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Testimony on the Annual Report of the Federal Hospital Insurance (HI) and Supplemental Medical Insurance (SMI) Trust Funds by The Honorable Donna E. Shalala
Secretary
U.S. Department of Health and Human Services

Before the House Ways and Means Committee
June 6, 1996

Mr. Chairman, Members of the Committee, thank you for the opportunity to address the Committee on the 1996 Annual Report of the Board of Trustees of the Federal Hospital Insurance (HI) Trust Fund and Supplementary Medical Insurance (SMI) Trust Fund. Each spring, the Medicare Trustees submit their annual report on the status of the Trust Funds to Congress. The report, which was released yesterday, projected that under Intermediate assumptions the HI Trust Fund would be depleted in 2001.

We should not alarm our Medicare beneficiaries. The Trust Fund contained nearly $130 billion in assets at the end of 1995. The balance is currently near an all-time high, and there is no imminent danger that claims will not be paid. There is time for us to act but let me emphasize that we should act now to ensure the solvency of the HI Trust Fund. We are hopeful that we can find common ground with this Committee and with the Congress on Medicare reforms that will strengthen the HI Trust Fund in the short-term, and provide us with sufficient time to carefully consider approaches to preserving the fund's long-term solvency.

Let me remind you that this report is consistent with our three previous reports. In fact, over the past 15 years, the Trustees have projected the date of insolvency to be anywhere from 1987 to 2005, and each year they recommended that Congress take action to protect the HI Trust Fund. Each time, the Congress and the Executive branch have always been able to respond to short-term challenges, improve the short-term longevity of the HI Trust Fund, and ensure continued Medicare protection for beneficiaries.

Only a few years ago, when the Clinton Administration took office, the HI trust fund was projected to become insolvent in 1999. We immediately took action, proposing a package of $56 billion in Medicare savings that extended the solvency of that trust fund for another three years. I believe that our record reflects our unwavering commitment to ensuring that the trust fund remains solvent.

Summary of the 1996 Report and Recommendations.

Let me begin by describing the HI Trust Fund and the services it supports for Medicare beneficiaries. The HI Trust Fund pays for inpatient hospital care, as well as expenditures for home health services., skilled nursing care, and hospice care. In 1995, the HI Trust Fund paid for $1 16.4 billion in services for 33 million aged and 4 million disabled beneficiaries.

The HI Trust Fund is financed primarily by payroll taxes. Employees contribute 1.45 percent of wages, and there is a matching contribution by employers. Self-employed individuals contribute 2.9 percent of self-employment income. OBRA 93 removed the ceiling on the amount of earnings that are taxable; consequently, this tax applies to all earnings. The Trust Fund also receives income from interest earnings on its assets, revenue from taxation of Social Security benefits, and income from miscellaneous sources.

Supplemental Medical insurance (SMI) or Part B covers physician services, along with outpatient hospital services, laboratory services and durable medical equipment. The SMI trust fund is financed by general revenues and premiums paid by enrollees and it covers Part B services. Part B premiums are deducted directly out of the monthly checks of Social Security beneficiaries. In 1996, premiums are $42.50 per month.

While SMI or Part B growth affects the federal budget deficit, unlike the HI Trust Fund, the SMI Trust Fund could never become insolvent. In the 1996 report, the Medicare Trustees note that the financing established for the SMI program for calendar year 1996 is estimated to be sufficient to cover program expenditures and preserve an adequate contingency reserve. Trust fund income is projected to equal expenditures for all future years -- but only because beneficiary premiums and government general revenue contributions are automatically increased to meet expected costs each year.

Medicare Trust Fund expenditures are driven by increases in enrollment, the complexity of medical services, and health care inflation generally. In the future, Trust Fund expenditures are projected to rise more rapidly than Trust Fund revenues. Anticipated increases in the number and complexity of medical services are expected to continue to result in expenditure growth rates in excess of payroll growth. Beginning in 201 0, the demographic shift that will occur with the retirement of the baby boom generation is projected to drive the expected imbalance between expenditures and revenues. After that point, a larger proportion of our population will be eligible for Medicare, and a correspondingly smaller percentage will be paying the taxes that support the Trust Fund. Over the 75 year long-range projection period, trust fund income as a percent of taxable payroll remains relatively level, while the expenditure rate rises steadily.

The 1996 Trustees Report projects about 5 years of HI Trust Fund solvency. Unless the Congress acts, the HI Trust Fund will be exhausted in 2001 using the Trustees' intermediate assumptions. These intermediate assumptions represent the Trustees' best estimate of the expected future economic and demographic trends that will affect the financial status of the HI Trust Fund. There are several reasons why the 1996 projection. differs from the 1995 projection. First, actual 1995 Trust Fund experience was somewhat worse than expected, and three main factors, involving Trust Fund expenditures, Trust Fund income, and economic assumptions, contributed to this estimating variation.

