[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]




    DEPARTMENT OF HEALTH AND HUMAN SERVICES FISCAL YEAR 2002 BUDGET 
                               PRIORITIES

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, MARCH 7, 2001

                               __________

                            Serial No. 107-5

                               __________

           Printed for the use of the Committee on the Budget


  Available on the Internet: http://www.access.gpo.gov/congress/house/
                              house04.html

                              -----------

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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
JOHN E. SUNUNU, New Hampshire        JOHN M. SPRATT, Jr., South 
  Vice Chairman                          Carolina,
PETER HOEKSTRA, Michigan               Ranking Minority Member
  Vice Chairman                      JIM McDERMOTT, Washington
CHARLES F. BASS, New Hampshire       BENNIE G. THOMPSON, Mississippi
GIL GUTKNECHT, Minnesota             KEN BENTSEN, Texas
VAN HILLEARY, Tennessee              JIM DAVIS, Florida
MAC THORNBERRY, Texas                EVA M. CLAYTON, North Carolina
JIM RYUN, Kansas                     DAVID E. PRICE, North Carolina
MAC COLLINS, Georgia                 GERALD D. KLECZKA, Wisconsin
ERNIE FLETCHER, Kentucky             BOB CLEMENT, Tennessee
GARY G. MILLER, California           JAMES P. MORAN, Virginia
PAT TOOMEY, Pennsylvania             DARLENE HOOLEY, Oregon
WES WATKINS, Oklahoma                TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington             CAROLYN McCARTHY, New York
JOHN T. DOOLITTLE, California        DENNIS MOORE, Kansas
ROB PORTMAN, Ohio                    MICHAEL E. CAPUANO, Massachusetts
RAY LaHOOD, Illinois                 MICHAEL M. HONDA, California
KAY GRANGER, Texas                   JOSEPH M. HOEFFEL III, 
EDWARD SCHROCK, Virginia                 Pennsylvania
JOHN CULBERSON, Texas                RUSH D. HOLT, New Jersey
HENRY E. BROWN, Jr., South Carolina  JIM MATHESON, Utah
ANDER CRENSHAW, Florida
ADAM PUTNAM, Florida
MARK KIRK, Illinois

                           Professional Staff

                       Rich Meade, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel


                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, March 7, 2001....................     1
Statement of:
    Hon. Tommy G. Thompson, Secretary, U.S. Department of Health 
      and Human Services.........................................     4
    Robert Rector, the Heritage Foundation.......................    48
    Wendell Primus, Director, Income Security, Center on Budget 
      and Policy Priorities......................................    67
    Gail Wilensky, John M. Olin Senior Fellow, Project Hope......    79
    Marilyn Moon, Senior Fellow, the Urban Institute.............    86
    Thomas R. Saving, Director, Private Enterprise Research 
      Center.....................................................    97
Prepared statement of:
    Hon. John M. Spratt, Jr., a Representative in Congress from 
      the State of South Carolina................................     2
    Secretary Thompson...........................................     7
    Mr. Rector...................................................    50
    Mr. Primus...................................................    71
    Dr. Wilensky.................................................    81
    Dr. Moon.....................................................    89
    Dr. Saving...................................................   103
    Hon. Ander Crenshaw, a Representative in Congress from the 
      State of Florida...........................................   125
    Hon. Gary Miller, a Representative in Congress from the State 
      of California..............................................   126
    Hon. Adam Putnam, a Representative in Congress from the State 
      of Florida.................................................   126
    Advanced Medical Technology Association......................   127

 
   DEPARTMENT OF HEALTH AND HUMAN SERVICES FY 2002 BUDGET PRIORITIES

                              ----------                              


                        WEDNESDAY, MARCH 7, 2001

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10 a.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Present: Representatives Nussle, Spratt, Bass, McCarthy, 
Gutknecht, McDermott, Thornberry, Bentsen, Sununu, Hooley, 
Kirk, Capuano, Collins, Moore, Fletcher, Honda, and Hastings.
    Chairman Nussle. I call this meeting of the full committee 
to order. This is a full committee hearing on the President's 
budget for Health and Human Services.
    Today's witness is the Honorable and recently, within the 
last half hour, as we understand, sworn in officially by the 
President of the United States, Secretary of Health and Human 
Services, former Governor of a neighboring State of mine, 
Wisconsin. We're honored to have you here today and we look 
forward to your testimony.
    This afternoon we will hear from witnesses involved in 
economics as well as health care on panels two and three. Then 
next, we will have a members day hearing, as well as hearings 
next week on the Department of Agriculture, the Department of 
State and the Department of Education. We look forward to those 
hearings as well.
    There is no question that, particularly coming from a State 
such as Iowa, where we have the number one population of older 
Americans over the age of 85 years old, and I think are ranked 
number two or three in all other categories involved with 
seniors, Medicare has become a vital cornerstone program to our 
entire economic development, not just health care in the 
service of rural areas. We are very interested in the Medicare 
program, and let me just highlight one issue in particular 
that, Mr. Secretary, we have worked very hard on this committee 
in a bipartisan fashion to achieve.
    Over the last couple of years, as I'm sure you note, we 
have begun running not only surpluses within the Medicare HI 
trust fund, but we as a Congress have decided to not use that 
resource, those resources, those surpluses for anything at all 
except Medicare. In fact, in a bipartisan fashion earlier this 
year, one of the first bills to pass the House was a Medicare 
lock box. Again, in a bipartisan demonstration of our support 
for Medicare, the Medicare surpluses and the need that we set 
those resources aside for future contingencies, future 
opportunities such as what all of our constituents have been 
talking to us about, and that's a prescription drug benefit, as 
well as other modernizations.
    When you come from a State such as Iowa, as well as 
Wisconsin, you recognize that in rural areas in particular, 
there is an abominable reimbursement rate when it comes to 
paying the bills for Medicare. We all pay the same amount of 
taxes, but you visit Wisconsin, as I certainly don't have to 
tell my colleagues from Wisconsin or Iowa or Minnesota, a 
number of others, Washington, I'll leave somebody out and 
they'll be discouraged, so I don't want to do that. But all 
over our country, in the rural areas in particular, we have 
seen a real disservice from Medicare.
    We've tried to do a patchwork quilt in order to achieve 
some reform. We've succeeded in some areas, we have not quite 
succeeded in others. We welcome the challenge that has been put 
on the table by the President and by yourself when it comes to 
reform.
    Mr. Secretary, you are a legend in your own time. You are 
the person who shed light on the whole issue of welfare. You 
led this country when it comes to welfare reform. You and your 
State dragged all of us, in some instances even kicking and 
screaming, to reform. Speaking as one member, I am delighted 
that you are going to be serving us in this capacity, to help 
not only continue the reform in our Nation's services, 
Government services through welfare, but also in the area of 
Medicare. We sorely need your guidance, your leadership in this 
regard as we move forward. So we welcome your testimony here 
today.
    I'd like to now welcome and recognize my friend and 
colleague, the Ranking Member, John Spratt from South Carolina.
    Mr. Spratt. Mr. Secretary, let me echo what the Chairman 
has just said and say that your reputation as a constructive 
reformer, creative reformer, precedes you here in Washington. 
We're happy to see you in the position you've assumed at HHS, 
and we're pleased to have you here this morning. Thank you very 
much.
    Chairman Nussle. I would ask unanimous consent that all 
members be allowed to place into the record at this point an 
opening statement.
    [The opening statements follow:]
                                                     March 6, 2001.

       BUSH BUDGET DIVERTS SOCIAL SECURITY AND MEDICARE SURPLUSES

    Dear Democratic Colleague: I commend to you the attached editorial 
from the March 5 edition of the Washington Post regarding the budget 
outline that President Bush submitted to the Congress last week. While 
the President's outline leaves ambiguous many crucial questions about 
the budget, the editorial points out that the President's $2 trillion 
tax cut clearly will undermine Social Security's and Medicare's long-
term viability.
    The President's budget violates the bipartisan consensus, 
reaffirmed only a few weeks ago by a near unanimous House vote, that 
all of the Social Security and Medicare surpluses should be saved to 
fulfill the existing commitments of those two programs. The President 
saves only part of the Social Security surplus. And he argues that the 
Medicare surplus does not exist, while simultaneously putting this 
supposedly nonexistent Medicare surplus into a reserve to be spent on 
other things.
    Social Security and Medicare surpluses by themselves are 
insufficient to meet existing benefit commitments. Projected insolvency 
of these two programs means that they will need resources in addition 
to the surpluses currently accumulating. The Bush budget's claim that 
the Social Security and Medicare surpluses can be tapped now to somehow 
fund privatization and additional benefits for prescription drugs is 
double counting, pure and simple.
    The President's excessive tax cut will force cuts to many priority 
programs, and it is not surprising that he has declined to specify what 
those cuts are. However, the most worrisome program cuts the tax cut 
will trigger are in Social Security and Medicare.
            Sincerely,
                                       John M. Spratt, Jr.,
                                         Ranking Democratic Member.

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

                         Spinach Before Dessert

    The budget outline that President Bush sent Congress last week 
implies much deeper future spending cuts than administration rhetoric 
suggested. Some of the deepest--and least discussed--would occur in 
Social Security and Medicare. The outline accurately describes the 
perilous long-term financial condition of these programs. That peril 
could be eased significantly if some of the money the president wants 
to use for a tax cut were diverted to them instead--if, to use the 
Clinton phrase, the Bush administration would ``save Social Security'' 
and Medicare first.
    But it has put the tax cut first. The president and his advisers 
suggest they have no choice--that they have set aside as much of the 
budget surplus as they technically can for the next 10 years for the 
programs for the elderly and still have money left over. They say 
there's a limit to how far the debt can be sensibly reduced, and that, 
apart from a tax cut, there's no other way to save the money--keep it 
from being spent--until it will be needed. But is that explanation the 
complete truth?
    It's likely that they could pay down a lot more debt than they 
newly claim. And this is not a budget that seeks to rescue Social 
Security or Medicare. If anything, the administration's proposals would 
worsen the plight of the programs. The budget outline rightly notes 
that Social Security's present path is ``unsustainable;'' the revenues 
in prospect won't remotely cover the cost of the baby boomers' 
retirement. But the administration would reduce those revenues. For 
younger workers, the president wants to partly ``privatize'' Social 
Security--transform it into a blend of traditional benefits and 
personal investment accounts--while preserving the existing system for 
older workers and those already retired. The problem is how to finance 
both systems at once. The outline suggests anew that the administration 
would take at least some of the money for the new accounts from the 
existing Social Security surplus. But that surplus is already 
inadequate to cover prospective costs. How, having deepened the hole, 
would they fill it? Significant benefit cuts is the unspoken answer.
    Supplementary savings accounts might indeed be a good hedge against 
eventual cuts in Social Security benefits. But the right way to begin 
setting them up is not to draw down Social Security reserves. The 
surplus general funds that the president would use to finance a tax cut 
mainly for higher-income people could be used instead to finance 
savings accounts for families across the board. That, too, would be a 
tax cut or could be couched as one. It just wouldn't benefit the same 
people. That's the underlying issue--not a complicated question about 
the best way to reduce the debt or restructure Social Security, but a 
simpler one: in dividing up the expected surplus over the next 10 
years, who wins?
    The Medicare pattern is similar. The hospital part of the program, 
financed by the Medicare share of the payroll tax, is in surplus. That, 
too, will disappear when the boomers retire. The budget outline rightly 
observes that in the long run Medicare will become a major drain on 
existing resources. Yet once again the administration proposes dipping 
into existing reserves rather than augmenting them. It would spread the 
payroll tax even thinner--begin using it to cover not just hospital but 
other Medicare costs, beginning with a possible new drug benefit. By 
shifting costs to the payroll tax, it would free up general revenues, 
thus making it seem easier to finance the president's tax cut. But the 
Medicare trust fund would go bankrupt sooner.
    The administration again says it has no choice; what else to do 
with the surplus? But the world wouldn't end if it, too, were used for 
a couple of years to pay down debt, pending the program's possible 
reform. Modernize the Medicare benefit structure, make whatever 
structural changes seem likely to make the program more efficient and 
feather the cost, then finance it. That's when Congress will know how 
large a tax cut it can afford.
    The president is proposing a large tax cut mainly for the rich that 
would leave the government without sufficient resources to cover 
enormous costs that his own budget clearly identifies. It's the wrong 
policy. His administration should tend to the programs first; eat its 
spinach, then dessert. This budget is the other way around.

    Chairman Nussle. Mr. Secretary, your entire statement will 
be placed in the record as you have presented it. You may feel 
free to present as you wish, and we welcome you and we look 
forward to your testimony. Mr. Secretary.

 STATEMENT OF HON. TOMMY G. THOMPSON, SECRETARY OF HEALTH AND 
                         HUMAN SERVICES

    Secretary Thompson. Good morning, Mr. Chairman and Ranking 
Minority Member Mr. Spratt. Thank you so very much for your 
kind words and all members of the committee. Thank you so very 
much. It is truly an honor for me to be here.
    I was telling the Chairman that I did get sworn in by the 
President a few minutes ago, and I went to the President and 
said, hurry it up so I can get up and testify in front of this 
committee. It's a very short ceremony, made even shorter 
because of that.
    I am honored to be here today, and I am honored to be able 
to discuss in front of this wonderful committee the framework 
of the President's fiscal year 2002 budget for the Department 
of Health and Human Services.
    I accepted the position of Secretary of this Department 
because there is no other job in America where you have a 
greater opportunity to help people, to actually make a 
difference and to improve people's lives. The Department's goal 
must be to build a healthier America by improving the quality 
of health care, the quality of life for all Americans and 
reduce health care costs.
    President Bush has outlined an ambitious agenda for the 
Nation, and the Department will play a major role. There are 
major challenges before us, but I am confident that we will be 
able to work together in a very bipartisan fashion to 
successfully meet them. If we are to succeed, we must be 
willing to reexamine the way we do things on a national level. 
We must no longer be content with the status quo, because 
that's how we've always done it.
    The HHS budget proposes new and innovative solutions for 
meeting the challenges that face this Nation. It seeks to 
enhance the groundbreaking research being conducted at the 
National Institutes of Health (NIH), modernize Medicare and 
expand access to quality health care, increase support for 
America's families and reform the way the Department's 
operations are managed.
    Our proposals also reflect the President's commitment to 
protecting Social Security and other priority programs, while 
continuing to pay down the national debt and providing tax 
relief for all Americans. The budget request for HHS for fiscal 
year 2002 is $471 billion for all the programs, including $55.5 
billion for discretionary programs, an 8 percent increase for 
the whole Department and a 5.1 percent increase for 
discretionary programs.
    Let me highlight some of our major proposals. One of the 
top priorities is the National Institutes of Health. The 
research that is conducted and supported by the NIH offers the 
promise of breakthroughs in preventing and treating disease 
from cancer to Parkinson's and Alzheimer's. And I compliment 
every person on this committee for supporting the NIH budget in 
the past.
    The potential that lies in these projects is why President 
Bush's plan to double those resources for the NIH by 2003 is so 
very vital. The $2.75 billion increase is the largest amount 
ever for NIH. And it will support the highest level of total 
research grants in the agency's history.
    Of all the issues confronting this Department, nothing has 
a more direct impact on the well-being of our citizens than the 
quality of health care. Our budget framework proposes to 
improve the health of the American people by expanding access 
to quality health care and beginning to modernize Medicare, 
including the addition of a prescription drug benefit.
    When Medicare was created in 1965, prescription drugs were 
not the integral part of health care that they are today. Drug 
coverage was not included as part of the Medicare benefit 
package. But what was acceptable 35 years ago is simply 
unacceptable today. As a first step toward remedying the 
situation, the President has put forward an immediate Helping 
Hand prescription drug proposal. This proposal gives immediate 
financial support to the States so that they will be able to 
provide prescription drug coverage to our neediest citizens.
    The President also believes comprehensive Medicare reform 
needs to be enacted at the same time as the prescription drug 
benefit. President Bush wants to devote $153 billion over the 
next 10 years on Medicare modernization that will help improve 
the financial health of the program and add a prescription drug 
benefit for all Medicare beneficiaries.
    Let me add one thing. As the President said last week in 
his budget address, every penny of the Medicare trust fund will 
be used for the Medicare fund, period. We also are proposing 
steps to strengthen the health care safety net for those most 
in need. Community health centers provide high quality, 
community based care to 11 million patients through a network 
of more than 3,000 centers. The President wants to increase the 
number of centers by 1,200 over the next 4 years, and he wants 
to double the number of patients from 11 million to almost 22 
million patients through this network. The President has 
proposed to increase those numbers in this budget.
    We propose to increase funding for community health centers 
by $124 million, which is the first installment in expanding 
this already successful program. To further increase 
flexibility and efficiency, we also will work with States to 
develop ideas that will increase States' ability to expand 
Medicaid and the State Child Health Insurance Program, more 
commonly referred to as SCHIP, to cover more of the uninsured.
    Within this framework of increased State flexibility, the 
Administration also plans to work with States to stem the 
growth of Medicaid costs and be able to ensure the fiscally 
prudent management of the Medicaid and S-CHIP programs. A 
former Secretary once said: The family is the original 
department of health, education and welfare. The name of this 
Department may have changed, the truth of the statement has 
not. America's families are its strength, and this Department 
is committed to doing everything in its power to help better 
the lives of America's families and their children.
    We are proposing a number of new initiatives to help to 
improve the quality of life of our Nation's families, including 
a new after school certificate program. We must be willing to 
invest in programs that support working families in order to 
move people from dependency to success in the work force. And 
one of the most important things that we in Government can do 
is help working families to assist them in obtaining child 
care. Last year, the Congress voted to provide a substantial 
increase in child care funding, and this year, we're asking you 
to take another step. The President has proposed to dedicate 
$400 million for after school certificates to help low income 
working parents to pay for after school care for their 
children. We expect these after school activities to have a 
strong educational component, helping children to achieve 
success in school.
    The budget also includes items on promoting stable families 
and responsible fatherhood, maternity group homes, which is a 
new program, a compassionate capital fund and a proposal to 
establish a center for faith-based and community initiatives 
within the Department. We also will increase funding for 
substance abuse programs by $100 million.
    In addition to funding these priorities, we're making 
changes at HHS. We must never stop asking ourselves at that 
Department, how can we do things better. One of the top 
priorities of this administration and one of mine is improving 
the management of the Health Care Financing Administration 
(HCFA). The demands in this organization have grown 
dramatically in the last few years. We must ensure that it has 
the necessary resources to successfully administer the 
Medicare, the Medicaid and the State Children's Health 
Insurance Program (SCHIP) on which so many people depend.
    At the same time, we recognize that patients, providers and 
States have legitimate complaints about the scope and the 
complexity of the regulations and the paperwork that govern 
these programs. During my confirmation hearings, I said that 
HCFA needs to undergo a thorough examination of its missions, 
its competing demands and its resources. We're currently in 
that process of undertaking just that kind of comprehensive 
review that will make some innovative changes. We will consider 
any and all options for improving that agency and making it 
more responsive and an effective organization.
    We must also look at the Department as a whole, and HHS 
will continue to play a lead role in the Governmentwide effort 
to streamline, simplify and provide electronic options for the 
grants management processes.
    Mr. Chairman, the budget I bring before you today contains 
a number of different proposals. But one common thread binds 
them all together. That is a desire to improve the lives of our 
American citizens. All of our proposals, from enhancing 
scientific research to modernizing Medicare, are put forward 
with this one simple goal in mind. I know all this is a goal 
that is shared by all of you on a bipartisan basis.
    I am prepared to work with each of you to ensure that we 
develop a budget for this Department that effectively serves 
the national interests. While this is not an exhaustive list of 
the President's Blueprint, I have outlined some of the 
President's top priorities for the Department of Health and 
Human Services.
    I would now be happy to answer and entertain any questions 
that you may have. And I thank you for giving me this 
opportunity to be here.
    [The prepared statement of Secretary Thompson follows:]

     PREPARED STATEMENT OF HON. TOMMY G. THOMPSON, SECRETARY, U.S. 
                DEPARTMENT OF HEALTH AND HUMAN SERVICES

    Good Morning, Chairman Nussle, Congressman Spratt, and Members of 
the committee. I am honored to appear before you today to discuss the 
framework of the President's FY 2002 budget for the Department of 
Health and Human Services.
    As I have noted on other occasions, I accepted the position of 
Secretary of this Department because I believe that there is no other 
job in America where you have a greater opportunity to help people to 
actually make a difference in people's lives and improve the quality of 
life they lead. President Bush has outlined an ambitious agenda for the 
nation, and I take great pride in the fact that this Department will 
play a major role in carrying out his plans. I would be less than 
candid if I did not acknowledge the vast scope of the challenges that 
lie ahead of us, but I am confident that we will be able to work 
together in a bipartisan fashion to successfully meet them.
    If we are to succeed in improving the lives of the people of this 
great nation, we must be willing to take another look at the way we do 
things on the national level. We must no longer be content to do things 
a certain way because ``that's how we've always done it"; but must 
instead be willing to reform our business practices and seek innovative 
ways to manage our programs. And while we know that the Federal 
Government has an important role to play, we must also recognize that 
we must look to others to State and local governments, to community 
faith-based organizations, to academic and religious institutions for 
new and creative approaches to solving public problems. The President 
and I share this view, and I am proud to say that it is reflected in 
the budget framework he has put forward.
    The framework I present to you today keeps the promises the 
President has made and proposes new and innovative solutions for 
meeting the challenges that face the nation. It seeks to enhance the 
groundbreaking research being conducted at the National Institutes of 
Health; modernize Medicare and expand access to quality healthcare; 
increase support for America's families; and reform the way the 
Department's operations are managed. Our proposals also reflect the 
President's commitment to a balanced fiscal framework that puts 
discretionary spending on a more reasonable and sustainable growth 
path, protects Social Security and other priority programs, continues 
to pay down the national debt, and provides tax relief for all 
Americans.
    Mr. Chairman, the total HHS request for FY 2002 is $ 471 billion 
(budget authority) and $468 billion (budget outlays). The discretionary 
component totals $ 55.5 billion (budget authority). Let me now 
highlight some of our major proposals.

        ENHANCING RESEARCH AT THE NATIONAL INSTITUTES OF HEALTH

    The National Institutes of Health (NIH) is the largest and most 
distinguished biomedical research organization in the world. The 
research that is conducted and supported by the NIH, from the most 
basic research on biological systems to the effort to map the human 
genome, offers the promise of breakthroughs in preventing and treating 
any number of diseases. A top priority for this Department is ensuring 
that the NIH continues to have the resources necessary to help turn 
these promises into a reality.
    To this end, the framework I present to you today includes a 
Presidential Initiative to double NIH's FY 1998 funding level by FY 
2003. For FY 2002, we are proposing an increase of +$2.75 billion, 
which will be the largest increase ever for NIH. This funding level 
will enable NIH to support the highest level of total research grants 
in the agency's history.
    With any large increase in resources, there also comes the 
increased challenge of making sure that those resources are managed 
properly. I take this responsibility very seriously, and NIH will be 
working to develop strategies to ensure that we are managing taxpayer 
dollars in the most efficient and effective way.

    MODERNIZING MEDICARE AND EXPANDING ACCESS TO QUALITY HEALTHCARE

    Of all the issues confronting this Department, nothing has a more 
direct effect on the well-being of our citizens than the quality of 
health care. Our budget framework proposes to improve the health of the 
American people by beginning the process of modernizing Medicare, 
including the addition of a prescription drug benefit; and by expanding 
access to quality health care.

                         IMMEDIATE HELPING HAND

    For 35 years the Medicare program has been at the center of our 
society's commitment to ensuring that all of our seniors enjoy a 
healthy and secure retirement. But the Medicare program is more than 
just a social contract between the government and the elderly, it is a 
commitment that our society has made to our seniors, as well as to the 
disabled. Honoring this commitment means not only making sure that the 
program is financially prepared for the wave of new beneficiaries that 
the aging of the babyboom generation will bring, but ensuring that 
current beneficiaries have access to the highest quality care.
    When Medicare was created in 1965, prescription drugs were not the 
integral part of health care that they are today and coverage for them 
was not included as part of the Medicare benefit package. But what was 
acceptable 35 years ago is simply unacceptable today. As a first step 
toward remedying this situation, the President has put forward an 
Immediate Helping Hand (IHH) prescription drug proposal. This proposal 
gives immediate financial support to States so that they can provide 
prescription drug coverage to beneficiaries with limited incomes or 
high drug expenses.
    The IHH proposal would complement and build on plans that are 
currently available in almost half the states, and under consideration 
in most others. The IHH would be fully funded by the Federal Government 
and would provide States with the flexibility to choose how to 
establish coverage or enhance existing plans. Individuals with incomes 
up to $11,600 and married couples with incomes up to $15,700 who are 
not eligible for Medicaid or a comprehensive private retiree benefit 
would pay no premium and no more than a nominal charge for 
prescriptions. Individuals with incomes up to $15,000 and married 
couples with incomes of up to $20,300 would receive subsidies for at 
least half the cost of the premium for high-quality drug coverage. The 
IHH plan also includes a catastrophic component that would cover any 
Medicare beneficiaries with very high out-of-pocket drug costs. The 
President's proposal would provide immediate coverage for up to 9.5 
million beneficiaries while we work to enact broader Medicare reform.
    The Immediate Helping Hand is a temporary plan to help our Nation's 
seniors who are most in need of assistance with their prescription drug 
costs. The benefit will sunset in 4 years or as soon as a comprehensive 
Medicare reform and prescription drug benefit is implemented. However, 
this plan is critical because it provides assistance to millions of 
Americans this year. The President is committed to providing a 
prescription drug benefit to all Medicare beneficiaries and wants to 
work with Congress in a bipartisan fashion to see this happen.
    The President believes comprehensive Medicare reform needs to be 
enacted at the same time as a prescription drug benefit. As I have 
already mentioned, the Medicare program has not kept pace with modern 
medicine. Today, Medicare covers only 53 percent of the average 
senior's annual medical expenses and the program's benefits package is 
lacking. In addition, Medicare is facing a looming fiscal crisis. A 
full assessment of the health of both the Part A and Part B Trust Funds 
reveals that spending exceeds the total of tax receipts and premiums 
dedicated to Medicare and that gap is expected to widen dramatically. 
Even without the financing problem, Medicare modernization would be 
necessary to ensure beneficiaries get high quality health care. 
President Bush wants to devote $153 billion over the next 10 years on 
urgently needed Medicare modernizations that will help improve the 
financial health of the program and the addition of a prescription drug 
benefit for all Medicare beneficiaries.

                   EXPANDING COMMUNITY HEALTH CENTERS

    While modernizing Medicare is the cornerstone of our healthcare 
agenda, we are also proposing steps to strengthen the health care 
safety net for those most in need. Community Health Centers provide 
high quality, community based care to approximately 11 million 
patients, 4.4 million of whom are uninsured, through a network of over 
3,000 centers in rural and urban areas. The President has proposed to 
increase the number of health center sites by +1,200 by FY 2006. As a 
first installment of this multiyear initiative, we propose to increase 
funding for Community Health Centers by +$124 million. We will also be 
looking at ways to reform the National Health Service Corps so as to 
better target placement of providers in areas experiencing the greatest 
shortages.

                  INCREASING ACCESS TO DRUG TREATMENT

    The problems caused by substance abuse affect not only the physical 
and mental condition of the individual, but the well-being of society 
as a whole. Nationwide, approximately 2.9 million people with serious 
substance abuse problems are not receiving the treatment they 
desperately need. To help close this treatment gap, we propose to 
increase funding for substance abuse treatment by +$100 million. These 
funds will be used to increase the Substance Abuse Block Grant, the 
primary vehicle for funding State substance abuse efforts, and to 
increase the number of Targeted Capacity Expansion grants, which seek 
to address the treatment gap by supporting strategic and rapid 
responses to emerging areas of need; including grants to organizations 
that provide residential treatment to teenagers.

               INCREASING SUPPORT FOR AMERICA'S FAMILIES

    William Bennett once said that ``the family is the original 
Department of Health, Education, and Welfare'', and while the name of 
this Department may have changed, the truth of this statement has not. 
America's families are its strength, and this Department is committed 
to doing everything in its power to help better the lives of America's 
families and children. We are proposing a number of new initiatives to 
help improve the quality of life of our nations' families; as well as 
to increase support for the charitable organizations that can make such 
a difference in people's lives.

                       AFTER SCHOOL CERTIFICATES

    One of the lessons I learned during my years as Governor of 
Wisconsin was that for people to move from dependency to success in the 
workforce, you had to be willing to invest in programs that support 
working families. One of the most important things that we as a 
government can do to help working families is to assist them in 
obtaining high-quality child care. Last year the Congress voted to 
provide a substantial increase in child care funding, and this year we 
are asking you to take another step to help working parents, and their 
children, be successful. The President has proposed to specifically 
dedicate $400 million for After School Certificates within the Child 
Care and Development Block Grant. This would help low income working 
parents to pay for the costs of after school care for their children. 
We expect these after school activities to also have a strong 
educational component, helping children to achieve success in school.

                   PROMOTING SAFE AND STABLE FAMILIES

    Our budget framework takes a number of steps to help protect our 
most vulnerable and at-risk children and to help them live safe and 
productive lives. First, we propose a +$200 million increase for the 
Promoting Safe and Stable Families program, which supports State and 
Tribal child welfare agencies in carrying out family preservation and 
support services. These additional funds will be used to help keep 
children with their biological families, or if it is not possible for 
them to safely remain with them, to place them with adoptive families. 
We will also provide an additional $2 million to expand collaborative 
Federal/State child welfare monitoring efforts. Second, we propose to 
create a new $67 million initiative within the Promoting Safe and 
Stable Families program to assist children of prisoners. This 
initiative will provide grants through States to assist faith and 
community-based groups in providing a range of activities to mentor 
children of prisoners and probationers, including family-rebuilding 
programs, that serve low-income children of prisoners and probationers. 
Finally, we propose an additional +$60 million for the Independent 
Living program. These funds would be used to provide vouchers, worth up 
to $5,000, to youths who are aging out of foster care so that they can 
obtain the education and training they need to lead productive lives. 
Funds could be used to pay for either college tuition or vocational 
training.

                         MATERNITY GROUP HOMES

    One of the toughest problems we face in trying to end the cycle of 
dependency is children having children. These teenage mothers have 
often suffered abuse or neglect themselves and may not have a safe and 
supportive family environment in which to raise their babies. To begin 
removing the obstacles to success that these mothers and their children 
face, we are proposing $33 million for a new Maternity Group Homes 
program. This program will support State efforts to work with 
organizations that operate community-based, adult-supervised group 
homes for teenage mothers and their children as well as to provide 
certificates to young mothers to obtain supportive services. These 
homes will provide a safe and nurturing environment for young mothers 
while offering the support necessary to help them and their children to 
improve their lives.

                    PROMOTING RESPONSIBLE FATHERHOOD

    Helping young mothers is an important part of our program to assist 
America's families, but it is also important that we recognize the 
critical role that fathers play in the lives of their families.
    Our budget framework includes $64 million to begin an initiative to 
promote responsible fatherhood by providing competitive grants to 
faith-based and community-based organizations that work to strengthen 
the role that fathers play in their families' lives. These funds will 
be used to support programs that help low-income and unemployed fathers 
and their families to avoid dependence on welfare, and to fund programs 
that promote successful parenting and marriage. Of these funds, $4 
million will be used for special projects of national significance.

                    COMPASSION AND CHARITABLE GIVING

    The President has been a leader in recognizing the important role 
that charitable organizations play in delivering services to the 
public, and we are proposing a number of steps to increase Federal 
support for these groups. First, we are requesting $67 million to 
establish a Compassion Capital Fund. Through public and private 
partnerships, these resources will be used to provide start-up capital 
and operating funds to qualified charitable organizations so that they 
can expand or emulate model social services programs. To complement 
this Compassion Capital Fund, we also propose to create a $22 million 
fund to support research on ``best practices'' among charitable 
organizations. Our budget framework also includes $3 million to 
establish a Center for Faith-Based and Community Initiatives in the 
Department in accordance with the President's recent Executive Order. 
Finally, we have included a proposal to encourage states to provide tax 
credits for contributions to designated charities that work to address 
poverty. Under this proposal, States would be allowed to use Federal 
funds provided through the Temporary Assistance for Needy Families 
program to partially offset revenue losses that resulted from the tax 
credits.

        REFORMING THE MANAGEMENT OF THE DEPARTMENT'S OPERATIONS

    For any organization to succeed, it must be willing to change. We 
must never stop asking ourselves how can we be doing things better. But 
we must also recognize that we do a disservice to all that rely on this 
Department if we do not provide the resources necessary to effectively 
administer our programs. In preparing our budget framework, we began 
the process of evaluating the programs and business practices of this 
Department and identifying the areas where we can do a better job of 
managing taxpayer resources, as well as those areas where new 
investments are required if we are to successfully administer our 
operations.

              HEALTH CARE FINANCING ADMINISTRATION REFORM

    One of the top priorities of this administration is improving the 
management of the Health Care Financing Administration (HCFA). The 
demands on this organization have grown dramatically in the last few 
years, and we must make sure that they have the necessary resources to 
successfully administer the Medicare, Medicaid, and State Children's 
Health Insurance programs on which so many people depend. At the same 
time, we must recognize that patients, providers, and States have 
legitimate complaints about the scope and complexity of the regulations 
and paperwork that govern these programs. During my confirmation 
hearings, I said that HCFA needed to undergo a thorough examination of 
its missions, its competing demands, and its resources. We are 
currently in the process of undertaking just this kind of comprehensive 
review, and we will consider any and all options for improving the 
agency and making it a more responsive and effective organization.

                INVESTING IN DEPARTMENTAL INFRASTRUCTURE

    The only way that this Department can effectively serve its many 
clients is if we commit to making the necessary investments in our 
management and infrastructure. One of the challenges in a large, 
decentralized Department such as HHS is finding ways to bring together 
diverse activities and to develop coordinated systems for managing our 
programs. Our budget framework provides the resources necessary to 
continue modernizing our facilities, and proposes steps to begin the 
process of streamlining our financial management and information 
technology systems so that we can enhance coordination across the 
Department and eliminate unnecessary and duplicate systems.
    It is critical that we invest in the modernization of the 
laboratories and office facilities in which many of our most important 
activities occur. With this goal in mind, we are requesting $150 
million to continue a major revitalization of labs and scientific 
facilities at the Centers for Disease Control and Prevention. We have 
also included funding for the Food and Drug Administration to finish 
construction of the Los Angeles laboratory and to continue development 
of the new headquarters facility in White Oak, Maryland.
    For financial management, we propose to invest an additional $50 
million to move toward a unified financial accounting system. The 
Office of Inspector General has cited major problems with the 
Department's current system structure, which involves five separate 
accounting systems operated by multiple agencies. We plan to replace 
these antiquated systems with one or two unified financial management 
systems that will increase standardization, reduce security risks, 
allow HHS to produce timely and reliable financial information needed 
for management decisionmaking, and provide accountability to our 
external customers.
    In the information technology arena, we are proposing $ 30 million 
for a new Information Technology Security and Innovation fund. 
Currently, the Department's information technology systems are highly 
decentralized, heterogeneous, and vulnerable to exploitation. Funds 
would be used to implement an Enterprise Infrastructure Management 
approach across the Department that would minimize our vulnerabilities 
and maximize our cost savings and ability to share information. With 
this approach, we will be able to reduce duplication of equipment and 
services and be better able to secure our systems against viruses and 
network intrusion.
    As the largest grant-making agency in the Federal Government, this 
Department will also continue to play a lead role in the governmentwide 
effort to streamline, simplify, and provide electronic options for the 
grants management processes. As part of the Federal Grant Streamlining 
Program, we will work with our colleagues across the government to 
identify unnecessary redundancies and duplication in the more than 600 
Federal grant programs, and to implement electronic options for all 
grant recipients who would prefer to apply for, receive, monitor, and 
close out their Federal grant electronically.

                         REDIRECTING RESOURCES

    Being a wise steward of taxpayer resources means not only 
recognizing where you need to invest, but also where resources can be 
redeployed to more effective uses. In preparing our budget framework, 
we carefully reviewed each agency, identified areas where funding could 
be redirected, and made targeted reductions in selected programs. Funds 
for one-time projects and unrequested activities were also eliminated, 
and the monies redirected to higher priority programs. These decisions, 
which were made in accordance with the President's overall fiscal 
goals, will help to moderate the growth of the Department's budget and 
put it on a more sustainable path.
    Last year, Congress took an important step to protect the integrity 
of the Medicaid program by passing legislation to address the ``upper 
payment limit'' loophole, which allowed states to draw down billions of 
dollars in Federal matching payments for hospitals and nursing homes 
without any assurance that these payments were used for their intended 
purposes. But this legislation only partially addressed the problem, 
because it created a higher upper payment limit for non-State 
government operated hospitals. Our budget proposes to go even further 
in closing the loophole, by prohibiting new hospital loophole plans 
that were deemed approved after December 31, 2000 from receiving the 
higher upper payment limit proposed in the Department's final rule 
implementing the upper payment limit legislation.
    In addition to taking steps to further address the Medicaid ``upper 
payment limit'' loophole, the administration plans to work with States 
to develop ideas that will improve States' ability to provide quality 
health care through their Medicaid and State Child Health Insurance 
Programs. Within this framework of increased State flexibility, the 
administration also plans to work with States to stem the growth of 
Medicaid costs and ensure the fiscally prudent management of the 
Medicaid and SCHIP programs.

               WORKING TOGETHER TO BUILD A BETTER NATION

    Mr. Chairman, the budget I bring before you today contains a number 
of different proposals, but one common thread binds them all togther a 
desire to improve the lives of the American people. All of our 
proposals, from enhancing scientific research to modernizing Medicare, 
from expanding access to care to increasing support for the nation's 
families, are put forward with this one simple goal in mind, and I know 
this is a goal we all share.
    As you begin to consider our proposals, let me leave you with one 
final thought. Senator Everett Dirksen said of the legislative process: 
``You start from the broad premise that all of us have a common duty to 
the country to perform. Legislation is always the art of the possible. 
You could, of course, follow a course of solid opposition, of 
stalemate, but that is not of the interest of the country.'' Starting 
from this premise, I am prepared to work with each of you to ensure 
that we develop a budget for this Department that effectively serves 
the national interest. I would be happy to address any questions you 
may have.

