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30–619 PDF 2006

S. HRG. 109–660

FROM MEDICAID TO RETIREE BENEFITS:

HOW SENIORS IMPACT AMERICA’S HEALTH CARE

COSTS

HEARING

BEFORE THE

SPECIAL COMMITTEE ON AGING 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

WASHINGTON, DC

JULY 13, 2006

Serial No. 109–27

Printed for the use of the Special Committee on Aging

(

SPECIAL COMMITTEE ON AGING 

GORDON SMITH, Oregon, Chairman 

RICHARD SHELBY, Alabama 

SUSAN COLLINS, Maine 

JAMES M. TALENT, Missouri 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

LARRY E. CRAIG, Idaho 

RICK SANTORUM, Pennsylvania 

CONRAD BURNS, Montana 

LAMAR ALEXANDER, Tennessee 

JIM DEMINT, South Carolina 

HERB KOHL, Wisconsin 

JAMES M. JEFFORDS, Vermont 

RON WYDEN, Oregon 

BLANCHE L. LINCOLN, Arkansas 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

BILL NELSON, Florida 

HILLARY RODHAM CLINTON, New York 

KEN SALAZAR, Colorado 

CATHERINE FINLEY, Staff Director 

JULIE COHEN, Ranking Member Staff Director 

(II) 

C O N T E N T S 

Page 

Opening Statement of Senator Gordon Smith ....................................................... 1

Opening Statement of Senator Herb Kohl ............................................................. 3

Opening Statement of Senator Ron Wyden ........................................................... 3

Opening Statement of Senator James Talent ....................................................... 4

Opening Statement of Senator Debbie Stabenow ................................................. 5

PANEL OF WITNESSES

G. Richard Wagoner, Jr., chairman and chief executive officer, General Motors Corporation, Detroit, MI .............................................................................. 6

Hon. Janet Napolitano, governor, State of Arizona, Phoenix, AZ ....................... 30

Donald B. Marron, acting director, Congressional Budget Office, Washington, 

DC .......................................................................................................................... 55

APPENDIX 

Prepared Statement of Senator Ken Salazar ........................................................ 89

(III) 

(1)

FROM MEDICAID TO RETIREE BENEFITS: 

HOW SENIORS IMPACT AMERICA’S HEALTH 

CARE COSTS 

THURSDAY, JULY 13, 2006 

U.S. SENATE, 

SPECIAL COMMITTEE ON AGING, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:06 a.m., in room 

SD–106, Dirksen Senate Office Building, Hon. Gordon H. Smith 

(chairman of the committee) presiding. 

Present: Senators Smith, Talent, Kohl, Wyden, Carper and Clinton. 

OPENING STATEMENT OF SENATOR GORDON H. SMITH, 

CHAIRMAN 

The CHAIRMAN. Good morning, ladies and gentlemen. We welcome you all to this hearing of the U.S. Senate Special Committee 

on Aging. We have a very important topic to consider today, ‘‘From 

Medicaid to Retiree Benefits: How Seniors Impact America’s Health 

Care Costs.’’ 

We are joined by two very distinguished witnesses. Richard Wagoner is the president of General Motors and Janet Napolitano is 

the Governor from my mother’s home State, the great State of Arizona. We thank you so very much, Governor, for being here. 

We will begin by having opening statements by my colleagues 

and then we will turn to our witnesses. Our colleague, Debbie 

Stabenow, will be introducing more formally Richard Wagoner. So 

we thank you, Senator, for being here at this important hearing. 

Our nation is facing a crisis. Health care costs continue to escalate, while quality continues to lag behind other industrialized nations. Just this past April, a study was released in the Journal of 

the American Medical Association that compared the health status 

and spending of Americans to that of British citizens. The results 

were alarming. Not only did Americans have lower overall health 

status, we are spending almost twice as much. 

We will hear from our witnesses how health care costs continue 

to impact employers, States and the Federal Government’s ability 

to deliver health care. The two driving factors for growth in health 

care spending are continually high health care inflation and a 

growing senior population. While the size of the over-age–65 population can’t be changed, steps can be taken to better their care and 

create efficiencies to ensure we are spending our health care dollars wisely. 

2

Obviously, the question is asked why is this important. The National Center for Chronic Disease Prevention and Health Promotion estimates that 80 percent of people over age 65 have at 

least one chronic health condition, and 50 percent of those have at 

least two chronic conditions. Further, the size of this population is 

projected to explode to 71.5 million people, or 20 percent of our population, by the year 2030, when all the baby-boomers will have retired. 

These alarming statistics clearly indicate that our nation is facing a financial train wreck. That is why it is important to act now 

to reform our system, and I believe the place to start is Medicaid. 

The Medicaid program, which was created in 1965, has failed to 

evolve over time. As innovations in the delivery and management 

of care have become mainstream in the private sector, Medicaid 

has remained firmly set in its original fee-for-service model. 

However, Medicaid is not a failure. It is an integral and essential 

component of America’s health care system, providing safety net 

coverage to over 60 million Americans. These Americans are the 

poor, the elderly and the disabled. However, as strongly as I support Medicaid, I am not an apologist for it. I do not believe Medicaid needs to be reformed. I do not believe it should be put on a 

pedestal, never to be changed, I believe that reform is essential. 

In that respect, I continue to try to be a bridge from my party, 

the Republican Party, to the Democratic Party, fighting to protect 

the program, but at the same time urging sound, rational reform. 

That is the purpose of this hearing, to create a bipartisan forum 

where all stakeholders—members, beneficiaries, providers and advocates—can come together to chart the future of Medicaid. 

I hope that by starting this dialog now, we can develop sound 

policies that are based on improving care and ensuring efficiency 

rather than simply cutting funding to meet a dollar figure. In the 

end, I fear the latter approach only ends up costing the country 

more both in actual dollars spent and in the negative impact to 

human life. 

The Aging Committee has a long tradition of leading the Congress toward innovative and necessary changes to our social programs. In fact, the Social Security program and Medicare were created based on recommendations that came from this Committee. 

We also have continued to operate in an open and bipartisan manner, and I have to make special note of Senator Kohl and the privilege and pleasure it is to work with him on such a basis. 

As Congress embarks on changes to Medicaid, and hopefully the 

entire health care system, we have an opportunity to once again 

lead the way. We need to put ideology aside and develop solutions 

that will ensure the long-term solvency of Medicaid. In doing so, I 

am hopeful the combined effect will drive efficiencies and modernizations throughout the entire health care system. 

As we will hear from our witnesses, both of whom oversee large 

health care programs, utilizing the size and clout of Medicaid can 

force innovation in the delivery of care and provide lower-cost, 

higher-quality health care. It is time to act, and I hope my colleagues will join me as I begin a series of hearings and monthly 

roundtable discussions focused on reforming Medicaid the right 

way, not just the budget way. 

3

I look forward to hearing from our witnesses, and before we do 

that, I will turn to my colleague, Senator Kohl. 

OPENING STATEMENT OF SENATOR HERB KOHL 

Senator KOHL. Well, thank you, Mr. Chairman, and, of course, 

we welcome all of our witnesses today. This hearing will kick off 

a series of Committee meetings to examine Medicaid, its challenges, and bipartisan proposals for reform. I congratulate you, Mr. 

Chairman, for undertaking this very ambitious agenda. 

Medicaid is the largest health care program in the United States, 

covering more than 60 million people. While Medicaid is traditionally viewed as a program for low-income families and their children, 70 percent of spending is on the elderly and the disabled. 

There is no question that the current trends in Medicaid growth 

and spending are not sustainable for Federal or State governments. 

We all agree that we have to cut costs. The question is how, without endangering the most vulnerable in our society. 

In my State of Wisconsin, Medicaid provides quality services to 

a broader population than is required by law. Our Governor has 

worked to avoid limiting enrollment and services, seeking instead 

to buy prescription drugs at better prices and rely on home and 

community-based care options as an alternative to costly long-term 

care institutions. 

Arizona is engaged in a similar battle to cut Medicaid spending 

without cutting Medicaid care, and we look forward to hearing 

from Governor Napolitano about their success. We also hope to 

hear from Richard Wagoner about General Motors and the private 

sector’s struggle with rising health care costs. These costs threaten 

GM’s fiscal solvency just as certainly as they affect that of the entire Nation. 

So again I thank you, Mr. Chairman, for holding this first hearing on the topic, and we all look forward to working with you on 

this issue. 

The CHAIRMAN. Thank you, Senator Kohl. 

Senator Wyden. 

