[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
     WASTE, FRAUD, AND ABUSE IN THE FEDERAL CROP INSURANCE PROGRAM 

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

                                HEARING

                               before the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 3, 2007

                               __________

                           Serial No. 110-74

                               __________

Printed for the use of the Committee on Oversight and Government Reform


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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 HENRY A. WAXMAN, California, Chairman
TOM LANTOS, California               TOM DAVIS, Virginia
EDOLPHUS TOWNS, New York             DAN BURTON, Indiana
PAUL E. KANJORSKI, Pennsylvania      CHRISTOPHER SHAYS, Connecticut
CAROLYN B. MALONEY, New York         JOHN M. McHUGH, New York
ELIJAH E. CUMMINGS, Maryland         JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio             MARK E. SOUDER, Indiana
DANNY K. DAVIS, Illinois             TODD RUSSELL PLATTS, Pennsylvania
JOHN F. TIERNEY, Massachusetts       CHRIS CANNON, Utah
WM. LACY CLAY, Missouri              JOHN J. DUNCAN, Jr., Tennessee
DIANE E. WATSON, California          MICHAEL R. TURNER, Ohio
STEPHEN F. LYNCH, Massachusetts      DARRELL E. ISSA, California
BRIAN HIGGINS, New York              KENNY MARCHANT, Texas
JOHN A. YARMUTH, Kentucky            LYNN A. WESTMORELAND, Georgia
BRUCE L. BRALEY, Iowa                PATRICK T. McHENRY, North Carolina
ELEANOR HOLMES NORTON, District of   VIRGINIA FOXX, North Carolina
    Columbia                         BRIAN P. BILBRAY, California
BETTY McCOLLUM, Minnesota            BILL SALI, Idaho
JIM COOPER, Tennessee                ------ ------
CHRIS VAN HOLLEN, Maryland
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont

                     Phil Schiliro, Chief of Staff
                      Phil Barnett, Staff Director
                       Earley Green, Chief Clerk
                  David Marin, Minority Staff Director















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 3, 2007......................................     1
Statement of:
    Babcock, Bruce, director, Center for Agricultural and Rural 
      Development, Iowa State University; Bruce Gardner, 
      distinguished university professor, College of Agriculture 
      and Natural Resources, University of Maryland; and Steve 
      Ellis, vice president, Taxpayers for Common Sense..........    78
        Babcock, Bruce...........................................    78
        Ellis, Steve.............................................    93
        Gardner, Bruce...........................................    87
    Gould, Eldon, Administrator, Risk Management Agency, U.S. 
      Department of Agriculture, accompanied by Michael Hand, 
      Deputy Administrator for Compliance, Risk Management 
      Agency; Phyllis K. Fong, Inspector General, U.S. Department 
      of Agriculture; and Lisa Shames, Acting Director, Natural 
      Resources and Environment, U.S. Government Accountability 
      Office.....................................................    13
        Fong, Phyllis K..........................................    24
        Gould, Eldon.............................................    13
        Shames, Lisa.............................................    44
Letters, statements, etc., submitted for the record by:
    Babcock, Bruce, director, Center for Agricultural and Rural 
      Development, Iowa State University, prepared statement of..    81
    Davis, Hon. Tom, a Representative in Congress from the State 
      of Virginia, prepared statement of.........................    10
    Ellis, Steve, vice president, Taxpayers for Common Sense, 
      prepared statement of......................................    95
    Fong, Phyllis K., Inspector General, U.S. Department of 
      Agriculture, prepared statement of.........................    26
    Gardner, Bruce, distinguished university professor, College 
      of Agriculture and Natural Resources, University of 
      Maryland, prepared statement of............................    89
    Gould, Eldon, Administrator, Risk Management Agency, U.S. 
      Department of Agriculture, prepared statement of...........    16
    Shames, Lisa, Acting Director, Natural Resources and 
      Environment, U.S. Government Accountability Office, 
      prepared statement of......................................    46
    Waxman, Chairman Henry A., a Representative in Congress from 
      the State of California, prepared statement of.............     3


     WASTE, FRAUD, AND ABUSE IN THE FEDERAL CROP INSURANCE PROGRAM

                              ----------                              


                         THURSDAY, MAY 3, 2007

                          House of Representatives,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10 a.m. in room 
2157, Rayburn House Office Building, Hon. Henry A. Waxman 
(chairman of the committee) presiding.
    Present: Representatives Waxman, Maloney, Cummings, 
Kucinich, Clay, Watson, Yarmuth, Braley, Cooper, Hodes, Davis 
of Virginia, Platts, Duncan, Turner, and Sali.
    Staff present: Phil Schiliro, chief of staff; Phil Barnett, 
staff director and chief counsel; Brian Cohen, senior 
investigator and policy advisor; Margaret Daum, counsel; Earley 
Green, chief clerk; Teresa Coufal, deputy clerk; Matt Siegler, 
special assistant; Zongrui ``JR'' Deng, chief information 
officer; Miriam Edelman and Will Ragland, staff assistants; 
David Marin, minority staff director; Larry Halloran, minority 
deputy staff director; Jennifer Safavian, minority chief 
counsel for oversight and investigations; Keith Ausbrook, 
minority general counsel; Ellen Brown, minority legislative 
director and senior policy counsel; Anne Marie Turner, minority 
counsel; Patrick Lyden, minority parliamentarian and member 
services coordinator; Brian McNicoll, minority communications 
director; and Benjamin Chance, minority clerk.
    Chairman Waxman. The meeting of the committee will please 
come to order.
    Our committee started this year with 4 days of hearings on 
waste, fraud and abuse. We examined why $12 billion in cash 
disappeared in Iraq. We looked at the problems created by our 
Government's growing reliance on private security contractors, 
and we investigated the calamitous Deepwater contract to build 
ships for the Coast Guard. We also held a day of hearings on 
waste, fraud and abuse in the healthcare system.
    This a theme that we will return to repeatedly this year. 
The taxpayers understand it costs money to run the Government, 
but they can't accept rampant waste, fraud and abuse that 
squanders their money on boondoggle programs. They are looking 
to Congress to rein in the wasteful spending and Federal 
giveaways that are driving our Nation deeper into debt.
    Our committee is uniquely positioned to week out waste, 
fraud and abuse. Because we have Government-wide oversight 
authority, we can look at wasteful spending with independence 
and a fresh perspective. As we hold hearings in this committee, 
there will be no sacred cows.
    The crop insurance industry is a well financed and 
influential lobby, but in this committee, there will be no free 
passes. Our responsibility is to look out for the taxpayer, not 
the crop insurers, drug companies, Federal contractors, or any 
other special interest.
    I am not an agriculture expert. I grew up over my family's 
grocery store, so I know a little bit more about selling 
produce than I know about growing it. But I know a waste of 
taxpayers' money when I see it. What our committee will learn 
today is that the object of this hearing, the Federal Crop 
Insurance Program, is costing taxpayers billions of dollars.
    Nobody can argue with the goals of the crop insurance 
program: to provide farmers and ranchers with a safety net when 
bad weather or bad luck threatens financial ruin. But from the 
taxpayer perspective, it is hard to imagine a more costly and 
inefficient way of providing this safety net for farmers.
    The Federal Crop Insurance Program has become a textbook 
example of waste, fraud and abuse in Federal spending. Under 
this program, farmers received $10.5 billion over the last 6 
years, but it has cost the taxpayers almost $19 billion to 
provide this financial protection to farmers. Over $8 billion 
in taxpayer funds have been used for excess payments to 
insurers and other middlemen. Somehow, about 40 cents of every 
dollar that the taxpayers have put into the crop insurance 
program has been for unproductive expenses.
    The testimony from the Government Accountability Office 
will explain where some of this money is going. GAO has found 
that the private crop insurance companies are obtaining 
underwriting profits that are almost three times as high as 
industry averages. These exorbitant profits are funded by the 
taxpayers and farmers that pay for the program. According to 
GAO, over the last decade, these crop insurance companies have 
earned $2.8 billion in underwriting profits. Simply reducing 
their underwriting profits to industry average levels would 
have saved the taxpayers almost $2 billion.
    These reports of billions of dollars in taxpayers' 
expenditures are the reason I am holding this hearing today. 
Nobody begrudges assistance to a farmer whose crop is destroyed 
in a natural disaster, but no one should tolerate insurance 
companies that skim billions from the treasury to fatten their 
profits.
    Eliminating waste, fraud and abuse is not a partisan issue, 
and on this committee we are particularly fortunate that Tom 
Davis is our ranking member, and that we have Democrats and 
Republicans who share the commitment to putting the interests 
of the taxpayers first, and understand the importance of our 
oversight role.
    I am pleased that we are holding this hearing. It is not 
one of the usual ones. We don't have a bank of cameras. We 
don't have C-SPAN. We don't have all the other press covering 
our every move. But I think this can be as significant a 
hearing as any other, if we can explore ways to save the 
taxpayers what could amount to billions of dollars. I think 
there can be no more important purpose for an oversight 
committee.
    [The prepared statement of Chairman Henry A. Waxman 
follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Mr. Davis.
    Mr. Davis of Virginia. Thank you, Mr. Chairman.
    I guess we are really down in the weeds on this one today. 
I want to thank you for convening this hearing. As the 
principal House oversight committee, we are empowered by our 
rules to review and study on a continuing basis the operation 
of Government activities at all levels with a view to 
determining their economy and efficiency. That is a broad 
mandate to look anywhere in any department or agency for 
profligate spending and direct reforms.
    This morning, we are going to focus that powerful oversight 
microscope on a costly program that seems uniquely and 
dangerously vulnerable to waste, fraud and abuse, the Federal 
Crop Insurance Program. In an attempt to induce the private 
insurance marketplace to underwrite the highly variable risks 
of crop blights and failures, the program subsidizes premiums 
and provides insurers with a generous margin to cover 
administrative and operating costs. The Federal Government even 
assumes a substantial portion of the liabilities flowing from 
the riskiest pool of policies.
    But the program has not achieved its primary goal, to 
reduce or eliminate the need for annual disaster payments to 
farmers. In its current structure, the crop insurance system 
offers almost no incentives to limits costs, but practically 
invites unnecessary or fraudulent payments.
    Today, we will hear from the Department of Agriculture, the 
USDA Inspector General's Office, the U.S. Government 
Accountability Office, and respected academics on efforts to 
control a subsidy program that last year cost taxpayers $2.5 
billion.
    Both the Inspector General and the GAO have made 
recommendations to the Agriculture Department's Risk Management 
Agency to tighten expenditure controls, recoup excessive 
payments, prevent fraudulent claims, and strengthen enforcement 
against those who exploit the program. We need to know what 
progress is being made implementing those recommendations; what 
resources are being applied to the task; and what is still to 
be done to reduce vulnerabilities.
    Farm bills now under consideration may attempt to expand 
crop insurance availability and subsidies further still, so the 
inclusion of stronger fiscal controls and enforcement tools 
should be an urgent priority. The administration has proposed 
three important structural reforms to make crop insurance a 
more effective hedge against annual disaster payments, reduce 
administrative and operating costs, and limit underwriting 
gains by insurers in years when premiums far exceed paid 
claims.
    Not surprisingly, some farm groups oppose these proposals, 
but as we have demonstrated in the past, bipartisan oversight 
by this committee can inform and improve the work of other 
committees trying to balance the needs and demands of various 
constituencies. In 2003 and 2004, our investigations, a very 
bipartisan investigation in fact, suggested by Mr. Waxman, of 
inspections and testing to detect mad cow disease brought 
important information to light about delays, denials and other 
lapses in vigilance that might have otherwise been overlooked.
    With this hearing, we can shine the same curative light on 
the crop insurance program.
    Again, Chairman Waxman, thank you for focusing the 
committee's attention on this important Federal program. I look 
forward to the testimony of today's witnesses and to our 
continued bipartisan work to make Government more efficient and 
effective.
    [The prepared statement of Hon. Tom Davis follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Waxman. Thank you very much, Mr. Davis.
    If any Member wishes to insert an opening statement in the 
record, the record will be held open for 5 days for that 
purpose.
    I do want to recognize Mr. Cooper, if you have any opening 
comments?
    Mr. Cooper. Thank you, Mr. Chairman.
    I would just congratulate you for holding this important 
hearing. Despite the lack of cameras, this is a top taxpayer 
issue. I congratulate you for focusing on this. Thank you.
    Chairman Waxman. Thank you.
    Mr. Braley, I know that you have a conflict in your 
schedule. I want to recognize you at this time for any comments 
you wanted to make.
    Mr. Braley. Thank you, Mr. Chairman.
    I want to thank you and the Committee on Oversight and 
Government Reform, particularly you and Ranking Member Davis 
for holding this hearing today to examine waste, fraud and 
abuse in the Federal Crop Insurance Program.
    My high school math teacher in Brooklyn, IA was a Federal 
crop insurance adjuster during the summer time when he wasn't 
teaching math, so this is something that I have some 
familiarity with. I hope that the hearing will lead to 
improvements in the Federal Crop Insurance Program which will 
provide more benefits to farmers at lower cost, and which will 
provide savings to American taxpayers.
    It is my distinct privilege to welcome today Dr. Bruce 
Babcock to our hearing. Dr. Babcock is a professor of economics 
and the director for the Center for Agricultural and Rural 
Development at Iowa State University, my alma mater. He will be 
testifying as part of the second panel of witnesses.
    As a proud graduate of Iowa State, one of the premier 
agricultural institutions in the country, and I might add, the 
birthplace of the digital computer, I am proud to see 
leadership from Dr. Babcock and my alma mater on this important 
topic.
    The Center for Agricultural and Rural Development at Iowa 
State University was founded in 1958 and conducts innovative 
public policy and economic research on agricultural, 
environmental and food issues. Under the leadership of Dr. 
Babcock, the Center's academic research and public outreach 
programs inform and benefit State, Federal and international 
policymakers; academic researchers; agricultural, food and 
environmental groups; American farmers; and the public.
    Dr. Babcock has been a professor at Iowa State University 
since 1990. As the director for the Center for Agricultural and 
Rural Development, he has initiated advanced research on 
policies affecting valuation and risk management; Government 
price support and disaster relief programs; and agricultural 
insurance and alternatives.
    His research has led to innovative risk management 
strategies for farmers and has led to the development of 
several new crop insurance products. I am very proud of the 
fact that in 2002, Dr. Babcock was awarded the USDA Secretary 
of Agriculture Award for outstanding accomplishments in the 
area of agricultural public policy research and formulation.
    I would like to thank him for his leadership on this issue 
and for being here today. As the chairman mentioned, I cannot 
be here for the entirety of the hearing due to a scheduling 
conflict because, Dr. Babcock, I have another hearing on the 
impact of renewable energy production in rural America. So I 
hope you take that back with my regrets to the people at Iowa 
State.
    However, I do look forward to reviewing your testimony, 
along with the testimony of all the other witnesses, so that we 
can learn about how improvements can be made to this very 
important Federal Crop Insurance Program to benefit America's 
farmers and taxpayers.
    Thank you, Mr. Chairman.
    Chairman Waxman. Thank you very much, Mr. Braley. We will 
look forward to hearing from Dr. Babcock in the next panel. We 
are pleased that he is here.
    We are pleased to welcome the first panel of witnesses. We 
have three witnesses on our panel today. Mr. Eldon Gould is the 
Administrator of the USDA's Risk Management Agency. Mr. Gould 
has served as RMA Administrator since November 2005.
    Michael Hand, the Risk Management Agency's Deputy 
Administrator for Compliance will also be joining Mr. Gould at 
the witness table.
    Also joining us as a witness will be Phyllis Fong, the 
USDA's Inspector General.
    Rounding out our panel will be Lisa Shames, GAO's Acting 
Director for Natural Resources and the Environment.
    We welcome you all to our hearing today. It is the practice 
of this committee to swear in all witnesses, so we are not 
singling you out, and we would like you if you would rise and 
please take the oath.
    [Witnesses sworn.]
    Chairman Waxman. Thank you very much. The record will 
indicate that each of the witnesses answered in the 
affirmative.
    Mr. Gould, why don't we start with you? There is a button 
on the base of the mic. Push it in and pull it close enough to 
you so that we can hear it and it can also be heard for the 
record.

