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35–145—PDF 2006

S. HRG. 109–891

PRESIDENT’S FISCAL YEAR 2007 BUDGET

(MEDICAID AND MEDICARE PROPOSALS)

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

FEBRUARY 9, 2006

(

Printed for the use of the Committee on Finance
COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

(II)
C O N T E N T S

OPENING STATEMENTS

Page

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

on Finance ............................................................................................................ 1

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 3

ADMINISTRATION WITNESS

Leavitt, Hon. Mike, Secretary, U.S. Department of Health and Human Services, Washington, DC ........................................................................................... 5

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 3

Grassley, Hon. Charles E.:

Opening statement ........................................................................................... 1

Prepared statement .......................................................................................... 29

Leavitt, Hon. Mike:

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 32

Responses to questions from committee members ......................................... 42

Smith, Hon. Gordon H.:

Prepared statement .......................................................................................... 106

(III)

(1)

PRESIDENT’S FISCAL YEAR 2007 BUDGET

(MEDICAID AND MEDICARE PROPOSALS)

THURSDAY, FEBRUARY 9, 2006

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 9:30 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Charles E.

Grassley (chairman of the committee) presiding.

Also present: Senators Hatch, Snowe, Smith, Crapo, Baucus,

Conrad, Bingaman, Lincoln, Wyden, and Schumer.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. We welcome Secretary Leavitt to discuss the

President’s spending proposals in regard to Medicaid and Medicare.

The committee, of course, has a great interest in the administration’s priorities within the Department of HHS. This hearing will

provide the committee an opportunity to discuss the details of the

President’s budget.

Specifically, the President’s budget proposes substantial savings

in Medicare, and even some additional reforms beyond what we did

last year on Medicaid. Together, these provisions would decrease

spending by almost $50 billion over 5 years.

Just yesterday, the President signed into law the Deficit Reduction Act. This legislation will reduce growth of Medicare and Medicaid by $11.1 billion over 5 years.

Now, comparatively, this reduction is relatively modest, representing one-fourth of 1 percent of what Congress would otherwise

be spending on these programs. However, it is a significant accomplishment and not one that was very easy to get done politically

and procedurally.

It has been 8 years since Congress last passed legislation that reduced mandatory spending. As we all know, these achievements,

that way, are never easy. I do not think I am going to shock anyone

by saying that any more reductions of significant scope could be

difficult to achieve this year.

One area that we will probably need to address is physician payments. The physician payment formula, as we all know, is seriously

flawed. The Deficit Reduction Act provides a 1-year 0-percent update to physician payments. Doctors are scheduled for a 4.6 percent

reduction in payments in 2007.

There is conflicting news about hospitals. Hospitals, on average,

are losing money treating Medicare patients, yet, at the same time,
2

USA Today reports that hospitals have their highest overall margins ever.

All hospitals, of course, are not the same. Apparently teaching

hospitals are making a 6-percent margin on Medicare patients,

while non-teaching hospitals are losing 6 percent treating the same

beneficiaries. So, there is a problem when formulas work out that

way. I am sending a letter today to urge CMS to make changes

that should improve the accuracy and equity of the hospital inpatient payment system.

I think an across-the-board reduction, and in some cases a freeze,

to provider payments will be challenging. There may be other ways

to achieve the same goal. If we accomplish the same end, I would

hope everybody would be open to whatever we might propose.

One area along this line is to do more to reward quality. I fully

support every effort to link provider payments to quality. I see

from the budget that the administration supports differential updates to encourage physicians to report quality measures, and I

compliment the administration, as they have worked with us on

those things over the months as well.

But, frankly, I was disappointed that the administration is not

proposing bolder steps in this area. We need to engage all providers, including physicians, nursing homes, and health plans.

We obviously need more transparency on health costs, because

beneficiaries do not know what they are paying for. Data on providers’ costs and quality should be publicly available to give consumers an idea of what they are buying.

Giving consumers more direct involvement in paying for their

care will prompt them to shop for the best value, ultimately choosing the highest-quality and lowest-cost care. This will increase competition, resulting in improvements throughout the health care system.

If Medicare reductions do end up on the table, the Medicare Advantage Regional Stabilization Fund should be at the top of the

list. This fund has not been used. There are already a good number

of regional Medicare Advantage plans participating. It is clear that

this fund is not needed.

I look forward to hearing more about the President’s proposals

on the uninsured. There are now almost 46 million Americans in

that category. We do need strategies. Continued expansion of

health care savings accounts, coupled with tax deductions and credits to encourage their use, is a good step forward.

I hope that we can put partisan politics aside on this issue and

have a thoughtful dialogue on what is a critical issue. We must

make changes to contain health care costs and reduce the number

of uninsured.

Beneficiaries and taxpayers both deserve the highest value for

every dollar that is spent on Medicare, Medicaid, and safety net

programs. The President’s budget always sets off a good debate,

which we are now going to have.

I have a longer statement I am putting in the record.

[The prepared statement of Senator Grassley appears in the appendix.]

The CHAIRMAN. Senator Baucus?
3

OPENING STATEMENT OF HON. MAX BAUCUS,

A U.S. SENATOR FROM MONTANA

Senator BAUCUS. Thank you, Mr. Chairman.

In the book of Deuteronomy, Moses told the children of Israel, ‘‘If

there is among you anyone in need, a member of your community

in any of your towns within the land that the Lord your God has

given you, do not be hard-hearted or tight-fisted toward your needy

neighbor. You should rather open your hand, willingly lending

enough to meet the need, whatever it may be.’’

In our day, in our community, that job, the job of opening our

hands to meet the need, falls most heavily on the Department of

Health and Human Services. Today, we examine the administration’s proposals on how the Department should do that job.

From the perspective of those in need, I find the administration’s

priorities misdirected. Administration officials may well have had

the needy in mind, but the administration’s proposals too often

seem to extend a hand to someone else altogether.

Let me start with the administration’s health savings account

proposals. Over the next 10 years, the administration proposes

spending $156 billion on these accounts.

To receive the tax benefits of one of these accounts, a beneficiary

would have to enroll in a health insurance plan with a high deductible. Who would make that choice? People who do not expect large

medical expenses would be most likely to make that choice. These

are not people with health needs, and it is what health care analysts call adverse selection.

Encouraging healthier Americans to choose these accounts with

high-deductible plans will make health care more expensive for

those who stay behind in traditional coverage.

Sick individuals who remain in traditional coverage are more expensive to cover. Since the new accounts will encourage healthy

people to leave traditional plans, the premiums for everyone else

in traditional plans will rise accordingly.

Thus, these accounts will lead to a weaker health care system,

not a stronger one. As the magazine, The Economist, wrote: ‘‘The

administration’s plan may speed the reform of American health

care, but only by hastening the day the current system falls apart.’’

Yes, these new health savings accounts would make an attractive

investment, but who would choose to invest in them? People who

already have wealth and savings who want a tax-sheltered home

for those investments would make that choice. People who are

scraping to get by, people in need, would not make that choice.

These accounts would, thus, not be likely to add to net savings.

Yes, it makes sense that those who spend their own money rather than their employer’s will be more sensitive to the cost of health

care, commonly referred to by the administration as having ‘‘skin

in the game.’’ But let us be honest with ourselves. It is not easy

for the average consumer, the average patient, to know which

health care services are best.

Greater transparency of price and quality information, while a

good goal, will not solve this problem. Individuals overly concerned

about the cost of care may cut back on cost-effective health care,

and if that happens it will ultimately cost the health care system

more.
4

I might add that this smacks, frankly, of Darwinism, the survival

of the fittest. This proposal is just that. Those who are the most

fit, those who are the most wealthy, those who are the most

healthy, will survive; those not, not as well.

On the issue of Medicare generally, the administration’s priorities are, again, misdirected. For example, the administration

would reduce payments to Medicare hospitals, home care, and

nursing home providers, among others. Yet, the same budget would

maintain current over-payments to Medicare managed care, Medicare Advantage plans.

Medicare Advantage plans are aptly named; the folks who offer

these plans have a distinct advantage. Medicare pays them far

more than it costs to care for an average Medicare beneficiary, and

yet Medicare Advantage plans typically enroll healthier, and cheaper, Medicare patients.

Recognizing the unfairness of this system, the Medicare Payment

Advisory Commission recommended several policies last year to reduce over-payments to Medicare Advantage plans.

