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S. HRG. 109–234

THE FUTURE OF MEDICAID: STRATEGIES FOR

STRENGTHENING AMERICAN’S VITAL SAFETY NET

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JUNE 15, 2005

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

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C O N T E N T S

OPENING STATEMENTS

Page

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

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

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 16

WITNESSES

Warner, Hon. Mark, Governor, Commonwealth of Virginia, Richmond, VA ...... 4

Huckabee, Hon. Mike, Governor, State of Arkansas, Little Rock, AR ................ 7

Weil, Alan, J.D., executive director and president, National Academy for

State Health Policy, Portland, ME ..................................................................... 35

Lambrew, Jeanne, PhD, senior fellow at The Center for American Progress,

Washington, DC ................................................................................................... 38

Butler, Stuart M., PhD, vice president, domestic and economic policy studies,

The Heritage Foundation, Washington, DC ...................................................... 42

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 16

Prepared statement .......................................................................................... 51

Butler, Stuart M., PhD:

Testimony .......................................................................................................... 42

Prepared statement .......................................................................................... 53

Responses to questions from:

Senator Rockefeller ................................................................................... 68

Senator Bingaman ..................................................................................... 68

Grassley, Hon. Charles E.:

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

Huckabee, Hon. Mike:

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 97

Responses to questions from:

Senator Grassley ....................................................................................... 115

Senator Baucus .......................................................................................... 120

Senator Kyl ................................................................................................ 125

Senator Crapo ............................................................................................ 127

Senator Rockefeller ................................................................................... 127

Senator Bingaman ..................................................................................... 135

Kerry, Hon. John:

Prepared statement .......................................................................................... 70

Lambrew, Jeanne, PhD:

Testimony .......................................................................................................... 38

Prepared statement .......................................................................................... 72

Responses to questions from:

Senator Baucus .......................................................................................... 90

Senator Rockefeller ................................................................................... 90

Senator Bingaman ..................................................................................... 91

Smith, Hon. Gordon:

Prepared statement .......................................................................................... 93

Thomas, Hon. Craig:

Prepared statement .......................................................................................... 96

Page

IV

Warner, Hon. Mark:

Testimony .......................................................................................................... 4

Prepared statement .......................................................................................... 97

Responses to questions from:

Senator Grassley ....................................................................................... 115

Senator Baucus .......................................................................................... 120

Senator Kyl ................................................................................................ 125

Senator Crapo ............................................................................................ 127

Senator Rockefeller ................................................................................... 127

Senator Bingaman ..................................................................................... 135

Weil, Alan, J.D.:

Testimony .......................................................................................................... 35

Prepared statement .......................................................................................... 140

Responses to questions from:

Senator Baucus .......................................................................................... 167

Senator Rockefeller ................................................................................... 168

Senator Bingaman ..................................................................................... 169

COMMUNICATIONS

The AIDS Institute .................................................................................................. 173

Alzheimer’s Association ........................................................................................... 176

American Academy of HIV Medicine ..................................................................... 186

American Academy of Pediatrics ............................................................................ 188

American Congress of Community Supports and Employment Services

(ACCSES) and Disability Service Providers of America (DSPA) ..................... 201

American Health Care Association (AHCA) and the National Center for Assisted Living (NCAL) ........................................................................................... 210

Association for Community Affiliated Plans ......................................................... 216

Bi-State Primary Care Association ........................................................................ 218

Community Transportation Association of America ............................................. 220

District of Columbia Primary Care Association .................................................... 224

Families USA ........................................................................................................... 227

Governor Anibal Acevedo-Vila ́, Commonwealth of Puerto Rico ........................... 229

March of Dimes ........................................................................................................ 234

Medicaid Health Plans of America ......................................................................... 238

Michigan Academy of Family Physicians .............................................................. 241

Michigan Health and Hospital Association ........................................................... 249

National Association of Chain Drug Stores ........................................................... 251

National Association of Children’s Hospitals ........................................................ 260

National Breast Cancer Coalition .......................................................................... 268

National Citizen’s Coalition for Nursing Home Reform ....................................... 274

National Committee to Preserve Social Security and Medicare .......................... 279

National Council of La Raza ................................................................................... 281

Partnership for Medicaid ........................................................................................ 287

Pediatric Nurse Practitioners ................................................................................. 292

University of Michigan Hospitals and Health Centers ........................................ 294

Voices for America’s Children ................................................................................. 296

Volunteers of America ............................................................................................. 301

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THE FUTURE OF MEDICAID: STRATEGIES FOR

STRENGTHENING AMERICAN’S VITAL SAFETY NET

WEDNESDAY, JUNE 15, 2005

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 9:59 a.m., in

room SD–628, Dirksen Senate Office Building, Hon. Charles E.

Grassley (chairman of the committee) presiding.

Present: Senators Hatch, Snowe, Thomas, Smith, Crapo, Baucus,

Rockefeller, Kerry, Lincoln, Wyden, and Schumer.

Also present: Mark Hayes, Rodney Whitlock, Susan Jenkins, Pat

Bousliman, and Alice Weiss.

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

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. I know you are all shocked that we are starting

on time, or even a little bit early. But our governors have to be to

the other body at a certain time, and we have a vote coming up

at 10 o’clock.

I am hoping that Senator Baucus is voting, and then he will

come back and run the committee, and then I will go over and vote

and will be back then so we can keep the meeting going to accommodate the governors.

Welcome to our hearing on the future of Medicaid, Governors,

and also anybody in the audience, in which we hope to examine,

and will examine, ways to strengthen the Nation’s health care safety net.

First, I would welcome our witnesses and thank them for joining

us today, and particularly already at the table, Governor Huckabee

and Governor Warner, for being with us today.

While Medicaid is a program financed jointly by State and Federal dollars, the States have the principal responsibility for running this very important program. It is for this reason that the bipartisan proposals of the Nation’s governors are of such importance, and it is these proposals that are going to be the focus for

today’s hearing.

We are here today to begin a process of strengthening Medicaid.

We are at a very important juncture with Medicaid, and we need

to take decisive action to protect this vital safety net for the people

who need it.

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Medicaid has overtaken Medicare as the largest health care program, and it is rapidly growing as a share of State budgets, doubling since 1990, while education spending has remained about

flat.

States like Missouri, Tennessee, California, Mississippi, and even

my own State of Iowa are struggling with these growing costs. Between 1998 and 2003, combined Federal and State spending on

Medicaid grew by more than 55 percent.

When you take into account CBO’s forecast for the next 10 years,

combining Medicaid spending from 1998 through 2015, it will grow

by more than 275 percent. Spending in the year 2015 will be almost triple what it was in 1998. Many States have already had to

take drastic measures to address these growing fiscal pressures.

With bipartisan voice, our Nation’s governors have placed Medicaid on the forefront of their agenda. We have been hearing from

the Nation’s governors, both Republican and Democrat, since the

beginning of this year.

Their message has been clear. If we do not work together to control the growth of Medicaid spending right now, these growing fiscal pressures will force States to take even more far-reaching steps

to control expenditures.

My hope is that, today, we begin the process of finding common

ground to make good decisions for Medicaid’s beneficiaries and the

program’s financial future. It can be done if we work together. The

causes are complex. More people are accessing Medicaid services.

Health care is becoming more expensive. We need to do more to

more carefully scrutinize how we pay, and how much we pay, for

these services. We need to examine whether or not we are paying

too much for prescription drugs.

Any ideas we consider should not jeopardize the coverage of optional beneficiaries just because they are optional rather than mandatory. I think we can come up with policies that improve Medicaid’s fiscal health without jeopardizing that coverage, and, in fact,

we will.

To my friends who do not want us to find any savings in Medicaid, I hope they reconsider their position. If we do not find ways

to relieve some financial pressures the States are facing, we end up

jeopardizing the coverage of very needy people that we seek to protect.

If the States do not get relief, they are going to have to make

some difficult decisions to keep their schools funded and their

budgets balanced, decisions that will jeopardize the coverage of current Medicaid beneficiaries. I believe that is why the governors

have united to tackle this difficult issue, as I think we will hear

today in their testimony.

Ladies and gentlemen, we have a responsibility to be good stewards of the Medicaid program. We need to spend the next few days

making good decisions about how to preserve and strengthen the

Medicaid program for the people who truly need it.

Senator Lincoln would like to introduce her governor.

Senator LINCOLN. Mr. Chairman, thank you. I would like to let

you know that the staff has noted that this is the first time I think

I have been on time, so I am on a roll, between yesterday and

today.

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The CHAIRMAN. It is a good thing I started running; I have a

strong heart. [Laughter.]

Senator LINCOLN. Well, thank you, Mr. Chairman. This is such

a vitally important hearing we have today. We are very proud to

have you gentlemen with us, Governors, to really talk about the

partnership that we need to build in making sure that we do make

Medicaid both efficient and effective, and making sure that we are

getting the best bang for our dollar there. I think you all have certainly gotten off to a great start in some of the suggestions you

have that you will be presenting to us today.

But it is certainly my privilege to be here today to introduce our

governor, Governor Mike Huckabee, from my own State of Arkansas, who is testifying on behalf of the National Governors Association, along with Governor Warner, who also represents me a little

bit, actually. For the time I spend here in Washington, we stay out

in North Arlington and am certainly proud of that as well, Governor Warner.

But, Governor Huckabee, I am so appreciative to you for being

with us today to discuss Medicaid. It is a program that provides

health care and long-term care to people who would otherwise go

without those services, and it truly is our Nation’s safety net for

health care and long-term care.

I think you know, as we have discussed many times, as well as

I do, how important Medicaid is to our Nation, and especially to

our home in Arkansas, where 1 in 5 people receive Medicaid, more

than half of the births are financed by Medicaid, and close to 80

percent of nursing home residents are paid for by Medicaid in the

State of Arkansas.

I applaud your efforts as an advocate for Medicaid, most recently

in your strong stance against budget cuts to the program. You and

I both believe that budget cuts should not be made on the backs

of our Nation’s most vulnerable: poor, children, pregnant women,

parents, the elderly, and individuals with disabilities. The place to

look at that is to go through these types of thoughtful processes

and figure out ways that we can make Medicaid more efficient.

I hope that we can build on the common ground today and in the

future. I am looking forward to getting more information about how

NGA’s proposal will impact rural Americans who are truly difficult

to serve, and women who make up the majority of the Medicaid

population. Those are two focuses here in Congress that I often

focus on, and I am appreciative to have such thoughtful folks working on this proposal as you two governors.

I am also incredibly concerned about the impacts some policy recommendations would have on those seniors and individuals with

disabilities who depend on Medicaid for long-term care, people who

would otherwise not be served by private insurance because they

are too poor or too sick.

Medicaid deserves a lot of attention and thoughtful consideration, and I think the proposal that the governors have come together with has indicated just that. I believe it is critical that we

look at this program through the eyes of the 58 million Americans

who really, really depend on it.

Governor Huckabee, we are proud of you, proud of not only the

hard work you have put in with the Governors Association, but the

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great example that you set nationwide for overall health, and your

attention to it. You have certainly taken a personal attack on that,

and we are very proud of that, but you cannot lose any more

weight.

Governor HUCKABEE. All right.

Senator LINCOLN. We look forward to working together, because

we do know that one thing is for sure, and that is, this is an important enough issue, it is also a challenging enough issue, that none

of us can do it by ourselves. We are grateful to both of you for

working together, and being willing to work with us to preserve

and to improve this very, very vital program.

Governor Huckabee, we in Arkansas are very proud that you are

here. We are glad that you have joined us today. We are proud of

the accomplishments that you have made on behalf of our State

and the millions of people there that you represent. Most importantly, we look forward to a good working relationship with the

Governors Association where we can really come up with the kind

of solutions we need for our Nation.

So, welcome, Governors, to both of you, and a special thanks to

Governor Huckabee. We are proud of you. Thanks for being here.

The CHAIRMAN. Besides being the Chief Executive Officers of

their two States, Virginia and Arkansas, we have the privilege of

having the Chairman of the National Governors Association and

the Vice Chairman of the National Governors Association, respectfully, Governor Warner and Governor Huckabee.

Today, their association is releasing a preliminary policy paper

outlining bipartisan recommendations for the Medicaid program, so

we are very pleased to have you with us here today to share the

Governors Association proposal on Medicaid changes. Thank you

both for being here.

I assume that you start out, Governor Warner.

STATEMENT OF HON. MARK WARNER, GOVERNOR,

COMMONWEALTH OF VIRGINIA, RICHMOND, VA

Governor WARNER. I do. Thank you, Mr. Chairman. I want to

thank you on behalf of all the Nation’s governors for allowing us

to appear before this distinguished panel today.

As the Nation’s governors, we are very proud of the product that

we are laying before you today and appreciate the chance to be

brought into this debate.

I would add at the outset that what we released this morning is

a document that has had the active involvement of more than 35

governors or their Medicaid directors. We have not had a single

governor opt out of the proposals that we are outlining.

So, as the Nation’s governors, we have come together. We are the

folks who are responsible, day in and day out, for, as Senator Lincoln indicated, providing health care to some of our Nation’s most

needy and providing, in total, the largest health insurance plan in

the Nation.

I want to also commend my Vice Chair, Mike Huckabee, who has

been a great partner in this whole effort. We are proud of the fact

that we have maintained this bipartisan spirit in the document

that we are laying out for you.

5

Today’s work, though, is simply the beginning of this process and

should not be viewed as a final product. We look forward to working with you and the administration as we work towards a meaningful reform of the Medicaid issue.

Now, as governor, Medicaid and health care-related issues take

about as much time as any subject that I am faced with. I simply,

as a starting point, want to say that I was involved in this issue

long before I became governor.

I remember back in the early 1990s when I was a private citizen.

I helped form something called the Virginia Health Care Foundation, which was going to take on the problems of the uninsured in

Virginia. Back in 1992, we had a million uninsured.

Well, we have had one of the most successful public/private

health care foundations in the Nation. We helped 600,000 Virginians get health care. That is the good news. The bad news is,

in 2005, we have still got a million uninsured Virginians.

So, how we deal with Medicaid in relationship to the uninsured,

and recognizing that Medicaid is not some island in our health care

system, is terribly important.

In addition, one of the things I am proudest of in Virginia is, as

governor, we have taken Virginia from really the bottom in the

States in terms of signing up children for both our Medicaid and

SCHIP program. In rural Virginia, we are literally close to the top.

We now have signed up over 128,000 kids.

We have 96 percent of our eligible children signed up for either

the Medicaid or SCHIP program, again, one of the most meaningfully effective components of this terribly important health care

issue.

Before we start with the specifics, though, I want to again reinforce a couple of the things that the Chairman and Senator Lincoln

have already indicated.

Governors start each budget cycle with a debate on Medicaid.

The Medicaid reforecast now, in terms of setting your budget

terms, becomes even more of a driving force than your education

reforecast.

In Virginia, for example, in 1990, Medicaid was a $1 billion program. By the end of this current budget cycle in Virginia, it will

be a $5 billion program.

Now, I would feel much better about the growth in this program

if we had achieved better coverage, improved payments to providers, or a series of expanded services. But, unfortunately, even

though we have seen a dramatic increase in costs, we have not

seen a dramatic increase in the quality of service.

Like a series of bipartisan governors, I am interested in Medicaid

reform because Medicaid, as it is currently situated, is simply not

sustainable for the States over the long term.

