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DEPARTMENT OF HEALTH AND HUMAN SERVICES

BUDGET PRIORITIES FOR FISCAL YEAR 2004

HEARING

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

HEARING HELD IN WASHINGTON, DC, FEBRUARY 26, 2003

Serial No. 108–5

Printed for the use of the Committee on the Budget

(

Available on the Internet: http://www.access.gpo.gov/congress/house/house04.html 

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COMMITTEE ON THE BUDGET 

JIM NUSSLE, Iowa, Chairman 

CHRISTOPHER SHAYS, Connecticut, 

Vice Chairman 

GIL GUTKNECHT, Minnesota 

MAC THORNBERRY, Texas 

JIM RYUN, Kansas 

PAT TOOMEY, Pennsylvania 

DOC HASTINGS, Washington 

ROB PORTMAN, Ohio 

EDWARD SCHROCK, Virginia 

HENRY E. BROWN, JR., South Carolina 

ANDER CRENSHAW, Florida 

ADAM PUTNAM, Florida 

ROGER WICKER, Mississippi 

KENNY HULSHOF, Missouri 

THOMAS G. TANCREDO, Colorado 

DAVID VITTER, Louisiana 

JO BONNER, Alabama 

TRENT FRANKS, Arizona 

SCOTT GARRETT, New Jersey 

GRESHAM BARRETT, South Carolina 

THADDEUS MCCOTTER, Michigan 

MARIO DIAZ–BALART, Florida 

JEB HENSARLING, Texas 

GINNY BROWN–WAITE, Florida 

JOHN M. SPRATT, JR., South Carolina, 

Ranking Minority Member 

JAMES P. MORAN, Virginia 

DARLENE HOOLEY, Oregon 

TAMMY BALDWIN, Wisconsin 

DENNIS MOORE, Kansas 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

ROSA DELAURO, Connecticut 

CHET EDWARDS, Texas 

ROBERT C. SCOTT, Virginia 

HAROLD FORD, Tennessee 

LOIS CAPPS, California 

MIKE THOMPSON, California 

BRIAN BAIRD, Washington 

JIM COOPER, Tennessee 

RAHM EMMANUEL, Illinois 

ARTUR DAVIS, Alabama 

DENISE L. MAJETTE, Georgia 

RON KIND, Wisconsin 

PROFESSIONAL STAFF

RICH MEADE, Chief of Staff 

THOMAS S. KAHN, Minority Staff Director and Chief Counsel 

(III)

C O N T E N T S

Page 

Hearing held in Washington, DC, February 26, 2003 .......................................... 1

Statement of: 

Hon. Tommy G. Thompson, Secretary, U.S. Department of Health and 

Human Services ............................................................................................ 6

Gail R. Wilensky, Ph.D., John M. Olin Senior Fellow, Project Hope ........... 61

Judith Feder, Professor and Dean of Public Policy, Georgetown University .................................................................................................................. 66

Prepared statement and additional submissions of: 

Hon. Adam H. Putnam, a Representative in Congress from the State 

of Florida ....................................................................................................... 5

Secretary Thompson: 

Prepared statement ................................................................................... 8

Response to Mr. Nussle’s question regarding the President’s Medicare 

Proposal .................................................................................................. 16

Response to Mr. Nussle’s question regarding the Physician Update 

Rule ......................................................................................................... 17

Response to Mr. Baird’s question regarding the health care tax credit 

proposal .................................................................................................. 39

Response to Mr. Scott’s question regarding low-income heating assistance ......................................................................................................... 47

Prepared statement of Dr. Wilensky .............................................................. 63

Prepared statement of Dr. Feder .................................................................... 69

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DEPARTMENT OF HEALTH AND HUMAN SERVICES BUDGET PRIORITIES FOR FISCAL 

YEAR 2004

WEDNESDAY, FEBRUARY 26, 2003

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The committee met, pursuant to call, at 10 a.m., in room 210, 

Cannon House Office Building, Hon. Jim Nussle (chairman of the 

committee) presiding. 

Members present: Representatives Nussle, Shays, Gutknecht, 

Ryun, Hastings, Brown, Putnam, Wicker, Hulshof, Tancredo, 

Vitter, Bonner, Franks, Garrett, Barrett, Diaz-Balart, Hensarling, 

Brown-Waite, Spratt, Moran, Hooley, Baldwin, Moore, DeLauro, 

Scott, Capps, Thompson, Baird, Cooper, Emanuel, Davis, Majette, 

and Kind. 

Chairman NUSSLE. This is the full committee hearing on the Department of Health and Human Services budget priorities for fiscal 

year 2004. 

Today we have two very distinguished panels. The first panel is 

the Secretary of Health and Human Services, the Honorable 

Tommy G. Thompson, Secretary of Health and Human Services, 

and the second panel will be Gail Wilensky. Dr. Wilensky is a senior fellow from Project Hope—and Dr. Judith Feder, who is the 

Dean of Public Policy at Georgetown University. We are honored 

to have these guests with us today to testify and to give us their 

advice on a host of issues, but most importantly, the budget for fiscal year 2004. 

Mr. Secretary, thank you so much for taking time to spend with 

us today. This is, as we were just speaking off the record here, I 

believe, your 41st appearance, as you were saying, before the Congress; and that may be a record, certainly among the current Secretaries. I am not sure it is true with others in previous administrations, but what it says to me is that you are willing to be here, to 

defend programs, to defend policy, to defend administration, to answer questions, tough questions, at a time when there are not always good, easy answers as you know. But we appreciate that. 

The Department of Health and Human Services has a long list 

of responsibilities, maybe the longest list just about anywhere in 

the cabinet. The responsibilities are within numerous agencies. 

There are four specific areas that I believe our committee would 

like to focus on here today. Certainly bioterrorism, welfare reform, 

Medicaid reform, and Medicare reform with prescription drugs 

2

would probably be the four big areas that members may want to 

inquire. I am sure there may be others. 

I don’t think most people would immediately associate the Department of Health and Human Services with homeland security; 

at least that was not traditionally an association. But the last 2 

years have underscored the critical services that this department 

provides when it comes to the well-being of our citizens, especially 

in the event of a bioterrorist attack. 

Since September 11, we have become increasingly aware of the 

possibility of these types of attacks. Health and Human Services is 

at the forefront of ensuring America that we are ready by overseeing that there exists an appropriate supply and stockpile of vaccines and immunizations, an appropriate number of trained health 

care providers and first responders, hospitals and facilities that are 

properly outfitted and equipped, appropriate funding for vaccine research and development, and improved information networks so 

that key personnel can act appropriately in the event of an emergency. 

Another area that I would like to discuss that has had some success over the last several years is welfare reform. 

Mr. Secretary, there is probably no one with more working 

knowledge in this area than you. As the Governor of Wisconsin, 

you led the effort to bring common-sense reforms to this program 

that helped put more people back to work and ended decades of 

government dependence; and we used you as a model and used 

your expertise and advice as a model for our reform. 

Since we passed welfare reform in 1996, the number of families 

receiving welfare has been reduced by more than half, and child 

poverty has been cut significantly; and that is a job well done for 

this Congress, for this administration, for previous administrations, 

and we need to build upon that. When welfare reform finally 

passed, there were critics who claimed that it might work well during the current economic boom that we saw at that time, but we 

were warned that welfare case loads would swell during economic 

slowdowns. I am pleased to note that, in fact, the reforms did sustain during economic slowdown. 

One of the key components of welfare reform—the one that I believe made it such a success—was the flexibility that gave States 

the ability to implement the program. In a similar fashion, the 

President’s budget proposes to reform the Federal-State Medicaid 

program. 

This proposition, in theory, gives the States greater flexibility to 

cover some of the 41 million Americans without health insurance. 

But, Mr. Secretary, we don’t have a lot of specifics or details on the 

Federal-State Medicaid program reforms that are part of this proposal, and Congress eagerly awaits that guidance from the administration. 

Similarly, the last issue I want to touch upon is by no means the 

least in importance. It may be the most important non-Homeland 

Security, non-Defense issue that we have before us, and although 

most of the public discussion has focused on prescription drugs, 

there is an urgent need to fundamentally reform the program of 

Medicare; or, for that matter, risk that it has become unsustainVerDate Feb 1 2002 11:02 Jun 04, 2003 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 X:\HEARINGS\108TH\108-5\HBU057.000 RYAN PsN: RYAN
3

able. Even today, Medicare’s dedicated revenue is lower than expenditures for the program as a whole. The President’s budget says that Medicare has a $13.3-trillion 

shortfall over the next 75 years. Taken together, Medicare, Social 

Security and Medicaid eventually will consume all Federal revenue. So therefore, I agree with the warning that the President has 

in his budget where it says, quote, ‘‘Given the financial challenges 

faced by Medicare in the future, the Congress must be extremely 

careful that legislative changes not add to the long-term, unfunded 

promises faced by this program.’’ 

I also have a more specific concern with regard to Medicare. My 

State of Iowa, as you know has the fifth highest population of people over the age of 65 and has the most over the age of 85 of any 

State. So clearly Medicare is an incredibly important component of 

our health care system. And we have visited about this many times 

because I know Wisconsin has shared similar issues and concerns. 

Ironically though, while Iowa ranks 6th in terms of providing 

overall quality, it remains 50th in overall Medicare reimbursement. 

Medicare simply does not pay its fair share to Iowa or, for that 

matter, many other States in similar situations. And I will just report to you for the good of the order, that it is not enough, nor is 

it acceptable, for the director of CMS, Mr. Scully, to just praise our 

efficiency and tell us that our hospitals are fine using data that is 

2 years old; that is just not acceptable. And while we certainly understand he has an enormous amount of expertise in this area, we 

wish that he would come forward with proposals rather than just 

faint praise. 

Unfair reimbursements rates are causing major problems for recruitment and retention of health care personnel. It is making it 

tough for health care facilities to make ends meet. If Iowa’s health 

care providers are forced to leave rural and small urban communities the same way it is true in so many other States represented 

on this committee, other employers will follow suit. It is that simple. If the health care leaves the community, you have no economic 

development. 

So I am pleased that the recent omnibus appropriations bill included some short-term relief, but it was not enough. This needs 

to be resolved. We have talked about this many times. My concern 

is that even though I have had a chance to meet with you and Mr. 

Scully and the President himself about this issue and had a chance 

to talk about some specifics, we have had the budget proposal with 

a plugged number of $400 billion for a few weeks now and still 

have no icing on the cake, meaning we have none of the details 

similar to the Medicaid program. 

I believe Iowans certainly have waited long enough, and I can 

tell you that I believe Congress and America have waited long 

enough. I believe it is time for the administration to come forward 

and give us the principles of the plan and the outline as soon as 

possible. 

We need to fix this problem now, and we need your leadership 

and the leadership of the President in order to get it done, as we 

have seen from recent experiences here in the Congress. 

So, Mr. Secretary, I know you have got a snootful of issues that 

are on your plate, but I also know that you revel in the challenges 

4

that face you and the Department and our country; otherwise, you 

wouldn’t have taken on this task. And so we know that when we 

make these constructive comments and arguments to you, they are 

not falling on deaf ears. We have got a partner in someone who 

wants to work with us. 

So, with that, let me turn to Mr. Moran for any comments that 

he would like to make on behalf of Mr. Spratt. And then I would 

like to begin with your testimony. 

Mr. MORAN. Thank you very much, Chairman Nussle, and we 

thank the Secretary for being here. 

And given the fact that the President was clearly going to appoint a Republican as Secretary of HHS, I think he made an excellent choice in choosing you, Governor Thompson. And I do sympathize with you for having to defend this miserable HHS budget 

that you are presented with. 

There are three reasons I say that. One is the domestic discretionary spending levels. Given the fact that the President feels that 

we can afford tax cuts of trillions of dollars, the idea that we would 

be cutting in critical areas, NIH, for example, just doesn’t seem to 

be logical. The National Institutes of Health budget here will erode 

the progress that NIH has made in recent years and undermine 

the agency’s ability to continue current research efforts and undertake new research efforts, and I am quoting there from a number 

of people involved with NIH that have been involved in the substantial progress they have made. 

In terms of Medicare, that the—excuse me. In terms of prescription drug coverage that the chairman rightfully emphasized, I do 

think that in the interest of full disclosure, we should make it clear 

to seniors that they cannot get prescription drug coverage under 

your approach through their Medicare plan. The plan that is being 

presented with the price tag that the chairman suggested does, in 

fact, put them into private health coverage, and I am not sure that 

Medicare seniors are fully aware of the consequences of this plan. 

And the third area that I know you are going to emphasize in 

your testimony, that I think we want to ask further questions 

about is with regard to the Medicaid program, because I know as 

Governor—if you were still Governor of Wisconsin—you would be 

in the front lines protesting this plan. 

I see you nodding there. I think you may be prematurely nodding 

there, Governor, but I wanted to catch that, make a note on that, 

that the Governor was nodding affirmatively. 

You would be on the front lines protesting this plan because 

what we are doing is putting this thing under a block grant which, 

while it may give more leverage to individual Governors, takes 

away responsibility from the Federal Government for the substance 

of the plan. But most importantly, it covers your fiscal situation for 

the first 7 years, but then in the last 3 years, you have to pay it 

all back. 

This is worse than the tax plan that we get under the budget 

resolution by saying that we are going to repeal the whole tax plan 

in order to pay for it in the tenth year. You know we are not going 

to do that, and States can’t possibly pay back what we are advancing them for the first 7 years in the last 3 years. Talk about being 

fiscally irresponsible. 

5

Now, some of them may feel they are going to be out of office 

then and it is not their problem. But to suggest that we would advance money and then require the States to pay it back when they 

may well be in even worse fiscal condition doesn’t seem to be responsible. I know that you would have been one of the first ones 

to protest this approach. 

I don’t want to take a lot of your time because we are going to 

have a lot of interesting questions to ask, and we are looking forward to your testimony and appreciate you for your leadership, 

Governor Thompson. Thank you. 

Thank you Mr. Chairman. 

Chairman NUSSLE. The record will reflect that the Secretary was 

fidgeting in his seat. 

Mr. MORAN. Sounds like you are fudging there, Mr. Chairman. 

Chairman NUSSLE. That is OK, Jimmy. 

All members, with unanimous consent, may put a statement in 

the record at this point. 

[The prepared statements follow:]

PREPARED STATEMENT OF HON. ADAM H. PUTNAM, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF FLORIDA

Mr. Chairman, I am pleased that we have convened today to receive the fiscal 

year 2004 budget priorities for the United States Department of Health and Human 

Services from Secretary Tommy Thompson. I am honored to be here with you, Ranking Member Spratt, and the rest of the committee, to exchange views on the Department of Health and Human Services budget for the coming year. Thank you, Secretary Thompson, for appearing today to discuss the needs of your Department, 

which is so crucial to the well-being and health of our Nation. 

I look forward to hearing your department’s plans for addressing the looming 

Medicare crisis in this country. Together, Congress and the administration must 

create a fair and responsible Medicare program that has improved benefits for its 

current customers while remaining a stable, solvent program for the future. Medicare’s outmoded benefit does not cover prescription drugs, provide consistent coverage for many preventive treatments, support coordinated management of chronic 

diseases, or offer catastrophic coverage. 

It is imperative that any Medicare reform plans include benefits similar to what 

our seniors are receiving now, yet also move to modernize them. Seniors are generally pleased with their current benefits but understand the need for a prescription 

drug benefit. However, we must institute reforms that will ensure a quality Medicare program is available to future generations also. Reforms must create a Medicare that is relevant to future generations. I am eager to hear the President’s proposal to modernize Medicare and I am hopeful that we can create a system that 

will keep all of Medicare’s benefits financially secure while also providing our seniors with what is necessary for them to live healthier and improve their quality of 

life. 

I am also concerned with the Department of Health and Humans Services’ role 

in meeting threats to our homeland’s security. Americans have access to the best 

health care system in the world, headed up by the most dedicated professionals from 

the CDC level right down to the local hospital. We have the finest health system, 

yet we must continue to reinforce it. I want to be assured that we are improving 

surveillance techniques, the dissemination of information, and awareness of biological threats such as anthrax, smallpox, botox, bubonic plague, and food safety 

threats. These are the new threats to our country and they must be addressed. 

In the past I have expressed my concerns with foot and mouth disease and mad 

cow disease as examples of diseases that would have a huge impact on public safety 

and consumer confidence in our food supply. This has been a concern of mine for 

a long time, and so I’m appreciative that you are concerned about it too. I am hopeful that you have continued to keep food safety and biological threats a high priority 

in your department. 

Mr. Secretary, I look forward to your testimony and I am sure you will provide 

all of us with a clear picture of your Department’s priorities and required resources 

necessary to keep America healthy.

6

Chairman NUSSLE. Mr. Secretary, welcome back to the committee. This is your third time that you have had an opportunity 

to come before us. We do greatly appreciate that, and we would like 

to ask you to proceed as you see fit. 

STATEMENT OF THE HONORABLE TOMMY G. THOMPSON, SECRETARY, U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES 

Secretary THOMPSON. Thank you very much, Mr. Chairman. 

Thank you so much for your leadership, your dedication; and thank 

you for your opening remarks on so many issues that are really key 

to Iowa, to the country and especially to my department; Mr. 

Spratt in absentia and my current Congressman. Mr. Moran, I live 

in your district, and I——

Mr. MORAN. Wouldn’t you know he is a constituent. 

Secretary THOMPSON [continuing]. I would like to point out, Congressman Moran, that if I was still Governor, I would walk all the 

way from Madison to Washington, DC, to be the first Governor to 

sign up for my plan, because it is that good; and I hope to get a 

chance to explain it to you and even convince my temporary Congressman from northern Virginia that it is the right way to go. 

And, Mr. Shays and all the other members of this wonderful 

committee, thank you for giving me this honor to appear in front 

of you to present the President’s fiscal year 2004 budget for the Department of Health and Human Service’s that continues to advance 

the President’s goal of ensuring that every American has access to 

health care. 

The President proposes outlays for HHS of $539 billion; 539 billion represents an increase of $36.8 billion, or over 7 percent, over 

fiscal year 2003’s enacted amounts, and an increase of more than 

$109 billion, or 25 percent, since 2001. The discretionary part of 

the budget increases $1.64 billion, or 2.6 percent, to $65 billion of 

budget authority. This would be $60 million higher than the enacted fiscal year 2003 appropriation. 

Our most urgent priority is bioterrorism, and I would parenthetically, just at the outset, invite every member of this committee to 

come over to the Department of Health and Human Services to see 

our operation, our brand-new communications room, which is state 

of the art, and I think it will allay a lot of your fears, once you 

have a chance to go through it and give me an opportunity to explain it to you. 

Congressman Shays has been through it, and he would, I think, 

remark that it is one of the finest communications rooms in the 

Federal Government. It is an area where we have moved with unprecedented speed, commitment, and determination to prepare our 

Nation for an attack or a public health crisis since the terrorist attack of September 11. 

It is clear that our public health structure is stronger than ever, 

and getting stronger each and every day as we work with States 

and local communities to prepare for possible attacks as well as 

other health crises. Yet there is much work to do, and we remain 

committed to building our unprecedented efforts to protect the public health. 

7

Our budget would spend $3.6 billion to further enhance the steps 

that we have taken since that terrible day including an additional 

$1.4 billion in State, local and hospital preparedness. Additionally, 

President Bush recently announced a new initiative, Project Bioshield, that would also help prepare the country for a bioterrorism 

attack. 

He would spend roughly $6 billion over 10 years on new countermeasures. This proposal would speed up research approval of vaccines and treatments and ensure a guaranteed funding source for 

their purchase, just the latest in our forward-looking efforts to protect our homeland. 

While we are preparing the Nation for a bioterrorist attack, we 

are also working aggressively to strengthen and modernize our two 

largest health programs, Medicare and Medicaid, popular programs 

that are badly in need of an update. 

As you well know, Mr. Chairman, our Nation’s Medicare program 

needs to be strengthened and needs to be improved in order to fill 

the gaps in current coverage. The President has proposed numerous principles for Medicare enhancements to ensure that we are 

providing our seniors with the best possible care. We have also 

dedicated $400 billion over the next decade to achieve this very ambitious goal, and we look forward to working closely with Members 

of Congress and especially this committee to develop and pass a responsible and effective Medicare bill. 

The budget proposed a prescription drug benefit that would be 

available to all beneficiaries, would protect them against high drug 

expenditures and would provide additional assistance through generous subsidies for low-income beneficiaries to ensure individuals 

have ready access to pharmaceutical drugs. 

Passing Medicare legislation will be a huge task, and improving 

Medicaid is also very urgent. In fact, Medicaid is growing even 

more rapidly than Medicare. The Federal portion is $162 billion 

this year, and the program is growing at about 9 percent a year. 

But State Medicaid programs are under tremendous financial pressure and beneficiaries risk losing coverage. Two-thirds of the States 

have already made reductions or have reductions pending. 

The President has proposed a very aggressive plan to preserve 

coverage, make Medicaid more efficient and provide better health 

care delivery. We would begin by addressing the immediate fiscal 

needs of the States. We would meet the 9 percent base growth in 

the program and then forward-fund by $3.25 billion for 2004 and 

$12.7 billion over 7 years. And the States would not have to pay 

it back. If Congress adopts this plan, States will be able to build 

on the successes of the States’ Children’s Health Insurance Program. I had a chance to discuss this proposal with many Governors 

on Monday, and their reaction was very positive. 

Let me be very clear about two things. First, State participation 

in this new program would be optional; it would be voluntary. Second, mandatory populations will continue to receive all of their 

mandatory benefits. The Medicaid entitlement will be unchanged. 

States will have more flexibility in covering optional populations, 

which account for a large part of Medicaid spending. They will gain 

the ability to target special needs populations, such as those suffering from mental illness and HIV/AIDS. And if we do not improve 

8

Medicaid, a million Americans could lose coverage this year, and 

millions more next year. I look forward to working with this Congress to make sure that that does not happen. 

At the same time we expand access to health care, we also want 

to reduce the number of people who need it, and because so many 

Americans suffer from preventable diseases, this administration 

has made prevention a key priority. Our budget proposes a new investment of $100 million to promote a healthier lifestyle by emphasizing prevention of obesity, diabetes and asthma, something I am 

absolutely committed to and passionate about. 

Turning from health to welfare. Many of you worked on welfare 

reform in 1996 and we have all known how successful it has been. 

We will work with Congress this year to reauthorize the program 

and to strengthen work requirements and support for healthy families. The President’s budget would spend $17.6 billion for 2004 on 

TANF, and the $2-billion contingency fund still remains available. 

Now is not the time to turn back. We must move forward in helping millions of Americans become self-sufficient. In a continuing effort to improve the lives of children who are at risk of abuse and 

neglect, we are proposing a child welfare financing option that 

States can use to improve their child-welfare service systems. We 

propose to spend nearly $5 billion for foster care in 2004, a $90-

million increase over the fiscal year 2003 enacted appropriation. 

The President has made improving our Nation’s health and 

health care one of his biggest priorities for the year; and by working together, we can make it one of our proudest achievements. I 

look forward to all the work and I know our discussion this morning will get things rolling. 

I thank you, Mr. Chairman, members of this committee, once 

again for giving me this opportunity to come before you and testify 

and answer your questions. 

[The prepared statement of Secretary Thompson follows:]

PREPARED STATEMENT OF HON. TOMMY G. THOMPSON, SECRETARY, U.S. 

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Good morning Mr. Chairman, Mr. Spratt, and members of the committee. I am 

honored to be here today to present to you the President’s fiscal year 2004 budget 

for the Department of Health and Human Services (HHS). I am certain you will find 

that, viewed in its entirety, our budget will help improve the health and safety of 

our Nation. 

The President’s fiscal year 2004 budget request continues to support the needs of 

the American people by strengthening and improving Medicare and Medicaid, enhancing Temporary Assistance for Needy Families (TANF) and Foster Care; 

strengthening the Child Support Enforcement Program; and furthering the reach of 

the President’s New Freedom Initiative. 

The $539 billion proposed by the President for HHS will enable the Department 

to continue its important work with our partners at the State and local levels and 

the newly created Department of Homeland Security. Working together, we will 

hold fast to our commitment to protect our Nation and ensure the health of all 

Americans. Many of our programs at HHS provide necessary services that contribute to the war on terrorism and provide us with a more secure future. In this 

area, I am particularly focused on preparedness at the local level, ensuring the safety of food products, and research on and development of vaccines and other therapies to counter potential bioterrorist attacks. 

Our proposal includes a $37-billion increase over the fiscal year 2003 budget, or 

about 7.3 percent. The discretionary portion of the HHS budget totals $65 billion 

in budget authority, which is an increase of $1.6 billion, or about 2.6 percent. HHS’ 

mandatory outlays total $475.9 billion in this budget proposal, an increase of $32.3 

billion, or roughly 7.3 percent. 

9

Your committee will set the framework for achieving many of the administration’s 

most important priorities. I am grateful for the close partnership we have enjoyed 

in the past, and I look forward to working with you on an aggressive legislative 

agenda to advance the health and well being of millions of Americans. Today, I 

would like to highlight for you the key issues in the President’s budget. 

SUPPORTING THE PRESIDENT’S DISEASE PREVENTION INITIATIVE

One of the most important issues on which we can work together is disease prevention. We all have heard the disturbing news about the prevalence of diabetes, 

obesity and asthma that could be prevented through simple lifestyle changes. The 

statistics, I am sure, are as alarming to you as they are to me. For example, the 

incidence of diabetes and obesity among Americans is up sharply in the past decade, 

putting millions more Americans at higher risk for heart disease, stroke and other 

related medical conditions. 

Diabetes alone costs the Nation nearly $100 billion each year in direct medical 

costs and leads to incalculable indirect economic costs, including disability, missed 

work and premature death. Medical studies have shown that modest lifestyle 

changes—such as getting more exercise and losing weight—can reduce an individual’s risks for developing these serious health conditions. 

For this reason the HHS budget, consistent with the President’s Healthier US effort, proposes a coordinated, Department-wide endeavor to promote a healthier lifestyle emphasizing prevention of obesity, diabetes, and asthma. The fiscal year 2004 

budget includes a new investment of $100 million for targeted disease prevention. 

The proposed fiscal year 2004 budget for the National Institutes of Health builds 

upon the doubling of the NIH budget that was completed in fiscal year 2003, providing an increase of $500 million from the previous year. NIH will be able to increase funds devoted to its research programs by $1.9 billion, or 7.5 percent. In addition 

FIGHTING BIOTERRORISM

As Americans confront the realities of terrorism and hatred around us, it is imperative that the Federal Government be prepared to keep our citizens safe and 

healthy. HHS’s $3.6 billion bioterrorism budget substantially expands ongoing medical research, maintains State and local preparedness funding, and includes targeted 

investments to protect our food supply. The President’s proposal significantly expands NIH research funding needed to develop vaccines and medicines that will 

make biologic agents much less effective as weapons. HHS and DHS will be working 

hand-in-hand to ensure that Americans have emergency access to stockpiles containing effective drugs, vaccines, and other biologics. HHS and the Department of 

Homeland Security, will spearhead the development of Project Bioshield. This 

project, which the President recently proposed, will bring together the resources of 

the United States government in an innovative effort to develop defenses against 

bioterror before they are ever needed. Project Bioshield will have three (3) major 

goals: • Ensure sufficient resources are available to procure the next-generation countermeasures. The administration proposes a permanent, indefinite authority that 

will: a) provide the government with the flexibility needed to respond to changing 

threat information and science; b) establish a guaranteed funding source that will 

allow the government to purchase vaccines and other therapies as soon as experts 

believe they can be made safe and effective; and c) spur the industry investment 

needed to produce these countermeasures by providing assurance that if they can 

produce a needed product, the government can and will purchase it. • Speed up NIH research and advanced development. Provide more flexible contracting and procurement authorities for critical biodefense work. 

• Make promising treatments available more quickly for use in emergencies. Establish a new FDA Emergency Use Authorization for promising medical countermeasures that are under development that provides greater flexibility in emergency 

situations than the current Investigational New Drug (IND) authority. 

IMPROVING THE NATION’S HEALTH

In an effort to improve the Nation’s health, the budget includes initiatives to reduce drug-related medical costs and carry out the Best Pharmaceuticals for Children 

Act. The request for the Food and Drug Administration (FDA) includes $13 million 

to increase Americans’ access to safe, effective, and less expensive generic drugs. 

The budget also includes an additional $30 million in NIH and FDA to expand Federal and private research to improve information for prescribing pharmaceuticals to 

children. 

10

The HHS budget includes a series of improvements in the financing of childhood 

vaccines to meet three goals—first, improve vaccine access for children eligible for 

the Vaccines for Children program, second, restore tetanus-diphtheria booster to the 

VFC program; and third, build a national stockpile of childhood vaccines. To ensure 

against future shortages of childhood vaccines, HHS will develop a strategic plan 

and implement a vendor-managed, 6-month supply of all childhood vaccines by 

2006. In addition, legislation will be proposed to improve access to VFC vaccines for 

children already entitled to them. The budget proposes to expand the number of access points for underinsured children to those whose private insurance does not 

cover the immunizations by allowing them to receive their VFC vaccines at State 

and local public health clinics. I also propose to restore the tetanus and diphtheria 

booster to the VFC program by removing outdate price caps that are so low that 

vendors will not bid on VFC contracts. 