   STATEMENTS OF ELDON GOULD, ADMINISTRATOR, RISK MANAGEMENT 
AGENCY, U.S. DEPARTMENT OF AGRICULTURE, ACCOMPANIED BY MICHAEL 
  HAND, DEPUTY ADMINISTRATOR FOR COMPLIANCE, RISK MANAGEMENT 
AGENCY; PHYLLIS K. FONG, INSPECTOR GENERAL, U.S. DEPARTMENT OF 
    AGRICULTURE; AND LISA SHAMES, ACTING DIRECTOR, NATURAL 
   RESOURCES AND ENVIRONMENT, U.S. GOVERNMENT ACCOUNTABILITY 
                             OFFICE

                    STATEMENT OF ELDON GOULD

    Mr. Gould. Thank you, Mr. Chairman, and members of the 
committee. I am Eldon Gould, Administrator of the USDA Risk 
Management Agency. I am also a lifelong farmer from King 
County, IL, with a 1,500 acre corn, soybean and wheat farm, and 
a 700 sow farrow to wean hog operation.
    I appreciate this opportunity to provide an update on the 
efforts of the RMA to improve the integrity of the Federal Crop 
Insurance Program. The Federal Crop Insurance Program is a 
partnership between the Federal Government and 16 approved 
insurance companies which deliver the insurance against crop 
failure due to natural causes for over 80 percent of America's 
farm acreage.
    The program is working as it was intended and is performing 
well, meeting the targeted loss ratios set by Congress. We 
still have work to do and improvements to make, but we are 
making good progress in our fight against program abuse.
    It bears saying that the vast majority of people in the 
Federal Crop Insurance Programs, farmers, insurance agents, 
loss adjusters, industry professionals and Government 
employees, are hard-working men and women acting with the 
highest integrity and competence.
    That being said, we are committed to doing all we can to 
enhance and maintain program compliance through prevention, 
detention and enforcement. We recognize that with the increased 
workload required of our compliance people in the wake of the 
Agriculture Risk Protection Act, we have to work efficiently. 
RMA's compliance program emphasizes preemption and deterrence 
in our efforts, while still aggressively pursuing program abuse 
by assisting USDA's Office of Inspector General and the 
Department of Justice.
    The results from our data mining efforts have made an 
impressive difference in avoiding undue payments to people who 
might try to take advantage of this important program. Data 
mining alone has achieved reductions and indemnities for the 
selected producers of more than $437 million since the 2002 
crop year.
    We also now use remote sensing, geospatial information 
technologies, and other computer-based resources to ensure we 
are being good stewards of the taxpayer dollar.
    Our compliance personnel completed the second year of a 
structured random policies review in 2006, and will soon begin 
the third round of the 3-year cycle of reviewing participating 
insurance providers. Compliance completes the random reviews to 
establish a program error rate under the Improper Payments 
Information Act of 2002. It is noteworthy that our main 
observed error rate from these reviews on 600 randomly selected 
policies was 2.64 percent.
    Mr. Chairman, I have here the administration's 2007 farm 
bill proposal and I would like to submit it for the record. The 
farm bill proposes redirecting $10 million of existing funds 
authorized under the Federal Crop Insurance Act to increase 
compliance personnel and training and expand the very effective 
tools that we use. The funds requested would also support data 
mining efforts through the continued development of our 
comprehensive information management system [CIMS]. Our current 
outdated business systems are at the end of their expected life 
cycle, making it impossible to make comparisons across crop 
years electronically.
    We desperately need new IT resources to put the wealth of 
information we gather to the best use. The data warehouse 
itself, which consolidates the information from all of these 
data bases, and is used to support the data mining efforts, 
must be replaced.
    In our 2008 budget, we have asked for $5.4 million to 
replace equipment, and $3.6 million to continue the regular 
operations of data mining. We also ask for approved insurance 
providers to share in the cost to develop and maintain a new IT 
system by assessing a one-half cent per dollar of premiums 
sold.
    Administration of the crop insurance program requires all 
interested parties to identify viable insurance products and 
solutions that meet the needs of the agricultural community. 
Working together, we will continue to maintain program 
integrity through prevention, detention and enforcement.
    I thank you for this opportunity to participate in this 
important hearing, and I look forward to responding to 
questions on these issues.
    [The prepared statement of Mr. Gould follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Waxman. Thank you very much.
    Let's now go to Ms. Fong.

                  STATEMENT OF PHYLLIS K. FONG

    Ms. Fong. Thank you, Mr. Chairman, Ranking Member Davis and 
members of this committee. We appreciate the opportunity to be 
here today to testify about our views on the crop insurance 
program.
    As you know, we in the IG have conducted substantial audit 
and investigative work pertaining to this program over the past 
few years. I just want to make a few key points for you today.
    There has clearly been a significant upward trend in 
Federal payments to assured insurance providers or insurance 
companies for expenses in underwriting gains. Over the past 6 
to 7 years, total payments to AIPs have increased to record 
levels. The Federal reimbursement to AIPs for each producer 
policy has increased almost 100 percent during that period of 
time, and the Government's subsidy of premiums has also 
increased by over 180 percent.
    We believe that Congress has done a successful job in 
broadening the Federal safety net for producers, but it is now 
time to reassess what constitutes an acceptable cost to the 
Government.
    We believe that to have an effective crop insurance 
program, we need to have three elements. First, we have to have 
the proper assignment of risk between insurance companies and 
the Government.
    Second, we need to have effective management controls in 
place, including a strong quality control system.
    And third, we need aggressive compliance reviews and 
investigations to address fraud.
    Let me just say a few words about each of those elements. 
In terms of assignment of risk, we believe that currently RMA 
is underwriting most of the risk for crop losses. As a result, 
the insurance companies have less of an incentive to vigorously 
administer the Federal Crop Insurance Program in accordance 
with the Government's and taxpayers' best interests. To ensure 
that Federal funds are used responsibly and efficiently, AIPs 
need to consistently monitor risky policyholders. They need to 
deny claims of questionable losses, and they need to address 
weaknesses in their own practices.
    With respect to the second element of management controls, 
we have reported our concerns on issues such as conflict of 
interest among sales agents, loss adjusters and policyholders. 
We believe this is an area that needs increased attention.
    We also believe that a common information system between 
RMA and FSA is critical to improving integrity and reducing the 
risk of improper payments.
    Third, we recognize that RMA has taken positive steps to 
improve the quality control system, but more can be done in 
this area.
    With respect to enforcement, we in OIG work very closely 
with RMA and the Department of Justice to aggressively pursue 
fraudulent crop insurance claims and schemes. Compared to fraud 
affecting other USDA programs, these cases are particularly 
complex and time consuming. We find that we must expend a lot 
of resources to pursue them because the schemes are very 
complex. Some of the kinds of fraud that we have seen include 
losses being claims on crops that were never planted. We have 
seen collusion between program participants to fabricate their 
losses. And we have seen fraudulent shifting of crop production 
between insured and non-insured parcels of land.
    While many of the participants in the program are honest 
and comply with the program's requirements, there have been a 
few who have really given the crop insurance program a bad 
name, and we feel that we need to aggressively pursue those to 
ensure that there is an effective safety net for all producers.
    In terms of recommendations, we support many of the 
provisions that the administration has included in its farm 
bill proposal, and we have also detailed other specific 
recommendations in my full written statement.
    Thank you again for inviting me, and we look forward to 
answering questions.
    [The prepared statement of Ms. Fong follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Waxman. Thank you very much, Ms. Fong.
    Ms. Shames.

