MOFFIT: Twenty minutes ago the President of the United
States signed the Medicare bill into law. The debate about what the
bill says is over. It's now what the law says, and that
conversation will continue.
Today we're privileged to have with us the
director of the Congressional Budget Office, Douglas Holtz-Eakin.
Dr. Holtz-Eakin was appointed on February 5, 2003. He served
previously as chief economist for the President's Council of
Economic Advisers. He also was a senior staff economist there. He
represents the Congressional Budget Office on the Federal
Accounting Standards Advisory Board.
Holtz-Eakin is also Trustee Professor of Economics at the Maxwell
School at Syracuse University, where he served as chairman of the
department of Economics and the associate director of the Center
for Policy Research. He is the author of numerous articles in
journals and professional studies.
the past, he has held academic appointments at Columbia and
Princeton Universities. He has also been a visiting scholar at the
American Enterprise Institute here in Washington.
second speaker, who will comment on what the director has to say,
is Jeff Lemieux. Jeff Lemieux is the executive director of
Centrists.Org. It's a nonpartisan think tank dedicated to health
care policy, economic policy, and budget discipline, among other
things. Jeff is also the senior economist of the Progressive Policy
Institute, which is a center-left think tank here in Washington
that is associated with the Democratic Leadership Council.
Before joining PPI, Jeff was the staff
economist for the National Bipartisan Commission on the Future of
Medicare, which was chaired by Senator John Breaux of Louisiana and
Congressman Bill Thomas of California. Prior to his service with
the Bipartisan Commission, Jeff was also a principal analyst at the
Congressional Budget Office. At CBO Jeff was in charge of
estimating the cost of national health care reform plans and the
impact of Medicare changes. Between 1990 and 1992, he served as a
member of the Office of the Actuary of what was then the Health
Care Financing Administration, the agency, now called CMS, that
we have two fine speakers today. Welcome, please, the director of
the Congressional Budget Office, Douglas Holtz-Eakin.
Robert E. Moffit is Director of the
Center for Health Policy Studies at The Heritage
HOLTZ-EAKIN: Thank you, Bob. The Medicare prescription
drug bill is now the law of the land, but I would like to begin my
remarks by at least metaphorically turning back the clock to a time
prior to today's signing and sketching the setting into which this
bill and the discussion about the bill was launched, as well as the
setting in which it will be implemented.
That's a world in which seniors, or
Medicare-aged individuals, will spend about $1.8 trillion on
prescription drugs over the 10-year budget window between 2004 and
2013, and over the more narrow period when the bill is actually
implemented, 2006 on, about $1.5 trillion. This amount constitutes
about 50 percent of current Medicare outlays. It's a big number and
it will grow quite rapidly. Indeed, it has grown on average about 9
percent per year.
Those seniors receive their coverage in a
variety of ways. CBO's estimates, which were prepared for testimony
before the Ways and Means Committee earlier this year, indicated
that about 25 percent of all seniors did not have prescription drug
coverage of any kind. That percentage represents about 10 million
people. However, about 75 percent of all seniors did have some sort
of coverage for their prescription drug costs. About 30 percent of
that coverage came from employer-sponsored plans, about 16 percent
from Medicaid, about 12 percent from Medigap, and the residual from
a variety of federal or state and local plans for which seniors
Looking across that population, about 90
percent of all seniors filled some sort of prescription for drugs
in the year 2000, according to data from the Medicare Current
Beneficiaries Survey. So about 90 percent of seniors had some
prescription drug costs. These seniors spent an average of $1,500
on prescription drugs. Given the prescription drug coverages that
were available, one of the interesting things that the data
highlights is the absence of any particular relationship between
the scale of out-of-pocket costs and the income of seniors. Looking
at the flip side of that, there was no particular systematic
relationship between income levels and the degree to which
individuals had coverage for their prescription drug costs.
going to spend a fair amount of time today talking about the costs
of the prescription drug bill and what is now likely the future of
the law. But before doing so, I think it's fair to say that
Congress enacts programs for their benefits, and that it passes
budgets to hold the line on costs. As the director of the CBO, my
staff and I spend an enormous amount of time talking about the
costs. But in many cases it's useful to reflect on the
I would have hoped by this time in the debate over this
legislation to have some clean message for you about the benefits.
