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OSEC Congressional Testimony

Statement of Robert B. Reich Secretary of Labor Before the Senate Finance Committee[6/6/95]

Mr. Chairman and Members of the Committee:

Thank you for the opportunity to appear before you today to discuss the future of the Medicare system. My fellow trustees and I recently submitted to Congress our annual report on the financial status of the two separate Medicare trust funds -- the Hospital Insurance (HI) Trust Fund and the Supplementary Medical Insurance (SMI) Trust Fund. As you know, this year's report shows that the Hospital Insurance Trust Fund will be insolvent by the year 2002, and that the costs of the SMI program will continue to soar.

These problems are not new. Indeed, for the past 15 years, the trustees have called for reform. And the Clinton Administration has already worked with Congress to address the problem, although there is still much more to be done. Prior to the Omnibus Budget Reconciliation Act of 1993 (OBRA 93), the HI Trust Fund was expected to be depleted by 1999. But the reforms included in OBRA 93, along with the strong economy America has enjoyed since then, have delayed the Trust Fund's depletion until 2002. These short-term remedies, let me be clear, do not solve the deeper problems with the Medicare system, nor do they exhaust the Administration's commitment to reform. But they do buy us precious time in which to devise and implement a more comprehensive solution. It is now up to all of us to use this time well.

We all agree that the Medicare system is in need of change. The President has repeatedly said that he would like to sit down with Congress to produce a bipartisan blueprint for broadbased health care reform. The Clinton Administration believes that the financing problems that the Medicare system faces must be solved within the broader context of health care reform. As a trustee of the Medicare trust funds, I am very concerned about the impending insolvency of the I-H Trust Fund, and pleased that this Congress seems intent on addressing this issue. However, I am deeply troubled by some of the approaches that are being discussed.

Attempts to quickly shrink federal spending by greatly reducing Medicare benefits, in isolation -from broader reform, will leave many Americans worse off without addressing the fundamental structural flaws of our health care system. Large reductions in Medicare will increase health care costs to the elderly. They will also strain the finances of many health care providers, including some of America!s most valuable and vulnerable health-care institutions. But the effects don't stop there. Providers may attempt to shift costs to private health insurance companies. If costs are shifted, many working Americans who are privately insured, and who may believe themselves to be insulated from the Medicare issue, will in fact feel the squeeze.

Speaker Gingrich and others claim that reducing Medicare expenditures will be "painless." This simply is not plausible. Dramatically cutting spending for a program like Medicare--to the extent the Senate Budget resolution has proposed--without reforming the overall health care system requires either reducing services or shifting the costs of the services to somebody else.

The Elderly:

While no specific bill has been put on the table, one prominent proposal would increase premiums, co-payments, and deductibles for elderly and disabled Medicare recipients. Under this plan, deductibles would be doubled from their current levels, premiums would be hiked every year until 2002, and there would be a dramatic increase in co-payments for home health care and other services. These changes, taken together, would raise annual Medicare costs by over $2,000 per couple in 2002 alone. For the typical Medicare beneficiary, increased premium costs will come right off the top of their Social Security checks--the simple equivalent of a Social Security benefit cut. This is particularly grave when one considers that these deep Medicare cuts may potentially be used to offset tax cuts for some of the most comfortable of our citizens.

Health Care Providers:

Some vulnerable health care providers will also feel the pain of these deep cuts. When Medicare benefits are slashed outside the context of the overall health care reform, some hospitals may shift costs to the privately-insured. In the face of large Medicare cuts, hospitals whose patients are predominately Medicare beneficiaries and the uninsured will.have few other options except to reduce the quality of care to all patients, or to close their doors. In particular, we are concerned that large reductions in Medicare payments could endanger rural and urban safety-net hospitals.

Hospitals in rural areas are often small. Some serve mostly Medicare recipients, and often are the only health care provider within 50 or more miles. Since many of these hospitals are already in financial distress, large Medicare cuts in isolation from broader efficiency improvements may cause rural hospitals to reduce the quality of care or to squeeze the wages of hospital workers. In extreme cases, these hospitals will be forced to go out of business, and workers will be laid off. Nearly 10 million Medicare beneficiaries live in rural areas. Such large cuts in Medicare outside the context of overall health care reform puts their health care in greater jeopardy. Some urban "safety net" hospitals--which are also in many cases America!s most important teaching hospitals-are equally limited in their ability to shift the burden of drastic reductions in Medicare benefits, and will face similar cost pressures.