                    STATEMENT OF LISA SHAMES

    Ms. Shames. Chairman Waxman, Ranking Member Davis, and 
members of the committee, I am pleased to be here today to 
discuss RMA's efforts to address fraud, waste and abuse in the 
crop insurance program.
    As you know, crop insurance protects farmers against 
financial losses caused by natural disasters. However, we at 
the GAO recently identified the Federal Crop Insurance Program 
to be in need of better oversight to ensure program funds are 
spent as economically, efficiently and effectively as possible.
    Over the last 5 years, the crop insurance program cost the 
Government over $16 billion, of which nearly $7 billion was 
paid to participating insurance companies. That is, 40 cents of 
every dollar went to the companies, while 60 cents went to the 
farmer.
    I plan to discuss two key points today. First, while RMA 
has strengthened its procedures in response to recommendations 
GAO made in 2005, regulatory and statutory requirements in the 
program's design still hinder efforts to reduce fraud, waste 
and abuse.
    Second, compensation to the insurance companies has been 
excessive in light of the underwriting gains and cost 
allowances insurance companies receive.
    First, RMA has strengthened its procedure to prevent and 
detect fraud, waste and abuse in the crop insurance program. 
RMA provides information more frequently on suspect claims so 
that field inspections can be more timely and has drafted 
regulations that, when final, will allow it to use its expanded 
sanction authority on program violators.
    Positively, RMA reports cost savings of over $300 million 
in the form of avoided payments from 2001 to 2004. Nonetheless, 
we found the program's design as laid out in RMA's regulations 
or as required by statute, can impeded RMA's efforts in a 
number of ways.
    In terms of RMA's regulations, farmers have the option of 
insuring their crop in multiple units or combined as one unit. 
Insuring their crops in multiple units can make it easier to 
file false insurance claims because a farmer can shift 
production to one field and file a false claim for loss on the 
other field. We found that 12 percent of farmers identified as 
having irregular claims were suspected of this switching among 
their fields.
    RMA disagreed with our recommendation to reduce the 
insurance guarantee or to eliminate this coverage to farmers 
whose claims compare irregularly to others in the area.
    In terms of statutory requirements, RMA is obligated by law 
to offer farmers coverage if an insured crop is prevented from 
being planted because of weather conditions. It is often 
difficult to determine whether farmers had the opportunity to 
plant the crop. Also, this preventive planting coverage is 
expensive. RMA pays about $300 million annually in claims.
    My second point this morning is that compensation to the 
insurance companies has been excessive. USDA pays both 
underwriting gains and cost allowances as negotiated in the 
contract with the companies, the standard reinsurance 
agreement, or SRA. Underwriting gains totaled $2.8 billion from 
2002 through 2006. These gains represent an average annual rate 
of return of 17.8 percent. This rate of return is considerably 
higher than the benchmark for private property and casualty 
insurance, which is 6.4 percent.
    USDA had a one time authority to renegotiate the financial 
terms of its SRA with the companies in 2005. Nonetheless, in 
2005, the insurance companies received a rate of return of 30 
percent, and in 2006 the rate of return was 24 percent. 
Companies received these gains despite drought conditions in 
parts of the country that would normally suggest they would 
earn lower profits.
    In addition to underwriting gains, USDA paid a cost 
allowance to the insurance companies of $4 billion to cover 
administrative and operating expenses for program delivery from 
2002 to 2006. USDA expects these expenses to increase by about 
25 percent by 2008 because of higher crop prices, particularly 
for corn and soybeans. Higher crop prices increase the value of 
the policy. This means that companies will receive a higher 
cost allowance without a corresponding increase in expenses for 
selling or servicing the policies.
    Congress has an opportunity in reauthorizing the farm bill 
to provide USDA with the authority to periodically renegotiate 
the financial terms of the SRA so that the companies' rate of 
return is more in line with private insurance markets.
    In conclusion, Federal crop insurance plays an invaluable 
role in protecting farmers. Nonetheless, we identified crop 
insurance as a program in need of enhanced congressional 
oversight because we cannot afford to continue businesses as 
usual, given the Nation's current deficit and growing long-term 
fiscal challenges. RMA has made progress in addressing fraud, 
waste and abuse, but weaknesses we identified in the program 
design continue to leave the crop insurance program vulnerable.
    Furthermore, RMA's efforts to limit program costs has had 
minimal effect. Congress has an opportunity in its 
reauthorization of the farm bill to bring costs more in line 
with the private insurance industry. Such a step can help 
position the Nation to meet its fiscal responsibilities by 
saving hundreds of millions of dollars annually.
    Mr. Chairman, this concludes my prepared statement. I would 
be pleased to answer any questions that you or members of the 
committee may have.
    [The prepared statement of Ms. Shames follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Waxman. Thank you very much.
    I appreciate the testimony of all of you. I want to try and 
see if I can understand this program a little bit more 
precisely. Ms. Shames, 40 percent of the money that the Federal 
Government puts into the program never makes it to the farmers. 
That amounts to $11 billion worth of benefits designed to go to 
farmers that are shunted off to middlemen or the insurance 
companies. Is that right?
    Ms. Shames. Yes.
    Mr. Waxman. I can't think of another program with this kind 
of expenditure for delivery costs. The Medicare program spends 
over 95 percent of its money actually providing medical care. 
The administrative costs of the Social Security program are 
less than 1 percent. But 40 percent of the money we spend on 
the crop insurance program seems to go for the administrative 
costs, if we are going to be nice about it, just to run the 
program.
    Can you think of another Federal Government program that is 
as inefficient as the crop insurance program?
    Ms. Shames. GAO has not ranked the various Federal 
programs, but I can tell you that we did put the Federal Crop 
Insurance Program as 1 of 13 programs in need of enhanced 
oversight. This letter was sent by the Controller General to 
the new Congress to help the new Congress.
    Chairman Waxman. Administrator Gould, can you explain to us 
and to the taxpayers why 40 percent of the costs of your 
program don't ever make it to the farmers that it is supposed 
to help?
    Mr. Gould. That seems like a lot of dollars. I would be the 
first to admit that. But I think you have to stand back and 
look at the program, that it covers the breadth and width and 
depth of all the producers in the United States. There is a lot 
of variability caused by weather in the various crops in the 
various parts of the country.
    The other thing I think that is important is that we are 
required by statute to deliver the program to all producers in 
all corners of the United States. So obviously the delivery 
costs are more than they would be for some programs, and I am 
sure that accounts for some of the difference.
    Chairman Waxman. Well, we are dealing with a risk. That is 
what insurance is all about. But it seems to me what is going 
on is that the taxpayers are providing three separate and huge 
subsidies to crop insurers. Ms. Shames, I would like you to 
walk through how this works. First, crop insurance companies 
receive the benefit of billions of dollars in taxpayer 
subsidies to offer crop insurance to farmers. Is that right?
    Ms. Shames. Yes.
    Chairman Waxman. And they earn extraordinarily high 
windfall gains on these premiums. They get much more in 
premiums than they pay out to farmers when disaster strikes.
    Ms. Shames. USDA pays for both. Yes.
    Chairman Waxman. They have earned $2.8 billion in 
underwriting profits in the last 5 years. Is that right?
    Ms. Shames. Yes, that is correct.
    Chairman Waxman. OK. Then on top of these subsidized 
premiums, the companies also receive billions of dollars in 
commissions when they sell crop insurance. Basically, these are 
additional subsidies to cover the administrative costs. Is that 
right?
    Ms. Shames. Yes.
    Chairman Waxman. Over $4 billion in subsidies in the last 
decade went into these commissions.
    Finally, we provide another taxpayer-funded benefit to 
insurers that we allow them to hand their riskiest policies 
back to the Federal Government. So the insurance companies are 
taking the risk, but their riskiest 20 percent of the crops 
that they cover, they can say to the Federal Government, well, 
you are going to pay all of it.
    Ms. Shames. The Government shares a large burden of the 
risk, yes.
    Chairman Waxman. How much of the risk do they share in the 
20 percent that are the riskiest?
    Ms. Shames. About 85 percent.
    Chairman Waxman. About 85 percent. Now, the insurance 
companies keep a portion of the premiums, but then they are no 
longer responsible for paying farmers in the event of a 
disaster. Is that right in those circumstances?
    Ms. Shames. Right.
    Chairman Waxman. So it is really a remarkable program. We 
have so many different ways of subsidizing crop insurers I can 
barely keep track of it. We have three separate subsidies, it 
seems to me. Now, what if we just let people go buy private 
market insurance coverage? I gather that would be so expensive 
that it would be unaffordable for many farmers. Is that the 
case, Mr. Gould?
    Mr. Gould. Yes, that would the case. It might not be 
unaffordable for all farmers, but certainly in areas that are 
marginal producing areas with problems, where the risk is 
greater. It would be very expensive for those producers.
    Chairman Waxman. So we want to make sure that they have 
this insurance coverage safety net. Is there any competition 
between insurance companies here? Can the farmers pick one as 
opposed to another, based on a lower price?
    Mr. Gould. No. The insurance companies all have the same 
rate. The rates area actually set by the Risk Management 
Agency. Our goal is a rate of 1.0, so the indemnities paid are 
equal to the premiums. That is our rating goal. So 
consequently, the insurance companies compete only on service 
and areas that they wish to write and deliver the program to 
the producers.
    Chairman Waxman. And do most insurance companies compete in 
the same geographical region? Or do they split up the areas of 
the country, and some insurance company covers one area and 
another insurance company covers another area?
    Mr. Gould. Some companies compete more in one area. There 
may be come that compete in a given area of the United States. 
Others may specialize in the less, how shall I say, populous 
parts of the country. But all in all, companies are entitled to 
write anywhere and everywhere. They actually have to get 
licenses from different States in which they write, so there 
isn't a lot of overlap in particular companies.
    Chairman Waxman. Ms. Shames, is there any other insurance 
policy for any other potential loss where the insurance 
companies have so little risk that they really themselves are 
facing?
    Ms. Shames. The closest analogy would be for the property 
and casualty insurance. Of course, the benchmark for that in 
terms of profitability is about one third.
    Chairman Waxman. About one third.
    Ms. Shames. Yes.
    Chairman Waxman. So if we are going to guarantee insurance, 
one thing we could do is to say we are going to make sure that 
the subsidies are not going to be any more than property and 
casualty insurers.
    Ms. Shames. It would certainly be a benchmark.
    Chairman Waxman. And how much money would we be saving if 
we simply went to that level?
    Ms. Shames. Certainly hundreds of millions of dollars.
    Chairman Waxman. If there any fear that you would have that 
insurance companies wouldn't be able to continue in operation?
    Ms. Shames. Well, the expenses that they impose are so 
composed, in other words, in terms of their administrative and 
operating costs, so I would say that there is some buffer.
    Chairman Waxman. OK. I thank you very much.
    I am going to call on Mr. Davis and the other Members.
    Mr. Davis of Virginia. Thank you.
    Mr. Gould, the 2007 farm bill proposes a change requiring 
insurance companies to return 22 percent of their underwriting 
gains to the Government. What responses have you received from 
industry and your authorizing committee regarding this 
proposal?
    Mr. Gould. Well, as we stand back and look at the 
administration's farm bill proposals, there are a number of 
proposals in there to rebalance the program. You mentioned the 
quota share, the net book quota share as one option. There are 
others about reducing the A&O subsidy to the companies, and 
also increasing the farmer portion of the premium. All those 
are designed to have less exposure to the taxpayer.
    Mr. Davis of Virginia. I understand that. I am asking how 
industry has reacted to that, and how the authorizing 
committees have reacted to that, from your perspective.
    Mr. Gould. From my perspective, I don't think that probably 