Instead, I've come to a simple conclusion after listening to people
talk about this legislation. This bill is the Rorschach test for
the future of health care policy in the United States. Listen to
any group talk about this law and you hear widely divergent
opinions about the benefits that will be embodied in it as we go
examples stand out. On demonstration projects for PPOs, is this the
end of Medicare as we know it? Or this is a desirable aspect of
competition introduced into a government program? Or perhaps it's
just an ineffective fig leaf adopted and put into the bill.
the income testing of the Part B premium, is this the end of a
universal benefit for Medicare? Or is this too little too late? Or
is it just perhaps the beginning, the leading edge of some
effective cost controls in the Medicare program?
the coverage of low-income dual-eligibles between Medicare and
Medicaid, one view I've heard is that this is more effective
targeting for low-income beneficiaries. At the other end, I've
heard that this is simply an undesirable federal takeover of a
state program and an expansion of federal obligations.
the private delivery of the prescription drug benefit, a topic that
CBO studied at length, is this simply the sensible application of
market principles to the delivery of a government program? Or is
this a risky venture into the unknown with unknown consequences for
Another area is the use of the true
out-of-pocket notion in the delivery of the prescription drug
benefit. One view is that this represents a sensible targeting of
the benefit to those individuals with a genuine need, or with real
out-of-pocket expenses. At the other end, it's been interpreted as
just a clear incentive to drop existing coverage by employers and
other groups and, as a result, is an undesirable feature of the
Finally, with regard to the doughnut hole,
the famed section of the bill where there is no copay by the
government, is this a good thing because it allowed the benefit to
be front loaded and will attract more seniors into the program,
thus mitigating any selection problems in the delivery of a
prescription drug benefit? Or is this simply a bad thing and a way
to fit a $1 trillion benefit into a $400 billion budget? Or perhaps
it's just an insurance product that has never been seen running
loose in nature and, as a result, has no merits at all.
could go on, but I think that gives you a flavor of the kind of
debate that we see now and will likely to see for years to come on
the benefits of this prescription drug legislation.
My main message today, however, is to simply sketch a little bit
the likely costs, and particularly the federal budget costs, of the
legislation as enacted. I hope everyone in this room has memorized
a single number: $395 billion, the CBO's estimate of the 10-year
cost of this bill. This cost represents not really a 10-year cost,
but because the benefit doesn't begin until 2006 and ramps up from
about $26 billion then to about $75 billion by the end, it's closer
to an 8-year budget cost. However, I think the way that cost is
configured is of some interest.
many of the iterations of the bill we saw roughly the same kind of
structure and the same spending target, or about $400 billion on
prescription drugs. For providers, roughly break even while
providing more generous reimbursements in some cases but paying for
them by recapturing costs, in particular the reimbursements for
outpatient drugs in oncology and some other areas of the current
regard to the delivery of the Part A and Part B benefits, spend
some money to increase the outlays for private plans, now Medicare
Advantage, the PPOs and HMOs that are out there on the landscape,
and balance that with some higher recapture of costs through a
greater level of the Part B deductible, indexing that deductible
for inflation and introducing for the first time an income testing
of the Part B premium. That will affect only those with more than
$80,000 of income and is really a small fraction of the population,
about 3 percent of beneficiaries. Roughly speaking, that structure
is now built into the bill, and the question is how it will evolve
first thing to note is that the bill arrives at roughly the same
time that the baby boom generation is beginning to enter into its
retirement. The CBO projected last summer that the growth in the
number of Medicare beneficiaries will rise from about 1 1/2 percent
a year between 2005 and 2008. Between 2009 and 2013 that growth
doubles to 3 percent. In the years thereafter we see the steady
retirement of the baby boom generation. So from the point of view
of demographics, one would expect that the out year costs of the
bill would rise as the number of beneficiaries increases as well.
Indeed, if one takes into account the rise in prescription drug
costs at historic rates and the increased number of beneficiaries,
it's easy to expect this bill to cost over $1 trillion in the
second 10 years and perhaps approach $2 trillion in 10-year costs
between 2014 and 2023. In rough orders of magnitude, that would
suggest the bill is at about $190 billion in 2023.
