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July 22, 1999, Thursday

TYPE: COMMITTEE HEARING

LENGTH: 29597 words

COMMITTEE: SENATE FINANCE COMMITTEE

HEADLINE: U.S. SENATOR WILLIAM ROTH HOLDS HEARING ON MEDICARE PROPOSALS

LOCATION: WASHINGTON, D.C.

BODY:
U.S. SENATE COMMITTEE ON FINANCE HOLDS HEARING ON MEDICARE

JULY 22, 1999

SPEAKERS: U.S. SENATOR WILLIAM V. ROTH, JR. (R-DE),

CHAIRMAN

U.S. SENATOR JOHN CHAFEE (R-RI)

U.S. SENATOR CHARLES E. GRASSLEY (R-IA)

U.S. SENATOR ORRIN G. HATCH (R-UT)

U.S. SENATOR FRANK H. MURKOWSKI (R-AK)

U.S. SENATOR DON NICKLES (R-OK)

U.S. SENATOR PHIL GRAMM (R-TX)

U.S. SENATOR TRENT LOTT (R-MS)

U.S. SENATOR JAMES M. JEFFORDS (R-VT)

U.S. SENATOR CONNIE MACK (R-FL)

U.S. SENATOR FRED THOMPSON (R-TN)

U.S. SENATOR DANIEL PATRICK MOYNIHAN (D-NY),

RANKING MEMBER

U.S. SENATOR MAX BAUCUS (D-MT)

U.S. SENATOR JOHN D. ROCKEFELLER IV (D-WV)

U.S. SENATOR JOHN B. BREAUX (D-LA)

U.S. SENATOR KENT CONRAD (D-ND)

U.S. SENATOR BOB GRAHAM (D-FL)

U.S. SENATOR RICHARD BRYAN (D-NV)

U.S. SENATOR J. ROBERT KERREY (D-NE)

U.S. SENATOR CHARLES S. ROBB (D-VA)

DONNA SHALALA, SECRETARY, DEPARTMENT OF HEALTH

AND HUMAN SERVICES

DAN CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET OFFICE

DAVID WALKER, COMPTROLLER GENERAL, GENERAL

ACCOUNTING OFFICE

*

MOYNIHAN: Mr. Chairman, before we proceed to the serious matters at hand, may I join my colleagues in wishing you a very happy birthday?

(APPLAUSE)

ROTH: Thank you. That's OK, it was yesterday, with the tax bill. But, needless to say, it's nice to be 39 again.

(LAUGHTER)

So, there are some things I'd rather forget, but the alternative is no better.
In any event, today represents an important milestone in our series of hearings on Medicare reform. And for the past four months, we have been tracing the evolution of the Medicare program, examining its current status and identifying aspects of the program in need of reform. And we've identified various options for modernizing Medicare and strengthening it to meet the long term challenges associated with the aging of the baby boomer generation.

Today the administration will join our ongoing association. We are indeed honored to have with us, Secretary Donna Shalala of the Department of Health and Human Services. And I know that the panel looks forward, very much, to your testimony. And I also want to thank Mr. Walker and Dr. Crippen for joining us. We also look forward to their analysis and observations.

Medicare reform is an incredibly complex undertaking. It demands careful navigation of programmatic fiscal and political challenges. And as our committee continues to develop a reform package, the administration's views and technical will be an important consideration. I sincerely hope the administration will rise to the challenge, and work constructively with us to make responsible Medicare reform a reality this year.

We're familiar with the broad themes the president has set forth. With regard to Medicare reform, the administration goals are ones that we all share. For example, no one can deny that making Medicare more competitive and efficient should be a priority. And similarly, it's entirely appropriate to modernize Medicare's benefit package.

There is, rightfully, a great deal of attention focused on adding prescription drug coverage, which, if done properly, I support. However, we have heard from numerous witnesses this year that more than this is required to truly put Medicare benefits on par with what is typical in private health insurance. These and other benefit improvements need to be coupled with improved incentives for efficiency, with respect to deductible, to co-insurance for various services.

The administration's final goal, extending the life of the Part A Trust Fund is more than a goal. It's a shared basic responsibility. And I'd simply note that our stewardship over the Medicare program's fiscal stability goes significantly beyond just adding revenues. Our responsibilities are both deeper and broader. They encompass Part B as well, and include creating an effective, sustainable program design, coupled with effective federal administration and oversight.

Despite our general agreement on principles, it goes without saying that the levels and the details, whether they're talking about systematic reform or the structure of a new benefit -- these details are what I'm interested in today.

Secretary Shalala, I trust you'll walk us through the specifics of the administration's proposal, related to program reforms. Because in earlier hearings, we have taken the administration's testimony on broader budgetary and fiscal questions related to Medicare reform, I would hope today that we would focus specifically on Medicare program changes.

With that, I would like to recognize Senator Moynihan, for any comments he may care to make.

MOYNIHAN: Mr. Chairman, might I yield my time to Senator Rockefeller?

ROTH: Senator Rockefeller.

ROCKEFELLER: Thank you, Mr. Chairman, and thank you, particularly, the senior Senator from New York. Welcome, Secretary Shalala, and I'm very happy that we are here, at last, to talk about the president's proposal for Medicare reform.

I spent a year -- probably not the happiest year of my life -- on the Medicare commission. I learned even more about the demographic problems that face Medicare. While Medicare has done a good job in keeping pace with private sector costs -- something not realized by most people -- in fact, as it's outperformed the private sector -- the fact is that the population covered by Medicare will double in the next 30 years. In order to cover this increase in population, and maintain our promise to American seniors, we have no choice but to either dedicate more revenue to Medicare, or drastically cut benefits. There is no in-between position.

One of my main objections to the proposal for the Medicare Commission came out of the Medicare Commission's decision to completely ignore the possibility of spending any new revenue on Medicare, and thus doom it. Under that plan, Medicare benefits would have surely been slashed over time. It is an unacceptable solution.

The president's package of reforms responsibly address the demographic problem to dedicating a part of the surplus to shoring up Medicare. In stark contrast, the majority of this committee voted yesterday for a nearly $800 billion tax cut package that would soak up all of that surplus, and make it impossible to sustain, let alone strengthen Medicare. If the Republican tax package would become law, it would have -- let me say as clearly as I can -- a devastating effect on Medicare beneficiaries, and the millions of Americans who rely on that program.

Medicare is a social insurance program. It always has been. When the program first began, as we all know, 50 percent of seniors were not covered by health insurance in this country. They were -- the market decided that they were too risky and did not cover them. That's why Medicare was created. Even today, the private sector is highly unstable for Medicare beneficiaries. Medicare plus choice withdrawals, we have seen recently, are evidence of that. Another 250,000, I believe, within the last several days were dumped.

Elderly and disabled people need to have a safety net that does not go away when they get sick. The president is right to propose a prescription drug benefit for all Medicare beneficiaries. We all know insurance pools need to have both healthy and sick people in them, the way it originally was with Blue Cross, before there was a Blue Shield. You made money on some, you lost on others, but everybody was in the pot.

By offering prescription drug coverage to all beneficiaries, the president is helping to reduce costs for beneficiaries while maintaining Medicare as a universal benefit. Currently, because Medicare fails to cover prescription drugs, far too many seniors -- and I would obviously first think of the ones I represent in West Virginia, but his would be true in Texas, Louisiana, North Dakota, New York, Delaware, everywhere else -- are paying for the medication themselves. Or they're not taking it. Or they're not eating and are taking it. But it's out of their pocket. A universal prescription drug benefit would be of great significance to tens of millions of these people.

I would say, respectfully, that Senator Kennedy and I have also struggled with how best to provide Medicare drugs for beneficiaries. Our plan, like the one before us today, uses competition, not the government, through pharmaceutical benefit managers to gain volume discounts in the marketplace. However, our plan also went one step farther by offering a cap on out-of-pocket spending. This is one area that -- where I think the President's plan could use improving.

ROCKEFELLER: Over the past year, I've spoken strongly and -- sometimes too strongly perhaps -- in my arguments against risky Medicare proposals. My main concern has always been focused on how these changes would impact the people, that we have, as a nation, committed ourselves to protect -- Medicare beneficiaries.

The president has taken the best of our work from the Medicare Commission in the past year, while rejecting more risky approaches to reform. I commend the president for his efforts, and look forward to working with my colleagues on this legislation. And I thank my chairman of the full committee, and chairman of my side of the committee.

ROTH: Thank you, Senator Rockefeller. Now, Secretary Shalala, you obviously need no introduction. Again, let me welcome you. We are pleased to have you. I look forward to your remarks. Please proceed.

SHALALA: Thank you very much, Mr. Chairman, and again, happy birthday. Senator Moynihan, distinguished committee members -- Mr. Chairman you actually share a birthday. You'll notice that HCFA Administrator Nancy Ann Minh DeParle (ph) is not here. She and her husband Jason had their first child at 12:30 a.m. this morning -- a baby boy, 7 pounds 12 ounces, and 21 inches long.

ROTH: Yay! I'm both older, and weigh more.

(APPLAUSE)

SHALALA: As I said to my colleagues, NASA hasn't been able to get their shuttle off yet, but HCFA was able to (OFF-MIKE) a bouncing baby boy this morning.

We obviously are very pleased to be here. And my testimony requires considerable detail to explain the plan. But I'll do it as briefly as I can. I submitted a longer testimony to the committee.

ROTH: It will be included as a part of the record.

SHALALA: Thank you very much.

I'm very pleased to be here to discuss President Clinton's plan to modernize and strengthen the Medicare program and to prepare it for the challenges ahead. As Americans, we can all point with great pride to the legacy of the Medicare program. But if we're to keep the promise of Medicare to future generations, then a program designed in the 1960s must be modernized and strengthened to meet the challenges of the 21st century. That's what we've tried to achieve in this proposal.

When the president took office in 1993, Medicare was actually predicted to go bankrupt this year -- 1999. But working with the Congress, the president has supported reforms that, along with the strong economy, have resulted in a projected trust fund solvency through the year 2015. We are all gratified by the good news, and Congress should be too. It indicates that together, we've extended the life of the H.I. trust fund by a full 16 years, and cut the 75 year actuarial deficit by 66 percent.

Several factors, of course, contributed to Medicare's good news. First, of course, our robust economy has helped increase payroll tax revenues into the trust, and held the line on health care cost increases. Second, the Departments rigorous management of the trust fund, and our bipartisan work together to attack waste, fraud and abuse in the program, have returned more than $1.2 billion to Medicare in the last two years alone.

Third, the bipartisan Balanced Budget Act of 1997 -- we share the concerns that many members have expressed that B.B.A. may have had unintended effects. The president's plan incorporates a substantial reserve fund to address some of those effects. But at the same time, I think we all agree that the B.B.A. made necessary and long-overdue changes in the way Medicare pays health care providers, and in the incentives we provide for important prevention services.

But if we are to strengthen and modernize Medicare for the future, we'll have to do a lot more. The fact is that over the next 35 years, the size of the Medicare population will double. The fact is that too few beneficiaries have access to affordable prescription drug coverage. And the fact is, that in far too many instances, Medicare is prohibited by law from using market forces that could clearly make it more efficient.

By building on the work of the bipartisan commission on the future of Medicare, the president's plan responds to each of these issues. And in that regard, I want to recognize the leadership of Senator Breaux and thank the other members of the committee who served on the commission -- Senators Rockefeller, Kerrey, and Senator Phil Gramm.

The president's plan has three specific goals -- to make Medicare more competitive and efficient, to modernize the benefit package -- including a long overdue prescription drug benefit , to extend the life of the Medicare trust fund until 2027. I mentioned earlier that we've already implemented several reforms that will help to save hundreds of millions of dollars, and extended Medicare solvency to 2015.

The president's plan builds on this achievement. As you know, Medicare has too often been barred from engaging in competitive practices that the private sector routinely uses to improve patient care, to improve quality, and to cut costs. We believe that its time that Medicare had access to the same strategies, to provide the highest quality care using the fewest taxpayer dollars.

In short, we need to be able to finally recognize and reward high quality health providers. In addition, by increasing competition among contractors, and fostering prudent purchasing, the president's plan would dramatically improve the current payment system, a system which too often has led to excessive payment rates in many parts of the country, and lower rates in others.

The president's proposal would also extend competition to Medicare managed care plans, while maintaining a viable traditional program. Plans would be paid for covering Medicare's defined benefits, including the new drug benefit, and would compete over cost and quality. This would save money, both for the beneficiaries and for the program.

The president's plan also sets aside $7.5 billion for adjustments to the B.B.A. that may be necessary to smooth out payment reforms affecting beneficiaries' access to high-quality care. We will work with Congress and others to identify real access problems and to craft appropriate solutions.

Even though the B.B.A. severely constrained our administrative flexibility, the president's plan includes several adjustments to moderate its impact on the ability of providers to deliver quality care. And these adjustments will help hospitals -- particularly rural and teaching hospitals, and home health care agencies. The president's plan also includes important provisions to improve Medicare management. And chief among these is the establishment of a management advisory council to help identify and implement innovations and customer service in purchasing and in management.

But these steps to make Medicare more competitive and efficient simply aren't enough to fully prepare the program to face the challenges ahead. We must also modernize benefits to include services that have become essential elements of high-quality medicine. In particular, we must include an affordable prescription drug benefit that is available to all beneficiaries.

As this committee knows, when Medicare was created, no one could have imagined the role of prescription drugs eventually would play in modern medicine. In fact, Senator Moynihan has showed the MERC (ph) books from 1965 and to the present day. But despite their proven value, too many older and disabled Americans simply cannot afford the prescription medicines that they need.

Let me be very clear, in the wealthiest nation on earth, a prescription drug benefit is not an option but an obligation. And that's why the president's plan provides all Medicare beneficiaries with access to affordable, comprehensive coverage for prescription drugs. The new drug benefit is also completely voluntary. If individuals have better prescription drug coverage, they can stay with it.

It's important to remember, however, that at least 13 million Medicare beneficiaries -- one in three -- have no coverage at all. Fifty-four percent of those without coverage are above 150 percent of the poverty line. Millions of others who now have coverage are finding it expensive and unstable, with benefits eroding over time through deductibles and premiums. And that's why our plan includes incentives for employers that currently offer retiree coverage, to maintain it.

About 60 percent of the total cost of this new drug benefit will be offset through savings. The remaining costs will be offset by dedicating less than one eighth of the amount of the surplus dedicated for Medicare under the president's plan. The plan makes several other necessary benefit improvements to promote prevention, to rationalize cost sharing, to allow access for people over 55, to improve coordination of care for beneficiaries also enrolled in Medicaid.

As you may notice, the plan also builds on proposals to promote disease prevention and health promotion, put forth by Senator Bob Graham and others. The president's plan also takes steps to offer coverage to older Americans who now lack any health insurance. All of our efforts to modernize Medicare will result in new efficiencies and competition that mean substantial savings.

But no responsible savings policy can address the fact that America's elderly population will double within the next 30 years. Because of this, and his strong belief that the baby boom generation should not pass Medicare's financing crisis on to its children, the president has proposed that a significant portion of the surplus be dedicated to strengthening the program.

The president's plan dedicates 15 percent of the budget surplus to the program for the next 15 years. This will assure the financial health of the trust fund through at least 2027. It does not create an unlimited tap on general revenues, but instead invests a fixed portion of the surplus in Medicare, to cover the temporary but overwhelming influx of retirees.

Let me say again that Medicare's improved financial outlook has in no way diminished the pressing need to strengthen and modernize the program. For many older and disable American's, Medicare isn't a support system, it's a lifeline. And we must ensure that it is never broken. We have the hard work of the bipartisan commission to build on. We have the president's thoughtful, clear, and detailed plan before us. And we have the responsibility to seize the opportunity and act now, while there is no climate of crisis to distort our vision.

Mr. Chairman, before I conclude my presentation, I'd like to briefly refer to several charts that help to emphasize the importance of providing an important prescription drug benefit for all beneficiaries.

In chart one, "The Sources of Drug Coverage for Medicare Beneficiaries" -- first of all that means that about one third -- 44 percent -- have no coverage at all. Among those with coverage, beneficiaries use a combination of private insurance and public programs. These sources of coverage vary widely in quality, and are often subject to change. For example, employers may discontinue retiree health benefits, managed care plans may withdraw from service areas, and Medigap premiums may rise to unaffordable levels.

For public coverage, about half of those with coverage, get that coverage through public programs, including Medicaid, Medicare Managed Care and state pharmacy assistance plans. While Medicaid drug benefits are generous, only about 12 percent of Medicare beneficiaries receive drug coverage through Medicaid, and eligible criteria vary by the state, so that not all beneficiaries have the same opportunity for coverage.

