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[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]

 
 DEPARTMENT OF HEALTH AND HUMAN SERVICES BUDGET PRIORITIES FOR FISCAL 
                               YEAR 2005
=======================================================================

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, FEBRUARY 26, 2004

                               __________

                           Serial No. 108-21

                               __________

           Printed for the use of the Committee on the Budget

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

                                 ______

                 U.S. GOVERNMENT PRINTING OFFICE

92-277                 WASHINGTON : 2004
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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
CHRISTOPHER SHAYS, Connecticut,      JOHN M. SPRATT, Jr., South 
  Vice Chairman                          Carolina,
GIL GUTKNECHT, Minnesota               Ranking Minority Member
MAC THORNBERRY, Texas                JAMES P. MORAN, Virginia
JIM RYUN, Kansas                     DARLENE HOOLEY, Oregon
PAT TOOMEY, Pennsylvania             TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington             DENNIS MOORE, Kansas
ROB PORTMAN, Ohio                    JOHN LEWIS, Georgia
EDWARD SCHROCK, Virginia             RICHARD E. NEAL, Massachusetts
HENRY E. BROWN, Jr., South Carolina  ROSA DeLAURO, Connecticut
ANDER CRENSHAW, Florida              CHET EDWARDS, Texas
ADAM PUTNAM, Florida                 ROBERT C. SCOTT, Virginia
ROGER WICKER, Mississippi            HAROLD FORD, Tennessee
KENNY HULSHOF, Missouri              LOIS CAPPS, California
THOMAS G. TANCREDO, Colorado         MIKE THOMPSON, California
DAVID VITTER, Louisiana              BRIAN BAIRD, Washington
JO BONNER, Alabama                   JIM COOPER, Tennessee
TRENT FRANKS, Arizona                RAHM EMANUEL, Illinois
SCOTT GARRETT, New Jersey            ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina   DENISE MAJETTE, Georgia
THADDEUS McCOTTER, Michigan          RON KIND, Wisconsin
MARIO DIAZ-BALART, Florida
JEB HENSARLING, Texas
GINNY BROWN-WAITE, Florida

                           Professional Staff

                       Rich Meade, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel

                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, February 26, 2004................     1
Statement of:
    Hon. Tommy G. Thompson, Secretary, Department of Health and 
      Human Services.............................................     6
    Alan R. Weil, Director, Assessing the New Federalism, the 
      Urban Institute............................................    52
Prepared statement and additional submission of:
    Questions for the record from the Hon. Denise Majette, a 
      Representative in Congress from the State of Georgia.......     4
    Mr. Thompson:
        Prepared statement.......................................     8
        Response to Mr. Scott's question regarding the Faith-
          Based Legislative Initiative...........................    42
    Letters for the record from Hon. Rosa L. DeLauro, a 
      Representative in Congress from the State of Connecticut...    37
    Mr. Weil.....................................................    54

                     DEPARTMENT OF HEALTH AND HUMAN
                 SERVICES BUDGET PRIORITIES FOR FY 2005

                              ----------                              

                      THURSDAY, FEBRUARY 26, 2004

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:10 a.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Shays, Gutknecht, 
Ryun, Hastings, Putnam, Wicker, Tancredo, Bonner, Garrett, 
Barrett, Spratt, Moran, Hooley, Baldwin, Moore, DeLauro, Scott, 
Capps, Thompson, Baird, Cooper, Emanuel, Davis, Majette, Kind, 
and Edwards.
    Chairman Nussle. Good morning and welcome, everyone, to 
this hearing in the Budget Committee. I am pleased to have with 
us today the Secretary of the Department of Health and Human 
Services for a return visit, the Hon. Tommy Thompson, to 
discuss the key elements of the Department's request for this 
year's budget.
    Secretary Thompson, welcome back to the Budget Committee, 
and we are honored to have you with us today. We know that you 
have a prior commitment, that you need to leave at noon; making 
a very important journey, as I understand it, to Iraq. So it is 
important that we have a chance to visit with you and let you 
get on to some other important business.
    While the Department of Health and Human Services has a 
long list of responsibilities and certainly numerous agencies 
within its jurisdiction, there are three areas that I believe 
are important to focus on today: Medicare reform and 
prescription drugs; the health savings accounts, and, of 
course, the new efforts with regard to counteracting 
bioterrorism.
    Last year the Congress and President Bush accomplished a 
feat that policymakers have struggled with for years. We 
enacted legislation to strengthen Medicare and include a first-
ever prescription drug benefit. While the new law may not be a 
perfect solution to the many challenges that confront the 
Medicare program, it is without question a truly historic first 
step in strengthening the program, which has really lagged 
behind private health insurance since its enactment in 1965.
    The benefits of this action are really already on their 
way. According to the Centers for Medicaid and Medicare 
Services, in just 4 months all beneficiaries will have access 
to a Medicare discount card that will result in about 10 to 15 
percent savings for the average beneficiary, and up to about a 
25-percent savings on certain prescription drug costs. Low-
income seniors will also be receiving a $600 subsidy in 
conjunction with their prescription drug discount card, which 
is really welcome relief to so many, I know, of my constituents 
that I met with this last week during the President's Day 
recess.
    In addition to the inclusion of the prescription drug 
benefit, there are a host of other positive changes to Medicare 
that I think are worth noting. We strengthened its financing by 
addressing waste, fraud and abuse, which I am proud to say was 
an effort that at least had some of its beginning and momentum 
from this committee last year as part of our budget process; 
reforming the regulatory structure to ease the burden on 
Medicare providers, making it easier for generic drugs to enter 
the marketplace; and, finally, addressing the payment and 
equity that has been there with regard to rural and urban areas 
that certainly you, as Governor of Wisconsin, and I know well 
from Iowa, it is an issue of particular concern to many of us 
on this committee. And I have seen some studies that finally 
show Iowa out of last place, which I can tell you my 
constituents were very happy about.
    As part of the improvements in both benefits and the way 
Medicare program does business, the Congress and the President 
have also enacted transformation in the way that we can manage 
health care needs. Now, much like Americans save for their own 
and their family's future through IRAs and 401(k)s and 
education savings accounts and the like, we have enacted the 
opportunity for people to save for their own medical needs 
through health savings accounts. These accounts will not solve 
every problem in health care, certainly, but it will allow for 
two very important changes. First, they will restore to 
consumers the ability to plan for and make their open choices, 
which is huge in health care for so many people. And secondly, 
it will help address some of the long-term demographic and 
financial problems facing the Medicare program.
    While a discussion of these changes will likely consume the 
bulk of the hearing, I don't mean to forget probably one of the 
most important new roles and expanding roles for the 
Department, as we are all aware of the ongoing threat to our 
Nation from a potential and continuing bioterrorist attack.
    Secretary Thompson, you and your Department have been 
charged with ensuring that we are prepared with the necessary 
training, supplies, and vaccines to protect our citizens in the 
event of such an incident. Mr. Secretary, I am eager to hear 
about the progress that the Department has made on these fronts 
in the past few years and also your thoughts on what also may 
need to be done to ensure our safety.
    I want to also ensure that we talk about Medicare 
enactment, and if there are challenges or changes that we need 
to be working on in order to ensure that the Medicare changes 
that we have enacted last year can be put into effect as 
quickly as possible so that we can make sure that the benefits 
from this act are able to be taken advantage of as quickly as 
possible.
    So I appreciate you being with us today. Your entire 
testimony will be made part of the record, and at this point I 
would turn to Mr. Spratt for any comments he would like to 
make.
    Mr. Spratt. Mr. Secretary, thank you very much for coming 
and discussing one of the biggest components on the domestic 
side of our budget--probably the biggest--and for taking time 
out of what has to be a phenomenally busy schedule to answer 
our questions about this program.
    Mr. Secretary, one of the surprises in the budget this year 
was the revelation that the Medicare prescription drug benefit, 
passed just a few months ago with a basically Republican 
majority, was going to cost $534 billion, $139 billion more 
than was advertised at the time it was passed.
    Had that cost estimate been disseminated and available to 
Members of the House of Representatives, particularly on the 
other side of the aisle, I don't think it would have passed, 
not at $539 billion.
    And had that price for the rather meager coverage been 
advertised, then I think everybody might have been compelled to 
go back and look at the bill and look at one extraordinary 
provision in that bill which prohibited the government from 
negotiating drug prices with pharmaceutical firms. For the 
first time in the 21 years I have been in Congress, this bill 
contained a provision which said to offices of the government, 
you don't have the obligation, indeed you are not allowed to go 
seek the best price for the U.S. Government. Not only is it bad 
policy, it is expensive policy, and it is certainly not a 
precedent we want to follow elsewhere.
    Now we received word recently, the Wall Street Journal had 
a story of which I am sure you are aware, indicating that 
several States who are in the business of buying drugs for 
Medicaid--I think the drug bill for all the Medicaid, State and 
Federal, is $27.5 billion last year, a big number--they are out 
trying to form purchasing pools themselves, among themselves, 
using pharmacy benefit managers so that they can negotiate down 
with the prices. And they have been called to account and told 
that this might not conform to Federal law. Well, great. I 
would like to see--we want clarification of that today.
    And probably the only way to break the phalanx and the 
existing circumstances of these prices is to allow some 
importation so there is some competition for the domestic 
prices, but we don't have much assurance that that is going to 
happen either. Surely we don't want to add to all of the other 
aspects of this problem a prohibition on the States. We ought 
to be encouraging the States, telling them to get out and 
negotiate lower drug prices, that we will readily approve any 
kind of reputable and well-set-up proposal.
    Let me show you just a few charts to get the debate going, 
Mr. Secretary, that we will be talking about today. The 
President's budget, as this chart shows, a simple bar graph 
that the President's budget will cut HHS, your Department, by 
about $1 billion this year, for next year.
    Next chart. Here are some of the allocations. NIH, a few 
years ago we resolved, House and Senate, both sides of the 
aisle, that we would double the budget for NIH over a period of 
5 years, and we did it. Now we are beginning to see NIH barely 
grow with the rate of inflation, and that is bound to have an 
impact on medical research and breaking the new frontiers of 
medical research.
    FDA, vitally important role. It would be one of the 
overseers, if we did allow importation to get some drug price 
competition going, just a 2-percent increase.
    And then HRSA, which is basically the community health side 
of the HHS, this is the organization that provides for 
community health centers and public health--these are the 
people who don't have anything, and have to go to the 
government as a last resort for their health, -2.28 percent. It 
is a cut over the period of 5 years.
    And then the CDC, which was mentioned indirectly by the 
chairman when he referred to bioterrorism, after 9/11 a number 
of Members went down to Atlanta to see CDC; and, Mr. Secretary, 
frankly they were shocked at the condition of some of the 
facilities there, both in terms of what we can do for this 
BioShield-type initiative that we are taking and also in terms 
of what might be mispriced, misallocated or pilfered from that 
operation down there and put to dangerous uses in our economy.
    So we have got a lot to talk about, Mr. Secretary, and I 
know you have got limits on your time, I don't want to stretch 
them. But these are some of the things that we want to touch 
upon, and I hope that is all responded to in the course of the 
statements you are about to make. Thank you again for being 
here.
    Chairman Nussle. Thank you, Mr. Spratt.
    I ask unanimous consent that all members be allowed 7 days 
to submit statements for the record and also, as we have done 
in the past, as well, questions if we don't get to members, so 
that the Secretary may, because of his time constraints, answer 
them in writing.
    [The information referred to follows:]

     Questions for the Record offered by Hon. Denise L. Majette, a 
          Representative in Congress From the State of Georgia

    Thank you Secretary Thompson for coming before us today. You have 
had a tough time today defending the President's abysmal budget 
request. It is impossible to defend a budget that shortchanges our 
children today and our grandchildren tomorrow.
    The President's proposal fails to meet today's urgent domestic 
priorities including making sure our children receive a good education 
and adequate health care. And as Chairman Greenspan testified 
yesterday, it will leave our children with crippling deficits far into 
the future and a truly staggering debt.
    This is an irresponsible budget that shortchanges our children's 
education and health, and then leaves them to pay the check for over 7 
trillion in debt. Our children deserve better.
    But beyond the big picture Mr. Secretary, I do have some specific 
questions.
Question No. 1:
    Mr. Secretary, as you know, the CDC is based in my district, and 
like all Americans I am committed to ensuring that this critical agency 
is adequately funded to perform all that we are asking these 
professionals to do. This includes their role in public health research 
and implementation as well as their increasing role in responding to 
the threat from terrorism.
    Our current total national healthcare expenditure (private, 
federal, state) this year is $1.6 trillion. With the aging baby boomer 
population and the financial strain of Medicare and Medicaid this 
number will double by 2012. Chairman Greenspan warned yesterday about 
the stifling effect increased Medicare spending could have in the 
future. In light of this, it makes sense to invest more in research and 
in proven prevention programs to lower these costs.
    And in terms of the CDC's other role in fighting biological 
threats, yesterday CIA director Tenet testified that Al-Qaida's program 
to produce Anthrax is one of the most immediate terrorist threats we 
are likely to face.
    And yet, the President's budget cuts the CDC's funding by over $400 
million this year--furthermore, they would be below today's funding 
levels 5 years from now. Mr. Secretary, will you support CDC Director 
Julie Gerberding's professional judgment request, made in May 2003, 
that CDC's budget should instead be doubled over the next 5 years to 
fulfill these dual roles?
Secretary Thompson's Written Response
    Thank you for the question, Congresswoman Majette. Now, and in 
future years, I remain fully committed to supporting the important work 
of the Department's Centers for Disease Control and Prevention. With 
regard to CDC's fiscal year 2005 budget request, increases of $341 
million in various programs were offset by funding of:
     Buildings & Facilities (+$81.5M) to continue construction 
of the Roybal East Campus Consolidated Laboratory Project (Bldg 106), 
which will replace and consolidate infectious disease laboratory and 
vivarium facilities and to complete the Fort Collins Vector Borne 
Infectious Disease Laboratory which includes insectary, vivarium and 
diagnostic laboratories (-$179 million below fiscal year 2004 enacted);
     One-time congressional projects (-$44M);
     Extramural prevention research (-$15M) CDC has a growing 
commitment to extramural public health research broadly, not only 
research confined to prevention efforts. In an effort to avoid 
duplication, CDC aims to continue to invest in the extensive rubric of 
public health research on a coordinated, agency-wide basis.);
     Youth Media Campaign (-$30.8M) The President's fiscal year 
2005 budget request for the VERB campaign is $5 million. The fiscal 
year 2004 funding of $36 million will be used to extend the phase 3 
media buy (fiscal year 2003 funds) for the VERB Campaign. In effect, 
the fiscal year 2004 appropriation increases phase 3 from a $51.3 
million to an $87 million campaign and this will also help to ensure 
continued added value (in-kind) commitments from media partners.); and
     Terrorism redirection (-$130M) Monies that were previously 
allocated directly to states (-$105 million), for upgrading internal 
CDC capacities (-$15 million), and the culmination of a seven year 
research project around anthrax vaccine (-10 million), will be used to 
fill a preparedness gap in early attack warning and surveillance. The 
benefits of the new BioSense program, of expanding quarantine stations 
at US airports, and of enhancements to the Laboratory Response Network 
will be felt in all state and local health departments. The Nation as a 
whole will be better prepared to respond to a bioterrorist attack and 
surveillance and lab capacities at CDC and in the states will be 
greatly improved.
Question No. 2:
    Mr. Secretary, another investment in our future that I would like 
to address is our investment in education, specifically early childhood 
education.
    Head Start is underfunded this year alone by $1.5 billion and more 
than a third of eligible children are still being left behind.
    And the President's budget will not increase the number of children 
served by this crucial program.
    I'd like to remind everyone, Mr. Secretary, of a few facts about 
Head Start. Participants in Head Start are:
     Less likely to be held back in school.
     Less likely to be placed in special education classes.
     More likely to succeed in school.
     More likely to graduate.
     More likely to be rated as behaving well in class and 
being better adjusted in school.
     And five times less likely to end up in jail as adults.
    Mr. Secretary, Head Start saves us more than it costs by reducing 
incarceration rates. Will you join me in fighting to increase funding 
for this critical program?
Secretary Thompson's written response
    The administration agrees that Head Start is a valuable program 
that has served our Nation's children well over the last four decades. 
Funding for the program has increased $750 million over the last 4 
years. Nevertheless, we believe that it is critical to continue to 
improve the quality and effectiveness of the program to ensure that 
every child enters school ready to learn. This can be done by ensuring 
that all Head Start teachers are trained in the most up-to-date, 
research-based methods for helping children develop early literacy and 
numeracy skills that they need in order to be successful in 
kindergarten. In fact, the Administration has implemented an aggressive 
plan to make this happen. Over 50,000 Head Start teachers have received 
training in early language and literacy development and early literacy 
teaching strategies through our STEP program. Moreover, for the first 
time, an outcomes-based system of accountability has been implemented 
so that weaker programs can be identified and provided with the 
training and technical assistance that will result in improved 
language, cognitive, and early literacy outcomes for children 
participating in those programs. These improvements will not be made at 
the cost of sacrificing the comprehensive services that are being 
offered to close to 920,000 children in the program.
    However, I disagree with your assertion that nearly a third of 
eligible children are being left behind, because many families chose 
other options for their children, including placing the child in State-
run pre-K programs, day care centers, or in at-home education with 
their parents or other family members. Additionally, many Head Start 
programs have experienced problems in maintaining their funded 
enrollment levels. In fact, self-reporting by Head Start centers 
indicates that on average a typical grantee has an enrollment level of 
only 93.1 percent of funded slots. Nationally, that means that 62,000 
eligible children are not receiving Head Start services, yet they 
should be given current funding levels. The President's fiscal year 
2005 budget has proposed a solution by requesting $45 million to fund a 
demonstration program allowing up to eight States the option of greater 
coordination between Head Start, State-run pre-K, and child care. This 
could result in significantly fewer programs with under-enrollment 
problems and more children receiving a high quality preschool 
education. Additionally, the fiscal year 2005 budget would provide for 
an increase in Head Start enrollment of nearly 10,000 children by 
reallocating a percentage of Head Start discretionary training and 
technical assistance funding. Together, these efforts will help more 
children around the country prepare to enter school healthy and ready 
to learn. We urge Congress to act on both of these requests.
    We appreciate Congressional concern on this issue and look forward 
to working with your Committee to continue to strengthen the Head Start 
program.

    Mr. Secretary, welcome. Your entire statement will be made 
part of the record, and you may summarize it as you feel 
necessary. We are welcome to receive your testimony.

 STATEMENT OF HON. TOMMY G. THOMPSON, SECRETARY, DEPARTMENT OF 
                   HEALTH AND HUMAN SERVICES

    Secretary Thompson. Thank you very much, Mr. Chairman. I 
applaud you and your leadership and thank you so very much for 
giving me this opportunity to come in front of you. And if in 
fact we don't finish up when I have to leave, I would be more 
than happy to come back if you so desire.
    Congressman Spratt, thank you for your leadership as well. 
I appreciate your figures. I appreciate your comments, and I 
would like to address several of the things that you have 
raised in your opening remarks.
    I also want to thank all members of the committee for your 
responsibility and your dedication and your friendship. Thank 
you for inviting me to discuss the President's fiscal year 2005 
budget for the Department of Health and Human Services.
    In my first 3 years at the Department, we have made 
tremendous progress in improving the health, the safety, and 
the independence of the American people. We continue to advance 
in providing health care to seniors and to lower-income 
Americans and improving the well-being of children, 
strengthening families, and protecting the homeland. We have 
reenergized the fight against AIDS at home and abroad. We 
increased access to quality health care, especially for 
minorities, the uninsured and the underinsured. We are helping 
smokers free themselves from this debilitating habit through a 
national quit line which we funded internally in the Department 
at my request. And with your help, 2 months ago President Bush 
signed the most comprehensive improvements to Medicare since it 
was created nearly four decades ago.
    To expand our achievements the President proposes $580 
billion for HHS for fiscal year 2005, an increase of $32 
billion, or 6 percent over fiscal year 2004. Our discretionary 
budget authority is $67 billion, an increase of $819 million, 
or a 1.2-percent increase over fiscal year 2004, but an 
increase of 26 percent over fiscal year 2001 when I took over.
    In order to strengthen our bioterrorism preparedness and 
Public Health System, we have requested $4.1 billion, up from 
$300 million, in 2001.
    I would like to ask all of you and encourage you to take me 
up on it, to come over and see the war room that we have built 
at the Department of Health and Human Services. Emanuel has 
been over and Tammy Baldwin has been over and a couple of you 
have been over, but it is very visionary. It is probably the 
most exciting thing for communications and for tracking 
diseases and storms in the world. And I would invite you to 
come over at any time. It would be very revealing and would 
help you in your discussions, I am confident.
    This investment will improve preparedness for bioterrorist 
attack or for any public health emergency. We have already seen 
your investments pay off in CDC's leadership in fighting the 
SARS outbreak last year and a coordinated public health 
response to the West Nile virus. It even helped to deal with a 
particularly hard flu season this year.
    We have also launched our steps to a healthier U.S. 
campaign--I happen to be passionate about prevention--in order 
to encourage Americans to improve their health and avoid 
disease by practicing healthy habits and avoiding risky 
behaviors.
    As you know, I am a big proponent of information 
technology. That is why we provided a computer language 
program, SNOWMED, to providers at no charge. We are leading the 
way in developing standards for electronic medical records. And 
yesterday morning I announced an FDA rule to prevent medication 
errors by requiring bar codes on all medicines and blood 
products and to incorporate preventative practice into 
Medicare. I worked with members of the committee and with the 
rest of Congress to provide the most comprehensive update to 
Medicare since it was created in 1965.
    We have preserved the Medicare program and built upon it 
with better benefits and more choices. These better benefits 
include prescription drug coverage to save seniors money, 
improvements in preventative care, which I believe is very, 
very important, and better access to the doctors and medical 
care that seniors want.
    In many cases benefits will be enhanced immediately. We are 
already reviewing the new benefit proposals which were 
submitted by Medicare advantage plans. Let me give you a few 
examples. Independent Health and Universal Health Care will 
reduce premiums for Medicare Advantage Plans in New York by 13 
to 50 percent. Independent Health also expects to enhance 
benefits. In Massachusetts, Tufts is cutting premiums from $147 
to $80. And members of the Medicare Blue Value Plan of Horizon 
Blue Cross/Blue Shield of New Jersey will no longer pay the $52 
premium.
    Overall, we expect 2 million Medicare Advantage 
beneficiaries will pay lower premiums, 2 million will save 
money on cost sharing, and 3.4 million will get enhanced 
benefits. The new law is already at work saving seniors money 
and increasing their access to modern medicine.
    HHS has already completed 76 activities in implemented the 
MMA, such as issuing the regulation for the discount card only 
8 days after the bill was signed. Our centers for Medicare and 
Medicaid Services have been working with State governments, the 
Social Security Administration and other partners to identify 
people eligible for the card, set up communication systems for 
information sharing, create a price comparison Web site, and 
review the card provider applications.
    Seniors will be able to enroll in the card by May of this 
year. We will add transparency as well to the prescription drug 
market by making public the price of each drug under each card. 
In fact, we will update the prices on our Web site each and 
every week.
    We expect competition among the cards will drive down drug 
prices, probably significantly, as people compare the prices 
each card offers for the drugs they typically take. We also 
press forward with our initiative to improve health care 
quality by adding home health agencies to the effort launched 
in 2002 for nursing homes.
    Americans can now get comparative quality information about 
specific home health agencies and nursing homes, and hospitals 
will be next. Speaking of hospitals, we have made it clear to 
hospitals that they are welcome to provide discounts for the 
uninsured and the underinsured.
    Through intergovernmental transfers, State governments can 
share their costs of the Medicaid program with local 
governments. We believe the Federal Government should be 
matching true expenditures. Restoring the matching requirements 
would save $23 billion in the Medicaid program over the next 10 
years. While these savings would be significant, that still 
represents less than 1 percent of what the Federal Government 
will spend over the next 10 years.
    We look forward to working with Congress, the medical 
community, and all Americans as we build upon our past 
accomplishments and implement the new Medicare law and carry 
out the initiatives that President Bush is proposing to build a 
healthier, safer, and stronger America.
    [The prepared statement of Secretary Thompson follows:]