anybody wants to get up and say that they are making too much 
money. So I suspect the industry is going to react negatively 
to these proposals, but we think it is an opportunity to go 
back and re-balance the program and have the American 
taxpayers' dollars----
    Mr. Davis of Virginia. Have you gotten any receptivity on 
the part of the committee to the proposal? Are they reacting to 
their constituents in industry?
    Mr. Gould. I am sorry. I am not sure I understand.
    Mr. Davis of Virginia. Well, is the committee saying, hey, 
this is a great idea; we want to write this into the farm bill; 
or do you think they are listening to their industry who is 
less receptive to this?
    Mr. Gould. I think, from my perspective, in the view of the 
USDA, I think they are putting forth their best foot forward to 
re-balance the program.
    Mr. Davis of Virginia. I am asking about the Ag Committees 
in the House and the Senate. You have your bill. We know the 
industry.
    Mr. Gould. We have talked to them, but we have not gotten 
any feedback from them.
    Mr. Davis of Virginia. They haven't said, hey, that is a 
great idea.
    Mr. Gould. They have not come forward with that.
    Mr. Davis of Virginia. You have no indication they are 
going to write this into the bill at this point?
    Mr. Gould. They have not seen the language yet, no.
    Mr. Davis of Virginia. They had a hearing on it on Tuesday. 
What was the reaction of Members to this part? Was there any 
reaction?
    Mr. Gould. Not on the possibility of the companies. We 
talked more about the supplemental deductible coverage that is 
also one of the administration's farm bill proposals.
    Mr. Davis of Virginia. And how was the reaction to that?
    Mr. Gould. I would say very favorable.
    Mr. Davis of Virginia. OK. The 2007 farm bill proposes to 
reduce subsidies for insurance company administrative and 
operating costs by 2 percentage points. The reaction there from 
the committee members on Ag?
    Mr. Gould. We did not talk about that specifically.
    Mr. Davis of Virginia. OK. So that wasn't really addressed 
at your hearing, it would seem.
    Mr. Gould. No. I think the Ag Committee is waiting to see 
the language that the administration is going to come forth 
with, and then they will act or react to that accordingly.
    Mr. Davis of Virginia. OK.
    Ms. Fong, let me ask you. We know from USDA of the backlog 
at the Department of Justice hindered the ability to properly 
prosecute individuals who were committing fraud on the crop 
insurance program. How does this backlog affect your office's 
work?
    Ms. Fong. Well, these cases can be very, very difficult and 
complex because they involve multiple parties, lots of 
different schemes and the need to track that evidence across 
State lines. And the records are very difficult to find. So 
what we have found is that the prosecutors need to be educated 
on the complexities of the program. As a result, we have been 
very fortunate. We have found in a couple of States prosecutors 
who are really interested in going after these questions, and 
we have had some very successful cases.
    In other places, we engaged in education and training, and 
we are currently working with Justice very closely on some 
major investigations at the national level that we are quite 
optimistic about.
    Mr. Davis of Virginia. OK.
    Ms. Shames, how would allowing the USDA to renegotiate the 
financial terms of the standard reinsurance agreement reduce 
the monetary waste in the program?
    Ms. Shames. Well, it gives USDA an opportunity to bring the 
SRAs closer in line with private industry. We feel that is 
where the hundreds of millions of savings will be, to try to 
bring it closer to the industry standard.
    Mr. Davis of Virginia. OK. I will just ask one question and 
everybody can take a stab at it. If you could just make one 
suggestion as to how USDA could best reduce waste, fraud and 
abuse in the crop insurance program, what would it be and how 
would it work? Top priority?
    Mr. Gould. The top priority would probably be to increase 
our compliance budget and exposure so we could get more 
compliance, people on the ground; increase our IT budget so we 
could in fact do more data mining. That has been extremely 
successful in finding and prosecuting anomalies that show up in 
the crop insurance world. That would probably be our No. 1.
    Mr. Davis of Virginia. Not a change in law, just allow you 
to do your job, basically.
    Mr. Gould. That is correct.
    Mr. Davis of Virginia. Anyone else? Ms. Fong do you have a 
comment?
    Ms. Fong. I think we should look at the basic structure of 
the program. We need to have more incentives for insurance 
companies to really make sure that they pay out on good claims. 
If there are questionable claims, that they really pursue those 
and look at them. Right now, those incentives I would say are 
very low, very few.
    Mr. Davis of Virginia. Ms. Shames.
    Ms. Shames. We recommended in our 2005 report that RMA and 
FSA conduct all these inspections in the fields that were 
called for. In other words, those fields that were suspected of 
false claims. USDA had disagreed with this recommendation 
because they felt they had insufficient resources to do that.
    Mr. Davis of Virginia. Thank you.
    Chairman Waxman. Thank you, Mr. Davis.
    Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman.
    I used to represent an entirely rural district. Now, I have 
a more urban one, but I still care deeply about farmers and 
their welfare. What we have heard today is pretty disturbing. 
It sounds like this could be one of the most wasteful programs 
in all the Federal Government, at least in terms of percentage 
of money that is not reaching the intended beneficiaries. That 
is pretty scary right there.
    We also have a situation in which the farm bill is up for 
reauthorization. To my knowledge, that committee has not had a 
single hearing so far, and there is just a little time left for 
a witness that is at all critical of this program.
    It also seems to be a situation in which the industry has 
given over $1 million in campaign contributions primarily to 
Agriculture Committee members. The reform proposals we are 
hearing, better data mining and things like that, catching 
fraud, could be interpreted as doing more of the work for these 
insurance companies. The startling number that I heard was from 
Ms. Shames saying that the Federal Government still holds 85 
percent of the risk here.
    Ms. Shames. Yes. I should point out that is for the most 
risky fund.
    Mr. Cooper. That is an amazing situation. This sounds like 
corporate welfare to me. It is the Department of Agriculture, 
not the Department of Corporate Welfare. I looked last night at 
a couple of the Web sites for the 16 companies that are in this 
business. If you look just at the initial page, it looks like 
small town America, Main Street, little towns, great States. 
But as you dig into the Web site a little bit, sometimes you 
will see that these are obscure subsidiaries of multi-billion 
dollar multinational insurance companies headquartered in 
Bermuda and God knows where else.
    If I were Mr. Gould, I would be trying to manage a 
situation like this. You point out in your testimony that you 
are a life-long farmer in northern Illinois. That doesn't 
interfere with your day job here in Washington? How does that 
work?
    Mr. Gould. Actually, when I came to Washington, it was a 
requirement to recuse myself from the farm operation. I have a 
son back in Illinois that is operating and managing the farm. 
So this is my full-time position today.
    Mr. Cooper. As a farmer or farm owner or former farmer, 
what sort of crop insurance do you have?
    Mr. Gould. Prior to coming to Washington, I carried 
primarily the CAT policy. Since coming to Washington, I 
actually asked my son the last time I was home, I asked him 
what kind of crop insurance do we have, and we do have a GRIP 
policy, a gross revenue insurance protection plan. It is a 
county-based program.
    Mr. Cooper. Do you worry as a farmer that you are not 
necessarily getting a good deal? The taxpayer, according to the 
chairman's numbers, are paying $19 billion into these sorts of 
programs, and farmers have gotten $10 billion of that? One of 
the most inefficient ratios that I am aware of in any 
Government program?
    Mr. Gould. I think we need to stand back and look at the 
program in totality. That being that we are as an agency 
required to insure all parts of the country, each part of the 
country, and some places are very sparse or high-risk crops. We 
are still required to provide the coverage for those people and 
those producers.
    Mr. Cooper. I have a limited amount of time. Remember, you 
represent the U.S. Department of Agriculture. By definition, 
you cover the country.
    Mr. Gould. Yes.
    Mr. Cooper. Do you really need companies headquartered in 
Bermuda and other places to help you cover the country and to 
pay them $9 billion or $4 billion for their services? If the 
Agriculture Department did its job, you wouldn't need this 
extra layer.
    Mr. Gould. I would like to point out that the companies 
that you refer to as being headquartered in Bermuda are 
reinsurance companies. They are the companies that insure the 
16 insurance companies in the United States. In the 
administration's farm bill proposal, we are suggesting that we 
as taxpayers take some of that reinsurance and keep it in-
house, so to speak, so that would certainly reduce the amount 
of reinsurance opportunities that would go to reinsurance 
companies.
    Mr. Cooper. Mr. Gould, I am not sure you heard Ms. Shames. 
She was saying that the Federal Government has already retained 
85 percent of the risk for these riskiest farms. So you are 
already the reinsurer. You are just allowing the companies to 
reap the profits and the commissions for trying to somehow 
augment the Federal Government's capability. The Federal 
Government is holding the bag here.
    Mr. Gould. We are proposing to provide or hold back some of 
the quota share on all the funds, not just the most risky 
funds. So in fact in total, the program would in fact retain 
much more of the premium and much more of the risk than is 
currently the case.
    Mr. Cooper. So instead of being the most inefficient 
program in Government, it might be the second or third most 
inefficient program in Government?
    Mr. Gould. I don't have a way of ranking or knowing the 
other programs. I certainly think it would be an improvement 
for this program and still maintain the goals and objectives as 
set out by statute.
    Chairman Waxman. Thank you, Mr. Cooper. Your time has 
expired.
    Mr. Duncan.
    Mr. Duncan. Thank you, Mr. Chairman. Thank you very much 
for calling this hearing and calling attention to a very 
serious problem. I want to say that I agree with everything 
that my colleague, Congressman Cooper, has just said about 
this. I have those same concerns. I think anybody that is 
fiscally conservative would be horrified by what we are hearing 
here today.
    Mr. Gould, how many employees do you have in your agency?
    Mr. Gould. We have a total of 500 employees in the agency, 
and approximately 100 of those look after the compliance 
function.
    Mr. Duncan. The reason I ask that, you know, every time I 
hear about a Federal agency messing up, which almost seems to 
be a daily occurrence, if they are ever questioned about it, 
they always say one of two things. They always say either they 
are underfunded and need a bigger budget; or they say their 
computers are out of date and not talking to each other.
    And yet, all these Federal departments and agencies are 
getting far more in funding than a comparable operation in the 
private sector would get, and all of them have more up to date 
technology, yet those are the excuses they always fall back on.
    When you hear these things like the chairman has said, and 
Mr. Cooper, about how this program is the most wasteful or one 
of the most wasteful in the whole Government, does that 
embarrass you? Is that going to stir you into any kind of 
action? What are you doing to do in response to this? Are you 
just going to sit around and wait until we come in and increase 
your budget? Are you going to go back this afternoon and start 
doing something about this?
    Mr. Gould. Thank you for the question. We are in I would 
say an ongoing effort to improve the program. As I have become 
more familiar with the program, I see some opportunities for 
improvement. That is an ongoing effort. However, we are limited 
to some degree by statute what we can do, what we can change, 
how fast we can change it. Our rating period looks back over a 
period of time to determine the proper rates.
    I would say, maybe contrary to the comments made here about 
our technology and the things we have to work with, that our 
budget has not kept up with our needs. We have largely kept 
pace with the computer program we do have by funding that 
through salary lapses and things of that nature.
    So it has become a challenge and we have to establish 
priorities. I think we recognize some of----
    Mr. Duncan. Let me just say this. You are surely not saying 
the statute now limits you. If you find out this afternoon or 
tomorrow that some farmer has done something crooked, you are 
not telling us that you can't do anything about it because of 
the statute, are you?
    Mr. Gould. No, I am not saying we can't do anything about 
it. What I am saying is we are limited to some things we can do 
by statute in how fast we can change and adjust the program. I 
