[Senate Hearing 106-92]
[From the U.S. Government Publishing Office]


                                                         S. Hrg. 106-92


 
                           TOBACCO RECOUPMENT

=======================================================================

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

                      COMMITTEE ON APPROPRIATIONS 
                         UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                            SPECIAL HEARING

                               __________

         Printed for the use of the Committee on Appropriations


                                


 Available via the World Wide Web: http://www.access.gpo.gov/congress/senate

                                 ______

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                      COMMITTEE ON APPROPRIATIONS

                     TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
SLADE GORTON, Washington             FRANK R. LAUTENBERG, New Jersey
MITCH McCONNELL, Kentucky            TOM HARKIN, Iowa
CONRAD BURNS, Montana                BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama           HARRY REID, Nevada
JUDD GREGG, New Hampshire            HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah              PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho                   DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas          RICHARD J. DURBIN, Illinois
JON KYL, Arizona
                   Steven J. Cortese, Staff Director
                 Lisa Sutherland, Deputy Staff Director
               James H. English, Minority Staff Director
                                 ------                                

 Subcommittee on Departments of Labor, Health and Human Services, and 
                    Education, and Related Agencies

                 ARLEN SPECTER, Pennsylvania, Chairman
THAD COCHRAN, Mississippi            TOM HARKIN, Iowa
SLADE GORTON, Washington             ERNEST F. HOLLINGS, South Carolina
JUDD GREGG, New Hampshire            DANIEL K. INOUYE, Hawaii
LARRY CRAIG, Idaho                   HARRY REID, Nevada
KAY BAILEY HUTCHISON, Texas          HERB KOHL, Wisconsin
TED STEVENS, Alaska                  PATTY MURRAY, Washington
JON KYL, Arizona                     DIANNE FEINSTEIN, California
                                     ROBERT C. BYRD, West Virginia
                                       (Ex officio)
                           Professional Staff
                            Bettilou Taylor
                             Mary Dietrich
                              Jim Sourwine
                               Aura Dunn
                        Ellen Murray (Minority)

                         Administrative Support
                             Kevin Johnson
                       Carole Geagley (Minority)



                            C O N T E N T S

                              ----------                              
                                                                   Page
Statement of Hon. Michael Hash, Deputy Administrator, Health Care 
  Financing Administration, Department of Health and Human 
  Services.......................................................     1
Opening statement of Senator Hutchison...........................     1
Summary statement of Michael Hash................................     2
    Prepared statement...........................................     4
Background.......................................................     4
Determining Federal taxpayers' fair share........................     5
Federal taxpayers................................................     6
Statement of Hon. Paul E. Patton, Governor of Kentucky and 
  executive committee member, National Governors Association.....    11
    Prepared statement...........................................    13
Tobacco settlement funds belong to the States....................    13
Governors oppose Federal restrictions............................    14
Set-asides for smoking cessation programs are bad public policy..    15
State revenue impacts of the tobacco agreement...................    15
Tobacco settlement...............................................    16
Statement of Hon. Mike Fisher, attorney general of Pennsylvania..    17
    Prepared statement...........................................    19
Key provisions...................................................    20
Letter from Mike Fisher to Governor Thomas J. Ridge..............    23
Statement of Hon. John Cornyn, attorney general of Texas.........    24
    Prepared statement...........................................    26
The Texas lawsuit................................................    26
The misapplication of the Medicaid third-party liability 
  provisions to the lawsuit filed by the State of Texas..........    26
The uses to which the money received by the State of Texas will 
  be dedica- ted.................................................    27
The little red hen...............................................    28
Statement of Hon. Tom Miller, attorney general of Iowa...........    28
    Prepared statement...........................................    29
Tobacco funds....................................................    30
Statement of Matthew Myers, executive vice president, National 
  Center for Tobacco-Free Kids...................................    38
    Prepared statement...........................................    40
Major conclusions................................................
Medicaid and the State tobacco lawsuits..........................
Investing in tobacco prevention will save lives and money........

         Material Submitted Subsequent to Conclusion of Hearing

Prepared statement of Senator Thad Cochran.......................    47
Prepared statement of Senator Larry E. Craig.....................    47
Letter from Alan G. Lance to Senator Larry Craig.................    48
Prepared statement of Senator Tom Harkin.........................    48
Prepared statement of Senator Richard J. Durbin..................    49
Medicaid law.....................................................    49
Future Medicaid claims...........................................    49
Federal/State partnership........................................    49
Budget implications..............................................    50
Tobacco control programs.........................................    50
Governor's priorities............................................    50
Public support...................................................    50
Prepared statement of Carl Tubbesing, deputy executive director, 
  National Conference of State Legislatures......................    51



                           TOBACCO RECOUPMENT

                              ----------                              


                         MONDAY, MARCH 15, 1999

                           U.S. Senate,    
    Subcommittee on Labor, Health and Human
     Services, and Education, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 11:36 a.m., in room SD-124, Dirksen 
Senate Office Building, Hon. Kay Bailey Hutchison presiding.
    Present: Senators Specter and Hutchison.

                DEPARTMENT OF HEALTH AND HUMAN SERVICES

                  Health Care Financing Administration

STATEMENT OF HON. MICHAEL HASH, DEPUTY ADMINISTRATOR


                 opening statement of senator hutchison


    Senator Hutchison. I think we are ready, and I apologize 
for our running a little late. I just came in from the airport 
and Senator Specter's train is late coming in from Pennsylvania 
this morning. So that is the hazard of a Monday morning 
hearing.
    But I am very pleased to see the very first-rate witnesses 
that we have been able to put together, because this is an 
issue that is going to be coming to the floor very shortly and 
I think having the witnesses explain their various positions 
will be very important.
    I would like to start with my own statement. I am on the 
subcommittee which Senator Specter chairs, but I also am the 
sponsor of S. 346, which is the vehicle that we are using to 
deal with the tobacco recoupment issue. Senator Bob Graham is 
my co-sponsor and we now have 43 co-sponsors of the bill. So I 
am very pleased that we are going to be able to talk about 
this.
    In brief, my bill, along with Senator Graham, is to clarify 
existing Federal law to prevent what I believe to be an 
erroneous interpretation of that law by the Health Care 
Financing Administration. HCFA's stated position has been that 
every dollar of every State settlement is directly attributable 
to Medicaid and that the Federal Government is therefore 
entitled to 57 percent of those funds, which is the national 
average Federal share of the Medicaid program.
    I think that position is not correct on the merits. I have 
looked at the law carefully and I just do not read into the law 
what HCFA is claiming that it says. So I will look forward to 
hearing from the HCFA representative to explain the point of 
view of HCFA.
    But I and the supporters of the bill believe that it is 
wrong for the Federal Government to try to seize any of these 
State funds. It will lead to years of protracted litigation 
that would tie up the money. I would like for this to be 
clarified, which is why I have put this bill onto the 
supplemental appropriations bill. We definitely need to have 
clarification.
    Many State legislatures are meeting right now. Many of 
these legislatures meet only once every 2 years, and they do 
not feel comfortable spending the money as long as the HCFA 
letter is out there saying that Medicaid is entitled to part of 
these funds.
    The fallback position as stated by the President to the 
Governors recently is that, well, perhaps the Federal 
Government does not need to take the money from Medicaid, but 
they would like to have a 25 percent requirement that the 
States spend the money on tobacco cessation programs. Well, I 
have looked at the stated purposes for which many States are 
going to use their recoupment funds and some of them do have 
tobacco recoupment programs, some have them but not at the 25 
percent level, and some big States especially, spending 25 
percent of the money on tobacco recoupment for a State like--I 
am sorry--for the cessation of tobacco use by teenagers, 25 
percent of the funds for Texas or California would create quite 
a few entrepreneurs for seminars in our State.
    So I do not think that the Federal Government should try to 
do a one size fits all approach here, nor on the merits do I 
think that the Federal Government has any kind of rightful 
claim. The Federal Government was not part of these lawsuits 
and most certainly the fact that they have announced their 
intention, the Justice Department, to sue the tobacco companies 
shows that they have a separate cause of action, as I 
understand it, based on Medicare.
    So I am glad that we have experts in this field. I think 
that we can clarify both the Federal Government position and 
the State government position, and now is the time to begin. 
Let me just lay out the ground rules quickly for you. Each 
witness will have 5 minutes to make a statement and then 
following that each Senator will have 5 minutes to ask 
questions.
    So with that, I would like to call the first panel, which 
is Mr. Michael--which is represented by Mr. Michael Hash, the 
Deputy Administrator of the Health Care Financing 
Administration, fondly known as ``HCFA.'' Prior to joining HCFA 
in April of 1998, Mr. Hash was a principal with Health Policy 
Alternatives, a consulting firm specializing in health care 
financing.
    So, Mr. Hash we certainly welcome you to the panel and 
would like to hear your interpretation of the law or whatever 
you would like to say. Thank you.


                   summary statement of michael hash


    Mr. Hash. Thank you, Senator Hutchison. We appreciate you 
holding this hearing and inviting us to discuss our obligations 
under current law to recoup Federal taxpayers' share of 
Medicaid funds from State tobacco settlements.
    State Governors and their attorneys general have achieved 
an enormous victory. They have worked hard to hold tobacco 
firms accountable for the health care costs of smoking-related 
illnesses. We are pleased that many States, like the President 
has suggested, want to use tobacco settlement money to fight 
teen smoking, to protect tobacco farmers, to assist children, 
and to promote the public health.
    However, existing Federal law clearly requires States to 
share all Medicaid recoveries from liable third parties with 
Federal taxpayers, who pay more than half of all Medicaid 
costs. Nothing in the law as we read it creates an exception 
for tobacco settlements, regardless of their size. States 
routinely share Medicaid recoupments with Federal taxpayers. In 
fact, three States have already reported earlier tobacco 
settlements with the Liggett Corporation.
    My written testimony outlines the current legal authorities 
and the history of this issue in some detail, so I will just 
simply summarize for now. Federal law specifically requires 
States to pursue Medicaid recoveries from third parties. The 
law does not authorize the Federal Government to bring or 
participate in these suits. States must return and report these 
recoveries to HCFA so that Federal taxpayers receive their fair 
share.
    HCFA passes the savings from Medicaid recoupments back to 
Federal taxpayers by subtracting the Federal share of Medicaid 
recoupments, minus costs incurred by the States in obtaining 
these recoveries, from future Medicare payments to the State. 
Over the last 5 years Federal taxpayers have recouped more than 
$1.5 billion from third party liability collections by the 
States.
    The State tobacco settlements clearly include restitution 
for costs of Medicaid tobacco-related illnesses. In fact, the 
States' tobacco settlements prohibit States from making any 
future claims for Federal and State tobacco-related Medicaid 
expenditures. That means that Federal taxpayers are precluded 
from taking any action to recoup their fair share of Medicaid 
expenditures for tobacco-related illnesses. Federal taxpayers 
are, therefore, clearly entitled to a share of tobacco-related 
Medicaid expenditures.
    However, as the President has said in his budget and 
otherwise, in lieu of exercising our claims under Federal law, 
the administration has proposed giving States flexibility and 
discretion over how these funds would be spent. Specifically, 
the President has proposed that States keep 100 percent of the 
tobacco settlement funds in exchange for a commitment to use a 
portion of the funds to reduce youth smoking, to improve the 
public health, to protect tobacco farmers, and to assist 
children.

                           prepared statement

    The details of this arrangement would be worked out through 
negotiations with the Congress and the States. We want to work 
with you and the States to find a bipartisan resolution of 
Federal taxpayers' claims to tobacco settlements and one that 
we agree is fair to all Americans.
    I want to thank you again for holding this hearing and I am 
happy to answer any questions that you might have.
    [The statement follows:]
                   Prepared Statement of Michael Hash
    Chairman Specter, Senator Harkin, distinguished subcommittee 
members, thank you for inviting me to discuss the Health Care Financing 
Administration's obligation under current law to recoup Federal 
taxpayers' share of Medicaid funds from State tobacco settlements.
    In November 1998, several State Attorneys General reached an 
historic settlement with the tobacco industry that provides 
reimbursement to the States for some of the health care costs 
associated with treating smoking-related illnesses. The Attorneys 
General deserve a great deal of praise for crafting this important 
agreement. The settlement follows and confirms an important principle 
established with the 1996 settlement with the Liggett tobacco 
corporation: tobacco companies must be held accountable for the damage 
their product does to our nation's health. Most importantly, the 
national agreement will help curb smoking among our nation's youth, a 
goal that the Administration and members of this Subcommittee share.
    As the Subcommittee knows, the Administration began our tobacco 
efforts four years ago with the strong leadership of the President, 
Vice President, and the then Commissioner of the Food and Drug 
Administration (FDA). The FDA then put in place a strong crackdown on 
youth access to tobacco, the broadest and most significant effort to 
date to protect our children from the dangers of tobacco. Last year, 
the president sought comprehensive tobacco legislation and, while the 
1998 State tobacco settlement was an important step in the right 
direction, more must be done to protect our children and hold the 
tobacco industry accountable.
    We are here today to talk about Medicaid recoupment. Existing 
Federal law clearly requires States to share all Medicaid recoveries 
with Federal taxpayers. Nothing in the law creates an exception for 
tobacco settlements, regardless of their size. States routinely report 
and credit HCFA with the Federal share of third party liability 
collections. It is worth highlighting that three States--Massachusetts, 
Louisiana, and Florida--reported and credited to HCFA some of their 
tobacco collections as part of a settlement with the Liggett 
Corporation. Although the funds involved in the Liggett settlement are 
much smaller than those at stake in the comprehensive settlement, these 
initial payments indicate that the States understand their legal and 
fiduciary responsibility to credit the Federal government with its 
share of tobacco settlement proceeds.
    Rather than having HCFA claim the full Federal share of the 
comprehensive settlement through current law procedures, the 
Administration has proposed an approach that gives States flexibility 
and discretion over how these funds will be spent. Specifically, the 
Administration proposes that States keep 100 percent of the tobacco 
settlement funds in exchange for a commitment to use a portion of the 
proceeds to reduce youth smoking, protect tobacco farmers, improve 
public health and assist children. The details of this arrangement 
would be worked out through negotiation with the States and Congress. 
Without such an arrangement, not a single penny of tobacco settlement 
funds would have to be used to reduce youth smoking.
                               background
    Medicaid is a joint Federal/State partnership, in which States run 
their own individual Medicaid programs within Federal guidelines, and 
the Federal government pays for, on average, 57 percent of State 
Medicaid costs. The Federal match rate is at least 50 percent in all 
States and as high as 77 percent. State administrative costs, including 
costs incurred in pursuit of Medicaid cost recoveries, qualify for 
Federal matching at a rate of 50 percent.
    Federal law specifically requires States to pursue Medicaid 
recoveries from third parties. The law says States must report these 
recoveries to HCFA so that Federal taxpayers receive their fair share 
of such recoveries.
    This dates back to the beginning of the Medicaid program. The Title 
XIX Medicaid chapter of the Social Security Act at section 1903(d)(2) 
specifically requires that Federal taxpayers be reimbursed for the 
Federal share of Medicaid expenditures that States recovered from 
liability cases involving third parties.
    Section 1903(d) of the Social Security Act mandates that States 
allocate from the amount of any Medicaid-related recovery the pro-rata 
share to which the Federal Government is entitled. Specifically, this 
law states:

          (2)(A) The Secretary shall then pay to the State, in such 
        installments as he may determine, the amount so estimated, 
        reduced or increased to the extent of any overpayment or 
        underpayment which the Secretary determines was made under this 
        section to such State for any prior quarter and with respect to 
        which adjustment has not already been made under this 
        subsection.
          (2)(B) Expenditures for which payments were made to the State 
        under subsection (a) shall be treated as an overpayment to the 
        extent that the State or local agency administering such plan 
        has been reimbursed for such expenditures by a third party 
        pursuant to the provisions of its plan in compliance with 
        section 1902(a)(25). . . .
          (2)(3) The pro rata share to which the United States is 
        equitably entitled, as determined by the Secretary, of the net 
        amount recovered during any quarter by the State or any 
        political subdivision thereof with respect to medical 
        assistance furnished under the State plan shall be considered 
        an overpayment to be adjusted under this subsection.

    These statutory requirements have been in existence for 30 years. 
Furthermore, 42 U.S.C. Sec. Sec. 1396a(a)(25)(A), which became 
effective March 31, 1968, establishes that it is the State's 
responsibility `to ascertain the legal liability of third parties . . . 
to pay for care and services available under the [State's Medicaid] 
plan.'' Regulations set forth in 42 CFR 433.136 define `third party' as 
``any individual, entity or program that is or may be liable to pay all 
or part of the expenditures for medical assistance furnished under a 
State plan.'' Also, 42 CFR 433.140(c) describes the State's obligation 
clearly: ``If the State receives FFP [Federal financial participation] 
in Medicaid payments for which it receives third party reimbursement, 
the State must pay the Federal government a portion of the 
reimbursement determined in accordance with the FMAP [Federal medical 
assistance percentage] for the State.'' It is important to recognize 
that unlike the States, the Federal Government is not authorized by the 
Medicaid statute to sue third parties directly. This does not mean, 
however, that Congress intended to abdicate its claim to such 
recoveries. Rather, the Medicaid statute protects the Federal 
Government's interests by explicitly making the States responsible for 
both pursuing these recoveries, reporting them to HCFA, and ensuring 
that the Federal Government receives its share. Thus, the State cannot 
pursue only State claims; it is obligated to pursue both State and 
Federal claims at the same time.
    States routinely comply with this law. Three States--Florida, 
Louisiana, and Massachusetts--reported recoupments of more than 
$780,000 from tobacco settlements with the Liggett Corporation.
    In fiscal 1998, States reported more than $642 million in 
recoveries for medical costs for which another party was liable, often 
because a judge ruled that the other party was at fault. Federal 
taxpayers' share of third party liability Medicaid recoupments reported 
from fiscal year 1994 through fiscal year 1998 totaled $1.5 billion.
    HCFA passes savings from Medicaid recoupments back to Federal 
taxpayers by subtracting the Federal share of Medicaid recoupments, 
minus costs incurred by States in obtaining the recoveries, from future 
Medicaid disbursements to States.
    Just like in the tobacco settlements, States routinely undertake 
Medicaid recoupment actions without any Federal involvement. In fact, 
Federal law authorizes only States, and not the Federal government, to 
file lawsuits under the Medicaid statute to recoup Medicaid funds. It 
says it is States' responsibility ``to ascertain the legal liability of 
third parties . . . to pay for care and services'' under State Medicaid 
plans.
               determining federal taxpayers' fair share
    The State tobacco settlements clearly include restitution for the 
costs to Medicaid of care for disease caused by tobacco. In fact, the 
Florida settlement specifically states that it in part covers Medicaid 
expenditures. In exchange for settlement funds, all the States gave up 
all present and future claims, including all Federal Medicaid claims. 
These settlements legally prohibit States from making any future claims 
for tobacco-related Medicaid expenditures, and the Social Security Act 
does not authorize the Federal government from bringing Medicaid 
recoupment suits.
    That means Federal taxpayers are precluded from taking any other 
route for recouping their fair share of Medicaid expenditures for 
tobacco-related illnesses, and since their tax dollars went to States 
to cover these costs. Federal taxpayers are, therefore, clearly 
entitled to a share of the settlement for tobacco-related Medicaid 
expenditures.
                               conclusion
    We commend States for their historic achievement in obtaining 
settlements from tobacco companies. The Social Security Act does not 
authorize us to seek Medicaid restitutions from third parties, and only 
States could have done what they did. We are currently working with our 
colleagues at the Justice Department to secure a similar recovery from 
tobacco companies for costs of treating tobacco-related diseases 
incurred by Medicare and other Federal health programs outside of 
Medicaid.
    We want to work with you and States to find a resolution of Federal 
taxpayers' claim to tobacco settlements that we all agree is fair to 
all Americans. I thank you for holding this hearing, and I am happy to 
answer your questions.

