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WASTE, FRAUD, AND ABUSE IN THE FEDERAL

CROP INSURANCE PROGRAM

HEARING

BEFORE THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MAY 3, 2007

Serial No. 110–74

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

TOM LANTOS, California

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

——— ———

PHIL SCHILIRO, Chief of Staff

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

DAVID MARIN, Minority Staff Director

(III)

C O N T E N T S

Page

Hearing held on May 3, 2007 ................................................................................. 1

Statement of:

Babcock, Bruce, director, Center for Agricultural and Rural Development,

Iowa State University; Bruce Gardner, distinguished university professor, College of Agriculture and Natural Resources, University of Maryland; and Steve Ellis, vice president, Taxpayers for Common Sense ....... 78

Babcock, Bruce .......................................................................................... 78

Ellis, Steve ................................................................................................. 93

Gardner, Bruce .......................................................................................... 87

Gould, Eldon, Administrator, Risk Management Agency, U.S. Department

of Agriculture, accompanied by Michael Hand, Deputy Administrator

for Compliance, Risk Management Agency; Phyllis K. Fong, Inspector

General, U.S. Department of Agriculture; and Lisa Shames, Acting

Director, Natural Resources and Environment, U.S. Government Accountability Office ......................................................................................... 13

Fong, Phyllis K. ......................................................................................... 24

Gould, Eldon .............................................................................................. 13

Shames, Lisa .............................................................................................. 44

Letters, statements, etc., submitted for the record by:

Babcock, Bruce, director, Center for Agricultural and Rural Development,

Iowa State University, prepared statement of ........................................... 81

Davis, Hon. Tom, a Representative in Congress from the State of Virginia, prepared statement of ........................................................................ 10

Ellis, Steve, vice president, Taxpayers for Common Sense, prepared statement of ........................................................................................................... 95

Fong, Phyllis K., Inspector General, U.S. Department of Agriculture,

prepared statement of ................................................................................... 26

Gardner, Bruce, distinguished university professor, College of Agriculture

and Natural Resources, University of Maryland, prepared statement

of ..................................................................................................................... 89

Gould, Eldon, Administrator, Risk Management Agency, U.S. Department

of Agriculture, prepared statement of ......................................................... 16

Shames, Lisa, Acting Director, Natural Resources and Environment, U.S.

Government Accountability Office, prepared statement of ....................... 46

Waxman, Chairman Henry A., a Representative in Congress from the

State of California, prepared statement of ................................................. 3

(1)

WASTE, FRAUD, AND ABUSE IN THE FEDERAL

CROP INSURANCE PROGRAM

THURSDAY, MAY 3, 2007

HOUSE OF REPRESENTATIVES,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The committee met, pursuant to notice, at 10 a.m. in room 2157,

Rayburn House Office Building, Hon. Henry A. Waxman (chairman

of the committee) presiding.

Present: Representatives Waxman, Maloney, Cummings,

Kucinich, Clay, Watson, Yarmuth, Braley, Cooper, Hodes, Davis of

Virginia, Platts, Duncan, Turner, and Sali.

Staff present: Phil Schiliro, chief of staff; Phil Barnett, staff director and chief counsel; Brian Cohen, senior investigator and policy advisor; Margaret Daum, counsel; Earley Green, chief clerk; Teresa Coufal, deputy clerk; Matt Siegler, special assistant; Zongrui

‘‘JR’’ Deng, chief information officer; Miriam Edelman and Will

Ragland, staff assistants; David Marin, minority staff director;

Larry Halloran, minority deputy staff director; Jennifer Safavian,

minority chief counsel for oversight and investigations; Keith

Ausbrook, minority general counsel; Ellen Brown, minority legislative director and senior policy counsel; Anne Marie Turner, minority counsel; Patrick Lyden, minority parliamentarian and member

services coordinator; Brian McNicoll, minority communications director; and Benjamin Chance, minority clerk.

Chairman WAXMAN. The meeting of the committee will please

come to order.

Our committee started this year with 4 days of hearings on waste, fraud and abuse. We examined why $12 billion in cash disappeared in Iraq. We looked at the problems created by our Government’s growing reliance on private security contractors, and we

investigated the calamitous Deepwater contract to build ships for

the Coast Guard. We also held a day of hearings on waste, fraud

and abuse in the healthcare system.

This a theme that we will return to repeatedly this year. The

taxpayers understand it costs money to run the Government, but

they can’t accept rampant waste, fraud and abuse that squanders

their money on boondoggle programs. They are looking to Congress

to rein in the wasteful spending and Federal giveaways that are

driving our Nation deeper into debt.

Our committee is uniquely positioned to week out waste, fraud

and abuse. Because we have Government-wide oversight authority,

we can look at wasteful spending with independence and a fresh

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perspective. As we hold hearings in this committee, there will be

no sacred cows.

The crop insurance industry is a well financed and influential

lobby, but in this committee, there will be no free passes. Our responsibility is to look out for the taxpayer, not the crop insurers,

drug companies, Federal contractors, or any other special interest.

I am not an agriculture expert. I grew up over my family’s grocery store, so I know a little bit more about selling produce than

I know about growing it. But I know a waste of taxpayers’ money

when I see it. What our committee will learn today is that the object of this hearing, the Federal Crop Insurance Program, is costing

taxpayers billions of dollars.

Nobody can argue with the goals of the crop insurance program:

to provide farmers and ranchers with a safety net when bad weather or bad luck threatens financial ruin. But from the taxpayer perspective, it is hard to imagine a more costly and inefficient way of

providing this safety net for farmers.

The Federal Crop Insurance Program has become a textbook example of waste, fraud and abuse in Federal spending. Under this

program, farmers received $10.5 billion over the last 6 years, but

it has cost the taxpayers almost $19 billion to provide this financial

protection to farmers. Over $8 billion in taxpayer funds have been

used for excess payments to insurers and other middlemen. Somehow, about 40 cents of every dollar that the taxpayers have put

into the crop insurance program has been for unproductive expenses.

The testimony from the Government Accountability Office will

explain where some of this money is going. GAO has found that the

private crop insurance companies are obtaining underwriting profits that are almost three times as high as industry averages. These

exorbitant profits are funded by the taxpayers and farmers that

pay for the program. According to GAO, over the last decade, these

crop insurance companies have earned $2.8 billion in underwriting

profits. Simply reducing their underwriting profits to industry average levels would have saved the taxpayers almost $2 billion.

These reports of billions of dollars in taxpayers’ expenditures are

the reason I am holding this hearing today. Nobody begrudges assistance to a farmer whose crop is destroyed in a natural disaster,

but no one should tolerate insurance companies that skim billions

from the treasury to fatten their profits.

Eliminating waste, fraud and abuse is not a partisan issue, and

on this committee we are particularly fortunate that Tom Davis is

our ranking member, and that we have Democrats and Republicans

who share the commitment to putting the interests of the taxpayers first, and understand the importance of our oversight role.

I am pleased that we are holding this hearing. It is not one of

the usual ones. We don’t have a bank of cameras. We don’t have

C–SPAN. We don’t have all the other press covering our every

move. But I think this can be as significant a hearing as any other,

if we can explore ways to save the taxpayers what could amount

to billions of dollars. I think there can be no more important purpose for an oversight committee.

[The prepared statement of Chairman Henry A. Waxman follows:]

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Mr. Davis.

Mr. DAVIS OF VIRGINIA. Thank you, Mr. Chairman.

I guess we are really down in the weeds on this one today. I

want to thank you for convening this hearing. As the principal

House oversight committee, we are empowered by our rules to review and study on a continuing basis the operation of Government

activities at all levels with a view to determining their economy

and efficiency. That is a broad mandate to look anywhere in any

department or agency for profligate spending and direct reforms.

This morning, we are going to focus that powerful oversight microscope on a costly program that seems uniquely and dangerously

vulnerable to waste, fraud and abuse, the Federal Crop Insurance

Program. In an attempt to induce the private insurance marketplace to underwrite the highly variable risks of crop blights and

failures, the program subsidizes premiums and provides insurers

with a generous margin to cover administrative and operating

costs. The Federal Government even assumes a substantial portion

of the liabilities flowing from the riskiest pool of policies.

But the program has not achieved its primary goal, to reduce or

eliminate the need for annual disaster payments to farmers. In its

current structure, the crop insurance system offers almost no incentives to limits costs, but practically invites unnecessary or

fraudulent payments.

Today, we will hear from the Department of Agriculture, the

USDA Inspector General’s Office, the U.S. Government Accountability Office, and respected academics on efforts to control a subsidy program that last year cost taxpayers $2.5 billion.

Both the Inspector General and the GAO have made recommendations to the Agriculture Department’s Risk Management

Agency to tighten expenditure controls, recoup excessive payments,

prevent fraudulent claims, and strengthen enforcement against

those who exploit the program. We need to know what progress is

being made implementing those recommendations; what resources

are being applied to the task; and what is still to be done to reduce

vulnerabilities.

Farm bills now under consideration may attempt to expand crop

insurance availability and subsidies further still, so the inclusion

of stronger fiscal controls and enforcement tools should be an urgent priority. The administration has proposed three important

structural reforms to make crop insurance a more effective hedge

against annual disaster payments, reduce administrative and operating costs, and limit underwriting gains by insurers in years when

premiums far exceed paid claims.

Not surprisingly, some farm groups oppose these proposals, but

as we have demonstrated in the past, bipartisan oversight by this

committee can inform and improve the work of other committees

trying to balance the needs and demands of various constituencies.

In 2003 and 2004, our investigations, a very bipartisan investigation in fact, suggested by Mr. Waxman, of inspections and testing

to detect mad cow disease brought important information to light

about delays, denials and other lapses in vigilance that might have

otherwise been overlooked.

With this hearing, we can shine the same curative light on the

crop insurance program.

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Again, Chairman Waxman, thank you for focusing the committee’s attention on this important Federal program. I look forward

to the testimony of today’s witnesses and to our continued bipartisan work to make Government more efficient and effective.

[The prepared statement of Hon. Tom Davis follows:]

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Chairman WAXMAN. Thank you very much, Mr. Davis.

If any Member wishes to insert an opening statement in the

record, the record will be held open for 5 days for that purpose.

I do want to recognize Mr. Cooper, if you have any opening comments?

Mr. COOPER. Thank you, Mr. Chairman.

I would just congratulate you for holding this important hearing.

Despite the lack of cameras, this is a top taxpayer issue. I congratulate you for focusing on this. Thank you.

Chairman WAXMAN. Thank you.

Mr. Braley, I know that you have a conflict in your schedule. I

want to recognize you at this time for any comments you wanted

to make.

Mr. BRALEY. Thank you, Mr. Chairman.

I want to thank you and the Committee on Oversight and Government Reform, particularly you and Ranking Member Davis for

holding this hearing today to examine waste, fraud and abuse in

the Federal Crop Insurance Program.

My high school math teacher in Brooklyn, IA was a Federal crop

insurance adjuster during the summer time when he wasn’t teaching math, so this is something that I have some familiarity with.

