[Senate Hearing 109-708]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-708
 
                    MEDICAID: CREATIVE IMPROVEMENTS
                             FROM THE FIELD

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

                                HEARING

                               before the

                FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
                     INFORMATION, AND INTERNATIONAL
                         SECURITY SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 28, 2005

                               __________

              FIELD HEARING IN CHARLESTON, SOUTH CAROLINA

                               __________


       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs




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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
TOM COBURN, Oklahoma                 THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island      MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah              FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico         MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia

           Michael D. Bopp, Staff Director and Chief Counsel
   Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk


FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL 
                         SECURITY SUBCOMMITTEE

                     TOM COBURN, Oklahoma, Chairman
TED STEVENS, Alaska                  THOMAS CARPER, Delaware
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
LINCOLN D. CHAFEE, Rhode Island      DANIEL K. AKAKA, Hawaii
ROBERT F. BENNETT, Utah              MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico         FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia

                      Katy French, Staff Director
                 Sheila Murphy, Minority Staff Director
            John Kilvington, Minority Deputy Staff Director
                       Liz Scranton, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statement:
                                                                   Page
    Senator Coburn...............................................     1

                               WITNESSES
                        Friday, October 28, 2005

Hon. Mark Sanford, Governor, State of South Carolina.............     4
Hon. Tracy E. Edge, a Representative in Congress from the South 
  Carolina.......................................................    12
Judith Solomon, Senior Fellow, Center on Budget and Policy 
  Priorities.....................................................    18
Donald Tice, D.O., Member South Carolina Board of Medical 
  Examiners......................................................    21
Professor Regina E. Herzlinger, Nancy R. McPherson, Professor of 
  Business Administration, Chair, Harvard Business School........    23
Ed McMullen, President, South Carolina Policy Council Education 
  Foundation.....................................................    24

                     Alphabetical List of Witnesses

Edge, Hon. Tracy E.:
    Testimony....................................................    12
    Prepared statement with attachments..........................    52
Herzlinger, Professor Regina E.:
    Testimony....................................................    23
    Prepared statement...........................................    94
McMullen, Ed:
    Testimony....................................................    24
    Prepared statement...........................................   104
Sanford, Hon. Mark:
    Testimony....................................................     4
    Prepared statement with attachments..........................    33
Solomon, Judith:
    Testimony....................................................    18
    Prepared statement...........................................    82
Tice, Donald, D.O.:
    Testimony....................................................    21
    Prepared statement...........................................    89


                    MEDICAID: CREATIVE IMPROVEMENTS



                             FROM THE FIELD

                              ----------                              


                        FRIDAY, OCTOBER 28, 2005

                                     U.S. Senate,  
            Subcommittee on Federal Financial Management,  
        Government Information, and International Security,
                          of the Committee on Homeland Security    
                                        and Governmental Affairs,  
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10 a.m., at 
the College of Charleston, Wachovia Auditorium, Ground Floor of 
the School of Business and Economics, 5 Liberty Street, 
Charleston, South Carolina, Hon. Tom Coburn, Chairman of the 
Subcommittee, presiding.
    Present: Senator Coburn.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. We will ask for your attention, please, if 
we could have it.
    This is the start of the hearing of the Federal Financial 
Management Subcommittee of the Committee on Homeland Security 
and Governmental Affairs. We are having this hearing today 
because of the problems that those who are dependent on us face 
in our country in terms of healthcare.
    I am a practicing physician. I have delivered over 4,000 
children in the last 23 years. I will deliver two babies this 
weekend--I'm going to try to get out of here real quick so I 
can do what I need to do this weekend. And over 50 percent of 
the babies that I have delivered have been Medicaid babies, and 
so I know a whole lot about caring for those people who need 
our help.
    This hearing is not about money. It is about quality. It is 
about access. It is about care. It is about prevention. And if 
we don't have those things, the costs go way up. If we do 
better on prevention, access, quality and care, the costs go 
down.
    So what this hearing is about is, how do we, in the future, 
develop plans that create dignity, access, quality care, and 
prevention for those that are dependent upon us.
    Several States have wonderful ideas. My own home State is 
struggling with the costs associated with Medicaid, the lack of 
access, the lack of prevention, the lack of quality, the higher 
risk nature of obstetrics and the NICU visits that so many 
babies through Medicaid go to that people who are not in 
Medicaid, for some reason, their children do not end up there.
    So what I want to do is to make sure we understand the 
purpose of this hearing. This is not the only State we are 
going to be doing this in. But there is a dollar figure 
associated with it, and the fact is that the Federal 
Government, and I suspect South Carolina, is on this 
unsustainable course.
    Today, not looking at Medicaid but looking at Social 
Security and Medicare alone, we have unfunded liabilities that 
will place the young people who attend the College of 
Charleston in extreme risk. Those unfunded liabilities at this 
time are over $40 trillion, not looking at Medicaid. What that 
means for our country and for our children and grandchildren is 
that we will abandon the heritage that was left for us and 
leave a legacy of debt, a legacy of lost opportunity, a legacy 
of lack of college education, home ownership, job realization, 
and progression.
    So I welcome each of you here. We are very serious. This is 
the 19th Subcommittee hearing that my Subcommittee has had 
since April 1. We are working hard to look at the options and 
the problems that are facing our country from a financial 
aspect, but I take a very personal interest in terms of the 
healthcare aspect of it because I happen to be very much 
involved with it.
    Before we ask your Governor to testify, with the following 
event that took place yesterday, I would ask each of you, if 
this is how you want us to solve the problems.
    The Committee on Indian Affairs yesterday decided that the 
Alaskan natives who have their healthcare service through the 
Indian healthcare, because we cannot create opportunity and 
access, we have decided to give them less than standard care. 
We decided that we would allow people who are trained 2 years 
in New Zealand to do their root canals, their pulpotomies, 
their tooth extraction and their curettage repair.
    So I lost the vote in terms of trying to change that and 
put money to that program rather than lessen the quality of 
care, but it portends what is about to happen in our country as 
we face the financial difficulties in front of us.
    And I would ask us all to look at our hearts and say, is it 
right that the way we are going to meet our obligation to those 
people who are dependent on us is to give them less than what 
we are going to have for ourself in terms of opportunity, 
access, quality, and prevention? If that is what we chose to 
do, then we have undermined the very spirit of what we call 
America.
    So this is an important hearing in terms of what we need to 
do, how we need to look at things, and the quality and the way 
we treat those that are dependent on us.
    Many have said that you cannot change Medicaid because it 
will not work. Well, I would remind you that many people said 
we cannot change welfare, it will not work. This country has 
had a tremendously successful process of giving people back 
their dignity who happen to be caught, through no fault of 
their own, and trapped, and the same people are saying the same 
thing about healthcare reform and Medicaid reform today.
    [The prepared statement of Senator Coburn follows:]
                  PREPARED STATEMENT OF SENATOR COBURN
    Back in 1965, Medicaid was originally designed as a safety net for 
those in need. We have strayed far from our original objective: 
Medicaid now covers one out of every six Americans (46 million) and 
costs $338 billion a year. This antiquated entitlement program has not 
only compromised quality of care and eliminated consumer choice, it has 
also managed to bankrupt Federal and State budgets. Something has to 
change. The longer we do nothing about the crisis, the more difficult 
the inevitable decisions will be.
    I want to applaud Governor Sanford for recognizing the need for 
intervention and for proposing reform measures that might help prevent 
the program from going bankrupt in South Carolina. South Carolina's 
Medicaid reform proposal implements free-market principles to improve 
healthcare quality and curb waste.

                     The Status Quo Hurts Patients

    As a practicing physician, I see fewer and fewer of my colleagues 
willing to accept Medicaid patients. Physicians lose money by 
participating in the program. For every dollar we spend on a Medicaid 
patient, we are reimbursed 62 cents by the program. But it costs us in 
time too. Interacting with the bureaucracy is an onerous burden for 
over-scheduled providers. Our experience isn't unique. MedPAC reports 
that ``approximately 40 percent of physicians restricted access for 
Medicaid patients.'' The problem is worse among specialists.
    Let me be clear: My complaint isn't about our reimbursement rates. 
Nobody's planning on getting rich on a safety net program for the poor. 
The main reason why the flight of physicians is a problem is because it 
means Medicaid patients have fewer and fewer options when it comes to 
finding a doctor and getting an appointment once they find one. We all 
know how frustrating it can be when you call for a doctor's appointment 
and they can't fit you in for months. With 40 percent of providers 
trying to limit their Medicaid patients, imagine how much longer these 
folks have to wait, if they get in at all. Or maybe they have to pick a 
doctor who is much further away, or who doesn't speak their language.
    These delays and restrictions are nothing more than a form of 
health care rationing. Inevitably, as State governments seek to control 
costs, they must restrict access to services. This is most visible in 
the restriction of prescription drug formularies, which handicaps 
doctors and limits patients. There are other restrictions as well--
South Carolina has had to place a cap on the number of visits a 
beneficiary may make to an emergency room each year.
    It's no surprise that nobody wants to be on Medicaid. A 
Commonwealth survey found that 65 percent of Americans would prefer 
private coverage, and only 10 percent actually preferred Medicaid or 
Medicare above private insurance--most of those never experiencing 
private care. Patients are well aware of the stigma and the other 
problems with Medicaid. Elected officials have a moral obligation to 
end dependency on inferior State-run programs whenever possible. And 
for those who must depend on Medicaid, compassion demands that we do 
whatever we can to make the program effective, efficient, and equal in 
quality to that received by those not covered by Medicaid. Some would 
argue that the poor or indigent are incapable of taking control of 
their health care. I disagree. It's arrogance to assume that Medicaid 
beneficiaries or their caregivers are incapable of intelligent 
decision-making about their own health.
    Medicaid creates a variety of perverse incentive structures. One of 
those is the so-called ``job lock.'' There is a point at which the 
value of the Medicaid benefits a person will lose by getting a better-
paying job is more than his increased income from that job. Some people 
are forced to choose between free health care and a better paying job. 
This ``job lock'' keeps Medicaid recipients trapped in their dependence 
on the State.
    There are other perverse incentives in Medicaid, such as an under-
emphasis on prevention and an over-emphasis on acute and emergency 
care. If you were trying to help out your diabetic mom or your child 
with a disability, wouldn't you want to pre-empt a medical crisis by 
investing more in preventive services and disease management, rather 
than having to visit your loved one in the ICU after an ER admission? 
Wouldn't it be better to structure Medicaid more like many private 
insurance plans--which place an emphasis on prevention?

