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




  THE ADMINISTRATION'S REGULATORY ACTIONS ON MEDICAID: THE EFFECTS ON 
                PATIENTS, DOCTORS, HOSPITALS, AND STATES

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

                                HEARING

                               before the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            NOVEMBER 1, 2007

                               __________

                           Serial No. 110-91

                               __________

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
              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                JIM JORDAN, Ohio
CHRIS VAN HOLLEN, Maryland
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont

                     Phil Schiliro, Chief of Staff
                      Phil Barnett, Staff Director
                       Earley Green, Chief Clerk
                  David Marin, Minority Staff Director
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on November 1, 2007.................................     1
Statement of:
    Parrella, David, director, Medical Care Administration, 
      Department of Social Services, State of Connecticut, 
      Hartford, CT, and Chair, Executive Committee, National 
      Association of State Medicaid Directors (on behalf of the 
      National Association of State Medicaid Directors); Barbara 
      Miller (on behalf of National Council for Community 
      Behavioral Healthcare); Twila Costigan, program manager, 
      Adoption and Family Support Program, Intermountain, Helena, 
      MT (on behalf of the Child Welfare League of America); 
      Denise Herrmann, Saint Paul Public Schools, Saint Paul, MN 
      (on behalf of the National Association of School Nurses); 
      Alan Aviles, president, New York City Health and Hospitals 
      Corp. (on behalf of the National Association of Public 
      Hospitals); Sheldon Retchin, vice president for health 
      sciences and CEO of health system, Virginia Commonwealth 
      University, Richmond, VA (on behalf of the American 
      Association of Medical Colleges); Angela Gardner, attending 
      emergency physician, University of Texas Medical Branch, 
      Galveston, TX, and vice president, American College of 
      Emergency Physicians (on behalf of the American College of 
      Emergency Physicians); and Marjorie Kanof, Managing 
      Director, Health Care, Government Accountability Office....    19
        Aviles, Alan.............................................    53
        Costigan, Twila..........................................    35
        Gardner, Angela..........................................   151
        Herrmann, Denise.........................................    46
        Kanof, Marjorie..........................................   159
        Miller, Barbara..........................................    29
        Parrella, David..........................................    19
        Retchin, Sheldon.........................................   136
    Smith, Dennis, Director, Center on Medicaid and State 
      Operations, Centers for Medicare and Medicaid Services, 
      Department of Health and Human Services....................   195
Letters, statements, etc., submitted for the record by:
    Aviles, Alan, president, New York City Health and Hospitals 
      Corp. (on behalf of the National Association of Public 
      Hospitals), prepared statement of..........................    55
    Braley, Hon. Bruce L., a Representative in Congress from the 
      State of Iowa, prepared statement of.......................   242
    Costigan, Twila, program manager, Adoption and Family Support 
      Program, Intermountain, Helena, MT (on behalf of the Child 
      Welfare League of America), prepared statement of..........    37
    Davis, Hon. Danny K., a Representative in Congress from the 
      State of Illinois, prepared statement of...................   232
    Davis, Hon. Tom, a Representative in Congress from the State 
      of Virginia, prepared statement of.........................    15
    Gardner, Angela, attending emergency physician, University of 
      Texas Medical Branch, Galveston, TX, and vice president, 
      American College of Emergency Physicians (on behalf of the 
      American College of Emergency Physicians):
        Letter dated December 12, 2007...........................   181
        Prepared statement of....................................   153
    Herrmann, Denise, Saint Paul Public Schools, Saint Paul, MN 
      (on behalf of the National Association of School Nurses), 
      prepared statement of......................................    48
    Kanof, Marjorie, Managing Director, Health Care, Government 
      Accountability Office, prepared statement of...............   161
    Miller, Barbara, (on behalf of National Council for Community 
      Behavioral Healthcare), prepared statement of..............    31
    Parrella, David, director, Medical Care Administration, 
      Department of Social Services, State of Connecticut, 
      Hartford, CT, and Chair, Executive Committee, National 
      Association of State Medicaid Directors (on behalf of the 
      National Association of State Medicaid Directors), prepared 
      statement of...............................................    23
    Retchin, Sheldon, vice president for health sciences and CEO 
      of health system, Virginia Commonwealth University, 
      Richmond, VA (on behalf of the American Association of 
      Medical Colleges), prepared statement of...................   139
    Smith, Dennis, Director, Center on Medicaid and State 
      Operations, Centers for Medicare and Medicaid Services, 
      Department of Health and Human Services, prepared statement 
      of.........................................................   198
    Towns, Hon. Edolphus, a Representative in Congress from the 
      State of New York, prepared statement of...................   229
    Watson, Hon. Diane E., a Representative in Congress from the 
      State of California, prepared statement of.................   238
    Waxman, Chairman Henry A., a Representative in Congress from 
      the State of California, prepared statement of.............     4

 
  THE ADMINISTRATION'S REGULATORY ACTIONS ON MEDICAID: THE EFFECTS ON 
                PATIENTS, DOCTORS, HOSPITALS, AND STATES

                              ----------                              


                       THURSDAY, NOVEMBER 1, 2007

                          House of Representatives,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:05 a.m. in 
room 2157, Rayburn House Office Building, Hon. Henry A. Waxman 
(chairman of the committee) presiding.
    Present: Representatives Waxman, Towns, Cummings, Kucinich, 
Davis of Illinois, Watson, Higgins, Braley, Cooper, Van Hollen, 
Hodes, Murphy, Sarbanes, Welch, Davis of Virginia, Shays, Mica, 
Platts, Foxx, Sali, and Jordan.
    Also present: Representative Engel.
    Staff present: Phil Barnett, staff director and chief 
counsel; Kristin Amerling, general counsel; Karen Nelson, 
health policy director; Karen Lightfoot, communications 
director and senior policy advisor; Andy Schneider, chief 
health counsel; Teresa Coufal, deputy clerk; Caren Auchman and 
Ella Hoffman, press assistants; Kerry Gutknecht and Bret 
Schothorst, staff assistants; Art Kellerman, fellow; Tim 
Westmoreland, consultant; Jennifer Safavian, minority chief 
counsel for oversight and investigations; Kristina Husar, 
minority counsel; Patrick Lyden, minority parliamentarian and 
members services coordinator; and Benjamin Chance, minority 
clerk.
    Chairman Waxman. The meeting of the committee will please 
come to order.
    Throughout this year our committee has held a series of 
hearings on making Government work again. We have focused on 
programs or agencies that once were effective but are now 
broken or dysfunctional. Today's hearing examines one of our 
Government's most important agencies, the Centers for Medicare 
and Medicaid Services at the Department of Health and Human 
Services. Called CMS for short, the agency is responsible for 
administering the country's two largest health insurance 
programs, Medicare and Medicaid, which cover nearly 100 million 
Americans at a cost of over $600 billion. As the largest single 
purchaser of health care in the country, CMS has enormous power 
to do good or do harm.
    Medicaid is funded jointly by the Federal Government and 
the States. It covers more than 60 million low-income 
Americans. Medicaid is the largest insurer of infants and 
children in the United States, covering more than 28 million 
kids. It is also the largest insurer of people with 
disabilities, covering almost 10 million people. Medicaid is 
the single largest source of funding for our Nation's public 
teaching hospitals, children's hospitals, and community health 
centers and public clinics--programs that benefit not only the 
poor, but everyone in their communities.
    Unfortunately, little notice has been paid to a series of 
Medicaid regulations proposed by the administration over the 
last 10 months, but these proposals would have enormous 
impacts. They are, in my opinion, a thinly disguised assault on 
the health care safety net. If implemented, they would cause 
major disruptions to State Medicaid programs and the people and 
institutions that depend on them.
    In total, the proposals would shift at least $11 billion in 
cost to State and local governments, the largest Medicaid 
regulatory cost shift in memory. Since these are Federal 
matching funds, the real cuts in programs at the local level 
could be at least twice this amount. This could force States to 
make a difficult choice: either raise taxes or cut vital 
services.
    This morning our committee will examine six rules the Bush 
administration has proposed. Three of these proposed rules 
target some of our Nation's most vulnerable citizens by cutting 
funding and services to disabled children, disabled adults, and 
elementary school children. The other three would cut billions 
of dollars in Federal funding from some of our Nation's most 
vital health care institutions: teaching hospitals, safety net 
providers, and public hospitals that support trauma centers, 
burn units, and other vital but unprofitable programs that 
benefit everyone in the community, insured and uninsured, 
alike.
    What is almost as troubling as the impact of these rules is 
the manner in which they are being pursued. Some of these 
proposals have been proposed in the past, but when they were 
proposed, 300 Members of the House and 55 Members of the Senate 
signed letters to Secretary Leavitt opposing the efforts.
    Undeterred, CMS pressed ahead and proposed these 
regulations. During the 90 day comment period on the proposed 
rule, CMS received more than 400 negative comments. The 
bipartisan National Governors Association, bipartisan National 
Council of State Legislatures, bipartisan National Association 
of Counties, numerous State and county governments, and a large 
number of hospital organizations, professional associations, 
and consumer groups all raised concerns. Not one person wrote 
in support of the rule.
    In response, Congress imposed a 1-year moratorium on CMS' 
authority to implement the rule. Despite all this, CMS is still 
moving ahead.
    This rule that I am referring to is just one example. All 
of the proposed regulations are made up out of whole cloth by 
CMS. They are reinterpreting laws, some of which have not been 
changed in 40 years. These changes, in my opinion, are not 
anchored in statute. They do not have the support of the 
Congress, and they deserve no deference from the courts.
    These actions and the subsequent issuance of five more 
proposals that shift an additional $7 billion in costs to the 
States bring us to today's hearing. The first panel will 
describe the effects of these rules on individual Americans, 
their community providers, and the States. Dennis Smith, the 
official at CMS who wrote these regulations, will join us on 
the second panel.
    I think that we need to look at what is happening very, 
very carefully at CMS, and I hope that they will look very 
carefully at the hearing record today, because, let's be clear, 
these regulations are not about program integrity. If they were 
refining guidance and improving accountability, that would be 
one thing; but since they are prohibiting services that have 
been successful for decades in order to cut funding that 
Congress has specifically preserved, this is not a careful 
surgery on Medicaid; this is a reckless amputation.
    I hope CMS will listen carefully to what our witnesses and 
the members of the committee have to say about their proposals, 
and I hope they will go back to the drawing board. If there 
truly are fiscal integrity concerns that need to be addressed 
through new rules, this committee would work with CMS to 
accomplish that goal. There is no other committee that has been 
as active in trying to make sure that we have integrity in our 
fiscal management than this committee has been.
    I look forward to the witnesses, and I hope that this 
hearing will have an impact.
    I ask unanimous consent that my complete opening statement 
be part of the record in its entirety. Without objection, that 
will be the order.
    [The prepared statement of Chairman Henry A. Waxman 
follows:]

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


    Chairman Waxman. Mr. Davis.
    Mr. Davis of Virginia. Thank you. Mr. Chairman, I want to 
thank the chairman for holding today's hearing to review six 
proposed Medicaid regulations.
    I hope these hearings will examine the justification of the 
proposed changes and their potential impacts not only on the 
individual beneficiaries, but on the financial sovereignty of 
the program, as a whole. Preserving the integrity of Medicaid 
is of great importance to this committee, and most importantly 
to millions that it serves.
    Medicaid is one of the fastest-growing parts of the Federal 
budget. It is one of the fastest-growing parts of State 
budgets, as well. But it is also the safety net provider within 
the health system offering care to our most vulnerable 
citizens.
    In 2006 over 63 million individuals relied on Medicaid 
program, including children, pregnant women, individuals with 
disabilities, and the elderly. Given the important role 
Medicaid plays in the health care system, Congress, States, and 
the Centers for Medicare and Medicaid Services, CMS, need to be 
vigilant stewards of Medicaid's financial resources.
    Medicaid surpassed Medicare in 2002 to become the largest 
Government health care program. In 2005 the cost of providing 
this care exceeded $300 billion, and it is projected to double 
in a decade. Such rapid growth strains Federal and State 
budgets. Fraud and abuse, along with questionable financial 
arrangements, can contribute to this growth and possibly 
jeopardize legitimate Medicaid services.
    Medicaid is jointly financed by State and Federal 
Governments. The Federal share of funding is between 50 and 77 
percent. While Federal participation is necessary and 
appropriate, this financing arrangement can incentivize States 
and providers to shift the cost of non-Medicaid services to the 
Medicaid program in order to obtain additional Federal funds.
    While this is an understandable motivation, especially in 
light of the pressures on State budgets, it does put additional 
strain on the Medicaid program and it should be evaluated.
    For these reasons and others, the GAO has placed Medicaid 
on its high-risk list. The GAO found that inadequate fiscal 
oversight has led to increased and unnecessary Federal 
spending. Specifically, GAO has pointed to schemes that 
leverage Federal funds improperly, and inappropriate billing of 
providers serving program beneficiaries as factors in this 
designation.
    For this reason, I am pleased that Dr. Marjorie Kanof, the 
Managing Director of Health Care at GAO, is here to speak to 
these overriding risk factors and fraud and abuse concerns 
within the Medicaid system.
    In the last year, CMS has issued a number of proposed 
Medicaid regulations. My opening statement doesn't afford me 
sufficient time to comment on all six. I look forward to an 
informative discussion that will hopefully lead to a more clear 
understanding of the genesis of these regulations and their 
impact on Medicaid beneficiaries, States, and providers.
    I do understand that some of these regulations were, in 
part, prompted by CMS' concern about the diversion or 
inappropriate use of Medicaid funds that may not have violated 
the letter of the law or regulations but are inconsistent with 
the spirit of the program. For example, as detailed in the 
proposed rehabilitative services regulation, Medicaid funds 
have been used to pay for services in wilderness camps in which 
juveniles are involuntarily confined. It would seem such 
programs are primarily within the domain of the Justice System 
and would be provided by the State, regardless of the 
juvenile's Medicaid eligibility. As such, juvenile detention 
wilderness camps may be better funded as part of State justice 
system as opposed to Medicaid health services.
    As with any effort to improve fiscal integrity of the 
Medicaid program and address potentially inappropriate uses of 
scarce Medicare sources, a delicate balance must be achieved to 
ensure that legitimate needs and services of beneficiaries are 
not, in fact, harmed.
    I anticipate that a good portion of today's hearing will 
focus on whether or not CMS has struck the right balance in 
these proposed regulations, and I look forward to witnesses' 
feedback on this.
    With that in mind, I want to thank today's witnesses for 
participating in this hearing, and I want to thank the chairman 
for calling it.
    [The prepared statement of Hon. Tom Davis follows:]