The recently enacted budget bill partly adopted one of MEDPAC’s recommendations, but several others, including the elimination of a $10-billion incentive fund for Medicare Regional PPOs,

were not included.

I, frankly, do not understand the administration’s rationale for

over-paying private Medicare plans, while proposing cuts for other

Medicare providers. Once again, the administration appears to help

those who are not in need.

I am also deeply concerned about the budget proposals that give

the administration authority to make across-the-board cuts in

Medicare. The administration is asking Congress to give it authority to cut all Medicare providers by four-tenths of a percent when

Medicare spending reaches a certain threshold.

When we wrote the threshold into the new drug law, we created

a process that would require thoughtful, targeted proposals and not

mindless sequestration. This proposal contradicts that intent.

The budget’s Medicaid cuts, I believe, are also misdirected.

The recently enacted Budget Reconciliation bill, which I did not

support, made deep cuts in Medicaid. The President signed it yesterday. The ink is barely dry. Now the budget proposes Medicaid

cuts more than twice those just enacted, $17 billion over 5 years.

We should pause to ensure that we have not damaged our Nation’s

safety net before Congress makes further cuts.

Many of the proposals would once again target the States. The

provider tax and targeted case management services reductions

concern me. States rely on these funds to provide vital services to

nursing home residents and at-risk populations.

The Congressional Budget Office says that these cuts will adversely affect tens of millions of Medicaid beneficiaries, yet the administration proposes more cuts in its budget.

The Department of Health and Human Services oversees critical

programs that extend a hand to those in need, and, yes, we must

ensure that the Department does so wisely. But let us start by

making sure that we spend those dollars, first, on those in need.

Let us make sure that we do not lavish benefits on those who are
5

not. Let us wisely extend our hands to meet the needs in this good

land that the Lord our God has given us.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much.

We have our Secretary before us, and everybody knows who he

is, so I am not going to go into an introduction. We thank you for

your cooperation.

I also want to follow up on yesterday’s meeting, only in the sense

of when you and Dr. McClellan were before the closed group, you

offered to give some time lines to get things done, and we appreciate that cooperation.

We are building on that with a weekly communication between

our staff and your staff. We appreciate that cooperation, and hopefully those deadlines and date lines will be met.

So, go ahead with the subject that is before us now, the budget.

STATEMENT OF HON. MIKE LEAVITT, SECRETARY, U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES, WASHINGTON, DC

Secretary LEAVITT. Thank you, Senator and members of the committee.

Let me, first, say I am moved by the responsibility referred to in

Senator Baucus’ recitation of Scripture. We do view ourselves as

having the responsibility to carry out the compassionate instincts

of the people of the United States.

It is a great and noble country, and a great and noble responsibility. My purpose in being here today is to talk about the ways in

which we believe we can, with the most wisdom, carry that mandate forward.

The budget that we will be discussing today is a large one, $700

billion, nearly. It represents nearly 1 in 4 dollars that the taxpayers of our Nation put forward for our care and keeping and investment.

It is well known to all of you that that budget is broken into two

large categories. One we refer to as the entitlement programs.

These are decisions that we have made as a country to meet the

specific needs of groups that we have determined collectively we

will care for: the elderly, the poor, those with disabilities, people in

populations that need to be cared for with specific purpose.

The second we refer to as ‘‘discretionary.’’ It is discretionary only

in the sense that it requires our year-to-year judgment on how best

to prioritize the available funds.

There is concern among all of us, I believe, about the long-term

implications of the obligations that we have created as a country

for us to care for people we deeply care about. Medicare occupies

an increasing and dramatically encroaching portion, not just of our

budget, but of the entire economy.

It is rapidly growing toward double digits of the entire Gross Domestic Product. There is no one, I believe, in this room who does

not believe that that is a matter of grave concern to us, economically and culturally.

So I do hope we will get a chance to talk about how we can resolve that. We will not resolve it today, but maybe in part we can

begin to find ways that we can improve that trend.
6

On the other side of the ledger—the discretionary budget—we

are at a time with substantial deficits, and they need to be reduced. The President has established a goal to reduce that deficit.

As a result, he has instructed that we put forward budgets that

are both responsible, but demanding, demanding on all of us to become more innovative, demanding on all of us to find better ways

to accomplish things.

So today I come to you with a budget on the discretionary side

that will be $1.5 billion less than the budget that was enacted in

2006. My public service has included a fair amount of time as Governor of one of our States, and I, through the course of that time,

presented budgets, some of which included the best of times when

we had new money to invest, and sometimes when we did not.

I will tell you that it has been my experience, as it has been

yours, that when we are reducing budgets we have to make difficult choices among programs, all of which are good because they

have some redeeming, responsible person who is passionate for

them.

I am going to present to you my thoughts about how we should

reduce many of them today. They likely will not be the same

thoughts that others have. There will be disagreement on them because there is a passionate advocate, and with good reason, for

every one.

When I have concluded and the budget begins to be discussed by

the Congress, you will obviously have your own views as to what

we should do on this. My purpose today is to simply tell you what

mine are.

Rather than to go through what is $75 billion of discretionary

programs in the very limited time here today, why do I not give

you a sense of my own philosophy, how I have approached this

with the large group of people in the Department who have assembled this budget?

I made clear to them that I believed there were some priorities

that we needed to focus on, new ideas, so this budget does have

new initiatives. It has new initiatives that deal with health information technology. It has a new initiative related to our need to

cover and to test more people with AIDS. It has new initiatives

that deal with how we can give independence to some of our disabled persons in this Nation.

It also has a series of commitments that the President has made.

For example, his commitment to expand dramatically the number

of community health centers. Those are commitments that we need

to cover. There is also bio-terrorism and the pandemic discussion

that we have had in this committee, all of which we feel intuitively

have to be covered.

Philosophically, what I did in assembling this budget was to say

to my colleagues, I want to find a source for those new initiatives

that can be drawn from one-time funds, for example, that will not

be repeated.

I want to find programs where the purposes have been addressed

a number of different places. If they are being addressed by two

different parts of the budget, let us only address it one place. I

have asked them to find funds that were carry-overs, to use those
7

funds. I have also looked for several programs in the budget that

we proposed be cut last year, but were not.

So I have, frankly, gone about looking in this budget to find

funds that we could apply to what we thought were important new

initiatives, because they are so important in the context of things.

Then I have asked them to go through a series of steps in analyzing all of our existing budgets, a series of principles of investment. Again, rather than go through specifics, let me just articulate eight principles that I have asked them to apply to every one

of the investments we are making.

The first is targeting, as opposed to replacing, general programs.

You are going to find a number of places here where programs

have covered a wide array of need, some who need it more than

others. I have said, let us cover fewer institutions, for example, but

with more money, so we will have better targeted programs, but

maybe fewer of them. That is one principle.

Another is prevention. If we can find a way to prevent something

as opposed to just paying for it after it has been broken or paying

for a person after they are sick, that is a better principle. So you

will see a number of places where reductions have been made on

the basis of preventing, rather than just paying after things have

gone awry.

The third principle is actually providing services. Senator Baucus

talked about the need we have to provide for those who are poor,

who are sick, and who need to be uplifted. Many times we are

building infrastructure to do that, but not actually getting to the

point of delivering service.

In times when we do not have the ability to do both, my preference is, let us help people and not just build infrastructure. It is

nice and important to do both, but if you have to do one, let us

focus on delivering services to people.

The fourth is recognizing that we can find ways to be efficient.

We do not always make the right choices; markets will. I have

looked for ways to find efficiency through markets. I have looked

for ways to have individuals be able to make choices that fit their

needs.

I have looked for ways to invest in new technologies when old

technologies may have run their course. You will find cuts in this

budget where things that we have researched for a long time were

taking funds that could be used to research new technologies.

I have looked for ways to invest across the entire Department.

There is a tendency, in large Departments like this, to see silos of

investment. I am looking for ways to break down the walls of those

silos and invest across the entire health care system or across the

entire Department.

I am also looking for programs I can measure. If we cannot

measure their benefit, I think there has to be some question asked

about whether there is benefit.

