U.S. GOVERNMENT PRINTING OFFICE

70–917 DTP WASHINGTON : 2001

DEPARTMENT OF HEALTH AND HUMAN SERVICES

FISCAL YEAR 2002 BUDGET PRIORITIES

HEARING

BEFORE THE

COMMITTEE ON THE BUDGET

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

HEARING HELD IN WASHINGTON, DC, MARCH 7, 2001

Serial No. 107–5

Printed for the use of the Committee on the Budget

(

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COMMITTEE ON THE BUDGET

JIM NUSSLE, Iowa, Chairman

JOHN E. SUNUNU, New Hampshire

Vice Chairman

PETER HOEKSTRA, Michigan

Vice Chairman

CHARLES F. BASS, New Hampshire

GIL GUTKNECHT, Minnesota

VAN HILLEARY, Tennessee

MAC THORNBERRY, Texas

JIM RYUN, Kansas

MAC COLLINS, Georgia

ERNIE FLETCHER, Kentucky

GARY G. MILLER, California

PAT TOOMEY, Pennsylvania

WES WATKINS, Oklahoma

DOC HASTINGS, Washington

JOHN T. DOOLITTLE, California

ROB PORTMAN, Ohio

RAY LAHOOD, Illinois

KAY GRANGER, Texas

EDWARD SCHROCK, Virginia

JOHN CULBERSON, Texas

HENRY E. BROWN, Jr., South Carolina

ANDER CRENSHAW, Florida

ADAM PUTNAM, Florida

MARK KIRK, Illinois

JOHN M. SPRATT, Jr., South Carolina,

Ranking Minority Member

JIM MCDERMOTT, Washington

BENNIE G. THOMPSON, Mississippi

KEN BENTSEN, Texas

JIM DAVIS, Florida

EVA M. CLAYTON, North Carolina

DAVID E. PRICE, North Carolina

GERALD D. KLECZKA, Wisconsin

BOB CLEMENT, Tennessee

JAMES P. MORAN, Virginia

DARLENE HOOLEY, Oregon

TAMMY BALDWIN, Wisconsin

CAROLYN MCCARTHY, New York

DENNIS MOORE, Kansas

MICHAEL E. CAPUANO, Massachusetts

MICHAEL M. HONDA, California

JOSEPH M. HOEFFEL III, Pennsylvania

RUSH D. HOLT, New Jersey

JIM MATHESON, Utah

PROFESSIONAL STAFF

RICH MEADE, Chief of Staff

THOMAS S. KAHN, Minority Staff Director and Chief Counsel

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C O N T E N T S

Page

Hearing held in Washington, DC, March 7, 2001 ................................................. 1

Statement of:

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

Human Services ............................................................................................ 4

Robert Rector, the Heritage Foundation ........................................................ 48

Wendell Primus, Director, Income Security, Center on Budget and Policy

Priorities ........................................................................................................ 67

Gail Wilensky, John M. Olin Senior Fellow, Project Hope ........................... 79

Marilyn Moon, Senior Fellow, the Urban Institute ....................................... 86

Thomas R. Saving, Director, Private Enterprise Research Center .............. 97

Prepared statement of:

Hon. John M. Spratt, Jr., a Representative in Congress from the State

of South Carolina .......................................................................................... 2

Secretary Thompson ......................................................................................... 7

Mr. Rector ......................................................................................................... 50

Mr. Primus ........................................................................................................ 71

Dr. Wilensky ..................................................................................................... 81

Dr. Moon ............................................................................................................ 89

Dr. Saving ......................................................................................................... 103

Hon. Ander Crenshaw, a Representative in Congress from the State

of Florida ....................................................................................................... 125

Hon. Gary Miller, a Representative in Congress from the State of California .................................................................................................................. 126

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

Florida ............................................................................................................ 126

Advanced Medical Technology Association ..................................................... 127

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DEPARTMENT OF HEALTH AND HUMAN

SERVICES FY 2002 BUDGET PRIORITIES

WEDNESDAY, MARCH 7, 2001

HOUSE OF REPRESENTATIVES, COMMITTEE ON THE BUDGET, Washington, DC.

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

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

committee) presiding.

Present: Representatives Nussle, Spratt, Bass, McCarthy, Gutknecht, McDermott, Thornberry, Bentsen, Sununu, Hooley, Kirk,

Capuano, Collins, Moore, Fletcher, Honda, and Hastings.

Chairman NUSSLE. I call this meeting of the full committee to

order. This is a full committee hearing on the President’s budget

for Health and Human Services.

Today’s witness is the Honorable and recently, within the last

half hour, as we understand, sworn in officially by the President

of the United States, Secretary of Health and Human Services,

former Governor of a neighboring State of mine, Wisconsin. We’re

honored to have you here today and we look forward to your testimony.

This afternoon we will hear from witnesses involved in economics

as well as health care on panels two and three. Then next, we will

have a members day hearing, as well as hearings next week on the

Department of Agriculture, the Department of State and the Department of Education. We look forward to those hearings as well.

There is no question that, particularly coming from a State such

as Iowa, where we have the number one population of older Americans over the age of 85 years old, and I think are ranked number

two or three in all other categories involved with seniors, Medicare

has become a vital cornerstone program to our entire economic development, not just health care in the service of rural areas. We

are very interested in the Medicare program, and let me just highlight one issue in particular that, Mr. Secretary, we have worked

very hard on this committee in a bipartisan fashion to achieve.

Over the last couple of years, as I’m sure you note, we have

begun running not only surpluses within the Medicare HI trust

fund, but we as a Congress have decided to not use that resource,

those resources, those surpluses for anything at all except Medicare. In fact, in a bipartisan fashion earlier this year, one of the

first bills to pass the House was a Medicare lock box. Again, in a

bipartisan demonstration of our support for Medicare, the Medicare

surpluses and the need that we set those resources aside for future

contingencies, future opportunities such as what all of our constituVerDate 11-MAY-2000 15:22 May 29, 2001 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 H:\DOCS\HEARINGS\107-5\HBU066.000 HBUDGET1 PsN: HBUDGET1
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ents have been talking to us about, and that’s a prescription drug

benefit, as well as other modernizations.

When you come from a State such as Iowa, as well as Wisconsin,

you recognize that in rural areas in particular, there is an abominable reimbursement rate when it comes to paying the bills for

Medicare. We all pay the same amount of taxes, but you visit Wisconsin, as I certainly don’t have to tell my colleagues from Wisconsin or Iowa or Minnesota, a number of others, Washington, I’ll

leave somebody out and they’ll be discouraged, so I don’t want to

do that. But all over our country, in the rural areas in particular,

we have seen a real disservice from Medicare.

We’ve tried to do a patchwork quilt in order to achieve some reform. We’ve succeeded in some areas, we have not quite succeeded

in others. We welcome the challenge that has been put on the table

by the President and by yourself when it comes to reform.

Mr. Secretary, you are a legend in your own time. You are the

person who shed light on the whole issue of welfare. You led this

country when it comes to welfare reform. You and your State

dragged all of us, in some instances even kicking and screaming,

to reform. Speaking as one member, I am delighted that you are

going to be serving us in this capacity, to help not only continue

the reform in our Nation’s services, Government services through

welfare, but also in the area of Medicare. We sorely need your

guidance, your leadership in this regard as we move forward. So

we welcome your testimony here today.

I’d like to now welcome and recognize my friend and colleague,

the Ranking Member, John Spratt from South Carolina.

Mr. SPRATT. Mr. Secretary, let me echo what the Chairman has

just said and say that your reputation as a constructive reformer,

creative reformer, precedes you here in Washington. We’re happy

to see you in the position you’ve assumed at HHS, and we’re

pleased to have you here this morning. Thank you very much.

Chairman NUSSLE. I would ask unanimous consent that all members be allowed to place into the record at this point an opening

statement.

[The opening statements follow:]

March 6, 2001.

BUSH BUDGET DIVERTS SOCIAL SECURITY AND MEDICARE SURPLUSES

DEAR DEMOCRATIC COLLEAGUE: I commend to you the attached editorial from the

March 5 edition of the Washington Post regarding the budget outline that President

Bush submitted to the Congress last week. While the President’s outline leaves ambiguous many crucial questions about the budget, the editorial points out that the

President’s $2 trillion tax cut clearly will undermine Social Security’s and Medicare’s long-term viability.

The President’s budget violates the bipartisan consensus, reaffirmed only a few

weeks ago by a near unanimous House vote, that all of the Social Security and

Medicare surpluses should be saved to fulfill the existing commitments of those two

programs. The President saves only part of the Social Security surplus. And he argues that the Medicare surplus does not exist, while simultaneously putting this

supposedly nonexistent Medicare surplus into a reserve to be spent on other things.

Social Security and Medicare surpluses by themselves are insufficient to meet existing benefit commitments. Projected insolvency of these two programs means that

they will need resources in addition to the surpluses currently accumulating. The

Bush budget’s claim that the Social Security and Medicare surpluses can be tapped

now to somehow fund privatization and additional benefits for prescription drugs is

double counting, pure and simple.

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The President’s excessive tax cut will force cuts to many priority programs, and

it is not surprising that he has declined to specify what those cuts are. However,

the most worrisome program cuts the tax cut will trigger are in Social Security and

Medicare.

Sincerely,

JOHN M. SPRATT, JR.,

Ranking Democratic Member.

[From the Washington Post, Monday, Mar. 5, 2001]

SPINACH BEFORE DESSERT

The budget outline that President Bush sent Congress last week implies much

deeper future spending cuts than administration rhetoric suggested. Some of the

deepest—and least discussed—would occur in Social Security and Medicare. The

outline accurately describes the perilous long-term financial condition of these programs. That peril could be eased significantly if some of the money the president

wants to use for a tax cut were diverted to them instead—if, to use the Clinton

phrase, the Bush administration would ‘‘save Social Security’’ and Medicare first.

But it has put the tax cut first. The president and his advisers suggest they have

no choice—that they have set aside as much of the budget surplus as they technically can for the next 10 years for the programs for the elderly and still have

money left over. They say there’s a limit to how far the debt can be sensibly reduced, and that, apart from a tax cut, there’s no other way to save the money—

keep it from being spent—until it will be needed. But is that explanation the complete truth?

It’s likely that they could pay down a lot more debt than they newly claim. And

this is not a budget that seeks to rescue Social Security or Medicare. If anything,

the administration’s proposals would worsen the plight of the programs. The budget

outline rightly notes that Social Security’s present path is ‘‘unsustainable;’’ the revenues in prospect won’t remotely cover the cost of the baby boomers’ retirement. But

the administration would reduce those revenues. For younger workers, the president

wants to partly ‘‘privatize’’ Social Security—transform it into a blend of traditional

benefits and personal investment accounts—while preserving the existing system for

older workers and those already retired. The problem is how to finance both systems

at once. The outline suggests anew that the administration would take at least some

of the money for the new accounts from the existing Social Security surplus. But

that surplus is already inadequate to cover prospective costs. How, having deepened

the hole, would they fill it? Significant benefit cuts is the unspoken answer.

Supplementary savings accounts might indeed be a good hedge against eventual

cuts in Social Security benefits. But the right way to begin setting them up is not

to draw down Social Security reserves. The surplus general funds that the president

would use to finance a tax cut mainly for higher-income people could be used instead to finance savings accounts for families across the board. That, too, would be

a tax cut or could be couched as one. It just wouldn’t benefit the same people. That’s

the underlying issue—not a complicated question about the best way to reduce the

debt or restructure Social Security, but a simpler one: in dividing up the expected

surplus over the next 10 years, who wins?

The Medicare pattern is similar. The hospital part of the program, financed by

the Medicare share of the payroll tax, is in surplus. That, too, will disappear when

the boomers retire. The budget outline rightly observes that in the long run Medicare will become a major drain on existing resources. Yet once again the administration proposes dipping into existing reserves rather than augmenting them. It would

spread the payroll tax even thinner—begin using it to cover not just hospital but

other Medicare costs, beginning with a possible new drug benefit. By shifting costs

to the payroll tax, it would free up general revenues, thus making it seem easier

to finance the president’s tax cut. But the Medicare trust fund would go bankrupt

sooner.

The administration again says it has no choice; what else to do with the surplus?

But the world wouldn’t end if it, too, were used for a couple of years to pay down

debt, pending the program’s possible reform. Modernize the Medicare benefit structure, make whatever structural changes seem likely to make the program more efficient and feather the cost, then finance it. That’s when Congress will know how

large a tax cut it can afford.

The president is proposing a large tax cut mainly for the rich that would leave

the government without sufficient resources to cover enormous costs that his own

budget clearly identifies. It’s the wrong policy. His administration should tend to the

programs first; eat its spinach, then dessert. This budget is the other way around.

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Chairman NUSSLE. Mr. Secretary, your entire statement will be

placed in the record as you have presented it. You may feel free

to present as you wish, and we welcome you and we look forward

to your testimony. Mr. Secretary.

STATEMENT OF HON. TOMMY G. THOMPSON, SECRETARY OF

HEALTH AND HUMAN SERVICES

Secretary THOMPSON. Good morning, Mr. Chairman and Ranking

Minority Member Mr. Spratt. Thank you so very much for your

kind words and all members of the committee. Thank you so very

much. It is truly an honor for me to be here.

I was telling the Chairman that I did get sworn in by the President a few minutes ago, and I went to the President and said,

hurry it up so I can get up and testify in front of this committee.

It’s a very short ceremony, made even shorter because of that.

I am honored to be here today, and I am honored to be able to

discuss in front of this wonderful committee the framework of the

President’s fiscal year 2002 budget for the Department of Health

and Human Services.

I accepted the position of Secretary of this Department because

there is no other job in America where you have a greater opportunity to help people, to actually make a difference and to improve

people’s lives. The Department’s goal must be to build a healthier

America by improving the quality of health care, the quality of life

for all Americans and reduce health care costs.

President Bush has outlined an ambitious agenda for the Nation,

and the Department will play a major role. There are major challenges before us, but I am confident that we will be able to work

together in a very bipartisan fashion to successfully meet them. If

we are to succeed, we must be willing to reexamine the way we do

things on a national level. We must no longer be content with the

status quo, because that’s how we’ve always done it.

The HHS budget proposes new and innovative solutions for meeting the challenges that face this Nation. It seeks to enhance the

groundbreaking research being conducted at the National Institutes of Health (NIH), modernize Medicare and expand access to

quality health care, increase support for America’s families and reform the way the Department’s operations are managed.

Our proposals also reflect the President’s commitment to protecting Social Security and other priority programs, while continuing

to pay down the national debt and providing tax relief for all Americans. The budget request for HHS for fiscal year 2002 is $471 billion for all the programs, including $55.5 billion for discretionary

programs, an 8 percent increase for the whole Department and a

5.1 percent increase for discretionary programs.

Let me highlight some of our major proposals. One of the top priorities is the National Institutes of Health. The research that is

conducted and supported by the NIH offers the promise of breakthroughs in preventing and treating disease from cancer to Parkinson’s and Alzheimer’s. And I compliment every person on this committee for supporting the NIH budget in the past.

The potential that lies in these projects is why President Bush’s

plan to double those resources for the NIH by 2003 is so very vital.

The $2.75 billion increase is the largest amount ever for NIH. And

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it will support the highest level of total research grants in the

agency’s history.

Of all the issues confronting this Department, nothing has a

more direct impact on the well-being of our citizens than the quality of health care. Our budget framework proposes to improve the

health of the American people by expanding access to quality

health care and beginning to modernize Medicare, including the addition of a prescription drug benefit.

When Medicare was created in 1965, prescription drugs were not

the integral part of health care that they are today. Drug coverage

was not included as part of the Medicare benefit package. But what

was acceptable 35 years ago is simply unacceptable today. As a

first step toward remedying the situation, the President has put

forward an immediate Helping Hand prescription drug proposal.

This proposal gives immediate financial support to the States so

that they will be able to provide prescription drug coverage to our

neediest citizens.

The President also believes comprehensive Medicare reform

needs to be enacted at the same time as the prescription drug benefit. President Bush wants to devote $153 billion over the next 10

years on Medicare modernization that will help improve the financial health of the program and add a prescription drug benefit for

all Medicare beneficiaries.

Let me add one thing. As the President said last week in his

budget address, every penny of the Medicare trust fund will be

used for the Medicare fund, period. We also are proposing steps to

strengthen the health care safety net for those most in need. Community health centers provide high quality, community based care

to 11 million patients through a network of more than 3,000 centers. The President wants to increase the number of centers by

1,200 over the next 4 years, and he wants to double the number

of patients from 11 million to almost 22 million patients through

this network. The President has proposed to increase those numbers in this budget.

We propose to increase funding for community health centers by

$124 million, which is the first installment in expanding this already successful program. To further increase flexibility and efficiency, we also will work with States to develop ideas that will increase States’ ability to expand Medicaid and the State Child

Health Insurance Program, more commonly referred to as SCHIP,

to cover more of the uninsured.

Within this framework of increased State flexibility, the Administration also plans to work with States to stem the growth of Medicaid costs and be able to ensure the fiscally prudent management

of the Medicaid and S–CHIP programs. A former Secretary once

said: The family is the original department of health, education

and welfare. The name of this Department may have changed, the

truth of the statement has not. America’s families are its strength,

and this Department is committed to doing everything in its power

to help better the lives of America’s families and their children.

We are proposing a number of new initiatives to help to improve

the quality of life of our Nation’s families, including a new after

school certificate program. We must be willing to invest in programs that support working families in order to move people from

6

dependency to success in the work force. And one of the most important things that we in Government can do is help working families to assist them in obtaining child care. Last year, the Congress

voted to provide a substantial increase in child care funding, and

this year, we’re asking you to take another step. The President has

proposed to dedicate $400 million for after school certificates to

help low income working parents to pay for after school care for

their children. We expect these after school activities to have a

strong educational component, helping children to achieve success

in school.

The budget also includes items on promoting stable families and

responsible fatherhood, maternity group homes, which is a new

program, a compassionate capital fund and a proposal to establish

a center for faith-based and community initiatives within the Department. We also will increase funding for substance abuse programs by $100 million.

In addition to funding these priorities, we’re making changes at

HHS. We must never stop asking ourselves at that Department,

how can we do things better. One of the top priorities of this administration and one of mine is improving the management of the

Health Care Financing Administration (HCFA). The demands in

this organization have grown dramatically in the last few years.

We must ensure that it has the necessary resources to successfully

administer the Medicare, the Medicaid and the State Children’s

Health Insurance Program (SCHIP) on which so many people depend.

At the same time, we recognize that patients, providers and

States have legitimate complaints about the scope and the complexity of the regulations and the paperwork that govern these programs. During my confirmation hearings, I said that HCFA needs

to undergo a thorough examination of its missions, its competing

demands and its resources. We’re currently in that process of undertaking just that kind of comprehensive review that will make

some innovative changes. We will consider any and all options for

improving that agency and making it more responsive and an effective organization.

We must also look at the Department as a whole, and HHS will

continue to play a lead role in the Governmentwide effort to

streamline, simplify and provide electronic options for the grants

management processes.

Mr. Chairman, the budget I bring before you today contains a

number of different proposals. But one common thread binds them

all together. That is a desire to improve the lives of our American

citizens. All of our proposals, from enhancing scientific research to

modernizing Medicare, are put forward with this one simple goal

in mind. I know all this is a goal that is shared by all of you on

a bipartisan basis.

I am prepared to work with each of you to ensure that we develop a budget for this Department that effectively serves the national interests. While this is not an exhaustive list of the President’s Blueprint, I have outlined some of the President’s top priorities for the Department of Health and Human Services.

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I would now be happy to answer and entertain any questions

that you may have. And I thank you for giving me this opportunity

to be here.

[The prepared statement of Secretary Thompson follows:]

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

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Good Morning, Chairman Nussle, Congressman Spratt, and Members of the committee. I am honored to appear before you today to discuss the framework of the

President’s FY 2002 budget for the Department of Health and Human Services.

As I have noted on other occasions, I accepted the position of Secretary of this

Department because I believe that there is no other job in America where you have

a greater opportunity to help people to actually make a difference in people’s lives

and improve the quality of life they lead. President Bush has outlined an ambitious

agenda for the nation, and I take great pride in the fact that this Department will

play a major role in carrying out his plans. I would be less than candid if I did not

acknowledge the vast scope of the challenges that lie ahead of us, but I am confident

that we will be able to work together in a bipartisan fashion to successfully meet

them.

If we are to succeed in improving the lives of the people of this great nation, we

must be willing to take another look at the way we do things on the national level.

We must no longer be content to do things a certain way because ‘‘that’s how we’ve

always done it′′; but must instead be willing to reform our business practices and

seek innovative ways to manage our programs. And while we know that the Federal

Government has an important role to play, we must also recognize that we must

look to others to State and local governments, to community faith-based organizations, to academic and religious institutions for new and creative approaches to solving public problems. The President and I share this view, and I am proud to say

that it is reflected in the budget framework he has put forward.

The framework I present to you today keeps the promises the President has made

and proposes new and innovative solutions for meeting the challenges that face the

nation. It seeks to enhance the groundbreaking research being conducted at the National Institutes of Health; modernize Medicare and expand access to quality

healthcare; increase support for America’s families; and reform the way the Department’s operations are managed. Our proposals also reflect the President’s commitment to a balanced fiscal framework that puts discretionary spending on a more

reasonable and sustainable growth path, protects Social Security and other priority

programs, continues to pay down the national debt, and provides tax relief for all

Americans.

Mr. Chairman, the total HHS request for FY 2002 is $ 471 billion (budget authority) and $468 billion (budget outlays). The discretionary component totals $ 55.5 billion (budget authority). Let me now highlight some of our major proposals.

ENHANCING RESEARCH AT THE NATIONAL INSTITUTES OF HEALTH

The National Institutes of Health (NIH) is the largest and most distinguished biomedical research organization in the world. The research that is conducted and supported by the NIH, from the most basic research on biological systems to the effort

to map the human genome, offers the promise of breakthroughs in preventing and

treating any number of diseases. A top priority for this Department is ensuring that

the NIH continues to have the resources necessary to help turn these promises into

a reality.

To this end, the framework I present to you today includes a Presidential Initiative to double NIH’s FY 1998 funding level by FY 2003. For FY 2002, we are proposing an increase of +$2.75 billion, which will be the largest increase ever for NIH.

This funding level will enable NIH to support the highest level of total research

grants in the agency’s history.

With any large increase in resources, there also comes the increased challenge of

making sure that those resources are managed properly. I take this responsibility

very seriously, and NIH will be working to develop strategies to ensure that we are

managing taxpayer dollars in the most efficient and effective way.

MODERNIZING MEDICARE AND EXPANDING ACCESS TO QUALITY HEALTHCARE

Of all the issues confronting this Department, nothing has a more direct effect

on the well-being of our citizens than the quality of health care. Our budget framework proposes to improve the health of the American people by beginning the procVerDate 11-MAY-2000 15:22 May 29, 2001 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6621 H:\DOCS\HEARINGS\107-5\HBU066.000 HBUDGET1 PsN: HBUDGET1
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ess of modernizing Medicare, including the addition of a prescription drug benefit;

and by expanding access to quality health care.

IMMEDIATE HELPING HAND

For 35 years the Medicare program has been at the center of our society’s commitment to ensuring that all of our seniors enjoy a healthy and secure retirement. But

the Medicare program is more than just a social contract between the government

and the elderly, it is a commitment that our society has made to our seniors, as

well as to the disabled. Honoring this commitment means not only making sure that

the program is financially prepared for the wave of new beneficiaries that the aging

of the babyboom generation will bring, but ensuring that current beneficiaries have

access to the highest quality care.

When Medicare was created in 1965, prescription drugs were not the integral part

of health care that they are today and coverage for them was not included as part

of the Medicare benefit package. But what was acceptable 35 years ago is simply

unacceptable today. As a first step toward remedying this situation, the President

has put forward an Immediate Helping Hand (IHH) prescription drug proposal. This

proposal gives immediate financial support to States so that they can provide prescription drug coverage to beneficiaries with limited incomes or high drug expenses.

The IHH proposal would complement and build on plans that are currently available in almost half the states, and under consideration in most others. The IHH

would be fully funded by the Federal Government and would provide States with

the flexibility to choose how to establish coverage or enhance existing plans. Individuals with incomes up to $11,600 and married couples with incomes up to $15,700

who are not eligible for Medicaid or a comprehensive private retiree benefit would

pay no premium and no more than a nominal charge for prescriptions. Individuals

with incomes up to $15,000 and married couples with incomes of up to $20,300

would receive subsidies for at least half the cost of the premium for high-quality

drug coverage. The IHH plan also includes a catastrophic component that would

cover any Medicare beneficiaries with very high out-of-pocket drug costs. The President’s proposal would provide immediate coverage for up to 9.5 million beneficiaries

while we work to enact broader Medicare reform.

The Immediate Helping Hand is a temporary plan to help our Nation’s seniors

who are most in need of assistance with their prescription drug costs. The benefit

will sunset in 4 years or as soon as a comprehensive Medicare reform and prescription drug benefit is implemented. However, this plan is critical because it provides

assistance to millions of Americans this year. The President is committed to providing a prescription drug benefit to all Medicare beneficiaries and wants to work with

Congress in a bipartisan fashion to see this happen.

The President believes comprehensive Medicare reform needs to be enacted at the

same time as a prescription drug benefit. As I have already mentioned, the Medicare program has not kept pace with modern medicine. Today, Medicare covers only

53 percent of the average senior’s annual medical expenses and the program’s benefits package is lacking. In addition, Medicare is facing a looming fiscal crisis. A full

assessment of the health of both the Part A and Part B Trust Funds reveals that

spending exceeds the total of tax receipts and premiums dedicated to Medicare and

that gap is expected to widen dramatically. Even without the financing problem,

Medicare modernization would be necessary to ensure beneficiaries get high quality

health care. President Bush wants to devote $153 billion over the next 10 years on

urgently needed Medicare modernizations that will help improve the financial

health of the program and the addition of a prescription drug benefit for all Medicare beneficiaries.

EXPANDING COMMUNITY HEALTH CENTERS

While modernizing Medicare is the cornerstone of our healthcare agenda, we are

also proposing steps to strengthen the health care safety net for those most in need.

Community Health Centers provide high quality, community based care to approximately 11 million patients, 4.4 million of whom are uninsured, through a network

of over 3,000 centers in rural and urban areas. The President has proposed to increase the number of health center sites by +1,200 by FY 2006. As a first installment of this multiyear initiative, we propose to increase funding for Community

Health Centers by +$124 million. We will also be looking at ways to reform the National Health Service Corps so as to better target placement of providers in areas

experiencing the greatest shortages.

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INCREASING ACCESS TO DRUG TREATMENT

The problems caused by substance abuse affect not only the physical and mental

condition of the individual, but the well-being of society as a whole. Nationwide, approximately 2.9 million people with serious substance abuse problems are not receiving the treatment they desperately need. To help close this treatment gap, we

propose to increase funding for substance abuse treatment by +$100 million. These

funds will be used to increase the Substance Abuse Block Grant, the primary vehicle

for funding State substance abuse efforts, and to increase the number of Targeted

Capacity Expansion grants, which seek to address the treatment gap by supporting

strategic and rapid responses to emerging areas of need; including grants to organizations that provide residential treatment to teenagers.

INCREASING SUPPORT FOR AMERICA’S FAMILIES

William Bennett once said that ‘‘the family is the original Department of Health,

Education, and Welfare’’, and while the name of this Department may have

changed, the truth of this statement has not. America’s families are its strength,

and this Department is committed to doing everything in its power to help better

the lives of America’s families and children. We are proposing a number of new initiatives to help improve the quality of life of our nations’ families; as well as to increase support for the charitable organizations that can make such a difference in

people’s lives.

AFTER SCHOOL CERTIFICATES

One of the lessons I learned during my years as Governor of Wisconsin was that

for people to move from dependency to success in the workforce, you had to be willing to invest in programs that support working families. One of the most important

things that we as a government can do to help working families is to assist them

in obtaining high-quality child care. Last year the Congress voted to provide a substantial increase in child care funding, and this year we are asking you to take another step to help working parents, and their children, be successful. The President

has proposed to specifically dedicate $400 million for After School Certificates within the Child Care and Development Block Grant. This would help low income working parents to pay for the costs of after school care for their children. We expect

these after school activities to also have a strong educational component, helping

children to achieve success in school.

PROMOTING SAFE AND STABLE FAMILIES

Our budget framework takes a number of steps to help protect our most vulnerable and at-risk children and to help them live safe and productive lives. First, we

propose a +$200 million increase for the Promoting Safe and Stable Families program, which supports State and Tribal child welfare agencies in carrying out family

preservation and support services. These additional funds will be used to help keep

children with their biological families, or if it is not possible for them to safely remain with them, to place them with adoptive families. We will also provide an additional $2 million to expand collaborative Federal/State child welfare monitoring efforts. Second, we propose to create a new $67 million initiative within the Promoting Safe and Stable Families program to assist children of prisoners. This initiative

will provide grants through States to assist faith and community-based groups in

providing a range of activities to mentor children of prisoners and probationers, including family-rebuilding programs, that serve low-income children of prisoners and

probationers. Finally, we propose an additional +$60 million for the Independent

Living program. These funds would be used to provide vouchers, worth up to $5,000,

to youths who are aging out of foster care so that they can obtain the education and

training they need to lead productive lives. Funds could be used to pay for either

college tuition or vocational training.

MATERNITY GROUP HOMES

One of the toughest problems we face in trying to end the cycle of dependency

is children having children. These teenage mothers have often suffered abuse or neglect themselves and may not have a safe and supportive family environment in

which to raise their babies. To begin removing the obstacles to success that these

mothers and their children face, we are proposing $33 million for a new Maternity

Group Homes program. This program will support State efforts to work with organizations that operate community-based, adult-supervised group homes for teenage

mothers and their children as well as to provide certificates to young mothers to

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ment for young mothers while offering the support necessary to help them and their

children to improve their lives.

PROMOTING RESPONSIBLE FATHERHOOD

Helping young mothers is an important part of our program to assist America’s

families, but it is also important that we recognize the critical role that fathers play

in the lives of their families.

Our budget framework includes $64 million to begin an initiative to promote responsible fatherhood by providing competitive grants to faith-based and communitybased organizations that work to strengthen the role that fathers play in their families’ lives. These funds will be used to support programs that help low-income and

unemployed fathers and their families to avoid dependence on welfare, and to fund

programs that promote successful parenting and marriage. Of these funds, $4 million will be used for special projects of national significance.

COMPASSION AND CHARITABLE GIVING

The President has been a leader in recognizing the important role that charitable

organizations play in delivering services to the public, and we are proposing a number of steps to increase Federal support for these groups. First, we are requesting

$67 million to establish a Compassion Capital Fund. Through public and private

partnerships, these resources will be used to provide start-up capital and operating

funds to qualified charitable organizations so that they can expand or emulate

model social services programs. To complement this Compassion Capital Fund, we

also propose to create a $22 million fund to support research on ‘‘best practices’’

among charitable organizations. Our budget framework also includes $3 million to

establish a Center for Faith-Based and Community Initiatives in the Department

in accordance with the President’s recent Executive Order. Finally, we have included a proposal to encourage states to provide tax credits for contributions to designated charities that work to address poverty. Under this proposal, States would

be allowed to use Federal funds provided through the Temporary Assistance for

Needy Families program to partially offset revenue losses that resulted from the tax

credits.

REFORMING THE MANAGEMENT OF THE DEPARTMENT’S OPERATIONS

For any organization to succeed, it must be willing to change. We must never stop

asking ourselves how can we be doing things better. But we must also recognize

that we do a disservice to all that rely on this Department if we do not provide the

resources necessary to effectively administer our programs. In preparing our budget

framework, we began the process of evaluating the programs and business practices

of this Department and identifying the areas where we can do a better job of managing taxpayer resources, as well as those areas where new investments are required if we are to successfully administer our operations.

HEALTH CARE FINANCING ADMINISTRATION REFORM

One of the top priorities of this administration is improving the management of

the Health Care Financing Administration (HCFA). The demands on this organization have grown dramatically in the last few years, and we must make sure that

they have the necessary resources to successfully administer the Medicare, Medicaid, and State Children’s Health Insurance programs on which so many people depend. At the same time, we must recognize that patients, providers, and States have

legitimate complaints about the scope and complexity of the regulations and paperwork that govern these programs. During my confirmation hearings, I said that

HCFA needed to undergo a thorough examination of its missions, its competing demands, and its resources. We are currently in the process of undertaking just this

kind of comprehensive review, and we will consider any and all options for improving the agency and making it a more responsive and effective organization.

INVESTING IN DEPARTMENTAL INFRASTRUCTURE

The only way that this Department can effectively serve its many clients is if we

commit to making the necessary investments in our management and infrastructure. One of the challenges in a large, decentralized Department such as HHS is

finding ways to bring together diverse activities and to develop coordinated systems

for managing our programs. Our budget framework provides the resources necessary

to continue modernizing our facilities, and proposes steps to begin the process of

streamlining our financial management and information technology systems so that

11

we can enhance coordination across the Department and eliminate unnecessary and

duplicate systems.

It is critical that we invest in the modernization of the laboratories and office facilities in which many of our most important activities occur. With this goal in

mind, we are requesting $150 million to continue a major revitalization of labs and

scientific facilities at the Centers for Disease Control and Prevention. We have also

included funding for the Food and Drug Administration to finish construction of the

Los Angeles laboratory and to continue development of the new headquarters facility in White Oak, Maryland. For financial management, we propose to invest an additional $50 million to move

toward a unified financial accounting system. The Office of Inspector General has

cited major problems with the Department’s current system structure, which involves five separate accounting systems operated by multiple agencies. We plan to

replace these antiquated systems with one or two unified financial management systems that will increase standardization, reduce security risks, allow HHS to produce

timely and reliable financial information needed for management decisionmaking,

and provide accountability to our external customers. In the information technology arena, we are proposing $ 30 million for a new Information Technology Security and Innovation fund. Currently, the Department’s information technology systems are highly decentralized, heterogeneous, and vulnerable to exploitation. Funds would be used to implement an Enterprise Infrastructure Management approach across the Department that would minimize our

vulnerabilities and maximize our cost savings and ability to share information. With

this approach, we will be able to reduce duplication of equipment and services and

be better able to secure our systems against viruses and network intrusion.

As the largest grant-making agency in the Federal Government, this Department

will also continue to play a lead role in the governmentwide effort to streamline,

simplify, and provide electronic options for the grants management processes. As

part of the Federal Grant Streamlining Program, we will work with our colleagues

across the government to identify unnecessary redundancies and duplication in the

more than 600 Federal grant programs, and to implement electronic options for all

grant recipients who would prefer to apply for, receive, monitor, and close out their

Federal grant electronically.

REDIRECTING RESOURCES

Being a wise steward of taxpayer resources means not only recognizing where you

need to invest, but also where resources can be redeployed to more effective uses.

In preparing our budget framework, we carefully reviewed each agency, identified

areas where funding could be redirected, and made targeted reductions in selected

programs. Funds for one-time projects and unrequested activities were also eliminated, and the monies redirected to higher priority programs. These decisions,

which were made in accordance with the President’s overall fiscal goals, will help

to moderate the growth of the Department’s budget and put it on a more sustainable path.

Last year, Congress took an important step to protect the integrity of the Medicaid program by passing legislation to address the ‘‘upper payment limit’’ loophole,

which allowed states to draw down billions of dollars in Federal matching payments

for hospitals and nursing homes without any assurance that these payments were

used for their intended purposes. But this legislation only partially addressed the

problem, because it created a higher upper payment limit for non-State government

operated hospitals. Our budget proposes to go even further in closing the loophole,

by prohibiting new hospital loophole plans that were deemed approved after December 31, 2000 from receiving the higher upper payment limit proposed in the Department’s final rule implementing the upper payment limit legislation.

In addition to taking steps to further address the Medicaid ‘‘upper payment limit’’

loophole, the administration plans to work with States to develop ideas that will improve States’ ability to provide quality health care through their Medicaid and State

Child Health Insurance Programs. Within this framework of increased State flexibility, the administration also plans to work with States to stem the growth of Medicaid costs and ensure the fiscally prudent management of the Medicaid and SCHIP

programs.

WORKING TOGETHER TO BUILD A BETTER NATION

Mr. Chairman, the budget I bring before you today contains a number of different

proposals, but one common thread binds them all togther a desire to improve the

lives of the American people. All of our proposals, from enhancing scientific research

to modernizing Medicare, from expanding access to care to increasing support for

12

the nation’s families, are put forward with this one simple goal in mind, and I know

this is a goal we all share.

As you begin to consider our proposals, let me leave you with one final thought.

Senator Everett Dirksen said of the legislative process: ‘‘You start from the broad

premise that all of us have a common duty to the country to perform. Legislation

is always the art of the possible. You could, of course, follow a course of solid opposition, of stalemate, but that is not of the interest of the country.’’ Starting from this

premise, I am prepared to work with each of you to ensure that we develop a budget

for this Department that effectively serves the national interest. I would be happy

to address any questions you may have.

Chairman NUSSLE. Mr. Secretary, thank you so much for your

testimony.

I would like to dive right into a topic which has been talked

about quite a bit on Capitol Hill over the last week, and it involves

Medicare and its inclusion in the President’s contingency fund as

presented in his budget. There has been a very high degree of

angst concerning that, and I want to get your take on that. You

said in your testimony, and I’d like you to amplify that, my understanding from the President’s budget and from your testimony

today is that Medicare is for Medicare is for Medicare is for Medicare is for Medicare. Is there anything that you have to change

that understanding?

Secretary THOMPSON. I would just add one more, it’s for Medicare.

Chairman NUSSLE. It’s for Medicare. [Laughter.]

So regardless of how it’s called, where it’s put, lock boxes, contingency funds, here, there, in a mattress, in a mason jar in the back

of my back yard, which I’d certainly volunteer for if somebody

would like to put it there, Medicare is for Medicare.

Secretary THOMPSON. That is correct.

Chairman NUSSLE. And it’s your intent that based on the President’s budget that there be an immediate need for about $153 billion of that for Medicare modernization and an Immediate Helping

Hand.

Secretary THOMPSON. That is correct.

Chairman NUSSLE. There is also some who have suggested that

if Medicare modernization can move even more quickly than at

first it was believed to be able to move, in a much more expedited

fashion that in fact more of that Medicare trust fund surplus could

be used for that type of reform. Is that correct?

Secretary THOMPSON. That is absolutely correct. The President is

adamant about trying to get through this session, and especially

this year, a Medicare reform package, one with prescription drugs.

What the President and what I’m very concerned about is that the

prescription drug proposal is the one that everybody wants to pass.

And it’s more contentious and more comprehensive and more difficult to pass Medicare reform.

But the President and I personally and strongly urge Congress

to work with us on a bipartisan basis to streamline, modernize and

make Medicare more efficient, include prescription drugs therein,

and give our senior citizens more options. We will work with anybody in this committee or anybody in the Congress to accomplish

that goal.

Chairman NUSSLE. If we prepare a budget here on Capitol Hill

which segregates the entire HI trust fund surplus into a different

sort of mechanism than the President’s contingency fund as we

13

write that budget, would you have any objection to that way of preparing the budget, so that we end all confusion about where Medicare is and should be?

Secretary THOMPSON. Mr. Chairman, the Congress certainly can

do that. The administration does not believe that is necessary. But

if Congress feels that that is the way to go, we will strongly support you.

