PREPARED STATEMENT OF SENATOR DANIEL PATRICK MOYNIHAN

We meet today for a subcommittee hearing on two bills aimed at improving public confidence in the Social Security program.

S. 216 would remove the Social Security Administration from the Department of Health and Human Services and reestablish it as an independent executive branch agency headed by a bipartisan three-member board. This would be a return to the original structure. The Social Security Act of 1935 established the original Social Security Board, which was charged with administering the Old-Age Insurance program created by the Act. I am pleased that today we will hear from Mr. Robert J. Myers, who played a role in planning the original program and has spent his life on it. We also have with us the Honorable Robert M. Ball, whose association with SSA started in 1939 and who served as Social Security Commissioner for 11 years, from 1962 to 1973, longer than any one else who has held that post.

SSA was placed into a larger umbrella agency in 1939. That may have seemed symmetrical then. Social Security was still a small program. Today, SSA's budget accounts for over 62 percent of the budget of the Department of Health and Human Services. And yet it is difficult to find SSA in the HHS management hierarchy.

In addition, SSA has had 10 Commissioners in the last 16 years. Little needs to be added here. One served in the Carter Administration for only 12 months. Not in an acting capacity. A Commissioner, confirmed by the Senate. Twelve months.

And then there is the extraordinary disinvestment fiasco. We learned in November 1985 that the Treasury Secretary had been secretly disinvesting the Social Security Trust Funds. And in no small sums. $28 billion in 1985. $10 billion in 1984. And did the Social Security Commissioner know? Was the secretary of Health and Human Services told? No, and neither were the public trustees informed, nor the Congress. It was a covert activity.

We shouldn't be surprised that the American public has no confidence in the Social Security program. In 1979, Peter D. Hart Research Associates conducted a nationwide public opinion survey for the National Commission on Social Security on the public's attitude toward Social Security. The survey showed that 61 percent of nonretired adults had little or no confidence that funds would be available when they retired. The public's confidence had sunk even lower by 1985 when a survey by Yankelovich, Skelly & White showed that 66 percent, two-thirds, of nonretired adults thought it unlikely they would see their retirement benefits. Two-thirds!

Public survey data for 1988 from the American Council of Life Insurance show that there has been some improvement in public confidence in Social Security in the last few years, probably as a result of the Social Security Amendments of 1983. The survey results indicate that the percent of nonretired adult Americans who are not confident in the future of Social Security has declined to 51 percent. I welcome the news. But I suggest that the fact that half of American workers do not believe in Social Security is not something we should be satisfied with. And I put it that this lack of public confidence remains the biggest problem facing Social Security. The system is, after all, a compact across generations. The willingness of young workers to fund the system rests on the confidence that it will be there for them when they need it.

Reestablishing SSA as an independent agency headed by a bipartisan board will help restore public confidence in Social Security by showing that the Government recognizes that this program, with its 39 million recipients and 125 million contributors, is too important for even the possibility of political manipulation. This is the reason the independent agency idea was endorsed in the January 1983 report of the bipartisan National Commission on Social Security Reform. It is past time to act on this recommendation. We must let the American public know that the Government takes seriously its role as trustee for the Nation's pension system.

The second bill to be considered, S. 1079, would require SSA to send biennial account statements to workers telling them what they have paid into the system and what they can expect to get back in the way of benefits.

People really know very little about the way Social Security works. As a result, they are easily misled. Easily alarmed. Witness the rise of movements which seem to have little purpose save to terrify the aged.

The problem is that you never hear from SSA until you retire or die. We pay into Social Security all our lives, and in every paycheck see the money withheld, but nary a word from the Social Security Administration.

The solution is to do what Canada did. We have now moved to a partially funded system as they did in the 1960s. Now it is time to have regular reports of the kind they instituted in 1985. And I note that the Canadian Social Security agency,

Canada Pension Plan, has been kind enough to provide a representative, Mr. Donald Walsh, to testify today as to their experience with this program.

A final word. A warning really. Either we do these things or we see the system picked apart. Plundered for cash by OMB and demagogues.