In fact, that's the story of public pharmaceutical benefit coverage. I don't know how Senators Gramm (ph) and Senators Mack explain to Senator Conrad and Senator Nickles why the government of the United States provides pharmaceutical benefits in their states, if people join managed care plans, but if you're in a state that has no managed care plans, or very few of them, there's no chance of getting a pharmaceutical benefit through government programs, specifically through the Medicare program. The unevenness of how the public programs work, and of the Medicare program in particular, and the fairness of it, ought to be of great concern to us.

For private coverage, 32 percent of Medicare beneficiaries have private insurance for drug coverage. That's really the employer- sponsored retiree health benefit plans and Medigap policies that include drug coverage. And in 2000, about one fourth -- 24 percent -- of all beneficiaries will get drug coverage through plans of their former employers.

On chart two, you see a lack of coverage for prescription drugs is a problem for Medicare beneficiaries at every income level. In fact, here's the point of why we can't just take care of the poor. In the year 2000, 54 percent of beneficiaries without drug coverage have over 150 percent of poverty.

In chart three, it tells you something about where they live. In the year 2000, 48 percent of beneficiaries living in rural areas will not have any prescription drug coverage. Rural beneficiaries generally have more trouble paying out-of-pocket costs for drugs, because they are somewhat more likely to have incomes that are pretty low, and lower than their urban counterparts.

So this is not a problem just of the poor. It's a problem of the middle class. It's a problem of where you live.

SHALALA: It's a problem of whether you get to participate in a managed care plan, or not. It's a problem of how we pay, now, for managed care. If we overpay, so that a plan can provide extra benefits, as we do in places in Florida, people get into managed care and are attracted to it because of the pharmaceutical budget -- because of the pharmaceutical benefits. But if you live in rural America, or in a place where there aren't many managed care plans, you don't have a chance to get a chance at a pharmaceutical benefit.

So, this is an issue of fairness. Should geography determine the quality of your health care? Is justice to be determined by geography in this program, or are we going to provide fairness and a critical health benefit? The first justification for pharmaceutical is because it's important for health. But second, if we're going to provide it, we must provide it fairly.

Thank you very much, Mr. Chairman.

ROTH: Thank you, Madame Secretary. Madame Secretary, the Progressive Policy Institute, which, of course, is the centralist Democratic think tank, has suggested four changes they say would greatly strengthen the president's proposal.

First, set up a Medicare board to run the competitive system for health plans that would eventually encompass the traditional fee for service program.

Second, to ask HCFA to develop a comprehensive business plan for the traditional fee for service program, in order to modernize its benefits, to improve its service and quality, and to set up a premium so that it can be competitive with private plans.

And three, limit prescription drug coverage to low-income beneficiaries.

Four, set a fair limit on the amount of general revenue to be used for Medicare.

Would you please comment on these suggestions, and how they might...?

SHALALA: Well, if I might do it quickly. I think I've responded to the pharmaceutical drug coverage. If we focus it just on low- income beneficiaries, then we have a number of choices. We will leave out large numbers of people. We will continue the benefit to people, who are high income, just because they live in an area where there's managed care, and it's provided through a managed care company. It seems to me that for us to focus now, just on low-income beneficiaries, we've got a large number of people who don't have access to pharmaceutical benefits, and who are, in fact, middle class. And I responded to that.

On the issue of setting up a medical board to run the competitive system for health plan, that would eventually encompass the traditional fee for service plans, I would suggest that the competitive system that we recommend does not separate fee-for-service from managed care. In fact, managed care competes against fee-for- service, and competes on the basis of price and quality. And you shouldn't want to split up that responsibility. Nor should we want to create a new bureaucracy, and this -- what the bureaucracy -- and create an independent new bureaucracy.

And I would think that all of us would be very concerned about transferring essential government functions that millions of seniors depend on, to any kind of a private sector entity. Maintaining eligibility, and enrollment and records go to the heart of the entitlement of the health care system. And turning that over to a private sector board, I think we ought to be very wary about.

So...

ROTH: May I...

SHALALA: And the final point about...

ROTH: Let me interrupt if I might.

SHALALA: Yes.

ROTH: Two points -- as I understand it, the recommendation is not that medical board be necessarily private. It could still be government, but it would be independent...

SHALALA: But it would be a...

ROTH: And the other point is on the competitiveness. As I understand that, the reason they raise a question there is that there's no limit of costs as far as fee-for-service is concerned, which is contrasted, of course, with the home HMO programs.

SHALALA: Well, let me say a couple of points about that, because one of the things they recommend is a comprehensive business plan for the traditional fee-for-service program, to both modernize its benefits, to improve its service and quality. Within the president's plan, we, in fact, modernize fee-for-service.

And with the introduction, both of prudent purchasing, of reducing fee-for-service costs by introducing competition throughout the fee-for-service program, through the introduction of centers of excellence, to actually reward beneficiaries that go to places for treatment and for surgery, for example, that provide lower price and quality, and in the introduction of PPOs (ph), which is another private sector approach to reducing costs.

So, there are substantial reforms, in the first time for fee-for- service -- in the fee-for-service program that, I think, reflect both private sector business practices and will hold down fee-for-service costs.

Again, going back to my testimony, we have been quite successful in holding down fee-for-service costs, through a variety of different steps that we have taken. Fee-for-service costs have grown below that of the private sector. And, as you know, a combination of things have been done to get there, including extensive efforts to go after waste and fraud.

The next steps are to allow us to use private sector business practices in fee-for-service, as well as economic incentives to reduce -- to keep fee-for-service costs down, and to let managed care compete against fee-for-service, so that managed care, bidding on the same benefit package, can reduce the actual premium that an individual pays, as a way of enticing them into managed care, because it will be less expensive for theme to go into managed care, which over time, of course, will reduce the government's overall costs.

ROTH: Do you want to comment on the limit on the amount of general revenue?

SHALALA: Well, we do have a limit on the amount of general revenue. I mean, in fact, the Congress of the United States is our limit on the amount of general revenue and what we're willing to spend. And, I think that we keep the amount of general revenue in this program down, for the Part B premium in particular, through a combination of these efforts. Plus we have here, indexed the Part B premium, so as the cost of living goes up, the contribution from individuals will simultaneously be covered.

I think that we've done a good job keeping down Medicare costs. We have a couple of problems ahead of us. Unless we're prepared to continue the fiscal discipline, costs will start going up on us after 2003. And number two, unless we're prepared to put in new money into the system we cannot take care of the doubling of the population.

ROTH: I'd like to go back to a point I raised earlier for further comment. Now, the president has proposed a new competitive pricing system for Medicare private managed care plans, that does not include a requirement, as we said earlier, for the original Medicare fee-for-service program to compete as well.

I'm not clear, how would you ensure that plans, will would be receiving competitive capitated (ph) payments will not be disadvantaged, compared to the traditional program, which will continue to have an open-ended benefit with no budget constraints?

SHALALA: Here's how it works. The managed care plans -- first of all, they're competing for the -- they're setting the price themselves. This is true price competition. They're setting the price themselves. And we're comparing apples with apples. So everybody is competing on the basic benefit package, which is the comprehensive benefit package of Medicare, plus the prescription drugs. They compete against the average fee for service cost in their area.

And for every dollar they bid below, beneficiaries keep 75 percent, and the government gets 25 percent. The beneficiary then, can use the savings to buy back benefits they want to add. But the important point here is, the managed care plans themselves, set what they want -- set the bids themselves. We don't dictate the bids. But they are bidding against the average fee-for-service cost in their area.

The advantage of this is, what you're doing is offering positive economic incentives for people to move into managed care. And what's the incentive? Their premium comes down. We have less spending -- out of pocket spending, because they have a lower premium -- and a lower premium than they would have under fee-for-service. And they get that lower premium because they choose a managed care plan. They can -- the managed care plans can bid with zero premium. And that means that they would attract, probably, large numbers of people in their community. But they get their market share through a bidding process that we don't rig, that they determine. They determine what their bid is. And they all can participate. Each of them will have different bids.

ROTH: Well, I just have say...

SHALALA: True price competition.

ROTH: I just have to say I find it hard. I see competition among the managed care programs, but I find it very difficult to see how there's genuine competition with a fee-for-service. With that I'll turn it over to Senator Moynihan.

MOYNIHAN: Mr. Chairman, just two general points. On the baby boom and it's effects, and so forth, there was, indeed a period there -- post World War II. In 1950 the fertility rate was at 3.03. By 1975 it had dropped to -- it halved, to 1.77. And it's never got back more than to 2.4. We have a bulge which is obviously not going to continue, right?

SHALALA: That's correct, and that's precisely what we're proposing to finance -- the bulge.

MOYNIHAN: The bulge, all right.

SHALALA: By using the surplus to finance the bulge, which is the doubling of Medicare beneficiaries between now and 2035. And this proposal gets us to 2027.

MOYNIHAN: That does not go on indefinitely.

SHALALA: No.

MOYNIHAN: Yes, that's a point to be made. Two -- just to comment -- not to rouse Senator Gramm's enthusiasms too much, but you speak of private-sector business principles that you're putting in place. It seems to me that an increasing problem of public administration, is you might want private sector business principles, but you can't pay private sector salaries. The rewards aren't there. And it seems to me, it would put a limit on just what large organizations can do in government, that don't have other particular military rewards, as it were. I leave you that thought.

But the president yesterday, speaking of the 1977 (sic) Balanced Budget Act, said this is the reason all these teaching hospitals are in trouble today. All these teaching hospitals are in trouble today.

Just a moment's anecdote -- in 1974, as the Senate Finance Committee began to deal with health care, I realized I didn't know anything about the subject. And I asked the head of Sloane (ph) Kettering, Paul Marx (ph) if he'd put on a little seminar for me. We met at 10:00. And at about 10:15, the dean of Johns Hopkins said, "You know, Minnesota may have to close it's medical school."

Well, then I realized I'd heard something. This was where all the Swedes went. And they don't close medical schools, they open medical schools.

Now, how could this be? And he could then explain that managed care was moving from the West Coast to the East Coast. It reached the high plains. All the good citizens had signed in. And managed care doesn't send patients to teaching hospitals. Absent a teaching hospital, you can't have a medical school. And that seems to me, a crisis of huge proportions -- I mean a real crisis -- a change in the whole structure. And it created these schools and maintained them -- the best in the world.

They were hit by the 1997 proposals as if we didn't notice this was happening. We'd already heard, in this committee, the phrase "the commodification of medicine" -- the arrival of markets in medicine. And these particular institutions are what economists call public goods. A public good is something everybody shares, so nobody will pay for. And that's really what government's all about. Right Phil?

Yes, that's why you have the Army...

GRAMM: Speak close to the mike, Pat, this is good stuff people need to hear.

(LAUGHTER)

MOYNIHAN: Oh God, I must be -- oh oh.

(LAUGHTER)

But what are you going -- you don't seem to have a concentrated concern about the most important institutions in the whole medical system. And they keep -- and the president is now talking about it. And can you help us there?

SHALALA: I hope so, Senator. They are not only public goods, they are magnificent public goods. And they are absolutely critical, both to the success this country has had in this particularly golden age of biomedical research...

MOYNIHAN: Yes.

SHALALA: ... because they are the infrastructure, that of course these investments in the National Institutes of Health, as well as the private health care company investments. And so we need these institutions in particular. And as you indicated, they have no peer. I mean Germany has Max Planck, Japan has Kyoto, England has Cambridge, but no other country in the world has the kind of concentration of academic teaching hospitals.

And as you point out, the changing nature of the health care system -- in particular the fact that they've had to take the deep discounts that managed care has negotiated with the private sector, in particular has created for them an untenable situation. And as the government moved in to more accurately pay for the patients that it was responsible for, we did do something to the B.B.A. As you know, we pulled out some of the indirect and direct medical costs from the managed care, to pay them directly.

SHALALA: In this plan, we take the disproportionate share payments -- a proposal that you've had over the years -- out, to give it to the teaching hospitals, and the other disproportionate share. The president has set aside, as I indicated, $7.5 billion. There are a number of kinds of institutions that will make proposals. We must look carefully with the Congress at where there is evidence that there's a lack of access, but also, that we have institutions that are important to our future, that we'll want to invest in -- nursing homes, home health care, other hospitals. Everybody is going to want to make a claim.

For these institutions in particular, if I might make a private point, since I ran one. Concentrating just on Medicare -- a point that you've made before -- as a way of fixing what is important and significant institutions, may not be the only thing we need to do.

MOYNIHAN: (OFF-MIKE) something knew has happened...

SHALALA: But if they are in fact a public good -- if they are, in fact, a public good, then the narrow base of Medicare may not be sufficient for this country. And we've got to the seamlessness of both the institutions and the work they do from their -- our investments in the NIH through the institutions themselves.

So, I would say to you that as we work through this quality amount the president has set aside, these institutions, obviously, are very high on everyone's list. They are, for me, the most important institutions for the future of health care.

And I think, frankly -- whether Senator Gramm (ph) would agree or not -- they may be the most important institutions for the future of our economy. Because they really -- our investments in biomedical research are very much responsible for some positive changes in the growth of this economy, that simply don't exist elsewhere.

So, obviously, the president and this administration shares your concern. We have done some things already -- some specific things in this plan. And we have set aside some resources for the teaching hospitals as well as for some of the other unintended consequences of the Balance Budget Act that we must, together, go through extremely carefully.

MOYNIHAN: Could I ask that you might send us a paper on teaching hospitals in the president's plan? Thank you.

SHALALA: I'd be happy to do that, Senator.

MOYNIHAN: Thank you very much.

ROTH: Senator Grassley.

I would like to say we'll limit questions to five minutes. We've got a large number here, and of course, we have a second panel.

Senator Grassley is next.

GRASSLEY: The chairman has identified two hundred and some billion dollars out of this surplus for Medicare reform and for prescription drugs. So, I think we're all talking about supporting some sort of prescription drug program. And we would like to work with you on that. But we have some questions about your plan. You may have some questions about some of our ideas as well.

I only say that the chairman has identified that amount of money, because we voted a tax bill out of committee yesterday. And the other side of the aisle was giving speeches on the floor of the Senate this morning denigrating that effort, and saying that there wasn't any effort to be worried about prescription drugs, and Medicare reform, and saving any money for that. But we have saved money for that. So I think that's just plain wrong to be speaking in terms of that, when our chairman has been very careful about this whole approach of a tax decrease, and still having money for Medicare.

I've got five questions I want you to listen to as I give them, with some explanations in between, before you answer any. One of my concerns with the president's proposal is that it will encourage employers, who currently offer their retirees prescription drug coverage to drop the coverage. Can you describe the rationale for paying employers to provide what they may already be offering, and to give them this subsidy, in addition to the tax break they already have?

Secondly, does this make sense to spend tax dollars this way, on a Medicare program that has major financial hurdles already to overcome? Thirdly, so why not target the benefits to those low-income seniors who need it -- and who need it most and who are least likely to get an employer-sponsored coverage?

Now, before I ask my fourth and fifth one, I want to express concern for individuals who do not currently have the benefit of receiving prescription drug coverage through their employer. These plans tend to be more generous than most coverage available to seniors. So, fourthly, we'll also want to know that employers are -- we also know that employers are starting to scale back some of this coverage. And do we want to encourage this scale-back even further by replacing this with a much less generous federal benefit?

And then, lastly, how did you determine what employer subsidy would be adequate to ensure that this would not occur? And, what assurances do you give us that the subsidy, if it's justified, will be enough?

SHALALA: Those are a very good set of questions. Let me see if I can answer them quickly. First of all, our goal was to minimize the crowd-out of employer coverage -- exactly what you're talking about. How do we stop the slide of employers dropping drug coverage for their future retirees? What can we do to offer some incentive?

So, rather than giving them the whole amount of money, under our proposal the direct subsidy to an employer's health plan, that provides a comparable or better drug coverage, would be one third smaller -- about $16 a month.

So we would provide a smaller subsidy to try to stabilize that part of the market. And what we're trying to do here is not introduce a highly centralized program, but to build on what's out there. So, we directly subsidize retirees' plans, by giving a smaller amount of money to employers as a way of stopping that slide of their dropping drug coverage, and a way of getting some basic coverage across the country, so that everybody has the same basic coverage. And many employers will, of course, add a better benefit.

GRASSLEY: What about the fact that if we're spending money for this, wouldn't it be better to spend that money on strengthening the Medicare program, as opposed to subsidizing a present corporate plan?

