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Advisory of April 18, 2007, announcing the hearing WITNESSES Richard S. Foster, Chief Actuary, Centers for Medicare and Medicaid Services, Baltimore, Maryland SUBMISSIONS FOR THE RECORD HEARING ON THE 2007 MEDICARE TRUSTEES REPORT Wednesday, April 25, 2007 U.S. House of Representatives, The Subcommittee met, pursuant to call, at 2:08 p.m. in Room 1100, Longworth House Office Building, Hon. Fortney Pete Stark (Chairman of the Subcommittee) presiding. [The advisory announcing the hearing follows:]
Chairman Stark. If our guests would find a comfortable seat, we will commence the hearing on the 2007 trustees report on the financial condition of the Medicare program. We have with us Mr. Richard S. Foster, Rick Foster, the chief actuary of the Centers for Medicare and Medicaid Services, from Baltimore. He is not a stranger to our Committee. He has been helping us for many years. Thank you, Mr. Foster, for being here. The trustees report is a tool that helps us try and decide what to do about the Medicare program, and we haven't done much adjusting in recent years. As we review your report this year, we will begin to oversee Medicare and try to ensure its continued viability for the future. I would like to start by paraphrasing Mark Twain, saying that the report of Medicare's demise has been greatly exaggerated, but despite some gloom and doom forecasts, the report of the trustees doesn't show any disasters and perhaps can give us some ideas to keep it solvent and sustain it. While we face undeniable demographic challenges, increased cost challenges, the 45 percent trigger warning we keep hearing is, I think, little more than an attempt to both get us to turn away from Medicare as an entitlement. Since Medicare's creation, we have regularly modernized the program to accommodate advances in medicine. For a growing population, one that is growing older and, in many cases in the last years, sicker--and we are going to return to that process--the private plans don't have their own fund, and those payments for Medicare Advantage are drawn from the regular trust funds, and there are some major implications there. Overpayments are directly negatively affecting the solvency in the general revenues for Medicare, and it is something we will have to look at. The report does highlight a large migration in the coming years from the traditional fee-for-service plans, and we can see how the plans have overtaken physician spending, for example, and are now second only to hospitals in terms of the provider costs. The report also highlights that Part B spending is artificially understated because the trustees are forced to assume continuation of the current law under which the physicians are scheduled to get a 10 percent cut next year and nearly a 5 percent cut each of the following 8 years. I think it is pretty clear that the political climate won't allow that to happen to such an extent. So, we have our work cut out for us. I think most of us agree that all payments and all providers are going to have to be reviewed, and I look forward to working with my colleagues on both sides of the aisle and the administration to see if we can balance the competing priorities and enact a Medicare policy that is good for the beneficiaries, the taxpayers, and fair to the providers. A big job ahead of us, and I look forward to the assistance of my ranking member, Mr. Camp, and I look forward to his comments. Mr. Camp. Thank you very much, Mr. Chairman, for holding today's hearing. I also want to welcome CMS Chief Actuary Rick Foster, who will testify about the 2007 Medicare Trustees Report. Having seen the report, which was released on Monday, the long-term solvency of Medicare isn't getting any better. The Health Insurance Trust Fund, which finances Medicare Part A, is now projected to be exhausted by 2019. The Supplementary Medical Insurance Trust Fund, which finances both Part B and Part D, continues to grow at a rate that is greater than both the rate of growth in private insurance and total national health expenditures. Unlike Part A, Part B of Medicare does not face insolvency, but that is only because the program gets its funding from beneficiaries' premiums and general revenue. Because of the rapid growth in Part B spending, beneficiary premiums have significantly increased over the last 4 years. Further growth in Part B spending can only mean dramatically greater costs for both Medicare beneficiaries and taxpayers. I also want to briefly discuss what I believe will be a topic during today's hearing, the 45 percent trigger. This is the second year Medicare trustees have signaled that program outlays will be comprised of at least 45 percent of general revenue funds, and under statute both the President and Congress must respond to this warning next year. I think it is important that Congress not pass on an opportunity to bring real reform to Medicare. We can't afford to wait any longer because financial pressures threatening Medicare only grow greater with each passing year. One positive item in the trustees report highlights how we can potentially strengthen and improve the Medicare program. Program costs for Part D are 30 percent lower than what was projected when the Medicare Modernization Act was passed in 2003, and in 2007 alone plan bids came in 10 percent lower than the previous year. To me, this is evidence that competition is working. Participating plans have successfully negotiated with drug companies and pharmacies to offer plans to seniors at lower cost. Part D is the only part of Medicare that has a lower rate of growth than expected. Some commentators have suggested that with different parties controlling the legislative and executive branches of government it is unlikely that we will enact any serious health care legislation this year. I still recall, however, a divided Federal Government came together to make difficult choices in the past, and this resulted in 1997 in the Balanced Budget Act, which ultimately led to major reforms strengthening and improving the Medicare program and extended the solvency of the HI Trust Fund. I certainly hope, Mr. Chairman, that we can work together again to address this new challenge, and I look forward to working with my colleagues as well on both sides of the aisle as well on this issue. I thank you for the opportunity to address this. Thank you. Chairman Stark. I want to announce that during this period General Petraeus is enlightening the Members on problems in Iraq, and the Chair is one of the few Members in Congress who hasn't signed the secrecy pledge, so I can't go. But my colleagues may be interested, and should be, in hearing what he has to tell us. So, you may notice that they are coming and going. I have suggested to the minority staff that if they have some written questions that you would like to have on the record, I would be glad to present them to Mr. Foster for you. The same would hold for Mr. Doggett, who I know has constituents who are interested in getting a report on General Petraeus' comments. So, I will try and see that if there are any questions that my colleagues want to have directed to Mr. Foster, we can. I am again pleased to have you, Rick. I would like you to take as much time as you desire. Normally we talk about 5 minutes, but you have got a rather major report. So, why don't you just proceed to enlighten us in any way that you feel comfortable.
