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




                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION




                            Serial No. 112-1


           Printed for the use of the Committee on the Budget

                       Available on the Internet:

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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
FRANK C. GUINTA, New Hampshire

                           Professional Staff

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

                            C O N T E N T S

Hearing held in Washington, DC, January 26, 2011.................     1

    Hon. Paul Ryan, Chairman, Committee on the Budget............     1
        Prepared statement of....................................     3
    Hon. Chris Van Hollen, ranking minority member, Committee on 
      the Budget.................................................     4
    Hon. Earl Blumenauer, a Representative in Congress from the 
      State of Oregon, submission for the record:
        Letter, dated January 26, 2011, from supporters of the 
          Patient Protection and Affordable Care Act of 2010.....    36
    Richard S. Foster, F.S.A., Chief Actuary, Centers for 
      Medicare & Medicaid Services...............................     7
        Prepared statement of....................................    10
    Dennis G. Smith, secretary, Wisconsin Department of Health 
      Services...................................................    64
        Prepared statement of....................................    66
    James C. Capretta, fellow, Ethics and Public Policy Center...    69
        Prepared statement of....................................    71
        Response to Ms. Kaptur's question........................    87
    Paul N. Van de Water, senior fellow, Center on Budget and 
      Policy Priorities..........................................    75
        Prepared statement of....................................    76

                       THE FISCAL CONSEQUENCES OF
                          THE HEALTH CARE LAW


                      WEDNESDAY, JANUARY 26, 2011

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 9:40 a.m. in room 
210, Cannon House Office Building, Hon. Paul Ryan [chairman of 
the committee] presiding.
    Present: Representatives Ryan of Wisconsin, Garrett, 
Simpson, Campbell, Calvert, Akin, Cole, Price, McClintock, 
Chaffetz, Stutzman, Lankford, Black, Ribble, Flores, Mulvaney, 
Huelskamp, Young, Amash, Rokita, Guinta, Van Hollen, Schwartz, 
Kaptur, Blumenauer, McCollum, Yarmuth, Pascrell, Honda, Ryan of 
Ohio, Wasserman Schultz, Moore, Castor, Tonko, and Bass.
    Chairman Ryan. The hearing will come to order.
    I welcome all to the first House Budget hearing of the 
112th Congress.
    Before we get started, I want to thank ranking minority 
member Chris Van Hollen for his cooperation in getting the 
committee rules adopted and with this hearing and for starting 
a little early so we can get a head start on the day.
    Why is this the Budget Committee's first hearing and why is 
it focused on health care? Well, let's just put it very simply. 
Our fiscal problem is a health care problem. Health care 
spending is driving the explosive growth in our spending and 
our debt.
    The new health care law was sold under the guise of fiscal 
responsibility. The claim was that the government would spend 
trillions of dollars, add millions to a new government-
controlled health care program, and create two new open-ended 
health care entitlements, all in order to lighten our budgetary 
burden. Most Americans understand that something is just not 
adding up here. Today's hearing is intended to peel back the 
layers of the law and its maze of mandates, dictates, controls, 
tax hikes, and subsidies.
    Many try to distort our criticism of the health care law 
and say that we are criticizing the CBO. Actually, quite the 
opposite is true. I think CBO does a very good job. We ask them 
to do a lot under short notice, and they perform very 
admirably. The analysis performed by the CBO, Mr. Foster, and 
others enable us to unpack the law's budgetary smoke and 
mirrors and reveal its true fiscal impact.
    We face a choice of two futures, and nowhere is this choice 
more clearly defined as it is in health care. Down one path 
lies the managed decline of a government-run system on the 
verge of bankruptcy. There is an alternative path, and it is a 
path that leads to true choice and competition in health care. 
It is modeled after the health care system that we ourselves in 
Congress enjoy; and it puts patients first, with providers 
competing for our business.
    But before we can get there, we must reject the notion that 
a centrally planned, bureaucratically run health care system 
can produce more favorable outcomes than the one managed by 
doctors and patients.
    Do we want a system that is command and controlled, price 
controlled, formulaically controlled by government, or do we 
want a system where the patient is the center, where the 
patient is sovereign, where they get to decide, where 
providers--doctors, hospitals, insurers--compete against each 
other for our business or do we want them competing for 
favoritism from a shrinking pool of government resources?
    While I am opposed to the President's health care law, I 
want to find solutions to these problems. That is why I have 
worked with Democrats to come up with other proposals to try 
and find answers to these.
    Alice Rivlin and I most recently teamed up on a proposal in 
the Fiscal Commission. She and I don't see eye to eye on 
everything, but we tried to come together with a compromise to 
try to find a way to fix some of these problems to address our 
health care problems and our fiscal problems. I hope we can 
continue to build bipartisan support for policies that create 
incentives in our health care system to enhance quality, reduce 
costs, and promote patient satisfaction.
    It is an honor to welcome our first witness, Rick Foster, 
Chief Actuary for the Centers of Medicare and Medicaid 
Services. Time and again, Rick's unbiased actuarial reports 
have proved difficult to square with the claims made by the 
law's proponents, specifically with respect to the direction of 
health care spending as a result of this law.
    After Rick's testimony, we will hear from a panel of three 
witnesses. Dennis Smith, the newly confirmed Secretary of 
Health Services in my home State of Wisconsin. Dennis has 
tremendous experience in this area, having served as Medicaid 
Director at HHS under the previous administration. He will give 
us a sense of what the impact of the law is on the States.
    Next, Jim Capretta, former associate and director at the 
Office of Management and Budget. Few in my mind have made as 
compelling a case as Jim on both the costly consequences of 
this law and the path forward to advance real reform.
    And we will hear from Paul Van de Water from the Center for 
Budget and Policy Priorities. Paul has an impressive 
background, and I welcome his thoughts to advance an informed 
debate on this critical issue.
    I look forward to today's discussion. I thank our witnesses 
for joining us and starting a little early.
    With that, I would like to yield to Ranking Member Van 
Hollen for an opening statement.
    [The statement of Mr. Ryan follows:]

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

    Welcome all, to the first House Budget Committee hearing of the 
112th Congress. This is an immensely consequential time for the 
Congress, and our Federal Government in general. It is a time in which 
this committee will play an exceptionally important role. I welcome the 
opportunity to tackle the challenges we face: the stakes are very 
high--but so are the potential rewards.
    I also offer my congratulations to Chris Van Hollen on being 
selected as Ranking Member on this committee. Chris is an eloquent 
spokesman for his party's views and principles, and I look forward to 
many vigorous, and I hope enlightening, debates on issues that are so 
critically important to our country right now.
    One of those, of course, is health care--and specifically the 
health care legislation enacted last year. It remains a highly 
contested subject, and the more Americans learn about the legislation, 
the more questions and doubts they have.
    We in America enjoy a strong and innovative health care system. But 
its costs, including those of the Federal Government, are out of 
control. The average cost of a health insurance policy for a family of 
four doubled between 2000 and 2007, and is projected to double again in 
the next seven years. And because the federal government has made a 
large and open-ended commitment to the health security of most 
Americans, health care costs have a huge impact on our federal budget. 
The Congressional Budget Office says Federal spending on health care, 
as a percentage of the economy, will double over the next 25 years--
crowding out spending for anything other than health care and Social 
    To put it simply, our fiscal problem--in which government debt is 
approaching the size of the entire economy--is a health care problem.
    The Democrats' health care legislation was sold as a way of 
addressing both--but whether that's true is seriously in doubt. Our 
first witness today has said that any health care savings resulting 
from the law will be more than offset by higher expenditures for 
coverage expansions. The Director of the Congressional Budget Office 
has said the legislation will not substantially reduce the upward 
pressure on health care spending.
    In short, this Washington-centered health care overhaul--with its 
maze of mandates, dictates, controls, tax hikes, and subsidies--will 
very likely accelerate the rise in health care costs. Many of these 
costs will be foisted onto the states, as the bill's Medicaid 
expansions will strain their budgets even further.
    Today's hearing is intended to peel back the layers of this complex 
law, to sweep aside the budgetary smoke and mirrors, and to examine its 
effects on health care costs and, consequently, on our nation's 
    Our witnesses today will help clarify these issues.
    First is Rick Foster, Chief Actuary for at the Centers for Medicare 
and Medicaid Services. Due to his role, Rick can offer a clear and 
thoroughly unbiased of the fiscal effects of the health care law.
    We'll hear from Dennis Smith, Secretary of Health Services in my 
own state of Wisconsin, Dennis can speak today about the new Medicaid 
obligations this law will force on states such as Wisconsin.
    And we'll also hear from Jim Capretta, a former associate director 
at the Office of Management and Budget and currently a fellow working 
on health care issues at the Ethics and Public Policy Center.
    No one has done a better job than Jim of exposing gimmicks in the 
health care law that hide its true costs.
    We are at a fiscal crossroads, with two very different futures 
waiting for us at the end of two very different paths. One path leads 
to the managed decline of a government-run system on the verge of 
bankruptcy. Harsh austerity, severe benefit cuts and massive tax 
increases wait for us at the end of this path.
    The other path leads to true choice and competition as reflected in 
the health care reform proposals that I and some of my colleagues, such 
as Tom Price, have put forward in Congress.
    Putting patients first--contributing a defined amount to their 
health security and making doctors and hospitals compete for their 
business--would put the focus in health care on quality, cost, 
efficiency and patient satisfaction, just as it is in almost every 
other business.
    I am proud to have worked with former Clinton administration budget 
director Alice M. Rivlin to advance some of these reforms. It is 
possible to build bipartisan support for policies that allow consumers 
and patients to make choices for themselves, even as the government 
provides sensible oversight of the marketplace.
    We all understand that, for too many Americans, the health care 
system isn't working. Nobody is talking about going back to the status 
quo. But we cannot forge a bipartisan way forward until we remove this 
partisan roadblock.
    With that, I will yield to Ranking Member Van Hollen for an opening 

    Mr. Van Hollen. Thank you, Mr. Chairman.
    I want to join the chairman in welcoming Mr. Foster and the 
other witnesses here today. I have to say at the outset that 
many of us are disappointed that the first hearing of the 
Budget Committee, rather than focusing on jobs and the economy, 
is focused on looking backwards and repealing the health care 
reform bill.
    As the President indicated last night in the State of the 
Union address, there are going to be issues, of course, that 
arise with the health care reform bill and we should work 
together to address those issues as they come up. But 
relitigating the whole health care reform bill we think is a 
mistake and doesn't focus our resources, energy, and attention 
on the really pressing problems for the American people, 
getting more people back to work, getting the economy in full 
gear going forward. That being said, we do believe that today's 
hearing and other hearings on the health care reform bill will 
help eliminate many of the myths and misunderstandings that 
came up in connection with the health reform legislation.
    We on the Democratic aisle a few weeks ago before the vote 
had a hearing where we invited our constituents from around the 
country to testify on that bill. It was an unofficial hearing, 
because the majority decided to press forward with repeal 
without having any hearing in this Congress, listening to the 
benefits that have already begun to kick in for millions of 
    We heard testimony from moms and dads, sisters and 
brothers, who talked about the fact that they like the fact 
that no longer will their kids be kicked off of a health 
insurance policy or denied coverage to begin because they have 
a preexisting condition like asthma or diabetes.
    We heard from parents that really like the assurance that 
their children could stay on their health insurance policy 
until they were age 26.
    We heard from small businesses that are taking advantage of 
the tax credits to provide more affordable coverage for their 
employees. A recent Forbes article indicated that that tax 
credit benefit has exceeded beyond expectations.
    We heard from senior citizens who as of January 1 get a 
little bit more help in covering the costs of their medicines 
when they fall into the donut hole.
    So millions of Americans in the last 10 months have begun 
to recognize important benefits of that legislation.
    Now, I know our colleagues on the other side of the aisle 
will say, well, we are going to get rid of all of this and put 
back in some of that stuff. The reality is between the years 
2000 and 2006 health insurance premiums in this country 
doubled. They went up 100 percent. Congress and the former 
President did nothing during that period of time.
    Under the health care reform bill, if you look at the CBO 
January letter, you will find that, over a period of time, 
premiums will begin to come down in the employer insurance 
market and that people's out-of-pocket costs in the individual 
market will go down over a period of time.
    So we believe we should be focused on trying to fix those 
areas like the 1099 small business burden that I think there is 
common agreement should be changed, rather than relitigating 
this whole issue.
    Now, just a word on the deficit reduction benefits of the 
health care reform bill. Because, obviously, the Congressional 
Budget Office most recently in its January letter indicated 
that over the first 10 years we would save, we would reduce the 
deficit by $230 billion under the health care reform law as 
passed; and over the 20-year period, it would be $1.4 trillion 
in deficit reduction benefits. The CBO, as we all know, is an 
independent, nonpartisan entity; and I think we would all agree 
that we will have budget and fiscal chaos if we decide at our 
own whim and initiative to throw out CBO numbers.
    Now today we are going to focus on, as the Chairman said, 
what CBO was given to score; and I actually think this will 
help illustrate the fact that the CBO numbers are real. Now I 
know we would like--I hope we will have the CBO come at some 
point and testify on their own deficit reduction package, 
rather than sort of take an indirect approach to those numbers. 
But I think what we are going to find--and I am looking forward 
to the testimony of Mr. Foster--is that indeed the CBO numbers 
are something that, while he cannot independently verify 
because that is not his total area of expertise, that they are 
built on what we believe are important assumptions.
    Just two quick slides I want to look at the outset, and 
then I will conclude my remarks.

    This first one is based on the analysis that Mr. Foster did 
in April of 2010. It takes a chart of total national health 
care expenditures in the year 2019 if the health care reform 
bill is implemented as enacted. Those are the columns to the 
left. The columns to the right are the number of people who 
will now receive health insurance and be able to get 
preventative care, just like Members of Congress can get 
through their insurance, get the health care they need when 
they need it through their insurance.
    The estimates are between 32 and 34 million Americans--CBO 
says 32 million, Mr. Foster says 34 million Americans--will get 
that additional coverage. That is on the right. You can see 
directly the benefits.
    We have heard a lot of talk about how this is going to be a 
huge expenditure. And if you look at national health care 
expenditures, in--let's go back--in the year 2019, that is just 
9 years from now--and this is taking Mr. Foster's slide with 
the bill as enacted--you are talking about a 1 percent 
difference with the health care reform bill, 1 percent 
difference in the health care reform bill and getting 32 to 34 
million more Americans covered.
    I think if you look at the remainder, we will be hearing 
from Mr. Foster, as you go into the outyears and begin to bend 
the cost curve if you implement this bill as enacted, you 
actually get to a point where national health expenditures as a 
result of passage and implementation of the new law actually 
will be less than if we had done nothing.
    So we look forward to the testimony of Mr. Foster and 
others as we go forward this morning.
    I conclude with this slide, which are the CBO numbers, 
which show the savings for the first 10 years and then the 
savings from a deficit perspective for the second 10.

    Thank you very much, Mr. Chairman.
    Chairman Ryan. Let me just say we have a difference of 
opinion on some of these things. I appreciate the gentleman's 
    I know they don't want us to get into relitigating the 
health care law, but I think everybody would agree the debt 
problem is a health care problem, and we are going to have to 
relitigate that to get to a real solution, because we haven't 
fixed the debt problem yet.
    So, with that, I want to welcome Rick. You have come here a 
number of times. We have seen you over at Ways and Means. We 
really appreciate your professionalism and the time you have 
taken in your career to dedicate to these issues.
    The floor is yours.


    Mr. Foster. Thank you----
    Chairman Ryan. You have to pull it closer.
    Mr. Foster. Thank you, Chairman Ryan, Representative Van 
Hollen, and distinguished committee members----
    Chairman Ryan. Can you pull it a little closer, Rick? We 
can't hear you that well. Pull it right next to your face.
    Mr. Foster. I remember these microphones. Is that any 
    Okay. They always come through in the end, just like 
    Chairman Ryan, Representative Van Hollen, and distinguished 
members of the committee, thank you for inviting me to testify 
today about the impact of the Affordable Care Act on Medicare, 
on Medicaid, and on national health expenditures in the U.S.
    The Office of the Actuary at CMS provides actuarial, 
economic, and other technical assistance to policymakers both 
in the administration and in Congress. We do this on an 
independent basis, objectively, and also on a nonpartisan 
basis. The Office of the Actuary has performed this role for 
more than the last 45 years, since even before the enactment of 
the Medicare program.
    I am appearing today in my role as an independent adviser 
to Congress; and I am joined by John Chateau, who is a Fellow 
of the Society of Actuaries. He is the Director of our Medicare 
and Medicaid Cost Estimates Group in the Office of the Actuary. 
My statements are my own and do not necessarily represent an 
official position of the Department of Health and Human 
    Over the last couple of years, we have generated a lot of 
information about the financial coverage and other effects of 
the draft health reform legislation and then Affordable Care 
Act as it was finally enacted. My written testimony has a lot 
of detail. There is even more detail than that in the 
memorandum that Representative Van Hollen mentioned, our April 
22nd, 2010, detailed memorandum on the financial impacts.
    Also, the 2010 Medicare Trustees Report has a lot of 
information about the financial status of Medicare under the 
Affordable Care Act.
    We also have a September, 2010, article that has 
projections of national health expenditures under the new 
legislation; and we just recently came out with our 2010 
actuarial report on the financial outlook for Medicaid, which 
is now available on the CMS Web site, as are all these other 
    The Affordable Care Act has a major impact on the coverage 
status or the insured status of people in the U.S. As 
Representative Van Hollen mentioned, we have estimated that by 
2019 the number of people who lack health insurance would be 
reduced by about 34 million people because of the Affordable 
Care Act. As part of this, it increases Medicaid enrollment by 
an estimated 20 million; and it would also provide private 
health insurance through the health insurance exchanges to an 
estimated 16 million people who were previously uninsured.
    Now, the overall impact on people who currently have 
employer-sponsored health insurance is mixed. For many people, 
they would now have the opportunity to get this coverage, or at 
least they would be more inclined to take the coverage that is 
currently offered. For some other people, however, their 
employers might be more inclined to drop the coverage that 
already exists. On balance, we saw only a slight reduction, a 
very small reduction, in the total, but keep in mind that is 
made up of an increase followed by a decrease.
    The Affordable Care Act has effects for Federal 
expenditures and, within that, for the Medicare program and the 
Medicaid program; and it also has effects on total U.S. health 
care spending. I will run briefly through the key pieces of 
    Our estimate for the period fiscal years 2010 through 2019, 
during which the reforms are only partially implemented, our 
estimate is that the coverage expansions through Medicaid and 
through the exchange coverages would increase Federal costs by 
a total of about $828 billion; and that is a net total, taking 
into account the additional penalty receipts we would receive 
for employers or individuals who did not participate or did not 
offer or have health insurance coverage.
    About half of the $828 billion net increase is due to the 
expansion of Medicaid coverage; and the other half, roughly, is 
due to the Federal subsidies that will be available for people 
with exchange coverage and low enough levels of income.
    The projected Medicare savings under the Affordable Care 
Act are estimated to offset about $575 billion of this total 
cost that I just mentioned. Some of this, the largest part, is 
made up through lower payment rates to Medicare providers and 
lower payment updates in the future, which together over this 
10-year period would save about $233 billion.
    The Act also specifies lower Medicare Advantage benchmarks, 
the payment comparisons that private health insurance plans are 
judged against when Medicare sets their payment rates. We 
estimate that would save $145 billion over this period. And 
then there are higher hospital insurance payroll taxes, an 
additional 0.9 percent for people with high levels of earnings, 
and that would generate another $63 billion.
    There are a number of other smaller impacts, both within 
Medicare and Medicaid and also in the immediate insurance 
reforms, the class of Federal long-term care insurance program 
and so forth that we can talk about in more detail if it would 
be helpful.
    We have estimated, as we saw in the chart earlier from 
Representative Van Hollen, that the Affordable Care Act Care 
Act would cause an increase in total national health 
expenditures in the U.S. The total over the 2010-2019 period is 
estimated to be $311 billion, which is, as his graph showed, a 
little less than 1 percent.
    As you would expect from our conversation just now, there 
is a substantial increase in total health spending associated 
with the coverage expansions. People, individuals, and families 
who have health insurance tend to spend considerably more for 
health care than people who do not have health insurance. So 
with 34 million more people gaining health insurance, you would 
expect a higher level of expenditures. That is offset somewhat 
because many of these people will be on Medicaid where the 
payment rates to providers are very low. So it is a relatively 
inexpensive way of giving people health insurance coverage, and 
it has its own set of issues that we could talk about.
    There are partially offsetting reductions in total national 
health expenditures because of the Medicare savings; and, also, 
there are lower out-of-pocket payments by individuals. When 
people get health insurance coverage, typically they don't have 
to pay nearly so much. They will get more services, but the 
cost sharing on the new higher level of services is typically 
less than what they were paying when they had to pay everything 
for a lower level of services. So we would also expect a 
significant level of reduction in out-of-pocket costs.
    As many of you know, the Board of Trustees for Medicare and 
I have expressed some concerns about the Medicare provider 
payment reductions that are required under the Affordable Care 
Act. In particular, the Act specifies permanent annual payment 
updates for most categories of providers that equal the 
increase in their input prices. In other words, the price 
increases they have to pay to get office space, to pay energy, 
to pay fringe benefits for their staff, their wages, supplies, 
you name it.
    Normally in the past, that is how we have updated provider 
payments, by the increase in their input prices. In the future, 
under the Affordable Care Act, we will pay them based on the 
increase in their input prices minus the increase in economy 
wide, multi-factor productivity.
    There are reasons for considering such a change, but it is 
doubtful that many health care providers can match or have 
their own productivity increase at the same rate as in the 
economy at large, where you have manufacturing and other high-
productivity sectors.
    Now, over time, the payment rates, the Medicare payment 
rates, for affected providers will grow at a rate that is about 
1.1 percent less than the increase in their input prices. 
Unless providers can improve their productivity or find other 
efficiencies, over time the payment rates will become 
inadequate to cover their input costs. Without legislation to 
do something about all of this, providers might have to end 
their participation in Medicare and that would have possible 
adverse consequences for beneficiaries' ability to access 
health care.
    Now, much more likely than that scenario is, if the payment 
rates become inadequate, you and your colleagues will act to do 
something about the inadequate payment rates, much as you have 
had to do for many years now to address the physician payment 
reductions that would be required under current law because of 
the sustainable growth rate formula. But if Congress does have 
to act to override these payment adjustments, that means that 
actual future costs for Medicare would be higher, considerably 
higher in fact, than what we are projecting under current law. 
Put another way, the Medicare savings we just discussed under 
the Affordable Care Act would be lower.
    I would like to sum up by saying that there is a 
substantial degree of uncertainty associated with anybody's 
projections of the financial impacts of the Affordable Care 
Act. It is very difficult to anticipate and accurately predict 
how individuals or employers or health care providers will 
respond to the many new features and different aspects of 
health care that result from the Affordable Care Act. We will 
be paying close attention to new information as it becomes 
available, and we will update our estimates periodically to 
reflect the new information.
    I hope this information will be helpful to you all and to 
your colleagues as you continue to debate these difficult 
issues, and I would like to pledge the Office of the Actuary's 
continuing assistance to your efforts to determine the optimal 
solutions to the financial and other challenges facing health 
care in the U.S.
    I would be happy to answer any questions you have.
    [The prepared statement of Richard S. Foster follows:]

    Prepared Statement of Richard S. Foster, F.S.A., Chief Actuary,
                Centers for Medicare & Medicaid Services

    Chairman Ryan, Representative Van Hollen, distinguished Committee 
members, thank you for inviting me to testify today about the impact of 
the Patient Protection and Affordable Care Act, as amended by the 
Health Care and Education Reconciliation Act of 2010, on the Medicare 
and Medicaid programs and on total health expenditures in the U.S.
    I would like to begin by saying a little about the role of the 
Office of the Actuary at the Centers for Medicare & Medicaid Services. 
We have the responsibility to provide actuarial, economic, and other 
technical assistance to policy makers in the Administration and 
Congress on an independent, objective, and nonpartisan basis. Our 
highest priority is to help ensure that policy makers have the most 
reliable technical information possible as they work to sustain and 
improve Medicare and Medicaid. The Office of the Actuary has performed 
this role on behalf of Congress and the Administration since the 
enactment of these programs over 45 years ago. We have also provided 
actuarial estimates for various past national health reform 
initiatives, including the proposed Health Security Act in 1993-1994 
and the Affordable Care Act as it was developed and enacted in 2009-
    I am appearing before your Committee today in my role as an 
independent technical advisor to Congress. My statements, estimates, 
and other information provided in this testimony are my own and do not 
represent an official position of the Department of Health & Human 
Services or the Administration. Unless noted otherwise, the estimates 
used in this testimony are drawn from my memorandum of April 22, 2010, 
``Estimated Financial Effects of the `Patient Protection and Affordable 
Care Act,' as Amended.'' This memorandum and the other documents to 
which I refer are available on the CMS website at http://www.cms.gov/
ActuarialStudies/. We are in the process of updating many of these 
estimates for use in the President's 2012 Budget and in a forthcoming 
article on national health expenditure projections. Although some of 
the updates will be significant, they will not substantially change the 
overall outlook for the financial effects of the Affordable Care Act as 
described in this testimony.
                          affordable care act
    The March 2010 health care reform legislation, generally known as 
the Affordable Care Act, affects nearly every aspect of health care in 
the U.S. Among its many provisions expected to have a significant 
financial effect, the Act:
     Mandates coverage for health insurance in 2014 and 
later.--Establishes Health Insurance Exchanges.
      -Provides Federal subsidies for Exchange insurance premiums and 
cost-sharing requirements.
      -Provides temporary tax credits for small businesses that offer 
health coverage.
      -Imposes penalties on some individuals who forgo coverage.
      -Imposes penalties on large employers that do not offer health 
insurance to workers.
     Expands Medicaid eligibility and makes other changes to 
Medicaid and the Children's Health Insurance Program (CHIP).--Increases 
income threshold from less than 100 percent of Federal Poverty Level 
(FPL) to 138 percent.
      -Extends coverage to those without specific non-income qualifying 
factors (e.g., disability).
      -Increases Medicaid prescription drug rebates.
      -Reduces Medicaid disproportionate share hospital (DSH) 
      -Introduces Medicaid ``Community First Choice Option'' and other 
changes to encourage home and community-based services.
      -Raises Federal matching rates for States with existing 
childless-adult coverage expansions.
      -Temporarily increases Medicaid payments to primary care 
      -Extends CHIP funding for 2014 and 2015.
     Implements numerous Medicare changes.--Permanently reduces 
Medicare payment updates for most categories of providers by the 
increase in economy-wide multifactor productivity (approximately 1.1 
percent per year).
      -Reduces Medicare Advantage payment benchmarks and permanently 
extends the authority to adjust for coding intensity.
      -Reduces Medicare DSH payments and refines imaging payments.
      -Creates an Independent Payment Advisory Board together with 
Medicare expenditure growth rate targets.
      -Increases the HI payroll tax rate by 0.9 percentage point for 
individuals with earnings above $200,000 and families above $250,000 
and raises Part D premiums for single enrollees with incomes above 
$85,000 or couples above $170,000.
      -Phases out the Part D coverage gap (``donut hole'').
      -Initiates numerous quality- and coverage-related Medicare 
provisions, including reporting of physician quality measures, reducing 
payments in cases involving hospital-acquired infections, reducing 
readmissions, and implementing evidence-based coverage of preventive 
      -Creates a Center for Medicare and Medicaid Innovation in CMS for 
testing alternative models of health care delivery systems, payment 
methods, etc. and establishes a Medicare Shared Savings Program for 
accountable care organizations (ACOs).
     Implements certain immediate insurance reforms.--Minimum 
coverage requirements.
      -Pre-existing Condition Insurance Plan for those uninsured for at 
least 6 months.
      -Federal reinsurance for employer-sponsored early retiree plans.
      -Expansion of dependent coverage to age 26.
     Creates Federal Community Living Assistance Services and 
Supports (CLASS) long-term care insurance program.
     Supports comparative effectiveness research.
     Adds new taxes and fees.--Excise tax on high-cost employer 
health plans.
      -Taxes or fees on insurance plans, prescription drug 
manufacturers, device makers.
      -Additional 0.9-percent HI payroll tax on high earners.
      -Additional 3.8-percent tax on high investment returns, other 
non-earnings income.
    As described in more detail in my April 22, 2010 memorandum, the 
Affordable Care Act is estimated to reduce the number of uninsured 
persons in the U.S. by 34 million in 2019. Approximately 18 million 
would gain Medicaid coverage as a result of the expansion of 
eligibility criteria. (In addition, roughly 2 million people with 
employer-sponsored health insurance would enroll in Medicaid for 
supplemental coverage.) Another 16 million uninsured persons would 
receive individual insurance coverage through the newly created 
Exchanges, with the majority of these qualifying for Federal premium 
and cost-sharing subsidies. Finally, we estimate that the number of 
individuals with employer-sponsored health insurance would decrease 
slightly overall, reflecting both gains and losses in such coverage 
under the Affordable Care Act.
    estimated impact of affordable care act on federal expenditures
    The table shown on the following page presents the estimated 
financial effects of selected provisions in the Affordable Care Act on 
the Federal Budget in fiscal years 2010-2019. For convenience of 
presentation, the provisions of the legislation are grouped into six 
major categories:
    (i) Coverage provisions, which include the mandated coverage for 
health insurance, the expansion of Medicaid eligibility, and the 
additional funding for CHIP;
    (ii) Medicare provisions;
    (iii) Medicaid and CHIP provisions other than the coverage 
expansion and CHIP funding;
    (iv) Provisions aimed in part at changing the trend in health 
spending growth;
    (v) The CLASS program; and
    (vi) Immediate health insurance reforms.
    The estimated costs and savings shown in the table are based on the 
effective dates specified in the law as enacted. We assume that 
employers and individuals would take roughly 3 to 5 years to fully 
adapt to the new insurance coverage options and that the enrollment of 
additional individuals under the Medicaid coverage expansion would be 
completed by the third year of implementation. Because of these 
transition effects and the fact that most of the coverage provisions 
would be in effect for only 6 of the 10 years of the budget period, the 
cost estimates shown in this memorandum do not represent a full 10-year 
cost for the new legislation.

