retirement accounts that does not lead to a tax increase?
+ Secretary SNOW. Congressman Crane, you are right that there
+is an automatic reduction in the level of payments at the point
+at which the Trust Fund can no longer pay the full level of
+benefits, and that is 2042. We cannot let that happen. That is
+why moving to these personal accounts now makes so much sense,
+to find a way to augment the financial condition of the Social
+Security plan and take some of the burden off of it. That is
+precisely what would happen. There is no legal obligation to
+pay at the current level. The obligation is to pay the funds
+that are available as benefits and that results in that 74
+percent declining over time, level of payments. We cannot let
+that happen.
+ Mr. CRANE. If Congress does not make changes to Social
+Security, specifically no individual retirement accounts, no
+benefit cuts, no tax increases, and no increase in retirement
+age, what do you think would be the impact on the Treasury?
+ Secretary SNOW. Well, if no changes are made and we hit the
+year 2042 and the benefit levels are allowed to fall in
+accordance with the income levels then it will have a very
+serious impact on the recipients who I think will feel cheated.
+They have made their payments in and they are now not able to--
+the retirees who made their payments in would not then be able
+to draw down the expected amount of money. If we fund it at
+current levels, we produce that horrific deficit number that
+you saw reflected in Congressman Shaw's chart. We are the
+victim here of plain and simple mathematics, inescapable math.
+We cannot dodge it. We cannot hide from it. The numbers that
+were shown are the real numbers in that report. The only way to
+deal with this is to find the means to supplement the income
+that Social Security has, that people have who would otherwise
+draw on Social Security. That is where this idea of the
+personal accounts makes so much sense.
+ Mr. CRANE. Thank you, Mr. Secretary. We appreciate your
+attendance here today, too.
+ Secretary SNOW. Thank you.
+ Chairman THOMAS. The Committee thanks you and understands
+the pressing engagement that you must go to and looks forward
+to your next testimony before the Committee.
+ Secretary SNOW. Thank you, very much.
+ Chairman THOMAS. The Committee would now ask Douglas Holtz-
+Eakin, the Director of the CBO; Rick Foster, Chief Actuary,
+CMS; and Stephen C. Goss, Chief Actuary, SSA, if they would
+please come forward. The Chair welcomes all of you to the
+Committee and each of you has written testimony which will be
+made part of the record. If you could address us briefly in
+your own words prior to Members asking questions, the Chair
+would ask you to do so. We will start with Dr. Holtz-Eakin and
+then move across the panel to Mr. Goss and Mr. Foster. Mr.
+Holtz-Eakin?
+
+ STATEMENT OF DOUGLAS HOLTZ-EAKIN, PH.D., DIRECTOR,
+ CONGRESSIONAL BUDGET OFFICE
+
+ Mr. HOLTZ-EAKIN. The CBO estimates that the Medicare
+Modernization Act will raise net outlays of the Federal
+Government by $395 billion over the period of 2004 to 2013. My
+written statement, which we submit for the record, details the
+underpinnings of the CBO estimate. It also accounts for the
+numerous small and technical factors that lead to a difference
+with the Administration's estimate for the same legislation.
+The CBO has been working with Congress on prescription drug
+legislation since 1999. Dozens of CBO staff with advanced
+training in health policy, health economics, finance and budget
+analysis have contributed to this effort. Included among them
+are those with prior or subsequent experience with the OMB, the
+Health Care Financing Administration and the Medicare Payment
+Advisory Commission. Their depth and reach have been enhanced
+through regular consultation with private sector actuaries,
+reinsurers, financial services experts, pharmacy benefit
+managers and many others. Our expertise has also been enhanced
+through continuous interactions with congressional staff, and
+we have benefited greatly from the generosity of our
+professional colleagues at CMS.
+ Over the past several years, CBO has deployed this
+accumulation of skills, data and modeling capability to the
+challenges of projecting the costs of Medicare in general and
+the prescription drug legislation in particular. The CBO has
+provided testimony to Congress--to this Committee on at least
+three occasions, and to other Committees on up to eight
+occasions. We have provided nearly 15 documents and letters to
+the Members including a 2002 study on issues in the design of a
+prescription drug benefit, and have provided many cost
+estimates. In 2002, CBO provided over 50 estimates of the cost
+of drug legislation. With the daunting pace of activity in the
+past year, the total number of proposals, amendments and formal
+cost estimates is innumerable but is safely in a range that may
+approach 10 times that number. This experience has yielded a
+great respect for our professional colleagues at CMS and a
+healthy appreciation of the fundamental uncertainties
+associated with cost estimates in this area. Nevertheless, it
+is my considered professional judgment that $395 billion was
+and remains the single best estimate of the cost of this
+legislation. Chairman Thomas, Congressman Rangel and Members of
+this Committee, I thank you for the opportunity to appear today
+and look forward to answering your questions.
+ [The prepared statement of Mr. Holtz-Eakin follows:]
+ Statement of Douglas Holtz-Eakin, Ph.D., Director,
+ Congressional Budget Office
+ Chairman Thomas, Congressman Rangel, and Members of the Committee,
+I am pleased to be here with you today. I understand that one purpose
+of this hearing is to discuss the Trustees' 2004 reports for Social
+Security and Medicare that were released yesterday and to assess the
+impact of the Medicare Prescription Drug, Improvement, and
+Modernization Act of 2003 (MMA) on Medicare's long-term financial
+condition. To help provide a basis for that assessment, I will focus my
+remarks on the Congressional Budget Office's (CBO's) estimate of the
+MMA's cost over the next 10 years and on the differences between that
+estimate and the Administration's estimate for that same period. The
+MMA was a very complex piece of legislation containing many provisions,
+and CBO's modeling of its costs was correspondingly complex. Rather
+than try to explain the scoring for all of its provisions, I will
+concentrate on the two sections of the act that account for nearly all
+of the net difference between those two estimates: the new prescription
+drug benefit and the revised payment system for managed care plans
+under Medicare.
+CBO's Cost Estimate
+ CBO has estimated that the MMA will increase mandatory outlays by
+$395 billion over the 2004-2013 period. Anytime a complex and
+substantially new program is created, predicting the outcome precisely
+is difficult, but CBO's estimate was the result of extensive analyses
+of the pharmaceutical market, the Medicare program, the costs of
+managed care plans, and the likely responses of potential enrollees. To
+date, CBO has not received any additional data or studies that would
+lead the agency to reconsider its conclusions. Therefore, CBO believes
+that its budgetary estimate is sound and has no reason to revise it.
+ Table 1 shows the major components of CBO's 10-year cost estimate.
+The provisions of the MMA that established a prescription drug benefit
+under Part D of Medicare were estimated to increase mandatory spending
+by $409 billion on net. Title II of the act, which altered the payment
+system for managed care plans under Part C of Medicare--and also
+changed the name of that program from Medicare+Choice to Medicare
+Advantage--was estimated to cost $14 billion through 2013. (The net
+costs of providing the new drug benefit to enrollees in Medicare's
+managed care plans were included in the $409 billion estimate for the
+Part D provisions.) All of the legislation's other provisions, which
+primarily involve the traditional Medicare fee-for-service (FFS)
+program, were estimated to reduce net outlays by $28 billion.
+
+ Table 1: Major Components of CBO's Cost Estimate for the Medicare
+ Prescription Drug, Improvement, and Modernization Act of 2003
+ (Billions of dollars)
+------------------------------------------------------------------------
+ Mandatory Spending, FY 2004-2013
+------------------------------------------------------------------------
+Prescription Drug Benefit Provisions 409
+------------------------------------------------------------------------
+Medicare Advantage Provisions 14
+------------------------------------------------------------------------
+All Other Provisions -28
+------------------------------------------------------------------------
+ Total 395
+------------------------------------------------------------------------
+Source: Congressional Budget Office.
+a. Includes mandatory spending for administration of Part D (in title X
+ of the MMA) and interactions with the Hatch-Waxman Act and importation
+ provisions in title XI; excludes the interaction of Part D with
+ Medicare spending for benefits under Parts A and B (which is included
+ in the estimate for ``All Other Provisions''). Those factors account
+ for the difference between the $409 billion estimate for the
+ prescription drug benefit provisions shown above and CBO's $410
+ billion estimate for title I of the MMA.
+
+ Although Table 1 shows the MMA's impact on mandatory spending, a
+complete estimate of the overall budgetary impact of the legislation
+must also consider its effect on revenues. CBO estimated that the
+various revenue effects of the MMA's provisions were largely
+offsetting. According to the Joint Committee on Taxation, the law would
+reduce revenues by about $7 billion over 10 years, primarily as a
+result of provisions to allow qualified taxpayers to establish health
+savings accounts. At the same time, CBO estimated that the Medicare
+drug benefit provisions would have the effect of increasing revenues by
+about $7 billion, as businesses would reduce expenditures on nontaxable
+health benefits and increase them on taxable forms of compensation. By
+contrast, the Administration estimated that the health savings account
+provisions would result in a revenue loss of about $17 billion over the
+2004-2013 period and to date has not estimated an indirect effect on
+revenues resulting from the Medicare drug benefit. While the overall
+assessment of the MMA's impact on federal deficits or surpluses must
+take into account all of its effects on spending and revenues, the
+focus today is on CBO's outlay estimates and how they differ from the
+Administration's estimates as developed by the actuaries at the Centers
+for Medicare and Medicaid Services (CMS). Accordingly, I will devote
+the remainder of my testimony to the main factors affecting estimated
+outlays for the new prescription drug benefit and for the revised
+payment system for managed care plans.
+Costs for the Part D Prescription Drug Benefit
+ CBO's $409 billion estimate for the net costs of providing the
+prescription drug benefit under the MMA can be separated into several
+components, as shown in Table 2. Under the law, CBO projected, stand-
+alone prescription drug plans and integrated health plans under
+Medicare would incur costs of $507 billion through 2013 to provide the
+basic statutory drug benefit. Those costs would be partially offset by
+$131 billion in premium payments made by or on behalf of enrollees.
+Separate payments to employer-sponsored and union plans providing
+qualified drug coverage to Medicare-eligible retirees would amount to
+an additional $71 billion. The law also subsidizes additional drug
+coverage for certain low-income enrollees, and CBO estimated that those
+subsidies would cost $192 billion over the 2004-2013 period (including
+about $1 billion to provide assistance with drug costs in conjunction
+with the drug discount card program that will operate from mid-2004
+through December 2005).
+
+Table 2: Components of CBO's Cost Estimate for the Medicare Prescription
+ Drug Benefit
+ (Billions of dollars)
+------------------------------------------------------------------------
+ Mandatory Spending, FY 2004-2013
+------------------------------------------------------------------------
+Payments to Medicare Drug Plans for 507
+ Basic Benefits
+------------------------------------------------------------------------
+Beneficiary Premium Payments -131
+------------------------------------------------------------------------
+Employer and Union Subsidies 71
+------------------------------------------------------------------------
+Low-Income Subsidies 192
+------------------------------------------------------------------------
+Federal Medicaid Spending -142
+------------------------------------------------------------------------
+Transfers from State Medicaid -88
+ Programs
+------------------------------------------------------------------------
+Effects on Other Federal Programs -2
+------------------------------------------------------------------------
+ Total 409
+------------------------------------------------------------------------
+Source: Congressional Budget Office.
+Note: Numbers may not add up to totals because of rounding.
+
+ CBO also estimated that the Part D prescription drug benefit
+provisions would reduce other federal outlays in a number of ways.
+Transferring responsibility for the prescription drug benefits of
+``dual eligibles'' from Medicaid to Medicare would save the federal
+government an estimated $152 billion in Medicaid spending through 2013.
+(Dual eligibles are Medicare beneficiaries who are also eligible for
+full Medicaid benefits.) Those savings would be partly offset by an
+additional $10 billion in federal outlays for Medicaid resulting from
+the new law's drug benefit provisions--largely owing to additional
+spending on benefits for Medicare beneficiaries who would enroll in
+Medicaid as a result of applying for the low-income drug subsidy
+program. Thus, net federal Medicaid savings were estimated at $142
+billion over 10 years. In addition, the MMA contains a provision that
+will recapture a portion of the corresponding savings for states on
+Medicaid drug expenditures, which CBO estimated would reduce federal
+costs by $88 billion. Finally, the Medicare drug benefit will on net
+reduce mandatory spending for the Federal Employees Health Benefits
+(FEHB) program and other federal programs that pay for prescription
+drugs by about $2 billion.
+ CBO's cost estimates for prescription drug benefit proposals were
+based on an analytic structure and a microsimulation model that
+projects how those proposals would affect a representative sample of
+Medicare beneficiaries. CBO has used that basic approach to estimate
+the costs of proposed Medicare prescription drug benefits since 1999,
+updating it each year to account for new data and refining it to
+address new provisions. The microsimulation model contains detailed
+information about beneficiaries' spending for prescription drugs, their
+supplemental insurance coverage (both public and private), their health
+status, and their income. The information on drug spending used by CBO
+is based on data from the 1999 and 2000 Medicare Current Beneficiary
+Survey, projected forward using CBO's March 2003 economic and technical
+assumptions--including projected growth rates for drug spending that
+reflected the most recent CMS estimates for national health
+expenditures.
+ Costs and Premiums for Medicare Drug Plans. Estimating the costs of
+providing the basic drug benefit under Medicare involved three basic
+steps: (1) estimating the number of beneficiaries who would enroll in a
+Medicare drug plan; (2) estimating the average costs of providing those
+enrollees with covered benefits (including the administrative costs of
+doing so); and (3) using the resulting estimate of gross costs to
+calculate the offsetting premium receipts that would result from the
+statute's subsidy formulas. Because of the myriad provisions in the law
+that could affect each of those steps--particularly the costs per
+enrollee--CBO had to develop a relatively sophisticated modeling
+capability. Even so, the primary drivers of federal costs remain the
+drug benefit's design and the premium subsidy (with that subsidy not
+only determining how gross costs are allocated between enrollees and
+the government but also affecting participation in such a voluntary
+program).
+ In large measure, CBO based its estimates of program enrollment for
+the drug benefit on the experience of Medicare Part B. Part B is a
+voluntary program that has a 75 percent premium subsidy and a
+substantial penalty for late enrollment; as a result, most but not all
+Medicare beneficiaries who are eligible for Part B enroll in it. Part
+D's provisions are quite similar--it is a voluntary program with a 74.5
+percent average premium subsidy and significant late-enrollment
+penalty--and the provisions strongly encourage beneficiaries to enroll
+when they are first eligible to do so, even if their drug spending is
+relatively low at the time. Nevertheless, CBO assumed that active
+workers with drug coverage and some federal retirees would not enroll
+in Part D, even if they were enrolled in Part B, because the value of
+any additional drug benefits they would receive would be less than the
+added premiums they would pay; those projected nonparticipants
+represent about 7 percent of all Medicare beneficiaries. CBO also
+assumed that the roughly 6 percent of beneficiaries who are enrolled in
+Medicare Part A but do not elect to enroll in Part B (some of whom are
+also active workers) would generally choose not to enroll in Part D. In
+sum, CBO estimated that 87 percent of all Medicare beneficiaries would
+participate in the drug benefit in some manner--with about 68 percent
+enrolling in a Medicare prescription drug plan and the remaining 19
+percent receiving drug coverage through a former employer that would be
+subsidized directly by Medicare.
+ To estimate costs per enrollee, CBO started with a projection of
+total outpatient drug spending by the Medicare population in the
+absence of a new Medicare benefit. That total was then adjusted by
+several discrete factors:
+
+ a ``price effect'' to reflect the likelihood that average
+drug prices will be slightly higher because beneficiaries who currently
+lack drug coverage will become insulated from those prices;
+ a ``use effect'' to capture changes in demand for drugs
+resulting from changes in beneficiaries' cost-sharing liabilities (so
+that their total drug use would increase somewhat if their own out-of-
+pocket costs fell);
+ an adjustment to reflect the degree to which Medicare
+drug plans will manage the costs of their enrollees (discussed further
+below);
+ and a slight decrease in spending due to the fact that
+prices negotiated by Medicare drug plans will be exempt from the
+Medicaid ``best price'' provision--an exemption that gives those plans
+more leeway to negotiate steeper price discounts from manufacturers
+because they will not have to pass on the same discount to Medicaid.
+
+ It is important to emphasize that, although CBO sought to model
+each of those factors separately, they have offsetting impacts and the
+net effect on drug spending or its components will reflect all of them
+simultaneously.
+ In estimating the degree of cost management that Medicare drug
+plans would achieve on average, CBO focused on three main
+considerations: the incentives that plans would have to control costs
+(based on the degree of financial risk they would face); the ``tools''
+that they could use to control spending (such as preferred drug lists
+and pharmacy networks); and the degree of competition they would face
+(as expressed through differences in beneficiary premiums and cost-
+sharing levels among drug plans). Plans bearing meaningful financial
+risk would lose money if their costs of providing benefits exceeded
+expectations and thus would have strong incentives to limit those costs
+as much as possible while still attracting enrollees--but CBO assumed
+that they would also have somewhat higher administrative costs as a
+result. A plan's ability to act on those incentives will depend on what
+mechanisms it can use to secure price discounts and to encourage
+beneficiaries to use less costly therapeutic alternatives, though
+trade-offs could arise between the steps they take to control costs and
+the ease with which enrollees can obtain the drugs of their choice. The
+extent to which beneficiaries save on their premium by joining a less
+expensive drug plan is also an important consideration: it provides an
+incentive for plans to keep their costs low over time to attract and
+retain enrollees, and it encourages beneficiaries to consider whether
+the extra premium of a more costly plan is worth paying.
+ To summarize the effects of incentives and tools on cost
+management, CBO estimated the ``gross drug savings'' that would be
+expected, on average, for a given proposal. Those gross drug savings
+represent the degree to which costs would be reduced compared with an
+unmanaged benefit (such as a traditional indemnity insurance plan), and
+they combine three types of savings from management: savings due to
+price discounts or rebates from manufacturers and pharmacies; savings
+from controlling overall drug use; and savings due to changing the mix
+of drugs used. For the MMA, CBO estimated that drug plans bearing the
+full level of financial risk as specified by the statute would achieve
+average gross savings of 20 percent initially, growing to 25 percent
+over the budget window. That path reflects the gradual widening of the
+statute's ``risk corridors'', which will expose plans to greater
+financial risk over time.\1\ For beneficiaries whose current drug
+spending already reflects some degree of cost management, however, that
+spending was adjusted only to capture the incremental savings that
+would be achieved. CBO also assumed that there was some probability
+that beneficiaries would be enrolled in reduced-risk or ``fallback''
+drug plans as specified by the law; in those cases, CBO estimated lower
+gross savings owing both to the reduced financial risk those plans
+would face and to the less competitive environment in which they would
+operate.
+---------------------------------------------------------------------------
+ \1\ Under the MMA's risk-corridor provisions, prescription drug
+plans whose costs turn out to be somewhat higher than expected will see
+an increasing share of those costs covered by additional federal
+payments, while plans with actual benefit costs that are below expected
+levels will essentially have to reimburse Medicare for a corresponding
+share of the savings.
+---------------------------------------------------------------------------
+ After applying those adjustments to determine total drug spending
+by enrollees, CBO estimated the gross costs of providing the drug
+benefit by applying the statute's benefit-design provisions and adding
+an estimate of the administrative costs that drug plans would incur.
+Rather than review all aspects of the benefit design, let me focus on
+two key features. First, with certain exceptions, the benefit's
+catastrophic threshold--above which about 95 percent of drug costs are
+covered--is determined by out-of-pocket costs actually incurred by
+enrollees. That feature, which is often referred to as the ``true out-
+of-pocket'' provision, has the effect of targeting federal assistance
+to those who lack additional drug coverage. By the same token, though,
+such coverage is implicitly penalized because the costs that it covers
+do not count toward reaching the catastrophic threshold.\2\ As a
+consequence, federal costs will depend in part on the extent and
+sources of any supplemental drug coverage that enrollees may have.
+---------------------------------------------------------------------------
+ \2\ In addition, Medigap policies that cover cost sharing for other
+Medicare benefits are prohibited from including supplemental drug
+coverage for Part D enrollees, so enrollees desiring such coverage
+would have to obtain it from another source (such as a former employer
+or their Medicare drug plan).
+---------------------------------------------------------------------------
+ A second key determinant of federal costs is that the standard
+benefit's deductible, initial coverage limit, and catastrophic
+threshold are indexed to the projected growth rate in per capita drug
+expenditures for the Medicare population. As a result, that benefit
+will, on average, cover about the same share of enrollees' drug costs
+each year. Table 3 shows CBO's projections for each of those benefit
+parameters through calendar year 2013 as well as the associated levels
+of beneficiaries' cost-sharing liabilities or total drug spending. As
+the table suggests, CBO estimates that per capita drug spending for
+Medicare beneficiaries will increase at an average annual rate of
+nearly 9 percent from 2006 to 2013.
+ Table 3 also shows CBO's estimate of the average monthly premium
+per beneficiary for each calendar year (which reflects not only covered
+benefits but also administrative costs, and thus grows somewhat more
+slowly than the benefit parameters). Although the MMA's subsidy
+formulas are complex--specifying both a fixed ``direct'' subsidy and a
+reinsurance subsidy that varies with spending above the catastrophic
+threshold--and beneficiaries' premiums will depend on what drug plan
+they join, CBO estimated average premiums by applying the 74.5 percent
+average subsidy to average gross costs.
+ Finally, by multiplying the average gross cost of providing the
+drug benefit and the average premium by the number of enrollees, CBO
+generated estimates of total calendar year obligations and receipts;
+converting those figures into fiscal year outlays yielded CBO's
+estimates of $507 billion in payments to drug plans, offset by $131
+billion in premium receipts, as shown in Table 2.\3\
+---------------------------------------------------------------------------
+ \3\ CBO's estimate of premium collections assumes that all
+enrollees have their Part D premiums withheld from their Social
+Security checks, but net federal outlays would be the same if
+beneficiaries chose to pay those premiums directly to their drug plans
+instead since federal payments to those plans and premium receipts
+would be reduced dollar for dollar.
+
+ Table 3: Standard Drug Benefit Design and Estimated Monthly Premiums
+--------------------------------------------------------------------------------------------------------------------------------------------------------
+ Calendar Year
+ -----------------------------------------------------------------------------------------------
+ 2006 2007 2008 2009 2010 2011 2012 2013
+--------------------------------------------------------------------------------------------------------------------------------------------------------
+Annual Deductible $250 $275 $300 $325 $350 $380 $410 $445
+--------------------------------------------------------------------------------------------------------------------------------------------------------
+Coinsurance Between Deductible and Initial Coverage 25 25 25 25 25 25 25 25
+ Limit (Percent)
+--------------------------------------------------------------------------------------------------------------------------------------------------------
+Initial Coverage Limit
+--------------------------------------------------------------------------------------------------------------------------------------------------------
+ Program spending at limit $1,500 $1,646 $1,808 $1,946 $2,115 $2,115 $2,460 $2,666
+--------------------------------------------------------------------------------------------------------------------------------------------------------
+ Beneficiary spending at limit $750 $824 $903 $974 $1,055 $1,055 $1,230 $1,334
+--------------------------------------------------------------------------------------------------------------------------------------------------------
+ Total spending at limit $2,250 $2,470 $2,710 $2,920 $3,170 $3,170 $3,690 $4,000
+--------------------------------------------------------------------------------------------------------------------------------------------------------
+Coinsurance Between Initial Coverage Limit and 100 100 100 100 100 100 100 100
+ Catastrophic Threshold (Percent)
+--------------------------------------------------------------------------------------------------------------------------------------------------------
+Catastrophic Threshold
+--------------------------------------------------------------------------------------------------------------------------------------------------------
+ Out-of-pocket spending at threshold $3,600 $3,950 $4,350 $4,650 $5,050 $5,450 $5,900 $6,400
+--------------------------------------------------------------------------------------------------------------------------------------------------------
+ Total spending at threshold a $5,100 $4,496 $6,158 $6,596 $7,165 $7,715 $8,360 $9,066
+--------------------------------------------------------------------------------------------------------------------------------------------------------
+Coinsurance above threshold (Percent)b 5 5 5 5 5 5 5 5
+--------------------------------------------------------------------------------------------------------------------------------------------------------
+Average Monthly Premium $35 $37 $41 $43 $47 $49 $54 $58
+--------------------------------------------------------------------------------------------------------------------------------------------------------
+Source: Congressional Budget Office.
+Note: Numbers may not add up to totals because of rounding. Benefit parameters shown here reflect the legislation's rounding rules.
+a Represents total spending at the catastrophic threshold for individuals without other drug coverage.
+b For 2006, cost sharing will be the greater of 5 percent coinsurance or a copayment of $2 (for generic and multiple-source drugs) or $5 (for single-
+ source drugs); after 2005, the $2 and $5 amounts are also indexed.
+
+ Participation and Costs for Employer and Union Subsidies.
+Currently, a substantial share of Medicare beneficiaries receive
+coverage for their drug costs through a former employer. As I have
+noted, though, the extent to which enrollees will reach the standard
+Medicare drug benefit's catastrophic threshold depends on whether they
+have such supplemental coverage for their Part D cost sharing. If
+retirees with such coverage enroll in a Medicare drug plan, therefore,
+their impact on federal costs will depend on the extent to which their
+former employer supplements that coverage. The MMA also establishes an
+additional option for employer and union plans that provide retirees
+with qualified drug coverage: employers that take that option will
+receive a tax-free payment directly from Medicare equal to 28 percent
+of total drug costs in a specified dollar range. To project what
+federal costs will be, CBO thus had to estimate not only the extent of
+the drug coverage that those retirees would have but also the mechanism
+through which that coverage would be subsidized.
+ Under the MMA, CBO estimated, average federal subsidy payments on
+behalf of retirees would generally be greatest if they enrolled in a
+Medicare drug plan and received the basic drug benefit with no
+supplemental drug coverage. Medicare's average subsidy payment would be
+reduced if those retirees were instead provided generous wraparound
+coverage by their former employer; in that case, retirees would not
+likely reach the basic benefit's catastrophic threshold for out-of-
+pocket costs. CBO also estimated that the direct payments from Medicare
+to employer and union plans would be about the same, on average, as the
+net subsidies that retirees would generate if they enrolled in a
+Medicare drug plan and retained a generous employer wraparound policy.
+In other words, those direct Medicare payments to employer and union
+plans would also be lower, on average, than the net subsidies for
+retirees who were enrolled in Medicare drug plans and had no additional
+drug coverage.
+ Although the favorable tax treatment accorded to those direct
+payments would make that approach somewhat more attractive, CBO
+nonetheless concluded that the difference in subsidies under the MMA
+gives employers a new financial incentive to drop prescription drug
+coverage for Medicare-eligible retirees. In its estimates, CBO did not
+assume that all employers would respond to that financial incentive but
+did project that 2.7 million Medicare-eligible retirees who would have
+had more generous employer drug coverage in 2006 in the absence of a
+Medicare drug benefit would not see their former employer supplement
+the basic Part D benefit. In those cases, it would make most sense for
+those retirees to enroll in a Medicare drug plan (with their former
+employer potentially choosing to pay their Part D premium as a means of
+compensation). At the same time, CBO assumed that nearly all of the
+remaining retirees with employer-sponsored drug coverage--about 8
+million individuals in 2006--would see their employer take the direct
+subsidy payment from Medicare, both because of its tax advantages and
+for reasons of administrative simplicity. CBO's estimate of $71 billion
+in direct subsidy payments reflects the share of drug spending by those
+retirees that is projected to fall in the covered range.
+ Participation and Costs for Low-Income Subsidies. The MMA
+established two levels of additional drug benefits for enrollees with
+sufficiently low income and countable assets: a more generous subsidy
+for beneficiaries who are either dually eligible for full Medicare and
+Medicaid benefits or have income below 135 percent of poverty and low
+assets; and a somewhat less generous subsidy for those with income
+below 150 percent of poverty and assets below a slightly higher limit.
+On the basis of an analysis of both administrative and survey data, CBO
+estimated that 35 percent of Medicare beneficiaries would be eligible
+for low-income subsidy benefits under the MMA; about 30 percent would
+be eligible for the more generous subsidy; and 5 percent would qualify
+for the less generous subsidy.
+ At the same time, CBO projected that a significant proportion of
+the eligible population would not apply for the low-income subsidies.
+CBO's estimate of the number of people who would sign up for low-income
+subsidies was based on several factors, including historical
+participation in the Qualified Medicare Beneficiary (QMB) and Specified
+Low-Income Medicare Beneficiary (SLMB) programs. The QMB and SLMB
+programs pay some or all of the premiums and cost sharing under Parts A
+and B of Medicare for beneficiaries with incomes below 120 percent of
+the poverty level and limited assets. In those programs, many
+beneficiaries who are eligible do not enroll. CBO assumed that
+participation in the low-income subsidy would be somewhat greater than
+that for other welfare-related programs, however, because MMA allows
+individuals to enroll at offices of the Social Security Administration.
+ CBO also estimated that the share of eligible beneficiaries
+receiving low-income subsidies would rise gradually after the
+implementation of the Medicare drug benefit. (Unlike the basic drug
+benefit, which penalizes individuals for late enrollment, the
+additional low-income subsidies are available at any time with no
+penalty to Part D enrollees.) Ultimately, CBO assumed that almost 70
+percent of those eligible would receive low-income subsidies under the
+MMA. About 75 percent of those eligible for the more generous subsidy
+would receive it, while about 35 percent of those eligible for the less
+generous subsidy would receive that benefit. Participation rates for
+the more generous subsidy would be much higher because they would
+include all dual eligibles, who would participate in the drug benefit
+by default.
+ In estimating the costs of the subsidy payments, CBO also assumed
+that participants would generally have higher average drug costs than
+beneficiaries who were eligible for those subsidies but chose not to
+enroll--that is, some adverse selection will occur. The total estimated
+cost of $192 billion for the low-income subsidies over 10 years also
+includes the costs of covering the enrollment fees and providing up to
+$600 of assistance for certain low-income beneficiaries in conjunction
+with the Medicare drug discount card. For that transitional assistance
+program, which is scheduled to operate from mid-2004 through December
+2005, CBO assumed relatively low take-up--specifically, that about 20
+percent of eligible Medicare beneficiaries or about 3 percent of all
+beneficiaries would enroll--because of its limited benefits and
+temporary nature. (As an accounting matter, the costs of the low-income
+subsidies also include the costs of paying all or a portion of
+enrollees' Part D premiums, rather than treating those subsidy payments
+as reductions in the premium receipts specified above.)
+ Offsetting Federal Savings. Although this testimony has focused on
+the various costs of providing the drug benefit under Medicare, the
+MMA's provisions will also generate offsetting federal savings, both
+implicitly and explicitly:
+
+ Transferring responsibility for the prescription drug
+benefits of dual eligibles from Medicaid to Medicare will save the
+federal government an estimated $152 billion in Medicaid spending
+through 2013. Those savings will be partly offset by an additional $10
+billion in federal Medicaid outlays stemming from the new law's drug
+benefit provisions--largely from additional spending on benefits for
+Medicare beneficiaries who will enroll in Medicaid or the QMB and SLMB
+programs as a result of applying for the low-income drug subsidy
+program.
+ Absent other provisions, those federal Medicaid savings
+would be accompanied by corresponding savings for the states on their
+Medicaid costs. The MMA's ``clawback'' provision, however, will
+recapture a substantial portion of the states' estimated drug savings,
+which CBO estimated would further reduce federal costs by $88 billion.
+ Finally, CBO estimated that some federal retirees will
+enroll in a Medicare drug plan; as a result, a portion of their
+prescription drug costs will be indirectly shifted to Medicare (and is
+included in the figures provided above). Based on that impact, as well
+as small effects on other federal programs that pay for prescription
+drugs, CBO estimated that the Medicare law's drug benefit provisions
+would reduce mandatory federal spending by about $2 billion.
+Costs for Medicare Advantage Plans
+ The MMA's provisions affecting private health plans under Medicare
+are also quite complicated, so again I will attempt to summarize the
+key features that affected their scoring. Currently, those health
+plans--which are primarily health maintenance organizations (HMOs)
+participating on a county-by-county basis--are required to provide Part
+A and Part B benefits and are paid on the basis of a statutory formula.
+To the extent that Medicare's payments exceed their costs of providing
+the required benefits, plans must presently give the difference to
+beneficiaries through some combination of additional benefits and
+premium rebates. To the extent that plans choose to provide premium
+rebates, the Medicare program retains 20 percent of the difference and
+the beneficiaries receive the other 80 percent, but if plans provide
+additional benefits, no such ``tax'' is imposed. As a result, very few
+plans offered premium rebates in 2003 (the first year that such rebates
+were permitted) or 2004. The past few years have also seen a number of
+plans withdraw from the program, reduce their service areas, or lose
+enrollees; in part that has occurred because plan costs have grown more
+rapidly than payment rates, making it more difficult for plans that
+remain in the program to attract enrollees by offering extra benefits.
+Prior to passage of the MMA, CBO projected that the share of Medicare
+beneficiaries in private plans would decline from the current level of
+13 percent to about 8 percent.
+ For 2004 and 2005, the MMA largely retained the existing payment
+system for private health plans but increased the payment rates (and
+changed the name of the program from Medicare+Choice to Medicare
+Advantage). Starting in 2006, however, a revised system will be
+instituted. The statutory payment rate will be relabeled as the
+``benchmark'' amount, and plans will submit bids that reflect the costs
+they expect to incur in providing Part A and Part B benefits. Medicare
+will pay plans their bids plus 75 percent of the amount by which the
+benchmark exceeds the bid. Plans must then return that 75 percent to
+beneficiaries, either as additional benefits or as a rebate on their
+Part B or Part D premium. Thus, the essential change from current
+requirements is that--instead of retaining part (20 percent) of the
+difference between a plan's cost and the statutory payment rate only if
+the plan returns that difference to beneficiaries as a premium rebate--
+Medicare will retain part (25 percent) of that difference regardless of
+whether the plan provides additional benefits or premium rebates.
+ The MMA also established new rules for preferred provider
+organizations (PPOs) that operate on a regionwide level; and to
+encourage participation by those plans, it set up a stabilization fund
+with an initial balance of $10 billion. Such plans could be offered
+starting in 2006, and they will generally be subject to the same rules
+as county-based plans (though the benchmarks for the regional PPOs will
+be a weighted average of the benchmarks for county-based plans in their
+region and the bids submitted by the PPOs). Starting in 2010, the MMA
+also authorized ``comparative cost adjustment'' demonstration projects
+in up to six areas of the country; under those demonstrations, the bids
+of private plans would affect not only the benchmark for the area but
+also the Part B premium for enrollees in the traditional fee-for-
+service program in that area.
+ In analyzing proposals regarding private health plans in Medicare,
+CBO focused on three factors: the costs those plans would incur, the
+payments Medicare would make, and the resulting incentives for
+beneficiaries to enroll--all of which were compared with the status
+quo. To estimate private plan costs for providing Medicare benefits,
+CBO examined data on the experience of existing HMOs in Medicare; data
+comparing payments to doctors and hospitals by private plans and by the
+Medicare FFS program; and data comparing commercial HMO and PPO costs.
+One important consideration was that, even though Medicare payment
+rates in many areas exceed the local average cost of providing benefits
+in the traditional FFS program, private plans that must negotiate fees
+with their providers are not offered in those areas. It thus seemed
+reasonable to infer that, if such plans were made available in those
+areas, their costs would probably equal or exceed both the Medicare
+payment rate and local FFS costs. CBO also projected that private plan
+costs would continue to grow somewhat more quickly than costs in the
+traditional FFS program for the next few years before converging to the
+same growth rate.
+ The upshot of CBO's analysis of the MMA's provisions was that
+regional PPOs would generally have difficulty providing Medicare
+benefits at costs that were much less than the benchmarks to which they
+would be compared. Correspondingly, even in the areas where those plans
+might become available, beneficiaries would not see substantial premium
+rebates or extra benefits and thus would have only limited incentives
+to leave FFS programs and enroll in PPOs. While there would also be
+some additional enrollment in county-based plans because of the
+immediate increase in payment rates (and the correspondingly higher
+benchmarks after 2005), CBO estimated only a small increase in the
+overall share of beneficiaries enrolled in private plans as a result of
+the MMA's provisions--and did not ultimately distinguish whether those
+additional enrollees would be in county-based plans or regional PPOs.
+CBO's final cost estimate reflected not only the additional costs of
+those new enrollees (relative to their costs in the FFS program), but
+also the net costs of the higher payment rates and the revised payment
+system for beneficiaries already enrolled in private plans.
+ The $14 billion cost estimate for the MMA's title II provisions
+included several other components as well. CBO projected modest savings
+($0.3 billion through 2013) from the comparative cost adjustment
+demonstration and offsetting modest costs for a set of other provisions
+(primarily affecting specific types of plans or payments). More
+significantly, CBO also assumed that the sums available in the PPO
+stabilization fund would be spent but did not explicitly model the
+effect of that spending on beneficiary enrollment (since in that case,
+estimated spending would not be a function of enrollment).\4\
+---------------------------------------------------------------------------
+ \4\ Recently, CBO increased its ultimate projection of private plan
+enrollment from 9 percent to about 13 percent of the Medicare
+population, but that change has only a negligible effect on federal
+costs because most of the additional enrollment is projected to occur
+in areas where the payment rates and benchmarks are based on the local
+average of costs in the FFS program; in those instances, having an
+enrollee switch from the FFS program into a private plan does not
+substantially change federal outlays.
+---------------------------------------------------------------------------
+Comparison with the Administration's Cost Estimate
+ Having laid out the basis for CBO's estimate, I can now discuss how
+it compares with the Administration's estimate. While the differences
+between those estimates are of obvious interest to Members, they should
+not overshadow similarities in some of the assumptions underlying our
+respective projections. Regarding the drug benefit, both CBO and the
+Administration have assumed that private drug plans will be generally
+available to provide benefits starting in 2006. We have both assumed
+broad enrollment by beneficiaries in the basic drug benefit and lower
+take-up rates for the low-income subsidies. We have both assumed that a
+substantial minority of retirees who now have drug coverage through a
+former employer will see that employer choose not to supplement the
+basic Medicare benefit. And we have both assumed that the drug benefit
+and clawback provision will generate significant offsetting federal
+savings via Medicaid. Nevertheless, because the aggregate level of
+projected drug spending by Medicare beneficiaries is so large--$1.6
+trillion between 2006 and 2013, according to CBO estimates--seemingly
+small differences in the magnitude of those assumptions can translate
+into large dollar discrepancies.
+ Table 4 summarizes CBO's understanding of the differences in
+outlays between the two cost estimates for the Medicare Modernization
+Act. As you know, the Administration estimated that the MMA would
+increase net federal outlays for mandatory spending by $534 billion for
+fiscal years 2004 to 2013, a difference of $139 billion from CBO's
+estimate for that period. The Administration's estimate is $101 billion
+higher than CBO's for the drug benefit provisions, and $32 billion
+higher for the Medicare Advantage provisions. While the estimates for
+other provisions may have differed somewhat, the net difference in
+mandatory outlays for those provisions (about $6 billion) is relatively
+small.
+ As shown in Table 4, the difference of $101 billion in estimates
+for the drug benefit has three major components. First, about one-third
+of that discrepancy ($32 billion) is due to differences in our
+estimates of total payments to Medicare drug plans for the basic drug
+benefit (net of beneficiary premiums) and payments to qualified
+employer and union plans. CBO estimates that those net payments will
+sum to $448 billion, while the Administration's estimate (excluding
+intragovernmental transfers) is $479 billion. (The difference between
+those numbers rounds to $32 billion.)
+ One source of that difference is that the Administration assumed
+higher overall participation in the drug benefit--specifically, that 94
+percent of all Medicare beneficiaries would enroll. The discrepancy
+with CBO's estimate of 87 percent participation would appear to account
+for the entire $32 billion difference in costs, but the
+Administration's participation figures include a number of federal
+retirees who would generate intragovernmental transfers that would not
+count as outlays (for example, from Medicare to FEHB). If those
+participants are subtracted to get a more comparable measure of
+enrollment, the difference between CBO's estimated participation rate
+and the Administration's is smaller--about 3 percent to 4 percent. The
+principal difference that remains appears to involve Medicare enrollees
+who decline Part B but are not active workers; CBO assumed they would
+generally not participate in Part D (for the reasons already outlined),
+but the Administration assumed that they would enroll.
+
+ Table 4: Differences Between Cost Estimates for the Medicare Modernization Act
+ (Billions of dollars)
+----------------------------------------------------------------------------------------------------------------
+ Mandatory Outlays, FY 2004-2013
+ ------------------------------------------------
+ Difference
+ Administration CBO Estimate (Administration
+ Estimate minus CBO)
+----------------------------------------------------------------------------------------------------------------
+Drug Benefit Provisions
+----------------------------------------------------------------------------------------------------------------
+ Net payments to drug plans and employer/union subsidies 479a 448 32
+----------------------------------------------------------------------------------------------------------------
+ Low-income subsidies 239 192 47
+----------------------------------------------------------------------------------------------------------------
+ Federal Medicaid spending -123 -142 18
+----------------------------------------------------------------------------------------------------------------
+ Other provisions and effects -85 -89 4
+----------------------------------------------------------------------------------------------------------------
+ Subtotal 510 409 101
+----------------------------------------------------------------------------------------------------------------
+Medicare Advantage Provisions 46 14 32
+----------------------------------------------------------------------------------------------------------------
+Net, All Other Provisions -23 -28 6
+----------------------------------------------------------------------------------------------------------------
+ Total 534 395 139
+----------------------------------------------------------------------------------------------------------------
+Source: Congressional Budget Office.
+Note: Numbers may not add up to totals because of rounding. The figures shown here exclude effects of federal
+ revenues, which in combination with the impact on outlays determine the total effect of the legislation on
+ federal budget deficits or surpluses.
+a Figures shown here for the Administration's estimate exclude $16 billion in intragovernmental transfers from
+ Medicare to federal employers, which do not count as outlays.
+
+ The Administration also estimated that per capita costs for the
+basic drug benefit would be about 4 percent higher than CBO's estimates
+throughout the period. As my testimony has indicated, costs per capita
+reflect a variety of provisions and assumptions about the effects of
+those provisions, so it is difficult to isolate any single factor as
+the basis for that difference--but CBO's understanding is that the
+Administration projected slightly lower benefit costs and slightly
+higher administrative costs. Overall, the differences in number of
+participants and costs per capita each account for about half of the
+$32 billion difference in the estimated costs of providing the basic
+drug benefit.
+ The second major difference regarding the drug benefit involves the
+estimates of participation and costs for the low-income subsidies,
+which account for nearly half ($47 billion) of the overall difference.
+Here too it appears that the Administration assumed higher take-up of
+the subsidies, as well as modestly higher costs per participant.
