Educational workshop presented by WealthTrust-Arizona and world-renowned guest Robert K. Smoldt, Chief Administrative Officer Emeritus at Mayo Clinic and Associate Director of Healthcare Delivery & Policy Programs at Arizona State University. Mr. Smoldt has been involved in health care administration for more than 30 years and is currently pursuing U.S. health reform in close partnership with Mayo Clinic’s Emeritus President and CEO.

1. Deficit Reduction and
Healthcare

2. Bob Smoldt
• Associate Director, ASU Healthcare
Delivery and Policy Program
• Emeritus CAO, Mayo Clinic

3. Smoldt poll
• Question 1: Do you believe the federal
budget deficit is a very serious problem?
–U.S. = 68%
Source: Blendon and Benson, “The Public‟s View About Medicare and Budget Deficits,” NEJM 10.1056.

4. Smoldt poll
• Question 2: Do you believe it is possible to
balance the budget without cutting
Medicare spending in one way or the
other?
–U.S. = 54%
Source: Blendon and Benson, “The Public‟s View About Medicare and Budget Deficits,” NEJM 10.1056.

5. Smoldt poll
• Question 3: Do you agree with the
following methods of reducing the deficit?
A. Reduce military commitments
U.S. = 46%
B. Raise taxes on people with an annual income >$250K
U.S. = 69%
C. Limit tax deductions for corporations
U.S. = 62%
D. Reduce Medicare spending in some way
U.S. = 22%
Source: Blendon and Benson, “The Public‟s View About Medicare and Budget Deficits,” NEJM 10.1056.

6. Today:
• Will analyze the Medicare issue in
depth
• But need to understand the broader
U.S. deficit and debt problem

7. Growth of government
Total Federal Spending
(as percentage of U.S. Economy)
Total federal spending
Source: Walker, D. “Comeback America: The Nation‟s Fiscal Challenge and the Way Forward”, January 20, 2011

8. “You remember 1800, right?”

9. Growth of government
Total Federal Spending
(as percentage of U.S. Economy)
Total federal spending
Source: Walker, D. “Comeback America: The Nation‟s Fiscal Challenge and the Way Forward”, January 20, 2011

10. Federal government spending has increased
dramatically since the 1930s
Federal government outlays as % of GDP (1791-2010)
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1791 1811 1831 1851 1871 1891 1911 1931 1951 1971 1991 2011
Source: http://www.whitehouse.gov/omb/budget/Historicals; http://www.measuringworth.com/usgdp/; Federal
spending 1791-1900 based on “Historical Statistics of the United States, Colonial Times to 1970, Part II”; data
not adjusted for inflation

11. Changes in spending
Composition of Federal Spending
(as percentage of Total Spending)
Source: Walker, D. “Comeback America: The Nation‟s Fiscal Challenge and the Way Forward”, January 20, 2011

12. The cost of debt may have been held artificially
low
US net debt outstanding vs. effective interest rates (1980-2010)
$10,000 10.0%
Net debt outstanding
Effective interest rate
$8,000 8.0%
Net debt ($ billions)
Interest rates (%)
$6,000 6.0%
$4,000 4.0%
$2,000 2.0%
$- 0.0%
1980 1985 1990 1995 2000 2005 2010
Source: http://www.whitehouse.gov/omb/budget/Historicals

13. • As US federal spending has grown, so has
the federal deficit as a percent of GDP
• European Monetary Union’s“Stability and
Growth Pact” guidelines
• Annual deficit as a % of GDP should be equal to or
less than 3%
• EU 27 average = 2.3% in 2009
Source: The Reform of the Stability and Growth Pact; speech by Jose Manuel Gonzalez-Paramo; European Central
Bank; October 13, 2005. www.ecb.int/press/key/date/2005/html/sp051013.en.html.

