[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
 DEPARTMENT OF HEALTH AND HUMAN SERVICES BUDGET PRIORITIES FOR FISCAL 
                               YEAR 2004

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, FEBRUARY 26, 2003

                               __________

                            Serial No. 108-5

                               __________

           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
CHRISTOPHER SHAYS, Connecticut,      JOHN M. SPRATT, Jr., South 
  Vice Chairman                          Carolina,
GIL GUTKNECHT, Minnesota               Ranking Minority Member
MAC THORNBERRY, Texas                JAMES P. MORAN, Virginia
JIM RYUN, Kansas                     DARLENE HOOLEY, Oregon
PAT TOOMEY, Pennsylvania             TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington             DENNIS MOORE, Kansas
ROB PORTMAN, Ohio                    JOHN LEWIS, Georgia
EDWARD SCHROCK, Virginia             RICHARD E. NEAL, Massachusetts
HENRY E. BROWN, Jr., South Carolina  ROSA DeLAURO, Connecticut
ANDER CRENSHAW, Florida              CHET EDWARDS, Texas
ADAM PUTNAM, Florida                 ROBERT C. SCOTT, Virginia
ROGER WICKER, Mississippi            HAROLD FORD, Tennessee
KENNY HULSHOF, Missouri              LOIS CAPPS, California
THOMAS G. TANCREDO, Colorado         MIKE THOMPSON, California
DAVID VITTER, Louisiana              BRIAN BAIRD, Washington
JO BONNER, Alabama                   JIM COOPER, Tennessee
TRENT FRANKS, Arizona                RAHM EMMANUEL, Illinois
SCOTT GARRETT, New Jersey            ARTUR DAVIS, Alabama
GRESHAM BARRETT, South Carolina      DENISE L. MAJETTE, Georgia
THADDEUS McCOTTER, Michigan          RON KIND, Wisconsin
MARIO DIAZ-BALART, Florida
JEB HENSARLING, Texas
GINNY BROWN-WAITE, Florida

                           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, February 26, 2003................     1
Statement of:
    Hon. Tommy G. Thompson, Secretary, U.S. Department of Health 
      and Human Services.........................................     6
    Gail R. Wilensky, Ph.D., John M. Olin Senior Fellow, Project 
      Hope.......................................................    61
    Judith Feder, Professor and Dean of Public Policy, Georgetown 
      University.................................................    66
Prepared statement and additional submissions of:
    Hon. Adam H. Putnam, a Representative in Congress from the 
      State of Florida...........................................     5
    Secretary Thompson:
        Prepared statement.......................................     8
        Response to Mr. Nussle's question regarding the 
          President's Medicare Proposal..........................    16
        Response to Mr. Nussle's question regarding the Physician 
          Update Rule............................................    17
        Response to Mr. Baird's question regarding the health 
          care tax credit proposal...............................    39
        Response to Mr. Scott's question regarding low-income 
          heating assistance.....................................    47
    Prepared statement of Dr. Wilensky...........................    63
    Prepared statement of Dr. Feder..............................    69

 DEPARTMENT OF HEALTH AND HUMAN SERVICES BUDGET PRIORITIES FOR FISCAL 
                               YEAR 2004

                              ----------                              


                      WEDNESDAY, FEBRUARY 26, 2003

                          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.
    Members present: Representatives Nussle, Shays, Gutknecht, 
Ryun, Hastings, Brown, Putnam, Wicker, Hulshof, Tancredo, 
Vitter, Bonner, Franks, Garrett, Barrett, Diaz-Balart, 
Hensarling, Brown-Waite, Spratt, Moran, Hooley, Baldwin, Moore, 
DeLauro, Scott, Capps, Thompson, Baird, Cooper, Emanuel, Davis, 
Majette, and Kind.
    Chairman Nussle. This is the full committee hearing on the 
Department of Health and Human Services budget priorities for 
fiscal year 2004.
    Today we have two very distinguished panels. The first 
panel is the Secretary of Health and Human Services, the 
Honorable Tommy G. Thompson, Secretary of Health and Human 
Services, and the second panel will be Gail Wilensky. Dr. 
Wilensky is a senior fellow from Project Hope--and Dr. Judith 
Feder, who is the Dean of Public Policy at Georgetown 
University. We are honored to have these guests with us today 
to testify and to give us their advice on a host of issues, but 
most importantly, the budget for fiscal year 2004.
    Mr. Secretary, thank you so much for taking time to spend 
with us today. This is, as we were just speaking off the record 
here, I believe, your 41st appearance, as you were saying, 
before the Congress; and that may be a record, certainly among 
the current Secretaries. I am not sure it is true with others 
in previous administrations, but what it says to me is that you 
are willing to be here, to defend programs, to defend policy, 
to defend administration, to answer questions, tough questions, 
at a time when there are not always good, easy answers as you 
know. But we appreciate that.
    The Department of Health and Human Services has a long list 
of responsibilities, maybe the longest list just about anywhere 
in the cabinet. The responsibilities are within numerous 
agencies. There are four specific areas that I believe our 
committee would like to focus on here today. Certainly 
bioterrorism, welfare reform, Medicaid reform, and Medicare 
reform with prescription drugs would probably be the four big 
areas that members may want to inquire. I am sure there may be 
others.
    I don't think most people would immediately associate the 
Department of Health and Human Services with homeland security; 
at least that was not traditionally an association. But the 
last 2 years have underscored the critical services that this 
department provides when it comes to the well-being of our 
citizens, especially in the event of a bioterrorist attack.
    Since September 11, we have become increasingly aware of 
the possibility of these types of attacks. Health and Human 
Services is at the forefront of ensuring America that we are 
ready by overseeing that there exists an appropriate supply and 
stockpile of vaccines and immunizations, an appropriate number 
of trained health care providers and first responders, 
hospitals and facilities that are properly outfitted and 
equipped, appropriate funding for vaccine research and 
development, and improved information networks so that key 
personnel can act appropriately in the event of an emergency.
    Another area that I would like to discuss that has had some 
success over the last several years is welfare reform.
    Mr. Secretary, there is probably no one with more working 
knowledge in this area than you. As the Governor of Wisconsin, 
you led the effort to bring common-sense reforms to this 
program that helped put more people back to work and ended 
decades of government dependence; and we used you as a model 
and used your expertise and advice as a model for our reform.
    Since we passed welfare reform in 1996, the number of 
families receiving welfare has been reduced by more than half, 
and child poverty has been cut significantly; and that is a job 
well done for this Congress, for this administration, for 
previous administrations, and we need to build upon that. When 
welfare reform finally passed, there were critics who claimed 
that it might work well during the current economic boom that 
we saw at that time, but we were warned that welfare case loads 
would swell during economic slowdowns. I am pleased to note 
that, in fact, the reforms did sustain during economic 
slowdown.
    One of the key components of welfare reform--the one that I 
believe made it such a success--was the flexibility that gave 
States the ability to implement the program. In a similar 
fashion, the President's budget proposes to reform the Federal-
State Medicaid program.
    This proposition, in theory, gives the States greater 
flexibility to cover some of the 41 million Americans without 
health insurance. But, Mr. Secretary, we don't have a lot of 
specifics or details on the Federal-State Medicaid program 
reforms that are part of this proposal, and Congress eagerly 
awaits that guidance from the administration.
    Similarly, the last issue I want to touch upon is by no 
means the least in importance. It may be the most important 
non-Homeland Security, non-Defense issue that we have before 
us, and although most of the public discussion has focused on 
prescription drugs, there is an urgent need to fundamentally 
reform the program of Medicare; or, for that matter, risk that 
it has become unsustainable. Even today, Medicare's dedicated 
revenue is lower than expenditures for the program as a whole.
    The President's budget says that Medicare has a $13.3-
trillion shortfall over the next 75 years. Taken together, 
Medicare, Social Security and Medicaid eventually will consume 
all Federal revenue. So therefore, I agree with the warning 
that the President has in his budget where it says, quote, 
``Given the financial challenges faced by Medicare in the 
future, the Congress must be extremely careful that legislative 
changes not add to the long-term, unfunded promises faced by 
this program.''
    I also have a more specific concern with regard to 
Medicare. My State of Iowa, as you know has the fifth highest 
population of people over the age of 65 and has the most over 
the age of 85 of any State. So clearly Medicare is an 
incredibly important component of our health care system. And 
we have visited about this many times because I know Wisconsin 
has shared similar issues and concerns.
    Ironically though, while Iowa ranks 6th in terms of 
providing overall quality, it remains 50th in overall Medicare 
reimbursement. Medicare simply does not pay its fair share to 
Iowa or, for that matter, many other States in similar 
situations. And I will just report to you for the good of the 
order, that it is not enough, nor is it acceptable, for the 
director of CMS, Mr. Scully, to just praise our efficiency and 
tell us that our hospitals are fine using data that is 2 years 
old; that is just not acceptable. And while we certainly 
understand he has an enormous amount of expertise in this area, 
we wish that he would come forward with proposals rather than 
just faint praise.
    Unfair reimbursements rates are causing major problems for 
recruitment and retention of health care personnel. It is 
making it tough for health care facilities to make ends meet. 
If Iowa's health care providers are forced to leave rural and 
small urban communities the same way it is true in so many 
other States represented on this committee, other employers 
will follow suit. It is that simple. If the health care leaves 
the community, you have no economic development.
    So I am pleased that the recent omnibus appropriations bill 
included some short-term relief, but it was not enough. This 
needs to be resolved. We have talked about this many times. My 
concern is that even though I have had a chance to meet with 
you and Mr. Scully and the President himself about this issue 
and had a chance to talk about some specifics, we have had the 
budget proposal with a plugged number of $400 billion for a few 
weeks now and still have no icing on the cake, meaning we have 
none of the details similar to the Medicaid program.
    I believe Iowans certainly have waited long enough, and I 
can tell you that I believe Congress and America have waited 
long enough. I believe it is time for the administration to 
come forward and give us the principles of the plan and the 
outline as soon as possible.
    We need to fix this problem now, and we need your 
leadership and the leadership of the President in order to get 
it done, as we have seen from recent experiences here in the 
Congress.
    So, Mr. Secretary, I know you have got a snootful of issues 
that are on your plate, but I also know that you revel in the 
challenges that face you and the Department and our country; 
otherwise, you wouldn't have taken on this task. And so we know 
that when we make these constructive comments and arguments to 
you, they are not falling on deaf ears. We have got a partner 
in someone who wants to work with us.
    So, with that, let me turn to Mr. Moran for any comments 
that he would like to make on behalf of Mr. Spratt. And then I 
would like to begin with your testimony.
    Mr. Moran. Thank you very much, Chairman Nussle, and we 
thank the Secretary for being here.
    And given the fact that the President was clearly going to 
appoint a Republican as Secretary of HHS, I think he made an 
excellent choice in choosing you, Governor Thompson. And I do 
sympathize with you for having to defend this miserable HHS 
budget that you are presented with.
    There are three reasons I say that. One is the domestic 
discretionary spending levels. Given the fact that the 
President feels that we can afford tax cuts of trillions of 
dollars, the idea that we would be cutting in critical areas, 
NIH, for example, just doesn't seem to be logical. The National 
Institutes of Health budget here will erode the progress that 
NIH has made in recent years and undermine the agency's ability 
to continue current research efforts and undertake new research 
efforts, and I am quoting there from a number of people 
involved with NIH that have been involved in the substantial 
progress they have made.
    In terms of Medicare, that the--excuse me. In terms of 
prescription drug coverage that the chairman rightfully 
emphasized, I do think that in the interest of full disclosure, 
we should make it clear to seniors that they cannot get 
prescription drug coverage under your approach through their 
Medicare plan. The plan that is being presented with the price 
tag that the chairman suggested does, in fact, put them into 
private health coverage, and I am not sure that Medicare 
seniors are fully aware of the consequences of this plan.
    And the third area that I know you are going to emphasize 
in your testimony, that I think we want to ask further 
questions about is with regard to the Medicaid program, because 
I know as Governor--if you were still Governor of Wisconsin--
you would be in the front lines protesting this plan.
    I see you nodding there. I think you may be prematurely 
nodding there, Governor, but I wanted to catch that, make a 
note on that, that the Governor was nodding affirmatively.
    You would be on the front lines protesting this plan 
because what we are doing is putting this thing under a block 
grant which, while it may give more leverage to individual 
Governors, takes away responsibility from the Federal 
Government for the substance of the plan. But most importantly, 
it covers your fiscal situation for the first 7 years, but then 
in the last 3 years, you have to pay it all back.
    This is worse than the tax plan that we get under the 
budget resolution by saying that we are going to repeal the 
whole tax plan in order to pay for it in the tenth year. You 
know we are not going to do that, and States can't possibly pay 
back what we are advancing them for the first 7 years in the 
last 3 years. Talk about being fiscally irresponsible.
    Now, some of them may feel they are going to be out of 
office then and it is not their problem. But to suggest that we 
would advance money and then require the States to pay it back 
when they may well be in even worse fiscal condition doesn't 
seem to be responsible. I know that you would have been one of 
the first ones to protest this approach.
    I don't want to take a lot of your time because we are 
going to have a lot of interesting questions to ask, and we are 
looking forward to your testimony and appreciate you for your 
leadership, Governor Thompson. Thank you.
    Thank you Mr. Chairman.
    Chairman Nussle. The record will reflect that the Secretary 
was fidgeting in his seat.
    Mr. Moran. Sounds like you are fudging there, Mr. Chairman.
    Chairman Nussle. That is OK, Jimmy.
    All members, with unanimous consent, may put a statement in 
the record at this point.
    [The prepared statements follow:]

Prepared Statement of Hon. Adam H. Putnam, a Representative in Congress 
                       From the State of Florida

    Mr. Chairman, I am pleased that we have convened today to receive 
the fiscal year 2004 budget priorities for the United States Department 
of Health and Human Services from Secretary Tommy Thompson. I am 
honored to be here with you, Ranking Member Spratt, and the rest of the 
committee, to exchange views on the Department of Health and Human 
Services budget for the coming year. Thank you, Secretary Thompson, for 
appearing today to discuss the needs of your Department, which is so 
crucial to the well-being and health of our Nation.
    I look forward to hearing your department's plans for addressing 
the looming Medicare crisis in this country. Together, Congress and the 
administration must create a fair and responsible Medicare program that 
has improved benefits for its current customers while remaining a 
stable, solvent program for the future. Medicare's outmoded benefit 
does not cover prescription drugs, provide consistent coverage for many 
preventive treatments, support coordinated management of chronic 
diseases, or offer catastrophic coverage.
    It is imperative that any Medicare reform plans include benefits 
similar to what our seniors are receiving now, yet also move to 
modernize them. Seniors are generally pleased with their current 
benefits but understand the need for a prescription drug benefit. 
However, we must institute reforms that will ensure a quality Medicare 
program is available to future generations also. Reforms must create a 
Medicare that is relevant to future generations. I am eager to hear the 
President's proposal to modernize Medicare and I am hopeful that we can 
create a system that will keep all of Medicare's benefits financially 
secure while also providing our seniors with what is necessary for them 
to live healthier and improve their quality of life.
    I am also concerned with the Department of Health and Humans 
Services' role in meeting threats to our homeland's security. Americans 
have access to the best health care system in the world, headed up by 
the most dedicated professionals from the CDC level right down to the 
local hospital. We have the finest health system, yet we must continue 
to reinforce it. I want to be assured that we are improving 
surveillance techniques, the dissemination of information, and 
awareness of biological threats such as anthrax, smallpox, botox, 
bubonic plague, and food safety threats. These are the new threats to 
our country and they must be addressed.
    In the past I have expressed my concerns with foot and mouth 
disease and mad cow disease as examples of diseases that would have a 
huge impact on public safety and consumer confidence in our food 
supply. This has been a concern of mine for a long time, and so I'm 
appreciative that you are concerned about it too. I am hopeful that you 
have continued to keep food safety and biological threats a high 
priority in your department.
    Mr. Secretary, I look forward to your testimony and I am sure you 
will provide all of us with a clear picture of your Department's 
priorities and required resources necessary to keep America healthy.

    Chairman Nussle. Mr. Secretary, welcome back to the 
committee. This is your third time that you have had an 
opportunity to come before us. We do greatly appreciate that, 
and we would like to ask you to proceed as you see fit.