Mr. Foster. Thank you, Mr. Chairman. Chairman Stark. Pull the mike as close as you can to you. Mr. Foster. Yes, I remember these microphones well. Chairman Stark and other distinguished Members of the Committee, I really want to thank you for inviting me here to testify today about the financial outlook for the Medicare program. I will briefly summarize the key points from the new trustees report that just came out this past Monday. By way of background, let me start off by reminding you that the purpose of the trustees report is to assess the ability, the adequacy of the income of a trust fund and its assets, to ensure that benefits can be paid on time. In particular, while this may be somewhat of a narrow question, it turns out to be a fundamentally important question because unless we have a positive asset balance in a trust fund, then we don't have the statutory authority to make benefit payments. So, the two are tied together. As I said, it is a narrow, but it is an important one. It is not the only kind of question that can be asked. For example, we frequently hear questions having to do with, is Medicare sustainable in the long run? Or what is the impact of Medicare on the Federal budget? These are important questions, but they are fundamentally different questions than whether the trust funds are technically solvent or not. Unfortunately, you can't use one answer for the other question because they are just independent of each other. So, what I will be talking about and what the trustees report is all about is the assessment of the financial status and the ability of a trust fund to pay benefits when they are due. Medicare has three trust fund accounts. There is one, the Hospital Insurance Trust Fund is well known; and then for the Part B and Part D components of supplementary medical insurance, there is a separate account for each part of the program within the Supplementary Medical Insurance Trust Fund. Of course, there is a Part C of Medicare or Medicare Advantage, but its payments or the payments to those plans are made from the Part A and the Part B accounts for Medicare. It doesn't have its own separate account. By law, each trust fund account is separate. In other words, there is no provision that allows shifting revenues or assets from one trust fund account to another. There is no such provision. Consequently, to evaluate the financial status of Medicare, you have to look at each separate account individually and assess the adequacy of its income and assets. I might add that the trustees make projections under current law; they don't assume any change in the laws regulating the program, and the projections are necessarily uncertain. If you think about it, health care costs and their rate of increase from one year to the next can be somewhat volatile and, therefore, hard to project. In addition, they are even more uncertain than normal because of the drug benefit, which is a relatively new program yet. We are starting to get actual experience on it, but it still is quite new. We don't have decades of a track record like we do for Parts A and B. So, the projections, while uncertain, can still provide useful policy information and can be useful in the development of the Medicare program itself. I will talk now about the individual accounts and their financial status as shown in the trustees report, starting with the Hospital Insurance Trust Fund. Most of the financing for this fund, as you know, comes from the HI payroll tax which is part of the FICA and SECA payroll taxes. These rates are set in law and they can't change to accommodate higher or lower spending levels unless the Congress acts to change them. The hospital insurance financial status has improved slightly since last years trustees report, but it remains fairly poor, I have to say. Costs for hospital insurance are expected to exceed the tax revenues to the trust fund in this year, 2007, and all future years. The difference, the shortfall, can be met for a while by using the interest earnings on the invested assets and also by redeeming those assets themselves, but in 2019, as you mentioned, Mr. Chairman, the assets would be totally depleted, and at that point, if there is no corrective action, we could not pay all the benefits that are owed on time. The 2019 depletion date, incidentally, is estimated at 1 year later than the estimate from a year ago. At the end of the trustees' long-range 75-year protection period the schedule tax revenues for hospital insurance are expected to be sufficient to cover only less than one-third of the projected HI expenditures, so that signifies a very large actuarial deficit, which we are seeing just the beginning tip of, currently, but it would grow steadily worse. For supplementary medical insurance and the Part B account, here the financing is about 25 percent from beneficiary premiums, with the other 75 percent met by general revenues. Every year we reset or redetermine the premium and general revenue financing for Part B, and as a result, income will keep pace with program expenditures and the Part B accounts in the trust fund will never go broke. A concern has been raised, however, about the rate of Part B expenditure growth. For example, over the last 6 years, on average, Part B expenditures went up by about 11 percent per year. In addition, for Part B, as you know, there is a major problem with the mechanism for paying physicians under Medicare--the sustainable growth rate mechanism. Under current law it would require us to reduce physician fees under Medicare by 10 percent at the start of 2008; and then at the start of 2009, we would have to reduce them another 5 percent; and at the start of 2010 another 5 percent beyond that, et cetera, for about another 8 or 9 years. Collectively, that would result in a reduction in physician fees of 41 percent in 2016, compared to today's level, so not only no increases, but a 41 percent reduction. That situation is clearly implausible, and the Congress has overridden scheduled reductions for each of the last 5 years; and frankly, I think you all are pretty likely to continue doing so in the future. What that means, however, is that the actual Part B expenditures are quite likely to exceed the projected amounts shown in the trustees report, which are based on current law, including all those reductions in physician payments, and in the longer run, the understatement in the trustees report might well be in the range of 25 to 40 percent, so a fairly serious understatement. Turning to the Part D account in the Supplementary Medical Insurance Trust Fund, Part D financing is similar to Part B in that it comes from enrollee premiums, which currently cover about 7 percent of program costs; but that percentage will increase somewhat over time. General revenues provide the lion's share of the financing, currently about 82 percent, and then the payments, special payments by the States on behalf of the dual Medicare-Medicaid beneficiaries, those currently account for about 11 percent of total program costs. But that share will decline somewhat over the next 10 years. The good news about Part D is that the cost estimates have come down significantly, and over the first 10 years of the projection, they are now 13 percent lower, or about $127 billion, than what we estimated for the same period a year ago. I can describe for you the reasons for this difference in the estimates once we get to the questions and answers. Part D will also be an automatic financial balance, like Part B, because we have this annual redetermination of the beneficiary premiums and the general revenue financing, so we won't have this trust fund going broke either. But it is important to note that we do project costs to grow fairly quickly in Part D over the next 10 years, averaging about There is a