OVERVIEW OF PRESENT LAW AND ESTIMATED BUDGET EFFECTS OF THE MEDICARE CATASTROPHIC INSURANCE PROGRAM AND DESCRIPTION OF POSSIBLE PREMIUM OPTIONS

(PREPARED BY THE STAFF OF THE JOINT COMMITTEE ON TAXATION, MAY 25, 1989)

INTRODUCTION

The Senate Committee on Finance has scheduled a hearing on June 1, 1989, on the estimated budget effects of the Medicare catastrophic insurance program and supplemental premium options under the Medicare Catastrophic Coverage Act of 1988.

This document,1 prepared by the staff of the Joint Committee on Taxation, provides a discussion of present law, estimated budget effects, distribution of the supplemental premium, and possible premium options.

Part I of the document provides a summary description of present law relating to Medicare benefits and financing of the benefits. Part II compares the estimated budget effects of the Medicare catastrophic insurance program when the Act was enacted and the current estimates by the Congressional Budget Office and the Administration. Part III provides data on the distribution of the current Medicare supplemental premium by income group, and Part IV discusses possible options to modify the premium. Finally, the Appendix describes the method for deriving the distributional estimates.

I. PRESENT LAW

A. MEDICARE BENEFITS

In general

Medicare is a nationwide health insurance program for the aged and certain disabled persons. Medicare consists of three parts: the hospital insurance program (Part A), the supplementary medical insurance program of Part B (SMI), and the catastrophic drug insurance program of Part B (CDI).

Individuals who have attained age 65 and who are eligible for monthly social security or railroad retirement benefits are covered under Part A of Medicare at no cost. Part A coverage is also available at no cost to certain disabled individuals who have not attained age 65 and to persons who have end-stage renal disease. Persons who have attained age 65 and who are not eligible for social security or railroad retirement benefits may obtain Part A coverage providing they pay for the coverage. The monthly premium for such coverage, as of January 1, 1989, is $156.

Within limits, Part A of Medicare provides coverage for inpatient hospital care, skilled nursing facility (SNF) care, home health care, and hospice care.

Coverage under Part B, which includes the SMI and the CDI programs, is voluntary. All persons age 65 or older and individuals eligible for Part A benefits by virtue of disability or end-stage renal disease may elect to enroll in both these programs by paying the monthly premium. Enrollees may not elect to enroll in only one of these programs.

SMI covers doctor's services, other medical and health services e.g., laboratory and other diagnostic tests, ambulance services, outpatient services at a hospital), and certain home health services not covered under Part A. SMI covers 80 percent of the reasonable charges for such services, subject to a deductible. Beginning in 1990, enrollees in Part B will also be eligible for prescription drug benefits. Benefits under the Medicare Catastrophic Act of 1988

The Medicare Catastrophic Act of 1988 ("the Act") significantly expanded the benefits covered by Medicare. Major changes to the benefits are described below.

1 This document may be cited as follows: Joint Committee on Taxation, Overview of Present Law and Estimated Budget Effects of the Medicare Catastrophic Insurance Program and Description of Possible Premium Options (JCX-9-89), May 25, 1989.

Part A benefits

Inpatient hospital care.—Under the Act, Medicare pays all hospital inpatient costs above an annual deductible amount ($560 for 1989). Under prior law, the number of days covered by Medicare was limited for a single spell of illness, covered individuals paid a deductible for each spell of illness, and coinsurance amounts were payable after the 60th day in each spell of illness. The Act eliminated the concept of a spell of illness, which began with a hospital admission and ended on the 61st day following discharge from the hospital or from a skilled nursing facility (SNF) entered after the hospital stay.

Skilled nursing facility care.—Under the Act, the limit on SNF care is 150 days per year, and no prior inpatient stay is required for coverage. Coinsurance payments are required for the first 8 days of care each year, at a rate of 20 percent of average SNF costs per day ($25.50 for 1989). Under prior law, the limit on SNF care was 100 days per spell of illness, after a hospital stay of at least 3 days. Coinsurance payments were required for days 21 through 100 at a rate of 1/8th of the deductible amount ($67.50 for 1988).