Chairman NUSSLE. The administration has not been here long

enough to endure the concerns that have been expressed over the

last probably six to 8 years involving Medicare and its use. I think

it’s a well established principle now, particularly in the House of

Representatives, that we put that in a lock box and lock it away

not only financially, but lock it away politically so that it can’t be

used for anything else, as well as cannot be used rhetorically

against any one particular person or party. I think it would be wise

if we construct the budget that way.

I would just like to end my questioning with a question with regard to Medicare reform in general. And I’ve never been this adamant about a Medicare reform proposal that I’m about to be right

now. I’ve been willing to consider alternatives as a band-aid or as

a tourniquet to the situation that we find ourselves in with Medicare as we move forward. But I must tell you, Mr. Secretary, that

if I have to go home one more time and present one more Medicare

bill that allows rural areas in this country to continue to take a

back seat in reimbursement for its Medicare providers, you can

count me out of the reform.

I’m willing to step up and do whatever we need to do to modernize this program. I think that all of us on this committee are willing to engage in that. We’ll even engage in that, I hope, in a bipartisan way. But I must tell you, we cannot, as far as I’m concerned,

this is just one member speaking, proceed with a Medicare program that allows the kind of discrepancy between reimbursements

that we have seen over the last years. I would just ask if you share

that concern. You may not be able to make it as emphatic as I can.

But do you share that concern? Is this one of the cornerstones

or goals that you hope to achieve to try and take out that reimbursement discrepancy that we’ve seen over the last 10, 20 years?

Secretary THOMPSON. Mr. Chairman, there’s no question there’s

an inequitable situation as far as reimbursement and payment in

the Medicare funds. I come from a State like yours that has had

those abuses and has had that kind of disparity in payments. But

you know as well as I do that formula fights are probably the most

contentious of any kind of a fight in Congress. I’m hopeful to work

with you on a bipartisan basis in which we will not take from some

States and give to other States, because I don’t think it’s going to

pass.

So what we have to do is find ways to infuse some dollars to

make more equitable payments, so that we treat more uniformly all

the States and give everybody the opportunity to be treated equitably. For that I am very much in favor and am going to work with

you and with anybody in this Department to accomplish that. I

would take your admonition very seriously and hope that we can

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cient Medicare system that needs to be streamlined and more equitable. I’m confident we can do that if we’re willing.

Chairman NUSSLE. We welcome your partnership in that regard

and appreciate your testimony. Now I’d like to recognize Mr.

Spratt.

Mr. SPRATT. Thank you very much, and thank you for your testimony.

I think the confusion starts with the New Beginnings budget

that was sent up last week. In particular, if you have one available

to you, it’s Table S1, page 185. That particular table starts by citing the baseline surplus, $5,644,000,000. It then backs out the Social Security surplus, which we’ve agreed to do for lock box purposes. But there’s a glaring omission. Even though the Republican

leadership brought to the Floor a bill that had bipartisan support

to lock box Medicare, and also back it out, set it aside, this table

omits that step.

It then goes on, deducts the tax relief estimate, $1,620,000,000,

and deducts several initiatives, $153 billion for the Helping Hand

and Medicare modernization, additional spending of $20 billion

debt service, and then contingencies, $842 billion, which the President cited in his speech and other witnesses have cited as the cushion fund. The assurance that if these projections don’t pan out or

spending is higher than projected, the tax cut will end up taking

more revenues away, we’ve still got $842 billion there as a margin

of error.

But in truth, that $842 billion contains the Medicare trust fund,

the HI trust fund surplus. So that’s the reason we’re saying, based

on Table S1, that you’re counting the Medicare trust fund surplus

in a general contingency account. It doesn’t say contingencies for

Medicare. It says contingencies, general contingencies. And witnesses, beginning with the President, have said this is available,

this is our assurance that if we backslide and these numbers go

wrong, we’ve got this much cushion in there.

Do you think this chart is in error?

Secretary THOMPSON. I don’t think the chart is in error. But I

think the conclusion or interpretation may be. I certainly would not

say that you’re in error, Congressman. What I’d say is that I think

there’s some confusion. Let me try and explain.

As we all know, Part A of the Medicare fund is going to have a

surplus of about $525 billion over the course of the next 10 years.

Part B is going to have a deficit of $1,200,000,000. And the President feels that we should streamline all of Medicare, Part A and

Part B. It’s impossible just to separate Part A and say there’s a

surplus when Part B, which is also part of Medicare, has a deficit

of $1,200,000,000.

But saying all that, the President also has made it crystal clear

that the $525 billion is for Medicare. In Congress, there’s a law on

the book that says that every person is entitled to Medicare, and

the only way it could be changed is if Congress would change it.

And I don’t think this Congress is about to change that.

So that money, whether you call it a contingency or for Medicare,

it is for Medicare, and that money will be spent for modernizing

and improving Medicare for this country.

15

Mr. SPRATT. Well, therefore, the general contingency fund has to be reduced by $373 billion, $153 billion you’re dedicating to Medicare for Helping Hand and Medicare modernization. You back that

out of the $526 billion you get $373 billion. But that money is not

for general contingencies. It’s just for Medicare, if I hear you right.

Secretary THOMPSON. If the $153 billion is not enough, that

money can be used and should be used for improving and streamlining and reorganizing Medicare.

Mr. SPRATT. But for no other purpose?

Secretary THOMPSON. For no other purpose.

Mr. SPRATT. Would you have any objection then if we passed the

lock box legislation as we proposed?

Secretary THOMPSON. I am not at liberty to say that, Congressman. That is something that has been decided by OMB to put it

in this category. But this money is for Medicare. And the only people that could actually change that are the people in this room and

the people in the Congress. I don’t think that this Congress is

about to do that.

Mr. SPRATT. Well, I think the best thing for this Congress to do

is go ahead and pass the legislation, enact the legislation we

passed in the House.

One other source of confusion is that you began your testimony

and this blue book states that despite statements, despite impressions, Medicare is not in surplus. The HI trust fund is maybe in

surplus, but Medicare is in deficit.

I have two problems with that. One is, a deficit implies that the

overall amount of money that’s being spent in excess of what’s

being collected from payroll taxes and premiums is a mistake. I

mean, we don’t intend deficits. In truth, what you’re calling a deficit now is a policy designed subsidy, present as a feature of the

Medicare program from its very beginning.

So the language of this report, your language earlier, converts a

subsidy that was intended, part of our policy, something that comes

out of the general fund, we’re committing this much out of the

Treasury for Part B of Medicare. You take that and use a really

pejorative, at least around here, the word deficit has negative connotations. It suggests something that was done wrong, something

done by mistake, something we need to correct and reverse, as opposed to the fact that this is really a subsidy we intended all along.

Secretary THOMPSON. Congressman Spratt, I do not in any way

try to impugn or make pejorative remarks whatsoever. Let me try

and rephrase it.

Part B, over the next 10 years, is going to have more expenditures. If you call it subsidy or you call it deficit, there’s going to

be more outgo than income, about $1,200,000,000. And you put

Part B and you put Part A together, there is less money coming

into Medicare than what’s going out. You can call it—if you want

to call it subsidy.

Mr. SPRATT. You called it a subsidy. We intended it, we designed

it. We invented it, it’s a feature of the program. It’s not a deficit,

because that implies that—— Secretary THOMPSON. But the President and the administration

and I do not believe, then, that you can truly say that you only can

look at Part A and say there’s a surplus. We think you have to look

16

at both Part A and Part B and we think, and I don’t want to get

into a position of saying you said, I said. I’m here in a very humble

way to tell you that we need to fix Medicare.

And I want to work with you, Congressman, to do that. I want

to do it on a bipartisan basis. I want to fix both Part A and Part

B, and I’ve got ideas and I know you have some ideas. I would like

to be able to sit down with you in your office, discuss them and

come up with a solution so we can both walk away from here a

year from now and say, you know, we passed a Medicare bill on

a bipartisan basis, it’s going to be secure for our Senior citizens,

there’s a prescription drug, there’s some options in there. And it’s

financially solvent for a long time in the future.

That’s my goal, that’s the President’s goal, and that’s what we

want to do, Congressman.

Mr. SPRATT. I welcome the opportunity. But the language matters. If you say something is a deficit when it’s really a subsidy,

it matters to the ultimate outcome, how you analyze it.

Secretary THOMPSON. All I can say is I come from Wisconsin and

I apologize if I’m not up to speed on your jargon yet, but I will try

and learn as fast as I can, sir.

Mr. SPRATT. You were just sworn in a few minutes ago. I doubt

that you wrote this. I’m not necessarily directing it at you, I’m directing it at whoever wrote this policy. Because it takes the whole

matter, in my opinion, and stands it on its head.

Let me mention one other problem, the light’s on and I’ll come

back later. In 1993, the Medicare HI trust fund was almost scraping bottom.

Secretary THOMPSON. Right.

Mr. SPRATT. Projections showed that by 1999, it would be in a

deficit position, a true deficit position, an unintended one. And we

added various things to it. We also made reductions in the rate of

increase of Medicare payments.

As a consequence, we’ve been able to build up this surplus in the

Medicare HI trust fund. And we’ve been able to extend the solvent

life of that particular trust fund for financing inpatient care until

past 2020, a substantial improvement over 1999. And we’re pretty

proud of that.

But one of the ways we’ve done it is by saying this money is dedicated to that purpose, and that’s the purpose the trust fund served.

When I read the statement here, in New Beginnings, it suggests

to me that trust funds don’t serve a purpose. I think they do serve

a purpose. There’s a certain fictional aspect to them. But I think

by dedicating, earmarking and preserving funds that are intended

for a certain purpose, they do fulfill a function.

But if you take what we have accumulated and will accumulate,

the $526 billion that we will accumulate additionally for the Medicare HI trust fund over the next 10 years, and use some of that

to pay for Medicare prescription drugs, which we all know is going

to be very expensive, then you’ll only shorten the life of the HI

trust fund. When we look at your layout here, we get the distinct

impression that what you propose to do is use that trust fund, that

surplus, to pay for additional coverage. We propose to use the general surplus to pay for additional coverage, rather than dipping

into the Medicare trust fund, shortening its solvent life.

17

Wouldn’t you agree that that’s the problem, if you’re going to pay

for it out of the Medicare HI trust fund, then you’ve just shortened

the solvent life of the HI trust fund?

Secretary THOMPSON. If you don’t make any other changes,

you’re absolutely correct. But if you make the changes and streamline and improve it, there’s going to be some efficiencies built in,

and that’s what I’m hoping for, and that’s what the President’s

hoping for, Mr. Spratt.

Mr. SPRATT. Well, according to your statement in Blueprint for

New Beginnings, we’ve got a $645 billion deficit in this program. Do you think that you can squeeze $645 billion out with reforms?

Secretary THOMPSON. I can’t tell you that we can. I can tell you

that we’re going to try. And I can tell you that I need your help

in order to make that possible.

Mr. SPRATT. Well, I’m saying we need your help too by recogniz- ing that if this is to be done, I doubt you can effect $645 billion

in cost reductions over 10 years. That is another strong signal that

you’ve got to set aside some of this general fund surplus to be used

for Medicare reform, prescription drugs and other things we both

say we’re committed to.

Secretary THOMPSON. Thank you.

Mr. SPRATT. Thank you very much.

Chairman NUSSLE. Just for members’ information, we will be

continuing the hearing. There’s a vote on, please vote and come

back and we’ll keep the hearing going.

Mr. Bass.

Mr. BASS. Thank you, Mr. Chairman.

Congratulations, Secretary Thompson.

Secretary THOMPSON. Thank you, Congressman.

Mr. BASS. It’s a real pleasure to see you there, and I’ll never forget listening to you talk about welfare reform. It was an inspiration

in a time when we needed it. It made a big difference in this country.

I also recognize that this is your first hour, if not your first day,

first hour, and I don’t really think it’s proper to go into great detail

at this point, except to talk about a couple of things. First of all,

I want to associate myself as strongly as I can with the remarks

of our Chairman, Mr. Nussle, about the AAPCC formula and how

that impacts the disparity in Medicare coverage for rural versus

urban and suburban areas in this country. I understand, to use a

colloquial term, that this is a food fight. However, it is a problem

that afflicts rural districts and rural areas all over this country.

Also, I want to ask you a couple of quick questions about the

President’s Medicare reform proposal. The Helping Hand is the

President’s prescription drug proposal, is that right?

Secretary THOMPSON. That is correct.

Mr. BASS. And it is different from his campaign proposal, which

was essentially a block grant, is that right? Or is this basically an

extension of that?

Secretary THOMPSON. It’s basically an extension of that, Congressman, it’s more refined than it was in the campaign. But it’s

basically a block grant.

Mr. BASS. Does the budget submission include funding for both

Medicare reform and the Medicare prescription proposal?

18

Secretary THOMPSON. Yes, it does, Congressman. It puts aside

$156 billion—$3 billion this year and $153 billion over the next 10

years—of which $46 billion is set aside for Helping Hand.

Mr. BASS. OK, good.

Mr. Chairman, those are the only questions I have. I’ll yield back

to you.

Thank you, Mr. Secretary.

Secretary THOMPSON. Thank you very much, Congressman.

Chairman NUSSLE. Thank you.

Ms. McCarthy.

Ms. MCCARTHY. Thank you, Mr. Chairman. I wasn’t expecting to

be up so soon.

Congratulations on being here.

Secretary THOMPSON. Thank you.

Ms. MCCARTHY. I personally think that you have probably the

hardest job among any of your colleagues. I’m a nurse, I spent 32

years as a nurse. Since I’ve been in Congress, trying to work with

HCFA and what’s been going on, God bless you. That’s all I can

say.

Secretary THOMPSON. Thank you.

Ms. MCCARTHY. One of the things that I want to bring up, obviously we all care about Social Security and Medicare. You know

with the BBI fix that we had to all of our State hospitals throughout the country, the rural hospitals, certainly my hospitals back on

Long Island, in New York State, we tried to help them last year

by giving them more money to cover their Medicare reimbursements, to keep up, actually just about the infrastructure of their

hospitals.

So with $645 billion that you’re talking about, how are we going

to keep up the rate of payments back to those hospitals to keep

them out of the red, because they didn’t have the reimbursements

in the past, when we did the balanced budget amendment? We

killed them. I mean, the rural hospitals, certainly hospitals we saw

closing, our home health care agencies with the red tape that they

have. This is a big problem.

I know in my office, I mean, everyone comes in to say they still

need help. My concern is certainly taking care of my senior citizens

as they get older. We have baby boomers in 2008, which is really

coming up, we probably know, anyone that’s over 50, each day

seems to only have 10 hours a day and not 24 hours a day, because

that’s how fast time goes.

But we do have some problems. And with the budgets that we’re

seeing, I really do have a concern that there’s not going to be the

finances there to do what we’re supposed to do. And that is my concern.

How do you see, with the budget that’s been proposed, and all

the other things that, I actually did read the report, and everything

else. What’s going to be cut? I mean, there’s got to be cuts. There’s

got to be big cuts somewhere, just to cover the budget.

Secretary THOMPSON. There are going to be some reductions,

there’s no question about that. We’re still working on that, and I’m

sure I will be called back in front of this committee to testify when

the final budget document is up here. I’m not able to discuss the

19

reductions as of yet, because we’re still arguing over some of them,

or discussing some of them, and making decisions.

I would like to point out that I need your help in regards to the

nursing shortage that is looming out there, and I would appreciate

any comments you might have. Because this is something that is

very important to this Department, to try and find a way to get

more people enrolled into nursing and take that as a choice in their

professions. It’s very bad.

Ms. MCCARTHY. I have a bill that I would love you to look at and

support that would help my nurses, in recruiting more nurses.

Secretary THOMPSON. I would appreciate that. But there’s no

question.

But the Department has been treated very fairly when you look

at the increases. We got an overall increase, the President tried to

hold the increases at 4 percent. And we are going to go up at 5.1

percent on our discretionary funding, and 8 percent overall. That’s

a very nice increase for the Department of Health and Human

Services. I know that the large share of that increase goes to NIH,

$2.75 billion.

But we’ve been able to reduce some other things, such as onetime funding, which was $475 billion. There are some other things,

the $155 billion, Congresswoman, that was not requested. And we

have made some other adjustments, but we’re still working on

those. I’ll be more than happy to come back and discuss them with

you either personally or in front of this committee.

Ms. MCCARTHY. And I thank you for that. But I guess this is the

one thing that an awful lot of us are concerned about. Many of us

feel that we should actually be doing a budget first, before we have

tax cuts that are coming out. I feel very strongly on that, and I

come from an area where I’ll probably get killed on it, because I

happen to love tax cuts. I think I basically have always voted for

tax cuts since I’ve been here.

But when it comes down to looking at our budgets, and even just

the budget that you’ll be dealing with, and with the tax cuts going

first, I’m really afraid that Social Security and Medicare is going

to get the short end of it. And I’m really concerned about that. Because if we could deal with something for 5 years out, I could probably live with it. Ten years out, I mean, I just got hit with my oven

breaking down. That was not in my budget. Somehow I’m going to

have to try and find that money. I’ve got a 1994 car. It’s starting

to break down. I’m going to have to find money for that.

You know as well as I do that Government is the same. It’s just

got billions on the end, or trillions on the end. We still have to do

a budget. I really wish we could do a budget first, before we go look

at the tax cuts.

Secretary THOMPSON. Well, the President campaigned very

strongly on a tax cut. He is a man of principle and he does exactly

what he says he’s going to do.

Ms. MCCARTHY. Oh, I don’t mind that. We’re going to get a tax

cut.

Secretary THOMPSON. He feels very strongly, as I do, that tax

cuts are necessary to stimulate the economy and to improve the

economy and I think that you will find that this tax cut, it amounts

20

to only 6 percent of the overall expenditure outlay. So I really think

that we can afford it, Congresswoman.

Ms. MCCARTHY. Thank you, Secretary Thompson.

Chairman NUSSLE. Thank you.

Mr. Gutknecht.

Mr. GUTKNECHT. For the benefit of some of our colleagues, this

is the Budget Committee, so I thought I’d share this with them. We

were just informed this morning that as of the first 3 months of

the last fiscal year, the Federal Government had generated surpluses of $40 billion. As of the first 3 months of this year, we have

generated $74 billion in surpluses.

And I think there’s going to be more than enough money this

year and throughout the balance of the decade to provide for tax

relief. So I strongly support what the President is trying to do to

allow families to keep more of what they earn. I say that just in

response to the earlier line of questioning.

Governor, and I will call you Governor, in some respects I believe

that’s a much higher title than this one you get to keep for the rest

of your life. I have been a big admirer of you for many, many years

in the State of Minnesota. I don’t so much have a question, but I

do have a couple of comments. I think the President has chosen

wisely to put you in this position. This is probably, no, I think

without a doubt, this is the toughest position at the Federal level,

the job that you took the oath of office for this morning.

There are two very huge issues you’re going to have to deal with.

One is Medicare, and folded into that is prescription drug. And

then ultimately, as part of that as well, you have to deal with the

whole bureaucracy we know as the Health Care Financing Administration. Those are very, very difficult problems. We want to help

you as much as possible.

They are huge bureaucracies. And I want to talk a little bit about

what’s happening, just so that you understand where we have been

and where I have been on prescription drugs. I do believe that we

need to totally reform the Medicare system, as the President has

talked about, and then ultimately, there has to be included some

kind of prescription drug benefit, especially for those people who

are currently falling through the cracks. I absolutely believe in

that.

But I also believe that if we don’t do this right, there is simply

not enough money in Christendom to pay for the unlimited demand

for free drugs. I want to talk about what’s happening, because I’m

not certain that the people who work for you in the FDA will give

you the whole truth and nothing but the truth about prescription

drugs. I will just give you my perspective.

We were able to get a couple of things passed last year. One of

them was a small amendment that I had attached to a larger bill

that essentially said that the FDA has to, for personal importation,

let me explain the situation. And it’s not just about Canada. I

think we’ve heard an awful lot about what happens relative to

Americans going to Canada to buy prescription drugs, and now

there are at least three on-line services that are offering prescription drugs to Americans.

But what’s happening around the world, and I’m a big believer

in free trade. I believe that trade ultimately is a very good thing.

21

I also believe that we should not be in the business of setting price

controls. But on the other hand, it bothers me greatly that many

of these large pharmaceutical companies, who are now based in

places like Switzerland, are willing to sell drugs in Switzerland for

a fraction of what they’re willing to sell those drugs here in the

United States.

Let me give you an example. Let’s take a drug like Coumadin.

Coumadin is a drug that my dad takes, it’s a blood thinner, it’s one

of the most commonly prescribed drugs in the United States. The

average price for a 30 day supply in America is about $30. That

same Coumadin sells in Switzerland for $3. In other words, it’s $1

a pill here in the United States, it’s 10 cents a pill in Switzerland.

Now, we have free trade with Switzerland. Goods and services go

back and forth across the border, and yet the one area where

Americans could benefit enormously with free trade is in prescription drugs. And as a result, there was a lot of confusion about what

the law was before. I tried to clarify that.

The issue that I raised, and what my amendment essentially said

was, the burden of proof is now on the FDA to prove that that is

not a legal drug in the United States. So what we said in the legislation, which the President signed and we now have evidence the

FDA is at least moving to try and enforce, we said, you’ve got to

at least tell the consumer what is wrong with the drug that they’re

bringing into the United States.

So now at least they do cite the fact that, the new letter, and the

threatening letters are starting to go out again to seniors. I have

a copy of one. Let me just read for you what it says, because you

need to be aware of this, as the new Secretary.

The drug that was detained was a drug called Lipitor. The FDA

says that the article appears to be a new drug without an approved

new drug application. That’s what the FDA says in a letter to a

senior. Now, if you go to the FDA’s own web site, July 1998, they

list Lipitor as an approved drug.

Now, on one hand, we’re telling seniors and consumers that

Lipitor is not an approved drug, when clearly the FDA knows that

Lipitor is an approved drug. The argument that you will hear from

some of your people within the administration is, well, we cannot

absolutely guarantee that that is in fact Lipitor. And do you know

what? They’re right.

But please bear in mind that every day, millions of pounds of

food come into the United States. And it is the Food and Drug Administration. We bring in everything from cheese to pork bellies to

strawberries to tomatoes. The truth of the matter is, we don’t know

whether there couldn’t be some kind of adulteration of any of those

products. We don’t carefully inspect every single tomato that comes

into the United States.

It seems to me that the FDA has in effect been helping the pharmaceutical industry for a very long time in protecting them against

competition by building a wall disallowing imports as high as the

sky, and yet we have a very, very small threshold in terms of

drugs. I want you to be aware of that. Because I think there’s a

powerful case to be made here, and it does begin to fit with what

we’re doing here on the budget. Let me explain that.

22

The best estimates that we have is, last year, we the Federal

Government, through the Veterans Administration, through medical assistance and other programs which we fund, we spent over

$5 billion, minimum, in fact, one estimate is as high as $15 billion,

that we spent last year on prescription drugs. If we simply began

to open up the markets and allow some competition within the

pharmaceutical industry, we could save the Federal Government at

minimum another 30 percent. Now, 30 percent of $5 billion is over $1.5 billion. That would go

a long way to helping to solve this problem for those seniors who

currently are falling through the cracks.

So I do hope that you’ll take an open mind in looking at the legislation we passed last year. There is no such thing as absolutely

safe. Even today, in hospitals in America today, and I hate to

admit this, but there are patients who get the wrong medication.

It happens. So we can never protect everybody from every unforeseen thing.

But I want to close with this point, and this is not a question,

but for your own edification, that it isn’t the responsibility of the

Federal Government to protect consumers absolutely. We can never

do that. And in the day and age, a FedEx package, for example,

if you sign for a FedEx package, they’ve got a bar code on that,

they know when it was picked up, and at almost any point in the

transmission of that package from the sender to the receiver,

FedEx can tell you exactly where it is, with bar coding technology.

We now have probably the best control we possibly can have in

terms of making certain that what left the factory or what left the

pharmaceutical supply house in Switzerland will be exactly what

comes into this country.

So I really do hope that we can work together, because I think

it is a serious problem. I respect the people at the FDA. On the

other hand, I think we have to understand that there is no such

thing as perfectly safe. We can be within a small fraction of guaranteeing that that is in fact Lipitor that’s in that package, and we

know that Lipitor is an approved product. If they want to sell

Lipitor for 10 cents on the dollar for what they sell it in the United

States in other countries, the FDA should not be allowed to stand

between American consumers and lower drug prices.

Thank you, Mr. Chairman.

Chairman NUSSLE. The gentleman’s time has expired.

Secretary THOMPSON. Congressman, could I quickly just make a

couple of statements? First off, I agree with you and I thank you

so very much for your understanding. I appreciate the job that

you’ve done. I’ve watched you right next door, and I’m very impressed by your abilities and what you’ve been able to do as a Congressman.

But secondly, I want to find out about those letters. Because I

personally take Lipitor, and it better be an approved drug, or else

my doctor’s in trouble.

I would like to see those letters, and I would like to also work

with you and I would hope that we would be able to get our FDA

director through the process quickly, because we want to make

some changes in the overall running of the whole Department,

make it much more responsive. And if you’ve got threatening letVerDate 11-MAY-2000 15:22 May 29, 2001 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6602 H:\DOCS\HEARINGS\107-5\HBU066.000 HBUDGET1 PsN: HBUDGET1
23

ters, I would like to hear from you and I would like to take them

up with the people. So please give me a copy of them.

Mr. GUTKNECHT. We’ll be happy to give you copies. Thank you.

Chairman NUSSLE. Thank you, Mr. Gutknecht.

The gentleman from Washington, Mr. McDermott.

Mr. MCDERMOTT. Thank you, Mr. Chairman.

Mr. Secretary, as you assume the Wisconsin seat on the Cabinet,

we hope that we can have as good a working relationship with you

as we did with Secretary Shalala.

Secretary THOMPSON. I can absolutely guarantee that, sir.

Mr. MCDERMOTT. OK. I want to pursue something that Mr.

Spratt talked about, in part because I sat on the Medicare Commission for a year and went through that whole process.

Secretary THOMPSON. I know you did.

Mr. MCDERMOTT. I know that you as you assume your job are

assuming a job of a trustee. And one of the things of a trustee is

to report immediately to the Congress whenever the board is of the

opinion that the amount of the trust fund is unduly small. That’s

a heavy responsibility that you have.

I have behind me this chart which illustrates what is going on

in this budget book. On page 14 of your budget document, you state

that Medicare as a whole is in deficit over the next 10 years for

$645 billion. Those are your—that’s the administration’s figures.

Then if you turn to page 51, you say you can address Medicare’s

existing problems plus add a prescription drug benefit for only

$156 billion between now and 2011. Now, I understand that you’re

including modernization or some kind of change in Medicare.

That’s inherent in that statement.

I would like you to tell us how you’re going to save the 400 and some odd billion dollars, $489 billion. Is it increases in payroll

taxes? Or is it cuts to payments to providers? Or is it cuts of benefits? I mean—or maybe bigger copays? Where are you going to get $489 billion? To have put that together and said it’s there, it’s nice.

I’ve been doing this a long time.

Secretary THOMPSON. I know you have, Congressman.

Mr. MCDERMOTT. I like specifics. I want to know what percent

you think you’re going to get from cutting providers when we do

our reform of Medicare, or what benefits are we taking away, or

what copays are we increasing? Or are we simply going to go out

and raise the payroll taxes? Some place you have to come up with

the difference between this and that. That’s $489 billion.

Secretary THOMPSON. Congressman, first off, let me tell you that

the President believes we should take a look at the total Medicare

package, both Part A and Part B, and that he does not feel you can

just separate and say that you’ve got a surplus in one and that

you’ve got a subsidy, to use the words of Congressman Spratt, in

Part B. We have not, the administration nor my Department, has

sat down yet or has had the time to do so, Congressman, to really

be able to answer your question specifically. We do not know if

there’s going to have to be any of the things that you’ve said. We

do not know what we’re going to be recommending as a Medicare

reform. I can tell you we’ve been having meetings and the meetings

have been going well. But there has not been any definitive decisions as to any of the things you’ve mentioned, or any other

24

changes in Medicare that might be able to bring you that kind of

savings.

I know you like specifics. I like specifics. But I can tell you that

we’re not there yet, and that’s all I can answer at this point in

time.

Mr. MCDERMOTT. You were Governor for 14 years, I was the

ways and means chairman in the State of Washington and I wrote

five budgets in a row. So I know a little bit about it, and so do you.

Secretary THOMPSON. Yes, sir.

Mr. MCDERMOTT. What other places could you come up with

money if you don’t cut benefits, don’t cut providers, don’t increase

copayments or increase the taxes that are going into it? What other

way could you fill that gap?

Secretary THOMPSON. There are the possibilities, Congressman,

that we have to completely look at Medicare, look at the ways in

which we’re going to use the tax code, look at ways we might infuse

some new dollars. I don’t know what they would be. I do not know

at this point in time how we would make those changes. I can tell

you that we’re working on them, and I’ll be coming back to discuss

it with you and to the other members on this committee as soon

as we are able to come up with our final package. Hopefully that

will be soon, but I can’t at this point in time tell you when it’s

going to be.

Mr. MCDERMOTT. I hope that your package comes up before we

pass the tax package.

Secretary THOMPSON. I’m not saying that it will.

Mr. MCDERMOTT. Because if we’re giving all the money away and

it comes up that you need some dough, I’m afraid where it’s coming

from. I think that’s why many of us are opposed to the President’s

or the Congress’s rush to pass the tax cut before you see this budget. Because if it turns out in the end that you want to reduce the

payments to providers, I think the medical association and the hospital association all ought to have a chance to come in here and

say, hey, wait a minute.

Secretary THOMPSON. I’m sure they will.

Mr. MCDERMOTT. We did that in 1997, and we’ve been adding

back every year since because of cutting too much. I think it’s very

clear to everybody on the committee, you have not got the facts, the

details. I didn’t expect you would. And my feeling is we should not

be moving with a tax cut until we have the facts.

I want to just ask one other question. I know that as Governor,

or in the past at least, you have been supportive of the use of stem

cells in research for Parkinson’s Disease and for Alzheimer’s disease and spinal cord injuries and diabetes and a whole other category of illnesses. When you came in, or perhaps the administration—I don’t know how much of a part you played in it, was to

bring into question whether the stem cell research at the National

Institutes of Health is going to go on.

I would hope you would look at that very, very, very carefully.

Because the only hope for most of those illnesses is some continuing research about how you can take early stem cells and recreate

or redo brain cells or spinal cord cells. I think that it would be a

terrible mistake to roll back the provisions of the order of the

President, the last President. I think that it is very important, and

25

I hope that you will at least take this guy’s view of it into mind

when you do it. Because I think it would be a serious mistake to

say to the National Institutes of Health, stop the research in these

areas.

Secretary THOMPSON. Thank you very much for your advice on

both subjects, Congressman. I will take all of your comments very

seriously. I would like to point out that I believe that the President

is correct that we can have both Medicare reform, save money, and

have a tax cut. That’s number one. Number two, I am taking my

decision very seriously on stem cell research. I am somewhat concerned about the legal opinion that allowed NIH to proceed based

upon the Federal law that now exists in this country.

But I am seriously considering it. I will take your admonitions

to heart and I will continue to do so, because I believe very strongly

in the need for research.

Mr. MCDERMOTT. Thank you.

Chairman NUSSLE. Mr. Thornberry.

Mr. THORNBERRY. Thank you, Mr. Chairman.

Mr. Secretary, over the next few weeks, you and all of us are

going to hear a lot about Medicare funding from various accounts.

It is in large measure a political tactic to try to scare people about

Medicare to attack the tax plan. We know that that’s coming and

we’re going to hear a lot more about that. But I have to tell you,

I am conducting my town meetings this year on health care. I believe that the challenge for you and us and Medicare has really less

to do with how much money we put into it than what the system

is like.

Just thinking about some of the comments made to me this past

weekend, one lady in tears who is a physician’s assistant’s wife, because they’re putting their house on the market, not just because

of low reimbursement rates in a rural area, but because they have

not been reimbursed for several months. They’re too afraid to come

to my office for help, because they have been threatened in some

way or another. A doctor, who’s a leading cancer doctor, knows of

a treatment they use at M.D. Anderson down in Mr. Bentsen’s district, but yet HCFA prevents them from doing that same treatment

except on an inpatient basis where it is of course far more expensive to do.

All sorts of providers talk about requiring to change the billing

codes by a certain date and then HCFA didn’t have theirs changed

by that date, so they had to go back and resubmit everything. The

list goes on and on. I guess with your considerable reputation for

reform and some of the very good people you’ve got working with

you, are you going to look at this thing from the ground up? Because a lot of people who have looked at this believe that we’ve got

to scrap HCFA and start from scratch.

Secretary THOMPSON. Thank you very much for the question, because I have many ideas in regards to what we have to do. There’s

no question, in my prior life as Governor, I was probably one of the

biggest critics of HCFA in this country. I have come out and I have

spent a day out on the campus at HCFA, looked it over, talked to

a lot of people. The first thing I have to have is my HCFA director

confirmed by the Senate and put in place.

26

Number two, this Congress, and I’m not being critical, this Congress has put a lot more responsibility on HCFA in the last 5

years. HIPAA alone is adding lots of rules and regulations with no

increase in personnel and very little increase in resources.

Number three, the resources at HCFA are not what you would

call modern day. I don’t know if this Congress knows about this, but HCFA spends $375 billion and they do not yet have a double

entry bookkeeping system. It is unheard of to think that an agency

that runs the largest health insurance company in America doesn’t

have a double entry bookkeeping system. That went out in 1911,

and HCFA is still using a single entry bookkeeping system.

Number four, the computer systems at HCFA need to be modernized. I don’t know if this committee knows it, but we have over 200

different computer systems in the Department of Health and

Human Services, several that cannot talk to one another. And

we’re running a department with that kind of equipment.

Number five, HCFA’s got some great people. They’ve got a lot of

responsibilities. We’ve got to time the rules and the changes in

those rules either on a quarterly or semiannually or an annual

basis, instead of sending them out and saying, oh, we made this

rule last week, and because you didn’t know about it, that’s your

problem. We should be able to put it out there so the patient, the

provider, the States and this Congress knows that this rule is coming and it’s going to change prospectively instead of retroactively.

Number six, we have to make sure we take a look, and maybe

HCFA’s got too much responsibility. Maybe Medicare and Medicaid

should be split. Maybe SCHIP should be in a different area. These

are things we want to look at.

I want to come back with a whole litany of changes. Because

when I was going through the confirmation process, Democrats and

Republicans and Independents alike, everybody came to the same

conclusion. Everybody loves to hate HCFA. And I told the people

at HCFA, maybe we should even change the name. What is a

HCFA? [Laughter.]

So I’ve got lots of ideas. I want to make lots of changes. But I’m

going to have to have the support of this Congress in order to do

it. First thing, we’ve got to have a double entry bookkeeping system. Secondly, we’ve got to have a computer system that everybody

can tie into, the providers and the Department as a whole. Then

we have to put the rulemaking on a different plateau than what

it is.

If we can make those changes with a new administrator, I’m confident you’re going to see a change of attitude and a change of direction at HCFA. I am dedicated and passionate, as you can tell,

to accomplish that, Congressman. Thank you for the question.

Mr. THORNBERRY. Well, thank you for your answer. That’s the

most encouraging news, just seeing the fire in your eyes, that I’ve

seen in quite some time. I’ve got some proposals that I’m introducing this week to deal with the paperwork requirements. Have your

folks come up with an estimate as to how much of our health care

dollar in Medicare is consumed by paperwork or regulations, either

from the Government side or from the provider side?

Secretary THOMPSON. I’ve heard anecdotally that it’s 18 to 19

percent. But I can’t come here and say to you, Congressman, that

27

I know for a fact that it is. But I’ve heard that. I’ve heard it as

a Governor. And I’m sure it is high.

But another thing, and I’m going to throw this out here, and it’s

probably not the place to do it, but it needs to be said. When Medicare was passed in 1965, there was a deal made that the Blues,

which I have a great respect for, are the only ones that could provide the vendor payments. Therefore, you’re limited in the Federal

Government, to contract with other providers.

There are a lot, as everybody knows, there have been a lot of

changes in the computer system. Just that one change, and maybe

reduce the number, but that also is contentious. I’m throwing it out

there because I would like to get people to start thinking about

this. There need to be some changes in how we contract. But HCFA

is limited to who they can contract with. I think you want the best

product, the best service, which I do, and I think we should not be

limited to who we can contract with.

Mr. THORNBERRY. Thank you, Mr. Chairman. Good luck, Mr. Secretary.

Secretary THOMPSON. Yes, lots of luck, everybody says. [Laughter.]

Thank you.

Chairman NUSSLE. Mr. Bentsen.

Mr. BENTSEN. Thank you, Mr. Chairman.

Mr. Secretary, it’s good to see you today. I have a few questions.

One, I’d like to ask for the record, and then I’d like to get back to

what Mr. McDermott discussed. Also, at the outset, I want to echo

what Mr. McDermott said about the stem cell research. I had a 10

year old constituent, Carolyn Rolley, from my district in my office

the other day. She suffers from juvenile diabetes. Her parents are

very concerned about whether or not your agency is going to overturn the previous administration’s executive order.

So I would hope you’d take a hard look at that.

Secretary THOMPSON. I’m going to, Congressman.

Mr. BENTSEN. I appreciate that.

Second of all, for the record, the President’s budget blueprint

talks about changes in health professions funding. And I assume

this may well include things like medical education, graduate and

indirect medical education. That has tremendous impact on the

teaching hospitals of this country, including those in my district. I

would like to get for the record from your office what ideas you all

have in mind and whether you’re looking at a different funding

structure, whether you’re looking at a universal funding structure

or what. When those of us who represent large medical centers,

read something like that, it raises a few flags.

Secretary THOMPSON. Congressman, that decision has not been

finally made yet, but it will be made relatively soon.

Mr. BENTSEN. And it’s a difficult question.

Secretary THOMPSON. It is.

Mr. BENTSEN. It’s something that Congress has been grappling

with for quite some time. As you probably know, we ratcheted it

down in 1997, we’ve been ratcheting it back up since then. But we

still have a somewhat inefficient funding structure in that area.

Secretary THOMPSON. Thank you for that background information.

28

Mr. BENTSEN. Going back to the whole question of the Medicare

trust funds, I appreciate your comments today that the Medicare

funding is only going to be used for Medicare. I will tell you, you

may want to talk to your OMB director. Because his comments last

week really do not comport with your statement. And quite frankly,

the President’s budget blueprint, which I know you’re familiar

with, does not either.

I want to walk through some of the numbers with you, if I could.

And I know you’re new on the job, so I’m not going to hold you to

it too much.

But both to use your comments that Medicare is for Medicare,

and to use the logic that the OMB director and the President had

and you echoed today, that you should look at Medicare Part A and

B together, Federal law notwithstanding, and in fact, the OMB director last week didn’t seem to understand that it would take Congress to change that law. I think you made that clear today.

But the fact is, the President’s budget doesn’t show a $500 billion

future trust fund surplus, which are encumbered funds to future

beneficiaries. So if we back that out of the $842 billion contingency

fund, that leaves us with $342 billion left there.

Now, the $153 billion that’s the Medicare modernization, my first

question is, does that come out of those trust fund receipts? The

question I have for that is—— Secretary THOMPSON. No, out of that $526 billion?

Mr. BENTSEN. Yes.

Secretary THOMPSON. No. It does not.

Mr. BENTSEN. It does not?

Secretary THOMPSON. No, it doesn’t.

Mr. BENTSEN. So I think really for mathematical purposes or ac- counting purpose, we need to back that out of the $342 billion

that’s left in the contingency fund. That leaves us $186 billion.