basic challenge in financing Medicare or health insurance plans of just about any kind. It is not unique to Medicare, but that is, if you think about how the expenditures increase, health care costs grow if you have more people who are eligible for the coverage, for the benefits. They also grow based on increases in the price per medical service performed, and that typically reflects wages and price increases. But beyond that, as well, beneficiaries tend to use more services over time. The utilization goes up, and moreover, the intensity of those services or the average complexity goes up also. That is a function largely of technology. Every year smart people invent new services, new techniques, new drugs, whatever, and we as the consumers of them want those because they make us in better health. So, for all of those reasons, health care costs tend to increase at a faster rate, say, than our incomes or the national economy, and that causes a financing pressure. It makes it harder and harder over time to pay for the health insurance programs. On top of that, of course, we have the demographic problems that are fairly well known at this point. With the retirement of the baby boom population, the number of beneficiaries will increase much faster than the number of workers, and in addition, as the baby boom generation ages, they will move into the higher ages where health care costs grow the fastest or are the highest. That will contribute also. For Medicare, in total, currently the expenditures represent about 3.1 percent of gross domestic product, or the total size of the economy; but by the end of the trustees' long-range projection period that cost level has grown to 11 percent under their intermediate assumptions. Let me say just a couple words about the 45 percent trigger that has gotten so much attention this year. This was enacted as part of the Medicare Modernization Act in section 801, and the next couple sections as well, and it works as follows: If the difference between Medicare expenditures and what is referred to as the "dedicated revenue sources"--and by that, I mean the payroll taxes, the premiums, the State payments, and the small amount of revenue we get from income taxes on Social Security benefits--so if those four dedicated revenue sources fall short of total expenditures to the extent of 45 percent, if the difference is at least 45 percent and is projected to get there within the first 7 years of the projection, then that prompts a determination by the trustees of excess general revenue Medicare funding. Now if that determination is made in two consecutive trustees reports, as it was--for example, the 2006 report had such a determination of excess general revenue Medicare funding, and we have now had a second consecutive determination in the 2007 report. When that happens, it triggers a, quote, "Medicare funding warning." So, this funding warning is now met or triggered for the first time with this report. The Medicare funding warning requires that the President submit legislation designed to respond to the warning, and he has 15 days after the next budget submission to do that. In this case, that would be the fiscal year 2009 budget that comes out in early February 2008. So, either as a part of that budget or within 15 days afterwards the President must submit the legislation, and then Congress is required to consider the legislation on an expedited basis under special rules. The test itself is a little more complicated, perhaps, than I might prefer, but I would characterize it as a useful measure, useful indication of the magnitude of the general revenue financing that is provided under current law for Medicare. For many years, hospital insurance always got the attention because the HI Trust Fund was always going broke or threatening to go broke. The Parts B and D of Medicare, which were, in fact, increasing at a faster rate than Part A, got relatively little attention. So, I think the intent of this new test, this new funding warning, was to call more attention to the magnitude of the general revenue financing and to the impact on the Federal budget; and I think it useful in that regard. We have to be careful, however, because a Medicare funding warning, despite its title, should not be interpreted as an indication that trust fund financing is inadequate. It is not that kind of measure. That sort of assessment can only be made, as I mentioned, by looking at each account individually and assessing the adequacy of its financing and assets. Let me finish up by saying that based on the projections in the 2007 trustees report, the Medicare board of trustees recommends prompt attention to the financial challenges facing Medicare. Chairman Stark, as you well know, for many, many years, really, many decades, the Office of the Actuary at CMS has helped Congress and the administration in analyzing the financial situation and what might be done about it; and I would just like to pledge the Office of the Actuary's continuing assistance to Congress as you continue to strive to solve these challenges. I would happy to answer any questions that you might have. [The prepared statement of Mr. Foster follows:] Chairman Stark. Rick, thank you very much. My staff deeply appreciates your offer of helping us, because as we try and reconcile whatever savings we will have to find in the Medicare program this year, we are going to need a lot of help estimating a figure that, whatever changes we make, will create in the overall. I have got a couple of questions that I would like to get through and then a couple on your testimony. A chart on page 148 shows that growing enrollment and expenditures; that we are getting growing enrollment and expenditure in Medicare Advantage. It seems to me we are spending more, not less, on these private plans than we would spend in the traditional program. Is that a correct assumption? Mr. Foster. Yes, sir. Under the current payment mechanism for Medicare Advantage plans, except in rare circumstances, we end up paying more for those enrollees than we would for the traditional fee-for-service enrollee in the same area. Chairman Stark. That would be the case during the whole 75-year window? You don't see any way of growing out of this? Mr. Foster. We don't see any change under current law in that regard. The degree of the higher payments would change somewhat, but they would remain higher than the Chairman Stark. So, in your opinion, if we followed MedPAC's recommendations with respect to the Medicare Advantage plans, the financial condition or outlook for Medicare would be improved? Mr. Foster. Yes. If you mean, by that, their discussion of setting the Medicare Advantage benchmarks equal to the fee-for-service cost in the area, yes, that would reduce costs. Chairman Stark. Because the Part B premiums are based on total Part B expenditures, which include payments to the Medicare Advantage plans, isn't it true that the Part B premiums are raised for all beneficiaries even though 80 percent of the beneficiaries aren't in Medicare Advantage plans? In other words, we have to raise the Part B premiums on all Medicare beneficiaries to pay for the slightly less than 20 percent who are in Medicare Advantage plans; is that a correct assumption? Mr. Foster. Yes, sir, it is. There is a standard premium for all beneficiaries; and as you know, of course, starting this year, there is also an income-related premium for certain high-income beneficiaries. But the premium is the same for each income category regardless of whether you are in a Medicare Advantage plan or not; and we have estimated that the additional payments to Medicare Advantage plans above and beyond what the fee-for-service cost would have been adds about $2 per month to the standard Part B premium. Chairman Stark. If the Advantage rates had been equalized, do you know whether or not we would have hit the 45 percent trigger in the past 2 years? Mr. Foster. Well, we wouldn't have hit the trigger in the past 2 years because if you had lower expenditures, then the ratio would go down and that would extend when you hit the trigger. I misunderstood your question. You are saying, would we in fact have Chairman Stark. Been under the 45 percent? Mr. Foster.