    Chairman Nussle. Mr. Secretary, thank you so much for your 
testimony.
    I would like to dive right into a topic which has been 
talked about quite a bit on Capitol Hill over the last week, 
and it involves Medicare and its inclusion in the President's 
contingency fund as presented in his budget. There has been a 
very high degree of angst concerning that, and I want to get 
your take on that. You said in your testimony, and I'd like you 
to amplify that, my understanding from the President's budget 
and from your testimony today is that Medicare is for Medicare 
is for Medicare is for Medicare is for Medicare. Is there 
anything that you have to change that understanding?
    Secretary Thompson. I would just add one more, it's for 
Medicare.
    Chairman Nussle. It's for Medicare. [Laughter.]
    So regardless of how it's called, where it's put, lock 
boxes, contingency funds, here, there, in a mattress, in a 
mason jar in the back of my back yard, which I'd certainly 
volunteer for if somebody would like to put it there, Medicare 
is for Medicare.
    Secretary Thompson. That is correct.
    Chairman Nussle. And it's your intent that based on the 
President's budget that there be an immediate need for about 
$153 billion of that for Medicare modernization and an 
Immediate Helping Hand.
    Secretary Thompson. That is correct.
    Chairman Nussle. There is also some who have suggested that 
if Medicare modernization can move even more quickly than at 
first it was believed to be able to move, in a much more 
expedited fashion that in fact more of that Medicare trust fund 
surplus could be used for that type of reform. Is that correct?
    Secretary Thompson. That is absolutely correct. The 
President is adamant about trying to get through this session, 
and especially this year, a Medicare reform package, one with 
prescription drugs. What the President and what I'm very 
concerned about is that the prescription drug proposal is the 
one that everybody wants to pass. And it's more contentious and 
more comprehensive and more difficult to pass Medicare reform.
    But the President and I personally and strongly urge 
Congress to work with us on a bipartisan basis to streamline, 
modernize and make Medicare more efficient, include 
prescription drugs therein, and give our senior citizens more 
options. We will work with anybody in this committee or anybody 
in the Congress to accomplish that goal.
    Chairman Nussle. If we prepare a budget here on Capitol 
Hill which segregates the entire HI trust fund surplus into a 
different sort of mechanism than the President's contingency 
fund as we write that budget, would you have any objection to 
that way of preparing the budget, so that we end all confusion 
about where Medicare is and should be?
    Secretary Thompson. Mr. Chairman, the Congress certainly 
can do that. The administration does not believe that is 
necessary. But if Congress feels that that is the way to go, we 
will strongly support you.
    Chairman Nussle. The administration has not been here long 
enough to endure the concerns that have been expressed over the 
last probably six to 8 years involving Medicare and its use. I 
think it's a well established principle now, particularly in 
the House of Representatives, that we put that in a lock box 
and lock it away not only financially, but lock it away 
politically so that it can't be used for anything else, as well 
as cannot be used rhetorically against any one particular 
person or party. I think it would be wise if we construct the 
budget that way.
    I would just like to end my questioning with a question 
with regard to Medicare reform in general. And I've never been 
this adamant about a Medicare reform proposal that I'm about to 
be right now. I've been willing to consider alternatives as a 
band-aid or as a tourniquet to the situation that we find 
ourselves in with Medicare as we move forward. But I must tell 
you, Mr. Secretary, that if I have to go home one more time and 
present one more Medicare bill that allows rural areas in this 
country to continue to take a back seat in reimbursement for 
its Medicare providers, you can count me out of the reform.
    I'm willing to step up and do whatever we need to do to 
modernize this program. I think that all of us on this 
committee are willing to engage in that. We'll even engage in 
that, I hope, in a bipartisan way. But I must tell you, we 
cannot, as far as I'm concerned, this is just one member 
speaking, proceed with a Medicare program that allows the kind 
of discrepancy between reimbursements that we have seen over 
the last years. I would just ask if you share that concern. You 
may not be able to make it as emphatic as I can.
    But do you share that concern? Is this one of the 
cornerstones or goals that you hope to achieve to try and take 
out that reimbursement discrepancy that we've seen over the 
last 10, 20 years?
    Secretary Thompson. Mr. Chairman, there's no question 
there's an inequitable situation as far as reimbursement and 
payment in the Medicare funds. I come from a State like yours 
that has had those abuses and has had that kind of disparity in 
payments. But you know as well as I do that formula fights are 
probably the most contentious of any kind of a fight in 
Congress. I'm hopeful to work with you on a bipartisan basis in 
which we will not take from some States and give to other 
States, because I don't think it's going to pass.
    So what we have to do is find ways to infuse some dollars 
to make more equitable payments, so that we treat more 
uniformly all the States and give everybody the opportunity to 
be treated equitably. For that I am very much in favor and am 
going to work with you and with anybody in this Department to 
accomplish that. I would take your admonition very seriously 
and hope that we can work very quickly, hard, on a bipartisan 
basis, to develop an efficient Medicare system that needs to be 
streamlined and more equitable. I'm confident we can do that if 
we're willing.
    Chairman Nussle. We welcome your partnership in that regard 
and appreciate your testimony. Now I'd like to recognize Mr. 
Spratt.
    Mr. Spratt. Thank you very much, and thank you for your 
testimony.
    I think the confusion starts with the New Beginnings budget 
that was sent up last week. In particular, if you have one 
available to you, it's Table S1, page 185. That particular 
table starts by citing the baseline surplus, $5,644,000,000. It 
then backs out the Social Security surplus, which we've agreed 
to do for lock box purposes. But there's a glaring omission. 
Even though the Republican leadership brought to the Floor a 
bill that had bipartisan support to lock box Medicare, and also 
back it out, set it aside, this table omits that step.
    It then goes on, deducts the tax relief estimate, 
$1,620,000,000, and deducts several initiatives, $153 billion 
for the Helping Hand and Medicare modernization, additional 
spending of $20 billion debt service, and then contingencies, 
$842 billion, which the President cited in his speech and other 
witnesses have cited as the cushion fund. The assurance that if 
these projections don't pan out or spending is higher than 
projected, the tax cut will end up taking more revenues away, 
we've still got $842 billion there as a margin of error.
    But in truth, that $842 billion contains the Medicare trust 
fund, the HI trust fund surplus. So that's the reason we're 
saying, based on Table S1, that you're counting the Medicare 
trust fund surplus in a general contingency account. It doesn't 
say contingencies for Medicare. It says contingencies, general 
contingencies. And witnesses, beginning with the President, 
have said this is available, this is our assurance that if we 
backslide and these numbers go wrong, we've got this much 
cushion in there.
    Do you think this chart is in error?
    Secretary Thompson. I don't think the chart is in error. 
But I think the conclusion or interpretation may be. I 
certainly would not say that you're in error, Congressman. What 
I'd say is that I think there's some confusion. Let me try and 
explain.
    As we all know, Part A of the Medicare fund is going to 
have a surplus of about $525 billion over the course of the 
next 10 years. Part B is going to have a deficit of 
$1,200,000,000. And the President feels that we should 
streamline all of Medicare, Part A and Part B. It's impossible 
just to separate Part A and say there's a surplus when Part B, 
which is also part of Medicare, has a deficit of 
$1,200,000,000.
    But saying all that, the President also has made it crystal 
clear that the $525 billion is for Medicare. In Congress, 
there's a law on the book that says that every person is 
entitled to Medicare, and the only way it could be changed is 
if Congress would change it. And I don't think this Congress is 
about to change that.
    So that money, whether you call it a contingency or for 
Medicare, it is for Medicare, and that money will be spent for 
modernizing and improving Medicare for this country.
    Mr. Spratt. Well, therefore, the general contingency fund 
has to be reduced by $373 billion, $153 billion you're 
dedicating to Medicare for Helping Hand and Medicare 
modernization. You back that out of the $526 billion you get 
$373 billion. But that money is not for general contingencies. 
It's just for Medicare, if I hear you right.
    Secretary Thompson. If the $153 billion is not enough, that 
money can be used and should be used for improving and 
streamlining and reorganizing Medicare.
    Mr. Spratt. But for no other purpose?
    Secretary Thompson. For no other purpose.
    Mr. Spratt. Would you have any objection then if we passed 
the lock box legislation as we proposed?
    Secretary Thompson. I am not at liberty to say that, 
Congressman. That is something that has been decided by OMB to 
put it in this category. But this money is for Medicare. And 
the only people that could actually change that are the people 
in this room and the people in the Congress. I don't think that 
this Congress is about to do that.
    Mr. Spratt. Well, I think the best thing for this Congress 
to do is go ahead and pass the legislation, enact the 
legislation we passed in the House.
    One other source of confusion is that you began your 
testimony and this blue book states that despite statements, 
despite impressions, Medicare is not in surplus. The HI trust 
fund is maybe in surplus, but Medicare is in deficit.
    I have two problems with that. One is, a deficit implies 
that the overall amount of money that's being spent in excess 
of what's being collected from payroll taxes and premiums is a 
mistake. I mean, we don't intend deficits. In truth, what 
you're calling a deficit now is a policy designed subsidy, 
present as a feature of the Medicare program from its very 
beginning.
    So the language of this report, your language earlier, 
converts a subsidy that was intended, part of our policy, 
something that comes out of the general fund, we're committing 
this much out of the Treasury for Part B of Medicare. You take 
that and use a really pejorative, at least around here, the 
word deficit has negative connotations. It suggests something 
that was done wrong, something done by mistake, something we 
need to correct and reverse, as opposed to the fact that this 
is really a subsidy we intended all along.
    Secretary Thompson. Congressman Spratt, I do not in any way 
try to impugn or make pejorative remarks whatsoever. Let me try 
and rephrase it.
    Part B, over the next 10 years, is going to have more 
expenditures. If you call it subsidy or you call it deficit, 
there's going to be more outgo than income, about 
$1,200,000,000. And you put Part B and you put Part A together, 
there is less money coming into Medicare than what's going out. 
You can call it--if you want to call it subsidy.
    Mr. Spratt. You called it a subsidy. We intended it, we 
designed it. We invented it, it's a feature of the program. 
It's not a deficit, because that implies that----
    Secretary Thompson. But the President and the 
administration and I do not believe, then, that you can truly 
say that you only can look at Part A and say there's a surplus. 
We think you have to look at both Part A and Part B and we 
think, and I don't want to get into a position of saying you 
said, I said. I'm here in a very humble way to tell you that we 
need to fix Medicare.
    And I want to work with you, Congressman, to do that. I 
want to do it on a bipartisan basis. I want to fix both Part A 
and Part B, and I've got ideas and I know you have some ideas. 
I would like to be able to sit down with you in your office, 
discuss them and come up with a solution so we can both walk 
away from here a year from now and say, you know, we passed a 
Medicare bill on a bipartisan basis, it's going to be secure 
for our Senior citizens, there's a prescription drug, there's 
some options in there. And it's financially solvent for a long 
time in the future.
    That's my goal, that's the President's goal, and that's 
what we want to do, Congressman.
    Mr. Spratt. I welcome the opportunity. But the language 
matters. If you say something is a deficit when it's really a 
subsidy, it matters to the ultimate outcome, how you analyze 
it.
    Secretary Thompson. All I can say is I come from Wisconsin 
and I apologize if I'm not up to speed on your jargon yet, but 
I will try and learn as fast as I can, sir.
    Mr. Spratt. You were just sworn in a few minutes ago. I 
doubt that you wrote this. I'm not necessarily directing it at 
you, I'm directing it at whoever wrote this policy. Because it 
takes the whole matter, in my opinion, and stands it on its 
head.
    Let me mention one other problem, the light's on and I'll 
come back later. In 1993, the Medicare HI trust fund was almost 
scraping bottom.
    Secretary Thompson. Right.
    Mr. Spratt. Projections showed that by 1999, it would be in 
a deficit position, a true deficit position, an unintended one. 
And we added various things to it. We also made reductions in 
the rate of increase of Medicare payments.
    As a consequence, we've been able to build up this surplus 
in the Medicare HI trust fund. And we've been able to extend 
the solvent life of that particular trust fund for financing 
inpatient care until past 2020, a substantial improvement over 
1999. And we're pretty proud of that.
    But one of the ways we've done it is by saying this money 
is dedicated to that purpose, and that's the purpose the trust 
fund served. When I read the statement here, in New Beginnings, 
it suggests to me that trust funds don't serve a purpose. I 
think they do serve a purpose. There's a certain fictional 
aspect to them. But I think by dedicating, earmarking and 
preserving funds that are intended for a certain purpose, they 
do fulfill a function.
    But if you take what we have accumulated and will 
accumulate, the $526 billion that we will accumulate 
additionally for the Medicare HI trust fund over the next 10 
years, and use some of that to pay for Medicare prescription 
drugs, which we all know is going to be very expensive, then 
you'll only shorten the life of the HI trust fund. When we look 
at your layout here, we get the distinct impression that what 
you propose to do is use that trust fund, that surplus, to pay 
for additional coverage. We propose to use the general surplus 
to pay for additional coverage, rather than dipping into the 
Medicare trust fund, shortening its solvent life.
    Wouldn't you agree that that's the problem, if you're going 
to pay for it out of the Medicare HI trust fund, then you've 
just shortened the solvent life of the HI trust fund?
    Secretary Thompson. If you don't make any other changes, 
you're absolutely correct. But if you make the changes and 
streamline and improve it, there's going to be some 
efficiencies built in, and that's what I'm hoping for, and 
that's what the President's hoping for, Mr. Spratt.
    Mr. Spratt. Well, according to your statement in Blueprint 
for New Beginnings, we've got a $645 billion deficit in this 
program. Do you think that you can squeeze $645 billion out 
with reforms?
    Secretary Thompson. I can't tell you that we can. I can 
tell you that we're going to try. And I can tell you that I 
need your help in order to make that possible.
    Mr. Spratt. Well, I'm saying we need your help too by 
recognizing that if this is to be done, I doubt you can effect 
$645 billion in cost reductions over 10 years. That is another 
strong signal that you've got to set aside some of this general 
fund surplus to be used for Medicare reform, prescription drugs 
and other things we both say we're committed to.
    Secretary Thompson. Thank you.
    Mr. Spratt. Thank you very much.
    Chairman Nussle. Just for members' information, we will be 
continuing the hearing. There's a vote on, please vote and come 
back and we'll keep the hearing going.
    Mr. Bass.
    Mr. Bass. Thank you, Mr. Chairman.
    Congratulations, Secretary Thompson.
    Secretary Thompson. Thank you, Congressman.
    Mr. Bass. It's a real pleasure to see you there, and I'll 
never forget listening to you talk about welfare reform. It was 
an inspiration in a time when we needed it. It made a big 
difference in this country.
    I also recognize that this is your first hour, if not your 
first day, first hour, and I don't really think it's proper to 
go into great detail at this point, except to talk about a 
couple of things. First of all, I want to associate myself as 
strongly as I can with the remarks of our Chairman, Mr. Nussle, 
about the AAPCC formula and how that impacts the disparity in 
Medicare coverage for rural versus urban and suburban areas in 
this country. I understand, to use a colloquial term, that this 
is a food fight. However, it is a problem that afflicts rural 
districts and rural areas all over this country.
    Also, I want to ask you a couple of quick questions about 
the President's Medicare reform proposal. The Helping Hand is 
the President's prescription drug proposal, is that right?
    Secretary Thompson. That is correct.
    Mr. Bass. And it is different from his campaign proposal, 
which was essentially a block grant, is that right? Or is this 
basically an extension of that?
    Secretary Thompson. It's basically an extension of that, 
Congressman, it's more refined than it was in the campaign. But 
it's basically a block grant.
    Mr. Bass. Does the budget submission include funding for 
both Medicare reform and the Medicare prescription proposal?
    Secretary Thompson. Yes, it does, Congressman. It puts 
aside $156 billion--$3 billion this year and $153 billion over 
the next 10 years--of which $46 billion is set aside for 
Helping Hand.
    Mr. Bass. OK, good.
    Mr. Chairman, those are the only questions I have. I'll 
yield back to you.
    Thank you, Mr. Secretary.
    Secretary Thompson. Thank you very much, Congressman.
    Chairman Nussle. Thank you.
    Ms. McCarthy.
    Ms. McCarthy. Thank you, Mr. Chairman. I wasn't expecting 
to be up so soon.
    Congratulations on being here.
    Secretary Thompson. Thank you.
    Ms. McCarthy. I personally think that you have probably the 
hardest job among any of your colleagues. I'm a nurse, I spent 
32 years as a nurse. Since I've been in Congress, trying to 
work with HCFA and what's been going on, God bless you. That's 
all I can say.
    Secretary Thompson. Thank you.
    Ms. McCarthy. One of the things that I want to bring up, 
obviously we all care about Social Security and Medicare. You 
know with the BBI fix that we had to all of our State hospitals 
throughout the country, the rural hospitals, certainly my 
hospitals back on Long Island, in New York State, we tried to 
help them last year by giving them more money to cover their 
Medicare reimbursements, to keep up, actually just about the 
infrastructure of their hospitals.
    So with $645 billion that you're talking about, how are we 
going to keep up the rate of payments back to those hospitals 
to keep them out of the red, because they didn't have the 
reimbursements in the past, when we did the balanced budget 
amendment? We killed them. I mean, the rural hospitals, 
certainly hospitals we saw closing, our home health care 
agencies with the red tape that they have. This is a big 
problem.
    I know in my office, I mean, everyone comes in to say they 
still need help. My concern is certainly taking care of my 
senior citizens as they get older. We have baby boomers in 
2008, which is really coming up, we probably know, anyone 
that's over 50, each day seems to only have 10 hours a day and 
not 24 hours a day, because that's how fast time goes.
    But we do have some problems. And with the budgets that 
we're seeing, I really do have a concern that there's not going 
to be the finances there to do what we're supposed to do. And 
that is my concern.
    How do you see, with the budget that's been proposed, and 
all the other things that, I actually did read the report, and 
everything else. What's going to be cut? I mean, there's got to 
be cuts. There's got to be big cuts somewhere, just to cover 
the budget.
    Secretary Thompson. There are going to be some reductions, 
there's no question about that. We're still working on that, 
and I'm sure I will be called back in front of this committee 
to testify when the final budget document is up here. I'm not 
able to discuss the reductions as of yet, because we're still 
arguing over some of them, or discussing some of them, and 
making decisions.
    I would like to point out that I need your help in regards 
to the nursing shortage that is looming out there, and I would 
appreciate any comments you might have. Because this is 
something that is very important to this Department, to try and 
find a way to get more people enrolled into nursing and take 
that as a choice in their professions. It's very bad.
    Ms. McCarthy. I have a bill that I would love you to look 
at and support that would help my nurses, in recruiting more 
nurses.
    Secretary Thompson. I would appreciate that. But there's no 
question.
    But the Department has been treated very fairly when you 
look at the increases. We got an overall increase, the 
President tried to hold the increases at 4 percent. And we are 
going to go up at 5.1 percent on our discretionary funding, and 
8 percent overall. That's a very nice increase for the 
Department of Health and Human Services. I know that the large 
share of that increase goes to NIH, $2.75 billion.
    But we've been able to reduce some other things, such as 
one-time funding, which was $475 billion. There are some other 
things, the $155 billion, Congresswoman, that was not 
requested. And we have made some other adjustments, but we're 
still working on those. I'll be more than happy to come back 
and discuss them with you either personally or in front of this 
committee.
    Ms. McCarthy. And I thank you for that. But I guess this is 
the one thing that an awful lot of us are concerned about. Many 
of us feel that we should actually be doing a budget first, 
before we have tax cuts that are coming out. I feel very 
strongly on that, and I come from an area where I'll probably 
get killed on it, because I happen to love tax cuts. I think I 
basically have always voted for tax cuts since I've been here.
    But when it comes down to looking at our budgets, and even 
just the budget that you'll be dealing with, and with the tax 
cuts going first, I'm really afraid that Social Security and 
Medicare is going to get the short end of it. And I'm really 
concerned about that. Because if we could deal with something 
for 5 years out, I could probably live with it. Ten years out, 
I mean, I just got hit with my oven breaking down. That was not 
in my budget. Somehow I'm going to have to try and find that 
money. I've got a 1994 car. It's starting to break down. I'm 
going to have to find money for that.
    You know as well as I do that Government is the same. It's 
just got billions on the end, or trillions on the end. We still 
have to do a budget. I really wish we could do a budget first, 
before we go look at the tax cuts.
    Secretary Thompson. Well, the President campaigned very 
strongly on a tax cut. He is a man of principle and he does 
exactly what he says he's going to do.
    Ms. McCarthy. Oh, I don't mind that. We're going to get a 
tax cut.
    Secretary Thompson. He feels very strongly, as I do, that 
tax cuts are necessary to stimulate the economy and to improve 
the economy and I think that you will find that this tax cut, 
it amounts to only 6 percent of the overall expenditure outlay. 
So I really think that we can afford it, Congresswoman.
    Ms. McCarthy. Thank you, Secretary Thompson.
    Chairman Nussle. Thank you.
    Mr. Gutknecht.
    Mr. Gutknecht. For the benefit of some of our colleagues, 
this is the Budget Committee, so I thought I'd share this with 
them. We were just informed this morning that as of the first 3 
months of the last fiscal year, the Federal Government had 
generated surpluses of $40 billion. As of the first 3 months of 
this year, we have generated $74 billion in surpluses.
    And I think there's going to be more than enough money this 
year and throughout the balance of the decade to provide for 
tax relief. So I strongly support what the President is trying 
to do to allow families to keep more of what they earn. I say 
that just in response to the earlier line of questioning.
    Governor, and I will call you Governor, in some respects I 
believe that's a much higher title than this one you get to 
keep for the rest of your life. I have been a big admirer of 
you for many, many years in the State of Minnesota. I don't so 
much have a question, but I do have a couple of comments. I 
think the President has chosen wisely to put you in this 
position. This is probably, no, I think without a doubt, this 
is the toughest position at the Federal level, the job that you 
took the oath of office for this morning.
    There are two very huge issues you're going to have to deal 
with. One is Medicare, and folded into that is prescription 
drug. And then ultimately, as part of that as well, you have to 
deal with the whole bureaucracy we know as the Health Care 
Financing Administration. Those are very, very difficult 
problems. We want to help you as much as possible.
    They are huge bureaucracies. And I want to talk a little 
bit about what's happening, just so that you understand where 
we have been and where I have been on prescription drugs. I do 
believe that we need to totally reform the Medicare system, as 
the President has talked about, and then ultimately, there has 
to be included some kind of prescription drug benefit, 
especially for those people who are currently falling through 
the cracks. I absolutely believe in that.
    But I also believe that if we don't do this right, there is 
simply not enough money in Christendom to pay for the unlimited 
demand for free drugs. I want to talk about what's happening, 
because I'm not certain that the people who work for you in the 
FDA will give you the whole truth and nothing but the truth 
about prescription drugs. I will just give you my perspective.
    We were able to get a couple of things passed last year. 
One of them was a small amendment that I had attached to a 
larger bill that essentially said that the FDA has to, for 
personal importation, let me explain the situation. And it's 
not just about Canada. I think we've heard an awful lot about 
what happens relative to Americans going to Canada to buy 
prescription drugs, and now there are at least three on-line 
services that are offering prescription drugs to Americans.
    But what's happening around the world, and I'm a big 
believer in free trade. I believe that trade ultimately is a 
very good thing. I also believe that we should not be in the 
business of setting price controls. But on the other hand, it 
bothers me greatly that many of these large pharmaceutical 
companies, who are now based in places like Switzerland, are 
willing to sell drugs in Switzerland for a fraction of what 
they're willing to sell those drugs here in the United States.
    Let me give you an example. Let's take a drug like 
Coumadin. Coumadin is a drug that my dad takes, it's a blood 
thinner, it's one of the most commonly prescribed drugs in the 
United States. The average price for a 30 day supply in America 
is about $30. That same Coumadin sells in Switzerland for $3. 
In other words, it's $1 a pill here in the United States, it's 
10 cents a pill in Switzerland.
    Now, we have free trade with Switzerland. Goods and 
services go back and forth across the border, and yet the one 
area where Americans could benefit enormously with free trade 
is in prescription drugs. And as a result, there was a lot of 
confusion about what the law was before. I tried to clarify 
that.
    The issue that I raised, and what my amendment essentially 
said was, the burden of proof is now on the FDA to prove that 
that is not a legal drug in the United States. So what we said 
in the legislation, which the President signed and we now have 
evidence the FDA is at least moving to try and enforce, we 
said, you've got to at least tell the consumer what is wrong 
with the drug that they're bringing into the United States.
    So now at least they do cite the fact that, the new letter, 
and the threatening letters are starting to go out again to 
seniors. I have a copy of one. Let me just read for you what it 
says, because you need to be aware of this, as the new 
Secretary.
    The drug that was detained was a drug called Lipitor. The 
FDA says that the article appears to be a new drug without an 
approved new drug application. That's what the FDA says in a 
letter to a senior. Now, if you go to the FDA's own web site, 
July 1998, they list Lipitor as an approved drug.
    Now, on one hand, we're telling seniors and consumers that 
Lipitor is not an approved drug, when clearly the FDA knows 
that Lipitor is an approved drug. The argument that you will 
hear from some of your people within the administration is, 
well, we cannot absolutely guarantee that that is in fact 
Lipitor. And do you know what? They're right.
    But please bear in mind that every day, millions of pounds 
of food come into the United States. And it is the Food and 
Drug Administration. We bring in everything from cheese to pork 
bellies to strawberries to tomatoes. The truth of the matter 
is, we don't know whether there couldn't be some kind of 
adulteration of any of those products. We don't carefully 
inspect every single tomato that comes into the United States.
    It seems to me that the FDA has in effect been helping the 
pharmaceutical industry for a very long time in protecting them 
against competition by building a wall disallowing imports as 
high as the sky, and yet we have a very, very small threshold 
in terms of drugs. I want you to be aware of that. Because I 
think there's a powerful case to be made here, and it does 
begin to fit with what we're doing here on the budget. Let me 
explain that.
    The best estimates that we have is, last year, we the 
Federal Government, through the Veterans Administration, 
through medical assistance and other programs which we fund, we 
spent over $5 billion, minimum, in fact, one estimate is as 
high as $15 billion, that we spent last year on prescription 
drugs. If we simply began to open up the markets and allow some 
competition within the pharmaceutical industry, we could save 
the Federal Government at minimum another 30 percent.
    Now, 30 percent of $5 billion is over $1.5 billion. That 
would go a long way to helping to solve this problem for those 
seniors who currently are falling through the cracks.
    So I do hope that you'll take an open mind in looking at 
the legislation we passed last year. There is no such thing as 
absolutely safe. Even today, in hospitals in America today, and 
I hate to admit this, but there are patients who get the wrong 
medication. It happens. So we can never protect everybody from 
every unforeseen thing.
    But I want to close with this point, and this is not a 
question, but for your own edification, that it isn't the 
responsibility of the Federal Government to protect consumers 
absolutely. We can never do that. And in the day and age, a 
FedEx package, for example, if you sign for a FedEx package, 
they've got a bar code on that, they know when it was picked 
up, and at almost any point in the transmission of that package 
from the sender to the receiver, FedEx can tell you exactly 
where it is, with bar coding technology. We now have probably 
the best control we possibly can have in terms of making 
certain that what left the factory or what left the 
pharmaceutical supply house in Switzerland will be exactly what 
comes into this country.
    So I really do hope that we can work together, because I 
think it is a serious problem. I respect the people at the FDA. 
On the other hand, I think we have to understand that there is 
no such thing as perfectly safe. We can be within a small 
fraction of guaranteeing that that is in fact Lipitor that's in 
that package, and we know that Lipitor is an approved product. 
If they want to sell Lipitor for 10 cents on the dollar for 
what they sell it in the United States in other countries, the 
FDA should not be allowed to stand between American consumers 
and lower drug prices.
    Thank you, Mr. Chairman.
    Chairman Nussle. The gentleman's time has expired.
    Secretary Thompson. Congressman, could I quickly just make 
a couple of statements? First off, I agree with you and I thank 
you so very much for your understanding. I appreciate the job 
that you've done. I've watched you right next door, and I'm 
very impressed by your abilities and what you've been able to 
do as a Congressman.
    But secondly, I want to find out about those letters. 
Because I personally take Lipitor, and it better be an approved 
drug, or else my doctor's in trouble.
    I would like to see those letters, and I would like to also 
work with you and I would hope that we would be able to get our 
FDA director through the process quickly, because we want to 
make some changes in the overall running of the whole 
Department, make it much more responsive. And if you've got 
threatening letters, I would like to hear from you and I would 
like to take them up with the people. So please give me a copy 
of them.
    Mr. Gutknecht. We'll be happy to give you copies. Thank 
you.
    Chairman Nussle. Thank you, Mr. Gutknecht.
    The gentleman from Washington, Mr. McDermott.
    Mr. McDermott. Thank you, Mr. Chairman.
    Mr. Secretary, as you assume the Wisconsin seat on the 
Cabinet, we hope that we can have as good a working 
relationship with you as we did with Secretary Shalala.
    Secretary Thompson. I can absolutely guarantee that, sir.
    Mr. McDermott. OK. I want to pursue something that Mr. 
Spratt talked about, in part because I sat on the Medicare 
Commission for a year and went through that whole process.
    Secretary Thompson. I know you did.
    Mr. McDermott. I know that you as you assume your job are 
assuming a job of a trustee. And one of the things of a trustee 
is to report immediately to the Congress whenever the board is 
of the opinion that the amount of the trust fund is unduly 
small. That's a heavy responsibility that you have.
    I have behind me this chart which illustrates what is going 
on in this budget book. On page 14 of your budget document, you 
state that Medicare as a whole is in deficit over the next 10 
years for $645 billion. Those are your--that's the 
administration's figures.
    Then if you turn to page 51, you say you can address 
Medicare's existing problems plus add a prescription drug 
benefit for only $156 billion between now and 2011. Now, I 
understand that you're including modernization or some kind of 
change in Medicare. That's inherent in that statement.
    I would like you to tell us how you're going to save the 
400 and some odd billion dollars, $489 billion. Is it increases 
in payroll taxes? Or is it cuts to payments to providers? Or is 
it cuts of benefits? I mean--or maybe bigger copays? Where are 
you going to get $489 billion? To have put that together and 
said it's there, it's nice. I've been doing this a long time.
    Secretary Thompson. I know you have, Congressman.
    Mr. McDermott. I like specifics. I want to know what 
percent you think you're going to get from cutting providers 
when we do our reform of Medicare, or what benefits are we 
taking away, or what copays are we increasing? Or are we simply 
going to go out and raise the payroll taxes? Some place you 
have to come up with the difference between this and that. 
That's $489 billion.
    Secretary Thompson. Congressman, first off, let me tell you 
that the President believes we should take a look at the total 
Medicare package, both Part A and Part B, and that he does not 
feel you can just separate and say that you've got a surplus in 
one and that you've got a subsidy, to use the words of 
Congressman Spratt, in Part B. We have not, the administration 
nor my Department, has sat down yet or has had the time to do 
so, Congressman, to really be able to answer your question 
specifically. We do not know if there's going to have to be any 
of the things that you've said. We do not know what we're going 
to be recommending as a Medicare reform. I can tell you we've 
been having meetings and the meetings have been going well. But 
there has not been any definitive decisions as to any of the 
things you've mentioned, or any other changes in Medicare that 
might be able to bring you that kind of savings.
    I know you like specifics. I like specifics. But I can tell 
you that we're not there yet, and that's all I can answer at 
this point in time.
    Mr. McDermott. You were Governor for 14 years, I was the 
ways and means chairman in the State of Washington and I wrote 
five budgets in a row. So I know a little bit about it, and so 
do you.
    Secretary Thompson. Yes, sir.
    Mr. McDermott. What other places could you come up with 
money if you don't cut benefits, don't cut providers, don't 
increase copayments or increase the taxes that are going into 
it? What other way could you fill that gap?
    Secretary Thompson. There are the possibilities, 
Congressman, that we have to completely look at Medicare, look 
at the ways in which we're going to use the tax code, look at 
ways we might infuse some new dollars. I don't know what they 
would be. I do not know at this point in time how we would make 
those changes. I can tell you that we're working on them, and 
I'll be coming back to discuss it with you and to the other 
members on this committee as soon as we are able to come up 
with our final package. Hopefully that will be soon, but I 
can't at this point in time tell you when it's going to be.
    Mr. McDermott. I hope that your package comes up before we 
pass the tax package.
    Secretary Thompson. I'm not saying that it will.
    Mr. McDermott. Because if we're giving all the money away 
and it comes up that you need some dough, I'm afraid where it's 
coming from. I think that's why many of us are opposed to the 
President's or the Congress's rush to pass the tax cut before 
you see this budget. Because if it turns out in the end that 
you want to reduce the payments to providers, I think the 
medical association and the hospital association all ought to 
have a chance to come in here and say, hey, wait a minute.
    Secretary Thompson. I'm sure they will.
    Mr. McDermott. We did that in 1997, and we've been adding 
back every year since because of cutting too much. I think it's 
very clear to everybody on the committee, you have not got the 
facts, the details. I didn't expect you would. And my feeling 
is we should not be moving with a tax cut until we have the 
facts.
    I want to just ask one other question. I know that as 
Governor, or in the past at least, you have been supportive of 
the use of stem cells in research for Parkinson's Disease and 
for Alzheimer's disease and spinal cord injuries and diabetes 
and a whole other category of illnesses. When you came in, or 
perhaps the administration--I don't know how much of a part you 
played in it, was to bring into question whether the stem cell 
research at the National Institutes of Health is going to go 
on.
    I would hope you would look at that very, very, very 
carefully. Because the only hope for most of those illnesses is 
some continuing research about how you can take early stem 
cells and recreate or redo brain cells or spinal cord cells. I 
think that it would be a terrible mistake to roll back the 
provisions of the order of the President, the last President. I 
think that it is very important, and I hope that you will at 
least take this guy's view of it into mind when you do it. 
Because I think it would be a serious mistake to say to the 
National Institutes of Health, stop the research in these 
areas.
    Secretary Thompson. Thank you very much for your advice on 
both subjects, Congressman. I will take all of your comments 
very seriously. I would like to point out that I believe that 
the President is correct that we can have both Medicare reform, 
save money, and have a tax cut. That's number one. Number two, 
I am taking my decision very seriously on stem cell research. I 
am somewhat concerned about the legal opinion that allowed NIH 
to proceed based upon the Federal law that now exists in this 
country.
    But I am seriously considering it. I will take your 
admonitions to heart and I will continue to do so, because I 
believe very strongly in the need for research.
    Mr. McDermott. Thank you.
    Chairman Nussle. Mr. Thornberry.
    Mr. Thornberry. Thank you, Mr. Chairman.
    Mr. Secretary, over the next few weeks, you and all of us 
are going to hear a lot about Medicare funding from various 
accounts. It is in large measure a political tactic to try to 
scare people about Medicare to attack the tax plan. We know 
that that's coming and we're going to hear a lot more about 
that. But I have to tell you, I am conducting my town meetings 
this year on health care. I believe that the challenge for you 
and us and Medicare has really less to do with how much money 
we put into it than what the system is like.
    Just thinking about some of the comments made to me this 
past weekend, one lady in tears who is a physician's 
assistant's wife, because they're putting their house on the 
market, not just because of low reimbursement rates in a rural 
area, but because they have not been reimbursed for several 
months. They're too afraid to come to my office for help, 
because they have been threatened in some way or another. A 
doctor, who's a leading cancer doctor, knows of a treatment 
they use at M.D. Anderson down in Mr. Bentsen's district, but 
yet HCFA prevents them from doing that same treatment except on 
an inpatient basis where it is of course far more expensive to 
do.
    All sorts of providers talk about requiring to change the 
billing codes by a certain date and then HCFA didn't have 
theirs changed by that date, so they had to go back and 
resubmit everything. The list goes on and on. I guess with your 
considerable reputation for reform and some of the very good 
people you've got working with you, are you going to look at 
this thing from the ground up? Because a lot of people who have 
looked at this believe that we've got to scrap HCFA and start 
from scratch.
    Secretary Thompson. Thank you very much for the question, 
because I have many ideas in regards to what we have to do. 
There's no question, in my prior life as Governor, I was 
probably one of the biggest critics of HCFA in this country. I 
have come out and I have spent a day out on the campus at HCFA, 
looked it over, talked to a lot of people. The first thing I 
have to have is my HCFA director confirmed by the Senate and 
put in place.
    Number two, this Congress, and I'm not being critical, this 
Congress has put a lot more responsibility on HCFA in the last 
5 years. HIPAA alone is adding lots of rules and regulations 
with no increase in personnel and very little increase in 
resources.
    Number three, the resources at HCFA are not what you would 
call modern day. I don't know if this Congress knows about 
this, but HCFA spends $375 billion and they do not yet have a 
double entry bookkeeping system. It is unheard of to think that 
an agency that runs the largest health insurance company in 
America doesn't have a double entry bookkeeping system. That 
went out in 1911, and HCFA is still using a single entry 
bookkeeping system.
    Number four, the computer systems at HCFA need to be 
modernized. I don't know if this committee knows it, but we 
have over 200 different computer systems in the Department of 
Health and Human Services, several that cannot talk to one 
another. And we're running a department with that kind of 
equipment.
    Number five, HCFA's got some great people. They've got a 
lot of responsibilities. We've got to time the rules and the 
changes in those rules either on a quarterly or semiannually or 
an annual basis, instead of sending them out and saying, oh, we 
made this rule last week, and because you didn't know about it, 
that's your problem. We should be able to put it out there so 
the patient, the provider, the States and this Congress knows 
that this rule is coming and it's going to change prospectively 
instead of retroactively.
    Number six, we have to make sure we take a look, and maybe 
HCFA's got too much responsibility. Maybe Medicare and Medicaid 
should be split. Maybe SCHIP should be in a different area. 
These are things we want to look at.
    I want to come back with a whole litany of changes. Because 
when I was going through the confirmation process, Democrats 
and Republicans and Independents alike, everybody came to the 
same conclusion. Everybody loves to hate HCFA. And I told the 
people at HCFA, maybe we should even change the name. What is a 
HCFA? [Laughter.]
    So I've got lots of ideas. I want to make lots of changes. 
But I'm going to have to have the support of this Congress in 
order to do it. First thing, we've got to have a double entry 
bookkeeping system. Secondly, we've got to have a computer 
system that everybody can tie into, the providers and the 
Department as a whole. Then we have to put the rulemaking on a 
different plateau than what it is.
    If we can make those changes with a new administrator, I'm 
confident you're going to see a change of attitude and a change 
of direction at HCFA. I am dedicated and passionate, as you can 
tell, to accomplish that, Congressman. Thank you for the 
question.
    Mr. Thornberry. Well, thank you for your answer. That's the 
most encouraging news, just seeing the fire in your eyes, that 
I've seen in quite some time. I've got some proposals that I'm 
introducing this week to deal with the paperwork requirements. 
Have your folks come up with an estimate as to how much of our 
health care dollar in Medicare is consumed by paperwork or 
regulations, either from the Government side or from the 
provider side?
    Secretary Thompson. I've heard anecdotally that it's 18 to 
19 percent. But I can't come here and say to you, Congressman, 
that I know for a fact that it is. But I've heard that. I've 
heard it as a Governor. And I'm sure it is high.
    But another thing, and I'm going to throw this out here, 
and it's probably not the place to do it, but it needs to be 
said. When Medicare was passed in 1965, there was a deal made 
that the Blues, which I have a great respect for, are the only 
ones that could provide the vendor payments. Therefore, you're 
limited in the Federal Government, to contract with other 
providers.
    There are a lot, as everybody knows, there have been a lot 
of changes in the computer system. Just that one change, and 
maybe reduce the number, but that also is contentious. I'm 
throwing it out there because I would like to get people to 
start thinking about this. There need to be some changes in how 
we contract. But HCFA is limited to who they can contract with. 
I think you want the best product, the best service, which I 
do, and I think we should not be limited to who we can contract 
with.
    Mr. Thornberry. Thank you, Mr. Chairman. Good luck, Mr. 
Secretary.
    Secretary Thompson. Yes, lots of luck, everybody says. 
[Laughter.]
    Thank you.
    Chairman Nussle. Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Mr. Secretary, it's good to see you today. I have a few 
questions. One, I'd like to ask for the record, and then I'd 
like to get back to what Mr. McDermott discussed. Also, at the 
outset, I want to echo what Mr. McDermott said about the stem 
cell research. I had a 10 year old constituent, Carolyn Rolley, 
from my district in my office the other day. She suffers from 
juvenile diabetes. Her parents are very concerned about whether 
or not your agency is going to overturn the previous 
administration's executive order.
    So I would hope you'd take a hard look at that.
    Secretary Thompson. I'm going to, Congressman.
    Mr. Bentsen. I appreciate that.
    Second of all, for the record, the President's budget 
blueprint talks about changes in health professions funding. 
And I assume this may well include things like medical 
education, graduate and indirect medical education. That has 
tremendous impact on the teaching hospitals of this country, 
including those in my district. I would like to get for the 
record from your office what ideas you all have in mind and 
whether you're looking at a different funding structure, 
whether you're looking at a universal funding structure or 
what. When those of us who represent large medical centers, 
read something like that, it raises a few flags.
    Secretary Thompson. Congressman, that decision has not been 
finally made yet, but it will be made relatively soon.
    Mr. Bentsen. And it's a difficult question.
    Secretary Thompson. It is.
    Mr. Bentsen. It's something that Congress has been 
grappling with for quite some time. As you probably know, we 
ratcheted it down in 1997, we've been ratcheting it back up 
since then. But we still have a somewhat inefficient funding 
structure in that area.
    Secretary Thompson. Thank you for that background 
information.
    Mr. Bentsen. Going back to the whole question of the 
Medicare trust funds, I appreciate your comments today that the 
Medicare funding is only going to be used for Medicare. I will 
tell you, you may want to talk to your OMB director. Because 
his comments last week really do not comport with your 
statement. And quite frankly, the President's budget blueprint, 
which I know you're familiar with, does not either.
    I want to walk through some of the numbers with you, if I 
could. And I know you're new on the job, so I'm not going to 
hold you to it too much.
    But both to use your comments that Medicare is for 
Medicare, and to use the logic that the OMB director and the 
President had and you echoed today, that you should look at 
Medicare Part A and B together, Federal law notwithstanding, 
and in fact, the OMB director last week didn't seem to 
understand that it would take Congress to change that law. I 
think you made that clear today.
    But the fact is, the President's budget doesn't show a $500 
billion future trust fund surplus, which are encumbered funds 
to future beneficiaries. So if we back that out of the $842 
billion contingency fund, that leaves us with $342 billion left 
there.
    Now, the $153 billion that's the Medicare modernization, my 
first question is, does that come out of those trust fund 
receipts? The question I have for that is----
    Secretary Thompson. No, out of that $526 billion?
    Mr. Bentsen. Yes.
    Secretary Thompson. No. It does not.
    Mr. Bentsen. It does not?
    Secretary Thompson. No, it doesn't.
    Mr. Bentsen. So I think really for mathematical purposes or 
accounting purpose, we need to back that out of the $342 
billion that's left in the contingency fund. That leaves us 
$186 billion. Now, this would----
    Secretary Thompson. Can I just interrupt? I'm sorry, I 
don't understand why you would back that out. Because that is 
over and above the $526 billion.
    Mr. Bentsen. You're right, I take that back. It's a 
separate line item in the President's budget.
    Secretary Thompson. Right.
    Mr. Bentsen. The point being that the President's 
contingency fund, if you take out the $500 billion, is down to 
about $350 billion. If you take out the extra $150 billion that 
we're spending on the income tax reduction bill that's up this 
week, because it was scored higher than what was assumed in his 
budget, we've really chopped that contingency fund down to very 
little. So I think that's a problem we have to deal with.
    Now, I want to go back to the long term reform issues that 
you talked about. If you take the $500 billion and use that for 
reform rather than pay out obligations that are against that 
$500, because that is encumbered money, would you agree?
    Secretary Thompson. That is.
    Mr. Bentsen. So how do you reform the system in the future 
if you use that money and are not double counting it without a, 
cutting benefits, b, raising taxes or copayments or premiums, 
or c, incurring additional debt in the future? Because as you 
know, in your own experience as Governor of a State, once the 
funds are encumbered, you have to make them up somewhere down 
the line. I think that's the concern. And I appreciate the fact 
that the administration wants to reform Medicare, wants to 
streamline Medicare, and at the same time, add more benefits to 
it.
    But I think you'll be familiar with the experience that 
we've had in the Medicare Plus or Medicare Choice program, 
where we wanted to give recipients more options under Medicare, 
bring HMOs and managed care entities into the Medicare system. 
What we found is, they couldn't survive in the system, they 
started backing out, and the only way we could keep them in 
there was to pay them more money.
    So what I'm trying to figure out is, even double counting 
the $500 billion to use that for reforms, how do you make up 
that money in the future? And how do you plan to streamline the 
system? I know you said you haven't written a plan. But do you 
all really think that you can get efficiencies equaling $500 
billion or more if you use the trust fund balances.
    Secretary Thompson. I can't answer that at this point in 
time, Congressman. I wish I could. And I don't want to come 
here and sound evasive, because I'm not. You're going to find 
that I'm very candid and I'm very direct. But the plan has not 
been put forth. It has not been scored. We're working on it. 
But I am encouraged by what we've been able to see that we can 
make some efficiencies in Medicare.
    And I have been very encouraged, both yesterday in the 
Senate Budget Committee and today, that there seems to be a lot 
of bipartisan spokespeople that are willing to look at Medicare 
and find ways to reform it. I think we should dedicate 
ourselves this year to do that. I can't tell you how we're 
going to save that amount of money. I can't tell you what 
benefits are going to be added or changed at this point in 
time. I wish I could, but I can't. All I can tell you is, this 
administration is dedicated to reform and streamline Medicare 
with prescription drugs included.
    Mr. Bentsen. Would you agree with this, we can only count 
the $500 billion once?
    Secretary Thompson. Absolutely.
    Mr. Bentsen. Thank you. Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Sununu.
    Mr. Sununu. Thank you very much, Mr. Chairman.
    I want to begin on that point, Mr. Secretary, because I 
think it's worth repeating, that the degree to which this 
administration is committed to modernizing the Medicare system, 
and to talk about real reforms and real changes that I hope and 
I believe will result in more choices for beneficiaries, and a 
better working system. And the administration recognizes that 
it isn't necessarily going to be free.
    I think that is a marked step from where we were with the 
previous administration that believed by just waving a magic 
wand and saying the trust funds were hereby twice as large as 
they were previously that we had somehow done something 
fundamental about Medicare solvency, or more important, about 
improving the program. I think we are at an historic point, 
because Democrats and Republicans recognize that real changes 
are needed.
    I also want to touch on some of the phraseology and jargon 
that has been used today. There was a suggestion that the Part 
A, which has a surplus in it of, the projection of $500 
billion, that that money somehow represents encumbered funds. I 
don't think that's entirely accurate. It's really a legal 
authorization that we now have to pay benefits through the 
Medicare system, something we know we need to do, we will do. 
But the fact remains that this system, taken as a whole, isn't 
solvent. It may be that in its original design, there was 
intended to be a subsidy.
    But we need to think about, as legislators, what that 
subsidy is. And if we take Part A, which has a surplus, it may 
well have a surplus, but we also know that that surplus and the 
legal ability to pay benefits is exhausted in 12 to 15 years. 
So there may be a surplus there, but the fact is, it isn't in 
any actuarial balance, it isn't safe and sound in perpetuity. 
In Part B, there has been a very large subsidy by design. But 
at the same time, that doesn't mean an open ended commitment to 