Now, this would—— Secretary THOMPSON. Can I just interrupt? I’m sorry, I don’t understand why you would back that out. Because that is over and

above the $526 billion.

Mr. BENTSEN. You’re right, I take that back. It’s a separate line

item in the President’s budget.

Secretary THOMPSON. Right.

Mr. BENTSEN. The point being that the President’s contingency fund, if you take out the $500 billion, is down to about $350 billion.

If you take out the extra $150 billion that we’re spending on the

income tax reduction bill that’s up this week, because it was scored

higher than what was assumed in his budget, we’ve really chopped

that contingency fund down to very little. So I think that’s a problem we have to deal with.

Now, I want to go back to the long term reform issues that you talked about. If you take the $500 billion and use that for reform

rather than pay out obligations that are against that $500, because

that is encumbered money, would you agree?

Secretary THOMPSON. That is.

Mr. BENTSEN. So how do you reform the system in the future if

you use that money and are not double counting it without a, cutting benefits, b, raising taxes or copayments or premiums, or c, incurring additional debt in the future? Because as you know, in your

29

own experience as Governor of a State, once the funds are encumbered, you have to make them up somewhere down the line. I think

that’s the concern. And I appreciate the fact that the administration wants to reform Medicare, wants to streamline Medicare, and

at the same time, add more benefits to it.

But I think you’ll be familiar with the experience that we’ve had

in the Medicare Plus or Medicare Choice program, where we wanted to give recipients more options under Medicare, bring HMOs

and managed care entities into the Medicare system. What we

found is, they couldn’t survive in the system, they started backing

out, and the only way we could keep them in there was to pay

them more money.

So what I’m trying to figure out is, even double counting the $500 billion to use that for reforms, how do you make up that

money in the future? And how do you plan to streamline the system? I know you said you haven’t written a plan. But do you all really think that you can get efficiencies equaling $500 billion or

more if you use the trust fund balances.

Secretary THOMPSON. I can’t answer that at this point in time,

Congressman. I wish I could. And I don’t want to come here and

sound evasive, because I’m not. You’re going to find that I’m very

candid and I’m very direct. But the plan has not been put forth.

It has not been scored. We’re working on it. But I am encouraged

by what we’ve been able to see that we can make some efficiencies

in Medicare.

And I have been very encouraged, both yesterday in the Senate

Budget Committee and today, that there seems to be a lot of bipartisan spokespeople that are willing to look at Medicare and find

ways to reform it. I think we should dedicate ourselves this year

to do that. I can’t tell you how we’re going to save that amount of

money. I can’t tell you what benefits are going to be added or

changed at this point in time. I wish I could, but I can’t. All I can

tell you is, this administration is dedicated to reform and streamline Medicare with prescription drugs included.

Mr. BENTSEN. Would you agree with this, we can only count the $500 billion once?

Secretary THOMPSON. Absolutely.

Mr. BENTSEN. Thank you. Thank you, Mr. Chairman.

Chairman NUSSLE. Mr. Sununu.

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

I want to begin on that point, Mr. Secretary, because I think it’s

worth repeating, that the degree to which this administration is

committed to modernizing the Medicare system, and to talk about

real reforms and real changes that I hope and I believe will result

in more choices for beneficiaries, and a better working system. And

the administration recognizes that it isn’t necessarily going to be

free.

I think that is a marked step from where we were with the previous administration that believed by just waving a magic wand

and saying the trust funds were hereby twice as large as they were

previously that we had somehow done something fundamental

about Medicare solvency, or more important, about improving the

program. I think we are at an historic point, because Democrats

and Republicans recognize that real changes are needed.

30

I also want to touch on some of the phraseology and jargon that

has been used today. There was a suggestion that the Part A,

which has a surplus in it of, the projection of $500 billion, that that

money somehow represents encumbered funds. I don’t think that’s

entirely accurate. It’s really a legal authorization that we now have

to pay benefits through the Medicare system, something we know

we need to do, we will do. But the fact remains that this system,

taken as a whole, isn’t solvent. It may be that in its original design, there was intended to be a subsidy.

But we need to think about, as legislators, what that subsidy is.

And if we take Part A, which has a surplus, it may well have a

surplus, but we also know that that surplus and the legal ability

to pay benefits is exhausted in 12 to 15 years. So there may be a

surplus there, but the fact is, it isn’t in any actuarial balance, it

isn’t safe and sound in perpetuity. In Part B, there has been a very

large subsidy by design. But at the same time, that doesn’t mean

an open ended commitment to run subsidy rates or deficits in the

hundreds of billions or trillions of dollars. No one wants a system

that bankrupts future generations for the sake of us as legislators

or as families.

I’d like you to talk a little bit about modernization at this point.

I know you don’t have specifics, but in particular, talk about the

prescription drug benefit. Medicare Choice, which Mr. Bentsen was

talking about, is the one part of Medicare that right now has a prescription drug benefit. And it’s the one part of Medicare that at the

end of last year we tried to add funding to make that reimbursement rate more fair, to keep people in the system. And even with

that additional funding, the providers through Medicare Choice are

getting less on average than the cost of beneficiaries who are under

fee for service.

I think that that’s an idea place to start to help expand the ability of beneficiaries to get access to prescription drugs. My question

for you is, what kinds of programs or opportunities have you seen

at the State level that you would want to bring with you now to

the Federal level as we try to modernize Medicare and in particular add a prescription drug benefit to Medicare?

Secretary THOMPSON. First, Congressman, thank you for your

comments. Because you laid it out as well as anybody has ever laid

it out, and I applaud you for it. If I misspoke about earmarking,

I’m sorry. The truth of the matter is that there is a responsibility

of the Federal Government to pay this money to anybody that

reaches the age of 65.

The HMO that you’re talking about with prescription drugs I

think is a big step forward. I would like to see an expansion of

that. I would like to see us work on that and make it much more

palatable to people to choose. Every State right now is looking at

SCHIP, ways to expand that, to develop ways to reduce the number

of uninsured in America. In my home State of Wisconsin, we expanded SCHIP with a waiver after it took us 18 months to get that

waiver. I’m very appreciative that we finally got it.

But we have been able to have our uninsured drop below 7 percent. I think in Wisconsin, we’re either the first or second or third

in America for the least number of uninsured.

31

But other States are doing that. There are a lot of innovative

ideas out there that I think this Congress and my Department

should take a look at and categorize and come back with a plan to

reduce the number of uninsured in America; and do things to refine, streamline, make more options for Medicare, so that people do

have a choice.

Mr. SUNUNU. You mentioned waivers under Medicaid and the

fact that at least in the recent past it has taken many months, in

some cases several years, to get those waivers that would enable

States to implement new ideas, new programs for health care, prescription drugs or what have you through the Medicaid program

with greater flexibility, to tailor a program to meet their needs.

What will the administration’s policy be on granting and reviewing

waivers and are there any other specific areas where, as a Governor, you saw success in the ability to deliver benefits better

through the welfare reform legislation that you might want to

carry through to a review of the effectiveness of Medicaid’s delivering benefits?

Secretary THOMPSON. First let me talk about waivers. I made a

decision that after a period of time, I don’t know what that period

of time is going to be, if HCFA has not made a decision that it’s

going to then be reviewed directly by the Secretary’s office as to

what’s wrong, and we’re going to comment and we’re also going to

contact the Governors and the legislators of that respective State

to find out why it has not been granted, what the problems are and

how we might be able to modify it so it could be granted.

I’m trying to change their attitudes instead of them trying to find

reasons to say no, change their attitudes to try to find a reason

why it will not work. Since I have been Secretary for 30 days, we

have already approved five waivers that I have personally gotten

involved in. And, I am personally going to get involved in expediting the waiver process for the Department of Health and Human

Services.

In regards to welfare reform, I think the fact that the TANF

grants were flexible enough to allow States to try innovative

things. Instead of a rush to the bottom, we’ve seen just the opposite, a rush to the top, where States have come in with innovative

ideas to provide welfare services. But more than that, they provide

services to help people get off of assistance and into the job market.

I think that has really been one of the best social changes in the

last 50 years in this country.

Mr. SUNUNU. I appreciate your willingness, and it sounds odd to

say, but your willingness to trust people at the State level to make

good decisions. Because I certainly believe in that approach. I want

to conclude by offering you the obligatory good luck.

Secretary THOMPSON. Thank you. I need that. And I need a few

prayers as well, sir.

Chairman NUSSLE. Ms. Hooley.

Ms. HOOLEY. Thank you.

Congratulations on being just sworn in. I also want to associate

myself with our Chair when he talked about AAPCC. I’m from a

State, Oregon, where we are very, very low reimbursement for

Medicare, and looking forward to seeing that bottom brought up.

32

It really needs to happen, it’s just killing us in States like ours and

in the rural communities.

I also want to just hope that on behalf of the 1 million children

that suffer from juvenile diabetes that you will keep the NIH

guidelines in place so we can continue the stem cell research going

on, and allow scientists to continue their valuable research in this

area. I hope you will support that.

Secretary THOMPSON. Congresswoman, let me point out three

things. Number one, your Governor has already been in with legislators on both sides of the aisle talking to me about a waiver.

Ms. HOOLEY. I know he has. I was going to ask you about that

waiver, too.

Secretary THOMPSON. It has not been introduced yet, but I think

it’s got some merit. I want to review that. I’ve got a great deal of

respect for your Governor, and I think the whole opportunity to

combine those is sort of innovative. I’m glad you’re supportive of it.

Secondly, in regard to——

Ms. HOOLEY. Stem cell research.

Secretary THOMPSON. No, the second was——

Ms. HOOLEY. Oh, AAPCC.

Secretary THOMPSON. Yes. The reimbursement. I want to be crystal clear. I come to this job from my vantage point of being a Governor for 14 and a half years, and representing both an urban and

rural State. I’ve fought very much with the reimbursement formulas, like you are, and like so many people that I’ve heard today.

But I just want to put a cautionary note in, that we have to find

a way so that we don’t take from an urbanized State in order to

do that.

Ms. HOOLEY. I understand that.

Secretary THOMPSON. Because all that will end up then is a reimbursement fight and nobody wins. I would like to be able to work

with you and work with the members of this committee on a bipartisan basis to see if we can’t come up with a more equitable formula.

Third, in regards to diabetes, it’s going to become epidemic in

this country. It’s going to become epidemic. I was just down at

CDC. I spent a day there. There are so many things out there that

we have to do, and childhood diabetes to me is something that we

have to address as a Nation.

I don’t think the Federal Government, and I’m not being critical,

I’m just making a statement, I don’t think the Federal Government

has done enough on prevention. We have to do more, if we’re going

to really solve the health care needs of our society, and diabetes is

one of them, we have to get into the mode of being more preventive. We have to be talking to people about exercise, about eating

properly and correctly.

And that’s going to do more to stem the diabetes epidemic that

faces this country, and it’s going to get worse in the years to come.

I happen to believe very much in research, and stem cell research, there are prohibitions in the law. And I am concerned

about the legal interpretation of what’s going on right now. I think

we have to have a fresh review, which I intend to do, but I am

going to do it in a very systematic way, and I’ll be back with you,

33

Congresswoman, to discuss my findings as soon as they are completed.

Ms. HOOLEY. I have just a couple more quick questions. Recent

research on brain development for children has shown how important that zero to 3 years of age is.

Secretary THOMPSON. Absolutely.

Ms. HOOLEY. And it highlights really the necessity for quality

care during that time. One of those programs, and there are other

programs, Head Start has provided comprehensive early childhood

development services to low income children since 1965. We know

the program works, and yet there are hundreds of thousands of

children that are eligible but we don’t have any place for them.

Last year, we increased Head Start by 19 percent, which serves

an estimated 70,000 children. I want to know if we can count on

you and this administration to continue increasing that vital funding.

Secretary THOMPSON. Once again I have to rely upon my past life

and tell you, Congresswoman, that Wisconsin was one of the first

States in order to put a State subsidy in to Head Start so we could

deal with more children. I happen to be passionate about it. I believe Head Start is one of those Federal programs that’s worked

better than what Congress had expected.

Ms. HOOLEY. It has.

Secretary THOMPSON. And we have to make sure that we take

care of that population, because those children are going to be our

future leaders. We’ve got to get them prepared to go to school. And

this happens to be something that this President is adamant about.

He wants to make sure every child is ready to learn to read when

they go to school, and is able to learn. He believes very strongly

in Head Start. I think that you’re going to find this administration

very forceful in improving Head Start wherever we possibly can,

building upon the successes that we’ve had in the past.

Ms. HOOLEY. Well, I am looking forward, Mr. Secretary, to having this administration put their money where their mouth is and

to make sure that in fact, more, additional money goes into Head

Start. Then just lastly, I know you met with the Governor, I’m glad

you brought up the waiver. I hope it doesn’t take as long as it took

Wisconsin to get its waiver. And I will look forward to working

with you on that waiver.

Secretary THOMPSON. Well, I can’t act on it until it’s first introduced.

Ms. HOOLEY. I understand that. It will be.

Secretary THOMPSON. OK, thank you very much. But I want to

make sure that what we do is correct and lawful, which I insist

upon. I will expedite waivers.

Ms. HOOLEY. Good. It’s a great, innovative program, that has

made a difference to our State. Thanks.

Secretary THOMPSON. Thank you.

Ms. HOOLEY. Oh, by the way, good luck. I forgot to say that, I’m

sorry. [Laughter.]

Secretary THOMPSON. Thank you very much. I need that more

than anything right now.

Chairman NUSSLE. Mr. Kirk.

34

Mr. KIRK. Mr. Secretary, I represent an area of Illinois just below

cheesehead land, in Lake County, Illinois.

Secretary THOMPSON. It’s good to see you again, Congressman.

Mr. KIRK. Thank you. I have a question about the administration

of Medicare. Let me describe two of my constituents. Jan

Vanderhoof lives in Lake County, Illinois, and received notice from

the previous administration that her Medicare managed care option was being dropped. Her 1941 dance partner, Col. Erwin

Bruckman, who lives in Cook County, Illinois, still has that Medicare managed care option.

Why did they choose managed care under Medicare? Because it

offered a prescription drug benefit. So Jan now does not have that

benefit. We are talking so much about offering that benefit, but the

previous administration dropped her. And Erwin still has it.

The reason for the divide is because we calculate Medicare reimbursement rates based on county boundaries. Those boundaries

made sense back in the 1960’s, when the city of Chicago would be

all included within one county, Cook County. Those days have long

since passed, and the city of Chicago now stretches over many different counties.

So I am faced with heavily suburban communities above and

below Lake Cook Road, which divides Lake and Cook Counties Everything depends on which side of that road you are on. Above that

road, there is no prescription drug benefit, and no managed care

option. Below that road, you’re still good to go.

Would it be possible to move beyond the outdated county lines

to something that would make more sense for the modern suburban reality of America, like Metropolotan-Statistical-Sampling

areas, in calculating Medicare reimbursement rates?

Secretary THOMPSON. That’s one question that has not been

thrown at me yet, Congressman. What you have just indicated

seems to me possible, but even more so plausible and something we

should look at. I can’t give you a definite answer right now, because this is the first time I’ve heard about it. I’d appreciate it if

you’d send me a letter on that or call me, because I’d like to discuss

it further.

I’m one of those individuals that loves new ideas. I love ideas,

especially on how to change and improve. I say this for the benefit

of every person on this committee, if you’ve got an idea that you

would like us to take a look at, please give it to me, and you’ll find

that most of those we’ll be very receptive to. This one seems to be

an excellent suggestion.

Mr. KIRK. I’ll do that, thank you. Certainly for the suburbs of

Milwaukee, I think probably the same thing would be true.

Secretary THOMPSON. Probably. I didn’t know that it was a problem.

Mr. KIRK. I’d like to join with my Democratic colleagues also on

supporting stem cell research. The key area that seems to offer so

much promise is the Edmonton Protocol, co-funded by the NIH and

the Juvenile Diabetes Research Foundation. It’s my understanding

that we have 21 people who have been insulin-free for over 14

months. That is not a treatment for diabetes, that is a cure. I think

we are just on the edge of something, as you well know. I think

35

stem cell research opens up the door. The Edmonton Protocol is

probably the best example of where we could go.

Lastly, I wanted to ask you about the GAO report that Medicare

was ′′high risk.′′ For us, we have got an estimate that roughly $14 billion of the $170 billion under Medicare’s fee for service payments were improper. Last year, improper payments totaled about $12

billion, amounting to nearly 7 percent for all fee for service payments. You mentioned this in your testimony, talking about outdated, ineffective computer systems. Certainly while we need a

commission on Medicare’s future. Where do you think the Department will be able to go unilaterally, just on the computer issue and

the payments efficiency issue?

Secretary THOMPSON. I don’t know if you were here for my answer to another Congressman about what I intend to do at HCFA.

I’ve got lots of ideas, and I don’t want to repeat myself because so

many members are here.

But the error rate is down, it’s down to 6.8 percent. We had made mistakes of $11.8 billion last year. That’s unacceptable to me.

It’s unacceptable to this Congress.

It’s going down, it was up to $22 billion 5 years ago, and it’s

down to about half of what it was. But can you imagine trying to

explain to somebody that your Department made $11.8 billion in

mistakes? It’s something that is unacceptable to me. I was shocked

when they told me that.

But the truth of the matter, HCFA’s administration doesn’t even

have double entry bookkeeping system. I was absolutely appalled

when I heard that. So we put some money into this budget for

what is called an integrated audit system that I hope that this

Congress approves.

We have over 200 different computer systems throughout the Department. And a lot of those cannot communicate with one another.

How can you run a company that has the largest health insurance

company in the world, Medicare, or in this country, Medicare, with

a system that has a single entry bookkeeping system and computers that don’t work?

Then you limit, on top of that, HCFA from contracting to just a

few companies. That to me is contentious, because I’m sure that

people are going to say, well, they’re the best companies. And I’m

not going to argue about that. But the truth of the matter is, everybody should have an opportunity to process the claims and put in

a thing. Maybe we’ve got too many contract vendors. If you want,

maybe we should reduce it down to three, four or five, put them

on a merit system, you make mistakes, you lose your contract.

Something real radical.

Mr. KIRK. Right. Mr. Secretary, I think I for one will be supporting you on that. Competition is the key answer. I also want to commend you on the administration’s commitment to NIH and what

we’re doing there. I think we’re really laying the foundation for our

country’s legacy in the next century.

Secretary THOMPSON. It’s an amazing place out there. We are

very fortunate in this country to have the best doctors, the best researchers and the best scientists working for the Department of

Health and Human Services and directly for the United States

Government. We have just awesome individuals, both at CDC and

36

at NIH, that are doing just wonderful work. I’m very optimistic

that right around the corner, we’re going to have a breakthrough

in one of the major illnesses. I don’t know which one it’s going to

be, and I can’t give you a time, I wish I could. But what’s going

on at NIH to me is just amazing.

Mr. KIRK. Right out at Deerfield, Illinois, we’re launching a new

anti-AIDS drug, Cyletra, which is far more powerful than the one

currently on the market. I know people fighting HIV around the

world need it, and it’s that kind of innovation that has been sponsored by NIH.

Secretary THOMPSON. Thank you very much, Congressman.

Chairman NUSSLE. Mr. Kirk, you’re recognized to offer the Secretary good luck.

Mr. KIRK. And good luck. Or buena suerte, I should say, lots of

luck. [Laughter.]

Chairman NUSSLE. Mr. Capuano.

Mr. CAPUANO. Thank you, Mr. Chairman.

Mr. Secretary, let me start right out, good luck. [Laughter.]

Secretary THOMPSON. Thank you.

Mr. CAPUANO. And also my deepest sympathies, because usually

those two things go along together.

Secretary THOMPSON. That’s true.

Mr. CAPUANO. I’d just like to make one comment before I get into

the main issues I want to discuss. I know you and the Department

will have something to do with this new faith-based initiative in

communities and the like. Having been raised as a Roman Catholic, I feel in many ways that my religious affiliation has been both

guilty of and a victim of significant prejudices in the past and currently in this world today. I believe that many people of religious

faiths feel that way about their particular religion, and I know that

Wisconsin is a relatively diverse State. I know that many of your

residents feel the same way.

My only concern when it comes to the Federal Government getting deeply involved with funding faith-based organizations is to

make sure that we do not fund faith-based organizations that are

discriminatory against other faiths. My faith is my faith, and it’s

really nobody else’s business, your faith is yours. To me, again,

this, this budget document is not the place to discuss that at the

moment.

But as we get into that, my hope is that everyone in the administration remembers their own personal and their own political experience back home, wherever they come from, because discrimination is not unique to the Catholic faith, it is not unique to the Jewish faith or to Blacks or to Hispanics or to women. Many people

that I know have experienced it in one way or another, many of

whom have been related to religious issues.

So again, I don’t expect that you would disagree with that. But

as you go about your particular aspects doing the faith-based stuff,

I would hope that you keep that in mind and reiterate it inside the

administration.

The issue that I want to pursue again is the Medicare. I think

that everyone here understands the difference between A and B.

We’re all pretty smart about that stuff, we all understand it pretty

well. It’s very interesting that one of the previous questioners made

37

a comment that even A, with its surpluses today, is not currently

actuarially stable. There are still significant problems right down

the road, even with A, never mind B. I found that very interesting.

I accept your comments, and nobody here today has pushed you,

I certainly won’t push you to tell us today, right now, what you’re

going to do about Medicare, what your proposals are going to be.

We understand that, and that’s fair.

At the same time, you cannot answer us how much any of those

are going to cost.

Secretary THOMPSON. That’s right.

Mr. CAPUANO. If you’re going to improve the audit system, it’s

going to be a cost. Now, maybe the cost will be less than the $11

billion you save, and I’m sure it will be, but there will be a cost.

There will be a cost to dealing with teaching hospitals. There will

be a cost to dealing with prescription drugs. There will be some

costs along the road and if the $11 billion is what we’re talking about, $11 billion isn’t going to cover the problems we currently

have. They might cover the cost that we’re going to add. But it

won’t cover the problems that we currently face in A and B.

Actually, the thing I like best about this budget document is on

page 51, where in two different places, there’s a discussion about

treating Medicare as a whole and treating the solvency of Medicare

in its entirety, which I presume to read means A and B together.

I agree with that wholeheartedly. I don’t think we should be separating the two. None of my constituents know the difference. None

of the taxpayers I know that pay it know the difference. They just

know we’re paying Medicare money and we want Medicare to be

safe.

So I accept everything you’ve said, and I really like the assurances you’ve given, which we did not get earlier, that these monies

that are now currently a surplus in one portion of Medicare will be

there to deal with whatever it is that we come up with Medicare.

Even if we come up with nothing, dealing with them together. I’m

very happy about that.

However, I will tell you that I personally would feel a lot better

if this budget document recognized that in writing. There’s a hundred ways to do it. There’s no one way to do it. We can all disagree

on how to do it. Anything that was done here would be good. And

I don’t see that here. Now, maybe it’s here, and I would love to be

pointed to where it is in the book, but I don’t see it, except the assurances that I’ve gotten from you. And again, I take you at your

word, but you’re not the President just yet, and I’d like to hear it

from higher.

For instance, one of the options we could have is simply leave it

in the Part A trust fund. Just leave it there. Nobody says we have

to take it out. Leave it there to take care of the problems that Part

A has already been pointed out that you know exist, we all know

exist. If you don’t want to leave it there, how about having a piece

of this budget simply say, OK, we’ll take it out of Part A, but we’re

going to appropriate it, right now, without any discussion, to Part

B. There’s two trust funds, let’s appropriate it into the Part B trust

fund.

Again, that’s not the only way. You could have, in Massachusetts, we’ve had several areas, matter of fact, it’s a very good finanVerDate 11-MAY-2000 15:22 May 29, 2001 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 H:\DOCS\HEARINGS\107-5\HBU066.000 HBUDGET1 PsN: HBUDGET1
38

cial tool, to have pour-over trust funds. When you have to much in

one trust fund, it immediately pours over to the other. Maybe we

should have a piece of legislation saying that would work.

There are hundreds of other options, even a very simple thing

like on the table that was pointed out by Mr. Spratt on page 185,

simply taking that 800 and whatever it was, $842 billion in contingencies and separating it into two lines, one line for general contingency of whatever the number is going to be, $200 billion, $300 billion, and another line that simply says, Medicare only contingencies. I would feel comfortable with that. Again, I would like

more. But that’s something. We don’t have any of that in this budget document.

And I would urge you, with all I can, to do more than simply give

us your assurances. Again, I don’t mean to question you on it, but

at the same time, you and I may not be here. And we all know that

last year, Mr. Greenspan was here last week and he was discussing

his concerns with the end of year last year spending frenzy. I think

he’s right, we did have a spending frenzy last year, I think it’s a

legitimate concern.

But I also want to point out that the leadership in neither the

House nor the Senate has changed since last year. Now, we tried

our best to change it, but it didn’t change. And if the leadership

doesn’t change, I have no assurances we’re not going to have another spending frenzy.

And I will tell you that though I have absolutely no problem

bringing pork home to my district, that’s what I’m here for, my district didn’t get much of that pork. And if I had some, maybe I

wouldn’t be complaining so much. [Laughter.]

But it didn’t. I have no assurances that we’re not going to have

another spending frenzy, and there’s nothing here that says I

won’t. As long as there’s an $842 billion contingency sitting there

that’s not earmarked for Medicare, we have the same risks we had

last year.

The last thing, since I’m running out of time, that I want to talk

about, is simply, I know that before you were Governor you were

a State representative. As a member of that legislative body, I

would be shocked, I’d be shocked if you or any other responsible

member of any legislative body would sit and pass a budget proposal that cannot answer so many important questions, if nothing

else, Medicare alone. It simply says, oh, pass a budget, spend all

this money, give all these huge tax breaks.

I want to make it real clear, real clear for the 500th time, no

one—I shouldn’t say no one—I’m not aware of anyone in the House,

Democrat or Republican, who doesn’t agree with you that there is

room for a tax cut, there is room to take care of the debt problems,

there is room to take care of Medicaid, and there is room to take

care of some of our spending priorities. The problem is, how much

are we going to do for each one of them and who’s going to get the

benefit. That’s the discussion. It’s not the discussion whether we’re

going to have it or not.

So my concern is, we’re being asked today to pass a tax cut, I

guess tomorrow, I just came from another hearing that has more

money that wants to be spent for the SEC over at the Banking

Committee, financial services. And I sit here today being asked to

39

pass a budget, never mind the softness of the estimates. I understand that. But I’m going to be asked to pass a budget that says,

trust us, put the money under contingency, and trust yourselves,

I mean, Congress is at fault as well, we all spend money, that’s

what we’re here for.

And I don’t have any of those answers. I would feel much better

if this money were either set off to the side, in writing, that’s it,

and, not just or, and that this budget and this tax cut were to wait

a month or two, whatever it takes, to come up with the proposals

that deal with such important things, and there’s lots of them, but

Medicare being the one I’m here to discuss today, and then we can

have that debate, knowing that we may agree, we may disagree.

But at least we’ll know what we’re talking about.

I’m afraid that when it comes time to fix Medicare, the money’s

gone. The money’s gone. And I’m supposed to look at most of my

constituents, who are going to get a few hundred bucks, at best, 10

years from now, and a tax cut, and say, sorry, you took your

money, we don’t have the money to fix Medicare. And I don’t see

anything in this budget that would assure me otherwise, unless

that money is completely set aside either legally or at least in writing in the budget. And I would ask that you bring that message

back to the administration some point soon.

Secretary THOMPSON. Thank you very much for your comments.

And I appreciate the admonitions. I think the Chairman of the

committee, Mr. Nussle, said it as well as anybody could say at the

beginning of the meeting, saying that this House, your House, is

going to pass a lock box. We’re not taking a position on that as the

administration, but it seems to me that you and Mr. Nussle are on

the same hymn book, singing the same hymn, and it’s probably

going to proceed that way.

So I believe it’s in your hands. I’m not in any way being evasive.

I just understand and I thank you for your comments.

Mr. CAPUANO. I look forward to agreeing with Mr. Nussle.

Chairman NUSSLE. It may happen a lot, who knows. Thank you

very much.

Secretary THOMPSON. Let’s hope it’s on Medicare reform.

Chairman NUSSLE. Mr. Collins.

Mr. COLLINS. Thank you, Mr. Chairman.

I’ll assure the gentleman from Massachusetts that the proper

changes in leadership in this town were made last year. [Laughter.]

Welcome, Mr. Secretary. You’ve mentioned that this is the largest insurance company in this country. It’s also, I consider the largest HMO in this country. It’s Government-run, which leaves a lot

of room for error and inefficiency. On top of that, the Congress is

the one that tries to run it by law. That even creates a worse problem.

It’s an entitlement, meaning that if you fit the criteria of the law

you’re entitled to the benefits under the Medicare. I’m just pleased

that President Bush is looking beyond the politics of this program

and focusing on policy. I look with anticipation of your recommendations to Congress on how we change that policy to make

it more efficient. I understand the six points that you made earlier,

and I think those are good points.

40

I hope the Congress has the will that the President has, and that

is, to deal with this issue beyond the politics of it, and get into the

actual policy of it. I’m on the Ways and Means Committee, which

we will deal with a lot of the Medicare itself.

Folks at home who are insured under this giant HMO understand the program and the threats to the health insurance under

Medicare. They understand that the arithmetic won’t work. When

you look at the ratio of workers today of 3.3 to those who are insured, and 30 years from now it will be 2 workers to 1, those numbers don’t work. They won’t work. As far as what it’s going to cost

in the future for this program, I don’t think anyone really knows.

Because it’s an entitlement. The demand based on the law will

drive the numbers.

The only way you can change that is not by saying you’re going

to throw more dollars at it, by looking at the policy itself. In my

understanding, from your comments here this morning, and I like

what you have done in the past as Governor. We enjoyed working

with you in 1995 and 1996, when we were going through the welfare reform on the Ways and Means Committee. I learned then

that I was a mean spirited fellow. I heard it every day. In fact, I

told a gentleman who was retiring from that committee at the end

of that 1996 year that I went to his retirement because I wanted

to hear him tell me one more time how mean spirited I am.

Well, really we’re not. We’re a compassionate body. The President is a compassionate person. But what we’re dealing with is an

HMO micromanaged by Congress, by a law, and that has to be

looked at and addressed in changing the law itself, dealing with

the policy. The money will be there. It will be driven by the policy.

We have no choice.

Thank you, Mr. Secretary, and I look forward to working with

you.

Secretary THOMPSON. Thank you very much, Congressman Collins, for your wonderful statement. I appreciate that and you’re absolutely dead on the mark.

Chairman NUSSLE. Thank you, Mr. Collins.

Mr. Moore.

Mr. MOORE. Thank you, Mr. Chairman.

Mr. Secretary, welcome, congratulations and good luck.

Secretary THOMPSON. Thank you, sir.

Mr. MOORE. I’ve only been here 2 years, so I’m going to be learning with you, but I would like to talk to you for just a couple of

minutes about a telephone call that I had yesterday at 3:30 from

Mitch Daniels, who appeared before this committee last week and

testified in the morning. I think Mr. O’Neill was in the afternoon.

I presume when Mr. Daniels called me yesterday to discuss the

President’s tax cut proposal, he knew that I had voted for estate

tax relief last year, as well as marriage penalty tax relief. He basically said to me, can you be with us on this tax cut. And I said,

I want to be direct with you. And he said, please do. I said, I’ve

got a couple of concerns. Number one, I wish we had a budget before we had a vote on a tax cut proposal. Of course, this is the

Budget Committee, and everybody here, I believe, is interested in

a budget and how the numbers add up before we start either new

spending programs or big tax cuts.

41

Again, I voted for tax cuts, I want to vote for tax cuts again and

I think the people deserve it. It’s not a question, really, whether

we’re going to have a tax cut or not, it’s how much, I believe.

I said, the first concern is, we don’t have a budget. My second

concern, I said, is, and this was yesterday, I said Sunday I was

watching the news and the weather. They reported that there was

going to be, on the weather they projected a 12 inch snow in Washington, D.C. on Monday. It made me wonder whether I’d get back

here in time for a tax cut vote on Thursday, which is based on a

projection of $5.6 trillion over the next 10 years.

Now, if a weather report can be that wrong in just 24 hours, my

question, how reliable projections on the economic numbers are

over the next 5 and 10 years. I would ask, I guess, do you share

those concerns about the realities of those projections?

Secretary THOMPSON. I share not the concerns, I share the optimism that those numbers are going to be there. I also share the

belief that they may be understated. I feel very comfortable with

what the projections indicate. Projections can be wrong. They’ve

been wrong in the past.

Mr. MOORE. And they could be wrong this time as well.

Secretary THOMPSON. They could be wrong. But it seems to me

that the conservative estimates that have gone into the projections

are such that you can feel pretty comfortable with the figures. In

fact, I think the error, if there’s going to be any, is on the fact that

it’s too conservative with the projections, and that there will be

more money available for all of these programs, tax cut and the

budget and Medicare reform.

Mr. MOORE. You know, you were Governor for 14 years in Wisconsin, correct, sir?

Secretary THOMPSON. That is correct, sir.

Mr. MOORE. You know Governor Bill Graves of Kansas?

Secretary THOMPSON. I do, very well.

Mr. MOORE. I’m from Kansas, and I know that the President

knows Governor Graves as well. I was over at the White House, invited over there 3 weeks ago Thursday. I told the President at that

time that Governor Graves, I’d seen a week before in the interview

in the Associated Press with Governor Graves. I believe if he were

sitting right here beside me he would tell you that what I’m going

to tell you is an accurate representation of what he said to the reporter. I thought he was very candid. He was talking in that interview about projected revenues that were coming into Kansas, he

was talking about tax cuts and about funding education.

What the Governor said was, if I had known then what I know

now, with some of the shortfalls in revenues our State is experiencing, I would have done things differently in terms of some of the

tax cuts we made. What he was saying was, we’re having a heck

of a time finding money to fund some of the vital education programs in our State. And just by sheer coincidence, that very morning on the front page of the New York Times, Kansas as well as

15 other States and their Governors were mentioned who were experiencing similar difficulties in their States with revenue shortfalls, and their attempts to try to find money to fund some of the

vital programs in their State.

42

Can you understand my concern about these revenue projections,

and even though you’re optimistic, can you understand my concern?

Secretary THOMPSON. I can understand your concerns, and I have

to tell you that Bill Graves is a very good friend and I strongly endorse Governor Graves. I’m new to the Federal system. I’ve been

here for 30 days. You’ve had 2 years. But when OMB, with their

expertise, makes projections, I think you have to rely upon it. Their

growth numbers are very conservative. That’s why I feel very comfortable and optimistic that they’re going to be met, and I think exceeded.

Mr. MOORE. Well, I think everybody here hopes that you’re right.

And I hope that optimism is warranted. Because if we’re wrong, I

fear that our country could be in for another 30 years of deficit

spending. I don’t want that to happen. I know you don’t either and

I’m sure everybody in this room does not want that to happen.

Secretary THOMPSON. I don’t think anybody wants that to happen, Congressman.

Mr. MOORE. Another part of the problem I have, I guess, with

the fact that we don’t have a budget yet, and that budget’s expected in April, is that correct, the detailed budget?

Secretary THOMPSON. That is correct.

Mr. MOORE. I understand the President has recommended in his

Blueprint, which we got the day after his speech, an increase in

HHS funding of about $2.8 billion, is that correct, for the next

year?

Secretary THOMPSON. That is correct.

Mr. MOORE. I think that is equal to the number of the increase

in NIH funding, is that correct, sir?

Secretary THOMPSON. It is.

Mr. MOORE. Would that mean, am I correct in assuming, them,

or presuming that if the funding for the increase in NIH is the

same as the increase for HHS that some of the programs which you

may have not targeted as far as a number yet, a budget number

yet, because you haven’t gone through the process, are either going

to be frozen or cut, including shelters for battered women, meals

on wheels for senior citizens, low income heating programs, Head

Start, Ryan White AIDS treatment and prevention grants, Maternal and Child Health Care Healthy Start, Centers for Disease Control and Food and Drug Administration? Does that mean those programs could be frozen or cut from their present levels?

Secretary THOMPSON. You’ve made a list there that’s very emotional, and I would have to tell you that most of those programs

are not going to be cut or level funded. You have to realize that

the Department of Health and Human Services budget, has a huge

budget. We were able to pick up $475 million just on one-time programs that Congress funded last year that have now met their purpose and are no longer needed. So there’s $475 million there.

There’s another $155 million that we were able to pick up that

were not only one-time, but they were not requested by the Department to continue. So you’re almost up to $650 million. Then there

are some other things that are going to be level funded, and I’m

not here to tell you that they’re not. And there are going to be some

programs that are going to be reduced from fiscal year 2001 funding.

43

But you also have to realize the Department of Health and

Human Services has been growing at the rate of about 8 percent

a year. So there is some massage room in there so that we can do

a very good job for all of those programs and continue to provide

the services needed for all Americans.

Mr. MOORE. I don’t mean to be emotional, but people in this

country do depend upon those programs.

Secretary THOMPSON. I know they do, and I intend to give them

the best service I possibly can.

Mr. MOORE. Thank you very much.

Secretary THOMPSON. Thank you.

Chairman NUSSLE. Dr. Fletcher.

Dr. FLETCHER. Thank you, Mr. Chairman. We certainly welcome

you, Mr. Secretary. The definition that you often hear for luck is

when ability meets opportunity. I feel you’re going to have some

pretty good luck here, so thank you. I applaud the President for the

appointment of you as Secretary.

Looking at the leadership, I served in the State House and

looked at your work back in the early 1990’s in welfare reform. It

stood out in the Nation as some of the most progressive and caring

legislation to bring people out of the cycle of poverty that this Nation has seen in the last several decades.

I also want to say that as we look at the budget, and as I was

looking through the numbers, I see over 5 years, the President calls

for about $1.3 trillion in total Medicare budget authority. I’m reminded of last year and the year before when we saw some budgets

from the former administration. We had some cuts actually in

Medicare, $28 billion 1 year with cuts in outpatient treatment of

cancer, renal dialysis, medication, some other things that I think

would take us back in time.

Medicine is changing substantially, and the system that was designed in 1965 does need updating, needs improving. There’s a lot

of room for improving, and the demarcation between A and B is a

false demarcation. Many of the treatments, procedures are done as

outpatient, and we incur a great deal of cost because some of them

are required to be done inpatient now that could be done much

more cost effectively outpatient. So I again look forward to your efforts to improving Medicare, because I do think there are some cost

savings.

Just to mention some of the other money, I noticed that you

spend over in HHS, or has been spent, about $1.5 billion on information technology, trying to keep up all those 200 different computer systems. I would recommend you look at buying a computer

company. Their price is low now, you could probably purchase one

over a couple years.

Secretary THOMPSON. That’s the best idea I’ve heard all day,

Congressman.

Dr. FLETCHER. And maybe update that, bring us in to the 21st

century. I think we’re ready to cross that bridge now, with the new

leadership.

Let me ask you a couple of questions, though . There are some

members that have concern about enacting a stand alone Medicare

prescription drug bill or program might inhibit us to move forward

or take some of the impetus out of reforming Medicare, which is

44

much needed. What are your feelings about that? What do you recommend?

Secretary THOMPSON. I’m very concerned about it, Congressman,

and I know the President is as well. We feel very strongly as an

administration that this is a golden opportunity for us, as a Congress, as a country, to reform Medicare, integrate Part A and Part

B, make it a unified system, find new options for individuals to

purchase, look at ways in which we could expand Medicare plus,

and find ways in which we can put it on a more efficient paying

system. All of this could be lost if Congress just passes a prescription drug bill. Because that’s the Cinderella. It’s the beautiful part.