                           federal taxpayers

    Senator Hutchison. Thank you, Mr. Hash.
    I would like to first ask you about your statement that 
Federal taxpayers would be shut out. The Justice Department has 
given notice that it plans to sue the tobacco companies under 
Medicare. So I do think--I do not see that the Federal 
taxpayers are going to be shut out.
    Mr. Hash. These are, Senator Hutchison, two distinctly 
separate matters, I believe. On the one hand, the suit that you 
refer to that the President announced in his State of the Union 
Address reflects the recovery of direct health care costs to 
Federal programs such as Medicare, the VA, the DOD, and other 
direct Federal health care programs.
    The matter of Medicaid expenditures, 57 percent on average 
which are Federal, is the subject I think of our discussion 
this morning, and under the law we do not have any recourse to 
bring suits of our own. In fact, as a term of the settlements 
that the States have entered into with the tobacco companies, 
States have waived their rights to any future claims on 
Medicaid, which would effectively extinguish any claims that 
the Federal Government would have with respect to Medicaid.
    Senator Hutchison. With respect to Medicaid, but would you 
not accede to the point that Medicare is much more general in 
coverage and perhaps is even a better Federal case as a first 
point? And then second, if the Federal Government felt that it 
had a fair claim under Medicaid, why did not the Federal 
Government sue under Medicaid in the first place?
    Mr. Hash. Well, with respect to the first question, 
Senator, we believe that the Federal Government does have a 
right to make a claim for Federal expenditures associated with 
tobacco-related illnesses for Medicare beneficiaries.
    With respect to your second question, regarding the ability 
of the Federal Government to pursue its own claims with 
Medicaid, as I indicated, our reading of the statute is that 
the Federal Government is precluded from being a party to suits 
under Medicaid. The statute specifically sets forth that States 
are to pursue third party liabilities under the Medicaid 
Program and then to in turn share those recoupments with the 
Federal Government on the basis of the Federal Government's 
share of the Medicaid Program.
    Senator Hutchison. Does it bother you at all that many 
States sued not even mentioning Medicaid as a cause of action? 
Some of the causes of action were consumer protection, 
racketeering, antitrust violations. Some States did assert 
direct health care costs, but others did not. In some cases 
Medicaid was thrown out, and in fact to my knowledge only 
Florida even mentioned Medicaid in the final settlement. There 
may have been one or two others, but the vast majority were on 
other causes of action.
    Mr. Hash. Senator, I think the answer to that question is 
of course we would like to work with the States to identify any 
evidence that they have that the settlements that they entered 
into, in fact, do not reflect any Medicaid-related costs. But 
as I mentioned earlier, the fact that they explicitly waived 
any future claim against the companies with respect to Medicaid 
expenditures suggests that the settlements are related to 
Medicaid expenditures.
    The Justice Department has reviewed the initial State 
filings of the lawsuits and determined that they almost all 
were predicated on Medicaid costs. There have been a number of 
outside, independent studies that have found that smoking-
related costs attributable to the Medicaid Program are on 
average about $12.9 billion a year.
    Senator Hutchison. How did HCFA come to the $18.9 billion 
figure in the President's budget?
    Mr. Hash. Actually, I think with respect to that I should 
respectfully refer you to the Office of Management and Budget. 
But I think the shorter answer on that is that it is an 
estimation of the portion of the 57 percent of the settlement 
amount due to the Federal Government spread over a 4-year 
period.
    Senator Hutchison. I do not see how you can get to that 
point. As I understand it, Medicaid is annually about $175 
billion, so 57 percent would be much more than $18.9 billion.
    Mr. Hash. It is a portion of the 57 percent of the State 
settlements that is estimated to flow to the States over the 
next 5 years.
    Senator Hutchison. But is that not the average that would 
go to the States of the Medicaid expenditures?
    Mr. Hash. I believe that the $18.9 billion is related to 
the 57 percent of the States' collective share of the 
settlements that they would receive over the next 5 years.
    Senator Hutchison. So you just based it on what the States' 
take was, regardless of what the States alleged, what their 
causes of action were? You just picked that number?
    Mr. Hash. Well, as I said, Senator, I think what the 
President intends here is that we work with the States to 
review all the evidence that they may have regarding the basis 
upon which their claims were made, in order that we can jointly 
arrive at an appropriate allocation of the funds between 
Medicaid and whatever other bases that the States may have made 
in terms of their settlement.
    Senator Hutchison. Let me--my time is almost up, but let me 
just ask you: If you are taking the position that this is 
Medicaid costs, how do you arrive then at the compromise that 
the President proposed, which would be tobacco cessation 
programs to the tune of 25 percent in lieu of the Medicaid 
costs? Does that not seem a little far-fetched if Medicaid cost 
reimbursement is your goal?
    Mr. Hash. Well, Senator, I think the President's intention 
is to work with the Congress and the States to arrive at a 
mutual agreement about an appropriate allocation of these 
funds. The President has suggested a number of what we believe 
are shared national and Federal priorities, including assisting 
children, reducing youth smoking, providing for the public 
health, and assisting farmers who are adversely affected.
    Those kinds of priorities are somewhat similar to what the 
Congress and the administration worked on last year in the 
context of the McCain bill, which I am sure you will recall set 
forth a kind of menu of options. I think that is what the 
President has in mind when he has taken the position of working 
with the Congress and the States to arrive at a mutual 
understanding and agreement about an appropriate allocation of 
these funds.
    Senator Hutchison. I think from the way you describe it, 
respectfully, it is a Federal grab to say that, we are taking 
this position because we think that it is Medicaid funds, but 
if you just refuse to do that then let us give you a menu of 
options that would be acceptable to the Federal Government for 
you to spend the State-earned tobacco recoupment money.
    I am not drawing the nexus there.
    Mr. Hash. Well, I guess I would have to respectfully say 
that we do not agree that this is a Federal grab, Senator. We 
believe that under the law the Federal taxpayers are actually 
entitled to their fair share of these recoupments because they 
provided half of the funding, roughly, for the Medicaid program 
along with the States.
    So I think we do not see it in the same context as a 
Federal grab. In the context of arriving at a mutual 
understanding about how these proceeds could be most 
effectively used, I think we are willing to look at a variety 
of ways in which the money might be applied.
    But absent some agreement that is really memorialized in 
legislation, we would have no assurance that even one penny of 
these funds would be used for preventing tobacco use by young 
people or any other public health use. States could use them 
for whatever purpose they might want, having nothing to do with 
these pressing public health needs.
    Senator Hutchison. Well, it just seems to me that if you 
believe that Medicaid is entitled to reimbursement, that you 
should pursue that option and not try to dictate to the States 
the range of things that would be acceptable to the big brother 
Federal Government, and perhaps you should pursue legislation 
in Congress. If you think that Medicaid is really being 
wronged, then perhaps the States did not have the right to 
bypass the Federal Government under Medicaid, and if you think 
that is a better cause of action why did you not just come to 
Congress and ask for legislation that would override the 
States?
    Mr. Hash. Well, as I mentioned to you earlier, under 
current law, Federal law, we do not have any standing to be a 
plaintiff in a suit to recover third party liabilities from any 
party, including tobacco companies. So we do not have----
    Senator Hutchison. But that is exactly the question that I 
am asking you: Why do you not pursue that if you really believe 
that it is HCFA's right to do so?
    Mr. Hash. I think the President's view on this is that we 
should work together toward an acceptable agreement about the 
allocation of the money which has now been awarded to the 
States through their settlement agreements. That money is 
there. We should work to make sure that it is applied to 
pressing public health needs and to the prevention of youth 
smoking.
    Senator Hutchison. Well, I guess I would just hopefully, 
respectfully, disagree that you could say it is Medicaid money, 
but you are not pursuing your Federal right to come to Congress 
and ask for the ability to sue, so the States are not wanting 
to give you Medicaid money because many of their lawsuits were 
not based on that, so the Federal Government should be able to 
come in and say, well, if we are not going to have Medicaid 
money and if we are not going to pursue our right to Congress 
to file suit under Medicaid let us tell the States what they 
should be doing with the money.
    I think there is not a nexus, and hopefully we can work 
with you or with the Justice Department on Medicare. I am glad 
the Federal Government is going to sue the tobacco companies, 
but I do not think that translates into taking the money that 
the States authorized through State leadership--very 
creatively, I might add.
    They won and that money is theirs. Now let us go forward 
and pursue another remedy, either through Medicaid or Medicare 
or what this administration thinks is the proper way to go. I 
will be helpful to you in that. But I will not be helpful to 
you--in fact, I guess it is pretty clear I am going to try to 
keep you from dictating to the States what they do with money 
that I think they have earned fair and square and I hope they 
will spend in many of the ways that you have named. But I just 
do not think it is my place to tell them.
    Mr. Hash. Well, Senator, I hope on behalf of the 
administration that we can work with you because we would like 
to have your help and the help of others in Congress and in the 
States to work out an agreement with respect to the use of 
these funds that is bipartisan and meets the priorities that 
all agree upon. I think we are optimistic that can be done and 
we hope you will be a part of that with us.
    Senator Hutchison. Well, let us look for another funding 
source.
    Thank you, Mr. Hash.
    Mr. Hash. Thank you, Senator.
    Senator Hutchison. I do thank you for your courtesy, and we 
will continue to work to find your rightful share.
    Mr. Hash. Thank you.
                       NONDEPARTMENTAL WITNESSES

STATEMENT OF HON. PAUL E. PATTON, GOVERNOR OF KENTUCKY 
            AND EXECUTIVE COMMITTEE MEMBER, NATIONAL 
            GOVERNORS ASSOCIATION
    Senator Hutchison. Now let me call Hon. Paul Patton--this 
is panel two--the Governor of Kentucky; Hon. Michael Fisher, 
the Attorney General of the Commonwealth of Pennsylvania; Hon. 
John Cornyn, the Attorney General of Texas; and Hon. Tom 
Miller, the Attorney General of Iowa.
    I want to thank all of you for coming. I want to say again 
that I think the States have been very creative in their 
approach to the tobacco issue. I have read many of the reported 
uses by the States and certainly they vary across the lot. Most 
are certainly using their money for health care, but some are 
not.
    So I would welcome hearing from you your views on what you 
think the right approach should be here. I would like to start 
with Governor Patton.
    Governor Patton. Thank you, Madam Chairwoman, for the 
opportunity to talk with you this morning.
    If I may, before I begin talking about the tobacco 
settlement, express my concerns and the Governors' about the 
proposal to take some of the TANIF funds, which I believe is a 
part of this proposed legislation. I cannot imagine a greater 
breach of faith between the Federal Government and the States, 
a breach of faith that would cost my State, Kentucky, $5 
million.
    Three years ago we fully realized that if the economy 
turned down the amount of extra money we could receive would be 
very limited, certainly not adequate to handle an increased 
caseload. Prudence dictated that we plan for a slowed economy 
and most States have. I know in Kentucky we were cautious as we 
implemented our program.
    As it became apparent that the rolls were actually 
dropping, we developed plans to spend our money on several 
different programs to eliminate dependency permanently, much of 
it on increased daycare services for working families.
    Our 1998 fiscal balance of $44 million, the basis for 
calculating the $5 million loss, is expected to drop to $14 
million by the end of fiscal 1999. This year we will spend $30 
million more than we are allocated from the Federal Government, 
and I am sure that other States have similar stories.
    I understand that had we reported our plans to spend 
differently we would have shown a zero balance, like several 
other States did. For Kentucky to lose $5 million which we 
already have plans to spend and sorely need because of the way 
we reported our plans is surely unfair, and I beseech you to 
live up to the commitment made to the States and not change the 
rules in the middle of the game.
    Now I would like to address the Governors' No. 1 
legislative priority, the retention of all funds received as a 
result of the settlement reached with the major tobacco 
companies. The Governors' position is clear, it is 
longstanding, and was re-articulated in a policy resolution 
adopted at the 1999 meeting here in Washington on February 23.
    That meeting was attended by all but two of the Governors, 
and I know of no Governor who does not agree with the 
resolution. This is truly a bipartisan position. Stated simply, 
our position is that the tobacco settlement funds belong to the 
States.
    There is a fundamental difference between the settlement we 
reached and the proposals being promoted a year or so ago 
involving Federal legislation to enact a tax on tobacco and 
appropriate the proceeds for several different purposes. You 
have already mentioned the many different reasons that States 
used to claim damages. The State by State allotments were 
determined, not based on Medicaid expenditures, but on an 
overall picture of health care costs in a given State.
    Speaking for Kentucky, I can assure you that I agreed to 
the settlement on behalf of all Kentuckians as an attempt to 
recover at least a small portion of the money they have or will 
spend on tobacco-related illnesses personally or through their 
government.
    The master settlement agreement represents a global 
settlement approach that covers States what sued for Medicaid, 
States who had Medicaid claims thrown out of courts, and other 
States that simply did not sue at all. The Medicaid third party 
recovery provisions of the Social Security Act do not 
encompass, nor did Congress intend them to apply to, situations 
in which States initiated lawsuits on behalf of all of their 
residents against manufacturers of products asserting a variety 
of consumer protection and other causes of action. These 
Medicaid provisions were adopted to facilitate reimbursements 
from insurance companies for small claims and to provide a tool 
to fight provider fraud. No one envisioned the use of the 
provisions to take from the States payments received as a 
result of massive State-originated negotiations with the 
tobacco industry.
    Let me summarize our position. Medicaid is not a major 
component of the settlement and therefore the Federal 
Government has no legitimate claim to the funds. Reduced 
tobacco consumption will significantly reduce State revenue and 
a part of these funds must be utilized to replace them.
    By their words and actions, Governors and States are 
allocating these funds for the most part to the same areas as 
are being discussed in Washington. But the Governors, working 
closely with State legislatures and concerned parties, must 
have the flexibility to tailor the spending of these funds to 
meet the needs of individuals in their States. There is simply 
no reason to believe that the Federal Government's wisdom on 
this issue is superior to the wisdom of the individual States 
and territories.

