Next, there may be considered the additional income and outgo picture, by fiscal years, for the entire OASDI system, including the proposed health-benefits program. The following table gives these data for the next four fiscal years (in millions):

* Includes additional income from change in earnings base applicable to the rise in combined employer-employee rate.

In considering the above figures, it should be noted that the additional income from the earnings-base change is the total of such income and not merely that portion of it which is assigned to the Health Insurance Account as being the quivalent of an increase of .1% in the combined employer-employee contribution rate. Also, it should be noted that the outgo includes the relatively small amount of additional cash benefits that will arise from increasing the earnings base--practically nothing in 1962, about $2 million in 1963, about $5 million in 1964, and about $10 million in 1965 (in the future such amounts will grow steadily).

The estimated income and outgo of the Health Insurance Account for the next four fiscal years is as follows (in millions):

*Includes additional income from change in earnings base applicable to the rise in combined employer-employee rate.

Table 3 presents the estimated progress of the Health Insurance Account by calendar years, according to the intermediate-cost estimate, carried out into the long-range future. The early-year figures (1962-65) represent what is actually anticipated on the basis of expected future earnings levels and medical-care costs; by 1970 these are merged with the long-range cost estimates, which assume 1959 price and wage conditions.

Table 3

ESTIMATED PROGRESS OF HEALTH INSURANCE ACCOUNT UNDER H.R. 4222,

a/ Based on varying interest rate estimated to be earned by OASDI Trust Funds, ultimately leveling off at 3.02% on total assets (3.10% on invested assets).

b/ Fund exhausted in year 2017.

The benefit cost in the early years (including also administrative expenses) is significantly lower than the level-premium cost and, conversely, higher eventually. This is the result of the relatively more rapid rise in the number of persons aged 65 and over entitled to monthly cash benefits than is the case for the coveredworker population. In the first full calendar year of operations, 1963, the cost is estimated at .46% of payroll, and by 1970 it is .53%. The average cost for the first 10 full calendar years of operation, 1963-72, is .50% of payroll. The cost as a percentage of payroll gradually rises after 1970; by 1980 it is .60%, and ultimately it rises to somewhat more than 3/4%.

The Account builds up slowly in the first few years because the benefits are made effective so rapidly and because the income has a certain lag due to the delay in collecting tax payments resulting from general legislative provisions. Thus, in both 1962 and 1963, income and outgo are virtually in balance--in fact, the former exceeds the latter by only about 10% relatively.

In the next few years after 1963, however, income to the Account is some 25% in excess of outgo so that a moderate fund builds up, and by 1965 it is almost $700 million. Income continues to exceed outgo in the following years since the covered population increases almost as rapidly as the beneficiary roll. In fact, it is not until about 20 years from now that outgo for benefits and administrative expenses is estimated to exceed the contributions allocated to this Account. It will, of course, be remembered that this is the intermediate-cost estimate and, accordingly, that high-cost experience would not show such favorable developments, while low-cost experience would show more favorable developments.

The Account is estimated to reach $2.0 billion by the end of 1970 and $3.9 billion in 1980. Thereafter, interest earnings continue to augment the growth of the Account so that it reaches a level of about $4.1 billion in 1985, but declines slowly thereafter (because the beneficiary roll eventually grows more rapidly than the covered population).

76123 0-61-pt. 1

D. Problems Involved in Cost Estimates for Health Benefits

Long-range actuarial cost estimates, by their very nature, can present the general range of costs but cannot be a precise forecast of future experience. This fact has been taken into consideration in the cost estimates for the Old-Age, Survivors, and Disability Insurance program over the quarter century of its operation. From time to time the assumptions underlying the actuarial cost estimates have been revised to take into account later available data and indications of trends. The cost estimates for the proposed health benefits program are subject to similar revisions.