OPENING STATEMENT OF SENATOR RON WYDEN 

Senator WYDEN. Thank you, Mr. Chairman. Mr. Chairman, I 

think I mentioned to you back when I was director of the Oregon 

Gray Panthers, we used to say we dream of the idea of an Oregonian being Chairman of the Senate Committee on Aging. It is great 

to see that you have the gavel in your hands, and I appreciate all 

of our bipartisan work in this regard. 

The CHAIRMAN. Thank you, Senator. 

Senator WYDEN. I think it is well understood that escalating 

health care costs are hitting America like a wrecking ball. This was 

seen again yesterday when there was an announcement that Medicare premiums were going to go up at least 11 percent next year. 

What that means is that many older people are going to be looking 

to their companies and companies like General Motors in order to 

secure good health care. Because health care is like an ecosystem, 

if you can’t secure your health care from Medicare and you can’t 

secure it on the retiree benefit side in the private sector, then, of 

course, you slide on to Medicaid. 

4

So I am very pleased that we are going to have our witnesses 

today, Mr. Wagoner and Governor Napolitano, because I am interested in looking with them particularly at how as entities—a big 

private employer and a major State—how they use their purchasing power in order to help drive down the costs of health care. 

We have Senators here who have been of great help to Senator 

Snowe and I, for example, in trying to life the restriction on Medicare so that Medicare could bargain to hold down the costs of medicine. We are just a handful of votes away, and I am sure Mr. Wagoner and Governor Napolitano—one of the first things that they do 

is try to ensure that they can use their clout in the marketplace 

in order to drive down the cost of health care. 

What I will be asking you, Mr. Wagoner, first, because I know 

you have thought a lot about health care and thought about it in 

an innovative way, is about your ideas on shared responsibility in 

terms of holding down health care costs and securing good services. 

It seems to me that there is a role for government, there is a role 

for the private sector, and I would also say as a Democrat there 

is a role for the individual, as well. So I am really glad you are 

here. 

I note Senator Stabenow is here. You are running with the right 

crowd, Mr. Wagoner, because Senator Stabenow has been a great 

advocate for quality and affordable health care. 

I thank my friend and colleague, Senator Smith, for bringing the 

Committee together to examine these issues. 

The CHAIRMAN. Thank you, Senator Wyden. 

Senator Talent. 

OPENING STATEMENT OF SENATOR JAMES TALENT 

Senator TALENT. Thank you, Mr. Chairman. I want to echo what 

the other Senators have said about the importance of this hearing. 

Medicaid is a vital program that makes a difference everyday to 

millions and millions of vulnerable people. It is the safety net in 

this area. 

We do have fiscal challenges ahead. I am actually optimistic that 

if this Committee and others like it will canvas what is happening 

out there and the good people involved in health care in the States 

and the localities, we can find ways really to make this program 

sustainable and affordable without cutting access or quality directly or indirectly, without taking it out of the hide of providers. 

There is so much good going on in health care. I really believe we 

can find it. 

I did want to make a comment. This is very timely, especially in 

view of the administration’s proposal to reduce the provider tax assessment program from 6 percent to 3 percent, which I know you 

are leading a struggle against, and I appreciate that. 

I do want to make a comment just to make certain you are aware 

of it that Missouri is a State that has entered into a special partnership agreement with CMS regarding its provider tax program. 

We opened up all our books and let them see everything, in return 

for which they agreed that they would not change the terms of the 

program during the life of the agreement. 

So this proposal not only has broad national effects, but it effects 

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ment negotiated in good faith and that Senator Bond and I are trying to make certain gets respected, whatever else is done. So I 

wanted to make certain the record had that in it. 

Again, I am grateful to you and to Senator Kohl for holding this 

important hearing. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Stabenow. 

STATEMENT OF SENATOR DEBBIE STABENOW 

Senator STABENOW. Thank you, Mr. Chairman. I want to particularly thank you and Senator Kohl and all of my colleagues for beginning this series which is so critically important to all of us. 

I am extremely pleased to have the opportunity to introduce the 

chairman and CEO of General Motors, Rick Wagoner, today. Over 

his 29-year career with General Motors, Rick has been involved, I 

am sure, in every facet of the company. He was elected to his current position on May 1, 2003, after serving as president and chief 

executive officer since June 2000, making him the youngest CEO 

in GM’s history. 

Given his wealth of experience, it is no wonder that when Rick 

Wagoner talks about health care, it makes national headlines and 

people listen. I think his words are very important, and his experiences, and those that he represents in terms of an industry are 

very, very important. 

Health care costs are a huge challenge facing American businesses, as we know, who are trying to compete in a global economy. 

The reason for that is that we fund health care differently than 

any other country does, and this difference eats into the bottom 

line for companies. 

Let me just mention, if I might, in making the introduction that 

there are many ways that we can work together. I have appreciated the work with General Motors on generic drugs, and Senator 

Lott and I have legislation to close loopholes currently in the generic drug laws to be able to speed generics to the marketplace. We 

have worked together on health IT, and I am sure Rick is going to 

talk about e-prescribing. I would say again Senator Snowe and I 

have legislation to move that forward, which I would look forward 

to working with you on. There are so many areas where we can 

work together. 

Senator Wyden talked about shared responsibility, and I am sure 

that Rick is going to be talking about the fact that 1 percent of 

their employees have catastrophic costs, but that is somewhere between 20 to 25 percent of the entire cost of the company. There are 

ways for us to come together and I hope that the Committee will 

be recommending opportunities for us to partner on those issues, 

as well as on Medicaid and Medicare. 

As I indicated, Rick Wagoner speaks for an entire industry which 

has created the middle class of this country, has given people goodpaying jobs, health care, pensions and security in retirement. As 

our companies compete in a global economy, I hope that we will be 

listening closely and listening to what Rick is saying today because 

we have a stake in their success. We have a stake in their ability 

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6

ceed, and I believe that means we keep the middle class of this 

country. 

So I am very pleased that Rick Wagoner is here. He is someone 

that we hold in high esteem in Michigan for his work and for the 

leadership of General Motors on a host of issues. Certainly, health 

care is at the top of that list. 

So welcome, Rick. 

The CHAIRMAN. Thank you, Senator Stabenow. 

Let me also now introduce, as well, our other witness who is the 

Governor of the great State of Arizona, Janet Napolitano. When I 

invited the Governor to participate in this hearing, it was because 

I am aware of and following the great things she is doing for the 

Medicaid population in Arizona and wanted very much to include 

Arizona’s experience in this important hearing. 

As I invited her to be with us today, it was very clear to me in 

our conversation that she had a much more important responsibility than being in Washington, DC today, not just running the 

State of Arizona, but being with her niece for this week, and on 

this Committee family comes first. 

Governor, thank you so much for taking the time. I don’t know 

whether you have a time constraint where you would like to go 

first in your testimony. We want to be respectful of that. 

Governor Napolitano. Senator, thank you for that. I would like 

to hear from Mr. Wagoner first and then I will dive in, and then 

we will get to questions from the Committee. 

The CHAIRMAN. Thank you so much, Governor. 

Mr. CEO of General Motors, thank you so much for being here, 

and we invite your testimony now. 

STATEMENT OF G. RICHARD WAGONER, JR., CHAIRMAN AND 

CHIEF EXECUTIVE OFFICER, GENERAL MOTORS CORPORATION, DETROIT, MI 

Mr. WAGONER. Thank you very much. I very much appreciate it. 

Chairman Smith, Senator Kohl, members of the Committee, it is 

an honor to have a chance to testify. 

Governor, thanks for joining us today and I will look forward to 

your comments momentarily. I wanted to thank Senator Stabenow 

for her kind introduction as well. 

I would like to highlight a few of General Motors’ efforts to improve the delivery and efficiency of health care services for our employees, retirees and dependents. In addition, I have provided a detailed description of GM’s key initiatives in my written testimony. 

Let me start by giving a little background. 

General Motors is the largest private purchaser of health care in 

the United States, paying the health care costs for 1.1 million employees, retirees and dependents. Of those 1.1 million people, approximately 530,000 are age 60 or over. In 2005, General Motors 

spent $5.3 billion for health care. That is more than we spent on 

steel. In fact, a staggering $1.9 billion of that cost was for prescription drugs. 

As you know, the U.S. spends more on health care as a percentage of GDP than any other industrialized country, and costs continue to rise, as has been pointed out earlier. Despite all that 

spending, basic quality indicators would suggest the U.S. does not 

7

have the best health care. In short, we need to get greater value 

for our health care dollar, and to do this requires the collaboration 

of stakeholders on many levels. 

