If we do it on the public sector alone, wouldn't there be an immediate flow of professinal services away from the public sector and into the private sector where they can make uncontrolled dollars? Isn't this going to leave the elderly and the poor and the other people who depend upon the public services system holding the short end of the stick, again?

Mr. ADAMS. Yes; that is what I said to Mr. Waxman, and I again am not trying to tell the committee how I think they should solve that, because I don't feel I have the expertise to do that. I do agree with your conclusion that that kind of both-side control has to exist or, yes, you will get a flow.

Mr. SCHEUER. Yes; if you, with all your hindsight and all your experience to date on the Budget Committee

Mr. ADAMS. That is what we all have the most of.

Mr. SCHEUER. We are all Monday morning quarterbacks.

If you were a Monday morning quarterback with all the experience you have had, both in your general disciplines of budget setting and with specific knowledge of medicaid and medicare, how would you write them differently today?

I don't mean in the details, but how would your philosophical or general fiscal cost controls approach differ from the approach taken a decade ago?

Mr. ADAMS. I would have used prospective budgeting and peer review and been very tough.

Mr. SCHEUER. Well, that is short, sweet, and to the point. I think most of us up here agree with you.

Thank you very much, Mr. Chairman.

Mr. ROGERS. I presume if we moved into an all public national health insurance program you would anticipate a tax increase because, obviously the cost would be rather heavy.

Mr. ADAMS. No, what I have stated in my statement was that you have a growth factor, as you have seen over the 5 years, and this pattern is: Our revenues rise because of additional numbers of people, and to a degree the inflation factor, which, under the progressive income tax, tends to produce more revenues and allows your revenues to go up without any changes in tax rate. That is what produces a potential surplus in fiscal year 1980 ranging from the $26 billion I suggest to the President's projection of about $40 billion and both getting up into the $50 to $60 billion range in fiscal year 1981. That is without any change in the rates, and it is with a $10 billion tax cut in about 1978-79 for those who have been pushed upward in the brackets through simple inflation.

Mr. ROGERS. I presume that does not anticipate additional programs?

Mr. ADAMS. It does not.

Mr. ROGERS. During that period of time?

Mr. ADAMS. And it also is conditioned, as I set forth at some length in the record, on restraint of existing programs. If we do not do this, we will never get to a surplus situation because the current services will continue to rise more rapidly than the revenues. Dr. Rivlin will describe this, I am sure, in more detail.

Mr. ROGERS. Yes. So it would seem to me that if we bring health care coverage from the private sector and place it in the public

sector; if we want a national health insurance program which is all public: then I would anticipate you would require additional taxes.

Mr. ADAMS. Oh, yes.

Mr. ROGERS. I presume that would be true?

Mr. ADAMS. Yes.

Mr. ROGERS. If those taxes were provided that would ease your budget problem?

Mr. ADAMS. Oh, yes.

Mr. ROGERS. Would the Budget Committee think, then, that if we go to a public system it should be done as a packet, we should provide for a certain amount of taxes, general revenue taxes, or set aside a fund for those taxes to go into?

Mr. ADAMS. If you want it to go faster than phasing it in as your revenues grow, there isn't any other way to do it unless you use a partial private, partial public plan, so that the entire cost does not go into the budget. I assume what you are asking is the total amount in the Federal budget.

Mr. ROGERS. Yes.

Mr. ADAMS. Yes. And I might state that I am not a conservative, even though people state that. Realistically, we have tried to see what we could get in tax reform without going to the rate structure and the best we were able to do last year was nothing.

We are hopeful next year of $1.5 billion, depending upon what the Finance Committee does. If they accept the House bill, we could pick that up. But we are not talking in terms of $20 to $30 billion under any of the programs presently out.

I would like to see us pick up more through reform, but I want to state to the chairman that from the viewpoint of this member at this point, I can't see much surplus there until fiscal year 1980.

Mr. ROGERS. Suppose we were to mandate private insurance, which would cover a rather large portion of the population, and then provide public programs for the financially needy and perhaps the elderly.

What would be your reaction to some approach like that?

