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eroded over the years until in 1981 premiums contributed less than one-quarter of the costs. TEFRÁ provisions suspended the limitation on annual premium increases and set a new premium level at 25 percent of projected costs for premium years beginning in July of 1983 and 1984.

Under our proposal, we would raise the Part B premium in stages: maintaining the current level of $12.20 per month from July 1, 1983 to the end of the year; increasing the premium to 25 percent of projected costs for calendar year 1984; and increasing the premium by equal increments of 2.5 percent beginning January 1, 1985 until it reaches 35 percent of projected costs in January of 1988. After January 1, 1988, the premium for each calendar year would be set at 35 percent of estimated costs. The proposal includes a “hold harmless” provision. Beneficiaries who have their premiums deducted from their Social Security checks (about 90 percent of the beneficiaries) will not have the dollar amount of those checks reduced below the previous year's level due to the premium increase.

INDEX PART B DEDUCTIBLE TO THE MEDICARE ECONOMIC INDEX

We also propose to index the Part B deductible to the annual changes in the national Medicare economic index. This provision would help maintain the constant dollar value of the deductible, thereby maintaining the value of the deductible as a deterrent to unnecessary utilization. Current law does not provide for regular increases in the deductible to reflect increases in health care costs. As a result, the initial beneficiary liability for medical services has decreased in real terms over time, shifting most of these costs to taxpayers in general.

In addition to these major Medicare proposals, our legislative package includes several other proposals that would strengthen program management, improve incentives for efficiency, and produce savings in program spending. Included are pro posals to institute competitive bidding for laboratory services and durable medical equipment, create consistent reimbursement policies for durable medical equipment, initiate an enhanced Medicare contracting strategy, and delay entitlement to Medicare benefits for the elderly for one month.

CONCLUSION

We believe these proposals to improve Medicare reimbursement and financing represent complementary efforts to constrain health care costs. Not only are they based on working, market-place incentives, but also they follow consistent and understandable principles:

They enhance cost awareness for all parties, consumers and providers alike;
They act to restore the incentives for cost-effective health care;

They improve the structure of Medicare financing, reimbursement, and coverage, especially by providing catastrophic coverage;

They enhance the opportunity for choice among different health coverage plans; and

They stimulate competition in the health care sector.

These proposals, when coupled with the Bipartisan Agreement recommendations, represent a strong beginning and will achieve short term stability for the HI Fund. Long term resolution is an issue still before us. Additionally, I feel a strong responsibility as Administrator and guardian of the HI Fund to continue to search for new and better opportunities to make the Medicare program more efficient and effective, without compromising the availability of needed services to our beneficiaries. In this light we look forward to the recommendations yet to come from the Advisory Council on Social Security and to working with the Congress in seeking a resolution to this basic long term financing problem.

I will be glad to answer the Committee's questions at this time.

TABLE 1.—ESTIMATED OPERATIONS OF THE HI TRUST FUND ON THE BASIS OF 1983 TRUSTEES REPORT ALTERNATIVE II-B ASSUMPTIONS, CALENDAR YEARS 1983–92 1

(Dollar amounts in millions)

1

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$8,221
6,140

$57

1983 1984 1985 1986.

$41,185
44,766
50,132
57,590

$41,128
46,847
53,147
61,946

-2,081
-3,015
- 4,356

3,125
-1,231

20 18 12 5

TABLE 1.-ESTIMATED OPERATIONS OF THE HI TRUST FUND ON THE BASIS OF 1983 TRUSTEES

REPORT ALTERNATIVE II-B ASSUMPTIONS, CALENDAR YEARS 1983-92 1-Continued

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Includes starting trust fund balance updated by Treasury Department. 2 Includes an interest repayment for the interfund loan of $12,437 million to OASI. The interest amounts of $1,362 million in 1983 and $1,337 million in 1984 and later are theoretical. If these payments are not made, the fund at the end of the year would be $6,825, $3,238, and - $1,409 million in calendar year 1983, 1984, and 1985, respectively.

3 Assets at beginning of year as a percentage of outgo during the year.

TABLE 2.—ESTIMATED OPERATIONS OF THE HI TRUST FUND ON THE BASIS OF 1983 TRUSTEES

REPORT ALTERNATIVE Il-B ASSUMPTIONS AND NATIONAL COMMISSION OF SOCIAL SECURITY REFORM PROPOSALS, CALENDAR YEARS 1983-92 1

1

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Includes starting trust fund balance updated by Treasury Department. Includes the lump-sum military transfer proposal for HI, Includes the prospective payments provision but does not include any fiscal year 1984 budget proposed law items.