                     We Can't Afford the Status Quo

    As a physician, I'm most worried about how Medicaid compromises 
patient care. We might be able to bear increased costs of a growing 
Medicaid program if these increases weren't also associated with such 
sub-standard options for patients. But I'm also a father, grandfather, 
and a Senator, and so I'm also losing sleep about how we're going to 
afford the program.
    Federal spending and deficits are out of control. This year, the 
Medicaid alone will cost Americans $338 billion. Medicaid, Medicare, 
and Social Security--the ``big 3'' of entitlement programs--consume 42 
percent of Federal spending (CBO) and that number will continue to eat 
up our children's future if something doesn't give.
    I've talked about the sub-standard quality of the Medicaid system. 
At the same time that quality has been decreasing, the program's 
funding has more than doubled over the last 10 years. We're heading 
towards a cliff. I worry that the political will does not exist to 
avert this looming crisis--and that States will be on their own. As it 
stands now, they are drowning in Medicaid bills.
    It used to be that police and schools were the biggest slices in 
the State budget pie. Now, it's Medicaid--eating up 22 percent of State 
budgets. By the year 2035, Medicaid will eat up half of the South 
Carolina's State budget. Doing nothing is not an option. States don't 
have as much fat as the Federal budget. What will you do--stop building 
roads? Stop supporting public schools? If something doesn't give, the 
legacy left by the so-called ``Greatest Generation'' will be a crushing 
debt-load on our children and grandchildren.

                      A Solution to the Status Quo

    We might be able to learn some lessons from welfare reform efforts 
during the last decade. The reform bill successfully transformed 
welfare from an entitlement program into cash assistance in the hands 
of the States. Back then, as today, critics feared that a change to the 
status quo would threaten the most vulnerable Americans. Instead, the 
welfare caseload actually decreased by 58 percent during the new 
model's first 6 years. Today, welfare is more a temporary hand-up on 
the road to self-sufficiency and less a way of life.
    Although almost every State is in a Medicaid crisis, not every 
State has a leader with the courage to risk his own political neck in 
order to confront the problem head-on. With critics circling, Governor 
Sanford has shown courage to admit that Medicaid could bankrupt South 
Carolina and propose ideas that could pre-empt a Medicaid train-wreck 
in South Carolina. His proposal is better for patients and for 
taxpayers.
    Instead of a defined benefit model, South Carolina proposes a 
defined contribution for Medicaid beneficiaries. South Carolina's 
proposal harnesses the consumer-driven ideas that made America great. 
Under the proposal. Medicaid beneficiaries will have ownership over 
their health care services through the creation of the Personal Health 
Account. Patients will be able to select private insurance and enroll 
in a plan just like other South Carolinians. This proposal treats the 
poor with the dignity they deserve by providing them choice and 
autonomy over their own health care. Not only is this approach the 
right thing to do morally, but it will curb inefficiency by moving the 
program from centralized government control to the marketplace. This 
environment will free providers and insurers from unnecessary 
bureaucracy and allow them to focus on the most important things--the 
patient, the relationship between the patient and the provider, and the 
high quality of care that citizens of the wealthiest and most 
innovative nation on earth have come to expect.
    I look forward to learning the details of this innovation from its 
chief architect: Governor Mark Sanford. We've also got witnesses from 
the South Carolina legislature, the provider community and the academic 
community. Thanks to all of you for being here.

    Senator Coburn. So it is with great pleasure, and also a 
great friend of mine I happened to serve in the U.S. House of 
Representatives with your Governor, Mark Sanford, welcome. 
Thank you for your leadership, and we await anxiously your 
testimony.