The budget also contains $100 million to begin working with industry to ensure 

the Nation has an adequate supply of influenza vaccine in the event of a pandemic. 

Due to its short shelf life, we cannot stockpile influenza vaccine, and current manufacturing methods could not surge to meet the Nation’s needs in a pandemic. Funds 

will be used for activities to ensure a year-round influenza vaccine production capacity and the development and implementation of rapidly expandable production technologies. 

In fiscal year 2003, we are completing a 5-year doubling of the budget of the National Institutes of Health (NIH). This year, we continue that commitment with a 

budget of $27.9 billion, a net increase of $549 million over last year. As a result 

of one-time projects being funded in fiscal year 2003, and not needing to be continued, NIH funding for research on larger scale projects will increase $1.9 billion, 7.5 

percent, and fund a record number of new and competing research grants. 

We are investing $50 million in a new program at AHRQ to increase investments 

in hospital information technology to improve patient safety. Of this amount, $26 

million will be used to focus on small and rural hospitals. Proven technologies like 

computerized physician order entry and automated medication dispensing systems 

improve the safety and quality of care. 

FAITH-BASED AND COMMUNITY INITIATIVES

In support of the President’s Faith-Based and Community Initiative, the HHS fiscal year 2004 budget supports programs that promote positive relationships that 

link faith- and community-based organizations, State and local governments, and 

Federal partners to develop a shared picture for substance abuse treatment and 

positive youth development. 

We are proposing to establish a new $200-million drug treatment program. For 

some individuals, recovery is best assured when it is achieved in a program that 

recognizes the power of spiritual resources in transforming lives. Under this new 

program, individuals with a drug or alcohol problem who lack the private resources 

for treatment will be given the means to secure drug treatment services. The program will give them the ability to choose among a range of effective treatment options, including faith-based and community-based treatment facilities. Another important program that helps some of our most vulnerable children is the Mentoring 

Children of Prisoners program. We are asking for funds to be increased to $50 million, which would in turn be made available to faith-based, community-based, State 

and local governments and tribes, and public organizations for programs that provide supportive one-on-one relationships with caring adults to these children who 

are more likely to succumb to substance abuse, gang activity, early childbearing and 

delinquency. This down payment will help approximately 30,000 adolescent children 

of prisoners receive some guidance, have positive role models, and give them a fighting chance to succeed. In addition, the budget request for the Compassion Capital 

Fund is $100 million, an increase of $65 million above the fiscal year 2003 appropriation. These funds would continue to be used to provide technical assistance to 

faith- and community-based organizations to expand and emulate model social programs. These are just a few examples of the services that can be provided to those 

in need under this initiative. 

STRENGTHENING AND IMPROVING MEDICARE

As we are all aware, our Nation’s Medicare program needs to be strengthened and 

improved to fill the gaps in current coverage. We remain steadfastly committed to 

ensuring that America’s seniors and individuals with disabilities can keep their current, traditional Medicare. The President has proposed numerous principles for 

Medicare enhancements to ensure that we are providing our seniors with the best 

possible care. The budget builds on those principles by dedicating $400 billion over 

11

10 years to strengthen and improve Medicare, including providing access to subsidized prescription drug coverage, better private options and better insurance protection through a modernized fee-for-service program. 

Prescription drug coverage 

Ensuring that Medicare beneficiaries have access to needed prescription drugs is 

a top priority for the President and me. This budget proposes a prescription drug 

benefit that would be available to all beneficiaries, protect them against high drug 

expenditures, and would provide additional assistance through generous subsidies 

for low-income beneficiaries to ensure ready access to needed drugs. The administration’s prescription drug plan would offer beneficiaries a choice of plans and would 

support the continuation of the coverage that many beneficiaries currently receive 

through employer-sponsored and other private health insurance. 

Medicare choices 

Medicare+Choice was introduced to provide beneficiaries with additional options 

for Medicare coverage. Over the past year, the Department has made significant 

strides in expanding beneficiaries’ Medicare+Choice options by approving 33 new 

preferred provider organizations PPOs) through a demonstration. However, due to 

a variety of factors, in many parts of the country, few other new plans have entered 

the program. More needs to be done to encourage plan participation. We believe that 

we should move away from administered pricing to set Medicare+Choice rates. The 

administration believes that Medicare+Choice payments need to be linked to the actual cost of providing care. America’s seniors and citizens with disabilities should 

have access to the same kind of reliable health care options others enjoy and that 

those choices should be provided through a market-based system in which private 

plans compete to provide coverage for beneficiaries. Those beneficiaries who select 

less costly options should be able to keep most of the savings. It is time we give 

our seniors the choice they have been promised in Medicare. 

Modernized fee-for-service 

One of the basic tenets of our proposal to strengthen and improve Medicare is 

that seniors and individuals with disabilities deserve the same range of health care 

delivery choices as Federal employees enjoy. These choices should reflect the care 

and service innovations incorporated into today’s best health insurance plans. A 

strengthened and improved Medicare program would rationalize cost-sharing for 

beneficiaries who need acute care. It would also eliminate cost sharing for preventive benefits and provide catastrophic coverage to protect beneficiaries against the 

high costs of treating serious illnesses. 

Medicare appeals reform 

Our budget also includes $129 million for the strengthening of the Medicare appeals process. The adjudicative function currently performed by the Administrative 

Law Judges at the Social Security Administration would be transferred to the Centers for Medicare and Medicaid Services (CMS). In addition, the administration proposes several legislative changes to the Medicare appeals process that would give 

CMS flexibility to improve the appeals system. These changes will enable CMS to 

respond to beneficiaries’ and providers’ needs efficiently and effectively. 

STRENGTHENING AND IMPROVING MEDICAID AND SCHIP

State health care partnership allotments 

Mr. Chairman, as you know, states are confronting serious challenges in running 

their Medicaid programs. It is crucial that we do something now to stabilize Medicaid programs so we do not allow millions of Americans to go without health care. 

In the past year, 38 states have reduced services or eligibility and most states are 

currently considering other benefit or eligibility cutbacks. We want to give states another option. It is our responsibility to work together so that states can get the help 

they need in managing their health care budgets, while preventing further service 

and benefit cuts and expanding coverage for low income Americans. 

Building on the success of the State Children’s Health Insurance Program 

(SCHIP) and the Health Insurance Flexibility and Accountability (HIFA) demonstrations in increasing coverage while providing flexibility and reducing the administrative burden on States, the administration proposes optional State Health Care Partnership Allotments to help States preserve coverage. Under this proposal, States 

would have the option of electing to continue the current Medicaid program or to 

choose partnership allotments. The allotment option provides States an estimated 

$12.7 billion in extra funding over 7 years over the expected growth rate in the current Medicaid and SCHIP budgets. If a State elects the allotments, the Federal porVerDate Feb 1 2002 11:02 Jun 04, 2003 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6621 X:\HEARINGS\108TH\108-5\HBU057.000 RYAN PsN: RYAN
12

tion of SCHIP and Medicaid funding would be combined and states would receive 

two individual allotments: one for long-term care and one for acute care. States 

would be required to maintain their current levels of spending on Medicaid and 

SCHIP, but at a lower rate of increase than the increase of the Federal share. 

States electing a partnership allotment would have to continue providing current 

mandatory services for mandatory populations. For optional populations and optional services, the increased flexibility of these allotments will allow each State to 

innovatively tailor its provision of health benefit packages for its low-income residents. For example, States could provide premium assistance to help families buy 

employer-based insurance. States could create innovative service delivery models for 

special needs populations including persons with HIV/AIDS, the mentally ill, and 

persons with chronic conditions without having to apply for a waiver. Another important part of the new plan would permit States to encourage the use of home and 

community-based care without needing a waiver, thereby preventing or delaying institutional care. Let me stress that this is an OPTION we are proposing for States. 

New Freedom Initiative 

One of the administration’s priorities is relying more on home and communitybased care, rather than institutional care for the elderly and disabled. The New 

Freedom initiative represents part of the administration’s effort to make it easier 

for Americans with disabilities to be more fully integrated into their communities. 

Under this initiative, we are committed to promoting the use of at-home and community-based care as an alternative to nursing homes. 

It has been shown time and again that home care combines cost effective benefits 

with increased independence and quality of life for recipients. Because of this, we 

have proposed that the fiscal year 2004 budget support a 5-year demonstration 

called ‘‘Money Follows the Individual’’ Rebalancing Demonstration, in which the 

Federal Government will fully reimburse States for 1 year of Medicaid home and 

community-based services for individuals who move from institutions into home and 

community-based care. After this initial year, States will be responsible for matching payments at their usual Medicaid matching rate. The administration will invest 

$350 million in fiscal year 2004, and $1.75 billion over 5 years on this important 

initiative to help seniors and disabled Americans live in the setting that best supports their needs. 

The administration again proposes four demonstration projects as part of the 

President’s New Freedom Initiative. Each promotes home and community-based 

care as an alternative to institutionalization. Two of the demonstrations are to provide respite services to caregivers of disabled adults and severely disabled children. 

The third demonstration will offer home and community-based services for children 

currently residing in psychiatric facilities. The fourth demonstration will test methods to address shortages of community direct-care workers. 

Medicaid coverage for spouses of disabled individuals 

The budget proposes to give States the option to extend Medicaid coverage for 

spouses of disabled individuals who return to work and are themselves eligible for 

Supplemental Security Income benefits. Under current law, individuals with disabilities might be discouraged from returning to work because the income they earn 

could jeopardize their spouse’s Medicaid eligibility. This proposal would extend to 

the spouse the same Medicaid coverage protection this committee was instrumental 

in offering to the disabled worker. 

Extension of the QI–1 program 

Under current law, Medicaid programs pay Medicare Part B Premiums for qualifying individuals (QI–1s), who are defined as Medicare beneficiaries with incomes 

of 120 percent to 135 percent of poverty and minimal assets. The budget would continue this premium assistance for 5 years. 

Transitional Medicaid Assistance (TMA) 

TMA provides health coverage for former welfare recipients after they enter the 

work force. TMA allows families to remain eligible for Medicaid for up to 12 months 

after they lose welfare related Medicaid eligibility due to earnings from work, and 

was scheduled to sunset in September 2002. TMA has been extended until June 30, 

2003 through the appropriations process. This budget proposal would extend TMA 

for five more years, costing $400 million in fiscal year 2004, and $2.4 billion over 

5 years. This program is an important factor in establishing independence for 

former welfare recipients by providing health care they could not otherwise afford. 

We are also proposing modifications to TMA provisions to simplify it and make 

it work better with private insurance. These provisions include: 

13

• States will be given the option to offer 12 months of continuous care to eligible 

participants. • States may waive income-reporting requirements for beneficiaries. • States that have Medicaid eligibility for children and families with incomes up 

to 185 percent of poverty may waive their TMA program requirements. • States have the option of offering TMA recipients ‘‘Health Coupons’’ to purchase 

private health insurance instead of offering traditional Medicaid benefits. 

State Children’s Health Insurance Program (SCHIP) 

As you know, SCHIP was set up with a funding mechanism that required States 

to spend their allotments within a 3-year window after which any unused funds 

would be redistributed among States that had spent all of their allotted funds. 

These redistributed funds would be available for one additional year, after which 

any unused funds would be returned to the Treasury. An estimated $830 million 

in fiscal year 2000 funds are expected to go back to the Treasury at the end of fiscal 

year 2003. The administration proposes that States be permitted to spend redistributed fiscal year 2000 funds through the end of fiscal year 2004. Extending the availability of SCHIP allotments would allow states to continue coverage for children 

who are currently enrolled and continue expanding coverage through HIFA waivers. 

Medicaid drug rebate 

The current Medicaid Rebate methodology establishes rebates to State Medicaid 

agencies based in large part on the drug manufacturer’s reported best price. The 

best price component of pharmaceutical rebates requires that the discounts that private sector purchasers are able to negotiate with pharmaceutical manufacturers also 

be given to Medicaid. It has been claimed that this provides a disincentive for drug 

manufacturers to give discounts to private sector purchasers. The administration is 

interested in working with this committee, the House Energy and Commerce Committee and the Finance Committee to explore policy options to address this issue. 

EMPOWERING AMERICA’S FAMILIES

Reauthorization of Temporary Assistance for Needy Families (TANF) and the Child 

Care Development Fund 

Building on the considerable success of welfare reform in this great Nation of 

ours, the President’s fiscal year 2004 budget follows the framework proposed in the 

fiscal year 2003 request which includes the reauthorization of TANF. We applaud 

passage of H.R. 4 and are committed to working with both the House and the Senate to ensure the legislation moves quickly through the process and is consistent 

with the President’s budget. The President’s proposal includes 5 years of funding 

for the TANF Block Grants to States, Tribes, and Territories; Matching Grants to 

Territories; and Tribal Work Programs at current levels. In addition, the fiscal year 

2004 budget reinstates authority for supplemental population grants at $319 million 

each year; restore transfer authority to the Social Service Block Grant of up to 10 

percent; as well as funding the $2 billion Contingency Fund with modified maintenance of effort and reconciliation requirements to make it more accessible for States. 

The central focus of the proposal strengthens work requirements while allowing 

States greater flexibility to define activities that will lead toward self-sufficiency. 

The Bonus to Reward High Performance States would be redesigned to provide $100 

million a year for bonuses for employment achievement. We propose replacing the 

bonus to reduce out-of-wedlock birth with a new initiative to fund research, demonstrations, and technical assistance activities primarily targeted to family formation. Our proposal includes $100 million for matching grants, also focused on building strong families and promoting healthy marriages. In addition, the budget proposes to reauthorize State abstinence education grants for 5 years at $50 million 

annually to further assist with reducing the number of out-of-wedlock pregnancies, 

reducing the spread of STDs, and helping teens make healthy life choices. These 

proposals demonstrate that this administration is committed to strengthening foundations for our children and supporting programs that will empower persons who 

have not been able to work, for any number of reasons, to achieve self-sufficiency. 

Hand in hand with these efforts, the President’s fiscal year 2004 budget also follows the framework established in the fiscal year 2003 budget and requests reauthorization of the Child Care and Developmental Block Grant Act and the Child 

Care Entitlement to assist States in meeting the critical child care needs of families. 

Increasing support for children in foster care 

In a continuing effort to improve the lives of children who are at risk of abuse 

and neglect, this administration is proposing a child welfare financing option that 

States can use to improve their child welfare service systems. This plan will allow 

14

States to choose a fixed allocation of funds over a 5-year period rather than the current entitlement funding for the Title IV–E Foster Care Program. Participating 

States will receive their funds in the form of flexible grants which could be used 

for a wide array of child welfare-related purposes, such as child abuse and neglect 

prevention, maintenance and administrative payments for foster care, child welfare 

training, and family support. The flexible funding will allow States to develop innovative plans that can be tailored to meet the needs of their child welfare populations. States that elect this option and experience emergencies affecting their foster care systems may apply for access to additional funding from the TANF contingency fund. 

The administration is proposing a nearly $5 billion budget for Foster Care in fiscal year 2004, an $89-million increase over last year’s request. Not only will these 

funds support the child welfare program option, but they also will be used to provide 

payments for maintenance and administrative costs for more than 240,000 children 

in foster care each month, as well as payments for training and child welfare data 

systems. 

The Adoption Incentives Program has been successful in contributing to the substantial increase in the number of children who are adopted from the public foster 

care system in recent years. The President’s fiscal year 2004 budget request includes reauthorization of this important funding. Additionally, we propose changes 

to the incentive system to target older children, who despite the overall gains in 

adoptions constitute an increasing proportion of the children waiting for adoptive 

families. The President’s budget request for the Adoption Incentives Program is $43 

million. 

Another important issue we face with foster care is the transition for children out 

of these programs. Last year, nearly 20,000 children aged out of the foster care system. In order to assist these at-risk young adults, the President is committed to 

maintaining the Independent Living Program, which provides a variety of services 

for youth who will likely remain in foster care until they turn 18 and former foster 

children between the ages of 18 and 21. The President’s budget request for the Foster Care Independence Program is $200 million. This request includes $60 million 

to provide participants with up to $5,000 for college tuition or vocational training 

to youth who age out of the foster care system. 

Additionally, the administration continues its commitment to the Promoting Safe 

and Stable Families Program by requesting to $505 million to assist States in coordinating services related to child abuse prevention and family preservation. This 

important program also helps to promote adoption and provides post-adoption support to families. 

Child support enforcement 

Related to my commitment to strengthening America’s families, I am proud to tell 

you that our Child Support Enforcement program has made some impressive gains. 

Child support collections hit a record $20 billion in fiscal year 2002, serving an estimated 17.1 million child support cases and in fiscal year 2001, over 1.6 million paternities were established or acknowledged. 

The President’s fiscal year 2004 budget will build on this considerable success. 

Legislation will be proposed to enhance and expand the existing automated enforcement infrastructure at the Federal and State level and increase support collected 

on behalf of children and families. For example, States can better benefit from Federal data systems to freeze and seize assets in multi-state financial institutions and 

to garnish insurance settlements in order to satisfy past due child support. In addition, gaming winnings will be subject to intercept for past due support. When combined with the opportunities to increase child support outlined in the President’s fiscal year 2003 budget (expanded passport denial, offset of certain Social Security 

benefits, optional pass through of child support to families on TANF, among others) 

these proposals offer an impressive $7.5 billion in increased child support payments 

to families over 10 years. The budget also recognizes that healthy families need 

more than financial support alone and increases resources for the Access and Visitation Program to support and facilitate non-custodial parents’ access to and visitation 

of their children. 

HEAD START

The President’s budget includes $6.8 billion for Head Start. This level will increase enrollment of children in those areas of the country with the greatest unmet 

need. This budget proposal will continue to focus on school readiness of Head Start 

programs. 

15

RESPONSIBLE FATHERHOOD AND HEALTHY MARRIAGES

The President’s budget also proposes $20 million for promotion and support of responsible fatherhood and healthy marriage. This funding will promote and support 

involved, committed, and responsible fatherhood and encourage the formation and 

stability of healthy marriages. 

PRESIDENT’S MANAGEMENT AGENDA

I am committed to improving the management of the Department of Health and 

Human Services, and I realize that as we work to improve the health and well-being 

of every American citizen, we also need to improve ourselves. The fiscal year 2004 

budget supports the President’s Management Agenda and includes cost savings from 

consolidating administrative functions; organizational delayering to speed decision 

making processes; competitive sourcing; implementation of effective work force planning and human capital management strategies; and adoption of other economies 

and efficiencies in administrative operations. We have also included savings in information technology (IT) which will be realized from ongoing IT consolidation efforts 

and spending reductions made possible through the streamlining or elimination of 

lower priority projects. I am also very excited about the IT infrastructure consolidation which should be fully implemented by October, 2003, that will further reduce 

infrastructure expenditures for several HHS agencies. 

IMPROVING THE HEALTH, WELL-BEING, AND SAFETY OF OUR NATION

Mr. Chairman, the budget I bring before you today contains many different elements of a single proposal. What binds these fundamental elements together is the 

desire to improve the lives of the American people. All of our proposals, from building upon the successes of welfare reform to protecting the Nation against bioterrorism; from increasing access to healthcare, to strengthening Medicare and Medicaid; all these proposals are put forward with the simple goal of ensuring a safe 

and healthy America. I know this is a goal we all share, and with your support, 

we are committed to achieving it.

Chairman NUSSLE. Thank you, Mr. Secretary. 

Let me begin with the budget proposal for Medicare. The proposal has $400 billion of new resources over 10 years for Medicare. 

Is that a net number, meaning is that a number that recognizes 

that we should make reforms within the base part of the program 

and that the net amount of Medicare should be no more than $400 

billion over that 10-year period? 

Secretary THOMPSON. That is correct. 

Chairman NUSSLE. Or is that the new number? 

Secretary THOMPSON. The $400 billion includes the changes that 

we will be making to Medicare. But the giant share of it is for prescription drugs, Mr. Chairman. 

Chairman NUSSLE. The omnibus bill that just passed had a $54-

billion 10-year add-on for——

Secretary THOMPSON. That is not subtracted, which a lot of people want to know about. That is not subtracted; the $400 billion is 

over and above that. 

Chairman NUSSLE. When the budget was submitted, the $54-billion doctor reimbursement changes were not contemplated and 

were not budgeted for in 2004 budget cycle? 

Secretary THOMPSON. That is correct. 

Chairman NUSSLE. How are we going to pay for that then? 

Secretary THOMPSON. We are taking that into the base budget 

that we have in Medicare, Mr. Chairman. But it is not part of the 

$400 billion that the President will be advocating in his Medicare 

proposal. 

Chairman NUSSLE. But then, in point of fact, it is a $454-billion 

budget? 

16

Secretary THOMPSON. If you add that to it, yes. But the final details have not been totally determined as of yet. 

Chairman NUSSLE. Alright. Well, I guess that is what I am—it’s 

either one or the other. It is either added to the 400, or it is part 

of a net $400 billion total at the end of the day. But otherwise, $54 

billion doesn’t just, as you know, fall out of the sky; it has got to 

come from someplace. 

Secretary THOMPSON. That is correct, Mr. Chairman, and as of 

right now, the $400 billion is for the changes the President is going 

to make and does not include the $54 billion, which was in the congressional appropriations bill which was signed last week. 

Chairman NUSSLE. Alright. Should that be in that number? Should the 54 be included in the $400 billion or should it be added 

on? 

Secretary THOMPSON. At this point in time, Mr. Chairman, I cannot answer that question because it is still being discussed. 

[The information referred to follows:]

SECRETARY THOMPSON’S RESPONSE TO MR. NUSSLE’S QUESTION REGARDING THE

PRESIDENT’S MEDICARE PROPOSAL

The fiscal year 2004 President’s budget requests $400 billion over 10 years for a 

prescription drug benefit and Medicare modernization. This remains the highest priority of the administration for fiscal year 2004. Congress took action to add $54 billion to fix physician payments after our budget was released. We do not anticipate 

adjusting our fiscal year 2004 President’s budget baseline to reflect this change until 

we do our mid-session review. As always, we are monitoring and assessing congressional actions and changes to the Medicare program made after our budget was submitted to assess whether adjustments are necessary.

Chairman NUSSLE. Alright. Well, we need an answer, because I 

will tell you right now——

Secretary THOMPSON. I understand that and I can tell you that 

I am pushing very hard to get an answer to all the questions dealing with Medicare, so I can come back in front of you and other 

members of this committee and tell you what is going on. 

Chairman NUSSLE. Do you have an idea of when we will get answers on Medicare? Because when I met with the President in December, at that point in time there was some discussion that this 

might happen congruent with the budget. 

Secretary THOMPSON. Mr. Chairman, I can assure you that my 

Department and the White House are working extremely long 

hours to accomplish a proposal that we can give to Members of 

Congress very soon. It is not quite ready. 

I can assure you that it is very close, and we will be giving you 

all the details very shortly. I can’t give you an exact date because, 

I have found, in this city timelines slip quite easily. And I don’t 

want to—I have been caught up in this before, and if I give a definite time, I would like to be able to honor that; and since I can’t 

tell you that it is going to be on a particular date, all I can tell you 

is, it is very imminent. 

Chairman NUSSLE. Well, let me report back to you about our 

timeline. We have to have a budget completed by April 15, and it 

requires us to be in markup here in this committee and on the floor 

within the next 3 weeks. 

Secretary THOMPSON. I understand that, Mr. Chairman. And all 

I can tell you is, I am pushing extremely hard to make your job 

easier by getting you the details very quickly. 

17

[The information referred to follows:]

SECRETARY THOMPSON’S REPLY TO MR. NUSSLE’S QUESTION REGARDING PHYSICIAN

UPDATE RULE

The fiscal year 2004 President’s budget assumes that the 2003 Physician Update 

Rule would have been implemented March 1, 2003. That rule would have decreased 

the physician fee schedule by 4.4 percent. The baseline reflected the current law at 

the time. The Consolidated Appropriations Resolution, 2003 (CAR) was not enacted 

until February 20, 2003, after the budget had been released. While the current law 

budget baseline cannot reflect anticipated changes in the law, even if it could, there 

was no way to know what the final provisions of CAR would be. The impact of the 

physician payment adjustment enacted in the CAR will be reflected in this summer’s mid-session review baseline.

Chairman NUSSLE. Well—and part of my job is to help make 

your job easy too by providing the resources to make sure that we 

can get these things done. But we to get the details on this. 

In your testimony on page 4, you say that under 

Medicare+Choice, ‘‘We believe that we should move away from 

administered pricing to set Medicare+Choice rates’’ and ‘‘the administration believes that Medicare+Choice payments need to be 

linked to the actual cost of providing care.’’ 

What would you say about the areas where Medicare+Choice is 

no longer available, such as many areas of Wisconsin and all of 

Iowa? 

Secretary THOMPSON. As you know, when Medicare+Choice started, it grew quite rapidly, and got up to almost 18 percent of the 

population. Then there was a decision made by Congress, I think 

in 1998, in which they were going to reduce the payments in those 

areas where the HMOs were operating and put a higher premium 

in those areas where they were not operating. 

It did not work, and as a result of that, it has not been able to 

continue to grow. In fact, it has slipped from 18 percent down to 

about 11 percent of the population. And what we are trying to do 

is put it on a financially solvent footing so that it will have the opportunity to continue to grow. The seniors that are in it like it, and 

if they have the opportunity, they will make that choice. But we 

have to make sure that companies are able to continue to furnish 

the product, namely the Medicare coverage. 

Chairman NUSSLE. Well, I don’t usually do this, but I am going 

to make the announcement right now. I am not voting for 

Medicare+Choice unless or until I understand how it is going to be 

in your part of Wisconsin and my part of Iowa, and I mean now. 

It is not going to be enough to come forward with another fillin-the-blank stopgap kind of Medicare+Choice proposal that we 

blindly assume is going to do the job, when it never has in our 

areas. We are done with it. And I mean, I—you know, I have blindly voted for a number of these proposals on the blind faith that, 

in fact, the marketplace will work and that we will be able to provide these kinds of opportunities for seniors, but I am announcing 

to you right now, I am done and I am on the authorizing committee 

and that is one vote. 

Now—and I am not threatening. I want to work to get this thing 

done right, but I will tell you that based on the track record, you 

don’t have one vote right now unless I see how it is exactly going 

to apply to my next door neighbor across the street in Manchester, 

IA, and whether or not she is going to have coverage under a 

18

Medicare+Choice plan or whether her reimbursement rates to her 

doctor or her hospital are going to be commensurate with their 

ability to stay in business and keep their doors open, period. Done. 

I don’t have any more room to negotiate on this. And I hate to 

say it that way, but it has lasted too long. 

Secretary THOMPSON. I appreciate your comments. But let me 

just respond by telling you that the Medicare+Choice is an HMO, 

among other things. I have been in just about all the meetings and 

I want to be able to tell you, and tell all the members of this committee the President’s plan is not going to force seniors into 

Medicare+Choice or into HMOs. It is going to be a different concept. And it will be based on the Federal Employees Health Benefit 

Program, which is in all areas of Iowa, which is in all areas of Wisconsin, which is in all areas of Alaska, whether you are a janitor 

in a Federal building, a warden or an FBI agent, every single Federal employee has had the benefit of the Federal Employees Health 

Benefit Plan. It is a competitive market, and we are looking at that 

procedure. 

It is not the Medicare+Choice that you are talking about, Mr. 

Chairman, and I want you to know that. There is nothing in the 

President’s proposal that is going to force—and I want to restate 

and to restate this once more, there is nothing in the President’s 

plan that will force the senior into an HMO plan. 

Chairman NUSSLE. Well, pardon me if I went off on a tangent 

then, but since we don’t know what the President’s plan is, you can 

pardon us for maybe not quite understanding what is in the plan. 

Secretary THOMPSON. I understand that, and it is my responsibility to get that proposal to you as soon as possible, and I will endeavor to make sure that happens as quickly as the President 

makes the final decisions. 

Chairman NUSSLE. I appreciate it. 

And I yield now to Mr. Moran. 

Mr. MORAN. Thank you very much, Chairman Nussle. And I am 

going to follow up on your line of questioning because I would 

agree with you. 

Whereas the Secretary says that this is going to be comparable 

to FEHBP, I suspect you are going to be putting people into PPOs 

if not HMOs. But it seems to me that if this is going to be viable 

of both, substantively, policy-wise as well as political, it ought to 

be as good as what the members provide for themselves. The President wants——

Secretary THOMPSON. I agree. 

Mr. MORAN. You agree. OK, I am glad we will begin from that 

assumption. 

The President wants seniors to pay a $275 deductible each year; 

most Members of Congress pay no deduction for prescription drugs. 

The President wants seniors to pay 50 percent coinsurance for the 

first $3,000 worth of medicines; most Members of Congress pay 25 

percent. The President wants seniors to have a gap in coverage 

where they pay 100 percent of costs when their need is between 

$3,000 and approximately $7,000 for drugs; most Members of Congress have no gaps in prescription drug coverage. 