run subsidy rates or deficits in the hundreds of billions or 
trillions of dollars. No one wants a system that bankrupts 
future generations for the sake of us as legislators or as 
families.
    I'd like you to talk a little bit about modernization at 
this point. I know you don't have specifics, but in particular, 
talk about the prescription drug benefit. Medicare Choice, 
which Mr. Bentsen was talking about, is the one part of 
Medicare that right now has a prescription drug benefit. And 
it's the one part of Medicare that at the end of last year we 
tried to add funding to make that reimbursement rate more fair, 
to keep people in the system. And even with that additional 
funding, the providers through Medicare Choice are getting less 
on average than the cost of beneficiaries who are under fee for 
service.
    I think that that's an idea place to start to help expand 
the ability of beneficiaries to get access to prescription 
drugs. My question for you is, what kinds of programs or 
opportunities have you seen at the State level that you would 
want to bring with you now to the Federal level as we try to 
modernize Medicare and in particular add a prescription drug 
benefit to Medicare?
    Secretary Thompson. First, Congressman, thank you for your 
comments. Because you laid it out as well as anybody has ever 
laid it out, and I applaud you for it. If I misspoke about 
earmarking, I'm sorry. The truth of the matter is that there is 
a responsibility of the Federal Government to pay this money to 
anybody that reaches the age of 65.
    The HMO that you're talking about with prescription drugs I 
think is a big step forward. I would like to see an expansion 
of that. I would like to see us work on that and make it much 
more palatable to people to choose. Every State right now is 
looking at SCHIP, ways to expand that, to develop ways to 
reduce the number of uninsured in America. In my home State of 
Wisconsin, we expanded SCHIP with a waiver after it took us 18 
months to get that waiver. I'm very appreciative that we 
finally got it.
    But we have been able to have our uninsured drop below 7 
percent. I think in Wisconsin, we're either the first or second 
or third in America for the least number of uninsured.
    But other States are doing that. There are a lot of 
innovative ideas out there that I think this Congress and my 
Department should take a look at and categorize and come back 
with a plan to reduce the number of uninsured in America; and 
do things to refine, streamline, make more options for 
Medicare, so that people do have a choice.
    Mr. Sununu. You mentioned waivers under Medicaid and the 
fact that at least in the recent past it has taken many months, 
in some cases several years, to get those waivers that would 
enable States to implement new ideas, new programs for health 
care, prescription drugs or what have you through the Medicaid 
program with greater flexibility, to tailor a program to meet 
their needs. What will the administration's policy be on 
granting and reviewing waivers and are there any other specific 
areas where, as a Governor, you saw success in the ability to 
deliver benefits better through the welfare reform legislation 
that you might want to carry through to a review of the 
effectiveness of Medicaid's delivering benefits?
    Secretary Thompson. First let me talk about waivers. I made 
a decision that after a period of time, I don't know what that 
period of time is going to be, if HCFA has not made a decision 
that it's going to then be reviewed directly by the Secretary's 
office as to what's wrong, and we're going to comment and we're 
also going to contact the Governors and the legislators of that 
respective State to find out why it has not been granted, what 
the problems are and how we might be able to modify it so it 
could be granted.
    I'm trying to change their attitudes instead of them trying 
to find reasons to say no, change their attitudes to try to 
find a reason why it will not work. Since I have been Secretary 
for 30 days, we have already approved five waivers that I have 
personally gotten involved in. And, I am personally going to 
get involved in expediting the waiver process for the 
Department of Health and Human Services.
    In regards to welfare reform, I think the fact that the 
TANF grants were flexible enough to allow States to try 
innovative things. Instead of a rush to the bottom, we've seen 
just the opposite, a rush to the top, where States have come in 
with innovative ideas to provide welfare services. But more 
than that, they provide services to help people get off of 
assistance and into the job market. I think that has really 
been one of the best social changes in the last 50 years in 
this country.
    Mr. Sununu. I appreciate your willingness, and it sounds 
odd to say, but your willingness to trust people at the State 
level to make good decisions. Because I certainly believe in 
that approach. I want to conclude by offering you the 
obligatory good luck.
    Secretary Thompson. Thank you. I need that. And I need a 
few prayers as well, sir.
    Chairman Nussle. Ms. Hooley.
    Ms. Hooley. Thank you.
    Congratulations on being just sworn in. I also want to 
associate myself with our Chair when he talked about AAPCC. I'm 
from a State, Oregon, where we are very, very low reimbursement 
for Medicare, and looking forward to seeing that bottom brought 
up. It really needs to happen, it's just killing us in States 
like ours and in the rural communities.
    I also want to just hope that on behalf of the 1 million 
children that suffer from juvenile diabetes that you will keep 
the NIH guidelines in place so we can continue the stem cell 
research going on, and allow scientists to continue their 
valuable research in this area. I hope you will support that.
    Secretary Thompson. Congresswoman, let me point out three 
things. Number one, your Governor has already been in with 
legislators on both sides of the aisle talking to me about a 
waiver.
    Ms. Hooley. I know he has. I was going to ask you about 
that waiver, too.
    Secretary Thompson. It has not been introduced yet, but I 
think it's got some merit. I want to review that. I've got a 
great deal of respect for your Governor, and I think the whole 
opportunity to combine those is sort of innovative. I'm glad 
you're supportive of it.
    Secondly, in regard to----
    Ms. Hooley. Stem cell research.
    Secretary Thompson. No, the second was----
    Ms. Hooley. Oh, AAPCC.
    Secretary Thompson. Yes. The reimbursement. I want to be 
crystal clear. I come to this job from my vantage point of 
being a Governor for 14 and a half years, and representing both 
an urban and rural State. I've fought very much with the 
reimbursement formulas, like you are, and like so many people 
that I've heard today.
    But I just want to put a cautionary note in, that we have 
to find a way so that we don't take from an urbanized State in 
order to do that.
    Ms. Hooley. I understand that.
    Secretary Thompson. Because all that will end up then is a 
reimbursement fight and nobody wins. I would like to be able to 
work with you and work with the members of this committee on a 
bipartisan basis to see if we can't come up with a more 
equitable formula.
    Third, in regards to diabetes, it's going to become 
epidemic in this country. It's going to become epidemic. I was 
just down at CDC. I spent a day there. There are so many things 
out there that we have to do, and childhood diabetes to me is 
something that we have to address as a Nation.
    I don't think the Federal Government, and I'm not being 
critical, I'm just making a statement, I don't think the 
Federal Government has done enough on prevention. We have to do 
more, if we're going to really solve the health care needs of 
our society, and diabetes is one of them, we have to get into 
the mode of being more preventive. We have to be talking to 
people about exercise, about eating properly and correctly.
    And that's going to do more to stem the diabetes epidemic 
that faces this country, and it's going to get worse in the 
years to come.
    I happen to believe very much in research, and stem cell 
research, there are prohibitions in the law. And I am concerned 
about the legal interpretation of what's going on right now. I 
think we have to have a fresh review, which I intend to do, but 
I am going to do it in a very systematic way, and I'll be back 
with you, Congresswoman, to discuss my findings as soon as they 
are completed.
    Ms. Hooley. I have just a couple more quick questions. 
Recent research on brain development for children has shown how 
important that zero to 3 years of age is.
    Secretary Thompson. Absolutely.
    Ms. Hooley. And it highlights really the necessity for 
quality care during that time. One of those programs, and there 
are other programs, Head Start has provided comprehensive early 
childhood development services to low income children since 
1965. We know the program works, and yet there are hundreds of 
thousands of children that are eligible but we don't have any 
place for them.
    Last year, we increased Head Start by 19 percent, which 
serves an estimated 70,000 children. I want to know if we can 
count on you and this administration to continue increasing 
that vital funding.
    Secretary Thompson. Once again I have to rely upon my past 
life and tell you, Congresswoman, that Wisconsin was one of the 
first States in order to put a State subsidy in to Head Start 
so we could deal with more children. I happen to be passionate 
about it. I believe Head Start is one of those Federal programs 
that's worked better than what Congress had expected.
    Ms. Hooley. It has.
    Secretary Thompson. And we have to make sure that we take 
care of that population, because those children are going to be 
our future leaders. We've got to get them prepared to go to 
school. And this happens to be something that this President is 
adamant about. He wants to make sure every child is ready to 
learn to read when they go to school, and is able to learn. He 
believes very strongly in Head Start. I think that you're going 
to find this administration very forceful in improving Head 
Start wherever we possibly can, building upon the successes 
that we've had in the past.
    Ms. Hooley. Well, I am looking forward, Mr. Secretary, to 
having this administration put their money where their mouth is 
and to make sure that in fact, more, additional money goes into 
Head Start. Then just lastly, I know you met with the Governor, 
I'm glad you brought up the waiver. I hope it doesn't take as 
long as it took Wisconsin to get its waiver. And I will look 
forward to working with you on that waiver.
    Secretary Thompson. Well, I can't act on it until it's 
first introduced.
    Ms. Hooley. I understand that. It will be.
    Secretary Thompson. OK, thank you very much. But I want to 
make sure that what we do is correct and lawful, which I insist 
upon. I will expedite waivers.
    Ms. Hooley. Good. It's a great, innovative program, that 
has made a difference to our State. Thanks.
    Secretary Thompson. Thank you.
    Ms. Hooley. Oh, by the way, good luck. I forgot to say 
that, I'm sorry. [Laughter.]
    Secretary Thompson. Thank you very much. I need that more 
than anything right now.
    Chairman Nussle. Mr. Kirk.
    Mr. Kirk. Mr. Secretary, I represent an area of Illinois 
just below cheesehead land, in Lake County, Illinois.
    Secretary Thompson. It's good to see you again, 
Congressman.
    Mr. Kirk. Thank you. I have a question about the 
administration of Medicare. Let me describe two of my 
constituents. Jan Vanderhoof lives in Lake County, Illinois, 
and received notice from the previous administration that her 
Medicare managed care option was being dropped. Her 1941 dance 
partner, Col. Erwin Bruckman, who lives in Cook County, 
Illinois, still has that Medicare managed care option.
    Why did they choose managed care under Medicare? Because it 
offered a prescription drug benefit. So Jan now does not have 
that benefit. We are talking so much about offering that 
benefit, but the previous administration dropped her. And Erwin 
still has it.
    The reason for the divide is because we calculate Medicare 
reimbursement rates based on county boundaries. Those 
boundaries made sense back in the 1960's, when the city of 
Chicago would be all included within one county, Cook County. 
Those days have long since passed, and the city of Chicago now 
stretches over many different counties.
    So I am faced with heavily suburban communities above and 
below Lake Cook Road, which divides Lake and Cook Counties 
Everything depends on which side of that road you are on. Above 
that road, there is no prescription drug benefit, and no 
managed care option. Below that road, you're still good to go.
    Would it be possible to move beyond the outdated county 
lines to something that would make more sense for the modern 
suburban reality of America, like Metropolotan-Statistical-
Sampling areas, in calculating Medicare reimbursement rates?
    Secretary Thompson. That's one question that has not been 
thrown at me yet, Congressman. What you have just indicated 
seems to me possible, but even more so plausible and something 
we should look at. I can't give you a definite answer right 
now, because this is the first time I've heard about it. I'd 
appreciate it if you'd send me a letter on that or call me, 
because I'd like to discuss it further.
    I'm one of those individuals that loves new ideas. I love 
ideas, especially on how to change and improve. I say this for 
the benefit of every person on this committee, if you've got an 
idea that you would like us to take a look at, please give it 
to me, and you'll find that most of those we'll be very 
receptive to. This one seems to be an excellent suggestion.
    Mr. Kirk. I'll do that, thank you. Certainly for the 
suburbs of Milwaukee, I think probably the same thing would be 
true.
    Secretary Thompson. Probably. I didn't know that it was a 
problem.
    Mr. Kirk. I'd like to join with my Democratic colleagues 
also on supporting stem cell research. The key area that seems 
to offer so much promise is the Edmonton Protocol, co-funded by 
the NIH and the Juvenile Diabetes Research Foundation. It's my 
understanding that we have 21 people who have been insulin-free 
for over 14 months. That is not a treatment for diabetes, that 
is a cure. I think we are just on the edge of something, as you 
well know. I think stem cell research opens up the door. The 
Edmonton Protocol is probably the best example of where we 
could go.
    Lastly, I wanted to ask you about the GAO report that 
Medicare was "high risk." For us, we have got an estimate that 
roughly $14 billion of the $170 billion under Medicare's fee 
for service payments were improper. Last year, improper 
payments totaled about $12 billion, amounting to nearly 7 
percent for all fee for service payments. You mentioned this in 
your testimony, talking about outdated, ineffective computer 
systems. Certainly while we need a commission on Medicare's 
future. Where do you think the Department will be able to go 
unilaterally, just on the computer issue and the payments 
efficiency issue?
    Secretary Thompson. I don't know if you were here for my 
answer to another Congressman about what I intend to do at 
HCFA. I've got lots of ideas, and I don't want to repeat myself 
because so many members are here.
    But the error rate is down, it's down to 6.8 percent. We 
had made mistakes of $11.8 billion last year. That's 
unacceptable to me. It's unacceptable to this Congress.
    It's going down, it was up to $22 billion 5 years ago, and 
it's down to about half of what it was. But can you imagine 
trying to explain to somebody that your Department made $11.8 
billion in mistakes? It's something that is unacceptable to me. 
I was shocked when they told me that.
    But the truth of the matter, HCFA's administration doesn't 
even have double entry bookkeeping system. I was absolutely 
appalled when I heard that. So we put some money into this 
budget for what is called an integrated audit system that I 
hope that this Congress approves.
    We have over 200 different computer systems throughout the 
Department. And a lot of those cannot communicate with one 
another. How can you run a company that has the largest health 
insurance company in the world, Medicare, or in this country, 
Medicare, with a system that has a single entry bookkeeping 
system and computers that don't work?
    Then you limit, on top of that, HCFA from contracting to 
just a few companies. That to me is contentious, because I'm 
sure that people are going to say, well, they're the best 
companies. And I'm not going to argue about that. But the truth 
of the matter is, everybody should have an opportunity to 
process the claims and put in a thing. Maybe we've got too many 
contract vendors. If you want, maybe we should reduce it down 
to three, four or five, put them on a merit system, you make 
mistakes, you lose your contract. Something real radical.
    Mr. Kirk. Right. Mr. Secretary, I think I for one will be 
supporting you on that. Competition is the key answer. I also 
want to commend you on the administration's commitment to NIH 
and what we're doing there. I think we're really laying the 
foundation for our country's legacy in the next century.
    Secretary Thompson. It's an amazing place out there. We are 
very fortunate in this country to have the best doctors, the 
best researchers and the best scientists working for the 
Department of Health and Human Services and directly for the 
United States Government. We have just awesome individuals, 
both at CDC and at NIH, that are doing just wonderful work. I'm 
very optimistic that right around the corner, we're going to 
have a breakthrough in one of the major illnesses. I don't know 
which one it's going to be, and I can't give you a time, I wish 
I could. But what's going on at NIH to me is just amazing.
    Mr. Kirk. Right out at Deerfield, Illinois, we're launching 
a new anti-AIDS drug, Cyletra, which is far more powerful than 
the one currently on the market. I know people fighting HIV 
around the world need it, and it's that kind of innovation that 
has been sponsored by NIH.
    Secretary Thompson. Thank you very much, Congressman.
    Chairman Nussle. Mr. Kirk, you're recognized to offer the 
Secretary good luck.
    Mr. Kirk. And good luck. Or buena suerte, I should say, 
lots of luck. [Laughter.]
    Chairman Nussle. Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Secretary, let me start right out, good luck. 
[Laughter.]
    Secretary Thompson. Thank you.
    Mr. Capuano. And also my deepest sympathies, because 
usually those two things go along together.
    Secretary Thompson. That's true.
    Mr. Capuano. I'd just like to make one comment before I get 
into the main issues I want to discuss. I know you and the 
Department will have something to do with this new faith-based 
initiative in communities and the like. Having been raised as a 
Roman Catholic, I feel in many ways that my religious 
affiliation has been both guilty of and a victim of significant 
prejudices in the past and currently in this world today. I 
believe that many people of religious faiths feel that way 
about their particular religion, and I know that Wisconsin is a 
relatively diverse State. I know that many of your residents 
feel the same way.
    My only concern when it comes to the Federal Government 
getting deeply involved with funding faith-based organizations 
is to make sure that we do not fund faith-based organizations 
that are discriminatory against other faiths. My faith is my 
faith, and it's really nobody else's business, your faith is 
yours. To me, again, this, this budget document is not the 
place to discuss that at the moment.
    But as we get into that, my hope is that everyone in the 
administration remembers their own personal and their own 
political experience back home, wherever they come from, 
because discrimination is not unique to the Catholic faith, it 
is not unique to the Jewish faith or to Blacks or to Hispanics 
or to women. Many people that I know have experienced it in one 
way or another, many of whom have been related to religious 
issues.
    So again, I don't expect that you would disagree with that. 
But as you go about your particular aspects doing the faith-
based stuff, I would hope that you keep that in mind and 
reiterate it inside the administration.
    The issue that I want to pursue again is the Medicare. I 
think that everyone here understands the difference between A 
and B. We're all pretty smart about that stuff, we all 
understand it pretty well. It's very interesting that one of 
the previous questioners made a comment that even A, with its 
surpluses today, is not currently actuarially stable. There are 
still significant problems right down the road, even with A, 
never mind B. I found that very interesting.
    I accept your comments, and nobody here today has pushed 
you, I certainly won't push you to tell us today, right now, 
what you're going to do about Medicare, what your proposals are 
going to be. We understand that, and that's fair.
    At the same time, you cannot answer us how much any of 
those are going to cost.
    Secretary Thompson. That's right.
    Mr. Capuano. If you're going to improve the audit system, 
it's going to be a cost. Now, maybe the cost will be less than 
the $11 billion you save, and I'm sure it will be, but there 
will be a cost. There will be a cost to dealing with teaching 
hospitals. There will be a cost to dealing with prescription 
drugs. There will be some costs along the road and if the $11 
billion is what we're talking about, $11 billion isn't going to 
cover the problems we currently have. They might cover the cost 
that we're going to add. But it won't cover the problems that 
we currently face in A and B.
    Actually, the thing I like best about this budget document 
is on page 51, where in two different places, there's a 
discussion about treating Medicare as a whole and treating the 
solvency of Medicare in its entirety, which I presume to read 
means A and B together. I agree with that wholeheartedly. I 
don't think we should be separating the two. None of my 
constituents know the difference. None of the taxpayers I know 
that pay it know the difference. They just know we're paying 
Medicare money and we want Medicare to be safe.
    So I accept everything you've said, and I really like the 
assurances you've given, which we did not get earlier, that 
these monies that are now currently a surplus in one portion of 
Medicare will be there to deal with whatever it is that we come 
up with Medicare. Even if we come up with nothing, dealing with 
them together. I'm very happy about that.
    However, I will tell you that I personally would feel a lot 
better if this budget document recognized that in writing. 
There's a hundred ways to do it. There's no one way to do it. 
We can all disagree on how to do it. Anything that was done 
here would be good. And I don't see that here. Now, maybe it's 
here, and I would love to be pointed to where it is in the 
book, but I don't see it, except the assurances that I've 
gotten from you. And again, I take you at your word, but you're 
not the President just yet, and I'd like to hear it from 
higher.
    For instance, one of the options we could have is simply 
leave it in the Part A trust fund. Just leave it there. Nobody 
says we have to take it out. Leave it there to take care of the 
problems that Part A has already been pointed out that you know 
exist, we all know exist. If you don't want to leave it there, 
how about having a piece of this budget simply say, OK, we'll 
take it out of Part A, but we're going to appropriate it, right 
now, without any discussion, to Part B. There's two trust 
funds, let's appropriate it into the Part B trust fund.
    Again, that's not the only way. You could have, in 
Massachusetts, we've had several areas, matter of fact, it's a 
very good financial tool, to have pour-over trust funds. When 
you have to much in one trust fund, it immediately pours over 
to the other. Maybe we should have a piece of legislation 
saying that would work.
    There are hundreds of other options, even a very simple 
thing like on the table that was pointed out by Mr. Spratt on 
page 185, simply taking that 800 and whatever it was, $842 
billion in contingencies and separating it into two lines, one 
line for general contingency of whatever the number is going to 
be, $200 billion, $300 billion, and another line that simply 
says, Medicare only contingencies. I would feel comfortable 
with that. Again, I would like more. But that's something. We 
don't have any of that in this budget document.
    And I would urge you, with all I can, to do more than 
simply give us your assurances. Again, I don't mean to question 
you on it, but at the same time, you and I may not be here. And 
we all know that last year, Mr. Greenspan was here last week 
and he was discussing his concerns with the end of year last 
year spending frenzy. I think he's right, we did have a 
spending frenzy last year, I think it's a legitimate concern.
    But I also want to point out that the leadership in neither 
the House nor the Senate has changed since last year. Now, we 
tried our best to change it, but it didn't change. And if the 
leadership doesn't change, I have no assurances we're not going 
to have another spending frenzy.
    And I will tell you that though I have absolutely no 
problem bringing pork home to my district, that's what I'm here 
for, my district didn't get much of that pork. And if I had 
some, maybe I wouldn't be complaining so much. [Laughter.]
    But it didn't. I have no assurances that we're not going to 
have another spending frenzy, and there's nothing here that 
says I won't. As long as there's an $842 billion contingency 
sitting there that's not earmarked for Medicare, we have the 
same risks we had last year.
    The last thing, since I'm running out of time, that I want 
to talk about, is simply, I know that before you were Governor 
you were a State representative. As a member of that 
legislative body, I would be shocked, I'd be shocked if you or 
any other responsible member of any legislative body would sit 
and pass a budget proposal that cannot answer so many important 
questions, if nothing else, Medicare alone. It simply says, oh, 
pass a budget, spend all this money, give all these huge tax 
breaks.
    I want to make it real clear, real clear for the 500th 
time, no one--I shouldn't say no one--I'm not aware of anyone 
in the House, Democrat or Republican, who doesn't agree with 
you that there is room for a tax cut, there is room to take 
care of the debt problems, there is room to take care of 
Medicaid, and there is room to take care of some of our 
spending priorities. The problem is, how much are we going to 
do for each one of them and who's going to get the benefit. 
That's the discussion. It's not the discussion whether we're 
going to have it or not.
    So my concern is, we're being asked today to pass a tax 
cut, I guess tomorrow, I just came from another hearing that 
has more money that wants to be spent for the SEC over at the 
Banking Committee, financial services. And I sit here today 
being asked to pass a budget, never mind the softness of the 
estimates. I understand that. But I'm going to be asked to pass 
a budget that says, trust us, put the money under contingency, 
and trust yourselves, I mean, Congress is at fault as well, we 
all spend money, that's what we're here for.
    And I don't have any of those answers. I would feel much 
better if this money were either set off to the side, in 
writing, that's it, and, not just or, and that this budget and 
this tax cut were to wait a month or two, whatever it takes, to 
come up with the proposals that deal with such important 
things, and there's lots of them, but Medicare being the one 
I'm here to discuss today, and then we can have that debate, 
knowing that we may agree, we may disagree. But at least we'll 
know what we're talking about.
    I'm afraid that when it comes time to fix Medicare, the 
money's gone. The money's gone. And I'm supposed to look at 
most of my constituents, who are going to get a few hundred 
bucks, at best, 10 years from now, and a tax cut, and say, 
sorry, you took your money, we don't have the money to fix 
Medicare. And I don't see anything in this budget that would 
assure me otherwise, unless that money is completely set aside 
either legally or at least in writing in the budget. And I 
would ask that you bring that message back to the 
administration some point soon.
    Secretary Thompson. Thank you very much for your comments. 
And I appreciate the admonitions. I think the Chairman of the 
committee, Mr. Nussle, said it as well as anybody could say at 
the beginning of the meeting, saying that this House, your 
House, is going to pass a lock box. We're not taking a position 
on that as the administration, but it seems to me that you and 
Mr. Nussle are on the same hymn book, singing the same hymn, 
and it's probably going to proceed that way.
    So I believe it's in your hands. I'm not in any way being 
evasive. I just understand and I thank you for your comments.
    Mr. Capuano. I look forward to agreeing with Mr. Nussle.
    Chairman Nussle. It may happen a lot, who knows. Thank you 
very much.
    Secretary Thompson. Let's hope it's on Medicare reform.
    Chairman Nussle. Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman.
    I'll assure the gentleman from Massachusetts that the 
proper changes in leadership in this town were made last year. 
[Laughter.]
    Welcome, Mr. Secretary. You've mentioned that this is the 
largest insurance company in this country. It's also, I 
consider the largest HMO in this country. It's Government-run, 
which leaves a lot of room for error and inefficiency. On top 
of that, the Congress is the one that tries to run it by law. 
That even creates a worse problem.
    It's an entitlement, meaning that if you fit the criteria 
of the law you're entitled to the benefits under the Medicare. 
I'm just pleased that President Bush is looking beyond the 
politics of this program and focusing on policy. I look with 
anticipation of your recommendations to Congress on how we 
change that policy to make it more efficient. I understand the 
six points that you made earlier, and I think those are good 
points.
    I hope the Congress has the will that the President has, 
and that is, to deal with this issue beyond the politics of it, 
and get into the actual policy of it. I'm on the Ways and Means 
Committee, which we will deal with a lot of the Medicare 
itself.
    Folks at home who are insured under this giant HMO 
understand the program and the threats to the health insurance 
under Medicare. They understand that the arithmetic won't work. 
When you look at the ratio of workers today of 3.3 to those who 
are insured, and 30 years from now it will be 2 workers to 1, 
those numbers don't work. They won't work. As far as what it's 
going to cost in the future for this program, I don't think 
anyone really knows. Because it's an entitlement. The demand 
based on the law will drive the numbers.
    The only way you can change that is not by saying you're 
going to throw more dollars at it, by looking at the policy 
itself. In my understanding, from your comments here this 
morning, and I like what you have done in the past as Governor. 
We enjoyed working with you in 1995 and 1996, when we were 
going through the welfare reform on the Ways and Means 
Committee. I learned then that I was a mean spirited fellow. I 
heard it every day. In fact, I told a gentleman who was 
retiring from that committee at the end of that 1996 year that 
I went to his retirement because I wanted to hear him tell me 
one more time how mean spirited I am.
    Well, really we're not. We're a compassionate body. The 
President is a compassionate person. But what we're dealing 
with is an HMO micromanaged by Congress, by a law, and that has 
to be looked at and addressed in changing the law itself, 
dealing with the policy. The money will be there. It will be 
driven by the policy. We have no choice.
    Thank you, Mr. Secretary, and I look forward to working 
with you.
    Secretary Thompson. Thank you very much, Congressman 
Collins, for your wonderful statement. I appreciate that and 
you're absolutely dead on the mark.
    Chairman Nussle. Thank you, Mr. Collins.
    Mr. Moore.
    Mr. Moore. Thank you, Mr. Chairman.
    Mr. Secretary, welcome, congratulations and good luck.
    Secretary Thompson. Thank you, sir.
    Mr. Moore. I've only been here 2 years, so I'm going to be 
learning with you, but I would like to talk to you for just a 
couple of minutes about a telephone call that I had yesterday 
at 3:30 from Mitch Daniels, who appeared before this committee 
last week and testified in the morning. I think Mr. O'Neill was 
in the afternoon.
    I presume when Mr. Daniels called me yesterday to discuss 
the President's tax cut proposal, he knew that I had voted for 
estate tax relief last year, as well as marriage penalty tax 
relief. He basically said to me, can you be with us on this tax 
cut. And I said, I want to be direct with you. And he said, 
please do. I said, I've got a couple of concerns. Number one, I 
wish we had a budget before we had a vote on a tax cut 
proposal. Of course, this is the Budget Committee, and 
everybody here, I believe, is interested in a budget and how 
the numbers add up before we start either new spending programs 
or big tax cuts.
    Again, I voted for tax cuts, I want to vote for tax cuts 
again and I think the people deserve it. It's not a question, 
really, whether we're going to have a tax cut or not, it's how 
much, I believe.
    I said, the first concern is, we don't have a budget. My 
second concern, I said, is, and this was yesterday, I said 
Sunday I was watching the news and the weather. They reported 
that there was going to be, on the weather they projected a 12 
inch snow in Washington, D.C. on Monday. It made me wonder 
whether I'd get back here in time for a tax cut vote on 
Thursday, which is based on a projection of $5.6 trillion over 
the next 10 years.
    Now, if a weather report can be that wrong in just 24 
hours, my question, how reliable projections on the economic 
numbers are over the next 5 and 10 years. I would ask, I guess, 
do you share those concerns about the realities of those 
projections?
    Secretary Thompson. I share not the concerns, I share the 
optimism that those numbers are going to be there. I also share 
the belief that they may be understated. I feel very 
comfortable with what the projections indicate. Projections can 
be wrong. They've been wrong in the past.
    Mr. Moore. And they could be wrong this time as well.
    Secretary Thompson. They could be wrong. But it seems to me 
that the conservative estimates that have gone into the 
projections are such that you can feel pretty comfortable with 
the figures. In fact, I think the error, if there's going to be 
any, is on the fact that it's too conservative with the 
projections, and that there will be more money available for 
all of these programs, tax cut and the budget and Medicare 
reform.
    Mr. Moore. You know, you were Governor for 14 years in 
Wisconsin, correct, sir?
    Secretary Thompson. That is correct, sir.
    Mr. Moore. You know Governor Bill Graves of Kansas?
    Secretary Thompson. I do, very well.
    Mr. Moore. I'm from Kansas, and I know that the President 
knows Governor Graves as well. I was over at the White House, 
invited over there 3 weeks ago Thursday. I told the President 
at that time that Governor Graves, I'd seen a week before in 
the interview in the Associated Press with Governor Graves. I 
believe if he were sitting right here beside me he would tell 
you that what I'm going to tell you is an accurate 
representation of what he said to the reporter. I thought he 
was very candid. He was talking in that interview about 
projected revenues that were coming into Kansas, he was talking 
about tax cuts and about funding education.
    What the Governor said was, if I had known then what I know 
now, with some of the shortfalls in revenues our State is 
experiencing, I would have done things differently in terms of 
some of the tax cuts we made. What he was saying was, we're 
having a heck of a time finding money to fund some of the vital 
education programs in our State. And just by sheer coincidence, 
that very morning on the front page of the New York Times, 
Kansas as well as 15 other States and their Governors were 
mentioned who were experiencing similar difficulties in their 
States with revenue shortfalls, and their attempts to try to 
find money to fund some of the vital programs in their State.
    Can you understand my concern about these revenue 
projections, and even though you're optimistic, can you 
understand my concern?
    Secretary Thompson. I can understand your concerns, and I 
have to tell you that Bill Graves is a very good friend and I 
strongly endorse Governor Graves. I'm new to the Federal 
system. I've been here for 30 days. You've had 2 years. But 
when OMB, with their expertise, makes projections, I think you 
have to rely upon it. Their growth numbers are very 
conservative. That's why I feel very comfortable and optimistic 
that they're going to be met, and I think exceeded.
    Mr. Moore. Well, I think everybody here hopes that you're 
right. And I hope that optimism is warranted. Because if we're 
wrong, I fear that our country could be in for another 30 years 
of deficit spending. I don't want that to happen. I know you 
don't either and I'm sure everybody in this room does not want 
that to happen.
    Secretary Thompson. I don't think anybody wants that to 
happen, Congressman.
    Mr. Moore. Another part of the problem I have, I guess, 
with the fact that we don't have a budget yet, and that 
budget's expected in April, is that correct, the detailed 
budget?
    Secretary Thompson. That is correct.
    Mr. Moore. I understand the President has recommended in 
his Blueprint, which we got the day after his speech, an 
increase in HHS funding of about $2.8 billion, is that correct, 
for the next year?
    Secretary Thompson. That is correct.
    Mr. Moore. I think that is equal to the number of the 
increase in NIH funding, is that correct, sir?
    Secretary Thompson. It is.
    Mr. Moore. Would that mean, am I correct in assuming, them, 
or presuming that if the funding for the increase in NIH is the 
same as the increase for HHS that some of the programs which 
you may have not targeted as far as a number yet, a budget 
number yet, because you haven't gone through the process, are 
either going to be frozen or cut, including shelters for 
battered women, meals on wheels for senior citizens, low income 
heating programs, Head Start, Ryan White AIDS treatment and 
prevention grants, Maternal and Child Health Care Healthy 
Start, Centers for Disease Control and Food and Drug 
Administration? Does that mean those programs could be frozen 
or cut from their present levels?
    Secretary Thompson. You've made a list there that's very 
emotional, and I would have to tell you that most of those 
programs are not going to be cut or level funded. You have to 
realize that the Department of Health and Human Services 
budget, has a huge budget. We were able to pick up $475 million 
just on one-time programs that Congress funded last year that 
have now met their purpose and are no longer needed. So there's 
$475 million there.
    There's another $155 million that we were able to pick up 
that were not only one-time, but they were not requested by the 
Department to continue. So you're almost up to $650 million. 
Then there are some other things that are going to be level 
funded, and I'm not here to tell you that they're not. And 
there are going to be some programs that are going to be 
reduced from fiscal year 2001 funding.
    But you also have to realize the Department of Health and 
Human Services has been growing at the rate of about 8 percent 
a year. So there is some massage room in there so that we can 
do a very good job for all of those programs and continue to 
provide the services needed for all Americans.
    Mr. Moore. I don't mean to be emotional, but people in this 
country do depend upon those programs.
    Secretary Thompson. I know they do, and I intend to give 
them the best service I possibly can.
    Mr. Moore. Thank you very much.
    Secretary Thompson. Thank you.
    Chairman Nussle. Dr. Fletcher.
    Dr. Fletcher. Thank you, Mr. Chairman. We certainly welcome 
you, Mr. Secretary. The definition that you often hear for luck 
is when ability meets opportunity. I feel you're going to have 
some pretty good luck here, so thank you. I applaud the 
President for the appointment of you as Secretary.
    Looking at the leadership, I served in the State House and 
looked at your work back in the early 1990's in welfare reform. 
It stood out in the Nation as some of the most progressive and 
caring legislation to bring people out of the cycle of poverty 
that this Nation has seen in the last several decades.
    I also want to say that as we look at the budget, and as I 
was looking through the numbers, I see over 5 years, the 
President calls for about $1.3 trillion in total Medicare 
budget authority. I'm reminded of last year and the year before 
when we saw some budgets from the former administration. We had 
some cuts actually in Medicare, $28 billion 1 year with cuts in 
outpatient treatment of cancer, renal dialysis, medication, 
some other things that I think would take us back in time.
    Medicine is changing substantially, and the system that was 
designed in 1965 does need updating, needs improving. There's a 
lot of room for improving, and the demarcation between A and B 
is a false demarcation. Many of the treatments, procedures are 
done as outpatient, and we incur a great deal of cost because 
some of them are required to be done inpatient now that could 
be done much more cost effectively outpatient. So I again look 
forward to your efforts to improving Medicare, because I do 
think there are some cost savings.
    Just to mention some of the other money, I noticed that you 
spend over in HHS, or has been spent, about $1.5 billion on 
information technology, trying to keep up all those 200 
different computer systems. I would recommend you look at 
buying a computer company. Their price is low now, you could 
probably purchase one over a couple years.
    Secretary Thompson. That's the best idea I've heard all 
day, Congressman.
    Dr. Fletcher. And maybe update that, bring us in to the 
21st century. I think we're ready to cross that bridge now, 
with the new leadership.
    Let me ask you a couple of questions, though . There are 
some members that have concern about enacting a stand alone 
Medicare prescription drug bill or program might inhibit us to 
move forward or take some of the impetus out of reforming 
Medicare, which is much needed. What are your feelings about 
that? What do you recommend?
    Secretary Thompson. I'm very concerned about it, 
Congressman, and I know the President is as well. We feel very 
strongly as an administration that this is a golden opportunity 
for us, as a Congress, as a country, to reform Medicare, 
integrate Part A and Part B, make it a unified system, find new 
options for individuals to purchase, look at ways in which we 
could expand Medicare plus, and find ways in which we can put 
it on a more efficient paying system. All of this could be lost 
if Congress just passes a prescription drug bill. Because 
that's the Cinderella. It's the beautiful part. That's what 
everyone wants to pass and go out and campaign on.
    Once that's done, is there going to be an impetus by this 
Congress to do the heavy lifting to reform Medicare? The 
administration doesn't think so. We've got a once in a long 
time opportunity to reform Medicare, and let's do it on a 
bipartisan basis, and let's do it right. I'm confident that we 
can do it, and I thank you for your support.
    Dr. Fletcher. Well, I'm encouraged to hear that, because I 
think it is important, we do have an opportunity. Medicine has 
changed substantially from acute care to chronic disease 
management as well as prevention. And Medicare obviously 
doesn't meet those modern needs that have come about because of 
certainly an increase in technology and an ability we have with 
drugs like Lipitor, as you mentioned, that prevent disease 
rather than paying for bypass surgery or something down the 
road.
    Let me ask you about Medicaid. What can we do? There's 
several States that are having a problem because of Medicaid 
over-expenditures. Kentucky's one of them. We just increased or 
got projections that show an increased deficit primarily 
related to prescription drugs and expenditures, at least in the 
State of Kentucky.
    What can we do from the Federal level? You bring a great 
deal of expertise, I'm sure, with Medicaid, in your experience 
as Governor. What can we do structurally or from a leadership 
standpoint here in Washington to help confront those problem?
    Secretary Thompson. I think what we have to do, 
Congressman, is to allow for an expanded waiver procedure on 
Medicaid, allow States to really manage their Medicaid system 
and not penalize them. Give them an opportunity to use the best 
and the brightest individuals in their State to develop 
programs and plans that are going to administer health care, 
and be able to do it in a flexible way and not penalize them 
when they want to do it differently, not have a rigid system. I 
think that would go a long way.
    Oregon has an interesting concept. Tennessee has an 
interesting concept, and they're making changes to make it more 
financially solvent. North Carolina just came in with a waiver 
on Medicaid, and I was able to grant that. A lot of States are 
trying things differently. Let's give them the hope and the 
opportunity to do that.
    I think you'd be surprised, just like we found in welfare, 
it wasn't only Wisconsin. It was your State and States like 
Texas that came up with some innovative ideas that made welfare 
reform a success in this country. I think we can have the same 
kind of results with Medicaid.
    Dr. Fletcher. Well, thank you, and I do look forward to 
working with you to help enact some of these changes. We 
welcome you to Kentucky, the beautiful Bluegrass State, and 
thank you very much, Mr. Secretary.
    Secretary Thompson. I'd love to come down, you've got a 
beautiful State. Thank you, Congressman.
    Chairman Nussle. Mr. Honda.
    Mr. Honda. Thank you very much.
    Congratulations on your appointment, and as said before, 
some of us are new, and I am new also.
    Secretary Thompson. Thank you. We'll both learn together, 
Congressman.
    Mr. Honda. Being new, though, I guess that allows us to ask 
some what some people might consider ignorant questions. So let 
me go about doing this. The budget that I received is called a 
blueprint. Usually a blueprint is a well defined, very detailed 
document. This document seems to be more conceptual in its 
framework.
    Given that, you talked about an increase of 8 percent at 
HHS, in that Department, where is it that we see it, and that 
must be an average increase, correct, 8 percent?
    Secretary Thompson. The 8 percent, the biggest----
    Mr. Honda. It's 8 percent growth in----
    Secretary Thompson. Eight percent growth. It goes from $436 
billion, which is the fiscal year 2001 numbers, to $471 
billion, a little over $35 billion. That's an 8 percent growth. 
That's in both the mandatory and discretionary.
    The discretionary payments, which go from $52.8 million to 
$55.5 million is a 5.1 percent growth. That's the 
discretionary. And the mandatory is where Medicare and Medicaid 
and SCHIP is. The discretionary is the other programs.
    Mr. Honda. And you're saying that the 8 percent growth is 
something that you would like to see controlled. I guess my 
question to you is that when there are needs, and we have to 
cover the discretionary portion, should we not meet those if we 
have the revenue? And under the category where it's required 
funding, we have a trust fund. Should that not be applied to 
those programs, rather than merging them?
    Secretary Thompson. That's got to be a decision by 
Congress. I think the Department of Health and Human Services 
has received very generous allotments in the last several 
years. Sometimes over 8 percent, but the average has been for 
the last, I believe, four fiscal years, I may be wrong in that, 
but the Department as a whole has grown by 8 percent.
    President Bush feels that that is too much growth, and that 
we cannot sustain that. If we're going to continue to have tax 
cuts, if we're going to continue to modernize the Federal 
Government, if we're going to continue to be able to hold down 
so that Government doesn't continue to keep growing at such an 
alarming rate, that he felt it was a more sustainable rate at 4 
percent. That's what this budget is all about. HHS even is 
above that 4 percent, and has been generously treated by this 
Congress in the past. We feel very comfortable in the 
Department that a 5.1 percent growth is acceptable and one that 
we can handle, and deliver the services and make the kind of 
changes I've been talking about.
    Mr. Honda. I guess that's the dilemma I find myself in, and 
perhaps someone else has the details. But for us to have a real 
good discussion on the details that you're describing, it seems 
to me that we would have to have a full budget before us in 
order to have this discussion. Is there a time definite that 
we'll be able to get a detailed budget from your Department?
    Secretary Thompson. It's my understanding, Congressman, 
that the budget will be delivered in the first week of April.
    Mr. Honda. April? OK. And so, in general, in the usual 
process when you were Governor, before anybody talked about 
having discussions about the amount that we can set aside and 
return back to the taxpayers, did you not usually have a budget 
before you first, and then you considered what a tax cut might 
look like for the taxpayers?
    Secretary Thompson. I have learned that there are a lot of 
differences going from the State and being Governor to the 
Federal level. What works at the State level I guess doesn't 
necessarily mean that it works at the Federal level or is being 
done at the Federal level. We at the State level would never 
have everything included in one budget. We have a capital 
budget and we have an operating budget and we have a segregated 
budget. Most States have at least an operating budget and a 
capital budget.
    But the Federal Government for some reason has just one 
budget, I guess it's always been the way business has been 
done. I am not questioning that; it just is a different style.
    So I don't think you can compare. I'm using that as an 
example. I don't think you can automatically compare what we do 
at the State level to the Federal level, because it's 
completely two different systems.
    Mr. Honda. Thank you.
    Chairman Nussle. Thank you.
    Mr. Hastings.
    Mr. Hastings. Thank you. I think I'm painfully the last one 
here, Mr. Secretary. It's good seeing you again.
    Secretary Thompson. It's always a pleasure seeing you.
    Mr. Hastings. I just wanted to mention one thing. One other 
member asked you about projections. That is an inexact science. 
But just keep in mind, in 1997 we passed the Balanced Budget 
Act. We thought we'd balance the budget in 2002. And we in fact 
balanced it in 1999. So your projections go both ways.
    What I would like to just talk about briefly is Medicare 
and Medicaid. I'm one of those States where the formula 
penalizes, and I spent President's Day recess talking to all my 
providers. I've done this the last 3 years. So I asked them to 
come up with, because I keep hearing the same thing, the 
formula's wrong, I think you're exactly right, it's a political 
problem, it's pretty hard to do it. If two people sat down and 
said, we have a high and a low, the easiest compromise is right 
in the middle, that's not going to happen in a political body 
like this. So you have to find some structural changes.
    I've heard a lot about regulations. But those things are 
hard to get a handle around, because they're all intertwined. 
I've asked my providers to come up with a top 10. I'd be more 
than happy to share them with you when the time comes.
    Because I think there need to be some structural changes. I 
think what you're doing your idea with prescription drugs and 
Medicare overhaul, that is precisely the way to go. I look 
forward to working with you on that.
    Since you have been a leader on welfare reform, and you 
indicated to Mr. Fletcher that perhaps Medicaid, I'm not going 
to put words in your mouth, ought to be maybe following the 
same model as welfare reform, are there some similarities that 
we can look at in Medicare in that regard also?
    Secretary Thompson. I'm not sure you can, Congressman. I'm 
not saying you can't, but I'm not sure, because it's a 
completely different entity. It's completely funded by the 
Federal Government. And it's controlled by the Federal 
Government, all the rules and regulations and administration of 
it is by the Federal Government pretty much. So it's very 
difficult, I think, to make the same analogy to Medicaid and to 
welfare from Medicare.
    I think you can make the argument that it's got to be much 
more responsive, it's got to be simpler, and it's got to be 
much more uniform as it relates to the administration here in 
Washington than what we've actually seen in the past.
    Mr. Hastings. Well, maybe something will come out of my 
effort to try to find regulations that are onerous to our 
providers that may show a regional or State difference. In 
other words, central Washington may be a whole lot different 
than say, Manhattan. Maybe there needs to be some flexibility 
in that regard.
    Secretary Thompson. Oh, I didn't refer to rules. I think 
with rules, we can do a much better job. One of the real 
problems has been that we have too many rules and they change 
too often. Then they have some kind of ex post facto result. We 
have to be prospective, and we have to simplify the rules.
    I don't know about you, but I tried to read some of these 
rules, and I just blank out. I can't understand them. I feel 
I'm a fairly quick study. So I can imagine what a provider is 
thinking about, back in Washington or back in New York. I think 
we can do a better job. That's what I hope to do.
    Mr. Hastings. You'll discover here when you hear two bells 
and all this stuff that we have to go vote. I will be more than 
happy when I gather all this information to obviously work with 
you to provide some of the onerous rules and regulations.
    With that, Mr. Chairman, thank you. I know we have to go 
vote, and it's good seeing you, Mr. Secretary.
    Secretary Thompson. Always a pleasure. Thank you so very 
much.
    Chairman Nussle. Thank you, Mr. Secretary, for your 
testimony.
    [Recess.]
    Chairman Nussle. The committee will come to order.
    Now we will begin the panel for today's second hearing on 
the President's Budget for Health and Human Services. This 
morning, we heard from the newly sworn-in Secretary, former 
Governor Tommmy Thompson, now the Secretary of the Department 
of Health and Human Services.
    This afternoon, we will focus on welfare in our next panel. 
I will invite our two gentlemen to come forward to the witness 
table. We have two leading authorities on the subject of 
welfare in our country, two that were involved in the welfare 
debate and reform proposals, certainly from two different 
vantage points, but nonetheless both well respected in the 
field. We are honored to have both of them here today.
    First, we have Robert Rector, who is from The Heritage 
Foundation. He is, as I said, one of the leading authorities on 
poverty and on the U.S. welfare system. He focuses on a range 
of issues relating to welfare reform, family breakdown and 
America's various social ills. He played a major role in 
crafting the Federal welfare reform legislation which passed in 
1996 and has conducted extensive research on the economic costs 
of welfare and its role in undermining families. We welcome Mr. 
Rector to our witness table today.
    We also have Wendell Primus who is a leading authority on 
welfare as well. He joined the Center on Budget Policy and 
Priorities in the beginning of 1997 and is the Director of 
Income Security. As head of this division, he is working to 
expand the Center's research into areas including Social 
Security, unemployment insurance, income poverty trends, 
Federal policy relating to 1996 Federal welfare law.
    At the U.S. Department of Health and Human Services, he 
served as the Deputy Assistant Secretary for Human Services 
Policy in the Office of the Assistant Secretary for Planning 
and Evaluation.
    We appreciate both of you coming today and I understand Mr. 
Primus is also going to regale us a little bit with his 
expertise about Iowa, to which I am looking forward.
    I will invite you to testify as you would like. Your entire 
testimony will be made part of the record without objection. 
You may summarize your testimony as you see fit and we will 
proceed from there with questions.
    First, I will recognize Mr. Rector. You may proceed.

