Business Roundtable

Meeting the Challenges of Economic Growth and Deficit Reduction Panel Two: Deficit Reduction: Getting Specific Moderator: Jim Nussle, President and COO, Growth Energy Speakers: Dan Crippen, Executive Director, National Governors Association Doug Holtz-Eakin, President, American Action Forum Alice Rivlin, Senior Fellow in Economic Studies, Brookings Institution Nancy Taylor, Partner, Greenberg Traurig

Tuesday, September 6, 2011 2:30 p.m. Washington, D.C.

Transcript by Federal News Service Washington, D.C.

JOHN ENGLER: Thank you very much, Maya, and thank you panel now when we think about going big, here comes the next panel, getting specific deficit reduction. And weve got some excellent panelists and a superb moderator today in the honorable Jim Nussle. And this panel, titled, you know, Deficit Reduction: Getting Specific, is going to look at some spending reductions in little more in-depth some of the entitlement reforms; maybe even some government restructuring; maybe as a former governor, Id like to see some new partnerships even with the states. Theyve got quite a stake in all of this. And were delighted that Jim Nussle, with his experience, is moderating this panel. He brings a perspective from the legislative branch a veteran member of Congress, the executive branch, the former head of the OMB. And in the private sector, he currently is president of Growth Energy, which association of producers and supporters of ethanol, so he may have something to say about one of the areas where money could be found. But we know Jim is a 16-year veteran of the House. The state of Iowa he chaired that budget committee for six years, and was the 36th director of the Office of Management and Budget, a member of President Bushs cabinet. So Jim Nussle, the stage is yours. JIM NUSSLE: Thank you, John. Appreciate it. Thank you, Governor. I appreciate it. What an outstanding first panel that we had today, particularly Maya. I am honored to be her co-chairman at the Committee for a Responsible Federal Budget, and they do a fantastic job there. She and her team provide some great information. I would commend you to go to our website and see all of the different sources of information that you can use to augment what youre learning here today. When I came in the front door or actually the side door to the Freedom Center today, I held the door because of the rain for some tourists who came in. And they read the opening sign that was there that said, Meeting the Challenges of Economic Growth and Reducing the Deficit (chuckles) and they said, oh boy, are we in the wrong place. (Laughter.) They only wish. (Chuckles.) I suppose the good news is that more and more people than ever before are aware of our fiscal challenges that face our nation. I would suggest that regarding the bad news it may be how many people believe that all you need to do is eliminate foreign aid, yeah, and maybe some of those earmarks and well probably have this thing under control. People know that they need to be concerned but have a difficult time still relating to trillions and billions and baselines and sequestration I actually had to try and explain to a layman sequestration and it sounded very kinky when they asked me the question. I want to thank the business roundtable for hosting this discussion. John Engler was able to assemble a fantastic group of folks, and this panel is no exception. As you can see from your

agenda, todays second panel is challenged with getting more specific about spending, about entitlements. And then the third panel will focus on revenue and tax reform. If I had a nickel for every time that this particular panel gave advice to the United States Congress many of them in front of my committee at the Budget Committee if they if I had a nickel for every time they said entitlement growth is unsustainable, we could probably have one doozy of an offset to put into the kitty for some of the work that needs to be done. Unfortunately, a majority of policymakers have not heeded their advice, and we find ourselves dealing with the current truth of their dire predictions and learning what unsustainable truly means. While the how-did-we-get-here question is fascinating, often confusing, its often a tiptoe through history that can be done in a pretty partisan way. In the next hour I will try and focus on the future, how we will use the talent weve gathered on this panel to focus on solutions and get more specific. Remember that when Congress arrived for work this year on the first day that they were sworn in and took office, they had already used all of the revenue for the entitlements. All of the revenue that was going to come in for this year was already out the door and obligated for entitlements. All of the discretionary accounts needed to be borrowed in order to sustain the budget. Upon their arrival today, as you just heard Bill Hoagland said he counted it up as a staffer, I counted it up as a member there are only 50 legislative days between now and December 23rd. And I even counted a few of the Fridays that were already given back. That doesnt give a lot of time for the supercommittee or the committees of jurisdiction, let alone the Congress, in order to do their work. And thats not, of course, the only agenda on the fall item on the fall on the fall list. There will be policies to foster long-term, sustained economic growth, job creation and other budget challenges, including the possibility looming of a continuing resolution. Our budget panel we have here today is a good group of folks who know a lot about the challenges that were about to face. Dan Crippen is the executive director of the National Governors Association and a former director of the Congressional Budget Office. Doug Holtz-Eakin is the president of the American Action Forum and also a former director of the Congressional Budget Office. Alice Rivlin not only served current or recently as a member of the Presidents Debt Commission but is the founding director of the Congressional Budget Office. And last, but certainly not least, is Nancy Taylor who served in several positions in the United States Senate, including health policy director for the Senate Committee on Labor and Human Resources. These folks are here to help us work through some of the issues regarding entitlement spending. So, friends, lets kick off with just a few minutes to kind of set the stage; and Ill ask this question of all four of you. All of you, of course, are very astute observers of Congress and the budget process. And its kind of a two or three part question: How difficult is the challenge that Congress faces? I mean, I realize that there are many answers that have been put forth on the part of policy advisers. But how difficult is the challenge over these next three months?