 STATEMENT OF THE HONORABLE TOMMY G. THOMPSON, SECRETARY, U.S. 
            DEPARTMENT OF HEALTH AND HUMAN SERVICES

    Secretary Thompson. Thank you very much, Mr. Chairman. 
Thank you so much for your leadership, your dedication; and 
thank you for your opening remarks on so many issues that are 
really key to Iowa, to the country and especially to my 
department; Mr. Spratt in absentia and my current Congressman. 
Mr. Moran, I live in your district, and I----
    Mr. Moran. Wouldn't you know he is a constituent.
    Secretary Thompson [continuing]. I would like to point out, 
Congressman Moran, that if I was still Governor, I would walk 
all the way from Madison to Washington, DC, to be the first 
Governor to sign up for my plan, because it is that good; and I 
hope to get a chance to explain it to you and even convince my 
temporary Congressman from northern Virginia that it is the 
right way to go.
    And, Mr. Shays and all the other members of this wonderful 
committee, thank you for giving me this honor to appear in 
front of you to present the President's fiscal year 2004 budget 
for the Department of Health and Human Service's that continues 
to advance the President's goal of ensuring that every American 
has access to health care.
    The President proposes outlays for HHS of $539 billion; 539 
billion represents an increase of $36.8 billion, or over 7 
percent, over fiscal year 2003's enacted amounts, and an 
increase of more than $109 billion, or 25 percent, since 2001. 
The discretionary part of the budget increases $1.64 billion, 
or 2.6 percent, to $65 billion of budget authority. This would 
be $60 million higher than the enacted fiscal year 2003 
appropriation.
    Our most urgent priority is bioterrorism, and I would 
parenthetically, just at the outset, invite every member of 
this committee to come over to the Department of Health and 
Human Services to see our operation, our brand-new 
communications room, which is state of the art, and I think it 
will allay a lot of your fears, once you have a chance to go 
through it and give me an opportunity to explain it to you.
    Congressman Shays has been through it, and he would, I 
think, remark that it is one of the finest communications rooms 
in the Federal Government. It is an area where we have moved 
with unprecedented speed, commitment, and determination to 
prepare our Nation for an attack or a public health crisis 
since the terrorist attack of September 11.
    It is clear that our public health structure is stronger 
than ever, and getting stronger each and every day as we work 
with States and local communities to prepare for possible 
attacks as well as other health crises. Yet there is much work 
to do, and we remain committed to building our unprecedented 
efforts to protect the public health.
    Our budget would spend $3.6 billion to further enhance the 
steps that we have taken since that terrible day including an 
additional $1.4 billion in State, local and hospital 
preparedness. Additionally, President Bush recently announced a 
new initiative, Project Bioshield, that would also help prepare 
the country for a bioterrorism attack.
    He would spend roughly $6 billion over 10 years on new 
countermeasures. This proposal would speed up research approval 
of vaccines and treatments and ensure a guaranteed funding 
source for their purchase, just the latest in our forward-
looking efforts to protect our homeland.
    While we are preparing the Nation for a bioterrorist 
attack, we are also working aggressively to strengthen and 
modernize our two largest health programs, Medicare and 
Medicaid, popular programs that are badly in need of an update.
    As you well know, Mr. Chairman, our Nation's Medicare 
program needs to be strengthened and needs to be improved in 
order to fill the gaps in current coverage. The President has 
proposed numerous principles for Medicare enhancements to 
ensure that we are providing our seniors with the best possible 
care. We have also dedicated $400 billion over the next decade 
to achieve this very ambitious goal, and we look forward to 
working closely with Members of Congress and especially this 
committee to develop and pass a responsible and effective 
Medicare bill.
    The budget proposed a prescription drug benefit that would 
be available to all beneficiaries, would protect them against 
high drug expenditures and would provide additional assistance 
through generous subsidies for low-income beneficiaries to 
ensure individuals have ready access to pharmaceutical drugs.
    Passing Medicare legislation will be a huge task, and 
improving Medicaid is also very urgent. In fact, Medicaid is 
growing even more rapidly than Medicare. The Federal portion is 
$162 billion this year, and the program is growing at about 9 
percent a year. But State Medicaid programs are under 
tremendous financial pressure and beneficiaries risk losing 
coverage. Two-thirds of the States have already made reductions 
or have reductions pending.
    The President has proposed a very aggressive plan to 
preserve coverage, make Medicaid more efficient and provide 
better health care delivery. We would begin by addressing the 
immediate fiscal needs of the States. We would meet the 9 
percent base growth in the program and then forward-fund by 
$3.25 billion for 2004 and $12.7 billion over 7 years. And the 
States would not have to pay it back. If Congress adopts this 
plan, States will be able to build on the successes of the 
States' Children's Health Insurance Program. I had a chance to 
discuss this proposal with many Governors on Monday, and their 
reaction was very positive.
    Let me be very clear about two things. First, State 
participation in this new program would be optional; it would 
be voluntary. Second, mandatory populations will continue to 
receive all of their mandatory benefits. The Medicaid 
entitlement will be unchanged. States will have more 
flexibility in covering optional populations, which account for 
a large part of Medicaid spending. They will gain the ability 
to target special needs populations, such as those suffering 
from mental illness and HIV/AIDS. And if we do not improve 
Medicaid, a million Americans could lose coverage this year, 
and millions more next year. I look forward to working with 
this Congress to make sure that that does not happen.
    At the same time we expand access to health care, we also 
want to reduce the number of people who need it, and because so 
many Americans suffer from preventable diseases, this 
administration has made prevention a key priority. Our budget 
proposes a new investment of $100 million to promote a 
healthier lifestyle by emphasizing prevention of obesity, 
diabetes and asthma, something I am absolutely committed to and 
passionate about.
    Turning from health to welfare. Many of you worked on 
welfare reform in 1996 and we have all known how successful it 
has been. We will work with Congress this year to reauthorize 
the program and to strengthen work requirements and support for 
healthy families. The President's budget would spend $17.6 
billion for 2004 on TANF, and the $2-billion contingency fund 
still remains available.
    Now is not the time to turn back. We must move forward in 
helping millions of Americans become self-sufficient. In a 
continuing effort to improve the lives of children who are at 
risk of abuse and neglect, we are proposing a child welfare 
financing option that States can use to improve their child-
welfare service systems. We propose to spend nearly $5 billion 
for foster care in 2004, a $90-million increase over the fiscal 
year 2003 enacted appropriation.
    The President has made improving our Nation's health and 
health care one of his biggest priorities for the year; and by 
working together, we can make it one of our proudest 
achievements. I look forward to all the work and I know our 
discussion this morning will get things rolling.
    I thank you, Mr. Chairman, members of this committee, once 
again for giving me this opportunity to come before you and 
testify and answer your questions.
    [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 Mr. Chairman, Mr. Spratt, and members of the 
committee. I am honored to be here today to present to you the 
President's fiscal year 2004 budget for the Department of Health and 
Human Services (HHS). I am certain you will find that, viewed in its 
entirety, our budget will help improve the health and safety of our 
Nation.
    The President's fiscal year 2004 budget request continues to 
support the needs of the American people by strengthening and improving 
Medicare and Medicaid, enhancing Temporary Assistance for Needy 
Families (TANF) and Foster Care; strengthening the Child Support 
Enforcement Program; and furthering the reach of the President's New 
Freedom Initiative.
    The $539 billion proposed by the President for HHS will enable the 
Department to continue its important work with our partners at the 
State and local levels and the newly created Department of Homeland 
Security. Working together, we will hold fast to our commitment to 
protect our Nation and ensure the health of all Americans. Many of our 
programs at HHS provide necessary services that contribute to the war 
on terrorism and provide us with a more secure future. In this area, I 
am particularly focused on preparedness at the local level, ensuring 
the safety of food products, and research on and development of 
vaccines and other therapies to counter potential bioterrorist attacks.
    Our proposal includes a $37-billion increase over the fiscal year 
2003 budget, or about 7.3 percent. The discretionary portion of the HHS 
budget totals $65 billion in budget authority, which is an increase of 
$1.6 billion, or about 2.6 percent. HHS' mandatory outlays total $475.9 
billion in this budget proposal, an increase of $32.3 billion, or 
roughly 7.3 percent.
    Your committee will set the framework for achieving many of the 
administration's most important priorities. I am grateful for the close 
partnership we have enjoyed in the past, and I look forward to working 
with you on an aggressive legislative agenda to advance the health and 
well being of millions of Americans. Today, I would like to highlight 
for you the key issues in the President's budget.
        supporting the president's disease prevention initiative
    One of the most important issues on which we can work together is 
disease prevention. We all have heard the disturbing news about the 
prevalence of diabetes, obesity and asthma that could be prevented 
through simple lifestyle changes. The statistics, I am sure, are as 
alarming to you as they are to me. For example, the incidence of 
diabetes and obesity among Americans is up sharply in the past decade, 
putting millions more Americans at higher risk for heart disease, 
stroke and other related medical conditions.
    Diabetes alone costs the Nation nearly $100 billion each year in 
direct medical costs and leads to incalculable indirect economic costs, 
including disability, missed work and premature death. Medical studies 
have shown that modest lifestyle changes--such as getting more exercise 
and losing weight--can reduce an individual's risks for developing 
these serious health conditions.
    For this reason the HHS budget, consistent with the President's 
Healthier US effort, proposes a coordinated, Department-wide endeavor 
to promote a healthier lifestyle emphasizing prevention of obesity, 
diabetes, and asthma. The fiscal year 2004 budget includes a new 
investment of $100 million for targeted disease prevention.
    The proposed fiscal year 2004 budget for the National Institutes of 
Health builds upon the doubling of the NIH budget that was completed in 
fiscal year 2003, providing an increase of $500 million from the 
previous year. NIH will be able to increase funds devoted to its 
research programs by $1.9 billion, or 7.5 percent. In addition
                         fighting bioterrorism
    As Americans confront the realities of terrorism and hatred around 
us, it is imperative that the Federal Government be prepared to keep 
our citizens safe and healthy. HHS's $3.6 billion bioterrorism budget 
substantially expands ongoing medical research, maintains State and 
local preparedness funding, and includes targeted investments to 
protect our food supply. The President's proposal significantly expands 
NIH research funding needed to develop vaccines and medicines that will 
make biologic agents much less effective as weapons. HHS and DHS will 
be working hand-in-hand to ensure that Americans have emergency access 
to stockpiles containing effective drugs, vaccines, and other 
biologics. HHS and the Department of Homeland Security, will spearhead 
the development of Project Bioshield. This project, which the President 
recently proposed, will bring together the resources of the United 
States government in an innovative effort to develop defenses against 
bioterror before they are ever needed. Project Bioshield will have 
three (3) major goals:
     Ensure sufficient resources are available to procure the 
next-generation countermeasures. The administration proposes a 
permanent, indefinite authority that will: a) provide the government 
with the flexibility needed to respond to changing threat information 
and science; b) establish a guaranteed funding source that will allow 
the government to purchase vaccines and other therapies as soon as 
experts believe they can be made safe and effective; and c) spur the 
industry investment needed to produce these countermeasures by 
providing assurance that if they can produce a needed product, the 
government can and will purchase it.
     Speed up NIH research and advanced development. Provide 
more flexible contracting and procurement authorities for critical 
biodefense work.
     Make promising treatments available more quickly for use 
in emergencies. Establish a new FDA Emergency Use Authorization for 
promising medical countermeasures that are under development that 
provides greater flexibility in emergency situations than the current 
Investigational New Drug (IND) authority.
                     improving the nation's health
    In an effort to improve the Nation's health, the budget includes 
initiatives to reduce drug-related medical costs and carry out the Best 
Pharmaceuticals for Children Act. The request for the Food and Drug 
Administration (FDA) includes $13 million to increase Americans' access 
to safe, effective, and less expensive generic drugs. The budget also 
includes an additional $30 million in NIH and FDA to expand Federal and 
private research to improve information for prescribing pharmaceuticals 
to children.
    The HHS budget includes a series of improvements in the financing 
of childhood vaccines to meet three goals--first, improve vaccine 
access for children eligible for the Vaccines for Children program, 
second, restore tetanus-diphtheria booster to the VFC program; and 
third, build a national stockpile of childhood vaccines. To ensure 
against future shortages of childhood vaccines, HHS will develop a 
strategic plan and implement a vendor-managed, 6-month supply of all 
childhood vaccines by 2006. In addition, legislation will be proposed 
to improve access to VFC vaccines for children already entitled to 
them. The budget proposes to expand the number of access points for 
underinsured children to those whose private insurance does not cover 
the immunizations by allowing them to receive their VFC vaccines at 
State and local public health clinics. I also propose to restore the 
tetanus and diphtheria booster to the VFC program by removing outdate 
price caps that are so low that vendors will not bid on VFC contracts.
    The budget also contains $100 million to begin working with 
industry to ensure the Nation has an adequate supply of influenza 
vaccine in the event of a pandemic. Due to its short shelf life, we 
cannot stockpile influenza vaccine, and current manufacturing methods 
could not surge to meet the Nation's needs in a pandemic. Funds will be 
used for activities to ensure a year-round influenza vaccine production 
capacity and the development and implementation of rapidly expandable 
production technologies.
    In fiscal year 2003, we are completing a 5-year doubling of the 
budget of the National Institutes of Health (NIH). This year, we 
continue that commitment with a budget of $27.9 billion, a net increase 
of $549 million over last year. As a result of one-time projects being 
funded in fiscal year 2003, and not needing to be continued, NIH 
funding for research on larger scale projects will increase $1.9 
billion, 7.5 percent, and fund a record number of new and competing 
research grants.
    We are investing $50 million in a new program at AHRQ to increase 
investments in hospital information technology to improve patient 
safety. Of this amount, $26 million will be used to focus on small and 
rural hospitals. Proven technologies like computerized physician order 
entry and automated medication dispensing systems improve the safety 
and quality of care.
                 faith-based and community initiatives
    In support of the President's Faith-Based and Community Initiative, 
the HHS fiscal year 2004 budget supports programs that promote positive 
relationships that link faith- and community-based organizations, State 
and local governments, and Federal partners to develop a shared picture 
for substance abuse treatment and positive youth development.
    We are proposing to establish a new $200-million drug treatment 
program. For some individuals, recovery is best assured when it is 
achieved in a program that recognizes the power of spiritual resources 
in transforming lives. Under this new program, individuals with a drug 
or alcohol problem who lack the private resources for treatment will be 
given the means to secure drug treatment services. The program will 
give them the ability to choose among a range of effective treatment 
options, including faith-based and community-based treatment 
facilities. Another important program that helps some of our most 
vulnerable children is the Mentoring Children of Prisoners program. We 
are asking for funds to be increased to $50 million, which would in 
turn be made available to faith-based, community-based, State and local 
governments and tribes, and public organizations for programs that 
provide supportive one-on-one relationships with caring adults to these 
children who are more likely to succumb to substance abuse, gang 
activity, early childbearing and delinquency. This down payment will 
help approximately 30,000 adolescent children of prisoners receive some 
guidance, have positive role models, and give them a fighting chance to 
succeed. In addition, the budget request for the Compassion Capital 
Fund is $100 million, an increase of $65 million above the fiscal year 
2003 appropriation. These funds would continue to be used to provide 
technical assistance to faith- and community-based organizations to 
expand and emulate model social programs. These are just a few examples 
of the services that can be provided to those in need under this 
initiative.
                  strengthening and improving medicare
    As we are all aware, our Nation's Medicare program needs to be 
strengthened and improved to fill the gaps in current coverage. We 
remain steadfastly committed to ensuring that America's seniors and 
individuals with disabilities can keep their current, traditional 
Medicare. The President has proposed numerous principles for Medicare 
enhancements to ensure that we are providing our seniors with the best 
possible care. The budget builds on those principles by dedicating $400 
billion over 10 years to strengthen and improve Medicare, including 
providing access to subsidized prescription drug coverage, better 
private options and better insurance protection through a modernized 
fee-for-service program.
Prescription drug coverage
    Ensuring that Medicare beneficiaries have access to needed 
prescription drugs is a top priority for the President and me. This 
budget proposes a prescription drug benefit that would be available to 
all beneficiaries, protect them against high drug expenditures, and 
would provide additional assistance through generous subsidies for low-
income beneficiaries to ensure ready access to needed drugs. The 
administration's prescription drug plan would offer beneficiaries a 
choice of plans and would support the continuation of the coverage that 
many beneficiaries currently receive through employer-sponsored and 
other private health insurance.
Medicare choices
    Medicare+Choice was introduced to provide beneficiaries with 
additional options for Medicare coverage. Over the past year, the 
Department has made significant strides in expanding beneficiaries' 
Medicare+Choice options by approving 33 new preferred provider 
organizations PPOs) through a demonstration. However, due to a variety 
of factors, in many parts of the country, few other new plans have 
entered the program. More needs to be done to encourage plan 
participation. We believe that we should move away from administered 
pricing to set Medicare+Choice rates. The administration believes that 
Medicare+Choice payments need to be linked to the actual cost of 
providing care. America's seniors and citizens with disabilities should 
have access to the same kind of reliable health care options others 
enjoy and that those choices should be provided through a market-based 
system in which private plans compete to provide coverage for 
beneficiaries. Those beneficiaries who select less costly options 
should be able to keep most of the savings. It is time we give our 
seniors the choice they have been promised in Medicare.
Modernized fee-for-service
    One of the basic tenets of our proposal to strengthen and improve 
Medicare is that seniors and individuals with disabilities deserve the 
same range of health care delivery choices as Federal employees enjoy. 
These choices should reflect the care and service innovations 
incorporated into today's best health insurance plans. A strengthened 
and improved Medicare program would rationalize cost-sharing for 
beneficiaries who need acute care. It would also eliminate cost sharing 
for preventive benefits and provide catastrophic coverage to protect 
beneficiaries against the high costs of treating serious illnesses.
Medicare appeals reform
    Our budget also includes $129 million for the strengthening of the 
Medicare appeals process. The adjudicative function currently performed 
by the Administrative Law Judges at the Social Security Administration 
would be transferred to the Centers for Medicare and Medicaid Services 
(CMS). In addition, the administration proposes several legislative 
changes to the Medicare appeals process that would give CMS flexibility 
to improve the appeals system. These changes will enable CMS to respond 
to beneficiaries' and providers' needs efficiently and effectively.
             strengthening and improving medicaid and schip
State health care partnership allotments
    Mr. Chairman, as you know, states are confronting serious 
challenges in running their Medicaid programs. It is crucial that we do 
something now to stabilize Medicaid programs so we do not allow 
millions of Americans to go without health care. In the past year, 38 
states have reduced services or eligibility and most states are 
currently considering other benefit or eligibility cutbacks. We want to 
give states another option. It is our responsibility to work together 
so that states can get the help they need in managing their health care 
budgets, while preventing further service and benefit cuts and 
expanding coverage for low income Americans.
    Building on the success of the State Children's Health Insurance 
Program (SCHIP) and the Health Insurance Flexibility and Accountability 
(HIFA) demonstrations in increasing coverage while providing 
flexibility and reducing the administrative burden on States, the 
administration proposes optional State Health Care Partnership 
Allotments to help States preserve coverage. Under this proposal, 
States would have the option of electing to continue the current 
Medicaid program or to choose partnership allotments. The allotment 
option provides States an estimated $12.7 billion in extra funding over 
7 years over the expected growth rate in the current Medicaid and SCHIP 
budgets. If a State elects the allotments, the Federal portion of SCHIP 
and Medicaid funding would be combined and states would receive two 
individual allotments: one for long-term care and one for acute care. 
States would be required to maintain their current levels of spending 
on Medicaid and SCHIP, but at a lower rate of increase than the 
increase of the Federal share.
    States electing a partnership allotment would have to continue 
providing current mandatory services for mandatory populations. For 
optional populations and optional services, the increased flexibility 
of these allotments will allow each State to innovatively tailor its 
provision of health benefit packages for its low-income residents. For 
example, States could provide premium assistance to help families buy 
employer-based insurance. States could create innovative service 
delivery models for special needs populations including persons with 
HIV/AIDS, the mentally ill, and persons with chronic conditions without 
having to apply for a waiver. Another important part of the new plan 
would permit States to encourage the use of home and community-based 
care without needing a waiver, thereby preventing or delaying 
institutional care. Let me stress that this is an OPTION we are 
proposing for States.
New Freedom Initiative
    One of the administration's priorities is relying more on home and 
community-based care, rather than institutional care for the elderly 
and disabled. The New Freedom initiative represents part of the 
administration's effort to make it easier for Americans with 
disabilities to be more fully integrated into their communities. Under 
this initiative, we are committed to promoting the use of at-home and 
community-based care as an alternative to nursing homes.
    It has been shown time and again that home care combines cost 
effective benefits with increased independence and quality of life for 
recipients. Because of this, we have proposed that the fiscal year 2004 
budget support a 5-year demonstration called ``Money Follows the 
Individual'' Rebalancing Demonstration, in which the Federal Government 
will fully reimburse States for 1 year of Medicaid home and community-
based services for individuals who move from institutions into home and 
community-based care. After this initial year, States will be 
responsible for matching payments at their usual Medicaid matching 
rate. The administration will invest $350 million in fiscal year 2004, 
and $1.75 billion over 5 years on this important initiative to help 
seniors and disabled Americans live in the setting that best supports 
their needs.
    The administration again proposes four demonstration projects as 
part of the President's New Freedom Initiative. Each promotes home and 
community-based care as an alternative to institutionalization. Two of 
the demonstrations are to provide respite services to caregivers of 
disabled adults and severely disabled children. The third demonstration 
will offer home and community-based services for children currently 
residing in psychiatric facilities. The fourth demonstration will test 
methods to address shortages of community direct-care workers.
Medicaid coverage for spouses of disabled individuals
    The budget proposes to give States the option to extend Medicaid 
coverage for spouses of disabled individuals who return to work and are 
themselves eligible for Supplemental Security Income benefits. Under 
current law, individuals with disabilities might be discouraged from 
returning to work because the income they earn could jeopardize their 
spouse's Medicaid eligibility. This proposal would extend to the spouse 
the same Medicaid coverage protection this committee was instrumental 
in offering to the disabled worker.
Extension of the QI-1 program
    Under current law, Medicaid programs pay Medicare Part B Premiums 
for qualifying individuals (QI-1s), who are defined as Medicare 
beneficiaries with incomes of 120 percent to 135 percent of poverty and 
minimal assets. The budget would continue this premium assistance for 5 
years.
Transitional Medicaid Assistance (TMA)
    TMA provides health coverage for former welfare recipients after 
they enter the work force. TMA allows families to remain eligible for 
Medicaid for up to 12 months after they lose welfare related Medicaid 
eligibility due to earnings from work, and was scheduled to sunset in 
September 2002. TMA has been extended until June 30, 2003 through the 
appropriations process. This budget proposal would extend TMA for five 
more years, costing $400 million in fiscal year 2004, and $2.4 billion 
over 5 years. This program is an important factor in establishing 
independence for former welfare recipients by providing health care 
they could not otherwise afford.
    We are also proposing modifications to TMA provisions to simplify 
it and make it work better with private insurance. These provisions 
include:
     States will be given the option to offer 12 months of 
continuous care to eligible participants.
     States may waive income-reporting requirements for 
beneficiaries.
     States that have Medicaid eligibility for children and 
families with incomes up to 185 percent of poverty may waive their TMA 
program requirements.
     States have the option of offering TMA recipients ``Health 
Coupons'' to purchase private health insurance instead of offering 
traditional Medicaid benefits.
State Children's Health Insurance Program (SCHIP)
    As you know, SCHIP was set up with a funding mechanism that 
required States to spend their allotments within a 3-year window after 
which any unused funds would be redistributed among States that had 
spent all of their allotted funds. These redistributed funds would be 
available for one additional year, after which any unused funds would 
be returned to the Treasury. An estimated $830 million in fiscal year 
2000 funds are expected to go back to the Treasury at the end of fiscal 
year 2003. The administration proposes that States be permitted to 
spend redistributed fiscal year 2000 funds through the end of fiscal 
year 2004. Extending the availability of SCHIP allotments would allow 
states to continue coverage for children who are currently enrolled and 
continue expanding coverage through HIFA waivers.
Medicaid drug rebate
    The current Medicaid Rebate methodology establishes rebates to 
State Medicaid agencies based in large part on the drug manufacturer's 
reported best price. The best price component of pharmaceutical rebates 
requires that the discounts that private sector purchasers are able to 
negotiate with pharmaceutical manufacturers also be given to Medicaid. 
It has been claimed that this provides a disincentive for drug 
manufacturers to give discounts to private sector purchasers. The 
administration is interested in working with this committee, the House 
Energy and Commerce Committee and the Finance Committee to explore 
policy options to address this issue.
                     empowering america's families
Reauthorization of Temporary Assistance for Needy Families (TANF) and 
        the Child Care Development Fund
    Building on the considerable success of welfare reform in this 
great Nation of ours, the President's fiscal year 2004 budget follows 
the framework proposed in the fiscal year 2003 request which includes 
the reauthorization of TANF. We applaud passage of H.R. 4 and are 
committed to working with both the House and the Senate to ensure the 
legislation moves quickly through the process and is consistent with 
the President's budget. The President's proposal includes 5 years of 
funding for the TANF Block Grants to States, Tribes, and Territories; 
Matching Grants to Territories; and Tribal Work Programs at current 
levels. In addition, the fiscal year 2004 budget reinstates authority 
for supplemental population grants at $319 million each year; restore 
transfer authority to the Social Service Block Grant of up to 10 
percent; as well as funding the $2 billion Contingency Fund with 
modified maintenance of effort and reconciliation requirements to make 
it more accessible for States.
    The central focus of the proposal strengthens work requirements 
while allowing States greater flexibility to define activities that 
will lead toward self-sufficiency. The Bonus to Reward High Performance 
States would be redesigned to provide $100 million a year for bonuses 
for employment achievement. We propose replacing the bonus to reduce 
out-of-wedlock birth with a new initiative to fund research, 
demonstrations, and technical assistance activities primarily targeted 
to family formation. Our proposal includes $100 million for matching 
grants, also focused on building strong families and promoting healthy 
marriages. In addition, the budget proposes to reauthorize State 
abstinence education grants for 5 years at $50 million annually to 
further assist with reducing the number of out-of-wedlock pregnancies, 
reducing the spread of STDs, and helping teens make healthy life 
choices. These proposals demonstrate that this administration is 
committed to strengthening foundations for our children and supporting 
programs that will empower persons who have not been able to work, for 
any number of reasons, to achieve self-sufficiency.
    Hand in hand with these efforts, the President's fiscal year 2004 
budget also follows the framework established in the fiscal year 2003 
budget and requests reauthorization of the Child Care and Developmental 
Block Grant Act and the Child Care Entitlement to assist States in 
meeting the critical child care needs of families.
Increasing support for children in foster care
    In a continuing effort to improve the lives of children who are at 
risk of abuse and neglect, this administration is proposing a child 
welfare financing option that States can use to improve their child 
welfare service systems. This plan will allow States to choose a fixed 
allocation of funds over a 5-year period rather than the current 
entitlement funding for the Title IV-E Foster Care Program. 
Participating States will receive their funds in the form of flexible 
grants which could be used for a wide array of child welfare-related 
purposes, such as child abuse and neglect prevention, maintenance and 
administrative payments for foster care, child welfare training, and 
family support. The flexible funding will allow States to develop 
innovative plans that can be tailored to meet the needs of their child 
welfare populations. States that elect this option and experience 
emergencies affecting their foster care systems may apply for access to 
additional funding from the TANF contingency fund.
    The administration is proposing a nearly $5 billion budget for 
Foster Care in fiscal year 2004, an $89-million increase over last 
year's request. Not only will these funds support the child welfare 
program option, but they also will be used to provide payments for 
maintenance and administrative costs for more than 240,000 children in 
foster care each month, as well as payments for training and child 
welfare data systems.
    The Adoption Incentives Program has been successful in contributing 
to the substantial increase in the number of children who are adopted 
from the public foster care system in recent years. The President's 
fiscal year 2004 budget request includes reauthorization of this 
important funding. Additionally, we propose changes to the incentive 
system to target older children, who despite the overall gains in 
adoptions constitute an increasing proportion of the children waiting 
for adoptive families. The President's budget request for the Adoption 
Incentives Program is $43 million.
    Another important issue we face with foster care is the transition 
for children out of these programs. Last year, nearly 20,000 children 
aged out of the foster care system. In order to assist these at-risk 
young adults, the President is committed to maintaining the Independent 
Living Program, which provides a variety of services for youth who will 
likely remain in foster care until they turn 18 and former foster 
children between the ages of 18 and 21. The President's budget request 
for the Foster Care Independence Program is $200 million. This request 
includes $60 million to provide participants with up to $5,000 for 
college tuition or vocational training to youth who age out of the 
foster care system.
    Additionally, the administration continues its commitment to the 
Promoting Safe and Stable Families Program by requesting to $505 
million to assist States in coordinating services related to child 
abuse prevention and family preservation. This important program also 
helps to promote adoption and provides post-adoption support to 
families.
Child support enforcement
    Related to my commitment to strengthening America's families, I am 
proud to tell you that our Child Support Enforcement program has made 
some impressive gains. Child support collections hit a record $20 
billion in fiscal year 2002, serving an estimated 17.1 million child 
support cases and in fiscal year 2001, over 1.6 million paternities 
were established or acknowledged.
    The President's fiscal year 2004 budget will build on this 
considerable success. Legislation will be proposed to enhance and 
expand the existing automated enforcement infrastructure at the Federal 
and State level and increase support collected on behalf of children 
and families. For example, States can better benefit from Federal data 
systems to freeze and seize assets in multi-state financial 
institutions and to garnish insurance settlements in order to satisfy 
past due child support. In addition, gaming winnings will be subject to 
intercept for past due support. When combined with the opportunities to 
increase child support outlined in the President's fiscal year 2003 
budget (expanded passport denial, offset of certain Social Security 
benefits, optional pass through of child support to families on TANF, 
among others) these proposals offer an impressive $7.5 billion in 
increased child support payments to families over 10 years. The budget 
also recognizes that healthy families need more than financial support 
alone and increases resources for the Access and Visitation Program to 
support and facilitate non-custodial parents' access to and visitation 
of their children.
                               head start
    The President's budget includes $6.8 billion for Head Start. This 
level will increase enrollment of children in those areas of the 
country with the greatest unmet need. This budget proposal will 
continue to focus on school readiness of Head Start programs.
              responsible fatherhood and healthy marriages
    The President's budget also proposes $20 million for promotion and 
support of responsible fatherhood and healthy marriage. This funding 
will promote and support involved, committed, and responsible 
fatherhood and encourage the formation and stability of healthy 
marriages.
                     president's management agenda
    I am committed to improving the management of the Department of 
Health and Human Services, and I realize that as we work to improve the 
health and well-being of every American citizen, we also need to 
improve ourselves. The fiscal year 2004 budget supports the President's 
Management Agenda and includes cost savings from consolidating 
administrative functions; organizational delayering to speed decision 
making processes; competitive sourcing; implementation of effective 
work force planning and human capital management strategies; and 
adoption of other economies and efficiencies in administrative 
operations. We have also included savings in information technology 
(IT) which will be realized from ongoing IT consolidation efforts and 
spending reductions made possible through the streamlining or 
elimination of lower priority projects. I am also very excited about 
the IT infrastructure consolidation which should be fully implemented 
by October, 2003, that will further reduce infrastructure expenditures 
for several HHS agencies.
       improving the health, well-being, and safety of our nation
    Mr. Chairman, the budget I bring before you today contains many 
different elements of a single proposal. What binds these fundamental 
elements together is the desire to improve the lives of the American 
people. All of our proposals, from building upon the successes of 
welfare reform to protecting the Nation against bioterrorism; from 
increasing access to healthcare, to strengthening Medicare and 
Medicaid; all these proposals are put forward with the simple goal of 
ensuring a safe and healthy America. I know this is a goal we all 
share, and with your support, we are committed to achieving it.

    Chairman Nussle. Thank you, Mr. Secretary.
    Let me begin with the budget proposal for Medicare. The 
proposal has $400 billion of new resources over 10 years for 
Medicare. Is that a net number, meaning is that a number that 
recognizes that we should make reforms within the base part of 
the program and that the net amount of Medicare should be no 
more than $400 billion over that 10-year period?
    Secretary Thompson. That is correct.
    Chairman Nussle. Or is that the new number?
    Secretary Thompson. The $400 billion includes the changes 
that we will be making to Medicare. But the giant share of it 
is for prescription drugs, Mr. Chairman.
    Chairman Nussle. The omnibus bill that just passed had a 
$54-billion 10-year add-on for----
    Secretary Thompson. That is not subtracted, which a lot of 
people want to know about. That is not subtracted; the $400 
billion is over and above that.
    Chairman Nussle. When the budget was submitted, the $54-
billion doctor reimbursement changes were not contemplated and 
were not budgeted for in 2004 budget cycle?
    Secretary Thompson. That is correct.
    Chairman Nussle. How are we going to pay for that then?
    Secretary Thompson. We are taking that into the base budget 
that we have in Medicare, Mr. Chairman. But it is not part of 
the $400 billion that the President will be advocating in his 
Medicare proposal.
    Chairman Nussle. But then, in point of fact, it is a $454-
billion budget?
    Secretary Thompson. If you add that to it, yes. But the 
final details have not been totally determined as of yet.
    Chairman Nussle. Alright. Well, I guess that is what I am--
it's either one or the other. It is either added to the 400, or 
it is part of a net $400 billion total at the end of the day. 
But otherwise, $54 billion doesn't just, as you know, fall out 
of the sky; it has got to come from someplace.
    Secretary Thompson. That is correct, Mr. Chairman, and as 
of right now, the $400 billion is for the changes the President 
is going to make and does not include the $54 billion, which 
was in the congressional appropriations bill which was signed 
last week.
    Chairman Nussle. Alright. Should that be in that number? 
Should the 54 be included in the $400 billion or should it be 
added on?
    Secretary Thompson. At this point in time, Mr. Chairman, I 
cannot answer that question because it is still being 
discussed.
    [The information referred to follows:]

 Secretary Thompson's Response to Mr. Nussle's Question Regarding the 
                     President's Medicare Proposal

    The fiscal year 2004 President's budget requests $400 billion over 
10 years for a prescription drug benefit and Medicare modernization. 
This remains the highest priority of the administration for fiscal year 
2004. Congress took action to add $54 billion to fix physician payments 
after our budget was released. We do not anticipate adjusting our 
fiscal year 2004 President's budget baseline to reflect this change 
until we do our mid-session review. As always, we are monitoring and 
assessing congressional actions and changes to the Medicare program 
made after our budget was submitted to assess whether adjustments are 
necessary.

    Chairman Nussle. Alright. Well, we need an answer, because 
I will tell you right now----
    Secretary Thompson. I understand that and I can tell you 
that I am pushing very hard to get an answer to all the 
questions dealing with Medicare, so I can come back in front of 
you and other members of this committee and tell you what is 
going on.
    Chairman Nussle. Do you have an idea of when we will get 
answers on Medicare? Because when I met with the President in 
December, at that point in time there was some discussion that 
this might happen congruent with the budget.
    Secretary Thompson. Mr. Chairman, I can assure you that my 
Department and the White House are working extremely long hours 
to accomplish a proposal that we can give to Members of 
Congress very soon. It is not quite ready.
    I can assure you that it is very close, and we will be 
giving you all the details very shortly. I can't give you an 
exact date because, I have found, in this city timelines slip 
quite easily. And I don't want to--I have been caught up in 
this before, and if I give a definite time, I would like to be 
able to honor that; and since I can't tell you that it is going 
to be on a particular date, all I can tell you is, it is very 
imminent.
    Chairman Nussle. Well, let me report back to you about our 
timeline. We have to have a budget completed by April 15, and 
it requires us to be in markup here in this committee and on 
the floor within the next 3 weeks.
    Secretary Thompson. I understand that, Mr. Chairman. And 
all I can tell you is, I am pushing extremely hard to make your 
job easier by getting you the details very quickly.
    [The information referred to follows:]

Secretary Thompson's Reply to Mr. Nussle's Question Regarding Physician 
                              Update Rule

    The fiscal year 2004 President's budget assumes that the 2003 
Physician Update Rule would have been implemented March 1, 2003. That 
rule would have decreased the physician fee schedule by 4.4 percent. 
The baseline reflected the current law at the time. The Consolidated 
Appropriations Resolution, 2003 (CAR) was not enacted until February 
20, 2003, after the budget had been released. While the current law 
budget baseline cannot reflect anticipated changes in the law, even if 
it could, there was no way to know what the final provisions of CAR 
would be. The impact of the physician payment adjustment enacted in the 
CAR will be reflected in this summer's mid-session review baseline.

