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



 
       CHALLENGES FACING THE MEDICAID PROGRAM IN THE 21ST CENTURY
=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 8, 2003

                               __________

                           Serial No. 108-58

                               __________

       Printed for the use of the Committee on Energy and Commerce


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

                               __________


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                    ------------------------------  

                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                      Ranking Member
FRED UPTON, Michigan                 HENRY A. WAXMAN, California
CLIFF STEARNS, Florida               EDWARD J. MARKEY, Massachusetts
PAUL E. GILLMOR, Ohio                RALPH M. HALL, Texas
JAMES C. GREENWOOD, Pennsylvania     RICK BOUCHER, Virginia
CHRISTOPHER COX, California          EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                 FRANK PALLONE, Jr., New Jersey
RICHARD BURR, North Carolina         SHERROD BROWN, Ohio
  Vice Chairman                      BART GORDON, Tennessee
ED WHITFIELD, Kentucky               PETER DEUTSCH, Florida
CHARLIE NORWOOD, Georgia             BOBBY L. RUSH, Illinois
BARBARA CUBIN, Wyoming               ANNA G. ESHOO, California
JOHN SHIMKUS, Illinois               BART STUPAK, Michigan
HEATHER WILSON, New Mexico           ELIOT L. ENGEL, New York
JOHN B. SHADEGG, Arizona             ALBERT R. WYNN, Maryland
CHARLES W. ``CHIP'' PICKERING,       GENE GREEN, Texas
Mississippi                          KAREN McCARTHY, Missouri
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania        JIM DAVIS, Florida
MARY BONO, California                THOMAS H. ALLEN, Maine
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
LEE TERRY, Nebraska                  HILDA L. SOLIS, California
ERNIE FLETCHER, Kentucky
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho

                   Dan R. Brouillette, Staff Director
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                         Subcommittee on Health

                  MICHAEL BILIRAKIS, Florida, Chairman

JOE BARTON, Texas                    SHERROD BROWN, Ohio
FRED UPTON, Michigan                   Ranking Member
JAMES C. GREENWOOD, Pennsylvania     HENRY A. WAXMAN, California
NATHAN DEAL, Georgia                 RALPH M. HALL, Texas
RICHARD BURR, North Carolina         EDOLPHUS TOWNS, New York
ED WHITFIELD, Kentucky               FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
  Vice Chairman                      BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico           GENE GREEN, Texas
JOHN B. SHADEGG, Arizona             TED STRICKLAND, Ohio
CHARLES W. ``CHIP'' PICKERING,       LOIS CAPPS, California
Mississippi                          BART GORDON, Tennessee
STEVE BUYER, Indiana                 DIANA DeGETTE, Colorado
JOSEPH R. PITTS, Pennsylvania        CHRISTOPHER JOHN, Louisiana
ERNIE FLETCHER, Kentucky             JOHN D. DINGELL, Michigan,
MIKE FERGUSON, New Jersey              (Ex Officio)
MIKE ROGERS, Michigan
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)










                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Eckardt, Hon. Adelaide, Representative, Maryland State House.    62
    Rowland, Diane, Executive Vice President, Health Policy, 
      Kaiser Family Foundation...................................    67
    Scully, Hon. Thomas A., Administrator, Centers for Medicare 
      and Medicaid Service, accompanied by Dennis Smith..........    15
Material submitted for the record by:
    Alzheimer's Association, prepared statement of...............   212
    American College of Obstetricians and Gynecologists, prepared 
      statement of...............................................   223
    American Health Care Association, prepared statement of......   213
    Association of American Medical Colleges, prepared statement 
      of.........................................................   234
    Consortium for Citizens with Disabiities, prepared statement 
      of.........................................................   229
    Eckardt, Hon. Adelaide, Representative, Maryland State House, 
      letter dated November 10, 2003, enclosing response for the 
      record.....................................................   211
    National Association of Community Health Centers, Inc., 
      prepared statement of......................................   216
    National Association of Public Hospitals and Health Systems, 
      prepared statement of......................................   236
    National Association of Children's Hospitals, prepared 
      statement of...............................................   242
    National Citizen's Coalition for Nursing Home Reform, 
      prepared statement of......................................   245
    Rowland, Diane, Executive Vice President, Health Policy, 
      Kaiser Family Foundation, response for the record..........   212
    Scully, Hon. Thomas A., Administrator, Centers for Medicare 
      and Medicaid Service, response for the record..............   247
    Voice of the Retarded, prepared statement of.................   220

                                 (iii)









       CHALLENGES FACING THE MEDICAID PROGRAM IN THE 21ST CENTURY

                              ----------                              


                       WEDNESDAY, OCTOBER 8, 2003

                  House of Representatives,
                  Committee on Energy and Commerce,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2123, Rayburn House Office Building, Hon. Michael 
Bilirakis (chairman) presiding.
    Members present: Representatives Bilirakis, Greenwood, 
Deal, Norwood, Wilson, Buyer, Brown, Waxman, Pallone, Stupak, 
Green, Strickland, Capps, DeGette, John, and Dingell (ex 
officio).
    Staff present: Patrick Morrisey, deputy staff director; 
Chuck Clapton, majority counsel; Jeremy Allen, health policy 
coordinator; Eugenia Edwards, legislative clerk; David Nelson, 
minority counsel; Bridgett Taylor, minority professional staff 
member; Amy Hall, minority professional staff member; and 
Jessica McNiece, staff assistant.
    Mr. Bilirakis. Good morning. I now call this hearing of the 
Health Subcommittee to order. I would like to begin by thanking 
our witnesses for taking the time, one of whom is not here yet, 
but he is on his way from downtown, by thanking our witnesses 
for taking the time to join us and provide their perspective on 
the myriad of changes facing the Medicaid program at this 
beginning of the 21st century. This is the third hearing we 
have held in Congress on Medicaid and I look forward to a 
vibrant discussion this morning, and I am sure it is going to 
be vibrant.
    Medicaid is a critical component of our Nation's health 
care safety net. Approximately 40 million low income children, 
elderly adults and people with diabetes rely on Medicaid, which 
is jointly financed by the Federal Government and the States. 
The title of this morning's hearing is Challenges Facing the 
Medicaid Program in the 21st Century, and I think that is a 
very appropriate title, especially when you consider that the 
Congressional Budget Office estimates that Federal spending on 
Medicaid will more than double over the next 10 years and 
consume an ever larger share of our GDP.
    As we grapple with these realities, it is incumbent on us 
to carefully review how the program is working and whether 
there are opportunities to better focus our Federal investment 
than Medicaid. I like to think that is the gist of this series 
of hearings. However, I think we should remember that a 
comprehensive review of Medicaid should also reveal a number of 
opportunities for modernizing this program. We should think 
critically about how we can provide States with the flexibility 
they need to design Medicaid programs that best meets the needs 
of their populations, while at the same time ensuring that 
Federal funds are targeted and used in the most effective 
manner possible. In terms of today's hearing, I am interested 
to hear our panelists' views on the open-ended funding stream 
available to States under Medicaid's financing structure and 
what incentives are inherent under such a system.
    As many of you know I had strong reservations about 
providing States with temporary increases in their Federal 
medical assistance percentages, FMAP, as we did under the Jobs 
and Growth Tax Relief Reconciliation Act of 2003. While I 
supported providing targeted limit assistance to the States, I 
did not support increasing the Federal Government's share of 
the responsibility for a State's Medicaid program, especially 
since many States dramatically expanded their Medicaid programs 
during the 1990's. I have concerns with a system that 
encouraged many States to expand their Medicaid program during 
the 1990's and then draw down increased Federal funds, and then 
come to the Federal Government for additional funds when the 
economy was not as strong.
    As we look toward developing strategies for reforming 
Medicaid, I also think that it is critical that we recognize 
that every senior citizen in America is entitled to coverage 
under Medicare and are, therefore, in my opinion, entitled to 
access any new prescription drug benefit that Congress might 
add to the program. H.R. 1, the Medicare Prescription Drug 
Modernization Act of 2003, recognized this and would allow 
every Medicare beneficiary, including the so-called, very 
important dual eligibles access to the new prescription drug 
benefit.
    Again, I would like to thank our witnesses for joining us 
today and we all look forward to your testimony and we are 
going to go through our opening statements here and hopefully 
by then our first witness, Mr. Scully will be here. If not, we 
might have to recess for a few minutes until he gets here. But 
he was called to the White House very suddenly this morning as 
I understand it and he is on his way now.
    I now yield to the gentleman from Ohio, Mr. Brown.
    Mr. Brown. I thank the chairman very much and appreciate 
his good work and genuine caring about people who have less 
advantage in this society. There are desperately poor people in 
America, and they can't afford health care and they can't 
afford long term care services. That is not Medicaid's 
challenge. It is the challenge of a caring society. I use the 
phrase ``caring society'' because President Bush used that 
phrase during his State of the Union address when he called 
Medicare the ``binding commitment of a caring society.''
    Do we have that same binding commitment to Medicaid? 
Medicaid doesn't fritter away tax dollars. It operates with 
less overhead than private insurance. Its costs are growing 
more slowly than private insurance, and for good or for worse, 
it pays providers less than private insurance.
    By any measure, that is a bare-bones system. Medicaid is 
not rife with fraud and abuse. There are strict controls on 
asset transfers. This and previous administrations have cracked 
down on other abuses. Medicaid is supposed to serve the truly 
poor and it does. If we want to deny care to senior citizens, 
to disabled individuals, to children who are living in poverty, 
let's have a hearing about that.
    But let's not imply that Medicaid is creating a funding 
crisis in this country. People in need and our willingness or 
unwillingness to assist those people is at issue here, not 
Medicaid. Medicaid spending growth isn't a sudden phenomenon. 
The President and the Congress knew about the increase on 
demands on Medicaid before we drained $3 trillion from the 
Federal Treasury and $16 billion from State budgets so we could 
give tax cuts for the most privileged people in our society.
    In Ohio, you have to be--my home State, you have to be 64 
percent of poverty to qualify for Medicaid. 64 percent. Is Ohio 
contemplating cuts in Medicaid eligibility and services? You 
bet it is. We toss off $3 trillion in Federal revenues, $16 
billion in State revenues, again, to give tax cuts to the most 
privileged in our society, then we warn the Nation that 
Medicaid is headed toward a funding crisis. Our population is 
aging. Prescription and other costs are growing. We face 
budget, daunting budgets deficits. There are 43.6 million 
uninsured, and Medicaid is the insurer of last resort. Those 
realities aren't Medicaid's challenge or Medicaid's fault. They 
are our challenge, and in many cases, they are our fault.
    Our challenge, not Medicaid's challenge, but ours is to 
finance Medicaid sufficiently so it can continue to serve 
people in need and confront the external factors, growing long-
term care needs, rising drug costs, eroding health coverage and 
$3 trillion worth of irresponsible tax cuts. Those are the 
external factors we should confront directly. Before enacting 
those tax cuts, did we make sure that the lost revenue wouldn't 
affect our ability to protect the most vulnerable in society? 
Quite the opposite.
    The administration tax cut proposal, $3 trillion, again 
going to the most privileged people in our society, was coupled 
with a program to block grant Medicaid, the program for the 
least privileged in our society, cutting off funding for 
optional populations and services. Think about that, 55 percent 
of seniors on Medicaid are optional. Should we kick these 
people off Medicaid? I want to read you a letter from one of my 
constituents, it is a fairly long letter in the last couple of 
minutes of my opening statement.
    ``I am printing this. I do not write good. My wife has 
Alzheimers. My wife is getting lousy care because they tell me 
you idiots of politicians, I don't care if you're Republican or 
Democrat, voted to cut these nursing homes. I go every day to 
my wife. One nursing home the light cord would not work so you 
could not call to the bathroom so you lay there in your body 
waste till someone does check which is hours away.
    Shame on you people and shame on you who voted the cut. I 
hope your family experiences this some way and see how you like 
it. I have used up my Medicare 21 days. Insurance kicks in for 
130 days. I pay $600 every 2 months for my wife. When that's 
gone they tell me I have to go to Medicaid which they will have 
to take everything away from us but our home and our old car. 
We were working people. My wife was an RN all her life. She 
took care of old people. I was an over-the-road bus driver. We 
are not rich. They will steal everything we worked all our 
lives for. I hope somehow you will have to suffer like this and 
watch your wife lay in body waste.
    Mad? You're damn right I'm mad. What a line of bull you 
give the people to get elected and turn around and shaft them. 
Every year, Medical Mutual raise my wife's rate, always 2 weeks 
before Christmas. Last year they raised it $80. The year before 
$105, taking it up to $600 every 2 months. Soon they will have 
all my Social Security check. She gets $840 a month. If we have 
to go to Medicaid they tell me they take all of her $840 and 
give her $40 back. I doubt you will ever see this. Your aide 
will shred this and I hope your aide has to watch his family 
lay in their body waste like I do for what you rotten 
politicians have done. And I served my country in World War II. 
What a joke.''
    The biggest challenge, Mr. Chairman, facing Medicaid is 
that we are losing sight of what it means to be a caring 
society. In the next couple of weeks, we are going to vote $87 
billion the President asked for in Iraq, and now I understand 
Republican leadership has proposed another round of tax cuts. 
Thank you.
    Mr. Bilirakis. I thank the gentleman.
    Mrs. Wilson. No. Dr. Norwood.
    Mr. Norwood. Thank you Mr. Chairman, and I thank you for 
calling this very important hearing today. I would also like to 
thank our witnesses, especially Mr. Scully, the esteemed 
administrator for CMS if he gets here, for being able to 
address this critical issue surrounding Medicaid and its 
implementation. Mr. Chairman, I think it is a good time and the 
correct time that we need to take a step back and take a look 
at the fundamental structure of Medicaid.
    There are several issues that concern me with the current 
structure and the implementation of Medicaid. First, the cost 
of Medicaid already has exceeded all expectations and is only 
expected to grow exponentially as we continue to move forward. 
As our population gets older, and our care becomes more 
technologically focused and capable, the cost of health care is 
going to continue to rise. And I hope our witnesses will 
discuss possible strategies to contain expenses in the future.
    Part of what we have done over the last 38 years is that we 
continually, as a Congress, increase the, or expand the 
categories in Medicaid, and we continually add more individuals 
on to the Medicaid lists for folks that are entitled, and we 
wonder why we have spent so much money, and we continually, the 
first step, is say well gosh, we are paying the health care 
provider too much, which was pointed out by Mr. Brown, is 
already below cost in many areas.
    So I would like for us to just take a real serious look 
about why this cost has continued to grow particularly over the 
last 38 years. And I am concerned about the impact Medicaid has 
on our States. In Georgia, we are paying 20 cents of every tax 
dollar into this program. Medicaid leaves wide discretions to 
the States to craft individually tailored workable plans that 
address the needs of each State's own citizens within the 
Federal guidelines.
    While this is a laudable principle, it has also spurred the 
history of State abuse that has plagued the Medicaid system. 
Today's Medicaid structure provides many perverse incentives 
for States to engage in questionable and very worrisome 
behaviors about the increase in funding. And of course, States 
need to increase their funding because of the budgetary 
difficulties they face. Current budget crisis put States in the 
position of having to decide between roads, books for schools, 
health care for children and the poor or long-term care for 
seniors. I have said here before and I think we ought to have 
some serious consideration about moving long-term care which is 
about generally our senior citizens out from under Medicare and 
place that under--out from under Medicaid and place that under 
Medicare.
    Mr. Chairman, I thank you for the hearing and Mr. Scully, 
we are delighted to have you today. And I look forward to your 
testimony.
    Mr. Bilirakis. The Chair thanks the gentleman.
    Mr. Green for an opening statement, 3 minutes.
    Mr. Green. Thank you, Mr. Chairman. And to follow up my 
colleague from Georgia, I think that is an outstanding idea if 
we would move it under Medicare, except I would hope we would 
cover more days than we do now under Medicaid for our poor 
seniors in nursing homes. Again, I want to welcome Mr. Scully, 
and Mr. Chairman, thank you for having this third in a series 
of hearings on the challenges facing the Medicaid program. The 
Medicaid program provides a critical safety net for 44 million 
low income Americans in the populations covered under the 
Medicaid the elderly disabled and children, some of our 
countries most vulnerable citizens. And as we know the health 
care cost for high risk populations such as these are 
expensive. Medicaid costs have been increasing dramatically in 
recent years, including a whopping 14 percent in fiscal year 
2002. This is certainly a cause for concern, especially since 
Medicaid costs tend to go up during economic downturns, and we 
are certainly experiencing a protracted economic downturn.
    Although I am weary of proposals that would block grant the 
program or substantially alter benefits, the benefits provided 
under Medicaid are vital, physician services, inpatient, 
outpatient hospital care, early periodic and screening 
diagnostic and treatment for children under 21, nursing home 
care and others that make life or death differences in 
beneficiaries' lives. And I've heard some critics talk about 
Medicaid, call it a Cadillac benefits program. But there is 
nothing extravagant about the benefits I have just listed. In 
fact, in the State of Texas, we don't do anything under social 
services that would be called extravagant, and we are even 
cutting back from there.
    Reforming Medicaid or providing more flexibility means 
slicing into services that save people's lives. And Mr. Scully, 
I have a concern, I guess, in--our workforce commission in 
Texas is talking about voting on a Medicaid plan that would 
actually remove families from Medicaid if their children are 
truant from school. And my concern is if you can't get your 
child in school, you don't have health care. And it seems like 
that would be violation of our Federal rules, but what I am 
using that as an example is block granting, something like 
that, and they would use the Medicaid program not for the basic 
tenet of health care, but to use it to force people to do some 
other things.
    Of course, I want children to go to school. But in Texas, 
we take away fishing licenses if you don't pay child support, 
which is pretty important, hunting licenses and even your 
driver's license. Maybe we ought to do that under Medicaid 
before we take away their health care. I know we will hear a 
lot today about flexibility and personal responsibility.
    I would like to remind my colleagues we are talking about 
real people with real needs. As you heard my colleague from 
Ohio in his letter, I actually talked to a constituent last 
night who said his wife was receiving Medicaid in Texas in our 
district and she--and they are cutting her home health care 
benefits. And he said I don't know what else I can do. He said 
I am on Medicare and disabled and I can't do it. And I said 
well, the State of Texas actually cut Medicaid coverage for 
home health care on September 1 and so since--you are probably 
just getting the notice of it. But we are going to try and see 
if hopefully they fell through a crack. But again, Mr. 
Chairman, I thank you for the time today and I will put my 
total statement in the record.
    Mr. Bilirakis. Thank you sir.
    And by the way, I guess the opening statement of all member 
of the subcommittee will be made a part of the record. Mrs. 
Wilson, 3 minutes.
    Mrs. Wilson. Thank you, Mr. Chairman. And thank you very 
much for holding this hearing today. I look forward to hearing 
the testimony. Medicaid is now the largest Federal health care 
program in the country. It is a $280 billion program with about 
48 million covered lives. It is 7 percent of our Federal 
budget, and in most States it is between 15 and 20 percent of a 
State's budget. It has a huge impact on our--the health of our 
Nation as well as the funding of health care. We spent a lot of 
time in this committee over the last 5 years looking at 
Medicare. And I think that Medicaid is the next major health 
care challenge that this committee should undertake.
    Mr. Chairman, you and Chairman Tauzin set up a Medicaid 
task force about 4 months ago and we have been meeting to 
examine a lot of the challenges facing Medicaid and we have 
listened to lots of people. People from the administration, 
doctors, people who run health care clinics and community 
health centers, people whose children are participants in 
Medicaid and there are some things that are beginning to 
emerge. And all of them are concerned about the future of 
Medicaid. We know that disabled adults want more control over 
their own care and who provides it, without having to wait for 
the State to come up with some innovative exception to the 
Medicaid rules.
    We know that Medicaid does a poor job of managing chronic 
diseases like diabetes and asthma and heart disease. As one 
doctor said to me, the system only gets paid if people are 
sick. It is not set up to improve the health of poor people. I 
visit a wound care clinic in Albuquerque and the RN there, 
Barbara List, said to me why is it so easy for me to admit an 
indigent patient to the hospital to have their foot amputated 
and so hard for me to get a compression stocking to prevent the 
foot from having to be amputated in the first place?
    We did a poor job in managing chronic disease and we know 
that Medicaid does virtually nothing to prevent disease or to 
reduce the risk of onset of disease. We know that under the 
pressure of expanding enrollment and increased costs, States 
have adopted some questionable financial schemes to maximize 
Federal dollars and that State agencies and hospitals, and 
doctors' offices follow the money stream rather than focusing 
on what is best for their patients.
    And I know that because I used to be the cabinet secretary 
for children, youth and families in the State of New Mexico, 
and we often did things that didn't necessarily benefit the 
patients who are relying upon the care. Mr. Chairman, we have 
tremendous challenges facing Medicaid in this country, and I 
hope that the testimony today will begin to focus on some of 
those challenges, so that Medicaid can improve the health of 
those who depend upon it, rather than just paying the claims of 
the people who file the paperwork. Thank you, Mr. Chairman.
    Mr. Bilirakis. The Chair thanks the gentlelady. Mr. Dingell 
for an opening statement.
    Mr. Dingell. Mr. Chairman, thank you. I commend you for 
holding this hearing. It is one which needs to be held. The 
subject of challenges facing the Medicaid program in the 21st 
century is an important one. One of the biggest problems that I 
see is the Office of Management and Budget, and quite honestly, 
some of the witnesses who will be testifying here before us 
today, because it seems attempts are being offered to shift 
much of the burden to the States in the form of block grants in 
a way which will adversely impact the well-being of those who 
are the beneficiaries of that program.
    As all know, Medicaid is the largest source of health 
coverage in the Nation. It provides coverage to millions of 
families with children, 8 million people with disabilities. It 
is the largest source of coverage for people needing long term 
care. In other words, Medicaid provides health insurance to 
people who are uninsured or are uninsurable. Medicaid serves as 
a vital health care safety net for the least advantaged of our 
citizens, particularly during times of massive layoffs caused 
by a flawed trickle down economic plan.
    Does it have flaws? Absolutely. Are these flaws 
correctable? Absolutely. In fact, flaws in the program have 
been subject to bipartisan corrections on a number of occasions 
over the past 20 years. Unfortunately, the administrations 
irresponsible tax cuts and failed economic policies have led to 
a fiscal crisis within the States. This has put additional 
pressure on Medicaid at the time that the Federal Government is 
trying to shift the burden of Medicaid to the States through 
the block grant mechanism. Medicaid roles have increased by 
about 4 million people since this administration took office.
    In response, the administration has determined to 
substitute block grants for need-based Federal funding, thus 
putting the States at risk for raising Medicaid costs due to 
economic downturns or unforeseen cost increases. The people who 
will suffer are, of course, those who are the beneficiaries of 
it. I would note that this administration seems very much 
determined to move a lot of people in the low income brackets 
from Medicare to Medicaid, thus imposing further burdens upon 
that group.
    A block grant may reduce some opportunities for gaming the 
system, but it will create others and I intend to ask the 
witnesses today to please tell us what recommendations they 
have made to the Congress for eliminating opportunities to game 
the system by the States and others, and also what actions they 
have taken administratively to bring these problems to a halt. 
I think the answer will indicate that nothing has been done by 
the administration with regard to this matter. Shelling out 
Federal dollars under a block grant system with no 
accountability of the recipient is not an answer. It simply 
indicates to me that those who are hurting now will hurt more.
    Moreover the burden for caring for vulnerable American 
families would be shifted to the shoulders of the States and 
their residents at a time when they can least afford to handle 
the additional responsibilities. It is unfortunate that fraud, 
waste, and abuse are not indicated on the basis of the 
Republicans' desire to end Medicaid as we know it, as millions 
of people have depended upon that program. I have long fought 
efforts by the States to game the Medicaid system, and I will 
continue to do so. I would note that under my chairmanship, we 
brought to a halt the raids upon DSH funds and the unseemly 
behavior of the States in inflating their claims under 
Medicare. That action has not prospered under the leadership of 
this administration. But the existence of fraud, waste, and 
abuse should not end need-based Federal funding for the most 
vulnerable amongst us.
    What we should do is to address the problem which exists 
with regard to fraud, waste, and abuse and not come up here and 
seek the lazy man's way out. We can properly and vigorously 
address fraud, waste, and abuse, but I do not believe that it 
is a moral matter to do so at the expense of those in the 
Medicaid program, something which has been one of the shining 
glories of the Medicaid program in that it has provided a 
safety net for the most needy amongst us. Thank you, Mr. 
Chairman.
    Mr. Bilirakis. The Chair thanks the gentleman.
    Mr. Buyer for an opening statement.
    Mr. Buyer. I retain my time and waive.
    Mr. Bilirakis. Mr. Waxman for an opening statement.
    Mr. Waxman. Yes. Thank you very much Mr. Chairman. Today 
the subcommittee is holding a hearing titled Challenges Facing 
the Medicaid Program in the 21st Century. In my view, this 
hearing might be more appropriately titled Challenges Facing 
the Health Care System in the 21st Century and how the Medicaid 
program has stepped forward to provide coverage for persons 
that the rest of the system fails. That title might focus our 
attention on what the real problem is. It might be popular with 
this administration and the majority in this Congress to be 
critical of Medicaid and define it as a broken program.
    I believe it is more accurate to describe it as a program 
which has been uniquely successful in providing services to 
millions of needy Americans with complex and difficult health 
care problems. Medicaid is now a program that is the single 
largest public program providing health care coverage, covering 
51 million Americans, significantly more than Medicare. It is a 
program that provides coverage for one out of five children. It 
is a program that covers 40 percent of the births in this 
country. Providing prenatal care and well baby care. And it is 
a program that supplements Medicare in uniquely important ways. 
It provides cost sharing for Medicare premiums. It makes 
Medicare affordable for low income seniors and disabled 
beneficiaries. It provides critical support supplements for 
services that Medicare doesn't cover, like prescription drugs, 
eyeglasses and hearing aids, and it provides long-term care 
services both in nursing homes and in home and community-based 
settings.
    It is indeed the only program that has tackled this 
difficult problem. It is a critical program in providing 
services for the disabled. Indeed with the continuing 
development of technology and support services that allows 
severely disabled people to live productive lives, Medicaid has 
been unique in providing coverage for the range of services and 
supports that are necessary and expensive, and I should add, 
typically not provided by traditional private insurance plans.
    Our witnesses today will do a better job than I can of 
elaborating on the populations and services that Medicaid 
covers and the critical role it plays, but I want to focus on 
the thread that runs through this picture. Medicaid is the 
program that serves the hardest to reach the cases that are 
most expensive and difficult, the services that are often 
otherwise not available when we are talking about people with 
AIDS, low income pregnant women who can't afford the basic 
costs of delivering their babies, or persons with physical and 
mental disabilities that need constant and continuing support.
    Whether we are talking about aged people without family or 
resources needing long-term care services or persons needing 
expensive prescription drugs to treat multiple health care 
problems, in all of these cases it is Medicaid that has been 
the program that fills in the gaps of our health care system.
    Mr. Chairman, I have additional comments I would like to 
put into the record with my opening statement.
    Mr. Bilirakis. Without objection.
    Mr. Waxman. But in the interest of time I want to say that 
the way to deal with problems is not to bash Medicaid for being 
successful at what we have asked it to do. We need to be better 
partners to the States in helping them to continue to meet the 
demands that have been placed on this program.
    [The prepared statement of Hon. Henry A. Waxman follows:]
    Prepared Statement of Hon. Henry A. Waxman, a Representative in 
                 Congress from the State of California
    Today this Subcommittee holds a hearing titled ``Challenges Facing 
the Medicaid Program in the 21st Century.''
    In my view, this hearing might be more appropriately titled 
``Challenges Facing the Health Care System in the 21st Century, and How 
the Medicaid Program Has Stepped Forward to Provide Coverage for 
Persons that the Rest of the System Fails.'' That title might focus our 
attention on what the real problem is.
    It might be popular with this Administration and the majority in 
this Congress to be critical of Medicaid and define it as a broken 
program. I believe it is more accurate to describe it as a program 
which has been uniquely successful in providing services to millions of 
needy Americans with complex and difficult health care problems.
    Medicaid is now a program that is the single largest public program 
providing health care coverage--covering 51 million Americans, 
significantly more than Medicare.
    It is a program that provides coverage for 1 out of 5 children. In 
every State of the Union children below poverty are covered by 
Medicaid.
    It is a program that covers 40 percent of the births in this 
country--providing prenatal care and well baby care assuring children a 
healthy start in life.
    Medicaid is a program that supplements Medicare in uniquely 
important ways. With its payment of Medicare premiums and cost-sharing, 
it makes Medicare affordable for low-income seniors and disabled 
beneficiaries. It provides critically important supplementary services 
that Medicare doesn't cover, like prescription drugs, eye glasses, and 
hearing aids.
    And it provides long-term care services--both in nursing homes and 
in home and community-based settings. It is indeed the only program 
that has tackled this difficult problem.
    It is a critical program in providing services for the disabled. 
Indeed, with the continuing development of technology and support 
services that allow severely disabled people to live productive lives, 
Medicaid has been unique in providing coverage for the range of 
services and supports that are necessary, necessary and expensive. And, 
I should add, typically not provided by traditional private insurance 
plans.
    Our witnesses today will do a better job that I can of elaborating 
on the populations and services that Medicaid covers, and the critical 
role in plays.
    But I want to focus on the thread that runs through this picture: 
Medicaid is the program that serves the hardest to reach, the cases 
that are most expensive and difficult, the services that often are 
otherwise not available. Whether we are talking about people with AIDS, 
or low-income pregnant women who can't afford the costs of delivering 
their babies, or persons with physical and mental disabilities that 
need constant and continuing support, whether we are talking about aged 
people, without family or resources, needing long-term care services, 
or persons needing expensive prescription drugs to treat multiple 
health care problems--in all of these cases it is Medicaid that has 
been the program that fills in the gaps in our health care system.
    Is the cost of Medicaid increasing? Of course. It pays for people 
who are sick and disabled and who use the most expensive services. It 
pays for prescription drugs where inflation has been the highest. And 
it serves an increasing number of people.
    When we face a recession and see people losing their employment-
based coverage, it provides coverage for more people instead of less. 
We may have more than 43.6 million uninsured in this country, but the 
figure would be considerably higher without the safety net of Medicaid.
    The financial burden of Medicaid is difficult to sustain. As we 
look to the future and the continuing challenges that Medicaid faces, 
we need to recognize that the Federal government has an obligation to 
provide greater help to the States in meeting the cost of the program. 
The answer is not to find a way to limit the Federal obligation--to put 
a lid on it so our budget looks good. The answer is to find the best 
way to provide greater assistance.
    We can start by helping with the costs of the dual eligibles, 
people covered by both Medicare and Medicaid. But we must do more.
    The way to deal with this problem is not to bash Medicaid for being 
successful at what we have asked it to do. We need to be a better 
partner to the States in helping them to continue to meet the demands 
that we have placed on this program.
    The needs of the people who depend on Medicaid require no less.