    As indicated, the provisions in support of expanding health 
insurance coverage (including the Medicaid eligibility changes and 
extended CHIP funding) are estimated to cost $828 billion through 
fiscal year 2019, net of penalty receipts from nonparticipating 
individuals and employers. The Medicare, other Medicaid and CHIP, 
growth-trend, CLASS, and immediate reform provisions are estimated to 
result in net savings of about $577 billion, leaving a net overall cost 
for this period of $251 billion before consideration of additional 
Federal administrative expenses and the increase in Federal revenues 
that would result from the excise tax on high-cost employer-sponsored 
health insurance coverage and certain other revenue provisions. (The 
new Supplementary Medical Insurance revenues from fees on brand-name 
prescription drugs under section 9008 of the Affordable Care Act, and 
the higher Hospital Insurance payroll tax income under section 9015, 
are included in the estimated Medicare savings shown here.) The 
Congressional Budget Office and the Joint Committee on Taxation have 
estimated that the total net amount of Medicare savings and additional 
tax and other revenues would somewhat more than offset the cost of the 
national coverage provisions, resulting in an overall reduction in the 
Federal deficit through 2019.
 estimated impact of affordable care act on medicare expenditures and 
    Net Medicare savings are estimated to total $575 billion for fiscal 
years 2010-2019. Substantial savings are attributable to provisions 
that would, among other changes, reduce Part A and Part B payment 
levels and reduce future ``market basket'' payment updates by the 
increase in economy-wide multifactor productivity ($233 billion); 
eliminate the Medicare Improvement Fund ($27 billion); reduce DSH 
payments ($50 billion); reduce Medicare Advantage payment benchmarks 
and permanently extend the authority to adjust for coding intensity 
($145 billion); freeze the income thresholds for the Part B income-
related premium for 9 years ($8 billion); implement an Independent 
Payment Advisory Board together with strict Medicare expenditure growth 
rate targets ($24 billion); and increase the HI payroll tax rate by 0.9 
percentage point for individuals with earnings above $200,000 and 
families above $250,000 ($63 billion). Other provisions would generate 
relatively smaller amounts of savings, through such means as reporting 
physician quality measures, reducing payments in cases involving 
hospital-acquired infections, reducing readmissions, refining imaging 
payments, increasing Part D premiums for higher-income beneficiaries, 
and implementing evidence-based coverage of preventive services.
    These savings are slightly offset by the estimated costs of closing 
the Part D coverage gap ($12 billion); reducing the growth in the Part 
D out-of-pocket cost threshold ($1 billion); extending a number of 
special payment provisions scheduled to expire, such as the 
postponement of therapy caps ($5 billion); and improving preventive 
health services and access to primary care ($6 billion).
    As noted below, the Affordable Care Act authorizes a substantial 
program of research, development, and testing for innovative new health 
delivery systems and payment methods. This program has significant 
potential for improvements in the quality and cost efficiency of health 
care, but its effects on Medicare expenditures cannot be assessed until 
specific plans have been developed and tested.
    The following chart shows actual past Medicare expenditures as a 
percentage of gross domestic product (GDP), together with estimated 
future amounts for 2010-2019 under the Affordable Care Act and under 
the prior law. Of the estimated net total Medicare savings of $575 
billion over this period, $486 billion is attributable to a net 
reduction in Medicare expenditures (with the balance due to increased 
revenues from taxes and fees). The chart illustrates the expenditure 
impact only.
    By 2019, the net reduction in Medicare expenditures is estimated to 
be 0.5 percent of GDP, which represents an 11-percent decrease from the 
level projected prior to the Affordable Care Act. This percentage 
reduction would grow larger over time as a result of the compounding 
effect of the slower annual updates in Medicare payment rates for most 
categories of health care providers.

    Based on the estimated savings for Part A of Medicare, the assets 
of the Hospital Insurance trust fund would be exhausted in 2029 
compared to 2017 under the prior law--an extension of 12 years. The 
combination of lower Part A costs and higher tax revenues results in a 
lower Federal deficit based on budget accounting rules. However, trust 
fund accounting considers the same lower expenditures and additional 
revenues as extending the exhaustion date of the HI trust fund. In 
practice, the improved HI financing cannot be simultaneously used to 
finance other Federal outlays (such as the coverage expansions) and to 
extend the trust fund, despite the appearance of this result from the 
respective accounting conventions. Conversely, expenditure reductions 
under Part B translate directly to lower financing requirements from 
general revenues and beneficiary premiums, since financing is re-
established annually to match program costs. Thus, in the case of Part 
B, the savings under the Affordable Care Act are not needed to help pay 
for future benefit costs, and the full reduction in Federal general 
revenues attributable to such savings can be used to offset other 
Federal costs, such as those arising under the health reform coverage 
expansions. (Part D expenditures will increase under the Affordable 
Care Act, requiring additional Federal general revenue financing.) More 
detailed information on the financial status of the Medicare trust 
funds is available in the 2010 Medicare Trustees Report.
    It is important to note that the estimated savings for one category 
of Medicare provisions may be unrealistic. The Affordable Care Act 
requires permanent annual productivity adjustments to price updates for 
most providers (such as hospitals, skilled nursing facilities, and home 
health agencies), using a 10-year moving average of economy-wide 
private, non-farm productivity gains. While such payment update 
reductions will create a strong incentive for providers to maximize 
efficiency, it is doubtful that many will be able to improve their own 
productivity to the degree achieved by the economy at large.\1\
    \1\ The provision of most health services tends to be very labor-
intensive. Economy-wide productivity gains reflect relatively modest 
improvements in the service sector together with much larger 
improvements in manufacturing. Except in the case of physician 
services, I am not aware of any empirical evidence demonstrating the 
medical community's ability to achieve productivity improvements equal 
to those of the overall economy. The Office of the Actuary's most 
recent analysis of hospital productivity highlights the difficulties in 
measurement but suggests that such productivity has been small or 
negligible during 1981 to 2005. (See http://www.cms.hhs.gov/
    The following chart illustrates the very large differential that 
would accumulate over long periods between the prices that health care 
providers have to pay to obtain the inputs they need to provide health 
care services and the corresponding Medicare payment rates. In 
practice, providers have few alternatives to paying market-based 
increases in wages and fringe-benefit costs for their employees. 
Similarly, price increases for office space, energy, utilities, and 
medical equipment and supplies are generally outside of providers' 

    Over time, a sustained reduction in payment updates, based on 
productivity expectations that are difficult to attain, would cause 
Medicare payment rates to grow more slowly than, and in a way that was 
unrelated to, the providers' costs of furnishing services to 
beneficiaries. Thus, providers for whom Medicare constitutes a 
substantive portion of their business could find it difficult to remain 
profitable and, absent legislative intervention, might end their 
participation in the program (possibly jeopardizing access to care for 
beneficiaries). Simulations by the Office of the Actuary suggest that 
roughly 15 percent of Part A providers would become unprofitable within 
the 10-year projection period as a result of the productivity 
adjustments.\2\ Although this policy could be monitored over time to 
avoid such an outcome, changes would likely result in smaller actual 
savings than described here for these provisions.
    \2\ The simulations were based on actual fiscal year 2007 Medicare 
and total facility margin distributions for hospitals, skilled nursing 
facilities, and home health agencies. Provider revenues and 
expenditures were projected using representative growth rates and the 
Office of the Actuary's best estimates of achievable productivity gains 
for each provider type, and holding all other factors constant.
    In their 2010 report to Congress on the financial status of the 
program, the Medicare Board of Trustees cautioned:
    The Affordable Care Act improves the financial outlook for Medicare 
substantially. However, the effects of some of the new law's provisions 
on Medicare are not known at this time, with the result that the 
projections are much more uncertain than normal, especially in the 
longer-range future. For example, the ACA initiative for aggressive 
research and development has the potential to reduce Medicare costs in 
the future; however, as specific reforms have not yet been designed, 
tested, or evaluated, their ability to reduce costs cannot be estimated 
at this time, and thus no specific savings have been reflected in this 
report for the initiative.
    Another important example involves lower payment rate updates to 
most categories of Medicare providers in 2011 and later. These updates 
will be adjusted downward by the increase in productivity experienced 
in the economy overall. Since the provision of health services tends to 
be labor-intensive and is often customized to match individuals' 
specific needs, most categories of health providers have not been able 
to improve their productivity to the same extent as the economy at 
large. Over time, the productivity adjustments mean that the prices 
paid for health services by Medicare will grow about 1.1 percent per 
year more slowly than the increase in prices that providers must pay to 
purchase the goods and services they use to provide health care 
services. Unless providers could reduce their cost per service 
correspondingly, through productivity improvements or other steps, they 
would eventually become unwilling or unable to treat Medicare 
    It is possible that providers can improve their productivity, 
reduce wasteful expenditures, and take other steps to keep their cost 
growth within the bounds imposed by the Medicare price limitations. 
Similarly, the implementation of payment and delivery system reforms, 
facilitated by the ACA research and development program, could help 
constrain cost growth to a level consistent with the lower Medicare 
payments. These outcomes are far from certain, however. Many experts 
doubt the feasibility of such sustained improvements and anticipate 
that over time the Medicare price constraints would become unworkable 
and that Congress would likely override them, much as they have done to 
prevent the reductions in physician payment rates otherwise required by 
the sustainable growth rate formula in current law.
    The annual report to Congress on the financial status of Medicare 
must be based on current law. In this report, the productivity 
adjustments are assumed to occur in all future years, as required by 
the Affordable Care Act. In addition, reductions in Medicare payment 
rates for physician services, totaling 30 percent over the next 3 
years, are assumed to be implemented as required under current law, 
despite the virtual certainty that Congress will continue to override 
these latter reductions.
    In view of the factors described above, it is important to note 
that the actual future costs for Medicare are likely to exceed those 
shown by the current-law projections in this report. We recommend that 
the projections be interpreted as an illustration of the very favorable 
financial outcomes that would be experienced if the productivity 
adjustments can be sustained in the long range--and we caution readers 
to recognize the great uncertainty associated with achieving this 
outcome. Where possible, we illustrate the potential understatement of 
Medicare costs and projection results by reference to an alternative 
projection that assumes--for purposes of illustration only--that the 
physician fee reductions are overridden and that the productivity 
adjustments are gradually phased out over the 15 years starting in 
    The following chart shows long-range projections of total Medicare 
expenditures, as a per-centage of GDP, under three scenarios. The 
substantial impact of the Affordable Care Act on expenditures is 
apparent by comparing the current-law projections from the 2010 
Trustees Report (which includes the effect of all ACA provisions) to 
the corresponding projections from the 2009 Trustees Report (pre-ACA). 
Medicare expenditures in 2030 are currently projected to be about 20 
percent lower than shown in the 2009 report, primarily as a result of 
the Affordable Care Act provisions. By 2050 and 2080, the projected 
difference increases to 32 and 43 percent, respectively.

    The growing difference between the current-law and prior-law 
projections in the long range is primarily attributable to the 
compounding effect of the slower Medicare price updates. To help assess 
the potential understatement of Medicare costs under current law, the 
Board of Trustees asked the Office of the Actuary to make projections 
under an illustrative alternative to current law. The alternative 
assumes that (i) Medicare payment updates for physicians would be based 
on the Medicare Economic Index, rather than the sustainable growth rate 
(SGR) formula, and (ii) the productivity adjustments to most other 
categories of providers would be gradually phased out after 2019. As 
indicated in the chart above, Medicare costs under the illustrative 
alternative to current law would be substantially greater than the 
current-law projections. It is important to note that the illustration 
represents only a means by which to consider the potential 
understatement of costs under current law. No endorsement of the 
illustrative payment changes by the Trustees, CMS, or the Office of the 
Actuary should be inferred.
      estimated impact of affordable care act on medicaid and chip
    The Affordable Care Act is estimated to add a total of $455 billion 
to aggregate Medicaid expenditures during fiscal years 2010-2019, an 
increase of about 8 percent. Federal expenditures represent the great 
majority ($434 billion) of this projected increase, equivalent to a 13-
percent increase compared to prior law. State expenditures are 
projected to expand only $21 billion (or about 1 percent). The Federal 
government participation is relatively larger than for current Medicaid 
expenditures because the Affordable Care Act specifies a much higher 
Federal matching rate for newly eligible beneficiaries, ranging from 
100 percent in fiscal years 2014, 2015, and 2016 to 90 percent by 2020 
and beyond.
    The most significant provision, measured by its impact on 
expenditures and enrollment, is the expansion of Medicaid eligibility 
to all persons under age 65 living in families with incomes below 138 
percent of FPL beginning in 2014. This expansion is projected to add 
more than 20 million Medicaid enrollees by 2019, an increase of about 
one-third compared to the prior law (including an estimated 2 million 
individuals with employer-sponsored health insurance who would enroll 
for supplementary coverage through Medicaid). About three-quarters of 
the additional enrollees are expected to be adults and the remaining 
one-quarter to be children.\3\ The percentage increase in Medicaid 
expenditures will be considerably lower than the increase in 
enrollment, since adults and children have much lower average health 
care costs than aged and disabled enrollees.
    \3\ In addition to the higher level of allowable income, the 
Affordable Care Act expands eligibility to people under age 65 who have 
no other qualifying factors that would have made them eligible for 
Medicaid under prior law, such as being under age 18, disabled, 
pregnant, or parents of eligible children. The estimated increase in 
Medicaid enrollment is based on an assumption that Social Security 
benefits would continue to be included in the definition of income for 
determining Medicaid eligibility. If a strict application of the 
modified adjusted gross income definition is instead applied, as may be 
intended by the Act, then an additional 5 million or more Social 
Security early retirees would be potentially eligible for Medicaid 
    The Affordable Care Act also provides for additional funding for 
the CHIP program, for 2014 and 2015, which would increase such 
expenditures by an estimated $29 billion.
    The total net Federal cost of the other Medicaid and CHIP 
provisions is estimated to be $28 billion in fiscal years 2010-2019 and 
reflects numerous cost increases and decreases under the individual 
provisions. Those with significant Federal savings include various 
provisions increasing the level of Medicaid prescription drug rebates 
($24 billion) and reductions in Medicaid DSH expenditures ($14 
billion). Interactions between the different sections of the Affordable 
Care Act, such as the lower Medicare Part B premiums, contribute an 
additional $9 billion in reduced Medicaid outlays.
    The key provisions that would increase Federal Medicaid and CHIP 
costs are the Medicaid ``Community First Choice Option'' and other 
changes to encourage home and community-based services ($29 billion), 
higher Federal matching rates for States with existing childless-adult 
coverage expansions ($24 billion), a temporary increase in payments to 
primary care physicians ($11 billion), and increased payments to the 
Territories ($7 billion). The net impact of the Medicaid and CHIP 
provisions on State Medicaid costs is a reduction totaling $33 billion 
through fiscal year 2019. These savings result in part because certain 
of the provisions reallocate costs from States to the Federal 
    The following chart shows past Medicaid and CHIP expenditures 
(Federal plus State) as a percentage of GDP, together with 10-year 
projections under the Affordable Care Act and prior law.

   estimated impact of affordable care act on total national health 
    The estimated effects of the Affordable Care Act on overall 
national health expenditures (NHE) are shown by the ``net total'' curve 
in the following chart. In aggregate, we estimate that for calendar 
years 2010 through 2019, NHE would increase by $311 billion, or 0.9 
percent, compared to prior law. Year by year, the relative increases 
are largest in 2016, when the coverage expansions would be fully phased 
in (2.0 percent), and gradually decline thereafter to 1.0 percent in 

    The net total increase in NHE reflects several large--and largely 
offsetting--effects on expenditures by private health insurance, 
Medicare, Medicaid, and individuals' own out-of-pocket costs, as shown 
by the columns in the chart above. Health expenditures are expected to 
increase by about $200 billion annually due to the substantial 
expansions of coverage under the Affordable Care Act. Numerous studies 
have demonstrated that individuals and families with health insurance 
use more health services than otherwise-similar persons without 
insurance. Under the health reform legislation, by 2019 an estimated 34 
million currently uninsured people would gain comprehensive coverage 
through the health insurance Exchanges, their employers, or Medicaid. 
The availability of coverage would typically result in a fairly 
substantial increase in the utilization of health care services, with a 
corresponding impact on total health expenditures. These higher costs 
would be partially offset by the sizable discounts imposed on providers 
by State Medicaid payment rules and by the significant discounts 
negotiated by private health insurance plans. We estimate that the net 
effect of the utilization increases and price reductions arising from 
the coverage provisions of the Affordable Care Act would increase NHE 
in 2019 by about 3.4 percent.
    The Affordable Care Act will also affect aggregate NHE through the 
Medicare savings provisions. We estimate that these impacts would 
reduce NHE by roughly 2.4 percent in 2019, assuming that the 
productivity adjustments to Medicare payment updates can be sustained 
through this period. The legislation would have only a slight impact on 
the utilization of health care services by Medicare beneficiaries 
(subject to the caveat mentioned previously regarding possible access 
issues if Medicare payment rates become inadequate). As shown in the 
chart, the Medicare savings accumulate rapidly, principally due to the 
compounding effect of the slower payment updates for most categories of 
    As indicated in the chart, out-of-pocket spending would be reduced 
significantly by the Affordable Care Act (an estimated net total 
decline of $237 billion in calendar years 2010-2019). This reduction 
reflects the net impact of (i) the substantial coverage expansions 
through Medicaid and the health insurance Exchanges, (ii) the 
significant cost-sharing subsidies for low-to-middle-income persons 
with Exchange coverage, (iii) the maximum out-of-pocket limitations 
associated with the qualified health benefit, (iv) lower cost-sharing 
payments by beneficiaries in fee-for-service Medicare, (v) higher cost-
sharing payments by Medicare Advantage enrollees, and (vi) the 
increases in workers' cost-sharing obligations in plans affected by the 
excise tax on high-cost employer-sponsored health insurance coverage.
    A number of the other provisions in the Affordable Care Act would 
also affect national health expenditures during 2010-2019, although the 
magnitude of these effects would be much smaller than the financial 
effects of the coverage expansions and Medicare savings provisions. 
These other provisions include the immediate insurance reforms in Title 
I; comparative effectiveness research; the excise tax on high-cost 
employer health plans; fees on health insurance plans and on 
manufacturers and importers of brand-name prescription drugs; and an 
excise tax on non-personal-use retail sales by manufacturers and 
importers of medical devices. The effects of these provisions are 
included in the respective categories of national health expenditures 
shown in preceding chart.
    Compared to prior law, the level of total national health 
expenditures is estimated to be higher through 2019 under the 
Affordable Care Act, but two particular provisions of the legislation 
would help reduce NHE growth rates after 2016. Specifically, the 
productivity adjustments to most Medicare payment updates would reduce 
NHE growth by about 0.10 to 0.15 percent per year. In addition, the 
excise tax on high-cost employer health plans would exert a further 
decrease in NHE growth rates of an estimated 0.05 percent in 2019 and 
slightly more than that for some years thereafter. Although these 
growth rate differentials are not large, over time they would have a 
noticeable downward effect on the level of national health 
expenditures. Such an outcome, however, would depend critically on the 
sustainability of both provisions. As discussed previously, the 
Medicare productivity adjustments could become unsustainable even 
within the next 10 years, and over time the reductions in the scope of 
employer-sponsored health insurance could also become an issue. For 
these reasons, the estimated reductions in NHE growth rates after 2016 
may not be fully achievable.
    The Affordable Care Act makes far-reaching changes to most aspects 
of health care in the U.S., including mandated coverage for most 
people, required payments by large employers not offering insurance, 
expanded eligibility for Medicaid, Federal premium and cost-sharing 
subsidies for many individuals and families, a new system of health 
benefits Exchanges for facilitating coverage, and a new Federal 
insurance program in support of long-term care. Additional provisions 
will reduce Medicare outlays, make other Medicaid modifications, 
provide more funding for the CHIP program, add certain benefit 
enhancements for these programs, and combat fraud and abuse. Federal 
revenues will be increased through an excise tax on high-cost insurance 
plans; fees or excise taxes on drugs, devices, and health plans; higher 
Hospital Insurance payroll taxes for high-income taxpayers; a new tax 
on investment revenues and other unearned income; and other provisions.
    In our independent capacity as technical advisors to the 
Administration and Congress, the Office of the Actuary at CMS has 
estimated the effects of the non-tax provisions of the Affordable Care 
Act on Federal outlays, overall national health expenditures, and 
health insurance coverage in the U.S. Our estimates are based on 
available data sources and what we believe are reasonable assumptions 
regarding individual, employer, and health plan responses to the 
legislation, together with analyses of the likely changes in the cost 
and use of health care services. In view of the complexity and scope of 
these changes, estimates of their financial and other effects are 
necessarily very uncertain. As the Affordable Care Act provisions are 
finalized through regulations, and as providers, employers, and 
individuals respond to the requirements and opportunities in the 
legislation, we will continue to monitor developments and to update our 
estimates for Medicare, Medicaid, CHIP, and total national health 
expenditures as necessary.
    I hope that the information presented here is of value to policy 
makers, and I pledge the Office of the Actuary's continuing assistance 
to the joint effort by the Administration and Congress to determine 
optimal solutions to the financial challenges associated with health 
care in the U.S. I would be happy to answer any questions you might 

