[House Hearing, 112 Congress]
[From the U.S. Government Printing Office]





        FULFILLING THE MISSION OF HEALTH AND RETIREMENT SECURITY

=======================================================================

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, MARCH 17, 2011

                               __________

                            Serial No. 112-7

                               __________

           Printed for the use of the Committee on the Budget







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                        COMMITTEE ON THE BUDGET

                     PAUL RYAN, Wisconsin, Chairman
SCOTT GARRETT, New Jersey            CHRIS VAN HOLLEN, Maryland,
MICHAEL K. SIMPSON, Idaho              Ranking Minority Member
JOHN CAMPBELL, California            ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California              MARCY KAPTUR, Ohio
W. TODD AKIN, Missouri               LLOYD DOGGETT, Texas
TOM COLE, Oklahoma                   EARL BLUMENAUER, Oregon
TOM PRICE, Georgia                   BETTY McCOLLUM, Minnesota
TOM McCLINTOCK, California           JOHN A. YARMUTH, Kentucky
JASON CHAFFETZ, Utah                 BILL PASCRELL, Jr., New Jersey
MARLIN A. STUTZMAN, Indiana          MICHAEL M. HONDA, California
JAMES LANKFORD, Oklahoma             TIM RYAN, Ohio
DIANE BLACK, Tennessee               DEBBIE WASSERMAN SCHULTZ, Florida
REID J. RIBBLE, Wisconsin            GWEN MOORE, Wisconsin
BILL FLORES, Texas                   KATHY CASTOR, Florida
MICK MULVANEY, South Carolina        HEATH SHULER, North Carolina
TIM HUELSKAMP, Kansas                PAUL TONKO, New York
TODD C. YOUNG, Indiana               KAREN BASS, California
JUSTIN AMASH, Michigan
TODD ROKITA, Indiana
FRANK C. GUINTA, New Hampshire
ROB WOODALL, Georgia

                           Professional Staff

                     Austin Smythe, Staff Director
                Thomas S. Kahn, Minority Staff Director








                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, March 17, 2011...................     1

    Hon. Paul Ryan, Chairman, Committee on the Budget............     1
        Prepared statement of....................................     2
    Hon. Chris Van Hollen, ranking minority member, House 
      Committee on the Budget....................................     3
        Prepared statement of....................................     4
    Alice M. Rivlin, the Brookings Institution and Georgetown 
      University.................................................     6
        Prepared statement of....................................     7
    Charles P. Blahous, research fellow, Hoover Institution and 
      Public Trustee for Social Security.........................    11
        Prepared statement of....................................    13
    James C. Capretta, fellow, Ethics and Public Policy Center...    19
        Prepared statement of....................................    21
    Paul N. Van de Water, senior fellow, Center on Budget and 
      Policy Priorities..........................................    27
        Prepared statement of....................................    28
    Hon. Allyson Y. Schwartz, a Representative in Congress from 
      the State of Pennsylvania, prepared statement of...........    67
    Hon. Bill Pascrell, Jr., a Representative in Congress from 
      the State of New Jersey, question submitted for the record.    67

 
                    FULFILLING THE MISSION OF HEALTH
                        AND RETIREMENT SECURITY

                              ----------                              


                        THURSDAY, MARCH 17, 2011

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in room 
210, Cannon House Office Building, Hon. Paul Ryan, [Chairman of 
the Committee] presiding.
    Present: Representatives Ryan, Garrett, Akin, McClintock, 
Stutzman, Lankford, Black, Mulvaney, Huelskamp, Young, Rokita, 
Van Hollen, Schwartz, Doggett, Yarmuth, Pascrell, Honda, Moore, 
Castor, Tonko, and Bass.
    Chairman Ryan. All right, let's get started, we like to 
start on time around here. So, first of all, I want to thank 
the witnesses. The hearing will come to order. I will start 
with a brief opening statement, then turn it over to my friend, 
Mr. Van Hollen.
    Let me just say, welcome to this important hearing on the 
future of our country. Medicare, Medicaid, and Social Security 
are very important programs that provide health and retirement 
security to millions of Americans. The principle aim of this 
hearing is to make clear that trying to protect the 
government's major entitlement programs by simply maintaining 
the status quo is, in fact, the surest way to destroy them.
    Medicare, Medicaid, and Social Security are growing at 
unsustainable rates, building up trillions of dollars in debt 
and unfunded promises that jeopardize the programs themselves, 
and the federal budget, and, ultimately, the entire U.S. 
economy. The longer Congress waits, the more we kick the can, 
the worse the problems become, leading to an inevitable crisis 
that will force deep, wrenching, sudden changes with profound 
effects on program beneficiaries.
    The fundamental missions of these programs, to ensure 
health and retirement security for all Americans, can be 
achieved, but only through honest leadership and real reform. 
By taking action now, Congress can develop gradual prospective 
changes, keeping promises to those now in or near retirement, 
while securing the program for future retirees.
    I thank the distinguished panel of bipartisan experts for 
joining us today to share their views on the sustainability of 
our safety net. I am happy to see my friend, a woman I have 
profound respect for, Alice Rivlin, with whom I worked on the 
President's fiscal commission to put forward solutions to the 
unsustainable trajectory of federal health care spending. Few 
people in Washington know more about these issues and have more 
credibility in addressing them than Alice does. Jim Capretta, 
former Associate Director at OMB, is also with us today. Few, 
in my mind, have made as compelling a case as Jim on the path 
forward to advance real reform.
    And you cannot have a hearing like this without having 
Chuck Blahous, who is one of the nation's foremost experts in 
retirement programs, and a trustee of the Social Security 
program. He will give us his thoughts. And I am also happy to 
have Paul Van de Water of the Center for Budget and Policy 
Priorities. While we do not always agree on the policy path 
forward, Paul, I welcome your thoughts in advance, and I 
appreciate your informed contribution to the debate.
    For the past several months, a number of us have been 
saying, We need to have a serious, honest conversation with the 
American people about these problems. Well, the time for that 
conversation is now. And I firmly believe that the American 
people are ready for this. They have had enough instability in 
their lives lately, and they deserve a federal health and 
retirement safety net that they can actually count on.
    If Congress wants to avoid defaulting on federal health and 
retirement programs, it must advance solutions that free the 
nation from the shadow of debt, strengthen its health and 
retirement safety net, and protect those in and near retirement 
from severe disruptions. If, and only if, we act now, reforms 
can be phased in gradually, conducive to economic growth and 
consistent with our historic commitment of leaving the next 
generation of Americans with a more prosperous future and 
secure nation. With that, I want to yield to my friend, the 
Ranking Member Mr. Van Hollen, for an opening statement.
    [The prepared statement of Paul Ryan follows:]

Prepared Statement of Hon. Paul Ryan, Chairman, Committee on the Budget

    Welcome all, to this important hearing on the future of our 
country.
    Medicare, Medicaid, and Social Security provide health and 
retirement security for millions of Americans. The principal aim of 
this hearing is to make clear that trying to ``protect'' the 
government's major entitlement programs by maintaining the status quo 
is, in fact, the surest way to destroy them.
    Medicare, Medicaid, and Social Security are growing at 
unsustainable rates, building up trillions of dollars in debt and 
unfunded promises that jeopardize the programs themselves, the Federal 
budget, and--ultimately--the entire U.S. economy.
    The longer Congress waits, the worse these problems become, leading 
to an inevitable crisis that will force deep, wrenching, sudden changes 
with profound effects on program beneficiaries.
    The fundamental missions of these programs--to ensure health and 
retirement security for all Americans--can be achieved, but only 
through honest leadership and real reform.
    By taking action now, Congress can develop gradual, prospective 
changes--keeping promises to those now in or near retirement, while 
securing the programs for future retirees.
    I thank the distinguished panel of bipartisan experts for joining 
us today to share their views on the sustainability of our safety net.
    I am happy to see Alice Rivlin, with whom I worked on the 
President's fiscal commission to put forward solutions to the 
unsustainable trajectory of federal health spending. Few people in 
Washington know more about these issues and have more credibility in 
addressing them than Alice does.
    Jim Capretta, a former associate director at the Office of 
Management and Budget, is also with us today. Few in my mind have made 
as compelling a case as Jim on the path forward to advance real reform.
    Chuck Blahous is one of the nation's foremost experts in retirement 
security--this hearing would not be complete without getting his 
thoughts on how to save these critical programs.
    And we'll hear from Paul van de Water of the Center for Budget and 
Policy Priorities. While we don't always agree on the policy path 
forward, I welcome his thoughts to advance an informed debate on this 
critical issue.
    For the past several months, a number of us have been saying we 
need to have a serious, honest conversation with the American people 
about these problems.
    The time for that conversation is now--and I firmly believe the 
American people are ready for it. They have had enough instability in 
their lives lately, and they deserve a federal health and retirement 
safety net they can count on.
    If Congress wants to avoid defaulting on federal health and 
retirement programs, it must advance solutions that free the nation 
from the shadow of debt, strengthen its health and retirement safety 
net, and protect those in or near retirement from disruptions.
    If--and only if--we act now, reforms can be phased in and gradual; 
conducive to economic growth and consistent with our historic 
commitment of leaving the next generation of Americans with a more 
prosperous and secure nation.
    With that, I will yield to Ranking Member Van Hollen for an opening 
statement.

    Mr. Van Hollen. Thank you, Mr. Chairman. Happy St. 
Patrick's Day to you and others. And I want to join the 
Chairman in welcoming our witnesses here today.
    As the Chairman said, Social Security, Medicare, and 
Medicaid are essential to the health and retirement security of 
millions of Americans. The challenge before us is to make these 
vital programs sustainable over the long haul, given the 
spending growth trends. These trends, as we all know, are due 
to aging of our population and the fact that per capita health 
care costs, both private and public, have grown faster than the 
economy. So I hope we can come together to ensure that the 
long-term viability and integrity of these programs can be put 
in place as we put our nation on a fiscally stable path.
    About one year ago, about one year ago, many in this 
Congress began to tackle the challenge of rising per capita 
health costs by enacting the Affordable Care Act. That law 
begins to address what every expert knows; that the rising cost 
of health care is not unique to Medicare and Medicaid. Those 
costs are endemic to the entire health care system. In fact, 
for 30 years, the per beneficiary spending in Medicare and 
Medicaid has grown at virtually the same rate as those for the 
overall health system. And over the last decade, the Medicaid 
per beneficiary costs actually grew more slowly than the rest 
of the health care system. By contrast, in the private market 
for individual coverage, premiums more than doubled between the 
years 2000 and 2008, as insurance industry profits quadrupled.
    The Affordable Care Act will begin to bring down the per 
capita costs of health care throughout the system, including in 
Medicare. As the independent, non-partisan Congressional Budget 
Office has told this committee, it will also reduce the federal 
deficit by $210 billion over 10 years, and by more than a 
trillion over 20 years. It includes virtually every cost 
containment provision recommended by health care experts. Dr. 
Rivlin and Dr. Van de Water made those points in a January 6, 
2011 letter to this committee, where they joined others in 
warning that, and I quote, Repealing the Affordable Care Act 
would cause needless economic harm and would set back efforts 
to create a more disciplined and more effective health care 
system, end of quote.
    The health care reform law includes numerous Medicare 
reforms, including mechanisms to slow down the growth of 
systems costs, new tools to crack down on fraud, and the 
elimination of excessive taxpayer subsidies to manage care 
insurance companies. The response to these important reforms 
was a barrage of campaign attack ads aimed at seniors, accusing 
Democrats of slashing Medicare. So Democrats here welcome an 
honest debate about how we can strengthen and sustain Medicare, 
Medicaid, and Social Security. We recognize that a variety of 
measures are necessary to accomplish that objective, but we 
will vigorously oppose any effort to undermine the integrity of 
those programs.
    You do not need to be a history buff to know that 
Republicans in earlier Congresses fought the establishment of 
Medicare and Social Security just as ferociously as they are 
fighting the Affordable Care Act today. And we will fight any 
budget plan that extends deficit-busting tax breaks for 
millionaires and the wealthiest Americans and at the same time, 
rolls back Medicare and Medicaid health services, and Social 
Security protections for seniors and the disabled, in the name 
of deficit reduction.
    And, Mr. Chairman, that brings me to my last point. As you 
have said, and I think everybody on this committee knows, any 
serious and comprehensive approach to reducing the deficits and 
the debt must ensure that we do not undermine our economic 
recovery, and requires us to examine the full range of ideas 
proposed by the President's bipartisan fiscal commission, as 
well as the Rivlin-Domenici debt reduction task force.
    So I hope that before this committee considers its 2012 
budget, we will also have hearings, and we have had some 
discussions, I know we have a tight schedule, but I hope we 
will also have hearings on the major issue of tax reform and 
tax earmarks, as well as the recommendation of both those 
bipartisan groups, regarding some of the wasteful and 
unnecessary spending in the Pentagon and some of the national 
security agencies. Otherwise, we will be sending the message 
that, despite the good work of the bipartisan commission and 
the Bipartisan Policy Center, the only targets for deficit 
reduction are the Domestic Discretionary Programs, a very small 
12 percent, that we spend a lot of time debating and the very 
important issues that are the subject of our hearing today. So 
I hope we will not limit ourselves just to those two areas, but 
expand our conversation as we put together our budget.
    Thank you, Mr. Chairman.
    [The prepared statement of Chris Van Hollen follows:]

 Prepared Statement of Hon. Chris Van Hollen, Ranking Minority Member, 
                     House Committee on the Budget

    I join Chairman Ryan in welcoming our witnesses today. Social 
Security, Medicare, and Medicaid are essential to the health and 
retirement security of millions of Americans. The challenge before us 
is to make these vital programs sustainable over the long run given the 
spending growth trends. These trends, as we all know, are due to the 
aging of our population and the fact that per capita health care 
costs--both private and public--have grown faster than the economy.
    So I hope we can come together to ensure the long-term viability 
and integrity of these programs as we put our nation on a fiscally 
stable path.
    One year ago, many in this Congress began to tackle the challenge 
of rising per capita health costs by enacting the Affordable Care Act. 
That law begins to address what every health expert knows--that the 
rising cost of health care is not unique to Medicare and Medicaid. 
Those costs are endemic to the entire health care system. In fact, for 
30 years, the per beneficiary spending in Medicare and Medicaid has 
grown at virtually the same rate as those for the overall health 
system--and over the last decade the Medicaid per beneficiary costs 
actually grew much more slowly than the rest of the health care system. 
By contrast, in the private market for individual coverage, premiums 
more than doubled between the years 2000 and 2008, as insurance 
industry profits quadrupled.
    The Affordable Care Act will begin to bring down the per capita 
costs of health care throughout the system--including in Medicare. As 
the independent, non-partisan Congressional Budget Office has told this 
Committee, it will also reduce the federal deficit by $210 billion over 
10 years and by more than $1 trillion over 20 years. It includes 
virtually every cost containment provision recommended by health care 
experts. Dr. Rivlin and Dr. Van de Water made those points in a January 
26, 2011 letter to this Committee, where they joined others in warning 
that repealing the Affordable Care Act would cause needless economic 
harm and would set back efforts to create a more disciplined and more 
effective health care system.
    The health care reform law includes numerous Medicare reforms, 
including mechanisms to slow the growth of system costs, new tools to 
crack down on fraud, and the elimination of excessive taxpayer 
subsidies to managed care insurance companies. The response to these 
important reforms was a barrage of campaign attack ads, aimed at 
seniors, accusing Democrats of slashing Medicare.
    So Democrats welcome an honest debate about how we can strengthen 
and sustain Medicare, Medicaid, and Social Security. We recognize that 
a variety of measures are necessary to accomplish that objective. But 
we will vigorously oppose any effort to undermine the integrity of 
these programs. You don't need to be a history buff to know that 
Republicans in earlier Congresses fought the establishment of Medicare 
and Social Security as ferociously as they are fighting the Affordable 
Care Act today. We will fight any budget plan that extends deficit-
busting tax breaks for millionaires and at the same time rolls back 
critical Medicare and Medicaid health services and Social Security 
protections for seniors and the disabled in the name of deficit 
reduction.
    And that brings me to my last point, Mr Chairman. Any serious and 
comprehensive approach to reducing the deficits and the debt must 
ensure that we do not undermine our economic recovery and requires us 
to examine the full range of ideas proposed by the President's 
Bipartisan Fiscal Commission as well as the Rivlin-Domenici Debt 
Reduction Task Force. So I hope that before the Budget Committee 
considers the 2012 budget, we will also have hearings on the major 
issue of tax reform and tax earmarks, as well as the recommendations of 
both bipartisan groups regarding some of the wasteful and unnecessary 
spending in the Pentagon and some of the national security agencies. 
Otherwise, we will be sending the message that, despite the good work 
of the Bipartisan Commission and Bipartisan Policy Center, the only 
targets for deficit reduction are domestic discretionary programs--a 
very small sliver of the budget--that we have spent weeks debating on 
the floor and the health and retirement security programs we are 
focusing on today. I hope that is not the case.

    Chairman Ryan. Thank you, Mr. Van Hollen. As you know, we 
are on tight schedules around here, but I want to do everything 
we can to get all of these issues out on the table, and over 
the course of our session, we will clearly do that. That is 
just, as you and I discussed, kind of a scheduling 
complication.
    I want to ask our witnesses, you have all testified here 
before, if you could summarize your testimony into five 
minutes. Your full written statements will be included in the 
record. And we will just start with Dr. Rivlin and then move on 
down the line, Dr. Rivlin, the floor is yours.

 STATEMENTS OF ALICE M. RIVLIN, THE BROOKINGS INSTITUTION AND 
  GEORGETOWN UNIVERSITY; CHARLES P. BLAHOUS, RESEARCH FELLOW, 
  HOOVER INSTITUTION AND PUBLIC TRUSTEE FOR SOCIAL SECURITY; 
  JAMES C. CAPRETTA, FELLOW, ETHICS AND PUBLIC POLICY CENTER; 
   PAUL N. VAN DE WATER, SENIOR FELLOW, CENTER ON BUDGET AND 
                       POLICY PRIORITIES

                  STATEMENT OF ALICE M. RIVLIN

    Ms. Rivlin. Thank you, Mr. Chairman. And thank you for 
holding this important hearing. As you and Mr. Van Hollen have 
emphasized, Americans are counting on Medicare, Medicaid, and 
Social Security. And the biggest challenge facing budget 
policymakers is to ensure that the promises represented by 
these programs are met in ways that are affordable and fiscally 
sustainable for the long run.
    In the last year and a half, I have served on both the 
commissions that have been mentioned. And I will talk today 
mainly on, about the proposals for Medicare reform in the task 
force on debt reduction that I co-chaired with my good friend 
Pete Domenici. The challenge for Medicare reform is to restrain 
the growth of this large federal program in ways that help the 
whole health care system deliver care more efficiently and 
effectively, and to do this without shifting the cost of caring 
for Medicare beneficiaries to other payers, or causing 
providers to drop out of Medicare.
    Medicare, as you know, is still largely a fee-for-service 
system in which the government is obligated to pay the bills 
presented for specified services to eligible beneficiaries. 
There are few incentives now built into the system for 
providers to deliver care efficiently or effectively, costs 
vary widely from one provider to another, and the government 
has no way of restraining the total cost of the program.
    The Affordable Care Act includes important provisions aimed 
at improving health outcomes and reducing cost growth. And I 
believe, as Representative Van Hollen emphasized, that it would 
be a mistake to repeal the Affordable Care Act. However, the 
impact and timing of these reforms is still uncertain. And 
therefore, the bipartisan policy task force recommended several 
cost-saving reforms in the short run, followed by a gradual 
transition of Medicare to a premium support, or defined 
contribution program, which would incent efficient delivery, 
while controlling the rate of growth of Medicare costs.
    That means that, beginning in 2018, Medicare beneficiaries 
would have a choice of remaining in the fee-for-service 
Medicare, or going to a Medicare Exchange, where they could 
choose among competing private health plans. The health plan 
would receive a fixed payment, risk-adjusted for the age, 
health, and status of the beneficiary, and would not be able to 
cherry-pick the least costly beneficiaries.
    In the first year, the subsidy for those choosing the 
Exchange would be equal to the average subsidy of traditional 
fee-for-service Medicare. In subsequent years, the growth of 
the subsidy for both options would be limited to the growth of 
GDP, plus one percent. Now this is lower than the projected 
growth. If the cost of fee-for-service Medicare rises faster 
than the GDP plus one, those electing to stay in that system 
would pay a premium to cover the additional cost.
    I think there are two reasons for shifting to a premium 
support model for Medicare. One is that the total subsidy would 
be controllable. Taxpayers would be making a defined 
contribution. Congress could, of course, vote to increase the 
subsidy faster than GDP growth plus one, but the budgetary 
consequences of doing so would be explicit. The other reason is 
that competition on a well-managed exchange can be expected to 
attract beneficiaries to health plans that organize themselves 
to provide the most effective care at the lowest price. The 
Medicare Exchange would be charged with providing the 
beneficiary with clear customer-friendly information about the 
plan's benefits, and costs, and health outcomes.
    Is that at five minutes? I cannot see it.
    Chairman Ryan, as you know, and I have drafted a skeletal 
version of the premium support proposal for consideration by 
the Simpson-Bowles Commission. We were not sufficiently 
persuasive. But that plan differs slightly from the Domenici-
Rivlin version, in that it would phase in much slower. The 
proposed premium support resembles the current structure of 
Medicare Advantage, but we think there are important 
differences, and that it would work considerably better.
    I will leave it at that, although my written statement does 
emphasize both Medicare reforms, which I think are more 
difficult, the fact that it is important to cap and phase out 
the employer-provided health exclusion under the tax code, and 
we strongly support Social Security reform to make Social 
Security safe and secure for future beneficiaries. Thank you, 
Mr. Chairman.
    [The prepared statement of Ms. Rivlin follows:]

    Prepared Statement of Alice M. Rivlin, the Brookings Institution
                       and Georgetown University*

