[Senate Hearing 109-660]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 109-660

                   FROM MEDICAID TO RETIREE BENEFITS:
             HOW SENIORS IMPACT AMERICA'S HEALTH CARE COSTS

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

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             JULY 13, 2006

                               __________

                           Serial No. 109-27

         Printed for the use of the Special Committee on Aging




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                           WASHINGTON : 2006 
30-619 PDF

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                       SPECIAL COMMITTEE ON AGING

                     GORDON SMITH, Oregon, Chairman
RICHARD SHELBY, Alabama              HERB KOHL, Wisconsin
SUSAN COLLINS, Maine                 JAMES M. JEFFORDS, Vermont
JAMES M. TALENT, Missouri            RON WYDEN, Oregon
ELIZABETH DOLE, North Carolina       BLANCHE L. LINCOLN, Arkansas
MEL MARTINEZ, Florida                EVAN BAYH, Indiana
LARRY E. CRAIG, Idaho                THOMAS R. CARPER, Delaware
RICK SANTORUM, Pennsylvania          BILL NELSON, Florida
CONRAD BURNS, Montana                HILLARY RODHAM CLINTON, New York
LAMAR ALEXANDER, Tennessee           KEN SALAZAR, Colorado
JIM DEMINT, South Carolina
                    Catherine Finley, Staff Director
               Julie Cohen, Ranking Member Staff Director

                                  (ii)




                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Gordon Smith........................     1
Opening Statement of Senator Herb Kohl...........................     3
Opening Statement of Senator Ron Wyden...........................     3
Opening Statement of Senator James Talent........................     4
Opening Statement of Senator Debbie Stabenow.....................     5

                           Panel of Witnesses

G. Richard Wagoner, Jr., chairman and chief executive officer, 
  General Motors Corporation, Detroit, MI........................     6
Hon. Janet Napolitano, governor, State of Arizona, Phoenix, AZ...    30
Donald B. Marron, acting director, Congressional Budget Office, 
  Washington, DC.................................................    55

                                APPENDIX

Prepared Statement of Senator Ken Salazar........................    89

                                 (iii)



 
FROM MEDICAID TO RETIREE BENEFITS: HOW SENIORS IMPACT AMERICA'S HEALTH 
                               CARE COSTS

                              ----------                              



                        THURSDAY, JULY 13, 2006

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:06 a.m., in 
room SD-106, Dirksen Senate Office Building, Hon. Gordon H. 
Smith (chairman of the committee) presiding.
    Present: Senators Smith, Talent, Kohl, Wyden, Carper and 
Clinton.

     OPENING STATEMENT OF SENATOR GORDON H. SMITH, CHAIRMAN

    The Chairman. Good morning, ladies and gentlemen. We 
welcome you all to this hearing of the U.S. Senate Special 
Committee on Aging. We have a very important topic to consider 
today, ``From Medicaid to Retiree Benefits: How Seniors Impact 
America's Health Care Costs.''
    We are joined by two very distinguished witnesses. Richard 
Wagoner is the president of General Motors and Janet Napolitano 
is the Governor from my mother's home State, the great State of 
Arizona. We thank you so very much, Governor, for being here.
    We will begin by having opening statements by my colleagues 
and then we will turn to our witnesses. Our colleague, Debbie 
Stabenow, will be introducing more formally Richard Wagoner. So 
we thank you, Senator, for being here at this important 
hearing.
    Our nation is facing a crisis. Health care costs continue 
to escalate, while quality continues to lag behind other 
industrialized nations. Just this past April, a study was 
released in the Journal of the American Medical Association 
that compared the health status and spending of Americans to 
that of British citizens. The results were alarming. Not only 
did Americans have lower overall health status, we are spending 
almost twice as much.
    We will hear from our witnesses how health care costs 
continue to impact employers, States and the Federal 
Government's ability to deliver health care. The two driving 
factors for growth in health care spending are continually high 
health care inflation and a growing senior population. While 
the size of the over-age-65 population can't be changed, steps 
can be taken to better their care and create efficiencies to 
ensure we are spending our health care dollars wisely.
    Obviously, the question is asked why is this important. The 
National Center for Chronic Disease Prevention and Health 
Promotion estimates that 80 percent of people over age 65 have 
at least one chronic health condition, and 50 percent of those 
have at least two chronic conditions. Further, the size of this 
population is projected to explode to 71.5 million people, or 
20 percent of our population, by the year 2030, when all the 
baby-boomers will have retired.
    These alarming statistics clearly indicate that our nation 
is facing a financial train wreck. That is why it is important 
to act now to reform our system, and I believe the place to 
start is Medicaid. The Medicaid program, which was created in 
1965, has failed to evolve over time. As innovations in the 
delivery and management of care have become mainstream in the 
private sector, Medicaid has remained firmly set in its 
original fee-for-service model.
    However, Medicaid is not a failure. It is an integral and 
essential component of America's health care system, providing 
safety net coverage to over 60 million Americans. These 
Americans are the poor, the elderly and the disabled. However, 
as strongly as I support Medicaid, I am not an apologist for 
it. I do not believe Medicaid needs to be reformed. I do not 
believe it should be put on a pedestal, never to be changed, I 
believe that reform is essential.
    In that respect, I continue to try to be a bridge from my 
party, the Republican Party, to the Democratic Party, fighting 
to protect the program, but at the same time urging sound, 
rational reform. That is the purpose of this hearing, to create 
a bipartisan forum where all stakeholders--members, 
beneficiaries, providers and advocates--can come together to 
chart the future of Medicaid.
    I hope that by starting this dialog now, we can develop 
sound policies that are based on improving care and ensuring 
efficiency rather than simply cutting funding to meet a dollar 
figure. In the end, I fear the latter approach only ends up 
costing the country more both in actual dollars spent and in 
the negative impact to human life.
    The Aging Committee has a long tradition of leading the 
Congress toward innovative and necessary changes to our social 
programs. In fact, the Social Security program and Medicare 
were created based on recommendations that came from this 
Committee. We also have continued to operate in an open and 
bipartisan manner, and I have to make special note of Senator 
Kohl and the privilege and pleasure it is to work with him on 
such a basis.
    As Congress embarks on changes to Medicaid, and hopefully 
the entire health care system, we have an opportunity to once 
again lead the way. We need to put ideology aside and develop 
solutions that will ensure the long-term solvency of Medicaid. 
In doing so, I am hopeful the combined effect will drive 
efficiencies and modernizations throughout the entire health 
care system.
    As we will hear from our witnesses, both of whom oversee 
large health care programs, utilizing the size and clout of 
Medicaid can force innovation in the delivery of care and 
provide lower-cost, higher-quality health care. It is time to 
act, and I hope my colleagues will join me as I begin a series 
of hearings and monthly roundtable discussions focused on 
reforming Medicaid the right way, not just the budget way.
    I look forward to hearing from our witnesses, and before we 
do that, I will turn to my colleague, Senator Kohl.

             OPENING STATEMENT OF SENATOR HERB KOHL

    Senator Kohl. Well, thank you, Mr. Chairman, and, of 
course, we welcome all of our witnesses today. This hearing 
will kick off a series of Committee meetings to examine 
Medicaid, its challenges, and bipartisan proposals for reform. 
I congratulate you, Mr. Chairman, for undertaking this very 
ambitious agenda.
    Medicaid is the largest health care program in the United 
States, covering more than 60 million people. While Medicaid is 
traditionally viewed as a program for low-income families and 
their children, 70 percent of spending is on the elderly and 
the disabled. There is no question that the current trends in 
Medicaid growth and spending are not sustainable for Federal or 
State governments. We all agree that we have to cut costs. The 
question is how, without endangering the most vulnerable in our 
society.
    In my State of Wisconsin, Medicaid provides quality 
services to a broader population than is required by law. Our 
Governor has worked to avoid limiting enrollment and services, 
seeking instead to buy prescription drugs at better prices and 
rely on home and community-based care options as an alternative 
to costly long-term care institutions.
    Arizona is engaged in a similar battle to cut Medicaid 
spending without cutting Medicaid care, and we look forward to 
hearing from Governor Napolitano about their success. We also 
hope to hear from Richard Wagoner about General Motors and the 
private sector's struggle with rising health care costs. These 
costs threaten GM's fiscal solvency just as certainly as they 
affect that of the entire Nation.
    So again I thank you, Mr. Chairman, for holding this first 
hearing on the topic, and we all look forward to working with 
you on this issue.
    The Chairman. Thank you, Senator Kohl.
    Senator Wyden.