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    
    Chairman Waxman. Thank you, Mr. Davis.
    Without objection, since we have eight members on the first 
panel, I would like to proceed without any further opening 
statements.
    Let me ask unanimous consent that Congressman Elliott 
Engel, who is not a member of our committee, may wish to join 
us, and I would ask unanimous consent he be permitted to 
participate in this hearing.
    Mr. Davis of Virginia. No objection.
    Chairman Waxman. That will be the order.
    Now we are going to receive testimony from the witnesses on 
our first panel.
    Mr. David Parrella is the director of Medical Care 
Administration for the Connecticut Department of Social 
Services. He is testifying on behalf of the National 
Association of State Medicaid Directors.
    Ms. Barbara Miller is a resident of Rockville, MD. Ms. 
Miller is a former Medicaid beneficiary who benefited from 
rehabilitation services, and she is testifying on behalf of the 
National Council for Community Behavioral Health Care.
    Ms. Twila Costigan is program manager for the Adoption and 
Family Support Program at Intermountain in Helena, MT. 
Intermountain is a nonprofit organization that provides 
services to children under severe emotional distress. She is 
testifying on behalf of the Child Welfare League of America.
    Ms. Denise Herrmann is a school nurse with St. Paul public 
schools in St. Paul, MN. She regularly works with the Medicaid 
children in the St. Paul school system. She is testifying on 
behalf of the National Association of School Nurses.
    Mr. Alan Aviles is president of the New York City Health 
and Hospitals Corp. He is testifying on behalf of the National 
Association of Public Hospitals.
    Dr. Sheldon Retchin is vice president for health services 
at the Virginia Commonwealth University Medical College in 
Richmond, VA. He is testifying on behalf of the American 
Association of Medical Colleges.
    Dr. Angela Gardner is a practicing emergency physician at 
the University of Texas Medical Branch in Galveston, TX, and 
she is testifying on behalf of the American College of 
Emergency Physicians.
    Last but not least, Dr. Marjorie Kanof is Managing Director 
of Health Care for the Government Accountability Office in 
Washington, DC. She is testifying on behalf of the GAO.
    I welcome all of you. You are, of course, testifying from 
your own personal knowledge and experiences, as well as on 
behalf of other organizations who share your point of view. We 
thank all of you for being here.
    It has been the practice of this committee that all 
witnesses that testify before us are asked to be put under 
oath, and so I would like to ask each if you if you will to 
please rise and raise your right hands.
    [Witnesses sworn.]
    Chairman Waxman. The record will indicate that each of the 
witnesses answered in the affirmative.
    We have prepared statements from you, and those statements 
will be made part of the record in their entirety. What we 
would like to ask each of you to do is to limit the oral 
presentation to no more than 5 minutes. You will have a clock 
in the center. It will be green. When there is 1 minute left, 
it will turn yellow. And then when the 5-minutes are up, it 
will turn red. We would like you at that point to conclude your 
testimony.
    I know you have a lot to say, and it is difficult to say in 
such a short period of time, but it is the only way we can hear 
from everybody and get questions and answers. But the whole 
statement will be in the record expressing all of your views, 
which is what I did in my opening statement, because I have a 
lot of strong views on this subject which I had in the opening 
statement, and I want it to be in the record.
    Mr. Parrella.

     STATEMENTS OF DAVID PARRELLA, DIRECTOR, MEDICAL CARE 
    ADMINISTRATION, DEPARTMENT OF SOCIAL SERVICES, STATE OF 
  CONNECTICUT, HARTFORD, CT, AND CHAIR, EXECUTIVE COMMITTEE, 
NATIONAL ASSOCIATION OF STATE MEDICAID DIRECTORS (ON BEHALF OF 
THE NATIONAL ASSOCIATION OF STATE MEDICAID DIRECTORS); BARBARA 
MILLER (ON BEHALF OF NATIONAL COUNCIL FOR COMMUNITY BEHAVIORAL 
  HEALTHCARE); TWILA COSTIGAN, PROGRAM MANAGER, ADOPTION AND 
FAMILY SUPPORT PROGRAM, INTERMOUNTAIN, HELENA, MT (ON BEHALF OF 
 THE CHILD WELFARE LEAGUE OF AMERICA); DENISE HERRMANN, SAINT 
PAUL PUBLIC SCHOOLS, SAINT PAUL, MN (ON BEHALF OF THE NATIONAL 
ASSOCIATION OF SCHOOL NURSES); ALAN AVILES, PRESIDENT, NEW YORK 
  CITY HEALTH AND HOSPITALS CORP. (ON BEHALF OF THE NATIONAL 
    ASSOCIATION OF PUBLIC HOSPITALS); SHELDON RETCHIN, VICE 
    PRESIDENT FOR HEALTH SCIENCES AND CEO OF HEALTH SYSTEM, 
 VIRGINIA COMMONWEALTH UNIVERSITY, RICHMOND, VA (ON BEHALF OF 
THE AMERICAN ASSOCIATION OF MEDICAL COLLEGES); ANGELA GARDNER, 
  ATTENDING EMERGENCY PHYSICIAN, UNIVERSITY OF TEXAS MEDICAL 
BRANCH, GALVESTON, TX, AND VICE PRESIDENT, AMERICAN COLLEGE OF 
  EMERGENCY PHYSICIANS (ON BEHALF OF THE AMERICAN COLLEGE OF 
 EMERGENCY PHYSICIANS); AND MARJORIE KANOF, MANAGING DIRECTOR, 
         HEALTH CARE, GOVERNMENT ACCOUNTABILITY OFFICE

                  STATEMENT OF DAVID PARRELLA

    Mr. Parrella. Thank you, Chairman Waxman. Good morning 
Congressman Davis, members of the committee. My name is David 
Parrella. For the past 10 years I have had the privilege of 
serving as Connecticut's director of Medical Care 
Administration. I am currently the chairman of the National 
Association of State Medicaid Directors, an affiliate of the 
American Public Human Services Association.
    Thank you for the opportunity to speak briefly with you 
today about the recent spate of regulations promulgated by my 
colleagues at the Federal Centers for Medicare and Medicaid 
Services, known as CMS.
    Let me be clear that, regardless of our differences on 
these issues, I do regard Dennis Smith and his staff at CMS as 
colleagues, and I share their commitment to be good custodians 
of the public dollars that we spend on health care.
    Let me begin by summarizing the broad mission of the 
Medicaid program, which is a State and Federal partnership to 
provide health care to the neediest and most vulnerable 
populations in our country.
    Medicaid currently provides comprehensive coverage to over 
63 million Americans. It is the single largest payer for the 
long-term care costs that are perhaps the greatest economic 
challenge that we face in health care as members of my own 
generation approach retirement.
    But Medicaid is more than a long-term care program. It is 
generally the largest health care program, if not the largest 
program, period, in most State budgets. It provides support and 
services for millions of Americans with a wide range of 
disabilities that enables them to live independent lives in the 
community. It is the single largest payer of mental health 
services, the largest purchaser in the Nation of 
pharmaceuticals, and the source of health insurance coverage 
for most of the Nation's working poor.
    As you debate the future of the State children's health 
insurance program, please remember that Medicaid is the largest 
source of care for children in low-income families and is the 
largest payer in most States for maternity and prenatal care.
    Across this immense landscape of health care delivery that 
is literally from cradle to grave, Medicaid programs have been 
encouraged, and in many cases mandated, by Congress to work in 
partnership with other State and Federal programs that touch 
upon the same populations. Teaching hospitals and substance 
abuse programs, programs for children with special education 
requirements and developmental delays, programs for children in 
the child welfare system, residential placements for people 
with developmental disabilities, community-based services for 
persons with mental illness and HIV, child immunization 
programs and outreach programs to schools to reach DDN-entitled 
children. All these programs have benefited from collaboration 
with Medicaid programs around the country as a source of 
Federal matching funds to help States meet the mandates placed 
upon them by Federal laws regarding the early and periodic 
screening, diagnosis, and treatment program--known as EPSDT--
IDEA, the Americans with Disabilities Act, etc.
    We have done so economically. National budget figures show 
a very low rate of growth of 2.9 percent in the Medicaid 
program in fiscal year 2007. Providers will tell you that the 
rates that we pay for health care services are far from 
exorbitant. Furthermore, we manage the program in an indirect 
cost rate that would be the envy of any CEO in the private 
market.
    So, despite the occasional messiness that ensues in a 
program of this size, we are not a runaway train on spending. 
Yet, in recent months, we have experienced a stealthy release 
of regulation after regulation seeking to reduce the scope and 
breadth of the Medicaid program. We have seen regulations that 
would limit facilities that could be reimbursed as public 
facilities, that would eliminate payment for graduate medical 
education, regulations that would impose burdensome new 
accounting measures on the funding for community-based 
services, and limit the ability to partner with the schools, 
where millions of Medicaid-eligible children can be enrolled 
and served.
    CMS is seeking to place new limits on how States are able 
to raise their required State's share for the Federal match, 
and perhaps most disturbingly, CMS is attempting to redefine 
what services can be covered under Medicaid as part of the 
rehabilitation State plan option, likely the single greatest 
vehicle for creativity and the design of programs for persons 
with life-long needs.
    Now, CMS officials will tell you that they do not seek to 
harm the Medicaid program, and I am sure they are sincere in 
this belief. Their rationale is based largely on a two-part 
premise that allowing Federal matching funds under Medicaid for 
these purposes is inevitably too tempting for the States and 
will lead them to create arcane schemes to draw down excess 
Federal revenues for services that were traditionally a State 
responsibility.
    Let me say here, as someone who has worked in Medicaid for 
the past 20 years, that they have a legitimate concern 
regarding program integrity, especially when times are tight in 
State budgets. But the other part of the premise is simply 
wrong. They maintain that the elimination of $20 billion in 
Federal Medicaid funding for Medicaid administration activities 
in schools or rehabilitation services for children with 
developmental delays or graduate medical education is 
appropriate because these activities were never intended to be 
part of Medicaid, despite decades of approved State plan 
amendments across the Nation.
    CMS' argument continues that ``If States want to fund these 
activities, they can simply appropriate more money. Special 
education is purely the responsibility of the Education 
Department. Services for persons with mental illness should be 
under the purview of SAMHSA, and disease prevention under 
Public Health, and medical education is limited to funds 
appropriated in the budgets of the State teaching hospitals.''
    However, there is no new appropriation on the horizon to 
replace Medicaid funding for these services through Federal IDA 
legislation or elsewhere, and Medicaid is simply reduced in the 
scope of its activities.
    It is surprising that this philosophy should come at a time 
when most experts in the field would say that the Nation's 
health care system is in a state of crisis. The emergency rooms 
of our teaching hospitals are bursting at the seams as they try 
to provide both emergency and non-emergency care to 47 million 
Americans who have no health insurance.
    A greater awareness of autism and spectrum disorders and 
mental illness among very young children has placed a strain on 
the entire mental health system. Persons with disabilities are 
struggling to find more creative alternatives to live 
independent and productive lives. A retrenchment by Medicaid 
will only make these struggles more difficult for millions of 
Americans at a time when no comprehensive reform of the health 
care system is even on the horizon.
    We are apparently unable to agree on what income levels 
should qualify a child to receive assistance with health care 
under S-CHIP, much less comprehensive health reform.
    As Chair of the National Association of State Medicaid 
Directors, I applaud your efforts to review some of the changes 
that CMS officials have placed. I further appeal to you to 
continue your efforts to expand the moratoriums that you have 
already placed on some of these regulatory initiatives. It is 
the belief outstanding of the National Association of State 
Medicaid Directors that these issues need to be part of a 
broader debate on the future of health care here in these 
chambers. On many of these issues you did debate them during 
the discussion that led to the Deficit Reduction Act and chose 
not to act.
    Please do not allow CMS to further limit the ability of the 
States to derive their share of Medicaid from taxes imposed on 
medical providers.
    Please do not allow CMS to eliminate the option for States 
to use Medicaid funding to pay for graduate medical education.
    Please do not permit CMS officials to jeopardize the future 
of children with developmental disabilities by subjecting the 
services they receive to an artificial distinction between 
having lost their cognitive abilities or never having had them 
at all.
    Please do not force persons with disabilities back into 
institutional settings because States cannot match cost report 
standards for the community-based services they receive to a 
Medicare institutional standard.
    Please do not cutoff information gathered by school 
personnel from helping States to determine eligibility for 
their programs.
    Please do not dictate to States what facilities can be 
designated units of government for reimbursement purposes.
    And Please do not take hospital reimbursement back to the 
future by mandating retro cost-based methodologies.
    [The prepared statement of Mr. Parrella follows:]

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Chairman Waxman. Thank you, Mr. Parrella. I gave you a 
little extra time.
    Mr. Parrella. Sorry, Mr. Chairman.
    Chairman Waxman. I appreciate that testimony on behalf of 
all the States that are running the program actually at the 
State level, which is, of course, a Federal and State program. 
Thank you very much.
    Ms. Miller, we would like to hear from you.

                  STATEMENT OF BARBARA MILLER

    Ms. Miller. Chairman Waxman and distinguished members of 
the committee, thank you for the opportunity to testify this 
morning on behalf of the National Council for Community 
Behavioral Health Care. My name is Barbara Miller.
    Today I am on the road to recovery from a serious mental 
illness. I am a program assistant at the Hearing Loss 
Association of America. Before starting that job, I did a lot 
of volunteer work for senior citizens and people with physical 
disabilities. I am also deaconess in the Word of Hope 
Fellowship Church. At the church I volunteer as assistant 
director of the youth department. There is a teenage girl in my 
apartment building who needs a steady, sensible adult 
influence, and I am trying to provide that to her as a mentor.
    But my future didn't always look so bright. I was first 
diagnosed with bipolar disorder in the early 1970's. I lived in 
the Springfield State Hospital in Sykesville, MD, for 2\1/2\ 
years. Chairman Waxman, it was a terrible experience. The 
doctors there struggled to give me a proper diagnosis, and I 
have to tell you the truth: it was like living in a warehouse.
    That is what happened to most people with serious mental 
illnesses in the 1960's and the 1970's: they were warehoused in 
State mental hospitals.
    However, with the help of treatment, rehabilitation, and 
housing provided by Threshold Services in Montgomery County, 
MD, I got where I am today.
    When I first started participating in rehabilitation 
services in 1990, I received Assertive Community Treatment at a 
house where I lived with several other people. Staff would come 
out regularly to check on me, measure progress on my treatment 
plan, and see how I was responding to medications. They always 
provided training about living with mental illness to the 
pastor and his wife who ran the house.
    Some time ago, I moved to the Halpine Apartments. It was a 
huge step for me because it was the first time I had lived on 
you own for many, many years.
    Threshold Services provided counseling to me during the 
transition and offered groups where people could support each 
other and not become isolated.
    Threshold Services runs a residential rehabilitation 
program and offsite psychiatric rehabilitation teams which 
serve a combined total of 250 people. These rehabilitation 
programs are important because they prepare people with serious 
and persistent mental disorders to go back to work and cope 
with life in the community. Threshold also helps 40 people 
choose, get, and keep jobs where they work side by side with 
non-disabled individuals through their supportive employment 
initiative, in partnership with St. Luke's House. This is 
tremendously impressive, because the nationwide unemployment 
rate among people with severe mental illnesses exceeds 80 
percent.
    Finally, Threshold has a psycho-educational day program 
that aims to develop community living skills and improve 
interpersonal relationships.
    With the help of treatment, rehabilitation, and housing 
provided by Threshold services, I got from where I was to where 
I am, and now Threshold services helps me maintain my success. 
So now I give back as a member of the board of directors. God 
and the members of my church are with me all the way. It takes 
a lot of faith in God to persevere. Now I give back as a 
deaconess and assistant youth director in the church.
    I was supported by public assistance; now I give back by 
working and paying taxes.
    Mr. Chairman, I am told by the National Council that almost 
every service that you have heard me describe during this 
testimony--assertive community treatment, psychiatric 
rehabilitation, and psycho-educational day programs--are in 
jeopardy because of a new rehabilitation option rule. In 
addition to medication and therapy, it is worth noting that 
these rehabilitation services permit people like me to live in 
the community and make a contribution to the community. If the 
Federal Government withdraws financing from them, many more 
people with serious mental disorders will end up in emergency 
rooms, inpatient hospitals, nursing homes, or in the prison 
system.
    I want to conclude this testimony with a simple plea: 
please don't send people with mental illnesses back to places 
like Springfield State Hospital. We have fought too hard and we 
have come too far to go back now.
    [The prepared statement of Ms. Miller follows:]

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    
    Chairman Waxman. Thank you very much, Ms. Miller, for that 
testimony.
    Ms. Costigan.