                           prepared statement

    Although States will spend significant amounts of money on 
programs that improve the health, education, and welfare of 
their citizens, States do not need to be told how to spend any 
portion of their money.
    Again, I thank you for the opportunity to be with the 
committee, and when the rest of the panel presents I will be 
glad to answer questions. Thank you very much.
    [The statement follows:]
               Prepared Statement of Gov. Paul E. Patton
    Mr. Chairman, thank you for the opportunity to appear before this 
subcommittee today to testify on the governors' number one legislative 
priority.
             tobacco settlement funds belong to the states
    The nation's governors agree that the funds obtained in the 
historic tobacco settlement agreement rightfully belong to the states. 
The retention of all funds received as a result of the settlement 
reached with the major tobacco companies of the nation. The governors' 
position is clear it was re-articulated in a policy resolution adopted 
at the 1999 winter meeting here in Washington on February 23rd. This 
meeting was attended by all but two of the governors and I know of no 
governor who does not agree with the resolution. This is truly a 
bipartisan position. Simply stated, our position is that the tobacco 
settlement funds belong to the states.
    Without the states' leadership and years of commitment to 
initiating and undertaking state lawsuits, we would not have achieved 
this major goal--a comprehensive settlement of myriad claims against 
the tobacco industry. After bearing all the risks and expenses in the 
arduous negotiations and litigation in which the states have been 
engaged we are now fully entitled to all the funds awarded to us.
    The nation's governors strongly endorse S. 346, the Hutchison/
Graham tobacco recoupment protection bill, and applaud the support of 
the many bipartisan cosponsors. It is crucial that the passage of this 
legislation, without federal restrictions, take place this year.
    There is a fundamental difference between the settlement we reached 
and the proposals being promoted a year or so ago involving federal 
legislation to enact a tax on tobacco and appropriate the proceeds for 
several purposes. For the federal government to take the position that 
the entire $246 billion settlement amount represents the recovery of 
Medicaid-related expenditures and that therefore HCFA is entitled to 
recoupment of 57 percent of the entire settlement is clearly untenable 
for a number of reasons.
    1. In the original state suits, states filed complaints that 
included a variety of claims, such as consumer protection, 
racketeering, antitrust, disgorgement of profits, and civil penalties 
for violations of state laws. Medicaid was not mentioned at all in a 
number of cases and was only one of a number of issues in many others. 
Further, the state-by-state allotments were determined, not based on 
Medicaid expenditures, but on an overall picture of health care costs 
in a given state.
    Speaking for Kentucky, I can assure you that I agreed to the 
settlement on behalf of all Kentuckians as an attempt to recover at 
least a small portion of the money they have spent or will spend on 
tobacco-related illnesses, personally or through the federal 
government. As a consequence, I view the money that the Kentucky state 
government will receive as belonging to the people of Kentucky and 
therefore the decision about how it should be spent should be made by 
their representatives in the Kentucky General Assembly. Our legislature 
does not meet this year, however they have already expressed, in a 
joint resolution passed in our 1998 regular session, their intention to 
make that decision on behalf of our people. The fact is that I believe 
that we will devote these funds to the same kinds of activities as are 
generally being discussed around the country and here in Washington. 
But even if we do intend to spend the funds on programs that are 
similar to the ones Washington would place in legislation, as a matter 
of principle, the people of Kentucky, the legislature, and I would be 
opposed to it. For the federal government to use its power to cause us 
to have to involuntarily remit these funds to the federal treasury is 
offensive and totally unacceptable.
    2. It is important to note that, ultimately, the master settlement 
agreement bears no direct relationship to any particular state lawsuit. 
The master settlement agreement represents a global settlement approach 
that represents states who sued for Medicaid, states who had Medicaid 
claims thrown out of court, and other states that simply didn't sue at 
all. The attorneys general were attempting to obtain a fair monetary 
recovery for all states considering the variety of claims and requests 
for relief and the common aims of the multistate settlement process.
    3. The federal government was invited to participate in the 
lawsuits, but declined. States were forced to bear all of the risk 
initiating the suits and the entire fiscal burden of carrying forth the 
unprecedented lawsuits against a well-financed industry that had never 
lost such a case before. It wasn't until after state victory was 
ensured that the federal government began to pay renewed attention to 
state activities.
    4. The Medicaid third-party recovery provisions of the Social 
Security Act do not encompass, nor did Congress intend them to apply 
to, situations in which states initiate lawsuits on behalf of all of 
their residents against manufacturers of products, asserting a variety 
of consumer protection and other causes of action. These Medicaid 
provisions were adopted to facilitate reimbursements from insurance 
companies for small claims and to provide a tool to fight provider 
fraud. No one envisioned the use of the provisions to take from the 
states payments received as the result of massive, state-originated 
negotiations with the tobacco industry.
    5. As I have already stated, the master settlement agreement 
negotiated between the attorneys general and the tobacco companies is 
separate and distinct from the agreement that failed to pass in the 
105th Congress. That failed proposal would have represented almost 
twice as much money, $368 billion compared to the current settlement of 
$246 billion. The failed agreement was much more comprehensive, 
representing both state and federal costs and requiring congressional 
approval. In the context of the negotiations over the $368 billion 
amount, the federal government may have had a legitimate claim to a 
share of the settlement, but the proposal's failure in Congress 
fundamentally changed the debate. Without passage of supporting 
legislation, states were forced to proceed with their own lawsuits and 
negotiate settlements based on nonfederal claims.
                 governors oppose federal restrictions
    The nation's governors also are strongly opposed to any federal 
restrictions on how states spend their tobacco funds. Each state must 
be given the flexibility to tailor its spending to the unique needs of 
its citizens. For example, some states need to be able to assist farm 
communities while others may want to expand health coverage to the 
uninsured. For example, to force Kentucky or Virginia to spend all 
their funds on health insurance for children would represent flawed 
federal policy when they need to assist farm communities. Similarly, to 
force Vermont to spend all its funds on health insurance for children 
would be unwise, given the low percentage of uninsured children in that 
state.
    Many governors, through state-of-the-state speeches or through 
proposed or finalized state legislation, have already publicly 
committed to spending these funds for the health and welfare needs of 
their citizens. The majority of governors have already made commitments 
to create trust funds and escrow accounts that will ensure that tobacco 
settlement funds are spent on health care, services for children, 
assistance for growers, education, and smoking cessation.
    The nation's governors and state legislators are committed to 
spending the settlement funds on a wide variety of state programs that 
will reduce teen smoking and improve the health, education and public 
welfare of each state's citizens. Ensuring this requires the 
flexibility for states to spend the settlement funds on programs 
targeted to the specific needs of each state. States do not need the 
federal government to tell them when and how to spend the money.
    Examples of spending commitments include the following.
  --Governor Jane Dee Hull of Arizona has proposed: building medical 
        facilities and permanently funding a variety of health care 
        programs; forming a trust fund for research and education on 
        smoking cessation; establishing an up-front payment for a new 
        state mental hospital, new state health laboratory, and rural 
        health clinics; and funding a county health care block grant.
  --Governor Gary Locke of Washington has proposed: increasing funding 
        for Washington's Basic Health Plan for working families; 
        expanding Medicaid health coverage for children in low-income 
        families; and establishing an endowment fund to help smokers 
        quit and convince young people not to use tobacco.
  --Governor Frank O'Bannon of Indiana has proposed: increasing funding 
        for children's health, antismoking programs, other public 
        health programs, and support of local health departments; 
        expanding health insurance to low-income working families; and 
        providing support to tobacco farmers to ease their transition 
        to other crops.
  --Governor James S. Gilmore III of Virginia has proposed: 
        establishing a fund for economic and agricultural development 
        targeted at assistance for farm communities hurt by the 
        settlement; establishing a health fund for children, community-
        based treatment for mental illness, long-term care, and youth 
        antismoking programs; and establishing a fund that addresses 
        other critical needs such as education infrastructure.
    set-asides for smoking cessation programs are bad public policy
    One of the restrictions under consideration in the Senate is a 
proposal to require states to spend 25 percent of the funds on smoking 
cessation programs. Although the nation's governors agree with the goal 
of substantially reducing smoking, we are adamantly opposed to this 
restriction. It would represent very poor public policy. There are 
already four major initiatives that are going into effect to reduce 
smoking.
    1. The price of tobacco has increased. The price of tobacco 
products has already increased between 40 cents and 50 cents per pack. 
Additional price increases may come over time as companies attempt to 
hold profit margins and make settlement payments. These price increases 
will substantially reduce smoking over time.
    2. Two major programs in the settlement are dedicated to reducing 
teen smoking and educating the public about tobacco-related diseases. 
$250 million will create a national charitable foundation to support 
the study of programs to reduce teen smoking and substance abuse and 
prevent diseases associated with tobacco use. An additional $1.45 
billion will create a National Public Education Fund to counter youth 
tobacco use and educate consumers about tobacco-related diseases.
    3. The settlement agreement has a significant number of 
restrictions on advertising and promotion. The settlement prohibits 
targeting youth in tobacco advertising, including a ban on the use of 
cartoon or other advertising images that may appeal to children. The 
settlement also prohibits all outdoor tobacco advertising, tobacco 
product placement in entertainment or sporting events, and the 
distribution and sale of apparel and merchandise with tobacco company 
logos. Further, the settlement places restrictions on industry lobbying 
against local, state, and federal laws. Over time, these restrictions 
on tobacco companies' ability to market their products to children and 
young adults will have a major impact on smoking.
    4. States are already spending state funds on smoking cessation and 
will substantially increase funding as the effectiveness of programs 
becomes established. Many states have already invested years in program 
design, modification, and evaluation to determine the best ways to 
prevent youth from taking up cigarette smoking and helping youth and 
adults quit smoking. Governors and states are highly motivated to 
implement effective programs. We see the human and economic burdens of 
tobacco use every day in lost lives, lost wages and worker 
productivity, and medical expenditures for tobacco-related illnesses. 
Thirteen states have already committed to creating a dedicated trust 
fund or devoting considerable settlement revenues to smoking cessation 
programs-Alabama, Alaska, Arizona, Delaware, Hawaii, Indiana, Maryland, 
Massachusetts, Missouri, New Jersey, North Dakota, Vermont, and 
Washington.
    Given the fact that these four major initiatives to reduce smoking 
are now being implemented, it is critical that additional spending be 
well coordinated with these and other initiatives. Governors will 
commit additional funds as the effectiveness of new programs is proven. 
However, the funds must be well coordinated with these four new 
initiatives. States must have the flexibility to spend funds in a cost-
effective way. They should not have to meet an artificial restriction 
that has no basis in sound public policy.
             state revenue impacts of the tobacco agreement
    Although the tobacco agreement will create payments of $246 billion 
to states over the next twenty-five years, the net revenue gain to 
states may be substantially below that total as state tobacco tax-
revenues are substantially reduced. In 1996 state tobacco tax 
collections were about $7.1 billion per year. Over the next twenty-five 
years, these revenues will fall substantially below what they would 
have been without a tobacco agreement.
    There are three major reasons for this reduction in revenue. First, 
the tobacco agreement has already increased the price of tobacco 
products by from 40 cents to 50 cents per pack. This could reduce state 
tobacco tax collections by around $700 million per year. However, over 
time there is the possibility that tobacco companies will be forced to 
increase prices more in order to maintain profit margins. If this were 
to lead to another increase of 50 cents per pack, the combination of 
the two price increases could lead to a reduction in state revenues of 
$1.4 billion per year.
    Second, in addition to the price effects, the tobacco agreement 
puts a number of restrictions on advertising that will further reduce 
smoking and thus state tax revenues.
    Third, the foundation created in the agreement to fund national 
smoking cessation programs coupled with state programs for smoking 
cessation will further substantially reduce smoking and therefore state 
tobacco tax revenues. Although it is difficult to provide an accurate 
estimate of the reduction in tobacco revenues, the combination of 
significant price increases coupled with major new smoking cessation 
programs would likely reduce state tobacco tax revenues by tens of 
millions of dollars over the twenty-five year period. This would 
substantially reduce the net revenues from the tobacco agreement.
    Further, there is another major potential offset to the settlement 
funds if the volume of cigarette sales is reduced. Specifically, there 
is a net revenue reduction for every percentage reduction more than 2 
percent. For example, if the volume of cigarettes sold is reduced by 12 
percent, state revenues from the agreement would be reduced by $14 
billion over twenty-five years. Similarly, if the volume went down by 
22 percent, then revenues would be $32 billion lower.
    This reduction in overall tobacco use is one of the primary 
purposes of the tobacco settlement, and the governors will applaud such 
reductions. Although a worthy goal, such reductions will reduce net 
funds available to states, and thus must be taken into consideration.
                               conclusion
    The nation's governors feel strongly that the states are entitled 
to all of the funds awarded to them in the tobacco settlement agreement 
without federal seizure. The master settlement agreement is 
fundamentally different from the proposals recently considered by the 
Congress. It is a global settlement of myriad claims. Medicaid was not 
the major focus or force in the settlement, and there is therefore no 
legitimate federal claim to the funds. Reduced tobacco consumption will 
significantly reduce state revenue and a part of these funds must be 
utilized to replace them. By their words and actions, governors and 
states are allocating these funds, for the most part, to the same areas 
that are being discussed in Washington. But the governors, working 
closely with state legislators and concerned parties must have the 
flexibility to tailor the spending of these funds to meet the needs of 
individuals in their states. There is no reason to believe that the 
federal government's wisdom on this issue is superior to the wisdom of 
the individual states and territories. Although states will spend 
significant amounts of money on programs that improve the health, 
education, and welfare of their citizens, states do not need to be told 
how to spend any portion of their money.
    I thank you again for the opportunity to appear before the 
committee, and I would be happy to answer any questions you may have.

                           tobacco settlement

    Senator Specter [presiding]. Thank you very much, Governor 
Patton.
    I regret my somewhat late arrival. The trains are having a 
little problem, but not as much problem as Senator Harkin is 
having, because he is in bed with a bad back.
    But we welcome you to this hearing on such short notice. I 
am sure you have gone over the history of the issue with the 
emergency supplemental appropriations bill coming to the floor 
perhaps later this week with a provision which Senator 
Hutchison introduced the week before last which would give the 
States the unfettered discretion to retain the money on the 
tobacco settlement.
    I received a call from our distinguished attorney general 
in Pennsylvania bringing me up to date on the matter, and 
Senator Harkin and I thought that it would be useful for this 
subcommittee to have a hearing because we have the 
responsibility for funding the Department of Health and Human 
Services and HCFA. Both Senator Harkin and I had expressed 
ourselves at the Appropriations Committee hearing of concern as 
to allowing the States to retain all of the funds.
    There is the existing provision of law which provides for 
the Federal Government to retain a proportionate share, pegged 
at some 57 percent, and it may be that we can reach an 
accommodation as to the concerns which a number have expressed 
about having an allocation of the funds directed toward 
preventing youth smoking and the medical matters, which is the 
reason we felt we ought to have this hearing.
    There is a conflict between the Finance Committee and 
Appropriations as to handling these matters. That is not a 
matter of your concern, but an objection was lodged to Senator 
Hutchison's amendment and an objection has been lodged to this 
hearing. But I think we can work out the Senate turf battles.
    The more important issue for Americans is what is going to 
happen to the funds. The smoking issue is an overwhelming one. 
I was reviewing the statistics again this morning; 400,000 
people die each year from tobacco-related illnesses. The 
projection is that some 5 million of those now under 18 will 
die from tobacco-related illnesses. Enormous costs are 
involved--$572 billion in health care expenditures each year by 
the U.S. Government on tobacco-related illnesses, $7.3 billion 
on Medicaid payments.
    This morning I noted a news report that women who smoke 
heavily--and this seems to have a curious causal relationship--
have children who have a higher incidence of being involved in 
criminal activity. So you really wonder where the smoking issue 
ends.
    But we do appreciate the work of the attorneys general in 
getting this $206 billion settlement. Not surprisingly, the 
Federal Government was not involved. I do not think that 
totally answers the question of the Federal Government's 
interests in proportionate share. If we only dealt with the 
Federal Government where they exercised diligence, we might not 
deal with the Federal Government much at all.
    But we thank you for your prompt attendance. I understand 
that Governor Patton is the first of this panel to testify. So 
we now turn to the Honorable Mike Fisher, who brings to this 
hearing a very distinguished background as an Assistant 
District Attorney and a State Senator and a candidate for 
Governor, and a very distinguished Attorney General in 
Pennsylvania.
    General Fisher, the floor is yours.
STATEMENT OF HON. MIKE FISHER, ATTORNEY GENERAL OF 
            PENNSYLVANIA
    Mr. Fisher. Thank you very much and good morning, Mr. 
Chairman, and we thank you for calling this hearing. Good 
morning, Senator Hutchison. We thank you for being here and for 
your leadership on this issue.
    I am very pleased to have the opportunity to address this 
subcommittee today on behalf of the National Association of 
Attorneys General concerning the States' historic settlement 
with the tobacco industry. I have been asked to give a short 
overview of the States' litigation against the industry and the 
subsequent $206 billion settlement.
    In 1994, Attorney General Mike Moore filed the first State 
lawsuit against the tobacco industry on behalf of the State of 
Mississippi, claiming that the industry had engaged in a 40-
year conspiracy to keep the truth from the public about the 
addictive nature of nicotine to cultivate a new generation of 
smokers.
    By June 1997, more than 40 States had filed their own 
lawsuits. On June 20 1997, attorneys general and the industry 
announced a tentative settlement. The tobacco industry was 
prepared to pay $368 billion, to acquiesce to FDA regulation, 
and change its way of doing business. Of that settlement, $196 
billion would have gone to the States and the balance would 
have largely gone to the Federal Government. This agreement was 
contingent on Congressional approval and, as you know, the 
required legislation was not enacted.
    In the summer of 1998, with roughly 36 State cases still 
unresolved, the Congress having abandoned efforts to approve 
the June 20 resolution, a second effort towards a multistate 
settlement commenced. Between July and November 1998, a group 
of attorneys general engaged in intensive negotiations with the 
tobacco industry.
    I was one of eight negotiators chosen by my colleagues to 
represent the coalition of States suing the industry. After 
months of negotiations, an agreement was signed on November 23, 
1998, under which the industry agreed to pay the States $206 
billion over 25 years. In addition, the agreement required the 
industry to make major public health concessions on how it 
would conduct business in the future. My written testimony 
outlines those various provisions.
    As we sit here today, State legislatures across the country 
are studying how best to use these proceeds. Without question, 
public health programs will be the principal recipient of 
settlement funds. In Pennsylvania, for example, I have provided 
to the Governor and our general assembly a blueprint for 
action. We have proposed spending the money to enhance our 
children's health insurance program and making more insurance 
funds to adults who do not otherwise have insurance, expanding 
funding for Pennsylvania's schools to offer comprehensive 
tobacco use and prevention programs, increased funding for 
medical research into tobacco-related diseases, and other 
proposals which are included in my written testimony, a copy of 
which is attached to my remarks.
    Although Pennsylvania's plan is not yet final, Pennsylvania 
Governor Tom Ridge has also stated that he wants to use the 
money for public health purposes, including smoking prevention 
and education programs. I am confident that our legislature 
will support our goal to spend the $11.3 billion we will 
receive on public health and tobacco cessation programs.
    The information available to me indicates that almost all 
the States have initiated plans to use the settlement dollars 
on health-related programs.
    I sued on behalf of the people of Pennsylvania, not for the 
Federal Government. The States fought the tobacco industry for 
more than 5 years, expended considerable time and resources, 
and assumed 100 percent of the risk. During this whole period 
of time the Federal Government sat on the sidelines. In fact, 
the Department of Justice specifically declined to become 
involved when it was asked. Therefore, it is wholly 
inappropriate for the Federal Government to now demand to share 
the States' proceeds.
    Those who have advocated that the Federal Government is 
entitled to share the proceeds have relied on a provision of 
the Social Security Act. I believe that that provision does not 
apply because the Federal Government does not have a valid 
claim to funds received by the States for settlement of purely 
State claims or for State share of Medicaid expenses.
    Even more significantly, I want to emphasize that many of 
the States' causes of action sought relief completely 
independent----
    Senator Specter. General Fisher, I must interrupt you for 
just a moment. There has been a black bag left on the coat 
stand in the corridor. So if anyone left it there, claim it now 
because it is about to be removed, for obvious reasons.
    Go ahead, General.
    Mr. Fisher. Thank you, Mr. Chairman, and it was not mine.
    Even more significantly, I want to emphasize that many of 
the States' causes of action sought relief completely 
independent of Medicaid. In Pennsylvania, for example, our 
consumer protection claim brought about under the Commonwealth 
unfair trade practices would have entitled us to recover a 
penalty of $1,000 for each pack of cigarettes sold in the 
Commonwealth and $3,000 if the sale was to a senior citizen. 
Every State had claims which were separate and apart from 
Medicaid funding, and I have listed the various examples in my 
testimony.
    The simple fact is that the States' lawsuits are not wholly 
comprised of Medicaid reimbursements. Each State's claim was 
based on violations of numerous State laws. For the Federal 
Government to seek to recover a share of the States' settlement 
of the $206 billion would in the view of the State attorneys 
general be an attempt to take money from the States that 
legitimately belongs to the States and represents the 
settlement of purely States' claims.
    Finally, let me address the proposal that a fixed 
percentage of the State settlement funds be restricted to 
smoking cessation and prevention efforts or, for that matter, 
any other specific category. The States should be permitted to 
use their money as they see fit. In fact, I firmly believe that 
a Federal mandate could be detrimental to the efforts of the 
Governors and the attorneys general to target most of the 
settlement funds to public health.
    Based on my past experience, I believe that legislators 
could wind up viewing this funding mandate as a ceiling rather 
than a floor, therefore making it more difficult for the States 
to commit virtually all of their funds to public health.