think as we look forward to the administration's farm bill, 
that is where we see our opportunity to make changes and 
improve the program and, as I have said before, re-balance the 
program in favor of the U.S. taxpayer.
    Mr. Duncan. You know, we all love and respect the farmers, 
but there is almost no industry that is more subsidized by the 
Federal Government, except for the defense industry. We just 
can't turn farmers into the biggest welfare recipients in the 
country. It says here that the overall cost to the taxpayer has 
increased 64 percent since 2000. Those are years of relatively 
low inflation. Each year ad hoc disaster assistance bills are 
passed that provided another $8.6 billion since 2000 on top of 
the regular farm bills. The vetoed Iraq supplemental contained 
another $3.5 billion in disaster aid.
    When you start adding in the subsidies and these crop 
insurance payments and all these programs that the various 
agriculture agencies have, I mean, my goodness, it seems like 
it is almost getting out of hand.
    Ms. Fong, you said that the best recommendation you can 
make is to give the insurance companies more incentive or put 
more pressure on them to not grant every claim that is made, or 
the more questionable claims. How do we do that? How do we give 
them incentive to do that, or put more pressure on them?
    Ms. Fong. It goes back to the basic question of who is 
bearing the risk. Right now, the way the program is structured, 
the Government and RMA bears the risk for claims having to be 
paid out. What needs to happen is to have more of an incentive, 
namely by increasing the amount of risk that the insurance 
companies bear would give them more of an incentive to really 
examine the claims that are being filed to determine whether 
they truly are legitimate claims that should be paid, or 
whether or not there are reasons why they shouldn't be paid.
    Right now, the way the system works, the incentive is for 
the insurance companies to grant the claim and to pass the risk 
along to the Federal Government.
    Mr. Duncan. Was Congressman Cooper correct that there are 
just 16 insurance companies involved in this business? Can 
anybody tell me?
    Ms. Fong. I believe that is correct.
    Mr. Duncan. That is?
    Thank you very much.
    Chairman Waxman. Mr. Cummings.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    This is a hell of a deal. I am serious. I have never seen 
anything like this. You know, one of the things that frustrates 
me about being in Congress is that we will have these hearings 
and everybody says there is something wrong. Republicans say 
there is something wrong. Democrats say there is something 
wrong. And guess what? Nothing happens.
    We hear Mr. Gould say that his hands are tied. Ms. Shames, 
are there things he can do now, so that we are not sitting here 
5 years from now, with everybody saying, oh, this is so sad, 
and it is worse in 5 years. What can he do? Let him know what 
he can do.
    Ms. Shames. GAO in 2005 issued a report that identified 
actions that could be taken to reduce the fraud, waste and 
abuse in the crop insurance program. We made several 
recommendations. ARPA gave RMA some tools to help it in terms 
of----
    Mr. Cummings. And when was that?
    Ms. Shames. ARPA was in 2000 and our report came out in 
2005. Just to give you a rundown of the status of the 
recommendations that we made, RMA did implement our 
recommendation that it should give FSA, the Farm Service 
Agency, information on a more timely basis, and RMA is doing 
that.
    On the other hand, we also recommended that all the claims 
that were suspect should be inspected. At the time, we found 
that only 64 percent of those claims were being inspected. RMA 
disagreed with our recommendation and they cited insufficient 
resources for that.
    The other thing that we found is that in terms of the data 
analysis, there are about $74 million in claims that RMA can 
recoup. Although RMA agreed with that recommendation, it has 
not implemented it yet. So here is something that can be done 
on a real time basis.
    There are also expanded sanctions that RMA has. RMA has 
drafted regulations to be able to take advantage of those 
expanded sanctions, but there are only in draft at this point.
    Mr. Cummings. Mr. Gould, did you hear what she said?
    Mr. Gould. Yes, sir.
    Mr. Cummings. Can you act on some of those things and tell 
us if you can, when you will?
    Mr. Gould. Certainly.
    Mr. Cummings. Let me try to explain this to you. You know, 
we have a limited time to act. I notice what agencies do is 
they wait for the next hearing, which comes a year or two 
later. So I would like to hear about deadlines, time lines, so 
that you get something done, a sense of urgency.
    So can you do some of those things? If so, when?
    Mr. Gould. Sir, if I might, actually on the regulations, 
they should be published by the end of May. They have been 
drafted. They are going through clearance, and we expect them 
to be out within, I have been told, 3 weeks.
    Mr. Cummings. That is one thing we can expect to see no 
later than June 1st?
    Mr. Gould. No later than that.
    Mr. Cummings. All right.
    Mr. Gould. Actually, on a couple of the other 
recommendations that GAO mentioned, one of them was to share 
information with FSA. We are doing that. We ran into a problem 
under the Privacy Act with sharing some of the information. FSA 
is in the process of publishing a notice to inform producers of 
the intended use so we can use data mining to attach those 
entity files that they recommended that we use, and share those 
between FSA and RMA for data mining purposes. So that is going 
to be done fairly soon.
    I talked to our Office of General Counsel attorney that is 
in charge of that, and she said as far as she knew, the notice 
was moving though whatever clearance is has to go through to 
get to the Federal Register to be published. Again, I would 
expect that before the end of the month.
    I think the only thing I would clarify is the 64 percent of 
spot checks. It wasn't that RMA disagreed with doing those spot 
checks. It was FSA said they didn't have the staff to do that. 
That is something RMA doesn't really have any control over. We 
would love to see FSA have the staff and resources to inspect 
every policy that we ask them to review for us.
    Mr. Cummings. I see my time is running out. What about that 
$74 million? She talked about $74 million that we need to be 
going after.
    Mr. Gould. That was the entity comparison, and actually if 
you look in the back of the GAO report that was published in 
2005, we took exception to part of that. One of the things that 
we took exception with publishing that number was the 
assumption was that all of FSA's data was correct and all of 
RMA's data was wrong. We haven't tested that to see if that is 
true or not. But that is tied up in the entity files and the 
Privacy Act issues that I just mentioned.
    Mr. Cummings. Ms. Fong, how do these fraud cases usually 
come to the attention of the Government?
    Ms. Fong. We receive information about potential fraud from 
a number of sources. RMA is one source, if they become aware of 
it. But most of our referrals tend to come from FSA, the Farm 
Services Administration, or the State and local law enforcement 
people. Frequently, informants will come forward and say, hey, 
I know about a farmer down the road who is perhaps sending in 
false information; you need to look into it. It will come to us 
through State and local enforcement.
    Mr. Cummings. I see my time is up. Thank you, Mr. Chairman.
    Chairman Waxman. Thank you, Mr. Cummings.
    Just to followup on that point, you didn't mention the 
insurance companies. They don't come forward and talk about 
fraudulent claims particularly because they don't have a strong 
incentive to care one way or the other, do they?
    Ms. Fong. I would hate to make a general statement. We 
receive many allegations and we may have received some from 
insurance companies. I wouldn't want to rule that out.
    Chairman Waxman. You did say they have a very low incentive 
to care when a fraudulent claim is submitted because, after 
all, it is not coming out of their pockets. Not only that, but 
they don't want to poison a relationship with a farmer that 
they want to go back next year and have him sign up for another 
period of time to take the insurance. Isn't that right?
    Ms. Fong. It is true that most of our information comes 
from RMA, FSA, and local law enforcement.
    Mr. Hand. Mr. Waxman? If I might?
    Chairman Waxman. Yes?
    Mr. Hand. There is a requirement under the SRA for the 
companies to report fraud or suspected fraud. I would agree 
that we think there is probably some that maybe doesn't get 
reported to us as timely as it should be. Whether that is 
because the companies don't feel the case is strong enough or 
for whatever reason, but we are working with them on that. It 
is a requirement, though, of the SRA, so if we found them in 
violation of that, we would take action against them on that 
basis.
    Chairman Waxman. I don't think that they are going to be 
too worried about that, but it sounds like you do have a legal 
basis to go after them if you find out about it.
    Mr. Gould, to be fair to the administration, you have come 
up with a proposal in the 2007 farm package to change some of 
these areas of what we are calling waste, fraud and abuse. I am 
especially interested in proposals that would improve the 
efficiency and effectiveness of the program and limit waste, 
fraud and abuse.
    Ms. Fong and Ms. Shames, have you had a chance to review 
the proposals of the Department of Agriculture at the 
administration? And should Congress be considering other 
approaches to limiting waste, fraud and abuse?
    Ms. Fong. We have reviewed the proposals dealing with the 
crop insurance program. We generally support them. We think 
that they would be a good step forward.
    Chairman Waxman. Ms. Shames?
    Ms. Shames. We have not done a detailed review, but they 
seem reasonable. As I said in my statement, we certainly 
advocate that there be an authority to renegotiate in the SRA.
    Chairman Waxman. Well, I think the administration is 
serious about eliminating waste, fraud and abuse. We are more 
than happy to work with them to do so. I think there are 
additional changes that ought to be put into place in this 
program. I want to discuss some of those with the next panel. 
It seems to me the status quo is quite unacceptable.
    I want to say we learned a tremendous amount about this 
issue from this panel, and I am very concerned about where 
billions of taxpayers' dollars are going in this effort. One of 
the things I will be doing after this hearing is requesting a 
more detailed GAO investigation of the Federal Crop Insurance 
Program. I know that GAO's investigators can give us important 
information about how these taxpayer dollars are being spent, 
and how we can make sure that the crop insurance program is 
less wasteful. So we are going to certainly work with you.
    And then my last comment, since I have been so involved in 
health issues, Medicare and Medicaid particularly, it is 
astounding to me when I hear people say we have to give poor 
people an incentive to hold down wasteful expenditures, so we 
make them come up with out of pocket costs; we want to give 
them the incentive really not to get the services, even though 
in many cases, they may need it.
    And here we are giving exactly the other incentive to the 
insurance companies. I think it is a mistake to blame the 
farmers. It is the insurance companies that are getting 
overpaid. How much money does a farmer get? How much of a 
percentage of his crop losses are usually covered? It is not 
100 percent. Is it 50 percent or less?
    Mr. Hand. Average coverage runs between 65 percent and 75 
percent.
    Chairman Waxman. Between 65 percent and 75 percent of their 
losses are reimbursed under this insurance program?
    Mr. Hand. Yes, sir.
    Chairman Waxman. OK. Well, that certainly helps. Maybe we 
can give them even more, or just save the taxpayers the money 
if we changed the amount of money that is going to these 
insurance companies.
    I thank you very much. We appreciate your being with us.
    We have three votes on the House floor, so we are going to 
take a recess. I would expect we will reconvene at 11:30 a.m.
    We stand in recess.
    [Recess.]
    Chairman Waxman. The hearing will come back to order.
    I am pleased to welcome our three witnesses on the second 
panel. Bruce Babcock is the director of Iowa State University's 
Center for Agricultural and Rural Development.
    Dr. Bruce Gardner joins us from the University of 
Maryland's College of Agriculture and Natural Resources. Dr. 
Gardner is also an old Washington hand, having served as USDA 
Assistant Secretary of Economics under President George H.W. 
Bush.
    They are joined by Steve Ellis, vice president of Taxpayers 
for Common Sense.
    We are pleased to have the three of you here today. Your 
statements will be part of the record in full. We are going to 
call on you in a minute, but as I have indicated, all witnesses 
before this committee do take an oath, so if you would please 
rise and raise your right hands.
    [Witnesses sworn.]
    Chairman Waxman. Thank you very much. The record will note 
that each of the witnesses answered in the affirmative.
    Dr. Babcock, why don't we start with you? There is a button 
on the base of the mic. We are going to have a timer for 5 
minutes. We would like to ask you if you can keep your 
statements to around that time. We will extend a little extra 
time if you need it.