                  STATEMENT OF TWILA COSTIGAN

    Ms. Costigan. Good morning, Mr. Chairman, members of the 
committee. My name is Twila Costigan. I live in Helena, MT, and 
I just want to make it clear that we do have plumbing in 
Montana. Even though we live way out there in the west, we do 
have it.
    I am here on behalf of the Child Welfare League of America, 
the Montana Children's Initiative--which is a group of 
providers across the State of Montana--and Intermountain 
Children's Home.
    Intermountain Children's Home is a magical place where we 
seek to restore hope to children and their families. We deal 
only with children with serious emotional disturbance.
    I am going to talk to you a little bit about how kids get 
to be SED, or seriously emotionally disturbed. I want to talk 
to you about two kids. One's name is Johnny, the other's name 
is Susie.
    Johnny is a young infant. As we all know, the first 3 years 
is when your brain is going crazy up there wiring, making you 
who you are going to be, giving you the skills that you will 
need to be successful in the community.
    Johnny lays in his crib and he cries because he needs his 
diaper changed, because he is hungry, because he is just not 
comfortable with where his mom is, or his caregiver is. 
Somebody comes to Johnny. Somebody picks Johnny up, and 
somebody looks at Johnny and says, you are beautiful. You are 
my son. You belong. I love you.
    I want to talk about Susie next. Susie cries because she is 
hungry or she needs her diaper changed or she's just not 
comfortable with where people are. She doesn't feel safe. For 
Susie, people don't come often enough. People don't pick her up 
and look in her eyes and talk to her and tell her that she is 
beautiful and that she is loved and that she belongs. Susie 
will probably some day be a seriously emotionally disturbed 
child, removed from her birth home, in the custody of the 
State, placed in foster care homes, maybe more than one. The 
average placement is three.
    For Susie and for Johnny and for each and every one of us, 
we are born with a drive to have relationships with other 
people. It is what we are here for.
    After a while, kids like Susie quit crying. Nobody is 
taking care of them, and they are not going to let anybody into 
their world. These are the kids who are most severely 
disfigured by adults in their life. Susie is driven to attach, 
to connect with this other human being. For our seriously 
emotionally disturbed kids, most of the time that adult that 
they are driven to attach to is the one who provides the trauma 
that leads to the serious emotional disturbance.
    In Montana we have a continuum of care. We provide services 
in the home, in the birth home, to try to keep kids in the 
home, which is always the best option. We have short-term 
foster care. Some of those kids are placed in adoptive care. 
The seriously emotionally disturbed children are a very small 
percentage of the kids who are in foster care. Most of those 
kids either go back to their birth home--about 77 percent in 
Montana--or a relative, or they are returned to their other 
parent. A small percentage of them are adopted.
    For our program, the rehabilitative services allow us to 
help these kids to bring hope into their lives, to provide in-
home services, to help their parents learn how to deal with 
them. Our continuum of care is the preservation in the 
beginning, in the birth home, foster care, therapeutic foster 
care, therapeutic group home care, residential treatment. The 
rehab services are a huge piece of the funding of therapeutic 
foster care and therapeutic group homes.
    It is really important for these kids to have some hope, 
and so I ask you, as you deliberate, as you think about this, 
think about Susie, who cried and cried and cried and nobody 
came to help her. Keep the rehab services intact and allow 
places like Intermountain and other wonderful places across the 
Nation to provide hope to these children who are our most 
vulnerable citizens and dependent on us as adults.
    Thank you.
    [The prepared statement of Ms. Costigan follows:]

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    
    Chairman Waxman. Thank you very much, Ms. Costigan.
    Ms. Herrmann.

                  STATEMENT OF DENISE HERRMANN

    Ms. Herrmann. Mr. Chairman, Mr. Davis, and members of the 
committee, my name is Denise Herrmann and I am a school nurse 
from St. Paul, MN. I am privileged to be here today 
representing the National Association of School Nurses on this 
critical issue of Medicaid funding regulations.
    I commend the committee for bringing attention to the fact 
that the Centers for Medicare and Medicaid Services have been 
issuing proposed rules that, if finalized, will negatively 
impact the lives of school children and the practice of school 
nursing.
    Through my testimony I hope I can explain how school nurses 
are involved with Medicaid administrative claiming in the areas 
of eligibility, enrollment, and referrals, and perhaps the best 
way to do this is to tell you the stories of school nurses, 
children, and families from across the United States.
    Healthy children learn better. School nurses are doing 
everything they can within Medicaid regulations to enroll 
eligible children and make appropriate medical referrals. How 
do we work with Medicaid eligibility? Parents routinely ask 
school nurses, Where do I go to begin this process of applying 
for Medicaid? How do I know my child's eligible? How do I 
enroll?
    Our school nurses located in Chairman Waxman's District 
tell us that in this past month 18 families have gotten medical 
assistance through the case management and case work of school 
nurses. This is an appropriate use of Medicaid claiming 
dollars. They are helping children access much-needed medical 
and dental care and are keeping them out of expensive and time-
consuming emergency health care facilities.
    Regarding enrollment, here is a scenario that happens 
regularly in my district. I call a mother and I say, your child 
is in my office. This is the second time today. Their asthma is 
out of control. They are coughing. They are wheezing, and their 
emergency medication doesn't seem to be working.
    I ask the mother, are they taking their regular controller 
medication that prevents asthma attacks? No. We stopped a month 
ago. We lost our health insurance and it costs $120 to get that 
medication this month. I was hoping he would get by without. 
And can you keep him in school, because I can't afford to miss 
work to come and get him.
    I remind her that her son was hospitalized a year ago 
because he hadn't been on his controller medications and I make 
a promise then to help her find health care for her child and 
get in one of the State programs.
    Health needs and problems are not something children leave 
at home. They come to school for 6 to 8 hours a day with their 
health needs and their problems. Parents feel comfortable and 
they trust the school nurse. It is the school nurse who is 
often the child's first and only access into that health care 
system. If society doesn't want our children to be left behind, 
then we need to be there to help them to be healthy, stay in 
school, and achieve academic success.
    Here is a typical referral example for a little girl I will 
call Amanda. She is a second grader and has type I diabetes and 
she needs insulin injections four to six times a day and has to 
test her blood sugar six to eight times. After being gone 6 
months, she came back to our school district without any health 
insurance. Her diabetes is out of control. The mom had no 
supplies to test her blood sugar, and only enough insulin to 
last a week, and no money to buy any more.
    It was the school nurse who managed Amanda's care and 
worked closely with a local clinic to obtain insulin supplies, 
insulin samples, syringes, test strips so that diabetes could 
be brought under control. These actions prevented Amanda from 
being hospitalized over the next 5 months until she was 
eventually covered by Medicaid.
    Members of this committee, I know you must have to deal 
with lots of tedious and faceless numbers and regulations 
regarding this issue. I want to put one more face on this. True 
story, a little girl I will call Ann. Her dad came to enroll 
her in our school district and she had a heart condition, and 
the nurse began the paperwork to get her enrolled in Medicaid, 
but in the meantime had to find a cardiologist who would see 
her and give her the medication she needed. Members, it is very 
hard to find a cardiologist who will take care of a kid without 
health insurance.
    I am happy to report that Ann is healthy and doing well 
today, but without the school nurse's persistence and 
intervention this family would have had to pursue much more 
expensive health care, such as a hospitalization or an 
emergency room visit for a condition that was treated by 
outpatient care.
    In addition, the process for this successful outcome would 
not have happened if the proposed rule to eliminate Medicaid 
administrative claiming by schools was in place.
    From these examples, I hope you will understand why our 
association is in disagreement with the CMS position that 
school-based administrative activities performed by school 
nurses fail to meet the statutory test of being necessary for 
the proper and efficient administration of a State plan.
    According to the Kaiser Commission, children represent half 
of all Medicaid enrollees, but only account for 17 percent of 
total program spending. Therefore, children are by no means 
draining the fund.
    On behalf of the National Association of School Nurses, I 
implore this committee to do whatever they can to let CMS know 
the harm that would occur by changing certain Medicaid 
regulations for administration claiming. It is painfully 
obvious to school nurses, as we work in these public systems, 
that by eliminating the Federal financial participation for 
school-based administrative claiming, the health needs of 
innocent children will go unmet and preventable consequences 
will be long-lasting for families and society.
    Thank you. I appreciate this opportunity to testify.
    [The prepared statement of Ms. Herrmann follows:]

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    
    Chairman Waxman. Thank you very much for your testimony.
    Mr. Van Hollen, I know you tried to get here in time to 
hear Ms. Miller's testimony. Do you want to say anything at 
this time?
    Mr. Van Hollen. Thank you, Mr. Chairman. I apologize for 
being late. I had a prior commitment, but I did also want to 
welcome my constituent, Barbara Miller. Thank you for your 
testimony. I had a chance to read your testimony, and I am so 
pleased you could be here to tell your story as we make these 
important decisions.
    I also want to thank Threshold Services for all that they 
do in our community. I see Craig Nowel, the executive director, 
and I want to welcome him and thank them for all the 
rehabilitation services they provided and allow people like you 
to be able to tell your story here today. Thank you for all 
that you have done to share with us today.
    Chairman Waxman. Thank you, Mr. Van Hollen.
    Mr. Aviles.

                    STATEMENT OF ALAN AVILES

    Mr. Aviles. Good morning, Mr. Chairman and members of the 
committee. I am Alan Aviles, president of HHC, the New York 
City Health and Hospitals Corp. I am pleased to have this 
opportunity to testify this morning on behalf of NAPH, the 
National Association of Public Hospitals and Health Systems.
    NAPH is deeply concerned about the severe adverse impact of 
all of the regulations you are reviewing today. I will focus my 
attention this morning primarily on the Medicaid cost limit 
regulation, which is subject to a congressionally adapted 1 
year moratorium until May 2008. If that regulation is permitted 
to go into effect, it has the potential to devastate essential 
safety net hospitals and health systems in many parts of the 
country.
    In addition to the Medicaid cost limit regulation, HHC and 
other NAPH members will be severely impacted by the proposed 
CMS rule affecting graduate medical education and a proposed 
Medicaid outpatient payment regulation that CMS recently 
published.
    Let me begin by briefly describing my own organization. HHC 
is the largest municipal health care system in the country. We 
provide health care to 1.3 million New Yorkers every year. 
Nearly 400,000 have no health insurance. We operate 11 acute 
care hospitals, 4 skilled nursing facilities, 6 large 
diagnostic and treatment centers, more than 80 community health 
centers, and a home health program.
    More than 60 percent of our budget comes from Medicaid. 
HHC's facilities provide nearly 20 percent of all general 
hospital discharges and 40 percent of all inpatient and 
hospital-based outpatient mental health services in New York 
City. One-third of New York City's emergency room visits occur 
in HHC hospitals, and we provide 5 million outpatient visits 
every year.
    My submitted written testimony describes the situation of 
other NAPH member hospitals nationally and also details 
billions of dollars in potential Medicaid cuts facing those 
hospitals as a result of these regulations.
    Let me briefly touch upon the potential impact of those 
cuts on the vulnerable patient populations and communities we 
serve.
    While it is not always possible to predict with precision 
which services will be reduced or eliminated, I can give you a 
few examples of decisions that might be required if public 
hospitals are faced with Medicaid cuts of this magnitude.
    We believe the impact in New York of the reduced costs and 
limit regulations would be upwards of $200 million per year. 
Faced with cuts of that magnitude, we would have to dismantle 
significant components of our ambulatory care system and scale 
down our emergency departments. These Medicaid funds help to 
support our extensive primary care network that prioritizes 
prevention, early detection of disease, and engagement of 
patients in the management of their chronic conditions.
    These funds also support the provision of prescription 
medications to hundreds of thousands of low-income New Yorkers, 
and the operations of our eleven public hospital's emergency 
departments and six trauma centers rely heavily on Medicaid 
funding.
    In California Dr. Bruce Chernoff, CEO of the Los Angeles 
County Department of Health Services has said, ``It is the 
equivalent to shutting down all the outpatient clinics we own 
and operate, as well as those we contract with in the 
community.''
    Gene Marie O'Connell, San Francisco General Hospital CEO 
and Chair of NAPH, states, ``San Francisco General Hospital is 
just holding its head above water with the current rates. The 
impact from the Medicaid cost limit rule means the loss of $24 
million, and from the GME rule an additional $5 million. If 
these rules become reality, we would need to close three 
nursing units, or 90 beds out of 550 beds, which would have a 
dire impact on services to the residents of San Francisco.''
    In Colorado, Dr. Patricia Gabow, Denver Health CEO and 
medical director, states, ``We need Congress to stop these 
rules. The impact of this rule on Denver health would be 
devastating. We might as well turn over the keys. We would no 
longer be able to serve as the major safety net system for 
Denver and Colorado and the region. The health of the entire 
community will be compromised through the impact on our trauma 
system, our disaster preparedness, and public health.''
    Mr. Chairman, my submitted written testimony includes 
numerous other examples from around the country. For this 
reason, it is imperative that Congress act now to stop these 
rules and to reaffirm your role in setting Medicaid policy for 
this country. We believe that CMS ignored Congress and violated 
Federal law by moving forward to implement several of these 
Medicaid regulations. We need the Congress to move quickly by 
the end of this calendar year to prohibit CMS from implementing 
the Medicaid cost limit, GME, and Medicaid outpatient 
regulations.
    We strongly urge the members of this committee to support 
and co-sponsor H.R. 3533, a bill introduced by New York 
Congressman Elliott Engel and Sue Myrick, which had 133 co-
sponsors as of this past Monday.
    Once again, I thank you for granting me the opportunity to 
speak with you this morning on behalf of NAPH. I would be happy 
to answer any questions you may have.
    [The prepared statement of Mr. Aviles follows:]

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Chairman Waxman. Thank you very much, Mr. Aviles.
    Mr. Towns.
    Mr. Towns. Let me just say, first off, thank you so much 
for being here. He heads the largest public hospital system in 
the United States. Of course, I am delighted for you to come 
and share with us your views and we hope to be able to talk 
further as we move forward into the question and answer period. 
I want to thank you so much for taking time from your busy 
schedule to come to share with us today.
    Thank you, Mr. Chairman. I yield back.
    Chairman Waxman. Thank you, Mr. Towns. Thank you very much, 
Mr. Aviles.
    Dr. Retchin.