So if those are the criteria, I think we need to bear that in mind, 

because we can’t sell a plan that is considerably worse for our conVerDate Feb 1 2002 11:02 Jun 04, 2003 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6602 X:\HEARINGS\108TH\108-5\HBU057.000 RYAN PsN: RYAN
19

stituents than it is for ourselves. And most of us are under this 

FEHBP plan. 

Under the President’s proposal, as we understand it, seniors would spend $5,500 of their own money each year on medicines 

and would get help with only 20 percent of their drug costs under 

the President’s plan. Our Congressional Budget Office estimates 

that Medicare beneficiaries will spend more than $1.8 trillion on 

prescription drugs between 2004 and 2013. Even if every dollar of 

the President’s proposal went toward prescription drug coverage, 

and it doesn’t because you have got three other areas of expenditures included there, so it looks like it is only about $300 billion 

for—specifically for prescription drug coverage. But even if it were 

$400 billion, the plan would only cover 22 percent of beneficiaries’ 

medication needs. 

Now, that’s Medicare. With my time, I want to get back to Medicaid because you said something about crawling from Wisconsin. 

Secretary THOMPSON. Not crawling. Walking. 

Mr. MORAN. Not crawling. Walking. OK, I don’t want to exaggerate. You would walk from Wisconsin to Washington in favor of 

this plan. But apparently your sentiments have changed since 

April 14, 1997, Governor Thompson, where you signed onto a letter 

to President Clinton, where you said, ‘‘We adamantly oppose a cap 

on Federal Medicaid spending in any form.’’

Now, this block grant is a cap on Medicaid. Well, that is the way 

you interpreted it when you were one of the leaders of the National 

Governors Association and signed onto this letter, because that is 

what block grants are all about. It is a method of capping entitlement programs. 

And I am sure you are familiar with this letter of April 14, 1997, 

so I won’t go into great detail on it. But I refer people to it if they 

question where the Governors are likely to stand. 

Those are our major concerns: Medicare, Medicaid and then some 

of this discretionary spending. You know, we can’t understand how we can have $1.3 trillion in 

tax cuts and yet some of the cuts that are in discretionary programs for the disadvantaged. 

You know, here, this budget proposal would mean that at least 

36,000 seniors would be cut from Meals on Wheels in this program. 

I can go down a half a dozen other programs that are in this budget. It just seems to be misplaced priorities. 

So that is where we have our problems. It is Medicare, it is the 

Medicaid block grant, and it is the very substantial reductions in 

discretionary programs. There is not a lot of money for each of 

these individual programs, but as the President has said in any 

number of quotes, it means a great deal in the lives of people in 

need. 

So I am not going to ask any questions. My colleagues are going 

to do that. But, again, I hope you have the answers to their questions. 

Thank you, Mr. Secretary. 

Secretary THOMPSON. Mr. Chairman, can I please respond? 

Chairman NUSSLE. Yes. 

Secretary THOMPSON. Congressman Moran, first off on Medicare, 

I will be more than happy to sit down with you and go through the 

20

plan as soon as all the decisions are made; as I indicated to the 

chairman, I will be more than happy to do that. I would like to 

work with you and come up with a Medicare plan that you could 

support on a bipartisan basis. 

Medicaid: I was one of the leaders when I signed that letter. Do 

you know what President Clinton was trying to do? He was trying 

to cap Medicaid on a per capita basis and take $8 billion out of the 

system. That is completely contrary to the program that I am advancing. 

Let me explain. We are not capping the program on a per capita 

basis. In fact, the mandatory coverages are not capped; they are 

the same as the current Medicaid program. 

The optional programs, which States now have the opportunity 

to drop, are dropping in record numbers—36 States last year, and 

42 States have got pending drops this year of over a million individuals under the current Medicaid law; the only thing that States 

and legislators can do is to drop whole populations. They cannot redefine the program and keep the coverage and keep the Federal 

dollars. The Medicaid proposal I am advancing allows them the 

flexibility to do that. The second thing is, it advances $12.7 billion over 7 years so that States are going to get an additional $3.25 billion this year, so they 

can set up their own programs and use flexibility in order to accomplish what you want to accomplish. What I want to accomplish 

is to keep individuals covered under the Medicaid system. 

The third thing is, under the current law there are three provisions in which States have to advance payments each year; they 

make these determinations in September and October. Each year 

the base budget for the States’ portion of Medicaid has three factors which they have to put into consideration to determine what 

their next year’s payment is going to be. It is based upon population increases within your State and utilization and indexing of 

medical costs in a particular State. 

Under the proposal we are advancing from the Department, the 

first two, the population increases and the utilization, are not going 

to be factors anymore. So it will only be based on the third factor; 

the indexing of the medical costs. Last year those increases were 

$12.7 billion. So, if you pass this particular program, States would 

only be paying approximately $4 billion. Therefore our net savings 

is over $8 billion of State contributions in order to get the same 

Federal match. 

So the States are going to pay less, get more money up front, 

which they will not have to pay back; and they will have complete 

flexibility to design the program so more people can be covered. 

Medicaid is growing at a rate of 9 percent a year for 10 years, 

and so 9 percent for 10 years is the line that we have to budget 

for. And for the first 7 years, States that voluntarily take this program will be above that line, and only in the 8th, 9th and 10th 

years will they go below the line. But they will still get increases; 

instead of 9 percent, it will be about 6 percent. But for the first 7 

years, they will have complete flexibility, will not have to pay that 

money back, and the mandatory coverages will be the same. 

So it is not a block grant because it continues to rise. There is 

no block grant because the population increases, the mandatory 

21

population increases, the money increases, and so do the responsibilities and the accountability put on by the Federal Government. 

Mr. MORAN. Thank you, Mr. Secretary. President Clinton’s intent 

was exactly the same amount of money. And I know his intent was 

to achieve the same savings, but we haven’t compared it in total. 

But I do think there is a lot of commonality to the plan that you 

rejected in the past. 

But I appreciate your explanation. Thank you, Mr. Secretary. 

Chairman NUSSLE. Mr. Gutknecht. 

Mr. GUTKNECHT. Thank you, Mr. Chairman. 

Mr. Secretary, Governor, I will try not to be as tough on you as 

some of my colleagues here, but I think you can understand there 

is a good deal of frustration. And as a former Governor, part of the 

frustration we are feeling on this committee is, we are having unlimited demands right now on a very limited budget, and frankly, 

as I mentioned to several of the other Secretaries, you know, we 

have had debate about economic theory and supply side economics 

and tax cuts. 

I tend to be a supply-sider. I tend to believe that during soft economic times it is a good idea to allow Americans to keep more of 

their own money. But I have to say, first and foremost, that is a 

theory, and this is a fact. The fact is that government will be paid; 

it will either be paid for now by us, or it will be paid for in the 

future by our children, with interest. And as a former Governor, I 

know that early in your governorship of Wisconsin you were very 

effective—probably made the most effective use of the veto of any 

Governor I have ever seen. And if I recall, it wasn’t so that you 

could add more spending to what the legislature was passing. It 

was to cut spending. 

The dilemma here is that even with the President’s’ budget as he 

has submitted it, we are looking at very, very large deficits, and 

not only this year, but for several years to come. One of the problems that the Governors are having, and I am sure you have talked 

to Governors and probably your successor—I met with our Governor, our new Governor, a few weeks ago and he told me that 

roughly a third of his problem that he is having to confront in the 

State of Minnesota in terms of his budget deficit is the cost of 

health care. My concern is, and I share some of the concern that 

the chairman mentioned, is that we are just going to nibble around 

this thing and not really deal with it. Because my real concern is, 

as a country, I don’t know—and I represent—I mean, the biggest 

employer in my district is one of the finest health care institutions 

in the world, and so we are very interested in making certain that 

every American has access to top-quality health care. No question 

about that. 

But can we afford, as a nation, to have a system that is somewhere near 14 percent of gross domestic product for overall health 

care? It seems to me that we have got to get serious about real reform, and we can’t just be shifting around dollars. And I think, in 

some respects, Mr. Moran is correct. It seems to me that we have 

got to come up with a system that is sauce for the goose and sauce 

for the gander; I think it has got to be fair to everybody. And the 

problem, it seems to me, that we have is we have set up various 

levels of health care delivery. 

22

We take care of seniors one way, we take care of Federal employees another way, State employees another way; and I do think that 

ultimately it is drawing down our economic growth rate. 

I have met with a lot of business people in my district. I have 

talked to big business people, small business people. I have talked 

to two of them in particular I will mention. One said that part of 

the reason he is not hiring more people today is that his cost for 

health care per employee is about $550 per month. He is in a very 

competitive marketplace, and he said, ‘‘I simply can’t afford to 

bring more people on because of the high cost of health care.’’

I talked to another individual last week, and he employs 134 people. This year his health care costs were going to go up 50 percent—50 percent. So what he did was he dropped the health care 

insurance for all of his employees. He simply gives them an additional $550 per month to buy their own insurance. 

And I guess I want to encourage you to look not only at what 

we are doing and what you are recommending, but I think we are 

going to have to look completely outside of the box. And I guess I 

had a bit of an epiphany when I was over in Taiwan a month ago. 

Their costs for health care in Taiwan—and I am not saying it is 

the model, but I think it is an example—where they are spending 

5 percent of their gross domestic product. We are spending almost 

14 percent. I am not sure how long we can afford a health care system in this country that is consuming that much of our GDP. 

We want to work with you. And we wish you all the luck, you 

are one of the toughest Secretaries in this Cabinet. If anybody can 

do it, you can do it. We want to help you. 

Secretary THOMPSON. Congressman, thank you for that openended question. I appreciate everything you have said, and I would 

like to respond point by point. First, it is 14.8 percent of GDP, and 

if we don’t make a change within the next 15 years, it will be 18 

percent of GDP. 

As for the second thing you talked about, the Mayo Clinic—it is 

a fantastic place. In fact, I had one of the chairmen of Mayo Clinic 

in charge of my regulatory reform, another cost driver. He came in 

with 250 changes with his commission, and held five hearings 

across America. We have already made 35 of those changes, such 

as eliminating paperwork, and streamlining efficiencies. 

The third thing you mentioned was your Governor, Tim Pawlenty 

from Minnesota. His biggest driver is Medicaid. This proposal, the 

Medicaid proposal, will be a godsend to the State of Minnesota. It 

will lower his payments by two-thirds that he has to pay in on the 

increases of that amount he would have to pay. I don’t know what 

Minnesota’s share is, but I can tell you, he would appreciate that. 

It would give him flexibility so that he could develop a Medicaid 

program in which he could use different programs and different 

benefits for southern Minnesota, central Minnesota, and northern 

Minnesota. This is something he cannot do under the Medicaid law. 

It would advance payments so that he would be able to get additional money right now over the next 7 years to set up a new system. 

We would require him to split the population into acute as well 

as long-term care and, therefore, we would be able to develop new 

23

ways to keep seniors out of institutions and use the flexibility to 

do it. 

The Medicaid proposal that I am advancing is way out of the box, 

and I would strongly urge you to strongly consider it. Medicare I 

cannot talk about except in general terms right now because the 

final details have not been made. 

You talked about thinking outside the box. Let me tell you what 

has to be done if we want to do this on a bipartisan basis. The first 

thing we have to do is pass a Medicaid proposal; we have to pass 

what I think is the best idea. It is based upon the very successful 

TANF and SCHIP programs. It would help every State that voluntarily goes into it. 

Third, we have to pass a very good uninsured proposal. I have 

got great ideas that I think that you would like to see in which we 

could actually pay for it, but—it would cause some angst, but it 

would deal with, and get a lot of the uninsured covered. 

The fourth thing and the biggest driver—and this is one thing 

that Congress has got to address—is preventative health. We spend 

$155 billion a year on tobacco-related illnesses; 400,000 people die. 

We spend $117 billion a year on obesity-related illnesses, and 

300,000 people die. We spend $100 billion on diabetes, and 200,000 

people die. Seventeen million people have diabetes; 16 million are 

prediabetic and if we do nothing in the next 5 years, there will be 

33 million people that have diabetes. 

Ninety-some million people in America have chronic illnesses. 

You can usually stop the chronic illnesses by exercising, watching 

your diet and quitting smoking. 

If we are willing to take on those three things, it would be the 

biggest driver of reducing costs across America. And when you add 

those three things, $115 billion on tobacco, $117 billion on obesity 

and a $100 billion on diabetes, you are at over $300 billion, and 

we are only spending $260 billion a year on Medicare. So, this is 

where you are going to have an impact. 

Mr. GUTKNECHT. Thank you. 

Chairman NUSSLE. Mr. Spratt. 

Secretary THOMPSON. I get a little emotional about that. I am 

sorry. 

Mr. SPRATT. Mr. Secretary, I was not here to welcome you when 

you came, and I apologize. 

Secretary THOMPSON. I am so happy you weren’t, but I am glad 

you are here now . 

Mr. SPRATT. I appreciate, as always, your forthright testimony. 

I don’t have any questions at this point, but thank you for coming. 

Secretary THOMPSON. Thank you very much for being here. 

Chairman NUSSLE. Ms. Hooley. 

Ms. HOOLEY. Yes. Thank you. 

And thank you for being here. It is always nice to have a Governor who has been in that spot before and understands what the 

States are talking about. Again, I thank you for being here. 

Medicaid—I am going to talk about two things, Medicaid and 

Medicare. Medicaid is one of the fastest rising costs in the State 

budget. In Oregon, Medicaid covers about 450,000 people; that has 

been increasing by 10 percent a year. Currently, Oregon is in a 

tough financial situation, not unlike a lot of States, but we are the 

24

number one unemployment State. We have cut days off our school 

year, we have made huge cuts to public safety, we are laying off 

State troopers and we are making State cuts to Medicaid. We have a projected $400 million budget shortfall in Medicaid 

alone, and we have already cut prescription drug benefits, alcohol 

and drug treatment, those things that are preventative—mental 

health benefits for many Medicaid recipients. And we have had 

people come and talk to us: You know, they are getting kicked out 

of nursing homes, they have got $1,000 a month drug payments 

that they can’t make. As we look at that $12.7 billion for participating States to encourage them to restructure their Medicaid—and I know you know 

this about Oregon—this is not what we need. We won’t receive 

much of this money because we restructured our Medicaid program 

10 years ago with the Oregon health plan. And it has been one of 

the most successful Medicaid programs in the country. We need 

money to fund Medicaid, not money to change it. 

While reduced revenues are placing severe strains on many State 

budgets and could limit Medicaid at a time when additional coverage and spending is most needed, the Federal Government’s 

share of the cost will only increase a fraction of a percent for 2004. 

Increasing the Federal Medicaid assistance percentage just by 2.45 

would provide Oregon with an additional $1.7 million over the next 

18 months, something we desperately need. 

How are you going to—how do you address Oregon’s needs when we desperately need assistance and would not benefit from the $12 

billion program that you are talking about, because we have already changed and restructured our program? 

Are you going to give us a special dispensation? 

Secretary THOMPSON. First off, the reason you were able to 

change is through the waiver process. 

Ms. HOOLEY. I know that. 

Secretary THOMPSON. And the reason that Oregon has been successful is, they have used the waivers which I have granted, as you 

know. 

Ms. HOOLEY. I do. I understand that. Thank you. 

Secretary THOMPSON. Several of the waivers do it. 

This plan is based upon TANF, it is based upon the SCHIP, and 

it is based upon the waivers that I have advanced since I have 

been Secretary. In fact, I have advanced 2,500 SCHIP plans, waivers and Medicaid State plan amendments. Oregon has received several of them to redo their plan. But Oregon still has several problems. It still is restricted under the current Medicaid law. 

Let me explain. Oregon has urban areas, it has rural areas. I 

spend a lot of time in Oregon, so I know the State, and you have 

got the mountains on the east, versus the plains and the ocean on 

the west coast. 

Ms. HOOLEY. Right. 

Secretary THOMPSON. And so you have different things. 

But you cannot, under the current Medicaid law, even with your 

options, have any kind of differentiations as far as benefits or as 

co-pays or as being able to use the SCHIP money. 

Oregon was not able to use all its SCHIP money. It had to send 

some back because it is SCHIP money. Under this proposal, Oregon 

25

gets to keep all of its SCHIP money and is able to use it. That is 

point No. 1. The second point, the $12.8 billion, the $3.2 billion this year 

would give Oregon an additional 2-percent increase on the Federal 

match. Oregon, if it voluntarily went into the program, would get 

another 1 percent of the Federal match by paying less into it. So 

instead of your 2.45-percent increase on the Federal match that 

you are asking for, if Oregon went into this program voluntarily, 

which I am sure they will, they will get a 3-percent increase on 

their Federal match. 

That is the dollars that they need in order to make this program 

work. That is why you should be enthusiastically supporting this 

program and be one of the prime sponsors for it. 

Secretary THOMPSON. This program is one of the most helpful 

programs for Oregon and New Mexico and Tennessee, States run 

by Democratic Governors. And each one of those individual Democratic Governors know that. 

Ms. HOOLEY. Let me ask you a second question. I want to follow 

up on our Chair’s question about Medicare. And again, we were 

very efficient in how we dealt with health care in our State, and 

then a long time ago when the formula came up for Medicare, we 

got the short end of the stick like many other States did. You have 

got seniors—the same program, everybody pays into this program, 

and yet you have got seniors in some States reaping the benefits 

of—they have prescription drug benefits, they have eye care, they 

have hearing care, and we have—our State is under-reimbursed. 

We have doctors leaving the system. They will not take any Medicare patients. They will not take any more Medicare patients. And 

are we ever going to get to a solution to this problem where it 

should be equal across the United States? 

And I don’t begrudge anyone any benefits they receive, but it 

seems to me if you have a program that is a national program, that 

it should treat people equally, and this program doesn’t. Do you see 

a solution at the end of the rainbow? 

Secretary THOMPSON. I see lots of solutions. I am extremely optimistic. I think if we have the will, Congresswoman, we have the 

opportunity to change Medicare for the best. There are some very 

inequitable provisions in it. Medicare needs a complete review by 

Congress and by the administration, and if we had the political will 

to do that, we could change it. 

Just to give you some ideas, there is something in the law that 

requires different payments for urban hospitals versus rural hospitals. It is a 1.5-percent difference. That could be changed. That 

could be uniform. There are MSAs in Iowa; there are 12 different 

areas in Iowa that have different hospital assessment areas in 

order to determine the formula and only one formula area for doctors. Now, that could be changed, and so that would be a uniform 

thing based upon a different kind of a formula. 

There has to be the will to make these kind of statutory changes 

legislatively. We can give you a whole list of them, but as long as 

the government is the driving force for all medical costs, and it is 

based upon reimbursement formulas that have been built up since 

1965 to the present, you have to really change it or change the 

model so that you have competition from the Federal Employees 

26

Health Benefit Program in order to benefit the kind of changes necessary to have a national system. And it can be done. It is going 

to require some bipartisan support to do that, but ideas are out 

there. If we sat down across the table, we could certainly, I am confident, come up with a solution and come up with a much better 

proposal that would treat more citizens more equitably. Whether or 

not we get rid of all the inequities, I can’t promise you that, but 

we could reduce them. 

Ms. HOOLEY. I would like to get a little closer. 

Secretary THOMPSON. So would I. 

Ms. HOOLEY. And happy to work on that. It seems to me such 

an unfair situation in this country. 

Secretary THOMPSON. I hope you would want to work with me on 

the Medicaid system, because I know that the proposal I am advancing would be tremendously helpful to Oregon. 

Chairman NUSSLE. Mr. Ryun. 

Mr. Hulshof. 

Mr. Garrett. 

Mr. GARRETT. I always appreciate coming to these meetings because the chairman often—I know he digs through this material 

more than I do and throws out little tidbits that strike me. And 

then in his opening comments when he stated that I guess in the 

not too distant future that if we take Medicare and Medicaid and 

Social Security and combined that, that will be consuming the entire Federal spending it just gives you pause to think that is where 

we are going with it. 

I also appreciate that in the time that I have been here as the 

freshman, to hear the folks, we have been able to have experts 

such as you come before us and to hear questions a lot harder than 

mine, because I sure don’t have the answer to this either, but I 

look forward to, with this administration, putting forward something that we can work with that will at least lead us down the 

road the right way. 

One of the numbers that I remember the chairman mentioned at 

one of the meetings that we had previously was talking about how 

Medicare spending is going just as it is right now, and as I understand your initial comments with $400 billion is essentially—and 

the way I look at it and the way you are saying is for prescription 

drugs primarily, that addition to the program after we complete 

any cost savings from the reform in the proposal that you will be 

presenting to us—but the numbers that I have seen before is that 

Medicare spending is about $269 billion, and it is projected to nearly double in the next 5 years, and by 2013—and I know you are 

not going to spend the $400 billion evenly, but even if we were to 

spend it out over a 10-year period of time, it averages out to $40 

billion per year. So if you didn’t do anything, you would be seeing 

a $25-billion average increase in the Medicare problem, which is 

part of the problem in essentially going in debt totally. 

But we are taking that $25 billion figure and adding on top of 

it, if I am understanding it correctly, another $40 billion on average, which is, I don’t know, around a 165-percent increase. And 

nothing that I have seen so far says that that is going to reverse 

the overall trend of what the chairman was saying at the outset, 

that eventually we are going to see Medicare, Social Security, and 

27

Medicaid consuming everything. We may be slowing the pitch of 

the chart on the graph a little bit, and in some ways maybe we 

are—by the reform, but by adding the prescription drugs and the 

$400 billion to it, actually we are throwing that red line up even 

further, aren’t we? 

Secretary THOMPSON. Absolutely. You can’t add a benefit of prescription drugs, which is going up at 13 to 15 percent a year, without having that trend line increase. It is impossible. So the only 

way to compensate for that is to make some kind of changes in the 

basic system in order to make it more efficient, and that is what 

the President and the administration are trying to do. 

What I have told a lot of people is that this is the dessert. Everybody wants prescription drug coverage, and everybody supports 

prescription drug coverage, Republicans and Democrats and Independents. And the seniors need it, there is no question about it. 

But if we don’t make some structural changes to the model, to the 

delivery system, this Congress, I don’t think, will ever come back 

until it is a crisis situation. 

That is why we need to make the changes with a prescription 

drug program so that we can try and put it on a better financial 

footing, but it will not go back to where it is right now. Prescription 

drugs is an expensive add-on, and it is going to be more expensive 

in the future with prescription drugs added on, even with the 

changes that we are advocating. 

Mr. GARRETT. I will close in the numbers I know this House 

passed before I was here, the additional program in their bill, that 

was a $13.3-trillion increase. The Senate Democrats had their own 

version, but theirs would have increased to a $20-trillion increase. 

I appreciate this is an add-on. With the overall budget question, 

how in the world do we add that on today until we can confirm 

that we are going to overall bring the line down by the cost savings? And until we—because even though what you are saying is, 

well, do the reforms, we will save a little money or maybe a lot of 

money through the reforms, but we are going to add on the prescription and not add benefits. 

One of my constituents said to me, how can we be doing this and 

adding it on, providing the benefit to the seniors today if my 

grandkids are going to be ending up being the ones paying for the 

seniors’ health benefits? 

Secretary THOMPSON. It is not a one-for-one situation. The 

changes that will be advocated will not bring it into line. This is 

going to require some real heavy lifting by Members of the Congress and the administration. But the first thing is not to exacerbate the situation so badly that we can’t get back there. And just 

adding on prescription drugs without any kind of corrections is 

just, to me, not acceptable, because all you are doing is driving up 

the cost, and there will be no driving force for anybody to get back. 

The driving force for people to look at Medicare right now is prescription drug coverage, and so it is important for us to take a look 

at the model, the delivery system, so that we can make some 

changes now and hopefully other changes in the future to make it 

something that is going to be around for your children and grandchildren and great grandchildren in the future. 

Chairman NUSSLE. Ms. Baldwin. 

28

Ms. BALDWIN. Thank you, Mr. Chairman. 

Secretary Thompson, thank you for your testimony this morning. 

As a former Governor, we have had a chance to work together before, and I want to thank you for being here. 

I want to follow some of the line of questioning regarding Medicaid. Those of us who have been following this have seen more 

generalities, and in your previous testimony in response to previous 

questions we are getting a little bit more of a first glimpse of some 

of the details behind the proposal. I want to, first of all, make sure 

that my understanding of the big picture is correct, and then probe 

a little more on the details, especially as you note on your testimony, prepared testimony, that the States are facing incredible 

budget crises, that many have—in the last year 38 have reduced 

services or eligibility, and most are considering further benefit and 

service and eligibility cutbacks this year. 

As I understand it, overall States could decide not to join in the 

flexibility program and operate their Medicaid programs without 

any sort of additional relief from the Federal Government. And certainly as the States are progressing with budget crises, this could 

resolve in deep Medicaid cuts for the States. In the alternative they 

could receive funding or these advances, $12.7 billion over 7 years, 

but only if they agreed to convert much of their Medicaid program, 

and we are going to dispute the terminology, but into a block grant 

or some new structure. And this would be capped, as I understand 

it, according to a fixed formula and would not automatically rise 

as the current formula does to meet increases in need perhaps due 

to a recession, or a rise in the number of families in poverty in a 

given State, or the costs of health care in a given State. Also, then 

there is this provision in the final 3 years of the 10-year plan of 

paying back the additional money. 

I have several concerns as I understand that outline, if I understand it correctly. I also want to draw your attention—I suspect 

you are already aware not of the activities of the National Governors Association in 1997, but this year they posed, as I understand it, a significant number of questions to tease out the details 

of this program. We have been given copies of their communication 

of earlier this month. Those are precisely the questions I am eager 

to get at, questions concerning the mandatory core, you know, what 

happens for the remaining mandatory populations with FMAP; and 

does it go away, is it reduced; financing; our questions, like are the 

utilization in populations’ projected increases based on the national 

average or on the individual States’ averages? Just a wide variety 

of questions. 

I would ask as you answer the National Governors Association 

and get those details that you provide them to my office, and, I suspect other members of the Budget Committee would be very interested to hear those details so that we can scrutinize this more carefully. And I would ask your timeline on that. 

And lastly, and I will give you the floor to tackle some of these, 

I want to just make a little bit of note about the governance of 

these programs as States opt in, if they do. 

We know that in the Medicaid program we have used the States 

as laboratories. The waiver programs have permitted the States 

over the last several years to engage in all sorts of experimentation 

29

with limited controls at the Federal level, but these have predominantly been transactions between the executive branch of the Federal Government and the executive branch of the State governments. As a former Governor, I know this is probably attractive; 

but as a lifetime legislator, I know that I am concerned about the 

legislative oversight. A vast amount of experimentation is taking 

place with very little guidance from the Congress or from the respective State legislatures, and, in that same contrast, to other arenas in which we have done State experimentations. Wisconsin’s 

welfare experience would be an example. 

So I would like to hear your comments also on the governance 

issue and accountability to the people of States through their legislators. 

Secretary THOMPSON. Well, thank you, Congresswoman Baldwin, 

and it is always a pleasure to see you. And let me just answer 

every one of your points. 

A lot of people don’t understand Medicaid. First off, this is not 

a block grant. A block grant by definition is level funding. TANF 

is a block grant. It is $16.8 billion a year for 5 years. Medicaid has 

a trend line. It is growing at the rate of 9 percent a year. We have 

to budget for 10 years. So, we take a look at the figures and the 

computation that States send us in September and October each 

year, and we make an actuarial judgment, and our actuarial judgment is that Medicaid is going up 9 percent. Next year, or this year 

in September, October, based upon cost accounting and other 

things, we may adjust that figure to 10 percent because we think 

that is probably where it is going to go. 

So, Medicaid has got a trend line. The Federal Government funds 

that trend line, and it is always going up. So you can just draw a 

trend line increasing at 9 percent a year and that is the Medicaid 

budget which will continue to increase. 

Second, there are mandatory populations, and there are optional 

populations. One-third of the Medicaid population is optional population; two-thirds is mandatory. Two-thirds of the cost of Medicaid 

are the optional benefits added on by Governors and legislators. So 

you have one-third of the population, two-thirds of the cost on optional populations. 

Governors and State legislators right now are dropping those optional populations because they either have to drop it or continue 

to fund it. There is no middle ground. They can’t change the mix. 

They can’t increase copayments. They can’t change from geographic 

locations from Madison to Superior. It has got to be uniform. So the 

only choice State Governors have, and legislators, is to drop it, and 

they have dropped over a million people last year, and this year 

there will be 42 States making further cuts into it. 

I am trying to change the program so that they can change that 

mix and give them the opportunity to be able to differentiate between Madison and Superior, maybe add some copayments and 

keep the Federal dollars in Madison and in the Medicaid system 

and keep those people covered. You should like that, and I know 

you will if you listen to my explanation. 

