[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
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
Available on the Internet: http://www.access.gpo.gov/congress/house/
house04.html
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COMMITTEE ON THE BUDGET
JIM NUSSLE, Iowa, Chairman
JOHN E. SUNUNU, New Hampshire JOHN M. SPRATT, Jr., South
Vice Chairman Carolina,
PETER HOEKSTRA, Michigan Ranking Minority Member
Vice Chairman JIM McDERMOTT, Washington
CHARLES F. BASS, New Hampshire BENNIE G. THOMPSON, Mississippi
GIL GUTKNECHT, Minnesota KEN BENTSEN, Texas
VAN HILLEARY, Tennessee JIM DAVIS, Florida
MAC THORNBERRY, Texas EVA M. CLAYTON, North Carolina
JIM RYUN, Kansas DAVID E. PRICE, North Carolina
MAC COLLINS, Georgia GERALD D. KLECZKA, Wisconsin
ERNIE FLETCHER, Kentucky BOB CLEMENT, Tennessee
GARY G. MILLER, California JAMES P. MORAN, Virginia
PAT TOOMEY, Pennsylvania DARLENE HOOLEY, Oregon
WES WATKINS, Oklahoma TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington CAROLYN McCARTHY, New York
JOHN T. DOOLITTLE, California DENNIS MOORE, Kansas
ROB PORTMAN, Ohio MICHAEL E. CAPUANO, Massachusetts
RAY LaHOOD, Illinois MICHAEL M. HONDA, California
KAY GRANGER, Texas JOSEPH M. HOEFFEL III,
EDWARD SCHROCK, Virginia Pennsylvania
JOHN CULBERSON, Texas RUSH D. HOLT, New Jersey
HENRY E. BROWN, Jr., South Carolina JIM MATHESON, Utah
ANDER CRENSHAW, Florida
ADAM PUTNAM, Florida
MARK KIRK, Illinois
Professional Staff
Rich Meade, Chief of Staff
Thomas S. Kahn, Minority Staff Director and Chief Counsel
C O N T E N T S
Page
Hearing held in Washington, DC, 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
DEPARTMENT OF HEALTH AND HUMAN SERVICES FY 2002 BUDGET PRIORITIES
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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 constituents 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.
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.
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 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 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.
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 process 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.
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 obtain supportive services. These
homes will provide a safe and nurturing environment 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 community-based 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 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 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 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 work very quickly, hard, on a bipartisan
basis, to develop an efficient 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.
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 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.
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
recognizing 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?
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 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
one-time 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 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. 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.
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 letters, 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 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 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.
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 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.
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
accounting 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 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.
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.
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. 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, 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.
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 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 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 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 financial 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 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.
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.
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.
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.
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 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.
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 acceptable 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 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.
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 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.
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 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.)
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.
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.
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.
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 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, 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.
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 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 never-
formed or broken families.
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 diverted 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 figures in Table 1and Appendix A. These minor
differences do not appreciably affect the overall analysis.
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.
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 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.
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. 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.
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.
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?
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 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.
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 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 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.
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, 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 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 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 out-of-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.
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 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 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 Medicaid. 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.
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.
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.
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.
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
INSTITUTE\1\
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.
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 Medicare. 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
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\
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.
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 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 hands-off 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.
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.
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 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.
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. 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.
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.
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 pre-paid 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
cost-conscious 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.
[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.
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 non-health 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 2\1/2\ 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 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-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 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 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 cost-
saving 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 prescription 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 low-income 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.
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, 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.
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
------------------------------------------------------------------------
$2,500 deductible
Real rate of return Medicare replacement policy
------------------------------------------------------------------------
5.4 2.68 2.27
8.5 0.86 0.73
------------------------------------------------------------------------
TABLE 2.--SIMULATED TRANSITION TO PREPAID MEDICARE
----------------------------------------------------------------------------------------------------------------
Benefits
Status quo Forecast paid from Benefits Aggregate Transition Medicare tax
Year Medicare tax Medicare prepaid paid from prepaid account cost plus prepaid
rate costs accounts tax revenues contributions 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 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.
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 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 service, 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.
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, 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 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.
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.
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 torpedoing 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
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.
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 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 where the individuals receive
secondary and tertiary care. Otherwise, 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.
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 so-called 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.
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 billion 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
pronounced 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.]