[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
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.house.gov/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
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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
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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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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.]