    Chairman Nussle. Well--and part of my job is to help make 
your job easy too by providing the resources to make sure that 
we can get these things done. But we to get the details on 
this.
    In your testimony on page 4, you say that under 
Medicare+Choice, ``We believe that we should move away from 
administered pricing to set Medicare+Choice rates'' and ``the 
administration believes that Medicare+Choice payments need to 
be linked to the actual cost of providing care.''
    What would you say about the areas where Medicare+Choice is 
no longer available, such as many areas of Wisconsin and all of 
Iowa?
    Secretary Thompson. As you know, when Medicare+Choice 
started, it grew quite rapidly, and got up to almost 18 percent 
of the population. Then there was a decision made by Congress, 
I think in 1998, in which they were going to reduce the 
payments in those areas where the HMOs were operating and put a 
higher premium in those areas where they were not operating.
    It did not work, and as a result of that, it has not been 
able to continue to grow. In fact, it has slipped from 18 
percent down to about 11 percent of the population. And what we 
are trying to do is put it on a financially solvent footing so 
that it will have the opportunity to continue to grow. The 
seniors that are in it like it, and if they have the 
opportunity, they will make that choice. But we have to make 
sure that companies are able to continue to furnish the 
product, namely the Medicare coverage.
    Chairman Nussle. Well, I don't usually do this, but I am 
going to make the announcement right now. I am not voting for 
Medicare+Choice unless or until I understand how it is going to 
be in your part of Wisconsin and my part of Iowa, and I mean 
now.
    It is not going to be enough to come forward with another 
fill-in-the-blank stopgap kind of Medicare+Choice proposal that 
we blindly assume is going to do the job, when it never has in 
our areas. We are done with it. And I mean, I--you know, I have 
blindly voted for a number of these proposals on the blind 
faith that, in fact, the marketplace will work and that we will 
be able to provide these kinds of opportunities for seniors, 
but I am announcing to you right now, I am done and I am on the 
authorizing committee and that is one vote.
    Now--and I am not threatening. I want to work to get this 
thing done right, but I will tell you that based on the track 
record, you don't have one vote right now unless I see how it 
is exactly going to apply to my next door neighbor across the 
street in Manchester, IA, and whether or not she is going to 
have coverage under a Medicare+Choice plan or whether her 
reimbursement rates to her doctor or her hospital are going to 
be commensurate with their ability to stay in business and keep 
their doors open, period. Done.
    I don't have any more room to negotiate on this. And I hate 
to say it that way, but it has lasted too long.
    Secretary Thompson. I appreciate your comments. But let me 
just respond by telling you that the Medicare+Choice is an HMO, 
among other things. I have been in just about all the meetings 
and I want to be able to tell you, and tell all the members of 
this committee the President's plan is not going to force 
seniors into Medicare+Choice or into HMOs. It is going to be a 
different concept. And it will be based on the Federal 
Employees Health Benefit Program, which is in all areas of 
Iowa, which is in all areas of Wisconsin, which is in all areas 
of Alaska, whether you are a janitor in a Federal building, a 
warden or an FBI agent, every single Federal employee has had 
the benefit of the Federal Employees Health Benefit Plan. It is 
a competitive market, and we are looking at that procedure.
    It is not the Medicare+Choice that you are talking about, 
Mr. Chairman, and I want you to know that. There is nothing in 
the President's proposal that is going to force--and I want to 
restate and to restate this once more, there is nothing in the 
President's plan that will force the senior into an HMO plan.
    Chairman Nussle. Well, pardon me if I went off on a tangent 
then, but since we don't know what the President's plan is, you 
can pardon us for maybe not quite understanding what is in the 
plan.
    Secretary Thompson. I understand that, and it is my 
responsibility to get that proposal to you as soon as possible, 
and I will endeavor to make sure that happens as quickly as the 
President makes the final decisions.
    Chairman Nussle. I appreciate it.
    And I yield now to Mr. Moran.
    Mr. Moran. Thank you very much, Chairman Nussle. And I am 
going to follow up on your line of questioning because I would 
agree with you.
    Whereas the Secretary says that this is going to be 
comparable to FEHBP, I suspect you are going to be putting 
people into PPOs if not HMOs. But it seems to me that if this 
is going to be viable of both, substantively, policy-wise as 
well as political, it ought to be as good as what the members 
provide for themselves. The President wants----
    Secretary Thompson. I agree.
    Mr. Moran. You agree. OK, I am glad we will begin from that 
assumption.
    The President wants seniors to pay a $275 deductible each 
year; most Members of Congress pay no deduction for 
prescription drugs. The President wants seniors to pay 50 
percent coinsurance for the first $3,000 worth of medicines; 
most Members of Congress pay 25 percent. The President wants 
seniors to have a gap in coverage where they pay 100 percent of 
costs when their need is between $3,000 and approximately 
$7,000 for drugs; most Members of Congress have no gaps in 
prescription drug coverage.
    So if those are the criteria, I think we need to bear that 
in mind, because we can't sell a plan that is considerably 
worse for our constituents than it is for ourselves. And most 
of us are under this FEHBP plan.
    Under the President's proposal, as we understand it, 
seniors would spend $5,500 of their own money each year on 
medicines and would get help with only 20 percent of their drug 
costs under the President's plan. Our Congressional Budget 
Office estimates that Medicare beneficiaries will spend more 
than $1.8 trillion on prescription drugs between 2004 and 2013. 
Even if every dollar of the President's proposal went toward 
prescription drug coverage, and it doesn't because you have got 
three other areas of expenditures included there, so it looks 
like it is only about $300 billion for--specifically for 
prescription drug coverage. But even if it were $400 billion, 
the plan would only cover 22 percent of beneficiaries' 
medication needs.
    Now, that's Medicare. With my time, I want to get back to 
Medicaid because you said something about crawling from 
Wisconsin.
    Secretary Thompson. Not crawling. Walking.
    Mr. Moran. Not crawling. Walking. OK, I don't want to 
exaggerate. You would walk from Wisconsin to Washington in 
favor of this plan. But apparently your sentiments have changed 
since April 14, 1997, Governor Thompson, where you signed onto 
a letter to President Clinton, where you said, ``We adamantly 
oppose a cap on Federal Medicaid spending in any form.''
    Now, this block grant is a cap on Medicaid. Well, that is 
the way you interpreted it when you were one of the leaders of 
the National Governors Association and signed onto this letter, 
because that is what block grants are all about. It is a method 
of capping entitlement programs.
    And I am sure you are familiar with this letter of April 
14, 1997, so I won't go into great detail on it. But I refer 
people to it if they question where the Governors are likely to 
stand.
    Those are our major concerns: Medicare, Medicaid and then 
some of this discretionary spending.
    You know, we can't understand how we can have $1.3 trillion 
in tax cuts and yet some of the cuts that are in discretionary 
programs for the disadvantaged.
    You know, here, this budget proposal would mean that at 
least 36,000 seniors would be cut from Meals on Wheels in this 
program. I can go down a half a dozen other programs that are 
in this budget. It just seems to be misplaced priorities.
    So that is where we have our problems. It is Medicare, it 
is the Medicaid block grant, and it is the very substantial 
reductions in discretionary programs. There is not a lot of 
money for each of these individual programs, but as the 
President has said in any number of quotes, it means a great 
deal in the lives of people in need.
    So I am not going to ask any questions. My colleagues are 
going to do that. But, again, I hope you have the answers to 
their questions.
    Thank you, Mr. Secretary.
    Secretary Thompson. Mr. Chairman, can I please respond?
    Chairman Nussle. Yes.
    Secretary Thompson. Congressman Moran, first off on 
Medicare, I will be more than happy to sit down with you and go 
through the plan as soon as all the decisions are made; as I 
indicated to the chairman, I will be more than happy to do 
that. I would like to work with you and come up with a Medicare 
plan that you could support on a bipartisan basis.
    Medicaid: I was one of the leaders when I signed that 
letter. Do you know what President Clinton was trying to do? He 
was trying to cap Medicaid on a per capita basis and take $8 
billion out of the system. That is completely contrary to the 
program that I am advancing.
    Let me explain. We are not capping the program on a per 
capita basis. In fact, the mandatory coverages are not capped; 
they are the same as the current Medicaid program.
    The optional programs, which States now have the 
opportunity to drop, are dropping in record numbers--36 States 
last year, and 42 States have got pending drops this year of 
over a million individuals under the current Medicaid law; the 
only thing that States and legislators can do is to drop whole 
populations. They cannot redefine the program and keep the 
coverage and keep the Federal dollars. The Medicaid proposal I 
am advancing allows them the flexibility to do that.
    The second thing is, it advances $12.7 billion over 7 years 
so that States are going to get an additional $3.25 billion 
this year, so they can set up their own programs and use 
flexibility in order to accomplish what you want to accomplish. 
What I want to accomplish is to keep individuals covered under 
the Medicaid system.
    The third thing is, under the current law there are three 
provisions in which States have to advance payments each year; 
they make these determinations in September and October. Each 
year the base budget for the States' portion of Medicaid has 
three factors which they have to put into consideration to 
determine what their next year's payment is going to be. It is 
based upon population increases within your State and 
utilization and indexing of medical costs in a particular 
State.
    Under the proposal we are advancing from the Department, 
the first two, the population increases and the utilization, 
are not going to be factors anymore. So it will only be based 
on the third factor; the indexing of the medical costs. Last 
year those increases were $12.7 billion. So, if you pass this 
particular program, States would only be paying approximately 
$4 billion. Therefore our net savings is over $8 billion of 
State contributions in order to get the same Federal match.
    So the States are going to pay less, get more money up 
front, which they will not have to pay back; and they will have 
complete flexibility to design the program so more people can 
be covered.
    Medicaid is growing at a rate of 9 percent a year for 10 
years, and so 9 percent for 10 years is the line that we have 
to budget for. And for the first 7 years, States that 
voluntarily take this program will be above that line, and only 
in the 8th, 9th and 10th years will they go below the line. But 
they will still get increases; instead of 9 percent, it will be 
about 6 percent. But for the first 7 years, they will have 
complete flexibility, will not have to pay that money back, and 
the mandatory coverages will be the same.
    So it is not a block grant because it continues to rise. 
There is no block grant because the population increases, the 
mandatory population increases, the money increases, and so do 
the responsibilities and the accountability put on by the 
Federal Government.
    Mr. Moran. Thank you, Mr. Secretary. President Clinton's 
intent was exactly the same amount of money. And I know his 
intent was to achieve the same savings, but we haven't compared 
it in total. But I do think there is a lot of commonality to 
the plan that you rejected in the past.
    But I appreciate your explanation. Thank you, Mr. 
Secretary.
    Chairman Nussle. Mr. Gutknecht.
    Mr. Gutknecht. Thank you, Mr. Chairman.
    Mr. Secretary, Governor, I will try not to be as tough on 
you as some of my colleagues here, but I think you can 
understand there is a good deal of frustration. And as a former 
Governor, part of the frustration we are feeling on this 
committee is, we are having unlimited demands right now on a 
very limited budget, and frankly, as I mentioned to several of 
the other Secretaries, you know, we have had debate about 
economic theory and supply side economics and tax cuts.
    I tend to be a supply-sider. I tend to believe that during 
soft economic times it is a good idea to allow Americans to 
keep more of their own money. But I have to say, first and 
foremost, that is a theory, and this is a fact. The fact is 
that government will be paid; it will either be paid for now by 
us, or it will be paid for in the future by our children, with 
interest. And as a former Governor, I know that early in your 
governorship of Wisconsin you were very effective--probably 
made the most effective use of the veto of any Governor I have 
ever seen. And if I recall, it wasn't so that you could add 
more spending to what the legislature was passing. It was to 
cut spending.
    The dilemma here is that even with the President's' budget 
as he has submitted it, we are looking at very, very large 
deficits, and not only this year, but for several years to 
come. One of the problems that the Governors are having, and I 
am sure you have talked to Governors and probably your 
successor--I met with our Governor, our new Governor, a few 
weeks ago and he told me that roughly a third of his problem 
that he is having to confront in the State of Minnesota in 
terms of his budget deficit is the cost of health care. My 
concern is, and I share some of the concern that the chairman 
mentioned, is that we are just going to nibble around this 
thing and not really deal with it. Because my real concern is, 
as a country, I don't know--and I represent--I mean, the 
biggest employer in my district is one of the finest health 
care institutions in the world, and so we are very interested 
in making certain that every American has access to top-quality 
health care. No question about that.
    But can we afford, as a nation, to have a system that is 
somewhere near 14 percent of gross domestic product for overall 
health care? It seems to me that we have got to get serious 
about real reform, and we can't just be shifting around 
dollars. And I think, in some respects, Mr. Moran is correct. 
It seems to me that we have got to come up with a system that 
is sauce for the goose and sauce for the gander; I think it has 
got to be fair to everybody. And the problem, it seems to me, 
that we have is we have set up various levels of health care 
delivery.
    We take care of seniors one way, we take care of Federal 
employees another way, State employees another way; and I do 
think that ultimately it is drawing down our economic growth 
rate.
    I have met with a lot of business people in my district. I 
have talked to big business people, small business people. I 
have talked to two of them in particular I will mention. One 
said that part of the reason he is not hiring more people today 
is that his cost for health care per employee is about $550 per 
month. He is in a very competitive marketplace, and he said, 
``I simply can't afford to bring more people on because of the 
high cost of health care.''
    I talked to another individual last week, and he employs 
134 people. This year his health care costs were going to go up 
50 percent--50 percent. So what he did was he dropped the 
health care insurance for all of his employees. He simply gives 
them an additional $550 per month to buy their own insurance.
    And I guess I want to encourage you to look not only at 
what we are doing and what you are recommending, but I think we 
are going to have to look completely outside of the box. And I 
guess I had a bit of an epiphany when I was over in Taiwan a 
month ago. Their costs for health care in Taiwan--and I am not 
saying it is the model, but I think it is an example--where 
they are spending 5 percent of their gross domestic product. We 
are spending almost 14 percent. I am not sure how long we can 
afford a health care system in this country that is consuming 
that much of our GDP.
    We want to work with you. And we wish you all the luck, you 
are one of the toughest Secretaries in this Cabinet. If anybody 
can do it, you can do it. We want to help you.
    Secretary Thompson. Congressman, thank you for that open-
ended question. I appreciate everything you have said, and I 
would like to respond point by point. First, it is 14.8 percent 
of GDP, and if we don't make a change within the next 15 years, 
it will be 18 percent of GDP.
    As for the second thing you talked about, the Mayo Clinic--
it is a fantastic place. In fact, I had one of the chairmen of 
Mayo Clinic in charge of my regulatory reform, another cost 
driver. He came in with 250 changes with his commission, and 
held five hearings across America. We have already made 35 of 
those changes, such as eliminating paperwork, and streamlining 
efficiencies.
    The third thing you mentioned was your Governor, Tim 
Pawlenty from Minnesota. His biggest driver is Medicaid. This 
proposal, the Medicaid proposal, will be a godsend to the State 
of Minnesota. It will lower his payments by two-thirds that he 
has to pay in on the increases of that amount he would have to 
pay. I don't know what Minnesota's share is, but I can tell 
you, he would appreciate that.
    It would give him flexibility so that he could develop a 
Medicaid program in which he could use different programs and 
different benefits for southern Minnesota, central Minnesota, 
and northern Minnesota. This is something he cannot do under 
the Medicaid law. It would advance payments so that he would be 
able to get additional money right now over the next 7 years to 
set up a new system.
    We would require him to split the population into acute as 
well as long-term care and, therefore, we would be able to 
develop new ways to keep seniors out of institutions and use 
the flexibility to do it.
    The Medicaid proposal that I am advancing is way out of the 
box, and I would strongly urge you to strongly consider it. 
Medicare I cannot talk about except in general terms right now 
because the final details have not been made.
    You talked about thinking outside the box. Let me tell you 
what has to be done if we want to do this on a bipartisan 
basis. The first thing we have to do is pass a Medicaid 
proposal; we have to pass what I think is the best idea. It is 
based upon the very successful TANF and SCHIP programs. It 
would help every State that voluntarily goes into it.
    Third, we have to pass a very good uninsured proposal. I 
have got great ideas that I think that you would like to see in 
which we could actually pay for it, but--it would cause some 
angst, but it would deal with, and get a lot of the uninsured 
covered.
    The fourth thing and the biggest driver--and this is one 
thing that Congress has got to address--is preventative health. 
We spend $155 billion a year on tobacco-related illnesses; 
400,000 people die. We spend $117 billion a year on obesity-
related illnesses, and 300,000 people die. We spend $100 
billion on diabetes, and 200,000 people die. Seventeen million 
people have diabetes; 16 million are prediabetic and if we do 
nothing in the next 5 years, there will be 33 million people 
that have diabetes.
    Ninety-some million people in America have chronic 
illnesses. You can usually stop the chronic illnesses by 
exercising, watching your diet and quitting smoking.
    If we are willing to take on those three things, it would 
be the biggest driver of reducing costs across America. And 
when you add those three things, $115 billion on tobacco, $117 
billion on obesity and a $100 billion on diabetes, you are at 
over $300 billion, and we are only spending $260 billion a year 
on Medicare. So, this is where you are going to have an impact.
    Mr. Gutknecht. Thank you.
    Chairman Nussle. Mr. Spratt.
    Secretary Thompson. I get a little emotional about that. I 
am sorry.
    Mr. Spratt. Mr. Secretary, I was not here to welcome you 
when you came, and I apologize.
    Secretary Thompson. I am so happy you weren't, but I am 
glad you are here now .
    Mr. Spratt. I appreciate, as always, your forthright 
testimony. I don't have any questions at this point, but thank 
you for coming.
    Secretary Thompson. Thank you very much for being here.
    Chairman Nussle. Ms. Hooley.
    Ms. Hooley. Yes. Thank you.
    And thank you for being here. It is always nice to have a 
Governor who has been in that spot before and understands what 
the States are talking about. Again, I thank you for being 
here.
    Medicaid--I am going to talk about two things, Medicaid and 
Medicare. Medicaid is one of the fastest rising costs in the 
State budget. In Oregon, Medicaid covers about 450,000 people; 
that has been increasing by 10 percent a year. Currently, 
Oregon is in a tough financial situation, not unlike a lot of 
States, but we are the number one unemployment State. We have 
cut days off our school year, we have made huge cuts to public 
safety, we are laying off State troopers and we are making 
State cuts to Medicaid.
    We have a projected $400 million budget shortfall in 
Medicaid alone, and we have already cut prescription drug 
benefits, alcohol and drug treatment, those things that are 
preventative--mental health benefits for many Medicaid 
recipients. And we have had people come and talk to us: You 
know, they are getting kicked out of nursing homes, they have 
got $1,000 a month drug payments that they can't make.
    As we look at that $12.7 billion for participating States 
to encourage them to restructure their Medicaid--and I know you 
know this about Oregon--this is not what we need. We won't 
receive much of this money because we restructured our Medicaid 
program 10 years ago with the Oregon health plan. And it has 
been one of the most successful Medicaid programs in the 
country. We need money to fund Medicaid, not money to change 
it.
    While reduced revenues are placing severe strains on many 
State budgets and could limit Medicaid at a time when 
additional coverage and spending is most needed, the Federal 
Government's share of the cost will only increase a fraction of 
a percent for 2004. Increasing the Federal Medicaid assistance 
percentage just by 2.45 would provide Oregon with an additional 
$1.7 million over the next 18 months, something we desperately 
need.
    How are you going to--how do you address Oregon's needs 
when we desperately need assistance and would not benefit from 
the $12 billion program that you are talking about, because we 
have already changed and restructured our program?
    Are you going to give us a special dispensation?
    Secretary Thompson. First off, the reason you were able to 
change is through the waiver process.
    Ms. Hooley. I know that.
    Secretary Thompson. And the reason that Oregon has been 
successful is, they have used the waivers which I have granted, 
as you know.
    Ms. Hooley. I do. I understand that. Thank you.
    Secretary Thompson. Several of the waivers do it.
    This plan is based upon TANF, it is based upon the SCHIP, 
and it is based upon the waivers that I have advanced since I 
have been Secretary. In fact, I have advanced 2,500 SCHIP 
plans, waivers and Medicaid State plan amendments. Oregon has 
received several of them to redo their plan. But Oregon still 
has several problems. It still is restricted under the current 
Medicaid law.
    Let me explain. Oregon has urban areas, it has rural areas. 
I spend a lot of time in Oregon, so I know the State, and you 
have got the mountains on the east, versus the plains and the 
ocean on the west coast.
    Ms. Hooley. Right.
    Secretary Thompson. And so you have different things.
    But you cannot, under the current Medicaid law, even with 
your options, have any kind of differentiations as far as 
benefits or as co-pays or as being able to use the SCHIP money.
    Oregon was not able to use all its SCHIP money. It had to 
send some back because it is SCHIP money. Under this proposal, 
Oregon gets to keep all of its SCHIP money and is able to use 
it. That is point No. 1.
    The second point, the $12.8 billion, the $3.2 billion this 
year would give Oregon an additional 2-percent increase on the 
Federal match. Oregon, if it voluntarily went into the program, 
would get another 1 percent of the Federal match by paying less 
into it. So instead of your 2.45-percent increase on the 
Federal match that you are asking for, if Oregon went into this 
program voluntarily, which I am sure they will, they will get a 
3-percent increase on their Federal match.
    That is the dollars that they need in order to make this 
program work. That is why you should be enthusiastically 
supporting this program and be one of the prime sponsors for 
it.
    Secretary Thompson. This program is one of the most helpful 
programs for Oregon and New Mexico and Tennessee, States run by 
Democratic Governors. And each one of those individual 
Democratic Governors know that.
    Ms. Hooley. Let me ask you a second question. I want to 
follow up on our Chair's question about Medicare. And again, we 
were very efficient in how we dealt with health care in our 
State, and then a long time ago when the formula came up for 
Medicare, we got the short end of the stick like many other 
States did. You have got seniors--the same program, everybody 
pays into this program, and yet you have got seniors in some 
States reaping the benefits of--they have prescription drug 
benefits, they have eye care, they have hearing care, and we 
have--our State is under-reimbursed. We have doctors leaving 
the system. They will not take any Medicare patients. They will 
not take any more Medicare patients. And are we ever going to 
get to a solution to this problem where it should be equal 
across the United States?
    And I don't begrudge anyone any benefits they receive, but 
it seems to me if you have a program that is a national 
program, that it should treat people equally, and this program 
doesn't. Do you see a solution at the end of the rainbow?
    Secretary Thompson. I see lots of solutions. I am extremely 
optimistic. I think if we have the will, Congresswoman, we have 
the opportunity to change Medicare for the best. There are some 
very inequitable provisions in it. Medicare needs a complete 
review by Congress and by the administration, and if we had the 
political will to do that, we could change it.
    Just to give you some ideas, there is something in the law 
that requires different payments for urban hospitals versus 
rural hospitals. It is a 1.5-percent difference. That could be 
changed. That could be uniform. There are MSAs in Iowa; there 
are 12 different areas in Iowa that have different hospital 
assessment areas in order to determine the formula and only one 
formula area for doctors. Now, that could be changed, and so 
that would be a uniform thing based upon a different kind of a 
formula.
    There has to be the will to make these kind of statutory 
changes legislatively. We can give you a whole list of them, 
but as long as the government is the driving force for all 
medical costs, and it is based upon reimbursement formulas that 
have been built up since 1965 to the present, you have to 
really change it or change the model so that you have 
competition from the Federal Employees Health Benefit Program 
in order to benefit the kind of changes necessary to have a 
national system. And it can be done. It is going to require 
some bipartisan support to do that, but ideas are out there. If 
we sat down across the table, we could certainly, I am 
confident, come up with a solution and come up with a much 
better proposal that would treat more citizens more equitably. 
Whether or not we get rid of all the inequities, I can't 
promise you that, but we could reduce them.
    Ms. Hooley. I would like to get a little closer.
    Secretary Thompson. So would I.
    Ms. Hooley. And happy to work on that. It seems to me such 
an unfair situation in this country.
    Secretary Thompson. I hope you would want to work with me 
on the Medicaid system, because I know that the proposal I am 
advancing would be tremendously helpful to Oregon.
    Chairman Nussle. Mr. Ryun.
    Mr. Hulshof.
    Mr. Garrett.
    Mr. Garrett. I always appreciate coming to these meetings 
because the chairman often--I know he digs through this 
material more than I do and throws out little tidbits that 
strike me. And then in his opening comments when he stated that 
I guess in the not too distant future that if we take Medicare 
and Medicaid and Social Security and combined that, that will 
be consuming the entire Federal spending it just gives you 
pause to think that is where we are going with it.
    I also appreciate that in the time that I have been here as 
the freshman, to hear the folks, we have been able to have 
experts such as you come before us and to hear questions a lot 
harder than mine, because I sure don't have the answer to this 
either, but I look forward to, with this administration, 
putting forward something that we can work with that will at 
least lead us down the road the right way.
    One of the numbers that I remember the chairman mentioned 
at one of the meetings that we had previously was talking about 
how Medicare spending is going just as it is right now, and as 
I understand your initial comments with $400 billion is 
essentially--and the way I look at it and the way you are 
saying is for prescription drugs primarily, that addition to 
the program after we complete any cost savings from the reform 
in the proposal that you will be presenting to us--but the 
numbers that I have seen before is that Medicare spending is 
about $269 billion, and it is projected to nearly double in the 
next 5 years, and by 2013--and I know you are not going to 
spend the $400 billion evenly, but even if we were to spend it 
out over a 10-year period of time, it averages out to $40 
billion per year. So if you didn't do anything, you would be 
seeing a $25-billion average increase in the Medicare problem, 
which is part of the problem in essentially going in debt 
totally.
    But we are taking that $25 billion figure and adding on top 
of it, if I am understanding it correctly, another $40 billion 
on average, which is, I don't know, around a 165-percent 
increase. And nothing that I have seen so far says that that is 
going to reverse the overall trend of what the chairman was 
saying at the outset, that eventually we are going to see 
Medicare, Social Security, and Medicaid consuming everything. 
We may be slowing the pitch of the chart on the graph a little 
bit, and in some ways maybe we are--by the reform, but by 
adding the prescription drugs and the $400 billion to it, 
actually we are throwing that red line up even further, aren't 
we?
    Secretary Thompson. Absolutely. You can't add a benefit of 
prescription drugs, which is going up at 13 to 15 percent a 
year, without having that trend line increase. It is 
impossible. So the only way to compensate for that is to make 
some kind of changes in the basic system in order to make it 
more efficient, and that is what the President and the 
administration are trying to do.
    What I have told a lot of people is that this is the 
dessert. Everybody wants prescription drug coverage, and 
everybody supports prescription drug coverage, Republicans and 
Democrats and Independents. And the seniors need it, there is 
no question about it. But if we don't make some structural 
changes to the model, to the delivery system, this Congress, I 
don't think, will ever come back until it is a crisis 
situation.
    That is why we need to make the changes with a prescription 
drug program so that we can try and put it on a better 
financial footing, but it will not go back to where it is right 
now. Prescription drugs is an expensive add-on, and it is going 
to be more expensive in the future with prescription drugs 
added on, even with the changes that we are advocating.
    Mr. Garrett. I will close in the numbers I know this House 
passed before I was here, the additional program in their bill, 
that was a $13.3-trillion increase. The Senate Democrats had 
their own version, but theirs would have increased to a $20-
trillion increase. I appreciate this is an add-on. With the 
overall budget question, how in the world do we add that on 
today until we can confirm that we are going to overall bring 
the line down by the cost savings? And until we--because even 
though what you are saying is, well, do the reforms, we will 
save a little money or maybe a lot of money through the 
reforms, but we are going to add on the prescription and not 
add benefits.
    One of my constituents said to me, how can we be doing this 
and adding it on, providing the benefit to the seniors today if 
my grandkids are going to be ending up being the ones paying 
for the seniors' health benefits?
    Secretary Thompson. It is not a one-for-one situation. The 
changes that will be advocated will not bring it into line. 
This is going to require some real heavy lifting by Members of 
the Congress and the administration. But the first thing is not 
to exacerbate the situation so badly that we can't get back 
there. And just adding on prescription drugs without any kind 
of corrections is just, to me, not acceptable, because all you 
are doing is driving up the cost, and there will be no driving 
force for anybody to get back.
    The driving force for people to look at Medicare right now 
is prescription drug coverage, and so it is important for us to 
take a look at the model, the delivery system, so that we can 
make some changes now and hopefully other changes in the future 
to make it something that is going to be around for your 
children and grandchildren and great grandchildren in the 
future.
    Chairman Nussle. Ms. Baldwin.
    Ms. Baldwin. Thank you, Mr. Chairman.
    Secretary Thompson, thank you for your testimony this 
morning. As a former Governor, we have had a chance to work 
together before, and I want to thank you for being here.
    I want to follow some of the line of questioning regarding 
Medicaid. Those of us who have been following this have seen 
more generalities, and in your previous testimony in response 
to previous questions we are getting a little bit more of a 
first glimpse of some of the details behind the proposal. I 
want to, first of all, make sure that my understanding of the 
big picture is correct, and then probe a little more on the 
details, especially as you note on your testimony, prepared 
testimony, that the States are facing incredible budget crises, 
that many have--in the last year 38 have reduced services or 