Prepared Statement of Hon. Tommy G. Thompson, Secretary, Department of 
                       Health and Human Services

    Good morning, Mr. Chairman and members of the committee. I am 
pleased to present to you the President's fiscal year 2005 budget for 
the Department of Health and Human Services (HHS). I am confident you 
will find our budget to be an equitable proposal to improve the health 
and well-being of our Nation's citizens.
    This year's budget proposal builds upon HHS accomplishments in 
meeting several of the health and safety goals established at the 
beginning of the current administration. This year, Congress passed the 
comprehensive Medicare reform legislation, adding prescription drug 
coverage for seniors and modernizing the Medicare program.
     Since 2001, with the support Congress, the administration 
has funded 614 new and expanded health centers that target low-income 
individuals, effectively increasing access to health care for an 
additional 3 million people, a 29-percent increase.
     The Department established the Access to Recovery State 
Vouchers program, providing 50,000 individuals with needed treatment 
and recovery services.
     To support the President's faith-based initiative, HHS has 
created the Compassion Capital Fund for public/private partnerships to 
support charitable groups in expanding model social services programs. 
We awarded 81 new and continuing grants in 2003.
     HHS initiated a new Mentoring Children of Prisoners 
program to provide one-to-one mentoring for over 30,000 children with 
an incarcerated parent in fiscal year 2004. The Department also created 
education and training vouchers for foster care youth, providing $5,000 
vouchers to 17,400 eligible youth.
     In August 2001, the President and I invited States to 
participate in the Health Insurance Flexibility and Accountability 
(HIFA) demonstration initiative. States use HIFA demonstrations to 
expand health care coverage. As of January 2004, HIFA demonstrations 
had expanded coverage to 175,000 people, and another 646,000 were 
approved for enrollment.
    I could go on listing our achievements to you and the committee, 
Mr. Chairman, but instead I have chosen to highlight a few that we are 
most proud of.
    For fiscal year 2005, the President proposes an HHS budget of $580 
billion in outlays to enable the Department to continue working with 
our State and local government partners, as well as with the private 
and volunteer sectors, to ensure the health, well-being, and safety of 
our Nation. Through the programs and services presented in the budget 
plan of HHS, Americans will receive new health benefits and services, 
be protected from the threat of bioterrorism, benefit from enhanced 
disease detection and prevention, have greater access to health care, 
and will see improved social services through the work of faith- and 
community-based organizations and a focus on healthy family 
development. This proposal is a $32-billion increase in outlays over 
the comparable fiscal year 2004 budget, or an increase of about 5.9 
percent. The discretionary request for the HHS budget totals $67 
billion in budget authority, a 1.2-percent increase.
    Allow me to draw your attention to several key factors of the HHS 
budget so that we may continue to work together to address the needs of 
our Nation.
               medicare and medicaid reform/modernization
    I am proud to have worked closely with so many members of the House 
on the Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (MMA), which President Bush signed into law December 8, 2003. 
With the implementation of MMA, the Department faces many challenges in 
the coming fiscal year. As the most significant reform of Medicare 
since its inception in 1965, the law expands health plan choices for 
beneficiaries and adds a prescription drug benefit. MMA will strengthen 
and improve the Medicare program, while providing beneficiaries with 
new benefits and the option of retaining their traditional coverage. 
The HHS fiscal year 2005 budget request includes about $482 billion in 
net outlays to finance Medicare, Medicaid, the State's Children's 
Health Insurance Program, the Health Care Fraud and Abuse Control 
Program, State insurance enforcement, and the Agency's operating costs.
                           drug discount card
    MMA establishes a new, exciting Medicare approved prescription drug 
discount card program, providing immediate relief to those 
beneficiaries who have been burdened by their drug costs. From June 
2004 through 2005, all Medicare beneficiaries, except those with 
Medicaid drug coverage, will have the choice of enrolling in a 
Medicare-endorsed drug discount card program. With the discount card, 
beneficiaries will save an estimated 10 to 15 percent on their drug 
costs. For some, savings may reach up to 25 percent on individual 
prescriptions. A typical senior with $1,285 in yearly drug expenses 
could save as much as $300 annually. To enroll, beneficiaries will pay 
no more than $30 annually. Those with low incomes will qualify for a 
$600 per year subsidy to purchase drugs. Medicare also will cover the 
enrollment fees for low-income seniors.
                  voluntary prescription drug benefit
    Responding to President Bush's pledge to add meaningful drug 
coverage to Medicare, MMA establishes a new voluntary prescription drug 
benefit under a new Medicare Part D. Starting in 2006, Medicare 
beneficiaries who are entitled to Part A, or enrolled in Part B, can 
choose prescription drug coverage under the new Part D. Under Part D, 
beneficiaries can choose to enroll in stand-alone, prescription drug 
plans (PDPs) or Medicare Advantage prescription drug plans (MA-PDs), 
and will be able to choose between at least two plans to receive their 
benefit. The law contains important beneficiary protections. For 
example, while the plans are permitted to use formularies, they must 
include drugs within each therapeutic category and class of covered 
Part D drugs, allowing beneficiaries to have a choice of drugs. In 
instances in which a drug is not covered, beneficiaries can appeal to 
have the drug included in the formulary. To reduce the number of 
prescribing errors that occur each year, HHS will develop an electronic 
prescription program for Part D covered drugs.
                           medicare advantage
    MMA replaces the Medicare+Choice program with a new program called 
Medicare Advantage, which will operate under Part C of Medicare. 
Starting in 2004, the new law changes how private plans will be paid. 
In response to the increasing costs of caring for Medicare 
beneficiaries, the law increases payments to managed care plans by 
$14.2 billion over 10 years. These enhanced payments will allow private 
plans to provide more generous coverage, including benefits that 
traditional Medicare may not offer. Specifically in 2004, plans must 
use these funds to provide additional benefits, to lower premiums and/
or cost-sharing, or to improve provider access in their network. This 
increased compensation will also encourage more private plans to enter 
the Medicare market, improving beneficiaries' overall access to care.
    Under Medicare Advantage, local managed care plans will continue to 
operate on a county-by-county basis. Beginning in 2006, Medicare 
Advantage also will offer regional plans, which will cover both in-
network and out-of-network services in a model very similar to what we 
in the Federal Government enjoy through the Federal Employee Health 
Benefits Program. There will be at least 10 regions, but no more than 
50. The regional plans must use a unified deductible and offer 
catastrophic protection, such as capping out-of-pocket expenses.
    The changes in the Medicare advantage program will provide seniors 
with more choices, improved benefits, and provide beneficiaries a 
choice for integrated care--combining medical and prescription drug 
coverage. We project that 32 percent of Medicare beneficiaries will 
enroll in Medicare Advantage plans by 2010.
                       providers and rural health
    Recognizing geographic disparities in Medicare payments, MMA 
provides much needed relief to rural providers by equalizing the 
standardized amounts paid to both urban and rural hospitals. Along with 
standardizing the base payment amounts to both urban and rural 
hospitals, MMA reduces the labor share of the standardized payment 
amount. In addition MMA increases payments for Disproportionate Share 
Hospitals (DSH) and provides greater flexibility to Graduate Medical 
Education (GME) residencies. The new law also increases flexibility for 
hospitals seeking Sole Community Hospital (SCH) status and reduces the 
requirements for achieving Critical Access Hospital (CAH) status. 
Critical Access Hospital status will receive increased payments under 
MMA, as the payment rate will be increased to 101 percent of allowable 
costs.
    Providers will see increased reimbursements under MMA. Physicians 
practicing in defined shortage areas will receive an additional 5 
percent payment bonus. Home Health Agencies in rural areas also will 
receive a 5 percent bonus. In a change for rural hospice providers, 
more freedom will be given to utilize nurse practitioners. The law also 
creates an Office of Rural Health Policy Improvements and requires 
demonstration projects involving telehealth, frontier services, rural 
hospitals, and safe harbors.
                          preventive benefits
    MMA expands the number of preventive benefits covered by Medicare 
beginning in 2005. Through a particularly important provision, an 
initial preventive physical examination will be offered within 6 months 
of enrollment for those beneficiaries whose Medicare Part B coverage 
begins January 1, 2005 or later. The examination, as appropriate, will 
include an electrocardiogram and education, counseling, and referral 
for screenings and preventive services already covered by Medicare, 
such as pneumococcal, influenza and hepatitis B vaccines; prostate, 
colorectal, breast, and cervical cancers; in addition to screening for 
glaucoma and diabetes. Diabetes and cardiovascular screening blood 
tests do not have any deductible or copayments, as Medicare pays for 
100 percent of these clinical laboratory tests.
                  regulatory reform/contracting reform
    MMA includes a number of administrative and operational reforms, as 
well. For example, regulatory reform provisions require the 
establishment of overpayment recovery plans in case of hardship; 
prohibit contractors from using extrapolation to determine overpayment 
amounts except under specific circumstances; describe the rights of 
providers when under audit by Medicare contractors; require the 
establishment of standard methodology to use when selecting a probe 
sample of claims for review; and prohibit a supplier or provider from 
paying a penalty resulting from adherence to guidelines. In addition, 
MMA allows physicians to reassign payment for Medicare services to 
entities with which the physicians have an independent contractor 
arrangement. Under the new law, final regulations are to be published 
within 3 years, and all measures of a regulation are to be published as 
a proposed rule before final publication.
    Also under the law, as Secretary, I will be permitted to introduce 
greater competitiveness and flexibility to the Medicare contracting 
process by removing the distinction between Part A and Part B 
contractors, allowing the renewal of contracts annually for up to 5 
years, limiting contractor liability, and providing incentive payments 
to improve contractor performance. These changes will enhance HHS 
efficiency and effectiveness in program operations.
    Regarding Medicare appeals, MMA changes the process for fee-for-
service Medicare by requiring the Social Security Administration and 
HHS to develop and implement a plan for shifting the appeals function 
from SSA to HHS by October 1, 2005. MMA also changes the requirements 
for the presentation of evidence. This also will enhance the efficiency 
and effectiveness of the operation of the Medicare program.
                    medicare and medicaid estimates
    Historically, HHS and the Congressional Budget Office (CBO) have 
provided differing estimates of Medicare and Medicaid spending. It is 
not uncommon for different assumptions underlying the respective 
estimates to produce differences in cost projections. This year's new 
estimates include the changes resulting from enactment of MMA.
    When Congress considered this act, Mr. Chairman, CBO estimated the 
cost of the bill at $395 billion from 2004-13. The HHS actuaries have 
recently estimated the cost of the law as $534 billion from 2004-13. 
The CBO Director told the House and Senate Budget Committees that CBO 
has not changed its estimate and that they continue to believe that the 
cost of the bill is $395 billion. Because the Medicare legislation 
makes far-reaching changes to a complex entitlement program with many 
new private sector elements, there is even larger uncertainty in these 
estimates than usual.
    The two sets of estimates provide a reasonable range of possible 
future cost scenarios for Medicare spending. The tremendous uncertainty 
surrounding estimates of the newly enacted Medicare law has resulted in 
a plausible range of estimates of future cost scenarios for Medicare 
spending, from the $395 billion estimate from CBO to the $534 billion 
estimate from the Medicare actuaries. It should be noted that this 
difference of $139 billion is approximately two (2) percent of the 
projected $7 trillion in total Federal Medicare and Medicaid spending 
over the same period, as projected by HHS.
                         additional mma changes
    MMA addresses other issues facing the Medicare program including 
the program's long-term, financial security. To contain costs in the 
Medicare program, the law requires the Medicare Trustees, beginning in 
the 2005 annual report, to assess whether Medicare's ``excess general 
revenue funding'' exceeds 45 percent. As defined in the law, excess 
general revenue funding is equal to Medicare's total outlays minus 
dedicated revenues. The Medicare Trustees shall issue a ``warning'' if 
general revenues are projected to exceed 45 percent of Medicare 
spending in a year within the next 7 years. If the Trustees issue such 
a warning in two consecutive years, the law provides special 
legislative conditions for the consideration of proposed legislation 
submitted by the President to address the excess general revenue 
funding.
    In addition to implementing MMA, the HHS budget request includes 
provisions for the State Children's Health Insurance Program, the New 
Freedom Initiative, and Medicaid.
           state children's health insurance program (schip)
    SCHIP was created with a funding mechanism that required states to 
spend their allotments within a 3-year window, after which any unused 
funds would be redistributed among states that had spent all of their 
allotted funds. These redistributed funds would be available for one 
additional year, after which any unused funds would be returned to the 
Treasury.
    On August 15, 2003, President Bush signed Public Law 108-74. The 
law restores $1.2 billion in fiscal year 1998 and fiscal year 1999 
SCHIP funds, and makes them available to states until September 30, 
2004. The law also extends $2.2 billion in fiscal years 2000 and 2001 
SCHIP funds, and revises the rule for the redistribution of the unspent 
funds from these allotments. For fiscal years 2000 and 2001 allotments, 
the law allows states that do not spend their entire allotment within 
the 3-year period to keep half of those respective year's unspent 
amounts. The other half would be redistributed to states that have 
spent their entire amount of the respective year's allotments. The law 
also extends the availability of funds from the fiscal year 2000 
allotments through September 30, 2004, and the availability of fiscal 
year 2001 allotment through September 30, 2005. The law gives some 
relief to states that expanded their Medicaid programs to cover 
additional low-income children prior to the enactment of SCHIP.
                         new freedom initiative
    The administration is committed to ensuring that people with 
disabilities and/or the long-term care needs receive the supports 
necessary to remain in (or return to) the community as opposed to 
remaining in an institutional setting. One of the administration's 
priorities is relying more on home- and community-based care, rather 
than costly and confining institutional care, for the elderly and 
people with disabilities. The New Freedom Initiative signifies the 
President's commitment to promoting at home and community-based care. 
There are several components to this initiative, Mr. Chairman, which I 
would like to bring to your attention.
    Under the ``Money Follows the Individual Re-Balancing 
Demonstration'' states could participate in a 5-year demonstration that 
finances services for individuals who transition from institutions to 
the community. Federal grant funds would pay for the home- and 
community-based waiver services of an individual for one year at an 
enhanced Federal match rate of 100 percent. As a condition of receiving 
the enhanced match, the participating State would agree to continue 
care at the regular Medicaid matching rate after the end of the 1-year 
period and to reduce institutional long-term care spending.
    The New Freedom Initiative is very important to me and to the 
President, and we would like to work closely with Congress to secure 
its passage this year. The administration recognizes the success of 
consumer directed programs that give people the opportunity to manage 
their own long-term care, as delineated by the development of its 
Independence Plus Waivers. Thus, we propose allowing individuals who 
self-direct all of their community-based, long-term care services to 
accumulate savings and still retain eligibility for Medicaid and 
Supplemental Security Income. Under current law, beneficiaries are 
discouraged from accumulating savings because it could jeopardize their 
eligibility for Medicaid and SSI. Under the Living with Independence, 
Freedom, and Equality (LIFE) Accounts Program, individuals who self-
direct all of their Medicaid, community-based, long term supports will 
be able to retain up to 50 percent of savings from their self-directed 
Medicaid community-based service budget at year end, contribute savings 
from employment, and accept limited contributions from others. 
Ultimately, LIFE Accounts would enable individuals to save money to 
reach long-term goals (for example, to purchase expensive equipment or 
attain higher education) and to obtain greater independence.
    The administration looks forward to working with Congress to pass 
legislation authorizing me, as Secretary, to administer demonstrations 
to assist caregivers and children with serious emotional disturbances. 
Two demonstrations will provide respite services to caregivers of 
adults with disabilities and to children with severe disabilities. A 
third demonstration will offer home and community-based services for 
children currently residing in psychiatric facilities. The fourth 
demonstration will address shortages of community, direct-care workers 
by providing grants to States to identify best practices and develop 
models. Direct-care workers play an important role in providing care to 
individuals living with disabilities in the community and this 
demonstration should help address these workforce challenges.
                    medicaid and schip modernization
    Medicaid spending continues to rise each year. Total Medicaid 
spending for 2004 is projected to be $304 billion, nearly a tripling in 
spending over 10 years. Medicaid--not Medicare--is currently the 
largest government health program in the United States. Since Medicaid 
expenditures are a large and growing proportion of most state budgets, 
the Medicaid program is an area to which states turn to reduce costs 
including dropping optional Medicaid benefits or limiting optional 
groups from enrolling.
    These concerns have fostered a dialogue between the Federal 
Government and the states regarding ways to improve and modernize 
Medicaid and SCHIP. Building on this dialogue, the administration will 
continue to work with Congress and other stakeholders to seek new ways 
to strengthen and improve the Medicaid and SCHIP programs.
    In addition to structural reform, improving the fiscal integrity of 
the Medicaid program will continue to be a priority for the 
administration and HHS. Among these efforts, the administration 
proposes capping the reimbursement level to individual state and local 
government providers to no more than the cost of providing services to 
Medicaid recipients and restricts the use of certain types of 
intergovernmental transfers. The proposal would deem as ``unallowable'' 
certain Medicaid expenditures that result in Federal Medicaid and 
disproportionate share hospital (DSH) payments returned by a government 
provider to the state. The proposal would not affect legitimate 
intergovernmental transfers that are used to help raise funds for the 
state share of Medicaid costs. Rather, this proposal would only apply 
to intergovernmental transfers that are used to recycle Medicaid 
payments through government providers.
                       other medicaid legislation
Extension of the Qualified Individual (QI) Program
    The administration is committed to helping low-income seniors 
afford not only prescription drugs, but also health coverage through 
Medicare. Under current law, as authorized by MMA, Medicaid programs 
will pay Medicare Part B Premiums for qualifying individuals (QIs) 
through September 30, 2004. QIs are defined as Medicare beneficiaries 
with incomes of 120 percent to 135 percent of the Federal Poverty Level 
and minimal assets. The HHS budget would continue this premium 
assistance for one additional year.
Extension of Transitional Medical Assistance
    As families make the transition from welfare to work, health 
coverage is an important component to ensure their success in 
contributing to, and remaining in, the work place. Transitional medical 
assistance (TMA) was created to provide health coverage for former 
welfare recipients after they entered the workforce. TMA extends up to 
one year of health coverage to families who lose eligibility for 
Medicaid due to earnings from employment. This provision will expire 
March 31, 2004. The administration proposes a 5-year extension of TMA 
with statutory modifications to simplify administration of the program 
for states. States would have the option to eliminate TMA reporting 
requirements; provide twelve months of continuous eligibility; and to 
request a waiver from providing the mandatory TMA program in their 
Medicaid program if their eligibility income level for families is set 
at 185 percent of the Federal Poverty Level or higher.
                     partnership for long-term care
    The budget request, Mr. Chairman, includes a proposal to eliminate 
the legislative prohibition on developing more partnership programs for 
long-term care (LTC). The partnership for LTC was formulated to explore 
alternatives to current LTC financing by blending public and private 
insurance. Four states currently have these partnerships in which 
private insurance is used to cover the initial cost of LTC. Consumers 
who purchase partnership approved insurance policies can become 
eligible for Medicaid services after their private insurance is 
utilized, without divesting all their assets as is typically required 
to meet Medicaid eligibility criteria.
                      refugee exemption extension
    Under current law, most legal immigrants who entered the country on 
or after August 22, 1996, and some who entered prior to that date, are 
not eligible for SSI until they have obtained citizenship. Refugees and 
asylees are currently exempted from this ban on SSI for the first 7 
years they reside in the United States. To ensure refugees and asylees 
have ample time to complete the citizenship process, the President's 
budget proposes extending the current 7-year exemption to 8 years.
   special enrollment period in the group market for medicaid/schip 
                                eligible
    This legislative proposal would make it easier for Medicaid and 
SCHIP beneficiaries to enroll in private health insurance by making 
eligibility for Medicaid and SCHIP a trigger for private health 
insurance enrollment outside of the plan's open season. This proposal 
will help states implement premium assistance programs in Medicaid and 
SCHIP.
                marriage and healthy family development
    This year the President is proposing a new marriage and healthy 
family development initiative. This Initiative is supported by funding 
increases in this Department's fiscal year 2005 budget, encompasses a 
variety of new and existing programs, and impacts both mandatory and 
discretionary programs.
    I am very grateful to the Finance Committee for acting to advance 
Temporary Assistance to Needy Families (TANF) reauthorization last 
fall, and I look forward to working together as the bill is considered 
on the Senate Floor in weeks ahead. Building on the considerable 
success of welfare reform in this great Nation, the President's fiscal 
year 2005 budget maintains the framework of the administration's 
welfare authorization proposal. We are committed to working with the 
Congress in the coming months to ensure the legislation moves quickly 
and is consistent with the President's budget. The President's proposal 
includes 5 years of funding for the TANF Block Grant to States and 
Tribes; Matching Grants to Territories; and Tribal Work Program. A new 
feature, intended to support the President's Marriage and Healthy 
Family Development Initiative, is a proposal for increased funding for 
two key provisions in our welfare reform package.
    A cornerstone of the President's commitment to strengthen and 
empower America's families through welfare reform provides targeted 
resources to family formation and healthy marriage strategies. 
Statistics tell us that children from two parent families are less 
likely to end up in poverty, drop out of school, become addicted to 
drugs, have a child out of wedlock, suffer abuse or become a violent 
criminal and end up in prison. Building and preserving families are not 
always possible. But it should always be our goal.
    Beginning in fiscal year 2005, the fiscal year 2005 budget would 
provide an additional $20 million, a total of $120 million, under TANF 
to support research, demonstrations, and technical assistance primarily 
focused on family formation strategies and healthy marriages and an 
additional $20 million for matching grants to States, Territories, 
Tribes, and Tribal Organizations for innovative approaches to promoting 
healthy marriage and reducing out-of-wedlock births. A dollar-for-
dollar match to participate in the grant program will be required, 
generating another $20 million in matching State and local funds. 
States can use Federal TANF funds to meet this matching requirement. In 
total, $360 million in Federal and State funding would be available in 
the fiscal year 2005 budget to broaden the administration's efforts to 
support healthy marriages and promote effective family formation.
    To reverse the rise in father absence and improve the well-being of 
our Nation's children, the budget includes a total of $50 million for 
grants for public entities; nonprofits, including faith-based; and 
community organizations to design demonstration service projects. These 
projects will test promising approaches to improve outcomes for 
children by encouraging the formation and stability of healthy 
marriages and responsible fatherhood, and to assist fathers in being 
more actively involved in the lives of their children.
    As the committee may remember, President Bush announced in his 
State of the Union address a new initiative to educate teens and 
parents about the health risks associated with early sexual activity 
and to provide the tools needed to help teens make responsible choices. 
To do this, the President proposes to double funding for abstinence 
education activities for a total of $273 million, including a request 
of $186 million, an increase of $112 million, for grants to develop and 
implement abstinence educations programs for adolescents aged 12 
through 18 in communities across the country; the reauthorization of 
state abstinence education grants for 5 years at $50 million per year 
as part of the welfare reform reauthorization; another $26 million for 
abstinence activities within the Adolescent Family Life program; and a 
new public awareness campaign to help parents communicate with their 
children about the health risks associated with early sexual activity.
    In addition, the budget provides for significant increases to two 
State child abuse programs reauthorized this past year as part of the 
Keeping Children and Families Safe Act of 2003. The increase for the 
Child Abuse Prevention and Treatment State Grants will enable State 
child protective service systems to shorten the time to the delivery of 
post-investigative services from 48 to 30 days. The Community-Based 
Child Abuse Prevention program will increase the availability of 
prevention services to an additional 55,000 children and their 
families.
                             child welfare
    The administration is proposing a nearly $5 billion budget for 
Foster Care. These funds will be used to support the President's child 
welfare program option, which provides states more flexibility in both 
the population served and allowable activities. The funds will be used 
to provide payments for maintenance and administrative costs for more 
than 230,000 children in foster care each month, as well as payments 
for training and child welfare data systems. The HHS budget request 
reflects savings associated with a legislative proposal to clarify the 
definition of ``home of removal'' in the foster care program in 
response to a court decision. The President's fiscal year 2005 budget 
also requests $140 million for the Independent Living Program and $60 
million for the Independent Living Education and Training Vouchers 
program. Additionally, to support the administration's commitment to 
helping families in crisis and to protecting children from abuse and 
neglect, the President's fiscal year 2005 budget requests $505 million, 
full funding, of the Promoting Safe and Stable Families program.
                       child support enforcement
    The President's fiscal year 2005 budget, building on the high level 
of success achieved by the Child Support Enforcement Program, focuses 
on critical improvements in the arena of medical child support. 
Legislation will be proposed to enhance and improve State's efforts to 
collect medical support on behalf of children. These efforts include 
providing Child Support agencies with notifications of lost coverage 
(COBRA notices) so they can assist families in providing continuous 
health care coverage. Additionally, legislation would require states to 
consider both parents' access to health care coverage when establishing 
child support orders, with the option of enforcing medical support 
orders against both custodial and noncustodial parents. By assuring 
that IV-D agencies receive notice of a child's loss of health insurance 
coverage, and by seeking health insurance from either parent, more 
children will have access to continuous health coverage, which will 
result in healthier children and families.
    These proposals build on the policies in the fiscal year 2004 
budget that increase resources for the Access and Visitation Program to 
support and facilitate non-custodial parents' access to visitation of 
their children, and various proposals to enhance and expand the 
existing automated enforcement infrastructure at the Federal and State 
level. When combined with the opportunities to increase child support 
outlined in the President's fiscal year 2003 budget, such as expanded 
passport denial, the offset of certain Social Security benefits, and 
the optional pass through of child support to families on TANF, these 
proposals offer an impressive $8.1 billion in increased child support 
payments to families over 10 years.
                   compassion and faith based agenda
Compassion Capital Fund
    The fiscal year 2005 budget requests $100 million for the 
Compassion Capital Fund, which creates public/private partnerships that 
support charitable organizations in expanding or emulating model social 
service programs.
Samaritan Initiative
    The President's budget also continues and strengthens the 
administration's commitment to end chronic homelessness by proposing 
$70 million for the Samaritan Initiative, a new competitive grant 
program jointly administered by the Departments of Housing and Urban 
Development, Health and Human Services, and Veterans Affairs that 
supports the administration's efforts to end chronic homelessness by 
2012. These grants will support the most promising local strategies to 
move chronically homeless persons from the streets to safe permanent 
housing with supportive services. Of the $70 million for the program, 
we are requesting $10 million at HHS for supportive services.
                domestic and global health improvements
    I would like to take a moment to share with the committee a few 
other priorities that strengthen our efforts for a healthier U.S. 
Building on the accomplishment of the 5-year doubling of the National 
Institutes of Health (NIH) budget, this year's budget proposal includes 
$28.6 billion for NIH. These funds will continue to support the long-
term stability of the biomedical research enterprise and ensure 
continued productivity in all areas of research at NIH. To bring 
medical research and advances to those who need it, $1.8 billion of the 
HHS budget proposal provides health care services to 15 million 
individuals through the Health Center program and an increase for the 
National Health Service Corps to initiate recruitment of nurses and 
physicians.
    The President's budget proposal for fiscal year 2005 also strives 
to meet the needs of our vulnerable populations. To protect our 
children from preventable illness, the budget proposes improvements to 
the Vaccines for Children (VFC) program to increase access to needed 
vaccines for underinsured children. In an effort to ensure we have 
enough vaccines when they are needed, the HHS budget request calls for 
a 6-month stockpile of all regularly recommended vaccines for children, 
as well as for a stockpile of influenza vaccine for next winter. In 
addition to our Nation's children, we must not forget those struggling 
yet who are ready to help themselves out of the cycle of addiction and 
dependency. For fiscal year 2005, the President proposes to double the 
Access to Recovery State Voucher program, for a total of $200 million, 
to provide vouchers to approximately 100,000 individuals seeking 
substance abuse treatment services.
    Our Nation's health, Mr. Chairman, is not dependent solely on 
access to care and treatment, but also on the security of our health in 
a global context. Our Nation faces threats from bioterrorism, disease 
outbreaks in other countries, and food-borne diseases and illnesses. 
The HHS budget targets $373 million of investments to accelerate the 
detection of and response to potential disease outbreaks of any kind, 
regardless of whether the pathogen is naturally occurring or 
intentionally released. The Food and Drug Administration (FDA) has 
already expanded its work dramatically to prevent intentionally 
contaminated foods from entering the U.S. The President's fiscal year 
2005 budget takes the next step by making the needed investments in FDA 
to expand substantially the laboratory capacity of its State partners, 
and to find faster and better ways to detect contamination, 
particularly at ports, processing plants, and other food facilities.
                        management improvements
    Finally, I would like to update the committee on the Department's 
efforts to use our resources in the most efficient manner. To this end, 
HHS remains committed to setting measurable performance goals for all 
HHS programs and holding managers accountable for achieving results. I 
am pleased to report that HHS is making steady progress. We have made 
strides to streamline and make performance reporting more relevant to 
decision makers and citizens. As a result, the Department is better 
able to use performance results to manage and to improve programs. By 
raising our standards of success, we improve our efficiency and 
increase our capability to improve the health of every American 
citizen.
       improving the health, safety, and well-being of our nation
    Mr. Chairman and members of the committee, the budget I bring 
before you contains many different elements of a single proposal. The 
common thread running through these policies is the desire to improve 
the lives of the American people. Our fiscal year 2005 HHS budget 
proposal builds upon our past successes to improve the Nation's health; 
to focus on improved health outcomes for those most in need; to promote 
the economic and social well-being of children, youth, families, and 
communities; and to protect us against biologic and other threats 
through preparedness at both the domestic and global levels. It is with 
the single, simple goal of ensuring a safe and healthy America that I 
have presented the President's fiscal year 2005 budget today. I know 
this is a goal we all share, and with your support, we at the 
Department of Health and Human Services are committed to achieving it.