SHALALA: Well, I think that what we're trying to do here is to add a benefit for everyone, and to build on what already exists out there. In this case, it's not like some people, as my chart demonstrates, don't already have some coverage through a variety of different means. So, rather than superimposing a single plan run by the government, we take advantage of contributions that the private sector is already making in this case.

And in the case of HMOs -- those that are already providing the benefit -- they will also get a payment that will stabilize them because they're also dropping coverage. Every health plan in Florida that dropped out of the Medicare program had a drug benefit.

And so, those people, if they don't have another HMO to go to -- are forced to go to fee-for-service. And so, making sure that managed care has a drug benefit, that people who get it through their retiree plans have a drug benefit, as opposed to simply saying everybody that gets a drug benefit, and getting private sector money out of the system.

So, it really is an attempt for the government not to have to pay for everybody who now gets it in another way. Instead, to stabilize access to a drug benefit out there, because this is a health decision, not a financing decision. It's a decision that we believe that no one would design a Medicare benefit today without drug coverage, so we want to make sure that everyone gets it.

GRASSLEY: Thank you, Mr. Chairman.

ROTH: Thank you. Senator Rockefeller.

ROCKEFELLER: Mr. Chairman, I would yield my time to Senator Graham, who has to be on the floor of the Senate very shortly, if that's all right with the chairman.

ROTH: Fine. Senator Graham.

GRAHAM: Thank you very much, Mr. Chairman. And thank you, Senator, for your courtesy.

I'd like to ask, basically, two questions. First, is injecting competition into the HMO plan -- I personally believe that competition, through competitive bidding, is a critical new step. It is a key to bringing some of the efficiencies of the market place into health care. It also is a key to the fairness of distribution of availability of HMOs. It is, I think, patently absurd to continue to use, essentially, a price list based on what fee-for-service medicine within the particular county happens to be, and make that the essential element in how you reimburse Health Maintenance Organizations.

And I would just say that Senator Mack and I don't have to have a conversation with Senator Nickles or Senator Conrad. We can have a conversation within our own state, because we've had a list of some 20 counties that have seen a dropping of their HMOs. And now four counties are called orphan counties, in that there's no HMOs that people can sign up with. So, within a single state there are these problems.

This brings me to the point that a very serious thing happened last week, when -- and I'd like to ask my colleagues how many were aware that in an amendment that was a part of the so-called final wrap-around amendment on the HMO Patients' Bill of Rights, we've repealed the -- not only the authority of HCFA to undertake the two demonstration projects in Kansas City and Phoenix, we prohibited the establishment of any additional demonstration projects. And then we said any future competitive programs had to be voluntary. Well, these HMOs aren't going to voluntarily for a plan that is economically -- they consider -- less advantageous than the current price list.

How many of my colleagues were aware that we did that in the HMO Patients' Bill of Rights.

(UNKNOWN): Yes, I was aware of it.

GRAHAM: We have one person aware of it.

ROTH?: I was aware of it.

GRAHAM: We have two people aware of it.

ROTH?: No, there's a lot of people who knew that.

GRAHAM: Well, you might not want to have your fingerprints too visible on that. But it was absolutely a counter to everything we say we profess, in terms of fairness of HMOs, of availability, and in terms of using the marketplace.

I'd like to ask, in light of that, Madam Secretary, where do you see the future of competitive bidding for HMO reimbursement levels?

SHALALA: Well, from our point of view, we must do it. First of all, there's just no other substitute, other than the old fashioned way in which we've been paying for this Medicare program. We've got to have true price competition. And that competition has to be between fee-for-service and HMOs.

The difference between what we did and Bill Thomas (ph), is that we actually put positive economic incentives. That is, what the HMOs are able to do is to actually submit their prices in a way in which they drive down the cost to the beneficiary. And so, they'll compete and the beneficiary will save their costs for their premium in particular.

But your point about competition is really true. As you know, we're having a very successful competitive program with durable medical equipment in Florida, in which we're demonstrating that we can save at least ten percent if we go to competitive bids.

You're about to hear from Mr. Crippen. He actually has written in his testimony -- unless he's changed it -- that he has no confidence in the political system's willingness to allow the government to go to these kinds of competitive reforms.

Prudent purchasing -- he thinks that given the experience of stopping us every time we wanted to go out to a competitive reform, that there will always be interference by elected officials, and lobbying by the providers to prevent us from getting competitive reforms.

I don't share his view. I have to say that. I think that once we go to these national kinds of reforms, once we agree that this is the way in which we're going to get better, more accurate pricing, and we're going to introduce true price competition if we do it across the board, we're going to be able to do it. But we must do it. We must do it. We have no other way of controlling costs, other than true price competition in our judgment, as well as giving us an ability to go in.

I can't -- I have a limited list written into law, of who can process claims for the Medicare program -- a limited list of insurance companies.

There are lots of businesses in this country now, that could process those claims. It's very difficult for us to fire anyone, because our lists are so short, in terms of who we can hire. It's difficult for us to work with contractors, when we are limited in our ability to work with those contractors.

We have already demonstrated in the Medicare program, that we can bring down costs, that we can reduce rates. We have cut our error rate in half in fee-for-service, which no one ever expected the Medicare program to do. So, I can only plead with the Congress to give us these reforms to negotiate with us for competitive reforms, so we can go out and get the best prices for the taxpayers.

GRAHAM: I just would like to conclude that I think it's instructive that no member on the Democratic side was aware of this provision, and only two on the Republican side were aware. And I hope that the Department does not give any undue weight to a stealth attack such as that, that was launched against this very important program for the future of Medicare.

GRAMM?: Maybe we should do some of those in Florida because every state that had them didn't want them.

GRAHAM: We have done one in Florida, Senator. As the secretary just said, Senator Mack and I didn't cave in to the providers on a competitive demonstration project for doable medical equipment in Lackland, Florida and we're getting 15 to 20 percent lower costs because we're using the market place. Senator, I'd be happy...

GRAMM?: Would the Senator yield...

SHALALA: And demonstrating that small businesses can participate in this kind of competition that it doesn't exclude small businesses. In fact the variety, the major number of contractors in Florida are actually small businesses.

GRAHAM: you have a comment you'd like to make on that, Senator?

GRAMM?: I'll be happy to. Competition, durable medical equipment is just a little bit different then the mandates that were imposed both in Arizona and I believe in Pennsylvania, all of which were the city council and those were saying, we want out of it, or we want to be voluntary. And frankly that's the way we'd like the amendment to say. It would be voluntary.

(CROSSTALK)

GRAHAM: Which means that you'd never have competitiveness because why would any provider which currently has a price list that guarantees them essentially a percentage of fee per service ever want to go into competitive bidding process. They're not that stupid.

GRAMM?: We'll debate this another a day. I just say, the competition wasn't even between fee per service and managed care, why it was competition was only in managed care versus managed care.

GRAHAM: (OFF-MIKE) opinions are currently established is a percentage of the fee per service. So the question is, do you want to have a continued price list or market place competition into HMOs?

ROTH: The time is up. We are going to have to proceed. Let me point out that we also canceled plans in the past in Maryland and Colorado because of complaints on their congressional delegation.

GRAMM: Would the senator yield for 20 seconds so I could give a point of information here.

ROTH: The senator from Texas will have time in a few minutes. We will now turn to Senator Nickles.

NICKLES: Actually the senator from Texas was next. He beat me here by two minutes.

ROTH: They put the list this way and I would like...

NICKLES: All right. I'll follow through. Madam Secretary (OFF- MIKE) I appreciate your coming to us today and trying to explain the president's proposal. Let me just make a couple comments. President yesterday in a press conference stated the following and it sounded a lot different then what you said today. The president said, "tomorrow I will release a report that shows that a great and going need for prescription drug coverage."

What the study shows is that 75 percent of older Americans lack dependable private sector coverage of prescription drugs. That's three out of every four seniors. And it goes on. Now, I think I heard you say that two-thirds of seniors do have some form of prescription drugs. Is that correct to say?

SHALALA: I did say that. What the president -- it is true that probably 25 percent have a stable system that in most of these systems it could pull out at any time as Medicare managed care has demonstrated, that they can pull out of your area and if you don't have an option of another managed care plan that has a prescription drug benefit you can go into -- you go back to fee-for-service and you wouldn't have a prescription drug benefit.

NICKLES: Well, my point being I think the president's statement is very misleading. Two-thirds of seniors are now eligible and now receiving some type of prescription coverage either through Medicaid or either through their employer or through a Medicare, HMO, managed care plan or through the Medigap. There's a lot of different things. Some states have some prescription drug coverage.

If two-thirds of them now have it, the president makes a statement and makes it sound like three-fourths don't, I'm bothered by that. I think it's a little misleading. I mention that because I think we have to be factual. And I haven't been able to totally analyze your chart but it looks factual and it looks quite contradictory to what the president said just yesterday.

Let me mention just one thing. Maybe I'm one of the few that seems to be concerned about it. But you talked about transferring a percentage of the surplus and I think your statement was that it was your plan to transfer 15 percent of the surplus over the next 10 years. Is that correct? Is that 15 percent of surplus excluding Social Security? Is that a yes?

SHALALA: It's 15 percent for Medicare.

NICKLES: Fifteen percent of the surplus excluding the Social Security surplus?

SHALALA: Yes. It's 15 percent of the total surplus would be set aside for Medicare.

NICKLES: Then you're trying to rob 15 percent of those -- you're trying to take money away from the social security trust fund and put it into Medicare?

(UNKNOWN): Wrong.

SHALALA: This is the on-budget surplus.

NICKLES: On-budget excluding Social Security surplus? Is that correct?

SHALALA: Yes.

NICKLES: I think it's important. I just looked at (OFF-MIKE) statement and we'll have Mr. Crippen in here in just a minute but on page 10 of his statement he says, the on-budget surplus according to the administration's -- these numbers are confusing but you don't have that much money.

SHALALA: Well, as you noted the numbers are confusing and we've just got his testimony so I'm sure that a member of the economic council, Mr. Lew will be happy to comment on that as quickly as possible.

I have not had a chance to read that testimony. We just did -- and I had a nice conversation with Mr. Crippen, we'll be going through with testimony including what he says about Medicare and about the projections.

NICKLES: Well, I just -- question -- also I want to tell you I have really questioned taking Medicare and saying well, we're going to fix it by adding a transfusion of money from surpluses, i.e. general revenues. Medicare is financed by payroll tax currently, is that correct?

SHALALA: Yes.

NICKLES: 2.9 percent on an individuals payroll tax but no cap. Did administration increase that tax dramatically when they took it off of the social security base which is $70,000. And now it's 2.9 percent on all income. That was done in '93. That's a humongous tax increase for people who make over $70,000, three percent of their payroll. And yet we still have problems.

And so I hear the administration saying, well, the payroll tax alone is not enough and so we want to have a significant percentage of general revenue funds and I kind of look at that -- I referred yesterday to my kids. I look at tax consequences as my kids. My son is working and he's paying a lot of Social Security and Medicare tax and we're really saying that's not enough.

We want a lot more of your income tax to come in and help finance Medicare. It's kind of an open-ended blank check to finance an entitlement that's growing. And I'm afraid as the CBO has estimated, I'm afraid you've grossly underestimated the cost of this program. And I see my time is running short so I want to make this editorial comment.

I don't think that the Medicare prescription drug proposal that you had, Madam Secretary, is very good. I think a lot of seniors would opt out. I think your program is voluntary. I hope that it is. And I think a lot of seniors say, wait a minute, we're not buying that much today. For us to make money on this deal we have to purchase I think, what, $800 and some odd dollars worth of drugs.

There's a break even point at some point. And a lot of people are less then that. And so they're saying, this is not going to work. Plus your increasing my (OFF-MIKE) premium is $24 this year going to $48 in a few years on top of the escalations that are already in the system that go to $96. You add those two together, that's a $140 a month in Part B, just to pay Part B in prescriptions.

And I just don't think it's a very good deal. Especially for the two-thirds who already have it. I think a lot of them would rather say, I'd rather stay with the program we have now. This is not that good a deal.

SHALALA: Well, Senator, let me make two quick comments. First on your last point. It is in fact an insurance scheme. I mean the point is that you invest now so that it's there for you when you need it. So the pharmaceutical benefit that we have -- this is the concept of insurance. Our actuary, we actually asked our actuary how much we would have to subsidize the Medicare pharmaceutical benefit to get most people in.

To get almost everybody in. And he said 50 percent. So that's where we set it. On your previous point, I'm not sure we have a choice. If we double the Medicare population, the effect of not using the surplus would require, without that transfer that we're talking about, a 20 percent cut in Part A spending. To have the same effect on the trust fund to get us out to 2027.

I don't think that anyone has a plan to cut Medicare Part A spending by 20 percent. If we think that we've heard from the providers already for what we've done, a 20 percent cut in Part A -- again back to the fundamental point. If you're going to double the number of beneficiaries you need to add new money to the system. We need to get savings at the same time and the Balanced Budget Act, the savings that we present in this proposal, introducing competition, all of those things help to slow the growth and in the case of the pharmaceutical benefit, we actually pay for 60 percent with savings.

NICKLES: Madam Secretary, I see my time is out. Let me just echo something that Senator Grassley mentioned. I think it's utterly absurd for us to come up with a program to subsidize employers that are currently providing for a benefit for us to say, well we're going to make sure you keep it so we're going to pay for two-thirds of it. I think that shows a real -- I think there's a serious mistake or flaw in your program.

SHALALA: Well thank you, Senator. As you know, we've never income tested a benefit in the history of Medicare. The concept of social insurance would be fundamentally flawed. All beneficiaries get all benefits in the Medicare program. And what we thought through was a way to do it without pulling everything out of everyplace they are and reducing the federal government's cost at the same time by simply subsidizing some places where they are currently are getting the benefit.

ROTH: Senator Rockefeller.

ROCKEFELLER: Thank you, Mr. Chairman. Madam Secretary, I'd like to get you to talk a little bit more about what you were talking before about usefully when Senator Graham was here. And that's the matter of getting more innovation. And you, in a sense, were saying that you had been handicapped in terms of medical technology etceteras.

Because Congress sort of says who you can go to and what you can do. And that is enormously frustrating to you because there are enormous -- there are other people out there that you could go to and perhaps get a better price. One, could you explain that again and secondly could you say how it is that the president's program fixes that?

SHALALA: Well, we are limited in the kind of competitive pricing and the discounts that we can negotiate on behalf of Medicare. And the example I gave was claims processing. The Congress of the United States has actually listed in the law the insurance companies that we can use and my point was there are other people who can do claims processing in this country and we ought to be able to have a wider group of people that we can pull from.

In addition, everything Medicare purchases, we tend to pay sticker price. We had to come here last year on the oxygen issue to get a reduction in what we were paying for oxygen over the objections, obviously, of the providers. There is too much rigidity on what Medicare purchases and how it prices. And we need as a large purchaser to be able to get reasonable discounts for what we purchase on perhaps of, basically, the taxpayers.

They are spending money they don't need to spend and we need this flexibility. The people that provide these goods and services will not like it because they would prefer for Congress to write in that kind of detail. I also will pledge to you, because I know all of you are interested in small businesses, that I believe that we can do much of this providing opportunities for small business.

In the demonstration that we did in Florida on durable medical equipment...

ROCKEFELLER: Madam Secretary?

SHALALA: ... we did demonstrate that.

ROCKEFELLER: I just want to be able to use my five minutes. But you're also saying it's not just claims processing, it's medical technology.

SHALALA: It's medical technology.

ROCKEFELLER: To conclude (ph) it from having an opportunity to make professional decisions about.

SHALALA: Exactly.

ROCKEFELLER: And how is it that the president's program changes that?

SHALALA: Well, it gives us an opportunity to go out and get bids on everything that we purchase. And to have professionals make the decisions. We actually set up a new panel with public involvement on a number of things that we do in the system including introducing private sector people that can help us introduce better management and better purchasing techniques.

ROCKEFELLER: OK. Second question. It was brought up before that there are those who would argue that a limited prescription drug benefit for Medicare would be less likely to crowd out as was mentioned in private health care dollars because it's believed that many seniors have access to health benefits in the retiree basis and therefore why would you be paying for them.

There is however among others there's a huge associate study that found that large employers are eliminating or reducing retiree health benefits all together. Now the word "all together" I want you to help me understand. Secondly, there is evidence that the quality and the comprehensiveness of the supplementary coverage available is inadequate in those plans.

ROCKEFELLER: So, would you contrast the scope in eligibility requirements of the president's prescription drug benefit plan with frankly that of the Medicare commissions proposal?