+Specifically, the Administration estimated that the number of enrollees
+in the subsidy program after 2009 would be 13 percent to 15 percent
+higher than CBO projected. The difference is even larger (in percentage
+terms) for the initial years because CBO assumed that participation
+would increase gradually to its ultimate level while the Administration
+used a roughly constant take-up rate. The Administration's estimate of
+per capita costs is also higher than CBO's, but that disparity shrinks
+from about 7 percent to 10 percent initially to about 4 percent by
+2013.
+ The third major difference regarding the drug benefit involves
+savings to Medicaid, which the Administration estimated would be $18
+billion lower than CBO's estimate. On net, that difference appears to
+reflect diverging estimates of what federal Medicaid spending on
+prescription drugs for Medicare beneficiaries would have been under
+prior law. In particular, CBO's baseline estimate included $18 billion
+in federal spending on waiver programs that provide limited drug
+coverage to low-income Medicare beneficiaries. At the same time, CBO
+assumed that federal spending on those waiver programs would end once
+the Part D benefit was implemented--both because Medicaid drug coverage
+for many of those enrollees would effectively be replaced by the
+Medicare benefit and low-income subsidies and because Medicaid would
+generally be precluded from using federal funds to supplement those
+drug benefits. Consequently, CBO's estimate of the federal savings
+resulting from the MMA was $18 billion higher than the Administration's
+estimate.
+ The other major component of the $139 billion difference in cost
+estimates--payments to Medicare Advantage plans under title II of the
+MMA--accounts for $32 billion of the overall difference. That is, CBO
+estimated that those provisions would increase federal outlays by $14
+billion over the period, while the Administration projected a $46
+billion increase. As CBO understands it, the basis for the discrepancy
+lies primarily in differing estimates of the per capita costs that
+regional PPO plans would incur in providing Medicare's Part A and Part
+B benefits. The Administration's estimates appear to be based at least
+in part on a recent PPO demonstration project, in which a number of PPO
+plans offered to provide those benefits at costs close to the average
+levels seen in the FFS program for their area. CBO also examined that
+demonstration project but concluded that those plans would not be
+indicative of PPO costs generally, in part because the plans most
+likely chose to participate in areas where their costs were most
+competitive (and not in areas where their relative costs would have
+been higher). The fact that those plans were offered almost exclusively
+in areas already served by Medicare+Choice plans that have provider
+networks also suggested to CBO that their experience might not apply in
+areas where such plans and provider networks were less prevalent.
+ It may seem counterintuitive that CBO estimated higher per capita
+costs for PPOs but lower overall federal costs for the legislation--and
+vice versa for the Administration--but that paradox reflects
+interactions between those costs, incentives for beneficiaries to
+enroll, and federal payments under the MMA. As we understand it, the
+Administration projected that PPO costs in many areas would be
+noticeably lower than the benchmarks against which those costs would be
+measured. Beneficiaries, who would receive three-fourths of the
+difference in the form of premium rebates and extra benefits, would
+thus have a strong incentive to enroll in those plans. As a result, the
+Administration estimated that total enrollment in private plans
+(regional and county-based plans combined) would grow quickly after
+2005 and reach 32 percent of the Medicare population by 2013.
+ At the same time, the Administration apparently estimated that
+those benchmarks would, on average, exceed the local costs of providing
+services in the traditional FFS program (which is the baseline against
+which costs for new enrollees must be measured). Correspondingly, the
+Administration projected that Medicare's total payments to the PPOs--
+including the rebates for beneficiaries who enrolled in them--would, on
+average, exceed the costs in the FFS program, so that federal spending
+would rise as beneficiaries switched from the FFS program into regional
+PPOs. By contrast, CBO's estimate that regional PPOs would have higher
+per capita costs led the agency to conclude that those plans are not
+likely to be widely available and would have costs close to the
+benchmarks in those areas where they were offered. Consequently, CBO
+projected that beneficiary enrollment would be limited and that--even
+though those enrollees would increase federal costs somewhat--the
+impact on federal spending would primarily be determined by use of the
+PPO stabilization fund.
+Conclusion
+ I hope that this explanation of the assumptions and methods used in
+generating CBO's cost estimate--and this analysis of the differences
+between that estimate and the Administration's--have been helpful to
+the Committee. Although CBO stands behind its cost estimate and has
+chosen to respectfully disagree with some of the assumptions the
+Administration used in developing its projections, CBO also
+acknowledges that it is difficult to estimate the outcome of such
+complex legislation precisely. Throughout this process, CBO has sought
+to be as open as it could about the approach used in estimating the
+costs of various proposals, both in previous testimony and in a variety
+of published studies, cost estimates, and letters. This hearing
+represents another step in that process, and I look forward to
+answering any questions the Committee Members may have.
+
+
+
+ Chairman THOMAS. Thank you, very much. Mr. Goss?
+
+ STATEMENT OF STEPHEN C. GOSS, CHIEF ACTUARY,
+ SOCIAL SECURITY ADMINISTRATION
+
+ Mr. GOSS. Mr. Chairman, Ranking Member, Members of the
+Committee, it is a pleasure to come and speak with you today
+about the 2004 Annual Report of the Social Security Board of
+Trustees. As you know, this report is required by law to
+provide to each of you an assessment of the actuarial status of
+the Social Security Trust Funds reflecting the provisions
+specified in current law. This report has been produced and
+delivered to the Congress now for 65 straight years, starting
+in 1940. The 2004 Social Security Trustees' Report reflects the
+combined judgment of the six trustees and their staffs in the
+development of a number of assumptions that underlay the
+projections. Moreover, the selection of these assumptions
+reflects the summary, advice, and research provided by experts
+from around the world in areas of economics, demography and
+actuarial science. I have certified on the last page of this
+report that I believe the assumptions to be reasonable and that
+the methods used for the projections are sound and generally
+accepted within the actuarial profession.
+ The fundamental projections of the U.S. population and
+economy produced by my office are used in the Social Security
+and Medicare Trustees' reports. These provide a solid base upon
+which projections of program specific costs and income are
+built. These projections provide a realistic picture of the
+likely future state of financing of the programs if no changes
+in law are enacted in the future. The projected financial
+status of the Social Security program is in good shape in the
+near term. Both the Old Age and Survivors Insurance and the
+Disability Insurance Trust Funds are expected to meet to the
+Trustees' short-range test of financial adequacy by a wide
+margin. In the longer term, however, the current financing of
+the Social Security program is expected to be inadequate to
+permit full payment of benefits scheduled in present law. Based
+on the Trustees' intermediate assumptions, the current annual
+excess of tax income over program costs is projected to start
+declining in 2009 and to reverse in 2018, at which time net
+redemptions of the Trust Fund assets will be needed to continue
+full payment of benefits. In 2042, these assets, or reserves,
+are expected to be exhausted and there will be only sufficient
+tax income to cover 73 percent of the scheduled benefits. All
+three of these dates and this percentage are unchanged from
+last year's report.
+ New data from a wide variety of sources, improvements in
+projection methods and a lowering of the ultimate Consumer
+Price Index (CPI) annual growth rate assumption from 3 percent
+to 2.8 percent have resulted in a slight reduction in the 75-
+year actuarial deficit from 1.92 to 1.89 percent of taxable
+payroll. This slight improvement is also seen in this 75-year
+open group unfunded obligation of the program, which increased
+from $3.5 trillion to $3.7 trillion, only half the amount
+expected based on the change in the valuation date alone. The
+pattern of the financial outlook is seen more readily in the
+annual estimates for the program. Lower than expected real wage
+growth for 2002 and 2003 contributed to slightly smaller
+program cash flow balances through the next 10 years compared
+to the 2003 report. However, other changes in data and methods
+resulted in a net improvement in cash flow balances for years
+after about 2045.
+ The result is an annual cash flow shortfall of 5.9 percent
+of taxable payroll at the end of the 75-year period compared to
+a shortfall of 6.5 percent which was projected in the 2003
+report. This reduction in cash flow shortfalls for the latter
+half of the long-range period is responsible for the small
+improvement in the actuarial balance and the unfunded
+obligations for the period as a whole. Thus, while the annual
+financial shortfalls projected for Social Security after 2045
+are improved somewhat from last year's report, the shortfalls
+are nonetheless very large. The historically low levels of
+birth rates experienced starting in the seventies make
+inevitable the expected declines in the number of workers per
+beneficiary, and thus the projected increases in the cost of
+the program as a percentage of taxable payroll. Choices are
+clear. To strengthen Social Security and maintain solvency
+beyond 2042, additional revenue can be provided, scheduled
+benefit levels can eventually be reduced, or some combination
+of these may be selected. Again, thank you for the opportunity
+to be here with you today. I will be happy to answer any
+questions. Thank you.
+ [The prepared statement of Mr. Goss follows:]
+ Statement of Stephen C. Goss, Chief Actuary,
+ Social Security Administration
+ Mr. Chairman, Ranking member, and members of the Committee, it is a
+pleasure to come and speak to you today about the 2004 Annual Report of
+the Social Security Board of Trustees. As you know, this Report is
+required by law to provide to you each year an assessment of the
+actuarial status of the Social Security Trust Funds reflecting the
+provisions specified in current law. This Report has been produced and
+delivered to the Congress now for 65 straight years, starting in 1940.
+ The 2004 Social Security Trustees Report reflects the combined
+judgment of the six Trustees and their staffs in the development of a
+number of assumptions that underlie the projections. Moreover, the
+selection of these assumptions reflects the summation of all of the
+advice and research of experts from around the world in the areas of
+economics, demography, and actuarial science. I have certified on the
+last page of the Report that I believe these assumptions to be
+reasonable and that the methods used for projections are sound and
+generally accepted within the actuarial profession.
+ The fundamental projections of the United States population and the
+economy produced by my office are used for both the Social Security and
+Medicare Trustees Reports. These provide a solid base upon which
+projections of program-specific cost and income are built. These
+projections provide a realistic picture of the likely future state of
+financing of the programs if no changes in law are enacted in the
+future.
+ The projected financial status of the Social Security program is
+good in the near term. Both the Old-Age and Survivors Insurance (OASI)
+Trust Fund and the Disability Insurance (DI) Trust Fund are expected to
+meet the Trustees short-range test of financial adequacy by a wide
+margin.
+ In the longer term, however, the current financing of the Social
+Security program is expected to be inadequate to permit full payment of
+benefits scheduled in present law. Based on the Trustees intermediate
+assumptions, the current annual excess of tax income over program cost
+is projected to start declining in 2009 and to reverse in 2018, at
+which time net redemptions of Trust Fund assets will be needed to
+continue full payment of benefits. In 2042, these assets, or reserves,
+are expected to be exhausted, and there will only be sufficient tax
+income to cover 73 percent of scheduled benefits. Both of these dates,
+and this percentage, are unchanged from last year's Report.
+ New data from a variety of sources, improvements of projection
+methods, and a lowering of the ultimate CPI annual-growth-rate
+assumption from 3 to 2.8 percent have resulted in a slight reduction in
+the 75-year actuarial deficit from 1.92 to 1.89 percent of taxable
+payroll. This slight improvement is also seen in the 75-year open-group
+unfunded obligation of the program which increased from $3.5 to $3.7
+Trillion, only half the amount expected based on the change in the
+valuation date alone.
+ The pattern of the financial outlook is seen more readily in the
+annual estimates for the program. Lower than expected real average wage
+growth for 2002 and 2003 contributed to slightly smaller program cash-
+flow balances through the next 10 years, compared to the 2003 report.
+However, other changes in data and methods resulted in a net
+improvement in cash-flow balances for years after 2045. The result is
+an annual cash-flow shortfall of 5.9 percent of taxable payroll at the
+end of the 75-year period, compared to a shortfall of 6.5 percent in
+the 2003 report. This reduction in cash-flow shortfalls for the latter
+half of the long-range period is responsible for the small improvements
+in the actuarial balance and the unfunded obligations for the period as
+a whole.
+ Thus, while the annual financial shortfalls projected for Social
+Security after 2045 are improved somewhat from last year's report, the
+shortfalls are still very large. The historically low levels of birth
+rates experienced starting in the 1970's make inevitable the expected
+declines in the number of workers per beneficiary and thus the
+projected increases in the cost of the program as a percentage of the
+payroll tax base. Choices are clear. To strengthen Social Security and
+maintain solvency beyond 2042, additional revenue can be provided,
+scheduled benefit levels can eventually be reduced, or some combination
+of these may be selected.
+ Again, thank you for the opportunity to be here today. I will be
+happy to attempt to answer any questions you have.
+
+
+ Chairman THOMAS. Thank you, very much, Mr. Goss. Mr.
+Foster?
+
+ STATEMENT OF RICK FOSTER, CHIEF ACTUARY,
+ CENTERS FOR MEDICARE AND MEDICAID SERVICES
+
+ Mr. FOSTER. Chairman Thomas, Representative Rangel,
+distinguished Members of the Committee, thank you for inviting
+me to testify again about the financial outlook for the
+Medicare Program. The Medicare Modernization Act of 2003
+clearly introduces the most significant changes to the program
+since its initial or original enactment in 1965. The new
+prescription drug benefit will bring Medicare more in line with
+modern insurance coverage and medical practice, and it will
+provide a valuable new benefit for all beneficiaries who choose
+to enroll in it, especially for those with low incomes. At the
+same time, of course, the new benefit will add substantially to
+the overall cost of Medicare, we estimate by nearly one-fourth
+compared to the prior program cost initially and growing to as
+much as about one-third. I will briefly summarize the most
+important findings of the 2004 Medicare Trustees' Report and
+comment just briefly on the differences in cost estimates
+between my office and the CBO.
+ You are all very familiar with the differences between the
+two parts of Medicare, HI or part A; and supplementary medical
+insurance, which now has Parts B and D in it, a number of
+differences that are well known. In particular they are
+financed in a different way by totally different methods. The
+HI is financed by a portion of the Federal Insurance
+Contribution Act and the Self-Employment Contributions Act
+payroll taxes. Those tax rates are fixed in the law and they
+cannot change without legislation. In contrast, both part B and
+Part D in the future are financed primarily by general revenues
+and beneficiary premiums. Those financing rates are adjusted
+every year by my office to match the expected cost. So, as a
+result of these different financing bases and because the
+assets cannot be interchanged, we have to evaluate the
+financial status of the HI Trust Fund and the part B and D
+accounts of the Supplementary Medical Insurance Trust Fund
+individually.
+ Dr. Holtz-Eakin talked a little bit about the nature of
+projections. Let me just remind you that in our Trustees'
+Report to Congress, we project based on current law. We assume
+no changes other than what is already there in the statute. The
+projections are necessarily uncertain particularly over longer
+time horizons like 75 years. Moreover, with the new drug
+benefit, because there is no past experience to go by and only
+limited data on drug spending for Medicare beneficiaries, we
+have an even greater degree of uncertainty than usual. Despite
+these limitations in short--and long-range projections, we
+consider them useful for informing policy development. For the
+HI Trust Fund you know, based on Secretary Snow's presentation,
+that the financial status has deteriorated since the last
+report. The projected year of depletion has moved up to 2019.
+At the end of our 75-year protection period the scheduled tax
+revenues will be sufficient to cover only one-fourth of the
+projected expenditures. Only one-fourth.
+ For the part B account in the Supplementary Medical
+Insurance Trust Fund the good news is, of course, that it is
+automatically in financial balance because we reset the
+financing every year. The bad news is its costs have tended to
+grow fairly quickly. For example, in the last 4 calendar years,
+the part B costs have grown at about 10 percent per year on
+average over that period. Moreover, because of the Consolidated
+Appropriations Resolution in 2003, together with higher than
+expected part B costs, we ran a fairly significant deficit in
+the Trust Fund in 2003, because the legislation came along
+after we had already set the financing. That resulted in over
+$10-billion deficit. Moreover, for this year, because of the
+Medicare Modernization Act, we again anticipate running a
+deficit with the result that we will have to raise the premium
+fairly sharply for 2005. We estimate in the Trustees' Report by
+about 17 percent.
+ For the Part D account, the new drug benefit, it will be in
+financial but, again, it will have significant costs. Let me
+mention just briefly the matter concerning the CBO cost
+estimates versus ours. I am convinced I know from our end and I
+am convinced from CBO that we have both operated independently.
+We have acted independently to use the best assumptions, data
+and methods that we could to get the best possible cost
+estimate. The fact that we disagree somewhat in no way means
+that they tried to tilt their estimates or that we tried to
+tilt our estimates. It means that the future is uncertain. We
+have the highest regard for our colleagues at CBO and we value
+our occasional get-togethers for technical interchanges. Mr.
+Chairman, I pledge the Office of the Actuary's continuing
+assistance as you struggle with these financial challenges
+facing Medicare. Thank you.
+ [The prepared statement of Mr. Foster follows:]
+ Statement of Rick Foster, Chief Actuary, Centers for Medicare and
+ Medicaid Services
+ Chairman Thomas, Representative Rangel, distinguished Committee
+members, thank you for inviting me to testify today about the financial
+outlook for the Medicare program as shown in the newly released 2004
+annual report of the Medicare Board of Trustees. I will also provide
+information on how our cost estimates for the Medicare Prescription
+Drug, Improvement, and Modernization Act compare with those of the
+Congressional Budget Office. I welcome the opportunity to assist you in
+your efforts to ensure the future financial viability of the nation's
+second largest social insurance program--one that is a critical factor
+in the income security of our aged and disabled populations.
+ The Medicare modernization act (MMA) introduces the most
+significant changes to the program since its enactment in 1965. The new
+prescription drug benefit will bring Medicare more in line with modern
+insurance coverage and medical practice, while providing a valuable new
+benefit for all beneficiaries who choose to enroll, especially those
+with low incomes. At the same time, of course, the new drug benefit
+will add substantially to the overall cost of Medicare.
+ As you know from the findings in the new Trustees Report, the
+financial outlook for the Medicare program has deteriorated
+significantly since last year's report. This change is due in part to
+the impact of the new legislation, but it also reflects other,
+unassociated developments in cost and revenue trends. The financial
+status of the Medicare trust funds must be evaluated separately for
+each fund and for each account within the funds.
+ The Hospital Insurance (HI) trust fund does not meet the Trustees'
+formal test for short-range financial adequacy, which had been met in
+each of the previous 5 reports. In addition, the depletion of the HI
+trust fund, which had been projected for 2026 in last year's Trustees
+Report, is projected to now occur in 2019. Beginning in 2004, HI tax
+revenues are projected to fall increasingly short of program
+expenditures, eventually covering only one-fourth of estimated costs by
+the end of the Trustees' 75-year projection period.
+ The Medicare modernization act created two separate accounts within
+the Supplementary Medical Insurance (SMI) trust fund--one for Part B,
+which continues to cover the traditional SMI services, and one for the
+new Part D, which provides subsidized access to prescription drug
+coverage. Because of the annual redetermination of financing for both
+Parts B and D, each account will remain in financial balance
+indefinitely under current law. SMI costs, however, are projected to
+continue increasing at a faster rate than the national economy and
+beneficiaries' incomes, raising concerns about the long-range cost
+implications of scheduled financing.
+Background
+ Roughly 41 million people were eligible for Medicare benefits in
+2003. HI, or ``Part A'' of Medicare, provides partial protection
+against the costs of inpatient hospital services, skilled nursing care,
+post-institutional home health care, and hospice care. Part B of SMI
+covers most physician services, outpatient hospital care, home health
+care not covered by HI, and a variety of other medical services such as
+diagnostic tests, durable medical equipment, and so forth. SMI Part D
+will initially provide access to prescription drug discount cards and
+transitional assistance to low-income beneficiaries. In 2006 and later,
+Part D will provide subsidized access to prescription drug insurance
+coverage as well as additional drug premium and cost-sharing subsidies
+for low-income enrollees.
+ Only about 22 percent of Part A enrollees received some
+reimbursable covered services during 2003, since hospital stays and
+related care tend to be infrequent events even for the aged and
+disabled. In contrast, the vast majority of enrollees incurred
+reimbursable Part B costs because the covered services are more routine
+and the annual deductible for SMI was only $100 in 2003.
+ The HI and SMI components of Medicare are financed on totally
+different bases. HI costs are met primarily through a portion of the
+FICA and SECA payroll taxes.\1\ Of the total FICA tax rate of 7.65
+percent of covered earnings, payable by employees and employers, each,
+HI receives 1.45 percent. Self-employed workers pay the combined total
+of 2.90 percent. Following the Omnibus Budget Reconciliation Act of
+1993, HI taxes are paid on total earnings in covered employment,
+without limit. Other HI income includes a portion of the income taxes
+levied on Social Security benefits, interest income on invested assets,
+and other minor sources.
+---------------------------------------------------------------------------
+ \1\ Federal Insurance Contributions Act and Self-Employment
+Contributions Act, respectively.
+---------------------------------------------------------------------------
+ SMI enrollees pay monthly premiums ($66.60 for Part B in 2004, and
+an estimated average level of $37.20 for Part D starting in 2006). For
+Part B, the monthly premiums cover about 25 percent of program costs
+with the balance paid by general revenue of the Federal government and
+a small amount of interest income. For Part D, the transitional
+assistance and prescription drug discount card costs in 2004 and 2005
+will be paid through enrollment fees and general revenues. In 2006 and
+later, the Part D costs will be met through monthly premiums, which on
+average will cover 25.5 percent of the cost of the basic coverage, with
+the balance paid by Federal general revenues, certain State transfer
+payments, and a small amount of interest income.
+ 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. In contrast, the premiums
+and general revenue financing for both Parts B and D of SMI are
+reestablished each year to match estimated program costs for the
+following year. As a result, SMI income automatically matches
+expenditures without the need for legislative adjustments.
+ Each component of Medicare has its own trust fund, with financial
+oversight provided by the Board of Trustees. My discussion of
+Medicare's financial status is based on the actuarial projections
+contained in the Board's 2004 report to Congress. Such projections are
+made under three alternative sets of economic and demographic
+assumptions, to illustrate the uncertainty and possible range of
+variation of future costs, and cover both a ``short range'' period (the
+next 10 years) and a ``long range'' (the next 75 years). The
+projections are not intended as firm predictions of future costs, since
+this is clearly impossible; rather, they illustrate how the Medicare
+program would operate under a range of conditions that can reasonably
+be expected to occur. It is important to note that the results shown in
+this year's report are even more uncertain than those in past reports
+due to the changes from the MMA. In particular, the Part D projections
+are estimated without any actual past program experience. The
+projections shown in this testimony are based on the Trustees'
+``intermediate'' set of assumptions.
+Short-range financial outlook for Hospital Insurance
+ Chart 1 shows HI expenditures versus income since 1990 and
+projections through 2013. For most of the program's history, income and
+expenditures have been very close together, illustrating the pay-as-
+you-go nature of HI financing. The taxes collected each year have been
+roughly sufficient to cover that year's costs. Surplus revenues are
+invested in special Treasury securities--in effect, lending the cash to
+the rest of the Federal government, to be repaid with interest at a
+specified future date or when needed to meet expenditures.
+
+ Chart 1--HI expenditures and income
+ (In billions)
+[GRAPHIC] [TIFF OMITTED] 23797A.002
+
+ During 1990-97, HI costs increased at a faster rate than HI income.
+Expenditures exceeded income by a total of $17.2 billion in 1995-97.
+The Medicare provisions in the Balanced Budget Act of 1997 were
+designed to help address this situation. As indicated in Chart 1, these
+changes--together with subsequent low general and medical inflation and
+increased efforts to address fraud and abuse in the Medicare program--
+resulted in a decline in Part A expenditures during 1998-2000 and trust
+fund surpluses totaling $61.8 billion over this period. After 2000,
+Part A expenditures and income converged slightly, as the Balanced
+Budget Refinement Act and the Benefit Improvement and Protection Act
+increased Part A expenditures and the 2001 economic recession resulted
+in lower payroll tax income for Part A.
+ Beginning in 2004, the Medicare modernization act is also estimated
+to increase Part A expenditures, through higher payments to rural
+hospitals and to private Medicare Advantage health plans. Total HI
+income, including interest earnings, is expected to slightly exceed
+total expenditures in 2004 through 2009. (HI tax revenues alone are
+estimated to fall short of total expenditures beginning this year.) The
+slightly faster projected growth trend in outlays would result in trust
+fund deficits starting in 2010 and later. Note that even relatively
+small changes in growth trends for either income or expenditures could
+have a very significant impact on the projected difference between
+these cash flows. In particular, the onset of deficits in the HI trust
+fund could easily occur several years earlier or later than this
+intermediate projection.
+ The Board of Trustees has recommended maintaining HI assets equal
+to at least one year's expenditures as a contingency reserve. As
+indicated in Chart 2, HI assets at the beginning of 2004 represented
+about 152 percent of estimated expenditures for the year. Future asset
+growth, reflecting the diminishing difference between income and
+expenditures described above, is projected to be significantly slower
+than expenditure growth in 2004 and later. After 2009, as assets are
+drawn down to cover the annual deficits, the trust fund balance would
+decline and would be exhausted in 2019 under the Trustees' intermediate
+assumptions.
+
+ Chart 2--HI trust fund assets
+ (Assets at beginning of year as percentage of annual expenditures)
+[GRAPHIC] [TIFF OMITTED] 23797A.003
+
+ The depletion date estimated in the 2004 Trustees Report represents
+a significant deterioration of the trust fund financial condition
+compared to the estimate in last year's report (2026). About 2 years of
+the total 7-year difference are attributable to the higher Part A costs
+under the Medicare modernization act. Other factors contributing to the
+closer exhaustion date for HI are higher incurred spending and lower
+tax revenues in 2003 than previously estimated (2 years), hospital
+assumption adjustments to better reflect recent historical experience
+(1.5 years), improved data on the health status of beneficiaries in
+private health plans (1 year), and model refinements for certain
+hospital payments (0.5 year).
+Long-range financial outlook for Hospital Insurance
+ The interpretation of dollar amounts through time is very difficult
+over extremely long periods like the 75-year projection period used in
+the Trustees Reports. For this reason, long-range tax income and
+expenditures are expressed as a percentage of the total amount of wages
+and self-employment income subject to the HI payroll tax (referred to
+as ``taxable payroll''). The results are termed the ``income rate'' and
+``cost rate,'' respectively. Projected long-range income and cost rates
+are shown in Chart 3 for the HI program.
+ Past income rates have generally followed program costs closely,
+rising in a step-wise fashion as the payroll tax rates were adjusted by
+Congress. Income rate growth in the future is minimal, due to the fixed
+tax rates specified in current law. Trust fund revenue from the
+taxation of Social Security benefits increases gradually, because the
+income thresholds specified in the Internal Revenue Code are not
+indexed. Over time, an increasing proportion of Social Security
+beneficiaries will incur income taxes on their benefit payments.
+
+ Chart 3--Long-range HI income and costs under intermediate assumptions
+ (as a percentage of taxable payroll)
+[GRAPHIC] [TIFF OMITTED] 23797A.004
+
+ Past HI cost rates have generally increased over time but have
+periodically declined abruptly as the result of legislation to expand
+HI coverage to additional categories of workers, raise (or eliminate)
+the maximum taxable wage base, introduce new payment systems such as
+the inpatient prospective payment system, etc. Cost rates decreased
+significantly in 1998-2000 as a result of the Balanced Budget Act
+provisions together with strong economic growth. After 2000, however,
+cost rates increased, partly as a result of the Balanced Budget
+Refinement Act and the Benefit Improvement and Protection Act. After
+2003, cost rates are again expected to increase as the Medicare
+modernization act is implemented, and to accelerate significantly as
+the baby boom generation enrolls in Medicare, beginning in about 2010.
+By the end of the 75-year period, scheduled tax income would cover only
+about one-fourth of projected expenditures.
+ The average value of the financing shortfall over the next 75
+years--known as the actuarial deficit--is 3.12 percent of taxable
+payroll. For illustration, this deficit could be closed by an immediate
+increase of 1.56 percentage points in the HI payroll tax rate, payable
+by employees and employers, each. If, instead, no changes were made
+until the year of asset exhaustion, then the HI payroll tax rate would
+require an increase of about 2.15 percent, payable by employees and
+employers, each. Note, however, that such changes would only correct
+the deficit ``on average.'' Initially, HI revenue would be
+significantly in excess of expenditures, but by the end of the period,
+only about one-third of the projected annual deficit would be
+eliminated. The long-range deficit could also be eliminated by many
+other approaches involving revenue increases and/or expenditure
+reductions, but its magnitude poses a very daunting challenge to policy
+makers.
+ The effect of the baby boom generation on Medicare and Social
+Security is relatively well known, having been discussed at some length
+for the last 30 years. Basically, by the time the baby boom cohorts
+have enrolled in Medicare, there will be nearly twice as many HI
+beneficiaries as there are today, but the number of covered workers
+will have increased by only about 20 percent. When the HI program
+began, there were 4.5 workers in covered employment for every HI
+beneficiary. As shown in Chart 4, this ratio was nearly 4.0 workers per
+beneficiary in 2003. When the baby boom joins Medicare, the number of
+beneficiaries will increase more rapidly than the labor force,
+resulting in a decline in this ratio to about 2.4 in 2030 and 2.0 by
+2078 under the intermediate projections. Other things being equal,
+there would be a corresponding increase in HI costs as a percentage of
+taxable payroll.
+ 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. over time and is
+projected to continue doing so. The average remaining life expectancy
+for 65-year-olds increased from 12.4 years in 1935 to 17.5 years
+currently, with an estimated further increase to about 22 years at the
+end of the long-range projection period. Medicare costs are also
+sensitive to the age distribution of beneficiaries. Older persons incur
+substantially larger costs for medical care, on average, than younger
+persons. Thus, as the beneficiary population ages over time they will
+move into higher-utilization age groups, thereby adding to the
+financial pressures on the Medicare program.
+
+ Chart 4--Workers per HI beneficiary
+[GRAPHIC] [TIFF OMITTED] 23797A.005
+
+Financial outlook for Supplementary Medical Insurance
+ The financial outlook for SMI is very different than for HI,
+although rapid expenditure growth is a serious issue for both
+components of Medicare. The Medicare modernization act established a
+separate account within the SMI trust fund to handle transactions for
+the new Medicare drug benefit. Because there is no authority to
+transfer assets between the new Part D account and the existing Part B
+account, it is necessary to evaluate each account's financial adequacy
+separately.
+ Chart 5 presents estimates of the short-range outlook for Part B.
+In contrast to the HI program, the income and expenditure curves for
+Part B are nearly indistinguishable in the future. As noted previously,
+Part B premiums and general revenue income are reestablished annually
+to match expected program costs for the following year. Thus, the
+program will automatically be in financial balance, regardless of
+future program cost trends.
+ As shown in Chart 5, however, Part B expenditures have exceeded
+income in recent years. In particular, in 2003 the Consolidated
+Appropriations Resolution increased payments to physicians after the
+Part B financing rates had been set for 2003. For 2004, similarly, the
+Medicare modernization act increased physician and certain other Part B
+expenditures after the financing rates had been set for the year. These
+legislative changes, together with stronger than expected expenditure
+growth, have decreased Part B assets below levels considered adequate
+for contingency purposes. To restore balance between Part B income and
+expenditures, and to rebuild the Part B account assets to a more
+adequate level, the monthly Part B premium rate and the associated
+general revenue payments will have to be increased substantially for
+2005.
+
+ Chart 5--SMI Part B expenditures and income
+ (In billions)
+[GRAPHIC] [TIFF OMITTED] 23797A.006
+
+ It should be noted that the projected Part B expenditures shown in
+the 2004 Trustees Report are unrealistically low, due to the structure
+of physician payments under current law. Future physician payment
+increases must be adjusted downward if cumulative past actual physician
+spending exceeds a statutory target. Prior to the MMA, past spending
+was already above the target level. The MMA raised the physician fee
+updates for 2004 and 2005, but without raising the target. Together,
+these factors yield projected physician updates of about--5 percent for
+7 consecutive years, beginning in 2006. Multiple years of significant
+reductions in physician payments per service are very unlikely to occur
+before legislative changes intervene, but these payment reductions are
+required under the current law payment system and are reflected in the
+Part B projections.
+ Beneficiaries will obtain the new Part D prescription drug benefit
+by voluntarily purchasing insurance policies from stand-alone companies
+or through private Medicare Advantage health plans. The costs of these
+plans will be heavily subsidized by Medicare through a combination of
+direct premium subsidies and reinsurance payments. Medicare will also
+provide further support on behalf of low-income beneficiaries and a
+special subsidy to employers who provide qualifying drug coverage to
+their Medicare-eligible retirees. The financial risk associated with
+the private drug plans will be shared between the plan and Medicare.
+Medicare's cost for the various drug subsidies will be financed
+primarily from general revenues. A declining portion of the costs
+associated with beneficiaries who also qualify for full Medicaid
+benefits will be financed through special payments from State
+governments.
+ For the Part D program, the financial operations in 2004 and 2005
+relate only to the prescription drug discount card and low-income
+transitional assistance. Since the general revenue subsidy for this
+benefit is expected to be drawn daily, no financial imbalance is
+likely. After 2005, when the Medicare prescription drug coverage
+begins, Part D income and outgo are expected to remain in balance as a
+result of annual adjustments of premium and general revenue income to
+match costs.
+ Chart 6 shows projected long-range SMI expenditures and premium
+income as a percentage of GDP. Under present law, Part B beneficiary
+premiums will continue to cover approximately 25 percent of total Part
+B costs, with the balance drawn from general revenues. Similarly, Part
+D beneficiary premiums are designed to cover 25.5 percent of the basic
+Part D benefit, on average, with the balance paid by general revenues
+and State transfers. SMI expenditures are projected to increase at a
+significantly faster rate than GDP, for largely the same reasons
+underlying HI cost growth. For the past 10 years, prescription drug
+spending has been the fastest growing major health sector. Consistent
+with these recent trends, the Medicare prescription drug spending under
+Part D is projected to initially grow faster than either Part A or Part
+B.
+
+ Chart 6--SMI expenditures and premiums as a percentage of GDP
+[GRAPHIC] [TIFF OMITTED] 23797A.007
+
+ Although SMI is automatically in financial balance, the program's
+continuing rapid growth in expenditures places an increasing burden on
+beneficiaries and the Federal budget. In 2010, for example, a
+representative beneficiary's Part B and D premiums would require an
+estimated 13 percent of his or her Social Security benefit, and another
+23 percent would be needed to cover average deductible and coinsurance
+expenditures for the year. By 2070, about 30 percent of a typical
+Social Security benefit would need to be withheld to pay the Part B and
+Part D premiums and about 54 percent would be required for copayment
+costs. Similarly, Part B and D general revenues in fiscal year 2010 are
+estimated to equal 19 percent of the personal and corporate Federal
+income taxes that would be collected in that year, if such taxes are
+set at their long-term, past average level, relative to the national
+economy. Under the same assumption, projected Part B and D general
+revenue financing in 2070 would represent over 50 percent of total
+income taxes.
+Combined HI and SMI expenditures
+ The financial status of the Medicare program is appropriately
+evaluated for each trust fund separately, as summarized in the
+preceding sections. By law, each fund is a distinct financial entity,
+and the nature and sources of financing are very different between the
+two funds. This distinction, however, frequently causes greater
+attention to the HI trust fund--and especially its projected year of
+asset depletion--and less attention to SMI, which does not face the
+prospect of depletion. It is important to consider the total cost of
+the Medicare program and its overall sources of financing, as shown in
+Chart 7. Interest income is excluded since, under present law, it would
+not be a significant part of program financing in the long range.
+
+Chart 7--Medicare expenditures and sources of income as a percentage of
+ GDP
+[GRAPHIC] [TIFF OMITTED] 23797A.008
+
+ Combined HI and SMI expenditures are projected to increase from 2.6
+percent of GDP in 2003 to about 13.8 percent in 2078, based on the
+Trustees' intermediate set of assumptions. The addition of Part D is
+expected to increase total Medicare costs by nearly one-fourth in 2006.
+In past years, total income from HI payroll taxes, income taxes on
+Social Security benefits, HI and SMI beneficiary premiums, and SMI
+general revenues was very close to total expenditures. Beginning in
+2004, overall expenditures are expected to exceed aggregate non-
+interest revenues, with the growing difference arising from the
+projected imbalance between HI tax income and expenditures--throughout
+this period, SMI revenues would continue to approximately match SMI
+expenditures.
+ Over time, SMI premiums and general revenues would continue to grow
+rapidly, since they would keep pace with SMI expenditure growth under
+present law. HI payroll taxes are not projected to increase as a share
+of GDP, primarily because no further increases in the tax rates are
+scheduled under present law. Thus, as HI sources of revenue become
+increasingly inadequate to cover HI costs, SMI premiums and general
+revenues would represent a growing share of total Medicare income. With
+the implementation of the Part D drug benefit in 2006, general revenues
+will become the largest source of Medicare financing. The difference
+between total Medicare outlays and ``dedicated financing sources'' \2\
+is projected to first reach 45 percent of outlays in 2012.
+---------------------------------------------------------------------------
+ \2\ Payroll taxes, income taxes on Social Security benefits,
+premiums, and Part D State payments.
+---------------------------------------------------------------------------
+Conclusions
+ In their 2004 report to Congress, the Board of Trustees notes the
+significant deterioration in the financial outlook for Medicare that
+has come about as a result of the modernization legislation, higher
+spending, and lower HI payroll tax revenue. The Trustees emphasize the
+continuing financial pressures facing Medicare and urge the nation's
+policy makers to take steps to address these concerns. They also argue
+that consideration of further reforms should occur in the relatively
+near future, since the earlier solutions are enacted, the more flexible
+and gradual they can be. Finally, the Trustees note that early action
+increases the time available for affected individuals and
+organizations--including health care providers, beneficiaries, and
+taxpayers--to adjust their expectations.
+ I concur with the Trustees' assessment and pledge the Office of the
+Actuary's continuing assistance to the joint effort by the
+Administration and Congress to determine effective solutions to the
+financial problems facing the Medicare program. I would be happy to
+answer any questions you might have on Medicare's financial issues.
+
+ Appendix
+
+ Summary of Differences Between OACT and CBO Cost Estimates for the
+ Medicare Prescription Drug, Improvement, and Modernization Act of 2003
+
+ The Office of the Actuary in the Centers for Medicare & Medicaid
+Services has estimated that the Medicare modernization act would
+increase net Federal costs by a total of $534 billion through fiscal
+year 2013.\1\ The corresponding estimate by the Congressional Budget
+Office is $395 billion. OACT and CBO have independently estimated the
+cost of the modernization act using the best data, assumptions, and
+methods that each organization could develop. The following points
+summarize the nature of the differences in the estimates.
+---------------------------------------------------------------------------
+ \1\ This estimate excludes Federal administrative costs, other than
+the $1.5 billion authorized by section 1015 of the act, and the impact
+on social insurance payroll taxes and general income taxes. An
+additional Medicare expenditure of $16 billion through 2013 would be
+made for employer drug subsidy payments to Federal employers.
+
+ The estimates differ principally because the future is
+uncertain, and this uncertainty is reflected in somewhat different
+assumptions regarding the numerous cost and behavioral factors that
+will affect actual future costs. In this regard, the difference in
+estimates is a useful reminder of the inherent uncertainty and a rough
+indication of the sensitivity of future costs to the underlying cost
+factors.
+ Of the total difference of $139 billion between the
+estimates, approximately $100 billion relates to Title I of the act,
+the Medicare prescription drug program:
+ OACT estimates that about 94 percent of all Medicare
+ beneficiaries would enroll in (or otherwise benefit from) the
+ Medicare drug benefit, compared to 87 percent for CBO,\2\ and
+ we also estimate a slightly higher average, per-beneficiary
+ value for the standard drug benefit. These factors account for
+ $32 billion of the total difference.
+---------------------------------------------------------------------------
+ \2\ Beneficiaries in employer-sponsored retiree health benefit
+programs are included in both percentages.
+---------------------------------------------------------------------------
+ While OACT and CBO estimate similar numbers of
+ beneficiaries who are eligible for the low-income drug subsidy,
+ OACT estimates a significantly higher enrollment rate by these
+ individuals. In addition, our estimated average cost for the
+ low-income subsidy per beneficiary is slightly greater than
+ CBO's. Of the total difference in estimated drug costs, the
+ low-income subsidy accounts for $47 billion.
+ The cost to Medicare of providing the drug benefit
+ would be partially offset by net Federal savings for Medicaid.
+ (Federal Medicaid drug expenditures for Medicare beneficiaries
+ would be eliminated, but other Federal Medicaid costs would
+ increase somewhat; as beneficiaries enroll for the Medicare
+ low-income drug subsidy, some will be found to qualify for
+ Medicaid coverage). CBO estimates a greater degree of net
+ Federal Medicaid savings, because their prior baseline
+ projections included a rapidly growing cost for ``pharmacy
+ plus'' Medicaid waivers. In total, the CBO savings estimate is
+ $18 billion greater than OACT's.
+ The remaining $3 billion of the total difference in
+ Title I estimates is due to a slightly different estimate of
+ State payments on behalf of Medicare beneficiaries who also
+ qualify for full Medicaid benefits.
+ $32 billion of the remaining difference in the overall
+cost estimates is associated with Title II, the Medicare Advantage
+program. OACT's estimated costs for this title are $46 billion, versus
+CBO's estimate of $14 billion:
+ CBO's estimate is based on a $10 billion cost for the
+ regional PPO stabilization fund, and $4 billion for the
+ increased MA payment rates. They estimate that about 13 percent
+ of beneficiaries will enroll in private health plans, most of
+ whom would be in local HMOs. Regional PPOs are estimated to
+ have costs somewhat in excess of the prevailing ``payment
+ benchmarks,'' with the result that few such plans could
+ participate and beneficiary enrollment would be minimal.
+ OACT's estimate includes $12 billion for the
+ stabilization fund and another $34 billion due to the higher
+ payment rates starting in 2004 and the restructured payment
+ formula in 2006 and later. We estimate that HMO enrollment
+ would increase from its current level of about 12 percent to 16
+ percent and that PPO enrollment would also reach 16 percent in
+ 2009 and later. The latter projection is based on estimated PPO
+ costs that are generally below the payment benchmarks, with the
+ result that beneficiaries could qualify for significant premium
+ rebates and/or additional benefits. Because these estimated PPO
+ costs typically exceed fee-for-service levels, however,
+ Medicare costs for such enrollees would be higher than under
+ prior law.
+ Other differences exist between the OACT and CBO
+estimates for Titles III through IX. These differences tend to be
+smaller and are also largely offsetting (with CBO sometimes higher and
+sometimes lower than our estimates). The remaining $7 billion of the
+total difference between total estimated costs is explained by these
+factors.