    Chairman Ryan. Thank you, Rick--Mr. Foster.
    Let me get into the sustainability of the cost-saving 
claims surrounding this law. I want to look at your analysis 
dated April 22nd of the new law.
    On page 10 of your analysis--and you came to the Fiscal 
Commission, which I served on, and went through great detail on 
this--I will just quote a couple of things, because I am trying 
to understand sort of the reliability of these cost savings.
    ``Simulations by the Office of the Actuary suggest that 
roughly 15 percent of Part A providers will become unprofitable 
within the 10-year projection period as a result of 
productivity adjustments.''
    Are you basically saying within a 10-year period you 
believe about 15 percent of Part A providers just will stop 
taking Medicare or will go bankrupt?
    Mr. Foster. If nothing else happens other than they have 
these lower payment rates under the Affordable Care Act, then 
we looked provider by provider for hospitals, skilled nursing 
facilities, and home health agencies and determined that 15 
percent of them within the 10 years would have total facility 
margins, profit margins, that were negative. In other words, 
these were providers that start off now with some positive 
level but that would turn negative within the 10 years because 
of the difference in Medicare payment rates.
    Now, the response to that, we didn't go into that. Would 
they merge? Would they go out of business? How else would they 
deal with it?
    Chairman Ryan. Which leads to the next two paragraphs down, 
where you say, ``In general, limiting cost growth to a level 
below medical price inflation alone would represent an 
exceedingly difficult challenge. Actuarial Medicare cost growth 
per beneficiary was below the target level in only four of the 
last 25 years, with three of those years immediately following 
the Balanced Budget Act of 1997. The impact of the BBA prompted 
Congress to pass legislation in 1999 and 2000 moderating many 
of the BBA projections.''
    So basically what you are saying is not unlike what 
happened in the last decade. Congress went too far from the 
perspective of providers and took a lot of the savings back, 
and you are basically suggesting that is probably the kind of 
pressure we are going to face again?
    Mr. Foster. Yes. The possibility is definitely there.
    In the Balanced Budget Act, of course, we did see then a 
few years later the Balanced Budget Refinement Act and the 
Benefit Improvements and Protection Act that had to undo some 
of the Balanced Budget Act savings.
    I would like to mention, Representative Ryan, that the 
quote you referred to has to do with the Independent Payment 
Advisory Board, which is charged with keeping Medicare cost 
growth rates during 2015 through 2019 to increase no more than 
the average of the regular CPI and the medical CPI. That is the 
demanding target that I referred to, and the fact that it has 
only happened a few times in history is judged against that 
standard, the average of the CPI and the medical CPI.
    Chairman Ryan. And that is the basic claim for the savings 
in the second decade in the outyears are based upon the 
feasibility of those savings claims, correct?
    Mr. Foster. In part. The standard for the growth rate is 
eased up, and it becomes the growth in GDP plus 1 percent that 
is an easier target to meet. Much of the savings in the second 
decade and third, fourth, fifth, et cetera, would come from the 
compounding effect of these lower price increases that Medicare 
will pay to providers. When something grows at 1.1 percent per 
year slower, that compounds to a lot over long periods of time.
    Chairman Ryan. I think that is a very important point. 
Because, as we look at different plans to deal with this, to 
deal with health care, to modernize Medicare, it is important 
to compare against current law. Current law has enormous 
unfunded liabilities. PPACA does try to lower the prices, lower 
the cost curves, lower reimbursements. All plans do that. So 
when we are taking a look at Medicare reform plans, I think it 
is fair to say the current trajectory is not sustainable, and 
the best question is how best to go about doing it and what 
actually is reliable, what actually is sustainable going 
    You did something in the last trustees' report that I don't 
know I have seen before. You put an appendix to this most 
recent trustees' report which I found very interesting. I 
wanted to kind of get into that very briefly. I will just quote 
a couple of paragraphs from this to try and understand what you 
are getting at here.
    In the appendix to the trustees' report, you more or less 
say, ``For these reasons, the financial projections shown in 
this report for Medicare do not represent a reasonable 
expectation for actual program operations in either the short 
run as a result of the unsustainable reduction in physician 
payment rates or the long range because of the strong 
likelihood that the statutory reductions in price updates for 
most categories of Medicare providers will not be viable.''
    You continue to say, ``While Part B projections in this 
report are reasonable in their portrayal of future costs under 
current law, they are not reasonable as an indication of actual 
future costs. Current law would require physician fee 
reductions totaling an estimated 30 percent over the next 3 
years, an implausible result. By the end of the long-range 
projection period, Medicare prices for hospitals, skilled 
nursing facilities, home health, hospice, ambulatory, surgical 
center, diagnostic laboratory, and many other services would be 
less than half their level under prior law.''
    I think, if I recall, at the Commission you said that 
within 10 years Medicare will be reimbursing providers at rates 
less than Medicaid. Is that the case?
    Mr. Foster. Yes, with two caveats. If you look at the 
average overall for Medicaid reimbursement levels or payment 
levels to providers and if you assume they stay at about the 
same relative level, not be ratcheted down further and further, 
then within 10 years under current law Medicare rates on 
average would actually be lower than that.
    Now, there is a provision in the current law that says you 
can't pay Medicaid any more than Medicare pays, so that 
provision would tend to prevent this from happening. But it is 
an illustration of the fact that the accumulating lower price 
updates will have a significant effect.
    Chairman Ryan. So the best-case scenario under those 
contrasting laws is they are on par with Medicaid?
    Mr. Foster. Yes, that is right.
    Chairman Ryan. Yes. In some States, about 50 percent of 
providers won't even take it. So I think this just illustrates 
that this issue is going to have to--we are going to have to go 
at this again. This is not resolved, this is not fixed, and we 
have our own collision course coming.
    I want to get into one more thing, and then I want to turn 
time over, because I understand the two of us don't have 5-
minute rules, and I want to be respectful of everybody's time.
    I just want to get into whether we can count a dollar 
twice. Is it possible to use Medicare savings like that in this 
new health care law to make the Medicare Trust Fund more 
solvent and to pay for a new health care entitlement? Can the 
same savings accomplish both goals? If the savings are used for 
the new entitlement, what does that mean for Medicare's long-
term solvency? That is the key, critical, double-counting 
thing. There is an issue with trust fund accounting, and there 
is an issue of what actually happens.
    If you could just highlight that and illustrate that for 
me, I would appreciate that.
    Mr. Foster. Sure, I would be glad to.
    My answer is a definitive yes and no. There has been a lot 
of discussion of this, of course. What I would like to do is 
explain how it works, and you can all judge for yourselves.
    It is best done by an example. Suppose that a given person 
will pay $100 more in Medicare hospital insurance payroll taxes 
as a result of the Affordable Care Act. So that person pays the 
extra $100, and it is credited to the Hospital Insurance Trust 
Fund. What that means is the trust fund gets a Treasury 
security worth $100, and it is a bond or whatever, and it will 
be repaid with interest whenever we need it. Now, the actual 
$100 bill, the $100 in cash, sits in the general fund of the 
Treasury and it can be used for any purpose needed to meet 
Federal Government expenditures. Whether that is helping offset 
the cost of the coverage expansions under the Affordable Care 
Act or anything else, that is what will happen. That $100 will 
be spent pretty much immediately.
    Now, the fact that a new amount of $100 came into the 
Treasury, that reduced the Federal budget deficit that would 
have otherwise occurred by $100. So, so far, this Medicare 
savings does reduce the Federal budget deficit and can be used 
to help pay for other expenditures.
    Now, in the future, when we need that $100, we have a 
Treasury bond or an IOU, a pretty good IOU, that says we can 
cash that in and be repaid with interest. So when we need that 
money, we will turn in the bond, we will get the $100, we will 
pay that $100 for the Medicare hospital insurance purpose. So 
it does also extend the life of the trust fund.
    Now, the obvious catch--or at least I hope it is fairly 
obvious--is that $100 can't be spent as $100 towards health 
care reform and as $100 towards Medicare expenditures. That 
takes $200. You only have $100. So you cannot directly use that 
money to do both purposes, and it would be essentially double 
accounting to imply that you can do it directly.
    On the other hand, because of the budget accounting 
principles and the trust fund accounting principles, both of 
these things happen. It reduces the deficit and extends the 
trust fund. The key thing is when you go back to pay back that 
$100, when you turn in the bond, then Treasury has to find 
another $100 someplace, either by borrowing it, which is 
usually the case, or another source of taxation or lower 
expenditures. So when we spend the $100 for Medicare, it has to 
be given to us from another source.
    I hope that clearly lays out how the process works.
    Chairman Ryan. And is that essentially why you put an 
appendix to the trustees' report this time?
    Mr. Foster. Not that so much, Mr. Ryan, as it was that the 
current law projections very likely understate the future costs 
because of these price adjustments, the SGR physician payments, 
et cetera. In our April 22nd memo and in our subsequent memos, 
we have noted that you can't use the same $100 for both 
    Chairman Ryan. Okay. So the two takeaways from the April 
22nd memo and the appendix to the trustees' report--which, like 
I said, I have not seen that before--are you believe these are 
unsustainable, the savings, and $1 cannot be counted twice.
    Mr. Foster. Yes. The $1 can't be counted twice. In terms of 
the unsustainability, that is more judgmental, but I think 
almost every expert I have talked to thinks there is only a 
limited likelihood that that could work in the longer term.
    Chairman Ryan. Thank you.
    Mr. Van Hollen.
    Mr. Van Hollen. Thank you, Mr. Chairman; and, Mr. Foster, 
thank you for your testimony.
    I want to pick up on this line of questioning the chairman 
was pursuing, because I think what you said was very important 
and it is important that everybody in this room understand what 
you said.
    Let's take your example of another $100 coming in from the 
Medicare payroll tax. That $100 comes from the U.S. Government. 
That doesn't make the Medicare system any worse off, does it, 
the $100?
    Mr. Foster. Not any worse off than the situation before the 
$100 arrived.
    Mr. Van Hollen. Correct. It doesn't do any harm to the 
Medicare payment system, correct?
    Mr. Foster. That is correct.
    Mr. Van Hollen. Okay. That $100 does go in, as you said, as 
part of deficit reduction, does it not?
    Mr. Foster. That is correct.
    Mr. Van Hollen. Correct. So it is not a gimmick, is it, to 
say that $100 helps reduce the Federal deficit?
    Mr. Foster. No. By normal budget accounting practices, it 
reduces the Federal budget deficit. In real life, that is 
exactly what would happen.
    Mr. Van Hollen. Right. That reduces the Federal deficits by 
$100, correct?
    Mr. Foster. Yes. It is $100 of new revenues that didn't 
exist before.
    Mr. Van Hollen. Exactly. What you are saying is obviously 
true, that the same dollar cannot be used to actually pay 
future Medicare costs. But, at the same time, what you are 
saying is the way the system works is that that dollar that 
goes to deficit reduction or something else is credited to the 
Medicare account. Isn't that correct?
    Mr. Foster. That is correct.
    Mr. Van Hollen. Okay. So in that sense the obligation of 
the Federal Government to the Medicare program would allow it 
to be extended, isn't that correct?
    Mr. Foster. Yes. Under the trust fund accounting laws.
    Mr. Van Hollen. Yes. Look, this is obvious. I appreciate 
you are saying it wasn't a gimmick, because it does reduce the 
Federal deficit in that example by $100. Now, there is no 
doubt--and if you find real savings, if the law is implemented 
as is, you also get deficit reduction from savings in Medicare, 
    Mr. Foster. That is right.
    Mr. Van Hollen. Ms. Allison Schwartz is going to be talking 
about the reforms that were in the health care reform bill that 
we believe will help bend the cost curve and find productivity 
savings within the system.
    As I understand your earlier point, it was partly a 
political point, right, which is that we will achieve the 
Medicare savings unless this House and the Senate and the 
President all agree to change the law, is that correct?
    Mr. Foster. I would argue with you a little bit on how I 
meant to characterize it. It probably becomes a political issue 
if the payment rates end up not being sustainable.
    Mr. Van Hollen. Correct.
    Mr. Foster. That was my point.
    Mr. Van Hollen. No, I appreciate that. If they are not 
sustainable, that would have to happen.
    Mr. Foster. Yes.
    Mr. Van Hollen. Just a quick point on the SGR, because you 
referenced that. This is the doc fix. This is an example of how 
Congress has had to make adjustments. Isn't it the case we 
would have to deal with the SGR fix, the doc fix, whether or 
not we passed health care reform?
    Mr. Foster. It has to be dealt with one way or the other. 
It is clearly not working.
    Mr. Van Hollen. If the Congress had never passed the health 
care reform law, if we never even talked about it, this 
Congress would still have to deal with that cost of the SGR, 
    Mr. Foster. Yes, that is correct.
    Mr. Van Hollen. Thank you.
    Now, as the chairman said, we have to make policy choices 
here and figure out the best way forward. I think we all agree 
that health care costs in this country have been on a very 
steep upward path and that they are unsustainable and the 
health care reform law begins to make changes to try and change 
that. As I said, Congresswoman Schwartz will be dealing with 
    But I would like to point up a comparison. Because the 
chairman mentioned in his opening remarks that there is an 
alternative plan. What I would like to put up is a page from 
the CBO letter, analysis of the committee, of the chairman's 
plan, of the roadmap plan as it relates to Medicare.
    Let me give you a copy. Why don't you pass these out on 
your side. Obviously you can't read it, so we are handing out 
hard copies.
    So this, as I said, is based on the January, 2010----
    Chairman Ryan. Looking at this, it says it works.
    Mr. Van Hollen [continuing]. CBO analysis.
    Mr. Foster, in your testimony, if you look at page 5, at 
the bottom of the page there is a paragraph that, by 2019, the 
net reduction in Medicare expenditures is estimated to be half 
a percent of GDP. Do you see that?
    Mr. Foster. Yes.
    Mr. Van Hollen. And your response to the chairman's 
questions were that these reductions could conceivably, unless 
adjusted productivity changed and other changes were made, 
could lead to some unsustainability, isn't that right?
    Mr. Foster. Sooner or later, they are almost bound to.
    Mr. Van Hollen. The chairman asked you a question about in 
2019: What would be its impact on providers? I would just ask 
you to look at this CBO analysis--if someone could get Mr. 
Foster a copy, if he doesn't have one. But what it references 
is the year 2020. This is the implementation of the roadmap 
scenario which the chairman referenced. You see that they have 
the alternative fiscal scenario, which is sort of current law, 
and you have got Medicare expenditures there at 4.5 percent of 
GDP. Do you see that? It is the 2020 column, second one down, 
4.2 percent.
    Mr. Foster. 4.2 percent, yes.
    Mr. Van Hollen. Then you see under the roadmap plan, if you 
look under Medicare as a percent of GDP, 3.7 percent. Do you 
see that? The difference is 0.5 percent of GDP.
    Now, in this part of the roadmap plan, that is the first 10 
years, that is before the voucher part gets kicked in. So those 
savings are assumed as a result of a number of things, 
including reducing general fund support for Medicare and that 
kind of stuff.
    But if you were to take that amount of money, 0.5 percent, 
out of GDP through of that method, you would raise the same 
concerns as you have raised with respect to the Affordable Care 
Act, correct?
    Mr. Foster. Possibly. It depends a lot on how it is done, 
and I will confess it has been a couple of years since I have 
taken a close look at Chairman Ryan's roadmap, so I don't 
remember the specifics of the short-term Medicare proposals.
    If they are done largely through slower updates for 
providers, I would have exactly the same concern. If they were 
done through other mechanisms that addressed the, say, fraud, 
waste, and abuse or inefficiency within the current health care 
system, that might be a lot more sustainable.
    We could look and provide an answer for the record.
    Mr. Van Hollen. Right. Well, I mean, in the Affordable Care 
Act we are going after fraud, waste, and abuse, too, correct?
    Mr. Foster. Sure.
    Mr. Van Hollen. So we get those savings in the Affordable 
Care Act, correct?
    Mr. Foster. There is a lot that can be done.
    Mr. Van Hollen. If we have got more on fraud, waste, and 
abuse, I think all of us would be very interested in knowing 
that. But I would urge you to take a look at the assumption the 
CBO made in reaching that so-called Medicare savings in the 
first 9 years of the Ryan roadmap, because it is things like 
reduce the annual inpatient hospital market basket factor, the 
same kind of things that we were talking about, except it 
doesn't include a lot of the reform elements that were included 
in the last 10 years to actually achieve those savings. I would 
like you to take a look at that.
    Now, beyond 2020, under the chairman's roadmap plan you 
developed a--it turned into a voucher system. In other words, 
the Medicare recipient, the senior citizen, is going to get 
handed a voucher, and the savings are achieved because that 
voucher has a declining value over a period of time. So it is 
less money to pay for the very real costs that you were talking 
about that health care providers face.
    So wouldn't you have similar concerns with respect to the 
sustainability component, except for the fact that the risk in 
many ways is shifted directly onto the Medicare beneficiary?
    Mr. Foster. I would say there are concerns or risks in both 
cases. We have already talked about the productivity 
adjustments and are provider payment rates adequate. With a 
voucher proposal for Medicare, if the voucher payments are 
indexed at an amount lower than the prevailing increase in 
costs or per capita costs for health care, then you would have 
a different sort of risk, the risk, nonetheless, that over time 
the voucher amounts might not be adequate for people to use to 
purchase significant health care coverage.
    Mr. Van Hollen. Meaning that a senior citizen on Medicare 
would have a voucher that may not be able to cover the same 
benefits as today, correct?
    Mr. Foster. That is possible, yes.
    Mr. Van Hollen. If we could just go to this last slide 
    No, that is not it. It is a handout, actually. It is on the 
back page.
    Now, Mr. Foster, if you could go to page 9 of your 
testimony, you have got a graph that sort of plots the Medicare 
expenditures. Again, this is the percent of GDP under the 
current law, meaning as the Affordable Care Act was passed, and 
then you have got the very top line which shows the trajectory 
if we hadn't passed the Affordable Care Act, and then you have 
an illustrative different example, right?
    Mr. Foster. That is right.
    Mr. Van Hollen. So I would now just like to compare that to 
the figure 3, which is, again, CBO's January analysis of the 
Medicare component of the chairman's plan.
    If you look at that, as your chart shows, if you had done 
nothing, under current law, it is off the charts. We all agree 
with that. But if you adopt the chairman's proposal, you get 
dramatic reductions as a percent of GDP. Because as we 
discussed, that value of the voucher that the senior citizen is 
getting is going down and down and down and down; and in fact, 
at the end of the day, as a percent of GDP, he takes it much 
lower by reducing the value of that voucher the senior is 
    So wouldn't you have similar concerns--I think you said you 
have similar concerns, but from a different direction, meaning 
the senior citizen has got to try to get health care services 
with something that is worth a lot less?

    Mr. Foster. With both of these kinds of proposals and also 
other kinds of proposals, there is one sort of potential saving 
grace. As I think most of you recognize, almost all medical 
technology, new developments, new devices, treatments, drugs, 
you name it, most of it is cost increasing. That is different 
from what we experience with manufacturing cars or computers or 
telephones or whatever. There, the new technology generally 
gets you lower costs at the same time as you get better things.
    Now, if there is a way to turn around the mindset for the 
people who do the research and development of new medical 
technology and to get them to focus more on cost-reducing 
technology and less on cost-increasing technology, if you can 
go that, then one of the biggest components of rapid health 
care cost growth turns it to your side, to your advantage, and 
away from being part of the problem.
    Now, with either a voucher system that puts a lot of 
pressure on what you can buy for health insurance or, to a 
somewhat lesser extent, the payment updates for Medicare 
providers or certain other kinds of things, if you can put that 
pressure on the research and development community, you might 
have a fighting chance of changing the nature of new medical 
technology in a way that makes lower costs like this possible 
and more sustainable.
    I would say the roadmap has that potential. There is some 
potential for the Affordable Care Act price reductions, 
although I am a little less confident about that. And we 
haven't yet talked, but perhaps in a minute with Representative 
Schwartz, about innovations, the possibility there.
    Mr. Van Hollen. Thank you, Mr. Chairman.
    Chairman Ryan. Thank you, Mr. Van Hollen.
    Mr. Campbell.
    Mr. Campbell. Thank you, Mr. Chairman.
    I don't think anyone knows more about the roadmap than the 
gentleman who wrote it, so I will yield back to the chairman 
for some comments.
    Chairman Ryan. I find it interesting that the ranking 
member spent most of his time not talking about the health care 
law we are having a hearing on today but about an individual 
member's proposal.
    Let me just say a couple of things just to clear the air.
    Under my proposal, Medicare spending as a percentage of GDP 
never goes down from where it is today. It is actually higher 
at the end of the window. Point number one.
    Point number two, we grandfathered the existing population 
at current Medicare growth rates. The short-term savings are 
about half of what PPACA is, and this scenario he is talking 
about applies to people 54 and below. People 55 and above grow 
at current rates, unlike the current law which we just now went 
through. That is another point we will have to get into--and we 
ought to do a hearing on this--about how best to reform 
    We know we are making promises to people in the future that 
will not be kept, that the government simply cannot keep. So 
the question is, what is the best way to proceed, what is the 
most humane way to proceed, and what is the best way to reform 
this program so we get more bang for our buck, so that we turn 
health care spending into a virtuous cycle, like Mr. Foster 
just said, instead of a vicious cycle which spins our debt and 
deficit out of control. Do we empower consumers or do we price 
control from the government? What works best?
    So I can go through point by point refutation of every one 
of those things that was done right there, only to simply say 
Medicare is the biggest driver of our debt. We are all kidding 
ourselves if we think the program can just go on as is; and the 
sooner we address it, the better off everybody is. The better 
we can guarantee my mom, who has been on it for a number of 
years, and everybody else's mom and dad can have the program 
they organize their lives around and that future retirees have 
a program they actually can count on. That is the purpose of 
this particular bill that I introduced; and that, hopefully, is 
the purpose of what we are all trying to achieve.
    With that, Mr. Campbell.
    Mr. Van Hollen. Mr. Chairman, just for 30 seconds?
    Chairman Ryan. Sure.
    Mr. Van Hollen. You referenced in your opening comments the 
fact that there was an alternative path forward, and I assume 
you were talking about your proposal. And the point is that you 
are right with respect to the percent of GDP you don't go over 
current GDP. But part of the testimony, as I understand from 
Mr. Foster, as he looks at both issues there are similar 
questions raised. So with respect to that component.
    Thank you, Mr. Chairman.
    Mr. Campbell. Thank you, Mr. Chairman.
    Mr. Foster, on August 7 of last year, the President said in 
part, ``The steps we took this year to reform the health care 
system have put Medicare on a sounder financial footing. Reform 
has actually added at least a dozen years to the solvency of 
    In making that statement, he is referring to CBO's score, 
which includes the Medicare tax that is your allegorical $100 
that you referred to earlier, is that correct?
    Mr. Foster. That is correct, although the estimate of the 
12 years was our estimate and the Board of Trustees, not the 
    Mr. Campbell. Okay, but he is using the allegorical $100.
    Okay, then when he signed the bill, in his signing 
statement he said, ``This legislation will also lower costs for 
families and for businesses and for the Federal Government, 
reducing our deficit by over $1 trillion in the next two 
    In making that statement about the deficit, he is not also 
using the Medicare tax, your $100 allegorical payment?
    Mr. Foster. Yes, he is.
    Mr. Campbell. So you can say it is legitimate, based on the 
scoring, to say you can add a dozen years to solvency of 
Medicare or that you can reduce the deficit, but it is not 
correct to say both simultaneously, is that correct?
    Mr. Foster. Almost. Both will happen as a result of the 
same one set of savings under Medicare, but it takes two sets 
of money to make it happen. It happens directly for the budget 
deficit from the Medicare savings. And then when we need the 
money to extend the Hospital Insurance Trust Fund, we have a 
promissory note--it is an IOU. It is not a worthless IOU, but 
it is an IOU--and Treasury has to pay that money back. But they 
have to get it from someplace. That is the missing link.
    Mr. Campbell. Okay. You just can't do both at the same 
    This reminds me, Karen Bass, former speaker of the 
California Assembly, isn't here, but when I was in the 
California Assembly there was a tobacco tax proposed, and the 
idea was it was going to reduce smoking and reduce the deficit. 
As we went through, we realized you can claim one or claim the 
other, but it is not going to do both. Because if people keep 
smoking, you will reduce the deficit. If people stop smoking, 
it is not going to raise any more money. And you may stop 
smoking, but you won't reduce the deficit.
    This is the same sort of thing. We are taking this same 
$100, allegorical $100, this same tax, and in one side saying, 
oh, we are going to reduce the deficit, and on the other side, 
we are going to extend Medicare. But it just simply can't do 
    Let me ask one other in my remaining 2 minutes.
    What I also heard you say, I believe, is that the 
downstream consequences of the payment, the Medicare, the 
reduced payments that doctors may get aren't necessarily 
factored into all the scoring. Is that a correct description of 
sort of what you said?
    Mr. Foster. Yes, sir, that is correct. Directly, we build 
in the impact on lower Medicare expenditures.
    Now, there are potential secondary impacts. If the payment 
rates become inadequate, if nothing is done about it and 
providers exit the market or refuse to treat Medicare patients, 
then you have some not very pleasant potential consequences. 
You can't find a doctor. Your local hospital will no longer 
treat Medicare. We do not model those secondary impacts.
    Mr. Campbell. Right. Yeah. Okay. And that to me is one of 
the great problems with this bill. Now this is all anecdotal, I 
admit. But since the bill has come out, in California insurance 
costs have gone way up, in part because of the mandated 
additional coverages. I have been approached by a number of 
people working for companies who have said that their company 
is either going to--they were getting a Cadillac policy--and 
they would reduce the policy, increase the cost. Other 
companies are going to drop health care for all of their 
employees in order to have them go into the exchange. And a 
number of doctors have told me they are either not going to 
accept Medicare and Medicaid or they are simply going to retire 
earlier. So these are a lot of actions and activities that 
private individuals are making out there in the world today, 
have already made as a result of this health care bill. Those 
reactions are not really modeled, is that correct, in the 
    Mr. Foster. Generally speaking, they are not. We do have a 
lengthy set of caveats about various concerns that we were 
aware of but which we had no way of estimating.
    Mr. Campbell. Right. And to me, just before my time runs 
out, is one of the great huge faults in this bill is that it 
does not include the real-world impacts that real-world people 
will do as a result of this miserable bill. I yield back.
    Chairman Ryan. Ms. Schwartz.
    Ms. Schwartz. Thank you, Mr. Chairman and ranking member.
    Mr. Foster, I appreciate some of the things you have said. 
It is sometimes hard to almost figure out where to start here a 
little bit--and I appreciate your testimony. Let me just say 
just a couple of things. And then really I do want to focus in 
on a comment in your written testimony--and you have made it 
orally here--that there is--and I think your words are exactly, 
that there is real potential, a significant potential to 
improve quality and efficiency through the innovations that are 
in this law. It is not a bill. It is a law. And it is already 
being implemented.
    Before I get there, I did just want to say that--it has 
already been said by Mr. Ryan and I don't expect to you respond 
to this--that we will not keep our promises to future seniors. 
And I just want to disagree with that. Certainly on this side 
of the aisle, we will keep our promises to future seniors. And 
that is in part why we did this bill, because of the rising 
rate of growth of cost in health care and getting the best 
value for our dollar could be improved upon. And we wanted to 
reduce costs for the government and for businesses and for 
families. And I appreciate your acknowledgement of the savings 
that are in this law.
    And what I wanted to ask you about specifically is you 
reference in a general way the innovations in this law. And 
there are really kind of two sets. There are some that are 
really going forward, mandated, if you will, on some of our 
providers. And you talk about some of those. The productivity 
adjustments, the reductions in overpayments to insurance 
companies, something that Medicare Advantage--I think some of 
my other colleagues are going to talk about that, reductions in 
payments, the potential of the independent payment advisory 
board, and even the coverage of part B and part D, those 
    But there are other areas as well, such as reducing the 
preventable hospital readmissions and really holding hospitals 
more accountable for reducing the hospital-acquired infections; 
bundle payments which are going forward; the 2 percent pay-for-
performance for hospitals, so that we are going to hold back, 
and if you do well, send you that money, but if you don't, not. 
Really pushing, really pretty aggressively I think, to reduce 
errors, to reduce infections, to improve quality in our 
hospitals and reduce costs as a result.
    So we are also--the other set are, as you point out, more 
innovative, have been tried, functioning. I think one of my 
other colleagues is going to talk about some of the health 
systems across this country that are doing a much better job 
than others on coordinated care, integrated care, and the 
improved quality and cost savings from that.
    But patient-centered medical homes for those with chronic 
diseases, the potential for cost savings are keen. Pennsylvania 
just got $33 million under this law. Five other States got it 
as well, to begin to implement these provisions: health 
information technology, accountable care organizations, health 
innovation zones, primary care being enhanced.
    So in my last 1\1/2\ minutes, would you agree, as you said 
in your testimony, that these innovations have the potential, 
significant potential of improving quality, improving access, 
and reducing costs not just for Medicare beneficiaries but for 
all patients, because providers will do it for all patients?
    Mr. Foster. I certainly agree that the potential is there. 
Some of the things you mentioned are relatively straightforward 
changes. I wouldn't include them in the innovation category. 
They are just changes that can be made. Like Medicare Advantage 
payment benchmarks, you could raise them, you could lower them.
    Ms. Schwartz. And that is happening?
    Mr. Foster. Yes. When I think of the innovations, I think 
of the creation of the Center for Medicare and Medicaid 
Innovation within CMS. Some of the other programs, the shared 
savings program for accountable care organizations, the bundled 
payment demonstration, things like this. Many of these do, in 
fact, have potential, and some of the things we don't even know 
about yet, some of the things that have yet to be designed or 
specified or tested or evaluated. I am a big believer in 
    Ms. Schwartz. So evaluating them and moving ahead on the 
ones that work is very important?
    Mr. Foster. Yes. I think it is a good way to help--well, 
the motto of the Society of Actuaries--there is a quote from 
John Ruskin and that is, ``The work of science is to substitute 
facts for appearances and demonstrations for impressions.'' We 
can talk about these things; but if we don't try them, then we 
won't really know if they work or not.
    Ms. Schwartz. I don't have a lot of time left. But are you 
aware of some of the work that is being done already by CMS to 
move fairly--I want to say aggressively, but that may not be 
perceived as a positive--but to move very actively, 
proactively, forward to not only test these models but to grow 
these models?
    Mr. Foster. Yes. We have been assisting with that effort.
    Ms. Schwartz. Right. And because there is choice for 
patients and choices for providers, because it is not that 
government-controlled their choices there are going to be a lot 
of variety in the kind of delivery system and payment reforms 
out there to improve quality and improve savings.
    Mr. Foster. There is definitely room for improvement. If I 
may, I would like to make one comment on that. There is the 
potential--and we don't know how much yet--hopefully a lot. But 
the process will tell us. One aspect that perhaps concerns many 
people, although many people don't know about it is, as the law 
is written, most of these innovations can be adopted nationwide 
if the Secretary of HHS determines that they improve quality or 
don't harm it, and that the chief actuary of Medicare 
determines that they either reduce costs or they don't increase 
    The standard for testing whether they increase costs or not 
is against current law. Current law, with all the provider of 
payment reductions, with the 30 percent physician cut, all of 
that. So it actually is a pretty tough hurdle to meet in terms 
of allowing these to go forward.
    Mr. Campbell [presiding]. Ms. Schwartz, I am afraid we are 
way over time.
    Ms. Schwartz. I think we are up to the challenge.
    Mr. Campbell. Mr. Calvert.
    Mr. Calvert. Thank you, Mr. Chairman. Medicare Advantage 
has been brought up. The minority health care law included 
significant cuts to the Medicare Advantage Program, a program 
which covers about 50 percent of beneficiaries in my district. 
What changes would seniors experience with these cuts?
    Mr. Foster. As a general rule, the Affordable Care Act 
reduces the Medicare Advantage payment benchmarks. Now, under 
the old law, these benchmarks were typically in the range of 
100 to 140 percent of a corresponding fee-for-service cost, and 
under the new law, they will be in the range of 95 to I believe 
it is 115 percent. So the benchmarks are reduced. In addition, 
the share of the difference between a benchmark and the plan 
bid, the portion of that that is paid to the plan in the form 
of rebates will be reduced. That proportion is reduced. You can 
get some of it back through----
    Mr. Calvert. That was one of my seniors back home in the 
    Mr. Foster. I am sure I had nothing to do with it.
    So the amount of money that Medicare Advantage plans will 
have in future years to reduce the cost-sharing requirements of 
regular Medicare, to add extra coverage or extra benefits or to 
reduce other premiums, part D premiums or part B premiums, will 
be smaller. There is no question about that. It will be 
    Mr. Calvert. Well, then, would seniors that currently have 
Medicare Advantage plans, can they expect to keep the current 
plan or benefits once those cuts are fully implemented?
    Mr. Foster. We would expect that the reductions are 
sufficient, that about one-half--eventually one-half of the 
current Medicare Advantage enrollees would end up either 
dropping out of their Medicare Advantage plan or no longer 
having a Medicare Advantage plan to participate in because it 
boils down to a choice. Right now the plans are fairly popular 
because of all the extra coverage, and people might be willing 
to put up with some degree of utilization management, for 
example, in order to get these other advantages. In the future, 
as the extra benefits are reduced significantly, they will be 
less likely to enroll.
    Mr. Calvert. So there will be less people in Medicare 
Advantage. What would they do then? Would they just shift into 
traditional Medicare do you believe? Or would they buy 
additional insurance?
    Mr. Foster. All of the above. Some would move into fee-for-
service Medicare and probably purchase Medigap coverage. Others 
would switch to--some of the people who might lose their given 
plan would switch to a different Medicare Advantage plan, if 
there is one available that still looks attractive.
    Mr. Calvert. So to put it simply, the services would be 
reduced but their costs would increase?
    Mr. Foster. Potentially both. In other words, the extra 
benefits they get would be reduced; and if they stay on their 
Medicare Advantage plan, they might have to pay a higher 
premium as well.
    Mr. Calvert. Do you estimate the number of beneficiaries 
would be affected by these cuts? Do you have a number on that?
    Mr. Foster. We do. We could add it to the record.\4\
    \4\ Editor's Note: The committee had not received the requested 
information prior to its publication deadline.
    Mr. Calvert. I appreciate that. Thank you, Mr. Chairman.
    Chairman Ryan [presiding]. Ms. Kaptur.
    Ms. Kaptur. Thank you very much, Mr. Chairman. Welcome, Mr. 
Foster. I just want to place a short statement on the record 
that the health insurance marketplace today has caused 
consumers to lack real choice in affordable insurance plans 
and, in fact, the marketplace lacks real competition. I voted 
for the Affordable Health Care Act because I believe it will 
restore competition. Meanwhile, much like Wall Street, the 
health insurance industry has been earning record profits by 
denying access to insurance and coverage to millions of our 
fellow citizens and by raising the cost of premiums to 
unaffordable levels. Many firms even deem you ineligible for 
insurance due to your gender or, amazingly, if you have 
bunions, calling them preexisting conditions.
    So exactly how much profit have these insurance giants been 
making off of denying insurance to the American people and by 
denying claims more and more every year? Well, look at the top 
five mammoth corporations that often avoid taxation even by 
holding some of their accounts offshore. In 2009, just the top 
five firms, United Health Group, WellPoint, CIGNA, Aetna and 
Humana made $9.537 billion in profits. That is a staggering 
number. And I might say, each of them contributed significantly 
to political campaigns to Congress. For just those five, 
$2,768,156. That is something to think about and why there is 
such a fight at the national level to try to get affordable 
choices in insurance to the American people.
    My concern is, the concentrated power of insurance 
companies as gatekeepers over the American people's health care 
is far too great. Restoring real competition among plans will 
give our consumers more choices of plans, just like Congress 
has. And with that competition, if you believe in competition, 
the private plans that will be available on the exchanges will 
give people choices for the first time in decades.
    I wanted to ask Mr. Foster, have you ever been in receipt 
of data or related reports that show you the tax avoidance that 
these insurance companies employ in order to avoid paying their 
fair share in our country, reports that might come to you from 
other agencies? Have you ever seen those?
    Mr. Foster. No, we do not study that kind of report.
    Ms. Kaptur. Yes. Could I ask you to again restate for the 
record from your testimony how many uninsured persons in the 
United States will be able to be insured under the Affordable 
Care Act?
    Mr. Foster. We estimate that by 2019, the number would be 
34 million.
    Ms. Kaptur. Imagine that, 34 million people. Not 34,000, 
not 3 million; 34 million people. That is over three times the 
size of just Ohio. That is a staggering number, and one that I 
am proud to have voted for a plan that will help to cover them.
    May I ask you, in your testimony, according to your 
analysis, what would be the out-of-pocket spending reductions 
to our Nation's citizens under the new law?
    Mr. Foster. In total, over the 10 years through 2019, the 
reduction is $220 billion, $227 billion.
    Ms. Kaptur. You are very close; $237 billion of savings to 
the American people who are struggling right now just to pay 
their heating bills in my part of the country, just to pay 
their property taxes, just to make it through the food banks 
crowded with people who are unemployed, that is a real 
accomplishment. That savings can actually be put to greater 
    And I wanted to ask you, in your testimony, you talk about 
16 million uninsured persons would receive individual insurance 
coverage through the newly created exchanges. Do you have any 
estimate of how many of those would be small businesses? I come 
from a small business family that had to sell its business 
years ago because our father got sick and couldn't get health 
insurance. Do you have an estimate of the people that would get 
insurance, what subset might be small business people?
    Mr. Foster. Deep within our model, that result is there. We 
have not actually tabulated it separately but we could do that 
for you.
    Ms. Kaptur. I would greatly appreciate that information for 
the record.\5\
    \5\ Editor's Note: The committee had not received the requested 
information prior to its publication deadline.
    Ms. Kaptur. Thank you very much. Thank you, Mr. Chairman.
    Chairman Ryan. Mr. Cole.
    Mr. Cole. Thank you, Mr. Chairman. Thank you, Mr. Foster. 
It is very thoughtful and helpful testimony.
    I want to focus in on the Medicaid portion of both your 
testimony and the program. How many of the 34 million people 
that are going to receive insurance are going to receive it 
through Medicaid?
    Mr. Foster. We estimate that 18 million would have their 
primary coverage through Medicaid.
    Mr. Cole. So over half.
    Mr. Foster. Yes. And another 2 million who have employer-
sponsored coverage would be eligible to sign up for 
supplementary coverage under Medicaid.
    Mr. Cole. And how will we pay for those additional 18 to 20 
million people?
    Mr. Foster. Well, Medicaid is funded jointly by the Federal 
Government and States, from general revenues almost 
exclusively. The Federal Government's share, of course, 
initially is almost 100 percent, grading down to 90 percent.
    Mr. Cole. What provisions have we made to help State 
governments pick up their portion of the cost, the additional 
and new cost of insuring this much larger population?
    Mr. Foster. Well, none that I can think of off the top of 
my head.
    Mr. Cole. So in other words we are expecting State 
governments--most of whom are facing record deficits right now 
or fiscally challenging situations--they just have to come up 
with the money?
    Mr. Foster. Their share of it, of course. Their share is 
relatively small compared to traditionally what Medicaid has 
    Mr. Cole. Let me ask you this. You mentioned in your 
testimony that Medicaid reimbursement rates were comparatively 
low compared to other forms. What sort of models do you have on 
whether or not physicians are going to accept these 18 to 20 
million new Medicaid patients that we are going to put in the 
system at very low reimbursement rates?
    Mr. Foster. We have raised the question. In other words, 
will there be enough physician and other provider supply to 
meet the new demand because of the additional people with 
insurance? We have not attempted to model quantitatively what 
the answer would be.
    Mr. Cole. So is it fair to say that we might provide 
coverage but we don't have a guarantee that we are going to be 
able to provide care to people that we put in the system?
    Mr. Foster. In the short term, that concerns us as a 
    Mr. Cole. And finally, is there any discussion of actually 
requiring physicians to take Medicaid patients?
    Mr. Foster. Not that I am aware of. It is not to say that 
there isn't, but I have not run across it.
    Mr. Cole. One additional question along these lines. How 
comfortable are you that, since we are funding this out of 
general revenue primarily at the Federal level and at the State 
level, you know, the money is going to be there? I mean, you 
just assume it is going to be there?
    Mr. Foster. Fundamentally, yes. When Congress passes a law 
and the President signs it, there is a law on the books that 
says something shall happen. Then we assume that that thing 
will happen.
    Mr. Cole. But you don't have any assumption as to whether 
or not we are going to raise taxes or simply borrow the money, 
I assume?
    Mr. Foster. That is correct.
    Mr. Cole. Do you want to hazard a guess as to which of the 
two we are likely to do?
    Mr. Foster. I think I will leave that up to you all.
    Mr. Cole. I think the record speaks for itself in that 
regard. Thank you very much for the testimony.
    Chairman Ryan. Mr. Blumenauer.
    Mr. Blumenauer. Thank you, Mr. Chairman. Thank you, Mr. 
    I must say that having an actuary before us talking about 
the policy was interesting, and I spent some time going back 
looking at the role of the science, the actuarial science and 
trying to comport that with what we are talking about here 
today. And you are put in a very difficult position because you 
are making judgments about what politics--how they are going to 
play out. And you referenced, for instance, the SGR that 
Congress didn't follow through on. And you are concerned that 
those same forces may be at work in the elements of reform in 
the bill that is before us.
    Can you quantify the difference, for example, of the 
pressure that may be exhibited on our legislation that we are 
discussing today as opposed to my good friend, the chair's road 
map that will have a voucher for everybody, that will be 
dramatically ratcheted down in the future? Can you quantify the 
likelihood that he will be able in 2080 to deliver on a voucher 
that is a quarter of the size that it is today in purchasing 
power as opposed to the likelihood of this legislation going 
forward as written? Can you quantify the difference between 
those two?
    Mr. Foster. Perhaps partially. What we could do would be to 
compare payment levels, utilization rates and so forth. It 
would be supported by either approach, as there was an earlier 
attempt this morning to do that. But we could see, as 
objectively as possible, how they compared to each other. Total 
payments over time as a percentage of GDP.
    Mr. Blumenauer. The same pressure, if you are going to have 
a radical reduction in the amount of support for older 
Americans, the same pressure would be there that we see on SGR 
and what you are claiming in this, would it not?
    Mr. Foster. Again, it depends. Potentially, yes. It depends 
a lot on the nature of the changes.
    Mr. Blumenauer. And that is one of the things I want to get 
at. Mr. Chairman, with your permission, I would like to enter 
in the record a letter that you and Ranking Member Van Hollen 
had received from eminent economists, including your friend 
Alice Rivlin, dated January 26.
    Chairman Ryan. Without objection.
    [The information follows:]