Mr. ADAMS. I think you could get it in place quicker than fighting for a tax increase. However, I would have to see your package and run it through an econometric model or the Congressional Budget Office to see what the economic impact is.

Mr. ROGERS. We are already spending a certain amount on medicaid and medicare. If we make improvements in those programs and then mandate private coverage of the middle sector, I presume we could move into a program like that more rapidly.

Mr. ADAMS. Now, and this is a personal view on that proposal, I think you must be very careful in the manner which you structure the mandate, because it could become verv regressive. In other words, it is the same thing that applies with a payroll tax. For example if you are taking a certain percentage or a flat dollar figure from everybody across the board then the working poor and those that are less able to pay, pay a greater proportionate share.

Mr. ROGERS. Yes.

Mr. ADAMS. Without that factor in it, Mr. Chairman, yes, you do get a cheaper package in terms of Federal spending.

Mr. ROGERS. I anticipate this committee would want to draw the general outlines of an overall plan, even if parts of it were then phased in. Do you think that is wise, rather than just approaching the problem by enacting an increment here and an increment there as we go along? Do you think it is well for us to go ahead and outline the total plan, even though it may not be triggered until, say, 1980-to have the goal set, the outline of the plan set, even even though it may not all be triggered as of the date of enactment? Mr. ADAMS. Yes, I think you should have a total package Mr. Chairman, because in that way you prepare the whole Congress and the Nation for getting into an overall program and they know what the overall costs are going to be and how you fit each piece together.

I think part of the problem we have now is that we are creating gaps in our health service by our categorical approach, both private and public, to health needs.

Mr. ROGERS. I understand you feel that by 1980 we can have a balanced budget, conditioned upon restraints.

Mr. ADAMS. Yes.

Mr. ROGERS. And no new programs?

Mr. ADAMS. That is correct. Obviously you can substitute one program for another or you can improve programs.

Mr. ROGERS. No significant

Mr. ADAMS. There are no big new programs. For example, I think you can go with a welfare reform program such as that built into my overall proposal, accompanied by a phase out of food stamps and AFDC; but you do that using the existing tax schedule and it is not a massive new spending program.

Mr. ROGERS. I presume that you would support full funding for programs that could have an impact on holding health costs down, like HMO's, perhaps?

Mr. ADAMS. Yes.

Mr. ROGERS. Full funding PSRO and review mechanisms?

Mr. ADAMS. Yes, I support those concepts.

Mr. ROGERS. And health planning?

Thank you, your testimony has been most helpful.

I am sorry, Mr. Scheuer.

Mr. SCHEUER. In your factoring in of the funds that would be available for all public services in the future, did you factor into the fact that the Defense budget will continue to have a gradually reducing claim both on the percentage of GNP and on the percentage of the Federal budget?

Mr. ADAMS. Yes.

Mr. SCHEUER. You did factor that in?

Mr. ADAMS. Yes.

Mr. SCHEUER. So there is no fat left we can point out to you? Mr. ADAMS. We factored that in. We are below the President's budget by 1981. The President's budget would be at $142.8 billion for defense and we are recommending $126 billion.

Mr. SCHEUER. Next question. There are a lot of people who are saying that when you take into account the problems of population,

environment, food, resources, particularly nonrenewable resources and energy, the long term growing energy crunch, that it seems almost inevitable that in the future we will be consuming fewer things and more services, we will be sort of readjusting our spending patterns and readjusting the proportion of our GNP that is spent, on the automobile, on new single family home developments, and that we as individuals and as a nation will be spending less resources on things and more resources on services.

If this is true, this would probably free up a larger percentage of GNP and a larger percentage of the Federal budget for services as opposed to construction and other things.

Has that concept been factored in here or is it just some will of the wisp I am claiming along with a few other kooks?

Mr. ADAMS. We have factored in proposals such as going to a more labor intensive economy.

Mr. SCHEUER. That is what I am talking about.

Mr. ADAMS. With the Federal Government tending to tilt more toward aid for the private sector; for example, toward subsidization of wages at a declining rate.