+
+ It is not uncommon for OACT and CBO to differ somewhat in their
+estimates. For example, CBO's estimated Medicare savings for the
+Balanced Budget Act of 1997 totaled about $116 billion in the first 5
+fiscal years. The corresponding OACT estimate was $152 billion.
+Similarly, the BBA savings estimates over the first 10 years were $394
+billion for CBO versus $517 billion for OACT. I believe that CBO has
+prepared competent, good-faith estimates for the Medicare modernization
+act. I prefer the assumptions and methods employed in the Office of the
+Actuary, and stand behind our own estimates, while recognizing that an
+uncertain future could prove all of us wrong.
+
+
+
+ Chairman THOMAS. Thank you, very much. Mr. Holtz-Eakin, you
+said that you believe that yours is the single best estimate.
+My assumption is that Mr. Foster believes his is the single
+best estimate. Mr. Goss, whenever we look at the Social
+Security projections, I am always struck by the fact that you
+do not really do your single best estimate. You do a high and a
+low and an intermediary. Why don't you just do the single best
+estimate? Then you would get more questions today.
+ Mr. GOSS. Well, Chairman Thomas, I was wondering about the
+fact that I am sitting in the middle here.
+ Chairman THOMAS. Purely by accident.
+ Mr. GOSS. I would say that for the Social Security
+Trustees' report you are exactly right, we do produce an
+intermediate protection which is generally characterized as the
+Trustees' best estimate based on their best assumptions for the
+future.
+ Chairman THOMAS. You bracket it.
+ Mr. GOSS. We do bracket it with a high and a low cost
+estimates. In addition we have, in the last 2 years, also
+provided a stochastic range. I do believe that the Medicare
+report does also include a high and low cost estimate.
+ Chairman THOMAS. Yes, it does, in the long-term because of
+the uncertainties. I do find it a little bit interesting that
+we have what I would guess is the high and the low estimate for
+this particular piece of legislation, and that it is probably
+most accurate to look at it as a range since neither one is
+going to be correct. Mr. Holtz-Eakin believes his is the single
+best estimate. Again, it is not a beauty contest. We are not
+choosing Mr. Holtz-Eakin over Mr. Foster for reasons that are
+not grounded in law. The Congressional Budget Act (P.L. 93-
+344), section 308, says that the CBO is the official
+scorekeeper and, in fact, Committees are required to include a
+CBO estimate with each bill reported.
+ Oftentimes, though, in the very difficult areas, and I want
+to underscore how difficult it has been for any actuary to
+attempt to make estimates in an area for which we have had no
+experience other than previous bills that failed and our re-
+examination of our previous estimates, deciding that they were
+not as good as we thought they were when they were issued. So,
+that is a growth curve and we have moved forward. Oftentimes
+you will hear from me or other Members, would you two please
+get together and talk to each other to see if we can narrow the
+differences between the estimates, not because we are trying to
+affect the outcome but because it is very difficult when there
+is a significant difference for the same proposal from two
+professional groups. It makes it very difficult.
+ If we are forced to choose, the law tells us very clearly
+that Mr. Holtz-Eakin wins. That is the law. That section 402 of
+the Congressional Budget Act requires estimates for bills
+reported by Committee. I think another point that needs to be
+underscored in this dynamic is that not only piece-by-piece do
+we need provisions scored by the CBO, but we need a complete
+estimate of the legislation passed by the Committee. That does
+not mean it is not going to change between Committee action and
+the floor, between the floor and going to conference, or coming
+out of conference. What the CBO does is constantly update the
+estimates. Mr. Foster, when were you able to provide a
+comprehensive, complete analysis of the legislation that was
+passed?
+ Mr. FOSTER. For the total package, we were not able to
+complete those estimates in their entirety until December 23rd.
+ Chairman THOMAS. Why were you not able to do that until
+late in December?
+ Mr. FOSTER. The complexity of the Medicare Advantage
+provisions led to very difficult estimating challenges. It
+involved trying to anticipate the behavior of plans as to
+whether to participate or not, what their cost would be, and
+then what the premiums would be and whether beneficiaries would
+be attracted to these plans or not, in which areas, and in how
+many numbers, and then the consequences for the cost to the
+program.
+ Chairman THOMAS. Would part of the time lag be that you had
+to get the bill in its entirety prior to making some of those
+interactive estimates and, in fact, the total estimate?
+ Mr. FOSTER. Yes.
+ Chairman THOMAS. So, the statutory underpinning of CBO
+having to be on horseback with estimates that we are required
+to accept is a slightly different job than yours, because
+although we value independent assessments, we are required to
+accept, piece-by-piece, building an overall cost. The thing
+that I find most remarkable about Mr. Holtz-Eakin's estimates
+are the fact that the CBO made an estimate at the end of the
+conference and then after the bill became law when you did;
+i.e., they had the information available of the direction that
+you were going. In their professional estimation, stayed with
+their number. That, I think, is very telling and
+notwithstanding how much someone may like your numbers or
+admire your numbers or admire your professionalism, when you go
+into the differences between the two programs I think it is
+quite telling, because as in your testimony, Mr. Foster, you
+point out that the areas of discrepancy are in the most cutting
+and problematic areas that are new. For example, the
+prescription drug benefit. You estimated what percentage of the
+seniors would enroll in Part D prescription drugs?
+ Mr. FOSTER. We estimated 94 percent.
+ Chairman THOMAS. Ninety-four percent. Do you know what the
+enrollment for part B, Medicare Supplement, is?
+ Mr. FOSTER. It is about 91 percent of all eligible people.
+ Chairman THOMAS. Ninety-one percent. Up until recently
+Medicare part B was a 75 cent on the dollar subsidy if you
+enrolled in part B, and you got a 91 percent take-up rate. You
+believe, in this expensive and growingly expensive program, 94
+percent will sign up. Mr. Holtz-Eakin, was your estimate?
+ Mr. HOLTZ-EAKIN. Eighty-seven percent.
+ Chairman THOMAS. Okay. So, 94, 87, no big deal, right? That
+is reasonable to assume that it is going to be somewhere
+between 87 and 94. What is the difference in cost between those
+two estimates?
+ Mr. HOLTZ-EAKIN. We would estimate that contributes about
+$16 billion to the difference between the CMS estimate and
+ours.
+ Chairman THOMAS. I think it is about $32 billion when you
+add the total package, in terms of the high benefit, the low
+benefit, and the other structures. So, if we are beginning to
+close the difference between the estimates, the difference
+between 94 and an 87 percent take-up rate is about $32 billion.
+The other one, which I think is difficult to estimate because
+we are moving from a mixed program for seniors, we have a
+senior health program since 1965. If you are a low-income
+senior you were treated differently in many aspects of health
+care needs through the Medicaid program. We finally, because of
+the prescription drug provision, are consolidating seniors at
+the Federal level, a uniform program for seniors finally across
+the Nation, not by the State-by-State basis. I believe this is
+an area that perhaps is the single largest dollar discrepancy
+in the two assumptions; is that correct?
+ Mr. FOSTER. The low-income subsidy, yes, sir.
+ Chairman THOMAS. The low-income subsidy. You estimated what
+take-up rate for the low-income subsidy, Mr. Foster?
+ Mr. FOSTER. Overall, among eligible individuals, in other
+words with the right income and the right assets, we had about
+75 percent. That included all of the Medicaid beneficiaries who
+we already know about, of course. So, 100 percent for them and
+a lower percentage for everybody else.
+ Chairman THOMAS. What was your estimate, Mr. Holtz-Eakin?
+ Mr. HOLTZ-EAKIN. About two-thirds.
+ Chairman THOMAS. So, 66 percent for CBO and----
+ Mr. FOSTER. Seventy-five.
+ Chairman THOMAS. Seventy-five percent. You know, 66, 75
+percent, that is ballpark. How much money difference was that?
+ Mr. FOSTER. A total of $47 billion.
+ Chairman THOMAS. Forty-seven billion dollars on which of
+those two numbers you choose as a take-up rate for low income
+into new programs where we are just now beginning to move
+forward. Mr. Foster, would you say that one of the assumptions
+you made on those extremely high take-up rates versus the CBO
+was that if we were not going to offer this program at the
+Federal level, the Federal Government would be more aggressive
+in advertising the programs, in making people aware of the fact
+that the new Medicare was available for them? That your
+assumptions might have been tied to a fairly aggressive
+publicity campaign?
+ Mr. FOSTER. We were certainly aware of CMS's intention to
+have a good beneficiary information campaign for exactly that
+sort of purpose.
+ Chairman THOMAS. Did that enter into your assumptions, in
+terms of the structure, at least as a contributing factor?
+ Mr. FOSTER. In part, yes.
+ Chairman THOMAS. Would you have provided a lower assumption
+if you assume that any of the advertising campaigns would have
+been significantly attacked or curtailed?
+ Mr. FOSTER. In the absence of advertising for the new
+benefit, we would have assumed a lower assumption.
+ Chairman THOMAS. In the absence of advertising for the new
+benefit, you would have assumed a lower take-up rate?
+ Mr. FOSTER. Right.
+ Chairman THOMAS. One last question, and frankly this is a
+frustrating one for me and a number of other Members. We have
+looked at areas where clearly we are going to spend more money.
+We finally decided to put some money into the rural providers
+in a way we have not in the past. You folks get out your
+pencils and all those pluses go to the bottom line. It makes
+sense because we are going to be spending more money. This
+Medicare Program also was one of the most significant
+expansions of preventive and wellness programs with disease
+management. In fact, we are going to be able to provide for the
+first time, for every senior entering Medicare, a physical. Now
+my assumption is if we can get every new entry into Medicare to
+have a physical, what we are going to be able to do is pick up
+some of those diseases or tendencies or problems which wind up
+being enormous costers if ignored. The one that we have been
+warned about is obviously diabetes, which leads to kidney
+failure which leads to end-stage renal disease, very expensive,
+very costly. If we are spending the money for a physical up
+front, how much money are the taxpayer's going to save over the
+next 10 or 20 years by not having these problems go to extreme
+cases and we can intervene early? How much money do we save for
+those preventive wellness and physicals that we now have in the
+law? Mr. Holtz-Eakin?
+ Mr. HOLTZ-EAKIN. In our estimate, we have reviewed the
+peer-reviewed evidence on the success of disease management
+programs in cutting overall costs and we could not find
+comprehensive evidence of large-scale savings, so those are not
+reflected in our estimate.
+ Chairman THOMAS. I understand disease management. I
+mentioned preventive, wellness and physicals.
+ Mr. HOLTZ-EAKIN. We do not have a specific estimate of
+savings from those programs in our estimate.
+ Chairman THOMAS. Mr. Foster.
+ Mr. FOSTER. I will be glad to provide the answer for the
+record but I have not personally reviewed the estimates for
+those specific provisions so I cannot tell you. I will provide
+it for the record.
+ [The information is pending.]
+ Chairman THOMAS. So, significant preventive wellness and
+detection measures, which cost because you say we are going to
+spend money on the program, give us no return on savings over a
+decade or two decades? That all they are, are costers. No one
+believes that. That is why they are so strongly supported and
+included in the legislation. This is just one fundamental
+reason why estimates are estimates, and anyone who tries to
+hang their hat on it will find out that there is a lot more
+vapor than substance in the projections that are made. Thank
+you very much. Mr. Rangel, you wish to question?
+ Mr. RANGEL. First, let me thank you, Mr. Chairman, for
+waiving the 5-minute rule so that we can actually get to the
+bottom of some of these serious questions that you have raised,
+as well as observations. I knew that you were good, all three
+of you. I had no idea that you could determine or guesstimate
+how much money we save by having preventive medicine. If I had
+thought that you guys could do this, I would ask you how much
+productivity could we get if we had an educated work force? How
+much savings could we have if we had preventive medicine? How
+many lives could be saved? I wish I had the foresight of the
+Chairman to even frame those questions, because it sounds like
+the Democratic national programs in terms of education and
+health and all of the things that we say cost lives in
+medicine. Having not known you were that good, let me say this:
+this may appear to be an awkward time for you but I want you to
+know how much we appreciate the fact that we are able to
+attract professionals that are nonpartisan and objective in
+providing information to guide this Congress to make the
+important legislative and political decisions.
+ I am so glad that you have the integrity to make certain
+that you know that when you lean toward partisanship, you do
+not just do to personal detriment, but to detriment of the
+entire professions of which you are honored members. All of you
+have served well for a number of years. Any awkwardness that
+you have today I would want you to know it is only to maintain
+your individual integrity and the integrity of your profession
+so that this Congress and Congress' that will come would know
+that we know how to get Democrats and Republican opinions,
+liberal and conservative opinions, but what we need and we have
+to maintain are objective opinions like those which you have
+given over the years. So, Mr. Foster, when, for the first time,
+did you know that your estimates of the cost of the Medicare
+prescription drug bill were different and exceeded that of the
+renowned and respected CBO?
+ Mr. FOSTER. We first had estimates, Representative Rangel,
+for the drug provisions in H.R. 1 and S. 1, actually their
+predecessor packages, in early June. Our estimates for the drug
+part were significantly greater than the $400 billion target.
+ Mr. RANGEL. What was your opinion, in terms of your
+estimate of the cost of the so-called drug part?
+ Mr. FOSTER. Back then the early estimates for the versions
+as reported out of the Committees were in the range of $550
+billion through fiscal year 2013, just for the drug part.
+ Mr. RANGEL. You knew that your estimate differed from your
+colleagues in the CBO?
+ Mr. FOSTER. I have forgotten exactly when CBO released its
+first estimates but it was around the same time, I think.
+ Mr. RANGEL. You knew that they were dramatically different?
+ Mr. FOSTER. I might have chosen a different word than
+dramatically, but----
+ Mr. RANGEL. Strike that. You knew it was different?
+ Mr. FOSTER. I knew they were different, yes, sir.
+ Mr. RANGEL. Now who did you share your opinion with?
+ Mr. FOSTER. That first round of estimates we gave to our
+then-Administrator, Tom Scully. I believe we also sent copies
+to Doug Badger in the White House, people at OMB, other people
+at HHS.
+ Mr. RANGEL. You do believe, I hope, that your
+responsibility was to give this type of information when
+requested to Members of Congress?
+ Mr. FOSTER. There has been a longstanding practice
+obviously of having the Office of the Actuary provide technical
+assistance to Congress when asked. This goes back to the
+beginning of Medicare and further than that to the beginning of
+Social Security.
+ Mr. RANGEL. So, this tradition meant Members of Congress,
+whether they were Republican or Democrats?
+ Mr. FOSTER. Yes, sir.
+ Mr. RANGEL. Did there come a time that the staff of the
+majority Republican party asked you to share your estimate as
+to the cost of this bill with them?
+ Mr. FOSTER. I am sorry, could you repeat the question.
+ Mr. RANGEL. Did there come a time that the staff of the
+majority party, the party of the Chairman, asked you to share
+your estimates with them?
+ Mr. FOSTER. I do not recall their asking for the overall
+package costs. They certainly sought technical assistance from
+time to time on particular issues.
+ Mr. RANGEL. Did they seek technical assistance in terms of
+the cost of the prescription drug program?
+ Mr. FOSTER. I do not remember their asking for the cost of
+the drug benefit, not the majority staff, sir.
+ Mr. RANGEL. Then besides Mr. Scully what did you do with
+this information as related to the cost of the prescription
+drug program that you found was different, at least than the
+CBO?
+ Mr. FOSTER. We gave that to the people who had requested
+it, primarily Mr. Scully and others in the Administration.
+ Mr. RANGEL. You had no request, that you know of, from the
+Republican staff?
+ Mr. FOSTER. Not for that, no, sir.
+ Mr. RANGEL. Did you have any requests from the Democratic
+staff?
+ Mr. FOSTER. Yes, sir, we did. The Democratic staff of the
+Committee on Ways and Means had asked, in around mid-June, for
+a number of specific technical analyses related to H.R. 1. As
+part of that they requested an overall cost estimate for the
+package and the impact of the provisions on the date of
+insolvency for the part A Trust Fund.
+ Mr. RANGEL. Did you give that to them?
+ Mr. FOSTER. No, we did not.
+ Mr. RANGEL. If the Republican staff had requested that same
+information, would you have given it to them?
+ Mr. FOSTER. No, I think the answer to that is no. I can
+explain if you like.
+ Mr. RANGEL. Well, why did you not give it to the Democrats,
+since they were the ones that actually asked you for it?
+ Mr. FOSTER. I recommended to Mr. Scully for two particular
+technical analyses which your staff had indicated were a high
+priority, I recommended to him that in fact we had completed
+these estimates and that they should be released. I thought
+that they represented legitimate technical questions and we had
+reasonable answers. Based on our decades-long experience of
+providing this technical assistance, I did not see any reason
+not to. So, I made that recommendation to Mr. Scully. By this
+point in time he had made it clear that we were not to respond
+directly to requests from Congress anymore, but instead we were
+to give any such response to him and he would decide what to do
+with it.
+ Mr. RANGEL. Did you feel that this type of response from
+Mr. Scully in any way interfered with your professionalism in
+terms of what traditionally had been your job as related to
+responding to Members of Congress and their staff?
+ Mr. FOSTER. Yes, sir. I thought it was inappropriate. If it
+had been an issue of our providing the response to Mr. Scully
+and him promptly providing the response to the requester, that
+would have been less of a concern. What I perceived was that
+some responses went out and some responses did not go out. It
+struck me there was a political basis for making that decision.
+I considered that inappropriate and, in fact, unethical.
+ Mr. RANGEL. Let me ask the other two panelists, who are
+professional and have demonstrated their professionalism since
+they dedicated themselves to public service. Do either one of
+you disagree with the conclusions that Mr. Foster had reached,
+as it relates to his professional integrity in dealing with
+this question that he was faced with? Mr. Goss?
+ Mr. GOSS. I would have to say no, I do not disagree with
+anything that Rick has said. I would suggest, however, and
+perhaps Doug is in the same situation, I do not know all the
+details of this so I cannot comment.
+ Mr. RANGEL. I do not know all of the details either but
+based on what he said, and I am only talking about the
+integrity of your office, in the hypothetical if you were faced
+in the situation which I presented to him and he responded,
+would you agree with his conclusion?
+ Mr. GOSS. I agree with Mr. Foster's conclusion, absolutely.
+ Mr. HOLTZ-EAKIN. I know the standards of conduct for the
+CBO. If the tradition of nonpartisanship and open access to
+Congress is as described, then I would agree.
+ Mr. RANGEL. Mr. Foster, since the integrity of your
+profession was on the line, what prevented you from disagreeing
+with Mr. Scully since, in fact, it was really not a Democratic
+or Republican issue but an issue of your professionalism?
+ Mr. FOSTER. Nothing prevented me from disagreeing with him.
+We disagreed quite a bit, sir. I attempted on several occasions
+to have a discussion with him about the importance of providing
+the technical assistance, whether or not it might be used to
+argue against his preferred position or the Administration's
+position, on the grounds that you all are the top policymakers
+in the Nation, grappling with the biggest changes to Medicare
+since the program was enacted. These programs are very complex
+and the changes are very complex. I argued that you all ought
+to have the best and most complete technical information you
+can get. Suffice it to say I did not prevail in any of those
+attempts with Mr. Scully. I also attempted to have the same
+conversation with other folks in the Administration who were
+much more sympathetic. In the end, the new rules that Mr.
+Scully put in place prevailed. In terms of my own view of the
+professional aspect, I did consult a top attorney at CMS in
+trying to wrestle with the question. Because I knew already,
+from a professional standpoint, that we serve the public at
+large. I felt a very strong responsibility on behalf of the
+public not to withhold technical information that could be
+useful in this debate. The legal answer I got, and you should
+know, sir, is that in any conflict or difference between the
+professional standards of conduct for actuaries in this country
+and the laws on the books, the laws win. That is a known
+standard.
+ Mr. RANGEL. Excuse me. I wish you would say that again
+because I have a feeling I must conclude, I have a very strong
+feeling I must conclude, and I wanted to hear your last
+response. I am so sorry.
+ Mr. BECERRA. Mr. Chairman, if we could ask Mr. Foster to
+pull the mike a little closer. It is difficult to hear him.
+ Chairman THOMAS. Mr. Foster, these are not unidirectional
+like the old ones, but the top of the mike pointed more toward
+your mouth might help.
+ Mr. RANGEL. I want to thank the Chair for your indulgence.
+ Mr. FOSTER. Can you hear me better now?
+ Mr. THOMAS. Yes.
+ Mr. FOSTER. From a professional standpoint, I felt then,
+and believe now, there is an obligation on behalf of the public
+for my office to give you the best advice possible when
+requested. When I consulted the attorney at CMS as to the legal
+basis, I ended up convinced that the Administrator had the
+legal right to direct our activities in the way he did. In a
+difference between a law on the books or the legal right to do
+so and a professional responsibility to the public and to a
+client, Congress in this case, the law prevails. However, I was
+not happy about that. At the point that--well, I had a
+difficult choice, sir, you can imagine. I could ignore the
+orders. I knew I would get fired. I was not afraid of that. I
+did not especially want to be fired but I was not afraid of it.
+I could comply with the orders and I could resign in protest,
+which in fact I ultimately decided to do. I ultimately decided
+to resign in protest because of the inappropriateness of the
+circumstances we were under. In the end my staff talked me out
+of that on the grounds that a resignation might make a big
+splash and have a big impact for a day or 2, but there was
+grave danger to the office and this longstanding practice in
+that situation. They convinced me, and perhaps I helped
+convince myself somewhat, I would be better off working inside
+the system to get back to the situation that I think, in fact,
+we are now in wherein Secretary Thompson has gone on record
+saying this support should be provided on a nonpartisan basis.
+Mark McClellan, our Administrator-designee, has said the same
+thing.
+ Mr. RANGEL. Let me thank you for being persuaded to stay
+the course. Let me thank your two colleagues because this is
+not about Mr. Foster. It is not about Republicans and
+Democrats. This is about the integrity of the professionals
+that we depend on to give us information when we need it. You
+standing with him protects yourself, you protect your
+profession, and you make certain that we Democrats do not make
+the same mistakes because we just get carried away with our
+power. Mr. Foster, you are to be congratulated. Believe me by
+you making this decision, I am certain that the Secretary and
+the Administration will be very careful to see that this does
+not happen with other professionals. Thank you, Mr. Chairman.
+ Chairman THOMAS. The gentleman's 15 minutes has expired.
+The gentleman from Illinois wish to be recognized?
+ Mr. CRANE. Yes, Mr. Chairman.
+ Chairman THOMAS. Would the gentleman yield briefly?
+ Mr. CRANE. Certainly.
+ Chairman THOMAS. Mr. Foster, I have not done this before.
+Based upon the series of questions and the answers, I would ask
+you did you and I have a telephone conversation in regard to
+the concerns on your professional integrity in this
+Administration?
+ Mr. FOSTER. Yes, sir, we did.
+ Chairman THOMAS. Could you convey the gist of the telephone
+conversation?
+ Mr. FOSTER. Yes, sir. It was back in June, following the
+first of these instances which involved a request that your
+staff had made to me for an estimate, which was ordered to be
+withheld, which I provided anyway because I had not in fact
+received that order. My understanding is that Mr. Scully was--
+well, I know that he was deeply unhappy.
+ Chairman THOMAS. What was the gist of our conversation?
+ Mr. FOSTER. I apologize. You called and asked me whether
+the information in the memo I had sent to you represented my
+best estimate and my best judgment. I said yes, that it did.
+ Chairman THOMAS. I said what then?
+ Mr. FOSTER. You also said that you would be talking with
+some folks about the threats that you had heard of toward me
+and that I should not worry about it.
+ Chairman THOMAS. Did we have a similar conversation? Was
+that a bit of a deja vu for you?
+ Mr. FOSTER. I am sorry?
+ Chairman THOMAS. Did we have a telephone conversation on a
+similar subject matter at a previous time?
+ Mr. FOSTER. Back in 1997?
+ Chairman THOMAS. Yes, when there was an Administration of a
+different party putting pressure on you not to release
+information and the gist of my conversation to you at that time
+was what?
+ Mr. FOSTER. That is a little further back and a little more
+forgotten.
+ Chairman THOMAS. The answer was in your professional
+opinion if the information you provided was your professional
+opinion I would defend you in presenting your professional
+opinion; i.e., identical telephone conversations in two
+different Administrations. Apparently, the idea of following
+the law as you indicated, in terms of the flow of information,
+was present not only in Republican administrations but in
+Democratic administrations. As a matter of fact, if you will
+look at report language in the 1997 act, we underscored your
+ability to make those kinds of statements. So, I supported you
+then. I support you now. If you choose to continue this
+position as your professional prerogative, I will support you
+in the future. That does not mean I am always going to agree
+with their estimates, but I certainly believe the service of
+providing those estimates is a valuable assistance in making
+law. I want to thank the gentleman from Illinois for yielding.
+ Mr. RANGEL. Mr. Chairman, I have a misunderstanding here.
+This exchange allows me to believe that Mr. Foster gave you his
+estimates before he was told not to do it. So, you had
+information that we Democrats could not get and did not share
+it with us.
+ Chairman THOMAS. That is not what he said. The gentleman
+from Illinois.
+ Mr. RANGEL. That is what it sounded like.
+ Mr. CRANE. May I reclaim my time? Mr. Goss, several other
+Members have exuberantly claimed that Social Security is
+fiscally sound by citing the report's short-term projection
+that ends in 2013. That claim conveniently allows them to
+ignore the longer term projections that show that by 2018, just
+5 years later, Social Security will no longer be able to rely
+solely on its tax revenue to cover benefit payments. What would
+be the consequences of ignoring Social Security's financial
+challenges and not modernizing the program while it still has a
+surplus by putting off reform for some future Congress to deal
+with when the Trust Fund begins to shrink?
+ Mr. GOSS. We clearly are at a point where we do well to
+understand that Social Security does have financial shortfalls
+coming in the future. By acting sooner we clearly have a
+greater range of possibilities that can be considered. If
+action were taken relatively soon, it would allow these
+opportunities to be put into the law so that they could grade
+in, they could phase in on a more gradual basis. A perfect
+example of this was the 1983 Social Security amendments (P.L.
+98-21) where the normal retirement age was legislated to be
+increased with a 17-year delay. The increase did not, in fact,
+start until the year 2000 even though the change was enacted in
+the year 1983. Therefore, in my judgment, the cost of delaying
+substantially a serious discussion and movement toward deciding
+on what should be done for Social Security will be to limit
+possibilities and perhaps make it more difficult to get the job
+done.
+ Mr. CRANE. Thank you, Mr. Goss.
+ Chairman THOMAS. Does the gentleman from California, Mr.
+Stark, wish to inquire?
+ Mr. STARK. Thank you, Mr. Chairman. I want to thank the
+panel. I just wanted to----
+ Chairman THOMAS. The Chair would indicate briefly, not on
+the gentleman's time, that we are going to do as much as we can
+to return from the Senate time structure to the House time
+structure. It will be a liberal 5 minutes but it is not going
+to be 15.
+ Mr. STARK. I thank the Chair. You mentioned in your
+testimony, Mr. Foster, in response to Mr. Rangel's question,
+that there were others or people in the White House who
+received your June estimates of H.R. 1 and S. 1. I think you
+mentioned Mr. Badger by name. Can you tell me who the others
+were, to the best of your recollection.
+ Mr. FOSTER. Yes, I believe Jim Capretta in the OMB and
+Jennifer Young, then Acting Assistant Secretary for Legislation
+at HHS. There would have been some other folks within HHS as
+well, Legislative Director, for example.
+ Mr. STARK. So, it would be reasonable to assume when
+Secretary Thompson told us last month and he answered Mr.
+Rangel, he said ``we knew all along, Congressman Rangel, that
+our assumptions were higher,'' that it would not have been a
+surprise that the Secretary might have known or had an inkling
+that there were these higher estimates, as well. Is that a fair
+assumption?
+ Mr. FOSTER. I do not actually know when the Secretary knew,
+sir.
+ Mr. STARK. There was a question that you may have
+participated in a meeting or a teleconference or a conference
+call in the presence of or with Mr. Badger where he either
+answered for you or directed you to refrain from providing any
+cost estimates or other information to Members or staff from
+the Committees of jurisdiction. Do you recall this event or
+these events?
+ Mr. FOSTER. There were, on occasion, either conference
+calls or meetings for the purpose of discussing various
+technical issues with the bill. Mr. Badger and others were
+typically present. On occasion, I remember him jumping in to
+answer a question that might have been directed toward me. I do
+not remember instances where I felt I had not been able to
+answer a question.
+ Mr. STARK. I am sure you recognize my limited professional
+competence in the area of actuarial science, and I am sure you
+do appreciate our Ways and Means minority health staff's
+interest and expertise not in actuarial science but in the
+intricacies of Medicare finance. Would it be a reasonable
+assumption that somebody as naive in these areas as myself, but
+with the help of my excellent staff, if we had had your June
+estimates in the range of $550 billion, would it have been a
+huge leap for us to suspect that either H.R. 1 or S. 1 or the
+resulting conference bill would have been far higher than $400
+billion?
+ Mr. FOSTER. I think that would be a reasonable conclusion.
+The drug provision, of course, was far and away the most
+expensive component. We had only rough estimates back then of
+the competition or what became the Medicare Advantage
+provisions. We generally had estimated those to be a cost of
+$30 billion to $50 billion. It was anticipated and, in fact,
+turned out to be the case that everything else, all the other
+fee-for-service provisions, had a modest overall savings in the
+neighborhood of $20 billion or $30 billion.
+ Mr. STARK. So, to summarize, had you not been restrained,
+or threatened, as the case may be, that in the normal course of
+events I would have received and Mr. Rangel would have received
+and others on the Committee and our staff would have received a
+response to our request of June 17th and on June 19th and with
+the information that we would have received based on your then-
+analysis, it would have been logical for us to assume that the
+cost of H.R. 1 and S. 1 and/or the result would be more in the
+neighborhood of between $500 billion and $600 billion than
+between $300 billion and $400 billion?
+ Mr. FOSTER. Yes. We certainly would have had a rough
+estimate that we could have conveyed informally to that effect.
+We would not have had a final refined estimate until the same
+December 23rd date that I mentioned.
+ Mr. STARK. May I take 30 seconds, Mr. Chairman. I would
+stipulate here that I was a partial author of a bill that cost
+far more, $900 billion I suspect, although I do not know where
+that estimate came from. At any rate I recognize that. The
+issue here is that I am sure people who would have opposed my
+position knew that was $900 billion. The concern that I have is
+that we can and often do disagree. We generally, for instance
+on the Joint Committee on Taxation, we operate with a great
+deal of reliability on the same set of numbers. I think that is
+my concern and I would hope it is a bipartisan concern, that in
+the future we have got to have a real level of confidence that
+at least the underlying numbers are the same on both sides, and
+we can proceed then to argue our differences as to what those
+numbers might be. I thank the Chairman for the extra time.
+ Chairman THOMAS. The Chair believes that the $900 billion
+estimate was a CBO figure. Therefore, had Rick Foster estimated
+yours, it would have been $1.3 trillion or $1.4 trillion, or
+$1.5 trillion, based upon the testimony that was heard. To make
+sure that the record is clear, the Chair would call on the
+gentleman from New York to explain the information he received
+from staff about the response that Mr. Foster made to him in
+terms of the telephone conversation we had and the material
+that was to be provided.
+ Mr. RANGEL. Yes, Mr. Chairman. I have been informed by
+staff and reassured by the Chair that the technical assistance
+information that Mr. Foster gave to the distinguished Chairman
+prior to the time that the restrictions were placed on you was
+not the actual estimate of the cost of the prescription drug
+sector of the bill.
+ Chairman THOMAS. I thank the gentleman. So, the point that
+I made that it was not in reference to the same thing that the
+gentleman was talking about was, in fact, accurate. I
+appreciate the gentleman's clarification for the record very
+much. Does the gentleman from Florida, Mr. Shaw wish to
+inquire?
+ Mr. SHAW. Thank you, Mr. Chairman. I commend Mr. Rangel for
+making that clarification. Mr. Foster, you have heard as the
+Chairman said that the $900 billion figure came from CBO.
+Perhaps I should ask Mr. Holtz-Eakin, is that correct
+information on Mr. Stark's bill?
+ Mr. HOLTZ-EAKIN. I believe that is correct, yes.
+ Mr. SHAW. So, his curiosity is answered on that. Mr.
+Foster, have you had an occasion to even look at that bill?
+ Mr. FOSTER. No, sir.
+ Mr. SHAW. Based upon what CBO came with, I would guess that
+you would score it very much higher than the CBO did; is that
+correct?
+ Mr. FOSTER. Possibly, but without looking at the
+provisions----
+ Mr. SHAW. I understand you cannot answer that directly but
+I would think that if you use the same assumptions that you
+used on our bill that you would raise it above the $900 billion
+because it is a much richer bill as far as benefits were
+concerned. I have this question for Mr. Holtz-Eakin. Were you
+present when Secretary Snow was testifying?
+ Mr. HOLTZ-EAKIN. Yes, I was.
+ Mr. SHAW. At that time you heard the gentleman from
+California, Mr. Matsui, inquire using my Social Security reform
+bill as an example in citing a deficit in that bill; is that
+correct?
+ Mr. HOLTZ-EAKIN. Yes, I did.
+ Mr. SHAW. What concerns me is an accounting process that
+the Federal Government uses. When you start talking about the
+accounting system, it is really a cash flow system in which any
+moneys put out, any revenues put out, can inflate the deficit
+even though it is invested, whether it is invested in a
+building or whether it is invested in a retirement account that
+will eventually be used to help fulfill the obligation of the
+SSA for the payment of benefits to future retirees. Is that not
+correct?
+ Mr. HOLTZ-EAKIN. That was the conversation, yes.
+ Mr. SHAW. What I am concerned about here is that I believe
+very strongly that the only sensible approach to save Social
+Security and to prevent this deficit is to start forward
+funding Social Security in some way. The problem you get into
+when you start doing that is you trip over the accounting
+process that the Federal Government uses. Even though that
+money is like putting it into a pension plan to take care of
+the future obligations of a government or of private industry.
+In the Federal system of accounting it is considered an outlay
+and that is just the way the system works. When it comes back,
+however, as you get into the out years and as people begin to
+retire and utilize their retirement account to help pay their
+benefits, that will assist the Trust Fund in the payment of the
+benefits, then that is considered a receipt; is that not
+correct?
+ Mr. HOLTZ-EAKIN. This is correct.
+ Mr. SHAW. It occurs to me that what we are talking about
+doing is that we should score the deficit as an outlay now so
+we can, as time goes on, start considering it a receipt. I
+think that this is a very serious flaw in our system that we
+should begin to take a look at it. If we are going to be
+responsible, if we are going to be responsible, and if we care
+about our kids and our grandkids, we have to start investing in
+Social Security with real economic assets. Those real economic
+assets can be in no safer place than they would be in
+individual retirement accounts, which would be available to
+help pay the benefits that tomorrow's seniors are looking
+forward to. Could you comment on that, and the accounting
+process, and what we might be able to do to solve this
+situation, the dilemma that we find just because of an
+irresponsible accounting system?
+ Mr. HOLTZ-EAKIN. Congressman, the CBO has, for the past
+several years beginning under my predecessor Dan Crippen, been
+building the capacity to look not only at the conventional 10-
+year cost estimate of Social Security proposals but also longer
+term implications from the perspective of system finances, from
+the perspective of the broader unified budget, and indeed from
+the perspective of impact on the economy as a whole. That
+capacity, although not yet complete, is nearing the ability to
+examine these proposals in quite great detail, including
+addressing some of the concerns that you have raised.
+ I look forward to working with you on that. I would like to
+take the opportunity to thank Mr. Goss, since he is here today,
+for the extent of assistance that he has provided the CBO in
+this undertaking. It has been quite a big undertaking and we
+would not have gotten to the point we have without his help.
+ Mr. SHAW. I also very much appreciate it because I think
+all of the alarms should be going off, not only on Medicare
+which is a more immediate problem, but in Social Security which
+also is an immediate problem because if we do not start
+investing in individual accounts for tomorrow's seniors, then
+the impact is going to be greater and it is going to be
+tougher. Because we need to get those funds into the individual
+accounts so they can start building. That is the magic. That is
+how we create a surplus over 75 years is by investing and
+letting those accounts buildup. It is the only way we are going
+to promise our kids and our grandkids at least as good a
+retirement as we have and avoid this economic disaster that
+could bring our economy down. No economy in the world could
+survive this type of pending deficit that we are looking at. I
+thank you, Mr. Chairman.
+ Chairman THOMAS. I thank the gentleman. Does the gentleman
+from Michigan wish to inquire?
+ Mr. LEVIN. Thank you. I just want to be clear what is
+really the issue here, at least a major issue. It is not which
+of the best estimates was best, but why the several so-called
+best estimates or figures were not given to us before we voted.
+The question really is what the Administration knew before the
+vote on the conference report surely, and what was not revealed
+to us. I just wanted to quickly go back over Mr. Thompson's
+testimony because there was an effort to kind of make Mr.
+Scully the scapegoat. You testified, Mr. Foster, that
+information was sent to the White House and to HHS; is that
+correct?
+ Mr. FOSTER. Not all of our cost estimates were sent but in
+a number of cases yes, we sent the estimates to them.
+ Mr. LEVIN. I asked Secretary Thompson, you knew your
+actuaries are estimating the cost far higher than CBO quite
+early on, well before we acted on the Medicare bill, right? You
+knew that? ``We knew that the assumptions were higher.'' You
+were told that the amount was higher? ``No, Mr. Levin,'' said
+Secretary Thompson. ``We did not know the final amount because
+the final 2 days changed the complexity and the direction of
+the bill.'' Then I say no, no, but before that your actuaries
+were saying before the last couple of days that the amount was
+higher. The Secretary, ``our preliminary estimates were higher,
+yes.'' My question, you passed that on to the White House? To
+somebody there? The Secretary, ``we passed that on to''--and
+then I interjected, somebody in the White House knew what your
+actuaries were saying? The Secretary, ``there were individuals
+in the White House who knew that ours, meaning the actuarial
+preliminary estimates, were higher, yes, based upon
+participation.'' That is the real issue here. Now the final
+estimate came later on but I think you testified, Mr. Foster,
+as to the key portions, for example, the difference in the
+take-up rate, the number of low income beneficiaries enrolled,
+that amounted to many billions. Those were not basically
+changed in the final bill, were they?
+ Mr. FOSTER. Our estimates, you mean, sir?
+ Mr. LEVIN. The basic material upon which you based your
+estimates. That material was known well before the final 2 days
+was it not?
+ Mr. FOSTER. Yes. Our estimates changed all along as the
+proposal itself changed, and we tried to keep up with it. The
+range of our estimates that we were in for the drug cost was
+typically $500 billion to $600 billion all the way through the
+process.
+ Mr. LEVIN. So, that difference cannot be simply attributed
+to the last 2 days. The difference between you and CBO was
+always substantial; is that not correct?
+ Mr. FOSTER. Yes, sir, that is correct.
+ Mr. LEVIN. So, I think, in a few words, there was a cover
+up of some basic information and it said the differences maybe
+were no big deal. Our having all of the facts are a big deal.
+We were not given them. We were not given those facts. The
+differential, while it somewhat shifted from time to time, was
+always there and it was always very, very substantial. We had
+the right to know. Not only the Administration. They have the
+right to tell us what they knew and they did not. They did not.
+It was not only Mr. Scully. Again, people in OMB were given
+your estimates?
+ Mr. FOSTER. Some of them, yes, sir.
+ Mr. LEVIN. People in the White House were given these
+assessments.
+ Mr. FOSTER. Some of the estimates, yes.
+ Mr. LEVIN. Also people in HHS?
+ Mr. FOSTER. Yes.
+ Mr. LEVIN. Thank you.
+ Chairman THOMAS. Does the gentle lady from Connecticut, the
+Chairman of the Subcommittee on Health, wish to inquire?
+ Mrs. JOHNSON. I would just note for the record that, Mr.
+Foster, you did earlier make very clear that the law allows Mr.
+Scully to control the flow of information and that is just the
+law. So, while you might not like it, that is where it was. Dr.
+Holtz-Eakin, did the Democrats ever submit their bill to you
+for estimation? To be estimated? Did they submit their
+alternative to you to be estimated?
+ Mr. HOLTZ-EAKIN. I am sure they submitted many bills. We
+can get the details for you.
+ Mrs. JOHNSON. We do have a letter back from you where you
+do estimate it as roughly $1 trillion. Mr. Foster, did the
+Democrats submit their bill to you to be estimated?
+ Mr. FOSTER. No, ma'am.
+ Mrs. JOHNSON. It is just interesting that, since you think
+CMS's opinion is so important, that you did not submit your
+bill to them to be estimated. So, let me just proceed on a
+couple of lines. First of all, Mr. Foster and Dr. Holtz-Eakin,
+I have enormous respect for not just you but the staffs behind
+you that work so hard on our behalf. I do say, Mr. Foster, that
+as a Member having to make judgments about your work, I have
+never seen 99 percent of any group do anything. So, to estimate
+that 99 percent would take up the drug benefit when only 91
+percent elected part B, and that is for doctors visits, does
+seem to be distant from my experience of reality. Ninety-four
+percent take-up, but in a subgroup to get to the 94 percent you
+would have to get to 99 percent. So, being the author of the
+Children's Health Bill and finding out that when we went out
+there to try to enlist children for this wonderful health
+insurance program what we found was enormous numbers of
+children not registered for Medicaid, which gave them free
+health care. So, it is very hard to get 99 percent in America
+to do anything, no matter how good the deal is. Certainly many
+think the prescription drug Part D benefit is not all that
+great and would not attract that kind of allegiance.
+ My point is this, the most controversial part of this bill
+was the expansion of the private plans. In June, in a memo that
+you did and that was made public, it was very clear--in fact,
+you say in that, our preliminary estimate is that about 48
+percent of the beneficiaries will participate in HMOs and
+preferred provider organizations (PPOs). So, everybody had that
+and everybody knew that was big money. That is underneath this
+bill, the biggest, most difficult, and one of the most costly
+issues. So, there were big differences. It was well known you
+were looking at a number of these issues differently than was
+CBO, and frankly than were many of us. I thought it was really
+quite astounding that you came up with the higher estimate
+because there were going to be more Advantage plans rather than
+a lower estimate because the competition would be greater
+because you would have more plans. So, this business of
+estimating and the judgments involved is complex. Each of us
+comes to it from our own experience. I respect both of you. We
+need your work. We learn from your disagreements.
+ It does concern me that neither of you seemed to take very
+seriously the portions of the bill that really are going to
+change Medicare for people with chronic illness, and remember
+that is most seniors, from an illness treatment program to a
+preventive program. Now we see Kaiser Permanente making the
+decision to invest $3 billion. They are going to save $10
+million the first year in Hawaii. The hospitals are going to
+have $6 million annually every year thereafter. Just the cost
+for medical errors cost our country $35 billion annually and we
+spend $5.4 billion in Medicare because tests that were taken
+cannot be gotten to the physician making the decision. So, if
+we go to electronic health records, if we go to electronic
+prescribing, that is going to have a big impact on costs. You
+see the private sector racing down that track at a pace not
+anticipated.