Strictly speaking for myself, not as an NGA representative, I believe solving the Medicaid crisis ought to be first and foremost in

terms of addressing entitlement reform at the Federal level.

But let me be clear: Medicaid reform should be policy-driven and

not budget-driven. It should be considered, and must be considered,

in the overall context of health care reform.

Let me also make clear at the outset that governors have not

changed their time-honored position that we oppose block grants or

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caps that are simply tools to shift further responsibility down to

the States.

But we welcome Federal policies that have achieved greater efficiency that provide us, in effect, as I think my colleague will say

in a few minutes—we as CEOs of the largest insurance programs

in our State—some additional flexibility, and can help us provide

both greater savings and what we hope will be greater expansion

of coverage.

Mr. Chairman, I indicated, overall in our Nation, Medicaid budgets now make up 22 percent of State spending. In aggregate, they

total more State spending than K–12. We have literally created a

situation where we are pitting the needs of grandma against the

needs of the grandkids.

Now, three factors are driving Medicaid growth. First, as we all

know, the Medicaid program is increasingly serving low-income,

frail seniors and people with serious mental and physical disabilities who, while they represent only about 25 percent of the Medicaid population, account for more than 70 percent of the Medicaid

budget. Those who are dually eligible for both Medicare and Medicaid account for 42 percent of Medicaid spending.

This has been one of those cost shifts that has taken place over

the years; as what was originally laid out to be a Federal responsibility, some of these costs have shifted down to the State.

Second, the caseload has increased about 40 percent over the last

4 years. Now, some of this has been because States have successfully, I think, done the right thing in stepping up signing up kids

for their SCHIP programs.

But we are also seeing other cost shifts taking place as more and

more employers, through either economic reasons or otherwise, are

no longer providing health care to their employees, and oftentimes

even encouraging these employees to go upon the Medicaid rolls.

Third, again, as has been already noted, the Consumer Price

Index for health care has been increasing 2 to 3 times the average

price index. Medicaid, like all insurers, has been faced with rising

costs.

One of the things that we have tried to do in this paper, and

while this paper is the first step as you go through these budget

deliberations between now and Labor Day and early fall, we recognize that Medicaid reform cannot be that island. It has to be combined with other health care reform.

I want to touch on a couple of the subjects that we hope will be

included in your deliberations. Our non-Medicaid recommendations

have three goals. First, to increase quality in health outcomes by

better utilizing modern technology in our health care system.

I think, as somebody who has spent a career in the technology

field, the fact that we really have not brought the power of IT to

health care should be an embarrassment. The fact that we still do

not have electronic medical records beyond pilot programs is something we need to move beyond.

Second, we need to develop alternative and more effective policy

tools that would assist individuals and employers to obtain and

maintain private health insurance as opposed to these individuals

falling onto the Medicaid rolls.

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Third, to improve financing and delivery of long-term care by developing incentives for quality, private, long-term care insurance

products: community-based care, innovative chronic care management, and alternative financing approaches.

Now, governors recommend a Federal refundable health care tax

credit for individuals, as well as employer tax credits for small employers. Now, again, these are issues where the devil is in the details, but we hope to be able to get into some of that. These are

also recommendations to help create more competition in the

health care marketplace.

Our paper also includes a number of recommendations promoting

the purchase of long-term health care insurance, again, through

the use of Federal tax deductions and credits, as well as expanding

long-term care partnership legislation, a partnership that is now

only existing in four States. Long-term Medicaid cannot remain the

majority payor for long-term care in this country.

Finally, there are recommendations to improve the quality of

home- and community-based care options, something where, over

the long haul, we must put much, much more attention.

Now, Mr. Chairman, let me again thank you for the opportunity

to appear before you today.

I am going to now turn it over to my colleague, Mike Huckabee,

who will take you through some of the specific Medicaid reform options we have laid out.

The CHAIRMAN. Could I announce to the committee members,

Senator Baucus, I believe, if the vote has started, is going to vote

and he is going to come over and chair this so we can keep the

meeting going. They have to be over to the House side by 11

o’clock.

Senator Huckabee? Or, Governor Huckabee?

STATEMENT OF HON. MIKE HUCKABEE, GOVERNOR,

STATE OF ARKANSAS, LITTLE ROCK, AR

Governor HUCKABEE. I was getting a promotion and did not even

realize it. Thank you, sir.

The CHAIRMAN. It is quite an honor to have a governor tell us

that they might get a promotion in the Senate.

Governor HUCKABEE. That is because I am appearing before you,

sir. [Laughter.] That is called ‘‘kissing up’’ in any State, I can assure you. [Laughter.]

Mr. Chairman, I am deeply grateful for the opportunity to join

my colleague, Governor Warner. I also realize Senator Lincoln had

to step aside to take a vote, but I do want to say how much I appreciate her very kind, gracious introduction.

But, more importantly, I appreciate her as a Senator from our

State. She has been an exemplary Senator and has served us very

honorably, and has also been a real champion for some of the

issues that we are going to be talking about here today. That is,

how can we best protect the children and the families of our States.

I want to assure you that the governors approach Medicaid reform not with the idea that we are trying to get out from under

the responsibility of making sure that we provide the best, most efficient, and effective coverage to the families that we are there to

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serve. We are looking for ways to improve that service, and to do

it in a way that does not break either the Federal budget or ours.

Quite frankly, the Medicaid program needs a new look. Next

month, on July 30th, the Medicaid program will celebrate its 40th

birthday. When you look back to 1965, the number-one song on the

billboard charts was ‘‘Help’’ by the Beatles. Perhaps we could say

that that song would be appropriate today. We need some help.

The cost of a new Chevrolet was $2,350, gasoline was 24 cents

a gallon, a loaf of bread was 21 cents. The best movie in 1965 was

‘‘The Sound of Music.’’ The top three television shows were ‘‘I Love

Lucy,’’ ‘‘Hazel,’’ and ‘‘My Three Sons.’’

Clearly, the world has changed from those days. There are some

people in this room who do not have a clue of what I have just spoken about because they have never heard of those television shows,

except for the remakes of the movies.

What I would say today is, we are coming today, realizing that

Medicaid is, in essence, a 45-rpm program in an MP–3 world, and

it is time for us to take a fresh look at it, not so that we can undo

it, but so that we can better do it.

Today, Governor Warner and I represent not simply a consensus

of a few governors who begrudgingly bring some proposals, nor do

we represent a deeply divided group of governors who have split

ideologically, politically, or even geographically. What we do represent today is somewhat unique in politics. We represent governors who have completely united behind the proposals that we

present to you.

In fact, over the past few months, the tedious and often very delicate discussions in which we have engaged to bring these proposals

have happened in such a manner that it was difficult to tell who

were the Republicans and who were the Democrats in the discussion.

We have not presented to you today the things that we have not

yet agreed on. There may be questions that will be raised about

issues that we are not proposing, for the simple reason that they

are issues that we have not quite come to terms on.

But today we are presenting issues that we have come to agreement on in complete, unanimous spirit. We hope that, with the

kind of effort that we have put forth, that those of you here in the

U.S. Senate will give us an opportunity to test these ideas, to put

them into motion, not for the sake of saving money, but for the

sake of better serving and saving families that we care about, just

as you do.

Governor Warner has spoken specifically about the broad overview of what we seek to do. What I would like to do is to mention

seven of the specific proposals that we have before you. I think

your staff is aware of some of the greater details that we have in

a more thorough document, but let me touch upon those, if I may.

The first one is in the area of prescription drug improvements.

Currently, we have a system that leaves very little transparency

and a whole lot of capacity for us to make it extremely difficult to

get the best price so that people can get the best prescription drug.

There is a very convoluted formula that deals with what is commonly revered to as ‘‘average wholesale price.’’

9

We would agree with the General Accounting Office that says

that the pricing structure is neither average, nor wholesale. It is

a convoluted structure that includes the figures of the acquired

cost, plus the dispensing fee, minus a rebate, and somehow through

this very cloudy process, our Medicaid budgets are strained.

Even in our own State, even though Medicaid itself is going to

grow at 11.5 percent this year, the prescription drug component

will grow at almost 20 percent this year. We realize prescription

drugs are often a way to keep people from the hospital and to live

a better quality of life, but we would ask for the tools to manage

our prescription drug program in the same way that any CEO running a program would wish to manage his prescription drug program.

The fact is, every governor operates the largest insurance program in his or her State, larger than any private sector insurance

program. Six hundred thousand Arkansans out of 2.6 million currently receive Medicaid benefits, and the cost since I have become

governor in July of 1996 has risen from some $600 million to over

$3 billion. We look for ways to make the system more transparent.

A second proposal is in changes in the asset policy. There is a

growing problem, in that many people are creative enough to be

able to divest themselves of assets and wealth in order to more rapidly access Medicaid benefits in the long-term care area. We would

like to close those loopholes to make it so that the people who are

really needy are really getting the services they need.

A third area is modifying the cost-sharing rules. While this may

be touchy to many people, this is another area where, remarkably,

Democrats and Republicans have come to an agreement, realizing

that every person receiving a benefit will receive a better benefit

and a more responsible benefit when he or she has some skin in

the game.

Our own experiments in various State plans, particularly with

children’s health policies, find that not only are the recipients more

grateful and willing to have a small co-pay for the pride and the

opportunity to participate, but it gives us the management tools

necessary so that we can help make sure that utilization is responsible, but at the same time, that coverage is guaranteed.

A fourth area is creating benefit package flexibility. If there is

one message that we could bring to the Senate today, it would be

this: Medicaid is not a program. Medicaid is 50 programs. It is

unique to each State.

Every State has its own State plan, and, therefore, making Medicaid proposals is a most difficult type of enterprise, for the simple

reason that, any time you put something on the table, we found

that 15 governors loved it, 15 governors hated it, 15 governors did

not care, 5 probably did not open up for discussion.

The reason is because every Medicaid State plan is uniquely different to that State population and to what has evolved over the

past 40 years. That is one of the reasons that reform is so difficult,

and yet it is also one of the reasons that we bring to you today proposals in which we have so much confidence.

A fifth area is developing comprehensive waiver reform. Waivers

are very difficult at times. They can become tedious, and the process itself can become laborious.

10

What we would like to do is to see that there would be portions

of the Federal Medicaid statute that could be changed so that waivers would be able to be granted more efficiently and more expeditiously so that the kind of changes and reforms in the program

could actually be carried out in the States.

A sixth, and perhaps if I would mention, a singular, most important reform, foundation to all of the others, is judicial reform. Congress and the Department of Health and Human Services need to

authorize States to rightfully make some basic operating decisions

about optional categories of the Medicaid program.

One of the problems we face is that, when we try to make improvements and extend coverage and bring real reforms to the

process, we often are sued in Federal court and two things happen:

HHS disappears and they simply leave us to stand on our own,

even though the very permission and authority to do the things we

have done have been granted by them, and the second thing that

happens, we inevitably lose and incur more cost rather than less

cost.

The seventh thing is to make some changes in Medicaid for the

commonwealths and the territories. There is clearly an unfair disadvantage that is taking place with the commonwealths and territories, and many of those territories and commonwealths are now

providing up to 80 percent of the coverage. They have far greater

limitations. We would urgently request that their needs be looked

at, because many of those areas are in a desperate situation.

Mr. Chairman, it looks like I have pretty well cleared the room

except for you. [Laughter.] I am grateful for the opportunity, and

we will be happy to respond to any questions.

Governor WARNER. That happens normally when Mike Huckabee

speaks. [Laughter.]

Governor HUCKABEE. Thank you, Governor.

Senator WYDEN. Thank you, both. This is going to be something

of a moveable feast, because we are going to have votes and Senators will be coming in.

But I, too, want to commend you both and get into the issue of

pharmaceuticals with you, in particular. I think it is clear that that

is one of the driving forces behind what Medicaid is facing, and I

am convinced that Medicaid needs to be a more prudent purchaser

here. I want to outline to you in particular my concern.

Of the 14 drugs that cost Medicaid the most in 2003, 9 of them

were directly advertised to the consumer on television and in the

popular media.

I do not think it is a coincidence that Nexium, the number-one

advertised drug, and Prevacid, the number-two advertised drug,

show up on that list of pharmaceuticals that Medicaid is buying.

So what this means is that Medicaid programs across the country are shoveling out huge sums for those television advertisements

where colorful pills are dancing across our TV screen. For the life

of me, I cannot figure out what the interest is in the Medicaid program in paying for those advertisements.

Now, Senator Sununu and I have introduced a bipartisan bill to

change pharmaceutical reimbursement so that Medicaid does not

pay these huge sums for direct-to-consumer advertising.

11

I would be interested in your thoughts, Governor Warner and

Governor Huckabee. This is an area, it seems to me, where you can

save substantial sums without hurting people and simply by making the Medicaid program a more prudent purchaser.

Now, when it comes to advertising, I think it is fine to say it is

going to go forward in the private sector. It is a first amendment

right. I am not interested in censorship. But why should Medicaid

be paying for those television advertisements?

I would like both of your views. I know you do not know the specifics of the legislation I have with Senator Sununu, but conceptually, would that be the kind of thing, on a bipartisan basis, that

governors would be supportive of?

Governor WARNER. Well, Senator Wyden, at first blush, that

makes some sense. I mean, obviously, how you would sort out, if

you could get to the level of scrutiny from the pharmaceutical companies on how much they spend on advertising versus R&D versus

production, it would help us get to the transparency, I think, that

Governor Huckabee talked about.

So at first blush, I think I would be very interested in seeing legislation and finding ways. Again, I think you made the point, if

there are ways we can make savings that do not restrict Medicaid’s

ability to receive the drugs they need, that could be a win on both

sides.

Senator WYDEN. I think, Governor, just for a little bit more detail—and again, all you know is the concept. As you know, the

Medicaid program gets a rebate under the process for negotiating

pharmaceutical prices. What Senator Sununu and I would see is,

in effect, giving you the opportunity to negotiate a deeper rebate,

a more extensive rebate, so as to reduce the premium you pay in

Medicaid for pharmaceutical ads.

Governor HUCKABEE. Senator, this points up two concerns of

ours that we just mentioned in laying out some reforms, one of

which is the prescription drug price, the other is the judicial issue.

In our State, we attempted to put some controls on what we were

paying for prescription drugs.

We pay more than twice the next payor, which is Blue Cross/

Blue Shield, in our State, as it turns out. So we are, 2 to 1, the

largest purchaser of prescription drugs, and naturally the cost of

those drugs is of great concern to us.

We would like the ability not only to have a better handle on the

cost, but also on the selection. We put into motion, thinking we had

the authority as a State, plans that would have demanded the best

price equal to the price given to the next customer. We were sued

in Federal court and we lost. The court said that we could not ask

for the best price.

It is those kind of issues that have really brought Democrats and

Republicans together in the governor ranks, and I think that we

would be very interested in any proposal that you could present

that would help us to get to those areas of great concern, of greater

transparency in how much the drugs really cost, and how much we

really should be paying.

Since we are serving the neediest populations in our State, we

want to pay a fair market value, but we do not want to pay an unfair market value. We are willing to pay what will help to provide

12

additional research and development, and even for some responsible advertising.