14. Federal Deficit as percent of GDP

15. With sustained deficits the US
debt grows…

16. Three measures of Federal debt/
financial obligations
1. Debt held by the public
2. Total debt = debt held by the public + debt
held by government agencies, e.g., Social
Security Trust Fund, etc.
3. Total liabilities = Total debt + future
pension, Social Security, payments, and
healthcare payments that are promised
under current legislation (the unfunded
liabilities)
Source: “A Short Primer on the National Debt”, WSJ, 8/29/11

17. Are there economic guidelines for the
maximum debt a country should tolerate?
• European Monetary Union’s “Stability &
Growth Pact: 60% of GDP *
• Reinhart and Rogoff: 90% **
* The European Monetary Union states guideline for EU countries. It came from recommendations contained
in a report entitled “The Critical Mission of the European Stability and Growth Pact”, Occasional Paper No. 70
by the Group of Thirty in 2004. The Group of Thirty is a group of thirty of the most prominent economists in
world. It included such U.S. economists as Paul Volker, Martin Feldstein, and Paul Krugman.
** Authors of a study titled “Growth in a Time of Debt.”

18. Economic growth can be impacted by a
country’s debt
• “(Debt) burdens above 90% are associated with 1
percent lower median growth. Our results are
based on a data set covering 44 countries for up
to 200 years…. (and) incorporates more than
3,700 observations.”
• “Our 90 % threshold is largely based on earlier
periods when old-age pensions and healthcare
costs hadn’t grown to anything near the size they
are today. Surely this makes the burden of debt
greater.”
Source: Op-Ed Bloomberg News, July 14, 2011 by Dr. Carmen Reinhart, senior fellow at the Peterson Institute
for International Economics and Dr. Kenneth Rogoff, Professor of Economics at Harvard University

19. Historical debt burden – Debt
held by public
Since 1800, US Debt Held by the Public has exceeded 60% of GDP
(the maximum
debt ceiling used by the European Monetary Union) only during
WWII
Source: Walker, D. “Comeback America: The Nation‟s Fiscal Challenge and the Way Forward”, January 20, 2011

20. Historical debt burden – Gross
Federal debt
US gross Federal debt (FY1900-2010)% GDP
140
WW II
120 Total Federal Debt =
100% GDP in 2011
100
90%
80 TARP and
Recession
60 60%
Great
40 Depression
WW I
20
0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Source: http://www.usgovernmentspending.com/ accessed September 8, 2011;
http://www.politifact.com/ohio/statements/2011/aug/18/rob-portman/sen-rob-portman-
says-us-debt-now-matches-size-gros/

21. Comparative debt burdens
Total government debt in the U.S. is higher than some
of the most financially troubled countries in Europe
Source: Walker, D. “Comeback America: The Nation‟s Fiscal Challenge and the Way Forward”, January 20, 2011

22. August 8th, 2011
“Sign of the Apocalypse:
The struggling Spanish banking group
Bankia is seeking a loan from the European
Central Bank and has put the two (Real
Madrid soccer players) up as collateral.”

23. “Sovereign fiscal responsibility
index”
• Measures:
A. Debt
B. Projection of future debt
C. Fiscal rules, transparency and enforceability
• Country rank:
1. Australia
5. China
12. India
23. France
27. Italy
28. United States
34. Greece
Source: True State of Our Federal Finances, Comeback America Initiative, www.tcaii.org and
David Walker, former Comptroller General of the U.S. 1988-2008

24. Future debt burdens
Future U.S. Debt Held by the Public is projected to
soar if current policies remain unchanged
Source: Walker, D. “Comeback America: The Nation‟s Fiscal Challenge and the Way Forward”, January 20, 2011

25. Our fiscal future
Without reforms, by 2055, revenues will just cover
interest costs
Source: Walker, D. “Comeback America: The Nation‟s Fiscal Challenge and the Way Forward”, January 20, 2011