+ Last week we had a hearing on quality. Everybody is doing
+it out there. PacifiCare, in a group that was 90-percent
+elderly, reduced hospital rates for one group by 98 percent for
+coronary artery disease, reduced emergency room visits, and it
+goes on. I will not go through all four of them because I do
+not have time. Basically, it saved $195 million in just these
+four programs in a group that was mostly seniors. You look at
+studies that have been done for us in the journal Heart, they
+found that heart failure patients and disease management
+programs reduced hospitalizations 87 percent. I am just
+astounded that you could cost out every dollar we spent but you
+could not cost in dollars that we saved. When we have every
+senior coming into Medicare having a physical to identify early
+diabetes, hypertension, heart problems and we build in disease
+management programs it just sort of spins my head that you give
+us practically no credit for that, essentially no credit for
+that. In the private sector they are getting lots of savings
+from that. Unfortunately, I used all my time in explaining my
+question but it is all right because you did not give us the
+credit so that is that. People ought to understand that these
+estimates do not take into account the systems changes that we
+put in place in this bill and that, coupled with what the
+private sector has learned and is doing, is going to make an
+enormous impact on the cost. Thank you.
+ Chairman THOMAS. The answer is either yes or no. Does the
+gentleman from New York, Mr. Houghton, wish to inquire?
+ Mr. HOUGHTON. Thank you very much, Mr. Chairman. Gentlemen,
+nice to see you. I do not want to talk about any cover ups. I
+do not want to talk about the difference in estimation between
+the CMS and the CBO. I will ask a very, very simple question to
+you, Dr. Holtz-Eakin. In your testimony you talk about the
+union plans assessing the 28-percent employer subsidy provided
+in the new Medicare law. You are quite sure unions can receive
+this subsidy? What about the State retiree plans?
+ Mr. HOLTZ-EAKIN. The union plans can receive the subsidy.
+State retiree plans, I am not familiar with the provisions. I
+can certainly check and get back to you.
+ Mr. HOUGHTON. If you would, I would appreciate it. Chairman
+Thomas, I am very fast. End of questions.
+ Chairman THOMAS. The answer is yes, State retirement plans
+can receive the support, as well. The key was to keep those
+people in the programs they are in with a modest subsidy rather
+than assuming the full cost in whatever plan they were in, we
+believe they will remain in with a portion of the bill. Again,
+a coster, but no credit whatsoever on the assumptions about the
+dollar saved over a longer period of time, and so forth, and so
+forth. The gentleman from Georgia, Mr. Lewis, wish to inquire?
+ Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman. I
+want to thank the three members of the panel for being here.
+Mr. Foster, I want to ask you several questions. I want to
+thank you for being so responsive. For the record, someone may
+come along 5 years from now or 10 years or 50 years from now
+and say what was this all about. So, I am going to ask you some
+questions and I want you to answer them pretty short and fast
+so I can get them all in. How long have you been employed by
+the Federal Government?
+ Mr. FOSTER. A little over 31 years, sir.
+ Mr. LEWIS OF GEORGIA. What is your present position?
+ Mr. FOSTER. Chief Actuary for the CMS.
+ Mr. LEWIS OF GEORGIA. Mr. Foster, would you be kind enough
+to describe your role in this position? What do you do?
+ Mr. FOSTER. My office and I prepare all of the financial
+projections for Medicare and Medicaid, for the President's
+budget, and for the annual report to Congress that we are here
+for today. We estimate the cost of proposed legislation on
+behalf of the Administration and Congress. We do a number of
+functions involving current Medicare statutory requirements,
+such as setting the Part B monthly premiums, setting the
+Medicare Advantage payment rates, and setting the inpatient
+hospital deductible. We also set all the price indices that are
+used for updating Medicare payments like the Medicare economic
+index, the inpatient hospital market basket, and so forth. I am
+sure I left out something important. We do the national health
+accounts, an estimate of the total spending on health care in
+all the United States.
+ Mr. LEWIS OF GEORGIA. Mr. Foster, do you enjoy your work?
+Do you enjoy your job? Is it a good job?
+ Mr. FOSTER. Most days, sir, yes.
+ Mr. LEWIS OF GEORGIA. How many people work under your
+direction?
+ Mr. FOSTER. Right now we have 70, sir.
+ Mr. LEWIS OF GEORGIA. They are good employees?
+ Mr. FOSTER. Yes, they are outstanding.
+ Mr. LEWIS OF GEORGIA. Let me ask you something else. Do you
+recall receiving an e-mail maybe around June 20 from the top
+aide to Mr. Scully? The e-mail said something like, do not
+share information with anyone else. The consequences for
+insubordination are extremely severe.
+ Mr. FOSTER. Yes, I remember that e-mail well.
+ Mr. LEWIS OF GEORGIA. When you received this e-mail, what
+did you do? What did you tell the people working with you? Did
+you say anything? Did you feel shocked?
+ Mr. FOSTER. That e-mail and the conversations that went
+with it put in place a new policy regarding assistance to
+Congress. We notified the office that we should no longer
+respond directly. Instead their requests and the responses had
+to come back to me and I would turn them over to Mr. Scully for
+disposition.
+ Mr. LEWIS OF GEORGIA. In all of your 30 years as an
+employee of the Federal Government or maybe in this particular
+work, have you ever received anything like this before?
+ Mr. FOSTER. No, nothing really quite like that.
+ Mr. LEWIS OF GEORGIA. I thank you for being so responsive
+and I thank you for being a good public servant. Thank you.
+ Mr. FOSTER. Thank you, sir. We try.
+ Chairman THOMAS. I thank the gentleman. The gentleman from
+California, Mr. Herger, wish to inquire?
+ Mr. HERGER. Thank you, Mr. Chairman. Mr. Foster, you had
+mentioned earlier that you were following the law; is that
+correct? We have precedent but we have the law and you were
+following the law. Therefore the directives you had through
+this e-mail were still following the law; is that correct?
+ Mr. FOSTER. Yes, sir.
+ Mr. HERGER. Dr. Holtz-Eakin, if I could ask you a question,
+please, just on the makeup of this legislation. The Medicare
+Modernization Act includes non-interference language that
+prevents the Secretary of HHS from interfering in negotiations
+between private plans and drug manufacturers. In your opinion,
+do you believe that private plans acting independent of the HHS
+Secretary will be able to effectively negotiate drug prices for
+seniors?
+ Mr. HOLTZ-EAKIN. Our estimate includes the fact that at-
+risk private prescription drug plans will have both the tools
+and the incentives to negotiate aggressively and to control
+costs on behalf of their beneficiaries.
+ Mr. HERGER. So, you feel that they will be able to
+effectively do that?
+ Mr. HOLTZ-EAKIN. Yes. In a letter we wrote in response to
+an inquiry from Senator Fritz, we indicated that removal of
+that language would not change the basic estimate of the bill.
+ Mr. HERGER. Would having the HHS Secretary involved in
+these negotiations result in lower prices, do you feel?
+ Mr. HOLTZ-EAKIN. If there were to be language which
+proactively stipulated that the Secretary enter into
+negotiations, it would depend on the particular circumstances
+in which that were to occur. In a separate letter to Senator
+Wyden on this topic, we did mention that in the cost of single-
+source prescription drugs, your classic blockbuster drug, and
+perhaps in fallback plans there might be some opportunity for
+the Secretary to negotiate price savings. In other
+circumstances, however, it did not appear to be the case.
+ Mr. HERGER. If the HHS Secretary were allowed to negotiate
+drug prices, is it not most likely the case that the Secretary
+would end up simply setting the prices as is done with the rest
+of Medicare, rather than truly negotiating these prices where
+we would tend to get a lower price?
+ Mr. HOLTZ-EAKIN. It is not possible to know without looking
+at the precise language and the authority that the Secretary
+was given in those kids of circumstances.
+ Mr. HERGER. Thank you. Thank you, Mr. Chairman.
+ Chairman THOMAS. I thank the gentleman. The gentleman from
+Maryland wish to inquire?
+ Mr. CARDIN. Thank you, Mr. Chairman.
+ Mr. Foster, let me follow up on the information issue
+because I am, along with I think all Members of this Committee,
+quite concerned about information that did not get to Congress
+in time for us to consider it when we had to make policy
+decisions. Of course, that is where the actuarial information
+becomes important.
+ I understand correctly there was a very significant
+difference between your estimate on the number of Medicare
+beneficiaries that will participate in private insurance under
+Medicare versus what the CBO assumes will be participating in
+private insurance, a difference of between 12 percent and 32
+percent approximately.
+ Mr. FOSTER. Yes, sir.
+ Mr. CARDIN. That difference has a dramatic impact on cost
+and could very well influence congressional action on how much
+additional funds we should make available to private insurance
+companies under the Medicare Program. Now if I understand
+correctly, you were instructed that this information, even
+though it had been requested by Congress, could not be made
+available directly by you to Congress but had to go through Mr.
+Scully; is that what happened?
+ Mr. FOSTER. Yes, any estimates or analysis that we prepared
+for Congress after about early June were to go through Mr.
+Scully. We had specific requests from the Ways and Means
+Democratic staff involving some of the competition in the
+Medicare Advantage provisions including the cost and any of
+those would have gone through Mr. Scully.
+ Mr. CARDIN. Are you aware of whether Congress was informed
+that this information was available but had to be gotten from
+Mr. Scully? That there was a new policy in place? Are you aware
+that that was communicated to Congress?
+ Mr. FOSTER. I, myself, passed that information on to
+individual staff members when the question arose. I do not know
+if anyone in the Administration announced that more broadly.
+ Mr. CARDIN. Are you aware of whether any of that
+information, the information I am referring to on the basic
+differences between CBO and the actuaries on the cost
+estimates, whether that was in fact made available to Congress
+before we were called upon to act?
+ Mr. FOSTER. I would have to stop and think because, as I
+said earlier, we never had a final cost estimate for the
+Medicare Advantage provision until much later on.
+ Mr. CARDIN. I appreciate that. In your answer to Mr.
+Thomas's question, you indicated the final numbers were not
+available until shortly before Christmas. The assumption
+numbers, the number of participants, and so forth, that was
+available, was it not?
+ Mr. FOSTER. Yes, sir.
+ Mr. CARDIN. That was not made available to Congress?
+ Mr. FOSTER. In fact, that part of it was for H.R. 1 under a
+request we had from Mr. Thomas in early June. That is what, in
+fact, set off the change in policy.
+ Mr. CARDIN. So, now, I guess the frustrating part here is
+this; that this information should be made available to all of
+us for policy discussions. There was a radical change in policy
+that you were basically instructed to implement. Yet there was
+no effort made to inform Congress collectively, as an
+institution, that these policy changes were being made and no
+chance for Congress to, in fact, focus on that before we were
+called upon to act on a very important piece of legislation
+without having the full information before us from the
+actuaries. Is that not a fair statement?
+ Mr. FOSTER. I did my best to let folks know that in fact, I
+could no longer respond directly and that they had to talk to
+Mr. Scully on that. What happened beyond that, I am not aware
+of.
+ Mr. CARDIN. I thank you. I thank you for your testimony and
+for your straight answers here before our Committee. Thank you,
+Mr. Chairman.
+ Chairman THOMAS. Thank the gentleman. The gentleman from
+Louisiana wish to inquire?
+ Mr. MCCRERY. Yes. Thank you, Mr. Chairman.
+ Chairman THOMAS. Will the gentleman yield briefly to me?
+ Mr. MCCRERY. Yes, sir.
+ Chairman THOMAS. In the exchange that Mr. Cardin just had
+with you, in the terms of the information, was in fact the
+basis of the phone call that I made to you, reinforcing the
+fact that if, in your professional opinion, the answers you
+provided were the best that you could do, that I would support
+and defend your ability to do that. The same basic conversation
+I had during the Clinton Administration. I thank the gentleman.
+ Mr. MCCRERY. Dr. Holtz-Eakin, when was the CBO formed? When
+did it first come into existence?
+ Mr. HOLTZ-EAKIN. It was created by the Budget Act 1974
+(P.L. 93-344) and began operating in 1975.
+ Mr. MCCRERY. Do you know why the CBO was created by
+Congress?
+ Mr. HOLTZ-EAKIN. At that time Congress was involved in a
+dispute with then-President Nixon regarding the impoundment of
+funds Congress had appropriated, a dispute that went to the
+U.S. Supreme Court. In the aftermath of that dispute, the
+Congress decided to have an independent ability to assess
+budgetary matters.
+ Mr. MCCRERY. So, in other words, Congress did not trust the
+Administration to come forward with estimates for legislation
+and other things, that they decided that they needed
+internally, so they created CBO?
+ Mr. HOLTZ-EAKIN. That is my understanding, yes.
+ Mr. MCCRERY. So, this is a long history of Congress wanting
+an independent source for all kinds of things, including
+estimates of the cost of legislation. In fact, Dr. Holtz-Eakin,
+is not Congress in its deliberations bound by the estimates of
+the CBO?
+ Mr. HOLTZ-EAKIN. In a formal sense it is bound by the
+decisions of the budget Committees to which we deliver our
+estimates and whose Members are the ultimate arbiters of cost
+estimates.
+ Mr. MCCRERY. In fact, section 308 of the Congressional
+Budget Act establishes the CBO as the scorekeeper for Congress,
+does it not?
+ Mr. HOLTZ-EAKIN. Yes, it does.
+ Mr. MCCRERY. When we say the scorekeeper, we mean you are
+the one who has to give us estimates of the cost of bills and
+it is those estimates on which we much rely; is that not
+correct?
+ Mr. HOLTZ-EAKIN. We are obligated to deliver estimates to
+the Congress. There is the possibility for directed
+scorekeeping, which alters the official reported score.
+ Mr. MCCRERY. So, bottom line, we have had estimates in the
+past from OMB which collaborated with CMS or the Health Care
+Financing Administration or any number of other government
+agencies. While some have attempted to use those numbers,
+sometimes Republicans and sometimes Democrats, for our own
+political purposes, the fact of the matter is when we are
+deliberating on legislation in Congress we are bound by the
+Budget Act to consider the estimate of the CBO in terms of
+sticking within the budget that we have passed; right?
+ Mr. HOLTZ-EAKIN. That is the tradition, yes, sir.
+ Mr. MCCRERY. I would submit that it is the law under the
+Congressional Budget Act.
+ Mr. HOLTZ-EAKIN. It is a fine point. We are forced to
+deliver an estimate. I would pray that you would respect it
+enough not to change it, but there is the opportunity for
+them----
+ Mr. MCCRERY. Certainly, we can pass a law to disregard the
+estimate, that is true. The law that is on the books says we
+have to abide by the estimates of CBO when dealing with the
+budget. So, that is what we did in the case of the Medicare
+bill. That is what we do in the case of every bill that we
+consider. If it is a tax bill, obviously the Joint Committee on
+Taxation does the estimate, but even that comes through the
+CBO. So, we are bound by that CBO estimate. Now let us get to
+the substance of the Medicare bill because some have said that
+this Medicare bill we passed will not do seniors any good, it
+will not help anybody. In fact, it may even be the end of
+Medicare. Well, we have one estimate of $395 billion, another
+of $535 billion or $550 billion, or whatever it is, so
+evidently we are spending money on somebody in the next 10
+years. I will ask both of you, Mr. Foster and Dr. Holtz-Eakin,
+in your professional opinion, will the private plan market for
+a prescription drug benefit proposed by the legislation in fact
+be in place in 2006? Mr. Foster?
+ Mr. FOSTER. We believe that it will. We believe there will
+be interest in this market.
+ Mr. MCCRERY. Dr. Holtz-Eakin?
+ Mr. HOLTZ-EAKIN. Yes, we believe it will, as well.
+ Mr. MCCRERY. In your professional opinion, will the vast
+majority of Medicare beneficiaries choose to enroll in this
+drug benefit? Mr. Foster?
+ Mr. FOSTER. They should because it is a good deal for them
+and if they wait they will be hit with a late enrollment
+penalty. So, they should.
+ Mr. HOLTZ-EAKIN. Our estimate indicates that 87 percent of
+eligible seniors will take it up.
+ Mr. MCCRERY. Will significant numbers of low-income
+individuals elect to enroll in the low-income subsidies which
+provide comprehensive drug coverage with no gaps in coverage
+for up to only $5 per prescription? Mr. Foster?
+ Mr. FOSTER. Yes, sir. We anticipate the great majority of
+such folks will take advantage of the low-income subsidy.
+ Mr. HOLTZ-EAKIN. Likewise, we anticipate that.
+ Mr. MCCRERY. Thank you very much, gentleman. Thank you, Mr.
+Chairman.
+ Chairman THOMAS. I thank the gentleman. The gentleman from
+Michigan wish to inquire?
+ Mr. CAMP. Thank you, Mr. Chairman. As my colleague
+mentioned, the CBO was formed under the 1974 Budget Act to give
+Congress an independent agency to evaluate the costs of
+legislation. Mr. Holtz-Eakin, I wonder if you could tell me if
+the estimate for the Medicare Modernization bill was provided
+to Congress in November of last year; is that correct?
+ Mr. HOLTZ-EAKIN. The final cost estimate on the bill was
+delivered shortly after passage.
+ Mr. CAMP. Shortly after passage. That was at $395 billion
+from 2004 to 2013; is that correct?
+ Mr. HOLTZ-EAKIN. That is correct.
+ Mr. CAMP. Since the time of that estimate and in the
+intervening release of the CMS data, has this caused you to
+change your estimate--or not you personally. Has this caused
+CBO to change the estimate?
+ Mr. HOLTZ-EAKIN. No, it has not.
+ Mr. CAMP. Have any of the assumptions underlying the
+estimate changed since that time?
+ Mr. HOLTZ-EAKIN. In the course of preparing our baseline
+estimates of the outlays in the Medicare Program, we have
+revisited each aspect of the bill. We have made a modest
+adjustment in the participation in the Medicare Advantage plans
+but the adjustment had no budgetary consequence.
+ Mr. CAMP. So, the budget estimate is the same as it was in
+November of last year?
+ Mr. HOLTZ-EAKIN. Yes, it is.
+ Mr. CAMP. I understand that CBO projects that spending on
+Medicare and Medicaid combined will total $6.9 trillion from
+2005 through 2014; is that correct?
+ Mr. HOLTZ-EAKIN. I do not know the number off the top of my
+head but it sounds right.
+ Mr. CAMP. Obviously your estimate of $395 billion for the
+Medicare Modernization bill affects both Medicare and Medicaid,
+represents less than 6 percent of this amount. The
+Administration's estimate at $534 billion represents less than
+8 percent of this amount. Is it fair to say whether the final
+estimate of the bill is $395 billion or $534 billion that the
+total amount of spending is really only a small portion of the
+overall spending on Medicare and Medicaid over the next decade?
+ Mr. HOLTZ-EAKIN. I think that is a fair assessment of the
+overall contribution and I certainly want to take this
+opportunity to say that, while we believe we have made a good
+faith effort to estimate the cost of the bill, we certainly
+recognize that the final cost could be higher. It could also be
+lower. It is our attempt to place it in the middle of the
+plausible range.
+ Mr. CAMP. On that point, CBO scored the 10-year cost of the
+initial preventive measures in this bill, the physical, the
+cardiovascular screening tests, the diabetes screening tests,
+the lower copayments for diagnostic mammograms in the hospital
+outpatient setting, that estimate was at $2.2 billion, that
+that would actually cost money, these preventive programs. The
+CMS was very close to that, scoring those same provisions at
+about $2.3 billion over 10 years. So, both organizations
+estimated that these costs would increase Medicare's costs over
+time. Yet there are benefits from early detection and treatment
+of disease and the provision in the bill was designed to detect
+diseases before they reached later stages which are more
+expensive to treat. Did any assumption of savings to Medicare
+over time due to earlier detection and treatment of diseases
+occur in your estimate?
+ Mr. HOLTZ-EAKIN. I can go back and consult with my staff on
+the details of that piece of the legislation. I do know that we
+have had a great deal of effort placed internally on surveying
+the research on the degree to which one can find cost savings
+in the future from outlays in the present in this area. One of
+the difficulties is that many of these savings do not show up
+in the score of the bill because the activities are already
+occurring in the baseline and what shows up as a new additional
+preventive activity that will produce new additional savings is
+what gets scored. If there are activities on prevention going
+on in the baseline, they simply get transferred to the Federal
+budget. We can get back to you on the details and continue to
+refine our estimates.
+ Mr. CAMP. I would appreciate that. Thank you very much.
+Thank you, Mr. Chairman.
+ [The information is pending.]
+ Chairman THOMAS. Thank the gentleman. The gentleman from
+Massachusetts wish to inquire, Mr. Neal?
+ Mr. NEAL. Yes, thank you, Mr. Chairman. Mr. Holtz-Eakin,
+did you say that the final number on the prescription drug bill
+was not offered until after it had been enacted?
+ Mr. HOLTZ-EAKIN. We provided estimates regularly throughout
+the year to both the House and the Senate and both parties.
+When the conference bill was passed, we produced a 67-page cost
+estimate detailing the underpinnings. We worked with the
+Committees to provide updates as they contemplated
+alternatives. With the passage of the final bill and the
+receipt of final language, we put out a short cost estimate and
+we also, at that point, began to put it into our baseline
+estimates of the cost of Medicare.
+ Mr. NEAL. So, actually after it was passed you gave a final
+number?
+ Mr. HOLTZ-EAKIN. Yes.
+ Mr. NEAL. Here is part of the problem, I think, that we
+confront today. This is a follow-up to a couple of earlier
+assertions that were offered by the other side. I suspect part
+of this is due to the aggrieved minority here. General Shinseki
+said that what was being offered to the American people in
+terms of troop assessments was not accurate. Lawrence Lindsey
+said that the war in Iraq was going to cost $200 billion to
+$300 billion. He was fired. General Shinseki was dismissed. We
+have an Energy Task Force that we are going to have to go to
+the Supreme Court now so that the public can find out what
+actually went on inside of those deliberations with the Vice
+President. Mr. Wilson is set to determine whether or not Niger
+provided enriched uranium to the Iraqis and his wife is outed
+as a Central Intelligence Agency agent. We are told there were
+weapons of mass destruction. There were no weapons of mass
+destruction apparently. For months we were told there was a
+link between Iraq and Al Qaeda. The Vice President kept it up
+after the President said there was not.
+ The ballot box in the House of Representatives is kept open
+at 3:00 a.m. in the morning until 6:00 a.m. in the morning to
+vote on a bill that we now know we did not have accurate
+numbers to assess the cost of. Television advertisements are
+utilized here to sell a bill to the American people for which
+there were faulty assumptions. An actuary, actuaries we all
+have great respect and regard in this system, people like you
+sitting here as witnesses. We have the highest regard for you.
+There are people like myself who beat people up on that side of
+the table over the Clinton health care bill and then opposed it
+because we did not get the right numbers. That never happens on
+the other side in this institution. You give them the wrong
+numbers, they go along with it. They offer incentives to a
+Member on the floor to vote for the bill, even with a faulty
+cost estimate. People wonder why we get upset on this side for
+the manner in which the minority is treated.
+ Now one thing I want to say about Chairman Thomas, I know
+he would not accept false numbers from either side in the
+Administration. He has that reputation around here. I do know
+that if he were given faulty numbers he would have said
+something. The truth is we all know this today, that we were
+given faulty numbers and then told, or professionals were told
+not to give us the real numbers. Then we hear this argument
+today, well, you could be far off in your estimates. I
+understand that. There is a pattern here that has been offered
+to the American people for months now about what they should
+know and what they should not know. That is a very troubling
+aspect of this debate. I thank the Chairman.
+ Chairman THOMAS. Thank the gentleman from Massachusetts.
+The gentleman from Missouri, Mr. Hulshof, wish to inquire?
+ Mr. HULSHOF. I appreciate it, Mr. Chairman, and I
+appreciate the gentleman from Massachusetts making the
+political points. Let me come back and say specifically----
+ Mr. NEAL. Would the gentleman yield?
+ Mr. HULSHOF. The faulty----
+ Mr. NEAL. Those are policy points, Mr. Hulshof. Those are
+not political points. All of the things that I described
+happened.
+ Mr. HULSHOF. Well then let me get directly to the policy.
+ Chairman THOMAS. The gentleman from Missouri has the time.
+ Mr. HULSHOF. The quote was from you, faulty cost estimate?
+Did I state correctly? Faulty cost estimate, is that right? Mr.
+Holtz-Eakin, on November 20th of 2003 did you write a letter to
+the Chairman of this Committee in essence saying that the
+Medicare Modernization Act would cost $395 billion over the
+2004 to 2013 period?
+ Mr. HOLTZ-EAKIN. Yes, I did, and I want to thank you for
+the chance to make the record correct. The cost estimate was
+available prior to the vote.
+ Mr. HULSHOF. You also reiterated, ``CBO has not had an
+opportunity to review the final legislative language and this
+estimate could change upon completion of that review.'' Do you
+remember putting that in this letter to the Chairman?
+ Mr. HOLTZ-EAKIN. Yes, we are always careful to make sure
+that we do not pin down an estimate until we see the final
+legislative language.
+ Mr. HULSHOF. After the final legislative language was
+enacted into law, signed by the President, somewhere in that
+course of legislative activity, your office went back and
+refigured to see whether or not you were confident in the cost
+estimate that the CBO gave to this body. Is it not a fact that
+you stand by that $395 billion cost estimate today just as you
+did on November 20th, 2003?
+ Mr. HOLTZ-EAKIN. Yes, I do.
+ Mr. NEAL. Would the gentleman yield?
+ Mr. HULSHOF. I see nothing faulty about that cost estimate,
+Dr. Holtz-Eakin. Now maybe that is just my perspective as a
+Member on the lower dais, not from Massachusetts, but certainly
+one that appreciates that Congress--and no disrespect intended,
+Mr. Foster--but Congress, our official scorekeeper is you, Dr.
+Holtz-Eakin. The CBO. Now I think it ironic that we have heard
+today this haranguing--and I respect the fact that information
+from whatever source is important, especially because as Mr.
+Stark said, we are not actuarial scientists. So, we rely upon
+you. To suggest that this $534 billion figure would somehow
+have caused the other side to come on board? Is that the
+suggestion? We have heard these complaints and criticisms that
+this bill, H.R. 1, was not generous enough. So, suddenly are we
+to believe that if this higher number of $534 billion were, in
+fact, our official number, that somehow we would have had some
+additional support on the other side of the aisle? I think that
+is ludicrous to even suggest it.
+ To me, the point is among some--not all, and Mr. Neal is a
+friend and I am not specifically throwing this in your
+direction, Mr. Neal, and I will yield in a second. Without
+question we have heard the words cover up. We have heard an
+effort to score political points. So be it. It is an election
+year. To me the real story of today is not these partisan
+attacks or this issue of credibility and going into the
+discussion of Niger, about Medicare. The point is the headlines
+should read, ``Medicare, Social Security going bust if Congress
+fails to act.'' That, to me, is the headline. I will yield
+briefly to my friend because I want to get to some questions on
+the actuarial numbers on the bigger issue, not the political
+issue. Mr. Neal.
+ Mr. NEAL. I believe, Mr. Foster, you are an actuary, are
+you not?
+ Mr. FOSTER. Yes, sir.
+ Mr. NEAL. That was my point, that the actuary is the one
+who came back to us with a long career of distinction, in
+offering numbers. The President uses the $534 billion mark in
+his budget.
+ Mr. HULSHOF. I accept that, Mr. Neal.
+ Mr. NEAL. That is not a political point. Mr. Hulshof, there
+is nothing wrong with coming from Massachusetts.
+ Mr. HULSHOF. There is nothing wrong with Massachusetts, Mr.
+Neal. It is one of the great 50 states. I would say to the
+gentleman that somehow talking about yellow cake in Niger and
+how it relates to this ``faulty cost estimate'' I think to be a
+bit of a stretch. Nonetheless my time is running short. Simply
+to me the real issue here, Mr. Goss, is exactly why you are
+here. Let me just say this because I know time is short and I
+wanted to get actually to--and I see the light has just gone.
+Very quickly, the effect of economic growth on Social
+Security's finances, the myth out in Missouri--perhaps not in
+Massachusetts where people are much more sophisticated, Mr.
+Neal--I say that tongue-in-cheek--is can we grow our way out of
+this problem or is this an actuarial demographic reality that
+we have to come to grips with here on Capitol Hill? Mr. Goss,
+that is the only question I get to ask, and if you could answer
+it briefly.
+ Mr. GOSS. Thank you very much. As we indicate in the
+sensitivity estimates provided in the Trustees' Report there
+would be a positive effect on the financial status of Social
+Security if we had stronger real wage growth. In our judgment,
+it would be fairly modest and it is hardly unlikely that there
+could be a sufficient increase in economic growth to make a
+substantial difference.
+ Mr. HULSHOF. What a great actuarial answer. I appreciate
+that and I yield back my time.
+ Chairman THOMAS. I thank the gentleman. The gentleman from
+Tennessee, Mr. Tanner, wish to inquire?
+ Mr. TANNER. Thank you very much, Mr. Chairman. I think the
+real issue here is was there a willful, deliberate withholding
+of information from Congress about a bill pending of such
+magnitude, regardless of whether one agrees with the
+methodology used? Was there a withholding of pertinent
+information that may have been helpful? Let me ask you this,
+Mr. Foster, during your career has there been any time other
+than this incident where you have been unable to communicate
+with the Members of Congress or the Committees of jurisdiction?
+ Mr. FOSTER. Yes, sir, on rare occasions.
+ Mr. TANNER. Let me ask you further then, I have read the
+excerpts from the Balanced Budget Act 1997 (P.L. 105-33) that
+give to you and your office--I will just read the terms. While
+the Chief Actuary is an official within the Administration,
+this individual and his or her office must often work with the
+Committees of jurisdiction in the development of legislation.
+It goes on to talk about the tradition and also that the
+conferees consider independent analysis to be consistent with
+your duties and so forth. Were you aware of this language last
+June?
+ Mr. FOSTER. Yes, sir, I was. I called that language to the
+attention of Mr. Scully and others.
+ Mr. TANNER. What were you told in that regard?
+ Mr. FOSTER. The polite version was that the conference
+language meant nothing.
+ Mr. TANNER. I think every Democrat and Republican alike on
+this Committee ought to be outraged at the willful, deliberate,
+and I would say sinister withholding. Regardless of whether you
+agree with the methodology or the numbers. That is beside the
+point. When we write these conference reports, we expect them
+to mean something, I would hope. I do not care whether it is a
+Democrat or Republican Administration. We have three separate
+but equal branches of government in this country. If we ever
+lose sight of that fact we are in a whole lot more trouble than
+who is right and who is wrong in terms of the numbers in this
+situation. So, Mr. Chairman, I appreciate this. Maybe if it
+means nothing to the people that were there last summer, maybe
+we ought to rewrite it in the law. Thank you.
+ Chairman THOMAS. I thank the gentleman. As the author of
+that language it meant something to me in 1997 when an
+Administration tried to stifle him and it means something to me
+today. The fact that we are having this hearing and providing
+this information on the record, I think, is evidence of that.
+The gentleman from California, Mr. Becerra, wish to inquire?
+ Mr. BECERRA. Thank you, Mr. Chairman. Thank you to all the
+witnesses for your testimony, especially the candor with which
+you have given us that testimony. We appreciate that very much.
+Mr. Foster, let me see if I can ask you to clarify a few things
+as we go forward in this discussion about the estimates and the
+process that went forward in the passage of the Medicare bill.
+You mentioned that you had conversations with folks at CMS
+including Mr. Scully about your projections and you mentioned
+as well that at one point you had a conversation with an
+attorney at CMS who advised you that Mr. Scully did have the
+authority to keep you from disclosing some of that information
+to Congress. Do you recall the name of that attorney you spoke
+to?
+ Mr. FOSTER. Yes, sir. That was our, at the time, Acting
+Deputy Administrator Leslie Norwalk.
+ Mr. BECERRA. What was that name?
+ Mr. FOSTER. Leslie Norwalk.
+ Mr. BECERRA. The gist of that directive was that Mr. Scully
+had the authority legally to preclude you from disclosing that
+information. Did she give you which law she or Mr. Scully
+referenced to say that the authority existed for them to
+prevent you from disclosing that information?
+ Mr. FOSTER. She might have, although I do not think so. I
+do not remember for sure. This hinged more on the question of
+constitutional separation of powers.
+ Mr. BECERRA. I know it was a while ago perhaps that you
+were told this by the attorney. Can you paraphrase as best you
+can or can you tell us again what it was she told you that
+indicated that the law gave Mr. Scully that authority to keep
+you from disclosing that information?
+ Mr. FOSTER. The general argument was that with separate
+branches of government, obviously a congressional and an
+executive branch, the congressional branch has its own
+scorekeeper, CBO of course.
+ Mr. BECERRA. So, it seems to have been related to the
+separation of powers?
+ Mr. FOSTER. Yes, sir.
+ Mr. BECERRA. You mentioned in your earlier remarks that
+others in the Administration, I do not know if you said
+requested or received your estimate for the cost of the
+Medicare bill. Did you say requested or received?
+ Mr. FOSTER. I probably said both at one time or another.
+ Mr. BECERRA. Do you recall who requested that information
+from the White House?
+ Mr. FOSTER. We had requests for the overall package cost
+estimate both from Mr. Scully and from Mr. Badger.
+ Mr. BECERRA. Mr. Badger?
+ Mr. FOSTER. In the White House.
+ Mr. BECERRA. Anyone else at the White House?
+ Mr. FOSTER. I do not believe so.
+ Mr. BECERRA. I believe you testified that Mr. Badger did
+receive that information?
+ Mr. FOSTER. Early on, when we all had only rough estimates
+for a package cost back in June, I know that information was
+sent both to Mr. Scully and to Mr. Badger.
+ Mr. BECERRA. Anyone else at the Administration that you can
+think of that, to your knowledge, received the information
+about the cost of the Medicare bill, your projected cost of the
+Medicare bill.
+ Mr. FOSTER. Again early on, as I think I mentioned before,
+Mr. Capretta at the OMB and Ms. Young at HHS.
+ Mr. BECERRA. What was the name at OMB?
+ Mr. FOSTER. Jim Capretta. Later on in the process, when we
+were closer to having a final estimate for the conference
+agreement, I had a conversation with Mr. Scully telling him the
+rough magnitude of the estimate.
+ Mr. BECERRA. Was this before the bill had passed Congress?
+ Mr. FOSTER. It was about 2 to 3 weeks before the final
+vote. I do not know if he passed that on to anyone else.
+ Mr. BECERRA. Is it still your intention to remain as Chief
+Actuary at CMS?
+ Mr. FOSTER. I have had more second thoughts lately, I
+suppose, but yes. We have many initiatives underway that I
+would like to see through.
+ Mr. BECERRA. I know that this has probably been a very
+challenging time for you over the last several months, major
+legislation, a lot of duties have been asked of you as well as
+the other individuals who are here with monumental programs
+that are critical to the American public. We appreciate what
+you have done. So, the next question I ask, and I ask you just
+to give me your own personal opinion. Do you believe you
+performed professionally in your capacity as Chief Actuary at
+CMS?
+ Mr. FOSTER. You are talking about last summer when all this
+came up, or in general?
+ Mr. BECERRA. At any time that you have been Chief Actuary.
+At all times do you believe you have performed professionally
+as the Chief Actuary for CMS?
+ Mr. FOSTER. I believe I have and I am aware that last
+summer was a difficult call. I will think about that one for a
+long time to come.
+ Mr. BECERRA. I thank you for the candor. There is an
+article in today's Hill newspaper that is titled ``Bush takes
+offensive on Foster,'' by Mr. Bob Cusack. It states--I will
+just read it and ask a quick question since my time has expired
+and the Chairman is being gracious. It starts off rattled at
+the controversy over Medicare scoring shows no sign of waning.
+The Bush Administration has shifted strategies and now is going
+after the actuary at the center of what some have called
+Scoregate. It goes on to mention that at one point Tom Scully--
+there are at least reports that Tom Scully may have threatened
+to fire you if you disclose this information. Can I ask one
+quick question here, and that is, do you feel threatened in
+your job at this stage?
+ Mr. FOSTER. No, sir.
+ Mr. BECERRA. Thank you very much. Thank you, Mr. Chairman.
+ Chairman THOMAS. Certainly. The gentleman from Washington,
+Mr. McDermott, wish to inquire?
+ Mr. MCDERMOTT. Thank you, Mr. Chairman? Mr. Foster, I was
+on the Budget Committee when they announced that we were going
+to spend $400 billion for the pharmaceutical benefit. We asked
+at that time for the parameters. What were the assumptions made
+about that $400 billion. It became pretty clear to at least us
+on the Committee who were not made privy to what was going on
+that they just plucked a number out of the air and put $400
+billion into the budget. Did you ever see the assumptions made
+for that $400 billion number? Did they ever submit those to you
+and ask you what your estimate was?
+ Mr. FOSTER. If I remember correctly, Representative
+McDermott, the $400 billion showed up early on. This predates
+2003.
+ Mr. MCDERMOTT. Yes, it does. It was in the 2002 era.
+ Mr. FOSTER. In 2003, in the development of the President's
+framework for Medicare reform, my office had estimated quite a
+number of packages that would have had a cost of about $400
+billion. None of them were ultimately proposed specifically
+only the more general framework.
+ Mr. MCDERMOTT. So, you had done a $400-billion package,
+this is what you can buy for $400 billion?
+ Mr. FOSTER. Yes, sir.
+ Mr. MCDERMOTT. So, when they went through the machinations
+here in the Congress and they wrote the bill in the Conference
+Committee without the Democrats there, did you know what
+assumptions they had changed from what you had done previously
+with your $400 billion package?
+ Mr. FOSTER. Well, there were many differences in the
+proposals themselves, compared to the specific illustrative
+packages we had done for the President early on.
+ Mr. MCDERMOTT. Could you help us understand how they--I
+mean, you had given them a way to give a $400 billion package.
+Apparently it was not sufficient or was deficient somewhere.
+They added things into it. Did you create the doughnut hole?
+Was that your idea?
+ Mr. FOSTER. No, sir, I will take no credit for that one.
+ Mr. MCDERMOTT. So, you gave a proposal for $400 billion
+that would have been across the year and people would not have
+this huge gap?
+ Mr. FOSTER. No, the doughnut hole goes back years. If you
+want to go back much earlier back in the Clinton
+Administration, there was consideration given to a drug
+benefit, what the design would look like. We were asked for
+advice. For so much money what could you do? We recommended a
+catastrophic only coverage, in that regard, using standard
+classical insurance principles. Of course, with a catastrophic
+coverage relatively few beneficiaries actually get anything out
+of the benefit. There was a policy desire to have more people
+favorably affected, to get something out of the benefit, which
+meant more up front coverage. When you take the combination of
+that desire together with a limited availability of money to
+fund it, that is what led to someone, not me, inventing the
+doughnut hole.
+ Mr. MCDERMOTT. So, they just used an old idea. That is
+really what they put together. They took your $400 billion
+package and put it in the waste basket and went back and said
+let us do a catastrophic program and some up fronts so we can
+attract some votes.
+ Mr. FOSTER. I am not sure who the ``they'' is in your
+sentence.
+ Mr. MCDERMOTT. It has to be the Republicans because we were
+not there. They never invited us to the meetings. So, the
+Conference Committee, when they did that, did they come out of
+that Conference Committee and hand you all of their assumptions
+and say this is what we have? Or did they say this is how much
+money we spent?
+ Mr. FOSTER. Well, early on in the development of the
+legislation, of course, there was the Senate Finance version,
+there was the Ways and Means Chairman's mark. If I remember
+correctly both of these, because of the cost constraints, had
+the doughnut hole in the drug benefit formula. I think that
+idea stayed all the way through the conference. There was a lot
+of interest along the way in whether something could be done to
+eliminate the doughnut hole without having the costs explode.
+Nobody found a solution to that.
+ Mr. MCDERMOTT. So, what set of assumptions did you do your
+whatever it is, $550 billion or $539 billion estimate? What
+assumptions did you use? The same ones they did, and just found
+more expense?
+ Mr. FOSTER. Yes, sir. You say assumptions but I am hearing
+specifications for the proposal. We had access, not quite as
+quickly as CBO did, but we had access from time to time to the
+conference agreement as it was being developed. We tried to
+estimate for those specifications such that in the end our
+package estimate of $534 billion reflected the final benefit
+formula from the conference, the $250 deductible, the $2,250
+initial coverage limit, the 25-percent coinsurance, all of the
+above.
+ Mr. MCDERMOTT. The Conference Committee did not have that
+estimate when they moved it out? They did not know what your
+estimate would be?
+ Mr. FOSTER. I do not know if the conferees had that or not.
+We had given the information to Mr. Scully.
+ Mr. MCDERMOTT. Thank you. Thank you, Mr. Chairman.
+ Chairman THOMAS. Certainly. Does the gentleman from Texas
+wish to inquire?
+ Mr. BRADY. Yes, Mr. Chairman.
+ Chairman THOMAS. Would the gentleman yield briefly?
+ Mr. BRADY. Yes, sir.
+ Chairman THOMAS. Mr. Foster, is your responsibility under
+the law the same as Dr. Holtz-Eakin's?
+ Mr. FOSTER. No, I would not say so, in general.
+ Chairman THOMAS. So, the questions that Mr. McDermott asked
+you about whether you were provided with information at each
+step along the way to do estimates really is not your job. It
+is Mr. Holtz-Eakin's job, is it not?
+ Mr. FOSTER. That is true.
+ Chairman THOMAS. So, the fact that you did not receive
+those estimates is not some surprise, since it has never worked
+that way. That in fact, as was established earlier in
+testimony, that for a bill to come out of Committee, the CBO
+has to score it. For each change that is made the CBO has to
+score it. Do you have to score it?
+ Mr. FOSTER. No, sir. We respond to requests. If you or
+anybody else seeks our assistance, we try our best to respond.
+ Chairman THOMAS. My understanding is that under the law in
+the administrative branch, that information flows through
+responsible administrators and they make that decision; is that
+correct? As your description of the law was conveyed to you by
+the attorney?
+ Mr. FOSTER. I believe that is a great description of the
+law, not necessarily the past practice for many years.
+ Chairman THOMAS. I understand that and that is another
+reason why I have made phone calls to you periodically, bucking
+you up as it were, in terms of your professional
+responsibilities and our desire for the information, whether
+that Administration is Democrat or Republican. The gentleman
+from Texas, thank you for yielding.
