Delivered April 29, 2008
GRACE-MARIE TURNER: Thank you all very much for
joining us today for this special forum on the Medicare program,
which now funds medical care for more than 42 million senior
citizens and disabled Americans. The presence of so many of you
here shows that you understand the need to focus on Medicare
more than just once a year when the Medicare Trustees' report is
I am Grace-Marie Turner, president of the Galen Institute, a
public policy research organization that focuses on free-market
ideas for health reform. We are co-sponsoring this event with our
colleagues from The Heritage Foundation and the American Enterprise
Institute. We also welcome the CMS Network as well as the Kaiser
Network. They are broadcasting this event from the Newseum as a
Webcast, which will be available later today on KaiserNetwork.org,
as well as at Galen.org and Heritage.org.
We also are very pleased to welcome Senator John Breaux and
Secretary Mike Leavitt, plus a distinguished panel of experts
to discuss the future of Medicare. Secretary Leavitt titled
his talk "Drifting Toward Disaster." He has been refining his
address personally until the early hours of this morning, showing
his dedication to this issue. Following his address, our
distinguished panel will discuss solutions for Medicare's
The Secretary will talk to us about the magnitude of the
problem, and our panelists will be talking about big picture
solutions. So to begin, I want to welcome my dear colleague and
friend Bob Moffit, Director of the Center for Health Policy Studies
at The Heritage Foundation. Once again, thank you all very much for
ROBERT E. MOFFIT, PH.D.: Ladies and
gentlemen, on behalf of my colleagues at The Heritage
Foundation, I also want to welcome you to this important forum.
Politicians think about the next election. Statesmen think
about the next generation. Senator John Breaux, a Louisiana
Democrat, is a statesman. He was elected to the House of
Representatives in 1972 at the age of 28, then the youngest member
of Congress. He was then elected in 1986 to fill the seat of
Senator Russell Long of Louisiana and began a stellar career
as a champion of bipartisanship in the United States Senate.
Senator Breaux rose to prominence as a member of the Senate
Finance Committee and was a leader in welfare reform and tax
reform. But it is in the area of entitlements where he made his
greatest name. As Chairman of the Committee on Aging, Senator
Breaux highlighted the importance of strengthening both Social
Security and Medicare. In 1998, he was selected by President
Clinton and House and Senate leaders to chair the National
Bipartisan Commission on the Future of Medicare.
Since his retirement from the Senate in 2005, he has remained a
steady voice of reason and a source of wise counsel for Republicans
and Democrats alike. It is my honor to give you Senator John
HON. JOHN BREAUX: Thank you very much Bob.
Thank you for your contributions over the years and for your
continued work in this area.
Good morning to all of you. What a great crowd. And we have a
great panel. I am delighted to be here to present-not to introduce,
but to present-to you the Secretary of HHS. We all know of his
great work. He promised me that right after he fixed Medicare, he
was going to go out and fix Medicaid. And then right after that, he
would fix the problem of the uninsured. And after that, he will fix
the VA and then provide universal care for all of us. So it is
going to be a busy day. But with his determination, I am sure it
can get done.
What we really need in this area is truly not all that
complicated. When I was on the Senate Finance Committee, we would
have almost endless hearings with the Secretary on Medicare reform.
Group after group would also come before the Finance Committee and
say, "Senator, you have got to fix Medicare. Fix it, but do not cut
my benefits. Fix it, but do not increase my premiums. Fix it, but
make sure you do not increase the eligibility age. But, darn it,
The problem obviously is that the things that you have to
consider, the things that you have to look at, and the things that
you have to do require not more books-except maybe books on
We should have a forum on political courage: how you get it, and
how you keep it. It's how you make reform work. Because the great
challenges facing Congress reflect a great deal about the
politics of our government and how we go about solving these
challenges. There are great suggestions on how to fix Medicare. But
the real issue is the political ability to make those very tough
decisions by a political body that runs for office on a regular
basis. It is very difficult.