What would be the first principles that Congress needs to consider that this the apostolic committee, the supercommittee, the select committee what would be first principles that you would advise them to consider as they as they take their position? And if its possible for you to end it by answering the question of: How would you define success? Is it defined by the 1.2 trillion (dollars)? Is it defined by an agreement? Is it defined by meeting and not killing each other at the end of the first session? That may be success in some peoples minds, but how would you define success? So, Dan, let me kick it let me let you kick this off. DAN CRIPPEN: Thanks, Jim. What you want us to do all three or one at a time and one at a time? MR. NUSSLE: Well, why dont you do all three and I realize thats a tall order, but try your best. MR. CRIPPEN: Ill try not to take too long either. How difficult is the challenge? Well, on a scale of one to 10, probably nine assuming that Dantes Inferno is 10, so (laughter) this is probably pretty hard. You know, it really is as others have said before and well all say again today up here the answer here ultimately is health care health care spending, whether its Medicare, Medicaid, retiree spending. And public programs are very important, both as models, precursors we set a lot of payment rates based on Medicare. But equally importantly, when my generation has retired, well have 80 million roughly of old farts in Medicare. And by the time 2014 hits us, health care reform both the expansion population and those who are already eligible into the Medicare or Medicaid program, rather well have another 80 million (people). So roughly half of the U.S. population will be in public health programs. And that half will be largely more expensive greatly more expensive than the average citizen. So make up a number but something like two-thirds to three-quarters of all health care spending will be in public programs; and when you add in state and local retirees and employees, current government employees, its easy that easy to get to 75 percent. So those programs are critically important to health care spending and to whatever we do to get the budget under control. And the principles, of course, from where I sit now, I have to say, are: Dont shift costs back to the states, dont do more unfunded mandates, and dont do more maintenance of effort. Now, thats of course obligatory in my position, but its important I think as well because we can move costs around and much of our debate on health care over the last two decades in fact has been about who should pay and whether you think of it as employer versus employee, public versus private, retirement age or not all of that has to do with how much and who is going to pay, not what we are buying.

So until we get to the debate about what is health care buying and theres important payment reforms that would help change that composition but it does come back to these more expensive patients chronic disease now is 75 percent of all costs, all that kind of stuff. Until we have a real paradigm shift in health care in this country to where we get away from acute care and a focus on who should pay, were never going to get to health care reform. And so its going to be very tempting to continue to shift costs to others, including states. So we can do it by changing the FMAP; we can do it by disallowing certain tax revenues to be counted against the federal match. And whenever we think of those policies on a one-onone basis, the effect is still going to be to shift costs back to states. So the principles would be, dont shift more costs back to states. I mean, you can force those taxpayers to pay theyre all the same taxpayers. You can do that kind of thing, but its not a solution. Its not a solution only in part for the federal budget but its certainly not a solution for the country. Success, therefore, for me would be that we do have at least a serious discussion and a beginning of a change in our health care paradigm. And by beginning, I mean things like and from where I sit the governors need to recognize that the states have control over most of the supply of health care. They train the doctors, the nurses. They say what docs can do, what nurses can do. They train the dental hygienist. They do all of that stuff. They determine the number of hospital rooms, the number of nursing home beds. If they have certificate of need programs they determine who gets imaging machines on and on. And so to understand the whole supply of health care is an important piece of what I think we can do over at NGA, but its part of this paradigm shift. We also have to change the training of people away from being necessarily specialists, one disease at a time, into treating a plethora of chronic disease. And we need a federal research program that says we understand now that we have changed. Were no longer treating acutely people who become sick or injured; were now treating people who are not in institutions but hopefully at home, but suffering from multiple diseases. So thats my measure of success would be, yes, we get a certain amount of savings, 1.2 (trillion dollars) pick a number probably avoiding sequester is a good thing all the way around. It shows discipline; it does some other things. But more importantly, I think we need to get on the whole discussion of health care reform and not simply how do we cut the deficit for next year. MR. NUSSLE: Thank you. Doug? What do you think? DOUG HOLTZ-EAKIN: Well, I think the conventional wisdom would be this isnt all that hard. I mean, first of all theyve been given tons of advice previously by the people at this table, and if they just followed it we wouldnt be here. If we had a dime for every time they ignored us wed all be retired no one would be here. So theres no absence of substantive policy materials that they could adopt. So its not like they have to go dream something up. Theres been a lot of work on this and they dont have to invent it in the next 50 legislative days. The other perspective from which its quite easy is

that conventional politics says this just, you know, fails and then we get the sequester which will happen after the election, and theres a real good chance theyll just, you know, dodge that sequester by passing some piece of legislation. So, you know, theres a lot to that sort of points toward this isnt all that hard because there isnt really all that much that could get done. Now, the things that go in the other direction that I think are important are, in particular, this recent round of polling that Bill McInturff did that suggests that the debt ceiling fight was just a turning point in the American electorates feelings about Washington. And the pressure will be on this committee not so much from a substantive point of view, but from a political point of view to prove that Washington is still has some value to this country and that the legislative process still works to some extent. And that, I think, is what makes this difficult. They have a high burden of public proof. And thats not about the substance of what they get done; its about how they conduct their affairs and what is perceived to be a responsible, legislative practice and getting some an outcome I dont know what to define that to be that keeps the public happy. Thats what makes it hard. Second thing second question so I dodged the first question, Ill just admit that. Principles the most important principle that should govern their deliberations is this should not be about the money. If you turn this into an exercise in getting to 1.2 (trillion dollars) or getting to 1.5 (trillion dollars) where all dollar reductions count the same, you will make some terrible policy errors. This should be about changing the structure of the entitlement programs so that they will in fact survive to the next generation of seniors and low-income Americans, and do it in a way that does not in fact explode the nations debt and endanger its economy. If you just turn it into something that looks like across-the-board cuts and dont change the architecture of a broken welfare state, the thing springs back to the life the minute the money shows up. So they cannot literally cannot make that mistake. Its been framed as a budget cutting exercise, and theres a temptation to just get there any way you can. I would be much happier with an outcome that fell short of 1.2 (trillion dollars), and they can. They can get to 600 billion (dollars) and say this is the best we did. So you could reform Social Security so that it now lasts in perpetuity and you wouldnt get a lot of 10-year savings but youll done you would have done an enormous amount of good from the perspective of an important social safety-net program, from the perspective of showing world capital markets that we can, in fact, change direction on entitlement programs. And that, to me, would be much a principle that they should adhere to. Lets do the right thing by the policy and even if it means falling short on the numbers. And so I define success very differently, which is success is a public education process that comes out of the focus on this committee that says the status quo is toxic and dangerous to this country ,and that a failure to deal with these entitlement programs is an acceptance of a future in which we stagnate as an economy, run the risk of a sovereign debt crisis and serve the