    Chairman Ryan, Representative Van Hollen, and Members of the 
Committee: Thank you for the opportunity to testify before the 
Committee today at this very important hearing on ``Fulfilling the 
Mission of Health and Retirement Security.'' Health and retirement 
security are essential to the well-being of the American population. 
Decades of congressional actions by both political parties created 
Medicare, Medicaid and Social Security, which contribute enormously to 
that security and have very broad public support. Americans are 
counting on those programs to be there for them when they need them. 
The biggest challenge facing budget policy makers is to find ways to 
ensure that the promises represented by these programs are met in ways 
that are affordable and fiscally sustainable for the long run, as the 
population ages and health care becomes increasingly expensive.
---------------------------------------------------------------------------
    *The views expressed are those of the author and are not 
attributable to the institutions with which she is associated.
---------------------------------------------------------------------------
    In the last year and a half, I have had the privilege of serving on 
the National Commission on Fiscal Responsibility and Reform (the 
Simpson Bowles Commission). I have also co-chaired, with my friend 
former Senator Pete Domenici, the Bipartisan Policy Center's Task Force 
on Debt Reduction. Both groups concluded that the federal budget is on 
a dangerously unsustainable path and that we must act decisively soon 
to reduce the risk of a debt crisis that could severely damage our 
future prosperity and global influence. Both reports emphasized that 
spending under Medicare, Medicaid, and to a lesser extent Social 
Security are projected to rise faster than revenues over the next 
several decades, creating unsustainable increases in deficits and debt. 
Both reports proposed reforms in these three programs, but both 
concluded that all parts of the budget (including domestic and defense 
appropriations, other mandatory spending, tax expenditures and 
revenues) must also play a part in reducing future deficits and 
restraining the growth of debt. In the interests of time and clarity, I 
will talk today about the recommendations of the Domenici-Rivlin Task 
Force with respect to Medicare, Medicaid and Social Security.
                                medicare
    Rapid increases in health care spending--due to ever-expanding 
medical capabilities and rising demand by an aging population combined 
with an inefficient delivery system--are already straining the federal 
budget. Indeed, they are straining all budgets, including those of 
states, localities, businesses and families. A common health care 
delivery system serves both Medicare beneficiaries and those with 
private insurance. Hence, the challenge of Medicare reform is to 
restrain the growth of this large federal spending program in ways that 
help the whole health care system deliver care more efficiently and 
effectively--and to do this without shifting the costs of caring for 
Medicare beneficiaries to other payers or causing providers to drop out 
of Medicare.
    Medicare is still largely a fee-for-service (FFS) system, in which 
the government is obligated to pay the bills presented for specified 
services to eligible beneficiaries. There are few incentives built into 
the system for providers to deliver care efficiently or effectively, 
costs vary widely from one provider or area to another, and the 
government has no way to restrain the total cost of the program. There 
are major opportunities both to slow the growth of Medicare spending 
and for the program to provide leadership in improving health service 
delivery.
    The Affordable Care Act includes important provisions aimed at 
improving health outcomes and reducing cost growth: authorizing 
Medicare to contract with accountable care organizations on the basis 
of shared savings and value-based payments to providers; pilot projects 
to try out other payment reforms; research on effectiveness of 
treatments; and development of information technology. However, the 
impact and timing of these efforts is still uncertain. Therefore, the 
Task Force recommended several cost-saving reforms in the short run 
followed by a gradual transition of Medicare to a ``premium support'' 
or defined contribution program, which would incent efficient delivery 
while controlling the rate of growth of total Medicare costs.
    For the short-term, the Task Force proposed these measures:
     Gradually raise Medicare Part B premiums from 25 to 35 
percent of total program costs (over five years);
     Use Medicare's buying power to increase rebates from 
pharmaceutical companies;
     Modernize Medicare's benefits package, including the 
copayment structure; and
     Bundle Medicare's payments for post-acute care in order to 
increase incentives for efficiency and cost reduction.
    Beginning 2018 Medicare beneficiaries would have a choice of 
remaining in FFS Medicare or going to a Medicare Exchange, where they 
could choose among competing private health plans. The health plan 
would receive a fixed payment, risk-adjusted for the age and health 
status of the beneficiary and would not be able to cherry pick the 
least costly beneficiaries. In the first year, the subsidy for those 
choosing the exchange would be equal to the average subsidy for 
traditional FFS Medicare. In subsequent years, the growth in the 
subsidy for both options would be limited to growth of GDP (five-year 
average) plus one percent. This is lower than the baseline projection 
of GDP plus 1.7 percentage points. If the cost of FFS Medicare rises 
faster than GDP plus one percent, those electing to stay in that system 
would have to pay a premium to cover the additional cost.
    There are two reasons for shifting to a premium support model for 
Medicare. One is that the total subsidy would be controllable. 
Taxpayers would be making a defined contribution. Congress could, of 
course, vote to increase the subsidy faster than GDP growth plus one 
percent, but the budgetary consequences of doing so would be explicit. 
The other reason is that competition on a well managed exchange can be 
expected to attract beneficiaries to health plans that organize 
themselves to provide the most effective care at the lowest price. The 
Medicare Exchange would be charged with providing the beneficiary with 
clear, customer friendly information about each plan's benefits, cost 
and health outcomes.
    Chairman Ryan and I drafted a skeletal version of Medicare Premium 
Support for consideration by the Simpson-Bowles Commission. The Ryan-
Rivlin version would phase in much slower than Domenici-Rivlin, because 
it would affect only newly eligible Medicare beneficiaries beginning in 
2021. This version would not offer premium support to those already in 
Medicare (although it would presumably retain Medicare Advantage) and 
would not retain FFS Medicare as an option for new enrollees. Hence, 
the transition would take much longer than the Domenici-Rivlin version.
    While the proposed premium support model resembles the current 
structure of Medicare Advantage, there are important differences. 
Competition among plans would be enhanced by creating a federal 
Medicare Exchange, which would increase the competitiveness of the 
market, leading to lower premiums. While Medicare currently informs 
beneficiaries of available Medicare Advantage plan choices and plan 
performance through a web site and other means, one-on-one marketing by 
Medicare's private plans is a dominant model for enrollment. A more 
formal exchange could make it easier for beneficiaries to compare and 
select among the plans available to them in head-to-head comparisons, 
reduce sales and marketing costs of the plans, and create better value 
for enrollees. Improvements will also emerge as states develop 
exchanges for individuals and small employers under the Affordable Care 
Act. The proposed Medicare Exchange would also provide incentives for 
plans to develop products that will save beneficiaries money. Today, if 
a Medicare Advantage plan has very low costs, it cannot pay a rebate to 
enrollees; instead, it must increase benefits. Under the proposed 
Medicare Exchange plans could offer beneficiaries relief from rising 
Medicare premiums, creating additional market incentives for 
efficiency.
    Asking beneficiaries to pay more for their Medicare coverage (or 
shift to a lower-cost plan) mirrors what has happened in private 
insurance over the past decade, with increases in patient cost sharing 
to keep premium growth from exceeding income growth by too large a 
margin. Employers have generally opted to increase patient cost sharing 
rather than increase the percentage of the premium that employees 
contribute. The former keeps employees enrolled in the plan and 
encourages more judicious use of health services.
                            medicaid reforms
    Medicaid, the program that provides health coverage to millions of 
low-income Americans, poses a different set of challenges because it is 
jointly funded by the federal and state governments, but administered 
by each state.
    In order to control Medicaid costs in the short term, the Task 
force recommended removing barriers that states face in providing 
benefits to ``dual eligibles'' (those eligible for both Medicare and 
Medicaid) through managed care plans. For the longer run the Task Force 
offered several approaches to reducing the amount by which Medicaid is 
growing faster than the economy. The goal would be to reduce annual 
per-beneficiary cost growth by 1 percentage point.
    One approach to achieving these savings would be to discontinue the 
shared financing arrangement between the federal and state governments. 
The system of matching federal payments that is currently in place has 
led to ``gaming'' of the system, where states have an incentive to run 
up higher health care costs in order to get more federal matching 
payments. At the same time, the federal government doesn't bear the 
full cost when it chooses to expand Medicaid benefits. The Task Force 
proposes to end these perverse incentives by allocating program 
responsibilities between the federal government and the states--in a 
budget neutral manner--so that each level of government would fully 
finance and administer its assigned components of the Medicaid program. 
This would require a complex set of negotiations between the federal 
and state governments but, in the end, would restore incentives for 
cost containment, and slow future growth.
    There are other approaches to slowing the growth of Medicaid 
spending while continuing to provide adequate health care for the low 
income population. States could be given more leeway to design their 
own programs, either through block grants (with maintenance of effort 
requirements) or through waivers under the existing program. 
Ultimately, when the state health care exchanges created by the 
Affordable Care Act are running well, Medicaid beneficiaries could be 
transitioned to the exchanges.
   cap and phase out the employer provided health insurance exclusion
    The Task Force plan includes an essential third component to 
reining in rapidly rising health care costs. As you know, the tax code 
currently excludes from income, health insurance benefits provided by 
employers. Our Task Force proposes to cap the exclusion of employer-
provided health benefits in 2018, and then phase it out over 10 years. 
There is broad agreement among health care economists that this will 
incent employers and employees to select more cost-effective health 
plans. In addition, because this is the largest tax expenditure in the 
federal budget, its phase-out will reduce the federal debt by an 
appreciable amount. Moreover, it will strengthen Social Security by 
increasing payroll revenues to the Social Security Trust Funds.
    Federal spending on health care and loss of revenue through the 
exclusion is so large that addressing it is critical to success of 
efforts to reduce the deficit enough to control federal debt. Large 
federal deficit reductions in health will require policies that slow 
the rate of growth of spending overall. Changing the tax treatment of 
employer-based health insurance and Medicare premium support are two 
steps that the Task Force considers to have the largest long term 
potential. But slowing the rate of growth of health spending is so 
challenging that many other policies should be pursued as well.
                            social security
    Finally, we must address Social Security and do it soon. Social 
Security, while separately funded by payroll taxes, is not in sound 
fiscal shape for the long run. Since putting Social Security back on a 
firm foundation will make only a modest contribution to reducing long 
run deficits, deficit reduction is not the central motivation for 
fixing Social Security. The right reason for saving Social Security is 
to reassure all Americans that this hugely successful program is 
solidly funded and will be there for the millions who depend on it when 
they need it. The main reason for acting now rather than later is 
simply that the sooner we act the less drastic adjustments we have to 
make. These adjustments can involve revenue increases, future benefit 
reductions (with or without retirement age changes), or some of each. 
They need not be large if they are done quickly and they need not have 
a significant effect on those currently retired or close to retirement.
    Those who argue that Social Security should not be part of a 
deficit reduction plan, sometimes point out that Social Security has 
been running surpluses for decades. Those surpluses were invested in 
Treasury bonds, which meant the government was borrowing from Social 
Security to fund other spending. Now that the time has come to redeem 
those bonds, they say, Social Security should not be ``punished'' by 
having to share in the reduction of future deficits. But this reasoning 
misses the point. Putting Social Security on a sound fiscal footing is 
not ``punishing'' the system or its beneficiaries. The bonds held by 
Social Security are obligations of the United States and will be paid--
even though Treasury will have to borrow to pay them. But current and 
future workers need to know that Social Security will be there for 
them, and the best way to reassure them is to act now to adjust future 
benefits and revenues. Taking immediate action is the right thing to do 
for future Social Security beneficiaries. That such action will also 
modestly reduce long run deficits and show the world that our political 
system is not totally gridlocked is just icing on the cake.
    The President's Fiscal Commission and our Debt Reduction Task Force 
both produced viable, solid plans to strengthen Social Security and 
ensure its long-term solvency. The Task Force plan would:
     Gradually raise the amount of wages subject to payroll 
taxes (currently $106,800) over the next 38 years to reach the 1977 
target of covering 90 percent of all wages;
     Change the calculation of annual cost-of-living 
adjustments (COLAs) for benefits to more accurately reflect inflation 
(this technical change is proposed for all COLA adjustments in the 
budget, including the indexation of tax brackets);
     Slightly reduce the growth in benefits compared to current 
law for approximately the top 25 percent of beneficiaries;
     Beginning in 2023, index the benefit formula for increases 
in life expectancy, without changing either the age of full retirement 
or the early retirement age from those in current law and require the 
Social Security Administration to ensure that early retirees understand 
that they are opting for a lower monthly benefit.
     Increase the minimum benefit for long-term, lower-wage 
earners, and protect the most vulnerable elderly with a modest benefit 
increase.
     Cover newly hired state and local government workers under 
the Social Security system, beginning in 2020, to increase the 
universality of the program.
    Mr. Chairman and Members of the Committee, I want to thank you for 
the opportunity to discuss today the great importance of addressing 
entitlement reforms as soon as possible. Let me say in closing that 
they should be addressed in the context of a full and balanced debt 
reduction plan that also includes a multi-year freeze on defense and 
non-defense discretionary spending, and a reform of the tax code that 
raises more revenues but also dramatically simplifies the tax system 
and makes our tax laws more competitive and pro-growth.
    I urge you to be bold in developing your FY 2012 Budget Resolution 
and I am happy to assist in any way I can. I would be happy to answer 
your questions.

    Chairman Ryan. Mr. Blahous.

                STATEMENT OF CHARLES P. BLAHOUS

    Mr. Blahous. Thank you, Mr. Chairman, Mr. Ranking Member, 
and all the members of the distinguished committee. It is an 
honor to appear before you today to discuss the challenges 
facing Social Security, which, as you both said in your opening 
statements, is a cornerstone of retirement security for 
millions of Americans. Pursuant to the five minute time 
limitation, I would just like to make three main points from my 
written testimony.
    First point is that, by any measure, Social Security faces 
a significant long term financing shortfall. Costs of the 
program are going to grow dramatically over the next couple of 
decades, as more baby boomers hit the retirement roles, so that 
under current law, by the 2030s, this one federal program alone 
would absorb roughly one out of every six taxable dollars that 
American workers earn. And even if we succeed in financing 
these rising costs within the general budget through that time, 
if we fail to act to address Social Security finances, the 
program will become insolvent in 2037, and benefits would be 
cut by 22 percent across the board.
    The second point I would make is that costs in Social 
Security are growing for three very specific reasons. The first 
of these is the aging of the population. The second is the 
method of financing the program. And the third is the current 
Social Security benefit formula.
    Social Security costs grow primarily because there will be 
many more beneficiaries to support as the baby boomers leave 
the ranks of workers and join the ranks of retirees. According 
to the 2010 trustees report, we will have over 90 million 
beneficiaries by the mid-2030s, and we will only have two 
taxpaying workers to support each person receiving Social 
Security benefits. This is down from a ratio of over three to 
one just before the baby boomers began to retire.
    The second reason that costs grow is simply the way that we 
finance the program. The program is financed, benefits are paid 
from incoming tax revenues contributed by workers. Therefore, 
the program finances are especially sensitive to changes in the 
ratio of taxpaying workers to collecting beneficiaries.
    The third reason that costs rise is rooted in program 
amendments that were enacted in the 1970s. If we still had the 
benefit formula in place that was established by Franklin 
Roosevelt, we would not actually have a financing shortfall 
right now. But in the 1970s, there were a series of benefit 
expansions, the most notable of which causes initial benefit 
payments to rise more rapidly than inflation. Basically, each 
succeeding class of Social Security beneficiaries is given 
benefits that are higher than the preceding class, relative to 
inflation.
    Now put these three factors together: population aging, the 
method of program financing, and the increase in per capita 
benefit levels; the result is a prescription for significantly 
rising tax burdens on younger generations.
    The third point I would make is simply that delay is very 
costly. Now this has become something of a cliche. You have 
probably heard a lot of analysts come in and say to elected 
decision makers that this is better done sooner, rather than 
later. But it is very important to understand that there are 
real adverse consequences, real harm is caused to real people 
as we delay dealing with this.
    If we fix Social Security today, our choices would be 
comparatively benign. We could fix the shortfall entirely 
without changing benefits for people now in retirement, or on 
the verge of retirement. We could do it without raising taxes. 
Not everyone would prefer to do it that way, but we could do it 
without raising taxes. And we could also ensure, even if we did 
not raise taxes, that future beneficiaries get benefits that 
are at least as high as today's retirees get, even relative to 
inflation.
    So our choices, in sum, are not that bad yet. But if you go 
to the opposite extreme, the no-action scenario, things look 
very bleak. There is the 22 percent benefit reduction that I 
referred to earlier. But I would submit to this committee that 
this is actually a gross understatement of how bad the costs of 
delay are. And the reason for that is that, I think we have 
something of a bipartisan consensus, that it is wrong to change 
benefits for people after they start collecting them. That it 
is not fair to cut the benefits of the 95 year old widow.
    So we have to reframe the question; if we want any benefit 
changes we make to take place prospectively, then how soon do 
we have to start making them? Well, if you wait until 2037, you 
could wipe out the entirety of benefit payments to new retirees 
and still not balance the system. So you start working 
backwards, and asking yourselves, How soon do we have to get 
started? The answer is quite soon. If you do not want to raise 
taxes on workers, if you do not want to change benefits for 
people within five years of retirement, you probably need to 
legislate in just the next couple of years. Beyond that point, 
you almost certainly have to raise taxes substantially on 
workers, or affect people closer to retirement.
    Before I close, Mr. Chairman, I would just like to briefly 
address one objection that is often raised against dealing with 
Social Security. It is occasionally said that Social Security 
reform should not be pursued because the program is not a 
significant contributor to the larger federal deficit. I 
respectfully submit to this committee that this is not the best 
way to think about the Social Security problem. Even if it were 
true, and it is not true, by the way; Social Security is a 
significant contributor to the long term fiscal imbalance. But 
even if it were true, Social Security, as a self-financing 
program, has to be brought into balance. And this is more 
easily done sooner rather than later.
    These larger budget issues are very important, but they are 
primarily relevant to Social Security because they establish 
that we will not be able to tap general revenues in any 
significant way to bail out the Social Security program. And 
this only highlights the importance of Social Security being 
able to stand on its own.
    Now obviously you, as legislators, will have to make the 
best tactical judgments as to the best process. If separating 
Social Security from the larger budget discussion enables us to 
enact reforms more swiftly, this is a strong argument for 
separation. But if it causes us to delay action, then this 
would be a strong argument against it.
    In conclusion, I would simply summarize with sentences from 
an article I recently authored with Robert Greenstein of the 
Center on Budget and Policy Priorities, Social Security faces a 
significant shortfall, which policy makers would be better off 
addressing sooner rather than later. Reasonable and well-
intentioned people will have differences over the best way to 
do so, but we have a common interest in doing it at the 
earliest possible time. Thank you.
    [The prepared statement of Mr. Blahous follows:]

       Prepared Statement of Charles P. Blahous, Research Fellow,
       Hoover Institution and Public Trustee for Social Security

    Thank you, Mr. Chairman, Mr. Ranking Member, and all of the members 
of this distinguished committee. It is an honor to appear before you 
today to discuss the challenges facing the federal Social Security 
program, a cornerstone of retirement security for millions of 
Americans.
                the social security financing challenge
    Social Security finances have many facets. Experts can and do 
differ on which aspects should be of greatest concern to elected policy 
makers. I will focus first in my written testimony on those aspects of 
program finances that I believe are broadly agreed upon.
    Taxes: Under current law, the vast majority of funds used to 
finance benefit payments at any given point in time is generated via a 
payroll tax upon covered wages. The total payroll tax upon wages is 
12.4%. Though nominally divided into two 6.2 point halves assessed 
respectively upon employer and employee, most economists agree that the 
entirety of the 12.4% tax is levied on the worker's wage compensation. 
Wage earnings subject to this tax, as well as any benefit credits based 
on those earnings, are both capped. This cap reflects Social Security's 
historic design of providing a floor of protection in the event of 
income loss due to old-age, disability, or death of a primary household 
wage earner. The current cap is $106,800 annually, and is indexed to 
grow generally with the national Average Wage Index (AWI). In addition 
to payroll taxation, a much smaller amount of incoming program revenue 
(about 3%) is generated via income taxation of Social Security 
benefits.
    The Trust Funds: Beyond revenue generated from current taxation, 
further authority and resources to finance benefit payments are 
provided by the Social Security Trust Funds.\1\ The economic 
significance of the Trust Funds is a source of persistent controversy. 
But though there is controversy over the Trust Funds' economic meaning, 
there is much less so over what the Trust Funds literally contain; 
specifically, special-issue Treasury bonds. These bonds are on the one 
hand real assets to the Social Security program, backed by the full 
faith and credit of the federal government, while on the other they are 
equally a real obligation of the general budget accounts. If we look at 
the bonds from the perspective of the Trust Funds, they are assets. If 
we look at them from the perspective of the unified federal budget, and 
from the taxpayer perspective, they are a net wash. The total amount of 
the Trust Funds, now roughly $2.6 trillion, represents the interest-
compounded value of past annual program balances, including the many 
years of surpluses since the 1980s.
---------------------------------------------------------------------------
    \1\ There are separate Trust Funds for the OASI (Old-Age and 
Survivors) and DI (Disability) programs, though public discussions 
often refer to the combined operations of the Funds.
---------------------------------------------------------------------------
    Benefits: Americans tend to think of retirement benefits first when 
thinking of Social Security. This is understandable given that the 
majority of benefit payments (about 63%) are made to retired workers. 
But Social Security also provides for a number of other forms of 
benefits as well, including disability benefits, spousal benefits, and 
benefits for widows, widowers and survivor children. Although there are 
differences in the methods of computing benefits for these respective 
populations, they all hinge in some fashion on the basic retirement 
benefit formula. The total value of one's Social Security benefit is 
not solely a function of one's own contributions. One's benefit is 
instead a function of a formula written into the law. Social Security 
redistributes income in a large variety of ways: from higher earners to 
lower earners; from the shorter-lived to longer-lived; from two-earner 
couples to one-earner couples; and from younger generations to older 
ones, among other trends. The overriding problem we face is that the 
total amount of projected benefit obligations that would result under 
current formulas is significantly higher than the amount of tax 
revenues that the program would generate under current law. One way or 
the other, this imbalance between incoming revenues and scheduled 
benefits must be corrected.
    The financing shortfall: Specific measurements of the Social 
Security financing shortfall vary from report to report. In my remarks 
I will focus primarily on the projections contained in the 2010 report 
of the Social Security Trustees.\2\ The updated 2011 Trustees' report 
is scheduled to be released next month. As members of this committee 
are aware, the Congressional Budget Office has released more recent 
figures that show a further deterioration of near-term finances 
relative to the 2010 Trustees' projections. I will nevertheless draw 
upon the Trustees' report's projections for long-term finances because 
they contain some additional details about program operations, and 
because the Trustees' report embodies the projection mechanism 
sanctioned by the Social Security Act.
---------------------------------------------------------------------------
    \2\ Although I currently serve as a public Trustee, the 2010 report 
was published prior to my confirmation to serve.
---------------------------------------------------------------------------
    According to both the Trustees' report and the Congressional Budget 
Office, Social Security expenditures began in 2010 to exceed incoming 
program tax revenue for the first time since the last major Social 
Security repairs in 1983. CBO estimated this 2010 cash deficit to be 
$37 billion; the Trustees' updated estimate is likely to be available 
next month. Some of the cost growth that resulted in this deficit arose 
from the long-anticipated event of the large Baby Boomer generation 
beginning to enter retirement. The date of these annual deficits' 
arrival was accelerated by the recent recession, which both depressed 
payroll tax collections and stimulated additional benefit claims, 
especially disability benefit claims. For multiple reasons, therefore, 
Social Security is now experiencing cash-flow shortfalls earlier than 
anticipated in any Trustees' report issued since the 1983 reforms.
    Despite this shortfall of tax income relative to benefit 
obligations, Social Security is still able to meet benefit payments due 
to the positive balance in its Trust Funds. We are currently in a 
somewhat unusual period in that the balance of the Trust Funds 
continues to rise even as program tax income lags behind benefit 
obligations. This occurs because the annual interest credited to the 
Trust Funds continues to exceed the program's annual cash shortfalls. 
As a result, part of the general government accounts' annual payments 
of interest are now tapped immediately to pay current benefits, while 
the remainder adds to the balance of the Trust Funds. But while these 
interest payments increase the balance of the Funds, they do not reduce 
the unified budget deficit. Accordingly, Social Security operations 
added $37 billion to the unified federal deficit last year (according 
to CBO), and will add substantially more in the years to come.
    By any measure, Social Security faces a significant long-term 
financing shortfall. The 2010 Trustees' report projected that the net 
excess of benefit obligations over incoming tax revenue over the 
following 75 years would equal $7.9 trillion in present value. Even 
after $2.5 trillion\3\ of additional general revenues is paid to redeem 
the assets in the Trust Funds through 2037, this would still leave 
Social Security with a 75-year shortfall of $5.4 trillion. This 
shortfall further increases beyond the 75-year period.
---------------------------------------------------------------------------
    \3\ The Trust Funds' balance on January 1, 2010, the date used for 
the calculations in the 2010 Trustees' Report.
---------------------------------------------------------------------------
    Such summary figures over long spans of time are inherently 
imprecise and can obscure the more salient issue of program cost growth 
over time. As a number of bipartisan technical panels and advisory 
councils have noted, it is insufficient for Social Security merely to 
be in average balance over long spans of time, if that average 
aggregate balance consists of impracticable annual imbalances in 
different years of the valuation period.\4\ This is one reason why for 
over a decade now Social Security Administration evaluations of Social 
Security financing proposals have included measures not only of their 
averaged effects over 75 years, but also of whether they lead to 
sustainable annual program balances within the 75-year period.
---------------------------------------------------------------------------
    \4\ In theory, program surpluses in some years could effectively 
offset deficits in other years if a foolproof mechanism could be 
established to ensure that revenue excesses in surplus years were 
always saved. This has not been the case in practice.
---------------------------------------------------------------------------
    Figure 1 below shows the projected growth of annual program 
revenues and costs under current law as a percentage of each worker's 
taxable wages, in comparison with rates over the last few decades.\5\ 
The cost of paying Social Security benefits absorbed roughly 11.5% of 
such wages in 2008, on the eve of the recession and the retirement of 
the Baby Boom generation. Costs will grow dramatically over the next 
two decades, resulting in a cost rate of roughly 16.7% by the mid-
2030s. In other words, the cost of paying benefits under existing 
formulas in this one federal program alone would absorb roughly one out 
of every six taxable dollars that American workers earn.
---------------------------------------------------------------------------
    \5\ ``Obligations'' on this graph include scheduled benefit 
obligations beyond 2037, even though due to projected Trust Fund 
depletion in 2037, benefits would under current law be suddenly cut by 
22% in that year. More recent projections from CBO indicate that the 
brief program surpluses projected in 2012-14 on this graph will not 
materialize. The Trustees are scheduled to update their own projections 
next month.