The third thing is, each year the States have got to make a computation. Wisconsin pays 42 percent in the Medicaid budget. The 

Federal Government pays 58 percent. We get a pretty good deal in 

30

Wisconsin. We get 58 percent. But the Governor and the legislature 

have to increase that 42 percent each year based upon three factors: What is the population increase in Wisconsin? What is going 

to be the utilization? And what is the indexed inflation of medical 

cost? So those three factors each year have to be added on to the 

State’s base of 42 percent. 

We are saying under this new proposal that States would voluntarily have the opportunity to join if they want to; that we will forgive them not having to make payments on population increases or 

on utilization, only on the inflation index. So that means the State 

legislature, in order to get the 58 percent, will be paying less, 

which means that the percent increase will go up by the Federal 

Government just by the terms because States will pay in less, 

which will mean the percentage for Wisconsin will go down. The inflation index increase will go up for the Federal Government mathematically. 

The fourth thing is that gives the Governor and the legislature 

this money to spend and the ability to use it. Also under this program, the SCHIP program, the disproportionate share for hospitals, 

the administration, and Medicaid, which now are four checks sent 

out quarterly on a draw-down by the States, will be two checks. 

They will be able to go to the State in two checks, one for acute 

care and one for long-term care and prevention. Because the longterm care and prevention States and Federal Government have 

really never really looked at, and what I think, that is going to be 

the increased cost in the future. I would like to see the Federal 

Government use this long-term care opportunity to be able to find 

ways to keep more people in their own homes, and they will have 

that flexibility to do so under the new model. 

Then you said they have to pay it back. Wrong. They don’t have 

to pay it back. If the States would take it, if Wisconsin would take 

it, instead of getting 9 percent, they would get 12 percent the first 

year, then above the trend line. Do you follow me? The trend line 

is 9 percent, they get 12 percent, then they get 11, then 10 percent, 

then 11 percent. They would always be up above the 9 percent for 

the 7 years. But then in the 8th year they would drop below the 

9 percent, but still get an increase of, say, 6 percent, not have to 

pay any of this money back. They would still get an increase of 6 

percent, 7 percent, and 8 percent for the last 3 years. They would 

still be getting an increase, but they would have the use of the 

money, the flexibility for adopting new systems and new ways to 

be able to accomplish that. 

And then on top of that, SCHIP is also a capped program. I don’t 

know if you know that. SCHIP is a capped program. And SCHIP 

each year, if the States don’t use it, has to be sent back after 3 

years. Under this program, this would be on top of the Medicaid 

program. And for those States like Oregon who have a system that 

can’t use the SCHIP money, and it goes back into the Federal Government and gets redistributed, Oregon would be able to use that 

money for helping low-income families. And so it is a wonderful 

thing for Oregon, it is a wonderful thing for Wisconsin, it is a wonderful thing for every State. 

And then you asked about oversight. I want you to know that, 

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ceived more waivers and we still have more waivers outstanding 

than any other State. I was very innovative, as you know, and I 

used the waiver process under the Clinton administration, under 

the first Bush and under the Reagan administration to get waivers 

to try things new. BadgerCare was one of my programs; family 

care, senior care, and welfare all were waiver programs that I used 

the Federal dollars in the Federal system to set up. And since I 

have been Secretary, I have granted more waivers than all previous Secretaries combined. And I am not shy about it, I am not 

bashful about it. I have to make sure they are budget-neutral. 

But under the waiver program that I have utilized with the 

States—and the Democrats and Republican Governors all have proclaimed that this is fantastic because they are able to set up new 

systems, we have been able to expand the system so that under the 

waivers that I have granted, 2.2 million more Americans today are 

covered by Medicaid and by Medicare; 6.7 million more Americans 

have increased benefits. And I am using the waiver proposal, the 

TANF proposal and the SCHIP proposal to come up with a new 

streamlined, modern Medicaid proposal that will be bigger and better than TANF, and all you have to do is learn the details, and I 

am confident, knowing your intelligence and your willingness to 

help people that need health coverage, that you will be one of my 

most enthusiastic backers and supporters for it. 

Ms. BALDWIN. One quick follow up on that detail. 

Chairman NUSSLE. The gentlelady’s time has expired, and the 

question consumed three more answers’ worth of time. 

So Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

And thank you, Mr. Secretary, for your testimony today. 

Before coming to Congress, I was in private business for 10 

years, which to me is all about going out and figuring out the goods 

and services people want and then producing them at the lowest 

price, which has produced the great American dream. However, we 

have a huge amount of our medical dollars that are spent in this 

country run through the government. 

One of the things I saw a number of months ago on the national 

press was a report that Medicare was spending five times as much 

on the same wheelchair as the VA did. Now, I know often the 

media doesn’t quite get it right, but I do know in the fiscal year 

2003 budget that the President’s budget included competitive bidding for durable medical equipment, and I am under the impression that this budget does not include that proposal. If that is correct, why wouldn’t you want to have competitive bidding for this? 

Secretary THOMPSON. We do want it. 

Mr. HENSARLING. OK. Is my information incorrect? Your proposal 

does include competitive bidding? 

Secretary THOMPSON. Competitive bidding is going to be in the 

new Medicare proposal, sir. 

Mr. HENSARLING. OK. 

Secretary THOMPSON. It is absolutely—yes. 

And another thing is I was hoping that Congress would change 

the contracting provisions that the House passed last year, which 

are arcane and as expensive as anything that we want. If you want 

to do something to help me a great deal to lower the Medicare costs 

32

and make it more efficient and more uniform, as several people 

have asked, change the contracting provisions as well. 

Mr. HENSARLING. What else might be on your laundry list, since 

I am a firm believer that government can act smarter and still be 

able to deliver greater health care services without necessarily taking more money away from the American taxpayer? What else 

might be on your laundry list for Congress? 

Secretary THOMPSON. Thank you. I have been waiting for that 

question. Thank you. 

I would like to find you or anybody else who would like to sponsor a very progressive proposal for the uninsured. I can give you 

the details. I would like to have you sponsor a proposal for preventative health on diabetes and asthma and obesity, which would be 

the biggest savings. 

I would like to change the contracting provisions. Right now we 

are required to get recommendations from State medical societies 

and hospitals in order to enter into a contract for our contract carriers and our financial intermediaries. And we have to do this, and 

we can’t consolidate them, and we can’t require accountability. Can 

you imagine that? If you change that, it would be great. 

The fourth thing I would like you to do is I would like you to 

take some of the fraud and abuse money and set up a quality improvement. I have got the details. I need somebody to sponsor it, 

you know, take that money and be able to put in a mini Hill-Burton law. 

What is your name? 

Mr. HENSARLING. Hensarling. 

Secretary THOMPSON. Mr. Hensarling, let us make it the 

Hensarling proposal, OK? 

Mr. HENSARLING. If anybody could spell it. 

Secretary THOMPSON. H-E-N-S-A-R-L-I-N-G. Alright. And put 

that money in and be able to use that money as a match grant for 

hospitals and clinics to be able to tap into to come up with uniform 

new technological devices. It would reduce mistakes, improve efficiencies. We could develop almost a paperless system, which would 

drive down the cost. And then on top of that do something on the 

medical liability system, and we would reduce the cost of health 

care tremendously. 

And I have got ideas, and I have got legislation and programs. 

I just can’t introduce them. 

Mr. HENSARLING. Thank you. As my time is running out here, 

could you give us a little more detail of the savings that could be 

derived from a meaningful medical liability reform? 

Secretary THOMPSON. That could be billions of dollars. Total cost 

to the Federal Government right now is about $28 billion. But that 

is just the cost that the Federal Government pays in liability judgments. That doesn’t take into consideration the defensive medicine, 

which is hard to quantify. But if you want to, we can try and quantify it, but the actual amount is about 20 to $28 billion that we can 

actually itemize. 

Mr. HENSARLING. Thank you, Mr. Secretary. 

Chairman NUSSLE. Mrs. Capps. 

Mrs. CAPPS. Secretary Thompson, welcome. I want to ask you 

about an issue we have discussed many times in the past. In fact, 

33

a couple weeks ago at Energy and Commerce Committee I brought 

up the topic of the nurse shortage. Nurses are critical to everyday 

health care as well as our Nation’s efforts to prepare for terrorism 

and bioterrorism, and clearly the current shortage compromises 

these efforts. We have to keep in mind that currently some 19,000 

nurses in the work force today are also in the Armed Forces Reserves. As they are being called up, our public health system becomes even more compromised. And I know you and I agree, and 

we have talked about the seriousness of this issue. 

I was very pleased to read in your fiscal year 2004 budget in 

brief document, wonderful language talking about the nurse shortage. You know I agree with it, and that is why we worked so hard 

to pass legislation last year, signed into law, addressing the growing nurse shortage. It is really a crisis. The Congress followed up 

on this in the omnibus appropriations bill that the President 

signed, increasing nurse funding for 2003 by $20 million over 2002. 

But this budget now only asks for $98 million for these very same 

programs, $15 million below the 2003 levels, in the face of a crisis 

in health care because of a nurse shortage. 

Is the administration—I would like an explicit answer, if you 

would—going to revise its request, or are you going to support a 

cut in the budget for nursing in 2004? 

Secretary THOMPSON. Congresswoman, you know how passionate 

I am with you on this, and I have put together a budget based 

upon the figures that are given me. I tried to put more money into 

nurses. As you know, I always do. The document speaks for itself. 

I wish we had more, but we don’t. There is an additional $21 million in the work force diversity that is assisting nurses that is not 

included in that. I tried to stretch as much as I possibly could. 

Mrs. CAPPS. Again I ask, could the administration revise this 

budget? 

Secretary THOMPSON. I doubt very much the administration will. 

Mrs. CAPPS. Then we are going to see areas continue to suffer, 

rural areas like Jim Nussle’s in Iowa and many rural parts of my 

district, and urban centers where advanced practice nurses are 

really delivering primary health care. That piece of the budget was 

cut in order to put a few more dollars—robbing Peter to pay Paul, 

actually—into basic nursing. But the overall cut is certainly going 

to fly in the face of our bioterrorism preparedness. Who is going to 

give the vaccines if we ever need them? 

Secretary THOMPSON. First, I want to work with you on this and 

work with Congress. And if we can find some more dollars, I am 

certain that the administration would be happy to sign it into law. 

Secondly, I hope you come over and see what we are doing as far 

as dividing up the country in order to make sure that bioterrorism 

is taken care of with nurses, doctors, and morticians. If you have 

the opportunity, I would invite you to come over, and I think I 

would allay a lot of the concerns and a lot of the fears you have 

as far as bioterrorism is concerned. 

Mrs. CAPPS. Well, it is one thing to see things on paper, but it 

is another thing to be in the communities that all of us are in every 

day and know that hospital wards are closed because of a lack of 

nurses; that when emergency staff gather—front line, first-line responders—that the pieces that are often in very short supply are 

34

the people to administer bioterrorism remedies and preventive 

mechanisms. 

We are talking about a few million dollars here in a very large 

budget, and I strongly ask you to reconsider the amount that has 

been allocated. 

Secretary THOMPSON. I want to be your partner in this, as you 

know, and I have talked to you many times about it, and I also 

want you to help us try and recruit more young people to go into 

nursing. 

We also have to do something about getting more of the senior 

nurses or more advanced educated nurses to go into teaching, because that is the bottleneck we have right now in our nursing colleges. 

Mrs. CAPPS. And that is exactly where these few million dollars 

we are talking about would be plugged right in. The need is so 

clearly there. I know you and I agree, and you know I am going 

to work very hard to increase the allocation in this budget in this 

very area, and we—I know that many of our communities are going 

to be right behind us in saying this is a crying need right now. It 

is not that high-cost of an item. It will stretch our resources just 

in the very areas that we need right at this time. 

Secretary THOMPSON. Your are a champion, and I salute you, and 

I thank you for your leadership. 

Mrs. CAPPS. And I will work with you. We are going to make—

we are going to do something about this budget. 

Secretary THOMPSON. Alright. 

Mrs. CAPPS. I yield back the balance of my time. 

Chairman NUSSLE. Thank you. 

Mr. Bonner. 

Mr. BONNER. Thank you, Mr. Chairman. 

Mr. Secretary, thank you very much for being here. You talked 

in answering some of the questions about the number of waivers 

you have granted since you have been Secretary. I would like to 

say thank you. On February 10, your Department granted a waiver 

for 30 Alabamans, and especially a young man by the name of Nick 

Dupree, to be able to stay at home receiving the care that they deserve without having to be forced into a nursing home. So thank 

you very much for that waiver in particular. 

Secretary THOMPSON. Thank you very much, Congressman. I appreciate that. 

Mr. BONNER. You made a point in answering one of the questions 

about increased costs associated with tobacco-related illnesses. I 

have had a number of phone calls from my constituents over the 

last few days about a rumor afloat that suggests there is a possible 

$2-a-pack increase in the Federal cigarette excise tax being contemplated by your Department. This would raise that tax from 39 

cents to $2.39 a pack. I don’t smoke. I have never smoked. But it 

is a legal product that is grown in this country. And so can you tell 

me, is this a proposal that you or that your Department is contemplating? 

Secretary THOMPSON. I can tell you we are not contemplating. 

This administration does not raise taxes. 

Mr. BONNER. Thank you. 

The second question that is of real concern——

35

Secretary THOMPSON. Saying that, I still think it would be nice 

to have some money set aside. I haven’t found a way to get it yet, 

but I am looking for a fund to use for smokers to be able to quit. 

Seventy percent of the smokers that are now smoking would like 

to quit, and I would like to be able to help them. 

Mr. BONNER. Mr. Secretary, as you are aware, current Medicare 

hospital reimbursement policy takes into account the area wage 

index. This is something that, in my view, has long outlived its 

purpose with regard to areas such as the area that I represent in 

Alabama. It is hard for me to go back home and meet with my hospitals and doctors and nurses and give them an answer about why 

they are being reimbursed at a lower rate in Mobile, AL, than their 

counterparts in Biloxi, MS, or Pensacola, FL, which are just 60 

miles away. Does this budget address this inequity? 

Secretary THOMPSON. No. 

Mr. BONNER. Would the administration be willing to take this on 

as a priority? 

Secretary THOMPSON. The Congress has got to take that on, because if you change one, Congressman, you take away from another. If you change the wage indexing, you take away from hospitals in Pennsylvania and New York and New Jersey for Alabama, 

Wisconsin, and Iowa. Now, coming from Wisconsin and Alabama, 

and Chairman Nussle, we may think that is a good deal. But Congress has got to make that decision as to how to deal with it. 

And I would like to point out, and especially for the chairman’s 

sake, that last year the actuaries wanted to raise the wage differentiation from 71 percent of the reimbursement formula to 72 

percent, which would have exacerbated the situation. I said no. We 

kept it at 71 percent. 

But when I was Governor, I tried to sue the Federal Government 

on this point. So I know what you are talking about. We have made 

certain improvements, but it is something that all of us collectively 

have got to sit down and work on. 

Mr. BONNER. My last question, Mr. Secretary, is that the home 

health industry has recently undergone a reduction in the reimbursement levels from Medicare, and this has had a chilling effect 

in terms of the services provided, especially to seniors, in my district and throughout the country. And so a question is does the administration have a plan, or would the administration be willing to 

work on a plan, to ensure the viability of home health care as we 

move forward into fiscal year 2004? 

Secretary THOMPSON. Yes. Of course we would. We are there to 

serve you. The Balanced Budget Amendment, which is a congressional law, in 1998 made that decision. It was not the Department. 

But, yes, I am. I would love to work with you on it. I would love 

to work with you on tobacco smoking, love to work with you on preventative health care, love to work with Mr. Hensarling on a lot 

of my ideas, and I would love to have some of you introduce them, 

because I think they are great ideas. All we have got to do is get 

some people to introduce them and get them passed. 

Mr. BONNER. We may try to get the Hensarling-Bonner bill on 

quality. 

Secretary THOMPSON. I would like that very much, and I would 

like to work with you on it, and I will give you the ideas, and then 

36

you can change it any way you want to and introduce it, and I will 

help you get it passed. 

Mr. BONNER. Thank you, Mr. Secretary. 

Thank you, Mr. Chairman. 

Chairman NUSSLE. Thank you. 

Mr. Emanuel. 

Ms. Majette. 

Ms. MAJETTE. Thank you, Mr. Chairman. 

Good morning, Mr. Secretary. 

Secretary THOMPSON. Good morning. How are you, Congresswoman? 

Ms. MAJETTE. I am fine. Thank you. 

I represent the Fourth District of Georgia, and the CDC, the 

Center for Disease Control and Prevention, has its headquarters in 

my district. And I would just like to take this opportunity to thank 

you for your management of that branch of your Department. 

Secretary THOMPSON. It is a great branch. 

Ms. MAJETTE. Mr. Secretary, I have recently had the privilege of 

visiting the CDC headquarters, and I certainly was very impressed 

with your staff’s expertise and their dedication. This branch of your 

Department is a vital link in the war or terrorism, as you well 

know, and I believe that I speak for all Americans when I say that 

I am proud of the work that the scientists and public health experts perform on our behalf. 

At this time when Americans are told to be concerned about the 

use of chemical weapons by rogue nations and are legitimately worried about chemical and biological attacks in our own cities, we 

know that preparing for these attacks is even more important than 

before. So I applaud your leadership of the CDC through this preparatory phase of its growth as we prepare to protect our citizens. 

The CDC is engaged in a very important facility building master 

plan, and within this plan the CDC will be able to enhance the exchange of information between public health professionals and 

allow them to better inform the public, which, as you know, is a 

vital mission. Also, as part of that plan the CDC will be much more 

effective at addressing the public health education and the disease 

prevention components about which you spoke with such passion 

earlier this morning, particularly in the areas of diabetes and asthma and obesity. 

So I would encourage you, Mr. Secretary, to make the rapid completion of these construction projects one of your priorities, as we 

don’t know how soon these facilities might be needed to protect 

Americans from the unknown, as well as being able to continue to 

move forward on the public health and public education front. 

The second point I would like to make, and here is really where 

my question comes in, is with regard to Medicaid and SCHIP. Obviously those programs provide insurance not just for potential 

workers, but also for their families and what I would like to focus 

on now, our children. SCHIP currently covers more than 5 million 

children nationwide. In Georgia the program is called PeachCare. 

In Georgia, PeachCare provides more than 50,000 children with 

health care coverage. Now, as I understand the budget, the proposed solution, Federal funding for PeachCare would be rolled into 

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37

cipients’ benefits. And, of course, you have talked about the flexibility implied by this system, but the potential effect it could have 

on the number of uninsured children cannot be ignored. 

What solution would you propose to deal with the very real possibility that, under this plan, States might run out of money in their 

grant and be forced to cut SCHIP rather than some of the other 

mandatory beneficiaries? 

Secretary THOMPSON. Congresswoman, they can do that right 

now. That is the SCHIP proposal. They can drop, they can add. 

And so that doesn’t change. 

And second, Georgia could elect to join or not join. The Medicaid 

proposal is a completely voluntary program. 

Third, the new changes would require the same amount of children to be covered, plus you would not be able to drop in order to 

get the SCHIP money, you would not be able to drop it. It would 

allow the State of Georgia to be able to take some of the SCHIP 

dollars and help low-income working families get health coverage 

as well, provided there aren’t any other further children eligible to 

get that money. Georgia would be able to have the discretion first 

to either join the program or not join the program, but could use 

that SCHIP money to help working families. 

This is what I did in Wisconsin. I was the first State to do this, 

called BadgerCare, and I found that if you allow the parent or parents to join up with their children, you get more children to go into 

the program. And that is what Georgia could do with this new, improvised, flexible Medicaid system. I am confident that you would 

have more kids covered under this change than under the current 

law. 

Ms. MAJETTE. Thank you. 

Mr. SHAYS [presiding]. Thank you, Mr. Secretary. We are going 

to go to Trent Franks, and then Brian Baird would follow. 

Mr. FRANKS. Thank you, Mr. Chairman, and thank you Secretary 

Thompson. A lot of us have followed you over the years and just 

seen your innovative personality and attitude be kind of an inspiration to a lot of the folks that want to try to look at new ways to 

systemically change things. 

Secretary THOMPSON. Thank you. 

Mr. FRANKS. And you know Mr. Secretary, I think that all of us 

on this panel, Democrat and Republican alike, have essentially in 

this particular area the same goals, and that is to try to afford all 

Americans the very best health care that they can have at the least 

cost while still maintaining their dignity to direct their own lives 

as much as possible. And yet you have very succinctly put forth the 

other side of the ledger, which is this whole preventative area, and 

I think that is vitally, vitally important, and it just would change 

the actuary completely if we could follow your line of logic there. 

Having said that, in order to produce the best health care possible at the least cost, if we glance over our shoulder and look back, 

we see the highway of history, as it were, is indeed littered with 

the wreckage of socialism. And it is free enterprise and innovation 

that have brought revolution to a lot of areas. I mean, just recently 

we have seen Federal Express bring revolution to the post office. 

We have seen the breaking up of a telephone monopoly 20 years 

ago completely bring revolution to the entire industry where we 

38

have seen a profound decrease in the actual cost and, when you 

index it for inflation, enormous decrease. And yet with our medical 

costs we see no end in sight in terms of the escalation. 

And one of the things that I found very fascinating in the proposal here was the President’s proposal to have a health tax credit, 

a refundable tax credit for low-income and moderate-income individuals that are not covered by insurance. And I am just wondering, has your Department—or would it be wise, considering the 

actuaries that we face, for us to look at that more broadly and ask 

ourselves what do we spend per person enrolled in Medicare and 

Medicaid, and ask ourselves if indeed this money were made available to them in the form of a government draft or a refundable tax 

credit could be assigned to private insurance, where would we be? 

What could they buy? And would it indeed be possible to create the 

same revolution in health care that we did in these other industries that I mentioned? 

Secretary THOMPSON. Thank you so very much, Congressman. 

Let me take your question and expand on the answer if I may. 

If you really want to get at health care costs, we have got to have 

a Medicare prescription proposal, because that helps the States as 

well because it funds the dual-eligibles’ prescription drugs. The 

Medicaid proposal that I am advancing is completely innovative, it 

is completely new, and it changes the system and allows the entrepreneurship of Governors and legislators to develop a whole new 

medical system in their States. That is why Democrats and Republicans alike should really like this proposal. Most Democrat Governors have taken advantage of the waivers that already do what 

I am suggesting we do in the new Medicaid law, and I know Republicans have as well. 

The third thing, let us take the President’s tax credit proposal. 

I think what we should do is expand it so that we would require 

every State to put all of the uninsured into a class. So for the 

State—I believe it is Arizona—I don’t know how many uninsured 

there are in Arizona, but let us say you have 2 million people in 

Arizona that are not insured. The Governor would put them all in 

a class of the uninsured and would be able to negotiate. Could you 

imagine how many companies would like to bid on 2 million people? And you have some very healthy individuals in that uninsured 

population. The categories of the uninsured are usually young, 

healthy people that are not making enough money or starting out 

and don’t think they are ever going to get sick. So it is a good class, 

and it should be quite competitive. There are some other people 

that can’t get a job and have got some other problems that just 

can’t get insurance. But overall, the class would be very competitive if you had that big of a buying category. 

So if you had the buying category for the uninsured, and then 

allowed the State or the individual to go down to the IRS office, 

get the number from the IRS office which would equate to cash, 

$1,000 for a single, $3,000 for a family to buy a family plan, you 

could conceivably move millions of people from being uninsured to 

insured, and it would lessen the cost of health delivery because 

those individuals go to the emergency ward because they wait until 

they get sick. But if they got insurance, you could also then put in, 

which I would like to see, disease management or preventative 

39

health, and you would save megabucks. It would work, it would 

solve the uninsured, and it would also improve the quality of 

health in America. 

Mr. FRANKS. Thank you, Mr. Secretary. My time has expired. 

Mr. SHAYS. Thank you. I was probably not paying attention to 

the clock. I am sorry, folks. 

What we are going to do is we are going to go to Brian Baird 

and then Rosa DeLauro. 

Mr. BAIRD. I thank the chairman and thank the Secretary for 

your—I found your testimony refreshing and interesting. I would 

like if your staff could give me a copy of the proposal you just described for dealing with uninsured. I would welcome that. 

Secretary THOMPSON. Thank you. It is in my head, but I will 

write it down for you. 

[The information referred to follows:]

PROVIDE INDIVIDUAL TAX SUPPORTS FOR HEALTH INSURANCE COSTS

Offering health credits. The President’s budget also proposes $89 billion in new 

health credits to make private health insurance more affordable for Americans who 

do not have employer-subsidized insurance. As part of the Department of Treasury 

budget proposal, eligible families with two or more children and incomes under 

$25,000 could receive up to $3,000 in credits to cover as much as 90 percent of the 

costs of purchasing health insurance. The credit phases out at $60,000 for families. 

Eligible individuals earning up to $15,000 annually would receive up to a $1,000 

tax credit. For individuals, the credit phases out at $30,000. The credits are refundable, so their value does not depend on taxes owed. Beginning in July 2005, advance 

credits will be available allowing individuals to directly reduce their monthly premium payments. The health credits could also be used in privately sponsored health 

insurance purchasing groups. This proposal is expected to provide coverage for 

Americans who would otherwise be uninsured for one or more months, and will help 

many more working low- and moderate-income families who currently purchase private health insurance with little or no government help.

Mr. BAIRD. Alright. Let me throw out a few things and then let 

you choose how to answer them in the 5-minute time in the interest of everybody else. 

First of all, I want to associate my comments with that of Chairman Nussle. Washington State, as you know, is quite disadvantaged relative to other States in Medicare compensation, and the 

fundamental principle to me is everybody pays into the Medicare 

system at the same rate, everybody should receive the same benefits regardless who they are. And if I may, and I don’t mean this 

to sound critical, but you have been, I think, constructive and 

shared that you have a number of ideas to fix a number of problems and invited Mr. Hensarling and others to join you on fixing 

those problems. I will offer to you that I will be happy to work with 

you to fix this problem, and if you have some ideas for how we can 

do so, I would appreciate it. So don’t just leave it to the Congress. 

You are the Secretary, and we will work with you on this, but this 

is, I would say, the number one priority for many of our States in 

health care. 

So secondly, I want to associate myself with Lois Capps’ comments on loans. I just came back from a tour of several community 

colleges, and they are very concerned. It is not your Department, 

but it affects this issue of nursing supply. I didn’t mean loans, I 

meant vocational—Carl Perkins vocational programs. 

The Carl Perkins cuts proposed will substantially adversely impact our ability to train nurses, and I hope you will work with your 

40

colleague, Mr. Paige, and others and the administration to fully 

fund those vocational funds for nurses. 

Finally, let me ask as a former practicing clinical psychologist, I 

am interested in mental health issues as you see them, and where 

you see that going from here, and how we can address the growing 

mental health needs and reduction in services for folks who need 

mental health. And thank you for your comments. 

Secretary THOMPSON. Thank you, Congressman. 

The first one on the uninsured, I would love to sit down with 

you. I have got some and I will put out some of my ideas in writing 

and send them to you, and if you want me to come up to your office, or you can come down, and I would like you to come down and 

see the communication room. I keep saying that because I think 

you would find it very fascinating and exciting, and allay a lot of 

your fears, which hopefully will allay a lot of your constituent fears 

about how well we can respond to a bioterrorism, chemical, or radiological attack. 

And secondly, in regards to the Carl Perkins, you will have to 

work with my colleague. I am confident he will want to work with 

you. Nursing is very important to all of us, and Congresswoman 

Capps has taken the leadership role, and I commend her every 

time I get a chance to see her on that, as well as several other people. Billy Tauzin was another great leader in this thing. And I 

think we can work something out. In regards to the SAMHSA budget, we have put in $200 million 

for a new State voucher program that hopefully is going to allow 

the States to set up accountability and responsibility, and allow for 

more money to get out to faith-based communities as well as other 

individuals in the community to offer mental health services. We 

are also putting in an additional $16 million for mental health 

services, $9 million for children’s mental health services, and $7 

million for projects for assistance with transition from homelessness. And we are putting in a lot of—I think it is $50 million in 

a new program to counsel children of prisoners, which has some 

mental health association, as you well know. 

Mr. BAIRD. How do those increases correspond to inflationary levels? Will that allow us to maintain current levels of spending? 

Secretary THOMPSON. It increases them quite a bit. 

Mr. BAIRD. Over inflation? 

Secretary THOMPSON. Much, much higher. Probably the biggest 

increases in this program ever. In fact, the voucher program is 

brand new. 

Mr. BAIRD. Let me, if I may——

Secretary THOMPSON. And as you know, the President has come 

out in favor of equal parity of mental health and believes very 

strongly in that. 

Mr. BAIRD. I would strongly endorse that and was going to ask 

you that very next question. I would very strongly endorse that and 

appreciate your commitment to that. 

Secretary THOMPSON. I was in favor of that when I was Governor, but I never quite got the legislature to go along with that. 

Mr. BAIRD. I will work with you on that one, too. 

On the SAMHSA front, one of the concerns that you may be interested in looking into this, I don’t know enough, but I hear from 

41

folks that dual-diagnosis patients, i.e., patients who have substance 

abuse problems and mental health problems. The funding streams 

are tied up in bureaucracy occasionally, so that if you are trying 

to treat a patient who is, say, dealing with affective disorder and 

has an alcohol problem, which is very common, you are restricted. 