That’s what everyone wants to pass and go out and campaign on.

Once that’s done, is there going to be an impetus by this Congress to do the heavy lifting to reform Medicare? The administration doesn’t think so. We’ve got a once in a long time opportunity

to reform Medicare, and let’s do it on a bipartisan basis, and let’s

do it right. I’m confident that we can do it, and I thank you for

your support.

Dr. FLETCHER. Well, I’m encouraged to hear that, because I think

it is important, we do have an opportunity. Medicine has changed

substantially from acute care to chronic disease management as

well as prevention. And Medicare obviously doesn’t meet those

modern needs that have come about because of certainly an increase in technology and an ability we have with drugs like Lipitor,

as you mentioned, that prevent disease rather than paying for bypass surgery or something down the road.

Let me ask you about Medicaid. What can we do? There’s several

States that are having a problem because of Medicaid over-expenditures. Kentucky’s one of them. We just increased or got projections

that show an increased deficit primarily related to prescription

drugs and expenditures, at least in the State of Kentucky.

What can we do from the Federal level? You bring a great deal

of expertise, I’m sure, with Medicaid, in your experience as Governor. What can we do structurally or from a leadership standpoint

here in Washington to help confront those problem?

Secretary THOMPSON. I think what we have to do, Congressman,

is to allow for an expanded waiver procedure on Medicaid, allow

States to really manage their Medicaid system and not penalize

them. Give them an opportunity to use the best and the brightest

individuals in their State to develop programs and plans that are

going to administer health care, and be able to do it in a flexible

way and not penalize them when they want to do it differently, not

have a rigid system. I think that would go a long way.

Oregon has an interesting concept. Tennessee has an interesting

concept, and they’re making changes to make it more financially

solvent. North Carolina just came in with a waiver on Medicaid,

and I was able to grant that. A lot of States are trying things differently. Let’s give them the hope and the opportunity to do that.

I think you’d be surprised, just like we found in welfare, it wasn’t

only Wisconsin. It was your State and States like Texas that came

up with some innovative ideas that made welfare reform a success

in this country. I think we can have the same kind of results with

Medicaid.

45

Dr. FLETCHER. Well, thank you, and I do look forward to working

with you to help enact some of these changes. We welcome you to

Kentucky, the beautiful Bluegrass State, and thank you very much,

Mr. Secretary.

Secretary THOMPSON. I’d love to come down, you’ve got a beautiful State. Thank you, Congressman.

Chairman NUSSLE. Mr. Honda.

Mr. HONDA. Thank you very much.

Congratulations on your appointment, and as said before, some

of us are new, and I am new also.

Secretary THOMPSON. Thank you. We’ll both learn together, Congressman.

Mr. HONDA. Being new, though, I guess that allows us to ask

some what some people might consider ignorant questions. So let

me go about doing this. The budget that I received is called a blueprint. Usually a blueprint is a well defined, very detailed document. This document seems to be more conceptual in its framework.

Given that, you talked about an increase of 8 percent at HHS,

in that Department, where is it that we see it, and that must be

an average increase, correct, 8 percent?

Secretary THOMPSON. The 8 percent, the biggest——

Mr. HONDA. It’s 8 percent growth in——

Secretary THOMPSON. Eight percent growth. It goes from $436

billion, which is the fiscal year 2001 numbers, to $471 billion, a little over $35 billion. That’s an 8 percent growth. That’s in both the

mandatory and discretionary.

The discretionary payments, which go from $52.8 million to $55.5

million is a 5.1 percent growth. That’s the discretionary. And the

mandatory is where Medicare and Medicaid and SCHIP is. The discretionary is the other programs.

Mr. HONDA. And you’re saying that the 8 percent growth is something that you would like to see controlled. I guess my question to

you is that when there are needs, and we have to cover the discretionary portion, should we not meet those if we have the revenue?

And under the category where it’s required funding, we have a

trust fund. Should that not be applied to those programs, rather

than merging them?

Secretary THOMPSON. That’s got to be a decision by Congress. I

think the Department of Health and Human Services has received

very generous allotments in the last several years. Sometimes over

8 percent, but the average has been for the last, I believe, four fiscal years, I may be wrong in that, but the Department as a whole

has grown by 8 percent.

President Bush feels that that is too much growth, and that we

cannot sustain that. If we’re going to continue to have tax cuts, if

we’re going to continue to modernize the Federal Government, if

we’re going to continue to be able to hold down so that Government

doesn’t continue to keep growing at such an alarming rate, that he

felt it was a more sustainable rate at 4 percent. That’s what this

budget is all about. HHS even is above that 4 percent, and has

been generously treated by this Congress in the past. We feel very

comfortable in the Department that a 5.1 percent growth is acceptVerDate 11-MAY-2000 15:22 May 29, 2001 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 H:\DOCS\HEARINGS\107-5\HBU066.000 HBUDGET1 PsN: HBUDGET1
46

able and one that we can handle, and deliver the services and

make the kind of changes I’ve been talking about.

Mr. HONDA. I guess that’s the dilemma I find myself in, and perhaps someone else has the details. But for us to have a real good

discussion on the details that you’re describing, it seems to me that

we would have to have a full budget before us in order to have this

discussion. Is there a time definite that we’ll be able to get a detailed budget from your Department?

Secretary THOMPSON. It’s my understanding, Congressman, that

the budget will be delivered in the first week of April.

Mr. HONDA. April? OK. And so, in general, in the usual process

when you were Governor, before anybody talked about having discussions about the amount that we can set aside and return back

to the taxpayers, did you not usually have a budget before you

first, and then you considered what a tax cut might look like for

the taxpayers?

Secretary THOMPSON. I have learned that there are a lot of differences going from the State and being Governor to the Federal

level. What works at the State level I guess doesn’t necessarily

mean that it works at the Federal level or is being done at the Federal level. We at the State level would never have everything included in one budget. We have a capital budget and we have an

operating budget and we have a segregated budget. Most States

have at least an operating budget and a capital budget.

But the Federal Government for some reason has just one budget, I guess it’s always been the way business has been done. I am

not questioning that; it just is a different style.

So I don’t think you can compare. I’m using that as an example.

I don’t think you can automatically compare what we do at the

State level to the Federal level, because it’s completely two different systems.

Mr. HONDA. Thank you.

Chairman NUSSLE. Thank you.

Mr. Hastings.

Mr. HASTINGS. Thank you. I think I’m painfully the last one

here, Mr. Secretary. It’s good seeing you again.

Secretary THOMPSON. It’s always a pleasure seeing you.

Mr. HASTINGS. I just wanted to mention one thing. One other

member asked you about projections. That is an inexact science.

But just keep in mind, in 1997 we passed the Balanced Budget Act.

We thought we’d balance the budget in 2002. And we in fact balanced it in 1999. So your projections go both ways.

What I would like to just talk about briefly is Medicare and Medicaid. I’m one of those States where the formula penalizes, and I

spent President’s Day recess talking to all my providers. I’ve done

this the last 3 years. So I asked them to come up with, because I

keep hearing the same thing, the formula’s wrong, I think you’re

exactly right, it’s a political problem, it’s pretty hard to do it. If two

people sat down and said, we have a high and a low, the easiest

compromise is right in the middle, that’s not going to happen in a

political body like this. So you have to find some structural

changes.

I’ve heard a lot about regulations. But those things are hard to

get a handle around, because they’re all intertwined. I’ve asked my

47

providers to come up with a top 10. I’d be more than happy to

share them with you when the time comes.

Because I think there need to be some structural changes. I

think what you’re doing your idea with prescription drugs and

Medicare overhaul, that is precisely the way to go. I look forward

to working with you on that.

Since you have been a leader on welfare reform, and you indicated to Mr. Fletcher that perhaps Medicaid, I’m not going to put

words in your mouth, ought to be maybe following the same model

as welfare reform, are there some similarities that we can look at

in Medicare in that regard also?

Secretary THOMPSON. I’m not sure you can, Congressman. I’m

not saying you can’t, but I’m not sure, because it’s a completely different entity. It’s completely funded by the Federal Government.

And it’s controlled by the Federal Government, all the rules and

regulations and administration of it is by the Federal Government

pretty much. So it’s very difficult, I think, to make the same analogy to Medicaid and to welfare from Medicare.

I think you can make the argument that it’s got to be much more

responsive, it’s got to be simpler, and it’s got to be much more uniform as it relates to the administration here in Washington than

what we’ve actually seen in the past.

Mr. HASTINGS. Well, maybe something will come out of my effort

to try to find regulations that are onerous to our providers that

may show a regional or State difference. In other words, central

Washington may be a whole lot different than say, Manhattan.

Maybe there needs to be some flexibility in that regard.

Secretary THOMPSON. Oh, I didn’t refer to rules. I think with

rules, we can do a much better job. One of the real problems has

been that we have too many rules and they change too often. Then

they have some kind of ex post facto result. We have to be prospective, and we have to simplify the rules.

I don’t know about you, but I tried to read some of these rules,

and I just blank out. I can’t understand them. I feel I’m a fairly

quick study. So I can imagine what a provider is thinking about,

back in Washington or back in New York. I think we can do a better job. That’s what I hope to do.

Mr. HASTINGS. You’ll discover here when you hear two bells and

all this stuff that we have to go vote. I will be more than happy

when I gather all this information to obviously work with you to

provide some of the onerous rules and regulations.

With that, Mr. Chairman, thank you. I know we have to go vote,

and it’s good seeing you, Mr. Secretary.

Secretary THOMPSON. Always a pleasure. Thank you so very

much.

Chairman NUSSLE. Thank you, Mr. Secretary, for your testimony.

[Recess.]

Chairman NUSSLE. The committee will come to order.

Now we will begin the panel for today’s second hearing on the

President’s Budget for Health and Human Services. This morning,

we heard from the newly sworn-in Secretary, former Governor

Tommmy Thompson, now the Secretary of the Department of

Health and Human Services.

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This afternoon, we will focus on welfare in our next panel. I will

invite our two gentlemen to come forward to the witness table. We

have two leading authorities on the subject of welfare in our country, two that were involved in the welfare debate and reform proposals, certainly from two different vantage points, but nonetheless

both well respected in the field. We are honored to have both of

them here today.

First, we have Robert Rector, who is from The Heritage Foundation. He is, as I said, one of the leading authorities on poverty and

on the U.S. welfare system. He focuses on a range of issues relating

to welfare reform, family breakdown and America’s various social

ills. He played a major role in crafting the Federal welfare reform

legislation which passed in 1996 and has conducted extensive research on the economic costs of welfare and its role in undermining

families. We welcome Mr. Rector to our witness table today.

We also have Wendell Primus who is a leading authority on welfare as well. He joined the Center on Budget Policy and Priorities

in the beginning of 1997 and is the Director of Income Security. As

head of this division, he is working to expand the Center’s research

into areas including Social Security, unemployment insurance, income poverty trends, Federal policy relating to 1996 Federal welfare law.

At the U.S. Department of Health and Human Services, he

served as the Deputy Assistant Secretary for Human Services Policy in the Office of the Assistant Secretary for Planning and Evaluation.

We appreciate both of you coming today and I understand Mr.

Primus is also going to regale us a little bit with his expertise

about Iowa, to which I am looking forward.

I will invite you to testify as you would like. Your entire testimony will be made part of the record without objection. You may

summarize your testimony as you see fit and we will proceed from

there with questions.

First, I will recognize Mr. Rector. You may proceed.

STATEMENT OF ROBERT RECTOR, THE HERITAGE

FOUNDATION

Mr. RECTOR. Thank you.

Today, I am going to speak about total means tested welfare

spending and the budget which is a topic we do not hear very much

about but I think it is very important to look at the total amount

of aid and the total system of providing aid to poor people which

the Federal Government currently provides in a holistic manner

rather than splitting it up into 20 different little parts which gives

you a very misleading picture about its size and its nature.

By total means tested aid I am covering cash, food, housing,

medical care, social services, training and directed education provided to low income persons. As I talk, if you have my written testimony, it would be easier if you could look at some of the charts.

Particularly now, I am speaking about Chart 2 in my written testimony.

In fiscal year 2000, the Federal Government spent $312 billion

on means tested aid to low income and poor people. With largely

mandatory contributions made by the State Governments, that

49

total came to $434 billion, a record high and about 4 percent of our

entire economy.

The amount of money we are spending on welfare last year alone

exceeds the entire gross national production of this Nation at the

beginning of the 20th Century. This spending has grown astronomically as Chart 2 will show.

When Lyndon Johnson launched the War on Poverty, we were spending $8 billion on welfare. Today that figure is now $434 billion. Even adjusting for inflation, welfare spending has increased

tenfold since the beginning of the War on Poverty and cash, food

and housing alone has increased sevenfold.

If Lyndon Johnson were to return today, look at the welfare state and look at that $434 billion, he would simply be appalled. He

would not be able to believe it. He would also clearly recognize that

this spending violates the essential principles of what he was trying to accomplish in the War on Poverty.

In launching the War on Poverty, Lyndon Johnson clearly stated

that he did not believe in unlimited growth of one-way handouts

and in unlimited growth in dependency. He did not believe in having an ever larger growth of people on the welfare system. Instead,

his goal was to reduce the behavioral causes which made dependency and poverty necessary. He had a joint goal of reducing poverty

and reducing dependency. I would say on both of those goals over

the last 35 years, we have largely failed.

The welfare spending growth that we have seen since the beginning of the War on Poverty has continued during the 1990’s. Very

few people realize that during the 1990’s, we actually had a welfare spending explosion. Total spending rose from $215 billion in 1990

to $434 billion in the year 2000. That is a doubling of growth. Even

after adjustment for inflation, the growth is at 61 percent. This

spending growth is projected to continue under the Bush budget.

If you could turn to Chart 4, it outlines both the growth the during the 1980’s and 1990’s as well as the projected growth that can

be determined from the figures in the Bush blueprint budget. What

we see is the total welfare spending over the next 5 years will rise

from $434 billion to $573 billion, an increase of roughly one-third.

Cash, food and housing will go up by roughly 25 percent.

It is particularly interesting given that the new administration

has a priority on defense to compare the defense outlay growth

with the projected welfare outlay growth. Defense spending, as you

can see on Chart 4, is projected to grow by about 17 percent over

the next 5 years. Welfare alone is going to grow by 31 percent. The

gap between welfare spending and defense spending will actually

go up over the next 5 years.

I think with this amount of money, which I think would stun the

average taxpayer, it is very, very difficult for anyone to claim that

the proposed Bush budget and tax cuts are in any sense going to

constrain or cause cuts in the welfare system. In fact, they do no

even slow down the growth of the welfare system in any way whatsoever.

I think if we are interested in controlling the growth of welfare

spending, as well as truly helping the poor, we need to look beyond

simple spending at the causes of why all this spending is occurring.

In Chart 6, I think the major causes are clearly outlined there.

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About half of total welfare spending goes to families with children and of that spending, some 70 to 90 percent goes to parents

and single families. In fact, as we look at the welfare system as it

affects children in the United States today, it is almost exclusively

a subsidy system for single parents. That goes for virtually every

program that you would look at, public housing, Section 8 housing,

TANF, food stamps, earned income tax credit. They are all predominantly subsidy systems for single parents.

The reason that we have the welfare system we have is basically

because the out-of-wedlock birth rate in the United States rose

form 6 percent when the War on Poverty began in the 1960’s to 31

percent today and the divorce rate has also risen. That absolute

collapse of marriage creates the economic need for all of the programs which you here on the Budget Committee feel you have to

fund because these families do need assistance because of the decline of marriage.

Fortunately, in the budget proposed by President Bush, there is

a small new program in there to promote fatherhood which I think

could be considerably higher and that program would be a focal

point for developing new policies to bring down the out-of-wedlock

birth rate, to bring down the divorce rate, and to encourage and

stabilize marriage.

In conclusion, I would say if you look at these figures in the

budget, it is quite clear that welfare spending is out of control and

is going to continue on the present course to rise very, very rapidly

for the foreseeable future.

To control welfare spending in the future, we need to do one

thing in particular. We need to remove those behaviors which create a need for aid in the first place, specifically, the lack of work

and the lack of marriage. If we remove those behaviors, then the

need for this great growth in welfare spending will disappear and

the client population will be far better off.

Specifically, what we should look at in terms of future welfare

policy is requiring work as a condition of receiving aid. That increases employment and reduces poverty. We should specifically

encourage rather than discourage marriage. If we could get even a

slight increase in the marriage rate and a drop in the out-of-wedlock childbearing rate, we would see welfare dependence drop very,

very rapidly.

If we do those things, we will see the rate of spending growth

level off, the poverty rate in the United States drop very, very rapidly as it has over the last 3 years due to the TANF reforms and

we would also see the well being of children, the most important

thing, increase dramatically.

I thank you for your time.

[The prepared statement of Robert Rector follows:]

PREPARED STATEMENT OF ROBERT RECTOR, SENIOR RESEARCH FELLOW, THE

HERITAGE FOUNDATION

INTRODUCTION

The U.S. welfare system may be defined as the total set of government programs—Federal and State—that are designed explicitly to assist poor and low-income Americans.

Nearly all welfare programs are individually means-tested.1 Means-tested programs restrict eligibility for benefits to persons with non-welfare income below a

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certain level. Individuals with non-welfare income above a specified cutoff level may

not receive aid. Thus, Food Stamp and Temporary Assistance to Needy Families

(TANF) benefits are means-tested and constitute welfare, but Social Security benefits are not.

The current welfare system is highly complex, involving six departments: HHS,

Agriculture, HUD, Labor, Treasury, and Education. It is not unusual for a single

poor family to receive benefits from four different departments through as many as

six or seven overlapping programs. For example, a family might simultaneously receive benefits from: TANF, Medicaid, Food Stamps, Public Housing, WIC, Head

Start, and the Social Service Block Grant. It is therefore important to examine welfare holistically. Examination of a single program or department in isolation is invariably misleading.

THE COST OF THE WELFARE SYSTEM

The Federal Government currently runs over 70 major interrelated, means-tested

welfare programs, through the six departments mentioned above. State governments

contribute to many Federal programs, and some states operate small independent

programs as well. Most state welfare spending is actually required by the Federal

Government and thus should considered as an adjunct to the Federal system. Therefore, to understand the size of the welfare state, Federal and state spending must

be considered together. (A list of individual welfare programs is provided in Appendix B.)

Total Federal and state spending on welfare programs was $434 billion in FY

2000. Of that total, $313 billion (72 percent) came from Federal funding and $121

billion (28 percent) came from state or local funds. (See Chart 1.)

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Welfare spending is so large it is difficult to comprehend. On average, the annual

cost of the welfare system amounts to around $5,600 in taxes from each household

that paid Federal income tax in 2000. Adjusting for inflation, the amount taxpayers

now spend on welfare each year is greater than the value of the entire U.S. Gross

National Product at the beginning of the 20th century.

The combined Federal and state welfare system now includes cash aid, food, medical aid, housing aid, energy aid, jobs and training, targeted and means-tested education, social services, and urban and community development programs.2 As Table

One shows, in FY2000:

• Medical assistance to low income persons cost $222 billion or 51 percent of total

welfare spending.

• Cash, food and housing aid together cost $167 billion or 38 percent of the total.

• Social Services, training, targeted education, and community development aid

cost around $47 billion or 11 percent of the total.

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Roughly half of total welfare spending goes to families with children, most of

which are single parent households. The other half goes largely to the elderly and

to disabled adults.

THE GROWTH OF WELFARE SPENDING

As Chart 2 shows, throughout most of U.S. history welfare spending remained

low. In 1965 when Lyndon Johnson launched the War on Poverty, aggregate welfare

spending was only $8.9 billion. (This would amount to around $42 billion if adjusted

for inflation into today’s dollars.)

Since the beginning of the War on Poverty in 1965 welfare spending has exploded.

The rapid growth in welfare costs has continued to the present.

• In constant dollars, welfare spending has risen every year but four since the

beginning of the War on Poverty in 1965;

• As a nation, we now spend ten times as much on welfare, after adjusting for

inflation, as was spent when Lyndon Johnson launched the War on Poverty. We

spend twice as much as when Ronald Reagan was first elected.

• Cash, food, housing, and energy aid alone are nearly seven times greater today

than in 1965, after adjusting for inflation;

• As a percentage of Gross Domestic Product, welfare spending has grown from

1.2 percent in 1965 to 4.4 percent today.

Some might think that this spending growth merely reflects an increase in the

U.S. population. But, adjusting for inflation, welfare spending per person is now at

the highest level in U.S. history. In constant dollars, it is seven times higher than

at the start of the War on Poverty in the 1960’s.

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TOTAL COST OF THE WAR ON POVERTY

The financial cost of the War on Poverty has been enormous. Between 1965 and

2000 welfare spending cost taxpayers $8.29 trillion (in constant 2000 dollars). By

contrast, the cost to the United States of fighting World War II was $3.3 trillion

(expressed in 2000 dollars). Thus, the cost of the War on Poverty has been more

than twice the price tag for defeating Germany and Japan in World War II, after

adjusting for inflation.

WELFARE SPENDING IN THE NINETIES

Welfare spending has continued its rapid growth during the last decade. In nominal dollars (unadjusted for inflation), combined Federal and state welfare spending

doubled over the last 10 years. It rose from $215 billion in 1990 to $434 billion in

2000. The average rate of increase was 7.5% per year. Part of this spending increase

was due to inflation. But, even after adjusting for inflation, total welfare spending

grew by 61 percent over the decade.

As Chart 2 shows medical spending (mainly in the Medicaid program) grew most

rapidly during the 1990’s, but welfare cash, food, and housing spending grew as

well. Adjusting for inflation, cash, food and housing assistance is 37 percent higher

today than in 1990. However, the growth in these programs has slowed since 1995,

increasing no faster than the rate of inflation. This recent slowdown in spending is,

in part, the effect of welfare reforms enacted in mid-nineties.

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FUTURE WELFARE SPENDING GROWTH

President George W. Bush’s recent budget blueprint does not contain sufficient detail to permit projections of welfare spending program by program.3 However, the

budget blueprint does provide spending projections for two major budget functions

which are integral to the welfare system. These budget codes are Income Security

(Function Code 600) and Health (Function Code 500). Income Security contains cash

welfare, Food Stamps and other food aid, and housing aid.4 Health (Code 500) contains Medicaid and a few smaller means-tested health programs. Between them,

these two budget categories contain about 90 percent of the Federal welfare system

as it is described in this testimony. (Note: neither category includes Social Security

or Medicare.)

President Bush’s budget plan allows for spending in Income Security and Health

to grow as rapidly or more rapidly than did former President Clinton’s FY 20001

budget request. Income Security (Code 600) is scheduled to grow by 24 percent over

the next 5 years. Health (Code 500) is scheduled to grow by 62 percent over 5

years.5

Based on these figures it seems certain that means-tested welfare spending will

grow as rapidly under President Bush’s first budget request as under Clinton’s last.

Projected welfare spending figures from Clinton’s last budget (FY2001) are provided

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in Appendix A.6 These figures show a rapid of growth in welfare spending. (See

Chart 3.)7

• Total Federal welfare spending is projected to grow from $315 billion in 2000

to $412 billion in 2005: an increase of 31 percent. The annual rate of spending increase is projected at 5.5 percent.

• Federal spending on cash, food, and housing aid is projected to grow from $141

billion to $174 billion: an increase of 23 percent. The annual rate of spending increase would be 4.3 percent, nearly twice the anticipated rate of inflation.

• Together, Federal and state welfare spending would rise from around $434 billion in 2000 to $573 billion in 2005.

Again, although we do not yet have program by program spending projections

from the Bush administration, the broad budget function figures we do have allow

for the same rate of growth in cash, food, and housing as Clinton’s plan. Moreover,

the Bush figures would permit more rapid growth in health spending. Thus, clearly,

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President Bush’s plan does not require cuts in welfare spending or even a slowdown

in the rate of spending growth.

WELFARE AND DEFENSE

The rapid projected rate of growth of future welfare spending can be illustrated

by comparing welfare to defense. The President has promised to make defense

spending a priority. Under his budget plan, nominal defense outlays would increase

for the first time in a half decade. Defense spending would rise by 17 percent over

5 years from $299 billion in FY2000 to $347 billion in FY2005. During the same

period, however, welfare spending is scheduled to rise by 31 percent. As Chart 4

shows, the gap between welfare and defense spending will actually broaden during

this period.

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THE EFFECTS OF WELFARE REFORM

In 1996, Congress enacted a limited welfare reform; The Aid to Families with Dependent Children (AFDC) program was replaced by the Temporary Assistance to

Needy Families (TANF) program. Critically, a certain portion of AFDC/TANF recipients were required to engage in job search, on the job training, community service

work, or other constructive behaviors as a condition for receiving aid. The effects

of this reform have been dramatic. • AFDC/TANF caseloads have been cut nearly in half. • TANF outlays have fallen substantially. (See chart 5.) • The decline in the TANF caseload has led to a concomitant decline in Food

Stamp enrollments and spending.

While critics predicted the reform would increase child poverty, the exact opposite

has occurred. Once mothers were required to work or undertake constructive activities as a condition of receiving aid they left welfare rapidly. Employment of single

mothers increased substantially and the child poverty rate fell sharply from 20.8

percent in 1995 to 16.3 percent in 2000. The black child poverty rate and the poverty rate for children living with single mothers are both at the lowest points in

U.S. history.

In the welfare reform of 1996 all sides came out as winners: taxpayers, society

and children. By requiring welfare mothers to work as a condition of receiving aid,

welfare costs and dependence were reduced. Employment increased and poverty fell.

Moreover, research shows that prolonged welfare dependence itself is harmful to

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children; reducing welfare use and having working adults in the home to serve as

role models for children will improve those children’s prospects for success later in

life.

The workfare principles of the 1996 reform should be intensified and expanded.

Work requirements in TANF should be strengthened. Similar work requirements

should be established in the Food Stamp and public housing programs. Finally, because the reform has clearly succeeded in cutting welfare use, TANF outlays should

be reduced by 10 percent in future years.

WELFARE SPENDING AND THE COLLAPSE OF MARRIAGE

As noted previously, about half of all means-tested welfare spending is devoted

to families with children. Of this spending on children, nearly all goes to single parent families. Chart 6 shows the percent of aid to children in major welfare programs

which flows to single parent families. The single parent share is generally well

above 80 percent.

Clearly, the modern welfare state, as it relates to children is largely a support

system for single parenthood. Indeed, without the collapse of marriage which began

in the mid-1960’s, the part of the welfare state serving children would be almost

nonexistent.

The growth of single parent families, fostered by welfare, has had a devastating

effect on our society. Today nearly one third of all American children are born outside marriage. That’s one out-of-wedlock birth every 35 seconds. Of those born inside marriage, a great many will experience their parents’ divorce before they reach

age 18. Over half of children will spend all or part of their childhood in neverformed or broken families.

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This collapse of marriage is the principal cause of child poverty and a host of

other social ills. A child raised by a never-married mother is seven times more likely

to live in poverty than a child raised by his biological parents in an intact marriage.

Overall, some 80 percent of child poverty in the U.S. occurs to children from broken

or never-formed families. In addition, children in these families are more likely to

become involved in crime, to have emotional and behavioral problems, to be physically abused, to fail in school, to abuse drugs, and to end up on welfare as adults.

Since the collapse of marriage is the predominant cause of child-related welfare

spending, it follows that it will be very difficult to shrink the future welfare state

unless marriage is revitalized. Policies to reduce illegitimacy, reduce divorce and expand and strengthen marriage will prove to be by far the most effective means to:

• reduce dependence;

• cut future welfare costs;

• eradicate child poverty; and,

• improve child well-being.

Tragically, current government policy deliberately ignores or neglects marriage.

For every $1,000 which government currently spends subsidizing single parents,

only one dollar is spent attempting to reduce illegitimacy and strengthen marriage.

Fortunately, President’s Bush’s budget plan does propose a new program to ‘‘promote responsible fatherhood.’’ This proposed program could become the seedbed for

a broad array of new initiatives to strengthen marriage. Still, the money requested

is pitifully small: only $64 million per year. This amounts to roughly one penny for

each one hundred dollars in projected welfare spending. The budget allocation to the

new fatherhood program in FY 2002 should be increased fivefold with the funds diVerDate 11-MAY-2000 15:22 May 29, 2001 Jkt 000000 PO 00000 Frm 00064 Fmt 6633 Sfmt 6621 H:\DOCS\HEARINGS\107-5\HBU066.000 HBUDGET1 PsN: HBUDGET1
61

verted from TANF outlays. Beyond FY 2000 some 5 to 10 percent of Federal TANF

funding should be devoted to pro-marriage activities.

CONCLUSION

When Lyndon Johnson launched the War on Poverty he did not envision an endless growth of welfare spending and dependence. If Johnson returned today to see

the size of the current welfare state he would be deeply shocked.

President Johnson’s focus was on giving the poor a ‘‘hand up’’ not a ‘‘hand out.’’ In his first speech announcing the War on Poverty, Johnson stated, ‘‘the war on poverty is not a struggle simply to support people, to make them dependent on the generosity of others.’’ Instead, the plan was to give the poor the behavioral skills and

values necessary to escape from both poverty and dependence. Johnson sought to

address the ‘‘the causes, not just the consequences of poverty.’’ Today, President Johnson’s original vision has been all but abandoned. We now

have a clear expectation that the number of persons receiving welfare aid should

be enlarged each year, and that the benefits they receive should be expanded. This

expectation is clearly reflected in the future spending projections in Appendix A.

Any failure to increase the numbers of individuals dependent on government and

the benefits they get is regarded as mean spirited.

Yet the expansion of the conventional welfare system is destructive. More than

twenty years ago, then President Jimmy Carter stated, ‘‘the welfare system is

antiwork, antifamily, inequitable in its treatment of the poor and wasteful of the

taxpayers’ dollars.’’ President Carter was correct, yet today little has changed except

that the welfare system has become vastly larger and more expensive.

This expansion of welfare spending has harmed rather than helped the poor. Instead of serving as a short-term ladder to help individuals climb out of the culture

of poverty, welfare has broadened and deepened the culture of self-destruction and

trapped untold millions in it.

Rather than increasing conventional welfare spending year after year, we should

change the foundations of the welfare system. Policy makers should embrace three

basic goals.

1. We should seek to limit the future growth of aggregate means-tested welfare

spending to the rate of inflation or slower.

2. We should require welfare recipients to perform community service work as a

condition of receiving aid along the lines of the TANF program operating in Wisconsin.

3. We should support programs which foster and sustain marriage rather than

subsidizing single parenthood. In addition, we should reduce the antimarriage penalties implicit in the welfare system.

These three goals are synergistic. They will operate in harmony and reinforce

each other. In the long run, it will be difficult to control welfare spending merely

by cutting funding. Rather, if we change the behaviors of potential recipients we will

reduce the need for future aid. As the need for aid diminishes, spending growth will

slow and then decline, and the well being of the poor and society as a whole will

rise.

ENDNOTES

1. A very small number of the programs listed in Appendix B are targeted to low

income communities rather than low income individuals. While such programs are

not formally means-tested, they should be considered part of the overall welfare system. Only a small fraction of aggregate welfare spending is provided through such

programs.

2. Appendix B provides a list of the major Federal and state welfare programs

covered in this testimony.

3. The White House, A Blueprint for New Beginnings: A Responsible Budget for

America’s Priorities, (Washington, D.C.: U.S. Government Printing Office, 2001)

4. Income Security (function code 600) contains some nonwelfare expenditures,

specifically outlays for retired Federal employees and other retirement spending.

However, the rate of growth of this retirement spending changes little from 1 year

to the next, therefore once the code 600 outlay totals are known one can predict the

means-tested component with reasonable accuracy.

5. The White House, p. 196.

6. Projected outlay figures taken from Office of Management and Budget, Budget

of the United States Government: Fiscal Year 2001, (Washington, D.C.: U.S. Government Printing Office, 2000). Table 32–2, pp. 352–364.

7. The outlay figures in Appendix A are less detailed than the past spending figures used in Table 1. This accounts for small discrepancies between the FY2000 figVerDate 11-MAY-2000 15:22 May 29, 2001 Jkt 000000 PO 00000 Frm 00065 Fmt 6633 Sfmt 6621 H:\DOCS\HEARINGS\107-5\HBU066.000 HBUDGET1 PsN: HBUDGET1
62

ures in Table 1and Appendix A. These minor differences do not appreciably affect

the overall analysis.

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Chairman NUSSLE. Thank you.

For the members’ benefit, we have three votes that are scheduled

on the floor. I am going to ask Mr. Primus to go ahead and give

us his testimony, I would like to hear it, and then we will go and

vote. We will come back after the votes to ask questions of the witnesses.

STATEMENT OF WENDELL PRIMUS, DIRECTOR, INCOME

SECURITY, CENTER ON BUDGET AND POLICY PRIORITIES

Mr. PRIMUS. Thank you for the opportunity to testify today.

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I would like to review what we know about the implementation

of welfare reform and then talk a little about the Bush budget.

Welfare reform has coincided with the longest running economic

expansion in our Nation’s history. Unemployment has fallen from

6.9 to 4 percent and hourly wages for the very bottom of the wage

distribution is increasing in real terms. We have also had enacted

make work pay policies of increasing the earned income tax credit

and significant increases in child care expenditures. Those policies

and that very strong economy have produced some very positive

outcomes, more positive than I would have predicted in 1996.

We clearly see that single mothers are working more, earning

more. In fact, the poorest 40 percent of mothers are earning about

$2,300 more each below about 115 to 120 percent of poverty. As a

result, child poverty has decreased. Under a measure of child poverty that includes food stamps, housing and the earned income tax

credit, it is now 12.9 percent, the lowest level since this measure

began in 1979. Caseloads have declined 56 percent in TANF, 35

percent in food stamps since 1994.

That is the very positive news. I want to emphasize is it has

come because of welfare reform, the strong economy and the make

work pay policies. We are really not able to disentangle which is

responsible for what parts of that very good news.

There is also some very troubling news. After adjusting for inflation, the very poorest mothers, those below 75 percent of poverty,

fell 4 percent between 1995 and 1999. We think about 700,000 families in this very strong economy have actually lost ground. The

poverty gap really has not budgeted much. If you look at the table

in my testimony, I show that if you do not count any government

and looks at earnings, it decreased significantly from 1993 to 1995

to 1999.

After you count all government taxes and transfers, there was almost no progress made between 1995 and 1999. In fact, this low

income mother on average who earned $2,300 more has only gotten

an increase in income of about $300 despite that increased earnings.

Many of those working families lost food stamps and President

Bush was appropriately concerned about the very high, marginal

tax rates as families entered the income tax system. However, single mothers with incomes between $13,000 and $20,000 typically

face marginal tax rates well above 50 percent.

What does that mean? That means if they go out and earn an

additional $1,000, they get to keep less than $500 of that. That is

because there is a food stamp tax rate of about 30 percent, that

varies between 24 and 36 percent. There is the EITC phase-out of

21 percent. They pay employee taxes and they also pay child care

co-pays in many cases as well as health insurance co-pays.

In your State of Iowa, we did some calculations, Mr. Chairman,

that looked at a mother say that had an increase in earnings from

$14,000 to $20,000. She gets to keep 30 percent of that $6,000 increase in earnings. So we think that the Bush administration has

missed many opportunities.

I want to add that while we have made enormous progress with

single mothers, we have not done nearly as well for young black

men in terms of increasing their labor forced participation and the

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MDRC tells us that we need both income and earnings gains to

really get positive outcomes. I would characterize the Bush budget where we have a $2.5 trillion non-Social Security, non-Medicare surplus, we really could

make significant improvements building upon welfare reform and

reducing those marginal tax rates for the working poor.

There is no expansion of the earned income tax credit. Working

families do not benefit from the Bush tax plan. We estimate that

33 percent of all children do not benefit; 55 percent of black children; 56 percent of Hispanic children do not benefit from the Bush

tax plan.

We could have made the child tax credit partially refundable, say

5 to 15 percent of earnings. That would have reduced those marginal tax rates and provided a significant increase in those mothers

who have responded to welfare reform and have entered the labor

force.

There is no funding for the change in child support distribution

rolls. I think we had a conversation last year where we know that

young men who pay child support sometimes face a 100 percent tax

rate. It is a mandatory payment that they should and must pay but

all of the proceeds go to government because we reduce that TANF

check dollar for dollar. There are no funds to improve those child

support distribution rolls and fund the bill that passed the House

last year, 405.

There is no expansion of Medicaid or SCHP. The typical state is

a mother loses Medicaid eligibility when she hits 67 percent of poverty. There is no improvement in the safety net for the working

poor legal immigrants. I also think we should have some funds to

restore some of the food stamp cuts enacted in 1996 that were primarily budget cuts. It was a reconciliation bill. That would again

ease some of those marginal tax rates. In sharp contrast, the Bush budget allocates $555 trillion to the

wealthiest 1 percent in this country who have incomes on average

of about $800,000 and who have gained, despite their high marginal tax rates, somewhat higher, an increase in income of 50 percent. They also got a significant tax reduction in 1997. I just want

to contrast what we have done for the very top versus how we

could have built upon welfare reform and helped working poor families.

In terms of the actual cuts in the Bush budget, there is no extension of TANF supplemental grants which means 17 States will actually get a reduction this year unless you extend those grants. I

think there is also a reduction in TANF funding because the Bush

administration says we are going to add a new purpose. We are

going to encourage States to encourage charitable giving. That

takes $400 million away from States to aid low income families and

I think primarily will reimburse middle class families for behavior

they are already undertaking. We have not yet seen all of the details.

We think there is about a $2 billion cut in HUD funding. We

know from the functional totals because there is an increase in

education in Function 500 that there has to be a significant increase in job training monies and there is also no expansion of

CHIP funds.

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If you recall, States are going to get $1.1 billion less this year

compared to 2001 because when it was enacted, there was this fall

off in funding. Now, with the surplus, I think there is clearly a

need to not go through that funding reduction.

In terms of how this fares in the State of Iowa, a State picked

at random.

Chairman NUSSLE. Could I ask you to save that because I would

like to hear this but I need to go and do my duty on the floor quickly and we will come back. Could we do that?

Mr. PRIMUS. Sure.

Chairman NUSSLE. The committee will be in recess until we are

done with the votes.

[Recess.]

Chairman NUSSLE. Mr. Primus, I interrupted your testimony so

that we could vote. I apologize for that. Please pick up where you

left off. I think you were about to tell me a bit about Iowa.

Mr. PRIMUS. Thank you.

I would like to demonstrate what some of these missed opportunities mean for working poor families in Iowa.

Some 28 percent of the children in Iowa would not benefit from

the Bush tax plan and 86 percent of those families include a worker. As I mentioned, I did a calculation for a single mother with two

children whose earnings increased from $14,000 to $20,000. She

faces a 70 percent marginal tax rate. I would argue that you ought

to be about the business of trying to reduce that tax rate so that

when she has entered the labor force, she gets to keep more of her

earnings.

About 9 percent of the children in Iowa lack health insurance. A

single mother who leaves welfare loses Medicaid assistance in Iowa

when her earnings get to 90 percent of poverty. In the typical

State, it is 67 percent of poverty and in most cases, when a noncustodial parent pays child support in Iowa, they essentially face

an effective 100 percent tax rate.

There is one other aspect. Nancy Johnson held a hearing last

year on what was an agreement among business and labor and administrators of the unemployment insurance system. The State of

Iowa has to impose an employer surtax to fund its employment

service. I think the budget should assume some unemployment insurance improvements along the lines of that stakeholder agreement.