I hope that the hearing will lead to improvements in the Federal

Crop Insurance Program which will provide more benefits to farmers at lower cost, and which will provide savings to American taxpayers.

It is my distinct privilege to welcome today Dr. Bruce Babcock

to our hearing. Dr. Babcock is a professor of economics and the director for the Center for Agricultural and Rural Development at

Iowa State University, my alma mater. He will be testifying as

part of the second panel of witnesses.

As a proud graduate of Iowa State, one of the premier agricultural institutions in the country, and I might add, the birthplace

of the digital computer, I am proud to see leadership from Dr. Babcock and my alma mater on this important topic.

The Center for Agricultural and Rural Development at Iowa

State University was founded in 1958 and conducts innovative public policy and economic research on agricultural, environmental and

food issues. Under the leadership of Dr. Babcock, the Center’s academic research and public outreach programs inform and benefit

State, Federal and international policymakers; academic researchers; agricultural, food and environmental groups; American farmers; and the public.

Dr. Babcock has been a professor at Iowa State University since

1990. As the director for the Center for Agricultural and Rural Development, he has initiated advanced research on policies affecting

valuation and risk management; Government price support and

disaster relief programs; and agricultural insurance and alternatives.

His research has led to innovative risk management strategies

for farmers and has led to the development of several new crop insurance products. I am very proud of the fact that in 2002, Dr.

Babcock was awarded the USDA Secretary of Agriculture Award

for outstanding accomplishments in the area of agricultural public

policy research and formulation.

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I would like to thank him for his leadership on this issue and for

being here today. As the chairman mentioned, I cannot be here for

the entirety of the hearing due to a scheduling conflict because, Dr.

Babcock, I have another hearing on the impact of renewable energy

production in rural America. So I hope you take that back with my

regrets to the people at Iowa State.

However, I do look forward to reviewing your testimony, along

with the testimony of all the other witnesses, so that we can learn

about how improvements can be made to this very important Federal Crop Insurance Program to benefit America’s farmers and taxpayers.

Thank you, Mr. Chairman.

Chairman WAXMAN. Thank you very much, Mr. Braley. We will

look forward to hearing from Dr. Babcock in the next panel. We are

pleased that he is here.

We are pleased to welcome the first panel of witnesses. We have

three witnesses on our panel today. Mr. Eldon Gould is the Administrator of the USDA’s Risk Management Agency. Mr. Gould has

served as RMA Administrator since November 2005.

Michael Hand, the Risk Management Agency’s Deputy Administrator for Compliance will also be joining Mr. Gould at the witness

table.

Also joining us as a witness will be Phyllis Fong, the USDA’s Inspector General.

Rounding out our panel will be Lisa Shames, GAO’s Acting Director for Natural Resources and the Environment.

We welcome you all to our hearing today. It is the practice of this

committee to swear in all witnesses, so we are not singling you out,

and we would like you if you would rise and please take the oath.

[Witnesses sworn.]

Chairman WAXMAN. Thank you very much. The record will indicate that each of the witnesses answered in the affirmative.

Mr. Gould, why don’t we start with you? There is a button on the

base of the mic. Push it in and pull it close enough to you so that

we can hear it and it can also be heard for the record.

STATEMENTS OF ELDON GOULD, ADMINISTRATOR, RISK MANAGEMENT AGENCY, U.S. DEPARTMENT OF AGRICULTURE,

ACCOMPANIED BY MICHAEL HAND, DEPUTY ADMINISTRATOR FOR COMPLIANCE, RISK MANAGEMENT AGENCY;

PHYLLIS K. FONG, INSPECTOR GENERAL, U.S. DEPARTMENT

OF AGRICULTURE; AND LISA SHAMES, ACTING DIRECTOR,

NATURAL RESOURCES AND ENVIRONMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

STATEMENT OF ELDON GOULD

Mr. GOULD. Thank you, Mr. Chairman, and members of the committee. I am Eldon Gould, Administrator of the USDA Risk Management Agency. I am also a lifelong farmer from King County, IL,

with a 1,500 acre corn, soybean and wheat farm, and a 700 sow

farrow to wean hog operation.

I appreciate this opportunity to provide an update on the efforts

of the RMA to improve the integrity of the Federal Crop Insurance

Program. The Federal Crop Insurance Program is a partnership beVerDate 11-MAY-2000 15:13 Sep 29, 2008 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 C:\DOCS\44427.TXT KATIE PsN: KATIE
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tween the Federal Government and 16 approved insurance companies which deliver the insurance against crop failure due to natural

causes for over 80 percent of America’s farm acreage.

The program is working as it was intended and is performing

well, meeting the targeted loss ratios set by Congress. We still have

work to do and improvements to make, but we are making good

progress in our fight against program abuse.

It bears saying that the vast majority of people in the Federal

Crop Insurance Programs, farmers, insurance agents, loss adjusters, industry professionals and Government employees, are hardworking men and women acting with the highest integrity and

competence.

That being said, we are committed to doing all we can to enhance

and maintain program compliance through prevention, detention

and enforcement. We recognize that with the increased workload

required of our compliance people in the wake of the Agriculture

Risk Protection Act, we have to work efficiently. RMA’s compliance

program emphasizes preemption and deterrence in our efforts,

while still aggressively pursuing program abuse by assisting

USDA’s Office of Inspector General and the Department of Justice.

The results from our data mining efforts have made an impressive difference in avoiding undue payments to people who might

try to take advantage of this important program. Data mining

alone has achieved reductions and indemnities for the selected producers of more than $437 million since the 2002 crop year.

We also now use remote sensing, geospatial information technologies, and other computer-based resources to ensure we are

being good stewards of the taxpayer dollar.

Our compliance personnel completed the second year of a structured random policies review in 2006, and will soon begin the third

round of the 3-year cycle of reviewing participating insurance providers. Compliance completes the random reviews to establish a

program error rate under the Improper Payments Information Act

of 2002. It is noteworthy that our main observed error rate from

these reviews on 600 randomly selected policies was 2.64 percent.

Mr. Chairman, I have here the administration’s 2007 farm bill

proposal and I would like to submit it for the record. The farm bill

proposes redirecting $10 million of existing funds authorized under

the Federal Crop Insurance Act to increase compliance personnel

and training and expand the very effective tools that we use. The

funds requested would also support data mining efforts through the

continued development of our comprehensive information management system [CIMS]. Our current outdated business systems are at

the end of their expected life cycle, making it impossible to make

comparisons across crop years electronically.

We desperately need new IT resources to put the wealth of information we gather to the best use. The data warehouse itself, which

consolidates the information from all of these data bases, and is

used to support the data mining efforts, must be replaced.

In our 2008 budget, we have asked for $5.4 million to replace

equipment, and $3.6 million to continue the regular operations of

data mining. We also ask for approved insurance providers to share

in the cost to develop and maintain a new IT system by assessing

a one-half cent per dollar of premiums sold.

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Administration of the crop insurance program requires all interested parties to identify viable insurance products and solutions

that meet the needs of the agricultural community. Working together, we will continue to maintain program integrity through

prevention, detention and enforcement.

I thank you for this opportunity to participate in this important

hearing, and I look forward to responding to questions on these

issues.

[The prepared statement of Mr. Gould follows:]

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Chairman WAXMAN. Thank you very much.

Let’s now go to Ms. Fong.

STATEMENT OF PHYLLIS K. FONG

Ms. FONG. Thank you, Mr. Chairman, Ranking Member Davis

and members of this committee. We appreciate the opportunity to

be here today to testify about our views on the crop insurance program.

As you know, we in the IG have conducted substantial audit and

investigative work pertaining to this program over the past few

years. I just want to make a few key points for you today.

There has clearly been a significant upward trend in Federal

payments to assured insurance providers or insurance companies

for expenses in underwriting gains. Over the past 6 to 7 years,

total payments to AIPs have increased to record levels. The Federal

reimbursement to AIPs for each producer policy has increased almost 100 percent during that period of time, and the Government’s

subsidy of premiums has also increased by over 180 percent.

We believe that Congress has done a successful job in broadening

the Federal safety net for producers, but it is now time to reassess

what constitutes an acceptable cost to the Government.

We believe that to have an effective crop insurance program, we

need to have three elements. First, we have to have the proper assignment of risk between insurance companies and the Government.

Second, we need to have effective management controls in place,

including a strong quality control system.

And third, we need aggressive compliance reviews and investigations to address fraud.

Let me just say a few words about each of those elements. In

terms of assignment of risk, we believe that currently RMA is underwriting most of the risk for crop losses. As a result, the insurance companies have less of an incentive to vigorously administer

the Federal Crop Insurance Program in accordance with the Government’s and taxpayers’ best interests. To ensure that Federal

funds are used responsibly and efficiently, AIPs need to consistently monitor risky policyholders. They need to deny claims of

questionable losses, and they need to address weaknesses in their

own practices.

With respect to the second element of management controls, we

have reported our concerns on issues such as conflict of interest

among sales agents, loss adjusters and policyholders. We believe

this is an area that needs increased attention.

We also believe that a common information system between RMA

and FSA is critical to improving integrity and reducing the risk of

improper payments.

Third, we recognize that RMA has taken positive steps to improve the quality control system, but more can be done in this area.

With respect to enforcement, we in OIG work very closely with

RMA and the Department of Justice to aggressively pursue fraudulent crop insurance claims and schemes. Compared to fraud affecting other USDA programs, these cases are particularly complex

and time consuming. We find that we must expend a lot of resources to pursue them because the schemes are very complex.

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Some of the kinds of fraud that we have seen include losses being

claims on crops that were never planted. We have seen collusion

between program participants to fabricate their losses. And we

have seen fraudulent shifting of crop production between insured

and non-insured parcels of land.

While many of the participants in the program are honest and

comply with the program’s requirements, there have been a few

who have really given the crop insurance program a bad name, and

we feel that we need to aggressively pursue those to ensure that

there is an effective safety net for all producers.

In terms of recommendations, we support many of the provisions

that the administration has included in its farm bill proposal, and

we have also detailed other specific recommendations in my full

written statement.

Thank you again for inviting me, and we look forward to answering questions.

[The prepared statement of Ms. Fong follows:]

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Chairman WAXMAN. Thank you very much, Ms. Fong.

Ms. Shames.

STATEMENT OF LISA SHAMES

Ms. SHAMES. Chairman Waxman, Ranking Member Davis, and

members of the committee, I am pleased to be here today to discuss

RMA’s efforts to address fraud, waste and abuse in the crop insurance program.

As you know, crop insurance protects farmers against financial

losses caused by natural disasters. However, we at the GAO recently identified the Federal Crop Insurance Program to be in need

of better oversight to ensure program funds are spent as economically, efficiently and effectively as possible.

Over the last 5 years, the crop insurance program cost the Gov- ernment over $16 billion, of which nearly $7 billion was paid to

participating insurance companies. That is, 40 cents of every dollar

went to the companies, while 60 cents went to the farmer.

I plan to discuss two key points today. First, while RMA has

strengthened its procedures in response to recommendations GAO

made in 2005, regulatory and statutory requirements in the program’s design still hinder efforts to reduce fraud, waste and abuse.