We made recommendations on the Medicare Commission. Some of them
were good. Some of them were enacted. The prescription drug program
in Part D was part of that; it has been a great success. So I am
really delighted to bring both Republicans and Democrats together
to see if we can get this done. Everybody can take credit for
getting it done. What Secretary Mike Leavitt brings to the table is
an understanding that comes from being a Governor, from being a
Cabinet Secretary, and from being a person who is really committed
to health care in this country. His is the type of leadership that
both sides of the political aisle can appreciate. He is a man both
sides can listen to, and can find the political courage necessary
to accomplish that task.
He knows the subject. In addition, he brings the commitment and
the political leadership. Ultimately, this is the greatest
challenge as we look at reforming health care in this country.
So, I am delighted to present to you the Honorable Michael Leavitt,
Secretary of HHS.
HON. MICHAEL O. LEAVITT: I want to begin by
explaining my motivation for giving this speech. Our nation has
made a promise to provide health care to our seniors. I am going to
speak critically of our current course. I don't want to see us
fail. To keep this commitment requires change. Time is running out.
Medicare is drifting toward disaster.
I am a Trustee of the Medicare Trust Fund. On March 26 I
attended what will likely be my last annual spring meeting of the
Trustees. Our primary business was to issue a report to the people
on the condition of the Social Security and Medicare Trust Funds.
The report is based on work by the government actuaries.
In the Treasury conference room we use there is a wall clock
that has been there since 1873. At one time, the clock was actually
hooked to the Western Union telegraph line which calibrated the
exact time on a regular basis.
This year, Rick Foster, the chief Medicare actuary, sat in
perfect alignment between me and the clock. As Rick gave his report
that the Medicare Hospital Insurance Trust Fund was projected to be
insolvent in 2019, I could see time passing with each swing of the
clock's pendulum: ticktock, ticktock.
I'm not sure if that caused what I am going to describe to you,
but as I listened I felt the weight of this responsibility pressing
on me. When the report was finished, the final page of the report
was passed around for our signatures.
It felt like the moment required more than just signing my name
and moving on to the next appointment. This is serious business
involving trillions of dollars and the lives of hundreds of
millions of people.
As much as anything, the weight was a blend of responsibility
and selfish panic. I realized that when the actuaries' forecast
matures-and it will-somebody is going to say to me, "Weren't
you a Trustee of the system for four years? What did you do to
address the problem?" Somehow, the response "I signed the report
each year" just doesn't feel adequate. Though the truth is,
that's about all the authority the Trustees are given.
Just before the vote to accept the report, I asked the Secretary
of the Treasury, Hank Paulson, the managing trustee, if he would
keep the record of the meeting open because there were some things
I just felt a need to say. He agreed.
My remarks today are a response to my discomfort, and I
plan to submit them as part of the minutes of the March 26
"Scouting the Rapids"
I have constructed a metaphor in my mind that is useful in
describing our dilemma with the Medicare entitlement program,
which I will share with you today.
Whitewater canoeing at the championship level is high adventure
and comes with serious dangers. My friend, Matt Knot, is an
instructor and guide on the Gauley River in West Virginia.
There are treacherous places in whitewater country. Canoers
call them hydraulics. They are given descriptive names like "Hungry
Mother" or "Lunch Counter" that dramatically communicate
Hydraulics form when water pours over an obstacle like a
rock. Unwary canoeists get sucked into them and can be trapped in
one place by the force of the current. They are instantly
overwhelmed and dragged under by the whirlpool effect created.
Matt says when you go into a hydraulic everything gets very
dark as you are pulled deeper. Water circulates the boat back to
the surface and then drags it down again, over and over. Survival
depends on keeping your wits, waiting-and hoping-to be flushed
out the bottom.
Some thrill-seeking river runners find the experience of
navigating a hydraulic exhilarating. However, the worst
hydraulics are known as "keepers." Boaters become victims when they
get sucked down into a hydraulic, and instead of being tossed about
for a while and flushed out from the bottom, they get mired in a
jungle of debris, which has also been sucked into the same
This is an important point to remember: it is not just the
hydraulic that brings fatal consequences; it is the combination of
the hydraulic and debris that isn't evident.