SHALALA: Well, the Medicare commissions proposal we have actually adopted and that is to go to 150 percent of poverty as a way of subsidizing those who are low income. We have added to that access to little income people, people in rural areas because you really do not handle a very large percentage of people who are on Medicare.

I think I pointed out that 54 percent of Medicare beneficiaries without pharmaceuticals have incomes above 150 percent of poverty. So we have not rejected what the Breaux-Thomas commission did. We have accepted it but builds on it because we would leave out 54 percent of the people without benefits. And as I pointed out many of them are in rural areas and access doesn't have to do as much with income but with geography and that seems to us fundamentally unfair.

ROCKEFELLER: And my follow-up, just to comment, I want to ask for a response because my time is up. You've indicated that people come to us -- medical people come to us and, you didn't make the implication but I'll make it for you, but we give way to their decision to have stuff fixed into law.

SHALALA: I wish it was medical people.

ROCKEFELLER: And others. It is however, an absolute fact which is at least universal on our side of the aisle that we have been overwhelmed in our states and our visits. Not sought out, not programmed by people who feel they have really been hurt by BBA cuts. Now every government organization says it's too early to tell because we've still got two years to run, et cetera, et cetera, et cetera.

You're proposing $7.5 billion. How did the administration have any idea that $7.5 billion would solve that problem which to us is very real?

SHALALA: Let me point out that we do more then $7.5 billion. That we in fact don't just stretch out the cuts beyond 2003 that the BBA did. We smooth out some of the differences. We make some choices where we think that there had been some unintended consequences. In addition to that, every bit of flexibility that the Congress gave me in the BBA I have used to try to smooth out or make appropriate changes where there were unintended consequences.

But there are some things that actually need legislation. The therapeutical caps were put in place for scoring reasons. They had nothing to do with health care. The health care people objected to them including us at the time. They clearly are having a serious health care access effect to appropriate care. Those are the kinds of things where we already have evidence.

We are accumulating evidence. While we've put aside $7.5 billion we're obviously making a judgment about what we think and where we think we're going to have evidence that we're denying people access. For the providers that will not be enough but we need to reach an agreement in a bipartisan way about what had been the unintended consequences that have added detrimental effect on the health care, on access to health care.

And we're in the middle of analyzing that now and we will be providing it to Congress what we know at the time. But, as you also know, there are many analysts, including our own, that think in some areas we shouldn't make changes even the providers are concerned. And again if you listen to my conversation on what Senator Moynihan said about academic health center.

They have been profoundly effected not necessarily by Medicare. We are probably their best payer. But by the discounts negotiated by private HMOs which have but them in a situation in which -- and combined with what we did on the BBA they had no place to cost-shift to. So for some institutions it's a more complex issue.

But we do need to do some things. Some of them will be transitional. But we cannot unravel the BBA. So it's going to be tricky and tough but we're going to have to really hard analysis. We did the BBA together. This administration believes that whatever changes we make we're going to have to do those together too.

ROTH: Senator Gramm.

GRAMM: Well, Mr. Chairman, let me set the record straight. I mandated the six test where you're competitive bidding medical equipment. You weren't doing it. When I went to Houston to announce the program, the White House called and ordered the head of the VA in Houston not to participate in my program. So you're doing what, as chairman of the health subcommittee, I mandated and you're taking credit for it.

The reality is that I did it, I mandated it, and the White House tried to disrupt my announcement of the program. Now, I'd like to make several points that I think are very important. First of all. I want to set this debate in the context of the tax cut. Our president for two years talked about save Social Security first, save Social Security now, but in the final analysis he adopted a totally phony proposal that was denounced by Democrats and Republicans alike.

When we had a chance to do something about Medicare under the leadership of Senator Breaux, the same president who in the cabinet room challenged every member, don't let this fail because of you, it failed because of the president. Because everyone of his appointees voted against it and it if one of them had voted for it, it would have become a recommendation to Congress.

Now, having killed Social Security reform, and Bill Clinton killed it. Having killed Medicare reform, and Bill Clinton killed it. He now says we can't cut taxes because we needed at least two things. My point is, he is about disingenuous as you can be on all of these issues.

(UNKNOWN): Would the senator yield?

GRAMM: No, I won't yield.

Now secondly, this proposal that when we're looking at Medicare which now is running into problems with a 2.9 percent payroll tax rising at a minimum to 12 percent of payroll -- a 12 percent payroll tax in 25 years and that's without overturning any of BBA and you won't overturn part of it. And that's without any prescription drugs. It seems to me that under those circumstances to be talking about providing a drug benefit to everybody instead of the people who really need it is political. It's not economic.

This proposal of yours maybe good politics. I'm sure somebody did a poll. I'm sure there have been focus groups. But it makes no sense at all economically. And you cut all benefits after the government has provided a $1,000 when people really need it. You, by covering everybody you're going to produce a cost which is going to force you ultimately to fixed prices and to ration and to kill off the growth of medical technology and pharmaceuticals.

And when you set it up you have no deductible so that when people have choices early on you have little incentive for them to control costs and then when they reach a $1,000 you cut off the government payment. Again, it makes absolutely no sense economically to structure it the way you structured it. So I got to conclude that, (A), you don't know what you're doing and I reject that.

Because I think you've got plenty of smart people including the president or (B); which is more reasonable and fits the facts better. This is totally political. Let me make the final point I wanted to make, Mr. chairman, and that is we need to go back to the Breaux proposal. The secretary talks about competition but she's not talking about competition.

She's talking about government controls and regulation. When you're the only buyer, that's not competition, that's monopoly. What Senator Breaux did in his proposal was to set up a cafeteria type system like we have for federal employees and let people chose and have competition. I would be perfectly happy to build into that a system like you're proposing in one area where people get to keep some of the money they save, I think that's a good idea.

But, Mr. Chairman, finally to conclude, I think what we've got here is a political proposal from beginning to end. I think we've got to reform Medicare or we'll never be able to pay for it. And the idea of the administration proposal to bring the non-elderly into Medicare, that same old chestnut they're still proposing. Talking about adding pharmaceutical benefits for everybody instead of focusing it on the people who can't pay for it today.

I just think this has become a cruel, political hoax. And we need to put it out of its misery by throwing it out and by going back to the Breaux commission and see if we can't put together a bipartisan proposal; that helps people with pharmaceuticals that need it; that sets up real competition, but it is not competition when the federal government through HCFA dictates price and engages in rationing.

That's not competition. I think your problem, Madam Secretary, is that your administration has no real concept of what competition is. Competition is private producers competing against each other.

(UNKNOWN): Can you say that again so I can write it down. I don't want to miss a word of that.

GRAMM: All right, let me say it again. The competition is private producers competing against each other on the basis of price. It is not a monopoly by dictating price and ultimately dictating technology. Competition is not rationing and price controls, it's competition among private sellers.

ROTH: Thank you, Senator Gramm. Let me -- your time is up -- say to our distinguished secretary, we want to give you the opportunity to answer if you feel it is appropriate. But really the purpose of the hearing today is to try to discuss specifics with regard to Medicare. And there have been some on both sides who have talked policy. We did a lot of that yesterday and I think we'll do a lot of it next week.

But I would urge, in the time we have remaining, that we try to keep discussions on the specific proposal. And with that, Madam Secretary...

SHALALA: Thanks, Senator. Let me respond to Senator Gramm very quickly first by saying that I obviously Senator Gramm disagree with your characterization of the president but also your interpretation of what we're trying to do here. In fact the Breaux-Thomas plan had the same fee for service competitive reforms, the plan that you signed on to that we're introducing here.

And second, our managed care proposal is competition but achieves the savings through a voluntary incentives and that is people move to managed care because it's going to save them money as opposed to being forced to move to managed care because fee for service costs go way beyond what they could possibly afford.

So we're trying to introduce what I thought most economists thought was the best way to do it and that is positive economic incentives as opposed to negative economic incentives. And third, let me say about the pharmaceutical benefit. The reason for it is a solid health care reason. The reason that there's no deductible is because we're trying to save money in the long run for the health care system by getting people to use their pharmaceutical benefits from the beginning and use them accurately.

And people do save money in the long run when everybody has it because they can continue to buy discounted drugs as part of the plan. So, I'd be happy to come to your office and explain this at some level of detail. I think I can give you enough of an economic argument for what we're trying to do here and at least soften you up for the open debate that we're going to have.

GRAMM: I don't think so.

(LAUGHTER)

ROTH: I have to say I'd vote with Gramm on that one. Senator Jeffords, please.

JEFFORDS: Madam Secretary, a lot of attention has been focused on the prescription drug coverage included in the president's plan. I am concerned that the president's drug benefit does nothing for seniors until the year 2002. And is not fully implemented until 2008. That is why I'm (OFF-MIKE) legislation will provide prescription drug coverage for those Medicare beneficiaries who can least afford it.

My proposal will build on a drug benefit that was included in the bipartisan commission's proposal by creating a new drug only Medigap plan which will be offered to needy seniors at no cost. Does the president have a plan to help the low income beneficiaries before 2002?

SHALALA: No, we basically kick into this plan as you know a couple of years down the pike in part because of the number of transactions that take place, the need to put the contracting in place. We're obviously are going to administer this through the private sector through benefit managers. And knowing what we know about what it takes, the number of transactions that are involved.

We believe it would be prudent to set it up very carefully and then also to phase it in very slowly. So this was a question of us knowing our managerial capacity to put this in place and looking at the complexity of doing that. But I do understand your proposal and that you would phase in the low income part of the coverage earlier.

And I fully understand that. But we were getting prudent managers in our recommendations.

JEFFORDS: Now, I want to turn to home health care if I could for a moment. It is clear for the provisions of the president's plan that he shares my concerns about maintaining high quality home health care services. The president's plan underscores my position that sequential billing needs to be eliminated to alleviate cash flow problems experienced by small cost efficient agencies.

I'm glad that we could work with you to achieve HCFA's April 19th repeal of sequential billing. Are there any further steps planned to prevent closure of home health agencies and to guarantee that beneficiaries will continue to have access to much needed home health care?

SHALALA: Well, as you probably know I have sent teams to a number of states to look in great detail at what's happening to home health care. To see what, beyond where we have administrative flexibility, we can do to make sure we're not denying access. And the GAO is taking a look at this issue at the same time. So, we may well have some other proposals beyond what we've done.

But at the moment we've obviously set aside $7.5 billion and we're exercising our administrative authority here as well as trying to look very carefully at where we might be creating access problems.

JEFFORDS: Thank you. Thank you, Mr. Chairman.

ROTH: Senator Chafee, please.

CHAFEE: Thank you very much, Mr. Chairman. Madam Secretary, I personally am prepared to use part of this surplus to extend the solvency and to provide for drug benefits if we're serious about making some structural changes to the program. I believe we need more competition, you've discussed that. And I believe we need to means test this program.

I agree with the president in that Medicare prescription benefit should be available to all beneficiaries. I'm concerned with the long-term sustainability of this program. While we're making important benefit like drugs available to only the lowest income through Medicare, I believe prescription drugs should be available to everyone. Everyone be eligible.

But there ought to be a means -- I don't understand why the taxpayer, the woman that comes in here and vacuums these rugs at night should be paying for Warren Buffett's doctor bills. What you're going to do is you're going to extend that. And I believe that all beneficiaries should be available to all benefits. And prescription drug would fall in that category. But, it's perfectly possible to means test the program. Why do you balk at that?

SHALALA: Senator, if I could ask a question. Are you talking about means testing just for pharmaceutical benefits or means testing the entire Medicare program?

CHAFEE: A pharmaceutical benefit that would be available for everyone. Just like Part B is available, and Part A.

SHALALA: We have not means tested any individual benefit in the Medicare program. As you know...

CHAFEE: But that's not a rationale, I've heard you use that before. We haven't done it therefore we shouldn't do it. You never had prescription drugs in there either before.

SHALALA: You're asking the Medicare program to set up a whole bureaucracy to means test a specific benefit. What the president has said is that he's open to the concept of some means testing of the Medicare program itself as opposed to individual benefits. Right now...

CHAFEE: I tried to say that. I tried to say that the prescription drug would be available to everyone. So you're not means testing the prescription drugs. You're means testing the eligibility for the program.

SHALALA: I think, Senator, that we believe that would lead us down the pike. Should we means test the flu shots that we propose to make free to everyone in Medicare? Should we means test colorectal screening or mammograms? Should we means test prostate screening because some people that may use it have incomes over $100,000 a year.

I mean, where do we pick and chose among the benefits that we provide that we should means test and why drugs versus some other benefit that we want to provide. The Medicare system was set up in a way in which everyone would get the same basic benefit package and anything else they wanted to purchase on top they would have to pay for it.

CHAFEE: Madam Secretary, I've tried to say it and it's funny, the lesson last week in church was throwing the seed on barren ground.

(LAUGHTER)

And that seed I've thrown has not sprouted.

SHALALA: Now in fact I honestly have had no effect on either you or Senator Gramm today.

CHAFEE: Well I like the company. Now, let's try again. I'm not saying that means testing the benefit. You've got prescription drugs nor rectal, colon cancer, whatever treatment, whatever it is. All I'm saying is that the eligibility for the program for Medicare should be means tested.

SHALALA: I think what the president has said and what I tried to respond to is that the president said is that he is open to means testing the Part B to income testing the Part B premium which I think is not inconsistent with what you're talking about.

So the president has indicated -- we do not have it in this proposal. But he has indicated before and he has said consistently that he is open to proposals to means test the Part B premium.

CHAFEE: OK. We're making some progress. I believe in that and I think you ought to include it. Because I just -- we're getting into a very, very expensive program here.

CHAFEE: I mean, you yourself have said that economically it's going to fine. You've indicated that there are going to be economic benefits. People are going to take their pills and thus stay out of the hospital and so dollar wise it's going to be a winner. I don't believe that. I think everybody...

SHALALA: I have not said that, Senator Chafee. In fact I've been extremely careful not to make those kinds of claims for the drug benefit. The one thing I've learned in this business is don't make those kind of claims for the benefits. The benefit is a critical part of modernizing the health care program. But we do not know yet, there are individual studies, but we should not over sell this other than in improvements in the quality and outcomes but not over sell it in terms of how much money we're going to save. And this administration is not going to do that.

CHAFEE: Well, I think you're right.

SHALALA: It will improve health outcomes.

(CROSSTALK)

CHAFEE: It's worthwhile to a lot of people. And it's worthwhile doing and they'll be better off. But I agree with you that the savings of not going to hospitals is not going to be a winner that way. Thank you, Mr. Chairman.

ROTH: And now, Senator Breaux.

BREAUX: Thank you, Mr. Chairman. Thank you very much, Madam Secretary. We will continue our discussions I'm sure on this subject for a long period of time. I have been handed the secret answer to all of these problems from my colleague, Senator Rockefeller. He suggested that we form a Medicare commission.

(LAUGHTER)

And study this problem and report back our findings. And I'm not certain that's the direction we should go. We spent a lot of time this afternoon, Mr. Chairman, and my colleagues talking about why the easiest things to do with Medicare. And that is to add more benefits to it in the forms of prescription drugs.

That's not reforming the system, it's still a 1965 model and we're talking about adding more prescription drugs. I think the president is right to do that. I disagree with what he has proposed. It is not nearly as good as it should be. I mean, it's not means tested. It is first dollar coverage which I think is a mistake. It does not cover catastrophic drug problems.

I mean, I'll ask the secretary to comment on these things. Number one, as I understand it the way the program would work is that half of the drug costs are going to be paid by the beneficiary. That's a big pretty hit. In addition to that they're going to be asked to pay a premium. In addition to that after they pay the first $1,000 of drugs, after that the whole things is a 100 percent on their back.

I mean it would seem to me that it would be much better to design the program with the same amount of money that would have a small deductible up front, that would have a smaller co-insurance amount and then have some type of a stop gap laws that says after $3,000 dollars the government pays for all of it. So I understand your comments on all this. And I agree we should have a prescription drug program. But I disagree on the design of it. It's not nearly as good as it should be. Dan Crippen is going to say that 36 percent of the people who have benefited from it is going to hit the stop gap (OFF-MIKE) $1,000 loss and have to pay all of it themselves. That's 36 percent of the people according to their figures.

And after the $5,000 figure kicks in they're estimate is that 25 percent of the people are going to get the maximum they can get then after that, when they really need the help the most, they have to pay 100 percent of the drug costs. I mean, we differ on that but I think, I mean, the program should be designed better.