So as we interact, there may be some areas on which we disagree, but you will find that somewhere in those principles there

is a reason I have made the choice I have. I just want to be here

today to obviously tell you why the decisions were made and to

hear your thoughts about it.
8

So, Mr. Chairman, that concludes my opening statement. I am

very happy to be responsive to your questions.

[The prepared statement of Secretary Leavitt appears in the appendix.]

The CHAIRMAN. All right.

I will not go through the announcement I made yesterday morning, but we will go by the same rules, 5-minute rounds.

I want to bring up pay-for-performance and ask the administration to be a little more adventurous. I am disappointed, as I said

in my statement, about not moving more aggressively to link provider payments to quality.

We must move past paying providers just for reporting data. We

have started down that road. This is because providers can fail to

do the right interventions, but still get a bonus payment.

That does not seem to me to be an incentive that would fit into

the principles you just mentioned. We must adjust our systems to

start paying for truly higher-quality performance.

What is the administration’s long-term vision for pay-for-performance? I will just read three questions instead of waiting for answers.

What additional authority or resources do you need from Congress to move forward? How do you plan to incentivize physicians

to report quality measures when they are scheduled to receive a

negative 5 percent update next year?

Secretary LEAVITT. Let me, first of all, acknowledge, Senator,

that nothing in government works fast enough for me either. When

you are dealing with large, complex organizations, I become impatient.

But at the heart of this is the ability to collect information and

measure things well. At the heart of that is the ability to use information technology to gather information so that we can measure it

and begin to compensate people on the basis of the value they

bring so that we are paying physicians on what they do to help patients, not just how many procedures they can perform.

There is a relationship you see. Whenever the rates go down, the

number of procedures goes up. That is not providing incentives in

a way that will ultimately work in the best interest of patients.

So the vision is very clear: to get beyond a system that I would

acknowledge does not make a lot of sense in the way that we currently create compensation for physicians and get to the point that

we are measuring performance. Now, some of that is going to have

to be, again, predicated on our ability to gather information.

And while you did not raise it, I will: the most important element, in my judgment, is getting information technology standards

to where we are able to gather the information, measure the quality, and then compensate the care for that purpose.

We do have, for the most part, sufficient authority to do it. There

may be a need for us in the future to come back for additional authorities as we perfect this, but, as you know, we are currently

going through a series of pilots that are showing quite a bit of

promise.

We have to work together with the medical community. This is

not something that we should just do unilaterally. We have to work

collaboratively. They certainly have enough incentive, because their
9

payment rates are at stake, and we have incentive, because we

have to find a solution to this.

The CHAIRMAN. My perception is—and it is more from news

media reports, and that may not be the best place to get your information—that various corporations—major corporations; you know

their names as well as I do—are moving very quickly in this area,

seeking the best return on their dollar in health care for their

retirees.

I guess I feel a little bit embarrassed that we in government,

spending 45 percent of the health dollar out of the Federal treasury, cannot do more. So, we just need to do more.

My next question. The President’s budget includes significant

funding for a variety of quality initiatives, including funding for

quality improvement organizations. A study published by the Journal of the American Medical Association last year found little difference in performance between QIO-participating hospitals and

non-participating hospitals. Do you feel that QIOs have accomplished the goals set out in the seventh scope of work?

Let me ask an additional question at this point. The President’s

budget notes that the most recent QIO contract shifts the focus of

the QIO activities to promote quality and efficiency. Is there any

concern that the QIOs may not be able to successfully accomplish

these tasks?

Then, lastly, what evidence is available that supports the choice

of QIOs as the most appropriate entity to take on the new tasks

that are in the President’s budget, such as assisting the adoption

of health IT among physicians’ offices across the country?

Besides your oral answer, I would like to have you submit evidence to my staff in addition. Go ahead.

Secretary LEAVITT. Thank you, Senator. We will respond to your

question in writing.

May I just emphasize, again, that none of us is meeting our aspirations to move as fast as we would like? That is true, not just for

government-paid programs, but also the corporate interests who

want to see more efficiency with their health plans.

At the heart of this is a mission that has recently been given to

QIOs, which is to help the medical community begin to adopt

health insurance technology. For us to get to pay-for-performance,

for us to get to a higher level of efficiency, for us to be able to start

supplying patients with information on their health so that they

can become more involved in the decisions, we need to harness the

promise and the capacity that health information technology provides to assist in making quality decisions.

Now, there is a significant part of this budget devoted to bringing

that about. I just want to acknowledge that it is happening. It is

not happening nearly fast enough for me, and obviously for you either. I believe the QIOs can play a productive role, but it is going

to have to be united in a broad effort, not just with QIOs, but

across the board.

The CHAIRMAN. Well, what about the AMA journal finding little

difference in the performance between QIO-participating hospitals

and non-participating hospitals?

Secretary LEAVITT. That bears investigation.

The CHAIRMAN. Senator Baucus?
10

Senator BAUCUS. Thank you, Mr. Chairman.

Mr. Secretary, is the premise of HSAs not also the reason for

their deficiency? Namely, if people have choices—the ‘‘skin in the

game’’ argument the administration makes—that, if people make

choices, they will choose what makes the most sense for them. On

the surface, that sounds nice, sounds good.

But if someone chooses what is best for him or her, and if he or

she is healthy, will he or she not choose to purchase an HSA? If

somebody is chronically ill, an aged person, will he or she choose

not to purchase an HSA because of the deductibles?

Would the result not therefore be that so much of the cost of

health care is passed along to those in need, and, therefore, is the

whole premise of HSAs not the reason for us to be most concerned?

That is, they would raise the cost to people who do not purchase

because they wisely choose not to?

Secretary LEAVITT. Senator, just a couple of areas where I would

have some disagreement with your thoughts about this.

One is the implication that those who have HSAs are left without

money to pay the deductible amounts. They have money, it’s just

money that they can save if they find a more efficient way.

They have the money. It is not like they are left without a capacity to make those expenditures. They can; it is just money that, if

they can find a more efficient way, there is an incentive for them

to do it.

Now, if they do not do it, they can spend it. If they spend it, then

they get to the point where they have full insurance and the insurance company pays it. It is just providing them with an incentive.

Frankly, the worry that there will be some kind of adverse selection just has not been borne out. We now have 3 million of these,

and they are growing rapidly. Nearly 40 percent of those who sign

up are people who did not have insurance before, and they are people who make less than $40,000 a year.

We are simply putting insurance within the reach of a population

that, at this point, does not have it. It has the side benefit, in some

cases, of being able to provide some level of incentive for them to

be cost-conscious consumers.

Senator BAUCUS. I am not going to get into an argument with

you over this, but frankly I think the true number is 1 million, not

3. The 1 million is the new, the remaining 2 million are people who

already have high-deductible health plans. So the honest—and I

am not saying you are dishonest—and accurate figure is 1 million,

frankly.

Secretary LEAVITT. Senator, I signed up. I am one of the 1 million. I signed up for one a year ago. I can just tell you the experience I have. The amount of money that is there available for me

for health care is the same as I had before, but for the first time

in my life I understand now how much my prescription drugs cost.

I just went to the drug store and gave them the card.

Senator BAUCUS. I understand. But a lot of people are not very

wealthy and they will not choose to buy an HSA because they do

not want to have to pay up to the deductible, first.

Secretary LEAVITT. The way an HSA works is, they are provided

the money that they need, just like they would with first-dollar insurance.
11

Senator BAUCUS. It just smacks of Darwinism to me, survival of

the fittest. If you are fit and healthy, wealthy and wise, you get an

HSA, particularly when the limits are raised, as proposed, from

$1,000 to $5,000. If you are not, you cannot, and you do not. It is

pretty simple.

Secretary LEAVITT. But it is a good thing to have people signing

up to have insurance. It is a bad thing if they do not have it. Forty

percent of the people who are getting them did not have any insurance before for some reason.

Senator BAUCUS. I am just curious about the administration’s rationale for Medicare cuts. At Ways and Means yesterday you said,

basically, the cuts are consistent with the most recent recommendations of MEDPAC. But as you know, the MEDPAC recommendations are 1-year recommendations with respect to Medicare, but the

President’s proposals are generally for 3 years.

Second, MEDPAC also recommends doing away with the Medicare Advantage advantage that those plans have. It seems like you

are picking and choosing from MEDPAC, with the result that it is

hurting people who need help and helping people who do not need

help.