    Secretary Thompson. Before I finish up, I just would like 
to answer, Congressman Spratt--I know the Governor of Michigan 
said that that was turned down. I don't know where she got her 
information. It has not been turned down. We are reviewing it, 
and we have given tasks and approval so far. So I don't know 
where the Governor made the announcement. It was picked up by 
the Wall Street Journal, but it was absolutely and completely 
erroneous.
    Chairman Nussle. Mr. Spratt.
    Mr. Spratt. Do you expect to give approval to this and to 
other similar plans so that States will be allowed to form 
pools, purchasing pools?
    Secretary Thompson. We are seriously looking at that, and 
our preliminary indications are that we will be.
    Mr. Spratt. Thank you, sir.
    Chairman Nussle. Mr. Secretary, welcome, and thank you so 
much for your testimony. I would like to maybe go away from 
where I even said I was going to go and jump into--because of 
time, maybe the last questions first, and that is health costs.
    When we deal with the budget that has been presented, we 
are dealing with the bill that is being presented, not what is 
underlying the bill, what is driving the costs. We are just 
getting presented the bill here; write the check. And part of 
the challenge that we have got and part of the frustration that 
we have with what happened from CMS and from the actuaries on 
the different amounts that could be at least projected to be 
for the costs of the Medicare bill is that we know that while 
they are wrong, we are going to stick with CBO. CBO says that 
it is $400 billion. There are going to be a number of 
estimates. Certainly they took into consideration the estimates 
or the projections of a number of different sources in coming 
to their conclusion, including CMS. So we are going to stick 
with the CBO numbers. Those are the best numbers that we have.
    Having said that, though, I think what CMS is saying 
through its actuaries, certainly what you have counseled in the 
past and what many other quarters are suggesting, is that 
unless we deal with the cost drivers in health care, who knows 
what the price may be? It could be 534. It could be 834. It 
could be 334. Who knows what the price is if we don't start 
dealing with the driving costs? And this is one of the huge 
unpredictable portions of our mandatory spending accounts which 
are currently completely out of control.
    Chairman Greenspan was here yesterday counseling us that we 
have got to get into the mandatory side of the ledger and to do 
a much better job of dealing with this. And certainly as you 
look at the mandatory side of the budget ledger, health care 
cost drivers are one of the most unpredictable volatile areas.
    Would you please touch on your advice for how we move 
forward, what you see some of the cost drivers to be and how we 
can approach each one? And that is my only--that is a huge 
question. I realize we could do an entire hearing just on that 
subject, but if you could touch--and we should; you are right, 
Mr. Gutknecht. If you would touch on that to begin with, that 
is how I would like to use this time.
    Secretary Thompson. Thank you very much, Congressman. I 
appreciate the open-ended question and giving me the 
opportunity to respond to something that I think we should. But 
first let me quickly tell you about why our actuaries thought 
it was going to be more costly for Medicare.
    First off, our actuaries believe there is going to be a 
much increased participation for low-income Americans, and that 
is going to consist of $47 billion because of the subsidies; 
those under 100 percent of poverty, 93 percent of the cost of 
their drugs are going to be paid by the Federal Government. So 
there will be an increased participation of $47 billion.
    The second big one is $32 billion, and that is where our 
actuaries believe that 94 percent of those individuals that are 
eligible for Part D will participate. CBO believes only 87 
percent, because they said only 91 percent of the people 
participated in Part B; and if they don't participate in Part 
B, why would they participate in part D? And then the other 
increases are basically because of the woodworking effect at 
the State level, there will be more individuals coming into the 
program based upon our actuarial assumptions versus CBO.
    But you have to base your figures on CBO. They are still at 
395. We don't know if it is 94 percent participation or 87 
percent participation, so nobody knows for sure. These are 
assumptions by your CBO and assumptions by our actuary, but 
that is the difference basically in the figures.
    The second thing, how do we do this, how do we drive down 
costs? We drive down costs by addressing where the costs are. 
One hundred twenty-five million Americans right now suffer from 
one or more chronic illnesses, and 70 to 75 percent of the 
dollars go for chronic illnesses. Most of those are for 
individuals that have more than one chronic illness, and it is 
a very small percentage when you look at the total universe of 
those individuals that are using the bulk of the dollars. So 
how do we address it? Of that figure, $155 billion goes for 
tobacco related illnesses, and last year 442,000 thousand 
Americans died. If we are going to do something about expenses 
in health care, we have to address tobacco-related illness.
    The second one is diabetes, $135 billion. We have just gone 
up from 16 million Americans to 18 million Americans right now 
that have Type 2 diabetes. About one-third of those don't even 
know it, and that is $135 billion, and it is a fast-growing 
epidemic, especially with minorities. And we can address 
diabetes very simply. NIH had a very exhaustive study. It was 
going to last 5 years. We quit after 2\1/2\ years because it 
was so complete, that if you lose 10-15 pounds and you walk 30 
minutes a day, you can reduce the incidence of diabetes by 60 
percent. And considering the fact that there are 16 million 
more Americans that are prediabetic, that will double to $270 
billion over 135 unless we start addressing diet and exercise.
    The third one, and the fastest growing one of all of them, 
is obesity and overweight. We spend $117 billion a year and 
over 332,000 Americans died from some obesity-related disease 
last year, mainly heart attacks, strokes, or hypertension. And 
what we have to do in America is we have to start changing our 
habits. And if we do that, we can address the three biggest 
causes of increasing health care dollars: tobacco-related 
illnesses and obesity, which has one-third of the cancer 
directed to it, and diabetes. These causes are where you are 
going to get it.
    And as William Sutton said when asked why he robbed banks? 
He said, ``that is where the money is.''
    That is where the cost drivers are, and that is what we 
have to address. We can do that by having a very aggressive 
program. Medicare was the first time that we have ever 
addressed this particular thing by putting in a baseline, 
borderline fiscal examination for all those coming into 
Medicare. And then we are going to start managing diseases. 
Ninety-two percent of the costs of Medicare right now go into 
waiting for people to get sick before we start treating them, 
and only 8 percent of the current Medicare goes into 
preventative illness. Under the new Medicare law with the 
baseline physical, we are finally going to start addressing 
people when they get sick, and start treating those sicknesses 
before they become so serious that it costs us millions of 
dollars to treat.
    That is what we have to do as a country, Mr. Chairman, if 
we are really going to start controlling health care dollars. 
That is where the big drivers are.
    Chairman Nussle. Thank you very much. Mr. Spratt.
    Mr. Spratt. Mr. Chairman, I don't want to beat a dead 
horse, but if I could just go back to the questions about the 
State plan. As I understand it, it was not just Michigan, but 
also Vermont; and is there an issue here about whether or not 
States will be allowed to pool their efforts and bargain 
collectively as opposed to allowing it to be done State by 
State?
    Secretary Thompson. It has never happened before. They have 
applied for a waiver to do so, Congressman Spratt. We are 
looking at that and reviewing that. A final decision has not 
been made, but the preliminary finding is that we would accept 
it.
    Mr. Spratt. Can you give us an idea of what the criteria 
will be? I have a State in particular that is considering 
signing such a contract.
    Secretary Thompson. The criteria is, is basically to make 
sure that the States are going to willingly and voluntarily go 
into the program. That has been basically the criteria.
    Mr. Spratt. If this is done, are you concerned it may raise 
a question, an uncomfortable question. The VA negotiates or 
sets prices, the States negotiate and set prices. Why can't HHS 
or why can't CMS, for 40 million beneficiaries?
    Secretary Thompson. Let me tell you the rationale, not 
necessarily that I agree with, but I am going to tell you what 
the rationale is, Congressman Spratt.
    Veterans hospitals negotiate and purchase drugs because 
they are the end users. They use the purchase of their drugs in 
the hospitals where they treat the patients. It goes to them. 
HHS does not purchase the drug and give it to the patients. It 
goes through an intermediary. It goes through a clinic or a 
doctor or a hospital, and under the new Medicare Modernization 
Act there is going to be PBMs or PPOs or HMOs that are going to 
be negotiating directly with pharmaceutical companies to drive 
down the prices.
    The majority of the Members of the Congress felt that it 
would be much better to have those individuals negotiating the 
prices. They could do a much better job than the bureaucrats in 
HHS, or me as Secretary. That is the argument.
    Mr. Spratt. Here is the anomaly in Medicare. We set prices 
for physicians.
    Secretary Thompson. We do.
    Mr. Spratt. We set prices for hospitals. But here is a 
whole segment of health care that is increasing faster than any 
other, and we have said, no, it is off limits, we will not 
negotiate, we will not set prices, we will let them go up 
pretty much as the providers determine. You have a problem with 
that, obviously. You were giving me the rationale. You didn't 
call it rational. You called it the rationale.
    Secretary Thompson. I called it the rationale, Congressman 
Spratt.
    Mr. Spratt. Let me ask you another question about the 
President's proposal for passing this year some health care tax 
credits. In his inaugural--excuse me--in his State of the Union 
he told us that his budget would be coming shortly, and when it 
came there would be $65 billion for health care tax credits to 
help mainly those who don't have coverage now with a tax credit 
which would be refundable. When we got the budget, we found out 
that, yes, indeed there was a proposal like that, but there was 
also an asterisk attached to it, and when you read the footnote 
and got the whole proposition in its full and proper context, 
the administration is saying, ``but it has to be fully 
offset.'' And you know and I know in a budget this tight, 
coming up with $65 billion in offsets is a Herculean if not 
impossible task.
    I asked Mr. Bolten--since the President's budget indicated 
that the executive branch would come over and work with us in 
identifying those offsets so that these health care tax credits 
could be passed--what he had in mind to start the bidding, what 
were they proposing to put on the table. And what he said was, 
we are going to take a good portion out of it, half of it as I 
recall, out of Medicaid. I suggested to him I was borrowing 
from one poor person to help another poor person. It was a net 
sum, zero sum game.
    Could you tell us what kind of Medicaid cuts are in store 
or would be proposed in order to offset this health care tax 
credit proposition?
    Secretary Thompson. You are setting me up, Congressman 
Spratt, because I was not privy to that. I don't know where 
Josh Bolten was going to get $35 billion out of Medicaid. I 
would have to recess the hearing to find out where he is going 
to get it. I don't know what he is talking about.
    Mr. Spratt. Could you give us an answer for the record, 
then?
    Secretary Thompson. I absolutely could. There are ways to 
find offsets. I would be more than happy to work with you. But 
under Medicaid, the IGTs are an area that there is abuse, 
Congressman Spratt, that I would like to discuss in greater 
detail with you and other members of this committee.
    Mr. Spratt. Are you referring to disproportionate share 
plans?
    Secretary Thompson. No, I am talking about 
intergovernmental transfers.
    Mr. Spratt. But not in the form of DSH or in the form of 
upper payment limits?
    Secretary Thompson. No. I am talking about the way that we 
reimburse under the formulas.
    Let me give you an example. I will give you a couple 
States' examples. State A made quarterly payments being 
electronically transferred them to the nursing home bank 
account. The State then immediately withdrew the amount of the 
payment from the provider's account, less a $2,500 
participation fee. The approximate amount of Federal Medicaid 
payment returned to the State for the general treasury or to 
knock down more Federal dollars was $191 million. The law says 
that the intergovernmental transfers are legal if, in fact, the 
payment stays with the provider. In this case, $191 million 
stayed with the provider. It went back to the State to be used 
for something else or to knock down further Federal dollars. It 
is a big loophole. It is something I would like to discuss.
    Mr. Spratt. Let me ask you this before you go on to that. 
Is this a policy you have assumed and therefore put in your 
baseline as savings that is already taken?
    Secretary Thompson. No. No. It is not taken. It is 
something that I inherited, and I am----
    Mr. Spratt. But does your baseline for cost assume that 
these changes will be made and therefore HHS will achieve some 
savings already assumed in the budget?
    Secretary Thompson. It is not in the baseline, Congressman 
Spratt.
    Mr. Spratt. It is not in the baseline. OK.
    Secretary Thompson. Can I go into one more State?
    Mr. Spratt. Yes, sir. Absolutely. Excuse me for 
interrupting you.
    Secretary Thompson. No, that is quite all right. You can 
interrupt me anytime, Congressman. You are a perfect gentleman, 
and I mean that.
    Mr. Spratt. I appreciate it, sir.
    Secretary Thompson. State B makes----
    Mr. Spratt. As a South Carolinian, that goes straight to my 
heart, sir.
    Secretary Thompson. Your southern charm goes to mine.
    State B makes supplemental payments to a county-owned 
nursing facility. Upon receipt of the payments, the nursing 
facilities are required to return 99 percent of the payment.
    Mr. Spratt. Let me just leave you--these other folks here 
have got questions to ask, and they are going to be as 
pertinent as mine, but my State is one of the States right now 
dealing with deferrals in the Medicaid program, where they have 
been sending you bills that have been approved for years at CMS 
and HCFA that are now being questioned; some of the 
intergovernmental transfers you were just talking about, DSH, 
upper payment limits, the administrative costs, stuff like 
that.
    And we had a conference in Charleston just a week ago, and 
the folks there came away with the impression that HHS was 
making Medicaid so onerous and so rigorous and so complicated, 
so hard to deal with, that they would soon be pleading for a 
block grant with a discounted level of funding; that it would 
be better than this complicated, onerous program in putting up 
with all these regulations that they have changed over time.
    Is that the underlying strategy?
    Secretary Thompson. Absolutely not, Congressman Spratt. And 
let me quickly explain. Intergovernmental transfers are legal 
if in fact the State gets the payment from a provider, from a 
hospital, doctors, county institutions, whatever; but the 
payment has got to go back. The Medicaid law says that 50 
percent approximately--let's just use a figure. Fifty percent 
of the money comes from the Federal Government, 50 percent 
comes from the State. Using the intergovernmental transfers, 
what the States are doing, they are taking the payments, asking 
for a tax or a provider reimbursement from the local units of 
government, taking that money and getting reimbursed from the 
Federal Government, and then using that money for other 
purposes, either general purposes--not the purpose for what 
Medicaid is set up.
    What I am trying to say and what we are trying to do with 
our auditors is we are trying to say we want to help you, we 
want to make sure that the intergovernmental transfer payments 
in South Carolina are legal. Now, if we really want to be 
serious about it--and I am talking now as the Secretary of 
Health and Human Services--there is about 5 percent of the 
total Medicaid program that is somewhat suspicious, and that 
figures out to about $9 billion.
    Now, some States take advantage of it. Other States don't. 
Some of the smarter States are ones that have had individuals 
out there saying, you cannot cheat but you can get some more 
money from the Federal Government doing it this way. And other 
States haven't done that.
    If we want to be fair about it. Why don't we stop the 
intergovernmental transfers across the board, and take that 
money and put it into an increased payment for the Federal 
Government? That would be much easier. It would be much cleaner 
and much more honest, and all States would be treated equally.
    Mr. Spratt. Thank you for your testimony, Mr. Secretary.
    Chairman Nussle. Mr. Gutknecht.
    Mr. Gutknecht. Thank you, Mr. Chairman.
    And welcome, Governor Thompson. As you know, I am a big fan 
of yours. I think a lot of the welfare reform----
    Secretary Thompson. I always feel like that, that I have to 
hang on to my wallet.
    Mr. Gutknecht. Yeah. Hang on to your wallet. But I really 
mean that. Welfare reform around this country happened largely 
because of you and your leadership when you were Governor of 
the badger State.
    I am not here to badger you today, but there are some 
things I want to talk about because I am not certain that you 
have been well served in this inspired debate about health 
care, health care reform, Medicare reform and ultimately about 
prescription drugs, because I think there are people who 
technically work for you who have not served you well in terms 
of giving you good information.
    Now, let me also start by saying I am not an economist and 
I do not play one here on the Budget Committee, but I have 
learned a lot about prescription drugs, and I think you will 
agree with me that there are really only two ways to control 
health care costs. One is by direct government control and the 
other is by trying to create some kind of market mechanisms to 
create a competitive marketplace.
    Let me give you an example, and I want to show a couple of 
charts. I think we have got them. If we can bring those up. The 
first one is a chart--and these are not my numbers. These were 
done at the Boston University in a study they released about a 
year ago.
    And let's just look at 2002. For every dollar that we pay 
for name-brand prescription drugs in the United States, the 
Swiss pay 63 cents. The folks in Great Britain pay 62 cents. 
Canada 60 cents, and on down.
    You know, it strikes me that if the people at the Boston 
University know that and if I know that, it just seems to me 
that people at the FDA should know that. And I am not certain 
that they have done a great job of sharing that information 
with you.
    And let me give you a more specific example, and you have 
had an awful lot of things thrust upon you as Secretary of 
Health and Human Services, not the least of which is when we 
had anthrax here in these buildings. And at that time you went 
out and made a purchase from a German company called Bayer. At 
that time they wanted something I believe like--and the numbers 
may not be exact, but it worked out to about $3 per capsule for 
CIPRO. You negotiated them down to about 80 cents. Were you 
aware at the time--or did anybody at the FDA tell you that that 
drug was available through the VA for 19 cents per capsule? 
That is embarrassing to me, that the FDA doesn't know that and 
doesn't share that information with you.
    These are things that I think are important when we look at 
the overall cost of health care; that if I can learn that with 
a staff of one or two people, it strikes me that the FDA, with 
staffs of hundreds of people, ought to be able to share that 
information with the Secretary of Health and Human Services.
    I want to show another chart, and this was something that 
we did. We were in Munich, Germany--and I am sorry this is a 
little hard for people to read, but I will go right to the 
bottom line. On our way home we bought 10 of the most commonly 
prescribed drugs in the United States, and we bought them at 
the Munich airport pharmacy. And those of us who travel to any 
extent know that if you buy--if you want to buy anything, you 
probably don't go and shop at the airport. Generally the 
airport has the highest prices. So I don't know what the prices 
were downtown, but this was at the Munich airport pharmacy. 
Those are the 10 most commonly prescribed drugs as far as we 
know in the United States, and the total is $1,039.65. We came 
back here to the States--I am sorry, the price in Munich was 
$373 and change. We came back to the United States and we 
priced those same drugs in drugstores here in Washington, DC, 
same dosage, same everything. They were $1,039.65.
    You know, again, I understand you have some openings on 
this board that somehow was in the bill. I would volunteer to 
serve on that board to do a little research on this, but it 
just seems to me--and you don't necessarily have to respond 
here--but at some point as the Secretary of Health and Human 
Services, you have got to demand that people who work for the 
FDA, and technically work for you, help you get that kind of 
information, because it seems to me if we are going to be 
offering this huge new entitlement--and it is massive, and 
frankly I don't think it stops at $535 billion. My own view is 
and the Congressional Budget Office tells us that over the next 
10 years seniors will spend $1.8 trillion on prescription 
drugs, and that number is going to grow. And so this is going 
to be an enormously expensive thing, and I do say publicly I 
don't think you have been well served by the folks who work 
under you.
    And, with that, if you want to respond, you are more than 
welcome to, but I wanted that on the record.
    Secretary Thompson. Well, thank you very much, Congressman 
Gutknecht, and as you know you have been a friend of mine for a 
long time, but let me go through several things.
    First off, in regards to the CIPRO that I negotiated with 
Bayer--and we also included in it 69 cents, by the way. We also 
are paying for the management fee for managing the inventory, 
which is not something the veterans do. That is point No. 1.
    No. 2, we have set up a commission according to a provision 
in the bill, and in regards to re-importation, we have got to 
give a report back, back to every Member of the Congress by 
December 1, this year. We are going to absolutely take 
advantage of your knowledge on the subject, I don't know as a 
member of the committee, but certainly as a witness and as a 
resource person. And that is No. 2. And we will have that 
commission report in for all Members of the Congress by 
December 1, this year.
    No. 3, the law right now on re-importation, as you know, 
requires me to certify that the drugs coming into America are 
safe. We had a target enforcement action twice this past year 
and the first target was on July 29th to the 31st and August 
5th to the 7th. The second one was in November of this year, 
and 87 percent, approximately, of the drugs that came in were 
somehow defective. And based upon that information, there is no 
way that I can certify that all drugs coming into America are 
safe.
    Now, some of those drugs were packaging problems. Some of 
them came in from different countries that said they were 
coming from Canada. Some of those drugs were drugs that FDA had 
not approved and were being sold in this country. Those are 
things that we have to be concerned about. If re-importation is 
going to go ahead, I think the best way to do it is to have 
this commission complete the study and get the necessary 
resources to FDA so that we can do it properly and safely.
    Mr. Gutknecht. But in truth, most of the reason for that 87 
percent was some of the language on the capsule, or on the 
packages, were in foreign languages. They were still the same 
drugs.
    Secretary Thompson. Some were. There were some that were 
not.
    Chairman Nussle. The gentleman's time has expired.
    Mr. Moran.
    Mr. Moran. I thank you very much, Mr. Chairman, and you do 
have fans on both sides of the aisle, certainly in terms of 
your effectiveness as Governor of Wisconsin, Secretary 
Thompson. I guess that is why we aren't hesitant to push you on 
some of the things that we feel most important--that we feel 
are most important to our constituents.
    Obviously on Medicare, you are going to hear a lot about 
the inability to negotiate for lower prices. Mr. Gutknecht did 
a nice job of underscoring that. Mr. Moore has a bill that many 
of us have cosponsored that is bipartisan, so I am going to 
defer to him to push that, and I trust others are going to 
raise the issue of the American taxpayer paying for these ads 
promoting a bill that is as controversial as this one is, and 
that would have failed in the House had it not been held open 
for 3 hours.
    But I am going to go on to another issue, because I was 
concerned that in your testimony, Mr. Secretary, you didn't 
mention another very serious national problem, and that is the 
problem of the uninsured. During your watch, the number of 
uninsured has increased by 2.4 million people. It is now close 
to 44 million as you know, and during the course of a year, 
about 75 million people are actually without health insurance 
at some point during that year. About 4 million people have 
lost their job-based health insurance over the past 2 years.
    And so we would like to know what is your vision, what is 
the administration's plan for addressing that? We can't be 
paying for it out of local property taxes, when a hospital has 
to take in indigent people that are uninsured through the 
emergency room, and you know how ineffective and inappropriate 
manner of health care that is.
    There have been three proposals that have been made by the 
administration. One is the tax credits. Another is the 
associated health plans, and then you have got this deductible 
proposal that----
    Secretary Thompson. And health savings accounts.
    Mr. Moran. The health savings accounts. Now, in terms of 
the tax credit, it said in your mid-session review from last 
year that this is when you lowered the cost of the proposal. It 
said the proposed tax credit is now assumed to be implemented 
more slowly and thus to cause less reduction in employer-
sponsored health insurance. But what struck us is that that is 
the clear implication that the proposal does, in fact, lead to 
a drop in employer-sponsored health insurance, which is only 
rational.
    Now, the second proposal you have, the associated health 
plans, our estimate that we got from the most extensive 
analysis--this was from the MIT guy--said it is going to save--
it is going to provide health insurance for about 330,000 
people, which is good. I am a cosponsor of that legislation 
actually, but it is a drop in the bucket in terms of addressing 
the 44 million people who are uninsured.
    And then in terms of those health savings accounts, the 
fact is that the vast majority of people who are uninsured, in 
fact 90 percent of the uninsured, were either in the 15 percent 
tax bracket or had no tax liability. So I think it is a stretch 
to suggest that these health savings accounts are going to help 
anybody but those who are in relatively high brackets, who 
likely have the least need for help in terms of paying for 
health insurance. So I would like to give you an opportunity to 
address how you realistically think we can reduce the number of 
uninsured.
    Secretary Thompson. Thank you very much, Congressman Moran. 
And as you know, I temporarily live in your district, so I 
appreciate----
    Mr. Moran. That is one of the reasons I am being so kind.
    Secretary Thompson. I assume that. I have a tremendous 
amount of influence in several blocks in your----
    Mr. Moran. Yes, I know. You live in Cameron Station. I am 
very conscious of that, and I have ticked off too many 
constituents that have been before me on this witness panel, so 
I am going to try to be a little more----
    Secretary Thompson. Congratulations on your engagement.
    Mr. Moran. Thank you, Mr. Secretary, but I still need you 
to answer the question.
    Secretary Thompson. Well, let me answer your question in 
several ways, because you have made several targeted 
accusations that I want to rebut quickly.
    No. 1, in regard to the Medicare ad, I am under the legal 
responsibility under the act to promote and get out as much 
information as possible. You and I differ as to the contents of 
the ads, but I had the ad scrubbed with several different 
groups, and all of those individuals independently from my 
sources in the department. I personally went out and did this, 
and they all indicated to me that they felt it was very 
nonpolitical.
    Secondly, in regards to you saying that the uninsured 
increased under my watch and indicated maybe I had some 
responsibility for that, they have increased; but I also want 
you to know I have used the power of the Secretary to grant 
waivers in which 2.4 million Americans across this country, 
mostly low income and minorities, can now have health insurance 
under the waiver process that I have. And I have expanded 
benefits to 6.7 million other Americans. So I am using every 
bit of power I possibly get to give insurance to those 
individuals that need it, and we will continue to do so as long 
as I am Secretary.
    The third, I didn't mention the uninsured in my remarks 
because I didn't have time. I would have loved to. There are 
several things that I would like to see happen. I think the 
President has laid out the tax credits, the association health 
plans, the health savings accounts. I would like to take those 
tax credits, Congressman Moran, and I would like to see some--
bipartisan support to do this. I would like to have this put 
into a pool in which every State would be able to get their 
portion. Virginia would get their portion. Wisconsin would get 
their portion. Have the Governor and the State legislature set 
up the uninsured into a pool, set up an insurance or insurance 
commissioner to go then out and negotiate.
    As you know, you have studied this, there is a good share 
of those individuals, the uninsured, who are very strong 
insurable risks, some of those individuals over $50,000 a year. 
One third of them are very healthy. One third of them are under 
the age of 29. So it would be a very good insurable risk. You 
would put those into a pool and then you would allow for bids, 
and then you would be able to cover a lot more individuals. 
This is one way to do it.
    Health savings accounts is another way that--I know you 
disagree because you believe that it is only going to be a tax 
reduction for the rich. I think it is a way for--maybe there 
are ways to scrub it, but there are ways in which we can get 
more people to really purchase insurance.
    You could also use the health savings accounts as another 
idea as to be able to allow for those individuals that purchase 
a health savings account to be able to have a high deductible 
and then be able to use some of the money for purchasing 
medical provisions under the tax credits, and there are many 
ways to do this.
    And I would like to sit down with you and give you some 
ideas on how we might be able to come up with a bipartisan bill 
to expand insurance for the uninsured. I think we should do it. 
I think there is some way to do it.
    There are other ways you can do it. You can take a look at 
the SCHIP program. There are $7.8 billion left in the SCHIP 
program. You could find ways in which we could use that money 
to develop a very good health insurance program, like we did in 