And I think John Chafee is absolutely right. And we're not talking about means testing who gets the drugs. We're not talking about who means tests who gets the prostate test. We're talking about means testing, how much you pay for it. I mean, if that's not a good democratic document to say that we're not going to subsidize someone in Ross Perot's financial category the same thing that we -- for drugs -- if we subsidize a poor woman who is barely outside of the poverty line is just not good politics and it's not good policy.

So, I commend the administration for having the drug program. I think it can be designed at the same price far better and more efficient then it's been designed. And, Madam Secretary, if you'd like to comment on that.

SHALALA: Yes, just quickly, Senator. And I appreciate your comments as well as leadership. First of all, we project that in the year 2000, less then three percent of the beneficiaries will have costs over $5,000. And 17 percent will have costs over $2,000. Now that's the HCFA actuary's projections. In addition to that, we do indeed provide for people after $5,000 in this proposal.

Because they are able to purchase drugs on whatever the discount is that's been negotiated on their behalf. So they'll be able to continue to purchase drugs. Our estimates are at least a 10 percent discount. So they will in the first instance have that discount up to $5,000 but be able to continue that discount. And while we did not deal with the major catastrophic issue, we did provide for that discount right through the process.

On the issue of deductibility, I'd be happy to show you some of the runs (ph) that we did. It becomes -- you don't raise a lot of money with some of these other pieces but it becomes very expensive. We wanted a modest benefit to get started. A benefit we knew that we could manage. And we, again, this is the concept of insurance for some people they won't get a benefit immediately, particularly when they sign up at 65. But they are in fact buying into the program to take of themselves when they are 70 and 75 and 80.

BREAUX: Well, I appreciate that. And I just think we can do a much better drug program. Mr. Chairman, I think we ought to address catastrophic costs. And it shouldn't be first dollar coverage. And it should be means tested. I mean, that's my feelings on the subject but I think we both agree that there should be a prescription drug program highly crafted and what the make-up of it is, is the real test.

The second -- I mean, that's the easy part. Good Lord, I mean, the real problem is how do we make the program more functional? We in the commission recommended a premium support competition where everybody had to compete. The administration I think is faulty in their recommendation and they said we're going to have competition but only the managed care people have to compete against each other.

Traditional Medicare is going to have a fence built around it, it doesn't have to compete. And I think everybody should have to compete. I mean our savings on the competition is $65 billion over 10 years. The scoring, is it not correct, that I have from the president's proposal is that you get more savings, you get more savings out of the president's proposal from your co-payments for clinical labs than you get through your competition.

For co-payments on clinical labs you get $9 billion in savings. For all this competition, you get $8 billion. I mean, that's hardly a drop in the bucket from competition is that you get more savings from co-payments for clinical labs. So, I think that if we're going to go with a competitive system, both traditional Medicare has to compete with managed care with a set amount of benefits that protect the beneficiary but everybody is going to have to compete if we're going to get any real savings from competition. And you're welcome to have the last word on that.

SHALALA: Senator, first of all it's important that we remember that the managed care plans themselves would pick their prices. So they're going to bid their prices in relationship to the average premium for the fee-for-service program. The fee-for-service program is part of that bidding process because they bid against that.

We believe that this promotes very fair competition by assuring that the beneficiaries pick similarly priced private plans and pay the same premium. The plans will then be competing against traditional Medicare for better price in market share. Now that's true price competition. We call it competitive defined benefit proposal and we don't have real price competition on managed care plans now.

They would be competing with the same benefit package so people really would understand the difference in terms of what they would save. We achieve competition in savings through an incentive of beneficiaries to choose a low cost plan. In your proposal, the difference -- the contrast here is that you get savings. But you get it by running up the cost of fee-for-service.

That is, if you have one managed care plan in Montana, the fee- for-service plan costs go way up. What we're doing is trying to make sure that the managed care plans can run their costs down so they can attract beneficiaries. So it's a positive economic incentive. It's important to remember though that we make the fee per service program more competitive through the use of market-oriented approaches too. But I think the fundamental difference here is that we have positive incentives to pull people into managed care because they save money. Their premium goes down if they move into managed care against fee-for service.

The other proposal that we have looked at which came out of the commission forces them into managed care by running up the fee-for- service costs. You know, we're both trying to get to the same place, Senator Breaux, and I think that enticing people in with positive economic incentives is the way to go.

And in this case the managed care plan price themselves and the beneficiaries won't be confused because the benefit package will be the same. They'll have pharmaceuticals in there. If they want to purchase more benefits in a managed care plan they're going to save money going into that plan so they'll have the cash to purchase some additional benefits.

But we're comparing apples with apples here and the important thing I think is that it's a positive incentive as opposed to shoving people in for fee-for-service -- shoving is too strong a word but you basically using an economic negative incentive here as opposed to what we believe we're using which is a positive incentive.

So, and you do get more savings from doing that because you're run up fee-for-service. It's a particular problem, as you well know, in rural areas where a new plan may come in but you protect rural areas where there are no plans and I recognize that. But I think, Senator, with all due respect, we're both trying to get to the same place to introduce competition.

We've taken all of your fee-for-service recommendations. We've obviously have gone to 150 percent of poverty and your recommendations on pharmaceuticals. We honestly believe that we're building on your proposals.

BREAUX: I think you did that without taking a breath.

(LAUGHTER)

Thank you very much.

ROTH: Senator Bryan.

BRYAN: I believe, Mr. Chairman, that Senator Baucus had proceeded me here.

ROTH: Oh no, you're next.

BRYAN: Am I next? All right, I'll be happy to.

Madam Secretary, I know you've endured a lot of lecture from us today here so let me continue in that tradition which the Senate does so very well when they have a captive witness. Let me preface my comments by saying that I do applaud the efforts of you and the president to come forward with a program to provide a prescription drug benefit.

You have cited an example of the disproportionate coverage of rural versus urban America. Each summer I spend most of August in rural Nevada. And I can tell you that there's no change in the Medicare program that those people in rural Nevada would like to see better than to have a prescription drug benefit. So, I think you're on the right track in terms of where we want to try to reach.

Now, let me make another couple of observations if I may. We're sitting on a demographic time bomb. In the year 2011, the first of the baby boomers turn 65. Seventy-six million Americans will be part of a tidal wave that will flood the system in terms of eligibility. Now that's going to be true whether Democrats are in the White House, Republicans in the White House, Wigs in the White House, the vegetarian party resurges and becomes the dominant political force in America.

That is inevitable. And we know that there are going to be some medical breakthroughs. Some of which appear to be just over the horizon. And we as Americans are going to demand that coverage and it will come as a cost. Now, I guess in terms of the broad alternatives we could reduce the benefits. You and I know that that is simply not going to happen. Indeed we're talking today about adding a very important benefit.

We're going to need some additional revenue and that involves the dreaded "T" word as I understand. But we do want to talk about some structural reforms and I want to just at least share my view. I would endorse and associate myself with the comments of the chairman of the retiree caucus, my good friend the senator from Rhode Island.

This committee, in a bipartisan way, overwhelmingly voted to means test Part B in 1997 and it carried on the floor of the United States Senate by overwhelming margins. I think we need to look at that. And I that would be the part of the message that I would encourage. The second thing I think needs to be pointed out and you did so I think very effectively.

What we say and what we do here in the Congress our profoundly different. We worship at the shrine of competition. And yet at the very moment that you try to engage in some competitive strategies we do the "el cavo," the "el-foldo" and you know, try to plug additional restraints upon you. And that is our fault. And that is to our discredit. And you need to be provided more flexibility to adopt this program.

I don't know the details of the program in Florida but, Senator Bob Graham, and you have indicated there's some savings. We need to provide that flexibility.

I guess my question really is in terms of in providing, you know, this benefit, what are the implications for those who have collective bargaining agreements? I mean, how does that factor in? I mean, that has been a negotiated benefit. If we're going to provide this coverage, what are the impacts of that?

SHALALA: Well, I think that what we've tried to do in the pharmaceutical benefit is to stabilize the situation that already exists. And for people who would get their retiree benefits and that would include a pharmaceutical benefit. As long as it's as least as good as what we're offering for people who don't have the benefit, we would give their company, or actually it would probably go to the health plan that they're in, a subsidy for keeping it. But it would be less then what we would pay if we were doing it directly.

So it's an incentive for employers who are increasingly dropping retiree pharmaceutical coverage, 25 percent droppage over the last couple of years, an incentive to keep that coverage. And so anything that was negotiated, the employers obviously would gain some resources to keep that benefit.

I should point out that in most of the major companies they are providing a lot more then this benefit so while this would be of some help in some subsidy to keep it would at least keep a minimum benefit for everyone across the country.

BRYAN: Have you given some thought in terms of devising the formula? Yesterday those of us who served on the Aging Committee were exposed to some testimony from individuals who are Medicare recipients who discuss situations that occur with respect to their HMOs changing the formula. That is whole classes of medication. No notice being given to them with potential serious adverse health consequences. Clearly there needs to be notice given and an opportunity to respond to that sort of thing.

What, if anything, do you do with this aspect which is apparently is a major concern out there?

SHALALA: Well, first of all, anyone currently in a Medicare plus choice plan ought to be notified appropriately of any formulary changes.

BRYAN: But apparently that's not occurring.

SHALALA: And HCFA is taking steps to ensure that the health care plans are adequately doing that. And at their hearing this week we were present and we heard those comments.

Under the president's plan we would include rules for establishing changing and notifying beneficiaries and the doctors and the formularies and any subsequent changes in any kind of contracting rules.

They would be required to provide adequate advance notification and we would protect the right of a doctor, if he insists that a patient get a drug that's not on the formulary, we would protect that doctor's right to get that drug and our plan would pay for it.

BRYAN: Finally, let me just say a little bit -- certainly enlist your help and guidance -- you correctly pointed out and I'm persuaded that in doing a Balanced Budget Act of '97 that with respect of physical therapy caps. That those have had unfortunate consequences and we need to adjust that. But as you know the entrepreneurial spirit is alive and well in terms of health care providers in America. And now that that door has been opened up a little bit and we've heard testimony in this committee from Ms. Salinsky (ph) that indeed we should make an adjustment.

BRYAN: Are you going to be providing us any data or information as to what other adjustments we ought to consider? Because, as you know, right now there is a full scale media blitz in which every provider in America has suggested -- and perhaps there's merit to it, I do not know -- that we've cut back too much, that we need to change the reimbursement formula. If we did that, that's going to have a serious impact upon the solvency of Medicare. What can you tell us about that?

SHALALA: Well, we will be working with this committee, and with other committees in the House, on what our -- information we have, and specifically whether there is an unintended health consequence, particularly denying access to an individual to appropriate health care because of a change that was made.

I pointed to therapeutical caps, because it is but one of example where we actually objected at the time and argued that it would have health consequences. There obviously may be others, and we've heard in this committee today about the possibility. But we will show you what analysis we have. The GAO will have analysis. I'm sure CBO will have some analysis.

I think the important point that we've made, that the president has made over and over again, is that no one should expect us to want to participate in any discussion that would unravel the fiscal discipline that has been introduced through the balanced budget amendment.

But it's very clear that we ought to consider unintended consequences that are denying access to Medicare beneficiaries, and we ought to look at that very carefully.

BRYAN: Thank you very much. Thank you, Mr. Chairman.

ROTH: Senator Baucus.

BAUCUS: Thank you, Mr. Chairman.

Mr. Chairman, I want to, first, thank you for trying to bring this discussion back into a the realm of civility, where it was not at an earlier point in this debate. A senator characterized the administration as being disingenuous. Mr. Chairman, I don't think you will agree with me, but frankly when the Republican tax cut was essentially 792, that interest in that 10-year period would be 179, that adds to 971, out of a on-budget surplus of less then that, 964. I think any fair person would say that's disingenuous, because there's nothing left for Medicare for veterans or other priorities.

But put that aside, the question I had for the secretary is really two. One is: Is -- when are we going to -- is there any way to accelerate the reimbursement plan for managed care providers, particularly in rural areas. As you know, Madam Secretary, it's about 7--30 national-local now, and I think the law accelerates that to 50- 50 in a few years.

But we only have, I think, one or two managed care companies in my state, and we'd like more, and there aren't more because of the reimbursement just isn't there. And particularly when the formula now is, as I mentioned, 70 percent -- I think it was 70 percent -- local is what it is and 30 percent national. And so, if we (ph) could give us some indication of, or some hope of perhaps accelerating that phase-in so that managed care is viable in rural areas.

SHALALA: Well, there are a number of things we're actually doing in the plan that will help rural hospitals for example. I mean, there's a long list of where I've exercised administrative flexibility that will actually help some of the providers, and I won't go into that here. But let me say that I actually think that a combination of what we're doing on the blend paying managed care to provide prescription drug benefits and allowing managed care to put the price on themselves will attract managed care to rural areas, that there actually will be simply more money in the system. I think the geographical adjustment may help, and of course we intend to follow through with the BBA requirements that you're talking about in terms of the blending.

But the problem now is that we just need to get more money into fee-for-service through the kinds of adjustment that we did in the BBA, as well as adding the drug benefit to get that number high enough so that the plans will see rural areas as attractive places to come in bid. And I think a combination of a number of things that we're doing will help to attract managed care to rural areas. We actually think this proposal will help.

BAUCUS: And I have some legislation too, frankly, that I hope helps. But I must say that it is a major problem, which is there is no managed care currently for all intents and purposes because it just doesn't pay.

SHALALA: Well, Senator, I think we're increasingly recognizing that both density and sparsity cost more money.

BAUCUS: Well, it does, but we're all here to provide service, and rural America's part of America, and so that's...

SHALALA: Well, I mean, that's that the point though. That it does take new investments, and we've done a number of things on the hospital payments, for example using our flexibility, including delaying the expansion of the hospital transfer policy, which will help transition to out-patient department prospective payment systems, delaying the implementation of out-patient department volume control mechanisms. I mean, a whole list of things.

Using the in-patient wage index to pay out-patient departments; that will help. Again, all of this is a matter of getting higher reimbursements into rural areas, which will of course effect directly the future service.

BAUCUS: Now is it the administration's view that the changes that you've made and recommend in respect to Medicare are not exceed the trust funds of Part A as well as Part B (INAUDIBLE) viable? I think you recommended -- you've estimated that Part A being viable to the year 2027. Do you think that's enough?

SHALALA: We think...

BAUCUS: There's no more structural reform is necessary in your judgment?

SHALALA: Oh, if we could get all these structural reforms...

BAUCUS: That is the administration's structural reforms?

SHALALA: Yes. If we could get all of these structural reforms, we believe that they would have a major effect on the Medicare program, both in bringing down costs through the competition, and in strengthening the health care and introducing, for the first time, real price competition.

BAUCUS: But you don't -- therefore it is the administration's view that the administration's proposed structural reforms are sufficient. That is, the additional structural reforms recommended by the Breaux Commission and others that are not contained in the administration's proposal are not necessary?

SHALALA: Well, the fundamental difference is in how we do price competition. And we have suggested that we should use economic incentives -- positive economic incentives for people to choose managed care. That is the effect on the Part B premium, by allowing managed care to bid in a way (ph) in which they can reduce the Part B premium it would attract people, as opposed to raising the fee for service cost in an area just because a managed care plan.

We think we've preserved real choice, and that more people will move into managed care; they'll have more money in their pockets; there'll be good economic incentives for them to pull into managed care.

In addition to that, there are reforms here we haven't talked about, and they have to do with managing chronic disease, and introducing for the first time in fee-for-service, some fees for case management that will -- much of the cost in Medicare increasingly is people who have chronic diseases who have complex problems that need some management.

And managed care, hopefully, as it moves to more integrated systems, will be able to do that and we need that in fee-per-service, too, because that's a way of driving down the cost of fee-for-service. But we need to pay the managers, the doctors who are managing these complex cases, a little bit more money to do that kind of management to bring these teams together.

Now there's a number of changes here that have to do with good health practice with quality changes that we think will make a difference.

BAUCUS: I appreciate that. There's still though, as you well know, not really a meeting of the minds yet on whether those proposals are sufficient. I grant you some of the objection is political on both sides of the aisle probably. But I'm asking you to step back for a moment, in the spirit of Senator Chafee, hoping some seeds will sprout.

What -- how do we better get a closer agreement, on both ends of Pennsylvania Avenue and also in the Congress, and I know this is naive, taking some of the politics out of it to get a more solid solution that as more people in Congress and the White House agree is more likely to achieve solvency in the trust fund that we want?

It's a little bit in process, and a little bit in...