    Under current law, this cost growth would mean dramatically rising 
pressures on the general budget from today through the mid-2030s. By 
2020, annual program deficits would be larger, relatively speaking, 
than in the program's so-called crisis years of 1977 and 1982, when 
urgent reforms were necessitated. And even if these rising costs were 
successfully shouldered within the general budget, Social Security 
benefits would still be suddenly cut by 22% in 2037 due to insolvency 
in the absence of a legislative correction.
                     why social security costs grow
    The rapid program cost growth projected through the 2030s is 
predominantly a function of three factors:
    1) The aging of the population;
    2) Pay-as-you-go financing;
    3) The current Social Security benefit formula.
    Social Security costs will grow, first, because there will be many 
more beneficiaries to support. In 2008, the total number of Social 
Security beneficiaries topped 50 million for the first time. There were 
3.2 taxpaying workers to support each beneficiary, the same ratio that 
existed in 1975. But these numbers are changing dramatically as the 
Baby Boomers leave the ranks of workers to join the ranks of retirees. 
The 2010 Trustees' report projected that there will be 90 million 
beneficiaries by 2036, and only 2.1 taxpaying workers to support each 
beneficiary.
    The second reason that costs rise is that the program is financed 
on a pay-as-you-go basis. Benefits are paid from tax contributions made 
by current workers, rendering program finances very sensitive to 
changes in the worker-collector ratio. If, hypothetically, Social 
Security had been constructed as a savings program--in which each 
generation always constrained its own consumption and put aside savings 
sufficient to fund the entirety of their own future benefits--its 
finances would be less susceptible to demographic shifts. Instead, 
Social Security has been operated on a pay-as-you-go basis in the sense 
that workers' tax contributions are not saved. Most of these 
contributions finance current benefit payments, while any surplus 
payments finance ongoing federal government consumption. The 
consequence is that the entire rising cost of paying benefits shown on 
Figure 1 must be met by future contributing taxpayers.


    The third reason that costs rise is rooted in program amendments in 
the 1970s. It was then that a benefit formula was put in place that 
pegs the growth of initial benefit payments to increases in the 
national Average Wage Index (AWI). The rationale behind this benefit 
formula was to maintain constant ``replacement rates''--i.e., benefits 
as a percentage of pre-retirement wages. Because wages tend to grow 
faster than prices over time, this formula results in the payment of 
higher benefits, relative to inflation, to younger generations of 
retirees.


    It is the combination of these three factors that causes Social 
Security costs to grow faster than the underlying tax base. An equation 
may be helpful in understanding this phenomenon. Under a financing 
method like that in Social Security, the following equation governs:

 (Per-capita benefits as a % of worker wages)
------------------------------------------
                                          = 
(Worker tax burden, as a % of wages)
     (Ratio of workers to beneficiaries)

    Accordingly, if the ratio of workers to beneficiaries declines, 
then tax rates must rise to fund benefits that grow as rapidly as 
wages. Alternatively, to avoid a tax increase as the population ages, 
per-capita benefits must grow more slowly than wages. It turns out that 
even with our demographics we can still afford a rate of per-capita 
benefit growth that is somewhat faster than price inflation, but not as 
fast as wage growth, without raising taxes. This benefit growth in 
excess of inflation will no longer be affordable within stable tax 
rates, however, after several more years of legislative delay.
              the costs of delay for program participants
    It has become something of a cliche for analysts of program 
finances in my position to warn decision-makers in your position of the 
costs of delay in addressing Social Security. It is very important, 
however, to recognize that this is not merely an abstract concern; 
significant further delay in repairing program finances will hurt real 
people.
    Let us start first with a positive illustration. Were a solution 
enacted today, we could repair Social Security's projected shortfall 
while facing relatively benign choices. We would be able to honor 
current benefit obligations to people now in retirement and on the 
verge of retirement. We could ensure that future retirees receive 
benefits that are at least as high as today's retirees receive, 
relative to inflation, and we could do so without a tax increase. This 
would still require changes to the current benefit formula and might 
not be everyone's preferred solution. Some others might argue to raise 
taxes even under a solution enacted today, so as to fund the full rate 
of benefit growth projected under the current formula, or something 
closer to it. The point remains, however, that today our choices are 
comparatively benign. If we act today, we needn't necessarily raise 
taxes on workers, nor must we compel future retirees to accept a 
standard of living in retirement that is lower than for today's 
retirees.
    Now let us examine the opposite extreme; the worst-case scenario. 
Suppose that we do nothing at all. Each year from now until the 2030s, 
burdens on taxpayers would grow. By the mid-2020s, in addition to the 
12.4% Social Security payroll tax, taxpaying workers would need to 
finance another $200 billion a year in Trust Fund bond redemptions just 
to keep full benefits flowing. By the 2030s, these additional annual 
obligations would be over $300 billion. As previously mentioned, the 
total cost of paying benefits would absorb fully one out of every six 
taxable dollars earned by workers by the 2030s. And even after that, 
the program would still become insolvent in 2037, causing a sudden 22% 
reduction in benefit payments.
    Dire though this scenario is, it actually understates the costs of 
delay as they would be felt in a practical sense. Further costs of 
delay arise because we have a fairly firm bipartisan consensus that we 
should not cut benefits for people who are already receiving them. The 
22% benefit reduction just referred to assumes we would be willing to 
allow benefits for a 95-year-old widow in 2037--someone who is already 
collecting benefits today in 2011--to be suddenly and dramatically cut. 
This is very unlikely. In practice, any changes we make to our cost 
obligations will likely only prospectively affect future retirees, not 
those already retired.
    And so we need to run this thought experiment again, and to ask how 
deep the cuts would have to be in 2037 if we limited them to new 
retirees. When we do that, it turns out that in 2037 we still wouldn't 
be in balance even if we cut off 100% of benefit payments to that 
year's new retiree class. This outcome also appears implausible. And so 
one must start working through the problem backwards from 2037 and ask, 
``How soon would any changes have to begin so that they don't result in 
disruptive cuts for those already retired, and do not produce an 
unprecedented increase in Social Security tax burdens?''
    The answer is: quite soon. By 2015, we'll have over 60 million 
beneficiaries on the rolls. Any changes we legislate today are unlikely 
to affect their benefits. If we wait to legislate until 2015, and thus 
haven't changed anything about the benefits for people retiring before 
2020, we'll have 70 million on the rolls then whose benefits can only 
be paid by imposing rising tax burdens.
    Even if we acted immediately today, and enacted one of the Social 
Security plans that most aggressively contains the rate of benefit 
growth without raising payroll taxes, our children will still face a 
cost rate of more than 15% of their wages by the 2030s for this one 
federal program alone.\6\ Thus, if we care about whether our children 
face qualitatively higher tax burdens than our own, we need to act very 
soon.
---------------------------------------------------------------------------
    \6\ See any of a number of Social Security proposals scored by the 
Office of the Social Security Actuary, for example the proposal of 
Senator Bennett, http://www.ssa.gov/OACT/solvency/RBennett--
20090212.pdf, in which the cost rate rises to 15.5% by 2030. The 
Bennett proposal is typical of Social Security plans that do not raise 
taxes, in that there still would be a substantial period of time during 
which general revenues are required to redeem Trust Fund bonds and to 
pay the retirement benefits of the large Baby Boom generation. To the 
extent that a Social Security proposal relies on additional tax 
revenues, these total cost rates would tend to rise even more rapidly 
through the 2030s at least.
---------------------------------------------------------------------------
    In sum, the fact that Social Security is projected to be solvent 
until 2037 matters little to the question of when we should act. Our 
window of opportunity for a reasonably equitable solution is closing 
much faster.
    There is another very important practical reason why delay is 
potentially very costly, even threatening to Social Security. It is 
very challenging to bring opposing perspectives together around a 
common plan of action for Social Security under any circumstances. 
Consider the difficulty we already have in bridging our differences 
about Social Security; it only gets harder to do this as the inevitable 
tax increases and benefit adjustments for affected generations grow 
larger.
    In 1983, the program came within mere months of insolvency and an 
interruption of vital checks to beneficiaries. That was with both 
parties agreeing on the immediacy of the problem, and on the dire 
consequences of failure.
    For additional perspective, consider that though in the early 1980s 
there was a threat of immediate insolvency, in other respects the 
situation was not nearly as severe as what we now face. Our situation 
is deteriorating far more quickly. Back in the early 1980s, the worker-
beneficiary ratio was still relatively stable for decades to come and 
the long-term costs of delay weren't nearly as great as they are now. 
For example, though the 1982 Trustees' report warned of near-term 
insolvency, it actually projected program surpluses in the 1990s and 
beyond, in contrast with our current projections of permanently growing 
long-term deficits. See Figure 4 below.


    Many people do not realize, due to a change in the Trustees' 
accounting methods adopted in 1988, that the long-term Social Security 
shortfall we now face is much larger than the one corrected in 1983--
more than 50% larger if measured by the same methods in use then. Given 
the demonstrated difficulty of enacting even the 1983 reforms on the 
brink of program insolvency, we should be very circumspect about 
assuming that a disruptive outcome for Social Security beneficiaries 
can be avoided after too many more years of inaction.
            some common objections to social security reform
    Before I close, Mr. Chairman, I would like to address some of the 
objections that are often raised against taking action to repair Social 
Security finances.
    One objection that received attention for some time was the 
argument that the Trustees' Social Security projections were overly 
conservative; that we shouldn't implement unnecessarily severe measures 
when much of the problem was likely to go away by itself under more 
optimistic projections. With Social Security finances in much worse 
shape today than any of the Trustees, CBO, OMB or GAO had previously 
projected, this is now asserted much less frequently than was recently 
the case. But it was actually never true. The Trustees' projection 
history since 1983 is actually one of generally consistent accuracy, 
and their errors have tended to be slightly more on the fiscally 
optimistic side of the line than on the pessimistic side of the line. 
For their 2010 report, the Trustees assumed a slight acceleration in 
long-term real wage growth rates relative to averages over the last 
several business cycles. And finally, there was not a single solvency 
scenario within the entire 95% confidence band of the Trustees' latest 
probabilistic analysis in which the program would not become insolvent.
    Today, some have asserted that Social Security reform should not be 
pursued because the program (it is said) is not a significant 
contributor to the larger federal deficit. I would respectfully submit 
that this is not the best way to approach the Social Security problem. 
First, the factual point: the Social Security imbalance is indeed the 
largest contributor to long-term deficits out of all spending programs 
other than Medicare or Medicaid. Over the next ten years, according to 
CBO's latest projections, not only will Social Security involve more 
expenditures than any other single federal program, but its aggregate 
cost growth will exceed that of either Medicare or Medicaid.\7\
---------------------------------------------------------------------------
    \7\ See Congressional Budget Office, The Budget and Economic 
Outlook: Fiscal Years 2011 to 2021, p. 58. Social Security costs are 
projected to grow from $727 B in 2011 to $1.267 T in 2021, an annual 
increase of $540 B. Medicare costs are projected to grow from $572 B in 
2011 to $1.021 T in 2021, an annual increase of $449 B.
---------------------------------------------------------------------------
    Even if Social Security weren't a significant contributor to long-
term deficits, this would not render corrective action unimportant: 
whether the rest of the budget is in surplus or in deficit, Social 
Security--if it is to remain self-financing--must be brought into 
balance. These larger budget issues are relevant only because they 
establish that it will be impractical over the long term to bail out 
Social Security with general government revenues. This reality only 
highlights rather than diminishes the importance of Social Security 
being able to stand on its own. The earlier that we repair Social 
Security's imbalance, the better off Social Security participants will 
be, and the stronger the program will be.
    You as legislators must make the tactical judgments as to the best 
process for restoring Social Security to balance. If separating Social 
Security from the larger budget discussion enables us to enact Social 
Security repairs more rapidly, this would be a strong argument for 
separation. If, however, such separation merely facilitates inaction 
and permits Social Security's imbalance to grow worse, this would be a 
very strong argument against it.
    Finally, it is sometimes said that we should not take action to 
resolve the Social Security imbalance because doing so would cause harm 
to people on Social Security. I would respectfully submit that this is 
not true. Right now, there is a substantial imbalance between what the 
program is promising beneficiaries and the resources it will have 
available to pay benefits. One way or the other, that imbalance has to 
be resolved; the government cannot send out the checks without in some 
way producing the revenue to do so. Thus, a failure to act is simply a 
failure to disclose to the affected parties how this imbalance will 
ultimately be resolved. It basically conceals from taxpaying workers 
and/or beneficiaries costs that will be imposed upon them but which 
they are not now being told about.
    Moreover, as we have discussed, the longer that we continue with 
the current imbalance on the books, the closer we get to the day where 
beneficiaries need to worry not only about cuts in the future growth of 
benefits--but about actual cuts even relative to previous benefit 
levels. Thus, it is inaction, rather than prudent and prompt reforms, 
that poses the greatest danger to Social Security beneficiaries.
                               conclusion
    My conclusion is best summarized by some sentences from an article 
I was recently privileged to co-author with Robert Greenstein of the 
Center on Budget and Policy Priorities. ``Social Security faces a 
significant shortfall, which policy makers would be better off 
addressing sooner rather than later. Reasonable and well-intentioned 
people will have differences over the best way to resolve the Social 
Security shortfall. We share a common interest, however, in taking 
action to do so at the earliest possible time.''

    Chairman Ryan. Thank you. I am sorry to end you there. A 
vote has hit, we have got 13 minutes left in the vote. Let's 
get through these two gentlemen, and if you could stick to your 
five minutes that would be great. Then we will recess and all 
come back after two votes. Mr. Capretta.

                 STATEMENT OF JAMES C. CAPRETTA

    Mr. Capretta. Thank you, Mr. Chairman, Mr. Van Hollen, for 
holding this hearing. It is a very important topic. The budget 
problems we are experiencing today are directly related to the 
fact that health costs have risen dramatically over the past 
four decades. In some sense, we are already living in the long 
run cost problem.
    In 1975, the federal government spent 1.3 percent of GDP on 
Medicare and Medicaid. In 2010, spending on just those two 
programs had risen to 5.5 percent of GDP. That is more than 400 
percent growth. Why are health care costs rising so rapidly?
    The prevailing view has been that the federal government 
health programs experience rapidly rising costs because they 
are victims of the runaway cost train that is pulling the 
entire system down the tracks at too rapid a rate. But this 
point of view ignores the crucial role of existing governmental 
policy. At present, the vast majority of Americans get their 
health insurance through one of three sources, Medicare, 
Medicaid for the low income, and employers for the working-age 
population and their families. In each instance, the federal 
treasury is underwriting rapid costs escalation, because there 
is no limit to what Uncle Sam will pay as the premiums rise.
    In Medicare, most beneficiaries are in fee-for-service with 
no cost sharing at the point of service, due to supplemental 
insurance. The result of this arrangement is hardly surprising. 
The volume of services paid for by Medicare has been on a 
steady and steep upward trajectory for decades. The real price 
Medicare paid for physician fees dropped between 1997 and 2005 
by five percent. That is, the real price paid for physician 
services went down, but volume went up by more than enough that 
total spending on physician services rose by 35 percent in real 
terms.
    Medicaid fuels cost growth because it is financed with a 
flawed statement of federal-state matching payments. In this 
arrangement, if a governor of a state wants to cut their 
state's Medicaid costs, they have to cut the program by $2.32 
to save $1. Not surprisingly, most state politicians do not 
find this to be attractive.
    The federal tax treatment of employer-sponsored coverage 
provides a similar incentive for higher costs. Rather than 
economizing, its unlimited tax break for health insurance 
premiums means that health benefits are preferred to cash wages 
in many instances.
    The key question is: what process is most likely to succeed 
in bringing about continual and rapid improvement in the 
productivity and quality of patient care? That is what is 
needed to slow the pace of rising costs. One view is that the 
government can help engineer more cost-effective health care 
delivery. That is the thought that animated the accountable 
care organizations in the new health care law, the Medicare 
pilot projects, the $10 billion Center for Medicare and 
Medicaid Innovation.
    But that has been tried, even though not in such a large 
way, but it has been tried many times in the Medicare program, 
in the past. And it has failed. There is an alternative, and it 
is a functioning marketplace with cost-conscious consumers. In 
2003, Congress built such a marketplace for the new 
prescription drug benefit. There is a competitive structure 
with a defined contribution fixed independently of the plan 
chosen by the beneficiaries. At the time of enactment, there 
were many pronouncements that it would never work, that no 
plans would participate, that it would be too complex, that the 
beneficiaries would prefer a one size fits all program run by 
the government, and the government could negotiate a better 
deal on its own. All of those assumptions were proven wrong. 
The program has come in 40 percent below expectations, in terms 
of costs.
    We need to do something similar in Medicare, in the rest of 
Medicare, on a prospective basis. As Chuck mentioned, these 
reforms in Medicare can be the same as they are in Social 
Security. They do not have to affect existing beneficiaries, or 
even those who are about to enter the program. On a prospective 
basis, we need to model the rest of Medicare, something along 
the lines of what we did in the prescription drug program.
    In Medicaid, a similar approach would allow for more 
seamless coverage between those who are on the Medicaid program 
and those who earn a little bit more and move into the working-
age private insurance system. As it stands today, when someone 
leaves Medicaid, they often have a spell of un-insurance 
because there is no coordination between the public program and 
private coverage.
    In the employer setting, if we move to a tax credit 
approach that is universal for all households, it would be, in 
a sense, a universal coverage program. Because if someone did 
not take up this tax credit and use it to buy insurance, they 
would forgo the entire amount of this new subsidy. So it is, in 
this sense, a universal coverage program that would allow 
everybody in America to have a good health insurance plan.
    Finally, I would just note that some have said that this 
shifts all the costs on the beneficiaries. That is only true if 
there is no productivity change from this kind of a shift. But 
if you assume, as I do, that moving toward this kind of an 
approach actually changes the dynamic of the health system 
toward higher productivity, higher quality, more patient-
focused system, then we can actually get a better system that 
is fiscally sound, as well as better for the patients. Thank 
you.
    [The statement of Mr. Capretta follows:]

            Prepared Statement of James C. Capretta, Fellow,
                    Ethics and Public Policy Center

    Mr. Chairman, Mr. Van Hollen, and members of the Committee, thank 
you for the opportunity to participate in this very important hearing 
on ``Fulfilling the Mission of Health and Retirement Security.''
    In the time available, I would like to focus my comments on the 
health care component of today's hearing.
             rising federal health entitlement obligations
    A primary objective of the Patient Protection and Affordable Care 
Act (PPACA) was to increase the health security of the American people. 
But health security, no matter how well intentioned, will be fleeting 
if the programs upon which that security depends are unaffordable for 
taxpayers.
    Unfortunately, that is exactly the situation in which we find 
ourselves today. Federal health entitlement spending has been growing 
rapidly for many years, and is expected to continue doing so even after 
enactment of the PPACA. Indeed, it is sometimes said that at some 
distant point in the future, the long-term rise in federal health care 
costs will catch up with us. But the truth is that rising federal 
health entitlement spending has already caught up with us. The budget 
problems we are experiencing today are directly related to the fact 
that health costs have risen dramatically over the past four decades. 
In 1975, the federal government spent 1.3 percent of GDP on Medicare 
and Medicaid. In 2010, spending on just those two program had risen to 
5.5 percent of GDP. That's more than 400 percent growth.
    And the Congressional Budget Office's (CBO) most recent projections 
show health entitlement spending is poised to rise even more rapidly 
over the next decade than it has in the past. As shown in Chart 1, CBO 
expects total health entitlement spending to rise from $810 billion in 
2010 to $1,763 billion in 2021. By 2021, health entitlement spending 
will make up an astonishing 36 percent of all non-interest federal 
outlays. So more than one in three dollars that the government spends 
on programs and agency budgets will go to meeting health entitlement 
obligations.


    During the debate over the health care law, it was suggested that a 
goal of reform was to begin to slow the pace of rising federal health 
entitlement costs. But the PPACA has almost certainly compounded the 
problem, not solved it. As shown in Chart 2, in a long-term forecast 
issued last June, CBO estimated what health entitlement spending would 
be in the coming decades if the health law had not been enacted at all 
and if it were implemented in full (called the ``extended baseline''). 
With those assumptions, the lines do in fact cross at some point around 
2027 or so--meaning the PPACA will have brought health entitlement 
obligations below the level they otherwise would be. But the ``extended 
baseline'' scenario assumes the new law's deep payment reductions in 
the Medicare program can be sustained on a permanent basis. As this 
committee heard at a hearing in January, the chief actuary of the 
Medicare program believes that to be a very unlikely scenario. 
Accordingly, CBO has also done a projection of what federal health 
entitlement obligations will be in future years under the PPACA if the 
Medicare cuts are moderated even slightly. With that assumption, the 
PPACA does not reduce federal health entitlement obligations but 
increases them, by about 1 percent of GDP by 2035.


                 the role of existing government policy
    Why are health care costs rising so rapidly? The prevailing view 
has been that the federal government's health programs experience 
rapidly rising costs because they are victims of the runaway cost train 
that is pulling the entire system down the tracks at too fast a rate. 
According to this way of thinking, the only way to slow the 
government's costs is to slow the whole train. That's the point of view 
that informed much of the writing of the new health care law.
    But this thinking misses a crucial point. Yes, one aspect of cost 
escalation is an exogenous factor. Rising wealth and medical discovery 
are fueling the demand for more and better treatments. That should not 
be resisted in any event. But there is widespread agreement that costs 
are also high and rising because of waste and inefficiency--and here 
the problem is not some force outside of government's control but 
existing governmental policy.
    At present, the vast majority of Americans get their health 
insurance through one of three sources: Medicare, for the elderly and 
disabled; Medicaid, for low-income households; and employers for the 
working-age population and their families. In each of these instances, 
the federal Treasury is underwriting rapid cost escalation because 
there is no limit to what Uncle Sam will pay.
    In an important 2006 study, Amy Finkelstein, an economics professor 
at the Massachusetts Institute of Technology, estimated that about half 
of the real-cost increase in health care spending in the United States 
from 1950 to 1990 can be attributed to the spread of federally-
subsidized and expansive third-party insurance through the government 
and employers.\1\
---------------------------------------------------------------------------
    \1\ ``The Aggregate Effects of Health Insurance: Evidence from the 
Introduction of Medicare,'' Amy Finkelstein, Massachusetts Institute of 
Technology, April 2006 (http://econ-www.mit.edu/files/788).
---------------------------------------------------------------------------
    Medicare's important influence on how health care services are 
delivered is often overlooked or understated. Medicare is the largest 
purchaser of services in most markets today. Four out of five enrollees 
are in the traditional program, which is fee-for-service insurance. 
That means Medicare pays a pre-set rate to any provider for any service 
rendered on behalf of a program enrollee, with essentially no questions 
asked. Nearly all Medicare beneficiaries also have supplemental 
insurance, from their former employers or purchased in the Medigap 
market. With this additional coverage, they pay no charges at the point 
of service because the combined insurance pays 100 percent of the cost. 
This kind of first-dollar coverage provides a powerful incentive for 
additional use. Whole segments of the U.S. medical industry have been 
built around the incentives embedded in these arrangements.
    Congress and the program's administrators have, without 
interruption, tried to hold down Medicare's costs by paying less for 
each service provided. Those providing services to Medicare patients 
have responded by providing more services, and more intensive 
treatment, over time for the same conditions that patients present to 
them. In most cases, there is no reason for them not to provide higher-
volume care. The patients generally do not pay any more when more 
services are rendered. And the bill is just passed on to the Medicare 
program--and federal taxpayers.
    The result of this dynamic is hardly surprising. The volume of 
services paid for by Medicare has been on a steady and steep upward 
trajectory for decades. As shown in Chart 3, according to CBO, the real 
price Medicare paid for physician fees dropped between 1997 and 2005 by 
nearly 5 percent, but total spending for physician services rose 35 
percent because of rising use and more intensive treatment per 
condition.\2\
---------------------------------------------------------------------------
    \2\ ``Factors Underlying the Growth in Medicare's Spending for 
Physicians' Services,'' Congressional Budget Office (CBO), Background 
Paper, June 2007 (http://www.cbo.gov/ftpdocs/81xx/doc8193/06-06-
MedicareSpending.pdf).