             OPENING STATEMENT OF SENATOR RON WYDEN

    Senator Wyden. Thank you, Mr. Chairman. Mr. Chairman, I 
think I mentioned to you back when I was director of the Oregon 
Gray Panthers, we used to say we dream of the idea of an 
Oregonian being Chairman of the Senate Committee on Aging. It 
is great to see that you have the gavel in your hands, and I 
appreciate all of our bipartisan work in this regard.
    The Chairman. Thank you, Senator.
    Senator Wyden. I think it is well understood that 
escalating health care costs are hitting America like a 
wrecking ball. This was seen again yesterday when there was an 
announcement that Medicare premiums were going to go up at 
least 11 percent next year. What that means is that many older 
people are going to be looking to their companies and companies 
like General Motors in order to secure good health care. 
Because health care is like an ecosystem, if you can't secure 
your health care from Medicare and you can't secure it on the 
retiree benefit side in the private sector, then, of course, 
you slide on to Medicaid.
    So I am very pleased that we are going to have our 
witnesses today, Mr. Wagoner and Governor Napolitano, because I 
am interested in looking with them particularly at how as 
entities--a big private employer and a major State--how they 
use their purchasing power in order to help drive down the 
costs of health care.
    We have Senators here who have been of great help to 
Senator Snowe and I, for example, in trying to life the 
restriction on Medicare so that Medicare could bargain to hold 
down the costs of medicine. We are just a handful of votes 
away, and I am sure Mr. Wagoner and Governor Napolitano--one of 
the first things that they do is try to ensure that they can 
use their clout in the marketplace in order to drive down the 
cost of health care.
    What I will be asking you, Mr. Wagoner, first, because I 
know you have thought a lot about health care and thought about 
it in an innovative way, is about your ideas on shared 
responsibility in terms of holding down health care costs and 
securing good services. It seems to me that there is a role for 
government, there is a role for the private sector, and I would 
also say as a Democrat there is a role for the individual, as 
well. So I am really glad you are here.
    I note Senator Stabenow is here. You are running with the 
right crowd, Mr. Wagoner, because Senator Stabenow has been a 
great advocate for quality and affordable health care.
    I thank my friend and colleague, Senator Smith, for 
bringing the Committee together to examine these issues.
    The Chairman. Thank you, Senator Wyden.
    Senator Talent.

           OPENING STATEMENT OF SENATOR JAMES TALENT

    Senator Talent. Thank you, Mr. Chairman. I want to echo 
what the other Senators have said about the importance of this 
hearing. Medicaid is a vital program that makes a difference 
everyday to millions and millions of vulnerable people. It is 
the safety net in this area.
    We do have fiscal challenges ahead. I am actually 
optimistic that if this Committee and others like it will 
canvas what is happening out there and the good people involved 
in health care in the States and the localities, we can find 
ways really to make this program sustainable and affordable 
without cutting access or quality directly or indirectly, 
without taking it out of the hide of providers. There is so 
much good going on in health care. I really believe we can find 
it.
    I did want to make a comment. This is very timely, 
especially in view of the administration's proposal to reduce 
the provider tax assessment program from 6 percent to 3 
percent, which I know you are leading a struggle against, and I 
appreciate that.
    I do want to make a comment just to make certain you are 
aware of it that Missouri is a State that has entered into a 
special partnership agreement with CMS regarding its provider 
tax program. We opened up all our books and let them see 
everything, in return for which they agreed that they would not 
change the terms of the program during the life of the 
agreement.
    So this proposal not only has broad national effects, but 
it effects Missouri, in particular, because we have this 
partnership agreement negotiated in good faith and that Senator 
Bond and I are trying to make certain gets respected, whatever 
else is done. So I wanted to make certain the record had that 
in it.
    Again, I am grateful to you and to Senator Kohl for holding 
this important hearing. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Stabenow.

              STATEMENT OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman. I want to 
particularly thank you and Senator Kohl and all of my 
colleagues for beginning this series which is so critically 
important to all of us.
    I am extremely pleased to have the opportunity to introduce 
the chairman and CEO of General Motors, Rick Wagoner, today. 
Over his 29-year career with General Motors, Rick has been 
involved, I am sure, in every facet of the company. He was 
elected to his current position on May 1, 2003, after serving 
as president and chief executive officer since June 2000, 
making him the youngest CEO in GM's history.
    Given his wealth of experience, it is no wonder that when 
Rick Wagoner talks about health care, it makes national 
headlines and people listen. I think his words are very 
important, and his experiences, and those that he represents in 
terms of an industry are very, very important.
    Health care costs are a huge challenge facing American 
businesses, as we know, who are trying to compete in a global 
economy. The reason for that is that we fund health care 
differently than any other country does, and this difference 
eats into the bottom line for companies.
    Let me just mention, if I might, in making the introduction 
that there are many ways that we can work together. I have 
appreciated the work with General Motors on generic drugs, and 
Senator Lott and I have legislation to close loopholes 
currently in the generic drug laws to be able to speed generics 
to the marketplace. We have worked together on health IT, and I 
am sure Rick is going to talk about e-prescribing. I would say 
again Senator Snowe and I have legislation to move that 
forward, which I would look forward to working with you on. 
There are so many areas where we can work together.
    Senator Wyden talked about shared responsibility, and I am 
sure that Rick is going to be talking about the fact that 1 
percent of their employees have catastrophic costs, but that is 
somewhere between 20 to 25 percent of the entire cost of the 
company. There are ways for us to come together and I hope that 
the Committee will be recommending opportunities for us to 
partner on those issues, as well as on Medicaid and Medicare.
    As I indicated, Rick Wagoner speaks for an entire industry 
which has created the middle class of this country, has given 
people good-paying jobs, health care, pensions and security in 
retirement. As our companies compete in a global economy, I 
hope that we will be listening closely and listening to what 
Rick is saying today because we have a stake in their success. 
We have a stake in their ability to succeed in a global economy 
because that means our people succeed, and I believe that means 
we keep the middle class of this country.
    So I am very pleased that Rick Wagoner is here. He is 
someone that we hold in high esteem in Michigan for his work 
and for the leadership of General Motors on a host of issues. 
Certainly, health care is at the top of that list.
    So welcome, Rick.
    The Chairman. Thank you, Senator Stabenow.
    Let me also now introduce, as well, our other witness who 
is the Governor of the great State of Arizona, Janet 
Napolitano. When I invited the Governor to participate in this 
hearing, it was because I am aware of and following the great 
things she is doing for the Medicaid population in Arizona and 
wanted very much to include Arizona's experience in this 
important hearing.
    As I invited her to be with us today, it was very clear to 
me in our conversation that she had a much more important 
responsibility than being in Washington, DC today, not just 
running the State of Arizona, but being with her niece for this 
week, and on this Committee family comes first.
    Governor, thank you so much for taking the time. I don't 
know whether you have a time constraint where you would like to 
go first in your testimony. We want to be respectful of that.
    Governor Napolitano. Senator, thank you for that. I would 
like to hear from Mr. Wagoner first and then I will dive in, 
and then we will get to questions from the Committee.
    The Chairman. Thank you so much, Governor.
    Mr. CEO of General Motors, thank you so much for being 
here, and we invite your testimony now.