In our own analysis, we found that GM employees and retirees 

need three important things: first, better information on effective 

treatments; second, better tools to identify effective and efficient 

health care providers; third, education and outreach to prevent disease and better manage chronic illnesses. 

To address these needs and to find innovative ways to create better health care delivery systems for all, GM is leading over 30 initiatives across the country. This morning, I would like to touch on 

just a few of them. 

For example, we have in place a number of programs and educational tools to help our employees, retirees and their families 

stay healthier and better manage disease. Way back in 1996, GM, 

along with the UAW, our largest union, launched Lifesteps, our 

comprehensive health and wellness program designed to help individuals identify controllable health risks, develop plans to reduce 

those risks and modify their lifestyles. 

Today, more than 75 percent of GM employees and a very substantial number of retirees have participated in this Lifesteps program which has led to more than 1 million health risk appraisals 

and the reduction of more than 185,000 specific health risks. 

What is more, we found that when our employees participate in 

Lifesteps as active employees, they are more likely to participate 

in these programs as Medicare-eligible retirees. So as our employees retire and move into Medicare, we are providing Medicare with 

a more health-conscious member and likely a healthier member. 

Another GM initiative that focuses on prevention and disease 

management is the Greater Flint Health Care Coalition Heart Failure Task Force. The goal of this program, which covers almost 

200,000 General Motors employees, retirees and their families in 

the greater Flint, MI area, is to encourage more physicians to follow established clinical guidelines in order to reduce health risks 

and readmission rates, and offer a better quality of care. 

We are pleased that early results show a significant improvement in the use of appropriate medications, better documentation 

and compliance with guidelines. For example, of 2,500 heart patients, those treated at the eight participating hospitals had significantly lower mortality and readmission rates, than those treated at 

six non-participating hospitals. 

GM has also had an extensive health education campaign for all 

of our employees, retirees and their families to help them become 

better health care consumers. Back in 2001, we began to emphasize 

to our employees and retirees the high quality and value of generic 

drugs. As a result, we have been able to gain over 90-percent generic substitution, again with the support of union leadership. 

Each percentage increase in generic use saves General Motors $4 

million a year. 

We also offer all of our employees and retirees many publications, including this comprehensive Health Care 101 guide that addresses major issues facing the health care system. We are also 

helping our employees and retirees become better consumers by 

8

providing them with more information about providers and plans 

in their communities. 

This August, GM, along with other employers, will launch the 

Dayton, Ohio Consumer Information Transparency Project. The 

program will give more than 70,000 local health care consumers 

some key shopping tools, like cost and quality information about 

their health care providers. The goal is to educate patients to make 

better-informed and effective health care choices and to create competition among providers based on cost of service and quality of 

service. 

Starting in 2006, GM began offering salaried workers and early 

retirees a choice of two high-deductible health care plans with 

health savings accounts. These plans have been very well received 

and give GM employees and early retirees greater control over 

their health care dollars, flexibility to choose their own providers 

and tax-favored ways to save for current and future health care 

costs. 

Another critical tool to help patients become better health care 

consumers is health information technology. We have projects in 

several of our communities, including a collaborative effort with 

Ford, DaimlerChrysler and Medco Health, which is supported by 

the UAW and the State of Michigan. This Southeast Michigan 

Electronic Prescribing Initiative encourages physicians to adopt 

wireless hand-held devices to look up formularies and other prescription drug information, write prescriptions and send them directly to the pharmacy for filling. As a result, we have seen a significant reduction in adverse drug events and an increase in generic drug use by over 7 percent. 

As I mentioned earlier, it takes collaboration by stakeholders in 

the public and private sectors to develop a quality health care system. While there are numerous collaborative efforts that GM supports, I want to highlight two that are showing great promise. 

In Michigan, GM is working with local health care providers, 

businesses, unions, hospitals and the Greater Detroit Health Care 

Council on a program called Save Lives, Save Dollars. The goal is 

to make hospitals more financially accountable for their performance and give consumers price and quality information on physicians. We believe that this will drive our health care cost system 

to achieve higher levels of performance, which will help save lives, 

and greater overall efficiency, which will help save dollars. 

The Save Dollars component will pay hospitals based on their 

meeting established performance measures. When care and outcomes are improved, we expect to spend fewer dollars. This is 

something we know from our own extensive experience in manufacturing. As you improve quality, you lower costs. 

Another quick example of collaboration is the implementation of 

the General Motors production system within health plans, hospitals and physician groups. GM has found that approximately 80 

percent of a process, regardless of the industry, is comprised of 

non-value-added activities. Since 1994, GM has held workshops in 

over 400 hospitals to help those in the health care industry learn 

how to be more efficient and eliminate waste. Average results have 

yielded a 60-percent productivity increase, a 46-percent inventory 

reduction and a 51-percent lead time improvement. 

9

So as you can see from all this, GM is investing considerable resources to find innovative ways to improve the quality and cost of 

health care services. However, we also believe that much more can 

be done with the support and engagement of Congress and other 

public and private sector stakeholders. 

Several key public and private initiatives that deserve attention 

are a rigorous and robust, competitive prescription drug market in 

which everyone has access to the full range of affordable pharmaceuticals, including generic biopharmaceutical drugs; policies that 

give consumers and physicians information on the relative effectiveness of different drugs and treatments so they can compare and 

distinguish treatment options; implementation of national health 

IT legislation; release of the complete Medicare claims data base; 

and, finally, a better public-private effort on high-cost cases. Just 

1 percent of the population with chronic and serious illnesses accounts for almost 30 percent of total health care expenditures. 

So in conclusion, GM is proud of the positive health care efforts 

we have been making in our communities for our employees, retirees and their families. However, we all can and must do even more 

to improve quality, reduce cost and get greater value for our health 

care dollar. At GM, we are committed to working with both public 

and private sector stakeholders to develop the solutions that will 

improve the health care market for everyone. 

Thank you again for the opportunity to share GM’s experiences 

with you today. 

[The prepared statement of Mr. Wagoner follows:]

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The CHAIRMAN. Thank you, Mr. Wagoner. 

Governor. 

STATEMENT OF HON. JANET NAPOLITANO, GOVERNOR, STATE 

OF ARIZONA, PHOENIX, AZ 

Governor NAPOLITANO. Well, thank you, Mr. Chairman and 

members of the Committee, for inviting me to be with you today. 

I am sorry I can’t be there in person, but as the Chairman referenced, I had a family obligation that I could not move. 

I must say as the Governor of a Western State that using the 

videoconferencing facilities to testify is a great service because it 

allows me to stay in my State and do the day-to-day work of government and to provide you with information that I think will be 

helpful. Indeed, I think I sit here in a unique position because normally Governors come to the Senate and they testify and they say 

we need more money, we need more help. 

I am here to say I think I can offer you some suggestions on the 

policy side that will end up saving money for the country as a 

whole. Indeed, there was a recent Lewin study that looked at Arizona’s Medicaid program and said that if this were adopted nationally, it would save you $83 billion over the next 10 years. So I 

thought what I would do in my testimony is highlight some of the 

elements of that and why it works and why we think you don’t 

have to choose between cost containment and quality of care. You 

can do both. 

In Arizona, as you may know, we were the last State to adopt 

a Medicaid program. That was in 1982, and we decided to design 

a program different from all others. In fact, we have been operating 

under a huge waiver since our beginning. We utilize managed care, 

full risk-based capitation, effective procurement and market forces 

to control costs. Our waiver allows us to use these tools and serve 

seniors and other populations in a cost-effective way. 

Now, without a doubt the most important component of our program is the partnership between the public and the private sectors. 

This is the cornerstone of our model. Arizona contains costs while 

providing high-quality services through use of managed competition with private sector managed care organizations, known as 

MCOs. 

Another key component of the model is that the MCOs we contract with are capitated at full risk for all services, including pharmaceuticals. The full risk contracting encourages MCOs to leverage 

purchasing power, to establish their own formularies, to case-manage members and to appropriately manage health care utilization. 

The model not only allows, but incentivizes MCOs to establish 

formularies that mandate use of generic drugs. 

While other States average a 50-percent rate of generic drug 

usage, Arizona has a rate of 71 percent, and that is just for our 

long-term care population. The Lewin study found that Arizona’s 

per-capita drug spending is the lowest in the Nation, without compromising quality. 

Arizona’s model also has seen significant savings from serving 

our aging members in home and community-based settings. Arizona has been able to reverse previous trends and now serves more 

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based settings rather than more costly nursing facilities. This is 

not only cost-effective, but it offers more options to our members 

in how they receive their care and how they continue to live effectively and independently in their own homes. 