And some of your reform efforts might look at that, and I would 

also be happy to work with you on that. 

Secretary THOMPSON. You know, Congressman, the best thing 

you could do for me is to point out exactly where it is. If you have 

got prime examples, I love ideas, and I love to find out where something is wrong in my Department, because it doesn’t take me long 

to get it fixed. I tell people if they believe in the status quo, I don’t 

want them on my team. And if they are not living on the edge, they 

are taking up too much space. So I want individuals that are willing to make changes. 

Mr. BAIRD. Thank you. 

Mr. SHAYS. Thank the gentleman. 

We will go to Doc Hastings and then to Rosa DeLauro. 

Mr. HASTINGS. Thank you, Mr. Chairman. 

And, Mr. Secretary, welcome to the committee. 

Secretary THOMPSON. It is always a pleasure. How are you, my 

friend? 

Mr. HASTINGS. I am doing well. Thank you. 

I do want to, however, associate myself with the remarks of my 

colleague from Washington and the chairman, because as was mentioned, Washington is one of those States that is under-reimbursed 

by the formula on Medicare. And I have had examples where providers have come in, and, you know, you have heard all the horror 

stories. So I look forward to seeing your proposal. And I hope there 

is a lot of choice in there because it——

Secretary THOMPSON. Congressman, the truth of the matter is we 

have to work together on this, because it just can’t be something 

from the administration. 

Mr. HASTINGS. I understand that, but you have to put the proposal down, and we have to respond to that. So it always has been 

amazing to me the idea that when you turn 65, you can’t make a 

decision; it boggles my mind, and that shouldn’t be so. 

Mr. SHAYS. A little more personal now, isn’t it? 

Mr. HASTINGS. Well, it is. Yeah. A little ways to go there. 

But one thing I want to talk about. You mentioned Medicaid. 

You spent a lot of time on Medicaid. You may have responded to 

this when I was gone, but—and you also tied Medicaid reform with 

SCHIP. In Washington State, our legislature passed a plan prior 

to SCHIP that covered funding up to 200 percent. 

Secretary THOMPSON. You can’t use your SCHIP money. This one 

would allow you to use it. 

Mr. HASTINGS. That is exactly my question. The flexibility that 

you are talking about——

Secretary THOMPSON. Absolutely. 

Mr. HASTINGS [continuing]. As it applies to Washington State 

would allow that to be used. 

Secretary THOMPSON. Absolutely, Doc. There are four States, 

Washington, New Hampshire, New Mexico, and Vermont, that 

can’t use their SCHIP money because their legislature went out 

42

first and passed it, and they have been discriminated against because they can’t use it. What they do is they have to send it back 

in, and then it is sent out on an apportionment basis to other 

States. So Washington’s SCHIP money is not going to Washington; 

it is going to all the other States around the country. 

This proposal would allow you to use your SCHIP money. For instance, it would allow you not only for children, but it would allow 

for low-income working parents of those children to sign up for 

health insurance as well and have the Federal Government pay 70 

percent of it. It is a wonderful program. As I told Congressman 

Moran, I would have walked to Washington from Wisconsin to get 

this deal. 

Mr. HASTINGS. Washington, DC. 

Secretary THOMPSON. To Washington, DC, and I think the Governor of Washington would like the same. I am working with Governor Locke, and he sees the merits of it. I am confident that unless it becomes a partisan issue, he will strongly support it. 

Mr. HASTINGS. Well, thank you very much, Mr. Secretary, for 

that clarification, because I felt that Washington fell under that, 

and I just wanted to get it on the record that that is precisely what 

you are proposing to take care of those States that are ahead of the 

curve, so to speak. So I appreciate very much your response to 

that. 

Secretary THOMPSON. Thank you very much. 

Mr. HASTINGS. Thank you. 

Mr. SHAYS. My colleague from Connecticut, Rosa DeLauro. 

Ms. DELAURO. I want to thank the Chair, and welcome, Mr. Secretary. It is a pleasure to see you today. 

Secretary THOMPSON. It is always a pleasure to see you, as you 

know. 

Ms. DELAURO. Thank you. And I look forward to your coming before Labor/HHS to have an opportunity for additional questions. 

The first is, I think, a different change, although I didn’t hear 

all the questions. I want to address the issue of child care and 

TANF. In 2002, and this is a quote from you, Mr. Secretary, that 

was absolutely right then, and it is absolutely right now, ‘‘I can tell 

you from my experience as Governor of Wisconsin, access to child 

care assistance can make a critical difference in helping low-income 

families find and retain jobs.’’

We know that that is the case, given what today is all about. 

And yet, in the President’s budget, it flat funds the child care and 

development block grant. It has 4.89 or $4.78 millions——

Secretary THOMPSON. It has $4.89 million. 

Ms. DELAURO [continuing]. Over the next 5 years. The fund currently serves only about one in seven eligible children. 

Let me take the State of Connecticut; 4,000 families are on a 

waiting list for child care. The waiting list in Connecticut opened 

in August, 2002; and we know that States have directed substantial shares of TANF funds to child care in recent years. But, even 

with this, the child care is only reaching a very small proportion 

of those children who are eligible. 

Now we have got some changes in the new welfare reform legislation. And I—we talk about welfare reform having worked and, 

you know, tout the success of that, but we also want change. We 

43

want to say, let’s move from a 30-hour work week to a 40-hour 

work week; and I am not disputing that. But if I am going to go 

to work for 40 hours, rather than 30 hours, what in God’s name 

am I going to do with my kids? I haven’t been able to take care 

of them in those 30 hours, and now I have got 40 hours. Where do 

I go and what do I do when this backs a law in? 

I don’t understand the rationale for freezing child-care funding in 

the budget. I am not even going to talk about education and training not being part of what we are talking about. Good Lord, if we 

could all get educated and trained in the same way, then maybe 

we could do away with the welfare system and so forth. But let’s 

leave that for Labor-HHS. Let’s just focus in on the child care. 

I just think if we are now going to say to States, you are now 

going to have to deal with this, let’s keep in mind you are not able 

to deal with it now. But now you have got to deal with this because 

we are going to move from 30 to 40. You handle it. 

What happens with this current commitment that we have to 

lower-income workers? The States are going to have to do this. I 

mean, this is unfunded mandate. I don’t think we can just slip that 

by and say it is not. 

Now the fact of the matter is, what kind of analysis—and I applaud the work that you do in your shop. What kind of analysis has 

HHS done to determine whether this welfare plan is feasible? The 

current—my State of Connecticut—my colleague from Connecticut 

will address this issue. We are in a tough spot in the budget in the 

State of Connecticut. Most States are this way. How are they going 

to handle these, this new requirement? What has your shop done 

to analyze this to find out if the fiscal condition of the States is 

going to allow them for dealing and handling with these new requirements? 

Secretary THOMPSON. Thank you very much, and thank you for 

your passion. You know, I really like your passion; and I would like 

to have a chance to discuss things with you, because we get along. 

Ms. DELAURO. We do. 

Secretary THOMPSON. Several things I want to point out. 

First off, the amount of money is not flat funded. If you look, the 

number of children has been reduced in the last 5 years, but the 

$4.8 billion was set. So you have half as many children today as 

you did back in 1997 when you passed the first TANF bill. 

Secondly, the number of hours is not only work hours. Work 

hours go from 20 to 24. The additional 14 and a half hours is for 

education, taking care of your children, allowing parents to be involved in PTA, going down to monitor your children in class, and 

being with your children. That would qualify for the 14 and a half 

hours. 

The third thing is the House bill increased the child support money by an additional $3 billion—$1 billion in mandatory, $2 billion in discretionary. So there is an additional $3 billion in the over 

5 years in the House bill that passed. 

This is something that most people don’t understand—under the 

existing TANF law, there is a provision that prevents States from 

using any excess money for child care. They have to use it on benefits. Right now there are $2.5 billion—$2.5 billion of unused TANF 

money out in the States that could go for child care; and some of 

44

that money is in Connecticut. If the TANF bill as we propose 

passes that is money that could go for child care, education and 

transportation instead of for benefits. So there is an additional $2.5 

billion that is locked up because of the restrictions under the current TANF law which will be changed in the new TANF law. 

Ms. DELAURO. Is that money fungible? Can it be used anywhere 

or does it have to be used just on——

Secretary THOMPSON. Just benefits. It all can be used under the 

current laws just for cash benefits, and that is why it is not being 

used. Therefore, if the new TANF law goes through, that money 

could be used for child care as well, Congresswoman. 

Ms. DELAURO. Just a quick point. I know that the number of 

kids may have gone down, but I think that you are looking at the 

TANF caseloads. With all due respect, Mr. Secretary, I believe that 

there are loads of kids out there who are eligible who we now cannot accommodate in any way. It is still my fear that we are not 

going to be able to accommodate them, and there are going to be 

more because more people are becoming unemployed in today’s 

economy. 

Secretary THOMPSON. But the caseload is still declining. The 

view shows that the decline has been through September, and that 

was a report that was put out by my Department I think last week. 

That is through September through the fiscal year. 

I don’t have new numbers for the next quarter. You may have 

more modern numbers than the Department does. I don’t think you 

do, but ours show that there has been a decrease of an additional 

three and a half percent in past year and among single parents, 6 

percent. So we are still working on that. 

But, you know, this thing has got a long ways to go. But I hope 

that the Senate will pass it, and hopefully we can continue to work 

to improve it. 

Ms. DELAURO. Thank you, Mr. Secretary. I thank the Chair. 

The CHAIRMAN. Ms. Brown-Waite. 

Ms. BROWN-WAITE. Thank you, Mr. Chairman. 

Mr. Secretary, I represent a district in Florida just north of 

Tampa, a very heavy retiree population. Medicare+Choice is a very 

successful program in the counties where it is offered. The problem 

is that we don’t have it in all of the counties and the reason being 

the reimbursement level. 

Secretary THOMPSON. You are right. 

Ms. BROWN-WAITE. Is it accurate that previously there has only 

been a 2-percent increase in Medicare+Choice reimbursement, even 

though their costs have gone up 8 percent? 

Secretary THOMPSON. You are absolutely correct. 

Ms. BROWN-WAITE. Well, Mr. Secretary, then it just seems to me 

as if we are on a road of making sure that Medicare+Choice is 

available in fewer and fewer areas. 

Secretary THOMPSON. You are absolutely correct. 

Ms. BROWN-WAITE. What is the reimbursement that is planned 

for this budget that we have before us? What is the reimbursement 

increase? 

Secretary THOMPSON. A lot higher as it was last year. But Congress didn’t pass it. 

45

Ms. BROWN-WAITE. What is a lot higher? What is the percentage 

that is in your budget? 

Secretary THOMPSON. I will be able to tell you that very soon, but 

it is a lot higher. 

Ms. BROWN-WAITE. A couple of other questions, Mr. Chairman, 

if I may continue. 

Secretary THOMPSON. Yes, you know, I agree with you. I mean, 

we are starving the problem as a result of us going down. We have 

got to put some more money into it if we want to make the program successful, and the seniors that do have Medicare+Choice like 

it. 

Ms. BROWN-WAITE. The seniors who do have it do like it, but I 

have counties where Medicare+Choice has pulled out because of inadequate reimbursement. 

Secretary THOMPSON. And you are right. 

Ms. BROWN-WAITE. The——

Secretary THOMPSON. Congress made the decision in 1998 that 

they were going to try and get it to expand faster into rural areas, 

so they decreased the amount of reimbursement. That was a conscious decision by Congress, which reduced the reimbursement to 

2 percent and then even some years lower than that from 1998 up 

until the present. Until last year we tried to increase it to 6.5 percent. And Congress came back with 2 percent. So we have tried in 

the administration to raise it, and as a result it was a failed decision. 

I mean, I am not being critical. Probably Congress thought they 

were doing the right thing, but they made the wrong decision by 

starving a growing program in urban areas in order to try and 

force it to go into rural areas by giving more money to rural areas, 

and then nobody showed up. 

Ms. BROWN-WAITE. My next question concerns the cost of the 

prescription drug program. In the budget that has been proposed, 

it is a $400 billion amount for the prescription drug program. Previously, the amount was $190 billion that was proposed last year. 

Help me to understand why the substantial increase in the 

amount. 

Secretary THOMPSON. The increase is because Congress as much 

as told us that if we didn’t come in with an amount that was going 

to be close to what they were working on that the proposal would 

be a nonstarter. 

Secondly, we want this proposal to pass. 

Third, we are making some meaningful changes which are going 

to require more dollars be put into it. 

And, fourth, we want to get something out there that has a much 

better probability to get fast action, which needs to be done. I am 

fearful that if it waits till next year it is going to get tied up in 

presidential politics, and once again we will fail to gets a Medicare 

proposal passed. 

Ms. BROWN-WAITE. The last question that I have for you concerns reimbursement to physicians. In Florida, because of the aging 

population, up to 85 percent of the patient caseload are Medicare 

recipients. The doctors had cuts, substantial cuts, and when your 

income goes down because of cuts and your expenses because of 

medical malpractice go up, I have physicians who are specialty 

46

physicians who are moving out of the area. Now the States and the 

Federal Government hopefully will do something with tort reform. 

But what about the reimbursement rate for physicians? You know, 

85 percent of your caseload in my district for the doctors that I 

have spoken to are Medicare. So they can’t offset that with private 

pay. 

Secretary THOMPSON. I am happy to report, with the work of the 

Congress and the most recent appropriation proposal which was 

signed into law by the President, we have been able to adjust upwards from a 4.4-percent reduction for doctors to a 1.6-percent increase, which will be published on Friday of this week. So on Saturday, March 1, doctors will, instead of getting a cut, get a 1.6-percent increase. 

Ms. BROWN-WAITE. What is in the budget for the 2003–2004—

any increase? 

Secretary THOMPSON. That is going to have to be decided by Congress, Congresswoman. 

Ms. BROWN-WAITE. Thank you. 

Chairman NUSSLE. Thank you. 

Mr. Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Mr. Chairman, before I begin my questions, I noticed on the 

schedule that the hearing for the education part of the budget had 

evaporated. That is a very important part of the budget, and I was 

wondering if we could get—if the Secretary can make it, if we could 

hear from somebody from the administration that can explain to us 

what is happening to education funding. 

Chairman NUSSLE. I thank the gentleman. If you would yield, 

the OMB Director did cover that in his testimony; and it was our 

hope to be able to get Secretary Paige. We had him scheduled for 

tomorrow, but there was a scheduling conflict together with our defense hearing. I had to make a judgment call, and defense took a 

priority at this moment in time because we had the opportunity to 

have the Secretary. 

Having said that, I would be happy to work to try to include an 

education hearing. That is—we have done that in years past. It 

was no intent to do anything but just to make sure we accommodate all of the different, various schedules. 

Mr. SCOTT. I would hope that we could do that before the mark 

up, Mr. Chairman, so it would be a meaningful hearing. I thank 

you for your cooperation. 

Mr. Secretary, it is good to see you again. 

Secretary THOMPSON. It is always a pleasure, Congressman. 

Mr. SCOTT. You mentioned diabetes, and I was wondering if you 

were familiar with the research that is going on in the Eastern Virginia Medical School. 

Secretary THOMPSON. Where? 

Mr. SCOTT. Eastern Virginia Medical School. If not, I would like 

to get you about a one-page summary of some of that very exciting 

research. 

Secretary THOMPSON. Please do. I speak about diabetes all over 

the country, and any information that might further enhance my 

ability to speak on it, I would appreciate. 

Mr. SCOTT. Thank you. 

47

The Medicaid option, I am not sure I completely follow it. But my 

question would be, as I understand, it is a option—you don’t have 

to take it? 

Secretary THOMPSON. That is right. It is voluntary. 

Mr. SCOTT. And if you don’t take it the rules don’t change? 

Secretary THOMPSON. The rules don’t change. 

Mr. SCOTT. If you switch and figure out it was a bad idea, can 

you switch back to the old system? 

Secretary THOMPSON. No. 

Mr. SCOTT. OK. Low-income heating assistance. It is my information that heating costs per gallon have gone up 30 to 50 percent. 

That is before we go to war and might get more than that. The 

LIHEAP budget, as I understand it, goes up 20 percent from last 

year, but even funded from the year before that. How is that going 

to work for people getting—buying the same number of—are they 

going to buy fewer gallons, be able to buy fewer gallons of heating 

fuel, or will fewer people be eligible for coverage? 

Secretary THOMPSON. That question has not been asked. I 

haven’t looked into it, Congressman. But I certainly will and get 

an answer back to you. 

I can tell you that the Congress took out discretionary money of $100 million and put it into the base funding so the LIHEAP 

money is going to be at $1.8 billion this year, in fiscal year 2003; 

and that is approximately $200 million more than it was this year. 

[The information referred to follows:]

LOW-INCOME HEATING ASSISTANCE

While heating oil prices have spiked recently, we are moving into the time period 

when oil use and purchases decline. The Department of Energy expects this to be 

a temporary price increase. You asked how price and funding changes would affect 

the amount of fuel LIHEAP buys for each household, and the number of households 

served. Since LIHEAP is a block grant, States make those decisions. This year, I 

was concerned with higher-than-expected fuel oil prices; that is why a significant 

portion of the contingency funds I released January 24 were directed to States based 

on their dependence on fuel oil. My fiscal year 2004 budget request includes $300 

million in contingency funding to address unanticipated needs such as those due to 

bad weather or abnormally high prices.

Mr. SCOTT. This year was a cut from the year before, as I understand it. 

Secretary THOMPSON. No, it was in discretionary money which 

was not all used, Congressman. 

Mr. SCOTT. OK. 

Secretary THOMPSON. This is going to be a mandatory fund so it 

will all be sent out, $1.8 million, which will be more money than 

it was this year. 

Mr. SCOTT. Mr. Secretary, the last time——

Secretary THOMPSON. I just have been corrected. It is the $200 

million that was added to the 1.8, so it will be $2 billion next year 

in 2004. It is going to be 1.8 in 2003 and $2 billion in 2004. 

Mr. SCOTT. OK. And it was $2 billion in 2002. 

Secretary THOMPSON. It was 1.6 in 2002. It is 1.8 in the fiscal 

year we are in, 2003; and it will be $2 billion, additional $200 million, for fiscal year 2004, Congressman. 

Mr. SCOTT. Mr. Secretary, the last time I was asking you questions, I asked you about discrimination. 

Secretary THOMPSON. Yes, I know you did. 

48

Mr. SCOTT. And you said at that time that discrimination with 

Federal money was wrong, period. 

Secretary THOMPSON. Yes. 

Mr. SCOTT. Trent Lott said that if Strom Thurmond had been 

elected we wouldn’t have had all these problems over all these 

years. Can you explain to me what problems the 1965 executive 

order has caused which prohibits discrimination in Federal contracts? 

Secretary THOMPSON. I don’t know what Trent Lott has got to do 

with that. Are you talking about the faith-based initiative? 

Mr. SCOTT. Yes, if the faith-based organization is hiring a truck 

driver, an accountant, a typist or a custodian, they can tell them, 

no, we don’t hire your kind. You are in the wrong religion under 

the President’s executive order. 

My question was——

Secretary THOMPSON. Nothing in the faith-based initiative, Congressman, promotes or encourages hiring discrimination. It doesn’t 

take away any freedom that they currently have. 

Mr. SCOTT. Mr. Secretary, before the President’s executive order, 

you could not tell somebody that they couldn’t be hired solely because of their religion with Federal money. After the executive 

order, you could tell somebody—you can practice all the bigotry you 

want and tell somebody, no, you don’t—you can’t get hired because 

of your religion. If it is an all-white church, you can manufacture 

an all-white work force. You couldn’t do that before the President’s 

executive order just a few weeks ago, isn’t that right? 

Secretary THOMPSON. It does not discriminate against people on 

race or sex. 

Mr. SCOTT. If it is an all-white church, you can hire an all-white 

work force. 

Secretary THOMPSON. It allows religions to hire people from that 

religion. 

Mr. SCOTT. Or exclude religions. You can consider religion when 

you hire. In other words, we don’t hire your kind. You are in the 

wrong religion. 

Secretary THOMPSON. You can consider religion when you hire, 

yes. 

Mr. SCOTT. Is that a problem? 

Secretary THOMPSON. I certainly hope not. 

Mr. SCOTT. I mean, before the executive order, you couldn’t do 

that. 

Secretary THOMPSON. But it doesn’t allow you to discriminate on 

race or sex. 

Mr. SCOTT. Just religion. 

Secretary THOMPSON. Just religion. 

Mr. SCOTT. Is that a good idea? 

Secretary THOMPSON. Yes, I believe it is. 

Mr. SCOTT. That is not what you said last time we talked. 

Secretary THOMPSON. I said last time that we should not use 

Federal dollars for discrimination based upon race or sex. I believe 

that the President has made a decision that money should get to 

faith-based groups wherever possible, where they have not had the 

opportunity in the past. And the executive order, as you pointed 

49

out, allows religious organizations to look at religion in hiring, but 

not based upon race or sex. 

Chairman NUSSLE. Thank you. 

Mr. Davis. 

Mr. DAVIS. Thank you, Mr. Chairman; and, Mr. Secretary, good 

afternoon to you. 

Secretary THOMPSON. Good afternoon. 

Mr. DAVIS. Let me ask you about a comment that you have made 

in a few press conferences and I think you made in response to Mr. 

Gutknecht’s questions earlier. That is, the degree of flexibility that 

States would have to make certain geographic changes in the way 

that they administer the Medicaid program. You were stating that 

one of the virtues of the program was that Minnesota, for example, 

or, in my case, Alabama could recognize some of the differences 

and costs and needs between a central part of the State, a southern 

part of the State. Give me some—let me come at it this way. 

Secretary THOMPSON. OK. 

Mr. DAVIS. What kind of reassurance can you give people who 

are living in certain rural areas or in certain isolated parts of 

States that they won’t get caught in that calculus that States are 

trying to perform? It seems that one aspect of flexibility under your 

program is that it would give States some capacity to shift resources away from certain high-need areas. If that assumption is 

not right, tell me why it is not right. 

Secretary THOMPSON. It is not right. Let me tell you why. 

The current law requires every class to be treated uniformly. 

These are optional programs. The State only has two choices. Continue the program as is, or drop the program for the optional population. And if it is in central Alabama—you represent Alabama——

Mr. DAVIS. Alabama, that is right. 

Secretary THOMPSON [continuing]. Central Alabama, I would 

think your constituents would like to have a third choice, instead 

of either. Because Alabama has got financial troubles and they are 

going to cut back some of their program, I would like to think that 

most people in your constituency would say, I would like to have 

a third option. Maybe reconfigure the benefits and allow the Federal dollars to continue and allow the program to continue. 

The States don’t have that option under the existing law. The 

States would have that under the new proposal. 

The fourth option would be that the State would not have to do 

it. It is completely voluntary for the State. 

And, the State would pay less and get more Federal dollars. 

I think all of those things would argue for you to support it. 

Mr. DAVIS. Let me come at it this way, Mr. Secretary. Let’s 

say——

Secretary THOMPSON. Did I answer your question? 

Mr. DAVIS. To some degree. To the degree you didn’t, I will follow 

up on it right now. 

Would the States have the flexibility if they opted into this program to say, for example, there is a particular part of our State 

where we think that the problem of children having dental care is 

not as acute as some other part of the State so, therefore, in this 

part of the State we are going to cut back on funds for dental care 

for children. Is that a hypothetical under your proposal? 

50

Secretary THOMPSON. I can’t imagine any State legislature ever 

allowing that to pass. Can you? 

Mr. DAVIS. Well, coming from Alabama I have seen things like 

that happen in my State, so it is—we haven’t had a Governor like 

you, unfortunately. 

Secretary THOMPSON. Congressman, you would have to pass that 

particular law in the legislature, and I can’t imagine in modern day 

that would ever happen. 

Mr. DAVIS. But there is nothing in the proposal, nothing in the 

regulations that would constrain the States’ abilities from doing 

that. 

Secretary THOMPSON. Unless it is the mandatory population. All 

the rights and all the responsibilities and all the protections are 

there, but the State now could drop the whole class, and that 

would be much worse. 

Mr. DAVIS. Let me shift——

Secretary THOMPSON. You would have to take dental away from 

the whole class, but you would still allow for basic benefits, which 

is a tremendous benefit for the States instead of dropping it. Because the problem is, under the existing law, 38 States have 

dropped optional programs this past year. A million people have already been dropped. Next year, 42 States are going to cut back 

even further; and more people are going to be dropped. I want to 

give these States the option to keep those Federal dollars coming 

in and give them the option to keep these programs alive. 

Mr. DAVIS. Let me cut you off for one second so I can sneak one 

more question here. Let me turn to Head Start, which I don’t think 

we have covered today. 

Let me anecdotally report to you that in my district a number 

of people are very concerned about the changes in Head Start; and 

certainly, as Governor, you have had a fair amount of experience 

with the program. 

Secretary THOMPSON. Very much so. 

Mr. DAVIS. In the time that you were Governor of Wisconsin did 

you find the Head Start program to be less than effective and, if 

so, did you speak out on that? Did you make attempts to change 

it as Governor? 

And the final part of that, Mr. Secretary, give me some sense 

when right now most statistics indicate that children are performing at a better level educationally coming through Head Start 

than children who don’t go through Head Start at the same socioeconomic level, given the fact that those educational benefits are 

being conferred, why shift the program from HHS to Education at 

all? 

Secretary THOMPSON. I am not going to answer the last part of 

it, but I will answer everything else. 

Mr. DAVIS. Can I have a point of order on that, Mr. Chair? 

Secretary THOMPSON. While the program is in the Department of 

Health and Human Services I am going to do everything I possibly 

can to make it the best program possible. 

Secondly, I did not, when I was Governor, get involved in Head 

Start because I had no ability to. I would have liked to. I think 

Head Start is an excellent program. But I would like to be able to 

take my pre-education dollars from my early childhood programs 

51

that I put in when I was Governor for early childhood, be able to 

use the opportunity to integrate them in with Head Start and 

make an even better program. Under the current law, I can’t do 

that. 

Under the changes that are being advocated, it would allow Governors to be able to work with the Head Start people and be able 

to use the pre-education dollars from the State, if the State has 

any, to work with Head Start to improve the overall program, 

which is completely voluntary and would require the sign-off of 

both the Secretary of Health and Human Services and the Secretary of Education. 

Mr. DAVIS. OK. Thank you, Mr. Chairman. 

Chairman NUSSLE. Thank you. 

Mr. Cooper. 

Mr. COOPER. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary, for being here. 

If we were to look back at this hearing 5, 10 years from now and 

a historian judged it, a big-picture presentation would seem to me 

to be something like States have deficits and those deficits are 

being used, basically, and Medicaid, as we know it—and let’s not 

prejudge that issue—Medicaid needs a lot of changes and you have 

been, you know, great in granting flexibility to States. It also seems 

like Federal deficits are being used to end Medicare and perhaps 

Social Security as we know it. And to me, it is important for us to 

be aware of the magnitude of the changes at the time they are 

being made. 

Because, so far at least, you haven’t issued a press release to this 

effect, yet the cumulative weight of the proposals is even attracting 

the attention of folks like Robert Pear and Robin Toner at the New 

York Times in their February 24 article where they start hinting 

that this isn’t son of Bush or son of Reagan. This may be son of 

Barry Goldwater sort of level of changes. So that the public can understand them, to me, truth in budgeting is a good idea, government transparency is a good idea, and if these changes need to be 

made, let’s be open and forthright with the American people about 

making such changes. 

So what would your response be? Are these changes of these 

magnitudes? Are you going to be speaking at banquets 10 years 

from now saying that you ended Medicaid as we knew it in the 

year 2003 or Medicare or Social Security as we knew it? 

Secretary THOMPSON. No. Thank you for the question. I think 5 

years, 10 years from now people are going to look back at this and 

say this was—if we do our job, that this was the most constructive 

Congress that made the most positive changes to allow programs 

to continue to grow better, with more quality and better health 

care than ever before. And if we don’t do that, Medicare, Medicaid 

and Social Security—let’s forget about Social Security, that is not 

here. Let’s talk about Medicare and Medicaid. That if we don’t 

make those changes we are in a world of hurt. 

Last year, a million people were dropped from Medicaid. This 

year, an additional 2 million people are going to be dropped. With 

the Medicaid proposal that I am advancing, it takes the best of the 

work ability of TANF and of SCHIP and of the mandatory popuVerDate Feb 1 2002 11:02 Jun 04, 2003 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6602 X:\HEARINGS\108TH\108-5\HBU057.000 RYAN PsN: RYAN
52

lations in Medicaid and allows it to continue to grow and expand. 

And I think you should support it, Congressman, with enthusiasm. 

Mr. COOPER. To put it in language that corporate America could 

understand, are you shifting these programs from defined benefit 

plans to defined contribution plans? 

Secretary THOMPSON. No, I am not. 

Mr. COOPER. Are you shifting away from the concept of social insurance? 