beneficiaries in important social safety-net programs poorly. And success would be for everyone to understand that at the end of this process so that reforms in the next Congress actually become much more politically likely and palatable. MR. NUSSLE: Alice, youve watched this probably longer than you care to remember and probably given more advice that just about anybody on this panel. What would you what would suggest to this group as they get going? ALICE RIVLIN: I would start with defining success because unless you can do that you cant answer the questions about principles and how hard it is. And I would urge them to define success much as I think Doug has real success for the long term to stabilize the debt at some reasonable percentage of GDP I dont care whether its 60 or 62 or 69. But in some reasonable period we got to make sure that the debt is not growing faster than our GDP. Doesnt mean you have to balance the budget. It does mean that you have to get the deficit down to some lower percent of GDP than the economy can grow at, which is another way of saying you dont grow the debt faster than your economy can reasonably grow. And we got to be pretty sure that were on that track. Now, if thats your definition of success and I would say theres one more I think you have to do that in law so that the markets can be sure of it. But you also have to do it in a way that doesnt derail the current recovery so all of those conditions on what is success. If you define it that way, then you are driven first to the entitlement programs, to the health care entitlements particularly but not exclusively. We have to get the entitlement programs growing slower than they are now projected to grow, and that means fundamental reform. Now, as somebody said on the earlier panel, were not going to get any group of politicians, a bipartisan group, to talk about fundamental entitlement reform unless they can also talk about tax reform. I dont think thats just a political point. I think we cant expect to handle as many more older people with rising medical costs even if we do a good job of it without raising the proportion that those entitlement programs are of our GDP. And unless you close down the rest of the government, that means were going to have to have some more revenue. So it drives you to tax reform. The principles, I think, have got to be that it must be bipartisan, it must be balanced and it must be pro-growth. And that does mean, I think, that you have to tackle both the long-run entitlement reform and a pro-growth tax reform, but one that raises more revenue over time. And those things cant be done real fast and these guys have only a 10-year window. They can get the 1.2 (trillion dollars) fairly easily. But I dont think thats success. Success is putting in place the longer-term reforms that are going to stabilize the debt. That means, I think, that they have to go to some kind of a two-stage process. And Bill Hoagland reflected suggested one in the first panel, that you get your near-term savings in some of which will be tax expenditures, some of which will be more savings in the entitlements, some of which may be a little bit more of the discretionary, although I hope not too much and

then you put in place a second stage process which could be like reconciliation instructions to the committee that will guarantee that you get the rest of them. MR. NUSSLE: Nancy? NANCY TAYLOR: Thank you. I am the one that has not been a CBO director so I just lucky me. MS. RIVLIN: (Inaudible.) MR. NUSSLE: And thus, the most influential on the panel. (Laughter.) MS. TAYLOR: I after living through health care reform I have to say that I think this will be an incredible challenge for this committee. And I think it will be an incredible challenge because people will say that theyve already given money towards a law that is being implemented and it will be difficult to find additional savings. So I think it will be a great challenge. But I hope that it isnt abandoned. I agree that it will take a cultural change. I think whatever is done has to be bipartisan. It has to reflect a vision of the future: Health care costs are consuming us all. Its consuming private employers; its consuming public programs. Who is the payer is concerned about where we are. And its my hope they start focusing on a fundamental issue which is, benefit structures in the Medicare program are outdated. The way were delivering services are outdated. There has to be a longer-term vision on how purchasers are purchasing, and greater innovation from the private market place has to be adopted. And so as they look at I have cheat sheets because I am a staffer of all of the list of potential things that could be done, that will be the wrong way. These are rifle shots that will only get you marginal savings without thinking about how you need to have structural reform in these programs. So I think thats the challenge. I think the principles have to be that we have to have a longer-term vision and we have to be prepared to take on those who want to fight against a longer-term vision of how we can do things better: Providers have to become more efficient, purchasers have to buy better, consumers have to be engaged and we have to find a way to take on that challenge and, as a society, adopt our American values that we dont we cant pay for everything. And we cant afford a health care system that is growing at the rate it is today. So finally, I guess, my vision of success is that we dont just do rifle shots but we look at everything. And that means we look at Medicare; we look at Medicaid. We have to look at health care reform. We made a decision the Congress made a decision to cover to expand coverage. And weve got to focus on health care costs. We know that 91 percent of those who are uninsured make less than 250 percent of the federal poverty level, yet we set tax credits at 400 percent. We have a recognition that employer-sponsored coverage is good and valuable why? They innovate. Private employers innovate do creative things. So we have to start adopting some of those principles in our public programs.