                           prepared statement

    Once again, Mr. Chairman, I would like to thank you for 
providing me this opportunity to address the committee. I 
believe the decisions which the Senate and the House of 
Representatives will make will have a significant impact on the 
health of Pennsylvania and our citizens throughout the United 
States.
    Mr. Chairman, I stand available to answer any questions.
    Senator Specter. Thank you very much, General Fisher.
    [The statement follows:]
                   Prepared Statement of Mike Fisher
    Good morning, Chairman Specter, Senator Harkin, and distinguished 
members of the Senate Appropriations Subcommittee on Labor, Health and 
Human Services, and Education. Thank you for the opportunity to address 
the Subcommittee today on behalf of the National Association of 
Attorneys General concerning the States' historic settlement with the 
Tobacco industry. I urge you to support Senator Hutchison's 
legislation, which will allow the States to keep the money rightfully 
earned as a result of this litigation. As you are aware, Senator 
Hutchison's legislation, which now has 44 co-sponsors, has been amended 
into the fiscal year 1999 supplemental appropriations bill that the 
Senate will soon consider.
    Before I begin my remarks, allow me to provide you with the 
following submission from the National Conference of State 
Legislatures, which also urges you to support legislation to protect 
the states' funds from federal interference.
    I've been asked to give you a short overview of the states' 
litigation against the tobacco industry and the subsequent $206 billion 
settlement. In 1994, Attorney General Mike Moore filed the first state 
lawsuit against the Tobacco industry on behalf of the State of 
Mississippi, claiming that the industry had engaged in a 40-year 
conspiracy to keep the truth from the public about the addictive nature 
of nicotine and to cultivate a new generation of smokers. Soon after I 
was elected Pennsylvania's Attorney General in January 1997, I filed 
suit against the tobacco industry and became the 23rd state to file. By 
June of 1997, more than 40 states had filed their own lawsuits.
    On June 20, 1997, the Attorneys General and the industry announced 
a tentative settlement. The tobacco industry was prepared to pay $368 
billion, to acquiesce to FDA regulation and change its way of doing 
business. Of that settlement, $196 billion would have gone to the 
states and the balance would largely have gone to the federal 
government. This agreement was contingent on Congressional approval and 
as you know the required legislation was not enacted. During the period 
of Congressional review, the states' litigation continued and, to the 
consternation of the industry, the states' cases began to go to trial. 
The industry agreed to settle individually the lawsuits brought by 
Mississippi, Florida and Texas and Minnesota.
    In the summer of 1998, with roughly 36 state cases still unresolved 
and with Congress having abandoned efforts to approve the June 20 
resolution, a second effort towards a multi-state settlement commenced. 
This time around, the negotiators focused only on settling the states' 
claims, and set aside those issues in the prior year's negotiation 
which required Congressional action.
    Between July and November of 1998, a group of Attorneys General 
engaged in intensive negotiations with the tobacco industry. I was one 
of the eight negotiators chosen by my colleagues to represent the 
coalition of states suing the industry. After months of negotiations, 
an agreement was signed on November 23, 1998 under which the industry 
agreed to pay the states $206 billion over 25 years to settle our 
claims. I can assure you the states were proceeding on the assumption 
that whatever settlement funds were received would belong 100 percent 
to the states. That is why we ultimately agreed to a total settlement 
figure of $206 billion, an amount almost identical to what the states 
were to receive from the June 20th resolution, rather than the $368 
billion that the tobacco industry had originally agreed to in the 
proposed global settlement in June 1997.
    In addition, the Agreement required the industry to make major 
public health concessions on how it would conduct business in the 
future. I want to emphasize, these were concessions which most likely 
would not have been obtainable in any state's individual lawsuit.
                             key provisions
    While it would be impossible for me to discuss all the terms of 
this complex agreement in the time available, I want to point out the 
major provisions of the Agreement. These provisions include 
restrictions on the tobacco industry's business practices, advertising 
and marketing, especially as they relate to children. The Agreement:
  --removes and bans all tobacco billboards.
  --prohibits the direct or indirect targeting of minors in the 
        advertising, promotion, or marketing of tobacco products.
  --bans the use of cartoons in advertising, marketing, and packaging.
  --restricts brand name sponsorships.
  --removes and bans all transit tobacco advertisements.
  --bans payment for product placement in movies as well as in 
        television shows, theatrical performances, live theater, 
        recorded performances, and video games.
  --restricts distribution of free samples to adult-only facilities.
  --requires proof of age for distribution of free gifts.
  --restricts the use of brand names by third parties and requires 
        tobacco companies to enforce their trademarks.
    The Agreement also:
  --establishes a minimum pack size of 20 cigarettes.
  --requires corporate culture changes among the tobacco defendants, 
        including commitment to assist in the reduction of youth 
        smoking.
  --dissolves the Tobacco Institute, The Council for Tobacco Research, 
        and the Council for Indoor Air Research, and mandates that 
        future trade associations do not act like those of the past.
  --restricts lobbying against laws that limit non-tobacco products 
        that look like tobacco products (e.g., bubble gum).
  --establishes a user-friendly searchable web site of all industry 
        produced documents.
  --establishes a counter-advertising fund and education foundation of 
        at least $1.45 billion, which includes $250 million to fund the 
        study of youth smoking.
  --establishes a $50 million enforcement fund with the National 
        Association of Attorneys General.
    Upon full implementation of the settlement, these fundamental 
industry restrictions and reforms, in combination with the public 
health, youth smoking cessation, and medical research programs 
contemplated by this $206 billion settlement, will by all accounts 
produce significant results in the saving of lives and reduction of 
teen smoking.
    As we sit here today, State Legislatures across the country are 
studying how best to use these proceeds. Without question, public 
health programs will be the principal recipient of the settlement 
funds. In Pennsylvania, for example, I have provided to the Governor 
and our General Assembly the following blueprint for action:
  --Supplement funding for Pennsylvania's children's health insurance 
        program and make funding available for adults without insurance 
        who have not reached the Medicare eligibility age.
  --Expand funding for PA schools to offer comprehensive programs on 
        tobacco use prevention.
  --Increase funding for medical research into tobacco-related 
        diseases.
  --Increase funding for effective smoking cessation programs.
  --Expand funding for increased enforcement of youth smoking laws.
  --Increase support for community-based anti-smoking programs.
    (A copy of my recommendations to the Governor is attached for your 
review.)
    Although Pennsylvania's plan is not yet final, Pennsylvania 
Governor Tom Ridge has also stated that he wants to use the money for 
public health purposes, including smoking prevention and education 
programs. I am confident that our legislature will support our goal to 
spend the $11.3 billion on public health and tobacco cessation 
programs.
    The information available to me indicates that almost all the 
States have initiated plans to use settlement dollars on public health-
related programs. These plans are jeopardized by the federal 
government's threat to recoup the money or restrict how it can be used.
    I sued on behalf of the people of Pennsylvania, not for the federal 
government. The states fought the tobacco industry for more than five 
years, expended considerable time and resources, and assumed 100 
percent of the risk. During this whole time period, the federal 
government sat on the sidelines. In fact, the Department of Justice 
specifically declined to become involved when asked. It is wholly 
inappropriate for the federal government to now demand a share of the 
states' proceeds.
    Those who have advocated that the federal government is entitled to 
a share of the proceeds have relied on a provision in the Medicaid Act. 
I believe that provision does not apply because the federal government 
does not have a valid claim to funds received by the states for 
settlement of purely state claims or for the states' share of medicaid 
expenses. The relevant provisions of the Medicaid Act, 42 U.S.C. 
Sec. 1396a(a)(25) and Sec. 1396b(d), do not justify, let alone require, 
the federal government's attempt to recover part of the states' 
settlement. Under Sec. 1396b(d)(3), the United States can seek a ``pro 
rata share [of reimbursements] to which the United States is equitably 
entitled, as determined by the Secretary,'' by way of reduction to 
federal payments to states. However, under the states' settlement 
agreement, the federal government is not ``equitably entitled'' to any 
portion of the settlement, because the settlement as to that portion 
which may be for Medicaid represents only the states' portion of 
tobacco-related Medicaid expenses. The federal government's equitable 
portion was only reflected in the proposed $368 billion settlement of 
June 1997 that Congress failed to approve.
    Even more significantly, I want to emphasize that many of the 
states' causes of action sought relief completely independent of 
Medicaid. In Pennsylvania, for example, our consumer protection claim 
brought under the Commonwealth's Unfair Trade Practices Act would have 
entitled us to recover a penalty of $1,000 for each pack of cigarettes 
sold in the Commonwealth and $3,000 if the sale was to a senior 
citizen. In addition, prevailing on this claim could have resulted in 
the court ordering the surrender of all corporate profits the tobacco 
industry had from its sales in Pennsylvania.\1\
---------------------------------------------------------------------------
    \1\ Pennsylvania's complaint had ten distinct counts: Count 1, 
Civil Conspiracy/Concert of Action; Count 2, Undertaking a Special 
Duty--willful and negligent breach; Count 3, Fraudulent 
Misrepresentation; Count 4, Fraudulent Concealment; Count 5, Negligent 
Design; Count 6, Strict Liability; Count 7, Unfair Trade Practices 
(consumer protection); Count 8, Public Nuisance; Count 9, Negligent and 
Intentional Entrustment; and Count 10, Unjust enrichment/Restitution.
---------------------------------------------------------------------------
    Every state had claims which were separate and apart from Medicaid 
funding. For example:
  --Many states, like Pennsylvania, had claims for violation of their 
        consumer protection laws. Remedies included significant 
        monetary penalties for each violation, and there were millions 
        of potential violations.
  --Many states, for example, Florida, Ohio and Texas had viable RICO 
        claims. Available remedies included surrender of corporate 
        profits and treble damages. Billions of dollars were at stake.
  --Several states had public nuisance claims. In Iowa, for example, 
        the remedy requested was the refund of the entire price of each 
        cigarette pack sold.
  --Numerous states, such as Connecticut, Minnesota, Vermont and 
        Washington had state law antitrust claims. As in the case of 
        the RICO claims, available remedies included surrender of 
        corporate profits and treble damages.
  --Vermont asserted a claim for violations of its Public Health Act. 
        The remedy was a staggering penalty of $10,000 per violation 
        per day.
  --Even where a state asserted a Medicaid related claim, it was never 
        the sole avenue for relief. Hence, when the Iowa Supreme Court 
        affirmed the dismissal of the Medicaid portion of Iowa's 
        complaint, Iowa's case continued. Similarly, California's case 
        continued even after the dismissal of its Medical claims.
    The simple fact is that the states' lawsuits were not wholly 
comprised of Medicaid reimbursements. Each state's claim was based on 
violations of numerous state laws. For the federal government to seek 
to recover a share of the state settlement of $206 billion would, in 
the view of the state Attorneys General, be an effort to take money 
from the states that legitimately belongs to the states and represents 
the settlement of purely state claims. I can assure you that any such 
effort would inevitably result in nationwide litigation between the 
federal government and the states. This would result in a diversion of 
monies which could otherwise be spent for public health.
    Finally, let me address the proposal that a fixed percentage of the 
states' settlement funds be restricted to smoking cessation and 
prevention efforts or, for that matter, any other specific category. 
States should be permitted to use their money as they see fit to meet 
their particular state's needs. As a former state legislator of 22 
years, I find offensive the notion that the states can't be trusted to 
spend their money wisely. In fact, I believe that the states are better 
situated to determine what level of spending on particular programs 
makes the most sense to the people in that state. These are decisions 
that need to be made at home and not handed down or monitored by a new 
federal bureaucracy.
    In addition, I firmly believe that a federal mandate could be 
detrimental to efforts by Governors and Attorneys General to target 
most of the settlement funds to public health funding in the long term. 
Based upon my past experience, I believe that legislators could wind up 
viewing this funding mandate as a ceiling rather than a floor for 
public health spending. The State Legislatures may see the federal 
government's mandate as a maximum amount they need to dedicate to 
public health measures. This would undercut all we have attempted to 
gain. Give the states who did the work to attain this historic 
settlement the freedom to develop the public health spending plan that 
best meets the needs of their people over the next 25 years. We took 
the risk--allow us to do the job.
    Once again, I would like to thank you for providing me with this 
opportunity to address this Committee. I believe that these decisions 
can have a significant impact on the health of Pennsylvanians and our 
citizens throughout the United States.
                                 ______
                                 
          Letter From Mike Fisher to Governor Thomas J. Ridge
                      Commonwealth of Pennsylvania,
                                Office of Attorney General,
                                  Harrisburg, PA, January 14, 1999.
Hon. Thomas J. Ridge,
Governor, Commonwealth of Pennsylvania,
Harrisburg, PA.
    Dear Governor Ridge: I am very pleased to inform you that on 
January 13, 1999, Judge John Herron, Administrative Judge of the Court 
of Common Pleas of Philadelphia County, approved the Pennsylvania 
tobacco settlement and consent decree, which I helped to negotiate on 
behalf of the Commonwealth. By dismissing all objections to our $11.3 
billion tobacco settlement, Judge Herron has paved the way for the 
timely implementation of the significant health policies and monies 
which are due Pennsylvania under the settlement. Because this consent 
decree holds the participating state attorneys general responsible for 
enforcing its provisions, I can assure you that I will do everything in 
my power to ensure that the tobacco industry operates within the 
parameters of this agreement.
    Decisions on how the settlement proceeds will be used need to be 
made in the near future by you and the General Assembly. I look forward 
to working with you in that process. As Pennsylvania's share of the 
1998 payment may be received prior to the beginning of the next fiscal 
year, I would ask you to consider creating a restricted Tobacco 
Recovery Fund into which all of the tobacco dollars will first be 
deposited upon receipt from the escrow agent. Preservation of monies in 
this way will conserve the principal and result in earnings, actually 
increasing the amount of dollars available to the Commonwealth.
    There are a number of initial recommendations on where these funds 
could best be directed that I would like to offer for your 
consideration:
    1. Establishment of a Pennsylvania Tobacco Settlement Advisory 
Panel. The purpose of this oversight panel would be to advise the 
Governor and the General Assembly on the best use of the proceeds 
coming to the State as a result of the settlement. This panel's ongoing 
role would be to recommend, review and monitor those programs and 
initiatives chosen to receive funding from the settlement funds.
    2. Supplement Funding for Pennsylvania's Children's Health 
Insurance Program. As you are aware, the General Assembly greatly 
expanded the scope of this program in 1998, making CHIP available to 
even more of Pennsylvania's children. Proceeds from the settlement 
could be used to ensure full funding of the program now, and in the 
future.
    3. Encourage Pennsylvania's Schools to Offer Comprehensive School-
Based Programs on Tobacco Use Prevention. The key to curtailing tobacco 
use is to educate our children about its deadly effects. Funds should 
be made available to our schools and education professionals in order 
to give them the resources to acquire and develop new, innovative 
educational programs designed to make children understand the perils of 
tobacco use.
    4. Increase Funding for Medical Research to Improve the Diagnosis 
and Treatment of Tobacco-Related Illnesses. Pennsylvania is home to 
some of the pre-eminent research hospitals and cancer centers in the 
nation. Pennsylvania should substantially increase its commitment to 
these institutions, allowing them to strengthen and expand their 
efforts in diagnosing and treating cancer and other tobacco-related 
illnesses.
    5. Increase Funding for Effective Smoking Cessation Programs. 
Effective and accessible cessation programs are integral to any 
comprehensive state tobacco control effort. Steps should be taken to 
provide direct cessation services to the medically uninsured and 
medical assistance recipients. Revenues could also be used to encourage 
private health plans to cover cessation programs.
    6. Limit Youth Access to Tobacco Products. Funds should be used to 
develop and enhance retail education programs to ensure that store 
owners are aware of the law and are taking every necessary measure to 
limit youth access to tobacco products. In addition, state and local 
law enforcement agencies, including the Office of Attorney General, 
should receive funding to implement tougher enforcement initiatives.
    7. Support Community-Based Anti-Smoking Programs. The Center for 
Disease Control and Prevention reports that some of the most effective 
anti-smoking initiatives are community-based programs. Local programs 
can effectively utilize individual community leaders, community 
businesses, ethnic and cultural groups, and school and youth 
organizations.
    Directing the funds to be derived from this settlement to these 
kind of efforts, as well as other related proposals, will be important 
for Pennsylvania's future. The careful selection of where this money is 
spent, should help Pennsylvania to defeat any claim that may be 
asserted by the Health Care Financing Administration seeking 
reimbursement for federal medical assistance funding.
    I am truly grateful to have had the opportunity to help negotiate 
this historic settlement, and proud to represent Pennsylvania in this 
action, and I look forward to working with you to assure that the best 
decisions are made in utilizing these dollars.
            Very truly yours,
                                               Mike Fisher,
                                                  Attorney General.
STATEMENT OF HON. JOHN CORNYN, ATTORNEY GENERAL OF 
            TEXAS
    Senator Specter. Our next witness is the distinguished 
Attorney General from the State of Texas, John Cornyn----
    Senator Hutchison. ``CORR-nin.''
    Senator Specter. ``CORR-nin.'' Always good to have a fellow 
Texan here.
    Mr. Cornyn. You bet.
    Senator Specter. Mr. Corrnyn has been in the practice of 
law, a member of the State judiciary, a district judge, a 
presiding judge, and a member of the Texas Supreme Court. 
Welcome, Judge--General Cornyn. We look forward to your 
testimony.
    Mr. Cornyn. Thank you, Chairman Specter. It is a pleasure 
for me to be here today before the committee and particularly 
to support the efforts of my Senator, Texas Senator Kaye Bailey 
Hutchison, by clarifying and attempt to clarify what I believe 
to be the current law, which is that the funds that have been 
recovered by the States through their individual tobacco 
lawsuits as well as the collective settlement of 46 States 
amounting to $206 billion, that those are not recoverable by 
the Federal Government, but HCFA, based on the legal theories 
that were alleged in virtually every State, with maybe one or 
two exceptions.
    I first would like to discuss the lawsuit that was brought 
by the State of Texas, which was settled separately, as you may 
recall, in January of 1998, and to address the various legal 
theories that were alleged in that case. I would also like to 
explain to you why any attempt on the part of the Federal 
Government to withhold Medicaid dollars which the State is 
legally authorized to receive is without legal justification.
    Finally, I would like to provide you with some information 
about the various programs to which the Texas tobacco recovery 
already--will be dedicated under a memorandum of understanding 
between the leaders of our State Senate, our House 
appropriations committee, and my predecessor attorney general.
    The Federal Government I believe has no legal right to 
withhold Federal Medicaid money, money that the State of Texas 
is legally authorized to receive, money that provides health 
care to children and poor people all over Texas, because the 
State of Texas did not bring a cause of action seeking recovery 
of Medicaid money under the Medicaid third party recovery 
program. In short, I do not believe there should be a Medicaid 
recoupment because no Medicaid recovery was either sought or 
obtained.
    The Texas lawsuit was brought to recover money expended by 
the State to provide medical treatment to citizens suffering 
from smoking-related illnesses and to seek appropriate 
injunctive relief against the defendants' continued illegal 
conduct. The general categories of claims were four in number: 
first, the Federal Racketeer-Influenced and Corrupt 
Organization Act, or RICO; secondly, Federal and State 
antitrust claims; third, equitable principles of Federal and 
State common law; and fourth, under products liability law.
    The State of Texas made no claims seeking recovery of 
Medicaid money under the third party recovery program, and yet 
the Federal Government is now threatening to withhold Medicaid 
money which the State of Texas is authorized by law to receive.
    I believe that if you look, in short, at the allegations 
contained in the Texas lawsuit and in the judgment that was 
actually, the settlement that was actually obtained awarding 
the State of Texas $17.3 billion against the tobacco industry, 
in addition to $3.3 billion in attorney's fees through a 
national arbitration award, that you will see that none of it 
relates in any way to the Medicaid program.
    Now, I would like to mention to you that under the 
memorandum of understanding entered into by the chairman of the 
Senate finance committee of the State of Texas and the House 
appropriations committee and the attorney general at the time, 
my predecessor, there are funds dedicated to tobacco cessation 
programs. In fact, under the memorandum of understanding $200 
million would already go to a tobacco cessation funding 
program. I believe, based on the comments of the leadership in 
the State Senate and the State House, that in fact the vast 
majority of the funds will go to public health as well as 
tobacco cessation programs.
    Now, if you will forgive me, when I learned a little bit 
more about the nature of Senator Hutchison's proposal and 
HCFA's claim to recoup up to 57 percent of what the States had 
recovered, I was reminded of a play that my daughter 
participated in when she was in elementary school called ``The 
Little Red Hen.''
    You may recall that the little red hen asked the cat and 
the rat and the pig to help her plant wheat, harvest the wheat, 
grind it into flour, and finally bake it into bread. And even 
though each of them were unwilling to help with the hard work, 
once the fruits of her labor were plain they were more than 
willing to enjoy the fruits of the little red hen's labor.
    Now, the little red hen in this instance is the States, who 
asked for and received no help from the Federal Government when 
it took on the tobacco industry. But now, after the risks have 
been taken, after the work has been done, the Federal 
Government is like the cat, the rat, and the pig in ``The 
Little Red Hen,'' all of whom want to enjoy the benefits of the 
States' labor.