Second, compensation to the insurance companies has been excessive in light of the underwriting gains and cost allowances insurance companies receive.

First, RMA has strengthened its procedure to prevent and detect

fraud, waste and abuse in the crop insurance program. RMA provides information more frequently on suspect claims so that field

inspections can be more timely and has drafted regulations that,

when final, will allow it to use its expanded sanction authority on

program violators. Positively, RMA reports cost savings of over $300 million in the

form of avoided payments from 2001 to 2004. Nonetheless, we

found the program’s design as laid out in RMA’s regulations or as

required by statute, can impeded RMA’s efforts in a number of

ways.

In terms of RMA’s regulations, farmers have the option of insuring their crop in multiple units or combined as one unit. Insuring

their crops in multiple units can make it easier to file false insurance claims because a farmer can shift production to one field and

file a false claim for loss on the other field. We found that 12 percent of farmers identified as having irregular claims were suspected of this switching among their fields.

RMA disagreed with our recommendation to reduce the insurance guarantee or to eliminate this coverage to farmers whose

claims compare irregularly to others in the area.

In terms of statutory requirements, RMA is obligated by law to

offer farmers coverage if an insured crop is prevented from being

planted because of weather conditions. It is often difficult to determine whether farmers had the opportunity to plant the crop. Also,

this preventive planting coverage is expensive. RMA pays about

$300 million annually in claims.

My second point this morning is that compensation to the insurance companies has been excessive. USDA pays both underwriting

gains and cost allowances as negotiated in the contract with the

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companies, the standard reinsurance agreement, or SRA. Underwriting gains totaled $2.8 billion from 2002 through 2006. These

gains represent an average annual rate of return of 17.8 percent.

This rate of return is considerably higher than the benchmark for

private property and casualty insurance, which is 6.4 percent.

USDA had a one time authority to renegotiate the financial

terms of its SRA with the companies in 2005. Nonetheless, in 2005,

the insurance companies received a rate of return of 30 percent,

and in 2006 the rate of return was 24 percent. Companies received

these gains despite drought conditions in parts of the country that

would normally suggest they would earn lower profits.

In addition to underwriting gains, USDA paid a cost allowance to the insurance companies of $4 billion to cover administrative

and operating expenses for program delivery from 2002 to 2006.

USDA expects these expenses to increase by about 25 percent by

2008 because of higher crop prices, particularly for corn and soybeans. Higher crop prices increase the value of the policy. This

means that companies will receive a higher cost allowance without

a corresponding increase in expenses for selling or servicing the

policies.

Congress has an opportunity in reauthorizing the farm bill to

provide USDA with the authority to periodically renegotiate the financial terms of the SRA so that the companies’ rate of return is

more in line with private insurance markets.

In conclusion, Federal crop insurance plays an invaluable role in

protecting farmers. Nonetheless, we identified crop insurance as a

program in need of enhanced congressional oversight because we

cannot afford to continue businesses as usual, given the Nation’s

current deficit and growing long-term fiscal challenges. RMA has

made progress in addressing fraud, waste and abuse, but weaknesses we identified in the program design continue to leave the

crop insurance program vulnerable.

Furthermore, RMA’s efforts to limit program costs has had minimal effect. Congress has an opportunity in its reauthorization of

the farm bill to bring costs more in line with the private insurance

industry. Such a step can help position the Nation to meet its fiscal

responsibilities by saving hundreds of millions of dollars annually.

Mr. Chairman, this concludes my prepared statement. I would be

pleased to answer any questions that you or members of the committee may have.

[The prepared statement of Ms. Shames follows:]

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Chairman WAXMAN. Thank you very much.

I appreciate the testimony of all of you. I want to try and see if

I can understand this program a little bit more precisely. Ms.

Shames, 40 percent of the money that the Federal Government

puts into the program never makes it to the farmers. That amounts

to $11 billion worth of benefits designed to go to farmers that are

shunted off to middlemen or the insurance companies. Is that

right?

Ms. Shames. Yes.

Mr. Waxman. I can’t think of another program with this kind of

expenditure for delivery costs. The Medicare program spends over

95 percent of its money actually providing medical care. The administrative costs of the Social Security program are less than 1

percent. But 40 percent of the money we spend on the crop insurance program seems to go for the administrative costs, if we are

going to be nice about it, just to run the program.

Can you think of another Federal Government program that is

as inefficient as the crop insurance program?

Ms. SHAMES. GAO has not ranked the various Federal programs,

but I can tell you that we did put the Federal Crop Insurance Program as 1 of 13 programs in need of enhanced oversight. This letter was sent by the Controller General to the new Congress to help

the new Congress.

Chairman WAXMAN. Administrator Gould, can you explain to us

and to the taxpayers why 40 percent of the costs of your program

don’t ever make it to the farmers that it is supposed to help?

Mr. GOULD. That seems like a lot of dollars. I would be the first

to admit that. But I think you have to stand back and look at the

program, that it covers the breadth and width and depth of all the

producers in the United States. There is a lot of variability caused

by weather in the various crops in the various parts of the country.

The other thing I think that is important is that we are required

by statute to deliver the program to all producers in all corners of

the United States. So obviously the delivery costs are more than

they would be for some programs, and I am sure that accounts for

some of the difference.

Chairman WAXMAN. Well, we are dealing with a risk. That is

what insurance is all about. But it seems to me what is going on

is that the taxpayers are providing three separate and huge subsidies to crop insurers. Ms. Shames, I would like you to walk

through how this works. First, crop insurance companies receive

the benefit of billions of dollars in taxpayer subsidies to offer crop

insurance to farmers. Is that right?

Ms. SHAMES. Yes.

Chairman WAXMAN. And they earn extraordinarily high windfall

gains on these premiums. They get much more in premiums than

they pay out to farmers when disaster strikes.

Ms. SHAMES. USDA pays for both. Yes.

Chairman WAXMAN. They have earned $2.8 billion in underwriting profits in the last 5 years. Is that right?

Ms. SHAMES. Yes, that is correct.

Chairman WAXMAN. OK. Then on top of these subsidized premiums, the companies also receive billions of dollars in commisVerDate 11-MAY-2000 15:13 Sep 29, 2008 Jkt 000000 PO 00000 Frm 00071 Fmt 6633 Sfmt 6633 C:\DOCS\44427.TXT KATIE PsN: KATIE
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sions when they sell crop insurance. Basically, these are additional

subsidies to cover the administrative costs. Is that right?

Ms. SHAMES. Yes.

Chairman WAXMAN. Over $4 billion in subsidies in the last decade went into these commissions.

Finally, we provide another taxpayer-funded benefit to insurers

that we allow them to hand their riskiest policies back to the Federal Government. So the insurance companies are taking the risk,

but their riskiest 20 percent of the crops that they cover, they can

say to the Federal Government, well, you are going to pay all of

it.

Ms. SHAMES. The Government shares a large burden of the risk,

yes.

Chairman WAXMAN. How much of the risk do they share in the

20 percent that are the riskiest?

Ms. SHAMES. About 85 percent.

Chairman WAXMAN. About 85 percent. Now, the insurance companies keep a portion of the premiums, but then they are no longer

responsible for paying farmers in the event of a disaster. Is that

right in those circumstances?

Ms. SHAMES. Right.

Chairman WAXMAN. So it is really a remarkable program. We

have so many different ways of subsidizing crop insurers I can

barely keep track of it. We have three separate subsidies, it seems

to me. Now, what if we just let people go buy private market insurance coverage? I gather that would be so expensive that it would

be unaffordable for many farmers. Is that the case, Mr. Gould?

Mr. GOULD. Yes, that would the case. It might not be

unaffordable for all farmers, but certainly in areas that are marginal producing areas with problems, where the risk is greater. It

would be very expensive for those producers.

Chairman WAXMAN. So we want to make sure that they have

this insurance coverage safety net. Is there any competition between insurance companies here? Can the farmers pick one as opposed to another, based on a lower price?

Mr. GOULD. No. The insurance companies all have the same rate.

The rates area actually set by the Risk Management Agency. Our

goal is a rate of 1.0, so the indemnities paid are equal to the premiums. That is our rating goal. So consequently, the insurance

companies compete only on service and areas that they wish to

write and deliver the program to the producers.

Chairman WAXMAN. And do most insurance companies compete

in the same geographical region? Or do they split up the areas of

the country, and some insurance company covers one area and another insurance company covers another area?

Mr. GOULD. Some companies compete more in one area. There

may be come that compete in a given area of the United States.

Others may specialize in the less, how shall I say, populous parts

of the country. But all in all, companies are entitled to write anywhere and everywhere. They actually have to get licenses from different States in which they write, so there isn’t a lot of overlap in

particular companies.

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Chairman WAXMAN. Ms. Shames, is there any other insurance

policy for any other potential loss where the insurance companies

have so little risk that they really themselves are facing?

Ms. SHAMES. The closest analogy would be for the property and

casualty insurance. Of course, the benchmark for that in terms of

profitability is about one third.

Chairman WAXMAN. About one third.

Ms. SHAMES. Yes.

Chairman WAXMAN. So if we are going to guarantee insurance,

one thing we could do is to say we are going to make sure that the

subsidies are not going to be any more than property and casualty

insurers.

Ms. SHAMES. It would certainly be a benchmark.

Chairman WAXMAN. And how much money would we be saving

if we simply went to that level?

Ms. SHAMES. Certainly hundreds of millions of dollars.

Chairman WAXMAN. If there any fear that you would have that

insurance companies wouldn’t be able to continue in operation?

Ms. SHAMES. Well, the expenses that they impose are so composed, in other words, in terms of their administrative and operating costs, so I would say that there is some buffer.

Chairman WAXMAN. OK. I thank you very much.

I am going to call on Mr. Davis and the other Members.

Mr. DAVIS OF VIRGINIA. Thank you.

Mr. Gould, the 2007 farm bill proposes a change requiring insurance companies to return 22 percent of their underwriting gains to

the Government. What responses have you received from industry

and your authorizing committee regarding this proposal?

Mr. GOULD. Well, as we stand back and look at the administration’s farm bill proposals, there are a number of proposals in there

to rebalance the program. You mentioned the quota share, the net

book quota share as one option. There are others about reducing

the A&O subsidy to the companies, and also increasing the farmer

portion of the premium. All those are designed to have less exposure to the taxpayer.

Mr. DAVIS OF VIRGINIA. I understand that. I am asking how industry has reacted to that, and how the authorizing committees

have reacted to that, from your perspective.

Mr. GOULD. From my perspective, I don’t think that probably

anybody wants to get up and say that they are making too much

money. So I suspect the industry is going to react negatively to

these proposals, but we think it is an opportunity to go back and

re-balance the program and have the American taxpayers’

dollars——

Mr. DAVIS OF VIRGINIA. Have you gotten any receptivity on the

part of the committee to the proposal? Are they reacting to their

constituents in industry?

Mr. GOULD. I am sorry. I am not sure I understand.

Mr. DAVIS OF VIRGINIA. Well, is the committee saying, hey, this

is a great idea; we want to write this into the farm bill; or do you

think they are listening to their industry who is less receptive to

this?

