I think it is important to realize that although there are 467 disagnosis related groups, only 167 of the diagnosis related groups account for 90 percent of the medicare expenditures. And so, that other margin, the other 10 percent has a great number of occasions for review.

One of the most important things we learned in New Jersey was the fact that the total operating expenses in the New Jersey hospitals increased less than the national increase. We think that is an important concern.

One of the areas we looked at in terms of the development of the prospective payment system was how to assure predictability for the Government and also for the hospital. And we wanted to establish the Federal Government as a prudent buyer of services, rather than to pay, if you will, whatever amount the individual hospitals felt was appropriate.

Lastly, we wanted to create a system of rewards and penalties, and the system would do just that. We have provided an incentive to hospital management for flexibility, for innovation, and for more efficient use of hospital resources.

And also, most importantly, we are going to continue to assure the beneficiary will have access to appropriate care.

Let me move now to the impact of the passage of the prospective payment system.

If you look at this chart, (see chart A, p. 7) you can clearly see that if we had not passed the provisions in H.R. 1900, alternative II-B, the Hospital Insurance trust fund would have been going broke in 1986. Passage of H.R. 1900 delayed the termination date of the trust fund to the point where it now is expected that it will be bankrupt in 1989 or 1990. It would be 1989 if there is no payback of the $12 billion that was borrowed from the Social Security Trust Fund. However, Social Security has indicated to us that they do intend to start paying us back. And if you add that back in, then we will be fiscally balanced until 1990, which gives us a few more years to work on the problems.

The basic solvency issue, however, is one that we need to continue to work on. We need to continue to think about it in relationship to reimbursement reform, such as the prospective payment system, as well as looking at alternatives to high cost hospital care. If one looks at the 25-year projection period from 1982 through 2007 on the next chart (see chart B, p. 8), the average cost of the program, if expressed as a percent of payroll, will be 5.14 percent. During that same 25-year period, the average current law tax rate is running 2.87 percent. So in order to have the program in balance, we would have to reduce payments by 44 percent, or we would have to increase the Hospital Insurance payroll tax by 80 percent, in order to keep the program solvent over the next 25 years.

Historical Data (1977-1982)

Alternative II-B, Post-TEFRA(1983-1986)
Alternative II-B with provisions of
H.R. 1900 (1983-1989)

0

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Calendar Year

Percent of Taxable Payroll

10

HI Cost as Projected Under Alternative
II-B Post-TEFRA

HI Cost as Projected Under Alternative
II-B with Provisions of H.R. 1900

HI Tax Rates

As you know, the Quadrennial Advisory Council on Social Security is currently analyzing the fiscal problems of the Hospital Insurance trust fund and exploring the long range options for resolution. We anticipate that their recommendations will be in later this year. We will continue, of course, to work towards designing the kinds of program activities that we believe will make for a more fiscally balanced program.

Next, if I can, I would like to go over our proposals as we have submitted them to Congress.

We need to change behavior. In order to do that, we need to remove all kinds of perverse incentives for all sectors of the market. And we believe that the hospitals, the physicians, the consumer, the employers and the insurers all need to work together and to share the responsibility for controlling costs on which I think in the past we have not always worked together.

Our first proposal is to restructure part A of the medicare program to provide catastrophic coverage for the elderly. And in doing that, we are proposing to eliminate the existing limits on the covered hospital days. Currently we cover 90 days in each spell of illness. The first 60 days are free and then from day 61 to day 90, the beneficiary pays one-quarter of the cost. And then if he moves into his 60-day lifetime reserve, he pays half of the cost. Each individual pays the first day deductible which is the average cost of one day in the hospital, which this year is $304. Next year, as you know, because hospital costs are going up, that figure may be $350, because the deductible is determined by statute as the average cost of one day's care.

So we think in the long run, whatever we can do to bring down the phenomenal growth in hospital costs, will then bring down the Part A deductible, too.

We are proposing to increase cost sharing in the early days of the beneficiaries spell of illness, because we think that is where the incentive could be to have the beneficiary work with the physician. And perhaps ask the doctor if it is possible to leave the hospital one day early.

If we could save one day of each hospital stay of each one of our medicare patients, we would save $1 billion a year.

I think many of us are familiar with occasions when that one day could have been saved, although perhaps not in all cases.

We are proposing that the cost sharing in the early days in the hospital spell of illness be at the rate of 8 percent, or $28 per day, on hospital days 2 through 15, and then 5 percent or roughly $17.50 a day, on the hospital days after the 5th.

We are also, however, proposing to reduce from 12.5 to 5 percent the coinsurance on care in skilled nursing facilities that beneficiaries now pay on days 21 to 100. And also no beneficiary would be charged the coinsurance on more than 60 hospital days a year. The deductible could not be charged more than twice in 1 year's time. And if I may use an example, under the current law, if an individual was severely ill, and was hospitalized, let's say for 150 days, then under the current law the individual could be liable for as much as $13,475, and after the 150th day then be liable for the full cost of all uncovered services. By contrast, under our catastrophic proposal, the individual would still pay the same first day deductible

and would pay an additional coinsurance that would total about $1,530.

Again, we think that this is a better proposal, because it protects the sickest patients and gives the incentive up front to those who perhaps are less ill and could leave the hospital a day sooner.

The second proposal we have is to expand our authority to deal with a voluntary voucher system for our medicare patients to give our beneficiaries the option of enrolling in any one of a number of private health plans.

Last year Congress did permit us to pay HMO's and other competitive medical plans on a risk basis. We would establish a voluntary program of a voucher valued at 95 percent of what we know it would cost to care for that same beneficiary if he had elected traditional coverage.

Each plan would have to guarantee that as a minimum they would pay the same benefits as are currently provided under medicare's parts A and B, and the individual would have an annual opportunity to either change plans or return to the traditional medicare program.

One important feature here is that this would enhance competition among the various private plans, because if the individual beneficiary was able to find a plan that cost less, then the beneficiary could either take advantage of additional services that were offered by that particular private plan, or he could get a cash rebate.

Again, we are trying to effect more competition in the marketplace.

Another proposal we have is to freeze the physician fee. Physician fees are the second largest component of medicare spending. In 1982 it went up an average of 21 percent and in 1983, it is anticipated it will be going up 19 percent. Because the physicians largely have been unaffected by the laws that have been passed under both the Tax Equity and Fiscal Responsibility Act of 1982 and the Omnibus Budget Reconciliation Act of 1981, we believe that it would be appropriate to ask for a freeze in physician reimbursement under the medicare program for 1 year, effective from July 1983 through June 1984, while we study the restructuring of the fee system.

Another component we have is the proposal to increase the part B premium. When the medicare part B program was initially set up, the source of income was to be a 50/50 split, with a 50-percent share from general revenue financing and 50 percent from the premium. Over the years the beneficiaries percentage has eroded because it was tied to social security cash benefit increases. We have found ourselves now with less than a quarter of the total outlays being paid for by the premiums themselves as indicated by the next chart. (See chart C, p. 11.) So we are proposing to increase the premiums.