Finally, I would hope that in this budget, and as the Congress

thinks about reauthorizing TANF, food stamps and child care next

year, one is that you make sure you reserve enough monies in the

budget so that reauthorization can take place. I would hope that

the authorizing committees could change the central focus from

caseload reduction to poverty reduction; that we need additional

supports to help the families remaining on welfare get into the

work force.

Something that I have worked a lot on in the last several years

is to really help noncustodial parents build capacity to support

their children financially and emotionally. The Bush budget does

include some new monies to really start to do that.

I think we also need to provide support to two parent families.

Two parent families are not being served by our welfare system.

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They have much lower participation rates in Medicaid, food stamps

and TANF. I think we need to increase funding.

In terms of the budget implications, I think there is a strong case

for extending the TANF supplemental grants. Those 17 States are

actually going to get a decrease. In terms of funding levels, they

get an average of about $700 per poor child. The nonsupplemental

States get $1,700 per poor child. The States getting these extra

grants have higher child poverty rates, lower fiscal capacity. The

Bush budget was correct in recommending a $200 million increase

a year in child welfare but they did not include the child support

distribution reforms.

In conclusion, the bottom line is, I think this surplus gives you

the opportunity to really build upon welfare reform and improve

our work-based safety net substantially. I would urge that you reallocate some of that $555 billion you are giving to the top 1 percent in the form of a tax cut and improve in some way child care

funding, Medicaid, health insurance for the working poor in this

country.

Thank you.

[The prepared presentation of Wendell Primus follows:]

PREPARED PRESENTATION OF WENDELL PRIMUS, DIRECTOR OF INCOME SECURITY,

CENTER ON BUDGET AND POLICY PRIORITIES

ECONOMIC CONTEXT OF WELFARE REFORM

Key Factors in Explaining the Positive Outcomes

• Welfare reform coincided with the longest-running economic expansion in our

nation’s history.

• Average annual unemployment fell from 6.9 percent in 1993 to 4.0 percent in

2000.

• Hourly wage rates for the lowest-paid workers began to rise after falling for two

consecutive decades.

• EITC expansions to make work pay.

• Increases in child care expenditures.

POSITIVE OUTCOMES OF WELFARE REFORM

• Single mother are working more.

• In 1992, about one-third of single mothers with young children were employed;

by 1999, more than half were employed.

• Single mothers are earning more.

• The poorest 40 percent of single mother families increased their earnings by

about $2,300 per family on average between 1995 and 1999 after adjusting for inflation.

• Child poverty has decreased.

• Under a measure of poverty that includes government benefits and taxes, the

child poverty rate fell to 12.9 percent in 1999 the lowest level since this measure

became available in 1979.

• Caseloads have declined by 56 percent in TANF and 35 percent in Food Stamps

since 1994.

TROUBLING RESULTS OF WELFARE REFORM

• After adjusting for inflation, the average disposable incomes of the poorest fifth

of single mothers fell 4 percent between 1995 and 1999, despite increased earnings.

• According to the Current Population Survey, there are 700,000 families that

have significantly less income in 1999 than their counterparts in 1995.

• The ‘‘poverty gap’’ has not budged significantly in recent years despite the decrease in the poverty rate.

• The poverty gap measures the total number of dollars that would be required

to bring all people with incomes below the poverty line up to the poverty line.

• Trends in disposable income.

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• While the poorest 40 percent of single mother families increased their earnings

by about $2,300 per family on average between 1995 and 1999, their disposable income increased only $292. (All figures adjusted for inflation.)

• Many working families are inappropriately losing ancillary benefits for which

they remain eligible, such as food stamps.

• Single mothers with incomes between about $13,000 and $20,000 face very high

marginal tax rates.

• The labor force participation rates of young African American men has fallen

6 percentage points between 1993 and 1999.

• MDRC results show that positive outcomes for children require both work and

income gains.

BUILDING ON WELFARE REFORM

Missed Opportunities to Help the Working Poor

• No expansions of the Earned Income Tax Credit, such as:

• A ‘‘third tier’’ in the EITC for families with three or more children.

• Reduction in the marriage penalty in the EITC.

• Expansion of the EITC in targeted income ranges to reduce marginal tax rates.

• Working poor families do not benefit from the Bush tax plan.

• Some 33 percent of all children will not benefit from the Bush tax plan; 55 percent of Black children and 56 percent of Hispanic children will not benefit.

• Could make the child tax credit partially refundable, by refunding a small percentage of earnings (between 5 percent and 15 percent) up to a maximum credit of

$1,000 per child.

• No funds to improve child support distribution rules like H.R. 4678, which

passed the House 405–18.

• Many low-income noncustodial parents face an effective tax rate of 100 percent

when they pay child support.

Missed Opportunities to Help the Working Poor

• No expansion of Medicaid or SCHIP for working parents and the many children

who remain uninsured.

• In the median state, a parent in a family of three loses Medicaid eligibility

when her income surpasses 67 percent of the poverty line.

• No improvement in the safety net for legal immigrants.

• Should restore food stamp benefits for the working poor and states should have

the option to restore Medicaid coverage.

• No funds to improve the Food Stamp program and restore ‘‘budget’’ cuts enacted

in 1996 that affected working families, among others.

• In sharp contrast, the administration budget allocates $555 billion to benefit the

richest 1 percent of Americans over the next decade, a group whose real income increased nearly 50 percent since 1989 and who enjoyed a significant tax cut in 1997.

This amount is more than health, education, and all other initiatives combined.

CUTS IN LOW-INCOME PROGRAMS

• No extension of TANF supplemental grants.

• Currently, wealthier states receive about $1,778 in TANF dollars per poor child,

while poorer states that received supplemental grants receive $733 per poor child.

• Reduction in TANF funding for low-income families because $400 million spent

on state tax credits for charitable giving.

• $2.2 billion cut in real funding for HUD programs.

• Reductions in job training monies.

• There is no expansion of SCHIP funding to offset a cut of $1.125 billion in FY

2002 compared to FY2001. This cut was a budget-related measure included when

the program was enacted.

THE WORKING POOR IN IOWA

• Some 28 percent of children in Iowa will not benefit from the Bush tax plan;

86 percent of excluded families include a worker.

• Single mothers with two children and child care expenses face average marginal

tax rates of 70 percent as their earnings increase from $14,000 to $20,000.

• Some 9 percent of children in Iowa lack health insurance coverage.

• A single mother leaving welfare loses health insurance coverage when her income reaches 90 percent of the poverty line.

• In many cases, low-income NCPs face an effective 100 percent tax rate on the

child support they pay.

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• Because of employment service funding reductions, Iowa has been forced to

enact a special surcharge on employers. The budget should assume unemployment

insurance improvements.

BUILDING ON WELFARE REFORM: TANF REAUTHORIZATION

• Change the law’s central focus from caseload reduction to poverty reduction.

• Support families in the transition from welfare to work by providing appropriate services for adults with significant employment barriers, examining sanction

policies, and modifying the time limit on Federal cash assistance.

• Help noncustodial parents build capacity to support their children both financially and emotionally.

• Provide services to strengthen two-parent families and help fragile families stay

together.

• Increase funding and make states more accountable for how they use their

TANF block grant funds.

• The block grant should be indexed for inflation.

• Additional funds to reduce the vast disparities in resources available to poorer

states.

• A more effective measure is necessary to provide states additional funds in case

of an economic downturn.

BUDGET IMPLICATIONS

• Extend TANF Supplemental Grants and put in baseline.

• Child Welfare.

• Child Support distribution reform.

• Fatherhood/Employment services for low-income NCPs.

• Unemployment Insurance reform.

• Monies for TANF, child care, the Social Services Block Grant, Food Stamps,

Medicaid, and SCHIP.

Chairman NUSSLE. Thank you both for your testimony with regard to welfare reform and poverty.

There is no question that the percentage both of you used, 56

percent of a reduction in the welfare rolls, that to a very large extent the reforms we put into place in 1996 have been generally

very successful, that there are a lot of success stories. I think what

both of you are telling us is that there are challenges that lie ahead

and you are giving us some advice on how best to meet those challenges.

Apart from the argument you make about the $555 billion going

to the top 1 percent, which my information tells me some of that

tax cut is attributed to people who are deceased which is an interesting way of computing it but probably not very realistic.

Aside from that, a debate over tax cuts, I think there is a longer

term issue here that both of you discuss and that is how do we

meet this challenge? What do we do? Obviously there are some

good reforms that were put into place creatively both by the Federal Government and by the State Government. There are still people both in Iowa, as well as every State, who have not yet been

able to figure out the benefit, or we have not figured out how to

benefit and get them on their feet. It is not just a matter of providing the assistance; it is also a matter of moving them from dependency to independence.

The question I would have is, what are your specific recommendations? I understand what you are saying about the tax

cut. Suggest for a moment, you have lost that argument, what

other suggestions would you make with regard to specific proposals

and reforms that you would hope to see us consider as part of our

moving forward, whether in this budget or budgets in years to

come?

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Mr. RECTOR. I would offer a number of points. The first is that

I think if you listen to Mr. Primus, and I have listened to him for

20 years now, you would think the welfare system was cut and cut

and cut and cut, but somehow when you look at the chart, it keeps

going up and the taxpayers keep paying more.

Since 1965, welfare spending, even after adjusting for inflation,

has increased every year but four. Every year it goes up. Somehow,

the book of Proverbs tells us, ‘‘The eyes of man are never full.’’ No

matter what is spent here, we have doubled spending in the last

10 years. You can always come back and hear dozens and dozens

of recommendations of why to spend more. Somehow the situation

never seems to improve. I think that is basically because we are

spending on the wrong things.

If we spend on one-way handouts, if we spend on programs that

reward idleness and reward single parenthood, you get more idleness and more single parenthood. That is the one thing we have

learned from welfare reform.

I would recommend a number of fundamental things. One is I

think you need to set a reasonable goal for future spending. I think

cash, food and housing should increase no faster than the rate of

inflation in future years. The underlying philosophy behind that is

as Lyndon Johnson said, ‘‘We want to have fewer people on welfare, not more.’’ We should have fewer people. Simply let the

spending increase no faster than the rate of inflation would allow

for some increases while having a declining population on the rolls.

The second, most important thing I think we could do in terms

of welfare program structure is to recognize that the reform we

passed in 1996 was only a half of a reform. The most significant

thing that happened in 1996 was we passed national requirements

that said women on AFDC are required to undertake some community work service or job search or some sort of constructive activity

as a condition for getting aid. When we did that, the caseload

dropped in half; the employment rates went up; the child poverty

rate for black children and children in single parent families is now

at the lowest point in the entire history of the United States largely as a result of that Act. That Act is quite weak. Most people do

not realize that of the 2 million welfare mothers still left on the

rolls, half are sitting there idly at home, not doing anything.

One thing we should do as we look toward TANF reauthorization

is have a requirement that all parents on TANF be required on a

weekly basis to participate in some sort of constructive activity

leading to self-sufficiency.

The other thing we need to understand is if we look at public

housing, of the aid that goes to children, 80 to 90 percent is to single parents; Section 8 housing, same thing; earned income tax credit, something like 66 percent; food stamps, aid to children, some 80

percent goes to single parents. These programs exist largely as subsidy systems that are trying to address the collapse of marriage

that began in the 1960’s. None of this spending would occur if that

collapse of marriage had not occurred.

Child poverty, 80 percent of the child poverty in the United

States today occurs to children from either a home where the mother never married or some sort of home that is broken or fractured.

Child poverty and welfare and single parenthood are essentially all

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the same problem, yet we never address why welfare exists. We

never address why that poverty exists.

The first and foremost thing I would recommend in future years

is we need to begin to devise active programs to encourage marriage rather than penalize it and recognize that all of these welfare

programs as means tested programs implicitly penalize marriage.

If the woman has a boyfriend who is the father of the child but he

has earnings, she gets to keep most of her welfare income as long

as she is not married to him. The moment she marries him, his

earnings are counted against her welfare eligibility and those benefits are going to be substantially reduced.

The whole system is antimarriage and has been that way for a

long time and it is also agnostic. It never talks to parents about

the value of marriage. Eighty-five percent of all the out-of-wedlock

child births are paid for right at the front door by Medicaid. That

is the first payment you have for that child, a substantial one.

In close to half of those cases, most of these are women in their

early 20’s, in close to half of those the woman is actually cohabiting

with the father at the time of birth, he is right there in the home,

they have a reasonable relationship. In no State in the United

States does the Government even say, have you two thought about

getting married, can we tell you what the effects on this child

would be if you did get married. Could we tell you the effects on

one another? Could we provide you with some mentoring services

or some skills to try to improve your relationships? That is the

singlemost important thing you could do to improve the well being

of that child, reduce his future prospect for child poverty as well

as substantially welfare outlays in the United States.

You could go from California to Maine and not find a single brochure in any Government office that says anything positive to that

young couple about marriage. I regard that as a terrible tragedy.

The last concrete recommendation I would make is that I think

TANF has been very successful in reducing dependency and poverty and it is time that the taxpayer gets some reward for that success. Therefore, I would recommend that when TANF is reauthorized next year, the future budget authority for TANF should be

fixed and cut by 10 percent above existing levels. That still leaves

more than enough funding to keep the TANF reform going forward,

particularly if you improve the work requirements.

Chairman NUSSLE. Mr. Primus.

Mr. PRIMUS. I will try to be brief.

I strongly support work and I think you have to encourage work

is by reducing those marginal tax rates I talked about. In the case

of Iowa, it might be providing more child care dollars so they do

not have to impose a co-pay but it also could be by reducing the

phaseout in the earned income tax credit. Today, we take away 21

cents for every dollar that is earned. Perhaps we should only take

away 10 or 15 cents until the family has lost food stamp eligibility.

Another way we could reduce marginal tax rates is making the

child tax credit refundable against earnings. In other words, phase

it in say at a 10 percent rate, so your mother and two kids reach

the $1,000 at $20,000, $1,000 for each child. That would also reduce marginal tax rates.

76

I think welfare reform has worked better than I thought. Those

mothers are working more but they are keeping as much of their

income.

The other thing I think is Medicaid. Today working parents lose

Medicaid in the typical State at 67 percent of poverty. I think you

have to provide additional SCHP or Medicaid funds so States can

cover the working poor to a higher level. Those three things would

do a lot for the work base.

Let me say something about marriage. I think there is a limit

to what Government can do. It cannot make two people love each

forever, even if they produced a child. There is research that suggests that the Child Support Enforcement Program, the stronger it

is, it reduces out of wedlock births and it lowers divorce rates, not

a heck of a lot but statistically significant.

I think we should be moving toward a universal child support

system where the cultural is if you do not live with your kids, you

pay. For some of the dads at the very bottom of the earning spectrum, we also need to help them get into the labor force and we

need to reduce the 100 percent tax rate on child support at the bottom. That is one very concrete thing you could do.

Chairman NUSSLE. I appreciate your recommendations.

Are there other members who wish to inquire? Ms. Clayton.

Ms. CLAYTON. I do have a statement and a couple of questions.

Mr. Rector, many of the points you make I certainly agree with.

However, I have an overriding feeling that you have made poor

people a scapegoat by the fact that increased government spending

has occurred and there are still more people who are dependent on

less food. I could take a chart for the same period of time and look

at defense spending and see it go up. I do not think it goes up in

proportion.

I can also tell you that I can take a budgetary projection for a

number of the sectors of this Government and see it go up. I also

believe that single parents add to the poverty rate and contribute

to a lot of the problems. I have committed myself to teenage pregnancy long before I came to Congress. I did not have to be a Member of Congress to be engaged in that. I do that in my own community.

Again, it should not be perceived that because they are there, we

do not make a difference. We turn our backs on that. Spending will

go up regardless. We will either be paying more in prisons or paying more to a system. There is no way not to have society pay for

dysfunctionality. So if we are not committed to changing that

dysfunctionality, those issues with education, prevention of teen

pregnancy and other things will continue. That is my sermon for

today.

My question is, in the EITC earning, would you be in favor of

increasing that for married families. Also, to what extent do you

think that would help in the poverty of married families since there

are married families in poverty just like singles.

Mr. RECTOR. One of the few increases in means tested spending

that I would support would be an increase in the earned income

tax credit for married couples. I think that would be very valuable

in terms of offsetting the antimarriage effects that exist in all of

these other programs. Let me emphasize again all means tested

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programs inherently have a household splitting effect. A lot of people think welfare is antimarriage because married couples cannot

get it. That is not true. What it says is you get welfare if you have

very low earnings in your home. What is the easiest way to have

very low earnings in the home is not to have an employed husband

on the record. He might be a boyfriend around the block but if you

get married, he is going to go on the record and you lose most of

your welfare eligibility. That has been the core of antimarriage and

that applies to public housing, food stamps, Medicaid and TANF.

I think making the EITC a little more marriage friendly would

be an excellent way to offset that a bit, but I also think we have

to get in there and give the message. I think young people today

do not understand any connection between being married and having children. They actually will say stuff like that and that is a

tragic thing.

I would love to go into high schools and at risk communities and

talk to young women and say to them, all the data shows you want

to bring a child into the world and you will in a few years but the

very best thing you can do—— Ms. CLAYTON. My time is almost up. You would give that to not

only poor people but to anybody, the education?

Mr. RECTOR. Yes. I think it should be targeted but I think everybody could use it.

Ms. CLAYTON. You understand divorce is increasing for those not

in poverty as well?

Mr. RECTOR. Absolutely.

Ms. CLAYTON. I just want the morality standard to be for all of

us, those who are poor and those who are not.

Mr. Primus, do you know of research that shows there is an impact on the economic security and families and marriage? Tell me

about the economic security of marriage on families?

Mr. PRIMUS. There was a study on the Minnesota Family Investment Program by the Manpower Development Research Corporation in New York. They found there are positive outcomes for children if earnings increase and income increases. Minnesota had a

very generous earnings disregard so that when you worked, you got

to keep a large part of those earnings.

That same research also shows that marriage rates increased in

those situations. I think the key to some of this marriage argument

is making sure that males have a job. Women are not going to

marry unemployed men that have very poor labor markets. I think

William Wilson’s research shows that, so if we really want to make

sure we increase marriage and increase two-parent families, I

think economic security is the first thing and that is kind of a flip

side.

Mr. Rector is urging more social services. I think we should focus

on an economic security plan. I also think we need to serve two

parent families much better in our welfare system. There is a culture that says, welfare does not help two parent families.

Ms. CLAYTON. Mr. Rector, would you support dividing support to

married couples under the TANF Program rather than just to the

mother?

Mr. RECTOR. They are already supported under the TANF Program. The problem with that is that we started that in the 1980’s

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and it did not have much pro-marriage effect because it used to be

called the AFDC Unemployed Parent Program. Two parent families

could get in under the program but the condition of aid is that the

father is not working. That is not what we want.

If you bring in a family and keep them on AFDC for many, many

months where the dad is not working, the message you are probably sending is the dad is not really that necessary to the home.

Actually, there is some research that indicates that increased family breakup.

The group we want to support and encourage is marriage of

mothers to employed fathers which is why the EITC is a much better way of doing it because there the dad is working. Now you have

all the elements in place. The dad is working, the mother is getting

married to him, the child has two parents in the home.

In addition to providing that economic support, we need to provide counseling. We can teach people how to keep their relationships together, how not to fight and fall apart. We can do those

things and that is the singlemost important thing we can do for

American children.

Ms. CLAYTON. Thank you, Mr. Chairman.

Chairman NUSSLE. Ms. McCarthy.

Ms. MCCARTHY. Mr. Rector mentioned $313 billion in spending

on welfare programs. I am curious if you know how much of that

is actually spent on families with children? Going through the

budget, I noticed that there is going to be a $1 billion cut in housing and 40 percent of those in public housing are elderly and disabled and here we are cutting.

Mr. PRIMUS. I think if you look at Mr. Rector’s chart, Table 1,

over half of the total amount of spending here is on Medicaid and

a lot of Medicaid goes to nursing homes for the elderly. I did a calculation where I looked at all the families with children below poverty, with earnings below poverty, and I added all the means tested

cash, their food stamps, their EITC, everything but health, and

that totaled $40 billion. That is not the picture you are getting

here. That is about $2,500 per poor child. We give a middle income

child about $1,000 through the child tax credit and the personal exemption.

In fact, that $2,500 per poor child is probably less than the disparity in education funding between inner city children and suburban children in many of our communities. All of the EITC is spent

on families with earnings. I do not call that welfare; I call that primarily an earnings supplement and a reduction of payroll taxes.

Ms. MCCARTHY. I still think we have a long way to go on training to get good jobs, not jobs paying $3.25 to $4.00 a hour because

no one is ever going to get off welfare under those scenarios.

Chairman NUSSLE. Thank you very much.

I want to thank the panel for their insight, comments and suggestions. It is always an interesting subject and I appreciate your

continued advice to us on the topic. I look forward to another opportunity sometime down the road.

Thank you.

We will introduce this next panel quickly, and then we will invite

them to testify.

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First is Dr. Thomas Saving, who is from the Private Enterprise

Research Center at Texas A&M. Dr. Saving was appointed by the

President to the Board of Trustees of Social Security and Medicare

Funds, just here recently in the year 2000.

Next is Marilyn Moon. Dr. Moon is an economist with interests

in health, income, security, and public policy. She is a Senior Fellow at the Urban Institute. We welcome her to the witness table.

Dr. Moon has served as the Senior Analyst to the Congressional

Budget Office, and she’s the first Director of the Policy Institute of

the American Association for Retired Persons.

Last and certainly not least is Dr. Gail Wilensky. Dr. Wilensky

has done a number of things that this Congress is familiar with.

She is a former Presidential appointee, as the Director and Administrator of the Health Care Finance Administration.

We heard earlier today that maybe the new Secretary of HHS

may want to change that name. He said he was not sure what a

HCFA was. He was not sure anyone knew what a HCFA was. So

maybe you have some insight on that.

But your duties were as former Administrator, as well as Deputy

Assistant for the President for Policy Development, where you advised previous President George Bush on the health care and welfare issues. You earned a BA in psychology and a PhD in economics

from the University of Michigan.

We welcome all three of you. We would inform you that your full

testimony will be made part of the record, and we invite you to

summarize your testimony before us today.

We will start with Dr. Wilensky. Welcome.

STATEMENT OF GAIL WILENSKY, JOHN M. OLIN SENIOR

FELLOW, PROJECT HOPE

Dr. WILENSKY. Thank you, Mr. Chairman and members of the

committee.

As you have indicated, I am a former HCFA administrator. I will

be glad and heartily support the notion of finding a new name for

the organization. I am currently the Chair of the Medicare Payment Advisory Commission.

I want it to be clear that I am not acting in either of those capacities today, but rather am providing my own views as a health policy person and an economist.

I am going to primarily talk about the administration’s programs

for Medicare and prescription drug coverage, the need for reform,

and the extent to which the administration addresses these needed

reforms. Then I will just briefly touch, if there is time, on the proposals for Medicaid reform, and also proposals for the uninsured.

The administration has proposed spending $153 billion over the

10 year period, fiscal 2002 to 2011, to modernize and reform Medicare. The specifics of what the administration is going to propose

in terms of long-term reform are not yet clear. There is some funding for a temporary program to provide assistance to low income

seniors and seniors with catastrophic expenses.

There is no question that the program needs to be reformed. Reforming the regulatory structure is commonplace discussion in

Washington now and outside. People understand that the benefits

are inadequate. There is some very questionable solvency issues,

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particularly when you think about Part B, and not just the Part

A trust fund, and it is a very administratively complex program.

In my opinion, as important as the inadequate benefits are, not

having out-patient prescription drug coverage and catastrophic coverage, it would not be a good idea to do a standalone drug benefit,

outside of the context of further reform of the Medicare Program

The reason is, I believe that it is imprudent to substantially increase the spending needs of a program that is already in a financially fragile state, without doing something to reform the program.

Second of all, if history is any guide, however much you think

the program will cost, you will be wrong. If we look at the ESRD

experience, we are seeing a six or seven billion dollar program,

after anticipating a much smaller program.

Between the time the catastrophic legislation that was passed in

1988 and repealed in 1989, the prescription portion of that bill increased by a factor of two-and-a-half fold from the time it was first

proposed until the time it was actually repealed. We do not know

what it would have actually cost. We never got that far.

So it seems pretty likely that we will undershoot that estimate.

As you know, CBO has recently put out new estimates about how

much faster drug spending has gone up for the elderly than we had

thought.

Finally, the design issues of a drug benefit program are difficult

and have not yet been determined. It would be very useful if the

Congress could decide how it wanted to reform Medicare and start

now.

The fact is, building a infrastructure for a reformed Medicare

will take time. Future seniors need to know the program that they

will face.

Future seniors will be very different from the people whw are

now on the Medicare Program. They will be better educated, and

they will frequently have more income. Many of the woman will

have worked full time, or at least substantially during the entire

adult period, and their experiences with the work force and their

health plans will be very different.

The question, or at least one question you will need to consider,

is whether a temporary program for those most in need is a reasonable interim step.

It might be, as the administration has proposed, as a block grant

to try to make use of the fact that 26 states have some kind of assistance programs; or it might be a program that starts first with

the special populations under Medicare, the so-called QIMBY and

SLIMBY populations; the qualified Medicare beneficiary in the selected low income populations, that get special help paying their

deductibles and co-insurance and premiums. They are not on Medicaid, but they get special help.

In order to do that, you would have to make a lot of the decisions

about designs. In order to do the block grant, you would have to

go through new legislation and possibly run the risk of having

money out there, which would be hard to curtail.

So whether or not we have a temporary program, although you

can make good arguments as to why we should help now those

most in need while we get ready for long term reform, whether it

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is really worth the political capital is something you will have to

decide.

What I would caution is be wary if you do not do Medicare reform and prescription drug coverage; be wary about spending more

to increase payments to providers.

I think there is some justification that could be made for the two

previous pieces of legislation following the Balanced Budget act,

the so-called BBRA, and the Beneficiary Improvement and Protection Act, that was signed into law last December.

But it appears, at least for hospitals, that providers are doing

much better financially. It appears based on three-quarters data

that is now available for 2000, that margins are back up around

the rate they were in 1997.

So if we do not see agreement on Medicare reform, I caution you

to be careful about spending that money that is set aside for increasing provider payments.

I have two quick words on the other areas in the administration

proposal. One is about Medicaid. The specific legislative proposals

about Medicaid have not yet been released, but there was included

in the budget a substantial savings, $17.5 billion roughly, from

Medicaid that involved tightening up the upper payment limit provisions for which there was some improvement in December when

HCFA issued some new regulations.

This is once again an area in which the states have shown themselves to be very creative at finding ways to increase the Federal

share of match in Medicaid; having been at HCFA during voluntary donations and provider taxes, the first wave of creative financing, now to be replaced with upper payment limit in intergovernmental revenues.

It is not clear to me that we can continue to rely on the matching

grant, where the states put in part of the money as an effective

cost containment mechanism for Medicaid.

It may be time to think about other strategies that would convert

the structure of the program and still allow for state flexibility,

which is clearly of interest, both to the Secretary and to the President, as well to the Governors. I would be glad to talk about what

that might look like, if there is time later.

Finally, I want to recognize although the details are not yet very

clear, the administration will be proposing a multi-prong strategy

for the uninsured: a refundable tax credit, combined with efforts to

build the infrastructure by increasing substantially the amount of

money for community health centers, and by providing some funds

to innovative local organizations.

It recognizes that if we are going to make inroads in trying to

reduce the numbers of uninsured, it will take a series of steps and

strategies.

Thank you very much, Mr. Chairman.

[The prepared statement of Gail Wilensky follows.]

PREPARED STATEMENT OF GAIL R. WILENSKY, PH.D., JOHN M. OLIN SENIOR FELLOW,

PROJECT HOPE

Mr. Chairman and members of the Budget Committee: Thank you for inviting me

to appear before you. My name is Gail Wilensky. I am the John M. Olin Senior Fellow at Project HOPE, an international health education foundation and I chair the

Medicare Payment Advisory Commission. I am also a former Administrator of the

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Health Care Financing Administration. My testimony today reflects my views as an

economist and a health policy analyst as well as my experiences running HCFA. I

am not here in any official capacity and should not be regarded as representing the

position of either Project HOPE or MedPAC.

My testimony today primarily discusses the administration’s programs for Medicare and prescription drug coverage, the need for reform and the extent to which

the administration addresses these needed reforms. My testimony also briefly discusses the administration’s proposals for Medicaid reform and the proposals for the

uninsured.

THE ADMINISTRATION’S MEDICARE PROPOSALS

The administration has proposed a program to modernize and reform Medicare

that spends $64.2 billion in fiscal years 2002–2006 and $153 billion in fiscal years

2002–2011. This is in addition to $2.5 billion set aside for FY 2001 that is not included in the five or 10 year numbers.

The long-term reform plan has not yet been submitted, but the administration’s

principles for reform include preserving Medicare’s current guarantee of access, a

choice of health plans that includes the option of purchasing prescription drug coverage, covering the expenses for low-income seniors, streamlining access to new

medical technologies, establishing an accurate measure of Medicare solvency and

not increasing payroll taxes.

The administration is proposing an interim and temporary program that provides

assistance to low-income seniors and seniors with catastrophic drug expenditures

until Medicare reform is enacted and implemented. The program, Immediate Helping Hand, provides funds to the states that would cover the costs of prescription

drug coverage for seniors below 135% of the poverty line with no premium and

nominal co-payments. Seniors between 135% and 175% of the poverty line would receive partial coverage. Catastrophic coverage would be provided for seniors with outof-pocket drug costs exceeding $6000 per year.

THE NEED TO REFORM MEDICARE

Although Medicare has resolved the primary problem it was created to address,

ensuring that seniors had access to high quality, affordable medical care, there are

a variety of problems with Medicare as it is currently constructed. The administration has correctly assessed the most important of these flaws: inadequate benefits,

financial solvency, excessive administrative complexity and an inflexible Medicare

bureaucracy.

A part of the motivation for Medicare reform clearly has been financial, particularly concern about the solvency of the Part A Trust Fund. Part A funds the costs

of inpatient hospital care, Medicare’s coverage of skilled nursing homes and the first

100 days of home care. The Part A Trust Fund is primarily funded by payroll taxes.

The changing demographics, associated with the retirement of 78 million

babyboomers between the years 2010 and 2030 and their increasing longevity, mean

that just as the ranks of Medicare beneficiaries begins to grow, the ratio of workers

to beneficiaries will begin to decline. Even with the strong economy of the last decade and the slow growth in Medicare payments since 1997, current projections show

Part A Trust Funds payments exceeding Part A income by 2010 and its assets exhausted by 2025.

As important as issues of Part A solvency are, the primary focus on Part A as

a reflection of Medicare’s fiscal health has been unhelpful and misleading. As the

administration has made clear, Part B of Medicare, which is financed 75 percent

by general revenue and 25 percent by premiums paid by seniors, is a large and

growing part of Medicare. Part B currently represents about 40 percent of total

Medicare expenditures and is growing substantially fast than Part A expenditures

and about 5 percent faster than the economy as a whole. This means that the pressure on general revenue from Part B growth will continue in the future even though

it will be less observable than Part A pressure. It also means that not controlling

Part B expenditures will mean fewer dollars available to support other government

programs.

However, as the committee understands, the reasons to reform Medicare are more

than financial. Traditional Medicare is modeled after the Blue Cross/Blue Shield

plans of the 1960’s. Since then, there have been major changes in the way health

care is organized and financed, the benefits that are typically covered, the ways in

which new technology coverage decisions are made and other changes that need to

be incorporated into Medicare if Medicare is to continue providing health care comparable to the care received by the rest of the American public.

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Much attention has been given to the fact that the benefit package is outdated.

Unlike almost all other health care plans, Medicaid effectively provides no outpatient prescription drug coverage and no protection against very large medical

bills. Because of the limited nature of the benefit package, most seniors have supplemented traditional Medicare although some have opted out of traditional Medicare

by choosing a Medicare risk or Medicare+Choice plan.

The use of Medicare combined with supplemental insurance has had important

consequences for both seniors and for the Medicare program. For many seniors, it

has meant substantial additional costs, with annual premiums varying between

$1000 and $3000 or more. The supplemental plans have also meant additional costs

for Medicare. By filling in the cost-sharing requirements of Medicare, the plans

make seniors and the providers that care for them less sensitive to the costs of care,

resulting in greater use of Medicare-covered services and thus increased Medicare

costs.

Medicare has also struggled with coverage decisions for new technology. The processes currently in place have been complicated and time-consuming and frequently

have meant that seniors get coverage for new technologies years after the rest of

the populations. This was true for heart and lung transplants a decade ago and was

true for Positron Emission Topography (PET) until just recently.

There are also serious inequities associated with the current Medicare program.

The amount Medicare spends on behalf of seniors varies substantially across the

country, far more than can be accounted for by differences in the cost of living or

differences in health-status among seniors. Seniors and others pay into the program

on the basis of income and wages and pay the same premium for Part B services.

These large variations in spending mean there are substantial cross-subsidies from

people living in low medical cost states and states with conservative practice styles

compared to people living in higher medical cost states and states with aggressive

practice styles.

ASSESSING THE ADMINISTRATION’S MEDICARE PROPOSALS

The administration correctly understands Medicare needs reform in many dimensions. Medicare’s benefits are clearly outmoded, but Medicare’s problems extend beyond the absence of prescription drug and catastrophic coverage. Medicare needs to

be modernized to accommodate the needs of the retiring babyboomers and to be viable for the 21st Century.

During the campaign, the President’s long-term modernization of the Medicare

proposal was modeled after the Federal Employees Health Benefit Plan (FEHBP)

and the work of the Bipartisan Commission for the Long Term Reform of Medicare.

The principles provided for the President’s plans to reform Medicare are consistent

with these models of reform but the specifics of such a reform have not yet been

proposed. Instead, only the first step included during the campaign, a temporary,

short-term strategy to help low income seniors and seniors with catastrophic expenses, has been presented.

The budget as presented raises at least two questions. If there is a lack of agreement about other areas of reform, should a prescription drug benefit be added to

traditional Medicare now, with reform to follow some time in the future? If not, is

there any place for a temporary program of prescription drug coverage and how

should that program be designed?

Although I believe a reformed Medicare package should include outpatient prescription drug coverage, I believe just adding this benefit is not the place to start

the reform process. The most obvious reason is that there are a series of reforms

needed to modernize Medicare. To introduce a benefit addition that would substantially increase the spending needs of a program that is already financially fragile

without addressing these other issues of reform is a bad idea.

I personally support reform modeled after the FEHBP. I believe this type of structure would produce a more financially stable and viable program and would provide

better incentives for seniors to choose efficient health plans and/or providers and

better incentives for health care providers to produce high quality, low-cost care.

This type of program, particularly if provisions were made to protect the frailest and

most vulnerable seniors, would allow seniors to choose among competing private

plans, including a modernized fee-for-service Medicare program for the plan that

best suits their needs.

I am aware that the FEHBP model remains controversial with some in the Congress, but I think it’s important that committee members understand that many of

the most vexing problems of FEHBP are also present with the current combination

of fee-for-service Medicare and Medicare+Choice plans, e.g. risk adjustment, providing user-friendly information, protecting vulnerable seniors, etc. But whatever the

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model of reform the Congress chooses to pass, the direction of the reform, a timetable for its implementation and important first steps should be determined before

any major, new spending commitments are added to Medicare.

A second reason to proceed with some caution is the recognition of how difficult

it is to correctly estimate the cost of a new additional benefit. Our past history is

this area is not encouraging. The cost of the ESRD (end-stage renal disease) program introduced in 1972 was substantially underestimated. The estimated cost of

the prescription drug component of the catastrophic bill passed in 1988 and repealed

in 1989 increased by a factor of two and one-half between the time it was initially

proposed and the time it was repealed. The new estimate of prescription drug

spending by the elderly recently released by the Congressional Budget Office forecasts drug spending will rise at an average of 12 to 13 percent per year for the next

decade instead of the 11 percent per year projected last year. This means that the

estimated cost of prescription drug bills already proposed, including the President’s,

is too low. The new cost estimate for H.R. 4680, passed last June is $213 billion

over 10 years instead of the original estimate of $160 billion and the plan proposed

by House Democrats would be $440 billion over 10 years rather than $330 billion.

In addition to cost and estimating concerns, important questions remain about

how best to structure a pharmacy benefit. Most recent proposals have made use of

pharmacy benefit managers or PBM’s as a way to moderate spending without using

explicit price controls. These strategies, when used by managed care, showed some

promise for a few years ago although more recently they have seemed less effective.

But most PBM’s have relied heavily on discounted fees and formularies and only

recently have begun using more innovative strategies to more effectively manage

use and spending. If Medicare is to make use of PBM’s, decisions will need to be

made about whether and how much financial risk PBM’s can take, the financial incentives they can use, how formularies will be defined and how best to structure

competition among the PBM’s. All of these issues taken together suggest that legislating a standalone prescription drug benefit addition to traditional Medicare is not a good idea. Given our history, the cost is likely to be severely underestimated, the design issues are difficult,

the structure and design of a reformed Medicare program are still subject to dispute

and the program remains financially fragile.

The best strategy would be to agree on the design of a reformed Medicare program and begin to implement changes now. It is likely to take several years to build

the infrastructure needed for a reformed Medicare program and to transition to a

new program. Producing the regulations needed to implement the controversial legislation needed for a drug benefit will take at least 2 years. A reasonable interim

step is to put in place a temporary program providing prescription drug coverage

to help those most in need.

There are at least two ways a temporary program of prescription drug coverage

might be designed. One way is along the lines of the administration’s proposal, i.e.,

a grant program to the states that allows state to extend existing pharmaceutical

assistance programs, expand Medicaid coverage or introduce new programs, following in the model of the Children’s Health Insurance Program (CHIP). The advantage of this strategy is that it builds on assistance programs already existing in 26

states and doesn’t require new Federal regulations. However, there are a variety of

disadvantages to this strategy as well, i.e., it requires new legislation in states that

don’t already have assistance programs, state pharmacy assistance programs may

not be good designs for a regular Medicare benefit and may set a bad precedent,

it may be difficult to convince states to pursue a temporary program and ending a

block grant may be more difficult than starting one.

A second type of interim strategy would be to provide pharmaceutical coverage

first to those populations who already get special treatment under Medicare, that

is, the qualified Medicare beneficiary (QMB’s) and the specified low-income beneficiaries (SLMB’s). This strategy addresses most of the disadvantages of the block

grant program but it requires agreement on many of the design issues already noted

and also requires the issuance of new regulations before it can be implemented.

Both of these suggest benefits might not actually be provided in the near-term.

Whether or not the benefits of providing an interim program of outpatient prescription drug coverage for selected needy populations is worth the costs, is a decision the Congress will need to make. Congress might well decide it’s not worth the

political capital it would take and focus its efforts directly on broader Medicare reform, which will also include a prescription drug program.

If Congress does not enact Medicare reforms this year, it should be wary of using

any spending that has been set aside for Medicare reform for the purpose of further

increasing payments to providers. While some justification could be made for the

Balanced Budget Refinement Act passed in 1999 and the Beneficiary Improvement

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and Protection Act passed in 2000, the improved financial status of many types of

providers under Medicare and the higher projected spending rates for Medicare in

the coming decade suggest Congress should act with great caution. MedPAC recently reported that total margins for hospitals in FY2000 appear to be greater than

5 percent, up from 2.8 percent in 1999. The financial status for other providers is

less clear and while a variety of changes need to be made to the way they are reimbursed, whether or not payments need to be increased should be carefully assessed.