eligibility, and most are considering further benefit and 
service and eligibility cutbacks this year.
    As I understand it, overall States could decide not to join 
in the flexibility program and operate their Medicaid programs 
without any sort of additional relief from the Federal 
Government. And certainly as the States are progressing with 
budget crises, this could resolve in deep Medicaid cuts for the 
States. In the alternative they could receive funding or these 
advances, $12.7 billion over 7 years, but only if they agreed 
to convert much of their Medicaid program, and we are going to 
dispute the terminology, but into a block grant or some new 
structure. And this would be capped, as I understand it, 
according to a fixed formula and would not automatically rise 
as the current formula does to meet increases in need perhaps 
due to a recession, or a rise in the number of families in 
poverty in a given State, or the costs of health care in a 
given State. Also, then there is this provision in the final 3 
years of the 10-year plan of paying back the additional money.
    I have several concerns as I understand that outline, if I 
understand it correctly. I also want to draw your attention--I 
suspect you are already aware not of the activities of the 
National Governors Association in 1997, but this year they 
posed, as I understand it, a significant number of questions to 
tease out the details of this program. We have been given 
copies of their communication of earlier this month. Those are 
precisely the questions I am eager to get at, questions 
concerning the mandatory core, you know, what happens for the 
remaining mandatory populations with FMAP; and does it go away, 
is it reduced; financing; our questions, like are the 
utilization in populations' projected increases based on the 
national average or on the individual States' averages? Just a 
wide variety of questions.
    I would ask as you answer the National Governors 
Association and get those details that you provide them to my 
office, and, I suspect other members of the Budget Committee 
would be very interested to hear those details so that we can 
scrutinize this more carefully. And I would ask your timeline 
on that.
    And lastly, and I will give you the floor to tackle some of 
these, I want to just make a little bit of note about the 
governance of these programs as States opt in, if they do.
    We know that in the Medicaid program we have used the 
States as laboratories. The waiver programs have permitted the 
States over the last several years to engage in all sorts of 
experimentation with limited controls at the Federal level, but 
these have predominantly been transactions between the 
executive branch of the Federal Government and the executive 
branch of the State governments. As a former Governor, I know 
this is probably attractive; but as a lifetime legislator, I 
know that I am concerned about the legislative oversight. A 
vast amount of experimentation is taking place with very little 
guidance from the Congress or from the respective State 
legislatures, and, in that same contrast, to other arenas in 
which we have done State experimentations. Wisconsin's welfare 
experience would be an example.
    So I would like to hear your comments also on the 
governance issue and accountability to the people of States 
through their legislators.
    Secretary Thompson. Well, thank you, Congresswoman Baldwin, 
and it is always a pleasure to see you. And let me just answer 
every one of your points.
    A lot of people don't understand Medicaid. First off, this 
is not a block grant. A block grant by definition is level 
funding. TANF is a block grant. It is $16.8 billion a year for 
5 years. Medicaid has a trend line. It is growing at the rate 
of 9 percent a year. We have to budget for 10 years. So, we 
take a look at the figures and the computation that States send 
us in September and October each year, and we make an actuarial 
judgment, and our actuarial judgment is that Medicaid is going 
up 9 percent. Next year, or this year in September, October, 
based upon cost accounting and other things, we may adjust that 
figure to 10 percent because we think that is probably where it 
is going to go.
    So, Medicaid has got a trend line. The Federal Government 
funds that trend line, and it is always going up. So you can 
just draw a trend line increasing at 9 percent a year and that 
is the Medicaid budget which will continue to increase.
    Second, there are mandatory populations, and there are 
optional populations. One-third of the Medicaid population is 
optional population; two-thirds is mandatory. Two-thirds of the 
cost of Medicaid are the optional benefits added on by 
Governors and legislators. So you have one-third of the 
population, two-thirds of the cost on optional populations.
    Governors and State legislators right now are dropping 
those optional populations because they either have to drop it 
or continue to fund it. There is no middle ground. They can't 
change the mix. They can't increase copayments. They can't 
change from geographic locations from Madison to Superior. It 
has got to be uniform. So the only choice State Governors have, 
and legislators, is to drop it, and they have dropped over a 
million people last year, and this year there will be 42 States 
making further cuts into it.
    I am trying to change the program so that they can change 
that mix and give them the opportunity to be able to 
differentiate between Madison and Superior, maybe add some 
copayments and keep the Federal dollars in Madison and in the 
Medicaid system and keep those people covered. You should like 
that, and I know you will if you listen to my explanation.
    The third thing is, each year the States have got to make a 
computation. Wisconsin pays 42 percent in the Medicaid budget. 
The Federal Government pays 58 percent. We get a pretty good 
deal in Wisconsin. We get 58 percent. But the Governor and the 
legislature have to increase that 42 percent each year based 
upon three factors: What is the population increase in 
Wisconsin? What is going to be the utilization? And what is the 
indexed inflation of medical cost? So those three factors each 
year have to be added on to the State's base of 42 percent.
    We are saying under this new proposal that States would 
voluntarily have the opportunity to join if they want to; that 
we will forgive them not having to make payments on population 
increases or on utilization, only on the inflation index. So 
that means the State legislature, in order to get the 58 
percent, will be paying less, which means that the percent 
increase will go up by the Federal Government just by the terms 
because States will pay in less, which will mean the percentage 
for Wisconsin will go down. The inflation index increase will 
go up for the Federal Government mathematically.
    The fourth thing is that gives the Governor and the 
legislature this money to spend and the ability to use it. Also 
under this program, the SCHIP program, the disproportionate 
share for hospitals, the administration, and Medicaid, which 
now are four checks sent out quarterly on a draw-down by the 
States, will be two checks. They will be able to go to the 
State in two checks, one for acute care and one for long-term 
care and prevention. Because the long-term care and prevention 
States and Federal Government have really never really looked 
at, and what I think, that is going to be the increased cost in 
the future. I would like to see the Federal Government use this 
long-term care opportunity to be able to find ways to keep more 
people in their own homes, and they will have that flexibility 
to do so under the new model.
    Then you said they have to pay it back. Wrong. They don't 
have to pay it back. If the States would take it, if Wisconsin 
would take it, instead of getting 9 percent, they would get 12 
percent the first year, then above the trend line. Do you 
follow me? The trend line is 9 percent, they get 12 percent, 
then they get 11, then 10 percent, then 11 percent. They would 
always be up above the 9 percent for the 7 years. But then in 
the 8th year they would drop below the 9 percent, but still get 
an increase of, say, 6 percent, not have to pay any of this 
money back. They would still get an increase of 6 percent, 7 
percent, and 8 percent for the last 3 years. They would still 
be getting an increase, but they would have the use of the 
money, the flexibility for adopting new systems and new ways to 
be able to accomplish that.
    And then on top of that, SCHIP is also a capped program. I 
don't know if you know that. SCHIP is a capped program. And 
SCHIP each year, if the States don't use it, has to be sent 
back after 3 years. Under this program, this would be on top of 
the Medicaid program. And for those States like Oregon who have 
a system that can't use the SCHIP money, and it goes back into 
the Federal Government and gets redistributed, Oregon would be 
able to use that money for helping low-income families. And so 
it is a wonderful thing for Oregon, it is a wonderful thing for 
Wisconsin, it is a wonderful thing for every State.
    And then you asked about oversight. I want you to know 
that, yes, I have been aggressive. When I was Governor, 
Wisconsin received more waivers and we still have more waivers 
outstanding than any other State. I was very innovative, as you 
know, and I used the waiver process under the Clinton 
administration, under the first Bush and under the Reagan 
administration to get waivers to try things new. BadgerCare was 
one of my programs; family care, senior care, and welfare all 
were waiver programs that I used the Federal dollars in the 
Federal system to set up. And since I have been Secretary, I 
have granted more waivers than all previous Secretaries 
combined. And I am not shy about it, I am not bashful about it. 
I have to make sure they are budget-neutral.
    But under the waiver program that I have utilized with the 
States--and the Democrats and Republican Governors all have 
proclaimed that this is fantastic because they are able to set 
up new systems, we have been able to expand the system so that 
under the waivers that I have granted, 2.2 million more 
Americans today are covered by Medicaid and by Medicare; 6.7 
million more Americans have increased benefits. And I am using 
the waiver proposal, the TANF proposal and the SCHIP proposal 
to come up with a new streamlined, modern Medicaid proposal 
that will be bigger and better than TANF, and all you have to 
do is learn the details, and I am confident, knowing your 
intelligence and your willingness to help people that need 
health coverage, that you will be one of my most enthusiastic 
backers and supporters for it.
    Ms. Baldwin. One quick follow up on that detail.
    Chairman Nussle. The gentlelady's time has expired, and the 
question consumed three more answers' worth of time.
    So Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    And thank you, Mr. Secretary, for your testimony today.
    Before coming to Congress, I was in private business for 10 
years, which to me is all about going out and figuring out the 
goods and services people want and then producing them at the 
lowest price, which has produced the great American dream. 
However, we have a huge amount of our medical dollars that are 
spent in this country run through the government.
    One of the things I saw a number of months ago on the 
national press was a report that Medicare was spending five 
times as much on the same wheelchair as the VA did. Now, I know 
often the media doesn't quite get it right, but I do know in 
the fiscal year 2003 budget that the President's budget 
included competitive bidding for durable medical equipment, and 
I am under the impression that this budget does not include 
that proposal. If that is correct, why wouldn't you want to 
have competitive bidding for this?
    Secretary Thompson. We do want it.
    Mr. Hensarling. OK. Is my information incorrect? Your 
proposal does include competitive bidding?
    Secretary Thompson. Competitive bidding is going to be in 
the new Medicare proposal, sir.
    Mr. Hensarling. OK.
    Secretary Thompson. It is absolutely--yes.
    And another thing is I was hoping that Congress would 
change the contracting provisions that the House passed last 
year, which are arcane and as expensive as anything that we 
want. If you want to do something to help me a great deal to 
lower the Medicare costs and make it more efficient and more 
uniform, as several people have asked, change the contracting 
provisions as well.
    Mr. Hensarling. What else might be on your laundry list, 
since I am a firm believer that government can act smarter and 
still be able to deliver greater health care services without 
necessarily taking more money away from the American taxpayer? 
What else might be on your laundry list for Congress?
    Secretary Thompson. Thank you. I have been waiting for that 
question. Thank you.
    I would like to find you or anybody else who would like to 
sponsor a very progressive proposal for the uninsured. I can 
give you the details. I would like to have you sponsor a 
proposal for preventative health on diabetes and asthma and 
obesity, which would be the biggest savings.
    I would like to change the contracting provisions. Right 
now we are required to get recommendations from State medical 
societies and hospitals in order to enter into a contract for 
our contract carriers and our financial intermediaries. And we 
have to do this, and we can't consolidate them, and we can't 
require accountability. Can you imagine that? If you change 
that, it would be great.
    The fourth thing I would like you to do is I would like you 
to take some of the fraud and abuse money and set up a quality 
improvement. I have got the details. I need somebody to sponsor 
it, you know, take that money and be able to put in a mini 
Hill-Burton law.
    What is your name?
    Mr. Hensarling. Hensarling.
    Secretary Thompson. Mr. Hensarling, let us make it the 
Hensarling proposal, OK?
    Mr. Hensarling. If anybody could spell it.
    Secretary Thompson. H-E-N-S-A-R-L-I-N-G. Alright. And put 
that money in and be able to use that money as a match grant 
for hospitals and clinics to be able to tap into to come up 
with uniform new technological devices. It would reduce 
mistakes, improve efficiencies. We could develop almost a 
paperless system, which would drive down the cost. And then on 
top of that do something on the medical liability system, and 
we would reduce the cost of health care tremendously.
    And I have got ideas, and I have got legislation and 
programs. I just can't introduce them.
    Mr. Hensarling. Thank you. As my time is running out here, 
could you give us a little more detail of the savings that 
could be derived from a meaningful medical liability reform?
    Secretary Thompson. That could be billions of dollars. 
Total cost to the Federal Government right now is about $28 
billion. But that is just the cost that the Federal Government 
pays in liability judgments. That doesn't take into 
consideration the defensive medicine, which is hard to 
quantify. But if you want to, we can try and quantify it, but 
the actual amount is about 20 to $28 billion that we can 
actually itemize.
    Mr. Hensarling. Thank you, Mr. Secretary.
    Chairman Nussle. Mrs. Capps.
    Mrs. Capps. Secretary Thompson, welcome. I want to ask you 
about an issue we have discussed many times in the past. In 
fact, a couple weeks ago at Energy and Commerce Committee I 
brought up the topic of the nurse shortage. Nurses are critical 
to everyday health care as well as our Nation's efforts to 
prepare for terrorism and bioterrorism, and clearly the current 
shortage compromises these efforts. We have to keep in mind 
that currently some 19,000 nurses in the work force today are 
also in the Armed Forces Reserves. As they are being called up, 
our public health system becomes even more compromised. And I 
know you and I agree, and we have talked about the seriousness 
of this issue.
    I was very pleased to read in your fiscal year 2004 budget 
in brief document, wonderful language talking about the nurse 
shortage. You know I agree with it, and that is why we worked 
so hard to pass legislation last year, signed into law, 
addressing the growing nurse shortage. It is really a crisis. 
The Congress followed up on this in the omnibus appropriations 
bill that the President signed, increasing nurse funding for 
2003 by $20 million over 2002. But this budget now only asks 
for $98 million for these very same programs, $15 million below 
the 2003 levels, in the face of a crisis in health care because 
of a nurse shortage.
    Is the administration--I would like an explicit answer, if 
you would--going to revise its request, or are you going to 
support a cut in the budget for nursing in 2004?
    Secretary Thompson. Congresswoman, you know how passionate 
I am with you on this, and I have put together a budget based 
upon the figures that are given me. I tried to put more money 
into nurses. As you know, I always do. The document speaks for 
itself. I wish we had more, but we don't. There is an 
additional $21 million in the work force diversity that is 
assisting nurses that is not included in that. I tried to 
stretch as much as I possibly could.
    Mrs. Capps. Again I ask, could the administration revise 
this budget?
    Secretary Thompson. I doubt very much the administration 
will.
    Mrs. Capps. Then we are going to see areas continue to 
suffer, rural areas like Jim Nussle's in Iowa and many rural 
parts of my district, and urban centers where advanced practice 
nurses are really delivering primary health care. That piece of 
the budget was cut in order to put a few more dollars--robbing 
Peter to pay Paul, actually--into basic nursing. But the 
overall cut is certainly going to fly in the face of our 
bioterrorism preparedness. Who is going to give the vaccines if 
we ever need them?
    Secretary Thompson. First, I want to work with you on this 
and work with Congress. And if we can find some more dollars, I 
am certain that the administration would be happy to sign it 
into law.
    Secondly, I hope you come over and see what we are doing as 
far as dividing up the country in order to make sure that 
bioterrorism is taken care of with nurses, doctors, and 
morticians. If you have the opportunity, I would invite you to 
come over, and I think I would allay a lot of the concerns and 
a lot of the fears you have as far as bioterrorism is 
concerned.
    Mrs. Capps. Well, it is one thing to see things on paper, 
but it is another thing to be in the communities that all of us 
are in every day and know that hospital wards are closed 
because of a lack of nurses; that when emergency staff gather--
front line, first-line responders--that the pieces that are 
often in very short supply are the people to administer 
bioterrorism remedies and preventive mechanisms.
    We are talking about a few million dollars here in a very 
large budget, and I strongly ask you to reconsider the amount 
that has been allocated.
    Secretary Thompson. I want to be your partner in this, as 
you know, and I have talked to you many times about it, and I 
also want you to help us try and recruit more young people to 
go into nursing.
    We also have to do something about getting more of the 
senior nurses or more advanced educated nurses to go into 
teaching, because that is the bottleneck we have right now in 
our nursing colleges.
    Mrs. Capps. And that is exactly where these few million 
dollars we are talking about would be plugged right in. The 
need is so clearly there. I know you and I agree, and you know 
I am going to work very hard to increase the allocation in this 
budget in this very area, and we--I know that many of our 
communities are going to be right behind us in saying this is a 
crying need right now. It is not that high-cost of an item. It 
will stretch our resources just in the very areas that we need 
right at this time.
    Secretary Thompson. Your are a champion, and I salute you, 
and I thank you for your leadership.
    Mrs. Capps. And I will work with you. We are going to 
make--we are going to do something about this budget.
    Secretary Thompson. Alright.
    Mrs. Capps. I yield back the balance of my time.
    Chairman Nussle. Thank you.
    Mr. Bonner.
    Mr. Bonner. Thank you, Mr. Chairman.
    Mr. Secretary, thank you very much for being here. You 
talked in answering some of the questions about the number of 
waivers you have granted since you have been Secretary. I would 
like to say thank you. On February 10, your Department granted 
a waiver for 30 Alabamans, and especially a young man by the 
name of Nick Dupree, to be able to stay at home receiving the 
care that they deserve without having to be forced into a 
nursing home. So thank you very much for that waiver in 
particular.
    Secretary Thompson. Thank you very much, Congressman. I 
appreciate that.
    Mr. Bonner. You made a point in answering one of the 
questions about increased costs associated with tobacco-related 
illnesses. I have had a number of phone calls from my 
constituents over the last few days about a rumor afloat that 
suggests there is a possible $2-a-pack increase in the Federal 
cigarette excise tax being contemplated by your Department. 
This would raise that tax from 39 cents to $2.39 a pack. I 
don't smoke. I have never smoked. But it is a legal product 
that is grown in this country. And so can you tell me, is this 
a proposal that you or that your Department is contemplating?
    Secretary Thompson. I can tell you we are not 
contemplating. This administration does not raise taxes.
    Mr. Bonner. Thank you.
    The second question that is of real concern----
    Secretary Thompson. Saying that, I still think it would be 
nice to have some money set aside. I haven't found a way to get 
it yet, but I am looking for a fund to use for smokers to be 
able to quit. Seventy percent of the smokers that are now 
smoking would like to quit, and I would like to be able to help 
them.
    Mr. Bonner. Mr. Secretary, as you are aware, current 
Medicare hospital reimbursement policy takes into account the 
area wage index. This is something that, in my view, has long 
outlived its purpose with regard to areas such as the area that 
I represent in Alabama. It is hard for me to go back home and 
meet with my hospitals and doctors and nurses and give them an 
answer about why they are being reimbursed at a lower rate in 
Mobile, AL, than their counterparts in Biloxi, MS, or 
Pensacola, FL, which are just 60 miles away. Does this budget 
address this inequity?
    Secretary Thompson. No.
    Mr. Bonner. Would the administration be willing to take 
this on as a priority?
    Secretary Thompson. The Congress has got to take that on, 
because if you change one, Congressman, you take away from 
another. If you change the wage indexing, you take away from 
hospitals in Pennsylvania and New York and New Jersey for 
Alabama, Wisconsin, and Iowa. Now, coming from Wisconsin and 
Alabama, and Chairman Nussle, we may think that is a good deal. 
But Congress has got to make that decision as to how to deal 
with it.
    And I would like to point out, and especially for the 
chairman's sake, that last year the actuaries wanted to raise 
the wage differentiation from 71 percent of the reimbursement 
formula to 72 percent, which would have exacerbated the 
situation. I said no. We kept it at 71 percent.
    But when I was Governor, I tried to sue the Federal 
Government on this point. So I know what you are talking about. 
We have made certain improvements, but it is something that all 
of us collectively have got to sit down and work on.
    Mr. Bonner. My last question, Mr. Secretary, is that the 
home health industry has recently undergone a reduction in the 
reimbursement levels from Medicare, and this has had a chilling 
effect in terms of the services provided, especially to 
seniors, in my district and throughout the country. And so a 
question is does the administration have a plan, or would the 
administration be willing to work on a plan, to ensure the 
viability of home health care as we move forward into fiscal 
year 2004?
    Secretary Thompson. Yes. Of course we would. We are there 
to serve you. The Balanced Budget Amendment, which is a 
congressional law, in 1998 made that decision. It was not the 
Department.
    But, yes, I am. I would love to work with you on it. I 
would love to work with you on tobacco smoking, love to work 
with you on preventative health care, love to work with Mr. 
Hensarling on a lot of my ideas, and I would love to have some 
of you introduce them, because I think they are great ideas. 
All we have got to do is get some people to introduce them and 
get them passed.
    Mr. Bonner. We may try to get the Hensarling-Bonner bill on 
quality.
    Secretary Thompson. I would like that very much, and I 
would like to work with you on it, and I will give you the 
ideas, and then you can change it any way you want to and 
introduce it, and I will help you get it passed.
    Mr. Bonner. Thank you, Mr. Secretary.
    Thank you, Mr. Chairman.
    Chairman Nussle. Thank you.
    Mr. Emanuel.
    Ms. Majette.
    Ms. Majette. Thank you, Mr. Chairman.
    Good morning, Mr. Secretary.
    Secretary Thompson. Good morning. How are you, 
Congresswoman?
    Ms. Majette. I am fine. Thank you.
    I represent the Fourth District of Georgia, and the CDC, 
the Center for Disease Control and Prevention, has its 
headquarters in my district. And I would just like to take this 
opportunity to thank you for your management of that branch of 
your Department.
    Secretary Thompson. It is a great branch.
    Ms. Majette. Mr. Secretary, I have recently had the 
privilege of visiting the CDC headquarters, and I certainly was 
very impressed with your staff's expertise and their 
dedication. This branch of your Department is a vital link in 
the war or terrorism, as you well know, and I believe that I 
speak for all Americans when I say that I am proud of the work 
that the scientists and public health experts perform on our 
behalf.
    At this time when Americans are told to be concerned about 
the use of chemical weapons by rogue nations and are 
legitimately worried about chemical and biological attacks in 
our own cities, we know that preparing for these attacks is 
even more important than before. So I applaud your leadership 
of the CDC through this preparatory phase of its growth as we 
prepare to protect our citizens. The CDC is engaged in a very 
important facility building master plan, and within this plan 
the CDC will be able to enhance the exchange of information 
between public health professionals and allow them to better 
inform the public, which, as you know, is a vital mission. 
Also, as part of that plan the CDC will be much more effective 
at addressing the public health education and the disease 
prevention components about which you spoke with such passion 
earlier this morning, particularly in the areas of diabetes and 
asthma and obesity.
    So I would encourage you, Mr. Secretary, to make the rapid 
completion of these construction projects one of your 
priorities, as we don't know how soon these facilities might be 
needed to protect Americans from the unknown, as well as being 
able to continue to move forward on the public health and 
public education front.
    The second point I would like to make, and here is really 
where my question comes in, is with regard to Medicaid and 
SCHIP. Obviously those programs provide insurance not just for 
potential workers, but also for their families and what I would 
like to focus on now, our children. SCHIP currently covers more 
than 5 million children nationwide. In Georgia the program is 
called PeachCare. In Georgia, PeachCare provides more than 
50,000 children with health care coverage. Now, as I understand 
the budget, the proposed solution, Federal funding for 
PeachCare would be rolled into part of the grant that the 
States would use to cover Medicaid recipients' benefits. And, 
of course, you have talked about the flexibility implied by 
this system, but the potential effect it could have on the 
number of uninsured children cannot be ignored.
    What solution would you propose to deal with the very real 
possibility that, under this plan, States might run out of 
money in their grant and be forced to cut SCHIP rather than 
some of the other mandatory beneficiaries?
    Secretary Thompson. Congresswoman, they can do that right 
now. That is the SCHIP proposal. They can drop, they can add. 
And so that doesn't change.
    And second, Georgia could elect to join or not join. The 
Medicaid proposal is a completely voluntary program.
    Third, the new changes would require the same amount of 
children to be covered, plus you would not be able to drop in 
order to get the SCHIP money, you would not be able to drop it. 
It would allow the State of Georgia to be able to take some of 
the SCHIP dollars and help low-income working families get 
health coverage as well, provided there aren't any other 
further children eligible to get that money. Georgia would be 
able to have the discretion first to either join the program or 
not join the program, but could use that SCHIP money to help 
working families.
    This is what I did in Wisconsin. I was the first State to 
do this, called BadgerCare, and I found that if you allow the 
parent or parents to join up with their children, you get more 
children to go into the program. And that is what Georgia could 
do with this new, improvised, flexible Medicaid system. I am 
confident that you would have more kids covered under this 
change than under the current law.
    Ms. Majette. Thank you.
    Mr. Shays [presiding]. Thank you, Mr. Secretary. We are 
going to go to Trent Franks, and then Brian Baird would follow.
    Mr. Franks. Thank you, Mr. Chairman, and thank you 
Secretary Thompson. A lot of us have followed you over the 
years and just seen your innovative personality and attitude be 
kind of an inspiration to a lot of the folks that want to try 
to look at new ways to systemically change things.
    Secretary Thompson. Thank you.
    Mr. Franks. And you know Mr. Secretary, I think that all of 
us on this panel, Democrat and Republican alike, have 
essentially in this particular area the same goals, and that is 
to try to afford all Americans the very best health care that 
they can have at the least cost while still maintaining their 
dignity to direct their own lives as much as possible. And yet 
you have very succinctly put forth the other side of the 
ledger, which is this whole preventative area, and I think that 
is vitally, vitally important, and it just would change the 
actuary completely if we could follow your line of logic there.
    Having said that, in order to produce the best health care 
possible at the least cost, if we glance over our shoulder and 
look back, we see the highway of history, as it were, is indeed 
littered with the wreckage of socialism. And it is free 
enterprise and innovation that have brought revolution to a lot 
of areas. I mean, just recently we have seen Federal Express 
bring revolution to the post office. We have seen the breaking 
up of a telephone monopoly 20 years ago completely bring 
revolution to the entire industry where we have seen a profound 
decrease in the actual cost and, when you index it for 
inflation, enormous decrease. And yet with our medical costs we 
see no end in sight in terms of the escalation.
    And one of the things that I found very fascinating in the 
proposal here was the President's proposal to have a health tax 
credit, a refundable tax credit for low-income and moderate-
income individuals that are not covered by insurance. And I am 
just wondering, has your Department--or would it be wise, 
considering the actuaries that we face, for us to look at that 
more broadly and ask ourselves what do we spend per person 
enrolled in Medicare and Medicaid, and ask ourselves if indeed 
this money were made available to them in the form of a 
government draft or a refundable tax credit could be assigned 
to private insurance, where would we be? What could they buy? 
And would it indeed be possible to create the same revolution 
in health care that we did in these other industries that I 
mentioned?
    Secretary Thompson. Thank you so very much, Congressman. 
Let me take your question and expand on the answer if I may.
    If you really want to get at health care costs, we have got 
to have a Medicare prescription proposal, because that helps 
the States as well because it funds the dual-eligibles' 
prescription drugs. The Medicaid proposal that I am advancing 
is completely innovative, it is completely new, and it changes 
the system and allows the entrepreneurship of Governors and 
legislators to develop a whole new medical system in their 
States. That is why Democrats and Republicans alike should 
really like this proposal. Most Democrat Governors have taken 
advantage of the waivers that already do what I am suggesting 
we do in the new Medicaid law, and I know Republicans have as 
well.
    The third thing, let us take the President's tax credit 
proposal. I think what we should do is expand it so that we 
would require every State to put all of the uninsured into a 
class. So for the State--I believe it is Arizona--I don't know 
how many uninsured there are in Arizona, but let us say you 
have 2 million people in Arizona that are not insured. The 
Governor would put them all in a class of the uninsured and 
would be able to negotiate. Could you imagine how many 
companies would like to bid on 2 million people? And you have 
some very healthy individuals in that uninsured population. The 
categories of the uninsured are usually young, healthy people 
that are not making enough money or starting out and don't 
think they are ever going to get sick. So it is a good class, 
and it should be quite competitive. There are some other people 
that can't get a job and have got some other problems that just 
can't get insurance. But overall, the class would be very 
competitive if you had that big of a buying category.
    So if you had the buying category for the uninsured, and 
then allowed the State or the individual to go down to the IRS 
office, get the number from the IRS office which would equate 
to cash, $1,000 for a single, $3,000 for a family to buy a 
family plan, you could conceivably move millions of people from 
being uninsured to insured, and it would lessen the cost of 
health delivery because those individuals go to the emergency 
ward because they wait until they get sick. But if they got 
insurance, you could also then put in, which I would like to 
see, disease management or preventative health, and you would 
save megabucks. It would work, it would solve the uninsured, 
and it would also improve the quality of health in America.
    Mr. Franks. Thank you, Mr. Secretary. My time has expired.
    Mr. Shays. Thank you. I was probably not paying attention 
to the clock. I am sorry, folks.
    What we are going to do is we are going to go to Brian 
Baird and then Rosa DeLauro.
    Mr. Baird. I thank the chairman and thank the Secretary for 
your--I found your testimony refreshing and interesting. I 
would like if your staff could give me a copy of the proposal 
you just described for dealing with uninsured. I would welcome 
that.
    Secretary Thompson. Thank you. It is in my head, but I will 
write it down for you.
    [The information referred to follows:]