I think we all agree that the most basic goal is to ensure that 

Medicaid endures and it endures to serve our seniors and others 

who rely on this program for their health care. I believe the Arizona model offers opportunities that other States and the Federal 

Government should be encouraging. 

Again, I want to thank you for this opportunity to testify before 

you today and I would be happy to answer any questions that you 

have. I have a more complete statement that I have submitted to 

the Committee and I hope that you will include it in your deliberations. 

[The prepared statement of Governor Napolitano follows:]

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The CHAIRMAN. Thank you, Governor, and we will include your 

full statement and we value very much your participation and your 

insights. 

Did you say that the number of savings for the Federal Govern- ment nationwide would be $83 billion? 

Governor NAPOLITANO. Yes. This is based on a study done by the 

Lewin Group looking at how we manage our health care costs 

versus other States in the Medicaid area, and they said if you followed Arizona’s model, those are the types of savings you would 

incur. 

But again, Mr. Chair, and to echo what you said in your opening 

comments, it is not just about a budget number; it is about providing health care for people. I think the key point of that is you 

can create those savings and still provide quality health care. 

The CHAIRMAN. Well, that has been my point all along through 

the Medicaid debate earlier in this Congress, and I have to say $83 

billion is—by the way, it is $83 billion over how many years? 

Governor NAPOLITANO. Ten. 

The CHAIRMAN. Ten years. That is enough even to get the attention of the U.S. Senate. But I think even more important than the 

budget number, my point in my opening statement was, look, Medicaid needs reform. I think Arizona has shown a light as to how 

you can reform it without compromising health and quality. I can’t 

thank you enough for that example and sharing it with us. 

I guess the question I have for you is what has the Deficit Reduction Act of 2005 done to your ability positively or negatively. I 

would be very interested in how we can mitigate any damage done 

and not just replicate some of the good things you have done. 

Governor NAPOLITANO. Mr. Senator, I think it is a little too soon 

to know what the DRA really has done. What I do think we need 

to communicate to HHS and the administration on the Medicaid 

program is the need for flexibility in the States. 

Our waiver has been in existence since 1982. It works, but we 

still spend an ordinate amount of administrative time going back 

to CMS to justify the waiver even though from a cost containment 

perspective and a quality of care perspective this is probably one 

of the most, if not the most effective Medicaid program in the country. 

The CHAIRMAN. Are other States learning from you, asking these 

questions, and specifically the State of Oregon? 

Governor NAPOLITANO. I can’t speak to Oregon, but I can say 

that States and other Governors have been speaking with me. Of 

course, we are all speaking with the Congress now because we are 

all concerned that in the effort to reduce the Federal deficit, decisions will be made about Medicaid and other programs that are 

budget-driven as opposed to policy-driven. I think from the view of 

the Governors, we think, make the policy changes and then let the 

budget work its way out. 

The CHAIRMAN. Well, obviously the way you have worked it out, 

it serves health, Medicaid and the budget, and I think that that is 

the better approach to Medicaid reform and my point from the beginning. 

As we go forward, Governor, and the Deficit Reduction Act is implemented, I would be very anxious to learn from you what its negVerDate 0ct 09 2002 14:06 Nov 07, 2006 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 H:\DOCS\30619.TXT SAGING1 PsN: JOYCE
45

ative positive impacts are in terms of flexibility so that we can be 

responsive in a timely way and undo any damage that may have 

been done. 

Governor NAPOLITANO. Thank you, Senator, and I would be 

happy to be speaking with you as we go through the implementation of the Deficit Reduction Act. I am the incoming chair of the 

National Governors Association, so I am sure I will be hearing from 

my colleagues around the country. 

The CHAIRMAN. Well, that is terrific, and I hope that my Udall 

cousins are all treating you well. Turn them over to me if they are 

not. 

Governor NAPOLITANO. Your Udall cousins are treating me very 

well and we could use more of them. Thank you. 

The CHAIRMAN. I think I have about 5,000 of them in Arizona. 

Mr. Wagoner, thank you again. You know, as I listened to your 

testimony and have considered some of the remarkable things you 

have done, frankly, they almost seem to replicate many of the 

things which the State of Arizona is trying to do. She has given us 

a potential score from a study that was done. Have you been able 

to score budgetarily or in health outcomes what your programs 

have meant? 

Mr. WAGONER. We haven’t, Senator, added them up. Frankly, I 

think as the Governor mentioned, it is a little bit of, in some sense, 

a dicey practice of doing it because we are really trying to do two 

things. We are trying to improve quality of health care and quality 

of people’s lives, and the cost of providing that. So the accounting 

for it is—we try to be a little careful about being overly, let me say, 

bean-counterish about it. 

But for each of the programs that we do, as I indicated in my 

testimony, we have a pretty good sense of what the cost would have 

been in the absence of that program. Sometimes, it is cost-saving 

to us. Sometimes, it is better health treatment. We would be more 

than glad to sit down with the staff of the Committee and really 

work through initiative by initiative those that I mentioned and 

others that we filed in the written testimony that perhaps could 

give you some insights on which kinds of activities generate which 

kinds of savings. 

The CHAIRMAN. Are you mindful of Fortune 500 companies or 

perhaps even your competitors following similar enlightened models as General Motors is in health care? 

Mr. WAGONER. Yes. I think different companies have begun to seriously focus their best thinking on health care costs at different 

times because I think, to be honest, for some companies with different profiles of retirees, for example, it might not have been a big 

cost item for them. But I would be surprised if there are many 

large companies that don’t have fairly sophisticated efforts going on 

to try to both improve quality and reduce the cost of health care, 

because it is frankly such an issue in global competitiveness today. 

But I think maybe even more interesting, Senator, it is not just 

large companies. We have, obviously, many suppliers of all sizes, 

large and small, local and global, and dealers which tend to be medium or smaller businesses. We find that health care costs for 

many of them is a very important issue because they find simply 

46

that it is a benefit their employees very much appreciate and really 

want. Yet, the cost of it is unmanageable. 

So they are very interested in having access to these ideas, as 

well, but they obviously don’t necessarily have the capability to 

have the staffing or, as you referred to earlier, the purchasing 

power that we do. I think it highlights to me the importance of 

what you are doing on the Committee, which is not just improving 

health care for General Motors, but focusing on can we do for the 

whole system of health care costs in the United States. 

The CHAIRMAN. Richard, 2 weeks ago we had in this Committee 

a most fascinating hearing on a topic called medical tourism. We 

had testimony from an ESOP-owned, a union-owned company, in 

which they had come to an agreement with employees within their 

union, within their company, to access health care in India. It is 

called IndUS. This IndUS company—India U.S., I assume the acronym means—is staffed by Indians who are trained in American 

medical schools and in American business schools and have replicated in India the finest medical facilities that you could find in 

America. 

The union representative told us of one employee who had a 

heart issue. The cost of the heart surgery in North Carolina was 

$96,000. In India, with equal care, competent physicians, and legal 

rights, the cost was $6,000. Is this an issue that you all are looking 

at? 

Mr. WAGONER. I have to say I am familiar with it, having read 

about stories such as those you are citing, but it is not something 

that we have studied. 

The CHAIRMAN. Is it something you will have to look at? 

Mr. WAGONER. It is not something that we are looking at in detail right now. I would say just from the practical perspective, as 

we see it, because of our size, we have felt that items like medical 

care—for the most part, our employees would prefer to do it, if at 

all possible, at a convenient location to where they live. Given the 

number of people we insure, we hadn’t really thought of the practicality, to be honest, of shipping high volumes of people overseas. 

The CHAIRMAN. All the pre-ops were done by teleconferencing, 

like we are doing with Governor Napolitano. 

Mr. WAGONER. Right. 

The CHAIRMAN. I was astounded by what I learned in that hearing and I just simply note it to you because there is a lot of difference between $6,000 and $96,000. 

Mr. WAGONER. I think, Senator, if I could comment, I think perhaps something that we would learn from that is why can they do 

that for $6,000. Certainly, there may be lower wage rates involved, 

things that we could not replicate here, but I would suspect it is 

a much more sophisticated systems-based answer than that, and I 

think gets at the issue that I think bothers so many of us, which 

is why can’t we deliver the kind of health care system that people 

want here at a much more efficient cost, because the costs of some 

of these treatments like you are citing seem to be almost unimaginable. 

It does suggest that if we put a number of these initiatives in 

place which have been discussed, we really should have an opportunity to provide the kind of health care people want at a much 

47

lower cost. I think that is one of the things that I know you are 

working on here and we applaud it. 