    Medicaid fuels cost growth because it is financed with a flawed 
system of federal-state matching payments--with no limit on the amount 
that can be drawn from the U.S. Treasury each year. For every dollar of 
Medicaid costs, the federal government pays, on average, 57 percent and 
the states pick up the rest. In this arrangement, if a governor or 
state agency wants to cut their state's Medicaid costs, they have to 
cut the program by $2.30 to save $1.00 because the other $1.30 belongs 
to the federal government. Not surprisingly, most state politicians do 
not find this to be a particularly appealing option. So, instead, they 
spend most of their energy devising ways to ``maximize'' how much they 
get from the federal government for Medicaid services--while looking 
for creative ways to contribute the required state portion of the 
funding without really doing so.
    The federal tax treatment of employer-sponsored coverage provides a 
similar incentive for higher costs rather than economizing. Today, 
employer-paid health insurance premiums do not count as taxable 
compensation for workers. No matter how expensive the health insurance 
premium, if the employer is paying, it is tax-free to the worker. 
Employees thus have a strong incentive to take more and more of their 
compensation in the form of health coverage instead of cash wages 
because the health coverage is not taxable. For every dollar spent on 
health coverage, a worker receives a full dollar of coverage; whereas 
with every dollar received in other forms of compensation, a portion 
has to go to the government.
    When you put it all together--Medicare's incentives for rising 
volume, unlimited federal funding for state-run Medicaid plans, and a 
tax subsidy for employer plans that grows with the expense of the 
plan--it is not surprising that health care costs are rising rapidly in 
the United States. The vast majority of Americans are in insurance 
arrangements where a large portion of every extra dollar spent on 
premiums or services is paid for by taxpayers, not them.
                            the key question
    So cost escalation is at the center of our fiscal problems, and it 
is making health care unaffordable for too many people. The key 
question for health reform is, what can be done about it. Put more 
precisely, the key question health reformers must answer is this: what 
process is most likely to succeed in bringing about continual and rapid 
improvement in the productivity and quality of patient care? Because 
the only way to slow the pace of rising costs without comprising the 
quality of American medicine is by making the health sector ever more 
productive. More health bang for the buck, if you will.
    One view holds that the federal government can ``engineer'' more 
cost-effective health care delivery. That's the theory behind the new 
law's Accountable Care Organizations, other Medicare pilot projects, 
the comparative effectiveness research funding, and the new $10 billion 
Center for Medicare and Medicaid Innovation.
    But Medicare's administrators have been trying for years to change 
the dynamic in the traditional fee-for-service program and have failed. 
The problem is that the only way to build a high-quality, low-cost 
network is to exclude those who are low-value and high-cost. And that's 
something Medicare has never been able to do. It's been much easier, 
and more tempting, to simply impose across-the-board payment reductions 
for all providers of services, without picking winners and losers among 
physicians and hospitals. And so such arbitrary cost-cutting has become 
the default mechanism for hitting budget targets of various kinds over 
the years.
    And, despite all the talk of ``delivery system reform,'' that is 
exactly what was done in the PPACA too. Among other things, Congress 
enacted a permanent ``productivity improvement factor,'' which will 
reduce the inflation increases applied to multiple Medicare payment 
systems. These reductions will reduce the normal update for the costs 
of medical practice by about half a percentage point every year in 
perpetuity for every provider of these services, including hospitals, 
without regard to how well or badly they treat patients. The 
compounding effect of such reductions will produce, on paper, enormous 
savings. But these cuts almost certainly will not be sustained as they 
will push average Medicare payment rates for services below those of 
Medicaid by 2019, according to the chief actuary at the Centers for 
Medicare and Medicaid Services. If that were actually to occur, some 15 
percent of Medicare's hospitals would stop seeing Medicare patients to 
avoid massive financial losses.\3\
---------------------------------------------------------------------------
    \3\ ``Estimated Financial Effects of the `Patient Protection and 
Affordable Care Act,' as Amended,'' Richard S. Foster, Centers for 
Medicare and Medicaid Services, Office of the Actuary, April 22, 2010 
(https://www.cms.gov/ActuarialStudies/Downloads/PPACA--2010-04-22.pdf).
---------------------------------------------------------------------------
 transforming health care delivery with cost-conscious consumer choice
    There is an alternative to centralized cost-control efforts. It's a 
functioning marketplace with cost-conscious consumers.
    In 2003, Congress built such a marketplace, for the new 
prescription-drug benefit in Medicare.
    Two features of the program's design were important to its success. 
First, there was no incumbent government-run option to distort the 
marketplace with price controls and cost shifting. All private plans 
were on a level playing field. They competed with each other based on 
their ability to get discounts from manufacturers for an array of 
prescription offerings that are in demand among beneficiaries and their 
physicians.
    Second, the government's contribution to the cost of drug coverage 
is fixed and is the same regardless of the specific plan a beneficiary 
selects. The contribution is calculated based on the enrollment-
weighted average of bids by participating plans in a market area. 
Beneficiaries selecting more expensive plans than the average bid must 
pay the additional premium out of their own pockets. Those selecting 
less expensive plans pay a lower premium. With the incentives aligned 
properly, participating plans know in advance that the only way to win 
market share is by offering an attractive product at a competitive 
price because it is the beneficiaries to whom they must ultimately 
appeal.
    This competitive structure, with a defined contribution fixed 
independently of the plan chosen by the beneficiary, has worked to keep 
cost growth much below other parts of Medicare and below expectations. 
At the time of enactment, there were many pronouncements that using 
competition, private plans, and a defined government contribution would 
never work because insurers would not participate, beneficiaries would 
be incapable of making choices, and private insurers would not be able 
to negotiate deeper discounts than the government could impose by fiat. 
All of those assumptions were proven wrong. What actually happened is 
that robust competition took place, scores of insurers entered the 
program with aggressive cost cutting and low premiums, costs were 
driven down, and federal spending has come in 40 percent below 
expectations.
    Similar changes--what might be called a defined contribution 
approach to reform--must be implemented in the non-drug portion of 
Medicare, as well as in Medicaid (excluding the disabled and elderly) 
and employer-provided health care.
    In Medicare, that would mean using a competitive bidding system--
including bids from the traditional fee-for-service (FFS) program--to 
determine the government's contribution in a region. Beneficiaries 
could choose to enroll in any qualified plan, including FFS. In some 
regions, FFS might be less expensive than the competing private plans. 
But in some places, it almost certainly would not be, and beneficiary 
premiums would reflect the cost difference. This kind of reform could 
be implemented on a prospective basis so that those already on the 
program or nearly so would remain in the program as currently 
structured.
    In Medicaid, moving toward fixed federal contributions for the 
acute-care portion of the program would allow for much greater 
integration between Medicaid and the insurance market available to most 
workers. Today, when a Medicaid recipient goes back to work, he often 
loses public insurance but doesn't get employer coverage. Converting 
the entitlement into something that can be used in a variety of 
insurance settings should facilitate portability and more continuous 
coverage.
    For employers, the key is to convert today's tax preference for 
employer-paid premiums into a fixed, refundable tax credit that is 
available to all households (headed by someone under the age of 65), 
regardless of whether they work or pay taxes. This would provide 
``universal coverage'' of insurance to the entire U.S. population. Any 
household that didn't buy coverage would lose the entire value of the 
credit. The number choosing to do so would likely be very small.
    Moving toward a defined-contribution approach to reform would allow 
for much greater federal budgetary control, which is of course a 
primary objective and tremendously important for the nation's economy 
and long-term prosperity. But this isn't just a fiscal reform. It's a 
crucial step toward better health care too because it would put 
consumers and patients in the driver's seat, not the government. With 
consumer making choices about the kind of coverage they want as well as 
the type of ``delivery system'' through which they get care, the health 
system would orient itself to delivering the kind of care patients want 
and expect.
    Critics argue that this improved fiscal outlook that would flow 
from moving toward defined contribution health care would come at the 
expense of the beneficiaries, who would bear the entire risk of costs 
continuing to rise faster than the government's newly fixed 
contribution.
    But that would only be the case if building a functioning 
marketplace had no discernible impact on the productivity of the health 
sector. It is far more likely that converting millions of passive 
insurance enrollees into cost conscious consumers will have a 
transformative effect on health care delivery, and for the better. 
There would be tremendous competitive pressure on those delivering 
services to do more with less, and find better ways of giving patients 
what they truly need. Any health sector player that did not step up and 
improve its productivity would risk losing substantial market share 
among seniors, working people, and those on Medicaid. In other areas of 
our economy that have gone through a consumer revolution, the 
transformation of the industry has been stunning.
                               conclusion
    There is obviously much more that needs to be done to ensure a 
stable and accessible health care system for future generations. 
Support will need to be limited for those with means so that more can 
be done for those who need extra help. Special assistance will be 
necessary to ensure those with pre-existing conditions can secure 
affordable coverage. And the government will need to do its part, to 
ensure transparency in prices and quality, and to ensure the rules of 
the marketplace prevent excessive risk segmentation and inferior care 
for those with less resources.
    But with effective government oversight, cost-conscious consumers 
have the potential to transform American health care, making it much 
more productive and of high quality, which is what we desperately need. 
With such a reform, the system will become more patient-focused, more 
efficient, and more innovative. The result will be less fiscal stress, 
a healthier population, and a health care sector that delivers the kind 
of value the public deserves.

    Chairman Ryan. Thank you. Mr. Van de Water.

               STATEMENT OF PAUL N. VAN DE WATER

    Dr. Van de Water. Mr. Chairman, Mr. Van Hollen, and members 
of the committee, I appreciate the opportunity to be here this 
morning. As you, Mr. Chairman, and my colleagues have already 
stated, Social Security, Medicare, and Medicaid are bulwarks in 
protecting the health and retirement security of America's 
seniors and persons with disabilities. Nonetheless, 
increasingly, we are seeing proposals to restructure these 
programs in ways that would undermine their ability to protect 
against the risks of income loss and high health care costs.
    Some propose making large cuts in scheduled Social Security 
benefits, or partially privatizing the program. Others suggest 
phasing out traditional Medicare and replacing it with vouchers 
to purchase private insurance. Still others would end the 
state-federal partnership in Medicaid, and substitute a fixed 
federal block grant. In my view, these proposals all share 
serious deficiencies.
    Few seniors are living on Easy Street, and most have little 
capacity to bear additional economic risk. Social Security 
benefits are modest. The average Social Security benefit is 
only $1,175 a month, or about $14,000 a year. That is not quite 
30 percent above the poverty line. Some 95 percent of 
beneficiaries receive benefits of less than $2,000. Moreover, 
most beneficiaries have little significant income from other 
sources.
    Dependence on Social Security rises with advancing age. As 
fewer people work, out of pocket health care costs rise, and 
other income sources are depleted. Social Security will be even 
more critical for today's younger workers when they retire, 
since few of them will be covered by employer-sponsored and 
fine benefit pension plans.
    Social Security, Medicare, and Medicaid are also highly 
cost-effective. Their administrative costs are low, and the new 
universal coverage of Social Security and Medicare holds down 
benefit costs by protecting against adverse selection in 
purchasing annuities and health coverage.
    Mr. Chairman, in your opening remarks, you talked about how 
changes are needed. And with that I agree. Social Security's 
solvency should be strengthened, and further efforts are needed 
to slow the growth of health care costs. But where I disagree 
with some of my colleagues, and perhaps with you, is on the 
solutions. Social Security can be made solvent through modest 
changes, and it should. And second, an important thing to do, 
as Dr. Rivlin has also said, is to move forward effectively to 
implement the Affordable Care Act and the cost containment 
measures that have already been enacted.
    In my view, the fundamental structures of these programs 
are sound, and they can be improved, and our country's fiscal 
situation strengthened, by making incremental changes, and 
without fundamentally changing the nature of what we have 
today. Thank you very much.
    [The prepared statement of Dr. Van de Water follows:]

       Prepared Statement of Paul N. Van de Water, Senior Fellow,
                 Center on Budget and Policy Priorities

    Mr. Chairman, Mr. Van Hollen, and members of the committee, I 
appreciate the invitation to appear before you today to discuss health 
and retirement security.
    Our landmark public programs--Social Security, Medicare, and 
Medicaid--are bulwarks in defending the well-being of America's seniors 
and people with disabilities. Social Security provides a wage-indexed, 
inflation-protected benefit that is the foundation of retirement 
security. Thanks to Medicare, seniors are the one part of the 
population in which health insurance coverage is almost universal. 
Medicaid fills the gaps in Medicare protection for those with very low 
incomes and is the nation's primary payer for long-term care services 
and supports.
    Despite the vital roles they play, Social Security, Medicare, and 
Medicaid are under attack. Increasingly, we see proposals to 
restructure them in ways that would undermine their ability to protect 
against the risks of income loss and high health care costs. Some 
propose making large cuts in scheduled Social Security benefits or 
diverting a portion of payroll tax contributions into private accounts. 
Others suggest phasing out traditional Medicare and replacing it with 
vouchers to purchase private insurance. Still others would end the 
shared federal-state fiscal responsibility in Medicaid and substitute a 
fixed federal block grant. Some recommend all of the above.
    These proposals have some key aspects in common and also share some 
serious deficiencies. Time does not allow a thorough analysis of each 
one, but let me offer a few comments.
    Few seniors are living on Easy Street, and most have little 
capacity to bear additional economic risks. Social Security benefits 
are modest.\1\ The average Social Security benefit is only about $1,175 
a month, or $14,100 a year. That's less than 30 percent above the 
poverty line. Some 95 percent of retired workers--and even larger 
percentages of disabled workers and aged widows--receive monthly 
benefits of less than $2,000. Moreover, most beneficiaries have little 
significant income from other sources. In 2008, the typical (or median) 
elderly beneficiary had a total household income of only about $20,000 
a year, most of it from Social Security. Dependence on Social Security 
rises with advancing age, as fewer people work, out-of-pocket health 
care costs rise, and other income sources are depleted. Social Security 
will be even more critical for today's younger workers, since few of 
them will be covered by employer-sponsored defined-benefit pension 
plans.
---------------------------------------------------------------------------
    \1\ Kathy A. Ruffing and Paul N. Van de Water, Social Security 
Benefits Are Modest, Center on Budget and Policy Priorities, January 
11, 2011.
---------------------------------------------------------------------------
    Social Security, Medicare, and Medicaid are also highly cost-
effective, and privatization--in whole or in part--is likely to 
increase costs, not reduce them. Social Security's administrative 
expenses amount to only 1 percent of benefit payments. In Medicare, 
administrative expenses are roughly 2 percent for traditional Medicare 
and 11 percent for Medicare Advantage plans.\2\ The near-universal 
coverage of Social Security and Medicare holds down benefit costs by 
protecting against adverse selection in purchasing annuities and health 
coverage.\3\ The average cost of health coverage for a Medicaid 
beneficiary is significantly lower than under private insurance (after 
adjusting for differences in health status), despite Medicaid's more 
comprehensive benefits and significantly lower cost-sharing charges, 
because of Medicaid's lower payment rates to providers and lower 
administrative costs.\4\
---------------------------------------------------------------------------
    \2\ Congressional Budget Office, Designing a Premium Support System 
for Medicare, December 2006, p. 12.
    \3\ Adverse selection occurs when people with poorer-than-average 
health are more likely to purchase health insurance coverage, or when 
people with longer-than-average life expectancy are more likely to 
purchase annuities.
    \4\ Leighton Ku and Matthew Broaddus, ``Public and Private 
Insurance: Stacking Up the Costs,'' Health Affairs (web exclusive), 
June 24, 2008.
---------------------------------------------------------------------------
    The main driver of the federal government's long-term fiscal 
imbalance is the rising per-person cost of health care throughout the 
economy. Growth in federal health care costs is not driven by factors 
that are unique to public programs. To the contrary, for 30 years, per-
beneficiary spending in Medicare and Medicaid has grown at rates nearly 
identical to those for the overall health care system. And during the 
past decade, Medicaid costs per beneficiary grew much more slowly than 
costs for employer-sponsored insurance and costs across the health care 
system as a whole.\5\ Medicare and Medicaid can and should take the 
lead in slowing the growth of costs, as they have done in the past, but 
they cannot get too far out in front. Attempting to force big cuts in 
federal health spending without also restraining the growth of private 
health-care costs would simply shift costs to vulnerable elderly, 
disabled, and other beneficiaries (and limit their access to needed 
care) or to state taxpayers.
---------------------------------------------------------------------------
    \5\ John Holahan, Lisa Clemans-Cope, Emily Lawton, and David 
Rousseau, Medicaid Spending Growth over the Last Decade and the Great 
Recession, 2000-2009, Kaiser Commission on Medicaid and the Uninsured, 
February 2011.
---------------------------------------------------------------------------
    Fortunately, the new health reform law takes important steps to 
slow the growth of health care costs. The Affordable Care Act contains 
almost every cost-containment provision that policy analysts have 
considered effective in reducing the growth of medical spending. These 
include:
     Payment innovations, such as bundled payments and 
accountable care organizations, that will reward providers based on the 
value of their care, not the volume of their procedures;
     An excise tax on high-cost insurance plans to make 
consumers more cost-sensitive and discourage excess utilization;
     An Independent Payment Advisory Board that will develop 
and submit proposals to reduce cost growth and improve quality in both 
Medicare and the health care system as a whole;
     A Center for Medicare and Medicaid Innovation that will 
test, evaluate, and foster rapid expansion of new ways to increase the 
value of care;
     A Federal Coordinated Health Care Office that will test 
and evaluate new systems of care to integrate benefits more effectively 
and lower costs for dual eligibles (low-income Medicare beneficiaries 
who also receive Medicaid);
     Measures to inform patients and payers about the quality 
of health care providers;
     Additional tools and funding to fight health-care fraud;
     More funding for comparative effectiveness research; and
     Steps to promote wellness and prevention.
    Slowing the growth of health care costs is one of our nation's most 
pressing economic challenges, and success will benefit employers, 
workers, and taxpayers. The effort will require an ongoing process of 
testing, experimentation, and rapid implementation of what is found to 
work. The health reform law begins that process. Congress should work 
to assure effective implementation of the Affordable Care Act, not to 
undermine the programs that form the bedrock of health and income 
security for seniors, persons with disabilities, and those with low 
incomes.