Matt teaches students to anticipate. He calls it "scouting the
river." Scouting is more than looking ahead. It's listening for the
roar and sensing when the current is pulling you toward a dangerous
Here's the second important point. Safety comes only in
foresight and avoidance. Matt says, "You have to start positioning
your canoe well ahead of the danger, commit to a course that avoids
the dangerous area, and then paddle hard."
I'm sure it is obvious to you that the river in my metaphor is
the growing obligation our nation has to the pay for the health
care of our senior and disabled citizens. Medicare's liabilities
have grown from a mere trickle 40 years ago into what Matt Knot
would call "Class 5 rapids." As new streamlets merge, it is
becoming a raging torrent-more demanding and dangerous with each
The Medicare Trustees' Report does a good job of "scouting the
rapids." But a nation that does not act on the warnings it contains
is no different than a canoeist ignoring evidence of hydraulics in
the river ahead.
The disaster is not inevitable. If we act now, we can change the
outcome. In health care, the core problem is that costs are rising
significantly faster than costs in the economy as a whole.
Rising Costs, Aging Population
Health care has done exactly that for my entire life. When I was
born, it was 4 percent of the economy. When my son was born,
it had doubled to 8 percent. When my first grandson was born two
years ago, it had doubled again to 16 percent.
Every piece of evidence shows the trend continuing. The
problem is beyond the fact that medical cost growth is faster than
that of any other part of the economy. Our problem is also
demographic. Our population is aging and as we age, medical
expenses grow. Today, 12 percent of the population is 65 or older.
By 2030, nearly 20 percent of us will be seniors. There is nothing
we can do to change that.
We have made a decision in our society that the cost of seniors'
health care will be borne primarily by younger people who are still
working. When that decision was made, it was assumed there would
always be a fresh crop of earners to support the health care of
their parents. That is not proving to be true. The demographic
reality is there are diminishing numbers of workers per
senior, and this ratio will decline rapidly once the "baby boom"
generation reaches Medicare eligibility age starting in
In preparing to deliver this speech, I had economists,
actuaries, and demographers developing detailed scenarios
demonstrating how this will unfold. I then spent hours-writing
draft after draft-looking for the right combination of facts to
illustrate our dilemma. I've concluded today, that such a
fact-filled analysis is unnecessary. Most of you have done the math
yourself and know the simple truth: Higher and higher costs are
being borne by fewer and fewer people. Sooner or later, this
The real pressure on this problem starts between now and 2019,
when the Medicare Hospital Insurance Trust Fund is projected
to become insolvent. There is no backup plan in the law to ensure
that hospitals continue to be paid when the Trust Fund is
Congress will not be able to sit idly by and allow the Medicare
program to become insolvent-they will be forced to take action.
They will have the old familiar choices of raising taxes, cutting
benefits to seniors, or imposing reduced payment rates on health
care providers. Some of these choices represent the ugliest of
political dilemmas, pitting a generation of workers against
their parents and grandparents.
I have a son who is 30. He and his wife are just beginning their
household. They have one young daughter and another baby on the
way. They are in many ways becoming a typical American
household. This is a wonderful thing to see as a parent, but I
worry about our national economic future; I worry about our coming
Let's consider what their generation's economic prospects look
like over the next two decades. The typical household is going to
see its health care spending basically double in the next twenty
years-from 23 percent to 41 percent of total compensation. At
the same time, we are going to nearly double the share of federal
spending that goes to pay for Medicare, from 13 percent to more
than 23 percent. And we are going to do this while the number
of working people per Medicare beneficiary is sliced nearly in
half, from 4 to 2 and a half.
That is clearly not a rosy scenario for growing young households
like my son's. These working families will argue, "My generation
did not agree to this arrangement. This is happening at a time when
my own health care is unaffordable. I have children who need food
and clothes. I'm struggling to make ends meet. Seniors need to
either have lower benefits or pay more of the cost
themselves." In fact, they will insist, "We are the ones with the
heavy burden. Government needs to help us more so we can
continue to work and enjoy what our parents did."
But their parents and grandparents will have legitimate worries
too. They will argue, "I did my time. I paid into the system. I
have a legal entitlement for health care, and the government
has a moral obligation to provide it. I know the demographics
have changed, but that isn't my problem." In fact, seniors will
argue, "Health care costs are so high, my Medicare premiums,
co-pays and deductibles are eating up almost half of my Social
Security check. You need to help us more, not less."