                           prepared statement

    In summary, Mr. Chairman, members of the committee, the 
attempted recoupment by HCFA of the tobacco recoveries of the 
State of Texas and the other States is not fair, it is not the 
law, and this committee ought to reject it.
    Thank you very much.
    Senator Specter. Thank you very much, Attorney General 
Cornyn.
    I very well remember the ``Little Red Hen'' story. I just 
have one question before we go on to the next witness, is the 
Federal Government the cat, the rat, or the pig, or a 
combination of rat and pig? [Laughter.]
    Mr. Cornyn. I believe I will not comment on that, Senator.
    Senator Specter. Well, we will press you for an answer when 
the questions and answers comes.
    [The statement follows:]
                   Prepared Statement of John Cornyn
    Thank you for allowing me to offer my testimony on Senator 
Hutchison's proposal. I would like briefly to address three issues:
  --I would like to discuss the lawsuit brought by the State of Texas 
        against the tobacco companies and to address the various causes 
        of action and specific items of relief that we sought.
  --I would like to explain to you why any attempt on the part of the 
        federal government to withhold Medicaid dollars which the state 
        is legally authorized to receive is without legal 
        justification.
  --And finally, I would like to provide you with information about the 
        various programs on which the State of Texas is expending money 
        that it has received in its tobacco settlement.
                           the texas lawsuit
    Simply put, the federal government has no legal right to withhold 
federal Medicaid money--money that the State of Texas is legally 
authorized to receive--money that provides health care to children and 
poor people all over Texas--because the State of Texas did not bring a 
cause of action seeking recovery of Medicaid money under the Medicaid 
third-party liability program.
    The lawsuit filed by Texas was brought to recover money expended by 
the State to provide medical treatment to citizens suffering from 
smoking-related illnesses and to seek appropriate injunctive relief and 
the defendants' continued illegal conduct.
    The State alleged violations or causes of action in four broad 
areas of law: (1) Federal Racketeer Influenced and Corrupt 
Organizations Act (RICO); (2) Federal and state Antitrust Acts; (3) 
Equitable principles of Federal and State Common Law; and (4) Product 
Liability Law. The State of Texas made no claim seeking recovery of 
Medicaid money under the third-party liability program. And yet the 
federal government is threatening to withhold Medicaid money to which 
the State of Texas is authorized by law to receive--money that pays for 
health care treatment to children and the poor in the State of Texas--
in an attempt to lay claim to money to which the federal government has 
no right.
the misapplication of the medicaid third-party liability provisions to 
                the lawsuit filed by the state of texas
    It is widely believed that the State of Texas--that, indeed, each 
of the fifty states--filed suit against the tobacco companies under 
each state's Medicaid third-party liability recovery statutory 
provisions that each state participating in the Medicaid program is 
required to enact. I have not examined the pleadings filed by each of 
the fifty states, so I cannot declare that no other state filed a cause 
of action and sought relief under that state's Medicaid third-party 
liability recovery statutory program. But I can declare that the State 
of Texas did not. Then why do so many assume that we did? The answer to 
that can be explained by any first year law student.
    As every first year law student knows, proving up damages and 
proving liability are two very different things. Simply put, there are 
two components that an attorney bringing a lawsuit that seeks relief in 
the form of damages is required to prove. First, the attorney must 
prove a theory of liability--a theory, whether a violation of common 
law or statutory law, that imposes a duty to act or not act on the 
defendant sued. And second, the attorney must prove damages, however 
calculated.
    In the tobacco lawsuit filed by the State of Texas, the State 
proved damages by estimating the amount of money that the State expends 
on health care costs involving tobacco-related illnesses. And what more 
logical place to seek information on the costs incurred by the State 
than by examining expenses incurred under the State's largest health 
care program--the Medicaid program. But that was not the only component 
in calculating the costs of health care incurred by the State. The 
State also examined costs incurred in providing health care to the 
indigent, to persons in jails and prisons, and to persons receiving 
care in public hospitals, none of which are part of the Medicaid 
program.
    Moreover, in alleging liability, the State never claimed a 
violation of or sought recovery under the State's Medicaid third-party 
liability recovery program. As we have seen, the State of Texas alleged 
violations of or asserted claims under federal and state statutes and 
federal and state common law under 15 different causes of action and 
sought 20 specific items of relief--and not one cited or even mentioned 
state or federal Medicaid provisions.
    Thus, as a matter of law, the federal government is not entitled to 
lay claim to any of the money received by the State of Texas under its 
settlement agreement with the tobacco companies.
  the uses to which the money received by the state of texas will be 
                               dedicated
    I've addressed the legal issues involved. Now let me address the 
public policy issues. Any attempt by the federal government to dictate 
to the states how the tobacco money must be spent rests, in part, on 
the paternalistic notion that the federal government knows better than 
the state does what the health care needs of those states are. But each 
state's needs are different and each state should decide just how its 
money should be spent.
    The State of Texas will receive an estimated $17.3 billion during 
the next 25 years by virtue of its settlement with the tobacco 
companies and all of the money that the State has received so far has 
been earmarked for health-related expenditure, either in the form of 
direct reimbursements to political subdivision providing health care 
and to health education facilities or in the form of the creation of 
permanent trust funds, the income from which will be used for public 
health and health education, including:
    $2.3 billion was been directly set aside for counties and hospital 
districts to compensate them for unreimbursed health care costs. First, 
there will be direct disbursements of money--$450,000,000 in total--
during this year and the following two years to reimburse counties and 
hospital districts for unreimbursed health care costs they incur 
providing health care to indigents, to persons in jail, and to persons 
in prison. The remaining approximately $1.8 billion will be placed in a 
permanent trust fund created by law, the earnings from which will, in 
perpetuity, be used to reimburse the counties and hospital districts.
    During the next two years, the legislature proposes to disburse 
$881 million to fund, in conjunction with the federal government, a 
children's health insurance program; a state-wide tobacco pilot program 
for anti-smoking program directed at children; and the creation of 11 
different permanent endowments at 11 public institutions, the income 
from which will support research and other programs that benefit public 
health, the creation and operation of a children's cancer center, and 
the creation of an institute for border health. Specifically, the 
proposed expenditures include:
    1. $151 million or other such amounts as needed for the purpose of 
providing funding, in conjunction with the federal government, for the 
Children's Health Insurance Program pursuant to Title XXI of the Social 
Security Act;
    2. $200 million to fund tobacco pilot program for the purpose of 
supporting smoking cessation program, enforcement of juvenile smoking 
laws, counter-marketing promotional efforts directed toward youth, 
general anti-tobacco educational programs, and other similar 
activities;
    3. $200 million to create an endowment for the benefit of the 
University of Texas Health Science Center at San Antonio for the 
purpose of establishing, maintaining, and operating a children's cancer 
center;
    4. $100 million to the University of Texas M. D. Anderson Cancer 
Center in Houston to create an endowment fund for research and other 
programs that benefit public health;
    5. $50 million to the Texas Tech University Health Science Center 
and the University of Texas at El Paso to create an endowment fund for 
research and other programs, including the establishment and operation 
of an institute for border health;
    6. $50 million to the University of Texas Southwestern Medical 
Center at Dallas to create an endowment fund for research and other 
programs that benefit the public health;
    7. $25 million to the University of Texas Medical Branch at 
Galveston to create an endowment for research and other programs that 
benefit the public health;
    8. $25 million to the University of Texas Health Science Center at 
Houston to create an endowment fund for research and other programs 
that benefit the public health;
    9. $25 million to the University of Texas at Tyler to create an 
endowment fund for research and other programs to benefit the public 
health;
    10. $25 million to Texas A&M University Health Science Center to 
create an endowment fund for research and other programs that benefit 
the public health;
    11. $25 million to the University of North Texas Health Science 
Center at Fort Worth to create an endowment fund for research and other 
programs that benefit the public health;
    12. $5 million to the Regional Academic Health Center to create an 
endowment fund for research and other programs that benefit the public 
health.
    And finally, the memorandum of understanding calls for the creation 
of four separate permanent trust funds, the earnings of which will be 
used for the following: 1. Tobacco education and enforcement; 2. 
Children and public health; 3. Emergency medical services and trauma 
care; and 4. Rural health facility capital improvements.
                           the little red hen
    The recoupment claims of the federal government, for funds that 
they played no role in obtaining, remind me of the children's story 
about the Little Red Hen. You remember: the little red hen asked the 
cat, the rat, and the pig, to help her plant the wheat, harvest it 
after it had grown, grind it into flour, and finally bake it into 
bread. But even though they were unwilling to help with the hard work, 
all of the little red hen's neighbors were willing to enjoy the fruits 
of her labor.
    Now, the little red hen in this instance is the states, who asked 
for and received no help from the federal government when it took on 
the tobacco industry. But now, after the risks have been taken by the 
state, after the work has been done, the federal government is like the 
cat, the rat, and the pig--all of whom wanted to enjoy the benefits of 
someone else's labor.
    In summary, Senators: Its not fair, it's not the law, and this 
committee ought to reject it.
STATEMENT OF HON. TOM MILLER, ATTORNEY GENERAL OF IOWA
    Senator Specter. Our next witness is the Honorable Tom 
Miller, Attorney General of Iowa. He served in that position 
from 1979 to 1991 and again since 1995; former city attorney 
and private practitioner. Welcome, Attorney General Miller. We 
look forward to your testimony.
    Mr. Miller. Thank you, Senator Specter and Senator 
Hutchison, for having this hearing and for inviting me. What I 
want to do is briefly describe the Iowa hearings, briefly talk 
about first principles, talk about how we want to spend the 
money in Iowa, at least I hope we spend the money in Iowa, and 
then summarize.
    In Iowa we brought a common law, a series of common law 
claims for the Medicaid money. We also brought a Consumer Fraud 
Act claim. We felt that the Consumer Fraud Act claim was the 
stronger one of the two, and indeed the court rulings bore that 
out.
    I would mention, however, that to the extent we prevail on 
consumer fraud there is some obligation of one type or another 
to spend that money either returning it to individual smokers, 
which would be impossible, or spending it on tobacco 
prevention. So tobacco prevention really is tied to the 
consumer fraud claim.
    We brought a State RICO claim. We brought a claim 
concerning nuisance. And we were looking for a series of fines. 
So we tried to hit a number of aspects in our lawsuit. The one 
that looked to be the most successful would have been consumer 
fraud.
    Whenever we deal with these issues, particularly if they 
are complex or difficult or controversial, we always go back to 
the first principles of why we did this in the first place. We 
did it for two reasons, brought these lawsuits. The first 
reason for many of us, including myself, were the reasons that 
you alluded to a few minutes ago, Senator Specter: 400,000 
Americans dying each year from tobacco-related disease, 5,000 
Iowans, 3,000 kids starting every day, 1,000 of those will die 
from tobacco-related disease. That is the main reason that we 
got in the lawsuits. That is the main reason I think we are 
here today.
    We got in the lawsuits, too, for the money. The money was 
considerable and important to us, but in the whole scheme of 
things secondary.
    In Iowa, what I have proposed and our Governor, Tom 
Vilsack, has agreed in principle to these proposals, although 
he has not signed onto the dollar amounts, we propose to spend 
each year $17.7 million of the recovery on tobacco prevention 
type programs, about $8.5 million on school-based programs, 
cessation, research, local and community programs, about $6.5 
million on public education, including TV and media ads, $2 
million on enforcement, and one-half million on evaluation, 
what is working and what is not working.
    We are at the point where our legislature is coming down 
towards the end. Decisions have to be made. It is very, very 
important to our State that you all make the decision on what 
happens to this money that is claimed by the Federal 
Government.
    Senator Hutchison, we are deeply indebted for you to take 
the leadership on this issue and, as we discussed this morning, 
bring about sort of a coup on the Senate Appropriations 
Committee to get us to where we are. We are deeply indebted to 
you.
    I also took heart from the witness from the administration 
when he indicated that they are willing to compromise on this. 
They have had their set of priorities where they want the State 
money to be spent. As they indicate that there is movement to 
compromise on that, I would hope that there is some compromise 
resolution, because what I would hate to see happen is for the 
Congress and the administration to continue to fight on this 
issue and not reach resolution.

                           prepared statement

    In that case, the Governor of Iowa, the Attorney General of 
Iowa, the legislature in Iowa, and all Iowans lose, because we 
cannot spend that money, and we would spend it, I think, in an 
intelligent way.
    I just would encourage some sort of compromise to get this 
resolved and have us do our good works in the State. Thank you.
    [The statement follows:]
                    Prepared Statement of Tom Miller
    I appreciate the opportunity to testify before this subcommittee on 
an issue of great importance to my state and the nation.
    My message today is simple. When leaders in Washington and in state 
capitols discuss tobacco issues (including today's issue of federal 
recoupment) the focus should always remain on the key public policy 
goal--reducing the death and suffering caused by tobacco usage. Tobacco 
is the number one preventable cause of death in the United States. The 
statistics are staggering--420,000 Americans, including 5000 Iowans, 
die yearly from smoking. In the relatively small state of Iowa, 
approximately 12,000 Iowa kids become new daily smokers each year and 
about 4,000 of these will die from tobacco caused disease.
    The State of Iowa has been in the fight against the tobacco 
industry for some time. On November 27, 1996, Iowa became one of the 
earlier states to file a lawsuit against the tobacco companies. Our 
lawsuit contained several causes of action. Not only did it include a 
claim for reimbursement of Medicaid costs incurred as a result of 
tobacco related illnesses, but strong claims under the Iowa Consumer 
Fraud Act, common law nuisance and the new Iowa law concerning ongoing 
criminal conduct.
    Since the settlement agreement was signed on November 23, 1998, 
attention in Iowa, like all states, has turned to how the settlement 
money should be expended. On February 18, 1999, I, along with Tobacco 
Free Iowa (a state-wide tobacco control coalition) proposed that $17.7 
million of the settlement money be spent on a Comprehensive Iowa Plan 
for Tobacco Prevention and Control. I was joined at the announcement by 
Governor Tom Vilsack who pledged to support an effective tobacco 
control program in our state. Leaders of both parties in the Iowa 
Legislature also have indicated a willingness to support efforts to 
reduce youth tobacco use.
    The Comprehensive Iowa Plan for Tobacco Prevention and Control is 
based on recommendations of the Centers for Disease Control and input 
from tobacco control advocates in Iowa. The plan has five components: 
The first component will support state and local programs to reduce 
tobacco use, including school programs, cessation programs, research, 
local partnerships and community programs, and educational programs. 
The second component is sponsorship and support of public education 
through tobacco-free media messages on TV, radio, and other media, and 
special events and promotions. The third component is strengthening of 
enforcement of tobacco control laws by local law enforcement and 
creating a tobacco control unit in the Attorney General's Office. The 
fourth component is the ongoing monitoring, assessment, and evaluation 
of the plan.
    Based on the experience of other states (notably California and 
Massachusetts, and more recently Oregon), I believe this plan can have 
a real impact in reducing the prevalence of teen smoking in Iowa.
    The issue in front of this subcommittee today, of course, is 
whether the federal government should try to recoup part of settlement 
recovery. I strongly urge the Congress to allow states to keep all of 
money. This is a fair and just result. The states took the risks, 
invested the time, money, and talent, and brought these lawsuits to a 
successful resolution. The states should receive the rewards.
    I also urge the Congress and the administration to act in an 
expeditious manner. Delay on this matter only adds uncertainty and 
confusion. This issue has been before the Congress and the 
Administration for over one and one-half years. There was an 
opportunity to resolve the Medicaid recoupment question as part of the 
budget bill last year--the Congress and the Administration failed to do 
so. In Iowa, the Governor and the Legislature want to appropriate the 
money in a responsible way that benefits our citizens. They cannot do 
so until you and the President act.
    I thank you for the opportunity to testify today.