Secretary LEAVITT. I view MEDPAC as being one voice that can

provide advice. We ultimately have to be responsible for the decisions that we make, and we will be.

I will give you an example: the market basket, reducing by fourtenths of 1 percent the market basket recommendation. As pointed

out, hospitals are in good financial times, most of them.

At least the reports in the news media are that they are making

more money now than they have been in the past. Plus, this is a

pattern that has been followed for a decade or a decade and a half,

that we have not funded the entire market basket because it provides some incentive for efficiency.

Now, I know there will be hospital administrators who will question what I just said, but I am responding to global numbers I have

been provided. We think it is not a bad idea at all for hospitals to

have to find ways of innovating, and this is one way of incenting

them.

Senator BAUCUS. You only answered half the question. What

about the Medicare Advantage over-payments? The hospitals are

doing all right; the Medicare Advantage plans are doing really all

right. So why are you not also addressing that as well?

Secretary LEAVITT. As I dig into this, what I find is that it is primarily focused on making certain that we have the availability of

plans in areas like Montana, and Iowa, and Utah, and North Dakota, because we need to make certain that we can provide those

plans on a national basis so that there is choice in the capacity to

have those services. I think that is not just reasonable, but an affirmative policy.

The CHAIRMAN. I will pass over a couple of people who temporarily had to step out and go to Senators Smith, Conrad, Lincoln,

then Snowe. If members who have been here come back, then I will

go back and pick them up, so do not feel like I am neglecting you.

Senator Smith?

Senator SMITH. You can cut me off as soon as they arrive, Mr.

Chairman.
12

The CHAIRMAN. Well, I do not mean in the middle of your questions. [Laughter.]

Senator SMITH. I am just giving you permission.

The CHAIRMAN. All right.

Senator SMITH. Thank you, Mr. Chairman.

Secretary Leavitt, it is a pleasure to be in your company today.

I appreciate very much all the work that you do.

I do not know you well, but I think I know your heart. I think

what Senator Baucus read from Deuteronomy is an ethic that you

and I share in common. I am really on the horns of a dilemma this

morning, because I was prepared to ask you to help me with funding on SSI, youth suicide prevention, and a whole range of issues

that affect the poor, disabled, the needy, and the elderly. I have

fought for those issues because I care about them and believe in

them, for the reasons that I think Senator Baucus articulated.

But I am also mindful that we are just playing around the edges

here. I recently saw—from materials that Senator Gregg and Senator Conrad provided to us that make it clear—that in 25, to the

outside 35, years, your Department is going to be the only Department of the Federal Government because three programs—Social

Security, Medicare, and Medicaid—will consume all Federal revenues.

What that means is, no money for defense, no money for homeland security, no money for farms, no money for schools, no money

for the pet projects I have. I have tried to fight for the poor, and

I voted for medical savings accounts.

My office has a schedule lined up for me with request after request of Oregonians with honorable and legitimate concerns and requests from the Federal Government. I do not know what to tell

them any more. I care about what they care about, but we are just

kidding ourselves here.

I know my friends there would like us just to raise taxes. I think,

all right, what will that do to America? That is what Europe has

done to Europe. They have even more generous social benefits.

They have much higher taxes. They are going to hit the wall before

we do.

So I am just wondering if, in your deliberations with the White

House, if we are really squaring with the American people about

the ticking time bomb that we are all sitting on as a Nation.

I mean, I do not know. It just seems to me that we are going to

have to soon come to a place where Republicans and Democrats become Americans first and figure out how to save our country, because you are the only Department in government that is going to

be around in 25, 30 years on the current track.

Do you have a comment?

Secretary LEAVITT. Well, Senator, only to add to the weight of

the quite remarkably weighty things you have already said. Not

only would it be the only Department in the Federal Government,

but we will have eroded the capacity of State governments to provide public education because Medicaid will have overtaken not

just education, but virtually every other budget in State government by that time.

At the heart of this is health care. Health care, in 1960, was 5

percent of our Gross Domestic Product. Today, it is 16 percent. One
13

program, Medicare, today is 3.4 percent of our Gross Domestic

Product. One program. There is little doubt that no society can sustain that kind of erosion of its economic competitiveness.

The jobs that ultimately create the capacity for the tax revenues

to be developed will diminish and we will be left without the capacity to do it. In fact, one could argue that that day will be hastened

by that systemic collapse.

Now, how do we resolve it? Well, I think there are some very

basic principles we have to begin to fall back on. One is, we have

to change the way we think about health care. It cannot be just

about how we treat people after they are sick, it has to also be

about helping people stay healthy.

That is not just a government program, it is about us being willing to take on the issues like obesity and chronic disease. It also

means we find more efficient ways to do it.

We have talked about health information technology. That is one

example of the way we can provide information, not just to individuals on their own health, but to institutions on who is doing what

well so it can be implemented. We all have to recognize that there

are limits. Your time is up, and I have used a good share of it.

Senator SMITH. Well, no. I mean, I think you and I both understand the problem. I think we all do. I hope you will forgive me

as I push for full funding of the Garrett Lee Smith Act. I am going

to do it again. Other things I believe in, I am going to fight for.

But I would say to my Democratic colleagues, I am willing to talk,

because we are kidding ourselves.

Secretary LEAVITT. I think this is the reason the President has

proposed a bipartisan approach to an Entitlements Commission

that could begin to examine things, not for just this generation, but

for generations to come.

Senator SMITH. Thank you, Mr. Chairman.

The CHAIRMAN. Senator Conrad?

Senator CONRAD. First of all, I want to associate myself with the

remarks Senator Baucus led off with that I thought were right on

point on a whole series of subjects.

I want to associate myself with the questions of Senator Smith.

I would say to my colleague, at least for this Senator, I do not

think tax increases are the first place we ought to look, even on

the revenue side.

I believe the first place we ought to look is the tax gap, the difference between what is owed and what is being paid. The Internal

Revenue Service says that is now $350 billion a year. I believe that

is an under-estimate. That is the first place we ought to look because, clearly, you have to deal with both the spending side of the

equation and the revenue side.

Mr. Secretary, first of all, you know that I have respect for you.

I have told you that privately, I have said it publicly, and I mean

it. I think you are a fine man. I was delighted to meet your father

this morning and to be able to say to him, you did very well in raising this man.

I expressed yesterday my profound disappointment with what

has happened in the prescription drug program roll-out. It has not

gone well. That is an understatement in my State. I think it has

been chaotic. I am hearing from pharmacists that they are thinking
14

of dropping Medicare patients because of how this has been handled. That would truly make this all worse.

As you know, representing Utah as Governor, rural States are

different than some of the more urban States. Let me go to some

of the budget recommendations.

You have adopted what was described as MEDPAC’s recommendations, but you have adopted their proposals for 3 years and they

have only made a 1-year proposal. So I do not think it is quite fair

to say these are MEDPAC’s proposals with respect to hospitals,

nursing homes, home health care, and the rest.

Kind of the impulse here is that hospitals have high margins,

higher than normal. That is true in parts of the country. It is distinctly not the case in the part of the country I represent. If you

take out the four largest hospitals in North Dakota, and there are

42 hospitals in my State, the margins are, for the rest, in the negative, a negative 1 to 2 percent.

So, help me understand. What is going to happen to those hospitals that are already under pressure if this proposal goes forward?

Secretary LEAVITT. Senator, you have raised concerns about two

sectors of the health care economy: the pharmacists and the hospitals, and in particular, rural hospitals. Senator Smith, on the

other hand, has pointed out how health care, generally, is encroaching on our Gross Domestic Product in a way that it borders

on the point where it will begin to cost our economic competitiveness.

Any time we begin to put constraints on any part of the economy

and it begins to feel its economic equation constrained, there is a

struggle and a worry. People cry out and they, properly, bring attention to their dilemma.

There is a long list of people within the health care system who

are doing the same thing right now. But for the reasons that Senator Smith has indicated, we have to find ways of becoming more

efficient.

If we go too far and people begin to be adversely affected to the

point that they cannot deliver services, then perhaps we have to

adjust incrementally. But we are providing in this budget at least

our read on how we can begin to constrain health care costs in a

program that is ultimately going to eat up our capacity to be prosperous as a Nation.