      STATEMENT OF ROBERT RECTOR, THE HERITAGE FOUNDATION

    Mr. Rector. Thank you.
    Today, I am going to speak about total means tested welfare 
spending and the budget which is a topic we do not hear very 
much about but I think it is very important to look at the 
total amount of aid and the total system of providing aid to 
poor people which the Federal Government currently provides in 
a holistic manner rather than splitting it up into 20 different 
little parts which gives you a very misleading picture about 
its size and its nature.
    By total means tested aid I am covering cash, food, 
housing, medical care, social services, training and directed 
education provided to low income persons. As I talk, if you 
have my written testimony, it would be easier if you could look 
at some of the charts. Particularly now, I am speaking about 
Chart 2 in my written testimony.
    In fiscal year 2000, the Federal Government spent $312 
billion on means tested aid to low income and poor people. With 
largely mandatory contributions made by the State Governments, 
that total came to $434 billion, a record high and about 4 
percent of our entire economy.
    The amount of money we are spending on welfare last year 
alone exceeds the entire gross national production of this 
Nation at the beginning of the 20th Century. This spending has 
grown astronomically as Chart 2 will show.
    When Lyndon Johnson launched the War on Poverty, we were 
spending $8 billion on welfare. Today that figure is now $434 
billion. Even adjusting for inflation, welfare spending has 
increased tenfold since the beginning of the War on Poverty and 
cash, food and housing alone has increased sevenfold.
    If Lyndon Johnson were to return today, look at the welfare 
state and look at that $434 billion, he would simply be 
appalled. He would not be able to believe it. He would also 
clearly recognize that this spending violates the essential 
principles of what he was trying to accomplish in the War on 
Poverty.
    In launching the War on Poverty, Lyndon Johnson clearly 
stated that he did not believe in unlimited growth of one-way 
handouts and in unlimited growth in dependency. He did not 
believe in having an ever larger growth of people on the 
welfare system. Instead, his goal was to reduce the behavioral 
causes which made dependency and poverty necessary. He had a 
joint goal of reducing poverty and reducing dependency. I would 
say on both of those goals over the last 35 years, we have 
largely failed.
    The welfare spending growth that we have seen since the 
beginning of the War on Poverty has continued during the 
1990's. Very few people realize that during the 1990's, we 
actually had a welfare spending explosion. Total spending rose 
from $215 billion in 1990 to $434 billion in the year 2000. 
That is a doubling of growth. Even after adjustment for 
inflation, the growth is at 61 percent. This spending growth is 
projected to continue under the Bush budget.
    If you could turn to Chart 4, it outlines both the growth 
the during the 1980's and 1990's as well as the projected 
growth that can be determined from the figures in the Bush 
blueprint budget. What we see is the total welfare spending 
over the next 5 years will rise from $434 billion to $573 
billion, an increase of roughly one-third. Cash, food and 
housing will go up by roughly 25 percent.
    It is particularly interesting given that the new 
administration has a priority on defense to compare the defense 
outlay growth with the projected welfare outlay growth. Defense 
spending, as you can see on Chart 4, is projected to grow by 
about 17 percent over the next 5 years. Welfare alone is going 
to grow by 31 percent. The gap between welfare spending and 
defense spending will actually go up over the next 5 years.
    I think with this amount of money, which I think would stun 
the average taxpayer, it is very, very difficult for anyone to 
claim that the proposed Bush budget and tax cuts are in any 
sense going to constrain or cause cuts in the welfare system. 
In fact, they do no even slow down the growth of the welfare 
system in any way whatsoever.
    I think if we are interested in controlling the growth of 
welfare spending, as well as truly helping the poor, we need to 
look beyond simple spending at the causes of why all this 
spending is occurring. In Chart 6, I think the major causes are 
clearly outlined there.
    About half of total welfare spending goes to families with 
children and of that spending, some 70 to 90 percent goes to 
parents and single families. In fact, as we look at the welfare 
system as it affects children in the United States today, it is 
almost exclusively a subsidy system for single parents. That 
goes for virtually every program that you would look at, public 
housing, Section 8 housing, TANF, food stamps, earned income 
tax credit. They are all predominantly subsidy systems for 
single parents.
    The reason that we have the welfare system we have is 
basically because the out-of-wedlock birth rate in the United 
States rose form 6 percent when the War on Poverty began in the 
1960's to 31 percent today and the divorce rate has also risen. 
That absolute collapse of marriage creates the economic need 
for all of the programs which you here on the Budget Committee 
feel you have to fund because these families do need assistance 
because of the decline of marriage.
    Fortunately, in the budget proposed by President Bush, 
there is a small new program in there to promote fatherhood 
which I think could be considerably higher and that program 
would be a focal point for developing new policies to bring 
down the out-of-wedlock birth rate, to bring down the divorce 
rate, and to encourage and stabilize marriage.
    In conclusion, I would say if you look at these figures in 
the budget, it is quite clear that welfare spending is out of 
control and is going to continue on the present course to rise 
very, very rapidly for the foreseeable future.
    To control welfare spending in the future, we need to do 
one thing in particular. We need to remove those behaviors 
which create a need for aid in the first place, specifically, 
the lack of work and the lack of marriage. If we remove those 
behaviors, then the need for this great growth in welfare 
spending will disappear and the client population will be far 
better off.
    Specifically, what we should look at in terms of future 
welfare policy is requiring work as a condition of receiving 
aid. That increases employment and reduces poverty. We should 
specifically encourage rather than discourage marriage. If we 
could get even a slight increase in the marriage rate and a 
drop in the out-of-wedlock childbearing rate, we would see 
welfare dependence drop very, very rapidly.
    If we do those things, we will see the rate of spending 
growth level off, the poverty rate in the United States drop 
very, very rapidly as it has over the last 3 years due to the 
TANF reforms and we would also see the well being of children, 
the most important thing, increase dramatically.
    I thank you for your time.
    [The prepared statement of Robert Rector follows:]

   PREPARED STATEMENT OF ROBERT RECTOR, SENIOR RESEARCH FELLOW, THE 
                          HERITAGE FOUNDATION

                              INTRODUCTION

    The U.S. welfare system may be defined as the total set of 
government programs--Federal and State--that are designed explicitly to 
assist poor and low-income Americans.
    Nearly all welfare programs are individually means-tested.\1\ 
Means-tested programs restrict eligibility for benefits to persons with 
non-welfare income below a certain level. Individuals with non-welfare 
income above a specified cutoff level may not receive aid. Thus, Food 
Stamp and Temporary Assistance to Needy Families (TANF) benefits are 
means-tested and constitute welfare, but Social Security benefits are 
not.
    The current welfare system is highly complex, involving six 
departments: HHS, Agriculture, HUD, Labor, Treasury, and Education. It 
is not unusual for a single poor family to receive benefits from four 
different departments through as many as six or seven overlapping 
programs. For example, a family might simultaneously receive benefits 
from: TANF, Medicaid, Food Stamps, Public Housing, WIC, Head Start, and 
the Social Service Block Grant. It is therefore important to examine 
welfare holistically. Examination of a single program or department in 
isolation is invariably misleading.

                     THE COST OF THE WELFARE SYSTEM

    The Federal Government currently runs over 70 major interrelated, 
means-tested welfare programs, through the six departments mentioned 
above. State governments contribute to many Federal programs, and some 
states operate small independent programs as well. Most state welfare 
spending is actually required by the Federal Government and thus should 
considered as an adjunct to the Federal system. Therefore, to 
understand the size of the welfare state, Federal and state spending 
must be considered together. (A list of individual welfare programs is 
provided in Appendix B.)
    Total Federal and state spending on welfare programs was $434 
billion in FY 2000. Of that total, $313 billion (72 percent) came from 
Federal funding and $121 billion (28 percent) came from state or local 
funds. (See Chart 1.)



    Welfare spending is so large it is difficult to comprehend. On 
average, the annual cost of the welfare system amounts to around $5,600 
in taxes from each household that paid Federal income tax in 2000. 
Adjusting for inflation, the amount taxpayers now spend on welfare each 
year is greater than the value of the entire U.S. Gross National 
Product at the beginning of the 20th century.
    The combined Federal and state welfare system now includes cash 
aid, food, medical aid, housing aid, energy aid, jobs and training, 
targeted and means-tested education, social services, and urban and 
community development programs.\2\ As Table One shows, in FY2000:
     Medical assistance to low income persons cost $222 billion 
or 51 percent of total welfare spending.
     Cash, food and housing aid together cost $167 billion or 
38 percent of the total.
     Social Services, training, targeted education, and 
community development aid cost around $47 billion or 11 percent of the 
total.


    Roughly half of total welfare spending goes to families with 
children, most of which are single parent households. The other half 
goes largely to the elderly and to disabled adults.

                     THE GROWTH OF WELFARE SPENDING

    As Chart 2 shows, throughout most of U.S. history welfare spending 
remained low. In 1965 when Lyndon Johnson launched the War on Poverty, 
aggregate welfare spending was only $8.9 billion. (This would amount to 
around $42 billion if adjusted for inflation into today's dollars.)
    Since the beginning of the War on Poverty in 1965 welfare spending 
has exploded. The rapid growth in welfare costs has continued to the 
present.
     In constant dollars, welfare spending has risen every year 
but four since the beginning of the War on Poverty in 1965;
     As a nation, we now spend ten times as much on welfare, 
after adjusting for inflation, as was spent when Lyndon Johnson 
launched the War on Poverty. We spend twice as much as when Ronald 
Reagan was first elected.
     Cash, food, housing, and energy aid alone are nearly seven 
times greater today than in 1965, after adjusting for inflation;
     As a percentage of Gross Domestic Product, welfare 
spending has grown from 1.2 percent in 1965 to 4.4 percent today.
    Some might think that this spending growth merely reflects an 
increase in the U.S. population. But, adjusting for inflation, welfare 
spending per person is now at the highest level in U.S. history. In 
constant dollars, it is seven times higher than at the start of the War 
on Poverty in the 1960's.

                    TOTAL COST OF THE WAR ON POVERTY

    The financial cost of the War on Poverty has been enormous. Between 
1965 and 2000 welfare spending cost taxpayers $8.29 trillion (in 
constant 2000 dollars). By contrast, the cost to the United States of 
fighting World War II was $3.3 trillion (expressed in 2000 dollars). 
Thus, the cost of the War on Poverty has been more than twice the price 
tag for defeating Germany and Japan in World War II, after adjusting 
for inflation.

                    WELFARE SPENDING IN THE NINETIES

    Welfare spending has continued its rapid growth during the last 
decade. In nominal dollars (unadjusted for inflation), combined Federal 
and state welfare spending doubled over the last 10 years. It rose from 
$215 billion in 1990 to $434 billion in 2000. The average rate of 
increase was 7.5% per year. Part of this spending increase was due to 
inflation. But, even after adjusting for inflation, total welfare 
spending grew by 61 percent over the decade.
    As Chart 2 shows medical spending (mainly in the Medicaid program) 
grew most rapidly during the 1990's, but welfare cash, food, and 
housing spending grew as well. Adjusting for inflation, cash, food and 
housing assistance is 37 percent higher today than in 1990. However, 
the growth in these programs has slowed since 1995, increasing no 
faster than the rate of inflation. This recent slowdown in spending is, 
in part, the effect of welfare reforms enacted in mid-nineties.




                     FUTURE WELFARE SPENDING GROWTH

    President George W. Bush's recent budget blueprint does not contain 
sufficient detail to permit projections of welfare spending program by 
program.\3\ However, the budget blueprint does provide spending 
projections for two major budget functions which are integral to the 
welfare system. These budget codes are Income Security (Function Code 
600) and Health (Function Code 500). Income Security contains cash 
welfare, Food Stamps and other food aid, and housing aid.\4\ Health 
(Code 500) contains Medicaid and a few smaller means-tested health 
programs. Between them, these two budget categories contain about 90 
percent of the Federal welfare system as it is described in this 
testimony. (Note: neither category includes Social Security or 
Medicare.)
    President Bush's budget plan allows for spending in Income Security 
and Health to grow as rapidly or more rapidly than did former President 
Clinton's FY 20001 budget request. Income Security (Code 600) is 
scheduled to grow by 24 percent over the next 5 years. Health (Code 
500) is scheduled to grow by 62 percent over 5 years.\5\
    Based on these figures it seems certain that means-tested welfare 
spending will grow as rapidly under President Bush's first budget 
request as under Clinton's last. Projected welfare spending figures 
from Clinton's last budget (FY2001) are provided in Appendix A.\6\ 
These figures show a rapid of growth in welfare spending. (See Chart 
3.)\7\



     Total Federal welfare spending is projected to grow from 
$315 billion in 2000 to $412 billion in 2005: an increase of 31 
percent. The annual rate of spending increase is projected at 5.5 
percent.
     Federal spending on cash, food, and housing aid is 
projected to grow from $141 billion to $174 billion: an increase of 23 
percent. The annual rate of spending increase would be 4.3 percent, 
nearly twice the anticipated rate of inflation.
     Together, Federal and state welfare spending would rise 
from around $434 billion in 2000 to $573 billion in 2005.
    Again, although we do not yet have program by program spending 
projections from the Bush administration, the broad budget function 
figures we do have allow for the same rate of growth in cash, food, and 
housing as Clinton's plan. Moreover, the Bush figures would permit more 
rapid growth in health spending. Thus, clearly, President Bush's plan 
does not require cuts in welfare spending or even a slowdown in the 
rate of spending growth.

                          WELFARE AND DEFENSE

    The rapid projected rate of growth of future welfare spending can 
be illustrated by comparing welfare to defense. The President has 
promised to make defense spending a priority. Under his budget plan, 
nominal defense outlays would increase for the first time in a half 
decade. Defense spending would rise by 17 percent over 5 years from 
$299 billion in FY2000 to $347 billion in FY2005. During the same 
period, however, welfare spending is scheduled to rise by 31 percent. 
As Chart 4 shows, the gap between welfare and defense spending will 
actually broaden during this period.



                     THE EFFECTS OF WELFARE REFORM

    In 1996, Congress enacted a limited welfare reform; The Aid to 
Families with Dependent Children (AFDC) program was replaced by the 
Temporary Assistance to Needy Families (TANF) program. Critically, a 
certain portion of AFDC/TANF recipients were required to engage in job 
search, on the job training, community service work, or other 
constructive behaviors as a condition for receiving aid. The effects of 
this reform have been dramatic.
     AFDC/TANF caseloads have been cut nearly in half.
     TANF outlays have fallen substantially. (See chart 5.)
     The decline in the TANF caseload has led to a concomitant 
decline in Food Stamp enrollments and spending.



    While critics predicted the reform would increase child poverty, 
the exact opposite has occurred. Once mothers were required to work or 
undertake constructive activities as a condition of receiving aid they 
left welfare rapidly. Employment of single mothers increased 
substantially and the child poverty rate fell sharply from 20.8 percent 
in 1995 to 16.3 percent in 2000. The black child poverty rate and the 
poverty rate for children living with single mothers are both at the 
lowest points in U.S. history.
    In the welfare reform of 1996 all sides came out as winners: 
taxpayers, society and children. By requiring welfare mothers to work 
as a condition of receiving aid, welfare costs and dependence were 
reduced. Employment increased and poverty fell. Moreover, research 
shows that prolonged welfare dependence itself is harmful to children; 
reducing welfare use and having working adults in the home to serve as 
role models for children will improve those children's prospects for 
success later in life.
    The workfare principles of the 1996 reform should be intensified 
and expanded. Work requirements in TANF should be strengthened. Similar 
work requirements should be established in the Food Stamp and public 
housing programs. Finally, because the reform has clearly succeeded in 
cutting welfare use, TANF outlays should be reduced by 10 percent in 
future years.

             WELFARE SPENDING AND THE COLLAPSE OF MARRIAGE

    As noted previously, about half of all means-tested welfare 
spending is devoted to families with children. Of this spending on 
children, nearly all goes to single parent families. Chart 6 shows the 
percent of aid to children in major welfare programs which flows to 
single parent families. The single parent share is generally well above 
80 percent.
    Clearly, the modern welfare state, as it relates to children is 
largely a support system for single parenthood. Indeed, without the 
collapse of marriage which began in the mid-1960's, the part of the 
welfare state serving children would be almost nonexistent.
    The growth of single parent families, fostered by welfare, has had 
a devastating effect on our society. Today nearly one third of all 
American children are born outside marriage. That's one out-of-wedlock 
birth every 35 seconds. Of those born inside marriage, a great many 
will experience their parents' divorce before they reach age 18. Over 
half of children will spend all or part of their childhood in never-
formed or broken families.



    This collapse of marriage is the principal cause of child poverty 
and a host of other social ills. A child raised by a never-married 
mother is seven times more likely to live in poverty than a child 
raised by his biological parents in an intact marriage. Overall, some 
80 percent of child poverty in the U.S. occurs to children from broken 
or never-formed families. In addition, children in these families are 
more likely to become involved in crime, to have emotional and 
behavioral problems, to be physically abused, to fail in school, to 
abuse drugs, and to end up on welfare as adults.
    Since the collapse of marriage is the predominant cause of child-
related welfare spending, it follows that it will be very difficult to 
shrink the future welfare state unless marriage is revitalized. 
Policies to reduce illegitimacy, reduce divorce and expand and 
strengthen marriage will prove to be by far the most effective means 
to:
     reduce dependence;
     cut future welfare costs;
     eradicate child poverty; and,
     improve child well-being.
    Tragically, current government policy deliberately ignores or 
neglects marriage. For every $1,000 which government currently spends 
subsidizing single parents, only one dollar is spent attempting to 
reduce illegitimacy and strengthen marriage.
    Fortunately, President's Bush's budget plan does propose a new 
program to ``promote responsible fatherhood.'' This proposed program 
could become the seedbed for a broad array of new initiatives to 
strengthen marriage. Still, the money requested is pitifully small: 
only $64 million per year. This amounts to roughly one penny for each 
one hundred dollars in projected welfare spending. The budget 
allocation to the new fatherhood program in FY 2002 should be increased 
fivefold with the funds diverted from TANF outlays. Beyond FY 2000 some 
5 to 10 percent of Federal TANF funding should be devoted to pro-
marriage activities.

                               CONCLUSION

    When Lyndon Johnson launched the War on Poverty he did not envision 
an endless growth of welfare spending and dependence. If Johnson 
returned today to see the size of the current welfare state he would be 
deeply shocked.
    President Johnson's focus was on giving the poor a ``hand up'' not 
a ``hand out.'' In his first speech announcing the War on Poverty, 
Johnson stated, ``the war on poverty is not a struggle simply to 
support people, to make them dependent on the generosity of others.'' 
Instead, the plan was to give the poor the behavioral skills and values 
necessary to escape from both poverty and dependence. Johnson sought to 
address the ``the causes, not just the consequences of poverty.''
    Today, President Johnson's original vision has been all but 
abandoned. We now have a clear expectation that the number of persons 
receiving welfare aid should be enlarged each year, and that the 
benefits they receive should be expanded. This expectation is clearly 
reflected in the future spending projections in Appendix A. Any failure 
to increase the numbers of individuals dependent on government and the 
benefits they get is regarded as mean spirited.
    Yet the expansion of the conventional welfare system is 
destructive. More than twenty years ago, then President Jimmy Carter 
stated, ``the welfare system is antiwork, antifamily, inequitable in 
its treatment of the poor and wasteful of the taxpayers' dollars.'' 
President Carter was correct, yet today little has changed except that 
the welfare system has become vastly larger and more expensive.
    This expansion of welfare spending has harmed rather than helped 
the poor. Instead of serving as a short-term ladder to help individuals 
climb out of the culture of poverty, welfare has broadened and deepened 
the culture of self-destruction and trapped untold millions in it.
    Rather than increasing conventional welfare spending year after 
year, we should change the foundations of the welfare system. Policy 
makers should embrace three basic goals.
    1. We should seek to limit the future growth of aggregate means-
tested welfare spending to the rate of inflation or slower.
    2. We should require welfare recipients to perform community 
service work as a condition of receiving aid along the lines of the 
TANF program operating in Wisconsin.
    3. We should support programs which foster and sustain marriage 
rather than subsidizing single parenthood. In addition, we should 
reduce the antimarriage penalties implicit in the welfare system.
    These three goals are synergistic. They will operate in harmony and 
reinforce each other. In the long run, it will be difficult to control 
welfare spending merely by cutting funding. Rather, if we change the 
behaviors of potential recipients we will reduce the need for future 
aid. As the need for aid diminishes, spending growth will slow and then 
decline, and the well being of the poor and society as a whole will 
rise.

                                ENDNOTES

    1. A very small number of the programs listed in Appendix B are 
targeted to low income communities rather than low income individuals. 
While such programs are not formally means-tested, they should be 
considered part of the overall welfare system. Only a small fraction of 
aggregate welfare spending is provided through such programs.
    2. Appendix B provides a list of the major Federal and state 
welfare programs covered in this testimony.
    3. The White House, A Blueprint for New Beginnings: A Responsible 
Budget for America's Priorities, (Washington, D.C.: U.S. Government 
Printing Office, 2001)
    4. Income Security (function code 600) contains some nonwelfare 
expenditures, specifically outlays for retired Federal employees and 
other retirement spending. However, the rate of growth of this 
retirement spending changes little from 1 year to the next, therefore 
once the code 600 outlay totals are known one can predict the means-
tested component with reasonable accuracy.
    5. The White House, p. 196.
    6. Projected outlay figures taken from Office of Management and 
Budget, Budget of the United States Government: Fiscal Year 2001, 
(Washington, D.C.: U.S. Government Printing Office, 2000). Table 32-2, 
pp. 352-364.
    7. The outlay figures in Appendix A are less detailed than the past 
spending figures used in Table 1. This accounts for small discrepancies 
between the FY2000 figures in Table 1and Appendix A. These minor 
differences do not appreciably affect the overall analysis.















    Chairman Nussle. Thank you.
    For the members' benefit, we have three votes that are 
scheduled on the floor. I am going to ask Mr. Primus to go 
ahead and give us his testimony, I would like to hear it, and 
then we will go and vote. We will come back after the votes to 
ask questions of the witnesses.

STATEMENT OF WENDELL PRIMUS, DIRECTOR, INCOME SECURITY, CENTER 
                ON BUDGET AND POLICY PRIORITIES

    Mr. Primus. Thank you for the opportunity to testify today.
    I would like to review what we know about the 
implementation of welfare reform and then talk a little about 
the Bush budget.
    Welfare reform has coincided with the longest running 
economic expansion in our Nation's history. Unemployment has 
fallen from 6.9 to 4 percent and hourly wages for the very 
bottom of the wage distribution is increasing in real terms. We 
have also had enacted make work pay policies of increasing the 
earned income tax credit and significant increases in child 
care expenditures. Those policies and that very strong economy 
have produced some very positive outcomes, more positive than I 
would have predicted in 1996.
    We clearly see that single mothers are working more, 
earning more. In fact, the poorest 40 percent of mothers are 
earning about $2,300 more each below about 115 to 120 percent 
of poverty. As a result, child poverty has decreased. Under a 
measure of child poverty that includes food stamps, housing and 
the earned income tax credit, it is now 12.9 percent, the 
lowest level since this measure began in 1979. Caseloads have 
declined 56 percent in TANF, 35 percent in food stamps since 
1994.
    That is the very positive news. I want to emphasize is it 
has come because of welfare reform, the strong economy and the 
make work pay policies. We are really not able to disentangle 
which is responsible for what parts of that very good news.
    There is also some very troubling news. After adjusting for 
inflation, the very poorest mothers, those below 75 percent of 
poverty, fell 4 percent between 1995 and 1999. We think about 
700,000 families in this very strong economy have actually lost 
ground. The poverty gap really has not budgeted much. If you 
look at the table in my testimony, I show that if you do not 
count any government and looks at earnings, it decreased 
significantly from 1993 to 1995 to 1999.
    After you count all government taxes and transfers, there 
was almost no progress made between 1995 and 1999. In fact, 
this low income mother on average who earned $2,300 more has 
only gotten an increase in income of about $300 despite that 
increased earnings.
    Many of those working families lost food stamps and 
President Bush was appropriately concerned about the very high, 
marginal tax rates as families entered the income tax system. 
However, single mothers with incomes between $13,000 and 
$20,000 typically face marginal tax rates well above 50 
percent.
    What does that mean? That means if they go out and earn an 
additional $1,000, they get to keep less than $500 of that. 
That is because there is a food stamp tax rate of about 30 
percent, that varies between 24 and 36 percent. There is the 
EITC phase-out of 21 percent. They pay employee taxes and they 
also pay child care co-pays in many cases as well as health 
insurance co-pays.
    In your State of Iowa, we did some calculations, Mr. 
Chairman, that looked at a mother say that had an increase in 
earnings from $14,000 to $20,000. She gets to keep 30 percent 
of that $6,000 increase in earnings. So we think that the Bush 
administration has missed many opportunities.
    I want to add that while we have made enormous progress 
with single mothers, we have not done nearly as well for young 
black men in terms of increasing their labor forced 
participation and the MDRC tells us that we need both income 
and earnings gains to really get positive outcomes.
    I would characterize the Bush budget where we have a $2.5 
trillion non-Social Security, non-Medicare surplus, we really 
could make significant improvements building upon welfare 
reform and reducing those marginal tax rates for the working 
poor.
    There is no expansion of the earned income tax credit. 
Working families do not benefit from the Bush tax plan. We 
estimate that 33 percent of all children do not benefit; 55 
percent of black children; 56 percent of Hispanic children do 
not benefit from the Bush tax plan.
    We could have made the child tax credit partially 
refundable, say 5 to 15 percent of earnings. That would have 
reduced those marginal tax rates and provided a significant 
increase in those mothers who have responded to welfare reform 
and have entered the labor force.
    There is no funding for the change in child support 
distribution rolls. I think we had a conversation last year 
where we know that young men who pay child support sometimes 
face a 100 percent tax rate. It is a mandatory payment that 
they should and must pay but all of the proceeds go to 
government because we reduce that TANF check dollar for dollar. 
There are no funds to improve those child support distribution 
rolls and fund the bill that passed the House last year, 405.
    There is no expansion of Medicaid or SCHP. The typical 
state is a mother loses Medicaid eligibility when she hits 67 
percent of poverty. There is no improvement in the safety net 
for the working poor legal immigrants. I also think we should 
have some funds to restore some of the food stamp cuts enacted 
in 1996 that were primarily budget cuts. It was a 
reconciliation bill. That would again ease some of those 
marginal tax rates.
    In sharp contrast, the Bush budget allocates $555 trillion 
to the wealthiest 1 percent in this country who have incomes on 
average of about $800,000 and who have gained, despite their 
high marginal tax rates, somewhat higher, an increase in income 
of 50 percent. They also got a significant tax reduction in 
1997. I just want to contrast what we have done for the very 
top versus how we could have built upon welfare reform and 
helped working poor families.
    In terms of the actual cuts in the Bush budget, there is no 
extension of TANF supplemental grants which means 17 States 
will actually get a reduction this year unless you extend those 
grants. I think there is also a reduction in TANF funding 
because the Bush administration says we are going to add a new 
purpose. We are going to encourage States to encourage 
charitable giving. That takes $400 million away from States to 
aid low income families and I think primarily will reimburse 
middle class families for behavior they are already 
undertaking. We have not yet seen all of the details.
    We think there is about a $2 billion cut in HUD funding. We 
know from the functional totals because there is an increase in 
education in Function 500 that there has to be a significant 
increase in job training monies and there is also no expansion 
of CHIP funds.
    If you recall, States are going to get $1.1 billion less 
this year compared to 2001 because when it was enacted, there 
was this fall off in funding. Now, with the surplus, I think 
there is clearly a need to not go through that funding 
reduction.
    In terms of how this fares in the State of Iowa, a State 
picked at random.
    Chairman Nussle. Could I ask you to save that because I 
would like to hear this but I need to go and do my duty on the 
floor quickly and we will come back. Could we do that?
    Mr. Primus. Sure.
    Chairman Nussle. The committee will be in recess until we 
are done with the votes.
    [Recess.]
    Chairman Nussle. Mr. Primus, I interrupted your testimony 
so that we could vote. I apologize for that. Please pick up 
where you left off. I think you were about to tell me a bit 
about Iowa.
    Mr. Primus. Thank you.
    I would like to demonstrate what some of these missed 
opportunities mean for working poor families in Iowa.
    Some 28 percent of the children in Iowa would not benefit 
from the Bush tax plan and 86 percent of those families include 
a worker. As I mentioned, I did a calculation for a single 
mother with two children whose earnings increased from $14,000 
to $20,000. She faces a 70 percent marginal tax rate. I would 
argue that you ought to be about the business of trying to 
reduce that tax rate so that when she has entered the labor 
force, she gets to keep more of her earnings.
    About 9 percent of the children in Iowa lack health 
insurance. A single mother who leaves welfare loses Medicaid 
assistance in Iowa when her earnings get to 90 percent of 
poverty. In the typical State, it is 67 percent of poverty and 
in most cases, when a noncustodial parent pays child support in 
Iowa, they essentially face an effective 100 percent tax rate.
    There is one other aspect. Nancy Johnson held a hearing 
last year on what was an agreement among business and labor and 
administrators of the unemployment insurance system. The State 
of Iowa has to impose an employer surtax to fund its employment 
service. I think the budget should assume some unemployment 
insurance improvements along the lines of that stakeholder 
agreement.
    Finally, I would hope that in this budget, and as the 
Congress thinks about reauthorizing TANF, food stamps and child 
care next year, one is that you make sure you reserve enough 
monies in the budget so that reauthorization can take place. I 
would hope that the authorizing committees could change the 
central focus from caseload reduction to poverty reduction; 
that we need additional supports to help the families remaining 
on welfare get into the work force.
    Something that I have worked a lot on in the last several 
years is to really help noncustodial parents build capacity to 
support their children financially and emotionally. The Bush 
budget does include some new monies to really start to do that.
    I think we also need to provide support to two parent 
families. Two parent families are not being served by our 
welfare system. They have much lower participation rates in 
Medicaid, food stamps and TANF. I think we need to increase 
funding.
    In terms of the budget implications, I think there is a 
strong case for extending the TANF supplemental grants. Those 
17 States are actually going to get a decrease. In terms of 
funding levels, they get an average of about $700 per poor 
child. The nonsupplemental States get $1,700 per poor child. 
The States getting these extra grants have higher child poverty 
rates, lower fiscal capacity. The Bush budget was correct in 
recommending a $200 million increase a year in child welfare 
but they did not include the child support distribution 
reforms.
    In conclusion, the bottom line is, I think this surplus 
gives you the opportunity to really build upon welfare reform 
and improve our work-based safety net substantially. I would 
urge that you reallocate some of that $555 billion you are 
giving to the top 1 percent in the form of a tax cut and 
improve in some way child care funding, Medicaid, health 
insurance for the working poor in this country.
    Thank you.
    [The prepared presentation of Wendell Primus follows:]

 PREPARED PRESENTATION OF WENDELL PRIMUS, DIRECTOR OF INCOME SECURITY, 
                 CENTER ON BUDGET AND POLICY PRIORITIES

                   ECONOMIC CONTEXT OF WELFARE REFORM

Key Factors in Explaining the Positive Outcomes

     Welfare reform coincided with the longest-running economic 
expansion in our nation's history.
     Average annual unemployment fell from 6.9 percent in 1993 
to 4.0 percent in 2000.
     Hourly wage rates for the lowest-paid workers began to 
rise after falling for two consecutive decades.
     EITC expansions to make work pay.
     Increases in child care expenditures.

