Statement by Donna S. Shalala,
Secretary, Health and Human Services

February 29, 1996

Secretary Shalala. Mr. Chairman, Congressman Gibbons, thank you for the invitation to join you today. I welcome the opportunity to discuss with you the status and the future of the Medicare Hospital Insurance Trust Fund.

Since the day he took office in 1993, the President bas devoted himself to improving the availability and affordability of medical care in this country, especially for those who rely on Medicare-our senior citizens and those who are living with disabilities.

In his first year in office, the President's economic recovery program breathed new life into the Medicare Trust Fund, extending the fiscal solvency of the Part A Trust Fund by 3 full years for that critical program. And I would note that that legislation passed without a single Republican vote in either House of Congress.

Last year, and now this year, the President is again proposing measures to extend the fiscal solvency of the Part A Trust Fund. As part of his comprehensive plan to balance the Federal budget in 7 years, the President has proposed $124 billion in Medicare reforms that would extend the life of the Part A Trust Fund for more than a decade from now.

Throughout this process, the administration's policies on Medicare have been based on three basic principles: First, that Medicare should be a more prudent purchaser of health care services for the 37 million beneficiaries who depend on it. Second, senior citizens need greater choice of high-quality health plans that also preserve the important consumer and financial protections Medicare prom­ ises. And third, we must increase our effort to root out waste, fraud and abuse of the Medicare Program.

These are the elements that must form the basis of any agreement we reach to balance the Federal budget, and the good news is that those elements are on the table in both the President's plan and some of the proposals made by the majority party in Congress.

Our job is to come to an agreement on those elements while discarding proposals that would weaken the Trust Fund and endanger the physical and financial health of beneficiaries. For example, it is our firm belief that we should not dramatically increase out-of­pocket expenses for senior citizens when they are already spending 20 percent of their own limited income on medical expenses not covered by Medicare.

We also should not eliminate important limitations on balance billing that protect seniors against overcharging by providers.

We should not open the Medicare Program to untried and untested health care approaches, like medical savings accounts, which have been estimated to cost Medicare more than $4 billion rather than save Medicare money. And we should not weaken our efforts against fraud and abuse at a time when we have finally begun to win the battle against those who would abuse the system for their own financial gain.

As the President has said, the elements of a bipartisan agreement to balance the budget in 7 years are on the table. The question is whether we can come together and approve those elements this year. In light of the Trust Fund's short-term financing problems, we would urge that this be accomplished sooner rather than later.

We would also urge that we will be more likely to accomplish this if Republicans set aside their proposals that harm the Medicare Trust Fund and harm beneficiaries.

Now I would like to turn to the question of the current financial health of the Part A Trust Fund. Mr. Chairman, I am deeply concerned about recent allegations from Members of the majority party in this Congress of a breach of trust by this administration in its oversight of the Part A Trust Fund. Nothing could be further from the truth.

Far from a breach of trust, the administration has worked hard to protect Medicare and the Trust Fund as I have just outlined.

I want to take this opportunity to walk you through the process through which the administration and the Medicare Trustees' Report to Congress on the Trust Fund. I would like to submit for the record a copy of my February 12 letter to the Committee on this subject. By law, the Medicare Trustees submit their annual report on the status of the HI Trust Fund to Congress each spring. The law specifically requires the Trustees to report on the performance of the Trust Fund in the prior fiscal year.

In their report, the Trustees also make projections about future performance and solvency. The report is widely distributed to the Congress and to the public.

In addition to the statutory requirement to issue an annual report, other specific statutory requirements ensure that Congress will be notified if the outlook for the Part A Trust Fund is particularly critical.

For example, the law requires the Trustees to notify Congress if the Trust Fund's assets are expected to fall below 20 percent of 1 year's expenditures in the short term, which the Trustees have used to mean 10 years. The Trustees have sent this special notification, known as a "section 709 letter" along with their annual reports during each of the last 3 years.

The section 709 letter sent to congressional leaders in April 1995 indicated that the Trustees projected that the HI Trust Fund would be depleted in 2002.

In addition to the annual report, the administration prepares semiannual estimates of the financial operations of the HI Program as part of the President's budget process. Each year, the adminis­ tration releases Medicare baseline projections as part of the President's budget proposal for the upcoming fiscal year. These estimates for fiscal year 1997 will be released next month as part of the President's fiscal year 1997 budget submission to Congress.

The Treasury Department, which serves as the official bookkeeper of government outlays and revenues, reports retrospectively on outlays from and revenues to the Part A Trust Fund. These reports show actual cash flows to and from the HI Trust Fund, in contrast to the projections in the Medicare Trustees' Report and the projections in the President's budget.

In October 1995, the Treasury Department reported on the Trust Fund income and outlays, together with the Fund's assets at the end of fiscal year 1995.

The Treasury reports are widely distributed to each Member of Congress, to the Congressional Budget Office, this Committee, the House and Senate Budget Committees, the Senate Finance Com­ mittee, and others on request.

The data provided in the Treasury reports are analyzed by a variety of public and private agencies and organizations. For example, in November of last year, the Congressional Budget Office reported on the Treasury data for fiscal year 1995 in a report entitled, "Analysis of the September Treasury Statement."

In addition, CBO used this data to update their Medicare baseline in December 1995, which reflects the higher growth on part A spending and the lower growth on part B spending.