   STATEMENT OF G. RICHARD WAGONER, JR., CHAIRMAN AND CHIEF 
   EXECUTIVE OFFICER, GENERAL MOTORS CORPORATION, DETROIT, MI

    Mr. Wagoner. Thank you very much. I very much appreciate 
it. Chairman Smith, Senator Kohl, members of the Committee, it 
is an honor to have a chance to testify.
    Governor, thanks for joining us today and I will look 
forward to your comments momentarily. I wanted to thank Senator 
Stabenow for her kind introduction as well.
    I would like to highlight a few of General Motors' efforts 
to improve the delivery and efficiency of health care services 
for our employees, retirees and dependents. In addition, I have 
provided a detailed description of GM's key initiatives in my 
written testimony. Let me start by giving a little background.
    General Motors is the largest private purchaser of health 
care in the United States, paying the health care costs for 1.1 
million employees, retirees and dependents. Of those 1.1 
million people, approximately 530,000 are age 60 or over. In 
2005, General Motors spent $5.3 billion for health care. That 
is more than we spent on steel. In fact, a staggering $1.9 
billion of that cost was for prescription drugs.
    As you know, the U.S. spends more on health care as a 
percentage of GDP than any other industrialized country, and 
costs continue to rise, as has been pointed out earlier. 
Despite all that spending, basic quality indicators would 
suggest the U.S. does not have the best health care. In short, 
we need to get greater value for our health care dollar, and to 
do this requires the collaboration of stakeholders on many 
levels.
    In our own analysis, we found that GM employees and 
retirees need three important things: first, better information 
on effective treatments; second, better tools to identify 
effective and efficient health care providers; third, education 
and outreach to prevent disease and better manage chronic 
illnesses.
    To address these needs and to find innovative ways to 
create better health care delivery systems for all, GM is 
leading over 30 initiatives across the country. This morning, I 
would like to touch on just a few of them.
    For example, we have in place a number of programs and 
educational tools to help our employees, retirees and their 
families stay healthier and better manage disease. Way back in 
1996, GM, along with the UAW, our largest union, launched 
Lifesteps, our comprehensive health and wellness program 
designed to help individuals identify controllable health 
risks, develop plans to reduce those risks and modify their 
lifestyles.
    Today, more than 75 percent of GM employees and a very 
substantial number of retirees have participated in this 
Lifesteps program which has led to more than 1 million health 
risk appraisals and the reduction of more than 185,000 specific 
health risks.
    What is more, we found that when our employees participate 
in Lifesteps as active employees, they are more likely to 
participate in these programs as Medicare-eligible retirees. So 
as our employees retire and move into Medicare, we are 
providing Medicare with a more health-conscious member and 
likely a healthier member.
    Another GM initiative that focuses on prevention and 
disease management is the Greater Flint Health Care Coalition 
Heart Failure Task Force. The goal of this program, which 
covers almost 200,000 General Motors employees, retirees and 
their families in the greater Flint, MI area, is to encourage 
more physicians to follow established clinical guidelines in 
order to reduce health risks and readmission rates, and offer a 
better quality of care.
    We are pleased that early results show a significant 
improvement in the use of appropriate medications, better 
documentation and compliance with guidelines. For example, of 
2,500 heart patients, those treated at the eight participating 
hospitals had significantly lower mortality and readmission 
rates, than those treated at six non-participating hospitals.
    GM has also had an extensive health education campaign for 
all of our employees, retirees and their families to help them 
become better health care consumers. Back in 2001, we began to 
emphasize to our employees and retirees the high quality and 
value of generic drugs. As a result, we have been able to gain 
over 90-percent generic substitution, again with the support of 
union leadership. Each percentage increase in generic use saves 
General Motors $4 million a year.
    We also offer all of our employees and retirees many 
publications, including this comprehensive Health Care 101 
guide that addresses major issues facing the health care 
system. We are also helping our employees and retirees become 
better consumers by providing them with more information about 
providers and plans in their communities.
    This August, GM, along with other employers, will launch 
the Dayton, Ohio Consumer Information Transparency Project. The 
program will give more than 70,000 local health care consumers 
some key shopping tools, like cost and quality information 
about their health care providers. The goal is to educate 
patients to make better-informed and effective health care 
choices and to create competition among providers based on cost 
of service and quality of service.
    Starting in 2006, GM began offering salaried workers and 
early retirees a choice of two high-deductible health care 
plans with health savings accounts. These plans have been very 
well received and give GM employees and early retirees greater 
control over their health care dollars, flexibility to choose 
their own providers and tax-favored ways to save for current 
and future health care costs.
    Another critical tool to help patients become better health 
care consumers is health information technology. We have 
projects in several of our communities, including a 
collaborative effort with Ford, DaimlerChrysler and Medco 
Health, which is supported by the UAW and the State of 
Michigan. This Southeast Michigan Electronic Prescribing 
Initiative encourages physicians to adopt wireless hand-held 
devices to look up formularies and other prescription drug 
information, write prescriptions and send them directly to the 
pharmacy for filling. As a result, we have seen a significant 
reduction in adverse drug events and an increase in generic 
drug use by over 7 percent.
    As I mentioned earlier, it takes collaboration by 
stakeholders in the public and private sectors to develop a 
quality health care system. While there are numerous 
collaborative efforts that GM supports, I want to highlight two 
that are showing great promise.
    In Michigan, GM is working with local health care 
providers, businesses, unions, hospitals and the Greater 
Detroit Health Care Council on a program called Save Lives, 
Save Dollars. The goal is to make hospitals more financially 
accountable for their performance and give consumers price and 
quality information on physicians. We believe that this will 
drive our health care cost system to achieve higher levels of 
performance, which will help save lives, and greater overall 
efficiency, which will help save dollars.
    The Save Dollars component will pay hospitals based on 
their meeting established performance measures. When care and 
outcomes are improved, we expect to spend fewer dollars. This 
is something we know from our own extensive experience in 
manufacturing. As you improve quality, you lower costs.
    Another quick example of collaboration is the 
implementation of the General Motors production system within 
health plans, hospitals and physician groups. GM has found that 
approximately 80 percent of a process, regardless of the 
industry, is comprised of non-value-added activities. Since 
1994, GM has held workshops in over 400 hospitals to help those 
in the health care industry learn how to be more efficient and 
eliminate waste. Average results have yielded a 60-percent 
productivity increase, a 46-percent inventory reduction and a 
51-percent lead time improvement.
    So as you can see from all this, GM is investing 
considerable resources to find innovative ways to improve the 
quality and cost of health care services. However, we also 
believe that much more can be done with the support and 
engagement of Congress and other public and private sector 
stakeholders.
    Several key public and private initiatives that deserve 
attention are a rigorous and robust, competitive prescription 
drug market in which everyone has access to the full range of 
affordable pharmaceuticals, including generic biopharmaceutical 
drugs; policies that give consumers and physicians information 
on the relative effectiveness of different drugs and treatments 
so they can compare and distinguish treatment options; 
implementation of national health IT legislation; release of 
the complete Medicare claims data base; and, finally, a better 
public-private effort on high-cost cases. Just 1 percent of the 
population with chronic and serious illnesses accounts for 
almost 30 percent of total health care expenditures.
    So in conclusion, GM is proud of the positive health care 
efforts we have been making in our communities for our 
employees, retirees and their families. However, we all can and 
must do even more to improve quality, reduce cost and get 
greater value for our health care dollar. At GM, we are 
committed to working with both public and private sector 
stakeholders to develop the solutions that will improve the 
health care market for everyone.
    Thank you again for the opportunity to share GM's 
experiences with you today.
    [The prepared statement of Mr. Wagoner follows:]
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    The Chairman. Thank you, Mr. Wagoner.
    Governor.