 TESTIMONY OF HON. MARK SANFORD,\1\ GOVERNOR OF STATE OF SOUTH 
                            CAROLINA

    Governor Sanford. Sir, thank you very much for being here. 
Thank you very much for coming down here on your 19th field 
hearing in helping us to further deliberate what I think is one 
of the most important public policy issues facing our State. I 
would say that this is on the front burner of top issues that 
will confront the Palmetto State on three different levels.
---------------------------------------------------------------------------
    \1\ The prepared statement of Governor Sanford with attachments 
appears in the Appendix on page 33.
---------------------------------------------------------------------------
    One, it directly impacts the health of 850,000 South 
Carolinians. Second, that it is fundamentally tied to our 
ability to stay competitive in the global climate that we live 
in. If we cannot stay healthy economically, we can't have the 
revenue stream that only pays for healthcare and education and 
other things. And third, this is fundamentally tied to our 
ability to, as you correctly pointed out, maintain spending in 
other categories of government that are very important to the 
people of South Carolina.
    So on a variety of different fronts, thank you very much 
for being here. Before I go any further, thank you for the way 
that you have been standing up for the notion of making choices 
and setting priorities in the U.S. Senate. Fundamentally, to 
govern is to choose, but one of the tragedies at work in 
today's political process is that nobody wants to choose.
    And so I would like to submit for the record a Wall Street 
Journal article \1\ talking about how you dare to use the P 
word, which were priorities, in looking at offsets for a 
sculpture garden in Washington State, an art museum in 
Nebraska, a Rhode Island animal shelter, and now the infamous 
bridge to nowhere wherein you suggested an offset. We're 
talking $4.5 million per resident for the 50 residents versus a 
7-minute ferry ride. And you had said, why don't we take some 
of these moneys and put them into needs that exist after 
Hurricane Katrina. That, fundamentally, to me, is governing 
that notion of making choices. So I would submit that for the 
record.
---------------------------------------------------------------------------
    \1\ The article from the Wall Street Journal appears in the 
Appendix on page 34.
---------------------------------------------------------------------------
    Fundamentally, what we are about in this Medicaid proposal 
that we have before the Federal Government is one that is 
policymakers making better choices so that, indeed, people end 
up with better quality healthcare within the Medicaid 
population; and, second, it is about allowing individuals to 
make choices so that they can, indeed, end up with a better 
healthcare system that works better for them and their 
families.
    Let me go back to those three thoughts that I just quickly 
ran through. First of all, the ability to maintain spending. It 
is important to know that in South Carolina in the year 2000, 
one of every $7 spent in State government was spent on 
Medicaid. By the year 2005, it is one of every $5; by the year 
2010, it is projected to be one of every $4; and by the year 
2015, it is projected to be one of every $3.
    I have here a number of charts that I will submit for the 
record. This is a chart showing the growth of Medicaid at 9.5 
percent each year, 1998 through 2004, versus our State revenue 
growing at 2.4 percent.
    Another chart shows our overall expenditure, which is 
roughly 19 percent of our budget currently, moving quickly to 
29 percent over the next 10 years.\1\
---------------------------------------------------------------------------
    \1\ The chart appears in the Appendix on page 36.
---------------------------------------------------------------------------
    Another chart that shows by the year 2010, Medicaid will 
consume 121 percent of new revenues coming into State 
government,\2\ 121 percent which means there has to be a 
substantial tax increase or a substantial lessening of other 
goods and services of government, or a substantial cut to 
Medicaid.
---------------------------------------------------------------------------
    \2\ The chart appears in the Appendix on page 37.
---------------------------------------------------------------------------
    I would also submit this note, which I think is 
interesting.\3\ This is written by a Democratic Maryland 
Legislator John Houston, President of the National Council of 
State Legislators, and says this: I am a Democrat, a liberal 
Democrat, but we can't sustain the current Medicaid program. 
It's fiscal madness, it doesn't guarantee good care, it's a 
budget buster, we need to instill a greater sense of personal 
responsibility so the people in need can find themselves better 
care.
---------------------------------------------------------------------------
    \3\ The note appears in the Appendix on page 38.
---------------------------------------------------------------------------
    These are a couple of charts to which you alluded to; 
unsustainable at the Federal level.\4\ If you look at the 
growth curve on entitlement spending on a variety of different 
fronts, and I will submit those for the record.
---------------------------------------------------------------------------
    \4\ The charts appear in the Appendix on page 39.
---------------------------------------------------------------------------
    Senator Coburn. Without objection.
    Governor Sanford. Thank you, sir. And where does that leave 
us? It leaves us with one of two avenues. I have here a list of 
other States. For instance, as recently as October 25, Kentucky 
had announced that it was going to stop paying for non-
emergency care done in hospital rooms.
    Maryland has just cut $7 million in Medicaid funding for 
newly-arrived legal immigrants to their--let me say that in 
English--newly-arrived legal immigrants and pregnant women in 
the State of Maryland.
    Michigan's Governor Granholm, Democratic colleague of mine, 
just announced they were going to include a $40 million cut to 
healthcare providers.
    Missouri actually voted--the State senate voted to sunset 
Medicaid in the year 2008 before finally settling to take 
90,000 people off the rolls of Medicaid in Missouri.
    In Tennessee, another Democrat colleague, Phil Bredesen, 
Governor of Tennessee, proposed taking 323,000 people off the 
Medicaid rolls before settling for the 190,000-person cut.
    Now, one option here in dealing with these budget realities 
that I just enumerated is to make these kinds of cuts, as 
outlined by these colleagues of mine, in other States. I think 
a far better way for Medicaid, the system itself, and most 
importantly for the recipients of Medicaid, is to look at 
reform.
    Jeb Bush, just this last week, was able to get a waiver 
through along the lines of what we have proposed. In Illinois, 
a Democratic colleague of mine just announced this week, Rod 
Blagojevich, who we served with in the U.S. House, has shifted 
1.7 million people over to a managed care proposal.
    Brad Henry, Governor of your home State of Oklahoma, along 
with a Senate task force, has actually asked Robbie Kerr to 
come and testify before that committee on reforms. Vermont, 
which comes from arguably a more progressive political 
structure than the State of South Carolina, has gotten through 
a Medicaid waiver September 27 that would allow for managed 
care and changes to the system.
    We think a far better proposal is to allow reforms to take 
place in the system so that it is, one, sustainable; and, two, 
it allows more choices, better quality of care for the 
population served.
    Going to my second point, that reform to Medicaid is 
fundamental to our ability to stay competitive in the State of 
South Carolina. I really believe that Thomas Friedman's flat 
world is here and that we are on an international playing 
field; we directly compete not just with other States but with 
other countries around the globe.
    And toward that end, I would make two notes. One is that 
the Congressional Budget Office has shown at the Federal level, 
your level, as you correctly pointed out with the contingent 
liability you just alluded to, Federal spending will go from 20 
percent, which is basically a GDP, which basically where it has 
been over the last 50 years, since World War II, to 34 percent 
in the year 2050, unless changes are not made to the 
entitlement systems.
    So the reality is we know a change is coming. The question 
is, are we going to make it one that is most suited to 
individual needs that exist, versus a blanket system? We think 
the individual needs is very important. And toward that end, I 
will submit to the record, the recent bankruptcy filing by the 
automaker Delphi, which is the largest bankruptcy in automotive 
history in the United States of America. It, in large part, 
went Chapter 11 because of some healthcare contingent 
liabilities. And one of the things that I think is important, 
and this is a Wall Street Journal editorial of October 19, 
2005, is their note here, the better idea is to introduce more 
competition into the healthcare marketplace.\1\
---------------------------------------------------------------------------
    \1\ The article from the Wall Street Journal appears in the 
Appendix on page 42.
---------------------------------------------------------------------------
    A few years ago, a supermarket chain by the name of Whole 
Foods switched to a consumer-driven healthcare plan in which 
its 32,000 employees were allowed to pick from a menu of care 
options. After 3 years, the company's healthcare costs rose by 
only 3.3 percent, compared with national averages in the double 
digits, but more importantly, job turnover plummeted and there 
was better healthcare.
    So I think that it is as well about how do we stay 
competitive in this global climate that we are living in so 
that we can have a vibrant economy and, therefore, have the 
revenue that will pay for the healthcare, education, and other 
fundamental needs.
    The last point though is the most important one, and that 
is the one that you correctly identified, which is about 
quality access and prevention. We are talking about 850,000 
South Carolinians' lives, and we are talking about, one, how do 
you better coordinate care for 850,000 folks? I have a variety 
of sheets which I will again, as well, submit to the record.\2\
---------------------------------------------------------------------------
    \2\ The information appears in the Appendix on page 43.
---------------------------------------------------------------------------
    These are claim sheets pulled from Robbie Kerr's office, 
HHS, that show a variety of different visits to a single person 
in need. And I think you, as a doctor, would be the first to 
say, if you have a half a dozen different people coming by to 
visit you, you do not have coordinated care. And the notion 
that you are not going to look holistically at one's health is 
a tragic mistake in terms of a quality care. And we do not have 
coordinated care in the present system.
    So you literally have these tear sheets that I can pull 
from Robbie that will show a half a dozen different agencies 
coming by to visit one Medicaid patient in the course of a 
month, and the result, relatively poor care because it is not 
coordinated. To look only at one's hand or one's foot or one's 
eye or one's arm is not the whole look that you have got to 
have if you want to have a good healthcare delivery system.
    So, one, this is about coordination. It is as well about 
prevention. How do you spend more dollars earlier so that you 
can avoid some of the very costly procedures that come at the 
later stages of disease that could have been avoided if you had 
been more in the war to prevent it.
    I would say second this is about outcomes. We are about 
average in what we spend per capita on healthcare, about 25th, 
but we are 47th in the Nation in healthcare outcomes. That 
coordination, we believe, is absolutely crucial to bettering 
the quality of care for South Carolinians, and as well for 
doing what we have tried to consistently stress with the 
variety of fitness challenges and other things of spending more 
money earlier in the healthcare process as opposed to simply 
reacting to disease.
    The third thing that I think is so important about this 
from a healthcare standpoint is that, right now in South 
Carolina, I suspect in Oklahoma and other States as well, there 
is real racial disparity on healthcare outcomes in our State. 
And I think that this is fundamentally an issue of social 
justice. Because if you look at the divide in healthcare 