Privately-insured Working Americans:

Some hospitals that M shift costs to insured patients may do so. Many of America's hospitals have used gains from some payers to cover losses from others. Health care providers frequently charge insured patients more to cover the expenses of the 40 million Americans who do not have health insurance and thus frequently receive uncompensated care. In this context, slashing the Medicare program without broader health care reform may lead hospitals to increase costs to the privately-insured to make up- foe the enormous losses from Medicare patients.

For example, the 1995 Prospective Payment Assessment Commission (ProPac) report to Congress stated that as payments for Medicare and Medicaid were reduced over the last decade, hospitals responded by increasing revenue from private payers. Indeed, in 1992, hospitals spent $26 billion more than they received for furnishing services to Medicare, Medicaid, and uninsured patients. In the same year, they took in $29 billion in revenue above their costs of providing care to privately-insured patients. For example, just a few miles away at Georgetown University Hospital they charge paying patients 95 cents for an Advil tablet--8 times the retail price at a nearby drug store-in order to help offset the costs of uncompensated care.

For any action there is an equal and opposite reaction. This is an immutable law of physics, and applies in comparable ways to healthcare policy. Those who prefer concrete models to abstract theorems can think of it as squeezing a balloon. If you push on one side, the air is forced to the other side. It stands to reason that deep Medicare cuts of the magnitude proposed by the Senate Budget resolution--if they are undertaken without reforming the health care system itself and without denying medical care to Medicare beneficiaries--will likely force 150 million privately-insured Americans to pay more. The cost shifting that results from large Medicare cuts outside the broader context of health care reform would essentially impose a hidden tax on working Americans. As Henry Aaron, an expert on health care issues at the Brookings Institution, recently testified: "Large reductions in Medicare spending within the current program framework will impose ... taxes on private businesses and individuals."

A Congressional Budget Office analysis of an earlier proposal concludes that some of the expenditure reductions to providers will simply be shifted--in the form of price increases--to private payers. Martin Feldstein, a Harvard professor and former chairman of the Council of Economic Advisers, agrees. He wrote last year that a "very large hidden tax would result from reducing government payments to hospitals and other providers of Medicare services without any reduction in the care that they are expected to give. As a result, the hospitals and other providers would just raise their prices to patients and insurance companies. In the end, it would be the privately insured individuals who bear those costs in the form of higher insurance premiums and lower wages."

A hidden tax is serious enough. But even worse, we are concerned that cost-shifting-triggered by Medicare cuts of the scale currently proposed--will have the ultimate effect of reducing healthcare coverage. Costs may be shifted to the privately-insured and premiums will tend to rise to cover those costs. And as premiums increase, some workers and their families will be priced out of the market, and will end up without coverage. Mark Pauly, a health care economist at the University of Pennsylvania, wrote in a survey -of the relevant literature that "there is fairly consistent evidence that insurance coverage is sensitive to proxies for its price." A recent CBO report concurs with this assessment.

Traditionally, membership in the American middle class included not only a job with a steadily increasing income, but a bundle of benefits that came with employment. Since 1979, we have seen a divergence in health benefits, related to education and skills. Employer-sponsored health coverage for workers with college degrees has declined only slightly, from 79 percent in 1979 to 76 percent in 1993. But rates for high school graduates have fallen from 68 percent to 60 percent over the same period, and for high school dropouts, the 1979 rate--already low at 52 percent--has plummeted to 36 percent. Nearly 100,000 Americans are already losing health insurance each and every month. Medicare cuts unaccompanied by broader reforms can only exacerbate this crisis.

According to a recent study by David and June O'Neill, lesseducated workers are more likely to lose coverage when confronted with higher premiums. This gives reason to believe that the hidden tax associated with cost shifting will disproportionately affect workers with less education--the very group that has suffered the sharpest drop in health-care coverage since 1979, and whose overall prospects have become bleaker and more unsettled in today's changing economy.

One drawback to cutting Medicare in isolation was recently summarized by The Economist: "Although the federal budget would benefit [from reduced Medicare expenditures], these savings could be offset by higher costs in private health care... Thus the best way to cut Medicare... would be to subsume them within broader health-care reforms." For that reason, we need to sit down together--in a bipartisan manner--and produce a blueprint for broad-based health care reform. We must put the HI Trust Fund on a sound, sustainable footing. We have all known this for a long time now. But we have a responsibility to every American who works hard and plays by the rules to fix the problem of our health-care system, not simply shuffle from one group to another the excess costs that the current flawed system produces.

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