26. Growing foreign dependency
U.S. dependency on foreign lenders to finance public
debt has risen sharply

27. The wishful thinking U.S.
debt solutions
• Increase taxes on well-to-do Americans: Would raise top 2 tax
brackets to 86% and 91% (from 33% and 35%)1
• Raise taxes for all: Would double marginal tax for individuals and
corporations (some middle income Americans would be at 66%)2
• Grow the economy: “To stabilize debt at 60% GDP, economy would
need to grow at 6% for at least the next 10 years – the economy has
never growth by more that 4.4% in any decade since WWII.”1
1. Bipartisan Policy Center presentation to PG Peterson Foundation fiscal summit at www.pgpf.org
2. Heritage Foundation presentation to PG Peterson Foundation fiscal summit at www.pgpf.org

28. Before deciding on solutions we should
look at underlying factors causing the
increase in debt…

29. Entitlements are a major contributor to
the rise in federal debt
Federal expenses vs. GDP, adjusted for inflation (1965-
2010)
1200%
GDP
Total outlays
1000% Defense
Entitlements*
800%
600%
400%
200%
0%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
-200%
*Entitlements = ”Payments for individuals” (includes Social Security, Medicare, Medicaid, VA payments, etc.)
Source: http://www.whitehouse.gov/omb/budget/Historicals

30. In addition to the Federal debt, the
US also has unfunded liabilities…

31. Federal financial hole
$70.0
Total: $61.9T
$60.0
$USD trillions
$50.0
$40.0 $45.8 Unfunded social insurance
promises
$30.0
$20.0
$2.0 Commitments and
$10.0 contingencies
$13.6 $14.1 Explicit liabilities including
$0.0 debt
Total U.S. debt Total liabilities
Explicit liabilities include such items as military and civilian pensions and retiree health; unfunded social insurance promises are
future Medicare and Social Security benefits for the next 75 yrs (estimates as of January 1, 2009; discounted to present value);
Total US debt as of September 30, 2010
Source: Walker, D. “Comeback America: The Nation‟s Fiscal Challenge and the Way Forward”, January 20, 2011

32. “Now $46,300”

33. Federal financial obligations per U.S.
household as of June 30, 2011
• Total Federal Debt as of June 30, 2011:
– $125,500
• Federal Financial Hole as of Sept. 30, 2011:
– $536,300

34. “…the entitlement programs are not self-
funded. They are unfunded liabilities to a
significant extent at this point. They are the
biggest component of spending going
forward.” – Ben Bernanke1
“In an uncertain world, our currency and
credit are well established. But there are
serious questions, most immediately
about the sustainability of our
commitment to growing entitlement
programs” – Paul A. Volcker2
1. “State of Economy: View from the Federal Reserve”, testimony before the House Budget Committee, June 9, 2010
2. Volcker PA, remarks at the Stanford Institute for Economic Policy Research, May 18, 2010

35. Federal financial hole – Social
insurance programs
Unfunded social insurance promises (2009)$ trillions
Medicaid: Paid from general tax revenue each year and does not have a trust fund
Unfunded social insurance promises are future Medicare and Social Security benefits for the next 75 yrs (estimates as of January
1, 2009; discounted to present value)
Source: Walker, D. “Comeback America: The Nation‟s Fiscal Challenge and the Way Forward”, January 20, 2011

36. Medicare – Why an issue?
• Health costs growing faster than the
economy
• Aging population

37. The growth in healthcare costs has
generally outpaced GDP growth
Growth in healthcare expenditures vs. GDP in the United States
(1990-2009) Healthcare
expenditures per
capita (PPP$)
GDP per capita
(nominal)
Change in growth
Source: OECD, 2011

38. U.S. is not unique in having healthcare
expenditures outpace GDP growth
Growth in healthcare expenditures vs. GDP (1990-2009)
GDP per capita
(nominal)
Healthcare
expenditures per
capita (PPP$)
CAGR* (%)
*CAGR = Compound Annual Growth Rate
Source: OECD, 2011

39. Historical and projected number of
Medicare beneficiaries
Number of Beneficiaries (1966-2030) Millions
Source: 2010 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary
Medical Insurance Trust Funds

40. Workers paying Medicare tax per
Medicare beneficiary
Number of workers per beneficiary (1970-2030)
Source: Public Agenda, "Fewer Workers Projected Per HI Beneficiary," Retrieved Sept 19, 2011; 2010 Annual Report of the Boards of Trustees of
the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds

41. But haven’t we paid Medicare taxes
over our lives to earn this benefit?
“Two married 66 year olds with roughly average
earnings over their lifetimes will end up paying
about $110,000 in dedicated Medicare taxes
through the (Medicare) payroll tax, including the
portion their employers pay. They can expect to
receive about $340,000 in benefits. Two average
earning 56 year olds will pay about $140,000 and
get back about $430,000 in benefits.”
Source: David Leonhardt, “Generational Divide Colors Debate Over Medicare‟s Future,” New York
Times, April 5, 2011.

42. Will the Congressional debt deal
solve the problem?
The Economist, August 6th, 2011:
• “But the thoughtlessness of the debt deal –
notably its failure to tackle any of the real sources
of America’s fiscal problems, such as entitlement
spending, raises a bigger worry.”
• Simpson/Bowles “savings” over ten years - $4T
• Bipartisan Policy Center “savings” over ten years -
$5.8T
• Super Committee target - $1.5T

43. Will the health reform bill of
2010 help?
• Half of the health reform bill was "paid for" with across the board
reductions in what Medicare will pay for medical services.
• These reductions will lead down the road to providers getting 50%
less than presently (according to the Medicare actuary).
• Providers already lose money on average with Medicare patients.
• As the Medicare actuary has said (and as CBO implied), these
reductions will lead to less access to providers for Medicare
beneficiaries or reduced quality -- or both.
• Should heed the initial advice of Dr. Henry Aaron.

44. Henry Aaron
Brookings Institution:
“The costs of extending coverage are certain…
The savings from delivery system reform are speculative and
slow.”
“…not even the worthy goals of health reform justify
increasing already perilous budget deficits.”
“Reform must therefore be paid for…”
Source: NEJM, Perspective, September 3, 2009

45. A 1967 estimate understated eventual
Medicare spending by a factor of 10
Medicare spending, actual vs.
estimated $billions
Source: Senate Joint Economic Committee Report, 2009

46. Can the health reform bill’s Independent
Payment Advisory Board (IPAB) help?
• If Medicare spending above a target level after 2014, IPAB
issues a plan to get to target.
• HHS must implement the plan unless Congress
intervenes
• BUT: “The Board is not allowed to …ration care, raise
premiums, increase cost sharing, restrict benefits, or
modify eligibility; leaving (further) reductions in
payments to providers..”
Source: CBO report: www.cbo.org.gov/ftpdocs/doc2085/03-10-Reducingthe Deficit.pdf

47. To solve the Medicare problem, can we learn
from what these two did to prop up Social
Security in the 1980’s?

48. What to do: Social Security as an
example?
• Annual income greater than expense till 1975-1981
• Reforms enacted
– Cut benefits by 5%
– Raised tax rates by 2.3%
– Increased full retirement age 3% (to age 67)
• Restored stability for 25 years
• But demographics impacting again
– “Social Security expenditures exceeded the program’s income in
2011 for the first time since 1983.” *
Source: A Summary of the 2011 Annual Report by the Social Security and Medicare Boards of Trustees on
www.ssa.gov

49. The first step to solving Medicare
issue:
“Denial is not a
policy.”

50. What are the options for
Medicare?
If Medicare in its present form will not be
affordable for
U.S. taxpayers, there are some basic options
for
correcting:
a. Raise eligibility age

51. Raise eligibility age
Life Expectancy at age 65 (Years)
• 1960 14.3
• 2007 18.6
+4.3 Years

52. Questionable Trust Fund
projections for life expectancy
• 2005 Trust Fund projection of life
expectancy at 65 in 2025
• 17.5 male and 20.0 female
• 2007 actual life expectancy at 65
• 17.2 male and 19.9 female
Source: http://aging.senate.gov/crs/aging1.pdf
Source: http://www.cdc.gov/nchs/data/hus/hus10.pdf#022