                  STATEMENT OF SHELDON RETCHIN

    Dr. Retchin. Thank you, Chairman Waxman, Mr. Davis, members 
of the committee. I am Sheldon Retchin. I am vice president for 
Health Sciences at Virginia Commonwealth University and CEO of 
the VCU Health System in Richmond, VA. I am here to testify 
before the committee about the detrimental impact of the 
proposed CMS rule to eliminate Federal matching payments for 
graduate medical education [GME], under the Medicaid program.
    I am also here on behalf of the Association of American 
Medical Colleges and I want to put a face to the devastating 
consequences these cuts would have on the Nation's teaching 
hospitals.
    The VCU Health System is really two health systems. On the 
one hand it is a tertiary care center and is the region's only 
level one trauma center, and one of only two burn centers in 
the entire Commonwealth of Virginia. We perform solid organ 
transplants and attract referrals from not only across the 
Commonwealth, but all up and down the Mid-Atlantic region.
    On the other hand, we are also a primary provider of 
hospital and intensive services and primary care services for 
inner-city Richmond. Let me tell you why.
    Over the past three decades, there has been a migration of 
approximately 750 hospital beds from the city of Richmond to 
the surrounding suburbs. These beds were not replaced and, in 
fact, led to the closure of four major hospitals in the city of 
Richmond, three of which relocated into more affluent suburbs. 
So today the VCU Health System is the last remaining health 
system with a major hospital in the inner city, downtown 
Richmond.
    So what happens is we take care of the inner city of 
Richmond, and during the past year we had 8,400 hospital 
discharges covered by Medicaid, 26 percent of all hospital 
inpatient work. Medicaid beneficiaries crowd our emergency 
rooms, they overwhelm our clinics. We had 65,000 outpatient 
Medicaid visits this past year. And that is not the whole 
story. In addition to the Medicaid population, the VCU provides 
a significant amount of care for low-income but income too high 
to be eligible for Medicaid. These are indigent patients.
    So, taken together, Medicaid and indigent care represent 
about 45 percent of all the care our teaching hospital 
provides. So this devotion to care for the disadvantaged in our 
region is unrivaled.
    Now, we do this judiciously. We are very careful stewards 
of these precious resources, and, not only that, we are 
innovators. So we contract with primary care physicians in the 
community to decompress the emergency room, and we contract 
with those inner-city community physicians, about 30 different 
practices, with funds that are not even Medicaid. That is 
because we want to be judicious, and we are doing this and 
putting band-aids as much as we can on the solution.
    Believe me, this is a safety net, not a safety hammock.
    CMS suggests that the Medicaid program should not make 
payments toward the cost of graduate medical education. The 
timing of this proposal is especially perplexing. As you all 
know, the Nation faces a looming physician shortage in 
conjunction with the rise in the health care demands that are 
being placed on it by baby boomers. This rule would undo a 
history of support that stretches back more than two decades.
    During this time, CMS has long recognized graduate medical 
education as a legitimate and authorized Medicaid expenditure, 
has consistently approved State plans for this expenditure, and 
has always matched Medicaid GME payments along the way.
    In 2005, 47 States and the District of Columbia made and 
provided GME payments under the Medicaid program. In Virginia 
this past year we received $6.7 million in direct GME Medicaid 
costs.
    I assure you, Virginia's Medicaid funding for GME is a 
Federal-State partnership split 50/50, so you have to ask why 
so many States like Virginia are making this commitment to 
graduate medical education that are now proposed for Federal 
reduction. That is because sustenance of the physician work 
force is at least as important, if not more so, for Medicaid 
beneficiaries than it is for Medicare.
    While adequate access is vulnerable for beneficiaries of 
both programs, I can assure you that physician Medicaid 
participation in most States is even more sensitive than 
Medicare to the work force supply.
    Over the past 20 years, despite modest health care reforms, 
unfortunately we have made little progress reducing the total 
number of our citizens who remain uninsured. That certainly has 
had its consequences in downtown Richmond. Employer-based 
coverage has eroded during the past 7 years, as we all know, 
and most of the uninsured and Medicaid beneficiaries are hard-
working Americans who are either self-employed or employed by 
businesses, small businesses who cannot afford health care 
coverage for their employees.
    With all due respect, I feel like we are walking up a down 
escalator. These cuts will merely unravel the safety net yet 
further and make health reform and expanded coverage that much 
harder to accomplish in the horizon ahead.
    With 47 million Americans uninsured and another 40 million 
Americans on Medicaid or under-insured, the safety net is 
stretched tight, and the teaching hospitals are holding the 
corners.
    I thank you for the opportunity to testify today. The 
teaching hospital community greatly appreciated the 1-year 
moratorium preventing regulatory action on this rule until May 
2008, and we contend that this moratorium may have already been 
violated. We are also very grateful to Representatives Engel 
and Myrick and over 133 bipartisan co-sponsors for advocating 
in support of the Public and Teaching Hospital Preservation Act 
to extend the moratorium for an additional year.
    My fellow teaching hospital and medical school leaders and 
the Association of American Medical Colleges look forward to 
working closely with you on these issues which are of such 
importance to the health and well-being of all Americans.
    Thank you.
    [The prepared statement of Dr. Retchin follows:]

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    
    Chairman Waxman. Thank you very much, Dr. Retchin.
    Dr. Gardner.

                  STATEMENT OF ANGELA GARDNER

    Dr. Gardner. Thank you, Mr. Chairman and members of the 
committee. My name is Dr. Angela Gardner. I am an assistant 
professor at the University of Texas Medical Branch in 
Galveston. I have been providing emergency care to Texans for 
more than 20 years. I am also vice president of the Board of 
Directors for the American College of Emergency Physicians 
[ACEP]. We represent 25,000 emergency physicians in 53 chapters 
across the Nation.
    I would like to thank you for allowing me to testify today 
on behalf of ACEP to discuss the impact on vulnerable 
populations and safety net hospitals if CMS is allowed to 
reduce Medicaid payments to States by approximately $5 billion, 
as it has proposed to do in the regulatory process. Today I 
would like to share with you several important factors that 
make the care received in the emergency department unique and 
how the proposed Medicaid cuts will further erode access to 
life-saving emergency medical care in Texas and the rest of the 
Nation.
    Actually, I would like to tell you a story.
    I worked in the emergency department on Tuesday night, and 
on my arrival all 48 of my beds were full. We had 22 patients 
in the hallway. We had 14 patients in the waiting room. We had 
three ambulances unloading and two helicopters waiting to land. 
That is a normal day. And, as I hear from Dr. Retchin and Mr. 
Aviles, that is a normal day in New York and Denver and San 
Francisco, as well.
    When I arrived, 25 percent of my beds were taken up by 
patients who were waiting on a bed inside the hospital, four of 
those on respirators waiting on ICU beds. This is a normal 
Tuesday night.
    At midnight I got a patient who arrived to me comatose from 
the back seat of his mother's car. He had been driven 250 miles 
to my emergency department to get our care. I will call this 
man Norman to preserve his privacy.
    Norman had been having headaches for about a month. On the 
third week, when his right hand wouldn't work any more and he 
started vomiting, his mother said, you have to go to the 
hospital. They went to the emergency department at their local 
hospital, where he was diagnosed with a brain tumor on the left 
side of his brain.
    They don't have a neurosurgeon at this hospital--and this 
is a regular-sized city--so they called UTMB for a transfer. We 
accepted the patient to neurosurgical service.
    Unfortunately, we didn't have a bed. The process is he has 
been put on a list to get a bed when one becomes available.
    After waiting 8 days for his bed in the hospital there in 
his home town, Norman, in pain and vomiting and unable to move 
out of that bed, begged his parents to take him home to die, 
and they did.
    He went home to die, and when he became comatose his mother 
loaded him in the back seat and brought him to me. I put him on 
a ventilator. I gave him drugs. I got him a neurosurgeon. What 
I could not get him was a bed.
    If you will excuse me, this is emotional. I left the 
hospital Wednesday morning. I do not know if Norman died, but I 
believe that he will die in that trauma bay. He will never see 
the inside of a hospital. He will have his neurosurgeon, but he 
will not have a bed.
    As you sit here and absorb the impact of the story, I would 
like to let you know something. Norman is not indigent. Norman 
is a working man with health insurance. The problem with the 
cuts that Medicaid wants to make, the cuts to Medicaid that are 
being proposed, is that it affects not only the indigent but 
everyone out there. This could happen to you, it could happen 
to someone that you love.
    Of our children in Texas, 32 percent are on Medicaid. 
Another 18 percent of them are uninsured. That is 50 percent of 
our children who are under-insured or lacking access to health 
care. I can't see that any cut in that program is going to help 
anyone.
    More to the point, we don't have beds, and we don't have 
beds in the same way that New York doesn't, in the same way 
that other colleges in Virginia don't. Cutting our programs is 
not going to give us beds. It is not going to help people like 
Norman, whose main need is a neurosurgeon and a bed.
    I would like to wrap up today by thanking you for allowing 
me to be here, by tolerating my emotion for my patients, and by 
asking you: please, don't cut funding to our valuable public 
hospitals.
    [The prepared statement of Dr. Gardner follows:]

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    
    Chairman Waxman. Thank you very much, Dr. Gardner.
    Dr. Kanof.

                  STATEMENT OF MARJORIE KANOF

    Dr. Kanof. Mr. Chairman, Mr. Davis, and members of the 
committee, I am also pleased to be here with you today as you 
explore recent regulatory actions of CMS related to the 
Medicaid program and the potential impacts of these actions on 
patients, providers, and States. I think we have heard several 
examples of this this morning.
    Medicaid fulfills a crucial role in providing health 
coverage for a variety of vulnerable populations, but ensuring 
the program's long-term sustainability is critically important.
    Starting in the early 1990's and as recently as 2004, we 
and others identified inappropriate Medicaid financing 
arrangements in some States. These arrangements often involved 
supplemental payments made to government providers that were 
separate from and in addition to those made at a State's 
typical Medicaid payment rates.
    In March 2007, we reported on a CMS initiative that was 
started in 2003 to end these inappropriate arrangements. My 
remarks today will focus on Medicaid financing arrangements 
involving supplemental payments to government providers. I will 
discuss our findings on these financial arrangements, including 
their implications for the fiscal integrity of the Medicaid 
program and on CMS' initiative begun in 2003 to end these.
    In summary, for more than a decade we and others have 
reported on financing arrangements that inappropriately 
increased Federal Medicaid matching payments. In these 
arrangements, States received Federal matching funds by paying 
certain government providers, such as county-owned or-operated 
nursing homes, amounts that greatly exceeded Medicaid rates. In 
reality, the large payments were often temporary, since States 
could require the government providers to return all or most of 
the money back to the States.
    States could use these Federal matching funds received in 
making these payments, which essentially made a round trip from 
the State to the provider and back to the State, at their own 
discretion. Such financing arrangements have significant fiscal 
implications for the Federal Government and the States. The 
exact amount of additional Federal Medicaid funds generated 
through these arrangements is unknown, but it is estimated that 
it was billions of dollars.
    Despite congressional and CMS action taken to limit such 
arrangements, we have found, even in recent years, that 
improved Federal oversight was still needed.
    Because they effectively increased the Federal Medicaid 
share above what is established by law, these arrangements 
threaten the fiscal integrity of Medicaid's Federal and State 
partnership. They shift costs inappropriately from the State to 
the Federal Government and take funding intended for covered 
Medicare costs from providers who do not under these 
arrangements retain the full payment.
    The consequences of this arrangement are illustrated in one 
State's arrangement in 2004 which increased Federal 
expenditures without a commensurate increase in State spending. 
The State made a $41 million supplemental payment to a local 
government hospital. Under its Medicaid matching formula, the 
State paid $10.5 million, CMS paid $30.5 million as the Federal 
share of a supplemental payment. After receiving the 
supplemental payment, however, in a very short time the 
hospital transferred back to the State approximately $39 
million of the $41 million payment, retaining just $2 million.
    This March we reported on CMS' initiative to more closely 
review State financing arrangements through their State plan 
amendment process. From August 2003, to August 2006, 29 States 
ended one or more arrangements for financing supplemental 
payments because providers were not retaining the Medicaid 
payment for which States had received Federal matching funds.
    We found CMS' action to be consistent with Medicaid payment 
principles that payment for services is consistent with 
efficiency and economy. We also found, however, that the 
initiative lacked transparency, and that CMS had not issued any 
written guidance about the specific approval standards.
    When we contacted 29 States, only 8 reported receiving any 
written guidance or clarification from CMS. State officials 
told us it was not always clear what financing arrangements 
were allowed and why arrangements were approved or not 
approved. This lack of transparency raised questions about the 
consistency with which States had been treated in ending their 
financial arrangements.
    We recommended that CMS issue guidance about allowable 
financial arrangements.
    In conclusion, as the Nation's health care safety net, the 
Medicaid program is of critical importance to beneficiaries and 
providers. The Federal Government and States have a 
responsibility to administer the program in a manner that 
ensures expenditures benefit those low-income people for whom 
benefits were intended.
    Congress and CMS have taken important steps to improve the 
financial management of Medicaid, yet more can be done to 
ensure the accountability and fiscal integrity of the Medicaid 
program.
    Mr. Chairman, this concludes my statement. I will be happy 
to answer questions.
    [The prepared statement of Dr. Kanof follows:]