--been under 45 percent within the 7 years? We might not have. In other words, we might have stayed below the 45 percent. We could figure that out for you, but we have not actually done the calculation. Chairman Stark. If it is easy to figure out, I would be curious to know it, but I am not sure that it is a bit of information that will sway a lot of votes. Mr. Foster. I would tend to think that--because in 2013, in the projection currently, we are only slightly above the 45 percent threshold, it is my guess that the lower payments, if the law were changed in that way, would reduce us below that threshold for 2013--maybe for not a lot longer. Chairman Stark. If we had lowered the Advantage payments to equalize the fee-for-service rates, what would have been the effect on the solvency projections? Do you know that? Mr. Foster. Yes, sir. If we set the benchmarks at the fee-for-service level, that would reduce Part A payments to Medicare Advantage plans, just like Part B payments; and we have estimated that would extend the insolvency date for about 2 years. Chairman Stark. You mentioned in the Part D that the costs were about 13 percent below the estimate. Can you tell me what--how much of that reduction, or cost savings, maybe it is figured in, would come because there was lower enrollment than was anticipated? Mr. Foster. I can provide the specific answer for you for the record. I can tell you less quantitatively that that is one of the factors behind the lower estimated cost, but it is also one of the smaller factors. Chairman Stark. Are generic drugs one of the factors, higher utilization of generics? Mr. Foster. That is one of the factors actually in two different respects. If I may elaborate on that, the biggest factor underlying the lower cost estimates that we have today, compared to our original ones from 2003, far and away the biggest factor is that in 2004, 2005 and 2006 the cost growth for prescription drugs per capita in the country at large, not just Medicare, but that cost growth was suddenly only about 5 to 6 percent per year; and that is really only about half, less than half of what it had been for more than a decade prior to that. So, that was a dramatic slowdown in the rate of cost growth for prescription drugs, and that affected the Part D program as well. So, that is the biggest factor. Part of that is that the private sector plans--in fact, all drug plans--had a big push to increase the use of inexpensive generic equivalents and to cut back on the use of more expensive brand-name drugs. So, that contributed to this slower growth rate, along with other factors. In addition to that, another one of the significant differences between the cost estimates had to do with the savings that Part D plans could generate by negotiating favorable retail price discounts, also manufacturer rebates. Through utilization management, we had originally expected such savings could represent 25 percent savings off of a retail level, but we thought it would take competition among plans a few years to reach that ultimate 25 percent. We were pleasantly surprised to find that the plans anticipated about 27 percent in the very first year and again in 2007. So, their savings from the retail discounts, the rebates, and the utilization management were bigger than we thought they would be initially, and similar thereafter. The last factor has to do with the 10 percent reduction in the bids that you mentioned, Mr. Chairman. This was, again, a welcome surprise and somewhat startling. Drug plan costs generally increase over time, and so when we discovered that the bids, on average, had actually gone down 10 percent in 2007 compared to 2006, it was, as I said, quite a surprise. Now many of the plans are continuing to push the generic use as a way to keep their costs as low as possible and to be competitive. In addition, we saw many plans in 2006 that had not bid terribly competitively, and as a result, they had relatively high premiums and they weren't competitive. They didn't get much enrollment. Most of those plans came in trying a lot harder in 2007, and in fact, they mostly were able to reduce their bids to a more competitive level. Chairman Stark. Along that line, however, isn't it correct that the government, if they are overly aggressive in lowering their bids, then Health and Human Services comes in and gives them a subsidy to cover some of the costs so that, in effect, if I am running a drug plan, if I understand this system, if I do a low-ball bid, then I will get extra money from Health and Human Services to cover some of the costs that may result from my bidding too low. Is that not the way the system works? Mr. Foster. That is pretty close to the way it works. Chairman Stark. How much would you guess that we are going to end up spending on these so-called risk sharing payments? Mr. Foster. Well, we have had to think about exactly that issue, Mr. Chairman. Because the bids for 2007 were so low, you have to ask yourself, are they overly aggressive, can the plans actually fulfill this level of cost that they are expecting? We decided that at least for some of the plans, on average, they probably cannot for the 2007 bids. Now, we estimate--based on what are frankly some relatively crude assumptions about how many plans and by how much, we estimate that for the next couple of years, based on the 2007 and 2008 experience, that we will have to pay back to the plans about $1 billion per year, roughly $1 billion. Chairman Stark. For how long? Mr. Foster. Well, for the experience coming out of 2007 and, again, for the experience coming out of 2008. For 2006, we actually expect to get money back from the plans because the risk sharing works both ways. If they do better than their bids, they have to share with us on the same terms their extra profits. So, in the first year, for 2006, we expect to receive a modest amount of returned amounts from the plans, but thereafter, about--a little over a billion dollars for 2 years. There is a table in the trustees report that shows these estimates. Chairman Stark. How about over a longer period of time? Mr. Foster. We expect it to gradually decrease. It is reasonable to think that there will continue to be a very heavy degree of competition among plans, intense competition, as we have seen so far; and there might continue then to be some degree of either excess optimism, or over aggression or whatever you might want to call it, such that, on average, they might continue bidding a little lower than they can actually achieve in practice. Now, starting in 2008, the risk-sharing arrangements, the risk corridors, are no longer as favorable from the plan standpoint, so if they lose money from bidding too aggressively, they have to retain more of the loss than they do for 2006 and 2007. Chairman Stark. Do you want to give me an aggregate figure guess for 10 years? Mr. Foster. We can add it up for you, but it starts off at a little over a billion a year and then quickly goes down to about 0.4 billion. Hang on a second; we will look up the year-by-year figures for you. Chairman Stark. I have one more question, and I will let my colleagues jump in here. Mr. Foster. Let me go ahead and answer this one for you. On page 158 of this year's trustees report, we have a table that shows, in the next-to-the-last column, the net amount of risk-sharing payments made by Medicare. For 2007, we expect to pay on behalf--I am sorry, to receive on behalf of--plans experienced in 2006 about $1.2 billion that they have to pay us back. Within the next year, we estimate having to pay them another 1.2 billion as loss sharing; then 1.1 billion; then 0.9, 0.8, et cetera, and in the tenth year, about 0.7 billion. Chairman Stark. For a total of-- Mr. Foster. I can add it up. Chairman Stark. Around 7 billion, I am willing to bet you. I can't do that with my shoes and socks on. Mr. Foster. 