Wisconsin, called ``Badger Care'' to give those individuals 
coverage.
    Mr. Moran. Thank you, Mr. Secretary.
    Chairman Nussle. Mr. Hastings.
    Mr. Hastings. Thank you, Mr. Chairman and Mr. Secretary, it 
is good to see you again. And you have a very difficult job, 
and I think you have performed your duties very, very well.
    I want to kind of pick up on this whole notion of insured 
and uninsured from maybe a different perspective. When we look 
at health insurance in this country, that insurance is unique 
compared to other insurance. And by that I mean in many cases 
it is only available as a condition of employment. Somebody 
doesn't go to work for X company because they offer good 
property insurance, or at Y company because their car insurance 
is better than somebody else. But health insurance falls into 
that category as a result, rightly or wrongly, since the Second 
World War when all of this came about. It tends to be arm's-
length, third-party pay and not an individual making those 
decisions. And I happen to think that as a result, in many 
people's minds, health insurance to them is prepaid insurance 
or prepaid health care. And I would just make the observation 
that there is a huge difference between prepaid health care, 
because that implies you are paying something at some time, but 
you are paying it in full, for the benefit to accrue when you 
want that, or prepaid insurance in a classic insurance case 
which you take care of the unexpected.
    Now, with that in mind, the chairman in his opening remarks 
was talking about controlling health costs, and Mr. Gutknecht 
talked about finding some market mechanisms, albeit in 
different ways, but nevertheless with health costs. It seems to 
me that the concept of HSAs goes a long way to alleviating all 
of this, simply because you are empowering people to make their 
own decisions.
    I happen to think that the HSAs within the Medicare bill is 
one of those significant policy changes that we had made, and I 
just wonder if you have any evidence, having noticed the 
marketplace out there since HSAs have gone into place the first 
of this year, if you are seeing a lot of activity in that area.
    Secretary Thompson. We are seeing a lot of activity on all 
aspects of the Medicare Modernization Act, much more so than we 
ever thought possible. Health savings accounts is one of those, 
Doc, that is receiving a lot of things--a lot of inquiries 
coming in as to where they might be able to purchase this--into 
the Department.
    Secondly, on the card we expected maybe 50-60 applications. 
We have 106. One has withdrawn, and one has merged. So we have 
104 left; 55 across the country and regionally, and 46--48 are 
from those individuals that are in HMOs and want to be able to 
enroll their members. So there are a lot of inquiries, a lot of 
telephone calls coming in to our 1-800-Medicare line. Our Web 
page is just phenomenal, asking questions about the Medicare, 
and when is it going to be implemented and how soon they can 
start getting benefits.
    So it is not only the health savings accounts. All aspects 
of the Medicare Modernization Act are receiving overwhelming 
kinds of inquiries at the present time.
    Mr. Hastings. Well, I support it because of HSAs, 
obviously, but also because of the reimbursement formulas for 
rural areas. I come from a rural area, and I can tell you that 
my providers are very pleased with that. And I gather you are 
probably hearing the same thing.
    Secretary Thompson. This was the best bill that rural areas 
in America could have ever hoped to get. Thanks to Congressman 
Nussle's leadership and Senator Grassley's leadership for a 
long time, your leadership, Congressman, and so many people 
that represent rural areas, this is an excellent bill for 
reimbursements. To be able to reduce the wage disparities--
which makes up the high percentage of the reimbursement in the 
market--from 72 cents down to 63 cents is a wonderful thing. To 
allow for increased payments for doctors in underserved areas 
and be able to increase the disproportionate shares by $6 
billion. There is a total of $26 billion for rural areas and a 
total of $36 billion for States that are going to get 
reimbursed.
    So I would compliment all of you who are a part of it, 
because none of us--I have been fighting for this as Governor 
of the State of Wisconsin for years. In fact, I brought a 
lawsuit against--as a Governor, because of the disparity of 
payments to the State of Wisconsin. We weren't quite as bad off 
as Iowa, but we were right up there, and this bill was 
exceptional for the States of Iowa, Wisconsin, Oregon, 
Washington, the Dakotas, and Nebraska, Montana, and Wyoming. 
And most rural States got a huge benefit.
    Mr. Hastings. Thank you, Mr. Secretary. Thank you, Mr. 
Chairman.
    Chairman Nussle. Ms. Hooley.
    Ms. Hooley. Thank you, Mr. Chair.
    Mr. Secretary, welcome. I have to peek around other people 
to see you.
    I have a couple of very quick questions. One is, I am going 
to go back to prescription drugs. That is an issue that all of 
us have been talking about for a long time, the high cost of 
prescription drugs. They just seem to be going up exponentially 
each year. I think the increase is something like 14 percent 
this year.
    And I just have a hard time understanding your opposition 
to negotiating prices. I mean, you negotiated with CIPRO. I 
know you negotiated getting more flu vaccine. I mean, 
everywhere that I know of in Federal Government, the VA 
negotiates, everywhere in government, we negotiate for 
automobiles, we negotiate for all kinds of equipment and office 
supplies. What is your objection to negotiating the price of 
prescription drugs?
    Secretary Thompson. I will tell you the rationale again. 
The Veterans Department has the power to negotiate and give the 
drugs to individual patients in the veterans system, and we do 
not purchase drugs and give the drugs away. We set prices. We 
allow for the reimbursement formulas, but the actual payments 
go to the fiscal intermediaries, the contract carriers. And 
under the new Medicare Modernization Act, the new way to do it 
was to be set up by PBMs and PPOs and HMOs to do the 
negotiating. And the Congress in their wisdom thought that it 
would be better for those individuals to have the power rather 
than the Department.
    Ms. Hooley. Another question just along those lines. Do you 
have any kind of a program, for example, where you have 
research done--independent research done on drugs that provide 
the same benefit? For example, if you have arthritis you can 
take Vioxx, you can take Celebrex, you can take ibuprofen, and 
there are probably a whole bunch of others.
    Secretary Thompson. We have----
    Ms. Hooley. Where you look at all the drugs that do the 
same thing for the disease or the condition, and that you have 
some comparison then as to side effects and to the costs, so 
that every doctor in their office will know that if a patient 
comes in and they say, I have arthritis, that they can give 
them some choices at least, or know which drugs cost the least 
amount.
    Secretary Thompson. We do, but not as complete as I would 
like or, I am sure, you would like, Congresswoman. But let me 
tell you what we are doing right now. We are setting up in CMS 
a Web page in which, when the card rolls out, we will have 
every card issuer and their prices on every drug and every 
formula that they have, and we will have the prices on every 
drug so that you will be able to look it up every single day. 
It will be updated on a weekly basis, and every cardholder 
will. And then we are going to give this information out. So if 
you are a senior citizen, you call up 1-800 Medicare with your 
list of prescriptions. You will call us and say, these are the 
prescriptions. And we will say, how far do you want to travel 
to your drugstore? And that information we will have online as 
well. And then we will be able to compare every card issuer, 
what they got in cost, and be able to tell your constituent, 
that senior, Mrs. Jones, what she will have to pay and what 
would be the best price, best deal for her.
    On top of that, on the $600 credit for low-income seniors, 
Merck has just announced that they are going to give away all 
of their Merck drugs free of charge to that category of people 
above the $600. So those individuals with under 135 percent of 
poverty that are using America drugs will first get a $600 
debit card and then they will get their Merck drugs free of 
charge.
    I think that is going to certainly encourage other 
pharmaceutical companies to do the same thing. And what this is 
going to do, this transparent Web page is going to have a 
tremendous tendency to drive down prices not only for seniors, 
but for States, for individuals, and for companies, because 
they can look in and if they can see what the price is. They 
are going to be able to say, Why can't I get that price?
    Let's take three stabs, Lipitor, Zocor and Mevcor, and 
right now Lipitor is the fastest and the largest selling drug 
in America.
    And mevacor and Crestor. And we will have information on 
all three of those statins, plus the prices.
    Now, Merck sells Zocor. For those under 135 percent of 
poverty, it will be given free of charge. You can't get any 
lower than that. And so I think it is going to have a tendency 
on Pfizer, who sells Lipitor, that they are going to have to be 
competitive; or mevacor, which is going to be sold by Astra 
Zeneca, and I am using that as an example of what it is going 
to do to drive down prices.
    Chairman Nussle. Thank you.
    Mr. Bonner.
    Mr. Bonner. Thank you, Mr. Chairman.
    Mr. Secretary, welcome. First of all, could you restate the 
number of waivers that you have issued during your tenure as 
Secretary?
    Secretary Thompson. I have issued 3,600 State plan 
amendments and waivers since I have been there, more than all 
the 18 previous Secretaries combined.
    Mr. Bonner. I would like to say thank you on behalf of one 
you issued for a young man from my district in Alabama, Nick 
Dupree. Nick's story is tragically familiar to a lot of 
Americans. He is a quadriplegic. He lives every breath on a 
ventilator. He graduated from Spring Hill College, and because 
he reached the ripe of old of age 21, he was being forced into 
a nursing home until your office intervened.
    So I know it is easy to fire shots at you. I would like to 
say thank you for what you did for Nick and 29 other people 
from my State.
    Some of my friends on the other side seem to want to----
    Secretary Thompson. We approved that waiver in one day.
    Mr. Bonner. I know that. It was right after I met with you 
last year, and I want to say thank you.
    Some of our friends on the other side seem to want to have 
it both ways. They want to blast those of us in the majority 
and the President for fiscal irresponsibility, and at the same 
time seem to offer billions upon billions of dollars of 
amendments that if they were in charge would spend even more 
money.
    And so my question to you is, according to CBO, last year's 
Democratic alternative to the House-passed Medicare bill would 
have resulted in direct spending outlays of $1 trillion over 10 
years. In your view, what do you believe would have been the 
implications to Medicare's financing over the long term if that 
alternative had in fact made it into law?
    Secretary Thompson. Well, it is obvious it would have been 
more, because you are starting at a higher base. And when you 
add on to that base increased expenditures, you are going to 
have a much higher outlay than the bill that finally passed.
    Mr. Bonner. That is all, Mr. Chairman.
    Chairman Nussle. Thank you.
    Ms. Baldwin.
    Ms. Baldwin. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for being here. I want to delve a 
little bit further into some of the discussion that has already 
been prompted on the uninsured. As you know, it has been one of 
my lifelong passions in politics, and I was very encouraged to 
hear you talk about some of the ideas you have of where we 
could go from here to tackle that problem.
    Unfortunately, I think a number of those aren't yet 
captured in the budget that is before us, but are really ideas 
that you are opening up an invitation for bipartisan discussion 
of where we go from here.
    What I wanted to focus on a little are some serious 
discrepancies in the numbers of how many people are estimated 
to be impacted by the three major proposals that are contained 
in the President's budget to address the uninsured, those three 
proposals being, as Mr. Moran earlier outlined: the refundable 
tax credit at a price tag, I think, of $70.1 billion, the 
association health plans, and also specific tax deductions for 
catastrophic health insurance. You added in there the health 
savings accounts, but these are sort of the three that have 
been put forth by this President.
    I know that you had a chance to testify not too long ago in 
front of the Ways and Means Committee in which, in that 
testimony, you gave an estimate that it was your hope that 
those three proposals, sort of taken together, could extend 
health insurance opportunities to perhaps half of those who are 
uninsured. I heard the figure reported, 20 million was the 
hope.
    You are probably aware that a number of----
    Secretary Thompson. If I said that--I don't believe I said 
that. But if I did, I misspoke, because it does not cover that 
many.
    Ms. Baldwin. OK. My understanding was that that was your 
testimony in front of the Ways and Means Committee, that these 
policies would cut the ranks of the uninsured in half, a 
reduction of roughly 20 million.
    I would like to--would like a correction if indeed that 
wasn't your testimony.
    What I wanted to bring forth was the information that a lot 
of us have looked at of late in evaluating these programs, a 
professor, as you heard, from MIT estimated that the refundable 
tax credit might extend health insurance to perhaps 1.9 million 
people who would be currently among the ranks of the uninsured.
    A CBO study indicated that the association health plans 
might provide, modestly, 330,000-additional people health 
insurance.
    And there was difficulty in even getting a number estimate 
on the third proposal.
    But when you aggregate, you know, it is looking about 2.2 
million, which is great. I would not want to criticize in any 
way that type of extension of health care. But I have to 
question the bang for the buck. And certainly there are other 
initiatives that could be put forward where we would be making 
a much bigger dent.
    So if these three are the centerpiece proposals for 
addressing our incredibly desperate problem with 43.6 million 
uninsured individuals, that only counts, as you have heard, 
those that have been uninsured for a full year, probably 75 
million who have been episodically uninsured throughout a year.
    To have three proposals that may help 2.2 million of those 
75 million at a cost of close to 100 billion, I want to know if 
your figures are different. And certainly if you want to 
elaborate any more on problems that would--on proposals that 
would get to a larger share of the uninsured, I would certainly 
love to hear those ideas.
    Secretary Thompson. First, the tax credit proposal that the 
President has advanced, which I support, is supposed to cover a 
little over 4 million people. I do not know the exact number. I 
can look it up on the association health plans. We think it is 
higher than what your figures are.
    But--and the tax deductible one, I don't know if you can 
quantify as to how many people that is going to help, but let's 
say it is somewhere between--let's say you are at 2.5 million 
and we are at 5 million. What I was saying in Ways and Means, 
there are ways and proposals that we could come up with that, 
could get a lot more, a higher percentage. And I said I would 
hope that some day we could get to one-half.
    Ms. Baldwin. Yeah. Just for clarification, I think 
Congressman Levin asked concerning the administration's plan 
and your response--somebody just gave me the transcript--was--
--
    Mr. Shays [presiding]. You know, the gentlelady's time has 
run out, and I really want to make sure that others on your 
side get a chance to respond.
    Secretary Thompson. I know your passion, Congresswoman 
Baldwin, for this. I would love to work with you to come up 
with ideas. I have some ideas, and I am sure that we can come 
up and hopefully get together a bipartisan package that would 
help the uninsured.
    I would much rather--instead of arguing about it, I would 
like to come up with policies which we could work on together 
to get it done.
    Mr. Shays. We are going to go to Mr. Hensarling and then to 
Mr. Moore and then to Mr. Diaz-Balart and then to Ms. DeLauro.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Good morning, Mr. Secretary. I learned a lot from your 
presentation as far as some of the cost driver are concerned--
--
    Secretary Thompson. Thank you.
    Mr. Hensarling. In the provision of health care through the 
Federal Government, I think you mentioned that 8 percent of the 
budget is presently spent on preventative care.
    Secretary Thompson. Medicare.
    Mr. Hensarling. OK, on Medicare, preventative care.
    In private insurance plans, quite often people are incented 
to--financially--to engage in good, healthy behaviors. Many 
private insurance programs obviously will lower your premium if 
you are a nonsmoker. My observation is that the world works off 
of incentives, what incentives do we presently have in the 
system for people to be nonsmokers, to have reasonable diets, 
to engage in reasonable exercise?
    Secretary Thompson. We don't have much. We don't have much. 
And that is something that this Congress, and I applaud you for 
bringing up because we have to build in some incentives to 
encourage people to practice good behavior, whether it be a 
credit on your health insurance like, for example, if you are a 
good driver, you usually get a credit on your automobile 
insurance policy.
    I have had the health insurance companies come in, and I 
talked to them about putting on a credit on their health 
insurance for practicing good behavior. So if you are 
physically fit, you are exercising, watching your diet, you get 
a credit on your health insurance. They liked the idea, but 
they said there are too many rules and regulations and laws 
that prevent them from doing it.
    Now, that would be one thing right there that, if we wanted 
to strike a blow for freedom, give health insurance companies 
the opportunity to give health insurance policies with an 
incentive to practice good behavior, which is going to save the 
State and the Federal Government millions of dollars.
    Mr. Hensarling. I would also like to strike a blow for 
freedom, Mr. Secretary.
    Secretary Thompson. Thank you.
    Mr. Hensarling. I appreciate your bringing it to my 
attention.
    Speaking of regulations, I am under the impression that 
there are roughly 130,000 pages of regulations and forms in the 
Medicare program. I am also led to believe that the Federal 
Employee Health Benefit Plan, which many would argue delivers 
better health care at a less expensive price, has roughly 56 
pages of regulations.
    At what point does the regulatory burden become so large 
that we provide a disincentive for companies to come in, 
participate in Medicare, and create a more competitive 
marketplace? And to what extent is the regulatory burden a cost 
drivers in health care in America?
    Secretary Thompson. I think they are tremendous. And what I 
am trying to do is, I am trying to change that. What we need to 
do, Congressman, is to start getting to a paperless system in 
America in the delivery of health care dollars.
    Grocery stores are more technologically advanced than 
hospitals and clinics. And the regulations are required by laws 
that you pass and the Congress passes and are signed into law 
by the President.
    We are trying to mitigate many of those rules and 
regulations and make it easier. Like the privacy law; we had to 
make many changes to that to make it meaningful.
    But getting back, if you really want to get at this thing, 
you could probably talk about somewhere between 25 to 50 
percent of cost if we could get to a paperless system. And so 
that you could have uniformity, I have requested the Institute 
of Medicine to come up with a uniform patient record. We don't 
even have a uniform patient record in America.
    Second thing, we have hired--we have licensed what we call, 
from the pathologists, SNOMED, which is the vocabulary of all 
the illnesses in America, and we are going to give that out to 
anybody that wants it free of charge.
    Third, we are going to get uniform standards put in place 
so that the hospitals and clinics in your district will know 
that they have these kinds of standards to meet so that they 
are going to purchase the kind of software and the kind of 
computers that are going to be able to be compatible.
    And then you know my ultimate goal is to be able to get a 
chip developed so every one of us have a personalized chip with 
our health medicine information that can be downloaded, and you 
would then be able to have uniform patient records, uniform 
lexicon and uniform standards on a chip. You could drive down 
the cost and make this administration much easier.
    Mr. Hensarling. Thank you.
    Mr. Shays. We are going to try to make sure we go down this 
list; and let me just tell you, we have Mr. Moore and then Mr. 
Diaz-Balart and then we are just going to go down the 
Democratic list, and I will say--and not ask questions, and you 
can see we have more than six and we have to finish up in 35 
minutes, so----
    Secretary Thompson. I will make my answers shorter too.
    Mr. Shays. Mr. Moore.
    Mr. Moore. Thank you, Mr. Chairman.
    Mr. Secretary, welcome. I want to recount for the committee 
a conversation we had. In fact, the week of the vote on the 
Medicare bill, Mr. Secretary, you met with the Blue Dog 
coalition, had a discussion with that group, I think on 
Tuesday.
    Later that week--and I believe, Mr. Secretary, it was the 
day before the vote--I got a call from you at my office and I 
am going to recount this as accurately as I can, as I remember.
    You said, Congressman, can you be with us on this bill?
    And I said, Mr. Secretary, I really have not made up my 
mind.
    As you know, with any major piece of legislation, there is 
some good news and bad news; and the good news in this bill is 
catastrophic coverage and low-income coverage and the fact that 
there is reimbursement for physicians and hospitals, Medicare 
providers here. And I said, That is the good news.
    In our discussion I think you said something like, ``What 
is your concern?''
    I said, ``Mr. Secretary, there are 25 million veterans in 
this country and the Secretary of Veterans Affairs on behalf of 
those veterans has the authority under Federal law to negotiate 
lower prices, try to negotiate lower prices.'' I said, ``I wish 
you had that authority.''
    As I recall, Mr. Secretary, your response was something 
like this. ``If I had that authority, Congressman, I would 
gladly exercise it, but as you know, this bill prohibits 
that.''
    And I said, ``Mr. Secretary, that is my concern about this 
bill and that is why I still haven't made up my mind.''
    In fact, I ended up voting against the bill, even though I 
was leaning to voting for it, because I think it failed to 
address the cost issue.
    Part of our discussion, I said to you also was, ``There are 
40 million Medicare beneficiaries in this country, and right 
now each of those persons is a one-person buying group. And if 
we would lump 5 million, 20 million or 40 million people in a 
buying group, there should be some leverage there for you or 
somebody on behalf of those beneficiaries to negotiate lower 
prices, again just as the Secretary of Veterans Affairs does.''
    And I said, ``Our seniors pay, I believe, among the highest 
prices in the world, and in effect, our seniors subsidize 
people in Canada and Mexico where there are price controls.'' 
And I will tell you, Mr. Secretary, I do not believe in price 
controls.
    I want our pharmaceutical companies to make a profit and 
continue to develop the world--these wonderful drugs that 
provide quality of life and, in fact, keep people alive. On the 
other hand, I don't want them to make their profits just on the 
backs of American seniors.
    So I introduced a bill with Jo Ann Emerson from Missouri. 
And this bill would specifically repeal the one section of the 
Medicare bill, H.R. 1, that was passed and give you specific 
authority to negotiate, on behalf of 40 million Medicare 
beneficiaries in this country, lower prices.
    And my question to you is, if you had that authority, would 
you exercise it, No. 1?
    No. 2, if the bill passes--and we have 125 bipartisan 
cosponsors right now--if this bill would pass, would you 
recommend to the President that he sign it, sir?
    Secretary Thompson. First off, even if I had the power, I 
don't know whether or not it would be used very often, the 
reason being because, right now, we don't purchase the drugs. 
The Veterans Department does.
    The PBMs are going to purchase the drugs, or the PPOs are 
going to purchase the drugs, and the HMOs are.
    But if I had the power, of course, I would use it. I have 
never been reticent about using power. And so if I get the 
power, I would use it. But I am just telling you, I don't know 
whether or not it would be usable because of the way the system 
is set up.
    Second thing, you are absolutely correct, seniors pay the 
highest amount of the drugs because nobody is negotiating for 
them. Under the new bill, under the new Medicare bill, they 
will be having people negotiate with them and the transparency 
on the Web page is going to be very helpful. It was not only 
the Republican bills that had this non-negotiable language, it 
was the Democrat bills as well; and I just want to put that on 
the record.
    Mr. Moore. I appreciate that, but I want to say this. I 
think and I hope that all of us in this room and in Congress 
can get away from--this should not be about Republicans and 
Democrats. This should be about American seniors and the 
American people.
    Secretary Thompson. I agree.
    Mr. Moore. I know you do, Mr. Secretary. I absolutely 
believe that you want the best for health care in this country. 
I really believe that.
    Secretary Thompson. I am passionate about it.
    Mr. Moore. I know you are. I could tell in your opening 
statement that you are. I know that.
    One more question. I will finish very quickly here.
    Mr. Shays. The gentleman only has 22 seconds.
    Mr. Moore. I understand that, if I can finish, Mr. 
Chairman.
    Mr. Shays. Well you have got to leave him time to answer.
    Mr. Moore. Well, then, I won't ask the question.
    Mr. Shays. Let me just say I am just trying to accommodate 
eight members so they get chances as well. We will go to Mr. 
Diaz-Balart and then to Ms. DeLauro, and then we will go to Mr. 
Scott, to Mrs. Capps, to Mr. Emanuel, Mr. Davis, Ms. Majette, 
and so on.
    Mr. Moore. May I submit the question to him in writing?
    Mr. Shays. Sure. Absolutely.
    Mr. Moore. Thank you.
    Mr. Diaz-Balart. Thank you, Mr. Chairman.
    Mr. Secretary, the programs within the Department of Health 
and Human Services historically have been notorious for being 
burdened with waste and fraud, and abuse. And nobody has done 
more to fight waste, fraud, and abuse when you were Governor, 
and now, as you have; and I think everybody understands and 
applauds you for that, sir.
    Can you discuss some of your successes in fighting waste, 
fraud, and abuse within your Department? And also some of your 
future plans to continue to fight what I know we all believe is 
a major problem.
    Secretary Thompson. The IGT is one area that we are looking 
at right now. We have put in some new auditors that are going 
to be able to, we think, modernize our system completely. We 
have modernized our computer systems; that is badly needed 
because some of our software is 30 years old in the Medicare 
reimbursement system. Some of our software is older than the 
technicians that we have hired to maintain it. So we are doing 
some improvements there.
    The third thing we are doing is, we are putting a lot of 
emphasis on getting delinquent child support collected, 
something that hadn't been done before. And we are increasing 
the amount of money each year we take on waste, fraud, and 
abuse. We just have made some huge cases and got some others 
pending, and the amount of money that we take in on waste, 
fraud, and abuse is going up each and every year.
    Mr. Diaz-Balart. Mr. Secretary--and just for an example, I 
am not picking on anybody. The NIH has received some, I think, 
well-deserved criticism. We all know that they do some 
essential things for the country, but they also have some 
egregious examples of waste. For example, a recent NIH grant 
funded research that observed--this true; I am not making this 
up--observed individuals watching pornography while drinking 
alcohol. When people found out about it, they all wanted to 
sign up.
    That is $470,000 just on that issue alone, and it seems to 
me that people have to be held accountable for their actions. 
And, everywhere if the people are not held accountable, you do 
not get accountability.
    Do you have any ideas, any steps that you are thinking of 
taking to hold people accountable for such examples of waste 
that are pretty obvious to--you know, do not pass the straight-
face test.
    Secretary Thompson. Yeah. I have asked Elias Zerhouni, who 
I think is one of the best NIH directors we have ever had in 
this country. He is having a rigorous review of this stuff.
    I don't want to get involved in reviewing scientifically 
based things, because I am not a scientist. He is, and so he is 
much better and more capable, and he is responsible for the 
NIH. The same thing for Dr. Gerberding at CDC. They are 
responsible for making sure that the grants that are given are 
grants that are based upon good science, and they are doing 
that.
    As far as NIH, they are taking a look at the ways that this 
story that was put in one of the California newspapers--they 
are having a huge review. In fact, Elias Zerhouni was up here 
and testified, I believe, in the Senate Appropriations 
Committee about the review process he has done. He has set up 
an independent investigation, and he has brought in some real 
outstanding national and international scientists to review 
what the allegations were and what is going on. And we will 
make all of that information available to you and to every 
Member of Congress.
    Mr. Diaz-Balart. Thank you, Mr. Secretary. I think all of 
us know that nobody has tried harder to make sure that the 
taxpayers' money reaches those that are really most needy.
    Thank you, and we want to thank you for those efforts. 
Thank you, sir.
    Secretary Thompson. Thank you very much, Congressman Diaz-
Balart.
    Mr. Shays. I thank the gentleman.
    Ms. DeLauro, you have the floor.
    Ms. DeLauro. Thank you very much, Mr. Chairman.
    Mr. Secretary, welcome. I will get another chance to ask 
you some questions at Labor, HHS.
    If you want the authority, we would like to give you the 
authority. Cipro is produced at Bayer which, as you know, is in 
the Third Congressional District of Connecticut; and we thank 
you for driving that cost down. I didn't know it was 19 cents 
from the VA.
    But the authority can be had, and I believe that, in fact, 
you would use it.
    Let me move to a different area which has to do with the 
prescription drug ads. I understand that late last night HHS 
submitted the material to the GAO answering questions about the 
potential misuse of government funds by the executive branch 
for the publicity or propaganda effort around the Medicare law.
    Can you get us those responses so that we can make it part 
of this record, and can you get us a list of where the ads were 
run?
    Secretary Thompson. Sure.
    [Secretary Thompson's response was sent to Representative 
DeLauro's office 10/14/2004:]
    Ms. DeLauro. Fine. Thank you.
    And we also would like, for the record, Mr. Chairman, the 
letters that many of us on the committee sent to the Secretary 
and also to the IG, to make those part of the record.
    Mr. Shays. Without objection, they will be part of the 
record.
    [The information referred to follows:]