STATEMENTS OF BRUCE BABCOCK, DIRECTOR, CENTER FOR AGRICULTURAL 
 AND RURAL DEVELOPMENT, IOWA STATE UNIVERSITY; BRUCE GARDNER, 
DISTINGUISHED UNIVERSITY PROFESSOR, COLLEGE OF AGRICULTURE AND 
  NATURAL RESOURCES, UNIVERSITY OF MARYLAND; AND STEVE ELLIS, 
           VICE PRESIDENT, TAXPAYERS FOR COMMON SENSE

                   STATEMENT OF BRUCE BABCOCK

    Mr. Babcock. Thank you, Mr. Chairman, Ranking Member Davis, 
and committee members for the opportunity to participate in 
today's hearing.
    I have been continuously and intensely involved with crop 
insurance since the early 1990's. Despite my experience, I have 
only recently been able to make a judgment about whether or not 
taxpayer support for crop insurance is justified. The program 
is so complicated that it defies quick understanding. But one 
needs to know how all the pieces of the program work together 
before an informed judgment about efficient use of taxpayer 
funds can be made.
    The two most credible public policy objectives that have 
been offered to justify taxpayer support for crop insurance are 
that purely private markets would not offer farmers enough 
insurance and that Congress needs a program to eliminate ad hoc 
disaster assistance packages.
    Farmers face significant risk in their farming operations, 
and crop insurance clearly helps them manage this risk. But 
examination of the data and available research unequivocally 
demonstrate that most farmers would not choose to buy the type 
and level of crop insurance being sold today were it not for 
the large premium subsidies offered by the program.
    This lack of market demand for crop insurance seems odd. 
Why should farmers have to be enticed with subsidies to buy a 
seemingly effective risk management tool? The answer is that 
farmers have other more cost-effective ways to manage their 
risk. Diversification, off-farm work, use of marketing tools, 
and adoption of risk-reducing production practices all work to 
reduce financial vulnerability, as do the commodity programs in 
the farm bill. So for most farmers, crop insurance is a cost-
effective risk management tool only when the cost is 
dramatically lowered through premium subsidies.
    The fact that most farmers will not buy crop insurance 
without substantial subsidies leaves only the second policy 
objective as a justification for taxpayer support. 
Congressional support for crop insurance has been driven mainly 
by the hope that enough subsidies will induce enough farmers to 
buy enough coverage to forestall the need for ad hoc disaster 
assistance. The subsidies given insurance companies, which 
consist of the administrative and operating reimbursement and 
underwriting gains, are more than enough to make it worth their 
while to service farmers' insurance policies.
    The surplus subsidies are then paid as sales commissions to 
crop insurance agents. The resulting commission rates are large 
enough in most regions of the country to create a strong 
incentive for agents to work at convincing farmers that crop 
insurance is in their best interests. Fortunately for agents, 
it is an easy sell because premium subsidies have been 
increased to the point where most farmers find it profitable to 
buy crop insurance.
    For a long time, I have misunderstood the role that 
underwriting gains play in the industry. At first, I thought 
they were the price taxpayers had to pay to induce crop 
insurance companies to share in risk. But then I discovered 
that the actual amount of risk that is being shared is so small 
relative to the price that we pay that companies are in fact 
being paid substantially more than the market price of the risk 
they bear.
    So I looked elsewhere for an explanation. I now believe 
that large underwriting gains paid to companies serve two 
purposes. First, they are a complicated mechanism to increase 
the amount of money that can be used to pay agent commissions. 
Higher agent commissions translate into more insurance being 
sold, so large underwriting gains are consistent with the 
objective of getting more farmers to buy insurance.
    The second purpose is that underwriting gains do serve the 
purpose of creating some incentive for companies to combat 
fraudulent claims. After all, when companies share in losses, 
which they do to some extent, they have a greater incentive to 
challenge bogus claims.
    The taxpayer costs of using crop insurance as a means of 
eliminating disaster assistance is significant. Since 2001, the 
program has cost taxpayers $18.7 billion. Farmers have received 
$10.5 billion of this amount. The difference is the amount of 
money that has been used to induce farmers to buy crop 
insurance and to service the sold policies.
    In essence, Federal tax dollars have been used to create an 
industry for only one purpose: to contract out the delivery of 
disaster assistance. One way to judge whether taxpayer support 
for this industry is efficient or wasteful is to compare 
taxpayer costs of crop insurance with the resulting reduction 
in disaster payments. I think that the calculus on this 
question has been made quite easy by inclusion of yet another 
disaster payment package in the recently vetoed Iraq War 
funding bill.
    I believe that generous taxpayer support for crop insurance 
has not succeeded in its stated purpose and it is now time to 
look for another way to help farmers to get through crop 
disasters. Fortunately, a way forward is now open because the 
House and Senate Ag Committees are trying to determine what to 
do with the 2007 farm bill. I would hope that members of these 
committees are considering proposals for how the farm bill 
safety net can be integrated with the crop insurance safety net 
to automatically and directly provide the kind of support that 
farmers expect when disaster strikes. Both taxpayers and 
farmers would enjoy the benefits of this type of smart reform.
    Again, thank you for this opportunity to share my thoughts 
about the crop insurance program. I will be happy to answer any 
questions later.
    [The prepared statement of Mr. Babcock follows:]

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    Chairman Waxman. Thank you very much. Excellent testimony.
    Dr. Gardner.

                   STATEMENT OF BRUCE GARDNER

    Mr. Gardner. Thank you, Mr. Chairman and members of the 
committee. I appreciate the opportunity to address some issues 
of waste and inefficiency in the crop insurance program.
    I am going to focus on three problem areas: First, crop 
insurance as related to disaster payment programs; second, the 
low benefits farmers get from crop insurance subsidies as 
compared to the cost of the subsidies for the taxpayer; and 
third, some issues in the land use and environmental effects of 
subsidized crop insurance.
    I should note that I am currently involved with a project 
for the American Enterprise Institute that has commissioned 21 
papers on a range of farm bill topics. One of those focuses on 
crop insurance. That paper goes into further depth on all three 
of these issues.
    So first, crop insurance and disaster payments. The 
powerful history here, I think we should go back even to 1938 
when we started with subsidized Federal crop insurance after 
several decades of unsatisfactory experience, basically the 
losses were too high, but yet still farmers participated in the 
program. Congress introduced a disaster payments program in the 
1973 farm bill, which I think is one of the most interesting 
experiments we have had in this area.
    This program was essentially crop insurance with no 
premiums charged. This was popular, of course, but the program 
had high budget costs. It was criticized by the General 
Accounting Office for encouraging farmers to plant on marginal 
acreage and for reducing farmers' incentives to take preventive 
measures against crop loss.
    By 1980, President Carter was moved to comment that the 
disaster payments program had itself become a disaster. In 
1981, Congress ended the program, which I think shows that 
Congress is capable of making adjustments when the evidence is 
overwhelming that they have to be made.
    After 1980, policy moved back in the direction of bigger 
subsidies on Federal crop insurance. The idea was that ad hoc 
disaster programs and subsidized crop insurance were 
substitutes, and that the appropriate establishment of crop 
insurance would preclude the need for disaster bills.
    This hope has not been realized. After boosts in spending 
on crop insurance subsidies in the mid 1990's and again after 
2000, spending on insurance subsidies was still further 
increased, yet spending on ad hoc disaster payments did not 
decline, but rather increased further. In 2003 to 2006, Federal 
budget outlays on both programs together averaged $4.9 billion 
a year, or about four times the levels of the 1980's.
    Was this just because nationwide crop failures were worse? 
No. Indeed, U.S. crop yields were at or above the trend levels 
in this period. The problem is more a matter of not being able 
to convince some farmers to buy even highly subsidized 
insurance when experience has revealed that a serious disaster 
will be followed by an ad hoc relief program.
    Now, the second thing I want to mention briefly is that 
benefits and costs of crop insurance, and we have heard a lot 
about this already, but I think one would have to recognize 
that even if we do spend a lot on crop insurance subsidies, 
that could be worthwhile if the benefits to producers were 
sufficient.
    In fiscal years 2003 to 2005, an average of $3 billion in 
insurance indemnity payments were paid out to producers. 
However, while farmers' insurance premiums are subsidized, they 
still paid an average of $1.5 billion annually during these 
years to buy their coverage. Therefore, the net benefit from 
the crop insurance to farmers was $1.5 billion annually.
    The Government's cost is the premium subsidies paid plus 
delivery costs. These costs added up to $4 billion annually in 
2003 to 2005. Thus, in this period, the Government incurred $4 
in budget costs for every $1.50 in net benefits that producers 
received. This an inefficient transfer, as we have heard 
already many times.
    The direct payment commodity programs that we have, that 
spend actually quite a bit more money, are criticized in many 
ways, but at least the money the Government spends on those 
programs goes directly into farmers' pockets almost entirely.
    Finally, I want to just mention briefly the third topic of 
land use and the environment. The history of crop insurance and 
disaster payment programs provides ample evidence that the 
programs encourage farmers to grow riskier crops and grow them 
on more vulnerable land than would otherwise occur. An Economic 
Research Service study estimates that about 1 million acres are 
devoted to grain and cotton production that would not be in the 
absence of subsidized crop insurance. More than half this 
acreage is on the Great Plains.
    As one would expect, crop insurance subsidies encourage 
production in the areas of highest weather risk. These are the 
same areas that are targeted under the Conservation Reserve 
Program for taking such land out of crop production and placing 
it in soil conserving uses. So we have a tendency to be undoing 
with crop insurance subsidies what we are doing with 
conversation policy.
    So in summary, subsidized crops insurance has an honorable 
history as an attempt to assist farmers in risk management, but 
it has proven far too costly in terms of cost to taxpayers per 
dollar of benefits received by farmers. It has not precluded ad 
hoc disaster programs, and it has induced production on 
marginal land.
    I believe the Nation would benefit from an end to these 
subsidies completely and just let crop insurance be sold on a 
regular market basis like other insurance policies are.
    Thank you.
    [The prepared statement of Mr. Gardner follows:]

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    Chairman Waxman. Thank you very much, Dr. Gardner.
    Mr. Ellis.