    Chairman Ryan. Thank you very much. We will recess until we 
come back, then we will start with questions.
    [Recess]
    Chairman Ryan. Dr. Rivlin, I want to give you a chance to 
expound upon your earlier comments with respect to your 
Medicare reforms; you have pioneered a lot of this. The 
Domenici-Rivlin plan, how it is different from the one that you 
and I authored, phase-ins, the treatment of traditional fee-
for-service, and why you made those decisions.
    Ms. Rivlin. Yes, Mr. Chairman. I think the main difference 
is the phase-in. What you had in the roadmap, and we retained 
it in the version that we did together, was a very slow phase-
in that would give the premium support only to new applicants, 
that is new eligibles, as they became eligible for Medicare in 
2021. And they would not be allowed to stay or to go into the 
fee-for-service system, although everybody who was already in 
it would be staying in it. And that means that, even after 10 
years, there would only be people under 75 in Premium Support.
    When we did the Domenici-Rivlin plan, we wanted to phase it 
in much sooner. And we thought that putting an option out there 
for everybody to be in Premium Support would put downward 
pressure on all health costs, because the private plans that 
were competing in the Premium Support system, we hope, would be 
providing service more efficiently. And if the people elected 
stayed in fee-for-service, and that went up faster, they could 
choose a more efficient plan. So that was the reasoning.
    Chairman Ryan. In your fee-for-service structure, which 
would occur alongside your premium support structure, you 
proposed balance billing in the fee-for-service side? You are 
capping at certain rates, as you know.
    Ms. Rivlin. Yes. I think we did not work out all the 
details of how it would work, but the concept was that if the 
cost, the average subsidy under the fee-for-service system, was 
rising faster than GDP plus one then people who stayed in it 
would have to pay an additional premium. I think we would have 
to put together parts A and B, and maybe D, but we already have 
a premium in B, so if you put those two together, you have a 
mechanism for charging a premium.
    Chairman Ryan. I see, so it is a defined contribution fee-
for-service system, capped at the same growth rate that the 
premium support system is capped at.
    Ms. Rivlin. That is the basic idea.
    Chairman Ryan. Yes, and if cost pressures occur higher then 
the beneficiary would bear the difference. And you would give 
them the ability to do that, meaning the ability of providers 
to get that.
    Ms. Rivlin. Right.
    Chairman Ryan. Yes, okay. Mr. Blahous. I heard about this 
morning, I did not see MSNBC yesterday. But the Senate Majority 
Leader Harry Reid said that he would consider looking at Social 
Security quote, two decades from now, end quote. You touched on 
this in your testimony, but could you specifically describe the 
effect of waiting to reform Social Security on those who are in 
or near retirement? And what effect would that have on younger 
generations if we wait to address Social Security reform two 
decades from now?
    Mr. Blahous. Sure. As I indicated in my written testimony 
and oral remarks, delay basically concentrates the effects of 
any adverse consequences on a shrinking number of people. And 
so any particular generation is going to be harder hit the 
longer you delay. Now, waiting all the way until the 2030s is 
basically a nightmare scenario from the standpoint of younger 
generations, because basically you are completely exempting the 
baby boom generation, which is a historically large generation, 
from making any contribution to the problem. The consequence is 
that, if you hold off until the 2030s, you are in a position 
where either you are going to have to reduce benefits fully by 
a quarter, roughly, or increase worker tax burdens by roughly 
one-third, or a combination of those two very severe outcomes.
    I think there is another very important point to make, 
which is that delay brings into fundamental question whether we 
can fix the system at all. Remember, in 1983, we came within 
months of not being able to send out the checks. It is hard to 
fix Social Security, simply because Republicans and Democrats 
disagree. And they disagree under the best of circumstances. 
Right now, the long term Social Security shortfall is already 
substantially bigger today than the one they fixed in 1983. If 
you measure it by the same methodology, the accounting methods 
have changed since then, so a lot of people do not realize 
this, but if you measure it the same way, we already have a 
bigger problem to solve.
    As this problem mounts and the gap that Republicans and 
Democrats have to close with each other gets bigger and bigger, 
we increase the risk that we may not be able to get an 
agreement on a solution, and have a chaotic and disruptive 
consequence.
    Chairman Ryan. The present value of the unfunded promise is 
$5.3 trillion, is that correct?
    Mr. Blahous. Right. The last trustee's report, it was $5.4 
trillion in present value, and that assumes the trust fund is 
an asset. If you count the general revenue obligations to the 
trust fund, it is about $7.9 trillion in the last trustee's 
report.
    Chairman Ryan. And if we delay, every year, how much, on 
average, does that increase by every year of delay?
    Mr. Blahous. It is in the hundreds of billions. Having the 
liberty of some imprecision, my guess, the 75 year shortfall 
probably rises by about $400 billion a year in present value. 
That is a rough guess. The so-called infinite horizon's 
shortfall would rise by more. But even this, I would submit, 
understates the true cost of delay. Because the true cost of 
delay is affected by the fact that we do not want to cut 
benefits for people once they hit the rolls. So you have a 
bigger share of that shortfall that is politically inviolate.
    Chairman Ryan. How confident are you on these projections? 
The reason I ask that is, we were told just a year ago, or two 
years ago, we were going to have Social Security surpluses 
through 2017. Then we had these economic problems, and now CBO 
is telling us we are going to have permanent cash deficits from 
now on. So, permanent cash deficits starting in 2011, when we 
thought we were not going to be in that situation for another 
six years.
    Given the deterioration of what we call baselines, the 
economy, what is the downside of all of this?
    Mr. Blahous. Well, this is very important, because the 
trustees' projections have long been subject to debate. Are 
their projections too optimistic, are they too pessimistic, 
what have you? So there is a range of uncertainty around the 
projections. I think the most important thing to understand, 
that even with a great diversity of possible outcomes, for 
fertility, for longevity, for economic growth, the system is 
going to become insolvent sometime within the next half 
century.
    And there is just as much risk that the problem will arrive 
much sooner, as there is reason to hope that it might be 
delayed by a few years. There is a 95 percent confidence band 
in a probabilistic analysis that the trustees perform each 
year. Last year there was not a single scenario in that 95 
percent confidence band where the system did not become 
insolvent. So the chances of this problem not happening is 
almost negligible.
    Chairman Ryan. Mr. Capretta, you touched on this a little 
bit in your testimony. We spend more money on health care per 
person than any other industrialized country in the world, by 
about two and a half times, I think. So we spend a lot of money 
on health care, just through taxpayers. As you mentioned, 
between Medicare, Medicaid, the tax exclusion, that is 
something like $4.5 trillion over the next 10 years. And that 
is, I think, a low-ball estimate. That is just for Medicaid and 
the tax exclusion, I think, for the under-65 population.
    And clearly these programs are growing at such an 
unsustainable rate that they will crash the economy, bring 
insolvency, and give us a debt crisis. And a core problem with 
that, and I think everybody agrees with this, is health 
inflation. So, how do we get at the root source and cause of 
health inflation? There are basically, from my perspective, two 
schools of thought around here on how to do this.
    One is, have the government more firmly involved and more 
centrally directing the system in reforms through various 
mechanisms, formulas, price controls and things like that. The 
other is more of a consumer-directed, patient-centered system, 
to try and inject competition into the system, like we have 
seen in other sectors of our economy.
    I am trying to do justice to both schools of thought. But 
what I am trying to get at is, how do we get ourselves on a 
virtuous cycle? Because we are in a vicious cycle right now. 
The more money we put into it, the more inflation gets out of 
our control, the worse our deficit and debt become. How do we 
get this sector of our economy operating like the other sectors 
of our economy, where we are improving productivity, where we 
are actually lowering price increases, where we are actually 
rewarding performance, where we are actually increasing 
quality, lowering costs? And a lot of folks say, We just cannot 
do this in health care, because health care's so different. 
Health care is, you know, a personal issue, it is so different.
    The reason I can see you, and your name, and the clock, is 
I got LASIK surgery, you know, 10 years ago. And LASIK surgery 
is an out-of-pocket expenditure. It cost me $4,000, then. I got 
it in Madison, at this place called Davis Duehr Dean, and ever 
since then, they have revolutionized this Excimer laser three 
times. It costs about $1,600 now. So the price has gone down, 
the quality has gone up. And that is just one area in health 
care. But it strikes me that it is not as if this sector, large 
sector, very important sector of our economy, is not immune 
from those market forces occurring.
    So how do we get ourselves onto a virtuous cycle, where we 
are stretching our health care dollars more, we are getting 
better quality in health care, and health inflation is not 
destroying our system, in health care and our budget?
    Mr. Capretta. Well, I very much agree with your premise 
here, which is, that is the key. How do we get on that virtuous 
cycle? And I do think the answer is to move away from a system 
where, on the margins, the Treasury is paying for a good 
portion of the cost inflation. In other words, what is 
happening today is that taxpayers are essentially underwriting 
extra inflation, because the way Medicare operates, the way 
Medicaid operates, and the way the employer-based system 
operates, as premiums go up, and automatically part of it is 
paid for by the tax system. That takes a tremendous incentive 
out of the system to adjust itself.
    So I think the first step is to recognize that government 
budget policy is already part of the problem. And addressing 
that, then, can start to have the opposite effect.
    Now, when I was last before this committee in January, this 
same topic came up quite a bit with, the witness who preceded 
me made a lot of news, it was the Chief Actuary for the 
Medicare program. He was asked about this a number of times. 
And his response was, very cautious; I do not want to speak for 
him. But he basically said, there is a hope that, when you move 
toward a system where consumers have limited support from the 
government, but also freedom to choose, that that will then 
incent, through competition and choice, the kind of dynamic you 
just referred to.
    And he also said, and I think this is very important, that 
it is not clear that the other approach, the approach you 
described, Mr. Chairman, that a centralized management of the 
system can get that kind of productivity leap that we really 
need. And in fact, if you look at the history of how Medicare 
has operated over the years, there is a strong incentive in the 
program. To really get productivity improvement, you have to 
start making choices. You have to say, This delivery system is 
highly efficient, and this other one is not. And we are going 
to reward the high efficiency one. Okay.
    The Medicare program has a very difficult time doing that, 
because you have to pick winners and losers. The private system 
can do that a lot better than a public system. The public 
system ends up saying, usually, We are going to pay everybody 
the same, at a low rate. That is how they cut costs, okay. But 
to really get productivity improvement in the health system, 
you have to start saying, We are going to reward the high 
achievers. We are going to reward high value and low cost. And 
to do that, that usually happens more easily in a market system 
than in a government system.
    Chairman Ryan. I could go on but in the interest of time, 
Ranking Member Mr. Van Hollen.
    Mr. Van Hollen. Thank you, thank you, Mr. Chairman. I am 
going to, I guess I will come back to that. But just to follow 
up on that point that was made, I think the American people 
would be surprised to learn that the private insurance market 
is working really well in terms of cost containment. As I 
referenced in my earlier remarks, between the years 2000 and 
2008, health care premiums doubled in the individual private 
markets. So this is part of a larger conversation on the whole 
health care thing.
    If I could, Dr. Rivlin, I want to turn to health care in a 
minute. But first I want to address a couple of the other, 
larger issues with respect to our efforts to reduce deficits 
and our debt. And I want to thank you for your service to our 
country, in many capacities, most recently, of course, both as 
a member of the President's Bipartisan Fiscal Commission and as 
the co-chair of the Rivlin-Domenici Commission.
    Now, with respect to the Bipartisan Fiscal Commission, you 
of course, supported the final result, but you made some 
important comments in your letter accompanying that report. 
And, with respect to the fiscal commission report, you said, 
and I quote, that you would have shifted the plan's overall 
balance more toward revenue increase and less toward spending 
cuts, end quote. And then you went on to say, quote, that you 
do not believe it is wise, or even feasible, to cap federal 
revenues at 21 percent of GDP.
    Now, we have had a conversation this morning, a little bit, 
about how this is a very important subject that we are tackling 
today. But really, to get to the bottom of the deficit, that 
issue, we have got to expand that issue. I would say that, 
there is an article in The Wall Street Journal today that Mr. 
Camp, the Chairman of the Ways and Means Committee, is going to 
try and bring down the top marginal rate to 25 percent. I do 
not know how he is going to do it, but it will be a huge, huge 
tax break, again, for the folks, highest income folks in the 
country.
    So if you could just explain what you meant when you said, 
quote, you do not believe it is wise, or even feasible, to cap 
federal revenues at 21 percent of GDP.
    Ms. Rivlin. Right. We have this surge of retirees moving 
into our retirement programs. We have talked about this all 
through this hearing, how that puts upward pressure on Social 
Security spending, Medicare, and Medicaid. And although I 
support the reforms that will bend the curve in health care and 
I want to put Social Security on a firm basis, I do not believe 
it is realistic that we are going to be able to do the right 
thing by this much larger aging population and hold federal 
spending and revenues at 21 percent.
    So, in the Domenici-Rivlin plan, it goes up to 23, and I 
think that is more realistic. But we are going to have to fight 
hard to stay there. The upward pressures on the health care 
spending programs are enormous. And the challenge is very 
great.
    And as to tax reform, I saw the article about the Camp 
plan, and he served with Chairman Ryan and myself on the fiscal 
commission. The mistake there, I think, is to make it revenue-
neutral. We are going to need more revenues. We need tax 
reform. And I think the kind of reform that Representative Camp 
is talking about is feasible, it is feasible to bring the rates 
down, but only if you get rid of almost all of, the loopholes 
and special provisions. And those go to upper income people 
differentially.
    So you can have a tax reform with lower rates and still 
have a more progressive impact. And we show how to do that in 
the Domenici-Rivlin plan.
    Mr. Van Hollen. Thank you. According to The Wall Street 
Journal article, if you brought the top marginal rate down to 
that level, you would have to find $2 trillion in savings 
through the other deductions, over the next 10 years; big, big 
number, when we say we want to reduce deficits and debt.
    In your letter accompanying the Fiscal Commission report, 
you also said, and I quote, you worry that cutting 
discretionary spending sharply as soon as fiscal year 2013 may 
slow the economy, end quote. As you know, HR 1 that passed in 
the House, cut significantly deeper, even immediately. We have 
recognized that we all have to tighten our belts, but given the 
fact that you were worried about the impact on jobs and the 
economy of immediate, deep cuts by 2013, I assume you have 
similar concerns about immediate, deep cuts of the magnitude we 
are talking about, on the economy and jobs.
    Ms. Rivlin. I think the cuts in 2011, which we are halfway 
through already, would, of the magnitudes being talked about by 
the Republicans, would be ill-advised. But my main problem with 
that is, it is a distraction from the long-run problems that we 
are talking about today, which are the really important things 
to think about as we bring our debt under control.
    Mr. Van Hollen. Right. And let me get now to the question 
of the Medicare reforms that you have been talking about. 
Because as you know, when Congress established Medicare back in 
the 1960s, one of the main reasons we did it is because seniors 
and disabled citizens had a very difficult time finding 
affordable health care, given the health care risks they posed. 
That was the whole engine behind Medicare.
    Now, we have already tried several efforts at privatizing 
different parts of Medicare. You referred to one of them in 
your testimony, with respect to the Medicare Advantage plans. 
What we have discovered so far is that, in order to prevent 
some of them from dropping out, they actually had to increase 
the federal taxpayer subsidy beyond the subsidy for the fee-
for-service Medicaid, up to 114 percent.
    So here is my question. In your proposal, you say you want 
to put in this voucher, premium support program, whatever you 
want to call it, by the year 2018. You have also said that you 
strongly support the Affordable Health Care Act, and that it 
would be a big mistake to get rid of it. And you have commented 
about the importance of the exchanges, which are set up under 
the Affordable Care Act, which as you know, would take place in 
the year 2014.
    So my question to you is this, that will give us some 
sense, will it not, about the extent to which this kind of 
exchanges and premium support can, in fact, lower costs? And 
why would we not make sure that we wait to see how effective 
that is, before we make the decision to experiment with the 
folks in Medicare? And maybe that was the purpose of your 
timing, for 2018. But it seems to me that we have a lot of 
people who are not insured, who are going to come into this 
exchange seeking more affordable health care. Let's see how it 
works on them, 2014, before we turn all the seniors in Medicare 
into this experiment. What do you, what, what do you think of 
that?
    Ms. Rivlin. Well, in the first place, we did not turn all 
of the seniors in Medicare in to this program. We gave them an 
option starting in 2018, by which time we hope we will have 
some experience with exchanges. And this would be a new 
Medicare Exchange, a national exchange, rather than state by 
state. But I think the importance of beginning to reform 
Medicare is that if you keep waiting until you get more 
evidence, you have the same problem that Charles Blahous was 
talking about. The longer we wait before we start doing 
something, the more expensive it is and the harder it is. So, I 
think 2018 is not too soon to offer an option to seniors to be 
on a well-organized exchange.
    Mr. Van Hollen. Yes, my point was that we will have a 
pretty good idea in the year 2014, so I guess your timing would 
work. In other words, if that experiment was great, you know, 
but, but I just would not want to make a decision today with a 
pretty fragile population. Because it does shift the risks of 
increasing health care costs more onto the recipients, on the 
seniors.
    Ms. Rivlin. If they choose it.
    Mr. Van Hollen. Right. Well, as I understand it, either 
way. In other words, either you stay in the traditional 
Medicare system, but if the costs there rise faster, you have 
to pay more, or you get a voucher, where if it does not keep 
pace with the cost, you have to pay more. But I do not want to 
get in great detail right now, because I have limited time.
    Dr. Van de Water, one of the proposals that has been 
kicking around out there is to block grant Medicaid. In other 
words, say, the federal government is going to hand over its 
entire share of Medicaid to the states, no strings attached, 
blank check, do what you want with it.
    Now, I think you know that under Medicaid, while the 
majority of recipients are not seniors in long-term care and 
disabled individuals, at least 50 percent of the money spent in 
Medicaid goes there. Could you talk about what impact a block 
grant of Medicaid would have, on all the populations? Because 
at the end of the day, I think people are going to have to ask 
themselves the question: which populations do they want to 
drop? Or what benefits do they want to drop? And I would just 
end by pointing out what you did in your testimony, which is, 
under Medicaid, in fact, the growth in costs has been far lower 
than in the private insurance market. If you could just comment 
on that.
    Dr. Van de Water. Yes, Mr. Van Hollen. From my point of 
view, shifting Medicaid to a block grant, changing the current 
federal-state partnership to some extent flies in the face of 
how one should construct a sound federal fiscal system.
    First of all, it is quite clear that only the federal 
government can take responsibility for counter-cyclical fiscal 
actions, and clearly Medicaid is a very cyclical program. Costs 
go up substantially in periods of economic downturn, as we are 
still experiencing. And secondly, there is also a limited 
extent to which states can take responsibility for helping low-
income people. States have to maintain a competitive tax 
situation. So no one state can get too far ahead there. So for 
both of those reasons, it is important that the federal 
government play a major role in Medicaid.
    The proposals to block grant Medicaid have as their stated 
aim, to reduce federal spending. And the result, therefore, is 
to place increasing burdens on states. The block grant 
proposals typically have, as part of them, elements that would 
further increase state flexibility in Medicaid. But I think all 
of the evidence suggests the room to increase efficiencies in 
Medicaid is quite limited, for precisely the reason that you 
indicated; that as in health care, generally a small proportion 
of the sickness beneficiaries account for a very large 
proportion of the cases.
    The implication is under a block grant, states would face 
increasing shortfall. And they could deal with that in one of 
two ways, either through increasing taxes on their residents, 
or through squeezing beneficiaries. And again, as you suggest 
in your question, that ultimately many categories of 
beneficiaries would be affected, but certainly including 
particularly the elderly and persons needing long-term service 
and support, and children, as well.
    Mr. Van Hollen. Thank you, Mr. Chairman. Like the Chairman 
said, Social Security, all these areas are areas we could have 
a full discussion. Maybe we will have a chance later to come 
back to it. But time is out, I thank all the witnesses.
    Chairman Ryan. And I just want to say, in the interest of 
our, our interest of having a bipartisan dialogue, Dr. Rivlin 
is our Republican witness who has come and spoke on behalf of 
the health care law. So that is how we try to do things around 
here. Mr. Garrett.
    Mr. Garrett. Thank the Chair again for this very important 
meeting. I guess the seminal issue with regard to Social 
Security is, do we have a problem? And I say that somewhat 
tongue in cheek. But if you were listening to the floor this 
past week, members from the other side of the aisle, discussing 
Social Security, off other issues, but bringing up Social 
Security, said there is no problem. That what we are all 
discussing here is fear-mongering. That there is still a 
positive cash flow going into Social Security at this point in 
time. I think we have heard it from the panel, but in 10 
seconds, from Dr. Blahous or Dr. Van de Water, can we assure 
the other side of the aisle who was on the floor this past week 
that we do have a problem with Social Security, that needs to 
be addressed today?
    Mr. Blahous. I have no qualms in saying we have a 
substantial financing problem in Social Security.
    Mr. Garrett. And the cash flow?
    Dr. Van de Water. It is clear that Social Security does 
face a long-run shortfall. Social Security is not running a 
deficit this year. One comes up with that result only if you 
ignore the important and substantial interest receipts that the 
program receives from its trust fund assets.
    Mr. Garrett. But you have to consider that, correct?
    Dr. Van de Water. That having been said I agree with Chuck, 
that Social Security is facing a shortfall that should be 
addressed. The question is how to address it.
    Mr. Garrett. Right. And on that point will be a follow-up 
question, then; one of the ways, both of you comment on this, 
and maybe this is too simple to put it, to go back to the way 
FDR originally intended it. And to do so, you talked about the 
issue of indexing, one element of that, correct?
    Dr. Van de Water. Right.
    Mr. Garrett. The other element of it, though, would be, 
basically, a raising of the taxes, as the same tax rates, I 
mean the tax increase, and who would be subjected to it, the 
other element of that, correct? If we had done, if we do those 
things, hypothetically, that would solve the problem, but keep 
benefits at the same approximate level where they are today?
    Dr. Van de Water. Well, I am not advocating this.
    Mr. Garrett. I am not advocating it either.
    Dr. Van de Water. Technically, if the initial benefit 
formula grew exactly at the rate of inflation going forward, 
that by itself would eliminate the financing shortfall, and you 
would not have to increase taxes at all. Now, as it happens, we 
can actually afford, then, the projected tax revenue stream, a 
rate of benefit growth that is somewhat in excess of inflation. 
And to the extent that Congress decided to increase Social 
Security taxes, obviously we would be able to pay an even 
higher rate of benefit growth beyond that.
    Mr. Garrett. So, Dr. Van de Water, just comment on that. 
Because your comment before is that, saying that the rates we 
are paying out, benefits you are receiving right now in Social 
Security keeps you at just about the poverty level, per 
individuals. And so if we just take those steps alone, that 
would just basically keep people at the same level. Would you 
be advocating keeping people at that level, as far as a 
benefit?
    Dr. Van de Water. No, I would not, sir. And let me first of 
all say that, while I agree with Chuck on a lot of issues, I do 
disagree with his characterization of the original structure of 
Social Security. Prior to 1972, Social Security benefits were 
adjusted for inflation for real wage growth, on an ad hoc 
basis. In 1972, those adjustments were made automatic, and the 
process was refined in 1977, because the '72 version had a 
technical flaw.
    But the basic approach, even before the automatic 
adjustments were formalized, was to maintain benefits roughly 
constant in relation to a worker's pre-retirement earnings. And 
I believe that is an appropriate standard, and one we should 
attempt to stick with. I am not advocating against any benefit 
reductions, but I do think we need to look at benefits in 
relation to what a person earned during his or her working 
years, not simply in relation to the poverty level.
    Mr. Garrett. I appreciate that. And very quickly, I only 
have a minute left, Dr. Rivlin, with regard to the proposals 
and with regard to premium support, two quick questions on 
that. One of the problems with premium support, I have heard, I 
think actually from folks in the Brookings Institute, is that 
the adequacy of that support going forward, and you touched 
upon this in your testimony, and whether or not that can 
actually be capped later, basically put an adequate level 
without coming back to Congress to raise that, which Congress 
would be probably inclined to do, as we have with Doc Fix and 
otherwise. And secondly, the timeline to be able to implement 
this; you are looking at about 2018. Who would we be affecting 
by going to a premium support model? Would we, we would not be 
affecting people who are 65 or older, but would we be affecting 
people younger than that? What would the implications be of 
that?
    Ms. Rivlin. In the proposal, as we drafted it in Domenici-
Rivlin, in 2018, everybody who was eligible for Medicare would 
have the option, but it would be an option of moving into 
premium support instead of staying in fee-for-service Medicare. 
And there might be an advantage to do that if, as we hope, the 
competition among clients does give people better care at a 
lower cost. But they would not have to move.
    Mr. Garrett. Right. And the issue on the premium support, 
the fact that the adequacy of that premium support would be 
adequate over time, short of coming back to Congress and 
seeking additional appropriation as that amount goes forward?
    Ms. Rivlin. That is a question, really, because we cannot 
tell what will happen to health care costs. If the reforms in 
the Affordable Care Act, and all of those pilots about better 
payment systems and better delivery systems, if those produce 
good results, and I am hopeful that they will, then premium 
support would be a mechanism for the plans choosing the best 
results and, but we cannot really tell. I think there is a good 
deal of uncertainty about whether the pilot programs and the 
research and all of the things that were called for, will 
actually produce results.
    Mr. Garrett. Thank you.
    Chairman Ryan. Thank you. Ms. Schwartz.
    Ms. Schwartz. Thank you, Chairman. And thank you to the 
panel. I was going to, I would submit, to everyone in this 
panel, I am going to submit for the record, a correction from 
the last hearing we had, nothing to do with the current 
panelists. Because I wanted to call attention to an incident 
that occurred at last week's budget hearing, in which a 
colleague of mine not only attributed false statements to me, 
but also breached the basic rules of decorum and civility in 
the house. He is a freshman, so he may not have understood 
those rules.
    But, I do not want to take the time at this hearing, but I 
know a colleague of mine had to do this before. But he really 
attributed false statements about an hour and a half, two hours 
after I made them. And I will submit, for the record, a repeat 
of what I said last time, about how we got to where we are over 
the last decade, before the great recession. Just a couple of 
years ago, relating particularly to Part D expenditures, the 
two wars that were not paid for, and the tax cuts that were not 
paid for, and how that attributed to the fiscal problem. I 
think the panelists would understand what I am talking about, 
but it really is a point for the record, for some of the 
members, and the way we actually try and conduct these 
hearings. And I know the Chairman was not here, I do not think, 
but I think he would have been equally distressed by them, had 
he heard them.
    So let me just move on to what is really a very important 
topic for us to deal with, which is, of course, cost 
containment and entitlement reform. Two questions I am going to 
try and get to in my time, which is that, one, as Dr. Rivlin 
pointed out, there are really important reforms and 
modifications and flexibility provided, in the health law, 
related to paid performance for hospitals, the different kind 
of payment opportunities in accountable care organizations and 
health innovation zones. I believe many people have said we 
have incorporated into the health law all of the good ideas 
about how we can both improve quality, improve outcomes, and 
reduce costs over time.
    You pointed out, there are no guarantees, but there is 
enormous opportunity to do that. And I just wanted you to 
really reiterate how your feelings about the importance of 
implementing those reforms, and what repeal would do, if we 
were to take away those opportunities and begin again, and not 
in fact, move our providers and all the payment systems to a 
better system of reimbursement and improved quality.
    Ms. Rivlin. Right. I do believe that almost every idea 
about improving quality and reducing cost was incorporated in 
some way, usually as a pilot program, into the Affordable Care 
Act. And we need to fund it, and we need to record the results, 
and get them out there so that people can see what is a better 
system.
    Ms. Schwartz. And to grow them. The word pilot sometimes 
means to people that we are going to just do a few of these. 
The difference between a pilot and a demonstration, as you 
know, is that they can grow, they can be as big, they can be 
used as much as we want them to.
    Ms. Rivlin. Yes, and if they work, they can influence the 
whole system. So I think there is great potential there. I also 
believe in the exchanges. And that we need to fund those, get 
them working well, and see if this approach does produce good 
results.
    Ms. Schwartz. Right. And the purpose of those exchanges is, 
as you know, is because the individual marketplace is such a 
failure in this, the private market. The individual marketplace 
is the most expensive and inaccessible, that it is very 
difficult for individuals to buy affordable coverage, 
meaningful coverage. And so, the reason for the exchanges is 
just that, is to help provide a marketplace where they can 
compare coverage. And we do not know how that is going to work, 
but we do know that you have to fix a failed system that does 
not provide for that.
    And yet, your suggestion is that we offer to seniors some 
support, for them to be able to buy insurance in an exchange. 
And yet, healthy, younger individuals have had a very hard time 
buying insurance. Do you think that only the healthiest, 
youngest seniors would be able to find affordable, meaningful 
coverage in an exchange, and only the very sickest seniors 
would stay on fee-for-service Medicare, making fee-for-service 
Medicare even more expensive per person?
    Ms. Rivlin. No, not if we were to set up the exchanges in 
the way that we envision.
    Ms. Schwartz. So you are saying there really have to be 
regulations, this would have really clear federal regulations 
on the way it would be done, for it to work?
    Ms. Rivlin. Yes. It has to be an organized exchange in 
which they have clear choices.
    Chairman Ryan. Thank you. Mr. Akin.
    Mr. Akin. Thank you, Mr. Chairman. Just a couple things 
that I have noticed in some of the questioning, and it is an 
interesting point, and that is that supposedly a lot of cost 
growth in private insurance. Now my understanding, and anybody 
wants to take a shot at this they can, Mr. Capretta, maybe 
start with you. My understanding is the reason for the cost 
growth in private insurance is because of cost shifting.
    I mean, when I think back, I am getting a little long in 
the tooth, before the Civil War, maybe not quite that bad, but, 
it used to be that a lot of people had what is called a major 
medical policy. And those were pretty reasonable and affordable 
policies. But over time, as different corporations and all 
would bid the price, they would get discount prices on health 
insurance that was then balanced, the major medical policy had 
to pick up the difference from the hospitals. It is my 
understanding there was cost shifting. Is that why it would 
appear sometimes that a private policy looks like it is going 
up because it is really paying for other people as well? And if 
not, what does cause it to go up?
    Mr. Capretta. Well, I think that could be part of it. 
Certainly there is lots of evidence that public programs paying 
below market rates does result in private insurers being 
charged more for similar treatments that then drive up premiums 
on the private side. So that does occur. But I think the issue 
in the private health system is, we do not really have a 
marketplace today, actually.
    I think, fundamentally, it is incorrect to sort of say that 
we have a private market in health insurance today, in large 
part because it is dominated, of course, by employer-provided 
insurance. And that insurance enjoys a tax break, federal tax 
break, that then most observers of the health system have said, 
over the years, contributes substantially to, you know, moving 
more compensation into health and out of cash, okay. So one 
reason why people's wages have not gone up very much in the 
last 10 or 15 years is because so much of it has gone toward 
health care. And that, then, contributes to health inflation, 
as well, okay, so I think it is really incorrect to think that 
today's system is an observation of a private economy at work, 
because it is sorted very substantially by the current federal 
tax break.
    Mr. Akin. So I think the Chairman's example of LASIK 
surgery would be more like a free market, because the 
government was not involved in that at all. It was a cash-type 
business, and as the years progressed, the technology improved. 
And the price goes down, the quality goes up. So that is more 
of an isolated, free market system, while you are saying the 
other is very heavily influenced by all of the other players, 
first of all a tax policy for big corporations, and second of 
all, the impact of Medicare and Medicaid in the other place.
    Mr. Capretta. That is correct.
    Mr. Akin. Okay. The second question, there was discussion, 
and this is sort of interesting. I have heard on this committee 
a number of times, repeatedly, mostly from the Democrats, that 
cutting government spending could hurt the economy. And that is 
sort of a weird idea to me. I always thought that we had 
examples from JFK, and Reagan, and Bush, that when we would 
reduce taxes, we could keep government spending down, that 
tended to help the economy grow. Relative to what we are 
talking about here today, if we try to do some things in Social 
Security where we are not spending as much on Medicare because 
we have come up with a better system, does that endanger the 
economy, or does not that really make the economy stronger, if 
we can address the tremendous deficit that we are looking at?
    Ms. Rivlin. Let me try that. I think, when you are in a 
recession, or coming out of a recession slowly, as we are now, 
there is a risk that if you cut government spending too 
rapidly, you will endanger the recovery. But in the long run, 
the biggest danger to our economy and our future prosperity is 
the rising debt that we are facing, for all the reasons we have 
been talking about here. And I think the major point that 
people ought to keep in their heads is, if we have a debt 
crisis, then we will have a deeper recession than we are in 
now, and it will be harder to get out of it. So the point is, 
we can have any size government we want, but we have got to pay 
for it.
    Mr. Akin. I appreciate your answers. Thank you, Mr. 
Chairman.
    Chairman Ryan. Mr. Doggett.
    Mr. Doggett. Thank you, Mr. Chairman. I certainly agree 
with you that we need a serious discussion with the American 
people about these issues. I think, though, that the issue is 
whether or not that discussion is narrowed to the sole question 
of how Americans want to compromise and reduce the level of 
their retirement security. And I think we need a much broader 
focus.
    Dr. Rivlin, you testified yesterday, along with the former 
Republican Chairman of the Senate Budget Committee.
    Ms. Rivlin. I do not think he is a former Republican, he is 
a former Chairman.
    Mr. Doggett. No, he is an active Republican, but he is a 
former Budget Chair, to be sure, Senator Domenici. And you both 
testified, I believe, that you can do all the things that you 
talked about this morning, and the other witnesses, with 
reference to retirement security. And if we fail to include the 
revenue side, as you responded to Mr. Van Hollen, if you fail 
to address the revenue side, we will fail to get our fiscal 
house in order, is that correct?
    Ms. Rivlin. Yes, I believe that we cannot cut spending, 
especially as the baby boom generation retires, enough to solve 
this problem, on the spending side alone.
    Mr. Doggett. At a time when the revenue to Gross Domestic 
Product, or economy ratio, is at the lowest level in over 60 
years, you certainly did not embrace the notion that the 
Republicans are advancing, in today's Wall Street Journal, that 
we can add another $2 trillion of tax cuts to the burden that 
we already have, with reference to debt, did you? Either of 
you.
    Ms. Rivlin. I do not read Mr. Camp's proposal as adding $2 
trillion. The thing that distresses me about Mr. Camp's 
proposal is that he says it is revenue-neutral. And I do not 
think we can afford revenue-neutral. We need more revenue going 
forward.
    Mr. Doggett. And Senator Domenici agreed with you in 
testimony yesterday. And I think the problem here, we talk 
about a serious discussion, is that that serious discussion 
really needs to begin in the House Republican Caucus. The 
mythology that we can assure our military security, our 
educational security, our retirement security, without any 
additional revenue, is a mythology that just does not comport 
with reality and the challenges that our country faces. And 
very interrelated, as you pointed out this morning, is this 
question of rising health care cost.
    And I think you would agree, Dr. Rivlin, that when you talk 
about Medicare and Medicaid, we are really talking about parts 
of a broader question of how, in America, we can continue to 
improve the quality of health care and contain the cost of that 
health care in a way that it can be affordable for the taxpayer 
and for the individual. And with reference to that, I do not 
know of a broader attempt to deal with this difficult issue, 
did not go far enough, in my opinion, but a broader and more 
comprehensive attempt, than the attempt to rein in health 
insurance monopolies last year through the Affordable Health 
Care Act. Just one example of our efforts that I know you 
support its comparative effectiveness.
    Republicans keep saying, they do not want to know what 
works. They have attempted to limit the funding for 
implementation of looking at comparative effectiveness plans. 
They do not want to eliminate their privatization experiment 
with paying $1,100, $1,200 more per beneficiary of Medicare 
advantage, another way that we sought to reduce cost. You 
certainly support comparative effectiveness investigation, do 
you not? To be sure we know what works?
    Ms. Rivlin. I do. And I think the Affordable Care Act 
contains many provisions that would help us learn how to 
deliver more effective care, and at lower cost.
    Mr. Doggett. Now, Dr. Van de Water, my concern is about 
shifting more risk to individual retirees. And I know Dr. 
Blahous, having been the Executive Director for the Bush 
attempt to, what we feel is to privatize Social Security, feels 
that that is a better way to go. But is it your feeling that 
privatizing Social Security and shifting more risk by 
eliminating Medicare for those who are 65 or 66, and moving to 
a voucher plan, that that will provide either the fiscal 
security or the retirement security that generations of 
retiring Americans need and deserve?
    Dr. Van de Water. Well, let's distinguish, look at both 
Social Security and Medicare, briefly. As far as Social 
Security is concerned, I think Social Security's importance 
should, you know, should be maintained in the future, 
particularly in the light of the shrinkage of defined benefit 
pension plans in the private sector. I sometimes describe 
Social Security privatization as an idea whose time has passed. 
At one point, when large numbers of workers had defined benefit 
pension plans, there was an argument that putting that together 
with Social Security meant we were over-weighted in that 
direction. That certainly is not the case today.
    Social Security is now going to be the only defined benefit 
pension plan that most workers have, and I think it is 
important to retain that as a base on which people can build 
their 401(k)s, other retirement arrangements, and their 
personal savings.
    As far as Medicare is concerned, I think, as the dialogue 
this morning has already confirmed, I mean, particularly the 
discussion early on between the Chairman and Dr. Rivlin, the 
details of how a premium support plan is set up are very 
important. Congresswoman Schwartz asked, a moment ago, about 
the structuring of the market that would be required. Now, I am 
not a great fan of premium support under any circumstances, but 
in the form that Dr. Rivlin has laid it out, in her proposal 
with Senator Domenici, they have attempted to deal with these 
issues. In other versions, those issues are not dealt with as 
well.
    Chairman Ryan. Thank you. I just want to keep the time 
going, so everybody has a chance.
    Mr. Doggett. Thank you, Mr. Chairman.
    Chairman Ryan. Mr. McClintock.
    Mr. McClintock. I would begin by pointing out to the 
gentleman that revenues are important, and they come in one of 
two ways. Revenues come from economic growth and expansion; 
that is the healthy way. The unhealthy way is by extracting 
higher taxes at the expense of economic growth and expansion, 
and that ultimately becomes a self-defeating exercise.
    I wanted to follow-up on Mr. Akin's question regarding the 
private health market. The Chairman makes a very good point. He 
references his LASIK surgery, that is entirely done outside of 
the government, or private insurance markets, simply a cash 
transaction. As he described that, I was reminded of whole-body 
imaging. We are seeing the same thing there. We are now seeing 
reports of general practitioners that are simply withdrawing 
from the insurance market, withdrawing from the government 
support market, and simply going on a cash basis, fees-for-
service, entirely outside of that process.
    So, Mr. Capretta, you mentioned that a lot of the costs, 
and of course, the Ranking Member also makes a good point, that 
Hey, the private insurance market has doubled in cost between 
2000 and 2008. Mr. Capretta, you make the point, a lot of that 
is government intervention. Is that the principle cost driver 
in the private insurance market? Because we are certainly 
seeing a decrease in costs, and an increase in quality, in the 
cash market.
    Mr. Capretta. You know, this is a very important question. 
I would argue that the number one reason why our health 
delivery system looks the way it does today, actually, the 
number two reason is probably the employer tax provision. But 
the number one reason is actually Medicare fee-for-service. 
Medicare fee-for-service, good as it is in terms of providing 
security to our elderly population, the health system has 
basically been built up around its structure. And the way it 
works is that you have a fee-for-service insurance program. And 
most seniors also have, in addition to that, supplemental 
coverage. So between retiree wraparound plans, Medigap plans 
that they buy in the private market, or Medicaid for the low-
income seniors, the vast majority of seniors at the point of 
service pay no additional cost sharing.
    So fee-for-service only really works if there is some cost 
sharing on the part of the participant. Because, otherwise, you 
know, it is a, basically, a claim gets filed, it gets paid by 
the government. So if the beneficiaries are not paying anything 
at the point of service, and the government is paying, you 
know, claims any that come in, you have got a system that is 
really built for volume. And our whole, much of our medical 
system has been built up around that.
    There was a very famous article, well-known article, that 
was written a year or so ago, in the New Yorker Magazine, by 
Atul Gawande, about McAllen, Texas, and how they have a high 
volume, very intensive delivery structure. Why did that happen 
there? The number one reason there was Medicare fee-for-
service. It is a good program in the sense that it is providing 
good security, but it is driving fragmentation and lack of 
coordination in our health system in a way that is very costly.
    Mr. McClintock. So have we entered a vicious cycle, where 
the principle cost driver in the Medicare system is rising 
medical costs, and the reason for rising medical costs is 
government interference?
    Mr. Capretta. Well, there is some truth to that, yes, that 
it is sort of a circle, yes. That government policy is driving 
up costs, and then, to try to make up for that, they cut fees. 
In other words, the predominant way of trying to get costs 
under control over the last, I would say, 30 years, has been to 
reduce the payment rates that public insurance has paid for 
individual treatments in a fee-for-service environment. There 
have been some other efforts around that, but the main way has 
been to try to reduce the fee structure. That tends to then 
also drive up volume even more. So it has gotten into a little 
bit of a cycle of cost increases, pay cuts, cost increases, and 
pay cuts.
    Mr. McClintock. Mr. Blahous, is there any way for us to 
honor the commitments we have made to everybody in the Social 
Security system, and yet move that system to an actuarially 
sound foundation?
    Mr. Blahous. Absolutely. But again, I would stress, it is 
much easier to do that the sooner you act.
    Mr. McClintock. And again, very briefly, what would you 
recommend we do, to accomplish that?