There are some wild cards in any long-term forecast and
the CBO finds it useful in guiding Congress to provide long-term
outlooks as a rough indicator of the way the compass is pointing
from a fiscal point of view. Those wild cards usually take two
forms. One set of wild cards are technical wild cards, economic
wild cards, the sheer difficulty of looking into the future and
trying to get a handle on the overall cost of a bill or the path of
this case the most relevant wild card is the relative pace in the
growth of prescription drug costs. As I mentioned earlier, drug
prices and spending in particular, the combination of prices and
utilization, have risen faster than health care costs as a whole.
For those familiar with the area, health care costs as a whole are
rising much faster than the economy. So we have not just the usual
story in which health care costs rise quickly, but one where the
particular kind of health care costs, prescription drug spending,
are rising even faster than that.
our long-term projections we take the view that the growth rate of
prescription drug costs is about 3 percentage points faster than
health care spending as a whole, but then over the next 25 years it
ramps down to about 1 percentage point faster than health care as a
whole. That's a forecast constructed on the grounds that trends
that cannot continue, won't. But we have no particular information
about the degree to which that rate will come down or the timing of
the decrease. Therefore, it's sensible to assess the future with
some notion of risk, and an upper bound to that risk would be to
assume that the drug costs continue to rise at 3 percentage points
faster than health care spending as a whole and thus consume a
greater fraction of our economic resources.
the flip side, there also are policy risks. Although the bill has
now been the law for something near an hour, it may not in fact
survive in this form. Congress and the Administration may revisit
it at some point in the future. If they do so, it will affect the
cost of the bill going forward and the command of economic
resources in the economy
most obvious and the simplest way to get a handle on the potential
cost differences is to imagine filling in the doughnut hole, or the
gap where there is literally an end to the government's share of
the costs prior to hitting the catastrophic limit. Closing the
doughnut hole has been widely discussed as a possible future change
in the bill. So in thinking about the future, one has to think
about the degree to which one fills in the doughnut hole or adds to
the coverage in some way.
asked the CBO staff to crank up a spreadsheet and give me a rough
estimate of what closing the doughnut hole might cost the federal
government on the Medicare prescription drug benefit. Now, there's
an important question you have to ask yourself when you do that.
Would it be the case if you filled in the doughnut hole that you
kept the current split in cost, 75 percent government subsidy, 25
percent in premiums to beneficiaries? If so, filling in the
doughnut hole comes with an increase in premiums and we would not
see the estimated $35 premium that you've seen quoted regarding the
bill as currently configured. Rather, you'd see a much higher
premium if that were the way it was done.
alternative of course is that one could fill in the doughnut hole
or otherwise enrich the benefit and not adhere to that 25-75 split.
If so, the premium would remain at an estimated $35 and then rise
thereafter, and the government's tab would go up
the numbers that I'm going to talk about, we assumed that we
maintain the current structure of the bill, 75 percent subsidy, 25
percent picked up by premiums. As a result, to the extent that
either we're wrong on technical reasons and drug care costs are
higher than anticipated, or policy events overtake us and the bill
turns out to be richer than as it was currently passed, in both
cases, the premium is expected to rise and the government's share
of the bill would be correspondingly smaller.
The Range of
What does that look like from the point of view of the
possible outlays in the future? One scenario would be that we keep
the bill as it's configured and we take a look at the drug costs.
If we've guessed it right, drug costs will ramp down from 3 to 1
percentage point faster annual growth. If so, this bill ends up at
something like $190 billion in 2023 and is on track to be something
like 1 percent of GDP out at 2050.
the other extreme it could be the case that we simply have constant
growth in prescription drug prices, something rising at 3
percentage points a year faster than health care as a whole, and
the prescription drug benefit becomes richer. In this particular
example we fill in the doughnut hole in the benefit. If so, in 2023
this bill would cost in the neighborhood of $360 billion and it
will be on track to be about 4 1/2 percent of GDP by 2050. In
between those two estimates lies an enormous range where the actual
cost of this bill could reside due to an economic future or a
policy future that is different than what is embodied in the
Those are the extremes. You can imagine
configurations in between. One could imagine we get the technicals
right but not the policy changes. If so, it's something like a $320
billion benefit in 2023 and we're on track for something like 2
percent of GDP in 2050. Or you could do the reverse combination and
say the policy is not going to change but the economic or drug
price future is not what we anticipate, in which case it's not
quite as expensive in 2023--on the order of $200 billion--and it's
only about 2 1/2 percent of GDP in 2050.