The CHAIRMAN. Well, there are a lot of Republican and Democrat 

Senators wondering the same thing. So, anyway, my time is up and 

I want to note Senator Hillary Clinton has joined us. We welcome 

you, Senator, and we will just go in order of appearance and thank 

you for being with us. 

Senator Kohl. 

Senator KOHL. Thank you very much. 

Mr. Wagoner, you talked about the cost of health care spending, 

of course, and the fact that almost 40 percent of your health care 

spending is on prescription drugs. You talked about generic drugs 

and the opportunities that they present you and, by extension, our 

country to do something about the staggering costs of health care. 

Will you talk about a little bit more generic drugs, their importance, in your opinion, to our Nation, the things that we need to 

do here in Washington to see to it that generic drugs get full access 

to the marketplace and not prevented from providing that kind of 

cost saving to our country? 

Mr. WAGONER. Senator, I think you have stated our position very 

well. Our experience is as you suggest and we do think there has 

been progress in enhancing the availability of generic drugs, and 

we do see that as a significant element of cost control with no sacrifice in quality. 

I think an area where we are seeing an opportunity to expand 

generic options would be in the biopharmaceutical drugs, which 

today do not have the proactive attention that traditional drugs do, 

chemical-based drugs. We see that as an area where, frankly, 

health care expenses are rising from a low base, but at an alarming 

rate. So that would be an area, for example, that—specific focus on 

providing the resources where those drugs could be reviewed and 

opened up to generics on a timely basis—would be a good example 

of an area where we see significant additional opportunity to provide the kind of treatment that people want and need, but at a 

much more effective cost than the current model provides. 

Senator KOHL. In your statement, did you give us an estimate 

on, in your judgment, what generic drug usage in your company is 

saving you? 

Mr. WAGONER. Well, yes. We said that of all of the formularies 

that offer generic drugs, generic alternatives, we have had about a 

90-percent success rate in converting from branded to generic. For 

each point on that scale that we move, it saves us about $4 million. 

So assuming this against a base of $1.9 billion, that would be a 

savings of roughly $400 million, very significant in total. 

I would say just from my own experience, from drug to drug you 

could see savings even greater than that. I would also think, to be 

honest, that having greater access to generics would also help to 

keep the pricing of the brand name pharmaceuticals perhaps in a 

more competitive light as well. 

Senator KOHL. So can I conclude that you would suggest that we 

need here—to the extent that we are in a position to influence the 

process, we need here in Washington to see to it that everything 

is done to open up the market to generic drugs which, as you pointed out, have absolutely no downside with respect to quality? 

48

Mr. WAGONER. Our experience has been very good. It has got, obviously, to be done on a thoughtful basis. I think that has worked 

out very well from our experience. I want to be clear. I think prescription drugs do play an important role in the whole health care 

system, too. So in no way, shape or form are we ‘‘anti’’ those. We 

think they play an important role, but our experience is by enabling greater access to generics, making sure consumers understand the value equation in generics, those sorts of things can really help to provide, as the Governor said, very high-quality health 

care at much lower cost. I think that is really what we are all talking about here. 

Senator KOHL. Thank you very much, Mr. Wagoner. 

Governor Napolitano, some States that have expanded home and 

community-based services, such as your State, have experienced 

cost increases which you have not, apparently, in what is called the 

woodwork effect, which is that people who might not have participated in the State health care system join, as you know, when they 

are offered programs that allow them to stay in their homes and 

in their neighborhoods. 

How have you managed to avoid this cost increase? 

Governor NAPOLITANO. Yes, Senator, thank you. We have avoided the woodwork effect because we use a pre-assessment screening 

tool, which is a very effective device. We interview people. We ascertain whether they are eligible for or would qualify for institutionalization or not, and it is those that would qualify for institutionalization that we then look to—yes, you qualify, but would you 

be better off in your own home, in your own setting, and have our 

services delivered to you? 

The use of that tool—and this has been evaluated by a number 

of entities—has allowed us to increase the percentage of our seniors who can stay in their homes and have services delivered to 

them. Like I said in my testimony, two-thirds of our seniors who 

are in the long-term care program are getting long-term care at 

home, as opposed to the majority of States where it is actually the 

reverse statistic. But it is the use of this tool that allows us to 

screen early and that prevents the woodwork effect from driving up 

our costs. 

Senator KOHL. Do you think that the relatively smaller size of 

your State, as opposed to the really larger States in our country, 

gives you a somewhat greater ability to do this kind of screening, 

or do you think that does not affect it at all? 

Governor NAPOLITANO. We are the 17th largest State in the 

country, so we are at least medium, and we have a large senior 

population. In fact, by the year 2020, 25 percent of our population 

will be 65 or older. So it is to our interest to really think through 

long-term care, think about it for ourselves, actually, because as 

the baby-boomer ages, we need to think about the long-term care 

models we want to employ, but then set up a system that allows 

us to enable people who are capable to stay in their homes and live 

as freely and independently and comfortably as possible. 

Senator KOHL. That is very good. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Kohl. 

49

So you won’t think we are rude, they have called a vote. I would 

propose that Senator Kohl and I rush over and vote and come back 

while Senator Wyden and Senator Clinton ask questions, and we 

will make sure we hold the vote open for our colleagues. 

Here is the gavel, Ron. 

Senator WYDEN [presiding]. Mr. Chairman, thank you. 

Mr. Wagoner, as you know, since 1945 and Harry Truman, this 

country has been trying to come up with a way to make sure that 

all Americans could get essential, affordable health care. We 

thought we had a shot at it in the early 1990’s, as you know, and 

at that time many corporations said we are not sure we can survive 

if there is comprehensive health reform. What I hear a lot of companies saying now is we can’t survive without comprehensive 

health reform. 

My first question to you is do you think we are at the point 

again, a tipping point, when the companies would be willing to 

work with the Congress in a bipartisan way for comprehensive reform, getting beyond these incremental steps? 

Mr. WAGONER. I obviously can’t speak for everybody, Senator. I 

can say from General Motors’ perspective—and certainly I talk to 

my colleagues in the auto and auto supply business—this is a huge 

issue for us and I think I can assure you that we all would be most 

interested in that form of engagement. 

I can also tell you at the quarterly Business Roundtable survey 

of the CEOs of the largest companies, which extends obviously far 

beyond auto and auto supply and even manufacturing, they ask us 

each quarter what are the toughest challenges you face in your 

business, and health care, in the last number of surveys, has come 

up as the biggest challenge that business faces—health care costs. 

So that would suggest to me that I think a fairly broad base of 

the business community is very concerned about this issue. So I believe they would be willing to engage proactively, and I assure you 

we would be. 

Senator WYDEN. Tell me your thoughts about the idea of shared 

responsibility, that there is a role for a government, there is a role 

for the private sector and there is a role for the individual. This 

obviously was a big topic of debate when Massachusetts, for example, considered their proposal. 

What do you think the Congress ought to be pushing employers 

to do as part of comprehensive health reform and saying to the employers, you are going to have be part of this as well; everybody is 

going to have to be part of the equation? What can the Congress 

expect employers to do in this regard? 

Mr. WAGONER. Well, obviously, our model, Senator, is one that 

involves the three parties really working together to fund the 

health care expense, and it is one that we have had at GM for 

many years. 

My personal view on the matter to your broader question is I do 

think there are things the Congress can act on right now which 

would help to get at the broad-based issue of reducing health care 

costs while improving quality. You are familiar with the list and 

I mentioned a number of them today. 

Obviously, the development of a sophisticated information technology center in health care would be worth billions of dollars to 

50

all providers, but does require some strong leadership. The use of 

all of the data that we have on cost and quality—there is no data 

base that is as comprehensive, as high-quality, as good as the 

Medicare claims data base. If we were able to provide that information, I think you would see significant improvements. There are 

many, many more things, and my philosophy, frankly, has been we 

should really push to get on those things that I think everyone can 

agree on. 

Senator WYDEN. I think you are right, and my seat-mate, Senator Clinton, has done very important work in the technology area, 

but I do want to come back to this question of what the Congress 

ought to expect from employers. I and others have been reluctant 

to just impose mandates because if you just heap on mandates, you 

can put people out of business. 

But if we are going to have shared responsibility—and I am prepared to tell individuals they are going to have to pay a portion of 

health costs in the future—what should the Congress ask of employers? 

Mr. WAGONER. Well, again, I don’t think I am in probably a position to tell you what should be required of all employers. You know 

what we do. My experience is the more we can let market forces 

work even in areas that are not purely market-type businesses, 

which health care isn’t, I think that is the better prescription. So 

I think to be honest, I better leave it to you all to decide the specific contribution you expect of business. 