                                                  January 26, 2011.
Hon. Paul Ryan, Chairman; Hon. Chris Van Hollen, Ranking Member,
U.S. House of Representatives, Committee on the Budget, Washington, DC 
    Dear Chairman Ryan and Representative Van Hollen: Congress this 
week is holding hearings on the economic impact of health care reform. 
We write to convey our strong conclusion that leaving in place the 
Patient Protection and Affordable Care Act of 2010 will significantly 
strengthen our nation's economy over the long haul and promote more 
rapid economic recovery in the immediate years ahead. 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.
    Our conclusion is based on two economic principles. First, high 
medical spending harms our nation's workers, new job creation, and 
overall economic growth. Many studies demonstrate that employers 
respond to rising health insurance costs by reducing wages, hiring 
fewer workers, or some combination of the two. Lack of universal 
coverage impairs job mobility as well because many workers pass up 
opportunities for self-employment or positions working for small firms 
because they fear losing their health insurance or facing higher 
    Second, the Affordable Care Act contains essentially every cost-
containment provision policy analysts have considered effective in 
reducing the rate of medical spending. These provisions include:
     Payment innovations such as greater reimbursement for 
patient-centered primary care; bundled payments for hospital care, 
physician care, and other medical services provided for a single 
episode of care; shared savings approaches or capitation payments that 
reward accountable provider groups that assume responsibility for the 
continuum of a patient's care; and pay-for-performance incentives for 
Medicare providers.
     An Independent Payment Advisory Board with authority to 
make recommendations to reduce cost growth and improve quality within 
both Medicare and the health system as a whole
     A new Innovation Center within the Centers for Medicare 
and Medicaid Services charged with streamlining the testing of 
demonstration and pilot projects in Medicare and rapidly expanding 
successful models across the program
     Measures to inform patients and payers about the quality 
of medical care providers, which provide relatively low-quality, high-
cost providers financial incentives to improve their care
     Increased funding for comparative effectiveness research
     Increased emphasis on wellness and prevention
    Taken together, these provisions are likely to reduce employer 
spending on health insurance. Estimates suggest spending reductions 
ranging from tens of billions of dollars to hundreds of billions of 
dollars. Because repealing our nation's new health reform law would 
eliminate the above provisions, it would increase business spending on 
health insurance, and hence reduce employment.
    One study concludes that repealing the Affordable Care Act would 
produce job reductions of 250,000 to 400,000 annually over the next 
decade. Worker mobility would be impaired as well, as people remain 
locked into less productive jobs just to get health insurance.
    The budgetary impact of repeal also would be severe. The 
Congressional Budget Office concludes that repealing the Affordable 
Care Act would increase the cumulative federal deficit by $230 billion 
over the next decade, and would further increase the deficit in later 
years. Other studies suggest that the budgetary impact of repeal is 
even greater. State and local governments would face even more serious 
fiscal challenges if the Affordable Care Act were repealed, as they 
would lose substantial resources provided under the new law while 
facing the burdens of caring for 32 million more uninsured people. 
Repeal, in short, would thus make a difficult budget situation even 
    Rather than undermining health reform, Congress needs to make the 
Affordable Care Act as successful as it can be. This would be as good 
for our economy as it would be for the health of our citizens.
Henry J. Aaron Senior Fellow The Brookings Institution
Jean Marie Abraham Assistant Professor University of Minnesota School 
        of Public Health
Randy Albelda Professor of Economics University of Massachusetts, 
Sylvia A. Allegretto Economist University of California, Berkeley
Stuart Altman Sol C. Chaikin Professor of National Health Policy 
        Brandeis University Elizabeth Oltmans Anant Assistant Professor 
        of Public Policy and Economics Duke University
Rania Antonopoulos Director, Gender Equality and the Economy Program 
        Levy Economics Institute
Kenneth J. Arrow Professor of Economics Emeritus Stanford University
Michael Ash Associate Professor of Economics and Public Policy 
        University of Massachusetts, Amherst
David Autor Professor and Associate Head, Department of Economics 
        Massachusetts Institute of Technology
Susan L. Averett Charles A. Dana Professor of Economics Lafayette 
Christopher Avery Roy E. Larsen Professor of Public Policy Harvard 
        University Kennedy School of Government
Rojhat B. Avsar Assistant Professor of Economics Columbia College
M.V. Lee Badgett Professor of Economics University of Massachusetts, 
El-hadj Bah Lecturer University of Auckland
Ron Baiman Director of Budget and Policy Analysis Center for Tax and 
        Budget Accountability Asatar Bair Professor of Economics City 
        College of San Francisco
Dean Baker Co-Director Center for Economic and Policy Research
Radhika Balakrishnan Professor, Women's and Gender Studies Rutgers, The 
        State University of New Jersey
Nesecan Balkan Department of Economics Hamilton College
Erol Balkan Professor of Economics Hamilton College
Steve Balkin Professor of Economics Roosevelt University
Nina Banks Associate Professor of Economics Bucknell University
William Barclay Adjunct Professor University of Illinois at Chicago
Drucilla K. Barker Professor and Director, Women's and Gender Studies 
        University of South Carolina
David Barkin Profesor de Economia Universidad Autonoma Metropolitana-
Anirban Basu Associate Professor, Department of Health Services 
        University of Washington Francis M. Bator Lucius N. Littauer 
        Professor of Political Economy Emeritus Harvard University 
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Charles M. Becker Associate Chair and Research Professor, Department of 
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Marc F. Bellemare Assistant Professor Duke University
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Carole Biewener Professor of Economics Simmons College
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Roger Even Bove Department of Economics & Finance (retired) West 
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Paul J Gertler
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Neva Goodwin Co-Director, Global Environment and Environment Institute 
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Tai Gross Assistant Professor, Department of Health Policy and 
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Michael Grossman Distinguished Professor of Economics City University 
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Jonathan Gruber Professor of Economics Massachusetts Institute of 
Kwabena Gyimah-Brempong Professor and Chair, Department of Economics 
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Jack Hadley Professor and Senior Health Services Researcher George 
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Paul Hancock Professor of Economics Green Mountain College
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Joan Hoffman Professor and Chair, Department of Economics John Jay 
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Harold Pollack Helen Ross Professor of Social Service Administration 
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Daniel Polsky Professor of Medicine University of Pennsylvania
Paddy Quick Professor of Economics St. Francis College
Matthew Rabin Professor of Economics University of California, Berkeley
Sarah Reber Assistant Professor of Public Policy University of 
        California, Los Angeles
Jim Rebitzer Professor of Management, Economics and Public Policy 
        Boston University School of Management
Michael Reich Professor of Economics University of California, Berkeley
Uwe Reinhardt James Madison Professor of Political Economy Princeton 
Dahlia Remler Professor, School of Public Affairs, Baruch College City 
        University of New York
Alice M. Rivlin Senior Fellow The Brookings Institution Charles P. Rock 
        Professor of Economics Rollins College
Christina D. Romer Class of 1957 Professor of Economics University of 
        California, Berkeley
Samuel Rosenberg Acting Vice Provost for Faculty and Academic 
        Administration Roosevelt University
Meredith Rosenthal Associate Professor of Health Economics Harvard 
        University School of Public Health
Roy J. Rotheim Professor of Economics Skidmore College
Anne Beeson Royalty Associate Professor of Economics Indiana University 
        Purdue University Indianapolis
Cristopher J. Ruhm Professor of Public Policy and Economics University 
        of Virginia
Emmanuel Saez
E. Morris Cox Professor of Economics University of California, Berkeley
Harwood D. Schaffer Research Assistant Professor University of 
John Schmitt Senior Economist Center for Economic and Policy Research
Charles L. Schultze Senior Fellow Emeritus, Economic Studies The 
        Brookings Institution Eric A. Schutz Professor, Economics 
        Rollins College
Joseph M. Schwartz Professor of Political Science Temple University
Charles R. Sebuharara Visiting Assistant Professor of Finance Pamplin 
        College of Business, Virginia Tech
Eric Seiber Assistant Professor of Health Services Management and 
        Policy The Ohio State University
Janet Seiz Associate Professor of Economics Grinnell College Bisakha 
        Sen Associate Professor, Department of Healthcare Organization 
        and Policy University of Alabama, Birmingham
Mark Setterfield Professor of Economics Trinity College
Anwar Shaikh Professor of Economics New School for Social Research
Nina Shapiro Professor of Economics Saint Peter's College
Judith Shinogle Senior Research Scientist Maryland Institute for Policy 
Peter Skott Professor of Economics University of Massachusetts, Amherst
Timothy Smeeding Arts and Sciences Distinguished Professor for Public 
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Eugene Smolensky Professor of the Graduate School University of 
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Bryan Snyder Department of Economics Bentley University
Eswaran Somanathan Visiting Professor Princeton University
Paula H. Song Assistant Professor, Health Services Management & Policy 
        The Ohio State University Neeraj Sood Associate Professor 
        Schaeffer Center for Health Policy and Economics, University of 
        Southern California
Janet Spitz Associate Professor of Business College of Saint Rose
James Ronald Stanfield Emeritus Professor of Economics Colorado State 
Sally C. Stearns Professor of Health Economics University of North 
        Carolina at Chapel Hill
Bruce Stuart Professor University of Maryland School of Pharmacy
Paul Swanson Professor of Economics William Paterson Univeristy
Katherine Swartz Professor of Health Economics and Policy Harvard 
        University School of Public Health
Donald H. Taylor, Jr. Associate Professor of Public Policy Duke 
Mark Thoma Professor of Economics University of Oregon
Chris Tilly Professor and Director of the Institute for Research and 
        Employment University of California, Los Angeles
Mariano Torras Professor of Economics Adelphi University
Pravin K. Trivedi
J.H. Rudy Professor of Economics
Indiana University-Bloomington
Jennifer Troyer Associate Professor of Economics University of North 
        Carolina at Charlotte
Laura Tyson
S.K. and Angela Chan Chair in Global Management Haas School of 
        Business, University of California, Berkeley
Robert Otto Valdez Robert Wood Johnson Foundation Professor, Family & 
        Community Medicine and Economics University of New Mexico
Paul N. Van de Water Senior Fellow Center on Budget and Policy 
Courtney Harold Van Houtven Associate Professor Duke University
Lane Vanderslice Editor, Hunger Notes worldhunger.org
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Mark E. Votruba Associate Professor of Economics and Medicine Case 
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Jane Waldfogel Professor of Social Work and Public Affairs Columbia 
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Michael Wilson Instructor Harvard Medical School
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Barbara Wolfe Professor, Economics and Political Science University of 
Justin Wolfers Associate Professor of Business and Public Policy The 
        Wharton School, University of Pennsylvania
Robert S. Woodward Professor of Health Economics University of New 
Vivian Wu Assistant Professor University of Southern California David 
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Joshua Graff Zivin Associate Professor of Economics University of 
        California, San Diego