1. Actual expenditures were 3.1 percent greater than the Trustees had projected last year, primarily because hospital patients were somewhat sicker and more costly, and because hospitals billed Medicare more rapidly in 1995 than we had projected at the outset of last year.
   
   
2. Income to the Trust Fund was 1.2 percent lower than projected, primarily because of slower than expected wage growth and because of our lack of experience in estimating the income resulting from the payroll tax changes made in OBRA 1993.
   
   
3. Each year the Trustees use more current data and update their assumptions as they evaluate the performance and solvency of the Hi Trust Fund.

In addition to actual 1995 Trust Fund experience, other factors contributed to our new projection that the long-term financial balance of the Trust Fund will be less favorable than we had projected last year.

1. Use of skilled nursing facility and home health services is now projected to grow at a faster rate in the future than we had projected last year.
   
   
2. We now project future hospital patients will be somewhat sicker and more costly than previously projected.
   
   
3. We have updated our long range economic and demographic assumptions.
   
   
4. The new 75 year window on which we base our long range projections includes 2070, an additional year of poor performance, but no longer includes 1995, a year of relatively good performance.

Based on our projections, the Trustees make two recommendations. First, we recommend prompt, decisive, effective action to ensure short term HI Trust Fund solvency. Such action is required so that Medicare services continue smoothly, as beneficiaries expect. It also is required to ensure sufficient time for consideration of options to ensure long run Trust Fund solvency.

Our second recommendation is related to Medicare's long term financial concerns. The Trustees recommend the establishment of an advisory group to address long term solvency. The advisory group for Medicare recommended by the Trustees will contribute to the development and thoughtful consideration of policy options in response to this unprecedented demographic shift.

The President Has a Plan to Ensure the Short-Term Solvency of the Trust Fund.

Since taking office, the President has worked to improve Hi Trust Fund solvency and has taken concrete action to strengthen Medicare.

As I mentioned earlier, the President's 1993 five-year deficit reduction package (OBRA 93) extended the life of the Trust Fund by an additional three years by achieving realistic Medicare savings and by stimulating general growth in the economy. In addition, the President's health care reform plan, the Health Security Act, would have extended the life of the HI Trust Fund for an additional five years.

This Administration continues its commitment to controlling Medicare costs in the future. As part of his comprehensive plan to balance the Federal budget, the President has proposed $116 billion as scored by CBO in specific policy changes designed to strengthen Medicare. The President's proposal will ensure the life of the HI Trust Fund for about ten years from now, as both our actuaries and CBO have estimated.

To achieve these savings, the Administration's plan modifies Medicare provider payments in a number of ways that promote greater efficiency and make Medicare a more prudent purchaser. Our plan also achieves savings through increased efforts to combat waste, fraud and abuse. We also propose to move part of the financing of the home health benefit to Part B so that under Part A it returns to the acute- care benefit that it was intended to be. Importantly, we would achieve these savings and extend the life of the HI Trust Fund while maintaining and strengthening key protections for the beneficiaries Medicare serves.

The primary HI savings achieved in the President's proposal are derived from specific provider payment provisions and by shifting the financing of the post-hospital aspect of the home health benefit back to Part B. The plan provides incentives to hospitals for efficiency by constraining updates for hospital operating costs, reimbursing reasonable levels of capital costs, reforming medical education payments, and reforming the rules governing transfers from a hospital to a post-acute care facility. It also reforms payments to home health agencies and skilled nursing facilities by establishing prospective payment systems for these providers.

The Administration plan represents a balanced approach -- one that protects traditional Medicare while expanding choice and preventive benefits. First, our proposal does not impose additional costs on beneficiaries; the plan maintains Part B premiums at 25 percent of program costs. Second, our plan does not contain dangerous changes -- like MSAs that cost money and undermine the HI Trust Fund by encouraging new plans to engage in "cherry picking" of healthier beneficiaries. Third, the Administration also would maintain critical limits on 'balance billing,' which protect the program's 37 million beneficiaries from excessive charges from providers. Fourth, our plan maintains important protections for low-income Medicare beneficiaries. Fifth, our package expands the range of private plans available under Medicare without harming the traditional fee-for-service program or shifting new, burdensome cost responsibilities onto beneficiaries. Finally, coverage of key preventive benefits like mammograms are improved under our proposal.

Conclusion

As the Trustees have recommended, action is needed in the short- run to gain sufficient time for an advisory group to make recommendations on approaches to long-term solvency. It would be irresponsible not to take action.

While we have major concerns with elements in the Republican budget proposal that are threatening to the Medicare program and to its beneficiaries, we do acknowledge areas of commonality. We note that CBO has estimated that both the Republican and the Administration's balanced budget proposals would have the effect of extending the HI Trust Fund solvency for about the next decade. It is time to set aside the controversial elements in the competing Medicare proposals to fashion a Medicare package of changes that can be enacted and that can extend the HI Trust Fund sufficiently in the short-term to enable us to face the challenges of the future.