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Washington, DC The committee met, pursuant to notice, at 10:03 a.m., in room SH-216, Hart Senate Office Building, Hon. Herb Kohl, presiding. Present: Senators Smith, Talent, Kohl, Wyden, and Lincoln.

OPENING STATEMENT OF SENATOR HERB KOHL Senator Kohl (presiding). This hearing will come to order, and we welcome you all here today, where we will explore ways to contain growth in Medicare spending by helping seniors lead healthier lives.

As always, we thank our Chairman, Senator Gordon Smith, for working with us in a bipartisan manner to examine issues affecting seniors. It is not secret that the Federal Government will face fiscal challenges as the Baby Boomers begin to retire and become eligible for Medicare.

From the year 2000 to 2030, the number of people on Medicare will nearly double from 40 million to 78 million. In fact, in the next 25 years, Federal spending on Medicare, Medicaid, and Social Security will almost equal what we now spend on the entire Federal Government.

So we know these costs are looming and yet our nation remains woefully unprepared. Net Federal spending on Medicare was more than $300 billion in 2004. But what many people don't know is that a small share of Medicare beneficiaries account for a very large share of total Medicare spending.

Just 10 million of the 40 million Medicare beneficiaries account for 85 to 90 percent of the program's costs every year.

As we will hear today, much of this spending is for patients suffering from multiple chronic diseases. Studies show that Medicare spends 2 out of every 3 dollars on people with five or more chronic conditions, such as diabetes, emphysema, heart disease, arthritis, or osteoporosis.

These chronic conditions are largely preventable, treatable, and their onset can often be delayed through proper nutrition and exercise. At a time when our nation is growing older, it is clear that the successes we have in preventing chronic diseases will directly affect our ability to contain future growth in Medicare spending.

We need to get the word out that prevention is not something that only children and younger adults can benefit from. Seniors need to understand that it is never too late to benefit from a healthier lifestyle.

It is also important to note that this not just a challenge for the Federal Government. Rising health care costs will continue to be an issue for all American families and businesses, and so we need more prevention, nutrition, and exercise by younger generations also.

Today, we will hear from Bill Herman from Highsmith, Incorporated, a company in Fort Atkinson, WI, on their award-winning prevention programs to keep their employees healthy and their insurance costs low.

This makes sense for businesses, but also for our country, for, after all, unless we find a way to prevent and treat chronic diseases early on, Medicare will inherit even more costly problems as more people join the program.

I am pleased to have the director of the Congressional Budget Office here today to present CBO's recent report on Medicare HighCost Beneficiaries.

We also look forward to hearing from our second panel of witnesses who will discuss ways to successfully prevent and affordably treat chronic diseases.

In particular, we need to find ways to educate seniors and boomers that it is never too late to change their lifestyle and improve their health and improve Medicare's finances at the same time.

We need to make sure that seniors know about the preventive benefits that Medicare offers and why they are so important to take advantage of.

We should look for ways to use technology to give seniors and health providers more tools to take control of their health.

We know that many of the Senators on this committee share this concern for skyrocketing costs of health care, particularly Medicare. We know that we will all take away some good recommendations from today's hearing, and continue working together to stem this growing problem.

So, again, we thank everyone for their participation here today, and now turn to our Chairman, Gordon Smith, for his opening remarks.


CHAIRMAN The CHAIRMAN. Thank you, Senator Kohl, and thank you for arranging this hearing on such a vital topic. Today's hearing is, as he has stated very well on the importance of prevention in helping to slow the growth of Medicare spending. We have two excellent panels of witnesses today, and I will look forward to a productive discussion.

Over 40 million elderly and disabled Americans rely on Medicare for their health care coverage. In 2004, total Medicare spending exceeded $300 billion and is expected to grow significantly in the coming decades as the Boomer Generation approaches retirement.

With this impending challenge, we must find ways to control the growth of Medicare spending if we are to preserve this critically important part of our health care safety net for our seniors and the disabled.

It is vital that we identify where spending is the greatest under Medicare and develop comprehensive strategies in which to lower expenditures in these areas. A May 2005 Congressional Budget Office report, which this hearing will examine, may have identified one such area. According to the report, a relatively small group of high-cost Medicare beneficiaries account for a large share of the program spending.

According to CBO, only 10 million of the 40 million Medicare beneficiaries account for 90 percent of the program's cost.

Further, three-quarters of these 10 million high-cost beneficiaries suffer from multiple chronic diseases, such as diabetes, emphysema, heart disease and stroke, arthritis, and osteoporosis.

Such diseases require extensive care and often serve as the catalyst for many other conditions and ailments. Many of these chronic conditions are preventable through a regimen of proper nutrition and exercise.

Additionally, the cost of treating these conditions can be significantly reduced by the implementation of chronic disease management programs.

That is why this hearing will also examine some innovative technologies currently being used by institutional health care providers, such as the Veterans' Administration, to monitor and manage high cost patients more efficiently. Our ability to prevent and affordable treat chronic disease is key to our ability to contain the anticipated growth in Medicare spending.