outcomes, in a lot of ways there have been gaps closed with the 
civil rights movement in income or in education or in housing, 
but the health issue has been persistent with regard to a 
consistent divide between where whites end up and where blacks 
end up. And so I would just give you a couple of statistics.
    In South Carolina, for instance, infant mortality rates are 
basically two-and-a-half times higher for blacks. In South 
Carolina, life expectancy--and this is nationwide--is about 10 
years less. Blacks have significantly higher mortality rates as 
a result of heart disease, stroke, and cancer. The bottom line 
is that nationwide, about 85,000 African-American deaths could 
be prevented if you close that gap that now exists.
    A Harvard study came out recently that showed if you look 
within the minority population, with the black population, if 
with Medicaid you simply move toward a managed care system, 
seven of nine different indices, the gaps begin to close in 
terms of healthcare outcomes.
    And I would say that it is for those reasons that we are 
asking for a reform to the system so that we update, and I 
stress the word update, the way that Medicaid is delivered in 
the United States of America. And I say this particularly 
because if you look at the CMS Journals, what they would show 
is about 39,000 pages of regulations and manuals for the 
administration of Medicare and Medicaid, and that stands in 
stark contrast to the 208 pages that regulate the Federal 
Employee Health Benefits Program which covers about nine 
million workers at the Federal level; everybody from literally 
a janitor on Capitol Hill to a Senator like yourself.
    So fundamentally, what we're asking for in this waiver is, 
can we have an increasing degree of choices for the Medicaid 
population that right now exist for nine million Federal 
workers, again, ranging from the janitor on Capitol Hill to the 
Senator. We believe that notion of choice, that everybody's 
healthcare needs are fundamentally different, is very important 
to bettering healthcare in our State.
    Just a couple of other things that I want to throw out at 
you and submit as well for the record. One is that we have a 
long history of waivers in South Carolina. Robbie and his 
department--I have here one, two, three, four, five, six, 
seven, eight, nine, ten, eleven waivers since 1984 that have 
been granted by the Federal Government to HHS across a wide 
swath of different healthcare outcomes. We think that this 
waiver is certainly in line with those others that have been 
granted in the past.
    I would also say not only have we had a history of doing 
waivers in the past in South Carolina, if you look at the 
number of waivers occurring in other States around this 
country, a wide array. I have here a Thursday, August 18, Wall 
Street Journal article called Rocky Mountain Medicaid.\1\ It's 
about a Colorado disability program, CDAS, the State's 
experiment with Consumer-Directed Attendant Support for the 
severely disabled that began in 2002. What is important to note 
is that it has gone so well that the Legislature just approved 
opening the system statewide to 33,000 Medicaid recipients.
---------------------------------------------------------------------------
    \1\ The article from the Wall Street Journal appears in the 
Appendix on page 45.
---------------------------------------------------------------------------
    And what is particularly telling is the story of Linda 
Storey, who is a 51-year-old rocker who has been battling 
multiple sclerosis for 30 years. Her quote is this, ``It gives 
you your life back. I'm more in control of my health now.''
    I think it is relevant to point out what is stated here is 
in the first 2 years of the Colorado CDAS pilot program, showed 
that monthly spending actually went down.
    People deserve choices. These are the words of the Speaker 
Pro Tem Cheri Jahn, who is a Democrat in Colorado. ``People 
deserve choices.'' With those choices comes not only greater 
dignity for the individual, but also better incentives for the 
system itself. Colorado has a working example with the Medicaid 
waiver right now.
    I will give you one other Medicaid waiver, and that is what 
is called ``Cash and Counseling,'' which began in Arkansas. It 
quickly expanded to Florida, and New Jersey. It has from there 
expanded to 11 other States across this country. It is about 
disabled long-term care needs. There has been a reduction in 
the neglect and there has been enhanced satisfaction to the 
customers, the Medicaid recipients themselves, as a result of 
this program.
    So I could show other examples of things happening with 
Medicaid waivers in other States, but I know I am running up 
against time.
    In brief, our plan is to allow money to go into a personal 
healthcare account, and then from there people could pick from 
a wide array of different choices from managed care, to medical 
home network, to buying into their own healthcare plan if they 
happen to be working for an employer that has a healthcare 
plan, to a self-directed plan. It is fundamentally based on 
ownership, people owning their own account. It is based on the 
notion of consumer-directed plans, which is what you see in 
most cases at work in the larger healthcare marketplace. It has 
with it essential safeguards, and the government would still 
approve each of these plans, and it would be required of each 
of the plans that it will require mandatory services.
    Fundamentally, it is about this: Do you allow, with 
Medicaid, a change so that we can fill the cup of each person's 
healthcare needs and allow them to select a plan that works for 
them, or does everybody have to drink out of the same Federal 
healthcare cup in meeting those needs? They are two different 
paradigms, but one that I think is very much built around the 
individual and the very disparate needs that exist with 
healthcare at the individual level is our plan.
    I will call it quits with what you called it quits with, 
and that was, I pulled here a quote from Tommy Thompson, 1992. 
He said, ``for every one of my welfare reform programs that 
I've put into law or was able to get a waiver for from the 
Federal Government, there have been critics and there have been 
nay-sayers, but they want to keep the status quo.''
    I don't want to keep the status quo. The status quo doesn't 
work. Give us in Wisconsin the chance to be flexible, the 
opportunity to change it, and we'll show the way for the 
country to follow.
    As it turns out, his words were prophetic because, as a 
result of that incubation, that change that occurred at the 
State level, ultimately Federal welfare reform occurred.
    I think that States really have become the incubators of 
many national changes. I think that what is happening with 
Florida with Jeb Bush, what's happening in Georgia with Sunny 
Perdue, what's happening in a wide array of different changes 
is very important to this incredibly important national debate. 
I appreciate the time to testify.
    Senator Coburn. Thank you, Governor.
    No previous Governor has proposed such a bold Medicaid 
reform in your State. You could easily leave this problem to 
successors instead of suffering the criticism in the media. Why 
are you risking your political neck for Medicaid reform?
    Governor Sanford. I think it goes back to what I was 
talking about, which is we spent a lot of time--I have spent, 
you know, a ridiculous amount of time riding a bike across 
South Carolina for a couple of different weekends, dragging 
Jenny and the kids, talking about how if we do a couple of 
little things differently in terms of getting a little bit more 
exercise, a little bit more activity, we can end up with very 
different healthcare outcomes in the State of South Carolina if 
we simply do a few things differently. We've been trying to 
raise awareness on that front.
    Medicaid is an extension of that larger thought process of, 
we need to do a few things a bit differently if we're going to 
end up with different outcomes. The old saying is if you keep 
on doing what you've been doing you're going to keep on getting 
what you've been getting. I think that any time that you try 
and have one-size-fits-all with regard to something as personal 
as one's healthcare, you are going to have problems. Indeed, 
the statistics have certainly shown that and they have showed 
that particularly in some different populations more than 
others.
    I think this about fundamentally how do you better quality 
of care, how do you better access. In some parts of rural South 
Carolina, doctors will not take Medicaid patients anymore 
because we have capitated what the doctor can get. And so it is 
about quality, it is about access, and most of all it is about 
prevention. How do you spend more of the dollars earlier.
    Senator Coburn. I was interested in your projections that 
in 2010, 23 percent, I believe you said, of the increased 
revenue that South Carolina would be required to take of 
Medicaid. I've got a surprise for you. The money is not at the 
Federal level. There is not going to be significant increases 
after about 2008 in Medicaid FMAP programs. The money is not 
there.
    And so not only will there be that 23 percent out of your 
increased revenues, there probably will be a lessening share 
from the Federal Government. There is no way that we can keep 
the commitments at the Federal level to what we said we were 
going to do.
    Now, we could say we are going to do that. And if you look 
at the growth projection, not just the growth but the velocity 
of growth in Social Security and Medicare, it will consume any 
flexibility that we would have in Medicaid. And by the year 
2018, the vast majority of the Federal Government won't have 
any other services, significant services or growth in any 
service whatsoever except Medicare and Social Security. Not 
Medicaid, not defense. The largest growing and fastest growing 
component of the Federal budget today is interest, and it's 
going to continue to grow. That's why pain and making the 
priorities are so important.
    So what you are really saying is South Carolina's going to 
have to cut everything else if you do not reform Medicaid; is 
that correct?
    Governor Sanford. Correct.
    Senator Coburn. So every other area of South Carolina is 
going to be in decline in terms of revenues based on the 
mandatory match that you have today with Medicaid?
    Governor Sanford. Correct.
    Senator Coburn. One of the things that I have read in the 
press, your reforms have been accused of being risky and 
untested. How would you assess the level of risk in your reform 
versus the risk by staying with the current system?
    Governor Sanford. Anything that's ultimately unsustainable 
comes to an end. I think that what you pointed out, what I 
pointed out with the graphs and charts, is that we're on an 
unsustainable course. What we do know is that there will be 
changes in the system, it is just a question of how the system 
will change.
    We think that going the route that some governors have gone 
is a mistaken one where you simply say we are going to 
capitate, we are going to take 300,000 people off the rolls, we 
will take 190,000 people off the rolls, is not the desired 
choice. We think that you can reform the system such that 
people have more control over their healthcare outcomes, and by 
having competition in the system will ultimately better it. We 
think that is by far the better route to go.
    But are things going to change? Yes. I mean, that is a 
certainty.
    Senator Coburn. Let me, if I may----
    Governor Sanford. And that is why it was as well raised--
you talk about risk. It is important to note what has happened 
with other Federal waivers, whether it is in Colorado, whether 
it is in the 15 States that I outlined with the long-term 
disability program. There have been a whole host of waivers, 
and in every instance, whether it is with the Whole Foods 
example in the private sector side, the cases where you have 
allowed the customer, the Medicaid recipient, to have more 
control over how they spend their healthcare dollars, care has 
gone up, access has gone up, and quality has gone up. And I 
think that those are the things, the ultimate matrix of 
measurements that anybody should look at when they look at 
defining risk.
    Senator Coburn. Let me invite Representative Tracy Edge, 
South Carolina General Assembly, to join the Governor on this.
    Representative Edge has served in the South Carolina House 
of Representatives since 1996. He is currently a member of the 
House Ways and Means Committee on which he chairs the 
subcommittee with jurisdiction over the Medicaid Program, 
Health and Human Services, Medicaid and Environmental Control.
    Representative Edge, welcome.