(CROSSTALK)

SHALALA: I think obviously we're prepared to start working with congressional committees to turn this proposal into legislation and to work through it with the appropriate congressional committees. But let me say, first we have to agree on some of the fundamentals: that the solvency of the trust fund has to be a critical part of whatever we do, and that we cannot get to solvency by trying to get savings out of the existing program. It does take an infusion of new money when you double the number. So we have to go on some of the fundamentals.

Second, we have to agree that we're going to lock arms and hang tough on the introduction of these more modern business practices, prudent purchasing, the use of centers of excellence. There are going to be lots of objections to us trying to get savings by moving Medicare away from paying sticker price for everything.

And that's going to take those Democrats and Republican deeply committed to turning this program into a much better purchaser of services and a better manager of services.

BAUCUS: My time's up. I just wanted, if I might a very quick question. There just is a sense and I -- that the Medicare program is still quite inefficient, that there is some waste. And I know you've discussed this with other senators but -- and I'm not going to ask you to respond unless you want to, but I just -- it is my feeling that what HCFA has done so far still does not yet, sort of, pass the smell test. That is, a lot more (OFF-MIKE) should be done within the administration...

SHALALA: Senator, Senator, we're the people that have a very high smell test and we have said very clearly that there are restraints on us for getting the best prices and introducing competition into the Medicare program. We have listed, in great detail, what those restraints are.

BAUCUS: I'm talking not only about prices, but also just as management and personnel and just delays within HCFA, and that's not just pricing I'm talking about.

SHALALA: Well, and in fact we could show you some of the most remarkable improvements in the history of the program. We've cut error rates in half.

BAUCUS: Good. I was just telling you my...

SHALALA: And no administration has done more on waste, fraud and abuse then this administration. If we're not perfect in terms of the management, no one will concede that faster then me, but what we've asked for is more management strength as part of this proposal.

BAUCUS: All right, I'm just telling you that, based on what I feel in talking to people out in the field, my state Montana, we've got a little ways to go yet. Thank you.

ROTH: Madam Secretary, earlier on you said you would be speaking with Dr. Crippen about the -- what's that? Oh, I'm sorry -- Senator Mack.

MACK: It's a long way over to this area. Thank you, Mr. Chairman.

ROTH: I can barely see you.

MACK: We'll see what we can do about that.

Anyway, I want to touch on the issue of cancer clinical trials. Senator Rockefeller and I have introduced legislation to have Medicare cover routine patient costs with respect to Medicare for cancer. A majority of this committee has co-sponsored that legislation. The administration included it in its budget. But it's rather conspicuous by its absence in your plan that you're presenting. Why is that?

SHALALA: Well, first of all because it was included in our budget and we didn't take everything from our budget proposal and included it in what we sent up on this particular Medicare proposal. But let there be no question in your mind of this administration's support for that proposal. The proposal that we submitted as part of our original budget submission -- I think it's somewhat more limited then what you and Senator Rockefeller have proposed. I have to go back and take a look at it.

Let me also say that we believe that including Medicare recipients in cancer clinical trials is in fact a quality issue, that will improve the quality of cancer treatment.

MACK: I still don't understand why it wouldn't have been included in this modernization of the program?

SHALALA: Well, because we have other changes in -- Medicare changes in the president's original submission that affect the Medicare program that we...

MACK: This is not a substitute for the original?

SHALALA: No, it is not a substitute for the original proposal, so you combine the two.

MACK: All right. We'll take a look at it...

SHALALA: I'm sorry there was some misunderstanding of that, but we are not substituting for our original proposal -- our original budget proposal which included a number of different things. I'm testifying only on the latest proposal from the president that includes the solvency, the pharmaceutical benefit, and this is in fact is direct response to the Breaux Commission reporting.

We said that we would come back with our plan in the areas that they covered plus dealing with the solvency issue.

MACK: I was just surprised with the modernization plan for...

SHALALA: I bet you were, so I think we're on the same page.

MACK: All right, well I'm glad to hear that.

Let me go to the prescription drug area as well. When I look at the cost estimates of both OMB and CBO I see a rather significant difference in their projected costs. I believe yours, or at least OMB's is about $118 billion. CBO's, at least what I've been able to determine, is about $168 billion. That's a 43 percent difference in the estimated costs.

I suspect that you're probably not the one to ask, but yesterday we talked about -- at least some members raised the importance of having extended data available, not just five years. Do you have information as to what this would cost over the first 10 years? What it would cost for the 15 years? What it would cost for the first 20 years?

I mean, the numbers I've seen would indicate to me that this is going to cause an explosion in the cost of the Medicare program.

SHALALA: No, we actually had done some of those projections and we'll show you what we have. In terms of what CBO has done, as you know, we saw the first details this morning. Mr. Crippen and I have already -- that's not a criticism of him, we've just talked.

SHALALA: We will be going through their estimates and their assumptions to see what they did.

As you know, the HCFA actuary and this administration's economic forecasts have been right on target. And we've been particularly on target with our health care estimates over the last six years.

So, I'm pretty confident in what we've done. And we will be reviewing what CBO did to find out why they came to the conclusions they did. But we stand by our actuary and by the projections that we have presented to this committee.

MACK: Well, I do know that there's been a pretty interesting concentration of effort with respect to this committee's focus on the failure to estimate the cost of what the BBA was. So, I'm not sure that we're all confident in people's expectations about what these assumptions are.

SHALALA: Well...

MACK: Let me just go -- no, let me just go to the...

SHALALA: And Senator, if I might say, we would repeat that we were accurate on the BBA. The Senate chose to take other projections.

MACK: The other area that -- and I -- this may have been covered earlier, but as I understand the way this would work out in the out years where the cap is at $5,000...

SHALALA: Right.

MACK: ... is it unfair or inaccurate to say that, in order to receive this $5,000 benefit, that an individual would have out-of- pocket expended $2,500? And under your...

SHALALA: Yes.

MACK: ... and under your estimate, would have paid $528 in premiums?

SHALALA: Yes.

MACK: With means that the person is then getting something less than $2,000?

SHALALA: Well, let me say they are also getting these drugs at a discount. So, as part of that, they are actually getting a chance to purchase more as part of that.

MACK: I'm not making a point about that. I'm trying to -- I mean -- the -- I think the average person who listens to this thinks that their benefit is $5,000, but in order to get that benefit they're paying somewhere in the neighborhood of $3,000.

SHALALA: No, it's very clear. We're going to subsidize 50 percent of $5,000. And to get that, you pay a premium every month in addition to what you're paying for your 50 percent for the drugs. This is an insurance scheme which will be helpful, but it's quite modest, and we shouldn't overstate what this will do. It will help lots of people reduce their drug costs, but it will not eliminate their drug costs.

MACK: And I guess my last point here would be that, it is a -- the prescription drug proposal is, in fact, I believe, as it is written, a scheme that will explode the cost of Medicare. Which says to me -- because I happen to believe that we ought to include prescription drugs in a Medicare program. But wouldn't it make more sense to target these benefits in the early years so that we get a sense about how the whole system is going to work?

I think others have suggested maybe the idea of even means testing. To go into this at full bore, seems to me quite risky.

SHALALA: Senator, you know, we actually do phase it in. I mean we start with $2,000 and we are phasing it in. And the problem with trying to...

MACK: But you're not -- I must say, you're not answering my question. Let's not get cute with the semantics.

SHALALA: Well, if you're suggesting that we should start with people of 150 percent of poverty.

MACK: Well, I think it was suggested 135 would be closest.

SHALALA: Actually, the Breaux Commission, I think, has changed their position to 150 percent. We include that as part of our proposal. We also -- I think, a combination of -- you'll have to look at our projections and our assumptions. If we thought this was going to spin out of control, that the wedge was going to go like this, we would have never recommended it.

One of the reasons that there is a large contribution by the individual, one of the reasons there's a premium here, is a way of making sure that it doesn't spin out of control. And therefore, we have described this as a modest benefit. It obviously is an insurance scheme, in which lots of people participate, that may not get as much back in the early years as they will later when they get genuinely ill.

But I would not over-characterize this other than this is a critical element of modern health care.

The other point -- I'd like to go back to the point that I made about Florida. Large numbers of Medicare recipients and managed care in Florida get this benefit now, and if you live in a rural area, you don't get it. So, how we would phase it in so you would continue to get it in Florida and not get it in Montana, I mean, you're going to have trouble explaining that to your colleagues on both sides of the aisle, I would think.

So, the current system, in our judgment, is unfair. But more importantly, it -- this is about good health, and we need to include this benefit if we're going to modernize the benefit package.

ROTH: Senator Robb.

ROBB: Thank you, Mr. Chairman.

Madam Secretary, I thank you for coming. I'm delighted that you're still here. I had to depart for a few minutes. So, I'll just make an observation and then ask a general question, if I may.

When I left, as I recall, you were being implicitly criticized -- or the plan at least was being implicitly criticized for not having enough assets devoted to covering the prescription drug benefit that was available in the president's plan.

And indeed, given the fact that the cost of prescription drugs is going up faster than the overall cost of medical services or health care services generally, and the fact that the population eligible is going to increase, that is a problem. But I would contrast that to the fact that there was a tax bill reported out of this committee yesterday that didn't reserve any dollars for that particular identified need by the committee -- just an editorial comment, in passing.

Now, let me ask a broader question though, because what I think that you and the president have proposed clearly is a good first step, but it's not the full systemic reform of Medicare that we talked about at one point. I wonder if you could -- if you have not already done so in the period of time that I had to slip over to Intelligence -- just talk for just a minute about some of the things that you'd like to see incorporated in a long-term, systemic reform of Medicare that would sustain its viability and its ability to both continue and to meet the needs of our aging population in the next few years.

SHALALA: Well, the fundamental theme that we need to run through, whether it's a reform of fee-for-service or the new competitive reforms that we're suggesting that we introduce, is that we need to move to price and quality, and we need to convince beneficiaries to go to places where they can get both price and quality.

In the long run, the system is inefficient unless we can move large numbers of people to integrated systems of care, to better management of chronic and long-term diseases, and we can move the management of Medicare to stop paying sticker prices and get better prices for everything we purchase.

But the concept of centers for excellence, for example, where Medicare beneficiaries would be enticed, actually, because they'd save money on co-payments and various fees to go to a place to have a surgery, for example, or some other kind of treatment that provided high quality care -- and we will have identified them as providing that -- and good prices.

So, moving the system towards a quality system is absolutely key here, and we believe that the way to do that is through economic incentives, and through the introduction of competition at every stage in the Medicare program.

ROBB: Let's assume, Madam Secretary, that this committee -- and that's a rather ambitious assumption -- will approve the president's plan in its entirety, at this point in the remaining year and a half. In the administration, would it be your hope that we could incorporate any additional systemic changes?

Clearly, there's no quarrel with getting higher quality at lower cost, and to control some of the difficulties that you just alluded to. But is there anything else that you'd like to see us consider in terms of putting in place to deal with that challenge over the long term if we accept your goal as higher quality and lower -- more competitive price?

SHALALA: Well, I think that actually, if I were to add one more piece, it would have to do with how we fund the management of these large health care programs, and whether there actually are incentives in the funding for building in more efficiencies. We strangle them with the amount of management. We run these programs at less than three percent of overhead. No private sector company manages health care at less than, probably, 10 percent.

And if we want to introduce these kinds of changes, we have to properly fund the managers. And I'm not talking about higher salaries, I'm talking about the systems we need to put in place; our ability to do contracting both with private sector managers to manage large parts; and our ability, frankly, that we are restrained now to fire companies that aren't performing; and to be able to go to a broader list, whether it's processing claims or the pharmaceutical benefit managers that we want to use in the private sector.

We just have to have a lot less rigidity in our ability to manage this program, and that takes a combination of resources and flexibility. And that will be key as to whether any of this -- no matter what competitive plan you choose, our ability to manage it will depend on what you do on the management side at the same time.

ROBB: That sounds a little bit like a chancellor of a university system might discuss the tenure system from time to time. But I won't ask you to...

SHALALA: No, I'm actually deeply committed to tenure. What I don't want to do is to tenure in a limited list of private sector companies or prices into the system. As opposed to giving us a better chance at getting better prices and better management that we contract for in the system.

Remember, we administer Medicare basically through the private system. Let us loose to actually do that in a fair and honest way. Whether it's small business or large businesses, I think we can do that if we have a broader flexibility.

ROBB: Distinction accepted and I thank you.

Mr. Chairman, my time is complete.

ROTH: Thank you, Senator Robb.

Madam Secretary, earlier on you said you were going to speak with Dr. Crippen about the CBO estimates of the cost of the reform. It would be very helpful if the committee received from you a full statement of how your actuaries developed their estimates. So, I'd appreciate those being submitted.

And second, the record is open. I will have a number of questions to submit to you tonight, and it would be very, very helpful if we could have answers to those questions sometime next week. And of course the record's open for everybody to submit questions. We are trying -- in the midst of trying to develop a program, so, I would appreciate the answers, as I say, sometime next week.

We thank you for being here and for your patience.

SHALALA: Thank you.

ROTH: And it's been a long day. We shall continue to look forward to working with you on this most important piece of legislation.

I would say it is the intent -- my intent, to move ahead very promptly in September when we return after the August recess. Thank you very much.

SHALALA: Thank you, Mr. Chairman.

ROTH: Now, I'd like to call our second panel. Both of whom, of course, are frequent visitors to our committee. We're always pleased to have David Walker, the comptroller general of the United States; and then, we will turn to Dan Crippen, who, of course, is the director of the Congressional Budget Office.

Gentlemen, it's always a pleasure to welcome both of you, and we look forward to your testimony.

We'll start with you, Mr. Walker, please.

WALKER: Thank you, Mr. Chairman, members of the committee.

I'm pleased to be here today to discuss the president's recent proposal to reform Medicare. According to the president, his proposal is intended to make Medicare more efficient, modernize the benefit package, and extend the program's long-term solvency.

I'd like to make a few summary points before delving into more specifics with regards to the proposal. In that regards, Mr. Chairman, first let me note that the president's proposal contains a financing proposal as well as several programmatic reforms that are intended to advance the Medicare reform debate. It provides a baseline for further debate and consideration of reforming Medicare.

Specifically, the president's proposal will result in significant reductions in debt held by the public over the next 15 years, which would be very good. Secondly, it would extend the solvency of the HI trust fund on paper from 2015 to 2027.

It would not, however, help to assure the long-range sustainability of the Medicare program.

The president also proposes to include a voluntary prescription drug benefit in Medicare and to have health plans compete based upon price. These are two of the programmatic forms that I will discuss in more detail.

With regard to prescription drug benefit, the Congress and the president may ultimately decide to include some form of prescription drug coverage as part of Medicare reform. Given this expectation and the future projected growth of the program, some additional revenue sources may in fact be a necessary component of Medicare reform. However, it is essential that we not take our eye off the ball.

The most critical issue facing Medicare is the need to ensure the program's long-range financial integrity and sustainability. Given the size of Medicare's unfunded liability, it is realistic to expect that reforms to bring down future costs, will have to proceed in an incremental fashion. The time to begin the difficult but necessary steps to engage in comprehensive reform of Medicare is now, when we have budget surpluses and a demographic holiday where retirees are a far smaller portion of the population than they will be in the not- too-distant future.

Ideally, the unfunded promises associated with today's program should be addressed before, or at least concurrent with, proposals to make new unfunded promises. To do otherwise, might be politically attractive but not fiscally prudent. If additional benefits are added, policy makers need to consider targeting strategies and fully off-setting any related costs.

To qualify as meaningful reform, in our view, a proposal should make a significant down-payment toward ensuring Medicare's long-range financial integrity and sustainability. Solvency, in and of itself, is not enough.

As we testified before this committee in March, and again in June, proposals to reform Medicare should be assessed against several criteria, namely affordability, equity, adequacy, feasibility and acceptance.

Importantly in making these fiscal decisions for our nation, we believe that policy makers need to consider the fundamental differences between wants, needs and what both individuals and our nation can afford. This concept applies to all major aspects of government, from major weapons systems acquisitions to domestic program issues. It especially applies to the area of health care, where there is unlimited demand, unlimited wants and yet very different needs and practical limits as to what individuals and the nation can afford.

It also is important to keep in mind the fiduciary and stewardship responsibility that we all share to ensure the sustainability of Medicare for current and future generations, within a broader context of providing for other important national needs and continued economic growth.

WALKER: The president's latest proposal is projected to virtually eliminate publicly-held debt by 2015. This indeed will be a significant accomplishment. However, based upon our latest budget long-term simulation model, even if all future surpluses are saved and the current discretionary spending caps are complied with, we would nonetheless be saddled with a budget over the longer term that at current tax rates could find little else but entitlement programs for the -- could fund little else but entitlement programs for the elderly population.