    Mr. Blumenauer. That points out that this legislation, 
unlike SGR, unlike my friend's road map, has every single cost 
containment element that the experts have been calling for.
    Isn't that a significant difference between the SGR 
collapse and what we have going forward? Aren't the elements in 
    Mr. Foster. The potential benefits.
    Mr. Blumenauer. Were those elements in the SGR for cost 
    Mr. Foster. No.
    Mr. Blumenauer. Isn't that a significant difference?
    Mr. Foster. Yes, it is.
    Mr. Blumenauer. Okay. Let me just conclude.
    Mr. Foster. I would add to that, given the opportunity.
    Mr. Blumenauer. Super. And if I have time, I would love to 
have you do that. But one of the things I would like to focus 
on is the opportunity to squeeze value out of this system. I 
come from a region in the country that provides quality care. 
In fact, it is better-than-average care for half the cost of 
some areas of the country that provide less quality care. In 
fact, if everybody practiced medicine the way that it is 
practiced in metropolitan Portland, we wouldn't be having quite 
the urgency of the deficit. Isn't there a great deal of value 
to be squeezed out of the existing system?
    Mr. Foster. Yes. I would word it slightly differently. You 
can improve the value you get for the expenditures by improving 
quality. There are lots of opportunities there. There are also 
opportunities to squeeze out waste and inefficiency in 
unnecessary treatments.
    Mr. Blumenauer. Great. And I think that is an appropriate 
caveat, because what we are committed to doing is to provide 
better quality of care because right now we have areas of the 
country that are spending in a profligate fashion that aren't 
providing quality care, a ratio of 2 to 1, the evidence is 
strong that we have seen.
    And I guess the reason I wanted to add this letter to the 
record and why I am less concerned than our actuarial friend 
here is that unlike in the past, we have worked to put cost 
containment and quality improvement into this bill. Some of us 
would strengthen those reforms. If Congress has the guts to 
follow through, we will have better care for less cost. If we 
don't have the guts to follow through, then we are going to 
blow the system up, whether it is my friend's voucher that will 
be blown up in the future or it is the current program that is 
driving us over the cliff.
    So I hope we can, as a Congress, look to how we accelerate 
reform to reward value over volume and look deep at what is 
different today than the problems that our friend has mentioned 
in the past.
    Thank you very much.
    Chairman Ryan. Dr. Price.
    Mr. Price. Thank you, Mr. Chairman. And congratulations on 
gaining the gavel.
    Dr. Foster, I want to thank you for your testimony today 
and I think you have brought to light a number of interesting 
areas that frankly weren't discussed in their entirety through 
the discussion over the past 2 years.
    Health care is a dynamic activity, and there are real 
people behind the numbers that we talk about here, not just the 
folks providing the care, but the patients. So the consequences 
of the decisions that we make here affect real lives.
    I want to talk about that a little bit, following up on 
some of the discussion that Mr. Cole addressed. We heard 
throughout this whole debate and the adoption of the bill by 
the President and others, our friends on the other side, that 
if you like what you have, you can keep it; that whole point 
that if you like your health insurance, you can keep it. And as 
has been pointed out here, Medicare Advantage, you stated that 
half of the individuals receiving their coverage through 
Medicare Advantage would be dropping it or no longer having 
that plan. Is that an accurate reflection of what you said?
    Mr. Foster. That is our estimate. And the number for Mr. 
Calvert--although I believe he has had to leave--it was 7.4 
million people.
    Mr. Price. Seven point four million people will not be able 
to continue in the coverage that they currently have?
    Mr. Foster. That is right.
    Mr. Price. And I don't want to ask an actuary a political 
question. But it is some of my assessment that some of those 
7.4 million people, individuals, actually like what they have 
and they aren't going to be able to keep it, as a consequence 
of this legislation.
    Mr. Cole talked about the Medicaid participation by 
physicians. And I think it is incredibly important. As a 
physician, I know that many of my former colleagues, the 
reimbursement rates, the moneys that they receive for caring 
for Medicaid patients don't even cover the costs of providing 
that care. You have found that in your assessment as well?
    Mr. Foster. There are studies out there for Medicaid, 
looking at the adequacy of payment rates or the level. It 
varies quite a lot by State, as I am sure you know. If I 
remember it correctly, for physician payments, the lowest State 
had payment rates for physicians that were about 37 percent of 
Medicare's. Most States were more in the 70 or 80 percent 
    Mr. Price. And we are headed in that direction with 
Medicare, are we not? That chart in your testimony on page 7, 
your chart cites the difference between the provider input 
prices that you mentioned and the Medicare payment rate there. 
And this delta, this difference here will move the Medicare 
reimbursement towards the direction of the Medicaid 
reimbursement in many States, that is lower and making it so 
that more physicians, under your testimony, are going to have a 
more difficult time keeping their doors open for Medicare 
patients; is that accurate?
    Mr. Foster. Yes. Unless physicians can improve their 
productivity or take other steps.
    Mr. Price. And do you have any idea or sense about the 
percent of physicians that are not participating in Medicaid 
right now?
    Mr. Foster. No, I don't. There are surveys out there. What 
I believe I remember is that in the most recent one I saw, that 
about 15 percent of physicians nationwide said they were no 
longer taking or treating Medicaid patients.
    Mr. Price. And that number is moving up as the 
reimbursement moves down. I want to address another issue on 
how some of this was paid for. You mentioned in your testimony 
the taxes on insurance plans, prescription drug manufacturers, 
and device makers. You talked about the fact that technology 
improvements in health care actually increase costs. What is 
the reason for that?
    Mr. Foster. Well, I will give you two examples. You know, 
of course, that in recent years it is possible to implant a 
defibrillator in a patient with congestive heart failure or 
some other similar problem. And the implantable defibrillators 
are very expensive, and the technology didn't exist even a few 
years ago for this kind of procedure or its benefits. So many 
of the new technologies are very valuable, can help sustain 
life or improve the quality of the person's care.
    Let me give you another example. And you will understand 
this one better than I do. For years and years, the dye that is 
injected in a person's veins when they do body scans and so 
forth, there was a dye that had a very, very low rate of 
adverse side effects, next to nothing. And it was cheap. 
Everybody used it. A better dye came along that took the very 
low rate of adverse side effects and cut it roughly in half. It 
was negligible to begin, and now it is even less so.
    Mr. Price. I am running out of time.
    Mr. Foster. And it costs 10 times as much. Everybody is 
using the new one.
    Mr. Price. If you tax device manufacturers, do you not get 
less innovation and technology?
    Mr. Foster. I suspect what happens if you just tax device 
makers is you get a higher price for the devices.
    Mr. Price. Thank you. I yield back.
    Mr. Cole [presiding]. Mr. Yarmuth.
    Mr. Yarmuth. Thank you very much, Mr. Chairman. Thank you 
for your testimony, Mr. Foster.
    I hate to use my time for this, but I need to clear up an 
impression that was left in Mr. Cole's questioning of you as to 
the effect of the Affordable Care Act on Medicaid. I am afraid 
the impression was left that all of a sudden, the States are 
liable for expenditures to cover the expanded Medicaid 
eligibility citizens, when in fact the Affordable Care Act has 
the government pick up 100 percent of that additional cost for 
the rest of this decade; isn't that correct?
    Mr. Foster. For the first 3 years.
    Mr. Yarmuth. For first 3 years, and then 90 percent.
    Mr. Foster. Ninety percent in 2020 and later.
    Mr. Yarmuth. Right. And the cost of doing that to the 
Federal Government is accommodated by the increased revenues 
and the savings that were implemented in the law so that the 
net result of expanding the coverage under Medicaid to the 
deficit is not a negative figure; is that correct? According to 
    Mr. Foster. Yes. For the Federal deficit, that is correct.
    Mr. Yarmuth. Right. Exactly. Thank you.
    As I read your testimony, and I appreciated it very much, 
it seems to me that the only real hesitation you have is over 
this effect on providers in terms of whether or not the plan 
can actually result in the fiscal impact that we believe and 
CBO believe that it has. Is that a new concern? I mean, isn't 
that the concern that existed prior to even consideration of 
the Affordable Care Act?
    Let me ask--and I have a vested interest in this. I admit, 
my brother runs a home health care company. I am a stockholder. 
I have to make that clear. But back in the late 1990s, there 
was a severe drop in the reimbursement to home health care 
companies. About half the companies in the country went out of 
business for the same effect that you are warning of in your 
    Mr. Foster. Adequate payments for providers for the 
services they give to Medicare beneficiaries is important. It 
has always been important to Congress and the administration.
    Mr. Yarmuth. Right.
    Mr. Foster. So there had been concerns in the past, like 
the home health example you mentioned and some others that can 
come to mind like physical therapy.
    Mr. Yarmuth. Right.
    Mr. Foster. We anticipate or we see the potential for such 
concerns to be very widespread in the future.
    Mr. Yarmuth. Right. And let's say hypothetically under 
Chairman Ryan's road map which relies on pressure from both 
insurance companies and from individuals on providers to lower 
the cost of care--and in his document it says: With individuals 
controlling their own health care dollars, providers will be 
encouraged to compete for business by increasing quality and 
charging more competitive prices.
    So in order to get the effect that he is projecting in 
terms of cost, he relies on pressure from a different source--
competitive pressure as opposed to government mandate. But it 
still could have the effect of putting undue or unprofitable--
putting providers in an unprofitable position, could it not? 
Because there is always going to be a problem no matter what we 
    Mr. Foster. Well, the potential is there, as we talked 
about earlier.
    Mr. Yarmuth. Whether it is an insurance company putting 
pressure on providers, whether it is the government putting 
pressure on providers, or whether it is a consumer saying, I 
don't want to pay that much for your service, it is always a 
    Mr. Foster. With the provider of payment rates, if it ends 
up that a provider can just not cover his or her input costs, 
then that is a pretty clear-cut problem. The ability of a 
private insurance plan is to compete against each other, which 
they already do, but could be intensified under this kind of 
proposal. That has got the ability to get to your lowest 
bottom-dollar cost consistent with appropriate quality. But 
again, there are risks in both approaches that would need to be 
    Mr. Yarmuth. Exactly. Let me ask you a quick question about 
the CBO's track record and projecting effects of legislation on 
cost. In 1982 and 1983, the hospital prospective payment plan 
projected a savings of $10 billion over a period of 3 years. It 
was actually $21 billion. They underestimated the savings by 50 
percent. The Balanced Budget Act which we have referenced, 
actually the savings that CBO projected were exceeded 50 
percent greater in the first year, 113 percent greater the 
second year. And in Medicare part D, the projected costs over 
the first year was actually 40 percent lower than they 
projected. So CBO has actually had in recent history, the last 
couple of decades anyway, a track record of actually 
underestimating the savings or overestimating the cost to the 
government in their projections. Is that not accurate? My time 
is up, but you can answer that.
    Mr. Foster. I don't know their specific track record. I do 
know that we have from time to time overestimated or 
underestimated. I would like to think that it is about 
balanced. But, one way to find out.
    Mr. Yarmuth. Thank you very much.
    Mr. Cole. Mr. McClintock.
    Mr. McClintock. Thank you, Mr. Chairman.
    Two quick questions. We have touched on them, but just true 
or false: The two principal promises that were made in support 
of ObamaCare were, one, that it would hold costs down. True or 
    Mr. Foster. I would say false more so than true.
    Mr. McClintock. Okay. The other promise that Dr. Price had 
just touched on was the promise that if you like your plan you 
can keep it. True or false?
    Mr. Foster. Not true in all cases.
    Mr. McClintock. A few years ago, I had a fellow come to 
me--I was in the State legislature at the time. He had lost his 
job. He was in the private insurance market, went around trying 
to find coverage. He was turned down because of a preexisting 
condition. He had bursitis. He said, I don't care about the 
bursitis. That is a nuisance. I will take care of that. Just 
write me a policy to cover everything except the bursitis. And 
the response was, we would love to write you such a policy but 
we can't; it is against the law.
    Has there been any data on how much access has been denied 
because of nonlife-threatening conditions like bursitis, or I 
believe Ms. Kaptur mentioned bunions earlier?
    Mr. Foster. Not to my knowledge. The various State 
insurance departments might well have some feeling for that but 
I do not, I am afraid.
    Mr. McClintock. I rather suspect if we restored to people 
the freedom to obtain insurance policies tailored to their own 
needs, the lack of access to health insurance would drop 
substantially. There is an organization that runs a Web site 
called coverageforall.org.
    Chairman Ryan [presiding]. Will the gentleman yield for 
just a brief second? There is a vote on. And my intention is 
just to keep it rolling. So Mr. Honda is going to be next. So 
we are going to keep it going just in the interest of time. And 
I will stay until near the end, when Mr. Rokita will come back 
and relieve me to go vote, and we will just keep this going.
    Mr. McClintock. It is run by a private foundation. The head 
of that foundation tells me that they get tens of thousands of 
inquiries every month and are able to find insurance for these 
folks either in the private or public sector, about 99 percent 
of them anyway. Has there been any study on what is the 
percentage of uninsured who can either afford private insurance 
plans who simply haven't availed themselves of it or have 
qualified for public plans and have not availed themselves of 
    Mr. Foster. We do have data on that in our model for 
estimating the health reform proposals. And it is not uncommon 
to see people who are young, good health status that have the 
option of employer coverage and they just don't take it.
    Mr. McClintock. Well, the head of this foundation says that 
they are able to place 99 percent of the folks who make 
inquiries. Do you have any data that would support or refute 
that number?
    Mr. Foster. We could tabulate these numbers from our 
sample. But I don't know the results off the top of my head. We 
find many other people--and this is a bit surprising--where 
they might be eligible for Medicaid or they might be eligible 
for their employer plan, and they have actually fairly high 
health care costs, and yet they still don't sign up, even 
though it would be in their best interest financially, but 
something is preventing them from doing it, either a lack of 
understanding or maybe they can't afford their share of the 
premiums. So there is a lot of variation out there in people's 
insurance status.
    Mr. McClintock. Final question. You have looked at this 
issue pretty carefully. If you could design the ideal system, 
what would it look like?
    Mr. Foster. For health care in the U.S. overall?
    Mr. McClintock. In 60 seconds or less.
    Mr. Foster. Well, if I had a really good answer for that, I 
probably would be wealthy and doing something else. I would be 
happy to talk with you and your staff further about 
    Mr. McClintock. I will yield back.
    Chairman Ryan. Mr. Honda.
    Mr. Honda. Thank you, Mr. Chairman. And let me commend you 
for having these hearings. I think that without this hearing 
and without passage of the Affordable Health Care Act, we would 
not have this great conversation and this question-and-answer 
period. And I appreciate, Mr. Foster, your expertise. In fact, 
I am kind of in awe of it. And I appreciate the information 
that we have here that if we did not move on the Affordable 
Care Act, there would be approximately 34 million people 
without insurance coverage at a cost of 1 percent of increasing 
the costs.
    One of the things I find very interesting in this process, 
Mr. Chairman, is that Mr. Foster is helping us identify some of 
the land mines that we need to look at in order to move forward 
and improve this affordable health care plan. We knew at the 
beginning that it is not the perfect plan. But I do know that 
there are a lot of people who are going to be helped with this.
    And part of the robust dialogue and the debate is about 
identifying these kinds of land mines, one of which is--you 
talked about innovation. And I appreciate the comment about the 
cost of innovation that would be added to this kind of an 
effort. And I think that it bears well for people in my 
district, Silicon Valley, to listen to that. And what I mean by 
that is there is a lot of money spent on NASA research, which 
we must do and you support that, I believe. It is the product 
development research that could be more costly. And one of the 
good examples is that every time we have a new invention or a 
new innovation for a telecom or a wireless, we have to buy a 
new gadget. That is expensive. But if you can create the 
addition to a gadget that already exists and add that to an 
existing BlackBerry, say, the cost of the new innovation would 
be greatly reduced. So I think that that is one great thought 
that you brought up. And I think that is a policy I think we 
need to look at when we start to put money into product 
development research, and make that distinction from NASA 
research. And I think that it will also reduce a lot of 
equipment that is going to be out there that is going to end up 
being surplused, and then we have more stuff that we have to 
get rid of. Would that be an accurate statement of what you 
meant by the increased costs in technology?
    Mr. Foster. I suppose that is a piece of it. What I really 
had in mind was, doctors want to save patients' lives and give 
them better lives. Device makers and drug makers, they all want 
to do the same thing too. Many of these people, of course, want 
to make a good living while they are at it. But it all starts 
with treating people better and more effectively.
    There is a lot more focus and attention given on coming out 
with a new device or a new technique that will have a big 
impact no matter what the cost is, because with widespread 
insurance coverage, we only see as patients a small part of the 
total cost.
    Mr. Honda. Correct.
    Mr. Foster. There is much less of the innovation and the 
research and development that goes into coming up with an 
existing treatment and making it more efficient, less costly 
with the same quality outcome. And I think that will change in 
the future, but only with forces that tend to drive it to 
    Mr. Honda. And thus your example about a negligible side 
effect. You have one that is even less than that, but 10 times 
the cost in making it happen. And I think that is a point well 
taken. We see that in virus when we try to come up with 
inoculations, but we could look at a viral approach versus 
using eggs. And I think that that is one of the admonitions 
that you are probably talking about. So it is one that I take 
very seriously, and I appreciate your input on this.
    And I appreciate this process, Mr. Chairman. Thank you very 
much. And I think that the point is this: We start it and that 
is the good thing. Without the start, we would not have this 
debate, this dialogue, and I think the people of this country 
deserves this kind of work, where we really tease out all the 
issues so that when we come to another point, we may come 
closer to agreeing.
    So to the witnesses and to yourself, Mr. Chairman, thank 
you for coming. We appreciate it.
    Chairman Ryan. I thought we were going to have a member 
back. Perhaps they aren't going to voice-vote the second vote. 
So I will recess subject to the end of these last votes.
    Chairman Ryan. The hearing will come to order.
    We are just going to take Members as they come back. Next 
in line is Mr. Ribble from Wisconsin.
    Mr. Ribble. Thank you, Chairman Ryan. I appreciate being 
here. Mr. Foster, thank you for attending this hearing today. I 
appreciate that as well.
    Today's Budget Committee hearing is the first one that I 
have ever attended as a Member of Congress, but controlling our 
Federal budget is one of the reasons that I came here. It was a 
big part of why I decided to enter, after 30 years in the 
private sector, the race to become a Congressman.
    Last night we heard from the President. He is also 
concerned about our budget and about the deficits. I have heard 
the President on many occasions, as well as Members of 
Congress, talk about our Federal Government heading down an 
unsustainable path. Last night I was pleased that he talked 
about his children and his concern for his children. I have two 
grandchildren, and I am concerned for them as well. So I was 
very pleased that I was asked to serve on this committee, and I 
am pleased that you came here to talk to us today.
    I recognize, I think all Americans recognize, there is 
going to be some level of shared sacrifice that we are all 
going to have to participate in if we are to create a fiscal 
path that is sustainable. But I do have just a few questions, 
and then I will yield back to the chairman.
    Referring to your testimony on page 7, I would just like to 
read one statement you made: ``Over time, a sustained reduction 
in payment updates based on productivity expectations that are 
difficult to attain would cause Medicare payment rates to grow 
more slowly than and in a way that was unrelated to the 
providers' cost of furnishing services to beneficiaries. Thus, 
providers for whom Medicare constitutes a substantive portion 
of their business could find it difficult to remain profitable, 
and, absent legislative intervention, might end their 
participation in the program, possibly jeopardizing access to 
care for beneficiaries. Simulation by the Office of the Actuary 
suggests that roughly 15 percent of providers would become 
unprofitable within the 10-year projection period as a result 
of the productivity adjustments.''
    Given this concern, do you believe that it is going to be 
more likely or less likely that students who might be 
considering a career in medicine, whether it be doctors or 
nurses, any type of health care providers--do you believe it 
would be more likely they would enter given this scenario or 
less likely?
    Mr. Foster. Well, that is a good question that I hadn't 
thought about a whole lot. I think for somebody who thinks 
about the issue, that they would recognize health care in the 
U.S. is going to remain a growth industry for decades to come. 
Many people who go into medicine, of course, want to help other 
people. I would think there would still be a lot of interest. 
My bigger concern would be will Medicaid be paying enough to 
attract those doctors into treating Medicaid patients; and 
likewise with Medicare, will the payment rates be sufficient to 
attract doctors' interests.
    Mr. Ribble. I would agree with you with that same concern. 
If, in fact, fewer medical providers will provide services, 
either to Medicare or Medicaid, and the access to supply goes 
down, demand is going to continue to go up based on all the 
charts I saw today. In fact, demand is going to increase 
dramatically. The concern I have is that the supply of 
providers is going to go down for this.
    Given that concern, do you anticipate either increases in 
costs or a big shift in costs to people who are not in that 
program, where the shifting gets worse, given the fact that 
supply will go down?
    Mr. Foster. There are very possible sort of macroeconomic 
effects like that. In other words, if a doctor has the choice 
between--if a doctor has a potentially, unlimited, unworkable 
amount of patients he or she could receive, would the doctor 
want to take the private health insurance payments with a 
negotiated payment rate, or Medicaid or Medicare, where it is 
administratively set and could become inadequate? It is not 
hard to figure that one out, although many doctors want to help 
everybody. If the supply of providers, doctors or other 
facilities or whatever--if the supply of available care goes 
down, then it is likely that, where possible, prices for that 
remaining supply would go up.
    We cautioned about many of these potential macroeconomic 
effects in our April 22nd memo at some length, but we also 
acknowledged that we don't have the ability to really test how 
serious are these concerns, how likely, how difficult if they, 
in fact, occur.
    Mr. Ribble. Thank you, Mr. Foster.
    I yield back, Mr. Chairman.
    Chairman Ryan. Ms. Wasserman Schultz.
    Ms. Wasserman Schultz. Mr. Chairman, thank you.
    I want to focus on seniors and the costs of the Affordable 
Care Act and how it affects seniors, because our Republican 
colleagues on the other side of the aisle have talked about 
wanting to reduce costs for seniors, yet seemingly the repeal 
of the Affordable Care Act would actually increase costs 
    Specifically, Mr. Foster, could you tell us if Medicare 
fee-for-service beneficiaries will see their premiums and 
coinsurance go up, or down, as a result of the Affordable Care 
    Mr. Foster. Generally speaking, if the Affordable Care Act 
were repealed, then the cost-sharing requirements and the 
premiums for fee-for-service beneficiaries would increase. The 
reason is that because of the lower payment rates for 
providers, most categories of providers, under the Affordable 
Care Act, if the payment, the allowed charge for a payment, is 
lower, then your 20 percent coinsurance on that rate is also 
lower, and if the payment rates are not reduced, then you don't 
get that gain or that improvement in coinsurance.
    Ms. Wasserman Schultz. And can you focus a little bit on 
the part D component, the effects of the Affordable Care Act on 
the part D premiums and how that would impact seniors?
    Mr. Foster. Yes. For part D, the drug benefit, in part 
because of the phasing out of the coverage gap or the so-called 
donut hole, that raises the cost of the program somewhat and 
would result in somewhat higher part D premiums as a result.
    Ms. Wasserman Schultz. And arguably that would be offset by 
the considerable reduction for seniors participating in part D 
in their out-of-pocket costs as a result of the donut hole 
being closed over time, correct?
    Mr. Foster. I think that is correct, but I am going to ask 
John Chateau if he has an opinion.
    Yes. He said for those who reach the coverage gap, that 
would be the case.
    Ms. Wasserman Schultz. Thank you.
    Just a follow-up question. On the subject of prescription 
drug benefits again, specifically, when our colleagues on the 
other side of the aisle passed the Medicare Modernization Act 
in 2003 that created the Part D program, its costs were not 
offset. CBO at the time estimated that the bill would add $394 
billion to the deficit over 10 years. This was a bill that was 
unpaid for. What is the traditional long-term horizon for 
actuarial projections in the Medicare trustees' report? How 
many years?
    Mr. Foster. Seventy-five years.
    Ms. Wasserman Schultz. And, according to projections, how 
much will the prescription drug program draw from general 
revenue over that 75-year period?
    Mr. Foster. Let me look up an answer for you, since I don't 
remember everything off the top of my head.
    Ms. Wasserman Schultz. Thank you.
    Mr. Foster. Well, I will tell you what. This one I am going 
to look up in the trustees' report myself so I don't tell you 
anything wrong.
    Ms. Wasserman Schultz. Thank you very much.
    While he is looking up the answer, do you mind if my time 
not tick off?
    Chairman Ryan. Go ahead, timekeeper.
    Ms. Wasserman Schultz. I don't want to run out of time 
while he is thumbing through the pages. Thank you.
    Chairman Ryan. Turn it back on now.
    Mr. Foster. The Federal cost, the Medicare cost for part D 
as a percentage of GDP is currently about 0.4 percent. Yes, 
that is an average figure which I will quote, also. That 0.4 
percent currently is going to increase over time as the cost 
goes up at a faster rate than GDP. At the end of the 75-year 
period, for example, it would be about 1.75 percent. The 
average that Diana Meredith was so helpful finding for me, the 
average over the entire 75-year period is about 0.7 percent of 
    Ms. Wasserman Schultz. And what does that translate to in 
    Mr. Foster. That is a good question. How much is GDP these 
days, $15 trillion?
    Ms. Wasserman Schultz. Would about $7.2 trillion in present 
value terms be accurate?
    Mr. Foster. Oh, for the whole 75 years, that sounds like 
the right ballpark. That is the total cost over the entire time 
    Ms. Wasserman Schultz. One of the concerns is you have 
CBO's score of the Medicare Modernization Act, which included 
nearly $410 billion in new spending for the prescription drug 
benefit, but it also showed, between the puts and takes in 
Medicare and Medicaid and revenues, that netted out to about 
$16 billion in savings over 10 years. So the vast majority of 
the prescription drug benefit's cost, $394 billion over the 
first 10 years, was added to the deficit, is that correct?
    Mr. Foster. I believe that is correct. I don't remember any 
other legislation designed to offset the cost of the Medicare 
Modernization Act.
    Ms. Wasserman Schultz. Just to wrap up, is it reasonable to 
assume that projected out over 75 years that the unpaid portion 
of the prescription drug benefit would reach into the trillions 
of dollars?
    Mr. Foster. Yes.
    Ms. Wasserman Schultz. Thank you very much.
    Thank you, Mr. Chairman. I yield back.
    Chairman Ryan. Mr. Huelskamp.
    Mr. Huelskamp. Thank you, Mr. Chairman. I appreciate the 
opportunity to ask a few questions.
    Mr. Foster, I appreciate you being here. I know you had 
some earlier discussion about the number of providers that 
would become unprofitable in the next 10-year period under this 
law. Is there a certain breakdown on what types of providers 
that might disappear, refuse to provide services? I wonder if 
you could describe that a little bit more in detail.
    Mr. Foster. Yes, I can.
    We looked at three categories of providers: hospitals, 
including both their inpatient and outpatient sides; skilled 
nursing facilities; and home health agencies. What we found in 
terms of the proportion of each category that would become 
unprofitable as a result of the productivity payment 
adjustments, they were fairly similar. So that 15 percent 
figure that I mentioned holds about right for each of the three 
    Mr. Huelskamp. In addition, were there any disparities in 
geographical breakdown on those numbers of providers with the 
cuts that were contained within the law?
    Mr. Foster. There might well be. We did not look to see the 
most effective providers, whether they were concentrated in one 
part of the country or another. That could be done, but we 
haven't done it at this time.
    Mr. Huelskamp. Do you not already have data about that 
effectiveness for different geographical regions?
    Mr. Foster. We certainly have the cost report data from 
every single facility provider in the whole country, and we can 
tabulate that data along the lines you are describing. Most of 
our analysis is done at a national level, but we could do that.
    Mr. Huelskamp. I would appreciate that detail on a rural 
versus urban breakdown.\6\
    \6\ Editor's Note: The committee had not received the requested 
information prior to its publication deadline.
    Mr. Huelskamp. Mr. Foster, the numbers I have heard from 
rural hospitals is that actually perhaps a quarter to a third 
of those would disappear. What kind of options would Medicare 
patients have if the hospitals disappeared?
    Mr. Foster. The situation you described, if the hospitals 
could no longer participate because of inadequate payment 
rates, would be fairly catastrophic in terms of its impact on 
Medicare beneficiaries, not to mention other patients in the 
area. It is for that reason that I am relatively convinced that 
if the payment rate became inadequate and were seen to be 
approaching inadequacy that Congress would act to do something 
about the payment rates to prevent exactly that scenario from 
    Mr. Huelskamp. To repeat your earlier testimony again, the 
estimates, I presume that scenario would never be reached, but 
you believe it would be reached fairly quickly?
    Mr. Foster. I think there is a strong likelihood of that, 
yes, sir.
    Mr. Huelskamp. As far as CMS, is there an expectation of 
how close services should be available to Medicare patients?
    Mr. Foster. How close? You mean in terms of just physical 
    Mr. Huelskamp. Physical distance, availability. When we 
talk about the massive cuts proposed in this bill for Medicare, 
particularly in rural areas, I am just wondering what is the 
principle involved here? I have not heard much concern, not 
from you but from CMS, about that lack of providers and how far 
we expect them to go to receive services under the massive cuts 
in the bill.
    Mr. Foster. I think there are such concerns. They show up 
in different ways, for example, within the Medicare Advantage 
world and provider networks, likewise part D, pharmacy 
networks, what kind of distances are there and what is allowed 
to form a reasonable network. There are any number of hospitals 
that have been in some danger of going out of business that 
have been classified as critical access hospitals or sole 
community providers. So I think the concern is there.
    Mr. Huelskamp. And are there any other proposals that you 
would suggest, other than potentially restoring the proposed 
cuts in the law, to prohibit this catastrophic event?
    Mr. Foster. I would propose that we, the Office of the 
Actuary, you, Members of Congress, MedPAC working on your 
behalf, CBO, that we all pay very close attention to the 
adequacy of payment rates and any potential access problems and 
act sooner rather than later if these problems develop, as I 
think they may well.
    Mr. Huelskamp. I appreciate that, Mr. Foster.
    I also served for many years at the State government level, 
and we have already seen that occur in Medicaid. If we end up 
in that same situation in Medicare, it doesn't matter how much 
insurance you have if you don't have a provider. This bill 
assumes there will be providers, or this law presumes that. We 
will have a catastrophic situation, and I am very disappointed 
the former Congress did not look closely at that matter.
    I appreciate your answers to the question, and I yield back 
my time.
    Chairman Ryan. Ms. Moore.
    Ms. Moore. Well, thank you so much, Mr. Chairman, for 
yielding, and I want to thank Mr. Foster for appearing. Rumors 
that actuaries are boring have been greatly exaggerated.
    Mr. Foster. Can I have that in writing, please?
    Ms. Moore. This has been a really great discussion. I have 
learned a lot. I wasn't on any of the committees of 
jurisdiction that put the bill together.
    So we started out with the chairman making a definitive 
statement that I agreed with totally, that our fiscal problem 
in this country is a health care problem. I was wondering if 
you agreed with that statement? Is it a fiscal problem? Then I 
have read other sort of independent reports. I am reading a 
report here by Henry Aaron--not the famous Hank Aaron--from the 
Brookings Institute. He coauthored it with David Cutler, 
Professor of Applied Economics at Harvard, and Alice Rivlin, 
Greater Washington Research of the Brookings Institution, that 
say that current health care expenditures are now $2.6 
trillion. They are projected to reach $4.5 trillion in 2019.
    In your testimony, Mr. Foster, you said that health care 
expenditures would be something like--what did you say--7.6 
percent, they would rise by 2019. Can you remind me of what you 
said in your testimony?
    Mr. Foster. Well, I am trying to remember. I talk a lot, 
and then I forget some of it.
    Ms. Moore. Right. So I guess the first thing I want to 
clarify is that, absent this bill, health care costs are rising 
at an unsustainable level already. Would you not agree with 
    Mr. Foster. They are rising at a rate that certainly is 
causing problems and will continue to cause problems. Whether 
it is sustainable or not, that is in the eye of the beholder. 
But it is a rate that could not go on forever at that rate.
    Ms. Moore. Right. There has been a great deal of discussion 
about the impact of this bill and the costs of it being 
unsustainable. I guess what I really wanted to clarify is that, 
for businesses, for individuals, people in the individual 
market, absent being on Medicare, Medicaid, being the poor, 
health care costs are unsustainable with the current growth 
    So the real question that I have is based on the next 
statement I think my chairman made, is that Medicare is the 
biggest driver of the debt. The question I want to know is, is 
the cost of care for Medicare being driven by the private 
sector, the increases in the costs in the private sector, or is 
Medicare driving those costs upward? I was confused by all this 
    Mr. Foster. Sure. The answer is that the factors that 
affect health care cost growth tend to affect it in all 
categories, whether it is Medicare, Medicaid.
    Ms. Moore. No, but I am saying is the pricing in the 
private market the determinant of how much--you say that 
Medicare and Medicaid doctors are receiving lower than what is 
happening in the private sector, is that correct?
    So, in other words--my time is expiring. I am just going to 
make a statement and say that the fiscal problem is the fact 
that we aren't bending the cost curve in the private sector. So 
that is what this bill is intended to do. This notion that--so 
you say in your testimony that this bill, if implemented, would 
have grown by 7.2 percent by 2019 but will grow instead by 6.9 
percent if this is implemented as we anticipate. And I think 
that that is extremely important to point out, that it is not 
Medicare and Medicaid that are responsible for these 
unsustainable health costs; it is that we have got to bend the 
cost curve.
    Now, the fact there are going to be so many more patients, 
Medicare, Medicaid, 34 million, according to your testimony, 
more people who are insured, shouldn't that, based on what we 
know about insurance, bring the costs down? Shouldn't that be, 
the mandate to have insurance, shouldn't that in fact be 
something we can assume would bring the cost of health care 
down, more people, having the risk spread across 34 million 
more people? Shouldn't that bring the private sector costs 
    Mr. Foster. It can. The factor you are talking about is if 
you can get a broad risk pool of average health people, not 
just the high-cost ones, but the high-cost, the medium, the 
low-cost, everybody, and if you can avoid what actuaries refer 
to as adverse selection, where people get insurance only when 
they need it and that tends to drive up costs, then you would 
have every reasonable expectation that the premiums that the 
insured people would have to pay would better match this 
average risk level. And I think in fact that will happen with 
the exchange coverage and a mandated coverage.
    Ms. Moore. Thank you so much for that testimony, Mr. 
Foster. The cost curve and premiums will go down with more 
coverage of more people and that it is private-sector insurance 
that is driving the cost up, not Medicare. Thank you for those 
    I yield back.
    Mr. Foster. And I would just add, I wouldn't agree with all 
of that, but I would be happy to discuss it.
    Ms. Moore. I get the last word, sir. I don't think you get 
the last word.
    Mr. Foster. I apologize.
    Chairman Ryan. Mr. Mulvaney.
    Mr. Mulvaney. I would be happy to yield 30 seconds of my 
time to the presenter.
    Ms. Moore. I don't think you can yield time to the 
presenter, Mr. Chairman.
    Mr. Mulvaney. I am joking, Ms. Moore.
    Ms. Moore. I just want to make sure. Did I miss out on the 
rules package?
    Mr. Mulvaney. That is fine.
    Mr. Foster, thank you very much. I thank you for sticking 
around while we had to come and go for that vote.
    I have what is probably an academic question for somebody 
who is just trying to figure out government accounting versus 
what I consider to be ordinary, real-world accounting.
    I want to go back to that $100 example you gave earlier of 
these additional revenues coming into the general fund for 
Medicare. The Treasury issues this bond, this private debt 
essentially over to Medicare, and that is essentially how that 
additional $100 both reinforces the condition of the trust fund 
and helps reduce the deficit, giving rise to some accusations 
that maybe it is double counting. But I think what you told us 
today is that that transaction is unwound at the back end and 
we only count it one time.
    Here is my question: When that $100 flows into the Treasury 
and the Treasury issues that bond--we will use that term--which 
is a private debt of the United States Government, doesn't that 
in and of itself increase the debt of this government?
    Mr. Foster. It does.
    Now, the national debt is counted two different ways. One 
way counts all of it, including amounts owed to Federal trust 
funds, including Medicare; and another way is to look at the 
national debt excluding the Federal trust funds. I think the 
latter method is more commonly looked at.
    Mr. Mulvaney. Right. In terms of the debt ceiling, don't we 
count both of those things?
    Mr. Foster. I will leave that up to somebody else who knows 
the answer better than I do.
    Mr. Mulvaney. Is it fair to say that that transaction, 
while it doesn't impact the deficit, this $100 transaction that 
you walked through, that it actually helps the deficit, to use 
the previous example, does reinforce for at least a period of 
time the condition of the Medicare trust fund, does also 
increase the private debt of this country?
    Mr. Foster. The $100 bond does increase the total gross 
Federal debt.
    Mr. Mulvaney. Thanks, Mr. Foster.
    That is all I have. I yield back the balance of my time, 
Mr. Chairman.
    Chairman Ryan. You will learn to use it all. Everybody 
    Ms. Castor.
    Ms. Castor. Thank you very much, Mr. Chairman.
    Welcome, Mr. Foster.
    I appreciate having this hearing on the fiscal benefits of 
the Affordable Care Act, and I am very interested in health 
policy and really like a good discussion and debate. But I have 
to tell you, the folks I represent back home, they don't want 
to relitigate and re-fight the old health care battle. Yes, 
they want us to improve it, but they went through that for a 
couple of years, and they want us to focus on jobs and the 
economic recovery as our primary responsibility. But here we 
    What I am hearing back home is that they are really 
appreciating these new reforms, eliminating the discrimination 
based upon preexisting conditions. There are so many of our 
neighbors and family members, people that we know, that have 
had cancer, they might be in remission, asthma, children with 
diabetes, now they can get insurance.
    I hear from a lot of parents that are welcoming the 
opportunity to keep their kids that are coming out of college 
on their policy. And seniors in Florida, we have quite a 
number, a high percentage, really like the improved Medicare 
benefits. So I think the discussion of repeal is causing great 
instability, and we need to focus on moving forward.
    One of the things is we can't--when you explain to folks 
that repeal is going to blow a $230 billion hole in the 
deficit, they just don't understand how we can be so off track 
on the new Congress.
    But one of the areas where the Affordable Care Act achieves 
substantial cost savings is what we did to eliminate the 
government subsidies and overpayments going to the private 
health insurance companies under Medicare Advantage.
    For a number of years, we were receiving expert advice 
about these overpayments of 14 percent overpayments. The 
Medicare Payment Advisory Committee, an independent group, said 
that those overpayments were no help to the taxpayers and the 
higher subsidies were straining Medicare's already shaky 
financials. They said, rather than improving efficiency, 
Medicare Advantage ``has instead become a program in which 
there are few incentives for efficiencies.'' That was MedPAC 
Chairman Glenn Hackbarth in April, 2007.
    ``There is no longer financial neutrality to the private 
plans because incentives push the costs higher than traditional 
Medicare. Overpaying in the short run, especially overpaying 
indiscriminately without requirements, is never a strategy for 
achieving long-run efficiency.''
    We know now that, under the law, taking all of that expert 
advice from the MedPAC and other groups, that we are, according 
to the nonpartisan CBO, achieving savings of $136 billion. It 
simply wasn't fair to have folks on traditional Medicare and 
other taxpayers providing a subsidy to the private health 
insurance companies.
    You heard from Ms. Kaptur who said--what was it--$9.5 
billion in profits and CEO salaries. Let's put that money back 
into health services for our seniors and the health system. And 
that is what the Affordable Care Act does.
    It just wasn't fair. Because what you were doing with that 
Medicare Advantage, by giving them, the health insurance 
companies, more money, you didn't say we want something for 
that subsidy. You didn't say we want more cost containment. You 
didn't say for that subsidy we want better outcomes or higher 
quality or better care or coordination. There was no incentive. 
Instead, those administrative costs were going up, up, up.
    Now, Mr. Foster, CBO's nonpartisan analysis says we are 
going to save $136 billion on that piece. But I notice your 
analysis says we are going to save even more, $145 billion, is 
that correct? Could you explain why you see greater cost 
savings there?
    Mr. Foster. I would be glad to.
    With any sort of proposal like this, or provision, you can 
try to estimate its future impact over the next 10 years, but 
it requires a lot of assumptions. You have to figure out, okay, 
how many people will still be in the plans, how many people 
would there have been in the plans under the old law, and then 
the comparison of the payment rates is fairly mechanical. But 
the behavioral change, do people drop out of plans or not, that 
is very hard to do.
    So it is not surprising that two independent organizations 
like CBO and the Office of the Actuary would come up with 
somewhat different estimates for this provision, the $136 
billion versus the $145 billion. In fact, it might be a little 
surprising that we are that close.
    Ms. Castor. Moving forward, what is the percentage now in 
the private plans versus traditional Medicare?
    Mr. Foster. Twenty-four percent was the last I heard.
    Ms. Castor. So one-quarter. And I don't know if you see the 
same ads that I see every time there is open enrollment. These 
are still very healthy plans, and they are going to compete. It 
is always amazing to me the full-page ads in the paper, and 
they really helped, besides political campaigns, all of the TV 
stations helped make a profit. So, obviously, there was so much 
in administrative costs and marketing costs going there, and I 
am looking forward to implementing this Act and making sure 
that those monies, rather than subsidies and high CEO salaries 
and big profits, go into the health services for those on 
    I thank you very much.
    Chairman Ryan. Mr. Rokita.
    Mr. Rokita. Thank you, Mr. Chairman; and thank you, Mr. 
Foster, for sticking this out.
    One maybe not so quick question, there has been mention 
made that at least one side of the aisle wants to keep good on 
its promises to seniors. The idea that one group or other has a 
monopoly on that is surprising to me and disappointing to me 
something like that would be said. But putting that silliness, 
which it is, aside for a minute, I would like your opinion and 
direct answer on this.
    If you do not change the health care, quote, unquote, 
reform law that is in effect, if you do not change Medicare law 
and policy, isn't it true that the only way you can cover 
seniors, you can make good on the promises to seniors currently 
and in the future, is to do one or a combination of the 
following: raise taxes; put the costs on the backs of our kids 
and grandkids by the government issuing more debt; or, three, 
ration care, which you could argue to my question is a change 
in the law. Is there any other way?
    Mr. Foster. If you look at the financial outlook for 
Medicare and we see a big gap for the Hospital Insurance Trust 
Fund between promised benefits and scheduled revenues, and we 
see for Parts B and D that the costs go up and the general 
revenues and premiums have to go up automatically to match 
them, and you say, okay, what can you do about Part A, the 
Hospital Insurance Trust Fund, then fundamentally you either 
have to raise the tax rates that support the program or scale 
back on the benefit coverage. Either of those requires a change 
in the law.
    Likewise, the idea of rationing care, which I would address 
with the greatest of reluctance, rationing care would take a 
change in the law, also.
    Mr. Rokita. Right, but you understand the point of my 
question, which was don't change the other parts of the law, 
except the only way to do this would be to raise taxes, debt-
load our kids, or ration care. That is the only way to keep the 
promise in the other parts of the law aside from that, is that 
correct? I think you just said it. Is there any other way? I am 
not trying to trick you. I just want to know if I am missing 
    Mr. Foster. Certainly raising taxes to finance what is 
promised at current levels, et cetera, would work, with various 
implications. If you reduced benefits, I wouldn't say that the 
Medicare package is very luxurious to begin with, so there may 
not be a lot of room there. Under current law, you can't borrow 
to finance Part A of Medicare. You can borrow to financial the 
general revenues for Parts B and D. So that is allowed by 
current law.
    The rationing of the care, right now the law says to 
providers at large, provide these treatments to Medicare 
beneficiaries and we will pay you. We have talked earlier about 
the situation if the payment rates become inadequate and 
beneficiaries might have trouble finding a doctor or other 
provider to help care for them. But I see that not as the 
formal sense of rationing care as generally thought of, where 
if somebody is 100 years old and needs a hip replacement, we 
can't afford to do it.
    Mr. Rokita. I appreciate what you are saying.
    Mr. Chairman, I will yield back, with a request that if we 
are going to talk about keeping our promises to seniors, we do 
it in a more genuine way and recognize that we are talking 
about kids, grandkids, higher taxes, or rationing.
    Thank you.
    Chairman Ryan. Ms. Bass.
    Ms. Bass. Yes. I just wanted to make a couple of points and 
ask you a rather narrow question. Just on the personal level--I 
am new here. This is my third week here. But last year when 
health care reform was passed and signed by the President it 
was a very, very exciting moment for me personally and also 
    Personally, you know, I remember the day I got the letter 
in the mail as a parent saying that my daughter, once she 
turned 23, would no longer be covered. I think that prior to 
this debate most parents didn't even know that was the way it 
was, until you received that letter. Then you are left with 
nothing really to do about it. So having that solved or at 
least extended until a child or young adult is 26 I know is a 
great relief for parents around the country.
    Then just personally, on Tuesday, February 1st, as the new 
Members will be able to sign up for health care, I will be able 
to include my stepdaughter under coverage. She would have never 
been able to be covered before. She is 19. She had leukemia 
when she was 6. A preexisting condition like that would have 
pretty much eliminated her from ever having health insurance.
    On a professional level, I spent many years working in the 
emergency room, and a lot of times I think in this debate when 
we are talking about the 31 or 32 million people not now 
covered, you want to talk about having care rationed, that is 
the population that has care rationed. But it is also a 
population that costs a tremendous amount to our country, 
because they wind up in the emergency room.
    I would see people who would wait months to receive 
treatment because they had nowhere to go and then, by the time 
we saw them, they could have been at the end stage of their 
cancer or requiring surgery. Where if they had had adequate 
health care, they would have never been put in that position to 
begin with. So sometimes I think when we are talking about the 
30 million who are not covered we are thinking about maybe our 
moral or social obligation to cover them. But, putting that 
aside, just the fiscal impact of having people not covered, I 
think oftentimes we lose the point of that in this debate.
    In terms of the question, my question centers on the 
potential savings from payment innovation. The Act includes 
numerous pilots that are aimed at learning what type of payment 
arrangements will best promote efficiency and quality, but yet 
your office hasn't really scored any savings from that, and I 
wanted to know the reason for that. Did you not score any 
savings because you don't think they will work, or because you 
don't have the information, or what is your reason for not 
looking at that?
    Mr. Foster. It is really the latter, the insufficient 
information, particularly at the time that the health care law 
was being enacted. As we said earlier, there is a lot of 
potential good things to come out of innovation for higher 
quality, lower cost, et cetera. But for us to estimate a 
specific result, we have to know something specific that is 
going to be considered. And because there was not sufficient 
specifications or provisions underlying most of these, we were 
not able to.
    Ms. Bass. Do you have any opinions about them, some of the 
projects proposed, the pilots?
    Mr. Foster. Sure. In a general sense, you only have to talk 
to our administrator, Don Burwick, for maybe 3 minutes before 
you hear all about the potential for reducing waste, being more 
efficient in the provision of health care, and you are 
converted. And he is right. There is a lot of services that are 
unnecessary. There is a lot of waste that happens. There is a 
lot of efficiency that could be improved. So these alternative 
methods do have the potential to do all of the above.
    Ms. Bass. Thank you.
    Let me also just say that we were very excited in 
California to be receiving the extra support that was needed, 
definitely, that the plan provides for, that the bill provides 
for in the first few years. Thank you.
    Mr. Foster. If I may follow up very briefly, one of the 
programs that you referred to is the Medicare shared savings 
program for ACOs, and Mr. Chateau and other team members in our 
office are working right now to estimate the specific potential 
for costs or savings from implementing this through regulations 
and the regulations coming out probably in the next few weeks.
    Ms. Bass. Great. So in the next few weeks we would know 
what those savings potentially would be?
    Mr. Foster. Right.
    Ms. Bass. Thank you.
    Chairman Ryan. Mr. Pascrell.
    Mr. Pascrell. Thank you, Mr. Chairman. I am glad we 
clarified I think through the hearing many things. And by the 
way, Mr. Chairman, I think that we have heard enough over the 
last year and a half to indicate we ration health care now. It 
was one of the reasons why we worked to correct that situation, 
and we certainly, none of us who worked in Ways and Means, 
wanted to create a worse situation than we already had. 
Rationing occurs now under the present system, proof positive. 
There is enough data for that.
    So now we know that--and you said, Mr. Foster--correct me 
if I am wrong--that premiums will go down in the exchanges 
which are about to take place in a few years, that it will go 
down because we spread the risk rather than the same folks 
getting the bill. Now we are spreading it across one of the 
basic foundations of what reform is. We have individual 
mandates. That will be debated. It will be debated in the 
    But if you only get insurance when you are sick, in other 
words, if you don't have it, as opposed to making it a mandate, 
then the costs we do know is much higher than it ordinarily 
would be. Point number one. Do you agree or disagree with that?
    Mr. Foster. I largely agree, if I could elaborate just a 
little bit.
    In terms of the premiums going down, certainly if you have 
a risk pool that is mostly made up of people who desperately 
need the insurance because of their high cost and nobody else, 
that is a high premium insurance policy.
    Mr. Pascrell. Right.
    Mr. Foster. If you have people who have some risk of health 
care cost and they want insurance against that, but they are 
not high cost currently, they could just become so, and they 
are included in the pool, then the premium comes down. There 
are other factors that affect whether premiums increase or 
decrease, one of which is the Affordable Care Act mandates 
certain minimum standards for coverage, which could tend to 
raise the coverage and therefore the premium that goes with it.
    Mr. Pascrell. Thank you. So on the other side of these 
increases in premiums, given the scenario which I just 
presented, what about Medicare premiums? Congresswoman 
Wasserman Schultz referred to this before. How do we get to 
deal with that?
    Now, you, the Office of Actuary, stated very clearly that 
Medicare will be preserved and strengthened through this 
legislation. There are two points I want to put before you. I 
want to ask if you agree or you disagree and then, if you 
would, tell us why. It will lower annual premiums by nearly 
$200 per beneficiary; and, B, it will lower annual average 
coinsurance by over $200 per beneficiary. Is this true or not 
    Mr. Foster. Yes. If you look at the coinsurance impact for 
fee for service beneficiaries, and it is important to 
distinguish between fee for service and those in Medicare 
    Mr. Pascrell. What is the direction we are going in 
throughout this legislation?
    Mr. Foster. It is more fee for service.
    Mr. Pascrell. That is correct.
    Mr. Foster. Yes, that is correct.
    As you mentioned earlier, because of the lower payment 
rates to providers, that translates into lower coinsurance 
within Part A, Part B, and Part D for fee for service 
beneficiaries and of the order of magnitude that you cited. 
There are also premium impacts for Part B.
    Mr. Pascrell. In conclusion, Mr. Foster, and thank you for 
your testimony, we can't really score or we can't really come 
up with a number that makes sense, can we, in dealing with the 
benefit of a proven preventive care. Let's take that one for 
example. That is a tough thing to score, isn't it?
    Mr. Foster. Yes, sir, it is.
    Mr. Pascrell. Yet in the very foundation of this 
legislation, which is now the law of the land, the very 
foundation is to make sure that we mandate those preventive 
examinations, and I would think they would be no better used 
than with our senior population. Would you agree or disagree 
with that?
    Mr. Foster. Preventive care I think is very valuable, very 
helpful for all patients, and given the much higher propensity 
for older people to have health conditions, all the more so for 
    Mr. Pascrell. Thank you, Mr. Foster.
    Thank you, Mr. Chairman.
    Chairman Ryan. Mr. Tonko.
    Mr. Tonko. Thank you, Mr. Chairman.
    Mr. Foster, the measure that passed as a repeal bill last 
week was somewhat silent on the $250 checks that have already 
been issued to seniors who qualified with that threshold level 
in the pharmaceutical piece. What is your thinking if the law 
were to be--if that were to be enacted into law in terms of 
how--whether or not the seniors would have to repay those 
checks to the government?
    Mr. Foster. Well, in fairness, I don't actually know. If 
the law were repealed retroactively and all the provisions that 
have already taken effect, such as the Part D rebate checks for 
people in the coverage gap, along with everything else, if all 
that was put back the way it had been, then in theory I think I 
was quoted as saying that people would have to pay back those 
    Mr. Tonko. Thank you.
    In terms of the provider network, the various organizations 
that you thought would be hurt into the future, my recollection 
was that these organizations that speak for the providers had 
endorsed the measure, the Affordable Care Act, and I would 
assume they moved forward with that endorsement because it 
responded to their own special needs. Do you think that they 
saw the additional 34 million people being covered and the 
resources that are put into play because of that as a growth 
potential for them?
    Mr. Foster. I am sure they did. As you referred to, for 
example, the hospital industry was comfortable with a certain 
level of payment reductions through Medicare, in part because 
they saw many more patients that would now be insured and could 
pay, as opposed to were not insured and could not pay. I think 
they saw that as a fair deal, one that they could live with.
    There is one catch to this. I am not sure they considered 
adequately the additional people with insurance coverage, the 
34 million. That is what we refer to as a level shift. You get 
34 million more people with coverage, and it pretty much stays 
that way in time. It goes up a little bit.
    With the productivity adjustments, that is a growth rate 
change. It affects the level in the first year, more in the 
second year, more in the third year, forever. I think they 
looked at the first 10 years and balanced it out and said, this 
looks okay. I am not sure they looked beyond the 10 years and 
thought about it.
    Mr. Tonko. I would assume that they did the long-term and 
short-term analyses, and speaking in favor of the legislation 
really meant a lot to a lot of people, because they were 
concerned about the provider networks. But I appreciate your 
    Thank you, Mr. Chairman.
    Chairman Ryan. Thank you.
    Mr. Foster, thank you very much for your time today. I 
appreciate it.
    This concludes the first panel of witnesses. Let me 
introduce our next panel.
    First, we will start off with Dennis Smith, the Secretary 
of the Wisconsin Department of Health services. Then we will 
have James Capretta, a Fellow at the Ethics and Public Policy 
Center, followed by Paul Van de Water, a Senior Fellow at the 
Center on Budget and Policy Priorities.
    First off, I want to start by asking the witnesses, since 
this is a panel of three, I want to ask if we can try to stick 
to 5 minutes for your opening presentations. That way we can 
get to members' time. We are going to have a vote I think at 
1:30, so let's see if we can get as much through before that 
vote hits.
    Secretary Smith, welcome. It is fantastic to have you back 
home in Wisconsin. May I trust you are a Packer fan now?
    Mr. Smith. Absolutely, Mr. Chairman.
    Chairman Ryan. Good. So why don't we start of off with you, 
Secretary Smith.