We are contributing a lot. In fact, I think you would see, Senator, 

that the direction that has been going on in businesses is businesses are reducing or even eliminating the health care benefits because they are so expensive particularly, for example, to retirees. 

My preference is to resolve that, rather than specifically legislating 

that businesses should provide it—I think the fundamental issue is 

we need to get our arms around the cost issue. 

Senator WYDEN. Let me ask you about one idea that I am looking 

at with respect to the role of the employer. I hear constantly from 

businesses that their employees very often have to take a full day 

off in order to get health care. In other words, their appointment 

was for ten o’clock. They show up at ten o’clock, they wait until 

noon, and essentially the worker and the company lose a full day 

of productivity. 

What do you think about the idea of essentially bringing health 

care to the worksite? As we look at the role of the employer in a 

shared responsibility system, we might try to look at this partnership so that the employer and government and the individual 

might do something that was in everybody’s interest, which is essentially to bring health care to the worksite so that we don’t lose 

a day of productivity. Is that something you might think is fruitful? 

Mr. WAGONER. Well, I know that some companies have done 

that. We have done that at specific sites and I think have had some 

success doing it. I think basic demographics, things like that, will 

drive whether it is economically attractive for everyone. If you have 

a small business, perhaps it wouldn’t be something that would 

make sense from a stand-alone basis. 

But I think it is something that a number of companies have 

done at specific sites where there are enough people and the work 

51

is time-sensitive and things of that sort. So we certainly don’t rule 

that out as one of the things that might help improve the productivity of the system. 

Senator WYDEN. My time is up and, as you know, my seat-mate 

has a longstanding interest in this issue, as well, and I am going 

to give her the gavel and hope to come back. 

Mr. WAGONER. Thank you. 

Senator CLINTON [presiding]. Thank you. It is good to see you 

again, Mr. Wagoner. Governor, welcome. We are delighted to have 

you be part of this hearing as well. 

Governor NAPOLITANO. Thank you. 

Senator CLINTON. GM does business all over the world. You obviously are an American company with global reach and we hope 

that continues. You have employees in how many countries, Mr. 

Wagoner? 

Mr. WAGONER. I would say we have employees probably in 40, 

45 countries. 

Senator CLINTON. Have you done an analysis of your health care 

costs in those other 44 countries? 

Mr. WAGONER. We have. It is concentrated primarily on the, let 

me say, 20 countries where we have most of the employees. 

Senator CLINTON. Do those include Canada, European countries, 

as well as Asian countries? 

Mr. WAGONER. They do, Senator, yes. 

Senator CLINTON. Is that information that could be made available to this Committee in some non-proprietary way for a basis of 

comparison? 

Mr. WAGONER. We would be glad to share that information with 

the Committee. 

Senator CLINTON. Obviously, what I am trying to get at is that 

I think American companies are being put in an impossible position 

when it comes to a global economy. Ten years ago, if you had been 

here, I think we would be talking on a slightly different plane 

about what the challenges were, but 10 years is a lifetime when it 

comes to the pace and speed of global competition with respect to 

American jobs and American productivity and America’s standard 

of living. 

I think that when we look at health care costs, it is apparent 

that you compete against companies in countries where individual 

businesses don’t provide health care costs, where that is provided 

across the board, where everyone has to make a contribution 

through the tax system. Some preliminary analyses that I have 

seen show that if you add all of the costs on American business, 

which include taxes, health care, worker’s comp, et cetera, the costs 

that you are paying are considerably higher than what is paid for 

health care in comparably advanced countries where everybody 

pays into the system. 

On the other side of the equation are those companies in countries that don’t provide health care, where basically it is every person for himself. There is a rudimentary system, but there is no organized way, and therefore the costs are commensurately lower. 

I have become increasingly convinced that we are getting a bad 

deal in America and that GM is getting a bad deal and most of the 

other companies that are doing the right thing by insuring employVerDate 0ct 09 2002 14:06 Nov 07, 2006 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 H:\DOCS\30619.TXT SAGING1 PsN: JOYCE
52

ees are getting a bad deal. But certainly companies like yours 

which essentially bear the social contract of the last 50 years are 

getting an especially bad deal because you are paying for what are 

now considered retired employees, therefore unproductive employees who certainly did a great service to you and to our country, but 

no longer are in the workforce. 

I don’t think this is a sustainable position, and I read your testimony and I really commend you for the many innovative programs 

and the efforts that you have undertaken to try to squeeze down 

your costs. I would be interested again, if this is not proprietary, 

if you could provide this Committee with some sense of what the 

costs are for running all these programs—the huge benefit-managing departments that large companies have to have, the costs of 

third-party payers that large companies have to pay. We spend $1.7 trillion on health care in this country. We spend 

50 percent more than any other country and we don’t even have 

the highest results in terms of quality of health care when you look 

across the board. So one of my continuing questions is why does 

American business take such a bad deal. I mean, basically, you are 

getting a really bad deal. 

The cost of administering Medicare is much less than the cost of 

administering your health care programs. The average cost of private insurance is considerably higher than the administrative costs 

of Medicare. I don’t know how it much it costs to pay for benefit 

managers and the whole bureaucracy you have to pay for, but I assume it is considerable. 

So why is it that American business doesn’t just rise up and say 

there has got to be better way here, and why don’t you bring not 

just your market power to bear, but your political power to get 

some changes in this dysfunctional, overly expensive, unproductive 

health care system that we all are paying for? 

Mr. WAGONER. Senator, I share many of your views and I think 

your analysis is correct that if you compare the cost of health care 

that we pay for employees in the U.S. versus any other country 

where we have significant production operations, it would be anywhere from somewhat to a lot higher, and I suspect that is true 

for many businesses. 

I think individual businesses probably look at your question 

along the following lines. If they are like us, they see the high cost 

of health care and so they are faced with several choices, such a 

investing in other lower-cost locations. That is good for some businesses, but it is not good for the U.S. economy because we lose jobs. 

Or they may perhaps tradeoff and say rather than giving significant wage increases, we will put that money into health care costs 

for the employees. Or they may choose to not offer health care benefits or reduce the amount of health care benefits which they offer, 

which I think is definitely a trend we see in business. 

Senator CLINTON. Mr. Wagoner, I am so sorry, but they have told 

me if I don’t go to vote, I am not going to get to vote. I would love 

to get the rest of your answer perhaps in writing and the information that you kindly offered to provide us. 

Mr. WAGONER. I would be glad to do that. 

Senator CLINTON. Thank you so very much for being here. 

Mr. WAGONER. Yes, ma’am. Thank you. 

53

The CHAIRMAN [presiding]. Thank you, Senator Clinton. 

Before we let you go, just a couple of follow-ups I had. Governor, 

I am interested to know in Arizona how you have made sure that 

private managed care organizations are focusing on managing care 

and not managing costs. I am sure you know the difference. If they 

are managing costs by saving money through delaying or denying 

needed care, what is your role in that? How does the government 

make sure that care is managed instead of costs being managed? 

Governor NAPOLITANO. One is we are really one of the largest 

purchasers of health care in the State and that gives us some market power. What we do is we have within our AHCCCS department, which is the acronym for our Medicaid area, a whole division 

that is designed to make sure that quality of care is not sacrificed 

for cost. 

We also write into our vendor contracts a number of quality of 

care provisions, including a provision that says you have to spend 

84 percent of your capitated costs on direct rendition of services, 

not on other expenditures. So both by oversight and by contract, we 

endeavor to maintain the quality of care even as we try to control 

costs. 

The CHAIRMAN. Did I understand you to say that you are the 

purchaser of prescription drugs as well? 

Governor NAPOLITANO. Well, that is part of the capitated costs. 

It is a full-risk, capitated program, and part of that is the pharmaceuticals. So we leave it to the MCOs and the market to figure out 

how to provide medically adequate care in the sense that they get 

the capitated costs. If they are able to achieve some savings someplace, they get the benefit of that. If not, they assume the risk of 

that, and pharmaceuticals are a part of that calculation. 

The CHAIRMAN. Richard, as you are no doubt aware, the Centers 

for Medicare and Medicaid Services have tried without a great deal 

of success to publish cost and quality information for various sectors of the health care industry. It hasn’t been very successful, but 

it appears like you might have been successful in the program you 

described. 

How were you able to secure participation of these groups and 

how helpful have your employees and retirees found the information? 

Mr. WAGONER. We have been able to do this successfully, I would 

say, on a limited basis, in areas where obviously we have concentrations, high numbers of employees, so we can create data 

bases that are meaningful and accurate. I think it has been very 

helpful. 