The problem is: both will be right. The problems we see today
with Medicare have the power to pit these parents and children
against each other in an intergenerational economic struggle where
each side will suffer.
Frighteningly, we will see that competition for resources play
out much like another economic tension we are already
experiencing. Our choices about social investment-in
infrastructure, education, national defense-are being reduced as
mandatory spending crowds out discretionary spending. In the last
two decades, we've gone from half of our national spending being
discretionary to only 38 percent. In four years, it is projected to
be down to less than one-third.
We are seeing mandatory health care expenses crowd out other
government spending-just as we are going to see health care
spending crowd out non-health care spending in American
By now the current has grown so much that we are being sucked
down into the hydraulic whirlpool again and again, with little
surface time for air. The debris is piling up, and we may not have
a way out.
Would it be a stretch to say 20 years hence, we would likely
have accumulated a substantially larger national debt than we have
now; and that a significant portion of that debt would be in the
hands of foreign capital sources? Again, that's our current
Other nations, of course, have scouted out the river. What will
the impact be of continued trade deficits, and new global
competitors who spend a fraction of what we do on health care, yet
produce similar or better big picture health results?
We factor continued growth into our scenario like it is
certainty. Without continued investment from private and public
sources, our prosperity would be taken away.
I was in Singapore the week before last. Their health care
system consumes 4 percent of their gross domestic product. Rather
than a Medicare-like government system, they require citizens to
save. Incidentally, the Singaporean life expectancy is slightly
longer than it is in the United States.
I would simply ask this question. If you were considering
between an investment in two organizations and one spent 4
percent on health care with no future liability and the other spent
16 percent and had trillions of dollars of unfunded obligations,
which one would you be most interested in?
In the late 1990s, I was Governor of Utah, and went to Argentina
to develop trade relationships. I met various ministers of the
Argentine government who, at the time, were proposing some
aggressive and controversial changes. Among these was an attempt to
transition their country away from a constitutionally
protected pension system, their version of entitlements.
I remember thinking, "These are the most courageous
political leaders I've ever met." I soon found it was not just
courage. They were compelled.
Thinking the Impossible
At the beginning of the 20th century, Argentina was one of the
wealthiest countries in the world- wealthier even than the United
States. Over the next fifty years, successive governments
constructed, and then expanded, an ever-generous system of
social benefits, nationalized industries, and created a vast and
bloated public administration. Yet protectionist policies and
a failure to invest in innovation in agriculture and other key
industries meant the world economy began to change while
Argentina's didn't. Its productivity suffered. But the
country kept on spending, content and confident it was
better-off than its neighbors.
As it turns out, Argentina had been operating for many years on
money borrowed from the financial markets and organizations like
the World Bank and the International Monetary Fund. By the 1990s,
the mortgage outstripped the country's ability to pay. Creditors
told Argentina, "No more, unless you fix your entitlements."
Frankly, Argentina had started down the path of reform late, and
once the government started, the political pain was too much-the
nation could not sustain it. The government developed a solid
monetary policy, but could not change its fiscal or spending
A few years later, Argentina was in political turmoil, with
a rapid succession of governments, a currency in free-fall,
and a rapid spike in unemployment. The country teetered on the
verge of civil unrest. Why? Because Argentines had put off hard
choices for so long they were forced to make change too quickly,
and they simply didn't have the political strength to do it.
It seems inconceivable that the United States of America, the
strongest economic power in human history, the land of the free and
the home of the brave, could ever be in a situation like the one
Argentina faced a decade ago. But, is it?
Let's think on a horizon of twenty years.
Is it hard to conceive of a severe productivity dip in the
United States as labor markets become more sophisticated in nations
like China, Vietnam, India, and Brazil? They are increasingly
competing not only with our manufacturing sectors but also with our
more dynamic knowledge sectors.
Is it really difficult to imagine world credit markets
saying to the United States of America-as the world did to
Argentina: "Given your lack of action in dealing with your deficit
and the entitlements causing the problem, we are beginning to lack
confidence in you"?