So to me success would be to find a way to challenge our leaders to find new ways of offering and delivering health care benefits without resorting to some rifle-shot cuts that only end up in short-term savings. Finally, the final challenge is the physician fee-schedule will need to be fixed by the end of the year. It is the secret in the health care community that everyone talks about. One year how much, CBO directors 18 billion (dollars), $20 billion? A permanent fix, $300 billion $300 billion. MR. : Closer to 400 (billion dollars).

MS. TAYLOR: And I dont know how you fix the Medicare program and make it function like a more modern health care system without permanently correcting that deficiency in our system. So those are the challenges. But success to me would be any amount of money that looks at a long-term vision of having a culturally different view of health care, bipartisan, looking at a way of delivering the benefits in a more innovative, modern approach. MR. NUSSLE: Let me let me ask Alice and Doug to comment a little bit on how would we build and one of the things, like, I would look for as a if I was a if I was a member on this how would you build momentum off of some early success, some early agreements? All three of you Nancy mentioned this as well, and Doug had mentioned, obviously and its so true that most all of the proposals that are out there have been have been out there for quite some time. And, Alice, you know that from your commission that you had with Pete Domenici. And so where would we go first? Where are the common denominators of proposals that we could look for the committee turning to first, possibly to build some momentum if that would be an early goal that they would want to try and achieve? And if thats not the goal, correct me and tell me how you would do it. But I would look for something I mean, the Committee for a Responsible Federal Budget put out a side-by-side of all of the different commissions and where there were similarities between the different proposals. Is that a good starting point, or would you approach this differently? Alice, why dont you if you dont mind, how would you approach it? MS. RIVLIN: Well, I think theres a difference between what you do inside the committee and what you talk about. I would caution them against talking at all because once they say, well, here is our framework were going to do this much of this and this much of that then they are subject to both lobbying and press pressure. And they better stay as vague as they possibly can until theyve got it all wrapped up. And we did that in the two commissions Domenici-Rivlin and Simpson-Bowles that I participated in. But I think those are the places to start because if you look at those side-by-sides, the common elements dominate the differences. MR. NUSSLE: Give us some examples of (inaudible)

MS. RIVLIN: Well, the most common element is reform of the individual and corporate income taxes in a way that broadens the base and lowers the rates, but doesnt lower them so much that you cant raise more revenue as the as the economy grows and people get older. And there and I think we have to or the commission ought to go big on tax reform. The other is how to get a credible health reform. And I think it has to have a couple of elements. It has to have everything that Nancy says in terms of being favorable to innovation and efficiency. But it also has to have a define the governments contribution. We have to get so we know how much the government is going to spend for health care the Congress can decide that. We cant do that now. Medicare is a fee-for-service program where the Congress simply has to pay the bills whatever they are. In this Domenici-Rivlin plan we came out with a version of premium support which is potentially defined contribution. You would have the government say heres how much were going to spend for Medicare, and its not its not going to grow faster than X, where we thought X should be GDP-plus-1 percent. But you can pick any number you want and the Congress can obviously change it. But within that total the you can structure the program in different ways, and we gave seniors a choice: stay with fee-for-service if you want to, go to an exchange and buy a plan that will compete there. But in no case is your subsidy going to go up faster than GDP-plus-1 (percent). And I think need something like that. MR. NUSSLE: Doug, what would you do (inaudible) MR. HOLTZ-EAKIN: So I think that the key, of course, is to get members to agree on things. And I think the first thing to work on, because it doesnt require so much in the way of spending political capital, is to agree on the problem. And I think its actually quite necessary to agree that, you know, were not going to try to solve the discretionary spending problem in this; its not thats not the right place. This is about entitlements. Were going to focus on the first on the ones that we understand the best, and get a real agreement on what problem theyre trying to solve. I think this is important also because my take on whats going on broadly in this area is that many people, including some at this table, have proposed solutions to a problem that the American public has not yet accepted which is that we simply cannot continue the way we are. And so I think this committees primary job is to education the American public on that. They first have to agree on how to characterize it. So agree on the problem; thatll get you going. Second thing is do some literally some geeky budget process things to make sure that the committee and its successors cannot cheat. And theres a good list of budget gimmicks that have been used again and again and again. And so do some public good governance that says, you know what, were serious about this and were taking off the table the standard games mandatory savings in discretionary bills and all the things that would that this town is quite adept at doing to pretend they cut but they dont. And so I would do that second.

Third, Id do the programs that we understand that we dont need to radically change but are just, you know, sort of too generous or broken. And there I would put things like farm programs, mandatory spending programs of that type. They can go there and fix those up. Social Security its not going to get you a lot of 10-year savings. Every commission thats looked at this says we can do Social Security pretty easily. Prove that you can solve a problem like that work on that. And then youll get to health, with is really hard and about which there is no consensus. There is not yet a bipartisan agreement on what Medicare will look like in 2045. So I think thats the hardest and you lay groundwork before you try to go there even though its, you know, clearly, numerically the most important. And I guess the last thing Id close with is, Id worry a lot about the tax reform piece about of this. I mean, I love tax reform; Id love to talk about tax reform. But if this turns into the commission to do tax reform, it will miss the fundamental problem which is the spending side. And if you do tax reform, one of the things you will do, because it is one of the biggest tax expenditures, is you will shave back somehow the non-taxation of employer-sponsored health insurance. And if you do that before you fix the spending programs on the health side, we will end up with every single American in these exchanges your governors will be toast, I think, is the technical term (laughter) and it will cost more than anyone can calculate. So these have to be done together and in the right order or it wont work. MR. NUSSLE: Nancy, time and time again, we keep coming back to health care. Do you see in the health care silo, if you will, whether its Medicare or Medicaid or in general, some common denominator momentum-building proposals that are out there that could get the committee moving in a positive direction to either slow the rate of growth or reverse the growth rate and get it growing slower, at least, than the national economy is growing? I mean, do you see any of those out there that they could turn to as a starting point if theyre going to just zero in on health care MS. TAYLOR: Well, I MR. NUSSLE: so they avoid the rifle shots you were talking about? MS. TAYLOR: I well, I do believe that weve got to start figuring out how to fix amount of money for a beneficiary and how to spend it more efficiently. I think thats one but it does not have bipartisan support and it does need to be built. And Im going to steal from my colleague Bill Hoagland and Ill say, in health care, its got to be called the committee of courage because I dont think that you will be able to come out with either rifle shots or big reforms without building a consensus around it. For example, on health care reform, there are a lot of people very concerned about health care reform and the new law. But if you step back and look at it, its a law that was built on