+ Mr. BRADY. Thank you, Mr. Chairman. Mr. Foster, I wish your
+information would have been made public at the time. I think
+while I am very comfortable with the CBO's scoring, I think it
+would have been helpful to the public debate to hear your view
+that this plan was more attractive and helpful for our poor
+seniors and that more of our other seniors would have chosen
+this plan than perhaps had been estimated. I think that would
+have been good for the debate to have that. Let me ask you, as
+far as the CBO scoring, in your view was the CBO estimate
+fraudulent?
+ Mr. FOSTER. No, sir, not even remotely.
+ Mr. BRADY. No, not even remotely?
+ Mr. FOSTER. That is correct.
+ Mr. BRADY. Was the CBO scoring an intentional
+misrepresentation of this bill?
+ Mr. FOSTER. I am convinced it is not.
+ Mr. BRADY. You are convinced it is not. Would you
+characterize the scoring by CBO as an honest interpretation of
+a very complex bill or something to that effect?
+ Mr. FOSTER. Yes, sir.
+ Mr. BRADY. Thank you. I think this is important because we
+get two or three estimates for many of our bills. We, by law,
+have to choose CBO. I am comfortable with that. I think this
+really gets to the heart of the debate today. Let me ask you,
+as long as you are using your actuarial skills and expertise,
+today I heard a number of comments and read them, some even by
+Senator Kerry of Massachusetts, that blame President Bush and
+his tax relief for the declining state of Medicare. Yet the
+Medicare Hospitalization Fund is paid for by payroll
+contributions and the President's tax relief had nothing to do
+with payroll contributions. The claim that President Bush's tax
+relief has accelerated the insolvency of the Medicare
+Hospitalization Fund, is that an accurate--in your actuarial
+expertise is that accurate?
+ Mr. FOSTER. There is a relatively minor interaction. Some
+of our income is from income taxes paid by Social Security
+beneficiaries on their Social Security benefits. If the
+marginal tax rates change that can affect our revenue from that
+source. I would consider that only a fairly negligible impact
+on the HI Trust Fund.
+ Mr. BRADY. So, the answer is for the most part it is not
+very accurate?
+ Mr. FOSTER. Yes, sir.
+ Mr. BRADY. It is not very accurate. The Medicare plan has
+been claimed, that Congress passed, accelerate financial
+insolvency of Medicare by 2 years is the estimate of the
+Trustees' Reports. The Democratic plan, promoted by many of the
+Ways and Means Members here today on the opposite side, was
+much larger than the plan that we passed. Is it accurate to say
+that the Democrat Medicare plan, with the higher cost, would
+have accelerated the insolvency of Medicare when compared to
+the Republican plan that was passed?
+ Mr. FOSTER. It would depend entirely on how the cost was
+financed, sir. I do not remember the specific provisions and
+how that would happen.
+ Mr. BRADY. Just for the record, it was financed much as the
+current one was. I appreciate, I think it is important to note
+today that the CBO scoring was an honest one, that President
+Bush's tax relief has not accelerated or changed Medicare in
+any way, and that the Republican plan was in fact much lower
+than the Democratic plan that was debated. Thank you, Mr.
+Chairman. I yield back the balance of my time.
+ Chairman THOMAS. I thank the gentleman. The gentleman from
+Texas, Mr. Doggett, wish to inquire?
+ Mr. MCDERMOTT. Thank you. Thank you very much for your
+integrity, sir. No one has suggested that the work of the CBO
+was fraudulent. What is fraudulent is willful interference with
+your professional judgment, secreting and hiding critical
+information, and willful disregard of the Congressional Budget
+Act. The question I would have to you is to be sure I am clear,
+Mr. Foster. Tom Scully had your best professional judgment as
+an independent actuary that the true cost of this Medicare bill
+would far exceed the $400 billion ceiling that the Bush
+Administration had established. You gave him that information
+last June?
+ Mr. FOSTER. For early versions of the legislation last June
+and then for later versions from time to time.
+ Mr. DOGGETT. You gave the same information to Doug Badger,
+the top White House official who occupies a position at the
+White House similar to Condoleeza Rice on security matters, he
+is the top health official who briefs President Bush. He had
+that information that the Administration's bill exceeded the
+cost of $400 billion by about a third from you back in June of
+last year?
+ Mr. FOSTER. Yes, the information back in June, that is
+correct.
+ Mr. DOGGETT. You provided the same information to the top
+health official at the OMB, the top legislative health
+secretary or acting secretary at HHS. You made that information
+widely available to the Bush Administration last June. Let me
+ask you if you have become aware through any source whether any
+Members of Congress or any members of the staff of this
+Committee or any other congressional staff gained access to
+your estimates before this near all-night session of the House
+that it took to cajole enough people to pass the bill?
+ Mr. FOSTER. I really do not know who had access to it, sir.
+ Mr. DOGGETT. You did discuss, you have indicated and the
+Chairman has indicated, participation rates with him for
+certain aspects of the plan last June, did you not?
+ Mr. FOSTER. Yes.
+ Mr. DOGGETT. I believe Mr. McManus, with his staff, had one
+of the additional requests for estimated participation rates
+and that you were told you would be fired if you provided it?
+ Mr. FOSTER. That is correct.
+ Mr. DOGGETT. Those participation rates are the building
+blocks from which you get the cost estimates, are they not?
+ Mr. FOSTER. Yes, sir.
+ Mr. DOGGETT. So, it is not just idle academic concern. If
+someone knows there is a great variance in participation rates,
+then it does not take a very bright person to recognize there
+is going to be a great variation in the cost; correct?
+ Mr. FOSTER. Other things being equal, yes, sir.
+ Mr. DOGGETT. You also testified that you attempted after
+these threats to fire you to discuss--I believe your words were
+attempted to discuss with other members of the Administration
+the demands that had been placed on you to secret what you
+considered important and vital information for the Congress to
+have but which Mr. Scully's improper order denied you the right
+to submit. Would you identify each of the individuals in the
+Administration with whom you discussed this problem and their
+titles?
+ Mr. FOSTER. Sure. Following the blow up involving Mr.
+Thomas's request, Scott Whitaker, who is the HHS Chief of
+Staff, called me to express concern and support both from
+himself and on behalf of Secretary Thompson. We discussed the
+issue about the provision and what steps we could take to
+improve the situation. In addition, a few weeks after that
+Peter Urbanowitz, who at the time was the Deputy Director of
+the Office of the General Counsel at HHS, called similarly to
+express support and to help figure out what could be done.
+ Mr. DOGGETT. You responded to Mr. Tanner with regard to Mr.
+Scully's comments on the responsibility as reflected I believe
+in the language that accompanied the Budget Act. Could you tell
+the Committee as best you recall what Mr. Scully's words were
+with regard to that subject?
+ Mr. FOSTER. In various discussions, going back as far as
+June 2001, about the role of the Office of the Actuary in
+providing assistance to Congress, technical assistance, I had
+tried to make the case with Mr. Scully that you all valued
+this, using as one piece of evidence the conference language
+from the Balanced Budget Act where it is fairly clearly laid
+out what the expectations are and the value placed on that. I
+also tried just the logical argument that the Nation's top
+policymakers should have the best information available. When I
+say that I do not mean that the CBO information is not good. It
+is very good. There are many situations where CBO might not
+have been in a position to do a special analysis because of
+their other workloads or, in some rare cases, we might have a
+special expertise to make a contribution if requested. So, we
+had these discussions, or I had these discussions with Mr.
+Scully. He is not an easy person to have a discussion with.
+ Mr. DOGGETT. I have found that to be true, also.
+ Mr. FOSTER. So, he generally was not interested in what was
+in the conference language. He did early on want to maintain
+good relations with Congress and from June 2001 to June 2003 we
+had a system in place where we could respond directly to your
+requests.
+ Chairman THOMAS. The gentleman's time has expired.
+ Mr. DOGGETT. I just want the answer to the last question.
+What were Mr. Scully's words about the conference report, as
+best you recall them?
+ Mr. FOSTER. I think, on at least one occasion his exact
+words were unprintable. I certainly would not want to repeat
+them in this setting.
+ Mr. DOGGETT. Were unprintable?
+ Mr. FOSTER. Yes, sir.
+ Mr. DOGGETT. Thank you.
+ Chairman THOMAS. The gentleman from Texas, Mr. Sandlin,
+wish to inquire?
+ Mr. SANDLIN. Thank you, Mr. Chairman. Thank you, Mr.
+Foster, for coming today. Mr. Foster, I have very few questions
+about the cover up. I think that has been covered in great
+detail. You did say, in transmitting this information, or
+failing to transmit the information, you felt you were
+following the law; is that correct?
+ Mr. FOSTER. As best I understood it, yes, sir.
+ Mr. SANDLIN. Whether it was legal or not you felt it was
+improper to withhold that information, did you not?
+ Mr. FOSTER. Yes, sir.
+ Mr. SANDLIN. You felt like that was not ethical, did you
+not?
+ Mr. FOSTER. Yes.
+ Mr. SANDLIN. Let me ask you, did the enactment of the
+Medicare reform legislation in any way reduce the solvency of
+Medicare part A, the HI Trust Fund?
+ Mr. FOSTER. Yes, sir. We have estimated that the impact of
+the higher payment rates to managed care plans and to rural
+providers in the part A Trust Fund advanced the date of
+depletion by 2 years.
+ Mr. SANDLIN. By 2 years. So, a part of that, as you just
+indicated, was due to the payments to HMOs and PPOs; is that
+correct?
+ Mr. FOSTER. Yes, sir.
+ Mr. SANDLIN. So, giving money to these HMOs and PPOs, this
+private group, contributed to the lack of solvency in the
+Medicare Trust Fund; correct?
+ Mr. FOSTER. Contributes to the earlier depletion, yes, sir.
+ Mr. SANDLIN. Was there ever or is there ever a point in
+your modeling of this law in which you show a savings due to
+the managed care plans?
+ Mr. FOSTER. No, sir, not as currently structured.
+ Mr. SANDLIN. There is not even a savings after 75 years or
+even in the famous infinite horizon? It never shows savings; is
+that correct?
+ Mr. FOSTER. After the first 25 years we lump everything
+together in our methodology and project it jointly.
+ Mr. SANDLIN. In the rest of the budget we just estimate out
+about 5 years, usually; is that not correct?
+ Mr. FOSTER. Five or 10.
+ Mr. SANDLIN. So, it is very difficult to have any
+confidence whatsoever in numbers that are say 75 years out; is
+that not correct?
+ Mr. FOSTER. The further you go the more uncertainty there
+is.
+ Mr. SANDLIN. Well, 75 years is a long time, is it not?
+ Mr. FOSTER. Yes, sir.
+ Mr. SANDLIN. Now, is it true that under the law that the
+per-beneficiary private plan payment rates substantially exceed
+the payment rates provided to traditional fee-for-service under
+Medicare?
+ Mr. FOSTER. It varies area-by-area.
+ Mr. SANDLIN. Overall is that not true, though?
+ Mr. FOSTER. On average, overall, yes.
+ Mr. SANDLIN. I think on average it is about 25 percent more
+goes in the private pay payment plan as opposed to the
+traditional fee for payment service; is that correct?
+ Mr. FOSTER. That sounds too high, sir, but we could look
+into it and provide something for the record.
+ Mr. SANDLIN. Would it surprise you if that was it?
+ Mr. FOSTER. It sounds too high.
+ Mr. SANDLIN. You know it is more?
+ Mr. FOSTER. On average, yes.
+ Mr. SANDLIN. Are not the overhead costs higher in the HMOs
+and PPOs than in the traditional Medicare? Have not studies
+shown that?
+ Mr. FOSTER. The administrative costs typically are higher.
+ Mr. SANDLIN. Now you said, and maybe Mr. Goss or Dr. Holtz-
+Eakin said that you felt there was a demand in the market for
+the private care, for the HMO or PPO care; is that correct?
+ Mr. FOSTER. I believe we were talking about the drug
+companies at the time.
+ Mr. SANDLIN. Demand for the drug plan under the Medicare
+bill, which is a part of the reform.
+ Mr. FOSTER. Yes, sir.
+ Mr. SANDLIN. Did you know that 80 percent of the Medicare
+eligible people that live in rural areas, such as I represent,
+are not even living in areas where there is any HMO coverage
+whatsoever? Did you know that?
+ Mr. FOSTER. Yes, HMOs are not common in rural areas.
+ Mr. SANDLIN. So, in those areas, actually reducing the
+ability of them to get this service, and actually beneficiaries
+residing in those areas where there are no private plans are
+then effectively receiving lower average Medicare subsidies
+than folks who live in areas that are covered by HMOs; is that
+not correct?
+ Mr. FOSTER. I think I need to think about that a little
+bit.
+ Mr. SANDLIN. If there is, in fact--if in fact there is a
+higher reimbursement to a plan, as opposed to traditional
+Medicare, if there is no plan available then the folks in the
+plan areas I will call it are getting higher reimbursements or
+higher rates than those in the non-plan areas; is that not
+correct?
+ Mr. FOSTER. In a rural area where there is no private plan
+and the beneficiary is in fee-for-service traditional Medicare,
+there is a whole set of payment rules and mechanisms for the
+care they receive.
+ Mr. SANDLIN. They are getting less, as you testified. Let
+me ask you one other question. As you have testified, there is
+under the bill no negotiation between the Secretary and the
+pharmaceutical industry or Medicare and the pharmaceutical
+industry on the cost of prescription drugs. Is it not true that
+in the Veterans Administration, however, they are saving about
+48 percent in costs through negotiation; is that not right?
+ Mr. FOSTER. I am less familiar with the Veterans
+Administration situation.
+ Mr. SANDLIN. Would that surprise you?
+ Mr. FOSTER. I do not know one way or the other.
+ Mr. SANDLIN. Thank you. Thank you, Mr. Chairman.
+ Chairman THOMAS. The gentleman's time is expired. The
+gentleman from Wisconsin wish to inquire?
+ Mr. RYAN. I do, thank you, Mr. Chairman. I guess since I am
+batting cleanup here, there are a number of points I would like
+to make. First, I want to just ask a couple of technical
+questions from the previous questions. With respect to the part
+A, the HI Trust Fund, and the acceleration of the insolvency by
+2 years, to what extent is that attributable to HMOs and/or
+rural providers? Can you segregate the amount of the
+acceleration of the insolvency attributed to rural providers
+and HMOs?
+ Mr. FOSTER. Yes, sir, only very roughly right now. We could
+do a more thorough job for you. I would call it about 60
+percent due to the higher payment rates for the Medicare
+Advantage plans and roughly 40 percent for the higher payments
+to rural providers.
+ Mr. RYAN. So, rural providers did get a substantial
+increase in their payments, as well as buttressing the Medicare
+Advantage program?
+ Mr. FOSTER. Yes, sir.
+ Mr. RYAN. It was mentioned earlier from the other gentleman
+from Texas that the HHS estimate, the CMS estimate, is the true
+estimate. Is your estimate the true estimate?
+ Mr. FOSTER. If we could make true estimates, I would not
+have to be CMS Chief Actuary. I would be out there in the stock
+market or someplace.
+ Mr. RYAN. Your estimate is just like somebody else's
+estimate; correct? It is a good educated guess, just as CBOs?
+ Mr. FOSTER. They are all estimates. Doug may well be right.
+I may be wrong. It may be the other way around. It is quite
+possible we will both be wrong.
+ Mr. RYAN. It is quite probable both of you are wrong and we
+will be somewhere in between for all we know.
+ Mr. FOSTER. We hope it would be in between.
+ Mr. RYAN. One thing that I think, we have just gone through
+a long hearing on all of this, and I think people may be
+confused as to the procedures around here.
+ Chairman THOMAS. Would the gentleman yield briefly on that
+point?
+ Mr. RYAN. Sure.
+ Chairman THOMAS. The Chair recalls Dr. Holtz-Eakin
+indicating that what he provided at the $395 billion rate was
+an intermediate estimate from his ship. It could be lower or
+higher. The assumption that he is the floor and CMS is the
+ceiling is not accurate based upon the testimony provided by
+Dr. Holtz-Eakin. It could be lower than the $395 billion. Is
+that correct, Mr. Holtz-Eakin, based on your statement?
+ Mr. HOLTZ-EAKIN. Yes, there is a range of uncertainty
+around all estimates we provide. It could be lower. It could be
+higher.
+ Chairman THOMAS. So, when we are looking for the true
+estimate, as though someone were withholding the Holy Grail, a
+statement along those lines probably is designed to draw a
+conclusion rather than to illuminate. Thank you very much, Mr.
+Ryan, for yielding.
+ Mr. RYAN. I thank the Chair. What I want to look at is the
+differences in the two estimates between CBO and CMS. It is
+also very important to note that, as has been mentioned
+earlier, Congress is required to use CBO estimates. When we
+score legislation all legislation that affects revenues and
+expenditures, we always have to get a score on its revenue
+impact or its expenditure impact for purposes of conforming
+with the budget resolution as driven by the Budget Committee.
+In each of these cases, we have to use CBO. You always have
+other scores out there, from OMB, from an independent agency.
+Nevertheless, in every single occasion, Congress has to use
+CBO. In looking at the differences between the two estimates on
+this Medicare bill, you can basically look at the fact that
+CMS--and please correct me, the two gentleman if I am wrong,
+CMS assumes a 94-percent participation rate in the drug plan
+and CBO assumes 87 percent; is that correct?
+ Mr. HOLTZ-EAKIN. Correct.
+ Mr. RYAN. With respect to the low-income subsidies for low-
+income seniors for prescription drug benefit which the biggest
+out-of-pocket exposure is, I think, a $5 copay, CMS assumes a
+75-percent participation rate in the low-income subsidies and
+CBO assumes a 70-percent participation rate; is that correct?
+ Mr. HOLTZ-EAKIN. A little bit lower, actually.
+ Mr. RYAN. That is right, two-thirds. With respect to the
+Medicare Advantage programs where seniors get to choose among
+competing plans very much like we as Federal employees do with
+our own Federal Employee Health Benefit System, CMS assumes 32
+percent of seniors will choose to enroll in either these HMOs
+or PPOs and CBO assumes 13 percent; is that correct?
+ Mr. HOLTZ-EAKIN. That is correct.
+ Mr. RYAN. So, in essence, and those are the big differences
+between your two estimates, what CMS is simply saying is that
+more people are going to benefit from this new Medicare law? Is
+that essentially what you are saying, Mr. Foster, that more
+individuals will actually choose to benefit from the new
+prescription drug benefit and these new choices that will be
+made available to them in their areas
+ Mr. FOSTER. Yes, sir.
+ Mr. RYAN. So, from a beneficiary standpoint, whichever of
+these estimates are true, we have these estimates where at the
+basic rate, CBO, saying 87 percent of all seniors will benefit
+from a drug plan, where 66 percent of low-income seniors at
+least will benefit, and CMS is saying even more people will
+benefit from this new prescription drug law. I think it is
+important to point out here that what we are talking here is
+the differences in how many people will be helped from this new
+Medicare law. One thing that I think is important at the end of
+all of this is look at the big numbers we are talking about.
+Over the next 10 years is it not true that Medicare and
+Medicaid will spend about $6.9 trillion; is that correct, Mr.
+Holtz-Eakin or Mr. Foster?
+ Mr. HOLTZ-EAKIN. Ballpark, yes.
+ Mr. FOSTER. That is certainly the right ballpark.
+ Mr. RYAN. About $6.9 trillion. So, when we are looking at a
+difference of an estimate of about $139 billion, what is the
+difference in your two estimates over the total course of the
+next 10 years in the spending of Medicare and Medicaid?
+ Mr. HOLTZ-EAKIN. We can we look this up.
+ Mr. FOSTER. For Medicare only, if you look at the March CBO
+baseline versus the President's budget, the total was actually
+quite close for Medicare expenditures. In the Trustees' Report,
+in part because of higher CPI assumptions, we have a somewhat
+higher level.
+ Mr. RYAN. One more?
+ Chairman THOMAS. One more quickly.
+ Mr. RYAN. One more quick one. We have heard a lot of talk
+about the doughnut hole here today under this new benefit.
+According to CBO analysis the typical senior will spend less
+than $1,900 in prescription drugs in 2006 and will not reach
+the initial coverage limit of $2,250. One-third of the seniors
+will be eligible for low-income assistance and will have no gap
+in coverage regardless of how much they spend. Given these two
+points, Mr. Holtz-Eakin, what is your estimate of the number of
+seniors who will experience absolutely no gap in coverage or no
+doughnut hole under this new Medicare prescription drug
+benefit?
+ Mr. HOLTZ-EAKIN. I do not know the number off the top of my
+head. I am happy to get it to you.
+ Mr. RYAN. If you could, I would appreciate that.
+ [The information is pending.]
+ Chairman THOMAS. I thank the gentleman. The gentleman from
+North Dakota is recognized for a North Dakota minute.
+ Mr. POMEROY. I thank the Chairman. I will be very brief. I
+have just been concerned----
+ Chairman THOMAS. Time goes very slowly in North Dakota. A
+North Dakota minute lasts a while.
+ Mr. POMEROY. I will be very brief. Mr. Foster, I have felt
+it very unfair that you have been attacked for bringing to
+light the fact that your cost estimates were precluded from
+being disclosed to Members of Congress even upon direct inquiry
+for those estimates. In fact, the Hill newspaper now, ``Bush
+takes offensive on Foster.'' The article indicates that an
+actuary has to have proof of assertions that the White House
+may have had knowledge of your estimates. Are you telling us
+today that you have directly sent e-mail to someone in the
+White House of the cost estimate you prepared?
+ Mr. FOSTER. Yes, sir. For the estimates back in June, the
+preliminary estimates, there is such evidence.
+ Mr. POMEROY. There is evidence that the White House
+received this. Now part of the chattering class, the talk show
+discussion of all of this, has raised an issue as to whether
+you are politically motivated in bringing this information to
+us. Indeed, one talk show pundit was saying ``this Foster''--I
+am quoting now from the Capital Gang program on CNN. ``This
+Foster, this actuary, is a bureaucrat but he is a Democrat. He
+is--he is very hostile to the Administration.'' Mr. Foster, are
+you actively involved with a political party?
+ Mr. FOSTER. I will be happy to answer your question sir,
+but only with a brief explanation. For our work, our estimates
+for Medicare and Medicaid, we very carefully keep any political
+preferences and any political affiliation out of our work so
+that we can provide just the best neutral, nonpartisan, et
+cetera, analysis. Now having said that, I will tell you a short
+story. Back in 1972, when I was first eligible to vote, I
+registered as a Democrat so that I could vote against George
+Wallace in the Maryland primary. I never got around to changing
+my registration but I will announce to the world, I suppose,
+that I voted for every Republican presidential candidate ever
+since 1972 except the 1 year that I wrote in Jack Kemp.
+ Mr. POMEROY. I am sorry to hear that.
+ Chairman THOMAS. The gentleman's time is expended to both a
+North and South Dakota minute.
+ Mr. POMEROY. I do think that is important to get on the
+record and the statement made by that talk show pundit that you
+are hostile to this Administration, are you hostile to this
+Administration?
+ Mr. FOSTER. No, sir. I think very highly of Secretary
+Thompson and I think very highly of President Bush.
+ Mr. POMEROY. Indeed, do you believe this Administration
+would have been better served by having the work of your
+actuarial team come forward in due course into this debate?
+ Mr. FOSTER. Yes, I do.
+ Mr. POMEROY. I do not have any other questions, Mr.
+Chairman. Thank you.
+ Chairman THOMAS. I thank the gentleman and I want to thank
+all of you. I want to underscore the gentleman from Missouri's
+statement. Notwithstanding the nitpicking and the very
+microscopic examination of the job of actuaries today, when you
+take a step back and look at the overall picture, this society
+needs to make some fundamental changes to both the Social
+Security and the Medicare program if we expect those who are
+currently paying the bill to receive the benefits that those
+now enjoy. The hearing stands adjourned.
+ [Whereupon, at 4:26 p.m., the hearing was adjourned.]
+ ------
+
+
+
+
+ BOARD OF TRUSTEES 2004 ANNUAL REPORTS
+
+ ----------
+
+
+ THURSDAY, APRIL 1, 2004
+
+ U.S. House of Representatives,
+ Committee on Ways and Means,
+ Washington, DC.
+
+ The Committee met, pursuant to notice, at 12:10 p.m., in
+room 1100 Longworth House Office Building, Hon. Bill Thomas
+(Chairman of the Committee) presiding.
+ ------
+
+ Chairman THOMAS. Good afternoon. Today, we continue the
+Committee's review of the 2004 Annual Reports of the Board of
+Trustees of the Social Security and Medicare Trust Funds.
+Pursuant to U.S. House of Representatives Rule XI, clause
+2(j)(1), at the insistence of the minority, four additional
+witnesses have been called before us to offer testimony on the
+Trustees' Report on Medicare. The minority is fully within its
+rights under Rule XI and the Chair has no discretion in that
+regard. Before us today, one of the witnesses that was
+requested, Leslie Norwalk, who is the Acting Deputy
+Administrator for the CMS, and Jeff Flick, who today is the San
+Francisco Regional Administrator for CMS. Doug Badger, Special
+Assistant to the President for Economic Policy, had been
+requested by the minority to appear, and White House Counsel
+Alberto Gonzales has provided the Committee a letter of
+explanation on executive privilege. Therefore, Mr. Badger will
+not appear. Tom Scully, former CMS Administrator, has provided
+a letter of explanation to the Committee outlining the reasons
+for his declining the invitation, as well. Without objection, I
+ask that both letters be entered into the record. The clerks
+will make sure that Members have copies of those letters. With
+that, I would recognize the Ranking Member, Mr. Rangel, for any
+opening statement he may wish to make.
+ [The opening statement of Chairman Thomas follows:]
+ [The information follows:]
+ Opening Statement of The Honorable Bill Thomas, Chairman, and a
+ Representative in Congress from the State of California
+ Good afternoon. Today we continue the Committee's review of the
+2004 Annual Reports of the Boards of Trustees of the Social Security
+and Medicare.
+ Pursuant to Rule XI, Clause 2(j)(1) >of the U.S. House of
+Representatives four additional witnesses have been called before us to
+offer testimony on the Trustees Report on Medicare.
+ Leslie Norwalk, Acting Deputy Administrator for the Centers for
+Medicare and Medicaid Services (CMS) and Jeff Flick, San Francisco
+Regional Administrator for CMS will provide testimony to us today. Doug
+Badger, Special Assistant to the President for Economic Policy, will
+not appear. White House Counsel Alberto Gonzales has provided a letter
+of explanation on executive privilege. Tom Scully, former CMS
+Administrator, has also declined to testify, and has provided a letter
+of explanation to the Committee. Without objection, I ask that both
+letters be entered into the record.
+ I would now like to recognize the ranking member, Mr. Rangel, for
+any opening statement he might make.
+
+
+
+ The White House
+ Washington, DC 20500
+ March 31, 2004
+Hon. Bill Thomas
+U.S. House of Representatives
+Committee on Ways and Means
+1102 Longworth House Office Building
+Washington, DC 20515-0548
+
+Dear Chairman Thomas:
+
+ I am writing in response to your letter of yesterday inviting Doug
+Badger, Special Assistant to the President for Economic Policy, to
+appear before the House Committee on Ways and Means tomorrow.
+ It is longstanding White House policy, applied during
+administrations of both parties, that members of the White House staff
+should decline invitations to testify at congressional hearings.
+Accordingly, on Mr. Badger's behalf, I respectfully decline the
+invitation to him to testify before the Committee on Ways and Means.
+ Sincerely,
+ Alberto R. Gonzales
+ Counsel to the President
+ ______
+
+ April 1, 2004
+Honorable William M. Thomas,
+Chairman
+Committee on Ways and Means
+U.S. House of Representatives
+Washington, D.C. 20515-6348
+
+Dear Mr. Chairman:
+
+ Thank you for your invitation to appear at a hearing you have
+scheduled to begin at noon, Thursday, April 1. Unfortunately, for the
+past ten days I have been traveling, both domestically and abroad, and
+so I am unable to appear. However, I do have some comments that I
+believe are relevant to the Committee's inquiry.
+ I am very proud of my tenure as Administrator of the Centers for
+Medicare and Medicaid Services (CMS). Among other accomplishments, we
+worked feverishly with consumer and patient groups, as well as unions
+and providers, to produce the first health quality measures for nursing
+homes and home health agencies--and published them in every major paper
+in the country. We started on the same mission with hospitals. We also
+greatly expanded 1 800 MEDICARE and educated millions of seniors about
+the terrific Medicare and Medicaid benefits to which they are entitled.
+These are but a few of the accomplishments of which I'm most proud.
+ Most significantly, with the Administration's help, you and your
+colleagues on the Committee passed an EXCELLENT Medicare bill that will
+stand the test of time. Long after the November elections are over,
+your collective historic achievement will remain. The goal of this
+Administration and Congress has always been to help low-income seniors.
+As a result of the action of the Committee, millions of seniors will no
+longer have to choose between the drugs they need to sustain themselves
+and their rental payments. This generation of low-income seniors will
+receive enormous relief, and the next generation of seniors will be far
+better served by a much more dynamic and consumer-responsive Medicare
+program that will better meet the health needs of seniors and the
+disabled of all incomes.
+ As we all know, there have been longstanding differences between
+CMS budget assumptions and those articulated by the Congressional
+Budget Office (CBO). Virtually everyone engaged in the Medicare reform
+effort knew that these assumptions differed and was also aware of
+multiple meetings between CMS and CBO to reconcile these differences.
+In fact, I testified before the Senate Finance Committee in June, 2003,
+about the differing assumptions generated by CBO and CMS, noting that
+``it's a fundamental disagreement between our actuaries . . . there are
+seven or eight fundamental differences.``
+ As Administrator of CMS, it was my responsibility to determine when
+and how the CMS Chief Actuary should respond to Congressional requests.
+From the very beginning of my tenure at CMS, Mr. Richard Foster
+expressed his strongly held view that he, as the head of the Office of
+Chief Actuary, was independent of me or anyone else within the
+Executive Branch. Accordingly, Mr. Foster believed that he was free to
+make decisions about when or how to respond to Congressional inquiries
+relating to CMS cost estimates generally, and, in particular, the
+Medicare Reform bill.
+ Simply put, I disagreed, and there is no question whatsoever that I
+made it very clear to Mr. Foster, both directly and indirectly, that I,
+as his supervisor, would decide when he would communicate with
+Congress. It is a position that I also made very clear to the
+Republican and Democratic Leadership of the three CMS oversight
+Committees, beginning with meetings that occurred in the spring of
+2001. Moreover, it is also worth noting that even Mr. Foster, in his
+testimony before this Committee on March 24, admitted that my position
+was accurate as a matter of law. He indicated during his appearance
+that he sought legal advice about my view and was told that I was
+correct.
+ I believe that I dealt with Mr. Foster, and all other CMS employees
+under my supervision, openly and fairly during my entire tenure. 1
+remain proud of my twenty-five years of strong, bipartisan relations
+with the Congress, of my personal commitment to improving health care
+for America's seniors, and of the role I played in assisting with the
+passage of what I believe will prove to be an achievement of historic
+proportions.
+ Sincerely,
+ Thomas A. Scully
+
+
+
+ Mr. RANGEL. Thank you, Mr. Chairman. Even though you said
+that you had no discretion in extending the hearing, I want to
+thank you on behalf of the minority for the spirit in which you
+did extend it and know that we have your support in trying to
+make certain that the integrity of the professional staff of
+any administration, Republican or Democrat, is not tainted by
+partisanship. Even at the last hearing, you demonstrated by
+reflecting on the past that you have given assurances to staff
+that when they were coerced into not cooperating with Members
+of Congress, that you would support them in their effort to
+come forward. Having said that, we really think that the
+executive branch on this issue does not enjoy the executive
+privilege claimed today. The question is whether the executive
+branch of government actually withheld the information that the
+true cost of the Medicare bill was up to $450 billion rather
+than $400 billion.
+ With the legal interpretations of executive privilege that
+have been given to us, it is clear that there has to be some
+conversation that the staff had with the President that they
+would believe that his testimony would be entitled to executive
+privilege. If Mr. Badger did not discuss it with the President,
+then, of course, there is no need to raise the question. If he
+did discuss it with the President, Members of Congress ought to
+know whether the President of the United States knew what the
+facts were and through his subservients said that we shouldn't
+get that information.
+ We do know that a lawyer for the Administration did
+indicate to Mr. Foster that if he shared this information with
+Members of Congress, that he could get fired. We do know that
+Mr. Scully has informed us that he talked with the President
+about these issues. We do know that Mr. Scully apparently
+ordered Foster to share at least his testimony for us to
+believe that you could share this information with Republicans
+but not with Democrats. This is a very serious issue, not just
+for this hearing but for the integrity of the U.S. House of
+Representatives and for this Committee.
+ There are a variety of things at this time, after caucusing
+with our Members, that I will be asking you. One is to make
+certain that it is not without discretion but that you would
+support this inquiry until we get the answers that we need;
+two, that you subpoena Mr. Badger here; three, that if you see
+fit not to do that, that we should vote to be able to have him
+here. I just got a copy of Mr. Scully's letter. I don't know
+what privilege he has, but he is certainly a key person between
+the Congress, Mr. Foster, the President, and Mr. Badger, so I
+would hope that he, too, would be subject to a subpoena, and
+that at the end of the day, we would know whatever information
+was withheld, and would know it was not willingly withheld from
+the Congress. So, knowing that you have demonstrated in 1997 an
+interest in this subject, I hope that it would not be a
+minority request but would come from the Chair for the full
+Committee and, therefore, for the House.
+ Chairman THOMAS. Does the gentleman wish a response?
+ Mr. RANGEL. I certainly do.
+ Chairman THOMAS. I thank the gentleman. The question really
+hinges on the statement the gentleman made about information
+that we need or want. The Chair is certainly concerned about
+information that the Chair and the Committee needs to carry out
+our legal obligation. When the desire shifts to want, it turns
+into a question of curiosity. I will tell the gentleman that
+the letter from the counsel to the President, which I believe
+he has a copy of, is very brief. It is two short paragraphs,
+and the operative portion of that, I believe, it is
+longstanding White House policy applied during administrations
+of both parties that members of the White House staff should
+decline invitations to testify at congressional hearings. It is
+true that at the time this letter is presented indicating that
+the executive branch wishes to exercise longstanding decisions
+regarding executive privilege, that at the same time, they have
+allowed a member of the Administration, notwithstanding the
+executive privilege, to testify. So, I don't believe the answer
+is found in the counsel to the President's letter based upon,
+of course, a decision that they made. They could choose to or
+not.
+ In Mr. Scully's letter, which we also just received this
+morning, I notice on page 2 that Mr. Scully in his letter
+declining the invitation of the Committee to appear before it
+on this issue, in the second paragraph on page 2 says,
+``Moreover, it is also worth noting that even Mr. Foster in his
+testimony before this Committee on March 24 admitted that my
+position,'' Mr. Scully's position, ``was accurate as a matter
+of law. He indicated during his appearance that he sought legal
+advice about my view and was told that I was correct.'' One of
+the reasons I was pleased Ms. Norwalk was able to appear before
+us for questioning on this issue is that in the questioning by
+the minority Members, Mr. Foster indicated that Ms. Norwalk in
+her position at the time was the one who supplied the decision
+in regard to whether or not Mr. Scully was operating within his
+legal bounds. That, I believe, is a worthwhile area to examine.
+Mr. Flick was kind enough to come, and I understand now is the
+Western Regional CMS, that you had to fly out to make this
+appearance. We appreciate it.
+ Mr. Rangel is right. There was a requirement under Rule XI
+that we have a second hearing, but time, place, and manner is
+within the purview of the Chair and the Chair wanted to try to
+respond in as reasonable time as possible so that we could have
+some continuity in front of us on this issue. Since Mr. Foster
+appeared to believe that the law allowed Mr. Scully to make the
+decision the way he did it, I believe the Committee's concern
+should turn on whether or not that was an appropriate or legal
+decision, i.e., the need argument. If it is just because of
+curiosity as to who said what to whom, notwithstanding the fact
+Mr. Scully was perfectly legal in the decisions that he made,
+then the Chair would be concerned about simply pursuing a line
+of questioning on the basis of curiosity.
+ So, the Chair is here to examine that difference stated
+very succinctly by the gentleman from New York. Is it a
+question of need or is it a question of want? The Chair stands
+ready to exercise the full legal power of the Committee if
+there is a need. If it is a want, then the Chair would have to
+examine the level of concern over the want to simply continue
+to inquire who said what to whom, when, and how,
+notwithstanding the fact that they had every legal right to
+make the decision that was made, and that would be the Chair's
+position in listening to the testimony to determine whether it
+actually is a need of this Committee or if it is a want of some
+of the Members of the Committee.
+ Mr. RANGEL. Mr. Chairman, by your actions in 1997, I think
+you have proven my position that there is a need that we have
+integrity with professional actuaries and that they can report
+the information as needed, not wanted, by the Congress. So, the
+significance of the legal opinion provided by Ms. Norwalk
+really doesn't matter. Lawyers can be wrong, and if this person
+was threatened that you could be fired when they had a legal
+obligation to inform the Congress, you can dismiss that. Now
+comes the question, who told the lawyer, who told Mr. Scully
+that he was authorized to threaten the person who had the legal
+right to tell us the information we wanted? Of course, when Mr.
+Badger, who was involved in these conversations, refuses to
+come to testify exercising executive privilege, then what he is
+saying is, or implying, is that it was the President that said
+that you cannot divulge the discussion that we had.
+ I would like to say, in concluding my arguments here, that
+there are so many examples of the executive, not just Ms.
+Condoleezza Rice, but in the last Administration, Erskine
+Bowles, Chief of Staff of the President, McLaughley, Podesta,
+Ruff, Nolan, Quinn, all counsel to the President, assistants to
+the President, 45 top-rank Clinton people testified under oath.
+So, we don't want to get into the argument as to the rights of
+executive privilege. The one question I am asking you, I guess,
+is that before I ask for a vote on the issue, are you prepared
+to exercise your discretion as the Chairman of this
+distinguished Committee to subpoena Mr. Badger to testify?
+ Chairman THOMAS. Would the gentleman yield once again?
+ Mr. RANGEL. Yes. Sure.
+ Chairman THOMAS. I thank the gentleman. As an admitted non-
+attorney, the Chair is examining not narrow legal points but
+broader fundamental constitutional points. The legislative
+powers derive from Article I. The executive power is derived
+from Article II. There has been a long and colorful legal
+history of the ability of those who derive their constitutional
+powers from Article I being able to require those who draw
+their powers from Article II to do things that those who draw
+their powers from Article I want them to do. There are those
+who draw their powers from Article II who have a long and
+colorful history of trying to get those who draw their powers
+from Article I to do what those in Article II want them to do,
+and all of it is refereed by those who derive their
+constitutional powers from Article III.
+ Again, the Chair would consider entertaining what I
+consider to be a significant power not exercised by this
+Committee in the time of this Chairman's tenure. If we are in
+pursuit of a legal need, if, in fact, Mr. Scully was operating
+outside the legal bounds in telling someone under his
+jurisdiction that the information was information that the
+executive branch could choose to share or not share, rather
+than the way the gentleman from New York stated that we had a
+legal or constitutional right to the information,
+notwithstanding the Article II provisions which gives rise to
+the executive privilege, if there was a violation of the law,
+the Chair stands ready to use whatever tools necessary to get
+to the bottom of the violation of the law. If it is a question
+of style in terms of Administration or someone who is
+frustrated because they aren't an independent operator within
+an administrative hierarchy, that, then, I don't think reaches
+the level of the need for a subpoena of testimony.
+ We have people in front of us who were directly,
+intimately, and first-person involved in shaping the decisions
+and the opinions that Mr. Foster exercised at the last hearing.
+If, in fact, there is a comfort level on the part of the
+Committee that Mr. Scully exercised the decisions he made well
+within the law, then the need question, the Chair believes, has
+been answered. The want question is something that very often
+doesn't get fulfilled, but the Chair doesn't believe that the
+powers under Article I extend to simply whims and wants
+fulfilled using what I consider to be a powerful legal tool.
+The Chair will go to any lengths to make sure that the law is
+followed. The Chair is not ready to go to any lengths to
+satisfy someone's whim or curiosity.
+ Mr. MCCRERY. Mr. Chairman.
+ Mr. RANGEL. Mr. Chairman, I concur with the direction in
+which the Chair is going in terms of determining whether he is
+satisfied there is a need to exercise the awesome power of the
+subpoena. I have been advised that my ability to call the
+question for a subpoena has to be at the beginning of a
+hearing, and further, that we have to have a quorum for that to
+happen. So, while you are searching for the need, I don't want
+to lose my rights as a Member to be able to raise the motion.
+If you can give some type of assurances that the motion to
+request the subpoena for witnesses and the fact that it would
+be done in a timely manner when we have a quorum, I have no
+problem with you searching for the need.
+ Chairman THOMAS. I ask if the gentleman believes there is a
+quorum present.
+ Mr. RANGEL. I would then ask----
+ Chairman THOMAS. If the gentleman wishes to exercise that
+right, the Chair would like to make the decision after he has
+been informed by virtue of the testimony of the witnesses.
+ Mr. RANGEL. I am saying I have no problem with that as long
+as you also indicate that I reserve the right to raise the
+motion without violating the House rules which gives me the
+right to do it----
+ Chairman THOMAS. I tell the gentleman the Chair would be
+somewhat concerned that we may, in fact, lose a quorum and the
+Chair would not want to deny the gentleman's right based on a
+quorum call. So, if the gentleman feels that he wants to have
+the maximum protection of the rules, he probably ought to move
+the question now, knowing we have a quorum, and hopefully the
+information that is presented will support the Chair in the
+belief that this is not a legal need but a want or curiosity.
+ Mr. RANGEL. In the event that I fail in my motion, I hope
+if the Chair is satisfied that it is a need and not a want for
+curiosity, that you still would have the power to exercise----
+ Chairman THOMAS. If the gentleman would yield, my search
+for the truth is not influenced by the mere exercise of
+democratic authority.
+ Mr. MCCRERY. Mr. Chairman, would you yield?
+ Chairman THOMAS. Certainly.
+ Mr. MCCRERY. It seems to me----
+ Chairman THOMAS. I believe, actually, the gentleman from
+New York has the time.
+ Mr. MCCRERY. He is running the clock.
+ Chairman THOMAS. Notice there is no clock running.
+ [Laughter.]
+ Mr. MCCRERY. It seems to me when you come to the question
+of need versus want, you reference Article I of the
+Constitution, and one of the responsibilities of the House of
+Representatives is to allocate money. We were given the power
+to appropriate. In order to appropriate on behalf of the
+American people, we have to have the best information
+available. It seems to me that it is not a want on our part, it
+is to establish a precedent here about whether or not we are
+entitled to the information that is being developed in the
+government by Federal employees as we carry out our role of
+oversight. That is what the question here, our need for it, is.
