PREPARED STATEMENT OF THE AMERICAN ASSOCIATION OF RETIRED PERSONS

I.

INTRODUCTION

The American Association of Retired Persons (AARP) appreciates this opportunity to present our views on the Administration's proposals to further cut the Medicare program

reduce the deficit, bring down interest rates, and promote

steady economic growth. Indeed, despite the "bipartisan" wrapping paper, the basic contents of the Administration's

proposed budget is little different from previous years:

massive revenue losses;

large, undisciplined defense increases; and,

deep cuts in domestic entitlement and discretionary

programs.

Like the past two years, the burden of the Administration's

proposals fall most heavily on our nation's needy, dependent and vulnerable populations. For older Americans

tion's FY 84 proposals are as bad if not worse than prior

a six-month freeze on cost-of-living adjustments

for social security, SSI, food stamps and veterans'

pensions.

a doubling of out-of-pocket costs for hospitalization

under Medicare.

further significant increases in out-of-pocket costs

for physician care under Medicare, Part B.

other reductions in food stamps, low income energy

assistance, housing assistance and legal aid.

All in all, the effect of the Administration's proposals

is to

reduce the income of older Americans

while

significantly increasing their out-of-pocket costs.

Our testimony today will focus primarily on the budget cuts

in the Medicare and Medicaid programs, the reasons for our concern, and the consequences of the proposed cuts on this nation's

elderly.

In addition, we will propose alternative recommendations

for reducing federal spending in the health care sector.

II.

ASSESSI THE AD INISTRATION'S MAJOR PROPOSALS TO
CUT MEDICARE IN FY 84

The Administration proposes further Medicare cuts in

FY 84 of $1.7 billion.

of the $1.7 billion almost 1 billion

($990M) will come directly from beneficiaries in the form of

increased copays and deductibles.

In addition the proposed

physician freeze totals $700 million and will likely also

increase beneficiary out-of-pocket costs.

The proposed savings comes

on top of FY 84 savings of $6.2 billion and another $7.0 billion

in FY 85 already on the books (due to reconciliation in 1981

The budget proposes total new savings of $25.26 billion

Most of their proposals either directly or indirectly

shift costs now being borne by the federal government to

program recipients, though Medicare providers take some

cuts too.

While the Administration appears to have made its

proposals on the basis of program savings alone, our

Association believes that additional criteria are equally

necessary for evaluating proposals to change the inedicare

program.

First, any proposal to change Medicare must contribute

to restraint in the escalating rise in health care costs.

Hospital costs, which make up approximately 75 percent of

Medicare expenditures, increased 19 percent in 1981 and over 13 percent in 1982, more than triple the rate of inflation.

A recent CBO study on Medicare pointed

out

that

of the projected 13.2% rise in hospital costs, only 2.2%

is due to increased aged beneficiaries, while the balance

of 10.8% stems from rising hospital costs.

Unless such

costs can be restrained, Medicare beneficiaries will face

continuing efforts to slash the program, particularly in

the face of pending insolvency of the HI trust fund.

Despite two years of budget cuts in Medicare, the HI

trust fund (Part A) is projected to be insolvent sometime

in the 1980's.

The timing is subject to the extension of

continued interfund borrowing among the trust funds.

If

interfund borrowing is extended as proposed by the National

Commission on Social Security Reform, the HI trust fund

could be drained by mid-1984 or early 1985.

If interfund

is not extended indefinitely, the HI trust may be able to

make it to 1988 or 1989, though a recent CBO study indicates

that the fund could be depleted as early as 1987.

A second important criteria for evaluating proposals

to change Medicare is the avoidance of cost shifting to

Medicare beneficiaries.

The economic status of most of

America's elderly is precarious at best:

Elderly households are overwhelmingly concentrated

in the lower-income brackets, particularly compared to the non-elderly in 1981, 21% of elderly house

holds had incomes below $5,000 compared with 8% of

non-elderly households and over 50% of elderly house

holds had incomes below $10,000 compared with 19%

of the non-elderly (see table below).

The median income level of elderly-headed households

is less than half (45%) that of the non-elderly.

older persons experience one of the highest poverty

rates (15.3%) of any adult age group and one of the

highest near-poverty rates (25.2%), with older women

predominating in these poverty categories.

The following table illustrates the economic situation

TOTAL 1981 MONEY INCOME OF HOUSEHOLDS BY AGE OF HOUSEHOLDER

Source:

Census Bureau, "Money Income and Poverty Status of Families
and Persons in the United States: 1981" (Series P-60, No. 134)

Proposals that simply shift program costs to beneficiaries

are based on the erroneous notion that the elderly can and should

bear an even greater burden. But, Medicare currently pays only 40% of the elderly's health care bill. The Part A deductible

automatically rises from $304 to $350 in FY 84, over a 15%

increase.

(The Part A deductible rose from $204 in 1981

to $260 in 1982, over a 27% increase, due to the 1982 Budget

Reconciliation Act.)

The Part B premium rises automatically

in FY 84 to $13.60 from $12.20, almost a 10% increase,

and

Part B deductible, which was $60 in FY 81, is now $75, a

25% increase.

Beneficiary liability for Medicare Part B

physician services alone is approximately 698. of total

physicians' charges due when deductibles, coinsurance and

unassigned claims are included. Moreover, the unwillingness of a large number of physicians to accept assignment (i.e.,