       Provide Individual Tax Supports for Health Insurance Costs

    Offering health credits. The President's budget also proposes $89 
billion in new health credits to make private health insurance more 
affordable for Americans who do not have employer-subsidized insurance. 
As part of the Department of Treasury budget proposal, eligible 
families with two or more children and incomes under $25,000 could 
receive up to $3,000 in credits to cover as much as 90 percent of the 
costs of purchasing health insurance. The credit phases out at $60,000 
for families. Eligible individuals earning up to $15,000 annually would 
receive up to a $1,000 tax credit. For individuals, the credit phases 
out at $30,000. The credits are refundable, so their value does not 
depend on taxes owed. Beginning in July 2005, advance credits will be 
available allowing individuals to directly reduce their monthly premium 
payments. The health credits could also be used in privately sponsored 
health insurance purchasing groups. This proposal is expected to 
provide coverage for Americans who would otherwise be uninsured for one 
or more months, and will help many more working low- and moderate-
income families who currently purchase private health insurance with 
little or no government help.

    Mr. Baird. Alright. Let me throw out a few things and then 
let you choose how to answer them in the 5-minute time in the 
interest of everybody else.
    First of all, I want to associate my comments with that of 
Chairman Nussle. Washington State, as you know, is quite 
disadvantaged relative to other States in Medicare 
compensation, and the fundamental principle to me is everybody 
pays into the Medicare system at the same rate, everybody 
should receive the same benefits regardless who they are. And 
if I may, and I don't mean this to sound critical, but you have 
been, I think, constructive and shared that you have a number 
of ideas to fix a number of problems and invited Mr. Hensarling 
and others to join you on fixing those problems. I will offer 
to you that I will be happy to work with you to fix this 
problem, and if you have some ideas for how we can do so, I 
would appreciate it. So don't just leave it to the Congress. 
You are the Secretary, and we will work with you on this, but 
this is, I would say, the number one priority for many of our 
States in health care.
    So secondly, I want to associate myself with Lois Capps' 
comments on loans. I just came back from a tour of several 
community colleges, and they are very concerned. It is not your 
Department, but it affects this issue of nursing supply. I 
didn't mean loans, I meant vocational--Carl Perkins vocational 
programs.
    The Carl Perkins cuts proposed will substantially adversely 
impact our ability to train nurses, and I hope you will work 
with your colleague, Mr. Paige, and others and the 
administration to fully fund those vocational funds for nurses.
    Finally, let me ask as a former practicing clinical 
psychologist, I am interested in mental health issues as you 
see them, and where you see that going from here, and how we 
can address the growing mental health needs and reduction in 
services for folks who need mental health. And thank you for 
your comments.
    Secretary Thompson. Thank you, Congressman.
    The first one on the uninsured, I would love to sit down 
with you. I have got some and I will put out some of my ideas 
in writing and send them to you, and if you want me to come up 
to your office, or you can come down, and I would like you to 
come down and see the communication room. I keep saying that 
because I think you would find it very fascinating and 
exciting, and allay a lot of your fears, which hopefully will 
allay a lot of your constituent fears about how well we can 
respond to a bioterrorism, chemical, or radiological attack.
    And secondly, in regards to the Carl Perkins, you will have 
to work with my colleague. I am confident he will want to work 
with you. Nursing is very important to all of us, and 
Congresswoman Capps has taken the leadership role, and I 
commend her every time I get a chance to see her on that, as 
well as several other people. Billy Tauzin was another great 
leader in this thing. And I think we can work something out.
    In regards to the SAMHSA budget, we have put in $200 
million for a new State voucher program that hopefully is going 
to allow the States to set up accountability and 
responsibility, and allow for more money to get out to faith-
based communities as well as other individuals in the community 
to offer mental health services. We are also putting in an 
additional $16 million for mental health services, $9 million 
for children's mental health services, and $7 million for 
projects for assistance with transition from homelessness. And 
we are putting in a lot of--I think it is $50 million in a new 
program to counsel children of prisoners, which has some mental 
health association, as you well know.
    Mr. Baird. How do those increases correspond to 
inflationary levels? Will that allow us to maintain current 
levels of spending?
    Secretary Thompson. It increases them quite a bit.
    Mr. Baird. Over inflation?
    Secretary Thompson. Much, much higher. Probably the biggest 
increases in this program ever. In fact, the voucher program is 
brand new.
    Mr. Baird. Let me, if I may----
    Secretary Thompson. And as you know, the President has come 
out in favor of equal parity of mental health and believes very 
strongly in that.
    Mr. Baird. I would strongly endorse that and was going to 
ask you that very next question. I would very strongly endorse 
that and appreciate your commitment to that.
    Secretary Thompson. I was in favor of that when I was 
Governor, but I never quite got the legislature to go along 
with that.
    Mr. Baird. I will work with you on that one, too.
    On the SAMHSA front, one of the concerns that you may be 
interested in looking into this, I don't know enough, but I 
hear from folks that dual-diagnosis patients, i.e., patients 
who have substance abuse problems and mental health problems. 
The funding streams are tied up in bureaucracy occasionally, so 
that if you are trying to treat a patient who is, say, dealing 
with affective disorder and has an alcohol problem, which is 
very common, you are restricted. And some of your reform 
efforts might look at that, and I would also be happy to work 
with you on that.
    Secretary Thompson. You know, Congressman, the best thing 
you could do for me is to point out exactly where it is. If you 
have got prime examples, I love ideas, and I love to find out 
where something is wrong in my Department, because it doesn't 
take me long to get it fixed. I tell people if they believe in 
the status quo, I don't want them on my team. And if they are 
not living on the edge, they are taking up too much space. So I 
want individuals that are willing to make changes.
    Mr. Baird. Thank you.
    Mr. Shays. Thank the gentleman.
    We will go to Doc Hastings and then to Rosa DeLauro.
    Mr. Hastings. Thank you, Mr. Chairman.
    And, Mr. Secretary, welcome to the committee.
    Secretary Thompson. It is always a pleasure. How are you, 
my friend?
    Mr. Hastings. I am doing well. Thank you.
    I do want to, however, associate myself with the remarks of 
my colleague from Washington and the chairman, because as was 
mentioned, Washington is one of those States that is under-
reimbursed by the formula on Medicare. And I have had examples 
where providers have come in, and, you know, you have heard all 
the horror stories. So I look forward to seeing your proposal. 
And I hope there is a lot of choice in there because it----
    Secretary Thompson. Congressman, the truth of the matter is 
we have to work together on this, because it just can't be 
something from the administration.
    Mr. Hastings. I understand that, but you have to put the 
proposal down, and we have to respond to that. So it always has 
been amazing to me the idea that when you turn 65, you can't 
make a decision; it boggles my mind, and that shouldn't be so.
    Mr. Shays. A little more personal now, isn't it?
    Mr. Hastings. Well, it is. Yeah. A little ways to go there.
    But one thing I want to talk about. You mentioned Medicaid. 
You spent a lot of time on Medicaid. You may have responded to 
this when I was gone, but--and you also tied Medicaid reform 
with SCHIP. In Washington State, our legislature passed a plan 
prior to SCHIP that covered funding up to 200 percent.
    Secretary Thompson. You can't use your SCHIP money. This 
one would allow you to use it.
    Mr. Hastings. That is exactly my question. The flexibility 
that you are talking about----
    Secretary Thompson. Absolutely.
    Mr. Hastings [continuing]. As it applies to Washington 
State would allow that to be used.
    Secretary Thompson. Absolutely, Doc. There are four States, 
Washington, New Hampshire, New Mexico, and Vermont, that can't 
use their SCHIP money because their legislature went out first 
and passed it, and they have been discriminated against because 
they can't use it. What they do is they have to send it back 
in, and then it is sent out on an apportionment basis to other 
States. So Washington's SCHIP money is not going to Washington; 
it is going to all the other States around the country.
    This proposal would allow you to use your SCHIP money. For 
instance, it would allow you not only for children, but it 
would allow for low-income working parents of those children to 
sign up for health insurance as well and have the Federal 
Government pay 70 percent of it. It is a wonderful program. As 
I told Congressman Moran, I would have walked to Washington 
from Wisconsin to get this deal.
    Mr. Hastings. Washington, DC.
    Secretary Thompson. To Washington, DC, and I think the 
Governor of Washington would like the same. I am working with 
Governor Locke, and he sees the merits of it. I am confident 
that unless it becomes a partisan issue, he will strongly 
support it.
    Mr. Hastings. Well, thank you very much, Mr. Secretary, for 
that clarification, because I felt that Washington fell under 
that, and I just wanted to get it on the record that that is 
precisely what you are proposing to take care of those States 
that are ahead of the curve, so to speak. So I appreciate very 
much your response to that.
    Secretary Thompson. Thank you very much.
    Mr. Hastings. Thank you.
    Mr. Shays. My colleague from Connecticut, Rosa DeLauro.
    Ms. DeLauro. I want to thank the Chair, and welcome, Mr. 
Secretary. It is a pleasure to see you today.
    Secretary Thompson. It is always a pleasure to see you, as 
you know.
    Ms. DeLauro. Thank you. And I look forward to your coming 
before Labor/HHS to have an opportunity for additional 
questions.
    The first is, I think, a different change, although I 
didn't hear all the questions. I want to address the issue of 
child care and TANF. In 2002, and this is a quote from you, Mr. 
Secretary, that was absolutely right then, and it is absolutely 
right now, ``I can tell you from my experience as Governor of 
Wisconsin, access to child care assistance can make a critical 
difference in helping low-income families find and retain 
jobs.''
    We know that that is the case, given what today is all 
about. And yet, in the President's budget, it flat funds the 
child care and development block grant. It has 4.89 or $4.78 
millions----
    Secretary Thompson. It has $4.89 million.
    Ms. DeLauro [continuing]. Over the next 5 years. The fund 
currently serves only about one in seven eligible children.
    Let me take the State of Connecticut; 4,000 families are on 
a waiting list for child care. The waiting list in Connecticut 
opened in August, 2002; and we know that States have directed 
substantial shares of TANF funds to child care in recent years. 
But, even with this, the child care is only reaching a very 
small proportion of those children who are eligible.
    Now we have got some changes in the new welfare reform 
legislation. And I--we talk about welfare reform having worked 
and, you know, tout the success of that, but we also want 
change. We want to say, let's move from a 30-hour work week to 
a 40-hour work week; and I am not disputing that. But if I am 
going to go to work for 40 hours, rather than 30 hours, what in 
God's name am I going to do with my kids? I haven't been able 
to take care of them in those 30 hours, and now I have got 40 
hours. Where do I go and what do I do when this backs a law in?
    I don't understand the rationale for freezing child-care 
funding in the budget. I am not even going to talk about 
education and training not being part of what we are talking 
about. Good Lord, if we could all get educated and trained in 
the same way, then maybe we could do away with the welfare 
system and so forth. But let's leave that for Labor-HHS. Let's 
just focus in on the child care.
    I just think if we are now going to say to States, you are 
now going to have to deal with this, let's keep in mind you are 
not able to deal with it now. But now you have got to deal with 
this because we are going to move from 30 to 40. You handle it.
    What happens with this current commitment that we have to 
lower-income workers? The States are going to have to do this. 
I mean, this is unfunded mandate. I don't think we can just 
slip that by and say it is not.
    Now the fact of the matter is, what kind of analysis--and I 
applaud the work that you do in your shop. What kind of 
analysis has HHS done to determine whether this welfare plan is 
feasible? The current--my State of Connecticut--my colleague 
from Connecticut will address this issue. We are in a tough 
spot in the budget in the State of Connecticut. Most States are 
this way. How are they going to handle these, this new 
requirement? What has your shop done to analyze this to find 
out if the fiscal condition of the States is going to allow 
them for dealing and handling with these new requirements?
    Secretary Thompson. Thank you very much, and thank you for 
your passion. You know, I really like your passion; and I would 
like to have a chance to discuss things with you, because we 
get along.
    Ms. DeLauro. We do.
    Secretary Thompson. Several things I want to point out.
    First off, the amount of money is not flat funded. If you 
look, the number of children has been reduced in the last 5 
years, but the $4.8 billion was set. So you have half as many 
children today as you did back in 1997 when you passed the 
first TANF bill.
    Secondly, the number of hours is not only work hours. Work 
hours go from 20 to 24. The additional 14 and a half hours is 
for education, taking care of your children, allowing parents 
to be involved in PTA, going down to monitor your children in 
class, and being with your children. That would qualify for the 
14 and a half hours.
    The third thing is the House bill increased the child 
support money by an additional $3 billion--$1 billion in 
mandatory, $2 billion in discretionary. So there is an 
additional $3 billion in the over 5 years in the House bill 
that passed.
    This is something that most people don't understand--under 
the existing TANF law, there is a provision that prevents 
States from using any excess money for child care. They have to 
use it on benefits. Right now there are $2.5 billion--$2.5 
billion of unused TANF money out in the States that could go 
for child care; and some of that money is in Connecticut. If 
the TANF bill as we propose passes that is money that could go 
for child care, education and transportation instead of for 
benefits. So there is an additional $2.5 billion that is locked 
up because of the restrictions under the current TANF law which 
will be changed in the new TANF law.
    Ms. DeLauro. Is that money fungible? Can it be used 
anywhere or does it have to be used just on----
    Secretary Thompson. Just benefits. It all can be used under 
the current laws just for cash benefits, and that is why it is 
not being used. Therefore, if the new TANF law goes through, 
that money could be used for child care as well, Congresswoman.
    Ms. DeLauro. Just a quick point. I know that the number of 
kids may have gone down, but I think that you are looking at 
the TANF caseloads. With all due respect, Mr. Secretary, I 
believe that there are loads of kids out there who are eligible 
who we now cannot accommodate in any way. It is still my fear 
that we are not going to be able to accommodate them, and there 
are going to be more because more people are becoming 
unemployed in today's economy.
    Secretary Thompson. But the caseload is still declining. 
The view shows that the decline has been through September, and 
that was a report that was put out by my Department I think 
last week. That is through September through the fiscal year.
    I don't have new numbers for the next quarter. You may have 
more modern numbers than the Department does. I don't think you 
do, but ours show that there has been a decrease of an 
additional three and a half percent in past year and among 
single parents, 6 percent. So we are still working on that.
    But, you know, this thing has got a long ways to go. But I 
hope that the Senate will pass it, and hopefully we can 
continue to work to improve it.
    Ms. DeLauro. Thank you, Mr. Secretary. I thank the Chair.
    The Chairman. Ms. Brown-Waite.
    Ms. Brown-Waite. Thank you, Mr. Chairman.
    Mr. Secretary, I represent a district in Florida just north 
of Tampa, a very heavy retiree population. Medicare+Choice is a 
very successful program in the counties where it is offered. 
The problem is that we don't have it in all of the counties and 
the reason being the reimbursement level.
    Secretary Thompson. You are right.
    Ms. Brown-Waite. Is it accurate that previously there has 
only been a 2-percent increase in Medicare+Choice 
reimbursement, even though their costs have gone up 8 percent?
    Secretary Thompson. You are absolutely correct.
    Ms. Brown-Waite. Well, Mr. Secretary, then it just seems to 
me as if we are on a road of making sure that Medicare+Choice 
is available in fewer and fewer areas.
    Secretary Thompson. You are absolutely correct.
    Ms. Brown-Waite. What is the reimbursement that is planned 
for this budget that we have before us? What is the 
reimbursement increase?
    Secretary Thompson. A lot higher as it was last year. But 
Congress didn't pass it.
    Ms. Brown-Waite. What is a lot higher? What is the 
percentage that is in your budget?
    Secretary Thompson. I will be able to tell you that very 
soon, but it is a lot higher.
    Ms. Brown-Waite. A couple of other questions, Mr. Chairman, 
if I may continue.
    Secretary Thompson. Yes, you know, I agree with you. I 
mean, we are starving the problem as a result of us going down. 
We have got to put some more money into it if we want to make 
the program successful, and the seniors that do have 
Medicare+Choice like it.
    Ms. Brown-Waite. The seniors who do have it do like it, but 
I have counties where Medicare+Choice has pulled out because of 
inadequate reimbursement.
    Secretary Thompson. And you are right.
    Ms. Brown-Waite. The----
    Secretary Thompson. Congress made the decision in 1998 that 
they were going to try and get it to expand faster into rural 
areas, so they decreased the amount of reimbursement. That was 
a conscious decision by Congress, which reduced the 
reimbursement to 2 percent and then even some years lower than 
that from 1998 up until the present. Until last year we tried 
to increase it to 6.5 percent. And Congress came back with 2 
percent. So we have tried in the administration to raise it, 
and as a result it was a failed decision.
    I mean, I am not being critical. Probably Congress thought 
they were doing the right thing, but they made the wrong 
decision by starving a growing program in urban areas in order 
to try and force it to go into rural areas by giving more money 
to rural areas, and then nobody showed up.
    Ms. Brown-Waite. My next question concerns the cost of the 
prescription drug program. In the budget that has been 
proposed, it is a $400 billion amount for the prescription drug 
program. Previously, the amount was $190 billion that was 
proposed last year. Help me to understand why the substantial 
increase in the amount.
    Secretary Thompson. The increase is because Congress as 
much as told us that if we didn't come in with an amount that 
was going to be close to what they were working on that the 
proposal would be a nonstarter.
    Secondly, we want this proposal to pass.
    Third, we are making some meaningful changes which are 
going to require more dollars be put into it.
    And, fourth, we want to get something out there that has a 
much better probability to get fast action, which needs to be 
done. I am fearful that if it waits till next year it is going 
to get tied up in presidential politics, and once again we will 
fail to gets a Medicare proposal passed.
    Ms. Brown-Waite. The last question that I have for you 
concerns reimbursement to physicians. In Florida, because of 
the aging population, up to 85 percent of the patient caseload 
are Medicare recipients. The doctors had cuts, substantial 
cuts, and when your income goes down because of cuts and your 
expenses because of medical malpractice go up, I have 
physicians who are specialty physicians who are moving out of 
the area. Now the States and the Federal Government hopefully 
will do something with tort reform. But what about the 
reimbursement rate for physicians? You know, 85 percent of your 
caseload in my district for the doctors that I have spoken to 
are Medicare. So they can't offset that with private pay.
    Secretary Thompson. I am happy to report, with the work of 
the Congress and the most recent appropriation proposal which 
was signed into law by the President, we have been able to 
adjust upwards from a 4.4-percent reduction for doctors to a 
1.6-percent increase, which will be published on Friday of this 
week. So on Saturday, March 1, doctors will, instead of getting 
a cut, get a 1.6-percent increase.
    Ms. Brown-Waite. What is in the budget for the 2003-2004--
any increase?
    Secretary Thompson. That is going to have to be decided by 
Congress, Congresswoman.
    Ms. Brown-Waite. Thank you.
    Chairman Nussle. Thank you.
    Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Chairman, before I begin my questions, I noticed on the 
schedule that the hearing for the education part of the budget 
had evaporated. That is a very important part of the budget, 
and I was wondering if we could get--if the Secretary can make 
it, if we could hear from somebody from the administration that 
can explain to us what is happening to education funding.
    Chairman Nussle. I thank the gentleman. If you would yield, 
the OMB Director did cover that in his testimony; and it was 
our hope to be able to get Secretary Paige. We had him 
scheduled for tomorrow, but there was a scheduling conflict 
together with our defense hearing. I had to make a judgment 
call, and defense took a priority at this moment in time 
because we had the opportunity to have the Secretary.
    Having said that, I would be happy to work to try to 
include an education hearing. That is--we have done that in 
years past. It was no intent to do anything but just to make 
sure we accommodate all of the different, various schedules.
    Mr. Scott. I would hope that we could do that before the 
mark up, Mr. Chairman, so it would be a meaningful hearing. I 
thank you for your cooperation.
    Mr. Secretary, it is good to see you again.
    Secretary Thompson. It is always a pleasure, Congressman.
    Mr. Scott. You mentioned diabetes, and I was wondering if 
you were familiar with the research that is going on in the 
Eastern Virginia Medical School.
    Secretary Thompson. Where?
    Mr. Scott. Eastern Virginia Medical School. If not, I would 
like to get you about a one-page summary of some of that very 
exciting research.
    Secretary Thompson. Please do. I speak about diabetes all 
over the country, and any information that might further 
enhance my ability to speak on it, I would appreciate.
    Mr. Scott. Thank you.
    The Medicaid option, I am not sure I completely follow it. 
But my question would be, as I understand, it is a option--you 
don't have to take it?
    Secretary Thompson. That is right. It is voluntary.
    Mr. Scott. And if you don't take it the rules don't change?
    Secretary Thompson. The rules don't change.
    Mr. Scott. If you switch and figure out it was a bad idea, 
can you switch back to the old system?
    Secretary Thompson. No.
    Mr. Scott. OK. Low-income heating assistance. It is my 
information that heating costs per gallon have gone up 30 to 50 
percent. That is before we go to war and might get more than 
that. The LIHEAP budget, as I understand it, goes up 20 percent 
from last year, but even funded from the year before that. How 
is that going to work for people getting--buying the same 
number of--are they going to buy fewer gallons, be able to buy 
fewer gallons of heating fuel, or will fewer people be eligible 
for coverage?
    Secretary Thompson. That question has not been asked. I 
haven't looked into it, Congressman. But I certainly will and 
get an answer back to you.
    I can tell you that the Congress took out discretionary 
money of $100 million and put it into the base funding so the 
LIHEAP money is going to be at $1.8 billion this year, in 
fiscal year 2003; and that is approximately $200 million more 
than it was this year.
    [The information referred to follows:]

                     Low-Income Heating Assistance

    While heating oil prices have spiked recently, we are moving into 
the time period when oil use and purchases decline. The Department of 
Energy expects this to be a temporary price increase. You asked how 
price and funding changes would affect the amount of fuel LIHEAP buys 
for each household, and the number of households served. Since LIHEAP 
is a block grant, States make those decisions. This year, I was 
concerned with higher-than-expected fuel oil prices; that is why a 
significant portion of the contingency funds I released January 24 were 
directed to States based on their dependence on fuel oil. My fiscal 
year 2004 budget request includes $300 million in contingency funding 
to address unanticipated needs such as those due to bad weather or 
abnormally high prices.