+It is not to find out the exact number or anything else. It is
+to find out what is there so that we can make a reasoned
+judgment. We very often take varying opinions about what the
+number is and ignore one of them and go with another one. That
+is not the issue here. The issue is whether we can be barred
+from knowing that a competent professional has created a model
+that gives him a number which is at major variance with what
+was put before us. We were told $400 million--$400 billion, and
+then we find out that $534 billion was floating around. That is
+almost--well, I don't know. I am not going to give a
+percentage. It is a big difference. I think that that is why we
+need--we could have argued that. We would have had a big
+argument in here if we had known that other number.
+ Chairman THOMAS. Well, we had one.
+ Mr. RANGEL. I yield to the gentleman from Texas.
+ Mr. DOGGETT. Thank you.
+ Chairman THOMAS. Does he want an answer, or was that a
+statement?
+ Mr. RANGEL. I yield to the Chair to respond.
+ Chairman THOMAS. I thank the gentleman for yielding. What
+the gentleman from Washington is asking for was not available
+because he was looking for facts. What was available was an
+estimate based upon assumptions which, frankly, when Mr. Foster
+was in front of us, were challenged by a number of Members of
+the Committee, especially, as I recall, the gentlewoman from
+Connecticut, the Chair of the Subcommittee on Health in terms
+of the take-up rates. In addition to that, Mr. Foster's talents
+are not unique nor is his model unique. There are others who
+carry out those various functions. The desire of Congress to
+get the best information can be provided from a number of
+sources. If the only factual source was a member of the
+Administration, in determining a legal decision, the Chair
+would then be looking at the question of subpoenaing the
+individual who had the fact which Congress desperately needed.
+ I do not believe the attempt to subpoena someone to find
+out if they were within their legal rights to indicate in an
+administrative hierarchy that an individual was not free to
+exercise whatever judgment they felt free to exercise absent
+supervision reaches that level. The gentleman's point is,
+people who make decisions either had the legal authority or
+didn't have the legal authority to make them. It is not whether
+you liked his style in doing it. That wouldn't raise it to a
+level of subpoena. What we have in front of us is an ability to
+determine whether or not Mr. Scully operated under the law.
+That would be the point at which the Chair would make the
+decision of exercising the subpoena, and the decision of
+calling it need or want was not the Chair's. It was framed that
+way by the Ranking Member from New York, and the Chair thanks
+the gentleman for once again yielding.
+ Mr. RANGEL. I yield to the gentleman from Texas.
+ Mr. DOGGETT. There appear to be two different individuals
+here and two different situations. As I understand with
+reference to Mr. Badger, the Condoleezza Rice of health care
+policy at the White House, as we learned last week, it may be
+that since they are stonewalling that the subpoena is the only
+route. With reference to Mr. Scully, as I read his letter, and
+he, of course, does not enjoy any executive privilege
+concerning his conversations with the President, but Mr. Scully
+is not refusing to come, as I understand it. He has simply said
+that he is tired today. He says, ``I have been traveling these
+past 10 days.'' Whether we interfered with his nap time or
+whatever might be the case, perhaps it is just a matter short
+of a subpoena of simply rescheduling at a time when he is more
+well-rested and my inquiry would be whether the Chair, perhaps
+short of going to the extreme of a subpoena, could simply
+continue this hearing to a time when Mr. Scully is well rested
+and could come and tell us about his conversations with the
+President and others on this very important matter.
+ Mr. RANGEL. I yield to the Chair.
+ Chairman THOMAS. I thank the gentleman for yielding, and
+his time is nearly expired. I tell the gentleman from Texas
+that trying to screen through what I assume to be somewhat
+facetious remarks that the Chair especially is concerned about
+issuing a subpoena against a private citizen. Dealing with
+individuals who are carrying out functions of office under the
+law is one question, but now simply to find out, as the
+gentleman characterized, who said what to whom and when, and
+compelling them to appear before this Committee when what they
+did was legal is an extension of the power of this Committee
+that I believe would verge on abuse of the power.
+ The gentleman declined the invitation which the minority
+has under Rule XI to extend the hearing. The Chair has complied
+with that in what I believe was the most efficacious time,
+place, and manner of response. We have before us two
+individuals who have direct personal knowledge of decisions
+that affected Mr. Scully and affected Mr. Foster, and it seems
+to me that that ought to be something that we would listen to
+if at the end of the testimony and the questioning period, if
+there is--it is clear that he operated under the law in
+exercising his decision, then again, I think it reverts to a
+manner of style. I am quite sure that Mr. Scully's style
+doesn't meet the level of desired stylistic behavior that
+either the gentleman from Washington or the gentleman from
+Texas would prefer. That does not trigger, in the Chair's
+opinion, a need to issue a subpoena. That is yet to be
+determined based upon the testimony and the questions that lie
+before this second half of the hearing on the Trustees' Report.
+ Mr. DOGGETT. Mr. Chairman, I am not asking about issuing a
+subpoena to Mr. Scully. I am just asking if the Chair is
+declining to extend an invitation to him to come at a time that
+is more convenient to Mr. Scully to be here, since he is the
+actor and the person involved rather than one of his
+assistants.
+ Chairman THOMAS. Might I respond?
+ Mr. RANGEL. Yes. I yield to the Chair to respond.
+ Chairman THOMAS. In looking at the nearly expired time of
+the Ranking Member, I tell the gentleman that the minority has
+requested an extension of the hearing under Rule XI. That
+extension has been granted. The gentleman now seeks to figure
+out a way to bounce the ball down the street with a
+continuation of a continuation of a continuation. The Chair's
+reading of Mr. Scully's letter is he ain't coming.
+ Mr. RANGEL. Mr. Chairman, in order to protect my right in
+being timely in raising the motions to subpoena both Mr. Scully
+and Mr. Badger, I, under House Rule I (1)(2)(k)(6), I move that
+the Committee issue a subpoena to a witness, Special Assistant
+to the President for Economic Policy, Doug Badger, to testify
+before the Committee on Ways and Means as soon as possible at a
+mutually agreeable time following the upcoming district work
+period on the subject of cost estimates on the Medicare
+prescription bill passed by the Congress in 2003 and to provide
+the Committee by at least 5 days prior to the hearing with
+documents relevant to this subject.
+ Mr. MCCRERY. Mr. Chairman.
+ Chairman THOMAS. The gentleman from Louisiana.
+ Mr. MCCRERY. Mr. Chairman, I move to table the motion of
+the gentleman from New York.
+ Chairman THOMAS. Motion to table is before us. It is not
+debatable.
+ Mr. RANGEL. There is not a debate on that?
+ Chairman THOMAS. It is not debatable on his second. If the
+gentleman from Louisiana----
+ Mr. LEVIN. Are we going to shut off debate on this?
+ Mr. RANGEL. Yes.
+ Chairman THOMAS. Can the Chair finish his statement? In an
+attempt to try to create and maintain comity, notwithstanding
+the gentleman from Louisiana's parliamentary privilege, on a
+procedural motion, which is not debatable, the underlying
+motion is. So, the Chair will recognize for a brief period of
+time the gentleman from Michigan with what the Chair will call
+a timely request, notwithstanding it came after the motion, to
+discuss briefly his concerns about the motion.
+ Mr. LEVIN. Would the Chairman yield?
+ Chairman THOMAS. The gentleman from Michigan.
+ Mr. KLECZKA. It seems that other Members also want to talk
+about the motion. Is the Chairman only restricting the debate
+on the motion to the gentleman from Michigan?
+ Chairman THOMAS. The Chair indicated that in an attempt to
+maintain comity, the Chair would allow the gentleman from
+Michigan, notwithstanding the fact that the motion to table was
+timely presented and there is no debate on that motion. If the
+gentleman from Wisconsin indicates that every Member of the
+minority is going to debate this, notwithstanding----
+ Mr. KLECZKA. Well, I am not saying every Member. I am
+saying more than one Member would possibly like to be heard on
+the motion.
+ Chairman THOMAS. The Chair has indicated his willingness to
+offer comity because the gentleman from Michigan intervened,
+not timely, but the Chair is willing to entertain that request.
+If the gentleman from Wisconsin wishes to push his point that
+the Chair is not following parliamentary procedure because the
+motion to table was timely presented, the Chair will move to
+the vote on the motion to table.
+ Mr. KLECZKA. So, that is a threat, that if I insist on
+talking on the motion, then Sandy Levin from Michigan doesn't
+talk? That is----
+ Chairman THOMAS. I tell the gentleman it is not a threat.
+It is an attempt by the Chair to follow parliamentary
+procedure.
+ Mr. KLECZKA. That is not comity, it is comedy.
+ Chairman THOMAS. The Committee has before it the motion to
+table the gentleman from New York's motion, and all those in
+favor of tabling----
+ Mr. LEVIN. Mr. Chairman----
+ Chairman THOMAS. Say aye.
+ [Chorus of ayes.]
+ Mr. LEVIN. Mr. Chairman----
+ Chairman THOMAS. Those opposed?
+ [Chorus of noes.]
+ Mr. LEVIN. Mr. Chairman, you recognized me.
+ Chairman THOMAS. In the opinion of the Chair, the motion to
+table has passed and the motion----
+ Mr. RANGEL. I ask for a recorded vote.
+ Chairman THOMAS. From the gentleman from New York is laid
+upon the table.
+ Mr. RANGEL. I ask for a roll call.
+ Chairman THOMAS. A sufficient number of hands. The clerk
+will call the roll on the motion to table the gentleman from
+New York's motion on the subpoena.
+ Mr. LEVIN. Mr. Chairman, point of information before the
+vote. I thought you were going to recognize me.
+ Chairman THOMAS. I tell the gentleman the Chair was willing
+as a matter of comity to recognize the gentleman,
+notwithstanding he did not have parliamentary standing. It was
+clear that other Members on his side of the aisle were not
+willing to allow the Chair to exercise that comity, and so the
+Chair was more than willing to exercise the parliamentary right
+to move to the procedural motion.
+ Mr. LEVIN. Mr. Chairman, I just want to say that you
+recognized the gentleman from Louisiana. I don't think you were
+surprised by the motion he was going to submit. There is no way
+you are going to shut down discussion of these issues, and you
+can do it now through this device----
+ Mr. MCCRERY. Mr. Chairman, I do not believe that this
+discussion is in order in the middle of a----
+ Chairman THOMAS. It is not in order----
+ Mr. LEVIN. It isn't in order----
+ Chairman THOMAS. It is not in order. A point of information
+is not the correct reference, but the Chair was allowing the
+gentleman to express himself in an attempt to continue to
+maintain comity.
+ Mr. LEVIN. Comity, then let us have discussion of the
+motion.
+ Chairman THOMAS. I tell the gentleman that the Chair
+attempted to do that, notwithstanding the timely notice of the
+motion to table. There were Members on his side of the aisle
+that indicated that the attempt to provide comity by the Chair
+was not sufficient, which meant the Chair would then not be
+able to follow parliamentary procedure and the Chair is
+concerned about that and believes we should.
+ Mr. LEVIN. Stonewalling won't work. We will state our----
+ Chairman THOMAS. I tell the gentleman we are in the middle
+of a roll call----
+ Mr. RAMSTAD. Regular order.
+ Chairman THOMAS. The Chair will indicate that he has
+continued to provide a reasonable opportunity, and since a roll
+call by a show of hands was called by the minority, the rules
+indicate that we should now have that roll call.
+ Mr. RANGEL. I ask unanimous consent that the gentleman from
+Michigan be allowed to express himself.
+ Chairman THOMAS. I tell the gentleman that it is not in
+order during a roll call for anyone to express their position
+and the clerk will call the roll.
+ Mr. RANGEL. It was my understanding that unanimous
+consent----
+ Mr. RAMSTAD. Regular order.
+ Mr. RANGEL. Suspend all of the rules. I have asked for
+unanimous consent----
+ Chairman THOMAS. Not in the middle of a roll call.
+ CLERK. Mr. Crane?
+ Mr. CRANE. Aye.
+ CLERK. Mr. Crane votes aye. Mr. Shaw?
+ Mr. SHAW. Aye.
+ CLERK. Mr. Shaw votes aye. Mrs. Johnson?
+ Mrs. JOHNSON. Aye.
+ CLERK. Mrs. Johnson votes aye. Mr. Houghton?
+ Mr. HOUGHTON. Aye.
+ CLERK. Mr. Houghton votes aye. Mr. Herger?
+ Mr. HERGER. Aye.
+ CLERK. Mr. Herger votes aye. Mr. McCrery?
+ Mr. MCCRERY. Aye.
+ CLERK. Mr. McCrery votes aye. Mr. Camp?
+ Mr. CAMP. Aye.
+ CLERK. Mr. Camp votes aye. Mr. Ramstad?
+ Mr. RAMSTAD. Aye.
+ CLERK. Mr. Ramstad votes aye. Mr. Nussle?
+ Mr. NUSSLE. Aye.
+ CLERK. Mr. Nussle votes aye. Mr. Johnson?
+ Mr. JOHNSON. Aye.
+ CLERK. Mr. Johnson votes aye. Ms. Dunn?
+ [No response.]
+ Mr. Collins?
+ Mr. COLLINS. Yes.
+ CLERK. Mr. Collins votes yes. Mr. Portman?
+ Mr. PORTMAN. Aye.
+ CLERK. Mr. Portman votes aye. Mr. English?
+ Mr. ENGLISH. Aye.
+ CLERK. Mr. English votes aye. Mr. Hayworth?
+ Mr. HAYWORTH. Aye.
+ CLERK. Mr. Hayworth votes aye. Mr. Weller?
+ Mr. WELLER. Aye.
+ CLERK. Mr. Weller votes aye. Mr. Hulshof?
+ [No response.]
+ Mr. McInnis. Mr. McInnis?
+ Mr. MCINNIS. Yes.
+ CLERK. Mr. McInnis votes yes. Mr. Lewis of Kentucky?
+ Mr. LEWIS OF KENTUCKY. Aye.
+ CLERK. Mr. Lewis of Kentucky votes aye. Mr. Foley?
+ Mr. FOLEY. Aye.
+ CLERK. Mr. Foley votes aye. Mr. Brady?
+ Mr. BRADY. Aye.
+ CLERK. Mr. Brady votes aye. Mr. Ryan?
+ Mr. RYAN. Aye.
+ CLERK. Mr. Ryan votes aye. Mr. Cantor?
+ Mr. CANTOR. Aye.
+ CLERK. Mr. Cantor votes aye. Mr. Rangel?
+ Mr. RANGEL. No.
+ CLERK. Mr. Rangel votes no. Mr. Stark?
+ Mr. STARK. No.
+ CLERK. Mr. Stark votes no. Mr. Matsui?
+ Mr. MATSUI. No.
+ CLERK. Mr. Matsui votes no. Mr. Levin?
+ Mr. LEVIN. No.
+ CLERK. Mr. Levin votes no. Mr. Cardin?
+ Mr. CARDIN. No.
+ CLERK. Mr. Cardin votes no. Mr. McDermott?
+ Mr. MCDERMOTT. No.
+ CLERK. Mr. McDermott votes no. Mr. Kleczka?
+ Mr. KLECZKA. No.
+ CLERK. Mr. Kleczka votes no. Mr. Lewis of Georgia?
+ Mr. LEWIS OF GEORGIA. No.
+ CLERK. Mr. Lewis of Georgia votes no. Mr. Neal?
+ Mr. NEAL. No.
+ CLERK. Mr. Neal votes no. Mr. McNulty?
+ Mr. MCNULTY. No.
+ CLERK. Mr. McNulty votes no. Mr. Jefferson?
+ [No response.]
+ Mr. Tanner?
+ Mr. TANNER. No.
+ CLERK. Mr. Tanner votes no. Mr. Becerra. Mr. Becerra?
+ Mr. BECERRA. Pass.
+ CLERK. Mr. Becerra passes. Mr. Doggett?
+ Mr. DOGGETT. No.
+ CLERK. Mr. Doggett votes no. Mr. Pomeroy?
+ Mr. POMEROY. No.
+ CLERK. Mr. Pomeroy votes no. Mr. Sandlin?
+ Mr. SANDLIN. No.
+ CLERK. Mr. Sandlin votes no. Ms. Tubbs Jones? Ms. Tubbs
+Jones?
+ Ms. TUBBS JONES. No.
+ CLERK. Ms. Tubbs Jones votes no. Ms. Dunn?
+ Ms. DUNN. Yes.
+ CLERK. Ms. Dunn votes yes. Mr. Hulshof?
+ [No response.]
+ Mr. Jefferson?
+ [No response.]
+ Mr. Becerra?
+ Mr. BECERRA. No.
+ CLERK. Mr. Becerra votes no. Mr. Thomas?
+ Chairman THOMAS. Yes.
+ CLERK. Mr. Thomas votes yes.
+ Chairman THOMAS. The clerk will announce the vote.
+ CLERK. Twenty-three aye, 16 no.
+ Chairman THOMAS. There being 23 ayes and 16 noes, the
+motion of the gentleman from New York, Mr. Rangel, is laid on
+the table.
+ Mr. RANGEL. Mr. Chairman, under House Rule I (1)(2)(k)(6),
+I move that the Committee issue a subpoena to a witness, former
+CMS Administrator, Mr. Thomas Scully, to testify before the
+Committee on Ways and Means as soon as possible following the
+upcoming district work period on the subject of cost estimates
+on the Medicare prescription drug bill passed by the Congress
+in 2003 and to provide the Committee with all the documents
+relevant to this subject at least 5 days prior to the hearing--
+--
+ Mr. KLECZKA. Mr. Chairman, on the motion----
+ Mr. RANGEL. In support of this motion, Mr. Chair, let me
+say this. I think that you have extended yourself beyond the
+mandatory discretion decisions in this Committee. I think you
+have done it because you feel as a Member of this Committee and
+certainly as the Chairman that what we do today may in the
+future dictate how we are treated by Administration officials,
+and to that extent, I apologize to the witnesses that are here
+patiently waiting----
+ Mr. KLECZKA. Will Mr. Rangel yield?
+ Mr. LEVIN. Mr. Chairman.
+ Mr. KLECZKA. Mr. Rangel, would you yield, please?
+ Mr. LEVIN. Mr. Chairman.
+ Chairman THOMAS. Prior to the Chair----
+ Mr. RANGEL. I just wanted to complete my thought, and that
+is while we recognize that the majority has the right to table
+this motion, I hope they recognize that the damage they are
+doing is not to me as the Ranking Member or to the minority,
+but to this Committee as we seek to determine at this hearing
+what right the executive branch has to deny us information
+which we are entitled to know. Furthermore, though the
+decisions may appear to be partisan, I would hope that the
+majority Members would recognize that this Committee has a
+longstanding reputation of integrity and of protecting our
+jurisdiction and making certain that our constitutional rights
+are not abused.
+ Mr. LEVIN. Mr. Rangel, would you yield?
+ Mr. RANGEL. I yield to Mr. Levin, who was denied the
+opportunity----
+ Mr. MCCRERY. Point of order, Mr. Chairman.
+ Mr. RANGEL. To express himself.
+ Mr. MCCRERY. Point of order, Mr. Chairman.
+ Chairman THOMAS. The gentleman from Louisiana will state
+the point of order.
+ Mr. MCCRERY. The gentleman was recognized for a motion.
+ Chairman THOMAS. That is correct.
+ Mr. MCCRERY. He cannot yield time during offering a motion
+to the Committee.
+ Chairman THOMAS. That is correct. The gentleman was
+recognized for the purpose of offering a motion. He has offered
+a motion----
+ Mr. RANGEL. I move the----
+ Chairman THOMAS. He has explained to a degree the motion,
+and the Chair would indicate that all we are trying to do is
+get the facts before we make a decision. The gentleman from New
+York has every right to make a decision before he gets the
+facts, and that is evidenced by the motion that he has offered.
+ Mr. LEVIN. Mr. Chairman----
+ Chairman THOMAS. The Chair would be willing for the purpose
+of comity to allow the gentleman from Michigan to make some
+brief points, notwithstanding the fact that the Chair has the
+ability to recognize except for the structure of in the middle
+of a roll call vote, and then the Chair would not exercise the
+recognition but rather to carry out the roll call vote and that
+is what occurred on the last request by the gentleman from New
+York.
+ Mr. RANGEL. Well, I recognize----
+ Chairman THOMAS. The Chair would attempt to allow a
+reasonable dialog by recognizing the gentleman from Michigan
+for any comments he may wish to make on the motion by the
+gentleman from New York requesting a subpoena for the former
+Administrator. The gentleman from Michigan?
+ Mr. LEVIN. Thank you, Mr. Chairman. We need to understand
+what the question is, what the issue is. It was not when Mr.
+Foster was here who was right, whether it was $400 billion that
+was as stated when we were voting on this or $530-some billion
+that was the actuarial figure. That, there was disagreement.
+The issue isn't legally whether Mr. Scully had the right to
+tell Mr. Foster he could not tell people. That is an issue. The
+main issue is who knew about the actuarial figure? Why wasn't
+it disclosed in a timely fashion? That is the issue. We voted
+in this Congress on major legislation while there was
+information that was hidden from us by some in the
+Administration and we have a right to know why and who knew.
+That is the issue. To say this question, therefore, is a matter
+of curiosity or a whim or a style is absolutely incorrect. It
+is the knowledge that is the right of the public and the need
+for there to be truthfulness. I said when Mr. Foster was here
+that there was a cover-up of this information and we want to
+know how high up the cover-up went. Mr. Scully says something
+by his letter. We have a right to have him right here in front
+of us, under oath, to ask him what he knew, whom he talked to
+within the White House, under what circumstances and why he did
+not tell us, the representatives of the people, the information
+that he knew. That is the issue. So, anybody here can
+stonewall, and I am sorry my other colleagues cannot speak.
+They will do it when they inquire of these witnesses. We will
+find a way, because as we have found out on other occasions,
+and I close with this, there is no way to hide the truth. I
+just want to say, I have great respect for Mr. McCrery. For you
+to move to table and quash discussion of this motion is not
+going to work. We are going to get this information out one way
+or the other.
+ Mr. RANGEL. I move the question, Mr. Chairman.
+ Mr. MCCRERY. Mr. Chairman.
+ Chairman THOMAS. The Chair recognizes the gentleman from
+Louisiana.
+ Mr. MCCRERY. Mr. Chairman, before I make the motion to
+table, I would just refer----
+ Mr. RANGEL. A point of order, Mr. Chairman.
+ Mr. MCCRERY. Everyone to Mr. Scully's letter----
+ Mr. RANGEL. Point of order.
+ Mr. MCCRERY. Which points out clearly----
+ Mr. RANGEL. Is recognized----
+ Mr. MCCRERY. That information was available----
+ Chairman THOMAS. The gentleman from Louisiana will suspend.
+The Chair recognized the gentleman from Louisiana. He did not
+recognize the gentleman from Louisiana for the purpose of
+offering a motion. He recognized the gentleman from Louisiana.
+ Mr. RANGEL. I'll withdraw my point of order.
+ Chairman THOMAS. The time is the gentleman from
+Louisiana's. Would the gentleman like to continue----
+ Mr. MCCRERY. Thank you, Mr. Chairman. I think the Chairman
+has been quite generous with allowing the minority to explore
+this question during Mr. Rangel's presentation early on in this
+hearing and then by allowing Mr. McDermott and Mr. Levin.
+Frankly, we could argue about this all day long and some may
+conclude that that is, in fact, the point of the minority. The
+facts are that there was information available to the public
+which would have led any knowledgeable person to conclude that
+OMB's ultimate assumptions and ultimate estimate of the cost of
+the Medicare bill were going to be higher than CBO's. Mr.
+Scully, in fact, according to his letter, testified before the
+Senate Finance Committee to the fact that his assumptions were
+different. If you had looked at those assumptions and been
+familiar with how the estimate on the bill was going to work,
+you would know that it was going to be higher. You add to that
+the fact that the minority repeatedly introduced, supported,
+talked about Medicare bills that cost a lot more than either
+one of the CBO's estimate or the OMB estimate and I think you
+see this debate for what it is.
+ Mr. NEAL. Would the gentleman yield?
+ Mr. MCCRERY. I will be glad to yield.
+ Mr. NEAL. Mr. McCrery, is it your position that the
+Medicare prescription drug bill would have passed in the House
+of Representatives had the true figure been known?
+ Mr. MCCRERY. My position is that many more Democrats,
+according to their rhetoric, would have voted for a bill with a
+much higher price tag.
+ [Laughter.]
+ Well, then I suppose you were just introducing things out
+of folly that cost twice as much. I mean, come on, get real
+here.
+ Chairman THOMAS. The gentleman from Louisiana has the time.
+ Mr. MCCRERY. Let us just get down to what this is all
+about. This is a lot about politics. We understand that.
+Everybody in the audience understands that. We have spent
+enough time on it. We have two witnesses here at the behest of
+the minority operating fully under the rules of the House,
+which we recognize, to extend a hearing which we called to try
+to explore this subject. Under your rights in the minority, we
+now have extended the hearing and two of the witnesses which
+you invited to appear are here and we are waiting to hear their
+testimony. Enough of the politics. Let's get on with the
+hearing and then you can all make your remarks----
+ Mr. SHAW. Mr. Chairman.
+ Mr. MCCRERY. To try to get that out. I move----
+ Mr. SHAW. Mr. Chairman.
+ Chairman THOMAS. I tell the gentleman from Louisiana----
+ Mr. MCCRERY. I move to table the motion of the gentleman
+from New York.
+ Chairman THOMAS. In the opinion of the Chair, the gentleman
+from Louisiana is debating the point, probably would be
+considered a preface to his motion, and since the Chair had
+recognized the gentleman from New York and the gentleman from
+Michigan, two Members of the minority, the Chair wishes to
+recognize a second Member of the majority, and the Chair
+recognizes the gentleman from Florida, Mr. Shaw.
+ Mr. SHAW. Mr. Chairman, I move to table the motion of the
+gentleman from New York.
+ Chairman THOMAS. The gentleman from Florida moves to table
+the motion of the gentleman from New York. All those in favor?
+ [Chorus of ayes.]
+ Those opposed?
+ [Chorus of noes.]
+ In the opinion of the Chair, the ayes have it.
+ Mr. LEVIN. Roll call.
+ Chairman THOMAS. The Chair will recognize the right of the
+minority to call the roll, with the understanding that we would
+like to have the roll call without attempts to gain recognition
+during the roll call. Will the clerk call the roll?
+ CLERK. Mr. Crane.
+ Mr. CRANE. Aye.
+ CLERK. Mr. Crane votes aye. Mr. Shaw?
+ Mr. SHAW. Aye.
+ CLERK. Mr. Shaw votes aye. Mrs. Johnson?
+ Mrs. JOHNSON. Aye.
+ CLERK. Mrs. Johnson votes aye. Mr. Houghton?
+ [No response.]
+ Mr. Herger?
+ Mr. HERGER. Aye.
+ CLERK. Mr. Herger votes aye. Mr. McCrery?
+ Mr. MCCRERY. Aye.
+ CLERK. Mr. McCrery votes aye. Mr. Camp?
+ Mr. CAMP. Aye.
+ CLERK. Mr. Camp votes aye. Mr. Ramstad?
+ Mr. RAMSTAD. Aye.
+ CLERK. Mr. Ramstad votes aye. Mr. Nussle?
+ Mr. NUSSLE. Aye.
+ CLERK. Mr. Nussle votes aye. Mr. Johnson?
+ Mr. JOHNSON. Aye.
+ CLERK. Mr. Johnson votes aye. Ms. Dunn?
+ Ms. DUNN. Aye.
+ CLERK. Ms. Dunn votes aye. Mr. Collins?
+ Mr. COLLINS. Yes.
+ CLERK. Mr. Collins votes yes. Mr. Portman?
+ Mr. PORTMAN. Aye.
+ CLERK. Mr. Portman votes aye. Mr. English?
+ Mr. ENGLISH. Aye.
+ CLERK. Mr. English votes aye. Mr. Hayworth?
+ Mr. HAYWORTH. Aye.
+ CLERK. Mr. Hayworth votes aye. Mr. Weller?
+ Mr. WELLER. Aye.
+ CLERK. Mr. Weller votes aye. Mr. Hulshof?
+ [No response.]
+ Mr. McInnis?
+ Mr. MCINNIS. Yes.
+ CLERK. Mr. McInnis votes yes. Mr. Lewis of Kentucky?
+ Mr. LEWIS OF KENTUCKY. Aye.
+ CLERK. Mr. Lewis of Kentucky votes aye. Mr. Foley?
+ Mr. FOLEY. Aye.
+ CLERK. Mr. Foley votes aye. Mr. Brady?
+ Mr. BRADY. Aye.
+ CLERK. Mr. Brady votes aye. Mr. Ryan?
+ Mr. RYAN. Aye.
+ CLERK. Mr. Ryan votes aye. Mr. Cantor?
+ Mr. CANTOR. Aye.
+ CLERK. Mr. Cantor votes aye. Mr. Rangel. Mr. Rangel?
+ Mr. RANGEL. No.
+ CLERK. Mr. Rangel votes no. Mr. Stark?
+ Mr. STARK. No.
+ CLERK. Mr. Stark votes no. Mr. Matsui?
+ Mr. MATSUI. No.
+ CLERK. Mr. Matsui votes no. Mr. Levin?
+ Mr. LEVIN. No.
+ CLERK. Mr. Levin votes no. Mr. Cardin?
+ Mr. CARDIN. No.
+ CLERK. Mr. Cardin votes no. Mr. McDermott?
+ Mr. MCDERMOTT. No.
+ CLERK. Mr. McDermott votes no. Mr. Kleczka?
+ Mr. KLECZKA. No.
+ CLERK. Mr. Kleczka votes no. Mr. Lewis of Georgia?
+ Mr. LEWIS OF GEORGIA. No.
+ CLERK. Mr. Lewis of Georgia votes no. Mr. Neal?
+ Mr. NEAL. No.
+ CLERK. Mr. Neal votes no. Mr. McNulty?
+ Mr. MCNULTY. No.
+ CLERK. Mr. McNulty votes no. Mr. Jefferson?
+ [No response.]
+ Mr. Tanner?
+ Mr. TANNER. No.
+ CLERK. Mr. Tanner votes no. Mr. Becerra?
+ Mr. BECERRA. No.
+ CLERK. Mr. Becerra votes no. Mr. Doggett?
+ Mr. DOGGETT. No.
+ CLERK. Mr. Doggett votes no. Mr. Pomeroy?
+ Mr. POMEROY. No.
+ CLERK. Mr. Pomeroy votes no. Mr. Sandlin?
+ Mr. SANDLIN. No.
+ CLERK. Mr. Sandlin votes no. Ms. Tubbs Jones?
+ Ms. TUBBS JONES. No.
+ CLERK. Ms. Tubbs Jones votes no. Mr. Houghton?
+ Mr. HOUGHTON. Aye.
+ CLERK. Mr. Houghton votes aye. Mr. Hulshof?
+ [No response.]
+ Mr. Jefferson?
+ [No response.]
+ Mr. Thomas?
+ Chairman THOMAS. Aye.
+ CLERK. Mr. Thomas votes aye.
+ Chairman THOMAS. The clerk will announce the vote.
+ CLERK. Twenty-three ayes, 16 no.
+ Chairman THOMAS. There being 23 ayes and 16 noes, the
+motion of the gentleman from New York is laid upon the table.
+The Chair is prepared to allow the witnesses to begin
+testimony. The Chair will indicate that because this hearing
+was requested as an extension of the previous hearing, the
+Chair, to try to accommodate in a timely fashion, called the
+hearing for today at 12:00 p.m. A previously scheduled hearing
+in this room is to begin at 2:00 p.m. and the Chair intends not
+to disrupt the previously scheduled hearing, which was ordered
+for 2:00 p.m. The Chair will now, first of all, thank Ms.
+Norwalk and Mr. Flick for appearing before us----
+ Mr. DOGGETT. Parliamentary inquiry, Mr. Chairman.
+ Chairman THOMAS. The gentleman from Texas?
+ Mr. DOGGETT. Do I understand, then, that the testimony from
+the witnesses and the questions from all Members of this
+Committee will be limited to a total of 59 minutes or however
+much is left before 2:00 p.m.?
+ Chairman THOMAS. I tell the gentleman, no, it was the 2
+hours that we had available when the Committee began.
+ Mr. DOGGETT. At this point, without the Chair having made
+any prior announcement on this topic, you may not even reach
+all the Members of this Committee and permit them a right to
+question. Is that my understanding? I mean, I can just count 5
+minutes per person down here, and if everyone takes their time,
+some Members of the Committee will not be permitted to ask any
+questions.
+ Chairman THOMAS. The gentleman is usually very persuasive
+and perhaps he can persuade some Members not to utilize their
+full time so he can have a chance----
+ Mr. KLECZKA. Mr. Chairman, parliamentary inquiry.
+ Chairman THOMAS. The gentleman from Wisconsin.
+ Mr. KLECZKA. Mr. Chairman, is it not true that the most
+powerful Committee in Congress, the Committee on Ways and
+Means, has other hearing rooms, that we have not only this main
+hearing room, but there are other rooms throughout the Capitol
+complex where the next hearing could be conducted? Is that not
+true so we can continue with this?
+ Chairman THOMAS. I tell the gentleman, this room was chosen
+because of the importance and the number of people who are
+going to attend that hearing. It was on the schedule prior to
+this, scheduled for 2:00 p.m., and the Chair intends to honor
+the previously scheduled hearing.
+ Mr. KLECZKA. Isn't this the same----
+ Chairman THOMAS. The sooner we can begin, the better we
+have----
+ Mr. KLECZKA. Isn't this the same Committee hearing that was
+scheduled for 10:00 a.m. this morning and it never occurred at
+10:00 a.m.?
+ Chairman THOMAS. No.
+ Mr. KLECZKA. Are you sure?
+ Chairman THOMAS. The Chair is willing to recognize the
+witnesses----
+ Mr. RANGEL. A parliamentary inquiry, Mr. Chairman.
+ Chairman THOMAS. The gentleman from New York.
+ Mr. RANGEL. Does the Chair intend to place the witnesses
+under oath?
+ Chairman THOMAS. As long as the Chairman's tenure to this
+point, no witness has been placed under oath and the Chair
+would probably begin the inquiry as to the necessity of the
+oath to inquire both of Ms. Norwalk and Mr. Flick, are you
+currently employed by the Federal Government?
+ Ms. NORWALK. Yes.
+ Mr. FLICK. Yes.
+ Chairman THOMAS. I believe the answer to that would be yes.
+In the procedure of being employed, were you required to swear
+or affirm an oath of allegiance to the United States and its
+Constitution?
+ Ms. NORWALK. Yes.
+ Mr. FLICK. Yes.
+ Chairman THOMAS. The answer is yes. Beyond that, your goal
+here is to pursue the truth? The Chair feels comfortable, I
+will tell the gentleman from New York, that based upon their
+prior swearing or affirming and their current role, that the
+Chair believes the testimony by these people who voluntarily
+have appeared before the Committee who had a choice not to
+appear will be truthful without the need to push it to an oath-
+taking procedure.
+ Mr. RANGEL. Further parliamentary inquiry, Mr. Chairman. In
+view of the fact that the Chair has now interpreted the need or
+lack of need for an oath before congressional Committees, would
+it be in order that the Ranking Member be allowed to have a
+motion that the witnesses be placed under oath?
+ Chairman THOMAS. I tell the gentleman that the decision
+that the Chair made was based upon the same one in terms of
+need or wants. If the gentleman is questioning witnesses who
+voluntarily appeared before us who have in their current place
+of employment sworn an oath of allegiance to the Constitution,
+the Chair finds virtually no difference between the position of
+the witness and the position of every Member on this Congress.
+We, too, are employed by the Federal Government, and we, too,
+have taken an oath of office. If the gentleman believes that
+the witnesses, or the concern over the witnesses rises to the
+point of requiring an oath, the Chair may be prepared for every
+Member of the Committee to rise and also reaffirm their oath,
+so that we are all on the same level of concern about our
+willingness to take oaths and the voracity of our statements.
+ Mr. RANGEL. Well, I exclude the Members of this Committee,
+but I move that the witnesses be placed under oath.
+ Mr. MCCRERY. Mr. Chairman.
+ Chairman THOMAS. The gentleman from Louisiana?
+ Mr. MCCRERY. Knowing that it is a violation of Federal law
+to knowingly tell a falsehood to a government official, I think
+it would be duplicative, unnecessary, and perhaps even diminish
+the possibility in the future of getting good witnesses to
+appear before the Committee. I therefore move to table the
+motion of the gentleman from New York.
+ Chairman THOMAS. The gentleman from Louisiana has moved to
+table the gentleman from New York's----
+ Mr. DOGGETT. Mr. Chairman, parliamentary----
+ Chairman THOMAS. Motion. All those in favor, say aye.
+ [Chorus of ayes.]
+ Those opposed?
+ [Chorus of noes.]
+ In the opinion of the Chair, the ayes have it. The ayes
+have it and the motion is tabled.
+ Mr. RANGEL. Record vote.
+ Chairman THOMAS. A sufficient number of hands. The clerk
+will call the roll.
+ CLERK. Mr. Crane?
+ Mr. CRANE. Aye.
+ CLERK. Mr. Crane votes aye. Mr. Shaw?
+ Mr. SHAW. Aye.
+ CLERK. Mr. Shaw votes aye. Mrs. Johnson?
+ Mrs. JOHNSON. Aye.
+ CLERK. Mrs. Johnson votes aye. Mr. Houghton?
+ Mr. HOUGHTON. Aye.
+ CLERK. Mr. Houghton votes aye. Mr. Herger?
+ Mr. HERGER. Aye.
+ CLERK. Mr. Herger votes aye. Mr. McCrery?
+ Mr. MCCRERY. Aye.
+ CLERK. Mr. McCrery votes aye. Mr. Camp?
+ Mr. CAMP. Aye.
+ CLERK. Mr. Camp votes aye. Mr. Ramstad?
+ Mr. RAMSTAD. Aye.
+ CLERK. Mr. Ramstad votes aye. Mr. Nussle?
+ Mr. NUSSLE. Aye.
+ CLERK. Mr. Nussle votes aye. Mr. Johnson?
+ Mr. JOHNSON. Aye.
+ CLERK. Mr. Johnson votes aye. Ms. Dunn?
+ [No response.]
+ Mr. Collins?
+ Mr. COLLINS. Yes.
+ CLERK. Mr. Collins votes yes. Mr. Portman?
+ Mr. PORTMAN. Aye.
+ CLERK. Mr. Portman votes aye. Mr. English?
+ Mr. ENGLISH. Aye.
+ CLERK. Mr. English votes aye. Mr. Hayworth?
+ Mr. HAYWORTH. Aye.
+ CLERK. Mr. Hayworth votes aye. Mr. Weller?
+ Mr. WELLER. Aye.
+ CLERK. Mr. Weller votes aye. Mr. Hulshof?
+ [No response.]
+ Mr. McInnis?
+ [No response.]
+ Mr. Lewis of Kentucky?
+ Mr. LEWIS OF KENTUCKY. Aye.
+ CLERK. Mr. Lewis of Kentucky votes aye. Mr. Foley?
+ [No response.]
+ Mr. Brady?
+ Mr. BRADY. Aye.
+ CLERK. Mr. Brady votes aye. Mr. Ryan?
+ Mr. RYAN. Aye.
+ CLERK. Mr. Ryan votes aye. Mr. Cantor?
+ Mr. CANTOR. Aye.
+ CLERK. Mr. Cantor votes aye. Mr. Rangel. Mr. Rangel?
+ Mr. RANGEL. No.
+ CLERK. Mr. Rangel votes no. Mr. Stark?
+ Mr. STARK. No.
+ CLERK. Mr. Stark votes no. Mr. Matsui?
+ Mr. MATSUI. No.
+ CLERK. Mr. Matsui votes no. Mr. Levin?
+ Mr. LEVIN. No.
+ CLERK. Mr. Levin votes no. Mr. Cardin?
+ Mr. CARDIN. No.
+ CLERK. Mr. Cardin votes no. Mr. McDermott?
+ Mr. MCDERMOTT. No.
+ CLERK. Mr. McDermott votes no. Mr. Kleczka?
+ Mr. KLECZKA. No.
+ CLERK. Mr. Kleczka votes no. Mr. Lewis of Georgia?
+ Mr. LEWIS OF GEORGIA. No.
+ CLERK. Mr. Lewis of Georgia votes no. Mr. Neal?
+ Mr. NEAL. No.
+ CLERK. Mr. Neal votes no. Mr. McNulty?
+ Mr. MCNULTY. No.
+ CLERK. Mr. McNulty votes no. Mr. Jefferson?
+ [No response.]
+ Mr. Tanner?
+ Mr. TANNER. No.
+ CLERK. Mr. Tanner votes no. Mr. Becerra?
+ Mr. BECERRA. No.
+ CLERK. Mr. Becerra votes no. Mr. Doggett?
+ Mr. DOGGETT. No.
+ CLERK. Mr. Doggett votes no. Mr. Pomeroy?
+ Mr. POMEROY. No.
+ CLERK. Mr. Pomeroy votes no. Mr. Sandlin?
+ Mr. SANDLIN. No.
+ CLERK. Mr. Sandlin votes no. Ms. Tubbs Jones?
+ Ms. TUBBS JONES. No.
+ CLERK. Ms. Tubbs Jones votes no. Ms. Dunn?
+ [No response.]
+ Mr. Hulshof?
+ [No response.]
+ Mr. McInnis?
+ [No response.]
+ Mr. Foley?
+ [No response.]
+ Mr. Jefferson?
+ [No response.]
+ Mr. Thomas?
+ Chairman THOMAS. Aye.
+ CLERK. Mr. Thomas votes aye.
+ Chairman THOMAS. The clerk will announce the vote.
+ CLERK. Twenty aye, 16 no.
+ Chairman THOMAS. There being 20 ayes, 16 noes, the motion
+of the gentleman from New York is laid upon the table. The
+Chair is prepared to allow the witnesses to present testimony
+at this point.
+ Mr. DOGGETT. Point of order, Mr. Chairman.
+ Chairman THOMAS. The Chair----
+ Mr. DOGGETT. I have a point of order.
+ Chairman THOMAS. Point of order?
+ Mr. DOGGETT. Yes, sir.
+ Chairman THOMAS. The gentleman from Texas on his point of
+order.
+ Mr. DOGGETT. Solely. Mr. Chairman, House Rule XI, Clause
+(2)(j)(2), provides that, quote, ``each Committee shall apply
+the 5-minute rule during the questioning of witnesses in any
+hearing until such time as each Member of the Committee who so
+desires has had an opportunity to question each witness.''