THE ADMINISTRATION’S MEDICAID PROPOSALS

The specific programmatic changes to Medicaid and the Children’s Health Insurance Program (CHIP) that the administration will be proposing are not yet available. The expectation is that the administration will introduce changes that will increase state flexibility and encourage the use of private insurance and coordination

with employer-sponsored insurance.

The administration’s budget does not reflect legislated spending increases in Med- icaid. The budget does, however, include a savings estimate of $17.4 billion over 10

years. This reflects a proposal by the administration to further restrict the effects

of the ‘‘upper payment limit’’ loophole. The upper payment limit has involved the

use of a higher payment for purposes of collecting the Federal share of Medicaid,

with a forced rebate to the states, which has allowed states to effectively increase

the Federal share in Medicaid spending. The final rule published by HCFA last year

partially closed this loophole but still allowed some states to continue the practice

for years and expanded the arrangement for non-State government-operated hospitals. The administration proposes prohibiting any hospital plans approved after

Dec. 31, 2000 from receiving the higher payment limit proposed in last year’s final

rule.

The concerns raised by the Upper Payment Limit practices raise a more general

concern about Medicaid. The presumption underlying the current Medicaid program

is that the state’s share of the matching grant provides the basic incentive for states

to moderate spending under Medicaid. However, the states have shown themselves

to be very creative in devising financing strategies which effectively increases the

Federal share of the match beyond that which exists in law. Provider taxes and voluntary donations plagued the program during the 1990’s; upper payment limits and

intergovernmental transfers continue to plague the program. In this environment,

the interest in increasing state flexibility increases concerns as to whether state actions will be budget-neutral or cost increasing to the Federal budget. With recent

CBO projections of a 9 percent average annual growth rate in Medicaid for the next

decade, any further attempts by states to increase their Federal matching share and

thereby reducing incentives to be cost-conscious, are worrisome. It may be time once

again to consider moving to a block grant program based on the number of individuals below certain income levels or a per capita block grant covering individuals

within specified income levels. In return for this increased flexibility, states would

need to provide information on the health status and use of services by people covered by the grants. This would be mean the Federal Government would have more

information on the effects of its program than it has with the current Medicaid program.

THE ADMINISTRATION’S PROPOSALS ON THE UNINSURED

The administration is proposing a multipronged strategy to provide support for

the uninsured, including refundable tax-credits, investments in community health

centers, a reform of the National Health Service Corps and an investment in a

health communities innovation fund. This strategy recognizes that as important as

it is to provide increased insurance coverage to the uninsured, there will be a continuing need to fund the so-called health safety net. This is both because there are

likely to be substantial numbers of uninsured individuals irrespective of the precise

program that is adopted and because even for some individuals with insurance coverage, there may not be adequate health resources to provide the care that is needed.

The tax credits are part of the Treasury Department’s budget. The budget sets

aside $26.4 billion over 10 years, some of which is for individuals who don’t have

access to employer-sponsored health insurance. The precise amount has not yet been

released. The HHS budget includes $124 million for FY 2002 as part of a multiyear

commitment to increase the number of community health centers by 1200 and double the number of people served. $400 million for FY2002 is budgeted to provide

funding for innovative local organizations addressing various local health care

needs. The National Health Service Corp reform primarily reflects a management

effort that will improve the targeting of the neediest communities.

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The question of whether the proposed refundable tax credit is likely to induce the

purchase of private insurance is an area in which there is considerable debate. The

decision to increase insurance coverage by providing financial assistance to individuals to purchase insurance as opposed to increasing eligibility for public programs

is a first order decision that the Congress must make. The remaining budgeted

items represent substantial efforts to improve the health care infrastructure.

Let me summarize my points as follows:

The administration proposes to spend $153 billion in FY 2002–2011 to modernize

and reform Medicare

• Specific provisions of long-term reform not yet submitted

• Funding includes support for temporary program providing assistance to low income seniors and seniors with catastrophic drug expenses

Medicare needs to be reformed

• Current Medicare program has inadequate benefits, questionable financial solvency, excessive administrative complexity and excessive bureaucracy

Adding a standalone drug benefit without further reform is very risky

• Imprudent to substantially increase the spending needs of a financially fragile

program

• Actual costs of a new benefit will be underestimated if history is any guide

• Design issues of a drug benefit are difficult and have yet to be determined

Starting now to implement a reformed program is a good idea

• Building the infrastructure will take time

• Future seniors need to know the design of the future Medicare program

• Future seniors will be different from today’s seniors in terms of work experiences, health plan experiences, income and education

Temporary program for those most in need is a reasonable interim step

• Possible designs include a block grant to states or coverage limited to populations currently getting special treatment, e.g. QMB and SLMB populations

• Temporary program may not be worth the political capital it would require

Congress should be wary of spending Medicare reform funds to further increase

provider payments

• Financial status of some types of Medicare providers has improved substantially

Administration proposes a $17.4 bil legislated savings from Medicaid

• Proposal involves tightening the upper payment limit provisions

• ‘‘Creative financing’ by states combined with interests in increased flexibility

may necessitate different structure for Medicaid than current matching grant program

Administration has multipronged strategy for the uninsured

• Refundable tax credits to encourage the purchase of private insurance

• $124 million in FY 2002 to increase the number of community health centers

• $400 million in FY 2002 to fund innovative local organizations

Mr. PUTNAM [assuming Chair]. Thank you, Dr. Wilensky.

Dr. Moon.

STATEMENT OF MARILYN MOON, SENIOR FELLOW, THE

URBAN INSTITUTE

Dr. MOON. Thank you, it is a pleasure to be here today to testify

on these important issues. Medicare is an issue that I feel very

strongly about.

I wanted to start my testimony talking a little bit about some of

the budget numbers in the President’s recent submission of his

blueprint. Then I am going to talk mainly about prescription drugs,

and a little bit about other reforms of the Medicare Program.

Certainly, I agree with the administration’s proposal that indicates that Parts A and B of Medicare should be thought about together. They are, for the most part, an integrated plan for most individuals, who do not worry about whether (A) or (B) is covering

their service.

They do know that they pay the Part B premium, for example,

but other than that this is one program, as far as most individuals

are concerned. It may or may not be a good idea to formally join

those two pieces.

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But I would caution it is very misleading to treat the $86 billion

in general revenues that fund the Part B program, along with premiums, as a deficit.

Since 1965, when Medicare was passed, general revenues have

been an important part of the sources of funding for this program,

and they are in the statute. In that sense, they are exactly the

same as veterans’ benefits or Medicaid.

If we want to accept this notion of $86 billion as a deficit, we

could shove other spending from general revenues into the Part A

trust fund. I can guarantee you, that quickly there would be no

surplus.

Another issue I raised in the budget numbers in the administration’s proposal is the shifting of home health from Part A to Part

B. The document argues that this change had no consequence

whatsoever, except to make Part A look better.

It does indeed make Part A look better than it would have otherwise, but it also was an indirect and intended increase in premiums on beneficiaries; that is, it did not just accidently happen.

That is about a $50 billion effect over the 10 years that we are

talking about. I am sure beneficiaries would be happy to give back

the $1,200 in extra premiums that they are going to pay over 10

years, and have home health go back into Part A, if we want to

be purists about it.

The point I am trying to make here is that it is very important

to recognize that Medicare needs financial help. It needs reforms,

but it is not a solution to simply dismantle legitimate financing the

way that the language implies in the administration’s proposal.

I believe that we can start now to do prescription drugs in the

Medicare Program, and we do not have to either do it only for low

income individuals, or as part of a larger and broader reform effort.

That is not to say that broader reform efforts do not need to be

looked at, or that other changes are unnecessary for Medicare; but

rather, that drugs represent a vital benefit. People are at considerable risk now, and that is going to increase every year. The sources

of coverage that both high and low income people have, for drug

protection is quickly becoming not viable.

Only about 40 percent of all Medicare beneficiaries now have

what I would call stable drug coverage, that is either through an

employer-based plan, or through the Medicaid Program. Both of

those areas are areas in which increasingly we hear states concerned about the cost of drugs for Medicaid, and employers concerned about the cost of drugs in their retiree packages.

So this is problem that is not going to go away on its own. It is

only going to get worse. The need is there and the resources are

there. We are at an unprecedented time in our history, as the administration has argued. There is a large surplus, that we could

use to start a reasonable and an important program of prescription

drug coverage for seniors and disabled persons.

There is another reason to think about doing prescription drugs

sooner, rather than later. Some people argue that we must have reform before we can have prescription drug coverage. I believe that

we really need to have prescription drug coverage before you can

have reasonable reform.

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A number of changes need to be made in the traditional part of

Medicare, which serves 86 percent of all beneficiaries, and will continue to do so for a very long time. At present, people who are covered by traditional Medicare feel it necessary to go out and get supplemental coverage.

When they either get it from an employer, or they buy it on their

own, it adds to inefficiency in Medicare, because then it tends to

become essentially first dollar coverage.

If we could restructure the Medicare Program to look more like

the insurance that most of us in this room have, then we could

keep some cost sharing and deductibles in the program, but provide

enough protection to beneficiaries that they do not have to seek

supplemental protection elsewhere.

Moreover, Medigap, which is the term people use for private supplemental insurance, is increasingly an age-rated benefit. That

means that people who are older pay much more for their Medigap

policies than people who are younger, as compared to the premiums under Medicare, which are the same for everyone.

Adding drug coverage and making other cost sharing changes

certainly would be a way to help take some of the burdens off of

the very high risk seniors, by moving services into the Medicare

Program. These high risk people would be better off even if they

had to pay substantial Medicare premiums to get prescription drug

coverage.

Moreover, it is important to think about ways in which to improve the traditional Medicare Program, such as adding disease

management or case management kinds of activities, to truly coordinate care. That is important in areas where managed care is

not available, and for people who have multiple illnesses, and rely

upon multiple doctors, who are unlikely to join a managed care

plan.

For those individuals, it is difficult to say, we are going to put

you into a hypertension control program, for example, but we are

not going to pay for any of the hypertensive drugs, when these are

some of the expensive drugs that people take.

It is very difficult to think of ways to coordinate care, either in

traditional Medicare or in managed care, unless you have a comprehensive benefit package.

The private insurance plans have recognized this for a long time.

Much of their plea for higher payments is not to cover the basic

Medicare-covered services, which the GAO says they get sufficient

amounts for, but for the extra benefits that they want to offer.

These extra benefits help to attract patients, and to treat them well

and allow coordination of care, when they are covered by the plan.

So for those reasons, I believe that it is very important to have

prescription drug coverage. If we move, over time, to a more private plan approach to the program, it is also important, because

prescription drugs are one of those things that are risk selection attractors. That is, if you offer a very good prescription drug package,

you are likely to attract sicker and more expensive patients.

If you do that, and you are a ‘‘good guy’’ plan, and you try to hold

the line on costs, you are going to be in big trouble.

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Consequently there is now a race to the bottom for a lot of managed care plans,, putting $500 caps, for example, on the amount of

prescription drugs they will cover.

This is a problem that until Medicare has a benefit package that

covers the things that most people need, and that are particularly

important when they are sick, is going to be a problem.

In addition, we are not quite ready for a major restructuring in

Medicare. We have not dealt with risk selection very well. We have

not dealt with other things that need to be done to make private

plans and competition work well.

Instead, I would focus on a number of other more incremental reforms. I would focus on improving risk selection, so that if we move

in the direction of more private plans, we are prepared to do so.

The administration also makes a good point about the complexity

of the current Medicare Program, but I would urge any of you to

look at your insurance plans and the rules and coverage information available to you, as evidence of the complexity of those plans.

This is not a problem that is inherent to a Government program.

This is a problem where complications of health care coverage are

endemic in the United States.

Moreover, I believe that it is important to recognize that if we

are going to have an improved Medicare system over time, we need

to have the resources, both in personnel and dollars, to straighten

out some of the legitimate problems that exist in the Health Care

Financing Administration.

I would welcome a close analysis in looking at regulations, and

at the organization of HCFA. I think the main thing I would caution is, do not assume that you can simply throw HCFA out, start

all over again, and that none of these problems will arise in the

future.

There is a lot to do before we turn the program over to the private sector. I would like to see this year be a year in which there

was a lot of attention on modernizing the traditional part of Medicare, and working on adding prescription drugs.

Thank you.

[The prepared statement of Marilyn Moon follows.]

PREPARED STATEMENT OF MARILYN MOON, SENIOR FELLOW, THE URBAN INSTITUTE1

Chairman Nussle, Congressman Spratt, and Members of the committee: Thank

you for the opportunity to testify today on Medicare reform issues. This is, as the

budget blueprint introduced by President Bush says in its introduction, ‘‘an unprecedented moment in history.’’ The Federal Government now has the financial ability

to make needed changes in Medicare, including adding prescription drug benefits,

and to put the program on a stronger financial footing. But the administration’s

blueprint does not acknowledge the full extent of what is needed for Medicare.

After reviewing some of the specific issues raised in the blueprint, I concentrate

on prescription drug issues because this is a reasonable place to start on improving

Medicare for the future. It is essential for most other types of reforms. And to address this issue effectively, sufficient resources need to be reserved for this task. I

also emphasize issues facing the traditional fee-for-service part of the program,

which serves 34.4 million of the 40 million Medicare beneficiaries but is often ignored when the discussion turns to ‘‘reform.’’ For the foreseeable future, traditional

Medicare will serve the majority of beneficiaries and an even larger majority of

older and sicker beneficiaries. Improvements in traditional Medicare should be an

important part of any reform effort.

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BUDGET NUMBERS AND ISSUES IN THE BLUEPRINT

The Bush administration’s blueprint for the budget recognizes some of the important issues facing Medicare in the future. Medicare was singled out by President

Bush during the campaign and again in the budget submission as a program in

need of expansion, particularly with respect to prescription drug coverage. The principles laid out in the document also indicate that Medicare’s guarantee of access

must be preserved, both in general and with respect to new technological advances,

and that additional protections are needed for low income beneficiaries. All of these

are laudable goals.

Further, it is appropriate to consider both Parts A and B of Medicare when examining the costs of serving the elderly and disabled. But the blueprint document goes

further and treats Part B as if it were in deficit because it relies on general revenue

financing. General revenues have been a major funding source for Medicare since

its passage in 1965 and that obligation is spelled out in statute. It makes no sense

to treat Part B as in ‘‘deficit’’ and thereby imply that payroll taxes should support

both Parts A and B. Such an argument makes no more sense than assuming that

spending on Medicaid, Veteran’s benefits or even defense should be covered by the

Part A Trust Fund. All of these other sources of spending have no more legal claim

on general revenues than does Part B.

Coupled with the blueprint’s pledge not to raise payroll taxes, if general revenues

are excluded, there is no way that there will be enough revenue to support existing

benefits beyond about 2005.2 And certainly there will not be enough revenue from

2.9 percent of payroll to cover the increasing number of people who will be eligible

for the program at the end of the decade or to fund a prescription drug benefit.

Part of the case made in the document for combining A and B in examining Medicare is a criticism of the shift of some home health benefits from Part A to Part

B in the Balanced Budget Act of 1997. This change, which returned home health

closer to how it was treated in 1966, did make Part A look better. But it is incorrect

to argue that it ‘‘had no economic consequences.’’ By shifting a majority of home

health care to Part B, beneficiaries costs rise since their Part B premium is 25 percent of the costs of Part B services. Thus, this was an indirect, but intended, increase in beneficiary contributions. In fact, beneficiaries’ share of combined A and

B spending will rise from about 9 percent prior to the BBA to over 11 percent when

the phase in of home health is completed in 2004. Over the 10 year period, that

translates a per capita premium increase of nearly $1200. Most beneficiaries would

not consider this a meaningless change; indeed they would likely welcome having

home health returned to Part A.

This is not to say that only Part A should be considered in examining Medicare

but rather that both parts should be considered with regard both to their spending

and sources of income. Should there be limits or constraints on general revenue contributions to Medicare? Even those who have implicitly argued for such a limit have

never proposed reducing general revenue contributions to zero.

At a time when both President Bush’s document and most policy makers recognize that new benefits need to be added to Medicare and that the aging of the Baby

Boom generation pose new demands on Medicare, it seems foolish to deny general

revenue spending and pledge that payroll taxes will not be raised. More willingness

to raise revenues is needed to assure Medicare’s future. The information in the

budget blueprint does a disservice to that effort.

PRESCRIPTION DRUG ISSUES

Three basic approaches to adding prescription drug coverage for Medicare beneficiaries have been suggested:

• Provide coverage only for those with low incomes—either as an initial step or

as the full response;

• Provide universal coverage, but only in concert with other reforms, such as relying on private insurance plans; and

• Provide universal coverage that are not contingent upon other reforms.

The obvious advantage of offering coverage only to low-income people (as the Bush

administration has proposed for the next 4 years) is cost. But this seemingly low

cost approach requires a separate administrative structure (most likely state run)

to determine eligibility and the menu of drugs that would be covered. This structure

will take time to build and may be problematic if the program is only intended to

last for several years. But, most important, a low income approach would solve only

part of the problem because many beneficiaries who would not qualify face high

costs and no access to reliable insurance.

The main reason to tie drug coverage to other reforms is to create a warmer reception for what may be very unpopular new requirements in other areas of MediVerDate 11-MAY-2000 15:22 May 29, 2001 Jkt 000000 PO 00000 Frm 00094 Fmt 6633 Sfmt 6621 H:\DOCS\HEARINGS\107-5\HBU066.000 HBUDGET1 PsN: HBUDGET1
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care. This has been the stance of some who propose further privatization of the

Medicare program. But a drug benefit would likely be stalled while controversies

over the role of traditional Medicare and private plans are worked out. Meanwhile,

the plight for beneficiaries will worsen each year. Another risk of this approach is

that a drug benefit would be designed that works well with private plan options,

but treats coordination with the traditional Medicare program as an afterthought.

The approach I favor would deal with the prescription drug issue now, perhaps

in conjunction with some other changes in Medicare, but not a full restructuring of

the program. Getting it right on prescription drugs is a large task by itself. Regardless of whether the future of Medicare relies on incremental reforms or program restructuring to feature private insurers, a drug benefit is a necessary first step.

Moreover, since both traditional Medicare and private plans are likely to be part

of the future, any drug benefit needs to work under either scenario. Is the $153 billion proposed in the budget blueprint enough to fund a reasonable

Medicare prescription drug benefit? If the costs of prescription drugs rise at the rate

that the CBO estimates over the next 10 years, $153 billion will cover a benefit that

is less than 10 percent of drug spending by Medicare beneficiaries, not enough to

offer the type of protection that beneficiaries need or expect. On the other hand, if

the administration’s $153 billion number is a net figure after achieving substantial

(but as yet undefined) savings, perhaps the amount to be contributed would be

much higher. Even if the number were doubled to $300 billion, however, this would

only raise the contribution to an average of about 20 percent of costs of drugs, and

it leaves unknown where the $150 billion in additional savings would come from.

Prescription Drugs and Medicare Beneficiaries. Prescription drugs are the

primary acute care benefit excluded from Medicare coverage. Only in the hospital,

a nursing home, or in a hospice will Medicare cover drugs. But drugs are now, more

than ever, a critical part of a comprehensive health care delivery system. Lack of

compliance with prescribed medications can raise health care costs over time. And

for many who need multiple prescriptions, the costs can be beyond their reach.

An initial look at supplemental coverage might suggest that there is little need

to expand benefits, except perhaps for those with very low incomes. True, many

beneficiaries do have supplemental insurance plans. But, if the reliability of insurance is taken into account, many more have unmet needs. Medicare beneficiaries

supplement their basic benefits from four sources. The first two, employer-based retiree insurance and individual supplemental coverage (which is referred to as

Medigap), are provided by private insurers, while Medicaid, a public benefit, subsidizes many low-income beneficiaries. Fourth, Medicare contracts with private

plans, mostly health maintenance organizations (HMOs), to serve beneficiaries who

choose to enroll. Such plans often cover services that basic Medicare does not. Such

supplemental coverage varies in quality, beneficiaries’ access, and the degree to

which the added coverage relieves financial burdens. Only employer-based retiree

coverage and Medicaid offer reliable drug benefits, and even then not to all their

enrollees.

Employer-based plans normally offer comprehensive supplemental insurance, including drug benefits, and subsidize retirees’ premiums. Thus, these plans both reduce out-of-pocket expenses and increase access to services. But such plans are limited to workers and dependents whose former employer offers generous retiree benefits. As a consequence, these benefits accrue mainly to higher income retirees.

Medicaid, which also offers generous ‘‘fill in’’ benefits, including drugs, is limited

to persons with incomes well below the Federal poverty level. low incomes. Since

Medicaid is a joint federal/state program, states have latitude in establishing eligibility and coverage. And although all states cover prescription drugs, many have

limits on who is eligible and what drugs are included. Concern about the high costs

of prescription drugs suggests that states are unlikely to expand these benefits on

their own, (although some are active in providing separate drug programs).

Medigap plans are rarely a good bargain for most beneficiaries. Beneficiaries pay

the full costs of such plans. Medigap options that include drugs have become prohibitively expensive for many beneficiaries, particularly the very old who must pay

substantially higher premiums than those aged 65 to 69, for example. And even

though they can charge steep premiums, many insurers are refusing to offer options

with drug coverage. Most likely, Medigap drug coverage will soon be viable only for

those who have been grandfathered into a reasonable plan.

Finally, beneficiaries can opt to go into a Medicare + Choice plan. These private

plans generally offer additional benefits at a lower cost than Medigap does, but require enrollees to meet certain conditions, such as agreeing to go only to doctors and

other care providers who are on a prescribed list. Since 1997, these plans have either shrunk their benefits packages or raised premiums (over and above Medicare’s

Part B premium). Drug coverage has either been dropped altogether or stringent

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caps have been placed on the amount covered. Moreover, a number of plans have

pulled out of Medicare, causing beneficiaries to scramble for new arrangements.

In sum, while a substantial number of beneficiaries now have drug coverage, the

share with reliable coverage (employer-based or Medicaid) is considerably smaller.

Only 39 percent of Medicare beneficiaries have reliable coverage, and an even smaller percentage have it for a full year. Further, states and former employers who now

support good coverage may pull back as prescription drugs become even more expensive, intensifying demand for drug coverage in the future. Figure 1 indicates how

vulnerable beneficiaries are. It identifies those most in need of coverage across different levels of economic status (shown as income as a share of the poverty guidelines). The white areas stand for beneficiaries who have no coverage or who now

rely on Medigap or Medicare+Choice plans.

As Figure 1 also shows, in all groups a majority of beneficiaries is without reliable

coverage. Cutting benefit eligibility at 135 percent or 175 percent of the poverty

level would not do away with the problems that beneficiaries face of obtaining reliable prescription drug coverage. In fact, the group with incomes between 175 percent and 250 percent of poverty (about $15,000 to $20,000 for a single person) get

little coverage from either employer-subsidized or Medicaid coverage. They are in

many ways as vulnerable as the truly poor. If eligibility extends to 250 percent of

poverty, that would include over 60 percent of the Medicare population. And even

of those with incomes above 250 percent of poverty, only 41 percent have reliable

coverage.

Spending on drugs, on average, is about the same across all income groups. In

other words, the importance of this benefit does not decline with income, although

the ability to pay does improve. And, even more important, the burdens on Medicare

beneficiaries will continue to rise, even with no policy changes. Figure 2 projects

out-of-pocket spending for several groups of beneficiaries. Much of the growth in

out-of-pocket burdens over the next 25 years reflects growth in the cost of prescription drugs.3

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Issues Crucial to Beneficiaries. As shown above, prescription drug costs are

a large and rising expense that many beneficiaries must face. The willingness of

Medigap beneficiaries to pay high amounts to obtain drug coverage and of

Medicare+Choice beneficiaries to enroll and switch plans to obtain drug coverage

suggest how much beneficiaries value this benefit. It is likely, then, that they would

pay higher premiums to obtain this coverage. But, low income protections and a universal subsidy would be needed to make this an effective benefit.

If the drug benefit is to be a voluntary option, a subsidy and some enrollment restrictions would be even more important to insure that a broad range of beneficiaries would join the Medicare plan. Consider Part B of Medicare. It is a voluntary benefit, but a subsidy makes it sufficiently valuable to attract almost all

beneficiaries. As a consequence, risk selection does not raise the costs of the coverage.

The structure of any prescription drug benefit will affect access and use. If a

standard drug benefit were offered as an option through the Medicare program, the

administration of the benefit could be contracted out to private companies just as

Medicare now does for its payments to hospitals, physicians and other providers.

This approach hews closely to the practice of the basic Medicare program.

Alternatively, the private sector could be used to establish voluntary prescription

drug options. Usually this tack is proposed as a way to allow coverage to vary from

plan to plan and across the country. But this private option works better for enrollees who choose to be in private plans than for those in traditional Medicare because

the latter would face confusing choices. Already, most beneficiaries have two types

of insurance. Adding a third separate benefit, run by yet another insurer, would undoubtedly add to the complexity and confusion that already plagues many beneficiaries. Breaking up coverage makes little sense from an insurance standpoint—

one reason why the insurance industry has not been interested in standalone drug

plans.

Further, even for those in private plans, permitting variation in benefit packages

offered creates a serious disadvantage. Allowing individuals to choose what is ‘‘best’’

for them is likely to separate the sick from the healthy and make it difficult to make

sure that the neediest can afford coverage. Most Medicare beneficiaries who expect

to use few drugs would choose a plan with no deductible, low co-insurance, and a

low cap on benefits. Those who anticipate using more or higher priced drugs might

want greater overall protection even if they have to pay a deductible or high coinsurance rate for their initial purchases. A standardized benefit takes away one tool

for achieving risk selection.

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Finally, the generosity of the plan is a critical element. Even the most generous

plans will not be as comprehensive as what most younger families have, even

though the needs are greater for Medicare beneficiaries. Protections ought to be generous enough to be valued by those who enroll, although the costs of a drug benefit

are likely to be high and grow rapidly over time.

OTHER REFORM ISSUES

Drug coverage represents a logical first step in reform, helping to smooth the way

for other Medicare changes. It also makes sense to carry out some other reforms

simultaneously, and put in place changes that may pave the way for later, more extensive changes.

Improving the Traditional Medicare Program. One major criticism leveled at

fee-for-service Medicare is that when it is combined with supplemental insurance,

many beneficiaries have nearly first dollar coverage. If beneficiaries face cost sharing requirements, that might make them more conscious of the costs of care. The

Congressional Budget Office has long contended that this approach substantially

raises the costs of Medicare. Further, dual coverage generates excess administrative

costs that beneficiaries must cover.

Adding prescription drug coverage would reduce the need for other supplemental

insurance, but probably not enough to encourage beneficiaries to drop their Medigap

plans. Other changes in cost sharing would be needed, such as reducing the very

high Part A deductible and limiting the total amount of cost sharing that any beneficiary would owe. A more rational Medicare cost-sharing package would not have

to be an expensive addition, especially if it increased cost sharing in such areas as

the Part B deductible that are low compared to the private sector. These changes

could help defray higher costs elsewhere. If the basic Medicare benefit could be

made to look more like insurance that most working families have, with good protections and reasonable cost sharing, the traditional Medicare program could satisfy

both beneficiaries and those worried about costs.

In addition, moving more basic health care services under the Medicare umbrella

would substantially better protect sicker and older beneficiaries. The very old get

Medicare at community rates (i.e. where everyone pays the same premium), but

they depend more on Medigap for their supplemental coverage even though these

policies are age rated and hence are very costly. These beneficiaries are least able

to afford Medigap premiums and could benefit if they were covered under Medicare

instead. And in the case of younger disability beneficiaries, Medigap is often not

available at all.

Another advantage of expanding the traditional Medicare benefit package is that

further reforms that might coordinate care through disease-management or other

programs can be effective only if the full range of care is available. The lack of prescription drug coverage and the reality of very high out-of-pocket costs increases the

likelihood of noncompliance. Such noncompliance would make it hard to achieve

overall savings since the extra expense of coordination of care would not be offset

by better outcomes. For example, it makes no sense to have a program to control

hypertension if beneficiaries cannot afford the drugs necessary to combat hypertension.

Finally, the current Medicare+Choice plans are able to offer prescription drug

benefits in part because they receive Federal payments in excess of what it costs

to provide the current Medicare benefit package. The General Accounting Office has

found that plans get payments more than 13 percent higher than what it would cost

in fee-for-service to provide the basic benefits. Even the HMO industry now makes

its case for higher payments over time as necessary to retain a ‘‘desirable’’ benefit

package—not just the required Medicare benefits. The problem is that many of the

6 million beneficiaries in HMOs thus get subsidies for drug coverage, but those in

traditional Medicare—who are sicker on average and more likely to need drugs—

do not. Adding a prescription drug benefit to Medicare would help both

Medicare+Choice enrollees and those in traditional Medicare. And since partial subsidies are already in place for HMOs, accounting for this could lower the costs of

providing universal coverage.

In addition to improvements in Medicare from adding a drug benefit, other modernization efforts will be important as well. The administration’s criticisms of the

current program and call for ‘‘modernization’’ can be viewed as a need for restructuring or as a call for improving the current system. The latter effort should be undertaken regardless of what happens in restructuring of Medicare.

Much of the administration’s criticism about Medicare centers on complexity and

bureaucracy. Certainly the Health Care Financing Administration’s (HCFA) operations should be improved. But it is also important to determine what the problems

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are and how to solve them rather than just pinning the blame on government bureaucracy. Over the years, the responsibility of HCFA has grown substantially, but

its resources to deal with these responsibilities both in dollars and personnel have

not expanded. Second, the Congress has taken a strong interest in Medicare and

dictated many policies at a very disaggregated level.

It is important to note that few private insurance companies escape problems of

complexity and bureaucracy. Many workers and their families find the requirements

of their plans to obtain approval before getting some services, to determine which

doctors and hospitals are in network and which are not, understanding the bills

when they come due months later, and the need to appeal denials of care to be cumbersome, complex and overly bureaucratic. Thus, problems with the complexity of

our current health care system are by no means inherent only to government. The

goal should be to reduce these burdens throughout health care, but to lay the issue

at the doorstep of only Medicare is misleading. More resources are needed to expand

oversight capabilities and bring in professionals who have private sector experience.

Further, the traditional Medicare program needs to have more flexibility to deal

with providers of care and make judgement calls that the Congress has often prevented. Experiments with new ways to coordinate care in a fee-for-service setting

need to be undertaken. Improved methods of payment to private plans and better

measures to control for risk selection are needed both in the current system and are

necessary before beginning a more extensive restructuring effort. Relying on private

plans to make decisions is unlikely to result in the government observing a handsoff approach. Nor should it. Medicare is an important program that needs careful

oversight to protect the beneficiaries it serves.

Restructuring Options that Rely on the Private Sector. Proposals to rely

more upon the private market to offer coverage to Medicare beneficiaries would also

be helped if a reasonable prescription drug benefit were in place. Not only does

managed care need a comprehensive benefit package to perform well, but such a

benefit would help reduce the incentive for risk selection that private plans now

face. Plans would find it difficult to voluntarily add any benefits—such as drugs—

without attracting sicker patients. They would likely respond in the same way that

current Medicare+Choice plans have responded by paring back drug coverage.

For these reasons, competition will work much better if the basic plan that all

must offer is sufficiently comprehensive and standardized. This would still leave

ample room for adding other benefits or competing on price. Until adjustments that

could account for differences in health status are improved, it will be difficult to use

competition in positive ways. The benefits to plans of seeking good risks are simply

still too tempting. It is easier to make profits by attracting healthy patients than

by coordinating care.

Some of the steps described above in connection with reforming the current program need to be in place and working well before a full restructuring of Medicare

is undertaken. This is particularly the case if traditional Medicare is put at risk and

becomes inordinately expensive over time. That would harm the most vulnerable

beneficiaries, offsetting any gains that might result in improved efficiency or choice.

Further, concerns raised about managed care for younger Americans and the issue

of whether such an approach can actually offer cost savings need to be addressed

before making aggressive moves toward this type of change. Figure 3, for example,

compares Medicare per capita growth with growth in spending by private insurance

over nearly a thirty years. Medicare’s track record is substantially better than the

private sector.

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Improving Beneficiary Education and Information. Another factor important to the success of Medicare reform is to give beneficiaries more say in decisions

about their own care. But simply giving them responsibility (for example, requiring

them to choose a plan) will not work unless they have the tools to respond. Credible,

independent sources of information will be essential.

A good place to start this educational effort would be with the prescription drug

benefit. A publicly funded but independent organization that would provide information on the quality of generic drugs and the extent of equivalence across name

brands in the same drug categories, for example, could help beneficiaries to make

more informed choices. Reassurance that a less expensive drug is just as effective

will be more powerful coming from a credible source than from a plan with a financial stake in that decision. Prescription drug coverage will be expensive; so government should invest in the resources necessary to make better decisions. This information could also help hold down costs of drugs both in Medicare and in the private

sector.

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Financing. Expanding benefits is a separable issue from how the structure of

Medicare evolves over time. It is not separable from the issue of the cost of new

benefits, however. Adding drug coverage clearly raises financing issues. New revenues, most likely from a combination of beneficiary and taxpayer dollars, will be required. The administration’s proposals ignore this key issue and in fact make it

worse by treating general revenue as ‘‘deficit’’ financing and arguing for no increase

in payroll taxes. No restructuring effort or other reform will be sufficient to remove

the need for greater resources over time.

CONCLUSION

A familiar refrain for critics of Medicare is that it is a ‘‘Cadillac’’ program, but

the model year is 1965. This criticism is often leveled at Medicare’s fee-for-service

system. In fact, the Medicare delivery system has undergone a large number of

changes and reforms. In the 1980’s, it was a leader in pushing for payment reforms

and its per capita growth rates were lower than that of private insurance. It now

has a private option dominated by managed care plans, and increasingly reforms

have sought to give administrators of the program further flexibility in managing

the costs of care. Where the criticism is more on target, however, is in the area of

benefits. The basic structure of the Medicare benefit package has changed little

since 1965.

The current patchwork approach to provide drug benefits through private insurance, such as we have now, is seriously flawed. Prescription drug benefits generate

risk selection problems; already the costs charged by many private supplemental

plans for prescription drugs equal or outweigh their total possible benefits because

such coverage attracts sicker than average enrollees. A concerted effort to expand

benefits is necessary if Medicare is to be an efficient and effective program. This

commitment will require substantial new resources, but adding a prescription drug

benefit is a logical place to begin reforms of Medicare. It does not make sense to

hold beneficiaries hostage in order to pass other unpopular and unproven changes

in the program.

Too often the solution proposed to complexity or inefficiency is to start over with

a whole new system. But that approach carries no guarantees of success. Improvements in the current Medicare system could test out whether more restructuring

will work well for Medicare beneficiaries. There is a great deal to do before major

reforms are ready for ‘‘prime time.’’

ENDNOTES

1. Senior Fellow, The Urban Institute. The views expressed herein are those of

the author and do not necessarily reflect those of the Urban Institute, its trustees,

or its sponsors.

2. This is based on last year’s Trustees numbers. The outlook would likely be a

little better this year, but not by very much.

3. Although these numbers are dramatic, they still may understate possible increases in out-of-pocket costs. For example, we do not assume changes in insurance

coverage over time, and we assume relatively modest drug growth of 10 percent per

year for 10 years and then the same growth rates as for other health care services.

Mr. PUTNAM. Thank you, Dr. Moon.

Dr. Saving, welcome to the committee.

STATEMENT OF THOMAS R. SAVING, DIRECTOR, PRIVATE

ENTERPRISE RESEARCH CENTER

Dr. SAVING. Thank you very much for the opportunity to discuss

the challenges Medicare faces in the future.

I am going to have a little disclaimer here, too, because I am a

Public Trustee of the Social Security and Medicare Trust Funds.

I want to say, at the outset, my comments here do not represent

the opinions of the Social Security Administration, or the Health

Care Financing Administration, or any part of the things from

which I am a trustee. They are really my opinions, as an economist.

I want to comment briefly on the reforms that affect Medicare

programs, expenditures, and revenues. Most reforms, from those

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enacted as part of the BBA in 1997, the recommendations of members of the National Bi-Partisan Commission on the future of Medicare, and a lot of our discussion here today, have concentrated on

reducing the current expenditure levels, and on future expenditure

growth.

However, reforming the program’s finances also deserves our attention, and it is becoming an increasing problem, as we look at it.

Let me have Figure 1.

To get a feel for the future tax implications of current Medicare,

I present in the figure total Medicare expenditures. Now what I

have here, I express those all in terms of taxable payroll, because

that is a way that we happen to tax at least Part A of Medicare

and, of course, Social Security.

It just gives us a feel for what these numbers are like. It is the

sum of both SMI, Part B, and Part A of Medicare. The deficits that

you might see there, Marilyn does not want to call those deficits.

We can call them whatever we like. What they are—they are expenditures that have to come from the Treasury—and do not come

from the dedicated sources of income for Medicare, Part A or Part

B.

So what I have in here as revenues are the part that consumers

or beneficiaries pay in Part B plus Part A taxes. The difference has

to come from the Treasury, however we want to talk about that.

What we can see is that the difference between revenue and expenditures shows the magnitude of the funding shortfall each year,

and that has to be made up from general revenues. In 2000, that

deficit was 1.13 percent of payroll; and by 2040, the transfer from

the Treasury is going to be 7.5 percent of taxable payroll. By 2070,

it is going to be 13.5 percent of payroll.

If you combine that with what the current Social Security is

going to take, we are looking at transfers from the Treasury to

these programs that are 27.5 percent of total payroll. Let me put

Figure 2 up there.

There is another way to talk about the financial challenge arising for Medicare and Social Security, and that is to calculate their

accrued liabilities.

The debt that we have promised to the future is exactly the same

kind of debt that we have when we talk about the general publicly

held debt, for which we pay interest payments. The only difference

is that if we do not make the interest payments, Wall Street bangs

us on the knuckles and lowers the value of all Government bonds.

In this case, of course, Congress can immediately just take away

these benefits, if they want to.

What I have done here is to calculate the value of our promises.

I have actually discounted them by a fairly high discount rate, because they are uncertain. As a matter of fact, in the past, when Social Security has gotten into difficulties, we have taken some of the

benefits away.

So if that is going to happen in the future, in any case, the size

of these debts are $8.8 trillion for Social Security, and $8 trillion

for Medicare. These two debts, every bit as much as the publicly

held debt, are some five times the publicly held debt.

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So if we are going to use the surplus to reduce debt, we can use

it just as well to reduce this debt, as to reduce the so-called nominal debt that we have outside.

Let me go back to Figure 1. Regardless of the long-range rate

used to estimate future expenditures, Medicare is underfunded by

its current revenue sources. As the figure illustrates, the growth of

Medicare will have a dramatic impact on the funds projected to be

transferred from the rest of the budget to Medicare.

Accelerating Medicare costs will, in the absence of meaningful reform, not only drive Medicare spending to levels that may be

unsustainable for future generations of taxpayers, but will create

a currently unfavorable environment for adding much needed prescription drug coverage.

The projection of future Medicare costs incorporates assumptions

about demographic changes in the future, because we make a lot

of assumptions when we are doing this. These include income

growth, health care market structure, and medical technological

progress.

We cannot do much about demographics. As a matter of fact, because this baby boom problem exists in the entire developed world,

the future assumptions that we are making about immigration are

likely to be very optimistic; because all of the developed world is

going to be competing for immigrants.

The working population in Japan and in all of Europe is going

to be declining rapidly because they have a bigger baby boom population problem than we do.

In order to produce and have workers in their countries, they are

going to have to import people. They are going to present us with

much greater competition for immigrants than we have ever had

in the past. I think that we are making optimistic immigration assumptions in the demographics.