    Mr. Blahous. Well, if you are asking my policy views, I 
tend to regard the two biggest sources of our fiscal problem as 
being population aging, and growth in the per capita value of 
benefits. CBO did a report in 2003 where they said, if you look 
at cost growth and Social Security, 55 percent of it is 
population aging, 45 percent is excess cost growth in the 
benefit formula. So I would start with both of those things. I 
have to think, you have to look at the retirement age, I think 
you have to look at the benefit formula as well.
    There is also a set of changes I think, personally, that 
should be made, to improve the program's impact on labor force 
participation decisions. There are a lot of aspects of the 
Social Security system that are designed, basically, to drive 
people out of the workforce, because they reflect the 1935 
design. Everything from the actuarial adjustments for early and 
delayed retirement, to the way that your personal wage history 
is tracked. All of these things basically punish you if you 
decide to add an extra year of work and continue to pay taxes. 
And I think we should change some of those.
    Chairman Ryan. Thank you. Mr. Yarmuth.
    Mr. Yarmuth. Thank you, Mr. Chairman. Thanks to all of the 
panel. One of the things that becomes pretty clear when you are 
either discussing Dr. Rivlin and Senator Domenici's plan, or 
the roadmap that the Chairman has proposed, most of the ideas 
coming from the Republican side result in some kind of 
increased shifting of risk to senior citizens, when we are 
talking about the Medicare program. At least that is my 
observation.
    So I would, what I would like to ask is, particularly Dr. 
Van de Water and Dr. Rivlin, what do you think, since we know 
that right now, of all Social Security recipients, senior 
citizens, about two-thirds rely on Social Security for at least 
half their income, and one-third rely on Social Security for 
their entire income. How much cost-shifting or risk-taking do 
we think is reasonable to move toward the senior citizens under 
Medicare? Do you have a sense, what percentage of their income 
now is consumed by health care cost, and what it might be 
reasonable to assume we could do? What the impact of these 
proposals might be.
    Dr. Van de Water. If I could start, and then pass it on to 
Dr. Rivlin. I think your basic diagnosis of the situation is 
correct, that we do have to be careful in avoiding shifting 
additional risk onto those beneficiaries who are least able to 
bear it. In my view, any plan to restore Social Security's 
solvency needs a balance between scaling back future benefits 
and raising taxes, and I think it has to be designed in a way 
that protects low-income beneficiaries. And with that, I will 
pass it on to Dr. Rivlin, since I think the proposal that she 
and Senator Domenici have made, while I would not endorse it in 
all respects, is a reasonable illustration of how that might be 
done.
    Mr. Yarmuth. Yes, Doctor.
    Ms. Rivlin. I think you pose the dilemma very well. We have 
a very expensive system of providing health care for older 
people, and we have more and more older people. I do not 
believe that we can afford, in the long run, to keep fee-for-
service Medicare, because it is going to get more and more 
expensive. And because of the impact, I do not agree with 
everything Dr. Capretta said, but it does, instead of Medicare 
leading the whole system toward better efficiency, it in many 
ways deters it.
    So, we have to balance shifting more risk onto older 
people, and I would shift it more onto upper-income older 
people. And the need to get Medicare into a sustainable long-
run posture, so that it is more efficient and providing better 
service for less money. That does not mean we are going to 
spend less over time; we are not going to spend as much more as 
we will on this trajectory.
    Mr. Yarmuth. Well, I think everybody agrees with that, that 
is the goal we ought to establish. The how-to is a little bit 
more difficult. In your report with Senator Domenici, you 
talked about potential savings in other areas of the government 
as well, and we focused today on Social Security, Medicare, and 
obviously they are long-term drivers of potential increase in 
the debt. It is my understanding that Senator Domenici and you 
concluded that waste and abuse in the Defense Department, if 
you just crack down on that, could save over $1 trillion over 
the next six years. Is that correct?
    Ms. Rivlin. I do not remember the exact number, but we 
proposed a hard freeze, meaning no increase in nominal dollars, 
for Defense, for five years. And we believe that we can have a 
strong Defense if we use our Defense dollars more efficiently. 
And Secretary Gates has been one of the leaders in trying to do 
that. It requires reform in the procurement system, more 
contributions to the tri-care system on the part of retirees, 
and a better ratio of the tooth-to-tail, as they say, in 
defense. And I think we can do that and still be the strongest 
nation in the world, by a long shot.
    Mr. Yarmuth. Correct. Well, thank you for that, and I hope 
maybe we can have a hearing on that in this committee, as well. 
I would love to ask another question, but my time is rapidly 
ending, so I will yield back. Thank you, Mr. Chairman.
    Mr. Lankford [presiding]. Thank you very much. Mrs. Black, 
Tennessee.
    Mrs. Black. Thank you, Mr. Chairman. And I thank the panel 
for being here today. I do not think there is any doubt about 
us all agreeing that the debt crisis is here upon us. And we 
all do agree on that. I know that there is a difference of 
agreement on what we should do on these very large programs 
that are consuming 60 percent of our budget. And yet, if you 
were to look at what the public appears to think that the 
answer is, they think fraud, waste, and abuse, and cutting out 
our Foreign Aid, will solve our problem. And, obviously, that 
is not going to solve the problem. But I would like to hear 
from each of you, how you believe that we can get the public to 
understand the problem that we have, and that we need to make 
some changes. I would like to hear your opinion on that.
    Ms. Rivlin. I think the public is actually way ahead of 
politicians. When you get a group of average citizens in a room 
and say, Here is the problem, we have this looming debt, and if 
we go on doing what we are doing, we will have a huge crisis. 
Now, what do you think we ought to do about it? And we have 
done this quite a lot. They come up with pretty sensible 
solutions. And they are, as in both of the two commission 
reports, a little of this and a little of that.
    They are willing to cut benefits on entitlement programs, 
they are willing to hold firm on discretionary spending, once 
they understand what that means, and they are willing to raise 
revenues as well. And the evidence from groups of citizens 
brought together to solve this problem is, I think, rather 
encouraging.
    Mrs. Black. Doctor, I do want to say that, what I am 
reading in most of the publications now, when the public is 
asked, they do not see Medicare, Medicaid, and Social Security 
as being a part of the solution. They continue to say, waste, 
fraud, abuse, and cutting foreign aid. That is what I am even 
hearing in my town halls, back in my district.
    Ms. Rivlin. Right. But that is because they have not 
realized that they have to make choices. I think it is the 
responsibility of politicians to bring this problem home. To 
say, We have to make some choices here, and not to say, It is 
all very simple, it can be solved by growth, or It can be 
solved by getting out waste, fraud, and abuse. That is not 
true, and I believe that political campaigns on both sides have 
not helped the public to understand, we have got a big problem 
here, and we have got to make choices.
    Mrs. Black. Anyone else? Would you like to jump in there, 
Doctor?
    Mr. Blahous. I would just say that, I mean, I have been 
working on Social Security reform for 15, 20 years now. And the 
one thing that I have learned is that I have no earthly idea 
how to communicate to the general public the real urgency of 
the problem. I wrote, recently, a book about Social Security 
reform. And I did say, in the book, that I thought our public 
debate about Social Security was not where it should be. And 
there is a lot of blame to throw around for that. And I think 
there is blame that goes both sides of the aisle, I think there 
is blame that goes to the advocacy groups, I think there is 
blame that goes to the press. There is a lot of blame to be 
allocated.
    But I actually singled out, in my book, one particular 
community, for criticism. And that is the community of which I 
am a part right now, which is the community of scholars, and 
academics, and people in think tanks. Because too often, I 
think, people in positions like mine have a tendency to want 
to, kind of, echo the predilections of their funding sources, 
or their political allegiances, when people in positions like 
mine are actually in a very privileged position, where we are 
somewhat immune from the political pressures that face all of 
you. And so I would point the finger of responsibility back to 
those of us on this panel, because I think there is a much 
better job that needs to be done by people in our position to 
explain these issues to the public.
    Mr. Capretta. I am not like Chuck, I do not have any 
particular expertise in this area. I think you do more than me, 
all of you here do more than I, but I guess I would just 
generally say that there is a difference, I think, a little 
bit, between polling responses that people give to off-the-cuff 
questions, and a reasoned discourse that they enter into with 
average citizens, as Dr. Rivlin referred to. And, in general, 
my confidence is pretty high that in the old saying that we 
will do the right thing after trying everything else, right? So 
I think a reasoned discourse around our choices, and the 
difficulties of them, will lead to the correct solution.
    Mrs. Black. Dr. Van de Water?
    Dr. Van de Water. I think Chuck Blahous is a little bit too 
hard on himself. Chuck and my colleague Bob Greenstein, as 
Chuck mentioned in his testimony, wrote a paper a few months 
ago, outlining the dimensions of the Social Security financing 
issues and the reasons why the problem is real, and why solving 
the problem sooner rather than later would be a good thing to 
do. And Chuck and my organization do not have the same 
perspective on how to solve the problem, but we do agree on the 
dimension of it. And I think that that kind of information can 
be made more widely available.
    Mrs. Black. Thank you.
    Mr. Lankford. Thank you. Mr. Pascrell.
    Mr. Pascrell. Thank you, Mr. Chairman. My friend from 
Tennessee asked some pertinent, interesting questions. I must 
inform her, and I do seriously respect your position, but that 
movie has been seen over and over again. We started this mess 
in 2001. And for me to have to sit here and listen to the 
reruns, instead of looking to the future, because this is what 
politics and government should be about. Where will our people 
be tomorrow, and two years from now? We heard this in 2002, we 
heard it in 2003. In fact, at that time, the head of OMB was 
Mr. Daniels. And he said then that revenues declined two years 
in a row, fiscal year 2004 he is saying this, the first such 
phenomenon in over 40 years.
    Why did revenues decline in those two years? Revenues 
declined in 2002 by seven percent, the largest percentage 
decline since 1946. And, as it turned out, the 2001 tax cut was 
the right policy, he said. And he concluded that we need to 
have another tax cut, which they did, reducing revenues and, 
quote unquote, strengthening investor confidence by ending the 
double taxation of shareholder dividends. Thank you, Mitch 
Daniels.
    And what did we have? No growth in jobs. Nada. Zero. I do 
not know how else to say it. We did not have what they said we 
were going to have. The greatest contributor to the deficit, 
look at the facts, and we go over it over and over again. Mr. 
Chairman, people in my district tell me they appreciate 
Medicare and Social Security, not because they have been polled 
on it. So I want honest discourse. That is exactly what we 
need. Real discourse that remembers where we have been, and the 
old movies that we have seen.
    We kept the basic structure, but included new delivery and 
payment reforms in the health care reform. In fact, we did 
begin the process of changing the entitlement programs. If you 
read one-third of the health care bill, which is devoted to 
Medicare and Medicaid, I cannot reiterate enough; health care 
reform was the beginning of entitlement reform. I said, the 
beginning. No one could deny health care reform extended the 
life of Medicare by 12 years. To date, the only action this 
majority has taken at entitlement reform was the vote to repeal 
health care reform.
    Some of our witnesses today believe the best way to reform 
Medicare would be, partially, to privatize it. Our Chairman 
also supports this idea through his roadmap to make Medicare a 
voucher program. Clear and simple, we have seen this over the 
last two years. I want to have a vote on this. I think I 
deserve a vote. Everybody here deserves a vote. And Chairman, I 
would like to ask the Chairman, through the Chair, are we going 
to get a vote, are we going to get an opportunity to vote on 
the voucher program, which is our answer to changes that must 
be made in Medicare?
    I want to know, right now, are we going to have this? This 
idea is a bold idea. The Chairman's idea. And I think we should 
talk about it. I think we should have discourse about it. And I 
think we should have that discourse right here. I encourage 
you, I encourage you to bring this up as we mark up the budget 
resolution. Do you support having such a vote on the roadmap? 
And is this what this committee is going to do?
    Let me ask that question first, and the Chairman is not 
here. So let me continue, if you wish to answer it, go ahead. 
According to Standard and Poor's index on health care, in 2010, 
health costs covered by private insurance rose by 7.75 percent, 
compared to Medicare, which increased at a modest 3.3 percent. 
The report is here, it is succinct, it is in the Standard and 
Poor indexes, it is very uncomplicated to read this. Medicare, 
as it is currently structured, controls costs better than 
private insurers.
    And Weiner was right in today's Politico, when he said we 
have dealt with the opposite of what the loyal opposition is 
saying. This is the core of the matter here, Mr. Chairman. This 
is the core of the matter. It is the record. Block grants and 
vouchers are not the answer. If we are talking about 
controlling costs for our budget, I do not see the sense in 
moving seniors from a lower-cost insurance provider to a 
higher-cost insurance provider, do you, Mr. Van de Water?
    Mr. Lankford. Actually, there is not time to be able to 
respond to that. Time has expired.
    Mr. Pascrell. Can he answer the question? The question is 
over. Can he answer?
    Mr. Lankford. Your time has expired about 30 seconds ago on 
that, actually, though. We will let you follow up on that in a 
coming question, if that fits in well. Will that be all right? 
Mr. Mulvaney.
    Mr. Mulvaney. Thank you, Mr. Chairman. Happy St. Patrick's 
Day, everybody. With a last name like Mulvaney, I cannot help 
but be in a good mood today, which is rare for a budget 
meeting, I can tell you that. You sit here long enough, as you 
can tell. So let's focus today on some positives, maybe. Ms. 
Rivlin, I will begin by disagreeing with you slightly. You said 
that the folks back home, while they might believe that 
something has to be done, they have not yet figured out that 
they have to make tough choices. I would suggest to you that it 
is us, up here, who have not figured that out yet. That, as we 
go around the debate today, everybody seems to say, Well, we 
need to do something.
    But face it, Washington, in my mind at least, as someone 
who has only been here a couple weeks, is not famous for making 
its tough choices. But I did hear some things today, from your 
testimony, from the questions that you have gotten, that we 
seem to agree on, which is that we all want to keep the basic 
promises. There is no one up here trying to abrogate our 
responsibilities, there is no one up here trying to break the 
social contract. We are trying to figure out how to do it. And 
what I have also heard is that, in order to do that, we have to 
do something. We have to do something.
    My understanding of the law is that if we do nothing, then, 
in the next 25 years or so, the benefits will be cut across the 
board, 22 percent. That is without any additional congressional 
action. When you get your check in the mail 20 years from now, 
it will automatically be 22 percent smaller than it would have 
otherwise been. So we have to do something, and we seem to 
agree on that. We also seem to agree that we have to do 
something sooner rather than later. Now, there will be 
disagreements as to what sooner or later means, and there 
obviously will be disagreements as to what the structure of the 
change will be. But let's start the discussion by focusing on 
the things that we agree on.
    And let me make a suggestion to you, then, with that 
backdrop. If someone came to you today and said, You know, 
let's not do anything for 20 years. Let's do absolutely nothing 
about this for 20 years. Can you help me understand, each of 
you, and we will start with Mr. Van de Water because you did 
not get a chance to answer the last question. If we do nothing, 
where are we in Social Security 20 years from now? And if you 
could keep the answer short enough to give everybody a chance 
to respond to that, that would be great.
    Dr. Van de Water. Yes, Mr. Mulvaney. You are quite correct, 
under the current financing schedule, that the Social Security 
program will face a problem in 2037, and at that point, if 
nothing is done, benefits would have to be cut by approximately 
22 percent. Clearly, it would be, I have said several times 
today, I agree with Chuck Blahous, that it would be better, 
other things may equal to solving that problem sooner rather 
than later.
    But the difficulty is coming together on some sort of a 
plan on which to do it. And certainly I would say that, if it 
were my choice, I would rather not act sooner, if it meant 
adopting what I thought was a very poor solution. But I would 
rather wait if I got a better solution. Chuck might feel the 
same way, although his view of a good solution and a bad 
solution might be exactly the opposite of mine.
    Mr. Mulvaney. Mr. Capretta?
    Mr. Capretta. Well, in the next 20 years, the population 
aged 65 and older is going to go from about 41 million, 
roughly, today, to I think about 71 million in 2030, something 
like that. So we will have added a pretty good, sizable portion 
to the population over that. As a consequence of that, the 
amount of spending that will be associated with these major 
entitlement programs will probably go up by about five 
percentage points of GDP. So we spend, in rough terms, roughly 
10 percent of GDP on Social Security, Medicare, and Medicaid. 
In 20 years, it will be roughly 15 percent of GDP.
    So you are adding a pretty good size to our budget without 
any new way to pay for it. I doubt that we will get through 
that kind of pressure in our budget without major dislocation 
of some sort. We would have to, probably would stumble our way 
into a very major and punitive tax increase and, maybe, 
simultaneous to that, still have a debt crisis, because you 
would end up running up a lot of debt.
    Mr. Mulvaney. Mr. Blahous, very briefly.
    Mr. Blahous. Well, I see three major effects [inaudible] in 
the system, as costs in the system rise over the next 20 years. 
To the point where, although it is allocated between payroll 
taxes and income taxes, workers are having to shell out $1 out 
of every $6 they earn to keep Social Security going. That is 
the first effect. The second effect is, when you act, you get 
the most unfair solution possible. If you wait until that 
point, you are going to have net benefit losses of four percent 
of the wage income of younger generations. That is a net loss. 
That is not the total burden of Social Security. That is the 
amount they would lose, even if they got back all the benefits 
they were promised. Third is, you might not be able to get it 
done. We already have a bigger problem to solve than they had 
in 1983. They almost did not solve it, on the brink of 
insolvency. We should not assume we are going to be able to 
solve it without chaotic consequences in the 2030s.
    Mr. Mulvaney. Ms. Rivlin, we are not going to get a chance 
to get your answer, we are out of time, I apologize. I would 
put it to you, and to everybody at the meeting that that is 
exactly what the majority leader in the Senate suggested last 
night that we do, nothing, for 20 years. That is what the 
Senate is suggesting, as of last night. Thank you.
    Mr. Lankford. Mr. Honda.
    Mr. Honda. Mr. Chairman, I would like to yield 30 seconds 
to Mr. Pascrell, so that Dr. Van de Water can respond to the 
last question that he had.
    Mr. Lankford. No issue with that.
    Dr. Van de Water. I believe that the question was about 
Medicare's record and cost increases. And I would simply agree 
with what Mr. Pascrell said, and say that result shows up not 
only in the recent Standard and Poor's data that he cited, but 
also, if you look at the comparisons that the CMS actuary puts 
out, and the national health expenditure accounts, comparing 
growth of private health insurance and Medicare, for comparable 
benefits over a long period of time, you find exactly that same 
result. So I think, yes, you are right, that Medicare's record 
in holding down the rate of growth of costs is much better than 
some of my colleagues here have given it credit for.
    Mr. Pascrell. Thank you, Mr. Van de Water, thank you, Mr. 
Chairman, thank you, Mr. Honda.
    Mr. Honda. Thank you. Dr. Rivlin, early on, you mentioned 
that, when we were talking about HR-1 activities, you indicated 
that what we are doing right now is a serious distraction. 
Could you elucidate us, or, you know, expand on that comment 
about serious distraction from what, and what is it that we 
should be doing?
    Ms. Rivlin. I was referencing the intense debate and 
negotiation over the continuing resolution for 2011. However 
one feels about how that should come out, it is a very small 
amount of money for a very short time, and I believe it is a 
distraction from the serious issue that this committee is 
focused on today; the long run growth of entitlements and other 
spending beyond revenues. We have got to fix that to avoid a 
serious debt crisis and nothing that we do on the remaining 
months of 2011 is going to affect that very much.
    Mr. Honda. Thank you, Dr. Rivlin. You also mentioned that 
you have a plan with Chairman Ryan that turns Medicare into a 
program much like the Affordable Care Act, by creating 
regulated exchanges, offering certified insurance products 
populated by socialized buyers. You have stated that this will 
unleash innovation that will greatly reduce costs. In that 
case, would not you agree that the Affordable Care Act, the 
only genuine entitlement reform either party has passed into 
law this century, will unleash the same innovation, reducing 
health care costs and addressing our deficit and debt?
    Ms. Rivlin. I hope so. I strongly believe that the 
Affordable Care Act has the potential to bend the cost curve. I 
also believe in the exchanges, as a mechanism. I have failed to 
understand why Republicans believe in exchanges, perhaps, for 
Medicare, as the Chairman and I have suggested, but not in the 
context of the Affordable Care Act. There seems to me a 
disconnect in the thinking, but that is where it is.
    Mr. Honda. If I heard you correctly, did I hear you say 
that you and the Chairman had, come up with this joint plan, 
but the Chairman himself does not support the idea, the concept 
of exchange in this plan?
    Ms. Rivlin. No, he does support it for Medicare premium 
support. But I am not going to speak for the Chairman.
    Mr. Honda. I do not, I do not expect you to.
    Ms. Rivlin. But Republicans, in general, have not supported 
the Affordable Care Act, which also includes exchanges.
    Mr. Honda. And the vote on that, Affordable Care Act, is 
not, I believe that they just about all have voted for repeal. 
Dr. Van de Water, I have almost a minute, little over, not 
quite a minute. You were shaking your head a couple of times 
when Dr. Capretta was responding to Mr. McClintock's question. 
Would you explain why you were shaking your head on that one?
    Dr. Van de Water. Oh, I apologize for shaking my head.
    Mr. Honda. No, I read motions and we are human.
    Dr. Van de Water. It is hard to remember the question. But 
I think the issue was the same as with regard to Mr. Pascrell's 
question about Medicare's role in controlling costs. I think 
that describing Medicare as the source of cost growth rather 
than as a way of controlling it is, in some ways, 180 degrees 
from the situation. In fact, in many cases, Medicare has taken 
the lead in efforts to control costs, through introducing new 
payment arrangements such as the DRG arrangements for hospitals 
and the prospective payment for physicians. So I think that 
that, I suspect, is what I had in mind.
    Mr. Honda. Thank you, Mr. Chairman. Perhaps the witnesses, 
in their closing comments, can explain to me, explain to us, 
the issue of increased revenues. What that means, and where 
does it come from. Perhaps later.
    Mr. Lankford. Yes. Perhaps in the days to come, or the 
moments to come. All right, Mr. Huelskamp.
    Mr. Huelskamp. Thank you, Mr. Chairman. I appreciate the 
conferees being here today. And I am going to start with 
admitting that I do have a particular bias. I spent 14 years in 
the state legislature, and struggled with the issue of 
Medicaid. And I would be curious of a couple comments, starting 
with Dr. Rivlin, and then Mr. Capretta. Your thoughts on the 
issue, the Medicaid block grants proposal, which is being 
seriously considered, I believe. So, Dr. Rivlin, your thoughts 
on block grants, to turn them over to the states for further 
approach.
    Ms. Rivlin. I think Medicaid is a very difficult issue for 
everybody, because we all want the most vulnerable people to 
get Medicare. But the program is not working extremely well. In 
the Domenici-Rivlin plan, we suggested, we did not actually 
recommend it, we suggested that one way would be, one way to 
reduce costs was to get rid of the matching and to divide the 
program between federal responsibility, which might be for the 
younger people, and state responsibility, which might be for 
long-term care, those are of comparable sizes.
    But there are other ways to do it. I do not think a block 
grant is a solution by itself, unless there are quite strong 
maintenance of effort and other provisions that keep states 
from just bailing out of the program. And, but I think one 
could do that.
    Mr. Huelskamp. Mr. Capretta.
    Mr. Capretta. I very much agree with Dr. Rivlin on the 
issue of the matching payment program. First of all, Medicaid's 
big and complicated, you really can divide it into, sort of, 
two parts. It has an acute care part, with lots of people, but 
the spending is relatively low. And there is the disabled and 
elderly population on Medicaid, which is a more complicated 
question, and most of the spending is associated with them.
    But for the acute care portion of it, in particular, I 
think the real question is, how do you get away from this 
matching approach, which creates all kinds of distortions at 
the state level? As I indicated in my testimony, because of the 
way the matching program works, many states, even though they 
would certainly like to save a lot of money in Medicaid, if 
they take out $1, they only get to keep maybe 30 cents of it, 
okay. So this incentive to go through that political process is 
quite low. And it turns out that many states have kind of gone 
in the opposite direction, which is, to figure out ways to get 
more federal matching money for things that used to be state-
only money. And so they go through a lot of exercise in that, 
and then they try to minimize, in all fairness, the pain that 
is associated with their own state contribution through a lot 
of different mechanisms.
    So the matching program has created a number of 
distortions, it has inflated Medicaid costs. I think the key is 
to get away from that, and to get toward a system of defined 
contribution. I, very much in terms of the exchange program, I 
think exchanges actually probably would be a good idea for the 
Medicaid population. Trying to get them into a system of 
defined contributions so that they are making some choices 
about their coverage, much like the working-age population.
    Mr. Huelskamp. And I appreciate that. One of my 
frustrations has been that, for states that have occasionally 
asked for waivers for that particular approach, multiple 
administrations of both parties have not looked kindly on those 
proposals. But I think, in the history of our country, 
obviously with potential for innovation at the state level, my 
other bias is, I do not think all the answers to health care 
innovation are in this town. And we will see enormous changes 
in Medicaid, whether it is my home state of Kansas, where we 
actually have a doctor who is also Lieutenant Governor heading 
up a task force on doing that.
    And, but if we want innovation, we want changes, we want to 
bend the cost curve, there are other solutions and answers out 
there, and I appreciate the recognition of the cost-sharing. 
But you are absolutely right, it is actually not cutting back, 
it is going forward. If we spend $1 dollar, we get free money 
from Washington there is a dollar and a half, and it has been 
always a big argument for growing budgets, whether or not you 
make any changes to the health care system. You cannot. It is 
just about more money or less money, and not a lot of those 
waivers. But then, we cannot secure proper waivers there.
    But on the other hand, with the President's health care 
plan, you know, we have over 1,000 waivers already granted for 
that. And then we still do not have the particular waivers we 
want in Medicaid. So I think we will see some real innovation 
there going on, and the defined contribution is certainly a way 
to go. So I appreciate that, and thank you, Doctor, as well. 
Thank you, Mr. Chairman.
    Mr. Lankford. Thank you. Mr. Tonko.
    Mr. Tonko. Thank you, Mr. Chair. While we are here today 
debating programs like Social Security and Medicare, in terms 
of profit margins and the bottom line, I think it bears 
reiterating that Social Security is not a campaign promise. It 
is the real contract on America, and spoken with America. Our 
constituents have paid in hard-earned dollars, fulfilling their 
responsibility in that contract. And every proposal I have 
heard coming out of the majority lately entails the federal 
government defaulting on its end of the bargain, cutting 
benefits for my constituents, our constituents, benefits that 
they have a legal, moral, and political right, I believe, to 
collect. Meanwhile, we turn a blind eye to tax expenditures 
grossly skewed to benefit the wealthy, at a far greater cost to 
our nation.
    So Dr. Van de Water, I would like to, I have asked the 
committee to bring up a chart prepared by your organization, 
now, on this screen. You would never know it listening to our 
debates around here lately, but tax expenditures in this 
country well exceed our annual spending on so-called 
entitlement programs. Dr. Van de Water, can you explain this 
chart, please, for a bit?
    Dr. Van de Water Not having had the benefit of LASIK 
surgery, I cannot actually see it very well.
    Thank you. This chart, the pink and red bar on the left, 
shows total estimate of individual tax expenditures, and it 
compares those with the middle bar, cost of Medicare and 
Medicare, and the right bar being Social Security. And it just 
shows that if you added up all the individual and corporate tax 
expenditures, that there are larger either than Medicare and 
Medicaid put together, or Social Security by itself. And I 
think it just suggests that there is room to help restore 
solvency to Social Security and to maintain Medicare and 
Medicaid through modestly paring back on tax expenditures, 
rather than having to slash the benefits of the programs. And I 
think that Dr. Rivlin has referred to much the same thing.
    Mr. Tonko. So to sum it up, then, tax expenditures exceed, 
as we can see, the total annual cost of Medicare and Medicaid 
combined. They also, as we can see, exceed the cost of Social 
Security. They exceed the cost of non-security discretionary 
spending that the majority is so keen on eliminating. And yet 
Representative Ryan's roadmap, which is a starting point for 
your budget discussions this year, proposes decreasing revenue, 
raising taxes on the middle class, lowering taxes on the 
wealthy, and cutting benefits under Medicare and Social 
Security. As I see it, we are asked to cut health and 
retirement entitlements to pay for tax entitlements for the 
wealthy. Dr. Van de Water, I know you are familiar with the 
recommendations of the Simpson-Bowles Commission. What concerns 
me most about the commission's proposals and about the Ryan 
roadmap is that we are talking about cutting basic benefits for 
our seniors, our retirees, our widows, our children, and the 
disabled. My question for you, Dr. Van de Water, is, do you 
think that these proposed benefit cuts will, to use the title 
of today's hearing, fulfill the mission of health and 
retirement security?
    Dr. Van de Water Well both the roadmap and Bowles-Simpson 
are long and complicated, but let me just focus on the Social 
Security part of both. The Bowles-Simpson proposal relies, to 
my mind disproportionately, on cutting back Social Security 
benefits. The mix between benefit cuts and revenues is 60-some-
odd percent benefit cuts, averaged over the first 75 years, but 
in fact it is about 80 percent benefit cuts at the end of that 
period. I think that probably some modest benefit cuts are 
inevitable, but I certainly think the Bowles-Simpson plan is 
heavily over-weighted in that direction and the Ryan roadmap 
even more so, since as I recall that exclusively involves 
benefit cuts and nothing in the way of revenue increases.
    Mr. Tonko. And your thoughts on eliminating the taxable cap 
to bring more dollars into the trust fund? Or any other 
proposals that you would back?
    Dr. Van de Water Certainly, the limit on earnings subject 
to the Social Security tax has shrunk in the sense that it 
captures a smaller proportion of total earnings today than it 
did back in the late 1970s and early 80s, on account of the 
growing disparity in earnings. And I think it certainly would 
be a good idea to increase the cap so it gets back towards 
covering at least 90 percent of earnings, as it did not all 
that long ago.
    Mr. Tonko. Thank you very much.
    Mr. Lankford. Thank you. Dr. Van de Water, I apologize. We 
seem to always be gaveling you out. You seem to be the last 
question on a lot of these things. So, Mr. Young.
    Mr. Young. First, I would like to thank all our panelists 
for your time here today. This has been a very instructive 
conversation and I appreciate your help. I am going to build 
upon an earlier reference by Dr. Rivlin, the health exchanges. 
I happen to have opposed the Affordable Care Act, for the 
record, but not on the grounds of the exchanges. There are 
those of us who, on principled and intellectually honest 
grounds, opposed that act because of the individual mandates 
and certain other provisions. And I know that you are aware of 
that, I just did not want anyone to infer otherwise from your 
comments.
    Ms. Rivlin. Thank you.
    Mr. Young. Mr. Capretta, CBO projects, regarding the 
Affordable Care Act, that 23 million people will be enrolled in 
these new health exchanges. Do you believe this is a 
conservative estimate, or something that is perhaps not 
generous enough in terms of those who will end up in those 
exchanges?
    Mr. Capretta. I tend to view that as being slightly on the 
conservative side. Maybe more than slightly. The reason is that 
first of all, I think the number of people who are subsidizing 
the exchanges because CBO says that though some people will go 
into the exchanges and not be subsidized. But the number of 
people subsidizing the exchanges will be about 19 million, if I 
remember right. And I think the numbers being subsidized could 
be substantially higher than that, because I think the subsidy 
structure inside the exchanges is quite a bit more generous on 
the low end of the wage scale compared to the tax preference 
that people would get from an employer-based plan. So there 
would be a tremendous magnet for particularly people on the low 
side of the wage scale to get their insurance through the 
exchanges because their after-tax income, if you will, would go 
up quite a bit if that were to be the case.
    Now, CBO and others have said that first of all, in 
Massachusetts, there has not been a lot of that yet. And number 
two, there are rules in the law that say if an employer puts 
their low-wage workers in the exchanges, they have to put their 
high-wage workers in there too. And the high-wage workers would 
not like that because they would be worse off. So the question 
is what is going to happen? Will the labor markets start to 
segregate over time? There is so much money at stake associated 
with these subsidies and the exchanges, though, I believe, as 
the history of entitlements has been over the last four 
decades, the population tends to grow with the money available. 
And so I really strongly believe that the number who could end 
up in the exchanges, once employers figure out how to rearrange 
themselves, take advantage of it to the maximum extent 
possible, the number could be well, well above 19 million.
    You have to understand that the population that the 
subsidies are aimed at is huge. It is between 133 and 400 
percent of the poverty line would be eligible for discounts in 
the exchanges, potentially, if you look at the census data for 
people under the age of 65, that is potentially about 110 
million people. So you know, we are looking at a very 
substantial entitlement expansion if everybody ended up in 
them. Now I do not expect all of them to, but one estimate by a 
former CBO director looked at this and said, if just everybody 
under 250 percent of the poverty line ended up in the 
exchanges, the amount of spending in the bill would go up, in 
rough terms, by about $1 trillion over 10 years.
    Mr. Young. Thank you. Dr. Rivlin, this next question is 
directed your way. You know, I have been sharing with my 
constituents for some time that those who have the greatest 
stake in entitlement reform, all variants of it, are those who 
are the most vulnerable. They depend disproportionately upon 
the continued existence of Social Security, of Medicaid, and to 
the extent we can address this earlier rather than later, it 
will certainly benefit those populations more than others. It 
was brought to my attention, a recent column by Ruth Marcus in 
the Washington Post, and she describes herself in the column as 
a Deficit Panda as opposed to a Deficit Hawk.
    Ms. Rivlin. Yes, I liked that.
    Mr. Young. And I think that was elegant. I am going to 
quote a bit from that and just get your brief comments. We do 
not have a whole lot of time left. She writes, in part; Then 
there is the group about which we deficit pandas care most: the 
poor and working poor. They are at the greatest risk from a 
financial crisis, not merely because of the prospect of losing 
jobs. Higher interest rates would drive up housing costs while 
budget pressures would further squeeze funds for public 
housing. Spending on education from preschool through college 
would be threatened, income inequality would increase, 
educational failures would slow economic growth. We have about 
15 seconds left. Do you agree with her assessment?
    Ms. Rivlin. I do, and I think those who worry most about 
the vulnerable, and in the context of entitlement programs 
particularly, need to keep in mind that if we do not fix this 
debt problem, we are in deep trouble. And people who suffer 
most in a recession are the poor and the working poor. But that 
does not mean that we cannot fix the entitlement programs in a 
way that does protect the vulnerable. And in the Social 
Security plan in Domenici-Rivlin, we do that.
    Mr. Young. You and I agree on that important point, and I 
do believe from my first reading of it, is that you succeed in 
that endeavor. Thank you.
    Mr. Lankford. Thank you. Ms. Castor.
    Ms. Castor. Thank you, Mr. Chairman, and thanks to all the 
panelists for being here today. Mr. Capretta, I was very 
surprised to hear you hold up Medicare Part D as a model for us 
here in the Budget Committee, because when it was adopted, it 
was not paid for. There were no offsets, there was no dedicated 
financing, and I think that was very irresponsible. It has 
added a great deal to our national debt. Do you know how much 
it has added to the deficit and debt, Medicare Part D?
    Mr. Capretta. I do not, no. Not off the top of my head. I 
probably could calculate it.
    Ms. Castor. Well, the latest estimate is $385 billion. You 
were with OMB, and Dr. Blahous, you were an advisor to the 
President at that time. I know the estimate then was $407 
billion. Now, thankfully, it is only $385 billion, but why did 
you think adding that amount to the deficit and debt was a good 
idea?
    Mr. Capretta. I will take this question if you want me to. 
First of all, it is important to recognize that both sides. It 
was on a bipartisan basis that people were pursuing 
prescription-drug coverage in 2002 and 2003. The major 
alternatives, actually, that were offered as substitutes for 
the bill at the time it was passed by a lot of those who 
eventually opposed the bill and did not cut the cost or did not 
pay for it. They actually would have added even more debt and 
more spending.
    Ms. Castor. But that does not get to the question of why.
    Mr. Capretta. No, no. I just want to make sure you are 
clear that there is a bipartisan consensus at that time to pass 
a prescription-drug benefit and Medicare.
    Ms. Castor. So, there is a lot of responsibility to go 
around.
    Mr. Capretta. I just want to make sure the record is clear 
about what the alternative was. The other point is that at the 
time, the reason why there was a lot of momentum to pass a 
prescription drug benefit was because it was the only major 
insurance program in the United States, and it was for seniors, 
that did not have coverage.
    Ms. Castor. You are not answering my question on why it was 
unpaid for, and why you thought it was a good idea to push 
ahead. Dr. Blahous, do you have an answer?
    Mr. Capretta. Well I was about to get to that if you wanted 
me to, but go ahead, Chuck.
    Mr. Blahous. I mean, speaking very broadly here, because at 
the time I was with Social Security only and was not involved 
with the prescription drug discussions at all, but I think Jim 
said it exactly right. President Bush had campaigned on a 
prescription drug benefit, there was a sense that Medicare 
needed to be modernized to include a prescription-drug benefit, 
and I think the Bush White House saw its role in this as 
basically, within the realm of the possible, which was, We are 
going to pass a prescription drug benefit, trying to make sure 
that was done in the least cost way.
    Ms. Castor. All right, then the second part of the question 
is, why did you tie the hands of Medicare to negotiate? A lot 
of cost estimates now that if Medicare had the ability to 
negotiate, that we could save an additional $20 billion plus, 
maybe more. The extension of existing price-negotiation with 
Medicare would really help us as we talk about entitlements and 
Medicare savings. Five years now into Medicare Part D, price 
status shows that Part D plans are failing to deliver on the 
promise that you mentioned in your testimony, Mr. Capretta, 
that competition would bring down prices.
    The adopted approach has not resulted in drug prices that 
are comparable to the low prices negotiated by the Veterans 
Administration. Your structure that prohibits Medicare from 
using its negotiating clout on behalf of the 43 million seniors 
and others in Medicare to obtain low drug prices is costing us 
all money. It is costing seniors, it is costing taxpayers much 
more than it should. I think, moving forward, our budget 
framework needs to consider Medicare Part D becoming more cost-
effective by eliminating the prohibition that prevents Medicare 
from bargaining for better prices. Do you all have a comment on 
that, Dr. Rivlin?
    Ms. Rivlin. Yes, I think that giving Medicare more 
negotiating power would have been a good thing. And I would 
also like to point out that we did not do Medicare 
prescription-drug in the 1990s when I was OMB director. We did 
not because we did not have a way of paying for it, because we 
were working under the PAYGO rules. And what happened after 
2002 was, the PAYGO rules went away and that was the 
consequence.
    Ms. Castor. Thank you very much.
    Mr. Lankford. Thank you. Mr. Rokita.
    Mr. Rokita. Thank you, Mr. Chairman. Thank you to the 
witnesses for coming today. I apologize, I had to leave in the 
middle of this to go to another committee and badger another 
set of witnesses. But I am back now, and have a couple of 
hopefully quick questions. I just want to go right down the 
line, if I could, so if you could keep it real short. I am 
still digesting your testimony as I alluded to but Dr. Rivlin, 
would you be in favor of doing a needs test for Medicare? Am I 
understanding things right, or not?
    Ms. Rivlin. We already have an income-adjusted premium in 
Part B. Yes, I think that the premium can be adjusted to 
income.
    Mr. Rokita. In terms of services, are you willing to give 
the safety net, which I call a safety hammock now, rein it in a 
little bit?
    Ms. Rivlin. I think we would have to have a much more 
specific discussion about what you had in mind before I could 
give you a yes or no answer.
    Mr. Rokita. But the concept would be okay?
    Ms. Rivlin. The concept of upper-income people paying more 
is okay with me, and we have already done that.
    Mr. Rokita. Doctor?
    Mr. Blahous. Specifically on Medicare or on Social 
Security?
    Mr. Rokita. Well, I will skip you, since you are Social 
Security. I was thinking about Medicare. Mr. Capretta?
    Mr. Capretta. Well, I agree with Dr. Rivlin. I am for 
needs-testing the Medicare program going forward, even more 
than we have done. We have done it already to some extent, and 
I think even more could be done going forward. That is not the 
solution to the whole problem, though. You would need to do a 
lot more than that.
    Mr. Rokita. Okay, thank you. Doctor?
    Dr. Van de Water Yes, I think that having income-tested 
premiums, as we now do, is a reasonable thing to do, and that 
could perhaps be modestly expanded. But as far as doing the 
means-testing through the tax system is clearly the efficient 
way to do it. Having a separate means-testing system for the 
benefits, I think, does not make sense at all.
    Mr. Rokita. Okay, thank you. Dr. Rivlin, you mentioned that 
you had focus groups and you would lay out the problem and 
everyone would come up with solutions. I agree with that from 
my anecdotal evidence in doing town halls. My question to you, 
specifically and very briefly is, were these groups willing to 
cut their own benefits or were they talking about future 
benefits?
    Ms. Rivlin. Yes, I mean, I have found even groups of 
seniors are willing to consider cuts. They are very concerned 
about their grandchildren when they really focus on what the 
problem is.
    Mr. Rokita. Thank you very much. Dr. Blahous--am I 
pronouncing that correctly?
    Mr. Blahous. Yes.
    Mr. Rokita. Thank you. You are a Social Security trustee. 
You said if we do not address the issues within a couple years, 
we may not get this kind of opportunity going forward. You also 
said you had no earthly idea how to communicate the problem. I 
am going to give you an earthly one to shoot down. I get this 
nice color brochure that tells me how much I am going to get in 
Social Security if and when I retire, and all that sort of 
thing. It is about four or five pages. You are familiar. What 
is prohibiting us from laying out the problem there? And if 
there are some laws prohibiting it, maybe you can help me 
change those?
    Mr. Blahous. There are actually no laws prohibiting it. And 
it is actually material that Congress has occasionally wrestled 
with in the past, and directed Social Security Administration 
to include additional information in it.
    Mr. Rokita. Do you have to wait for Congress?
    Mr. Blahous. No. The Social Security Administration can 
make periodic revisions to this. Now as you would imagine, 
whenever they make revisions people on both sides of the aisle 
Congress look very carefully over their shoulders as they do so 
to make sure that they are not slanting it one way or the 
other. But it is periodically revised.
    Mr. Rokita. That is fine. And as this panel has pointed 
out, this is not political anymore. This is about the solvency 
of a nation, in my opinion the greatest one the world has ever 
seen. So I do not know why we cannot use that as a medium. Go 
ahead, Doctor, if you like.
    Dr. Van de Water Just to add very, very quickly. It is my 
recollection that the Social Security Statement already 
contains some information about the long-run financing issues.
    Mr. Rokita. Not like this. Not with the charts. Not like 
the good conversation that we are having today and that this 
nation needs to have, but I appreciate it.
    Dr. Van de Water Well, clearly not to that extent.
    Mr. Rokita. Yes, okay. Can I see the tidal wave chart? Do 
you have it ready? There has been talk that raising taxes would 
be a huge help in solving this problem. Someone, it was maybe 
not at this hearing today, but I have heard that would be the 
only solution that is needed. I want each of you to tell me if 
I am reading this chart wrong. If I understand it right, by 
just past 2021, if this government confiscated everything this 
nation produced, we would still not be able to pay for these 
programs. Is that accurate or not?