+House Rule XI, Clause (2)(j)(1) is the rule of the House to
+which the Chairman referred that gives him no discretion to
+deny this hearing. My point of order is that the Chair, by his
+ruling limiting the time of this hearing to less than an hour
+and denying me and other Members of the Committee an
+opportunity to ask any questions is in violation of both House
+Rule XI, Clause (2)(j)(2) and House Rule XI, Clause (2)(j)(1),
+since he has converted this appearance of a hearing into a
+total sham hearing, denying the minority their right to ask
+questions of these witnesses. I would urge my point of order.
+ Chairman THOMAS. I tell the gentleman that my ability to
+reach the level the gentleman from Texas described these
+hearings pales in comparison. The Chair will indicate that
+there are many occasions in which hearings that are called have
+not been successful in exhausting the opportunities of each and
+every Member. The Chair indicates the time, place, and manner,
+oftentimes controls the circumstances we find ourselves in. The
+Chair would like to start the process because the gentleman
+from Texas has come to a conclusion without the process ever
+yet having been allowed to begin. He has reached a conclusion
+which is not yet warranted nor can the point of order be made
+since the hearing has not ended and every Member has not had
+their chances for the 5 minutes. So, if the gentleman wants to
+continue to attempt to make his point so that, in fact, there
+is no time for any Member, the Chair would consider that
+dilatory and, therefore, would rule that the Chair would not
+recognize the gentleman to make a point of order----
+ Mr. DOGGETT. The Chair has no choice----
+ Chairman THOMAS. When the point of order might be timely--
+--
+ Mr. DOGGETT. To recognize me to make a point of order----
+ Chairman THOMAS. The Chair indicates----
+ Mr. DOGGETT. I urge my point of order, Mr. Chairman.
+ Chairman THOMAS. The Chair indicates the gentleman from
+Texas's inquiry is not timely as a point of order.
+ Mr. DOGGETT. Mr. Chairman, I urge my point of order----
+ Chairman THOMAS. It is not timely. The Chair recognizes----
+ Mr. DOGGETT. If you want to overrule it, fine, but
+otherwise, I want to appeal this ruling of the Chair.
+ Chairman THOMAS. The Chair recognizes the witnesses----
+ Mr. DOGGETT. Mr. Chairman, I urge my point of order and I
+urge it now. I want a----
+ Chairman THOMAS. I tell the gentleman----
+ Mr. DOGGETT. Is there a ruling on the order?
+ Chairman THOMAS. I tell the gentleman that the Chair
+recognized the gentleman for a point of order. The point of
+order----
+ Mr. DOGGETT. The point of order has been made and the Chair
+refuses to rule on it----
+ Chairman THOMAS. The gentleman from Texas made----
+ Mr. DOGGETT. Since the Chair is acting totally improperly--
+--
+ Chairman THOMAS. The gentleman's point was not timely.
+ Mr. DOGGETT. Mr. Chairman, I urge my point of order.
+ Chairman THOMAS. The point was not timely and the gentleman
+is now----
+ Mr. DOGGETT. I take that as a denial----
+ Chairman THOMAS. Carrying out dilatory tactics.
+ Mr. DOGGETT. I appeal the ruling of the Chair and I urge--
+--
+ Mr. MCCRERY. Mr. Chairman.
+ Chairman THOMAS. I tell the gentleman----
+ Mr. DOGGETT. I ask for a vote on----
+ Chairman THOMAS. He was not recognized----
+ Mr. DOGGETT. The ruling of the Chair.
+ Chairman THOMAS. For that purpose.
+ Mr. DOGGETT. Mr. Chairman, you have no discretion when a
+point of order is made but to entertain that point of order. If
+you are denying the point of order as not timely, then please
+do so and I will appeal respectfully your ruling and show you
+the respect to which you are entitled. I am entitled to a
+ruling on my point of order. It is privileged and you do not
+have the discretion to ignore it.
+ Chairman THOMAS. I tell the gentleman----
+ Mr. MCCRERY. Mr. Chairman.
+ Chairman THOMAS. I tell the gentleman on his point of
+order, which was a conclusion based upon Rule XI, that every
+Member gets to exercise the 5-minute rule, has not yet ripened.
+ Mr. DOGGETT. I urge my point of order. If----
+ Chairman THOMAS. No Member has been denied the right to
+question. Therefore, Rule XI is not now in violation and the
+gentleman's point of order is not timely.
+ Mr. DOGGETT. Mr. Chairman, you have denied my point of
+order as not ripe and I appeal the ruling of the Chair,
+respectfully.
+ Chairman THOMAS. The gentleman was recognized for a point
+of order. The Chair is telling the gentleman his point of order
+is not ripe----
+ Mr. DOGGETT. The Chair is denying----
+ Chairman THOMAS. Therefore there is no ability to appeal
+the decision of the Chair.
+ Mr. DOGGETT. My point of order while attempting to avoid
+making a ruling which he knows will be appealed. I appeal the
+ruling of the Chair denying my point of order to have a fair
+opportunity to ask these witnesses questions.
+ Chairman THOMAS. I tell the gentleman that he will have a
+fair opportunity, and until he is denied, his point of order is
+not timely.
+ Mr. DOGGETT. Mr. Chairman, I appeal the ruling of the
+Chair. The Chair has ruled that the point of order is not ripe.
+That is a denial of the point of order as the Chair clearly
+knows.
+ Chairman THOMAS. I will accept the gentleman's argument
+that the Chair's ruling of the fact that not every Member has
+been able to exercise their 5 minutes as a point of order is
+not timely. The Chair believes that point of order is not
+timely. The gentleman from Texas believes it is and, therefore,
+appeals the decision of the Chair.
+ Mr. DOGGETT. Thank you, Mr. Chairman.
+ Mr. MCCRERY. Mr. Chairman, I don't believe that is
+debatable, but just in case it is, I move to table the motion
+of the gentleman to appeal the ruling of the Chair.
+ Chairman THOMAS. The gentleman's move to table the motion
+is timely and appropriate. All those in favor of tabling the
+motion, say aye.
+ [Chorus of ayes.]
+ Those opposed?
+ [Chorus of noes.]
+ In the opinion of the Chair, the ayes have it----
+ Mr. DOGGETT. Mr. Chairman, record vote.
+ Chairman THOMAS. The motion to appeal the decision of the
+Chair is tabled.
+ Mr. DOGGETT. Record vote.
+ Chairman THOMAS. A sufficient number for a record vote. The
+clerk will call the roll.
+ CLERK. Mr. Crane?
+ Mr. CRANE. Aye.
+ CLERK. Mr. Crane votes aye. Mr. Shaw?
+ Mr. SHAW. Aye.
+ CLERK. Mr. Shaw votes aye. Mrs. Johnson?
+ Mrs. JOHNSON. Aye.
+ CLERK. Mrs. Johnson votes aye. Mr. Houghton?
+ Mr. HOUGHTON. Aye.
+ CLERK. Mr. Houghton votes aye. Mr. Herger?
+ Mr. HERGER. Aye.
+ CLERK. Mr. Herger votes aye. Mr. McCrery?
+ Mr. MCCRERY. Aye.
+ CLERK. Mr. McCrery votes aye. Mr. Camp?
+ Mr. CAMP. Aye.
+ CLERK. Mr. Camp votes aye. Mr. Ramstad?
+ Mr. RAMSTAD. Aye.
+ CLERK. Mr. Ramstad votes aye. Mr. Nussle?
+ Mr. NUSSLE. Aye.
+ CLERK. Mr. Nussle votes aye. Mr. Johnson?
+ Mr. JOHNSON. Aye.
+ CLERK. Mr. Johnson votes aye. Ms. Dunn?
+ [No response.]
+ Mr. Collins?
+ Mr. COLLINS. Yes.
+ CLERK. Mr. Collins votes yes. Mr. Portman?
+ Mr. PORTMAN. Aye.
+ CLERK. Mr. Portman votes aye. Mr. English?
+ Mr. ENGLISH. Aye.
+ CLERK. Mr. English votes aye. Mr. Hayworth?
+ Mr. HAYWORTH. Aye.
+ CLERK. Mr. Hayworth votes aye. Mr. Weller?
+ Mr. WELLER. Aye.
+ CLERK. Mr. Weller votes aye. Mr. Hulshof?
+ [No response.]
+ Mr. McInnis?
+ [No response.]
+ Mr. Lewis of Kentucky? Mr. Lewis of Kentucky? Mr. Lewis?
+ Mr. LEWIS OF KENTUCKY. Aye.
+ CLERK. Mr. Lewis of Kentucky votes aye. Mr. Foley?
+ [No response.]
+ Mr. Brady?
+ Mr. BRADY. Aye.
+ CLERK. Mr. Brady votes aye. Mr. Ryan?
+ Mr. RYAN. Aye.
+ CLERK. Mr. Ryan votes aye. Mr. Cantor?
+ Mr. CANTOR. Aye.
+ CLERK. Mr. Cantor votes aye. Mr. Rangel. Mr. Rangel?
+ Mr. RANGEL. No.
+ CLERK. Mr. Rangel votes no. Mr. Stark?
+ Mr. STARK. No.
+ CLERK. Mr. Stark votes no. Mr. Matsui?
+ Mr. MATSUI. No.
+ CLERK. Mr. Matsui votes no. Mr. Levin?
+ Mr. LEVIN. No.
+ CLERK. Mr. Levin votes no. Mr. Cardin?
+ Mr. CARDIN. No.
+ CLERK. Mr. Cardin votes no. Mr. McDermott?
+ Mr. MCDERMOTT. No.
+ CLERK. Mr. McDermott votes no. Mr. Kleczka?
+ Mr. KLECZKA. No.
+ CLERK. Mr. Kleczka votes no. Mr. Lewis of Georgia?
+ Mr. LEWIS OF GEORGIA. No.
+ CLERK. Mr. Lewis of Georgia votes no. Mr. Neal?
+ Mr. NEAL. No.
+ CLERK. Mr. Neal votes no. Mr. McNulty?
+ Mr. MCNULTY. No.
+ CLERK. Mr. McNulty votes no. Mr. Jefferson?
+ [No response.]
+ Mr. Tanner?
+ Mr. TANNER. No.
+ CLERK. Mr. Tanner votes no. Mr. Becerra?
+ Mr. BECERRA. No.
+ CLERK. Mr. Becerra votes no. Mr. Doggett?
+ Mr. DOGGETT. No.
+ CLERK. Mr. Doggett votes no. Mr. Pomeroy?
+ Mr. POMEROY. No.
+ CLERK. Mr. Pomeroy votes no. Mr. Sandlin?
+ Mr. SANDLIN. No.
+ CLERK. Mr. Sandlin votes no. Ms. Tubbs Jones?
+ Ms. TUBBS JONES. No.
+ CLERK. Ms. Tubbs Jones votes no. Ms. Dunn?
+ [No response.]
+ Mr. Hulshof?
+ [No response.]
+ Mr. McInnis?
+ [No response.]
+ Mr. Foley?
+ [No response.]
+ Mr. Jefferson?
+ [No response.]
+ Mr. Thomas?
+ Chairman THOMAS. Aye.
+ CLERK. Mr. Thomas votes aye.
+ Mr. MCINNIS. Mr. Chairman, how am I recorded?
+ Chairman THOMAS. How is the gentleman from Colorado
+recorded?
+ CLERK. Mr. McInnis is not recorded.
+ Mr. MCINNIS. Yes.
+ CLERK. Mr. McInnis votes yes.
+ Ms. DUNN. Mr. Chairman, how am I recorded?
+ Chairman THOMAS. How is the gentlewoman from Washington
+recorded?
+ CLERK. Ms. Dunn is not recorded.
+ Ms. DUNN. Aye.
+ CLERK. Ms. Dunn votes aye.
+ Chairman THOMAS. The clerk will announce the vote.
+ CLERK. Twenty-two aye, 16 no.
+ Chairman THOMAS. There being 22 ayes and 16 noes, the
+motion of the gentleman from Texas is laid on the table. The
+Chair is ready to allow the witnesses to present their
+testimony. The Chair would indicate that if you have any
+written testimony, it will be made a part of the record and you
+can inform us in any way you see fit in the time that you have.
+I would begin with Mr. Flick and, again, would have Ms.
+Norwalk.
+ Mr. Flick.
+
+STATEMENT OF JEFF FLICK, SAN FRANCISCO REGIONAL ADMINISTRATOR,
+ CENTERS FOR MEDICARE AND MEDICAID SERVICES, SAN FRANCISCO,
+ CALIFORNIA
+
+ Mr. FLICK. Mr. Chairman, Members of the Committee on Ways
+and Means, good afternoon. My name is Jeff Flick. I am
+currently serving as the Regional Administrator for the CMS in
+the San Francisco Regional Office. I am a career civil servant
+and my employment with CMS began in January 2001. Shortly after
+starting work in Washington, D.C., I was detailed into the
+Office of the Acting Administrator. I worked for a couple of
+months as a Special Assistant to the Acting Administrator,
+Michael McMullen. I was working in the Office of the
+Administrator when Tom Scully was sworn in as the CMS
+Administrator in May 2001. I continued my work as Special
+Assistant, working directly with Administrator Scully until
+September 2003, when I assumed my current role as Regional
+Administrator in San Francisco.
+ I am pleased to be with you today and I assume that you are
+interested in talking with me regarding an e-mail I sent to
+Rick Foster in June of 2003 in my capacity as Special Assistant
+to the Administrator. As Special Assistant to the
+Administrator, I was largely involved in the day-to-day work of
+the Administrator. Some people would describe this as keeping
+the trains running. I tried to make sure that the schedules
+made sense, appropriate briefing materials were prepared, and
+so forth, the important work of the agency was accomplished,
+and yes, I tried to keep the Administrator on schedule. I was
+rarely, if ever, involved in the details of the work. In fact,
+it was more than a full-time job simply keeping up with the
+daily work flow in the Office of the Administrator. In June of
+2003, I prepared an e-mail that I sent to Rick Foster. The e-
+mail was sent to Rick after I had at least one conversation
+with Rick and after I had several conversations with the
+Administrator. The e-mail focused on a request from a minority
+staff member for an impact analysis on a specific provision in
+the bill. As I recall, the Administrator was very concerned
+about the analysis and the request for the analysis.
+ This particular request caught his attention in a way
+others did not. He suggested to me that at least some of the
+information that was requested involved provisions that were no
+longer in the bill. He asked me to contact Rick Foster,
+requesting that Mr. Foster work up the numbers and send them
+directly to the Administrator. The Administrator was very
+clear, ``Have Rick send them to me prior to sharing with anyone
+else.'' The Administrator indicated to me that he would
+probably be talking with Rick about this and he emphasized to
+me that Rick should not release the numbers until I, the
+Administrator, have a chance to review the information and
+until I, Tom Scully, explicitly talk with Rick authorizing the
+release.
+ Chairman THOMAS. Mr. Flick, let me indicate that normally
+we would allow witnesses to finish their statements, but we are
+under the 5-minute rule. The red light has come on. If you
+could wrap it up in a sentence or two so no one could accuse
+you of unduly prolonging your testimony.
+ Mr. FLICK. I see. I relayed the message to Rick through a
+phone call. I was not convinced that Rick would comply with the
+request. Later that day, I retrieved an e-mail and gave it to
+the Administrator. Administrator Scully authorized the release
+of some information but asked me to contact Rick a second time,
+confirming the initial instructions, and the Administrator
+emphasized that if Rick did not adhere to these instructions,
+it would be outright insubordination and insubordination
+carries serious consequences. The language in this statement is
+not exact. I am recalling this from memory to the best of my
+ability. The actual language may have been more colorful than
+the text. I was not able to reach Rick by telephone. I
+comprised an e-mail to communicate the message that the
+Administrator asked me to convey to Rick. I believe the e-mail
+I sent to Rick Foster was an accurate reflection of the message
+I was instructed by Administrator Scully to convey. Thank you,
+Mr. Chairman. This concludes my remarks.
+ [The prepared statement of Mr. Flick follows:]
+Statement of Jeff Flick, San Francisco Regional Administrator, Centers
+ for Medicare and Medicaid Services, San Francisco, California
+ Mr. Chairman, members of the Ways and Means Committee. Good
+afternoon--my name is Jeff Flick. I am currently serving as the
+Regional Administrator for the Centers for Medicare & Medicaid Services
+(CMS) in the San Francisco Regional Office. I am a career civil servant
+and my employment with CMS began in January 2001. Shortly after
+starting work in Washington, D.C., I was detailed into the Office of
+the Acting Administrator. I worked for a couple of months as a special
+assistant to the Acting Administrator, Michael McMullan. I was working
+in the Office of the Administrator when Tom Scully was sworn in as the
+CMS Administrator in May 2001. I continued my work as a special
+assistant, working directly with Administrator Scully until September
+2003, when I assumed my current role as Regional Administrator in San
+Francisco.
+ I am pleased to be with you today and I assume that you are
+interested in talking with me regarding an email I sent to Rick Foster
+in June of 2003 in my capacity as special assistant to the
+Administrator. As special assistant to the Administrator, I was largely
+involved in the day-to-day work of the Administrator. Some people would
+describe this as keeping the trains running. I tried to make sure the
+schedules made sense, appropriate briefing materials were prepared,
+etc. The important work of the Agency was accomplished and, yes, I
+tried to keep the Administrator on schedule. I was rarely, if ever,
+involved in the details of the work. In fact, it was more than full-
+time job simply keeping up with the daily workflow in the Office of the
+Administrator.
+ In June of 2003, I prepared an email that I sent to Rick Foster.
+This email was sent to Rick after I had at least one conversation with
+Rick, and after I had several conversations with the Administrator. The
+email focused on a request from a minority staff member for an impact
+analysis on a specific provision in the bill. As I recall, the
+Administrator was very concerned about the analysis, and the request
+for the analysis. This particular request caught his attention in a way
+others did not. He suggested to me that at least some of the
+information that was requested involved provisions that were no longer
+in the bill. He asked me to contact Rick Foster--requesting that Mr.
+Foster work up the numbers and send them directly to the Administrator.
+The Administrator was very clear--have Rick send them to me prior to
+sharing with anyone else. The Administrator indicated to me that he
+would probably be talking with Rick about this and he emphasized to me
+that Rick should not release the numbers until I (the Administrator)
+have a chance to review the information, and until I (Tom Scully)
+explicitly talk with Rick authorizing the release.
+ I relayed this message to Rick (through a phone call) but I was not
+convinced that Rick would comply with the request of the Administrator.
+Rick sent an email directly to the Administrator after my conversation
+with Rick, asking that he (Rick) be allowed to release the information
+immediately. I retrieved the email and gave it to the Administrator.
+Administrator Scully authorized the release of some information but he
+asked me to contact Rick a second time, confirming the initial
+instructions, and the Administrator emphasized that if Rick does not
+adhere to these instructions, it is outright insubordination and
+insubordination carries serious consequences. The language in this
+statement is not exact. I am recalling this from memory to the best of
+my ability and the actual language may have been more colorful than the
+text in this statement.
+ I was not able to reach Rick by telephone and I comprised an email
+to communicate the message that the Administrator asked me to convey to
+Rick Foster. I believe the email I sent to Rick Foster was an accurate
+reflection of the message I was instructed by Administrator Scully to
+convey. I believe I shared a copy of the email with Administrator
+Scully.
+ Thank you, Mr. Chairman; this concludes my remarks.
+
+
+
+ Chairman THOMAS. I thank the gentleman.
+ Ms. Norwalk.
+
+STATEMENT OF LESLIE V. NORWALK, ACTING DEPUTY ADMINISTRATOR AND
+ CHIEF OPERATING OFFICER, CENTERS FOR MEDICARE AND MEDICAID
+ SERVICES
+
+ Ms. NORWALK. Good afternoon, Chairman Thomas and Members of
+the Committee on Ways and Means. My name is Leslie Norwalk.
+Since November 2001, I have officially served as Counselor to
+the Administrator at the CMS. For the past year, I have been
+the Acting Deputy Administrator and Chief Operating Officer of
+CMS. In this role, I direct the day-to-day operations of CMS.
+On March 25, 2004, Richard Foster, CMS's Chief Actuary,
+mentioned my name and referred to me as a, quote, ``top
+attorney at CMS,'' unquote, in his testimony before this
+Committee. I understand that the Committee is interested in
+hearing my recollection about a meeting I had with Mr. Foster
+and any advice I gave him. On June 13, 2003, Mr. Foster came to
+see me to discuss a difficult situation and to ask for my help
+to resolve it. While Mr. Foster sought my advice, I believe
+that it was in my capacity as Deputy and Chief Operating
+Officer and not in my capacity as a lawyer. I believe this
+because my interactions with Mr. Foster in 2003 focused on
+helping him manage the incredible workload that the Office of
+the Actuary had from a CMS management perspective.
+Nevertheless, in discussing his concerns last August, I gave
+Mr. Foster my opinion about the interplay of the Constitution,
+the Balanced Budget Act 1997, and its accompanying report
+language.
+ During our June 13 meeting, Mr. Foster described the
+history of his office in providing actuarial support to
+Congress, including the history surrounding the Balanced Budget
+Act 1997 legislation and the accompanying report language, as
+well as his professional responsibilities. Under these
+authorities, he believed that he had an obligation to report
+his actuarial analysis to Congress without informing the
+Administrator of the specifics of the congressional request or
+his analysis in response to the request. He believed that
+providing this information to the Administrator compromised his
+ability to function as he believed the Chief Actuary should.
+During the meeting, I reviewed the statutory language, which
+states, quote, ``The Chief Actuary shall be appointed by and in
+direct line of authority to the Administrator,'' end quote. The
+accompanying Conference Report language highlights the
+importance of actuarial analysis in drafting legislation.
+However, neither the statutory text nor Conference Report
+language on its face requires the Office of the Actuary to
+report to or provide internal executive branch information to
+Congress. While Mr. Foster noted the emphasis in the Conference
+Report of sharing information with Congress, I explained to him
+that the Conference Report language does not require sharing
+information. In any event, the Conference Report language does
+not have the force of law.
+ I further explained that a statutory requirement that would
+mandate the Chief Actuary report directly to Congress would
+raise serious separation of powers issues under the
+Constitution. While I am an attorney, my interpretation and
+advice was provided in my capacity as the Acting Deputy
+Administrator and Chief Operating Officer, not as an attorney
+for the agency. Of course, on a daily basis, all executive
+branch officials interpret the statutes under which we operate.
+Furthermore, I have consulted with the attorneys in the HHS
+Office of General Counsel and they have informed me that they
+concur in my interpretation. Mr. Foster is a highly regarded
+actuary, and consequently, it is not surprising that Members of
+Congress and the executive branch are interested in his
+actuarial analysis of items impacting the Medicare, Medicaid,
+and State Children's Health Insurance Program, programs.
+Finally, I had no knowledge of any analysis by the Office of
+the Actuary that scored a complete bill until I returned from
+Christmas vacation this January. It is my understanding that
+the only request that was delayed was an impact analysis of an
+early version of the premium support provision. Thank you.
+ [The prepared statement of Ms. Norwalk follows:]
+ Statement of Leslie V. Norwalk, Acting Deputy Administrator,
+ Centers for Medicare and Medicaid Services
+ Good afternoon. Chairman Thomas and Members of the Ways and Means
+Committee, my name is Leslie Norwalk. Since November 2001, I have
+officially served as Counselor to the Administrator at the Centers for
+Medicare & Medicaid Services. For the past year, I have been the Acting
+Deputy Administrator and Chief Operating Officer of CMS. In this role I
+direct the day-to-day operations of CMS.
+ On March 25, 2004, Richard Foster, CMS's Chief Actuary, mentioned
+my name and referred to me as a ``top attorney at CMS'' in his
+testimony before this Committee. I understand that the Committee is
+interested in hearing my recollection about a meeting I had with Mr.
+Foster and any advice I gave him.
+ On June 13, 2003, Mr. Foster came to see me to discuss a difficult
+situation for him and to ask for my help to resolve it. While Mr.
+Foster sought my advice, I believe that it was in my capacity as the
+Deputy and Chief Operating Officer, and not in my capacity as a lawyer.
+I believe this because my interactions with Mr. Foster in 2003 focused
+on helping him manage the incredible workload that the Office of the
+Actuary had from a CMS-management perspective. Nevertheless, in
+discussing his concerns last June, I gave Mr. Foster my opinion about
+the interplay of the Constitution, the Balanced Budget Act of 1997 and
+its accompanying report language.
+ During our June 13th meeting, Mr. Foster described the history of
+his office in providing actuarial support to Congress, including the
+history surrounding the Balanced Budget Act of 1997 legislation and
+accompanying Conference Report language and his professional
+responsibilities. Under these authorities, he believed that he had an
+obligation to report his actuarial analysis to Congress, without
+informing the Administrator of the specifics of the Congressional
+request or his analysis in response to the request. He believed that
+providing this information to the Administrator compromised his ability
+to function as he believed the Chief Actuary should.
+ During the meeting, I reviewed the statutory language, which
+states, ``The Chief Actuary shall be appointed by, and in direct line
+of authority to, the Administrator. . . .'' 42 U.S.C. 1317(b)(1). The
+accompanying Conference Report language highlights the importance of
+actuarial analysis in drafting legislation. However, neither the
+statutory text nor Conference Report language on its face requires the
+Office of the Actuary to report to or provide internal Executive Branch
+information to Congress. While Mr. Foster noted the emphasis in the
+Conference Report of sharing information with Congress, I explained to
+him that the Conference Report language does not require sharing
+information. In any event, the Conference Report language does not have
+the force of law. I further explained that a statutory requirement that
+would mandate the Chief Actuary report directly to Congress would raise
+serious Separation of Powers issues under the Constitution. While I am
+an attorney, my interpretation and advice was provided in my capacity
+as Acting Deputy Administrator and Chief Operating Officer for CMS, and
+not as an attorney for the agency. Of course, on a daily basis all
+Executive Branch officials interpret the statutes under which we
+operate. Furthermore, I have consulted with the attorneys in the HHS
+Office of General Counsel, and they have informed me that they concur
+in my interpretation.
+ Mr. Foster is a very highly regarded actuary, and consequently, it
+is not surprising that Members of Congress and the Executive Branch are
+interested in his actuarial analysis of items impacting the Medicare,
+Medicaid and SCHIP programs.
+ Finally, I had no knowledge of any analysis by the Office of the
+Actuary that scored a complete bill until I returned from my Christmas
+vacation this January. It is my understanding that the only request
+that was delayed was an impact analysis of an early version of the
+premium support provision.
+ Thank you.
+
+
+
+ Chairman THOMAS. Thank you very much, Ms. Norwalk. My
+understanding, Mr. Flick, and the gist of your comments are
+that you believe you carried out a ministerial function in not
+being able to physically communicate to Mr. Foster, but by e-
+mailing him the Administrator's position on the issue, and that
+basically was the point, is that correct?
+ Mr. FLICK. That is correct, Mr. Chairman.
+ Chairman THOMAS. Ms. Norwalk, you indicated that although
+Rick Foster in his testimony before us indicated that he saw
+you as an attorney and you were providing advice to him, he
+accepted your interpretation and you believe you were providing
+an understanding of the administrative relationship under the
+law. I happen to believe that your interpretation of report
+language is accurate. It does not carry the force of law. I am
+pleased to know that you have double-checked with the people
+who have on their door the official title of making sure that
+the legal decisions are correct, and they have provided you
+with a comfort level that the decision you made in your
+capacity as an administrator was, in fact, the correct one had
+you performed an attorney-client relationship with Mr. Foster.
+So, what Mr. Scully did in indicating that he did not want
+information to be released, which, in fact, probably would not
+have enlightened Congress as much as confused Congress, because
+my understanding is that with the statement that Mr. Flick
+made, some of the assumptions that were currently in the model
+at that time of CMS were positions that had been abandoned by
+the Congress and, therefore, any cost estimate based on
+positions abandoned by the Congress would not be accurate and
+that that was one of the primary motives that Mr. Scully chose
+not to allow Rick under his administrative capacity to provide
+that information to Congress. Is that correct?
+ Ms. NORWALK. That is correct; I did receive counsel from
+the Office of General Counsel and my understanding is
+consistent with your explanation of why it was that Mr. Scully
+did not want the information to be provided at that particular
+time.
+ Chairman THOMAS. Does the gentleman from New York wish to
+inquire?
+ Mr. RANGEL. Let me once again thank you for your patience.
+I apologize for the process. Counselor, are you familiar with
+Public Law 108-199 that, one, prohibits or prevents or
+attempts--it sanctions the payment of salary of any officer or
+employee of the Federal Government who prohibits or prevents or
+attempts to threaten to prohibit or prevent any other office or
+employee of the Federal Government from having any direct oral
+or written communication or contact with any Member, Committee,
+or Subcommittee of the Congress in connection with any matter
+pertaining to the employment of such other office or employee
+and pertaining to the department or agency of such office or
+employee, or in any way, irrespective of whether such
+communication or contact is initiated of each other office or
+employee of response or the request or inquiry of such Member,
+committee, or Subcommittee. This is included in every
+appropriation bill and provides sanctions against anyone that
+interferes from a Federal employee giving information to the
+Congress. Are you familiar with that?
+ Ms. NORWALK. I don't believe I have ever read that
+particular language before.
+ Mr. RANGEL. Do you believe that the Actuary professionally
+had an obligation to respond to any Member of the Congress
+within the four corners of their professional, non-political
+position, such as the one that was held by Mr. Foster?
+ Ms. NORWALK. Well, I believe that the statutory language
+requires that the Chief Actuary is in direct line of authority
+to the Administrator, so----
+ Mr. RANGEL. I don't think that is responsive, Counselor.
+ Ms. NORWALK. Can you restate the question, please?
+ Mr. RANGEL. Do you believe that the Actuary had a
+professional responsibility, that was really outlined by the
+language inserted by Chairman Thomas, that he had a
+professional responsibility to respond to inquiries made by
+Members of Congress?
+ Ms. NORWALK. I believe that Mr. Foster believes he has a
+professional responsibility, but I do not believe that he has a
+legal obligation to report.
+ Mr. RANGEL. So, were you informed by Mr. Scully that the
+language that was in the Budget Committee report had no legal
+significance?
+ Ms. NORWALK. I am sorry?
+ Mr. RANGEL. The language which was put into the report as
+related to the Actuary is to provide prompt, impartial,
+authoritative, and confidential information with respect to the
+effects of legislative proposals, are you familiar with the
+language which is in there?
+ Ms. NORWALK. I am familiar with the language in the
+Conference Report, yes.
+ Mr. RANGEL. Do you believe it has no legal merit?
+ Ms. NORWALK. I believe that it is instructive and helpful,
+but it does not have any legal weight.
+ Mr. RANGEL. Therefore, you believe that Mr. Foster had no
+legal or professional obligation to respond to Members of
+Congress?
+ Ms. NORWALK. I believe that Mr. Foster had no legal
+obligation to report to Congress.
+ Mr. RANGEL. That if he did report to Congress, you believe
+that Mr. Scully could have fired this public servant, this
+civil servant?
+ Ms. NORWALK. I have not looked into whether or not. One
+other thing that is actually in the Balanced Budget Act
+statutory language is that he may only be removed for cause, or
+for good cause. I have not ever explored whether or not----
+ Mr. RANGEL. Do you believe that if he had given the
+information requested by Members of Congress, that Mr. Scully
+would have had legal cause to fire him?
+ Ms. NORWALK. I don't know whether or not insubordination
+rises to good cause.
+ Mr. RANGEL. Well, what advice did you give to Mr. Foster
+that allowed him to believe that you were supporting Mr. Scully
+and that he could be fired if he shared the information that
+was requested by----
+ Ms. NORWALK. It was actually not a part of our discussion.
+Mr. Foster and I only discussed what he thought was his
+professional obligation and I pointed out to him that the
+Conference Report language and the statutory language--first of
+all, did not require him to report to Congress, and if it had,
+it may raise separation of powers issues. We did not discuss
+whether or not his actions which hadn't occurred would have
+been----
+ Mr. RANGEL. Well, Mr. Flick, you are not an attorney,
+right?
+ Mr. FLICK. That is correct. I am not an attorney.
+ Mr. RANGEL. You said in colorful and uncolorful language
+that you thought that it would have reached a point of
+insubordination and that he could have been fired if he had
+given that information as requested?
+ Mr. FLICK. Congressman, I didn't necessarily have an
+opinion. What I was stating was what the Administrator had
+instructed me. It was the Administrator who clearly indicated
+that if Mr. Foster were to ignore clear instructions, that is
+outright insubordination. That was the Administrator.
+ Mr. RANGEL. So, you were only in a position of a messenger.
+You did not know whether he had the right to do it or not. You
+were just saying that your boss told you to tell him that he is
+out of there if he did give the information.
+ Mr. FLICK. That my boss, who was Administrator Scully,
+clearly indicated that if the instructions, which I believe
+were clear----
+ Mr. RANGEL. Okay.
+ Mr. FLICK. Were ignored, that that is outright
+insubordination----
+ Mr. RANGEL. Did you have any discussions with anyone above
+Mr. Scully--did you discuss this or were you present when Mr.
+Scully discussed this with the Secretary, Secretary Thompson?
+ Mr. FLICK. Congressman, I did not.
+ Mr. RANGEL. Do you know whether or not Mr. Scully discussed
+this with the President of the United States?
+ Mr. FLICK. I do not.
+ Mr. RANGEL. Did you have any discussions with Mr. Scully
+where he shared with you who else in the White House he
+discussed this ban on Mr. Foster?
+ Mr. FLICK. Mr. Congressman, I don't recall any discussions
+like that. That is not the typical kind of discussion that I
+would have with Administrator Scully.
+ Mr. RANGEL. My last question, if I may. Let me congratulate
+you on your promotion. You do good work and you earned it. Do
+you believe that it is necessary, or that there is a need for
+legislators to know when passing a historic Medicare bill--such
+as the one that was before us--that we know what the actuarial,
+what the executive branch, believes the cost of that bill would
+be? Do you believe, based on your past experience, that it is
+necessary that we have the information as relates to estimates
+of the costs of such legislation?
+ Mr. FLICK. Mr. Congressman, I don't personally have an
+opinion on that. I do know that there was a good bit of
+discussion about a set of professional actuaries in CBO and the
+fact that there is another set of----
+ Mr. RANGEL. How long have you worked for the Federal
+Government?
+ Mr. FLICK. For just over 3 years.
+ Mr. RANGEL. How long have you interacted with the Congress?
+ Mr. FLICK. My interaction with the Congress was not very
+often.
+ Mr. RANGEL. So, you really don't know what we want and what
+we need?
+ Mr. FLICK. That is correct.
+ Mr. RANGEL. Thank you, Mr. Chairman.
+ Chairman THOMAS. Certainly. The Chair would indicate the
+gentleman consumed 7 minutes and 50 seconds.
+ Mr. RANGEL. You are so kind, Mr. Chairman. I can't tell you
+how much I feel obligated to you.
+ Chairman THOMAS. Seven minutes and 56 seconds.
+ Mr. RANGEL. I am obligated to you.
+ Chairman THOMAS. Eight minutes. Does the gentlewoman from
+Connecticut wish to inquire?
+ Mrs. JOHNSON. Thank you, Mr. Chairman. Mr. Flick, in the
+time that you worked closely with Mr. Scully, did it ever come
+to your attention that Members of the House from the Democrat
+side asked Mr. Foster for an estimate of their Medicare
+prescription drug in its entirety?
+ Mr. FLICK. No, Congresswoman. That never came to my
+attention.
+ Mrs. JOHNSON. Ms. Norwalk, you have worked with Mr. Scully
+at the top levels of running the agency that is responsible for
+Medicare for many, many months now, several years. Did you ever
+see a request from the Democrats or hear about a request from
+the Democrats to Mr. Foster to estimate the cost of their bill?
+ Ms. NORWALK. I never saw requests or heard of a request to
+estimate the cost of an entire bill.
+ Mrs. JOHNSON. You know, I just want those watching this
+hearing to understand the extraordinary hypocrisy of what is
+happening. Some Members have said, don't you think it is
+necessary to know what the executive branch thinks the cost of
+a bill is? The very gentleman who just made that statement
+never thought it was necessary to know what the executive
+branch thought was the cost of their bill. Never did they make
+the request to CMS to cost out their bill, even though they
+brought it to the floor of the U.S. House of Representatives,
+several different complete bills, which we voted on. They
+always asked the CBO what the CBO thought was the cost of their
+bill, as did we because we are, by law, bound by what the CBO
+thought. Now, they did not think enough of Mr. Foster to ask
+for his opinion. They did not think enough of what the
+Administration thought would be the cost of their bill to ask
+for their opinion. I would have to say, I put in the record
+some of my great disagreements with Mr. Foster at the last
+hearing because actuaries do numbers and then they make
+judgments. I disagree with Mr. Foster that 99 percent of a
+subgroup would join a government program. I have never seen it
+happen in my 28 years in government.
+ So, I disagree with the judgment he made, not necessarily
+the numbers, but the judgment that proceeded them and caused
+the numbers. I disagreed with his judgment that there would be
+48 percent of people, of seniors, joining the Medicare plans
+when at their height and their most generous moment, no more
+than 16 did. I see that my time has not quite run out, but I
+know it will run out. What I want to put on the record is that
+we are besmirching the reputations of people who have served
+our country as administrators at great sacrifice. Mr. Scully
+has young children. He has a wife. I never saw anyone work
+harder. He was the very first administrator in our Nation's
+history to develop health quality measures for nursing homes
+and publish them, health quality measures for home health and
+publish them. Don't they care about that? They did not care
+enough about Mr. Scully's agencies, and Mr. Scully's actuaries'
+cost of the bill to ask for it, but it is time to say, we need
+to move forward. We need to remember that all actuaries testify
+that the majority of seniors are going to get new benefits, are
+going to sign up for those new benefits under the new Medicare
+program, and that one-half of the retired women in America will
+have no deductibles, no premiums, $1 or $2 for generics and $3
+or $5 for copayment for brand name drugs. If that isn't
+progress, I don't know what it is. I am sorry you had to sit
+here almost an hour-and-a-half while what was basically a
+totally partisan political process went on that rests on
+fundamentally a hypocritical view of whose numbers mattered.
+Thank you, Mr. Chairman.
+ Chairman THOMAS. The gentlewoman consumed 4 minutes and 30
+seconds.
+ Mrs. JOHNSON. I yield back the balance.
+ Chairman THOMAS. Does the gentleman from California wish to
+inquire?
+ Mr. STARK. Thank you, Mr. Chairman. Mr. Flick, we are
+talking generally here about estimates that Mr. Foster prepared
+sometime between May and maybe November of last year.
+ Mr. FLICK. Yes, sir.
+ Mr. STARK. Just so you understand what I am about to ask, I
+asked Mr. Foster if we had had your June estimate in the range
+of $550 billion, would it have been a leap of faith for us to
+suspect that H.R. 1 or S. 1 or the resultant conference bill
+would have been far higher than $400 billion, and Mr. Foster
+replied, I think that would be a reasonable conclusion. So,
+basically I am asserting and I want to know if you agree, that
+there were some estimates that might have led us to think that
+the total cost would be above $400 billion. Is that a
+reasonable assumption to your knowledge?
+ Mr. FLICK. Mr. Congressman, I don't think I can speak
+specifically to your question.
+ Mr. STARK. I am speaking generally, that there was some
+information that might have led to a higher estimate than $400
+billion.
+ Mr. FLICK. The only thing that I can tell you for sure that
+I was aware of, is that there were a number of impact analyses
+performed on specific provisions in the bill.
+ Mr. STARK. In your role, and I suspect you would only know
+this of Mr. Scully, both Secretary Thompson and Mr. Scully have
+been quoted numerous times asserting that they shared
+information with Members or staff involved in the conference
+throughout the year. Indeed, my distinguished colleague from
+Connecticut, Mrs. Johnson, confirmed in March in the New York
+Times that she had seen such estimates, quoting ``absolutely we
+knew about these numbers,'' but that she disagreed with the
+assumptions and disregarded the analysis. To your knowledge, or
+are you aware through anybody else, and I will just ask you
+about a series of people here, and of paper or e-mails that you
+may have transmitted to or from Administrator Scully, and
+whether any of these people might have received these estimates
+that were created by Mr. Foster or his staff. Would Speaker
+Hastert or his staff? You can just say yes or no unless you
+know that they received some information.
+ Mr. FLICK. Congressman, it is my understanding that there
+was a great deal of e-mail traffic regarding estimates of the
+impact of specific provisions of the bill, and I believe some
+of those e-mails went to people other than Administrator
+Scully.
+ Mr. STARK. Would you be aware of Speaker Hastert or his
+staff?
+ Mr. FLICK. I am not aware of Speaker Hastert or his staff.
+ Mr. STARK. Majority Leader DeLay or his staff?
+ Mr. FLICK. I don't--I am not aware.
+ Mr. STARK. Chairman Thomas and our Ways and Means staff?
+ Mr. FLICK. I am not aware.
+ Mr. STARK. Chairman Tauzin and his staff?
+ Mr. FLICK. I am not----
+ Mr. STARK. Do any of these names----
+ Mr. FLICK. Congressman, I am not aware of any e-mail
+traffic going directly to Members of Congress.
+ Mr. STARK. No, are you aware that they may have received
+these estimates, whether it was through e-mail or----
+ Mr. FLICK. I don't know.
+ Mr. STARK. By hand or over the phone or any other way?
+Okay. Chairman Johnson or her staff?
+ Mr. FLICK. No, sir.
+ Mr. STARK. Majority Leader Frist? Would he have----
+ Mr. FLICK. Again, I am not aware.
+ Mr. STARK. Are those e-mails--is there record of that e-
+mail traffic? Does that exist?
+ Mr. FLICK. Well, there was a record of the e-mail traffic.
+I am not sure what the current status is.
+ Mr. STARK. Fax? Would there be copies of faxes sent back
+and forth to all these people concerning Mr. Foster's
+estimates?
+ Mr. FLICK. There were some faxes sent back and forth.
+Again, I can't speak to the availability of that information
+today.
+ Mr. STARK. So, there were e-mails and faxes regarding
+estimates and sent to the Hill or to the White House and
+various places?
+ Mr. FLICK. There was a good bit of e-mail traffic that
+involved Administrator Scully.
+ Mr. STARK. Mr. Chairman, it would certainly seem to me, and
+I am sure you are one step ahead of me on this, that we should
+request to see the record of the faxes and the e-mails. That
+would give us some definitive understanding of who received
+these estimates and when they received them, and I would ask
+the Chair if you might consider requesting those or supporting
+a resolution of inquiry. In other words, you do have these that
+you mentioned in your memo, that Chairman Thomas received one
+and Mr. McManus received one. So, we know from this copy of
+your e-mail to Mr. Foster that some of these people received
+this information. I guess that is what we are really trying to
+find out is, how widely this information was disseminated and
+what we can assume about it. Mr. Chair, if the gentleman would
+respond.