    Mr. Bilirakis. The Chair thanks the gentleman.
    Mr. Deal for an opening statement, 3 minutes.
    Mr. Deal. I will reserve my time, Mr. Chairman.
    Mr. Bilirakis. All right, sir. Ms. Capps for an opening 
statement.
    Ms. Capps. Thank you, Mr. Chairman. I appreciate this 
opportunity to discuss the challenges facing Medicaid in the 
21st century. I welcome Mr. Scully to this hearing and to the 
other witnesses as well. I want to reference a letter that my 
colleague from Ohio quoted from, one of his constituents and I 
hope that Mr. Scully has a chance to read that letter. It 
struck me as a nurse. I think each of us have had contacts with 
our constituents with similar stories to this. I wondered if 
your constituent, Mr. Brown, realizes that the biggest 
challenge that Medicaid faces is the Bush Administration's 
proposal to dismantle it.
    At a time when unemployment is so high, when the economy is 
in such dismal shape, when more and more people are losing 
their jobs and thereby their health insurance, this 
administration wants to arbitrarily cap Medicaid funding and 
change it to a block grant. It is an attempt to take advantage 
of the States fiscal problems to pass an ill-considered 
ideological proposal that will actually do more harm to 
millions of Americans.
    This administration is trying to entice States into this 
program with a short-term boost in funding and the false 
promise of flexibility. But this is a siren song that many 
State Governors are already resisting, and I would urge the 
Nation's Governors to lash themselves to their masts, fill 
their ears with wax and resist this call so they do not crash 
their constituents on the rocks of the Bush Medicaid block 
grant plan. Right now, Medicaid guarantees health care to 42 
million Americans who are struggling to take care of their 
families and to make ends meet.
    Taking away that guarantee will pull the rug out from under 
working people who are just trying to survive in such a weak 
economy. Medicaid is not broken. In fact, it is working exactly 
the way it is designed to. As more and more Americans lose 
their jobs and their health insurance, Medicaid is there to 
help them. As more and more Americans find they cannot afford 
the growing expensive health care Medicare is there. It is the 
way it is supposed to operate.
    The program helps to soften the impact of a slowing economy 
and it is a major means to speed the recovery to follow. But 
the block grant proposal would mean that in any given year, 
there would be an upper limit on what the Federal Government 
would pay. If that does not match the needs of Medicare 
beneficiaries, too bad. This means that States might be forced 
to help cut--forced to cut help to seniors in nursing homes, 
cuts to the disabled, support for pregnant women or to parents 
without insurance. This is not how to help the uninsured.
    This is not how to revive a flagging economy. This 
administration does not seem concerned with either of these 
goals. All that seems to matter is that this is a means whereby 
to cut back on Medicaid, the program, so that more and more tax 
cuts will be available.
    Mr. Chairman, I don't support the President's proposal, and 
I hope that this committee will not endorse it. In this 
hearing, and in those in the future, I truly hope that we can 
look at other solutions to the Medicaid funding challenges and 
carefully consider the consequences of this administration's 
proposal. I yield back.
    Mr. Bilirakis. The Chair thanks the gentlelady. Mr. Stupak 
for an opening statement, 3 minutes.
    Mr. Stupak. Thank you, Mr. Chairman. It is long past time 
for this Medicaid hearing to take place. The Medicaid crisis 
has reached a fever pitch in this country, and our States and 
our low income families are hurting. All 50 of our States are 
struggling to provide health coverage for low income families 
at a time when enrollment is increasing due to a sluggish 
economy and escalating health care costs. A recent Kaiser 
Family Foundation report pointed out that over the past 3 
years, 50 States have been forced to make cuts in Medicaid to 
control drug costs. 50 States have reduced or frozen provider 
payments; 34 have reduced or restricted eligibility; 35 have 
reduced benefits; and 32 have increased copayments.
    In Michigan where I am from, Governor Granholm has 
inherited a financial mess, and she has been doing everything 
she can to keep Medicaid program afloat, but it is a monumental 
task. Even after cuts to hospitals over the past 2 years, the 
State will cut another $110 million from hospital Medicaid 
payments in this fiscal year. The Federal Government must step 
in and provide more funding. It is as simple as that.
    The administration block grant proposals are a cynical 
attempt to cap or reduce funding and will leave our States at 
the mercy of soaring health care and pharmaceutical drug costs. 
The Medicaid debate today is a matter of priorities. As this 
Republican-led Congress spends trillions of dollars to provide 
tax breaks to wealthy Americans and billions to pay to rebuild 
Iraq and provide Iraqis with universal health service, while 
leaving our most vulnerable citizens without health care. Let's 
redirect these priorities and take care of the ones who need it 
the most. Let's shore up the Medicaid program today, not 
tomorrow.
    Mr. Chairman, I look forward to hearing testimony of our 
very distinguished panel, and I yield back the balance of my 
time.
    Mr. Bilirakis. Mr. Pallone, for an opening statement.
    Mr. Pallone. Thank you, Mr. Chairman. I want to use this 
morning's hearing to stress the importance of preserving 
Medicaid, and the way to do it is to reject the 
administration's proposal to block grant this program that is, 
in fact, the largest source of insurance in the United States 
today. In this hearing today, we will hear that by block 
granting Medicaid States will have flexibility necessary for 
expanding access to health care. But let's be clear.
    In reality, this is a proposal that simply blackmails the 
States. The block grant proposal caps the Federal share of 
Medicaid dollars so the States cannot receive adequate funding 
as their Medicaid needs rise. By shifting fiscal responsibility 
to States, the Medicaid block grant encourages States to limit 
their liability by capping enrollment, cutting benefits, and 
increasing cost sharing for millions of low income people. In 
addition, any short-term relief that States receive up front 
under the block grant will have to be paid back at the end of 
the 10-year budget window. And if that's not a bribe, then I 
don't know what is.
    By undermining access to care for the poor, the sick and 
the disabled, the President's proposal weakens the health care 
safety net and adds to the widening credibility gap that is 
putting him and Republicans that support his proposal further 
out of touch with the American people.
    And Mr. Chairman, it seems that given the current 
atmosphere of erosion of employer-sponsored coverage and the 
dwindling economy, we need to strengthen and not undermine the 
Medicaid program. Supporting an increase in the Federal 
Medicaid contribution, the FMAP will shore up State Medicaid 
programs with an immediate increase in funding to offset 
reduced State revenues that are placing severe strains on State 
budgets nationwide, including my home State of New Jersey.
    Now, if States are always amenable to flexibility and the 
FMAP is the type of Medicaid relief that States desire, not a 
budget neutral block grant. Mr. Chairman I just want to 
reiterate that I think the Medicaid, well, obviously the 
Medicaid program is an entitlement to the poor, the sick, and 
the disabled, and States cannot and should not be allowed to 
pick up and choose who they will and will not cover, which is 
exactly the type of flexibility that will be provided with this 
block grant.
    Choosing to cutoff benefits to an optional population 
sounds easy and sounds justifiable. However, we must keep in 
mind when examining Medicaid, that optional looks like five out 
of six elderly nursing home residents, or a family at 60 
percent of the Federal poverty level, and this is not 
population whose health benefits can be considered optional.
    Now, you know last week the Census Bureau came out with a 
report that the number of uninsured rose dramatically and that 
we are now looking at a figure of 43.6 million uninsured 
Americans, and I am referencing this report, because were it 
not for the Medicaid program, an additional 4 million Americans 
would be added to the already overwhelming number of uninsured. 
And these 4 million people are comprised of working families 
with children who have unfortunately lost their jobs due to our 
economy, and as a result, have lost their employer-sponsored 
health coverage.
    So again, we are in a crisis with regard to health care and 
access to health care. And for us to do anything but shore up 
the Medicaid program is a mistake. And the block grant is 
certainly not the way to go. Thank you, Mr. Chairman.
    Mr. Bilirakis. The Chair thanks the gentleman.
    I am hopeful that we will be able to get to Mr. Scully 
before too very much longer. But certainly I don't want to 
cutoff opening statements. I would appreciate it if we can keep 
them as brief as we can. Mr. Strickland.
    Mr. Strickland. Mr. Chairman, I want to reserve my time. 
But before I do that, I want to thank Mr. Scully for some help 
he gave me recently with Todd Children's Hospital in 
Youngstown, Ohio. Thank you.
    Mr. Bilirakis. The Chair thanks the gentleman. Mr. John.
    Mr. John. Pass.
    Mr. Bilirakis. Pass. Ms. DeGette.
    Ms. DeGette. I will reserve my time also.
    [Additional statement submitted for the record follows:]
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    Thank you, Chairman Bilirakis, for holding this important hearing 
today. I also want to thank C-M-S Administrator Scully, Maryland 
Delegate Adelaide Eckardt, and Ms. Diane Rowland for taking the time to 
testify before the Health Subcommittee about the challenges facing the 
Medicaid program, and ways to respond to these challenges.
    The Medicaid program serves a vital role for providing health care 
services for our nation's most vulnerable populations--including low-
income children, seniors and people with disabilities. At the same 
time, Medicaid also faces serious challenges, due in part to certain 
structural flaws in the program. I believe that we owe it to the 
beneficiaries who depend on this program, as well as the taxpayers who 
pay for it, to examine these challenges and evaluate how we can improve 
this vital program.
    One of the biggest challenges currently facing the Medicaid program 
is how federal rules often limit states' ability to provide the best 
care to the most needy beneficiaries. Under these rules, each state is 
required to offer the entire package of Medicaid benefit to all 
eligible beneficiaries. These rules create a one size fits all 
entitlement that does not make policy or fiscal sense.
    The rules prohibit states from reaping any fiscal savings from 
tailoring the benefit package to meet the specific needs of certain 
eligibility categories, like private sector plans have been able to do. 
In contrast, Medicaid offers a broad benefits package that many 
beneficiaries typically will not fully need, and sometimes ignores the 
benefits of offering particular benefits to cover specific patient 
populations. States need more flexibility to tailor benefit packages to 
best suit the needs of their covered populations.
    The State Children's Health Insurance Program (SCHIP) is an 
excellent example of how states can achieve great results when they 
have a greater degree of control in how they design their benefit 
package and provide coverage for eligible children. SCHIP provides 
grants to states to expand health insurance coverage for low-income 
uninsured children. States have broader flexibility to design and 
implement SCHIP programs--as opposed to Medicaid--resulting in more 
diversity across states. This program is viewed as highly successful 
and has helped millions of children gain access to needed health 
insurance. We should look at SCHIP as one example for how we could 
begin to improve Medicaid.
    The contrast between SCHIP and traditional Medicaid also highlights 
another critical challenge facing the Medicaid program. SCHIP funding 
is based upon state specific capped allotments, rather than the open-
ended entitlement structure used by Medicaid. This open-ended nature of 
Medicaid funding has helped contribute to the explosive growth in 
Medicaid spending in recent years. During times of budget surplus, 
states have had significant incentives to expand their programs, using 
generous federal match rates to provide new benefits and cover new 
populations. In times of budget shortfalls, states are forced to either 
trim back these new benefits, or come looking for additional Federal 
funding.
    If Medicaid continues on its projected course, with growth rates in 
the double digits, states will simply not be able to bear the cost of 
the Medicaid program. They will have to further cut services, limit 
eligibility, or look to other budget priorities for savings. This is a 
serious challenge that both the States and the Federal government must 
take steps to address.
    Let me also be clear: we are not planning to do any additional 
``temporary'' increase in the Federal Medicaid matching rate to get 
states through any further short-term budget crises. We did that 
earlier this year and pledged that the assistance would only be truly 
temporary. I intend to hold the supporters of this policy to their word 
and ensure that the assistance remains only temporary.
    An additional challenge facing the Medicaid program is the lack of 
a coordinated Medicare benefit. Currently Medicare does not provide a 
prescription drug benefit for its beneficiaries. Approximately 6 
million Medicare beneficiaries, who are also eligible for Medicaid, 
must depend on the state programs to provide them with their 
prescription drugs. These dually eligible individuals often suffer from 
chronic illnesses, and thus are big consumers of prescription drugs 
within the existing Medicaid benefit. It is absolutely crucial that any 
legislation enacted this year to create a new drug benefit be created 
within the existing Medicare program, for all Medicare-eligible 
beneficiaries. This action would help states focus their limited 
Medicaid resources on their neediest populations and would also allow 
for improved coordination of care for beneficiaries.
    There are serious challenges facing Medicaid today, and the program 
is clearly at a crossroads. If we are not willing to make some major 
changes in the current program, the long-term prospects will not be 
bright. States need more flexibility to respond to the unique needs of 
their Medicaid populations. We hope that some of the suggestions our 
witnesses offer today will help the Committee as we plan to move 
forward with Medicaid reform. We need to look for innovative solutions 
to the problems facing Medicaid. I believe that Medicaid beneficiaries 
and America's taxpayers deserve nothing less.

    Mr. Bilirakis. The Chair appreciates your cooperation. We 
will just move right on to the first panel which consists of 
the Honorable Tom Scully, the administrator of CMS Centers for 
Medicare and Medicaid service. Tom, you have 10 minutes. Use 
that as you will, sir.

STATEMENT OF HON. THOMAS A. SCULLY, ADMINISTRATOR, CENTERS FOR 
   MEDICARE AND MEDICAID SERVICE, ACCOMPANIED BY DENNIS SMITH

    Mr. Scully. Thank you Mr. Chairman. I will go as fast as I 
can. And Mr. Brown, thank you for having me today. Thank you 
for having us here this morning and thank you for No. 1, being 
flexible. I had to go to a meeting at the White House this 
morning. Obviously came in a few minutes late and I apologize 
for that, and thank you also for allowing me to bring Dennis 
Smith, who runs the Medicaid program. We work a lot together, 
but he's far more knowledgeable than I am so I appreciate the 
committee's willingness to have Dennis come with me today, and 
obviously I will let him answer all the tough questions and I 
will take the easy ones.
    Let me just start off by saying that I think Medicare, as a 
number of you pointed out, including Congresswoman Wilson, has 
been the focus of a lot of congressional attention this year. I 
spent a lot of time on it, including my meeting this morning. 
But Medicaid is obviously a bigger program, much more 
complicated, arguably much more in need of reform. And I would 
be anxious and hope Congress would be interested in engaging on 
any basis whether it is the administration's bill or any other 
on looking at the underlying Medicaid program. Medicaiid is 
much more complicated than Medicare. It is really 57 small 
programs between the different States and the territories. 
Every one of them is different.
    Every arrangement is different. Every State program is 
different. It is a very, very complicated program. It is a 
wonderful program, as many of you have said. Medicaid covers 48 
to 50 million people. And it does a lot of wonderful things. 
But it is a very complicated program that has gotten too little 
attention, in my opinion, from the Federal Government, 
including my agency. I have 4,800 full-time employees in my 
agency, and probably another 5,500 contract employees. We have 
about 500 people that work on Medicaid. Another 500 do survey 
and certification, but about 500 people actually work on 
Medicaid. We have 62 financial managers around the country that 
work on Medicaid.
    So in many ways, given the amount of attention that has 
been given to this, by HCFA/CMS and by many people over the 
years, it is not too surprising we have ended up with a 
complicated, tangled amalgam of State programs.
    So I would welcome a lot more attention to Medicaid, and I 
think that Medicaid, by virtue of the fact that it is actually 
run by the States and we are a relatively passive paying 
partner, has gotten far less focus than it probably deserves on 
the Federal policy level.
    Let me just start quickly by going through the structure, 
which I am sure most of you understand. Many people think that 
Medicaid is a women and children's program. In fact, 73 percent 
of the enrollees in Medicaid are women and children. But there 
is a chart attached to my testimony which shows that only about 
27 percent of the funding goes to women and children. A large 
percentage of the funding goes to the blind and disabled, which 
is obviously an important population to serve and obviously not 
something that probably can or will be changed very much.
    But that's about 18 percent of the Medicaid population. 
Yet, it is about 45 percent of the funding. One of the things 
that has put a lot of pressure on the States in recent years 
that a lot of people also don't understand and which I think 
Mr. Brown alluded to, is that almost 70 percent of people in 
nursing homes are on Medicaid. That puts an enormous amount of 
pressure on the States. This represents only about 9.5 percent 
of the beneficiaries, but 27 percent of the funding.
    There are a number of studies out there that have shown 
that as many as 50 percent of the people that are going into 
nursing homes on Medicaid are not truly poor, that they 
transfer their assets to some of their family members. 
Eventually most of them do become poor and in fact do need 
Medicaid. But in many cases in many States you could make an 
argument that higher income people in some of these cases 
should use their own assets for at least the first few months 
if not years before they go on Medicaid. Yet there are very 
elaborate arrangements in many States to avoid that.
    That puts an enormous amount of pressure on States, and if 
we are truly trying to help blind, disabled, truly poor women 
and children, and the truly poor that need nursing homes, I 
think, this is a source that a lot of people should focus more 
attention on to make sure that the people that are on Medicaid 
going to nursing homes are truly poor. There has been very 
little attention given to asset transfer issues.
    One thing the administration is working on with HUD, is a 
small existing program in HUD for reverse mortgages. We have 
spent a lot of time working with the National Council on Aging, 
the AARP, and others, to find a way to enhance that program. 
Eighty percent of seniors have a paid-off home with an average 
asset value of $107,000. Yet very few of them think that it as 
an asset to be used to buy long-term care insurance; to pay for 
home health care.
    Most seniors don't want to be in a nursing home. Most of 
them want to stay at home and they go to a nursing home as a 
last resort. Yet they have very little financial ability to 
find a way to finance that. We think we need to find clever 
ways, and we think we have some interesting ways to actually 
use their existing assets in their home to allow people to stay 
at home longer, then go to assisted living instead of nursing 
homes. And if they are not truly poor, we need to find ways 
without putting pressure on them to use their home as an asset, 
which is the No. 1 asset most seniors have.
    Seniors have $1.5 trillion tied up in assets in paid off 
mortgages. One hundred percent paid off mortgages on their 
homes. Yet they rarely think of that as an asset they can use 
to help pay for their long term care. And I think it is 
something that the States and CMS should both look at and spend 
more time focusing on.
    Secretary Thompson, Dennis Smith and I are spending a lot 
of time on that right now.
    Let me just switch to talk about the focus of this hearing 
is. I have said repeatedly, but frequently misquoted, that if I 
were a Medicaid director in a State, I might very much do what 
they have been doing. I don't blame them. If the Federal 
Government sets up dumb rules in Medicaid and States use them 
to maximize the reimbursement, yes you can't necessarily blame 
them, but we need to police it better and do a better job of 
making sure that we treat everybody exactly the same. A number 
of you mentioned that Medicaid next year is going to be a $304 
billion program, which will make it the largest Federal health 
care program.
    But, out of the $304 billion, probably about $25 billion of 
that is attributable to intergovernmental transfers or taxes. 
We estimate that $304 billion is spent, but we really don't 
know how much of this might be attributable to inappropriate 
financing schemes. Our best guess is that about $25 billion of 
that is phantom matches that aren't actually put up by the 
States. So there's $25 billion of mythical care that really 
isn't given. That is a huge problem.
    We really believe we need to turn this back into the State-
Federal partnership the program was intended to be. In the last 
20 years, I have spent a lot of time with many of you, 
including Mr. Waxman, trying to find ways to make sure this 
program actually works as a Federal-State partnership. I think 
that is critical. I think we should be able to look every 
Governor in the eye whether he is a Democrat or Republican and 
say they are getting exactly the same deal.
    I attached a chart to my testimony this morning, and I 
think you will see that if you look at the statutory match 
rates which are based on poverty, Mississippi, being the 
poorest State in the country, has the highest statutory match 
rate. In at least 25 States, there is no real connection 
between what their match rate is and what the Federal 
Government is paying. Again, I don't necessarily blame a State 
budget director or a Medicaid director for doing that. But over 
the years, we have allowed it to happen and we have actually 
had very inequitable distribution among the States about what 
their actual match rates are. We have made a big effort to try 
to fix that.
    Medicaid is the fastest growing program in the government. 
When I went into the first Bush Administration in 1989, 
Medicaid was a $60 billion a year program. This year it is $304 
billion. It has grown 37\1/2\ percent, since I have been at 
CMS. That is pretty rapid growth. We have no problem with rapid 
growth, and I will get to that in a minute. We don't have any 
desire to spend less on Medicaid. But we want to spend more 
wisely.
    We need to deal with long-term care costs. We need to deal 
with spend-downs for Medicaid. We need to deal with the 
problems we have State-by-State on extremely high spending on 
prescription drugs when it is not necessarily appropriate. We 
are very focused on trying to fix the program and make it work 
better. And a lot of that comes back to addressing financing 
problems. So let me just switch back to that for a moment.
    If you look at the three big branches of financing 
gamesmanship that have gone on in the last 15 years, from 1988 
to 1993, most of the States were trying to maximize 
disproportionate share hospital payments. We did limit that in 
the earlier 1990's, and it has worked fairly relatively 
effectively. The next transition beyond that, and this is 
illustrated in attached examples in the testimony was 
intergovernmental transfers. They exploded in the mid 1990's, 
and we have, to some degree, put a limit on them.
    To me, the most disturbing development, which happened in 
the last 4 or 5 years, is upper payment limits. And the reason 
it disturbs me more than anything else is that in the earlier 
two sets of games, theoretically we were spending more money on 
health care. With upper payments limits, States, in effect, 
have been able to cash out the State match, and get more 
Federal dollars without putting up any more money. And the most 
disturbing trend is the case where Medicaid is actually 
spending less money on health care because it is not with the 
Federal Government. The States are actually drawing down more 
Federal money and still putting up State money, and they are 
actually cashing out State money and displacing the Federal 
money, and we end up spending less on health care, which is 
clearly not the goal.
    So I would argue we have done a lot in the last couple of 
years to slow down the States. I wouldn't expect them to be 
happy, but I do think that I can honestly tell any Governor 
from either party that in the last 3 years, to the extent we 
possibly could under the law, we have been able to look them in 
the eye and say they are getting exactly the same deal, and 
that we treat them exactly the same way. I will give one 
example. Regarding Missouri, which you can see in your charts. 
Two years ago we had a very large problem building in the 
Medicaid program. The normal course would have been to litigate 
it for 15 years.
    Instead, we spent about a year and a half with a Democratic 
Governor, and their State's Secretary of Health working out a 
much more transparent financing schedule for Missouri. We 
settled most of the differences. All of them actually. We have 
what I think is a very clear model as a partnership where 
Missouri submits to us everything they are doing on Medicaid at 
the beginning of the year. We understand what they are doing. 
We understand their taxes. We understand their financing. We 
spend a lot more time working with them. As a result, they 
happen to have a very good Medicaid program.
    We spent a lot more time working with them and trying to 
make Medicaid a better program, and a lot less time trying to 
figure out who can maximize their match rates, which is what 
happens in too many States, unfortunately.
    So our goal here is to get back to the point where we spend 
a lot of time working on Medicaid, making Medicaid a better 
program and less time trying to figure out who can find the 
most clever accountants to maximize the reimbursement. I think 
that is a goal that probably all of us share. Let me just 
finally wrap up on the administration's proposal.
    The administration's proposal, just to be very clear, is 
not a block grant. Our interest is not to save money. Our 
interest is to give the States a lot more flexibility. 
Secretary Thompson was a Governor. Obviously, he was not a big 
advocate of the current Medicaid structure in Wisconsin when he 
was a Governor. He, Dennis Smith and I spent a lot of time on 
this. What we were trying to do is give the States more 
flexibility without saving any money. It is not a block grant. 
It is limited only to optional beneficiaries. The Federal 
Government would still be required to cover all mandatory 
beneficiaries. The focus is to give States more budget 
certainty and to give us more budget certainty, while giving 
the States a lot more flexibility.
    I was involved in negotiating the first TennCare waiver in 
1990 in the first Bush Administration. I was involved in doing 
it again in the past year. I was involved with Senator, then 
Congressman Wyden on this committee, when the first Oregon 
waivers went through.
    We did a large waiver with Illinois last year. No State has 
to seek waivers. Even under the President's proposal, no State 
has to change a thing. What we are trying to do is give the 
Governors the maximum flexibility to come in and get a straight 
deal from us as far as how they can deal with their optional 
populations with far more flexibility, far more money in the 
baseline. They would get more money for flexibility and less 
hassle and a much more straightforward relationship with the 
Federal Government. And the bottom line is that nobody was 
required to do it. Any State that didn't want to didn't have to 
participate.
    So I certainly understand people's concern. I think you 
know we are really interested in making the Medicaid program 
work better and we are not proposing a block grant. We are 
proposing giving the States greater flexibility and we would be 
very, very interested in seeing and working with the committee 
and with the Senate Finance Committee on trying to find ways to 
make the Medicaid program work better in the long term as a 
more efficient partnership that is going to continue to serve 
many, many millions of people. Thank you, Mr. Chairman.
    [The prepared statement of Hon. Thomas Scully follows:]
 Prepared Statement of Hon. Thomas Scully, Administrator, Centers for 
                     Medicare and Medicaid Services
    Chairman Bilirakis, Ranking Member Brown, distinguished Committee 
members, thank you for inviting me to discuss the challenges facing the 
Medicaid program in the 21st Century, and for allowing Dennis Smith, 
the Federal Medicaid director, to appear with me today. The Medicaid 
program faces many challenges. With more than 40 million Americans 
lacking health insurance, CMS has been pursuing a wide range of 
initiatives to expand insurance coverage, including working 
aggressively to improve the Medicaid waiver process. Through waivers 
and State plan amendments (SPAs), Medicaid eligibility expanded by more 
than 2.27 million people between January 2001 and September 2003. In 
addition, we are focused on outreach so that potentially eligible 
individuals know about the Medicaid program, and as in the Medicare 
program, we are working to ensure that Medicaid beneficiaries receive 
quality care. While all of these areas present challenges to the 
Medicaid program, today I am here to focus on Medicaid finances, 
perhaps the most immediately pressing challenge to the program.
    Medicaid spending continues to rise each year--and this is no small 
concern. When I first went to work at OMB in 1989 during the first Bush 
Administration, total Federal and State Medicaid spending was $61.2 
billion. By the time I departed in 1993, total Medicaid spending had 
grown to approximately $132 billion. Today, total Medicaid spending for 
2004 is projected to be $304 billion--that's nearly a tripling in 
spending over 10 years and five-fold increase since 1989. Moreover, 
Medicaid--not Medicare--is now the largest government health program in 
the United States. In FY 2002, total Federal-State Medicaid outlays 
($259 billion) exceeded Medicare outlays ($257 billion) for the first 
time. This trend is continuing, with Medicaid outlays exceeding 
Medicare by about $4 billion in FY 2003 ($281 billion versus $277 
billion), and estimated to exceed it by approximately $26 billion in FY 
2004 ($304 billion versus $289 billion). In addition, in May, Congress 
approved a temporary infusion of additional Federal funds as part of 
the Jobs and Growth Tax Relief Reconciliation Act of 2003. Under the 
new law, States will get a temporary increase in the percentage rate 
for Federal Medicaid matching funds (FMAP) for five calendar quarters, 
beginning April 1, 2003, and ending June 30, 2004. Thus, total Federal 
spending for Medicaid over the next ten years is estimated at $2.6 
trillion. Combined Federal and State spending on Medicaid in this 
period is estimated at $4.5 trillion.
    While some of this growth is due to expanded coverage and 
eligibility--positive growth for the program because so many more 
uninsured Americans are getting health care services--much of the 
increase in Medicaid spending over the past 10 years can be attributed 
to the ever-increasing costs of providing long-term care. The Medicaid 
program primarily serves three groups of beneficiaries. Women and 
children comprise about 73 percent of enrollees but utilize just 27 
percent of the Medicaid funding. The elderly and people with 
disabilities are the other two major groups that comprise just 27 
percent of the Medicaid population, though the cost of their care 
consumes about 70 percent of Medicaid spending. In fact, almost 70 
percent of nursing home beds are now Medicaid-financed, and State and 
Federal governments pay roughly 60 percent of all long-term care costs 
nationally.
    Since Medicaid expenditures are a large and growing proportion of 
most State budgets, the Medicaid program is an area to which States 
turn to reduce costs. To reduce costs, States are feeling pressure to 
drop optional Medicaid benefits or to reduce optional populations. 
States also find other creative revenue enhancing mechanisms, including 
utilizing a variety of legal and regulatory loopholes to enhance the 
Federal funds they receive to provide health care for their citizens. 
Intergovernmental transfers (IGTs) are a prime example of such 
loopholes. While it is completely legal for States to share costs with 
counties and other local government bodies to recoup Medicaid 
expenditures, IGTs are only supposed to provide the statutorily 
determined match rate for a State. However, States often find ways to 
use IGTs to avoid paying the statutory match rate and effectively shift 
a larger portion of Medicaid costs to the Federal government. The 
Federal government should only match real expenditures for the Medicaid 
population at the real matching rates, but in recent years, IGTs have 
been used to draw billions in Federal funds with no true State or local 
spending.
    As Federal and State Medicaid spending continues to grow rapidly, 
it is increasingly important for CMS to ensure that taxpayer dollars 
are serving their intended statutory purpose of improving health care 
quality and access for Medicaid beneficiaries. There are many 
opportunities for improving the fiscal integrity and management of the 
Medicaid program. I would like to discuss some of the problems we have 
seen, and some strategies that might refocus the program away from 
financing gamesmanship and back to delivering health care to America's 
vulnerable populations.
                               background
    Medicaid is a partnership between the Federal government and the 
States. While the Federal government provides financial support to the 
States and is responsible for overseeing the Medicaid program, each 
State essentially designs and runs its own program. States have great 
flexibility in administering their programs, and the Federal government 
pays States a portion of their costs by matching certain spending 
levels, with statutory matching rates currently ranging between 50 and 
77 percent. This creates a natural tension in which States strive to 
maximize Federal matching dollars. The Federal government has a 
responsibility to ensure that funds are matched appropriately. However, 
through various financing and funding mechanisms, including the use of 
donations and taxes, the Disproportionate Share Hospital (DSH) program, 
and Upper Payment Limits (UPL), many States manage to inappropriately 
draw down more Federal Medicaid dollars with fewer State dollars, 
resulting in an effective FMAP that is higher than the statutorily 
determined matching rates, creating inequities among States. CMS has 
begun to close these loopholes and ensure that States receive 
appropriate matching rates, but it is a long, complicated and 
politically unpleasant battle.
    To prevent inappropriate funding mechanisms now, and in the future, 
it is important that we understand the various types of loopholes that 
States have exploited in the past and continue to exploit today. We 
must remain vigilant in closing and avoiding all of these loopholes. 
President Bush, Secretary Thompson, and I take this very seriously. We 
want to continue to work with you to correct current inappropriate 
State funding mechanisms to ensure the fiscal integrity of the Medicaid 
program and to ensure that Federal dollars are used to pay for Medicaid 
covered services for Medicaid-eligible individuals.
                    inappropriate funding mechanisms
    As I mentioned, over the last two decades States have developed 
innovative ways of enhancing Federal matching dollars. In 1985 the 
Centers for Medicare & Medicaid Services (CMS), formerly the Health 
Care Financing Administration (HCFA), changed the regulations governing 
the way the Federal government provides matching funds to States when 
they received private donations to help cover administrative costs. 
This rule change was merely intended to reduce record keeping and 
provide States more flexibility for accepting philanthropic donations.
    Additionally, regulations at the time allowed States to impose 
special taxes on specific provider groups. These regulations led States 
to impose taxes and receive donations from providers that led to new 
ways to finance States' share of Medicaid expenditures. In 1986, 
Congress was concerned that States were not reimbursing 
Disproportionate Share Hospitals (DSH) for their uncompensated care 
costs. Legislation was passed that eliminated any limit on DSH 
payments. The combination of new revenue sources from donations and 
taxes and the ability to pay unlimited reimbursement to 
Disproportionate Share Hospitals (DSH) led to a significant increase in 
the Medicaid expenditures claimed by States. Once these exploding 
loopholes began to be limited, States pursued the Upper Payment Limit 
(UPL) loophole more aggressively. These scenarios, which I will 
describe in greater detail, provided opportunities for States to 
creatively draw additional Federal matching funds.
Provider Donations and Provider-Specific Taxes
    An early maximization strategy States employed to enhance Federal 
Medicaid matching funds without using additional State resources was 
the use of provider donations and taxes. Typically, a State would 
either arrange for providers to ``donate'' funds to the Medicaid 
program, or it would establish special ``taxes'' on certain provider 
groups. Once these funds were collected from the affected providers, 
they were then repaid to those providers through increased Federal 
Medicaid payments, largely in the form of DSH payments. Since States 
had a great deal of flexibility in how they made DSH payments, they 
were able to raise DSH rates to compensate providers for the costs 
associated with the donations or taxes. As the DSH payments were 
raised, the effective level of Federal matching funds increased 
correspondingly. In the end, the providers were repaid their donations 
or taxes, and the State was left with the Federal matching funds to 
either return to the provider or to keep for whatever use it decided. 
The only party that incurred any new cost was the Federal government. 
It was a no risk, no cost, free money mechanism for dozens of States.
    I spent a considerable amount of time on this issue while I was at 
the Office of Management and Budget in the first Bush Administration. I 
can tell you that the widespread use of these financing mechanisms 
contributed to extraordinary increases in Federal Medicaid expenditures 
in the late 1980s and early 1990s. For example, in 1989 we found that 
three States were drawing a combined total of $23 million from Federal 
funds through provider taxes and donations. This number increased to 
eight States drawing an additional $300 million in 1990, and by 1991 
more than half of the States were drawing an incredible $12 billion.
    In 1991, Congress passed the ``Medicaid Voluntary Contribution and 
Provider-Specific Tax Amendments of 1991,'' the first piece of stand-
alone Medicaid legislation in the program's history. This law set out 
strict conditions that States must meet in order to use taxes levied on 
health care providers as part of their State dollars eligible for 
Federal Medicaid matching funds. The law said the taxes must be:

 Broad based, or applied to all members of a definable group. For 
        example, they must apply to all hospitals, not just psychiatric 
        hospitals;
 Uniform, with all providers within the group being taxed at the same 
        rate; and
 Not part of a ``hold harmless'' agreement where the funds are 
        returned to the providers either directly or indirectly.
    The law also eliminated Federal Medicaid matching payments for 
provider donations, except in very limited circumstances. After 
significant consultation with the States, CMS published a final 
regulation implementing this law in 1993. The rule laid out a process 
for States to request waivers of certain provisions for tax programs 
that are not broad based or uniform. The ``hold harmless'' provision, 
however, cannot be waived. In an effort to improve State compliance 
with the law, in 1995 CMS issued detailed regulatory guidelines 
explaining the Donations and Tax rules.
    In 1997, CMS notified States that if legislation explicitly ending 
the use of impermissible taxes and resolving outstanding State 
liabilities was not passed, CMS would have no choice but to ask the 
Department of Justice to pursue enforcement measures to resolve States' 
liabilities. Also in 1997, the Balanced Budget Act (BBA) banned States 
from using Federal Medicaid matching funds for purchases unrelated to 
health care, such as building roads and bridges. In 1998, CMS proposed 
legislation to allow the Secretary to work out compromises with States 
regarding large unallowable funds States received, rather than having 
to refer these cases to the Justice Department. Although this proposal 
never became law, due to the other restrictions I discussed, it appears 
that today States generally have stopped attempting to exploit this 
particular loophole.
Disproportionate Share Hospitals
    Another financing mechanism commonly used by States has its roots 
in the early 1980's. In 1981, Congress recognized that some hospitals 
were treating a large number of uninsured patients thereby increasing 
their uncompensated care costs (UCC). As a result, these hospitals were 
taking in far less revenue per patient and experiencing difficulty 
remaining open. With the passage of the Omnibus Budget Reconciliation 
Act (OBRA) of 1981, Congress allowed States to pay more to hospitals 
treating a disproportionate share of uncompensated care cases as a way 
to encourage these hospitals to continue treating needy patients. 
Although this program concept clearly represented a good idea, the 
States were slow to embrace it.
    A major change to the DSH law took effect in OBRA 1986, which 
prohibited the Federal government from putting any limit on payments 
made to hospitals that serve a disproportionate number of low-income 
patients with special needs. Then, in OBRA 1987, Congress created DSH 
payment rules and qualifications in law, specifically defining 
Disproportionate Share Hospitals and requiring States to pay additional 
funds to certain qualifying hospitals. OBRA 1993 further restricted 
State use of DSH revenues by limiting the amount that States could pay 
to specific hospitals to 100 percent of their uncompensated care costs, 
further limiting abusive DSH practices.
    As OBRA 1993 took effect, States began looking for new ways to 
maximize Federal funds. One way States financed their share of Medicaid 
expenses was through IGTs. States have always been allowed to shift 
funds among the different levels of government to reduce administrative 
burdens. For instance, a County can transfer funds to the State, and 
States can use this money as their share of Medicaid expenditures. 
However, States provided DSH payments to public facilities that 
exceeded their Medicaid costs, receiving more Federal matching funds in 
the process, and these facilities could then refund some of the money 
to the State through IGTs (see attached chart 1). To end this practice, 
the Balanced Budget Act of 1997 mandated State-specific caps on the 
total level of Federal matching payments to State DSH hospitals.
Upper Payment Limits
    As Congress mandated limits on DSH payments and restricted States' 
ability to use donations and taxes, States began exploring other 
creative ways to enhance their Federal Medicaid funding, such as 
maximizing their ``Upper Payment Limit'' calculations. In 1987 Congress 
had established Upper Payment Limits for State owned or operated 
inpatient facilities, in an effort to remove the inherent incentive for 
States to overpay themselves. However, under the revised rules, States 
still were allowed to exceed these UPLs for certain publicly owned 
providers. By calculating the maximum amount that Medicare would have 
paid to each Medicaid facility--the Upper Payment Limit--States were 
able to obtain extra Federal matching funds. Under this scenario, 
States could calculate the upper limit for both public and private 
hospitals and nursing homes in the aggregate, rather than separating 
public from private. This gave them the flexibility to pay public 
hospitals and nursing homes more than private facilities. As a result, 
public hospitals could then return money to the State. The State, in 
turn, could use these funds to obtain more Federal matching dollars. 
The State could then return a portion of its share of the money to the 
public facilities, and keep the Federal share for its own use (see 
attached charts 2 and 3).
    The Agency saw the first indications that States were using Upper 
Payment Limits in publicly owned providers to raise revenues in the 
early 1990s, although the dollar amounts and the number of States were 
limited. At that time, aggressive consultants began advising States to 
use Upper Payment Limits as a way to increase Federal Medicaid revenues 
flowing to the States. In 1999, at CMS' request, the Health and Human 
Services Office of the Inspector General performed audits in six States 
that confirmed the abusive nature of these payment arrangements. To 
close this loophole, CMS published three regulations establishing 
Federal upper payment limits (UPL) that limited the ability of States 
to increase their share of the Federal payments under Medicaid without 
actually spending State funds. Generally, the new UPL rules prevent 
States from paying each type of hospital and nursing home in Medicaid 
more than 100 percent of what Medicare would pay for similar services.
    The final regulation, which took effect May 15, 2002, included 
provisions for a gradual phase out of excess Federal funds drawn down 
by States using these funding schemes. There are three phase-down 
periods: two, five and eight years, and States are assigned to each 
depending upon the length of time they had operated the funding 
schemes. The longer a State relied on the excess funds, the longer they 
have to phase out the use of those funds.
    In early 2002, CMS notified 24 States determined by CMS to be 
qualified for a transition period under the upper payment limit (UPL) 
regulations. CMS provided the States with its preliminary determination 
regarding the length of each State's transition period and requested 
that each State submit the necessary UPL calculations to support its 
preliminary findings. CMS is presently evaluating the UPL calculations 
provided by each of the 24 States and the associated Medicaid spending, 
both of which are necessary to make final UPL calculations. The first 
transition period of the two-year phase out ended on September 30, 
2002.
                        cms oversight activities
    CMS has a strong interest in strengthening financial oversight and 
ensuring payment accuracy and fiscal integrity. Federal matching funds 
must be a match for real State expenditures, not a match of phantom 
dollars. At the Federal level, our primary role is to exercise proper 
oversight and review of State financial practices and to provide 
guidance and support for States' efforts to ensure program and fiscal 
integrity. While we have made substantial progress in helping States 
identify and reduce improper payments, we are now turning our attention 
to strengthening Medicaid Federal financial management activities.
    We have taken some initial steps to improve our financial 
management processes, but we know that more work can and must be done. 
As part of the President's FY 2003 Budget, we have dedicated $10 
million from the Health Care Fraud and Abuse Control (HCFAC) account to 
develop a comprehensive Medicaid program integrity plan. The FY 2004 
Budget proposes to allocate $20 million from HCFAC for this initiative. 
We are increasing attention to, and emphasizing the importance of 
Medicaid financial management at all levels of our Agency and across 
all of our regions. This effort involves improving Federal oversight 
capabilities of State Medicaid financial practices, and focusing 
attention on program areas of greatest risk, so that our resources are 
targeted appropriately. The following are examples of improvements and 
progress we have made as part of our Medicaid financial management and 
program integrity redesign.
Creating National Reimbursement Teams
    In an effort to improve national consistency in the issuance and 
application of Medicaid reimbursement policy, we have put together a 
team of Central and Regional Office staff, the National Institutional 
Reimbursement Team (NIRT), who are responsible for reviewing all 
institutional reimbursement State plan amendments, providing technical 
assistance to the States, and developing Medicaid institutional 
reimbursement regulations and policy. For example, the team is 
currently using a standard set of questions that must be answered by 
States before a State plan amendment will be approved and will help 
ensure that the payment methodology is clear. Questions include issues 
such as, ``Do providers retain all of the Medicaid payments including 
the Federal and State share (including normal per diem, DRG, DSH, 
supplemental, and enhanced payments) or is any portion of the payments 
returned to the State, local governmental entity, or any other 
intermediary organization?'' As a result of this effort, we will better 
know what we are paying for and how we are paying for it. The team's 
work will help ensure consistency in the application and review of our 
Medicaid policies. We also have established a Non-Institutional 
Provider Team (NIPT), which functions similarly to the NIRT, but for 
non-institutional providers, namely physicians. The NIRT and the NIPT 
have been working together on UPL transitions for those States with 
both inpatient and outpatient UPL phase-outs.
Upfront Reviews of State Funding Sources and Expenditures
    We will be redirecting and adding resources this year with the goal 
of changing the emphasis of the Financial Management (FM) review of 
State Medicaid/SCHIP programs from an after-the-fact review to an 
upfront and proactive review. Our new emphasis would be primarily to 
review the non-Federal share amounts and related expenditures prior to 
the beginning of the fiscal year so that any problems or issues can be 
resolved before any claims are submitted. This process would provide an 
approval of the State's operating plan for the upcoming year, with the 
goal of eliminating the need for CMS to intervene and disallow Federal 
Medicaid funding after it has already been spent by the State and to 
identify any unallowable funding schemes or expenditures before they 
actually happen. Now is the best time to start this effort--while 
States are currently developing budget plans for next year. That way, 
we can examine spending before States are locked into a budget, and 
avoid disallowances that disrupt the State budget cycle.
Making Federal Matching Payments Only When State Plan Amendments Are 
        Approved
    In the past, States have been allowed to draw down Federal matching 
payments for State plan amendments that were submitted, but not yet 
approved. This allowed States to assume a financial risk if their plan 
amendment was subsequently disapproved. Since Federal matching payments 
were readily available while their State plan amendments were being 
considered, States had little incentive to ensure their plan amendments 
were approved. In fact, some State plan amendments were pending for 
years while the States continued to draw down Federal matching 
payments. In January 2001, we issued a State Medicaid Director letter 
informing the States that we would no longer make Federal matching 
payments until State plan amendments were approved, thus removing the 
previous incentive for States to keep plan amendments pending. For our 
part, we have changed our policy so that we will either approve or 
disapprove plan amendments within 90 days.
Partnership with State and Federal Oversight Agencies
    Another key element of our new financial management strategy is to 
strengthen our working relationships and our exchanges of information 
with several State entities. Every State has one or more audit entities 
responsible for ensuring that State expenditures, including those in 
the Medicaid and State Children's Health Insurance Programs, are 
properly made and documented. Furthermore, every Medicaid Agency has a 
surveillance and utilization review staff to pinpoint and pursue 
questionable provider claims and Agency payments. Finally, as you know, 
virtually all States operate a Medicaid Fraud Control Unit, typically 
housed in the Attorney General's office, to pursue instances of 
suspected Medicaid fraud. By better cultivating our relationships with 
State agencies that perform these types of functions, we believe we can 
continue to enhance our oversight of the Medicaid program nationwide. 
In addition, over the last several years, at the Federal level, we have 
developed a close collaboration with the Department of Health and Human 
Services' Office of the Inspector General. We intend to continue this 
relationship.
                             future action
    CMS has several efforts underway to improve Medicaid's financial 
oversight and management. For example, both the General Accounting 
Office and this Committee's Oversight and Investigation Subcommittee 
have begun investigations into potential waste, fraud, and abuse in 
Medicaid State plans. Additionally, the Medicare reform legislation 
currently in conference, also addresses Medicaid with the inclusion of 
a provision that would require a State, as a condition of receiving DSH 
payments, to submit an annual report that:

 Identifies each DSH hospital that received a payment adjustment under 
        this section for the preceding fiscal year and the amount of 
        the payment adjustment made to such hospital for the preceding 
        year;
 Includes such other information as the Secretary determines necessary 
        to ensure the appropriateness of the payment adjustments made 
        under this section for the preceding fiscal year.
    These are all temporary solutions, and Medicaid financing needs 
fundamental structural reforms that will return the program to a 
Federal and state partnership. The Administration has demonstrated its 
commitment to increasing states' flexibility in administering their 
Medicaid programs. The HIFA, Independence Plus and Pharmacy Plus waiver 
initiatives have given states significantly more flexibility to expand 
eligibility and to tailor their programs to meet the needs of their 
beneficiaries.
    However, reform of the financing structure of Medicaid is needed if 
we are serious about reducing waste, fraud and abuse. Because state 
governments are facing budget pressures, they will seek creative 
Medicaid financing strategies. The financial incentives in the program 
exacerbate this problem. Under the current Federal-state matching 
mechanism, if a state cuts one dollar of its own spending, then the 
state forfeits between one and two dollars in federal funds. Under 
current law, states may eliminate coverage of optional populations and 
drop optional benefits. They are doing so. In the past year, over two-
thirds of states have reduced services or eligibility and most states 
are currently considering other benefit or eligibility cutbacks. This 
puts the health coverage of thousands of Americans at risk because when 
states can no longer afford to pay their share of the costs, they may 
lose the Federal funding as well.
    We want to give states another option so that they can manage their 
health care budgets, while preventing further service and benefit cuts 
and while actually expanding coverage for low income Americans. Our 
proposal builds 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.
    Under this proposal, states would have the option of electing to 
continue the current Medicaid program or to choose an alternative 
global financing option. States electing this alternative would have to 
continue providing current mandatory services for mandatory 
populations. For optional populations and optional services, the 
increased flexibility of these allotments would 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. The Administration has been 
engaged in discussions with the governors aimed at creating a proposal 
that both accomplishes the desirable goal of reform and addresses some 
of the major concerns in Medicaid.
    An additional avenue for addressing Medicaid funding challenges is 
to encourage consumers to buy long-term care insurance. For example, 
the President has proposed to expand the four State programs on Long 
Term Care Partnerships, as well as two important tax relief measures 
for care givers and those who purchase long term care insurance.
                               conclusion
    Through complex, creative financing schemes States have 
artificially maximized Federal Medicaid matching funds. This practice 
is simply unacceptable. The Medicaid program must be a Federal-State 
partnership, not an exercise in financing gamesmanship. We must 
continue to ensure that beneficiaries receive the high quality care 
they deserve, and that we are appropriately matching State Medicaid 
funds. The last two decades have demonstrated that States can be 
extremely resourceful in creating innovative funding mechanisms that do 
not comply with the intent of the Medicaid program, which requires 
States to certify that they have the appropriate funding to pay their 
matching Medicaid share. We all need to work harder to ensure States 
are able to help pay for high quality health care for their residents 
through appropriate means, but we need to be vigilant in order to 
prevent further loopholes before they become set in law or regulation. 
We appreciate your support in these efforts and the opportunity to 
discuss this important topic with you today. We are happy to answer 
your questions.