      Letters Submitted for the Record by Hon. Rosa L. DeLauro, a 
        Representative in Congress From the State of Connecticut

                            Hon. Tommy Thompson, Secretary,
                   Department of Health and Human Services.
                                                  February 4, 2004.
    Dear Secretary Thompson: We are writing to express our outrage at 
the administration's announcement of a massive taxpayer-funded 
advertising campaign to promote its Medicare bill. Just 1 day after 
presenting a budget that eliminates and cuts critical programs, 
America's working families are being asked to foot the bill for the 
administration's election year advertising.
    Yesterday, the White House announced that it will use $9.5 million 
from your Department for a television ad campaign to ``rebut criticism 
of the new Medicare law''. In addition, $3.1 million will be used for 
newspaper, radio and internet ads in both English and Spanish. This new 
ad campaign raises serious questions about the administration using 
taxpayer funds for political purposes. Accordingly, we would like you 
to provide the following information:
    The rationale for spending taxpayers' funds on this ad campaign. If 
this is an effort to educate the public about the prescription drug 
legislation, why does it advocate particular points of view that are 
clearly controversial and that have already been challenged by senior 
and consumer organizations as being inaccurate and misleading.
    The total cost in appropriated and non-appropriated Department 
funds dedicated to this ad campaign. Please identify the specific 
accounts from which the funds are being drawn, and prepare an 
additional separate breakdown of the cost associated with the 
production of each television, print, radio and internet ad, and a 
separate breakdown of the cost of placing the ads before the public.
    The name of each business involved in producing or placing the ads; 
how much each is being paid for their work; and whether the contracts 
were put out for bid.
    The names of the locations in which the ads are being placed.
    An accounting of other instances in which the Department used funds 
to advocate for a specific program or legislation.
    During a time when we are asked to rein in spending and use 
taxpayer money wisely, why is it acceptable to spend this money on an 
ad campaign, particularly when it is discussing a benefit that will not 
even be implemented until 2006?
    American families should not have to pay for this sham advertising 
campaign, especially for partisan political gain. We look forward to 
your prompt response.
            Sincerely,
                                           Rosa L. DeLauro,
                                                Member of Congress.
                                             Frank Pallone,
                                                Member of Congress.
                                            Bernie Sanders,
                                                Member of Congress.
                                                 Tom Allen,
                                                Member of Congress.
                                            Jan Schakowsky,
                                                Member of Congress.
                                              Rahm Emanuel,
                                                Member of Congress.
                                              Marion Berry,
                                                Member of Congress.

      Letter Submitted for the Record by Hon. Rosa L. DeLauro, a 
        Representative in Congress From the State of Connecticut

 Dara Corrigan, Acting Principal Deputy Inspector General, 
                   Department of Health and Human Services.
                                                  February 5, 2004.
    Dear Ms. Corrigan: We are writing to request an investigation of 
the Department of Health and Human Services (HHS) involvement in a 
taxpayer-funded advertising campaign to promote the administration's 
Medicare bill. Specifically, we are concerned that this effort is a use 
of taxpayer funds for political purposes and that the administration 
will be using its own campaign operatives to place the ads.
    On February 3rd, the White House announced that it will use $9.5 
million from HHS for a television ad campaign to ``rebut criticism of 
the new Medicare law''. In addition, $3.1 million will be used for 
newspaper, radio and Internet ads in both English and Spanish. Why 
would the administration undertake this program 2 years before the 
program is to even start.
    It has also come to our attention that a media firm currently 
working for the President's re-election campaign has been hired to 
purchase the $9.5 million worth of television ad time for this new 
commercial. National Media Inc. stands to make a windfall from this 
campaign. This is the same company that has been repeatedly hired for 
ad campaigns primarily funded by the Republican party and by the drug 
industry. National Media Inc. has done ads for Citizens for Better 
Medicare, a drug industry front group that has spent tens of millions 
of dollars on ads attacking lawmakers interested in lowering the cost 
of prescription drugs.
    Therefore, we would like you to conduct an investigation that 
focuses on the following:
    Is it legal to use taxpayer money to fund this advertising 
campaign?
    Does the ad campaign violate Federal law under 31 USC 1301(a), 
dealing with the appropriate application of funds, and 5 USC 7321(a), 
dealing with political participation?
    Has any other administration conducted an informational campaign 2 
years prior to implementation?
    Why was the decision made to purchase the time through National 
Media, Inc., rather than through the firm that created the 
advertisements? Was any individual from the White House involved in the 
selection of National Media, Inc.?
    Was the selection of the advertising firm competitively bid?
    How were the media markets where the ads will run selected? And 
what relationship do those markets have to the 2004 Presidential 
campaign?
    During a time when we are asked to eliminate or cut critical 
programs, we want to ensure that the administration is not using 
taxpayer money for partisan political gain. We look forward to you 
investigating this matter promptly.
            Sincerely,
                                           Rosa L. DeLauro,
                                                Member of Congress.
                                             Frank Pallone,
                                                Member of Congress.
                                             Sherrod Brown,
                                                Member of Congress.
                                            Bernie Sanders,
                                                Member of Congress.
                                                 Tom Allen,
                                                Member of Congress.
                                              Marion Berry,
                                                Member of Congress.
                                            Jan Schakowsky,
                                                Member of Congress.
                                              Rahm Emanuel,
                                                Member of Congress.

      Letter Submitted for the Record by Hon. Rosa L. DeLauro, a 
        Representative in Congress From the State of Connecticut

             Mr. Leslie Moonves, President, CBS Television.
                                                 February 10, 2004.
    Dear Mr. Moonves, We understand that CBS is currently running 
advertisements produced by the U.S. Department of Health and Human 
Services (HHS) on the subject of the recently enacted prescription drug 
legislation. We urge the network to suspend airing these ads pending 
the outcome of an ongoing General Accounting Office investigation into 
the propriety of the Department's alleged expenditure of taxpayer funds 
on these ads, which are essentially political in nature.
    On February 3, the HHS revealed that it will use $9.5 million for a 
television ad campaign to rebut criticism of the new Medicare law. At 
this point in time, government investigators have questions about the 
source of the funds used, and the means under which the production and 
media contracts have been let.
    In addition, it has come to our attention that the media concern 
hired to purchase the air time is also employed by the President's 
reelection campaign. It is well known that the firm in question, 
National Media Inc., also does substantial work for the Republican 
party and the pharmaceutical industry.
    Because of these concerns, the General Accounting Office is 
conducting an investigation into the matter, and a number of Members of 
Congress have asked the HHS Inspector General for answers about it.
    Given the extremely questionable origin of the ads and the overtly 
political nature of their content, we hope that as a matter of 
fairness, your network will at least suspend running them until some of 
these questions can be answered.
    Thank you for your attention to this matter. We look forward to 
hearing from you.
            Sincerely,
                                           Rosa L. DeLauro,
                                                Member of Congress.
                                              Rahm Emanuel,
                                    Member of Congress.