Senator CONRAD. If I could just intercede on that point and say

to you, look, I do not think anybody is more acutely aware of the

need for fiscal restraint than this Senator, as Ranking Member of

the Budget Committee. I believe deficits matter. Unfortunately,

there are increasing numbers of people in this town who do not

think so. They clearly do matter.

But when I look at the choices here, Medicare Advantage, by reasonable estimations, the MEDPAC proposal there could save $30

billion over 10 years, and you have not adopted the MEDPAC proposal there at all. Why not?

Secretary LEAVITT. As I indicated before, MEDPAC is only there

to advise. We ultimately have to be responsible for our own policy

recommendations. These are our recommendations. It is our view
15

that it is important to have the Medicare Advantage plans, for example, operating in areas like North Dakota and South Dakota.

One of the reasons it is important to have them treated in the

way that this budget proposes is so they can, in fact, operate, and

operate in a way that is financially consistent with the needs of the

hospitals. If they are paid more in North Dakota, it is because the

hospitals there require it.

Senator CONRAD. I would just conclude by saying, as I look at

this budget, it is distinctly unfriendly to a rural State like mine.

I look at the cuts in rural health programs, 83 percent cut, and the

effect on hospitals in my State.

I would just say to you, I do not think we can just put all the

hospitals in the same category, because, as you know, there are

really vast differences.

I appreciate the Chairman’s indulgence.

The CHAIRMAN. Senator Lincoln?

Senator LINCOLN. Thank you, Mr. Chairman. Thank you, Mr.

Secretary.

I am a little bewildered on that last question. Medicare+Choice

has always cost more. I do not know why we think it is going to

all of a sudden get less expensive because we supplement it and

you keep it in those areas. It served so few of those areas in the

past, I do not know why that is going to change. I will save that

confusion for later.

Mr. Secretary, I have a couple of specific questions about the

budget. Again, as my other colleagues, I would like to associate myself with the previous comments from Senator Baucus and Senator

Smith.

I agree, we are digging a hole. As far as making difficult choices,

moving forward, and working together, it just does not seem to be

happening as much as many of us would like that to happen.

Specifically, in the President’s proposal, in his budget, Mr. Secretary, there is a reduction in the ambulance fee schedule by $10

million in 2007 and $290 million over 5 years.

Many ambulance providers in Arkansas have just closed over the

past year. Those that have remained have tried to absorb those

that were closed. They have struggled to stay afloat.

In fact, I just heard from one of my ambulance providers yesterday that CMS has frozen the Medicare payment this week. These

providers are the backbones of our communities.

They certainly have to meet the same regulations that other ambulance providers in other areas do, but when you find that these

ambulance providers are providing those same regulated services

on one to two calls a day compared to their competitors that may

get 25 calls within one city block of Manhattan, they are put at an

extreme disadvantage, particularly when they see these fee schedules and, again, frozen Medicare payments.

I just have to add that many of our providers performed heroic

work during the aftermath of Hurricanes Katrina and Rita in the

Gulf Coast. We are one of the neighbors to the north. We absorbed

about 65 evacuees.

But almost all of our southern ambulance providers left and went

to the distressed region. Many of them were shot at. They were put
16

in despicable conditions. Yet, they stayed there and served those

who needed to be served. Some of them are still there.

So it is so important, I think, to consider, as Senator Conrad just

mentioned, not all hospitals are alike, not all regions are alike, and

certainly the needs and concerns that exist there.

So I guess my ultimate question on that would be, what is your

reason for cutting the Medicare payments to the ambulance providers? This was not a MEDPAC recommendation, and certainly

the freeze that CMS has put on those payments this week is an

added concern.

Secretary LEAVITT. A couple of general comments. My father is

here, but my grandfather once said to me, if you are trying to get

yourself out of a hole, the first thing to do is to stop digging.

I think that really leads back to Senator Smith’s comment. There

is not a part of this budget, that if it was listed with any kind of

reduction, that there would not be a sense of pain associated with

it.

Now, with respect to the ambulance systems, may I just say we

are not cutting anything. We are slowing the growth in their reimbursements, that is it. We are just slowing the growth.

Senator LINCOLN. I just think it is so important, because my providers have said to me, they do not have a problem being a part

of that reduction and understanding that there is pain involved,

but disproportionately, for these types of providers, I think it is so

important that we recognize that they are providing a service,

meeting the same regulations as providers in urban areas.

They are doing it on much less because, by nature in a rural

area—I mean, I have one ambulance provider that is covering five

counties because no one else is willing to do it.

The hospitals are shutting down their services. They are not providing ambulance service any more. The private industry ambulances could not even get on the list during the aftermath of the

Gulf Coast disaster in order to get the repayment for what they

did.

So I do not think that they are unwilling to share in the pain.

The problem becomes, their pain is so disproportionately different,

particularly in rural areas. There is a great concern on my part

there.

Secretary LEAVITT. Thank you.

Senator LINCOLN. Yes. I understand.

The CHAIRMAN. Senator Lincoln, your time is up.

Senator Schumer, let me explain that you and Senator Snowe

were here before and you had to temporarily step out. So, I will

now call on you.

Senator SCHUMER. Mr. Chairman, I was thinking on the way

over, you handled the order in which people are called in a very

fair, midwestern way. All the other committees should be so fair.

The CHAIRMAN. Well, tell the rest of the people from New York

that, would you? [Laughter.]

Senator SCHUMER. Yes. They all know.

Thank you for being here, Mr. Secretary. My first question is on

generic drugs. I am just always surprised how the administration,

which is very concerned with cutting costs, has a blind spot when

it comes to the difference between generic drugs, which are much
17

cheaper, and brand-name drugs. I really can only attribute this to

not such good reasons.

So, let me ask you about this one. Your budget would cut payments to pharmacies for generic drugs—you know there is a payment to pharmacies for handling drugs—but do nothing to brand

drugs that are still on patent.

In other words, what you are doing is, you are trying to save

some money by cutting the payments to the pharmacies, but you

are sort of pushing them—because they do better when they handle

the brand-name drug than the generic drug—to distribute the

brand-name drug.

There is a cut here on generics—where the generic alternative

exists—from 250 percent of the average manufacturer price to 150

percent. Why did you not do the same with brand-name drugs? If

you were going to cut the generics, why not cut the brand-name

drugs? It is going to save. It may not save it in this budget year,

but it is going to save the country money in the long run.

Secretary LEAVITT. Senator, I am not able to respond adequately

to that. I do not know the answer to it. I can tell you that we are

doing all we can, that I am aware of, to promote the use of generic

drugs, both in their manufacture, approval, and distribution, and

incent people.

Senator SCHUMER. All right. Could you get back to me in writing

what the rationale is?

Secretary LEAVITT. I would be happy to. It is not something I can

reconcile.

Senator SCHUMER. And why there is a difference. I would urge

you to do the same for each. If you feel you have to cut the pharmacy costs, you can show us the information on that. But to do it

for generics and not for brand-name drugs just defies logic, if you

want to save money and keep care good.

Second, I would like to follow up. I had a discussion yesterday

with Administrator McClellan on formularies. Senator Feinstein

and I, Senator Bingaman, Senator Snowe, three of us on this committee, we have introduced a bill to prohibit Medicare drug plans

from changing their drug lists for seniors who have already committed to their plans for a year.

A senior will sign up with one plan because, say, it has Norvasc.

Then the company is allowed to change and get off and say, we are

not using Norvasc, we are using some other drug, and the person

is stuck.

Now, Administrator McClellan said that this is not happening,

that the plans are not switching, getting in and out of drugs. But

we have heard evidence to the contrary. Can you tell us what can

be done in this situation?

Secretary LEAVITT. Senator, you have introduced legislation.

That will be a policy question that will be debated by the Senate

and decided. In the meantime, I can tell you this.

Senator SCHUMER. Great.

Secretary LEAVITT. There is a process under which plans can

change their formulary, but it does require that they seek approval

of HHS through CMS, and that is a rigorous process through which

they have to go to do it.
18

Now, I asked the same question, is it happening? I am told the

same thing he told you, and that is, it is not happening. If it is

happening, or if it does begin to happen, they will be rigorously

scrutinized, for the very reasons you pointed out. We are trying to

get people into plans that fit their need.

Senator SCHUMER. Right.

Secretary LEAVITT. And if they are not in a plan that fits their

need, we want them to be able to make a change to the plan that

does.

Senator SCHUMER. Right.