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Mr. Bilirakis. Thank you very much Mr. Scully.
    In your testimony, I guess particularly in your written 
testimony, you focused more on how some States have used a 
variety of schemes to obtain billions of additional Federal 
Medicaid dollars. You know, if all that additional Medicaid 
dollars, Federal Medicaid dollars were used for health purposes 
for those people in the States, I don't know that that would 
upset me too very much. But I guess what would really upset me 
would be if some of those dollars were being used for purposes 
other than health care. Can you maybe respond to that? How much 
would you say, and I don't mean in terms of dollars, but 
percentages or whatever the case may be, do you feel of those 
dollars are used for purposes other than health care?
    Mr. Scully. I would say that is very hard to say, Mr. 
Chairman. I think a rough estimate. I think we have done a lot 
better in the last 2 years about, you know, it used to be that 
when the State applied with a State plan for more Medicaid 
money we used to approve it and then generally, and I mentioned 
this in my testimony, the tradition had been to approve it when 
States had spent it and then we'd try to get it back later, 
which obviously never works. We have, in the last couple of 
years, got to the point of saying we are not going to give any 
States the money until they explain where it is going and it is 
spent on health care and not on building roads.
    There are lot of examples in the early 1990's, I won't pick 
on any States, where some States got billions of dollars for 
the Medicaid program and didn't use it for health care. I think 
we have minimized that to some degree. But the money is very 
fungible. And in many cases, especially through upper payment 
limits and intergovernmental transfers, the States, in fact, 
take quite a bit of money off the top and don't use it for 
health care, which is extremely troubling to us. I don't think 
we have a problem matching real State expenditures and carrying 
more people on health care. The concern we have is two-fold. 
There is an awful lot of Federal dollars being drawn down when 
States aren't putting up any money at all.
    And second, giving everybody the same deal. I mean there is 
nobody here from Alabama, so I will pick on them, although we 
have been working cooperatively with them, the poorest State in 
the country is Mississippi. They have, I think, a 77 percent 
match rate.
    Alabama next door has a statutory match rate of about 70 
percent and in recent years, they have gotten as high as 93 
percent. So to me, it is a matter of, you know, the poorest 
States should get the best deal, and everybody should work on 
the same sets of rules, and if States have been clever enough 
to draw down money inappropriately and we haven't called them 
on it, which in the past we hadn't always done it, is not a 
fair deal under the statute. And I think that that is the 
primary issue.
    Mr. Bilirakis. I know the same thing has been taking place 
over the years regarding dish money too. Can you give us some 
examples if you know, I know you have been at this for a long, 
long time, and you are certainly familiar with some of the 
excesses and some of the fraud that has taken place. But can 
you give us some examples of how some of their money has been 
used in the past aside than for health care?
    Mr. Scully. Well, once again, it is, I mean, I would say it 
is fraud. On the other hand, I would say that as I said 
repeatedly, if you are a State budget director, or you are a 
State Medicaid director, and you can get away with it. I think 
many of them tried to do it.
    Mr. Bilirakis. I would suggest that fraud is probably not 
as strong a word as should be used in a case like that.
    Mr. Scully. Yeah, I believe some of this behavior has been 
outrageous. But I think part of it is the agency has to crack 
down. We have been doing that. It has not been fun. It is not 
politically pleasant. And I think we have been doing equitably 
among all States. But I think it has to be done. Yeah, I can 
give you examples of lots of things. But, you know, I would 
start off with the tax in my home State of Pennsylvania years 
ago. What happened was every nursing home in the State paid a 
tax for one tenth of a second, sent it to a bank in Harrisburg. 
The State raised $500 million, put it up and got an immediate 
match of $500 million from the Federal Government and 
transferred it back to the nursing homes. That was the original 
way donations and taxes worked.
    There are many ways intergovernmental transfers work, but 
intergovernmental transfers, for example, generally State 
hospital would transfer its entire budget to the State for a 
split second. That would be put up as a Federal match, would be 
transferred back to the public hospital.
    Obviously there is no State money involved. It is all--it 
is all a wire transfer and there is no money put up. There are 
many ways to do intergovernmental transfers and that is one. 
Disproportionate share of hospital payments I will pick on just 
to pick one particular State in the upper Midwest, they 
actually had--were paying a particular public hospital 870 
percent of their actual rates.
    So, for example, if you had a hip replacement that cost 
$10,000, the State would allow itself to be billed $87,000 by 
the hospital so the Federal Government would then match its 
percentage of that. In that particular State it was about 60 
percent. So you can imagine the State then picked up on a 
Federal match for that procedure roughly $50,000. They only 
paid the hospital 10. So the State put up nothing, got $40,000 
in cash. Paid the hospital 10 and the only person left unhappy 
is the Federal Government.
    So the upper payment limits basically allowed States to 
come up with outrageously high reimbursements that were far 
more than anybody would pay.
    That is a quick example of all three mechanisms. There are 
many, many different ways to do it. There has been almost no 
limit on the legal cleverness of various----
    Mr. Bilirakis. Not to condone anything like that, but 
certainly if that money at least was used for health care it 
would be--not to be condoned, but certainly something we would 
understand and maybe sometimes look the other way. But when it 
is used for roads and for infrastructure and for purposes other 
than what it was intended for, that is what really gripes me.
    My time is up. I would now yield to Mr. Brown. Thank you, 
sir.
    Mr. Brown. Thank you.
    Mr. Scully, welcome. I am glad you are here.
    As you know, the number of Medicaid enrollees in the U.S. 
between 1996 and 2000 stayed at around 33 million. In 2001, 
that number jumped to 36 million. Today, it has climbed to 40 
million, 40 million in the next year. Given the state of the 
economy, that would seem to be a good thing. After all, even 
with the safety net, the percentage of uninsured Americans, we 
learned last week, rose from 14.6 to 15.2 percent of the 
population, now 43 point something million uninsured Americans. 
Do you see the increase in Medicaid spending as a positive 
phenomenon?
    Mr. Scully. I think it is a positive phenomenon in a lot of 
States. Especially that started 4 or 5 years ago when they had 
surpluses, were expanding SCHIP, and they were using the money, 
they were expanding through waivers and other mechanisms to 
cover more people. We encouraged that.
    We have covered, I think, 2.27 million more people under 
Medicaid since we have been at CMS. I think that is a good 
development. For instance, in Illinois, we just covered 340,000 
people up to 200 percent of poverty on a waiver of prescription 
drugs. So in the States that had the financing, they were 
trying to expand coverage, and we were all for it. I think it 
was great.
    The problem obviously now is the States are feeling a 
contraction, and they are starting to reduce their coverage, 
and that has us concerned, obviously. Our concern is, when the 
spending is going up, it is very easy for States to expand 
coverage when they are doing it 100 percent Federal dollars and 
no State dollars. Our interest is making sure that the 
expansions are partnerships and that, obviously, when the 
States contract, Congress appropriate quite a bit of money in 
the tax bill to the States to get them through, hopefully, the 
next year and a half. That may help. But our concern now is to 
try to find a way to sustain the expansions we have.
    Mr. Brown. Mrs. Capps in her opening statement talked--and 
I think I am reading somewhat between the lines and somewhat 
directly what you said--that Medicaid has been a success 
because--in some sense measured in part that we are spending 
more money because we are taking care of more people in 
recessionary times.
    If we agree that an adequate safety net is a minimum 
requirement of a just society, that a program like Medicare 
works that way, I am not sure I understand why capping funding 
would be expected to maintain or improve that safety net. In 
other words, given that the 2001, 2002 explosion of Medicaid 
applicants from the 33 million constant for 4 years up to 36 
million and then to 40 million, given that that correlates with 
the rise in unemployment, the loss of 2.5 million or so jobs in 
the last couple of years, how do States handle recession with 
capped funding? How are we going to be able to sustain that 
safety net?
    Mr. Scully. We didn't look at it as a cap, first. It is 
totally voluntary, so no State has to do it.
    Second--and I think if Secretary Thompson were sitting here 
he would tell you that every one of his Governor colleagues 
would be back here in 2 years kicking themselves for not doing 
this--the reason is because the current Medicaid baseline, when 
we proposed this in the spring, Medicaid was growing at about 
11.5 percent a year. Most States were still looking at rapid 
growth in Medicaid. What they were going to get from this--and 
we were negotiating with them whether it was a 3-year, 5-year, 
10-year baseline. They were going to get budget certainty to 
lock in the Federal spending at a 10 percent plus a year 
inflated level.
    Now they are going to come back--because the States on 
their own accord are cutting their spending, you are going to 
find that current Medicaid spending baselines have dropped down 
to 4, 5, 6 percent.
    We essentially were telling the States, we are worried 
about some of these games. We are worried about budget 
certainty. We are going to give you a 10 percent a year 
inflated baseline and total flexibility. We were talking about 
3 years, 5 years, 10 years with the Governors and lock that in. 
And they are going to come back 6 months later and say that 10 
percent baseline no longer exists because they have been forced 
themselves to cut it back to 3 or 4 percent a year growth. So 
it was totally voluntary.
    I can tell you, from Secretary Thompson's point of view as 
a Governor, he said to many of his colleagues, you guys are 
nuts not to come in and lock in 10, 11 percent a year growth 
for 5, 10 years and run your program more flexibly.
    What we get out of it was budget certainty. We didn't have 
to worry about upper payment limits or intergovernmental 
transfers. What the States got out of it was locking in a 
baseline that was based on the growth projections of 2 years 
ago which are clearly coming down. For most States, we believe 
it would have been a terrific deal for them. If they didn't 
think it was, they didn't have to do it.
    Mr. Brown. But a cap means less money to them, ultimately.
    Mr. Scully. No, a cap--we were going to build in a 10-year 
baseline and were discussing with the Governors, before they 
decided they weren't interested this year, 5-year numbers, 3-
year numbers, 10-year numbers. We were going build in a current 
baseline with current beneficiary growth plus medical inflation 
on a per capita basis, give them exactly what they were going 
to get, projected over the next 10 years, and it was from an 
artificially high baseline.
    What we would have gotten out of that is we wouldn't have 
had to worry about all these different mechanisms that have 
over the years turned out to have artificial inflation. What 
the States would have gotten out of it was a lot more 
flexibility with a lot more money. If they came back today for 
the same deal, every State would be looking at a much smaller 
pot of money than they would have had 6 months ago because they 
have been forced to reduce their spending.
    Mr. Brown. Are you implying that the States wring out waste 
and inefficiencies better than you have and better than Dennis 
has?
    Mr. Scully. No, I am implying that if you give the State--
let's say hypothetically Ohio, and I should know their Medicaid 
budget, but I don't. But let's say we have a $20 billion 
program in Ohio. It is $12 billion Federal and $8 billion 
State. The States are spending an awful lot of time trying to 
figure out how to not spend their $8 billion and get more out 
of our $12 billion. Whereas, if we just gave them a static 
amount of money, they would run their program better with a lot 
more flexibility and they would spend less time trying to worry 
about how to game the match.
    We were going to lock that $20 billion in at an 
artificially high baseline, because they used to have an 11 
percent growth rate. I believe the Medicaid growth rate with 
the new numbers that come out in the budget is probably going 
to be 6 or 7 percent. We have been trying to find ways to make 
the financing work better; and, State by State, this was a 
voluntary effort. Any State could have said no or said yes.
    If the Governor wanted to come in and lock in a baseline 
and say I want--this is essentially what Tennessee has done 
since 1990. Tennessee has come in on an annual, purely 
capitated basis. They have to cover all their beneficiaries, 
but we give them a waiver, and they have much more flexibility 
in their program when we negotiate the bulk number. But it is 
purely voluntary on Tennessee's part. But this is the way 
Tennessee has worked since 1990.
    I am not advocating Tennessee's program, but I think they 
would argue it has given them a lot of flexibility.
    Mr. Bilirakis. Mrs. Wilson.
    Mrs. Wilson. Thank you, Mr. Chairman.
    Tom, thank you for your testimony. You have quite a bit of 
information on the financing and eligibility and so forth. But 
I wonder what kind of data and information do you have on how 
Medicaid has affected the health status of patients? Does CMS 
gather that data? Can you tell us about how Medicaid has 
improved control of blood sugar levels for diabetics, for 
example, or how immunization rates have been improved by 
Medicaid?
    Mr. Scully. I think we have done quite a bit of 
immunization and preventive care. But it is obviously a State-
by-State program.
    I have spent a lot of time, for instance, in Mississippi. 
The Mississippi Delta probably has the most acute diabetes 
problem in the country. We have tried to find ways to have 
Mississippi manage it better. We have done everything 
imaginable in the last 5 years. I am not sure we have made much 
of a dent in it.
    Your question is it very much varies State by State. Some 
States do a great job in disease management. Some do virtually 
nothing. I am not sure--one of the things that we think we 
would get out of waivers is to give the States the ability to 
do quite a bit more of that.
    Mrs. Wilson. How do we know, funding this huge health care 
program, whether we are helping anybody or not? We all know it 
increases coverage and so on, but how would we say we have a 
broader goal of improving the health status of folks who depend 
on it in preventing the onset of disease if we don't have the 
data?
    Mr. Smith. If I may add, we are working with the States on 
some specific performance indicators that are based on children 
and adults; and we are looking at things like improvements for 
children who have asthma. There are a number of different 
indicators, performance indicators that we are building into 
the system. The SCHIP law itself, the States have to report on 
performance.
    But I would say we do--and we have some States on a State-
by-State basis that have been reporting different types of 
outcomes. Missouri, for example, even goes down to how it has 
reduced the number of days a child has missed from school.
    It is very uneven. Some States do a lot more than others 
do.
    We also have a national performance-based initiative that 
we are working with the States on to tell us more. Oftentimes, 
immunization rates, for example, it is hard to peg down because 
people move in and out of Medicaid. So if you are looking only 
at immunizations that Medicaid has paid for, you are probably 
not seeing the entire picture because a child has moved on and 
off of the program.
    I think Massachusetts did an extensive tracking system and 
again pretty much found out just tracking Medicaid does not 
give you an accurate picture of the overall health care because 
people move on and off of the program. But we are trying to 
improve that.
    Mrs. Wilson. Does CMS, the Federal Government, pay for 100 
percent of the information systems in order to gather this data 
and find out whether we are helping people, improve people's 
health status, or is that a shared priority as well?
    Mr. Scully. It depends on the program. Some of the matches 
are at the State match. A bunch of them are at 90/10, 
technology matches, and there are some we actually pay almost 
100 percent of.
    Mr. Smith. 90/10 for new Medicaid Management Information 
Systems, the MMIS systems. In terms of if you are making 
improvements into your system, much of that would be matchable 
as high as 90 percent. The regular match rate, just the ongoing 
administrative rate, though, is a regular match rate. There is 
an administrative match rate of either 50 percent or 75 
percent.
    Mrs. Wilson. How many of the 57 programs would you assess 
have an exceptional tracking program for health indicators?
    Mr. Smith. For health indicators, that is not the way the 
information systems have really been used at this point.
    Mrs. Wilson. So it is still about payments, it is not about 
health?
    Mr. Smith. You are absolutely correct.
    Mr. Scully. There is no standardized format for the States 
to use as far as tracking diabetes patients or any other 
chronic diseases.
    Part of the problem, as Dennis said, is a lot of people--
the transition in and out of Medicaid is pretty rapid as well 
so it is not a static group of patients like Medicare is 
generally.
    Mrs. Wilson. Thank you, Mr. Chairman.
    Mr. Bilirakis. The Chair thanks the gentlelady.
    Mr. Dingell to inquire.
    Mr. Dingell. Mr. Scully, there is nothing in your testimony 
about what you are doing to fix the problems in nursing homes 
raised by recent GAO studies. Also, there is nothing in here 
about how you would make it easier for people to get enrolled 
in the Medicaid program so you can get services. What are you 
doing in both of these instances, please?
    Mr. Scully. I think we have expanded--encouraged the States 
to do a lot to enroll new beneficiaries. I mentioned I think 
there are 2.27 million new Medicaid beneficiaries in the last 
2\1/2\ years. I think we have pretty aggressively encouraged 
the States to do more outreach, both in Medicaid and in SCHIP. 
Obviously, under the current economic environment, States are 
probably slowing that down a little bit, which is a concern to 
us. But I think we have been pretty aggressive in the outreach 
for new beneficiaries on this.
    Mr. Dingell, I am not sure which--GAO sends me a lot of 
studies on nursing homes. I am not sure which one--on nursing 
home quality?
    Mr. Dingell. I am sorry?
    Mr. Scully. I am sorry. Your question was about a GAO study 
on nursing homes. Which one?
    Mr. Dingell. What are you doing to bring these new 
beneficiaries into the program?
    Mr. Scully. To enroll new beneficiaries? I think we have 
done a lot of SCHIP and Medicaid outreach State by State. I 
think the numbers show that there has been a pretty significant 
expansion in the population the last couple of years. On the 
nursing home issue, I have been probably the most rabid 
advocate of nursing home quality.
    Mr. Dingell. I note, for example, you tell us that 2.27 
million people were added to the Medicaid rolls between 2001 
and 2003 who were previously uninsured. How many of these were 
not previously covered under Medicaid and SCHIP?
    Mr. Scully. I think those were almost all new.
    Mr. Smith. Mr. Dingell, those are new people.
    Mr. Dingell. Those are really new people who had never been 
covered under Medicaid before?
    Mr. Smith. They were not previously eligible under the 
rules that the State had been working under at the time.
    Mr. Dingell. Were they covered or not?
    Mr. Smith. They were not covered by Medicaid when the State 
submitted those expansions, whether through an income disregard 
or a waiver. Those were people who were not previously 
eligible.
    Mr. Scully. Those were not just the people that may have 
been expanded by an economic downturn. Those are the people 
that were covered by virtue of the fact that we gave States 
waivers to expand their coverage.
    Mr. Dingell. They then were covered under waivers under 
previous circumstances?
    Mr. Scully. There was an increase in the base level 
population of the people that came on because of economic 
changes.
    Mr. Dingell. I want the broad numbers of new people 
covered, not covered because you changed a person who was under 
a waiver to a person who was regularly covered.
    Mr. Scully. Those are people that could never have been 
covered under current law but for the waiver, so we expanded it 
by 2.27 million people by virtue of giving waivers.
    Mr. Dingell. I have 2 minutes and 18 seconds, and I note 
that the record now indicates that you have a lot of these 
people who have been moved from waivers to permanent coverage, 
but your indication to me is they have not gotten additional 
coverage. I will submit to you a letter requesting the answer 
to this particular question so that we can get this more 
clearly.
    The Clinton Administration published a final regulation 
that would have prohibited approval of any new State UPL plans. 
HCFA told States that no new plans would be approved. This 
administration came into office, the administration reversed 
that position and allowed new States in under the wire. It has 
approved their UPL proposals. What were those States and why 
were they approved and why were others not approved?
    Mr. Scully. I will ask Dennis. He probably knows the 
details. But the answer, I think, is there was a transitional 
issue with three or four States.
    Mr. Dingell. Two were approved, Virginia and Wisconsin. Why 
were they approved?
    Mr. Scully. Because of the timing of the law, I believe it 
was.
    Mr. Dingell. Pardon?
    Mr. Smith. Mr. Dingell, if I may, at the time that rule was 
promulgated, we believed that more States in fact would have 
been eligible.
    Mr. Dingell. But only two came in. Why were those two 
States approved and why were others not approved?
    Mr. Smith. I will be happy to follow up with you.
    Mr. Scully. In fairness to Dennis, because Dennis, as you 
probably know, was the former Medicaid director in----
    Mr. Dingell. Would you submit to the committee, please, the 
answer to those questions dealing specifically with each of the 
States?
    Mr. Scully. Yes.
    Mr. Dingell. We were told that we should restructure 
Medicaid because States have abused the system. Aren't we best 
served to abate the abuses, stop the abuses and be on guard 
against future problems, rather than changing the system? Isn't 
that the way we should proceed?
    Mr. Scully. Yes, and I think we have pretty aggressively, 
and I think most of the States would tell you that----
    Mr. Dingell. No, that I note to you goes rather less than 
converting Medicaid to a block grant system which is what this 
administration is now proposing. Block grants are quite 
different than a system of shared responsibility and shared 
expenses. Why are we going this route to address the problems 
of abuses?
    Mr. Scully. We have been very aggressive. I don't think any 
State Medicaid director would tell you we haven't been 
extremely aggressive in trying to make them play by the rules. 
I think, as I said previously, we don't believe it is a block 
grant. We believe it is a simplified version of a waiver, much 
like Oregon and Tennessee and other States have worked under 
for years; and any State that doesn't want to do it doesn't 
have to. We believe we are trying to improve the State-Federal 
partnership, not block grant.
    Mr. Dingell. I heard my time is up. Thank you, Mr. 
Chairman.
    Mr. Bilirakis. Thank you, Mr. Chairman.
    Mr. Scully. Mr. Bilirakis, could I just for 1 second add, 
just for Dennis, the two States you mentioned, I should 
remember the details. I was the one that made the decision on 
Virginia and Wisconsin. GAO spent a lot of time looking into 
this because of Virginia where Dennis used to work and 
Wisconsin where my boss used to work. I made both of those 
calls personally, I was very involved in it, GAO did a very 
detailed investigation, and I believe they were convinced I did 
the right thing.
    Mr. Bilirakis. I also was somewhat confused regarding your 
answer that Mr. Dingell referred to that the record now shows 
regarding the 2.27 million that he referred to. Those were 
completely new beneficiaries, is that right? They had not 
previously received or were eligible for Medicaid?
    Mr. Scully. They are additional new beneficiaries that came 
in. Those 2.27 million are people that, under the current State 
laws, had we not given the waivers, could not have gotten 
coverage. By virtue of us giving a waiver--they were additional 
people that would not have been covered but for the waivers.
    Mr. Smith. Those were specific expansion numbers based on a 
State plan amendment that the State submitted to us for new 
coverage. So we have tried very hard to count them correctly so 
they--that does not reflect people who came in, they were 
previously eligible but then they came in.
    Mr. Bilirakis. But the bottom line is they were purely new 
beneficiaries?
    Mr. Scully. But, as Mr. Brown noted, the other population 
of Medicaid beneficiaries has also grown as more people have 
gotten on the Medicaid rolls due to poverty thresholds and 
other things.
    Mr. Waxman. Mr. Chairman, would you yield on this point 
just so we can get a clarification?
    Mr. Bilirakis. Very briefly.
    Mr. Waxman. I think it would be helpful for us if we get in 
the record what the populations are. Because it is my 
understanding that many of these people could have been put 
into the Medicaid program through a State plan. They didn't 
need a waiver to add that population. So we ought to find out 
exactly how many were added because of the waiver and how many 
would have been added had the State decided to cover them under 
their ability to submit their plan.
    Mr. Smith. Mr. Waxman, you are correct, and that number 
does reflect both waivers and State plan amendments. But the 
point was that they were new people that the State opted to 
cover on their own.
    Mr. Waxman. And the State could have opted to cover them on 
their own without a waiver?
    Mr. Smith. Yes, sir.
    Mr. Waxman. So we need to have the differentiation of the 
populations.
    We will submit a question in writing, Mr. Chairman; and we 
would love to get a response.
    Mr. Smith. But they were all new people, regardless of 
whether they were under a waiver or a plan amendment.
    Mr. Bilirakis. Mr. Buyer is recognized to inquire. Mr. 
Buyer, 8 minutes.
    Mr. Buyer. Thank you.
    All of us, we represent our districts, we represent our 
States, and we try to look at a system of the totality. But 
there are also then numbers, and in particular there are 
Senators that then will try to do their own little rifle shots 
to protect their own little hospitals based on their own 
circumstance.
    So you here are trying to manage an overall system while 
you feel the political pressures of individuals who may be even 
in power positions to do XY with regard to their own little 
hospital. That is a given in the political environment. You 
here are providing some testimony on what to do to best help a 
system and, at the same time, in the U.S. Senate in the 
Medicare bill, S. 1, Senators put in some rifle shots with 
regard to how to assist specific hospitals. And I don't 
question they are having difficulty. I want to ask you, do you 
think this is an appropriate way to assist public hospitals 
with large uncompensated care costs and has Congress done this 
for other hospitals? And do you have any concerns about 
establishing this type of precedent?
    Mr. Scully. Yes, we do, obviously. I am guessing the one 
you are referring to in the Senate is the one that just happens 
to be in a Midwestern State.
    Mr. Buyer. Yes.
    Mr. Scully. I think Indiana. Obviously, people concerned 
about individual hospitals are concerned about that provision 
as essentially it draws down a huge amount of additional 
Federal dollars for one hospital without putting up any 
additional State dollars. Obviously, there are many hospitals 
that we have a number of programs, Medicare disproportionate 
share, Medicaid disproportionate share, other cross subsidies. 
We have $32 billion of total cross subsidies that take care of 
indigent care both in Medicare and Medicaid at hospitals. To 
single out one particular hospital to--I believe they are 
talking about statutorily raising the upper payment limit to 
175 percent of Medicare, we think is obviously not good policy, 
and we are opposed to that particular provision. We don't like 
rifle shots generally, but that particular----
    Mr. Buyer. This is in reference to Wishard Hospital in 
Indianapolis. Are there others out there in this bill that we 
don't know about or is this the only one in S. 1?
    Mr. Scully. It is the only one I am aware of. I am spending 
most of my life on this bill right now.
    Mr. Buyer. The difficulty here is for these hospitals--not 
just whether it is Wishard but other public hospitals--are the 
high level of uncompensated care, is the uninsured. Here in 
Indiana we have a Governor that cut the Medicaid by 10 percent 
and then we have an escalation in the uncompensated care and 
people are less apt to--why seek individual responsibility or 
why take my health care offered by the employer? I can turn it 
down and take the cash instead and just go get care at Wishard. 
I don't know what has happened to responsibility in the system 
if all we are going to say is, well, let's just let the 
government fund these types of things. What is your sense?
    Mr. Scully. I should correct--apparently, I have been 
corrected. There is a psychiatric hospital in Michigan that 
also has a rifle shot in the Senate bill. I think we spent an 
awful lot of time in this bill working on Medicare 
disproportionate share, indirect medical education and other 
things that are supposed to take care of inner city hospitals' 
indigent care needs; and to pick out one particular one and 
give it a turbocharged advantage is not a good----
    Mr. Buyer. Let me be clear here. So then the administration 
opposes the rifle shot with regard to Wishard and the one in 
Michigan and you prefer making these substantive changes to 
help an overall system for the country?
    Mr. Scully. Absolutely.
    Mr. Buyer. Let me ask about the--you keep using or the 
words are thrown out about financing schemes. Obviously, these 
States have been seeking some type of advice here by some 
consultants or associations on how to game the system. You made 
reference to that in your testimony.
    Mr. Scully. And then they bill us usually for 70 or 80 
percent of the cost to the consultant. That is even better.
    Mr. Buyer. So tell us, obviously, people can do--this is 
sort of--this is dancing on the edge here. They can stay within 
the law and give their advice, but what are you doing with 
regard to working with outside groups to prevent the gaming of 
the system?
    Mr. Scully. Dennis was a Medicaid director for many years 
in Virginia. I have been working on this through two 
administrations. It is like deja vu all over again. I had spent 
a lot of my time from 1989 to 1993 working on the same issues.
    I think we have been trying to be straight with the State 
Medicaid directors. As I have said repeatedly, if I were a 
State Medicaid director, I am not sure if the law allows that 
some people shouldn't push the edge of the envelope.
    We have been trying to be very clear about the rules. We 
have been ratcheting down on them pretty drastically. The 
primary thing we have done is told the States that when they 
apply for a new service or new expansion for upper payment 
limit or anything else, they are not going to get the money 
until they explain it to us.
    What had happened in the past in many cases is we give them 
the money--and I went through this with Nancy and with Paula, 
who is a good friend. They faced the problem in the past. I am 
sure Tim would tell you this. You give the States the money and 
then go back later and say we would like our $2 billion back or 
our $500 million back and all of a sudden you are on the front 
page of the newspaper telling that State, instead of them 
overbilling you, you are now trying to re-collect from the 
State for money that they have already spent.
    The primary mechanism we have used is basically say you 
have got to get--we're not going to give you any money until we 
understand the financing and until we agree with it and it is a 
legitimate service and legitimate match and the money is being 
spent on health care.
    Mr. Buyer. Why would we reimburse States if we would pay 
individuals to scheme against the Federal Government?
    Mr. Scully. I think the primary reason is for many years it 
was not widely understood, the Medicaid program was 
understaffed, and it was generally a partnership where the 
Federal Government trusted the States for sending in legitimate 
bills and we sent in our matches and the consultants in the 
States were way ahead of us.
    Mr. Buyer. Is this something whereby it is within your 
discretion or is this something that Congress needs to change 
the law?
    Mr. Scully. It is painfully within my discretion, 
generally. Congress could change the law, but it does not fund 
having--obviously, when the States are having the budget 
pressures they have, the primary source of any State budget 
director is to call up his Medicaid director and say, can we 
get a few hundred million dollars out of Medicaid? Generally, 
over the years, they have. But we started saying no, and 
particularly in this environment it is difficult.
    Mr. Buyer. Are you willing to tell the State Medicaid 
directors that you will not reimburse for their outside 
consultants?
    Mr. Smith. Actually, we already have provided guidance to 
the States that--often, these are relied upon as contingency 
fee contracts; and we have told the States, if those are for 
Medicaid maximization, we would not pay and they would not be 
allowable in that respect.
    Mr. Scully. They can still bill us for the fees, but if 
somebody happens to get $500 million for their State, they used 
to be able to get a percentage of that. We obviously----
    Mr. Smith. There are a number of specific----
    Mr. Buyer. You obviously have--you can finish the sentence. 
You have stopped that?
    Mr. Scully. We have stopped that, yes, to the extent we 
understand it. The money is very fungible and extremely hard to 
track.
    Mr. Smith. There are a number of specific areas where we 
have seen a lot of this in the past on school-based 
administrative services, for example, so we have provided--we 
have made final a claiming guide on administrative costs. They 
pop up in several different specific areas. As we find them, we 
do provide specific guidance to the States and tried to be very 
clear about what is allowed and what is not, but a lot of it is 
traced back to finding the flow of the dollars.
    Mr. Buyer. All right. Thank you. I yield back.
    Mr. Bilirakis. Mr. Waxman to inquire.
    Mr. Waxman. Thank you very much, Mr. Chairman.
    Mr. Scully, I am pleased to see you. Your presentation 
about Medicaid seems to be a complaint that the open-ended 
matching funds inevitably result in States trying to maximize 
use of Federal dollars. That is not all bad, because what the 
Federal Government did in the Medicaid program was to use 
Federal dollars to encourage them to do things that they 
wouldn't otherwise be able to do or wouldn't be able to choose 
to do on their own.
    For example, we adopted recently an increased match for 
States to provide breast and cervical cancer treatment 
services. We specifically designed that to encourage States to 
use that money, and we used a carrot of Federal matching funds 
to achieve that coverage. In fact, that is what most of 
Medicaid does. It encourages the States by using a carrot to 
cover the optional services and optional populations which is 
most of the Medicaid spending. We designed the program to 
encourage the States to use the matching funds to take up these 
options.
    No one is going to defend games being played when funds are 
being used for other purposes, but the vast majority of the 
funds Medicaid gets from the Federal Government is for very 
legitimate purposes, some of those optional services and 
optional populations that would be under a block grant, whether 
they be the breast and cervical cancer program, the 
prescription drugs, home- and community-based services, 
programs for disabled people, particularly the working 
disabled, the coverage of kids over 100 percent of poverty, 
most people in nursing homes, eyeglasses and hearing AIDS for 
adults.
    So if you look at the Medicaid program as simply a program 
for States to get funds in an open-ended way and we are going 
to close it, if we close the amount of money they can get they 
are not going to cover some of those services, in my opinion.
    You have raised the DSH problem and you have raised the UPL 
problem. The DSH system now exists in statute. The Congress 
said exactly how much money it wants to spend on DSH in each 
State. The UPL regs are closing down the abuses in the system. 
So let's put those things aside and look at the problems of the 
Medicaid program.
    Seventy percent of the costs of the Medicaid program are to 
serve lower income people who are elderly or disabled. The 
largest and fastest-growing Medicaid services are for those 
people in nursing homes and for prescription drugs. Where will 
these people turn to for long-term care and pharmaceuticals if 
Medicaid is not able to serve them?
    Mr. Scully. Mr. Waxman, I agree with you. There are a lot 
of things we try to incentivize in the Medicaid program. We 
have done a lot of them over the years. I think that is exactly 
right. We have incentivized technology in 90 percent, some new 
coverages at 90 percent. The problem is when it is a 100 
percent Federal match, and that has happened in many cases. I 
think we have tried to minimize that. We have capped DSH. We 
have limited UPL.
    Mr. Waxman. I am not asking you what you can do to limit 
it. If you limit it, if you leave the program as it is, if you 
limited the program and you couldn't cover long-term care in 
nursing homes and prescription drugs, where are these people 
going to go?
    Mr. Scully. What we have looked at is--I believe what we 
have done is totally voluntary for any State. What Oregon 
decided to do, I think they have done a fairly good job. Some 
people don't like the TennCare model, but I think Tennessee has 
covered an awful lot of uninsured people.
    Mr. Waxman. Many States are turning to strict limits on the 
number of prescriptions a Medicaid beneficiary can get a month 
for drugs. Many of them are allowing only three drugs per month 
with no exceptions. Many elderly and disabled people need more 
than three prescriptions per month. What can these people do if 
Medicaid won't pay for the drugs if they need it for such 
chronic conditions as diabetes, heart disease or even HIV?
    Even with open-ended funding they are cutting back on these 
programs. Charity hospitals don't provide outpatient drugs. It 
seems to me that they are going to be having to go to the drug 
companies for assistance programs, if that is possible. I think 
they are going to run into big trouble.
    Mr. Scully. As I said, this is totally voluntary for any 
State. But I think, on the contrary, States have covered new 
populations. There are plenty of places where, if you are at 35 
percent of poverty and if you are not in a category that is 
eligible, you can't get any coverage. In a State like Illinois, 
we covered 340,000 seniors up to 200 percent of poverty with 
new drugs. On the contrary, I think we have given States 
flexibility to cover more people.
    Mr. Waxman. They have more flexibility if they get those 
matching funds, in my view. That is why they have been able to 
cover a lot of these populations that are optional to them. But 
if we limit the amount of matching funds the States get, then 
seems to me we limit their flexibility. We have a disagreement 
about this, but I believe we limit their flexibility to how to 
cut back on services for people; and the services that are most 
expensive are services for very, very vulnerable people who 
have nowhere else--my point is they have nowhere else to turn.
    Governor Schwarzenegger in California is going to face this 
problem, and he is not going to buy in if he has any sense to 
the idea that he is going to get a little bit more money up 
front and then have the choice to get that money now but get 
the State stuck in a situation where they are going to have a 
limit on Federal dollars, especially when States end up with 
the brunt of a poor economy, which has happened under the 
economy that is suffering under the Bush Administration's 
economic policies.
    Mr. Scully. I was about to say something nice.
    Mr. Waxman, I would just say I appreciate--your comments on 
this have been very reasonable this morning. We would like to 
work with you and get by the rhetoric of block grants because 
that is not what it is to make the program work better. As you 
know, I spent a lot of last winter working with Governor Davis 
to come up with an extremely flexible waiver.
    Mr. Waxman. A lot of good it did him.
    Mr. Scully. I think the L.A. County public hospitals will 
tell you it did a lot of good for them. I think it took a lot 
of burden off L.A. County and southern California. We spent a 
lot of time working with them on their waiver to give them a 
lot more flexible use of their money or they would have had a 
lot of problems.
    I think the issue is--I understand this is politically 
sensitive. We would like to find a way to make the States work 
as reasonably and as flexible as they can. We have done a lot 
of work with California and let them do a lot of creative 
things on their waivers that I think has provided a lot better 
health care for California.
    Mr. Bilirakis. Mr. Deal to inquire for 8 minutes.
    Mr. Deal. Thank you, Mr. Chairman.
    Mr. Scully, during your statement and also in opening 
statements by members here, references have been made to the 
SCHIP program. I think we all generally recognize this has been 
a fairly successful program in providing health coverage for 
low-income children. As I understand that program, it has a 
capped annual expenditure back to the States.
    I have two questions. First of all, is this a similar model 
to what was being proposed for Medicaid in general, that being 
an annual capped program; and, second, has it been successful 
in eliminating some of the gamesmanship that the States have 
tried to play in a noncapped approach?
    Mr. Scully. I guess yes and no. SCHIP is a supplemental 
program beyond the Medicaid program. It does have a lot more 
flexibility than Medicaid. There is much more budget certainty 
for us in the Federal Government. So to that extent, the fact 
that it is a model for giving the States greater flexibility to 
use a clearer pot of funds, that is the case.
    But, clearly, we were not trying to cap the Medicaid 
program and come up with--obviously, no State had to do this. 
We were only looking at the optional populations the States 
could have dropped tomorrow to give them more flexibility. The 
mandatory populations in Medicaid would have had to have been 
covered exactly as they are today.
    I guess the argument, and maybe Dennis can clarify, is that 
I think it probably includes some of the better aspects of 
SCHIP, but obviously Medicaid is an entitlement program. People 
that are categorically entitled to the Medicaid program would 
continue to be categorically entitled to the Medicaid program.
    Mr. Smith. If I can add--and SCHIP was very much the model 
that we were looking at and pursuing. People I believe would 
say that SCHIP has been wildly successful. But you touch on 
another point in that there are caps in Medicaid today. There 
are eligibility caps there. If you don't meet--even at 35 
percent of poverty, if you are an uninsured adult male, you 
aren't going to qualify for the Medicaid program. So there are 
eligibility caps in Medicaid today. The QI-1 program for low-
income seniors is a capped funding program. The caps are not 
all that foreign.
    As Mr. Scully referenced, States dealing with 1115 waivers 
are negotiating capped Federal liabilities. So they are not all 
that foreign to the Medicaid program as in fact these types of 
financing arrangements between the States and Federal 
Government have grown in the last several years.
    Mr. Scully. I would like to just clarify this as somehow I 
think it is perceived as a block grant or some type of way to 
save Federal spending. This was Secretary Thompson's idea. He 
was a Governor, and I think he was one of the more creative 
Governors on welfare and Medicaid. He came back and said, if I 
were a Governor still, what deal would I want, and he was the 
one that was pushing this. I think he is incredibly frustrated 
that his fellow former Governors have not understood more about 
what he is trying to do.
    Mr. Deal. Let me ask you about another area that has 
attracted a lot of attention recently, and that is the issue of 
dual eligibles, a significant portion of the population now and 
projected to be an even significantly larger portion of the 
population in the future. What is the administration's position 
with regard to these dual eligibles as it relates to long-term 
care and prescription drug benefits?
    Mr. Scully. Obviously, we are in the middle of doing the 
negotiations right now. We are determined not to take sides 
between the House and Senate, certainly not in public, anyway.
    I guess the long-term care issue is a little different, but 
I think the prescription drug issue in Medicare is complicated. 
I think the one thing we have said publicly is that the 
President is determined to spend every marginal new dollar 
covering a new person, and we believe the money in the Medicare 
benefit should go to cover predominantly low-income seniors 
with a new drug benefit and should not go to basically pay for 
an existing senior who has an existing drug benefit.
    So one of our concerns whether you look at either bill is 
just spending money to buy out existing coverage whereas we 
should be covering a lot more people. We have said, I guess, 
publicly, the Senate--there is no question the Senate drug 
benefit covers a lot more people, low-income people than the 
House benefit does. Some would argue the Senate benefit may 
have a little too generous coverage. We think we need to find 
the right mix. But our concern is covering as many new low-
income Americans as we possibly can with a drug benefit. I 
don't believe we are talking at this point about making any 
changes in long-term care.
    Mr. Smith. Mr. Deal, to sort of put it in perspective of 
the other spending on duals, prescription drugs are only 15 
percent of the Medicaid expenditures on duals. Once you start 
moving into other areas, you are talking about considerably 
even greater sums.
    Mr. Deal. I yield back, Mr. Chairman.
    Mr. Bilirakis. The Chair thanks the gentleman.
    Mrs. Capps to inquire.
    Mrs. Capps. Mr. Scully, recently, Surgeon General Carmona 
argued for the United States taking a more aggressive role in 
preventing violence through proven public health strategies. We 
spend in this country close to $6 billion annually on domestic 
violence. I am urging you--this is a little plug for some 
legislation I have to ensure that providers in our health 
programs include screening for domestic violence and follow-up 
services for women, and I hope that is some legislation you can 