But because the drugs that we are purchasing through the Medicaid program are going to the most vulnerable citizens in our

State, because it is the taxpayer money that is covering it, we do

feel like we need greater levels of ability to manage those funds

and to have the ability to negotiate for best price, something we

currently do not have the authority to do.

Senator WYDEN. Governor Warner?

Governor WARNER. Senator, I would just like to add as well, you

mentioned the Medicaid rebate. I mean, having that flexibility to

negotiate a deeper Medicaid rebate or receive a deeper Medicaid rebate, even the President’s earlier proposals, when he, I think, early

in his administration proposed moving the Medicaid rebate from

15.1 percent to 20 percent, we are in excess of a couple of billion

dollars worth of savings. So if there was a way to tie that partially

to advertising, I think there could be significant dollars.

I mean, also, as long as we are talking drug pricing here, one of

the things we have shared is that if you look at drug pricing, some

of the initial proposals seem like they put a disproportionate burden on the pharmacists themselves.

Some of this burden ought to be shared between pharmacists, big

pharmaceuticals, even finding some ways to continue to encourage

generics, but also have some savings there.

One thing the governors also raise in their report, while we are

looking forward with some anticipation and trepidation to the Medicaid drug benefit, we are concerned that, as this Federal drug benefit is put into place, that States that have negotiated better prices

may, through the clawback provision, actually end up on the losing

side.

I can tell you, in our State, having the 2003, in effect, cut number as your starting point, we put in place, with some of the drugs

you have actually mentioned, a much more aggressive PDL. After

that fact, we get none of the benefit for that with the new Medicaid

drug benefit, as it is currently constituted.

Senator WYDEN. Let me ask about one other area, then recognize

my friend from Oregon, who, as you know, has done so much good

work in terms of trying to preserve the funds that are essential to

assisting low-income people.

With respect to long-term care, going back to the days when I

was director of the Gray Panthers, we were constantly fighting a

battle to make it easier to shift Medicaid dollars that were essentially designated for care in institutions into the home and community-based care kind of area, where, in effect, you get a two-for.

You get more of what older people want, which is to be home and

in the community at a cheaper price to the taxpayer. We have been

trying to bring CMS and the administration, in effect, kicking and

screaming, to streamline that process to make it easier.

Mark McClellan, whom I like and admire, is always telling us,

it is coming soon. It is kind of like the marquee at the old movie

house where it says ‘‘Coming Soon,’’ and it just kind of never sort

of gets to you.

What suggestions do the governors have with respect to this

huge area of cost where, if we could just get a little bit more flexiVerDate 11-MAY-2000 16:40 Jan 24, 2006 Jkt 095484 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 25121.000 SFINANC2 PsN: SFINANC2
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bility, we could start steering the dollars out of the institutional

area, get them into the home care area, and give older people more

of what they want at a cheaper price to the taxpayer? I would like

to hear from either of you, then recognize colleagues who have been

waiting.

Governor Warner?

Governor WARNER. Senator Wyden, a couple of specific suggestions. First, we think we need to change the mind-set in this country to encourage all-age folks to purchase long-term care insurance

and have those long-term care insurance products that will also

provide support for in-home care. We suggested, for example, the

use of a Federal tax credit as one way to move forward in that direction.

Second, we do think that our current situation actually encourages some folks to perhaps use legal tools to disproportionately

shift assets prior to going into a nursing home, which we are not

sure how often it is done, but it is done. Sometimes that shift takes

place because there are not viable in-home care options.

One of the things we have suggested in our paper is greater use,

for example, of reverse mortgages, but a reverse mortgage that

would still allow the individual to maintain some equity in their

home so that they could pass that equity on to their children. We

do understand the very real concern.

Somebody late in their life should not have to perhaps spend

down their single last asset, which oftentimes is their home, and

have nothing to pass on to their kids.

If we could retain some equity and use that reverse mortgage,

again, as a tool to provide some investment in home care, I think

you would get, not a silver bullet, but you actually do move forward

on this issue of how we give a more viable option as opposed to the

kind of nursing home or nothing option, or other long-term care or

nothing option that we have right now.

Senator WYDEN. Governor Huckabee, did you want to add anything to that?

Governor HUCKABEE. Very briefly. The NGA’s position is essentially what Governor Warner has mentioned, and that is kind of

what we are limited to speak for on behalf of NGA.

There are certainly a lot of models in our States, including one

that we pioneered along with Florida and Pennsylvania, with a

grant from the Robert Wood Johnson Foundation, called Independent Choices, which did allow people to make a lot more of

their own purchasing decisions for home health care.

We have data on that, some science behind it that shows that it

is a dramatic improvement, giving people an option to have home

care that delays the necessity of going into long-term care. So,

there are some excellent tested models in the State, the very kind

of experiments that we believe can be brought to the broader Medicaid program.

Senator WYDEN. As a novice chairman, I am told that Senator

Lincoln comes next, and my apologies to Senator Smith.

Senator Lincoln?

Senator LINCOLN. Thank you. Did you need to get somewhere,

Senator Smith? All right.

14

Thanks, again, gentlemen, for being here. We are very grateful

for your knowledge, and certainly the hard work that you have already invested in how we can make Medicaid more effective and

efficient.

I am very proud to hear us talking about long-term care. Senator

Grassley and I just introduced a bill yesterday, as a matter of fact,

on the issue of incentives for long-term care insurance, and making

sure that we are doing our part to really encourage that.

The NGA’s plan suggests requiring beneficiaries to pay higher copayments as a way of saving money in Medicaid, and we certainly

know that personal responsibility is an important part of everything that we want to encourage. Yet, several studies show that

charging high co-payments to low-income people, particularly, results in people simply not getting the care they need, and that is

a concern we have.

So, I guess my question really is, how do you propose raising copayments for some Medicaid beneficiaries who may be able to pay

just a bit more, while protecting those who truly cannot afford to

pay more in out-of-pocket expenses, particularly those who take

multiple drugs every month or who have chronic conditions?

Governor HUCKABEE. Senator Lincoln, this is a question I am

glad was raised, because I think it is one of the more fundamental

issues that will create some controversy here. But it is also one of

the ones that the governors were able to come to a real, solid agreement on, I think, much to the surprise of many.

You were perhaps more familiar with this than any other Senator here because of the Our Kids First program and the tremendous success it has had. It has helped Arkansas become the national leader in reducing the number of uninsured kids, over 49

percent in the last 8 years. We have a proven track record of a program that was really a precedent to SCHIP, and put in place before

there was an SCHIP.

What we learned from that program, was that a very reasonable,

responsible, and modest co-pay did not cause people to shun the

system. In fact, they accessed the system when they needed it.

What it did, however, was to give us some control of utilization

where people did not go to the emergency room when a clinical

visit would have done just as well. People did not go for extraordinary tests when a simple test would have done the job.

But, more importantly, it was not a cost containment issue, it

was an issue in which people felt that they had some ownership.

They had, actually, some pride in the fact that they were not being

given something. They were able to walk in and out of that clinic

with their heads held high, with their pride intact, for having participated.

What our proposal calls for is that there would never be more

than a maximum 5 percent of a family’s income ever expended, and

we feel that making sure that there is a containment so you do not

put an undue burden on an already struggling family is important.

But equally important is to make sure that we can extend the

coverage as wide and far as possible. Currently, the biggest flaw

in the Medicaid system is that it is like a cliff in which those who

are currently covered have, amazingly, complete and comprehenVerDate 11-MAY-2000 16:40 Jan 24, 2006 Jkt 095484 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 25121.000 SFINANC2 PsN: SFINANC2
15

sive coverages the likes of which the State employees in our State

do not have.

What we would rather see is the flexibility so that we can have

the management tools that every other insurer has in order to contain some cost, realizing that those who are mostly impoverished

need very, very careful protections, but by doing that, actually

being able to cover more people, to give at least some type of benefit, because there are so many people who have absolutely nothing

under them.

The Our Kids First program with which you are familiar, which

is operating as a waiver program with Medicaid, is proof positive

that, rather than it having a chilling effect upon access, it has just

the opposite, a responsible effect on people accessing care that they

desperately need. So, we believe that is why you see the governors

come to an agreement on this with some level of real enthusiasm.

Senator LINCOLN. There is somewhat of a ceiling on the amount

as a percentage of the family income that can be spent there. The

other thing I would hope is, because there are studies that do show

us that charging some of those higher co-pays or payments can

deter, that we would at least do the follow-up to make sure that

that is not occurring and we are monitoring that.

Governor HUCKABEE. And Senator, we would want to make sure

that we did the follow-up, and that is why we have done it extensively with our program. I think, also, the co-pays that we discussed are minimal, and even the expanded children’s program, the

maximum co-pay is a $10 co-pay.

That would be decided at each State level. It would simply give

the States the opportunity to implement them. They would not be

forced to, they would simply have the option. Some States may opt

not to do them.

Governor WARNER. Senator, let me add as well, in Virginia, one

of the things we did is we actually even lowered—in some cases

eliminated—some of our co-pays in our SCHIP program, called Famous, when we moved from an under 50-percent sign-up rate to a

96-percent sign-up rate. We think it was morally the right thing to

do, economically the right thing to do, to get these kids signed up.

But if we look at the overall system, the overall Medicaid co-pays

have been set at a $1 to $3 level since the early 1980s.

Senator LINCOLN. Right.

Governor WARNER. We are thinking, some incremental increase,

with the appropriate caps, particularly for the most needy, is appropriate. At the same time, there is great debate out there and

speculation. We often hear the stories of, how often is that Medicaid recipient coming for the fourth or fifth time to the emergency

room for the head cold? A lot of it, I do not think we know. I have

seen some of the studies. There is great debate back and forth.

I mean, for example, in Virginia, we have a tool that we have

used where we will not reimburse the hospital at an ER rate, we

will reimburse the hospital at a doctor visit rate, if it is determined

that it was inappropriate use of the ER.

We need more tools like that so we can only add, as my colleague

said, that personal responsibility component, but also partially, I

think, debunk part of the myth that there is great over-utilization

by some of our poorest people.

16

Senator LINCOLN. Thanks, Mr. Chairman. I have some other

questions and I will wait for the next round.

OPENING STATEMENT OF HON. MAX BAUCUS,

A U.S. SENATOR FROM MONTANA

Senator BAUCUS. Thanks very much, Senator.

First of all, I apologize to the governors for being late here. I,

frankly, applaud what you are doing in many ways. First, the substance, trying to help us get a handle on this.

Second, coming before Congress, which frankly, I think, provides

the Congress with an opportunity to reclaim responsibility that we

have not exercised, namely, oversight over the Medicaid program,

and in particular oversight over the 1115 waiver program. I do believe, frankly, that it has been abused.

The 1115s have been used in a way that Congress did not intend.

I think there are a lot of good 1115 waivers, but I also think that

Congress abdicated responsibility, and it is an opportunity now for

Congress to step in, working with the administration, working with

the governors, to make sure those waivers are appropriate.

Third, I think it is important for us in this body to reaffirm—

and I know the governors agree with this—the safety net feature

of Medicaid, because Medicaid is a safety net. That is why it was

set up, that is what it is.

With all the innovative talk about flexibility, co-pays, and so on

and so forth, it is important for us to keep in mind the main purpose of Medicaid, and that is a safety net for some of the less

wealthy in our country.

In that regard, I would just be curious to know a little more of

how you are going to protect people, with greater flexibility, to

make sure they continue to have the mandatory benefits currently

under Medicaid, whether it is hospitalization, for example, or nursing home care, immunizations, and other medically necessary services. You know the list.

Are those folks, with all this flexibility, who are currently getting

those mandated benefits going to continue to get them? I suppose,

under the law, we have to. So I am asking you, are you suggesting

that we relax which benefits are mandated and which ones are not?

Governor HUCKABEE. We are not suggesting that, Senator. I am

very happy to be able to say that that is not the proposal that we

are bringing. It is not the intention of the governors to see how

many people we can take away from access to medical care. It is

exactly the opposite.

But the current system is unsustainable, because not giving us

the management tools that are available to CEOs in the private

sector means that we are going to be forced to spend money that

may not be as efficiently spent as it would be on increasing reimbursement rates for hospitals, which in our State has not been

changed since 1996 because we are operating under constrained

budgets.

The issues that we do face are, give us the tools so we can better

take the monies that are available, making sure that we cover

those mandatory populations. But there are many optional programs that, while optional, we would like to be able to run so efficiently that we could make sure they are available in our States.

17

Senator BAUCUS. So if I understand you correctly, it is, maintain

all the mandatory benefits. No change there.

Governor HUCKABEE. The only change would be in our capacity

to have participant involvement with some level of co-pay on the

part of the recipient, not necessarily, but it also would be a limited

co-pay, which I have addressed to Senator Lincoln’s question.

Senator BAUCUS. Where does Congress draw the line here?

Maybe there is a more artful way of saying it. But this is a Federal

program. It is shared with the States. Clearly, there is a joint oversight responsibility here. Where do you suggest that Congress

draws the line in terms of how much flexibility to give to the States

and how much not?

Is there a bright line here? Clearly, governors want as much

flexibility as they can possibly get. Clearly, Congress has the responsibility to make sure—and I know the governors do not want

this result—that nobody is getting hurt here and people are getting

good services. So, how do we draw the line?

Governor WARNER. Well, Senator, one of the things we said at

the outset, just to reinforce what has been our long-term position,

is that we do not by any means favor moving Medicaid to block

grants, we do not favor caps, we recognize there is a tremendous

need. We administer these programs, but we also see we are getting hit with a triple whammy.

We are seeing cost shifts move from the Federal Government

down to the States, whether it is the increasing cost of dual eligibles, which is one of these kind of transfers that I am not sure was

ever formally blessed, but is taking place.

We see employers increasingly, for economic reasons and others,

decide to no longer provide health insurance to their employees,

and in some cases even encourage their employees to go on the

State Medicaid rolls.

We see an aging population, and occasionally we even see middle-class Americans find ways to get rid of mom and dad’s assets

before they go into some form of long-term care. We cannot absorb

all three of those.

What we are saying is, from both a Federal and State standpoint, give us our tools. There should be lines, and we suggested,

for example, no more than 5 percent of a certain income threshold

of a family’s income, maybe 7.5 percent at a higher threshold.

Remember, the Medicaid reimbursement levels, depending on the

States, vary dramatically. Arkansas and Virginia have very low

Medicaid reimbursement rates. Certain other States have much

more generous rates. So, there will be that bright line, but if you

have a higher amount of reimbursement levels, you might have a

little more flexibility on the co-pay.

Senator BAUCUS. I appreciate that. Even more helpful, though,

the more you can kind of give us a little more specific and precise

guidance here so that governors know, Congress knows, the administration knows, even though I am speaking generally here.

Governor WARNER. One thing Congress has laid out is, there

have been some studies out there. I do not recall the specific dollar

amount of proposed savings. But we were looking at $1 to $3, was

where our current Medicaid co-pays are.

18

There was one study that some entity in Congress did that talked about savings in a $3 to $5 or $3 to $6 range. We are talking about an incremental increase, from figures that were set in

the early 1980s versus where we are today, that seems in the range

of reasonable.

Senator BAUCUS. My time is up.

Governor WARNER. But let me just add one other thing. We also

need some of the tools to make sure that we do look at this issue

and having some sanction for people who, perhaps, over-use, for example, the emergency room, inappropriate use of certain facilities.