                  POSITIVE OUTCOMES OF WELFARE REFORM

     Single mother are working more.
     In 1992, about one-third of single mothers with young 
children were employed; by 1999, more than half were employed.
     Single mothers are earning more.
     The poorest 40 percent of single mother families increased 
their earnings by about $2,300 per family on average between 1995 and 
1999 after adjusting for inflation.
     Child poverty has decreased.
     Under a measure of poverty that includes government 
benefits and taxes, the child poverty rate fell to 12.9 percent in 1999 
the lowest level since this measure became available in 1979.
     Caseloads have declined by 56 percent in TANF and 35 
percent in Food Stamps since 1994.

                  TROUBLING RESULTS OF WELFARE REFORM

     After adjusting for inflation, the average disposable 
incomes of the poorest fifth of single mothers fell 4 percent between 
1995 and 1999, despite increased earnings.
     According to the Current Population Survey, there are 
700,000 families that have significantly less income in 1999 than their 
counterparts in 1995.
     The ``poverty gap'' has not budged significantly in recent 
years despite the decrease in the poverty rate.
     The poverty gap measures the total number of dollars that 
would be required to bring all people with incomes below the poverty 
line up to the poverty line.
     Trends in disposable income.
     While the poorest 40 percent of single mother families 
increased their earnings by about $2,300 per family on average between 
1995 and 1999, their disposable income increased only $292. (All 
figures adjusted for inflation.)
     Many working families are inappropriately losing ancillary 
benefits for which they remain eligible, such as food stamps.
     Single mothers with incomes between about $13,000 and 
$20,000 face very high marginal tax rates.
     The labor force participation rates of young African 
American men has fallen 6 percentage points between 1993 and 1999.
     MDRC results show that positive outcomes for children 
require both work and income gains.

                       BUILDING ON WELFARE REFORM

Missed Opportunities to Help the Working Poor

     No expansions of the Earned Income Tax Credit, such as:
     A ``third tier'' in the EITC for families with three or 
more children.
     Reduction in the marriage penalty in the EITC.
     Expansion of the EITC in targeted income ranges to reduce 
marginal tax rates.
     Working poor families do not benefit from the Bush tax 
plan.
     Some 33 percent of all children will not benefit from the 
Bush tax plan; 55 percent of Black children and 56 percent of Hispanic 
children will not benefit.
     Could make the child tax credit partially refundable, by 
refunding a small percentage of earnings (between 5 percent and 15 
percent) up to a maximum credit of $1,000 per child.
     No funds to improve child support distribution rules like 
H.R. 4678, which passed the House 405-18.
     Many low-income noncustodial parents face an effective tax 
rate of 100 percent when they pay child support.

MISSED OPPORTUNITIES TO HELP THE WORKING POOR

     No expansion of Medicaid or SCHIP for working parents and 
the many children who remain uninsured.
     In the median state, a parent in a family of three loses 
Medicaid eligibility when her income surpasses 67 percent of the 
poverty line.
     No improvement in the safety net for legal immigrants.
     Should restore food stamp benefits for the working poor 
and states should have the option to restore Medicaid coverage.
     No funds to improve the Food Stamp program and restore 
``budget'' cuts enacted in 1996 that affected working families, among 
others.
     In sharp contrast, the administration budget allocates 
$555 billion to benefit the richest 1 percent of Americans over the 
next decade, a group whose real income increased nearly 50 percent 
since 1989 and who enjoyed a significant tax cut in 1997. This amount 
is more than health, education, and all other initiatives combined.

                      CUTS IN LOW-INCOME PROGRAMS

     No extension of TANF supplemental grants.
     Currently, wealthier states receive about $1,778 in TANF 
dollars per poor child, while poorer states that received supplemental 
grants receive $733 per poor child.
     Reduction in TANF funding for low-income families because 
$400 million spent on state tax credits for charitable giving.
     $2.2 billion cut in real funding for HUD programs.
     Reductions in job training monies.
     There is no expansion of SCHIP funding to offset a cut of 
$1.125 billion in FY 2002 compared to FY2001. This cut was a budget-
related measure included when the program was enacted.

                        THE WORKING POOR IN IOWA

     Some 28 percent of children in Iowa will not benefit from 
the Bush tax plan; 86 percent of excluded families include a worker.
     Single mothers with two children and child care expenses 
face average marginal tax rates of 70 percent as their earnings 
increase from $14,000 to $20,000.
     Some 9 percent of children in Iowa lack health insurance 
coverage.
     A single mother leaving welfare loses health insurance 
coverage when her income reaches 90 percent of the poverty line.
     In many cases, low-income NCPs face an effective 100 
percent tax rate on the child support they pay.
     Because of employment service funding reductions, Iowa has 
been forced to enact a special surcharge on employers. The budget 
should assume unemployment insurance improvements.

            BUILDING ON WELFARE REFORM: TANF REAUTHORIZATION

     Change the law's central focus from caseload reduction to 
poverty reduction.
     Support families in the transition from welfare to work by 
providing appropriate services for adults with significant employment 
barriers, examining sanction policies, and modifying the time limit on 
Federal cash assistance.
     Help noncustodial parents build capacity to support their 
children both financially and emotionally.
     Provide services to strengthen two-parent families and 
help fragile families stay together.
     Increase funding and make states more accountable for how 
they use their TANF block grant funds.
     The block grant should be indexed for inflation.
     Additional funds to reduce the vast disparities in 
resources available to poorer states.
     A more effective measure is necessary to provide states 
additional funds in case of an economic downturn.

                          BUDGET IMPLICATIONS

     Extend TANF Supplemental Grants and put in baseline.
     Child Welfare.
     Child Support distribution reform.
     Fatherhood/Employment services for low-income NCPs.
     Unemployment Insurance reform.
     Monies for TANF, child care, the Social Services Block 
Grant, Food Stamps, Medicaid, and SCHIP.

    Chairman Nussle. Thank you both for your testimony with 
regard to welfare reform and poverty.
    There is no question that the percentage both of you used, 
56 percent of a reduction in the welfare rolls, that to a very 
large extent the reforms we put into place in 1996 have been 
generally very successful, that there are a lot of success 
stories. I think what both of you are telling us is that there 
are challenges that lie ahead and you are giving us some advice 
on how best to meet those challenges.
    Apart from the argument you make about the $555 billion 
going to the top 1 percent, which my information tells me some 
of that tax cut is attributed to people who are deceased which 
is an interesting way of computing it but probably not very 
realistic.
    Aside from that, a debate over tax cuts, I think there is a 
longer term issue here that both of you discuss and that is how 
do we meet this challenge? What do we do? Obviously there are 
some good reforms that were put into place creatively both by 
the Federal Government and by the State Government. There are 
still people both in Iowa, as well as every State, who have not 
yet been able to figure out the benefit, or we have not figured 
out how to benefit and get them on their feet. It is not just a 
matter of providing the assistance; it is also a matter of 
moving them from dependency to independence.
    The question I would have is, what are your specific 
recommendations? I understand what you are saying about the tax 
cut. Suggest for a moment, you have lost that argument, what 
other suggestions would you make with regard to specific 
proposals and reforms that you would hope to see us consider as 
part of our moving forward, whether in this budget or budgets 
in years to come?
    Mr. Rector. I would offer a number of points. The first is 
that I think if you listen to Mr. Primus, and I have listened 
to him for 20 years now, you would think the welfare system was 
cut and cut and cut and cut, but somehow when you look at the 
chart, it keeps going up and the taxpayers keep paying more.
    Since 1965, welfare spending, even after adjusting for 
inflation, has increased every year but four. Every year it 
goes up. Somehow, the book of Proverbs tells us, ``The eyes of 
man are never full.'' No matter what is spent here, we have 
doubled spending in the last 10 years. You can always come back 
and hear dozens and dozens of recommendations of why to spend 
more. Somehow the situation never seems to improve. I think 
that is basically because we are spending on the wrong things.
    If we spend on one-way handouts, if we spend on programs 
that reward idleness and reward single parenthood, you get more 
idleness and more single parenthood. That is the one thing we 
have learned from welfare reform.
    I would recommend a number of fundamental things. One is I 
think you need to set a reasonable goal for future spending. I 
think cash, food and housing should increase no faster than the 
rate of inflation in future years. The underlying philosophy 
behind that is as Lyndon Johnson said, ``We want to have fewer 
people on welfare, not more.'' We should have fewer people. 
Simply let the spending increase no faster than the rate of 
inflation would allow for some increases while having a 
declining population on the rolls.
    The second, most important thing I think we could do in 
terms of welfare program structure is to recognize that the 
reform we passed in 1996 was only a half of a reform. The most 
significant thing that happened in 1996 was we passed national 
requirements that said women on AFDC are required to undertake 
some community work service or job search or some sort of 
constructive activity as a condition for getting aid. When we 
did that, the caseload dropped in half; the employment rates 
went up; the child poverty rate for black children and children 
in single parent families is now at the lowest point in the 
entire history of the United States largely as a result of that 
Act. That Act is quite weak. Most people do not realize that of 
the 2 million welfare mothers still left on the rolls, half are 
sitting there idly at home, not doing anything.
    One thing we should do as we look toward TANF 
reauthorization is have a requirement that all parents on TANF 
be required on a weekly basis to participate in some sort of 
constructive activity leading to self-sufficiency.
    The other thing we need to understand is if we look at 
public housing, of the aid that goes to children, 80 to 90 
percent is to single parents; Section 8 housing, same thing; 
earned income tax credit, something like 66 percent; food 
stamps, aid to children, some 80 percent goes to single 
parents. These programs exist largely as subsidy systems that 
are trying to address the collapse of marriage that began in 
the 1960's. None of this spending would occur if that collapse 
of marriage had not occurred.
    Child poverty, 80 percent of the child poverty in the 
United States today occurs to children from either a home where 
the mother never married or some sort of home that is broken or 
fractured. Child poverty and welfare and single parenthood are 
essentially all the same problem, yet we never address why 
welfare exists. We never address why that poverty exists.
    The first and foremost thing I would recommend in future 
years is we need to begin to devise active programs to 
encourage marriage rather than penalize it and recognize that 
all of these welfare programs as means tested programs 
implicitly penalize marriage. If the woman has a boyfriend who 
is the father of the child but he has earnings, she gets to 
keep most of her welfare income as long as she is not married 
to him. The moment she marries him, his earnings are counted 
against her welfare eligibility and those benefits are going to 
be substantially reduced.
    The whole system is antimarriage and has been that way for 
a long time and it is also agnostic. It never talks to parents 
about the value of marriage. Eighty-five percent of all the 
out-of-wedlock child births are paid for right at the front 
door by Medicaid. That is the first payment you have for that 
child, a substantial one.
    In close to half of those cases, most of these are women in 
their early 20's, in close to half of those the woman is 
actually cohabiting with the father at the time of birth, he is 
right there in the home, they have a reasonable relationship. 
In no State in the United States does the Government even say, 
have you two thought about getting married, can we tell you 
what the effects on this child would be if you did get married. 
Could we tell you the effects on one another? Could we provide 
you with some mentoring services or some skills to try to 
improve your relationships? That is the singlemost important 
thing you could do to improve the well being of that child, 
reduce his future prospect for child poverty as well as 
substantially welfare outlays in the United States.
    You could go from California to Maine and not find a single 
brochure in any Government office that says anything positive 
to that young couple about marriage. I regard that as a 
terrible tragedy.
    The last concrete recommendation I would make is that I 
think TANF has been very successful in reducing dependency and 
poverty and it is time that the taxpayer gets some reward for 
that success. Therefore, I would recommend that when TANF is 
reauthorized next year, the future budget authority for TANF 
should be fixed and cut by 10 percent above existing levels. 
That still leaves more than enough funding to keep the TANF 
reform going forward, particularly if you improve the work 
requirements.
    Chairman Nussle. Mr. Primus.
    Mr. Primus. I will try to be brief.
    I strongly support work and I think you have to encourage 
work is by reducing those marginal tax rates I talked about. In 
the case of Iowa, it might be providing more child care dollars 
so they do not have to impose a co-pay but it also could be by 
reducing the phaseout in the earned income tax credit. Today, 
we take away 21 cents for every dollar that is earned. Perhaps 
we should only take away 10 or 15 cents until the family has 
lost food stamp eligibility.
    Another way we could reduce marginal tax rates is making 
the child tax credit refundable against earnings. In other 
words, phase it in say at a 10 percent rate, so your mother and 
two kids reach the $1,000 at $20,000, $1,000 for each child. 
That would also reduce marginal tax rates.
    I think welfare reform has worked better than I thought. 
Those mothers are working more but they are keeping as much of 
their income.
    The other thing I think is Medicaid. Today working parents 
lose Medicaid in the typical State at 67 percent of poverty. I 
think you have to provide additional SCHP or Medicaid funds so 
States can cover the working poor to a higher level. Those 
three things would do a lot for the work base.
    Let me say something about marriage. I think there is a 
limit to what Government can do. It cannot make two people love 
each forever, even if they produced a child. There is research 
that suggests that the Child Support Enforcement Program, the 
stronger it is, it reduces out of wedlock births and it lowers 
divorce rates, not a heck of a lot but statistically 
significant.
    I think we should be moving toward a universal child 
support system where the cultural is if you do not live with 
your kids, you pay. For some of the dads at the very bottom of 
the earning spectrum, we also need to help them get into the 
labor force and we need to reduce the 100 percent tax rate on 
child support at the bottom. That is one very concrete thing 
you could do.
    Chairman Nussle. I appreciate your recommendations.
    Are there other members who wish to inquire? Ms. Clayton.
    Ms. Clayton. I do have a statement and a couple of 
questions.
    Mr. Rector, many of the points you make I certainly agree 
with. However, I have an overriding feeling that you have made 
poor people a scapegoat by the fact that increased government 
spending has occurred and there are still more people who are 
dependent on less food. I could take a chart for the same 
period of time and look at defense spending and see it go up. I 
do not think it goes up in proportion.
    I can also tell you that I can take a budgetary projection 
for a number of the sectors of this Government and see it go 
up. I also believe that single parents add to the poverty rate 
and contribute to a lot of the problems. I have committed 
myself to teenage pregnancy long before I came to Congress. I 
did not have to be a Member of Congress to be engaged in that. 
I do that in my own community.
    Again, it should not be perceived that because they are 
there, we do not make a difference. We turn our backs on that. 
Spending will go up regardless. We will either be paying more 
in prisons or paying more to a system. There is no way not to 
have society pay for dysfunctionality. So if we are not 
committed to changing that dysfunctionality, those issues with 
education, prevention of teen pregnancy and other things will 
continue. That is my sermon for today.
    My question is, in the EITC earning, would you be in favor 
of increasing that for married families. Also, to what extent 
do you think that would help in the poverty of married families 
since there are married families in poverty just like singles.
    Mr. Rector. One of the few increases in means tested 
spending that I would support would be an increase in the 
earned income tax credit for married couples. I think that 
would be very valuable in terms of offsetting the antimarriage 
effects that exist in all of these other programs. Let me 
emphasize again all means tested programs inherently have a 
household splitting effect. A lot of people think welfare is 
antimarriage because married couples cannot get it. That is not 
true. What it says is you get welfare if you have very low 
earnings in your home. What is the easiest way to have very low 
earnings in the home is not to have an employed husband on the 
record. He might be a boyfriend around the block but if you get 
married, he is going to go on the record and you lose most of 
your welfare eligibility. That has been the core of 
antimarriage and that applies to public housing, food stamps, 
Medicaid and TANF.
    I think making the EITC a little more marriage friendly 
would be an excellent way to offset that a bit, but I also 
think we have to get in there and give the message. I think 
young people today do not understand any connection between 
being married and having children. They actually will say stuff 
like that and that is a tragic thing.
    I would love to go into high schools and at risk 
communities and talk to young women and say to them, all the 
data shows you want to bring a child into the world and you 
will in a few years but the very best thing you can do----
    Ms. Clayton. My time is almost up. You would give that to 
not only poor people but to anybody, the education?
    Mr. Rector. Yes. I think it should be targeted but I think 
everybody could use it.
    Ms. Clayton. You understand divorce is increasing for those 
not in poverty as well?
    Mr. Rector. Absolutely.
    Ms. Clayton. I just want the morality standard to be for 
all of us, those who are poor and those who are not.
    Mr. Primus, do you know of research that shows there is an 
impact on the economic security and families and marriage? Tell 
me about the economic security of marriage on families?
    Mr. Primus. There was a study on the Minnesota Family 
Investment Program by the Manpower Development Research 
Corporation in New York. They found there are positive outcomes 
for children if earnings increase and income increases. 
Minnesota had a very generous earnings disregard so that when 
you worked, you got to keep a large part of those earnings.
    That same research also shows that marriage rates increased 
in those situations. I think the key to some of this marriage 
argument is making sure that males have a job. Women are not 
going to marry unemployed men that have very poor labor 
markets. I think William Wilson's research shows that, so if we 
really want to make sure we increase marriage and increase two-
parent families, I think economic security is the first thing 
and that is kind of a flip side.
    Mr. Rector is urging more social services. I think we 
should focus on an economic security plan. I also think we need 
to serve two parent families much better in our welfare system. 
There is a culture that says, welfare does not help two parent 
families.
    Ms. Clayton. Mr. Rector, would you support dividing support 
to married couples under the TANF Program rather than just to 
the mother?
    Mr. Rector. They are already supported under the TANF 
Program. The problem with that is that we started that in the 
1980's and it did not have much pro-marriage effect because it 
used to be called the AFDC Unemployed Parent Program. Two 
parent families could get in under the program but the 
condition of aid is that the father is not working. That is not 
what we want.
    If you bring in a family and keep them on AFDC for many, 
many months where the dad is not working, the message you are 
probably sending is the dad is not really that necessary to the 
home. Actually, there is some research that indicates that 
increased family breakup.
    The group we want to support and encourage is marriage of 
mothers to employed fathers which is why the EITC is a much 
better way of doing it because there the dad is working. Now 
you have all the elements in place. The dad is working, the 
mother is getting married to him, the child has two parents in 
the home.
    In addition to providing that economic support, we need to 
provide counseling. We can teach people how to keep their 
relationships together, how not to fight and fall apart. We can 
do those things and that is the singlemost important thing we 
can do for American children.
    Ms. Clayton. Thank you, Mr. Chairman.
    Chairman Nussle. Ms. McCarthy.
    Ms. McCarthy. Mr. Rector mentioned $313 billion in spending 
on welfare programs. I am curious if you know how much of that 
is actually spent on families with children? Going through the 
budget, I noticed that there is going to be a $1 billion cut in 
housing and 40 percent of those in public housing are elderly 
and disabled and here we are cutting.
    Mr. Primus. I think if you look at Mr. Rector's chart, 
Table 1, over half of the total amount of spending here is on 
Medicaid and a lot of Medicaid goes to nursing homes for the 
elderly. I did a calculation where I looked at all the families 
with children below poverty, with earnings below poverty, and I 
added all the means tested cash, their food stamps, their EITC, 
everything but health, and that totaled $40 billion. That is 
not the picture you are getting here. That is about $2,500 per 
poor child. We give a middle income child about $1,000 through 
the child tax credit and the personal exemption.
    In fact, that $2,500 per poor child is probably less than 
the disparity in education funding between inner city children 
and suburban children in many of our communities. All of the 
EITC is spent on families with earnings. I do not call that 
welfare; I call that primarily an earnings supplement and a 
reduction of payroll taxes.
    Ms. McCarthy. I still think we have a long way to go on 
training to get good jobs, not jobs paying $3.25 to $4.00 a 
hour because no one is ever going to get off welfare under 
those scenarios.
    Chairman Nussle. Thank you very much.
    I want to thank the panel for their insight, comments and 
suggestions. It is always an interesting subject and I 
appreciate your continued advice to us on the topic. I look 
forward to another opportunity sometime down the road.
    Thank you.
    We will introduce this next panel quickly, and then we will 
invite them to testify.
    First is Dr. Thomas Saving, who is from the Private 
Enterprise Research Center at Texas A&M. Dr. Saving was 
appointed by the President to the Board of Trustees of Social 
Security and Medicare Funds, just here recently in the year 
2000.
    Next is Marilyn Moon. Dr. Moon is an economist with 
interests in health, income, security, and public policy. She 
is a Senior Fellow at the Urban Institute. We welcome her to 
the witness table. Dr. Moon has served as the Senior Analyst to 
the Congressional Budget Office, and she's the first Director 
of the Policy Institute of the American Association for Retired 
Persons.
    Last and certainly not least is Dr. Gail Wilensky. Dr. 
Wilensky has done a number of things that this Congress is 
familiar with. She is a former Presidential appointee, as the 
Director and Administrator of the Health Care Finance 
Administration.
    We heard earlier today that maybe the new Secretary of HHS 
may want to change that name. He said he was not sure what a 
HCFA was. He was not sure anyone knew what a HCFA was. So maybe 
you have some insight on that.
    But your duties were as former Administrator, as well as 
Deputy Assistant for the President for Policy Development, 
where you advised previous President George Bush on the health 
care and welfare issues. You earned a BA in psychology and a 
PhD in economics from the University of Michigan.
    We welcome all three of you. We would inform you that your 
full testimony will be made part of the record, and we invite 
you to summarize your testimony before us today.
    We will start with Dr. Wilensky. Welcome.

STATEMENT OF GAIL WILENSKY, JOHN M. OLIN SENIOR FELLOW, PROJECT 
                              HOPE

    Dr. Wilensky. Thank you, Mr. Chairman and members of the 
committee.
    As you have indicated, I am a former HCFA administrator. I 
will be glad and heartily support the notion of finding a new 
name for the organization. I am currently the Chair of the 
Medicare Payment Advisory Commission.
    I want it to be clear that I am not acting in either of 
those capacities today, but rather am providing my own views as 
a health policy person and an economist.
    I am going to primarily talk about the administration's 
programs for Medicare and prescription drug coverage, the need 
for reform, and the extent to which the administration 
addresses these needed reforms. Then I will just briefly touch, 
if there is time, on the proposals for Medicaid reform, and 
also proposals for the uninsured.
    The administration has proposed spending $153 billion over 
the 10 year period, fiscal 2002 to 2011, to modernize and 
reform Medicare. The specifics of what the administration is 
going to propose in terms of long-term reform are not yet 
clear. There is some funding for a temporary program to provide 
assistance to low income seniors and seniors with catastrophic 
expenses.
    There is no question that the program needs to be reformed. 
Reforming the regulatory structure is commonplace discussion in 
Washington now and outside. People understand that the benefits 
are inadequate. There is some very questionable solvency 
issues, particularly when you think about Part B, and not just 
the Part A trust fund, and it is a very administratively 
complex program.
    In my opinion, as important as the inadequate benefits are, 
not having out-patient prescription drug coverage and 
catastrophic coverage, it would not be a good idea to do a 
standalone drug benefit, outside of the context of further 
reform of the Medicare Program
    The reason is, I believe that it is imprudent to 
substantially increase the spending needs of a program that is 
already in a financially fragile state, without doing something 
to reform the program.
    Second of all, if history is any guide, however much you 
think the program will cost, you will be wrong. If we look at 
the ESRD experience, we are seeing a six or seven billion 
dollar program, after anticipating a much smaller program.
    Between the time the catastrophic legislation that was 
passed in 1988 and repealed in 1989, the prescription portion 
of that bill increased by a factor of two-and-a-half fold from 
the time it was first proposed until the time it was actually 
repealed. We do not know what it would have actually cost. We 
never got that far.
    So it seems pretty likely that we will undershoot that 
estimate. As you know, CBO has recently put out new estimates 
about how much faster drug spending has gone up for the elderly 
than we had thought.
    Finally, the design issues of a drug benefit program are 
difficult and have not yet been determined. It would be very 
useful if the Congress could decide how it wanted to reform 
Medicare and start now.
    The fact is, building a infrastructure for a reformed 
Medicare will take time. Future seniors need to know the 
program that they will face.
    Future seniors will be very different from the people whw 
are now on the Medicare Program. They will be better educated, 
and they will frequently have more income. Many of the woman 
will have worked full time, or at least substantially during 
the entire adult period, and their experiences with the work 
force and their health plans will be very different.
    The question, or at least one question you will need to 
consider, is whether a temporary program for those most in need 
is a reasonable interim step.
    It might be, as the administration has proposed, as a block 
grant to try to make use of the fact that 26 states have some 
kind of assistance programs; or it might be a program that 
starts first with the special populations under Medicare, the 
so-called QIMBY and SLIMBY populations; the qualified Medicare 
beneficiary in the selected low income populations, that get 
special help paying their deductibles and co-insurance and 
premiums. They are not on Medicaid, but they get special help.
    In order to do that, you would have to make a lot of the 
decisions about designs. In order to do the block grant, you 
would have to go through new legislation and possibly run the 
risk of having money out there, which would be hard to curtail.
    So whether or not we have a temporary program, although you 
can make good arguments as to why we should help now those most 
in need while we get ready for long term reform, whether it is 
really worth the political capital is something you will have 
to decide.
    What I would caution is be wary if you do not do Medicare 
reform and prescription drug coverage; be wary about spending 
more to increase payments to providers.
    I think there is some justification that could be made for 
the two previous pieces of legislation following the Balanced 
Budget act, the so-called BBRA, and the Beneficiary Improvement 
and Protection Act, that was signed into law last December.
    But it appears, at least for hospitals, that providers are 
doing much better financially. It appears based on three-
quarters data that is now available for 2000, that margins are 
back up around the rate they were in 1997.
    So if we do not see agreement on Medicare reform, I caution 
you to be careful about spending that money that is set aside 
for increasing provider payments.
    I have two quick words on the other areas in the 
administration proposal. One is about Medicaid. The specific 
legislative proposals about Medicaid have not yet been 
released, but there was included in the budget a substantial 
savings, $17.5 billion roughly, from Medicaid that involved 
tightening up the upper payment limit provisions for which 
there was some improvement in December when HCFA issued some 
new regulations.
    This is once again an area in which the states have shown 
themselves to be very creative at finding ways to increase the 
Federal share of match in Medicaid; having been at HCFA during 
voluntary donations and provider taxes, the first wave of 
creative financing, now to be replaced with upper payment limit 
in intergovernmental revenues.
    It is not clear to me that we can continue to rely on the 
matching grant, where the states put in part of the money as an 
effective cost containment mechanism for Medicaid.
    It may be time to think about other strategies that would 
convert the structure of the program and still allow for state 
flexibility, which is clearly of interest, both to the 
Secretary and to the President, as well to the Governors. I 
would be glad to talk about what that might look like, if there 
is time later.
    Finally, I want to recognize although the details are not 
yet very clear, the administration will be proposing a multi-
prong strategy for the uninsured: a refundable tax credit, 
combined with efforts to build the infrastructure by increasing 
substantially the amount of money for community health centers, 
and by providing some funds to innovative local organizations.
    It recognizes that if we are going to make inroads in 
trying to reduce the numbers of uninsured, it will take a 
series of steps and strategies.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Gail Wilensky follows.]

  PREPARED STATEMENT OF GAIL R. WILENSKY, PH.D., JOHN M. OLIN SENIOR 
                          FELLOW, PROJECT HOPE

    Mr. Chairman and members of the Budget Committee: Thank you for 
inviting me to appear before you. My name is Gail Wilensky. I am the 
John M. Olin Senior Fellow at Project HOPE, an international health 
education foundation and I chair the Medicare Payment Advisory 
Commission. I am also a former Administrator of the Health Care 
Financing Administration. My testimony today reflects my views as an 
economist and a health policy analyst as well as my experiences running 
HCFA. I am not here in any official capacity and should not be regarded 
as representing the position of either Project HOPE or MedPAC.
    My testimony today primarily discusses the administration's 
programs for Medicare and prescription drug coverage, the need for 
reform and the extent to which the administration addresses these 
needed reforms. My testimony also briefly discusses the 
administration's proposals for Medicaid reform and the proposals for 
the uninsured.

                THE ADMINISTRATION'S MEDICARE PROPOSALS

    The administration has proposed a program to modernize and reform 
Medicare that spends $64.2 billion in fiscal years 2002-2006 and $153 
billion in fiscal years 2002-2011. This is in addition to $2.5 billion 
set aside for FY 2001 that is not included in the five or 10 year 
numbers.
    The long-term reform plan has not yet been submitted, but the 
administration's principles for reform include preserving Medicare's 
current guarantee of access, a choice of health plans that includes the 
option of purchasing prescription drug coverage, covering the expenses 
for low-income seniors, streamlining access to new medical 
technologies, establishing an accurate measure of Medicare solvency and 
not increasing payroll taxes.
    The administration is proposing an interim and temporary program 
that provides assistance to low-income seniors and seniors with 
catastrophic drug expenditures until Medicare reform is enacted and 
implemented. The program, Immediate Helping Hand, provides funds to the 
states that would cover the costs of prescription drug coverage for 
seniors below 135% of the poverty line with no premium and nominal co-
payments. Seniors between 135% and 175% of the poverty line would 
receive partial coverage. Catastrophic coverage would be provided for 
seniors with out-of-pocket drug costs exceeding $6000 per year.

                      THE NEED TO REFORM MEDICARE

    Although Medicare has resolved the primary problem it was created 
to address, ensuring that seniors had access to high quality, 
affordable medical care, there are a variety of problems with Medicare 
as it is currently constructed. The administration has correctly 
assessed the most important of these flaws: inadequate benefits, 
financial solvency, excessive administrative complexity and an 
inflexible Medicare bureaucracy.
    A part of the motivation for Medicare reform clearly has been 
financial, particularly concern about the solvency of the Part A Trust 
Fund. Part A funds the costs of inpatient hospital care, Medicare's 
coverage of skilled nursing homes and the first 100 days of home care. 
The Part A Trust Fund is primarily funded by payroll taxes. The 
changing demographics, associated with the retirement of 78 million 
babyboomers between the years 2010 and 2030 and their increasing 
longevity, mean that just as the ranks of Medicare beneficiaries begins 
to grow, the ratio of workers to beneficiaries will begin to decline. 
Even with the strong economy of the last decade and the slow growth in 
Medicare payments since 1997, current projections show Part A Trust 
Funds payments exceeding Part A income by 2010 and its assets exhausted 
by 2025.
    As important as issues of Part A solvency are, the primary focus on 
Part A as a reflection of Medicare's fiscal health has been unhelpful 
and misleading. As the administration has made clear, Part B of 
Medicare, which is financed 75 percent by general revenue and 25 
percent by premiums paid by seniors, is a large and growing part of 
Medicare. Part B currently represents about 40 percent of total 
Medicare expenditures and is growing substantially fast than Part A 
expenditures and about 5 percent faster than the economy as a whole. 
This means that the pressure on general revenue from Part B growth will 
continue in the future even though it will be less observable than Part 
A pressure. It also means that not controlling Part B expenditures will 
mean fewer dollars available to support other government programs.
    However, as the committee understands, the reasons to reform 
Medicare are more than financial. Traditional Medicare is modeled after 
the Blue Cross/Blue Shield plans of the 1960's. Since then, there have 
been major changes in the way health care is organized and financed, 
the benefits that are typically covered, the ways in which new 
technology coverage decisions are made and other changes that need to 
be incorporated into Medicare if Medicare is to continue providing 
health care comparable to the care received by the rest of the American 
public.
    Much attention has been given to the fact that the benefit package 
is outdated. Unlike almost all other health care plans, Medicaid 
effectively provides no outpatient prescription drug coverage and no 
protection against very large medical bills. Because of the limited 
nature of the benefit package, most seniors have supplemented 
traditional Medicare although some have opted out of traditional 
Medicare by choosing a Medicare risk or Medicare+Choice plan.
    The use of Medicare combined with supplemental insurance has had 
important consequences for both seniors and for the Medicare program. 
For many seniors, it has meant substantial additional costs, with 
annual premiums varying between $1000 and $3000 or more. The 
supplemental plans have also meant additional costs for Medicare. By 
filling in the cost-sharing requirements of Medicare, the plans make 
seniors and the providers that care for them less sensitive to the 
costs of care, resulting in greater use of Medicare-covered services 
and thus increased Medicare costs.
    Medicare has also struggled with coverage decisions for new 
technology. The processes currently in place have been complicated and 
time-consuming and frequently have meant that seniors get coverage for 
new technologies years after the rest of the populations. This was true 
for heart and lung transplants a decade ago and was true for Positron 
Emission Topography (PET) until just recently.
    There are also serious inequities associated with the current 
Medicare program. The amount Medicare spends on behalf of seniors 
varies substantially across the country, far more than can be accounted 
for by differences in the cost of living or differences in health-
status among seniors. Seniors and others pay into the program on the 
basis of income and wages and pay the same premium for Part B services. 
These large variations in spending mean there are substantial cross-
subsidies from people living in low medical cost states and states with 
conservative practice styles compared to people living in higher 
medical cost states and states with aggressive practice styles.
           assessing the administration's medicare proposals
    The administration correctly understands Medicare needs reform in 
many dimensions. Medicare's benefits are clearly outmoded, but 
Medicare's problems extend beyond the absence of prescription drug and 
catastrophic coverage. Medicare needs to be modernized to accommodate 
the needs of the retiring babyboomers and to be viable for the 21st 
Century.
    During the campaign, the President's long-term modernization of the 
Medicare proposal was modeled after the Federal Employees Health 
Benefit Plan (FEHBP) and the work of the Bipartisan Commission for the 
Long Term Reform of Medicare. The principles provided for the 
President's plans to reform Medicare are consistent with these models 
of reform but the specifics of such a reform have not yet been 
proposed. Instead, only the first step included during the campaign, a 
temporary, short-term strategy to help low income seniors and seniors 
with catastrophic expenses, has been presented.
    The budget as presented raises at least two questions. If there is 
a lack of agreement about other areas of reform, should a prescription 
drug benefit be added to traditional Medicare now, with reform to 
follow some time in the future? If not, is there any place for a 
temporary program of prescription drug coverage and how should that 
program be designed?
    Although I believe a reformed Medicare package should include 
outpatient prescription drug coverage, I believe just adding this 
benefit is not the place to start the reform process. The most obvious 
reason is that there are a series of reforms needed to modernize 
Medicare. To introduce a benefit addition that would substantially 
increase the spending needs of a program that is already financially 
fragile without addressing these other issues of reform is a bad idea.
    I personally support reform modeled after the FEHBP. I believe this 
type of structure would produce a more financially stable and viable 
program and would provide better incentives for seniors to choose 
efficient health plans and/or providers and better incentives for 
health care providers to produce high quality, low-cost care. This type 
of program, particularly if provisions were made to protect the 
frailest and most vulnerable seniors, would allow seniors to choose 
among competing private plans, including a modernized fee-for-service 
Medicare program for the plan that best suits their needs.
    I am aware that the FEHBP model remains controversial with some in 
the Congress, but I think it's important that committee members 
understand that many of the most vexing problems of FEHBP are also 
present with the current combination of fee-for-service Medicare and 
Medicare+Choice plans, e.g. risk adjustment, providing user-friendly 
information, protecting vulnerable seniors, etc. But whatever the model 
of reform the Congress chooses to pass, the direction of the reform, a 
timetable for its implementation and important first steps should be 
determined before any major, new spending commitments are added to 
Medicare.
    A second reason to proceed with some caution is the recognition of 
how difficult it is to correctly estimate the cost of a new additional 
benefit. Our past history is this area is not encouraging. The cost of 
the ESRD (end-stage renal disease) program introduced in 1972 was 
substantially underestimated. The estimated cost of the prescription 
drug component of the catastrophic bill passed in 1988 and repealed in 
1989 increased by a factor of two and one-half between the time it was 
initially proposed and the time it was repealed. The new estimate of 
prescription drug spending by the elderly recently released by the 
Congressional Budget Office forecasts drug spending will rise at an 
average of 12 to 13 percent per year for the next decade instead of the 
11 percent per year projected last year. This means that the estimated 
cost of prescription drug bills already proposed, including the 
President's, is too low. The new cost estimate for H.R. 4680, passed 
last June is $213 billion over 10 years instead of the original 
estimate of $160 billion and the plan proposed by House Democrats would 
be $440 billion over 10 years rather than $330 billion.
    In addition to cost and estimating concerns, important questions 
remain about how best to structure a pharmacy benefit. Most recent 
proposals have made use of pharmacy benefit managers or PBM's as a way 
to moderate spending without using explicit price controls. These 
strategies, when used by managed care, showed some promise for a few 
years ago although more recently they have seemed less effective. But 
most PBM's have relied heavily on discounted fees and formularies and 
only recently have begun using more innovative strategies to more 
effectively manage use and spending. If Medicare is to make use of 
PBM's, decisions will need to be made about whether and how much 
financial risk PBM's can take, the financial incentives they can use, 
how formularies will be defined and how best to structure competition 
among the PBM's.
    All of these issues taken together suggest that legislating a 
standalone prescription drug benefit addition to traditional Medicare 
is not a good idea. Given our history, the cost is likely to be 
severely underestimated, the design issues are difficult, the structure 
and design of a reformed Medicare program are still subject to dispute 
and the program remains financially fragile.
    The best strategy would be to agree on the design of a reformed 
Medicare program and begin to implement changes now. It is likely to 
take several years to build the infrastructure needed for a reformed 
Medicare program and to transition to a new program. Producing the 
regulations needed to implement the controversial legislation needed 
for a drug benefit will take at least 2 years. A reasonable interim 
step is to put in place a temporary program providing prescription drug 
coverage to help those most in need.
    There are at least two ways a temporary program of prescription 
drug coverage might be designed. One way is along the lines of the 
administration's proposal, i.e., a grant program to the states that 
allows state to extend existing pharmaceutical assistance programs, 
expand Medicaid coverage or introduce new programs, following in the 
model of the Children's Health Insurance Program (CHIP). The advantage 
of this strategy is that it builds on assistance programs already 
existing in 26 states and doesn't require new Federal regulations. 
However, there are a variety of disadvantages to this strategy as well, 
i.e., it requires new legislation in states that don't already have 
assistance programs, state pharmacy assistance programs may not be good 
designs for a regular Medicare benefit and may set a bad precedent, it 
may be difficult to convince states to pursue a temporary program and 
ending a block grant may be more difficult than starting one.
    A second type of interim strategy would be to provide 
pharmaceutical coverage first to those populations who already get 
special treatment under Medicare, that is, the qualified Medicare 
beneficiary (QMB's) and the specified low-income beneficiaries 
(SLMB's). This strategy addresses most of the disadvantages of the 
block grant program but it requires agreement on many of the design 
issues already noted and also requires the issuance of new regulations 
before it can be implemented. Both of these suggest benefits might not 
actually be provided in the near-term.
    Whether or not the benefits of providing an interim program of 
outpatient prescription drug coverage for selected needy populations is 
worth the costs, is a decision the Congress will need to make. Congress 
might well decide it's not worth the political capital it would take 
and focus its efforts directly on broader Medicare reform, which will 
also include a prescription drug program.
    If Congress does not enact Medicare reforms this year, it should be 
wary of using any spending that has been set aside for Medicare reform 
for the purpose of further increasing payments to providers. While some 
justification could be made for the Balanced Budget Refinement Act 
passed in 1999 and the Beneficiary Improvement and Protection Act 
passed in 2000, the improved financial status of many types of 
providers under Medicare and the higher projected spending rates for 
Medicare in the coming decade suggest Congress should act with great 
caution. MedPAC recently reported that total margins for hospitals in 
FY2000 appear to be greater than 5 percent, up from 2.8 percent in 
1999. The financial status for other providers is less clear and while 
a variety of changes need to be made to the way they are reimbursed, 
whether or not payments need to be increased should be carefully 
assessed.

                THE ADMINISTRATION'S MEDICAID PROPOSALS

    The specific programmatic changes to Medicaid and the Children's 
Health Insurance Program (CHIP) that the administration will be 
proposing are not yet available. The expectation is that the 
administration will introduce changes that will increase state 
flexibility and encourage the use of private insurance and coordination 
with employer-sponsored insurance.
    The administration's budget does not reflect legislated spending 
increases in Medicaid. The budget does, however, include a savings 
estimate of $17.4 billion over 10 years. This reflects a proposal by 
the administration to further restrict the effects of the ``upper 
payment limit'' loophole. The upper payment limit has involved the use 
of a higher payment for purposes of collecting the Federal share of 
Medicaid, with a forced rebate to the states, which has allowed states 
to effectively increase the Federal share in Medicaid spending. The 
final rule published by HCFA last year partially closed this loophole 
but still allowed some states to continue the practice for years and 
expanded the arrangement for non-State government-operated hospitals. 
The administration proposes prohibiting any hospital plans approved 
after Dec. 31, 2000 from receiving the higher payment limit proposed in 
last year's final rule.
    The concerns raised by the Upper Payment Limit practices raise a 
more general concern about Medicaid. The presumption underlying the 
current Medicaid program is that the state's share of the matching 
grant provides the basic incentive for states to moderate spending 
under Medicaid. However, the states have shown themselves to be very 
creative in devising financing strategies which effectively increases 
the Federal share of the match beyond that which exists in law. 
Provider taxes and voluntary donations plagued the program during the 
1990's; upper payment limits and intergovernmental transfers continue 
to plague the program. In this environment, the interest in increasing 
state flexibility increases concerns as to whether state actions will 
be budget-neutral or cost increasing to the Federal budget. With recent 
CBO projections of a 9 percent average annual growth rate in Medicaid 
for the next decade, any further attempts by states to increase their 
Federal matching share and thereby reducing incentives to be cost-
conscious, are worrisome. It may be time once again to consider moving 
to a block grant program based on the number of individuals below 
certain income levels or a per capita block grant covering individuals 
within specified income levels. In return for this increased 
flexibility, states would need to provide information on the health 
status and use of services by people covered by the grants. This would 
be mean the Federal Government would have more information on the 
effects of its program than it has with the current Medicaid program.