STATEMENT OF HON. JANET NAPOLITANO, GOVERNOR, STATE OF ARIZONA, 
                          PHOENIX, AZ

    Governor Napolitano. Well, thank you, Mr. Chairman and 
members of the Committee, for inviting me to be with you today. 
I am sorry I can't be there in person, but as the Chairman 
referenced, I had a family obligation that I could not move.
    I must say as the Governor of a Western State that using 
the videoconferencing facilities to testify is a great service 
because it allows me to stay in my State and do the day-to-day 
work of government and to provide you with information that I 
think will be helpful. Indeed, I think I sit here in a unique 
position because normally Governors come to the Senate and they 
testify and they say we need more money, we need more help.
    I am here to say I think I can offer you some suggestions 
on the policy side that will end up saving money for the 
country as a whole. Indeed, there was a recent Lewin study that 
looked at Arizona's Medicaid program and said that if this were 
adopted nationally, it would save you $83 billion over the next 
10 years. So I thought what I would do in my testimony is 
highlight some of the elements of that and why it works and why 
we think you don't have to choose between cost containment and 
quality of care. You can do both.
    In Arizona, as you may know, we were the last State to 
adopt a Medicaid program. That was in 1982, and we decided to 
design a program different from all others. In fact, we have 
been operating under a huge waiver since our beginning. We 
utilize managed care, full risk-based capitation, effective 
procurement and market forces to control costs. Our waiver 
allows us to use these tools and serve seniors and other 
populations in a cost-effective way.
    Now, without a doubt the most important component of our 
program is the partnership between the public and the private 
sectors. This is the cornerstone of our model. Arizona contains 
costs while providing high-quality services through use of 
managed competition with private sector managed care 
organizations, known as MCOs.
    Another key component of the model is that the MCOs we 
contract with are capitated at full risk for all services, 
including pharmaceuticals. The full risk contracting encourages 
MCOs to leverage purchasing power, to establish their own 
formularies, to case-manage members and to appropriately manage 
health care utilization. The model not only allows, but 
incentivizes MCOs to establish formularies that mandate use of 
generic drugs.
    While other States average a 50-percent rate of generic 
drug usage, Arizona has a rate of 71 percent, and that is just 
for our long-term care population. The Lewin study found that 
Arizona's per-capita drug spending is the lowest in the Nation, 
without compromising quality.
    Arizona's model also has seen significant savings from 
serving our aging members in home and community-based settings. 
Arizona has been able to reverse previous trends and now serves 
more than 63 percent of our aging population in home and 
community-based settings rather than more costly nursing 
facilities. This is not only cost-effective, but it offers more 
options to our members in how they receive their care and how 
they continue to live effectively and independently in their 
own homes.
    I think we all agree that the most basic goal is to ensure 
that Medicaid endures and it endures to serve our seniors and 
others who rely on this program for their health care. I 
believe the Arizona model offers opportunities that other 
States and the Federal Government should be encouraging.
    Again, I want to thank you for this opportunity to testify 
before you today and I would be happy to answer any questions 
that you have. I have a more complete statement that I have 
submitted to the Committee and I hope that you will include it 
in your deliberations.
    [The prepared statement of Governor Napolitano follows:]
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    The Chairman. Thank you, Governor, and we will include your 
full statement and we value very much your participation and 
your insights.
    Did you say that the number of savings for the Federal 
Government nationwide would be $83 billion?
    Governor Napolitano. Yes. This is based on a study done by 
the Lewin Group looking at how we manage our health care costs 
versus other States in the Medicaid area, and they said if you 
followed Arizona's model, those are the types of savings you 
would incur.
    But again, Mr. Chair, and to echo what you said in your 
opening comments, it is not just about a budget number; it is 
about providing health care for people. I think the key point 
of that is you can create those savings and still provide 
quality health care.
    The Chairman. Well, that has been my point all along 
through the Medicaid debate earlier in this Congress, and I 
have to say $83 billion is--by the way, it is $83 billion over 
how many years?
    Governor Napolitano. Ten.
    The Chairman. Ten years. That is enough even to get the 
attention of the U.S. Senate. But I think even more important 
than the budget number, my point in my opening statement was, 
look, Medicaid needs reform. I think Arizona has shown a light 
as to how you can reform it without compromising health and 
quality. I can't thank you enough for that example and sharing 
it with us.
    I guess the question I have for you is what has the Deficit 
Reduction Act of 2005 done to your ability positively or 
negatively. I would be very interested in how we can mitigate 
any damage done and not just replicate some of the good things 
you have done.
    Governor Napolitano. Mr. Senator, I think it is a little 
too soon to know what the DRA really has done. What I do think 
we need to communicate to HHS and the administration on the 
Medicaid program is the need for flexibility in the States.
    Our waiver has been in existence since 1982. It works, but 
we still spend an ordinate amount of administrative time going 
back to CMS to justify the waiver even though from a cost 
containment perspective and a quality of care perspective this 
is probably one of the most, if not the most effective Medicaid 
program in the country.
    The Chairman. Are other States learning from you, asking 
these questions, and specifically the State of Oregon?
    Governor Napolitano. I can't speak to Oregon, but I can say 
that States and other Governors have been speaking with me. Of 
course, we are all speaking with the Congress now because we 
are all concerned that in the effort to reduce the Federal 
deficit, decisions will be made about Medicaid and other 
programs that are budget-driven as opposed to policy-driven. I 
think from the view of the Governors, we think, make the policy 
changes and then let the budget work its way out.
    The Chairman. Well, obviously the way you have worked it 
out, it serves health, Medicaid and the budget, and I think 
that that is the better approach to Medicaid reform and my 
point from the beginning.
    As we go forward, Governor, and the Deficit Reduction Act 
is implemented, I would be very anxious to learn from you what 
its negative positive impacts are in terms of flexibility so 
that we can be responsive in a timely way and undo any damage 
that may have been done.
    Governor Napolitano. Thank you, Senator, and I would be 
happy to be speaking with you as we go through the 
implementation of the Deficit Reduction Act. I am the incoming 
chair of the National Governors Association, so I am sure I 
will be hearing from my colleagues around the country.
    The Chairman. Well, that is terrific, and I hope that my 
Udall cousins are all treating you well. Turn them over to me 
if they are not.
    Governor Napolitano. Your Udall cousins are treating me 
very well and we could use more of them. Thank you.
    The Chairman. I think I have about 5,000 of them in 
Arizona.
    Mr. Wagoner, thank you again. You know, as I listened to 
your testimony and have considered some of the remarkable 
things you have done, frankly, they almost seem to replicate 
many of the things which the State of Arizona is trying to do. 
She has given us a potential score from a study that was done. 
Have you been able to score budgetarily or in health outcomes 
what your programs have meant?
    Mr. Wagoner. We haven't, Senator, added them up. Frankly, I 
think as the Governor mentioned, it is a little bit of, in some 
sense, a dicey practice of doing it because we are really 
trying to do two things. We are trying to improve quality of 
health care and quality of people's lives, and the cost of 
providing that. So the accounting for it is--we try to be a 
little careful about being overly, let me say, bean-counterish 
about it.
    But for each of the programs that we do, as I indicated in 
my testimony, we have a pretty good sense of what the cost 
would have been in the absence of that program. Sometimes, it 
is cost-saving to us. Sometimes, it is better health treatment. 
We would be more than glad to sit down with the staff of the 
Committee and really work through initiative by initiative 
those that I mentioned and others that we filed in the written 
testimony that perhaps could give you some insights on which 
kinds of activities generate which kinds of savings.
    The Chairman. Are you mindful of Fortune 500 companies or 
perhaps even your competitors following similar enlightened 
models as General Motors is in health care?
    Mr. Wagoner. Yes. I think different companies have begun to 
seriously focus their best thinking on health care costs at 
different times because I think, to be honest, for some 
companies with different profiles of retirees, for example, it 
might not have been a big cost item for them. But I would be 
surprised if there are many large companies that don't have 
fairly sophisticated efforts going on to try to both improve 
quality and reduce the cost of health care, because it is 
frankly such an issue in global competitiveness today.