                    STATEMENT OF STEVE ELLIS

    Mr. Ellis. Thank you.
    Good morning, Chairman Waxman, Ranking Member Davis, 
Representative Cooper. Thank you for inviting me here to 
testify on the Federal Crop Insurance Program. I am Steve 
Ellis, vice president of Taxpayers for Common Sense, a 
national, nonpartisan budget watchdog organization that has 
studied agriculture subsidies since our inception in 1995.
    I want to take this opportunity to applaud the critical 
work that this committee is undertaking. The committee's broad 
portfolio enables it to identify important trends and problems 
across the Federal Government and to approach programs with an 
independent and unbiased eye, which is often difficult for 
committees of original jurisdiction to do. Tellingly, we have 
not seen this type of oversight hearing in the Agriculture 
Committee.
    The crop insurance program has been an expensive failure. 
It has failed to end disaster payments. We practically have to 
pay for farmers to take out insurance. The only winners here 
are the insurance companies. To put it in perspective, in 2005 
insurers got more than $1.7 billion to provide crop insurance, 
while taxpayers in toto spent $3.1 billion on a program that 
delivered slightly more than $750 million in payments to 
farmers.
    In 1980, as has been discussed, the Government shifted to 
private companies to administer and grow the insurance program. 
Existing crop subsidies were increased even more from 1994 and 
2000, and now premium subsidies average roughly 60 percent. 
That is to say, out of every dollar a private insurer is 
charging for crop insurance, the farmer is paying 40 cents, 
while the taxpayer picks up 60 cents. This is an enormous 
subsidy by any measure.
    In addition, the Federal Government pays insurance 
companies to sell and administer policies. These administrative 
and operating subsidies run about 21.5 cents on the premium 
dollar. But the largest A&O expense for the companies is the 
agent commissions for the policies they sell. Some agents are 
paid up to 20 percent of the premium on their policies.
    In many ways, insurance is like gambling, but in a bizarre 
twist, the insurance companies are the house and the Federal 
taxpayer is the perpetual loser. This program has become less 
about crop insurance for farmers and more about revenue 
assurance for insurance companies.
    This is not to say that farmers are ignorant of their risk. 
Considering that theirs is one of the world's oldest 
professions, as Dr. Babcock indicated, farmers have found means 
to diversify their risk. Crop rotations, irrigation and farming 
multiple crops are all forms of limiting risk. In addition, 
many farms receive significant amounts of off-farm income. So 
it is fair to say that farmers do quite a bit of risk 
management without any Federal subsidies and without the Rick 
Management Agency. In fact, these farm level risk management 
techniques help explain why such large premium subsidies are 
required to induce farmers to purchase crop insurance.
    Federal insurance programs are always inefficient. The 
Federal Government is always the insurer of the last resort, so 
insurance programs are foisted upon the Government as a 
reaction to a perceived market failure, whether real or 
imagined. But even by Federal insurance program standards, the 
crop insurance program is incredibly inefficient. Under the 
current agreement, insurers are able to shift their high-risk 
policies onto the Federal Government and keep the lower-risk 
policies in their portfolio, in effect maximizing each 
company's gain in good years and minimizing losses in bad 
years.
    From our experience, expensive, complex and inefficient is 
a ready made recipe for waste, fraud and abuse. To tackle 
waste, fraud and abuse, you have to tackle the crop insurance 
program's overall expense, complexity and inefficiency. The 
interplay between subsidies for program crops, crop insurance, 
and disaster assistance must be examined more closely.
    After examining all of these questions, a few clear answers 
come to the surface. Disaster assistance must be ended. In the 
latest example of crop insurance failing to end disaster 
payments, there is $3.5 billion in agriculture disaster 
spending in the emergency supplemental bill. Since the 1994 
expansion of crop insurance premium subsidies, Congress has 
approved more than $36 billion in agriculture disaster 
assistance. The chairman of the Agriculture Committee in the 
House wants to create a permanent disaster title in the 
upcoming farm bill.
    The prospect of disaster assistance undercuts crop 
insurance and at the very least encourages under-insuring. 
Farmers, like all businesses, should adequately insure, and if 
they choose not to, they should not be bailed out by the 
taxpayer.
    Create effective incentives and disincentives. Encourage 
individual farmers to diversify risk and reduce exposure by 
providing reduced premiums as an incentive. Premium subsidies 
should be a reward, not a right. Base revenue insurance plans 
on total income. Increase mandatory insurance levels and deny 
crop subsidies for farmers who do not adequately insure. And 
finally, use Farm Service Agency officials to enforce and 
police crop insurance policies and enact strong punitive 
actions for abusers of the program. And last, increase 
competition.
    It is time to scrap the Soviet style planned economy that 
dominates crop insurance. If there is non-competition, then the 
value of having private insurers serve as crop insurers 
evaporates. Since Government currently bears virtually all the 
risk anyway, shifting some of all of the program background to 
the Government operations should be an option.
    Again, I want to thank the committee for holding this 
hearing and inviting Taxpayers for Common Sense here to 
testify. With the farm bill expiring later this year, this is 
an important time to consider this important issue. I would be 
happy to answer any questions you might have.
    [The prepared statement of Mr. Ellis follows:]