support. It is not unrelated to our topic at hand.
    But I want to continue this discussion of lump sum payments 
capped that would be the proposal by the administration for 
Medicaid. The administration predicted economic growth for 
fiscal year 2002. Instead, we saw more job losses and, more 
importantly, rising numbers of uninsured; and so we have also 
seen Medicaid having a rapid expansion. Doesn't it seem likely 
that from time to time estimates of what a State will need or 
States will need for Medicaid would be inaccurate? I would like 
you to kind of, I guess, continue some of Mr. Waxman's 
questioning about what happens to States when such an estimate 
discrepancy occurs, what happens if the States, as is the case 
today in almost every State, are already themselves in budget 
deficits and cannot afford to pick up excess costs?
    Mr. Scully. That is one of the primary reasons that we 
proposed our plan to begin with. All this is negotiable. As I 
have said, with Tennessee and any other State that we negotiate 
a waiver with, we negotiate the per capita amounts, we 
negotiate the inflation, we negotiate the assumptions about how 
fast beneficiaries are going to grow.
    I did that with Governor Davis last winter in California. 
We negotiated a whole new waiver for the California system. I 
think it was $1.9 billion. We had to make lots of assumptions 
about growth rates.
    One of the things that we thought--that Secretary Thompson 
thought was a benefit to the States when we did this last 
winter was that we were looking at projected growth rates State 
by State in Medicaid that were probably artificially high. We 
knew they were coming down, and we were willing to let the 
Governors lock those in for a few years which would have been 
beneficial to them. They didn't have to do it if they didn't 
want to. I think most of them are realizing now that they may 
have not made the correct judgment on that call.
    One of their biggest concerns we started with was we had 
talked about locking it in for 10 years. The Governors came 
back and said, that's too long. How about 5 years? How about 3 
years? We had just started talking to them about making those 
kind of midcourse adjustments when they decided, I think, due 
to the rhetoric of this is a block grant, which it is not, that 
it wasn't a safe thing for them to do this year. I think when 
you look at it purely on the merits, it was a no-brainer for 
them.
    Mrs. Capps. Let me just ask you, though, if the States had 
locked into estimates based on predictions that we would have 
economic growth that were made last year and then we have seen 
in many States a very sharp downturn in employment and rising 
needs, then what?
    Mr. Scully. Actually, that benefits them. Because a lot of 
them were looking at predictions of Medicaid growth, because 
they had the money, of 10, 11, 12 percent. We would have locked 
that in. And because they have been forced to voluntarily drop 
their optionals, they are now looking at having 2, 3, 4 percent 
growth rates. We were essentially going to let them lock in 
their prior growth rates for the Federal spending that didn't 
exist anymore. That exact trend actually would have helped 
them.
    Mrs. Capps. I guess maybe I need this to be clarified more. 
You are expecting them to expand during economic good times?
    Mr. Scully. They had expanded in the late 1990's, in the 
last couple years. Let's say, California, just for example.
    Mrs. Capps. That is true. What if it were capped at last 
year and California now faces the situation we are in?
    Mr. Scully. They would have been in great shape. Because 
what has happened State by State is that California--most of 
California's program is under waivers, by the way. A lot of 
this already is happening in California.
    Let's pick California. California's program runs about $33 
billion this year, I think, roughly. Let's say we have taken 
that $33 billion and inflated it at 12, 13 percent a year, 
because that was what we projected last year. California and 
every other State--I guarantee you in the next 6 months, 
California is going to have to come in and drop optional 
benefits to save money. Their growth rate, which used to be 
projected at 13 percent, which would have been locked in, we 
would have written them a check for that, they now drop to zero 
or 2 percent. They are going to lose the Federal match. All the 
Federal money will be gone, whereas they would have had it 
locked in.
    Mrs. Capps. I guess I am thinking of those people, when 
they are dropped, what happens to them?
    Mr. Scully. We don't want them to be dropped. That is what 
we were trying to avoid. California would have locked in an 
artificial--even though they would not have spent the money, 
they would have locked in the Federal money for 3, 5, 10 years 
at an artificial growth rate of 10 percent. We would have 
gotten the certainly of not having to argue about this 
gamesmanship every year, and they would have gotten the Federal 
money even if they didn't have their own. We would have locked 
it in.
    Now what happens, because we only match real spending, is 
California comes in and has to make decisions about dropping 
optional beneficiaries. If California's spending rate drops to 
zero or 1 or 2 percent, they are only going to get matched for 
those dollars. They are going to get less Federal money.
    Mrs. Capps. I guess my question is maybe even more basic or 
simple. What happens if the demand for Medicaid exceeds the 
locked growth rate?
    Mr. Scully. If the demand--it is just like it does in 
Tennessee. Theoretically, the State has to eat the difference. 
But if you look at the Tennessee experience, which is by far 
the most--that is the one I have had the longest experience 
with. I just spent a lot of time renegotiating TennCare with 
the new Democratic Governor in Tennessee. I would think that it 
would be very hard to find anybody in Tennessee in either party 
that doesn't think that it was a very good deal. We have 
adjusted it a number of times when they had good arguments.
    Mrs. Capps. They wouldn't lose their care?
    Mr. Scully. It hasn't happened in Tennessee.
    Mr. Bilirakis. Mr. Greenwood to inquire.
    Mr. Greenwood. Thank you, Mr. Chairman.
    Mr. Scully, you and I are both from Pennsylvania. You made 
the reference earlier to Pennsylvania's scheme with regard to 
nursing homes. It is my understanding that at this moment 
moving through the Pennsylvania legislature is a bill that they 
are calling the granny tax, wherein they tax nursing home beds. 
The nursing home providers pay that tax to the State, the State 
then uses it to match--would use it under this legislation to 
match Federal funds, thereby increasing the per diem to the 
nursing homes. Given what Pennsylvania has been through now, 
what would make Pennsylvania and its new Governor Rendell think 
that they could get away with that?
    Mr. Scully. I hope they don't think they can.
    Mr. Greenwood. They must. They are moving a bill through.
    Mr. Scully. I did a teleconference with the State Senate 
committee overseeing this about 3 weeks ago in Pennsylvania. 
They asked me that question. I basically said--under the 
parameters, I said we would turn it down and not match it.
    There is a provision in the bill which a number of Members 
were involved in, including you, I believe, that essentially 
you can have provider taxes if they are broad-based and 
redistributive. That means there would be winners and losers.
    For example, if you wanted to tax every nursing home in 
Pennsylvania, you would have to make sure they aren't all held 
harmless and get all the money back because then it is not 
really a tax. So if you want to tax every nursing home in 
Pennsylvania at 5 percent and guarantee they are going to get 
every penny back, it is not a legitimate tax. If you tax them 
all at 5 percent and they have different levels of indigent 
care, some get back 2 percent, some get back 8 percent, then 
that is a redistributive tax, works like a tax and we will 
match it. But we won't match it if it is just a hold harmless 
tax because the money is just there. If they send it off to the 
State, raise the money and get it all back and they are all 
guaranteed to be held harmless, we will not match that and we 
will take a long look at it, if that is the way Pennsylvania's 
tax works.
    That was largely the discussion I had with Missouri. 
Missouri restructured their tax structure on their providers so 
that there were winners and losers, and we actually do match 
their taxes. They used to be hold harmless taxes, and we did 
not match those. It depends on how Pennsylvania's is 
structured.
    Mr. Greenwood. It isn't a policy that even allows for a tax 
to be explicitly or specifically on the health care providers. 
It would seem to me, as a matter of policy, if you want to tax 
the people of Pennsylvania, all of whom are eligible for 
nursing home care, and then use those tax revenues to match 
Medicaid dollars, that is a fair and widely distributed tax as 
a policy, even though, given the caveat that you have just 
explained, that there is no guarantee that they would get it 
back. It still strikes me as a relatively phony taxing scheme.
    Mr. Scully. I am with you, but I lost that fight 12 years 
ago in the first Bush Administration when these provider taxes 
came up. I personally think all provider taxes are bogus, that 
is my own personal opinion, but Congress when we were trying to 
slow this down in the early 1990's passed a law and said you 
can have provider taxes but they have to create winners and 
losers and be broad based and redistributive. I personally 
think it should be general revenues. But current law says that 
if the taxes are broad based and redistributive, and there are 
even more complicated rules than that. You can use provider 
taxes, but they have to create winners and losers.
    Mr. Greenwood. I believe the new Medicaid director in 
Pennsylvania is one who was in the Medicaid department in 
Pennsylvania, left and became a private consultant to States to 
create these schemes and now is back running the Medicaid 
program under Governor Rendell. A great system.
    Mr. Scully. I promise I won't do that.
    Mr. Greenwood. One of your graphs that shows the growth 
rates of various components of the Medicaid program shows, I 
believe, expenditures on the disabled increasing very rapidly. 
In 1993, it was about $50 billion a year expended. It is now 
over $100 billion. Why has that been what seems to be the 
fastest-growing component?
    Mr. Scully. It is. Some of that maybe has not been publicly 
debated but, and Dennis may jump in here, probably a good 
social policy. I would guess the bulk of that or a lot of it is 
the fact that we have done a lot of home- and community-based 
waivers so that we have deinstitutionalized a lot of disabled 
people. So there are more people eligible for benefits. States 
have covered more, and that is probably a good thing, but it 
has clearly caused an enormous demand increase on the Medicaid 
program from the disabled population.
    Mr. Greenwood. Does it reflect any change in the 
eligibility by the States--who determines what the eligibility 
is to be called disabled?
    Mr. Smith. In some respects, States have expanded beyond 
who they are required to cover under Federal law. It is a 
combination of population expansions and the growth in home- 
and community-based waivers in particular, which again we think 
is a good thing.
    Again, as we are talking about the future of Medicaid and 
how to change the program, we think that respect of changing 
the dynamics in where people are served for their long-term 
care needs has a great deal of promise to focus the dollars 
more clearly on the individual rather than what we often find 
are provider-driven services and coverage. We think giving 
people more control over their own services has a great deal to 
offer, improving services and holding down the rates of growth.
    Mr. Scully. There has been a lot like Arkansas as a cash 
and carry. There are a number of States that have done those 
type of things.
    The answer to your question, Social Security makes the core 
determination, SSDI, of who is disabled statutorily under 
Medicaid, but many States have expanded that as an optional 
benefit beyond that to other categories, and we have encouraged 
that to places where it has provided much less 
institutionalized care generally.
    Mr. Greenwood. Thank you.
    Mrs. Wilson [presiding]. Thank you.
    The gentleman from Texas, Mr. Green, for 5 minutes.
    Mr. Green. Thank you, Madam chairman.
    Mr. Scully, I am going to ask my staff to give you a copy 
of the letter we sent last week that was signed by a number of 
Members from Texas on the issue of Medicaid coverage for TANF 
recipients in Texas for a child who skips a class. Because I 
know tomorrow, I think, the State workforce commission is 
actually going to make a decision on that.
    I appreciate what CMS is doing to ensure States are in 
compliance with Federal law and not restricting benefits to an 
individual if their teenager skips a class.
    You state in your testimony the elderly and people with 
disabilities comprise just 27 percent of the Medicaid 
population and note the cost of their care consumes about 70 
percent of Medicaid spending. You also state that almost 70 
percent of the nursing home beds are now Medicaid financed and 
State and Federal Governments pay roughly 60 percent of all the 
long-term costs nationally. I am concerned that increased 
flexibility and benefit design or eligibility requirements 
might throw these individuals who are no doubt among the 
frailest and most vulnerable into the streets. Managed care 
doesn't appear to work for this population, particularly in a 
nursing home setting. So I am curious as to how flexibility 
would do something about that 70 percent of the Medicaid 
spending. I didn't realize those percentages were that high, in 
all honesty.
    Mr. Scully. First, I would say a lot of people don't 
realize in Medicare--the percentage of managed care in the 
Medicare population is probably 11 percent. I think we have a 
little more than 5 million people in managed care. Dennis 
probably knows the exact number. We actually have something 
like 27 million people in Medicaid managed care. It is growing 
very rapidly, and many States are going in that direction.
    I actually think you can make a good argument that it has 
been a very good, positive trend for care in the Medicaid 
program, but when you get in the nursing home setting, it is 
totally different. I think very little nursing homes, almost 
none that I know of State by State, has managed care.
    The most disturbing trend in the nursing home setting that 
I see, and this gets back to Medicare, is I believe the average 
per day Medicaid reimbursement, it obviously varies greatly by 
State, is about $115 a day, whereas in Medicare we pay as much 
as $325 a day. I think the average is about $280. You get 70 
percent of the people in the nursing homes in this country in 
Medicaid and, depending on the State, there is a huge cross-
subsidy for Medicare and Medicaid. We only cover about 12 
percent of the beneficiaries in Medicare, but we basically 
massively overpay in Medicare which we know because the States 
chronically underpay in Medicaid.
    As the population grows of people in nursing homes on 
Medicaid, the ability to cross-subsidize, which probably isn't 
a good idea anyway in Medicare, it is a huge public policy 
problem. We are consciously cross-subsidizing Medicaid in 
nursing homes, but the nursing home rates, depending on the 
States, are generally chronically low and cause huge problems. 
So you have very little managed care in Medicare, but you have 
got a huge nursing home problem in Medicaid.
    Mr. Green. And Medicaid pays the full monthly, the 30 days, 
whereas Medicare just has that benefit for once a year.
    Mr. Scully. No, we pay for the first 60 days post-
hospitalization.
    What happens is, if the patient gets out, if you are a 
senior and you get out of the hospital, we pay for the first 60 
days. If you are there longer than that generally, and there 
are many other rules around it, you switch to Medicaid after a 
certain period of time. If you are chronically in a nursing 
home for good, that is where most of the Medicaid patients--
most of the nursing home patients are eventually paid for by 
Medicaid.
    Mr. Green. Again, with those high percentages that are 
taken care of, or the 70 percent cost of the care consumes the 
70 percent of the Medicaid spending, my next question is, could 
you point to an option where States might be able to use 
Medicaid funds as a type of premium support model for 
individuals who can use their Medicaid coverage to buy into 
their employer-sponsored plan or to purchase health insurance 
in the private market?
    Again, looking at the percentages that you talk about, 70 
percent of Medicaid spending is for that elderly and frail--so 
we would only be talking about 30 percent that could actually 
possibly be in the private sector; and you take out disabled, 
we are talking about such a small number of people. I find it 
hard to believe that Medicaid spending on a monthly basis--if I 
had the option, I could go find an individual policy with the 
Medicaid expenditures, for example, in Texas that you could 
find an individual policy knowing what I would be quoted for an 
individual policy in my 50's.
    Mr. Scully. You could buy a terrific individual policy. In 
many States, it depends on where you are, the Medicaid spending 
per capita is enormous; and one of the reasons--you are right. 
We believe we need to take pressure off the long-term care 
sector.
    I mentioned reverse mortgages and other things, but if you 
look at the per capita spending in Medicaid, obviously there is 
a core population of low-income people that need a full 
Medicaid benefit, but in many cases the per capita Medicaid 
spending is, in many cases, $6,000, $7,000, $8,000 a person, in 
some cases higher. One of our concerns is if you give States 
flexibility like Tennessee has had that they will take some of 
the relatively higher income people in the State--we obviously 
have a significant problem with the uninsured--and start using 
some of those resources to buy a basic Blue Cross plan or to 
buy other private insurance.
    Because one of the problems you have with State Medicaid 
plans in my opinion is State legislatures. Every benefit in the 
universe is covered for every specialist in the world when you 
get in the State legislatures, mandating benefits State by 
State and especially--it may be appropriate in low-income 
populations, but as you get relatively higher up in the income 
stream we have found States like Tennessee, when they can buy 
people policies that are private policies without all these 
mandates, that they can cover a lot more ground for a lot more 
people.
    Mr. Green. Again, I know, having served in the legislature 
and seen those mandates, and granted there is an argument for 
it, but oftentimes you also have problems with having a plan 
that has no benefits or very limited benefits that people 
aren't accustomed to.
    But getting back to the issue in the private market----
    Mrs. Wilson. Mr. Green, I think you are out of time. If you 
have got a quick question here----
    Mr. Green. Obviously I didn't realize I was out of time. 
Thank you, Madam chairman.
    Mrs. Wilson. Thank you.
    Mr. Stupak is recognized for 5 minutes.
    Mr. Stupak. Thank you; and, Mr. Scully, thanks for being 
here.
    When I was reading your written testimony, you spent about 
16 pages with charts and that, showing some of the tactics that 
the States used to maximize their Federal contribution. Just 
listening to the testimony here, let me ask a question this 
way. Do you see any irony in your argument that we can't trust 
the States with financing Medicaid so we should give them 
nearly complete control over access, quality and data about the 
health of their recipients? It is almost like you are saying, 
we can't trust them, but yet you are willing to block-grant it 
to them.
    Mr. Scully. No, the money is fungible. The Federal problem 
with the Medicaid program--and I don't mean to beat up the 
States too much. I mean, the fact is--Tim and others have been 
through this--there is no way to--the money is fungible when 
you are in a matching program. It has almost been too easy for 
the States to do this.
    I guess our experience in places like Tennessee or Illinois 
and other places, when you actually come up with a matching 
program, if you took the $33 billion in California and said, 
our expectation is to spend $18 billion or $20 billion and you 
spend $13, whatever the rate is, it is a lot easier to monitor. 
The States are not putting up real money. In the States that 
choose to do it, and this is purely optional by State, it would 
be a much easier ability to both fiscally manage it and to give 
the States more flexibility. We think it was a much better deal 
for the States.
    Obviously, even if our proposal had passed, any 1 of the 50 
Governors didn't want to do it didn't have to do it, or the 
State legislature. It was purely voluntary.
    So I guess I do think that the fact is an enormous amount 
of effort--and I skipped 8 years in the middle, but I can tell 
you between 1989 and now, my now 7 years in the government in 
that period, I spent a huge amount of my time, both when I was 
in the White House and OMB, on this program trying to work with 
the States, State by State, to figure out who is going to 
maximize revenue, who is going to get what match, and not 
enough time trying to figure out how to provide better 
benefits. And so I personally think it is the right set of 
incentives.
    Mr. Stupak. But it sort of seems like you trust the States 
with the patients but not with the cash.
    Mr. Scully. No. I think we trust the States to do it. It is 
just human nature. If you are in a budget squeeze as a State 
Medicaid director or State budget officer, and you can figure 
out a way to draw down Federal money without putting up State 
money, you are going to do it. And if we don't tell them they 
can't, they are going to do it.
    So it is not that we can't trust them. They are doing what 
they are incentivized to do, and we provide a lot of the wrong 
incentives. I would rather provide incentives to say you know 
what you are going to get from us. We know what you are going 
to put in. Let's focus on providing better care.
    Mr. Stupak. But even if you did your cap program that you 
want to do with that 10 percent increase and all that to take 
up for growth, it really wouldn't have made any changes in the 
last 3 years. As I said in my opening statement, just about 
every State has had to reduce benefits. The prescription drug 
cost has skyrocketed out of control. Thirty-five States have 
had to reduce benefits. Even if they got that extra 10 percent, 
the States would still be faced with the same situation, 
wouldn't they?
    Mr. Scully. I actually think most--if any State looked at 
what they could have gotten last spring versus what they are 
likely to get next year, it is hard for me to imagine a State 
that would have had a much better deal. It is hard for me to 
imagine for a State budget office that wouldn't see that. And 
we had a lot of pressure on the State.
    One of the things that I think, which we haven't gotten 
into, it is very frustrating to me, I won't pick on--I picked 
on some drug companies about this. It drives me crazy to see 
what the States are spending on prescription drugs in some 
cases. You know, we have got a lot of wonderful drugs that poor 
people need. We have also got a lot of drugs that have generic 
equivalents or have come off patent, and we spend a huge amount 
of money in Medicaid buying drugs because they run on TV ads, 
and low-income people have a 1 and $3 copayment, and they go 
out and buy $80-a-month prescriptions with a $3 copayment 
because they just saw it on television even though the drug is 
identical to the one that is generic or just came off patent.
    Mr. Stupak. Well, if you are talking about prescription 
drugs, then you wouldn't agree with the provisions in the 
House-passed bill, Medicare prescription drug plan, where the 
Secretary of HHS can't negotiate drug prices. There is a bar 
against it in the bill. They said the Secretary of Health and 
Human Services shall not negotiate drug prices. So if you want 
to bring down the price of drugs and use the purchasing powers 
of whether it be the States or the Federal Government, you 
would be barred against it from the legislation.
    Mr. Scully. Well, that is a very--this could take a couple 
of hours. I will take 30 seconds. I was one of the inventors of 
Medicaid drug rebates in the 1990 legislation, I think. I am 
not sure it works perfectly, but the volume of States' drug 
spending then was about 8 percent of the market, and that was 
enough, arguably, to give the States the ability to centralize 
their purchasing power.
    If I started buying--if Secretary of HHS started 
negotiating drugs through Medicare, I would be buying well over 
50 percent of the volume of all the United States. It just 
doesn't work.
    What we basically did in our program is we essentially have 
tried to split the country up into drug purchasing plans so 
that we would be buying in volume for seniors, but we would be 
doing it locally through the market, rather than--you wouldn't 
have a market if Secretary Thompson and I sat out there for 60 
percent of the drug spending and just decided to negotiate 
prices. We would be fixing prices, not negotiating prices. We 
would be the market.
    Mr. Stupak. Yeah, but you still have----
    Mr. Scully. It doesn't work.
    Mr. Stupak. Yeah, but the bill still doesn't allow the 
Federal Government to buy at any kind of reduced rate.
    Mr. Scully. What we try to do in the bill is split the 
country--in our proposal is split the country up into 10 
regions for PPOs and for prescription drug purchasing plans, 
get 41 million seniors buying in bulk and put them in huge 
groups to buy in bulk. But if I bought for all 41 million 
seniors, I would be the market. What we are trying to do is 
coordinate--the same thing with the prescription drug discount 
card, which I have been advocating from the first day I walked 
in the door, is the goal is to get seniors organized into huge 
purchasing pools to have the leverage----
    Mr. Stupak. But even your senior discount card, I remember 
asking a question, did not encourage the use of generics. In 
fact, I asked you the question on the 80 percent discount. I 
forget the one drug it was, the one for stomach concerns.
    Mrs. Wilson. Mr. Scully, if you could answer this question 
and then----
    Mr. Stupak. Even the prescription drug plan has----
    Mrs. Wilson. Your time has expired.
    Mr. Stupak. The Bush card never encouraged any kind of 
generics. I really think that the whole situation, whether it 
is the House-passed Medicaid plan that we have where Tommy 
Thompson can't negotiate or the one that the President put 
forward that you came and talked about before this committee, 
neither one of them did anything to drive down the price. In 
fact, you actually protected the price of drugs, and basically 
you left the prices to the poor seniors to try to pay for.
    Mr. Scully. I think what you see--and let me finish 
quickly. You notice we got sued in your original drug card and 
didn't do very well. We now in this bill will have clear 
statutory authority to do it, and I think you will see in the 
regulation that they will be very helpful toward generics.
    Mrs. Wilson. Thank you.
    Mr. Strickland has 8 minutes.
    Mr. Brown. Mr. Strickland, could you yield 30 seconds to me 
to start?
    Mr. Strickland. I will happy to yield more than 30 seconds 
to my friend.
    Mr. Brown. I thank the gentleman.
    Mr. Scully, I am unclear on something you said in response 
to Mr. Stupak on the purchase of what you said, expensive 
drugs. My understanding is that Medicaid can buy--if there are 
two generics, two or more generics that Medicaid can buy, that 
you can order the purchase to be paid for the cheapest of the 
three, or at least of the two generics; isn't that correct?
    Mr. Scully. That is correct with generics. What I was--I 
think I was referring to something else. I don't want to pick 
on particular drugs, but, you know, there are some drugs where 
there is a generic equivalent now, and there is still a name 
brand that is slightly different, extended time, and we pay $80 
a month for that prescription, the beneficiary pays a $3 
copayment, where there is a generic that might cost, you know, 
$16 a month. And the fact is we are spending an awful lot of 
Medicaid dollars on those types of drugs. And to give you an 
example, which I probably am not going to get invited to their 
Christmas party, but my most common complaint, and this is 
Nexium versus Prilosec, which are extremely similar, and we are 
spending $300 million last quarter on----
    Mr. Strickland. Reclaiming my time. Thank you.
    Mr. Scully, it seems as if we may be talking past each 
other, because is it my understanding that you are saying that 
your proposal is not a block grant, and it seems as if everyone 
on this side is saying it is a block grant. Is it a 
definitional problem, or is there a substantive difference 
between a block grant and what you are proposing be done?
    Mr. Scully. No, there is a huge difference, and I was--
there were block grants for Medicaid proposed 15 years ago, 
where basically you take the State's Medicaid allocation, give 
to the State, and let them run the program themselves. This is 
totally different. The mandatory beneficiaries in the program 
were required to be covered so the States would have to match 
it. We would have to cover it. It is only for the optional 
populations.
    Mr. Strickland. So would it be a block grant for the 
optional populations? Is that what you are saying?
    Mr. Scully. It would be a negotiated per capita payment 
amount that the States could voluntarily do. So no State would 
have to--it is essentially TennCare. If you look at what 
TennCare did, what Oregon did, it is a simplified bulk waiver 
for your optionals, which it is just a simplified way for 
Tennessee to do what they have already done with a lot less 
hassle.
    Mr. Strickland. So if I think I heard you correctly, you 
said it is capped per person?
    Mr. Scully. The calculation is a per capita spending on all 
three of the various populations.
    Mr. Strickland. So how does that differ from a block grant?
    Mr. Scully. Well, the block grant proposals were, first of 
all, 20 years ago where the entire population--where they were 
static populations, didn't grow. In this case it is a per 
capita amount, so if you happen to have a recession, and the 
number of people grew in Medicaid, your State gets more money 
per person. The block grants generally said if we are giving 
you $10 billion now, we will index to that inflation.
    Mr. Strickland. But the requirements associated with those 
resources would be the same type of requirements or lack of 
requirements that would be associated with a block grant; is 
that correct?
    Mr. Scully. I really don't think it is. I think the--again, 
if you look at most of California's population in the Medicaid 
managed care plans, they are already in exactly this type of 
per capita spending cap. So the States have already come in 
State by State and negotiated these arrangements in many cases. 
A State like California has done it for about a third of their 
program, and we are just trying to simplify it and make it easy 
to understand and actually give them a better deal.
    So I just--I think, unfortunately, and this just happens, 
that the rhetoric kind of overtook the reality, and I think it 
has been counterproductive.
    Mr. Smith. Mr. Strickland, if you look at other programs 
like the Maternal and Child Health Block Grant, Social Services 
Block Grants, the SAMHSA Block Grant, those are block grants in 
that they are discretionary. They have to be reauthorized, 
reappropriated.
    Mr. Strickland. If I could just interrupt here. I have here 
a document from OMB which indicates that by 2013, there will be 
a cut of more than $8 billion. How do you--how do you explain 
that? That is, understand, an actual cut in amounting to about 
2 percent, but----
    Mr. Smith. Well, again, that is 8 percent, $8 billion off 
what is already in the baseline. But the baseline is already 
growing. Under the administration's proposal, the Federal 
Government would have spent $2.7 trillion on Medicaid over the 
next 10 years. In our proposal we still would have spent $2.7 
trillion because there is growth built into the baseline, the 8 
billion that you are referring to----
    Mr. Strickland. But excuse me for interrupting, but Mr. 
Brown took some of my time, so I have to hurry.
    Isn't it accurate to say that the States will be getting 
less money as a result of what you are trying do?
    Mr. Scully. Well, if you went back and looked at that 
projection which was under the arm of giving the States the 
option, and we assumed half of them would do it from last 
January, and went back and looked at the midsession review 
budget which shows real State spending, what you will find is 
that $8 billion is swamped many times over because the fact is 
the States have to reduce their spending anyway. We are trying 
to lock in higher levels. The Medicaid baseline for next year, 
if you take that 10 years of numbers, will be way below what 
our proposal is.
    Mr. Strickland. But, Mr. Scully, you said the baseline 
projection included projected growth in the number of people--
--
    Mr. Scully. It did.
    Mr. Strickland. [continuing] did you not?
    Mr. Scully. We made some assumptions about the States when 
they got those projections and about what the behavior would 
be.
    Mr. Strickland. So if you cut $8 billion, you are cutting 
$8 billion from what the States would have been expected to 
receive.
    Mr. Scully. No, because we put it in on the front. What we 
basically required was that the States that got more money in 
the first 7 years would have to come back with lower rates of 
growth in the last 3. And there was almost a rounding error in 
$8 billion. When you look at the $2.7 trillion--I guess my 
point is if you looked at the $2.7 trillion and that baseline 
projection last January, I would bet if you looked at reality 
right now, it is probably down to $2.6 or $2.55, because the 
fact is the States are being forced to spend less.
    Mr. Strickland. I just want to get for the record, though, 
according to OMB, it is an $8.285 billion cut. Now, that is 
OMB's conclusion.
    I want to move on to just----
    Mr. Scully. That may be correct.
    Mr. Strickland. You know, I have got a minute and 30 
seconds. The administration opposed the FMAP Federal increase 
in funding for Medicaid for the States; is that correct?
    Mr. Scully. Yes.
    Mr. Strickland. Now, you have said, and I think others have 
said, in fact, the Kaiser Commission indicated that the State 
Medicaid directors were strongly in favor of the additional 
resources of about $10 billion. Every State surveyed indicated 
this was a needed relief. Twenty-one States indicated that FMAP 
would provide general relief within their Medicaid programs. An 
additional 19 States said the enhanced FMAP was going to be 
used to soften or prevent cuts. In Ohio the fiscal relief 
provided by FMAP prevented a cut that would have affected 
60,000 low-income parents. In Missouri the fiscal relief 
avoided cuts to parents and cuts to seniors and people with 
disabilities.
    How would reducing the long-term Federal commitment to 
health care for low-income vulnerable Americans by capping 
Federal funding of the program through the administration's 
approach help if the economy of States continues to struggle? 
This being my point: If that FMAP relief was not there, States 
would have cutoff vulnerable people. Will the administration 
support continued enhanced funding for future years if the 
economies of these States continue to struggle and they simply 
are faced with a choice of either cutting off people or the 
other option is to getting additional Federal resources; what 
will your response be?
    Mr. Scully. Well, we will have to wait until it comes up, 
but I will say that my major objection to the enhanced match, 
which I think was about $10 million in the fall, was--and I put 
a chart in my testimony--is there is no correlation between the 
FMAP now and the FMAP then. I am not picking on Ohio, but by 
our calculation Ohio's real FMAP is 4.5 percent higher than the 
statutory FMAP. And if you want to pick on a State like 
Mississippi, which is the poorest, that hasn't been quite as 
clever, I mean, spending more money on it, my argument last 
winter was you are going to split the money in the pot and put 
$10 billion in, you ought to give it to the people that haven't 
fudged. Why should we be handing it out to everybody whether 
they have played under the rules of the program or not? And we 
have essentially handed the money out across the board. And my 
argument would have been let's look at the real FMAP and see 
what they are getting.
    Mr. Strickland. So is Ohio fudging?
    Mr. Scully. Ohio is on the margins of being----
    Mr. Strickland. Is Ohio fudging?
    Mr. Scully. [continuing] on relatively good behavior.
    Mr. Strickland. If Ohio is fudging, I invite you to come in 
and solve the problem.
    Mr. Scully. I have spent a lot of time talking to them, and 
they have been very straightforward with us, but the fact is 
that over the years there are about 27 States that have 
successfully enhanced their match. Ohio is probably not in the 
world champion category.
    Mr. Strickland. You just said Ohio was fudging, and I want 
to get to the bottom of that.
    Mrs. Wilson. Okay. Thank you, Mr. Strickland.
    Ms. DeGette is recognized for 8 minutes.
    Ms. DeGette. Thank you, Madam Chairman.
    Mr. Scully, I share your concern and repulsion for people, 
States or institutions who are gaming the system, but I share 
some of the skepticism of some of my colleagues about this as a 
solution, and I think we should try to work together to try to 
find ways to stop this kind of behavior. You may not have the 
answer today to some of the questions I would like to ask, but 
I would like you to supplement it if you can in writing.
    You were talking about--one thing you talked about was 
senior citizens gaming the system by transferring assets, and 
we certainly have heard about that anecdotally over the years. 
I am wondering if you are aware of any studies or evidence to 
see how extensive this is.
    Mr. Scully. There are a number of studies. I looked at some 
last night. There were a couple--I think it was Colorado 
actually has and Connecticut has a fairly extensive one. And 
this has been debated in a lot of State legislatures with great 
pain about what the look-back should be, what the asset level 
transfer should be, how much is excluded from your assets. But 
it is a fact, as a former lawyer, there is a significant bar in 
this country with regard to transferring assets.
    Ms. DeGette. Do you know how extensive it is?
    Mr. Scully. Very extensive.
    Ms. DeGette. I know a lot of States like Colorado have 
enacted legislation to try to make it more and more difficult 
to do this, so that is why I like--I mean, I think people 
recognize it is a problem and----
    Mr. Scully. I guess my solution to this, just to be clear, 
is not necessarily to ratchet down this to make it tougher. You 
could have a good argument about what this should be. My--one 
of the suggestions that Secretary Thompson and I are working on 
is that a lot of these people that are transferring assets to 
their kids--for example, my mother is not wealthy.
    Ms. DeGette. I am sorry. I only have a few minutes.
    Mr. Scully. Okay. I will answer it after you are----
    Ms. DeGette. Thanks. And something else, and this is an 
issue I work on a lot, you probably know, is the 
disproportionate share of hospitals. And you were talking about 
hospitals gaming the system by putting in huge amounts of bills 
to the State for operations that should cost less, and I was 
really puzzled by that. And the reason was, as you might know, 
Ed Whitfield and I have been working for a number of years on 
trying to fix DSH reimbursements, and what I am wondering if 
there is not some incidence of safety net hospitals putting in 
these types of reimbursement requests just because they are so 
desperate to get funds.
    And let me just give you a little background. One analysis 
recently found that hospitals lost over $9 billion on Medicaid 
and uninsured patients in 2001 even with DSH funding. And if 
you look at the recent statistics, DSH funding has gone down 
since 1998 from $10.3 billion to $8.7 billion nationally, and 
yet the number of uninsured, as we have just seen, is 
increasing.
    I will tell you, the DSH hospitals in my district, I don't 
think they are trying to game the system. I think they are 
trying to get some reimbursements for all of the uninsured 
people that they are trying to treat, and I think Ed would say 
the same thing if he was here.
    Mr. Scully. If we could find a way to make sure they kept 
the money, that would be great, but what happens was I used to 
run a hospital association for 7 years, and what happens in 
many cases, the hospitals transfer the money to the State. They 
put it up for DSH. They get the match back, and the hospitals 
either get nothing back or a small percentage, and the State 
keeps the rest for other purposes. So if we can find a way to 
make sure it is actually going to indigent care, I would be all 
for it.
    Ms. DeGette. Well, do you think we should just eliminate 
DSH funding?
    Mr. Scully. No. I was involved in capping. What happened--
--
    Ms. DeGette. Well, what could we do to give the hospitals 
the money they actually need?
    Mr. Scully. Well, make sure they actually get the money, 
and it doesn't get----
    Ms. DeGette. Well, how are you going to do that if you 
block grant all the money to States----
    Mr. Scully. Well, we wouldn't block grant----
    Ms. DeGette. [continuing] and make this optional?
    Mr. Scully. I would be happy to work with you on trying to 
make sure that the money actually goes to the hospitals because 
that is where it is supposed to go. When I first discovered the 
Medicaid DSH program was in evidence in 1989, it was $200 
million in West Virginia and Alabama. By 1991, it was $13 
billion, $12.5 billion. And we have capped it, and we have 
limited it, and it is actually pretty flat.
    Ms. DeGette. But that is going down. DSH reimbursements 
have gone down, but the number of uninsured have gone up, and 
the people at the DSH hospitals in Colorado tell me--their 
problem isn't getting the money back from the State. Their 
problem is the caps we have put on it through the 1997 BBA.
    Mr. Scully. Well, I believe that if you actually went to 
the hospitals and said to them--and they are scared to death of 
this question----
    Ms. DeGette. I do go the hospitals. I do ask them that, and 
I also asked the hospital association that.
    Mr. Scully. I been to every hospital in your district, I 
believe, and I think you are right.
    Ms. DeGette. Did you ask them that question?
    Mr. Scully. Believe me, I am intensely familiar with this 
question, and I would be happy to ask that question, but I can 
almost guarantee you would find that none of them get every 
dollar back that they put in.
    Ms. DeGette. Let me talk to you for a minute about the 
States' situation, because in your written testimony and today 
in your verbal testimony, you said that one of the big problems 
is States use this Medicaid money and then divert State funds 
off to other purposes like highways and stadiums. And I think 
that was probably true in the 1990's. But I have a State right 
now where last spring the legislature faced a $900 million 
deficit, and they cut--what they did then was cut $61 million 
for medical programs for the poor, including Medicaid. I am 
going to guarantee you they weren't saying, ha, ha, let's take 
our Federal dollars and then put our State dollars somewhere 
else. They don't have the money. And I think this is true in 
all 50 States because according to a Kaiser report, all 50 
States executed cost-containment plans in fiscal year 2003.
    And so my question is instead of a complicated proposal 
that we would call a block grant proposal, you would call 
something else, to try to cap Federal money in the States, 
wouldn't it be better for us to try to work with States on 
waivers and other kinds of ways where they could really give 
relief to poor people and seniors and not have to worry about 
it rather than this brand new scheme?
    Mr. Scully. Well, I would argue we haven't tried to cap it. 
We have had a 37 percent increase in Federal spending on 
Medicaid since I have been in job. So it is not like--we have 
expanded coverage, we have encouraged more enrollment, we have 
done everything to expand the program. What we are asking from 
the States is that they actually match with matching real 
dollars, and I don't think that is an unreasonable request. And 
I know for a fact that Colorado is not one of the--I think you 
can look at my chart. Colorado has not been one of the States 
that has maximized reimbursement. They have actually generally 
played very much by the rules.
    Ms. DeGette. Well, we are all fiscally conservative out 
there. But the point is in a place like Colorado, I think under 
a scheme like this, they may actually suffer in reimbursement; 
certainly some of the reimbursements for SCHIP and other 
discretionary programs, but the State does not have that money, 
or for DSH. They don't have the extra money.
    Mr. Scully. This is purely voluntary. If Colorado looked 
and said this is not a good deal for us, and we don't want to 
do it, they don't have to do it. Even if our proposal passed as 
it was, we assumed half the States would say this is a good 
deal and take it. If they don't think it is a good deal, they 
don't have to do it.
    Ms. DeGette. And then I guess this is one problem a lot of 
us on this side have is then you get into a real patchwork of 
50 different States saying 50 different things.
    Mr. Scully. It can't get to be more a patchwork than it is 
now.
    Ms. DeGette. Well, I think I might disagree with you on 
that, because at least under current law, there is some 
guaranteed benefits, and I am not sure that that would happen 
under your proposal.
    Mr. Scully. Every guaranteed benefit, if you are a 
mandatory beneficiary under the current law, all this is 
optional coverage. No State could have dropped one single 
beneficiary that they are required to cover now. That was part 
of the proposal, the mandatories had to be covered and had to 
be matched. Any one of these two we are talking about any State 
could drop tomorrow if they wanted to. We are trying to give 
them the flexibility not to drop them and have more flexibility 
in how they covered them, and if they didn't want to do it, 
they didn't have to.
    So I just think that in fairness--and I understand, you 
know, I used to be a Senate staffer. I probably would have come 
up with the same talking points. But in fairness, this is not a 
block grant, never was, and has been largely misrepresented, 
and we would be happy to start from scratch and talk about ways 
to fix the Medicaid program.
    Ms. DeGette. I would like to spend some time talking 
particularly about DSH because I think it is being unfairly 
characterized, and it really is the safety net that is keeping 
sick people who are not even on Medicaid alive. And I think we 
need to really figure out a way to make that system work.
    Thank you, Madam Chairman.
    Mr. Scully. Thanks.
    Mrs. Wilson. Thank you very much, and thank you both very 
much for joining us this morning. We very much appreciate your 
being here, and we look forward to continuing this dialog.
    Mrs. Wilson. I would at this point like to introduce and 
ask to come forward the second panel that will be testifying 
today. Delegate Adelaide Eckardt from the Maryland State House, 
and Dr. Diane Rowland, the Executive Vice President of Health 
Policy for the Kaiser Family Foundation.
    Mr. Brown. Madam Chair, could I ask unanimous consent to 
offer these letters from various groups in the record about the 
whole issue of block granting and caps and all of that?
    Mrs. Wilson. Without objection.
    Thank you. Thank you both very much for joining us today. 
We have--your entire statements will be put into the record. 
And I would ask you each to summarize your remarks and share 
with us the high points of your remarks, and then we will open 
it up for questions.