6.9 billion. I should introduce who is behind me. This is Paul Patalnek, who is the director of our Part C and D actuarial group, a position created by the MMA. This is Clare McFarland, the deputy director of our Medicare and Medicaid cost estimates group. Chairman Stark. Welcome. Mr. Foster. Elizabeth Hall, who I am sure you know. Chairman Stark. I hope we can see more of you. Let me just do something on Part B, because as I mentioned, we are going do have to deal with the physician reimbursement. But you mentioned that physicians, under current law, which is what you used to base your estimate of the 11 percent per year growth, that their income would have to drop 10 percent. Now, my guess is that you don't mean income, but you mean their rates per procedure would drop 10 percent. Mr. Foster. Yes. If I said income, I should have said rates per procedure. Chairman Stark. Therefore, if we are going to have an 11 percent per year growth, unless you assume you are going to get a 10 percent a year increase in the number of docs, is it fair to assume that even in the face of a per-procedure cut, that the physicians may be receiving at least as much or more gross payments or income from the Medicare Part B system under fee-for-service? Mr. Foster. It is certainly true that a physician's revenue from Medicare reflects not only the payment per service, but how many services they perform. It also depends on the type of service they perform. So, for example--and let me mention, 11 percent is the actual historical growth rate on average over the last 6 years--under current law we project--and that was for Part B in total, not just physicians, but Part B--we project for total Part B spending over the next 10 years an average growth rate of 6.6 percent, but that reflects the current law reductions in physician payments. If Congress continues to override the payment reductions for physicians, then the growth rate would probably be more like 8 to 9 percent. Chairman Stark. Thank you. Thank you very much. I am going to recognize, with Mr. English's concurrence, Mr. Doggett, and then Mr. English. Mr. Doggett. Thank you very much. I am glad you are here under less contentious circumstances than your last testimony to the Committee. If I understand your testimony and the way this 45 percent trigger works, next February we should be receiving a report from the President outlining the steps that he recommends we take, perhaps the cuts in Medicare he had in his budget this time. Or he could propose changing the eligibility age of people, any number of things that would reduce the likelihood of the general revenue needs exceeding this amount. Mr. Foster. That is correct. Mr. Doggett. As to that 45 percent number, my recollection is that we never had a hearing in the House or the Senate to establish it, we never had anyone discuss it, that it was snuck in in the dead of night, or the light of day behind closed doors, in a conference Committee. Isn't it a rather arbitrary number? Have there been any studies or expert testimony to say that 45 percent is an appropriate trigger figure? Mr. Foster. I, too, was not part of the development of that particular threshold, so I am not in a good position to comment. I will say that it clearly must be judgmental; there is no scientific-- Mr. Doggett. Just as the 2 consecutive years is arbitrary and judgmental. Mr. Foster. Yes. I wouldn't say any of it is unreasonable. I think it is for a worthwhile purpose, but clearly it is judgmental. Mr. Doggett. You discussed this a little with the Chairman about the lower enrollment and the impact that it had on lower-than-expected costs in Part D. Do you have data available on how many of those, as far as the decrease in enrollment, are the low-income, subsidy-eligible or extra-help-eligible individuals? Mr. Foster. Relatively few out of the total difference that has come about between what we originally thought and the actual enrollees, relatively few of those people are in the low-income-subsidy category. We knew, of course, going into it that all of the Medicare-Medicaid dual beneficiaries would be auto-enrolled or facilitated into the program, and we had a pretty good idea about the additional number who would come in. So, that is not a large number. Mr. Doggett. As far as the group that is not automatically enrolled, but entitled to extra help, people that are not in Medicaid, are the number that have participated--how do they compare with the number that you estimated in your actuarial estimates originally? Mr. Foster. Currently, the total number of Part D enrollees who qualify for the low-income assistance is about 9.5 million, and we have estimated at one time or another that the total universe of people who we think would be eligible is about 13 million. I always have to caution everybody that estimates like that are very hard to do. Mr. Doggett. Of the 13 million, did you estimate originally how many you thought would take advantage of the program, would actually be enrolled? Mr. Foster. Yes, we did; and I don't remember the figure off the top of my head. Mr. Doggett. Is that something you could forward to our staff, because we have a hearing next week that relates to this subject, and I would appreciate getting the number by then. Mr. Doggett. Then on the question of the efficiency of Medicare in fee-for-service, have Medicare's administrative costs remained low? Mr. Foster. Yes, sir. If you look at the total administrative costs for Medicare, including everything that we incur at CMS, as well as what we pay for our intermediaries and carriers and other contractors to help process the claims and all, that total cost is a bit under 2 percent of total expenditures. Mr. Doggett. Is there any private plan in Medicare that comes close to that level of administrative costs? Mr. Foster. No. Virtually no health insurance plan would be that low. We have a giant economy of scale, which helps a lot. We don't have to earn a profit as a government entity, which helps some. But the other part of it is, we are probably not spending enough. I don't want this to sound like a blatant appeal for more funding, it is not that, but if you look at the private health insurance plans, they put a lot of resources behind tracking their claims experience monthly, or even weekly in some cases, to see how it develops. If they spot something funny involving potential fraud, for example, they are able to act on it very quickly. CMS is doing a much better job than, say, 5 or 10 years ago, but I would argue we are not doing enough in that regard. Mr. Doggett. Do you have an estimate of what additional amount would be cost productive to expend there? Mr. Foster. No. We don't have such an estimate, but past exercises have indicated you generally get a