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    Chairman Waxman. Thank you very much for your testimony.
    I am trying to think through how we can accomplish the 
goals that were set out in the creation of this program, and do 
it in a way that makes the most sense.
    The first goal was to stop the Government from having to 
pay after the damage has already been incurred, because the 
Congress is very softhearted and we hate to see disasters, and 
people suffer, so we always come in afterwards. I gather that 
none of you thinks this crop insurance subsidy program has kept 
us from coming in with relief after the damage is incurred to 
add to the insurance payments. Is that a correct statement? All 
of you are shaking your heads.
    Mr. Ellis.
    Mr. Ellis. Absolutely. We spent billions of dollars since 
we increased the subsidy, so clearly it is not even our 
opinion. It is reality, Mr. Chairman.
    Chairman Waxman. What is the market failure here? If a 
farmer wanted insurance in the private market, one would think 
he could go out and buy it. Now, the argument was made that it 
is just too expensive. Farmers can't afford it, so we have to 
help them buy this insurance. If I understand Dr. Gardner's 
testimony, you don't think that farmers always want this 
insurance even if it is affordable. Of course, if we are paying 
for it, they will take it.
    Is there a market failure? Or is there just not really a 
good enough market for people to buy this insurance? Why should 
the Government substitute our judgment over that of the farmer?
    Mr. Gardner. Well, I would say I agree with you. There is 
no pervasive market failure. You see problems with markets in 
insurance of all kinds. The most difficult one I think in crop 
insurance is sometimes the farmers have a better idea of their 
situation and know more than the insurance company does, and 
you have an adverse selection problem.
    But the Government has no solution for that problem, and in 
fact probably does less well at dealing with it than the 
private insurance companies do. So I don't see a market 
failure. I think that good evidence of that is in other areas 
where farmers bear risks, they do buy hail insurance; they buy 
fire insurance; they buy liability insurance just like any 
other citizen does. It is unsubsidized and the market works.
    Chairman Waxman. Dr. Babcock, you don't seem to go as far 
as Dr. Gardner in suggesting to eliminate the program and 
letting the market work as well as it is going to, letting the 
farmers make a decision. What would you do instead? Do you 
think there is still a purpose for a crop insurance program?
    Mr. Babcock. I think the evidence is clear that farmers 
will not buy the kind of coverage that is needed when this one 
out of whatever year event occurs, and a true disaster hits. So 
that when that occurs, there is going to be pressure to have 
some sort of an assistance program after the fact. I don't 
think it is sufficient just to be able to say, well, you didn't 
buy insurance so we are not going to help you. I think that 
ignores political reality.
    Fortunately, though, we have something called the farm bill 
that is supposed to be providing a safety net to farmers. Why 
not just design that farm bill in such a way that it 
automatically would direct payments to regions that would in 
fact deliver the aid when it is actually needed? I think that 
smart reform of the commodity policy can create a safety net 
that would do away with disaster assistance and would take on 
much of the risk of the crop insurance at the same time.
    Chairman Waxman. So you would use Federal funds to set up a 
pool of money to compensate farmers when a disaster occurs. Is 
that right?
    Mr. Babcock. That is right. It would be automatic. Farmers 
would know that they are getting it, and would adjust their 
operations accordingly. I would not do it at the individual 
farm level, because that means that they are going to be 
farming for the program. Rather, I would do it when a disaster 
hits. It is likely that almost all farmers in a county, for 
example, would suffer that same loss. And so I would do it at 
the county level.
    Chairman Waxman. So you would have a Government program, 
and then eliminate the private insurance completely.
    Mr. Babcock. Mr. Gould said that his son had purchased 
something called GRIP, group risk income protection. Basically, 
if I had a way of designing a policy, I would have the Federal 
Government, through the farm bill, basically offer that kind of 
a program to farmers as a replacement for the subsidy programs 
they have now. Then I would allow the crop insurance industry 
to write supplemental coverage on top of that would cover 
individual farm-level risks, and then let the private market 
offer that if farmers really need additional risk protection. 
And let the market decide how much risk protection they need.
    Chairman Waxman. How much would you cover? What percentage 
of the loss would the Government insurance program cover?
    Mr. Babcock. At the county level, which is different than 
the farm level--at the farm level, it would not cover anything 
for free. It would be up to the farmer to decide how much 
individual farm-level coverage they bought. Let the market 
determine that.
    At the Federal Government level, it would be on the order 
of you have at least a 10 percent drop in let's say county 
yield before payments would commence. So you would have a 10 
percent deductible.
    Chairman Waxman. Have any of you looked at possible 
competition? Is there some way to give incentives for 
competition and let the private insurance companies compete for 
the business, and then let the farmer decide if he wants to buy 
one policy as opposed to another? If he doesn't want go with 
any, it is his or her choice.
    Dr. Gardner.
    Mr. Gardner. Well, I am not an expert on the ins and outs 
of the insurance industry, but your question reminds me of an 
approach that Senator Lugar had introduced in the farm bill 
discussions in the Senate Agriculture Committee several times, 
which is in order to help farmers with their risk management 
problems, have the Government just provide a general subsidy, 
as we do along the lines Bruce was saying, but let the farmers 
decide how to spend it. They will have the kind of money they 
now get from support programs, but maybe not quite so much, and 
let them decide what to buy. Then the competition will arise.
    Who can satisfy the farmers' real needs for this protection 
in a market of competition, not only with insurance, but for a 
while they were even county or area-like yield contracts that 
you could buy on the Chicago Board of Trade. There are a number 
of ways, a number of mechanisms that could provide contingent 
assets that increase in value when bad things happen. I would 
say I just wouldn't want to limit it to crop insurance. Let the 
whole range of risk management tools be made available.
    Chairman Waxman. Thank you.
    Mr. Davis.
    Mr. Davis of Virginia. I want to ask what happens if we in 
the ag bill this year just abolish the program? How would the 
market respond if we abolished the Federal subsidies? Would the 
private markets react? How would the farmers react to it at 
that point? And what would be the result? We always have the 
right to come in if someone were hard hit and give them the 
appropriate payment.
    Mr. Gardner. Are you referring to all the commodity 
programs?
    Mr. Davis of Virginia. No, just this.
    Mr. Gardner. Just this one. Well, what would happen right 
away, of course, is it would be a big upheaval in the crop 
insurance industry. What would happen to farmers is they would 
have to figure out what is being offered very quickly.
    Mr. Davis of Virginia. I am just asking for a prediction of 
the market. Somebody would somewhere offer some insurance.
    Mr. Gardner. Yes, I believe they would, but the market 
would----
    Mr. Davis of Virginia. It would save the taxpayers a lot of 
money, at least on the front side. If you had a bad year, we 
may come on the backside and end up with some subsidies that we 
hadn't intended. I don't now the answer to that, which is what 
I am asking.
    Mr. Babcock. I will make a prediction of what would happen. 
I think that if the insurance companies were to offer the same 
products without the subsidies, that farmers would immediately 
go and buy GRP, group risk protection. It is an area yield. It 
is very cost-effective. And then they would buy private hail 
insurance on top of that. At least in my area of the country, 
the hail insurance often strikes an individual farm, but not 
the county. So the GRP would cover them very cost-effectively 
for a very small amount of money, then hail insurance would 
cover them for their primary other risk, other than drought.
    Mr. Davis of Virginia. Would they be out of pocket more 
than they are?
    Mr. Babcock. About the same, basically, because right now 
the system is set up to drive farmers to buy the most expensive 
policy they can, because agents get paid more, the Federal 
subsidy goes up, the more money that farmers pay. So in fact, 
they are incentivized to buy the bells and whistles policy.
    Mr. Davis of Virginia. Just let the market system work 
here, is what you are saying. It would respond appropriately 
and the Federal Government would be out of it and we would save 
taxpayers' dollars and you would have about the same coverage 
for the same cost, or close to it--not the same coverage, but 
you would have adequate coverage.
    Mr. Babcock. You would have cost-effective coverage that 
farmers, I think, would fill the needs of what farmers demand.
    Mr. Davis of Virginia. Mr. Ellis, do you have any 
prediction of what would happen?
    Mr. Ellis. No. I would absolutely agree with the way you 
are going on this. I think that in the last decade or 15 years, 
the insurance sector, not just crop insurance, but really the 
insurance sector writ large, has dramatically changed, 
basically after Hurricane Andrew, where they have been able to 
securitize risk. You can trade risk. The reinsurance market is 
quite large and significant. So there has been a dramatic 
change in the insurance industry that I think that if we 
allowed that to have more of a competition for crop insurance, 
that would definitely drive that.
    And then the other issue here is that right now, farmers 
are being in essence bribed to buy crop insurance. We are 
paying 60 percent of the premium to try to get them to buy crop 
insurance.
    Mr. Davis of Virginia. They can't afford not to.
    Mr. Ellis. Right, right. So then it is just a question of 
if you remove that, and they realize that they are going to 
have to take matters into their own hands, I think that some of 
these things more designed to their needs, as Dr. Babcock has 
indicated, those type of policies will start to percolate out. 
The insurance industry is a business. They are going to make 
money and there are ways to make money. I always point out, 
Liberace could insure his fingers, so just about anybody can 
insure just about anything. It just depends on what the cost 
is.
    Mr. Davis of Virginia. That is exactly right. But reform is 
unlikely to come out of the Agriculture Committee, isn't it?
    Mr. Ellis. They are certainly not a reform minded 
institution as far as making big changes. That actually does 
get to some of Dr. Gardner's points as well, which is what 
Agriculture has talked about is the three legged stool. You 
have crop insurance; you have disaster payments; and you have 
crop subsidies, the program crops. I think that really you have 
to look at all three of those because they do interrelated, and 
the different issues of them drive certain policies. People are 
buying certain types of crop insurance because of the program 
subsidies, and these all have interrelated effect.
    So I think that while I definitely agree that getting rid 
of crop insurance makes a lot of sense, I think you want to 
look at the other issues within the farm program. We are 
certainly not a big fan of the commodity title, Title I in the 
program crop subsidies, and it would be worthwhile to look at 
that and how to make those work better together.
    Mr. Davis of Virginia. I am not advocating. I am just 
asking. I think we need to ask the question, how would the 
markets respond on their own. We don't allow them to respond on 
their own because you have so many of these different 
Government gimmicks along the way. That is my question.
    Thank you, Mr. Waxman.
    Chairman Waxman. Thank you, Mr. Davis.
    Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman.
    During the previous vote, I talked to a colleague that is 
on the House Agriculture Appropriations Committee. Apparently, 
USDA testified there yesterday that all they needed was more 
staff money for raises, nothing for compliance, and a little 
bit more money for IT. So they don't seem to have gotten the 
message that reform is necessary.
    Help me understand, Dr. Babcock, hail insurance and GRP 
insurance. Is that completely private and unsubsidized? How 
does that work?
    Mr. Babcock. No. GRP is a federally subsidized and 
reinsured, just like a regular crop insurance product. What it 
was was an idea of trying to get farmers not to worry about so 
much compliance issues because their losses would be paid by 
the county.
    Hail insurance was a robust private insurance market up 
until ARPA subsidies in 2000 were greatly increased. Then 
farmer participation in hail insurance went down. Essentially, 
the private sector got crowded out because the subsidies for 
multi-peril crop insurance became so large that hail insurance 
is a proven private product that can be offered privately.
    Mr. Cooper. So the Government in 2000 helped kill this 
private sector offering, or reduce it substantially.
    Mr. Babcock. It reduced it. It is still offered, but the 
demand for it has gone down because the multi-peril products 
cover essentially a lot of the same risk.
    Mr. Cooper. In your testimony, when you predict that under 
current CBO protections, crop insurance programs will cost 
taxpayers an average of more than $5 billion per year over the 
next 5 years or $25 billion, does that include GRP insurance?
    Mr. Babcock. It does, but not very many farmers buy GRP 
because it is a very low cost program. If the Government is 
paying 60 percent of the premium, why would you want to 
minimize your own expenditure? So essentially the fastest 
growing crop insurance product out there is this GRIP product. 
GRIP-HRO it is called. It is an acronym. It is the most 
expensive product out there. It is the fastest growing product, 
and not as surprising, it is the one with the highest premium.
    Mr. Cooper. A few months ago, I had the pleasure of 
questioning the Secretary of Agriculture in a Budget Committee 
hearing. I asked him how many field offices he had. He said 
3,800. I asked how many of those offices were located in 
counties that no longer had any farms period, and he said he 
would get back to me on that. But that is one of the most 
extensive networks of Government offices for any Federal 
agency.
    One of you suggested in your testimony, it might have been 
Dr. Gardner--no, I think you suggested actually ending the 
program. I think it was Dr. Babcock that said maybe we should 
link participation in government subsidy programs with 
purchasing coverage, because if we have 3,800 offices and 
farmers have to go visit those offices anyway, that is a point 
of sale that is infinitely more efficient than 20 percent 
commissions that are being paid by these 16 crop insurance 
companies.
    Does something like that make sense? If you want to 
participate in the subsidy programs, you have to do something 
yourself to insure against the risk.
    Mr. Gardner. That kind of things has been tried. We did 
that after some of the disaster payments programs, to require 
filings in one of the commodity programs to have some crop 
insurance coverage.
    Mr. Cooper. Another thing that struck me, and the 
Washington Post pointed this out, that recipients of disaster 
payments, that information is private. No one is allowed to 
know. Why do you have a right to privacy when you get a large 
Government check like that due to hail or flood or drought, or 
whatever?
    Mr. Gardner. I don't know.
    Mr. Cooper. So that is something Congress did on its own, 
to hide the recipients of these payments. It is not like their 
neighbors don't know, because it is pretty apparent what is on 
your farm.
    It strikes me that there are number of folks who like 
farming the land, and there are some folks who like farming the 
taxpayer, and farming the taxpayer is probably a more lucrative 
undertaking.
    I want to quote for a second from the Post article talking 
about a Kansas farmer, Mark Orebaugh. It says, ``For Mark 
Orebaugh and most Kansas farmers, the Federal insurance is `a 
good deal.' In the past 4 years, he has paid $81,730 in 
premiums, but collected $295,796 in claims, or $3.62 for every 
dollar he put in. That is higher than the State average, but 
Orebaugh farms on the western side of Kansas, where water is 
scarce and much of the farmland is not irrigated.'' It goes on 
to say, ``There is just no water here. We probably should never 
have developed these fields when we did 30 years ago, because 
the water table was declining.''
    So that is Dr. Gardner's point, a lot of marginal land that 
really shouldn't be farmed is being kept in production at 
taxpayer expense, just due to the existence of these subsidy 
programs. But here is a man whose has four times more money 
than he paid in in premiums, because of farming the taxpayer.
    So land almost becomes irrelevant if you can gain the 
premiums and the payouts right, and the weather goes along, you 
can do quite well.
    Mr. Gardner. I would just like to say, though, that is it 
no picnic farming those really risky areas. I wouldn't want to 
do it. So I wouldn't put it so much that the farmers in those 
areas, like in the old disaster payments program, where it was 
quite clear that there were counties that weren't even eligible 
for the subsidized Federal crop insurance, were eligible for 
the disaster payments program, and wheat acreage rose 
substantially in those counties.
    I don't think those people had any picnic with this. They 
are just following what the incentives tell them to do.
    Mr. Cooper. I am not saying it is a picnic, but it is the 
subsidy program, the Government, that is keeping them tied to 
this hard work and this tough life.
    Mr. Gardner. I agree.
    Mr. Cooper. So without the Government intervention, he 
might have a better job somewhere?
    Mr. Gardner. Exactly.
    Mr. Cooper. Or be a farmer in an area with a water table 
and water and things like that are presumably necessary for 
growing crops.
    In testimony yesterday in the House Ag Committee, 
representatives of the crop insurance industry said that the 
administration's reform proposals, as weak as they are, the 
industry witness described them as ``draconian,'' and they 
would drive insurers from the market, resulting in serious and 
adverse consequences.
    Do you agree that the administration's reform proposals, as 
mild as they are, would have such an effect?
    Mr. Ellis. No, I would say that they are more dithering 
around the edges, rather than actually draconian. They talk 
about driving them from the market. I would question, what 
market? Really, all the rates are established. There is 
virtually no competition among the companies.
    So essentially, it isn't really a market at all to be 
driven from. So then it is really more about we have to 
fundamentally reexamine, which is what this committee is doing, 
and what these questions have certainly been touching on, and 
what the witnesses have testified to, that we have to 
fundamentally reexamine the way this program is being delivered 
and envisioned, and how we are going to do our agricultural 
supports, and in what form, and how little or how much.
    The administration's proposal doesn't go nearly far enough 
to do any of that sort of thing. I imagine they will cut into 
the profit margin of some of these companies, but really it is 
a pretty fat profit margin.
    Mr. Cooper. I see my time has expired. In prior testimony 
from the GAO, I think profit margins were about triple a normal 
casualty business. That seems to be pretty good.
    I thank the chairman for the time.
    Chairman Waxman. Thank you, Mr. Cooper.
    Could you elaborate, Dr. Gardner or any of you, on this 
cross purpose of subsidizing insurance and therefore 
encouraging them to grow crops that are interfering with the 
Conservation Reserve Program, and causing environmental 
problems. Dr. Gardner, do you want to elaborate more on that?
    Mr. Gardner. I can't elaborate too much more. This hasn't 
been intensively studied, but just to take an example. There 
have been some academics trying to look at what the effect to 
the Conservation Reserve Program has been on actual acreage 
conserved and acreage planted. They always find some slippage 
in this, that even though you enroll 36 million acres in the 
Conservation Reserve Program, but you don't see the 
corresponding decline in crop acreage. This means somebody is 
increasing crop acreage somewhere else as land enters the 
Conservation Reserve Program.
    Exactly all the reasons for that are not clear, but I think 
it is quite clear, and the ERS study that I mentioned is the 
only one I know that really tried to quantify that. They found 
an estimate of 960,000 acres, almost one million acres, in 
cotton and grain that would not otherwise be in cotton grain--
this was in the early 2000's--because of the existence of the 
crop insurance program. You can't say which acres those are, 
but there are clearly more than half of them in the Great 
Plains, and that is where your more risky conservation reserve 
type program land is. So there has to be some connection. To 
quantify it exactly, I can't go that far.
    Chairman Waxman. Well, let me invite you, those who think 
that there is maybe an alternative other than abolishing the 
program, which I think politically would cause a firestorm, to 
submit any other ideas. Submit to us some other ideas that 
could, one, integrate the insurance programs and might be 
something we can present in this farm bill to the Agriculture 
Committees or to our colleagues on the House floor. So please 
feel comfortable to submit it to us. We would like to look at 
it.
    Mr. Davis, anything further?
    Mr. Davis of Virginia. I appreciate all the witnesses.
    Chairman Waxman. Mr. Cooper, you have been very, very 
helpful and I thank you so much for being here.
    We stand adjourned.
    [Whereupon, at 12:20 p.m. the committee was adjourned.]

                                 
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