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    
    Chairman Waxman. Thank you very much. I want to thank all 
of the witnesses for your presentation. You have given us 
excellent, excellent information to think about as we look at 
this issue.
    We are now going to proceed to questions by the members of 
the committee in 5 minute intervals. I will start with myself.
    Dr. Kanof, as you know, one of the proposed rules issued by 
CMS would limit Medicaid payments to public hospitals to the 
direct cost of serving each Medicaid beneficiary. No payment 
would be allowed for the indirect cost that might be part of 
running the hospital, say, for example, the losses that the 
hospital might incur for emergency rooms, burn units, or trauma 
care. Has the GAO supported a policy of Medicaid payment for 
direct costs, alone?
    Dr. Kanof. No. In fact, we have, though, supported a 
recommendation made to Congress in both 1994 and repeated in 
2004 that costs should be limited to cost, but have never 
defined what is in that cost, what is direct or what is 
indirect.
    Chairman Waxman. In 1994, though, you said Congress should 
enact legislation.
    Dr. Kanof. We did, and, in fact, we did that because in 
comments that we received from HCFA at that time they indicated 
that they could not do this without congressional legislation, 
and, in fact, in 2005 the President's budget proposal actually 
requested legislation for this.
    Chairman Waxman. So would it be inaccurate for CMS to imply 
that GAO supports the proposed cost rule?
    Dr. Kanof. I think you have an interesting question you are 
asking me. GAO definitely recommends cost, but GAO has not 
commented what should be in that cost.
    Chairman Waxman. You recommend legislation. I know that you 
also know a great deal about the Medicare program. Does 
Medicare include direct and indirect costs within its payment 
system?
    Dr. Kanof. Yes. That is sort of a fundamental of how 
Medicare pays its providers.
    Chairman Waxman. Thank you. It has been one of the 
fundamental ways Medicaid has paid its providers, as well.
    Dr. Gardner, last week southern California suffered from a 
terrible disaster with devastating fires, and during this 
calendar year we have seen other problems such as the recent 
bridge collapse in Minneapolis. Communities relied on public 
teaching hospitals to provide critical emergency, trauma, and 
burn care. In the major cities of our country public hospitals 
provide nearly half of all level one trauma services and two-
thirds of burn care beds. Are you concerned that the rules 
proposed by CMS will damage our communities' ability to manage 
the next natural disaster or public health emergency?
    Dr. Gardner. Absolutely. I cannot be more clear that we 
have no surge capacity. As demonstrated in Los Angeles and in 
the counties surrounding San Diego, dealing with a catastrophe 
is a problem for them. They have seen the closure of six 
hospitals with emergency departments in the last several years. 
Had this catastrophe been worse, they would not have been able 
to deal with those patients. And there is nowhere else for them 
to go.
    Chairman Waxman. Well, one out of five hospitalized 
patients received care in a public hospital, one out of four 
babies is born in a public hospital, and one out of five ER 
patients receive care at a public hospital. Given this volume 
of services, will other hospitals be able to fill the void if 
public hospitals are forced to close beds or curtail services 
due to the CMS regulations?
    Dr. Gardner. No, sir. The private hospitals are in much the 
same shape as the public hospitals. There is no bed capacity. 
There aren't nurses. There aren't specialists. There isn't room 
anywhere for any overflow of the system. There will be nowhere 
for these patients to go.
    Chairman Waxman. We all know public and teaching hospitals 
operate emergency rooms, trauma centers, burn units, and 
sophisticated ICUs, but these hospitals also manage large 
outpatient clinics that keep community members healthy and out 
of the hospital. Today in our major cities over one-third of 
patients who need outpatient care receive it at a public 
hospital clinic. If CMS implements the proposed rules and 
public hospitals are forced to curtail these outpatient 
services or close these clinics, what options will these 
patients have to receive care?
    Dr. Gardner. Well, sir, as you know, regulations require 
that the emergency department stabilize and see any patients 
who present to our doorways, and my presumption is that those 
patients will show up in the emergency department and we will 
see them.
    And if I could just take 2 seconds to dispel a common myth, 
there is a myth out there that our emergency departments are 
overrun by patients who don't need to be seen in the emergency 
department, but our recent research shows that 70 percent of 
the people who come to see us need to be seen within 2 hours, 
and 15.3 percent of those need to be seen within 15 minutes. So 
we will be adding clinic patients to an already overburdened 
system.
    Chairman Waxman. Thank you.
    Mr. Aviles. Mr. Chairman, I would just add, as well, that 
this highlights the extent to which this can be viewed as penny 
wise and pound foolish. To the extent that you strip out----
    Chairman Waxman. I thank you for that, but I have one last 
question. You can see the red light, so my time is going to be 
up if I don't ask my last question of Ms. Herrmann.
    The President says he wants to make sure that the low-
income children are covered under Medicaid and S-CHIP. Now, 
Medicaid, of course, covers the poorest of the poor children. 
What would happen if you had the school nursing program made 
ineligible for treating some of these Medicaid patients?
    Ms. Herrmann. Thank you for your question. We see every day 
I would rather be a poor child because I am going to get 
Medicaid. If I am a little bit poor but not poor enough for 
Medicaid and I have diabetes, I have asthma, I have a broken 
arm, I have a bad respiratory virus, those children are not 
going to get seen. They are going to be delayed in treatment. 
What happens is that then----
    Chairman Waxman. Well, they won't even be in Medicaid, 
because you would enroll them in Medicaid.
    Ms. Herrmann. No. That is right.
    Chairman Waxman. If they are not in Medicaid and they have 
asthma, you can't even give them the services that they need.
    Ms. Herrmann. Exactly.
    Chairman Waxman. Thank you very much.
    Ms. Herrmann. Exactly.
    Chairman Waxman. I don't want to exceed the time. That red 
light is staring at me. But thank you very much for your 
answer. Maybe there will be further questions.
    Mr. Davis.
    Mr. Davis of Virginia. We will have some time later, but I 
want to get through this panel. Thank all of you for coming. I 
have to start with Dr. Retchin. He is from my State and he has 
been here before, and we very much appreciate your being here.
    Your written testimony quotes the proposed rule in which 
the CMS points out that the Federal Government does not know or 
track which States are making GME payments, the amounts States 
are spending, or the total number of hospitals receiving such 
payments. Given that, what is the answer? Should it be paid 
through Medicaid? Should it be better tracked and overseen from 
us?
    Dr. Retchin. Well, I think it is an excellent question. I 
am all for a better monitoring system, a better tracking 
system. I think CMS first has to realize these are legitimate 
costs. I mean, I think in part it could be obfuscation that if 
we can't track it then we can't pay it. That is illogical to 
me. In this case I think it is incredibly important for CMS to 
recognize the historical tradition of the payment itself, track 
it legitimately, and continue the payment for GME.
    Mr. Davis of Virginia. What part of GME payments or what 
part of--if you didn't have that coming, you are an urban 
hospital, you have a lot of people who can't pay that are 
presenting themselves at the door.
    Dr. Retchin. Well, if you combine the direct and the 
indirect, it is a substantial portion. I would venture to say 
it could be as much as 10 percent of our total revenues.
    The direct payment for graduate medical education is a 
substantial portion of our direct payments for graduate medical 
education. The other portion is only Medicare.
    Mr. Davis of Virginia. And the same would apply to New 
York, I am sure.
    I want to get to Dr. Kanof for a couple of minutes.
    How does the inappropriate maximization of Federal Medicaid 
reimbursement impact the financial integrity of the program? 
Does this have implications for Medicaid beneficiaries? Are we 
merely moving costs from the Federal to the State? I mean, what 
is your overview of that?
    Dr. Kanof. Well, in fact, what we have found and what we 
have reported is that the supplemental payments can undermine 
the fiscal integrity of the Medicaid Federal-State partnership, 
and we have looked at this and summarized it in three ways. 
They clearly, effectively increase, as I spoke about the 
Federal matching rate established under statute. They allow 
States to use Federal Medicaid funds for non-Medicaid purposes. 
And they enable States to make payments to government providers 
that significantly exceed their costs.
    While we have not specifically looked at the impact that 
this would have on Medicaid beneficiaries, a natural extension 
would be that if there are funds that are in the Medicaid 
program that are going to the States and then being returned to 
the States and not used for Medicaid, this would, in fact, harm 
a beneficiary.
    In fact, the HHS IG found that, in fact, there were 
Medicaid funds that were going to an institution. The 
institution had returned these funds to the State, and then the 
State Department of Health and Human Service actually put the 
provider in jeopardy for not providing quality care to the 
beneficiaries.
    Mr. Davis of Virginia. Let me followup on my earlier 
question. Is the GAO aware of any examples of concerns 
regarding Medicaid payments for school-based administration 
that may speak to the need for greater accountability or 
oversight in that area?
    Dr. Kanof. We have not examined this issue in great detail. 
Two years ago we looked at contingency fee payments, and in 
Georgia we found that, in fact, there were funds that have been 
directed to the State for State programs and they had 
specifically gone back into the State and not been used for 
education purposes. In reviewing that, we determined that there 
needed to be better guidance to ensure accountability of these 
funds.
    Mr. Davis of Virginia. Dr. Gardner, as it relates to 
uncompensated care, will government-operated facilities still 
have access to the dish payments which are meant to address 
caring for the uninsured?
    Dr. Gardner. I am not sure that I am adequately prepared to 
answer that question at this time. I can get back to you.
    Mr. Davis of Virginia. If you would try to get back to us, 
just for the record, that would be helpful to us.
    Dr. Gardner. All right.
    [The information referred to follows:]