                  STATEMENT OF DENNIS G. SMITH

    Mr. Smith. Thank you very much, Mr. Chairman, for inviting 
me today, and I hope that the lesson of Wisconsin, we believe 
we have a very important and impressive story to tell in the 
ongoing national debate over the controversial new law.
    Wisconsin is going to, quite frankly, look at this in terms 
of we have already achieved a level of insurance that is 
greater than what is expected under the national law. We have a 
very competitive health insurance market already; and, on 
balance, more people in Wisconsin will face greater costs than 
they will in additional benefits. So I think there will be a 
lot of talk about what does the new law really mean for us.
    Oftentimes at the national level you look at averages. You 
look at the entire country. I would suggest that it is 
critically important to look at individual States and what is 
going on within the specific populations.
    Again, as you average everything out, the previous panel, 
there was a lot of discussion about $100 in the trust fund and 
in the Federal budget. In the individual market that actuaries 
have already looked at, if you want to start talking about 100 
people within the individual market, you are going to say to 
those 100 people, if it is a cross-section as we have across 
the age groups, 25 percent of you are going to receive a 
decrease in your premium, in your individual market, and that 
decrease is going to be worth about 20 percent.
    If you only talk to that 25 percent of the group, they are 
going to be pretty happy with you. But 75 percent of that group 
is going to receive an increase in their premium, on average 
almost 25 percent increase in their premium. Ten percent of 
those individuals in that group are going to receive a premium 
increase of greater than 50 percent.
    In terms of the impact across the State, we estimate that 
PPACA will cost the taxpayers of Wisconsin $560 million per 
year, and this figure assumes very little loss of employer-
sponsored health insurance, which I suggest is the key to all 
of this. Because we have made assumptions about people's 
behavior and we have assumed employers are not going to drop 
their current health insurance coverage. If our assumption is 
wrong, then the estimates are going to be extremely different 
than what we have been told.
    Medicaid expansions under PPACA that are associated will 
cost the State $1.12 billion between 2014 and 2019. These are 
additional--basically individuals who--Wisconsin is already a 
very generous State. We already have a childless adult 
population. We have already extended coverage to many of those 
individuals. So the woodwork effect of people who are already 
eligible and gaining coverage.
    This will be partially offset, though, by a movement out of 
the existing Medicaid program. Approximately 122,000 children, 
parent caretakers, and pregnant women with incomes above 133 
percent of poverty will move off of Medicaid and onto the new 
subsidies. That will reduce the cost to the State of about $543 
    Then there are some additional extra subsidies, enhanced 
match rates in PPACA, that will reduce the cost to the State by 
about another $100 million. But, again, those are enhanced 
match rates. Those are not buying anybody new coverage. That is 
simply taking the money out of the State budget and offloading 
it to the Federal Government. It doesn't matter to the 
taxpayers where the money is coming from.
    Then the balance of the impact to the State is really an 
unknown to us at this point in time, because it all depends on 
how the Federal Government defines the maintenance of effort 
definition in the law of whether or not there will be further 
buyouts of State programs.
    There is about, in terms of the overall impact, roughly 
around 350 percent of the poverty line, that you will have 
additional costs that will outweigh your additional benefits 
under the law. Median family income in Wisconsin is around 400 
percent FPL, so a majority of the households in Wisconsin will 
face greater costs than they will in any additional benefits.
    There will be displacements of people in the program. At 
least 475,000 people in Wisconsin will lose their current 
coverage. Again, much of this money will be devoted to not 
insuring new people but simply shifting the cost of the pot 
where the money comes from. Our actuaries estimate that 46 
percent of individuals who will move into the public subsidies, 
either through Medicaid or the new tax credit, already have 
private coverage.
    Thank you, Mr. Chairman, for the courtesy. I look forward 
to your questions.
    [The prepared statement of Dennis G. Smith follows:]

           Prepared Statement of Dennis G. Smith, Secretary,
                Wisconsin Department of Health Services

    Thank you, Chairman Ryan, for convening this important hearing, 
``The Fiscal Consequences of the Health Care Law.'' Ranking Member Van 
Hollen and members of the Committee, I appreciate the opportunity to 
join you today to examine the fiscal consequences of the Patient 
Protection and Affordable Care Act (PPACA). The impact of the PPACA on 
state budgets, families, individuals, employers, the health insurance 
industry, health care providers, and our national economy is still 
slowly rising above the horizon and has yet to come into full view.
    Wisconsin has an important and impressive story to tell that may be 
useful in the ongoing national debate over this controversial new law. 
Wisconsin has been a leader and innovator in health care reform for 
more than two decades. In Wisconsin, a higher percentage of our 
citizens already have health care coverage than has been forecast for 
national peak coverage. According to the Centers for Medicare and 
Medicaid Services (CMS), the percentage of our citizens with health 
insurance coverage will reach nearly 94 percent at its peak. However, 
the University of Wisconsin Population Health Institute estimates that 
nearly 95 percent of Wisconsin citizens already have access to health 
insurance. Wisconsin has achieved this high level of coverage without 
an individual mandate and without guaranteed issue, while maintaining a 
robust and competitive insurance market.
    The Wisconsin Department of Health Services (DHS) has retained 
expert actuarial consultants to analyze the impact of PPACA on 
individuals, employers, and the various insurance markets. While our 
work still continues and we understand that the federal government must 
resolve a number of substantial issues before we will know the full 
fiscal impact of PPACA, there are some preliminary findings that we 
hope will be helpful. Further, the state is developing a sophisticated 
mock-up of a web-based intake system that might be considered a first 
generation of how parts of an exchange might work in terms of 
eligibility and selection of health plans. We hope the experience of 
Wisconsin will be helpful as Congress and the Administration make 
critical decisions that must be made over the next 18 months, well 
before the major parts of PPACA go into effect.
    The prospect of adding another 16-20 million individuals nationally 
to Medicaid is clearly a concern for the states both in terms of 
financing and in providing access for the Medicaid population. 
Wisconsin currently faces a Medicaid shortfall of about $214 million in 
the current fiscal year that must be closed by the end of June. For 
state fiscal year 2012 and state fiscal year 2013, the combined 
Medicaid shortfall is about $1.8 billion. We know that we are not alone 
as most states are also struggling with increasing caseloads in a weak 
    The best solution to ease the tremendous pressures on state budgets 
is to get people back to work. Between February 2008 and December 2008, 
our monthly enrollment of children increased by 15,691. Our monthly 
enrollment of adults with children during this same period grew by 
12,500 (February is used for comparable available data among groups; 
pregnant women and childless adults are not included as program changes 
were implemented that affected enrollment). Between December 2008 and 
December 2009, our monthly enrollment of children increased by 55,802 
and the monthly enrollment of adults with children grew by 46,837. In 
other words, enrollment between December 2008 and December 2009 grew 
three times faster than between February 2008 and December 2008.
    In December 2010, our monthly enrollment of children had increased 
by another 15,357 from the previous year and adults with children 
increased by 28,621. So in December 2010, our monthly enrollment of 
children and adults with children was nearly 174,000 higher (32 
percent) than in February 2008. Our total Medicaid enrollment surpassed 
1 million individuals for the first time in June 2009 and in December 
2010, enrollment reached 1,159,153 individuals out of a statewide 
population of roughly 5.5 million people. According to Census Bureau 
estimates, there are 1.4 million children in Wisconsin, of which 
374,615 are below 150 percent of the Federal Poverty Level. So current 
enrollment represents 109 percent of the Census Bureau's estimates of 
the number of children below 150 percent FPL in 2008/2009 and about 30 
percent of all children in Wisconsin.
    Getting everyone fully back to work would have a significant impact 
on the state budget. By way of comparison, if enrollment were to return 
to the February 2008 levels, the combined federal and state savings 
would be more than $1 billion.
    Some of the most important reasons and assurances originally given 
for the enactment of the new law appear to be fading. Individuals 
indeed will lose their current coverage. The cost of health care 
continues to go up, not down. And most important of all, the promised 
level of savings for American families will not materialize. We 
estimate that PPACA will cost the taxpayers of Wisconsin $560 million 
per year. And, this figure assumes relatively little loss of employer 
sponsored health insurance. Since Wisconsin has already achieved much 
of what is envisioned under PPACA in terms of coverage and without the 
most controversial provisions of the new law, the people of Wisconsin 
will want to clearly understand what, then, is the gain to be realized?
    We estimate that the additional state cost associated with the 
Medicaid expansion provisions of PPACA from 2014 to 2019 will total 
$1.12 billion. These costs will occur due to the addition of 
approximately 85,000 childless adults, the woodwork effect and take-up 
rates of individuals currently eligible but not enrolled, and 
additional months of coverage that will be added by reducing the 
``churning effect.''
    These costs will be partially offset by the reduction in enrollment 
of approximately 122,000 children, parents/caretakers, and pregnant 
women with income above 133 percent FPL who are already currently 
enrolled. The movement out of Medicaid to the new federal tax credits 
will save the state approximately $579.4 million between 2014 and 2019. 
This will reduce the state cost of PPACA to $543 million.
    PPACA includes enhanced matches for the State Children's Health 
Insurance Program (SCHIP) that we estimate will reduce the cost to the 
state by another $109 million, leaving the net cost of PPACA to the 
state of $433 million.
    However, this net number will be impacted by the pending federal 
policy decision about the definition of maintenance-of-effort (MOE), 
who is a newly eligible individual, and whose income is counted in 
determining eligibility. If, depending on these definitions, the 
federal government ``buys out'' our childless adult population, we 
estimate that cost to the federal budget will be nearly $1 billion, 
which then would become additional savings to the state to offset our 
costs. It is unclear whether the Congressional Budget Office (CBO) or 
the Office of the Actuary at the Centers for Medicare and Medicaid 
Services (CMS) have assumed the federal government would buy out all of 
the states' childless adult programs in its fiscal analysis of PPACA.
    But simply switching from state dollars to federal dollars does not 
buy additional coverage. At the end of the day, it matters little to 
taxpayers whether they are paying for the cost of PPACA through their 
federal income tax to finance new entitlement spending or higher debt, 
their state income tax, their local property tax, or higher premiums. 
There is no doubt PPACA will move hundreds of billions of dollars 
around in additional benefits and additional costs. It appears that the 
net impact per family will likely break around 350 percent of FPL. That 
is, if your income is below 350 percent FPL, the additional benefits of 
PPACA will be greater than the additional costs to you. But if you are 
above 350 percent FPL, the additional costs will likely be greater than 
the additional benefits. Median family income in Wisconsin for a family 
of four is equal to about 400 percent FPL. In other words, the 
additional costs of PPACA will exceed the additional benefits for a 
majority of individuals and families in Wisconsin.
    One of the major promises of health care reform was that 
individuals would keep their current coverage. This clearly will not be 
the case. At least 457,000 people in Wisconsin will likely be displaced 
from their current coverage. This includes 160,000 individuals from the 
individual market, 175,000 individuals from employer-sponsored coverage 
and 122,000 individuals, including children, who are currently in our 
public programs. Analysis of the impact on small group coverage is 
ongoing, but it is likely that there will be disruption in that market 
as well. Moreover, the level of losses in employer-sponsored health 
insurance is widely debated.
    Insurance generally involves the assessment, management, and 
mitigation of risk. PPACA seems to invite risk. It is fair to conclude 
that no one really knows, for example, how employers will behave, 
especially in these times of economic uncertainty. Actual experience in 
Wisconsin also shows how difficult it is to predict total costs because 
of the variance in the estimates of the numbers of uninsured and the 
uncertainty about take-up rates. For example, in comparing actual 
enrollment numbers to the estimates of uninsured children according to 
the U.S. Census Current Population Survey (CPS), the take-up rate for 
children with family income below 150 percent of the Federal Poverty 
Level (FPL) thought to be uninsured was 107 percent and the take-up 
rate for children with family income between 150 percent and 200 
percent FPL thought to be uninsured was 140 percent.
    Our actuaries estimate that 46 percent of individuals who will move 
into public subsidies either through Medicaid or the new tax credit 
entitlement already have private coverage. When you add in the federal 
``buy out'' of existing state coverage, a substantial amount of the new 
federal spending will simply replace federal dollars for existing 
private sector or state dollars without insuring a single new 
    Our actuaries' analysis clearly shows that PPACA creates winners 
and losers. Looking back on the debate over PPACA, important details 
were missing or blurred as data was aggregated and averages masked 
significant swings among age groups. For example, according to the 
preliminary actuarial analysis conducted for the state, overall 
premiums for the individual market will increase 6.6 percent. However, 
when we look at member distribution, the variation across groups is 
significant. 75 percent of those in the individual market will receive 
an increase in premiums with an average impact of nearly 25 percent. 
The other 25 percent will receive an average decrease in premium of 
nearly 20 percent. Moreover, 30 percent in the individual market will 
face premium increases between 25 and 50 percent and 8.5 percent will 
face increases of more than 50 percent. Clearly, it will be cheaper for 
many individuals to simply pay the new federal tax to remain uninsured, 
knowing they will be able gain entry to the market at a later time. 
Such dramatic swings will not stabilize the market, they will disrupt 
    Policymakers should look closely at those who face these premium 
increases. Those who receive a decrease in premium have an average age 
of 48 while those who will receive an increase in premium have an 
average age of 31. In other words, the younger, working age population 
that generally have lower earnings and face the greatest costs 
associated with raising children will face substantially greater 
premium increases than those older individuals who are reaching their 
peak earning power and face lower costs associated with raising 
    Of the individuals our actuaries estimate will enroll in coverage 
through the health exchange, two-thirds already have coverage through 
employer-sponsored health insurance or the non-group market.
    We are also concerned that greater federal regulation could lead to 
fewer health plans available to the people of Wisconsin. An individual 
in the Madison zip code area can choose from 12 health insurance 
companies offering a total of 324 plans. There are more than 30 
companies offering a health insurance product in the individual and 
small group market throughout Wisconsin. The largest company in terms 
of premiums has just 12 percent of the individual market. That is a 
healthy competitive environment that the federal government should not 
interfere with. But PPACA requirements on benefits and rating practices 
will significantly disrupt the current individual and small group 
    Wisconsin can also provide a glimpse into the changes ahead in the 
insurance distribution system itself as consumers gain access to health 
exchanges. Our online application tool, ACCESS has recently been 
highlighted by the Kaiser Commission on Medicaid and the Uninsured in 
its brief, Optimizing Medicaid Enrollment: Spotlight on Technology. 
ACCESS was developed, implemented, and enhanced over a period of 7 
years and allows individuals and families to apply for medical 
assistance, childcare, and food stamps. While technology can improve 
productivity, it costs about $287 to process an application at the 
county level.
    While ACCESS is an important tool, our experience demonstrates that 
reliance solely on a technology will not work for many individuals. The 
University of Wisconsin Population Health Institute recently concluded 
an evaluation on the utilization of ACCESS and found that the choice of 
application methods and the accuracy of enrollment systems vary 
significantly. ACCESS applicants were the least likely to be determined 
eligible for coverage compared to phone applications, walk-in, and 
mail-in applications. Only 69 percent of ACCESS applicants turned out 
to be eligible, suggesting an exchange will handle a high volume of 
individuals who will not be eligible for Medicaid or the new tax 
subsidies. Our own exit survey on the health insurance prototype shows 
that one-third of individuals responded that the tool did not provide 
enough information to make a decision on finding and purchasing health 
insurance. Finally, our experience with auto-enrolling childless adults 
shows substantial churning among individuals. There are clearly 
limitations and risks associated with reliance on sharing information 
across various government databases.
    ACCESS and our prototype are exciting and impressive tools. We are 
already well ahead of most states in building these on-line tools. But 
what we have built is still the easier parts. We estimate it will still 
take us another 2.5 years to implement the core functionality of an 
Exchange. That assumes the federal government will release all 
necessary guidance in a timely manner and that we will be able to 
leverage only the systems we currently have. While we are and should be 
optimistic, we also need to be realistic.
    To put this in context, consider that the planning and development 
of a new Medicaid Management Information System (MMIS) is a 9 to 12 
month process. Procurement itself takes another 12 months. It took the 
state 46 months to implement our new MMIS and another 6 months to 
obtain CMS certification for a total of 76 months. Is it realistic that 
this timeframe can be cut in half across the nation? If all of the 
various federal agencies involved in the implementation of exchanges 
cannot complete their work this year it is difficult to imagine how 50 
states and the District of Columbia will be able to meet the readiness 
assessment required by law in 2013.
    Mr. Chairman, implementation of PPACA as the law currently stands 
will cause a significant disruption across the nation. There is still a 
great deal of uncertainty as to the impact of PPACA on state and family 
budgets, on workers, and employers. Wisconsin already has achieved the 
coverage rates aspired to under PPACA. We have a strong, competitive 
health insurance market, which we want to preserve and protect. All of 
the gains Wisconsin has made should not be put at risk.