    Ms. DeLauro. Thank you. Media reports on this issue of the 
ad campaign early on talked about the $9.5 million, quote, ``to 
build public support for the new Medicare prescription drug 
law, seeking to rebut or counteract criticism.'' And that was 
the purpose of the ad campaign.
    All of us in this business are subject to tremendous 
criticism. Wouldn't it be nice if we had $9.5 million or $12 
million in a fund to allow us to combat that? We don't.
    You talk about the ad campaign as public information. My 
question to you is, quite honestly, what kind of a public 
information campaign leaves out critical information for 
seniors?
    Let me mention this. The ads don't tell seniors who enroll 
that they will pay more in premiums in some instances than they 
will receive in benefits. The ads do not educate seniors about 
the gap in their prescription drug coverage.
    The ads don't tell seniors that many medicines that they 
take will not be included on the formulary of the plan in which 
they enroll. The ads don't tell the seniors that the CBO and 
independent budget analysts say that potentially almost 3 
million seniors will lose coverage as a result of the 
legislation.
    The ads don't tell seniors or the disabled that with dual 
eligibility for Medicaid and Medicare, they will be forced to 
pay more for drugs. The ads do not tell seniors that they are 
prohibited from using their money to buy supplemental coverage.
    The ads do not tell them they will pay a substantial 
penalty if they wait to enroll in the drug plan. And the one 
piece of information that is in there on the discount cards, 
quite frankly, doesn't even tell them that it does not provide 
a discount for all medicines.
    And this is a program that is going to start in the year 
2006.
    It seems to me that we are, in fact, rebutting criticism, 
counteracting questions about the law, and we are not engaging 
in a public information campaign. And I say to you, what kind 
of a public information campaign leaves out this kind of 
critical information for seniors?
    Secretary Thompson. Well, Congresswoman, I can tell how 
passionate you are against the ad, and all I can tell you is 
that we had the ad reviewed by many different independent 
groups before it was publicized.
    Ms. DeLauro. Can you tell us who those groups are? Give us 
a list of the individuals that the ad was scrubbed with.
    Secretary Thompson. Sure. And these past 2 weeks, I am 
entering into a new promotional program on prevention that we 
are going to be rolling out in the month of March, that we are 
raising the money privately for, as well as some other ways. I 
had a bunch of individuals that I would say predominantly were 
on your side of the aisle in my office, experts insofar as 
advertising, and they all indicated the ad was very effective 
and they did not see anything political about it; and I will be 
more than happy to share that with you. We played the ad for 
them, and I don't think there was a Republican in the group.
    Ms. DeLauro. Same Medicare, more benefits. It really defies 
imagination.
    Thank you, Mr. Secretary.
    Mr. Shays. Thank the gentlelady.
    And at this time we will go to Mr. Scott, then Mrs. Capps, 
and then Mr. Emanuel and Mr. Davis, and then Mr. Edwards.
    Mr. Scott. Thank you. Thank you, Mr. Chairman.
    And thank you, Mr. Secretary. As you know, I have an 
interest in discrimination, and when you talk about religious 
discrimination, it overlaps with race because some religious 
organizations are all one race or another. Some churches are 
all black, some are all white, so if you can discriminate based 
on religion, you have the wherewithal to discriminate based on 
race.
    As you know, the Head Start bill that passed the House has 
a provision in it that allows discrimination. And my simple 
question to you is whether or not your position is that the 
Head Start program needs to be amended so that a sponsor of a 
Head Start program can tell a prospective teacher that you were 
the best qualified, but we just don't hire Jews. Or you were 
the best qualified, but we only hire people that belong to our 
church, which everybody happens to know is all white.
    Which way should the weight of government come down on? 
Should it protect the minorities trying to get a job or the 
sponsor trying to discriminate?
    Secretary Thompson. Well, you know, Congressman Scott, that 
I am absolutely opposed to any type of discrimination. As I 
understand, this proposal was put in at the behest of a lot of 
the religious, faith-based organizations because they want to 
level the playing field.
    Mr. Scott. They want to discriminate--the level playing 
field is no discrimination on a Federal contract.
    Secretary Thompson. Well, all I can tell you is, that was 
the reason for the language. I will be more than happy to 
review it again, but I was led to believe that there is no 
discrimination whatsoever.
    Mr. Scott. OK. So you have offered no support for the idea 
that is responsible for----
    Secretary Thompson. I support the reauthorization of the 
Head Start bill.
    Mr. Scott. But you don't believe that the sponsor of a Head 
Start program should tell a prospective teacher that we just 
don't hire Jews. You were the best qualified; we just don't 
hire your kind.
    I don't think that ought to be the new law.
    Secretary Thompson. Well, I certainly would like to have 
the opportunity to review that.
    Mr. Scott. When you were Governor of Wisconsin, you 
wouldn't allow that in Wisconsin, would you?
    Secretary Thompson. I probably would have some second 
thoughts.
    Mr. Scott. I know you would.
    Is it the policy of HHS to directly fund religious 
programs, even if the religious program is not directly paid 
for with Federal money? For example, if there is a drug 
counselor program and the drug counselor is paid with Federal 
money, can the pastor or choir director come in and conduct 
worship activities during the government-funded program or not?
    Secretary Thompson. I wish I had had some advance knowledge 
of this. I would have been more up to speed on it.
    All I can tell you, Congressman, is that the faith-based 
organizations, I think in the past have been discriminated 
against by legislation; and the President and this 
administration want to give faith-based organizations an 
opportunity to be able to apply and not be discriminated 
against in getting grants.
    Mr. Scott. Eight percent of the Head Start programs today 
are run by faith-based organizations without allowing them to 
discriminate and without funding religious activities. Catholic 
Charities gets a billion dollars a year--before this 
administration came in.
    So if you are not prepared to answer, that is fine, because 
it is a very specific question, and you can get in trouble if 
you give the wrong answer.
    Secretary Thompson. I would like to have you submit it, and 
I will be more than happy to respond to it.
    [The information referred to follows:]

 Mr. Thompson's Response to Rep. Robert Scott's Question Regarding the 
                   Faith-Based Legislative Initiative

  preserving the integrity of faith-based organizations that receive 
                             federal funds
    It has been settled for more than 100 years that the Establishment 
Clause does not bar the provision of direct Federal grants to 
organizations that are controlled and operated exclusively by members 
of a single faith. See Bradfield v. Roberts, 175 U.S. 291 (1899); see 
also Bowen v. Kendrick, 487 U.S. 589,609 (1988). This long-standing 
right was first codified in Title VII of the historic 1964 Civil Rights 
Act, expanded by Congress in 1972, and unanimously upheld by the United 
States Supreme Court in 1987. Justice Brennan wrote in upholding this 
law, ``Determining that certain activities are in furtherance of an 
organization's religious mission, and that only those committed to that 
mission should conduct them, is * * * a means by which a religious 
community defines itself.'' See Corp. of the Presiding Bishop of the 
Church of Jesus Christ of Latter Day Saints v. Amos, 483 U.S. 327,342 
(1987) (Brennan, J., concurring).
    President Bush believes that when faith-based organizations receive 
Federal funds, they should retain their right to hire those individuals 
who are best able to further their organizations' goals and mission. An 
Orthodox Jewish organization, for example, could lose its unique 
identity as Orthodox Jewish if forced to hire evangelical Christians or 
others who do not support their mission and beliefs. Forcing charities 
to choose between cooperating with the government to help the poor and 
maintaining their religious integrity is not a choice we should force 
faith-based organizations to make.
    Allowing faith-based organizations to hire on the basis of religion 
when they receive government funds protects the same freedom of 
association given other federally-funded organizations to define who 
they are and choose employees dedicated to that cause. For example, an 
environmentalist group that receives Federal funds can hire only 
employees who support its position on environmental conservation. A 
political party receiving government funds likewise can hire only those 
that agree with its ideology and mission. These organizations' ability 
to execute their goals hinges on whether they may choose to hire like-
minded people. President Bush believes that faith-based groups should 
not be denied this same right to hire employees who are similarly like-
minded.
    Head Start is one of the few Federal statutes that require faith-
based organizations to give up their protected religious hiring 
autonomy as a condition of receiving Federal funds under that program 
authority. The President's proposal for Head Start reauthorization 
would prevent discrimination against faith-based organizations by 
explicitly recognizing the right of faith-based groups participating in 
the Head Start program to retain their religious hiring autonomy even 
when accepting Head Start funds.
    Protecting the rights of religious organizations in the proposed 
Head Start reauthorization is part of the continuing effort to 
encourage participation of faith-based organizations. In fact, 
encouraging the participation of religious organizations in Federal 
social service programs is not a new notion. Efforts to clarify 
requirements that had inhibited participation of faith-based 
organizations in Federal social services program were begun under the 
previous administration. For example, the Public Health Service Act was 
amended in 2000 to expressly permit religious organizations providing 
substance abuse services to receive Federal financial assistance on the 
same basis as any other nonprofit private organization without 
impairing the religious character of such organizations or diminishing 
the religious freedom of individuals. Furthermore, the four Charitable 
Choice laws passed by a bipartisan Congress starting in 1996 and signed 
into law by President Clinton explicitly protected religious hiring 
rights.
    In addition to recognizing the right of faith-based organizations 
to take religion into account in making hiring decisions, the House 
reauthorization bill would include in the authorization for the State 
demonstration program a provision protecting the right of parents to 
choose among pre-school providers participating in the program. In 
communities in which faith-based organizations participate in a State's 
demonstration project, parents will have a chance to enroll their 
children in such programs. Parents would also have the opportunity to 
enroll their children in a secular program.
    Allowing faith-based organizations to complete for government funds 
while maintaining their religious integrity is part of the President's 
efforts to use every available resource to fight poverty and despair 
among America's needy. Of course, the President's Faith-Based and 
Community Initiative has worked hard to ensure that faith-based 
organizations receiving Federal funds comply with the constitutional 
parameters outlined by the Supreme Court. The administration, through 
Executive Order, regulations and other statements, has repeatedly 
explained that direct government funds cannot be used for inherently 
religious activities, such as worship, religious instruction, and 
proselytizing. Additionally, beneficiaries must have an opportunity to 
receive federally-funded services regardless of their religion. We are 
committed to removing barriers to the participation of faith-based 
organizations in Federal social service programs and to ensure that 
Federal funds are expended in ways consistent with the Establishment, 
Free Exercise, and Free Speech Clauses of the First Amendment.

    Mr. Scott. Thank you. The omnibus appropriations bill has a 
provision funding Access to Recovery, a voucher program for 
drug treatment. The language in the bill prohibits--requires 
programs to meet licensing standards. Let me read the language:
    ``Conferees direct that all providers participating in the 
Access to Recovery program should be held accountable to the 
same standards of care, performance, licensure and 
certification requirements as other licensed and certified drug 
and alcohol programs in their respective States.''
    Can you assure this committee that money budgeted for that 
program will only go to those programs that meet State 
licensing and certification requirements, as provided under the 
law, and that you will monitor those activities?
    Secretary Thompson. I happen to be a strict believer in the 
law and will do everything the law tells me I have to do.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Shays. I thank the gentleman.
    At this time we will go to Mrs. Capps.
    Mrs. Capps. Thank you, Mr. Chairman.
    And thank you, Mr. Secretary, for being here. Your agency 
has approved a number of comprehensive Medicaid waivers, the 
goal being expanded coverage. These waivers are a trade-off. 
States are exempted from requirements and allowed to reduce 
benefits and raise costs to certain beneficiaries, or current 
beneficiaries.
    In exchange, the States are supposed to increase the number 
of people Medicaid covers. And HHS has announced in a press 
release, which you referred to today, that waivers expanded 
Medicaid coverage to an additional 2.5 million people. However, 
a recent study by the nonpartisan Kaiser Family Foundation 
estimated that the waivers only expanded coverage to 200,000 
individuals, a tenth of the people HHS has claimed to be 
covered.
    I have a number of questions to kind of get at this issue 
in our limited time. So you said you were going to be brief. I 
think these are yes or no questions to start.
    Are you familiar with the Kaiser analysis?
    Secretary Thompson. No, I am not.
    Mrs. Capps. Well, Kaiser says that the number of newly 
insured individuals is only 200,000. And I am asking if your 
estimate counts waivers that were approved but subsequently not 
implemented.
    Secretary Thompson. No, the difficulty is that we approve 
the waiver based upon the information that the State gives us. 
Now, the State may get in financial trouble and not implement 
the waiver fully, or not implement the waiver at all and that 
could be, certainly, a reduction in the numbers.
    Mrs. Capps. OK. Kaiser did only count waivers that were 
actually implemented, which would seem like a more accurate 
analysis. And I am wondering then if your analysis counts 
individuals that already had health insurance coverage under 
other public programs, but were moved into the waiver program.
    Secretary Thompson. We counted those that we approved in 
State plan amendments as well, and this is a big difference 
because Kaiser did not include the State plan amendments that 
we approved. And in our press release we included the waivers 
plus the State plan amendment that we approved that did expand 
the coverage for uninsured Americans.
    Mrs. Capps. And Kaiser only counted individuals who are 
newly insured because to them and to me it seems a bit 
disingenuous to claim credit for individuals who already have 
insurance or already were insured; and I wonder if your 
estimate counts States' projections of enrollment then, rather 
than the actual number of people covered under these waivers.
    Secretary Thompson. We do not collect information on one of 
these--whether these individuals were previously insured. But 
we base our information on, predominantly, the information that 
the State submits to us.
    Mrs. Capps. It would seem to me that a more accurate 
account would only count the individuals already enrolled. And 
it is a particularly relevant topic since a number of States 
have only partially implemented their waivers or have frozen 
enrollment in their waiver initiative. So when you look at the 
actual number of people enrolled in these waiver initiatives 
who were previously uninsured, the Kaiser Foundation, I think 
it is hard not to believe that they are only counting the 
coverage; and this is only 200,000 people, which is a far cry 
from the administration's claim of 2.5 million people. It seems 
to highlight a credibility gap for this administration, and I 
think it raises serious questions about the waiver program.
    I am concerned about the cuts in coverage that occur under 
these waivers. More concerned, in fact, that they may not be 
accompanied by coverage expansion that we were led to expect. 
They are being highly touted, and I want us to really 
understand what they are actually doing. I am also really 
concerned about the States that don't fully implement the 
expansions that they have promised to make and that they have 
been given waivers for. For example, according to Kaiser, 
Oregon was given a waiver that allowed it to cap enrollment in 
Medicaid, increase programs and cost-sharing and reduce other 
benefits. They implemented these cuts. But Oregon also was 
supposed to cover parents and other adults below 185 percent of 
poverty.
    Now, Oregon isn't alone in this practice and I want to ask 
very briefly, are you doing anything to make sure that the 
States live up to their promises in the expansion programs, and 
not using waivers simply to reduce their cost?
    Secretary Thompson. Well, we don't use the waivers to 
reduce the costs. We use the waivers as a way in which we 
expand benefits.
    Mrs. Capps. I know.
    Secretary Thompson. That is the impetus.
    Mrs. Capps. I understand your impetus, but I believe it 
really----
    Secretary Thompson. We monitor. We monitor these waivers. 
But a good share--you know, we do a have shortage. We have got 
a huge responsibility.
    Mrs. Capps. I understand.
    Secretary Thompson. But I just wanted to say that Kaiser 
did not include a lot of the things that we approved in the 
State plan amendment, which really makes a difference.
    Mrs. Capps. I am just concerned that the most needy in our 
society now may not be getting the services that they need, and 
we need more oversight into this
    Mr. Shays. I thank the gentlelady.
    Mr. Emanuel. Excuse me--yes, Mr. Emanuel and then Mr. 
Davis.
    Mr. Emanuel. Thank you, Mr. Chairman.
    Mr. Secretary, thank you and I know you have got the trip 
and you are going to get ready for it. You are leaving real 
quickly.
    Three quick subjects: On the issue of prescription drug 
prices and affordability, we have--I think there are two 
methods on the table to deal with price. And I think, to be 
truthful, the reason the bill that passed isn't popular and 
isn't being embraced among seniors is because it fails to deal 
with the fundamental issue about price and affordability.
    Now one method, Congressman Gutknecht and I have led the 
effort on his legislation allowing the market and competition 
to give you choice. We would rather than pay 40 percent more, 
through competition, prices would come down, we would stop 
ending up subsidizing the French and German and Swiss, British 
who are basically paying 40 percent less than we do.
    The other method is create from Medicare a ``Sams Club'' 
and use the 40 million Americans to get the scale that they 
provide to basically negotiate prices. Your own IG--and I don't 
know if you know this and in following up on how Congressman 
Gutknecht had brought to your attention some issues--your IG 
testified in front of this committee on July 9, 2003. Studied 
24 drugs--Medicare buys, veterans' buys--and under those 24 
drugs, only 24 drugs picked by your IG, veterans saved 2 
billion a year versus what Medicare pays. And quoting this 
assessment, payment continues to grow as the amount paid by 
Medicare grows larger; and that bill prevents you from doing 
what private sector Sams clubs do. Everybody negotiates and 
uses scale to get better prices.
    Now I know what you said earlier. So you are in a box. 
Maybe you would use the power. Maybe you wouldn't use the 
power. Maybe if we withdrew competition, that is another 
method. And even Mr. Scully, your own CMS director said that 
relying on the private plans that you mentioned earlier has 
never been tried and to quote him directly, It doesn't exist in 
nature.
    So that is a cop-out in my view. You could have the power. 
We know it exists. It is being done by VA and other authorities 
here in the U.S. Government to get the type of prices and to be 
fair to our seniors and our taxpayers.
    Two other things real quickly, and I will leave you time to 
answer on your choices. One on the commission to study 
reimportation, there are over 260 million Americans. I wouldn't 
pick me to chair it, I am clear in my position. But I surely 
wouldn't pick Mr. McClellan to chair it either, he is clear in 
his position.
    As far as I could tell, David Kay is available.
    I mean, why of 260 million Americans you would pick him. He 
has already said where he is on this, and if the commission is 
sincere, it is always going to be questioned now that he chairs 
it.
    And lastly, on the issue of the uninsured, I have a bill. 
Rather than using a tax credit--it is a bipartisan bill--
turning that tax credit into a voucher, allowing me to take 
that voucher and go into a subsidiary of the Federal Employees 
Health Benefit Plan and use that scale of 33 working uninsured 
who have a voucher to go into a pool to get the economies of 
scale; and I would love for you to look at it and work with 
your staff if you are interested.
    It is bipartisan. You can pick any one of them or ignore 
them for all I care. That is not true, but go ahead.
    Secretary Thompson. Well, I am not going to ignore them and 
I will address all three of them.
    First off, in regards to the--let's go to the third one 
first. Absolutely. You know you have been over to see me. I 
told you I had some ideas. You said you had some ideas. I said 
I would love to work with you on a bipartisan basis to come up 
with a program on the uninsured.
    Mr. Emanuel. I will be waiting for you when you come back 
from Iraq.
    Secretary Thompson. And I will be more than happy to do 
that, and let's see if we can come up with something. And 
Congresswoman Baldwin and Congressman Gutknecht and anybody 
else who wants to join us would be--I would appreciate.
    Secondly, Mark McClellan, he is an expert. Everybody 
realizes that. He is an outstanding individual. I don't think 
that you have to worry one darned bit. But I understand your 
criticism and your suggestions, and maybe we should have some 
others. I will review that.
    Mr. Emanuel. Thank you.
    Secretary Thompson. I can understand where you are coming 
from on that, but Mark was not that interested in doing it. I 
wanted him to do it because I trust his judgment a great deal. 
He is a fine individual.
    Third, in regards to negotiations, right now even if I had 
the authority and the power, Congressman, if the PBMs were 
going to negotiate with the pharmaceutical companies, what 
would I do? I mean, we don't know; you know, that is a new 
system.
    But seniors certainly need somebody to do the negotiating 
for them. I think that the new PBM model is going to work 
extremely well, and I think it is going to drive down the 
prices.
    Mr. Emanuel. I trust you more than I do the PBMs. You work 
for the taxpayers. They are a private company.
    Secretary Thompson. And I think the thing that is really 
going to drive it down is this transparency that we are going 
to put up on the Web page and that you can look at and that 
everybody can watch.
    Mr. Shays. Mr. Secretary, you have three members. You have 
Mr. Davis, Mr. Edwards and myself. Are you able to stay till 
about 10 after?
    Secretary Thompson. Yes.
    Mr. Shays. And your trip--I am not sure that was wise to 
share with others--is out there, but we do want you to travel 
safely.
    Mr. Davis. I am sorry.
    Mr. Davis. Thank you, Mr. Chairman.
    And, Mr. Secretary, let me try to ask you two sets of 
questions and give you a chance to respond to them. The first 
one deals with what Mr. Emanuel was questioning you about at 
the very beginning, the question of the negotiating authority 
that the VA has right now.
    One would think that we ought to be able to look at that 
experience and make a set of conclusions whether or not the 
VA's participation has somehow distorted the market or created 
some untoward consequences that might tell us something about 
what would happen if you had some of the negotiating authority. 
So I want you to identify whether or not there have been any 
imperfections in the market or any unusual things that have 
happened that you think might be of any value to us from an 
analytical standpoint.
    And second of all, I want to ask you about a totally 
different topic which is the corrected disparities report that 
you are well aware of, involving racial disparities in this 
country. And I certainly applaud you for acting to issue the 
correct report and to alter the report language to acknowledge 
that there is a significant disparity in the country between 
the health care status of African Americans and Caucasians.
    But I want to focus on, frankly, how we got to this point 
in the first place from an internal standpoint. How did the 
report get altered to start with? And then what does that tell 
you about your internal processes at HHS that a document that 
was prepared, presumably by bureaucrats, people who weren't 
involved in the political process, had very critical language 
taken out of it. How did it get sanitized and what steps have 
you taken to address that problem?
    You can answer both of those.
    Secretary Thompson. I don't know any examples that there 
are distortions in the marketplace right now because the VA is 
purchasing drugs. I don't know of any. They have been doing it 
for some time and very effectively. I think that everybody 
recognizes the effectiveness of it.
    Whether or not, if you teamed up with what the VA purchases 
and what HHS would purchase, or could purchase under some new 
authority, if you gave all the authority to purchase the drugs 
under Medicare to one person or one department, whether that 
would cause a distortion, it conceivably could. I can't 
guarantee that or I can't tell you that it would. It 
conceivably could.
    In regards to the report, first off, the body of the 
report, not one word changed in the body of the report. It was 
the--as I understand it, it was the narrative about the report 
that was changed to make it more positive. But the body of the 
report, as I understand it, was not changed at all.
    Mr. Davis. To cut you off one second, as I understand it, 
it wasn't just to make it more positive. The conclusion was 
removed from the report that stated that there were racially 
identifiable disparities.
    Secretary Thompson. All I can tell you is, when I heard 
that, I said, we will issue it. It makes no sense.
    Mr. Davis. How do you think it happened----
    Secretary Thompson. I think people just wanted this to be a 
more positive report and made that editorial position known, 
and that is what happened.
    Mr. Davis. Who do you think made that choice? You say 
people.
    Secretary Thompson. I am responsible because I am the 
Secretary, so I am not going to say that, you know, this person 
or that person--it was a mistake. I corrected it immediately 
and now everybody knows that, and I will take the blame for it.
    Mr. Davis. All right. I will yield back my time in the 
interest of time, Mr. Chairman.
    Mr. Shays. I thank the gentleman.
    Mr. Edwards.
    Mr. Edwards. Thank you, Mr. Secretary, for all the good 
work you do and for being here today. I would like to revisit 
the issue raised by Congressman Scott regarding the President's 
faith-based initiative policy.
    I absolutely accept your statement that you oppose 
discrimination of any kind. So let me just ask this question in 
terms of fact.
    Isn't it a fact that this administration's policy is that a 
group, a private group, may receive $5 million in Federal tax 
dollars for drug counseling or to provide welfare reform 
efforts to help in job training; and then with those tax 
dollars, the administration says it is OK for that group to 
say, I am not going to hire you for solely one reason--because 
I don't like your religious faith.
    My question is, isn't that a fact that the administration 
supports that policy, the ability to discriminate in job hiring 
even when using Federal tax dollars, based solely on an 
American citizen's personal religious faith?
    Secretary Thompson. The administration believes that faith-
based organizations have been discriminated against in the 
past, and what they are trying to do is to correct that and 
allow faith-based organizations to get grants and dollars equal 
to what other organizations do and allow religious 
organizations to hire people of that religion.
    Mr. Edwards. Mr. Secretary, I don't think you directly 
answered the question. I know you stated what the 
administration's trying to do. So I will just make a statement 
with the time I have.
    The fact is, the administration is saying that it is OK for 
a group to receive $5 million for a drug counseling program, 
and then say to a job applicant, even when tax dollars are 
involved, we are not going to hire you because you are Catholic 
or Jewish, or we are not going to hire you because you don't 
pass our personal religious test.
    I find it extremely ironic that an administration claiming 
that what we should try to do is stop discrimination against 
faith-based groups, says it should be the policy of the U.S. 
Government to subsidize religious discrimination and religious 
bigotry.
    Let me ask you--a second issue on that question of, is the 
administration following through with what it says it believes, 
the issue of ``no child left behind?'' Am I correct in looking 
at some of the numbers put together by the Democratic staff of 
the Budget Committee that this budget actually would cut 
450,000 children off of child care services over the next 7 
years?
    Is it a 15 percent reduction in the real investment for 
Federal child care programs? If so, how does that comply with 
the philosophy of ``no child left behind''? That is a lot of 
children being left behind.
    Secretary Thompson. First off, I just wanted to point out 
that the individual receiving the services is guaranteed to 
receive all services.
    Mr. Edwards. Right. But to clarify that, Mr. Secretary, 
because I don't want this to be misunderstood, the fact is this 
administration says if you are applying for a federally funded 
job, a group may legally say that we are not going to hire you 
because you are Catholic or Jewish or Methodist or Hindu, or 
because you don't pass our private religious test. I find that 
deeply offensive.
    But go ahead and please answer the second question.
    Secretary Thompson. The second one, in regards to the 
projections out, these are projections made by OMB and these 
are projections that are going to mathematically get to one-
half of the deficit by 2009.
    But, you know, that the budget is submitted each year. I 
didn't have any input into putting the long-range projections 
in. I helped prepare the budget for 2005 for my Department. If 
I am here in 2006, I will be putting together a budget based 
upon the facts and figures and the evidence I have at that 
time.
    Mr. Edwards. I accept that. But just to make the facts 
clear, if the administration is asking the American people to 
believe the numbers they are presenting on their 5-year 
budgets, I assume they are telling the American people these 
are honest numbers factually. This is a 15 percent cut in child 
care services that would result directly in 450,000 children 
losing their care services.
    I am not suggesting you support that policy, but that is 
the fact of this budget proposal.
    Thank you, Mr. Secretary, for all the good things that you 
do.
    Secretary Thompson. Thank you, Congressman Edwards.
    Mr. Shays. Thank you, Mr. Secretary. I am the last one, and 
then you are on your way.
    I first want to say to you that in my judgment, you have 
been the finest and most outstanding Governor that I have ever 
seen in my political life, and the fact that we could get you 
to serve as Secretary where you have been truly outstanding, I 
just--I applaud you for what you have done as Governor and I 
know that members on both sides of the aisle would join me in 
applauding the job you have done as Secretary.
    In dealing with this whole issue of whether or not you 
could play a role in setting prices for prescriptions, when we 
asked CBO to look at this, given this was designed to be a 
private providing plan, they said, we estimate that striking 
that provision which would have a negligible effect on Federal 
spending because CBO estimates that substantive savings will be 
obtained by the private plans and the secretary would not be 
able to negotiate prices that further reduce Federal spending 
to a significant degree. The whole logic was that we had these 
private plans right now negotiated.
    They have millions of members, and now we are going to add 
the Medicare members on top of that. We think they are going to 
be able to renegotiate prices, make them lower than they have 
already made them, not just for Medicare, but for others that 
they have in their plans. And so, there was no logic to put you 
into this system, because we don't have one system for all.
    Do you find anything that I said----
    Secretary Thompson. Absolutely not. You are absolutely 
correct, as you usually are, Congressman.
    Mr. Shays. Thank you. But with regards to the whole issue 
of the plan itself, isn't it true that we never promised that 
this plan would solve everyone's problem?
    Secretary Thompson. That is right.
    Mr. Shays. We made it what we thought was affordable, and 
even if I thought the estimates were $400 million--billion, I 
always assumed they might be double. But I wasn't going to go 
with a plan that started out at $800 million because I thought 
that might go double.
    So we have always anticipated this plan is going to cost 
more.
    But isn't it true, if we have the money, we can make it 
more generous? All we simply have to do is pass legislation 
that will make the plan more generous; isn't that true?
    Secretary Thompson. It is in the power of the Congress to 
do that at any time they want to.
    Mr. Shays. Now, do you find it objectionable that we would 
have this plan fully take impact on 2005--excuse me, at the 
beginning of 2006, giving people time to understand this plan, 
but that we start.
    When Ms. DeLauro said the plan doesn't even begin until--
isn't it true that in the next few months people are going to 
be given a card, that they are going to be able to take this 
card and have major purchasing power and see their drug costs 
go from 10 to 25 percent reduction?
    Secretary Thompson. Absolutely. The cards are going to be 
rolled out in May, and people start enrolling in May, and June 
1, they can use their cards effectively. And we believe with 
the transparency on the Web page that we put up, it is going to 
have a huge tendency to drive down the prices. We think it is 
going to be more than 10 to 25 percent.
    Mr. Shays. So for $35 a year they will get a card that will 
basically help reduce the price 10 to 25 or maybe even 35 
percent?
    Secretary Thompson. Absolutely.
    Mr. Shays. Now even if they buy this card, they are not 
locked into participating in the program because it is my 
understanding--and I just want to make sure I am true--that 
they have to make this decision next year, sometime in the 
fall, and it will stretch into the next year?
    Secretary Thompson. That is correct.
    Mr. Shays. So--the end of 2005, end of 2006, so people have 
lots of time to decide whether they want to be part of this 
program and in fact they can still participate with the card.
    Secretary Thompson. Absolutely. There is no preclusion 
whatsoever. They can have that card immediately, and we want 
them to have it. We want every senior to have it.
    Mr. Shays. Now, let me just have you react to this final 
thing. There are approximately 43 million Americans who are 
uninsured. They get health care if they go to a hospital, but 
they still are uninsured; and they might have people hound them 
for their payments, and so that is not pleasant, to say the 
least. But the statistics I look at that there are 7.3 million 
or 17 percent of the uninsured who make over $75,000 dollars. 
What does that tell you?
    Secretary Thompson. It tells me and I believe it tells you 
that those individuals have made a conscious decision that they 
don't believe they are going to get sick and they don't need 
health insurance and don't want it. We think it is 18 percent, 
but 17 percent is great.
    Mr. Shays. OK. Well, you know what, maybe my math was 
wrong.
    At any rate, wonderful to have you here. You have a very 
large Department. You have done a great deal to get that 
Department moving in a very effective way and we certainly 
appreciate the work you have done.
    Secretary Thompson. Thank you very much.
    Mr. Spratt. I would only echo the chairman. Thank you for 
coming and thank you for your forthright answers. We look 
forward to working with you.
    Secretary Thompson. Thank you very much, Congressman. All 
of you, thank you.
    Mr. Shays. And travel safe.
    This hearing is adjourned.
    Wait. I am sorry; we have second panel. I am very sorry. We 
will just stand at ease a second.
    [Recess.]
    Mr. Shays. Mr. Weil, I would like to welcome you here. You 
have given very good information to this committee, and I thank 
you for waiting to be part of the second panel, but I guess if 
you follow the Secretary, it is not a bad thing. So you have 
the floor and you have the flexibility to make your statement 
as you would like.
    Mr. Spratt. Mr. Chairman, could I say one word of welcome 
to him?
    Mr. Weil, first of all thank you for coming. And secondly, 
I am sorry that we don't have more here, but your statement is 
excellent. I have read it as the hearing has gone on. We will 
see to it on our side that copies of the statement are not only 
entered in the record but made and given to the Democratic 
members of the committee, because I think you have done an 
excellent job. And you have got two members here who will be 
listening very intently. So thank you very much for your 
participation.
    Mr. Shays. Actually, it is kind of my favorite when the 
members leave and we get an opportunity to get into more depth. 
So thank you.