    But I think maybe even more interesting, Senator, it is not 
just large companies. We have, obviously, many suppliers of all 
sizes, large and small, local and global, and dealers which 
tend to be medium or smaller businesses. We find that health 
care costs for many of them is a very important issue because 
they find simply that it is a benefit their employees very much 
appreciate and really want. Yet, the cost of it is 
unmanageable.
    So they are very interested in having access to these 
ideas, as well, but they obviously don't necessarily have the 
capability to have the staffing or, as you referred to earlier, 
the purchasing power that we do. I think it highlights to me 
the importance of what you are doing on the Committee, which is 
not just improving health care for General Motors, but focusing 
on can we do for the whole system of health care costs in the 
United States.
    The Chairman. Richard, 2 weeks ago we had in this Committee 
a most fascinating hearing on a topic called medical tourism. 
We had testimony from an ESOP-owned, a union-owned company, in 
which they had come to an agreement with employees within their 
union, within their company, to access health care in India. It 
is called IndUS. This IndUS company--India U.S., I assume the 
acronym means--is staffed by Indians who are trained in 
American medical schools and in American business schools and 
have replicated in India the finest medical facilities that you 
could find in America.
    The union representative told us of one employee who had a 
heart issue. The cost of the heart surgery in North Carolina 
was $96,000. In India, with equal care, competent physicians, 
and legal rights, the cost was $6,000. Is this an issue that 
you all are looking at?
    Mr. Wagoner. I have to say I am familiar with it, having 
read about stories such as those you are citing, but it is not 
something that we have studied.
    The Chairman. Is it something you will have to look at?
    Mr. Wagoner. It is not something that we are looking at in 
detail right now. I would say just from the practical 
perspective, as we see it, because of our size, we have felt 
that items like medical care--for the most part, our employees 
would prefer to do it, if at all possible, at a convenient 
location to where they live. Given the number of people we 
insure, we hadn't really thought of the practicality, to be 
honest, of shipping high volumes of people overseas.
    The Chairman. All the pre-ops were done by 
teleconferencing, like we are doing with Governor Napolitano.
    Mr. Wagoner. Right.
    The Chairman. I was astounded by what I learned in that 
hearing and I just simply note it to you because there is a lot 
of difference between $6,000 and $96,000.
    Mr. Wagoner. I think, Senator, if I could comment, I think 
perhaps something that we would learn from that is why can they 
do that for $6,000. Certainly, there may be lower wage rates 
involved, things that we could not replicate here, but I would 
suspect it is a much more sophisticated systems-based answer 
than that, and I think gets at the issue that I think bothers 
so many of us, which is why can't we deliver the kind of health 
care system that people want here at a much more efficient 
cost, because the costs of some of these treatments like you 
are citing seem to be almost unimaginable.
    It does suggest that if we put a number of these 
initiatives in place which have been discussed, we really 
should have an opportunity to provide the kind of health care 
people want at a much lower cost. I think that is one of the 
things that I know you are working on here and we applaud it.
    The Chairman. Well, there are a lot of Republican and 
Democrat Senators wondering the same thing. So, anyway, my time 
is up and I want to note Senator Hillary Clinton has joined us. 
We welcome you, Senator, and we will just go in order of 
appearance and thank you for being with us.
    Senator Kohl.
    Senator Kohl. Thank you very much.
    Mr. Wagoner, you talked about the cost of health care 
spending, of course, and the fact that almost 40 percent of 
your health care spending is on prescription drugs. You talked 
about generic drugs and the opportunities that they present you 
and, by extension, our country to do something about the 
staggering costs of health care.
    Will you talk about a little bit more generic drugs, their 
importance, in your opinion, to our Nation, the things that we 
need to do here in Washington to see to it that generic drugs 
get full access to the marketplace and not prevented from 
providing that kind of cost saving to our country?
    Mr. Wagoner. Senator, I think you have stated our position 
very well. Our experience is as you suggest and we do think 
there has been progress in enhancing the availability of 
generic drugs, and we do see that as a significant element of 
cost control with no sacrifice in quality.
    I think an area where we are seeing an opportunity to 
expand generic options would be in the biopharmaceutical drugs, 
which today do not have the proactive attention that 
traditional drugs do, chemical-based drugs. We see that as an 
area where, frankly, health care expenses are rising from a low 
base, but at an alarming rate. So that would be an area, for 
example, that--specific focus on providing the resources where 
those drugs could be reviewed and opened up to generics on a 
timely basis--would be a good example of an area where we see 
significant additional opportunity to provide the kind of 
treatment that people want and need, but at a much more 
effective cost than the current model provides.
    Senator Kohl. In your statement, did you give us an 
estimate on, in your judgment, what generic drug usage in your 
company is saving you?
    Mr. Wagoner. Well, yes. We said that of all of the 
formularies that offer generic drugs, generic alternatives, we 
have had about a 90-percent success rate in converting from 
branded to generic. For each point on that scale that we move, 
it saves us about $4 million. So assuming this against a base 
of $1.9 billion, that would be a savings of roughly $400 
million, very significant in total.
    I would say just from my own experience, from drug to drug 
you could see savings even greater than that. I would also 
think, to be honest, that having greater access to generics 
would also help to keep the pricing of the brand name 
pharmaceuticals perhaps in a more competitive light as well.
    Senator Kohl. So can I conclude that you would suggest that 
we need here--to the extent that we are in a position to 
influence the process, we need here in Washington to see to it 
that everything is done to open up the market to generic drugs 
which, as you pointed out, have absolutely no downside with 
respect to quality?
    Mr. Wagoner. Our experience has been very good. It has got, 
obviously, to be done on a thoughtful basis. I think that has 
worked out very well from our experience. I want to be clear. I 
think prescription drugs do play an important role in the whole 
health care system, too. So in no way, shape or form are we 
``anti'' those. We think they play an important role, but our 
experience is by enabling greater access to generics, making 
sure consumers understand the value equation in generics, those 
sorts of things can really help to provide, as the Governor 
said, very high-quality health care at much lower cost. I think 
that is really what we are all talking about here.
    Senator Kohl. Thank you very much, Mr. Wagoner.
    Governor Napolitano, some States that have expanded home 
and community-based services, such as your State, have 
experienced cost increases which you have not, apparently, in 
what is called the woodwork effect, which is that people who 
might not have participated in the State health care system 
join, as you know, when they are offered programs that allow 
them to stay in their homes and in their neighborhoods.
    How have you managed to avoid this cost increase?
    Governor Napolitano. Yes, Senator, thank you. We have 
avoided the woodwork effect because we use a pre-assessment 
screening tool, which is a very effective device. We interview 
people. We ascertain whether they are eligible for or would 
qualify for institutionalization or not, and it is those that 
would qualify for institutionalization that we then look to--
yes, you qualify, but would you be better off in your own home, 
in your own setting, and have our services delivered to you?
    The use of that tool--and this has been evaluated by a 
number of entities--has allowed us to increase the percentage 
of our seniors who can stay in their homes and have services 
delivered to them. Like I said in my testimony, two-thirds of 
our seniors who are in the long-term care program are getting 
long-term care at home, as opposed to the majority of States 
where it is actually the reverse statistic. But it is the use 
of this tool that allows us to screen early and that prevents 
the woodwork effect from driving up our costs.
    Senator Kohl. Do you think that the relatively smaller size 
of your State, as opposed to the really larger States in our 
country, gives you a somewhat greater ability to do this kind 
of screening, or do you think that does not affect it at all?
    Governor Napolitano. We are the 17th largest State in the 
country, so we are at least medium, and we have a large senior 
population. In fact, by the year 2020, 25 percent of our 
population will be 65 or older. So it is to our interest to 
really think through long-term care, think about it for 
ourselves, actually, because as the baby-boomer ages, we need 
to think about the long-term care models we want to employ, but 
then set up a system that allows us to enable people who are 
capable to stay in their homes and live as freely and 
independently and comfortably as possible.
    Senator Kohl. That is very good.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Kohl.
    So you won't think we are rude, they have called a vote. I 
would propose that Senator Kohl and I rush over and vote and 