multiple return on your administrative dollars in this respect. Mr. Doggett. Mainly in looking for fraud? Mr. Foster. Fraud, but also what I would consider abuse. Let me give you an example. In my office a few years ago we were trying to understand why durable medical equipment costs were going up so quickly. That was the unit that we measured for that category of expenditures, durable medical equipment, and it was increasing much more rapidly than it had been. So, we looked at the subcategories, and in the process, we discovered that powered wheelchairs, the expenditures on such devices were increasing at about 40 to 50 percent per year for 4 years. So, we called this to the attention of other folks at CMS, and everybody dug into it a bit to see what was happening, and they revised the rules and so forth. Ideally, somebody--we or somebody else--would have discovered that problem in the first year, not the fifth year, before we had already spent a billion dollars, perhaps excessively, on the devices. Mr. Doggett. Well, could we enlist the assistance of your office in talking to the Congressional Budget Office and working to get some scoreable services on antifraud and abuse investments? Mr. Foster. We would be happy to talk with them and show them some examples of specific initiatives that have worked well. Mr. Doggett. I think that would be helpful. We are trying to find all the savings that we can in order to address some of the needs here. Then just, finally--and thank you for your consideration on this, Mr. Chairman--we don't have anything in your report, understandably, on the efficiency and administrative expenses of Medicare Advantage plans. Are there any estimates on what their administrative costs are? Mr. Foster. Yes. In fact, I do have some data here for Medicare Advantage plans, and these are broad averages of the plans participating in Medicare, the overall administrative cost, including profits, averages out about 13 percent. Mr. Doggett. So, we probably afford all of the antifraud, antiabuse changes that you could ever conceive of with Medicare's less than 2 percent expense and still have substantial savings over those Medicare Advantage plans. Mr. Foster. Substantial savings? Mr. Doggett. In terms of the administrative costs. Mr. Foster. But there are other components that go into it. In fact, if it is all right, I will mention just briefly, the private plans have the potential to have a lower cost for the Medicare covered services than fee-for-service if they can do the following: If they can negotiate more favorable prices for the services they get from their own providers than the Medicare payment rates, or if they can manage care so you avoid some of the unnecessary or harmful services, they can reduce money compared to Medicare fee-for-service. But they have to reduce it enough to offset their disadvantage on the administrative cost, because they have to make a profit and they don't have the economy of scale. Mr. Doggett. Thank you so much for your testimony and your service. Mr. Foster. You are welcome, sir. Chairman Stark. Mr. English, would you like to inquire? Mr. English. Thank you, Mr. Chairman. Mr. Foster, thank you for the opportunity to examine a program that obviously has been challenged as long as I have been in the House of Representatives, but with some wrinkles. Mr. Foster, this year the trustees report significantly lowered their expenditure projections for Part D. I think you have testified that they are 13 percent lower than last year. How much lower is the 2008 estimate of Part D cost as compared to the original estimate in 2003? Mr. Foster. That I can provide for you for the record. I don't have the figures with me. It would be roughly on the order of 30 percent. Mr. English. Maybe more. As you see it, what was the most significant factor for the trustees in their consistently lowering their cost projections for this part of the program? Mr. Foster. The biggest factor is actual data over time. When you go back to 2003--the latest survey data we had on drug use by Medicare beneficiaries dated back to either 1998 or 1999, so we had to project forward from the late 1990s to 2006 as to how the cost would increase over that time. I think we did a good job of that at the time, but then, as I mentioned earlier, starting in 2004, the annual cost increase per capita dropped abruptly, taking us and virtually everybody else by surprise. Mr. English. I understand your analysis, but isn't it also true that Part D plans were able to actually negotiate deeper discounts from drug manufacturers than the trustees had originally anticipated? Mr. Foster. Yes, sir, that is correct. Mr. English. By what dimension? Mr. Foster. We originally estimated--really, it was an assumption--that ultimately the pharmacy benefit managers, working on behalf of the drug plans, would be able to achieve savings off of retail level of about 25 percent. That represented, roughly, the best experience in PBMs that occurred at the time. We thought, initially, plans would not get there immediately. We thought the competition would take a few years to develop. So, we had an assumed savings of about 15 percent in the first year, building up to the 25 percent level over a few years. In real life, when we got the bids for 2006, the actual savings for retail discounts, utilization management, and manufacturer rebates came in at 27 percent, so a little higher than our ultimate assumption was. Mr. English. Mr. Foster, on a different point, the trustees report estimates Part B premiums, and it appears to me at least that the estimates are unrealistically low on the strength of the fact that built in is a assumption that current law will not be overridden. That would require Medicare payments to physicians to, in effect, be cut by 10 percent in 2008 and 5 percent for the next 8 years. I don't think that is going to happen. If Congress modifies these changes, beneficiary premiums necessarily will have to increase. If Congress were to provide a 1-year fix for physicians, what would the impact be on Part B premiums for next year? Looking beyond that, if the SGR were to be eliminated altogether, what would be the consequences for Part B premiums paid by seniors to participate in this program? Mr. Foster. Yes, let me give you a specific example to answer your question. The premium this year, 2007, the standard Part B premium is $93.50 per month. We anticipate under current law in the trustees report, as you suggested, that if nothing is done about the physician payments, the premium would have to increase modestly to $96.40 per month for next year. That is about a 3 percent increase. Now, if instead Congress acts to avoid the 10 percent reduction in physician fees that would occur otherwise under current law and if you avoid that by providing a zero percent update--in other words, freezing the payment rates at current levels--then the premium would have to increase to $100.50, so about a $4 increase compared to current law. If instead of the zero percent update, if the update were, say, equal to the Medicare economic index, which is a measure of input costs for physicians, then the premium--and it would be about a 2 or 2.5 percent increase for physicians in that scenario--then the premium would be $101.40. In other words, about a $5 increase. Mr. English. I think that is extremely useful information, because undoubtedly we are going to be under pressure to consider precisely those sorts of changes. I yield back my time. Thank you, Mr. Chairman. [3:09 p.m.] Chairman Stark. Thank you, Mr. English. Ms. Tubbs Jones, would you like to inquire? Ms. Tubbs Jones Thank you, Mr. Chairman. Yes. I would. Good afternoon, Mr. Foster. How are you? Mr. Foster. Good. Ms. Tubbs Jones I want to go back to an area that my colleague from Pennsylvania asked you about earlier with regard to claims information on the Medicare prescription drug program, Medicare Part D. We implemented Medicare Part D. Some of us like it, some of us don't, some of us say it is doing a great job. But your job is to do projections moving forward to help us understand what type of shape the fund is going to be in, right? Mr. Foster. Yes, ma'am. Ms. Tubbs Jones So, do you have any numbers at all with regard to Medicare Part D, claims numbers? Mr. Foster. We are only--we being the Office of the Actuaries-- Ms. Tubbs Jones I understand. Mr. Foster.