    STATEMENT OF ALAN R. WEIL, DIRECTOR, ASSESSING THE NEW 
                FEDERALISM, THE URBAN INSTITUTE

    Mr. Weil. Well, thank you, Mr. Chairman, Congressman 
Spratt, and I appreciate those words of welcome.
    My name is Alan Weil. I am a researcher at the Urban 
Institute here in Washington and former Director of the 
Colorado Medicaid Agency. My remarks will focus on how the 
proposed budget will affect Americans' health insurance, a 
topic that you all spent some time on with the Secretary.
    Last month the Institute of Medicine released a report 
documenting the consequences of having 43 million Americans 
without health insurance and calling for universal coverage by 
2010. Unfortunately, the President's budget will move us away 
from this goal.
    I reach that conclusion for three reasons:
    First, the proposed budget fails to provide the resources 
necessary to increase health insurance coverage.
    Second, the proposals included in the budget are not 
directed at those who most need assistance and, in fact, may 
undermine coverage that currently exists.
    And, third, the budget ignores the critical role States 
play in providing health insurance and puts States in a worse 
position to meet their citizens' needs.
    Now, the President's budget proposes a modest tax credit 
for low-income people who purchase health insurance in the 
individual market, although, as has been noted, the budget does 
not identify a source of funding for this portion of the 
proposal.
    Appropriately designed tax credits could play a 
constructive role if part of a comprehensive approach to 
covering the uninsured, but the credits proposed in the budget 
suffer from five problems.
    The most serious problem with this tax credit is 
availability. The proposed credits can only be used in the 
individual market where insurers routinely deny coverage to 
those with identifiable health problems and write coverage that 
excludes certain conditions. Health insurance simply will not 
be available to those who most need it, regardless of the size 
of the tax credit.
    The second problem with tax credits is adequacy. The $1,000 
to $3,000 credit falls far short of the cost of an insurance 
policy. Newly insured tax credit users will primarily end up in 
plans with high deductibles and copayments, causing them to 
defer needed care, risking bankruptcy if they get sick, and 
continuing to burden the health care system with uncompensated 
care.
    The third problem with tax credits is the amount. Tax 
credits suffer from what I call the Goldilocks problem. A 
credit large enough to entice a significant number of people to 
buy insurance is also large enough to disrupt the employer 
coverage on which more than 100 million Americans rely. A 
credit small enough to avoid harming the employer market is too 
small to help the uninsured. In the end, there is no such thing 
as a tax credit that is just right.
    The fourth problem with tax credits is administration. Many 
families will be unaware of the credit. They will fail to take 
advantage of it, or they won't take it in advance because they 
will worry about having to pay the government back.
    And the fifth problem with tax credits is accountability. 
When individuals face rising premiums, disputes over coverage, 
or concerns about quality, there will be no one there to help 
them.
    Now, the President also proposes, as you have discussed, a 
tax deduction for the premiums paid for catastrophic health 
insurance coverage. But that provides no benefit to the vast 
majority of people currently without insurance coverage. And 
the budget encourages the formation of association health 
plans, but they offer almost no benefits to the uninsured as 
well.
    Now, with respect to Medicaid, which is the cornerstone of 
existing coverage for low-income Americans, the budget 
resurrects last year's proposal to convert the entire program 
into a block grant. Medicaid block grants are a bad idea, and 
the Nation's Governors were right to reject them last year. The 
premise of the block grant proposal is that Medicaid is 
inefficient. But Medicaid's high costs are due primarily to the 
complex needs of the elderly and disabled people it serves, not 
to program inefficiencies.
    The options States would gain through block grants to scale 
back benefits and increase copayments will not generate 
substantial savings. Block grants shift the financial risk of 
meeting the most vulnerable Americans' needs to the States, 
where revenues are more volatile and tax bases are narrower. 
And block grants lock in current inequities across States.
    I believe actually that Medicaid block grants would have 
the ironic effect of reducing creativity and innovation at the 
State level. Why? Because money is necessary for States to 
undertake innovations, and the block grant structure, by 
shifting costs and risk to the States, will end up making 
States more conservative in their behavior.
    Now, the President's budget also does not propose to extend 
the enhanced Federal matching rate that was instrumental in 
keeping Medicaid cuts to a minimum last year, and it fails to 
extend the time States have to spend their SCHIP funds. 
Meanwhile States are facing new administrative and programmatic 
costs associated with the prescription drug bill. Together, 
these provisions reduce the resources States have to meet the 
health care needs of their residents.
    In sum, the budget provides inadequate resources to address 
the needs of the uninsured. The substantive provisions in the 
budget offer benefits primarily to the healthy and wealthy and 
take them away from the sick and the poor. And the budget 
leaves States bearing a larger share of health care costs in 
2005 than they did in 2004, even as State revenues remain 
relatively flat. While States may ultimately wield the axe of 
health insurance coverage cuts, this budget helps aim the 
blade.
    I encourage your critical review of the administration's 
2005 budget for the Department of Health and Human Services so 
we can make progress toward the goal of ensuring health 
insurance for all Americans. I greatly appreciate the 
opportunity to be here and would be happy to answer questions 
that you might have.
    Mr. Shays. Thank you very much, sir.
    [The prepared statement of Mr. Weil follows:]

    Prepared Statement of Alan R. Weil, Director, Assessing the New 
                    Federalism, the Urban Institute