53. Some pertinent questions:
• Is medicine allowing us to live too long?
• Are we retiring too early?
• Or both?

54. Rising life expectancy and lower retirement age result
in higher need for social support – Can we afford it?
Life Average
expectancy retirement
Year at birth age*
1950 68.2 68.3
2005 77.8 62.6
Gain/loss +9.6 -5.7
15.3 year spread
*Weighted average of “by gender” Social Security data for 1950-1955 and 2000-2005 based on labor force
composition – rounded Sources: OECD; National Center for Health Statistics; Bureau of Labor Statistics, Monthly
Labor Review (2002, 2008)

55. Working longer – Good for
Boomers; Good for economy
• McKinsey Global Institute:
• Boomers not financially prepared for retirement
• Boomer options:
– Reduce personal spending
– Work longer
• Economic impact of Boomers retiring 2 years later
(at 64.1)
• U.S. GDP difference over 2007-2035:
– Reduce personal spending: ($5.4) T
– Work 2 years longer: $12.9 T
Source: McKinsey Global Institute, “Talkin‟ „Bout My Generation: The Economic Impact of Aging US Baby
Boomers,” June 2008

56. What are the options for
Medicare?
If Medicare in its present form will not be
affordable for
U.S. taxpayers, there are some basic options for
correcting:
a. Raise eligibility age
b. Increase beneficiary share of costs

57. Medicare Part B (physician/outpatient services)
beneficiary premium as percent of total actual cost
Individual adjusted gross income Premium % total cost
Up to $85K 25%
$85 - $107 35%
$107 - $160 50%
$160 - $214 65%
$214+ 80%
• Increase percentage of cost
• Don‟t index up the salary cut-offs
Source: Medicare Premiums: Rules for Higher Income Beneficiaries: Social Security Administration Publication
#05-10161.

58. What are the options for Medicare?
If Medicare in its present form will not be
affordable for
U.S. taxpayers, there are some basic options for
correcting:
a. Raise eligibility age
b. Increase beneficiary share of costs
c. Limit benefits or move coverage to more of a
catastrophic insurance model

59. Limit benefits
• To control Medicare costs would require reducing
average Medicare benefits by 53% to $5,558 per
year
• More limited adjustments are
possible, e.g., increase deductibles, co-pays, etc.
• Changes either from program overall, or for
selected components like home health, skilled
nursing, drugs, etc.
Source: http://www.forbes.com/sites/robertlenzner/2011/07/31/our-country-is-in-deep-financial-
trouble/

60. Joint Select Committee on deficit reduction
possible considerations on reducing benefits
Action Ten year savings
• Prohibit Medigap paying 1st $550 $53B
• Subject lab tests to deductible $24B
• Require new home health co-pay $40B
• Increase skilled nursing cost sharing $21B

61. What are the options for
Medicare?
If Medicare in its present form will not be affordable for
U.S. taxpayers, there are some basic options for
correcting:
a. Raise eligibility age
b. Increase beneficiary share of costs
c. Limit benefits or move coverage to more of a catastrophic
insurance model
d. Increase Medicare taxes

62. Increase Medicare taxes
• To correct the underfunding of Medicare
would require increasing the Medicare tax
by 3.9% to 6.8%
• A self employed person making $100,000
would have Medicare tax move from $2,900
to $6,900 – all in addition to federal income
taxes
Source: http://www.forbes.com/sites/robertlenzner/2011/07/31/our-country-is-in-deep-
financial-trouble/

63. What are the options for
Medicare?
If Medicare in its present form will not be affordable for
U.S. taxpayers, there are some basic options for
correcting:
a. Raise eligibility age
b. Increase beneficiary share of costs
c. Limit benefits or move coverage to more of a catastrophic
insurance model
d. Increase Medicare taxes
e. Change Medicare policies and payment approaches to
encourage greater cost efficiency