come back while Senator Wyden and Senator Clinton ask 
questions, and we will make sure we hold the vote open for our 
colleagues.
    Here is the gavel, Ron.
    Senator Wyden [presiding]. Mr. Chairman, thank you.
    Mr. Wagoner, as you know, since 1945 and Harry Truman, this 
country has been trying to come up with a way to make sure that 
all Americans could get essential, affordable health care. We 
thought we had a shot at it in the early 1990's, as you know, 
and at that time many corporations said we are not sure we can 
survive if there is comprehensive health reform. What I hear a 
lot of companies saying now is we can't survive without 
comprehensive health reform.
    My first question to you is do you think we are at the 
point again, a tipping point, when the companies would be 
willing to work with the Congress in a bipartisan way for 
comprehensive reform, getting beyond these incremental steps?
    Mr. Wagoner. I obviously can't speak for everybody, 
Senator. I can say from General Motors' perspective--and 
certainly I talk to my colleagues in the auto and auto supply 
business--this is a huge issue for us and I think I can assure 
you that we all would be most interested in that form of 
engagement.
    I can also tell you at the quarterly Business Roundtable 
survey of the CEOs of the largest companies, which extends 
obviously far beyond auto and auto supply and even 
manufacturing, they ask us each quarter what are the toughest 
challenges you face in your business, and health care, in the 
last number of surveys, has come up as the biggest challenge 
that business faces--health care costs.
    So that would suggest to me that I think a fairly broad 
base of the business community is very concerned about this 
issue. So I believe they would be willing to engage 
proactively, and I assure you we would be.
    Senator Wyden. Tell me your thoughts about the idea of 
shared responsibility, that there is a role for a government, 
there is a role for the private sector and there is a role for 
the individual. This obviously was a big topic of debate when 
Massachusetts, for example, considered their proposal.
    What do you think the Congress ought to be pushing 
employers to do as part of comprehensive health reform and 
saying to the employers, you are going to have be part of this 
as well; everybody is going to have to be part of the equation? 
What can the Congress expect employers to do in this regard?
    Mr. Wagoner. Well, obviously, our model, Senator, is one 
that involves the three parties really working together to fund 
the health care expense, and it is one that we have had at GM 
for many years.
    My personal view on the matter to your broader question is 
I do think there are things the Congress can act on right now 
which would help to get at the broad-based issue of reducing 
health care costs while improving quality. You are familiar 
with the list and I mentioned a number of them today.
    Obviously, the development of a sophisticated information 
technology center in health care would be worth billions of 
dollars to all providers, but does require some strong 
leadership. The use of all of the data that we have on cost and 
quality--there is no data base that is as comprehensive, as 
high-quality, as good as the Medicare claims data base. If we 
were able to provide that information, I think you would see 
significant improvements. There are many, many more things, and 
my philosophy, frankly, has been we should really push to get 
on those things that I think everyone can agree on.
    Senator Wyden. I think you are right, and my seat-mate, 
Senator Clinton, has done very important work in the technology 
area, but I do want to come back to this question of what the 
Congress ought to expect from employers. I and others have been 
reluctant to just impose mandates because if you just heap on 
mandates, you can put people out of business.
    But if we are going to have shared responsibility--and I am 
prepared to tell individuals they are going to have to pay a 
portion of health costs in the future--what should the Congress 
ask of employers?
    Mr. Wagoner. Well, again, I don't think I am in probably a 
position to tell you what should be required of all employers. 
You know what we do. My experience is the more we can let 
market forces work even in areas that are not purely market-
type businesses, which health care isn't, I think that is the 
better prescription. So I think to be honest, I better leave it 
to you all to decide the specific contribution you expect of 
business.
    We are contributing a lot. In fact, I think you would see, 
Senator, that the direction that has been going on in 
businesses is businesses are reducing or even eliminating the 
health care benefits because they are so expensive 
particularly, for example, to retirees. My preference is to 
resolve that, rather than specifically legislating that 
businesses should provide it--I think the fundamental issue is 
we need to get our arms around the cost issue.
    Senator Wyden. Let me ask you about one idea that I am 
looking at with respect to the role of the employer. I hear 
constantly from businesses that their employees very often have 
to take a full day off in order to get health care. In other 
words, their appointment was for ten o'clock. They show up at 
ten o'clock, they wait until noon, and essentially the worker 
and the company lose a full day of productivity.
    What do you think about the idea of essentially bringing 
health care to the worksite? As we look at the role of the 
employer in a shared responsibility system, we might try to 
look at this partnership so that the employer and government 
and the individual might do something that was in everybody's 
interest, which is essentially to bring health care to the 
worksite so that we don't lose a day of productivity. Is that 
something you might think is fruitful?
    Mr. Wagoner. Well, I know that some companies have done 
that. We have done that at specific sites and I think have had 
some success doing it. I think basic demographics, things like 
that, will drive whether it is economically attractive for 
everyone. If you have a small business, perhaps it wouldn't be 
something that would make sense from a stand-alone basis.
    But I think it is something that a number of companies have 
done at specific sites where there are enough people and the 
work is time-sensitive and things of that sort. So we certainly 
don't rule that out as one of the things that might help 
improve the productivity of the system.
    Senator Wyden. My time is up and, as you know, my seat-mate 
has a longstanding interest in this issue, as well, and I am 
going to give her the gavel and hope to come back.
    Mr. Wagoner. Thank you.
    Senator Clinton [presiding]. Thank you. It is good to see 
you again, Mr. Wagoner. Governor, welcome. We are delighted to 
have you be part of this hearing as well.
    Governor Napolitano. Thank you.
    Senator Clinton. GM does business all over the world. You 
obviously are an American company with global reach and we hope 
that continues. You have employees in how many countries, Mr. 
Wagoner?
    Mr. Wagoner. I would say we have employees probably in 40, 
45 countries.
    Senator Clinton. Have you done an analysis of your health 
care costs in those other 44 countries?
    Mr. Wagoner. We have. It is concentrated primarily on the, 
let me say, 20 countries where we have most of the employees.
    Senator Clinton. Do those include Canada, European 
countries, as well as Asian countries?
    Mr. Wagoner. They do, Senator, yes.
    Senator Clinton. Is that information that could be made 
available to this Committee in some non-proprietary way for a 
basis of comparison?
    Mr. Wagoner. We would be glad to share that information 
with the Committee.
    Senator Clinton. Obviously, what I am trying to get at is 
that I think American companies are being put in an impossible 
position when it comes to a global economy. Ten years ago, if 
you had been here, I think we would be talking on a slightly 
different plane about what the challenges were, but 10 years is 
a lifetime when it comes to the pace and speed of global 
competition with respect to American jobs and American 
productivity and America's standard of living.
    I think that when we look at health care costs, it is 
apparent that you compete against companies in countries where 
individual businesses don't provide health care costs, where 
that is provided across the board, where everyone has to make a 
contribution through the tax system. Some preliminary analyses 
that I have seen show that if you add all of the costs on 
American business, which include taxes, health care, worker's 
comp, et cetera, the costs that you are paying are considerably 
higher than what is paid for health care in comparably advanced 
countries where everybody pays into the system.
    On the other side of the equation are those companies in 
countries that don't provide health care, where basically it is 
every person for himself. There is a rudimentary system, but 
there is no organized way, and therefore the costs are 
commensurately lower.
    I have become increasingly convinced that we are getting a 
bad deal in America and that GM is getting a bad deal and most 
of the other companies that are doing the right thing by 
insuring employees are getting a bad deal. But certainly 
companies like yours which essentially bear the social contract 
of the last 50 years are getting an especially bad deal because 
you are paying for what are now considered retired employees, 
therefore unproductive employees who certainly did a great 
service to you and to our country, but no longer are in the 
workforce.
    I don't think this is a sustainable position, and I read 
your testimony and I really commend you for the many innovative 
programs and the efforts that you have undertaken to try to 
squeeze down your costs. I would be interested again, if this 
is not proprietary, if you could provide this Committee with 