Reforms reducing the future growth of Medicare, as well as Social Security and Medicaid, are vital under any fiscal and economic scenario to restoring fiscal flexibility for future generations of taxpayers.

Mr. Chairman, let me just show you a few quick charts that are in my testimony, if I can.

The first chart talks about -- the solid line represents the HI trust fund. The bars underneath represent annual deficits. You will see that the HI, part A, has been in a deficit position since 1992. We started the descent to trust fund insolvency by 2014. We face rapidly escalating deficits going into future years.

The next chart, please.

The solvency issue, Mr. Chairman, only deals with the trust fund, the solid line. What's important is to focus on sustainability. Is this program sustainable?

To look at a few charts that are relevant there, this chart demonstrates the projected increase in the composition of Medicare funding as a percentage of the gross domestic product, scheduled to more than double over the 75-year projection period.

The next chart shows what the budget outlook looks like in the year 2030 if we don't save the surplus. But even if we do assume that we stick with the discretionary spending caps, in the year 2030 you'll see that discretionary spending has all but been eliminated. Unfortunately, discretionary spending, in our current vernacular, includes things like national defense, the infrastructure, the judicial system, et cetera.

The reason that this happens is because of the explosive growth -- projected growth in Social Security, Medicare and other entitlement programs that we must begin to get control of.

And the last chart, Mr. Chairman, represents a projected increase in the payroll taxes associated with the Medicare program if the program continued to be funded based upon a payroll tax structure for part A. Social Security -- in part A, you can see there will be a dramatic escalation of the tax burden on future generations.

Mr. Chairman, I've got a significant amount of information contained within my statement which I would ask that be -- that it would be included for the record.

ROTH: The full statement will be included.

WALKER: Thank you, Mr. Chairman.

What I would like to do is to -- if I can, since I know that you and the other senators have had a chance to look at that, is to now just come to the bottom line.

Mr. Chairman, I believe that it's important to note the historic opportunity presented by the recently projected budget surpluses, but to note that they are projected budget surpluses. As recently as two years ago, they were projected budget deficits, and I think it's important that we keep that in mind. I think it's especially important that we keep that in mind when we're talking about potential real spending increases in an entitlement program that would be hard coded for the future.

The bottom line is that surpluses represent both an opportunity and an obligation. We have an opportunity to use our unprecedented economic wealth and fiscal good fortune to address today's needs. But an obligation to do so in a way that improves the prospects for future generations.

This generation has a stewardship responsibility to future generations to reduce the debt burden they inherit, to provide a strong foundation for future economic growth and to ensure that the future commitments are both adequate and affordable. Prudence requires making the tough choices today while the economy is healthy and the cohort of workers is relatively large.

National saving pays future dividends over the long term, but only if meaningful reform begins soon. Entitlement reform is best done with considerable lead time to phase in the changes and before the changes needed become dramatic and disruptive. The prudent use of the nation's current and projected budget surpluses, combined with meaningful Medicare and Social Security program reforms, can help us to achieve these objectives.

Mr. Chairman, that concludes my summary remarks. I'd be more than happy to answer questions after Mr. -- Dr. Crippen has had a chance to make his statement.

ROTH: Thank you.

Dan, do you want to proceed?

CRIPPEN: Mr. Chairman, Senator Moynihan, other members of the committee.

The last time we were together, we discussed the nature and size of the reforms needed for the Medicare program, particularly as the baby boomers swell the ranks of the retired. The president's latest proposals address some desirable reforms, including additional pharmaceutical benefits to the elderly.

It is worth noting, Mr. Chairman, that these issues are not new. Soon after Medicare was enacted in 1965, the cost of the program...

GRAMM: Mr. Chairman, could Dr. Crippen speak -- pull that thing closer to you and speak right into it.

CRIPPEN: Is that any better?

CRAMM: Yes.

CRIPPEN: OK. Soon after Medicare was enacted in 1965, the cost of the program began to exceed all estimates. We've been chasing that tail ever since. And in 1969, only three years after the program was kicked off, there was serious consideration of a proposal to add pharmaceutical coverage -- pharmaceutical benefits to the coverage. Coverage that has been considered at least once a decade ever since.

The president's proposal provides a framework for making significant changes to the Medicare program. It is intended to modernize Medicare's benefits, enable the federal government to become a more prudent purchaser of health services, and encourage price competition among health plans to slow the growth of Medicare spending in the longer term. CBO estimates that the president's Medicare reform plan would increase federal outlays by $111 billion over the next 10 years.

I'll be referring from now -- turning to Table 1 in the testimony, and reproduced on the chart up here, Mr. Chairman.

There are three components to our analysis and resulting differences with the president's estimates. The most significant is obviously the cost of the pharmaceutical benefit. The president proposes a new prescription drug benefit that would provide first- dollar coverage with an annual limit of $2,500 when fully phased in in 2008.

Although most Medicare enrollees would receive some benefit, on average 25 -- the average is a 25 percent subsidy up to the limit. The proposal would not substantially protect those in poor health who incur very large out-of-pocket expenses for prescription drugs.

Before we go much further, I'd like to discuss what may be the nature of the problem here. According to HCFA, as we just heard from the secretary and past publications, about 35 percent of Medicare beneficiaries lack drug coverage. That percentage probably hasn't changed much in the recent past, where beneficiaries are enrolled in managed care plans and most of them have coverage, but fewer retirees are likely to have coverage from their employers now, as the secretary noted.

Moreover, some beneficiaries, especially those that are purchasing Medigap coverage, have quite meager benefits. The coverage offered in the president's proposal would be more generous than Medigap. Concerns about the adequacy of drug coverage are growing as Medicare HMOs are also cutting back their drug benefits.

The other side of the story is that 65 percent of the beneficiaries do have coverage. And those that have employer- sponsored retiree plans usually have generous benefits including protection against catastrophically high drug expenses.

Our estimates are obviously higher than the administration's. Higher for what we obviously think are three good reasons.

First, our estimates enjoy the advantage of having data released by HCFA only a few days ago that clearly indicate more cost growth than has occurred in even the most recent past. They assume this growth will slow sharply over the next few years. We also assume that the slow down will occur, but not quite as rapidly as those projections suggest.

Second, we've included drug costs for Medicare beneficiaries who are in nursing homes, something the actuaries do not currently account for.

Finally, we expect the cost of Medicaid will be substantially higher, largely because some of the elderly who are currently eligible for Medicaid but are not enrolled will enroll to take advantage of the drug benefit. Currently, there are approximately 2.6 million potentially eligible elderly for Medicaid who are not enrolled.

The president proposes a number of cost saving measures for the traditional fee-for-service program, including the extension of some provisions of the budget -- of the BBA that limit payment updates beyond 2002.

The president will provide a small amount of additional funds to reduce the more immediate impact of the X (ph) payment reductions through as-yet-unspecified legislation. On balance, payments to providers will be reduced from baseline levels, although those reductions would accrue only after 2002. The president also proposed to change some of the beneficiary cost sharing requirements with a net increase in contributions by recipients.

Taken together, we estimate the savings in additional programs proposed by the president would be somewhat less than his estimates suggest. The difference is largely found in the estimated effects of new authorities to be given to the secretary of HHS. Some, due to skepticism about how both beneficiaries and providers would react to new incentives that may be implemented by the secretary, and some due to lack of specificity in the proposals made by the president.

The proposed competitive defined benefit will provide new opportunities for Medicare's managed care plan to compete on the basis of price as well as quality of service. Although the president's proposal would introduce new elements of competition among health plans that could help slow the growth of Medicare spending, it would fall short of a fully competitive program.

By establishing the fee-for-service sector as the benchmark for defining Medicare benefits and setting premiums for health plans, it would blunt the incentives for efficiency. For that reason, CBO has serious reservations about the magnitude of savings that could be expected from the competitive defined benefit.

We have not, however, completed an independent estimate of that part of the proposal, and for purposes of today's testimony, we have assumed the savings the administration has indicated they expect.

Finally, the president proposes to pay for the federal share of the prescription drug benefit through transfers from the general fund. As both the comptroller general and I have testified in the past, and he just said moments ago, those transfers are promises to pay future benefits with future general revenues. How burdensome that commitment might be depends on both the growth of future spending for prescription drugs and the growth of the economy over the coming decades.

Overall, the president's proposal provides incremental changes in some promising directions. They fall short of fundamental reform, however. For example, reducing payments for free-for-service providers would yield Medicare savings without contributing to the program's efficiency. But improving the efficiency of the fee-for- service sector is key to achieving short-term cost savings and longer- term reform.

Fee-for-service is likely to remain the plan of choice for most Medicare enrollees over at least this next decade, even under the most favorable assumptions about the growth of enrollment in managed care plans.

Successful adoption of the contracting and payment methods of private health plans used to manage their costs could establish a basis for a competitive fee-for-service sector, but recent efforts to test such methods have not found much acceptance among providers, and the president's proposal treads lightly on that issue.

Another element of many reform proposals is rationalizing cost- sharing requirements. The president's provisions would modestly increase some of those requirements and lower others without reducing their complexity. A more thorough reform might subject all Medicare coverage services to a single deductible and uniform co-insurance rates, at the same time, placing an annual limit on the amount that will at least pay in cost-sharing for all covered services, including drugs, if that's part of the benefit package.

In conclusion, Mr. Chairman, the overall effect of the president's proposal is to increase Medicare spending largely funded with general revenues. The proposed pharmaceutical coverage would give a small benefit to most enrollees but not provide catastrophic coverage to those with unusually high drug costs. The proposed reforms would move toward a more competitive system in the Medicare Plus Choice (ph) program but do little to reform the traditional fee- for-service sector.

Thank you, Mr. Chairman.

ROTH: Thank you.

David, in your prepared testimony, you express concern that financial controls such as cost-sharing in the Medicare program historically have eroded over time, and that we have not always been successful in predicting the cost of program expansion. You further suggest that to implement funding thresholds would require periodic congressional review.

Now, discussing those what you call threshold triggers have led to criticism that this conflicts with the entitlement concept of Medicare. So, I have two questions.

One, how do you respond to such criticisms, and can you elaborate on any specific threshold mechanisms that you may have in mind?

WALKER: Well, a couple of things, Mr. Chairman. First, we've been down this road before with regard to voluntary expansion of Medicare based on funding in part through general revenues, and that was Part B. When we started out with Part B, it was anticipated that 25 -- pardon me, 50 percent of the cost would be paid for by the beneficiaries and 50 percent of the cost would be paid for by general revenues.

WALKER: Today, 75 percent of the costs are paid for by general revenues, and 25 percent of the costs are paid for by beneficiaries. So, we don't really have a very good track record of being able to maintain fiscal discipline over these types of programs.

Secondly, we're talking about projected budget surpluses here, and the proposal would say that it is designed to pay for 60 percent of the estimated costs, but in a large part, based upon these projected budget surpluses and then the premiums that would be there.

I think we have to realize that these surpluses may or may not occur. And therefore, we have to have some mechanism that if, in fact they do not occur, what can be done in order to try to restrain the escalating costs of this program.

In addition, there are a number of estimates as can -- differences of opinion. Reasonable people can differ on what the real costs of this benefit is going to be. The difference between what HCFA's actuary, OMB and CBO have projected. I know that there's great uncertainty here. For example, I was just out on the West Coast with CalPERS, which is probably the largest public employee retirement system in the country, California system, about two months ago. And I know that health -- that prescription drugs is the fastest growing part of their health care costs, and they're trying to figure out how they are going to get control of these costs in the future.

So, I think we have to have mechanisms in place that, not just look at percentages, but look possibly at hard-dollar limits; that look at percentages of the economy with regards to Medicare and certain other factors. Because there is a difference between what people want, what they need and what we can afford. And I think that's one of the problems quite frankly, with regard to health care: we haven't made a distinction between those and we need to, because if we don't, we're never going to control the costs.

ROTH: Do you have any specific suggestion as to the technique, process or mechanism we should use?

WALKER: Well, I think several things. I think one -- you know, the president, in his proposal with regards to prescription drugs, has tried to do some things to control utilization. I mean, he's got a co-pay. But I think, you know, obviously you can look at the possible of the deductible; you can look at whether or not the -- you know, the premium ought to be modified based upon, you know, ability to pay; how you might be able to target this benefit more. And then, whoever you decide that you're going to target the benefit for, somehow consider some type of hard-dollar limits, or some type of mechanism, such as point of order or whatever, to re-look at this, if you do create a new, in effect, Part D, which is prescription drug benefit under Medicare.

ROTH: Let me turn to another matter.

The GAO has issued, I think, two reports recently indicating that Medicare Plus Choice plans are still overpaid even after implementation of BBA revisions, in that payment amounts are not the primary cause of ongoing Medicare Choice plans withdrawal. Now, I happen to believe that if plans were currently making excessive profits they would not be withdrawing from the program. Can you correlate your findings with the large number of plan withdrawals we've been witnessing?

WALKER: Well, Mr. Chairman, as you know, there is a difference between the urban area and the rural areas with regards to this. I mean, there is a problem to begin with in trying to get these types of plans to go into the rural areas to begin with.

But with regards to Medicare Plus Choice, I think we have to keep in mind that a vast majority of these plans are making enough on them such that, in addition to making a profit, they can offer beneficiaries enhanced benefits. In many cases, prescription drugs benefits, for example, as a way to entice coverage under these programs.

So in many cases, I think what you're finding is that they can still make a profit, but they can't provide as much of an enticement as otherwise they could do to attract coverage, or they have to decide that they're going to take less of a profit if they're going to maintain the same benefit level.

And so, part of the issue is, is that, what's their target with regards to profit margin here? And I think in time this thing will settle out. I think we had a lot of people rush into it. In some cases, they didn't do enough economic analysis. There was an over supply. And now, with some of the corrections that are occurring now, they're making more determinations on what makes economic sense based on their profit motives. So in time, I think it'll settle out.

ROTH: And let me ask you -- I'm very much concerned about the president's plan targeting employers to drop retiree prescription drug coverage. Would you elaborate on those implementations and the potential costs to the federal government?

WALKER: Well, we know, Mr. Chairman that the costs will be at least 67 percent of what the average in the program is. That's the subsidy the administration proposes to use to keep employers offering their plans. That coupled with their current tax deductibility, as I think you pointed out earlier in your opening remarks, it may be enough to keep many employers in the game. Many of those benefit packages are more lucrative or more generous than certainly what the president's proposal would be.

So, between the 67 percent subsidy and the tax deductibility, we expect most employers, if they have coverage today, would continue the coverage at least for the foreseeable future. But again, it will have a cost because of the 67 percent subsidy off the top.

CRIPPEN: Mr. Chairman, can I clarify one thing which I think is important?

ROTH: Sure, please.

CRIPPEN: You know, one of the things that we're talking about here is comparing the benefit package, and what do you compare the benefit package to in the case of Medicare? What's the appropriate comparison? I think one thing just to note for the record, the comparisons that are being made are comparing to benefit packages typically for active employees for the private sector.

Only about 15 to 16 percent of employers in the private sector have any retiree health care whatsoever for their retirees. A vast majority of employers are out of that business. And to the extent that they are in the business at all, they may or may not provide prescription drug coverage.

And so, to the extent that individuals are getting this coverage now, in many cases they are getting it through Medicare Plus Choice, they're getting it through Medigap policies or they're getting it through other types of arrangements. Because, for the most part, they're not getting prescription drug coverage through employer sponsored programs, in part because of the costs.

ROTH: Senator Mack.

MACK: Thank you, Mr. Chairman.

ROTH: I thought you were next.

GRAMM: He stayed, Mr. Chairman. I went back to -- I'd learned all I was going to learn from the secretary. So, I went back and I came back.

(LAUGHTER)

MACK: What are the unknowns with respect to prescription drugs that could affect the cost of the program? What are the things that both of you worry about as you try to project those costs? And I -- just so you know where I'm going with this -- as I said to the secretary, I thought it made a lot more sense to begin the prescription drug coverage in a much more targeted way. And that targeted way would be to those at the lower end of the income ladder.

And one of the reasons, in addition to the obvious, is to try to get a sense about how it's all going to work. How are you going to provide the prescription drugs, the pharmaceuticals? What -- how is it organized?

And so, what I'm asking you is as you both looked at making your estimates, what are the concerns out there -- what would you like to have more information about in order to have a better understanding of the impact?

Dan, why don't you start.

CRIPPEN: Well, the primary concern, Senator, is of course we start with the base, and what's in the base, and what level of benefit subsidy, the federal costs, all of that. But more critically, it's the growth in costs that's most important. What are the trends?