That aside, the demand for medical care, of course, given the assumptions of the technical panel that HCFA had and that were

presented in their results in November, is suggesting that our past

projections, and the projections that I have here are based, in fact,

on that technical panel’s assumptions, that health care is likely to

grow more rapidly than gross domestic product. Their suggestion is

1 percent more rapidly, and that is what these numbers project.

So we are not going to do much in those two areas. So where we

have to go, we are left relying on changing the structure of health

care markets to encourage competition.

Such competition has the potential of reducing the current level

of expenditures through demand reductions and price competition,

and at the same time, encouraging the development of new technology, which is directed toward cost reduction. That is something

that does not happen now, since buyers do not care what medical

care costs. Inventing a new technology that makes it cheaper does

not actually generate any revenue for you.

Fee-for-service Medicare, combined with supplemental insurance,

effectively gives many beneficiaries nearly first-dollar coverage.

Without real cost sharing requirements in place, beneficiaries tend

to have little regard for the price of health care services.

When consumers do not care what services cost, you can be certain that suppliers of these services will not care what they cost.

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In addition, the benefits of developing cost-saving technology are

positive only if those who demand services care about cost. Thus,

technological changes that increase our ability to find solutions to

current conditions for which there are no treatments result in higher expenditures.

With proper incentives, however, such expenditure increases may

be wholly or partially offset by the development of cost-reducing

technology.

We can develop an estimate of the demand effect of introducing

no first-dollar coverage, and it is something that Marilyn also discussed, by relying on the results of the Rand insurance experiment,

which was done in the 1980’s.

Updating that study to a $2,500 deductible policy results in a 24-

percent reduction in medical care expenditures. Those expenditure

reductions only are reductions in demand for health care at existing prices.

Once you had that size, and take the Medicare population times $2,500, the size of that market will make providers compete on

price to get into that market. Once they compete on price, prices

will be considerably lower, and cost-reducing technology will be encouraged.

Up to now, attempts to constrain expenditure growth really have

relied on price controls. We have thousands of years of historical

evidence that suggest that price controls do not work, and the expanding choice is the second aspect. That is the development of

Medicare Plus Choice.

Unfortunately, reimbursing private insurers, based on pre-set

risk adjusted payment rates as was done with Medicare Plus

Choice, induces providers to screen patients.

An alternative to establishing risk-adjusted reimbursement rates

is the competitive bidding process in which suppliers bid for each

type of patient, rather than HCFA telling suppliers what each type

of patient is going to be reimbursed, on the basis of last year’s

averages. In this way, suppliers reveal their reservation prices,

rather than HCFA attempting to determine the correct prices.

So how do we move ahead on bringing competition into the picture at a time when many are suggesting that Medicare’s coverage

be expanded to include prescription drug coverage? Now there are

convincing medical and economic reasons for adding prescription

drug coverage.

The current coverage, drug therapies that may be cost effective,

cost consumers more than perhaps more costly interventions. As a

result, technological advances are tilted toward the development of

such more costly interventions.

Introducing pharmaceutical coverage would level the playing

field for consumers of health care, and perhaps lead to technological advances that result in lower cost therapies. However, a

plan providing universal drug coverage with no conditions about

other reforms would be financially irresponsible, in this case.

Adding full drug coverage to all Medicare beneficiaries would effectively replace current private sector financing with public financing. We can expect that in 2001, we are looking at at least 1.3 percent of taxable payroll, which would be added to the large subsidies

already from the general fund of the Treasury.

101

Let me put Figure 3 back up there for a moment. This gives me

one thing that I think is a little bit of an aside. Look at what has

happened to prescription drug prices, and as we know, the inflation

in prescription drug prices has exceeded that in the rest of health

care.

There is a good reason for that. The reason for that is the growth

of third party payments. What this figure really shows you is that,

for the period from 1960 through the 1970’s, prescription drug

prices rose at an annual rate of only 1 percent. However, third

party payers only covered, on an average, 16 percent. That meant

that individuals were paying 84 percent of the price of prescription

drugs. They cared about what it cost.

In the last 20 years, what has happened is, we have had a huge

increase in the share. Now it is up to 73 percent of prescription

drugs that are paid for by somebody else.

On the average, for the second part of that period, it was 52 percent. You can see what happened to prescription drug prices. When

customers do not care what it costs, suppliers do not care what it

costs.

I think that is an important lesson that we have to learn. We

have to find a way to restructure Medicare so suppliers care what

it costs. If we cannot do that, we are going to have a problem.

Now the last thing I want to discuss is, how are we going to solve

this payment problem that we have and that is significant?

In the past, I have presented in Washington a couple of times a

method of trying to pre-pay Medicare, and the notion of having

each generation pay, in advance, for its own Medicare.

This is the system that I have worked out. We will put up the

next table, perhaps. The transition path that I have studied is the

following one. All workers born in 1946 or later, and those are all

the baby boomers, are in the pre-paid system. Everybody older remains in traditional Medicare.

Beginning today, individuals in the pre-paid system establish

and fund a private retirement account that is going to purchase

health insurance for the rest of their lives, once they reach retirement age.

This sounds like it is a very big deal; a very big, tall task. It is

a tall task but, in fact, it can be done. I think you should look at

the numbers there. You can see what they are.

The table shows the lifetime contribution rates on labor earnings

for new labor force entrants, assuming that per-capita benefits are

going to grow at GDP per capita, plus 1 percent, which was the

technical panel’s recommendation.

As you can see, I present two things on this table; one which is

current Medicare, and the other one is a $2,500 deductible policy.

You can see that if we have a conservative rate of return for

these accounts that are going to pre-purchase private health insurance, we are looking at a contribution rate of 2.68 percent for current Medicare. That is less than current Medicare taxes. If we assume a $2,500 deductible policy, it would be 2.27 percent.

If we look at the rate of return as the marginal productivity of

capital in the United States, then we are looking at a contribution

rate of 0.86 percent, or 0.73 percent for a $2,500 deductible policy.

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There are other favorable consequences of pre-paying retirement

insurance. With prepayment, capital stocks rise and income rises.

By pre-paying benefits, future payroll taxes will be reduced, producing significant efficiency gains.

Let me put Table 2 up. What it does is show you the path of tax

rates that actually would pre-fund Medicare. The first column

shows the time path of current Medicare, and what its tax rates

would look like. The second column shows you the time path of contributions that would pre-fund Medicare for everybody.

As you can see, in the year 2000, or actually 2001, those tax

rates are higher than current taxes. What I have done is, with the

4.17, I put the current contribution of Congress, of the Treasury,

to Part B, in those tax rates, so that they can be compared.

But as you can see, by 2018, the tax rates are lower with the prepaid system, and forever after, they are lower. In fact, they eventually go down to 1.24 percent.

Why are we talking about Medicare today? It is worth thinking

about that. We are not talking about the rising expenditures on

computers. Why is that? It is because Congress is not paying for

computers. Congress is paying for Medicare.

What we want to do is reduce the cost borne by taxpayers. But

also, it is not clear that we are ever going to pay the costs that I

am indicating up here. If we are not going to pay them, that means

benefits are going to be reduced.

First, Medicare should be thought of as a single insurance package rather than in terms of the historical acts that produced separate hospital and supplemental medical insurance programs.

Second, making suppliers and consumers of medical care costconscious requires that both groups care about prices. This can be

accomplished by eliminating first dollar coverage, and a provision

of a defined contribution Medicare benefit.

Then some form of additional premium support for lower income

elderly could address the concerns that they will not get the care

they need.

Because we inherited distribution of health situations, however,

such defined benefits must be risk-adjusted. The risk adjustments

must be determined by the marketplace, and not by HCFA, if we

are going to make this work.

With this form of benefit, we can probably add prescription drugs

and catastrophic coverage in a cost-effective way. Perhaps for the

same costs that we are now imagining, we can have both prescription drugs and catastrophic coverage, which are the two elements

of Medicare. It is particularly catastrophic coverage that forces people to buy Medigap.

Finally, I have observed in the recent discussions about fiscal

priorities an almost universal agreement to reduce the Government’s debt. I am emphasizing, as I did in the figure that talked

about the debts, that Medicare and Social Security commitments

made to current retirees and future retirees represent Government

debts in exactly the same way as the publicly held debt that is

traded on the New York Stock Exchange does.

If we are going to try to reduce debt, I think it makes more sense

to reduce this debt than the publicly held debt.

Thank you.

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[The prepared statement of Thomas R. Saving follows.]

PREPARED STATEMENT OF THOMAS R. SAVING, DIRECTOR, PRIVATE ENTERPRISE

RESEARCH CENTER

INTRODUCTORY COMMENTS

Thank you for this opportunity to discuss the challenges Medicare faces in the future. Since October of last year I have had the pleasure of serving as a Public Trustee of the Social Security and Medicare Trust Funds. During these few short months

my already high regard for the professionalism and objectivity of the actuaries who

prepare the Trustees Reports has risen. Let me say at the outset that my comments

do not represent the opinions of the Social Security Administration or the Health

Care Financing Administration.

I would like to comment briefly on reforms that affect the Medicare programs expenditures revenues. Most reforms, from those enacted as part of the Balanced

Budget Agreement in 1997 to the recommendations of the majority of the members

on the National Bipartisan Commission on the Future of Medicare, concentrate on

reducing expenditure levels and expenditure growth. Reforming the program’s finances also deserves attention. Currently, health care consumption of the elderly is

paid for by tax revenues. Even if the cost containment reforms are successful in

moderating expenditure growth, the tax bite will still undoubtedly grow. For this

reason, I investigate an alternative to transfer payment financing. In the last section of this report I will introduce the simulated effects of making a transition to

prepaid retirement health insurance.

MEDICARE REVENUES AND EXPENDITURES

Figure 1 presents total Medicare expenditures expressed as a percentage of taxable payroll along with the system’s dedicated revenues. The Hospital Insurance

(HI) portion of Medicare has a dedicated payroll tax of 2.9 percent which is supplemented by revenues collected as a result of taxing Social Security benefits. The Supplementary Medical Insurance (SMI) portion of Medicare is financed with a combination of premium payments and general revenue taxes. While these two parts

of Medicare are usually discussed separately, they are part and parcel of the overall

Medicare program and any reform of Medicare must deal with all of Medicare. As

such, the remainder of my remarks will treat the entire Medicare program, that is,

the sum of both the HI and SMI parts of current Medicare.

104

The revenues depicted in Figure 1 are the HI tax revenues and the premium payments required for participation in SMI. The latter revenues are set to 25 percent

of the SMI expenditures. The expenditure estimates depicted in Figure 1 are based

on the Health Care Financing Administration (HCFA) Technical Panel recommendations released in December of 2000 that long run Medicare expenditures should be

assumed to grow at a rate equal to per capita GDP growth plus 1 percent.1 The

technical panel charged with reviewing the financial projections in the Trustees reports maintained that rapid technological changes in medical care and the historical

evidence, among other reasons, justify a higher growth rate. Health care expenditure growth faster than GDP growth implies that the share of income being dedicated to medical care will continue to rise indefinitely and that the share of nonhealth care will fall indefinitely. Importantly, this assumption does not imply that

in the long run all GDP will be health care.

The difference between the revenue and expenditure series shows the magnitude

of the funding shortfall in each year that must be made up from general revenues.

In 2000 the difference was 1.13 percent of a payroll, but by 2040 the transfer from

the rest of the budget will grow more than sixfold to 7.54 percent of payroll. By 2070

the differential will grow to a staggering 13.5 percent of taxable payroll.2

Another way to quantify the financial challenge arising from transfer programs

like Medicare and Social Security is to calculate their accrued liabilities. These accrued liabilities are presented in Figure 2. The accrued liabilities of Medicare and

Social Security are equal to the value today of what is owed to current program participants. The present values are calculated using a 5.5 percent real discount rate.

This rate is higher than the real government borrowing rate, reflecting the uncertainty associated with receiving future payments from the programs.

Social Security’s accrued liabilities are the present value of the cumulative benefits all current taxpayers and retirees can expect to receive based on their earnings

up to the year 2001. For example, the accrued liabilities owed to today’s 65 year

olds are the benefits they will receive for the rest of their lives. For 45 year olds,

it is the present value of the future benefits they would receive based on their first

23 years in the labor force, assuming they started working at the age of 22. For

Social Security the accrued debt is estimated to be $8.8 trillion in 2001, roughly 21⁄2

times greater than the national debt.

Medicare’s accrued liabilities are calculated in a similar manner. Again, a 5.5 percent discount rate is used, but since benefit payments are not tied to past earnings

like Social Security’s, the accrued liabilities are the present value of expected benefits for all individuals who are vested in the program. Anyone who qualifies for Social Security by working and paying taxes for at least 10 years or who is married

to a qualified beneficiary can receive Medicare. Thus, almost everyone over the age

of 32 is vested in Medicare. The present value of SMI benefits are net of expected

105

premium payments. Together the estimated implicit debts of the Hospital and Supplementary Medical Insurance programs are equal to $8 trillion dollars in 2001.

REFORMS AIMED AT REDUCING EXPENDITURES

Regardless of the long range growth rate used to estimate future expenditures,

Medicare is underfunded by its current revenue sources. As Figure 1 illustrates, the

growth of Medicare will have a dramatic impact on the funds projected to be transferred from the rest of the budget to Medicare. The accelerating Medicare costs will,

in the absence of meaningful reform, not only drive Medicare spending to levels that

may prove to be unsustainable for future generations of taxpayers, but has already

created an unfavorable environment for adding much needed prescription drug coverage to the beneficiaries’ benefit package because any efforts to expand benefits

would inevitably worsen Medicare’s financing situation. The goal of most reform proposals is to reduce the level of expenditures and/or the growth rate in expenditures.

Projection of future Medicare costs incorporates considerations on future demographic change, income growth, health care market structure, and medical technology progress. There is not much that can be done to manipulate the demographic

trend, although, as I will argue later, that prepaying Medicare would go a long way

to help cope with the expected hike of Medicare costs when the tidal wave retirement of Baby Boomers comes.3 Demand for medical care tends to increase with income growth, but income growth-induced higher demand for medical care is not a

bad thing and we certainly need not contain income growth to save on the costs of

Medicare. Hence, we are left with relying on changing the structure of health care

markets to encourage competition. Such competition has the potential of reducing

the current level of expenditures through demand reductions and price competition

and at the same time encouraging the development of new technology directed toward cost reduction.

The current Medicare payment system, especially the dominant fee-for-service

part, is partly responsible for the very high current level of Medicare costs. Fee-forservice Medicare, combined with supplemental insurance, effectively gives many

beneficiaries nearly first dollar coverage. Without real cost sharing requirements in

place, beneficiaries tend to have little regard for the price of health care services.

When consumers have little regard for the cost of services, we can be certain that

the suppliers of services will have little regard for the price they charge. In addition,

the benefits of developing cost saving technology are positive only if those who demand services care about cost. Thus, technological changes that increase our ability

to find solutions for current conditions for which there are no treatments, will result

in higher expenditures. Such expenditures increases will be wholly or partially offset by the development of cost reducing technology with the proper incentives.

We can develop an estimate of the demand effect of introducing a no-first-dollar

coverage Medicare system by using the results of the RAND Health Insurance Experiment. The RAND experiment found that a policy with a $500 deductible in 1983

dollars and 100 percent coverage above the deductible reduced total expenditures

relative to fee care by 27 percent.4 Similarly, Christensen and Shinogle (1997) estimated that Medicare beneficiaries who have Medigap coverage used 28 percent

more service than do beneficiaries who are not covered.5 With Medigap, Medicare

can be essentially converted to a first dollar coverage policy.

Using results from the RAND study to estimate the expenditures associated with

a $2,500 deductible policy results in 24 percent savings. These savings only reflect

reductions in demand on the part of consumers. The effects will be even larger as

suppliers compete to provide the services consumed under the deductible amount.

While switching to a higher deductible policy is seldom mentioned as a Medicare

reform, it is instructive to consider designing an insurance package that includes

no-first-dollar coverage. Concerns over how lower income retirees will pay for care

below the higher deductible can by addressed by providing them with a need-based

transfer. The transfer must be designed, similar to a medical savings account, to

give them the incentive to consider the cost of care.

BALANCED BUDGET ACT OF 1997

The Medicare+Choice program initiated with the passage of the Balanced Budget

Act (BBA) of 1997 was expected to expand the set of private insurers available to

Medicare beneficiaries. The act allowed preferred provider and provider sponsored

organizations to enter the Medicare market alongside traditional health maintenance organizations. A key difference between the traditional fee-for-service Medicare and Medicare+Choice is the program’s payment methods. In the former, providers receive a separate payment for each covered medical service while, in the latter,

contracted private plans receive a fixed monthly amount for each beneficiary they

106

enroll. Competition among the expanded group of providers was expected to reduce

expenditures and slow cost growth.

Thus far, evidence supporting the expectations has been mixed at best. According

to a recent GAO study, providers participating in Medicare+Choice continue to attract healthier and less costly beneficiaries.6 Reimbursement rates have, up to this

point, been based on a formula adjusted for a participant’s geographic location, age,

sex, disability status and Medicaid eligibility. Since the reimbursement rates are not

individually risk adjusted, providers have the incentive to screen patients and reduce their exposure to high risk patients. The patients who participate in the private plans have a lower cost than the average of patients in fee-for-service, yet

Medicare+Choice providers receive the average cost. As a consequence,

Medicare+Choice has increased, rather than reduced, Medicare costs.

The BBA required the Department of Health and Human services to develop a

risk adjustment methodology that accounts for variation in per capita costs based

on health status and demographic factors for payment to Medicare+Choice

organizations. In its current form, the adjustment factors are a function of age, sex,

Medicaid eligibility, location, and inpatient diagnoses called the Principal In-Patient

Diagnostic Cost Group (PIP–DCG). The risk-adjusting methodology improves upon

the current methodology but can explain only 6 percent of the total variation in

medical expenditures. Other risk-adjustment methodologies are being evaluated, but

the GAO study concludes that the new methodology ‘‘. . . may ultimately remove

less than half of the excess payments caused by favorable selection.’’7

Reimbursing private providers based on preset risk-adjusted reimbursement rates

will continue to induce providers to screen patients. This year, reimbursement rates

vary by geographic location, age, sex, Medicaid eligibility, disability status and diagnostic cost group. Providers know beforehand how much they will receive for taking

on each type of patient rather than being asked to price each of the risk factors

themselves. An alternative to having HCFA establish risk-adjusted reimbursement

rates is a competitive bidding process in which suppliers bid for each type of patient.

THE RATIONALE OF THE PROPOSED REFORMS

A basic idea behind Medicare+Choice and several Medicare reform proposals on

the table are to adopt market-oriented approaches to achieve cost efficiencies. These

cost-saving approaches have already been successfully adopted by numerous employer-sponsored health care programs and by the Federal Employees Health Benefits Program (FEHBP). All these programs are designed to make beneficiaries sensitive to the cost implications of choosing a particular plan. The demand side costsaving incentives will then induce providers to deliver medical services that are

cost-efficient. Potentially more important, these same cost-saving incentives will

eventually lead to a better balance between service-expanding and cost-saving medical innovations, slowing down the growth of Medicare costs in the long-run.

In order to contain the accelerating costs of Medicare and to optimize its benefit

package, we must go even further in modernizing Medicare’s payment system by applying market approaches to cost efficiencies. This consensus can be seen from several leading proposals on Medicare reform (including the Breaux-Thomas proposal).

In addition to benefit expansion, these proposals include the following payment side

changes: (1) Fee-for-service modernization, which would enable the traditional Medicare to act as a prudent purchaser; (2) Medicare+Choice modernization, which would

encourage plans to compete on costs as well as quality; (3) A premium support system fashioned after the FEHBP, which would make beneficiaries more sensitive to

costs of care.

In the following, however, I want to focus on two other issues related to Medicare’s cost problem. First, what is the most sensible way to provide prescription

drug coverage for Medicare beneficiaries when costs are currently a paramount concern? Second, I want to argue for the case of prefunding Medicare that takes advantage of the baby boom workers still in working.

THE CASE FOR PRESCRIPTION DRUG COVERAGE

A major purpose of the Medicare program was to offer senior Americans access

to medical care. Yet an important part of current medical care, prescription drugs,

are for the most part not covered by Medicare. As a result, only about two thirds

of Medicare beneficiaries have prescription drug coverage (through employers’ plans,

Medicaid, Medigap and Medicare+Choice). Thus, while much of the Medicare reform

discussion concerns cost containment, another major Medicare updating plan on the

table proposes to make structural changes that add out-patient prescription drugs

to the Medicare program. For example, the Breaux-Thomas Medicare reform plan

(and the earlier Breaux-Frist plan) proposes making coverage available for prescripVerDate 11-MAY-2000 15:22 May 29, 2001 Jkt 000000 PO 00000 Frm 00110 Fmt 6633 Sfmt 6621 H:\DOCS\HEARINGS\107-5\HBU066.000 HBUDGET1 PsN: HBUDGET1
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tion drugs and catastrophic medical costs in a broader Medicare reform package featuring market solutions to cost efficiencies on the payment side. In contrast, the

President’s Immediate Helping Hand Prescription Drug Plan proposes temporary

prescription drug assistance to the neediest seniors until a comprehensive Medicare

reform plan including prescription drugs is enacted and implemented.

There are convincing medical and economic reasons for adding prescription drug

benefit as part of a reformed Medicare package. Indeed, it is hard to imagine that

a modern medical insurance plan does not include outpatient prescription drug coverage as an integral part. Approximately 98 percent of private health insurance

plans offer a prescription drug benefit or a cap on out-of-pocket expenses as an integral part of the benefit package. As a result of innovations on drug therapies, prescription drugs have been playing an increasingly important role in health care. According to the Health Care Financing Administration, Office of the Actuary, for the

last several years, overall health care expenditures grew at about 5 percent annually while nationwide prescription drug spending grew on average at a much higher

12 percent per year. Prescription drugs as a component of health care are even more

important for the elderly due to aging-related chronic diseases. In 1995, as some

studies show, an elderly person’s total average annual drug costs were $600 compared with $140 for a nonelderly person.8

PRESCRIPTION DRUG COVERAGE SHOULD BE BALANCED AGAINST COST CONCERNS

While adding drug coverage to Medicare is important, it raises financing issues

to a program whose future funding will strain even optimistic forecasts of future

economic growth. At least one study suggests that incorporating outpatient prescription drugs into the Medicare benefit package could add between 7 percent and 13

percent annually to Medicare’s total cost.9 The President’s budget proposal for fiscal

year 2002 includes $230 billion in expenditures on Medicare and, in addition, the

President proposes an Immediate Helping Hand Prescription Drug Plan to offer lowincome seniors prescription drug assistance and all seniors catastrophic drug coverage (more than $6,000 in out-of-pocket drug costs) which entails spending $11.2

billion in 2002 and $153 billion in the next 10 years.10 So even a prescription drug

plan targeted only to the neediest would add a significant share (almost 5 percent)

to the costs of the traditional Medicare program.

While I believe the new drug benefit initiative featured in the President’s IHH

plan is carefully crafted to balance competing concerns about the sustainability of

Medicare and the hardship faced by some beneficiaries, I do not think a plan providing universal drug coverage with no conditions about other reforms would be a financially responsible policy option. Adding full-scale drug coverage to all Medicare

beneficiaries would effectively replace private sector financing with public financing.

In 2001, seniors are expected to spend approximately $69 billion dollars on prescription drugs. This amount by itself is equal to 1.3 percent of taxable payroll.

Moreover, as Figure 3 shows, the surge in prescription drug price inflation has

coincided with the significant decrease in the share of prescription drug purchases

that are paid by individuals. During the 1960’s and 1970’s, prescription drug prices

increased at an annual rate of just over 1 percent while third party payers covered

only 16 percent of expenditures. Individuals paid the remaining 86 percent of the

cost. For the last two decades the average annual increase in drug prices rose to

7.3 percent, as average third party coverage rates rose to 52 percent. By 1998, third

party payers were covering 73 percent of the cost of prescription drugs. Thus, without a comprehensive reform, adding comprehensive drug coverage will likely

produce rapidly growing costs.

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REFORMING MEDICARE’S FINANCING

While most current reform initiatives are aimed at bringing competitive forces to

bear on the provision of health insurance for the aged, little attention has been paid

to insuring the solvency of Medicare. Over the last few years I have studied the feasibility of prepaying Medicare benefits. Medicare is financed on a pay-as-you-go

basis which means that, for the most part, contemporaneous taxes are used to pay

benefits. Further, the financing can be thought of as a transfer from the young to

the old (including the 75 percent of SMI benefits paid by the Federal Treasury).

Thus, the retirement of the baby boomers will cause severe problems for Medicare

that are further exacerbated by the possibility that benefits may grow at a faster

rate than the growth in the economy, necessitating transfers that grow as a share

of the economy.

A detailed presentation of the prepayment proposal can be found elsewhere, so I

will briefly outline its main components here.11 The transition path we have studied

is structured as follows. All workers born in 1946 and later would be in the prepaid

system and all individuals older than 54 today would remain in traditional Medicare. Beginning today, individuals in the prepaid system would establish and fund

a health insurance retirement account that at retirement would be sufficient to purchase health insurance for the rest of their lives. This may seem a tall task, and

indeed it is, but it is important to initiate the transition now and take advantage

of the earning power of the baby boomers while they are workers, rather than waiting until it is too late, when they become retirees and begin to draw benefits.

In Table 1, I present the lifetime contribution rate on labor earnings required to

prepay Medicare benefits assuming that per capita benefits grow at the rate of GDP

per capita growth + 1 percent.12 I present the rates required of new labor force entrants to prepay Medicare benefits and those required to prepay a $2500 deductible

policy. Recall that the prepaid program is phased in for individuals born after 1945,

so any move to a higher deductible policy would not affect current or near term retirees. As the rates in the table indicate, prepaying the total Medicare package can

be prepaid at rates that are less than the current payroll tax for the HI program

by itself. At a 5.4 percent real rate of return, the contribution rate is 2.68 percent

and if the rate of return is 8.5 percent the contribution rate is 0.86 percent. In the

following simulation, we allow the rate of return to decline as the accumulated

funds in the health insurance accounts increase the nation’s means of production.

The 5.4 percent return is roughly the long run return on a portfolio comprised of

60 percent stocks and 40 percent bonds. The higher 8.5 percent return is the pretax

rate of return on nonfinancial corporate capital.13 This rate is the marginal product

of capital and reflects the rate realized on the accounts if all taxes are waved. The

lower rate of 5.4 percent is after corporate tax payments. In the simulation results,

109

I use the pretax rate and implicitly assume that all taxes are waved on these accounts.

We introduce the higher deductible policy to show the level shift in the cost of

insurance. The lower cost is due to demand responses exclusively, even though as

consumers face the full cost of care below the deductible, suppliers will compete for

those first dollars resulting in lower prices. We estimate that contribution rates necessary to prepay the higher deductible policy are 2.27 percent and 0.73 percent, at

the 5.4 percent and 8.5 percent real rates of return, respectively.

The Table 1 shows that the contribution rates for new entrants are low. However,

the rates escalate for individuals who have fewer years remaining in the labor force.

In the simulation path we have studied, workers pay for contributions to individual

accounts for all individuals in the new system and for the Medicare costs of current

and near term retirees. In each year the transition tax rate, or tax in excess of the

rate that would be necessary without prepayment, is the same for all workers.

Before turning to the simulation results I would like to point out a few favorable

consequences of prepaying retirement medical insurance. The first I have already

mentioned in passing is; prepayment increases the nation’s capital stock. It can be

shown that pay-as-you-go transfers reduce savings and the size of a nation’s capital

stock or means of production. With prepayment, that outcome is reversed; capital

stock rises and so does income. The second consequence is that prepayment mollifies

the effects of variations in generation size. Without prepayment, the baby boomer’s

retirement will result in a great burden on the taxpayers, necessitating high tax

rates which have severe incentive effects. The final consequence is related to the

higher tax rates. By prepaying benefits, future payroll taxes will be reduced, producing significant efficiency gains.

Table 2 presents the simulation results. The first column shows the status quo

Medicare tax rate. The rate is the ratio of Medicare expenses for the aged net of

benefit payments divided by taxable payroll. We use taxable payroll as the denominator as an accounting metric, realizing that SMI is not financed by a payroll tax.

This column shows the tax rate assuming no prepayment. The remainder of the

table shows the results with prepayment. The initial marginal productivity of capital is assumed to be 8.5 percent . Contributions to the individual account are assumed to increase the capital stock dollar for dollar. As the capital stock rises, the

marginal product of capital falls and wages rise.

The higher wage base is used as the denominator in the next column titled forecast Medicare costs. The higher wage base results in lower tax rates. The next column shows the benefits paid from the prepaid accounts. The first of the baby

boomers retires in 2011, so the prepaid benefits are zero until then. As individuals

with prepaid insurance comprise an increasing share of retirees, their share of total

benefit payments rise. By 2050 all of the benefits are paid from the prepaid accounts. The next column identifies the share of benefits that must be paid by tax

revenues. These are the benefits of those who are born before 1946. As the column

indicates, by 2050 these individuals have died and the tax requirement is eliminated. The aggregate prepaid account contributions are shown in the next column.

Because the transition path being analyzed requires that all individuals born in

1946 and later have prepaid accounts by the time of their retirement, the aggregate

contributions are well above the rates shown in Table 1 for new labor force entrants.

Further, the long run rate of 1.24 percent is above the 0.86 percent rate in Table

1 because of the decline in the rate of return earned on the accounts. The next column shows the transition cost. These costs are the taxes in excess of the taxes with

no prepayment. Until 2018 the total cost of the transition, presented in the last column, exceeds the cost of the pay-as-you-go system. Figure 4 graphically depicts the

forecast Medicare costs and the Medicare tax plus prepaid account contributions.

For the first 18 years the transition is more expensive than continuing with the current financing arrangement. Thereafter, the prepaid system is less expensive.

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CONCLUDING REMARKS

In order to contain the accelerating costs of Medicare, Medicare’s payment system

can be modified by applying market approaches to cost containment that have been

successfully tested by numerous employer-sponsored health care programs and by

the Federal Employees Health Benefits Program. Consideration of prescription drug

coverage should be balanced against this heightened cost concern. Besides reforming

delivery of care, the rising cost pressures also makes a strong case for prepaying

Medicare.

TABLE 1.—LIFETIME CONTRIBUTION RATES AS A PERCENTAGE OF TAXABLE EARNINGS FOR LABOR

FORCE ENTRANTS

Real rate of return Medicare replacement $2,500 deductible policy

5.4 2.68 2.27

8.5 0.86 0.73

TABLE 2.—SIMULATED TRANSITION TO PREPAID MEDICARE

Year

Status quo

Medicare tax

rate

Forecast Medicare costs

Benefits paid

from prepaid

accounts

Benefits paid

from tax revenues

Aggregate prepaid account

contributions

Transition cost

Medicare tax

plus prepaid

accounts

2000 4.17 4.17 0.00 4.17 2.71 2.71 6.87

2010 4.66 4.58 0.00 4.58 2.30 2.30 6.87

2020 6.45 6.22 2.94 3.28 1.63 0.00 4.91

2030 9.14 8.70 7.12 1.58 1.31 0.00 2.90

2040 10.88 10.30 9.94 0.36 1.25 0.00 1.61

2050 11.90 11.25 11.25 0.00 1.24 0.00 1.24

2060 13.77 13.05 13.05 0.00 1.24 0.00 1.24

2070 15.91 15.28 15.28 0.00 1.24 0.00 1.24

ENDNOTES

1. This growth assumption was one of the primary recommendations published in

Review of Assumptions and Methods of the Medicare Trustees Report: Financial

111

Projections, December 2000. My estimates are not adjusted for the age distribution

of Medicare enrollees.

2. Paying Social Security benefits to the elderly and to survivors in 2040 will cost

15.5 percent of taxable payroll. Combined with Medicare the costs will climb to 27.7

percent of payroll.

3. On a related matter, faster introduction of young immigrants to this country

may offer some help on the revenue side, but as some studies show, the scale of

immigration that may generate a significant impact on Medicare and Social Security’s financing is likely to be politically infeasible.

4. See The Demand for Episodes of Medical Treatment in the Health Insurance

Experiment, Emmit B. Keeler, Joan L. Buchanan, John E. Rolph, Janet M. Hanley,

and David M. Reboussin, 1988, RAND Health Insurance Experiment Series.

5. ‘‘Effects of Supplemental Coverage on Use of Services by Medicare Enrollees,’’

Sandra Christensen and Judy Shinogle, Health Care Financing Review, Fall 1997,

pp. 5–17.

6. Medicare+Choice: Payments Exceed Cost of Fee-for-Service Benefits, Adding

Billions to Spending, August 2000, GAO/HEHS–00–161, General Accounting Office.

7. GAO, p. 5.

8. The first number is from M. Davis et al., ‘‘Prescription Drug Coverage, Utilization, and Spending Among Medicare Beneficiaries,’’ Health Affairs, Vol. 19, No. 1,

1999 and the second number is from Agency for Health Care Policy and Research

Center for Cost and Financing Studies, National Medical Expenditure Survey Data,

Trends in Personal Health Care Expenditures, Health Insurance, and Payment

Sources, Community-Based Population, 1987–1995 (March 1997). http://

www.meps.ahcpr.gov/nmes/papers/trends/intnet4d.pdf

9. M.E. Gluck, National Academy of Social Insurance Medicare Brief: A Medicare

Prescription Drug Benefit (April 1999). http://www.nasi.org/Medicare/Briefs/

medbr1.htm.

10. According to the President’s IHH drug plan, Seniors whose incomes are at or

below 135 percent of poverty would have no premium and nominal co-payments for

prescription drugs. Seniors whose incomes are between 135 percent and 175 percent

of poverty ($15,000 for a single person) would receive partial drug coverage.

11. See the Economics of Medicare Reform, Rettenmaier and Saving, The Upjohn

Institute for Employment Research, 2000, for a complete discussion of the proposal

and for details of our methods.

12. These results are based on a simulation model we developed several years ago.

The growth rate assumption is relative to our projection of GDP. Medicare benefits

are net of SMI premium payments.

13. This rate is from James Poterba, ‘‘The Rate of Return to Corporate Capital

and Factor Shares: New Estimates Using Revised National Income Accounts and

Capital Stock Data,’’ NBER working paper no. 6263, 1999.

Mr. PUTNAM. Thank you, Dr. Saving.

Are there questions of the witnesses?

Mr. Gutknecht.

Mr. GUTKNECHT. Thank you, Mr. Chairman, and I want to thank

the distinguished panel for coming here today.

I would like to, first of all, tell a quick story. When I was in the

State legislature, I remember I was on the subcommittee that dealt

with the public employees’ benefits.

I remember just a number of years ago that there were some experts who came in one day, and they were so excited. They had a

new idea for the health insurance program for the State employees.

It was going to involve first dollar coverage. It was going to save

us all kinds of money, because people would go in early, they would

get treated faster, and it was going to save us money.

I remember that day. I am not an economist, and it certainly is

not an economist’s term; but I said, there is unlimited demand for

free stuff. I said, I do not really see how this is going to save us

money.

About a year later, those same people came scurrying back into

the same room saying, we have got to make a change here. This

thing is eating us out of house and home.

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I am concerned about that. I think, Dr. Saving, your chart here

on prescription drugs is a very good one. I do think that part of

what is driving the inflation in the prescription drug industry is

the fact that an awful lot of Americans have some kind of prescription drug coverage, and do not really know how much prescription

drugs cost.

I say that, even with my parents. We were talking about this last

year. I asked them how much they were paying for prescription

drugs. They said, ‘‘I think it is $4.’’ They really did not know how

much. They do not take that many drugs, but they were somewhat

divorced from that.

Dr. Wilensky, I came in late, and I am sorry, because I really

wanted to hear all of what you had to say. You mentioned at least

a little bit about prescription drugs. I think you said, and I do not

want to put words in your mouth, but I think you said that we

should be very wary of another BBA type fix, until we get real reform, structural reform, of the system, and I agree with you.

Dr. WILENSKY. I did say that.

Mr. GUTKNECHT. Did you mention prescription drugs?

Dr. WILENSKY. What I said is, two strong recommendations. We

need prescription drugs, but we need to have that done within the

context of overall Medicare reform.

I recommend not doing a standalone. Let us start with prescription drugs and get to reform when we get to it, I think, because

of the financial fragility of the program, and the obvious ease with

which it is to give benefits, relative to doing the kinds of other

changes that are needed.

So my two recommendations are these. Do prescription drugs,

but only in the context of overall reform. If the Congress does not

do prescription drugs and/or Medicare reform, do not use the

money that has been set aside in the budget to increase provider

payments.

There was a rationale for the first two rounds, post-PBIA. But

I think unless there is some clear problem that is not currently obvious, that should not be repeated.

Mr. GUTKNECHT. Well, I really want to come back to this, because it does strike me that if we go with some kind of a new entitlement for prescription drugs, particularly under the current system that we have right now, with the patent situation, with the

FDA, and so forth, this is an issue that I have learned more and

more about, and the more I learn about it, the more troubled I am.

I do not believe in price controls, but I do believe in free markets.

We, in the United States, are really caught in a very difficult bind,

as it relates to prescription drugs. That is that American consumers, those who are paying the full freight right now, are paying

much, much more than any other consumer in the rest of the

world, as far as I can determine.

I really do think that we have got to look at ways that we can

at least allow for more competition, even within the prescription

drug industry. Frankly, we have got to get the doctors to participate in this.

You know, in some respects, I believe they are part of the problem, because they have a tendency to want to prescribe the best for

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their patients, and I am not questioning their motives. But the net

effect of this sometimes is to really make this problem even worse.

The other problem that I was surprised to learn, and I do not

think most Members of Congress know this, is that in terms of the

generics, there really is not much difference between a generic drug

and a brand name drug.

As a matter of fact, I am told, and maybe you can correct me on

this, that the difference between most generic drugs and the brand

name drug is no different than one batch of the brand name drug

and the next batch of that same brand name drug.

Yet, in many, many cases, we could save countless numbers of

millions of dollars, if we could simply get the doctors at least to

consider more often prescribing the generic brand.

But I do think the other part of it is, we have got to get at this

price thing. You know, with the pharmaceutical industry, I am not

out to get them. But on the other hand, in many respects, it certainly seems as it relates to American consumers, they have a license to steal.

When you take commonly prescribed drugs that are selling for 10

percent of what we sell them for in the United States, in Europe,

it really amounts to the fact that American consumers are subsidizing the starving Swiss. At some point, I think we have to say, we

are not going to play that game any longer.

Is there any comment on what we can do to create more competition, and help hold down the price of drugs? This is a great chart.

I love this chart. I am going to steal it from you, and use it in some

of my special orders.

Dr. WILENSKY. Let me give you one suggestion with an issue that

you raised initially, which has to do with intellectual property protection.

As a result of a number of pieces of legislation that were passed

by the Congress in the last 16 or 17 years, there has been an almost effective doubling of the amount of time, on average, that a

new chemical entity is patented.

While I think we need to be careful to protect intellectual property, I am not suggesting that you do away with it. The series of

changes have substantially increased the amount of monopoly control and power that exists. I think it may be time to go back and

to see the effect that has occurred over the last 16 years, and to

try to make sure that we have the right balance.

Whether or not generics are substantially less, whether there is

competition with other branded names varies very much by the

type of compound. But you are clearly correct, we want to encourage competition. That means making sure that the monopoly power

that is granted by the Government for particular new elements is

the good tradeoff. We want the best tradeoff that we can have, and

I think that is important.