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Mr. GOULD. I think, from my perspective, in the view of the

USDA, I think they are putting forth their best foot forward to rebalance the program.

Mr. DAVIS OF VIRGINIA. I am asking about the Ag Committees in

the House and the Senate. You have your bill. We know the industry.

Mr. GOULD. We have talked to them, but we have not gotten any

feedback from them.

Mr. DAVIS OF VIRGINIA. They haven’t said, hey, that is a great

idea.

Mr. GOULD. They have not come forward with that.

Mr. DAVIS OF VIRGINIA. You have no indication they are going to

write this into the bill at this point?

Mr. GOULD. They have not seen the language yet, no.

Mr. DAVIS OF VIRGINIA. They had a hearing on it on Tuesday.

What was the reaction of Members to this part? Was there any reaction?

Mr. GOULD. Not on the possibility of the companies. We talked

more about the supplemental deductible coverage that is also one

of the administration’s farm bill proposals.

Mr. DAVIS OF VIRGINIA. And how was the reaction to that?

Mr. GOULD. I would say very favorable.

Mr. DAVIS OF VIRGINIA. OK. The 2007 farm bill proposes to reduce subsidies for insurance company administrative and operating

costs by 2 percentage points. The reaction there from the committee members on Ag?

Mr. GOULD. We did not talk about that specifically.

Mr. DAVIS OF VIRGINIA. OK. So that wasn’t really addressed at

your hearing, it would seem.

Mr. GOULD. No. I think the Ag Committee is waiting to see the

language that the administration is going to come forth with, and

then they will act or react to that accordingly.

Mr. DAVIS OF VIRGINIA. OK.

Ms. Fong, let me ask you. We know from USDA of the backlog

at the Department of Justice hindered the ability to properly prosecute individuals who were committing fraud on the crop insurance

program. How does this backlog affect your office’s work?

Ms. FONG. Well, these cases can be very, very difficult and complex because they involve multiple parties, lots of different schemes

and the need to track that evidence across State lines. And the

records are very difficult to find. So what we have found is that the

prosecutors need to be educated on the complexities of the program. As a result, we have been very fortunate. We have found in

a couple of States prosecutors who are really interested in going

after these questions, and we have had some very successful cases.

In other places, we engaged in education and training, and we

are currently working with Justice very closely on some major investigations at the national level that we are quite optimistic

about.

Mr. DAVIS OF VIRGINIA. OK.

Ms. Shames, how would allowing the USDA to renegotiate the financial terms of the standard reinsurance agreement reduce the

monetary waste in the program?

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Ms. SHAMES. Well, it gives USDA an opportunity to bring the

SRAs closer in line with private industry. We feel that is where the

hundreds of millions of savings will be, to try to bring it closer to

the industry standard.

Mr. DAVIS OF VIRGINIA. OK. I will just ask one question and everybody can take a stab at it. If you could just make one suggestion

as to how USDA could best reduce waste, fraud and abuse in the

crop insurance program, what would it be and how would it work?

Top priority?

Mr. GOULD. The top priority would probably be to increase our

compliance budget and exposure so we could get more compliance,

people on the ground; increase our IT budget so we could in fact

do more data mining. That has been extremely successful in finding and prosecuting anomalies that show up in the crop insurance

world. That would probably be our No. 1.

Mr. DAVIS OF VIRGINIA. Not a change in law, just allow you to

do your job, basically.

Mr. GOULD. That is correct.

Mr. DAVIS OF VIRGINIA. Anyone else? Ms. Fong do you have a

comment?

Ms. FONG. I think we should look at the basic structure of the

program. We need to have more incentives for insurance companies

to really make sure that they pay out on good claims. If there are

questionable claims, that they really pursue those and look at

them. Right now, those incentives I would say are very low, very

few.

Mr. DAVIS OF VIRGINIA. Ms. Shames.

Ms. SHAMES. We recommended in our 2005 report that RMA and

FSA conduct all these inspections in the fields that were called for.

In other words, those fields that were suspected of false claims.

USDA had disagreed with this recommendation because they felt

they had insufficient resources to do that.

Mr. DAVIS OF VIRGINIA. Thank you.

Chairman WAXMAN. Thank you, Mr. Davis.

Mr. Cooper.

Mr. COOPER. Thank you, Mr. Chairman.

I used to represent an entirely rural district. Now, I have a more

urban one, but I still care deeply about farmers and their welfare.

What we have heard today is pretty disturbing. It sounds like this

could be one of the most wasteful programs in all the Federal Government, at least in terms of percentage of money that is not

reaching the intended beneficiaries. That is pretty scary right

there.

We also have a situation in which the farm bill is up for reauthorization. To my knowledge, that committee has not had a single

hearing so far, and there is just a little time left for a witness that

is at all critical of this program.

It also seems to be a situation in which the industry has given over $1 million in campaign contributions primarily to Agriculture

Committee members. The reform proposals we are hearing, better

data mining and things like that, catching fraud, could be interpreted as doing more of the work for these insurance companies.

The startling number that I heard was from Ms. Shames saying

that the Federal Government still holds 85 percent of the risk here.

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Ms. SHAMES. Yes. I should point out that is for the most risky

fund.

Mr. COOPER. That is an amazing situation. This sounds like corporate welfare to me. It is the Department of Agriculture, not the

Department of Corporate Welfare. I looked last night at a couple

of the Web sites for the 16 companies that are in this business. If

you look just at the initial page, it looks like small town America,

Main Street, little towns, great States. But as you dig into the Web

site a little bit, sometimes you will see that these are obscure subsidiaries of multi-billion dollar multinational insurance companies

headquartered in Bermuda and God knows where else.

If I were Mr. Gould, I would be trying to manage a situation like

this. You point out in your testimony that you are a life-long farmer in northern Illinois. That doesn’t interfere with your day job

here in Washington? How does that work?

Mr. GOULD. Actually, when I came to Washington, it was a requirement to recuse myself from the farm operation. I have a son

back in Illinois that is operating and managing the farm. So this

is my full-time position today.

Mr. COOPER. As a farmer or farm owner or former farmer, what

sort of crop insurance do you have?

Mr. GOULD. Prior to coming to Washington, I carried primarily

the CAT policy. Since coming to Washington, I actually asked my

son the last time I was home, I asked him what kind of crop insurance do we have, and we do have a GRIP policy, a gross revenue

insurance protection plan. It is a county-based program.

Mr. COOPER. Do you worry as a farmer that you are not necessarily getting a good deal? The taxpayer, according to the chairman’s numbers, are paying $19 billion into these sorts of programs,

and farmers have gotten $10 billion of that? One of the most inefficient ratios that I am aware of in any Government program?

Mr. GOULD. I think we need to stand back and look at the program in totality. That being that we are as an agency required to

insure all parts of the country, each part of the country, and some

places are very sparse or high-risk crops. We are still required to

provide the coverage for those people and those producers.

Mr. COOPER. I have a limited amount of time. Remember, you

represent the U.S. Department of Agriculture. By definition, you

cover the country.

Mr. GOULD. Yes.

Mr. COOPER. Do you really need companies headquartered in

Bermuda and other places to help you cover the country and to pay

them $9 billion or $4 billion for their services? If the Agriculture

Department did its job, you wouldn’t need this extra layer.

Mr. GOULD. I would like to point out that the companies that you

refer to as being headquartered in Bermuda are reinsurance companies. They are the companies that insure the 16 insurance companies in the United States. In the administration’s farm bill proposal, we are suggesting that we as taxpayers take some of that

reinsurance and keep it in-house, so to speak, so that would certainly reduce the amount of reinsurance opportunities that would

go to reinsurance companies.

Mr. COOPER. Mr. Gould, I am not sure you heard Ms. Shames.

She was saying that the Federal Government has already retained

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85 percent of the risk for these riskiest farms. So you are already

the reinsurer. You are just allowing the companies to reap the profits and the commissions for trying to somehow augment the Federal Government’s capability. The Federal Government is holding

the bag here.

Mr. GOULD. We are proposing to provide or hold back some of the

quota share on all the funds, not just the most risky funds. So in

fact in total, the program would in fact retain much more of the

premium and much more of the risk than is currently the case.

Mr. COOPER. So instead of being the most inefficient program in

Government, it might be the second or third most inefficient program in Government?

Mr. GOULD. I don’t have a way of ranking or knowing the other

programs. I certainly think it would be an improvement for this

program and still maintain the goals and objectives as set out by

statute.

Chairman WAXMAN. Thank you, Mr. Cooper. Your time has expired.

Mr. Duncan.

Mr. DUNCAN. Thank you, Mr. Chairman. Thank you very much

for calling this hearing and calling attention to a very serious problem. I want to say that I agree with everything that my colleague,

Congressman Cooper, has just said about this. I have those same

concerns. I think anybody that is fiscally conservative would be

horrified by what we are hearing here today.

Mr. Gould, how many employees do you have in your agency?

Mr. GOULD. We have a total of 500 employees in the agency, and

approximately 100 of those look after the compliance function.

Mr. DUNCAN. The reason I ask that, you know, every time I hear

about a Federal agency messing up, which almost seems to be a

daily occurrence, if they are ever questioned about it, they always

say one of two things. They always say either they are underfunded and need a bigger budget; or they say their computers are

out of date and not talking to each other.

And yet, all these Federal departments and agencies are getting

far more in funding than a comparable operation in the private sector would get, and all of them have more up to date technology, yet

those are the excuses they always fall back on.

When you hear these things like the chairman has said, and Mr.

Cooper, about how this program is the most wasteful or one of the

most wasteful in the whole Government, does that embarrass you?

Is that going to stir you into any kind of action? What are you

doing to do in response to this? Are you just going to sit around

and wait until we come in and increase your budget? Are you going

to go back this afternoon and start doing something about this?

Mr. GOULD. Thank you for the question. We are in I would say

an ongoing effort to improve the program. As I have become more

familiar with the program, I see some opportunities for improvement. That is an ongoing effort. However, we are limited to some

degree by statute what we can do, what we can change, how fast

we can change it. Our rating period looks back over a period of

time to determine the proper rates.

I would say, maybe contrary to the comments made here about

our technology and the things we have to work with, that our budgVerDate 11-MAY-2000 15:13 Sep 29, 2008 Jkt 000000 PO 00000 Frm 00077 Fmt 6633 Sfmt 6633 C:\DOCS\44427.TXT KATIE PsN: KATIE
74

et has not kept up with our needs. We have largely kept pace with

the computer program we do have by funding that through salary

lapses and things of that nature.

So it has become a challenge and we have to establish priorities.

I think we recognize some of——

Mr. DUNCAN. Let me just say this. You are surely not saying the

statute now limits you. If you find out this afternoon or tomorrow

that some farmer has done something crooked, you are not telling

us that you can’t do anything about it because of the statute, are

you?

Mr. GOULD. No, I am not saying we can’t do anything about it.