                             tobacco funds

    Senator Specter. Thank you very much, Attorney General 
Miller.
    With only 2 of us here, I think we will set the clock at 10 
minutes and see how that goes.
    We have just received a letter from the Secretary of Health 
and Human Services, Donna Shalala--it actually arrived shortly 
after noon, 12:03--expressing the Secretary's strong opposition 
to the provisions approved by the Senate Appropriations 
Committee, a good bit tougher in tone--and we will make this 
available to you--than the testimony which was given earlier 
today by Deputy Administrator Hash, whereas I note the prepared 
text suggests that the States keep 100 percent of the tobacco 
funds in exchange for a commitment to use a portion of the 
proceeds to reduce youth smoking, protect tobacco farmers, 
improve public health, and assist children.
    As I listen to the testimony, especially by Attorney 
General Cornyn and Attorney General Miller, and I think by 
Attorney General Fisher, too, that the Federal Government has 
no claim to the funds, so in a sense the legislation would be 
unnecessary, although there might be considerable controversy. 
So I think there is an interest, as General Miller expressed, 
to resolve it so that plans can be made and so that we do not 
get into litigation between the States and the Federal 
Government, which would be both unseemly and very, very costly 
and time-consuming.
    Everyone has talked about using the funds for smoking 
prevention and for medical purposes. There have been a variety 
of percentages tossed around by a number of Senators as to how 
much ought to be allocated for those purposes. But from what I 
hear, all the money, at least under the memorandum of intent 
which Attorney General Miller talked about and the programs 
that General Fisher is talking about, Mr. Cornyn as well--and I 
would be interested in your views on this, too, Governor 
Patton, because I did not hear your testimony; I came in right 
at the tail end--if the money is all to be spent along those 
lines, what would the objection be to having that as a 
condition, that all the funds be spent in the lines which you 
gentlemen have testified to?
    What do you think, Attorney General Miller?
    Mr. Miller. Well, like I said, I feel very strongly that 
you all should compromise on this and work it out. One possible 
area of compromise is to say that some of this money really was 
through the consumer remedy and that that money in effect 
should be spent on tobacco prevention. What that percentage is, 
I do not know what the magic percentage is.
    But I think if there is some compromise the bulk of the 
money should be free and clear, that there should be no 
conditions on the money. Part of it perhaps should be on 
tobacco prevention to dovetail with the consumer remedy that 
was in most of our lawsuits and was very, very much part of 
ours.
    I think that if there is any condition on part of the 
money, there should not be a lot of regulation. There has been 
some talk about States certifying that they have spent the 
money in the category. Maybe that should work. If there is a 
tobacco prevention category, States should have great freedom 
to use it in whatever ways that they want in tobacco 
prevention, consistent with the concept of laboratories of 
democracy.
    But I view that as some sort of compromise that maybe you 
all could work towards at some point.
    Senator Specter. Well, I think your point about the absence 
of regulation is a good point and one that I would subscribe 
to. I do not see having a limitation only to a portion of 
consumer fraud, which would then implicate tobacco prevention.
    Attorney General Shalala thinks she has a claim to this on 
Medicaid. I do not know what the quality of the case is. I know 
it is one which ought not to be litigated. But if there is a 
claim on Medicaid, then that would support a conclusion that 
some of the funds ought to be used for health purposes.
    Governor Patton, what is your thinking on this?
    Governor Patton. Well, there is a fundamental principle 
involved. As the attorneys general have stated and we the 
governors reiterate, this is the State funds that have been 
recovered for a broad variety of things like many other things 
that we may recover money for, and it really is a decision that 
should be made by the States.
    I think getting down to micromanagement in the area of like 
smoker cessation just illustrates the lack of wisdom for the 
Federal Government to make these decisions. These gentlemen 
evidently paid a great deal of attention to smoker cessation 
programs in the negotiations. For one thing, the cost of the 
program, 45 cents a pack, is in itself a vehicle of reducing 
consumption of cigarette products.
    The prohibition against many, many forms of advertisement--
another smoker cessation program. The allocation of almost $2 
billion specifically for smoker cessation programs illustrates 
that the attorneys general addressed this subject as a part of 
this settlement. On the one side they negotiated some smoker 
cessation programs and on the other side they negotiated some 
compensation for damages to various degrees.
    So then for the Federal Government to come in and say, 
well, what the attorneys general negotiated is not adequate and 
we need to insist on a certain portion of the States' money 
going for this, I think is incorrect. So I think that--I think 
that as a practical matter most of the money will end up being 
spent in the areas that is generally being discussed both in 
the State and the Federal level, as my comments related.
    But as a matter of principle, I think that the Federal 
Government should clarify the intent of the existing 
legislation because, as these gentlemen have said, we have a 
very strong position the Federal Government does not have this 
authority. If the administration is going to continue to 
insist, as they indicate that they have, the effect of Federal 
Government legislation will just eliminate protracted 
litigation, which will delay this money being effectively used 
for the benefit of the people of the country.
    Senator Specter. Well, Governor Patton, I do not agree with 
you as a matter of principle that the States ought to have full 
sway to make the decision. Secretary Shalala in her letter 
points out that in 1998 States recovered some $642 million from 
third party claims and the Federal share was some $400 million.
    You may articulate as a practical matter that the funds 
will be used for cessation and public health purposes, but they 
may not be. I am not talking about micromanagement, but, 
speaking only for myself, I am not prepared to turn over all 
the money carte blanche to the States.
    There just simply needs to be assurance that the moneys 
will not be used for some other important State purpose. But I 
am not at all talking about micromanagement. Suppose the 
conditions were that there would be on tobacco prevention just 
as Attorney General Fisher outlines it, and school education 
and public education and insurance coverage for children who 
cannot afford it, but that will be given related to damages 
caused by tobacco, and without any regulations, and something 
along the certification line which would be minimally 
intrusive? Attorney General Fisher, what is your thought about 
a proposal like that?
    Mr. Fisher. Mr. Chairman, I think the problem with a 
proposal like that is that not one shape does fit all. You have 
50 States across this country and the District of Columbia and 
territories who have shared or will share in this settlement or 
their four individual State settlements.
    I think you have to go back to the fundamental principle of 
whose moneys are we talking about. I believe these moneys are 
clearly moneys which were obtained by the States as a result of 
their State lawsuits. I am willing to admit, as I have in my 
testimony, that part of our suit did seek recovery of some 
Medicaid funds. There is no question about that. But we did 
have other counts contained therein.
    But there is a real difficult--I think it is going to be 
extremely difficult for the Congress and for the Federal 
Government to try to ascertain what that set percentage is 
across the board. When you try to put some categorical 
earmarking on the funds, I believe it presents some real 
difficulties in the various States shaping an appropriate 
program.
    Senator Specter. Well, suppose there are no categorical 
amounts, that the whole fund is left to the States, but with 
the kind of broad outlines that you have articulated that it is 
your view the moneys ought to be spent for.
    Mr. Fisher. The one point that I raised in my testimony, I 
am concerned that--let us say that the resolution was that 15 
percent of the total dollars was to be spent on a laundry list 
of funds.
    Senator Specter. I was thinking something more like 100 
percent.
    Mr. Fisher. Well, I would like to stay between 5 and 15 
percent. But just so whatever the percentage was.
    Senator Specter. Well, I am not going to go above 100 
percent, no matter what you say. [Laughter.]
    Mr. Fisher. And I will not go below zero, I promise.
    But whatever the percentage is, I think the potential then 
is that when we are working and as the governor and I are 
working back in Pennsylvania to try to convince the 
legislature--and I think we have made real progress--that we 
should spend practically all of our funds on public health and 
tobacco cessation programs, that by earmarking one percentage 
for a specific category you may give many legislators a signal 
that then they can spend the rest of the moneys for such things 
as tax reduction and filling potholes and other projects which 
really were not the intent of what I filed my suit for and my 
colleagues filed suit for.
    I think that is one of the real dangers in the Federal 
Government's stepping in and implementing a mandate that I do 
not believe is necessary for the States to carry out 
comprehensive programs.
    Senator Specter. Well, my red light is on, Attorney General 
Cornyn. So I am going to leave you to Senator Hutchison, and I 
hope she does pursue whether the Federal Government is the cat, 
the rat, or the pig.
    Senator Hutchison.
    Senator Hutchison. I think General Cornyn and I would 
probably agree on the answer, but neither of us are going to 
probably share that with you today.
    Let me say first I do thank the chairman for holding this 
hearing and for having this panel, because I think we are 
getting the views of the people who are out there on the front 
line dealing with this issue and many of the ones who were 
creative enough to go forward on this settlement.
    I have a question first for General Cornyn, and that is on 
the 25 percent ``set-aside'' for tobacco cessation programs. 
You mentioned that you thought probably Texas would be spending 
maybe $200 million out of the $2 billion-some, which would not 
meet the 25 percent category probably. But regardless of that, 
it has been suggested when you are talking about not having 
strings and trying to do it in a way that is not obtrusive on 
State authority that Secretary Shalala should have the ability 
to veto Medicaid money, the State's portion, if she finds that 
the State has failed to meet her definition of the 25 percent 
in the categories which she has mentioned--reduce youth 
smoking, protect tobacco farmers, assist children, and promote 
public health--and if she feels that that 25 percent does not 
meet those stated purposes, that she would withhold the money.
    Now, I would like to ask you, what would that do to a 
State's budgeting process?
    Mr. Cornyn. Well, of course the impact would be on the most 
vulnerable portion of our population, the beneficiaries of the 
Medicaid program. I think just the lack of wisdom of that I 
would like to think is obvious.
    Also, under the Texas settlement, which totaled $17.3 
billion plus attorney's fees, that would be $4.3 billion that 
is mandated by the Federal Government to be spent on smoking 
cessation programs. As you alluded to earlier----
    Senator Hutchison. You would have a fancy program.
    Mr. Cornyn [continuing]. It would be quite a cottage 
industry on providing smoking cessation programs in the State.
    As I said, under the memorandum of understanding and I 
believe under the appropriation bill that has already been 
introduced in the Texas legislature there is a provision made 
for a substantial amount, $200 million, for smoking cessation 
programs in Texas.
    So I think you are a better expert than I am in terms of 
its budgetary impact, but I think it is fair to conclude it 
would have a disruptive impact on the State's ability to plan 
how to spend this money in the manner it deems most 
appropriate.
    Senator Hutchison. Let me ask another question. In Donna 
Shalala's letter, which I just received this morning as well, 
it states that perhaps there could be legislation, Federal 
legislation that would resolve the Federal claim, the Medicaid 
claim, in exchange for a commitment by the States to use that 
portion of the settlement for shared priorities--reduce youth 
smoking, protect tobacco farmers, assist children, and promote 
public health.
    My question to the attorneys general, any of whom would 
like to answer, is if we could pass a law that would require 
the 25 percent, why would we not be able to pass a law that 
would allow the Federal Government to make a claim under 
Medicaid and change the present statutory mechanism?
    Mr. Cornyn. Well, the concern that jumps out at me, 
Senator, is a retroactivity problem under the United States 
Constitution. In the case of the Texas settlement, the 
settlement was consummated in January of 1998 and now to pass a 
law, which ordinarily should operate prospectively, to operate 
retroactively to pick up and dictate the terms of how that 
money is spent I think creates some very serious constitutional 
questions.
    Senator Hutchison. I was really referring to the Federal 
Government's ability, the Congress, to pass a law saying, 
changing the statutory language that precludes the Federal 
Government from being part of a settlement or an overpayment. 
In fact, let me just go back to the point that, is not the 
language upon which HCFA is relying that--is it not usually 
used for overpayments or mistakes in billing?
    Is there a record of it having been used for other types of 
lawsuit results in the past? Or is this a new and creative 
interpretation? Then following that, if that is the case, could 
we not change the law?
    Mr. Cornyn. I think this is a novel application of the 
third party recovery provisions under the Social Security Act, 
and I know of no precedent. In fact, my review of the law shows 
that this would be the first time that this type of thing has 
happened.
    As to changing the law for future prospective lawsuits by 
the Federal Government against the tobacco industry to recover 
for their share of the Medicaid costs, I think that is 
certainly within the power of the Federal Government to do, 
which would authorize that kind of litigation.
    Senator Hutchison. Yes, General Fisher?
    Mr. Fisher. Senator Hutchison, I would agree with General 
Cornyn on that, that I think that Congress could change the law 
however they say fit in that regard.
    But I also direct this subcommittee to the fact that there 
is currently a law on the books, which is the Federal Medical 
Care Recovery Act, which we believe--and our counsel has 
provided us a legal memorandum--which we believe if the Federal 
Government chose to exercise their rights to recover their 
Federal share of Medicaid, that they could pursue that remedy 
under that existing act.
    But even if someone disagreed with this interpretation and 
felt that you needed additional Federal legislation, I believe 
you could change the Social Security Act to make it clear that 
the Federal Government did have a right to go after the 
industry for that balance that in essence was left on the 
table.
    Remember, there is a difference between $206 billion and 
$368 billion, and that $368 billion--that difference is the 
amount of money which otherwise would have gone to the Federal 
had the original June 20th resolution been enacted.
    Senator Hutchison. Then you agree with General Cornyn's 
interpretation of the present HCFA statute, that it is usually 
used for overbilling and mistakes in billing?
    Mr. Fisher. Yes, I do concur with that.
    Senator Hutchison. General Miller?
    Mr. Miller. I would just, add one other category where it 
is commonly used is on personal injury actions, where someone 
is in an automobile accident, Medicaid has paid for the medical 
costs, and then routinely the States secure part of that, that 
judgment or settlement, for the Medicaid expenditures and then 
that is shared with the Federal Government. That is where it is 
commonly done.
    Senator Hutchison. It is a cost related to that particular 
type of lawsuit.
    Mr. Miller. Right.
    Senator Hutchison. Rather than a general sort of 
scattershot, which is what they are claiming now, from what I 
see.
    Mr. Miller. Yes; they are claiming that this is analogous 
to those kinds of accidents.
    I would agree with my colleague from Texas, though, that to 
try and do it now sort of looking back would be difficult. The 
tobacco companies would argue that it is unfair, perhaps 
unconstitutional, for them to pay the States and the Federal 
Government if you authorized a Federal action for the same sort 
of thing.
    Senator Hutchison. You are saying Medicare is the better 
approach for the Federal Government than Medicaid?
    Mr. Miller. Very much so.
    Senator Hutchison. Governor Patton, you probably could 
speak to the issue of what it does to a budgetary process if 
the Federal Government arbitrarily says 25 percent has to be 
spent on certain types of programs. What would that do to your 
budgeting capabilities in Kentucky?
    Governor Patton. Well, until this issue is settled I would 
not recommend the expenditure of any of the funds, because it 
would be irresponsible to do so. Our legislature does not meet 
until next year, so we are really not up against the plow like 
some of the other States are. But we do want to have this issue 
resolved in a way that will let us begin, very quickly to begin 
to think about the use of these funds.
    Senator Hutchison. Would the other States like to talk 
about whether money is being withheld? I understood that some 
are putting it into escrow until this matter is settled. So it 
is clearly something that we need to address and clarify, from 
the things that I have heard.
    Are any of you others having experiences of this type?
    Mr. Miller. Exactly. We are certainly in that situation. 
All of the legislative leaders and the governor and I think it 
would be irresponsible to spend the money with the Federal 
claim laying out there. So we are really paralyzed as to that 
amount. So it is extremely important that the Congress and the 
administration act as quickly as possible on this.
    Senator Hutchison. Do you think you would have 
clarification if the Secretary of Health and Human Services 
were able to essentially withhold your Medicaid money in the 
future if her interpretation of your use of the funds and yours 
differed?
    Mr. Fisher. Senator, I believe if that occurred, if there 
was no action by the Congress and there was even the threat of 
the withholding of the Medicaid funds, I would anticipate that 
there would probably be a lawsuit, which would be an 
unfortunate result because that would just be a further 
dissipation of the resources.
    But I concur with Attorney General Miller that we believe 
that we need a resolution of this issue as quickly as possible.
    Senator Hutchison. Thank you, all of you, for sharing your 
particular situation. I do hope we can act quickly in the 
supplemental appropriations bill. I hope the Federal Government 
will pursue its own avenues through Medicare. They have that 
option. It is a bigger, I think more appropriate, area of 
interest than Medicaid.
    I most of all hope that we do not create another Federal 
string of regulations and bureaucracies that would cause the 
States to do as you have just suggested they might, and that is 
to have to wait or hold money in escrow or not have the freedom 
to spend it. I do trust in the States that, even if they do not 
meet the exact specific test--for instance, Kentucky is going 
to help tobacco farmers, but Texas is not; Texas is going to 
use it for health care; Michigan is going to use it for 
scholarships.
    I do not think that we are going to get far afield here, 
but I do think that it is the States' money and I do not think 
they need to have strings that turn into regulations that turn 
into vetoes of Medicaid funds. We have seen this path before 
and I hope we can avoid it on this issue in the future.
    Thank you, and thank you, Mr. Chairman.
    Senator Specter. Thank you, Senator Hutchison.
    I think there is agreement that--we do not need the lights. 
We are about to move on to the next panel, but just a few 
concluding comments. I think there is agreement that we ought 
to get it resolved so that you can have certainty as to how to 
proceed. I think that is plain.
    The statute provides that the States do have the 
responsibility for initiating the litigation, States or local 
agency administering such plans shall take, et cetera, the 
legal action. So I think that in the States undertaking the 
matter it was, at least by the Federal statute, the States' 
obligation.
    The statute further provides that ``the pro rata share to 
which the United States is equitably entitled, as determined by 
the Secretary.'' So that, absent some change in law, the 
Secretary can make that determination.
    I share the frustration of the States on mandates, unfunded 
mandates--we are trying to stop those--on the regulatory 
system, and on a lot of strings which are attached. I am not 
sure exactly what is going to happen on the floor of the U.S. 
Senate, but I have a sense that there will be a majority which 
will favor some sort of general guidance as to how the funds 
are going to be used. I do not know what that percentage is 
going to be.
    When you talk about an action on behalf of consumers for 
consumer fraud, as Attorney General Miller outlines, there may 
be an obligation or there may be some claim of a class to 
enforce proceeds to go in a certain direction. I do not know, 
and I would like to see litigation avoided.
    But if you talk about the broad categories and you talk 
about a simple certification, I do not think we are in an area 
where there is over-Federal intrusion. But what I would request 
that each of you gentlemen do is to provide us with a 
generalized set of standards that you think would be easiest 
for you to live with, without prejudice. Not that you agree to 
them, but instead of having us work out a delineation or an 
enumeration, to have you work it out, so that the funds are not 
used for some totally collateral purpose.
    I do not want to become involved in an enumeration of some 
actions in some States, fortunately not Iowa, Kentucky, 
Pennsylvania, or Texas, where there has been a demonstrated 
need for some sort of general guidelines. But we do want to 
work with you. We do want to get it resolved.
    We do want to thank you for what you have done, and this 
hearing is designed to shed some light on the subject, to have 
a better understanding by us of your points of view and to try 
to work it out.
    We thank you very much for coming.
    Senator Hutchison. Thank you.
    Senator Specter. We move now to the third panel.
    [Pause.]
STATEMENT OF MATTHEW MYERS, EXECUTIVE VICE PRESIDENT, 
            NATIONAL CENTER FOR TOBACCO-FREE KIDS
    Senator Specter. We now move to our third panel, Mr. 
Matthew Myers, executive vice president and general counsel of 
the National Center for Tobacco-Free Kids. The center is a 
privately funded organization established to focus attention on 
reducing tobacco use among children.
    Welcome, Mr. Myers. We appreciate your coming and look 
forward to your testimony.
    Mr. Myers. Mr. Chairman, thank you for holding the hearing. 
I am delighted to be here. This hearing does address very 
important issues about what the Congress should do with regard 
to the Federal share of the funds the States are due to receive 
from the November 1998 settlement of the cases they brought 
against the tobacco industry.
    I have four basic points and I would like to make them 
briefly. The first is the States and the State attorneys 
general deserve enormous credit. Without their efforts, we 
would not have the opportunity now before us today. If, but 
only if, we use the money wisely, we have the opportunity to 
make major advances in reducing the number of our children who 
become addicted to tobacco.
    However, given the Government's Federal role in the 
Medicaid Program, the fact that the States took the lead in 
suing the tobacco companies does not alter the core legal 
premise that the Federal Government has a legitimate claim to a 
significant portion of the funds to be paid by the tobacco 
companies. At the heart of many of these cases and indeed the 
catalyst for the early cases was a claim that the State had 
spent millions and in some cases billions of dollars in 
Medicaid funds treating tobacco-caused disease. I do not need 
to tell this committee that the Medicaid Program is a Federal-
State partnership in which the Federal Government pays over 50 
percent of every dollar spent.
    Even in those State-initiated cases--and I think this is 
very important--where less emphasis was placed on the 
recoupment of Medicaid dollars, those cases which did not cite 
the Medicaid statute at all, or in those very few cases where a 
Medicaid claim was made and was cut back by the courts, the 
Medicaid Program is implicated.
    Now, why do I say that? In return for the tobacco 
industry's agreement to the terms of this particular 
settlement, the States agreed to accept the tobacco companies' 
payments as full payment for any claims which the State 
asserted or could have asserted for costs incurred in treating 
tobacco-caused disease. That includes the Medicaid claims. What 
that means is that by the terms of the settlements, even when 
they had not referred to Medicaid, the States accepted the 
payments in return for full payment of any possible Medicaid 
claim the States or the Federal Government might have had, 
past, present, or future.
    Senator Hutchison talked about the possibility of passing a 
law giving the Federal Government the right to sue under 
Medicaid. Well, unfortunately, at least as it relates to 
tobacco it is too late, because the States in their settlement 
have already waived any Federal claim as well as their own 
claim to these dollars.
    The hard reality is this State settlement is all of the 
money either the Federal Government or the State government is 
going to receive as a result of the billions of dollars of 
Medicaid payments that have been made or that in the future 
will be made. Thus, we reach the same conclusion that you do, 
Senator Specter: The Federal Government has a legitimate claim 
to a significant portion of the moneys.
    However, having reached that claim, we also think that this 
should be an area in which we do not fight. We support the 
States' request to have the money go back, provided that a 
significant portion of the money is actually used for the 
purposes for which the cases were brought.
    Senator Specter. Significant portion? Why not all of it?
    Mr. Myers. Well, to the extent that we could avoid getting 
into a fight with the States about how much of the money is 
Federal money versus State money, we would like to do so in the 
nature of a compromise. We believe that, based on the data 
supplied by the Centers for Disease Control and others, that 
you need at least 20 to 25 percent of the overall money, and it 
will vary somewhat from State to State of course, in order to 
fund comprehensive, effective tobacco control programs.
    Indeed, during the negotiations----
    Senator Specter. Tobacco control, but how about medical----
    Mr. Myers. Tobacco prevention programs. Well, let me limit 
it to that and then return to that question, because I think it 
is a very important point that you make.
    Indeed, during the negotiations it has been widely reported 
that some of the smaller States, the Dakotas, argued that their 
State ought to receive an increased proportion of the moneys 
precisely because there was a minimum amount of money that was 
necessary to fund a meaningful tobacco prevention and control 
program. That is why they got the money.
    Now, there are some States, as you heard today, that are 
proposing to spend the money on precisely the sort of programs 
about which we are talking about. Iowa, Washington, New Jersey 
are leaders in this. But unfortunately there are a substantial 
number of States that are talking about spending these dollars 
on everything but programs to reduce tobacco use or in some 
cases on public health.
    We would of course share your desire to see that money that 
was paid by the tobacco companies as a result of the death and 
disease that they have caused, are causing, and will cause be 
used to improve the public health. So we do agree on that 
point, Senator Specter, 100 percent.
    For us it is very important to realize that the decision 
that the Congress makes about whether to ensure that money is 
spent on public health and tobacco prevention will actually 
affect the amount of money that Congress and the Federal 
Government pays on Medicaid programs in the future. As a result 
of the leadership of some States, we now know that effective 
programs to prevent tobacco use and to help smokers quit--we 
can dramatically reduce the death toll and the disease and the 
Medicaid costs from tobacco prevention programs.
    Let me cite you a few examples, because I think it is very 
important to understand. In 1996, Oregon initiated the type of 
comprehensive tobacco prevention program we are talking about. 
In a 2-year period they reduced tobacco use in their State by 
11.3 percent, dramatically higher than the national average.
    In 1993, Massachusetts initiated a comprehensive tobacco 
prevention program, and there are three facts about that 
program that are critical. One is during that period of time 
they reduced smoking in their State by over 30 percent, over 3 
times the national average.
    Second, while smoking rates skyrocketed among children 
elsewhere, they did not in Massachusetts and, indeed, they even 
went down among eighth graders.
    Third, in the short term Massachusetts succeeded in cutting 
smoking among pregnant women by 50 percent. As a direct result 
of that, Massachusetts encountered a dramatically lower rate of 
premature births.
    California saw the same thing after they initiated their 
tobacco prevention program, and California has estimated that 
in the 6 years their program has been in existence they have 
saved 10,800 women from suffering from a premature birth. If 
that data is correct, and there is every reason to believe that 
it is, California's tobacco prevention program has paid for 
itself already.
    In other words, we think it is vitally important for 
Congress to step in and provide some guidance to the States, 
rather than for us all to fight about what proportion of this 
money is Medicaid money and what should be done with it. We 
know that if a significant percentage of the money is spent on 
programs to prevent tobacco use we can have a significant 
impact on the number of kids who become addicted, we can have 
over the long run a significant impact on disease rates of 
diseases like lung cancer, and in the short run we can have a 
dramatic impact on smoking and the health of pregnant women. We 
also know that over the long run we can save the Medicaid 
program, Federal and State, billions and billions of dollars.