Those kinds of numbers suggest that two
bottom lines are relevant from the point of view of thinking about
the fiscal future of the United States and for the bill in
isolation. First, this is a bill with not very well-known outyear
costs and not very well-known outyear benefits. Indeed, as I
mentioned at the outset, there's a tremendous disagreement about
the degree to which this will be a future of one type or another
from a policy perspective.
my eye at least, the growth of information about this law and
individual evaluations of costs and the benefits means that it is
highly unlikely that we'll end up exactly on the course that we
have set today
Second, the potential for large outyear
costs and the tendency of fiscal policy to emphasize more spending
means that once that money is spent you'll have to address how best
to finance the spending. These financing debates will press
particularly hard as we discuss how to accommodate the large rise
in entitlement programs more generally--Social Security, Medicare,
and Medicaid--into the fiscal policy of the United States. The
funding pressures of these other programs adds to the particular
need to take a good look at the track of these programs as we move
past the year 2014 and out into the future to 2030, 2040, and
That's my brief message on the future of
this bill, and thank you very much.
Douglas Holtz-Eakin is the
director of the Congressional Budget Office.
LEMIEUX: Thanks, Doug. That was a wonderful presentation,
and thank you, Bob, and the Heritage Foundation for inviting
remarks will focus on the context of the cost estimates you've just
heard Doug describe.
been calculating what happens to total Medicare spending when this
new law is implemented, assuming the doughnut hole is not filled
in. Under my calculations, based on the CBO baseline, I get to
about 1 percent of GDP as the long-term cost of this bill once the
baby boomers are fully retired or pretty much fully retired by
2030. That's a number that I think makes a lot of sense even though
it is a highly uncertain estimate.
What does this mean? There are four big federal government
entitlements: Social Security, which is expected to increase by
about 2 percent of GDP as the baby boomers retire; Medicare, which
after this drug benefit is expected to increase by over 3 percent
of GDP as the baby boomers retire, closer to 4, actually; Medicaid,
which because it pays for nursing home care for beneficiaries who
are poor or who have divested themselves of assets to qualify for
Medicaid coverage, is expected to increase especially rapidly as
the baby boomers themselves actually get old; and, fourth, interest
on the public debt.
current improvement in interest on the public debt over the last 5
years or so has been very impressive, but now we're back in
deficits and the national debt is growing. The deficit is expected
to be over 4 percent of GDP next year. If we continue to add
deficits at that magnitude for the next decade and then the baby
boomers retire, the interest cost of paying investors for loaning
money to the federal government would eventually become the largest
entitlement on this trajectory, about 8 percent of GDP by 2030,
larger even than Social Security or Medicare. The entire cost of
these four entitlements would exceed the current federal spending
budget, which is about 21 percent of GDP, and would exceed current
federal revenues, about 17 percent of GDP, by a large amount.
does it make sense to project such a calamitous budgetary situation
that far out into the future? Two reasons. The first reason is that
even though, like Doug said, things that can't go on forever don't,
it makes sense to project spending on its current trajectory so
that policymakers will have an idea what they're up against. It's
true that we're unlikely to allow interest, Social Security,
Medicare, and Medicaid to be 23 percent of GDP in the year 2030.
Something will give. On the other hand, if that's the trajectory,
it's important for policymakers to know so that they can begin to
think about reforms and other action.
second reason why thinking about long-term costs is important is
the case of Medicare: I don't see transformation in this bill. I
was looking at my newspaper clips yesterday, and the L.A. Times had
a story on the Web last night that described the Medicare bill as a
"landmark overhaul" of Medicare. I had to scratch my head at that
because I really saw quite the opposite in this bill. In a sense,
this was the sort of bill that Medicare reformers in 1998 wanted to
make sure never happened again. When the Balanced Budget Act in
1997 passed with hundreds and hundreds of lines of provisions and
very little time for CBO and other policy analysts to really figure
out how it would all work, a policy mess resulted. There were
plenty of mistakes in both the drafting of the bill and the
estimates of the bill (some of them that I made and my other
colleagues at CBO made others). Staff wrote things into the law
that had unintended consequences. For example, the law was supposed
to improve private plan participation in Medicare, but it ended up
cutting it by not quite half.