Secretary THOMPSON. Absolutely not. We are expanding social insurance, Congressman, because I think those States that would 

have my option on Medicaid would not have eliminated a million 

people. They would have been able to reconfigure it so a good share 

of those million would have been able to stay in the system, which 

I think you would support, and I know I do. 

Mr. COOPER. Well, it seems easy to support in the short run. But 

3 years hence aren’t Governors going to be coming back and saying, 

hey, we are going to have to pay back all this money you allowed 

us to receive now. And many States traditionally have been unwilling to support their poor. Wisconsin is different. You may be a social model for the rest of the Nation. But Tennessee is not at all 

like Wisconsin. 

Secretary THOMPSON. But, Congressman, you didn’t hear me. 

You don’t pay the money back. You don’t pay the money back. I 

don’t know, you must have been out of the room. Medicaid is growing at the rate of 9 percent a year. So the trend line nationally is 

9 percent. For the first 7 years, the States that voluntarily go into 

this would be above that trend line, at 10, 11, 12 percent. The 

trend line continues and the mandatory population continues, no 

matter what, the same as the existing law. 

Mr. COOPER. But two-thirds of the program is optional. 

Secretary THOMPSON. One-third of the population and two-thirds 

of the benefits are optional, which is two-thirds. But in the 8th 

year you would go below 9 percent. You would still be getting an 

increase, but you would drop maybe down to 6 percent. Not a payback of 7 percent or 8 percent, depending upon the trend line, because each year we have to reconfigure the trend line. 

Mr. COOPER. After you are Secretary, Governors may have a different view of the plan. But I hope you are building something that 

will last for the future. 

I admire so much of your record of innovation. You are an accomplished public servant. But these changes need to be clearly explained to the American people so they can have——

Secretary THOMPSON. I want to explain them to you first so you 

understand so you can explain them to your constituents. I am confident that this is a bigger change, a more important change for 

more people than the TANF proposal, and it will be more accepted, 

and 10 years from now you will be one of the individuals out there 

saying we did the right thing. We changed it, and we saved it, and 

it is going forward. And I am confident you will make that decision. 

Mr. COOPER. Like with TANF which ended welfare as we knew 

it, we will be ending Medicaid as we know it. 

Secretary THOMPSON. No, we will not, because it is not a block 

grant. 

53

Mr. COOPER. I am not talking about block grants. I am just talking about such a fundamental transformation of the program. We 

end it as we know it. That was the phrase used with welfare. 

Secretary THOMPSON. But it is not ending it as we know it. It allows it to grow and to continue. It allows the mandatory population 

to get all of its protection. It isn’t that big of a change because the 

States are already dropping these optional programs and optional 

populations. They have no choice. This proposal allows them to reconfigure it, maybe increase co-pays, maybe drop one of the benefits instead of the whole class, maybe reduce one of the benefits, 

but allow more people to be in. 

Let me give you an example. The State of Utah’s Medicaid plan 

was so rich that it was higher than what the Governor and State 

legislature and the State employees had. They asked for a waiver 

to reduce the Medicaid health insurance plan to equate and be able 

to be purchased with the State employees plan. So they reduced 

the Medicaid plan down to what the State employees and the State 

legislature had and were able to expand it so 25,000 more people 

could come into it. That is the kind of innovation that we are looking for. 

Mr. COOPER. I know that I have strained the patience of the 

Chair. Thank you. 

Chairman NUSSLE. Not the impatience of the Chair, it is just 

there are other members who want to inquire. Mr. Emanuel. 

Mr. EMANUEL. Thank you, Mr. Chairman. 

Mr. Secretary, I want to thank you for your comments about 

chronic illnesses that go on in this country, as a son of a pediatrician and the son of a nurse. But the lecture you gave us all on tobacco I would recommend be given to other audiences, and to the 

general public as well. 

Secretary THOMPSON. I hope I wasn’t lecturing to you. 

Mr. EMANUEL. No, felt good. Don’t worry about it. I am the father of three little children. They often lecture me. 

My point is, on the comments about tobacco, those comments 

need to be broadened not only by the Secretary of Health but also 

by the President as well as the people who overwhelmingly support 

your party, the Republican party. So I have no problems with it. 

I am glad to hear your comments. I agree with those comments 

as somebody who, for over 20 years; I swim a mile three times a 

week; and bike 12 miles twice a week. I believe good health is the 

best preventive medicine. So I appreciate your comments. 

To your offer on the uninsured, my father is retired from his pediatric practice 4 years. He dedicates 1 day a week, doing exactly 

SCHIP program for the City of—Health Department of Chicago. As 

I said, it is good for the kids, it is good for my dad, and it is great 

for my parents’ marriage now that he is retired. So I believe in it, 

and I would take you up on your offer and anybody you want to 

send over to my office to meet and talk about your plan for the uninsured. 

In Illinois, the SCHIP program is known as KidCare. It is something I was intimately involved in negotiating when I worked in 

the White House, and I advocated to expand it to family care. I 

think one of the craziest things to do is have kids in there whose 

parents work full time without health care. The kids are getting 

54

medical care, and the parents are sitting in the waiting room without a doctor. 

Secretary THOMPSON. You know what State was the first one? 

Mr. EMANUEL. Iowa and Illinois. But you only cover up to 33 percent. 

Secretary THOMPSON. No, Wisconsin was. 

Mr. EMANUEL. Well, the second one was Illinois. 

Secretary THOMPSON. Wisconsin was so far out in front of Illinois, like they always are, that——

Mr. EMANUEL. You are a real clean State, too. We always know 

that. We just had our elections in Chicago, and about 30,000 of 

your citizens voted, so we thank you, also. 

Secretary THOMPSON. My—I better not say it. 

Mr. EMANUEL. I think they are going to shut the microphones on 

both of us soon. Some part of this hearing has been somewhat of 

a rendezvous for you as a Governor. Some people talk about your 

record as Governor and ask you questions about it; and the truth 

is, you did very well as a Governor under those rotten rules you 

had and—you did very well as a Governor. You were a model on 

welfare and on health care and all the constricting rules. Somehow 

you did very well. 

So I would like to note that, although those changes—and I am 

for reforms and changes, as somebody who worked in both the 

SCHIP program and on welfare reform for the President. That rotten, confining system allowed good Governors like you to succeed. 

Second is, on welfare, you made some comments earlier about 

the welfare plan, and we kind of moved on to health care. And I 

believe firmly in welfare reform. I worked on passing it. I think it 

was the right thing to do. Because what we did is we basically 

eliminated the speed bumps folks face through child care, health 

care, transportation assistance, minimum wage and the EITC to 

move from dependency to independence. And the best thing we did 

is for those children whose parents now go to work. They are tied 

into the culture of work. So, rather than looking on the inside into 

the main value system in our country, they are part of the main 

value system; and that is something we can’t measure yet that will 

pay off for generations to come. 

Unfortunately, not putting the resources—there was a big poll 

done by the Joyce Foundation which showed that recipients who 

were successful, that moved, needed more dependable, reliable 

child care and health care; and, unfortunately, what is in this 

budget doesn’t allow them to do that. Now you can say the goal is 

70 percent. Without the resources there, you can’t achieve that. I 

believe in this, and I think all of us who worked on this want to 

see this succeed. Setting an arbitrary goal is the right thing to do. 

But without the resources it is one of the most mean-spirited 

things you can do. 

To the issue on block grants and flexibility—and I know a little 

about spin. I practiced it a little while. The problem here is that 

you have confused people that somehow block grants and flexibility 

mean the same thing. They are not the same thing. Block grants 

are a method of financing, and flexibility is a matter of administration. 

55

You have the power as the Secretary of HHS, as you have said, 

giving more waivers to give that flexibility. Block grants is a matter of financing. As you have explained with your 11, 12, 9 and 6, 

in fact, financing does go down; and you are giving Governors a 

Hobson’s choice. Get money now, and leave your colleagues in the 

future in a straitjacket. 

I would be interested in any reforms, but the one reform I am 

very interested in as it relates to SCHIP—and I want to make sure 

that I understand what you are asking because I think as I read 

it—I could be wrong. I am positive of that, that I probably am 

wrong—and it has bipartisan support here in Congress and that is 

add flexibility to the SCHIP program by reallocating expiring funds 

back to States to protect the SCHIP coverage. About 800,000 children with coverage would be threatened under current policy. 

The administration itself advocated a similar proposal last year, 

and I haven’t heard recently you advocate that, unless it is part of 

what you are talking about now. That, basically, allows States to 

keep the money from previous years to roll into the next year and 

States that succeed would also get more money. So you would be 

actually rewarding success in moving those children whose parents 

work full time into the health care system. Is that part of the program you are talking about? 

Secretary THOMPSON. No. 

Mr. EMANUEL. Did I go over or was it right on the line? 

Chairman NUSSLE. Right on the line. 

Mr. EMANUEL. I tell you I hope you don’t give that gavel to my 

kids. 

Secretary THOMPSON. Congressman, first, it was nice meeting 

you last night. A mutual friend of ours speaks very highly of you, 

and he told me that I had to get a chance to talk to you. But there 

are several things you mentioned. 

First, on tobacco, I speak about it, I am passionate about it, and 

I am glad you are as well. 

Secondly, I have the whole Department of Health and Human 

Services on a diet, including myself. I give out walking meters and 

make sure everybody tries to walk 10,000 steps a day so that they 

stay in good health. Because I say, if we are going to be Department of Health, we have got to lead by example. 

Third, I am very glad that you convinced your President, Bill 

Clinton, to sign the welfare bill after he vetoed it twice. 

Mr. EMANUEL. They were different welfare bills. 

Secretary THOMPSON. Well, he still vetoed it twice; and I am very 

glad you weighed in on that. 

Fourth, in regards to welfare, it is not mean-spirited. In this particular proposal, half of the population, half of the children are no 

longer on the program. Also, the Congress increased the support by 

$3 billion for child support. 

You cannot do welfare on the cheap. You have got to be able to 

furnish for health care. You have got to furnish for transportation 

and training, and you have got to also provide for child support. 

When I was a Governor I came to Congress and testified on that, 

and I said you are not going to save money on welfare. Because if 

you are going to get people to move from welfare to independence 

you are going to have to put more money into those four areas. I 

56

am happy to report that when I was Governor I took all the children off the waiting list and everybody had child care in the State 

of Wisconsin that applied for it. One of the few States that did 

that. 

Five, in regards to SCHIP, you are talking about the fact that, 

in the current Federal law, a State has an allotment for 3 years 

and after 3 years the money is forfeited back to the Federal Government if it is not used and then it is redistributed throughout the 

country. Several States, such as the States of Washington, Oregon, 

Tennessee and New Mexico, cannot use their SCHIP money, so 

they never get the benefit of it. This new proposal will allow them 

to use their money to allow for working families to get the same 

coverage as their children. 

I am very happy that you support that, because this a concept 

that I came up with in Wisconsin called BadgerCare, that you can’t 

expect the families to take the children in if they need health insurance. You get more children covered if you allow their parents 

to be covered, and this is going to be allowed in the new proposal. 

I disagree with you on the block grant. Block grants means level funding like a block grant is for TANF, $16.8 billion a year. 

The Medicaid proposal continues to grow at 9 percent; and, as 

you know from your experience in the White House, we have to reconfigure that trend line each year. Next year, it may be 10 percent. Next year, it may be 11 percent. But we also are not holding 

Governors to a different responsibility. They are completely voluntary. If they want to go into the new system, they can—if they 

don’t——

I am confident once I get a chance to explain it to you you will 

be supportive of it. I am confident that once I get a chance to explain it to all the Governors, get the details out there, 90 percent 

of the Governors will sign up for it. Because it is the right thing 

to do. It gives them the flexibility and the opportunity to get advanced funding. 

We are also going to set up a clearinghouse in the Department 

of Health and Human Services; and we are going to take the best 

practices of States around the country, whether it be Wisconsin, Illinois, California. We are going to be the clearinghouse, and we are 

going to send those out to the Governors and say this is what is 

working in long-term care. If you use this program and take all the 

waivers and decide what is doing the best out there and encourage 

Governors to use the best practices in order to make sure that 

Medicaid is there. 

Right now, Governors don’t have any choices. They either continue the program as it now exists or drop it, and that is what is 

happening out there, as you well know. One million people were 

dropped from medical assistance last year, probably 2 million this 

year, because they don’t have the third choice. The proposal that 

I am advancing gives them that third choice, allows them to reconfigure it, allows them to maintain the program, allows them to 

keep the Federal dollars coming into the health care delivery system, which is a winner for everybody. That is what I would hope 

you would do. 

The SCHIP proposal you are talking about, the $2.7 billion 

versus the $900 million, the President’s budget last year suggested 

57

to Congress that all that money should go back, and should not revert to the Treasury. It didn’t pass last year. This year, he took 

$900 million and said, this money should stay with the States; and, 

two, $1.8 billion should go back to the Treasury. But that is not 

part of the medical assistance proposal that I am advancing. 

Chairman NUSSLE. Mr. Shays. 

Mr. SHAYS. Mr. Secretary, I have enjoyed the fine questions that 

are being thrown at you and your excellent answers. I get a chance 

to see a lot of people respond to difficult questions, and you have 

purported yourself, I think, extremely well. 

You are a very sincere person. I love your passion. I also love 

your honesty. And I was thinking being Secretary is not like being 

Governor. But you have, I think, a tremendous opportunity to do 

a lot of good in your position as Secretary and especially in your 

past experience as being such an innovative Governor. I just hope 

you stay on as Secretary, and as long as George Bush is President, 

because we will be very fortunate if that is the case. 

I would like to——

Secretary THOMPSON. That was the nicest thing anybody has 

said to me. Thank you very much, Congressman. 

Mr. SHAYS. Well, it is from the heart; and I think others would 

have said that as well. 

I want to talk about Health Resources and Services Administration, and I want to talk about community health centers. I am beginning to feel that this country, one way or the other, is going to 

have to address the 41 or 43, whichever it is, million Americans 

who don’t have health insurance. Because, in the end, they get it. 

They just get it in distorted ways. As your document has pointed 

out, those who don’t have health care are more likely to be in a 

hospital when they don’t need to be. 

What I would like to ask you about is the amount of intensity 

the administration feels for continuing what I hope and expect was 

a doubling of community-based health care clinics I think in 5 

years. My sense is, in general terms, that we are going to go from 

10 million to 20 million; and I also have the expectation that about 

half of the folks in health care clinics don’t have insurance. So I 

make an assumption that, of the so-called 43 million Americans 

who don’t have insurance, 5 million presently are covered by health 

care clinics, so really do have health care and that, when we double 

it from 10 to 20, another 5 of the 10 don’t have health care and 

will benefit. I want to know if I am thinking soundly about this, 

or whether you can enlighten me as to whether that is——

Secretary THOMPSON. No, you are absolutely correct, Congressman. I can’t say off the top of my head if your figures are exact, 

but they are very close, if not right on the money. In fiscal year 

2004, we will be serving 13.75 million Americans. We are up to 

13.75 million, and at the end of this year we should be at 3,700 

community health clinics across America. They do a wonderful job; 

and I am so happy that you are supporting them, Congressman. 

Mr. SHAYS. So the administration, though, intends to move forward and pursue the doubling in the next 5 years, is that correct? 

Secretary THOMPSON. That is correct. We are working on that 

glide path. 

Mr. SHAYS. Thank you. 

58

Secretary THOMPSON. We want to get to 20 million. We are at 

about 14. 

Mr. SHAYS. I saw three blank faces when you turned to them, 

like why are you looking at me? OK. Well, a job well done. Keep 

it up. 

Secretary THOMPSON. Thank you very much. Once again, Congressman, thanks for coming over. Congressman Nussle, I would 

like to reinstitute my invitation to all of you to come over and see 

the command center. I think Congressman Shays would tell you it 

is worth the trip. 

Mr. SHAYS. It is worth the trip. I would also compliment you on 

your fine words on Representative Capps, because she is a star. 

Secretary THOMPSON. She is a delight. 

Chairman NUSSLE. Mr. Secretary, before you go, we spent an 

enormous amount of time today talking about Medicare and Medicaid. For those of us that watched public television last night and 

the presentation, the Nova report on a dirty bomb as an example 

of some of the things that might go on, I think it would be poor 

of us to leave—allow to you leave today without at least giving you 

the opportunity to expand a little bit our testimony with regard to 

bioterrorism. I mean, certainly smallpox gets most of the attention. 

But I feel bad that we have spent so much time on Medicare and 

Medicaid that we haven’t given you a little bit more time to expand 

on that subject. 

It is mostly an open-ended question about the strategies. Are you 

satisfied with what you are doing and seeing and the funding is 

mostly my question. 

Secretary THOMPSON. I thank you so much for giving me this opportunity, because this is another one of my passions. First off, the Congress gave us $1.1 billion last year, signed into 

law by the President on January 10. We sent out 20 percent of the 

money by February 1, which was 21 days later, which is probably 

the fastest it has ever happened before. 

We requested the States to come back with a comprehensive 

plan, what they would do with the money, by April 15. Most States 

complied, much to the chagrin of a lot of the critics who said it 

couldn’t be done. We sent out the balance of the money by June 

1; and now the States have got this wonderful plan that they have 

submitted to NIH, to FDA, to CDC and to the Secretary’s Office. 

We have sent the money out to expand the communications so 

that we will have 90 percent of the health departments hooked up 

to our Health Alert Network. We are expanding the surge capacity 

so every region in America now has to have a capacity of an additional 500 beds this year, a thousand next year and 1,500 the following year. We are setting up 122 cities that are in the metropolitan civic awareness. We are educating the first responders. 

My concern is that the States have only authorized and have 

only drawn down 17 percent of the Federal dollars. They might be 

committed, but only 17 percent of the money has been spent so far, 

and we have an additional $1.1 billion to send out again this year 

for them to continue. So I have talked to the Governors, told them 

that they have to take a look at this thing and find out. 

We are coordinating with the mayors and with the first responders, and we have also expanded our laboratory networks up to over 

59

200 so that we are hooked up on laboratories. We are increasing 

the security. And, we are requesting an additional $1.5 billion for 

fiscal year 2004, of which $518 million will go for hospitals for expanding their surge capacities and so on. We have got $780 million this year being used on bioterrorism 

research at NIH. We are looking at the six most prevalent agents 

that we are the most concerned about—smallpox, anthrax, botulinum toxin, which I am the most concerned about because it affects food. If we went into closed session, I would like to really talk 

to you about botulinum toxin because I am very concerned about 

it. The fourth one is the fever viruses, Ebola; the fifth is plague; 

and the sixth is tularemia. 

I am happy to report that NIH has come up with a vaccine on 

Ebola, which is one of the hemorrhagic fever viruses. We are going 

into human trials within the next couple of months. It looks very 

promising. 

We also then set up a bioshield plan which I would like to get 

into in more detail. This is a program which is a permanent indefinite appropriation, which has probably never been utilized much, 

if at all, before. It is $5.6 billion over 5 years. What this would require is Secretary of Homeland Security, Tom Ridge, to declare an 

emergency. I would have to certify that there is a counteragent out 

there that can be produced, that it cannot be produced or is not 

being produced currently commercially and that we can use the 

dollars in order to do that. 

We would take these two certifications to the President. He has 

to make the final determination; and if he makes the final determination, and if you pass bioshield, then we would get the money 

to go out and procure the particular money, the services to do that. 

This is something that is going to add to our thing. So if there 

is an imminent danger of smallpox we would be able then to go out 

and to try and recreate more vaccine or better vaccines. We are on 

the cutting edge. We were just issued two contracts today for a new 

smallpox vaccine, one from Canvas Baxter and another from a Copenhagen, Denmark firm. This is one that is called MVA, which is 

less potent than our current smallpox vaccine, and we think we 

could give it to immune deficient people without causing any adverse consequences. 

We are also developing a new anthrax RPA, which wouldn’t require six shots but only three shots and could be manufactured 

much faster and cheaper and better than the current anthrax that 

has only got one exclusive distributor ship, namely BioPort, and all 

the anthrax is being purchased by the Department of Defense. 

We are close on Ebola, and we are trying to develop a new antidote for botulinum toxin. That is classified information so I cannot 

talk about that. 

We have expanded our pharmaceutical supply so we have 600 

tons of pharmaceutical supplies in 12 strategic locations. We have 

set up plants now in which we can distribute 50 tons of medical 

supplies to any city in America within 7 hours. It requires nine 

semi truckloads or one KC–135 to do so. 

We have split the country into 10 regions; and we have got 8,000 

medical personel—doctors, nurses, morticians, and veterinarians—

ready to go, divided up. We have DMED–1 teams which have 2,800 

60

individuals. This is level ones distributed within 10 regions, and we 

put three on alert at all times. Right now, we put them on alert 

just to see if there are any problems so that we could be able to 

utilize them. 

We have had to send mortuary teams up to Rhode Island this 

past weekend because of the fire up there, and they came back 

with rave reviews of what they have done. 

We have sent mortuary teams down to Texas to identify the body 

parts from Columbia. 

We sent some medical teams and some mortuary teams over to 

Guam because of the typhoon which we, through the new communication room that we have been able to develop, can use to monitor food poisoning, and weather, as well as explosions. 

So we have divided that up and I think the Department of 

Health and Human Services is very well equipped to respond to a 

radiological, biological, or a chemical kind of an incident. We could 

not prevent it, but we can respond very quickly, and I would love 

to have you come over and see our operation, Congressman. 

Chairman NUSSLE. I appreciate you eating into your own time 

because I know you have to go to the Senate to talk about that. 

But I—you know, all the Medicare and Medicaid and all these 

other programs combined can’t do a thing if something like this 

happens, as we learned. So I appreciate you spending the moment 

just talking about it. 

Secretary THOMPSON. Thanks for giving me that opportunity. 

Chairman NUSSLE. Thank you, Mr. Secretary, for your testimony. 

We look forward to working with you on all of these programs and 

policies as we move forward, and we appreciate your return visit 

to the Budget Committee and wish you good luck and Godspeed in 

tackling these issues. 

Secretary THOMPSON. Thank you very much. 

Chairman NUSSLE. Thank you. 

The next panel of witnesses for today’s hearing we will invite forward. While they are coming forward, let me introduce them. We 

have today Dr. Gail Wilensky, who is making a return visit to the 

Budget Committee witness table, as well as Dr. Judith Feder, who 

is also making a return visit. Both of these professionals are familiar—are probably more familiar with the government health care 

policies as maybe anybody who is not currently in the administration or involved specifically with the Health and Human Services 

Department from various activities. 

I was just reviewing both of your biographies prior to inviting 

you forward, and it is amazing all of the things that you have been 

involved in and worked on. So we very much appreciate your time 

in coming here today and visiting with us. It doesn’t mean that you 

either agree or agree with us all the time. That is a different issue. 

But we do know of your professionalism and your interest, and we 

appreciate your time today. 

What I will do is I will ask both of you to testify, and then if we 

have any questions we can ask them of either one of you. 

61

STATEMENTS OF GAIL R. WILENSKY, PH.D., JOHN M. OLIN SENIOR FELLOW, PROJECT HOPE; AND JUDITH FEDER, PROFESSOR AND DEAN OF PUBLIC POLICY, GEORGETOWN UNIVERSITY 

Chairman NUSSLE. We will start with Dr. Wilensky. And we appreciate you coming back to the committee, Gail. Thank you. 

Thank you very much. 

STATEMENT OF GAIL R. WILENSKY 

Ms. WILENSKY. Mr. Chairman and members of the committee, 

thank you for inviting me to appear before you. 

I would like to have my testimony entered into the record and 

to use my few minutes to speak about some of the issues that have 

been raised about Medicare and Medicaid. 

First, let me comment on the administration’s proposals for 

Medicare and prescription drugs and the need for reforming Medicare and also their proposal to provide some optional Medicaid and 

SCHIP funding and flexibility as well as the rationale for these 

changes. In my testimony, I am going to draw on my experiences 

as the administrator of the Health Care Financing Administration 

and have also chaired MedPac for its first 4 years. 

As you know, the administration is proposing to spend a substan- tial amount of money, $400 billion, to reform and modernize Medicare. The specifics of the long-term Medicare reform have not yet 

been submitted. The framework and the principles have been articulated as following the Federal employees health care plan. That 

is a program that I participated in during the 10 or 12 years that 

I was a Federal employee and which each of you has also participated. It has many attractive aspects, most importantly that it allows people substantial choice in identifying the health care plans 

that will best meet their needs. 

I know Mr. Nussle and others on this committee have raised 

questions that relate to variations in Medicare spending. It is a serious issue that I wish the Congress would address. The Congress 

addressed it in only one very small way and in some ways 

unhelpfully in the 1997 Balanced Budget Act when it changed only 

the payments for the Medicare+Choice program but left the driver 

of the differential payments in Medicare+Choice, that is the substantial variations in spending that occurs throughout the Medicare fee-for-service program, to continue on as is. It is an issue that 

ultimately the Congress and administration will need to address if 

it is an issue that they want to resolve. 

Medicare solvency and financial pressure will continue. We have 

78 million baby boomers who are going to start to retire at the end 

of this decade. It will continue to place pressure not only on Part 

A but on Part B, which is mostly funded by general revenues. 

The current benefit structure, as has been noted by many, is unfair. It has people paying in at a comparable rate but receiving 

very different benefits depending on where they live in the country. 

It is inadequate, doesn’t include catastrophic care and also doesn’t 

include, of course, outpatient prescription drugs. 

The administrative structure is excessively complicated. Last 

year, just in time for your hearing, the GAO had issued a very good 

report that you had requested about how contractors provide to 

62

physicians and noted that in a large majority of times the information was inadequate, incomplete, and sometimes just wrong. 

Payment issues are starting to raise questions of access. You 

have had some discussion about what happened to physicians 

which would have been an issue this year. It will be an issue next 

year unless you change the way physician payments are set. So, 

while Medicare has many positive attributes, it also has some serious issues. 

Having said that, I believe a stand-alone drug benefit without 

making changes to Medicare that go to some of these other issues 

is imprudent because of the financial issues out in the future and 

because we know that we will substantially underestimate the cost 

of any new benefit if history is any guide. 

It is not, however, too soon to start designing and implementing 

a reformed Medicare program; and if the Congress is able and willing to do that, now would be all the better. Building the infrastructure will take time. Future seniors need to know the program that 

they will face, and future seniors will be very different from the existing senior population, particularly the women who will have had 

more education and more time in the labor force and more income. 

Just a word about Medicaid, if I may. You have heard that the 

administration is proposing to provide substantially greater flexibility to the optional benefits and the optional populations, leaving 

the mandatory population and mandatory benefits as they are. As 

best I can tell, it is fundamentally taking the same amount of flexibility that is currently available through the waiver process and 

giving that flexibility more directly to the States in order to try to 

help them respond in what is a very fiscally constrained period. 

Medicaid is ultimately the most flexible Federal program that exists, but it requires the waiver process which is costly and sometimes cumbersome. 

There is, however, an additional issue that I would like to raise 

as a former HCFA administrator and that is the Federal Government ought to be worried about what is otherwise likely to happen 

to Federal spending under Medicaid with the kind of fiscal pressure that the States are feeling. We have seen in previous periods 

of fiscal pressure on States that they have shown great creativity 

in ways to increase spending only at the Federal level and not at 

the State level. In the early 1990s this was done through provider 

taxes and voluntary donations. It was followed by intergovernmental revenue and disproportionate share spending. 

There are currently disputes going on with regard to upper payment limits as a way to try to increase Federal spending. The problem is that these are inappropriate ways for the Federal Government to make additional monies available to the States. It is unfair. Who gets the money is not a function of the need of the State 

but rather of the aggressiveness of the State, and it is being made 

without the explicit decision of the Congress. The specifics of the 

formula and the details of the program that the administration 

wants to propose are very important. You need to assess them carefully. But the rationale that they are providing is a sound one, and 

I would urge you not to dismiss it. 

Thank you. 

Chairman NUSSLE. Thank you. 

63

[The prepared statement of Gail Wilensky follows:]

PREPARED STATEMENT OF GAIL R. WILENSKY, PH.D., JOHN M. OLIN SENIOR FELLOW, PROJECT HOPE

Mr. Chairman and members of the Budget Committee: Thank you for inviting me 

to appear before you. My name is Gail Wilensky. I am a senior fellow at Project 

HOPE, an international health education foundation and I am also co-Chair of the 

President’s Task Force to Improve Health Care Delivery for our Nation’s Veterans. 

I have previously served as the administrator of the Health Care Financing Administration (now the Centers for Medicare and Medicaid Services) and also chaired the 

Medicare Payment Advisory Commission. My testimony today reflects my views as 

an economist and a health policy analyst as well as my experiences directing HCFA. 

I am not here in any official capacity and should not be regarded as representing 

the position of either Project HOPE or the Presidential Task Force. 

My testimony today discusses the administration’s proposals for Medicare and 

prescription drug coverage, the need for reforming Medicare, the administration’s 

proposal to provide optional Medicaid and SCHIP funding and flexibility and the rationale for these changes to Medicaid. 