Home health care.-Under prior law and the Act, there is no limit on the overall number of covered home health care visits and no coinsurance requirement. To be covered, home health care visits must be required on an intermittent basis. Under prior law, the intermittent requirement was interpreted to mean that there could be 5 to 7 visits a week, for 2 to 3 consecutive weeks. Under the Act, beginning in 1990, covered individuals may receive up to 38 consecutive days of home health care, 7 days a week.

Hospice care.-The Act eliminated the 210-day lifetime limit on hospice care.

Part B benefits

SMI benefits.-Beginning in 1990, the Act expands Part B benefits as follows. Each enrollee's annual liability for Part B copayments is capped. The cap is $1,370 for 1990, and will be adjusted each year to keep the proportion of enrollees subject to the cap constant at 7 percent. Part B coverage is expanded to include mammography screening for women, subject to a maximum of $50 (indexed) per screening and the usual copayment requirements. In addition, once sufficient costs have been incurred to receive benefits under either the copayment cap or the new drug provisions (see below), enrollees are eligible for respite benefits. Under this benefit, Medicare will pay 80 percent of reasonable costs for up to 80 hours a year of in-home personal services, to give the usual caretakers of homebound enrollees a respite.

Catastrophic drug insurance.-Effective January 1990, the Act provides coverage for drugs administered intravenously at home and for immunosuppressive drugs after the first year following a transplant, subject to an annual deductible amount of $550. Coinsurance of 20 percent will be required on drugs administered intravenously, while coinsurance will initially be 50 percent for newly-covered immunosuppressive drugs. (Medicare already covers 80 percent of the costs of immunosuppressive drugs in the first year following an organ transplant.)

Effective January 1991, the CDI program will be expanded. Coverage will include all outpatient prescription drugs and insulin, subject to an annual deductible amount ($600 in 1991) that will be adjusted each year to keep the proportion of enrollees paying the maximum deductible constant at 16.8 percent. Coinsurance requirements will be 50 percent of reasonable charges above the deductible in 1991, 40 percent in 1992, and 20 percent in 1993 and subsequent years.

Part A benefits

B. FINANCING OF MEDICARE BENEFITS

Part A benefits are financed through the Hospital Insurance Trust Fund. This trust fund is financed primarily through payroll tax contributions paid by employers, employees, and the self-employed. The payroll tax rate for 1989 is 1.45 percent of compensation up to $48,000 per employee. An equal amount is paid by the employer. Self-employed individuals pay both the employers' and employees' portion of

the tax.

SMI benefits

SMI benefits are funded through the Supplementary Medical Insurance Trust Fund (SMI Trust Fund) by premiums paid by enrollees in the Part B program and general revenues. In 1989 a temporary provision requires that enrollee premiums provide 25 percent of the financing of Part B. Thereafter, premium rates will be derived annually based upon the projected costs of the program for the coming year, but premium increases will be limited to increases in the social security cost-ofliving adjustment. Therefore, the share of benefits financed by premiums is expect

ed to drop below 25 percent, while the general revenue share will grow. The basic Part B monthly premium for 1989 is $27.90, without regard to the additional premium added by the Act (see below).

Financing of benefits under the Medicare Catastrophic Coverage Act of 1988

In general

The new benefits provided by the Act are financed through the combination of (1) an increase in the Part B flat monthly premium and (2) a new supplemental premium based on income tax liability. It is anticipated that the supplemental premium will finance approximately 63 percent of the costs under the Act, and that the flat premium will finance the remaining 37 percent of costs.

Flat premium

The Act provides for increases in the monthly Part B premium otherwise determined to finance the catastrophic coverage benefit and the prescription drug benefit. Through 1993, the amount of the increase is set by law. After 1993, the flat premium is adjusted through use of a formula that is designed to maintain a reserve in the Catastrophic Coverage Account and the CDI Trust Fund (see below).

For 1989-1993, the additional flat monthly premium for Part B enrollees is as follows: 2

The supplemental premium is payable in a year by any individual who is eligible for Part A of Medicare for at least 6 months during the year (except for those who pay the Part A premium), who has income tax liability for the year of at least $150, and who resides in one of the 50 states or the District of Columbia. Subject to a limit on the maximum premium payable by an individual, the annual premium is determined by multiplying (1) the supplemental premium rate by (2) the amount determined by dividing the individual's adjusted income tax liability by $150.