What I am saying is we are limited to some things we can do by

statute in how fast we can change and adjust the program. I think

as we look forward to the administration’s farm bill, that is where

we see our opportunity to make changes and improve the program

and, as I have said before, re-balance the program in favor of the

U.S. taxpayer.

Mr. DUNCAN. You know, we all love and respect the farmers, but

there is almost no industry that is more subsidized by the Federal

Government, except for the defense industry. We just can’t turn

farmers into the biggest welfare recipients in the country. It says

here that the overall cost to the taxpayer has increased 64 percent

since 2000. Those are years of relatively low inflation. Each year

ad hoc disaster assistance bills are passed that provided another

$8.6 billion since 2000 on top of the regular farm bills. The vetoed

Iraq supplemental contained another $3.5 billion in disaster aid.

When you start adding in the subsidies and these crop insurance

payments and all these programs that the various agriculture

agencies have, I mean, my goodness, it seems like it is almost getting out of hand.

Ms. Fong, you said that the best recommendation you can make

is to give the insurance companies more incentive or put more

pressure on them to not grant every claim that is made, or the

more questionable claims. How do we do that? How do we give

them incentive to do that, or put more pressure on them?

Ms. FONG. It goes back to the basic question of who is bearing

the risk. Right now, the way the program is structured, the Government and RMA bears the risk for claims having to be paid out.

What needs to happen is to have more of an incentive, namely by

increasing the amount of risk that the insurance companies bear

would give them more of an incentive to really examine the claims

that are being filed to determine whether they truly are legitimate

claims that should be paid, or whether or not there are reasons

why they shouldn’t be paid.

Right now, the way the system works, the incentive is for the insurance companies to grant the claim and to pass the risk along

to the Federal Government.

Mr. DUNCAN. Was Congressman Cooper correct that there are

just 16 insurance companies involved in this business? Can anybody tell me?

Ms. FONG. I believe that is correct.

Mr. DUNCAN. That is?

Thank you very much.

Chairman WAXMAN. Mr. Cummings.

75

Mr. CUMMINGS. Thank you very much, Mr. Chairman.

This is a hell of a deal. I am serious. I have never seen anything

like this. You know, one of the things that frustrates me about

being in Congress is that we will have these hearings and everybody says there is something wrong. Republicans say there is something wrong. Democrats say there is something wrong. And guess

what? Nothing happens.

We hear Mr. Gould say that his hands are tied. Ms. Shames, are

there things he can do now, so that we are not sitting here 5 years

from now, with everybody saying, oh, this is so sad, and it is worse

in 5 years. What can he do? Let him know what he can do.

Ms. SHAMES. GAO in 2005 issued a report that identified actions

that could be taken to reduce the fraud, waste and abuse in the

crop insurance program. We made several recommendations. ARPA

gave RMA some tools to help it in terms of——

Mr. CUMMINGS. And when was that?

Ms. SHAMES. ARPA was in 2000 and our report came out in

2005. Just to give you a rundown of the status of the recommendations that we made, RMA did implement our recommendation that

it should give FSA, the Farm Service Agency, information on a

more timely basis, and RMA is doing that.

On the other hand, we also recommended that all the claims that

were suspect should be inspected. At the time, we found that only

64 percent of those claims were being inspected. RMA disagreed

with our recommendation and they cited insufficient resources for

that.

The other thing that we found is that in terms of the data analysis, there are about $74 million in claims that RMA can recoup. Although RMA agreed with that recommendation, it has not implemented it yet. So here is something that can be done on a real time

basis.

There are also expanded sanctions that RMA has. RMA has

drafted regulations to be able to take advantage of those expanded

sanctions, but there are only in draft at this point.

Mr. CUMMINGS. Mr. Gould, did you hear what she said?

Mr. GOULD. Yes, sir.

Mr. CUMMINGS. Can you act on some of those things and tell us

if you can, when you will?

Mr. GOULD. Certainly.

Mr. CUMMINGS. Let me try to explain this to you. You know, we

have a limited time to act. I notice what agencies do is they wait

for the next hearing, which comes a year or two later. So I would

like to hear about deadlines, time lines, so that you get something

done, a sense of urgency.

So can you do some of those things? If so, when?

Mr. GOULD. Sir, if I might, actually on the regulations, they

should be published by the end of May. They have been drafted.

They are going through clearance, and we expect them to be out

within, I have been told, 3 weeks.

Mr. CUMMINGS. That is one thing we can expect to see no later

than June 1st?

Mr. GOULD. No later than that.

Mr. CUMMINGS. All right.

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Mr. GOULD. Actually, on a couple of the other recommendations

that GAO mentioned, one of them was to share information with

FSA. We are doing that. We ran into a problem under the Privacy

Act with sharing some of the information. FSA is in the process of

publishing a notice to inform producers of the intended use so we

can use data mining to attach those entity files that they recommended that we use, and share those between FSA and RMA

for data mining purposes. So that is going to be done fairly soon.

I talked to our Office of General Counsel attorney that is in

charge of that, and she said as far as she knew, the notice was

moving though whatever clearance is has to go through to get to

the Federal Register to be published. Again, I would expect that before the end of the month.

I think the only thing I would clarify is the 64 percent of spot

checks. It wasn’t that RMA disagreed with doing those spot checks.

It was FSA said they didn’t have the staff to do that. That is something RMA doesn’t really have any control over. We would love to

see FSA have the staff and resources to inspect every policy that

we ask them to review for us.

Mr. CUMMINGS. I see my time is running out. What about that

$74 million? She talked about $74 million that we need to be going

after.

Mr. GOULD. That was the entity comparison, and actually if you

look in the back of the GAO report that was published in 2005, we

took exception to part of that. One of the things that we took exception with publishing that number was the assumption was that all

of FSA’s data was correct and all of RMA’s data was wrong. We

haven’t tested that to see if that is true or not. But that is tied up

in the entity files and the Privacy Act issues that I just mentioned.

Mr. CUMMINGS. Ms. Fong, how do these fraud cases usually come

to the attention of the Government?

Ms. FONG. We receive information about potential fraud from a

number of sources. RMA is one source, if they become aware of it.

But most of our referrals tend to come from FSA, the Farm Services Administration, or the State and local law enforcement people.

Frequently, informants will come forward and say, hey, I know

about a farmer down the road who is perhaps sending in false information; you need to look into it. It will come to us through State

and local enforcement.

Mr. CUMMINGS. I see my time is up. Thank you, Mr. Chairman.

Chairman WAXMAN. Thank you, Mr. Cummings.

Just to followup on that point, you didn’t mention the insurance

companies. They don’t come forward and talk about fraudulent

claims particularly because they don’t have a strong incentive to

care one way or the other, do they?

Ms. FONG. I would hate to make a general statement. We receive

many allegations and we may have received some from insurance

companies. I wouldn’t want to rule that out.

Chairman WAXMAN. You did say they have a very low incentive

to care when a fraudulent claim is submitted because, after all, it

is not coming out of their pockets. Not only that, but they don’t

want to poison a relationship with a farmer that they want to go

back next year and have him sign up for another period of time to

take the insurance. Isn’t that right?

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Ms. FONG. It is true that most of our information comes from

RMA, FSA, and local law enforcement.

Mr. HAND. Mr. Waxman? If I might?

Chairman WAXMAN. Yes?

Mr. HAND. There is a requirement under the SRA for the companies to report fraud or suspected fraud. I would agree that we

think there is probably some that maybe doesn’t get reported to us

as timely as it should be. Whether that is because the companies

don’t feel the case is strong enough or for whatever reason, but we

are working with them on that. It is a requirement, though, of the

SRA, so if we found them in violation of that, we would take action

against them on that basis.

Chairman WAXMAN. I don’t think that they are going to be too

worried about that, but it sounds like you do have a legal basis to

go after them if you find out about it.

Mr. Gould, to be fair to the administration, you have come up

with a proposal in the 2007 farm package to change some of these

areas of what we are calling waste, fraud and abuse. I am especially interested in proposals that would improve the efficiency and

effectiveness of the program and limit waste, fraud and abuse.

Ms. Fong and Ms. Shames, have you had a chance to review the

proposals of the Department of Agriculture at the administration?

And should Congress be considering other approaches to limiting

waste, fraud and abuse?

Ms. FONG. We have reviewed the proposals dealing with the crop

insurance program. We generally support them. We think that they

would be a good step forward.

Chairman WAXMAN. Ms. Shames?

Ms. SHAMES. We have not done a detailed review, but they seem

reasonable. As I said in my statement, we certainly advocate that

there be an authority to renegotiate in the SRA.

Chairman WAXMAN. Well, I think the administration is serious

about eliminating waste, fraud and abuse. We are more than happy

to work with them to do so. I think there are additional changes

that ought to be put into place in this program. I want to discuss

some of those with the next panel. It seems to me the status quo

is quite unacceptable.

I want to say we learned a tremendous amount about this issue

from this panel, and I am very concerned about where billions of

taxpayers’ dollars are going in this effort. One of the things I will

be doing after this hearing is requesting a more detailed GAO investigation of the Federal Crop Insurance Program. I know that

GAO’s investigators can give us important information about how

these taxpayer dollars are being spent, and how we can make sure

that the crop insurance program is less wasteful. So we are going

to certainly work with you.

And then my last comment, since I have been so involved in

health issues, Medicare and Medicaid particularly, it is astounding

to me when I hear people say we have to give poor people an incentive to hold down wasteful expenditures, so we make them come up

with out of pocket costs; we want to give them the incentive really

not to get the services, even though in many cases, they may need

it.

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And here we are giving exactly the other incentive to the insurance companies. I think it is a mistake to blame the farmers. It is

the insurance companies that are getting overpaid. How much

money does a farmer get? How much of a percentage of his crop

losses are usually covered? It is not 100 percent. Is it 50 percent

or less?

Mr. HAND. Average coverage runs between 65 percent and 75

percent.

Chairman WAXMAN. Between 65 percent and 75 percent of their

losses are reimbursed under this insurance program?

Mr. HAND. Yes, sir.

Chairman WAXMAN. OK. Well, that certainly helps. Maybe we

can give them even more, or just save the taxpayers the money if

we changed the amount of money that is going to these insurance

companies.

I thank you very much. We appreciate your being with us.

We have three votes on the House floor, so we are going to take

a recess. I would expect we will reconvene at 11:30 a.m.

We stand in recess.

[Recess.]

Chairman WAXMAN. The hearing will come back to order.

I am pleased to welcome our three witnesses on the second panel.

Bruce Babcock is the director of Iowa State University’s Center for

Agricultural and Rural Development.

Dr. Bruce Gardner joins us from the University of Maryland’s

College of Agriculture and Natural Resources. Dr. Gardner is also

an old Washington hand, having served as USDA Assistant Secretary of Economics under President George H.W. Bush.

They are joined by Steve Ellis, vice president of Taxpayers for

Common Sense.

We are pleased to have the three of you here today. Your statements will be part of the record in full. We are going to call on you

in a minute, but as I have indicated, all witnesses before this committee do take an oath, so if you would please rise and raise your

right hands.

[Witnesses sworn.]

Chairman WAXMAN. Thank you very much. The record will note

that each of the witnesses answered in the affirmative.