                           prepared statement

    We think this is an issue in which the Federal Government 
has a direct financial interest and a direct policy interest. 
We support the positions that you took earlier to ensure that 
guidance is given to the States. If the State cases that were 
brought, as General Miller said, with the primary goal of 
reducing tobacco use and the amount of money we spend on 
tobacco-caused disease is to be met, it is essential that 
Congress express its views and ensure that at least a 
significant portion of the money be used for these purposes.
    Thank you.
    [The statement follows:]
                  Prepared Statement of Matthew Myers
    Good morning Mr. Chairman, and members of the committee. My name is 
Matthew Myers. I am the Executive Vice President and General Counsel of 
the National Center for Tobacco-Free Kids, a national organization 
created to protect children from tobacco by raising awareness that 
tobacco use is a pediatric disease, by changing public policies to 
limit the marketing and sales of tobacco to children, by altering the 
environment in which tobacco use and tobacco policy decisions are made, 
and by actively countering the tobacco industry and the influence of 
its special interest. The National Center is a membership organization 
with over 125 members, including many of this nation's major public 
health organizations and other groups concerned about the health and 
welfare of our nation's children.
    Mr. Chairman, I would like to thank you for holding this hearing to 
focus attention on what the Congress should do with regard to the 
federal share of the funds the states are due to receive from the 
November 1998 settlement of the cases they brought against the major 
tobacco companies. The answer to this important question will have an 
impact on federal Medicaid policy, the amount of money available to the 
federal government for Medicaid and other purposes, the amount of money 
the states retain as a result of the tobacco settlement, and whether 
the tobacco settlement actually results in the funding of programs in 
every state in the nation to reduce tobacco use, particularly among 
children.
                           major conclusions
    Before we go into more detail, I would like to summarize the 
National Center's key points:
    (1) The state attorneys deserve enormous credit. Without their 
efforts we would not have the opportunity now facing us. They initiated 
litigation when no one thought they could win; they used the litigation 
to develop a national consensus about the responsibility of the tobacco 
companies to reimburse taxpayers for the billions of dollars being 
spent to treat tobacco caused disease; and they forced the tobacco 
companies to the table. If we use the money from their agreement 
wisely, we have an opportunity to make major advances, advances that 
would not have otherwise been possible.
    (2) Given the federal government's role in the Medicaid program, 
the fact that state attorneys general took the lead in suing the 
tobacco companies does not alter the conclusion that the federal 
government has a legal entitlement to a significant portion of the 
funds to be paid by the tobacco companies in the settlement of these 
cases.
    (3) Despite having reached the conclusion that the federal 
government is entitled to a portion of these funds, we support the 
states' request that the federal government waive its right to these 
funds, provided that the waiver is conditioned on the states spending a 
sufficient amount on programs to actually prevent and reduce tobacco 
use--at least twenty-five percent of the total the states receive. This 
condition is necessary in order to accomplish the purpose for which the 
cases were brought and to take the steps necessary to reduce the burden 
on the Medicaid system of tobacco caused disease. Without Congressional 
action it is now clear that some states will fund programs to prevent 
and reduce tobacco use with these funds, but many will not do so.
    (4) We support the states' request because a number of states have 
already demonstrated what can be accomplished when a state takes the 
lead in the fight to reduce tobacco use. There now exists a sound 
scientific basis to demonstrate that a multifaceted tobacco prevention 
effort at the state and local level, if adequately funded and properly 
administered, does reduce tobacco use and can save a significant amount 
of money in health care dollars. While state programs do not replace 
the need for federal action in certain areas, funding state and local 
tobacco prevention and reduction efforts is good health policy and good 
fiscal policy.
                medicaid and the state tobacco lawsuits
    At the heart of many of the state tobacco cases was a claim that 
the state had spent millions, and in some cases billions, of dollars in 
Medicaid funds treating tobacco caused disease. As this committee is 
well aware, the Medicaid program is a federal/state partnership in 
which the federal government pays over fifty cents of every dollar 
spent. When a state joins the Medicaid program, it agrees that it will 
be the entity responsible for taking the steps to recover any funds 
paid out through the Medicaid program as the result of the wrong doing 
of a third party. The Medicaid program further provides that if a state 
succeeds in its efforts to recover these funds, the federal government 
is automatically entitled to the portion of the recovery that reflects 
the federal government's share of the original payment.
    Even in those state initiated cases where less emphasis was put on 
the claim for recoupment of Medicaid dollars, those cases which did not 
specifically cite the Medicaid program, or those cases where the courts 
limited the state's ability to seek Medicaid recoupment, the federal 
Medicaid program is impacted by the settlement. Why do we reach this 
conclusion? In return for the tobacco industry agreeing to the terms of 
the settlement, the states agreed to accept the tobacco companies' 
payments as full payment for any claims which the state had asserted or 
could have asserted for costs incurred in treating tobacco caused 
disease, including those related to the Medicaid program. They also 
released the tobacco companies from both the state's and the federal 
government's right to seek further recovery of money they will spend on 
tobacco caused disease. Since the federal government's Medicaid rights 
are dependent on the states, the state settlement cuts off the claims 
of the federal government.
    The federal government has incurred billions of dollars in Medicaid 
costs due to tobacco and will continue to do so. Beyond its share of 
the settlement, these are funds it can not now recover. No matter how 
these cases are characterized, the settlement directly affects the 
federal government's ability to recover reimbursement for past, present 
or future payments of federal Medicaid dollars for tobacco caused 
disease. Thus, what the Congress does now has an impact on Medicaid 
policy and the amount of money that will be available to the federal 
treasury. It will also have an impact on whether federal Medicaid 
related expenditures for tobacco caused disease increase or decrease in 
the future.
    If the federal government waives its share of the tobacco 
settlement funds, a significant portion of these funds should be 
dedicated to reducing tobacco use:
    It has been estimated that annually the federal government spends 
as much as 7.4 billion dollars through the Medicaid program to pay for 
treating individuals with tobacco caused disease. Unless strong action 
is taken to reverse current trends these expenditures and the tobacco 
problem will only continue to grow. Smoking among high school seniors 
in the United States is near a 19-year high. Since 1991 past-month 
smoking has increased by 35 percent among 8th graders. Over the past 10 
years the number of kids under 18 who become daily smokers each year 
has increased by over 70 percent. Nationwide, the Centers for Disease 
Control and Prevention has estimated that more than 3,000 kids become 
new daily smokers each and every day.
    When the states brought these cases they said that they did so in 
order to reduce tobacco use, particularly among children. Virtually 
every public official involved in bringing and prosecuting these cases 
stated repeatedly that the goal of these cases was to fund programs 
designed to reduce the number of our children who become addicted to 
tobacco and to assist and encourage adults to quit using tobacco. It is 
clear that those who negotiated the November 1998 settlement intended 
for some of the funds to be used to fund programs to reduce tobacco 
use. For example, it has been widely reported that during the 
negotiations that led up to the November 1998 settlement, the 
representatives of the smaller states in those negotiations asked for 
additional funds as part of the settlement based upon the explicit 
premise that in a small state there is a minimal amount of money that 
is necessary to conduct an effective and meaningful tobacco prevention 
program.
    The governors and state legislatures in a number of states have 
proposed to devote significant resources to protecting kids and 
reducing the terrible toll of tobacco. These states will have to do 
nothing different if our proposal is adopted. Yet, because the multi-
state settlement makes no provision for how the money will be spent, in 
a number of other states there are plans to spend little or none of the 
money on programs to reduce tobacco use. In those states it now appears 
that funds obtained as the result of the toll of tobacco will be 
diverted to purposes which will do nothing to reduce the number of our 
children who become addicted to tobacco or to reduce the amount of 
money that the government will spend to treat tobacco caused disease in 
the future.
       investing in tobacco prevention will save lives and money
    Virtually everyone agrees upon the essential components of a state 
based comprehensive tobacco prevention program. They include: public 
education campaigns to deglamourize and discourage tobacco use; 
effective school based programs, community based programs, treatment 
for those who want to quit, adequate funding for enforcing existing 
laws, and funds to evaluate the effectiveness of programs on an ongoing 
basis.
    There is now substantial scientific evidence to demonstrate that 
comprehensive state and local tobacco control programs work and 
independent studies from those states that have already initiated 
programs support this conclusion. For example, in 1996 Oregon passed an 
increase in its excise tax and initiated a comprehensive tobacco 
control program. The CDC has now reported that in the 2 years Oregon's 
program has been in existence, tobacco use in Oregon dropped by 11.3 
percent, an increase far greater than the national average. Of that 
increase, the scientific evidence demonstrates that nearly one-half of 
the decline was directly related to the newly created tobacco 
prevention programs.
    Massachusetts initiated a comprehensive tobacco control program in 
1993 after the enactment of a statewide initiative that increased its 
tobacco excise tax. Between 1992 and 1998 consumption of tobacco 
products in Massachusetts declined by over 30 percent, three times the 
national average. In addition, Massachusetts did not experience the 
dramatic increase in teen smoking that occurred throughout the rest of 
the country during this period. Perhaps most critically, while smoking 
increased among 8th graders nationally, it actually decreased in 
Massachusetts.
    The Massachusetts program produced results in another area that 
receives far too little focus. As a direct result of the Massachusetts 
program, smoking among pregnant women in Massachusetts declined by 47.8 
percent during this period, the steepest decline in the nation. The 
decline in smoking among pregnant women produced immediate financial 
and health results. It resulted in a significant reduction in premature 
births and other pregnancy complications among Massachusetts' 
population, saving very substantial amounts of money.
    In 1989 California increased its excise tax and used the funds to 
institute a comprehensive tobacco control program. Subsequently tobacco 
use in California dropped by 38 percent, more than twice the national 
average. As in Massachusetts, California has avoided the dramatic 
increase in teen smoking that has occurred nationally, and smoking 
among pregnant women dropped by nearly one half. It has been estimated 
that in California alone the tobacco prevention program resulted in 
over 10,800 fewer premature births.
    As a result of the tobacco settlement in Florida in 1997, Florida 
has recently initiated a comprehensive tobacco prevention program. It 
is too early in Florida to see actual changes in consumption, but there 
has already been documented increased awareness by children of the 
health effects of tobacco and changed attitudes among children about 
tobacco.
    In short the tobacco prevention programs which could be funded by 
using a portion of the money the states receive from the settlement of 
these lawsuits could save millions of lives and billions of healthcare 
dollars. It is about the most cost-effective investment Congress can 
make.
                               conclusion
    What the Congress decides to do with the federal portion of the 
money paid by the tobacco companies to the states will set a precedent 
for the Medicaid program and, as the Congressional Budget Office 
recognized, also affects the federal budget. Most importantly from our 
standpoint, what the Congress decides on this issue will also directly 
affect whether programs are put in place nationwide to reduce tobacco 
use among children.
    We support the states' request to have the federal government waive 
its claims to these funds, but only if the waiver is conditioned on the 
states' spending at least 25 percent of the funds to accomplish the 
dual goals that prompted these cases--reduce tobacco use, particularly 
among children and reduce the burden on the Medicaid system by reducing 
tobacco caused disease.

    Senator Specter. Mr. Myers, what do you recommend? You have 
talked about ``significant'' on a couple of occasions. I 
suggested at one point 100 percent and you did not take that 
figure. What figure would you insert in your amendment if you 
were filing one on the Senate floor?
    Mr. Myers. Mr. Chairman----
    Senator Specter. I do not want to elevate you too fast 
here, but what do you think?
    Mr. Myers. I appreciate that.
    Senator Specter. Or de-elevate you. I am not sure.
    Mr. Myers. Certainly an elevation.
    I am here on behalf of an organization that works for the 
goal of reducing tobacco use, particularly among children. The 
ultimate policy I have expressed also represents the views of 
the ENACT coalition, which is a broadly based public health 
coalition of groups----
    Senator Specter. Are you refusing to answer the question, 
Mr. Myers?
    Mr. Myers. No, I am about to give you the answer.
    Like the American Cancer Society, the American Heart 
Association----
    Senator Specter. Why do you not start there and then 
disclaim.
    Mr. Myers. OK. The only area in which I have precise 
expertise is the amount of money needed to be spent on programs 
to reduce tobacco use, and in that area we believe that at 
least 20 to 25 percent of the money must be spent. The 
additional amount of money that ought to be spent on programs 
for public health purposes is an area that is beyond our 
expertise, in which we would be delighted to work with you.
    Senator Specter. You said that some States are talking 
about other programs for use of this money.
    Mr. Myers. Yes, sir.
    Senator Specter. What specifically do you have in mind?
    Mr. Myers. Well, we can run a broad range of proposals, and 
very few States have reached a final conclusion at this 
juncture, many of the programs those that we would support and 
others are completely different. For example, in Rhode Island 
the Governor has proposed to use a substantial portion of the 
funds to reduce the car tax, which may or may not be a good 
idea, but it is certainly not why the lawsuit was brought.
    In a number of other States their proposals are to spend 
the money on dealing with educational crises that have been in 
existence for a long period of time.
    Senator Specter. Education unrelated to smoking?
    Mr. Myers. No; just education in general, financing the 
school systems.
    Senator Specter. Which States are talking about that?
    Mr. Myers. In Ohio the Governor has raised that as a major 
issue, although there are also major proposals in the 
legislature to spend some, a substantial amount of money, on 
programs to reduce tobacco use. We do not yet know how that 
debate is going to come out.
    Senator Specter. Any other purposes that you have heard 
about?
    Mr. Myers. Besides for education? Yes. The State of 
Louisiana, which does not yet have a formal proposal, at one 
point talked about using the funds--actually selling the 
entitlement to the settlement and then using the funds for debt 
reduction. The Governor of New York has also spoken about using 
the funds primarily for the purpose of debt reduction.
    In at least one western State there has been talk about 
using the money to deal with the water crisis or water problems 
in that State.
    I am not passing judgment on whether those are laudable 
goals or not laudable goals. They are simply not the reason 
these cases were brought, and if the money is diverted to those 
purposes what it means is that the continuing high tobacco use 
rates among children will only continue to rise and that we 
will have missed an historic opportunity to reduce tobacco use 
among children.
    Senator Specter. Well, thank you very much, Mr. Myers, for 
your testimony. We are going to have to formulate a program for 
amendment, because I do intend to offer one. A number of 
Senators have talked about it. Senator Harkin has talked about 
it, other Senators have talked about it.
    But I share your concern about not giving carte blanche to 
the States. I do not think it ought to be used for a car tax or 
for general debt reduction. You have a very specific problem, 
you have a very specific recovery, and I believe that there may 
well be a legal right on the part of the citizens who have been 
damaged to have these funds used to alleviate the specific 
damage.