For years 1989 through 1993, the supplemental premium rate is set by law. For years after 1993, the supplemental premium rate is adjusted by a formula that is designed to maintain a reserve in the Catastrophic Coverage Account and the CDI Trust Fund (described below).

The supplemental premium rate is equal to the sum of the catastrophic coverage premium rate and the prescription drug premium rate as follows:

The maximum annual supplemental premium shall not exceed the following

amount:

2 Residents of Puerto Rico, other U.S. commonwealths or territories, and individuals not entitled to or eligible for Medicare Part A have different premium schedules.

For years after 1993, the cap on the maximum supplemental premium is increased through the use of a formula (see below).

Married individuals who both are eligible for Part A benefits for at least 6 months during the year are treated as a single individual for purposes of the supplemental premium, except that the maximum limit on the supplemental premium is doubled (e.g., $1,600 for 1989). If only one spouse is Medicare-eligible for 6 months of the year, income tax liability is determined as one-half of the tax liability of the joint

return.

In the case of married individuals filing separate returns, the individual is treated as Medicare-eligible for 6 months if either the individual or the individual's spouse is so eligible. In addition, the maximum supplemental premium is twice the supplemental premium if, without regard to the rule in the preceding sentence, both spouses are Medicare-eligible for 6 months of the year. This provision is designed to prevent the supplemental premium from creating an incentive for married taxpayers to file separate returns.

Accounting

The receipts from the catastrophic coverage supplemental and monthly premiums fund the health and supplementary medical insurance portions of the catastrophic benefit (i.e., the increases in Part A and SMI benefits). The receipts from the prescription drug supplemental and monthly premiums fund the prescription drug benefits. These two sources of receipts and benefits are accounted for separately.

The prescription drug benefits are funded by the Catastrophic Drug Insurance Trust Fund (the "CDI Trust Fund"). All receipts attributable to the drug portion of the premiums are placed into the CDI Trust Fund and all payments for the benefits and administrative costs relating to covered drugs are drawn from the CDI Trust Fund.

Receipts attributable to the monthly flat catastrophic coverage premium are allocated to the SMI Trust Fund. Receipts attributable to the supplemental catastrophic coverage premium are allocated to the SMI Trust Fund and a newly created Federal Hospital Insurance Catastrophic Reserve Fund, with the division determined by the outlays from the catastrophic hospital insurance program. Outlays for catastrophic coverage are made from the Part A Hospital Insurance Trust Fund and the SMI Trust Fund.

In order to account for the receipts and outlays of the catastrophic coverage program separately from the prescription drug program, a bookkeeping account, known as the Medicare Catastrophic Coverage Account (the "Catastrophic Coverage Account"), was created. The balance recorded in the Catastrophic Coverage Account represents the cumulative financial position of the catastrophic coverage program. The Catastrophic Coverage Account is used to calculate monthly and supplemental catastrophic coverage premium rates after 1993 in a manner intended to maintain a contingency reserve in the Catastrophic Coverage Account. Similar adjustments are made after 1993 to the monthly and supplemental prescription drug premiums based on the balance in the CDI Trust Fund.

Adjustments to premiums after 1993

After 1993, the monthly and supplemental premiums and the supplemental premium cap are adjusted through the use of a formula. The formula is designed to maintain a reserve equal to 20 percent of annual outlays in the Catastrophic Coverage Account and, by 1996, a reserve in the CDI Trust Fund of 20 percent of annual outlays. The catastrophic coverage supplemental premium is adjusted by a percentage reflecting the past growth of per capita Medicare catastrophic coverage outlays relative to premiums paid, recent inflation, and the excess or shortfall of the balance in the Catastrophic Coverage Account of 20 percent of annual outlays in a preceding year. Similar calculations are performed for the prescription drug supplemental premium rate based on the balance in the CDI Trust Fund. In no case may the total supplemental premium rate increase over the prior year's premium by