Because what we want to try to do is, we want to have the system more efficient, but at the same time we want to find ways—

I have a million uninsured people in Virginia. I would like to find

ways to make sure that they have at least some level of care. We

do not offer it at this point

Senator BAUCUS. Senator Thomas?

Senator THOMAS. Thank you, Mr. Chairman.

Thank you, gentlemen, for being here. I think, certainly, we all

agree that there needs to be some changes. There needs to be some

changes in health care, particularly in Medicaid. The governors

and the States will have a great deal to do with this.

We have to control costs, we have to provide service, we have to

deal with over-utilization. I think we have to make sure that we

do not allow costs to limit access to health care, which is partly

what we are doing now.

So, at any rate, we need to be flexible, too. I come from a rural

State, and health care delivery in rural States is different sometimes than it is in the urban areas, and we need to understand

that.

You mentioned, how much of this do you see in long-term care

of shift of resources to qualify? I hear that is used quite a little bit.

Shift of personal resources to qualify for long-term care under Medicaid.

Governor WARNER. Senator, I am not sure. I mean, I think there

have been some studies, but I have to tell you, from Virginia’s

standpoint, we are not sure. But what we are looking at—and this

is something, I think, that goes to the overall approach—we are

looking at ways that we can find savings, but we are also looking

for tools and ways to reinvest.

For example, I know that Senator Grassley and Senator Lincoln

introduced legislation to provide a tax credit incentive for long-term

care insurance. We think that makes sense.

We think we need to change the culture in this country where

we provide and incent people to purchase long-term care insurance

that will allow in-home care, nursing home care, and intermediate

care so that folks do not have this, in effect, gaming of the system,

however much of it is done, to fall onto Medicaid rolls.

We think that the reverse mortgage option is a good one, but allowing some maintenance or some equity in the home so you have

something you can pass on to your children. We think that is an

incentive as well.

So, we have laid out a series of both savings and incentives to

get at this long-term care issue. It is the long-term care issue that

is the biggest cost driver in our Medicaid problem.

19

Senator THOMAS. Do you have community health centers, Governor?

Governor HUCKABEE. Yes, sir.

Senator THOMAS. Who is eligible to use those?

Governor HUCKABEE. Senator, it is done in a sliding scale basis.

The community health centers in our State provide the only point

of service for many, many of our citizens. As you represent a rural

State, we, too, are a rural State.

Not only the community health centers, but let me also add that

this goes to the heart of one of the proposals we have for the prescription drug reform, to make sure that any reforms do not come

at the sole expense of the local pharmacy, but that the cost of reform is shared by all of the stakeholders, including the pharmaceutical companies. That is why we need the transparency of the

system, because our community health centers are a point of service.

But, quite frankly, in many of our communities where we do not

even have a community health center, our local pharmacists may

be the only real point of service to do blood pressure checks, blood

sugar checks, and to provide some type of basic medical information to a very rural group of people.

Senator THOMAS. As we provide these services, of course, we are

talking about Medicaid, as we should. But we are talking about the

whole health care system. I am told, talking to our providers, that

the fact—they claim, at least, and I think it is probably true—that

Medicaid, or even Medicare, does not pay the full cost in the regular community hospital.

Therefore, the cost is shifted to the insured people who have private insurance, and therefore we are driving up the cost of insurance for others. What do you think about that? Does Medicaid pay

the costs the providers charge?

Governor HUCKABEE. It is a huge problem for many of us, because in some cases the reimbursement rates are nowhere near the

actual costs. The problem is, without the kind of management tools

that we have come together today to seek, we cannot increase those

reimbursement levels because the resources are simply not available to do it.

Senator THOMAS. But there are other impacts from that, are

there not?

Governor HUCKABEE. There are many impacts, not the least of

which is a cost shifting to the private sector, which then drives that

private sector cost up and forces many private sector and small

business people to no longer offer their employees benefits, and

that drives them to the Medicaid program. It is a vicious cycle, and

that is why we are here.

Senator THOMAS. We do have to look at the overall, even though

we are focusing on one part.

Governor Warner, we get different kinds of information. You

mentioned, I believe, that States’ cost of Medicaid is more than

education. Our report says, on average, States spend more than 3

times their State dollars on education than they do on Medicaid,

26 percent for elementary, 13 for higher, and Medicaid is 12.

Governor WARNER. Well, no, sir. Medicaid averages right now,

most recent figures, at least, that I have, are 22 percent. That exVerDate 11-MAY-2000 16:40 Jan 24, 2006 Jkt 095484 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 25121.000 SFINANC2 PsN: SFINANC2
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ceeds, in aggregate, the cost for K–12. There are some States, I

have seen within the last 2 weeks, higher numbers. For example,

in Tennessee, it was 33 percent of their budget. I think Missouri

was 30 percent. There are a host of States in the high 20s. We in

Virginia are down at about 15.

But the costs have risen dramatically. Earlier in my testimony,

I indicated that Medicaid in 1990, in Virginia, cost a billion dollars.

Medicaid, at the end of this budget cycle that we are currently in,

will cost $5 billion in Virginia. We have not dramatically increased

the quality with those increased costs.

Now, part of that, as you made mention, Senator, is not simply

a Medicaid issue, it is the overall health care-related issue. While

we have laid out today Medicaid-specific reforms and some other

reforms so that we can encourage more folks, particularly in small

businesses and others, not to fall upon Medicaid rolls, to at least

have some modified benefit package that we could make available,

we are going to have to be part of a longer health care debate.

Senator THOMAS. We are looking at that. And you mentioned

being a little chagrined. When you go to the budget and look at

these, 60 percent of this is paid by the Feds. So, we have a little

budget chagrin.

Governor WARNER. Not in Virginia. I wish it was 60 percent.

Senator THOMAS. Well, I will not argue with you. But we need

to get those figures, because we have different figures than you are

talking about today. We need to find out.

Governor WARNER. Well, as you know, the maximum ranges from

70 and 80 percent, with some down to around 50 percent, in many

of our States in terms of the Federal match.

Senator THOMAS. 60/40, generally.

The CHAIRMAN. I am willing to skip over myself and go with everybody else, but I ought to be able to have 5 minutes to ask questions.

Senator BAUCUS. Yes. I would say so.

The CHAIRMAN. So I am going to go to Senator Kerry, but what

I would like to do is make sure that, by 11:15, I get 5 minutes to

ask my questions. So, we have Senators Kerry, Rockefeller, Smith,

and Crapo to ask questions, and Hatch, maybe.

All right. Go ahead.

Senator KERRY. Thank you, Mr. Chairman. That was very generous of you. I appreciate it. Let me try to move right through it.

If I could very politely correct you, Governor, on that figure, Senator Thomas is actually correct. We were talking about it a moment ago. The figures are 22 percent when you add the Federal

and local dollars to the State. The State dollars alone are about 12

percent. So, the State contribution, in total, for Medicaid is 12 percent when we are talking about the State’s problem.

What I want to try to focus on here is sort of what the really

large choices are that we face. I think the proposals that you have

brought forward are important, and I think they are a great introduction to the discussion.

But in candor, taken as a whole, unless cost-sharing, benefit

package flexibility, waiver reforms, and judicial reform are tantamount to cutting the current mandated programs and to significantly doing the cost-shifting that you just mentioned, which will

21

have an impact on the private sector, they are not going to cure

the problem of either $10 billion, or the larger problem that we are

looking at in Medicaid. They are just not going to do it.

And it is not your fault. It is just 5.8 million people were added

to Medicaid between 2000 and 2003; 4.8 million people lost their

private health insurance, and the numbers are going to continue to

grow.

So the question is, what are we really going to do in larger

terms? Now, I have been here 22 years and I have listened to governors come up here and say, we need help to do this and that. We

tend to provide a significant amount. I have also watched them do

tax cuts in their home States and get reelected, accordingly.

The revenue stream is getting narrower while the problem is getting bigger. There is a fundamental conflict here. What would you

say if the Federal Government could say to you, we will relieve you

of the burden of Medicaid up to 100 percent of poverty.

We will take over Medicaid at the Federal level. We will do automatic enrollment of all children. You go to school, you are enrolled.

You go to day care, you are enrolled. If you go to child care, you

are enrolled, whatever.

From 100 percent of poverty up to 300 percent of poverty, the

States would agree to expand the SCHIP program and coverage so

that we take people up to 300 percent of poverty, about $47,000 for

a family of three. That would be a net savings to you in your States

of a total of $6 billion across the country. In the State of Virginia, we would return $128 million to you,

while we provide 100 percent coverage of children. In Arkansas, we

would provide $62 million back to you. You would have a net savings of $62 million and 100 percent coverage for all children. You

currently have, I think, 77,000 kids uncovered in Arkansas; you

have 202,000 in Virginia.

We can cover all of them. We can eliminate your headache of

Medicaid. We can return dollars to you and your States and relieve

you of this fiscal burden. But to do it, we cannot give people earning more than $300,000 the next tranche of the tax cut. What is

your choice?

Governor HUCKABEE. Senator, I think, first of all, you would

have a very receptive audience with governors to propose something that would take over that role of the children. I think we

would have to also add the discussion of what do we do with longterm care, because that is where a lot of our costs are, a huge level

of our costs, and also legal protections.

I think I speak for all of our governors when we tell you that

what we have presented today is not the extent of all the reforms

that are needed in Medicaid from the State or the Federal level.

What we have presented are the reforms that we have had 100

percent agreement on from Democrat and Republican governors,

and that we can bring to the table in good conscience, as genuine

reforms, that have been vetted out through a thorough process. It

is the starting place, not a finish line.

Senator KERRY. Well, I respect that. You said that in your testimony, and I really appreciate that. But a lot of us here are getting

kind of frustrated with staying at the starting line. I mean, we

have to get to a finish line here some day. This problem is going

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to get worse before it gets better. If our solution is to squeeze people down out of Medicaid, we are not solving anything at all.

Let me share with you. I sent an e-mail to people who have been

supportive of this Kids First concept. Twenty thousand people responded, leaving telephone messages on this.

Here is what they said from Manassas, Virginia. Matthew said,

‘‘What I don’t understand is how we are to be the richest and most

powerful country in the world.

‘‘Why are we forgetting about the people who are less fortunate

than ourselves, those who don’t have health insurance, children

who are living in poverty, children who are living without parents,

not knowing where the next paycheck is going to come from?

‘‘Why is it only the people who make the money can afford health

insurance, the only ones who are getting it? Poor people are people,

too, and children shouldn’t have to suffer because their parents

bust their butts every single day and only can afford to live paycheck to paycheck.

‘‘Why is it that children in the richest country in the world are

going hungry and are living with disease and germs that will affect

them and could eventually kill them because they can’t get the

proper medicine, the proper medical care? Why is it, in the most

powerful country in the world, our children are having to live with

these disgusting diseases that can be cured?’’

In Arkansas, a woman named Allison: ‘‘If we don’t start taking

care of the people in America, and mainly the children in America,

we are going to turn around one of these days and find that we are

a third world country. Charity begins at home, and the little children, they need us now.’’

So would you, in fact, join in an effort with the governors to make this choice, that for $300,000 and up we do not have a tax

cut and we cover every child in America with health care, and return $6 billion to the States to relieve the fiscal burden? Would you

support that?

The CHAIRMAN. Would you please give a short answer?

Senator KERRY. It only requires a yes or a no.

Governor HUCKABEE. Senator, I want to say, we have done the

very thing you are talking about, and we did it 8 years ago. We

started covering children, and we want to cover children. What we

are here today to do, is to propose the things that will help us cover

more children.

But this unsustainable cost of the current Medicaid mandates

are such that it is going to prohibit doing what you want to do and

what I want to do. When I grew up back in 1965, when the Medicaid program started, my parents would not get on it, but they

probably qualified.

The fact is, there are a lot of people today who desperately need

the kind of coverage that Medicaid, and then the expanded Medicaid programs, provide. We want to give it to them, but we want

to do it in a way that does it efficiently and effectively.

Governor WARNER. And Senator, let me just add as well, one of

the things I am proudest of is the fact that, in Virginia, we took

a State that had one of the lowest sign-ups of children, and we

have now moved where we have signed up 96 percent of our kids

in Virginia. The Kaiser Foundation has recognized Virginia as one

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of the most successful children’s health initiatives in the whole

country.

I would add, and some of you may have read about it, we actually did have a little tax reform effort going on in Virginia a year

or so ago, and we stepped up to the plate in a bipartisan way and

have met our State’s financial needs, and are paying the commitments on health care and on education.

But clearly, even with the tax reform effort going on in Virginia,

we can see over the next decade where we are headed, unless we

can get a handle on these Medicaid issues and recognize that we

have to also deal with the one million uninsured Virginians we are

still looking at.

The CHAIRMAN. Senator Rockefeller?

Senator ROCKEFELLER. Thank you, Mr. Chairman.

With all due respect, gentlemen, neither of you answered John

Kerry’s very real question. We have done, whatever it is, $3 trillion

of tax cuts. I vote against them, I lose, it helps me, and I regret

that. But that is the choice. That is the choice.

Because this year we are either going to vote to make them permanent, which is, I think, $11.7 trillion or something, to the year

2075, or we could cure Social Security for one-third of that totally

until 2075, cure Medicaid, cure Medicare. What you are doing, it

seems to me—and we had a good talk about this, Governor, yesterday—we are not talking here just about an average and ordinary

population.

We are talking about the very poorest people in this country who

are, in fact, paying 3 times more than the so-called personal responsibility business. They are actually paying 3 times more than

people that have private health insurance with respect to the proportion of their income.

Now, this is not the usual population. This is a select population

of those who are particularly poor. The asset transfer thing is not

a big deal in West Virginia. People love to make it a big deal.

There are, of course, some examples, just as there are examples of

corporations and people and all the rest who cheat on stuff.

But these are the people who need the help. This is the safety

net. This is the only real safety net that we have. That is why we

have to treat it specially. If you want to save money, you can save

$30 billion off of Medicaid. You can do that with three things: you

take the slush fund for private plans, which none of us over here

like. That is $5.8 billion in 5 years.

MEDPAC has said that private plans are being paid at 107 percent of their cost. If you just put them down in private plans, which

we do not like, put them down to 100 percent, you save $12.6 billion over 5 years.

If you asked them to adjust for risk in these private plans, you would save an additional, almost, $12 billion. Is Medicare on the

table for you? Do you not agree with me that you do not just treat

this as another—you said, Governor, that it was a policy problem.

I have never believed that.

I have always believed it was a budget problem. It was a desire

to cut the budget, where people who could make the least noise

about it would make the least noise about it, and it would be left

up to us to argue it out.

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Governor WARNER. Well, Senator, let me try to address that.

First of all, if we can find a way that Medicaid makes up part of

what you all have dictated as $10 billion worth of savings, have at

it. We would welcome that.

We said at the outset—as a matter of fact, we have been very

clear from the outset—that we think this debate should be policy

driven and not driven by an arbitrary budget number.

What we have tried to lay out with you here in our proposal are,

yes, ways where we think we can make the system more efficient,

but also ways where, over the long haul—and this is by no means

a full, comprehensive health care reform package—we can start

getting at particularly some of these issues that are going to break

the bank: long-term care, incentives for long-term care insurance,

looking at tax credits in terms of issues related to employer and

employee tax credits so those folks at the margin do not fall on the

Medicaid rolls.