So I thank all of our witnesses for coming today to discuss this issue, and look forward to the testimonies. Thank you.

Senator KOHL. Thank you very much. Senator Smith, we also have with us the other Senator from Oregon, Ron Wyden.

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OPENING STATEMENT OF SENATOR RON WYDEN Senator WYDEN. Thank you very much. I want to commend both of you. I think this is an excellent topic, and I thank you, both, for your leadership.

What I think is so striking about this is that for all practical purposes the Federal Government doesn't run health care programs. What the Federal Government does is run sick care programs, and probably nothing shows it more graphically than the topic that we are going to examine today under the leadership of my two friends and colleagues.

The Federal Government is going to spend a boatload of money for what is essentially a chronic care program. That is what Medicare has become today, and that is what Mr. Holtz-Eakin and his capable folks document, you know, once more.

What is so striking is that if you look at the two parts of Medicare, Part A of Medicare will pay an astounding sum for essentially institutional care. What Senator Smith and I see in our state is essentially the insurance carrier that runs Medicare for our state will write out a check for $40,000, $50,000, some prodigious sum of money, for a seniors hospital coverage under Part A, and then there will be very little spent on prevention under the outpatient portion of Medicare Part B.

Senator Kohl is absolutely right. There is a little bit of coverage. We got to do a better job of getting the word out about those preventive benefits under Part B. I really hope that as we work together on a bipartisan basis and have the very valuable assistance, Mr. Holtz-Eakin, that we can essentially revamp this program. Let us do a better job of targeting the resources where they are most needed, which is essentially what Senator Kohl and Senator Smith have said in terms of chronic care, and then let us do a better job of prevention so that we are not always playing catch-up ball under Part A when somebody is flat on their back in the hospital.

I want my two colleagues to know that as part of the bipartisan legislation that Orrin Hatch and I have written, the Health Care that Works for All Americans Act, which, in effect, will kick in this October when the information about health care spending goes online, and we start walking the country through the choices, that I really want to see that law follow up on the good work that you have done, Senator Kohl and Senator Smith. It is an important hearing. Thank you, both, Senators. Mr. Holtz-Eakin has worked with my office on a variety of issues, and we appreciate all his cooperation as well, and I look forward to the testimony. Senator KOHL. Thank you very much, Senator Wyden.

We are pleased to welcome our first witness, Dr. Douglas HoltzEakin, director of the Congressional Budget Office.

Dr. Holtz-Eakin was appointed to a 4-year term in 2003; previously served for 18 months as chief economist for the President's Council on Economic Advisors, where he also served as the senior staff economist in 1989 and 1990.

So we are very pleased that you are here, and we welcome your testimony.

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CONGRESSIONAL BUDGET OFFICE, WASHINGTON, DC Mr. HOLTZ-EAKIN. Well, thank you, Senator Kohl. Thank you, Chairman Smith, Senator Wyden.

I am pleased that the CBO could be here to talk about our report, and this important issue. The starting point, as has already been mentioned by both the Chairman and Senator Kohl is the concentration of Medicare spending among a very few beneficiaries.

In 2001, the data in the report show that 25 percent of the beneficiaries accounted for 85 percent of Medicare spending. It is useful to note that this is not unique to Medicare. National health spending has the same character, actually a bit more concentrated. This is the kind of pattern one would expect in an insurance program, where a relatively small number of claimants in any year would account for the bulk of the spending.

But it does raise some questions and possibilities. First, of course, is, “Can we save some Medicare costs in examining this?" Is it possible that these are always the same people? I mean, we use 2001, but could it be the same people every year; and if so, is there a way to address their health so that they are either less expensive to begin with or are less expensive to Medicare in the future in some way.

The report tries to take a look at this. The second figure that we look at examines the question of whether these are, in fact, the same people put differently, is there some persistence in these expenditures from year to year?

What we do is try to track the high cost Medicare beneficiaries, those in the top 25 percent, over time. The graph that we have in front of you and is on the screens shows the high-cost folks in 1997, and then looks back a few years to what they were costing before that, and then follows them for years after 1997 up to 2001 to see what the expenditure looks like.

The dark bar represents this group, and what you can see is that it ramps up prior to 1997. They were high cost in 1997, but they were accelerating in their costs prior to that, and then ramping down past 1997. This is consistent with a pattern that you would expect-one in which there are some acute care expenses. Someone breaks a leg and has an episode of high costs, but it goes away. Another part of the mixture is chronic, ongoing expenditures for the kinds of chronic care they might require. It is also important to note a key feature of the post-97 experience, which is the large fraction of these beneficiaries who are close to death, and indeed die in the years thereafter. That pattern is consistent with about 25 percent of the spending each year that goes to those in the last

year of life.

Now, where are these costs coming from? If we go to the third figure, they are coming from the fact that, while these high-cost beneficiaries do the same things that other people do—they go to the doctor, for example—they are much more likely to do other things—go to the emergency room, have a hospital admission, or be in a skilled nursing facility. Regardless of which of those things they are involved in, they tend to use more services at the same time. So they have a greater propensity to have all those events than in the population as a whole.

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