 STATEMENTS OF HON. ADELAIDE ECKARDT, REPRESENTATIVE, MARYLAND 
   STATE HOUSE; AND DIANE ROWLAND, EXECUTIVE VICE PRESIDENT, 
            HEALTH POLICY, KAISER FAMILY FOUNDATION

    Ms. Eckardt. Good afternoon. I am Delegate Addie Eckardt 
from the Eastern Shore of Maryland, and I am here today to 
share with you my thoughts on Medicaid reform.
    I would like to start by saying we really are in the best 
and worst of times. We are very fortunate because we do have a 
Medicare program, and we do have a Medicaid program. The 
Medicaid program, I would say, has been very successful in 
attempting to provide health insurance, health coverage for 
those most vulnerable citizens in our constituency and our 
States. But I would suggest to you, and I am going to kind of 
cut to the chase, that there are a couple of things that we 
need to keep in mind as we proceed.
    I believe, Mrs. Wilson, you suggested that we need to look 
at the elements of wellness, of personal responsibility, of 
caring for families as we proceed, and I am going to underline 
a number of the strategies to facilitate reform that have 
already been stated.
    First of all, I believe that there does have to be 
continued flexibility for the States both to give them a better 
way to deal with eligibility and with the benefit structure. 
And I am going to use one of the examples that happened to us 
in Maryland. We had a program a number of years back called 
Kids Count, which we attempted to use some Medicaid funds to be 
able, along with State funds, to provide some health care for 
kids, but we did that before the SCHIP program. When the SCHIP 
program came along, then we kind of were penalized because we 
thought we could just roll our Kids Count program into the 
SCHIP program, and because there were certain requirements for 
both eligibility and benefits, we weren't able to do that. And 
we thought that may have been a more cost-effective way, while 
providing an essential benefit package to more kids.
    What happened is that we had to go back and look at a 
number of different options and waivers to be able to then do 
the SCHIP program. We expanded that program to go way above the 
Federal poverty level to above 300 percent a number of years 
back. And, in fact, we were so diligent with our enrollment 
that we funded--I projected funding for about 60,000 children, 
and we wound up having over 100,000, which left us with a 
little bit of a shortfall.
    This past year in our legislative session, we went back to 
revisit how we looked at that program, and, in fact, we did 
limit the enrollment for the high end for those people at 300 
percent of poverty while we left open the lower-end program, 
which was for those people below the Federal poverty level, 
which we thought was important.
    The reason I am sharing that with you is that I think 
there--because we need that additional flexibility because we 
have found that even as we expanded the program, we weren't 
enrolling all of those people who are most vulnerable and most 
poor. And I suggest that we might use the SCHIP program in 
thinking about our seniors.
    Maybe we need an SCHIP program to include our dually 
eligible population, which is presented as, you know, another 
dilemma because of the high cost of the increasing cost of 
long-term care. If we could look at the dual-eligible and maybe 
get some pilot programs, as you have done a lot of the 
demonstration waivers, both with funding from Medicare and from 
Medicaid, to be able to then institute a truly managed care 
program--and I say managed care in quotes because I don't mean 
a managed cost program. You are exactly right when you talk 
about a lot of our health care delivery system is based on what 
is reimbursed, not what is in the best interest of the 
populations that we serve--in States I believe are truly 
genuine in their attempt to provide the best care, the most 
cost-effective care to our most vulnerable populations. And I 
think they, in fact would be able to do that.
    I think we also need to take a look at the life span. If 
you are talking about kids and you are talking about senior 
care, you have everybody else in between. We fund low-income 
pregnant moms and kids, but there is no provision for low-
income dads. And so you get a very difficult situation, 
particularly when it comes to things like dental care and other 
kinds of care.
    We would like to treat the family as a whole, and we have 
tried to figure out in Maryland where is the best place to do 
that and how is the best way to do that. So even though we are 
putting a lot of energy into the SCHIP program, which I think 
is good, and it is almost like a front-loaded program, we need 
to put our dollars there right now and make sure we have 
efficient programs in the States, giving the States the 
flexibility, because my premise is that over the long haul, 
those individuals in those programs will value medical care.
    We have instituted some copays and some premiums at a 
nominal level, because my experience, my 30 years experience in 
working in psychiatric and mental health care, is that when 
people are able to pay a little bit, then they take some 
personal responsibility and some ownership. If you look at our 
federally qualified health centers, they will tell you that if 
individuals pay a little bit on a copay when they come into the 
center, they think twice about calling the center and walking 
in for every cold, every sniffle, every concern that they have 
with their kids or with their families.
    So I think we do have to institute measures along the way 
to help people, A, value health and wellness and be able to 
maintain an element of self-sufficiency as they move forward 
and not to erode the existing private health insurance market. 
So all of these things have to be taken into consideration when 
you move forward and take the Federal program and figure out 
how you provide the most--the best resources or resources to 
the State so that they can get out of the patchwork quilt 
business.
    One other way I think we need to move forward is to provide 
tax deductions for long-term care insurance. I would like to 
see, personally, tax deductions for any health insurance 
because I think that again builds those incentives, but long-
term care insurance would be a place to start.
    The other thing that has been talked a lot today has been 
the way that folks divert their financial resources when you 
have to go into a nursing home, and that is a very prevalent 
practice, and it is spread by word of mouth, and it is spread 
sometimes by well-meaning organizations. And I think why that 
happens is because many people find that the kind of care that 
they need, because they wait too long, is through the Medicaid 
system and through the Medicaid reimbursement.
    My mom had a stroke a number of years ago. She was healthy 
most of her life. So I agree with the fact that most of the 
health care dollars are spent in the last year or two of an 
individual's life. She had a stroke. She had some financial 
resources, but she had a stroke in one State. She was sent to 
another State for health care. And then it became like an 
assembly line. Whoever pays for what is what she got, not what 
she needed. And I would say to you that ultimately we brought 
her back to Maryland. She did have the financial resources, so 
we were able to provide a degree of care for her, but it was 
not what I would have desired. It was choppy, it was 
insensitive, it was disrespectful, I think, of her, and of the 
family, and we were left on our own.
    And I am a health care provider, and I hear the story over 
and over again. I have worked diligently for over 30 years to 
be able to make a contribution to health care so that all of 
our citizens have access to health care, and I will continue to 
champion that. So I would urge you, and I would suggest, that 
now is a good time to look at reform. It is good to look and 
take an evaluation of the programs that we have because you 
have a very daunting task. Are the States in budget crisis? 
Yes, they are. But I think, again, this is a good time to look 
at that because I believe States are going to be very conscious 
about how they deliver health care to their citizens, because 
it will be too costly if we don't do otherwise. Thank you.
    [The prepared statement of Hon. Addie Eckhardt follows:]
  Prepared Statement of Hon. Addie Eckardt, Delegate, Maryland State 
                                 House
    Medicaid the government program that pays for the costs of 
providing health care coverage to 44 million low-income individuals 
continues to be a significant program across the country. Over the 
years efforts continue to provide for the most vulnerable citizens. 
States and the Federal Government fund the program jointly, with the 
respective percentages for each state determined by the use of the FMAP 
(Federal Medical Assistance Percentage) formula that is based on the 
state per capita income. In the fiscal year (FY) 2001, total Medicaid 
expenditures totaled $228 billion, with the federal share equaling 
approximately 57 percent of the total. The federal share of the 
Medicaid expenditures currently represents 7 percent of all Federal 
outlays, while the state share of Medicaid spending accounts for 
between 15 and 20 percent of states' total expenditures.
    Medicaid covers health care expenses for four primary low-income 
populations: 1) children, 2) parents of children and pregnant women, 3) 
the aged, and 4) the blind and disabled. Approximately three quarters 
of the current Medicaid population consists of children and other 
adults, with the remaining quarter consisting of the aged and disabled 
persons. The aged and the disabled, however, consume two-thirds of all 
Medicaid expenditures, principally through their use of long-term care, 
pharmaceuticals and related services. Statutory mandates require that 
states cover certain populations, e.g. children under age 5 with family 
incomes below 133 percent of the Federal Poverty Level (FPL), while 
states may elect to cover other ``optional'' populations, such as 
children age 6-19 with family incomes at or below 100 percent of FPL.
    Medicaid covers two distinct types of health care services: those 
that are statutorily mandated and those that are optional. Statutorily 
mandated services include inpatient and outpatient hospital care, 
physician services, early and periodic screening, diagnostic and 
treatment services and immunizations. Optional services include 
outpatient prescription drugs, dental care and vision for adults. About 
two-thirds of all Medicaid expenditures are attributable to services 
for optional populations and benefits.
    According to a report by the Kaiser Commission on Medicaid and the 
Uninsured, States are beginning what is for some the fourth consecutive 
year of fiscal stress. State tax revenues declined significantly in 
2002 and remained at that low level throughout 2003. As they completed 
their 2003 fiscal year and developed budgets for the fiscal year 2004, 
states faced total budget shortfalls of at least $70 billion. To close 
these large budget gaps, states reduced planned spending and some began 
to raise taxes and fees. After the beginning of fiscal year 2003, 
states reduced budgeted spending levels for the year, and many states 
proposed to reduce fiscal 2004 spending.
    These fiscal conditions place significant pressure on Medicaid, the 
state/federal program that funds health and long term coverage for 51 
million low-income Americans. Medicaid is generally the states' second 
largest budgeted item. At the same time that the state revenues have 
fallen, spending on the Medicaid program has been increasing 
significantly, reflecting increasing health care costs and the growing 
number of people living in poverty as a result of the weak economy.
    States have been implementing many new measures to control their 
budgets in the face of the declining revenues. The Kaiser Foundations' 
report outlines their conclusions all of which, I believe, reflect a 
need to reform Medicaid at the Federal level. I am here today to share 
with you my thoughts for your consideration as you review the Medicaid 
program, the increasing numbers of uninsured and underinsured, and our 
declining revenues.
    The Medicaid program serves an important role in the provision of 
health care for some of the sickest and most vulnerable citizens in 
this country. It has been very successful improving care to individuals 
who would otherwise be without health care. For instance, in Maryland 
all children below the federal poverty level have access to care, 
including for the first time ever access to Treatment for Substance 
Abuse and Mental Health. This has resulted in a proliferation of 
providers for those services. Also in Maryland in our enthusiasm to 
provide coverage for as many kids as possible we enrolled more than we 
anticipated and funded. When we, on the budget committee attempted to 
freeze the enrollment of the program until the funding levels equaled 
the service demands, we were accused of limiting services. It is 
important to me that a program work efficiently before expansion 
occurs. Probably some advocates may characterize any effort to reform 
and improve Medicaid as an attempt to dismantle the program. This is 
simply not the case. In fact, as a health care provider/RN, I am 
committed to ensuring that Medicaid beneficiaries continue to receive 
access to high quality care and I believe that we can improve the kind 
of care they receive and how it is provided.
                            reform measures
    There are many challenges currently facing the Medicaid program. 
One of the primary problems is that the current rules limit the states' 
ability to provide the best care to the most needy citizens. The 
current Medicaid structure attempts to impose one set of rules and 
provide one standard set of benefits to a varied and diverse Medicaid 
population state by state. Moms and kids, the elderly, and the disabled 
all have different needs and would benefit from very different coverage 
packages. States need flexibility to determine eligibility and tailor 
different benefit packages to best meet the needs of these populations, 
rather than having to adhere to the fixed prescriptive formulas for 
eligibility and benefits.
    Until recently states have not been allowed to design 
individualized packages without losing the federal monies. We in the 
states have appreciated the increased flexibility given in the SCHIP 
program, which gives states a greater degree of autonomy and control in 
how they design their benefit structure and provide coverage for 
children. States can tailor their programs consistent with 
beneficiaries' needs and existing government structures. States are 
under tremendous fiscal constraints, but cannot afford to drastically 
limit benefits because of the increasing pressure on our hospitals for 
treatment when other measures fail. If health care is not offered early 
through community based services and as we face the increasing numbers 
of citizens needing long-term care, our costs will continue to soar. 
The emphasis will continue to be on the more expensive inpatient care. 
The pressure will also continue to remain on the use of Medicare 
dollars. Many of our most vulnerable citizens need comprehensive 
coordinated services that can be provided in the community. Careful and 
thoughtful attention is important, as states design effective programs 
using the available Medicaid funds.
    Flexibility also needs to be considered as we find solutions for 
the dually eligible Medicare-Medicaid beneficiaries. In Maryland within 
the Medicaid program 80 percent of the health care dollars are spent by 
20 percent of the beneficiaries. Long-term care costs are increasing 
with the increasing numbers of seniors. Can we think about allowing 
states to use monies from both programs to institute managed care for 
this population. The coordination of care would improve and many states 
would welcome the opportunity to develop pilot projects. What have we 
got to loose. Most states want to provide quality care to families and 
flexibility is the key.
    Another challenge facing Medicaid is how to deal with the culture 
of dependence that entitlement programs can sometimes breed. My state 
of Maryland has had tremendous success in interrupting the cycle of 
dependence in our Welfare to Work program. We have been able to work 
with individuals as they enter the workforce and assume productive 
roles in society. We also are taking advantage of the federal programs 
to allow those disabled individuals who are working to increase their 
earnings and not loose their healthcare benefits.
    The culture of dependence in Medicaid can lead to over utilization 
of services. It can inhibit more and more individuals from taking 
personal responsibility for obtaining their own health insurance, when 
it is available. When we increase the availability of free health care 
to higher income groups, we fail the poorest citizens and provide 
disincentives for employer sponsored coverage.
    Another problem is that of individuals inappropriately attempting 
to gain Medicaid coverage for expensive services such as nursing home 
care and prescription drugs. A veritable cottage industry has developed 
to coach individuals in ways to shift and/or hide their assets in ways 
that will allow them to qualify for Medicaid. This type of abuse 
undermines the public trust in these programs and most importantly 
takes dollars away from the care of those persons who need it most and 
for whom Medicaid was intended to protect. Strong measures need to be 
taken to prevent this practice.
    Prescription coverage is essential as we face the long-term care 
and increasing senior population. Without a Medicare Prescription 
coverage option, Medicaid foots the costs of those citizens who make 
difficult choices when the options include whether or not to buy food, 
fuel or medication. If the medication prescribed is difficult to obtain 
due to cost, citizens do not follow their plan of care and again the 
result is the utilization of hospital care. It is absolutely critical 
that we create a new drug benefit within the Medicare program to 
provide this assistance to our most vulnerable low-income citizens. 
Prescription drugs are the fastest growing expense within our states 
Medicaid budget, and individuals who are dually eligible are some of 
our biggest consumers of these drugs within the existing Medicaid 
benefit. Creating a new Medicare drug benefit will also allow for 
better coordination of care for Medicare services, which can lead to 
better clinical outcomes for these people.
    In summary I have attempted to share with you my thoughts regarding 
Medicaid reform. I have reviewed the current Medicaid programs and some 
of the current information that the Kaiser Commission has presented 
about the States' response to their increasing fiscal crisis and 
increasing numbers of uninsured. As the county slowly comes out of our 
economic decline, now is the time to do something and reform Medicaid 
to prepare for the future. States have been doing the best with what 
they have patching their public health care system with whatever they 
can find to provide for the most vulnerable citizens. It is the right 
thing to do.
    There are simply several ideas to keep in mind. Give states more 
flexibility--there are too many restrictions for managed care in the 
types of organizations and in regard to quality and access. Give states 
increasing flexibility with eligibility and benefits. Provide a way to 
limit the practice of hiding assets so that individuals have to utilize 
Medicaid. Encourage the use and tax relief for long-term care 
insurance. Develop pilot programs using Medicare and Medicaid funding 
to allow states to offer a managed care program for these individuals. 
Or better yet let the states develop plans and fund them on their 
creativity and ability to make the best use of the dollars for their 
populations. Provide incentives for states that promote health and 
personal responsibility and significant positive health outcomes. 
Remember that government closest to the people is the most effective 
and most responsive. Let the states decide whether they want to cover 
fewer people with more coverage or whether to cover more with fewer 
benefits.
    I appreciate the opportunity to come before you today and on such 
short notice. It is important to me that we spend taxpayer's money 
wisely but together figure out a way to provide affordable quality 
health care to our constituents. I look forward to working with you.

    Mrs. Wilson. Thank you very much.
    Dr. Rowland.

                   STATEMENT OF DIANE ROWLAND

    Ms. Rowland. Thank you. It is a pleasure to be with you 
today and to talk about the Medicaid program and the role that 
it plays.
    Medicaid is, in fact, the linchpin program that addresses 
the health and long-term care needs of this Nation's low-income 
disabled and elderly populations, and children and families. It 
is, in fact, the glue that fills the many cracks in our 
fragmented health care system, and as we have heard so often 
today, it shares many of the ills that face our overall health 
care system.
    Its most widely acknowledged role is as the source of 
health insurance coverage for 38 million low-income children 
and parents, and it has kept millions of poor children and 
their parents from adding to our growing uninsured population. 
As the census numbers that came out last week reveal, in the 
absence of Medicaid, we would have had an increase of 4 million 
instead of just 2.4 million to our uninsured population.
    However, for Medicaid it is the coverage of the health and 
long-term care services of the 8 million people with 
disabilities and 5 million low-income elderly that dominate the 
spending. And Medicaid is also the program that enables the 
Medicare program, in fact, to work for 7 million of Medicare's 
sickest and most poor beneficiaries, one-quarter of whom are in 
nursing homes. These dual-eligibles account for 14 percent of 
Medicaid beneficiaries and 42 percent of all Medicaid spending. 
Spending for them on prescription drug coverage alone 
represents 6 percent of total Medicaid spending and nearly half 
of all Medicaid spending on prescription drugs.
    The structure of our Medicare program provides States with 
the ability and the flexibility to broaden coverage beyond 
Federal requirements and to expand as need arises. About 65 
percent of all programs--spending in the program is, in fact, 
at State option, and of that optional spending, 83 percent goes 
to care for the aged and disabled population, with the bulk 
being for long-term care and prescription drug coverage.
    However, I would note that despite the rhetoric, Medicaid 
is actually a low-cost program given the population it covers. 
When we do adjustments for the health status of the population 
to compare Medicaid to private insurance, we see that spending 
per capita is actually lower in the Medicaid program than for 
the privately insured. Medicaid spends more overall because it 
covers a sicker population, not because it offers a broader 
benefit package. And despite the creative financing discussions 
that we have had earlier, the overwhelming share of Medicaid's 
dollars still actually go to pay for the care of our poorest 
citizens. And there is a growing cost of care for the elderly 
and disabled because of their greater health care needs.
    When we look at spending increases, we have heard a lot 
today about enrollment expansions, but, in fact, of the 
increase in Medicaid spending from 2000 to 2002 of $50 billion, 
60 percent of that was for the care of elderly and disabled 
individuals. So it is not our expansions to children that are 
the major culprit.
    But nonetheless, Medicaid spending has risen in recent 
years with the downturn in the economy and rising health care 
costs. However, the good news, or the bad news if Mr. Scully's 
numbers were right, is that in fiscal 2003, the rate of growth 
in Medicaid spending fell by nearly a quarter to 9.3 percent, a 
marked contrast to the 13.9 percent increase we saw in private 
insurance premiums in that year.
    As the States grapple, in fact, with their severe revenue 
shortcomings, there is a growing pressure to restrain Medicaid 
spending. Although it is the decline in State revenues and not 
the increase in Medicaid spending that is the major contributor 
to State budget shortfalls, nonetheless as a major budget item 
Medicaid is also being looked at for savings. Over the past 3 
years, in fact, 34 States have had to reduce eligibility or 
even more restrict their health care benefits for those being 
covered. The fiscal relief offered by the Congress has made a 
difference and moderated many of these cuts, but as you know, 
this relief will expire at the end of 2004.
    The strategy States have undertaken appear to have been 
successful in reducing the rate of Medicaid spending growth, 
but they also raise real questions about how the program will 
be able to meet the health care needs of low-income people 
whose numbers are growing. There are no easy answers to 
reducing the cost of providing care to over 50 million 
Americans who now depends on Medicaid. They are low-income 
children, but they are also persons with chronic mental illness 
and retardation, those with HIV/AIDS, poor Medicare 
beneficiaries, and those with severe physical and mental 
disabilities. The cost of caring for this population is high, 
reflective of their serious health problems, not excessive or 
unwarranted spending by the program.
    Program costs grow in response to downturns in the economy, 
the needs of an aging population and emerging public health 
crises and emergencies, and Medicaid's financing structure 
allows the program to respond. As we look to reform this 
program, we should be looking at finding ways to support and 
maintain essential coverage, to make sure that the coverage 
provided is meeting the health care needs of the population 
served, and to make sure that we are getting the kinds of 
health outcomes from those dollars that are warranted. Assuring 
that financing is adequate to meet the needs of America's most 
vulnerable and addressing our growing uninsured population 
ought to be among our Nation's highest priorities and a real 
commitment of our resources.
    Thank you, and I welcome your questions.
    [The prepared statement of Diane Rowland follows:]
  Prepared Statement of Diane Rowland, Executive Vice President, The 
     Henry J. Kaiser Family Foundation, Executive Director, Kaiser 
                Commission on Medicaid and the Uninsured
    Mr. Chairman and members of the Committee, thank you for inviting 
me to appear before the Committee today to discuss the issues and 
challenges facing Medicaid in providing health and long-term care 
coverage for the low-income population. I am Diane Rowland, Executive 
Vice-President of the Henry J. Kaiser Family Foundation and Executive 
Director of the Kaiser Commission on Medicaid and the Uninsured.
    The Kaiser Commission on Medicaid and the Uninsured is a 16 member, 
bi-partisan national panel established by the Kaiser Family Foundation 
in 1991 to serve as a source of information and analysis on the 
Medicaid program and health and long-term care coverage of the low-
income population. I am pleased to be here today to share the work of 
the Commission.
Medicaid Today
    Since its enactment in 1965 as companion legislation to Medicare, 
Medicaid has operated as a federal and state partnership to meet the 
health needs of the nation's most vulnerable populations. It has 
evolved from a program providing federal financing to states for health 
coverage of their welfare population to a program that now provides 
health and long-term coverage to 51 million low-income Americans at an 
annual cost to the federal and state governments of $205 billion in 
2002. It is now the nation's largest health care program.
    In our fragmented health care system, Medicaid is the linchpin 
program that addresses the health and long-term care needs of this 
nation's low-income disabled and elderly populations and families and 
children. Medicaid has a broad reach--it is the source of health 
insurance coverage for 1 in 5 American children and over a third of all 
Hispanic and African-American children, but it also provides health and 
long-term care coverage for 60 percent of nursing home residents, 44 
percent of people living with HIV/AIDS, 20 percent of people with 
severe disabilities and 15 percent of Medicare beneficiaries (Figure 
1).
    In meeting these needs, Medicaid accounts for nearly one of every 
five dollars of health care spending, nearly one of every two dollars 
spent on long-term care and over half of public mental health spending. 
Medicaid assists, on average, over one in ten state residents and is 
the largest source of federal support to states and a major engine for 
state economies, supporting millions of jobs across the country (Figure 
2).
    Medicaid's most widely acknowledged role is as the source of health 
insurance coverage for 38 million low-income children and parents. By 
providing fundamental health insurance protection, Medicaid keeps 
millions of poor children and their parents from adding to our growing 
uninsured population. With the enactment of the State Children's Health 
Insurance Program (SCHIP) in 1997 and the Medicaid expansions over the 
last decade, Medicaid and SCHIP now have the potential to reach all 
low-income children. Although more needs to be done to broaden outreach 
and facilitate enrollment to achieve full participation by all eligible 
uninsured children, the latest census numbers show that public coverage 
through Medicaid and SCHIP helped to offset the decline in employer 
coverage. While the number of uninsured grew by 2.4 million in 2002, 
Medicaid coverage kept another 1.6 million from being added to the 
uninsured and maintained coverage for children.
    It is not, however, Medicaid's role as a health insurer of low-
income families that provides Medicaid's most unique or costly 
undertaking. Medicaid's role in assisting 8 million low-income people 
with disabilities and 5 million low-income elderly people with both 
medical care and long-term care services dominates Medicaid spending. 
Although children account for half of all Medicaid beneficiaries, they 
account for only a small share of spending. Together children and their 
parents represent three-quarters of all beneficiaries and 30 percent of 
all spending, while the elderly and disabled account for a quarter of 
beneficiaries and 70 percent of spending (Figure 3). In 2002, per 
capita expenditures per child were $1,500 compared to $11,800 per 
disabled beneficiary and $13,100 per elderly Medicaid beneficiary. 
Higher utilization of acute care services coupled with long-term care 
spending for the elderly and disabled account for the difference 
(Figure 4).
    For low-income Medicare beneficiaries Medicaid coverage is 
particularly important. Although Medicare provides basic medical 
coverage, the required cost-sharing and gaps in benefits, most notably 
lack of prescription drug or long-term care coverage, leave many holes 
to be filled by Medicaid. The 7 million individuals with both Medicaid 
and Medicare--the ``dual eligibles''--are among Medicare's poorest and 
sickest beneficiaries. In addition to having low-incomes, these dual 
eligibles are also more likely than other Medicare beneficiaries to be 
in poor health, suffer from chronic diseases, and have limitations on 
their activities of daily living leading to long-term care needs 
(Figure 5). As a result, the dual eligible population accounts for 14 
percent of Medicaid beneficiaries, but for 42 percent of all Medicaid 
spending (Figure 6). Spending on prescription drug coverage alone for 
the dual eligible population represents 6 percent of total Medicaid 
spending--$13.4 billion in 2002--and represents approximately half of 
all Medicaid spending on prescription drugs.
    The structure of Medicaid provides states with federal matching 
funds for coverage of mandatory populations and services, but also 
enables states to obtain federal matching funds for a wide range of 
optional services and broader population coverage. Most notably, states 
are required to cover all children under the poverty level and most 
aged and disabled recipients of cash assistance under the Supplementary 
Security Income (SSI) program and have the option to cover children at 
higher income levels, their parents, and other low-income elderly and 
people with disabilities in the community and in nursing homes. 
However, coverage of non-disabled childless adults is not an optional 
category for coverage. With regard to benefits, states must cover basic 
physician, laboratory, and hospital services, but many benefits, 
including prescription drug coverage and community-based long-term care 
are covered at state option.
    Although the configuration varies from state to state, about 65 
percent of all program spending is at state option. However, in meeting 
the health and long-term care needs of the low-income population, the 
legislative language of ``State Option'' hardly applies to the 
population's need for the services covered--83 percent of optional 
spending is for the aged and disabled population and the bulk is for 
long-term care and prescription drug coverage (Figure 7). Without these 
``optional'' services and the broadened coverage at state option of the 
aged and people with disabilities, millions of America's poorest and 
sickest people would be without essential health and long-term care 
services.
    Moreover, despite its comprehensive coverage of services and 
limited cost-sharing, Medicaid is in reality a low-cost program when 
compared with other health care spending. Among children, per capita 
expenditures for those in Medicaid are significantly lower than for 
their privately insured counterparts (Figure 8). While per capita 
expenditures for adults in Medicaid are higher than the corresponding 
amounts for low-income adults who have private coverage, this is due to 
the much poorer health status of the adult population enrolled in 
Medicaid. When adults with disabilities are excluded from the analysis 
of both Medicaid and private insurance, per capita expenditures are 
significantly lower for Medicaid adults than for the privately insured. 
Medicaid spends more because it covers a sicker population.
    Although Medicaid is a substantial investment of federal and state 
dollars, it also provides an effective return on that investment in 
terms of improving access to care for our low-income population. 
Medicaid does a particularly good job in helping low-income populations 
close the gap in access to care and in connecting people to the health 
system. Uninsured children and adults are less likely to obtain medical 
care and more likely to postpone needed care and lack a regular source 
of care than those with Medicaid coverage (Figure 9). Among the elderly 
and disabled with Medicare coverage, Medicaid supplements Medicare 
coverage and provides access comparable to those with private 
supplemental insurance and notably better than that experienced by the 
population covered with Medicare only (Figure 10).
Medicaid Spending
    These roles make Medicaid both a complex and costly program. 
Medicaid is complex because it is not a single program, but an array of 
services and programs under a single name, structured and operated 
somewhat differently in each of the 50 states and the District of 
Columbia. It is a costly program because health care, and especially 
long-term care, in America is expensive and Medicaid covers those with 
among the most substantial health care needs--including those with 
severe disabilities and chronic health problems requiring on-going 
care.
    Medicaid spending is determined by the number of people covered, 
the cost of their medical and long-term services and the amount of 
services used. During the early 90s, Medicaid spending growth was 
particularly high, largely due to the use of provider taxes and 
donations and other financing mechanisms used by states to gain 
additional federal matching funds (Figure 11). Once these practices 
were curbed, Medicaid spending growth returned to levels more 
consistent with private spending and reflective of expanding coverage. 
A notable drop occurred in the period surrounding welfare reform, 
largely due to individuals losing Medicaid coverage during the welfare 
reform transition. This was also a time when cost increases for the 
private health insurance were at an all-time low (Figure 12). In recent 
years, Medicaid spending has increased as enrollment has grown and the 
cost of medical care has risen for both the public and private sectors.
    Over the 2000-2002 period, Medicaid expenditures for services grew 
by 12.9 percent overall--a rate comparable to the increases seen for 
private health insurance premiums. Although Medicaid is historically a 
low-paying purchaser of health care services, there is continual 
pressure on the program to keep pace with payment rates in the private 
sector in order to maintain access to care for Medicaid beneficiaries. 
As a result, the spiraling costs for health care also impact Medicaid. 
Just as for private insurance, prescription drugs costs had the highest 
rate of growth among Medicaid services, increasing 18.8 percent from 
2000 to 2002 (Figure 13). However, after several years of rapidly 
accelerating Medicaid spending growth, in FY 2003 the rate of growth in 
Medicaid spending fell by nearly a quarter, to 9.3 percent. This rate 
of growth, which is still substantial, stands in marked contrast to 
growth trends for employer-sponsored health insurance, which continue 
to increase and reached 13.9 percent that year.
    The rapid Medicaid spending growth has been driven, in part, by 
enrollment increases resulting from the loss of income and private 
insurance coverage during the current economic downturn, together with 
continued increases in hospital and prescription drug costs that have 
affected the entire health care sector. Yet, Medicaid spending 
increases on a per capita basis remained substantially lower than 
increases in per capita spending in the private sector--from 2000 to 
2002, Medicaid per capita spending increased on average 8.6 percent 
compared to over 12 percent increases in private insurance premiums per 
person. Moreover, Medicaid enrollment growth also helped to soften the 
recession's effects, stemming further increases in the number of 
uninsured. However, the increased enrollment of low-income children and 
parents is not the major driver of Medicaid spending increases--it is 
the cost of care for the elderly and disabled who depend on Medicaid to 
fill Medicare's gaps and provide assistance with both acute and long-
term care needs. The elderly and individuals with disabilities 
accounted for almost 60 percent of the $50 billion growth in Medicaid 
spending from 2000 to 2002 due to their extensive need for health 
service and their use of costly long-term care coverage (Figure 14).
The State Fiscal Challenge
    At the same time as these pressure push Medicaid spending up, 
states are facing extremely challenging fiscal conditions, and have 
been for several years. State tax revenues declined significantly in 
2002 and remained at that low level throughout 2003 (Figure 15). The 
recent falloff in state tax revenue is large even by the standards of 
recent history---the decline in state tax revenue is twice as big as it 
was in either of the two most recent recessions. Moreover, it is this 
revenue falloff, not the recent increase in Medicaid spending, that has 
been by far the major contributor to state budget shortfalls, which 
reached more than $70 billion this year.
    As states have grappled with the challenge of balancing their 
budgets in the face of declining revenues, most have devoted 
significant attention to implementing new measures to control their 
Medicaid spending growth. For fiscal year 2003, every state and the 
District of Columbia has put in place some Medicaid cost containment 
mechanism. Over the past three years, 34 states have reduced 
eligibility and even more have restricted health care benefits (Figure 
16). These strategies appear to have been successful in reducing the 
rate of Medicaid spending growth, but they also raise real questions 
about how the program will be able to meet the health care needs of 
low-income people, whose numbers are growing.
    The outlook for state budgets in FY 2004 and 2005 remains 
challenging. The state revenue picture remains depressed. Spending 
pressures continue to build. States have exhausted a lot of one-time 
measures they have used to balance their budgets. Medicaid expenditure 
assumptions in FY 2004 appear optimistic, and Medicaid budget 
shortfalls are likely in a majority of states. Finally, the federal 
fiscal relief Congress provided in June, which helped states avoid 
making additional and deeper changes to their Medicaid programs this 
year, expires at the end of fiscal year 2004. This, along with present 
expectations of low revenue growth, will leave states with significant 
gaps in their budgets for FY 2005. As states enter another year of 
Medicaid cost containment, they will continue to struggle to balance 
the health needs of their low-income citizens with the need to close 
what are for many states gaping holes in their overall state budgets.
Looking Ahead
    Medicaid's role in providing health and long-term services to our 
nation's most vulnerable people and its widening safety net 
responsibilities have brought notable improvements in coverage of low-
income families and assistance to the elderly and individuals with 
disabilities. As the primary source of financing and coverage for the 
low-income population, Medicaid has been a critical force in moderating 
the growth in America's uninsured population over the last three 
decades. Without Medicaid, millions of our nation's poorest children 
would be without health insurance. And, Medicaid continues to provide 
coverage beyond that of private insurance or Medicare to the most 
vulnerable and frail in our society--acute and long-term care services 
for persons with chronic mental illness and retardation; medical and 
long-term care services and drug therapy for those with AIDS; 
assistance with Medicare's premiums and cost-sharing and prescription 
drug coverage for poor Medicare beneficiaries; and home-based and 
institutional care for those with severe physical and mental 
disabilities that require long-term care. In the absence of Medicaid, 
it is hard to envision how these enormous societal needs would be met.
    Yet, one of the most daunting challenges facing Medicaid's future 
is how to meet the growing need for health and long-term care coverage 
within the constraints of federal and state financing. The fiscal 
situation in the states, coupled with the growing federal deficit, 
makes assuring adequate financing and meaningful coverage for low-
income families, the elderly, and people with disabilities a growing 
challenge. Yet, it is a challenge we must meet with responsible 
proposals that assure that the most frail and vulnerable among us are 
protected and able to obtain the health and long-term care services 
they need.
    There are no easy answers to reducing the cost of providing care to 
the over 50 million Americans who now depend on Medicaid for health and 
long-term care assistance--the poorest, oldest, frailest, and most 
disabled of our population. The cost of caring for this population is 
high, reflective of their serious health problems, not excessive 
spending by the program. Program costs grow in response to downturns in 
the economy, the needs of an aging population and emerging public 
health crises and emergencies. Efforts at reform should be directed at 
finding ways to support and maintain the coverage the program offers 
while balancing the responsibilities for coverage and financing between 
the federal and state governments. Assuring that financing is adequate 
to meet the needs of America's most vulnerable and addressing our 
growing uninsured population ought to be among our nation's highest 
priorities.
    Thank you for the opportunity to testify today. I welcome your 
questions.