            THE ADMINISTRATION'S PROPOSALS ON THE UNINSURED

    The administration is proposing a multipronged strategy to provide 
support for the uninsured, including refundable tax-credits, 
investments in community health centers, a reform of the National 
Health Service Corps and an investment in a health communities 
innovation fund. This strategy recognizes that as important as it is to 
provide increased insurance coverage to the uninsured, there will be a 
continuing need to fund the so-called health safety net. This is both 
because there are likely to be substantial numbers of uninsured 
individuals irrespective of the precise program that is adopted and 
because even for some individuals with insurance coverage, there may 
not be adequate health resources to provide the care that is needed.
    The tax credits are part of the Treasury Department's budget. The 
budget sets aside $26.4 billion over 10 years, some of which is for 
individuals who don't have access to employer-sponsored health 
insurance. The precise amount has not yet been released. The HHS budget 
includes $124 million for FY 2002 as part of a multiyear commitment to 
increase the number of community health centers by 1200 and double the 
number of people served. $400 million for FY2002 is budgeted to provide 
funding for innovative local organizations addressing various local 
health care needs. The National Health Service Corp reform primarily 
reflects a management effort that will improve the targeting of the 
neediest communities.
    The question of whether the proposed refundable tax credit is 
likely to induce the purchase of private insurance is an area in which 
there is considerable debate. The decision to increase insurance 
coverage by providing financial assistance to individuals to purchase 
insurance as opposed to increasing eligibility for public programs is a 
first order decision that the Congress must make. The remaining 
budgeted items represent substantial efforts to improve the health care 
infrastructure.
    Let me summarize my points as follows:
    The administration proposes to spend $153 billion in FY 2002-2011 
to modernize and reform Medicare
     Specific provisions of long-term reform not yet submitted
     Funding includes support for temporary program providing 
assistance to low income seniors and seniors with catastrophic drug 
expenses
    Medicare needs to be reformed
     Current Medicare program has inadequate benefits, 
questionable financial solvency, excessive administrative complexity 
and excessive bureaucracy
    Adding a standalone drug benefit without further reform is very 
risky
     Imprudent to substantially increase the spending needs of 
a financially fragile program
     Actual costs of a new benefit will be underestimated if 
history is any guide
     Design issues of a drug benefit are difficult and have yet 
to be determined
    Starting now to implement a reformed program is a good idea
     Building the infrastructure will take time
     Future seniors need to know the design of the future 
Medicare program
     Future seniors will be different from today's seniors in 
terms of work experiences, health plan experiences, income and 
education
    Temporary program for those most in need is a reasonable interim 
step
     Possible designs include a block grant to states or 
coverage limited to populations currently getting special treatment, 
e.g. QMB and SLMB populations
     Temporary program may not be worth the political capital 
it would require
    Congress should be wary of spending Medicare reform funds to 
further increase provider payments
     Financial status of some types of Medicare providers has 
improved substantially
    Administration proposes a $17.4 bil legislated savings from 
Medicaid
     Proposal involves tightening the upper payment limit 
provisions
     ``Creative financing' by states combined with interests in 
increased flexibility may necessitate different structure for Medicaid 
than current matching grant program
    Administration has multipronged strategy for the uninsured
     Refundable tax credits to encourage the purchase of 
private insurance
     $124 million in FY 2002 to increase the number of 
community health centers
     $400 million in FY 2002 to fund innovative local 
organizations

    Mr. Putnam [assuming Chair]. Thank you, Dr. Wilensky.
    Dr. Moon.

 STATEMENT OF MARILYN MOON, SENIOR FELLOW, THE URBAN INSTITUTE

    Dr. Moon. Thank you, it is a pleasure to be here today to 
testify on these important issues. Medicare is an issue that I 
feel very strongly about.
    I wanted to start my testimony talking a little bit about 
some of the budget numbers in the President's recent submission 
of his blueprint. Then I am going to talk mainly about 
prescription drugs, and a little bit about other reforms of the 
Medicare Program.
    Certainly, I agree with the administration's proposal that 
indicates that Parts A and B of Medicare should be thought 
about together. They are, for the most part, an integrated plan 
for most individuals, who do not worry about whether (A) or (B) 
is covering their service.
    They do know that they pay the Part B premium, for example, 
but other than that this is one program, as far as most 
individuals are concerned. It may or may not be a good idea to 
formally join those two pieces.
    But I would caution it is very misleading to treat the $86 
billion in general revenues that fund the Part B program, along 
with premiums, as a deficit.
    Since 1965, when Medicare was passed, general revenues have 
been an important part of the sources of funding for this 
program, and they are in the statute. In that sense, they are 
exactly the same as veterans' benefits or Medicaid.
    If we want to accept this notion of $86 billion as a 
deficit, we could shove other spending from general revenues 
into the Part A trust fund. I can guarantee you, that quickly 
there would be no surplus.
    Another issue I raised in the budget numbers in the 
administration's proposal is the shifting of home health from 
Part A to Part B. The document argues that this change had no 
consequence whatsoever, except to make Part A look better.
    It does indeed make Part A look better than it would have 
otherwise, but it also was an indirect and intended increase in 
premiums on beneficiaries; that is, it did not just accidently 
happen.
    That is about a $50 billion effect over the 10 years that 
we are talking about. I am sure beneficiaries would be happy to 
give back the $1,200 in extra premiums that they are going to 
pay over 10 years, and have home health go back into Part A, if 
we want to be purists about it.
    The point I am trying to make here is that it is very 
important to recognize that Medicare needs financial help. It 
needs reforms, but it is not a solution to simply dismantle 
legitimate financing the way that the language implies in the 
administration's proposal.
    I believe that we can start now to do prescription drugs in 
the Medicare Program, and we do not have to either do it only 
for low income individuals, or as part of a larger and broader 
reform effort.
    That is not to say that broader reform efforts do not need 
to be looked at, or that other changes are unnecessary for 
Medicare; but rather, that drugs represent a vital benefit. 
People are at considerable risk now, and that is going to 
increase every year. The sources of coverage that both high and 
low income people have, for drug protection is quickly becoming 
not viable.
    Only about 40 percent of all Medicare beneficiaries now 
have what I would call stable drug coverage, that is either 
through an employer-based plan, or through the Medicaid 
Program. Both of those areas are areas in which increasingly we 
hear states concerned about the cost of drugs for Medicaid, and 
employers concerned about the cost of drugs in their retiree 
packages.
    So this is problem that is not going to go away on its own. 
It is only going to get worse. The need is there and the 
resources are there. We are at an unprecedented time in our 
history, as the administration has argued. There is a large 
surplus, that we could use to start a reasonable and an 
important program of prescription drug coverage for seniors and 
disabled persons.
    There is another reason to think about doing prescription 
drugs sooner, rather than later. Some people argue that we must 
have reform before we can have prescription drug coverage. I 
believe that we really need to have prescription drug coverage 
before you can have reasonable reform.
    A number of changes need to be made in the traditional part 
of Medicare, which serves 86 percent of all beneficiaries, and 
will continue to do so for a very long time. At present, people 
who are covered by traditional Medicare feel it necessary to go 
out and get supplemental coverage.
    When they either get it from an employer, or they buy it on 
their own, it adds to inefficiency in Medicare, because then it 
tends to become essentially first dollar coverage.
    If we could restructure the Medicare Program to look more 
like the insurance that most of us in this room have, then we 
could keep some cost sharing and deductibles in the program, 
but provide enough protection to beneficiaries that they do not 
have to seek supplemental protection elsewhere.
    Moreover, Medigap, which is the term people use for private 
supplemental insurance, is increasingly an age-rated benefit. 
That means that people who are older pay much more for their 
Medigap policies than people who are younger, as compared to 
the premiums under Medicare, which are the same for everyone.
    Adding drug coverage and making other cost sharing changes 
certainly would be a way to help take some of the burdens off 
of the very high risk seniors, by moving services into the 
Medicare Program. These high risk people would be better off 
even if they had to pay substantial Medicare premiums to get 
prescription drug coverage.
    Moreover, it is important to think about ways in which to 
improve the traditional Medicare Program, such as adding 
disease management or case management kinds of activities, to 
truly coordinate care. That is important in areas where managed 
care is not available, and for people who have multiple 
illnesses, and rely upon multiple doctors, who are unlikely to 
join a managed care plan.
    For those individuals, it is difficult to say, we are going 
to put you into a hypertension control program, for example, 
but we are not going to pay for any of the hypertensive drugs, 
when these are some of the expensive drugs that people take.
    It is very difficult to think of ways to coordinate care, 
either in traditional Medicare or in managed care, unless you 
have a comprehensive benefit package.
    The private insurance plans have recognized this for a long 
time. Much of their plea for higher payments is not to cover 
the basic Medicare-covered services, which the GAO says they 
get sufficient amounts for, but for the extra benefits that 
they want to offer. These extra benefits help to attract 
patients, and to treat them well and allow coordination of 
care, when they are covered by the plan.
    So for those reasons, I believe that it is very important 
to have prescription drug coverage. If we move, over time, to a 
more private plan approach to the program, it is also 
important, because prescription drugs are one of those things 
that are risk selection attractors. That is, if you offer a 
very good prescription drug package, you are likely to attract 
sicker and more expensive patients.
    If you do that, and you are a ``good guy'' plan, and you 
try to hold the line on costs, you are going to be in big 
trouble.
    Consequently there is now a race to the bottom for a lot of 
managed care plans,, putting $500 caps, for example, on the 
amount of prescription drugs they will cover.
    This is a problem that until Medicare has a benefit package 
that covers the things that most people need, and that are 
particularly important when they are sick, is going to be a 
problem.
    In addition, we are not quite ready for a major 
restructuring in Medicare. We have not dealt with risk 
selection very well. We have not dealt with other things that 
need to be done to make private plans and competition work 
well.
    Instead, I would focus on a number of other more 
incremental reforms. I would focus on improving risk selection, 
so that if we move in the direction of more private plans, we 
are prepared to do so.
    The administration also makes a good point about the 
complexity of the current Medicare Program, but I would urge 
any of you to look at your insurance plans and the rules and 
coverage information available to you, as evidence of the 
complexity of those plans.
    This is not a problem that is inherent to a Government 
program. This is a problem where complications of health care 
coverage are endemic in the United States.
    Moreover, I believe that it is important to recognize that 
if we are going to have an improved Medicare system over time, 
we need to have the resources, both in personnel and dollars, 
to straighten out some of the legitimate problems that exist in 
the Health Care Financing Administration.
    I would welcome a close analysis in looking at regulations, 
and at the organization of HCFA. I think the main thing I would 
caution is, do not assume that you can simply throw HCFA out, 
start all over again, and that none of these problems will 
arise in the future.
    There is a lot to do before we turn the program over to the 
private sector. I would like to see this year be a year in 
which there was a lot of attention on modernizing the 
traditional part of Medicare, and working on adding 
prescription drugs.
    Thank you.
    [The prepared statement of Marilyn Moon follows.]

     PREPARED STATEMENT OF MARILYN MOON, SENIOR FELLOW, THE URBAN 
                              INSTITUTE\1\

    Chairman Nussle, Congressman Spratt, and Members of the committee: 
Thank you for the opportunity to testify today on Medicare reform 
issues. This is, as the budget blueprint introduced by President Bush 
says in its introduction, ``an unprecedented moment in history.'' The 
Federal Government now has the financial ability to make needed changes 
in Medicare, including adding prescription drug benefits, and to put 
the program on a stronger financial footing. But the administration's 
blueprint does not acknowledge the full extent of what is needed for 
Medicare.
    After reviewing some of the specific issues raised in the 
blueprint, I concentrate on prescription drug issues because this is a 
reasonable place to start on improving Medicare for the future. It is 
essential for most other types of reforms. And to address this issue 
effectively, sufficient resources need to be reserved for this task. I 
also emphasize issues facing the traditional fee-for-service part of 
the program, which serves 34.4 million of the 40 million Medicare 
beneficiaries but is often ignored when the discussion turns to 
``reform.'' For the foreseeable future, traditional Medicare will serve 
the majority of beneficiaries and an even larger majority of older and 
sicker beneficiaries. Improvements in traditional Medicare should be an 
important part of any reform effort.

               BUDGET NUMBERS AND ISSUES IN THE BLUEPRINT

    The Bush administration's blueprint for the budget recognizes some 
of the important issues facing Medicare in the future. Medicare was 
singled out by President Bush during the campaign and again in the 
budget submission as a program in need of expansion, particularly with 
respect to prescription drug coverage. The principles laid out in the 
document also indicate that Medicare's guarantee of access must be 
preserved, both in general and with respect to new technological 
advances, and that additional protections are needed for low income 
beneficiaries. All of these are laudable goals.
    Further, it is appropriate to consider both Parts A and B of 
Medicare when examining the costs of serving the elderly and disabled. 
But the blueprint document goes further and treats Part B as if it were 
in deficit because it relies on general revenue financing. General 
revenues have been a major funding source for Medicare since its 
passage in 1965 and that obligation is spelled out in statute. It makes 
no sense to treat Part B as in ``deficit'' and thereby imply that 
payroll taxes should support both Parts A and B. Such an argument makes 
no more sense than assuming that spending on Medicaid, Veteran's 
benefits or even defense should be covered by the Part A Trust Fund. 
All of these other sources of spending have no more legal claim on 
general revenues than does Part B.
    Coupled with the blueprint's pledge not to raise payroll taxes, if 
general revenues are excluded, there is no way that there will be 
enough revenue to support existing benefits beyond about 2005.\2\ And 
certainly there will not be enough revenue from 2.9 percent of payroll 
to cover the increasing number of people who will be eligible for the 
program at the end of the decade or to fund a prescription drug 
benefit.
    Part of the case made in the document for combining A and B in 
examining Medicare is a criticism of the shift of some home health 
benefits from Part A to Part B in the Balanced Budget Act of 1997. This 
change, which returned home health closer to how it was treated in 
1966, did make Part A look better. But it is incorrect to argue that it 
``had no economic consequences.'' By shifting a majority of home health 
care to Part B, beneficiaries costs rise since their Part B premium is 
25 percent of the costs of Part B services. Thus, this was an indirect, 
but intended, increase in beneficiary contributions. In fact, 
beneficiaries' share of combined A and B spending will rise from about 
9 percent prior to the BBA to over 11 percent when the phase in of home 
health is completed in 2004. Over the 10 year period, that translates a 
per capita premium increase of nearly $1200. Most beneficiaries would 
not consider this a meaningless change; indeed they would likely 
welcome having home health returned to Part A.
    This is not to say that only Part A should be considered in 
examining Medicare but rather that both parts should be considered with 
regard both to their spending and sources of income. Should there be 
limits or constraints on general revenue contributions to Medicare? 
Even those who have implicitly argued for such a limit have never 
proposed reducing general revenue contributions to zero.
    At a time when both President Bush's document and most policy 
makers recognize that new benefits need to be added to Medicare and 
that the aging of the Baby Boom generation pose new demands on 
Medicare, it seems foolish to deny general revenue spending and pledge 
that payroll taxes will not be raised. More willingness to raise 
revenues is needed to assure Medicare's future. The information in the 
budget blueprint does a disservice to that effort.

                        PRESCRIPTION DRUG ISSUES

    Three basic approaches to adding prescription drug coverage for 
Medicare beneficiaries have been suggested:
     Provide coverage only for those with low incomes--either 
as an initial step or as the full response;
     Provide universal coverage, but only in concert with other 
reforms, such as relying on private insurance plans; and
     Provide universal coverage that are not contingent upon 
other reforms.
    The obvious advantage of offering coverage only to low-income 
people (as the Bush administration has proposed for the next 4 years) 
is cost. But this seemingly low cost approach requires a separate 
administrative structure (most likely state run) to determine 
eligibility and the menu of drugs that would be covered. This structure 
will take time to build and may be problematic if the program is only 
intended to last for several years. But, most important, a low income 
approach would solve only part of the problem because many 
beneficiaries who would not qualify face high costs and no access to 
reliable insurance.
    The main reason to tie drug coverage to other reforms is to create 
a warmer reception for what may be very unpopular new requirements in 
other areas of Medicare. This has been the stance of some who propose 
further privatization of the Medicare program. But a drug benefit would 
likely be stalled while controversies over the role of traditional 
Medicare and private plans are worked out. Meanwhile, the plight for 
beneficiaries will worsen each year. Another risk of this approach is 
that a drug benefit would be designed that works well with private plan 
options, but treats coordination with the traditional Medicare program 
as an afterthought.
    The approach I favor would deal with the prescription drug issue 
now, perhaps in conjunction with some other changes in Medicare, but 
not a full restructuring of the program. Getting it right on 
prescription drugs is a large task by itself. Regardless of whether the 
future of Medicare relies on incremental reforms or program 
restructuring to feature private insurers, a drug benefit is a 
necessary first step. Moreover, since both traditional Medicare and 
private plans are likely to be part of the future, any drug benefit 
needs to work under either scenario.
    Is the $153 billion proposed in the budget blueprint enough to fund 
a reasonable Medicare prescription drug benefit? If the costs of 
prescription drugs rise at the rate that the CBO estimates over the 
next 10 years, $153 billion will cover a benefit that is less than 10 
percent of drug spending by Medicare beneficiaries, not enough to offer 
the type of protection that beneficiaries need or expect. On the other 
hand, if the administration's $153 billion number is a net figure after 
achieving substantial (but as yet undefined) savings, perhaps the 
amount to be contributed would be much higher. Even if the number were 
doubled to $300 billion, however, this would only raise the 
contribution to an average of about 20 percent of costs of drugs, and 
it leaves unknown where the $150 billion in additional savings would 
come from.
    Prescription Drugs and Medicare Beneficiaries. Prescription drugs 
are the primary acute care benefit excluded from Medicare coverage. 
Only in the hospital, a nursing home, or in a hospice will Medicare 
cover drugs. But drugs are now, more than ever, a critical part of a 
comprehensive health care delivery system. Lack of compliance with 
prescribed medications can raise health care costs over time. And for 
many who need multiple prescriptions, the costs can be beyond their 
reach.
    An initial look at supplemental coverage might suggest that there 
is little need to expand benefits, except perhaps for those with very 
low incomes. True, many beneficiaries do have supplemental insurance 
plans. But, if the reliability of insurance is taken into account, many 
more have unmet needs. Medicare beneficiaries supplement their basic 
benefits from four sources. The first two, employer-based retiree 
insurance and individual supplemental coverage (which is referred to as 
Medigap), are provided by private insurers, while Medicaid, a public 
benefit, subsidizes many low-income beneficiaries. Fourth, Medicare 
contracts with private plans, mostly health maintenance organizations 
(HMOs), to serve beneficiaries who choose to enroll. Such plans often 
cover services that basic Medicare does not. Such supplemental coverage 
varies in quality, beneficiaries' access, and the degree to which the 
added coverage relieves financial burdens. Only employer-based retiree 
coverage and Medicaid offer reliable drug benefits, and even then not 
to all their enrollees.
    Employer-based plans normally offer comprehensive supplemental 
insurance, including drug benefits, and subsidize retirees' premiums. 
Thus, these plans both reduce out-of-pocket expenses and increase 
access to services. But such plans are limited to workers and 
dependents whose former employer offers generous retiree benefits. As a 
consequence, these benefits accrue mainly to higher income retirees.
    Medicaid, which also offers generous ``fill in'' benefits, 
including drugs, is limited to persons with incomes well below the 
Federal poverty level. low incomes. Since Medicaid is a joint federal/
state program, states have latitude in establishing eligibility and 
coverage. And although all states cover prescription drugs, many have 
limits on who is eligible and what drugs are included. Concern about 
the high costs of prescription drugs suggests that states are unlikely 
to expand these benefits on their own, (although some are active in 
providing separate drug programs).
    Medigap plans are rarely a good bargain for most beneficiaries. 
Beneficiaries pay the full costs of such plans. Medigap options that 
include drugs have become prohibitively expensive for many 
beneficiaries, particularly the very old who must pay substantially 
higher premiums than those aged 65 to 69, for example. And even though 
they can charge steep premiums, many insurers are refusing to offer 
options with drug coverage. Most likely, Medigap drug coverage will 
soon be viable only for those who have been grandfathered into a 
reasonable plan.
    Finally, beneficiaries can opt to go into a Medicare + Choice plan. 
These private plans generally offer additional benefits at a lower cost 
than Medigap does, but require enrollees to meet certain conditions, 
such as agreeing to go only to doctors and other care providers who are 
on a prescribed list. Since 1997, these plans have either shrunk their 
benefits packages or raised premiums (over and above Medicare's Part B 
premium). Drug coverage has either been dropped altogether or stringent 
caps have been placed on the amount covered. Moreover, a number of 
plans have pulled out of Medicare, causing beneficiaries to scramble 
for new arrangements.
    In sum, while a substantial number of beneficiaries now have drug 
coverage, the share with reliable coverage (employer-based or Medicaid) 
is considerably smaller. Only 39 percent of Medicare beneficiaries have 
reliable coverage, and an even smaller percentage have it for a full 
year. Further, states and former employers who now support good 
coverage may pull back as prescription drugs become even more 
expensive, intensifying demand for drug coverage in the future. Figure 
1 indicates how vulnerable beneficiaries are. It identifies those most 
in need of coverage across different levels of economic status (shown 
as income as a share of the poverty guidelines). The white areas stand 
for beneficiaries who have no coverage or who now rely on Medigap or 
Medicare+Choice plans.



    As Figure 1 also shows, in all groups a majority of beneficiaries 
is without reliable coverage. Cutting benefit eligibility at 135 
percent or 175 percent of the poverty level would not do away with the 
problems that beneficiaries face of obtaining reliable prescription 
drug coverage. In fact, the group with incomes between 175 percent and 
250 percent of poverty (about $15,000 to $20,000 for a single person) 
get little coverage from either employer-subsidized or Medicaid 
coverage. They are in many ways as vulnerable as the truly poor. If 
eligibility extends to 250 percent of poverty, that would include over 
60 percent of the Medicare population. And even of those with incomes 
above 250 percent of poverty, only 41 percent have reliable coverage.
    Spending on drugs, on average, is about the same across all income 
groups. In other words, the importance of this benefit does not decline 
with income, although the ability to pay does improve. And, even more 
important, the burdens on Medicare beneficiaries will continue to rise, 
even with no policy changes. Figure 2 projects out-of-pocket spending 
for several groups of beneficiaries. Much of the growth in out-of-
pocket burdens over the next 25 years reflects growth in the cost of 
prescription drugs.\3\



    Issues Crucial to Beneficiaries. As shown above, prescription drug 
costs are a large and rising expense that many beneficiaries must face. 
The willingness of Medigap beneficiaries to pay high amounts to obtain 
drug coverage and of Medicare+Choice beneficiaries to enroll and switch 
plans to obtain drug coverage suggest how much beneficiaries value this 
benefit. It is likely, then, that they would pay higher premiums to 
obtain this coverage. But, low income protections and a universal 
subsidy would be needed to make this an effective benefit.
    If the drug benefit is to be a voluntary option, a subsidy and some 
enrollment restrictions would be even more important to insure that a 
broad range of beneficiaries would join the Medicare plan. Consider 
Part B of Medicare. It is a voluntary benefit, but a subsidy makes it 
sufficiently valuable to attract almost all beneficiaries. As a 
consequence, risk selection does not raise the costs of the coverage.
    The structure of any prescription drug benefit will affect access 
and use. If a standard drug benefit were offered as an option through 
the Medicare program, the administration of the benefit could be 
contracted out to private companies just as Medicare now does for its 
payments to hospitals, physicians and other providers. This approach 
hews closely to the practice of the basic Medicare program.
    Alternatively, the private sector could be used to establish 
voluntary prescription drug options. Usually this tack is proposed as a 
way to allow coverage to vary from plan to plan and across the country. 
But this private option works better for enrollees who choose to be in 
private plans than for those in traditional Medicare because the latter 
would face confusing choices. Already, most beneficiaries have two 
types of insurance. Adding a third separate benefit, run by yet another 
insurer, would undoubtedly add to the complexity and confusion that 
already plagues many beneficiaries. Breaking up coverage makes little 
sense from an insurance standpoint--one reason why the insurance 
industry has not been interested in standalone drug plans.
    Further, even for those in private plans, permitting variation in 
benefit packages offered creates a serious disadvantage. Allowing 
individuals to choose what is ``best'' for them is likely to separate 
the sick from the healthy and make it difficult to make sure that the 
neediest can afford coverage. Most Medicare beneficiaries who expect to 
use few drugs would choose a plan with no deductible, low co-insurance, 
and a low cap on benefits. Those who anticipate using more or higher 
priced drugs might want greater overall protection even if they have to 
pay a deductible or high coinsurance rate for their initial purchases. 
A standardized benefit takes away one tool for achieving risk 
selection.
    Finally, the generosity of the plan is a critical element. Even the 
most generous plans will not be as comprehensive as what most younger 
families have, even though the needs are greater for Medicare 
beneficiaries. Protections ought to be generous enough to be valued by 
those who enroll, although the costs of a drug benefit are likely to be 
high and grow rapidly over time.

                          OTHER REFORM ISSUES

    Drug coverage represents a logical first step in reform, helping to 
smooth the way for other Medicare changes. It also makes sense to carry 
out some other reforms simultaneously, and put in place changes that 
may pave the way for later, more extensive changes.
    Improving the Traditional Medicare Program. One major criticism 
leveled at fee-for-service Medicare is that when it is combined with 
supplemental insurance, many beneficiaries have nearly first dollar 
coverage. If beneficiaries face cost sharing requirements, that might 
make them more conscious of the costs of care. The Congressional Budget 
Office has long contended that this approach substantially raises the 
costs of Medicare. Further, dual coverage generates excess 
administrative costs that beneficiaries must cover.
    Adding prescription drug coverage would reduce the need for other 
supplemental insurance, but probably not enough to encourage 
beneficiaries to drop their Medigap plans. Other changes in cost 
sharing would be needed, such as reducing the very high Part A 
deductible and limiting the total amount of cost sharing that any 
beneficiary would owe. A more rational Medicare cost-sharing package 
would not have to be an expensive addition, especially if it increased 
cost sharing in such areas as the Part B deductible that are low 
compared to the private sector. These changes could help defray higher 
costs elsewhere. If the basic Medicare benefit could be made to look 
more like insurance that most working families have, with good 
protections and reasonable cost sharing, the traditional Medicare 
program could satisfy both beneficiaries and those worried about costs.
    In addition, moving more basic health care services under the 
Medicare umbrella would substantially better protect sicker and older 
beneficiaries. The very old get Medicare at community rates (i.e. where 
everyone pays the same premium), but they depend more on Medigap for 
their supplemental coverage even though these policies are age rated 
and hence are very costly. These beneficiaries are least able to afford 
Medigap premiums and could benefit if they were covered under Medicare 
instead. And in the case of younger disability beneficiaries, Medigap 
is often not available at all.
    Another advantage of expanding the traditional Medicare benefit 
package is that further reforms that might coordinate care through 
disease-management or other programs can be effective only if the full 
range of care is available. The lack of prescription drug coverage and 
the reality of very high out-of-pocket costs increases the likelihood 
of noncompliance. Such noncompliance would make it hard to achieve 
overall savings since the extra expense of coordination of care would 
not be offset by better outcomes. For example, it makes no sense to 
have a program to control hypertension if beneficiaries cannot afford 
the drugs necessary to combat hypertension.
    Finally, the current Medicare+Choice plans are able to offer 
prescription drug benefits in part because they receive Federal 
payments in excess of what it costs to provide the current Medicare 
benefit package. The General Accounting Office has found that plans get 
payments more than 13 percent higher than what it would cost in fee-
for-service to provide the basic benefits. Even the HMO industry now 
makes its case for higher payments over time as necessary to retain a 
``desirable'' benefit package--not just the required Medicare benefits. 
The problem is that many of the 6 million beneficiaries in HMOs thus 
get subsidies for drug coverage, but those in traditional Medicare--who 
are sicker on average and more likely to need drugs--do not. Adding a 
prescription drug benefit to Medicare would help both Medicare+Choice 
enrollees and those in traditional Medicare. And since partial 
subsidies are already in place for HMOs, accounting for this could 
lower the costs of providing universal coverage.
    In addition to improvements in Medicare from adding a drug benefit, 
other modernization efforts will be important as well. The 
administration's criticisms of the current program and call for 
``modernization'' can be viewed as a need for restructuring or as a 
call for improving the current system. The latter effort should be 
undertaken regardless of what happens in restructuring of Medicare.
    Much of the administration's criticism about Medicare centers on 
complexity and bureaucracy. Certainly the Health Care Financing 
Administration's (HCFA) operations should be improved. But it is also 
important to determine what the problems are and how to solve them 
rather than just pinning the blame on government bureaucracy. Over the 
years, the responsibility of HCFA has grown substantially, but its 
resources to deal with these responsibilities both in dollars and 
personnel have not expanded. Second, the Congress has taken a strong 
interest in Medicare and dictated many policies at a very disaggregated 
level.
    It is important to note that few private insurance companies escape 
problems of complexity and bureaucracy. Many workers and their families 
find the requirements of their plans to obtain approval before getting 
some services, to determine which doctors and hospitals are in network 
and which are not, understanding the bills when they come due months 
later, and the need to appeal denials of care to be cumbersome, complex 
and overly bureaucratic. Thus, problems with the complexity of our 
current health care system are by no means inherent only to government. 
The goal should be to reduce these burdens throughout health care, but 
to lay the issue at the doorstep of only Medicare is misleading. More 
resources are needed to expand oversight capabilities and bring in 
professionals who have private sector experience.
    Further, the traditional Medicare program needs to have more 
flexibility to deal with providers of care and make judgement calls 
that the Congress has often prevented. Experiments with new ways to 
coordinate care in a fee-for-service setting need to be undertaken. 
Improved methods of payment to private plans and better measures to 
control for risk selection are needed both in the current system and 
are necessary before beginning a more extensive restructuring effort. 
Relying on private plans to make decisions is unlikely to result in the 
government observing a hands-off approach. Nor should it. Medicare is 
an important program that needs careful oversight to protect the 
beneficiaries it serves.
    Restructuring Options that Rely on the Private Sector. Proposals to 
rely more upon the private market to offer coverage to Medicare 
beneficiaries would also be helped if a reasonable prescription drug 
benefit were in place. Not only does managed care need a comprehensive 
benefit package to perform well, but such a benefit would help reduce 
the incentive for risk selection that private plans now face. Plans 
would find it difficult to voluntarily add any benefits--such as 
drugs--without attracting sicker patients. They would likely respond in 
the same way that current Medicare+Choice plans have responded by 
paring back drug coverage.
    For these reasons, competition will work much better if the basic 
plan that all must offer is sufficiently comprehensive and 
standardized. This would still leave ample room for adding other 
benefits or competing on price. Until adjustments that could account 
for differences in health status are improved, it will be difficult to 
use competition in positive ways. The benefits to plans of seeking good 
risks are simply still too tempting. It is easier to make profits by 
attracting healthy patients than by coordinating care.
    Some of the steps described above in connection with reforming the 
current program need to be in place and working well before a full 
restructuring of Medicare is undertaken. This is particularly the case 
if traditional Medicare is put at risk and becomes inordinately 
expensive over time. That would harm the most vulnerable beneficiaries, 
offsetting any gains that might result in improved efficiency or 
choice. Further, concerns raised about managed care for younger 
Americans and the issue of whether such an approach can actually offer 
cost savings need to be addressed before making aggressive moves toward 
this type of change. Figure 3, for example, compares Medicare per 
capita growth with growth in spending by private insurance over nearly 
a thirty years. Medicare's track record is substantially better than 
the private sector.



    Improving Beneficiary Education and Information. Another factor 
important to the success of Medicare reform is to give beneficiaries 
more say in decisions about their own care. But simply giving them 
responsibility (for example, requiring them to choose a plan) will not 
work unless they have the tools to respond. Credible, independent 
sources of information will be essential.
    A good place to start this educational effort would be with the 
prescription drug benefit. A publicly funded but independent 
organization that would provide information on the quality of generic 
drugs and the extent of equivalence across name brands in the same drug 
categories, for example, could help beneficiaries to make more informed 
choices. Reassurance that a less expensive drug is just as effective 
will be more powerful coming from a credible source than from a plan 
with a financial stake in that decision. Prescription drug coverage 
will be expensive; so government should invest in the resources 
necessary to make better decisions. This information could also help 
hold down costs of drugs both in Medicare and in the private sector.
    Financing. Expanding benefits is a separable issue from how the 
structure of Medicare evolves over time. It is not separable from the 
issue of the cost of new benefits, however. Adding drug coverage 
clearly raises financing issues. New revenues, most likely from a 
combination of beneficiary and taxpayer dollars, will be required. The 
administration's proposals ignore this key issue and in fact make it 
worse by treating general revenue as ``deficit'' financing and arguing 
for no increase in payroll taxes. No restructuring effort or other 
reform will be sufficient to remove the need for greater resources over 
time.

                               CONCLUSION

    A familiar refrain for critics of Medicare is that it is a 
``Cadillac'' program, but the model year is 1965. This criticism is 
often leveled at Medicare's fee-for-service system. In fact, the 
Medicare delivery system has undergone a large number of changes and 
reforms. In the 1980's, it was a leader in pushing for payment reforms 
and its per capita growth rates were lower than that of private 
insurance. It now has a private option dominated by managed care plans, 
and increasingly reforms have sought to give administrators of the 
program further flexibility in managing the costs of care. Where the 
criticism is more on target, however, is in the area of benefits. The 
basic structure of the Medicare benefit package has changed little 
since 1965.
    The current patchwork approach to provide drug benefits through 
private insurance, such as we have now, is seriously flawed. 
Prescription drug benefits generate risk selection problems; already 
the costs charged by many private supplemental plans for prescription 
drugs equal or outweigh their total possible benefits because such 
coverage attracts sicker than average enrollees. A concerted effort to 
expand benefits is necessary if Medicare is to be an efficient and 
effective program. This commitment will require substantial new 
resources, but adding a prescription drug benefit is a logical place to 
begin reforms of Medicare. It does not make sense to hold beneficiaries 
hostage in order to pass other unpopular and unproven changes in the 
program.
    Too often the solution proposed to complexity or inefficiency is to 
start over with a whole new system. But that approach carries no 
guarantees of success. Improvements in the current Medicare system 
could test out whether more restructuring will work well for Medicare 
beneficiaries. There is a great deal to do before major reforms are 
ready for ``prime time.''

                                ENDNOTES

    1. Senior Fellow, The Urban Institute. The views expressed herein 
are those of the author and do not necessarily reflect those of the 
Urban Institute, its trustees, or its sponsors.
    2. This is based on last year's Trustees numbers. The outlook would 
likely be a little better this year, but not by very much.
    3. Although these numbers are dramatic, they still may understate 
possible increases in out-of-pocket costs. For example, we do not 
assume changes in insurance coverage over time, and we assume 
relatively modest drug growth of 10 percent per year for 10 years and 
then the same growth rates as for other health care services.

    Mr. Putnam. Thank you, Dr. Moon.
    Dr. Saving, welcome to the committee.