expanding coverage in the private marketplace. But whats happened is, there are some who view that the private marketplace is now being overburdened with too much regulation and rules and requirements. So the business of offering coverage is maybe becoming too burdened. So maybe we need to start with a cultural understanding of who is the purchaser and how they can purchase and innovate and look at some of those kinds of things. But no, I dont see theres consensus coming around anything except a great fear in the health care community that it will just mean more health care cuts, which means costs shifting to the private marketplace. And that would be wrong. MR. NUSSLE: Or to the states. MS. TAYLOR: Or the states or to other purchasers. MR. NUSSLE: (Inaudible.) And that gets me to Dan because obviously thats the one of the things you brought up early on. So, I mean, maybe a two-part question: First of all, how can we how can that be avoided? I mean, you putting on your former hat of CBO director, where would you point them, number one? And number two, are there any state initiatives that youve seen that, you know, you would bird dog for them and suggest them? Because there have been a lot of austerity, you know, proposals, innovations, et cetera, that used to be the laboratory still is, should be the laboratory for the federal government. Where would you point them, again, as a momentum-building kind of to replace to go to to help get this kicked off in a positive direction? MR. CRIPPEN: Let me start with your observation and then get more to your question, and that is that continuing to shift costs to the states, especially in health care, is not going to work. The last budgets, for example, submitted: On average, Medicaid went up 16 (percent) or 18 percent, and thats in part because of the end of ARRA, but everything else went down. So education was cut; roads were cut; anything you think of as an investment in the future, whether its capital, human or physical at least at the state level is all cut because Medicaid went up. Thats going to continue. Its certainly going to continue after 2014 when we get another probably 5 million currently eligible Medicaid people into the into Medicaid, plus the 15 million new folks. So, as Doug said, governors are either going to have to manage this somehow or be unelected because of all of the other cuts having to be made in order to balance their budgets. So its just I mean, its just not possible to continue to shift. You can try it and it may help the federal budget look better, but ultimately somebody is going to pay if you dont reform. There are things I think weve seen both at the state level and are really possible in this construct. For example, in the Medicaid, about two-thirds of the folks are currently and maybe a few more now in some kind of care management you can call it whatever you want. Unfortunately, so far, most of those folks are the moms and kids who are relatively inexpensive in the long run; Medicaid now pays for almost half of all births in the country. And while thats a could be a potentially expensive episode, it is one episode.

Its the chronically ill folks who spend most of the money. So more of those chronically ill are going into management of care. New York, for example, is pushing all of those folks into care management. California is in the process of doing so. So the you know, the necessity of managing care somehow, coordinating it, doing something about making sure somebodys watching, not based necessarily on spending, but based on health as you give people better health, its obvious but true that you get fewer expenditures. One area thats very promising and that the feds could do a lot more about facilitating is what we call dual eligibles. Its those folks who are eligible for both Medicare and Medicaid. And they collectively spend almost half of all health care dollars in the country. These are folks who are disabled and elderly, mostly, but who, for obvious reasons, cant work or are elderly and have high cost. Currently, those programs exist separate: Medicare is funded one way and Medicaid another. Medicaid is administered by the states; Medicare, by the feds. If you go into CMS anywhere and I hope you dont have to but if you do, you will find very different staffs. One side is Medicaid; one is Medicare. And never the twain shall meet. And yet, these patients who are in both programs are spending half of all our dollars. So somehow, combining these programs, combining the payments, the requirements, the appropriate regulation and sharing whatever savings there are with the states and the (Fed ?) would produce a really a great innovation in this context and produce savings. Ill give you one example. Hospital payments are now made for all of these very expensive patients out of Medicare. Doctors and drugs, depending upon which program, but can be Medicare or Medicaid. Other home care and nursing home care is Medicaid. So it depends on what your illness is and how youre being treated, what program pays. But if Im a Medicaid administrator in a state and I save somebody from going to the hospital because I give him better health, I dont get any credit for that on my books because the feds get credit because they didnt pay for hospital admission. So the incentive structure is really screwy on how you take care of people. And if we had a way of sharing the savings and giving both sides the right incentive of combining, wed be on the path to a much more robust system. Now, you know, our former colleagues at CBO were skeptical about how fast and how much, and rightfully so. But nonetheless, how we finance and take care of these expensive patients in a combined state-federal way is one of the important things that this commission could address. MR. NUSSLE: Let me just bring up two more that are on our agendas, so Ill mention them or get a reaction. Alice, do you think that program reviews should be required? I mean, is that something you looked at as part of your commission? And then the other one, of course, is, any kind of government or agency reorganization, a 21st-century design thats on our agenda as