[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Mrs. Wilson. Thank you both very much. I think I will start 
out here with a few questions.
    Addy, how would your mom's care have been different--if we 
gave you a magic wand and you could change the Medicaid system, 
how would you change it so that your mom's experience would be 
different?
    Ms. Eckardt. I am very biased.
    Mrs. Wilson. Bias is okay.
    Ms. Eckardt. I am biased in that. I would have liked to 
have somebody who had managed her care, somebody who truly--who 
had managed her care, not managed, as again I said, the cost. 
The insurance companies--and again, she was partly on the 
insurance company, and that was a problem. It is a problem 
across State lines because States differ. We could not have had 
her--she was from--living in Delaware. We thought she was in a 
facility where there was managed care in that facility, and 
that wasn't true. We thought it was assisted living, and that 
really wasn't true because I didn't realize that what it 
constitutes, assisted living, in one State is not assisted 
living in another State.
    So, I mean, there are some the things that we have tried to 
deal with in Maryland with the community services waiver, long-
term care and community services waiver. She went to 
Pennsylvania, and, of course, then their reimbursement differs 
for hospital care. So they wanted her out of there as soon as 
possible, and she couldn't go back to where she was. We wound 
up bringing her back to Maryland thinking, well, when her 
resources run out, we know Medicaid will pick it up. Well, that 
is when I learned how people deal with spending down because I 
was--everybody tells you, they have been there, and they now 
how to divert the money so that you can wind up qualifying for 
the medical assistance component.
    I would have liked somebody to have worked with her to 
really facilitate the prescription end of it for the--because 
for the first time she had to take like 12 different 
medications, and it was costing us like--would have cost about 
$800 a month or more. So that eats up resources right then and 
there.
    And the physicians didn't talk to each other. And I thought 
from my nursing experience, nurses are good ones to be able to 
get people to talk together who usually don't talk to each 
other, and that may have facilitated her care.
    If she had had a little bit more time for rehab, that would 
have made a difference because I think she came out 
prematurely, and I--of course, what happens then, people get--
if they are not managed well, they wind up getting heart 
attacks, and then they go the hospital, and then they get more 
expensive hospital care. And I thought a lot of that was 
unnecessary. And that is the same story I hear from lots of 
constituents.
    Mrs. Wilson. Okay. Dr. Rowland, in your testimony you 
talked about Medicaid, and in particular that Medicaid spends 
less for children than the comparable private insurance plans. 
And I think the words that you use, in the written testimony 
anyway, it is an effective return on investment in terms of 
improving access to care for our low-income population. Do you 
have data or does the Kaiser Family Foundation have data on not 
just improving access to care, but does it improve health 
outcomes compared to those with private insurance?
    Ms. Rowland. There is very limited data, obviously, on the 
improvement in health outcomes because we don't tend to track 
Medicaid populations over time. That requires really a 
longitudinal study. There are some limited studies that have 
shown, obviously, that those who are uninsured have poorer 
health outcomes than those with insurance, and Medicaid is 
included in the insured population. But the length of time for 
health insurance purposes that people are on the Medicaid 
program has generally been too short to pick up some of the 
health outcomes that you are talking about.
    In addition, there is really virtually no data collected at 
the State level on the Medicaid program or on the outcomes for 
the population.
    Mrs. Wilson. In your experience with Kaiser, and I know you 
work with a lot of States in looking at the different health 
care programs, are there States who do have good--who are 
models for looking at improving health status as opposed to 
just paying for the bills as they come in and managing the 
claims?
    Ms. Rowland. We think that many of the States have really 
tried through their use of managed care to provide for a better 
medical home for many of the Medicaid children that are 
enrolled in the program, but when we look at the patterns of 
care in Medicaid, the real programs that seem to have some of 
the most effective outcomes are more of our pace programs where 
we are really looking at coordinated care for very frail 
elderly people, and we see there some advantages. But overall, 
I would say that most States have been trying through their 
children's programs to provide better access to immunizations 
and better access to broader coverage, but have not necessarily 
yet seen the benefits of that in terms of long-range outcomes.
    Mrs. Wilson. Thank you.
    Mr. Stupak is recognized for 5 minutes.
    Mr. Stupak. Thank you.
    Dr. Rowland, I have a two-part question, if I may. And I 
know you sat through it, and I used some of your statistics 
there about what has been happening over the past 3 years in 
the Medicaid population with 50 States having taken action to 
control the drug costs, 50 States have reduced or frozen 
provider payments, 34 have reduced or restricted eligibility, 
and 32 States have increased copayments. These numbers indicate 
that the State actions are having a far-reaching impact on 
health coverage for low-income families at a time when 
enrollment is increasing, as you said in your testimony, due in 
part to our sluggish economy.
    If we continue on this current economic decline, is it 
likely that we will see improvement in people's ability to 
access certain health care services, or is it more realistic to 
believe that low-income family pieces will continue to face 
barriers and restrictions while trying to obtain certain health 
care services?
    Ms. Rowland. No. I think that we are clearly seeing--we are 
clearly seeing that as the States have tried to grapple with 
their revenue decline, which is their major contributor to 
their economic financing problems, that they have will to turn 
first to rainy day funds, into other sources of funds to try 
and maintain their Medicaid coverage. But we are now getting to 
the point where with the fiscal relief last year, some cuts 
have been moderated, but all States are saying that by 2005 
fiscal year they will be facing severe constraints in their 
Medicaid program.
    I think we will see a continued erosion in some of the 
coverage for especially parents, so that the parents of low-
income children are going to see real rollbacks in their kind 
of coverage. And we are also seeing, obviously, in the Medicaid 
programs coverage of prescription drugs, that that population 
heavily dependent on them are the elderly and the disabled, and 
there, even there, the benefits are beginning to be tighter.
    I think the good news is that States have really valued the 
kind of coverage they have been providing through the Medicaid 
program, tried to keep from rolling it back wherever they 
could, and have taken all the easy cuts to date, and so now 
what we are going to have to see is, without some additional 
financing assistance, of some real rollback in the kind of 
coverage that has been available.
    Mr. Stupak. Well, most of the States, as I am sure you are 
aware, and I know they mentioned California earlier in the 
earlier testimony today, most of them have to balance their 
budget, unlike the Federal Government. So you have to look for 
ways to balance the budget and those expenses, which Medicaid 
is a big expense for the States, that is where they start 
cutting. In Michigan they have cut about 7 percent of the 
hospital reimbursements last year, and they are looking to take 
$110 million out of Medicaid reimbursements to the hospitals in 
Michigan, and I don't know how they are going to do it.
    Ms. Rowland. The other piece is that a Medicaid cut for a 
State is a double-edged sword, because to save a dollar of 
State money, they have to cut $2 or more out of the program. So 
it really then begins to deplete the economic value because 
Medicaid is also a source of much jobs and much income 
generation in the economy of these States.
    Mr. Stupak. We all had some discussions on this side of the 
aisle, at least with Mr. Scully, about this block granting that 
they would like to do, which really would relinquish more 
responsibility and accountability to the individual States, and 
in this current economic crisis, I am sure the impact or the 
ability for low-income families to obtain health care that they 
need will really be greater.
    If we block grant, are we not giving more responsibility 
and accountability to the individual States at a time when they 
are under economic difficulties to even try to provide basic 
services under Medicaid?
    Ms. Rowland. Well, certainly, any way in which you cap the 
financing on the program limits the ability of States to 
continue to raise the program's profile in times of economic 
emergencies or other hazards, so that when you put a limit on 
the program, you may be giving greater flexibility in terms of 
who can be covered and what the benefits are, but you are 
really limiting the flexibility to respond to emergencies, 
changes in the States' coverage, changes in the economy.
    And what we have currently seen with the Medicaid program 
is that the downturn in our economy has moved many people from 
middle-income groups into the lower-income groups where they 
now qualify for the Medicaid program, and it is, in fact, the 
matching formula of Medicaid that at least has allowed States 
to have the Federal funds to go along with that. And I think 
when you put a limit on the program, you can't be sure what the 
conditions will be in the future that will change that, so it 
could, in fact, be restrictive.
    I know in conversations with the State of Ohio, they have 
told us that they would have done worse under the 
administration's proposal than under their current Medicaid 
spending even though they are under strict fiscal constraints.
    Mr. Stupak. Do you have some thoughts on how we should 
revamp the system so as to provide the most care to the most 
people and insure that this vital care is not eliminated by 
State budget deficits or other competing priorities? Do you 
have some thoughts on it?
    Ms. Rowland. Well, certainly, I think that looking at the 
coverage of the dual-eligible population and the costs incurred 
by that population and what the appropriate level of Federal 
financing for the dual-eligibles versus State financing is, 
picking up the cost of their Medicare premiums and removing 
that from the State budgets, perhaps even going as far as to 
help relieve the $7 billion annually that States now spend on 
the Medicare dual-eligibles for their drug benefits would be a 
start at really realigning some of the fiscal responsibilities.
    As we look at the program, we have heard talk of swaps in 
the past. The swaps disadvantaged many of the States. What I 
think we really need to look at is where the Federal share 
should be greater, and where the States can maintain the 
coverage, and how to do that balance. But putting a cap on the 
funding doesn't seem to me to address the fundamental need to 
really secure financing for the most vulnerable in our society.
    Mrs. Wilson. Thank you.
    Mr. Stupak. Thank you.
    Mrs. Wilson. Mr. Brown for 5 minutes.
    Mr. Brown. I thank the Chair. I apologize for having to 
leave to cast a vote in another committee. I apologize. I 
didn't get to hear Mr. Stupak's questions, all the questions 
and answers.
    Implicit in much of the earlier testimony, Dr. Rowland, is 
that Medicaid spending is out of control. We have got to rein 
in Medicaid spending. And surely it is difficult for State 
budget writers, obviously. But a couple of questions.
    What is the estimated--what--how--what level are 
administrative costs with Medicaid?
    Ms. Rowland. It is somewhere under 4 percent; usually about 
3.5 to 4 percent.
    Mr. Brown. And what would you estimate the overhead costs 
for a private insurance?
    Ms. Rowland. Private insurance usually runs between a 10 
and 20 percent, more likely around 15 percent, overhead cost.
    Mr. Brown. Is that differential recent, or has that been 
for some time?
    Ms. Rowland. It has been historically there. Private 
insurance obviously has more marketing costs, a lot of other 
attributes that they build in.
    Mr. Brown. I think one of the myths that we deal with 
around here that we try to bat down from time to time is that 
these public health programs, public programs for health care, 
Medicare and Medicaid, are actually more efficient than the 
private sector and by many measurements, when the assumption 
too many people here make, it is the exactly opposite.
    Ms. Rowland. Well, actually, as my statement also shows and 
some of the research we have done, because private insurers 
tend to pay higher rates to providers than the Medicaid 
program, if you were to take a Medicaid beneficiary and put 
them in private insurance, it would probably cost you more per 
beneficiary than what Medicaid is currently paying. The real 
differential in Medicaid payment rates or per capita spending 
is that most people on the Medicaid program who are adults are 
either disabled or pregnant individuals who by their very 
nature have higher health expenditures.
    Mr. Brown. Okay. On the first panel, Mr. Scully made some 
points about mandated benefits driving up costs and how 
Medicaid should have more flexibility to tailor benefits to 
need. Are there--a couple of questions. Do all Medicaid 
beneficiaries use all Medicaid benefits? I mean, I--and are 
there any studies indicating mandated benefits aren't medically 
necessary?
    Ms. Rowland. Well, just as in your private insurance plan, 
you have a range of benefits that are covered. I am sure in any 
given year you don't use all of those benefits, and within the 
Medicaid program we would hope and we see that the individuals 
who need long-term care services use them, but a 5-year old 
child does not need long-term care, does not use long-term care 
benefits under Medicaid, so that in reality what we are talking 
about here is that States need to do a very good job of 
utilization control, and the managed care plans need to make 
sure that the services they are providing are the medically 
necessary ones. But individuals should not be using benefits 
even though they are covered that are not medically necessary 
for them.
    Mr. Brown. So as in all insurance there is a range of 
benefits that Medicaid offers. People use some of those 
benefits at different times in their lives. And the ones that 
are offered are not medically necessary for certain parts of 
the population at certain times. And when you enroll in 
Medicaid, you obviously don't know which of those benefits you 
are going to need at some point in the next year or 2 years or 
5 years, correct?
    Ms. Rowland. Correct. And Medicaid covers a very diverse 
population, and especially for the individuals with 
disabilities on the program, a broad range of benefits there 
exceeds that of any private insurance plan. But that is why 
most of those people have to turn to Medicaid for their 
coverage.
    Mr. Brown. So this whole term that Mr. Scully used as a 
flexibility to tailor benefits to need just doesn't really 
wash.
    Ms. Rowland. I believe the States currently have the 
ability to tailor benefits to need because that is how you 
provide medical care services.
    Mr. Brown. Delegate Eckardt, one question for you. You have 
consistently in your career, my understanding is, championed 
payments for nurse midwives, nurse practitioners, other skilled 
nursing professions. You yourself were a psychiatric nurse. If 
reductions in Medicaid funds from the Federal Government, 
reductions in State tax receipts occasioned by the recession 
force cuts in Medicaid, how much of the cut should come from 
provider payments; and in answering that, if you would, how 
much room is left to cut reimbursements before providers simply 
refuse to treat Medicaid patients?
    Ms. Eckardt. That is a very good question. I hadn't thought 
long about the reimbursement end of it, because I think there 
is reimbursement--in Maryland there is reimbursement for an 
array of providers. And I think that providing that gives the 
kind of choice within the Medicaid program--like in our 
children's health care, we have an array of choices, and, for 
instance, in our wellness centers in a lot of our schools, we 
have a variety of providers, and those providers are 
reimbursed. And I dare say that you need to look at that in 
conjunction with outcomes, clinical outcomes, and if we can, in 
fact, demonstrate through our school-based health centers and 
our wellness programs and our schools that kids are staying in 
school, that they are healthy, that they are graduating from 
high school, then I think those provider reimbursements are 
adequate.
    And I think that we are going to be looking in Maryland, we 
are looking at program by program as opposed to just reducing 
reimbursement to providers.
    Mrs. Wilson. Thank you.
    Mr. Strickland is recognized for 5 minutes.
    Mr. Strickland. Thank you.
    Dr. Rowland, I don't want to beat a dead horse, but when 
Mr. Scully was here, we talked at some length about what a 
block grant is or isn't, and Mr. Scully, it seemed to me, was 
contending that what he was proposing was not a block grant. 
But when I look at the OMB table that I think you probably have 
access to, it shows that, as I pointed out to Mr. Scully, in 
2013 there will be an $8.285 billion cutoff of the baseline.
    Mr. Scully did indicate that the baseline includes the 
projected growth in the program for the numbers of people that 
will be added. So if you have an $8.285 billion cut, doesn't 
that necessarily mean that people will be cutoff and lose 
benefits? If we stay in this recession especially there may be 
even more people cutoff. Isn't that what a block grant does? 
You have increased need and a limited amount of money, a set 
amount of money, that people are necessarily going to lose 
benefits?
    Ms. Rowland. In the administration's original proposal, 
they talked about an allotment, an allotment that would be a 
little more generous in the early years and then would decrease 
in the later years and did not want to call that a block grant. 
But in general when we think even about the SCHIP program, we 
talk about a program in which there is a fixed Federal 
allotment of dollars. Once you have spent that amount of 
dollars, there is no more Federal dollars to be given, even if 
the population needs continue to grow and you end up having to 
cap enrollment or reduce benefits or do other things to live 
within the budget. That we have called and would continue to 
call a block grant. That seemed very similar to what was being 
proposed by the administration, although some of Mr. Scully's 
language here today was quite different in terms of talking 
about a per capita cap instead of an overall block grant. So I 
am not sure that the administration hasn't changed their 
position.
    In a typical block grant, you fix the amount of Federal 
financing that goes up over time. You may use some factors to 
increase it, such as a growth factor or a cost of living 
adjustment or whatever, but it tends to be a fixed amount, it 
is a predictable amount. If for some reason the needs--the 
economy falls and more people fall into low-income categories 
and more people go on to the program, there are no more Federal 
dollars to expand to match that as there are under the current 
Medicaid program, so you would expect the States then to have 
to reduce their spending.
    Moreover, of course, one of the attractivenesses to the 
States in terms of flexibility in a block grant is that they 
would have less accountability for how they spend their 
dollars. So it would be harder to tell whether any of the 
groups, especially those optional groups, would continue to 
receive coverage under a block grant.
    Mr. Strickland. Thank you. I just wanted to make it clear 
that, regardless of what we call it, the effect it seems to me 
would be the same effect that you would expect from a block 
grant as we have historically defined a block grant program to 
be.
    I just wanted to ask you quickly about the dual-eligibles 
and the proposal that at least was in the Senate Medicare 
prescription drug reform bill. What are the implications or 
what would be the implications to the Medicaid program and to 
the individual States if the provision in the Senate regarding 
dual-eligibles were to be enacted into law, in your judgment?
    Ms. Rowland. I think leaving the dual-eligible population 
that is covered by Medicaid out of a Medicare drug benefit is, 
first of all, the first time there would be differential 
treatment; and leaving the poor out of the coverage under 
Medicare would be a real exception to the overall policy of 
Medicare. But I think it would also mean that there would be a 
lot of difficult coordination issues at the State level between 
those who would qualify under Medicare for the low-income 
subsidies but they are not on Medicaid so they don't get the 
Medicaid coverage but Medicaid beneficiaries would be on the 
side in the Medicaid program.
    We also know that the drug benefit under the Medicaid 
program is an optional benefit, and it does vary across the 
States, so I think that the dual-eligible population would not 
have an equal benefit to the extent that the Medicare benefit 
would be provided to the rest of Medicare beneficiaries. 
Clearly, the cost implications for the States of having to 
maintain coverage of the dual-eligibles under the current 
fiscal crisis that they are facing means that many States may 
have to look at cutting back on this population at the very 
time as other beneficiaries in Medicare are just gaining drug 
coverage. So I would say that the best strategy for making 
coverages equitable is to put the entire population in the 
Medicare program that is entitled to Medicare and then have 
Medicaid be really the wraparound for those with serious 
illnesses and drug costs that go beyond the limits of the 
Medicare program.
    Mr. Strickland. Dr. Eckardt, would you have a comment 
regarding the dual-eligible provisions that are in the Senate 
bill and its potential impact upon the States?
    Ms. Eckardt. I have to admit honestly I am not real 
familiar with that, but I can tell you that I have been an 
advocate of using Medicare dollars for prescription relief for 
our most vulnerable population, and I think certainly the dual-
eligible are our most vulnerable citizens.
    Mrs. Wilson. Mr. Strickland, I think you are plumb out of 
time.
    Mr. Strickland. I am sorry. I want to thank the witnesses 
for their helpful information. Thank you, Madam Chair.
    Mrs. Wilson. Mr. Waxman is recognized for 5 minutes.
    Mr. Waxman. Thank you very much, Madam chairman.
    Ms. Rowland, in your testimony you painted a very 
compelling picture of the contributions the Medicaid program 
has made in providing health care coverage to populations that 
would otherwise be likely to be uninsured or have their 
specific health needs unmet. I would like your opinion on two 
related issues. Is the fact that Medicaid is a matching program 
where the Federal Government has an open-ended commitment to 
bear its share of the cost of providing services to this 
population a positive thing in terms of helping the program 
meet the needs of these vulnerable people?
    Ms. Rowland. I think if you look back at the history of the 
program over its many years you see that the matching rate 
system and the fact that there were Federal dollars to 
stimulate State investments has proven to be a very successful 
strategy. We see that there are both mandated populations 
covered by Medicaid but that many States use the availability 
of the matching funds to expand coverage beyond the mandates, 
and without the Federal matching funds I don't think States 
would have been able to respond to some of the economic 
downturns that we have had. They may not have been able to 
respond as fully as they would like because the matching 
doesn't come in a countercyclical way early enough. But they 
have been able to keep the program and maintain it over its 
history, and they have grown it in ways as we have societal 
needs that we have asked the States to pick up through 
Medicaid.
    One perfect example is the coverage of people with HIV/
AIDS. When that epidemic came out, there was no health 
insurance coverage provided through the private insurer. 
Medicaid was really able to step in. It is today the provider 
of--44 percent of all of the people with HIV/AIDS receive their 
care through Medicaid. If the program was a block grant or a 
capped program, I don't see any way that a new epidemic like 
that could have had the resources committed to it because they 
would have had to compete within the block for the existing 
funds.
    Mr. Waxman. In other words, asking my question another way, 
if we put the cap on the amount of Federal dollars available to 
help the States finance these services, you would think that 
that wouldn't help the States do a better job and it would put 
them in a more difficult position during economic downturns or 
adding to the rolls while reducing the States' economic base 
which would occur when you have these unanticipated health 
emergencies?
    Ms. Rowland. In my view, the crisis that we face now is how 
to pay for and finance and how to divide the financing between 
the Federal Government and the States for long-term care or 
care of our most vulnerable citizens. There are lots of ways 
that I think we can improve the way in which that care is 
delivered both for those on Medicaid but, frankly, for all of 
us in our health care system because we know our health care 
system has lots of inequities and lots of cracks in the way 
care is delivered. But I don't think putting a cap on financing 
is going to create a whole incentive to create a better world 
for all of us to receive our health care, and I think it is 
just going to squeeze down on the available resources for the 
poorest and the most vulnerable.
    Mr. Waxman. The Kaiser Commission recently released a study 
that I believe was done for you by the Rockefeller Institute 
that indicated that the decline in revenues available to the 
States was a much more significant factor in putting pressure 
on State Medicaid budgets than increases in program 
expenditures. As I understand it, many States have pegged their 
tax system to the Federal system so that when we vote to reduce 
taxes we have the automatic effect of reducing State revenues. 
State revenues also decline when we are in a recession. That is 
exactly the time when more people are in need of Medicaid. 
Could you elaborate a little on that study for the benefit of 
members of the subcommittee?
    Ms. Rowland. The Rockefeller Institute has done a study 
looking at the finances of the States and at the tax pressures 
that support State efforts. What they have found is that the 
$70 billion of deficit that the States have recently incurred 
is largely due to the fact that they have had a significant 
drop-off, the first time in over two decades, in their State 
revenue collections, largely due to the downturn in the economy 
and partially due to the effect of tax cuts eroding some of the 
other revenues they would obtain and that Medicaid contributed 
about $7 billion of that in terms of their cost increases. So, 
by and large, the overall problem we are facing at the States 
is a revenue-based problem, but that does affect the Medicaid 
program because it is still a substantial share of State 
spending.
    Mr. Waxman. Madam Chair, I would like to ask unanimous 
consent to put the report on this issue in the record.
    Mrs. Wilson. Without objection.
    Mr. Waxman. Last, the Medicaid Commission has done work 
documenting the changes States have made in their Medicaid 
program in response to their declining fiscal situation. Could 
you tell us maybe for the record which of the people served by 
the Medicaid program have been most adversely affected by the 
cutbacks and can you generalize about that, giving us some 
examples?
    Ms. Rowland. Certainly, and I would be glad to make the 
recent report that has the survey findings available for the 
record, too, if you would like.
    Mr. Waxman. I will ask unanimous consent to put that in.
    Mrs. Wilson. Without objection, we will include that in the 
record.
    [The information referred to follows:]





[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Ms. Rowland. For the most part, we see that the struggle 
for State revenues and for Medicaid financing is having its 
greatest impact on primarily the parents of young children. 
Many of the States, including New Jersey is one example, have 
had to roll back their coverage in that area. All States are 
struggling with how to restrain the cost of prescription drugs 
and how to better purchase those pharmaceuticals, but they are 
beginning to institute some curbs on the prescription drug 
utilization. That tends to affect the elderly and disabled 
population because they account for about 80 percent of all the 
prescription drug use in the States.
    We are seeing, obviously, provider payment reductions going 
on across the board in most States, which is one of the first 
places States turn to try to trim spending. That is affecting 
nursing home payment rates, managed care payment rates and 
other hospitals and other providers.
    I think we are going to see some erosion of managed care 
coverage in the States as some of the plans decide to pull out 
of the Medicaid market just as we saw them pull out of the 
Medicare market in the past as they see frozen or reduced 
payment rates, and we are clearly seeing changes in how 
prescription drugs are being used in the States.
    Mrs. Wilson. Thank you.
    I want to thank both of the witnesses today and thank all 
of you who have joined us for some of your morning.
    We will hold the record open for testimony and other 
statements, including Members' statements.
    I also wanted to let folks know we are close to finalizing 
the date and subject for our next hearing on Medicaid, which is 
likely to be on the coordination of care and on the management 
of chronic disease, to take a look at the challenges facing 
Medicaid with respect to those two issues.
    I thank all of you again. This hearing stands adjourned.
    [Whereupon, at 1:10 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

                        Maryland House of Delegates
                                              Annapolis, MD
                                                  November 10, 2003
The Honorable John Dingell and Sherrod Brown
The Committee on Energy and Commerce
Health Subcommittee
2125 Rayburn House Office Building
Washington, DC 20515
    Dear Congressman Dingell and Brown: This correspondence is in 
response to your inquiry regarding Medicaid reform and the culture of 
dependence that has been created by the current system. You requested 
specific examples that keep families on Medicaid when they have had 
comparable and affordable coverage in the private market. Let me share 
a few quick thoughts with you.
    First of all, the Medicaid system we have developed is growing. In 
our attempt to make healthcare affordable, accessible, and available, 
we have created a situation that is both positive and negative. We 
probably have more children, moms, some dads, the disabled and seniors 
receiving health care via Medicaid than ever before. Income levels have 
been expanded when previously only those at certain poverty levels were 
eligible. Several years ago Maryland participated in the waiver to 
offer health care to children and pregnant moms through the Children's 
Health plan. During the debate there was concern that as we increased 
the income levels for eligibility, we did not create a situation in 
which those mothers and children currently enrolled in a health care 
plan thru private insurance dropped their existing coverage to then 
obtain free coverage with the CHIPS program as the CHIPS program would 
be much less expensive than private insurance. For instance, state 
employees who would make up to 200% FPL would be, technically speaking, 
eligible for the CHIPS coverage. To avoid this situation, anyone who 
had existing employer-sponsored health coverage was not eligible. As a 
result, there were many state employees who were paying much more for 
their coverage than those on the CHIPS program; even though they had 
the same income. This seems to me to be inequitable and becomes a 
disincentive for citizens.
    As the cost of healthcare/coverage continues to rise, increasing 
numbers of employers are finding it harder to continue to provide 
health insurance for their employees. Co-pays and the employee 
contribution of premiums are increasing and both employers and 
employees find themselves in a difficult situation. For those 
individuals who have taken advantage of the CHIPS program and who are 
working off of welfare, it becomes harder and harder to find health 
insurance affordable or even available through the workplace other than 
Medicaid. Therefore, there is no incentive to take those jobs with 
employer sponsored coverage. As long as individuals do not incur the 
costs of health care there is no incentive to seek jobs with employer-
sponsored coverage.
    Another situation has occurred over the years. Those individuals 
struggling with severe mental illness or with multiple disabilities who 
are receiving disability may want to work. Because of the earnings 
limitation requirement, they do not work for fear of losing disability 
health benefits. I know several who did exceed their earnings 
limitation and received fines with the payback to the extent that it 
was so overwhelming that relapse occurred. One young woman told me that 
it is to hard and discouraging to break out of the cycle--it is easier 
to be sick. The Federal program will be help for these individuals as 
we implement a pilot in Maryland.
    I hope my thoughts are helpful. If I can be of further assistance 
please call my office 1-410-221-6561.
            Sincerely,
                                           Addie C. Eckardt
                                      Maryland State Representative
                                 ______
                                 
   Response for the Record from Diane Rowland, Sc.D., Executive Vice 
           President, Health Policy, Kaiser Family Foundation
    Representative Towns' Question. ``Can you share with the Committee 
some specific examples of how the `culture of dependence' has kept 
families on Medicaid when and where they have had comparable and 
affordable insurance coverage in the private market?''
    Diane Rowland's Answer. The population Medicaid covers are many of 
the poorest and most vulnerable Americans.
    With employer-sponsored insurance premiums experiencing annual 
double-digit growth; the average family premium costing over $9,000, of 
which the employee pays on average $2,400 annually; and premiums on the 
individual market being even higher, private health insurance coverage 
is financially out of reach for families whose incomes are low enough 
to qualify for Medicaid. Further, data show that low-wage workers are 
not likely to be offered health insurance through their employer. 
Therefore, low-income families on Medicaid generally do not have access 
to affordable comprehensive coverage in the private marketplace.
    The 13 million elderly and disabled individuals who rely on 
Medicaid are even less likely to have an opportunity to secure coverage 
through private plans. They often have severe chronic conditions that 
make them largely uninsurable through the private market. Medicaid thus 
serves as the insurer of last resort for many of these individuals who 
otherwise would simply go without any coverage.
    In addition, for the low-income elderly, long-term care coverage is 
not available or affordable at their age. Even for Medicare 
beneficiaries, Medicaid currently helps with drugs for which private 
plans are not available or prohibitive in cost.
                                 ______
                                 
           Prepared Statement of the Alzheimer's Association
    Decisions about Medicaid policy are among the most important 
decisions Members of Congress make that affect the lives of Alzheimer 
families. Medicaid is the single largest public payer for long term 
care services in the United States, and a last resort for persons with 
Alzheimer's who have no other way to pay for the help they need. Many 
Medicare beneficiaries with Alzheimer's also receive Medicaid to help 
pay for long term care, prescription drugs and other medical care.
    Medicaid is a critical program for people with Alzheimer's because 
it helps to cover the cost of nursing home care for persons who are 
poor or who ``spend down'' their resources on long term care. It also 
covers home and community based services for low income persons 
requiring nursing facility levels of care. Medicaid is the only 
``safety net'' for long term care.
    Medicaid also provides basic protections that Congress has 
carefully written into the law--including nursing home quality 
standards and protections against spousal impoverishment. These are 
also essential elements of the current Medicaid program.
    Medicaid is close to the breaking point in many states--called upon 
to do too much, for too many people, with too little money. It is not 
so different for Alzheimer families, and when Alzheimer families reach 
their breaking point, Medicaid is the only place they can turn for 
needed assistance.
    The following stories about Alzheimer families illustrate why the 
Medicaid program is so critical to the people we represent:
Mavis Gilpin
    Mavis Gilpin is 86 and she lives with her daughter, Yvonne Ager, 
age 61, in Georgia. She has lived with her daughter for about 10 years. 
Since her mother's diagnosis of Alzheimer's Ms. Ager states that her 
``life has been a disaster,'' especially now that her mother is 
invalid. Her mother requires 24-hour supervision. Ms. Ager is unable to 
cope with full-time employment because of her caregiving 
responsibilities. Prior to her mother qualifying for Medicaid, Ms. Ager 
had to take personal loans to pay for medical bills.
    Ms. Ager says the services provided by Medicaid are ``priceless and 
appreciated.'' Her mother receives medical and pharmaceutical benefits, 
as well as a home health aide. Ms. Ager stated that any reduction in 
her mother's Medicaid services would be ``disastrous.'' She is unable 
to transfer her mom without assistance. If the home health aide 
services were reduced or stopped, her mother's basic care would be 
compromised. Ms. Ager believes that the Medicaid prescription drug 
benefit has helped to keep her mom out of both the doctor's office and 
the hospital.
Margaret and George Isaac
    Margaret Isaac is 65 and provides care for her husband, George, who 
is 72 and diagnosed with Alzheimer's disease. He was diagnosed in 1999. 
Although he is still at home, over the years, Mrs. Isaac has watched 
the disease rob her husband of everything, and has seen her own 
caregiving responsibilities increase. Today, George ``doesn't 
understand anything more or less'' when she speaks with him. Mrs. Isaac 
assists him daily with his self-care and toileting. He requires 
constant supervision because of his cognitive impairment and confusion.
    The Isaacs rely on the monetary and program services provided by 
Medicaid. SOURCE, a Medicaid program in Georgia, sends a caseworker to 
their home. Mr. Isaac is able to attend adult day care, and receive 
home care and light housekeeping as part of his Medicaid services. The 
Isaacs also rely on Medicaid for their transportation to medical 
appointments and his participation in the adult day program. Mrs. Isaac 
believes that without the assistance from Medicaid that they ``wouldn't 
be able to afford to do anything''. They are in the process of selling 
their home and moving into HUD housing.
    There are many more stories of Alzheimer families who have 
exhausted their resources and turned to Medicaid as a last resort. And 
until researchers find a way to prevent or delay the onset of this 
disease, there will be many more such families in the future. A recent 
study published in the Archives of Neurology predicts the prevalence of 
Alzheimer's disease will increase 27% by 2020, an astonishing 70% by 
2030, and nearly 300% by 2050, unless science finds a way to slow the 
progression of the disease or prevent it.
    As the Committee works to improve the Medicaid program, the 
Alzheimer's Association urges you to maintain the Medicaid long term 
care safety net that is so important to people with Alzheimer's and 
their families.
                                 ______
                                 