  STATEMENT OF THOMAS R. SAVING, DIRECTOR, PRIVATE ENTERPRISE 
                        RESEARCH CENTER

    Dr. Saving. Thank you very much for the opportunity to 
discuss the challenges Medicare faces in the future.
    I am going to have a little disclaimer here, too, because I 
am a Public Trustee of the Social Security and Medicare Trust 
Funds.
    I want to say, at the outset, my comments here do not 
represent the opinions of the Social Security Administration, 
or the Health Care Financing Administration, or any part of the 
things from which I am a trustee. They are really my opinions, 
as an economist.
    I want to comment briefly on the reforms that affect 
Medicare programs, expenditures, and revenues. Most reforms, 
from those enacted as part of the BBA in 1997, the 
recommendations of members of the National Bi-Partisan 
Commission on the future of Medicare, and a lot of our 
discussion here today, have concentrated on reducing the 
current expenditure levels, and on future expenditure growth.
    However, reforming the program's finances also deserves our 
attention, and it is becoming an increasing problem, as we look 
at it. Let me have Figure 1.
    To get a feel for the future tax implications of current 
Medicare, I present in the figure total Medicare expenditures. 
Now what I have here, I express those all in terms of taxable 
payroll, because that is a way that we happen to tax at least 
Part A of Medicare and, of course, Social Security.
    It just gives us a feel for what these numbers are like. It 
is the sum of both SMI, Part B, and Part A of Medicare. The 
deficits that you might see there, Marilyn does not want to 
call those deficits. We can call them whatever we like. What 
they are--they are expenditures that have to come from the 
Treasury--and do not come from the dedicated sources of income 
for Medicare, Part A or Part B.
    So what I have in here as revenues are the part that 
consumers or beneficiaries pay in Part B plus Part A taxes. The 
difference has to come from the Treasury, however we want to 
talk about that.
    What we can see is that the difference between revenue and 
expenditures shows the magnitude of the funding shortfall each 
year, and that has to be made up from general revenues. In 
2000, that deficit was 1.13 percent of payroll; and by 2040, 
the transfer from the Treasury is going to be 7.5 percent of 
taxable payroll. By 2070, it is going to be 13.5 percent of 
payroll.
    If you combine that with what the current Social Security 
is going to take, we are looking at transfers from the Treasury 
to these programs that are 27.5 percent of total payroll. Let 
me put Figure 2 up there.
    There is another way to talk about the financial challenge 
arising for Medicare and Social Security, and that is to 
calculate their accrued liabilities.
    The debt that we have promised to the future is exactly the 
same kind of debt that we have when we talk about the general 
publicly held debt, for which we pay interest payments. The 
only difference is that if we do not make the interest 
payments, Wall Street bangs us on the knuckles and lowers the 
value of all Government bonds. In this case, of course, 
Congress can immediately just take away these benefits, if they 
want to.
    What I have done here is to calculate the value of our 
promises. I have actually discounted them by a fairly high 
discount rate, because they are uncertain. As a matter of fact, 
in the past, when Social Security has gotten into difficulties, 
we have taken some of the benefits away.
    So if that is going to happen in the future, in any case, 
the size of these debts are $8.8 trillion for Social Security, 
and $8 trillion for Medicare. These two debts, every bit as 
much as the publicly held debt, are some five times the 
publicly held debt.
    So if we are going to use the surplus to reduce debt, we 
can use it just as well to reduce this debt, as to reduce the 
so-called nominal debt that we have outside.
    Let me go back to Figure 1. Regardless of the long-range 
rate used to estimate future expenditures, Medicare is 
underfunded by its current revenue sources. As the figure 
illustrates, the growth of Medicare will have a dramatic impact 
on the funds projected to be transferred from the rest of the 
budget to Medicare.
    Accelerating Medicare costs will, in the absence of 
meaningful reform, not only drive Medicare spending to levels 
that may be unsustainable for future generations of taxpayers, 
but will create a currently unfavorable environment for adding 
much needed prescription drug coverage.
    The projection of future Medicare costs incorporates 
assumptions about demographic changes in the future, because we 
make a lot of assumptions when we are doing this. These include 
income growth, health care market structure, and medical 
technological progress.
    We cannot do much about demographics. As a matter of fact, 
because this baby boom problem exists in the entire developed 
world, the future assumptions that we are making about 
immigration are likely to be very optimistic; because all of 
the developed world is going to be competing for immigrants.
    The working population in Japan and in all of Europe is 
going to be declining rapidly because they have a bigger baby 
boom population problem than we do.
    In order to produce and have workers in their countries, 
they are going to have to import people. They are going to 
present us with much greater competition for immigrants than we 
have ever had in the past. I think that we are making 
optimistic immigration assumptions in the demographics.
    That aside, the demand for medical care, of course, given 
the assumptions of the technical panel that HCFA had and that 
were presented in their results in November, is suggesting that 
our past projections, and the projections that I have here are 
based, in fact, on that technical panel's assumptions, that 
health care is likely to grow more rapidly than gross domestic 
product. Their suggestion is 1 percent more rapidly, and that 
is what these numbers project.
    So we are not going to do much in those two areas. So where 
we have to go, we are left relying on changing the structure of 
health care markets to encourage competition.
    Such competition has the potential of reducing the current 
level of expenditures through demand reductions and price 
competition, and at the same time, encouraging the development 
of new technology, which is directed toward cost reduction. 
That is something that does not happen now, since buyers do not 
care what medical care costs. Inventing a new technology that 
makes it cheaper does not actually generate any revenue for 
you.
    Fee-for-service Medicare, combined with supplemental 
insurance, effectively gives many beneficiaries nearly first-
dollar coverage. Without real cost sharing requirements in 
place, beneficiaries tend to have little regard for the price 
of health care services.
    When consumers do not care what services cost, you can be 
certain that suppliers of these services will not care what 
they cost. In addition, the benefits of developing cost-saving 
technology are positive only if those who demand services care 
about cost. Thus, technological changes that increase our 
ability to find solutions to current conditions for which there 
are no treatments result in higher expenditures.
    With proper incentives, however, such expenditure increases 
may be wholly or partially offset by the development of cost-
reducing technology.
    We can develop an estimate of the demand effect of 
introducing no first-dollar coverage, and it is something that 
Marilyn also discussed, by relying on the results of the Rand 
insurance experiment, which was done in the 1980's.
    Updating that study to a $2,500 deductible policy results 
in a 24-percent reduction in medical care expenditures. Those 
expenditure reductions only are reductions in demand for health 
care at existing prices.
    Once you had that size, and take the Medicare population 
times $2,500, the size of that market will make providers 
compete on price to get into that market. Once they compete on 
price, prices will be considerably lower, and cost-reducing 
technology will be encouraged.
    Up to now, attempts to constrain expenditure growth really 
have relied on price controls. We have thousands of years of 
historical evidence that suggest that price controls do not 
work, and the expanding choice is the second aspect. That is 
the development of Medicare Plus Choice.
    Unfortunately, reimbursing private insurers, based on pre-
set risk adjusted payment rates as was done with Medicare Plus 
Choice, induces providers to screen patients.
    An alternative to establishing risk-adjusted reimbursement 
rates is the competitive bidding process in which suppliers bid 
for each type of patient, rather than HCFA telling suppliers 
what each type of patient is going to be reimbursed, on the 
basis of last year's averages. In this way, suppliers reveal 
their reservation prices, rather than HCFA attempting to 
determine the correct prices.
    So how do we move ahead on bringing competition into the 
picture at a time when many are suggesting that Medicare's 
coverage be expanded to include prescription drug coverage? Now 
there are convincing medical and economic reasons for adding 
prescription drug coverage.
    The current coverage, drug therapies that may be cost 
effective, cost consumers more than perhaps more costly 
interventions. As a result, technological advances are tilted 
toward the development of such more costly interventions.
    Introducing pharmaceutical coverage would level the playing 
field for consumers of health care, and perhaps lead to 
technological advances that result in lower cost therapies. 
However, a plan providing universal drug coverage with no 
conditions about other reforms would be financially 
irresponsible, in this case.
    Adding full drug coverage to all Medicare beneficiaries 
would effectively replace current private sector financing with 
public financing. We can expect that in 2001, we are looking at 
at least 1.3 percent of taxable payroll, which would be added 
to the large subsidies already from the general fund of the 
Treasury.
    Let me put Figure 3 back up there for a moment. This gives 
me one thing that I think is a little bit of an aside. Look at 
what has happened to prescription drug prices, and as we know, 
the inflation in prescription drug prices has exceeded that in 
the rest of health care.
    There is a good reason for that. The reason for that is the 
growth of third party payments. What this figure really shows 
you is that, for the period from 1960 through the 1970's, 
prescription drug prices rose at an annual rate of only 1 
percent. However, third party payers only covered, on an 
average, 16 percent. That meant that individuals were paying 84 
percent of the price of prescription drugs. They cared about 
what it cost.
    In the last 20 years, what has happened is, we have had a 
huge increase in the share. Now it is up to 73 percent of 
prescription drugs that are paid for by somebody else.
    On the average, for the second part of that period, it was 
52 percent. You can see what happened to prescription drug 
prices. When customers do not care what it costs, suppliers do 
not care what it costs.
    I think that is an important lesson that we have to learn. 
We have to find a way to restructure Medicare so suppliers care 
what it costs. If we cannot do that, we are going to have a 
problem.
    Now the last thing I want to discuss is, how are we going 
to solve this payment problem that we have and that is 
significant?
    In the past, I have presented in Washington a couple of 
times a method of trying to pre-pay Medicare, and the notion of 
having each generation pay, in advance, for its own Medicare.
    This is the system that I have worked out. We will put up 
the next table, perhaps. The transition path that I have 
studied is the following one. All workers born in 1946 or 
later, and those are all the baby boomers, are in the pre-paid 
system. Everybody older remains in traditional Medicare.
    Beginning today, individuals in the pre-paid system 
establish and fund a private retirement account that is going 
to purchase health insurance for the rest of their lives, once 
they reach retirement age.
    This sounds like it is a very big deal; a very big, tall 
task. It is a tall task but, in fact, it can be done. I think 
you should look at the numbers there. You can see what they 
are.
    The table shows the lifetime contribution rates on labor 
earnings for new labor force entrants, assuming that per-capita 
benefits are going to grow at GDP per capita, plus 1 percent, 
which was the technical panel's recommendation.
    As you can see, I present two things on this table; one 
which is current Medicare, and the other one is a $2,500 
deductible policy.
    You can see that if we have a conservative rate of return 
for these accounts that are going to pre-purchase private 
health insurance, we are looking at a contribution rate of 2.68 
percent for current Medicare. That is less than current 
Medicare taxes. If we assume a $2,500 deductible policy, it 
would be 2.27 percent.
    If we look at the rate of return as the marginal 
productivity of capital in the United States, then we are 
looking at a contribution rate of 0.86 percent, or 0.73 percent 
for a $2,500 deductible policy.
    There are other favorable consequences of pre-paying 
retirement insurance. With prepayment, capital stocks rise and 
income rises. By pre-paying benefits, future payroll taxes will 
be reduced, producing significant efficiency gains.
    Let me put Table 2 up. What it does is show you the path of 
tax rates that actually would pre-fund Medicare. The first 
column shows the time path of current Medicare, and what its 
tax rates would look like. The second column shows you the time 
path of contributions that would pre-fund Medicare for 
everybody.
    As you can see, in the year 2000, or actually 2001, those 
tax rates are higher than current taxes. What I have done is, 
with the 4.17, I put the current contribution of Congress, of 
the Treasury, to Part B, in those tax rates, so that they can 
be compared.
    But as you can see, by 2018, the tax rates are lower with 
the pre-paid system, and forever after, they are lower. In 
fact, they eventually go down to 1.24 percent.
    Why are we talking about Medicare today? It is worth 
thinking about that. We are not talking about the rising 
expenditures on computers. Why is that? It is because Congress 
is not paying for computers. Congress is paying for Medicare.
    What we want to do is reduce the cost borne by taxpayers. 
But also, it is not clear that we are ever going to pay the 
costs that I am indicating up here. If we are not going to pay 
them, that means benefits are going to be reduced.
    First, Medicare should be thought of as a single insurance 
package rather than in terms of the historical acts that 
produced separate hospital and supplemental medical insurance 
programs.
    Second, making suppliers and consumers of medical care 
cost-conscious requires that both groups care about prices. 
This can be accomplished by eliminating first dollar coverage, 
and a provision of a defined contribution Medicare benefit.
    Then some form of additional premium support for lower 
income elderly could address the concerns that they will not 
get the care they need.
    Because we inherited distribution of health situations, 
however, such defined benefits must be risk-adjusted. The risk 
adjustments must be determined by the marketplace, and not by 
HCFA, if we are going to make this work.
    With this form of benefit, we can probably add prescription 
drugs and catastrophic coverage in a cost-effective way. 
Perhaps for the same costs that we are now imagining, we can 
have both prescription drugs and catastrophic coverage, which 
are the two elements of Medicare. It is particularly 
catastrophic coverage that forces people to buy Medigap.
    Finally, I have observed in the recent discussions about 
fiscal priorities an almost universal agreement to reduce the 
Government's debt. I am emphasizing, as I did in the figure 
that talked about the debts, that Medicare and Social Security 
commitments made to current retirees and future retirees 
represent Government debts in exactly the same way as the 
publicly held debt that is traded on the New York Stock 
Exchange does.
    If we are going to try to reduce debt, I think it makes 
more sense to reduce this debt than the publicly held debt.
    Thank you.
    [The prepared statement of Thomas R. Saving follows.]

 PREPARED STATEMENT OF THOMAS R. SAVING, DIRECTOR, PRIVATE ENTERPRISE 
                            RESEARCH CENTER

                         INTRODUCTORY COMMENTS

    Thank you for this opportunity to discuss the challenges Medicare 
faces in the future. Since October of last year I have had the pleasure 
of serving as a Public Trustee of the Social Security and Medicare 
Trust Funds. During these few short months my already high regard for 
the professionalism and objectivity of the actuaries who prepare the 
Trustees Reports has risen. Let me say at the outset that my comments 
do not represent the opinions of the Social Security Administration or 
the Health Care Financing Administration.
    I would like to comment briefly on reforms that affect the Medicare 
programs expenditures revenues. Most reforms, from those enacted as 
part of the Balanced Budget Agreement in 1997 to the recommendations of 
the majority of the members on the National Bipartisan Commission on 
the Future of Medicare, concentrate on reducing expenditure levels and 
expenditure growth. Reforming the program's finances also deserves 
attention. Currently, health care consumption of the elderly is paid 
for by tax revenues. Even if the cost containment reforms are 
successful in moderating expenditure growth, the tax bite will still 
undoubtedly grow. For this reason, I investigate an alternative to 
transfer payment financing. In the last section of this report I will 
introduce the simulated effects of making a transition to prepaid 
retirement health insurance.

                   MEDICARE REVENUES AND EXPENDITURES

    Figure 1 presents total Medicare expenditures expressed as a 
percentage of taxable payroll along with the system's dedicated 
revenues. The Hospital Insurance (HI) portion of Medicare has a 
dedicated payroll tax of 2.9 percent which is supplemented by revenues 
collected as a result of taxing Social Security benefits. The 
Supplementary Medical Insurance (SMI) portion of Medicare is financed 
with a combination of premium payments and general revenue taxes. While 
these two parts of Medicare are usually discussed separately, they are 
part and parcel of the overall Medicare program and any reform of 
Medicare must deal with all of Medicare. As such, the remainder of my 
remarks will treat the entire Medicare program, that is, the sum of 
both the HI and SMI parts of current Medicare.



    The revenues depicted in Figure 1 are the HI tax revenues and the 
premium payments required for participation in SMI. The latter revenues 
are set to 25 percent of the SMI expenditures. The expenditure 
estimates depicted in Figure 1 are based on the Health Care Financing 
Administration (HCFA) Technical Panel recommendations released in 
December of 2000 that long run Medicare expenditures should be assumed 
to grow at a rate equal to per capita GDP growth plus 1 percent.\1\ The 
technical panel charged with reviewing the financial projections in the 
Trustees reports maintained that rapid technological changes in medical 
care and the historical evidence, among other reasons, justify a higher 
growth rate. Health care expenditure growth faster than GDP growth 
implies that the share of income being dedicated to medical care will 
continue to rise indefinitely and that the share of non-health care 
will fall indefinitely. Importantly, this assumption does not imply 
that in the long run all GDP will be health care.
    The difference between the revenue and expenditure series shows the 
magnitude of the funding shortfall in each year that must be made up 
from general revenues. In 2000 the difference was 1.13 percent of a 
payroll, but by 2040 the transfer from the rest of the budget will grow 
more than sixfold to 7.54 percent of payroll. By 2070 the differential 
will grow to a staggering 13.5 percent of taxable payroll.\2\
    Another way to quantify the financial challenge arising from 
transfer programs like Medicare and Social Security is to calculate 
their accrued liabilities. These accrued liabilities are presented in 
Figure 2. The accrued liabilities of Medicare and Social Security are 
equal to the value today of what is owed to current program 
participants. The present values are calculated using a 5.5 percent 
real discount rate. This rate is higher than the real government 
borrowing rate, reflecting the uncertainty associated with receiving 
future payments from the programs.



    Social Security's accrued liabilities are the present value of the 
cumulative benefits all current taxpayers and retirees can expect to 
receive based on their earnings up to the year 2001. For example, the 
accrued liabilities owed to today's 65 year olds are the benefits they 
will receive for the rest of their lives. For 45 year olds, it is the 
present value of the future benefits they would receive based on their 
first 23 years in the labor force, assuming they started working at the 
age of 22. For Social Security the accrued debt is estimated to be $8.8 
trillion in 2001, roughly 2\1/2\ times greater than the national debt.
    Medicare's accrued liabilities are calculated in a similar manner. 
Again, a 5.5 percent discount rate is used, but since benefit payments 
are not tied to past earnings like Social Security's, the accrued 
liabilities are the present value of expected benefits for all 
individuals who are vested in the program. Anyone who qualifies for 
Social Security by working and paying taxes for at least 10 years or 
who is married to a qualified beneficiary can receive Medicare. Thus, 
almost everyone over the age of 32 is vested in Medicare. The present 
value of SMI benefits are net of expected premium payments. Together 
the estimated implicit debts of the Hospital and Supplementary Medical 
Insurance programs are equal to $8 trillion dollars in 2001.

                 REFORMS AIMED AT REDUCING EXPENDITURES

    Regardless of the long range growth rate used to estimate future 
expenditures, Medicare is underfunded by its current revenue sources. 
As Figure 1 illustrates, the growth of Medicare will have a dramatic 
impact on the funds projected to be transferred from the rest of the 
budget to Medicare. The accelerating Medicare costs will, in the 
absence of meaningful reform, not only drive Medicare spending to 
levels that may prove to be unsustainable for future generations of 
taxpayers, but has already created an unfavorable environment for 
adding much needed prescription drug coverage to the beneficiaries' 
benefit package because any efforts to expand benefits would inevitably 
worsen Medicare's financing situation. The goal of most reform 
proposals is to reduce the level of expenditures and/or the growth rate 
in expenditures.
    Projection of future Medicare costs incorporates considerations on 
future demographic change, income growth, health care market structure, 
and medical technology progress. There is not much that can be done to 
manipulate the demographic trend, although, as I will argue later, that 
prepaying Medicare would go a long way to help cope with the expected 
hike of Medicare costs when the tidal wave retirement of Baby Boomers 
comes.\3\ Demand for medical care tends to increase with income growth, 
but income growth-induced higher demand for medical care is not a bad 
thing and we certainly need not contain income growth to save on the 
costs of Medicare. Hence, we are left with relying on changing the 
structure of health care markets to encourage competition. Such 
competition has the potential of reducing the current level of 
expenditures through demand reductions and price competition and at the 
same time encouraging the development of new technology directed toward 
cost reduction.
    The current Medicare payment system, especially the dominant fee-
for-service part, is partly responsible for the very high current level 
of Medicare costs. Fee-for-service Medicare, combined with supplemental 
insurance, effectively gives many beneficiaries nearly first dollar 
coverage. Without real cost sharing requirements in place, 
beneficiaries tend to have little regard for the price of health care 
services. When consumers have little regard for the cost of services, 
we can be certain that the suppliers of services will have little 
regard for the price they charge. In addition, the benefits of 
developing cost saving technology are positive only if those who demand 
services care about cost. Thus, technological changes that increase our 
ability to find solutions for current conditions for which there are no 
treatments, will result in higher expenditures. Such expenditures 
increases will be wholly or partially offset by the development of cost 
reducing technology with the proper incentives.
    We can develop an estimate of the demand effect of introducing a 
no-first-dollar coverage Medicare system by using the results of the 
RAND Health Insurance Experiment. The RAND experiment found that a 
policy with a $500 deductible in 1983 dollars and 100 percent coverage 
above the deductible reduced total expenditures relative to fee care by 
27 percent.\4\ Similarly, Christensen and Shinogle (1997) estimated 
that Medicare beneficiaries who have Medigap coverage used 28 percent 
more service than do beneficiaries who are not covered.\5\ With 
Medigap, Medicare can be essentially converted to a first dollar 
coverage policy.
    Using results from the RAND study to estimate the expenditures 
associated with a $2,500 deductible policy results in 24 percent 
savings. These savings only reflect reductions in demand on the part of 
consumers. The effects will be even larger as suppliers compete to 
provide the services consumed under the deductible amount. While 
switching to a higher deductible policy is seldom mentioned as a 
Medicare reform, it is instructive to consider designing an insurance 
package that includes no-first-dollar coverage. Concerns over how lower 
income retirees will pay for care below the higher deductible can by 
addressed by providing them with a need-based transfer. The transfer 
must be designed, similar to a medical savings account, to give them 
the incentive to consider the cost of care.

                      BALANCED BUDGET ACT OF 1997

    The Medicare+Choice program initiated with the passage of the 
Balanced Budget Act (BBA) of 1997 was expected to expand the set of 
private insurers available to Medicare beneficiaries. The act allowed 
preferred provider and provider sponsored organizations to enter the 
Medicare market alongside traditional health maintenance organizations. 
A key difference between the traditional fee-for-service Medicare and 
Medicare+Choice is the program's payment methods. In the former, 
providers receive a separate payment for each covered medical service 
while, in the latter, contracted private plans receive a fixed monthly 
amount for each beneficiary they enroll. Competition among the expanded 
group of providers was expected to reduce expenditures and slow cost 
growth.
    Thus far, evidence supporting the expectations has been mixed at 
best. According to a recent GAO study, providers participating in 
Medicare+Choice continue to attract healthier and less costly 
beneficiaries.\6\ Reimbursement rates have, up to this point, been 
based on a formula adjusted for a participant's geographic location, 
age, sex, disability status and Medicaid eligibility. Since the 
reimbursement rates are not individually risk adjusted, providers have 
the incentive to screen patients and reduce their exposure to high risk 
patients. The patients who participate in the private plans have a 
lower cost than the average of patients in fee-for-service, yet 
Medicare+Choice providers receive the average cost. As a consequence, 
Medicare+Choice has increased, rather than reduced, Medicare costs.
    The BBA required the Department of Health and Human services to 
develop a risk adjustment methodology that accounts for variation in 
per capita costs based on health status and demographic factors for 
payment to Medicare+Choice organizations. In its current form, the 
adjustment factors are a function of age, sex, Medicaid eligibility, 
location, and inpatient diagnoses called the Principal In-Patient 
Diagnostic Cost Group (PIP-DCG). The risk-adjusting methodology 
improves upon the current methodology but can explain only 6 percent of 
the total variation in medical expenditures. Other risk-adjustment 
methodologies are being evaluated, but the GAO study concludes that the 
new methodology ``. . . may ultimately remove less than half of the 
excess payments caused by favorable selection.''\7\
    Reimbursing private providers based on preset risk-adjusted 
reimbursement rates will continue to induce providers to screen 
patients. This year, reimbursement rates vary by geographic location, 
age, sex, Medicaid eligibility, disability status and diagnostic cost 
group. Providers know beforehand how much they will receive for taking 
on each type of patient rather than being asked to price each of the 
risk factors themselves. An alternative to having HCFA establish risk-
adjusted reimbursement rates is a competitive bidding process in which 
suppliers bid for each type of patient.

                 THE RATIONALE OF THE PROPOSED REFORMS

    A basic idea behind Medicare+Choice and several Medicare reform 
proposals on the table are to adopt market-oriented approaches to 
achieve cost efficiencies. These cost-saving approaches have already 
been successfully adopted by numerous employer-sponsored health care 
programs and by the Federal Employees Health Benefits Program (FEHBP). 
All these programs are designed to make beneficiaries sensitive to the 
cost implications of choosing a particular plan. The demand side cost-
saving incentives will then induce providers to deliver medical 
services that are cost-efficient. Potentially more important, these 
same cost-saving incentives will eventually lead to a better balance 
between service-expanding and cost-saving medical innovations, slowing 
down the growth of Medicare costs in the long-run.
    In order to contain the accelerating costs of Medicare and to 
optimize its benefit package, we must go even further in modernizing 
Medicare's payment system by applying market approaches to cost 
efficiencies. This consensus can be seen from several leading proposals 
on Medicare reform (including the Breaux-Thomas proposal). In addition 
to benefit expansion, these proposals include the following payment 
side changes: (1) Fee-for-service modernization, which would enable the 
traditional Medicare to act as a prudent purchaser; (2) Medicare+Choice 
modernization, which would encourage plans to compete on costs as well 
as quality; (3) A premium support system fashioned after the FEHBP, 
which would make beneficiaries more sensitive to costs of care.
    In the following, however, I want to focus on two other issues 
related to Medicare's cost problem. First, what is the most sensible 
way to provide prescription drug coverage for Medicare beneficiaries 
when costs are currently a paramount concern? Second, I want to argue 
for the case of prefunding Medicare that takes advantage of the baby 
boom workers still in working.

                THE CASE FOR PRESCRIPTION DRUG COVERAGE

    A major purpose of the Medicare program was to offer senior 
Americans access to medical care. Yet an important part of current 
medical care, prescription drugs, are for the most part not covered by 
Medicare. As a result, only about two thirds of Medicare beneficiaries 
have prescription drug coverage (through employers' plans, Medicaid, 
Medigap and Medicare+Choice). Thus, while much of the Medicare reform 
discussion concerns cost containment, another major Medicare updating 
plan on the table proposes to make structural changes that add out-
patient prescription drugs to the Medicare program. For example, the 
Breaux-Thomas Medicare reform plan (and the earlier Breaux-Frist plan) 
proposes making coverage available for prescription drugs and 
catastrophic medical costs in a broader Medicare reform package 
featuring market solutions to cost efficiencies on the payment side. In 
contrast, the President's Immediate Helping Hand Prescription Drug Plan 
proposes temporary prescription drug assistance to the neediest seniors 
until a comprehensive Medicare reform plan including prescription drugs 
is enacted and implemented.
    There are convincing medical and economic reasons for adding 
prescription drug benefit as part of a reformed Medicare package. 
Indeed, it is hard to imagine that a modern medical insurance plan does 
not include outpatient prescription drug coverage as an integral part. 
Approximately 98 percent of private health insurance plans offer a 
prescription drug benefit or a cap on out-of-pocket expenses as an 
integral part of the benefit package. As a result of innovations on 
drug therapies, prescription drugs have been playing an increasingly 
important role in health care. According to the Health Care Financing 
Administration, Office of the Actuary, for the last several years, 
overall health care expenditures grew at about 5 percent annually while 
nationwide prescription drug spending grew on average at a much higher 
12 percent per year. Prescription drugs as a component of health care 
are even more important for the elderly due to aging-related chronic 
diseases. In 1995, as some studies show, an elderly person's total 
average annual drug costs were $600 compared with $140 for a nonelderly 
person.\8\

  PRESCRIPTION DRUG COVERAGE SHOULD BE BALANCED AGAINST COST CONCERNS

    While adding drug coverage to Medicare is important, it raises 
financing issues to a program whose future funding will strain even 
optimistic forecasts of future economic growth. At least one study 
suggests that incorporating outpatient prescription drugs into the 
Medicare benefit package could add between 7 percent and 13 percent 
annually to Medicare's total cost.\9\ The President's budget proposal 
for fiscal year 2002 includes $230 billion in expenditures on Medicare 
and, in addition, the President proposes an Immediate Helping Hand 
Prescription Drug Plan to offer low-income seniors prescription drug 
assistance and all seniors catastrophic drug coverage (more than $6,000 
in out-of-pocket drug costs) which entails spending $11.2 billion in 
2002 and $153 billion in the next 10 years.\10\ So even a prescription 
drug plan targeted only to the neediest would add a significant share 
(almost 5 percent) to the costs of the traditional Medicare program.
    While I believe the new drug benefit initiative featured in the 
President's IHH plan is carefully crafted to balance competing concerns 
about the sustainability of Medicare and the hardship faced by some 
beneficiaries, I do not think a plan providing universal drug coverage 
with no conditions about other reforms would be a financially 
responsible policy option. Adding full-scale drug coverage to all 
Medicare beneficiaries would effectively replace private sector 
financing with public financing. In 2001, seniors are expected to spend 
approximately $69 billion dollars on prescription drugs. This amount by 
itself is equal to 1.3 percent of taxable payroll.
    Moreover, as Figure 3 shows, the surge in prescription drug price 
inflation has coincided with the significant decrease in the share of 
prescription drug purchases that are paid by individuals. During the 
1960's and 1970's, prescription drug prices increased at an annual rate 
of just over 1 percent while third party payers covered only 16 percent 
of expenditures. Individuals paid the remaining 86 percent of the cost. 
For the last two decades the average annual increase in drug prices 
rose to 7.3 percent, as average third party coverage rates rose to 52 
percent. By 1998, third party payers were covering 73 percent of the 
cost of prescription drugs. Thus, without a comprehensive reform, 
adding comprehensive drug coverage will likely produce rapidly growing 
costs.


                     REFORMING MEDICARE'S FINANCING

    While most current reform initiatives are aimed at bringing 
competitive forces to bear on the provision of health insurance for the 
aged, little attention has been paid to insuring the solvency of 
Medicare. Over the last few years I have studied the feasibility of 
prepaying Medicare benefits. Medicare is financed on a pay-as-you-go 
basis which means that, for the most part, contemporaneous taxes are 
used to pay benefits. Further, the financing can be thought of as a 
transfer from the young to the old (including the 75 percent of SMI 
benefits paid by the Federal Treasury). Thus, the retirement of the 
baby boomers will cause severe problems for Medicare that are further 
exacerbated by the possibility that benefits may grow at a faster rate 
than the growth in the economy, necessitating transfers that grow as a 
share of the economy.
    A detailed presentation of the prepayment proposal can be found 
elsewhere, so I will briefly outline its main components here.\11\ The 
transition path we have studied is structured as follows. All workers 
born in 1946 and later would be in the prepaid system and all 
individuals older than 54 today would remain in traditional Medicare. 
Beginning today, individuals in the prepaid system would establish and 
fund a health insurance retirement account that at retirement would be 
sufficient to purchase health insurance for the rest of their lives. 
This may seem a tall task, and indeed it is, but it is important to 
initiate the transition now and take advantage of the earning power of 
the baby boomers while they are workers, rather than waiting until it 
is too late, when they become retirees and begin to draw benefits.
    In Table 1, I present the lifetime contribution rate on labor 
earnings required to prepay Medicare benefits assuming that per capita 
benefits grow at the rate of GDP per capita growth + 1 percent.\12\ I 
present the rates required of new labor force entrants to prepay 
Medicare benefits and those required to prepay a $2500 deductible 
policy. Recall that the prepaid program is phased in for individuals 
born after 1945, so any move to a higher deductible policy would not 
affect current or near term retirees. As the rates in the table 
indicate, prepaying the total Medicare package can be prepaid at rates 
that are less than the current payroll tax for the HI program by 
itself. At a 5.4 percent real rate of return, the contribution rate is 
2.68 percent and if the rate of return is 8.5 percent the contribution 
rate is 0.86 percent. In the following simulation, we allow the rate of 
return to decline as the accumulated funds in the health insurance 
accounts increase the nation's means of production. The 5.4 percent 
return is roughly the long run return on a portfolio comprised of 60 
percent stocks and 40 percent bonds. The higher 8.5 percent return is 
the pretax rate of return on nonfinancial corporate capital.\13\ This 
rate is the marginal product of capital and reflects the rate realized 
on the accounts if all taxes are waved. The lower rate of 5.4 percent 
is after corporate tax payments. In the simulation results, I use the 
pretax rate and implicitly assume that all taxes are waved on these 
accounts.
    We introduce the higher deductible policy to show the level shift 
in the cost of insurance. The lower cost is due to demand responses 
exclusively, even though as consumers face the full cost of care below 
the deductible, suppliers will compete for those first dollars 
resulting in lower prices. We estimate that contribution rates 
necessary to prepay the higher deductible policy are 2.27 percent and 
0.73 percent, at the 5.4 percent and 8.5 percent real rates of return, 
respectively.
    The Table 1 shows that the contribution rates for new entrants are 
low. However, the rates escalate for individuals who have fewer years 
remaining in the labor force. In the simulation path we have studied, 
workers pay for contributions to individual accounts for all 
individuals in the new system and for the Medicare costs of current and 
near term retirees. In each year the transition tax rate, or tax in 
excess of the rate that would be necessary without prepayment, is the 
same for all workers.
    Before turning to the simulation results I would like to point out 
a few favorable consequences of prepaying retirement medical insurance. 
The first I have already mentioned in passing is; prepayment increases 
the nation's capital stock. It can be shown that pay-as-you-go 
transfers reduce savings and the size of a nation's capital stock or 
means of production. With prepayment, that outcome is reversed; capital 
stock rises and so does income. The second consequence is that 
prepayment mollifies the effects of variations in generation size. 
Without prepayment, the baby boomer's retirement will result in a great 
burden on the taxpayers, necessitating high tax rates which have severe 
incentive effects. The final consequence is related to the higher tax 
rates. By prepaying benefits, future payroll taxes will be reduced, 
producing significant efficiency gains.
    Table 2 presents the simulation results. The first column shows the 
status quo Medicare tax rate. The rate is the ratio of Medicare 
expenses for the aged net of benefit payments divided by taxable 
payroll. We use taxable payroll as the denominator as an accounting 
metric, realizing that SMI is not financed by a payroll tax. This 
column shows the tax rate assuming no prepayment. The remainder of the 
table shows the results with prepayment. The initial marginal 
productivity of capital is assumed to be 8.5 percent . Contributions to 
the individual account are assumed to increase the capital stock dollar 
for dollar. As the capital stock rises, the marginal product of capital 
falls and wages rise.
    The higher wage base is used as the denominator in the next column 
titled forecast Medicare costs. The higher wage base results in lower 
tax rates. The next column shows the benefits paid from the prepaid 
accounts. The first of the baby boomers retires in 2011, so the prepaid 
benefits are zero until then. As individuals with prepaid insurance 
comprise an increasing share of retirees, their share of total benefit 
payments rise. By 2050 all of the benefits are paid from the prepaid 
accounts. The next column identifies the share of benefits that must be 
paid by tax revenues. These are the benefits of those who are born 
before 1946. As the column indicates, by 2050 these individuals have 
died and the tax requirement is eliminated. The aggregate prepaid 
account contributions are shown in the next column. Because the 
transition path being analyzed requires that all individuals born in 
1946 and later have prepaid accounts by the time of their retirement, 
the aggregate contributions are well above the rates shown in Table 1 
for new labor force entrants. Further, the long run rate of 1.24 
percent is above the 0.86 percent rate in Table 1 because of the 
decline in the rate of return earned on the accounts. The next column 
shows the transition cost. These costs are the taxes in excess of the 
taxes with no prepayment. Until 2018 the total cost of the transition, 
presented in the last column, exceeds the cost of the pay-as-you-go 
system. Figure 4 graphically depicts the forecast Medicare costs and 
the Medicare tax plus prepaid account contributions. For the first 18 
years the transition is more expensive than continuing with the current 
financing arrangement. Thereafter, the prepaid system is less 
expensive.



                           CONCLUDING REMARKS

    In order to contain the accelerating costs of Medicare, Medicare's 
payment system can be modified by applying market approaches to cost 
containment that have been successfully tested by numerous employer-
sponsored health care programs and by the Federal Employees Health 
Benefits Program. Consideration of prescription drug coverage should be 
balanced against this heightened cost concern. Besides reforming 
delivery of care, the rising cost pressures also makes a strong case 
for prepaying Medicare.

    TABLE 1.--LIFETIME CONTRIBUTION RATES AS A PERCENTAGE OF TAXABLE
                    EARNINGS FOR LABOR FORCE ENTRANTS
------------------------------------------------------------------------
                                                     $2,500 deductible
  Real rate of return      Medicare replacement           policy
------------------------------------------------------------------------
              5.4                     2.68                    2.27
              8.5                     0.86                    0.73
------------------------------------------------------------------------


                               TABLE 2.--SIMULATED TRANSITION TO PREPAID MEDICARE
----------------------------------------------------------------------------------------------------------------
                                         Benefits
            Status quo     Forecast      paid from     Benefits        Aggregate       Transition   Medicare tax
   Year    Medicare tax    Medicare       prepaid      paid from    prepaid account       cost      plus prepaid
               rate          costs       accounts    tax revenues    contributions                    accounts
----------------------------------------------------------------------------------------------------------------
   2000          4.17          4.17          0.00          4.17            2.71            2.71           6.87
   2010          4.66          4.58          0.00          4.58            2.30            2.30           6.87
   2020          6.45          6.22          2.94          3.28            1.63            0.00           4.91
   2030          9.14          8.70          7.12          1.58            1.31            0.00           2.90
   2040         10.88         10.30          9.94          0.36            1.25            0.00           1.61
   2050         11.90         11.25         11.25          0.00            1.24            0.00           1.24
   2060         13.77         13.05         13.05          0.00            1.24            0.00           1.24
   2070         15.91         15.28         15.28          0.00            1.24            0.00           1.24
----------------------------------------------------------------------------------------------------------------

                                ENDNOTES

    1. This growth assumption was one of the primary recommendations 
published in Review of Assumptions and Methods of the Medicare Trustees 
Report: Financial Projections, December 2000. My estimates are not 
adjusted for the age distribution of Medicare enrollees.
    2. Paying Social Security benefits to the elderly and to survivors 
in 2040 will cost 15.5 percent of taxable payroll. Combined with 
Medicare the costs will climb to 27.7 percent of payroll.
    3. On a related matter, faster introduction of young immigrants to 
this country may offer some help on the revenue side, but as some 
studies show, the scale of immigration that may generate a significant 
impact on Medicare and Social Security's financing is likely to be 
politically infeasible.
    4. See The Demand for Episodes of Medical Treatment in the Health 
Insurance Experiment, Emmit B. Keeler, Joan L. Buchanan, John E. Rolph, 
Janet M. Hanley, and David M. Reboussin, 1988, RAND Health Insurance 
Experiment Series.
    5. ``Effects of Supplemental Coverage on Use of Services by 
Medicare Enrollees,'' Sandra Christensen and Judy Shinogle, Health Care 
Financing Review, Fall 1997, pp. 5-17.
    6. Medicare+Choice: Payments Exceed Cost of Fee-for-Service 
Benefits, Adding Billions to Spending, August 2000, GAO/HEHS-00-161, 
General Accounting Office.
    7. GAO, p. 5.
    8. The first number is from M. Davis et al., ``Prescription Drug 
Coverage, Utilization, and Spending Among Medicare Beneficiaries,'' 
Health Affairs, Vol. 19, No. 1, 1999 and the second number is from 
Agency for Health Care Policy and Research Center for Cost and 
Financing Studies, National Medical Expenditure Survey Data, Trends in 
Personal Health Care Expenditures, Health Insurance, and Payment 
Sources, Community-Based Population, 1987-1995 (March 1997). http://
www.meps.ahcpr.gov/nmes/papers/trends/intnet4d.pdf
    9. M.E. Gluck, National Academy of Social Insurance Medicare Brief: 
A Medicare Prescription Drug Benefit (April 1999). http://www.nasi.org/
Medicare/Briefs/medbr1.htm.
    10. According to the President's IHH drug plan, Seniors whose 
incomes are at or below 135 percent of poverty would have no premium 
and nominal co-payments for prescription drugs. Seniors whose incomes 
are between 135 percent and 175 percent of poverty ($15,000 for a 
single person) would receive partial drug coverage.
    11. See the Economics of Medicare Reform, Rettenmaier and Saving, 
The Upjohn Institute for Employment Research, 2000, for a complete 
discussion of the proposal and for details of our methods.
    12. These results are based on a simulation model we developed 
several years ago. The growth rate assumption is relative to our 
projection of GDP. Medicare benefits are net of SMI premium payments.
    13. This rate is from James Poterba, ``The Rate of Return to 
Corporate Capital and Factor Shares: New Estimates Using Revised 
National Income Accounts and Capital Stock Data,'' NBER working paper 
no. 6263, 1999.