things that we should maybe consider. Did you consider that on your commissions? And does it get you much? MS. RIVLIN: Im skeptical of mandated across-the-board program reviews. I mean, almost every administration has tried to do this, and some with modest success. But it generates a lot of unnecessary paperwork and sort of busywork on the part of bureaucrats. The answer is, no, we didnt talk about mandating program reviews. Most programs are there because people wanted them. And the people that they serve still want them. So I think that there is no substitute, and this really has to be done in the context of budgeting for saying, weve only got this much money; now, is there a better way of spending it than the way we are spending it now and trying to get rid of some of the least effective things? Now, that means you review them, but it doesnt mean that you sort of establish a process for saying every program has to have a cost-benefit analysis every three years, or something like that. MR. NUSSLE: Youre so right, and Ill never forget when we did our one of our reviews you know, one of the difficult budget committee exercises. And we thought we had found the perfect program to eliminate; I think it was called the National Helium Reserve. MS. RIVLIN: Yes, I remember that. MR. NUSSLE: It was there for those of you some of you may know this it was there for the dirigibles of World War I as a national strategic reserve. And when we eliminated it, certainly, as you might imagine, the national helium association I dont mean to be disparaging, but came out of the woodwork to let us know how important that program was (inaudible) (laughter) youre exactly right; there was a constituency for all of that. (Inaudible.) MS. RIVLIN: But thats why caps work because they give the congressman something to say MR. NUSSLE: Thats true. MS. RIVLIN: when the helium people come and say, we really need it. MR. NUSSLE: Right, that you need a way to say no. MR. HOLTZ-EAKIN: Now, I basically want to echo what Alice said. I dont think a big reorganization will be helpful. Mandatory reviews arent helpful. I mean, you know, I probably am going to get trouble with my friends on the Hill, but I think the one thing we should do is basically cut congressional staffs in half or by down to a third of what they are now. I think most of our problems in execution in government come from micromanagement by the Congress. I say that lovingly to the ex-members.

You know, we have government performance review acts. We have all sorts of ways to assess the effectiveness and on paper, we have all these ways to assess the effectiveness of programs wed just let people run them and look at the results. And instead, we get continual micromanaging by the Congress and, you know, operating plans and other things like that. I think that needs to stop. MR. NUSSLE: Do any of you Ill just throw this out as a jump ball, and then Id like to go to the audience if you have questions do you see the and I realize, in the last panel there was some question whether or not there was enough pressure given the fact that these cuts from sequestration wouldnt take effect until 2013 but do you see the juxtaposition of defense cuts versus entitlement reform or cuts? Do you see that as enough of a of a of a balance, of a pressure cooker, if you will, to get to an agreement, any of you? Or how do you see that dynamic, you know, working or not working out? Dan, you want to MR. CRIPPEN: Yeah, I dont I dont see that yet. And it will be more in perception than reality, I suspect, because the sequester does not go into effect until 2013. Therell be lots of time after the election to undo bad defense cuts or bad domestic cuts I mean, however you want to say bad. And so I dont know that a sequester and the threat of sequester versus entitlement programs if we actually vote for changes in entitlement, as weve all been around and unfortunately seen, then that spawns a lot of television ads about specifically who you cut and what you did. If the sequester is out there, its hard to make it into a big enough bogeyman even on the defense side, I suspect to have a lot of effect, knowing that its in the future, its some time, its not a current vote you really have to have to run against or run on. I mean, you know that better than I do of how specific votes and specific programs can be used against you. One of the standards, frankly, that I found has come to pass, at least in the last year or so, is, how can this be misconstrued? So when Im talking to governors about what we can do, this or this, they say, well, how can that be misconstrued? And, you know, if thats your standard, it doesnt let you do much. And Im not saying its just governors; its a lot of us. You know, how can the other side misconstrue this bill, this statement, this position? And its a very limiting standard. And so if we dont get beyond that, you know, the sequester is in the future and it wont bother me. MR. NUSSLE: Do you agree with that, Nancy? How do you how do you see that? MS. TAYLOR: I am already starting to see a concern by the health care community that this process may result in larger reductions than a 2-percent sequestration. So I do think there will be some attempts to limit the courage of this group to identify better ways of doing things. And I guess one of my challenges to this group, this panel, is that I hope that CBO will take on the challenge and identify more current ways of scoring how these kinds of innovative ways to deliver services in the entitlement programs can be done so that the members of this bipartisan committee can look at different ways of doing things rather than merely cutting the dollar or adding it or reducing the beneficiary, and instead, they look at more innovative ways of reducing health care spending so that there isnt as much concern.

MR. NUSSLE: Yeah, and I made it I made it seem like it was either/or. I mean, there is a well, Medicaids off the table; Medicare does is subject to a 2 percent or a limit on sequestration. But at any rate, there still is that pressure. Alice, go ahead, Im sorry. MS. RIVLIN: The sequester is there to scare the committee into finding a solution. And your question is, is it scary enough? MR. NUSSLE: Is it (good ?) enough, yeah. MS. RIVLIN: Is it scary enough? The real scary thing is what happens if we dont fix this problem. And Doug alluded to this earlier, but I think the committee has got to be telling itself every morning at 9:00, if we dont solve this problem, we could have a financial meltdown; the markets will turn against us; the economy could be wrecked for a generation; and we better step up to the plate. And they shouldnt focus that much on the sequester. MR. NUSSLE: Is that scarier than a well, lets put it this way: Which do you think would come first that kind of financial reaction to the lack of a decision by December, or the election, which, trust me, is a lot scarier to these guys, sometimes, than even any of the any of the things weve talked about so far? Which do you think could come first? MR. HOLTZ-EAKIN: The truth is, we dont know, and you know, so we should pretend we have no time to fix our debt outlook. We really should. I mean, we have we are in the territory debt to GDP gross debt to GDP above 90 percent were in the territory where, historically, countries have suffered lower growth, they have had a higher propensity for sovereign debt crises. We have similar characteristics as well to the places that get in trouble: a very heavy reliance on short-term borrowing youre looking at Treasury portfolio, its all very short-term, can change our cost-borrowing very quickly; we have a lot of nontransparent and contingent liabilities that we dont really understand. Mortgages keep popping up still. Years later, we dont know what the state pensions are going to look like. We have a bunch of problems. Thats those are the characteristics of countries that get in trouble. So we should not somehow pretend were immune and we can, you know, ignore until after the next election; I think that would be unwise in the extreme. MS. RIVLIN: And the next election isnt going to make it easier, no matter who wins. Everybody says, well, you know, if youre a Democrat, you think, well, Obama is going to win and then we can sort of fix it our way; and then the Republicans think, well, were going to get rid of this guy, and now we can then we can fix it our way. There is no unilateral solution to this problem. Youve got to do all of the above and then some, and it will not get a bit easier after an election. MR. HOLTZ-EAKIN: So I think for the so just to go back to that basic question, I dont think the sequester is very scary at all, actually, but so the conventional wisdom answer