As I look forward at this bill, it seems like history is
repeating itself. It's not really what I would call a
transformation or a true overhaul of Medicare. I think it's very
important for the media to reflect on what's going on here and
decide whether this is a transformation or just business as
look down the possible avenues of transformation, chronic care
looms very large. Chronic care is what the clinicians tell us is
the future of improving health care quality and possibly saving
money in the health care system. There are a few small provisions
in this bill on this part of Medicare's future. But I really don't
see a chronic care transformation here. With a stand-alone drug
benefit, any time you parcel out benefits into subcategories that
don't necessarily talk to one another, that works directly against
improved chronic care.
does this bill do for competition? This bill has some things that
improve competition. It would hopefully resuscitate the HMO sector
in Medicare and also provide room for a PPO sector in Medicare,
more room than is currently there. It would create a bidding
system, which none of us fully understands just yet.
the competitive aspects of this bill, (the demonstrations that go
into effect in 2010), are not really enough to justify calling the
bill a pro-competition landmark or an overhaul of Medicare. Maybe a
few precursor steps, but not transformation.
Third, information technology. My favorite
centrist, Newt Gingrich, has always talked about IT as having a
transformative effort in health care. I really don't see much IT in
Finally, accountability and
performance-based payments within the fee for service system in
Medicare also are lacking.
my first conclusion is that this is not reform and that it is
business as usual. What's especially distressing is that the last
time we did a bill like this in 1997, Congress was somewhat
apologetic. Congress said we should have a Medicare commission to
figure out how Medicare should really be governed, not by this
catchall of hundreds of congressional provisions which we don't
really know are in the bill until after it's been enacted.
time there has been no apology. I think with the Balanced Budget
Act and with this bill there is almost a comfort level that's been
found by Congress in creating this sort of congressional
micromanagement of Medicare, and that worries me a little bit.
second conclusion is that the lessons of health reform and of the
BBA exercises in both 1995 and 1997 haven't been lost on our
legislators. These episodes apparently teach that it's best to
leave the analysis until after the votes are held. In the early
1990s, when we were talking about health reform, there were perhaps
10 CBO reports on various aspects of health reform before any
legislation even moved to committee. In addition, there were
outside analyses from esteemed estimators, such as the Lewin Group,
and from the Administration. There was a lot to look at when people
were thinking about whether to do those health reforms.
After the early 1990s, however, analysis
increasingly took a back seat to political goals. The next big
health legislation was the Balanced Budget Act of 1995, which went
forward with far less analysis. Even so, people had an idea that it
was a shift toward a defined contribution system in Medicare and it
didn't pass. In 1997 there was even less analysis, as CBO was
really scrambling just to get the basic estimates done in time.
think the conclusion is now that we really don't want to see too
much analysis from CBO and others because it could hurt the
legislative prospects of such a complicated piece of legislation,
which relegates CBO to just explaining what's in the bills. The
cost estimates that came out in July were very helpful explaining
what was in the House and Senate bills.
CBO's other roles include trying to create
an economic perspective. If you look at a Congressional Research
Service summary of a bill you will find excellent descriptions of a
bill's contents, but no analysis of how the bill would affect, for
example, the economy or an industry. It's up to economists like
those at CBO to tell us something about the larger context of
legislation. In regard to the recent prescription drug legislation,
CBO should have spent more time answering questions like, What does
this mean in the long run? What does this mean in the larger sense
of health care in this country?
generally, how well would it work? The whole subject of the law's
likely effectiveness has been something that CBO hasn't had time to
work on, but hopefully CBO analysts will do so over the holidays
before they get wrapped up in other things. They need to focus on
whether or not this bill will work as drafted, if there are
additional technical changes that need to be made in the law, if
there are particular regulatory approaches that should be taken to
make the thing work, and so on. The larger analytical community
needs to analyze the political feasibility, which is something that
CBO cannot really do, but the rest of the analytic community can
decide whether or not these things are politically feasible.
those are my two basic conclusions: First, it's not transformation;
therefore, it will cost a lot. Second, we're on a legislative path
of leaving the analysis until after the votes are had, which has
its ups and downs. It may be easier to get legislation that way,
but we certainly don't know what we've got until after it's done
and now it's all up to us to go back, read the bill extremely
carefully, and work with CBO and the rest of the congressional
agencies to figure out what we've got here and what we should look
forward to in 2004 and beyond.
Jeff Lemieux is the
executive director of Centrists.Org.