Just from personal experience, you look through and if you have 

to go into some sort of elective surgery and there are eight hospitals in your area and you can look and see how many surgeries 

they have done and what has been the success rate of those surgeries, I think it is the kind of thing that is very helpful. I don’t 

think that the average consumer of health care is used to doing 

that sort of thing, which we find incredibly ironic. 

When you go buy a car, one of the things you might do is go on 

a website and try to get things like warranty performance or resale 

values. People do that as second nature, and yet when they are 

going to get some form of medical care, because that information 

54

isn’t easily available, they don’t do that. So this is where I think 

use of the Medicare claims data base in a thoughtful way would 

really help make everyone out there a smarter consumer. 

I think as the Governor mentioned, we don’t discount the role of 

individuals and the private enterprise system reacting to opportunities, and we think there is nothing like data on cost and quality 

of outcomes that would really help to drive people to the efficient 

and low-cost and high-quality providers of various services. 

The CHAIRMAN. Senator Kohl has a follow-up. 

Senator KOHL. Thank you. 

Just a word from each of you, if you would, on the importance 

of health information technology programs, their startup costs, but 

the payment that you get and how important you think these programs are in controlling the cost of health care and the sense of 

urgency or importance that you attach to it. 

We will start with you, Governor. 

Governor NAPOLITANO. Thank you, Senator Kohl. Over a year 

ago, I issued an executive order and what I did through that executive order was create task force that was called the Health-e Connection. What it was designed to do was to bring together public 

and private providers to look at how we input technology and have 

a statewide technology basis to our health care system. 

We are now in the process of implementing the recommendations 

of that group and our goal is within the next few years to have 

medical records online, accessible to providers. It is a quality of 

care issue, it is a cost containment issue and it is the wave of the 

future. 

One of the amazing things we found out as we went through the 

task force work is how paper-driven the medical industry is. For 

all the science that underlies medicine, their recordkeeping is in 

the 19th century. So to convert everything to a system that is universally accessible that allows us to transfer records on a real-time 

basis so that doctors and ER physicians have real-time information 

is a great development, I think, that the States are doing this. The 

Federal Government could help us by incentivizing that and providing grants or whatever to other States to do the same thing. 

Senator KOHL. Very good. 

Mr. Wagoner. 

Mr. WAGONER. I wholly endorse what the Governor said. I think 

she laid out the benefits. The case is compelling. You would be sensitive from your own background. The application of information 

technology, while it has taken a while, has moved across every sector of our economy—manufacturing, services, now into education. 

Health care has been, for a variety of reasons, very slow to embrace 

the opportunity. It is gold lying on the streets and we really need 

to get at it. 

Things like enacting the bill sponsored by Senators Enzi, Kennedy, Frist and Clinton for example, with a sense of urgency would 

be a great way to begin to capture more and more the benefits 

here. But it is just viewed by everyone I talk to—professionals in 

the field, our own business experience—that the benefits are huge. 

It does require some investment, as you say, but the return is 

going to be terrific. 

55

Senator KOHL. Those are good answers. I thank you both very 

much. 

I thank you, Mr. Chairman. 

The CHAIRMAN. Richard Wagoner and Governor Napolitano, we 

can’t thank you enough for sharing your time on this very important issue, an issue that eventually will be better reformed because 

of the work that you are doing and the Federal Government needs 

to do. So for that, we extend to your our heartfelt gratitude. With 

that, we wish you a good day and we will call up our second witness. 

Mr. WAGONER. Thank you very much. 

Governor NAPOLITANO. Thank you, sir. 

The CHAIRMAN. Thank you. 

Mr. Don Marron is the acting director of the Congressional Budget Office. 

We welcome you. Thank you, Don. 

He will present a new CBO report that examines the cost implications seniors have on America’s health care system, with a special focus on the Medicaid program and how its cost growth will 

fuel significant challenges for the entire Federal budget. 

Thank you, and the mike is yours. 

STATEMENT OF DONALD B. MARRON, ACTING DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE, WASHINGTON, DC 

Mr. MARRON. Thank you, Mr. Chairman. It is a pleasure to be 

here today to discuss the Medicaid program and the challenges it 

faces as a result of rising health care costs and demographic pressures. As you mentioned, my written testimony today is, in essence, 

a primer on Medicaid and some of the forces that are driving 

spending increases in it, and both looking back where we have 

been and looking forward to where we may be going. 

To start with—and this will come as no surprise—Medicaid is a 

very large program both in terms of enrollment and spending. In 

fiscal 2006, Medicaid will cover about 60 million people—1 in 5 

Americans—making it the largest Government health insurance 

program by enrollment. Federal spending for the program this year 

will total about $190 billion. That is about 7 percent of the overall 

Federal budget and about 1.5 percent of the overall U.S. economy. 

Including State spending, which itself is more than $100 billion, 

Medicaid spending is comparable in size to the net outlays for 

Medicare. It is a very large program. 

Now, in thinking about the size of the program, it is important 

to distinguish between who the enrollees are and where the money 

goes. It turns out that most Medicaid enrollees by numbers are 

children, their parents, and pregnant women. Together, those 

groups comprise about three-quarters of Medicaid enrollment, but 

they only comprise about 30 percent of the benefit spending. The 

aged and the disabled, on the other hand, have much higher costs 

than those other groups. So while they comprise only one-quarter 

of Medicaid enrollment, they are the ones who account for about 70 

percent of Medicaid benefit spending. 

As you know, Medicaid costs have risen rapidly in recently decades. These increases reflect both increases in enrollment—a growing population and expanded enrollment in the programs—and risVerDate 0ct 09 2002 14:06 Nov 07, 2006 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 H:\DOCS\30619.TXT SAGING1 PsN: JOYCE
56

ing costs per enrollee. The growth in enrollment has been particularly pronounced among disabled beneficiaries. 

Looking ahead over the next 10 years, for which CBO constructs 

projections as part of our baseline exercise, we project that rising 

costs per enrollee—that is, so rising health care costs per person—

will play the dominant role in driving Medicaid’s overall cost 

growth. 

The factors that drive Medicaid cost growth and the challenges 

the program faces are similar in many ways to those that face the 

U.S. health care system as a whole. As you know, health care 

spending generally in the United States has risen much faster than 

the economy in recent years. It now accounts for almost 16 percent 

of the GDP, up from 8 percent back in 1975. 

Most analysts agree that the bulk of this growth reflects increasing use of new medical technologies, or more generally the increased capabilities of medicine. Those advances enable us to treat 

new conditions, to improve upon existing treatments and to treat 

more people. Other factors have also contributed to the growth in 

spending—aging, increasing incomes, deeper insurance coverage. 

But, together, those explain much less of the spending increases. 

As an economist, I should emphasize that increased spending on 

health care is not necessarily a bad thing. The key issue—and this 

was discussed on the first panel—is whether that spending provides essential value and benefits that are commensurate with the 

spending. If it makes sense for the U.S. people and the U.S. economy to spend more on health care because it is delivering benefits 

that are worth it, that is fine. 

The chief concerns, however, are: A) that there may be concerns 

that we are not getting benefits commensurate with the spending, 

and that, B) we have a system in which there is a significant 

amount of Federal spending for health care. So, obviously, as that 

spending rises, it places pressures on the rest of the Federal budget. 

You mentioned earlier on, Mr. Chairman, that it is important to 

think about the interactions between Medicaid and the health system as a whole. What I would like to emphasize is that the factors 

driving health care spending generally are important for Medicaid 

because as capabilities and standards for the delivery of care increase generally in the health care system, they tend to be incorporated into Medicaid as well. In part, that reflects the choice of 

administrators about what procedures to cover, and in part it reflects the tendency of physicians to provide a comparable level of 

care to all of their patients. 

As this Committee is well aware, the rapid growth in Medicaid 

spending will occur at a time when the Federal budget will face increasing pressures due to health care costs and the aging of the 

population. As I mentioned earlier, CBO estimates that Medicaid 

spending this year will be about 1.5 percent of GDP. CBO projects 

that under current law Federal spending for Medicaid will reach 

about 2 percent of GDP in 10 years, by 2015, and under intermediate assumptions about future health care costs, could reach 4 

percent of GDP by 2050. 

So under current trends, under current law, the Medicaid program would take up a larger and larger share of the U.S. economy 

57

and, in addition, a larger and larger share of the Federal budget. 

Such potential cost growth is a particular challenge since Social Security and, in particular, Medicare will experience significant cost 

growth at the same time. 