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    
    Mr. Davis of Virginia. Mr. Aviles, some of the quotes in 
your written testimony speak to a very broad list of services 
that hospitals would purportedly have to discontinue under the 
proposed cost limit rule. I understand that you are challenging 
the CMS' estimate of the impact of the rule. For argument's 
purposes, if the impact was twice as large as CMS estimates, it 
still would be less than 1 percent change in Federal Medicaid 
spending. Can you talk to the magnitude of this change from 
your perspective?
    Mr. Aviles. It may be 1 percent in the aggregate, 
Congressman, but, in fact, NAPH members constitute 2 percent of 
the hospitals in this country, and we cover 25 percent of the 
uncompensated care. These regulations are directed at the 
public hospitals in the country, and therefore the impact is 
concentrated there.
    As I mentioned in my testimony, just for us the impact 
would be about 4 percent of our budget on the cost limit 
regulation alone. All three regulations together aggregate to 
closer to 9 percent of our budget, or in the range of $400 to 
$500 million.
    Others of our members in California, for example, the 
estimates are in excess of $500 million, in Florida in excess 
of $900 million, and in Tennessee and North Carolina and 
Georgia it is a combined impact of $800 million on an annual 
basis for the cost limit regulation, alone. That necessarily 
would devastate our ability to deliver services.
    Mr. Davis of Virginia. Thank you.
    Chairman Waxman. Thank you, Mr. Davis.
    We are being called to the House floor for a series of 
three votes. We are going to take a recess and come back at 10 
minutes to 12:00--I think that would be a good prediction of 
time--to complete the questions for this panel.
    Thank you.
    We stand in recess.
    [Recess.]
    Chairman Waxman. The hearing of the committee will please 
come back to order.
    Mr. Cummings.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    First of all I want to thank all of our witnesses for your 
testimony. I thank you for bringing and presenting a face for 
the people who are affected by these proposals.
    I also want to say to Ms. Miller, I want to thank you for 
your testimony. As a fellow Marylander, I am very, very, very 
proud of you. Thank you so very much for taking your story and 
bringing it to us. I really appreciate that, too.
    Dr. Gardner, please do not ever apologize for your passion. 
We are talking about the lives of human beings. We are talking 
about life and death situations.
    To all of you, I thank you for your passion.
    It seems, Mr. Chairman, that we are currently engaged in a 
very public debate over the future of S-CHIP, which covers 6 
million children and potentially will cover 4 million more. But 
today, after listening to this testimony, I am concerned that, 
while we wrangle over that program in the press, CMS has 
launched a systematic attack on Medicaid which serves 60 
million people, 28 million of them children, behind our backs 
and in their suites.
    Your testimonies highlight how vitally important it is that 
we shed a light on these ill-advised proposed regulations. Left 
to their own devices, it appears that CMS will leave our most 
vulnerable citizens--that is, the poor, the sick, the disabled, 
and the elderly--far, far behind, if not left out completely.
    Mr. Chairman, that is not the American way. As I listened 
to some of this testimony, I must tell you that if I closed my 
eyes I had to wonder whether or not we were still in America.
    America has gained its moral authority by the way it treats 
its people, not by military might. It may have been backed up 
by military might, but the way we treat every single American. 
This is not a matter of fiscal responsibility. I have concluded 
it is a matter of moral irresponsibility.
    Are we so morally bankrupt that we are willing to 
shortchange life and death services?
    That leads me to you, Mr. Parrella. I want to thank you for 
your testimony. You testified that you worked in Medicaid for 
the past 20 years. In your experience, is there any precedent 
for what CMS is doing with the six proposals we are discussing 
today? Has the Federal Medicaid agency ever proposed a set of 
Federal rules that would shift $11 billion in costs from the 
Federal Government to the States?
    Mr. Parrella. Thank you for that question, Mr. Cummings.
    I am not aware of a regulatory initiative that would have 
an impact of this magnitude that we have experienced.
    Mr. Cummings. And I take it from your testimony that the 
State Medicaid directors, the managers like you who actually 
run the program on a day to day basis, I guess you all oppose 
each of these six CMS proposals we are discussing today. And is 
that opposition bipartisan?
    Mr. Parrella. Our organization----
    Mr. Cummings. First of all, are you opposed?
    Mr. Parrella. I am, sir.
    Mr. Cummings. All right. And is that the view of your 
organization?
    Mr. Parrella. It is, sir.
    Mr. Cummings. It is a bipartisan organization?
    Mr. Parrella. It is, sir.
    Mr. Cummings. Do you all have opportunities to express your 
concerns to the folk who sit in the suites making these 
decisions affecting people's lives on a day to day basis?
    Mr. Parrella. We do.
    Mr. Cummings. And how do you do that? How do you go about 
doing that?
    Mr. Parrella. CMS is very good about meeting with us on at 
least a quarterly basis. We have direct access to Mr. Smith. In 
terms of the regulations that are issued, we provide written 
comments.
    Mr. Cummings. I always find these hearings fascinating 
because we hear your stories and, having been here 11 years, 
the fascinating part is we will hear the story from CMS in a 
few minutes. They will probably say--well, Mr. Smith has 
already said in his written testimony, ``These rules will 
provide for greater stability in the Medicaid program and 
equity among States.'' Do you agree with that statement?
    Mr. Parrella. I do not. I am sympathetic to the task that 
Mr. Smith and CMS have in that it is their responsibility to 
maintain program integrity, and part of program integrity is to 
hold the States accountable for the State share that they 
provide for Medicaid. So to the extent that these regulations 
were an attempt to correct any practices historically which 
have shifted inappropriately responsibility to the Federal 
Government from the States, I understand and support what Mr. 
Smith is doing. However, I think what these regulations do is 
they go far beyond that in terms of the impact that they are 
having on the kind of public providers and recipients who are 
here who benefit from these programs. I think that is the 
reason why we are in opposition.
    Mr. Cummings. I see my time is up. Thank you, Mr. Chairman.
    Chairman Waxman. Thank you, Mr. Cummings.
    Mr. Davis.
    Mr. Davis of Illinois. Thank you very much, Mr. Chairman. I 
want to thank you for holding this hearing. As a matter of 
fact, I represent a District that has more than 25 hospitals, 4 
medical schools, 30 community health centers. As a matter of 
fact, we are, indeed, a health mecca, and so you can imagine 
that these proposed rules frighten me to death. As a matter of 
fact, every time I think about them I shake in my boots in 
terms of the devastating impact that they could have, because 
we also care for people from not only in our State but we care 
for many people from all over the country and, indeed, from all 
over the world. So I thank all of you for your testimony.
    Let me just ask you, Mr. Aviles, the Senate Finance 
Committee recently confirmed Mr. Kerry Weems as the CMS 
administrator, and in response to questions submitted by the 
committee as it considered its nomination he made the following 
statement. He said, ``I appreciate that Medicaid is a vitally 
important program that serves very vulnerable populations. I am 
concerned that the perception that this Medicaid rule is 
intended to harm public providers. In fact, I understand it to 
protect public providers. Governmentally operated health care 
providers are assured the opportunity to receive full cost 
reimbursement for serving Medicaid-eligible individuals instead 
of being pressured to return some payment to the State.''
    It sounds like Administrator Weems believes that CMS is 
doing safety net hospitals like those in New York and like the 
three that I represent in my District in Chicago a favor by 
proposing these rules. Do you agree?
    Mr. Aviles. Absolutely not, Congressman. As I have 
mentioned before, the cumulative impact on these regulations is 
a massive cut in funding to our public hospitals across the 
country.
    The argument that it does us a favor by limiting our 
reimbursement to actual cost really turns a blind eye to the 
role that public hospitals play across the country. Those costs 
that we incur include the cost of running our trauma services, 
include the cost of running those burn beds.
    As you have heard, our members in communities across this 
country on average provide 50 percent of the trauma services, 
provide two-thirds of the burn beds.
    If you are in Miami and you need trauma services, the only 
place you are going to get those trauma services is in a public 
hospital. If you are in Los Angeles, CA, or Columbus, OH, the 
only place you are going to get specialized burn bed treatment 
is in a public hospital.
    So those costs need to be borne, and historically have been 
borne through supplemental Medicaid payments that recognize 
that is an essential part of the mission and role of public 
hospitals in this country.
    Mr. Davis of Illinois. Well, on the next panel the CMS 
witness, Mr. Smith, will argue that his proposed rules will not 
have a negative impact on providers and that if the rules were 
to negatively affect providers--he said, ``It would be due to 
decisions made by State and/or local governments, not by CMS.''
    If CMS implements this rule, and Federal Medicaid payments 
are no longer available to public hospitals for costs not 
directly attributable to Medicaid patients, will the State of 
New York and the city of New York pick up the financial slack 
and cover the difference on their own? And what about other 
States and localities?
    Mr. Aviles. With all due respect, that statement is a lot 
like saying that if we eliminated the Federal share of Medicaid 
entirely the States could pick up the slack and therefore there 
would not necessarily be a negative impact.
    We are talking about a massive de-funding of public 
hospitals. As I have mentioned, in New York City, alone, the 
combined effect of these rules would be in the neighborhood of 
$400 to $450 million. It is inconceivable that we could 
continue to run the public hospital system we currently have in 
our city with that type of defunding. Quite frankly, neither 
New York state or other States around the country have the 
wherewithal to make up that massive amount of defunding.
    Mr. Davis of Illinois. My time is about to run out. Let me 
ask you, If the States and local governments can't pick it up, 
do you think that the private sector hospitals and health 
systems would now be able to pick up the slack?
    Mr. Aviles. Absolutely not. We know that in many areas of 
the country the emergency departments are absolutely crowded. 
Many hospitals, certainly in the northeast and elsewhere, 
struggle just to stay above water. We are talking about a 
public hospital system that provides 1.7 million hospital 
discharges each year and close to 30 million outpatient visits. 
The private sector simply could not make that up, does not have 
the excess capacity to do that.
    Mr. Davis of Illinois. Thank you very much, and thank you, 
Mr. Chairman.
    Chairman Waxman. Thank you very much, Mr. Davis.
    Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Let me begin by first thanking all of you for your 
testimony and for the many examples that you were able to give 
to highlight the fact that we are moving in the wrong 
direction.
    Let me ask, did any of you comment on the rules? Did any of 
you comment on the rule?
    [Panel members nodding affirmatively.]
    Mr. Towns. You did? All of you?
    [Panel members nodding affirmatively.]
    Mr. Towns. You know, in looking at the situation, it seems 
to be not a single person supported this rule, so I am 
wondering now if comments make a difference. If nobody 
supported it and, of course, here we are. Of course, you 
expressed your concerns, which I hear you. I am hoping that the 
agency will also hear you, as well.
    Let me ask you, Dr. Aviles, what would this do to the 
graduate medical education programs that we have in our 
hospitals?
    Mr. Aviles. This would be extraordinarily destabilizing to 
the graduate medical education across the country. There is a 
very close inter-weaving of graduate medical education and 
public hospitals. Of NAPH members, 85 percent are teaching 
hospitals. In New York City, HHC has nearly 2,400 residents 
being trained on any day of the week. So this is a central 
component of the infrastructure for academic medicine, and the 
training of physicians in our country. With projected physician 
shortages going into the future as the Baby Boom generation 
requires more services, and as we look around the country and 
see physician shortages even now, it is a very dangerous 
proposition, indeed.
    Mr. Towns. There is legislation being put forth by my 
colleague from New York, Elliott Engel. I would like to move 
down the line and ask you, in terms of your views, whether you 
support it or not, basically yes or no, starting with you, Ms. 
Miller, and coming all the way down the line, the Elliott Engel 
legislation. Are you familiar with it?
    Mr. Parrella. I am not, sir.
    Mr. Towns. You are not familiar with it? OK.
    Mr. Parrella. Is it a moratorium legislation?
    Mr. Towns. Yes. Let's go right down the line.
    Mr. Parrella. Extend the moratorium. We would be in favor 
of that, sir.
    Mr. Towns. You would be in favor. OK. Right down the line.
    Ms. Miller. Yes.
    Mr. Towns. Yes. Yes or no, basically.
    Ms. Costigan. Yes.
    Ms. Herrmann. Yes.
    Mr. Aviles. Yes.
    Dr. Retchin. Yes.
    Dr. Gardner. Yes.
    Dr. Kanof. I am not in a position to offer an opinion.
    Mr. Towns. OK. All right. So that is neither yes nor no. 
OK. I got it.
    Let me just say to you, do you think that legislation would 
really help the delaying it a year rather than dealing with it 
now?
    Mr. Parrella. Yes, it would help. This legislation would 
help us.
    Mr. Aviles. It would help. We obviously would welcome a 
more permanent solution that would not require us to come back 
yet again, but certainly, given the alternatives, we would 
welcome a further moratorium.
    Mr. Towns. Do any others have any comments as to what this 
would do to your facility if these cuts go forward, as to what 
it would do to your facility in terms of if we do not rectify 
this?
    Ms. Costigan. We run an adoption program at Intermountain 
in Helena and Great Falls, MT. If this rehab rule stays the way 
it is, we would potentially lose that program. We have served 
over 100 SED kids, and we have found permanent homes for many 
of them, and we have kept them in permanent homes. We have a 73 
percent success rate. The program would be gone.
    Mr. Towns. Thank you.
    Ms. Herrmann. The Medicaid administrative claiming dollars 
that come back to school districts and programs, once that is 
gone the program is gone. That is it. Everything will be. So 
school nursing positions, social worker positions, preventive 
care--all of those kinds of things would be gone and we 
wouldn't be able to enroll or help kids with eligibility.
    Mr. Aviles. These funds help to subsidize the extraordinary 
cost of running six trauma centers in New York City, as well as 
our high-level neonatal intensive care units. All of those 
types of services would absolutely be endangered by this level 
of cuts.
    Dr. Retchin. The cuts as they stand in the proposed rules 
taken together would be absolutely devastating for our teaching 
hospital.
    A few years back we were actually on the cover of the Wall 
Street Journal because a cancer patient from a distant part of 
the State could not receive chemotherapy where he was, and he 
traveled about 150 miles to MCB hospitals where he got 
chemotherapy and treatment for his cancer and actually went 
into remission and survived. Those are the kind of programs at 
a cancer center like that we would have to reconsider. These 
would be devastating in terms of the consequences.
    Dr. Gardner. If I am allowed, I will have a short, two-part 
answer. One is that Texas is 51st already in administration of 
Medicaid, and we have 50 percent of our children and 30 percent 
of our adults who are also uninsured. We have research that 
says that over 20 percent of the adults and 25 percent of the 
children reported that they needed to see a doctor in the past 
2 years and could not do so. This will certainly not improve 
that.
    Mr. Towns. Thank you very much, Mr. Chairman. You have been 
very generous with the time. Thank you. I appreciate it.
    Chairman Waxman. Thank you, Mr. Towns.
    Ms. Watson.
    Ms. Watson. I really want to thank the Chair for holding 
this hearing. I think this is one of the more important issues 
that we have brought out to the public, and I want the public 
to listen closely.
    If all the new regulations were to be implemented, Federal 
Medicaid funds to States would be cut over $11 billion over the 
next 5 years. This loss in funding would be detrimental to the 
program and its recipients and would cause States to roll back 
valuable services that poor and low-income families would need 
and otherwise would not be able to afford.
    I represent the State of California. We are the first State 
in the Union to be a majority of minorities. We get a lot of 
people coming from over the Pacific Ocean, southeast Asia, over 
the border, and so on, with tremendous health needs. Where do 
they go? They go to emergency.
    We just lost one of our public hospitals because the 
funding was cut back, Martin Luther King down in Watts. I think 
all of you are aware of that. I heard someone on the panel 
mention the dish hospitals. Let me tell you, in the same area 
there is St. Francis, a Catholic hospital. They can't take 
another patient. The dish hospitals are under-funded.
    We are going to see more cases of people dying in the 
emergency room. We don't have an emergency room at King 
Hospital, as many of you know.
    I am a teacher, worked in the District, so I want to direct 
this question to Ms. Herrmann. I believe that you have answered 
most of my questions. What would happen in our schools? I think 
the worst thing we do in our districts--we have 1,100 of them 
in California--is cut out the daily nurse. We don't even see 
the doctors.
    So in his testimony, Mr. Smith for the next panel--he is 
the CMS witness--will defend this proposal rule on the grounds 
that there has been improper billing under the Medicaid 
program--In California we have our own. It is called MediCal--
by school districts for administrative costs and transportation 
services. There is no over-billing, because in a State as large 
as ours, the largest one in the Union, you are going to have to 
have an administration, you are going to have those costs.
    I want to ask Ms. Herrmann, does your school district 
improperly bill your State's Medicaid program for the cost of 
your services? Or are there administrative costs? And even if 
there had been abuses in other school districts, is this rule a 
common-sense solution to the problem?
    Ms. Herrmann. No, we do not improperly bill Medicaid, and I 
can't imagine any school district would knowingly and 