Secondly, you might need to help make sure that information is

available, so that both physicians and patients understand when

some of the new, more expensive compounds really provided added

value.

Information, of course, will not be enough. They need information, and you need to have economic incentives that encourage individuals, and through them, the physicians that they go to for servVerDate 11-MAY-2000 15:22 May 29, 2001 Jkt 000000 PO 00000 Frm 00117 Fmt 6633 Sfmt 6602 H:\DOCS\HEARINGS\107-5\HBU066.000 HBUDGET1 PsN: HBUDGET1
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ice, to make sure that their economic incentives support appropriate use of new therapeutics.

But I do think that reviewing intellectual property protection

provisions is something that is probably ripe for Congress to consider.

Dr. MOON. Could I just underscore what Gail has said, at the

end, in particular?

If we consider expanding prescription drug coverage to this population, the amount that it would take in additional funds to provide

good, credible information to consumers would be rounding error.

Consumers now only get their information from research largely

funded by drug companies. They are, understandably, a little suspicious sometimes, when they hear certain kinds of information, or

else accept unreliable information.

What would be helpful, not only for Medicare, but for the private

sector as a whole, would be good information, available from an

independent entity, about when generics are totally safe and equivalent, and when they are not; when drugs within a particular class

that are still under patent are largely equivalent or not. You might

actually get some price competition, which is unheard of, across

brand names, if you did that.

All of the drug proposals that people are talking about usually

have a 50 percent co-pay. Beneficiaries will be very well aware of

the cost of drugs, as many of them already are.

Dr. SAVING. It is kind of interesting here, because I gave a

speech on Friday in Dallas to the Chamber of Commerce. I was

driving up there from College Station. I saw a lot of billboards. The

billboards were advertising Lasik surgery. The biggest number on

the billboard was the price.

Now if you open up any magazine, and you will see ads for pharmaceuticals. Nowhere in that ad is the price mentioned. There is

a reason for that. That is that the people buying it are not paying,

and they do not care what it costs.

If we can make people care what it costs, the drug companies are

going to do a lot of this information for us. They are going to tell

us what the price is. That is the kind of competition that we would

like to see.

We would like to see them doing what they do with Lasik surgery: advertise the price; tell us what the drug is going to cost; why

we ought to be buying it instead of another one; and what its price

is going to be.

Mr. GUTKNECHT. Mr. Chairman, can I follow up?

Mr. PUTNAM. You certainly may.

Mr. GUTKNECHT. I am not really in favor of restricting advertising, although it does bother me, all the pharmaceutical ads that we

see on television, today.

You have just raised a very good point, what about the idea of

saying, OK, you can go ahead and advertise all you want, but you

have got to put the price in there? I mean, you do not have to necessarily respond, but it is something we maybe should think about.

Dr. WILENSKY. It is a very interesting idea to try to force the information. Again, I think you need two components. To get better

information will help, but it will not be enough. But it is a very

interesting idea, as the first step.

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Mr. PUTNAM. In fact, grocery store ads or drug store ads advertise nonprescription drug prices all the time.

Dr. WILENSKY. Right.

Mr. PUTNAM. It is really the prescription system that makes this

difficult. It is this deal between the doctors and drug companies

that makes the price information less important. We need to break

that, so that the drug stores who are advertising big, full-page ads

in the newspaper are going to talk to us about the price of prescription drugs. But that will only happen if the buyers care what it

costs.

Further questions; Mr. Collins.

Mr. COLLINS. Many of our seniors under Medicare or Medicaid

take a sizable number of drugs, maybe five or six, and some even

eight or nine.

What do you think or what is your opinion of the consultant

pharmacies who analyze how one drug may offset another drug,

and come back with recommendations that oftentimes lead to a

fewer number of drugs being taken?

Dr. WILENSKY. Well, the pharmacies and the pharmacists can

provide important information to the extent that they are the single supplier of prescription drugs.

One of the advantages in coordinated care/managed care plans is,

there usually is somebody around who is looking at all of the therapeutics that are being prescribed.

A pharmacist can provide that very important service. It really

will vary in the community as to how likely the same person is to

be providing that kind of information, or whether or not the information systems are connected.

So there is an important service, in terms of whether there may

be a drug interaction with regard to other things known about the

individual. Whether or not the senior is likely to go to the same

pharmacy for all of their prescriptions is a more complicated issue.

Mr. COLLINS. Let me narrow it down a little differently, a little

closer. In the nursing home, where a resident may, as I say, be taking a half a dozen different drugs, there is a consultant pharmacist,

who will go into the nursing home and look at all the drugs that

that nursing home is responsible for administering to that resident.

Are you familiar with that program, and what is your opinion of

that?

Dr. WILENSKY. I think when you have individuals who are receiving, and by the nature of being in a nursing home, you are having

individuals with multiple dependencies, and that is typically why

they are there, and they will be taking substantial numbers of

pharmaceuticals.

I am a trustee for the United Mine Workers Health and Retirement Fund, that funds the retiree benefits for individuals who average 80 years old. They tend to be a very old, frail population.

They have very high pharmaceutical prescription drug use.

As part of that program, they have brought in one of these pharmacy benefit management groups to try to work with the physicians and gerontologists to make sure the very high users are getting proper guidance, both to the physicians and to the individuals.

I think that will mean to be careful about whether or not it

would make sense to think about this, in general, on an average,

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for seniors; or whether there might be some special services for individuals who have extraordinary numbers of prescription drugs,

who have catastrophic expenditures, to think about whether people

who are in that category might need or benefit from some kind of

case management, clinical guidance, however you want to call it,

and who the right person will be. But I think the point that you

are raising is a good one.

I think the issue of who the right person will be is very important. One of my concerns is that sometimes in nursing homes, the

nursing home pushes for certain kinds of medications to make the

patients easier to take care of, to deal with incontinence, and that

can cause problems, in other areas, for example.

So one of the things that you also want to make sure is that

when you are dealing with something like a nursing home, that it

is not someone affiliated with a nursing home, who then is inappropriately coordinating certain kinds of drugs that may actually be

harmful to the patient.

One of the difficulties with any kind of program is that you

would like to have good oversight, and make sure that people get

good care, which is another reason why I think having some independent group that would have recommendations, could have some

oversight authority, and could collect the information to provide it

to individuals to say, you should be aware and worry about this

kind of drug interaction.

Mr. COLLINS. I caught the tail end of a news report the other

day, and I have not been able to track it down. There was some

study just recently that indicated that there was quite a duplication in medication, which added quite a bit to the cost. So that is

where I was coming from.

Dr. WILENSKY. This also causes clinical problems, as well, for individuals who have direct drug interactions; particularly for individuals who take a lot of pharmaceuticals, or who have a lot of

complicating illnesses.

Mr. COLLINS. I thank each of you for being here today.

Thank you, Mr. Chairman.

Mr. PUTNAM. Thank you, Mr. Collins.

Mr. Kirk.

Mr. KIRK. Thank you, Mr. Chairman.

Dr. Wilensky, you are highly experienced in all things HCFA. I

am wondering if you could tell me if there is an automatic and associated cost with removing the reimbursement rates under Medicare, that are currently calculated on a county by county basis? If

we went to MSAs, does that necessarily cost us anything?

Dr. WILENSKY. It would not necessarily cost you anything. You

could have a budget-neutral calculation, that would have the Federal Government spending exactly as it spends now.

Mr. KIRK. For you, and I ask you more as an outside witness, as

a political judgment, is that possible to do?

Dr. WILENSKY. It is possible. We have just been struggling with

this on the Medicare Payment Advisory Commission. Let me tell

you our recommendation and why.

We have been uneasy in urban areas about going to an MSA, because we think that the counties may have some substantial differences of what may be five or six counties within an MSA. There

117

are tradeoffs of getting into the larger unit; but on balance, the

Commissioners decided against it.

Where we do recommend going to a larger grouping than now exists is for the rural or small urban areas, where we think the current configuration provides unstable estimates, and estimates that

vary in ways that do not make much sense.

So our recommendation is that the Secretary consider larger

groupings that would provide stable estimates of spending in the

non-heavily urbanized areas; but on balance, to stay with the county for the urban areas.

However, we recognize that there are tradeoffs that you get into.

You will then have reimbursements differ, in terms of adjacent

areas.

Mr. KIRK. I represent a community that is all above suburban

Chicago. The communities 20 miles north of the county line are

just as suburbanized as those below.

What you are saying is, you recommended against solving that

problem. Right now, health care is radically different on one side

of road, in a community that is no different than the lower part.

Dr. WILENSKY. Also, we had recommended that in instances

where there is reclassification, which has been used to try to

smooth out some of the differences, that it be done in a way that

recognizes it does not leave whatever is left behind in the areas

around that reclassified hospital, et cetera, that they not be hurt

by that. So we think that there are ways, if there are particular

problems that exist, for a hospital in an adjacent area.

I do not want to say that there are problems that we do not

solve. We think, on the other hand, we will take an area, and pretend as though the four or five different areas within the metropolitan area, and we happen to be now in Washington, in an area that

is a five county MSA. There really are some substantial differences

in the five counties that make up the Washington MSA.

So you need to decide which way you think you solve more problems than you create.

Mr. KIRK. Right, and I would just say, in Chicago’s case, in the

difference between Cook and Lake County, Chicago has long ago

broken out of the bounds of Cook County. I have now got census

projections of 350,000 people moving the Lake County.

So this is only going to get worse. I think we need to address the

large groupings, because right now, you have got Medicare recipients in communities that are identical, who are treated differently.

Dr. WILENSKY. Are you talking about treated for purposes of

HMOs, or in terms of how the institutions are reimbursed?

Mr. KIRK. HMOs.

Dr. WILENSKY. Well, that really raises a somewhat different

issue. Let me try to be clear. Certainly, Mr. Nussle is not here now,

but Iowa is a State that is affected by this.

We are very aware of the different premium payments that occur

to HMOs, as a result of Medicare, the Medicare Plus Choice payments. We tend to ignore, all of us, that spending on behalf of the

senior, under traditional Medicare, which is where 87 percent of

the seniors are, varies even more now than the HMO payments

vary. But we do not tend to think we should do anything about

that. That is why we get these variations in HMO payments.

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Now the Congress has gone in and set various floors that do not

let the payments fall as low as they do in some of the urban and

low-cost counties.

I misunderstood the question that you were asking me. We have

a real problem in Medicare, in that it is a national program, but

spending by the Government on behalf of seniors varies all over the

map. A lot of it has nothing to do with either the health of the senior or the cost of providing health care services. It has to do with

how health care is provided and how health is demanded.

If we want to seriously look at that issue, which I would encourage the Congress to do, we need to think about the variation that

occurs in traditional Medicare spending, and think about how we

want to try to affect those kinds of variations.

To only look at what goes on in the Medicare Plus Choice plan

is to focus all our concern for 13 percent of the population, when

exactly the same problem is going on for the 87 percent in traditional Medicare.

Again, if these are areas where you would like to have any additional discussions with myself or staff at Medpak, we would be glad

to share with you some of our thoughts.

Mr. KIRK. I absolutely need that, because I will tell you, it is a

burning issue in the 10th District of Illinois.

I have one last question for Dr. Saving. This is on your assumption of Medicare, your famous Figure 1 here. Is it at all reasonable

to assume that the expenditure growth rate will be GDP plus one?

Dr. SAVING. Yes, I think it probably is, as a matter of fact. It is

based, if we were using economics terms, on the fact that health

care, especially for the elderly, is a superior good. What a superior

good is, it is good; where when their income goes up, they spend

a greater share of their income on it.

Now you ought to note that that does not mean that they are

spending less on other things. It just means they are spending a

smaller proportion of their income on other things.

So it is not the case, assuming that it is going to go up 1 percent

greater than GDP, that it means that it will, at some point, in

some limit, be all of GDP, because it will not be.

Mr. KIRK. Right.

Dr. SAVING. It will never be all of GDP. Everything else is also

growing.

Mr. KIRK. It would seem to me, a more dynamic model would

make sense; since the previous year’s growth was 4.7 percent, that

this would level out over time, as we get into a higher percentage

point, rather than just be at a straight 1 percent growth, which has

an enormous impact on the general revenue demands that Medicare has.

Dr. SAVING. Well, the revenue part does not have any impact on

the cost part, yes.

Mr. KIRK. Right.

Dr. SAVING. But if it is true in health care and it appears to be

the case, and of course, some of that is probably driven by the institution that we have set up, which encourages the research to be

not cost-reducing, but to be new technique developing, because that

is where the money is.

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If you are going to develop new techniques, then we are going to

find new ways to replace all our body parts that are wearing out,

and that is really where this is coming from.

What I have done here is simply take the technical panel, and

I have read the technical report, and I agree with them that health

care, at this point, is a superior good. Your question really is, are

we ever going to have technology that is going to change this? That

may be the case, and it may happen if we change the institution.

But the current institution simply ensures that the technological

developments are going to be ones that are going to increase expenditures.

The technical panel really based their recommendation on that

fact. They are saying, there is nothing in the offing that is going

to change that.

Mr. KIRK. Thank you, Mr. Chairman.

Mr. PUTNAM. Thank you, Mr. Kirk. I especially appreciate your

questions on the inequities of reimbursement rates, because it is a

burning issue in the 12th District of Florida, as well.

The gentleman from Kentucky, Mr. Fletcher.

Mr. FLETCHER. Thank you, Mr. Chairman, and thank you all.

We have had several committee hearings going on at the same

time. We are dealing with education, so forgive me for not getting

in earlier, but thank you for coming and for your presentation.

Dr. Wilensky, I wanted to ask you a few things. First off, I want

to thank you for all the work you have done in the past, your expertise.

Dr. WILENSKY. You are welcome.

Mr. FLETCHER. I have been able to visit with you at several conferences. Anywhere there are experts on health care, you seem to

show up. So thank you for all the work you have done.

I understand that on your testimony here, that you support the

reform model after the Federal Employee Health Benefit Plan. Let

me ask you under that, if you would describe the similarities between the Bush Medicare reform proposal and what benefits we receive, as Members of Congress.

Dr. WILENSKY. Well, the administration has not come forward

with the proposal that they will make the Congress for long-term

reform.

What I have done is to take what was part of the campaign,

where there was more detail in the proposal that was in the campaign, and also the principles that are part of the budget that was

just submitted, and to indicate that they are consistent with that.

So without wanting to tie the administration’s hands in terms of

what they will be submitting, they idea would be to have a choice

of health care plans available to seniors, as is the case under the

Federal Employees Health Care Plan.

I certainly presume that traditional Medicare will continue to be

a part of the offerings that are there. What will be important is to

make sure that, unlike the Federal Employees Health Care Plan,

where there is no risk adjustment, it is important to have risk adjustment for seniors.

It is not that the problem is not present for the under 65, but

both the absolute level is so much higher, and the likelihood of torVerDate 11-MAY-2000 15:22 May 29, 2001 Jkt 000000 PO 00000 Frm 00123 Fmt 6633 Sfmt 6602 H:\DOCS\HEARINGS\107-5\HBU066.000 HBUDGET1 PsN: HBUDGET1
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pedoing plans, if there is not risk adjustment, is greater in terms

of the Medicare Plus Choice plans.

A lot of technical issues about how to try to make sure, particularly in the short term, as we are deciding exactly how to do risk

adjustment, and whether or not to do some partial capitation or

other strategies, that reduce some of the financial risk, to protect

some of the frailest seniors that are around.

But like the Federal employees, there would be an annual enrollment. Like the Federal employees, information would be provided

by the Government. Presumably like the Federal employees, there

would be a cottage industry that develops, that provides even better information about what to expect from plans, given certain

kinds of health patterns.

It would allow seniors to have choices between the traditional

Medicare and other kinds of health care plans. It would be a fundamentally different dynamic than exists now, because the contribution made by the Federal Government, by Medicare, in terms

of the dollars to cover the premiums, would not vary with the cost

of the plan.

That is generally the distinguishing characteristic of the Federal

Employees Health Care Plan. It is what changes the whole economic dynamics over what exists today.

While I think there are a lot tinkerings that you could do, that

the Congress could do, in terms of applying this principle to Medicare, it is the notion of having the amount contributed by the Government vary by house status or by age or by cost of living index;

but not by the cost of the health care plan that the individual

chooses. That is really what drives the different behavior.

Mr. FLETCHER. You were discussing earlier, from one of the questions, the disparity that exists between different regions and the

AAPPCs, and particularly Medicare Plus Choice. You are saying

that that value, I assume, was actually derived from probably expenditures that were done in those regions.

Dr. WILENSKY. Exactly.

Mr. FLETCHER. Yet, I am not sure that any studies show that the

health care in those regions, or when you are looking at the experience rating in those, as far as matching demographically that the

care or morbidity mortality is much higher in folks that are using

a lot less money.

What kind of disparity do we have on private insurance, related

to Medicare, in a regional way? Does it correlate with that? Is it

a practice, just among geriatrics?

Dr. WILENSKY. No, this is an area, a term of art that you may

have heard, called variations in practice style. Dartmouth puts out

an atlas, if you want to see how large these variations are, in how

health care is delivered, and how medicine is practiced.

There was an article in the Wall Street Journal a while ago, indicating the very high likelihood of an individual having a bypass

procedure, or having other procedures, in some particular counties,

and I think it was in Texas, relative to other areas, which appear

to have people who looked very similar, in terms of their health

and age profiles.

It is a phenomenon that we have known existed, and probably

we have known about it for the last 30 years. There seem to be

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very different ways of practicing medicine. It has to do with the individual that is doing the practice, and not the health status of the

patient.

It has to do with uncertainty about the symptoms and about the

right procedures, given the symptoms. It is an issue that exists in

the under 65 and the over 65, and exists in the Medicare population, as well as others. So it is something we know about.

Mr. FLETCHER. I think it brings this up, as efforts have been

made to try to level the disparities between different regions, that

it really is going to have to get back probably to the practice of

making sure that we are using best guidelines or whatever.

Let me ask you, as we are running out of time here, one question. Given the institute of medicine reports on quality, and the

fact that reimbursal does not allow providers much venture capital

to invest in the information technology, and you need to really go

more digital in medicine, what recommendations would you have,

and are there some things we can do to begin in that direction, because we really, compared to other industries, are pretty archaic?

Dr. WILENSKY. I think there are a couple of things that could be

done. The first is, I am not convinced that the medical profession,

the people leading many of the hospitals and other institutions

really believe that high quality costs less. We hear that, as a general dictum.

But when you look at how money is invested, it is not clear that

either we know how to do that, or that they believe what is generally, in other sectors, to be true. One of the real questions is, is

it not convincing; why does this not happen? There does seem to

be a disconnect.

In some of the payments, it may be that how the payments are

made are too prescribed in terms of what they can be used for.

That is clearly not in anybody’s interest.

Making sure that there is information available about what

works and how it works, and why this is important, I think, is an

important part.

But getting the patients to demand the kind of information that

they should be demanding, as smarter patients and consumers, to

recognize that these are issues that they ought to be concerned

about as patients, is important.

Having reports like the Institute of Medicine make it clear how

sophisticated health care is, in some aspects, in terms of what we

do to people in terms of procedures, and how unsophisticated

health care is, in other aspects, in terms of making use of the information and technology; and putting in place the kind of fail-safe

procedures that are so much a part of the airlines, or so much a

part of other sections has not happened.

Trying to help get that structure in place is certainly something

that the Congress, working with groups like the Institute of Medicine, could help foster.

Mr. FLETCHER. Thank you, Dr. Wilensky.

Mr. PUTNAM. Thank you, Mr. Fletcher. Before you have to run

off, I need to get your consent that all members have seven legislative days to submit written statements to be printed in the record.

Do you object?

Mr. FLETCHER. I have no objection.

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Mr. PUTNAM. Thank you, sir.

Let me ask two questions and then we will wrap this up. According to a recent survey, 46 percent of the Nation’s uninsured have

incomes above 200 percent of poverty level.

Knowing that, to what extent will health care credits to the poor

really affect the number of uninsured in this country?

Dr. WILENSKY. It depends how the health care credit is structured. I think the refundable tax credits that we have talked about

for health care, that the President had proposed during the campaign, and we will see whether that is exactly the structure of

what is proposed to the Congress will very much help the low middle income people; those, say, at 150 percent of the poverty line,

200 percent of the poverty line, and above.

Whether or not the kind of refundable credits that have been discussed, at least in the past, will help those below the poverty line,

who are about one-third of the poor, is a different issue.

Recognizing that there are differences in those who are uninsured, they are a section that are very poor, a group that are low

middle income; then, as you said, almost half that are close to the

median family income in the United States that is about 200 percent of the poverty line, these are individuals who might be much

more susceptible, if they are to buy insurance, if they are provided

some tax subsidies.

If you only limit your help to people who are poor, below the poverty line, or just above the poverty line, obviously, there will be

substantial numbers of people, who will not get any assistance.

Mr. PUTNAM. Dr. Moon.

Dr. MOON. I also believe that for low income individuals, it may

not be the best policy to provide refundable tax credits. There are

many problems that arise concerning when you give them the refund: do they get it right away; do they get it beforehand? Is there

a reconciliation that occurs at the end of the year, if their income

goes up, so that they have to pay money back?

There are a lot of problems when you are dealing with a vulnerable low income population, that suggests to me that tax credits

may not be the way to go.

Tax credits would be more helpful for the people at 200 percent

of poverty and above, rather than the other way around.

Dr. SAVING. I agree mainly, I think, with Gail, and that is that

it is going to help people well below the 200 percent level.

But the other issue is to understand why a number of people are

uninsured. A lot of the uninsured have to do with the fact that we

are pricing insurance not risk-adjusted properly, and these are

younger people, on the average. Younger people are healthier people.

If they are going to have to pay, for example, like a single male,

who is going to have to pay for health insurance that covers pregnancy, he is not likely to get pregnant. He is going to have to pay

for that insurance. He is going to subsidize the older people like

me. To the extent that he wants to pay that subsidy, it is too big

a subsidy.

If insurance were priced totally risk-adjusted, I think we would

see far fewer people uninsured. Catastrophic insurance is all we

really care about anyway, for these people, probably. They should

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have that. If it were totally risk-adjusted, it would be very inexpensive.

I think these tax credits go a way toward doing that. But I think

you would want to take away, probably, the tax benefit that firms

get, or that people who work at firms get. You actually would want

to give them this refundable tax credit, but also charge off the insurance that their firm gives them, and make that ordinary income.

Now that would allow outside insurance to compete with the

firms operating on their own insurance. I suspect, though, that

that system would very quickly take the firms out of the insurance

business; because right now, they are self-insuring, and basically

farming out the paperwork to insurance companies. They farm out

the paperwork, and they would get out of the insurance business.

Then, health insurance would be portable, instead of what we

now have. It would be like automobile insurance. I think that is a

far superior thing to what we are doing. We are probably going to

move in that direction.

But with these tax credits, and then the combination of that and

taking the health care benefit that firms give, and declaring it to

be ordinary income to workers, at that point, they get the tax credit back by either buying health insurance from their firm, or buying it outside; but they get the same impact.

So there is no benefit to buying it from the firm, particularly. I

think we can change the whole industry in that way.

Mr. PUTNAM. Thank you. I would also ask for your observations

on community health centers, and what impact they have on helping to address a certain demographic population, and reduce the

number of uninsured, or reaching the needs of those who may be

uninsured.

Dr. WILENSKY. If I may, I would like to respond to that. I think

that doubling the number of people served by community health

centers, and making a substantial investment in their structures is

a very good addition to the infrastructure, particularly if it results

in coordination with the hospitals and academic health centers, or

secondary and tertiary hospitals, that these individuals will receive.

Texas has done that. The University of Texas system has worked

with the community health centers. What it means is that individuals going from primary care, that they are received in the community health centers, into the hospital, and then back to the primary

health care center, and have their records go back and forth with

them.

We need to recognize that in many parts of this country, particularly in areas that have large rural areas, very low population density areas, that there may be some difficulty in building the kind

of health infrastructure that exists elsewhere. For some individuals, having an insurance card, per se, may not be enough.

This is a way, both because there will remain people without insurance coverage, and because, for at least periods of time, there

is unlikely to be the facilities and individuals available in some

parts of the country, that investments in community health centers

can be very helpful. But they do need to have coordination with

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wise, the fragmentation can result in both more spending and less

good health care than we could have.

So I think it is a promising way to go, and I hope that the Congress gives it favorable consideration.

Mr. PUTNAM. Dr. Moon.

Dr. MOON. Community health centers are a good idea to fill in

the gaps. They help serve people in areas where they would have

trouble getting other health care providers.

But the amount of money that is being talked about, at $125 million, to expand community health centers is barely a drop in the

bucket. Remember, we are talking about 45 million or 44 million

uninsured. That is about $3 a person, so you are not going to

stretch it very far, unfortunately.

Mr. PUTNAM. Dr. Saving.

Dr. SAVING. I think this is a good idea, because for people who

are uninsured, it is not as if they do not have access to care. Unfortunately, many of them, of course, use the emergency room as their

ordinary physician.

To the extent that you can coordinate this, and move these people out of the emergency room and move them into ordinary clinics,

you can perhaps save money, under the current institution.

Now another institution, which would have fewer of these people

uninsured, and I would say the right kind of risk pricing for the

insurance, could make these people not uninsured.

That would solve a lot of this problem. Then they would not take

the emergency room, because the emergency room would be hugely

expensive. The reason they take it now is, it is cheap. We have to

change the relative prices.

Dr. MOON. Could I add something? I am very concerned about

pricing insurance so that we divide it up with the healthy paying

a low price, and the unhealthy paying a very high price.

The whole idea of insurance is the pooling of some risks. You

need to balance this goal, because you do not want to price insurance so high that very healthy young people do not see any reason

to buy insurance.

But I am very concerned that what could happen if we moved in

that direction, would be to reduce uninsurance for those who are

not going to use much health care, and raise uninsurance for sick

people who need health care.

All you have to do is look at the private market now, that allows

‘‘cream skimming’’ where insurers decide who they take or not. It

is not a pretty picture.

Dr. SAVING. No, but they ‘‘cream skim’’ because they are pricing

at the average. If you are risk adjusting, then they would not be

‘‘cream skimming.’’ They would like the sick people, just as well as

the healthy people.

The problem with what you have here is that somebody who is

chronically ill, we are not talking about insurance. That is the person whose house the hurricane has already taken out. If we rebuild

his house, that is welfare. That is not insurance.

So when you take people who are sicker than other people, and

try to give them the same prices as the well people, what you are

doing is giving them welfare. So we should just call it welfare.

125

Let us not trick ourselves into thinking that is insurance and

that is risk sharing. That is not risk sharing, because these are already past outcomes. Risk sharing is about the future.

So you take someone who has sick level A, and you say, I am

going to insure you for the future, in case you get sick level F. But

what I am going to do is charge you, based on the fact that you

are now sick level A, and what the probability is that you are going

to become sick level F.

That is insurance. Anything else is welfare. We can do that in

the Medicare area by making the support we are going to give for

individuals risk based, in this system in which they would go out

and then buy insurance. They are going to get support that is risk

based.

Anything else is welfare, and we should not try to call it insurance. It is spreading risk.

Mr. PUTNAM. Dr. Wilensky.

Dr. WILENSKY. It is possible that if you were to move to a system, as one that Dr. Saving describes, where you would have a socalled experience rating, and it would be based on expected use,

you could make payments after the fact, for people who you believe

are overly burdened by the kinds of premiums that they would

face.

You do not necessarily have to try to force this mixing of risks,

up front. It does raise the possibility, as we think now exists, that

some individuals who would be willing to buy a risk-based insurance policy that would be low, because in fact they are low users

and low expected users, would say, no thanks, because of the

amount they are being asked to subsidize.

So you can subsidize people who have expected high utilization

and expenditures. You do not have to just say, well, that is your

tough luck. You can do it after the fact, when you see the kinds

of premiums that people have to pay.

So I would like to make it clear that if you are worried about

whether or not this is an unfair burden, there are other ways to

handle to the problem, than to just force a pooling that goes on,

up front. That is probably a discussion for another committee hearing, though.

Mr. PUTNAM. Thank you. Thank you, Dr. Wilensky, Dr. Saving,

Dr. Moon. We appreciate your being here.

I want to thank all the hearty members of the committee, who

stuck it out to the end, and all the members of the congressional

staff and the audience, who sat through this as well, and participated in ‘‘take your son to Congress and let him Chair the meeting

day.’’

I, again, thank the witnesses. Without any further business, the

hearing is adjourned.

[Other materials submitted for the record follow:]

PREPARED STATEMENT OF HON. ANDER CRENSHAW, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF FLORIDA

Thank you, Mr. Chairman, for holding this hearing on the President’s FY2002

budget request for the Department of Health and Human Services. And, thank you,

Secretary Thompson, for joining us today to discuss the programs that—along with

education—form the heart of the President’s compassionate conservative agenda.

126

Mr. Secretary, you know better than almost anyone the great success that comes

from a true partnership between the Federal Government and the States. This is

as true for welfare reform as it is for Medicaid and education. The key is giving

States flexibility to implement the kind of reforms that work best within their borders.

When I was in the Florida Legislature, I often had the opportunity to meet with

my counterparts from other States and to study their proposals and programs. We

were all facing similar problems—how to provide access to quality health care for

low-income families; how to stop children from having children and end the cycle

of dependency on welfare; and how to improve the prospects for children who awoke

everyday with no hope for a bright future. But, we all had different ideas about how

to solve these problems.

It wasn’t that one idea was right and the other wrong, or even that one idea was

better than another. But, what works in Florida doesn’t necessarily work in Wisconsin. To be sure, we can learn from each other, but States need the ability to craft

the programs that suit their populations best.

This is why I am so very encouraged at your stewardship of the Department of

Health and Human Services, Secretary Thompson. You know that a Federal cookie

cutter approach to Medicaid, welfare, and other social service programs doesn’t

serve the country well. I look forward to working with you on these important programs.

PREPARED STATEMENT OF HON. GARY MILLER, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA

Mr. Chairman, I want to thank you for holding this hearing. I look forward to

listening to the testimony and responses from Secretary Thompson before this committee.

I was delighted to hear the remarks of the President in his address last week,

and am pleased with his priorities outlined in the budget blueprint. I am excited

to see the President is thinking outside of the box when it comes to providing for

the general welfare of the American people. I would encourage the President to continue searching for ways to use state and local government, as well using as private

organizations as resources to help in this task.

I would like to hear more about some of the new initiatives proposed by the President. In particular, I am interested in the ‘‘Immediate Helping Hand’’ prescription

drug benefit proposal. I also am interested in initiatives to help strengthen families

such as the ‘‘After School Certificates’’ and ‘‘Promoting Responsible Fatherhood’’ programs. I believe that strengthening the family is the only way to decrease dependency on government services.

I am also pleased to see that this President is willing to reform areas with real

policy instead of chasing problems with more money. Whether its reducing bureaucratic hurdles for patients and providers, redirecting one-time spending, or targeting

selected programs for reduction, I know there are places in which we can decrease

the size of government, while protecting its effectiveness. I look forward to working

with the President in finding areas where the Federal Government can become more

efficient.

Again, I want to thank Secretary Thompson for being here today and discussing

the President’s budget with this committee. I yield back the remainder of my time.

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

FROM THE STATE OF FLORIDA

Mr. Chairman, I am looking forward to working on this committee and with our

President to begin the work to reform the Medicare program. Primary concerns of

mine as well as my constituents are the need for prescription drug coverage for all

seniors and the lack of Medicare HMOs in my district and throughout rural America.

When I was in Florida’s State Legislature, I co-sponsored the Prescription Affordability Act that extends coverage to seniors up to 120 percent of the poverty level

and requires pharmacies to sell prescription drugs at Medicaid rates. As we work

on including prescription drugs in a reformed Medicare system, it is of utmost importance that those seniors with incomes above poverty level are also remembered

in a prescription drug program. Because of the high cost of prescription drugs, many

seniors are ineligible for help, yet struggling to make ends meet and afford their

prescriptions.

I have studied President Bush’s ‘‘An Immediate Helping Hand’’ plan, and agree

that an interim program could greatly benefit many of the neediest seniors until

Congress completes long term Medicare reform. The President’s proposal of $153 bilVerDate 11-MAY-2000 15:22 May 29, 2001 Jkt 000000 PO 00000 Frm 00130 Fmt 6633 Sfmt 6621 H:\DOCS\HEARINGS\107-5\HBU066.000 HBUDGET1 PsN: HBUDGET1
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lion over the next 10 years to provide prescription drugs to these needy seniors is

vital. Of extreme importance, however, is to remember those seniors that cannot afford their daily living expenses and the high cost of prescription drugs. For those

seniors unable to afford the high cost of prescription drugs, implementing the President’s plan to provide Medicare health care plans that provide the option of purchasing prescription drug coverage is a necessity.

Rural areas across the nation do not have access to Medicare HMOs due to funding. This is true in areas in my district as well. In Florida’s 12th District, I represent counties adjacent to one another with similar characteristics. One county has

availability to Medicare HMOs, while the other has no access. As the reforms for

Medicare begin, suburb and rural areas across the nation that cannot attract quality

providers because of low reimbursement rates must be considered. A county line is

not a sufficient distinction between areas to determine the ability for an area to

have access to these health care options. Exploring innovative ideas such as Medical

Savings Accounts or aggressively pursuing waivers to allow residents in non-served

areas access to the services covered by Medicare HMOs in other counties are possible options.

As we consider the budget for Medicare reform, it is vital that we consider the

impact it will have over the next 50 years, not just the next fiscal year. We need

to develop a generational consensus on ensuring that Medicare will be available to

the retiring seniors of today, for baby boomers and beyond. I intend to be involved

in this process.

I thank the Secretary for his thorough outline of the Administrations proposal for

Health Care reform and I thank to Dr. Gail Wilensky, Dr. Thomas Saving, and Dr.

Marilyn Moon for their thoughts as well. I look forward to being a part of modernizing Medicare to accommodate the changing needs of seniors today, and the seniors

of tomorrow.

TESTIMONY FOR THE RECORD BY THE ADVANCED MEDICAL TECHNOLOGY ASSOCIATION

AdvaMed is the largest medical technology trade association in the world, representing more than 800 medical device, diagnostic products, and health information

systems manufacturers of all sizes. AdvaMed member firms provide nearly 90 percent of the $68 billion of health care technology products purchased annually in the

U.S. and nearly 50 percent of the $159 billion purchased annually around the world.

AdvaMed strongly supports the President’s commitment to the Medicare program

and medical research. With great interest, we note that President Bush’s budget

blueprint states that ‘‘Medicare is not adapted to 21st Century medicine. Medicare

is often too slow to incorporate technologies and methods of delivering care * * *

As in virtually all fields, technological and entrepreneurial innovation are among

the keys to creating more value for the dollar in health care.’’

We strongly agree that Medicare should be encouraged to capitalize on advanced

technologies, which have revolutionized the U.S. economy and driven productivity

to new heights and new possibilities in many other sectors. Significant advances in

health care technologies—from health information systems that monitor patient

treatment data to innovative diagnostics tests that detect diseases early and lifesaving implantable devices—improve the productivity level of the health care delivery

system itself and vastly improve the quality of the health care delivered. New technologies can reduce medical errors, make the system more efficient and effective by

catching diseases earlier—when they are easier and less expensive to treat, allowing

procedures to be done in less expensive settings, and reducing hospital lengths of

stays and rehabilitation times.

AdvaMed applauds Congress for the steps it took in the Balanced Budget Refinement Act of 1999 (BBRA) and the Benefits Improvement and Protection Act (BIPA)

of 2000 to begin to make the Medicare coverage, coding and payment systems more

effective and efficient. In addition, the Health Care Financing Administration

(HCFA) has recently made some changes to modernize its coverage and payment

systems.

Despite these efforts, however, current policies still fail to keep up with the pace

of new medical technology. Serious delays continue to plague the amount of time

it takes Medicare to make new medical technologies and procedures available to

beneficiaries in all treatment settings.

As Cliff Goodman from the Lewin Group testified at a March 1st hearing in the

committee on Energy and Commerce, Medicare delays can total from 15 months to

5 years or more because of the program’s complex, bureaucratic procedures for

adopting new technologies. Keep in mind that all this is after the two to 6 years

it takes to develop a product and the year or more it takes to go through the Food

and Drug Administration (FDA) review. In addition, these delays are even more proVerDate 11-MAY-2000 15:22 May 29, 2001 Jkt 000000 PO 00000 Frm 00131 Fmt 6633 Sfmt 6621 H:\DOCS\HEARINGS\107-5\HBU066.000 HBUDGET1 PsN: HBUDGET1
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nounced when you consider that the average life span of a new technology can be

18 months.

The impact on patients has been dramatic. As physician witnesses testified on

March 1st, cancer patients have had to fight for years to get Medicare to cover

positron emission tomography, a potentially lifesaving scanning technology that has

been broadly available to people under private health insurance for a decade. In addition, tens of thousands of seniors and people with disabilities have not been able

to receive advanced technologies like coronary stents (which reopen blocked arteries), cochlear implants (which restore hearing) and heart assist devices (which keep

patients alive while waiting for a heart transplant).

These delays stem from the fact that for a new technology to become fully available to Medicare patients, it must go through three separate review processes to obtain coverage, receive a billing code and have a payment level set. Serious delays

in all three of these areas create significant barriers to patient access.

While HCFA has improved the transparency for making national coverage decisions and attempted to instill timeframes within the process, timeliness is still a

major problem. Under the current national coverage process framework, HCFA has

90 days to determine whether it will make a coverage decision or refer the request

to either the Medicare Coverage Advisory Committee (MCAC) or an outside health

technology assessment (HTA) group—or sometimes even to both. These outside assessments take between 3 and 12 months each. HCFA then has 60 days to review

the recommendations of the MCAC or HTA, and should a positive coverage determination be made, it takes 180 days from the first day of the next calendar quarter

to issue a code and set a payment level.

The coverage process should be streamlined and made more accountable, timely

and transparent. Steps should be taken to reduce redundancies in the MCAC panel

and HTA reviews. In addition, the focus of the MCAC panels should be directed toward gaining practical clinical advice from the medical experts on its panels.

After coverage is approved, there are three separate coding processes that determine how a device or procedure is identified and to which payment bundle it is assigned. Each of these coding systems have significant time-lags in assigning and updating codes. Under the new hospital outpatient perspective payment system (PPS),

HCFA now assigns and updates codes on a quarterly basis. To reduce coding delays

of 15–27 months, HCFA should use the outpatient PPS system as a model for applying similar systems to other settings, such as the inpatient hospital setting and doctors’ offices.

Coverage and codes mean very little, however, if the associated payment level is

inadequate. HCFA’s procedures for updating relative payment weights and reassigning technologies and procedures are informal and infrequent. For example, it took

HCFA 5 years to ultimately decide that the applicable diagnosis related group

(DRG) should be split into two DRGs for angioplasty with and without stent. During

those 5 years, hospitals took significant losses on each stent procedure and the diffusion of this cost-saving technology was hampered.

As required by BIPA, HCFA should develop formalized procedures for expeditiously assigning codes, updating relative weights and reassigning technologies to

recognize the value of new and substantially improved technologies. HCFA should

also fully implement the BIPA requirement to provide a transitional payment mechanism for new technologies where the DRG payment is inadequate.

Again, AdvaMed applauds Congress and the President for recognizing the value

of technology in improving the quality and efficiency of the health care system. We

look forward to working with Congress, the President and Secretary Thompson on

ways to modernize Medicare, incorporating the benefits technology can bear, and

furthering advances in medical research.

[Whereupon, at 4:25 p.m., the committee was adjourned, to reconvene at the call of the Chair.]

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