                         CONCLUSION OF HEARING

    Thank you all very much for being here, that concludes our 
hearing. The subcommittee will stand in recess subject to the 
call of the Chair.
    [Whereupon, at 1:08 p.m., Monday, March 15, the hearing was 
concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]



         MATERIAL SUBMITTED SUBSEQUENT TO CONCLUSION OF HEARING

    [Clerk's note.--The following material was not presented at 
the hearing, but was submitted to the subcommittee for 
inclusion in the record subsequent to the hearing:]
                        CONGRESSIONAL WITNESSES
               Prepared Statement of Senator Thad Cochran
    Mr. Chairman, I applaud my colleague from Texas, Senator Kay Bailey 
Hutchison's, work to protect the state tobacco settlements from 
recoupment by the federal government.
    The State of Mississippi was the first state in the nation to file 
suit and settle with the tobacco industry. The money our state will 
receive under its settlement agreement should be spent in accordance 
with the needs of our state as determined by our state's public 
officials--not by the federal government.
    I am pleased to support Senator Hutchison's tobacco recoupment 
amendment to the fiscal year 1999 supplemental appropriations bill.
                                 ______
                                 
              Prepared Statement of Senator Larry E. Craig
    Mr. Chairman, thank you for holding this critical hearing on the 
Clinton Administration's attempt to seize a large portion of the 
tobacco settlement from the states.
    The full Committee has already spoken to this issue by adopting 
Senator Hutchison's legislation, which I was proud to cosponsor, as an 
amendment to the supplemental appropriations bill the Senate should be 
considering in the near future.
    I am not a lawyer, and maybe that's why I'm not particularly 
impressed by all the legal hairsplitting we've been hearing from the 
government's lawyers about their claim to these funds. But you don't 
have to be a lawyer to recognize unfairness when you see it.
    In fact, I think my little granddaughter would recognize the story 
that's unfolding in Washington today: it's called the ``Little Red 
Hen.'' As my colleagues probably will recall, this story is about some 
people doing all the work and other people, who didn't lift a finger to 
help, wanting to share in the product of that work.
    In this case, we have the states who initiated lawsuits against the 
tobacco industry, who took all the risks, who received no assistance 
from the federal government in making their claims, and who ultimately 
succeeded in negotiating the historic Master Settlement Agreement last 
November. Now that the work has been done by these 46 little red hens, 
and the other four who negotiated individual settlements, the federal 
government wants to sweep in and take away 57 percent of the funds.
    Mr. Chairman, I do not think what we have here is an attempt to 
assert legal rights, but an attempt to assert control. Quite simply, 
the federal government wants to direct the spending of these funds by 
the states, despite the fact that this effort is likely to provoke more 
litigation, which in turn will only prevent the funds from benefiting 
the health or welfare of any state's residents. I do not think the 
federal government has the law on its side, and I know it doesn't have 
the equities or even common sense on its side.
    At this point, I would ask unanimous consent to place in the record 
of the hearing a letter from Idaho Attorney General Al Lance, objecting 
to the Administration's attempted money grab. I wholeheartedly agree 
with Attorney General Lance's confidence that the Idaho state 
legislature is quite capable of properly determining how Idaho's share 
of the tobacco settlement should be spent.
    It is my strong hope that the Administration will allow my state's 
legislature, and those of the other 49 states, to make these decisions 
without interference by abandoning its effort at recoupment. Failing 
that, I hope Congress will take action to protect the right of the 
states in this matter.
                                 ______
                                 
            Letter From Alan G. Lance to Senator Larry Craig
                                    State of Idaho,
                            Office of the Attorney General,
                                                  January 13, 1999.
Re Idaho tobacco settlement monies

Hon. Larry Craig,
U.S. Senate,
Washington, DC.
    Dear Senator Craig: You are no doubt aware that Idaho settled its 
lawsuit against the tobacco defendants. Under the settlement agreement, 
Idaho is set to receive annual payments totaling $711 million over the 
first 25 years of the settlement. Now that the settlement is complete, 
it is my understanding that the Clinton Administration intends to lay 
claim on a significant portion of settlement monies for its own use. 
This is wrong. I ask that you help Idaho protect itself from this money 
grab by supporting appropriate federal legislation.
    Idaho was one of 40 states that filed suit against various tobacco 
defendants, alleging violations of various state statutes. In Idaho's 
complaint we sought reparation for damages incurred by the State, as 
well as civil penalties, costs, and fees as a result of the defendants' 
actions. We alleged as damages the increased Medicaid costs 
attributable to tobacco use, which Idaho has spent, as well as the 
increased insurance premiums attributable to smoking that the State has 
paid for its state employees. We sought civil penalties under our 
consumer protection laws.
    Section 1903(d) of the Social Security Act provides that a State 
must allocate from the amount of any Medicaid-related recovery ``the 
pro-rata share to which the United States is equitably entitled.'' 
Relying upon this statute, it is our understanding that the Health Care 
Financing Administration will be taking the position that Idaho's 
settlement payments represent a credit applicable to Idaho's Medicaid 
program, regardless of whether the monies are received directly by the 
State's Medicaid program. This should not be so.
    It is not equitable for the federal government to take the fruits 
of the states' efforts. This is particularly true in this case. Idaho 
filed its suit, took significant risks, and fought for significant 
changes in how the tobacco industry will market its products. What did 
the Clinton Administration do in this regard with the federal 
government's vast resources? Nothing.
    I have great confidence that Idaho's Legislature will properly 
determine how Idaho's tobacco proceeds should be spent. I am sure you 
share that trust as well. That will not happen, however, if the federal 
government is allowed to take that money and spend it as it pleases. I 
ask for your assistance in making sure that does not happen.
            Sincerely,
                                             Alan G. Lance,
                                                  Attorney General.
                                 ______
                                 
                Prepared Statement of Senator Tom Harkin
    Mr. Chairman, thank you for holding this hearing. As you know, I am 
strongly opposed to the amendment Senator Hutchison has attached to the 
supplemental which would turn over all of the Federal share of the 
tobacco settlement to the States without any requirement that a penny 
of the funds will be used to reduce teen smoking.
    I know that some are saying that the federal government had no role 
in these lawsuits and therefore no right to these funds. They are 
wrong. The Federal taxpayer has every right to their share of the 
tobacco settlement. Medicaid is a federal-state partnership and the 
federal government pays an average of 57 percent of the costs of each 
state's Medicaid program.
    Under the Social Security Act, it is the responsibility of the 
states to recover any costs caused by third parties. In fact, the law 
says that only the states can file such suits. Medicaid law then 
requires the states to turn back to the federal government its share of 
any money the state recovers.
    While I understand that not all of the states based their cases 
entirely on lost Medicaid costs, when the states settled this case in 
November 1998, even those that did not include a Medicaid claim in 
their suit waived their right (and therefore, the federal government's 
right) to recover tobacco-related Medicaid costs in the future.
    The state suits began with the important goal of redressing the 
harms caused by tobacco; we owe it to our children and grandchildren to 
try to reduce that harm for future generations. Therefore, I will be 
offering an amendment on the Floor that will require States to devote 
some portion of the tobacco settlement proceeds to tobacco control 
programs.
    Smoking among high school students has increased 32 percent from 
1991 to 1997. Sadly, a number of States may not spend even a penny of 
the settlement dollars on preventing tobacco use among children. I feel 
very strongly that if we are going to allow the States to keep all of 
the proceeds of the tobacco settlement, the States must be required to 
commit some portion of those funds to reduce tobacco use, especially 
among kids.
    I look forward to hearing from our witnesses today and I want to 
especially welcome, the Attorney General from my home State of Iowa, 
Mr. Tom Miller. I want to commend Attorney General Miller and our new 
Governor of Iowa, Governor Vilsack, who have announced their plans to 
direct next year over $17 million of Iowa's tobacco settlement proceeds 
to tobacco prevention activities. I hope all States will follow Iowa's 
lead and use the tobacco dollars for what they were intended to be used 
for when all this tobacco litigation was started.
                                 ______
                                 
            Prepared Statement of Senator Richard J. Durbin
    Mr. Chairman, I am pleased that you have called this hearing on a 
very important issue that has not received sufficient scrutiny in the 
Congress. The premature addition of the Hutchison amendment to the 
supplemental appropriations bill is an attempt to push the Congress 
into a hasty decision with billions of dollars and important public 
health issues at stake. This hearing will help shed light on those 
issues as we consider the conditions under which the federal government 
may relinquish its legitimate claim to its share of the Medicaid 
tobacco settlement funds.
                              medicaid law
    The first point to emphasize is that the federal government is 
entitled to a share of the payments attributable to Medicaid costs from 
the settlement between the states and the tobacco companies.
    The Medicaid program is a federal/state partnership with each 
paying a portion of the program's costs. On average, the federal share 
of the Medicaid program is 57 percent. The states are obligated under 
long-standing Medicaid law to recoup any costs caused by third parties. 
Indeed, the law says that only the states can file such suits even 
though part of what they recover belongs to the federal government. 
Medicaid law then requires each state to turn back to the federal 
government its share of any money the state recovers. Clearly, the 
federal government is entitled to a portion of the recovery from the 
tobacco companies.
                         future medicaid claims
    Many people are not aware that the states agreed to relinquish 
future Medicaid claims against the tobacco companies, regardless of 
whether their current lawsuits involved Medicaid claims. The Master 
Settlement Agreement (MSA) includes provisions that settle all past and 
future Medicaid claims against the tobacco companies. This means the 
MSA settles federal claims, because current law requires the states to 
pursue third parties such as the tobacco companies on behalf of the 
states and federal government. Therefore, when the states waived their 
right to recover tobacco-related Medicaid costs in the future, they 
essentially waived the right of the federal government as well.
    The federal government has paid, and will continue to pay, one-half 
or more of the Medicaid costs associated with treating tobacco-caused 
diseases, even though the states have now waived the federal 
government's right to any further tobacco related Medicaid recovery. 
This further underscores the federal right to a share of the settlement 
proceeds.
                       federal/state partnership
    The states and the federal government share in both the costs and 
the recoveries under the Medicaid program. When states pursue third-
party Medicaid claims, the federal government shares half the costs of 
these collection efforts. The federal government is legally required to 
reimburse states for such costs whether a state wins or loses its 
litigation.
    States routinely follow the requirements of the Medicaid statute, 
which protects the federal government's interests by explicitly making 
the states responsible for pursuing these recoveries, reporting them to 
the Health Care Financing Administration (HCFA), and ensuring that the 
federal government receives the share to which it is entitled. In 
fiscal year 1997, the total collected by the states for third party 
liability Medicaid reimbursements was $638 million, of which $362 
million was returned by the states to the federal government as the 
federal share of the recoupments.
    There is even more direct evidence that the states were aware that 
they would have to reimburse the federal government after agreeing to 
settle their cases against the tobacco industry. In March 1996, five 
states (FL, LA, MA, MI, WV) settled with the Liggett tobacco company. 
That year three states (FL, LA, MA) credited HCFA with a portion of the 
$200,000 payment they each received from Liggett. In 1997, two states 
(LA, MA) credited HCFA with a share of the $91,000 payments they each 
received.
                          budget implications
    Congressional action to change current law to waive the federal 
claim has federal budget implications. The Congressional Budget Office 
(CBO) has estimated that possible federal recoveries from the states 
total $14 billion over five years and $28 billion over 10 years. 
However, CBO has also assumed that there is a 25 percent probability 
that HCFA will successfully retrieve these funds and, therefore, 
estimates for scoring purposes that the federal recovery from the state 
tobacco suits will total $2.9 billion over five years and $6.8 billion 
over 10 years. Any legislation that allows the states to keep all of 
the funds requires an offset of this magnitude or a waiving of the 
federal Budget Act.
                        tobacco control programs
    Congress has an obligation to ensure that at least a significant 
portion of the federal money is used to reduce the tragedy of tobacco 
use, particularly among our nation's children. This does not require, 
and I am not advocating, that we physically take back the federal 
money. Instead, we could leave the money in the hands of the states 
with clear assurances that the money will be used for appropriate 
purposes and not just used to build a new state capitol building or for 
other purposes unrelated to tobacco, health care, and children.
    Any Medicaid recoupment bill should give a mandatory share of the 
money to youth tobacco use prevention programs. Otherwise, many states 
will spend none of it on youth tobacco use, as several states have 
already proposed. The Centers for Disease Control estimates that each 
state will have to spend a minimum of an average of 25 percent of their 
settlement dollars to run an effective tobacco control program. A 
``lookback'' program can assess the success of each state's effort to 
reduce underage tobacco use and whether this percentage can be raised 
or lowered.
                         governor's priorities
    Where should we turn for guidance on how the federal share of the 
settlement money should be spent? I propose that we listen first to the 
priorities the National Governors Association (NGA) has already 
identified. According to the NGA Policy on Tobacco Settlement Funds 
adopted at their 1999 Winter meeting, ``The nation's Governors are 
committed to spending a significant portion of the settlement funds on 
smoking cessation programs, health care, education, and programs 
benefiting children.''
    This range of programs is appropriate. But the first priority is 
that these settlements resulted from the harms caused by tobacco; at 
least a part of the funds should be spent to reduce that harm in the 
future. This will help protect kids and save both federal and state 
dollars in the long run.
                             public support
    Finally, I would like to note that the public supports a large 
portion of the settlement money going to tobacco control programs. 
Polling conducted by the American Heart Association last November found 
that 74 percent of voters support dedicating at least half of these 
dollars to tobacco addiction treatment and efforts to educate teens 
about the dangers of tobacco.
    Mr. Chairman, while we should not grant the dream wish of the 
governors and turn this money over to them without any guidance on how 
it should be spent, we should listen to the priorities outlined by the 
governors and the concerns of the American public as we determine the 
terms under which we relinquish the federal share of this money.
    I am less concerned with who is spending the money than I am with 
how it is being spent and whether the goal of reducing underage 
addiction to tobacco is being seriously addressed.
    I thank you for the opportunity to share my thoughts with you today 
on this important issue.
                                 ______
                                 
                        NONDEPARTMENTAL WITNESS
   Prepared Statement of Carl Tubbesing, Deputy Executive Director, 
               National Conference of State Legislatures
    Since the Master Settlement Agreement (MSA) was signed last 
November, state legislators across the country have been studying the 
provisions of the agreement and determining what actions they need to 
take to implement the agreement in their respective states. As you know 
by now, this is a complicated legal proceeding. It presents 
particularly special challenges to short session states. States are 
taking many different approaches, but are unified on one issue. These 
funds are state funds and there is no room for intrusion of the federal 
government in the state budget and appropriation process.
    Representative Robert Junell of Texas came to Washington, D.C. in 
January to participate in the press conference jointly sponsored by 
your colleagues, Senator Kay Bailey Hutchison and Senator Bob Graham 
regarding the introduction of S. 346, a bill NCSL vigorously supports. 
This bill, which is now part of S. 544, the fiscal year 1999 
Supplemental Appropriations bill, is a top priority for NCSL and 
legislatures across the country. Representative Junell compared the 
states to the ``Little Red Hen.'' For those of you unfamiliar with this 
story, I will briefly describe it here.
    The Little Red Hen decided she wanted some fresh homemade bread and 
set about asking her friends and neighbors to help her with the 
process. Finding no takers, the Little Red Hen bought the seeds, 
planted the seeds, watered and weeded the plants, gathered the wheat, 
separated the grain, ground the grain into flour, made the dough, 
kneaded the dough and finally put the bread in the oven to bake. I may 
have missed a step or two along the way, but I hope you got the 
picture. All along the way the Little Red Hen asked for help, but 
received none. When the bread was finally ready, the Little Red Hen set 
a nice table and sat down to enjoy the fruits of her labor. Remember 
the Little Red Hen is representing the states. This is when the federal 
government steps in. As the Little Red Hen is slicing her loaf of 
bread, all the friends and neighbors who didn't have time, or the 
inclination to help show up with plates ready to join the feast. The 
Little Red Hen was not prepared to share. Neither are the states.
    The Congress and the Administration failed in its efforts to enact 
tobacco legislation last year. States, through their attorneys general, 
continued to move forward and ultimately reached a compromise that was 
formalized in the Master Settlement Agreement on November 23, 1998. 
Four other states (Florida, Minnesota, Mississippi and Texas) 
independently reached agreements with the tobacco manufacturers. As a 
result, 50 states as well as the District of Columbia, American Samoa, 
the U.S. Virgin Islands, Puerto Rico, Guam and the Northern Mariana 
Islands have succeeded where the federal government failed. We firmly 
believe that these funds, recovered on behalf of the citizens of these 
states and jurisdictions, should be disbursed according to state law, 
with no interference or direction from Washington, D.C.
    There has been considerable concern expressed about how states 
might spend these settlement dollars. NCSL, through its Health Policy 
Tracking Service (HPTS), is tracking all state tobacco settlement 
legislation. The information is published in an issue brief, ``Tobacco 
Settlement Distribution,'' that is updated weekly to reflect the most 
recent legislative action. Most state legislatures are still in 
session, so it is not possible to predict what legislation will 
ultimately be adopted, but I can tell you what has been introduced and 
discuss some general trends. Below is a chart from the most recent 
issue brief. This issue brief has been submitted for the record by 
Attorney General Mike Fisher of Pennsylvania, who testified before the 
subcommittee during the hearing on March 15, 1999.

                STATE TOBACCO SETTLEMENT LEGISLATION 1999
                        [Updated March 12, 1999]
------------------------------------------------------------------------
                                                 Number of
                                    Number of   States with   Percent of
             Category                 bills      bills from     States
                                                  column 1
------------------------------------------------------------------------
Child development................           11            7           14
CHIP/children's health...........           36           20           40
Smoking cessation, education,               64           25           50
 prevention......................
Access to health care for low               82           32           64
 income people...................
Tobacco growers/communities......           29            9           18
Trust funds......................          126           37           74
Education........................           21           11           22
Graduate medical education.......           10            6           12
Long term care...................           10            8           16
Tax cuts/tax credits.............           13            9           18
Medicaid recoupment..............           34           25           50
Other \1\........................           81           30           60
                                  -------------
      Total bills................          517
------------------------------------------------------------------------
\1\This category includes a number of health-related proposals including
  funding for: insurance risk pools, cancer research, women's health
  programs, HIV programs, prosthetic devices, veteran's homes, and
  medical equipment.

    Three quarters of the states have proposed trust funds. This 
reflects, at least in part, the uncertainty surrounding the actual 
amount of funds that will become available to states. Part of the 
uncertainty is built into the Master Settlement Agreement, through the 
potential imposition of offsets and adjustments, but the most 
significant question for states is whether the Health Care Financing 
Administration (HCFA) will be permitted to seize as much as 80 percent 
of a state's allotment. It is clear by looking at the chart that a 
majority of states are inclined to spend these funds on health care and 
services for children and the indigent. Fifty percent of the states 
have proposed to fund smoking cessation, education and prevention 
programs.
    Not reflected in the chart, but important to consider, is the fact 
that some states, Texas, New York and California come to mind, have 
agreed to allocate a significant amount, as much as 50 percent of their 
settlement funds, to local jurisdictions. Federally imposed mandated 
earmarking will certainly interfere with these carefully developed 
agreements and severely restrict state flexibility. Finally, national 
earmarking fails to account for actions already underway in the states. 
NCSL believes the federal system we have in place is working. The 
public is providing input and legislators across the country are 
responding. We do not believe Washington, DC, can do better.
    For the convenience of the subcommittee members, I will quickly 
review what has been proposed in the states with members on the 
subcommittee (I have not included Pennsylvania, Iowa and Texas because 
they had representatives at the hearing): Mississippi (trust fund, 
health care); Washington (trust fund, health care); New Hampshire 
(education, smoking cessation); Idaho (trust fund); Alaska (health 
care, tobacco cessation); Arizona (mental health facility, localities 
for health care); South Carolina (tobacco growers); Hawaii (health 
care, youth tobacco cessation programs); Rhode Island (community health 
centers, mental health centers, trust fund, smoking cessation); 
Wisconsin (CHIP, youth tobacco cessation programs); and California 
(health care, women's health, children's health, smoking cessation, aid 
to cities and counties).
    Finally, nine states are considering bills that would provide 
assistance to tobacco growers and to impacted communities. The 
importance of these bills should not be underestimated or disparaged. 
Agreements such as the one recently reached in the State of Virginia, 
where the state will spend funds to assist tobacco growers and to 
reduce the incidence of smoking among teenagers is just the kind of 
agreement that would be made more difficult to reach, if the federal 
government were to become involved.
    NCSL urges the members of the Subcommittee to support the provision 
in S. 544 that would prohibit the Health Care Financing Administration 
from seizing state tobacco settlement funds. This action will permit 
states to move forward with all deliberate speed to complete 
implementation of the settlement agreement and to fund important health 
care and other initiatives that are to be funded through this effort.
    I thank you for your kind consideration and hope that you will call 
upon NCSL if you have any questions or if we can be of additional 
assistance to you.

                                  
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