intentionally try to defraud the Medicaid program.
    I forgot the second part of your question. I am sorry.
    Ms. Watson. That is all right. I think you have answered it 
all.
    Ms. Herrmann. Thank you.
    Ms. Watson. It was a comprehensive question. But my second 
part was, Is this rule a solution?
    Ms. Herrmann. No, this rule is not the solution. Children 
will lose out and school districts will lose out because we 
will not be able to enroll them or assist to enroll them in 
Medicaid.
    Ms. Watson. And I am so pleased that I still see the green 
light. Mr. Chairman and Members, we are being asked again to 
fund a war over in Iraq. Soon it will be $1 trillion. And we 
are going to cutoff health care to the poorest and most 
deserving children in our Nation? It doesn't make any sense, 
and I am going to say for all of you to hear I will not cast a 
vote for another penny in Iraq if this rule goes through and we 
cutoff the services to our children and our schools and we 
cutoff the services in our county hospitals and we close the 
county hospitals by pulling back on the funds, as has happened 
to us in L.A. County, the largest county in the State of 
California. It doesn't make sense.
    If we are talking about protecting our homeland, it is not 
about the land, it is about the people on the land, and if we 
can't provide those services we ought to go out of business.
    Thank you, Mr. Chairman, for the time. I yield back.
    Chairman Waxman. Thank you, Ms. Watson.
    Mr. Higgins.
    Mr. Higgins. Thank you, Mr. Chairman. I have no questions, 
but more of just to thank the panel for being here. Most of the 
questions I had have been asked and answered. We appreciate 
very much your being here, because in making policy or 
challenging this administrative policy it is fundamentally 
important for us to know what the impact is going to be on the 
ground, whether it is graduate medical education and the impact 
to public hospitals and their ability to deliver services, be 
they at hospitals or clinics throughout the communities, are 
very, very important. I want to assure you that we are here to 
ensure that nothing is done that is going to have a detrimental 
impact relative to service delivery at a time when we should be 
providing more health care, not less, particularly to those who 
are most vulnerable in our community.
    Your presence here and the chairman's presentation of this 
hearing is fundamentally important toward shaping policy moving 
forward, and I thank you for being here.
    Thank you, Mr. Chairman.
    Chairman Waxman. Thank you, Mr. Higgins.
    Mr. Murphy.
    Mr. Murphy. Thank you very much, Mr. Chairman. I would like 
to especially thank Mr. Parrella for joining us today. He has 
served incredibly ably as the director of Medicaid Services in 
my own State of Connecticut. I got to serve 8 years on the 
Public Health Committee, 4 of those years chairing it, working 
together on a number of issues there.
    Mr. Parrella, I wanted to give you the opportunity to 
expand upon I think an important point in your testimony, which 
is that much of the rationale for these rule changes seems to 
be the contention from the administration that Medicaid was 
never supposed to cover these services in the first place. For 
someone that has only worked in this field for 10 years, even 
for me that contention seems incredibly wrong-headed. Your 
experience is much deeper and broader, and I would like you to 
just expand a little bit on the response, for those of us, when 
the administration tells us that the reason for these changes 
is simply because Medicaid was never supposed to cover it in 
the first place, and the corollary argument from the 
administration that there is other money out there to cover the 
services that they are cutting.
    Mr. Parrella. Thank you, Congressman. It is a great 
pleasure to refer to you as Congressman Murphy in an official 
setting.
    There are many examples you could find, but I think a best 
example is in the schools, in particular. I think some of the 
opposition comes from the sense that school business is the 
business appropriately of the Department of Education, that 
Medicaid should not cross that line. I think that we all know 
that Medicaid does cross that line because many of the children 
in schools receive services through special education.
    There is a Federal mandate for special education services 
through the IDEA, the Federal Act for special education. IDEA 
does not come close to funding the full cost of the medical 
portion of special education services that States and cities 
provide. So Medicaid was actually directed by Congress in the 
Medicare Catastrophic Act back in 1988 to participate in paying 
for special education services that were medical in nature.
    So we have had direction at various times in the past to be 
intimately involved in payment for services through the 
schools, so it does appear to be something of a retrenchment or 
a revisiting philosophically to say that, for the purposes of 
promoting program integrity, there are going to be areas like 
school education, like graduate medical education where 
Medicaid does not have a role.
    On the graduate medical education issue, Medicaid does have 
a role because we have a great vested interest in training 
doctors who will continue to serve the low-income population. 
So if you were to take a strict constructionist view and say 
that education at large is not part of Medicaid, that argument 
might hold some ground in a pure philosophical sense, but in 
the real world where States are simply not going to be able to 
replace the kind of funds, as Mr. Aviles said, for special 
education or graduate medical education, to take Medicaid out 
of the equation without some kind of supplemental Federal 
program to take its place is simply not realistic.
    Mr. Murphy. Thank you very much, Mr. Parrella.
    Ms. Costigan, I just want to talk to you for 1 second about 
foster care. One of the proposed regulations would, as I 
understand it, require therapeutic foster care homes to 
unbundle their services in how they bill for those services, 
creating, at least at first view, a whole new level of 
bureaucracy for families that are looking to take on some 
pretty difficult and emotionally complex children.
    What do you think the effect of that proposed regulation is 
going to be on efforts of States that are already difficult, as 
it is, to try to get parents to come into the therapeutic 
foster home system?
    Ms. Costigan. I think it will be very destructive to any 
recruitment efforts. I also think that our agencies will not 
have the ability to track everything by 15-minute increments, 
especially when what we are talking about is giving kids back a 
social life, giving them skills to be able to have a friend and 
keep a friend and be a friend. I think this Medicaid rule will 
eliminate the support that therapeutic foster parents need, and 
if we want permanent homes for our kids, which is one of the 
things that Intermountain is very interested in is permanent 
homes for seriously emotionally disturbed kids, we deal with 
therapeutic adoptive care, but we fall under therapeutic foster 
care.
    If we want these homes for these kids, we have to be 
willing to support them and to help them to help the child 
grow.
    Mr. Murphy. Thank you very much, Ms. Costigan.
    Thank you, Mr. Chairman, for holding this very important 
hearing.
    Chairman Waxman. Thank you very much, Mr. Murphy.
    Mr. Hodes.
    Mr. Hodes. Thank you, Mr. Chairman.
    I thank the panel for coming today. I am a co-sponsor of 
H.R. 3533, and I really appreciate the opportunity to have you 
here today to highlight this critical issue.
    I want to thank Mr. Cummings for his remarks, which I 
associate myself with. Like Mr. Cummings, I have been gravely 
concerned about what seems to be this administration's 
undeclared war on children and the poor under the Orwellian 
guise of a claim of fiscal responsibility. It is not what this 
country is about.
    I am wearing a pin which says Article I on it. The Article 
I initiative is a new initiative by the Democratic Members of 
the Class of 2006 to help the people in this country understand 
that checks and balances are vital in our system of Government, 
and this oversight hearing is one prime example of a check and 
a balance in a system where the administration seems to believe 
that it makes the law and not Congress.
    We will not be silent on this issue.
    In my home State of New Hampshire we have one large 
teaching hospital, Dartmouth Hitchcock Medical Center in 
Lebanon, NH, in association with Dartmouth College. It really 
is the sole teaching hospital there.
    I want to focus for a moment on the graduate medical 
education issues. I understand that a recent report by the 
Agency of Health Care Research and Quality, which is a sister 
agency to CMS, found that teaching hospitals have a terrible 
patient revenue margin. In fact, they are losing almost $0.10 
on the dollar.
    Dr. Retchin, would you simply explain why this is so. Why 
do they lose money? And how do you make up the difference?
    Dr. Retchin. Well, the old joke you make it up on volume 
probably doesn't apply here.
    The teaching hospitals are at a disadvantage from the start 
all the way to the finish line because they have so many 
missions, so they are asked to be the tertiary referral 
centers, the cutting edge for technology and development of new 
research, new therapeutics. They are asked to supply tomorrow's 
work force for health care workers, not only physicians but 
nurses, physical therapists, pharmacists, occupational 
therapists. And then they are asked, after all of that, to be a 
safety net in the partnership for taking care of the 
disadvantaged.
    So it should be no surprise that all of these missions 
require funding, and they all require subsidization, so the 
cross-funding of these is very difficult. I can tell you the 
safety net care generates no margins to subsidize either 
education or research, so all of these have to pay for 
themselves, and some fall by the wayside. They have to give up 
or compromise on one of those missions. It has to be research, 
education, and, as a last resort, patient care. They can't make 
it up. That is the answer.
    Mr. Hodes. Dr. Retchin, CMS says that its proposed rule 
eliminating Medicaid GME would ``clarify that costs and 
payments associated with graduate medical education programs 
are not payments for medical assistance that are reimbursable 
under the Medicaid program.''
    Do you agree with the CMS characterization that their 
proposed rule is a ``clarification?''
    Dr. Retchin. Well, after 20 years of approving the State 
plans for GME payments, after more than two decades of not only 
approving State payments but actually making the payments and 
sharing, this has been a great Federal-State partnership. It 
seems unusually convenient to come to the conclusion that this 
is merely a clarification. It took a long time to clarify.
    I think that everybody has skin in the game. We all have to 
train the work force of tomorrow. Here you have a Federal-State 
partnership, so it seems unusual, as one way to cut this, to 
make it merely a technical clarification.
    Mr. Hodes. Well, if the rule goes through, why can't the 
States simply step in and pick up the slack? And if they can't, 
what will happen if they don't? What will happen to training 
the Nation's doctors? What will happen, for instance, in your 
hospital on emergency care and disaster preparedness?
    Dr. Retchin. All of these have to be compromised. You know, 
it is sort of funny about this, because if you look at the 47 
States that actually have GME payments through Medicaid, most 
of those States, if not all, have balanced budget amendments. 
They are the ones that have to ride out the business cycles and 
yet continue year after year to make these payments and make a 
commitment to funding the most disadvantaged in our society.
    You would think actually it would be the Federal Government 
that would actually be saying to the States, You need to make 
these payments because we are concerned about the work force. 
It is just odd that it is the other way around.
    So the States will not be able to make this up. I hope some 
of the States would continue their portion, because, like I 
said, they both have skin in the game, but they won't be able 
to make up the defunding of the Federal portion. Can't happen.
    Mr. Hodes. Thank you.
    I yield back.
    Chairman Waxman. Thank you, Mr. Hodes.
    Mr. Shays.
    Mr. Shays. Thank you, Mr. Chairman. Again, thank you for 
having this hearing.
    I sometimes find, when everything is weighted one way, I 
want to bring some balance, even if I may not feel as strongly 
about that as I do. But in this case I am looking at 
administrative changes that change not 10 percent, not 1 
percent, but 9/10ths of 1 percent, so I am hard-pressed to know 
how terrible things are going to happen.
    We are talking about one thousand two hundred billion [sic] 
dollars of money spent and $11 billion in alterations over 5 
years. That is tiny times 10, so I don't want to blow this 
whole hearing out of proportion.
    With regard to the GAO, GAO has looked at a number of 
financing arrangements with Medicaid. In your experience, how 
does the joint nature of Medicaid program, joint Federal-State, 
50/50, incentivize inappropriate financing arrangements?
    Dr. Kanof. Well, it does it in several ways. Clearly, one 
way is as was mentioned this morning, earlier today, through 
the supplemental payments that can be excessively large and 
then can be transferred back from a provider to the State 
because there is an inter-government transfer allowed and there 
is an excessive amount of money now returned to the State. It 
allows this in that the payments are now not to the providers, 
because they have not rendered these services for this payment, 
and it creates tension in that it increases the Federal match 
to the State.
    Mr. Shays. In other words, what we have found in my 20 
years here, and that is why we looked at this issue in 1997, 
what we did in the late 1990's was, with President Clinton's 
support, we balanced the Federal budget. We pretty much allowed 
discretionary spending to go up 1 percent, slowed entitlements 
for 1 year alone by a few percentage points--not 9/10ths of 1 
percent--and we balanced the budget. That is what we did, 
Democrats and Republicans.
    Here we are talking about an $11 billion savings over $1.2 
trillion, and it is clear--all of us know this on this side, 
not there--that a smart State looks to take 100 percent of its 
costs, and if it can transfer it to Medicaid it now only has 50 
percent and now the Federal Government picks up the other 50 
percent. That is the incentive, isn't that true?
    Dr. Kanof. Without appropriate safeguards, those are the 
incentives.
    Mr. Shays. Absolutely. Now, I am very proud of how our 
State operates. I am also proud of our State's ingenuity. Mr. 
Parrella, I think that you get rewarded if you find ways to 
increase programs and reduce the State's costs, and if I were 
Governor I would want to make sure you did that every time. And 
if I was on that side of the table I would be arguing for it 
every time.
    But I am not on that side of the table. Medicare is going 
up $16 billion from last year to this year's budget, $17 
billion next, $18 billion the year after, $19 billion the year 
after, $21 billion the year after. It is not like the Federal 
Government isn't invested in this program, isn't that clear?
    Mr. Parrella. That is true, Congressman.
    Mr. Shays. So let me ask you, to the degree that some 
States use creative financing mechanisms, does that put States 
who choose to follow both the letter and spirit of the law and 
regulations at an unfair disadvantage by, frankly, undermining 
the overall financial integrity of the Medicaid program? In 
other words, if some States are using creative financing and 
you are a State that is pretty much playing by the letter and 
spirit of the law, doesn't that put you at a bit of a 
disadvantage?
    Mr. Parrella. I think the danger of creative financing, the 
way it has been described, is that it can undermine the 
relationship between the States and the Federal Government, 
which is based on a partnership. It is. We have to have 
integrity in what we represent to the Federal Government when 
we want to talk to them about matching funds for programs that 
we are trying to do to cover the uninsured. There has to be 
some integrity behind that so that they believe that we are 
really going to spend money on services that are really going 
to go to providers. That is part and parcel of what we do.
    I guess I would concede that if there are attempts to 
recycle funds or divert funds from that purpose, it undermines 
the credibility of every State.
    Mr. Shays. Well, Mr. Murphy and I both served at the State 
level, and when we were at the State level we thought like 
State legislators and we were eager to have you get every penny 
you could from the Federal Government. But I hope there is no 
disrespect on my side here. Please understand, I feel my job is 
to make sure it is fair for all States so that one State 
doesn't gain the system, and that we have a system that we can 
afford both on the State and Federal level.
    I thank all our witnesses again.
    Thank you, Mr. Chairman, for this hearing.
    Chairman Waxman. Thank you, Mr. Shays.
    Just for the record, Dr. Kanof, the GAO has recommended 
both improved accountability and transparency in many of these 
areas that are the subject of these proposed regulations. Has 
GAO ever recommended prohibiting Medicaid payment for school 
administrative services?
    Dr. Kanof. Based on my own knowledge of the reports that 
GAO has done, the answer to that would be no.
    Chairman Waxman. How about school transportation services?
    Dr. Kanof. No.
    Chairman Waxman. Therapeutic foster care services?
    Dr. Kanof. Not that I am aware of. No.
    Chairman Waxman. Rehabilitation services?
    Dr. Kanof. No.
    Chairman Waxman. Indirect hospital costs?
    Dr. Kanof. I don't think so.
    Chairman Waxman. OK. Graduate medical education costs?
    Dr. Kanof. No.
    Chairman Waxman. And assertive community treatment?
    Dr. Kanof. No.
    Chairman Waxman. Thank you.
    Let me thank all of you for your testimony.
    Mr. Shays. May I ask a question in regards to the question 
you asked?
    Chairman Waxman. Certainly.
    Mr. Shays. Have you looked at each one of these issues?
    Dr. Kanof. No. And what we have looked at is indications of 
more how is the State using some of these funds, but we have 
not looked at these issues.
    Chairman Waxman. If the gentleman would permit, these 
proposed regulations would impact each of those areas. We are 
not just talking about mechanisms for drawing more money. As I 
understand it, these are services that would no longer be 
available.
    I thank you all very much for your presentation. I think 
this is very, very helpful. It is a record that we are going to 
be able to share with our colleagues. Thank you so much.
    [Recess.]
    Chairman Waxman. The committee will come back to order.
    Mr. Smith, I am going to ask you to come forward.
    Dennis Smith is the Director of the Center on Medicaid and 
State Operations at the Centers for Medicare and Medicaid 
Services, Department of Health and Human Services.
    We are pleased to have you here today. As I indicated, it 
is the practice of this committee that all witnesses answer 
questions under oath, so please rise.
    [Witness sworn.]
    Chairman Waxman. Do you have a prepared statement? We would 
like to recognize you for comments you might wish to make.

