Statement by Donna Shalala, Secretary, Health and Human Services and
Dr. Shirley Charter, Commissioner of Social Security
before the Senate Finance Committee

May 9, 1995



Thank you for the opportunity to testify on the Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) trust funds. We are here today as Trustees appointed by the President and as members of the Clinton Administration who - like the Congress - are charged with protecting the Medicare program and its beneficiaries.

The trustees recently reponed that the HI trust fund will be depleted In 2002. While the HI trust fund financial balance is a significant problem and deserves our serious attention, let us also remind you that (1) this is not a new problem and (2) the projected life of the trust fund has been extended for three years since 1993.

Due to the actions taken In the Omnibus Budget Reconciliation Act of 1993 (OBRA 93) and a stronger-than-expected economy in 1994, Trust Fund depletion has been delayed from 1999 to 2002. Even with these improvements, however, the Trustees continue to foresee financial problems in the future for the HI Trust Fund.

As we noted, the Trustees' trends and projectiions have occurred before and are not surprising. fn the course of the past 15 years, the Trustees have predicted near-term financial problems for the trurt funds and recommended tht Congress take action to slow the growth of Medicare spending to assure trust fund solvency. While we have worked with Congress to improve the outlook of the trust fund, broader issues of health care cost and access limit how much more we can accomplish through Medicare reductions in growth alone.

We are concerned solutions focused solely on Medicare would severely strain many of our fragile health care delivery systems in rural and inner city communities and could result in cost shifting to small businesses and individuals. We must therefore consider this issue in the context of health reform.

Today, we will focus primarily on the solvency of the HI trust fund. Although the Trustees Report addresses cost growth in both the HI and the SMI trust funds, the issue of greatest concern is the HI trust fund solvency. The Administration looks forward to working with Congress to strengthen the Medicare program in the context of broader reforms to assure that Medicare remains stable now and in the future.

Description and Background lnformation on the Trust Funds

Let us begin by describing the HI trust fund and the services it supports for Medicare beneficiaries. The HI Trust Fund primarily pays for inpatient hospital care, but it also covers expenditures for home health services, skilled nursing care, and hospice care. In 1994, the HI Trust Fund paid for $104.5 billion in services for 32 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. Self­employed individuals contribute 2.9 percent of self employment inccme. 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 earning on its assets, revenue from taxation of Social Security benefits, and from miscellaneous sources.

Trust Fund expenditures ate projected to rise more rapidly than Trust Fund revenues. Anticipated increases in the number and complexity of medical services are expected to continue to increase expenditure growth rates. Driving the expected imbalance between expenditures and revenues is the demographic shift that will occur with the aging of the baby boom generation. A larger percentage of our population will be eligible for Medicare, and a correspondingly smaller percentage will be paying the taxes that support the Trust Fund.

What does this mean? The 1995 HI Trustees Report projects roughly another 7 yaars of solvency. The fund is exhausted in 2002. Over the 75 year long-range projection period, the income as a percent of taxable payroll remains relatively level while the cost rate rises steadily.

These are well-undestood trends; there is nothing new in this most recent Trustees Report. Over the past 15 years, the Trustees have projected the date of insolvency to be anywhere from 1987 to 2005, and eaeh year they recommend that Congress take action to protect the fund. As noted earlier, in part due to provsions in OBRA 93, Trust Fund depletion has been delayed to 2002.

OBRA 93 eliminated the maximum earnings cap for the HI program, so that the HI tax now applies to all earnings. It also achieved $55 billion in savings from the Medicare program, about $30 billion of which came from providers who are paid through the HI Trust Fund. In addition, OBRA 93 increased the maximum proportion of Old-Age, Survivorn, and Disability Insurance (OASDI) benefits subject to Federal income taxes from 50 percent to 85 percent, for only those beneficiaries with the highest incomes. Revenues generated by this provision are dedicated solely to the HI Trust Fund. Unfortunately, as part of its Contract with America, the House has voted to repeal the change in the taxation of OASDI benefits. It is ironic that those who are suddenly interested in the plight of the Medicare trust fund have advocated policies that exacerbate the insolvency of the Medicare trust fund.