    Ms. Rivlin. In the very long run, yes.
    Mr. Rokita. About 2081?
    Ms. Rivlin. Yes, 2081 is quite a long time from now. I do 
not expect to live that long.
    Mr. Rokita. No, 2025.
    Ms. Rivlin. But I think to say we cannot solve this on the 
tax side alone, because we would have to raise taxes 
continuously until they were taking over the whole GDP, which 
is your point. But we cannot solve it entirely on the spending 
side alone, either. We have got to do both.
    Mr. Rokita. I yield back. Does anyone on the panel disagree 
with what was said?
    Mr. Capretta. I would like to.
    Mr. Lankford. I would like to be able to defer that 
question. We will be able to pick it up, so thank you.
    Mr. Capretta. All right.
    Mr. Rokita. I yield back. Thank you to all four of you.
    Mr. Lankford. Ms. Bass.
    Ms. Bass. I think that is working now. I thank the 
witnesses for taking their time for coming, and I particularly 
wanted to thank Dr. Blahous. Did I say that correctly? And Dr. 
Rivlin for your comments that you made about the need to really 
educate the public, and our responsibility of that on both 
sides of the aisle. So I wanted to ask a couple of questions to 
clarify--I am not sure, I do not believe anybody on the panel 
is a physician, correct? So I am a former medical professional 
and so when I hear you talk I am trying to translate some of 
what you are saying, your language and your theories, into 
patient care. And so I believe it was Mr. Capretta who was 
talking about the choices that people would have to make, high 
achievers, you talked about productivity in the health care 
system, and I am trying to understand what that means.
    I mean our Chairman, he is not here right now, but he used 
a comparison with LASIK surgery, and I understand what he was 
talking about then in terms of that being market-driven, and 
you can shop around for that. But that is cosmetic surgery. It 
is elective. It is not a bypass. So could you please explain to 
me what you were talking about when you were talking about 
increasing productivity, a high-achieving provider, what does 
that mean?
    Mr. Capretta. Well the actual bill, the Affordable Care 
Act, tries to do a lot of that through mechanisms of the 
Medicare program. What they are trying to do is by paying 
hospitals and physicians in particular and clinics that they 
are associated with differently depending on how well they 
perform, that they will reorganize how they do business. The 
intake of patients, what happens to a patient when they see 
them, what they do after the patient is discharged, they are 
trying to make that process of patient care more productive. 
That is, use less economic resources and deliver better health.
    Ms. Bass. Yes, but what I was asking for was your opinion 
in terms of what needed to be done with Medicare, not so much 
the Affordable Care Act.
    Mr. Capretta. That needs to be done. The question is what 
will bring that about more quickly and more rapidly and more 
continuously. And I tend to be a skeptic that through 
regulations and Medicare payment adjustments, that that is 
going to work very well. Because we have tried that in the 
past. It tends to devolve into across-the-board payment rate 
reductions instead of more efficiency on the part of providers.
    Ms. Bass. And I will ask you in one second. So if not that 
way, are you suggesting a market formula works?
    Mr. Capretta. Absolutely.
    Ms. Bass. And if you are, could you please explain what 
that means for a patient?
    Mr. Capretta. Very much like what Dr. Rivlin has proposed 
as part of premium support, the theory here and the thought is 
that if you limit what the government is providing to an 
average-cost plan or perhaps something slightly below an 
average-cost plan, the beneficiary can then make some choices. 
They can decide on the insurance type of arrangement they want, 
plus the delivery structure through which they get their care. 
If they choose one that is more expensive, they do pay a little 
bit more out of pocket. If they choose one that is more 
efficient, they get to keep the savings. That is the structure 
of what we are trying to get at here and my own judgment is 
that that will lead to more rapid change on the side of the 
delivery structure, than trying to push it along through 
regulation.
    Ms. Bass. And I guess my concern, and then I will ask you 
Dr. Van de Water for your opinion, but my concern about that is 
that I think it is going to lead to less care. And I think it 
is going to lead to people making choices that, you know, could 
result in someone losing their life.
    Mr. Capretta. You know, if I could comment on that. It is 
not really well-known, but the recently passed health care law 
actually does put in effect a limit on Medicare spending. There 
is a substantial risk already in place in current law that the 
beneficiaries actually will not be able to get access to care, 
despite the talk of delivery-structure reform. That goes 
towards what they are paying for services, so the Medicare 
actuary says, That is likely to fall below what Medicaid pays.
    Ms. Bass. Okay, and I am sorry, I do not mean to cut you 
out, but I am running out of time, and I want Dr. Van de Water 
to reply. Thank you.
    Dr. Van de Water Speaking as an economist, I certainly 
would have to agree with Jim Capretta that cost-sharing, if 
wisely used, has a role to play in making sure that medical 
spending is done efficiently. But like you, as I perceive your 
question is suggesting, I think the role for additional cost-
sharing is somewhat limited. It is well-known based on past 
studies that when people cut back on the amount of care because 
of cost considerations, they often cut out care that would be 
valuable as well as care that might not have been particularly 
productive, because we as individual consumers are not 
necessarily good judges of what is helpful and what is not.
    Ms. Bass. Right, that is right. Exactly. Thank you.
    Mr. Lankford. Thank you. Mr. Stutzman.
    Mr. Stutzman. Thank you, Mr. Chairman, and thank you panel 
for being here as well today. I guess just for the record, I 
wish Mr. Pascrell was here. We were glad that Mitch Daniels 
came back to Indiana to be our governor, because we have a 
balanced budget and we have jobs that are being created in 
Indiana. So just for the record, Mr. Chairman, I would like to 
state that we were glad to have Mitch Daniels back in Indiana, 
back from Washington.
    Mr. Van de Water, you mentioned future beneficiaries for 
Social Security would be even more dependent on Social Security 
in the future, and you stated that view because few of them 
will be covered by employer-sponsored defined benefit pension 
plans. Why do you say that and are there not other options out 
there for individuals personally? And the reason I ask is 
because when I was 18 years old I was just a farm kid, I 
started my own personal IRA because I am not expecting Social 
Security to be there. There are plenty of other options as 
well. And a new poll just out today shows that 81 percent of 
Americans fear for Social Security. So I think Americans are 
getting the message as well, and seeing that. But there are 
other options besides defined benefit pension plans. We should 
not just put all the weight on employers.
    Dr. Van de Water Oh absolutely sir, and I was not meaning 
to suggest the contrary. Let me just say two things. First of 
all, why do I expect that fewer retirees in the future will 
have defined benefit pension plans? Simply if you look at the 
charts of coverage, in defined benefit pension plans for 
workers that fraction in private industry has shrunk 
dramatically in recent years. If you are interested, that chart 
appears in one of the papers I recently did for the Center on 
Budget. Obviously Social Security should not be the sole source 
of retirement income for most people. My older daughter and her 
husband, who have recently entered the workforce, are putting 
everything they can into their defined contribution accounts 
and I definitely encourage them to do so, and you made a good 
decision when you were younger. Although I might add, not 
exactly for the reason you said. I believe that Social Security 
will be there for my children and my new granddaughter. The 
question is what it is going to look like.
    Mr. Stutzman. Yes, exactly. I hope it is as well, and I 
think if we make decisions today that we can secure for the 
long term. I guess I would like to just ask for the panel, for 
each of you, and I think we will start with Dr. Rivlin. CBO 
says that the health care reform bill will both reduce debt 
held by the public and increase debt subject to the limit. How 
can this be?
    Ms. Rivlin. The limit is on gross debt, including the 
surpluses in the trust funds, and if everything goes as 
scheduled in the Affordable Care Act, it would improve the 
prospects of the Medicare trust fund.
    Mr. Stutzman. Dr. Blahous?
    Mr. Blahous. This is a very important point, because as Dr. 
Rivlin said, there are savings in the bill that extend the 
solvency of Medicare. That results in the issuance of 
additional debt to the Medicare trust fund. The statutory debt 
subject to limit is basically approximately the gross debt, 
which includes the debt issued to the trust fund. So in a 
sense, we are committing additional dollars to paying Medicare 
benefits in the future, but at the same time those dollars were 
also used as an offset within the unified budget for the new 
health entitlement. And because they have been basically 
committed to both purposes, this causes gross debt to actually 
rise under the bill.
    Mr. Stutzman. Okay, thank you.
    Mr. Capretta. Nothing more to say, other than to say that 
Chuck has got it exactly right.
    Mr. Stutzman. Would you like to add to that, Dr. Van de 
Water?
    Dr. Van de Water The only thing I would add is, again 
speaking as an economist, most economists would agree that the 
measure of the debt we should be looking at for purposes of 
considering whether or not we are approaching a fiscal crisis 
is the debt held by the public, not the gross debt, which is 
important but for other reasons.
    Mr. Stutzman. Thank you, Mr. Chairman. I yield back.
    Mr. Lankford. Thank you. Mrs. Moore.
    Ms. Moore. Thank you so much. I have a couple questions, 
first on Social Security, for Dr. Paul Van de Water and also 
for Mr. Capretta. You indicated in your testimonies that we 
needed to make some fixes to Social Security, and Dr. Van de 
Water, you said we could do that with very modest fixes, and I 
am suggesting perhaps removing the cap and increasing payroll 
taxes modestly with wage inflation. Would you agree with that?
    Dr. Van de Water Yes, I would.
    Ms. Moore. All right. And Mr. Capretta, you said that we 
need to fix Social Security without raising taxes. Could you 
share with me what those ideas are?
    Mr. Capretta. I think you might be confusing me with Chuck. 
I am not sure. I did not have anything in my written testimony 
about that.
    Mr. Blahous. And I, and by the way, I did not.
    Ms. Moore. I thought I heard you say we could do it without 
raising taxes.
    Mr. Blahous. It can be done without raising taxes.
    Ms. Moore. Okay, maybe I did not. So what would that be? 
What would the skeleton of that be?
    Mr. Blahous. You could do it through a combination of 
changes to the retirement age, to the benefit formula. There 
are other things that could be changed, such as the actuarial 
adjustments for early and delayed retirement, the way the 
system keeps track of your wage history. A grab bag of things.
    Ms. Moore. Do you want to answer, Dr. Rivlin?
    Ms. Rivlin. Yes, you could do it. But I think most plans, 
in order to reduce the burden on the benefit side, would say, 
``Let's raise the cap gradually back to the 90 percent of 
earnings where it started.''
    Ms. Moore. Okay, thank you so much. I want to ask a 
question. I appreciate all your expertise. I think the most 
stunning testimony, for me here today was yours, Mr. Capretta. 
You indicated that the cause for increases in Medicare were 
largely due to the fact that Uncle Sam will just pay any amount 
that is out there. I think in Dr. Rivlin's testimony, she cited 
a couple of things. The rapid increase in health care spending 
due to ever-expanding medical capabilities, technology, laser 
surgeries, tummy tucks, whatever. Then Mr. Young came back and 
asked you a question about the numbers of people that might be 
in the exchange. You said it could go as far as up to 110 
million people. It sounded almost like we need to recruit you 
to advocate for the public option. If, in fact, that this 
unbridled increase in health care costs is due to federal 
health care spending, employer taxation or tax exemptions and 
Medicaid and Medicare expenditures, the best thing to do would 
be to have something like a public option to say, ``Hey, we are 
not going to pay these huge fees anymore.'' We are going to 
offer people an opportunity to come into the government public-
option exchange. Respond to that, please.
    Mr. Capretta. Well I actually do not agree with that.
    Ms. Moore. Well I know you do not.
    Mr. Capretta. Just for the record, I do not.
    Ms. Moore. But to say that Medicare is driving the health 
care costs, seems like you have turned it on its head. So what 
are you saying?
    Mr. Capretta. Well maybe I will take on the responsibility 
of saying yes, I do basically think that is the problem. I 
mean, Medicare fee for service is the dominant payer in most 
markets.
    Ms. Moore. So all we have got to do is just say We are not 
going to pay you this anymore?
    Mr. Capretta. No, I did not say that.
    Ms. Moore. And that will drive down private health 
insurance?
    Mr. Capretta. Well actually, the delivery structure is the 
same pretty much for everybody, right? So the question is, why 
is the delivery structure organized and operating the way it 
does today? There are a number of reasons, but the number-one 
reason is Medicare fee-for-service.
    Ms. Moore. Okay, can you respond to that, Dr. Rivlin and 
Dr. Van de Water?
    Mr. Capretta. But just for a second, the point is to allow 
a little bit more, as Dr. Rivlin has proposed, structure where 
the delivery system can be reformed by beneficiary choice. I 
think that is the key.
    Ms. Moore. Dr. Van de Water?
    Dr. Van de Water I would disagree with Jim on this. When 
Medicare was established in 1965, it basically followed the 
payment practice that existed in the private sector at that 
point. It did not lead, it was following. But after not too 
many years, as the effects of that system became clear, 
Medicare started to innovate in many ways. I mentioned that in 
my answer to Mr. Honda, although I think I actually got things 
backwards. First, Medicare instituted the DOG systems for 
hospitals, later the fee schedule for physicians, and in those 
cases it has become the leader for changing payment mechanisms. 
Further changes are needed, but I think Medicare has been in 
the forefront in many cases.
    Ms. Moore. And since the hearing is almost over, I can ask 
you. There is one other person.
    Mr. Lankford. Yes, your time has expired.
    Ms. Moore. Sorry. It was just a stunning testimony, I mean. 
It is such a great education here on this committee. You know, 
you are going to be educated beyond belief.
    Mr. Lankford. Thank you. Let me recognize myself for a 
moment, for a few questions I wanted to be able to bounce off 
you briefly, and that is dealing with the incentive. I hear 
senior adults that will talk about, Nine hundred dollars is all 
I have to live on with Social Security, and they are saying 
that that does not reach the cost of living, that it is not 
poverty, and I hear within their question the assumption that 
all the retirement I will have will be Social Security. What 
incentives would you recommend for future generations when they 
think about retirement, to not think about Social Security as 
the 401(k) sitting out there that is the sole part of their 
retirement? Have there been incentives that you have seen to be 
able to encourage people to say, ``You need to have your own 
retirement plan, and this is supplemental to that''
    Mr. Blahous. If I could, I would make a couple of points. 
One is that I think sometimes, we do not think about this in 
the best way in the sense that we say, well people have these 
challenges to their retirement security, ergo, we need to make 
bigger promises from Social Security, even beyond what we can 
now afford. But we have to remember, Social Security is not 
immune to risk right now. We have a substantial political risk 
right now. People's benefits can and must be changed under 
current law, and the political risk, the risks their benefit 
stream continues to grow the longer that this problem is not 
dealt with. So we have to be very careful about telling people, 
The solution to your retirement-security problem is for the 
government to make more promises in Social Security that it 
already does not know how to fund.
    Beyond that, I personally am of the view that we should be 
making changes to Social Security to increase labor force 
participation in a way that increases the amount of income that 
people head into retirement with, outside of Social Security. 
We have a number of ways in which the current system is now 
designed, basically because it was drawn up in 1935, to drive 
people out of the workforce. Back then, we were trying to move 
people out of the workforce. We were trying to move seniors 
out, we were trying to move housewives out to make room for 
younger workers. Typical senior, if they extend their working 
career by a year, they are going to get a negative 50 percent 
return on any additional payroll taxes they pay. A typical 
secondary household earner, usually a woman, gets a negative 33 
percent return relative to what she would have gotten by simply 
staying home and collecting benefits as a nonworking spouse. 
These are terrible work incentives, and they undermine people's 
income security in retirement.
    Mr. Lankford. So do you have specific proposals that you 
have put out there and just to give you a chance to think in 
the academic world?
    Mr. Blahous. I have. Yes, I mean, I think there is a lot of 
things we could do. We could give seniors some relief from the 
payroll tax when they reach eligibility age, specifically the 
disability tax because they are not even eligible for 
disability benefits anymore. We could change the benefit 
formula. Right now, the way the benefit formula works, it only 
keeps track of your top 35 years of earnings. So once you get 
to year 35 and beyond, chances are, if you take a part-time job 
and transition to your retirement, the system may not even see 
that income, and you will get no additional benefits for that 
tax revenue. You could change that benefit formula so it 
recognizes all your earnings, years of work. I personally would 
increase the reward for delayed retirement and increase the 
penalty for early retirement. I think you could offer the 
delayed-retirement credit as a lump sum, which people tend to 
respond a bit more than to a small adjustment in their monthly 
benefit stream. There is a whole bunch of things like this we 
could do to repair the Social Security System.
    Mr. Lankford. Any other comments on that? Does anybody want 
to add to it?
    Dr. Van de Water Yes, I agree with some of Chuck's 
suggestions with regard to increasing incentives for work, but 
your question was, what about Social Security and encouraging 
additional savings and other private provisions? And all I 
would note is that I think the system already does that in two 
major respects. First of all, because the benefits are modest, 
averaging, as I said, only about $1,200 a month and at maximum 
only about $2,000 a year, I think anyone looking at those 
numbers would say, if at all possible, I would like to have 
additional savings.
    Mr. Lankford. Right. But the perception is, people are not 
looking at those numbers. They are assuming, when I get to 
retirement, it is going to be there. Then they get it and find 
out, Oh, it is not the numbers that I thought it would be.
    Dr. Van de Water Well that is part of the issue of being 
informed. And then secondly, because Social Security is not 
means-tested aside from the taxation of benefits, that also 
provides a strong incentive to supplement it through private 
savings and pensions.
    Mr. Lankford. Okay, thank you. Mr. Woodall, I am going to 
recognize you at this time as well and yield back 34 seconds. 
Any other questions at this point? There are no other questions 
in it, then thank you very much for coming. I appreciate your 
time and giving up one more moment to be able to come and be 
before this hearing time. This hearing is adjourned.
    [The prepared statement of Allyson Y. Schwartz follows:]