+ Chairman THOMAS. The gentleman's time has expired. The
+Chair would indicate that if, in fact, the question rises to
+the level of legal carrying out of duties under the law, the
+Chair is always interested in looking at information. If it is
+simply to see who said what to whom from an administrative
+prerogative, the Chair does not believe that the gentleman's
+desire to demand information reaches that level. Does the
+gentleman from Illinois wish to inquire?
+ Mr. CRANE. No.
+ Chairman THOMAS. Does the gentleman from Florida wish to
+inquire?
+ Mr. SHAW. No. I yield my time.
+ Chairman THOMAS. Does the gentleman from California, Mr.
+Matsui, wish to inquire?
+ Mr. MATSUI. Yes. Thank you very much, Mr. Chairman. I just
+have a few questions. Mr. Flick, you were the Administrator for
+the agency, is this correct?
+ Mr. FLICK. No, Congressman. I was the Special Assistant to
+the Administrator----
+ Mr. MATSUI. To the Administrator. I am sorry. You were the
+Special Assistant to the Administrator----
+ Mr. FLICK. That is correct.
+ Mr. MATSUI. So, you made sure that the operation ran on
+time and all this stuff, is this correct?
+ Mr. FLICK. That is largely what I did----
+ Mr. MATSUI. With the exception of the times when either you
+or Mr. Scully were out of town, you were probably in contact
+with him quite regularly, in view of the opening statement you
+made that you made sure he was kept on time, as well?
+ Mr. FLICK. That is correct, Congressman.
+ Mr. MATSUI. So, you were in the car with him when he came
+to testify, perhaps? You were with him pretty much? Your office
+was right next door to him?
+ Mr. FLICK. Occasionally, I was with him when he testified.
+Most of the time, I was back at the office trying to keep
+things going.
+ Mr. MATSUI. Keep things going. Now, when he and you talked
+about the fact that Mr. Foster had this additional information
+that he was requested to communicate to the Congress,
+particularly the minority staff of the Committee on Ways and
+Means, when you had that conversation with him, did he express
+some regret that he had to do this?
+ Mr. FLICK. No. He expressed concern regarding the request.
+ Mr. MATSUI. What was his concern?
+ Mr. FLICK. The indication that he gave to me is that the
+request involved information, or at least some information,
+that wasn't even in the bill anymore.
+ Mr. MATSUI. Okay. Now, did he at some subsequent time
+before you left in September for San Francisco, because this
+request was continuing, I would imagine, did he express any
+regret like, I am really sorry I have to do this, but
+unfortunately, I just have to do this?
+ Mr. FLICK. No, Congressman, I don't recall any expression
+of regret.
+ Mr. MATSUI. Did he at any time talk with you about the fact
+that the President was concerned about having this information
+revealed or perhaps the information being sent down to the
+Democratic staff of the Committee on Ways and Means?
+ Mr. FLICK. No, Mr. Congressman. We generally didn't talk
+about whatever conversations he may have had with the
+President. It wasn't really part of what I do.
+ Mr. MATSUI. Now, are you saying no----
+ Mr. FLICK. No.
+ Mr. MATSUI. You never heard that conversation, I mean, he
+never talked about the President with you?
+ Mr. FLICK. That is correct.
+ Mr. MATSUI. You said generally, he did not discuss this
+with you at all, about what the President might have thought or
+anything about the $534 billion?
+ Mr. FLICK. The only conversation that I recall having with
+Administrator Scully regarding the President was not business-
+related. It was simply Administrator Scully expressing that the
+President was very engaged and cares about Medicare a lot.
+ Mr. MATSUI. Did he say anything to you about the fact that
+the President wanted numbers, or was aware of the numbers?
+ Mr. FLICK. No, he didn't.
+ Mr. MATSUI. Was there anybody in the White House that he
+might have made that suggestion to, about the fact that the
+information should or should not be communicated to the
+minority staff, the Democratic staff of the Committee on Ways
+and Means, or any Democratic Member of the House?
+ Mr. FLICK. No. Congressman, we didn't have those kinds of
+discussions. The only incident that involved some expression of
+concern on the part of Administrator Scully was, I think,
+clearly described in my written statement.
+ Mr. MATSUI. Is that the only time you talked to him about
+the fact that he did not want this information transmitted to
+any Democratic Member or Democratic staff?
+ Mr. FLICK. Yes. As I recall, Congressman, there were, I
+think, a fairly large number of requests for technical
+assistance. Most of the time, those requests were processed
+quickly and without any concern. This one request was the only
+time that I was involved in communications of the sort that I
+described with Mr. Foster.
+ Mr. MATSUI. Okay. Thank you very much.
+ Mr. FLICK. Thank you.
+ Mr. MATSUI. Thank you.
+ Chairman THOMAS. I thank the gentleman. Does the gentleman
+from New York, Mr. Houghton, wish to inquire?
+ Mr. HOUGHTON. No.
+ Chairman THOMAS. Does the gentleman from Louisiana, Mr.
+McCrery, wish to inquire?
+ Mr. MCCRERY. No.
+ Chairman THOMAS. Does the gentleman from Michigan, Mr.
+Levin, wish to inquire?
+ Mr. LEVIN. No, I will pass.
+ Chairman THOMAS. Does the gentleman from Michigan wish to
+inquire?
+ Mr. CAMP. No.
+ Chairman THOMAS. Does the gentleman from Minnesota wish to
+inquire?
+ Mr. RAMSTAD. No.
+ Chairman THOMAS. Does the gentleman from Maryland, Mr.
+Cardin, wish to inquire?
+ Mr. CARDIN. Thank you, Mr. Chairman. I do. First, let me
+thank both of you for your testimony. I regret we don't have
+Mr. Badger or Mr. Scully here because the concern here is that
+the change in the way information was handled from the actuary
+to Congress was an effort to affect the vote in Congress rather
+than a matter of good management or separation of powers, and
+that is the concern that we have. We passed legislation
+anticipating that we would have access to the Chief Actuary, to
+the actuaries, and we would be able to get information. The
+information involved was important. It affected the final cost
+of a bill that we had to vote on in Congress. The Democratic
+substitute that we sought was intended to make a point about
+where we thought we should go, but it would not have a chance
+in a vote in Congress. It, H.R. 1, was a bill that was going to
+become law, the vote was very close in Congress, and the
+actuary's estimates were key. I just really want to give each
+of you a chance. Again, we don't have Mr. Badger or Mr. Scully,
+but do you have any information that this policy was, in fact,
+aimed at affecting a vote in Congress by denying information,
+information that was important that would affect not only votes
+of Democrats, but votes of Republicans. Clearly, Congress
+thought it was getting access to the actuary. We thought that
+is what the law that we passed required. Do you have any
+information that the intentions here were to affect the vote in
+Congress?
+ Mr. FLICK. Mr. Congressman, I can share this much
+information with you. Now, please understand, this is my
+personal opinion, but I believe Administrator Scully very much
+believed in the idea of providing technical assistance. He
+favored that, and I believe that happened on a very regular
+basis at CMS. There was one occasion, which is what I described
+in my written statement, where there was concern expressed.
+Outside of that one situation, I believe Administrator Scully
+very much shared your views and, in fact, was active in trying
+to make sure that we provided the technical assistance that
+people were seeking.
+ Mr. CARDIN. That is why it is troublesome that the
+information was not made available to Congress. Clearly, the
+CBO disagreed with some of these numbers, and we could have had
+a healthy debate about that here. The problem is, when you
+withhold the information and we have a very close vote and some
+estimates are what Members who voted for the bill thought was
+different, it raises serious questions. Additionally, when we
+have passed a law that we thought required information to be
+provided freely to Congress, and yet we don't get the
+information, it raises questions as to whether there was not
+more involved----
+ Chairman THOMAS. Would the gentleman yield briefly on that
+point?
+ Mr. CARDIN. I would be glad to.
+ Chairman THOMAS. It won't come out of the gentleman's time.
+We had testimony from Mr. Foster that he was not able to
+provide a complete estimate on the bill that we voted on until
+well into December. So, the idea that the Administration would
+have a number on the entire bill as we voted on it at the time
+that we voted on it simple is not creditable based upon the
+time and the manner in which CMS made the estimates, and I
+thank the gentleman for yielding.
+ Mr. CARDIN. I understand that they did not make their final
+estimates until December. It is the specific information
+regarding participation in private health care plans and number
+of people who would go into Part D, it is those differences
+from CBO that drove additional costs that I think would have
+been crucial during the debate of the Medicare bill. As you
+know, the Medicare bill passed by one vote. It was a very close
+vote on the floor. There are Members who voted for it saying,
+well, maybe it won't cost $400 billion. Maybe it will be less.
+We know now that there was information that indicated it would
+cost far more, at least from the actuary. We can debate whether
+that is accurate or not, but that information was not made
+unobstructably available as we thought it would be to Congress
+and we anticipated.
+ Ms. NORWALK. If I may comment, Congressman, as Mr. Scully
+said in his statement from today, he did testify before the
+Senate Finance Committee in June that there is a fundamental
+disagreement between our actuaries and the CBO. There are seven
+or eight fundamental differences regarding the assumptions
+generated by the actuary's office and the CBO. Senator Baucus
+in reply, I believe, stated that, ``there are clearly
+differences of opinion, but in some sense that is irrelevant
+because we go by CBO. That is the organization that decides
+what these costs are or not.'' Finally, if I may, please, now
+on September 30, prior to the vote on the bill, the Wall Street
+Journal reported that the CBO and Medicare actuaries at CMS
+remain far apart in how they score the early impact of the
+provisions. In fact, the article goes on to say that since the
+CBO expects fewer insurers to participate in Medicare, it tends
+to minimize the government's cost of helping the plans
+establish themselves. The CMS is more bullish about the
+likelihood of plans participating, but this optimism requires
+its actuaries to warn that up front costs to Medicare could be
+substantial. It goes on to say, in fact, that there is----
+ Mr. CARDIN. Ms. Norwalk, I understand what you are saying,
+and there is no question that CBO and the actuaries disagree.
+That is not the point. The point is whether there was an
+intentional effort to deny this information to Congress so that
+we could have a healthy debate on this issue. There is no
+question that there were different views here.
+ Ms. NORWALK. Well, my point is that this article was
+written in September of last year, not since the bill passed,
+actually beforehand, and so it was clear that I think there was
+significant information already in the public, not just between
+the actuaries----
+ Mr. CARDIN. Information from the Chief Actuary to Congress
+has a different credibility level here.
+ Ms. NORWALK. Right, and as far as I am aware, Congressman,
+no Member of Congress ever followed-up on this particular
+article, for example, to ask, because I have never seen any
+particular letter, for example----
+ Mr. CARDIN. It was requested----
+ Ms. NORWALK. To look at this----
+ Mr. CARDIN. We were going through normal channels.
+ Chairman THOMAS. The gentleman's time has expired.
+ Mr. CARDIN. Thank you, Mr. Chairman.
+ Chairman THOMAS. The Chair understands we are currently
+with less than 5 minutes to go on a vote on the floor of the
+House with possibility of a second vote following. So, the
+Chair would indicate that the Committee will stand in recess
+until 10 minutes after the last vote on the floor.
+ [Recess.]
+ Does the gentleman from Texas wish to inquire?
+ Mr. JOHNSON. Thank you, Mr. Chairman. Not at this time.
+ Chairman THOMAS. Does the gentleman from Ohio wish to
+inquire?
+ Mr. PORTMAN. Mr. Chairman, I have appreciated the testimony
+this morning and I have no questions.
+ Chairman THOMAS. Does the gentleman from Washington wish to
+inquire?
+ Mr. MCDERMOTT. Thank you, Mr. Chairman. Mr. Flick, well,
+actually both of you have asserted there was only one
+Democratic request that was denied or delayed. You further
+implied at the suggestion of Mr. Scully that the request in
+question was on a provision that is no longer relevant. Mr.
+Foster's testimony here last week directly contradicts that, as
+does Mr. Flick's e-mail. Last week, Mr. Foster said--where are
+we here--I will find his quote in a second--that none of the
+information had been provided. There were a whole series of
+things that had been asked and none of them were provided. Your
+e-mail shows that the request was framed in terms of a policy
+that was included in the Chairman's mark, which was the most
+current piece of legislation when the request was made. Now,
+the response was delayed, arguably to reflect what was
+considered on the floor, but it is patently false to assert it
+was on a provision no longer in the bill. Equally important,
+your e-mail, Mr. Flick, describes request number three, which
+has still not been provided. The request was for an estimated
+change in beneficiary/government financing share. That has
+still not been done. I think you can see it is a little
+tiresome to keep correcting the record, but I am sure you
+understand that this is relevant and goes directly to the
+question of Administration stonewalling. Now, I have a
+question, and you are not a lawyer----
+ Mr. FLICK. That is correct.
+ Mr. MCDERMOTT. You said, I think that what you are doing,
+Mr. Foster, is rising to the level of insubordination and you
+will be fired. Is that what you communicated to him?
+ Mr. FLICK. Excuse me, Mr. Congressman. I don't believe I
+did say that. What----
+ Mr. MCDERMOTT. You said severe consequences, I think was
+the term, was it?
+ Mr. FLICK. I was relating directly to a comment by
+Administrator Scully----
+ Mr. MCDERMOTT. So, Mr. Scully had made that determination,
+that this was grounds for firing him?
+ Mr. FLICK. Excuse me, Congressman. Mr. Scully indicated to
+me that if Mr. Foster does not follow the very clear
+instructions, it is outright insubordination and
+insubordination carries serious consequences.
+ Mr. MCDERMOTT. Now, serious consequences. Here we are,
+talking about words again. Are you talking about firing him?
+ Mr. FLICK. I don't know the answer to that, Congressman. I
+did not ask Administrator Scully exactly what he meant when he
+said consequences. I----
+ Mr. MCDERMOTT. Was it intended, do you think, to imply to
+him that he was going to be fired?
+ Mr. FLICK. The only thing that I can tell you is I believe
+it was intended to imply that this is a serious matter, and
+Administrator Scully wanted Mr. Foster to comply with the
+instructions.
+ Mr. MCDERMOTT. Ms. Norwalk, you said earlier in your
+testimony here that you did not know whether or not his
+releasing that information to the House against the
+instructions of the Administrator would rise to the level of
+insubordination and, therefore, cause for firing.
+ Ms. NORWALK. I believe my testimony, Congressman, was that
+I was unsure of whether or not such insubordination, if it had
+occurred, would rise to the level of good cause, consequently--
+--
+ Mr. MCDERMOTT. You have never given an opinion to Mr.
+Scully that he could fire----
+ Ms. NORWALK. That is correct.
+ Mr. MCDERMOTT. Mr. Foster. So, he made that--whatever
+threats he made or implied to the people that he contacted over
+here was made on the basis of his judgment. Now, he is a
+lawyer, I guess.
+ Ms. NORWALK. That is correct.
+ Mr. MCDERMOTT. He has read the law, presumably. He knows
+what his power is?
+ Ms. NORWALK. I can't speak to what he read or what he
+knows, but I would presume.
+ Mr. MCDERMOTT. Do you think it would be wise to ask the
+counsel who works for you where you stand on an issue like
+that?
+ Ms. NORWALK. If he were to ask the counsel, it would not
+have been me because the person who provides legal advice to
+the department at all levels of the department is, in fact, the
+HHS Office of the General Counsel. So, he would not have asked
+me.
+ Mr. MCDERMOTT. Why did Mr. Foster come to you, then?
+ Ms. NORWALK. Mr. Foster came to me, I believe, in my
+capacity as the Deputy Administrator and Chief Operating
+Officer because he wanted to have me help him solve what he saw
+as perhaps a management problem. He did not come to me, as far
+as I recall, seeking legal advice.
+ Mr. MCDERMOTT. He says, I mean, Mr. Scully says that he
+indicated during his testimony, meaning Mr. Foster, he sought
+legal advice about my view and was told I was correct. Now, is
+that talking about the conversation he had with you?
+ Ms. NORWALK. I presume that that is what Mr. Foster
+referred to. However, it is my understanding from my discussion
+with Mr. Foster that, in fact, when he came to speak to me, it
+was not in my capacity as an attorney but in my capacity as the
+Chief Operating Officer, which was typical of our relationship
+because I managed the day-to-day operations of CMS.
+ Mr. MCDERMOTT. I thought Mr. Flick did.
+ Ms. NORWALK. No, I am the Chief Operating Officer and
+Deputy Administrator, or at least acting in that capacity. Mr.
+Flick, if I may say, ran the Office of the Administrator as
+opposed to the entire organization.
+ Mr. MCDERMOTT. So, he is really irrelevant to what went on
+in the department? He really was just a scheduler?
+ Mr. FLICK. Just? Congressman, I will be happy to try to
+respond to that. I don't know about the word ``just,'' but
+clearly, that was a big part of my responsibilities, to stay on
+top of the day-to-day work flow in the Office of the
+Administrator.
+ Mr. MCDERMOTT. What did you do before you came to Mr.
+Scully?
+ Mr. FLICK. Before coming to government, I spent most of my
+career in the private health care sector, working in hospitals
+as both a vice president and a chief operating officer, working
+as the president of a medical group, and working as a president
+of a physician hospital organization.
+ Mr. MCDERMOTT. So, you came into this office with that kind
+of a background, but they put you at sort of managing his
+office?
+ Mr. FLICK. That is correct.
+ Mr. MCDERMOTT. I still say, Mr. Chairman, we really need to
+have Mr. Scully come here so we can find out where he got his
+opinion, whether he actually read the law and thought he could
+fire him or just could threaten him. I really have the feeling
+he was threatening him.
+ Chairman THOMAS. The gentleman's time has expired. He
+consumed 7 minutes. The gentleman from Pennsylvania?
+ Mr. ENGLISH. Thank you, Mr. Chairman. I would like to thank
+the witnesses for their exhaustive and candid testimony today.
+Mr. Chairman, pursuant to Rule XI, Clause (2)(k)(8), I move
+that the Committee now adjourn.
+ Chairman THOMAS. The motion before the Committee is to
+adjourn. All those in favor, say aye.
+ [Chorus of ayes.]
+ Those opposed? In the opinion of the Chair, the ayes have
+it. The ayes have it and the hearing stands adjourned.
+ [Whereupon, at 2:40 p.m., the hearing was adjourned.]
+ [Question submitted from Mr. Cantor to the Honorable Jo
+Anne B. Barnhart, and her response follows:]
+Question:
+ Does the SSA support or oppose waiving the 5-month
+waiting period for receiving disability benefits in cases that the
+Commissioner determines the waiting period would cause undue hardship
+to terminally ill beneficiaries?
+ What is the potential impact of waiving the 5-month
+waiting period for terminally ill beneficiaries on the Social Security
+System? How many recipients would this impact?
+ Are there alternatives to present law that Congress
+should consider changing in order to provide those who are terminally
+ill with relief from the 5-month waiting period?
+
+ Answer: This is in response to your letter asking questions that
+you would have asked had you been able to attend the March 24, 2004
+hearing at which Chief Actuary Goss testified. The questions concern
+waiving the 5-month waiting period for receiving disability benefits in
+cases where the Commissioner determines that the waiting period would
+cause undue hardship to applicants who are terminally ill.
+Unfortunately, significant costs are involved with such a proposal.
+ We are sensitive to the potential hardships that the 5-month
+waiting period may cause for terminally ill applicants and their
+families. We have procedures in place to ensure that their applications
+are processed as quickly as possible. In addition, people with
+disabilities whose income and resources do not go over certain limits
+may be eligible for supplemental security income payments during those
+5 months.
+ Congress has periodically considered legislation to waive the 5-
+month waiting period requirement for people with terminal illnesses.
+Several such bills with slightly different approaches have been
+introduced in the 108th Congress, including a bill you have
+cosponsored, H.R. 2598.
+ Our Office of the Chief Actuary has estimated the additional
+benefit payments that would be made under a similar proposal--one that
+would eliminate the 5-month waiting period for disability benefits for
+persons who die, or are expected to die, within 6 months of the onset
+of their disabling impairment. Payments for months in the waiting
+period would be made to disabled beneficiaries initially diagnosed as
+terminally ill but who actually live for more than 6 months after
+disability onset, with no attempt to recover such payments.
+Additionally, for beneficiaries expected to survive more than 6 months
+from disability onset who in fact die from their illness within the 6-
+month period, a retroactive payment for the waiting period would be
+due. Assuming such a proposal was effective for applications filed
+after September 30, 2004, we estimate 5-year program costs of $650
+million and 10-year costs of $1,540 million. The estimated number of
+persons who do not receive Social Security disability benefits in the
+current year because they do not survive the waiting period is
+approximately 25 thousand and is projected to increase slightly each
+year in the future.
+ Assuming that the 5-month waiting period was automatically waived
+as causing an undue hardship for all eligible applicants who are
+terminally ill, the above estimate would be about the same for your
+proposal. Assuming that the 5-month waiting period was waived for 50
+percent of eligible applicants who are terminally ill, and assuming
+that this half of the population was similar in nature to the total
+affected population, then the estimated 10-year costs of such a
+proposal would be $785 million.
+ [Submissions for the record follow:]
+ Statement of Cori E. Uccello, American Academy of Actuaries
+ Hearing on Board of Trustees 2004 Annual Reports \1\
+---------------------------------------------------------------------------
+ \1\ The following statement focuses on the 2004 Medicare Trustees'
+Report and does not address the Social Security Trustees' Report.
+---------------------------------------------------------------------------
+ American Academy of Actuaries \2,\ \3\
+---------------------------------------------------------------------------
+ \2\ Other members of the Medicare Trustees Subgroup who were
+involved in the development of this statement include: P. Anthony
+Hammond, ASA, MAAA, Chairperson; Roland E.King, FSA, MAAA; Gordon R.
+Trapnell, FSA, MAAA; and Lynette L. Trygstad, FSA, MAAA.
+ \3\ The American Academy of Actuaries is the public policy
+organization for actuaries practicing in all specialties within the
+United States. A major purpose of the Academy is to act as the public
+information organization for the profession. The Academy is non-
+partisan and assists the public policy process through the presentation
+of clear actuarial analysis. The Academy regularly prepares testimony
+for Congress, provides information to federal elected officials,
+comments on proposed federal regulations, and works closely with state
+officials on issues related to insurance. The Academy also develops and
+upholds actuarial standards of conduct, qualification and practice, and
+the Code of Professional Conduct for all actuaries practicing in the
+United States.
+---------------------------------------------------------------------------
+ The American Academy of Actuaries' Medicare Trustees Subgroup
+appreciates the opportunity to provide comments on the 2004 Medicare
+Trustees' Report. The Academy is the non-partisan public policy
+organization for actuaries of all specialties in the United States.
+INTRODUCTION AND SUMMARY
+ Each year, the Boards of Trustees of the federal Hospital Insurance
+(HI) and Supplementary Medical Insurance (SMI) trust funds report to
+Congress on the trust funds' financial condition. Together, these
+programs make up the Medicare program for the elderly and for certain
+disabled Americans. The Trustees' Report is the primary source of
+information on the financial status of the Medicare program, and the
+American Academy of Actuaries proudly recognizes the contribution that
+members of the actuarial profession have made in preparing the report
+and educating the public about this important issue.
+ According to the projections in the 2004 Medicare Trustees' Report,
+Medicare's financial status has deteriorated considerably since last
+year. The HI trust fund, which pays for hospital services, will be
+depleted earlier than previously expected and HI expenditures are
+projected to exceed HI non-interest income this year. In addition,
+Medicare expenditures will continue to consume an increasing share of
+federal outlays and GDP. The trustees conclude that ``the projections
+shown in [the] report continue to demonstrate the need for timely and
+effective action to address Medicare's financial challenges--both the
+long-range financial imbalance facing the HI trust fund and the
+heightened problem of rapid growth in expenditures.''
+ This statement examines more closely the findings of the Trustees'
+Report. The AmericanAcademy of Actuaries' Medicare Trustees Subgroup
+concludes that the Medicare program faces serious short-term and long-
+term financing problems. As highlighted in the 2004 Medicare Trustees'
+Report:
+
+ The HI trust fund fails to meet the test of short-range
+financial adequacy because HI trust fund assets will fall below annual
+expenditures within the next 10 years.
+ The HI trust fund also fails to meet the test of long-
+range actuarial balance. HI expenditures are projected to start
+exceeding HI non-interest income this year. By 2019, when trust fund
+assets are projected to be depleted, tax revenues would cover only
+about 80 percent of program costs, and this share will decrease rapidly
+thereafter. The trust fund depletion date is projected to arrive seven
+years sooner than projected last year, due in part to higher hospital
+expenditures, lower payroll taxes, and the increased payments to rural
+hospitals and private health plans enacted under the new Medicare
+legislation. Notably, the new prescription drug program does not impact
+the HI trust fund, because it is included in the SMI trust fund.
+ The SMI trust fund, which includes spending for the newly
+enacted Medicare prescription drug benefit, is expected to remain
+solvent, but only because its financing is reset each year to meet
+projected future costs. Projected increases in SMI expenditures,
+therefore, will require increases in beneficiary premiums and general
+revenue contributions over time.
+ Without payroll tax increases or benefit decreases,
+Medicare's demand on the federal budget, measured as the HI income
+shortfall and the general revenue contribution to SMI, is increasing
+rapidly.
+ Medicare expenditures as a share of GDP and of total
+federal revenues are also increasing rapidly, especially when
+considered in conjunction with Social Security expenditures, thereby
+threatening Medicare's long-term sustainability.
+
+ We recommend that policymakers implement changes to improve
+Medicare's financial outlook. The sooner such corrective measures are
+enacted, the more flexible the approach and the more gradual the
+implementation can be. Failure to act now may necessitate far more
+onerous actions later.
+SHORT-TERM FINANCING OF MEDICARE
+ To assure short-range financial adequacy of the HI trust fund, the
+Medicare trustees recommend that trust fund assets equal or exceed
+annual expenditures for each of the next 10 years. This level would
+serve as an adequate contingency reserve in the event of adverse
+economic or other conditions. For the next several years, the trust
+fund assets are expected to significantly exceed annual expenditures.
+However, trust fund assets are projected to fall below annual
+expenditures in 2012. As a result, the HI trust fund fails the test of
+short-range financial adequacy.
+LONG-TERM FINANCING OF MEDICARE
+ The Medicare program has fundamental long-range financing problems
+of three kinds:
+
+ 1. HI trust fund income will soon become inadequate to fund the HI
+portion of Medicare benefits;
+ 2. Medicare's demands on the federal budget are increasing; and
+ 3. Paying currently promised Medicare benefits will place an
+increasing strain on the U.S. economy.
+
+ Each of these problems is discussed in more detail below. Note that
+the expenditure numbers cited in this statement include the impact of
+the new Medicare prescription drug plan and other changes to be
+implemented under the Medicare Prescription Drug, Improvement, and
+Modernization Act of 2003.
+Medicare HI Trust Fund Income Will Soon Become Inadequate to Fund HI
+ Benefits
+ In terms of trust fund accounting, Medicare consists of two parts,
+each of which is financed separately: Hospital Insurance (HI) pays
+primarily for inpatient hospital care and Supplementary Medical
+Insurance (SMI) pays primarily for physician and outpatient care, as
+well as the new Medicare prescription drug benefit. Like the Social
+Security program, Medicare makes use of trust funds to account for all
+income and expenditures, and the HI and SMI programs operate separate
+trust funds. Taxes, premiums, and other income are credited to the
+trust funds, and are used to pay benefits and administrative costs. Any
+unused income is added to the trust fund assets, which are invested by
+law in U.S. government securities for use in future years.
+ The 2004 Medicare Trustees' Report highlights the long-term
+financing problems facing the program:
+
+ The HI program is funded primarily through earmarked
+payroll taxes. Over the last several years, HI payroll taxes and other
+non-interest income have exceeded benefits paid, and the trust fund has
+been accumulating assets. Beginning this year, however, HI expenditures
+are projected to exceed HI non-interest income. And beginning in 2010,
+HI expenditures are projected to exceed all HI income, including
+interest. At that point, the HI trust fund will need to begin redeeming
+its assets--U.S. government securities--in order to pay for benefits.
+If the federal government is experiencing unified budget deficits at
+the time these securities need to be redeemed, either additional taxes
+will need to be levied to fund the redemptions, or additional money
+will need to be borrowed from the public, thereby increasing the public
+debt.
+ By 2019, HI trust fund assets are projected to be
+depleted. At that time, tax revenues are projected to cover only about
+80 percent of program costs, with the share decreasing further
+thereafter. The HI trust fund depletion date is seven years earlier
+than that projected in last year's Medicare Trustees' Report, due in
+part to higher hospital expenditures, lower payroll taxes, and the
+increased payments to rural hospitals and private health plans enacted
+under the new Medicare legislation.\4\ Notably, the new prescription
+drug program does not impact the HI trust fund, because it is included
+in the SMI trust fund.
+---------------------------------------------------------------------------
+ \4\ According to the 2004 Medicare Trustees' Report, 2.0 years of
+the change are attributable to the new Medicare law, 2.0 years to
+higher spending and lower tax revenues, 1.5 years to assumption
+adjustments, 1.0 year to improved data on the health status of
+beneficiaries in HMOs, and 0.5 years to model refinements for certain
+hospital payments.
+---------------------------------------------------------------------------
+ The value in today's dollars of HI shortfalls over the
+next 75 years is $8.2 trillion, or 3.1 percent of taxable payroll over
+the same time period. For the first time, the 2004 Medicare Trustees'
+Report includes projections over an infinite time horizon, which
+increases the shortfall to $21.8 trillion, or 5.3 percent of taxable
+payroll. Nevertheless, given the uncertainty of projections 75 years
+into the future, extending these projections into the infinite future
+can only increase the uncertainty, so that these results can have only
+limited value for policymakers.
+ The SMI program is financed through beneficiary premiums
+that cover about a quarter of the cost. Federal general tax revenues
+covers the remaining three quarters. The SMI trust fund is expected to
+remain solvent, but only because its financing is reset each year to
+meet projected future costs. Projected increases in SMI expenditures,
+therefore, will require increases in beneficiary premiums and general
+revenue contributions over time.
+Medicare's Demand on the Federal Budget Is Increasing
+ Another way to gauge Medicare's financial condition is to view it
+from a federal budget perspective. In particular, this assessment
+determines whether Medicare receipts from the public (e.g. payroll
+taxes, beneficiary premiums) exceed or fall short of its outlays to the
+public. Under this approach, income from general revenues to the SMI
+program, which are essentially intragovernmental transfers between the
+general fund and the Medicare trust funds, are ignored. As a result,
+the difference between public receipts and public expenditures for
+Medicare reflects any HI income shortfall and the general revenue share
+of SMI.
+ Table 1 reports the HI income shortfall and the general revenue
+contribution to the SMI program in 2003 and over the next 10 years. In
+2003, the HI trust fund ran a surplus (i.e. a negative shortfall) that
+offset to some extent the general revenue financing of SMI. (Recall
+that the SMI program is designed such that three-quarters of its
+expenditures are funded through general revenues.) Nevertheless,
+Medicare expenditures already exceeded public receipts by $81 billion
+in 2003. Beginning this year, however, HI expenditures are expected to
+exceed HI public receipts by about $8 billion, and this HI shortfall
+plus the SMI general revenue contribution is expected to total $111
+billion. Over the next 10 years the cumulative difference between
+Medicare expenditures and public receipts will total $2.3 trillion.
+[GRAPHIC] [TIFF OMITTED] 23797A.009
+
+ Beginning in 2010, when HI expenditures are projected to exceed HI
+public receipts plus interest income on trust fund assets, the HI trust
+fund will need to begin drawing down its assets, further increasing
+Medicare's demand on the federal budget. Unless payroll taxes are
+increased or benefits reduced, HI trust fund assets are projected to be
+depleted in 2019, and there is no current provision allowing for
+general fund transfers to cover HI expenditures in excess of payroll
+tax revenues.
+ For a longer-term view of Medicare's demand on the federal budget,
+table 2 reports the HI income shortfall and the SMI general revenue
+contribution over the next several decades, as a share of GDP. The HI
+income shortfall and SMI general revenue contribution are projected to
+grow dramatically--from less than 1 percent of GDP in 2004 to more than
+10 percent of GDP in 2078. This will increase considerably the
+pressures on the federal budget, unless HI income shortfalls or SMI
+general revenue contributions are reduced.
+[GRAPHIC] [TIFF OMITTED] 23797A.010
+
+ (Although an appendix in the Trustees' Report includes a discussion
+of the impact of the Medicare trust funds on the federal budget, the
+long-term projections of the HI income shortfall and SMI general
+revenue contribution are available only in the Social Security and
+Medicare Boards of Trustees' summary of the 2004 annual reports. It
+would be useful if the projections were also presented in the Medicare
+Trustees' Report.)
+ The new Medicare law includes a provision intended to address these
+financial challenges. Basically, if general funding sources account for
+more than 45 percent of Medicare spending within the next seven years,
+the administration will be required to recommend ways to reduce this
+share.\5\ Options would include reducing benefits, raising beneficiary
+premiums, or raising payroll taxes. Congress could then implement the
+recommendations, but would not be required to do so.
+---------------------------------------------------------------------------
+ \5\ More specifically, a determination of ``excess general
+funding'' is triggered if the difference between Medicare outlays and
+dedicated financing sources (HI payroll taxes, HI share of income taxes
+on Social Security benefits, Part D state transfers, and beneficiary
+premiums) exceeds 45 percent of Medicare outlays within seven years of
+the projection.
+---------------------------------------------------------------------------
+ This provision draws attention to the need to manage the demand
+Medicare places on the federal budget, and sets the stage for future
+congressional debate over corrective action to limit the burden the
+program places on general tax revenues. Congressional action is not
+guaranteed, however, and other financing problems remain.
+ The 2004 Medicare Trustees' Report projects that the 45 percent
+threshold will first be reached in 2012, more than seven years into the
+projection period. Therefore, the administration requirement would not
+be triggered this year, but could be as soon as two years from now.
+Medicare Will Place Increasing Strains on the Economy
+ A broader issue related to Medicare's financial condition is
+whether the economy can sustain Medicare spending in the long run. To
+gauge the future sustainability of the Medicare program, we examine the
+share of GDP that will be consumed by Medicare. As shown in Table 3,
+total Medicare spending will consume greater shares of GDP over time.
+In 2003, total Medicare spending was 2.6 percent of GDP. This share is
+expected to increase to 3.4 percent in 2006, due in large part to the
+addition of the prescription drug benefit. It is expected to rise to
+7.0 percent of GDP in 2030 and 10.9 percent of GDP in 2060.
+ (Notably, the Centers for Medicare and Medicaid Services (CMS)
+estimate that Medicare pays for only about half of the total health
+spending of the elderly and disabled. As a result, this measure
+understates the share of the economy devoted to total health spending
+among these groups.)
+[GRAPHIC] [TIFF OMITTED] 23797A.011
+
+ Considering Medicare spending in conjunction with Social Security's
+further highlights the strain these programs place on the economy.
+Social Security spending as a share of GDP increases more modestly than
+Medicare over the next several decades, and by 2030, Medicare spending
+exceeds that of Social Security. Combined, Medicare and Social Security
+expenditures equaled 7.0 percent of GDP in 2003. This share of GDP will
+increase considerably to a projected 13.3 percent in 2030 and 17.4
+percent in 2060.
+ Medicare and Social Security expenditures are even more striking
+when considered relative to total federal revenues. The trustees report
+that total federal revenues have historically averaged about 19 percent
+of GDP. Using this average, about 40 percent of all federal revenues
+were used to pay Medicare and Social Security benefits in 2003. If no
+changes are made to either program and federal revenues remain at 19
+percent of GDP, this share is expected to increase to 70 percent in
+2030, and by 2070, Medicare and Social Security spending would about
+equal total federal revenues.
+ These projections highlight the increasing strains that Medicare,
+especially in conjunction with Social Security, will place on the U.S.
+economy. Moreover, increased spending for Medicare may crowd out funds
+for other federal programs. It is unclear whether the nation will be
+willing to make these tradeoffs in the future.
+ If we are to avoid this strain, reforms must be made to address the
+rapid growth in Medicare expenditures. It is important to recognize,
+however, that unless the growth in total health expenditures of the
+elderly and disabled is reduced--not just the share borne by the
+Medicare program--health expenditures will continue to consume a large
+and growing share of the economy. Shifting more program costs to
+workers through increased payroll taxes or to beneficiaries through
+higher premiums or increased cost sharing may reduce federal outlays
+for Medicare, but it will not reduce the share of the economy devoted
+to health expenditures.
+CONCLUSION
+ The American Academy of Actuaries' Medicare Trustees Subgroup
+continues to be very concerned about Medicare's long-range financing
+problems. With HI non-interest income expected to start falling short
+of outlays this year, the HI trust fund is expected to be depleted as
+soon as 2019, seven years earlier than projected last year. In
+addition, Medicare will likely exact increasing demands on the federal
+budget, even with the recently enacted provision that alerts Congress
+when the program's reliance on general revenue sources is becoming
+unduly large. The program's sustainability is also in question as
+currently promised benefits will make up increasing shares of both GDP
+and total federal revenues.
+ We recommend that policymakers implement changes to improve
+Medicare's financial outlook. We agree with the 2004 trustees, who
+state in their report:
+ ``The sooner the solutions are enacted, the more flexible and
+ gradual they can be. Moreover, the early introduction of
+ reforms increases the time available for affected individuals
+ and organizations . . . to adjust their expectations.''
+
+ * * *
+
+ The Academy is ready to provide the analysis and technical
+expertise of our member health actuaries in responding to issues
+regarding the future of the Medicare system. Recent Academy issue
+briefs include How Is Medicare Financed? and What Is the Role of the
+Medicare Actuary? In addition, Evaluating the Fiscal Soundness of
+Medicare, an Academy monograph, outlines how several reform measures
+could address Medicare's long-term financing problems. The monograph
+concludes that promising options to improve Medicare's financing
+problems include increased cost sharing by beneficiaries and increased
+use of managed care and competitive bidding. Less promising options
+include lowering payments to providers and increasing the eligibility
+age for Medicare. These and other Academy publications are available at
+www.actuary.org/medicare/index.htm.
+
+
+
+Statement of Don R. McCanne, Physicians for a National Health Program,
+ Chicago, Illinois
+ The 2004 Annual Report of the Boards of Trustees of the Federal
+Hospital Insurance and Federal Supplementary Medical Insurance Trust
+Funds describes the projected imbalances between the anticipated
+revenues and the expected growth in expenditures of the Medicare
+program. The Trustees call for prompt, effective, and decisive action
+to address this challenge.
+ As expected, a highly charged political debate rages over the
+causes of these anticipated net deficits in Medicare funding. Although
+we will hear much about factors such as the generous payments to
+Medicare Advantage plans, and the decline in tax revenues supporting
+the program, one factor predominates above all others: health care
+costs continue to escalate well beyond the level of inflation.
+ Health care cost increases are related to expanding and ever more
+expensive technological advances, along with unrestrained expansion in
+the capacity of our health care delivery system. We are spending more
+because we find more ways to spend health care dollars, and because we
+continue to expand the capacity that allows us to do it.
+ Approaching the Medicare deficit as an isolated problem will not
+address the fundamental cause of health cost increases. Rather, the
+integrity of the Medicare program would be threatened because solutions
+would be narrowly directed to substantially increasing revenues and/or
+dramatically reducing benefits. Either a reduction in benefits or an
+increase in cost sharing by the beneficiary would threaten to impair
+access to care because of lack of affordability for the individual
+beneficiary. The alternative of asking taxpayers to fund the increase
+in Medicare costs would be problematic when considering that they would
+also be facing the same escalating health care costs.
+ We already know that regions with higher health care capacity have
+increased intensity of services but without a commensurate improvement
+in medical outcomes. Hospitals with greater bed capacity in their
+intensive care units provide costly and relatively inhumane end-of-life
+care when less expensive and more compassionate care would be provided
+in a hospice environment. Physician owned specialty hospitals and
+medical group owned imaging systems significantly increase capacity and
+the level of services although there is negligible data available to
+demonstrate improved outcomes.
+ Other nations have demonstrated that planning and capital budgeting
+of capacity can prevent excessive utilization while ensuring adequate
+capacity to prevent unnecessary queues. The 15.5% of our Gross Domestic
+Product that we are currently spending on health care is more than
+enough to ensure appropriate capacity plus fund the operating expenses
+of our system, with the proviso that we do not waste resources on some
+of the current excesses of our system. Although health care planning
+declined after prior efforts, the current level of spending has reached
+a threshold that now makes it imperative.
+ The administrative costs of private health plans are significantly
+greater than those of public programs such as Medicare. But an even
+greater problem is the profound administrative burden placed on our
+health care delivery system by our fragmented system of a great
+multitude of private plans, large public programs, and, for some, no
+programs at all. In 2003 numbers, an estimated $286 billion in these
+administrative costs could be recovered and utilized for the
+deficiencies in health care coverage today. Eliminating administrative
+waste must be a part of our solution to rising costs.
+ Although our national policies protect and promote technological
+development, there is a pressing need to demand value for our private
+and public investment. Pharmaceutical firms that develop copycat drugs
+merely for the purpose of restarting the patent clock should no longer
+be disproportionately rewarded for such non-innovative efforts. Only
+new products with demonstrated value should be rewarded with higher
+prices. Also new products developed with public funding should return
+that investment to the taxpayer through lower prices. We should require
+that new technological innovations provide both significant medical
+benefit and value before funding them. And there is ample evidence to
+demonstrate that prices are much higher in the United States than in
+other nations. We clearly need a method of negotiating rates and prices
+to be sure that we are receiving a fair value for our health care
+investment while allowing a fair but not excessive profit for the
+manufacturer or provider.
+ To bring the level of health care cost increases down to near the
+rate of inflation, we need to control capacity and pay fair prices.
+Medicare alone cannot have a significant influence on capacity.
+Although Medicare does have some regulatory control over prices, acting
+alone inevitably results in inequitable results through cost shifting
+and unfairness in pricing, while failing to control global costs. And
+Medicare cannot further reduce administrative waste when it is adding
+to the administrative burden by being an additional player in our
+fragmented system.
+ Replacing our inefficient and wasteful system of funding care with
+a single public payer would control costs through global budgeting,
+planning and budgeting of capital improvements, and negotiation of
+rates and prices. And with the administrative savings made possible by
+eliminating the waste of the private bureaucracies, we could afford to
+fund care for everyone while controlling costs on into the infinite
+horizon. Instead of limiting Medicare reform considerations to revenue
+increases and benefit reductions, let us adopt systemic reforms that
+will enable the enactment of comprehensive, affordable coverage for
+everyone.
+
+
+
+