Dr. Babcock, why don’t we start with you? There is a button on

the base of the mic. We are going to have a timer for 5 minutes.

We would like to ask you if you can keep your statements to

around that time. We will extend a little extra time if you need it.

STATEMENTS OF BRUCE BABCOCK, DIRECTOR, CENTER FOR

AGRICULTURAL AND RURAL DEVELOPMENT, IOWA STATE

UNIVERSITY; BRUCE GARDNER, DISTINGUISHED UNIVERSITY PROFESSOR, COLLEGE OF AGRICULTURE AND NATURAL RESOURCES, UNIVERSITY OF MARYLAND; AND STEVE

ELLIS, VICE PRESIDENT, TAXPAYERS FOR COMMON SENSE

STATEMENT OF BRUCE BABCOCK

Mr. BABCOCK. Thank you, Mr. Chairman, Ranking Member

Davis, and committee members for the opportunity to participate

in today’s hearing.

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I have been continuously and intensely involved with crop insurance since the early 1990’s. Despite my experience, I have only recently been able to make a judgment about whether or not taxpayer support for crop insurance is justified. The program is so

complicated that it defies quick understanding. But one needs to

know how all the pieces of the program work together before an informed judgment about efficient use of taxpayer funds can be

made.

The two most credible public policy objectives that have been offered to justify taxpayer support for crop insurance are that purely

private markets would not offer farmers enough insurance and that

Congress needs a program to eliminate ad hoc disaster assistance

packages.

Farmers face significant risk in their farming operations, and

crop insurance clearly helps them manage this risk. But examination of the data and available research unequivocally demonstrate

that most farmers would not choose to buy the type and level of

crop insurance being sold today were it not for the large premium

subsidies offered by the program.

This lack of market demand for crop insurance seems odd. Why

should farmers have to be enticed with subsidies to buy a seemingly effective risk management tool? The answer is that farmers

have other more cost-effective ways to manage their risk. Diversification, off-farm work, use of marketing tools, and adoption of

risk-reducing production practices all work to reduce financial vulnerability, as do the commodity programs in the farm bill. So for

most farmers, crop insurance is a cost-effective risk management

tool only when the cost is dramatically lowered through premium

subsidies.

The fact that most farmers will not buy crop insurance without

substantial subsidies leaves only the second policy objective as a

justification for taxpayer support. Congressional support for crop

insurance has been driven mainly by the hope that enough subsidies will induce enough farmers to buy enough coverage to forestall the need for ad hoc disaster assistance. The subsidies given

insurance companies, which consist of the administrative and operating reimbursement and underwriting gains, are more than

enough to make it worth their while to service farmers’ insurance

policies.

The surplus subsidies are then paid as sales commissions to crop

insurance agents. The resulting commission rates are large enough

in most regions of the country to create a strong incentive for

agents to work at convincing farmers that crop insurance is in

their best interests. Fortunately for agents, it is an easy sell because premium subsidies have been increased to the point where

most farmers find it profitable to buy crop insurance.

For a long time, I have misunderstood the role that underwriting

gains play in the industry. At first, I thought they were the price

taxpayers had to pay to induce crop insurance companies to share

in risk. But then I discovered that the actual amount of risk that

is being shared is so small relative to the price that we pay that

companies are in fact being paid substantially more than the market price of the risk they bear.

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So I looked elsewhere for an explanation. I now believe that large

underwriting gains paid to companies serve two purposes. First,

they are a complicated mechanism to increase the amount of

money that can be used to pay agent commissions. Higher agent

commissions translate into more insurance being sold, so large underwriting gains are consistent with the objective of getting more

farmers to buy insurance.

The second purpose is that underwriting gains do serve the purpose of creating some incentive for companies to combat fraudulent

claims. After all, when companies share in losses, which they do to

some extent, they have a greater incentive to challenge bogus

claims.

The taxpayer costs of using crop insurance as a means of eliminating disaster assistance is significant. Since 2001, the program

has cost taxpayers $18.7 billion. Farmers have received $10.5 billion of this amount. The difference is the amount of money that has

been used to induce farmers to buy crop insurance and to service

the sold policies.

In essence, Federal tax dollars have been used to create an industry for only one purpose: to contract out the delivery of disaster

assistance. One way to judge whether taxpayer support for this industry is efficient or wasteful is to compare taxpayer costs of crop

insurance with the resulting reduction in disaster payments. I

think that the calculus on this question has been made quite easy

by inclusion of yet another disaster payment package in the recently vetoed Iraq War funding bill.

I believe that generous taxpayer support for crop insurance has

not succeeded in its stated purpose and it is now time to look for

another way to help farmers to get through crop disasters. Fortunately, a way forward is now open because the House and Senate

Ag Committees are trying to determine what to do with the 2007

farm bill. I would hope that members of these committees are considering proposals for how the farm bill safety net can be integrated with the crop insurance safety net to automatically and directly provide the kind of support that farmers expect when disaster strikes. Both taxpayers and farmers would enjoy the benefits of

this type of smart reform.

Again, thank you for this opportunity to share my thoughts

about the crop insurance program. I will be happy to answer any

questions later.

[The prepared statement of Mr. Babcock follows:]

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Chairman WAXMAN. Thank you very much. Excellent testimony.

Dr. Gardner.

STATEMENT OF BRUCE GARDNER

Mr. GARDNER. Thank you, Mr. Chairman and members of the

committee. I appreciate the opportunity to address some issues of

waste and inefficiency in the crop insurance program.

I am going to focus on three problem areas: First, crop insurance

as related to disaster payment programs; second, the low benefits

farmers get from crop insurance subsidies as compared to the cost

of the subsidies for the taxpayer; and third, some issues in the land

use and environmental effects of subsidized crop insurance.

I should note that I am currently involved with a project for the

American Enterprise Institute that has commissioned 21 papers on

a range of farm bill topics. One of those focuses on crop insurance.

That paper goes into further depth on all three of these issues.

So first, crop insurance and disaster payments. The powerful history here, I think we should go back even to 1938 when we started

with subsidized Federal crop insurance after several decades of unsatisfactory experience, basically the losses were too high, but yet

still farmers participated in the program. Congress introduced a

disaster payments program in the 1973 farm bill, which I think is

one of the most interesting experiments we have had in this area.

This program was essentially crop insurance with no premiums

charged. This was popular, of course, but the program had high

budget costs. It was criticized by the General Accounting Office for

encouraging farmers to plant on marginal acreage and for reducing

farmers’ incentives to take preventive measures against crop loss.

By 1980, President Carter was moved to comment that the disaster payments program had itself become a disaster. In 1981, Congress ended the program, which I think shows that Congress is capable of making adjustments when the evidence is overwhelming

that they have to be made.

After 1980, policy moved back in the direction of bigger subsidies

on Federal crop insurance. The idea was that ad hoc disaster programs and subsidized crop insurance were substitutes, and that the

appropriate establishment of crop insurance would preclude the

need for disaster bills.

This hope has not been realized. After boosts in spending on crop

insurance subsidies in the mid 1990’s and again after 2000, spending on insurance subsidies was still further increased, yet spending

on ad hoc disaster payments did not decline, but rather increased

further. In 2003 to 2006, Federal budget outlays on both programs

together averaged $4.9 billion a year, or about four times the levels

of the 1980’s.

Was this just because nationwide crop failures were worse? No.

Indeed, U.S. crop yields were at or above the trend levels in this

period. The problem is more a matter of not being able to convince

some farmers to buy even highly subsidized insurance when experience has revealed that a serious disaster will be followed by an ad

hoc relief program.

Now, the second thing I want to mention briefly is that benefits

and costs of crop insurance, and we have heard a lot about this already, but I think one would have to recognize that even if we do

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spend a lot on crop insurance subsidies, that could be worthwhile

if the benefits to producers were sufficient. In fiscal years 2003 to 2005, an average of $3 billion in insurance

indemnity payments were paid out to producers. However, while

farmers’ insurance premiums are subsidized, they still paid an average of $1.5 billion annually during these years to buy their coverage. Therefore, the net benefit from the crop insurance to farmers

was $1.5 billion annually.

The Government’s cost is the premium subsidies paid plus deliv- ery costs. These costs added up to $4 billion annually in 2003 to

2005. Thus, in this period, the Government incurred $4 in budget

costs for every $1.50 in net benefits that producers received. This

an inefficient transfer, as we have heard already many times.

The direct payment commodity programs that we have, that

spend actually quite a bit more money, are criticized in many ways,

but at least the money the Government spends on those programs

goes directly into farmers’ pockets almost entirely.

Finally, I want to just mention briefly the third topic of land use

and the environment. The history of crop insurance and disaster

payment programs provides ample evidence that the programs encourage farmers to grow riskier crops and grow them on more vulnerable land than would otherwise occur. An Economic Research

Service study estimates that about 1 million acres are devoted to

grain and cotton production that would not be in the absence of

subsidized crop insurance. More than half this acreage is on the

Great Plains.

As one would expect, crop insurance subsidies encourage production in the areas of highest weather risk. These are the same areas

that are targeted under the Conservation Reserve Program for taking such land out of crop production and placing it in soil conserving uses. So we have a tendency to be undoing with crop insurance

subsidies what we are doing with conversation policy.

So in summary, subsidized crops insurance has an honorable history as an attempt to assist farmers in risk management, but it

has proven far too costly in terms of cost to taxpayers per dollar

of benefits received by farmers. It has not precluded ad hoc disaster

programs, and it has induced production on marginal land.

I believe the Nation would benefit from an end to these subsidies

completely and just let crop insurance be sold on a regular market

basis like other insurance policies are.

Thank you.

[The prepared statement of Mr. Gardner follows:]

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Chairman WAXMAN. Thank you very much, Dr. Gardner.

Mr. Ellis.

STATEMENT OF STEVE ELLIS

Mr. ELLIS. Thank you.

Good morning, Chairman Waxman, Ranking Member Davis, Representative Cooper. Thank you for inviting me here to testify on

the Federal Crop Insurance Program. I am Steve Ellis, vice president of Taxpayers for Common Sense, a national, nonpartisan

budget watchdog organization that has studied agriculture subsidies since our inception in 1995.

I want to take this opportunity to applaud the critical work that

this committee is undertaking. The committee’s broad portfolio enables it to identify important trends and problems across the Federal Government and to approach programs with an independent

and unbiased eye, which is often difficult for committees of original

jurisdiction to do. Tellingly, we have not seen this type of oversight

hearing in the Agriculture Committee.

The crop insurance program has been an expensive failure. It

has failed to end disaster payments. We practically have to pay for

farmers to take out insurance. The only winners here are the insurance companies. To put it in perspective, in 2005 insurers got

more than $1.7 billion to provide crop insurance, while taxpayers

in toto spent $3.1 billion on a program that delivered slightly more

than $750 million in payments to farmers.

In 1980, as has been discussed, the Government shifted to private companies to administer and grow the insurance program. Existing crop subsidies were increased even more from 1994 and

2000, and now premium subsidies average roughly 60 percent.