The economy has shifted from a largely production-type operation to a more service oriented operation. We are not able, with the present economic tools that we have, to factor in the kind of changes that you mentioned, because the models tend to operate more in straight lines and more on a quantitative basis than qualitative.

So I can't say that we have factored in all of the kinds of things that you mentioned.

Mr. SCHEUER. The kind of long term trends that the Club of Rome has reported on you haven't gotten to that degree of refinement?

Mr. ADAMS. We have not gotten to that degree of refinement. Mr. SCHEUER. Okay. I want to thank the witness for his really expert and thoughtful testimony and for the trenmendous service that he is rendering the House and Congress and the public.

Mr. ROGERS. I think Dr. Carter has one more question.

Mr. CARTER. Yes. I have one or two questions I would like to ask you. Rarely do we have such a distinguished visitor here with as much expertise in this area.

I noticed our budget this year in $372 billion; is that in the neighborhood of being right?

Mr. ADAMS. You mean outlays?

Mr. CARTER. Yes.

Mr. ADAMS. Our outlays this year will be $374.1 billion.

Mr. CARTER. I was off $2 billion. All right. The President proposes the $399 billion and other proposals are $424 billion.

Mr. ADAMS. He proposes $394 billion. There has been a reestimate he is up $3 billion to $4 billion. Current service estimates are $424 billion in outlays.

Mr. CARTER. How much of that amount of money is for new programs?

Mr. ADAMS. In the present budget that is up there are only two shows real growth: defense is up 13 percent, which gives a new growth of about 4 percent, and interest on the debt. All others are held below the inflation rate in the President's budget.

Mr. CARTER. There are no new programs contemplated?

Mr. ADAMS. There are new programs in the sense, Dr. Carter, of doing a new thing.

Mr. CARTER. In a different way?

Mr. ADAMS. Within moneys already there. When you talk about a new spending program, I thought you were referring to an additional amount of money being allocated for a new

Mr. CARTER. That is exactly right.

Mr. ADAMS. For a new purpose.

Mr. CARTER. That is what I was talking about. And there are none of those?

Mr. ADAMS. That is right, except in defense.

Mr. CARTER. And I noticed that you envision a diminution in our defense appropriate from $142 million to $126 million.

Mr. ADAMS. That is by fiscal year 1981, in 5 years.

Mr. CARTER. In this defense spending, I would like to ask you if you are diminishing our foreign military assistance in that, if that is being factored in?

Mr. ADAMS. That is one of the items that is included; better use of manpower is a second area of saving. And a question which will have to be decided by the House is whether we are going to buy all of the new weapons systems being proposed.

Mr. CARTER. You are factoring in diminished foreign assistance; is that correct?

Mr. ADAMS. That is part of it. It is a very complicated formula for the total defense budget.

Mr. CARTER. I thank the chairman for his patience.

Mr. ROGERS. Thank you. Your testimony has been most helpful. We may be back in touch with you again when this committee has begun to gel its specific ideas.

Mr. ADAMS. Thank you, I appreciate very much your kindness in allowing me to testify.

Mr. ROGERS. Our next witness is Dr. Alice Rivlin, who is the Director of the Congressional Budget Office. We welcome you to the committee. I am sure the committee will benefit from your thinking. Your statement also will be made a part of the record, in full [see p. 1181], and you may proceed as you desire.

STATEMENTS OF ALICE M. RIVLIN, PH.D., DIRECTOR, CONGRESSIONAL BUDGET OFFICE; BRIDGER M. MITCHELL, SENIOR ECONOMIST, THE RAND CORP.; AND STUART H. ALTMAN, PH.D., DEPUTY ASSISTANT SECRETARY FOR PLANNING AND EVALUATION/ HEALTH, DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE

Ms. RIVLIN. Thank you, Mr. Chairman.

My prepared statement is a little long. Therefore, I would like to read part of it and summarize part of it.

Mr. ROGERS. Certainly.

Ms. RIVLIN. I appreciate having the opportunity to discuss with this subcommittee the financing and costs of national health insurance. I want to talk first about medical care inflation, about its causes and the effects it has on both public programs and private spending.