  TESTIMONY OF HON. TRACY R. EDGE,\1\ A REPRESENTATIVE IN THE 
 SOUTH CAROLINA HOUSE OF REPRESENTATIVES AND MEMBER, AMERICAN 
                  LEGISLATIVE EXCHANGE COUNCIL

    Mr. Edge. Thank you very much. It is my pleasure to be here 
today, and I am thankful that you were able to come here to 
South Carolina and give us this opportunity to explain our 
waiver to you.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Edge with attachments appears in 
the Appendix on page 52.
---------------------------------------------------------------------------
    Mr. Chairman, my name is Tracy Edge, and I represent the 
104th House District in South Carolina's House of 
Representatives. I am also the Chairman of the South Carolina 
House Ways and Means Subcommittee on Health, Human Services and 
Medicaid.
    In addition, I am also a member of the American Legislative 
Exchange Council, or ALEC, and ALEC is the Nation's largest 
nonpartisan individual membership organization with both State 
Legislators and Members of Congress encompassing all 50 States. 
ALEC's mission is to advance the Jeffersonian principles of 
free markets, limited government, federalism, and individual 
liberty, which are also features of our Medicaid waiver.
    It is my pleasure to be here before you today in support of 
South Carolina's Medicaid waiver proposal, which I believe is a 
step in the right direction toward empowering South Carolina's 
Medicaid beneficiaries.
    We have to act now to curb Medicaid's skyrocketing costs. 
South Carolina spends more than $4 billion annually, or about 
19 percent of our entire State budget. As our Governor pointed 
out, that is 9 percent more than where we were 5 years ago, and 
our projections have us at about 30 or 31 percent within 10 
years. I believe it could actually happen earlier than that, 
based upon numbers that I have been given by our Budget Control 
Board just this morning. This poses a real threat to other 
funding priorities, such as K through 12 education or law 
enforcement or environmental control.
    In my opinion, Medicaid's problems can be directly 
attributed to the perverse fiscal incentives imposed by its 
financial structure. State governments to doctors to patients, 
Medicaid does not give any incentive to provide or consume 
healthcare efficiently. In fact, the opposite is true. 
Medicaid's financing structure actually rewards inefficiency 
with more dollars. We see that in our budgeting every day when 
it pertains to how we structure our healthcare financing to 
match Federal dollars.
    As you know, the Federal Government pays more than half of 
all Medicaid spending through the Federal Medical Assistance 
Percentage, otherwise known as the Federal match. The Federal 
match gives South Carolina Medicaid spending a guaranteed 
return-on-investment. In South Carolina, the Federal match is 
69 percent. We typically say three-to-one when we talk in terms 
of match dollars. This means that every Medicaid dollar we 
spend yields about $2.85 in Medicaid benefits.
    Ironically, it is the Federal match that is causing 
Medicaid spending to spiral out of control. Medicaid's Federal 
match triggers a wasteful and inefficient spending spree, since 
States need to spend more in order to get more Federal money.
    We often hear about leveraging State Medicaid dollars with 
Federal funds, and we've been very creative at times in trying 
to draw down those Federal dollars by using what I believe are 
risky schemes in order to provide State dollars for our Federal 
matches. Federal dollars are not free. All taxpayers, including 
Medicaid recipients, pay Federal, State, and local taxes.
    Low provider reimbursement rates also directly contribute 
to Medicaid's costs and limit much-needed access to care. A 
major problem that I've battled during my term as chairman of 
the House subcommittee, and in my prior service as well in the 
House, has been, how do we combat physicians who will stop 
seeing Medicaid patients because the reimbursement rates are so 
low? So access has been a critical problem.
    Because of this, providers have the incentive to tack on 
unnecessary tests or stop seeing Medicaid patients altogether 
just to stay in business. We have seen high levels of fraud 
here in the last few years. There was one medical practice in 
my home county of Horry County that was found to have billed 
the government for $30 million over a 6-year period through 
Medicaid alone by ordering tests that were not needed and 
prescribing drugs that were not necessary.
    It is crucial that patients have a stake in their own 
healthcare spending. Unfortunately, South Carolina's Medicaid 
current fee-for-structure system largely shields beneficiaries 
from the consequences of their own healthcare decisions. Simply 
stated, our State's Medicaid system pays claims first, and if 
it asks questions, it asks the questions later.
    It is clear that the case for Medicaid reform has a lot to 
do with money, but more importantly, however, there is a strong 
moral case for Medicaid reform. We cannot and should not 
confine our most needy citizens to an almost-bankrupt system. 
And by almost bankrupt, I could get into some of the financing 
that we are facing for our coming year's budget later. Instead, 
we should put Medicaid beneficiaries on a road to self-
sufficiency by empowering them to take greater responsibility 
for their own healthcare needs. Shielding people from liberty 
and the ability to make their own decisions, in my sense, is 
immoral, and I think we should do everything possible to give 
them greater responsibility.
    We have a map for the road to self-sufficiency, and the 
example, obviously, is welfare reform. Before the Welfare 
Reform Act of 1996, there was an eerie similarity between the 
Medicaid and welfare programs. Both Medicaid and welfare were 
means-tested entitlement programs. Both programs were funded by 
an open-ended, Federal-State spending match, and both programs 
conferred a legal right to benefits.
    Now, almost 10 years later, the two programs could not be 
more different. Block-grant funding has caused welfare rolls to 
drop dramatically. Meanwhile, the Medicaid entitlement 
continues to keep the poor locked in a cycle of government 
dependency in several ways.
    First, it is likely that the mere existence of Medicaid 
could crowd out private sector healthcare alternatives. The 
Robert Wood Johnson Foundation found that of the 22 studies 
they reviewed on the issue, more than half concluded that the 
expansion of public health coverage was accompanied by 
reductions in private coverage. Here again, we find that you 
have government interference in the free market system which 
crowds out the free market.
    More importantly, Medicaid and other entitlements do not 
give the poor an incentive to save and invest, as beneficiaries 
have to remain under certain income levels in order to qualify 
for the benefits. As a result, it is possible that some of the 
beneficiaries may choose to stay below the poverty level, 
thereby locking them into an entitlement system. In other 
words, the government traps them and they don't know how to get 
out of the cycle.
    There is no reason why welfare reform should not serve as a 
model for Medicaid reform, and that is why our Medicaid 
proposal here is so important. Only South Carolina, not 
bureaucrats in Washington, know how to best serve South 
Carolinians on Medicaid.
    Governor Sanford's Medicaid waiver empowers beneficiaries 
to tailor their own healthcare dollars for their own healthcare 
needs. Each Medicaid beneficiary will receive a Personal Health 
Account so that they can fund their own healthcare in a variety 
of ways, either through Health Savings Accounts, by purchasing 
a managed care plan, by purchasing health insurance from their 
employer, or by joining a medical home network.
    This choice not only turns beneficiaries from government 
dependents into empowered healthcare consumers, but it also 
accomplishes the laudable goal of transitioning beneficiaries 
to self-sufficiency and independence through private coverage. 
Medicaid beneficiaries should have the same access to high-
quality, private health insurance as many of us enjoy.
    Just like welfare reform 10 years ago, there are critics 
who maliciously accuse Governor Sanford, myself, and others who 
are leading the fight on this proposal as being cruel or 
heartless. I have to reject that notion. Giving South 
Carolinians the opportunity to pull themselves out of poverty 
will work for them and it will work for Medicaid, just as it 
did for welfare reform in the 1990s.
    Mr. Chairman, there are some here today who have screamed 
over the last 3 months from the highest mountaintops that we 
should not pursue the waiver. However, if we would have enacted 
Medicaid cuts like the State of Florida has done over the last 
2 years, they would also be screaming from the same 
mountaintops. In other words, you can't have it both ways.
    The problem that I, as chairman of the House subcommittee 
which writes the budget for eight healthcare-related agencies 
has, is that every year we are faced with claiming and mounting 
costs that we have to match in order to keep from cutting 
services. Luckily, we have not had to do what Florida has done. 
We have been able to, by various means, carve together enough 
money in order to finance our growth in Medicaid and other 
healthcare programs.
    What happens when we cannot do that and we have to make the 
cuts like Florida has? Then we have people who are trapped in 
an inefficient system, no longer getting the services that they 
once were getting.
    I appreciate the opportunity, Mr. Chairman, to appear 
before you today. I take the job that I have quite serious. And 
I know that scenarios that we have had in the past may also 
continue to haunt us. For instance, 2 years ago we had a $400 
million shortfall in revenues compared to expenses in our State 
budget, yet that same year, the growth in Medicaid alone was 
$180 million. In other words, we actually had a reversal of 
$580 million of revenue.
    What did we have to do to cover Medicaid that year? We had 
to cut law enforcement, we had to cut security in our prisons, 
we had to cut environmental control, and cut back the resources 
that protect the natural resources of our State. We cannot 
continue to do that. I can tell you, I cannot sit at my dining 
table with books thicker than this year after year and figure 
out how we are going to pay for healthcare at the expense of 
education and other programs that we have.
    That is why we are pursuing the waiver that we have today. 
I am not going to claim that the waiver is going to have an 
automatic savings tomorrow, but I do believe that it will curb 
the rate of growth in Medicaid, and that is what is important 
to me. It is important to me to know that in the future we will 
be able to pay for healthcare through Medicaid and other 
programs that we have without having to cut the balance of our 
budget and cut services that other people need.
    Mr. Chairman, I appreciate the ability and the opportunity 
to be here for you today.
    The American Legislative Exchange Council and the Heritage 
Foundation and others have been very supportive in our Medicaid 
reform and the proposals that are contained in Governor 
Sanford's plan. I'm proud to sit with him here today, and I'm 
proud to be before you and say that we need to have the plan 
approved, not only for the fiscal responsibility for our State 
budget, but also to empower our citizens to make the choices 
that they need to have the ability to make.
    Again, I will say that some people do not want to give them 
that ability, and the reason is that they want to trap them and 
keep them into the system that they have so that they will be 
dependent upon this particular philosophy or this particular 
way of life. I think that is cruel, and I think we need to 
break away from that system.
    I would be happy to answer any questions that you have, and 
again, I thank you for being here.
    Senator Coburn. Thank you, Representative Edge.
    Give me 5 years ago in South Carolina, what was the growth 
of Medicaid? What was happening? Can you tell me?
    Mr. Edge. What was happening----
    Senator Coburn. In Medicaid growth. Were you seeing the 
same kind of growth, and were there attempts to fix the access 
and the quality, or was access and quality not a problem then?
    Mr. Edge. It was very difficult to try to do that because, 
at the time, we were having the beginning of 5 years or 4 
years, rather, of revenues that were going under expenditures. 
So the toughest job that we had was just maintaining the 
current system.
    We now have a conservative-controlled House, a conservative 
Governor and a conservative-controlled Senate. Quite frankly, 
many reforms that we proposed out of the House pushed by 
Governor Sanford were blocked because the philosophy in the 
Senate was a little bit different. So, no, we were not able to 
really pursue reforms that we needed to.
    We tried to pass a Medicaid reform proposal for the last 2 
years. It's been very difficult to do. It does not go anywhere 
near as far as the waiver goes, however, there were certain 
controls that we were trying to put in place that many in our 
government were fighting because of the change in status quo.
    The status quo is not going to balance our budget in years 
to come when we consistently need $100 million to $150 million 
of new money just for Medicaid, year after year after year.
    Senator Coburn. Let me come back. If we had all the money 
in the world and we had this system, you still would not have 
dignity for the patient, you still would not have access, you 
still would not have care, you would still have the same 
problems.
    So, it is not just a money problem. It is an access problem 
that people who are using and have to utilize Medicaid today 
are getting less access, and overall, in this country, less 
quality and, for certain, less prevention.
    And so there are a lot of reasons to be doing this. And as 
a physician, one of my main reasons for doing it is, because I 
have seen it and worked in it for 22 years, I have seen what 
Medicaid does and the stigmatization of somebody that has a 
Medicaid card versus somebody that walks in with an insurance 
card. Why can't they have the same thing that everybody else 
has? By the time you compile the dollars and you make the mix, 
why can't we give them access? Why can't we give them access to 
prevention? Why is it that somebody who has a mortality rate, 
infant mortality rate two-and-a-half times better, why is it 
that they do not have the access to the same prenatal care? The 
system has a lot to do with that. And it is not just money.
    It is the government control of the system and the 
inability to have the market-allocated resource, and then let's 
look at how the market is failing and supplement that rather 
than controlled managed healthcare.
    I thank you for your testimony.
    Governor, I have known you for a long time, and one last 
question for you is: A lot of people say, well, he is kind of 
this policy-walking numbers guy. In your heart, why do you want 
to fix this? What is your motivation for fixing this?
    Governor Sanford. I mean, I would go back to what I said 
earlier, and I want to be sensitive because you have got some 
great folks to come up here and testify.
    But I would simply go back to what I said before, which is: 
I believe in the fundamental and the dignity of the individual, 
and I believe that God makes every single person out there 
different, which means that every person fundamentally not only 
has different emotional needs but, frankly, they have different 
physical needs when you talk about one's health. And, 
therefore, the idea of a system that expands the number of 
choices so that people can pick for them and their families 
what makes the most sense based on their healthcare needs is 
fundamentally empowering to the individual, but also, I think, 
a way of creating better quality care for this important 
population of 850,000 South Carolinians.
    If you look at the number that you just cited, which is 
infant mortality two-and-a-half times with one population 
versus another, then why in the world wouldn't you want an 
expanded level of choice so that particular group might be able 
to come up with a package of benefits based on very different 
needs that they have versus another population? That's very 
difficult to do with a one-size-fits-all program, and that is 
what gets back to the multiple conversations that I have had 
with Robbie Kerr on how do you better Medicaid which is so 
critically important to thousands upon thousands of South 
Carolinians?
    Senator Coburn. Thank you very much. This panel is 
dismissed.
    We are going to take a 5-minute break so we can set up. I 
would also ask that our next witnesses please limit their 
testimony to 5 minutes.
    I would ask that the materials for the records offered by 
Governor Sanford be included in the record and in the printed 
final record.
    [Recess.]
    Senator Coburn. The hearing will come to order.
    As I said before, first of all, let me thank each of you 
all for being here. So that you all know how we select 
hearings--my Ranking Member is Senator Tom Carper, and all four 
hearings are divided up Republican and Democrat. We always, 
whenever we go into a State, we allow the State executive to 
have the option to testify, and then because there is a 
majority and a minority, we have a certain number of majority 
witness, and we always have at least one minority witness, and 
we have that again today.
    So I want to welcome those that are here to testify. Ms. 
Solomon joined the Center for Budget and Policy Priorities in 
January 2005 as a Senior Fellow specializing in Medicaid and 
SCHIP. Prior to her current position she was Senior Policy 
Fellow with Connecticut Voices for Children, and Executive 
Director of the Children's Health Council. She graduated from 
the University of Connecticut, and then Rutgers University Law 
School in New Jersey. She also currently lectures at the Yale 
University School of Medicine in New Haven, Connecticut.
    Ms. Solomon, thank you very much for being here.
    We also have Dr. Donald Tice. Dr. Tice is a Member of the 
Board of Medical Examiners in the State of South Carolina. He 
has specialized in family practice medicine for over 20 years, 
has first-hand experience with patient care under the present 
Medicaid system. He is elected by his peers and appointed by 
Governor Sanford to the South Carolina Board of Medical 
Examiners.
    Also is Dr. Regina Herzlinger, Nancy R. McPherson, 
Professor of Business Administration, Chair, at the Harvard 
School of Business. Dr. Herzlinger was the first woman to be 
tenured and chaired at Harvard Business School, and the first 
to serve on a number of corporate boards. She is widely 
recognized for her innovative research in healthcare, including 
her early predictions of the unraveling of managed care and the 
rise of consumer-driven healthcare and healthcare focused 
factories, two terms that she coined.
    Also with us is Ed McMullen, President of the South 
Carolina Policy Council. Mr. McMullen is head of South 
Carolina's only research and education foundation devoted to 
promoting principles of limited government and free enterprise 
in the Palmetto State, public policy. He has previously served 
with the Heritage Foundation in Washington, DC, which does 
promote limited government, economic freedom, and individual 
liberty.
    I want to thank each of you for being here. You will be 
recognized for 5 minutes. Your complete statement will be made 
a part of the record. And, Ms. Solomon, if you would be so kind 
to begin.