That is to say, out of every dollar a private insurer is charging for

crop insurance, the farmer is paying 40 cents, while the taxpayer

picks up 60 cents. This is an enormous subsidy by any measure.

In addition, the Federal Government pays insurance companies

to sell and administer policies. These administrative and operating

subsidies run about 21.5 cents on the premium dollar. But the largest A&O expense for the companies is the agent commissions for

the policies they sell. Some agents are paid up to 20 percent of the

premium on their policies.

In many ways, insurance is like gambling, but in a bizarre twist,

the insurance companies are the house and the Federal taxpayer

is the perpetual loser. This program has become less about crop insurance for farmers and more about revenue assurance for insurance companies.

This is not to say that farmers are ignorant of their risk. Considering that theirs is one of the world’s oldest professions, as Dr.

Babcock indicated, farmers have found means to diversify their

risk. Crop rotations, irrigation and farming multiple crops are all

forms of limiting risk. In addition, many farms receive significant

amounts of off-farm income. So it is fair to say that farmers do

quite a bit of risk management without any Federal subsidies and

without the Rick Management Agency. In fact, these farm level

risk management techniques help explain why such large premium

subsidies are required to induce farmers to purchase crop insurance.

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Federal insurance programs are always inefficient. The Federal

Government is always the insurer of the last resort, so insurance

programs are foisted upon the Government as a reaction to a perceived market failure, whether real or imagined. But even by Federal insurance program standards, the crop insurance program is

incredibly inefficient. Under the current agreement, insurers are

able to shift their high-risk policies onto the Federal Government

and keep the lower-risk policies in their portfolio, in effect maximizing each company’s gain in good years and minimizing losses in

bad years.

From our experience, expensive, complex and inefficient is a

ready made recipe for waste, fraud and abuse. To tackle waste,

fraud and abuse, you have to tackle the crop insurance program’s

overall expense, complexity and inefficiency. The interplay between

subsidies for program crops, crop insurance, and disaster assistance must be examined more closely.

After examining all of these questions, a few clear answers come

to the surface. Disaster assistance must be ended. In the latest example of crop insurance failing to end disaster payments, there is

$3.5 billion in agriculture disaster spending in the emergency supplemental bill. Since the 1994 expansion of crop insurance premium subsidies, Congress has approved more than $36 billion in

agriculture disaster assistance. The chairman of the Agriculture

Committee in the House wants to create a permanent disaster title

in the upcoming farm bill.

The prospect of disaster assistance undercuts crop insurance and

at the very least encourages under-insuring. Farmers, like all businesses, should adequately insure, and if they choose not to, they

should not be bailed out by the taxpayer.

Create effective incentives and disincentives. Encourage individual farmers to diversify risk and reduce exposure by providing reduced premiums as an incentive. Premium subsidies should be a

reward, not a right. Base revenue insurance plans on total income.

Increase mandatory insurance levels and deny crop subsidies for

farmers who do not adequately insure. And finally, use Farm Service Agency officials to enforce and police crop insurance policies and

enact strong punitive actions for abusers of the program. And last,

increase competition.

It is time to scrap the Soviet style planned economy that dominates crop insurance. If there is non-competition, then the value of

having private insurers serve as crop insurers evaporates. Since

Government currently bears virtually all the risk anyway, shifting

some of all of the program background to the Government operations should be an option.

Again, I want to thank the committee for holding this hearing

and inviting Taxpayers for Common Sense here to testify. With the

farm bill expiring later this year, this is an important time to consider this important issue. I would be happy to answer any questions you might have.

[The prepared statement of Mr. Ellis follows:]

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Chairman WAXMAN. Thank you very much for your testimony.

I am trying to think through how we can accomplish the goals

that were set out in the creation of this program, and do it in a

way that makes the most sense.

The first goal was to stop the Government from having to pay

after the damage has already been incurred, because the Congress

is very softhearted and we hate to see disasters, and people suffer,

so we always come in afterwards. I gather that none of you thinks

this crop insurance subsidy program has kept us from coming in

with relief after the damage is incurred to add to the insurance

payments. Is that a correct statement? All of you are shaking your

heads.

Mr. Ellis.

Mr. ELLIS. Absolutely. We spent billions of dollars since we increased the subsidy, so clearly it is not even our opinion. It is reality, Mr. Chairman.

Chairman WAXMAN. What is the market failure here? If a farmer

wanted insurance in the private market, one would think he could

go out and buy it. Now, the argument was made that it is just too

expensive. Farmers can’t afford it, so we have to help them buy

this insurance. If I understand Dr. Gardner’s testimony, you don’t

think that farmers always want this insurance even if it is affordable. Of course, if we are paying for it, they will take it.

Is there a market failure? Or is there just not really a good

enough market for people to buy this insurance? Why should the

Government substitute our judgment over that of the farmer?

Mr. GARDNER. Well, I would say I agree with you. There is no

pervasive market failure. You see problems with markets in insurance of all kinds. The most difficult one I think in crop insurance

is sometimes the farmers have a better idea of their situation and

know more than the insurance company does, and you have an adverse selection problem.

But the Government has no solution for that problem, and in fact

probably does less well at dealing with it than the private insurance companies do. So I don’t see a market failure. I think that

good evidence of that is in other areas where farmers bear risks,

they do buy hail insurance; they buy fire insurance; they buy liability insurance just like any other citizen does. It is unsubsidized

and the market works.

Chairman WAXMAN. Dr. Babcock, you don’t seem to go as far as

Dr. Gardner in suggesting to eliminate the program and letting the

market work as well as it is going to, letting the farmers make a

decision. What would you do instead? Do you think there is still a

purpose for a crop insurance program?

Mr. BABCOCK. I think the evidence is clear that farmers will not

buy the kind of coverage that is needed when this one out of whatever year event occurs, and a true disaster hits. So that when that

occurs, there is going to be pressure to have some sort of an assistance program after the fact. I don’t think it is sufficient just to be

able to say, well, you didn’t buy insurance so we are not going to

help you. I think that ignores political reality.

Fortunately, though, we have something called the farm bill that

is supposed to be providing a safety net to farmers. Why not just

design that farm bill in such a way that it automatically would diVerDate 11-MAY-2000 15:13 Sep 29, 2008 Jkt 000000 PO 00000 Frm 00105 Fmt 6633 Sfmt 6633 C:\DOCS\44427.TXT KATIE PsN: KATIE
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rect payments to regions that would in fact deliver the aid when

it is actually needed? I think that smart reform of the commodity

policy can create a safety net that would do away with disaster assistance and would take on much of the risk of the crop insurance

at the same time.

Chairman WAXMAN. So you would use Federal funds to set up a

pool of money to compensate farmers when a disaster occurs. Is

that right?

Mr. BABCOCK. That is right. It would be automatic. Farmers

would know that they are getting it, and would adjust their operations accordingly. I would not do it at the individual farm level,

because that means that they are going to be farming for the program. Rather, I would do it when a disaster hits. It is likely that

almost all farmers in a county, for example, would suffer that same

loss. And so I would do it at the county level.

Chairman WAXMAN. So you would have a Government program,

and then eliminate the private insurance completely.

Mr. BABCOCK. Mr. Gould said that his son had purchased something called GRIP, group risk income protection. Basically, if I had

a way of designing a policy, I would have the Federal Government,

through the farm bill, basically offer that kind of a program to

farmers as a replacement for the subsidy programs they have now.

Then I would allow the crop insurance industry to write supplemental coverage on top of that would cover individual farm-level

risks, and then let the private market offer that if farmers really

need additional risk protection. And let the market decide how

much risk protection they need.

Chairman WAXMAN. How much would you cover? What percentage of the loss would the Government insurance program cover?

Mr. BABCOCK. At the county level, which is different than the

farm level—at the farm level, it would not cover anything for free.

It would be up to the farmer to decide how much individual farmlevel coverage they bought. Let the market determine that.

At the Federal Government level, it would be on the order of you

have at least a 10 percent drop in let’s say county yield before payments would commence. So you would have a 10 percent deductible.

Chairman WAXMAN. Have any of you looked at possible competition? Is there some way to give incentives for competition and let

the private insurance companies compete for the business, and

then let the farmer decide if he wants to buy one policy as opposed

to another? If he doesn’t want go with any, it is his or her choice.

Dr. Gardner.

Mr. GARDNER. Well, I am not an expert on the ins and outs of

the insurance industry, but your question reminds me of an approach that Senator Lugar had introduced in the farm bill discussions in the Senate Agriculture Committee several times, which is

in order to help farmers with their risk management problems,

have the Government just provide a general subsidy, as we do

along the lines Bruce was saying, but let the farmers decide how

to spend it. They will have the kind of money they now get from

support programs, but maybe not quite so much, and let them decide what to buy. Then the competition will arise.

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Who can satisfy the farmers’ real needs for this protection in a

market of competition, not only with insurance, but for a while

they were even county or area-like yield contracts that you could

buy on the Chicago Board of Trade. There are a number of ways,

a number of mechanisms that could provide contingent assets that

increase in value when bad things happen. I would say I just

wouldn’t want to limit it to crop insurance. Let the whole range of

risk management tools be made available.

Chairman WAXMAN. Thank you.

Mr. Davis.

Mr. DAVIS OF VIRGINIA. I want to ask what happens if we in the

ag bill this year just abolish the program? How would the market

respond if we abolished the Federal subsidies? Would the private

markets react? How would the farmers react to it at that point?

And what would be the result? We always have the right to come

in if someone were hard hit and give them the appropriate payment.

Mr. GARDNER. Are you referring to all the commodity programs?

Mr. DAVIS OF VIRGINIA. No, just this.

Mr. GARDNER. Just this one. Well, what would happen right

away, of course, is it would be a big upheaval in the crop insurance

industry. What would happen to farmers is they would have to figure out what is being offered very quickly.

Mr. DAVIS OF VIRGINIA. I am just asking for a prediction of the

market. Somebody would somewhere offer some insurance.

Mr. GARDNER. Yes, I believe they would, but the market

would——

Mr. DAVIS OF VIRGINIA. It would save the taxpayers a lot of

money, at least on the front side. If you had a bad year, we may

come on the backside and end up with some subsidies that we

hadn’t intended. I don’t now the answer to that, which is what I

am asking.

Mr. BABCOCK. I will make a prediction of what would happen. I

think that if the insurance companies were to offer the same products without the subsidies, that farmers would immediately go and

buy GRP, group risk protection. It is an area yield. It is very costeffective. And then they would buy private hail insurance on top

of that. At least in my area of the country, the hail insurance often

strikes an individual farm, but not the county. So the GRP would

cover them very cost-effectively for a very small amount of money,

then hail insurance would cover them for their primary other risk,

other than drought.

Mr. DAVIS OF VIRGINIA. Would they be out of pocket more than

they are?

Mr. BABCOCK. About the same, basically, because right now the

system is set up to drive farmers to buy the most expensive policy

they can, because agents get paid more, the Federal subsidy goes

up, the more money that farmers pay. So in fact, they are

incentivized to buy the bells and whistles policy.