is, you know, they just go to the sequester and maybe even, you know, modify it so its even less terrifying. But theres a small probability of the big fix, and thats an enormous success. And that has to be big; that has to be way bigger than sort of the 1.2 (trillion dollars), 1.5 (trillion dollars). It has to be big enough that everyones (inaudible) gets scored so that it the relative scariness is the same for everyone. And it has to take on these big problems in a way that makes the political pain near-term worth it from the point of view of economic success and doing not having to come back and do it again and again. So thats what I think the courage talks needs to focus. Think big. MR. CRIPPEN: I hope and agree with virtually everything both Alice and Doug have said and Nancy. But my skepticism is borne over a couple decades of as you started out by saying, this is not new news. We knew we were going to be at whatever spot we have been. And it always reminds me of Herb Stein, of course, who famously said, if this cant go on forever, it wont. And we keep saying the same thing, this cant go on forever, so its going to collapse on us someday, and it will. Problem is, Herb died before he said when. And we have that same problem; its getting more and more critical. Were on a very steep but smooth curve; its not obvious where youll fall off. And until it becomes more obvious, Im afraid I mean, without some other calamity, whether its another perturbation of the financial markets, whether its Europe I dont know what it is but without something as an action-causing event here, Im afraid its just easier to wait for the sequester, which you dont have to vote for, and then undo the worst of it, perhaps, after Im not even predicting that, but I think its just easier not to do. And frankly, without talking about personalities, if I were going to appoint a gang of 12 to get a solution, this may not be the 12 that I would have appointed. (Laughter.) MR. NUSSLE: Lets go out to the audience for questions. Do you have any that Ive got more, but I want to make sure were answering the questions that are on your mind. Please, state your name and your question. Q: My name is Barry Doggett with Eaton Corporation. My question is for you, Congressman. These people came MR. NUSSLE: Thats not in my contract. Im not supposed to answer any questions. (Laughter.) Please. Q: The former CBO directors all came before you and testified that we were in trouble. And, you know, as theyve said, they were ignored. Why? (Laughter.) Maybe (inaudible) help us (Cross talk.)

Q: (Inaudible) mindset of whats going on. So, you know, what was it that has caused not just you, obviously, but plenty of other people in the same position to ignore this? MR. NUSSLE: Yeah, its a its a great question, and its kept me, believe it or not, awake at nights on many different occasions thinking about this because Alice has exactly and Nancy were exactly right when they referred to this as the courage caucus. What instills that kind of courage in a member of Congress? And Ill give you one example that I have to chuckle about now not the circumstance itself but the predicament that I was put in. In 1993, the Mississippi River flooded huge flood. It was, at that time, the flood to end all floods, and unfortunately weve had seven more since. At the time, I made the politically idiotic request that we offset the emergency spending by reducing spending elsewhere, and, in addition to that, that we begin budgeting for emergencies because while we dont know whats coming next year in that cycle, there will be unfortunate hurricanes, forest fires, floods, et cetera, that will occur. I didnt succeed then. There are members of Congress there are more of them now making that plea, but probably wont succeed as well this time, at least without a lot of pain. Im not suggesting I was courageous. There were many who thought I was completely stupid for doing that. But I have to tell you that unless somebody is willing to do it when it affects them, it wont work when you try and instill that discipline on someone else. Its the do unto others as you would expect them to do unto you and kind of principle. And thats I think some of the comments here are exactly right. Put it all in. Its got to affect everybody. Everyone has to feel some of the some of the pain. When we got to a balanced budget back in 1997 and again, Im not going back 97 97, 98, et cetera and Im not I wont go into because there are various reasons why we got there, but one of the reasons why we got there was because everyone felt at the time that everything was on the table, with the exception of Social Security, but people pretty much understood that that wasnt the problem at that at that point. So I think having this group understanding that everythings in and that, as Doug said, theres a reason that you can say to the next constituent group that comes into your office, Im sorry, no, because no is not a natural word for a politician to utter. Its usually, yes, how can I help you, what can we do, whats the program, how do we get it done, et cetera. So that didnt necessarily answer your question as to why they were ignored. Its the reason I said in my opening comments, ignored by a majority, because I like to think that, for most of these folks, I tried to tried not to ignore in fact, I was able to get instructions for reconciliation in just about every one of my six budgets, I think, except for one, which I thought was almost Herculean at the time I called it weeding the garden. If you dont take out one or the the one- or two-sies here and there, hopefully, you know, by doing that, you wouldnt get to the bigger problems. But Im not sure that was necessarily the best advice either.