For me personally, if you all at the Congress level want to take

on a reform of the Federal Tax Code, I would be very supportive.

Again, we have done it in Virginia, and would welcome you doing

it at the national level.

Senator ROCKEFELLER. Well, then, that is my point. If we are

going to do that where the administration, the House, and the Senate are all under the control of a single party, if we are going to

do that, do you not, as governors, have to fish or cut bait on that

issue, just as we had to as Senators?

I mean, you talk about Medicaid. You would not have a Medicaid

problem if we had not had these tax cuts, which have had a very

marginal effect on the economy. You would not have it. We would

not be having this discussion today. Remember the $5.6 trillion

surplus that the administration came into office on. I mean, is it

not fair of us to ask you—and some would say yes and some would

say no—but to go on record on it?

Governor WARNER. Senator, I think you and I would probably

agree on a lot of the proposals the administration has made on tax

policies maybe that are ill-timed.

But let me say, again, as you well know as a former governor,

we would still have, even if the Federal Government was not facing

unprecedented deficit levels, a Federal/State partnership.

There are still State dollars involved. We have close to a 50-percent match in Virginia. We have gone from $1 billion of State

spending to $5 billion of State spending in the last 15 years. It is

rising at a rate much more rapidly than anything else.

Senator ROCKEFELLER. My time is up. But do not tell me that

Medicaid and SCHIP are the same things. There are very different

financial requirements in those two. They are not the same. That

is just a detail, but you made that yesterday, and I think you have

made it today.

The CHAIRMAN. Senator Smith?

Senator SMITH. Governors, thank you for the bipartisan way in

which you are approaching Medicaid. I think the governors can

make a very important contribution. I am sorry it has become partisan here this morning.

25

I suppose the reason I register on this side of the aisle is in part

because of the discussion which has just gone on. I am a small

businessman.

When I look at the state of America’s economy and the recession

we have come out of, and I look across the ocean and I see our European allies with stagnant economies, with confiscatory tax rates,

with no growth, with deficits that would make ours look like an

easy problem, I do not think just jacking up taxes is the answer

here. I suspect that in both your States, your revenues are increasing. Is that accurate?

Governor HUCKABEE. Yes.

Governor WARNER. Yes.

Senator SMITH. Is that because your economy has gone up or because your tax rates have gone up?

Governor HUCKABEE. Both.

Governor WARNER. Both.

Senator SMITH. That is not what I wanted to ask. [Laughter.] I

do not want America to look like western Europe right now. I think

that there are rational ways that we can keep a marketplace growing and dynamic and creating opportunity instead of depression,

despair and recession.

So, in my view, just taxing our way out of this will never lead

to where we need to get as a people. Many European countries, and

Japan included, are my Exhibit A in that. We have a budget reconciliation of $10 billion.

It does not all have to be used in Medicaid. Maybe it will be, but

it does not have to be. But it is very important to me, as a matter

of principle, that we figure out the lines to be drawn that will keep

serving the people and give you the flexibility.

But I suspect that the flexibility you seek is going to take a

longer-term look than between now and September in order to do

it right so we do not hurt the people we are trying to help.

Now, I hold up my own State in the last recession as an example

of what can happen when you do not do this right. I do this with

my governor’s permission; he is a Democrat, I am a Republican.

But in 2003, Oregon increased premiums and co-pays and eliminated access to outpatient mental health and chemical dependency

services, and the prescription drug benefit. Fifty thousand Medicaid beneficiaries lost access to care they desperately needed, and

these costs did not disappear. They were just simply shifted to private plans and to other State budgets.

Instead, Oregon hospitals saw a 17-percent increase in admissions in the 3 months following the change in State policy. While

the State saw increases in the number of persons with mental illnesses enter their State hospitals, the local jails and prisons, those

populations also ballooned, I believe—they believe—as a direct result of Medicaid changes. In the end, the people got care. They just

did not get it in a very cost-efficient way.

In 2004, Oregon reinstated coverage for outpatient services and

other changes were made. Part of that was the State reimbursement Senator Rockefeller and I helped to push through this place,

and those pressures have been lessened.

So what I want to ask you, as you look over your recommendations, which one of those are not so structural as to run us into the

26

ditch? Which one of those, or among those, are likely to get us to

somewhere about $10 billion in savings that you all agree on and

which we can pass in a bipartisan way? Because at the end of the

day, it is going to take a bipartisan approach to get this done.

Governor HUCKABEE. Senator Smith, let me begin by saying that

we have not all gone out and cut taxes and enjoyed a reckless way

of cutting benefits to people. In fact, if anything, many of us—and

it has been very uncomfortable for some of us as Republican governors—were forced, because of rising Medicaid costs, to actually

have to go into special session and raise taxes just to cover what

we already had obligated for, not to expand services, not to cover

more people, which is what we would love to do. But we actually

did it just to cover the things we had already been obligated for.

So, I want to make clear that it has been a very difficult situation keeping up because of what Governor Warner had mentioned,

the growing numbers of people getting into the Medicaid program

and the fact that the Medicaid costs are rising at twice the rate of

inflation.

When we look at the specific proposals, we know that if we just

paid the front-end cost of the rebates rather than wait 6 months,

that would save the Federal Government $1.5 billion, and States

$1.1 billion. There are certain savings that we can estimate, but we

cannot score them because that is something only Congress can do.

I think it would be inappropriate for us to attempt to do the

work of CBO and present some scoring, but we do believe that the

proposals that we have have some cost benefits. But I want to

make clear that our goal is not to reduce costs. That may be yours.

Our goal is to better administer a program for the poorest, neediest people in our States. Our focus is to do it in a way that is more

efficient and that helps people rather than just simply balances the

budget. But we do believe that there are benefits, overall, to be realized.

Senator SMITH. But is there any low-hanging fruit that we can

get without hurting people?

Governor WARNER. We have laid out some areas. None of this is

low-hanging fruit, but areas that we can work through with you on.

I appreciate your comments that not all of this need come out of

Medicaid. It could perhaps come out, as Senator Rockefeller indicated, from Medicare or other areas to get to your budget number.

But also, I think it is very important—and this is, by not any

means, fully comprehensive—we have also put in this plan preventive actions related to long-term care, related to those workers on

the edge of falling onto the Medicaid rolls with tax credits and

other tools, modified benefit packages, purchasing pools, all tools

that we need that we think can at least slow the rate of growth.

Ultimately, that is what this has got to be about as well, not just

dealing with the short term, but I think, as Senator Rockefeller indicated, we have to deal with the long-term issue here. Some of the

tools we have laid out there, I hope you will look at those reinvestment tools, as well as some of the saving tools.

The CHAIRMAN. Senator Snowe, you are going to have to direct

your questions just to Governor Warner, because Governor

Huckabee has to go to another committee meeting on the Hill.

Go ahead.

27

Senator BAUCUS. If I might, just very quickly before the governor

leaves, I would just like, Mr. Chairman, to say the governors’ recommendations of how we deal with TANF—TANF has got to be reauthorized soon. We either go through reconciliation or we take it

outside of reconciliation.

The concern of some of us is, if it goes through reconciliation,

there are going to be cuts to the TANF program that do not make

sense for States and the people around our country. I was just curious about your recommendation on how we should handle that.

Governor WARNER. We would like to not see the cuts, and we

would also like to see a long-term reauthorization and not simply

these 3-month extensions.

Senator BAUCUS. Right. But the question is—maybe it is inside

baseball here—but either we go through the reconciliation process

here, it is outside reconciliation, that is, a separate authorizing bill.

The CHAIRMAN. Let me say that you want it to be outside of reconciliation.

Governor WARNER. We do.

Governor HUCKABEE. We do very much want it to be.

Senator BAUCUS. That is what I have been trying to encourage

you to say.

Governor HUCKABEE. Well, Senator, we would really like for it to

be outside of reconciliation for the fact that, if it is not, then it

could have an adverse effect on people in our State, particularly in

child care and areas where we are stretched and strained.

So, I think, even though it is not a policy adopted by the NGA

and we cannot speak for all of our colleagues, I think we would be

on safe ground to say that would be the position of our colleagues.

Senator BAUCUS. Thank you.

The CHAIRMAN. Senator Snowe?

Senator SNOWE. Thank you, Mr. Chairman.

I want to thank you, Governor Warner, for being here today, and

Governor Huckabee, and representing a bipartisan view on a critical program that, for the first time, is going to be comprehensively

reviewed and examined.

I think it is critical that we obviously get it right, because it is

the first time in 40 years that we are really providing a strong

overview, and we have to do it in concert and partnership with the

States as well.

It is important to be both fiscally responsible, and at the same

time be committed to those low-income people who have no insurance, the uninsured, who are growing in ranks and numbers across

America, which I think obviously further aggravates and compounds the problems that you are facing on the front line.

Let me ask you, did the Governors Association ever consider adjusting the Federal matching, the FMAP rate, the Federal Matching Assistance rate? The reason why I ask that, in Maine, for example—and I know this happened to 28 other States as well—

when they do the look-back to reflect the States’ economies and financial condition on which they base the Federal contribution to

the States and what the Federal share would be, it was between

the years 1998 through 2000, when the economies were growing

significantly.

28

So, as a result of all of that, the matching rate that the Federal

Government will provide, for this year—for example, in Maine, it

will decline by 1 percentage point; in 2006, it will further decline.

Senator Bingaman has legislation that would provide increased

appropriations for those States who have faced a serious loss as a

result of that adjustment because the FMAP, the way they make

the adjustment for the formula, does not reflect the accurate period

of time. It is so far back in the period, that by the time they make

that formula applicable, it does not reflect the current economic circumstances.

Governor WARNER. Well, let me, first of all, say how grateful all

of the governors were when you all stepped up the FMAP match

rate a couple of years back when all of the States were in the depth

of the worst fiscal crisis the States had faced since World War II,

and we are grateful for that.

We adjusted the FMAP match up. As long as it was to hold

harmless to all the other States, we would welcome that. But when

we were looking at a budget reconciliation number that you all

deemed, we did not come at that straight on because we did not

think it would have much saliency up here.

We would also love to see you pick up the dual eligibles. But,

again, back to Senator Kerry’s point, I would love to have us experiment on children, but I would really love to have, if you all are

willing, to pick up 100 percent of the cost of our seniors’ population

and the dual eligibles, as the original Federal/State contract laid

out. But we are here trying to deal with your fiscal circumstances

and our fiscal circumstances.

Senator SNOWE. Right.

Governor WARNER. But if you put forward an FMAP increase, no

governor is going to turn that away.

Senator SNOWE. It is not just an automatic increase. The question is whether or not that formula reflects an accurate period of

time.

Governor WARNER. I understand. Anything that you can do to

make the formula more reflective of the current circumstance

would be useful.

Senator SNOWE. Is that possible or not? That is what I am asking.

Governor WARNER. Technically, I do not know.

Senator SNOWE. You do not?

Governor WARNER. Let me answer a slightly different question,

but I think it has some applicability, which is, we in Virginia, and

a number of other States, with the Medicaid drug benefit—because

you set the number in terms of the baseline of 2003, States like

Virginia which have substantially increased their drug savings, for

example, by use of PDL, since 2003, get none of that benefit.

So, under the clawback provision, we are penalized for doing a

better job of negotiating, for example, drug prices than what the

Federal Government does. So, ratcheting up the date line on the

Medicaid drug benefit, and I would imagine the same on the

FMAP, would be greeted favorably.

Senator SNOWE. For the FMAP currently, it is 1998 to 2000, and

yet there is a downturn in 2003.

29

Governor WARNER. I understand. Very different circumstances

today.

Senator SNOWE. That formula has triggered for today, 2005 and

2006, for a look-back period to 1998 and 2000, and does not obviously take into account the downturn that occurred in 2003.

On drug prices, because obviously that is a contributing factor,

a significant factor in driving up the cost of the Medicaid program.

Is that correct?

Governor WARNER. Yes.

Senator SNOWE. All right.

Now, the President has recommended using the average sales

price, plus 6 percent. You are recommending an average wholesale

price. Is that correct?

Governor WARNER. No. We have problems with the average

wholesale price pricing formula. Our concerns with the administration approach was that it seemed to take most all of the savings

out of the hides of the local pharmacists.

We think it ought to be that savings, and there needs to be more

transparency in our drug pricing. And obviously, the complexity of

figuring out what is the appropriate price is something that we are

all trying to sort through.

But we think it ought to be borne not only by the pharmacists,

but ought to be borne as well by brand pharmaceuticals. We ought

to find other ways to encourage, for example, greater use of

generics. There are some interesting things going on in Canada in

terms of even generic definitions.

We also think that one of the things that the President had even

suggested, early on in his administration, was increasing the Medicaid rebate, drug pricing rebate. If we move that, for example, I

think under his own proposal, from 15.1 percent to 20 percent,

there were billions of dollars of savings. So, we think all of these

should be on the table.

Our concern with what it appeared to be with the administration’s initial proposal was, all of these savings were simply going

to come out of the pharmacist’s hide. When you have a State like

Maine which has large rural areas, or a State like Virginia that

has large rural areas, to take it simply out of the pharmacists’ dispensing fee may not be the best case.

Senator SNOWE. Thank you.

The CHAIRMAN. Governor Warner, I have questions for both you

and Governor Huckabee. I am going to take my first 5-minute

round now, because I was gone when my time came up. So if I ask

you a question that was more in his area to answer, you can just

say so and I will have him answer in writing.

Governor WARNER. That means, any tough ones, I can simply

pump to my invisible colleague.

The CHAIRMAN. I guess you can, yes.

In your testimony, you talk about the importance of changing the

rules of how seniors can qualify for Medicaid faster by transferring

assets. Specifically, you state that Medicaid should restrict the type

of assets that can be transferred.

I would like to have you elaborate on what type of assets someone can transfer so that Medicaid will pay their long-term care

30

costs sooner, and how you propose then closing loopholes where

they could not give away those assets, or those type of assets.

Governor WARNER. What we have talked about is a longer lookback period, number one. We have also talked about one of the

questions we have on asset transfer. There is a lot of debate out

there. We do not know. At least from Virginia’s standpoint, we do

not know how much inappropriate asset transfer is going on.

The three things that we have suggested have been, number one,

for example, tax credits that you and Senator Lincoln have introduced, the legislation that we would be supportive of, to encourage

purchase of long-term care insurance, which we think is very important.

Number two, we have looked at the expansion of what is called

the long-term care partnership program that I think is in four

States right now. Opening that up to more States seems to make

some sense.

Number three, we have looked at the question of reverse mortgages, but recognizing that we ought to have a more honest discussion about how we allow people, particularly with their home, to

retain some equity in that home.

If they have saved all their life and they have bought a home,

to be able to retain some of that equity to be able to pass it down

to their children. You hear stories of people transferring their home

ownership to their children or to a trust. We do not know how

much of that is going on.

But if there were a way to say, yes, we are going to ask you to

spend down some of that equity, perhaps in a way that can actually allow you to stay in your home for that care, but you are going

to be able to retain some amount.

And the right amount is what the debate would entail, $50,000, $75,000, $100,000. I am not sure what the right number would be

so that you could pass on that. That, in our mind, makes sense,

getting at a problem that some have said could have many, many

billions of dollars worth of savings, and others have said is not a

problem at all.