Under CBO’s projections, Social Security spending might increase by about 2 percent of GDP by 2050 and Medicare spending 

might increase by about 5.5 percent of GDP. Together, again, under 

current law, those three programs would take up about 19 percent 

of GDP several decades out, which is about what overall Federal 

spending today is when you strip out interest on the debt. 

Now, I should emphasize that these estimates are subject to 

great uncertainty. Demographic trends can be projected with some 

confidence, but future growth of health care costs is highly uncertain. It is easy to imagine scenarios in which the growth of health 

care costs is higher than our intermediate projections, and it is entirely possible that it will turn out to be lower as well. 

Still, these projections highlight the long-term budget challenges 

that we face, and again I want to emphasize they are primarily, it 

turns out, driven by rising health care costs per enrollee. That is 

the predominant contributor to it, and changing demographics are 

also an important but secondary factor. 

Because of these looming fiscal pressures, there has been increasing interest on ways to control spending in these programs. In 

thinking about Medicaid in particular, there is sort of a basic menu 

of choices that you could have. Since it is a joint State-Federal program, obviously one line of direction of pursuing savings for the 

Federal Government is to shift more costs onto the States. Another 

obvious approach is to have beneficiaries of the program bear more 

costs. That would reduce Federal spending and it also might induce 

some people to demand fewer services through the Medicaid program. 

Or you could try to pursue ways to make the delivery of care 

more efficient so that you have the possibility of having less spending and a higher quality of care. The challenge with those approaches is that finding mechanisms that accomplish that are actually quite challenging. Reference was made on the earlier panel 

about the woodwork effect. The woodwork effect comes from a situation in which there was a desire to pursue a more efficient way 

of delivering care in which you move people from an institutional 

setting to a community or home-based setting. 

That has the effect of being more efficient, lower-cost per beneficiary, but in many implementations of that you discover this 

woodwork effect that more beneficiaries come forward. Then as a 

result, if your concern is Federal spending, you may not——

The CHAIRMAN. It gets its name from people coming out of the 

woodwork for it? 

Mr. MARRON. Exactly. 

The CHAIRMAN. All right. 

Mr. MARRON. You may not get the reductions in overall spending 

that you might have thought just by comparing the per-capita costs 

of the two systems. Again this also raises an issue raised earlier 

about to what extent you want to focus just on the budget side 

versus kind of the delivery and efficiency of care. 

With that, I am happy to take any questions you have. 

58

The CHAIRMAN. Well, on that issue—and I know that has been 

the problem with home care, is the woodwork effect, and yet it does 

seem to me if they are entitled to be a part of the program and 

they come out of the woodwork and they are there are under law 

and it is more efficient and perhaps even better care and less cost, 

I guess that is the catch–22 we are in. 

I want to take you back to a comment, if you were here, from 

Governor Napolitano about the Lewin Group report. 

Mr. MARRON. Yes. 

The CHAIRMAN. Their report has shown that the Medicaid program would secure $83 billion over 10 years in savings if all the 

States moved to a full capitation, managed care model. I am wondering, do you value that study, do you agree with that study? 

Could you comment on the viability of their projections, whether 

CBO has done any related research that would verify that kind of 

a number? 

Mr. MARRON. Certainly. We took a very quick glance at the study 

this morning. We have not reviewed it in any great detail. What 

I took from it from a quick glance is the $83 billion number that 

you mentioned. That would be for the Medicaid program as a 

whole. For the States involved, it turns out that the FMAP is about 

56 percent, on average, so that translates into about $46 billion in 

potential savings for the Federal Government over the next 10 

years. 

I guess, first, just going back to—and this is one of these classic 

issues with these programs about what is a big number and what 

is a small number. Forty-six billion dollars is in one sense an astronomical number. It is interesting. When you compare it to the 10-

year spending in the Medicaid program at the Federal level, it still 

works out to be less than 2 percent. So it is relatively small compared to the overall program, but obviously a significant amount of 

money. 

The CHAIRMAN. Yes. 

Mr. MARRON. As I understand it again basically just from a quick 

glance, their analysis presumes that these changes would essentially happen overnight. Obviously, any policy initiatives that 

would try to pursue them—presumably, there would be some 

phase-in period over which they would occur. So I would expect 

lower savings just for that reason. 

States at the moment currently have the flexibility to pursue 

many kinds of managed care programs on their own, and so you 

face sort of the classic question about why isn’t this already being 

done. 

The CHAIRMAN. Why isn’t it? 

Mr. MARRON. Well, it is interesting. Arizona is clearly a very special case. As the Governor mentioned, they were the last entrant 

into the Medicaid program, and they are by far the most intensive 

users of managed care. For me, this sort of raises this classic issue 

with a program like Medicaid. 

Medicaid has this great sort of laboratories of democracy approach, in which it gives the individual States a great deal of freedom to try to choose what works best and it gives the other States 

an opportunity to learn from that. But it also gives the States an 

59

opportunity to design programs that best fit their culture, their 

population, their needs, their health care delivery system. 

It raises, then, a question about how well can you transfer the 

results in one State that has specifically chosen that approach to 

other States that for various reasons haven’t. I think that would 

be the key issue in trying to figure out whether——

The CHAIRMAN. Can you give me an example of some challenges, 

say, hypothetically Arkansas would have adopting what Arizona 

has? Are there States that you could compare that would have particular challenges evolving to such a capitated system? 

Mr. MARRON. I think the primary challenge would be that Arizona has worked at managed care since 1982. 

The CHAIRMAN. Managed care isn’t as accessible in other States? 

Mr. MARRON. That not every other State has chosen to go that 

far. So it is not something where you can easily just switch from 

a more fee-for-service-oriented delivery system. 

The CHAIRMAN. It takes a more mature industry in health care 

to deal with their system. 

Mr. MARRON. Yes, and then there may also be differences in the 

population covered, but I am afraid I don’t have those details at my 

fingertips. 

The CHAIRMAN. Do you ever do studies that actually make recommendations to CMS on these kinds of things or encouragement 

to give these kinds of waivers because something is working and 

something is not? 

Mr. MARRON. We at CBO studiously avoid recommendations of 

any kind, if possible. Our job is essentially to serve you and to give 

you the kinds of information that will be helpful for guiding policy 

decisions, and we are happy to assist you in that way. 

The CHAIRMAN. Well, obviously, we are going to have to do something continually on the whole entitlement category because eventually we will have no choice, because the entitlement side of the 

ledger is going to consume everything on the discretionary side. I 

think that is unsustainable to the American people, as well. 

Your analysis is appreciated today. It has been helpful and I 

have found this hearing very worthwhile. I hope maybe you have 

got a few ideas you can distill for us to make some recommendations to the Congress, and then maybe to OMB, too. I know there 

is always that fight, too. 

Thank you very much, Don, and we are grateful for your presence, and for all of you who have participated. 

[The prepared statement of Mr. Marron follows:]

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The CHAIRMAN. With that, this hearing is adjourned. 

[Whereupon, at 11:31 a.m., the Committee was adjourned.] 

(89)

A P P E N D I X 

PREPARED STATEMENT OF SENATOR KEN SALAZAR

Good Morning. 

I want to thank Chairman Smith and Ranking Member Kohl for their leadership 

and commitment to reform the Medicaid program and to fix our national health care 

crisis. 

The financial sustainablity and reform of Medicaid is a matter of life and death 

to over 57 million elderly, pregnant women, children, poor, and disabled Americans, 

who rely on Medicaid for necessary medical care. 

In my state alone, over 10% of our population relies on Medicaid to provide critical medical services. 

The problems affecting Medicaid are a reflection of the problems plaguing our national health care system. 

It is absolutely imperative that we reform our health care system so that all 

Americans, including our senior citizens, get the health care that they need and so 

that we stop the crippling effect that rising health care costs has on our citizens, 

businesses, economy and state and federal governments. 

Reforming our system will take the collective wisdom from hearings like this one. 

It will also take the political will to tackle our entire health care delivery system. 

Last year, Senator McCain and I introduced the National Commission on Health 

Care Act (S. 2007). Its purpose is simple and bold—to fix our broken health care 

system. It achieves that goal by bringing together elder statesmen and women to 

study and develop the best reform proposals that will solve our health care crisis. 

I look forward to working with the members of this Committee and the witnesses 

here today on health care reform, whether it is through a commission or other worthy legislative proposals. 

I am particularly interested in hearing the testimony and reform proposals of 

General Motors Corporation CEO, Richard Wagoner, Arizona Governor Janet 

Napolitano, and Donald Marron of the Congressional Budget Committee. 

It will take the concerted efforts of private businesses and leaders at all levels 

of government to solve the problems plaguing Medicaid and our entire health care 

system. 

Thank you.

Æ