But I think theyre in a theyre in an enormous situation given the fact that their horizon is the next election. And thats probably the answer of all answers. Our horizon were talking up today is 10, 15, 20 years, and the importance of doing something today that will have enormous ramifications on that 20-year window. Theyre thinking about the next 20 days and the change of fortunes that can happen, you know, because of a debate or a presidential speech on a to a joint committee or whatever it might be. And thats a different horizon. What else? Q: (Off mic) with the American (off mic) journals. What are the one or two things that the joint committee could do to boost economic growth? And what are the one or two things that the committee could do to hurt economic growth as they reach an agreement, if they reach (it ?)? MR. NUSSLE: Ill just provide this as (a jump ball ?). Alice, go ahead. MS. RIVLIN: Well, I would say, to boost the economic growth, certainly in the long run, is get stabilize the debt and make it visible how youre going to do it and create the certainty that this is going to happen. To endanger it is not to do that but also to not realize that the entitlements are the driving force going forward and to focus too much attention on cutting discretionary spending, which will inevitably cut everything like science and infrastructure and education investment more than it should be cut. MR. NUSSLE: Anybody else? Other questions? MS. RIVLIN: Can I make one point MR. NUSSLE: Sure. MS. RIVLIN: if the if you dont have a question immediately? And that is, weve put a lot of emphasis on these 12 people and Dan said, maybe theyre not the right people but theyre not really the ones that will make this succeed or fail. If the president and the leadership want this to succeed, it will, because they can command among them seven out of the 12 votes, which is all they need. Its a pretty good committee from that point of view. And if the president and the leadership want it to fail, itll fail. And I think its that simple. And well well hear more from the president this week. And I wouldnt give up on the notion that the president and the leadership of the Congress might see it in their mutual interest to have a success here. MR. NUSSLE: You anticipated my one of my last two questions: that is, what is the presidents role? How does the administration address this committee? How do they how do

they approach the committee? So Ill go ahead and let the others respond to that, since we dont have any other questions from the floor. Nancy, you want to give a (inaudible)? MS. TAYLOR: Yeah, sure. I think the president has got to give leadership and say everything should be on the table and have a discussion about programs he supported and not supported and new ways of thinking and doing things and not just rely on old lists but be willing to roll up his sleeves and find new ways of doing it. I think whoever said, we need to use this process as a process to educate Americans about our needs and their involvement in making our country better with a better, financially sound system, I think is critically important. MR. NUSSLE: Doug? MR. HOLTZ-EAKIN: I mean, its important to remember that this isnt some radically different way of doing business. This is simply expedited procedures for Congress to do what it usually does, which is to consider legislation and pass it to the president. And so the topic of interest, entitlement programs in particular, tax reform if were if we have the momentum to do it, stabilizing our national debt, is of enormous national importance. And big changes of that type only happen with White House leadership, period. And so his role is crucial in this and it cannot be overstated. He has to provide leadership in this. Hes the only one who can do the kinds of bipartisan gestures that are fundamentally at the heart of success in this endeavor. He can provide political cover for his allies by raising money for them and campaigning in their districts. He can show outreach to a Republican party that has not always been particularly polite to him and thus, really, set the tone for this. I think I think his role is crucial. MR. NUSSLE: Dan? MR. CRIPPEN: Of course, I agree that the president is first and foremost has to be the leader in this effort. I think congressional leadership is also important. And thats probably simplistic but nonetheless true. I mean, I remember, back in 87 all of you are too young to remember, but we had a market crash then that was even much greater than weve seen here. And the president sent us up the Hill to negotiate a budget. And everyone was very much interested. In fact, Social Security was on the table and we talked about CPI minus two or three and all kinds of what seemed to be big things at the moment. And, of course, as the pressure decreased because we were further away from a financial event, the less pressure there was to come to any resolution. And we did get an agreement and it was nice, but it was not monumental.

And so Congressional leadership is going to be very important here as well. The president himself cant do it; he doesnt ultimately have a vote, and the leaders have to produce those majority votes. So they all have to be in this together. Its not so much all three of them, but the president has to lead first and foremost, but we need congressional leadership too. MR. NUSSLE: So the last question is in the spirit of John McLaughlin, the McLaughlin Group. (Worse ?) prediction Nancy, will there be an agreement that is passed by December 23rd? And, if so, at what amount? MS. TAYLOR: So when Bill Hoagland says a hundred percent, I say, I think it will be so hard. And Ill be happy if they even get half of the 1.2 trillion (dollars) as long as theyve got the courage to do new things rather than just rely on some of the old things that havent worked in the past. MR. NUSSLE: Alice? MS. RIVLIN: Oh, Im pretty optimistic. I think there will be an agreement. I dont know exactly what the number will be. Im in favor of a two-stage agreement. But I think success means a lot more than 1.2 (trillion dollars). It means, ultimately, that what comes out of this would be more like four or five trillion (dollars) in deficit reduction over the relevant period. MR. NUSSLE: Doug? MR. HOLTZ-EAKIN: Ninety- percent chance of sequestered; 10-percent chance of a big fix 4 trillion (dollars), 5 trillion. MR. NUSSLE: Dan? MR. CRIPPEN: Im almost as pessimistic that is, about a 20-percent chance of getting an agreement that has, lets say, over a trillion of, you know, significance and is that close to avoid a sequester. So 20-percent chance of getting there. MR. NUSSLE: I yield back the balance of my time to the governor. (Laughter.) Lets thank the panel. MS. : Thank you. (Applause.)

(END OF PANEL TWO)