TESTIMONY OF JUDITH SOLOMON,\1\ SENIOR FELLOW, CENTER ON BUDGET 
                     AND POLICY PRIORITIES

    Ms. Solomon. Yes. I would like to thank the Chairman and 
Ranking Member Senator Carper for allowing me to testify today.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Solomon appears in the Appendix 
on page 82.
---------------------------------------------------------------------------
    I think it is important at the outset to say there is a lot 
that we agree on. I think we all agree that Medicaid 
beneficiaries should have choices, including provider networks, 
managed care plans, and as many providers as possible who 
participate in the program; that quality, improving quality in 
the program should be the goal of any reform.
    For example, the new emphasis in South Carolina on medical 
homes is a great idea for ensuring access and avoiding 
unnecessary trips to the emergency room. Provider payments 
impede access; they're too low. I think we agree on all those 
things. But I think where we part company is how to go about 
making changes in the program. I think many of the goals that 
have been listed do not need a waiver; they can be done within 
the existing rules and structures in Medicaid.
    Medicaid is of tremendous importance in this State and 
throughout the country. In South Carolina, 40 percent of South 
Carolina's children, and 30 percent of seniors, rely on 
Medicaid for vital healthcare services. Nationwide, when asked 
in a large public survey from the Kaiser Commission on Medicaid 
and the uninsured, over three-quarters of those responding 
supported the program and opposed cuts in benefits.
    Medicaid provides critical support to hospitals, nursing 
homes and other healthcare providers, and it does this in a 
really efficient way. In fact, we were talking earlier about 
preventive care. In my written testimony, we cite a study where 
Medicaid actually provides better preventive care than private 
insurance to children. Through its EPSDT program, it has a 
tremendous emphasis and puts a lot of responsibility on States 
to make sure our kids are getting that preventive care.
    And, yes, Medicaid costs are going up and this is a 
problem, but this is a healthcare problem. Healthcare costs are 
going up, and Medicaid is an important part of the healthcare 
system.
    As we look at changes in Medicaid, we have to realize 
anything we do is going to ripple out over to the larger 
healthcare system. The costs are going up because prescription 
drugs are going up. Enrollment is increasing because employers 
are not able to afford to provide care any longer for many 
employees. It is not crowd-out.
    Medicaid has provided the safety net that has kept the 
overall rate of uninsurance from going up in this country, and 
that was shown again in the most recent census information at 
the end of August.
    But our States and the Federal Government struggle with the 
costs. As I said, care really has to be taken to avoid harm to 
beneficiaries. In South Carolina, almost everyone who relies on 
the Medicaid program is poor, with income below the poverty 
line. People on Medicaid do not have the ability to absorb 
costs. A substantial body of research shows that even modest 
cost sharing decreases utilization of effective care, of 
important care, and also affects health outcomes in a negative 
way.
    So here are the problems that we see with what South 
Carolina is proposing. First off, it is attempting to save 
money by looking at only 40 percent of the cost of the program. 
The Medicaid program, children and parents in Medicaid, non-
disabled adults, are about 80 percent of the beneficiaries in 
this State, but the cost of providing services to them is only 
one-third of the program costs. And that is primarily who would 
be covered by the waiver. Those receiving long-term care 
services and those who are eligible for both Medicare and 
Medicaid take up about 40 percent of the overall cost of South 
Carolina's program, but they are outside of the waiver.
    So you are starting with this smaller portion of the 
program covering the majority of people, and you are trying to 
extract savings. But at the same time, the proposal has a whole 
list, and I have listed them in my testimony, of new entities 
that the State will have to contract with: Managed care plans, 
administrative service organizations, a vendor to develop 
electronic cards, an enrollment counselor, an extremely vital 
function but very labor-intensive providing counseling to 
beneficiaries. All of these are going to be private companies, 
and rightfully will be expecting to make a profit.
    So you are looking at 40 percent of the program covering 80 
percent of the people in a very efficient way, primarily 
because the provider payments are already very low, and you are 
going to have to extract all that new administrative expense. 
South Carolina's administrative expenses are very low right now 
for its Medicaid program; it is lean and mean. And I know I 
have heard Mr. Kerr, the Medicaid director, talk about the 
struggles they have for keeping up with that. But be that as it 
may, every dollar that will have to now be spent on 
administrative costs is going to come out of the benefits going 
to individuals and the payments to providers.
    South Carolina is not a State with, either in the private 
market or in Medicaid, with a large managed care presence, so 
there are a disconnect here. This idea that there is going to 
be many managed care companies coming in is really speculation, 
but yet the proposal is based on that.
    And the personal accounts that the State is proposing 
actually will cost money. The House Energy and Commerce 
Reconciliation bill has a demonstration program to allow 10 
States to have programs of Health Savings Accounts. When the 
CBO scored that proposal, it actually costs money. Because by 
giving people Personal Health Accounts, or HSAs, in some ways 
you are allowing them to keep them when they go off Medicaid, 
which is not a bad thing to do, but if we are looking at 
efficiency and saving money, they are going to have money that 
would not have otherwise been spent. At the same time, you 
still have to cover everybody's heath costs, and that is why 
that proposal scored and that is why this proposal would not 
save money.
    Before I conclude by just giving a couple of ideas of what 
could be done, I just want to talk about the Cash and 
Counseling, which has been cited as a precedent for this 
approach. Cash and Counseling has been a very effective 
demonstration project, but it is a very limited approach that 
cashes out a very predictable benefit provided to people with 
disabilities in Medicaid who are not even really a part of this 
proposal, for the most part, and it allows them to budget and 
direct their own personal care services, which are predictable; 
you know how much you are going to need for a personal care 
attendant. That has increased satisfaction, it has been 
successful, but is not a model for cashing out the entire 
Medicaid benefit where people's healthcare expenses--and I 
know, Dr. Coburn, you know this as a physician--are not 
predictable. For the most part, your health can change 
radically from one day to the next. So these are very important 
things to take into consideration.
    Senator Coburn. Can you wrap up for me in about 30 seconds?
    Ms. Solomon. I can.
    Senator Coburn. Thank you.
    Ms. Solomon. So what can be done? I think efforts to 
develop medical homes encourage preventive care. Coordinate 
care. If you are finding through your data, as the Governor 
said, that you have people using care, there are plenty of 
tools in the existing program around disease management and 
care coordination to do that.
    Ask providers and beneficiaries what they think. I think 
they have not been part of this planning process. I think it is 
very important that they be asked. Start small and proceed 
carefully. The program is just too important to take chances 
with risky and untested reforms. Yes, we have said that.
    Senator Coburn. Thank you. All right. Dr. Tice.

TESTIMONY OF DONALD TICE, D.O.,\1\ MEMBER, SOUTH CAROLINA BOARD 
                      OF MEDICAL EXAMINERS

    Dr. Tice. Yes, sir. Thank you, Dr. Coburn, for the 
opportunity to address this panel.
---------------------------------------------------------------------------
    \1\ The prepared statement of Dr. Tice appears in the Appendix on 
page 89.
---------------------------------------------------------------------------
    I have been a primary care physician for approximately 23 
years and have worked with Medicaid as a portion of my practice 
during that entire time.
    Medicaid, in my experience, is a prompt payer of claims. 
They do rightly hold the authority to audit records at any time 
and hold physicians accountable.
    Here, though, I would like to present a perspective from 
the private physician provider standpoint. Medicaid recently 
updated its Medicaid Provider Manual. The manual is clear and 
concise for users. Regretfully, my staff has great difficulty 
reaching a Medicaid representative at any time when an unusual 
situation arises. Voice messages left are rarely or never 
returned. When a call is returned, the representative typically 
refuses to be put on hold while our staff member is brought to 
the phone.
    This is a most unfortunate condition and discourages field 
staff from calling the representatives for assistance. There is 
currently no designated customer service unit to provide a 
claims resolution for any particular account. Consequently, 
providers will write off charges rather than trying to invest 
an inordinate amount of time getting the issue resolved. The 
State benefits, but the providers have just another reason why 
he or she does not want to take any additional Medicaid 
recipients into their practice.
    Recently, Medicaid introduced the Select Health Program. 
Patients were required to read informational materials 
notifying them that their children were placed under the care 
of a physician that was not known to them. A lot of parents 
never received the materials, some because the database was not 
current and they did not have the current addresses.
    Parents were asked to make an affirmative decision to 
disenroll in the program if they did not want this new 
physician. The burden of informing, educating, and trying to 
correct a parent's misunderstanding of their benefits then fell 
upon the provider's staffs. Medicaid officially did meet their 
burden of information and education, but really did the parents 
a disservice by enrolling them into a program without an 
affirmative choice being made.
    The Medicaid system sometimes interferes with decisions 
affecting the quality of care given to its recipients. 
Specifically, private offices are not reimbursed for the cost 
of their supplies. in many cases. When patients need 
immunizations, they have to be referred to the Public Health 
Department because providers are not reimbursed for those 
services. This fragments the care for the patient, and often 
these patients are non-compliant with medical direction.
    Another primary example where medical care is interfered 
with is when medications need to be injected or infused. Often, 
administration of products in the office setting could be done 
at a far reduced cost over that of a hospital setting. Both 
Medicare and Medicaid could realize tremendous savings if 
private offices were allowed to treat more aggressively and not 
have to hospitalize patients that could be treated in an 
outpatient setting.
    Physical therapy modalities cannot be offered in a private 
office because they are not reimbursed. A very common complaint 
of the general population, much less adult Medicaid population, 
is back, neck and joint problems. These services are very 
difficult to address in the primary care office because most of 
the services that we provide for those are not reimbursed. The 
patient has to be sent to a much higher-expense physical 
therapy setting or referred to the hospital. Continuity of care 
and considerable cost savings could be realized if the care was 
moved out of the hospital and back into the primary care 
physician's offices.
    Private outpatient offices are not and cannot be operated 
like the more expensive hospital-based offices or ER fast 
tracks with their much higher administrative costs. If we 
operated our offices like that, we could not survive.
    Patient dignity and sanctity of the provider/patient 
relationship is undermined when patients over 65 with Medicare/
Medicaid coverage has had to suffer the loss of healthcare 
services when Medicaid costs shifted the financial burden of 
the 20 percent co-pay insurance to the physician providers by 
denying payment when Medicaid is a secondary payer. Providers 
in mass are no longer taking Medicaid as a secondary payer, 
thereby making the patient responsible for a much greater 
financial burden, which they are unable to afford.
    Senator Coburn. For time's sake, I will give you one more 
minute, if you could sum up for us, please.
    Dr. Tice. Fraud and abuse are also a major problem in the 
current system. Many patients are working in service industries 
or construction jobs for unreported wages. They are making very 
good livelihoods, but they have Medicaid coverage for 
themselves and their family. People who work and report their 
earnings and who come into contact with these individuals on a 
regular basis are aware of this, including the physician's 
office staff. There is currently no good way to report these 
people, and if the report is made, it seems like nothing is 
really happening.
    I do want to say that possibly a Health Care Savings 
Account might benefit the system and put the recipients more in 
charge of their own healthcare. But caution has to be exercised 
in that education of Medicaid recipients has historically been 
difficult, at best. That is not only education as far as their 
benefits are concerned, but as far as their diabetes and 
hypertension and other healthcare issues. However, education 
will be the key to that success.
    There are two important items to remember. One is the 
responsibility for educating the patients cannot be borne by 
the outpatient offices. Changes in the inequity of the system 
towards the providers must be addressed. Everyone has to feel 
that they can make a difference by being able to help the State 
curb the abuses that are so obvious. Trust and cooperation must 
exist between the State system and its providers. I appreciate 
your time and attention. Thank you.
    Senator Coburn. Thank you. Dr. Herzlinger.

   TESTIMONY OF PROFESSOR REGINA E. HERZLINGER,\1\ NANCY R. 
MCPHERSON, PROFESSOR OF BUSINESS ADMINISTRATION, CHAIR, HARVARD 
                        BUSINESS SCHOOL