    Mr. Scott. This year was a cut from the year before, as I 
understand it.
    Secretary Thompson. No, it was in discretionary money which 
was not all used, Congressman.
    Mr. Scott. OK.
    Secretary Thompson. This is going to be a mandatory fund so 
it will all be sent out, $1.8 million, which will be more money 
than it was this year.
    Mr. Scott. Mr. Secretary, the last time----
    Secretary Thompson. I just have been corrected. It is the 
$200 million that was added to the 1.8, so it will be $2 
billion next year in 2004. It is going to be 1.8 in 2003 and $2 
billion in 2004.
    Mr. Scott. OK. And it was $2 billion in 2002.
    Secretary Thompson. It was 1.6 in 2002. It is 1.8 in the 
fiscal year we are in, 2003; and it will be $2 billion, 
additional $200 million, for fiscal year 2004, Congressman.
    Mr. Scott. Mr. Secretary, the last time I was asking you 
questions, I asked you about discrimination.
    Secretary Thompson. Yes, I know you did.
    Mr. Scott. And you said at that time that discrimination 
with Federal money was wrong, period.
    Secretary Thompson. Yes.
    Mr. Scott. Trent Lott said that if Strom Thurmond had been 
elected we wouldn't have had all these problems over all these 
years. Can you explain to me what problems the 1965 executive 
order has caused which prohibits discrimination in Federal 
contracts?
    Secretary Thompson. I don't know what Trent Lott has got to 
do with that. Are you talking about the faith-based initiative?
    Mr. Scott. Yes, if the faith-based organization is hiring a 
truck driver, an accountant, a typist or a custodian, they can 
tell them, no, we don't hire your kind. You are in the wrong 
religion under the President's executive order.
    My question was----
    Secretary Thompson. Nothing in the faith-based initiative, 
Congressman, promotes or encourages hiring discrimination. It 
doesn't take away any freedom that they currently have.
    Mr. Scott. Mr. Secretary, before the President's executive 
order, you could not tell somebody that they couldn't be hired 
solely because of their religion with Federal money. After the 
executive order, you could tell somebody--you can practice all 
the bigotry you want and tell somebody, no, you don't--you 
can't get hired because of your religion. If it is an all-white 
church, you can manufacture an all-white work force. You 
couldn't do that before the President's executive order just a 
few weeks ago, isn't that right?
    Secretary Thompson. It does not discriminate against people 
on race or sex.
    Mr. Scott. If it is an all-white church, you can hire an 
all-white work force.
    Secretary Thompson. It allows religions to hire people from 
that religion.
    Mr. Scott. Or exclude religions. You can consider religion 
when you hire. In other words, we don't hire your kind. You are 
in the wrong religion.
    Secretary Thompson. You can consider religion when you 
hire, yes.
    Mr. Scott. Is that a problem?
    Secretary Thompson. I certainly hope not.
    Mr. Scott. I mean, before the executive order, you couldn't 
do that.
    Secretary Thompson. But it doesn't allow you to 
discriminate on race or sex.
    Mr. Scott. Just religion.
    Secretary Thompson. Just religion.
    Mr. Scott. Is that a good idea?
    Secretary Thompson. Yes, I believe it is.
    Mr. Scott. That is not what you said last time we talked.
    Secretary Thompson. I said last time that we should not use 
Federal dollars for discrimination based upon race or sex. I 
believe that the President has made a decision that money 
should get to faith-based groups wherever possible, where they 
have not had the opportunity in the past. And the executive 
order, as you pointed out, allows religious organizations to 
look at religion in hiring, but not based upon race or sex.
    Chairman Nussle. Thank you.
    Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman; and, Mr. Secretary, 
good afternoon to you.
    Secretary Thompson. Good afternoon.
    Mr. Davis. Let me ask you about a comment that you have 
made in a few press conferences and I think you made in 
response to Mr. Gutknecht's questions earlier. That is, the 
degree of flexibility that States would have to make certain 
geographic changes in the way that they administer the Medicaid 
program. You were stating that one of the virtues of the 
program was that Minnesota, for example, or, in my case, 
Alabama could recognize some of the differences and costs and 
needs between a central part of the State, a southern part of 
the State. Give me some--let me come at it this way.
    Secretary Thompson. OK.
    Mr. Davis. What kind of reassurance can you give people who 
are living in certain rural areas or in certain isolated parts 
of States that they won't get caught in that calculus that 
States are trying to perform? It seems that one aspect of 
flexibility under your program is that it would give States 
some capacity to shift resources away from certain high-need 
areas. If that assumption is not right, tell me why it is not 
right.
    Secretary Thompson. It is not right. Let me tell you why.
    The current law requires every class to be treated 
uniformly. These are optional programs. The State only has two 
choices. Continue the program as is, or drop the program for 
the optional population. And if it is in central Alabama--you 
represent Alabama----
    Mr. Davis. Alabama, that is right.
    Secretary Thompson [continuing]. Central Alabama, I would 
think your constituents would like to have a third choice, 
instead of either. Because Alabama has got financial troubles 
and they are going to cut back some of their program, I would 
like to think that most people in your constituency would say, 
I would like to have a third option. Maybe reconfigure the 
benefits and allow the Federal dollars to continue and allow 
the program to continue.
    The States don't have that option under the existing law. 
The States would have that under the new proposal.
    The fourth option would be that the State would not have to 
do it. It is completely voluntary for the State.
    And, the State would pay less and get more Federal dollars.
    I think all of those things would argue for you to support 
it.
    Mr. Davis. Let me come at it this way, Mr. Secretary. Let's 
say----
    Secretary Thompson. Did I answer your question?
    Mr. Davis. To some degree. To the degree you didn't, I will 
follow up on it right now.
    Would the States have the flexibility if they opted into 
this program to say, for example, there is a particular part of 
our State where we think that the problem of children having 
dental care is not as acute as some other part of the State so, 
therefore, in this part of the State we are going to cut back 
on funds for dental care for children. Is that a hypothetical 
under your proposal?
    Secretary Thompson. I can't imagine any State legislature 
ever allowing that to pass. Can you?
    Mr. Davis. Well, coming from Alabama I have seen things 
like that happen in my State, so it is--we haven't had a 
Governor like you, unfortunately.
    Secretary Thompson. Congressman, you would have to pass 
that particular law in the legislature, and I can't imagine in 
modern day that would ever happen.
    Mr. Davis. But there is nothing in the proposal, nothing in 
the regulations that would constrain the States' abilities from 
doing that.
    Secretary Thompson. Unless it is the mandatory population. 
All the rights and all the responsibilities and all the 
protections are there, but the State now could drop the whole 
class, and that would be much worse.
    Mr. Davis. Let me shift----
    Secretary Thompson. You would have to take dental away from 
the whole class, but you would still allow for basic benefits, 
which is a tremendous benefit for the States instead of 
dropping it. Because the problem is, under the existing law, 38 
States have dropped optional programs this past year. A million 
people have already been dropped. Next year, 42 States are 
going to cut back even further; and more people are going to be 
dropped. I want to give these States the option to keep those 
Federal dollars coming in and give them the option to keep 
these programs alive.
    Mr. Davis. Let me cut you off for one second so I can sneak 
one more question here. Let me turn to Head Start, which I 
don't think we have covered today.
    Let me anecdotally report to you that in my district a 
number of people are very concerned about the changes in Head 
Start; and certainly, as Governor, you have had a fair amount 
of experience with the program.
    Secretary Thompson. Very much so.
    Mr. Davis. In the time that you were Governor of Wisconsin 
did you find the Head Start program to be less than effective 
and, if so, did you speak out on that? Did you make attempts to 
change it as Governor?
    And the final part of that, Mr. Secretary, give me some 
sense when right now most statistics indicate that children are 
performing at a better level educationally coming through Head 
Start than children who don't go through Head Start at the same 
socioeconomic level, given the fact that those educational 
benefits are being conferred, why shift the program from HHS to 
Education at all?
    Secretary Thompson. I am not going to answer the last part 
of it, but I will answer everything else.
    Mr. Davis. Can I have a point of order on that, Mr. Chair?
    Secretary Thompson. While the program is in the Department 
of Health and Human Services I am going to do everything I 
possibly can to make it the best program possible.
    Secondly, I did not, when I was Governor, get involved in 
Head Start because I had no ability to. I would have liked to. 
I think Head Start is an excellent program. But I would like to 
be able to take my pre-education dollars from my early 
childhood programs that I put in when I was Governor for early 
childhood, be able to use the opportunity to integrate them in 
with Head Start and make an even better program. Under the 
current law, I can't do that.
    Under the changes that are being advocated, it would allow 
Governors to be able to work with the Head Start people and be 
able to use the pre-education dollars from the State, if the 
State has any, to work with Head Start to improve the overall 
program, which is completely voluntary and would require the 
sign-off of both the Secretary of Health and Human Services and 
the Secretary of Education.
    Mr. Davis. OK. Thank you, Mr. Chairman.
    Chairman Nussle. Thank you.
    Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for being here.
    If we were to look back at this hearing 5, 10 years from 
now and a historian judged it, a big-picture presentation would 
seem to me to be something like States have deficits and those 
deficits are being used, basically, and Medicaid, as we know 
it--and let's not prejudge that issue--Medicaid needs a lot of 
changes and you have been, you know, great in granting 
flexibility to States. It also seems like Federal deficits are 
being used to end Medicare and perhaps Social Security as we 
know it. And to me, it is important for us to be aware of the 
magnitude of the changes at the time they are being made.
    Because, so far at least, you haven't issued a press 
release to this effect, yet the cumulative weight of the 
proposals is even attracting the attention of folks like Robert 
Pear and Robin Toner at the New York Times in their February 24 
article where they start hinting that this isn't son of Bush or 
son of Reagan. This may be son of Barry Goldwater sort of level 
of changes. So that the public can understand them, to me, 
truth in budgeting is a good idea, government transparency is a 
good idea, and if these changes need to be made, let's be open 
and forthright with the American people about making such 
changes.
    So what would your response be? Are these changes of these 
magnitudes? Are you going to be speaking at banquets 10 years 
from now saying that you ended Medicaid as we knew it in the 
year 2003 or Medicare or Social Security as we knew it?
    Secretary Thompson. No. Thank you for the question. I think 
5 years, 10 years from now people are going to look back at 
this and say this was--if we do our job, that this was the most 
constructive Congress that made the most positive changes to 
allow programs to continue to grow better, with more quality 
and better health care than ever before. And if we don't do 
that, Medicare, Medicaid and Social Security--let's forget 
about Social Security, that is not here. Let's talk about 
Medicare and Medicaid. That if we don't make those changes we 
are in a world of hurt.
    Last year, a million people were dropped from Medicaid. 
This year, an additional 2 million people are going to be 
dropped. With the Medicaid proposal that I am advancing, it 
takes the best of the work ability of TANF and of SCHIP and of 
the mandatory populations in Medicaid and allows it to continue 
to grow and expand. And I think you should support it, 
Congressman, with enthusiasm.
    Mr. Cooper. To put it in language that corporate America 
could understand, are you shifting these programs from defined 
benefit plans to defined contribution plans?
    Secretary Thompson. No, I am not.
    Mr. Cooper. Are you shifting away from the concept of 
social insurance?
    Secretary Thompson. Absolutely not. We are expanding social 
insurance, Congressman, because I think those States that would 
have my option on Medicaid would not have eliminated a million 
people. They would have been able to reconfigure it so a good 
share of those million would have been able to stay in the 
system, which I think you would support, and I know I do.
    Mr. Cooper. Well, it seems easy to support in the short 
run. But 3 years hence aren't Governors going to be coming back 
and saying, hey, we are going to have to pay back all this 
money you allowed us to receive now. And many States 
traditionally have been unwilling to support their poor. 
Wisconsin is different. You may be a social model for the rest 
of the Nation. But Tennessee is not at all like Wisconsin.
    Secretary Thompson. But, Congressman, you didn't hear me. 
You don't pay the money back. You don't pay the money back. I 
don't know, you must have been out of the room. Medicaid is 
growing at the rate of 9 percent a year. So the trend line 
nationally is 9 percent. For the first 7 years, the States that 
voluntarily go into this would be above that trend line, at 10, 
11, 12 percent. The trend line continues and the mandatory 
population continues, no matter what, the same as the existing 
law.
    Mr. Cooper. But two-thirds of the program is optional.
    Secretary Thompson. One-third of the population and two-
thirds of the benefits are optional, which is two-thirds. But 
in the 8th year you would go below 9 percent. You would still 
be getting an increase, but you would drop maybe down to 6 
percent. Not a payback of 7 percent or 8 percent, depending 
upon the trend line, because each year we have to reconfigure 
the trend line.
    Mr. Cooper. After you are Secretary, Governors may have a 
different view of the plan. But I hope you are building 
something that will last for the future.
    I admire so much of your record of innovation. You are an 
accomplished public servant. But these changes need to be 
clearly explained to the American people so they can have----
    Secretary Thompson. I want to explain them to you first so 
you understand so you can explain them to your constituents. I 
am confident that this is a bigger change, a more important 
change for more people than the TANF proposal, and it will be 
more accepted, and 10 years from now you will be one of the 
individuals out there saying we did the right thing. We changed 
it, and we saved it, and it is going forward. And I am 
confident you will make that decision.
    Mr. Cooper. Like with TANF which ended welfare as we knew 
it, we will be ending Medicaid as we know it.
    Secretary Thompson. No, we will not, because it is not a 
block grant.
    Mr. Cooper. I am not talking about block grants. I am just 
talking about such a fundamental transformation of the program. 
We end it as we know it. That was the phrase used with welfare.
    Secretary Thompson. But it is not ending it as we know it. 
It allows it to grow and to continue. It allows the mandatory 
population to get all of its protection. It isn't that big of a 
change because the States are already dropping these optional 
programs and optional populations. They have no choice. This 
proposal allows them to reconfigure it, maybe increase co-pays, 
maybe drop one of the benefits instead of the whole class, 
maybe reduce one of the benefits, but allow more people to be 
in.
    Let me give you an example. The State of Utah's Medicaid 
plan was so rich that it was higher than what the Governor and 
State legislature and the State employees had. They asked for a 
waiver to reduce the Medicaid health insurance plan to equate 
and be able to be purchased with the State employees plan. So 
they reduced the Medicaid plan down to what the State employees 
and the State legislature had and were able to expand it so 
25,000 more people could come into it. That is the kind of 
innovation that we are looking for.
    Mr. Cooper. I know that I have strained the patience of the 
Chair. Thank you.
    Chairman Nussle. Not the impatience of the Chair, it is 
just there are other members who want to inquire. Mr. Emanuel.
    Mr. Emanuel. Thank you, Mr. Chairman.
    Mr. Secretary, I want to thank you for your comments about 
chronic illnesses that go on in this country, as a son of a 
pediatrician and the son of a nurse. But the lecture you gave 
us all on tobacco I would recommend be given to other 
audiences, and to the general public as well.
    Secretary Thompson. I hope I wasn't lecturing to you.
    Mr. Emanuel. No, felt good. Don't worry about it. I am the 
father of three little children. They often lecture me.
    My point is, on the comments about tobacco, those comments 
need to be broadened not only by the Secretary of Health but 
also by the President as well as the people who overwhelmingly 
support your party, the Republican party. So I have no problems 
with it.
    I am glad to hear your comments. I agree with those 
comments as somebody who, for over 20 years; I swim a mile 
three times a week; and bike 12 miles twice a week. I believe 
good health is the best preventive medicine. So I appreciate 
your comments.
    To your offer on the uninsured, my father is retired from 
his pediatric practice 4 years. He dedicates 1 day a week, 
doing exactly SCHIP program for the City of--Health Department 
of Chicago. As I said, it is good for the kids, it is good for 
my dad, and it is great for my parents' marriage now that he is 
retired. So I believe in it, and I would take you up on your 
offer and anybody you want to send over to my office to meet 
and talk about your plan for the uninsured.
    In Illinois, the SCHIP program is known as KidCare. It is 
something I was intimately involved in negotiating when I 
worked in the White House, and I advocated to expand it to 
family care. I think one of the craziest things to do is have 
kids in there whose parents work full time without health care. 
The kids are getting medical care, and the parents are sitting 
in the waiting room without a doctor.
    Secretary Thompson. You know what State was the first one?
    Mr. Emanuel. Iowa and Illinois. But you only cover up to 33 
percent.
    Secretary Thompson. No, Wisconsin was.
    Mr. Emanuel. Well, the second one was Illinois.
    Secretary Thompson. Wisconsin was so far out in front of 
Illinois, like they always are, that----
    Mr. Emanuel. You are a real clean State, too. We always 
know that. We just had our elections in Chicago, and about 
30,000 of your citizens voted, so we thank you, also.
    Secretary Thompson. My--I better not say it.
    Mr. Emanuel. I think they are going to shut the microphones 
on both of us soon. Some part of this hearing has been somewhat 
of a rendezvous for you as a Governor. Some people talk about 
your record as Governor and ask you questions about it; and the 
truth is, you did very well as a Governor under those rotten 
rules you had and--you did very well as a Governor. You were a 
model on welfare and on health care and all the constricting 
rules. Somehow you did very well.
    So I would like to note that, although those changes--and I 
am for reforms and changes, as somebody who worked in both the 
SCHIP program and on welfare reform for the President. That 
rotten, confining system allowed good Governors like you to 
succeed.
    Second is, on welfare, you made some comments earlier about 
the welfare plan, and we kind of moved on to health care. And I 
believe firmly in welfare reform. I worked on passing it. I 
think it was the right thing to do. Because what we did is we 
basically eliminated the speed bumps folks face through child 
care, health care, transportation assistance, minimum wage and 
the EITC to move from dependency to independence. And the best 
thing we did is for those children whose parents now go to 
work. They are tied into the culture of work. So, rather than 
looking on the inside into the main value system in our 
country, they are part of the main value system; and that is 
something we can't measure yet that will pay off for 
generations to come.
    Unfortunately, not putting the resources--there was a big 
poll done by the Joyce Foundation which showed that recipients 
who were successful, that moved, needed more dependable, 
reliable child care and health care; and, unfortunately, what 
is in this budget doesn't allow them to do that. Now you can 
say the goal is 70 percent. Without the resources there, you 
can't achieve that. I believe in this, and I think all of us 
who worked on this want to see this succeed. Setting an 
arbitrary goal is the right thing to do. But without the 
resources it is one of the most mean-spirited things you can 
do.
    To the issue on block grants and flexibility--and I know a 
little about spin. I practiced it a little while. The problem 
here is that you have confused people that somehow block grants 
and flexibility mean the same thing. They are not the same 
thing. Block grants are a method of financing, and flexibility 
is a matter of administration.
    You have the power as the Secretary of HHS, as you have 
said, giving more waivers to give that flexibility. Block 
grants is a matter of financing. As you have explained with 
your 11, 12, 9 and 6, in fact, financing does go down; and you 
are giving Governors a Hobson's choice. Get money now, and 
leave your colleagues in the future in a straitjacket.
    I would be interested in any reforms, but the one reform I 
am very interested in as it relates to SCHIP--and I want to 
make sure that I understand what you are asking because I think 
as I read it--I could be wrong. I am positive of that, that I 
probably am wrong--and it has bipartisan support here in 
Congress and that is add flexibility to the SCHIP program by 
reallocating expiring funds back to States to protect the SCHIP 
coverage. About 800,000 children with coverage would be 
threatened under current policy.
    The administration itself advocated a similar proposal last 
year, and I haven't heard recently you advocate that, unless it 
is part of what you are talking about now. That, basically, 
allows States to keep the money from previous years to roll 
into the next year and States that succeed would also get more 
money. So you would be actually rewarding success in moving 
those children whose parents work full time into the health 
care system. Is that part of the program you are talking about?
    Secretary Thompson. No.
    Mr. Emanuel. Did I go over or was it right on the line?
    Chairman Nussle. Right on the line.
    Mr. Emanuel. I tell you I hope you don't give that gavel to 
my kids.
    Secretary Thompson. Congressman, first, it was nice meeting 
you last night. A mutual friend of ours speaks very highly of 
you, and he told me that I had to get a chance to talk to you. 
But there are several things you mentioned.
    First, on tobacco, I speak about it, I am passionate about 
it, and I am glad you are as well.
    Secondly, I have the whole Department of Health and Human 
Services on a diet, including myself. I give out walking meters 
and make sure everybody tries to walk 10,000 steps a day so 
that they stay in good health. Because I say, if we are going 
to be Department of Health, we have got to lead by example.
    Third, I am very glad that you convinced your President, 
Bill Clinton, to sign the welfare bill after he vetoed it 
twice.
    Mr. Emanuel. They were different welfare bills.
    Secretary Thompson. Well, he still vetoed it twice; and I 
am very glad you weighed in on that.
    Fourth, in regards to welfare, it is not mean-spirited. In 
this particular proposal, half of the population, half of the 
children are no longer on the program. Also, the Congress 
increased the support by $3 billion for child support.
    You cannot do welfare on the cheap. You have got to be able 
to furnish for health care. You have got to furnish for 
transportation and training, and you have got to also provide 
for child support.
    When I was a Governor I came to Congress and testified on 
that, and I said you are not going to save money on welfare. 
Because if you are going to get people to move from welfare to 
independence you are going to have to put more money into those 
four areas. I am happy to report that when I was Governor I 
took all the children off the waiting list and everybody had 
child care in the State of Wisconsin that applied for it. One 
of the few States that did that.
    Five, in regards to SCHIP, you are talking about the fact 
that, in the current Federal law, a State has an allotment for 
3 years and after 3 years the money is forfeited back to the 
Federal Government if it is not used and then it is 
redistributed throughout the country. Several States, such as 
the States of Washington, Oregon, Tennessee and New Mexico, 
cannot use their SCHIP money, so they never get the benefit of 
it. This new proposal will allow them to use their money to 
allow for working families to get the same coverage as their 
children.
    I am very happy that you support that, because this a 
concept that I came up with in Wisconsin called BadgerCare, 
that you can't expect the families to take the children in if 
they need health insurance. You get more children covered if 
you allow their parents to be covered, and this is going to be 
allowed in the new proposal.
    I disagree with you on the block grant. Block grants means 
level funding like a block grant is for TANF, $16.8 billion a 
year.
    The Medicaid proposal continues to grow at 9 percent; and, 
as you know from your experience in the White House, we have to 
reconfigure that trend line each year. Next year, it may be 10 
percent. Next year, it may be 11 percent. But we also are not 
holding Governors to a different responsibility. They are 
completely voluntary. If they want to go into the new system, 
they can--if they don't----
    I am confident once I get a chance to explain it to you you 
will be supportive of it. I am confident that once I get a 
chance to explain it to all the Governors, get the details out 
there, 90 percent of the Governors will sign up for it. Because 
it is the right thing to do. It gives them the flexibility and 
the opportunity to get advanced funding.
    We are also going to set up a clearinghouse in the 
Department of Health and Human Services; and we are going to 
take the best practices of States around the country, whether 
it be Wisconsin, Illinois, California. We are going to be the 
clearinghouse, and we are going to send those out to the 
Governors and say this is what is working in long-term care. If 
you use this program and take all the waivers and decide what 
is doing the best out there and encourage Governors to use the 
best practices in order to make sure that Medicaid is there.
    Right now, Governors don't have any choices. They either 
continue the program as it now exists or drop it, and that is 
what is happening out there, as you well know. One million 
people were dropped from medical assistance last year, probably 
2 million this year, because they don't have the third choice. 
The proposal that I am advancing gives them that third choice, 
allows them to reconfigure it, allows them to maintain the 
program, allows them to keep the Federal dollars coming into 
the health care delivery system, which is a winner for 
everybody. That is what I would hope you would do.
    The SCHIP proposal you are talking about, the $2.7 billion 
versus the $900 million, the President's budget last year 
suggested to Congress that all that money should go back, and 
should not revert to the Treasury. It didn't pass last year. 
This year, he took $900 million and said, this money should 
stay with the States; and, two, $1.8 billion should go back to 
the Treasury. But that is not part of the medical assistance 
proposal that I am advancing.
    Chairman Nussle. Mr. Shays.
    Mr. Shays. Mr. Secretary, I have enjoyed the fine questions 
that are being thrown at you and your excellent answers. I get 
a chance to see a lot of people respond to difficult questions, 
and you have purported yourself, I think, extremely well.
    You are a very sincere person. I love your passion. I also 
love your honesty. And I was thinking being Secretary is not 
like being Governor. But you have, I think, a tremendous 
opportunity to do a lot of good in your position as Secretary 
and especially in your past experience as being such an 
innovative Governor. I just hope you stay on as Secretary, and 
as long as George Bush is President, because we will be very 
fortunate if that is the case.
    I would like to----
    Secretary Thompson. That was the nicest thing anybody has 
said to me. Thank you very much, Congressman.
    Mr. Shays. Well, it is from the heart; and I think others 
would have said that as well.
    I want to talk about Health Resources and Services 
Administration, and I want to talk about community health 
centers. I am beginning to feel that this country, one way or 
the other, is going to have to address the 41 or 43, whichever 
it is, million Americans who don't have health insurance. 
Because, in the end, they get it. They just get it in distorted 
ways. As your document has pointed out, those who don't have 
health care are more likely to be in a hospital when they don't 
need to be.
    What I would like to ask you about is the amount of 
intensity the administration feels for continuing what I hope 
and expect was a doubling of community-based health care 
clinics I think in 5 years. My sense is, in general terms, that 
we are going to go from 10 million to 20 million; and I also 
have the expectation that about half of the folks in health 
care clinics don't have insurance. So I make an assumption 
that, of the so-called 43 million Americans who don't have 
insurance, 5 million presently are covered by health care 
clinics, so really do have health care and that, when we double 
it from 10 to 20, another 5 of the 10 don't have health care 
and will benefit. I want to know if I am thinking soundly about 
this, or whether you can enlighten me as to whether that is----
    Secretary Thompson. No, you are absolutely correct, 
Congressman. I can't say off the top of my head if your figures 
are exact, but they are very close, if not right on the money. 
In fiscal year 2004, we will be serving 13.75 million 
Americans. We are up to 13.75 million, and at the end of this 
year we should be at 3,700 community health clinics across 
America. They do a wonderful job; and I am so happy that you 
are supporting them, Congressman.
    Mr. Shays. So the administration, though, intends to move 
forward and pursue the doubling in the next 5 years, is that 
correct?
    Secretary Thompson. That is correct. We are working on that 
glide path.
    Mr. Shays. Thank you.
    Secretary Thompson. We want to get to 20 million. We are at 
about 14.
    Mr. Shays. I saw three blank faces when you turned to them, 
like why are you looking at me? OK. Well, a job well done. Keep 
it up.
    Secretary Thompson. Thank you very much. Once again, 
Congressman, thanks for coming over. Congressman Nussle, I 
would like to reinstitute my invitation to all of you to come 
over and see the command center. I think Congressman Shays 
would tell you it is worth the trip.
    Mr. Shays. It is worth the trip. I would also compliment 
you on your fine words on Representative Capps, because she is 
a star.
    Secretary Thompson. She is a delight.
    Chairman Nussle. Mr. Secretary, before you go, we spent an 
enormous amount of time today talking about Medicare and 
Medicaid. For those of us that watched public television last 
night and the presentation, the Nova report on a dirty bomb as 
an example of some of the things that might go on, I think it 
would be poor of us to leave--allow to you leave today without 
at least giving you the opportunity to expand a little bit our 
testimony with regard to bioterrorism. I mean, certainly 
smallpox gets most of the attention. But I feel bad that we 
have spent so much time on Medicare and Medicaid that we 
haven't given you a little bit more time to expand on that 
subject.
    It is mostly an open-ended question about the strategies. 
Are you satisfied with what you are doing and seeing and the 
funding is mostly my question.
    Secretary Thompson. I thank you so much for giving me this 
opportunity, because this is another one of my passions.
    First off, the Congress gave us $1.1 billion last year, 
signed into law by the President on January 10. We sent out 20 
percent of the money by February 1, which was 21 days later, 
which is probably the fastest it has ever happened before.
    We requested the States to come back with a comprehensive 
plan, what they would do with the money, by April 15. Most 
States complied, much to the chagrin of a lot of the critics 
who said it couldn't be done. We sent out the balance of the 
money by June 1; and now the States have got this wonderful 
plan that they have submitted to NIH, to FDA, to CDC and to the 
Secretary's Office.
    We have sent the money out to expand the communications so 
that we will have 90 percent of the health departments hooked 
up to our Health Alert Network. We are expanding the surge 
capacity so every region in America now has to have a capacity 
of an additional 500 beds this year, a thousand next year and 
1,500 the following year. We are setting up 122 cities that are 
in the metropolitan civic awareness. We are educating the first 
responders.
    My concern is that the States have only authorized and have 
only drawn down 17 percent of the Federal dollars. They might 
be committed, but only 17 percent of the money has been spent 
so far, and we have an additional $1.1 billion to send out 
again this year for them to continue. So I have talked to the 
Governors, told them that they have to take a look at this 
thing and find out.
    We are coordinating with the mayors and with the first 
responders, and we have also expanded our laboratory networks 
up to over 200 so that we are hooked up on laboratories. We are 
increasing the security. And, we are requesting an additional 
$1.5 billion for fiscal year 2004, of which $518 million will 
go for hospitals for expanding their surge capacities and so 
on.
    We have got $780 million this year being used on 
bioterrorism research at NIH. We are looking at the six most 
prevalent agents that we are the most concerned about--
smallpox, anthrax, botulinum toxin, which I am the most 
concerned about because it affects food. If we went into closed 
session, I would like to really talk to you about botulinum 
toxin because I am very concerned about it. The fourth one is 
the fever viruses, Ebola; the fifth is plague; and the sixth is 
tularemia.
    I am happy to report that NIH has come up with a vaccine on 
Ebola, which is one of the hemorrhagic fever viruses. We are 
going into human trials within the next couple of months. It 
looks very promising.
    We also then set up a bioshield plan which I would like to 
get into in more detail. This is a program which is a permanent 
indefinite appropriation, which has probably never been 
utilized much, if at all, before. It is $5.6 billion over 5 
years. What this would require is Secretary of Homeland 
Security, Tom Ridge, to declare an emergency. I would have to 
certify that there is a counteragent out there that can be 
produced, that it cannot be produced or is not being produced 
currently commercially and that we can use the dollars in order 
to do that.
    We would take these two certifications to the President. He 
has to make the final determination; and if he makes the final 
determination, and if you pass bioshield, then we would get the 
money to go out and procure the particular money, the services 
to do that.
    This is something that is going to add to our thing. So if 
there is an imminent danger of smallpox we would be able then 
to go out and to try and recreate more vaccine or better 
vaccines. We are on the cutting edge. We were just issued two 
contracts today for a new smallpox vaccine, one from Canvas 
Baxter and another from a Copenhagen, Denmark firm. This is one 
that is called MVA, which is less potent than our current 
smallpox vaccine, and we think we could give it to immune 
deficient people without causing any adverse consequences.
    We are also developing a new anthrax RPA, which wouldn't 
require six shots but only three shots and could be 
manufactured much faster and cheaper and better than the 
current anthrax that has only got one exclusive distributor 
ship, namely BioPort, and all the anthrax is being purchased by 
the Department of Defense.
    We are close on Ebola, and we are trying to develop a new 
antidote for botulinum toxin. That is classified information so 
I cannot talk about that.
    We have expanded our pharmaceutical supply so we have 600 
tons of pharmaceutical supplies in 12 strategic locations. We 
have set up plants now in which we can distribute 50 tons of 
medical supplies to any city in America within 7 hours. It 
requires nine semi truckloads or one KC-135 to do so.
    We have split the country into 10 regions; and we have got 
8,000 medical personel--doctors, nurses, morticians, and 
veterinarians--ready to go, divided up. We have DMED-1 teams 
which have 2,800 individuals. This is level ones distributed 
within 10 regions, and we put three on alert at all times. 
Right now, we put them on alert just to see if there are any 
problems so that we could be able to utilize them.
    We have had to send mortuary teams up to Rhode Island this 
past weekend because of the fire up there, and they came back 
with rave reviews of what they have done.
    We have sent mortuary teams down to Texas to identify the 
body parts from Columbia.
    We sent some medical teams and some mortuary teams over to 
Guam because of the typhoon which we, through the new 
communication room that we have been able to develop, can use 
to monitor food poisoning, and weather, as well as explosions.
    So we have divided that up and I think the Department of 
Health and Human Services is very well equipped to respond to a 
radiological, biological, or a chemical kind of an incident. We 
could not prevent it, but we can respond very quickly, and I 
would love to have you come over and see our operation, 
Congressman.
    Chairman Nussle. I appreciate you eating into your own time 
because I know you have to go to the Senate to talk about that.
    But I--you know, all the Medicare and Medicaid and all 
these other programs combined can't do a thing if something 
like this happens, as we learned. So I appreciate you spending 
the moment just talking about it.
    Secretary Thompson. Thanks for giving me that opportunity.
    Chairman Nussle. Thank you, Mr. Secretary, for your 
testimony. We look forward to working with you on all of these 
programs and policies as we move forward, and we appreciate 
your return visit to the Budget Committee and wish you good 
luck and Godspeed in tackling these issues.
    Secretary Thompson. Thank you very much.
    Chairman Nussle. Thank you.
    The next panel of witnesses for today's hearing we will 
invite forward. While they are coming forward, let me introduce 
them. We have today Dr. Gail Wilensky, who is making a return 
visit to the Budget Committee witness table, as well as Dr. 
Judith Feder, who is also making a return visit. Both of these 
professionals are familiar--are probably more familiar with the 
government health care policies as maybe anybody who is not 
currently in the administration or involved specifically with 
the Health and Human Services Department from various 
activities.
    I was just reviewing both of your biographies prior to 
inviting you forward, and it is amazing all of the things that 
you have been involved in and worked on. So we very much 
appreciate your time in coming here today and visiting with us. 
It doesn't mean that you either agree or agree with us all the 
time. That is a different issue. But we do know of your 
professionalism and your interest, and we appreciate your time 
today.
    What I will do is I will ask both of you to testify, and 
then if we have any questions we can ask them of either one of 
you.

  STATEMENTS OF GAIL R. WILENSKY, PH.D., JOHN M. OLIN SENIOR 
 FELLOW, PROJECT HOPE; AND JUDITH FEDER, PROFESSOR AND DEAN OF 
              PUBLIC POLICY, GEORGETOWN UNIVERSITY

    Chairman Nussle. We will start with Dr. Wilensky. And we 
appreciate you coming back to the committee, Gail. Thank you. 
Thank you very much.