  Prepared Statement of Hon. Allyson Y. Schwartz, a Representative in
                Congress From the State of Pennsylvania

    I was deeply disappointed at an incident that occurred during last 
week's budget hearing, in which a colleague of mine, not only 
attributed false statements to me, but also breached the basic rules of 
the House; decorum and civility.
    The Gentleman from Indiana was wrong in attributing to me a 
statement that I never made. I would like to take this time to set the 
record straight and be perfectly clear about how we got here:
    Medicare Part D created in 2003 by Republicans: WAS NOT PAID FOR.
    The two wars in Iraq and Afghanistan: WERE NOT PAID FOR.
    The 01' and 03' tax cuts for the rich: WERE NOT PAID FOR.
    Taken together, these policies account for 40 percent of the fiscal 
problem.
    Just two policies, enacted by the last Administration--the tax cuts 
and the two wars accounted for over $500 billion of the deficit in 2009 
and will account for almost $7 trillion in deficits in 2009 through 
2019, including the debt-service costs.
    Furthermore, had President Bush not cut taxes while simultaneously 
fighting two wars and adopting other programs without paying for them, 
the current deficit would be only 4.7 percent of GDP, not 11.2 percent. 
This is despite the weak economy and the costly efforts taken to 
restore it.
    The reason I give this historical perspective on how we got here, 
is to paint clear picture for the next decade. If we do not look to 
history, we are doomed to repeat it.

    [Submission for the record by Bill Pascrell, Jr., follows:]

    Question for the Record Submitted by Hon. Bill Pascrell, Jr., a
        Representative in Congress From the State of New Jersey

                     question for mr. van de water
    Some of our witnesses today believe the best way to reform Medicare 
would be to privatize the program. Our Chairman also supports this idea 
through his Roadmap to make Medicare a voucher program. Aside from the 
confusion privatization would create for seniors and the shift of 
financial risk to them, I want to make a point about the cost growth 
under Medicare versus the private sector.
    According to the Standard and Poor's Index on Healthcare, in 2010, 
health costs covered by private insurance rose by 7.75 percent compared 
to Medicare, which increased at a modest 3.3 percent. Clearly, Medicare 
as it is currently structured controls costs better than private 
insurers.
    Recognizing this, if we are talking today about controlling costs 
for our budget, I don't see the sense in moving seniors from a lower 
cost insurance provider to a higher cost insurance provider, do you?
    Do you agree with me that with the new tools included in health 
care reform, Medicare can both honor its reputation of offering 
reliable health coverage while also improving its ability to contain 
costs?
    Then wouldn't make more sense to adjust a system that we know 
works, rather than abandon it and shift seniors to a system that has 
greater administrative costs and general cost growth?

    [Whereupon, at 1:06 p.m., the committee adjourned subject 
to the call of the Chair]