--we are now only starting to get the individual claims itself, the individual drug-by-drug claim data. We now have access to it, and we are now starting to look at it and assess its quality. We have other data. We have actual data on enrollments. Ms. Tubbs Jones Actual data on what? I am sorry, sir. Mr. Foster. Enrollments. How many people have signed up, what type of people, et cetera. We also have the data from the bids that the Part D plan submit. Ms. Tubbs Jones The bids? Mr. Foster. Yes, the bids. As part of the process for the competition, they have to submit a bid by the first Monday or whatever it is in June, and that is the bid. They can't go back and change it. They live or die by how good a bid that is competitively against the other plans. Now, the bids themselves are their expectations. They are still estimates. They give us a bid in early June, which is their estimate for the following calendar year's cost, but they have a pretty good idea of what those costs ought to be. So, we have that kind of data, but insofar as what is happening in 2006 so far, we are only now really getting the data we have been wanting. Ms. Tubbs Jones Then back when this whole discussion about Medicare Part D began and there were projections, there was a big deal about what the real cost of Medicare Part D was really going to be. Back then it was--I guess the administration had some amount, and somebody else within the administration had a bigger amount, and supposedly that guy ended up losing his job because he said that amount was different than what the administration had originally planned. I say all that to say that actuaries are pretty--you are pretty--what is the word? You do projections, but you are pretty accurate with those projections. That is why we use actuaries, right? Mr. Foster. Sort of. Ms. Tubbs Jones Sort of. Now, wait a minute. If I had you on a witness stand in a case, I wouldn't want you to answer "sort of." What kind of expert would you be, sort of? Mr. Foster. I would be glad to elaborate, ma'am. Ms. Tubbs Jones I am saying that to say that the job of actuaries and the reason that we as a Nation and a world have come to rely on you is because of the ability you have to take numbers and make some projections. Mr. Foster. It is partly that. It is partly perhaps our foolhardy willingness to undertake such projects. The reality is, of course, the future is uncertain, the future is unknowable. We do the best job we can to try to figure out what costs will be, what trends will be, and in some cases it is easy. If you ask us what would the savings be if we reduced a particular provider of market basket update by 1 percentage point, we can tell you the answer to that quite precisely. On the other hand, if you ask us something like Part D, a new drug benefit, no past experience because the program hasn't existed, it is voluntary, not everybody will sign up, and we don't know how many plans we will get, with all those behavioral questions, that is really hard to estimate. Ms. Tubbs Jones So, then you would be better--or we would be better spent, then, to have a section of the report say, well, we are unable to really give you any good projections about Part D right now. Let us--give us another year when we have some real numbers and some real expectations then to be able to make the projections of what kind of shape Medicare or Medicaid is in based on Part D versus all the hoopla we are getting about this is the best program in the world, you know, seniors are real happy, they are getting drug treatment--not drug treatment, maybe they need that, too--but prescription drug coverage and the like. I am just trying to understand as I try and swallow or understand the report that there are factors such as I am relating to you with regard to Medicare Part D that you really can't tell us what is going on. Mr. Foster. We certainly can't tell you with certainty. The best we can do or the best any actuary can do is to give you an idea, a reasonable idea, of what the cost might be under normal kinds of circumstances. That is a good thing for policymakers like yourself to know about as opposed to saying it is hopeless, let's not even try. Ms. Tubbs Jones If you could just give me 1 more second, Mr. Chairman. I know my time is up. Is there anything else that I should be, as a policymaker, be concerned about that you can't put your arm around on a number, other than Medicare Part D? What else is there that I need to be concerned about? Mr. Foster. The farther we go out with the projections, the less certain they become. We can predict maybe the next 5 years pretty nicely in most cases, but the further out you go, the more opportunity there is for health care costs, health care service and delivery, and the nature of medical practice to change in ways that we can't anticipate now. Ms. Tubbs Jones So, you are saying there could be included in this other group of some uncertainty the cost of equipment, the doctors' fees, I don't know what. Mr. Foster. There are literally dozens and dozens of such factors we have to take into account to make these projections. Again, I think they are reasonable to help you in policymaking, but you don't want to bet the farm on our projections being exactly right in 5, 10 years or let alone 50 or 75. Ms. Tubbs Jones Mr. Foster, I am a former judge, and I had a lot of experts. You are the most honest actuary I have ever heard from in my life. Thank you very, very much for your testimony. Mr. Foster. Thank you very much, ma'am. Chairman Stark. Mr. Thompson, would like to inquire? Mr. Thompson. Thank you, Mr. Chairman. I would. I have a couple of questions for the honest actuary. Thank you for being here. In your testimony you mentioned that the Part D plans, bids were 10 percent lower in 2007 than in 2006. Are you suggesting that this decrease could be attributed to the plans underbidding their actual cost in an attempt to gain market share? Mr. Foster. It is possible. In other words, it is conceivable that one or more plans would figure out the best they could do and possibly bid a little lower than that in an effort to get the lowest possible premium and to get market share, and knowing that they can rely on the risk-sharing arrangement to keep from losing too much money. However, they can't get too carried away with this because my staff and I review these bids to make sure that they are plausible, to make sure that they are reasonable. If we spot what looks like a low-ball bid, we go back to them and we give them a hard time, we make them explain it, and often we don't accept it. Mr. Thompson. Given that follow-up or that review, what are your assumptions on future plan bid increases or decreases? Mr. Foster. We expect starting in 2008--and this is more of an assumption than a solid fact of any kind--but we expect starting in 2008 that we will see a more normal