There is a somewhat greater relative range of probable costs for the proposed health benefits than for the OASDI monthly cash benefits portion of the program, which has been functioning for more than 20 years. Not only is there incomplete data available on some of the various cost aspects and factors underlying the proposed health benefits as they would be provided under a social insurance system, but also service benefits quite obviously do not have costs as readily determinable as cash benefits that are directly related to covered earnings. But it should be recognized that, similarly, when the present OASDI cash benefits program was inaugurated in 1935, little was known about many of the factors entering into the actuarial cost estimates. Then, as now, assumptions had to be made on the basis of the data available, using the best possible actuarial judgment.

From a cost standpoint, the major benefit in the bill is the provision of hospital care. A great amount of data is available in regard to hospitalization experience of aged persons. Principal sources include the 1957 Beneficiary Survey made by the Bureau of Old-Age and Survivors Insurance, the continuing investigations made by the National Health Survey of the Public Health Service, and the experience of various insuring organizations such as the Blue Cross and private insurance companies. Much of this information has previously been summarized in "Hospitalization Insurance for OASDI Beneficiaries," a Report Submitted to the Committee on Ways and Means of the House of Representatives by the Secretary of Health, Education, and Welfare on April 3, 1959. Nonetheless, precise estimates are not possible because of such unknowns as the extent of hospital utilization by persons who have not had insurance in the past, but who would have benefit coverage under the provisions of the bill.

Another major difficulty in making cost estimates for hospitalization benefits is the extent to which hospital costs will rise in the future. The long-range actuarial cost estimates for the OASDI system have always assumed that earnings would be level in the future--for reasons that are described in detail elsewhere (see Actuarial Study No. 49, page 8, and the Report of the Committee on Ways and Means of the House of Representatives on the Social Security Amendments of 1961, H.Rept. No. 216, 87th Cong., April 7, 1961, pp. 14-16). This assumption

means that benefit costs relative to payroll will not be affected by any rising-earnings trend that may develop, because the benefit structure (including the maximum earnings base that is creditable toward benefits and that is subject to contributions) is assumed to be adjusted to keep pace with the rising earnings.

When earnings levels have increased in the past (increasing both benefit outgo and tax income--the latter more than the former, because of the weighted benefit formula), this factor has been recognized in subsequent cost estimates. Any resulting net reduction in cost has been made available for the financing of the program, including proposed benefit liberalizations. Liberalizations financed entirely in this manner merely keep the system up to date.

In considering the hospitalization-benefit costs in conjunction with a level-earnings assumption for the future, it is sufficient for the purposes of long-range cost estimates merely to analyze possible future trends in hospitalization costs relative to earnings. Accordingly, any study of past experience of hospitalization costs should be made on this relative basis. The actual experience in recent years has indicated, in general, that hospitalization costs have risen much more rapidly than earnings, with the differential being in the neighborhood of 3% or 4% per year.

One of the uncertainties in cost estimates for hospitalization benefits, then, is how long and to what extent this tendency will continue in the future. Some factors to consider are the relatively low wages of hospital employees (which have been rapidly "catching up" with the general level of wages and obviously may be expected to "catch up" at some future date, rather than to increase indefinitely at a more rapid rate than wages generally) and the development of new medical techniques and procedures, with resultant increased expense. In connection with the latter factor, there are possible counterbalancing items in that the higher costs involved for more refined and extensive treatments may be offset by better general health conditions, the development of out-of-hospital facilities, shorter durations of hospitalization, and less expense for subsequent curative treatments as a result of preventive measures,

The other three benefits provided by the bill would have a far lower relative cost than the hospitalization benefit (assuming that the types of services provided by the different facilities remain approximately the same as at present). Accordingly, even relatively large variations in the cost estimates for these benefits would have much less effect on the overall costs of the proposal. Although these services (skilled-nursing-home care following hospitalization, outpatient-hospital-diagnosis, and home-health-visits) are now being extensively provided in a number of areas, comparatively little data is available in regard to their cost for aged persons, when provided in the manner set out by the bill.