The CHAIRMAN. In regard to drugs, this is somewhat different

than what Senator Snowe brought up. I want to lead in by saying

that States have very limited power today to control drug spending

compared to the private market.

For instance, it is my understanding States cannot use closed

formularies. Their ability to drive generic utilization is limited, unlike the private market, which can extensively move the market towards generics through the use of tiered co-pays. How do you believe that the use of tiered co-pays for Medicaid prescription drugs

would improve the Medicaid benefit?

Governor WARNER. We have worked, and many, many States

have moved, because of some of the issues related around

formularies. Many of the States have moved to preferred drugs

lists. We have, for example, in Virginia; we have saved $35 million,

I believe, in the last year.

That was a negotiated process that we went through with our

pharmaceutical providers. We think we made a step in the right direction. Our concern is, I believe we are looking at some tiering of

co-pays in that PDL list. There is the tiered co-pay, so we have

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some direction on trying to incent people towards purchasing, for

example, the cheaper drug option.

One of the things, back to Senator Snowe’s question, and one of

our concerns with the administration’s original proposal, was if you

take it—and you are going to soon exhaust my knowledge in drug

pricing here—totally out of the pharmacists’ hide, there is no incentive at that point for the pharmacist to actually move to the generic

drug, because if it is a percentage dispensing fee based upon the

price of the drug, well, go with the more expensive drug.

So, we do need to look at more flexibility so that we can incent

better drug choices, and more appropriate drug choices, without

getting to the efficacy in restricting a drug that is so distinct for

a person’s particular condition. That is what we have tried to work

through.

It seems, at least, as you move now toward the new Federal drug

benefit, that a lot of that work in a lot of States, with the clawback

provision, is going to be, in effect, ripped away.

The CHAIRMAN. You suggest Medicaid prescription drug reform

should include increased rebates for manufacturers, at the same

time asking for tools to limit access manufacturers will have to

Medicaid beneficiaries. Yet, the best price statute guarantees manufacturers access to Medicaid beneficiaries in exchange for the rebates. How do you reconcile increasing the rebate, while limiting

access?

Governor WARNER. What we feel—and again, the President himself proposed increasing the rebate early on in his term—that there

still remains too much mystery about drug pricing. What we need,

is greater transparency.

Earlier today Senator Wyden, and I guess Senator Sununu, were

talking about legislation where they were trying to look at drug advertising in terms of drugs that were on the Medicaid list, and

should the taxpayer be footing the drug advertising. It is an interesting concept.

But if we are going to get at that, we have to get at the more

transparent nature of how these drug prices are set, and that is

something that I am not sure anyone has totally figured out.

The CHAIRMAN. Thank you, Governor Warner.

Now, Senator Schumer? Then we will go to the second panel.

Senator SCHUMER. Well, thank you. I thank you for coming, Governor.

I want to follow up on the drug area. It seems to me one of the

greatest places where Medicaid can save money is in the area of

drugs. I know that Senator Grassley and Senator Snowe before me

have asked questions. I have a few others.

The first relates to the relationship between Medicare and Medicaid in terms of drug purchasing power. Because when the Medicare prescription drug bill passed, I believe the States actually lost

bargaining power in the Medicaid program because they are no

longer going to purchase drugs for dual-eligible populations, but

they are going to have to pay back the Federal Government for the

coverage.

The way the bill is written, Medicare cannot negotiate to keep

prices down, so it may actually increase what the States pay, because some of the States have been able to do more negotiating for

32

Medicaid on their own, and now all of a sudden the rug is pulled

out from under them. So, they could end up paying more. That is

moving in the exact opposite direction of where we have to move,

and yet it is an unfortunate outcome of MMA.

So, let me ask you these questions. How important is it for

States to be able to leverage their buying power to negotiate better

prices in the Medicaid program, and what can Congress do to improve the States’ ability to negotiate lower drug prices for drugs in

the Medicare program? And, third, do you agree with the analysis

that I just presented?

Governor WARNER. Well, first of all, Senator Schumer, we do

agree with your analysis, that States like mine are being penalized

for cutting a better deal than what the Federal Government is

going to have cut, which again goes back to a point that Governor

Huckabee made repeatedly.

We are the largest providers, in our own respective States, of

health care, yet, particularly with the new drug benefit, we are restricted in our ability, like any private provider would be, to negotiate the best price possible. It does not make much sense.

Senator SCHUMER. Exactly. And yet, you have to pay back the

Federal Government.

Governor WARNER. We have to pay back with the clawback provisions.

Senator SCHUMER. The MMA tied the Federal Government’s

hands. It said, look, it would be better if the Federal Government

could negotiate with the drug companies, because they have even

more bargaining power than any individual State. But the MMA

says they cannot negotiate, yet you have to pay them back for their

inability to non-negotiate.

Governor WARNER. Senator, I agree with your analysis. It also

restricts some of the creative efforts that some States are looking

at in terms of purchasing pools, where you might have the Medicaid population, the State workforce, and perhaps even some private companies trying to band together to negotiate a better price.

That ability has been restricted.

And then to make matters worse, we have on top of that something that is kind of a hidden cost of a whole set of new administrative functions that are kind of layered down upon us, with no

transition help to administer what would be a very, very costly new

program, at least on the front end, in terms of the administration.

Senator SCHUMER. Right. So the big prescription drug bill was

actually a step backward, in at least this way, in terms of getting

your costs lower.

Governor WARNER. I am not going to characterize the whole bill.

I will characterize the fact that, from a State standpoint, some

States will benefit, some States will lose.

We constantly hear some conversation going on that there may

be some effort to hold States harmless, or that the clawback will

not be implemented as initially talked about. Clearly, I think it is

one of the reasons why we put this in our paper. This is an issue

that States are concerned about.

Senator SCHUMER. The second question relates to something that

has been a pet cause of mine, which is generic drugs. Some States

currently have in place a ‘‘generic first’’ substitution policy, which

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requires the pharmacist to dispense a generic when one is available.

It is my understanding, even when these policies are in place,

however, it is very easy for the doctor to request a brand drug,

even if it is not medically necessary. In New York, for instance, all

they have to do is check a little box. They do not need an explanation or anything else.

When Massachusetts had a similar policy, the State was spend- ing $10 to $11 million more a month on brand drugs, when there

was a generic available that would have been cheaper.

When the State implemented a stronger policy in which the doctor had to give a medical justification for the brand, and then get

permission from Medicaid—which is needed in some cases, obviously—their spending on these drugs plummeted 98 percent, from

$10 to $11 million per month to $200,000 to $300,000 per month,

without affecting the States’ ability to provide good, quality care to

its beneficiaries.

Let me ask you this. What effect would the implementation of

similar, effective ‘‘generics first’’ substitution policies in other

States have on the pharmaceutical budgets, and on the Medicaid

budget overall?

Governor WARNER. Again, I think you would find the overwhelming majority of governors would very strongly favor allowing

us to have a stronger tool to push towards generics.

Now, let me add, though, that what we also need to do so that

no one goes completely unscathed in this, as we see drugs rotate

off a brand into generic categories, my hope would be that we can

truly move drugs down to those generic pricing levels.

I would hope that, as we get into this drug pricing issue at a

greater level, we do not end up with drugs moving from 100 percent price down to 80 percent price, and then suddenly having

them called generics. There are timing issues on moving the price

levels down. There are generic definitions.

Other countries like Canada have been stronger on definitions of

generics. I think, again, if we are going to get into drug pricing,

these are all issues that we have to be looking at.

The CHAIRMAN. Senator Rockefeller wanted to ask one last question.

Governor WARNER. Yes, sir. Because I have to go over at some

point and relieve Mike Huckabee over on the House side as well.

Senator ROCKEFELLER. I will be quick.

The CHAIRMAN. Yes.

Senator ROCKEFELLER. Thank you very much, Mr. Chairman.

You indicated, and one of my worries is, so everybody gets some

health care. The words ‘‘some health care’’ is a slam-dunk in rhetoric. The question is, how much? What does it leave out? Which

leads me to this question.

I think—and I may be wrong, and you correct me if I am—that

your proposal would permit State Medicaid programs to target benefits which suggest that the current Medicaid benefit requirements

would no longer necessarily apply.

This seems to imply that the basic benefit for EPSDT would be

eliminated. You know the importance of that program, and I am

wondering what your response is.

34

Governor WARNER. Let me just say that that is not my implication as somebody who has spent some time at St. Mary’s Hospital

in Norfolk, which deals with these children who need this quality

of care. That is not the implication that I have, and I do not think

it is the implication that most governors have.

Senator ROCKEFELLER. That benefit does not exist in the private

sector. It does exist in Medicaid. I am worried that it falls into the

so-called ‘‘optional’’ part. Therefore, my concern is that some governors might drop it, while going on and saying everybody is covered by health care.

But you and I know, Governor—and you, in particular; your testimony this morning has been superb, deeply knowledgeable—that

what is not included becomes terrifically important. I cannot think

of anything more important than EPSDT.

Governor WARNER. Senator, I agree with you. But also, working

through this process on EPSDT, I do not think you are going to see

any governor walk away from that.

But I think what you do not need is to somehow say, because of

our need to make sure that these children need the best quality

care possible, that we are going to use that as a reason that we

cannot have some type of flexible benefit package at all, and look

at expanded flexible benefit packages for other subset populations.

I would say we cannot use the protection of that initiative as a reason to say we cannot even look at flexible benefit packages. So,

there is some back and forth that we have to work through on all

of this.

Senator ROCKEFELLER. Hence my worry. But I thank you, sir.

Governor WARNER. Yes, sir.

The CHAIRMAN. Governor Warner, before you go, let me thank

you. I think today is evidence of the good-faith commitment you

made, I think, way back in February when you and I had a rump

session, and Senator Baucus was there, and there were other governors there.

Governor WARNER. Yes, sir.

The CHAIRMAN. And you said you were going to work real hard

on this. You surely have, and I thank you for that.

Governor WARNER. Well, Mr. Chairman, thank you. Thank the

members of the committee. We end with where we started. We appreciate the opportunity to be before you. This is a bipartisan approach.

We want to be your partners in making our health care system,

our Medicaid system, more efficient, but also recognizing that we

have to improve the quality of care for the tens of millions of Americans who need this care desperately.

The CHAIRMAN. Can I also say, and this is not detracting from

anything you have said, it is just meant to be an expression of my

point of view, when we are dealing with this program and we are

talking about a 1 percent reduction, a lot of people see that as

something that just cannot be done.

If we would put up the proposition that not 1 percent could be

found in the Defense Department, everybody would think it is ludicrous. It is just as ludicrous to think that, in a program as big as

Medicaid, that if we cannot find 1 percent savings some way, that

they ought to send somebody else here to the U.S. Senate, because

35

it can be. There can be more efficiencies in defense, as well as this

program.

Thank you.

Governor WARNER. Thank you.

The CHAIRMAN. Now, our second panel. The first witness is Alan

Weil, executive director and president of the National Academy for

State Health Policy. Next is Jeanne Lambrew, senior fellow at the

Center for American Progress. Finally, Stuart Butler, vice president, Domestic and Economic Policy Studies, The Heritage Foundation.

I thank you all for agreeing to testify, and we will go in the order

that you were introduced.

So, Dr. Weil?

STATEMENT OF ALAN WEIL, J.D., EXECUTIVE DIRECTOR AND

PRESIDENT, NATIONAL ACADEMY FOR STATE HEALTH POLICY, PORTLAND, ME

Dr. WEIL. Thank you, Mr. Chairman, members of the committee.

I appreciate the opportunity to appear before you today to discuss

the Medicaid program.

My name is Alan Weil. I am the executive director of the National Academy for State Health Policy. We are a nonprofit, nonpartisan organization based in Portland, ME, dedicated to helping

States achieve excellence in health policy and practice.

Before I took my current position, I was a center director at the

Urban Institute, and before that, director of the Colorado Department of Health Care Policy and Financing, which is the Colorado

Medicaid agency.

As members of this committee, you are familiar with the many

roles Medicaid plays, serving poor children, families, people with

disabilities, and the elderly. But from a State perspective, there is

an important additional factor to consider when paying attention to

Medicaid.

For good or ill, Medicaid has become the foundation on which

much of our health care system is built. Medicaid is now intertwined with State mental health systems, developmental disability

systems, school-based health, Child Protective Services and foster

care, juvenile justice, public health and welfare reform.

Medicaid serves as a source of catastrophic coverage that helps

make private health insurance more affordable. We often hear that

43 percent of Medicaid costs are for services for people with disabilities, but this is a very heterogeneous category.

It includes people with severe mental illness, developmental disabilities, degenerative neurological diseases, traumatic injuries,

AIDS, conditions such as cerebral palsy, people who insurers generally seek to exclude from coverage.

The point is, changes to Medicaid can have ripple effects through

health and social service systems and can make it more or less

likely that your other efforts, for example, to reduce the number of

Americans without health insurance, will succeed. To put it bluntly, Medicaid changes are highly subject to the law of unintended

consequences.

Now, I am pleased today to be able to present to you the results

of an 18-month project that we completed earlier this year with

36

major funding from the David and Lucile Packard Foundation, and

support from the Robert Wood Johnson Foundation, AARP, and the

Agency for Health Care Research and Quality within the U.S. Department of Health and Human Services.

The project was called ‘‘Making Medicaid Work for the 21st Century.’’ I should just note, it began long before the current budget

deliberations and was not intended to speak directly to the budget

situation that you face.

In our project, we convened a group of State officials and national experts with a broad range of expertise in the Medicaid program to develop recommendations to make the program more effective and more successful. I have provided you with a list of the

workgroup members.

Our organization serves State officials, and those officials have

a great deal of experience with the Medicaid program. But the

State perspective must be balanced against other critical perspectives, including those of the more than 50 million Americans who

are enrolled in the program.

The Medicaid program has certainly been strengthened by the

lessons learned from State experimentation, and certainly States

have a tremendous stake in Medicaid’s success. But States are not

the only ones with such a stake.

I would say that our deliberations benefitted greatly from the inclusion of multiple perspectives to assure that, in looking out for

the interest of States, we did not fail to consider the interests of

others.

Before I describe the substance of our recommendations, a quick

note on our process. The report that we prepared was as a result

of a consensus process. No individual member should be viewed as

having adopted the recommendations as his or her preferred position. They represent a total package that reflects a complex balancing of interests and preferences.

In particular, the group paired areas of increased State flexibility

with areas of stronger Federal standards. And while some parties

may advocate one side of this balance more than the other, once

they are separated they no longer reflect the consensus of the

workgroup.

Our final report runs about 80 pages, and you have been provided with a copy for your consideration. But I will run, quickly,

through the key recommendations in the areas of eligibility, benefits, and financing.

With respect to eligibility, the workgroup regarded as its most

significant recommendation that Medicaid should provide comprehensive health care coverage for the poorest Americans, all people with incomes at or below the Federal poverty level without regard to age, family structure or health status.

This new national minimum eligibility level would apply in all

States and would replace the current system of categorical eligibility. This one change would dramatically simplify eligibility and

eliminate the last residue of Medicaid’s ties to the old welfare system.

Now, the workgroup also recommended that current requirements to cover children and pregnant women with incomes above

the poverty level be preserved, and it recommended continuing the

37

existing option for States to extend Medicaid coverage to eligibility

groups with income above those Federal requirements.