Furthermore, the American Academy of Actuaries noted in its December 1995 report, "Comments and Recommendations on Medicare Reform," that the total expenditures exceeded income for the Hospital Insurance Trust Fund in 1995.

On February 12, 1996, in a bulletin released by the Senate Budget Committee, Chairman Domenici acknowledged having received the Treasury data in October and noted, "The recent changes in projections do not significantly affect the longrun Medicare situation."

I would now like to talk specifically about how one should interpret the information that is provided in the Trustees' Report.

The primary purpose of the Trustees' Report is to provide estimates of the future financial status of the Trust Fund for use by the Congress in making decisions about the Medicare Program. Be­ cause of the uncertainty inherent in projections, the future status of the Trust Fund is examined under three alternative sets of as­ sumptions: "intermediate," "low cost" and "high cost." The intermediate set of assumptions represents the Trustees' best estimate of expected future economic and demographic trends-in employment, in wage increases, in health care prices, and utilization and other factors that will affect the financial status of the Trust Fund.

Each year, the Trustees' projections are updated, using the most recent available information on several factors, including inflation, wages, and utilization. One of those factors is actual experience in the past year.

For example, the Treasury report released in October provided actual cash revenues and outlays from the Part A Trust Fund for fiscal year 1995. This information on actual experience will be incorporated into future projections.

In summary, projections in the Trustees' Report are routinely updated to reflect actual experience and new economic data, but the projections themselves remain estimates of the future of the Medicare HI Trust Fund. Any given projection of Trust Fund status, by its very nature, cannot be expected to exactly mirror actual experience.

The Trustees construct our projections with the best and most recent information available and continually benchmark projections against actual results to obtain feedback on improving our methodology. Consequently, the Trustees' projections provided the most useful guides available to decisionmakers in addressing the issues of an uncertain future.

The 1995 Trustees' Report projected that under the intermediate assumptions, the HI Trust Fund would be depleted in 2002. This depletion date was 1 year later than was projected in the 1994 Report. The estimates under the "low cost" and "high cost" alter­ natives ranged from 2001 to 2006, and both of those numbers were included in our 1995 Trustees' Report. The Trustees estimated that HI Trust Fund income would exceed expenditures by $4.7 billion in fiscal year 1995; income would approximately equal expenditures in fiscal year 1996, and income would fall short of expenditures by approximately $5 billion in fiscal year 1997. However, as you know, actual expenditures exceeded revenues for fiscal year 1995 by $36 million.

The 1995 Trustees' projections were within a reasonable range of variation, as they have been over the past several years. Let me repeat that. The 1995 Trustees' projections were within a reasonable range of variation, as they have been over the past several years.

In each of the past 10 years, actual HI income has been within approximately 1.5 percent of projections in either direction. Actual HI expenditures exceeded projections in 6 of the last 10 years by amounts ranging from 0.4 percent in 1993 to 5.6 percent in 1992. Projections were higher than actual experience in 4 of the last 10 years, by amounts ranging up to 2 percent. This past year, in fiscal year 1995, total HI income was 1.2 percent less than projected, and expenditures were 3.1 percent greater than projected. Thus, the 1995 variation was within a normal range of variation.

Considering the complexity of the projections at stake, the Office of the Actuary has a very good track record with its estimates. By way of comparison, the Congressional Budget Office March 1995 baseline projections for HI were very comparable to the Trustees' Report projections and estimated a surplus in fiscal year 1995.

Moreover, a comparison of Trustees' Report and Congressional Budget Office projections of total Medicare spending, when the projections were made during the actual year in question, shows similar ranges of differences between projections and actual spending. Over the period 1987-95, the Trustees' Report overestimated same year spending four times and underestimated same year spending two times, and came within $1 billion twice; CBO overestimated spending three times, underestimated spending three times, and came within $1 billion on two occasions.

We fully recognize that you are very interested in having the most up-to-date projections of the HI Trust Fund depletion, and the Trustees will provide them to you as soon as they become available. Without the detailed analysis that these projections involve, it is too soon to draw firm conclusions about the extent to which the performance of the Trust Fund in fiscal year 1995, or any other factors, will affect the Trust Fund's estimated depletion date.

Despite the fact that these projections are not yet available, the HCFA actuaries have made an interim calculation based on incom­ plete information, suggesting that the projected Trust Fund depletion date would move back from 2002 to 2001.

However, this interim projection is preliminary and incomplete since it does not take into account any other changes in the data or assumptions that are currently being reviewed.

Finally, this projection is subject to change and the Trust Fund depletion date substantially delayed, if the Congress acts soon to adopt the constructive Medicare reforms that this administration has recommended.

In closing, let me again thank you for allowing me to appear before you today to set the record straight regarding the status of the HI Trust Fund. Although the status of the HI Trust Fund may be slightly worse than projected last year, the long-term outlook for Medicare has not changed and requires action. Without intervention, the Trust Fund will be exhausted within the next 5 years or so.

To meet this challenge, the President has submitted a 7-year balanced budget plan that ensures that the Trust Fund will remain solvent for more than a decade from now and provides us with an opportunity to tackle the longer term issues in a measured fashion.

We should move forward in a responsible bipartisan manner to enact these changes, as the Medicare Program requires and as the citizens we serve expect.

Thank you.