    The views presented are those of the author and do not necessarily 
represent those of the Urban Institute, its trustees or its sponsors.
    Mr. Chairman, members of the committee, I appreciate the 
opportunity to appear before you today to discuss the President's 
proposed 2005 budget for the Department of Health and Human Services. 
My name is Alan Weil and I direct the Assessing the New Federalism 
project at the Urban Institute, a non-profit, non-partisan research 
institute in Washington, DC before coming to the Urban Institute I was 
executive director of the Colorado Department of Health Care Policy and 
Financing, which is the state Medicaid agency.
    While the HHS budget covers many topics, I will focus on how it 
will affect Americans' health insurance coverage. Last month, the 
Institute of Medicine (IOM), which, as part of the National Academy of 
Sciences, has a charter granted by Congress to advise the Federal 
Government on scientific matters, released a report calling for 
universal health insurance coverage in America by 2010. The report, 
which was the culmination of 3 years of study, documented the huge cost 
to the nation, to communities, to families and individuals for leaving 
this problem unaddressed. It called for leadership from Congress and 
the administration to achieve the goal of universal coverage. Knowing 
that solving this problem would take some time, the IOM also 
recommended that existing sources of public insurance coverage be 
maintained so the problem does not get even worse in the interim. And 
the report reminded us that there are 43 million Americans without 
health insurance--a figure that has grown by 3 million in the last 3 
years.
    Unfortunately, the proposed 2005 budget fails to provide the 
leadership the nation needs in addressing the problem of the uninsured, 
and it fails to protect the existing coverage most Americans have. This 
budget represents a step backwards when it comes to one of America's 
most important challenges: covering the uninsured.
    There are three ways of considering how the President's budget will 
affect the uninsured. First, the budget includes a few proposals 
specifically designed to address this topic. Second, the budget 
includes a number of provisions that affect Medicaid, which is the 
cornerstone of coverage for low-income Americans who would almost 
certainly be without insurance coverage if they did not have Medicaid. 
Third, the budget affects the costs and funds states have available to 
meet their residents' health care needs. I examine each of these areas 
in turn to reach some overall conclusions regarding the effects of the 
budget on the uninsured.
                      proposals for the uninsured
    The President's budget proposes three policies specifically 
targeted at the uninsured.
    First, the President ``proposes'' a modest tax credit for low-
income individuals and families that purchase health insurance in the 
individual market--that is, who buy it on their own and do not receive 
it through their employer. I put ``proposes'' in quotation marks 
because the budget does not include funding for this measure. This 
makes it difficult to take the proposal seriously, since the 
administration can only advocate for these provisions if they identify 
offsetting savings--something they have thus far declined to do.
    Appropriately designed tax credits could play a constructive role 
if they were introduced as part of a comprehensive effort to provide 
health insurance to all Americans and they were used in conjunction 
with expansions of public coverage for low-income people. However, in 
the President's budget tax credits stand alone and therefore must be 
judged alone for their ability to meet the needs of the uninsured. Many 
people have written about the shortcomings of tax credits as an 
approach for reducing the number of people without health insurance. 
Tax credits suffer from five problems--problems of availability, 
adequacy, amount, administration and accountability.
    Availability. The most serious problem with tax credits is that of 
availability. Most tax credit proposals, such as the one offered by 
President Bush, are designed to encourage people to purchase coverage 
in the individual health insurance market. Insurers in this market 
routinely deny coverage to those with any identifiable health problems, 
or they write coverage that excludes conditions or body systems where 
there is any history of medical problems. When coverage is offered, 
rates are many times higher for older adults than for those who are 
younger. Administrative costs routinely exceed 30 percent of the 
premium. Given the current state of the non-group market, health 
insurance simply will not be available to those who most need it, 
regardless of the size of a tax credit.
    Adequacy. The second problem with tax credits is that of adequacy. 
The size of the credit--$1,000 for an individual and $2,000 to $3,000 
for a family in the President's proposal--falls far short of the cost 
of health insurance. Since few families of modest means can or will pay 
the difference between the credit and the cost of a typical health 
insurance plan, newly insured tax credit users will primarily end up in 
plans with deductibles and copayments that run in the thousands of 
dollars, with many excluded services or significant limitations on 
coverage. These limited benefit packages will leave families in exactly 
the position they find themselves today: deferring needed care because 
of cost, at risk of bankruptcy if they get sick, and placing a 
tremendous financial burden of uncompensated care on the entire health 
care system.
    Amount. The third problem with tax credits is that of the amount. 
Tax credits suffer from what I call the goldilocks problem. That is, a 
credit that is large enough to entice a significant number of people to 
buy health insurance in the individual market is also large enough to 
cause serious disruption in the employer market, thereby jeopardizing 
coverage for a much larger number of people. A credit that is small 
enough to avoid harming the employer market is too small to help very 
many of the uninsured. Most tax credit proposals seek the middle 
ground, but there is no such thing as a tax credit that is ``just 
right.''
    Another often ignored problem with setting the amount of the credit 
is how it will interact with existing or potential state policy choices 
with respect to public coverage through Medicaid and/or SCHIP. The 
presence of a tax credit large enough to help an individual purchase 
coverage will also reduce the incentives states have to retain or 
expand optional coverage in public programs that require the state to 
pay a portion of the bill. Faced with the choice between a fully 
federally funded tax credit or a matching Medicaid or SCHIP program, 
states have a clear incentive to rely upon the former. This scaling 
back of state effort would yield fewer people with comprehensive 
insurance coverage and a larger fiscal burden for the Federal 
Government.
    In short, it is impossible to set a credit amount that strikes some 
theoretically correct balance between helping no one and undermining 
the existing public and private health insurance system.
    Administration. The fourth problem with tax credits is that of 
administration. At a minimum, a tax credit must be refundable and paid 
in advance if it is to help a working family purchase coverage. 
Unfortunately, even with these provisions many families will be unaware 
of the credit, fail to take advantage of it, or not take it in advance 
because they will worry they will have to pay the government back if 
they receive a small wage increase during the year.
    Problems of administration arise in part from the desire to use the 
tax system to effect a goal that is inconsistent with its primary 
purpose. Although recent provisions, such as the EITC and the child 
care credit, have included similar features of refundability, neither 
of those credits involves the same complexity as that of the proposed 
health insurance tax credit. For example, eligibility for the health 
insurance credit is based upon the absence of something else--employer 
sponsored insurance and public insurance--which must be verified. 
Health insurance is bought by family units that do not necessarily 
align with tax filing units. The tax code is very good for changing 
marginal incentives but it is an awkward tool at best for achieving 
health insurance coverage.
    Accountability. The fifth problem with tax credits is that of 
accountability. Most people rely upon their employer or a public agency 
to provide them information about their health plan, assist with 
problems, and monitor the quality of coverage. But people in the 
individual market are on their own. If their coverage is cut, their 
premiums rise, or there is a dispute over their benefits, they must 
fend for themselves. If the Federal Government is providing financial 
incentives to purchase coverage, individuals will expect the Federal 
Government to address these problems. Consumer outcry among those who 
are denied coverage or who feel mistreated by their health plan will 
create immense pressure for the Federal Government to do something.
    Overall, the President's proposed tax credits will only help a very 
small number of people purchase health insurance, are inefficient as a 
matter of health policy because they will mostly be used by people who 
already have coverage, and they put at risk the coverage many people 
now have through their employment.
    The President's second proposal is to provide a tax deduction for 
the premiums people pay for catastrophic health insurance purchased in 
conjunction with the establishment of a Health Savings Account (HSA). 
This proposal offers no new coverage for the uninsured and threatens to 
increase costs for people most in need of coverage.
    It can be debated whether HSAs will achieve their stated goal of 
turning patients into price-sensitive, value-seeking consumers. What 
cannot be debated is that every person who gives up comprehensive 
health insurance coverage and shifts to catastrophic coverage is moving 
from a broader risk pool to a narrower one. It can be debated whether 
HSAs are only a good deal for healthy people. What cannot be debated is 
that HSAs are a better deal for healthy people than they are for sick 
people, and they are a better deal for wealthy people than they are for 
poor people. Inherent in the HSA approach is the tendency to divide the 
health insurance risk pool between high and low risks and between rich 
and poor. While the extent to which this division will occur can be 
debated, the tendency for it to occur cannot.
    The only possible consequence of providing a tax subsidy for the 
purchase of catastrophic coverage is to even further skew the benefits 
of HSAs to the rich. After all, a tax deduction offers the most value 
to people with the highest incomes, and is of little or no value to the 
typical person without health insurance.
    Thus, at best, the budget proposal helps the wealthiest Americans 
while doing nothing for the uninsured. But at worst, the proposal 
increases the incentive for healthy people to leave the broader risk 
pool, thereby increasing premiums for everyone else, and making it 
harder for employers to continue providing coverage to their employees. 
This is a step in the wrong direction when it comes to addressing the 
needs of the uninsured.
    While not actually in the budget, the President also proposes to 
permit the formation of Association Health Plans that can purchase 
insurance coverage for a group while being exempt from state insurance 
regulations. The best thing that can be said about this proposal is 
that it does not cost any money. However, this proposal shares the 
fundamental weaknesses of the other two proposals in the budget: it 
encourages fragmentation of the risk pool and it does nothing to 
address the fundamental reason so many people are without health 
insurance, which is cost.
    In sum, the three proposals related to health insurance coverage 
represent a flawed and ineffective set of approaches to reducing the 
number of Americans without health insurance. All three fragment the 
risk pool, which means that, to the extent anyone benefits from the 
proposals, the benefits will flow to people who are healthy and not to 
those with the greatest need. Two of the three rely upon changes in the 
tax code to encourage individuals to change their behavior, which has a 
failed track record in the area of health insurance. And the only one 
of the three that is funded directs its funds to higher income people.
    Most disappointing is that elsewhere in the budget the President 
touts the success of the State Children's Health Insurance Program 
(SCHIP). While SCHIP has its limitations, it does provide a 
comprehensive set of benefits to the neediest children and it does not 
discriminate against those who are sick. Given the choice between 
building upon programs like Medicaid and SCHIP that have a proven track 
record of providing access to health care services to needy Americans, 
and experimenting on the poor with new theories like tax credits and 
tax-preferred savings accounts, this budget reflects the wrong choice.
                           medicaid proposals
    In order to understand the implications of the President's budget 
on the uninsured, it is also important to examine how the budget 
affects the Medicaid program. Medicaid is the cornerstone of the 
nation's policy on covering the poor, reaching 50.7 million people.
    The President proposes a handful of changes in the Medicaid 
program, many of which are small, but positive steps for the program. 
However, there are two large proposals that would have more substantial 
effects on the program.
    The budget proposes changes designed to limit a series of 
strategies states have used to obtain Federal matching funds. The 
overall goal of improving Medicaid's fiscal integrity is a worthy one. 
However, this initiative has two shortcomings.
    First, barriers to state financing schemes can also impose undue 
barriers to legitimate state efforts to finance their programs. At a 
time when state resources are particularly tight, states can ill afford 
to have the Federal Government block their appropriate efforts to 
preserve the funding they need to administer their Medicaid programs.
    Second, this initiative, if successful, will remove funds from the 
Medicaid program at a time when the needs of that program are growing. 
The President's budget does not propose to plow the savings this 
initiative generates back into the Medicaid program or into other 
efforts to meet the health care needs of low-income people.
    The President's budget also indicates a continued interest in 
converting the entire Medicaid program into a block grant, although 
specific provisions to make this change do not appear in the budget. 
The Nation's Governors were right to reject this risky and destructive 
proposal last year. Another year's time having passed does not make 
this proposal any better.
    Many people have written about the damage Medicaid block grants 
will cause to the millions of low-income people who currently are 
enrolled in the program, and to the longer-term fiscal circumstances of 
the states. In a paper I wrote with my colleague John Holahan we 
discuss four reasons block grants for Medicaid are a bad idea: they 
represent a misdiagnosis of the problems facing Medicaid, the 
flexibility they create is unlikely to generate substantial savings, 
they shift risk to a level of government less able to bear it, and they 
lock in existing inequities.
    Misdiagnosis. Medicaid is an efficient program. While the program 
is expensive, this is primarily because of the population it serves. As 
the President's budget shows, 69 percent of Medicaid spending is 
attributable to people with disabilities and the elderly--groups for 
whom private health insurance is not a realistic option. When comparing 
similar populations, Medicaid costs per person are actually lower than 
those for private insurance. Thus, the premise of the block grant 
proposal--that Medicaid is inefficient and block grants would make it 
efficient--is flawed.
    Flexibility does not provide fiscal relief. Our analysis shows that 
scaling back optional benefits and increasing cost sharing will not 
generate substantial savings. Under current law states can eliminate 
certain categories of eligibility and tighten eligibility standards. 
Even in tough fiscal times states hesitate to take these actions 
because they know that the Medicaid population has no other 
alternatives. Block grants would give states the new option of creating 
waiting lists, but there is little reason to believe states would find 
this more appealing than the unpleasant options already available to 
them under current law.
    Shifting risk. The primary effect of a Medicaid block grant is to 
shift the financial risk of meeting the health care needs of the 
poorest and most disabled Americans to the states. State revenues are 
more volatile than those of the Federal Government, their tax bases are 
narrower, and they cannot run deficits. In tight times states are 
likely to shift these risks to local governments and even to individual 
enrollees. A health care safety net based on state and local financing 
is less stable than one that assures Federal financial participation 
when new needs arise.
    Inequities. The current distribution of Federal funding to states 
is inequitable when considering traditional measures such as poverty 
rates or the number of people without health insurance. While States' 
historical choices are responsible for many of these inequities, under 
current law states that shift direction and cover a new population or 
service can gain new matching funds. Block grants lock in existing 
inequities, preventing states that have provided less coverage in the 
past from being able to draw down additional Federal funds in the 
future even if they wish to invest in new solutions to their health 
care problems.
    I conclude that Medicaid block grants would have the ironic effect 
of reducing creativity and innovation at the state level. Why? Because 
money is necessary for states to initiate real innovations, and the 
block grant structure, by shifting costs and risks to the states, will 
make states more conservative in their behavior.
    The President's budget does reintroduce a number of proposals made 
in prior years to strengthen the Medicaid program, and these deserve 
your support. However, a simple calculation demonstrates how limited 
these proposals are. Setting aside the continuation of expiring 
programs, the budget for 2005 includes $182 million for new initiatives 
in Medicaid, while it makes cuts of $1.9 billion. Thus, on net, this is 
a budget that scales back support for Medicaid, which is a step in the 
wrong direction if our goal is to preserve the coverage people 
currently have.
                  resources for state health programs
    The final aspect of the President's budget that will affect the 
plight of the uninsured is proposals that affect state spending and 
resources for health care overall. Each year states make key decisions 
regarding coverage levels in Medicaid and other programs that aid the 
uninsured. If the Federal Government shifts health costs to the states 
or fails to support the programs it has created, states are left with 
less money to meet these health care needs. The budget leaves states 
with inadequate resources in two areas.
    The new Medicare prescription drug law imposed new costs on states. 
States face new administrative responsibilities and will undoubtedly 
see higher levels of enrollment in the Medicare Savings Plans (what 
were formerly called Qualified Medicare Beneficiaries and Specified 
Low-Income Medicare Beneficiaries). These new responsibilities and 
enrollees bring with them additional costs. While a well-designed 
prescription drug benefit could provide fiscal relief to states by 
reducing the share of drugs states pay for through their Medicaid 
programs, the law as enacted seeks to recover most of these savings. 
States face substantial budgetary uncertainty due to the so-called 
``claw back'' provisions.
    Meanwhile, the new Medicare law fails to reflect many of the 
lessons states learned by implementing prescription drug programs in 
the years before the Federal Government took action. States learned 
that administrative simplicity in eligibility standards and benefit 
design was an essential component of a successful plan. States learned 
that they had to take an active role in reducing prescription drug 
costs and not simply rely upon others to achieve savings. The new 
Medicare drug program creates new gaps and complexities for some 
Medicaid beneficiaries because it does not mesh well with existing 
Medicaid policies with respect to cost sharing and formularies. The new 
and remaining burdens states face as a result will make it harder for 
states to fund assistance for people without health insurance.
    Last year Congress, over the objections of the President, provided 
fiscal relief for states, half of which came in the form of a temporary 
increase in the Federal matching rate for Medicaid. This funding boost 
came just in the nick of time and permitted many states to avert 
substantial cuts in their Medicaid programs.
    The President's budget does not seek the continuation of these 
enhanced matching funds despite the fact that state fiscal conditions 
have barely improved from last year. The budget also allows the 
expiration of $1.1 billion of SCHIP money that could be allocated to 
states seeking to cover more children.
    In total, the President's budget projects Federal Medicaid spending 
in 2005 that is 3.4-percent higher than in 2004. It would be nice if 
this slow rate of growth reflected new efficiencies or expectations for 
low health care inflation. But it does not. A major reason for the low 
rate of growth is the expiration of the enhanced matching funds, 
meaning that states will be expected to bear a larger share of Medicaid 
costs in 2005 than they did in 2004.
    While we cannot know in advance the precise effects of this shift 
in costs from the Federal Government to the states, history provides us 
with a guide. States will, out of necessity, scale back coverage, 
eliminate categories of eligibility, and freeze already-low provider 
payment rates thereby threatening access and quality. These are the 
unfortunate, but predictable, effects of this budget.
                               conclusion
    The administration's budget is a statement of the President's 
priorities. The President periodically speaks of the need to address 
one of the nation's biggest problems: the large and growing number of 
Americans without health insurance. In evaluating this budget it is 
necessary to ask whether the funding decisions reflected in it will 
meet the nation's needs in this area.
    Unfortunately, an examination of the budget makes clear that 
enactment of this budget would be a step in the wrong direction when it 
comes to the uninsured.
    The budget provides no national vision of a solution to the 
problem. The few proposals it makes in this area offer benefits to the 
healthy and wealthy at the expense of the sick and the poor. These 
proposals threaten to undermine the base of employer-sponsored health 
insurance that covers the majority of Americans, and to unravel the 
public coverage through Medicaid that is the rope out of which the 
health care safety net for the poor is made.
    In addition, the budget simply ignores the major role states play 
in preventing the uninsured problem in this country from being even 
worse than it is. This budget leaves states worse off than they were in 
2004 while state revenues remain flat or very slowly recovering from 
deep troughs. While states may wield the axe of health insurance 
coverage cuts, this budget helps aim the blade.
    Overall, this budget reflects an inadequate Federal commitment to 
meeting the needs of Americans without health insurance coverage. I 
encourage your critical review of the administration's budget for the 
Department of Health and Human Services so Americans can benefit from a 
budget that is more likely to meet their needs.

    Mr. Shays. We are going to start with Mr. Spratt, and then 
I will have some questions. Then we will go back.
    Mr. Spratt. Thank you very much. Your statement makes a 
good case for building on the system we have got, which is 
often discredited and disdained, but as I understand it you are 
saying we would be better off to use the Medicaid program and 
expand it than we would to introduce a new payment device like 
health insurance tax credits.
    Mr. Weil. If we were to build a comprehensive approach that 
covered everyone, I think we could try different ways of 
reaching coverage. And the Institute of Medicine report lays 
out four options, some of which are purely one model, some 
purely another model. But in the range of options that are 
under serious consideration, which are very incremental where 
the resources are so limited, it is essential that you devote 
those resources to the places that you are most confident you 
will get your bang for the buck. And today we do have programs 
like Medicaid and SCHIP with a proven track record of providing 
coverage and access to low-income people, and then we have this 
sort of theoretical idea that we are going to use tax credits 
to try to reach people as well.
    And I would argue that the risk of taking the tax credit 
approach in an incremental world, which is the world you are 
operating in, is very high. With limited resources, the first 
dollars at this point ought to go into shoring up and expanding 
the existing programs.
    Mr. Spratt. Let's talk about some of the existing programs, 
like the SCHIP program. On page 9--have you read the 
Secretary's testimony?
    Mr. Weil. Yes, sir.
    Mr. Spratt. Page 9, he has a description of how SCHIP is 
funded, how their allotments, then their excess funds, and then 
these excess funds are redistributed among the States and there 
is $2.2 billion from fiscal year 2000 and 2001 and $1.2 billion 
in 1998 and 1999 funds. Could you make sense of all that for us 
and tell us what is going on with SCHIP? What are these funds 
being used for, and what is the potential use of those 
remaining unobligated or unspent funds?
    Mr. Weil. I will try to make sense of it. Basically when 
the SCHIP program began, the authorized funding was at a level 
that is appropriate to an ongoing program, but when the program 
started up it was very small, and each year we have seen 
enrollment go up by about a million people a year. States were 
given 3 years during which they could spend the allotment that 
they had, but over the course of those first 3 years, with the 
growth path, States accumulated so much of the--so many unspent 
funds, that the 3 years were up, and they were going to revert 
to the Treasury.
    There have been a number of efforts to give States longer 
and to reallocate the unspent funds to other States that had 
gone over their allotment. Now, in the end the question is, is 
Congress going to continue to give States the opportunity to 
cover as many children as possible with the funds that were 
initially approved for this program? If you make that 
commitment, given the start-up time in this program, you have 
to give States a little bit more time. And I think it is fair 
to say that this is a program with bipartisan support. It is a 
program that the Secretary speaks highly of. The President's 
budget touts the successes of this program. This is a 
bipartisan program. When States are facing very tight budgets, 
it seems like the wrong time to take away funds that otherwise 
would have----
    Mr. Spratt. Let me make an observation at this point. It is 
also a program, interestingly enough, which was created in the 
context of the balanced budget agreement of 1997. In other 
words, we were able to balance the budget, actually put it in 
surplus within a couple of years, but at the same time we were 
able to say there are a few priorities that we are going to 
squirrel funds away for. In this particular case, we raised the 
funds with a cigarette tax and then committed it to this 
particular program. But in any event, it shows that you can 
still make progress in covering people with health care 
coverage that they desperately need and at the same time 
balance the budget. We did it in 1997.
    Now, let me ask you also about page 12, if you would also 
sort of tell us what is going on there with Medicaid. The 
administration is proposing to cap reimbursement levels to 
individual, State and local government providers to no more 
than the cost of providing services to Medicaid recipients. I 
understand that they are assigning a savings to that broad 
statement there of about $23 billion.
    Mr. Weil. The administration proposes--and the Secretary 
spoke about efforts to improve fiscal integrity in the program, 
and I don't think anyone would argue with the goal of improving 
the integrity and making the matching formula that is the 
underpinning of the program work.
    The challenge is that although it is very easy to trot out 
examples of States misusing the matching system, it is equally 
easy to show examples where States are using the matching 
system exactly as it was intended to function, by bringing 
additional dollars in, having State and local governments and 
local agencies contribute to the program, and obtain matching 
funds to provide services to low-income families that need 
health coverage. And in a perfect world, we would divide up 
those that are legitimate and those that are illegitimate, and 
we would stop the illegitimate and we would promote the 
legitimate.
    So I would endorse the general notion that the Federal 
Government should attempt to improve the integrity of the 
program. A number of the provisions set up administrative 
burdens, auditing burdens for how States raise their funds and 
how they move their money around that goes way beyond what I 
think is appropriate if we don't want to get in the way of 
States expanding coverage, as they should be permitted to do 
under the Medicaid program.
    I would also just add that if the administration is 
expecting to be so successful that they can raise this kind of 
money, I would like to see them propose to plow that money back 
into insurance coverage, not to spend it on other priorities.
    Mr. Spratt. One final question. You appear to take a rather 
permissive view of program practices like DSH, disproportionate 
share payments that States have used in various ways, ingenuity 
in upper payment limits, simply on the grounds that this is, 
after all, funneling more money into the Medicaid system and 
serving a clear and desperate need. Am I reading you wrong?
    Mr. Weil. I don't think I am a permissive commentator when 
it comes to DSH. In fact, a lot of the evidence for and 
analysis for the tricks and games that States have played with 
DSH has come out of work that colleagues of mine at the Urban 
Institute have done. It is not my work, but I would acknowledge 
their work.
    The point I am making is that if you go back to the 
original DSH provisions, they were designed explicitly to 
make--in fact, to require States to have mechanisms to help 
those hospitals that provide care to a disproportionate share 
of uninsured and Medicaid patients to get additional funding to 
meet the burden of having a lot of patients who can't pay. And 
that is a legitimate goal and one that we shouldn't throw out 
just because States have figured out how to become more 
creative.
    Now, in my work and work with my colleagues--and I heard 
the Secretary talk about it as well--I think we would be well 
served to rethink how this program is designed so that the 
benefits more closely target the original objectives of the 
program.
    The reason I made the comments I did is that there are many 
safety net providers that rely very heavily on those funds, and 
if all we do is say DSH is a failure or a game or 
intergovernmental transfers have only been used for negative 
purposes, we are going to pull a lot of money out from 
legitimate efforts to provide care to people who otherwise 
would not have it. And I would hate to see us overreact, but I 
would not want to suggest that we should underreact either.
    Mr. Spratt. Thank you very much.
    Mr. Shays. I feel that since you have been so courteous 
yourself to be a panelist and wait so long, that we should 
advertise your book. Actually I am holding it up because--a 
quote in it regarding the disproportionate share hospital 
payments, or DSH. You say: Fiscal integrity in a matching grant 
program can only be insured if the program has a defined 
population, set of benefits and payment structure. DSH has 
provided an opportunity for fiscal games, because it operates 
outside such a structure.
    Therefore my question is, should DSH be eliminated? And 
what should take its place if it were eliminated?
    Mr. Weil. I didn't realize there were such risks involved 
in publishing my thoughts, but I appreciate the advertisement.
    Mr. Shays. That is only if you become a judge. Otherwise it 
is pretty harmless.
    Mr. Weil. I do believe that a serious effort to 
fundamentally redesign the DSH program would be valuable, but I 
would again say that it would be a mistake to reach the 
conclusion that all dollars flowing through DSH right now are 
just games and ways for States to draw down additional funds, 
because I think the evidence is clear that that is not the 
case.
    Mr. Chairman, I would say this, and to put a few more words 
around those words that I wrote, I worry that the Federal 
Government's efforts and the proposal in the budget focus on 
trying to follow the dollars on the revenue side.
    The intergovernmental transfer provisions, what is proposed 
in the budget is to try to basically audit where the dollars 
come from. As you know, in this committee, money is fungible 
and following the dollars is a very hard thing to do. In the 
long run--and the point I was trying to make in the words that 
I wrote--it is much better to follow the spending. And if you 
can build a program that defines who is eligible, for what 
benefits they are eligible, and has an appropriate amount to 
pay for those benefits, it is much easier to audit and feel 
confident that those dollars are being well used than it is to 
try to audit where the dollars are coming from. And so in the 
end I think you are going to have more success if you go that 
route.
    But you will not hear me oppose any effort to try to 
reconfigure the DSH program. I think its elimination without 
replacing the objectives it achieves would, however, also be a 
mistake.
    Mr. Shays. Thank you. Let me ask you this. There are about, 
approximately, 40 million under Medicaid, about 40 million 
pretty much under Medicare, plus or minus.
    Mr. Weil. Medicaid has now passed Medicare.
    Mr. Shays. So a sizable number. Then we say there are under 
43 million who are uninsured. They represent about 15 percent 
of our population. And I saluted President Clinton for saying 
we need to insure everyone. I didn't think his solution did it. 
I am not sure he in the end felt it did either, but it sure 
helped educate all of us. The sad thing is that we just gave up 
and didn't keep trying to struggle and work through it.
    We have, it is fair to say, an employer-based health 
insurance system, except for the 80 million Americans who are 
covered either under Medicare, Medicaid. Is that fair to say?
    Mr. Weil. And excluding the uninsured, yes.
    Mr. Shays. Right. And we have health care clinics. We have 
about 10 million covered, getting up to $20 million. That is 
part of the President's plan. And I am told about half, in 
essence, are getting insurance under that. In other words, 
there are uninsured who are getting coverage.
    Tell me how I am wrong saying--maybe how I look at this 
incorrectly--because my logic is originally 10 million under 
the community-based health care clinics and about half of them 
are uninsured and getting insurance--are getting coverage, even 
though they don't have insurance, and we are going to go up to 
20, where we think 10 of those million will be uninsured, 
therefore getting health care coverage in the clinic.
    Is it wrong for me to take the 43 million and then subtract 
10 million and say we are really down to 33 million?
    Mr. Weil. Congressman, I think it would be wrong. And the 
reason is that despite the incredible positive role that 
community health clinics play, they do not offer the full 
continuum of services that people need. And particularly if you 
speak with folks who run those clinics, and they are very 
appreciative of the expansion of the resources that the 
President has effected during his term, they have great 
difficulty moving--they are very good at providing primary 
care. They have great difficulty obtaining the specialty 
services, the secondary and tertiary care that their patients 
need. They also have difficulty providing some of the personal 
care that is necessary to manage chronic illnesses which are 
very common in the populations they serve.
    We do know from the data that the uninsured, even if they 
get care at clinics, are in poorer health than the insured, 
controlling for their income and age and everything else, and 
they get less health care than the insured. So I think it would 
be correct to say--and it is one of the--this is a good-news 
story--that moving people who are served in clinics to getting 
the same health care as people who are insured isn't going from 
a zero to a 1. It doesn't cost 100 percent of the cost of 
coverage, because we are already providing services to this 
population. But it is not the same as being insured.
    Mr. Shays. Let me just ask you this final question then--or 
this area.
    If there are about 14 million Americans who are uninsured 
who make $50,000 or more, and half of that number, about 7 
million who make $75,000 or more, what does that tell you, 
particularly about the 7 million Americans? Are they just, you 
know, young kids who are making good money, not choosing to get 
health care? Who are they?
    Mr. Weil. We need to know more about them, but lets--two 
things we should consider. First of all, these are people in 
households with income more than X, not making more than X. So 
when I graduated from graduate school and took my first job and 
had three roommates and we were all working like your staffs 
do, you know, not making a whole lot of money, and maybe didn't 
have health insurance, we would be in a household that was high 
income. So it is very important to look not just at household 
income, but at family units or health insurance units, and I 
think that will give you a different picture.
    Second of all, $50,000 is above the median income in this 
country, and it is a substantial amount of money to live on. 
But family coverage in many parts of this country is running, 
for an employer-sponsored plan, in the range of $9,000 a year. 
So we are still asking a lot of those families--and some of 
them, if they don't have coverage through an employer, have 
been written out of the individual market because they have a 
prior health condition and the insurer simply won't offer them 
coverage. It is certainly the case that there are people who we 
could reach, I think, without having to pay the full load to 
bring them into the insurance market and insurance coverage, 
but it is a small share of the uninsured.
    Mr. Shays. Thank you. Is there anything you would like to 
put on the record before we adjourn?
    Mr. Weil. No. I just thank you for the opportunity. And my 
written comments, I think, cover some of the other material.
    Mr. Spratt. I would ask that his full statement be included 
in the record.
    Mr. Shays. It absolutely will be. Thank you, Dr. Weil, very 
much. We appreciate it.
    Mr. Weil. You are welcome.
    [Whereupon, at 12:33 p.m., the committee was adjourned.]

                                  
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