                 STATEMENT OF GAIL R. WILENSKY

    Ms. Wilensky. Mr. Chairman and members of the committee, 
thank you for inviting me to appear before you.
    I would like to have my testimony entered into the record 
and to use my few minutes to speak about some of the issues 
that have been raised about Medicare and Medicaid.
    First, let me comment on the administration's proposals for 
Medicare and prescription drugs and the need for reforming 
Medicare and also their proposal to provide some optional 
Medicaid and SCHIP funding and flexibility as well as the 
rationale for these changes. In my testimony, I am going to 
draw on my experiences as the administrator of the Health Care 
Financing Administration and have also chaired MedPac for its 
first 4 years.
    As you know, the administration is proposing to spend a 
substantial amount of money, $400 billion, to reform and 
modernize Medicare. The specifics of the long-term Medicare 
reform have not yet been submitted. The framework and the 
principles have been articulated as following the Federal 
employees health care plan. That is a program that I 
participated in during the 10 or 12 years that I was a Federal 
employee and which each of you has also participated. It has 
many attractive aspects, most importantly that it allows people 
substantial choice in identifying the health care plans that 
will best meet their needs.
    I know Mr. Nussle and others on this committee have raised 
questions that relate to variations in Medicare spending. It is 
a serious issue that I wish the Congress would address. The 
Congress addressed it in only one very small way and in some 
ways unhelpfully in the 1997 Balanced Budget Act when it 
changed only the payments for the Medicare+Choice program but 
left the driver of the differential payments in 
Medicare+Choice, that is the substantial variations in spending 
that occurs throughout the Medicare fee-for-service program, to 
continue on as is. It is an issue that ultimately the Congress 
and administration will need to address if it is an issue that 
they want to resolve.
    Medicare solvency and financial pressure will continue. We 
have 78 million baby boomers who are going to start to retire 
at the end of this decade. It will continue to place pressure 
not only on Part A but on Part B, which is mostly funded by 
general revenues.
    The current benefit structure, as has been noted by many, 
is unfair. It has people paying in at a comparable rate but 
receiving very different benefits depending on where they live 
in the country. It is inadequate, doesn't include catastrophic 
care and also doesn't include, of course, outpatient 
prescription drugs.
    The administrative structure is excessively complicated. 
Last year, just in time for your hearing, the GAO had issued a 
very good report that you had requested about how contractors 
provide to physicians and noted that in a large majority of 
times the information was inadequate, incomplete, and sometimes 
just wrong.
    Payment issues are starting to raise questions of access. 
You have had some discussion about what happened to physicians 
which would have been an issue this year. It will be an issue 
next year unless you change the way physician payments are set. 
So, while Medicare has many positive attributes, it also has 
some serious issues.
    Having said that, I believe a stand-alone drug benefit 
without making changes to Medicare that go to some of these 
other issues is imprudent because of the financial issues out 
in the future and because we know that we will substantially 
underestimate the cost of any new benefit if history is any 
guide.
    It is not, however, too soon to start designing and 
implementing a reformed Medicare program; and if the Congress 
is able and willing to do that, now would be all the better. 
Building the infrastructure will take time. Future seniors need 
to know the program that they will face, and future seniors 
will be very different from the existing senior population, 
particularly the women who will have had more education and 
more time in the labor force and more income.
    Just a word about Medicaid, if I may. You have heard that 
the administration is proposing to provide substantially 
greater flexibility to the optional benefits and the optional 
populations, leaving the mandatory population and mandatory 
benefits as they are. As best I can tell, it is fundamentally 
taking the same amount of flexibility that is currently 
available through the waiver process and giving that 
flexibility more directly to the States in order to try to help 
them respond in what is a very fiscally constrained period.
    Medicaid is ultimately the most flexible Federal program 
that exists, but it requires the waiver process which is costly 
and sometimes cumbersome.
    There is, however, an additional issue that I would like to 
raise as a former HCFA administrator and that is the Federal 
Government ought to be worried about what is otherwise likely 
to happen to Federal spending under Medicaid with the kind of 
fiscal pressure that the States are feeling. We have seen in 
previous periods of fiscal pressure on States that they have 
shown great creativity in ways to increase spending only at the 
Federal level and not at the State level. In the early 1990s 
this was done through provider taxes and voluntary donations. 
It was followed by intergovernmental revenue and 
disproportionate share spending.
    There are currently disputes going on with regard to upper 
payment limits as a way to try to increase Federal spending. 
The problem is that these are inappropriate ways for the 
Federal Government to make additional monies available to the 
States. It is unfair. Who gets the money is not a function of 
the need of the State but rather of the aggressiveness of the 
State, and it is being made without the explicit decision of 
the Congress. The specifics of the formula and the details of 
the program that the administration wants to propose are very 
important. You need to assess them carefully. But the rationale 
that they are providing is a sound one, and I would urge you 
not to dismiss it.
    Thank you.
    Chairman Nussle. Thank you.
    [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 a 
senior fellow at Project HOPE, an international health education 
foundation and I am also co-Chair of the President's Task Force to 
Improve Health Care Delivery for our Nation's Veterans. I have 
previously served as the administrator of the Health Care Financing 
Administration (now the Centers for Medicare and Medicaid Services) and 
also chaired the Medicare Payment Advisory Commission. My testimony 
today reflects my views as an economist and a health policy analyst as 
well as my experiences directing HCFA. I am not here in any official 
capacity and should not be regarded as representing the position of 
either Project HOPE or the Presidential Task Force.
    My testimony today discusses the administration's proposals for 
Medicare and prescription drug coverage, the need for reforming 
Medicare, the administration's proposal to provide optional Medicaid 
and SCHIP funding and flexibility and the rationale for these changes 
to Medicaid.
                the administration's medicare proposals
    The administration has proposed to modernize and reform Medicare 
with a program that will include $400 billion in net additional 
spending. Although the details are not yet available, the principles 
for strengthening and improving Medicare are part of the budget. The 
reformed Medicare program would include an improved traditional fee-
for-service plan and more varied health insurance options, so that 
ultimately Medicare would look more like the Federal Employees Health 
Benefits Program (FEHBP). Some of the important principles underlying 
the reform include giving all seniors the option of a subsidized drug 
benefit, providing better coverage for preventive care, allowing 
seniors to keep traditional Medicare, providing better options to 
traditional Medicare, strengthening the program's financial security 
and streamlining Medicare's regulations and administrative procedures.
    The administration is also proposing a variety of strategies to 
improve Medicare in the short term including changes to the pricing of 
the Medicare+Choice program, changing the reimbursement for outpatient 
drugs, providing better information of the quality of care delivered in 
hospitals and nursing homes and improving the appeals process for 
beneficiaries and providers.
                      the need to reform medicare
    Although Medicare has resolved the primary problem it was created 
to address, ensuring that seniors have access to high quality, 
affordable medical care, there are a variety of problems with Medicare 
as it is currently constructed. These include complaints of inadequate 
benefits from the beneficiaries, concerns of long-term financial 
solvency by legislators and criticisms from the provider community of 
inadequate payments and excessive administrative complexity.
    Part of the motivation for Medicare reform has clearly been 
financial. The financial challenges to Medicare are well known and are 
documented annually in the Medicare Trustees Report made public each 
spring. Medicare is currently spending about $250 billion for 39-
million aged and disabled Americans and spending on Medicare is 
expected to grow at a rate of about 7 percent per year for the next 
decade. This rate is substantially faster than the rate of economic 
growth and than the growth in Federal revenues.
    The long-term outlook for Medicare is primarily driven by 
demographics. The changing demographics associated with the retirement 
of 78 million baby boomers between the years of 2010 and 2030, the 
expected longevity of the boomers, and the relatively smaller cohorts 
from the baby bust generation means that just as the ranks of 
beneficiaries begins to surge, the ratio of workers to beneficiaries 
will begin to decline. The strong economy of the last decade and the 
slow growth in Medicare expenditures for fiscal year 1998-2000 has 
provided more years of solvency than was initially projected, but even 
so, Part A of the Trust Fund, which is financed by a portion of the 
wage tax, is expected to face cash flow deficits as soon as 2016.
    As important as issues of Part A solvency are, however, the 
frequent focus on Part A as a reflection of Medicare's fiscal health is 
unhelpful and misleading. 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 faster than Part A and much faster than the economy as a 
whole. This means that 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 for Part B 
expenditures will mean fewer dollars available to support other 
government programs.
    However, the reasons to reform Medicare are more than financial. 
Traditional Medicare is modeled after the Blue Cross/Blue Shield plans 
of the 1960s. 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 
as well as 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.
    The most publicized problem of Medicare is its outdated benefit 
package. Unlike almost any other health plan that would be purchased 
today, Medicare effectively has no outpatient prescription drug 
coverage and no protection against very large medical bills. As a 
result, most seniors have supplemented traditional Medicare although 
some have opted-out of traditional Medicare by choosing a 
Medicare+Choice plan.
    The use of Medicare combined with supplemental insurance has 
important consequences for seniors and for the Medicare program. For 
many seniors, it has meant substantial additional costs. The 
supplemental plans also mean additional costs for Medicare. By filling 
in Medicare's cost-sharing requirements, 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 
increasing Medicare's costs.
    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. 
The large variations in spending for Medicare mean there are 
substantial cross-subsidies from people living in low medical cost 
states and states with conservative practice styles to people living in 
higher medical cost states and states with aggressive practice styles. 
The Congress and the public are aware of these differences because of 
the differences in premiums paid to Medicare+Choice plans but seem 
unaware that the differences in spending in traditional Medicare is now 
even greater than the variation in Medicare+Choice premiums.
    Finally, the provider community has been complaining bitterly about 
payment inadequacies as well as administrative complexities associated 
with Medicare. Particular concern has been raised about reduced 
payments to physicians and whether access to care for seniors is in 
danger of being jeopardized. Payment rates to physicians were reduced 
by more than 5 percent for fiscal year 2002 and would have been reduced 
by an additional 4.4 percent next month, had it not been for the action 
recently taken by the Congress. Even so, payments are expected to 
decline next year if additional changes aren't made to the way 
physician payments are calculated. Reductions in payments for nursing 
homes and home health care have also raised issues of future 
compromises in care although to date there has not been evidence to 
suggest access to care has become a problem for seniors. Information on 
quality is being made accessible where available and the administration 
is making the availability of additional quality measures for home care 
and nursing homes a major priority.
    Provider complaints about administrative complexities have been 
almost as great as their complaints about the levels of payment. 
Although none of these are new issues, providers have been increasingly 
vocal about these concerns. Among the many complaints that have been 
raised-uncertainty about proper billing and coding, inadequate and 
incomplete information from contractors and discrepancies in treatment 
across contractors seems to be at the top of most lists.
    In a report released last year, the General Accounting Office (GAO) 
verified the validity of many of the complaints. Among their findings: 
information given to physicians by carriers is often difficult to use, 
out of date, inaccurate and incomplete. The carriers provided toll-free 
provider assistance and web-based information but only 15 percent of 
the test calls were complete and only 20 percent of the sites had all 
the information required. CMS was also criticized for having too few 
standards for the carriers and for providing too little oversight.
             prescription drug coverage and medicare reform
    Although I believe it is important to pass a reformed Medicare 
program soon and that a reformed Medicare package should include 
outpatient prescription drug coverage, I believe just adding this 
benefit to the Medicare program that now exists is not the place to 
start the reform process. The most obvious reason is that there are a 
series of problems that need to be addressed in order to modernize 
Medicare to accommodate the needs of the retiring baby boomers and to 
be viable for the 21st Century. To introduce a benefit addition that 
would substantially increase the spending of a program that is already 
financially fragile relative to its future needs without addressing 
these other issues of reform is a bad idea.
    The principles articulated by the President are consistent with the 
FEHBP model and also the work of the Bipartisan Commission for the Long 
Term Reform of Medicare. I personally support reform modeled after the 
FEHBP where the government's payments on behalf of an individual would 
not vary with the type of plan that is selected. I believe this type of 
structure would produce a more financially stable and viable program. 
It would also provide 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 recognize that the FEHBP is controversial with some in Congress, 
particularly because of the difficulties the Medicare+Choice program 
has been having. It is important to understand, however, that many of 
the problems of the Medicare+Choice program reflect the decision by the 
Congress to encourage the expansion of plans in underserved areas by 
limiting the increase for plans with most of the enrollees to 2 percent 
per year, even though their costs were increasing at a rate that was 
several times that amount. In addition, Medicare+Choice plans have 
faced additional regulatory burdens as well as substantial 
uncertainties about future changes in regulation. Combined, these 
factors have helped transform what had been a vibrant, rapidly growing 
sector into a stagnant and troubled one.
    A second reason not to add a drug benefit without further reforms 
to Medicare is the difficulty of correctly estimating the cost of any 
new, additional benefit. Our past history in this area is not 
encouraging. The cost of the ESRD (end-stage renal disease) program 
introduced in 1972, for example, was underestimated by several-fold. 
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.
    These issues taken together reinforce my belief that adding a 
prescription drug benefit to traditional Medicare without further 
modernizing the program is unwise. A better strategy would be to agree 
on the design of a reformed Medicare program and to begin to implement 
changes now. At a minimum, it is likely to take at least 2 years to 
produce the regulations needed to build the infrastructure needed for a 
reformed Medicare program.
    As we contemplate a Medicare program for the 21st Century, it is 
also important to understand that the people who will be reaching 65 
over the next decade as well as the baby boomers have had very 
different experiences compared to today's seniors. Most of them have 
had health plans involving some form of managed care, many of them have 
had at least some experience choosing among health plans, most have had 
more education than their parents and many will have more income and 
assets. The biggest change involves the women who will be turning 65. 
Most of these women will have had substantial periods in the labor 
force, many will have had direct experience with employer-sponsored 
insurance and at least some will have their own pensions and income as 
they reach retirement age. This means we need to think about tomorrow's 
seniors as a different generation, with different experiences, with 
potentially different health problems and if we start soon, with 
different expectations.
                the administration's medicaid proposals
    The administration's proposal for Medicaid distinguishes between 
mandatory populations and mandatory benefits on the one hand and 
optional populations and optional benefits on the other. Mandatory 
benefits for mandatory groups are kept as they are under current law, 
but substantial new flexibility is provided for the optional 
populations and optional benefits. In addition, increased funding of 
$12.7 billion is provided over the first 7 years although the program 
is to be budget neutral over 10 years. Much of the flexibility that is 
currently available through the waiver process would be provided 
directly to the states under the administration's proposal. There are 
also specific incentives for supporting individuals with disabilities 
who are currently institutionalized that could be served in home or 
community-based settings.
    Although the specifics of the programs have not yet been presented 
in detail, the proposal discusses the use of an acute care health 
insurance allotment and a long-term care and community services 
allotment. The amounts in each would be based on spending in 2002 with 
level of effort requirements imposed on the states.
        the rationale for providing more flexibility to medicaid
    States are experiencing severe fiscal pressure from their Medicaid 
programs. These pressures are coming from three different directions. 
First, many states proactively increased spending on Medicaid during 
the 1990s by expanding the populations covered, the benefits offered 
and the rates paid to providers. Second, State revenue declined 
substantially more than initially anticipated in 2001 and 2002. Third, 
the counter-cyclical nature of Medicaid has produced some additional 
expansion in the Medicaid rolls. The administration is proposing to 
provide some of the flexibility that has been previously available to 
the states through the waiver process directly to the states to 
increase their ability to cope with these additional fiscal pressures. 
It should be noted that this increased flexibility is being proposed 
only for the optional populations and benefits and not for the 
mandatory populations or benefits.
    The expectation is that the flexibility being proposed will allow 
states to make the best use possible of their Medicaid funds in an era 
of unusually constrained resources. As in the case of SCHIP, states 
would be able to work more directly with private insurers and provide 
premium support for recipients enrolled in private plans. States would 
be able to tailor their programs to meet the needs of individuals 
throughout the State in ways that are not easily possible under current 
Medicaid rules, such as with the ``State-wideness'' requirement. This 
is not fundamentally new flexibility that is being offered the states 
since the waiver process provided what was essentially a fully flexible 
program but rather a less hassled and costly way to achieve a similar 
flexibility.
    There is an additional reason for the Federal Government to provide 
greater flexibility to the states in return for more total control over 
Federal monies for optional populations and benefits. States in 
previous periods of fiscal pressure have shown great creativity in 
developing ways to increase Medicaid spending using only increased 
Federal dollars. Provider taxes and voluntary donation strategies in 
the early 1990s, disputes over disproportionate share spending and 
intergovernmental revenue transfers later in the decade and current 
debates about upper payment limits are among the examples that come to 
mind. These are inappropriate ways for the Federal Government to make 
additional monies available to the state. The outcomes of these 
strategies do not represent the results of explicit decisions by the 
Congress to change the relative shares of Federal to State dollars in 
Medicaid and the amount of money a State receives is not determined by 
its own spending on Medicaid nor on the basis of its own fiscal need.
    The general direction of the Medicaid policy changes announced by 
the administration makes sense. The specifics of the formula and the 
details of the program will be important determinants of the impact of 
the proposed change on the states and on the populations that have been 
traditionally served by the Medicaid program. They should be assessed 
carefully.

    Chairman Nussle. Dr. Feder, welcome.

                   STATEMENT OF JUDITH FEDER

    Ms. Feder. Thank you, Mr. Chairman. I appreciate being 
before you and members of the committee.
    I am glad to have this opportunity to speak today on the 
impact of the President's 2004 budget on both Medicare and 
Medicaid. I would appreciate your accepting my remarks in full 
for the record.
    What I want to do right now is make some brief points with 
respect to the proposals on both programs. I have two key 
points.
    First, the fiscal support this budget offers for both 
Medicare and Medicaid is far too limited to meet program and 
beneficiaries' needs.
    Second, even the limited support that is offered is offered 
at too great a price: that is, abandonment of Federal fiscal 
guarantees that make today's Medicare and Medicaid so 
successful. These proposals would simply do more harm than 
good.
    Let me elaborate, first for Medicare, then for Medicaid.
    The administration proposes to allocate most of $400 
billion over 10 years for a prescription drug benefit. Measured 
against the costs of prescription drugs, despite the size of 
this sum, these dollars are too limited to support adequate 
protection. The Congressional Budget Office estimates the next 
10 years of drug costs for Medicare beneficiaries at $1.8 
trillion, and $400 billion covers only a small portion of that 
expense, exposing beneficiaries to a benefit with substantial 
cost sharing and actual holes in protection.
    The administration likes to compare its proposals to the 
Federal Employees Health Benefit Plan, which provides Members 
of Congress and others, including myself, with a comprehensive 
drug benefit. Estimates indicate, however, that a comprehensive 
benefit like the FEHBP's--which the Secretary advocated today, 
saying that Medicare beneficiaries ought to have the benefits 
Members of Congress have--would cost about twice what the 
administration has proposed. Not only is the benefit inadequate 
in general, the administration would provide it only to 
beneficiaries who agree to trade in their Medicare for 
enrollment in a private health insurance plan.
    You have to ask why the administration would want to 
replace Medicare with private health insurance. Is it because 
private insurance is more secure or reliable than Medicare? 
Experience with private insurance for the working age 
population and with Medi
care+Choice for Medicare beneficiaries tells us that the answer 
is no.
    Is it because private insurance is needed to expand choice 
for Medicare beneficiaries? Medicare beneficiaries already have 
the most meaningful choice--choice of doctors, hospitals and 
other providers. And surveys show that Medicare beneficiaries 
are more satisfied with their coverage and less likely to face 
access problems than younger people with employer-sponsored 
insurance.
    Is it because private insurance would cost less than 
Medicare now or over time? Medicare+Choice plans want more 
money for Medicare. They are not saving Medicare money. And, 
historically, Medicare costs have risen more slowly than 
private insurance, including the Federal Employees Health 
Benefit Plan, not faster. The only way private insurance can 
likely spend less than Medicare is to provide beneficiaries 
less service.
    The fact that the administration ignores the statutory 
commitment of general revenues to Medicare financing now and in 
the future and grossly exaggerates Medicare's long-term fiscal 
problems reinforces this concern. Privatizing Medicare won't 
secure protections for beneficiaries. It will undermine them.
    Turning to Medicaid, the administration's proposals are 
remarkably similar in form. The dollars are too limited, and 
they are offered at a price that would undermine the current 
program.
    First, the money. The administration offered States $3.25 
billion in 2004, $12.7 billion over 10 years. These dollars do 
little to address the deficits States are facing today, 
estimated at 70 to $85 billion in State fiscal year 2003. Plus, 
after 7 years, what the Secretary described as forward funding 
would be offset by a cut below that baseline that the Secretary 
was talking about, a cut in Federal funds precisely when the 
baby boom generation begins to turn age 65 and are likely to 
need help from this vital program.
    Second, States would receive this so-called aid only if 
they agreed to give up guaranteed Federal matching payments 
that vary with service costs. This is the key issue about 
current funding versus a block grant. Today, Federal funds to 
States flow with the number of people who are eligible and the 
actual cost of the care they receive. The administration would 
replace these guaranteed matching payments with capped Federal 
funds, caps perhaps based on an unexplained trend line, but 
caps, predetermined allotments, nevertheless.
    Why would the administration do this? Will it encourage 
flexible expansion of services, for example, for the uninsured 
or for the provision of long-term care at home rather than in 
nursing homes? Despite the administration's claims, the answer 
is no.
    Capped funds, even based on projections, are not as 
responsive to beneficiary needs as current arrangements. They 
do not allow for variation in need across States or 
unanticipated need within States or across the Nation. Think 
simply of a new medication for AIDS that can dramatically alter 
the cost to States of Medicaid services. And no flexibility in 
delivery can offset the increases in the numbers of people in 
need, especially among the elderly and disabled, or in the cost 
of services like prescription drugs and long-term care--to a 
significant extent optional services for optional populations--
that States will inevitably face.
    Will capping funds save money? The only money it will save, 
if services are delivered, is Federal money. Capping funds 
doesn't eliminate costs. It shifts them. That is, it limits 
Federal dollars and leaves States, their providers, and their 
beneficiaries high and dry.
    With capped funds, flexibility is nothing more than a 
euphemism for cost shifting to States or arbitrary cuts in 
protection that the Secretary seemed to prefer to better 
support for State programs. Such arbitrary cuts include waiting 
lists for enrollees, now prohibited under Medicaid law; 
substituting first-come, first-served service for uniform 
eligibility rules; changing the mix of benefits, which means 
favoring some parts of States over others, despite quite 
similar health care needs; charging even the poorest 
beneficiaries out-of-pocket payments; and limiting access to 
optional populations or services that include nursing home 
care, home care, prescription drugs and other services vital to 
vulnerable populations.
    Whether optional or mandatory, all beneficiaries subject to 
capped funds are at risk of reduced coverage as well as a loss 
of standards designed currently to assure timely access to 
quality care. And allowing States to pay in less to support the 
program--as the Secretary emphasized several times, referring 
to the three factors that might be used to project spending but 
basing maintenance of effort only on one of those factors, the 
cost of care--would allows States to pull out money at 
beneficiaries expense.
    In his most recent State of the Union address, President 
Bush described Medicare, and I quote, ``as the binding 
commitment of a caring Nation,'' unquote. The same language 
applies to Medicaid. A strong Medicare prescription drug 
benefit, along with fiscal prudence, rather than substantial 
tax cuts, is needed to secure our binding commitment to 
Medicare. Enhanced and guaranteed Federal matching payments are 
needed to secure our binding commitment to Medicaid.
    In his 2004 budget, the President abandons rather than 
secures these commitments. A caring Nation should reject these 
proposals.
    Thank you, Mr. Chairman.
    Chairman Nussle. Thank you, Dr. Feder.
    Appreciate both of your testimony here today.
    [The prepared statement of Judith Feder follows:]

   Prepared Statement of Judith Feder, Professor and Dean of Public 
                     Policy, Georgetown University

    Chairman Nussle, Congressman Spratt and members of the committee, I 
appreciate the opportunity to comment today on the administration's 
2004 budget proposals regarding Medicare and Medicaid. The 
administration describes its proposals as strengthening the ability of 
these vital programs to serve elderly, disabled and low income 
beneficiaries. In fact, however, the administration proposals threaten 
rather than strengthen Medicare and Medicaid. Not only do these 
proposals offer too little fiscal support to meet program needs. They 
also make even this modest support contingent upon the abandonment of 
the Federal fiscal guarantees that secure access to care for all 
eligible beneficiaries. Specifically, the administration proposes to 
replace Medicare with private insurance and to replace Medicaid's 
guaranteed Federal matching payments with capped Federal funds. Such 
policies would severely weaken both programs and their ability to serve 
the people who count on them.
    Let me explain first for Medicare, then for Medicaid.
           impact of administration's 2004 budget on medicare
    Although details are sketchy, it appears that the President's 2004 
budget proposes to make available (most of) $400 billion over 10 years 
to support prescription drug coverage, but only for beneficiaries who 
leave the current Medicare program and enroll in private insurance 
plans for all of their health care. These plans would also offer 
enrollees a different cost-sharing structure for benefits than Medicare 
currently provides.
    Rather than strengthening Medicare, this proposal provides too 
little benefit at too great a cost: First, it falls far short of the 
administration's promise to assure all Medicare beneficiaries the 
protection against prescription drug costs they so sorely need. The 
proposed financing for prescription drug coverage does not come close 
to what is necessary to provide all beneficiaries adequate protection. 
At the same time, its thinly veiled ``bribe'' to beneficiaries to leave 
Medicare for private insurance actually forces beneficiaries to choose 
between their need for a drug benefit and their need for Medicare's 
guarantee of dependable, affordable health insurance protection. 
Despite the urgency of beneficiaries' need for prescription drug 
protection, the administration's price--structural reforms that would 
undermine Medicare's greatest strengths--are simply not worth it.
    Inadequacy of the proposed benefit. Over the next 10 years, the 
Congressional Budget Office estimates that prescription drug costs for 
Medicare beneficiaries will cost $1.8 trillion. The proposed $400 
billion finances only a slim portion of these costs--leaving 
beneficiaries to face substantial out-of-pocket expenses in terms of 
deductibles, co-insurance, and holes without any coverage at all. This 
benefit does not come close to the protection Members of Congress (and 
I, as the wife of a Federal retiree) have through the Federal Employees 
Health Benefit Plan (FEHBP). Indeed, estimates indicate that a 
comprehensive prescription drug benefit would cost about twice the 
budget's $400 billion allocation.
    I know that this committee is well aware of the fiscal challenges 
facing the Nation. But providing adequate financing for prescription 
drugs is more a question of priorities than fiscal ability. For the 
administration to propose such insufficient investment in prescription 
drug coverage alongside a proposal for a $674 billion tax cut raises 
serious questions about their priorities.
    Inadequacy of private insurance. The administration's proposal to 
tie the availability of a prescription drug benefit, adequate or 
otherwise, to enrollment in private insurance plans forces 
beneficiaries to make an untenable choice: gain a drug benefit but lose 
Medicare's guaranteed access to care.
    Longstanding experience with private insurance reveals that it does 
not offer the dependable protection that Medicare guarantees. Medicare 
is an enormously successful program because it brings together the 
healthy and the sick, the better off and the less well-off in a single 
insurance arrangement, pooling risks to insure that all beneficiaries--
regardless of income or health status, are guaranteed financial 
protection against the costs of medical care. It is universal--covering 
virtually all people eligible--and enables beneficiaries to obtain 
services from the doctors, hospitals and other providers they choose.
    Private insurance cannot compete with Medicare's performance. Over 
30 years ago, Medicare was enacted because private insurance failed to 
reach nearly half the elderly population. Today, private insurance 
outside the workplace for the under age 65 population is plagued with 
``selection problems''--making affordable coverage available for people 
only when they are healthy and denying or restricting benefits to 
people when they are sick. And inside the workplace, the 1990s' shift 
to manage care reveals that health plans have relied far more on 
barriers to access than on efficient care management to control their 
costs. Rather than offering beneficiaries a broader set of choices, 
health plans may limit the doctors or hospitals that plan members can 
use or require them to pay extra to use the providers they want. 
Indeed, Karen Davis and her colleagues at the Commonwealth Fund find 
that despite better health status and lower need for care among 
privately insured employees under age 65, they report less confidence 
in getting care when needed and higher incidence of access problem than 
do Medicare beneficiaries.
    The Medicare program also has experience with reliance on private 
health insurance--through Medicare+Choice--that is decidedly 
disappointing. Plans that beneficiaries join in 1 year are out of 
business the next. Benefits that beneficiaries count on 1 year are 
reduced the next. And plans have never found it profitable to serve 
many parts of the country--especially rural areas. It appears that it 
is insurers who gain choice under these arrangements--not Medicare 
beneficiaries.
    Nor is reliance on private insurance likely to save money. 
Medicare+Choice plans are asking for higher payments from Medicare, not 
costing Medicare less. Contrary to claims made by proponents of private 
insurance for Medicare, the current Medicare program is as good and 
often better than the private sector in controlling its costs. In the 
past 5 years, Medicare's average growth in spending per beneficiary was 
lower than both the private sector and FEHBP. And, according to Marilyn 
Moon of the Urban Institute, over the last 30 years, Medicare spending 
per beneficiary has grown at a rate of over 1 percentage point less 
than private health insurance--a cumulative savings of about 41 percent 
relative to what costs would have been through private insurance. The 
facts are that private insurers cannot best Medicare in terms of value 
for the dollar in the purchase of services.
    The only way private insurance plans can likely spend less than 
Medicare is to provide less service. Indeed, previous proposals to rely 
on private insurers to provide prescription drug coverage to Medicare 
beneficiaries have sought savings precisely by allowing private 
insurers to limit beneficiaries' access to a full range of prescription 
drugs. Reliance on private insurance plans for the full range of 
Medicare benefits--as the administration proposes--would put affordable 
access to doctors and hospitals at similar risk. The risk to 
beneficiaries becomes even greater if the shift to private plans 
transforms Medicare from a program that guarantees the financing of 
service costs to a program that guarantees the financing of only a 
share of a private insurance premium. The latter would represent an 
explicit transfer of financial risk for overall health costs from the 
Medicare program to elderly and disabled beneficiaries.
                           medicare's future
    The administration's enthusiasm for shifting Medicare beneficiaries 
to private insurance is particularly suspect when it comes to 
Medicare's fiscal future. With the aging of the baby boom generation, 
the proportion of the population served by Medicare will grow from 14 
percent today to 22 percent in 2030. Along with likely continued 
increases in health care costs--not just for Medicare but for the 
Nation as a whole--the demands on the program will be substantial. As 
just described, reliance on private insurance cannot finance increased 
demands through greater efficiency. Indeed, the only way that 
privatization can address Medicare's future fiscal problems is if it 
shifts costs to beneficiaries, ending Medicare's guarantee to assure 
affordable access to mainstream medical care.
    Not only is the administration promoting privatization as a false 
``solution'' to future fiscal problems; it is exaggerating their scope 
and squandering the resources needed to address them. The President's 
budget reports a $13.3-trillion ``shortfall'' in Medicare over the next 
75 years. However, that calculation assumes that only dedicated payroll 
taxes (which finance Medicare's Hospital Insurance or Part A) and 
beneficiary-paid premiums (which finance 25 percent of Medicare's 
Supplementary Medical Insurance or Part B) are available to finance the 
program. It ignores that by law and from Medicare's inception, general 
revenues are used along with premiums to finance Medicare's Part B 
expenses. Unless the administration proposes to withdraw the statutory 
commitment to provide general revenue financing, the real ``shortfall'' 
is only one-third this amount. Further, the 75 year estimates involve 
long-term projections about which CBO and, in other places, the 
administration have expressed accuracy concerns. CBO has said that 
health costs are among the top three reasons for miscalculations in its 
projections. Interestingly, at the same time the administration reports 
a 75-year Medicare projection, it is unwilling to project its own 
budget proposals beyond 5 years.
    The right way to address the estimated and accurately calculated 
shortfall is to keep the nation's overall fiscal house in order. 
Between 2002 and 2011, Medicare's trustees estimate that payroll taxes 
will generate a surplus of over $510 billion. These and other revenues 
from members of the baby boom generation, now in their prime earning 
years, can be used to minimize Federal borrowing today, thereby 
strengthening the nation's capacity to meet future needs when they 
retire.
    But the 2001 tax cut and the additional $674 billion proposed in 
the President's 2004 budget move the Nation in precisely the opposite 
direction. In part, they use the Medicare surplus to finance a tax cut. 
And, by increasing debt, they add dramatically to the burdens that will 
fall on future generations. To exaggerate Medicare's fiscal crisis, 
promote privatization, and cut taxes suggests that securing and 
strengthening the Medicare program, both now and in the future, is not 
the administration's primary concern.
           impact of administration's 2004 budget on medicaid
    The administration's 2004 budget proposes to make available $3.25 
billion in 2004 and $12.7 billion over 7 years to share among States 
that agree to accept predetermined Federal allocations or block grants 
to fund services to low income populations. States who accepted the 
additional funds would be expected to repay them in years eight, nine 
and ten, regardless of program needs. The proposal is therefore budget 
neutral to the Federal Government over the 10 year period.
    This Medicaid proposal has much in common with the administration's 
Medicare proposal. First, the fiscal relief offered by the proposal is 
insufficient to address State budget pressures that are endangering 
Medicaid. The early year Federal funds are tiny relative to State 
fiscal deficits estimated in the range of $70-$85 billion in State 
fiscal year 2003. Second, the proposal offers States an untenable 
choice: gain even modest relief now but lose the current commitment to 
guaranteed Federal matching payments, designed to flow with the number 
of people eligible and the actual costs of their care.
    Inadequacy of the proposed Federal support. Recessions place States 
between a rock and a hard place when it comes to Medicaid financing. At 
the same time recessions increase the number of low income people 
seeking Medicaid coverage, they reduce the availability of State 
revenues available to finance that coverage. Coupled with increases in 
health care costs--notably for prescription drugs--States find 
themselves with demands that exceed the revenues they have available. 
Without Federal fiscal relief, States' likely response is to cut back 
the coverage that Medicaid provides. As of December 2002, proposed or 
implemented cutbacks were estimated to leave a million people without 
health care coverage.
    What's needed to prevent these cutbacks is a significant increase 
in the Federal Government's share of Medicaid costs--a boost in the 
matching rate--in order to cushion the recession's impact. Instead the 
administration is proposing not only a small funding increase that 
States must repay but also caps on Federal funds for Medicaid 
regardless of program needs. The proposal's repayment requirement would 
actually cut Federal funds after 7 years, regardless of the number of 
eligibles or costs of services at that point in time. The fact that the 
repayment cut would begin at precisely the point the baby boom 
population begins to turn 65, increasing the number of low income 
elderly people eligible for Medicaid, makes higher costs then almost a 
certainty.
    Inadequacy of block grants. Whatever its form, capped rather than 
open-ended funding is not responsive to the needs of the Medicaid 
population, the providers who serve them, or the States who share 
responsibility for financing their care. Medicaid is now the nation's 
largest health insurance program, providing health insurance to low 
income families and people with disabilities, filling in Medicare's 
gaps for low income elderly, and providing virtually the only safety-
net for people who need long-term care. To support these services, the 
Federal Government provides States open-ended matching funds: the more 
people who are eligible for service and the more services costs, the 
more States receive in Federal matching funds; the fewer people 
eligible, the less States receive.
    As explained by Andy Schneider in the ``Kaiser Family Foundation's 
Medicaid Resource Book'' (July 2002), financing arrangements that 
guarantee States at least half the costs of services (up to 83 percent 
in the lowest income States) encourage States to extend coverage beyond 
levels their own resources would support and make funds automatically 
available when circumstances create a need. Recession is one such need. 
The Urban Institute estimates that an increase in the unemployment rate 
from 4.5 percent to 5.5 percent produces an increase in Medicaid 
enrollment of 1.6 million--an increase that, under current law, is 
automatically supported by Federal funds. Public health emergencies are 
another such need. Medicaid covers an estimated 55 percent of persons 
living with AIDS and 90 percent of all children living with AIDS. When 
the number of people affected increases or the costs of treatment rise, 
Federal funds automatically increase to share the burden.
    Predetermined Federal allotments or block grants cannot achieve 
these goals. Block grants are distributed according to specific 
formulas, not according to the number of people served or the actual 
cost of services. Although the administration has not spelled out its 
proposal in detail, replacing guaranteed matching payments with capped 
funding is inevitably less responsive to the needs of vulnerable 
people. As my Georgetown colleague Cindy Mann has explained, 
predetermined allotments, even with rates of increase (which the 
administration has not specified), do not allow for variations in need 
across States (due to variation in health or economic circumstances) or 
for unanticipated changes in national circumstances. Had Federal 
funding for Medicaid in 2002 been based on costs projected in 1998, for 
example, Mann estimates that financing would have been 12-percent below 
actual spending.
    Reliance on uncertain projections to provide Federal funding is 
particularly likely to jeopardize Federal support for Medicaid services 
to low income elderly and disabled populations. Medicaid is now the 
only source of prescription drug protection for these vulnerable 
populations (and the administration's Medicare prescription drug 
proposal would not necessarily replace these Medicaid 
responsibilities). Medicaid is also the nation's long-term care safety 
net--financing almost half the nation's nursing home expenditures. 
Given the expected growth in the elderly and disabled population, 
capping Federal funds is a strategy to shift responsibility for serving 
the baby boom population from the Federal Government to the States.
    The administration describes its proposal as providing States 
``flexibility'' to use resources more creatively and presumably more 
efficiently to meet their needs. However, no creativity in delivery can 
offset likely increases in numbers of people in need and increases in 
the cost of services over which Medicaid has little if any control. 
With capped funds, States' ability to ``flexibly'' expand coverage--
provide coverage to currently ineligible uninsured populations or 
continue to expand home and community-based long-term care services--
will be hampered, not enhanced, given the need to cover the inevitably 
rising cost of existing obligations. Either that, or expansions will 
come at the expense of people already in need. The key to true 
expansion of protection is enhanced, guaranteed Federal matching 
payments, not capped Federal funds.
    Indeed, with capped Federal funds, ``flexibility'' is nothing more 
than a euphemism for cuts in protection that Federal rules currently do 
not allow: creating waiting lists for enrollment, favoring some parts 
of States over others, charging even the poorest beneficiaries out-of-
pocket payments for service, and limiting access to any and all 
services based on fiscal concerns. Although the administration proposal 
may exempt from some such restrictions Medicaid's so-called 
``mandatory'' population groups--primarily poor children, and elderly 
and disabled people eligible for Supplemental Security Income (SSI) 
(that is, with incomes below 74 percent of the Federal poverty level)--
it is unclear whether these exemptions would apply to all the services 
these groups currently receive. New types of restriction may apply to 
optional services (for example, prescription drugs, dental services, 
physical therapy, and eyeglasses). For optional groups--which include 
elderly and disabled people with incomes above 74 percent of the 
Federal poverty level--the majority of elderly Medicaid nursing home 
residents, pregnant women with incomes above 133 percent of the Federal 
poverty level, near poor children and very poor parents--States would 
appear to have total discretion to limit the terms and scope of 
coverage. The same may be true for the State Children's Health 
Insurance Program, funding for which is incorporated in the newly 
proposed State allotments.
    In general, a cap on Federal funds will constrain coverage for any 
and all groups and services subject to that cap. Similarly, elimination 
of an array of current Federal Medicaid standards--like those related 
to nursing home quality, access to emergency rooms and other 
protections under managed care, and timely processing of applications--
will affect any and all groups and services now benefiting from them.
    Overall, the administration's Medicaid proposal in no way secures 
Medicaid financing for vulnerable populations. Instead it takes 
advantage of States' current fiscal weakness to encourage States to 
take a bad risk: trading assured Federal financing in the future for a 
bit of new revenue and authority to cut spending today.
                               conclusion
    In his most recent State of the Union Address, President Bush 
described Medicare as ``the binding commitment of a caring nation.'' 
The same language applies to Medicaid. A strong Medicare prescription 
drug benefit along with fiscal prudence is needed to secure our binding 
commitment to Medicare. Enhanced and guaranteed Federal matching 
payments are needed to secure our binding commitment to Medicaid. In 
his 2004 budget, the President abandons rather than secures these 
commitments. A caring nation should reject these proposals.