Secretary LEAVITT. The goal is the same: let us make certain

that people get the drugs they need, when they need them.

Senator SCHUMER. Could I ask you to submit in writing how

many have applied to drop a drug and how many have been approved?

Secretary LEAVITT. That is a simple, and I believe fair, request.

Senator SCHUMER. Thank you.

All right. I do not have my glasses here, but I do have another

question. This is on Tamiflu. As you know, we have been involved,

and I want to salute you on your demonstrated commitment to preparing the Nation to deal with Tamiflu.

Now, I have worked to ensure that stockpiles of Tamiflu become

a reality. I think that the experts say there should be enough for

about 40 to 50 percent of the population.

What has happened, I think, in the administration, is that there

has been a push. You folks only have 5 million courses on hand,

less than the 100 million that would be around the 40 to 50 percent

mark. You are trying to push most of the cost on the States.

Yet, when we talk to the States, they are not doing it. It is sort

of, we are in an Abbot and Costello situation here. The States say

the Feds should do it, the Feds say the States should do it.

Tell us your view on this. What is going to happen if the States

do not live up to their part of the bargain? Their budgets are

stretched as well. Could you please comment?

Secretary LEAVITT. Yes. Thank you. I heard your comments on

this before, and I am anxious for a chance to reconcile it.

Actually, the World Health Organization, as well as our own

planners, recommend not 50 percent, but 25 percent for the population, which brings the number down to 81 million courses, which

is our target.

Senator SCHUMER. Right.

Secretary LEAVITT. We have orders placed.

Senator SCHUMER. That is because of my glasses that I got the

numbers wrong.

Secretary LEAVITT. That is fine.

Senator SCHUMER. Or lack thereof.

Secretary LEAVITT. We have orders placed that would get us to

our first target, which is 20 million courses by the end of 2006.

Senator SCHUMER. Paid for Federally?

Secretary LEAVITT. Paid for Federally. And I am in the midst of

a round of 50 Pandemic Summits with the States, where I am signing MOUs with each of the Governors, whereby, the 1st of July,

they will provide to me information about how much additional

Tamiflu they might require above their allocation.
19

We are going to buy 50 million courses and allocate it to the

States, then anything from 50 million up to the 81 million we will

subsidize if they choose to acquire some in addition.

In net, we will be paying for 70 percent of the Tamiflu that goes

into the hands of States and will be controlled in the distribution,

for the most part, upon priorities that the States elect.

Senator SCHUMER. All right. Thank you, Mr. Chairman.

The CHAIRMAN. Senator Bingaman?

Senator BINGAMAN. Thank you very much.

Thank you, Mr. Secretary, for being here and allowing us each

to ask our questions. Let me ask about this issue of health care for

American Indians. In my State—and I think maybe we visited on

this before—if you had to identify a group in the population that

gets inadequate health care, it is the Native American community,

I would say, even more than the Hispanic community, than everyone else combined.

More and more of the people in the Native American community,

more of the Indian citizens of my State, are moving to urban areas,

so I am very concerned that they continue to have access to health

care when they do that.

As I understand your budget proposal, it is to eliminate funding

for urban Indian programs. Now, in Albuquerque, for example,

there are over 30,000 Native Americans who are served either by

the Albuquerque Indian Health Center or what is now called the

First Nations Health Center. The Indian Health Center’s funding

was $13 million a couple of years ago; now it is down to $5 million.

It is proposed for total elimination.

I do not see that this is a good choice for allocation of health care

resources. I would be interested if there is some policy reason why

you do not favor these urban Indian health programs, or is there

something else going on here?

Secretary LEAVITT. Senator, as you know, the Indian Health

Service is a part of this Department. I will tell you, from my observation, they are the most compassionate people on the planet. They

are wonderful, working hard to serve the needs of those in the Native American community.

I mentioned earlier there were a series of principles that I had

framed up for the Department to say, when you look at investments, let us look at them. One of them is, let us look across the

Department. Instead of just having siloed investments, let us look

across the Department and find ways to create efficiencies so that

we are not just looking at investment in Indian Health, but we are

looking at the communities as well.

This is a prime example. I looked at the fact that we were building a network of community health centers in cities like Albuquerque and other places around the country, and we also had Indian Health Service clinics, and in some cases they were in reasonable proximity to one another, and probably neither of them was

adequate to serve the populations.

But if we had one, it could be in a situation where you would

have one piece of equipment instead of two, one lease instead of

two. They were essentially serving the same population. It just did

not make sense to me not to proceed forward on some consolidation

of that mission.
20

Senator BINGAMAN. So the idea is that the Native American who

had been going to the Albuquerque Indian Health Center would go

to community health centers?

Secretary LEAVITT. That is right.

Senator BINGAMAN. Now, as I understand it, I visited this Indian

Health Center. It is essentially geared up to do hospital-type health

care. I have never been in a community health center that was

geared up for that kind of thing. Is it your thought that they are

doing the work at these community health centers that will essentially substitute for what is going on at the Indian Health Center?

Secretary LEAVITT. That just feels inefficient to me to be creating

a separate system for one population of people when we are trying

to create a much better system for everyone. If we are building a

separate set of facilities for the Native American population who

live in urban areas than we are for the larger population,

neither——

Senator BINGAMAN. So it is a policy judgment that we should not

have an urban Indian program? Indians, if they want to move to

the city, ought to go to the regular community health centers?

Secretary LEAVITT. It is a policy judgment that we ought to serve

people in the best possible way we can, and having duplicate facilities does not serve people, or taxpayers, well.

Senator BINGAMAN. All right.

Let me ask about Medicaid. As I read your budget, the net effect of your proposal over the 5 years is a $13.5 billion cut in Medicaid.

I am told that 59 percent—this is an estimate by the Center on

Budget and Policy Priorities—is from shifting cost to the States.

Fifty-nine percent of what you are proposing that we legislate

would involve shifting cost to the States. Ninety-six percent of what

you are proposing to do in a regulatory way would involve shifting

costs to the State.

I just wonder. I think you said in your earlier comments before

I arrived that the States are under more and more difficulty trying

to cover the cost of Medicaid. Why does it make sense for us to say

we are going to load onto that problem some additional problems?

Secretary LEAVITT. Senator, first let me say that I believe if we

were to sort through the policy impact of the proposals we are making today, that there would be disagreement on our parts as to

whether or not we were shifting it to the States.

But let us leave that one for a second and just say that my biggest concern is that neither the States nor the Federal Government

can sustain Medicaid in its current form. We made some important

steps forward in the Deficit Reduction Act. These are efficiencies

that we believe can help us create a sustainable program.

I want to emphasize that Medicaid will continue to grow. There

is no cut here. It will continue to grow at a rate well in advance

of 7 percent a year. The reason that I made the comments earlier

was it is clear to me that it is not only unsustainable from the national government standpoint, but it is unsustainable for States as

well.

Senator BINGAMAN. All right. I think my time is up, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Senator BINGAMAN. Thank you.
21

The CHAIRMAN. We will start a second round of 5 minutes each.

I want to cite a statistic here that my staff has collected in regard to HSAs, those people that have bought HSAs for the first

time. Thirty-seven percent of them were previously uninsured.

Treasury estimates that the President’s proposal will increase

the number of HSAs from 14 million in 2010 to 21 million in that

same year, 2010. That would be a 50 percent increase.

Therefore, if the trends continue, about 8 million uninsured

would opt in to coverage with HSAs. I presume that is based on

that 37 percent.

I want to talk about SCHIP. My State of Iowa, along with other

States, is going to have a shortfall in this program providing health

insurance coverage for low-income people.

While we included funding in the Deficit Reduction Act to address this year’s shortfall, I am informed that shortfalls are still

going to persist, at least through next year.

Now, I know you share my concern about the value of this program. It is unfortunate that we face a reauthorization of SCHIP so

that States are not put in a position of eliminating coverage for

low-income people. The President’s budget proposes to address

State shortfalls. Could you elaborate on the proposal to address

those shortfalls?

Secretary LEAVITT. Yes. Let me address, then, both of those.

First, with respect to health savings accounts, your statistics are

square with mine. I met a man recently who had started an organization that now serves 150,000 customers. It was a bank that administers them.

He made very clear to me, nearly 40 percent of the people who

have these did not have insurance before. Demographically, he

points out that 40 percent of them are people who make under

$50,000 a year in income.

