Statement of  AARP

On behalf of AARP’s 38 million members we thank you for holding this hearing on the 2007 Medicare Trustees’ Report.  The annual Report of the Trustees offers an important opportunity for members of Congress to closely examine the financial health of the Medicare program.

Hospital Insurance (HI) Trust Fund

The new insolvency date for the Hospital Insurance (HI) Trust Fund is one year later than projected in last year’s report, which means that Medicare beneficiaries’ coverage is not in immediate jeopardy. It is important to note that predicting solvency over the long term is very difficult since it depends on estimates of both payroll tax income and health care spending. Part A solvency has averaged 12 years since the program began 36 years ago.  In the past, Congress has stepped in to either increase Trust Fund income or decrease spending from the Trust Fund so that the reserves are not depleted.

The Trustees’ findings are not unusual for Medicare Part A which has averaged a 12 year solvency projection since the program began 36 years ago (see Chart 1, p. 8).

The HI Trustees’ report can be viewed as an early warning system – providing Congress with ample opportunity to act judiciously to strengthen and improve the Medicare program for current and future beneficiaries.  This report is no different, but it does highlight the urgent need to control rising costs across the entire health care system – not just within Medicare. 

Supplementary Medical Insurance (SMI) Trust Fund

Because the SMI or Medicare Part B Trust Fund is funded by premiums and general tax revenues, it faces cost pressure, but not insolvency.  As in the private sector, Part B growth still outpaces the growth in the Gross Domestic Product (GDP) due in large part to growth in physician and hospital outpatient spending.  Estimating conventions require the Trustees’ baseline to reflect current law, which include significant cuts in physician payments scheduled to take effect as a result of the Sustainable Growth Rate (SGR) formula.  Congress has consistently voted to override these mandated reductions since 2003.  CMS actuaries have estimated that continuous overrides of the SGR would result in $300-$400 billion in aggregate expenditures in the Part B program over ten years.

Each time Congress overrides the SGR there is a direct cost for Medicare beneficiaries. That’s because by law, the monthly Part B premium is set at 25 percent of Part B spending.  The Part B premium has doubled since 2000 – due in large part to increases in physician spending.  The Trustees estimate that premium increases could be as much as 20 percent higher over 10 years if Congress prevents projected reductions in physician payments.  Medicare beneficiaries would also pay higher copayments for physician care as payments to physicians increase.

Congress must address the physician payment issue in order to control Part B expenditures and protect Medicare beneficiaries from burdensome out-of-pocket costs.  Short-term fixes simply exacerbate spending growth and only delay needed discussions about how to slow rising expenditures.  A new Medicare physician payment system should be designed with the beneficiary in mind by holding cost-sharing and premium increases down and improving the care beneficiaries receive.  AARP believes Medicare’s physician payment system should be changed from one that rewards quantity to one that rewards quality.

Medicare Advantage

Because Medicare Advantage (Part C) plans are required to offer all Part A and Part B benefits, they are paid for from both the HI and SMI trust funds.

The Medicare Trustees note that in 2006 there was a substantial increase in MA enrollment due to higher payments for MA plans provided under the Medicare Modernization Act (MMA).  Ultimately, the solvency of the Medicare Trust Funds is negatively affected by current excess payment policies to MA plans. 

AARP believes Medicare payments should be neutral with respect to coverage options.  Therefore, AARP urges Congress to more closely align MA plan payments with payments for traditional Medicare. 

Currently, Medicare payments clearly favor the MA program over traditional Medicare, which is unfair to the majority of beneficiaries who participate in the traditional program.  All taxpayers and all Medicare beneficiaries – not just the 18 percent of Medicare beneficiaries enrolled in private MA plans – are funding these excess payments.

When private plans were introduced to Medicare, they were expected to provide extra benefits to beneficiaries by achieving greater efficiencies at a lower cost to the program than traditional Medicare through the use of care coordination, negotiated prices, provider networks and other strategies.  Given the fact that MA plans have control over hospital and physician services, as well as the opportunity to manage and coordinate care, it is reasonable for Congress to hold MA plans to payment levels that are no more than those for the fee-for-service program.