    Chairman Ryan. Thank you very much.
    Mr. Capretta.


    Mr. Capretta. Mr. Chairman, Mr. Van Hollen, members of the 
committee, thank you for the opportunity to participate in this 
very important hearing.
    Entitlement spending was a problem even before the 
enactment of the Patient Protection and Affordable Care Act. In 
1975, the combined costs of Social Security, Medicare, and 
Medicaid was 5.4 percent of GDP. In 2009, those entitlement 
programs cost 10.1 percent of GDP. That jump in spending, 4.7 
percent of GDP, is the main reason it is so difficult to bring 
the Nation's budget closer to sustainable fiscal balance.
    Every year we are spending more and more to fill 
entitlement promises made years ago, and we really haven't hit 
the rough patch yet. Over the coming two decades, we are about 
to add 30 million new people to the category age 65 and older. 
As these baby boomers enroll in Social Security and Medicare, 
costs will soar. We were therefore already racing towards a 
budget entitlement crisis before the health law was passed. The 
key question is, did it make the problem better or worse?
    The President argued that it would make it better, 
essentially with the catch phrase ``health reform is 
entitlement reform,'' but I think we need to examine that 
question quite carefully.
    To begin with, it is important to note that the law is the 
largest entitlement expansion since the 1960s. It will add, as 
has been discussed already a number of times, at least 15 to 
perhaps 20 million people to the Medicaid program, another 15 
to 20 million people to the new insurance subsidies through the 
exchanges. How then does a law which increases spending by 
nearly $1 trillion over the next decade reduce the deficit? The 
only way is by cutting spending by amounts in excess of the new 
spending commitments and by raising taxes. So although the 
legislation has often been described as a deficit reduction 
measure, it might be more accurate to say that it is a very 
large spending bill that, at least on paper, is paid for by 
even larger tax increases.
    But these numbers don't actually tell the whole story, and 
I want to go through a couple of things just to highlight some 
issues that might raise questions about the deficit reduction 
included in the CBO numbers.
    First, the CLASS Act. The argument that the new law reduces 
the deficit is dependent pretty heavily on the CLASS Act. The 
CLASS Act is a new long-term care insurance program. You might 
think because the score is for $70 billion in new premiums in 
the next 10 years that it is a deficit reducer, but, in truth, 
the CLASS Act is actually a budgetary time bomb. Every 
actuarial analysis that has been done on it shows that it will 
suffer from very severe adverse selection.
    It is a voluntary program. The people who enroll in it 
quite rationally will be the people the most likely to benefit 
from it. Their premiums will be therefore relatively high 
because of the risk pool. But, overall, the premiums will fall 
well short of what is needed to cover implicit benefit 
promises. Over time what is likely to happen, as every study 
that has looked at it has said, is that benefits will have to 
be either reduced very dramatically on the vulnerable citizens 
who enrolled or pressure will build for another Federal 
bailout. So this program is actually unstable. The idea that it 
contributed to deficit reduction is not really a good 
characterization to the public about what is really going on 
with this program.
    Next, I want to talk about the premium subsidies in the 
insurance exchanges. Census data show that there are about 111 
million people under the age of 65 who are living in households 
with incomes between 135 and 400 percent of the poverty line. A 
CBO estimate shows 19 million of these people in this income 
category will get the new premium assistance in 2019. Now if 
that were to happen, if 90 million more people will be outside 
staying in job-based coverage and not on the exchanges, it 
would actually be quite unfair to many low-wage workers.
    As I tried to show in my testimony on chart one, a couple 
of researchers from the Urban Institute have done a very 
careful study of the differential subsidies between the 
employer-based system and the exchanges. As you can see in the 
chart, on the low wage of the income scale for households below 
about $60,000 or $50,000 a year in annual cash income, they 
would be far better off in the exchanges than the employer-
based system because the value of the exchange subsidies far 
exceeds the tax break. However, they are not eligible to go 
into the exchanges. So, in a sense, you are going to have two 
households living right next to each other, one inside the 
exchange and one out; and the one inside the exchange will get 
up to $3,500 or $4,000 more inside the exchange than out.
    You have got serious disequilibrium associated with this 
kind of differential. And my only judgment is--and this was not 
part of the CBO estimate, but I do believe, you know, sometimes 
we can question the assumptions. My own judgment is that, over 
time, this kind of instability will get corrected so that 
people will be treated equally and fairly. Eventually, all the 
people who would get the larger subsidy structure and 
entitlements through the new entitlement program will end up 
there, and it will cost a lot more to pay for that. That will 
be essentially buying the base, which they didn't want to do 
when you are writing the bill. But, over time, it is very 
difficult to give an entitlement away to one person but not an 
equally qualified alternative.
    I see that I am running out of time here, Mr. Chairman. I 
will enter the rest of my testimony for the record. There are a 
couple of other points that could be made, but I will save 
those for Q&A. Thank you.
    [The prepared statement of James C. 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 the fiscal consequences of the health care law.
    The most serious threat to the nation's long-term prosperity is 
projected large fiscal deficits over the years and decades ahead. And 
the main reason the nation's budget deficits are expected to remain at 
dangerously high levels for the foreseeable future is because of the 
rapid growth of entitlement spending.
    Importantly, entitlement spending was a problem even before the 
enactment of the Patient Protection and Affordable Care Act (PPACA). In 
1975, the combined cost of Social Security, Medicare, and Medicaid was 
5.4 percent of GDP. In 2009, these entitlement programs cost 10.1 
percent of GDP.
    That jump in spending--4.7 percent of GDP--is the main reason it is 
so difficult to bring the nation's budget closer to sustainable fiscal 
balance. Every year, we are spending more and more to fulfill 
entitlement promises made years and decades ago, leaving less and less 
to finance other priorities, even as the growing levels of entitlement 
spending puts enormous pressure on taxpayers.
    And we haven't even hit the really rough patch yet. Over the coming 
two decades, the United States will undergo an unprecedented 
demographic transformation, as the baby boom generation moves from its 
working years into retirement. The number of Americans age 65 and older 
will rise from 41 million in 2010 to 71 million in 2030. As these baby 
boomers enroll in Social Security and Medicare, costs will soar.
    We were therefore already racing toward a budget and entitlement 
crisis before the health care law was considered and passed. Indeed, 
for the proponents of the legislation, that became a primary argument 
for its enactment. The president argued that his health care plan would 
begin to address the entitlement problem, at least from the perspective 
of the health programs. ``Health reform is entitlement reform'' was the 
    But is that really the case? Did the new health care law ease the 
entitlement and budget crisis, or did it make matters even worse? That 
is the crucial question, and this Committee should be commended for 
taking it up as one of the first items for discussion in this new 
Congress. I believe the evidence is overwhelming that the new law will 
make matters not better, but far worse.
    The most noteworthy characteristic of the new law is that it is the 
largest entitlement expansion since the 1960s. So, at a time when the 
federal budget is already buckling under the weight of existing 
entitlement programs, the new law stands up three new ones which will 
enroll tens of millions of Americans into taxpayer-financed programs 
promising permanent access to uncapped benefits. Moreover, spending on 
these new entitlements is expected to grow at rates that are above the 
level of growth of the economy or general inflation.
    How then does a new law which increases spending by nearly $1 
trillion over the period 2010 to 2019 reduce the federal deficit (by 
about $130 billion over ten years according to the Congressional Budget 
Office and by a modest amount in the decade after that)? The only way 
is by raising taxes and cutting spending by amounts in excess of the 
new spending commitments. According CBO's estimate of the final 
legislation, spending reductions will bring the net increase in 
spending down to about $430 billion over the next decade. The tax hike 
to pay for this spending will total about $560 billion over the same 
    Thus, although the legislation has often been described by 
proponents as a deficit reduction measure, it might be more accurate to 
say that it is a very large spending bill, offset, at least on paper, 
by even larger tax increases.
    But even these numbers do not tell the whole story. It is also 
important to look carefully at the assumptions underlying these 
estimates to determine if the promised deficit reduction will occur in 
reality, or just on paper. There are a number of reasons to be very 
skeptical in this regard.
                             the class act
    The argument that the new law reduces the federal budget deficit 
over the coming decade rests in large part on the supposed deficit 
reduction from the creation of the Community Living Assistance Services 
and Supports Act, or CLASS Act, which is a new long-term care insurance 
entitlement program. CBO's estimate assumes that $70 billion in 
supposed deficit reduction through 2019 is to come from the CLASS Act.
    But, in truth, the CLASS Act is another budgetary time-bomb waiting 
to explode, not a solution that produces deficit reduction. In the 
short term, because the program is brand new and no one is eligible for 
benefits until they have paid in for five years, premiums are collected 
and no benefits are paid--producing what appears to be a temporary 
surplus. But beyond the visible ten-year window, those premiums are 
needed to pay long-term care insurance claims.
    Moreover, every actuarial analysis done on the program indicates it 
will suffer from severe adverse selection. That is, it will attract 
mainly enrollees who expect to need the benefit. The result is that 
individual premiums are likely to be quite high because too few healthy 
workers will enroll. Overall premiums will fall well short of what is 
needed to cover the implicit benefit promises. Pressure will then build 
for a future taxpayer bailout to avoid imposing cuts on the vulnerable 
citizens who elected to enroll and pay premiums. In short, this program 
is not going to solve our entitlement crisis. Indeed, it is a perfect 
illustration of why federal entitlement spending is our central 
budgetary problem.
             disequilibrium in federal insurance subsidies
    The new law promises members of households with incomes between 135 
and 400 percent of the federal poverty line new premium subsidies if 
they get their coverage through the new state-run ``exchanges.'' Census 
data show that today there are about 111 million Americans under the 
age of 65 who are living in households with incomes in that range. But 
CBO estimates that only 19 million people will be getting the new 
premium assistance in 2019. They assume the other 90 million Americans 
will stay in job-based plans.

    If that were really to happen, it would be terribly unfair. As 
Stephanie Rennane and Eugene Steuerle of the Urban Institute have 
documented, the new premium subsidies in the exchanges are worth far 
more to low- and moderate-wage workers than today's federal tax 
preference for employer-paid premiums (see Chart 1). For instance, a 
household of four with compensation of $60,000 in 2016 would get $3,500 
more in government assistance if they moved from employer coverage to 
an exchange. The extra subsidies would be even more for lower wage 
    The new law thus sets up a situation where two families with 
identical compensation totals from their employers can get very 
different levels of federal support depending on where they get their 
    In my judgment, that's not likely to be a politically stable 
situation. Pressure will build on elected leaders to treat every 
American equally. That is likely to lead to regulatory and legislative 
decisions making it easier for workers now in job-based plans to 
migrate to the exchanges.
    Over time, what is likely to happen is that those who would be 
better off in the exchanges will end up there, one way or another, even 
as higher wage workers retain the tax advantage for job-based coverage. 
As the labor market segregates, costs will soar well above the $1 
trillion in new spending over ten years currently projected for the 
                         amt-like bracket creep
    The new law relies heavily on tax increases to cover the new 
entitlement spending. According to CBO's latest long-term budget 
projections, by 2035, the tax increases in the new law will collect 
revenue equal to 1.2 percent of GDP, which is very substantial. In 
today's terms, that's a $180 billion tax increase, every year.
    How can that be, given that the tax hikes do not go nearly that 
high in the first decade? The answer is AMT-like bracket creep. The new 
tax on high-cost insurance plans, sometimes called the ``Cadillac'' 
tax, applies to policies with premiums for families above $27,500 in 
2018. That threshold will only grow with general consumer inflation in 
2020 and beyond, not growth of health costs. Thus, by 2030, the tax 
will be binding on many millions of Americans' insurance plans.
    Similarly, the new Medicare taxes on wages and other sources of 
income apply only to individuals with incomes above $200,000 per year 
beginning in 2013 ($250,000 for couples). But those income thresholds 
are fixed; they won't rise with inflation at all. In very short order, 
that means these taxes will begin hitting middle-class Americans with 
massive tax hikes. By 2030, inflation will have eroded the $200,000 
threshold so that it is the equivalent of $130,000 today (assuming 2.5 
percent annual inflation).
                  the medicare payment rate reductions
    The largest spending reduction in Medicare comes from automatic 
reductions in the inflation updates for hospitals and other 
institutional providers of care. The notional rationale is that these 
cuts represent productivity improvement in the various institutions 
getting Medicare payments. The reductions, amounting to a 0.4-0.5 
percentage point reduction off the normal inflation update for Medicare 
payments, will occur every year, in perpetuity. The compounding effect 
of doing this on a permanent basis would be massive savings in 
Medicare--if they really were implemented. CBO says the cuts will 
generate $156 billion over the first decade alone.
    But there are strong reasons to suspect these cuts will not be 
sustained. Medicare's actuarial team, led by Richard Foster, has warned 
repeatedly that these cuts are not viable over the medium and long-term 
because they would jeopardize access to care for seniors. The cuts 
would push average Medicare payments to levels that are below what 
Medicaid is expected to pay, and the network of providers willing to 
take care of Medicaid patients is notoriously constrained. It is hard 
to imagine political leaders allowing Medicare to become less 
attractive to those providing services than Medicaid is today.
    It's worth noting here that these cuts in payment rates do not 
constitute ``delivery system reform,'' which the administration has 
often stated is what it is trying to achieve with the Medicare changes 
in the new law. These cuts in inflation updates will hit every 
institution equally, without regard to whether or not the institution 
is treating its patients well or badly. The savings that are expected 
from other reforms, such as Accountable Care Organizations, are minor 
by comparison.
 the budgetary effect of tax hikes and medicare cuts in a second decade
    The administration and others have noted frequently that CBO's cost 
estimate indicates the possibility of modest deficit reduction in the 
second decade after 2019 (although CBO notes that such an estimate 
carries more uncertainty than its ten-year projections). But the 
expectation of long-term deficit reduction is entirely dependent on 
huge spending reductions from the Medicare inflation cuts and from more 
and more middle-class Americans paying higher taxes under the new law's 
tax provisions.
    As shown in Chart 2, the tax hikes from the new law plus the 
savings from the ``productivity adjustment'' in Medicare would generate 
about $180 billion in ``offsets'' in 2020. By 2030, the spending cuts 
and tax hikes from these provisions will have more than tripled, to 
over $600 billion. If these taxes and spending cuts do not materialize, 
the new law will be a budget-buster of significant proportions.

                         debt subject to limit
    Both CBO and the Medicare actuaries have both noted that the 
Medicare cuts and payroll tax hikes which are supposed to improve the 
solvency of the Medicare hospital trust fund in the new law can only be 
counted once, not twice. Here is how CBO put it in a Director's blog 
post from December 2009:
    ``To describe the full amount of HI trust fund savings as both 
improving the government's ability to pay future Medicare benefits and 
financing new spending outside of Medicare would essentially double-
count a large share of those savings and thus overstate the improvement 
in the government's fiscal position.''
    In other words, these taxes and cuts in Medicare either improve the 
government's ability to pay future Medicare claims, or they pay for a 
new entitlement program--but not both.
    One way to see that clearly is by looking at the impact of the 
health care law on debt subject to limit. According to CBO, the new law 
will increase that debt, by about $230 billion over the coming decade, 
because the Medicare tax hikes and spending cuts are double-counted 
instead of devoted to deficit reduction.
    Mr. Chairman, you and your colleagues on this committee face a 
daunting challenge. The nation is rushing rapidly toward a fiscal 
crisis, driven by excessive borrowing and debt. Even before the health 
law was enacted, it was necessary to reform the nation's entitlement 
programs to bring spending commitments more in line with what the 
country can afford. Now, with enactment of the health law, the climb to 
a balanced budget got much steeper.
    The solution is to start by unwinding what was just passed and 
replacing it with a program that constitutes genuine entitlement 

    Chairman Ryan. All of your submitted testimony will be 
included in the record, and we can get it in Q&A.
    Mr. Van de Water.


    Mr. Van de Water. Thank you. Mr. Chairman and members of 
the committee, I appreciate the invitation to appear before you 
    Last March, the Congressional Budget Office estimated that 
the health reform legislation would reduce the deficit modestly 
in its first 10 years but substantially in the following 
decade. The CBO has reiterated that finding several times, most 
recently in its letter to Speaker Boehner 3 weeks ago. 
Heretofore, both supporters and opponents of a law have 
generally accepted, if only begrudgingly, the CBO cost estimate 
is the best, unbiased estimate available of that law's effects 
on the Federal budget.
    In the case of health reform, however, critics have 
attempted to discredit the CBO estimate by charging that the 
law relies on several budgetary gimmicks. The Center on Budget 
and other analysts have explained time and again why these 
charges are groundless. In these remarks, I will focus on 
dispelling the misconceptions that have arisen in one 
particular area, health reform's budgetary effects on Medicare.
    First, as you have discussed extensively already this 
morning, critics have claimed that CBO's cost estimate double 
counts the Medicare savings. This assertion is readily 
disproved just by reading the estimate. CBO counts everything 
once and only once. It counts the Medicare savings once. It 
doesn't count anything twice. The effect of health reform on 
the financial status of the Medicare trust funds is distinct 
from the law's effects on the Federal budget.
    Rick Foster, the Medicare actuary, has affirmed more than 
once again this morning that health reform will extend the 
solvency of the Hospital Insurance Trust Fund by about 12 
years. There is no double counting involved in recognizing that 
Medicare savings improves the status of both the Federal budget 
and the Medicare trust funds. In the same way, when a baseball 
player hits a homer, it both adds one run to his team's score 
and also improves his batting average. Neither situation 
involves double counting.
    Second, again, as has already been discussed, critics 
contend that the Medicare savings and health reform should not 
be taken seriously because they will not be allowed to go into 
effect. This claim is wrong for several reasons. In part, it 
reflects the misreading of history. The record shows that 
Congress has repeatedly adopted measures to produce 
considerable savings in Medicare and has let them take effect.
    A colleague and I carefully examined every piece of major 
Medicare legislation enacted in the past 20 years. We have 
found that virtually all of the Medicare savings in these laws 
were successfully implemented. The often-cited sustainable 
growth rate formula for physicians is the exception and not the 
rule. Even so, Congress has cut physician payment rates more 
than CBO originally estimated.
    The Medicare actuary Rick Foster, as you have heard, has 
raised questions about the sustainability of one category of 
savings, the reductions in payment rates to reflect economy 
wide gains in productivity. Although his concerns deserve a 
serious hearing, as you have given them this morning, other 
experts do see more room to extract efficiencies and improve 
productivity in the health care sector.
    The Medicare Payment Advisory Commission, your expert 
advisory body on Medicare payment policies, expects that 
Medicare should benefit from productivity gains in the economy 
at large. MedPAC finds that hospitals with low Medicare profit 
margins often have inadequate cost controls, not inadequate 
Medicare payments.
    Because the productivity adjustments are now law, Congress 
would have to pass a new law to stop them from going into 
effect. And under the statutory pay-as-you-go rules, that 
future legislation would have to be paid for so that it didn't 
increase the deficit.
    Bringing deficits under control will require making 
difficult trade-offs and tough political decisions on both 
taxes and spending, especially for health care. If we can't 
count any provision that is controversial and might later be 
changed, we would have to conclude that many proposals, 
including the Bowles-Simpson proposal, Rivlin-Domenici plan, 
and Congressman Ryan's road map, would not really reduce the 
deficit. In fact, if we can't count any provision that a later 
Congress might reverse, we can't do serious deficit reduction 
at all.
    Thank you very much.
    [The prepared statement of Paul N. 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.
    When Congress was about to enact health reform last March, the 
Congressional Budget Office (CBO) estimated that the legislation would 
reduce the deficit--modestly in its first ten years, but substantially 
in the following decade.\7\ CBO has reiterated that finding several 
times, most recently in a letter to Speaker Boehner three weeks ago.\8\
    \7\ Douglas W. Elmendorf, Director, Congressional Budget Office, 
Letter to the Honorable Nancy Pelosi, March 20, 2010.
    \8\ Elmendorf, Letter to the Honorable John Boehner, January 6, 
    Heretofore, both supporters and opponents of a law have accepted, 
if only begrudgingly, the CBO cost estimate as the best unbiased 
analysis available of that law's effects on the federal budget. In this 
case, however, critics have attempted to discredit the CBO estimate by 
charging that the health reform law relies on several budgetary 
gimmicks. The Center on Budget and Policy Priorities and other analysts 
have explained time and again why these charges are groundless.\9\
    \9\ James R. Horney and Paul N. Van de Water, House-Passed and 
Senate Health Bills Reduce Deficit, Slow Health Care Costs, and Include 
Realistic Medicare Savings, Center on Budget and Policy Priorities, 
December 4, 2009; Paul N. Van de Water and James R. Horney, Health 
Reform Will Reduce the Deficit, Center on Budget and Policy Priorities, 
March 25, 2010; Paul N. Van de Water, Debunking False Claims About 
Health Reform, Jobs, and the Deficit, Center on Budget and Policy 
Priorities, January 7, 2011.
    In these remarks I will focus on dispelling the misconceptions that 
have arisen in one particular area--health reform's budgetary effects 
on Medicare.
    First, critics have claimed that CBO's cost estimate double-counts 
the Medicare savings. This assertion is readily disproved. Let's be 
very clear. CBO counts everything once and only once. It counts the 
Medicare savings once. CBO doesn't count anything twice. Just read the 
cost estimate.
    The effect of health reform on the financial status of the Medicare 
trust funds is distinct from the law's effect on the federal budget. 
The Medicare actuary has affirmed more than once, most recently just 
last week, that health reform will extend the solvency of the Hospital 
Insurance trust fund by about 12 years.\10\ There's no double-counting 
involved in recognizing that Medicare savings improve the status of 
both the federal budget and the Medicare trust funds. In the same way, 
when a baseball player hits a homer, it both adds one run to his team's 
score and also improves his batting average. Neither situation involves 
    \10\ Richard S. Foster, Chief Actuary, Centers for Medicare & 
Medicaid Services, Memorandum to the Honorable Pete Stark, January 18, 
    By the way, CBO accounted for deficit reduction in exactly this way 
in previous Congresses, under both political parties. For example, the 
Balanced Budget Act of 1997 and the Deficit Reduction Act of 2005 (both 
of which were passed by Republican Congresses) included Medicare 
savings that were counted as both reducing the deficit and also 
improving the outlook for the Hospital Insurance trust fund. No one 
raised claims of double-counting when these bills were enacted.
    Second, critics sometimes contend that the Medicare savings in 
health reform should not be taken seriously because they will not be 
allowed to go into effect. This claim is wrong for several reasons.
    In part, this charge reflects a misreading of history. The record 
demonstrates that Congress has repeatedly adopted measures to produce 
considerable savings in Medicare and has let them take effect. My 
colleague Jim Horney and I carefully examined every piece of major 
Medicare legislation enacted in the past 20 years; we found that 
virtually all of the Medicare savings in this legislation were 
successfully implemented. The oft-cited sustainable growth rate formula 
for physician payments is the exception rather than the rule. Even so, 
Congress has cut physician payment rates more than CBO estimated for 
the original provision.
    The Medicare actuary has raised questions about the sustainability 
of one particular category of Medicare savings in health reform--the 
reductions in payment updates for most providers to reflect economy-
wide gains in productivity. Although these concerns deserve a serious 
hearing, other experts see more room to extract efficiencies and 
improve productivity in the health care sector. Notably, the Medicare 
Payment Advisory Commission (MedPAC), Congress's expert advisory body 
on Medicare payment policies, generally expects that Medicare should 
benefit from productivity gains in the economy at large. MedPAC finds 
that hospitals with low Medicare profit margins often have inadequate 
cost controls, not inadequate Medicare payments.\11\
    \11\ Medicare Payment Advisory Commission, Report to the Congress: 
Medicare Payment Policy, March 2010, pp. 6-7, 36.
    Because the productivity adjustments are now law, Congress would 
have to pass a new law to stop them from taking effect. Under the 
statutory pay-as-you-go rules, that future legislation would have to be 
paid for, so that it didn't increase the deficit.
    In any event, both CBO and the Medicare actuary have always assumed 
in their projections that the laws of the land will be implemented, 
rather than hazard guesses about how future Congresses might change 
those laws. Surely no one would want estimates to be based on such 
speculation. Dr. Gail Wilensky, who ran Medicare under President George 
H.W. Bush, has expressed it this way: ``It would be very hard to know 
what you would use if you didn't use current law--whose view you would 
use.'' \12\
    \12\ Remarks at a forum sponsored by the American Enterprise 
Institute, August 6, 2010.
    Finally, these issues must be viewed in the context of reducing 
projected long-run federal budget deficits. Bringing deficits under 
control will require making difficult trade-offs and tough political 
decisions on both taxes and spending, especially for health care. If we 
can't count any provision that is controversial and might later be 
changed, we would have to conclude that neither the Bowles-Simpson 
proposals, the Rivlin-Domenici plan, nor Congressman Ryan's Roadmap 
would really reduce the deficit. In fact, if we can't count any 
provision that a later Congress might reverse, we can't do serious 
deficit reduction.