64. CMS can realize ~12-18% annual cost savings if clinical
practice style aligns with top decile Hospital Referral
Regions (HRR)
Medicare FFS spending and estimated savings, HRR
data (2008) Average
standardized risk-
adjusted per capita Potential CMS
HRR costs ($USD) savings (% total)*
Decile 1 6,194 17.6
Decile 2 6,613 12.5
National average** 7,500 --
Decile 9 8,301 --
Decile 10 8,849 --
*Total = National average standardized risk adjusted per capita cost x total Medicare beneficiaries in sample; Total Medicare beneficiaries n =
25,832,920; Standardization of Spending: To standardize payment rates, examined Medicare‟s various FFS payment systems and identified the factors
that lead to different payment rates for the same service (e.g., local wages, input prices, DSH, GME); Estimated what Medicare would have paid for
each claim without those adjustments; Risk-Adjustment of Spending: Used total Hierarchical Condition Category (HCC) risk scores to risk-adjust
spending data; Calculated standardized risk-adjusted costs by taking the standardized costs for each beneficiary in a region and dividing them by his/her
actual individual risk score **Includes VI, PR, DC and unassigned data Source: “New Data on Geographic Variation”, Institute of Medicine, 2011

65. Gaining Medicare efficiencies
• Start by addressing patients with most
expensive conditions
• Financially reward providers who get better
patient outcomes while using fewer
resources – e.g. Pay for Value.
• Value = Patient Outcomes
Cost per patient over time

66. • Change existing financial incentives and start paying for
value
• If we accomplish this correctly, providers will self-
organize into systems that produce high value care
• Present Medicare pay for value approach will not reward
better outcomes at lower cost.

67. What are the options for Medicare?
– Raise eligibility age
– Increase beneficiary share of costs
– Limit benefits or move coverage to more of a
catastrophic insurance model
– Increase Medicare taxes
– Change Medicare policies and payment approaches to
encourage greater cost efficiency
– Move Medicare to a premium support model with
private insurers

68. Move Medicare to a premium
support model
• Medicare would no longer be a government insurance
company
• Instead would function like FEHBP – coordinate private
insurance options and provide a set dollar amount to each
beneficiary to purchase from the insurance options
• Approach recommended by the Clinton Medicare
Bipartisan Commission in 1995 and by the Bipartisan
Policy Committee Task Force in 2010

69. Washington Post editorial, May 8, 2011
• “Democrats have effectively scared seniors as a political tactic for
many years. Republicans returned the tables in 2010… Now Rep. Paul
Ryan (R-Wis.) has given President Obama and his party a chance to
reclaim the low ground and they haven’t hesitated. [premium support
proposal]
• “But it’s [Ryan’s proposal] honest enough to acknowledge that simply
preserving Medicare as we know it is not an option…
• “…the concept is hardly beyond pale – as past support for it, in some
form, from Democrats such as budget expert Alice Rivlin and former
Senator John Breaux suggests. [In addition] the principle undergirds
how Medicare pays for drugs, and resembles how the Obama health
plan would subsidize insurance on market exchanges for some non-
senior adults.”

70. What are the options for
Medicare?
If Medicare in its present form was not be affordable for U.S. taxpayers;
what would you do?
a. Raise eligibility age
b. Increase beneficiary share of costs
c. Limit benefits or move coverage to more of a catastrophic insurance
model
d. Increase Medicare taxes
e. Change Medicare policies and payment approaches to encourage
greater cost efficiency
f. Move Medicare to a premium support model with private insurers
g. Some combination

71. What would you do about Medicare?
If Medicare in its present form was not be affordable for U.S. taxpayers;
what would you do?
a. Raise eligibility age
b. Increase beneficiary share of costs
c. Limit benefits or move coverage to more of a catastrophic insurance
model
d. Increase Medicare taxes
e. Change Medicare policies and payment approaches to encourage
greater cost efficiency
f. Move Medicare to a premium support model with private insurers
g. Some combination

72. “Yes, We Can”
“Yes, we can do what it takes to create a better
future, but we all must do out part, and we need to
start now.”
-Hon. David M. Walker, Former Comptroller General
of the United States (1988-2008)