    Dr. Herzlinger. Thank you so much, Dr. Coburn and Senator 
Carper, for giving me this opportunity to testify.
---------------------------------------------------------------------------
    \1\ The prepared statement of Dr. Herzlinger appears in the 
Appendix on page 94.
---------------------------------------------------------------------------
    The Medicaid program is a great program. It provides a 
much-needed health insurance safety net for 52 million of our 
Nation's poor and medically needy, but its price tag threatens 
the financial stability of States, growing at almost 10 percent 
in 2004 alone, far in excess of revenues.
    What is a fiscally-responsible State Governor or State 
Legislature to do? They can either raise taxes, cut the 
expenses of other programs, cut the benefits or the number of 
beneficiaries in Medicaid--Tennessee, for example, cut 190,000 
people out of its Medicare rolls--or do something else.
    Governor Mark Sanford is to be commended for choosing a 
different path, for trying to find a different way out of this 
problem; not by cutting, but by turning to the innovations in 
healthcare. Because this plan is likely to become a national 
model if it is adopted, it has drawn the attention, national 
attention, of policy analysts who question the concept of 
choice in Medicaid, and especially the consumer-driven option. 
In this testimony, I would like to respond to both of these 
points.
    What about choice? Well, in the rest of our economy we have 
a wide choice of goods and services. Choice is not only what 
consumers need and want, but choice creates competition, and 
competition is the key to controlling costs. Most Americans 
want a choice in healthcare, but South Carolina's Medicaid 
recipients currently have all too little choice, very few 
physician networks that are organized to treat those with 
special needs--people with diabetes, with AIDS, with 
hypertension, with sickle cell disease, treatment limited to 
the physicians who are willing to take on Medicaid enrollees, 
and virtually no managed care.
    Furthermore, because Medicaid nationally pays providers 
only 65 percent of what they receive for treating the State's 
employees, 30 percent of all physicians refuse to accept any 
new Medicaid enrollees. And Medicaid enrollees experienced, 
according to a recent Journal of the American Medical 
Association article, much more difficulty in scheduling visits 
for follow-up care than those with other types of insurance. 
Medicaid recipients have more unmet healthcare needs than 
similar adults with private insurance.
    Critics of the Governor's plan contend that choice cannot 
materialize in South Carolina because it has so few Medicaid-
managed care providers currently. But when Georgia requested 
bids for Medicaid-managed care, 10 firms responded. When Ohio 
had a conference for its potential conversion to Medicaid-
managed care, it drew nine new managed care firms into the 
State, including very well-established and well-known firms 
like Aetna, United Health and Anthem, which is the arm of 
Wellpoint.
    Now, the people who worry about giving Medicaid recipients 
choices are especially concerned about the consumer-driven 
option. They contend that Medicaid enrollees are too poorly 
educated and that they lack access to sources of information.
    Now, first of all, these critics may well believe that when 
people have a choice they overwhelmingly opt for a consumer-
driven option. That is not correct. There has been a fairly 
long history of giving employees choice, and only about 5 to 20 
percent of employees, when they are given a choice of health 
insurance plans, choose consumer-directed ones. Switzerland, 
which has had a consumer-directed plan for a 100 years, in 
Switzerland, low-income people typically chose plans that give 
them the most insurance, understandably.
    Nevertheless, what happens when people who are not well-
educated, allegedly, use consumer-driven plans, can they use 
them to advantage? The experiences of the disabled who opted 
for the government based Cash and Counseling programs indicate 
that they derived greatly enhanced satisfaction while 
controlling costs, even though many of the participants had 
intellectual impairments.
    Senator Coburn. Thirty seconds, please, Doctor.
    Dr. Herzlinger. Participants substantially increased their 
satisfaction and unmet need, and as one program participant 
noted, I am not under anyone's thumb anymore.
    As for the private sector's consumer-driven experiences 
with low-income populations, the experience of Whole Foods, 
which is the supermarket chain, is very instructive. As of 
2004, its employees, primarily blue collar, saved $14 million 
for themselves in their own savings accounts, turnover 
plummeted, and costs rose only 3.3 percent in contrast to the 
rest of the healthcare system.
    These plans have transformed how enrollees approach their 
healthcare. They do spectacularly well with people who have 
chronic medical problems. They change behavior from, I do this 
because my health plan covers it, to, I do it because if I 
catch an issue early, I will save money in the long run. Thus 
the firm McKinsey, which has no stake in this, not under 
contract, found that 75 percent of the enrollees in a consumer-
driven program complied with medicine regimen as opposed to 63 
percent of those in other forms of insurance.
    Medicaid enrollees are currently treated like second-class 
citizens. Some providers choose either not to see them or to 
treat them only after considerable delay because of the 
program's low payment rates, and enrollees have little access 
to the managed care, and no access to the consumer-driven plans 
available to the rest of the population.
    Senator Coburn. All right. Thank you very much. Mr. 
McMullen.