A majority of the purchasers are families that have children.

Half of the purchasers are over the age of 40. Americans with

HSAs have no better health status than those with traditional coverage.

What this is doing is putting insurance within the reach of a

large population of people who are currently losing their hope that

they can have insurance. We are also seeing a number of businesses and other organizations that provide health care that are

finding themselves unable to do so. This is a very important part

of being able to keep health care within the reach of the average

American.

Now, another important part of that is SCHIP. You raised that

point. It is clear that has been a program that we both admire and

see the advantage of. There have been States which have had

needs that have gone beyond their appropriation or our authorization, and you have fixed that in the short term. There will be an

ongoing need to do that in the long term.

The CHAIRMAN. We included $750 million—and that’s a 5-year

figure—for grants for programs to promote healthy marriage and

responsible fatherhood.

That is a substantial amount of money that I think is a good investment, because, in strengthening marriage and fatherhood, it is
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without a doubt one big step towards reducing, or keeping people

out of, poverty and enhancing child well-being.

I assume you concur in that. But how do you intend to ensure

that these funds are appropriately spent and will result in the desired outcomes? The reason I asked that question is because there

are a lot of people in Congress who are not too enthusiastic about

that program. I like it, but some do not. So, we have to make sure

we have our eye on the ball as that money is spent.

Secretary LEAVITT. Mr. Chairman, the impetus for a great deal

of this came from the States. Prior to my service on the President’s

Cabinet, I served as Governor. I know with certainty that Governors who deal with the problem of marriages that do not function

are deeply concerned and desirous of being able to exercise the

principle that I spoke of earlier, which is prevention.

This is an effort to prevent before we have to treat. It is a far

more efficient and humane way to do it, and it is the only way we

will ultimately get to the bottom of it. It will be the States who ultimately use these dollars to find many ways to efficiently use it.

That has been true of all of the Human Service programs. When

we have allocated dollars and put significant guidelines to guide

them, the States have found ways to use it. I am already seeing

States advance ideas on how to do it.

This is a difficult subject. The reason that people occasionally

feel uncomfortable with it is because marriage is not always the

easiest subject to discuss. But it is clearly at the heart.

It is undeniable that those families, those children who are able

to be in a successful family where marriage is part of it, are more

successful. We need to encourage that as a social institution.

The CHAIRMAN. Yes. Thank you.

Now, Senator Baucus?

Senator BAUCUS. I will be brief, Mr. Chairman. Thank you very

much.

The CHAIRMAN. And then Senator Lincoln, then Senator Bingaman.

Senator BAUCUS. Mr. Secretary, I earlier asked you some basic

national questions. I would like to turn to my State of Montana for

my couple, three. I will make three points and you can address

them. I will give you all them at once, first.

First is, I very much appreciate your deep interest in Libby, MT.

It means a lot to me, and especially the folks in Libby.

As you may know, there is a clinic up there called the CARD

Clinic. It is a center for asbestos-related diseases and it provides

health care and screening. Regrettably, it has run out of money. It

has three more months left. Also, regrettably, the company, W.R.

Grace, is backing off on health care payments to people.

So I just ask you to take a good, hard look at that CARD Clinic

and see if you can get some dollars up there to help those people

who, as you well know, need a lot of help because of asbestos.

Second, I see the budget proposes eliminating the $33 million

Urban Indian Health Program. As you know, about 60 percent of

Native American Indians do not live on a reservation, they live in

cities. I wonder if perhaps you have some other way of addressing

their health care needs to help take care of them.
23

Third, anything you can do in your budget—I know a lot of this

is other budgets—to fight methamphetamine. It is a huge problem

nationwide. You know that as well as anybody here. We would like

to have some real focused meth grants.

Montana is in the top quartile of States for methamphetamine

abuse. I think we are one of the top 12, or something like that, because we are just in a wide open space and it is easy to build labs

and for meth to come in from Mexico, Canada, and so forth. So, I

very much hope that you can look at those three.

The CHAIRMAN. Let me associate myself with those remarks because my next question, which I will not have to ask now, was

going to be on methamphetamine, along the same lines of what

Senator Baucus said.

Secretary LEAVITT. Let me start with that one then and work my

way back. Senator, I am fascinated by what is happening in Montana with private foundations stepping up to see if they can—Tom

Siebold put a lot of money into a foundation that is driving an effort to deal with the demand issue.

I personally believe that that is ultimately what we have to do,

is focus on the demand side of this, as well as supply. But until

we start getting demand down, people are going to find a way to

get it in, whether it is from Mexico or some kind of lab.

Senator BAUCUS. Well, let us hope not. But you might be right.

Secretary LEAVITT. That is right. Well, I would like very much

to think that is not true, but history has demonstrated that, until

we get demand down, they find a way.

The second point on urban health: Senator Bingaman and I had

a conversation while you were out of the room. But let me repeat,

briefly, that we are increasing the amount of money we are putting

into the Indian Health Service in the rural areas, but we are making a policy judgment that we are better off, rather than building

community health centers and urban Indian Health Centers in the

same communities, building the community health center into

something that meets our aspirations, and to serve the urban Indian population through those, for reasons that I can enumerate

again if you would like. That is the policy judgment we have made

in our budget, and I feel good about it.

With respect to Libby, I visited once at your invitation.

Senator BAUCUS. Thank you.

Secretary LEAVITT. We have been trying to get together on a second visit so I can actually see the clinic.

Senator BAUCUS. Right.

Secretary LEAVITT. It was a very helpful thing for me to do so,

and I hope that occasion will occur.

Senator BAUCUS. Thank you.

The CHAIRMAN. Senator Lincoln?

Senator LINCOLN. Thank you, Mr. Chairman.

Mr. Secretary, as a daughter, I know how proud you are to have

your dad here. Now as a parent myself, I know how proud your father is to be here, supporting you.

My last two questions actually reflect back on my own father,

whom I lost several years ago after a very long journey with Alzheimer’s.
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In looking at the priorities of the President’s budget, not just this

year but certainly in years past, I’m concerned about the elimination of a program, which is the program with geriatric training

at all levels through support for geriatric education centers, fellowship programs, and small grants to junior facilities for career development.

Just as we anticipated there would be very difficult situations in

the transition of dual-eligibles on the Medicare prescription drug

component and sought to try to alleviate those problems before

they happened, we know a lot of baby boomers are aging and we

know that our population is aging.

With 126 medical schools and only 3 of those having a department in geriatrics, these types of programs are critically important.

This program is gone. You all recommended eliminating it last

year. We saved it for one more year 2 years ago, and it is now gone.

And certainly the elimination of programs like this runs counter

to the recommendation from the recent White House Conference on

Aging, where increased funding for geriatric training ranked in the

Top 10 list of recommendations.

Certainly for most medical institutions, but I think really all,

without Federal funding to support geriatric education for our

health care professionals, the workforce that we are going to need

in the future will be deprived of this vital aspect of their training,

and we are going to be deprived of being able to care for our growing elderly population.

My first question to you is, what are you as an administration

recommending to take care of that? I know that for us in rural

America, but I think for all people across the Nation, finding health

care for aging parents, particularly those with Alzheimer’s, is getting increasingly more difficult. These individuals are not being

trained.

We in Arkansas were able to train, since 2000, through the Arkansas Geriatric Education Center, about 10,000 health professionals. We will no longer be able to do that, more than likely, with

the elimination of this program.

Also to that end, in terms of end-of-life care, the President proposed a cut in the hospice payments, which would cost Arkansas

providers approximately $5.1 million in hospice payments over 5

years.

I do not know about others’ experience, but I know that with hospice it was an incredible support system for our family and it enabled us to really fulfill my father’s wishes, which were to be at

home in his end-of-life situation.

Most experts agree that this is an under-utilized benefit. I am

afraid that the cut will further exacerbate that problem.

The other thing is, the hospice payment cut was not recommended by MEDPAC. I think if you talk to most individuals

who have used hospice, you will realize that it is a valuable, valuable tool. If we eliminate that, as well as the training for elder

care, then we are going to have a real problem in the years to

come.

But suggestions you all have, what you are going to supplement

those with?
25

Secretary LEAVITT. Senator, I do not know of anyone who has not

been touched in a very personal way by this disease, a family member, a friend, whoever. It is a difficult, hard part of our mortal life.

