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

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.

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

1 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.

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 198392 1

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

1 Includes starting trust fund balance updated by Treasury Department, includes the lump-sum military transfer proposal for Hl. 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 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

1

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.

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

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

1 Includes starting trust fund balance updated by Treasury Department. Includes the lump-sum military transfer proposal for HI. 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.

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.

4 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 de

cisions 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

uled to report this summer. Can you tell us when exactly that Council will report, and do you envision then at that point, having legislation ready to send to Capitol Hill? Because certainly if anything is going to be implemented, I think the realities of the matter would at least indicate to me that that it is going to be difficult to enact any reforms next year, in an election year, so you are already up to 1985 at the earliest. Would you give me your views on when the Council is going to report and whether or not you envision sending legislation to Capitol Hill?

Dr. DAVIS. Yes. The initial date that was given to the Council was a report due in July. However, by statute, they must have the report in by next January. The date was simply arrived at when the Council was initially set up. They had a couple of months delay in actually getting started.

There was some question as to whether they had to meet the date of July. Secretary Schweiker did indicate to the Council that if they needed an additional month or two that would be appropriate.

I believe that they plan on completing their work sometime during the summer, so I would anticipate that we would be getting their report in the early fall.

We would obviously take a look at that and would sit down with the Department and think through the kinds of recommendations that they have. We would incorporate many of those suggestions, I would expect, into our legislation for 1985, which we will be working on in August and September.

Mr. RINALDO. So you would be submitting legislation in 1985.

If the Council recommends the use of general revenues, would you then support that approach?

Dr. DAVIS. I cannot speak for the administration at this time on that approach. If they would recommend that, we obviously would take it under advisement. But I, as you know, would not presume to make the final decision for the administration at this time.

Mr. RINALDO. Since you are obviously opposed to using general revenues, would you then say that the entire shortfall has to be made up primarily by program cuts or reduction in benefits or by a combination of reduction in benefits and other revenues? And, if so, what revenues?

Dr. DAVIS. I think it is premature to make a final determination about what the change in behavior would bring, but, as I indicated earlier, it probably would need to be a careful balancing of both a reduction in the outlays, as well as looking at how one can finance it.

Mr. RINALDO. Have you or the Department investigated any alternative methods of finding revenue sources for medicare?

Dr. DAVIS. No. At the moment, we have been concentrating most of our resources on the development of reimbursement reform. The prospective payment system took us about a year to develop because it is a brand new system. After 16 years of paying in a retrospective way, one does not change that overnight.

Second, we then tackled the whole area of looking at restructuring the third-party financing mechanism for health care benefits with a tax cap and the other health incentive reforms for this year.