Effective Solutions Require Broader Health Care Reform

Any significant changes in the Medicare program, whether in the financing, eligibility, benefit provisions or payment rates, will effect the entire health care system. Therefore, this Administration believes that strong action to avoid depletion of the Hospital Insurance Trust Fund should not be undertaken by looking at Medicare alone.

Reductions in payments to providers would have significant effects on providers' overall financial condition. This is especially true for providers whose patients are prodominately Medicare beneficiaries or providers who also treat uninsured persons, whether located in inner cities or rural areas.

• Large reductions In Medicare payments would have a devastating effect on a significant number of urban safety-net hospitals. These hospitals already are bearing a disproportionate share of the nation's growing burden of uncompensated care.

-For large urban public hospitals, which are heavily used by Medicaid and self-pay patients, Medicare is an important source of adequate payment. According to the 1994 Special Report of the National Assoelatton of Public Hospitals, while Medicare in 1991 was the payer for only 11 percent of discharses in these institutions, it accounted for almost 20 percent of net operating revenue.

For these hospital on average, in 1991 Medicare accounted for a bigger share of net operating revenues than private payers.

• Large reductions in Medicare payments could also endanger rural hospitals.

-Nearly 10 million Medicare beneficiaries (25 percent of the total) live in rural America where there is often only a single hospital in their county. These rural hospitals tend to be small and to serve primarily Medicare patients.

-Significant reductions in Medicare revenues will cause many of these hospitals, which already are in financial distress, to close or to turn to local taxpayers to increase what are often substantial local subsildies.

-Rural residents are more llkely than urban residents to be uninsured. As a result, offsetting the effects of Medicare cuts by shifting costs to private payers is more difficult for small rural hospitals.

-Rural hospitals are often the largest employer in their communities; closing these hospitals will result in job loss and physicians leaving these communities.

Other providers may shtft their costs onto payers who do not have the market power to negotiate advantageous rates. This means that ultimately many small businesses and individuals - those Americans who are alreddy paying the highest health insurancc premiums in the nation-will shoulder an even larger share of health care costs.

Large reductions in Medicare rermbursements to providers could also hurt beneficiaries. Significantly cutting payment rates to providers might restrict access for beneficiares as providers would be less willing to provide services to them. Further, low income beneficiaries would be the hardest hit. According to AARP, out-of pocket health costs represent 21 percent of income for those over 6S years. In addition, over 75 percent of Medicare beneficiaries haveincomes below $25,000. Medicare reductions could increase the cost burden of the nation's most vulnerable elderly - the low-income. Such increases become the equivalent of reducing their Social Security.

Attempts to restore the solvency of the trust fund cannot undermine Medicare's commitment to access to care for elderly persons. We should take care that any efforts to extend the solvency of the trust fund do not put Medicare beneficiaries at undue risk, but at the same time protect the program for them in the future.

Only through focusing on the entire health system will we be able to address issues within Medicare and preserve access for Medicare beneficiaries and underserved populations.

The Administration takes seriously its responsibility to current and future Medicare beneficiaries to insure the solvency of the trust fund. The Health Care Financing Administration (HCFA) continues to make many program changes to improve the efficiency of the Medicare system. For example, hospital prospective payment has contributed to slowing the increase in Medicare expenditures for hospital services. As a result, on a per enrollee basis, Medicare grew at a slower rate than the private sector between 1984 and 1991 - 7.7 percent compared to the private sector's 9.8 percent.

As we add these issues, we must remember that Medicare does not stand alone. It is an integral part of a larger health care system, and its solvency should be addressed only in the context of that larger system. Broader health care reform will occur only if we work on a bipartisan basis. The Administration looks forward to working with the Congress to develop lasting solutions to Medicare's fiscal problems.