    Chairman Ryan. Thank you, Mr. Van de Water.
    Let me just start off by reading from the CBO Doug 
Elmendorf blog posting in 2009.
    ``To describe the full amount of H.I. Trust Fund savings as 
both improving the government's ability to pay future Medicare 
benefits and financing new spending outside of Medicare would 
essentially double count a large share of those savings and 
thus overstate the improvement of the government's fiscal 
    So I think we have a little bit of dispute on that.
    Secretary Smith, I want to ask you, you just threw out a 
lot of statistics because you have your own actuaries in 
Wisconsin making their own estimates. Go through that one more 
time, just very briefly. How many people are you projecting 
will lose the current coverage they have? What proportion of 
people in Wisconsin will see an increase in their insurance 
premiums? And how many people are you projecting will go from 
their private current coverage they enjoy into the exchange?
    Those are basically three questions I wanted to get at 
because you went through that pretty fast. I appreciate you 
compressing your testimony into 5 minutes.
    Mr. Smith. Yes, sir. And, again, we have only been on the 
job 3 weeks, so these are the actuaries that the previous 
administration hired.
    Chairman Ryan. The Democratic administration.
    Mr. Smith. Yes, sir. And had done the work there. So we 
estimate a couple of different things.
    One, again sort of the break point. There are people who 
will get additional benefits and they will outweigh any 
additional costs to them. There are others who will get 
additional costs and additional benefits, but the costs will 
outweigh the benefits. If the break point seems to be around 
about 350 percent of poverty, that if you are below that, more 
benefits than costs; above that, more costs than benefits.
    Given that the median family income in household income in 
Wisconsin is around 400 percent, then that suggests the 
majority will have greater costs than they will in benefits. 
The number of people who are moving out of their current 
coverage is about 475,000 individuals. Those include people who 
are in the individual market who already, again, have health 
insurance coverage, people who are currently on Medicare that 
are at higher income levels who will move off Medicaid which 
would be savings to the State. But then those are Federal 
dollars that are being paid for that. And then a small 
migration out of the employer market. But those are the 
individuals you know. And, in Wisconsin, the total population 
is about 5.5 million people. So close to 10 percent of the 
people will have their current insurance coverage disrupted.
    Chairman Ryan. Mr. Capretta, you are a number cruncher, and 
you have gone into this quite a bit. Bring up your chart, the 
Urban Institute chart, if you could. Because that is Gene 
    Mr. Capretta. It is, yes.
    Chairman Ryan. This is the question I am trying to get at, 
and I don't know if anybody really knows how to measure this 
very well, the interplay between shifting--employers dumping 
people into the exchange. And this is an issue I think we have 
got to get into.
    I personally don't think we are quite capturing this at 
CBO. I will just give you a couple anecdotal conversations I 
have had with large employers in Wisconsin. I don't think we 
appreciate this. We are going to have a competitive dumping 
situation from my perspective from just experiences with 
    A large employer in my district, privately held 
corporation, multigenerations have held this, lots of 
employees. Their competitors are publicly traded. They have 
gotten the signal from their competitors that they plan on 
basically putting their people in the exchange because it is a 
$2,000 per person fine instead of the $15,000 to $17,000 they 
are now paying for employer-sponsored health insurance. This 
employer does not want to discontinue this benefit package. 
They don't want to discontinue providing what, for them, I 
think is about a $17,000 per year package. But when their 
competitors in a manufacturing industry, in a very low-margin 
business, are going to have about a $15,000 per employee cost 
advantage they feel they have no choice but to dump their 
employees into the exchange.
    So that kind of conversation is occurring around boardrooms 
all around Wisconsin. I know that for a fact, because I have 
talked to lots of employers who are telling me that, and I can 
only imagine that that same kind of conversation is occurring 
around America.
    So give us a sense of how you see this interplay occurring 
between employers deciding whether it is in their interest for 
competitive reasons or other reasons to keep offering insurance 
which will have to be actuarial equivalents to the exchange or 
whether they will put their people in the exchange, given that 
a lot of people will actually be better off at the lower end of 
the income or salary or pay scale. What interplay do you see 
coming? What are alternative scenarios that are probably more 
likely to reality? And then what are the fiscal consequences of 
that if these different kinds of projections bear out?
    Now, granted, we are stabbing at this. But if we are off by 
a few magnitudes, the cost of this thing could explode. Give us 
a sense of that.
    Mr. Capretta. Sure. First of all, just to be fair to CBO 
and others, I mean, this is incredibly complicated, and we have 
a sample size of one, Massachusetts being the only State that 
is really in this. And so the ability to model this out and 
understand how it will play it out over a decade is very 
    Having said that, I think the point you are making is the 
right one, which is there is so much more money available in 
the exchanges than out of it for the low-wage population, as 
this chart shows, the break point in terms of being better off 
outside the exchange is way upwards of about $80,000 a year. 
So, below that, everybody would be better off in the exchange, 
rather than getting the tax preference for the employer-paid 
premium plan.
    Employers obviously have a mix of employees. So any firm 
that has predominantly low-wage workers almost surely would 
want to go into the exchange. Even if they are above 50, pay 
the penalty. The penalties are factored into this calculation 
for the employer. So you could still pay the penalty and still 
be better off. Okay? That is what is likely to happen on the 
low wage. For small firms with lots of low-wage workers, they 
are probably going to end up in the exchanges.
    Now for firms that have a mix of high-wage and low-wage 
workers, you know, who knows what will happen over time. I 
mean, for them, if they put everybody in the exchange, the 
high-wage workers would be worse off, too, and they wouldn't 
like that. So they are going to have to figure out a way to 
either keep going with their plan, which CBO assumes, or they 
are going to have to figure out a way to maybe separate into 
two different kinds of companies, one that is predominantly low 
wage to take advantage of this new exchange and one that is 
predominantly high wage.
    I believe as new firms form, as new companies are built, 
this will be one issue--not the only issue, but it will be one 
important issue they take into account when deciding how to 
structure their workforce and how to organize their company 
because there is so much Federal money involved here.
    Doug Holtz-Eakin, the former director of CBO, has looked at 
this and said, if the break point is at about 250 percent of 
poverty, if you just assume all of those workers in one way or 
another end up in the exchanges over time and are not retained 
in the job-based system, the extra costs over just the first 
decade would be another $1 trillion. So we are talking--if you 
are off, as you said, Mr. Chairman, by just a little bit here, 
you are talking many, many, many more subsidies going out the 
    Chairman Ryan. And your point is what percent of that PL in 
this chart?
    Mr. Capretta. In this chart, it is as high as--I can't see 
the numbers from here, but it is about $80,000, I believe. Yes, 
it is about $80,000 in household income. This is in 2016 
    Chairman Ryan. You said you wanted to add to your 
    Mr. Capretta. Oh, the only thing I wanted to mention, the 
last point I wanted to mention--I ran out of time--was really 
in chart two. I don't know if chart two could be brought up.
    This goes back to Chief Actuary Foster's point about the 
Medicare productivity improvements and the revenue provisions 
that are also in the bill. You can't see it on this chart up 
above. But the black there is actually the tax increases 
associated with the new health care law, and the gray area is 
the savings associated with the Medicare productivity 
improvement savings. Okay?
    So we saw a cost estimate that went out to about 2019 from 
CBO that showed a number for each of those, okay? And then in 
the second decade, as Paul mentioned, they are saying that 
there is a broader health care or deficit reduction going on in 
the second decade. I think it is important to realize that the 
second decade deficit reduction that is in that CBO letter is 
tied up almost entirely in these two things, the new revenue 
that is supposedly going to be collected as well as the 
productivity improvement provision in Medicare.
    As Mr. Foster repeated over and over again, the compounding 
effect of taking a slice off of the payment update every year 
in perpetuity is massive. You might get away with it for 5, 
maybe even 10 years. But to assume you are going to have that 
kind of wedge going out over the long run is really hard to 
    Just to give you the numbers, if you calculate it out, the 
amount of deficit reduction or the amount of offsets produced 
by just these two items is about $180 billion in 2020, and it 
would grow just from these two items to over $600 billion in 
    Now the tax side we haven't talked about too much. It is 
similar to the productivity improvement item. There is a new 
payroll tax here on wages for the Medicare program as well as 
nonwage income for Medicare, supposedly going to apply to 
everybody above $200,000 a year if you are an individual, 
$250,000 if you are a couple.
    Chairman Ryan. That is unindexed $250,000?
    Mr. Capretta. That is unindexed, not even to the CPI. It is 
the same number in perpetuity. Okay? So, by 2030, this will not 
be $250,000 in today's income. The $200,000 number will erode 
to about $130,000. So you are talking about pushing more and 
more middle-class wage earners into this tax, generating huge 
revenue in the second decade. That is how they get to the 
deficit reduction.
    Chairman Ryan. Like the AMT, correct?
    Mr. Capretta. Correct.
    Chairman Ryan. I can go on and on. I want to be generous 
with everybody else's time.
    Mr. Van Hollen.
    Mr. Van Hollen. Thank you, Mr. Chairman.
    Mr. Van de Water--thank you all for your testimony. I just 
want to go over some of the points you raised and dig into a 
little more detail, because a lot of the talk around here has 
been based on the CBO's deficit reduction numbers. We didn't 
have CBO here today. Instead, we had the chief actuary of CMS, 
Mr. Foster, who did a good job. But I think we should also 
focus on this deficit reduction issue, and his testimony was 
pretty clear. I don't know if you were here when he walked 
through the example of if you increase the Medicare payroll 
tax, $100 comes in. He pointed out that, in fact, that $100 is 
$100 towards deficit reduction. Were you here for that?
    Mr. Van de Water. Yes, I was, sir.
    Mr. Van Hollen. And he clearly stated right here on the 
record that that is not a gimmick. Were you here for that?
    Mr. Van de Water. Yes, I was.
    Mr. Van Hollen. So our colleagues on the committee on the 
Republican side of this committee put out a chart where they 
put the Medicare double-counting gimmicks under the rubric of 
deficit reductions. But there are separate points, aren't they, 
with respect to double-counting and the Medicare Trust Fund 
versus counting toward the deficit?
    Mr. Van de Water. Yes, sir. I think that is a very good way 
of explaining it. This discussion about so-called double 
counting I think has succeeded in complicating what is 
basically a pretty simple situation.
    The primary issue that is being discussed is what is the 
effect of the health reform legislation on the Federal deficit? 
That is what the CBO cost estimate addresses. And one can 
determine quite readily by looking at the estimate itself 
whether any particular item is being counted twice. And if you 
look at the estimate, you would find quite clearly that that is 
not the case. As I have sometimes joked, if there is one thing 
that the CBO is good at, it is doing arithmetic.
    Mr. Van Hollen. Thank you.
    Let's just go to a couple of other items on this chart that 
was put out by the majority on the Budget Committee. Let's go 
to Social Security taxes, because that relates in some ways to 
the conversation we are having, except on the Social Security 
    Mr. Van de Water. It is exactly the same issue.
    Mr. Van Hollen. And there what it is as a result of 
something we should talk a little bit more about, which is that 
there is a greater tax on some of the very high costs, what we 
will call Cadillac plans that some employers will choose to 
reduce the amount of compensation paid their employees in the 
form of health care benefits and increase it in the form of 
wages, correct?
    Mr. Van de Water. Yes, that is correct.
    Mr. Van Hollen. And in fact the chairman is not here. But 
under one of his plans he also eliminates the so-called tax 
expenditure for health benefits, correct?
    Mr. Van de Water. Yes.
    Mr. Van Hollen. So we, under this plan, do that, but we 
phase it in over a longer period of time, and we don't totally 
eliminate it, correct?
    Mr. Van de Water. Correct.
    Mr. Van Hollen. So that is new wages. And then there are 
FICA Social Security taxes on those new wages, correct?
    Mr. Van de Water. Yes.
    Mr. Van Hollen. And those are new income to the U.S. 
Government, right?
    Mr. Van de Water. Yes.
    Mr. Van Hollen. Ergo, that is deficit reduction, correct?
    Mr. Van de Water. Yes.
    Mr. Van Hollen. All right. So that is Social Security 
taxes, not gimmicks. It goes to deficit reduction.
    Now let's go to the appropriations issue that the majority 
has raised. Are you familiar with that issue?
    Mr. Van de Water. Yes, I am, sir.
    Mr. Van Hollen. Now, under the bill, the CBO estimates that 
there are about $115 billion of government funding required to 
implement the reform, is that right?
    Mr. Van de Water. Not exactly. There are $115 billion in 
authorizations over 10 years included in the bill. But a lot of 
that, however, is, well, very important, desirable programs, 
not items that are absolutely, positively essential to 
implement health reform. The parts that, in my view, are the 
essential implementation pieces are much, much smaller. It is 
the amount that the Department of Health and Human Services and 
the Treasury Department will require to administer the new law, 
and CBO says that those pieces are only in the order of $10 
billion to $20 billion over the first 10 years.
    Mr. Van Hollen. All right. And that is the point I wanted 
to get at. And much of that is already authorized under current 
law, isn't that right?
    Mr. Van de Water. Absolutely. And, moreover, as you members 
well know, often things get authorized and not appropriated.
    Mr. Van Hollen. Right. And that money will be subject to 
the appropriations process here; and all of our colleagues, 
Republicans and Democrats, will have a chance to vote on 
whether or not to have that funding, correct?
    Mr. Van de Water. Yes.
    Mr. Van Hollen. Okay. Thank you.
    Now with respect to--were you here for Mr. Foster's 
testimony about the doc fix numbers and how, even if we had 
never heard of the health care reform bill, we would still have 
to deal with that issue?
    Mr. Van de Water. Yes.
    Mr. Van Hollen. All right. The last issue--and on the CLASS 
Act, I think there are some fair issues that have been raised 
on some of the timing issues. And it is for that reason, 
actually, that it wasn't included under the pay-as-you-go 
rules. It was treated separately as part of this bill. So maybe 
we can have a discussion about the long-term impact of that, 
although it is unquestionable that it leads to deficit 
reduction in this time period, isn't that correct?
    Mr. Van de Water. Yes.
    Mr. Van Hollen. So, again, I appreciate it. Because this 
hearing was largely convened to try to rebut the notion of 
CBO's deficit numbers; and I think it has been pretty clear 
through the testimony of Mr. Foster, as confirmed by you, that 
what they put under the category of gimmicks is, in fact, 
legitimate deficit reduction. Do you agree?
    Mr. Van de Water. Yes, I do.
    Mr. Van Hollen. All right. Thank you.
    Mr. Rokita [presiding]. Thank you, Mr. Van Hollen.
    The chair claims a bit of time.
    I would like Witness Capretta to respond to a few things, 
if he could.
    First of all, this double-accounting issue. I enjoy 
baseball. I have played baseball. It seems to me the analogy 
made by Mr. Van de Water is less than perfect, and I wanted you 
to comment on that.
    And, secondly, I would like you to comment on this repeal 
of the tax exclusion issue, if you would, please. Given your 
experience, I don't want to be----
    Mr. Capretta. Sure. First, on the double-accounting issue, 
I think if you listen carefully to Mr. Foster--I know everybody 
did--but, actually, when you strip it all away, he said what is 
happening here is we are spending the $1 twice. That is what is 
happening because of the accounting conventions. The same 
dollar is being spent twice by the bill the way the trust fund 
accounting works. Okay? It is being used to pay for, under 
PAYGO, a new entitlement program, and it is being used to pay 
future Medicare claims.
    Now he is saying that that is just a current law convention 
that has been in place for a long time, which is true. But to 
say that the same dollar is not being spent twice is not true. 
It is being spent twice. That is why it is double counting.
    Now, CBO did--as the chairman, Chairman Ryan, already 
articulated, the point of bringing this up is that you can only 
spend the money not once, not twice. And if you want to claim 
it for deficit reduction, fine. It should be applied entirely 
to deficit reduction, not to spending on a new entitlement 
    If you had done Medicare reform, saved all the money, 
reduced the Nation's debt, sort of improved the fiscal position 
of the government to pay future Medicare claims, that would 
have spent the money once. That would have been really save 
savings, and you would have actually improved the ability of 
the government to pay Medicare in the future. That is not what 
happened. So that is why it is double counting.
    Secondly, one way to get a view into this a little bit is 
to get a look at something that is coming up in the next few 
months, which is debt subject to limit, right? Now we have two 
different kinds of debt. We have debt held by the public and we 
have debt which is held by the public plus governmental trust 
    If you look at what has happened under the bill, according 
to CBO, using the same numbers that everybody has been talking 
about today, debt subject to limit, this bill will make that go 
up faster than it would have under prior law because it is 
issuing more debt to the Medicare Trust Fund. Okay? If we had 
saved all of the Medicare cuts, that would not have happened. 
We would have not increased debt subject to limit under the 
bill. So we have double counted the money. We are going to 
spend it twice, and debt subject to limit is going to go up 
from this bill, not down.
    Mr. Rokita. Thank you, sir. Sounds like a gimmick to me.
    Repeal of the tax exclusion.
    Mr. Capretta. Oh, pardon me. You asked that as well.
    This is really ironic, actually, that this has come up 
here. A couple of things to say about that.
    First is that the new tax is a tax on high-cost insurance 
plans, and it doesn't start until 2018. But once it starts, it 
is going to be indexed at a very low rate. So the threshold 
will be about $27,500 for a family coverage plan in 2018, but 
then in 2019 and 2020 and 2021 and beyond, that $27,500 number 
will only go up by consumer inflation, not by health care 
costs. It is all factored into that revenue number I was 
showing before. By the end of a 10-year period this new tax 
would apply to a lot more people than it would if it had been 
indexed to health care costs generally.
    It is a huge revenue item. I agree with Mr. Van Hollen. It 
would actually raise a lot of money if it was in place.
    But I think there is something to be questioned here. We 
start the new entitlement here in 2014, large expansion in 
entitlement programs in 2014. Because of political reasons, 
they delayed the tax until 2018. Actually, the current 
President will never actually collect this tax. Even if he is 
re-elected for a second term, it will be collected by another 
President. It is so controversial that people that are opposed 
to it in the first place are already promising to get rid of it 
entirely. I am very worried that this revenue will never 
    Mr. Rokita. Thank you, Mr. Capretta. I am going to use the 
questions I asked you as my questions as a member and then go 
right to questions from the other side.
    Ms. Schwartz. Thank you.
    Ms. Schwartz. I appreciate the opportunity to talk about 
how we are going to go forward in the future. I think the 
notion--and I think Mr. Van de Water mentioned this--is sort of 
the supposition of this whole hearing is that we can't trust 
the CBO, and you can't actually believe that the law, as 
written, is ever going to be implemented. Well, if that is 
actually the case, then how do we ever go forward on anything? 
I think that was sort of mentioned.
    I mean, the point was just made that we expect that there 
will be new revenues and cost savings, but, in fact, we don't 
trust any of them. But what is happening here, I have to say, 
is that the notion that we should therefore just repeal this 
law and go back to nothing and our conversation--not only did 
we work on this for 2 years and incorporate a lot of different 
ideas to save costs for businesses and for the government and 
for families, but, you know, we have been talking about this 
for three decades. And I would imagine from every State point 
of view, every family, and every business and from the Federal 
Government, we really look at a way forward to create the 
consumer protections, the patient protections that we have 
talked about on our side this morning for existing condition 
coverage for children, covering your young adult children. We 
can talk about all of those.
    But the opportunity to pay for the donut hole rather than 
see that just be deficit increases, that was talked about. I 
think we heard $7 trillion over 75 years if we repeal this bill 
and do nothing. The innovations in payment and delivery system 
all would be repealed. So even if you say, I don't know how 
much it is going to save, I don't know how much greater quality 
and efficiency would be accomplished, we don't want to do any 
of them is kind of stunning I think in a way, just because we 
are not exactly sure how many billions of dollars we will save. 
It could be many billions or just a few billions. But not to do 
any of it because we are not exactly sure is somewhat 
    Of course, leave on the table the 50 million Americans who 
mostly show up in the ER and use health care so inefficiently--
and all the employers, I know that we have talked about before, 
who are seeing 10, 20, 30, 40 percent increases from one year 
to the next who will look at this legislation and say, will I 
continue to provide actually this law, health coverage for my 
employees, or not? What works best for me?
    What didn't get mentioned when that question came up was 
that in Massachusetts the one experience we have, as was 
mentioned, the fact is that, even with a much smaller penalty--
I think it was $500 or $700 a year if they didn't provide 
coverage--that is just an increase in the number of employers 
who paid health coverage for their employees. It was the 
expectation that they would as well as a way to attract 
employees, and there was employer pressure to do it. So that 
was mentioned as the one experience that we have.
    So the notion that they are going to drop this and lose the 
tax benefits, which they do, the government sees more money 
that will then be able to be used for the exchanges. 
Opportunity for new primary care doctors, being able to provide 
the right kind of care. I mean, almost everybody agreed on 
that, that we ought to do more about that. We do that in this 
    So I are think that really the only question that I have is 
for Mr. Van de Water, that I would say, is it truly better to 
set aside all these consumer protections, all these 
opportunities for lower cost for businesses and families? The 
cost savings to the government the CBO has scored and even Mr. 
Foster talked about could definitely occur and start all over 
again, take another decade or so to figure this out and just 
let Medicare not see some of these benefits and reductions and 
not see individuals and families or employers see these 
benefits. That is really what we are looking at.
    So I would just ask you as to whether you want to make a 
statement about that, about whether we should proceed to do 
everything we can to have this law work for the American people 
or should we just set it aside and--which isn't going to 
happen--or keep talking about setting it aside and not 
encourage the use of all the tools that are in this law to 
reduce costs and to improve quality and efficiency and cover 
more Americans. That is really the choice we have.
    Mr. Van de Water. I definitely agree with you on that.
    In your discussion with Rick Foster earlier, you listed all 
of the major cost control provisions that are in the new 
legislation. I think it was Mr. Blumenauer--I am not sure--who 
referred to the letter that a number of economists issued. I 
happened to be one of them which identifies some of the really 
important cost control elements in the Affordable Care Act; and 
I do believe that it would be far better to proceed to see what 
works, to move expeditiously to implement those things that do, 
to move equally expeditiously to get off of those things that 
don't, and to make progress in the direction of cost control.
    Mr. Rokita. Thank you, Ms. Schwartz.
    Mr. Mulvaney for 2 minutes, and then we will adjourn.
    Mr. Mulvaney. Very briefly, because we have to go over and 
vote. So I will keep my question very short and start it with 
Mr. Smith. But anyone should feel free to kick in.
    Mr. Smith, I appreciate your testimony regarding what it is 
going to cost Wisconsin. My understanding in talking to my 
folks back home in South Carolina is that our number is about 
$900 million. So we feel your pain.
    Here is my question: When you gave your testimony today 
about the number of folks who will drop off of the private 
health care systems and fall into Medicaid, which the State is 
partially responsible for, was the number that you gave us, did 
that consider that math in coming up with that number?
    Mr. Smith. Yes. We assume that there are shifts among this 
    Mr. Mulvaney. So my follow-up to anybody on the panel is, 
did the CBO do the same thing? Did the CBO assume that a 
certain number of people were going to fall off of private care 
and onto Medicaid when it scored this bill?
    Mr. Smith. There is some assumption. But the assumption 
about the employer, they assumed very little employer drop 
mainly because of the experience in Massachusetts. I would 
reflect that Massachusetts' experience was when economic times 
were relatively good. Without additional Federal subsidies--I 
mean, to use Massachusetts as a model I think is questionable 
because the economic times are totally different and these huge 
new Federal subsidies are----
    Mr. Mulvaney. And the bigger issue--and I don't want to cut 
you off--Mr. Van de Water, I will let you comment on this one, 
but we are running out of time--is did the CBO score the cost 
to the States?
    Mr. Van de Water. Yes, it did, and that was exactly the 
point that I was going to make, that both CBO and Mr. Foster, 
the Medicare actuary, have almost exactly the same estimate for 
the additional Medicaid cost to the States over the first 10 
years, approximately $20 or $21 billion, which is only about 1 
percent of State Medicaid costs and is much, much less on a 
national basis than the numbers that are being cited by Mr. 
Smith. So there are some serious questions about how Mr. 
Smith's numbers comport with the estimates both to the Medicare 
Actuary and the CBO.
    Mr. Smith. If I may, again, whether it is coming out of the 
State budget or the Federal budget doesn't really make too much 
difference to the taxpayer.
    Mr. Mulvaney. That is my point. Sooner or later somebody is 
going to have to pay for it. If these numbers are wrong in 
Wisconsin, but I understand they were generated by a previous 
Democrat administration, then we have evidently made the same 
mistake in South Carolina. My guess is that if you go around 
the country, not everybody is making the same mistake.
    Thank you, gentlemen. We do need to go.
    Chairman Ryan [presiding]. Two minutes to each. How does 
that sound? Because these gentlemen are busy.
    So let's go to Ms. Kaptur and then to Mr. Pascrell.
    Ms. Kaptur. Very good.
    Gentlemen, thank you for your testimony.
    Mr. Smith, how long have you been with the State of 
Wisconsin as Secretary of Health and Human Services?
    Mr. Smith. About 3 weeks, ma'am.
    Ms. Kaptur. About 3 weeks, okay. And may I ask, prior to 
that, could you state your career history?
    Mr. Smith. Most of my career has been in public service. I 
spent most--I have spent almost 8 years running the Medicaid 
program at the Federal level, the Centers for Medicare & 
Medicaid Services. So Rick Foster was a colleague during that 
period of time, ran the Virginia Medicaid program, various 
State and local--and have worked on the Hill as well.
    Ms. Kaptur. Okay. And would you know at this point the 
major Wisconsin insurance plans that operate either in the 
region you are working in Madison or Statewide?
    Mr. Smith. I am learning them at a time. Our regions--
again, our markets are very different from the northern region 
to southeast. I am learning those markets now. We have a very 
competitive market in the individual market. Our top company in 
terms of the individual market as a percentage of premiums is 
only 12 percent.
    Ms. Kaptur. What is that company, sir?
    Mr. Smith. I believe it is Blue Cross. But 12 percent as 
being the top suggests that we have got great competition, and 
we want to protect it.
    Ms. Kaptur. All right. Let me just say to Mr. Capretta, 
does your organization receive any outside funding for its 
support, the policy center that you represent?
    Mr. Capretta. We are funded, of course. We get funding from 
philanthropies, from some corporations.
    Ms. Kaptur. Are any of these insurance related?
    Mr. Capretta. I don't think so. I can check for the record, 
but I don't think so.
    Ms. Kaptur. All right. If you could provide that.
    [The information follows:]

    The Ethics and Public Policy Center has not received funding from 
health insurers in its current fiscal year (which began in July 2010). 
In our 2009-2010 fiscal year, the support that we received from 
insurance-related sources amounted to about 1 percent of our expenses 
for the year.

    Ms. Kaptur. I wanted to ask Mr. Smith, are you aware of a 
company called the United Health Group? Do they function in 
    Mr. Smith. They do. Yes, ma'am.
    Ms. Kaptur. All right. Are you aware that their CEO in 2006 
got the largest corporate parachute in the history of corporate 
America, walked away from his company with $1.1 billion? I 
wanted to ask you, do you think that is egregious?
    Mr. Smith. Again, I have no judgment on what the 
    Chairman Ryan [continuing]. If we are going to make this 
    Mr. Smith. Again, my concern in Wisconsin is, the PPACA 
could consolidate the health care market and reduce 
competition. It is the large corporations who always have the 
grace--advantage when something like this comes along because 
they have the margins and squeeze out the smaller firms, and 
that is what I want to avoid.
    Ms. Kaptur. I agree that it is a competitive marketplace. 
That is my key objective as well.
    Chairman Ryan. Mr. Pascrell.
    Mr. Pascrell. If indeed Wisconsin, Mr. Chairman, has true 
competition, then wouldn't your citizens in Wisconsin--and I am 
asking this rhetorically--be getting more value for your 
dollar, not less in comparison to other States? Could you 
explain why the annual Wisconsin health insurance cost ranking 
report released in December states the following: Every region 
of the State of Wisconsin has suffered higher health insurance 
hyperinflation than the national average. Wisconsin's health 
insurance premiums have increased, Mr. Chairman, 198 percent 
over the last decade compared to 130 percent nationally. How do 
you explain that?
    Mr. Smith. I am not familiar with the data, sir. I don't 
have an explanation.
    Mr. Pascrell. I am not making these numbers up, I can 
assure you, Mr. Smith. It comes right from the annual report, 
the annual Wisconsin health insurance costs.
    And, secondly, you mentioned in your testimony several 
times about the importance and significance of creating jobs, 
    Mr. Smith. Yes, sir.
    Mr. Pascrell. Yet your Governor just sent back $900 million 
on high-speed rail, money of which went to Iowa and Illinois, 
15,000 jobs down the tubes. How do you explain that?
    Chairman Ryan. Let me just interject. He is the Secretary 
of Health Services. He is not the Secretary of Transportation.
    Mr. Pascrell. I know. I am making a point here because the 
criticism from the noble other side is that this is a job 
killer. And it is nice to use words like that. But we need to 
be talking out of one side of our mouth, don't you agree with 
    Chairman Ryan. I appreciate it, and I would say that that 
15,000 number is a real bogus number. We can rescind that money 
so it doesn't go anywhere so we can get this debt under 
    Mr. Pascrell. It is going to Iowa and Illinois.
    Chairman Ryan. Is the gentleman done?
    Mr. Pascrell. Thank you, Mr. Chairman.
    Chairman Ryan. Thank you.
    Only because we have 9 seconds left in this vote, we need 
to wrap this thing down. The three of you, thank you very much 
for taking your time and for your indulgence and for your 
testimony. I appreciate it.
    This hearing is adjourned.
    [Whereupon, at 1:30 p.m., the committee was adjourned.]