kind of increase in the bids. Mr. Thompson. A more normal what? Mr. Foster. Sort of increase in the bids. It would be startling to have another decrease in the bids; not inconceivable, but startling. When they first went into this in 2006, of course, the plans themselves did not know for a fact what their costs would be. This was a new program for them as well. They might have been a little on the conservative side to make sure they didn't lose too much money. But now that they are getting some amount of experience in their first year, they had a better idea of where their costs would be in the second and later years, and they will get better with their bidding over time and dial it in. Mr. Thompson. Thank you. What portion of the decrease in Part D expenditures is due to a lower-than-expected enrollment? If that is the case, how many of those are low-income, subsidy-eligible individuals, your lack of data notwithstanding? Mr. Foster. Right. I will provide a detailed answer for the record, sir. I will give you more of a qualitative answer right now. Out of the three or four major factors explaining the difference in the cost estimates, the difference in enrollment is the smallest contributing factor. Within that, the low-income subsidy figures on the number of enrollees are not a big factor. But we will provide a more specific answer for you. Mr. Thompson. Okay. Thank you. Then in regard to Medicare Advantage plans, should you expand your work to include more information about--I am talking about the trustee reports, future trustee reports. Should those be expanded to try to capture more information about the Medicare Advantage plans and their impact on the trust funds? Mr. Foster. Yes. I think that would be helpful. Mr. Thompson. How do we do that? Could you just do that? Do I have to ask Mr. Stark to tell you to do that? What do we do? Mr. Foster. Sooner or later we have to ask the Board of Trustees just because we write the words for them, just because we make the projections, we draw the graphs and print the report. Mr. Thompson. So, should we send a Subcommittee letter to the Board or something? Mr. Foster. You certainly could. Mr. Thompson. What is the most effective way to get that? Put it in a bill someplace or-- Mr. Foster. Well, ultimately if you put it in the bill and it became law, of course, we would follow exactly that. But I think the easiest and best thing to do would be if you would like to send a letter to the Board of Trustees asking for specific kinds of information, I am sure the Board would consider it. An even easier way is you just tell me. Have your staff send me a note about the kinds of things you would like to see in there. Mr. Thompson. Could you consider my questioning, then, you being told? Mr. Foster. I beg your pardon? Mr. Thompson. You said tell you. Would you consider my questioning as me telling you? Mr. Foster. Works for me, sir. Mr. Thompson. Thank you. Thank you very much. I have no further questions, Mr. Stark. Chairman Stark. Thank you. I would add to Mr. Thompson's request in that as it--I guess it is now our second largest expenditure group. It is going to become more important for us to know how those expenditures are broken down and what is comprised in them. I wanted to ask just one other thing that I missed again. We have just started to income-relate the premiums. For the record, it is something to which I objected only because I think the system is already as progressive as it can be. You pay the tax on your income without limit. So, if you make $10 million a year, you pay a huge tax, and you get the same benefit as somebody making $10,000 a year. I don't know why we should make it superprogressive. But relative to the Part B premium change, a couple of questions. Could you tell me how many beneficiaries are being charged higher premium amounts? Do you have any idea of whether or not people are dropping out of Medicare because of the higher premiums? Then just other consequences to the plan that I am not aware of. So, I mean, relative to this kind of new procedure, do we know how many are getting charged? Is there any indication that they are dropping out because of this? Is it behavioral? What does it mean for--I don't suppose it adds much to the Part B--it doesn't change--or will it change what other people will pay? I don't know. Could you enlighten me on that? Mr. Foster. Yes, sir, to an extent. We don't have actual data yet on the number of people paying the higher premium. We will down the road a ways. What we have right now are our estimates of the number of people who would be affected by the income-related premium. Also we do estimate that some people would drop out or have dropped out either because they don't think financially it is a good deal for them, or they are just irritated. For 2007, the first year of operation for income-related premium, we are estimating that about 2.2 million beneficiaries are subject to the higher premium rate, and that is a little over 5 percent of all the beneficiaries. We further estimate that that figure would grow over time, such that in 2016 it would be about 3.2 million, and that is about a little over 6 percent of beneficiaries for that year. We don't anticipate a large-scale dropout of people from Part B as a result of this for many reasons, but we have estimated that initially for 2007 about 11,000 beneficiaries would drop out, and that that would increase over time, reaching about 46,000 in 2016. Chairman Stark. Total or per year? Mr. Foster. That is total, total that would have dropped out. Chairman Stark. Well, I gather, then, that just the philosophical effect probably would be more than the financial effect on the system. I want to thank you for most generously offering to be involved in helping us wind our way through. I was talking to Mr. Camp earlier, and I don't know that any of my colleagues on this Subcommittee have gone through the production of a reconciliation bill, and I would have a few senior moments remembering the last time I did. So, we are going to have a learning process here as we try to come to grips with whatever the budget will require us to save, and your staff could be most helpful to us in helping us come to grips with how we gather these numbers. We, of course, are going to have to sit after some kind of a budget target for our Subcommittee and find those areas that we can dial up or dial down. Let's say we are going to change hospital payments. Then within that, as you recall, we have to deal with rural hospitals a disproportionate share, and teaching. All of those adjustments in kind of a zero-sum game are politically difficult, but they are somewhat easier if we have some idea, particularly in those areas where it is linear, we just have a market basket minus or plus, does it just go up and down in the straight line, or do we have to watch out for unintended consequences on the rest of the closed system. So, we will take you up on your offer. It was very gracious of you to do that, and we have been having some seminars for the Members and staff, and I think we might--if you and some of your staff would be willing to have you come by and be our instructors for an hour or two when we meet again to get some idea of what we are faced with as we try to make this budget come into balance. Thank you. Thank your staff. Look forward to working with you the rest of the year. Thanks very much. Mr. Foster. Thank you, Mr. Chairman. Chairman Stark. The hearing is adjourned. [Whereupon, at 3:25 p.m., the hearing was adjourned.] [Submissions for the Record follow:]
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