In order to minimize the disruption to beneficiaries who rely on MA plans for their health care, AARP believes Congress should phase out MA plan payments that exceed fee-for-service costs over a period of time.  Because geographic variations in spending continue to be a problem in the Medicare program, including within in the MA program, AARP believes it is important that Congress address the payment areas with the largest discrepancies first.  It is important that those areas of the country that provide care most efficiently are not penalized. 

Medicare Funding Warning 

The Trustees’ report includes the second “funding warning” in this year’s annual report.  The Medicare Modernization Act requires the Trustees to issue this warning if general revenues account for 45 percent of combined HI and SMI expenditures at any period during a seven-year window.

AARP believes the 45 percent trigger is an arbitrary limit and provides a false alarm about Medicare’s funding situation.  General revenues have always financed a significant portion of Medicare Part B. 

Moreover, because of the way the trigger is designed, policy options to avoid the trigger are limited and may do little to help long-run cost growth.  For example, while researchers have documented worrisome trends in obesity rates and chronic conditions for current and future Medicare beneficiaries, efforts to improve preventive services may reduce Part A costs, but increase Part B costs, thereby setting off the trigger.  Similarly, shifting services from inpatient to outpatient settings has the same effect. 

AARP believes the 45 percent trigger should ultimately be repealed so that Congress is not distracted from the real issue – runaway health costs in the entire health care system.  Runaway costs burden not only Medicare and other federal health care programs, but negatively impact state and local governments, employers, and individuals.  Congress must begin to address the problem of system wide health care cost growth – it is not just a Medicare problem, and it cannot be addressed in Medicare alone. 

Medicare Part D

Because Part D is financed similarly to Part B, it too faces cost pressure, but not insolvency.  The Trustees’ Part D cost estimates are substantially lower than those reported last year, primarily due to lower prescription drug plan bid submissions. However, the Trustees are projecting the average annual increases in spending to be nearly 13 percent – due mainly to increases in per capita drug costs (about 2/3) and enrollment (about 1/3).

The projected increase in Part D spending is clear evidence of the need for Congress to enact policies to further help lower drug costs. 

AARP supports legislation to:

• Remove the prohibition on the Secretary of HHS from negotiating with pharmaceutical manufacturers on behalf of Medicare beneficiaries (H.R. 4, S. 3);
• Allow for a pathway for the approval of lower cost, safe, comparable, and interchangeable versions of biologic drugs (H.R. 1038, S. 623);
• Legalize personal and wholesale importation of prescription drugs, starting with Canada (H.R. 380, S. 242);
• Prevent abuses in patent settlements between generic and brand name prescription drug manufacturers (S.316); and
• Provide full funding for comparative effectiveness research authorized in the MMA.

Conclusion

The Medicare program is vitally important to tens of millions of Americans and their families.  Each year, the Trustees’ Report presents the challenges faced by the program and offers the opportunity to make some improvements for the future. 

AARP believes Congress must make changes to the way Medicare pays physicians and Medicare Advantage plans to keep the program strong for the future.  In addition, Congress can take important steps to help reduce the price of prescription drugs for all Americans.  Ultimately, however, it must address the underlying rate of growth of health care costs in the entire health system – not just Medicare – if we are truly to achieve meaningful reform. 

Chart 1

Projections of Part A Solvency Have Varied Widely
Average number of years until insolvency is 12 (1970-2007)

Source: Derived from CRS, April 1995, and the Annual Reports of the Board of Trustees of the Hospital Insurance Trust Fund, 1996-2007.

Notes:

• No insolvency dates indicated in 1973 and 1974.
• No long-range projection in 1989.
• Range reported, as indicated by the white bars: 1975 Report - late 1990s; 1976 Report - early 1990s; 1977 Report - late 1980s.