2 Includes an interest repayment for the interfund loan of $12,437 million to OASI. The interest amounts of $1,362 million in 1983 and $1,337 million in 1984 and later are theoretical. If these payments are not made, the fund at the end of the year would be $10,286, $7,677, $5,311, $3,887, and - $166 million in calendar year 1983, 1984, 1985, 1986, and 1987, respectively.

3 Savings attributable to prospective payment are computed as the additional savings which would be generated in fiscal year 1986 and later by eliminating the October 1985 sunset provision on the hospital rate-of-increase limits of section 101(b) of the Tax Equity and Fiscal Responsibility Act. The prospective payment legislation proposed by the administration does not mandate a system which would necessarily generate this level of savings. Instead, the level of the prospective payment rates is left to the discretion of the Secretary of HHS.

• Assets at beginning of year as a percentage of outgo during the year.

TABLE 3.-ESTIMATED OPERATIONS OF THE HI TRUST FUND ON THE BASIS OF 1983 TRUSTEES

REPORT ALTERNATIVE II-B ASSUMPTIONS, NATIONAL COMMISSION ON SOCIAL SECURITY REFORM PROPOSALS, AND FISCAL YEAR 1984 BUDGET PROPOSED LAW ITEMS CALENDAR YEARS 1983– 92 1

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1983 1984. 1985 1986 1987 1988 1989 1990

$44,648 $41,078
45,959 45,544
52,647 51,232
60,923 57,970
66,278 65,239
71,473 73,400
76,688 82,547
81,410 91,735

$3,570

$11,734
12,149
13,564
16,517
17,556
15,629
9,770
- 555

415 1,415 2,953

1,039 - 1,927 -5,859 - 10,325

20 26 24 23 25 24 19 11 * Assets at beginning of year as a percentage of outgo during the year.

TABLE 3.—ESTIMATED OPERATIONS OF THE HI TRUST FUND ON THE BASIS OF 1983 TRUSTEES

REPORT ALTERNATIVE II-B ASSUMPTIONS, NATIONAL COMMISSION ON SOCIAL SECURITY REFORM PROPOSALS, AND FISCAL YEAR 1984 BUDGET PROPOSED LAW ITEMS CALENDAR YEARS 198392 1-Continued

[Dollar amounts in millions]

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1 Includes starting trust fund balance updated by Treasury Department, includes the lump-sum military transfer proposal for HI. 2 Assets at beginning of year as a percentage of outgo during the year.

TABLE 4.-ESTIMATED OPERATIONS OF THE HI TRUST FUND ON THE BASIS OF 1983 TRUSTEES

REPORT ALTERNATIVE III ASSUMPTIONS, CALENDAR YEARS 1983-92 1

1

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Includes starting trust fund balance updated by Treasury Department 2 Includes an interest repayment for the interfund loan of $12,437 million to OASI. The interest amounts of $1,362 million in 1983 and $1,337 million in 1984 and later are theoretical. If these payments are not made, the fund at the end of the year would be $6,603, $2,042, and - $4,814 million in calendar years 1983, 1984, and 1985, respectively.

3 Assets at beginning of year as a percentage of outgo during the year.

TABLE 5.- ESTIMATED OPERATIONS OF THE HI TRUST FUND ON THE BASIS OF 1983 TRUSTEES

REPORT ALTERNATIVE III ASSUMPTIONS AND NATIONAL COMMISSION OF SOCIAL SECURITY REFORM PROPOSALS, CALENDAR YEARS 1983–92 1

[Dollar amounts in millions)

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1 Includes starting trust fund balance updated by Treasury Department. Also includes the lump-sum military transfer proposal for HI, twice the tax rate for self-employed, and the prospective payments provisions but does not include any fiscal year 1984 budget proposed law items.

2 Includes an interest repayment for the interfund loan of $12,437 million to OASI. The interest amounts of $1,362 million in 1983 and $1,337 million in 1984 and later are theoretical

. If these payments are not made, the fund at the end of the year would be $10,109, $6,522, $1,945, and - $3,269 million in calendar year 1983, 1984, 1985, and 1986, respectively.

3 Savings attributable to prospective payment were computed as the additional savings which would be generated in fiscal year 1986 and later by eliminating the October 1985 sunset provision on the hospital rate-of-increase limits of section 101(b) of the Tax Equity and Fiscal Responsibility Act. The prospective payment legislation proposed by the administration does not mandate a system which would necessarily generate this level of savings. Instead, the level of prospective payment rates is left to the discretion of the Secretary of HHS.

3

TABLE 6.1-ROUGH ESTIMATED OPERATIONS OF THE HI TRUST FUND ON THE BASIS OF 1983

TRUSTEES REPORT ALTERNATIVE III ASSUMPTIONS, NATIONAL COMMISSION ON SOCIAL SECURITY REFORM PROPOSALS, AND FISCAL YEAR 1984 BUDGET PROPOSED LAW ITEMS CALENDAR YEARS 1983-92

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Includes starting trust fund balance updated by Treasury Department. Includes the lump-sum military transfer proposal for Hl. Does not include the lump-sum uninsured transfers.