I would just point to three things. First, we did make the decision not to re-fund the program. We did it for two reasons. One is,

I am looking for ways I can actually pay for treatment, not just for

infrastructure. In my mind, this fell under that category.

Senator LINCOLN. But what about those who administer treatment? If we do not train them, the treatment does not get there.

Secretary LEAVITT. The second conclusion I drew is, I was having

a very hard time measuring the success of this program. I do not

doubt the fact that it provides value, but in a budget year you have

good things competing with good things. The way I made this decision was to say I cannot measure that, and I am not certain.

The third thing I will just point to is that we had to make decisions on whether we spend on one thing or another, and I concluded that I wanted to spend across the Department, as much as

I could, on prevention.

So you will see in this budget a substantial initiative on genes

and environment, because I think ultimately, if we are able to use

that new level of knowledge that we have, we will find a way in

which we can begin to prevent, or at least preempt, or in some way

delay that terrible experience that people have.

Senator LINCOLN. I hope you are right on that. But I just worry

about those who are suffering currently without the appropriate

care. It is a tough way to go.

Secretary LEAVITT. It is very difficult.

Senator LINCOLN. Thank you.

The CHAIRMAN. Senator Bingaman?

Senator BINGAMAN. Thank you.

Let me ask about an issue I raised with Mark McClellan yesterday, and he said he would look into it. I would like to see if you

could also look into it.

The Congress put a provision in the prescription drug bill, which

was passed over 2 years ago now, that said that as to the Indian

Health Service, when they contract for health services, they cannot

be charged more than Medicare is charged.

We also said that, effective a little over a year ago, your Department was to issue a regulation to implement that. No regulation

has been issued. It is costing millions of dollars to the Indian

Health Service to continue paying what they are having to pay.

If you would issue that regulation, I believe it would save the Indian Health Service millions of dollars in their payments for these

contract health services. I would ask you to look at that and try

to get that regulation out, if you could.

Secretary LEAVITT. Thank you. I was in Santa Fe on Friday,

meeting with Governor Richardson on the ways to work through

any New Mexico-specific problems on Part D, and he raised this

subject.

Senator BINGAMAN. Very good.

Secretary LEAVITT. I talked with both our regional people and

Governor Richardson and his Medicaid colleagues. We concluded

that I would, in fact, go back and review it. We are in the process
26

of doing so. When we reach a conclusion, I would be very pleased

to communicate that with you.

Senator BINGAMAN. Well, I would appreciate that. It is a priority

for me, and I am sure it is for our Governor as well.

Go back just a minute to this urban Indian health issue, bringing

this down to a concrete circumstance we have there in Albuquerque. First Choice is the name of the provider that runs our

community health centers. We have a couple there in Albuquerque.

I have been there to visit those centers, and they have people

waiting in line for services. If in fact we are going to terminate

funding for the Indian Health Center on the theory that the 30,000

Native Americans who have been getting their health services

there can go to these other centers, it would seem that we ought

to be putting some resources in to building additional community

health centers, expanding the existing ones, doing something in

that community. Is that being done?

Secretary LEAVITT. Let me deal with it globally and then speak

directly. We do have, in this budget, the capacity to expand or add

302 new community health centers; 80 of those will be targeted to

the most impoverished areas or counties.

I do not know specifically whether or not Albuquerque will be on

that list because it will require them to make application.

Now, what you have described for me seems absolutely logical.

If we are going to follow this policy, then we have to create capacity, or at least find ways—and it is possible as well that it could

come out of these new dollars, if they apply.

I would be very pleased to make certain that we have regional

people who are looking at that to determine how to affect it. I am

dealing at the policy level, but that is a very compelling specific

and one that we ought to look into.

Senator BINGAMAN. Thank you very much. I would appreciate it

if you can look into that and get back to us.

The Chairman mentioned that I think the figure was 37 percent

of the people who have, I believe he said, purchased HSA

policies——

The CHAIRMAN. Since we passed the law, 37 percent have not

had health insurance previously.

Senator BINGAMAN. Right.

The CHAIRMAN. So it subtracts from the pool of uninsured.

Senator BINGAMAN. Right. My understanding of how this HSA

thing works is, you have to do three things to really get the benefits. You have to, first of all, buy the policy, a high-deductible policy

which says that you, the individual, are responsible for the first

$1,000, $2,000, or whatever the figure is. It has to be at least

$1,000. So, you are taking that responsibility. So you buy the

policy.

Second, you establish the HSA, because you do not have to establish an HSA just because you bought the policy. Then the third

thing you have to do is, you have to put money in the HSA so that

there is something there to pay for health care costs. I mean, otherwise you do not get any benefit from having the HSA.

Do we have statistics, first of all, on how many people who have

purchased these high-deductible policies have actually gone and established a health savings account? Second, how many of those who
27

have established a health savings account have actually put money

into it so they can pay for their health care costs?

Secretary LEAVITT. Let me address that on several levels. There

are a lot of people in America who do not have health insurance,

not because it is not available to them, but because they just

choose not to buy it.

Senator BINGAMAN. Right.

Secretary LEAVITT. In many cases, they choose not to buy it because they think it is too expensive. When they think it is too expensive, implicit in that decision is, I do not think I am ever going

to need it, therefore I am not going to buy it. A lot more of them

would do it if they thought it was $200 a month instead of $500

a month. Society would be dramatically better off if everyone had

at least a high-deductible plan.

Senator BINGAMAN. So catastrophic coverage would be a good

thing.

Secretary LEAVITT. It would be a very good thing.

Senator BINGAMAN. Right. For the whole country. Right.

Secretary LEAVITT. And one of the problems now is, if you buy

an HSA through a non-employer, if you buy it as an individual, you

are not treated in the same way tax-wise that you are if you get

it through your employer. So, this is one way to encourage people

to buy insurance.

The second point is, as you know, if a family were going to pay

$900 a month for a full indemnity plan and they could buy a highdeductible plan for $500, that $400, in most cases—in fact, almost

every case I know of—goes into some account that the employer

puts in for the employee. Therefore, they have dollars that are

available to them to pay the first dollars.

Senator BINGAMAN. But that is in a circumstance where they

have had insurance before. I am asking about the group that Senator Grassley was referring to, which are people who have not had

any coverage.

Their employers have never provided them with coverage. All of

a sudden, they do have a high-deductible policy. How many of them

have money in an account so that they can actually pay for their

health care costs?

The CHAIRMAN. I think you said it right, except do not assume

with that 37 percent. Some of them could have been at an employer

where they had health insurance and just decided not to participate in it. Those people would be part of the uninsured as well.

Senator BINGAMAN. Right. Right.

The CHAIRMAN. Go ahead.

Senator BINGAMAN. But my concern is, I saw an article in the

Wall Street Journal or somewhere which said something over 60

percent of the people who have bought the policies have not put

any money into these accounts. I do not know if that is the right

statistic. But I wonder, do you have those statistics? Could you get

that to us?

Secretary LEAVITT. I do not have them today, but if they are

available I would be pleased to both have them and to share them

with you.

The CHAIRMAN. And I would like to have them, too.
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Secretary LEAVITT. I can tell you that I have spoken with those

who administer these accounts and they assure me—in fact, they

talk to me about the average balance on their accounts and how

they come down toward the end of the year. The vast majority of

people who buy them are finding the advantage. I cannot give you

actual statistics, but I will get them.

Senator BINGAMAN. I think my concern is that there are a lot of

people who may buy the high-deductible policies for whom there is

no account to administer because they have not put any money

in it.

Secretary LEAVITT. But there are several aspects of the President’s proposal, one of which is to even out the tax treatment.

Whether or not it is with an HSA or not, we have every advantage,

in my judgment, this year to see incentives created for people to

buy insurance.

They are a lot better off, and society is a lot better off, if they

have catastrophic coverage than if they do not, and that is one

part. I will do my best to get information.

Senator BINGAMAN. Thank you very much. Thank you, Mr.

Chairman.

The CHAIRMAN. Thank you.

The hearing is completed. I thank you, Mr. Secretary, and ask

any members who have questions in writing, that those would be

submitted to us by close of business Monday night. Thank you, Mr.

Secretary.

[Whereupon, at 11:38 a.m., the hearing was concluded.]
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