We focused equal attention on acute and long-term care, and that

is an important aspect of the work of the group. The workgroup

concluded that States should be given new options for setting financial and functional criteria to qualify for long-term care services.

States should be permitted to modify income and assets tests to

allow applicants seeking community-based care, who are most likely to use up their resources within a short time if they enter a

nursing home, to qualify for Medicaid-financed acute and community care services while they are still in the community.

States should also be permitted to set different functional criteria

for institutional and community-based long-term care services.

In the area of benefits, the workgroup recommended that all individuals covered up to the new national minimum eligibility level

be entitled to the same set of acute, primary care and long-term

care benefits provided under current Medicaid law, with continuation of current rules that limit cost-sharing to nominal levels.

For individuals above the mandatory levels, States should be allowed to offer the current package, or a lesser, but still comprehensive, set of benefits that meets certain benchmark standards, and

with higher levels of cost-sharing. We do propose allowing States

to offer acute and preventive care, but not long-term care, to those

optional populations.

States could also choose to offer a different long-term care package to optional eligibles than they do to the mandatory eligibles.

The workgroup recommended that States have the option of converting home- and community-based service waivers into an ongoing program with Medicaid, and that parents of Medicaid-eligible

children be able to enroll their children in CHIP so long as certain

enrollee protection standards are met.

With respect to financing, the workgroup evaluated the current

financing structure, where the Federal Government matches qualifying State Medicaid expenditures, and rejected the need for a radical restructuring of this approach. Specifically, the workgroup recommended against converting Medicaid into a block grant.

The workgroup recommended revisions to the formula and process for establishing the Federal Medicaid Assistance Percentage,

the FMAP. The FMAP does need to be set in a way that more

quickly and accurately reflects changes in the economy and the fiscal capacity of States.

The group suggested that the Federal Government should provide more support to States for Medicaid costs associated with lowincome persons enrolled in Medicare, and this support should be

provided in conjunction with efforts to improve care coordination

and program management between Medicare and Medicaid. This is

a complex and important area that we describe in much more detail in the report.

We propose the Federal Government provide an enhanced match

to States for the costs associated with simplifying and expanding

eligibility to everyone below poverty; that States be given new opportunities to coordinate Medicaid coverage with private employersponsored insurance through what are called premium assistance

38

programs, specifically allowing States to implement these programs

without being required to meet certain waiver standards.

Further, States should be allowed to require employers to enroll

their Medicaid-eligible employees in employer health plans at times

other than their open enrollment period.

We made an additional recommendation with respect to extending the policy of reimbursing States 100 percent of the cost of services provided to American Indians and Alaskan Natives in the Indian Health Service or tribal facilities, regardless of where the

services are delivered.

As we carried out our Making Medicaid Work for the 21st Century project, we identified, we believe, many opportunities to

strengthen and improve the Medicaid program.

These opportunities are designed to make the program more efficient and effective, not simply shift costs to other payors, or worse

yet, to the poor and vulnerable people the program is designed to

serve.

I should say that, in our conversations, the people who work

most closely with the program are most skeptical of grand claims

for large savings. Particularly, they are skeptical of claims of savings associated with a general term like ‘‘flexibility.’’

Flexibility is not the same as efficiency. Those who propose flexibility should bear the burden of presenting evidence to support concrete steps they will take with their new-found flexibility to make

the program more efficient. If cuts are necessary, that is a decision

that you and others will have to make, but cuts should not hide

behind vague language like flexibility.

On behalf of the National Academy for State Health Policy and

the many people who volunteered many hours to help us prepare

our work, I am pleased to be able to share with you the results of

our deliberations that we approached also in a bipartisan—or I

would really say a nonpartisan—way.

We stand ready to assist you in any way possible to strengthen

and improve the Medicaid program as you continue your discussions.

The CHAIRMAN. Thank you, Dr. Weil.

[The prepared statement of Dr. Weil appears in the appendix.]

The CHAIRMAN. Now, Dr. Lambrew?

STATEMENT OF JEANNE LAMBREW, PhD, SENIOR FELLOW AT

THE CENTER FOR AMERICAN PROGRESS, WASHINGTON, DC

Dr. LAMBREW. Thank you. My name is Jeanne Lambrew, and I

am a senior fellow at the Center for American Progress, as well as

an associate professor at the George Washington University.

I appreciate the opportunity to appear before you today to discuss the future of Medicaid. In this statement and in greater depth

in my testimony, I will cover three topics.

First, I will discuss some of the major cost drivers in Medicaid

and what to do about them; second, I will discuss the need for

broader reform, since Medicaid’s problems are the system’s problems; and, third, I will raise concerns about some of the proposals

that have come up in the course of the discussion today.

To put these ideas into context, it is useful to review this program’s goals. Medicaid was designed to remove financial barriers

39

to health and long-term care for vulnerable populations. Because

spending follows need rather than a pre-set budget, it has adapted

to changing times.

Medicaid protected coverage and preserved jobs during the recent

recession. It funded Disaster Relief Medicaid in New York after

9/11. It is becoming increasingly important in rural areas, where

the aging of America has already begun.

Yet, Medicaid faces challenges. It is not serving all vulnerable

populations. More than half of all poor adults are not eligible for

Medicaid. Its quality of care, especially in long-term care, could be

improved, and, as has been stressed today, its costs are straining

budgets.

To get behind this issue of cost, the Center for American

Progress commissioned papers on prescription drugs, long-term

care, and high-cost cases in Medicaid. In advance, I thank Kathleen Gifford, Sandy Kramer, Judy Feder, Andy Schneider, and

Yvette Shenouda for writing these papers and letting me draw on

them today.

Starting with drugs, this service category continues to drive Medicaid costs. Expenditures on drugs doubled between 1998 and 2002,

and they continue at very rapid growth rates.

While States have been aggressive in trying to reduce drug costs,

the Federal Government has been largely absent as a partner in

containing these costs.

There are several ways that Congress could help reduce drug

costs in Medicare and the Nation. First, it could provide States

with information to improve their reimbursement policies.

As we heard earlier, States operate largely in the dark in setting

drug cost reimbursement. There are several measures that the Federal Government could provide to States to make them better purchasers of drugs.

Second, Congress could update the Medicaid drug rebate. Required by Federal law, this rebate has not been modified for over

12 years, despite rapid growth in costs. Governor Warner and Governor Huckabee mentioned the fact that there really could be some

additional work in this area. In addition, oversight over the accuracy of the self-reported manufacturing price data will make a big

difference in ensuring appropriate pricing.

Third, Congress could increase its investment in research to promote evidence-based coverage of drugs. In the long run, research

on the relative effectiveness and the relative cost of similar drugs

and other health services will be key to improving outcomes and

efficiency. Information on comparative effectiveness is a better way

to set a preferred drug list than looking at price considerations

alone.

The last point I will make about drugs is to underscore a concern

most recently raised by Governor Warner. On January 1st, Medicare will assume primary drug coverage for Medicaid beneficiaries

also eligible for Medicare, known as dual eligibles.

Because no redundancy was built in, Medicaid funding ends on

the day that the Medicare funding begins, and the most vulnerable

population could experience some lapse in coverage. Keeping Medicaid funding available during this transition, as has been proposed

40

by Senator Rockefeller, should be considered in any Medicaid legislation this year.

Perhaps a greater long-term cost issue than drugs, though, is

long-term care. A large and growing number of Americans needs

long-term care, and its costs are high. Clearly, the Nation needs an

extensive, fairly financed long-term care insurance system. However, this system does not exist today in either the private or the

public sectors.

Sales of private long-term care insurance are growing, having tripled in the 1990s. But private long-term care insurance is unaffordable for many, inadequate relative to the cost of care, and unreliable, since few States guarantee that the investment in insurance

will be returned if that company folds in the future.

Public programs also fall short of ensuring insurance protections.

Medicare covers very little long-term care, and Medicaid, which

pays for close to half of all long-term care expenditures, only pays

for people who are low-income or who have exhausted their resources.

A number of policies have been proposed to address the longterm care problems generally, and Medicaid specifically. Most experts suggest that the Nation adopt a long-term care social insurance program in which everybody contributes to financing, and resources are allocated based on need.

Short of this, Congress could improve Medicaid’s home care coverage and promote so-called partnerships. Currently, four States

have this long-term care partnership program and would like to expand that nationwide.

A better option might be to partner Medicare with private longterm care insurance rather than Medicaid. With Medicare’s broad

financing and eligibility, it may be the program on which we should

build to try to encourage a public/private partnership.

But it is important to recognize that private insurance will not,

any time soon, be a substitute for Medicaid, and reform in this area

will likely increase, not decrease, costs.

Turning from services to people, my colleagues and I decided to

follow the money and look at Medicaid beneficiaries who were responsible for most of that program’s costs.

Our results were sobering: 72 percent of Medicare spending was

attributable to only 10 percent of Medicaid beneficiaries in the community. This is more concentrated than in Medicare or private insurance, and these high-cost beneficiaries are more likely than

other Medicaid beneficiaries to be older, women, poor, non-Hispanic

whites, and rural residents.

Many of these high-cost beneficiaries have chronic health problems, such as heart disease, asthma, and diabetes. Over half were

hospitalized in the last year, and their spending on home health

care actually exceeds their spending on drugs.

Lastly, it is important to recognize that Medicaid actually pays

for one-fourth of the top 10 percent most costly individuals in

America. This is 30 times more than the number of people served

by medical high-risk pools nationwide.

So what do we do about this? One option is to promote better

medical management of high-cost cases. Some States have established programs for beneficiaries with conditions such as asthma,

41

heart disease, diabetes, or schizophrenia. Medicare has begun demonstrations in this area, and Medicaid should follow suit.

Management of people with multiple chronic conditions would be

aided by implementing an electronic infrastructure in the health

system. An electronic health record would ensure coordination

across multiple providers and settings, it would facilitate the use

of evidence-based guidelines, and it would allow for monitoring

through telemedicine in rural areas. Congress could accelerate this

by applying a higher matching rate to such investments.

Prevention is also important, since similar conditions affecting

these high-cost beneficiaries can be avoided or managed to make

them milder. Federal policy could create incentives for effective

prevention models, but prevention, like care management and information technology, while likely to improve the quality of care

and health outcomes for Medicaid beneficiaries, may not result in

the kind of short-term budget savings that Congress is seeking.

I would like to turn from looking at these specific Medicaid cost

drivers to briefly discuss the cost drivers system-wide. There is a

growing crisis in the U.S. health care system. Since the year 2000,

the number of uninsured has risen by 5 million, to 45 million

Americans.

The lack of coverage exacts a large personal toll, hurts our businesses, and results in billions of dollars in uncompensated care

costs that get passed through the health care system. Uninsurance

is perhaps the most important, but not the only, problem in the

system. Health costs are affecting all payors in the U.S., and as

such, Medicaid’s costs are the so-called ‘‘canary in the coal mine,’’

only pointing to the larger systemic failures.

We at the Center for American Progress think that the answer

is not Medicaid reform, but health system reform. Fixing only Medicaid will not prevent a further erosion in private coverage, and

vice versa. Stabilizing private coverage will not be sufficient to

meet Medicaid’s coverage and financing deficits.

To this end, we propose a plan that calls for expanding coverage

to all, improving it for all through better quality and efficiency, and

paying for these investments through a small, dedicated tax. The

program is described on our website.

However, since Congress is discussing Medicaid reform and not

comprehensive reform, I would like to end with a note of caution.

The budgetary and political environment may take good ideas off

the table and steer towards others that could weaken, rather than

strengthen, this vital program.

The governors, this morning, proposed increasing cost-sharing

and reducing benefits for people currently eligible for Medicaid.

These may produce some budget savings, but at a cost in economic

and human terms.

Many studies have shown that, for people with very limited income, any cost-sharing can deter the use of care, whether that care

is necessary or not. If needed care is deferred, it could result in

preventable hospitalizations or emergency room use. This would increase the overall cost of the system through uncompensated care,

if not through Medicaid directly.

42

It could also exact a human toll. The Congressional Budget Office

warned, after reviewing the evidence, that poor individuals facing

higher co-payments displayed worse health on some measures.

The governors’ call for benefit flexibility could also create some

problems. In Medicaid, if an individual does not need a service,

Medicaid does not pay for it. Those who do need a wide range of

services are those 10 percent of the population who account for

most of this program’s cost. Cutting benefits for these people would

be penny wise but pound foolish, yet exempting them means that

there are very little savings that could result.

There is a role for cost-sharing and benefit flexibility for higher

income people enrolled in Medicaid, as Alan discussed. However,

this is not the vast majority of people enrolled in the program

today.

For them, higher cost-sharing and partial benefit packages will

likely render them effectively uninsured. This is because, in truth,

there is no such thing as partial access: you have it or you do not.

If Medicaid beneficiaries do not have access, then the program has

failed in its mission.

In closing, improvements can, and should, be made in Medicaid’s

provision of high-quality, accessible care to all vulnerable persons.

A number of policy options exist, and many have been outlined

today.

While these proposals could help in the short run, Medicaid’s

problems are the system’s problems, and broader reform is needed.

In the meantime, caution must be taken, given the budget constraints, to avoid the path of least resistance, reducing coverage

and access for the lowest-income and sickest in our Nation.

Thank you.

Senator SNOWE. Thank you very much, Dr. Lambrew.

[The prepared statement of Dr. Lambrew appears in the appendix.]

Senator SNOWE. Dr. Butler?

STATEMENT OF STUART M. BUTLER, PhD, VICE PRESIDENT,

DOMESTIC AND ECONOMIC POLICY STUDIES, THE HERITAGE FOUNDATION, WASHINGTON, DC

Dr. BUTLER. Thank you, Madam Chairman. I want to thank the

committee for the invitation to testify, and also to follow the two

governors, because I think the National Governors Association has

shown how well-intentioned people from both parties can come together and develop initiatives to move us forward on health care.

I would also like, at the beginning of my remarks, to make three

points about the context in which these discussions of Medicaid are

necessarily taking place. One, of course, is that we all know that

health costs in Medicaid, Medicare, and in the private sector are

driving up the costs of Federal spending over the long term.

Over the next 25 years, we will see, according to the GAO and

Congressional Budget Office, that the proportion of our Nation’s resources on Federal spending will rise, from about 20 percent today

to about 30 percent in 25 years’ time.

That will mean either huge deficits, huge tax increases, or else

we have to look at some ways of reforming the way we do spend

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money in order to spend money smarter and to have measurable

outcomes.

The second point of context is something that has been agreed

on very broadly this morning, that Medicaid cannot be seen in isolation. Governor Warner stressed this. Dr. Lambrew has just said

the same thing. When we look at Medicaid we must do so in the

general context of looking for broader health coverage for Americans.

The third point of context I want to make is that the increasing

polarization in Congress and in Washington means that, in order

to make bipartisan progress, it is very important to look at strategies that appeal to the flanks of the political system, as well as to

the center.

It is very important to have enthusiastic buy-in across the political spectrum as we try to move forward, just as we are seeing the

importance of buy-in from the States in how we move forward.

I believe an enhanced approach to Federalism, to really work

more closely with the States, is the key to achieving progress to

reach our general goal of improved coverage.

In my testimony, I summarize a proposal that was developed by

myself and Henry Aaron from The Brookings Institution. I would

suggest to the committee, anything that Heritage and Brookings

can agree on is probably worth noting.