some sense of what the costs are for running all these 
programs--the huge benefit-managing departments that large 
companies have to have, the costs of third-party payers that 
large companies have to pay.
    We spend $1.7 trillion on health care in this country. We 
spend 50 percent more than any other country and we don't even 
have the highest results in terms of quality of health care 
when you look across the board. So one of my continuing 
questions is why does American business take such a bad deal. I 
mean, basically, you are getting a really bad deal.
    The cost of administering Medicare is much less than the 
cost of administering your health care programs. The average 
cost of private insurance is considerably higher than the 
administrative costs of Medicare. I don't know how it much it 
costs to pay for benefit managers and the whole bureaucracy you 
have to pay for, but I assume it is considerable.
    So why is it that American business doesn't just rise up 
and say there has got to be better way here, and why don't you 
bring not just your market power to bear, but your political 
power to get some changes in this dysfunctional, overly 
expensive, unproductive health care system that we all are 
paying for?
    Mr. Wagoner. Senator, I share many of your views and I 
think your analysis is correct that if you compare the cost of 
health care that we pay for employees in the U.S. versus any 
other country where we have significant production operations, 
it would be anywhere from somewhat to a lot higher, and I 
suspect that is true for many businesses.
    I think individual businesses probably look at your 
question along the following lines. If they are like us, they 
see the high cost of health care and so they are faced with 
several choices, such a investing in other lower-cost 
locations. That is good for some businesses, but it is not good 
for the U.S. economy because we lose jobs. Or they may perhaps 
tradeoff and say rather than giving significant wage increases, 
we will put that money into health care costs for the 
employees. Or they may choose to not offer health care benefits 
or reduce the amount of health care benefits which they offer, 
which I think is definitely a trend we see in business.
    Senator Clinton. Mr. Wagoner, I am so sorry, but they have 
told me if I don't go to vote, I am not going to get to vote. I 
would love to get the rest of your answer perhaps in writing 
and the information that you kindly offered to provide us.
    Mr. Wagoner. I would be glad to do that.
    Senator Clinton. Thank you so very much for being here.
    Mr. Wagoner. Yes, ma'am. Thank you.
    The Chairman [presiding]. Thank you, Senator Clinton.
    Before we let you go, just a couple of follow-ups I had. 
Governor, I am interested to know in Arizona how you have made 
sure that private managed care organizations are focusing on 
managing care and not managing costs. I am sure you know the 
difference. If they are managing costs by saving money through 
delaying or denying needed care, what is your role in that? How 
does the government make sure that care is managed instead of 
costs being managed?
    Governor Napolitano. One is we are really one of the 
largest purchasers of health care in the State and that gives 
us some market power. What we do is we have within our AHCCCS 
department, which is the acronym for our Medicaid area, a whole 
division that is designed to make sure that quality of care is 
not sacrificed for cost.
    We also write into our vendor contracts a number of quality 
of care provisions, including a provision that says you have to 
spend 84 percent of your capitated costs on direct rendition of 
services, not on other expenditures. So both by oversight and 
by contract, we endeavor to maintain the quality of care even 
as we try to control costs.
    The Chairman. Did I understand you to say that you are the 
purchaser of prescription drugs as well?
    Governor Napolitano. Well, that is part of the capitated 
costs. It is a full-risk, capitated program, and part of that 
is the pharmaceuticals. So we leave it to the MCOs and the 
market to figure out how to provide medically adequate care in 
the sense that they get the capitated costs. If they are able 
to achieve some savings someplace, they get the benefit of 
that. If not, they assume the risk of that, and pharmaceuticals 
are a part of that calculation.
    The Chairman. Richard, as you are no doubt aware, the 
Centers for Medicare and Medicaid Services have tried without a 
great deal of success to publish cost and quality information 
for various sectors of the health care industry. It hasn't been 
very successful, but it appears like you might have been 
successful in the program you described.
    How were you able to secure participation of these groups 
and how helpful have your employees and retirees found the 
information?
    Mr. Wagoner. We have been able to do this successfully, I 
would say, on a limited basis, in areas where obviously we have 
concentrations, high numbers of employees, so we can create 
data bases that are meaningful and accurate. I think it has 
been very helpful.
    Just from personal experience, you look through and if you 
have to go into some sort of elective surgery and there are 
eight hospitals in your area and you can look and see how many 
surgeries they have done and what has been the success rate of 
those surgeries, I think it is the kind of thing that is very 
helpful. I don't think that the average consumer of health care 
is used to doing that sort of thing, which we find incredibly 
ironic.
    When you go buy a car, one of the things you might do is go 
on a website and try to get things like warranty performance or 
resale values. People do that as second nature, and yet when 
they are going to get some form of medical care, because that 
information isn't easily available, they don't do that. So this 
is where I think use of the Medicare claims data base in a 
thoughtful way would really help make everyone out there a 
smarter consumer.
    I think as the Governor mentioned, we don't discount the 
role of individuals and the private enterprise system reacting 
to opportunities, and we think there is nothing like data on 
cost and quality of outcomes that would really help to drive 
people to the efficient and low-cost and high-quality providers 
of various services.
    The Chairman. Senator Kohl has a follow-up.
    Senator Kohl. Thank you.
    Just a word from each of you, if you would, on the 
importance of health information technology programs, their 
startup costs, but the payment that you get and how important 
you think these programs are in controlling the cost of health 
care and the sense of urgency or importance that you attach to 
it.
    We will start with you, Governor.
    Governor Napolitano. Thank you, Senator Kohl. Over a year 
ago, I issued an executive order and what I did through that 
executive order was create task force that was called the 
Health-e Connection. What it was designed to do was to bring 
together public and private providers to look at how we input 
technology and have a statewide technology basis to our health 
care system.
    We are now in the process of implementing the 
recommendations of that group and our goal is within the next 
few years to have medical records online, accessible to 
providers. It is a quality of care issue, it is a cost 
containment issue and it is the wave of the future.
    One of the amazing things we found out as we went through 
the task force work is how paper-driven the medical industry 
is. For all the science that underlies medicine, their 
recordkeeping is in the 19th century. So to convert everything 
to a system that is universally accessible that allows us to 
transfer records on a real-time basis so that doctors and ER 
physicians have real-time information is a great development, I 
think, that the States are doing this. The Federal Government 
could help us by incentivizing that and providing grants or 
whatever to other States to do the same thing.
    Senator Kohl. Very good.
    Mr. Wagoner.
    Mr. Wagoner. I wholly endorse what the Governor said. I 
think she laid out the benefits. The case is compelling. You 
would be sensitive from your own background. The application of 
information technology, while it has taken a while, has moved 
across every sector of our economy--manufacturing, services, 
now into education. Health care has been, for a variety of 
reasons, very slow to embrace the opportunity. It is gold lying 
on the streets and we really need to get at it.
    Things like enacting the bill sponsored by Senators Enzi, 
Kennedy, Frist and Clinton for example, with a sense of urgency 
would be a great way to begin to capture more and more the 
benefits here. But it is just viewed by everyone I talk to--
professionals in the field, our own business experience--that 
the benefits are huge. It does require some investment, as you 
say, but the return is going to be terrific.
    Senator Kohl. Those are good answers. I thank you both very 
much.
    I thank you, Mr. Chairman.
    The Chairman. Richard Wagoner and Governor Napolitano, we 
can't thank you enough for sharing your time on this very 
important issue, an issue that eventually will be better 
reformed because of the work that you are doing and the Federal 
Government needs to do. So for that, we extend to your our 
heartfelt gratitude. With that, we wish you a good day and we 
will call up our second witness.
    Mr. Wagoner. Thank you very much.
    Governor Napolitano. Thank you, sir.
    The Chairman. Thank you.
    Mr. Don Marron is the acting director of the Congressional 
Budget Office.
    We welcome you. Thank you, Don.
    He will present a new CBO report that examines the cost 
implications seniors have on America's health care system, with 
a special focus on the Medicaid program and how its cost growth 
will fuel significant challenges for the entire Federal budget.
    Thank you, and the mike is yours.