Just like in the Medicare program at-large, it's not -- the demographics are important and the baby boom numbers are...

MACK: Are you talking about utilization are you?

CRIPPEN: Both utilization and price.

But just like in the Medicare program itself, the critical fact is the cost per person and its growth. It's not just the number of bodies in the program.

So, with these estimates, important -- the most important single driving factor is how fast are drug cost and utilization going to go up? And as we found from the most recent data, as I said, just days old, that's changing upwards dramatically even from a year ago. The estimates the actuaries based their overall administration estimates on were that drug costs, and utilization for this program were developed about eight percent. They now have numbers that are double digits, and that's just the change from last year.

So, there are -- that's the single most important thing. Now, there are others that are considering some design questions in this particular program that one has to be concerned about. First, the limit is relatively high, as you pointed out, and not catastrophic in nature, so there's going to be a temptation to change the limit. It's only indexed to CPI, not to drug cost or health care costs. So again, there'll be pressure, I suspect, to legislate a higher limit at some point if this were to become law.

It's also -- they keep Medicare current drug expenditures -- although very limited, there are some drug expenditures in Part B. Those stay in Part B with a 75-percent subsidy, as opposed to the drugs that will be included in Part D, with a 25-percent subsidy. So, there'll be a temptation to try and migrate drugs across, I assume, from D to B.

So there are a number of things to worry about in the design of the program. But in terms of its implementation and experience, the single most important thing is the growth of costs.

WALKER: Three things, Senator, first utilization; secondly...

MACK: I should stop you there. Why don't you tell us -- I assume that there are factors -- there are several layers of things that can affect utilization; is that right?

WALKER: Well -- and obviously, one of the things that can affect it is what kind of financial incentives exist for the individual to decide whether or not they're going to seek, you know, an additional prescription drug benefit or whatever. And whether or not they're going to be covered to begin with. I think that's the second point -- adverse selection.

One of the concerns that you have to guard against is, my understanding of the president's proposal it would be a voluntary program. People would make an election at the point in time they become eligible for Medicare -- e.g., age 65 -- as to whether or not they want to participate in this program or not. They could get out, but they couldn't get in after that point in time. So, it would be a one-time election.

So therefore, people would then have to make a judgment based upon the design of this program, and based upon how much prescription drug coverage they expect they're going to need as to whether or not they want to play or not. Depending upon the design, you could have a circumstance in which people who are expecting a much higher prescription drug costs would play, and the people that don't would not.

And the last one, I guess, would be -- major one would be the fact that a lot of the benefit is being funded based upon a projected surplus which may or may not occur. And therefore, what kind of safety valves are there in the event that the surplus doesn't occur?

MACK: Let me just touch on another subject that I'm, I know a little bit about so it might be dangerous. The competitive defined benefit. And we hear the word competition used over and over and over again in the presentation of the president's proposal.

As I understand it though, that competition is a fairly small portion of the overall Medicare program. That is, for the managed care portion of it. Is that correct?

WALKER: It is correct, Senator. And it will get -- they don't claim to get a lot of savings out of that either. But if -- I mean, the flip side is, there isn't a lot of new proposed competition for the fee-for-service side, which is -- as I said in my opening remarks, is the most important in the foreseeable future.

MACK: And let me -- I think I generally understand -- there will be an establishment of this defined benefit. There would be an invitation to bid on those benefits. Then there would be the effort by the provider to enroll beneficiaries in the program. And at that -- then after that, there would be a risk adjustment done by -- I'll say HCFA -- I'm not sure who does it, but someone does a risk adjustment.

Is that going to entice providers into this form of business? Is there -- I guess what I'm raising here is won't they, kind of, see this last step, this risk adjusted process, as something that could put them very much at risk about whether they actually go into the program?

CRIPPEN: Certainly. There is not only the risk adjuster, Senator, I think the overall assumption behind the president's plan is that there will be providers here who will meet the needs of anyone who wants them. I don't know that that's a safe assumption.

Part of the calculus too, that you didn't mention, is that there will be provided an incentive for individuals to join these managed care plans, because any price they charge lower than the reference point, the difference would be split between the government and the individual.

But that assumes that the individual is willing to trade in a dollar of insurance benefits for 75 cents in cash and maybe pay a premium somewhere else.

So, it's far from clear, and again, as I said in my opening statement, we're not sure exactly how it's going to work. But for the moment, we've assumed the administration's estimates are probably about right because they aren't making strong claims.

MACK: My time is up so if you have a...

WALKER: Real quick one, Senator. Risk adjustment's a double- edged sword. On one hand, it could have an impact on whether or not insurance companies are willing to play, and on what basis they're willing to play, including how long they are willing to play, which we're seeing with regards to Medicare Plus Choice to a certain extent.

On another hand, it's essential in order to avoid adverse selection. Because otherwise, what you can have is creaming, where if you can go out and then try to pre-select your population and try to somehow design it such that you're getting the people that are less likely to need the coverage, that leaves a lot more room for profit margin, if you will. So, it's a double-edge sword.

CRIPPEN: Part of the problem, Senator, with risk adjusters is that traditionally while it's a nice -- it's certainly nice in theory, it's very hard to implement. The current proposal that HCFA has, for example, I believe accounts for about nine percent of the variance in health expenditures. So, it accounts for very little of the differences in expenditures across people. And so -- I mean, it's very hard to do. It's a nice theoretical concept but very hard to implement.

ROTH: Senator Gramm.

GRAMM: Well, Mr. Chairman, first of all thank you very much for the hearing. I'd just like to express a frustration, that this is at least the second, and probably the third, time that we've had our two official estimators or checkers of reality appear after we've had an administration witness, where, for all practical purposes, most people are gone by the time we get the reality check. And I'd like to just suggest, Mr. Chairman, that maybe in the future we ought to have the administration one day and then have the reality check the next, so that people have an opportunity to hear the facts after we've heard what, unfortunately, has become the propaganda.

I'd like to outline a scenario that worries me about the prescription drugs. And just bear with me until I get through and then I'd like to see, if I can, to entice you to comment to see if you share some of the concerns.

Number one: today, for people who are getting the full payment of their pharmaceuticals in programs like Medicaid, we know that the level of average spending on pharmaceuticals -- I think the number is $711.

GRAMM: For people who have no third-party payment, it's less than $350. So, the one thing we know for sure is that the demand for pharmaceuticals is pretty price elastic in terms of the price to the person that's consuming. If you're going to make them free or nearly free, people are going to increase consumption dramatically.

Secondly, there's some new data that suggests that half of seniors don't spend $500 a year on drugs, so they would have no incentive to join the administration's program, especially when they're younger seniors. I've seen figures as high as 40 percent of seniors don't spend $200 a year on pharmaceuticals.

So, I think it is clear we're going to have a tremendous amount of adverse selection. The people who are older, sicker, heavier users are going to tend to join the program; younger people aren't. We started out with a 50/50 cost-sharing on Part B; it's down to 25. We're not going to be able to hold the 50/50 cost share. We're not going to be able to hold the $1,000 cap. In fact, the administration's program cuts on when you don't need it, and cuts off when you do.

So, we're going to end up increasing the amount that the government will pay. And I'm concerned that, if we have a universal system where everybody's involved, that we're going to end up with costs that ultimately will dictate -- especially when we're already looking at the cost of the current program, without repealing any of the balanced budget provisions, and without adding pharmaceuticals, we're looking at, in 25 years, Medicare costing at least 12 percent a payroll.

I don't see how, if we adopt the president's program, we can avoid spiraling costs, ultimately price controls and ultimately rationing. Could I get you all to be so bold as to comment on that?

WALKER: Senator, you have the luxury of making those assertions. I can't.

CRIPPEN: Senator, I think I pointed out in the previous question that one of the things we have to be concerned about is, depending upon the design of the program, as to whether there might be an opportunity for adverse selection. And I think one of the things you're reinforcing is you think, in your opinion, there would be under this program.

GRAMM: And a lot of it.

CRIPPEN: In utilization, obviously, there's a trade-off. I think one of the things, candidly, that we need to do in health care, which I get concerned about when we approach health care incrementally, is that issue that I've talked about before: the wants, the needs versus afford.

Everybody wants unlimited health care; whether it be prescription drug, whether it be acute care, whatever, they want unlimited. They need certain basic things. Arguably, they need access to health care group rates. They might need protection against catastrophic illness or whatever. I mean, they need that. I mean, whether they want it, they need it.

And then, we have to somehow figure out how we can break this down to say, Look, let's differentiate between what people want and what they need. Let's recognize there's a difference between giving people access to health care group rates so they can get insurability, versus who's going to pay for it. How much they ought to pay, how much the taxpayers ought to pay.

And I think that's something we really haven't done. And I think it's something that it's important that we do do.

I think the other thing we have to keep in mind is we've got a consumption problem in health care. It's going out the roof, and yet we're incenting (ph) health care in many ways, including through the tax code, big time.

And so, we've got a break -- we've got a disconnection between what we're trying to accomplish, which is to make people more sensitive to the cost versus risk trade-off to try to control consumption and utilization, to try to prevent adverse selection. I think we need to look at it more comprehensively.

GRAMM: Let me, Mr. Chairman, do one final question.

I -- in looking at the data that came out yesterday from CBO on your mid-session review of the president's budget, you estimate that in -- over the next 10 years, as I read your numbers, that the president will have basic spending up 207, additional discretionary spending up 328. The USA accounts, which are outlays, as you properly note, of $245 billion. Medicare prescription drugs of 111. Debt service will go up as a result of all of this spending.

And in total, the president -- as I read your charts, the president would spend $1.033 trillion in additional spending as compared to what we are looking at in terms of the budget that we have adopted, if you projected it out 10 years. Am I reading that right?

CRIPPEN: Yes, sir. It's relative to our standard baseline, which at the moment assumes the caps are met, and that thereafter, the amount of discretionary spending will go up with inflation.

GRAMM: Well, Mr. Chairman, I'd just like to note that, with all of the whining and gnashing of teeth yesterday about your $794 billion tax cut, that even if you funded the president's Medicare program with $111 billion you're still -- with a tax cut and Medicare, you're still substantially below the total level of new spending the president's talking about.

So, the incredible paradox is, is that while we have our Democrat colleagues screaming and hollering about us using the surplus -- the non-Social Security surplus for tax cuts, the president has in fact submitted a budget that spends far more in new spending than we're talking about in terms of tax cuts.

So every horror they talk about if we cut taxes by $794 billion, in terms of not having the money for other things, if we spend $1.033 trillion we won't have it for other things either. And the important thing is, you can raise taxes and get the money back, as we've proven on many occasions, but if you start all these new programs, I don't see a corresponding evidence that we can eliminate programs and save money.

So, I wish we had had this mid-session review a week earlier that we could have used in this debate. But facts would only confuse our critics and probably not help us.

Thank you, Mr. Chairman.

ROTH: Senator Grassley.

GRASSLEY: Thank you, Mr. Chairman.

Dr. Walker, I'd like to start with you about one of the main differences between the plan of the administration and the model that was put forth by the Medicare Commission. And that is that the administration would not force traditional Medicare programs to compete with private plans. The commission suggested that including the fee-for-service program in this competition was necessary in order to modernize it. And so, I'd appreciate a comment from you on the effects of this aspect of the administration's plan.

WALKER: Well, Senator, I -- my main comment that I would give you is, is that the president's proposal, I think, represents an attempt to get the debate going on reform. But it doesn't do nearly enough on sustainability. It doesn't do anything hardly at all with regard to fee-for-service programs, which is where a vast majority of the dollars that we're dealing with here now.

And I think that's something that we're going to have to eventually come to grips with. We're going to have to come to grips with, not just the issue of solvency, but also the issue of sustainability. And we're also going to have to come to grips with meaningful reforms in the fee-for-service program. That's one possibility -- what the Medicare Commission talked about, is one possibility for coming at this.

GRASSLEY: And both to you and to Dr. Crippen, about the estimates that vary so much on the prescription drug benefit from the way that you have designed the benefit to who's covered. We have two very different estimates from the CBO and from OMB on the president's proposal. A difference of about $50 billion, and of course, this isn't a small amount of money. And it is why we need to proceed, of course, with caution when we decide how to provide a prescription drug benefit, so we don't end up promising something that we can't sustain.

I'm concerned that we may be relying on a strong economy, surpluses, the current level of Medicare savings which may not be sustainable to finance a program. How can we craft a benefit in a responsible manner avoiding a financing disaster should a picture change?

WALKER: I think that you're correct. There's a lot of uncertainties here. I think the differences between the numbers that HCFA has come up with, and OMB has come up with, and what CBO has come up with, serves to reinforce the inherent uncertainties, the variability, the volatility associated with prescription drug costs. We have to proceed with caution.

Secondly, I think we have to recognize that this is an expansion of benefits in a program where we already have significant unfunded promises. And part of the expansion of benefits here is proposed to be funded by projected surpluses that may or may not occur.

So, I think we need to look at -- if the Congress decides it's going to move forward in a prescription drug benefit, on targeting -- targeting it to those that need it; on making sure that the design is such that there are adequate incentives to avoid adverse selection and to control utilization; and that there be some safety valves to make sure that if these surpluses don't occur, that we can re-look at, you know, the financing of this program to decide what, if any, adjustments are necessary.

And last, I think we have to shine a light on this -- on any program the Congress would decide to go forward, as to the financial integrity of this benefit by itself, because recent data has shown that this part of health care costs is escalating much more rapidly than overall health care costs, and that's a matter of concern.

GRASSLEY: Dr. Crippen, did your estimate include any suggestions of how to approach it so you don't avoid that $50 billion difference?

CRIPPEN: No, Senator, our differences in estimates really go to the last point that the comptroller general made, which is we have very rapid -- or much more rapid than we expected increases in both utilization and prices of drugs. And so much of our difference between CBO and OMB is due to the more current data which shows the more rapidly increasing prices. There is nothing in that, of course, that suggests you could do anything different with the design of the program.

GRASSLEY: Do you see the -- Dr. Crippen, do you see that as the administration plans on at least one of the assumptions, on a big down turn in the price of drugs? And that coincides obviously with the introduction of the drug benefit. I suppose it's a rationale for being able to pay for it and sustain it. Do you see that happening?

CRIPPEN: It's entirely possible, Senator. What the administration is assuming is that, by organizing this large a benefit, they will have some power to negotiate discounts with pharmaceutical providers, and that's probably possible. Certainly, the current pharmacy benefit managers can do that. It does beg the question, however, as I said the other night, when everyone has a discount, does a discount exist? So, it is unclear exactly how much they could get through negotiations.

But more importantly again, Senator, is that if that's a question of what our initial costs are going to be, what's more important is how quickly will it grow. And so, the discount, while an important factor of those initial cost estimates, has not much to do with the out-year costs.

GRASSLEY: Yes.

WALKER: Senator, I think the other issue is, is that while clearly, due to the number of persons likely to be involved in the prescription drug benefit under Medicare, that would give one a significant amount of leverage to negotiate. The question is, at what price? At what price with regards to, you know, research and development, and some other activities that are going on in the area of prescription drugs.

And so, you know, there's no free lunch. I mean, there's going to be an effect. And I know that even parts of the government have expressed concern about what the potential implications might end up being on the discounts that they're getting.

So, I think we have to proceed with caution. I mean, I think there's increasing recognition that there may be a need to modernize the benefit package. But I hope that we just don't take a step backwards on the financial integrity of this program. I hope that we can make a step forward.

GRASSLEY: Thank you, Mr. Chairman.

Thank you, gentlemen.

ROTH: Well, gentlemen, as always, your testimony's extremely useful, and we do hope that upon our return in September to proceed with reform. So, we'll be counting on your continued advice and recommendations. Thank you very much.

The committee is in recess.

END

NOTES:
Unknown - Indicates Speaker Unkown
Inaudible - Could not make out what was being said.
off mike - Indicates could not make out what was being said.

PERSON: WILLIAM V ROTH JR (94%); JOHN H CHAFEE (72%); DANIEL PATRICK MOYNIHAN (67%); ORRIN G HATCH (57%); PHIL GRAMM (56%); DON NICKLES (56%); FRANK H MURKOWSKI (56%); CONNIE MACK (55%); TRENT LOTT (55%); FRED THOMPSON (54%); MAX BAUCUS (53%); RICHARD H BRYAN (52%); BOB GRAHAM (52%); KENT CONRAD (52%); DONNA EDNA SHALALA (51%); CHARLES S ROBB (51%); J ROBERT KERREY (51%);

LOAD-DATE: July 27, 1999

Document 149 of 268.


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