    Chairman Nussle. Do members have any questions?
    Mr. Shays or Mr. Scott. Mr. Scott. Oh, I am sorry. Well, 
let--do you have questions?
    Mr. Scott. I will go next.
    Chairman Nussle. Mrs. Capps.
    Mrs. Capps. Thank you Mr. Chairman.
    I would like to ask you to respond, Professor Feder. The 
Bush administration has said that all the current beneficiaries 
would continue getting current benefits. You kind of disputed 
that a bit. But I want to bring out this part that the 
Secretary referred to today as the so-called ``optional 
beneficiaries,'' or benefits that are optional, that could be 
cut as Federal dollars become more limited.
    I say this, in the light of almost every State facing a 
deficit with its own budget right now, it is certainly going to 
be right up front there if this legislation should pass or if 
this proposal of the administration becomes law.
    You have made some comments about this, but again, what do 
you think about this argument and who are--maybe you can 
describe some of these optional beneficiaries. What would they 
do without the availability of Medicaid and what would happen 
to them as more and more people become unemployed?
    Ms. Feder. I would be happy to address that.
    I think there has been some uncertainty. As we have 
discussed the details, actually both proposals are not fully 
laid out. And there has been some inconsistency in the 
information on whether, as the Secretary said today, mandatory 
populations would continue to receive benefits, or more 
accurately, whether they would be subject to the capped funds. 
I believe even today, he spoke about perhaps exempting the 
mandatory population from the capped funds for mandatory 
services, but not optional services, as was pointed out.
    To be more precise, mandatory population groups are 
primarily the poorest population groups, the poorest children 
and elderly and disabled people who are eligible for 
Supplemental Security Income, SSI. Those people have incomes 
below 74 percent of the poverty level. These people, along with 
optional groups in the population--which include the bulk of 
nursing home residents--people also rely on optional benefits. 
Optional benefits include benefits for prescription drugs, 
benefits for dental care, benefits for physical therapy, 
benefits for eyeglasses.
    So those optional benefits, even for the poorest 
population, would be constrained potentially under the caps. 
And for the optional population groups, those people who are 
just above poverty or have incomes above SSI level for the bulk 
of nursing home residents, for the beneficiaries receiving home 
care, those populations and their services are totally up for 
grabs and at the States' discretion.
    And the difference--even though those benefits are optional 
now, the State must define eligibility rules that apply across 
States. They must provide comprehensive benefits for the 
population they make eligible. And so, as they squeeze, they 
cannot be arbitrary in the cuts they are putting into place. So 
what is needed is money so that those States won't have freedom 
to cut in ways that may be arbitrary.
    Mrs. Capps. It is rather a nightmare scenario to think of 
what would happen to nursing home residents, for example, 
should this proposal be enacted.
    And then, if I could go on, because I want to give you a 
chance to elucidate and respond to so many members, along with 
the Secretary, saying Medicaid and Medicare programs are just 
too expensive, they have been growing at such a high rate we 
can't afford them. What are some other ways that we should 
consider our responsibility in this arena and the kind of 
valuable services that these services provide to our 
population?
    Ms. Feder. I am glad you asked Congresswoman Capps, because 
the issue is not affordability of these services. Cutting back 
program protections doesn't make the costs of health care go 
away. It simply shifts them to the people who bear those costs, 
and for many, it makes them unable to get it. The issue is not 
affordability; the issue is our Nation's priorities.
    I personally am appalled at the notion that some would 
propose a $674 billion tax cut at this time and argue that 
decent protections for Medicare beneficiaries, for prescription 
drugs, for poor and vulnerable populations, for health and 
long-term care services are unaffordable. And over the long 
term the issue is fiscal prudence to enable this Nation to 
address the additional costs that will inevitably come as our 
generation turns age 65. Those costs, we know they are coming. 
The job is to minimize debt today so that we can cope better in 
the future. That's exactly the opposite of what we are doing, 
what is being proposed.
    Mrs. Capps. Thank you.
    Thank you, Mr. Chairman.
    Chairman Nussle. Thank you.
    Mr. Shays.
    Mr. Shays. Thank you, Mr. Chairman.
    I would like to thank both of our witnesses. It is kind of 
awkward sometimes, when you are the second panel after a 
Secretary, but you both are such noted scholars and experts on 
these issues that I know we continue to rely on both of you for 
your advice and counsel.
    I have to tell you that what frightens the hell out of me 
is that when I look at basically two-thirds of our budget on 
automatic pilot, and I think that I am supposed to be in a 
legislature that is supposed to come to grips with these 
issues, and I look at Medicaid going up at an average of 9-
percent a year and Medicaid close to 7--that is what the 
average kind of is. And I think it is such a big bulk of 
government spending, and, I think, of opportunity costs that it 
drowns out other things.
    And then I think that we have already learned that our 
gross domestic product, 14.4 percent is on health care in 
general, and I think that our American businesses have to 
compete overseas with countries that their gross domestic 
product might be at 5 percent, like, you know, Formosa or 
Taiwan.
    So I guess what I want to ask you both is, how do we slow 
the growth in these gigantic programs so they ultimately don't 
crowd out other very needed programs?
    Ms. Wilensky. That's a very large question to handle in a 
hearing. I think, in this country, we will spend more on health 
care than in other countries because we are not inclined to 
wait. We want easy access to new technologies. We tend not to 
want to have a lot of constraints on our providers, and when we 
place those constraints, or attempt to place those constraints, 
people respond badly. I believe it will be much more a question 
of whether people feel they are getting value for the money 
that they are spending, and when they don't, they get very 
frustrated.
    To me, it is instructive to consider a managed care 
backlash we had in this country in the late 1990s. We did not 
see a similar kind of response from Federal employees who, when 
they are unhappy, every November can vote with their feet and 
find a different health care plan.
    I don't want to pretend that this model is a panacea and is 
not going to challenge us as to how much we want to spend on 
the currently working versus how much we want to spend on the 
currently not working. These are difficult issues and there is 
no easy resolution. But the question of whether or not some 
kinds of programs, put in place, are able to respond better to 
what people want than others is what you, as Members of 
Congress, have to decide.
    What we are seeing, in part, now, on Medicaid is the 
aftermath of many States have done what a lot of us wanted them 
to do in the late 1990s, expand benefits, expand populations 
that they covered, and expand payments to providers. They are 
being caught in a fiscal bind with no ability to deficit-
finance and having to respond in a simple way, to reduce 
expenditures which is usually to try to cut providers' rates or 
to cut benefits now, in some cases, or populations.
    What you are able to do as Members of Congress is to try to 
help design programs that make sense with these changing 
demographics. I am not sure what we are going to--this country 
next about trying to restrain health care spending. We are in 
the spending phase because nobody has been very comfortable 
with seeing restraints come back in place.
    I don't think we are going to repeat the 1990s, and I don't 
think we are going to go back and repeat some of what we did in 
the 1980s. Whether or not we move to a Federal employees' 
model, whether or not we allow individuals to make better 
choices in terms of the kind of health care they want, whether 
we have flexibility or whether we go back to have more 
regulatory strategies, I think that is really what we are going 
to have to decide as a country: What do we want to do next?
    But I don't think we are going to--this country is going to 
continue spending substantial amounts on health care. The fact 
that we are so proud that we doubled the NIH budget is only 
going to make it more difficult, not less, because there will 
be many technological advances to go along with our aging 
population.
    It is really a question of whether we can have people feel 
like they are getting value for their money, and they are in a 
position to make the choices they want, or do we want to have a 
much more structured, regulatory approach. Judy and I differ in 
terms of what it is that makes sense, particularly for, say, 
our Medicare program.
    Either as a program or as a component program, there are 
fundamental philosophical issues that the Congress is going to 
have to deal with. When we have seen the expansions talked 
about for the uninsured, there really is a fundamental 
philosophical question about whether or not you want to use 
refundable tax credits and grouping mechanisms, or do you want 
to expand Medicare and Medicaid to the currently uninsured as a 
way to try to bring people into insurance coverage. These 
represent legitimate, philosophical disputes that people can 
have and still feel passionately they want to see the problem 
solved.
    Mr. Shays. And the light is on, but I am sure Mr. Scott 
doesn't mind my going on longer.
    The bottom line is, I think, we have so much distortion now 
in the marketplace in taking care of the uninsured because we 
are not going to--we don't throw them off a cliff. We just give 
them a different kind of health care.
    Dr. Feder, feel free to make some comments.
    Ms. Feder. Thank you, Mr. Shays.
    I agree with much, though not all, as she knows, of what 
Gail said. And I want to go back to the way you framed the 
problem, which was in terms of the percentage of GDP we spend 
on health care, a growing amount for the Nation as a whole, 
because I think, as you recognized in that comment, it is the 
entire health care system that causes costs to rise.
    The unique problems of Medicare, it is not that Medicare is 
inefficient. It is that Medicare--and particularly looking out 
into the future--has to deal with larger numbers of older and 
disabled beneficiaries. They have the same problems with health 
care costs that the entire Nation has, not different ones; 
indeed, because of the payment control mechanisms, they 
actually are able to do somewhat better than the private sector 
in controlling costs.
    But health care costs are rising, and deciding whether we 
are getting value for the dollar--we are, after all, an 
affluent Nation; our GDP is expected to rise per worker by 50 
percent over the next--what is it--through 2035. How we want to 
use those dollars is our choice.
    I would also add----
    Mr. Shays. Let me just say, the problem is, in one way it 
is our choice; in another way, it isn't quite our choice. That 
is, when you see that we are going to have--I have some 
companies that are going out of business in my district because 
they are not able to compete with countries that don't have 
such large health care costs and so on. And you know their 
labor costs are not.
    Ms. Wilensky. I do not buy that. Their total labor cost is 
divided between wages and fringe benefits, and if they can't 
compete, it is because of their labor compensation, the total 
labor compensation, and not the notion that there is some piece 
of it that is growing faster.
    Mr. Shays. No, I think there are a lot of pieces. But if 
you are paying $15,000 for health care insurance for your 
employee, it makes it pretty hard.
    Ms. Wilensky. What it means is that the workers are going 
to get squeezed on wages, and of course, what we saw in the 
1990s is because we were so much more successful in slowing 
down the rate of health care spending, we were able to see 
substantial increases in wages in the 1990s without inflation.
    Mr. Shays. So your argument--and we will get back to you, 
Dr. Feder. But your argument is, bottom line----
    Ms. Wilensky. It is productivity. And what happens in terms 
of total labor compensation, that is what makes you competitive 
or not.
    Mr. Shays. Of which health care is a much larger amount in 
the United States than it is for other countries?
    Ms. Wilensky. It is, but relative to the total package it 
is actually quite small.
    Mr. Shays. Well, great. Then I don't feel as scared.
    Ms. Wilensky. I think it is an easy--it is an easy excuse 
as to why a company is having trouble.
    Mr. Shays. I am not looking for excuses. I am just very 
concerned that my employees now have--my constituents no longer 
have jobs, and I am trying to get some answers to it.
    But, Dr. Feder, we kind of interrupted you.
    Ms. Feder. That is quite alright.
    What--on this point I think there are also differences 
between the way we finance medical care in this Nation and the 
way it is done in other countries. In other countries they bear 
those costs. Not all countries have extensive health insurance 
systems or as costly health care. But in other countries it is 
financed through the tax system and it doesn't fall in the same 
way on individuals, on particular employers.
    So there are many ways that we have the issue of whether we 
want to continue to support the advancing of health care, 
adopting new technology that is providing us a lot of good, 
along with, perhaps, a lot of unnecessary service. We do have 
to figure out, if we don't want to do that, how we limit what 
we spend on health care, a very challenging choice. It should 
not be done to limit those who are most in need of care, the 
elderly and disabled beneficiaries of Medicare, leaving younger 
populations unaffected.
    We shouldn't be leaving the uninsured hanging out to dry 
when the problem is not the health care costs for that 40-some 
million people, but rather the costs for all of us who have 
health insurance. But we as a Nation need to grapple with it 
appropriately. It is not beyond our ability to deal with.
    Mr. Shays. Thank you both.
    Thank you, Mr. Scott, for your patience. Mr. Scott, you 
have as much time as you want.
    Mr. Scott. Thank you, Mr. Chairman.
    I think--in follow-up to your question, I think Dr. Feder 
has suggested that if we had universal health care, that would 
relieve the employers of paying a significant portion of their 
wages and would make us more competitive. And we have also 
heard that the programs we are trying to deal with now, 
Medicare and Medicaid, you take the health care system you have 
got and expenses out there, and we are just buying what is out 
there. If we could get a hold on the health care system and the 
increases, then we would be a lot better off.
    But in that light, if we are dealing with a private system 
rather than Medicare or Medicaid, private has--you have got to 
pay for the services, you have got expenses, you have got a 
profit. There are only three little pots you can play with, and 
if you are not going to reduce the services, where are Medicare 
and Medicaid in terms of cost of administration?
    Ms. Feder. As you know, Medicare in particular, I believe 
that the figure is less than a handful of percentage points--2 
to 5 percentage points, 2 percent of Medicare in administrative 
costs is the figure that I recall.
    Mr. Scott. What is private system?
    Ms. Feder. Private sector varies by the size of the group 
being insured. My belief is that for employer-sponsored 
insurance in large firms, it is in the neighborhood of between 
10 and 11 percent. And for small businesses it is in the 
neighborhood of 30 to 40 percent.
    Mr. Scott. So you can't--you are doing as well as you can 
on expenses, you don't have a profit, so how can you possibly 
do better in the private system than Medicare or Medicaid?
    Ms. Feder. I have got to tell you, Mr. Scott, it beats me. 
I think, and the record shows, as I said, that Medicare does a 
far better job historically of controlling costs than does the 
private sector. Claims about a competitive system or the 
Federal Employees Health Benefit Program have simply not been 
borne out. They--we have not seen a slowdown in health care 
costs.
    Mr. Scott. OK. Now, as I understand this proposal, you get 
a prescription drug benefit? You go into an HMO, is that the 
deal on this thing?
    Ms. Feder. An HMO or another--the administration has said a 
private health insurance plan because they have considered 
options beyond HMOs.
    Mr. Scott. Once you get into the private sector, is there 
any limit to what they can charge you on co-pays?
    Ms. Feder. I believe actually in terms of what the 
administration has laid out in detail--and the details are 
sketchy on the proposal, but my understanding is that they 
would be, they are proposing to make some specifications of a 
benefit plan, but allow variation within it. So some variation 
within limits.
    Mr. Scott. If the HMO that you get into goes broke, then 
what happens?
    Ms. Feder. That is a good question and not one to which I 
have seen an answer, and one which we have had a problem with.
    Mr. Scott. And once you go to a HMO can you get back to 
Medicare.
    Ms. Feder. I believe I heard the Secretary say no, but I 
don't know the answer to that in their proposal.
    Mr. Scott. OK. Medicaid, now, there has been a question of 
whether this thing is capped or not. After this thing goes and 
if you choose that option, do you get a set amount of money or 
not?
    Ms. Feder. My understanding of the proposal is that it is 
to replace the current system that provides Federal dollars on 
a matching basis, based on the number of people who actually 
sign up and the costs of their service. It would replace that, 
for a substantial portion at least, if not all of Medicaid, 
with predetermined allotments to the States.
    Mr. Scott. So the State of Virginia would get one big check 
regardless of who they enroll, based on what they used to be 
spending?
    Ms. Feder. In a word, that is pretty much true.
    Mr. Scott. And if they enroll more people, that is on the 
State; and if they enroll less people, that is good for the 
State.
    Ms. Feder. Or the State budget.
    Mr. Scott. State budget.
    Now, if you buy in, you can't get--I mean, if you buy in, 
you can't get back to the regular Medicaid. After about 6 or 7 
years--he kept kind of doing this to the curve, where you get 
under the cost of inflation--if the cost of medical care keeps 
going at 9 percent, in the fullness of time, you are going to 
be way behind the curve as I understand it.
    Ms. Feder. Well, the way I understood it--and it was clear, 
I thought, in his use of the term, forward-funding--it means 
give the money to you up front, then take it back at the end, 
as I understood it.
    And even though he said that it was not a cut, as he showed 
the trend line, by doing this, he did indeed say that in years 
7, 8 or 8, 9 and 10, that States would receive less than that 
inflation trend line, that baseline.
    So I think that your interpretation is correct, that 
becomes a cut.
    Mr. Scott. So when he said you wouldn't have to pay it 
back, that wasn't really the whole story. You just wouldn't be 
getting enough.
    Ms. Feder. I didn't understand that, because I believe that 
the forward-funding, if you get more up front, that means that 
you have to get less in the back.
    Mr. Scott. In future, with the costs going way up, we could 
just increase it, say, instead of 9 percent, 6 percent, 5 
percent, whatever kind of a budget he wants to do; and the 
State of Virginia would just get that check and we would be on 
our own after that.
    Ms. Feder. Well when you move away from the commitment that 
we have now to match the payments based on the eligibles and 
the costs, then you can decide what rate of increase you want 
to apply. I have not seen it well explained, what the 
administration intends, although they sound as though they are 
talking about a baseline--which is the projected rate, as he 
said, changing from year-to-year.
    But policy could be changed. It becomes quite simple to 
ratchet that down as is the experience in other areas. But--
well, go right ahead.
    Mr. Scott. The State doesn't have to sign up for this and 
your recommendation would be to leave well enough alone?
    Ms. Feder. Oh, I think it is a really bad gamble. I think 
it is appalling that we would only provide States aid if they 
sign up for it, because it is really forcing them to make what 
I would argue is a very, very bad choice.
    Mr. Scott. Thank you, Mr. Chairman.
    Chairman Nussle. Thank you. I just have a couple of things. 
We appreciate your time today.
    The first is, with regard to--and you were on MedPAC. You 
were the--in fact, you chaired MedPAC, didn't you, Dr. 
Wilensky?
    You know, it seems to me one of the frustrations that we 
have, or at least that I have--I can't speak for everybody, but 
one of the frustrations we have is that the data we are using 
to make determinations of impact and how things are--how things 
are going, how the challenges within Medicare in particular are 
being handled by our system are often 2 years old or longer. 
And is that still true, A; and B, what can we do about it? And 
doesn't it--doesn't that information make our decisions 
incorrect from the beginning, or inaccurate from the very 
beginning if you are basing it on information that is 2 years 
old?
    Ms. Wilensky. Two years is usually good in health data, to 
have the data not be more than 2 years out of date. There have 
been some attempts to try to get information sooner. The 
American Hospital Association has a survey that is used to 
provide information that I think is about a year old. But if 
you are trying to use actual information in terms of spending 
or cost reports, it is very difficult to have it quicker just 
because by the time it takes to come in, and for bills to be 
paid.
    It does seem peculiar in an age of instant information that 
we can't find better ways to transmit information within the 
government. It is possible that some of the effects of the 
HIPAA requirements, which have transaction standards, will be 
to have information more readily available after it is all in 
place.
    But it is a source of frustration.
    Chairman Nussle. One other thing that I--or just since you 
are here, you are the--you are the co-chair of the President's 
Task Force to Improve Health Care Delivery for our Nation's 
veterans. And I wanted to ask you, because there has been some 
discussion lately, and in fact, bills that have been introduced 
in the most recent Congress and now, I assume, considered to be 
introduced in this Congress, to change the method of financing 
this from a discretionary annual program to a mandatory funded 
program; and I guess what I am curious about is, is the task 
force considering a recommendation in that regard?
    When are--I guess first, when are the recommendations 
coming out? I suppose I shouldn't ask you to tilt your hand too 
much, but if you would tip your hand, is it heading in that 
direction or maybe a different way of financing the veterans 
program?
    Ms. Wilensky. Our recommendations will be made to the White 
House no later than May of this year. We had an interim report 
that was out last summer. This activity has been one that has 
taught me Medicare is not as hard a problem as I had thought 
relative to other issues. Much of what the task force is 
looking at has to do with ways to try to have health care 
between the VA and the DOD--for retirees and veterans--be 
integrated in a better way so that resources can be shared, so 
that health care can be more transparent for the active duty to 
retiree status of an individual. And so we are--many of our 
activities have involved looking at information systems, trying 
to go to single physical discharges rather than having 
duplicate physical discharges.
    We have also looked at the issue of a funding mismatch. The 
problem is that if you have major waiting times in the VA 
system, it makes it very hard to talk about sharing or 
coordination between the VA and DOD when you have one system 
that is already so backed up.
    We are in the midst of our final deliberations and as of 
now, the task force--these are all open meetings, so anybody 
can come listen as we proceed over the next 2 months. But the 
task force seems to be leaning to make an impartial 
distinction. The first refers to the categories, what had been 
called 1-through-6s, those who were service-connected 
disabilities and the indigent.
    With geographic adjustments, it is 1-through-7s in the new 
definition, and to look at that group differently from the 
category--so-called Category-8s, or the old 7s who have neither 
service-connected disabilities nor are they indigent. At this 
point we are leaning toward a way to try to assure full funding 
for those with service-connected disabilities and for the 
indigent without directly discussing, or at least at this 
point, recommending the funding mechanism.
    As you might imagine, as a former administrator, I am very 
gun-shy about adding to the large pot of expenditures that Mr. 
Shays has already noted is off of the table in terms of 
discretionary decision-making. But to also recognize we need to 
make sure that there is full funding for this group of veterans 
who have service-connected disabilities and/or who are 
indigent, whatever mechanism is used.
    We are also engaged in a discussion about what, if any, 
policies might seem appropriate for the Congress to consider as 
to the Category-8s. We have not come to any conclusions either 
with regard to the funding or with regard to this issue. The 
task force seems to be leaning in this direction to recognize a 
difference between those that have service-connected 
disabilities or who are indigent and those who were newly 
allowed to use the VA as a result of the 1996--in the 
Millennium legislation.
    I think we are all feeling a sense of frustration that 
Congress' legislation and funding seem to be inconsistent. We 
recognize that technically the Congress provided the Secretary 
with the ability to close enrollment, but Congress seems very 
unhappy when the Secretary actually tries to do that.
    We are likely to have the sentiment that would-be funding 
and intent need to go closer together.
    Chairman Nussle. Well, thank you. I mean, I am sure that 
there are more areas we could get into, but I will spare you 
that because I know May is just around the corner, and we are 
all very anxiously awaiting those recommendations. But it sure 
sounds like you are touching all of the most important 
component parts. There are many, as you know.
    I want to thank you both for your testimony and for your 
advice. I am sure you will continue to provide it in this kind 
of forum as well. As you said, there are many other ways that 
we can discuss this. An open hearing isn't always the most easy 
way to accomplish that. But we appreciate all the ways that you 
have done those in the past, and we appreciate your testifying 
today.
    If there is nothing else to come before the committee, we 
will stand adjourned.
    [Whereupon, at 1:50 p.m., the committee was adjourned.]

                                
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