 STATEMENT OF DONALD B. MARRON, ACTING DIRECTOR, CONGRESSIONAL 
                 BUDGET OFFICE, WASHINGTON, DC

    Mr. Marron. Thank you, Mr. Chairman. It is a pleasure to be 
here today to discuss the Medicaid program and the challenges 
it faces as a result of rising health care costs and 
demographic pressures. As you mentioned, my written testimony 
today is, in essence, a primer on Medicaid and some of the 
forces that are driving spending increases in it, and both 
looking back where we have been and looking forward to where we 
may be going.
    To start with--and this will come as no surprise--Medicaid 
is a very large program both in terms of enrollment and 
spending. In fiscal 2006, Medicaid will cover about 60 million 
people--1 in 5 Americans--making it the largest Government 
health insurance program by enrollment. Federal spending for 
the program this year will total about $190 billion. That is 
about 7 percent of the overall Federal budget and about 1.5 
percent of the overall U.S. economy. Including State spending, 
which itself is more than $100 billion, Medicaid spending is 
comparable in size to the net outlays for Medicare. It is a 
very large program.
    Now, in thinking about the size of the program, it is 
important to distinguish between who the enrollees are and 
where the money goes. It turns out that most Medicaid enrollees 
by numbers are children, their parents, and pregnant women. 
Together, those groups comprise about three-quarters of 
Medicaid enrollment, but they only comprise about 30 percent of 
the benefit spending. The aged and the disabled, on the other 
hand, have much higher costs than those other groups. So while 
they comprise only one-quarter of Medicaid enrollment, they are 
the ones who account for about 70 percent of Medicaid benefit 
spending.
    As you know, Medicaid costs have risen rapidly in recently 
decades. These increases reflect both increases in enrollment--
a growing population and expanded enrollment in the programs--
and rising costs per enrollee. The growth in enrollment has 
been particularly pronounced among disabled beneficiaries.
    Looking ahead over the next 10 years, for which CBO 
constructs projections as part of our baseline exercise, we 
project that rising costs per enrollee--that is, so rising 
health care costs per person--will play the dominant role in 
driving Medicaid's overall cost growth.
    The factors that drive Medicaid cost growth and the 
challenges the program faces are similar in many ways to those 
that face the U.S. health care system as a whole. As you know, 
health care spending generally in the United States has risen 
much faster than the economy in recent years. It now accounts 
for almost 16 percent of the GDP, up from 8 percent back in 
1975.
    Most analysts agree that the bulk of this growth reflects 
increasing use of new medical technologies, or more generally 
the increased capabilities of medicine. Those advances enable 
us to treat new conditions, to improve upon existing treatments 
and to treat more people. Other factors have also contributed 
to the growth in spending--aging, increasing incomes, deeper 
insurance coverage. But, together, those explain much less of 
the spending increases.
    As an economist, I should emphasize that increased spending 
on health care is not necessarily a bad thing. The key issue--
and this was discussed on the first panel--is whether that 
spending provides essential value and benefits that are 
commensurate with the spending. If it makes sense for the U.S. 
people and the U.S. economy to spend more on health care 
because it is delivering benefits that are worth it, that is 
fine.
    The chief concerns, however, are: A) that there may be 
concerns that we are not getting benefits commensurate with the 
spending, and that, B) we have a system in which there is a 
significant amount of Federal spending for health care. So, 
obviously, as that spending rises, it places pressures on the 
rest of the Federal budget.
    You mentioned earlier on, Mr. Chairman, that it is 
important to think about the interactions between Medicaid and 
the health system as a whole. What I would like to emphasize is 
that the factors driving health care spending generally are 
important for Medicaid because as capabilities and standards 
for the delivery of care increase generally in the health care 
system, they tend to be incorporated into Medicaid as well. In 
part, that reflects the choice of administrators about what 
procedures to cover, and in part it reflects the tendency of 
physicians to provide a comparable level of care to all of 
their patients.
    As this Committee is well aware, the rapid growth in 
Medicaid spending will occur at a time when the Federal budget 
will face increasing pressures due to health care costs and the 
aging of the population. As I mentioned earlier, CBO estimates 
that Medicaid spending this year will be about 1.5 percent of 
GDP. CBO projects that under current law Federal spending for 
Medicaid will reach about 2 percent of GDP in 10 years, by 
2015, and under intermediate assumptions about future health 
care costs, could reach 4 percent of GDP by 2050.
    So under current trends, under current law, the Medicaid 
program would take up a larger and larger share of the U.S. 
economy and, in addition, a larger and larger share of the 
Federal budget. Such potential cost growth is a particular 
challenge since Social Security and, in particular, Medicare 
will experience significant cost growth at the same time.
    Under CBO's projections, Social Security spending might 
increase by about 2 percent of GDP by 2050 and Medicare 
spending might increase by about 5.5 percent of GDP. Together, 
again, under current law, those three programs would take up 
about 19 percent of GDP several decades out, which is about 
what overall Federal spending today is when you strip out 
interest on the debt.
    Now, I should emphasize that these estimates are subject to 
great uncertainty. Demographic trends can be projected with 
some confidence, but future growth of health care costs is 
highly uncertain. It is easy to imagine scenarios in which the 
growth of health care costs is higher than our intermediate 
projections, and it is entirely possible that it will turn out 
to be lower as well.
    Still, these projections highlight the long-term budget 
challenges that we face, and again I want to emphasize they are 
primarily, it turns out, driven by rising health care costs per 
enrollee. That is the predominant contributor to it, and 
changing demographics are also an important but secondary 
factor.
    Because of these looming fiscal pressures, there has been 
increasing interest on ways to control spending in these 
programs. In thinking about Medicaid in particular, there is 
sort of a basic menu of choices that you could have. Since it 
is a joint State-Federal program, obviously one line of 
direction of pursuing savings for the Federal Government is to 
shift more costs onto the States. Another obvious approach is 
to have beneficiaries of the program bear more costs. That 
would reduce Federal spending and it also might induce some 
people to demand fewer services through the Medicaid program.
    Or you could try to pursue ways to make the delivery of 
care more efficient so that you have the possibility of having 
less spending and a higher quality of care. The challenge with 
those approaches is that finding mechanisms that accomplish 
that are actually quite challenging. Reference was made on the 
earlier panel about the woodwork effect. The woodwork effect 
comes from a situation in which there was a desire to pursue a 
more efficient way of delivering care in which you move people 
from an institutional setting to a community or home-based 
setting.
    That has the effect of being more efficient, lower-cost per 
beneficiary, but in many implementations of that you discover 
this woodwork effect that more beneficiaries come forward. Then 
as a result, if your concern is Federal spending, you may not--
--
    The Chairman. It gets its name from people coming out of 
the woodwork for it?
    Mr. Marron. Exactly.
    The Chairman. All right.
    Mr. Marron. You may not get the reductions in overall 
spending that you might have thought just by comparing the per-
capita costs of the two systems. Again this also raises an 
issue raised earlier about to what extent you want to focus 
just on the budget side versus kind of the delivery and 
efficiency of care.
    With that, I am happy to take any questions you have.
    The Chairman. Well, on that issue--and I know that has been 
the problem with home care, is the woodwork effect, and yet it 
does seem to me if they are entitled to be a part of the 
program and they come out of the woodwork and they are there 
are under law and it is more efficient and perhaps even better 
care and less cost, I guess that is the catch-22 we are in.
    I want to take you back to a comment, if you were here, 
from Governor Napolitano about the Lewin Group report.
    Mr. Marron. Yes.
    The Chairman. Their report has shown that the Medicaid 
program would secure $83 billion over 10 years in savings if 
all the States moved to a full capitation, managed care model. 
I am wondering, do you value that study, do you agree with that 
study? Could you comment on the viability of their projections, 
whether CBO has done any related research that would verify 
that kind of a number?
    Mr. Marron. Certainly. We took a very quick glance at the 
study this morning. We have not reviewed it in any great 
detail. What I took from it from a quick glance is the $83 
billion number that you mentioned. That would be for the 
Medicaid program as a whole. For the States involved, it turns 
out that the FMAP is about 56 percent, on average, so that 
translates into about $46 billion in potential savings for the 
Federal Government over the next 10 years.
    I guess, first, just going back to--and this is one of 
these classic issues with these programs about what is a big 
number and what is a small number. Forty-six billion dollars is 
in one sense an astronomical number. It is interesting. When 
you compare it to the 10-year spending in the Medicaid program 
at the Federal level, it still works out to be less than 2 
percent. So it is relatively small compared to the overall 
program, but obviously a significant amount of money.
    The Chairman. Yes.
    Mr. Marron. As I understand it again basically just from a 
quick glance, their analysis presumes that these changes would 
essentially happen overnight. Obviously, any policy initiatives 
that would try to pursue them--presumably, there would be some 
phase-in period over which they would occur. So I would expect 
lower savings just for that reason.
    States at the moment currently have the flexibility to 
pursue many kinds of managed care programs on their own, and so 
you face sort of the classic question about why isn't this 
already being done.
    The Chairman. Why isn't it?
    Mr. Marron. Well, it is interesting. Arizona is clearly a 
very special case. As the Governor mentioned, they were the 
last entrant into the Medicaid program, and they are by far the 
most intensive users of managed care. For me, this sort of 
raises this classic issue with a program like Medicaid.
    Medicaid has this great sort of laboratories of democracy 
approach, in which it gives the individual States a great deal 
of freedom to try to choose what works best and it gives the 
other States an opportunity to learn from that. But it also 
gives the States an opportunity to design programs that best 
fit their culture, their population, their needs, their health 
care delivery system.
    It raises, then, a question about how well can you transfer 
the results in one State that has specifically chosen that 
approach to other States that for various reasons haven't. I 
think that would be the key issue in trying to figure out 
whether----
    The Chairman. Can you give me an example of some 
challenges, say, hypothetically Arkansas would have adopting 
what Arizona has? Are there States that you could compare that 
would have particular challenges evolving to such a capitated 
system?
    Mr. Marron. I think the primary challenge would be that 
Arizona has worked at managed care since 1982.
    The Chairman. Managed care isn't as accessible in other 
States?
    Mr. Marron. That not every other State has chosen to go 
that far. So it is not something where you can easily just 
switch from a more fee-for-service-oriented delivery system.
    The Chairman. It takes a more mature industry in health 
care to deal with their system.
    Mr. Marron. Yes, and then there may also be differences in 
the population covered, but I am afraid I don't have those 
details at my fingertips.
    The Chairman. Do you ever do studies that actually make 
recommendations to CMS on these kinds of things or 
encouragement to give these kinds of waivers because something 
is working and something is not?
    Mr. Marron. We at CBO studiously avoid recommendations of 
any kind, if possible. Our job is essentially to serve you and 
to give you the kinds of information that will be helpful for 
guiding policy decisions, and we are happy to assist you in 
that way.
    The Chairman. Well, obviously, we are going to have to do 
something continually on the whole entitlement category because 
eventually we will have no choice, because the entitlement side 
of the ledger is going to consume everything on the 
discretionary side. I think that is unsustainable to the 
American people, as well.
    Your analysis is appreciated today. It has been helpful and 
I have found this hearing very worthwhile. I hope maybe you 
have got a few ideas you can distill for us to make some 
recommendations to the Congress, and then maybe to OMB, too. I 
know there is always that fight, too.
    Thank you very much, Don, and we are grateful for your 
presence, and for all of you who have participated.
    [The prepared statement of Mr. Marron follows:]
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    The Chairman. With that, this hearing is adjourned.
    [Whereupon, at 11:31 a.m., the Committee was adjourned.]
                            A P P E N D I X

                              ----------                              


               Prepared Statement of Senator Ken Salazar

    Good Morning.
    I want to thank Chairman Smith and Ranking Member Kohl for 
their leadership and commitment to reform the Medicaid program 
and to fix our national health care crisis.
    The financial sustainablity and reform of Medicaid is a 
matter of life and death to over 57 million elderly, pregnant 
women, children, poor, and disabled Americans, who rely on 
Medicaid for necessary medical care.
    In my state alone, over 10% of our population relies on 
Medicaid to provide critical medical services.
    The problems affecting Medicaid are a reflection of the 
problems plaguing our national health care system.
    It is absolutely imperative that we reform our health care 
system so that all Americans, including our senior citizens, 
get the health care that they need and so that we stop the 
crippling effect that rising health care costs has on our 
citizens, businesses, economy and state and federal 
governments.
    Reforming our system will take the collective wisdom from 
hearings like this one. It will also take the political will to 
tackle our entire health care delivery system.
    Last year, Senator McCain and I introduced the National 
Commission on Health Care Act (S. 2007). Its purpose is simple 
and bold--to fix our broken health care system. It achieves 
that goal by bringing together elder statesmen and women to 
study and develop the best reform proposals that will solve our 
health care crisis.
    I look forward to working with the members of this 
Committee and the witnesses here today on health care reform, 
whether it is through a commission or other worthy legislative 
proposals.
    I am particularly interested in hearing the testimony and 
reform proposals of General Motors Corporation CEO, Richard 
Wagoner, Arizona Governor Janet Napolitano, and Donald Marron 
of the Congressional Budget Committee.
    It will take the concerted efforts of private businesses 
and leaders at all levels of government to solve the problems 
plaguing Medicaid and our entire health care system.
    Thank you.

                                 
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