       Prepared Statement of the American Health Care Association
    The American Health Care Association is a non-profit federation of 
state long term care associations, together representing nearly 12,000 
non-profit and for-profit nursing facility, assisted living, 
developmentally-disabled and sub acute care providers that care for 1.5 
million elderly and individuals with disabilities nationwide.
    As the nation's largest publicly funded health care program, 
Medicaid now accounts for 16 percent of federal spending on health 
care. The program provides health and long term care coverage to 51 
million low-income Americans, and fills in Medicare coverage gaps--
primarily to meet seniors' prescription drug and long-term care needs. 
In 1989, Medicaid became the largest payer of long-term care. In 2001, 
of the $98.9 billion spent on nursing home care, Medicaid accounts for 
$47 billion of those dollars. Approximately two-thirds of nursing home 
patients rely on Medicaid to fund their care.
    Unfortunately, however, a ``perfect storm'' is brewing that 
threatens the financial viability of Medicaid and the long term care 
our less fortunate frail, elderly and disabled depend upon. Demographic 
changes will soon bring 77 million baby boomers and their need for care 
and services into a system policy experts representing all points of 
view argue will not be able to handle the exponential increase in 
demand for care.
    From 2010 to 2030, the number of baby boomers age 65 to 84 will 
grow by an estimated 81 percent while the population aged 85 and older 
will grow by 49 percent. As large numbers of the imminent tidal wave of 
baby boomers begins to require long term care, the Medicaid program 
will not be prepared to financially sustain the needs of this cohort--
especially if they rely mainly upon Medicaid to pay for their long term 
care. In addition, the life spans of individuals with MR/DD have 
increased dramatically and while the extra years are welcome and 
wonderful, the additional expense of this costly population is not 
addressed under the current Medicaid budgets.
    Seniors are often forced to rely on Medicaid for coverage of 
nursing home care because Medicare provides only a very limited long-
term care benefit. Medicare's coverage of skilled nursing facility 
services is limited to 100 days following a three-day hospital stay. 
The average beneficiary stays 23 days in the nursing home and then 
returns home while others have needs requiring skilled nursing care 
beyond their 100 day Medicare benefit. Others may lose their Medicare 
eligibility due to a change in their acuity--yet still require facility 
care. These Medicare beneficiaries are then responsible for the costs 
of their care, which can exceed $50,000 annually. Many apply for 
Medicaid benefits at this time.
    Because Medicaid is a means-tested entitlement program, they must 
meet Medicaid's resource requirements. Often this group has more 
resources than Medicaid allows, and must qualify for coverage by 
``spending down,''--thus impoverishing themselves to the point where 
they finally ``qualify'' for Medicaid coverage. In a typical U.S. 
nursing home, 67 percent of patients now rely on Medicaid for their 
care.
    Prior to 1997, states were required to pay rates that were ``. . . 
reasonable and adequate to meet the costs which must be incurred by 
efficiently and economically operated facilities in order to provide 
care and services in conformity with applicable state and federal laws 
. . .'' as required by the so-called Boren Amendment. States were 
successful in repealing Boren by arguing they should have maximum 
flexibility to design coverage parameters and set provider 
reimbursement rates. Yet, if government has the responsibility to set 
care standards, then it logically must have the obligation to pay for 
them. This places long-term care providers in an impossible conundrum: 
they are held accountable to federal standards while the state sets the 
provider reimbursement rate. As is increasingly the case, states simply 
do not keep up with the costs required to meet federal standards--and 
the problem becomes worse annually.
    At the same time, governors and state legislators face growing 
political pressures to expand their programs and cover more uninsured 
populations--especially during challenging economic times. States will 
also continue to face increasing costs in their Medicaid budgets as 
more people require nursing home care and as states expand home and 
community-based care options. States have struggled and will continue 
to struggle to identify more dollars for their Medicaid programs. In 
many states, governors, state legislatures and state Medicaid agencies 
have worked with the long-term care profession to pursue Medicaid 
maximization proposals. The American Health Care Association (AHCA) 
believes strongly that there must be adequate dollars for quality care. 
In some states, economic times have been grave enough that states have 
faced a tough choice between resorting to cuts to eligibility, 
reimbursement rates or benefits and therefore, placing care for seniors 
and people with disabilities in danger or pursuing such programs as 
upper payment limits involving intergovernmental transfers. AHCA 
recognizes that if it were not for states pursuing all possible funding 
avenues, long term care in many states would have seen more desperate 
cuts and seniors and people with disabilities may have lost their 
access to care.
States Will Continue to Face Medicaid Funding Challenges
    At a time when our nation should be preparing for the coming 
retirement tidal wave, states are, instead, struggling to fund services 
for current beneficiaries. The most recent Kaiser Commission survey 
found that for many states, FY2004 marked the third consecutive year 
they were forced to take new actions to reduce spending growth in their 
Medicaid programs. This has resulted in provider reimbursement freezes 
and new coverage limitations on vulnerable populations.
    In May, Congress passed and the President signed legislation that 
provided $20 billion in temporary fiscal relief to the states. Of that 
amount, $10 billion was earmarked for state Medicaid programs. AHCA 
strongly supports this legislation as temporary relief as states are 
continuing to see Medicaid cost growth and populations increase.
    According to Kaiser, states have also exhausted many one-time 
measures they have used to balance their budgets, and Medicaid budget 
shortfalls are likely in a majority of states for FY 2004. Continued 
expectations of low revenue growth as the economy remains sluggish 
combined with the growth in demand for Medicaid services means that 
states will continue to look for ways to cut programs, and limit 
coverage and benefits.
Kaiser Report Does Not Reflect True Picture of Rate Adequacy
    Results from the Kaiser survey show that reimbursement rates for 
nursing home care in fiscal year 2003 were cut or frozen in 17 states. 
For FY 2004, 19 states either cut or froze rates for nursing home care; 
33 states were able to increase rates for nursing home care in FY 2003; 
29 states were able to do so in FY 2004. It is important to note, 
however, that the increase or decrease of reimbursement rates is not a 
true barometer of whether Medicaid is effectively and efficiently 
paying for quality nursing home care; the key is determining whether 
reimbursement rates are keeping up with the real costs in the health 
care marketplace to provide those services.
    To identify and specifically quantify the shortfall between the 
Medicaid reimbursement rates and allowable costs of nursing homes in 
individual states, AHCA has engaged BDO Seidman, LLP, the independent 
public policy research firm. For the third consecutive year, BDO has 
reviewed the extent to which reimbursement rates have kept pace with 
the costs to provide care. Using a database of Medicaid rates and cost 
report information, comparisons of Medicaid rates and allowable costs 
from 2001 (the most recent audited or desk-reviewed cost report data 
available) were derived for 34 states--representing 70 percent of all 
Medicaid patient days in the country.
    While preliminary, indications are consistent with past studies and 
show that nationwide, the average shortfall in Medicaid reimbursement 
has grown to $10.39 per day for every Medicaid patient. In 2001, un-
reimbursed Medicaid-allowable costs exceeded $2.5 billion for these 34 
states, and exceeded $3.7 billion when the results are extrapolated to 
all 50 states. Rate increases in fiscal 2003 were, in many states, far 
less than the higher costs of providing quality care. In still other 
states, rates were either frozen or reduced--falling even farther below 
costs. The picture in fiscal 2004 does not improve.
The Necessity of Long Term Care Financing Reform
    AHCA praises the Bush Administration and the House Energy and 
Commerce Committee for recognizing that the Medicaid program needs 
reform, and for initiating a much-needed policy discussion. We are 
concerned, however, that the Administration's Medicaid Modernization 
Proposal alters the program to the detriment of our most vulnerable 
senior population and Americans with disabilities.
    The Administration's proposal establishes an annual funding 
allotment--in effect, a cap--to fund services for optional Medicaid 
populations. As an estimated 85 percent of Medicaid beneficiaries in 
nursing homes have optional Medicaid eligibility, they would be 
directly threatened by a plan that locks-in existing under funding and 
further forces states to ratchet down services and benefits. All 
residents of ICFs/MR, our most vulnerable Americans, would be under 
threat as the ICF/MR program is only an optional program under 
Medicaid. It is neither fair nor good public policy to force states to 
make care decisions based on economics--not what is best for the 
patient.
    The real need is to reform the long-term care financing system in a 
manner that brings about necessary funding stability and that ensures 
the supply of care meets a certain, growing demand. This nation's 
current system for financing long term care consists of an unstable 
patchwork of federal and state programs, with little private insurance 
participation and few meaningful incentives for individuals to take 
personal responsibility for their own long term care planning.
    While no available policy option can reduce the growing need for 
long-term care services and public spending, relative to current law, 
there are decisions that can be made regarding how public and private 
resources can be more effectively utilized.
    We are encouraged Congress and the Administration are exploring 
legislation that will provide an ``above-the-line'' deduction (S. 1335 
and H.R. 2096) of the premium costs for long-term care insurance. 
Research shows this deduction will encourage the purchase of private 
long term care insurance--from about 10% today to about 25% in five 
years--and help reduce government spending on Medicaid long term care 
services. AHCA supports enactment of the above-the-line deduction
    The costs of implementing an above-the-line deduction, though, can 
be quite high. At a time when government's discretionary dollars are 
tight, AHCA would propose an incremental expansion of tax incentives 
for private long term care insurance beginning with the introduction 
and passage of a refundable tax credit targeted toward low-income 
individuals. This refundable tax credit offers the greatest potential 
for achieving savings to the Medicaid program because it could be 
targeted at those individuals who are most likely to become dependent 
on Medicaid for their long term care needs. Because the refundable tax 
credit is progressive ( meaning that it can provide increased premium 
support when an individual's income declines because of retirement, 
disability or loss of employment ( it has the effect of creating a 
``financial safety-net'' to prevent the lapsing of those policies 
purchased under existing law without a substantial increase in current 
government spending. By ensuring that those policies purchased under 
current law remain in force, the ``financial safety-net'' created by 
the refundable tax credit, further enhances consumer choice and the 
individual's ability to control where and how their care needs will be 
met in the future.
Conclusion
    As their exists a substantial federal and profession-wide effort to 
improve the quality of care in our nation's nursing homes and homes for 
persons with MR/DD, AHCA believes quality improvement is an ongoing, 
permanent mission that necessarily requires adequate, reliable 
investment from the federal and state government.
    AHCA supports Medicaid reform that maximizes patient choice in the 
health care marketplace while concurrently providing and paying for 
high quality care. The status quo of subjecting seniors to a process 
forcing them to impoverish themselves to ``qualify'' for nursing home 
care is not sustainable; neither is it good public policy.
    We look forward to working with this Committee, and this 
Administration, to continue improving the quality of care in America's 
long term care facilities, and to maintain a collaborative dialogue 
that puts the special care needs of our frail, elderly and disabled 
always first.
                                 ______
                                 
  Prepared Statement of The National Association of Community Health 
                                Centers
    The National Association of Community Health Centers (NACHC) 
appreciates the opportunity to submit the following statement for the 
record on the important relationship between community health centers 
and the Medicaid program. NACHC is the advocate voice for our nation's 
over 1000 Community, Migrant, and Homeless Health Centers and Public 
Housing Primary Care Centers, and the patients and communities served 
by them.
    For almost 40 years, health centers, alongside public hospitals, 
public health departments and free clinics, have been providing high 
quality, cost-effective, primary and preventive health care to millions 
of people living in medically underserved communities regardless of 
their ability to pay.
    The reality is that community health centers play a critical role 
in building bridges to better care and serve as an intricate part of 
the health care safety net, in place to catch those who fall through 
the cracks. In fact, today, health centers serve as the family doctor 
and health care home for 14 million Americans in over 4,000 urban and 
rural communities across the country.
    One in nine Medicaid recipients, one in six low-income children, 
one in eight uninsured individuals, and one in ten rural Americans 
benefit from health centers (known in Medicaid law as Federal Qualified 
Health Centers, or FQHCs). Among the millions of people served by 
health centers:

 40% depend on coverage through Medicaid or SCHIP, the State 
        Children's Health Insurance program;
 40% lack health insurance coverage; and
 86% are living in families with incomes at or below 200% of the 
        Federal Poverty Level (FPL).
    As critical as they are for the health care they provide, health 
centers are much more to their communities:

 They are a major source of jobs and meaningful employment--most of 
        the 60,000+ employees of health centers are community 
        residents--and in many of their neighborhoods or towns, they 
        are often the largest employer.
 They are engines of economic development for their communities, 
        spending nearly $6 billion a year, with combined payrolls 
        exceeding $4 billion, and they generate more than $20 billion 
        in economic output for low-income communities across America.
 Health centers also serve as critical ``anchors'' in their 
        communities, helping to attract or retain other businesses, 
        including other physicians, pharmacies or diagnostic services--
        even local hospitals, but also other local businesses, and 
        playing a pivotal role in sustaining a sense of community, 
        giving residents a feeling of pride and helping to revitalize 
        communities.
    Additionally, many health centers are involved in special 
initiatives to monitor and address community-specific health problems, 
such as diabetes, asthma and cancer management, boosting infant 
immunization rates, keeping patients' blood pressure under control, and 
reducing the number of low birth-weight babies.
    As testament of the success and commitment of health centers in 
improving access to affordable, quality health care to our nation's 
medically underserved, Congress has shown broad bipartisan support for 
a multi-year initiative to expand the health center program to meet an 
ever-growing need across the country. In fact, over the past 5 years, 
Congress has increased federal investment for health centers by almost 
$700 million.
    Beyond this, for each of the past three years, President Bush (who 
pledged to grow this program during his campaign for office) has 
requested and received the largest increases in funding over the 
program's entire history. This combined effort on the part of the 
Congress and Administration has enabled health centers to reach out and 
serve more than 3 million new people, and it will eventually increase 
or expand health center access points by 1,200 over five years as well 
as eventually double the number of people served. In addition, when 
Congress established the Medicaid prospective payment system for health 
centers in 2000, it reaffirmed the importance and need of health 
centers as safety net providers.
    All told, however, for the vital mission of community health 
centers to be sustained, and for the President's initiative to be 
ultimately successful, Congress must recognize, understand and preserve 
the unique interrelationship between these centers and Medicaid as it 
considers reforming the joint federal-state program for the poor.
             the importance of health centers and medicaid
    Health centers are a major provider of primary and preventive care 
services to nearly 5 million Medicaid recipients. In fact, Medicaid is 
currently the single largest beneficiary of health center services, as 
well as health centers' single largest source of financing. Keenly 
recognizing the importance of health center services to Medicaid 
beneficiaries, Congress in 1989 required that the services of a FQHC be 
a guaranteed Medicaid benefit offered to beneficiaries in every State 
Medicaid program. Most important, Congress recognized and acknowledged 
that Medicaid reimbursement to FQHCs must be sufficient to assure that 
health centers were paid their full reasonable costs for serving 
Medicaid patients (so that they would not have to use their Public 
Health Service Act grant funds to subsidize low Medicaid payments). Two 
years ago, under the leadership of Congressmen Richard Burr and 
Edolphus Towns, and with the support of the overwhelming majority of 
the Energy and Commerce Committee, Congress reaffirmed the continued 
importance of adequate Medicaid reimbursement to health centers by 
creating a prospective payment system (PPS) for FQHCs that (1) assures 
continued access to care for Medicaid patients, (2) protects Federal 
grant funds to provide care for the uninsured, and (3) gives state 
Medicaid agencies greater flexibility in designing their Medicaid 
programs and predictability in the cost of payments to health centers.
             medicaid as a significant source of insurance
    Health center patients are more much more likely than the general 
US population to have Medicaid or be uninsured. Nationally, 11% of the 
population has Medicaid and another 15% is uninsured. In 2002, 36% of 
all health center users had Medicaid while 39% were uninsured. This 
disproportion stems from the fact that health center users are 
overwhelmingly at less than 200% of poverty; two-thirds of users are 
under 100% FPL. To be sure, Medicaid coverage and uninsurance varies by 
age group. Children under age 20 are much more likely to have Medicaid 
and less likely to be uninsured than adults age 20 and over. This is 
due to eligibility rules that are more favorable to children. In fact, 
over half or 54.6% of all health center children have Medicaid while 
less than a quarter or 23.4% of adults are covered under the program.
               medicaid as an important source of revenue
    By ensuring adequate Medicaid reimbursement to FQHCs, the Congress 
clearly recognized the potential impact of low Medicaid payments on 
health centers' ability to care for uninsured patients. In the 14 years 
since enactment of this payment system, health centers have increased 
their capacity for uninsured care by 2.5 million people--double the 
number of uninsured patients served in 1990, a rate of growth that is 
more than twice that for the nation's uninsured population. Currently, 
Medicaid represents 35% of total revenue for health centers--the 
largest of any single source and noticeably higher than the second 
largest source, federal grants revenue (25%). Indeed, Medicaid makes up 
63% of all patient-related revenue, significantly larger than any other 
insurance source.
                health center participation in medicaid
    Health centers are unique in the health care system because, as 
part of their grant requirements, they must be located in areas of high 
need and be open to all patients seeking care. This explains Medicaid's 
other role with regard to health centers: just as health centers rely 
on Medicaid revenues, Medicaid beneficiaries rely on health centers for 
their care. To illustrate this point, consider that although more than 
a third of all health center patients have Medicaid, Medicaid 
represents only 9% of private, office-based physician visits. It is 
also important to consider that only half of physicians are willing to 
accept all new Medicaid patients, and the proportion of private 
physicians willing to provide charity care has declined, according to 
one recent study. Thus, health centers are a significant provider of 
primary care to Medicaid beneficiaries, and tend to provide specialty 
care and enabling services that go beyond the care provided at office-
based physician settings. In fact, according to a recent report by the 
Kaiser Family Foundation, the number of Medicaid patients served by 
health centers nearly tripled, from 1.3 million to 3.6million persons 
in the years between 1980 and 2001, compared to 50 percent growth in 
total Medicaid enrollment in this period. Moreover, 99% of patients 
reported in 2001 that they were satisfied with the care they receive at 
health centers.
            delivering medicaid savings through quality care
    Health centers deliver savings to all payers, especially Medicaid. 
They control health care costs by providing primary and preventive 
services, reducing the need for more costly hospital care down the 
road. According to one recent study, communities served by health 
centers had 5.8 fewer preventable hospitalizations per 1,000 people 
over three years than other medically underserved communities not 
served by a health center. Another study found that Medicaid 
beneficiaries who seek care at health centers were 22 percent less 
likely to be hospitalized for potentially avoidable conditions than 
beneficiaries who obtained care elsewhere. Moreover, these patients 
were 16 percent more likely to have outpatient visits for such 
conditions. Several studies over the years have found that health 
centers save the Medicaid program at least 30 percent in annual 
spending for health center beneficiaries due to reduced specialty care 
referrals and fewer hospital admissions. Based on that data, it is 
estimated that health centers already save almost $3 billion annually 
in combined federal and state Medicaid expenditures--$1.8 billion in 
federal spending alone. That amount is greater than the total of all 
Medicaid payments to health centers last year.
                growing demand and diminishing resources
    Current budget shortfalls threaten state and local financial 
support of health centers, even though their cost of care is among the 
lowest of all providers. Reductions in Medicaid eligibility, benefits, 
and other areas potentially jeopardize the ability of health centers to 
continue to provide care to all patients, including Medicaid patients. 
Initiatives from the Bush Administration and Congress to boost health 
center funding cannot compensate for reductions in state Medicaid 
programs or in direct State health center grant support. A recent 
state-by-state survey revealed that at least 20 states have enacted or 
are considering significant cuts in dedicated state funding for Health 
Centers. The sum of those cuts exceeds $40 million annually, or nearly 
14% of all state funding Health Centers received last year. Loss of 
support in any form exacerbates the already strained financial 
condition of health centers, and will result in their inability to 
serve new patients or even many of their current patients. Compounding 
this problem is an increased patient load--nearly 800,000 new uninsured 
patients in the last three years have turned to health centers for 
care.
                       challenges for the future
    Medicaid plays an important role at health centers by providing 
patients access to comprehensive services beyond those available at 
health centers. Time and time again, these centers have demonstrated 
their ability to provide effective care--reducing infant mortality, 
decreasing hospital admissions and lengths of stay. However, as the 
health care needs of low-income individuals continue to grow, so do the 
challenges to health centers in sustaining their ability to provide 
quality care to Medicaid beneficiaries and other patients.
    As Congress moves forward on considering ways in which to reform 
Medicaid, it is critical that it keep in mind the important role health 
centers play in their communities and the unique relationship between 
these centers and the Medicaid program. Indeed, as the Kaiser Family 
Foundation points out, ``[t]he fundamental interrelationship between 
Medicaid and health centers . . . suggests, by extension, that dynamics 
in one domain are bound to have important impacts in the other.'' It is 
therefore imperative that lawmakers working on Medicaid reform consider 
the following significant issues for FQHCs:
The Burden of Medicaid Cutbacks on FQHCs
    To further increase the accessibility of primary and preventive 
health services for low-income people living in medically underserved 
areas, Congress created the Medicaid prospective payment system for 
FQHCs. By creating this system, Congress helped to provide stability 
and assure access to FQHCs by ensuring that grant dollars intended for 
providing care to the uninsured were protected.
    Yet according to reports filed by health centers for 2001, 19 
states cut their Medicaid payments for care provided to enrolled 
individuals by an average of about 9 percent from the previous year. 
Overall, Medicaid payments to health centers grew by less than 1 
percent per Medicaid patient, well below the 4.6% growth in the cost of 
care for each patient served, producing a net loss of more than $60 
million for the year. Beyond this, there has already been great shift 
of discretion to the states in the operation of their Medicaid programs 
through HHS' issuance of Section 1115 waivers--under which State 
Medicaid agencies are permitted to reduce benefits, increase cost 
sharing requirements, and adjust reimbursement rules.
    Health centers have already experienced the impact of this 
increased state flexibility in some 15 states during the 1990s. In most 
cases, the ability of health centers to care for both their Medicaid 
and their uninsured patients was impacted negatively when their 
Medicaid payments were reduced to in some case significantly below the 
cost of providing care. In many of those states, other providers 
decided not to participate or limited their care to only a few Medicaid 
patients, leaving health centers as one of the few remaining sources of 
primary and preventive care to this population. Given this experience, 
health centers urge Congress to keep in mind the important role that 
safety net providers have in their communities as they move forward on 
considering Medicaid reform proposals, and to assure that the current 
federal FQHC Medicaid payment system is not eroded in the process.
The Safety Net for the Safety Net
    Potential cutbacks in State Medicaid payments to health centers are 
only a portion of the issue. Cutbacks in Medicaid eligibility levels or 
benefits, caps in enrollment, or forgone expansion plans also have 
presented significant difficulties for FQHCs. These actions are 
occurring at the same time as employers have been forced to either 
shift more of the rising cost of health insurance onto their workers or 
to drop the coverage altogether, and as other health care providers 
have begun cutting back on the uncompensated or charity care they 
provide. The result is that health centers are serving an ever-
increasing number of uninsured individuals who previously were covered 
under Medicaid or through their employers. While these and other 
dramatic changes in the health care system have put a tremendous strain 
on the overall health center program, health centers remained committed 
to providing access to care for everyone that walks through their 
doors, regardless of their health status, insurance coverage, or 
ability to pay for services. Put simply, health centers provide care 
for those whom other providers cannot or will not serve.
    As Congress begins to consider possible reforms to Medicaid, we 
urge that any flexibility extended to states to alter their Medicaid 
and SCHIP programs:

 Include the resources and standards to assure that such flexibility 
        is used to expand the number of people receiving health 
        insurance coverage under those programs without reducing the 
        scope of essential services that are covered today, and
 Clearly recognize the key role of health centers and other core 
        safety net providers who care for significant numbers of 
        Medicaid and SCHIP recipients and those who remain uninsured, 
        and ensure that these providers are adequately paid for the 
        reasonable costs of health care they provide to enrollees.
    Failure to address these principles could inevitably increase the 
number of the uninsured as well as impact the very safety net providers 
whose mission is to serve them.
Reaching out to Those Who are Eligible but not Enrolled Today
    Even as the numbers of uninsured Americans rises to unprecedented 
levels, millions of those individuals are eligible for coverage under 
the Medicaid and SCHIP programs, yet remain unenrolled. In greatest 
part, this is due a lack of action in the part of several States to use 
all available tools available to improve enrollment. For example, in 
1990, Congress amended the Medicaid statute to require that, as a 
condition of program participation, States provide for the initial 
receipt and processing of applications for low-income pregnant women, 
infants, and children at outreach locations other than welfare or 
government offices, including FQHCs and Disproportionate Share (DSH) 
Hospitals. Congress specifically named FQHCs as required outstationing 
sites because ``they are, by definition, providers that serve large 
substantial numbers of low-income women, infants, and children.'' 
1 Some States were quick to implement the provisions of the 
new law and have been in full compliance with its requirements. 
However, many more States have not complied with the Federal Medicaid 
outstationing law either in whole or part. Indeed, two separate 
evaluations of state outstationed enrollment programs during the 1990s 
found that only 57 to 61 percent of all FQHCs operated outstationed 
programs.2 Health centers reported that the availability of 
State support was the most important factor in their decision to set up 
or expand outstationing activities. Of those FQHCs with enrollment 
workers, more than one-quarter found it necessary to pay for the 
position themselves, with no funding assistance from the State.
---------------------------------------------------------------------------
    \1\ House Report No. 101-881, at 104
    \2\ Sara Rosenbaum et al, ``Initial Findings from a Nationwide 
Study of Outstationed Medicaid Enrollment Programs at Federally 
Qualified Health Centers.'' Center for Health Services Research and 
Policy, George Washington University Medical Center, February 1998; and 
U.S. Department of Health and Human Services, Office of the Inspector 
General. ``Federally Funded Health Centers and Low Income Children's 
Health Care: Improving SCHIP enrollment and Adapting to Managed Care.'' 
December 2000. (OEI-06-98-00321).
---------------------------------------------------------------------------
    Recent Center's for Medicare and Medicaid Services' guidance to 
State Medicaid programs has clarified the States' responsibilities to 
place outstationed Medicaid enrollment workers at each DSH hospital and 
each FQHC participating in the State's Medicaid program. CMS also makes 
clear that ``[s]taffing and resource limitations do not relieve States 
of the obligation to comply with and pay for the outstationing 
requirements of the law and regulations.'' However, more than 3 years 
after that this guidance, a survey of states by NACHC revealed that 
only 7 States are fully compliant with the law's requirements; these 
States have placed outstationed enrollment workers at all FQHC sites 
and pay all costs associated with the outstationing. Another 20 States 
are partially compliant, placing workers at some FQHC sites and paying 
at least some of the costs. But 22 States remain completely non-
compliant, placing no State workers at any FQHC sites and failing to 
cover the costs of health center workers who are performing the 
outstationing functions.
    Overall, many States continue to not recognize that outstationing 
at FQHCs and DSH hospitals is a mandatory part of the Medicaid 
eligibility process. As a result, millions of individuals eligible to 
receive coverage under Medicaid regrettably remain unenrolled. 
Accordingly, we urge the Congress to take the necessary steps to ensure 
that people who currently qualify for coverage under either the 
Medicaid or SCHIP programs have all available opportunities to enroll 
in, and receive the benefits of, that coverage.
    We thank the Committee for holding this important hearing, and we 
look forward to working with Members to assure the enactment of reforms 
consistent with positions outlined in this statement.
                                 ______
                                 
              Prepared Statement of Voice of the Retarded
   opposition to block granting the medicaid program: what is really 
                             ``optional?''
    Voice of the Retarded, an advocacy organization representing 
thousands of families of individuals with mental retardation 
nationwide, is opposed to any Medicaid proposal that would ``block 
grant'' or otherwise ``cap'' services and funding for Medicaid eligible 
individuals.
    Block grant proposals to reform Medicaid places the availability of 
all optional services at great risk. It does not add any permanent new 
money to the program. Over time it will limit the program, resulting in 
the denial of eligibility for those most in need. Of great concern is 
the notion that the Medicaid program should be a capped block grant 
that will be incapable of helping our most vulnerable citizens, 
including people with mental retardation, in current and future 
economic crises. Arbitrary growth limits to achieve predictable 
Medicaid costs would destroy its ability to help in the times when it 
is most needed. These reform principles, if enacted, would permanently 
undermine the integrity of the Medicaid program.
    Medicaid is the primary and largest public source of funding for 
long term services and supports for over 7 million people with 
disabilities, including people with mental retardation. 200,000 more 
people with mental retardation and developmental disabilities are on 
waiting lists for services.
    Most Medicaid services for people with mental retardation are 
considered ``optional.'' This list of services includes such basic 
acute health care benefits as prescribed drugs, clinic services, dental 
care, physical therapy, prosthetic devices, and specified medical and 
remedial care. Longterm care ``optional'' benefits include home and 
communitybased services (HCBS) waiver, personal attendant care, case 
management, and Intermediate Care Facilities for the Mentally Retarded 
(ICFs/MR).
    ``What the Medicaid program calls `optional' services are, in 
reality, mandatory disability services for the children and adults who 
need them.'' (Consortium for Citizens with Disabilities, February 14, 
2003 letter to President Bush). Policymakers must consider quality of 
life. Most people now living in ICFs/MR, for example, experience severe 
and profound mental retardation with complex medical conditions and/or 
behavioral challenges. Without the essential skilled care they now 
receive they might perish. These ``lifeline'' services are not 
considered ``optional'' by recipients and must not be curtailed.
Solutions
    The significant challenges of individuals with mental retardation 
and developmental disabilities accessing quality medical, dental and 
other health care services in the community is well-documented in the 
media, in publicly funded studies, research by Special Olympics (http:/
/www.specialolympics.org/healthy--athletes/THE--HEALTH--STATUS.htm) and 
in scholarly publications, including the recent report of the Surgeon 
General, ``Closing the Gap: A National Blueprint to Improve the Health 
of Persons with Mental Retardation'' (February 2002) (http://
www.surgeongeneral.gov/topics/mentalretardation).
    In response to this crisis, and in the context of Medicaid reform, 
VOR urges Congress and the Administration to consider the establishment 
of university-based Community Resource Centers (CRCs). This is a cost-
effective system which utilizes the existing service infrastructure to 
expand the delivery of health care services and supports to Medicaid 
eligible individuals with disabilities who receive home and community-
based residential services.
    University-based CRCs provide desperately needed quality medical, 
dental, and other therapeutic services to Americans with mental 
retardation and developmental disability living in communities, who 
have significant difficulty obtaining these services. CRCs also 
function as universitybased centers of education, training, and 
research for medical and dental students, residents, externs, fellows, 
and professionals.
    The CRC model, already implemented in several states, establishes 
developmental medicine and dentistry training fellowships in mainstream 
medical and dental schools, utilizing preexisting, communitybased 
primary care clinics, Intermediate Care Facilities (ICFs) and other 
private service delivery systems (such as the Special Olympics Healthy 
Athletes program) as education and training sites.
    As Congress and the Administration consider Medicaid reform, there 
will be pressure to eliminate ICFs/MR in a misguided attempt to 
``broaden'' choice and reduce costs. Eliminating ICFs/MR will not save 
costs nor increase quality outcomes, and is counter to real choice. A 
peer-reviewed study, published in Mental Retardation (April, 2003), 
found that transitioning people from large Intermediate Care Facilities 
for the Mentally Retarded (ICFs/MR) to community based programs was not 
an effective strategy for reducing overall costs. Peer reviewed 
studies, the Surgeon General, state audit reports, and media 
investigative series have all documented systemic problems relating to 
the ability to provide safe and high quality care to people with 
profound mental retardation who are also medically-fragile. 
Furthermore, eliminating ICFs/MR would remove an important existing 
infrastructure that, as explained above, can be utilized to allow for 
more successful and happy community-based placements.
    Eliminating ICF/MR options is also counter to the landmark Olmstead 
decision which clearly establishes the right of individuals with mental 
retardation and their families to choose a setting that best meets 
individual needs, whether in the community or an ICF/MR. ``We emphasize 
that nothing in the ADA or its implementing regulations condones 
termination of institutional settings for persons unable to handle or 
benefit from community settings . . . nor is there any federal 
requirement that community-based treatment be imposed on patients who 
do not desire it.'' Olmstead v. L.C., 119 S. Ct. 2176, 2187 (1999).
    Thank you in advance for respecting choice and embracing the need 
for a full array of Medicaid services and supports. VOR looks forward 
to working with Congress to protect and strengthen the Medicaid 
program.



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