 TESTIMONY OF ED McMULLEN,\1\ PRESIDENT, SOUTH CAROLINA POLICY 
                 COUNCIL, EDUCATION FOUNDATION

    Mr. McMullen. Mr. Chairman, thank you for the opportunity 
to speak with you today. My name is Ed McMullen, and I am 
President of the South Carolina Policy Council, which is a 20-
year-old non-profit, non-partisan public policy research 
organization here in South Carolina.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. McMullen appears in the Appendix 
on page 104.
---------------------------------------------------------------------------
    I am here to present an overview of the innovative 
solutions that are being proposed to improve Medicaid in our 
State. There is no question that Medicaid must be reformed. It 
already consumes 20 percent of our State budget, and that is up 
10 percent from 1995. By the year 2015, Medicaid costs are 
projected to consume 30 percent of our State's budget. That is 
a growth rate that cannot be sustained.
    In addition, you mentioned the Federal Government will 
likely change the way it sends dollars back to the States. One 
plan proposes block grants instead of matching funds for 
States. Such a system would provide greater stability for the 
States, and take away the perverse incentive for them to spend 
more tax dollars to get more tax dollars.
    Our State would ultimately benefit from the change, because 
the current matching formula is based on a system that compares 
our State's per capita income to the U.S. average. And that 
means as our economy grows, and it is, our matching funds will 
decrease. Already, South Carolina's Federal matching ratio for 
fiscal year 2006 is 3.5 percentage points lower than it was in 
fiscal year 2004.
    In the long run, economic growth will shrink Medicaid 
rolls, but not in time to stem the massive growth in the 
program.
    Fortunately, there is progress toward reform in our State. 
The new waiver proposed by Governor Sanford is an innovative 
market-based plan to provide quality healthcare to patients 
that is affordable to taxpayers.
    You have heard about that plan today to provide Personal 
Health Accounts, or PHAs, for Medicaid patients. PHAs would 
offer greater access to quality care, allow patients to choose 
their doctors, decrease the number of emergency room visits 
through preventative care, and empower special needs 
populations with more choices.
    We also know that Health Savings Accounts work in the 
private sector, resulting in decreased premiums and lower out-
of-pocket expenditures.
    There is also research on other plans that provide more 
choices to those on government assistance. In States such as 
Arkansas, Florida and New Jersey, participation among elderly 
and disabled populations show high rates of satisfaction, as 
high as 90 percent. Clearly, these consumers are receiving high 
quality care, and they also believe it is an improvement over 
their previous plans.
    It is important that this plan have the companies in South 
Carolina, including one managed care company that currently 
serves 60,000 Medicaid patients, indicate they are eager to 
participate in this proposed plan.
    Just yesterday I was up in the mountains of South Carolina 
with a group of insurers. We heard today that we're worried 
about them coming into South Carolina. When they heard this 
plan, presented by Dr. Kerr, they were excited, they were 
eager, they were anticipating great opportunities for better 
quality healthcare.
    Healthcare companies support this plan. Consumers indicate 
their preference for more choices, not just in other States, 
but here in South Carolina, when a managed care program for 
Medicaid receives high marks from patients. Physicians have 
long argued for the need for comprehensive primary care, which 
this plan does allow.
    So who opposes the PHA plan? Frankly, the self-described 
advocates, many of whom are from out of State, who argued 
against our welfare reform in 1994 in South Carolina. Those who 
fought the change in the 1990s made some of the same arguments 
we hear today, including that the children will suffer.
    Those dire predictions have simply not come true. A 2001 
study for the South Carolina Department of Social Services 
found that of those who left welfare because they were earning 
money through newer, better jobs, 75 percent were still 
employed a year later. Only 10 percent of all those leaving 
welfare believe their children suffered after leaving the 
program.
    A subsequent study in 2003 found that 65 percent of all who 
had left the welfare rolls were working 40 hours a week or 
more, and 95 percent of them felt that leaving welfare created 
no hardship. I would call that good success.
    In spite of the doom-and-gloom scenarios, welfare reform is 
a success in this State. Furthermore, the Department of Social 
Services has become more efficient. And as the Charleston Post 
and Courier reported, South Carolina has been among the 
national leaders in cutting welfare rolls, earning high 
performance Federal bonuses in the process.
    We have to create that kind of positive change in South 
Carolina's Medicaid program. Neither patients nor taxpayers can 
afford the cost of this status quo. Medicaid patients deserve 
high quality care, and they should be able to choose it for 
themselves. They should not have to rely on overwhelmed 
emergency rooms that cannot possibly serve them as well as 
their own private doctors could.
    Medicaid patients are every bit as capable as other 
consumers when it comes to making informed decisions for 
themselves and their families; they do it every day. They must 
be given that opportunity again in healthcare.
    The proposed waiver plan is patient centered. It is based 
on successful approaches to healthcare. It is also cost 
effective, but most importantly, it is a step toward higher 
quality healthcare for those who are often denied the best 
available services. Such innovation clearly deserves a chance 
in South Carolina.
    Mr. Chairman, thank you for your time.
    Senator Coburn. Thank you, Mr. McMullen.
    Let me ask each of the panelists something. Is there any 
doubt in any of your minds that we have an obligation to help 
those that need us to help them with their healthcare? Does 
anybody disagree with that?
    [All panelists shake their heads.]
    Number two, is there any doubt in any of our panelists' 
minds that people ought to be able to have some say in their 
healthcare? Anybody disagree with that?
    [All panelists shake their heads.]
    That part of being a part of this country is having choice 
and freedom and expressing of your will.
    Would all of the panelists agree that part of the problem 
with this, the controversy over this might be the fear that 
somebody might be left behind, that somebody might not get what 
they need to get? Does anybody disagree with that?
    [All panelists shake their heads.]
    So let me come back and try to understand. If we do not 
have as good access now, and if we do not have as good a 
quality now, and we certainly do not have as good a 
prevention--we may have some in terms of EPDST programs in 
children, but we certainly do not have it with adults in 
Medicaid anywhere in this country like we need to have it, and 
it certainly does not equate to some of the prevention programs 
that people who are in the private insurance sector have, why 
in the world wouldn't we want to try to fix that?
    And I do not know if this is the right program or not. What 
I know is Medicaid almost everywhere is broken, and it is 
broken because those who are counting on us, we are saying, 
here is your healthcare, but it is less than the rest of us are 
getting, and the access is less, and the quality is less, and 
on basic, on average, the outcomes are less.
    So my question to each of our panelists is, what are the 
alternatives to what has been proposed today? What should we do 
as a Nation? Not just in South Carolina, but how do we fix 
this? How do we fix healthcare? Is choice and competition of 
allocate and resource and really let competition go for quality 
and outcome and availability and access? Why shouldn't some 
doctor in South Carolina be able to say, you are on Medicaid 
for an X fee? I am going to take care of your family all year? 
Why shouldn't they be able to do that, and that family spend 
less money and be able to keep that for themselves to 
incentivize to do something else? Why would we not want to do 
something like that?
    Ms. Solomon, I'll just let all of you go down the line.
    Ms. Solomon. Well, as I said, I think it is clear we all 
have similar goals here. The problem is, we pay providers less 
in Medicaid, and that has an impact on access. So when we are 
talking about trying to save money here, which really is what 
this proposal is attempting to do, how are we going to do it if 
we take--first of all, we are focusing on the people where the 
money is not, we are focusing on primarily the healthy people, 
we are not focusing on long-term care, creating new options for 
long-term care.
    Senator Coburn. Is it not true, in South Carolina, long-
term care is a separate budget? It is not considered because 
they have already decided that is how they are going to care 
for that patient. That is not part of this plan.
    Ms. Solomon. That is not part of the waiver but it is 40 
percent of the cost of Medicaid.
    Senator Coburn. I understand that. I would love to talk 
about long-term care----
    Ms. Solomon. Right.
    Senator Coburn [continuing]. Because I think we ought to 
incentivize people to help keep their parents with them, not in 
a nursing home.
    Ms. Solomon. But that is what I am saying, that is where 
maybe we could save some money. But when you are talking about 
80 percent of the beneficiaries and one-third of the cost, and 
then you are talking about building tremendous new 
administrative structures----
    Senator Coburn. What are the estimates for the 
administrative cost for this plan?
    Ms. Solomon. I have not seen any.
    Senator Coburn. So we don't know?
    Ms. Solomon. No, we do not know. But we know that there is 
a myriad of new private companies that will be involved, and 
all have to support employees and so on as part of this 
structure.
    I am just saying, so the reality is, to get where you want 
to be is going to cost more money and we would not disagree on 
that, but how are you going to give the cost of Medicaid in 
South Carolina for the people that are covered by this waiver, 
primarily is about $2,000 per person per year. The cost of 
individual health insurance this year is over $4,000. The cost 
of family coverage in the private market is $10,000. So there 
is your disconnect. It is costly, but there is not enough money 
in the system. So this proposal, I don't think, addresses, 
regardless of the goal----
    Senator Coburn. So what is the answer? If it is not this, 
what?
    Ms. Solomon. Well, I think you have to look at the whole 
program, I think you have to look at the heavy hitters, if you 
will. Look where you have--if people are using the emergency 
room--I was involved in a project in Virginia where they were 
very concerned that children were ending up in the emergency 
room. So what they did is they began to look at the data. Well, 
children were ending up in the emergency room, but on nights 
and weekends. So they called the provider's offices on nights 
and weekends, and they found that is what people were being 
told. So what they did was they brought in a 24-hour nurse 
advice line to talk to people, talk them through the problem 
and get them to the next day. That solved the problem.
    Look at the data, look at the problem, look at the issues. 
We do not need these large-scale reforms yet. I mean, we are 
not there yet, I do not think.
    Senator Coburn. OK. Mr. McMullen.
    Mr. McMullen. That's exactly what this plan does. So, I 
mean, when you look at the Governor's waiver, you clearly have 
two options. You have, in South Carolina, explosive healthcare 
costs in Medicaid. The Governor clearly stated it, we are 
either going to raise taxes or we are going to start cutting 
necessary programs that are education and safety programs, or 
we are going to restructure this system.
    We were faced with very similar dilemmas in 1994 with 
welfare reform, and the same advocates from out of State came 
to South Carolina and created this horrible scare tactic of 
what we can expect with children and families in the streets. 
And what really happened is exactly the opposite of what they 
projected to happen. It is a working systemic change, and that 
is what we need in Medicaid.
    Senator Coburn. Dr. Herzlinger.
    Dr. Herzlinger. I would like to respond as well.
    People who support a single payer typically make this 
administrative argument and they say it is so much cheaper if 
you have only a single payer rather than having all these 
different private plans competing with each other.
    Well, that is an interesting argument. If that is so, why 
don't we have the Federal Government buy our houses, buy our 
homes, buy our foods? Certainly the administrative costs would 
be lower. But the question is, what happens to total costs when 
you have a single payer, and what happens to total cost if you 
do not have the kind of innovation that Ms. Solomon was just 
talking about? What kind of innovation can give a better value 
for the money in Medicaid?
    For example, Duke physicians devised a program for 
congestive heart failure, which is a big problem for Medicaid 
recipients. In 1 year, they saved 40 percent, and they saved 40 
percent not by saying to the doctors I'm going to pay you less, 
not by saying to the recipients you can't see a specialist; 
they found a better way of delivering healthcare, so they made 
it better and cheaper.
    Consumer-driven plans have drastically reduced the rate of 
increase of healthcare costs while they have given even the 
sickest kinds of enrollees much better health status.
    So the answer is not to limit the purchaser to one buyer, 
who as able and as well-intended as they are, simply cannot do 
what a multiplicity of different individual participants in the 
Medicaid market can do. Our economy is built on competition. 
You cannot have competition with only one buyer.
    Senator Coburn. Dr. Tice, any comments?
    Dr. Tice. Yes. The impetus has to be to try to get the 
patient back into the private care facilities, because we 
really can deliver medicine with much better continuity of care 
than in an emergency room which is very disjunctive care, and 
we can deliver it at a much lower cost.
    Medicaid recipients have been given the opportunity to go 
to the emergency rooms at night or on weekends, wherever they 
so desire. Anyone with a third-party insurance is going to pay 
more to do that. If you want to bring the Medicaid recipients 
up to the same level as the people that have private insurance, 
then they should have the same disincentives as people with 
private insurance.
    Senator Coburn. All right. Let me give you all an example. 
I held a town hall meeting in Enid, Oklahoma about 6 weeks ago. 
And a farmer there was limping up on crutches and he had a 
total knee replacement and he got an infection in his knee. And 
he is a Medicare patient, but same rules apply on Medicare and 
Medicaid as far as CMS in terms of outpatient drug therapy. And 
he was offered the option to go spend 30 days in an outpatient 
hospital, in a hospital setting to get his IV antibiotics twice 
a day and Medicare could pay for that, or he could pay for it 
himself and stay at home.
    Well, the difference in the cost was $30,000 versus $4,200, 
but our government policy is, because we have a one-size-fits-
all, we cannot seem to figure out a way to make a good way for 
good judgment to be used in terms of how dollars are spent.
    Well, he was fortunate enough to have had a good wheat 
crop, so he chose, rather than to spend 30 days in a hospital 
and cost the government $30,000 for him to just get IV 
antibiotics that a nurse could give him twice a day at home 
through a PIC line, he chose to spend that money himself.
    Now, he saved all of us $30,000, which I thanked him for. 
But this is the problem with single-payer systems that are 
trying to manage care. And I would ask you that, couldn't we 
use that $25,000 better to make sure a baby does not hit a NICU 
unit, to make sure that somebody who has diabetes who is on 
Medicaid gets the kind of counseling that they need so that 
they never end up in diabetic ketoacidosis and in the ICU 
because they did not have continuity of care and did not have 
the opportunity, even though we have said we are going to take 
care of you, but did not have the continuity of care.
    So I do not know what the answers are to our problems, but 
I know what we are doing now is not going to work. And I think 
innovation and attempt at competition--I am not just a doctor, 
I ran a pretty good-sized business, I have a degree in 
accounting and production management, and I became a doctor 
after my first episode with cancer. It changed my life, and as 
it does many of the people in this room who have ever 
experienced cancer, it changed my life. But what I do know is 
that with government oversight, markets work well to allocate 
resources and to save us money, and I do not think we ought to 
be extremely afraid of it.
    I would note that Ms. Solomon's organization was one of the 
leading critics of welfare reform, for good reasons, because 
what the worry was is you are going to hurt people, you are not 
going to help them, you are going to hurt them. And that is an 
admiral goal to voice that opposition. But the choices, I 
think, that Governor Sanford outlined for us is, not just in 
South Carolina but as a Nation as well, but we either get a 
cutback, we are either going to raise taxes, or we are going to 
limit options by cutting back everything else in government to 
meet a commitment.
    And change is tough for all of us. But I will outline to 
you that, right now our children are on the hook for about 
$80,000 of Federal debt. That is my children. My children range 
in age from 35 to 28. But my grandchildren are on the hook for 
about a quarter million right now. And what we have to do is 
work together for those that have the heart to make sure we 
never hurt anybody, and those that have the numbers that say 
can't we do it better, we have to find a way in our country to 
bring those two thoughts together so that we can accomplish a 
legacy for our kids and our grandkids that was left for us.
    And because I have a great deal of interest in obstetrics, 
it is atrocious that Medicaid in a minority population, 
neonatal rates are what they are. And it is because of access. 
It is not because of the patients. I treat tons of Medicaid 
patients. It is because of access. They cannot get the 
available care. And so consequently, their child ends up with a 
problem. We spend $200,000 in a neo-natal ICU unit because they 
did not have access. We can fix that. We can do better.
    And so I will summarize with this: That I would challenge 
everybody that is here on either side of this issue to think 
about the patients, think about those that we have made a 
commitment to, and figure out that the numbers do not work now. 
So how do we come together and solve this problem for those 
people that we said we are going to commit to help? And you can 
make this polarizing or you can bring this together and fix it. 
We can make it polarizing in the U.S. Senate, in the U.S. 
Congress, or we can come together and fix it.
    I believe partisanship stinks in our country. I think it is 
killing us. And I believe it is time for leadership. And I 
believe that the people of South Carolina has a problem with 
Medicaid. I know the people of Oklahoma do. And we have to 
figure out how we meet the commitments, both for those in 
Medicaid, but all the rest of our country. And I will say, it 
may involve raising taxes. We may have to do it. Because, 
remember, if we don't pay for the things that we are doing 
today, that is a tax increase on our kids, and that does not 
fit with the heritage of our country or the legacy that we want 
to leave.
    So I would just put forward and ask that the people in this 
State start working together to try to figure out how do you 
best do that. It is easy to say this will not work and that 
cannot work, but I would hope that you would come together and 
be a model for the rest of us as a Nation. Show us the invasion 
that can occur. Take some risks, make sure the safety net is 
there. Take some risks and try it, try it with a third, try it 
with a half, try it with two-thirds, but don't continue the 
status quo.
    Mr. McMullen. Senator, let me just say one thing to that 
effect, because I think it is important to note. This has been 
a year-and-a-half long process, and what has been fascinating 
to watch is how Dr. Kerr over at HSS in South Carolina has 
worked aggressively to bring all the groups together. 
Yesterday, for the first time, I actually saw Democrats on one 
side, Republicans on the other, in the House and Senate 
leadership coming together at a table saying, we have finally 
made the changes in South Carolina to bring the people to the 
table to deal with the issues and concerns. And if South 
Carolina, left to its own devices without all the other clamor 
going on in Washington, I am convinced that with a Governor and 
leader like Mark Sanford, and with the leadership in the House 
and Senate, Republicans and Democrats, coming together as we 
saw yesterday in the mountains of South Carolina, we have a 
great future ahead of us in this issue.
    Senator Coburn. Thank you. Any other comments from our 
panelists?
    Thank you all for being here. Your complete statement will 
be made in the record. If there are people in the audience that 
would like to make a statement, we will leave the record open 
for 2 weeks. You can address it to the Federal Financial 
Management Oversight Committee of the Homeland Security 
Committee, and we will make your comments a part of the record.
    With that, the hearing is adjourned.
    [Whereupon, at 11:52 a.m., the Subcommittee was adjourned.]
                            A P P E N D I X

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