THE ADMINISTRATION’S MEDICARE PROPOSALS

The administration has proposed to modernize and reform Medicare with a program that will include $400 billion in net additional spending. Although the details 

are not yet available, the principles for strengthening and improving Medicare are 

part of the budget. The reformed Medicare program would include an improved traditional fee-for-service plan and more varied health insurance options, so that ultimately Medicare would look more like the Federal Employees Health Benefits Program (FEHBP). Some of the important principles underlying the reform include giving all seniors the option of a subsidized drug benefit, providing better coverage for 

preventive care, allowing seniors to keep traditional Medicare, providing better options to traditional Medicare, strengthening the program’s financial security and 

streamlining Medicare’s regulations and administrative procedures. 

The administration is also proposing a variety of strategies to improve Medicare 

in the short term including changes to the pricing of the Medicare+Choice program, 

changing the reimbursement for outpatient drugs, providing better information of 

the quality of care delivered in hospitals and nursing homes and improving the appeals process for beneficiaries and providers. 

THE NEED TO REFORM MEDICARE

Although Medicare has resolved the primary problem it was created to address, 

ensuring that seniors have access to high quality, affordable medical care, there are 

a variety of problems with Medicare as it is currently constructed. These include 

complaints of inadequate benefits from the beneficiaries, concerns of long-term financial solvency by legislators and criticisms from the provider community of inadequate payments and excessive administrative complexity. 

Part of the motivation for Medicare reform has clearly been financial. The financial challenges to Medicare are well known and are documented annually in the 

Medicare Trustees Report made public each spring. Medicare is currently spending 

about $250 billion for 39-million aged and disabled Americans and spending on 

Medicare is expected to grow at a rate of about 7 percent per year for the next decade. This rate is substantially faster than the rate of economic growth and than the 

growth in Federal revenues. 

The long-term outlook for Medicare is primarily driven by demographics. The 

changing demographics associated with the retirement of 78 million baby boomers 

between the years of 2010 and 2030, the expected longevity of the boomers, and the 

relatively smaller cohorts from the baby bust generation means that just as the 

ranks of beneficiaries begins to surge, the ratio of workers to beneficiaries will begin 

to decline. The strong economy of the last decade and the slow growth in Medicare 

expenditures for fiscal year 1998–2000 has provided more years of solvency than 

was initially projected, but even so, Part A of the Trust Fund, which is financed by 

a portion of the wage tax, is expected to face cash flow deficits as soon as 2016. 

As important as issues of Part A solvency are, however, the frequent focus on Part 

A as a reflection of Medicare’s fiscal health is unhelpful and misleading. Part B of 

Medicare, which is financed 75 percent by general revenue and 25 percent by premiums paid by seniors is a large and growing part of Medicare. Part B currently 

represents about 40 percent of total Medicare expenditures and is growing substantially faster than Part A and much faster than the economy as a whole. This means 

64

that pressure on general revenue from Part B growth will continue in the future 

even though it will be less observable than Part A pressure. It also means that not 

controlling for Part B expenditures will mean fewer dollars available to support 

other government programs. 

However, the reasons to reform Medicare are more than financial. Traditional 

Medicare is modeled after the Blue Cross/Blue Shield plans of the 1960s. Since then, 

there have been major changes in the way health care is organized and financed, 

the benefits that are typically covered, the ways in which new technology coverage 

decisions are made as well as other changes that need to be incorporated into Medicare if Medicare is to continue providing health care comparable to the care received 

by the rest of the American public. 

The most publicized problem of Medicare is its outdated benefit package. Unlike 

almost any other health plan that would be purchased today, Medicare effectively 

has no outpatient prescription drug coverage and no protection against very large 

medical bills. As a result, most seniors have supplemented traditional Medicare although some have opted-out of traditional Medicare by choosing a Medicare+Choice 

plan. 

The use of Medicare combined with supplemental insurance has important consequences for seniors and for the Medicare program. For many seniors, it has meant 

substantial additional costs. The supplemental plans also mean additional costs for 

Medicare. By filling in Medicare’s cost-sharing requirements, the plans make seniors 

and the providers that care for them less sensitive to the costs of care, resulting 

in greater use of Medicare-covered services and thus increasing Medicare’s costs. 

There are also serious inequities associated with the current Medicare program. 

The amount Medicare spends on behalf of seniors varies substantially across the 

country, far more than can be accounted for by differences in the cost of living or 

differences in health-status among seniors. Seniors and others pay into the program 

on the basis of income and wages and pay the same premium for Part B services. 

The large variations in spending for Medicare mean there are substantial cross-subsidies from people living in low medical cost states and states with conservative 

practice styles to people living in higher medical cost states and states with aggressive practice styles. The Congress and the public are aware of these differences because of the differences in premiums paid to Medicare+Choice plans but seem unaware that the differences in spending in traditional Medicare is now even greater 

than the variation in Medicare+Choice premiums. 

Finally, the provider community has been complaining bitterly about payment inadequacies as well as administrative complexities associated with Medicare. Particular concern has been raised about reduced payments to physicians and whether 

access to care for seniors is in danger of being jeopardized. Payment rates to physicians were reduced by more than 5 percent for fiscal year 2002 and would have been 

reduced by an additional 4.4 percent next month, had it not been for the action recently taken by the Congress. Even so, payments are expected to decline next year 

if additional changes aren’t made to the way physician payments are calculated. Reductions in payments for nursing homes and home health care have also raised 

issues of future compromises in care although to date there has not been evidence 

to suggest access to care has become a problem for seniors. Information on quality 

is being made accessible where available and the administration is making the 

availability of additional quality measures for home care and nursing homes a major 

priority. 

Provider complaints about administrative complexities have been almost as great 

as their complaints about the levels of payment. Although none of these are new 

issues, providers have been increasingly vocal about these concerns. Among the 

many complaints that have been raised-uncertainty about proper billing and coding, 

inadequate and incomplete information from contractors and discrepancies in treatment across contractors seems to be at the top of most lists. 

In a report released last year, the General Accounting Office (GAO) verified the 

validity of many of the complaints. Among their findings: information given to physicians by carriers is often difficult to use, out of date, inaccurate and incomplete. 

The carriers provided toll-free provider assistance and web-based information but 

only 15 percent of the test calls were complete and only 20 percent of the sites had 

all the information required. CMS was also criticized for having too few standards 

for the carriers and for providing too little oversight. 

PRESCRIPTION DRUG COVERAGE AND MEDICARE REFORM

Although I believe it is important to pass a reformed Medicare program soon and 

that a reformed Medicare package should include outpatient prescription drug coverage, I believe just adding this benefit to the Medicare program that now exists 

65

is not the place to start the reform process. The most obvious reason is that there 

are a series of problems that need to be addressed in order to modernize Medicare 

to accommodate the needs of the retiring baby boomers and to be viable for the 21st 

Century. To introduce a benefit addition that would substantially increase the 

spending of a program that is already financially fragile relative to its future needs 

without addressing these other issues of reform is a bad idea. 

The principles articulated by the President are consistent with the FEHBP model 

and also the work of the Bipartisan Commission for the Long Term Reform of Medicare. I personally support reform modeled after the FEHBP where the government’s 

payments on behalf of an individual would not vary with the type of plan that is 

selected. I believe this type of structure would produce a more financially stable and 

viable program. It would also provide incentives for seniors to choose efficient health 

plans and/or providers and better incentives for health care providers to produce 

high quality, low-cost care. This type of program, particularly if provisions were 

made to protect the frailest and most vulnerable seniors, would allow seniors to 

choose among competing private plans, including a modernized fee-for-service Medicare program for the plan that best suits their needs. 

I recognize that the FEHBP is controversial with some in Congress, particularly 

because of the difficulties the Medicare+Choice program has been having. It is important to understand, however, that many of the problems of the Medicare+Choice 

program reflect the decision by the Congress to encourage the expansion of plans 

in underserved areas by limiting the increase for plans with most of the enrollees 

to 2 percent per year, even though their costs were increasing at a rate that was 

several times that amount. In addition, Medicare+Choice plans have faced additional regulatory burdens as well as substantial uncertainties about future changes 

in regulation. Combined, these factors have helped transform what had been a vibrant, rapidly growing sector into a stagnant and troubled one. 

A second reason not to add a drug benefit without further reforms to Medicare 

is the difficulty of correctly estimating the cost of any new, additional benefit. Our 

past history in this area is not encouraging. The cost of the ESRD (end-stage renal 

disease) program introduced in 1972, for example, was underestimated by severalfold. The estimated cost of the prescription drug component of the catastrophic bill 

passed in 1988 and repealed in 1989 increased by a factor of two and one-half between the time it was initially proposed and the time it was repealed. 

These issues taken together reinforce my belief that adding a prescription drug 

benefit to traditional Medicare without further modernizing the program is unwise. 

A better strategy would be to agree on the design of a reformed Medicare program 

and to begin to implement changes now. At a minimum, it is likely to take at least 

2 years to produce the regulations needed to build the infrastructure needed for a 

reformed Medicare program. 

As we contemplate a Medicare program for the 21st Century, it is also important 

to understand that the people who will be reaching 65 over the next decade as well 

as the baby boomers have had very different experiences compared to today’s seniors. Most of them have had health plans involving some form of managed care, 

many of them have had at least some experience choosing among health plans, most 

have had more education than their parents and many will have more income and 

assets. The biggest change involves the women who will be turning 65. Most of 

these women will have had substantial periods in the labor force, many will have 

had direct experience with employer-sponsored insurance and at least some will 

have their own pensions and income as they reach retirement age. This means we 

need to think about tomorrow’s seniors as a different generation, with different experiences, with potentially different health problems and if we start soon, with different expectations. 

THE ADMINISTRATION’S MEDICAID PROPOSALS

The administration’s proposal for Medicaid distinguishes between mandatory populations and mandatory benefits on the one hand and optional populations and optional benefits on the other. Mandatory benefits for mandatory groups are kept as 

they are under current law, but substantial new flexibility is provided for the optional populations and optional benefits. In addition, increased funding of $12.7 billion is provided over the first 7 years although the program is to be budget neutral 

over 10 years. Much of the flexibility that is currently available through the waiver 

process would be provided directly to the states under the administration’s proposal. 

There are also specific incentives for supporting individuals with disabilities who 

are currently institutionalized that could be served in home or community-based settings. 

66

Although the specifics of the programs have not yet been presented in detail, the 

proposal discusses the use of an acute care health insurance allotment and a longterm care and community services allotment. The amounts in each would be based 

on spending in 2002 with level of effort requirements imposed on the states. 

THE RATIONALE FOR PROVIDING MORE FLEXIBILITY TO MEDICAID

States are experiencing severe fiscal pressure from their Medicaid programs. 

These pressures are coming from three different directions. First, many states 

proactively increased spending on Medicaid during the 1990s by expanding the populations covered, the benefits offered and the rates paid to providers. Second, State 

revenue declined substantially more than initially anticipated in 2001 and 2002. 

Third, the counter-cyclical nature of Medicaid has produced some additional expansion in the Medicaid rolls. The administration is proposing to provide some of the 

flexibility that has been previously available to the states through the waiver process directly to the states to increase their ability to cope with these additional fiscal 

pressures. It should be noted that this increased flexibility is being proposed only 

for the optional populations and benefits and not for the mandatory populations or 

benefits. 

The expectation is that the flexibility being proposed will allow states to make the 

best use possible of their Medicaid funds in an era of unusually constrained resources. As in the case of SCHIP, states would be able to work more directly with 

private insurers and provide premium support for recipients enrolled in private 

plans. States would be able to tailor their programs to meet the needs of individuals 

throughout the State in ways that are not easily possible under current Medicaid 

rules, such as with the ‘‘State-wideness’’ requirement. This is not fundamentally 

new flexibility that is being offered the states since the waiver process provided 

what was essentially a fully flexible program but rather a less hassled and costly 

way to achieve a similar flexibility. 

There is an additional reason for the Federal Government to provide greater flexibility to the states in return for more total control over Federal monies for optional 

populations and benefits. States in previous periods of fiscal pressure have shown 

great creativity in developing ways to increase Medicaid spending using only increased Federal dollars. Provider taxes and voluntary donation strategies in the 

early 1990s, disputes over disproportionate share spending and intergovernmental 

revenue transfers later in the decade and current debates about upper payment limits are among the examples that come to mind. These are inappropriate ways for 

the Federal Government to make additional monies available to the state. The outcomes of these strategies do not represent the results of explicit decisions by the 

Congress to change the relative shares of Federal to State dollars in Medicaid and 

the amount of money a State receives is not determined by its own spending on 

Medicaid nor on the basis of its own fiscal need. 

The general direction of the Medicaid policy changes announced by the administration makes sense. The specifics of the formula and the details of the program will 

be important determinants of the impact of the proposed change on the states and 

on the populations that have been traditionally served by the Medicaid program. 

They should be assessed carefully.

Chairman NUSSLE. Dr. Feder, welcome. 

STATEMENT OF JUDITH FEDER 

Ms. FEDER. Thank you, Mr. Chairman. I appreciate being before 

you and members of the committee. 

I am glad to have this opportunity to speak today on the impact 

of the President’s 2004 budget on both Medicare and Medicaid. I 

would appreciate your accepting my remarks in full for the record. 

What I want to do right now is make some brief points with respect to the proposals on both programs. I have two key points. 

First, the fiscal support this budget offers for both Medicare and 

Medicaid is far too limited to meet program and beneficiaries’ 

needs. 

Second, even the limited support that is offered is offered at too 

great a price: that is, abandonment of Federal fiscal guarantees 

that make today’s Medicare and Medicaid so successful. These proposals would simply do more harm than good. 

67

Let me elaborate, first for Medicare, then for Medicaid. 

The administration proposes to allocate most of $400 billion over 

10 years for a prescription drug benefit. Measured against the costs 

of prescription drugs, despite the size of this sum, these dollars are 

too limited to support adequate protection. The Congressional 

Budget Office estimates the next 10 years of drug costs for Medicare beneficiaries at $1.8 trillion, and $400 billion covers only a 

small portion of that expense, exposing beneficiaries to a benefit 

with substantial cost sharing and actual holes in protection. 

The administration likes to compare its proposals to the Federal 

Employees Health Benefit Plan, which provides Members of Congress and others, including myself, with a comprehensive drug benefit. Estimates indicate, however, that a comprehensive benefit like 

the FEHBP’s—which the Secretary advocated today, saying that 

Medicare beneficiaries ought to have the benefits Members of Congress have—would cost about twice what the administration has 

proposed. Not only is the benefit inadequate in general, the administration would provide it only to beneficiaries who agree to trade 

in their Medicare for enrollment in a private health insurance plan. 

You have to ask why the administration would want to replace 

Medicare with private health insurance. Is it because private insurance is more secure or reliable than Medicare? Experience with private insurance for the working age population and with Medi

care+Choice for Medicare beneficiaries tells us that the answer is 

no. 

Is it because private insurance is needed to expand choice for 

Medicare beneficiaries? Medicare beneficiaries already have the 

most meaningful choice—choice of doctors, hospitals and other providers. And surveys show that Medicare beneficiaries are more satisfied with their coverage and less likely to face access problems 

than younger people with employer-sponsored insurance. 

Is it because private insurance would cost less than Medicare 

now or over time? Medicare+Choice plans want more money for 

Medicare. They are not saving Medicare money. And, historically, 

Medicare costs have risen more slowly than private insurance, including the Federal Employees Health Benefit Plan, not faster. The 

only way private insurance can likely spend less than Medicare is 

to provide beneficiaries less service. 

The fact that the administration ignores the statutory commitment of general revenues to Medicare financing now and in the future and grossly exaggerates Medicare’s long-term fiscal problems 

reinforces this concern. Privatizing Medicare won’t secure protections for beneficiaries. It will undermine them. 

Turning to Medicaid, the administration’s proposals are remarkably similar in form. The dollars are too limited, and they are offered at a price that would undermine the current program. 

First, the money. The administration offered States $3.25 billion 

in 2004, $12.7 billion over 10 years. These dollars do little to address the deficits States are facing today, estimated at 70 to $85 

billion in State fiscal year 2003. Plus, after 7 years, what the Secretary described as forward funding would be offset by a cut below 

that baseline that the Secretary was talking about, a cut in Federal 

funds precisely when the baby boom generation begins to turn age 

65 and are likely to need help from this vital program. 

68

Second, States would receive this so-called aid only if they agreed 

to give up guaranteed Federal matching payments that vary with 

service costs. This is the key issue about current funding versus a 

block grant. Today, Federal funds to States flow with the number 

of people who are eligible and the actual cost of the care they receive. The administration would replace these guaranteed matching 

payments with capped Federal funds, caps perhaps based on an unexplained trend line, but caps, predetermined allotments, nevertheless. 

Why would the administration do this? Will it encourage flexible 

expansion of services, for example, for the uninsured or for the provision of long-term care at home rather than in nursing homes? Despite the administration’s claims, the answer is no. 

Capped funds, even based on projections, are not as responsive 

to beneficiary needs as current arrangements. They do not allow 

for variation in need across States or unanticipated need within 

States or across the Nation. Think simply of a new medication for 

AIDS that can dramatically alter the cost to States of Medicaid 

services. And no flexibility in delivery can offset the increases in 

the numbers of people in need, especially among the elderly and 

disabled, or in the cost of services like prescription drugs and longterm care—to a significant extent optional services for optional 

populations—that States will inevitably face. 

Will capping funds save money? The only money it will save, if 

services are delivered, is Federal money. Capping funds doesn’t 

eliminate costs. It shifts them. That is, it limits Federal dollars and 

leaves States, their providers, and their beneficiaries high and dry. 

With capped funds, flexibility is nothing more than a euphemism 

for cost shifting to States or arbitrary cuts in protection that the 

Secretary seemed to prefer to better support for State programs. 

Such arbitrary cuts include waiting lists for enrollees, now prohibited under Medicaid law; substituting first-come, first-served service for uniform eligibility rules; changing the mix of benefits, which 

means favoring some parts of States over others, despite quite 

similar health care needs; charging even the poorest beneficiaries 

out-of-pocket payments; and limiting access to optional populations 

or services that include nursing home care, home care, prescription 

drugs and other services vital to vulnerable populations. 

Whether optional or mandatory, all beneficiaries subject to 

capped funds are at risk of reduced coverage as well as a loss of 

standards designed currently to assure timely access to quality 

care. And allowing States to pay in less to support the program—

as the Secretary emphasized several times, referring to the three 

factors that might be used to project spending but basing maintenance of effort only on one of those factors, the cost of care—would 

allows States to pull out money at beneficiaries expense. 

In his most recent State of the Union address, President Bush 

described Medicare, and I quote, ‘‘as the binding commitment of a 

caring Nation,’’ unquote. The same language applies to Medicaid. 

A strong Medicare prescription drug benefit, along with fiscal prudence, rather than substantial tax cuts, is needed to secure our 

binding commitment to Medicare. Enhanced and guaranteed Federal matching payments are needed to secure our binding commitment to Medicaid. 

69

In his 2004 budget, the President abandons rather than secures 

these commitments. A caring Nation should reject these proposals. 

Thank you, Mr. Chairman. 

Chairman NUSSLE. Thank you, Dr. Feder. 

Appreciate both of your testimony here today. 

[The prepared statement of Judith Feder follows:]

PREPARED STATEMENT OF JUDITH FEDER, PROFESSOR AND DEAN OF PUBLIC POLICY, 

GEORGETOWN UNIVERSITY

Chairman Nussle, Congressman Spratt and members of the committee, I appreciate the opportunity to comment today on the administration’s 2004 budget proposals regarding Medicare and Medicaid. The administration describes its proposals 

as strengthening the ability of these vital programs to serve elderly, disabled and 

low income beneficiaries. In fact, however, the administration proposals threaten 

rather than strengthen Medicare and Medicaid. Not only do these proposals offer 

too little fiscal support to meet program needs. They also make even this modest 

support contingent upon the abandonment of the Federal fiscal guarantees that secure access to care for all eligible beneficiaries. Specifically, the administration proposes to replace Medicare with private insurance and to replace Medicaid’s guaranteed Federal matching payments with capped Federal funds. Such policies would severely weaken both programs and their ability to serve the people who count on 

them. 

Let me explain first for Medicare, then for Medicaid. 

IMPACT OF ADMINISTRATION’S 2004 BUDGET ON MEDICARE

Although details are sketchy, it appears that the President’s 2004 budget proposes 

to make available (most of) $400 billion over 10 years to support prescription drug 

coverage, but only for beneficiaries who leave the current Medicare program and enroll in private insurance plans for all of their health care. These plans would also 

offer enrollees a different cost-sharing structure for benefits than Medicare currently 

provides. 

Rather than strengthening Medicare, this proposal provides too little benefit at 

too great a cost: First, it falls far short of the administration’s promise to assure 

all Medicare beneficiaries the protection against prescription drug costs they so 

sorely need. The proposed financing for prescription drug coverage does not come 

close to what is necessary to provide all beneficiaries adequate protection. At the 

same time, its thinly veiled ‘‘bribe’’ to beneficiaries to leave Medicare for private insurance actually forces beneficiaries to choose between their need for a drug benefit 

and their need for Medicare’s guarantee of dependable, affordable health insurance 

protection. Despite the urgency of beneficiaries’ need for prescription drug protection, the administration’s price—structural reforms that would undermine Medicare’s greatest strengths—are simply not worth it. 

Inadequacy of the proposed benefit. Over the next 10 years, the Congressional 

Budget Office estimates that prescription drug costs for Medicare beneficiaries will 

cost $1.8 trillion. The proposed $400 billion finances only a slim portion of these 

costs—leaving beneficiaries to face substantial out-of-pocket expenses in terms of 

deductibles, co-insurance, and holes without any coverage at all. This benefit does 

not come close to the protection Members of Congress (and I, as the wife of a Federal retiree) have through the Federal Employees Health Benefit Plan (FEHBP). Indeed, estimates indicate that a comprehensive prescription drug benefit would cost 

about twice the budget’s $400 billion allocation. 

I know that this committee is well aware of the fiscal challenges facing the Nation. But providing adequate financing for prescription drugs is more a question of 

priorities than fiscal ability. For the administration to propose such insufficient investment in prescription drug coverage alongside a proposal for a $674 billion tax 

cut raises serious questions about their priorities. 

Inadequacy of private insurance. The administration’s proposal to tie the availability of a prescription drug benefit, adequate or otherwise, to enrollment in private 

insurance plans forces beneficiaries to make an untenable choice: gain a drug benefit but lose Medicare’s guaranteed access to care. 

Longstanding experience with private insurance reveals that it does not offer the 

dependable protection that Medicare guarantees. Medicare is an enormously successful program because it brings together the healthy and the sick, the better off 

and the less well-off in a single insurance arrangement, pooling risks to insure that 

all beneficiaries—regardless of income or health status, are guaranteed financial 

70

protection against the costs of medical care. It is universal—covering virtually all 

people eligible—and enables beneficiaries to obtain services from the doctors, hospitals and other providers they choose. 

Private insurance cannot compete with Medicare’s performance. Over 30 years 

ago, Medicare was enacted because private insurance failed to reach nearly half the 

elderly population. Today, private insurance outside the workplace for the under age 

65 population is plagued with ‘‘selection problems’’—making affordable coverage 

available for people only when they are healthy and denying or restricting benefits 

to people when they are sick. And inside the workplace, the 1990s’ shift to manage 

care reveals that health plans have relied far more on barriers to access than on 

efficient care management to control their costs. Rather than offering beneficiaries 

a broader set of choices, health plans may limit the doctors or hospitals that plan 

members can use or require them to pay extra to use the providers they want. Indeed, Karen Davis and her colleagues at the Commonwealth Fund find that despite 

better health status and lower need for care among privately insured employees 

under age 65, they report less confidence in getting care when needed and higher 

incidence of access problem than do Medicare beneficiaries. 

The Medicare program also has experience with reliance on private health insurance—through Medicare+Choice—that is decidedly disappointing. Plans that beneficiaries join in 1 year are out of business the next. Benefits that beneficiaries count 

on 1 year are reduced the next. And plans have never found it profitable to serve 

many parts of the country—especially rural areas. It appears that it is insurers who 

gain choice under these arrangements—not Medicare beneficiaries. 

Nor is reliance on private insurance likely to save money. Medicare+Choice plans 

are asking for higher payments from Medicare, not costing Medicare less. Contrary 

to claims made by proponents of private insurance for Medicare, the current Medicare program is as good and often better than the private sector in controlling its 

costs. In the past 5 years, Medicare’s average growth in spending per beneficiary 

was lower than both the private sector and FEHBP. And, according to Marilyn 

Moon of the Urban Institute, over the last 30 years, Medicare spending per beneficiary has grown at a rate of over 1 percentage point less than private health insurance—a cumulative savings of about 41 percent relative to what costs would have 

been through private insurance. The facts are that private insurers cannot best 

Medicare in terms of value for the dollar in the purchase of services. 

The only way private insurance plans can likely spend less than Medicare is to 

provide less service. Indeed, previous proposals to rely on private insurers to provide 

prescription drug coverage to Medicare beneficiaries have sought savings precisely 

by allowing private insurers to limit beneficiaries’ access to a full range of prescription drugs. Reliance on private insurance plans for the full range of Medicare benefits—as the administration proposes—would put affordable access to doctors and 

hospitals at similar risk. The risk to beneficiaries becomes even greater if the shift 

to private plans transforms Medicare from a program that guarantees the financing 

of service costs to a program that guarantees the financing of only a share of a private insurance premium. The latter would represent an explicit transfer of financial 

risk for overall health costs from the Medicare program to elderly and disabled 

beneficiaries. 

MEDICARE’S FUTURE

The administration’s enthusiasm for shifting Medicare beneficiaries to private insurance is particularly suspect when it comes to Medicare’s fiscal future. With the 

aging of the baby boom generation, the proportion of the population served by Medicare will grow from 14 percent today to 22 percent in 2030. Along with likely continued increases in health care costs—not just for Medicare but for the Nation as a 

whole—the demands on the program will be substantial. As just described, reliance 

on private insurance cannot finance increased demands through greater efficiency. 

Indeed, the only way that privatization can address Medicare’s future fiscal problems is if it shifts costs to beneficiaries, ending Medicare’s guarantee to assure affordable access to mainstream medical care. 

Not only is the administration promoting privatization as a false ‘‘solution’’ to future fiscal problems; it is exaggerating their scope and squandering the resources 

needed to address them. The President’s budget reports a $13.3-trillion ‘‘shortfall’’ 

in Medicare over the next 75 years. However, that calculation assumes that only 

dedicated payroll taxes (which finance Medicare’s Hospital Insurance or Part A) and 

beneficiary-paid premiums (which finance 25 percent of Medicare’s Supplementary 

Medical Insurance or Part B) are available to finance the program. It ignores that 

by law and from Medicare’s inception, general revenues are used along with premiums to finance Medicare’s Part B expenses. Unless the administration proposes 

71

to withdraw the statutory commitment to provide general revenue financing, the 

real ‘‘shortfall’’ is only one-third this amount. Further, the 75 year estimates involve 

long-term projections about which CBO and, in other places, the administration 

have expressed accuracy concerns. CBO has said that health costs are among the 

top three reasons for miscalculations in its projections. Interestingly, at the same 

time the administration reports a 75-year Medicare projection, it is unwilling to 

project its own budget proposals beyond 5 years. 

The right way to address the estimated and accurately calculated shortfall is to 

keep the nation’s overall fiscal house in order. Between 2002 and 2011, Medicare’s 

trustees estimate that payroll taxes will generate a surplus of over $510 billion. 

These and other revenues from members of the baby boom generation, now in their 

prime earning years, can be used to minimize Federal borrowing today, thereby 

strengthening the nation’s capacity to meet future needs when they retire. 

But the 2001 tax cut and the additional $674 billion proposed in the President’s 

2004 budget move the Nation in precisely the opposite direction. In part, they use 

the Medicare surplus to finance a tax cut. And, by increasing debt, they add dramatically to the burdens that will fall on future generations. To exaggerate Medicare’s fiscal crisis, promote privatization, and cut taxes suggests that securing and 

strengthening the Medicare program, both now and in the future, is not the administration’s primary concern. 

IMPACT OF ADMINISTRATION’S 2004 BUDGET ON MEDICAID

The administration’s 2004 budget proposes to make available $3.25 billion in 2004 

and $12.7 billion over 7 years to share among States that agree to accept predetermined Federal allocations or block grants to fund services to low income populations. States who accepted the additional funds would be expected to repay them 

in years eight, nine and ten, regardless of program needs. The proposal is therefore 

budget neutral to the Federal Government over the 10 year period. 

This Medicaid proposal has much in common with the administration’s Medicare 

proposal. First, the fiscal relief offered by the proposal is insufficient to address 

State budget pressures that are endangering Medicaid. The early year Federal 

funds are tiny relative to State fiscal deficits estimated in the range of $70–$85 billion in State fiscal year 2003. Second, the proposal offers States an untenable choice: 

gain even modest relief now but lose the current commitment to guaranteed Federal 

matching payments, designed to flow with the number of people eligible and the actual costs of their care. 