    Mr. Putnam. Thank you, Dr. Saving.
    Are there questions of the witnesses?
    Mr. Gutknecht.
    Mr. Gutknecht. Thank you, Mr. Chairman, and I want to thank 
the distinguished panel for coming here today.
    I would like to, first of all, tell a quick story. When I 
was in the State legislature, I remember I was on the 
subcommittee that dealt with the public employees' benefits.
    I remember just a number of years ago that there were some 
experts who came in one day, and they were so excited. They had 
a new idea for the health insurance program for the State 
employees.
    It was going to involve first dollar coverage. It was going 
to save us all kinds of money, because people would go in 
early, they would get treated faster, and it was going to save 
us money.
    I remember that day. I am not an economist, and it 
certainly is not an economist's term; but I said, there is 
unlimited demand for free stuff. I said, I do not really see 
how this is going to save us money.
    About a year later, those same people came scurrying back 
into the same room saying, we have got to make a change here. 
This thing is eating us out of house and home.
    I am concerned about that. I think, Dr. Saving, your chart 
here on prescription drugs is a very good one. I do think that 
part of what is driving the inflation in the prescription drug 
industry is the fact that an awful lot of Americans have some 
kind of prescription drug coverage, and do not really know how 
much prescription drugs cost.
    I say that, even with my parents. We were talking about 
this last year. I asked them how much they were paying for 
prescription drugs. They said, ``I think it is $4.'' They 
really did not know how much. They do not take that many drugs, 
but they were somewhat divorced from that.
    Dr. Wilensky, I came in late, and I am sorry, because I 
really wanted to hear all of what you had to say. You mentioned 
at least a little bit about prescription drugs. I think you 
said, and I do not want to put words in your mouth, but I think 
you said that we should be very wary of another BBA type fix, 
until we get real reform, structural reform, of the system, and 
I agree with you.
    Dr. Wilensky. I did say that.
    Mr. Gutknecht. Did you mention prescription drugs?
    Dr. Wilensky. What I said is, two strong recommendations. 
We need prescription drugs, but we need to have that done 
within the context of overall Medicare reform.
    I recommend not doing a standalone. Let us start with 
prescription drugs and get to reform when we get to it, I 
think, because of the financial fragility of the program, and 
the obvious ease with which it is to give benefits, relative to 
doing the kinds of other changes that are needed.
    So my two recommendations are these. Do prescription drugs, 
but only in the context of overall reform. If the Congress does 
not do prescription drugs and/or Medicare reform, do not use 
the money that has been set aside in the budget to increase 
provider payments.
    There was a rationale for the first two rounds, post-PBIA. 
But I think unless there is some clear problem that is not 
currently obvious, that should not be repeated.
    Mr. Gutknecht. Well, I really want to come back to this, 
because it does strike me that if we go with some kind of a new 
entitlement for prescription drugs, particularly under the 
current system that we have right now, with the patent 
situation, with the FDA, and so forth, this is an issue that I 
have learned more and more about, and the more I learn about 
it, the more troubled I am.
    I do not believe in price controls, but I do believe in 
free markets. We, in the United States, are really caught in a 
very difficult bind, as it relates to prescription drugs. That 
is that American consumers, those who are paying the full 
freight right now, are paying much, much more than any other 
consumer in the rest of the world, as far as I can determine.
    I really do think that we have got to look at ways that we 
can at least allow for more competition, even within the 
prescription drug industry. Frankly, we have got to get the 
doctors to participate in this.
    You know, in some respects, I believe they are part of the 
problem, because they have a tendency to want to prescribe the 
best for their patients, and I am not questioning their 
motives. But the net effect of this sometimes is to really make 
this problem even worse.
    The other problem that I was surprised to learn, and I do 
not think most Members of Congress know this, is that in terms 
of the generics, there really is not much difference between a 
generic drug and a brand name drug.
    As a matter of fact, I am told, and maybe you can correct 
me on this, that the difference between most generic drugs and 
the brand name drug is no different than one batch of the brand 
name drug and the next batch of that same brand name drug.
    Yet, in many, many cases, we could save countless numbers 
of millions of dollars, if we could simply get the doctors at 
least to consider more often prescribing the generic brand.
    But I do think the other part of it is, we have got to get 
at this price thing. You know, with the pharmaceutical 
industry, I am not out to get them. But on the other hand, in 
many respects, it certainly seems as it relates to American 
consumers, they have a license to steal.
    When you take commonly prescribed drugs that are selling 
for 10 percent of what we sell them for in the United States, 
in Europe, it really amounts to the fact that American 
consumers are subsidizing the starving Swiss. At some point, I 
think we have to say, we are not going to play that game any 
longer.
    Is there any comment on what we can do to create more 
competition, and help hold down the price of drugs? This is a 
great chart. I love this chart. I am going to steal it from 
you, and use it in some of my special orders.
    Dr. Wilensky. Let me give you one suggestion with an issue 
that you raised initially, which has to do with intellectual 
property protection.
    As a result of a number of pieces of legislation that were 
passed by the Congress in the last 16 or 17 years, there has 
been an almost effective doubling of the amount of time, on 
average, that a new chemical entity is patented.
    While I think we need to be careful to protect intellectual 
property, I am not suggesting that you do away with it. The 
series of changes have substantially increased the amount of 
monopoly control and power that exists. I think it may be time 
to go back and to see the effect that has occurred over the 
last 16 years, and to try to make sure that we have the right 
balance.
    Whether or not generics are substantially less, whether 
there is competition with other branded names varies very much 
by the type of compound. But you are clearly correct, we want 
to encourage competition. That means making sure that the 
monopoly power that is granted by the Government for particular 
new elements is the good tradeoff. We want the best tradeoff 
that we can have, and I think that is important.
    Secondly, you might need to help make sure that information 
is available, so that both physicians and patients understand 
when some of the new, more expensive compounds really provided 
added value.
    Information, of course, will not be enough. They need 
information, and you need to have economic incentives that 
encourage individuals, and through them, the physicians that 
they go to for service, to make sure that their economic 
incentives support appropriate use of new therapeutics.
    But I do think that reviewing intellectual property 
protection provisions is something that is probably ripe for 
Congress to consider.
    Dr. Moon. Could I just underscore what Gail has said, at 
the end, in particular?
    If we consider expanding prescription drug coverage to this 
population, the amount that it would take in additional funds 
to provide good, credible information to consumers would be 
rounding error.
    Consumers now only get their information from research 
largely funded by drug companies. They are, understandably, a 
little suspicious sometimes, when they hear certain kinds of 
information, or else accept unreliable information.
    What would be helpful, not only for Medicare, but for the 
private sector as a whole, would be good information, available 
from an independent entity, about when generics are totally 
safe and equivalent, and when they are not; when drugs within a 
particular class that are still under patent are largely 
equivalent or not. You might actually get some price 
competition, which is unheard of, across brand names, if you 
did that.
    All of the drug proposals that people are talking about 
usually have a 50 percent co-pay. Beneficiaries will be very 
well aware of the cost of drugs, as many of them already are.
    Dr. Saving. It is kind of interesting here, because I gave 
a speech on Friday in Dallas to the Chamber of Commerce. I was 
driving up there from College Station. I saw a lot of 
billboards. The billboards were advertising Lasik surgery. The 
biggest number on the billboard was the price.
    Now if you open up any magazine, and you will see ads for 
pharmaceuticals. Nowhere in that ad is the price mentioned. 
There is a reason for that. That is that the people buying it 
are not paying, and they do not care what it costs.
    If we can make people care what it costs, the drug 
companies are going to do a lot of this information for us. 
They are going to tell us what the price is. That is the kind 
of competition that we would like to see.
    We would like to see them doing what they do with Lasik 
surgery: advertise the price; tell us what the drug is going to 
cost; why we ought to be buying it instead of another one; and 
what its price is going to be.
    Mr. Gutknecht. Mr. Chairman, can I follow up?
    Mr. Putnam. You certainly may.
    Mr. Gutknecht. I am not really in favor of restricting 
advertising, although it does bother me, all the pharmaceutical 
ads that we see on television, today.
    You have just raised a very good point, what about the idea 
of saying, OK, you can go ahead and advertise all you want, but 
you have got to put the price in there? I mean, you do not have 
to necessarily respond, but it is something we maybe should 
think about.
    Dr. Wilensky. It is a very interesting idea to try to force 
the information. Again, I think you need two components. To get 
better information will help, but it will not be enough. But it 
is a very interesting idea, as the first step.
    Mr. Putnam. In fact, grocery store ads or drug store ads 
advertise nonprescription drug prices all the time.
    Dr. Wilensky. Right.
    Mr. Putnam. It is really the prescription system that makes 
this difficult. It is this deal between the doctors and drug 
companies that makes the price information less important. We 
need to break that, so that the drug stores who are advertising 
big, full-page ads in the newspaper are going to talk to us 
about the price of prescription drugs. But that will only 
happen if the buyers care what it costs.
    Further questions; Mr. Collins.
    Mr. Collins. Many of our seniors under Medicare or Medicaid 
take a sizable number of drugs, maybe five or six, and some 
even eight or nine.
    What do you think or what is your opinion of the consultant 
pharmacies who analyze how one drug may offset another drug, 
and come back with recommendations that oftentimes lead to a 
fewer number of drugs being taken?
    Dr. Wilensky. Well, the pharmacies and the pharmacists can 
provide important information to the extent that they are the 
single supplier of prescription drugs.
    One of the advantages in coordinated care/managed care 
plans is, there usually is somebody around who is looking at 
all of the therapeutics that are being prescribed.
    A pharmacist can provide that very important service. It 
really will vary in the community as to how likely the same 
person is to be providing that kind of information, or whether 
or not the information systems are connected.
    So there is an important service, in terms of whether there 
may be a drug interaction with regard to other things known 
about the individual. Whether or not the senior is likely to go 
to the same pharmacy for all of their prescriptions is a more 
complicated issue.
    Mr. Collins. Let me narrow it down a little differently, a 
little closer. In the nursing home, where a resident may, as I 
say, be taking a half a dozen different drugs, there is a 
consultant pharmacist, who will go into the nursing home and 
look at all the drugs that that nursing home is responsible for 
administering to that resident. Are you familiar with that 
program, and what is your opinion of that?
    Dr. Wilensky. I think when you have individuals who are 
receiving, and by the nature of being in a nursing home, you 
are having individuals with multiple dependencies, and that is 
typically why they are there, and they will be taking 
substantial numbers of pharmaceuticals.
    I am a trustee for the United Mine Workers Health and 
Retirement Fund, that funds the retiree benefits for 
individuals who average 80 years old. They tend to be a very 
old, frail population. They have very high pharmaceutical 
prescription drug use.
    As part of that program, they have brought in one of these 
pharmacy benefit management groups to try to work with the 
physicians and gerontologists to make sure the very high users 
are getting proper guidance, both to the physicians and to the 
individuals.
    I think that will mean to be careful about whether or not 
it would make sense to think about this, in general, on an 
average, for seniors; or whether there might be some special 
services for individuals who have extraordinary numbers of 
prescription drugs, who have catastrophic expenditures, to 
think about whether people who are in that category might need 
or benefit from some kind of case management, clinical 
guidance, however you want to call it, and who the right person 
will be. But I think the point that you are raising is a good 
one.
    I think the issue of who the right person will be is very 
important. One of my concerns is that sometimes in nursing 
homes, the nursing home pushes for certain kinds of medications 
to make the patients easier to take care of, to deal with 
incontinence, and that can cause problems, in other areas, for 
example.
    So one of the things that you also want to make sure is 
that when you are dealing with something like a nursing home, 
that it is not someone affiliated with a nursing home, who then 
is inappropriately coordinating certain kinds of drugs that may 
actually be harmful to the patient.
    One of the difficulties with any kind of program is that 
you would like to have good oversight, and make sure that 
people get good care, which is another reason why I think 
having some independent group that would have recommendations, 
could have some oversight authority, and could collect the 
information to provide it to individuals to say, you should be 
aware and worry about this kind of drug interaction.
    Mr. Collins. I caught the tail end of a news report the 
other day, and I have not been able to track it down. There was 
some study just recently that indicated that there was quite a 
duplication in medication, which added quite a bit to the cost. 
So that is where I was coming from.
    Dr. Wilensky. This also causes clinical problems, as well, 
for individuals who have direct drug interactions; particularly 
for individuals who take a lot of pharmaceuticals, or who have 
a lot of complicating illnesses.
    Mr. Collins. I thank each of you for being here today.
    Thank you, Mr. Chairman.
    Mr. Putnam. Thank you, Mr. Collins.
    Mr. Kirk.
    Mr. Kirk. Thank you, Mr. Chairman.
    Dr. Wilensky, you are highly experienced in all things 
HCFA. I am wondering if you could tell me if there is an 
automatic and associated cost with removing the reimbursement 
rates under Medicare, that are currently calculated on a county 
by county basis? If we went to MSAs, does that necessarily cost 
us anything?
    Dr. Wilensky. It would not necessarily cost you anything. 
You could have a budget-neutral calculation, that would have 
the Federal Government spending exactly as it spends now.
    Mr. Kirk. For you, and I ask you more as an outside 
witness, as a political judgment, is that possible to do?
    Dr. Wilensky. It is possible. We have just been struggling 
with this on the Medicare Payment Advisory Commission. Let me 
tell you our recommendation and why.
    We have been uneasy in urban areas about going to an MSA, 
because we think that the counties may have some substantial 
differences of what may be five or six counties within an MSA. 
There are tradeoffs of getting into the larger unit; but on 
balance, the Commissioners decided against it.
    Where we do recommend going to a larger grouping than now 
exists is for the rural or small urban areas, where we think 
the current configuration provides unstable estimates, and 
estimates that vary in ways that do not make much sense.
    So our recommendation is that the Secretary consider larger 
groupings that would provide stable estimates of spending in 
the non-heavily urbanized areas; but on balance, to stay with 
the county for the urban areas.
    However, we recognize that there are tradeoffs that you get 
into. You will then have reimbursements differ, in terms of 
adjacent areas.
    Mr. Kirk. I represent a community that is all above 
suburban Chicago. The communities 20 miles north of the county 
line are just as suburbanized as those below.
    What you are saying is, you recommended against solving 
that problem. Right now, health care is radically different on 
one side of road, in a community that is no different than the 
lower part.
    Dr. Wilensky. Also, we had recommended that in instances 
where there is reclassification, which has been used to try to 
smooth out some of the differences, that it be done in a way 
that recognizes it does not leave whatever is left behind in 
the areas around that reclassified hospital, et cetera, that 
they not be hurt by that. So we think that there are ways, if 
there are particular problems that exist, for a hospital in an 
adjacent area.
    I do not want to say that there are problems that we do not 
solve. We think, on the other hand, we will take an area, and 
pretend as though the four or five different areas within the 
metropolitan area, and we happen to be now in Washington, in an 
area that is a five county MSA. There really are some 
substantial differences in the five counties that make up the 
Washington MSA.
    So you need to decide which way you think you solve more 
problems than you create.
    Mr. Kirk. Right, and I would just say, in Chicago's case, 
in the difference between Cook and Lake County, Chicago has 
long ago broken out of the bounds of Cook County. I have now 
got census projections of 350,000 people moving the Lake 
County.
    So this is only going to get worse. I think we need to 
address the large groupings, because right now, you have got 
Medicare recipients in communities that are identical, who are 
treated differently.
    Dr. Wilensky. Are you talking about treated for purposes of 
HMOs, or in terms of how the institutions are reimbursed?
    Mr. Kirk. HMOs.
    Dr. Wilensky. Well, that really raises a somewhat different 
issue. Let me try to be clear. Certainly, Mr. Nussle is not 
here now, but Iowa is a State that is affected by this.
    We are very aware of the different premium payments that 
occur to HMOs, as a result of Medicare, the Medicare Plus 
Choice payments. We tend to ignore, all of us, that spending on 
behalf of the senior, under traditional Medicare, which is 
where 87 percent of the seniors are, varies even more now than 
the HMO payments vary. But we do not tend to think we should do 
anything about that. That is why we get these variations in HMO 
payments.
    Now the Congress has gone in and set various floors that do 
not let the payments fall as low as they do in some of the 
urban and low-cost counties.
    I misunderstood the question that you were asking me. We 
have a real problem in Medicare, in that it is a national 
program, but spending by the Government on behalf of seniors 
varies all over the map. A lot of it has nothing to do with 
either the health of the senior or the cost of providing health 
care services. It has to do with how health care is provided 
and how health is demanded.
    If we want to seriously look at that issue, which I would 
encourage the Congress to do, we need to think about the 
variation that occurs in traditional Medicare spending, and 
think about how we want to try to affect those kinds of 
variations.
    To only look at what goes on in the Medicare Plus Choice 
plan is to focus all our concern for 13 percent of the 
population, when exactly the same problem is going on for the 
87 percent in traditional Medicare.
    Again, if these are areas where you would like to have any 
additional discussions with myself or staff at Medpak, we would 
be glad to share with you some of our thoughts.
    Mr. Kirk. I absolutely need that, because I will tell you, 
it is a burning issue in the 10th District of Illinois.
    I have one last question for Dr. Saving. This is on your 
assumption of Medicare, your famous Figure 1 here. Is it at all 
reasonable to assume that the expenditure growth rate will be 
GDP plus one?
    Dr. Saving. Yes, I think it probably is, as a matter of 
fact. It is based, if we were using economics terms, on the 
fact that health care, especially for the elderly, is a 
superior good. What a superior good is, it is good; where when 
their income goes up, they spend a greater share of their 
income on it.
    Now you ought to note that that does not mean that they are 
spending less on other things. It just means they are spending 
a smaller proportion of their income on other things.
    So it is not the case, assuming that it is going to go up 1 
percent greater than GDP, that it means that it will, at some 
point, in some limit, be all of GDP, because it will not be.
    Mr. Kirk. Right.
    Dr. Saving. It will never be all of GDP. Everything else is 
also growing.
    Mr. Kirk. It would seem to me, a more dynamic model would 
make sense; since the previous year's growth was 4.7 percent, 
that this would level out over time, as we get into a higher 
percentage point, rather than just be at a straight 1 percent 
growth, which has an enormous impact on the general revenue 
demands that Medicare has.
    Dr. Saving. Well, the revenue part does not have any impact 
on the cost part, yes.
    Mr. Kirk. Right.
    Dr. Saving. But if it is true in health care and it appears 
to be the case, and of course, some of that is probably driven 
by the institution that we have set up, which encourages the 
research to be not cost-reducing, but to be new technique 
developing, because that is where the money is.
    If you are going to develop new techniques, then we are 
going to find new ways to replace all our body parts that are 
wearing out, and that is really where this is coming from.
    What I have done here is simply take the technical panel, 
and I have read the technical report, and I agree with them 
that health care, at this point, is a superior good. Your 
question really is, are we ever going to have technology that 
is going to change this? That may be the case, and it may 
happen if we change the institution.
    But the current institution simply ensures that the 
technological developments are going to be ones that are going 
to increase expenditures.
    The technical panel really based their recommendation on 
that fact. They are saying, there is nothing in the offing that 
is going to change that.
    Mr. Kirk. Thank you, Mr. Chairman.
    Mr. Putnam. Thank you, Mr. Kirk. I especially appreciate 
your questions on the inequities of reimbursement rates, 
because it is a burning issue in the 12th District of Florida, 
as well.
    The gentleman from Kentucky, Mr. Fletcher.
    Mr. Fletcher. Thank you, Mr. Chairman, and thank you all.
    We have had several committee hearings going on at the same 
time. We are dealing with education, so forgive me for not 
getting in earlier, but thank you for coming and for your 
presentation.
    Dr. Wilensky, I wanted to ask you a few things. First off, 
I want to thank you for all the work you have done in the past, 
your expertise.
    Dr. Wilensky. You are welcome.
    Mr. Fletcher. I have been able to visit with you at several 
conferences. Anywhere there are experts on health care, you 
seem to show up. So thank you for all the work you have done.
    I understand that on your testimony here, that you support 
the reform model after the Federal Employee Health Benefit 
Plan. Let me ask you under that, if you would describe the 
similarities between the Bush Medicare reform proposal and what 
benefits we receive, as Members of Congress.
    Dr. Wilensky. Well, the administration has not come forward 
with the proposal that they will make the Congress for long-
term reform.
    What I have done is to take what was part of the campaign, 
where there was more detail in the proposal that was in the 
campaign, and also the principles that are part of the budget 
that was just submitted, and to indicate that they are 
consistent with that.
    So without wanting to tie the administration's hands in 
terms of what they will be submitting, they idea would be to 
have a choice of health care plans available to seniors, as is 
the case under the Federal Employees Health Care Plan.
    I certainly presume that traditional Medicare will continue 
to be a part of the offerings that are there. What will be 
important is to make sure that, unlike the Federal Employees 
Health Care Plan, where there is no risk adjustment, it is 
important to have risk adjustment for seniors.
    It is not that the problem is not present for the under 65, 
but both the absolute level is so much higher, and the 
likelihood of torpedoing plans, if there is not risk 
adjustment, is greater in terms of the Medicare Plus Choice 
plans.
    A lot of technical issues about how to try to make sure, 
particularly in the short term, as we are deciding exactly how 
to do risk adjustment, and whether or not to do some partial 
capitation or other strategies, that reduce some of the 
financial risk, to protect some of the frailest seniors that 
are around.
    But like the Federal employees, there would be an annual 
enrollment. Like the Federal employees, information would be 
provided by the Government. Presumably like the Federal 
employees, there would be a cottage industry that develops, 
that provides even better information about what to expect from 
plans, given certain kinds of health patterns.
    It would allow seniors to have choices between the 
traditional Medicare and other kinds of health care plans. It 
would be a fundamentally different dynamic than exists now, 
because the contribution made by the Federal Government, by 
Medicare, in terms of the dollars to cover the premiums, would 
not vary with the cost of the plan.
    That is generally the distinguishing characteristic of the 
Federal Employees Health Care Plan. It is what changes the 
whole economic dynamics over what exists today.
    While I think there are a lot tinkerings that you could do, 
that the Congress could do, in terms of applying this principle 
to Medicare, it is the notion of having the amount contributed 
by the Government vary by house status or by age or by cost of 
living index; but not by the cost of the health care plan that 
the individual chooses. That is really what drives the 
different behavior.
    Mr. Fletcher. You were discussing earlier, from one of the 
questions, the disparity that exists between different regions 
and the AAPPCs, and particularly Medicare Plus Choice. You are 
saying that that value, I assume, was actually derived from 
probably expenditures that were done in those regions.
    Dr. Wilensky. Exactly.
    Mr. Fletcher. Yet, I am not sure that any studies show that 
the health care in those regions, or when you are looking at 
the experience rating in those, as far as matching 
demographically that the care or morbidity mortality is much 
higher in folks that are using a lot less money.
    What kind of disparity do we have on private insurance, 
related to Medicare, in a regional way? Does it correlate with 
that? Is it a practice, just among geriatrics?
    Dr. Wilensky. No, this is an area, a term of art that you 
may have heard, called variations in practice style. Dartmouth 
puts out an atlas, if you want to see how large these 
variations are, in how health care is delivered, and how 
medicine is practiced.
    There was an article in the Wall Street Journal a while 
ago, indicating the very high likelihood of an individual 
having a bypass procedure, or having other procedures, in some 
particular counties, and I think it was in Texas, relative to 
other areas, which appear to have people who looked very 
similar, in terms of their health and age profiles.
    It is a phenomenon that we have known existed, and probably 
we have known about it for the last 30 years. There seem to be 
very different ways of practicing medicine. It has to do with 
the individual that is doing the practice, and not the health 
status of the patient.
    It has to do with uncertainty about the symptoms and about 
the right procedures, given the symptoms. It is an issue that 
exists in the under 65 and the over 65, and exists in the 
Medicare population, as well as others. So it is something we 
know about.
    Mr. Fletcher. I think it brings this up, as efforts have 
been made to try to level the disparities between different 
regions, that it really is going to have to get back probably 
to the practice of making sure that we are using best 
guidelines or whatever.
    Let me ask you, as we are running out of time here, one 
question. Given the institute of medicine reports on quality, 
and the fact that reimbursal does not allow providers much 
venture capital to invest in the information technology, and 
you need to really go more digital in medicine, what 
recommendations would you have, and are there some things we 
can do to begin in that direction, because we really, compared 
to other industries, are pretty archaic?
    Dr. Wilensky. I think there are a couple of things that 
could be done. The first is, I am not convinced that the 
medical profession, the people leading many of the hospitals 
and other institutions really believe that high quality costs 
less. We hear that, as a general dictum.
    But when you look at how money is invested, it is not clear 
that either we know how to do that, or that they believe what 
is generally, in other sectors, to be true. One of the real 
questions is, is it not convincing; why does this not happen? 
There does seem to be a disconnect.
    In some of the payments, it may be that how the payments 
are made are too prescribed in terms of what they can be used 
for. That is clearly not in anybody's interest.
    Making sure that there is information available about what 
works and how it works, and why this is important, I think, is 
an important part.
    But getting the patients to demand the kind of information 
that they should be demanding, as smarter patients and 
consumers, to recognize that these are issues that they ought 
to be concerned about as patients, is important.
    Having reports like the Institute of Medicine make it clear 
how sophisticated health care is, in some aspects, in terms of 
what we do to people in terms of procedures, and how 
unsophisticated health care is, in other aspects, in terms of 
making use of the information and technology; and putting in 
place the kind of fail-safe procedures that are so much a part 
of the airlines, or so much a part of other sections has not 
happened.
    Trying to help get that structure in place is certainly 
something that the Congress, working with groups like the 
Institute of Medicine, could help foster.
    Mr. Fletcher. Thank you, Dr. Wilensky.
    Mr. Putnam. Thank you, Mr. Fletcher. Before you have to run 
off, I need to get your consent that all members have seven 
legislative days to submit written statements to be printed in 
the record. Do you object?
    Mr. Fletcher. I have no objection.
    Mr. Putnam. Thank you, sir.
    Let me ask two questions and then we will wrap this up. 
According to a recent survey, 46 percent of the Nation's 
uninsured have incomes above 200 percent of poverty level.
    Knowing that, to what extent will health care credits to 
the poor really affect the number of uninsured in this country?
    Dr. Wilensky. It depends how the health care credit is 
structured. I think the refundable tax credits that we have 
talked about for health care, that the President had proposed 
during the campaign, and we will see whether that is exactly 
the structure of what is proposed to the Congress will very 
much help the low middle income people; those, say, at 150 
percent of the poverty line, 200 percent of the poverty line, 
and above.
    Whether or not the kind of refundable credits that have 
been discussed, at least in the past, will help those below the 
poverty line, who are about one-third of the poor, is a 
different issue.
    Recognizing that there are differences in those who are 
uninsured, they are a section that are very poor, a group that 
are low middle income; then, as you said, almost half that are 
close to the median family income in the United States that is 
about 200 percent of the poverty line, these are individuals 
who might be much more susceptible, if they are to buy 
insurance, if they are provided some tax subsidies.
    If you only limit your help to people who are poor, below 
the poverty line, or just above the poverty line, obviously, 
there will be substantial numbers of people, who will not get 
any assistance.
    Mr. Putnam. Dr. Moon.
    Dr. Moon. I also believe that for low income individuals, 
it may not be the best policy to provide refundable tax 
credits. There are many problems that arise concerning when you 
give them the refund: do they get it right away; do they get it 
beforehand? Is there a reconciliation that occurs at the end of 
the year, if their income goes up, so that they have to pay 
money back?
    There are a lot of problems when you are dealing with a 
vulnerable low income population, that suggests to me that tax 
credits may not be the way to go.
    Tax credits would be more helpful for the people at 200 
percent of poverty and above, rather than the other way around.
    Dr. Saving. I agree mainly, I think, with Gail, and that is 
that it is going to help people well below the 200 percent 
level.
    But the other issue is to understand why a number of people 
are uninsured. A lot of the uninsured have to do with the fact 
that we are pricing insurance not risk-adjusted properly, and 
these are younger people, on the average. Younger people are 
healthier people.
    If they are going to have to pay, for example, like a 
single male, who is going to have to pay for health insurance 
that covers pregnancy, he is not likely to get pregnant. He is 
going to have to pay for that insurance. He is going to 
subsidize the older people like me. To the extent that he wants 
to pay that subsidy, it is too big a subsidy.
    If insurance were priced totally risk-adjusted, I think we 
would see far fewer people uninsured. Catastrophic insurance is 
all we really care about anyway, for these people, probably. 
They should have that. If it were totally risk-adjusted, it 
would be very inexpensive.
    I think these tax credits go a way toward doing that. But I 
think you would want to take away, probably, the tax benefit 
that firms get, or that people who work at firms get. You 
actually would want to give them this refundable tax credit, 
but also charge off the insurance that their firm gives them, 
and make that ordinary income.
    Now that would allow outside insurance to compete with the 
firms operating on their own insurance. I suspect, though, that 
that system would very quickly take the firms out of the 
insurance business; because right now, they are self-insuring, 
and basically farming out the paperwork to insurance companies. 
They farm out the paperwork, and they would get out of the 
insurance business.
    Then, health insurance would be portable, instead of what 
we now have. It would be like automobile insurance. I think 
that is a far superior thing to what we are doing. We are 
probably going to move in that direction.
    But with these tax credits, and then the combination of 
that and taking the health care benefit that firms give, and 
declaring it to be ordinary income to workers, at that point, 
they get the tax credit back by either buying health insurance 
from their firm, or buying it outside; but they get the same 
impact.
    So there is no benefit to buying it from the firm, 
particularly. I think we can change the whole industry in that 
way.
    Mr. Putnam. Thank you. I would also ask for your 
observations on community health centers, and what impact they 
have on helping to address a certain demographic population, 
and reduce the number of uninsured, or reaching the needs of 
those who may be uninsured.
    Dr. Wilensky. If I may, I would like to respond to that. I 
think that doubling the number of people served by community 
health centers, and making a substantial investment in their 
structures is a very good addition to the infrastructure, 
particularly if it results in coordination with the hospitals 
and academic health centers, or secondary and tertiary 
hospitals, that these individuals will receive.
    Texas has done that. The University of Texas system has 
worked with the community health centers. What it means is that 
individuals going from primary care, that they are received in 
the community health centers, into the hospital, and then back 
to the primary health care center, and have their records go 
back and forth with them.
    We need to recognize that in many parts of this country, 
particularly in areas that have large rural areas, very low 
population density areas, that there may be some difficulty in 
building the kind of health infrastructure that exists 
elsewhere. For some individuals, having an insurance card, per 
se, may not be enough.
    This is a way, both because there will remain people 
without insurance coverage, and because, for at least periods 
of time, there is unlikely to be the facilities and individuals 
available in some parts of the country, that investments in 
community health centers can be very helpful. But they do need 
to have coordination with where the individuals receive 
secondary and tertiary care. Otherwise, the fragmentation can 
result in both more spending and less good health care than we 
could have.
    So I think it is a promising way to go, and I hope that the 
Congress gives it favorable consideration.
    Mr. Putnam. Dr. Moon.
    Dr. Moon. Community health centers are a good idea to fill 
in the gaps. They help serve people in areas where they would 
have trouble getting other health care providers.
    But the amount of money that is being talked about, at $125 
million, to expand community health centers is barely a drop in 
the bucket. Remember, we are talking about 45 million or 44 
million uninsured. That is about $3 a person, so you are not 
going to stretch it very far, unfortunately.
    Mr. Putnam. Dr. Saving.
    Dr. Saving. I think this is a good idea, because for people 
who are uninsured, it is not as if they do not have access to 
care. Unfortunately, many of them, of course, use the emergency 
room as their ordinary physician.
    To the extent that you can coordinate this, and move these 
people out of the emergency room and move them into ordinary 
clinics, you can perhaps save money, under the current 
institution.
    Now another institution, which would have fewer of these 
people uninsured, and I would say the right kind of risk 
pricing for the insurance, could make these people not 
uninsured.
    That would solve a lot of this problem. Then they would not 
take the emergency room, because the emergency room would be 
hugely expensive. The reason they take it now is, it is cheap. 
We have to change the relative prices.
    Dr. Moon. Could I add something? I am very concerned about 
pricing insurance so that we divide it up with the healthy 
paying a low price, and the unhealthy paying a very high price.
    The whole idea of insurance is the pooling of some risks. 
You need to balance this goal, because you do not want to price 
insurance so high that very healthy young people do not see any 
reason to buy insurance.
    But I am very concerned that what could happen if we moved 
in that direction, would be to reduce uninsurance for those who 
are not going to use much health care, and raise uninsurance 
for sick people who need health care.
    All you have to do is look at the private market now, that 
allows ``cream skimming'' where insurers decide who they take 
or not. It is not a pretty picture.
    Dr. Saving. No, but they ``cream skim'' because they are 
pricing at the average. If you are risk adjusting, then they 
would not be ``cream skimming.'' They would like the sick 
people, just as well as the healthy people.
    The problem with what you have here is that somebody who is 
chronically ill, we are not talking about insurance. That is 
the person whose house the hurricane has already taken out. If 
we rebuild his house, that is welfare. That is not insurance.
    So when you take people who are sicker than other people, 
and try to give them the same prices as the well people, what 
you are doing is giving them welfare. So we should just call it 
welfare.
    Let us not trick ourselves into thinking that is insurance 
and that is risk sharing. That is not risk sharing, because 
these are already past outcomes. Risk sharing is about the 
future.
    So you take someone who has sick level A, and you say, I am 
going to insure you for the future, in case you get sick level 
F. But what I am going to do is charge you, based on the fact 
that you are now sick level A, and what the probability is that 
you are going to become sick level F.
    That is insurance. Anything else is welfare. We can do that 
in the Medicare area by making the support we are going to give 
for individuals risk based, in this system in which they would 
go out and then buy insurance. They are going to get support 
that is risk based.
    Anything else is welfare, and we should not try to call it 
insurance. It is spreading risk.
    Mr. Putnam. Dr. Wilensky.
    Dr. Wilensky. It is possible that if you were to move to a 
system, as one that Dr. Saving describes, where you would have 
a so-called experience rating, and it would be based on 
expected use, you could make payments after the fact, for 
people who you believe are overly burdened by the kinds of 
premiums that they would face.
    You do not necessarily have to try to force this mixing of 
risks, up front. It does raise the possibility, as we think now 
exists, that some individuals who would be willing to buy a 
risk-based insurance policy that would be low, because in fact 
they are low users and low expected users, would say, no 
thanks, because of the amount they are being asked to 
subsidize.
    So you can subsidize people who have expected high 
utilization and expenditures. You do not have to just say, 
well, that is your tough luck. You can do it after the fact, 
when you see the kinds of premiums that people have to pay.
    So I would like to make it clear that if you are worried 
about whether or not this is an unfair burden, there are other 
ways to handle to the problem, than to just force a pooling 
that goes on, up front. That is probably a discussion for 
another committee hearing, though.
    Mr. Putnam. Thank you. Thank you, Dr. Wilensky, Dr. Saving, 
Dr. Moon. We appreciate your being here.
    I want to thank all the hearty members of the committee, 
who stuck it out to the end, and all the members of the 
congressional staff and the audience, who sat through this as 
well, and participated in ``take your son to Congress and let 
him Chair the meeting day.''
    I, again, thank the witnesses. Without any further 
business, the hearing is adjourned.
    [Other materials submitted for the record follow:]

PREPARED STATEMENT OF HON. ANDER CRENSHAW, A REPRESENTATIVE IN CONGRESS 
                       FROM THE STATE OF FLORIDA

    Thank you, Mr. Chairman, for holding this hearing on the 
President's FY2002 budget request for the Department of Health and 
Human Services. And, thank you, Secretary Thompson, for joining us 
today to discuss the programs that--along with education--form the 
heart of the President's compassionate conservative agenda.
    Mr. Secretary, you know better than almost anyone the great success 
that comes from a true partnership between the Federal Government and 
the States. This is as true for welfare reform as it is for Medicaid 
and education. The key is giving States flexibility to implement the 
kind of reforms that work best within their borders.
    When I was in the Florida Legislature, I often had the opportunity 
to meet with my counterparts from other States and to study their 
proposals and programs. We were all facing similar problems--how to 
provide access to quality health care for low-income families; how to 
stop children from having children and end the cycle of dependency on 
welfare; and how to improve the prospects for children who awoke 
everyday with no hope for a bright future. But, we all had different 
ideas about how to solve these problems.
    It wasn't that one idea was right and the other wrong, or even that 
one idea was better than another. But, what works in Florida doesn't 
necessarily work in Wisconsin. To be sure, we can learn from each 
other, but States need the ability to craft the programs that suit 
their populations best.
    This is why I am so very encouraged at your stewardship of the 
Department of Health and Human Services, Secretary Thompson. You know 
that a Federal cookie cutter approach to Medicaid, welfare, and other 
social service programs doesn't serve the country well. I look forward 
to working with you on these important programs.

 PREPARED STATEMENT OF HON. GARY MILLER, A REPRESENTATIVE IN CONGRESS 
                      FROM THE STATE OF CALIFORNIA

    Mr. Chairman, I want to thank you for holding this hearing. I look 
forward to listening to the testimony and responses from Secretary 
Thompson before this committee.
    I was delighted to hear the remarks of the President in his address 
last week, and am pleased with his priorities outlined in the budget 
blueprint. I am excited to see the President is thinking outside of the 
box when it comes to providing for the general welfare of the American 
people. I would encourage the President to continue searching for ways 
to use state and local government, as well using as private 
organizations as resources to help in this task.
    I would like to hear more about some of the new initiatives 
proposed by the President. In particular, I am interested in the 
``Immediate Helping Hand'' prescription drug benefit proposal. I also 
am interested in initiatives to help strengthen families such as the 
``After School Certificates'' and ``Promoting Responsible Fatherhood'' 
programs. I believe that strengthening the family is the only way to 
decrease dependency on government services.
    I am also pleased to see that this President is willing to reform 
areas with real policy instead of chasing problems with more money. 
Whether its reducing bureaucratic hurdles for patients and providers, 
redirecting one-time spending, or targeting selected programs for 
reduction, I know there are places in which we can decrease the size of 
government, while protecting its effectiveness. I look forward to 
working with the President in finding areas where the Federal 
Government can become more efficient.
    Again, I want to thank Secretary Thompson for being here today and 
discussing the President's budget with this committee. I yield back the 
remainder of my time.

 PREPARED STATEMENT OF HON. ADAM PUTNAM, A REPRESENTATIVE IN CONGRESS 
                       FROM THE STATE OF FLORIDA

    Mr. Chairman, I am looking forward to working on this committee and 
with our President to begin the work to reform the Medicare program. 
Primary concerns of mine as well as my constituents are the need for 
prescription drug coverage for all seniors and the lack of Medicare 
HMOs in my district and throughout rural America.
    When I was in Florida's State Legislature, I co-sponsored the 
Prescription Affordability Act that extends coverage to seniors up to 
120 percent of the poverty level and requires pharmacies to sell 
prescription drugs at Medicaid rates. As we work on including 
prescription drugs in a reformed Medicare system, it is of utmost 
importance that those seniors with incomes above poverty level are also 
remembered in a prescription drug program. Because of the high cost of 
prescription drugs, many seniors are ineligible for help, yet 
struggling to make ends meet and afford their prescriptions.
    I have studied President Bush's ``An Immediate Helping Hand'' plan, 
and agree that an interim program could greatly benefit many of the 
neediest seniors until Congress completes long term Medicare reform. 
The President's proposal of $153 billion over the next 10 years to 
provide prescription drugs to these needy seniors is vital. Of extreme 
importance, however, is to remember those seniors that cannot afford 
their daily living expenses and the high cost of prescription drugs. 
For those seniors unable to afford the high cost of prescription drugs, 
implementing the President's plan to provide Medicare health care plans 
that provide the option of purchasing prescription drug coverage is a 
necessity.
    Rural areas across the nation do not have access to Medicare HMOs 
due to funding. This is true in areas in my district as well. In 
Florida's 12th District, I represent counties adjacent to one another 
with similar characteristics. One county has availability to Medicare 
HMOs, while the other has no access. As the reforms for Medicare begin, 
suburb and rural areas across the nation that cannot attract quality 
providers because of low reimbursement rates must be considered. A 
county line is not a sufficient distinction between areas to determine 
the ability for an area to have access to these health care options. 
Exploring innovative ideas such as Medical Savings Accounts or 
aggressively pursuing waivers to allow residents in non-served areas 
access to the services covered by Medicare HMOs in other counties are 
possible options.
    As we consider the budget for Medicare reform, it is vital that we 
consider the impact it will have over the next 50 years, not just the 
next fiscal year. We need to develop a generational consensus on 
ensuring that Medicare will be available to the retiring seniors of 
today, for baby boomers and beyond. I intend to be involved in this 
process.
    I thank the Secretary for his thorough outline of the 
Administrations proposal for Health Care reform and I thank to Dr. Gail 
Wilensky, Dr. Thomas Saving, and Dr. Marilyn Moon for their thoughts as 
well. I look forward to being a part of modernizing Medicare to 
accommodate the changing needs of seniors today, and the seniors of 
tomorrow.
Testimony for the Record by the Advanced Medical Technology Association
    AdvaMed is the largest medical technology trade association in the 
world, representing more than 800 medical device, diagnostic products, 
and health information systems manufacturers of all sizes. AdvaMed 
member firms provide nearly 90 percent of the $68 billion of health 
care technology products purchased annually in the U.S. and nearly 50 
percent of the $159 billion purchased annually around the world.
    AdvaMed strongly supports the President's commitment to the 
Medicare program and medical research. With great interest, we note 
that President Bush's budget blueprint states that ``Medicare is not 
adapted to 21st Century medicine. Medicare is often too slow to 
incorporate technologies and methods of delivering care * * * As in 
virtually all fields, technological and entrepreneurial innovation are 
among the keys to creating more value for the dollar in health care.''
    We strongly agree that Medicare should be encouraged to capitalize 
on advanced technologies, which have revolutionized the U.S. economy 
and driven productivity to new heights and new possibilities in many 
other sectors. Significant advances in health care technologies--from 
health information systems that monitor patient treatment data to 
innovative diagnostics tests that detect diseases early and lifesaving 
implantable devices--improve the productivity level of the health care 
delivery system itself and vastly improve the quality of the health 
care delivered. New technologies can reduce medical errors, make the 
system more efficient and effective by catching diseases earlier--when 
they are easier and less expensive to treat, allowing procedures to be 
done in less expensive settings, and reducing hospital lengths of stays 
and rehabilitation times.
    AdvaMed applauds Congress for the steps it took in the Balanced 
Budget Refinement Act of 1999 (BBRA) and the Benefits Improvement and 
Protection Act (BIPA) of 2000 to begin to make the Medicare coverage, 
coding and payment systems more effective and efficient. In addition, 
the Health Care Financing Administration (HCFA) has recently made some 
changes to modernize its coverage and payment systems.
    Despite these efforts, however, current policies still fail to keep 
up with the pace of new medical technology. Serious delays continue to 
plague the amount of time it takes Medicare to make new medical 
technologies and procedures available to beneficiaries in all treatment 
settings.
    As Cliff Goodman from the Lewin Group testified at a March 1st 
hearing in the committee on Energy and Commerce, Medicare delays can 
total from 15 months to 5 years or more because of the program's 
complex, bureaucratic procedures for adopting new technologies. Keep in 
mind that all this is after the two to 6 years it takes to develop a 
product and the year or more it takes to go through the Food and Drug 
Administration (FDA) review. In addition, these delays are even more 
pronounced when you consider that the average life span of a new 
technology can be 18 months.
    The impact on patients has been dramatic. As physician witnesses 
testified on March 1st, cancer patients have had to fight for years to 
get Medicare to cover positron emission tomography, a potentially 
lifesaving scanning technology that has been broadly available to 
people under private health insurance for a decade. In addition, tens 
of thousands of seniors and people with disabilities have not been able 
to receive advanced technologies like coronary stents (which reopen 
blocked arteries), cochlear implants (which restore hearing) and heart 
assist devices (which keep patients alive while waiting for a heart 
transplant).
    These delays stem from the fact that for a new technology to become 
fully available to Medicare patients, it must go through three separate 
review processes to obtain coverage, receive a billing code and have a 
payment level set. Serious delays in all three of these areas create 
significant barriers to patient access.
    While HCFA has improved the transparency for making national 
coverage decisions and attempted to instill timeframes within the 
process, timeliness is still a major problem. Under the current 
national coverage process framework, HCFA has 90 days to determine 
whether it will make a coverage decision or refer the request to either 
the Medicare Coverage Advisory Committee (MCAC) or an outside health 
technology assessment (HTA) group--or sometimes even to both. These 
outside assessments take between 3 and 12 months each. HCFA then has 60 
days to review the recommendations of the MCAC or HTA, and should a 
positive coverage determination be made, it takes 180 days from the 
first day of the next calendar quarter to issue a code and set a 
payment level.
    The coverage process should be streamlined and made more 
accountable, timely and transparent. Steps should be taken to reduce 
redundancies in the MCAC panel and HTA reviews. In addition, the focus 
of the MCAC panels should be directed toward gaining practical clinical 
advice from the medical experts on its panels.
    After coverage is approved, there are three separate coding 
processes that determine how a device or procedure is identified and to 
which payment bundle it is assigned. Each of these coding systems have 
significant time-lags in assigning and updating codes. Under the new 
hospital outpatient perspective payment system (PPS), HCFA now assigns 
and updates codes on a quarterly basis. To reduce coding delays of 15-
27 months, HCFA should use the outpatient PPS system as a model for 
applying similar systems to other settings, such as the inpatient 
hospital setting and doctors' offices.
    Coverage and codes mean very little, however, if the associated 
payment level is inadequate. HCFA's procedures for updating relative 
payment weights and reassigning technologies and procedures are 
informal and infrequent. For example, it took HCFA 5 years to 
ultimately decide that the applicable diagnosis related group (DRG) 
should be split into two DRGs for angioplasty with and without stent. 
During those 5 years, hospitals took significant losses on each stent 
procedure and the diffusion of this cost-saving technology was 
hampered.
    As required by BIPA, HCFA should develop formalized procedures for 
expeditiously assigning codes, updating relative weights and 
reassigning technologies to recognize the value of new and 
substantially improved technologies. HCFA should also fully implement 
the BIPA requirement to provide a transitional payment mechanism for 
new technologies where the DRG payment is inadequate.
    Again, AdvaMed applauds Congress and the President for recognizing 
the value of technology in improving the quality and efficiency of the 
health care system. We look forward to working with Congress, the 
President and Secretary Thompson on ways to modernize Medicare, 
incorporating the benefits technology can bear, and furthering advances 
in medical research.

    [Whereupon, at 4:25 p.m., the committee was adjourned, to 
reconvene at the call of the Chair.]

                                
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