2 Includes an interest repayment for the interfund loan of $12,437 million to OASI. The interest amounts of $1,362 million in 1983 and $1,337 million in 1984 and later are theoretical. If these payments are not made, the fund at the end of year would be $10,157, $7,903, $5,213, $2,118,-$5,294 million in calendar year 1983, 1984, 1985, 1986, and 1987, respectively.

3 Savings attributable to prospective payment were computed as the additional savings which would be generated in fiscal year 1986 and later by eliminating the October 1985 sunset provision on the hospital rate-of-increase limits of section 101(b) of the Tax Equity and Fiscal Responsibility Act. The prospective payment legislation proposed by the administration does not mandate a system which would necessarily generate this level of savings. Instead, the level of prospective payment rates is left to the discretion of the Secretary of HHS. * Assets at beginning of year as a percentage of outgo during the year.

Mr. RINALDO. Thank you. Before we get into the questions, I would like to acknowledge the presence of two local officials here in Princeton: Dick Woodbridge from the Princeton Borough Council and Bill Cherry from the Princeton Township Committee.

Dr. Davis, I mentioned in my statement that I believe we must consider using some general revenues for medicare part A. Would you mind giving us your thoughts on general revenue financing? Let me break that down into a couple of parts, if I may. Could you foresee general revenues being dedicated for just some particular portion of the hospitalization part of medicare or could you foresee phasing in the use of general revenues across-the-board to take up part of the increased costs that you mentioned over the years ahead? I understand every other major country uses general revenues in their social security, or similar programs.

Dr. Davis. Well, you pose a very difficult question.

As you well know, general revenue funds do support a part of medicare now because they support a large of part B, as I indicated earlier. So to the extent that it is now supporting 75 percent of the part B outlays, it already does support an important component in the medicare program.

If one looks at the general revenue that goes into part A, it is a very, very small part at the current time. It is mainly financed by the payroll tax. The small part is simply to recognize some grandfathered in groups from years ago.

I think that one of my concerns relative to general fund financing would be that we have got to change behavior. And if we use general funds as the source of support, we might not face up to what I think has to be faced up to including some very difficult decisions relative to coverage, relative to restructuring of the financing, and also, I think, relative to change in behavior. I think it is very important for us to tackle the most difficult management problem and that is to significantly change the way we think about the current practice. And I am afraid if we were to use general revenue financing, that might be perceived as an easier way out than changing practice patterns, which is a hard thing to do.

You mentioned that many other countries fund care under general fund revenue, and I think that is true. I would point out that at a recent conference that I attended with a number of other people who are looking at international health care financing, all countries are facing dilemmas about how to bring down their health care costs. For example, France last year in an effort to try to balance their budget, instituted a copayment system because there was a shortfall in their general revenue funding versus what their outlays were. And that has meant increases in taxes on certain things, such as alcohol, tobacco, and other areas.

So I think in summary, I would prefer to see us continue to struggle to bring down the costs by a variety of incentives.

Mr. RINALDO. While that is a very laudable goal, there are number of experts who feel that with a $400 billion cumulative shortfall projected for 1995, even if we change behavior and put into practice some of the things that you mentioned, it is inevitable that we are going to have to use general revenues to some extent. And if that is correct, then how would you go about using general revenues, for which portion of the hospitalization part, or just phasing it in, or under a given formula?

Dr. Davis. Mr. Chairman, one of the things that I tried to point out was that our current estimate of going broke in 1990 are based upon current behavior practices. It would be inprudent for actuaries to assume that significant changes in behavior practices will occur without having evidence that such changes would occur.

I truly believe that by the institution of a prospective payment system, that we will see a change in behavior. Clearly, that is what the data here in New Jersey has pointed out to us. Individual physicians looked more closely at the number of days that they hospitalized an individual and the number of ancillary tests that they performed.

To the degree we are successful in changing behavior, we will buy ourselves a few more years.

If it is true, as you say, that we are only postponing the inevitable, I guess I would like to postpone the inevitable as long as possible. To think about putting this under general revenue funding would increase, I think, the tax burden on individuals. Clearly we have been trying as much as we can over the last several years. So I would be reluctant to move into this area because of that.

Again, I think it is a significant problem. As I mentioned, we must reduce the outlays by 44 percent, or failing that, we would have to increase the hospital insurance tax by some 80 percent, or possibly a combination of the two to guarantee the solvency of the trust fund beyond 1990.

Mr. RINALDO. Well, I appreciate what you are saying. I understand it. But the decade is over in only 7 short years. The Advisory Council on Social Security, which is studying medicare, is sched

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