When we talk about the metaphoric torrent we are navigating, it
is much more than just Medicare, of course. The massive burden we
are feeling is created by a full 16 percent of our gross
domestic product rushing through a single sector of the
economy. We need changes that can affect this entire sector we call
But there is a very close relationship between Medicare and the
balance of the U.S. health sector. Medicare is such a powerful
payer; the rest of the sector has based their billing and
reimbursement mechanisms on Medicare.
I believe the key to health care reform in our nation is
Medicare reform. Successfully changing Medicare will trigger the
rest of the health care sector to follow. That would be better
news if changing Medicare were not so politically and
Sounding the Alarm
Since I am speaking in my capacity as a Trustee of the Social
Security and Medicare Trust Funds today, it is important to
acknowledge that this job is about sounding the alarm. I hope I
have made clear to you just how alarmed I am and how alarmed we
should all be. There is serious danger here. It troubles me
that this matter is not receiving more attention in the
presidential candidates' discussions. The next President will have
to deal with this in significant part. In fact, if they don't
deal with it, our opportunity to apply Matt Knot's strategy of
repositioning early and paddling hard is lost.
So, given the strong possibility this won't get fixed in the
next 266 days, I would like to add some general advice on the
creation of a political construct for action and a general
strategy to solve the problem. I want to add, these are not being
presented as Administration policies or proposals. I take
complete responsibility for them as a Trustee simply laying out my
To get this done, we will have to do three things: separate the
commitment from the pain, pick the right moment, and modernize the
budget scoring conventions.
Separate Commitment from Pain. I believe there will
need to be some trigger points built into legislation so
members of Congress are not casting a vote to take specific
measures but rather laying contingent plans if things go
beyond a predetermined point. For example, if Medicare exceeds more
than a defined percentage of the gross domestic product, some
combination of actions would be automatically triggered and
could be overridden only by a difficult to obtain
Next, pick the right moment. It will be necessary for
Congress to acknowledge that bi-partisan action is required. The
usual legislative process won't ever produce enough bi-partisanship
to deal with this problem. The way election cycles operate now,
only a few months separate the time one election cycle ends and the
next one begins.
Senators like Judd Gregg and Kent Conrad have offered
bi-partisan legislation creating a special legislative process
similar to those relating to military base closures. My sense is
that such arrangements need to be put into place during windows of
time when control of political power is sufficiently uncertain that
both major parties feel at risk. To succeed, the rules of such
a process would need to be the product of a larger consensus
requiring both parties to operate under them regardless of whether
they were in the majority or minority.
Finally, modernize scoring conventions. Many of the
tools Congress will need to reform Medicare will involve
significant behavioral changes and require investments that
traditional scoring conventions would count solely as expenditures.
In an age when the power of investment and productivity are the
keys to success, the federal scoring conventions overvalue the
status quo while undervaluing the investments that could transform
So far this morning, I have talked about the serious
imperative our nation has to change the course of Medicare.
I also discussed several parts of a political construct
that would allow political action.
Now I would like to frame up, at a high level, what a solution
should look like from my perspective. I'm ready to break into
song on this matter, but will restrain myself. However, if you find
this preview interesting, I would enjoy sharing it in more
detail with you at another time.
A Medicare system solvent through the 21st century would
have three characteristics. First, value of care would replace
volume of care as Medicare's best-rewarded virtue. Second, Medicare
parts A and B would operate like Part D. Third, each generation
would carry its share of the load.
1) Value of care would replace volume of care as
Medicare's best rewarded virtue.
In Medicare, our most expensive patients are those with multiple
chronic diseases. The combination of ailments compounds to
magnify each other. The same is true with Medicare. Medicare has
three chronic ailments that are defeating the system.
The first, I call Silo Syndrome: Each medical action is
paid for separately. That provides little opportunity or incentive
for coordination among providers and it often results in bad
referral decisions, sloppy hand-offs, duplications, fraud, and
poor quality of care. The result is inappropriate care and
Medicare needs to use its power as the nation's biggest payer to
change this. It's not only wasteful but it encourages unnecessary
care and expensive medical mistakes.