Mr. DAVIS OF VIRGINIA. Just let the market system work here,

is what you are saying. It would respond appropriately and the

Federal Government would be out of it and we would save taxpayers’ dollars and you would have about the same coverage for the

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same cost, or close to it—not the same coverage, but you would

have adequate coverage.

Mr. BABCOCK. You would have cost-effective coverage that farmers, I think, would fill the needs of what farmers demand.

Mr. DAVIS OF VIRGINIA. Mr. Ellis, do you have any prediction of

what would happen?

Mr. ELLIS. No. I would absolutely agree with the way you are

going on this. I think that in the last decade or 15 years, the insurance sector, not just crop insurance, but really the insurance sector

writ large, has dramatically changed, basically after Hurricane Andrew, where they have been able to securitize risk. You can trade

risk. The reinsurance market is quite large and significant. So

there has been a dramatic change in the insurance industry that

I think that if we allowed that to have more of a competition for

crop insurance, that would definitely drive that.

And then the other issue here is that right now, farmers are

being in essence bribed to buy crop insurance. We are paying 60

percent of the premium to try to get them to buy crop insurance.

Mr. DAVIS OF VIRGINIA. They can’t afford not to.

Mr. ELLIS. Right, right. So then it is just a question of if you remove that, and they realize that they are going to have to take

matters into their own hands, I think that some of these things

more designed to their needs, as Dr. Babcock has indicated, those

type of policies will start to percolate out. The insurance industry

is a business. They are going to make money and there are ways

to make money. I always point out, Liberace could insure his fingers, so just about anybody can insure just about anything. It just

depends on what the cost is.

Mr. DAVIS OF VIRGINIA. That is exactly right. But reform is unlikely to come out of the Agriculture Committee, isn’t it?

Mr. ELLIS. They are certainly not a reform minded institution as

far as making big changes. That actually does get to some of Dr.

Gardner’s points as well, which is what Agriculture has talked

about is the three legged stool. You have crop insurance; you have

disaster payments; and you have crop subsidies, the program crops.

I think that really you have to look at all three of those because

they do interrelated, and the different issues of them drive certain

policies. People are buying certain types of crop insurance because

of the program subsidies, and these all have interrelated effect.

So I think that while I definitely agree that getting rid of crop

insurance makes a lot of sense, I think you want to look at the

other issues within the farm program. We are certainly not a big

fan of the commodity title, Title I in the program crop subsidies,

and it would be worthwhile to look at that and how to make those

work better together.

Mr. DAVIS OF VIRGINIA. I am not advocating. I am just asking.

I think we need to ask the question, how would the markets respond on their own. We don’t allow them to respond on their own

because you have so many of these different Government gimmicks

along the way. That is my question.

Thank you, Mr. Waxman.

Chairman WAXMAN. Thank you, Mr. Davis.

Mr. Cooper.

Mr. COOPER. Thank you, Mr. Chairman.

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During the previous vote, I talked to a colleague that is on the

House Agriculture Appropriations Committee. Apparently, USDA

testified there yesterday that all they needed was more staff money

for raises, nothing for compliance, and a little bit more money for

IT. So they don’t seem to have gotten the message that reform is

necessary.

Help me understand, Dr. Babcock, hail insurance and GRP insurance. Is that completely private and unsubsidized? How does

that work?

Mr. BABCOCK. No. GRP is a federally subsidized and reinsured,

just like a regular crop insurance product. What it was was an idea

of trying to get farmers not to worry about so much compliance

issues because their losses would be paid by the county.

Hail insurance was a robust private insurance market up until

ARPA subsidies in 2000 were greatly increased. Then farmer participation in hail insurance went down. Essentially, the private sector got crowded out because the subsidies for multi-peril crop insurance became so large that hail insurance is a proven private product that can be offered privately.

Mr. COOPER. So the Government in 2000 helped kill this private

sector offering, or reduce it substantially.

Mr. BABCOCK. It reduced it. It is still offered, but the demand for

it has gone down because the multi-peril products cover essentially

a lot of the same risk.

Mr. COOPER. In your testimony, when you predict that under current CBO protections, crop insurance programs will cost taxpayers

an average of more than $5 billion per year over the next 5 years

or $25 billion, does that include GRP insurance?

Mr. BABCOCK. It does, but not very many farmers buy GRP because it is a very low cost program. If the Government is paying

60 percent of the premium, why would you want to minimize your

own expenditure? So essentially the fastest growing crop insurance

product out there is this GRIP product. GRIP-HRO it is called. It

is an acronym. It is the most expensive product out there. It is the

fastest growing product, and not as surprising, it is the one with

the highest premium.

Mr. COOPER. A few months ago, I had the pleasure of questioning

the Secretary of Agriculture in a Budget Committee hearing. I

asked him how many field offices he had. He said 3,800. I asked

how many of those offices were located in counties that no longer

had any farms period, and he said he would get back to me on that.

But that is one of the most extensive networks of Government offices for any Federal agency.

One of you suggested in your testimony, it might have been Dr.

Gardner—no, I think you suggested actually ending the program.

I think it was Dr. Babcock that said maybe we should link participation in government subsidy programs with purchasing coverage,

because if we have 3,800 offices and farmers have to go visit those

offices anyway, that is a point of sale that is infinitely more efficient than 20 percent commissions that are being paid by these 16

crop insurance companies.

Does something like that make sense? If you want to participate

in the subsidy programs, you have to do something yourself to insure against the risk.

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Mr. GARDNER. That kind of things has been tried. We did that

after some of the disaster payments programs, to require filings in

one of the commodity programs to have some crop insurance coverage.

Mr. COOPER. Another thing that struck me, and the Washington

Post pointed this out, that recipients of disaster payments, that information is private. No one is allowed to know. Why do you have

a right to privacy when you get a large Government check like that

due to hail or flood or drought, or whatever?

Mr. GARDNER. I don’t know.

Mr. COOPER. So that is something Congress did on its own, to

hide the recipients of these payments. It is not like their neighbors

don’t know, because it is pretty apparent what is on your farm.

It strikes me that there are number of folks who like farming the

land, and there are some folks who like farming the taxpayer, and

farming the taxpayer is probably a more lucrative undertaking.

I want to quote for a second from the Post article talking about

a Kansas farmer, Mark Orebaugh. It says, ‘‘For Mark Orebaugh

and most Kansas farmers, the Federal insurance is ‘a good deal.’

In the past 4 years, he has paid $81,730 in premiums, but collected

$295,796 in claims, or $3.62 for every dollar he put in. That is

higher than the State average, but Orebaugh farms on the western

side of Kansas, where water is scarce and much of the farmland

is not irrigated.’’ It goes on to say, ‘‘There is just no water here.

We probably should never have developed these fields when we did

30 years ago, because the water table was declining.’’

So that is Dr. Gardner’s point, a lot of marginal land that really

shouldn’t be farmed is being kept in production at taxpayer expense, just due to the existence of these subsidy programs. But

here is a man whose has four times more money than he paid in

in premiums, because of farming the taxpayer.

So land almost becomes irrelevant if you can gain the premiums

and the payouts right, and the weather goes along, you can do

quite well.

Mr. GARDNER. I would just like to say, though, that is it no picnic

farming those really risky areas. I wouldn’t want to do it. So I

wouldn’t put it so much that the farmers in those areas, like in the

old disaster payments program, where it was quite clear that there

were counties that weren’t even eligible for the subsidized Federal

crop insurance, were eligible for the disaster payments program,

and wheat acreage rose substantially in those counties.

I don’t think those people had any picnic with this. They are just

following what the incentives tell them to do.

Mr. COOPER. I am not saying it is a picnic, but it is the subsidy

program, the Government, that is keeping them tied to this hard

work and this tough life.

Mr. GARDNER. I agree.

Mr. COOPER. So without the Government intervention, he might

have a better job somewhere?

Mr. GARDNER. Exactly.

Mr. COOPER. Or be a farmer in an area with a water table and

water and things like that are presumably necessary for growing

crops.

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In testimony yesterday in the House Ag Committee, representatives of the crop insurance industry said that the administration’s

reform proposals, as weak as they are, the industry witness described them as ‘‘draconian,’’ and they would drive insurers from

the market, resulting in serious and adverse consequences.

Do you agree that the administration’s reform proposals, as mild

as they are, would have such an effect?

Mr. ELLIS. No, I would say that they are more dithering around

the edges, rather than actually draconian. They talk about driving

them from the market. I would question, what market? Really, all

the rates are established. There is virtually no competition among

the companies.

So essentially, it isn’t really a market at all to be driven from.

So then it is really more about we have to fundamentally reexamine, which is what this committee is doing, and what these questions have certainly been touching on, and what the witnesses have

testified to, that we have to fundamentally reexamine the way this

program is being delivered and envisioned, and how we are going

to do our agricultural supports, and in what form, and how little

or how much.

The administration’s proposal doesn’t go nearly far enough to do

any of that sort of thing. I imagine they will cut into the profit

margin of some of these companies, but really it is a pretty fat

profit margin.

Mr. COOPER. I see my time has expired. In prior testimony from

the GAO, I think profit margins were about triple a normal casualty business. That seems to be pretty good.

I thank the chairman for the time.

Chairman WAXMAN. Thank you, Mr. Cooper.

Could you elaborate, Dr. Gardner or any of you, on this cross

purpose of subsidizing insurance and therefore encouraging them

to grow crops that are interfering with the Conservation Reserve

Program, and causing environmental problems. Dr. Gardner, do

you want to elaborate more on that?

Mr. GARDNER. I can’t elaborate too much more. This hasn’t been

intensively studied, but just to take an example. There have been

some academics trying to look at what the effect to the Conservation Reserve Program has been on actual acreage conserved and

acreage planted. They always find some slippage in this, that even

though you enroll 36 million acres in the Conservation Reserve

Program, but you don’t see the corresponding decline in crop acreage. This means somebody is increasing crop acreage somewhere

else as land enters the Conservation Reserve Program.

Exactly all the reasons for that are not clear, but I think it is

quite clear, and the ERS study that I mentioned is the only one

I know that really tried to quantify that. They found an estimate

of 960,000 acres, almost one million acres, in cotton and grain that

would not otherwise be in cotton grain—this was in the early

2000’s—because of the existence of the crop insurance program.

You can’t say which acres those are, but there are clearly more

than half of them in the Great Plains, and that is where your more

risky conservation reserve type program land is. So there has to be

some connection. To quantify it exactly, I can’t go that far.

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Chairman WAXMAN. Well, let me invite you, those who think that

there is maybe an alternative other than abolishing the program,

which I think politically would cause a firestorm, to submit any

other ideas. Submit to us some other ideas that could, one, integrate the insurance programs and might be something we can

present in this farm bill to the Agriculture Committees or to our

colleagues on the House floor. So please feel comfortable to submit

it to us. We would like to look at it.

Mr. Davis, anything further?

Mr. DAVIS OF VIRGINIA. I appreciate all the witnesses.

Chairman WAXMAN. Mr. Cooper, you have been very, very helpful and I thank you so much for being here.

We stand adjourned.

[Whereupon, at 12:20 p.m. the committee was adjourned.]

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