Inadequacy of the proposed Federal support. Recessions place States between a 

rock and a hard place when it comes to Medicaid financing. At the same time recessions increase the number of low income people seeking Medicaid coverage, they reduce the availability of State revenues available to finance that coverage. Coupled 

with increases in health care costs—notably for prescription drugs—States find 

themselves with demands that exceed the revenues they have available. Without 

Federal fiscal relief, States’ likely response is to cut back the coverage that Medicaid 

provides. As of December 2002, proposed or implemented cutbacks were estimated 

to leave a million people without health care coverage. 

What’s needed to prevent these cutbacks is a significant increase in the Federal 

Government’s share of Medicaid costs—a boost in the matching rate—in order to 

cushion the recession’s impact. Instead the administration is proposing not only a 

small funding increase that States must repay but also caps on Federal funds for 

Medicaid regardless of program needs. The proposal’s repayment requirement would 

actually cut Federal funds after 7 years, regardless of the number of eligibles or 

costs of services at that point in time. The fact that the repayment cut would begin 

at precisely the point the baby boom population begins to turn 65, increasing the 

number of low income elderly people eligible for Medicaid, makes higher costs then 

almost a certainty. 

Inadequacy of block grants. Whatever its form, capped rather than open-ended 

funding is not responsive to the needs of the Medicaid population, the providers who 

serve them, or the States who share responsibility for financing their care. Medicaid 

is now the nation’s largest health insurance program, providing health insurance to 

low income families and people with disabilities, filling in Medicare’s gaps for low 

income elderly, and providing virtually the only safety-net for people who need longterm care. To support these services, the Federal Government provides States openended matching funds: the more people who are eligible for service and the more 

services costs, the more States receive in Federal matching funds; the fewer people 

eligible, the less States receive. 

As explained by Andy Schneider in the ‘‘Kaiser Family Foundation’s Medicaid Resource Book’’ (July 2002), financing arrangements that guarantee States at least 

72

half the costs of services (up to 83 percent in the lowest income States) encourage 

States to extend coverage beyond levels their own resources would support and 

make funds automatically available when circumstances create a need. Recession is 

one such need. The Urban Institute estimates that an increase in the unemployment 

rate from 4.5 percent to 5.5 percent produces an increase in Medicaid enrollment 

of 1.6 million—an increase that, under current law, is automatically supported by 

Federal funds. Public health emergencies are another such need. Medicaid covers 

an estimated 55 percent of persons living with AIDS and 90 percent of all children 

living with AIDS. When the number of people affected increases or the costs of 

treatment rise, Federal funds automatically increase to share the burden. 

Predetermined Federal allotments or block grants cannot achieve these goals. 

Block grants are distributed according to specific formulas, not according to the 

number of people served or the actual cost of services. Although the administration 

has not spelled out its proposal in detail, replacing guaranteed matching payments 

with capped funding is inevitably less responsive to the needs of vulnerable people. 

As my Georgetown colleague Cindy Mann has explained, predetermined allotments, 

even with rates of increase (which the administration has not specified), do not 

allow for variations in need across States (due to variation in health or economic 

circumstances) or for unanticipated changes in national circumstances. Had Federal 

funding for Medicaid in 2002 been based on costs projected in 1998, for example, 

Mann estimates that financing would have been 12-percent below actual spending. 

Reliance on uncertain projections to provide Federal funding is particularly likely 

to jeopardize Federal support for Medicaid services to low income elderly and disabled populations. Medicaid is now the only source of prescription drug protection 

for these vulnerable populations (and the administration’s Medicare prescription 

drug proposal would not necessarily replace these Medicaid responsibilities). Medicaid is also the nation’s long-term care safety net—financing almost half the nation’s nursing home expenditures. Given the expected growth in the elderly and disabled population, capping Federal funds is a strategy to shift responsibility for serving the baby boom population from the Federal Government to the States. 

The administration describes its proposal as providing States ‘‘flexibility’’ to use 

resources more creatively and presumably more efficiently to meet their needs. 

However, no creativity in delivery can offset likely increases in numbers of people 

in need and increases in the cost of services over which Medicaid has little if any 

control. With capped funds, States’ ability to ‘‘flexibly’’ expand coverage—provide 

coverage to currently ineligible uninsured populations or continue to expand home 

and community-based long-term care services—will be hampered, not enhanced, 

given the need to cover the inevitably rising cost of existing obligations. Either that, 

or expansions will come at the expense of people already in need. The key to true 

expansion of protection is enhanced, guaranteed Federal matching payments, not 

capped Federal funds. 

Indeed, with capped Federal funds, ‘‘flexibility’’ is nothing more than a euphemism for cuts in protection that Federal rules currently do not allow: creating waiting lists for enrollment, favoring some parts of States over others, charging even the 

poorest beneficiaries out-of-pocket payments for service, and limiting access to any 

and all services based on fiscal concerns. Although the administration proposal may 

exempt from some such restrictions Medicaid’s so-called ‘‘mandatory’’ population 

groups—primarily poor children, and elderly and disabled people eligible for Supplemental Security Income (SSI) (that is, with incomes below 74 percent of the Federal 

poverty level)—it is unclear whether these exemptions would apply to all the services these groups currently receive. New types of restriction may apply to optional 

services (for example, prescription drugs, dental services, physical therapy, and eyeglasses). For optional groups—which include elderly and disabled people with incomes above 74 percent of the Federal poverty level—the majority of elderly Medicaid nursing home residents, pregnant women with incomes above 133 percent of 

the Federal poverty level, near poor children and very poor parents—States would 

appear to have total discretion to limit the terms and scope of coverage. The same 

may be true for the State Children’s Health Insurance Program, funding for which 

is incorporated in the newly proposed State allotments. 

In general, a cap on Federal funds will constrain coverage for any and all groups 

and services subject to that cap. Similarly, elimination of an array of current Federal Medicaid standards—like those related to nursing home quality, access to emergency rooms and other protections under managed care, and timely processing of applications—will affect any and all groups and services now benefiting from them. 

Overall, the administration’s Medicaid proposal in no way secures Medicaid financing for vulnerable populations. Instead it takes advantage of States’ current fiscal weakness to encourage States to take a bad risk: trading assured Federal financing in the future for a bit of new revenue and authority to cut spending today. 

73

CONCLUSION

In his most recent State of the Union Address, President Bush described Medicare 

as ‘‘the binding commitment of a caring nation.’’ The same language applies to Medicaid. A strong Medicare prescription drug benefit along with fiscal prudence is 

needed to secure our binding commitment to Medicare. Enhanced and guaranteed 

Federal matching payments are needed to secure our binding commitment to Medicaid. In his 2004 budget, the President abandons rather than secures these commitments. A caring nation should reject these proposals.

Chairman NUSSLE. Do members have any questions? 

Mr. Shays or Mr. Scott. Mr. Scott. Oh, I am sorry. Well, let—do 

you have questions? 

Mr. SCOTT. I will go next. 

Chairman NUSSLE. Mrs. Capps. 

Mrs. CAPPS. Thank you Mr. Chairman. 

I would like to ask you to respond, Professor Feder. The Bush administration has said that all the current beneficiaries would continue getting current benefits. You kind of disputed that a bit. But 

I want to bring out this part that the Secretary referred to today 

as the so-called ‘‘optional beneficiaries,’’ or benefits that are optional, that could be cut as Federal dollars become more limited. 

I say this, in the light of almost every State facing a deficit with 

its own budget right now, it is certainly going to be right up front 

there if this legislation should pass or if this proposal of the administration becomes law. 

You have made some comments about this, but again, what do 

you think about this argument and who are—maybe you can describe some of these optional beneficiaries. What would they do 

without the availability of Medicaid and what would happen to 

them as more and more people become unemployed? 

Ms. FEDER. I would be happy to address that. 

I think there has been some uncertainty. As we have discussed 

the details, actually both proposals are not fully laid out. And there 

has been some inconsistency in the information on whether, as the 

Secretary said today, mandatory populations would continue to receive benefits, or more accurately, whether they would be subject 

to the capped funds. I believe even today, he spoke about perhaps 

exempting the mandatory population from the capped funds for 

mandatory services, but not optional services, as was pointed out. 

To be more precise, mandatory population groups are primarily 

the poorest population groups, the poorest children and elderly and 

disabled people who are eligible for Supplemental Security Income, 

SSI. Those people have incomes below 74 percent of the poverty 

level. These people, along with optional groups in the population—

which include the bulk of nursing home residents—people also rely 

on optional benefits. Optional benefits include benefits for prescription drugs, benefits for dental care, benefits for physical therapy, 

benefits for eyeglasses. 

So those optional benefits, even for the poorest population, would 

be constrained potentially under the caps. And for the optional population groups, those people who are just above poverty or have incomes above SSI level for the bulk of nursing home residents, for 

the beneficiaries receiving home care, those populations and their 

services are totally up for grabs and at the States’ discretion. 

And the difference—even though those benefits are optional now, 

the State must define eligibility rules that apply across States. 

74

They must provide comprehensive benefits for the population they 

make eligible. And so, as they squeeze, they cannot be arbitrary in 

the cuts they are putting into place. So what is needed is money 

so that those States won’t have freedom to cut in ways that may 

be arbitrary. 

Mrs. CAPPS. It is rather a nightmare scenario to think of what 

would happen to nursing home residents, for example, should this 

proposal be enacted. 

And then, if I could go on, because I want to give you a chance 

to elucidate and respond to so many members, along with the Secretary, saying Medicaid and Medicare programs are just too expensive, they have been growing at such a high rate we can’t afford 

them. What are some other ways that we should consider our responsibility in this arena and the kind of valuable services that 

these services provide to our population? 

Ms. FEDER. I am glad you asked Congresswoman Capps, because 

the issue is not affordability of these services. Cutting back program protections doesn’t make the costs of health care go away. It 

simply shifts them to the people who bear those costs, and for 

many, it makes them unable to get it. The issue is not affordability; 

the issue is our Nation’s priorities. 

I personally am appalled at the notion that some would propose a $674 billion tax cut at this time and argue that decent protections for Medicare beneficiaries, for prescription drugs, for poor and 

vulnerable populations, for health and long-term care services are 

unaffordable. And over the long term the issue is fiscal prudence 

to enable this Nation to address the additional costs that will inevitably come as our generation turns age 65. Those costs, we know 

they are coming. The job is to minimize debt today so that we can 

cope better in the future. That’s exactly the opposite of what we are 

doing, what is being proposed. 

Mrs. CAPPS. Thank you. 

Thank you, Mr. Chairman. 

Chairman NUSSLE. Thank you. 

Mr. Shays. 

Mr. SHAYS. Thank you, Mr. Chairman. 

I would like to thank both of our witnesses. It is kind of awkward sometimes, when you are the second panel after a Secretary, 

but you both are such noted scholars and experts on these issues 

that I know we continue to rely on both of you for your advice and 

counsel. 

I have to tell you that what frightens the hell out of me is that 

when I look at basically two-thirds of our budget on automatic 

pilot, and I think that I am supposed to be in a legislature that 

is supposed to come to grips with these issues, and I look at Medicaid going up at an average of 9-percent a year and Medicaid close 

to 7—that is what the average kind of is. And I think it is such 

a big bulk of government spending, and, I think, of opportunity 

costs that it drowns out other things. 

And then I think that we have already learned that our gross domestic product, 14.4 percent is on health care in general, and I 

think that our American businesses have to compete overseas with 

countries that their gross domestic product might be at 5 percent, 

like, you know, Formosa or Taiwan. 

75

So I guess what I want to ask you both is, how do we slow the 

growth in these gigantic programs so they ultimately don’t crowd 

out other very needed programs? 

Ms. WILENSKY. That’s a very large question to handle in a hearing. I think, in this country, we will spend more on health care 

than in other countries because we are not inclined to wait. We 

want easy access to new technologies. We tend not to want to have 

a lot of constraints on our providers, and when we place those constraints, or attempt to place those constraints, people respond 

badly. I believe it will be much more a question of whether people 

feel they are getting value for the money that they are spending, 

and when they don’t, they get very frustrated. 

To me, it is instructive to consider a managed care backlash we 

had in this country in the late 1990s. We did not see a similar kind 

of response from Federal employees who, when they are unhappy, 

every November can vote with their feet and find a different health 

care plan. 

I don’t want to pretend that this model is a panacea and is not 

going to challenge us as to how much we want to spend on the currently working versus how much we want to spend on the currently 

not working. These are difficult issues and there is no easy resolution. But the question of whether or not some kinds of programs, 

put in place, are able to respond better to what people want than 

others is what you, as Members of Congress, have to decide. 

What we are seeing, in part, now, on Medicaid is the aftermath 

of many States have done what a lot of us wanted them to do in 

the late 1990s, expand benefits, expand populations that they covered, and expand payments to providers. They are being caught in 

a fiscal bind with no ability to deficit-finance and having to respond 

in a simple way, to reduce expenditures which is usually to try to 

cut providers’ rates or to cut benefits now, in some cases, or populations. 

What you are able to do as Members of Congress is to try to help 

design programs that make sense with these changing demographics. I am not sure what we are going to—this country next 

about trying to restrain health care spending. We are in the spending phase because nobody has been very comfortable with seeing 

restraints come back in place. 

I don’t think we are going to repeat the 1990s, and I don’t think 

we are going to go back and repeat some of what we did in the 

1980s. Whether or not we move to a Federal employees’ model, 

whether or not we allow individuals to make better choices in 

terms of the kind of health care they want, whether we have flexibility or whether we go back to have more regulatory strategies, I 

think that is really what we are going to have to decide as a country: What do we want to do next? 

But I don’t think we are going to—this country is going to continue spending substantial amounts on health care. The fact that 

we are so proud that we doubled the NIH budget is only going to 

make it more difficult, not less, because there will be many technological advances to go along with our aging population. 

It is really a question of whether we can have people feel like 

they are getting value for their money, and they are in a position 

to make the choices they want, or do we want to have a much more 

76

structured, regulatory approach. Judy and I differ in terms of what 

it is that makes sense, particularly for, say, our Medicare program. 

Either as a program or as a component program, there are fundamental philosophical issues that the Congress is going to have to 

deal with. When we have seen the expansions talked about for the 

uninsured, there really is a fundamental philosophical question 

about whether or not you want to use refundable tax credits and 

grouping mechanisms, or do you want to expand Medicare and 

Medicaid to the currently uninsured as a way to try to bring people 

into insurance coverage. These represent legitimate, philosophical 

disputes that people can have and still feel passionately they want 

to see the problem solved. 

Mr. SHAYS. And the light is on, but I am sure Mr. Scott doesn’t 

mind my going on longer. 

The bottom line is, I think, we have so much distortion now in 

the marketplace in taking care of the uninsured because we are not 

going to—we don’t throw them off a cliff. We just give them a different kind of health care. 

Dr. Feder, feel free to make some comments. 

Ms. FEDER. Thank you, Mr. Shays. 

I agree with much, though not all, as she knows, of what Gail 

said. And I want to go back to the way you framed the problem, 

which was in terms of the percentage of GDP we spend on health 

care, a growing amount for the Nation as a whole, because I think, 

as you recognized in that comment, it is the entire health care system that causes costs to rise. 

The unique problems of Medicare, it is not that Medicare is inefficient. It is that Medicare—and particularly looking out into the 

future—has to deal with larger numbers of older and disabled 

beneficiaries. They have the same problems with health care costs 

that the entire Nation has, not different ones; indeed, because of 

the payment control mechanisms, they actually are able to do 

somewhat better than the private sector in controlling costs. 

But health care costs are rising, and deciding whether we are 

getting value for the dollar—we are, after all, an affluent Nation; 

our GDP is expected to rise per worker by 50 percent over the 

next—what is it—through 2035. How we want to use those dollars 

is our choice. 

I would also add——

Mr. SHAYS. Let me just say, the problem is, in one way it is our 

choice; in another way, it isn’t quite our choice. That is, when you 

see that we are going to have—I have some companies that are 

going out of business in my district because they are not able to 

compete with countries that don’t have such large health care costs 

and so on. And you know their labor costs are not. 

Ms. WILENSKY. I do not buy that. Their total labor cost is divided 

between wages and fringe benefits, and if they can’t compete, it is 

because of their labor compensation, the total labor compensation, 

and not the notion that there is some piece of it that is growing 

faster. 

Mr. SHAYS. No, I think there are a lot of pieces. But if you are 

paying $15,000 for health care insurance for your employee, it 

makes it pretty hard. 

77

Ms. WILENSKY. What it means is that the workers are going to 

get squeezed on wages, and of course, what we saw in the 1990s 

is because we were so much more successful in slowing down the 

rate of health care spending, we were able to see substantial increases in wages in the 1990s without inflation. 

Mr. SHAYS. So your argument—and we will get back to you, Dr. 

Feder. But your argument is, bottom line——

Ms. WILENSKY. It is productivity. And what happens in terms of 

total labor compensation, that is what makes you competitive or 

not. 

Mr. SHAYS. Of which health care is a much larger amount in the 

United States than it is for other countries? 

Ms. WILENSKY. It is, but relative to the total package it is actually quite small. 

Mr. SHAYS. Well, great. Then I don’t feel as scared. 

Ms. WILENSKY. I think it is an easy—it is an easy excuse as to 

why a company is having trouble. 

Mr. SHAYS. I am not looking for excuses. I am just very concerned that my employees now have—my constituents no longer 

have jobs, and I am trying to get some answers to it. 

But, Dr. Feder, we kind of interrupted you. 

Ms. FEDER. That is quite alright. 

What—on this point I think there are also differences between 

the way we finance medical care in this Nation and the way it is 

done in other countries. In other countries they bear those costs. 

Not all countries have extensive health insurance systems or as 

costly health care. But in other countries it is financed through the 

tax system and it doesn’t fall in the same way on individuals, on 

particular employers. 

So there are many ways that we have the issue of whether we 

want to continue to support the advancing of health care, adopting 

new technology that is providing us a lot of good, along with, perhaps, a lot of unnecessary service. We do have to figure out, if we 

don’t want to do that, how we limit what we spend on health care, 

a very challenging choice. It should not be done to limit those who 

are most in need of care, the elderly and disabled beneficiaries of 

Medicare, leaving younger populations unaffected. 

We shouldn’t be leaving the uninsured hanging out to dry when 

the problem is not the health care costs for that 40-some million 

people, but rather the costs for all of us who have health insurance. 

But we as a Nation need to grapple with it appropriately. It is not 

beyond our ability to deal with. 

Mr. SHAYS. Thank you both. 

Thank you, Mr. Scott, for your patience. Mr. Scott, you have as 

much time as you want. 

Mr. SCOTT. Thank you, Mr. Chairman. 

I think—in follow-up to your question, I think Dr. Feder has suggested that if we had universal health care, that would relieve the 

employers of paying a significant portion of their wages and would 

make us more competitive. And we have also heard that the programs we are trying to deal with now, Medicare and Medicaid, you 

take the health care system you have got and expenses out there, 

and we are just buying what is out there. If we could get a hold 

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on the health care system and the increases, then we would be a 

lot better off. 

But in that light, if we are dealing with a private system rather 

than Medicare or Medicaid, private has—you have got to pay for 

the services, you have got expenses, you have got a profit. There 

are only three little pots you can play with, and if you are not 

going to reduce the services, where are Medicare and Medicaid in 

terms of cost of administration? 

Ms. FEDER. As you know, Medicare in particular, I believe that 

the figure is less than a handful of percentage points—2 to 5 percentage points, 2 percent of Medicare in administrative costs is the 

figure that I recall. 

Mr. SCOTT. What is private system? 

Ms. FEDER. Private sector varies by the size of the group being 

insured. My belief is that for employer-sponsored insurance in 

large firms, it is in the neighborhood of between 10 and 11 percent. 

And for small businesses it is in the neighborhood of 30 to 40 percent. 

Mr. SCOTT. So you can’t—you are doing as well as you can on expenses, you don’t have a profit, so how can you possibly do better 

in the private system than Medicare or Medicaid? 

Ms. FEDER. I have got to tell you, Mr. Scott, it beats me. I think, 

and the record shows, as I said, that Medicare does a far better job 

historically of controlling costs than does the private sector. Claims 

about a competitive system or the Federal Employees Health Benefit Program have simply not been borne out. They—we have not 

seen a slowdown in health care costs. 

Mr. SCOTT. OK. Now, as I understand this proposal, you get a 

prescription drug benefit? You go into an HMO, is that the deal on 

this thing? 

Ms. FEDER. An HMO or another—the administration has said a 

private health insurance plan because they have considered options 

beyond HMOs. 

Mr. SCOTT. Once you get into the private sector, is there any 

limit to what they can charge you on co-pays? 

Ms. FEDER. I believe actually in terms of what the administration has laid out in detail—and the details are sketchy on the proposal, but my understanding is that they would be, they are proposing to make some specifications of a benefit plan, but allow variation within it. So some variation within limits. 

Mr. SCOTT. If the HMO that you get into goes broke, then what 

happens? 

Ms. FEDER. That is a good question and not one to which I have 

seen an answer, and one which we have had a problem with. 

Mr. SCOTT. And once you go to a HMO can you get back to Medicare. 

Ms. FEDER. I believe I heard the Secretary say no, but I don’t 

know the answer to that in their proposal. 

Mr. SCOTT. OK. Medicaid, now, there has been a question of 

whether this thing is capped or not. After this thing goes and if you 

choose that option, do you get a set amount of money or not? 

Ms. FEDER. My understanding of the proposal is that it is to replace the current system that provides Federal dollars on a matching basis, based on the number of people who actually sign up and 

79

the costs of their service. It would replace that, for a substantial 

portion at least, if not all of Medicaid, with predetermined allotments to the States. 

Mr. SCOTT. So the State of Virginia would get one big check regardless of who they enroll, based on what they used to be spending? 

Ms. FEDER. In a word, that is pretty much true. 

Mr. SCOTT. And if they enroll more people, that is on the State; 

and if they enroll less people, that is good for the State. 

Ms. FEDER. Or the State budget. 

Mr. SCOTT. State budget. 

Now, if you buy in, you can’t get—I mean, if you buy in, you can’t 

get back to the regular Medicaid. After about 6 or 7 years—he kept 

kind of doing this to the curve, where you get under the cost of inflation—if the cost of medical care keeps going at 9 percent, in the 

fullness of time, you are going to be way behind the curve as I understand it. 

Ms. FEDER. Well, the way I understood it—and it was clear, I 

thought, in his use of the term, forward-funding—it means give the 

money to you up front, then take it back at the end, as I understood it. 

And even though he said that it was not a cut, as he showed the 

trend line, by doing this, he did indeed say that in years 7, 8 or 

8, 9 and 10, that States would receive less than that inflation trend 

line, that baseline. 

So I think that your interpretation is correct, that becomes a cut. 

Mr. SCOTT. So when he said you wouldn’t have to pay it back, 

that wasn’t really the whole story. You just wouldn’t be getting 

enough. 

Ms. FEDER. I didn’t understand that, because I believe that the 

forward-funding, if you get more up front, that means that you 

have to get less in the back. 

Mr. SCOTT. In future, with the costs going way up, we could just 

increase it, say, instead of 9 percent, 6 percent, 5 percent, whatever 

kind of a budget he wants to do; and the State of Virginia would 

just get that check and we would be on our own after that. 

Ms. FEDER. Well when you move away from the commitment 

that we have now to match the payments based on the eligibles 

and the costs, then you can decide what rate of increase you want 

to apply. I have not seen it well explained, what the administration 

intends, although they sound as though they are talking about a 

baseline—which is the projected rate, as he said, changing from 

year-to-year. 

But policy could be changed. It becomes quite simple to ratchet 

that down as is the experience in other areas. But—well, go right 

ahead. 

Mr. SCOTT. The State doesn’t have to sign up for this and your 

recommendation would be to leave well enough alone? 

Ms. FEDER. Oh, I think it is a really bad gamble. I think it is 

appalling that we would only provide States aid if they sign up for 

it, because it is really forcing them to make what I would argue 

is a very, very bad choice. 

Mr. SCOTT. Thank you, Mr. Chairman. 

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Chairman NUSSLE. Thank you. I just have a couple of things. We 

appreciate your time today. 

The first is, with regard to—and you were on MedPAC. You were 

the—in fact, you chaired MedPAC, didn’t you, Dr. Wilensky? 

You know, it seems to me one of the frustrations that we have, 

or at least that I have—I can’t speak for everybody, but one of the 

frustrations we have is that the data we are using to make determinations of impact and how things are—how things are going, 

how the challenges within Medicare in particular are being handled by our system are often 2 years old or longer. And is that still 

true, A; and B, what can we do about it? And doesn’t it—doesn’t 

that information make our decisions incorrect from the beginning, 

or inaccurate from the very beginning if you are basing it on information that is 2 years old? 

Ms. WILENSKY. Two years is usually good in health data, to have 

the data not be more than 2 years out of date. There have been 

some attempts to try to get information sooner. The American Hospital Association has a survey that is used to provide information 

that I think is about a year old. But if you are trying to use actual 

information in terms of spending or cost reports, it is very difficult 

to have it quicker just because by the time it takes to come in, and 

for bills to be paid. 

It does seem peculiar in an age of instant information that we 

can’t find better ways to transmit information within the government. It is possible that some of the effects of the HIPAA requirements, which have transaction standards, will be to have information more readily available after it is all in place. 

But it is a source of frustration. 

Chairman NUSSLE. One other thing that I—or just since you are 

here, you are the—you are the co-chair of the President’s Task 

Force to Improve Health Care Delivery for our Nation’s veterans. 

And I wanted to ask you, because there has been some discussion 

lately, and in fact, bills that have been introduced in the most recent Congress and now, I assume, considered to be introduced in 

this Congress, to change the method of financing this from a discretionary annual program to a mandatory funded program; and I 

guess what I am curious about is, is the task force considering a 

recommendation in that regard? 

When are—I guess first, when are the recommendations coming 

out? I suppose I shouldn’t ask you to tilt your hand too much, but 

if you would tip your hand, is it heading in that direction or maybe 

a different way of financing the veterans program? 

Ms. WILENSKY. Our recommendations will be made to the White 

House no later than May of this year. We had an interim report 

that was out last summer. This activity has been one that has 

taught me Medicare is not as hard a problem as I had thought relative to other issues. Much of what the task force is looking at has 

to do with ways to try to have health care between the VA and the 

DOD—for retirees and veterans—be integrated in a better way so 

that resources can be shared, so that health care can be more 

transparent for the active duty to retiree status of an individual. 

And so we are—many of our activities have involved looking at information systems, trying to go to single physical discharges rather 

than having duplicate physical discharges. 

81

We have also looked at the issue of a funding mismatch. The 

problem is that if you have major waiting times in the VA system, 

it makes it very hard to talk about sharing or coordination between 

the VA and DOD when you have one system that is already so 

backed up. 

We are in the midst of our final deliberations and as of now, the 

task force—these are all open meetings, so anybody can come listen 

as we proceed over the next 2 months. But the task force seems 

to be leaning to make an impartial distinction. The first refers to 

the categories, what had been called 1-through-6s, those who were 

service-connected disabilities and the indigent. 

With geographic adjustments, it is 1-through-7s in the new definition, and to look at that group differently from the category—socalled Category-8s, or the old 7s who have neither service-connected disabilities nor are they indigent. At this point we are leaning toward a way to try to assure full funding for those with service-connected disabilities and for the indigent without directly discussing, or at least at this point, recommending the funding mechanism. 

As you might imagine, as a former administrator, I am very gunshy about adding to the large pot of expenditures that Mr. Shays 

has already noted is off of the table in terms of discretionary decision-making. But to also recognize we need to make sure that there 

is full funding for this group of veterans who have service-connected disabilities and/or who are indigent, whatever mechanism is 

used. 

We are also engaged in a discussion about what, if any, policies 

might seem appropriate for the Congress to consider as to the Category-8s. We have not come to any conclusions either with regard 

to the funding or with regard to this issue. The task force seems 

to be leaning in this direction to recognize a difference between 

those that have service-connected disabilities or who are indigent 

and those who were newly allowed to use the VA as a result of the 

1996—in the Millennium legislation. 

I think we are all feeling a sense of frustration that Congress’ 

legislation and funding seem to be inconsistent. We recognize that 

technically the Congress provided the Secretary with the ability to 

close enrollment, but Congress seems very unhappy when the Secretary actually tries to do that. 

We are likely to have the sentiment that would-be funding and 

intent need to go closer together. 

Chairman NUSSLE. Well, thank you. I mean, I am sure that there 

are more areas we could get into, but I will spare you that because 

I know May is just around the corner, and we are all very anxiously awaiting those recommendations. But it sure sounds like you 

are touching all of the most important component parts. There are 

many, as you know. 

I want to thank you both for your testimony and for your advice. 

I am sure you will continue to provide it in this kind of forum as 

well. As you said, there are many other ways that we can discuss 

this. An open hearing isn’t always the most easy way to accomplish 

that. But we appreciate all the ways that you have done those in 

the past, and we appreciate your testifying today. 

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If there is nothing else to come before the committee, we will 

stand adjourned. 

[Whereupon, at 1:50 p.m., the committee was adjourned.]

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