The second category is Quality Indifference:
Doctors, hospitals, and other medical providers are paid at
the same rates for low-quality or high-quality performance.
Physicians who take measures that prevent acute flare-ups of
chronic conditions are paid no more than those who don't. Skilled
nursing facilities that prevent unnecessary
re-hospitalizations are paid the same as those that don't. In fact,
poor quality is often rewarded. When patients contract preventable
hospital infections, costs skyrocket and in most settings, the
hospital profits from it. Not only is our current system
quality-indifferent, we reward poor quality!
Patients deserve to know the quality of the care they receive
according to standards set by the experts. The information should
be transparent, and most of all, we should reward quality.
This leads naturally to the third category: Chronic
More. There are no mechanisms or incentives for controlling
the volume and intensity of care. Not for the patient or the
provider. The entire process rewards volume. Doctor and hospital
incomes rise as more units of service are ordered. If those units
are more costly, they generate even more revenue.
It is the same for a patient. Our current payment system provides
no means for a patient to know the cost and little reason to
These volume incentives need to be treated with strong doses of
information transparency and by building incentives for high
quality, efficient care directly into our payment structure. A
variety of policies would force these changes, and luckily the
infrastructure of quality metrics and strategies for rewarding
value are available. It just takes congressional action.
2) Make Medicare Parts A and B more like Medicare Part
In addition to changing the incentives from
volume-rewarding to value-rewarding, the Medicare Part D
Prescription Drug Program provides a good example of how better
transparency and competition can drive change. It has not only
ensured that seniors get the drugs they need, it has also
demonstrated that seniors can use an organized
marketplace to drive quality up and cost down.
Today, 90 percent of those who are eligible have drug coverage;
satisfaction rates are high; and the cost is almost 40 percent
below the original estimates. While there are several things
that have contributed to the drop, a big one is the power of a
competitive marketplace. Prices are determined through competition.
The cost of the benefit is transparent to consumers and they can
choose the benefits that meet their needs.
If the Medicare Part D structure were applied to Medicare Parts
A and B, it would revolutionize the entire system. Imagine a
physician practice investing resources to monitor and track
patients with chronic conditions. They might if the program
provided a beneficiary information on the quality of their
care and dollar savings if they used more effective providers. It
would drive quality up and cost down.
3) Each generation needs to do its share.
My father and mother are on Medicare. They worked hard all their
lives and have done well. My dad likely earns more than the
30-year-old son I told you about earlier. He is struggling to buy a
home, support his family, save for the children's college
fund, and buy his health insurance. Yet, my son has taxes drawn
from each paycheck to subsidize my parent's health insurance.
Medicare can be made more efficient by rewarding value and
shifting to a PartD-like competitive model of delivery. However,
what remains as the most important obstacle is rebalancing the
This is a classic public policy decision that has to be faced.
It is simply unreasonable to think Medicare can be sustained
unless this is changed. If we start now, the change can be made
over time and with genuine fairness. We can avoid an
intergenerational economic struggle from which both sides
suffer. Promises to today's and future beneficiaries to
provide coverage of health care must be kept, but not at the
expense of future generations.
Medicare is indeed drifting toward disaster, but we know what to
do. Matt Knot's river advice is the key: "Start positioning your
boat well head of the danger, commit to a course that averts the
problem, and paddle hard."
Every generation of Americans has overcome challenges to
secure our nation's role as the world's economic leader. I
believe solving the health care puzzle is this generation's
challenge. It will require change.
In a global market there are three ways to approach change. You
can fight it and fail; you can accept it and survive; or you can
lead it and prosper.
We are the United States of America. Let us lead.
Panelists included Robert Berenson, M.D., Senior Fellow at the
Urban Institute (urban.org
); Stuart M. Butler, Ph.D., Vice
President for Domestic and Economic Policy Studies at The Heritage
); Thomas P. Miller, Esq.,
Resident Fellow at the American Enterprise Institute
); Alice M. Rivlin, Ph.D., Senior Fellow at the
Brookings Institution (brookings.edu
); and Gail R.
Wilensky, Ph.D., Senior Fellow at Project Hope