Let me summarize the four key elements of that very quickly,

and then talk about the context, specifically, of Medicaid.

The first is that Henry Aaron and I argued that Congress has

to establish very broad and measurable goals for improving coverage generally, and for describing the protections that have to be

in place for vulnerable groups. Senator Baucus alluded to this just

a few minutes ago.

Second, Congress should enact what we call a ‘‘policy toolbox,’’ in

other words, a set of Federal initiatives and legislative waivers that

really do appeal to those on the left as well as the right.

I think the National Governors Association has shown how combining proposals that are favored by left and right can be done, and

allow us all to move forward. I think this is the case of log rolling

that would be very beneficial for everybody, and we are suggesting

specific proposals that could be included in this toolbox. This

should be tested to see how effective they might be as a possible

model for broader reform in the future.

Let me give some examples of the kind of things that we mean.

There have been discussions of looking at Medicaid and who is eligible for Medicaid, and perhaps looking at maybe an income-based

threshold rather than a welfare-based threshold for Medicaid.

I think that is something that should be looked at in Federal legislation and might be applied in a State to see exactly how effective

that is in reaching our general goal of improving coverage.

Ideas for improving the structure of affordable health insurance

also should be considered to be put in place in particular States

that wish to try them. I think proposals like Senator Lincoln’s idea

for an approach modeled on the FEHBP for small businesses is the

kind of proposal that should be made available to States to try,

with the agreement of the Federal Government, to see exactly how

effective it is.

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Senator Frist’s proposal for a Healthy Mae as a way of restructuring and providing reinsurance is another example of this. Similarly, an enhanced approach to refundable tax credits, to have large

tax credits in particular places, to see how effective they might be.

There are a number of proposals like this that are bottled up in

Congress right now. Henry Aaron and I suggest that we agree to

allow them out to be tried in the States willing to put them into

place, in conjunction with the Federal Government.

The third element of our proposal is that States would offer innovative proposals utilizing some of these toolbox items, as well as

their own commitments and their own approaches, to be tried in

their State.

We have argued that the decisions as to which of these proposals

should be implemented should come under some form of semi-independent commission, we think, in order to build trust as to what

should be tried and how it is going to be evaluated.

We do need some independent body to help Congress to do that.

We think that that body ought to be comprised of governors, key

legislators, and members of the administration, so that there is a

clear bipartisan support for these approaches.

Then the fourth element of our proposal is payment by results.

States that really do achieve the broad objectives that they agreed

to with the Federal Government to improve coverage generally in

the context of Medicaid changes, or whatever else is on the table,

ought to be rewarded for their achievements.

Either some of the savings that are achieved should be reprogrammed into State initiatives, or, if there is new Federal money

available in the future, that should be tied to progress in reaching

agreed steps forward in improving coverage.

In a sense, this is rather similar to some of the elements of the

1996 welfare reform legislation, which set broad goals, broad protections and requirements, and then essentially allowed States to

begin to look at alternative ways of reaching those goals.

Considering Medicaid within this broad objective of improving

coverage, I just want to make a couple of points, or to reemphasize

a couple of points.

One is that I really do feel very strongly that in order to get buyin from the governors, as well as the Minority in Congress, as well

as the Majority, then any steps that really look at significant reforms and significant changes in the Medicaid system must be seen

as fair and balanced.

That is one of the reasons why I strongly feel that some form of

commission—that is, a strong political body—is extremely important to develop a partnership and an agreement to move forward.

These members of that commission, I feel, need to be voting partners. They need to really bring political strength to the table.

I know the current Medicare Commission is not exactly designed

to do what we have been proposing, but I think the reluctance of

governors and some members of Congress to take part is an indication that, unless it has clear independence and political clout, it is

unlikely to get buy-in.

The last point I want to make is that whatever you do in Congress to try to reach the goals of savings in Medicaid by making

changes in the program, I think it is critically important that

45

States be able to propose alternative ways of reaching those goals

and those savings, while improving coverage.

That means that some States might be able to implement a

change, for example, that might actually make larger reductions in

Medicaid, but the quid pro quo might be explicit Federal funding

for a refundable tax credit for some other provision that, in conjunction, means that the Medicaid population and the rest of the

population in the State actually enjoys more coverage than previously.

Flexibility of this kind, with the ability to mix and match Federal

funding, is absolutely critical to moving forward, not just on Medicaid, but to establishing working models that might actually be

ones that we want to apply more generally.

Mr. Chairman, we have heard from the governors today. We

have heard, as I said when you were out, an example of Republicans and Democrats at the State level coming together, putting

elements into the equation that appeal to one side and the other,

and coming up with a proposal that allows us to move forward.

I think we can do that at the Federal level in the way that I suggested. I think, also, by looking at a fresh approach to the relationship between the Federal Government and the States, I think it is

possible for us to really begin to achieve the goals that have alluded us for so long.

[The prepared statement of Dr. Butler appears in the appendix.]

The CHAIRMAN. Well, thank you very much. You can tell that we

were dividing up time here so I could go vote, and now Senator

Snowe is going to go vote. I think maybe Senator Rockefeller is

going to come back and want to ask some questions, too.

So, let me start out, please. If I ask you to repeat something that

was in your oral testimony because I did not hear it, feel free to

say so, and then I will just go back to the record so you will not

have to repeat yourself.

The governors testified—and this is for Dr. Weil—of the importance of their having greater flexibility in determining eligibility in

designing benefits. Theoretically, your members all work for governors, so I am curious. How does your group differ from the governors on State flexibility?

Dr. WEIL. Well, I think our proposal does differ in some important ways at the level of details, but perhaps it would be more

helpful to describe the differences first in terms of concept.

The flexibility we include in our report is quite structured, and

at least as I understood it, particularly as I read their written document, the governors were looking for a very high level of flexibility around benefits and eligibility with very, very few constraints, the ability to impose cost-sharing from the outset, the

ability to reduce benefits for very, very low-income people. I did not

get the impression that there were limits.

As I read their document, for example, a limit of 7.5 percent of

income for a family at 150 percent of poverty, means that perhaps

a family making $25,000, $30,000 is going to pay $2,000 or more.

We were not looking at options that went up to that level.

So the first difference, I think, is we view a much stronger road

map from the Federal Government in terms of how the flexibility

will be structured. Second, and this is equally important, is that,

46

as I indicated, our proposals are a package, and we paired flexibility with a requirement that States, in their Medicaid programs,

expand coverage to everyone below poverty, that that would be a

Federal standard, and States would bear a share of the cost of that

expansion.

I am not surprised that governors, given their fiscal circumstances, do not feel that they can bring those two together, but

in our deliberations, it was very clear that flexibility should be

combined with some responsibility on the part of States.

Third, and this I say with some caution, only being somewhat familiar with the governors’ proposal, when you think about savings

in Medicaid, there are really only three ways to get savings.

You can shift costs to someone else, and reducing prices is a form

of that, you can shift costs to the enrollees in cutting benefits and

increasing what they have to pay as a form of that, or you can try

to actually design a more efficient way to deliver services to people

in the program.

And as I listened to the governors’ flexibility, it is primarily flexibility oriented to the first two of those kinds of changes, which is

not to say that they are inappropriate, but they are more about

shifting and reducing and not driving at how we deliver care to

people.

Now, I do believe that the governors feel that, behind the flexibility they ask, they have examples of ways to improve how care

is delivered. But I see a greater disconnect.

I would say our workgroup focused much more on how to improve coordination between Medicare and Medicaid, how to deliver

long-term care services earlier, before people need institutional

care, how to bring disease management and integration of public

and private dollars so that people are getting care early, instead of

waiting and getting it at the back end.

So, at least from my perspective, we were looking much more at

how care is delivered, trying to make the program more efficient.

I see fewer examples of that in the document that I saw this morning from the governors.

The CHAIRMAN. I thank you.

On another point, dealing generally with fraud and abuse, one

area that was not focused on by the National Academy proposal,

so I am curious why not, is the area of fraud and abuse.

I am very concerned about the low level of funding allotted at the

Federal level to investigate fraud and abuse. It is my understanding that, of the $742 million for the health care fraud and

abuse control program, only $14 million were used for Medicaid in

2004.

This is a small share compared to the $720 million used to ferret

out fraud in the Medicare program. This is particularly troubling,

given that the Office of Inspector General has estimated that $1

spent on Medicaid fraud and abuse nets $3 in return.

I know that the States have made some significant inroads. I

read about Medicaid fraud in the papers on a weekly basis, but I

am wondering whether the Federal Government should not be putting more resources into this area.

Do you think fraud and abuse are potential areas of savings in

the Medicaid program?

47

Dr. WEIL. Mr. Chairman, the States and the folks that we work

with share your concern on this issue. I should note that, although

I gave you an overview of our recommendations in both my verbal

and written testimony, our full document does include a number of

specific recommendations with respect to a few areas, including

particularly how Medicare and Medicaid could work better together

in addressing concerns about fraud.

After all, it is the populations and the providers associated with

the dual eligibles that account for a large share of both of these

programs. We do talk about how the Federal Government funds

fraud prevention services, how States are required to pay for certain information from the Federal Government, how inappropriate

payments are collected, so we do have some attention to this issue

in our report, though perhaps not as much as is warranted. But I

would say that the States are very interested in doing that.

Just from a personal perspective, not trying to speak on behalf

of my organization, when I ran the Medicaid agency in Colorado,

despite the statistics that you cite showing the one-for-one payoff

associated with these kinds of investments, at the practical level,

when I was sitting in front of my State-level equivalent of the Finance or Budget Committee, getting additional staff was very hard,

because we had caps on FTEs and caps on State positions, even if

we thought that we would save more than the cost of the salary.

So I think Federal encouragement and assistance in this area

could help States overcome some of the barriers they find in addressing this concern.

The CHAIRMAN. Thank you.

Now, Dr. Lambrew, in your testimony you state that much of the

Medicaid spending is concentrated on very high-cost beneficiaries.

Specifically, you state that 10 percent of the beneficiaries accounted

for 61.5 percent of the Medicaid spending, and that was in the year

2001.

Since Medicaid is a State-based program, I am very interested in

your thinking on how States can better coordinate care of the highcost beneficiaries. What policies should we put in place then to get

States to better coordinate care?

Dr. LAMBREW. That is a very good question. There are lots of

ideas, and this is a huge area of potential, trying to figure out how

to take these high-cost cases and manage their care better.

Just as a note, this high-cost care management is different than

our historical case management in that it typically focuses on diseases, like diabetes or heart failure, or is triggered by people who

trip into the high-cost category. So, it is focused on a small set of

people.

Models often include evidence-based medicine, trying to use technology to coordinate care, electronic medical records, call centers to

make sure that an individual, when they need to ask a question,

has somebody to call when their doctor is not available.

So, there are several models out there. We have seen, in Kansas,

an aggressive asthma program that has been developed to provide

education and monitoring to prevent children with asthma from

going to the emergency room.

In Maryland, there is a program that looks at rural people with

diabetes. How do we actually ensure that they are doing the moniVerDate 11-MAY-2000 16:40 Jan 24, 2006 Jkt 095484 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 25121.000 SFINANC2 PsN: SFINANC2
48

toring of their blood sugars to prevent them from having complications?

In Massachusetts, they have, for years, had a program that targets those dual eligibles, those people who are eligible for Medicare

and Medicaid, and coordinates all their services, plus services not

covered by either program.

There are several State models out there. In the MMA, there was

this new Medicare Chronic Care Improvement program that will

actually test this out—how do we do this, what works, what does

not—and get good, hard numbers as a result, which is going to be

a breakthrough, because the truth of the matter is, the Congressional Budget Office wrote a 34-page memo that said, we are not

sure yet. We do not quite know what works and what does not. We

really need to get beyond that.

What can Congress do? Well, I think it is interesting. In the details of the report that the governors released, there is this idea of

doing a National Healthcare Innovations Program.

I am just reading this today, so I am not familiar with the details. But it would invest in 10 to 15 States to have large-scale

demonstrations. They list, among these types of demonstrations,

using innovative strategies to coordinate care, provide disease prevention, use evidence-based practices, et cetera. So, I think that is

one idea out there.

It is somewhat similar to what Dr. Butler was talking about with

his State-based demonstrations. But the truth is, this is what the

1115 Section is for, demonstrations on how do we implement effective and innovative ways to, as Alan said, improve the efficiency of

Medicaid. So, there are waiver options.

There is a new proposal put on the table by the governors, and

there is the old-fashioned idea of looking at Federal matching

rates, to figure out if we can incentivize this type of care.

The CHAIRMAN. Thank you.

Now I would like to ask Dr. Butler a question. From the testimony by the governors, it appears that their approach is consistent

with your approach on greater State flexibility. Why do you think

State flexibility is the key, and I think is primary in your judgment, to the future of Medicaid?

Dr. BUTLER. Well, I think it is for two related reasons. One is

that we do not really know the answer on how to really get better

value for money in Medicaid. We cannot be certain of what the answer is. So, it is very important to try different things and different

approaches in different States. That is one of the reasons why I

think the governors’ proposal is so important. Flexibility does allow

the Federal Government, in negotiating with particular States, to

really try approaches.

The second reason is that we do need to have some differences,

some variations that recognize differences between the States. That

might mean that what works for Medicaid in one State is not precisely what would work in another State. It is very important to

have flexibility to adjust to that.

But, as I said at the beginning, a precondition for flexibility is

that there has to be some agreement on what the overall goals are

of allowing that flexibility, and what the protections must be for

particular populations in that flexibility.

49

I think the governors would agree with that, but I think that is

critically important. This is not a case of handing over a check and

keeping your fingers crossed that they all do the right thing.

The CHAIRMAN. Also, you argue that we link performance-based

goals with any additional flexibility. Why are performance-based

goals needed, and how would they impact how States exercise that

greater flexibility?

Dr. BUTLER. Well, by performance I mean that, if there is an

agreement between the Federal Government and a State to achieve

the agreed objective to improve coverage, savings in Medicaid, and

so forth—and by performance-based, I mean we have to see those

outcomes as we allow flexibility—there has to be, first of all, a

plausible approach and proposal to achieve those objectives, with a

timeline. I think the release of funds or the agreement that savings

should be reprogrammed ought to be linked directly to achieving

the timelines in that agreed proposal.

The CHAIRMAN. If Senator Rockefeller does not come in just a

couple of minutes, I want to give a short summation here. If he

does not come, then we will adjourn.

First of all, I thank the governors, and I thank you for your appearance. We appreciate your time and insight on a very complex

issue. I think that we have learned a great deal, and probably have

a lot more to learn, but it has been valuable input from our witnesses.

As the committee continues its work on Medicaid, I believe that

we need to more carefully scrutinize the way that Medicaid funds

are spent. We know that there are hundreds of millions of dollars

in fraud, waste and abuse draining the program of much-needed resources. These funds could instead be used to assist Medicaid beneficiaries.

With that in mind, we are going to hold a 2-day hearing June

28 and 29 on fraud, waste and abuse in the Medicaid program.

Also, as a reminder to staff, as well as to you as witnesses—and

I did not say this to the governors—but Senators, if they have any

questions for the record that they would ask you to respond to in

writing, they should be submitted by this Friday at the close of

business this week. Thank you all very much.

The committee hearing is adjourned.

[Whereupon, at 12:31 p.m., the hearing was concluded.]

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