  STATEMENT OF DENNIS SMITH, DIRECTOR, CENTER ON MEDICAID AND 
 STATE OPERATIONS, CENTERS FOR MEDICARE AND MEDICAID SERVICES, 
            DEPARTMENT OF HEALTH AND HUMAN SERVICES

    Mr. Smith. Thank you very much, Mr. Chairman. I will make 
my remarks brief and try to respond really to some of the 
issues that were raised from the previous panel and questions 
from the Members, themselves. Hopefully we will be helpful to 
help to understand the context of the rules, the impact across 
the program, and really how the rules do work, because I think 
that in some respects the interpretation of rules get 
interpreted and reinterpreted and stretched a little further 
than what the rules actually say.
    I think I first also want to thank David Parrella for his 
very kind remarks. We do work very closely together with the 
Medicaid directors and we have a great deal of respect for 
David personally and for Martha Rorety, who runs the Medicaid 
Directors, and we do have a great deal of exchange. We talk a 
lot about these regulations before they ever become regulations 
and what is going on out there in the States.
    The Medicaid program speaks through State plan amendments, 
so while you work within the confines of the statute, itself, 
in title 19, the States change their program, update their 
program, etc., through State plan amendments. And we do learn 
new things over time.
    We have learned new things through the submission of State 
plan amendments. I think I have done what my predecessors have 
done. In the area of school-based services, for example, and 
the discussion that we heard on the previous panel about the 
school nurse, some of the things that she was describing would 
not have been allowed under the guidance of the previous 
administration. Direct services that you are doing for routine 
medical care falls under the free care rule, and the rationale 
that no other payer is paying for it so it should not be billed 
to Medicaid. So some of the activities that she was describing 
would not have been allowed under the previous administration, 
as well.
    The previous administration became increasingly concerned 
about what is called bundling, to where schools would bundle 
payments together. They came out with guidance saying no, we 
are not going to recognize bundling any longer.
    In terms of provider taxes, the previous administration, 
again, was very concerned, took a disallowance against five 
States in excess of $1 billion. In many respects, the cost 
associated with Medicaid was not being shared by the State but, 
in fact, being passed off onto the providers, themselves. The 
previous administration stepped in and acted.
    We also provided a table as an attachment to my testimony 
that shows the history of deferrals and disallowances that we 
have taken as a result of our financial management activities, 
and I think in looking at the chart I think that we are very 
much in line with our predecessors.
    In terms of there was a lot of discussion about the cost 
rule, in particular, and again I have talked to a lot of 
groups, a lot of hospitals, and tried to explain what has been 
going on in Medicaid is the States have been passing their 
obligations on to providers. When we have stepped in, their 
providers have benefited from that.
    In California, for example, we have worked with California 
in their hospital financing. Revenues to California public 
hospitals went up. They went up by 12 percent, according to 
their own Public Hospital Association.
    Provider taxes, again, to sort of reveal what is below the 
surface, when is the last time someone came in and asked to be 
taxed? Provider taxes are related then to payments, because the 
provider is willingly paying a tax knowing that there is going 
to be a return on that through increased payments. So, again, 
the financing is left to the Federal Government because the 
provider is not really paying the tax. The State is not really 
paying its share, but it is the Federal Government who is 
funding.
    I think these things really can be summed up in terms of 
what we are funding and what we are for in these rules.
    Is it a medically necessary service? Is it for a Medicaid 
beneficiary? Is the matching requirement under the Federal-
State partnership intact? If, the answer is yes to all of 
those, we pay. Federal dollars follow State dollars. They are 
the ones who are determining the services. They are the ones 
who are determining the reimbursement rate to providers. They 
are the ones who are determining the scope of services when you 
get to an issue like rehabilitative services. We are not 
talking about a disagreement about is physical therapy covered 
as a rehab service. Of course it is. There is no disagreement 
about is speech therapy in a school covered. Of course it is. 
That is not what the disagreement is about. The disagreement is 
about pushing the edges of the envelopes even further to see 
where an activity or a program of the State is being funded 
with State-only dollars. If you can get Medicaid money out of 
the Federal Government by calling it Medicaid, then you are 
ahead of the game.
    That is where the issues of the discussions are about when 
we are talking about rehab services. We, again, learned a great 
deal in our conversations as States submit State plan 
amendments, on things like therapeutic foster care. There is 
not a definition of therapeutic foster care in the Medicaid 
statute. There are many different definitions of therapeutic 
foster care when you go out and ask the States, themselves, 
what do you mean by therapeutic foster care.
    Again, when you are talking about that, in itself, are 
these a component of services for people with mental illness? 
We will pay. Is this for a mental health counselor? We pay. is 
this for the prescription drugs that someone needs? Of course 
we will pay.
    This is about pushing the envelope to the outer boundaries 
to where is therapeutic foster care a juvenile justice 
wilderness camp. Then I think you do expect me to push back on 
the States and say no, that is outside the bounds.
    David Parrella's quote about the creativity of the States I 
thought had great double meaning to it. The creativity of the 
States, new things out there on the horizons. States 
contemplating, talking openly about four elderly prisoners in 
our penal system, in our correction system, can we somehow get 
them into a nursing home and have Medicaid start picking up the 
cost for them?
    These are things that have been pushed to the edge, beyond 
the edge, and, in our opinion, yes, beyond the edge when we ask 
you what do you mean by therapy and we get the answer is we are 
going to pay for small engine repair. We think that is our 
obligation to be saying what are we really paying for here. Is 
the Federal-State partnership intact?
    Again, if the State is paying its share, if it is for a 
medically necessary service, we are going to be there with you, 
as we have matched and we have matched over the years.
    [The prepared statement of Mr. Smith follows:]

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Chairman Waxman. Thank you, Mr. Smith. Your prepared 
statement is all going to be in the record.
    I want to start the questions, if I might.
    Over the past 10 months, CMS has issued six proposed 
Medicaid rules that would reduce Federal Medicaid payments to 
States by over $11 billion. There are persistent rumors that 
CMS is considering issuing more proposals that will cut Federal 
Medicaid payments to States even more. Members of this 
committee, the States, providers, and beneficiaries would all 
be very interested in knowing whether these rumors are true, so 
I want to ask you, between today and the end of this 
administration does CMS plan to propose regulations that would 
cut Federal Medicaid payments to States for targeted case 
management services? And if so, when will these proposed rules 
be published and how much do you estimate they will cut Federal 
payments to the States?
    Mr. Smith. We are to publish a rule on targeted case 
management. This is implementing the changes made under the 
Deficit Reduction Act of 2005, so we will be publishing final 
rules on that. The estimated savings I think is in the 
neighborhood of $4 billion.
    Chairman Waxman. And these proposed rules are where?
    Mr. Smith. These are under review. I believe they are in 
the final stages of review. They have been with OMB, so other 
agencies are looking and commenting, as well, so it is near the 
end of the process.
    Chairman Waxman. In the next 15 months, does CMS plan to 
propose regulations that would restrict the flexibility that 
States now have to use their own methods for counting income, 
flexibility that enables States to give Medicaid beneficiaries 
incentives to work or to recognize the unique expenses many 
disabled individuals face in their efforts to remain 
independent? And if so, when will these proposed rules be 
published and how much do you estimate they will cut Federal 
payments to the States?
    Mr. Smith. Are you referring to changes in how States do 
income disregards for eligibility, Mr. Waxman?
    Chairman Waxman. Yes.
    Mr. Smith. That is an issue that is under consideration. 
The S-CHIP debate was referenced earlier, and in some respects 
reflective of that, of how, in discussions about what is the 
upper limit for income eligibility for Medicaid or S-CHIP, 
through the use of income disregards going to actually even 
higher levels than that----
    Chairman Waxman. So you are looking at this area, as well, 
for----
    Mr. Smith. It is under consideration. Yes, Mr. Chairman.
    Chairman Waxman. OK. Let me ask you this: in the next 15 
months, does CMS plan to propose any other regulations that 
would reduce State flexibility or reduce Federal Medicaid 
payments to the States? If so, what are these proposals, when 
will they be published, and how much will they cut Federal 
payments to the States?
    Mr. Smith. Mr. Chairman, we are in the formulation of next 
year's budget. Decisions have not been made in terms of whether 
any further regulations, to my knowledge, any further 
regulations in Medicaid will be proposed. But, as I said, that 
is the normal pass-back between agencies and OMB, and final 
decisions are still generally a month away, month and a half 
away.
    Chairman Waxman. Well, we want to know if there are 
proposals, so we would like to have you inform us of that.
    Mr. Smith. Doing that prior to the release of the 
President's budget is usually an issue of some sensitivity.
    Chairman Waxman. The Federal Government spends about $200 
billion to help the States cover over 60 million low-income 
Americans. Because of the program's size, changes in Federal 
Medicaid policy could have major impact on States, on counties, 
on hospitals, on other providers, and, of course, on 
beneficiaries, who, by definition, are the most vulnerable 
among us. They have to be very, very poor to get covered under 
Medicaid.
    Each of the proposed rules we are discussing today would 
make major changes in Federal Medicaid policy. As we heard from 
the witnesses on the first panel, many of these changes could 
well cause great harm. Yet, with one minor exception, each of 
these proposed rules have no statutory authorization, much less 
a statutory directive. Congress has made no change in the 
Medicaid statute relating directly to limits on payments to 
public providers for Medicaid patients since 1997. In fact, the 
administration in its fiscal year 2005 and 2006 budgets 
proposed such a statutory change and Congress rejected the 
proposal.
    Congress has made no change in the Medicaid statute 
relating directly to payments to teaching hospitals for GME 
since the program's enactment in 1965.
    Congress has made no change in the Medicaid statute 
relating directly to outpatient hospital services since 1967.
    Congress has made no change in the Medicaid statute 
relating directly to payments for rehabilitation services since 
1989.
    Congress has made no change in the Medicaid statute 
relating directly to payments for school administrative and 
transportation costs since 1989.
    In only one instance provider taxes has Congress made a 
change in the Medicaid statute in this past decade, and that 
change does not support the harmful changes you propose in your 
March 23rd rule.
    In that red folder is a compilation of Social Security Act 
in the red cover. The Medicaid statute begins at page 1677, 
where there is a yellow sticker. Could you show us where in the 
Medicaid Act Congress has specifically directed CMS to issue 
the rules you propose that we are discussing this morning, 
other than the provider tax rule?
    Mr. Smith. Well, I think the Medicaid statute, itself, has 
a number of provisions that instruct the agency to assure that 
there is a match rate that Congress has established by statute 
that is updated every year. There is a provision in the 
Medicaid statute that specifically excludes payments under 
Medicaid for things that are not Medicaid services. So there 
are provisions in the Secretary's authority to review State 
plans, to whether or not those State plans are consistent with 
the efficiency and economy of Federal reimbursement. So there 
are a number of provisions in the statute to give us the 
authority to do what we have done.
    Chairman Waxman. I just must disagree with you very 
strongly. I don't see anything in the statute that allows you 
to decide what is Medicaid eligible and what is not Medicaid 
eligible. I see nothing that allows you to withdraw $11 billion 
in Federal Medicaid funds from the States.
    It looks to me like you have just decided to take matters 
into your own hands. It is a blatant disregard of the 
prerogative of Congress to make major changes in Federal 
Medicaid policy. If you want changes, you should propose them. 
If you propose them and Congress doesn't agree with them, you 
don't have the ability, in my view, to just come in and propose 
them by way of rulemaking. I regret sincerely that matters have 
come to this point, and I strongly urge you to reconsider your 
course.
    Mr. Smith. Mr. Chairman, if I may, in particular, be able 
to give you the exact cite, in terms of the cost rule that we 
have discussed this morning and the impact on the hospitals and 
the States, etc., again, through State plan amendments, which 
we have the obligation to review, 1902(a)(2) specifically says 
that the State match must be assured by the State, that it 
requires ``Federal participation by the State equal to all of 
such non-Federal share, or provide for the distribution of 
funds, et cetera.''
    That does tell me when a State submits a State plan 
amendment to increase reimbursement for a hospital, that it is 
my obligation to say I am willing to commit the Federal dollar, 
but show me your State dollar. That has been the genesis of the 
problems that we have been talking about in terms of recycling 
where providers are being required by the State or county 
government to return money that was meant to pay them for 
services provided to a Medicaid recipient.
    Chairman Waxman. I have to move on to other Members, but 
Mr. Parrella testified that we have had an ongoing working 
relationship between the Federal Government and the States, a 
partnership to provide care for the poorest among us for two 
decades, and some of these State plans are routine. You are 
taking routine State plans and then trying to jam through 
changes that Congress never intended, and I don't think you 
have the authority to do it.
    Mr. Davis.
    Mr. Davis of Virginia. Thank you very much.
    Mr. Smith, if you wait for Congress to act on this, it is 
an airplane flying into the mountain. It is the fastest-growing 
part of the Federal budget. It is the fastest-growing part of 
State budgets. It is annual appropriations $300 billion a year. 
That is more than the Defense budget. And we don't vote on it 
or touch it at this point in Congress. So I think you have a 
responsibility to make sure that the dollars are spent wisely, 
and I don't have a comment on these six proposals that you have 
made, but I think you have every right to get out there and put 
them out for comment and to see where the public is, who is 
going to get hurt.
    It is not really a question of dollars; it is a question of 
services and, as you say, making sure that the taxpayers are 
getting their benefit on this.
    It is a difficult job, but if you wait for Congress to act 
on this there won't be any money left in the budget. This is 
the single fastest growing part of the Federal budget.
    The cuts that they talk about, too, we are not talking 
about cutting Medicaid payments? The payments go up, don't 
they, every year? This is just a cut in anticipated growth; is 
that fair to say?
    Mr. Smith. You are correct, Mr. Davis. This is slowing the 
rate of growth. As Mr. Shays pointed out, we are talking about 
$11 billion over five of which Federal spending will be over $1 
trillion in that time period.
    Mr. Davis of Virginia. My understanding is that the Federal 
portion right now is set to go up $16 billion in 2008, $17 
billion in 2009, $21 billion in 2012. That is a lot of money as 
we go forward.
    Health care is a complicated issue and we want to try to 
make sure that everybody gets served one way or another, but 
ultimately it is going to be a congressional responsibility to 
try to sort that out.
    I am as frustrated as you are by Congress' inability to act 
or give you appropriate direction. A blank check isn't the way 
to solve it.
    Let me ask you this: it is projected that the cost of the 
Medicaid program will double in the next 10 years. To the 
degree that States are inappropriately shifting costs to the 
Medicaid program because of the open-ended entitlement 
structure, what pressure does this add to the Medicaid program 
and its ability to fulfill its mission to provide medical 
services to those that are most in need?
    Mr. Smith. Well, Mr. Davis, I think, again, part of it is 
overall health care and Medicaid's role in that. Clearly, 
health care in itself is increasing and continues to grow. That 
is part of that. Medicaid is a component of that larger system. 
To some extent it causes the increase, even in the private 
sector. Governor Schwarzenneger, for example, has talked about 
the increased pressure on the private sector because MediCal 
under-pays its providers. So there are relationships throughout 
the system.
    It does put greater pressure on everyone. Some changes we 
have applauded and helped to lead.
    Mr. Davis of Virginia. I mean, pressure is everywhere. The 
providers that were here today, I think we all understand their 
frustration, as well. I hear from the providers, whether it is 
doctors or whether it is hospitals, in our area. Everybody is 
pressured under this current system.
    One thing that was noted, they talked about hospital 
closing in one of the Members' District. Five hospitals were 
closed in San Diego County over the last 3 years just because 
of people coming across the border and presenting themselves at 
the emergency room.
    This is a complicated issue.
    Let me ask a couple questions. For the purposes of 
clarifying the impact of harmonizing Medicaid's definition of 
outpatient services with that of Medicare, will those services 
that are no longer considered outpatient services no longer be 
reimbursed by Medicaid?
    Mr. Smith. No, sir. The issue is not whether or not a 
service will be paid for. Again, there are lots of services 
provided in an outpatient setting. We would continue to pay for 
those services.
    The issue, though, again, as we saw in State plan 
amendments in asking States about what they were going to 
include in, what they were trying to do was basically inflate 
their upper payment limit for their outpatient hospital 
service. So it is not an issue whether or not you are going to 
pay for a clinic service; it is how it can be used to count 
toward potentially supplemental payments.
    Mr. Davis of Virginia. To clarify the impact on 
transportation services and Medicaid, could you try to explain 
how the proposed rule affects the following: First, 
transportation to school and back for non-school-aged children 
to receive medical services.
    Mr. Smith. For non-school-age, if they were receiving a 
medical service at the school, we would pay in that respect. 
Yes, sir.
    Mr. Davis of Virginia. Transportation from school to a 
community-based provider and back for medical services?
    Mr. Smith. We would pay for that, Mr. Davis.
    Mr. Davis of Virginia. OK. Coverage of medical equipment 
necessary for a disabled student, like a breathing apparatus or 
wheelchair, to be transported to and from the school?
    Mr. Smith. In that respect, an individual is going to have 
their own. A child who is on a respirator has the need for a 
respirator before school, during school----
    Mr. Davis of Virginia. Do you cover the equipment, though?
    Mr. Smith. Yes, sir.
    Mr. Davis of Virginia. Some of that equipment would be 
covered by you, and that would continue to be covered?
    Mr. Smith. That would already have been paid for by 
Medicaid.
    Mr. Davis of Virginia. Do you think that some of the 
services included in therapeutic foster care, when unbundled, 
will continue to be covered by Medicaid?
    Mr. Smith. Again, Mr. Davis, that is the issue in terms of 
when we are asking the States what are the components of what 
they mean. Therapeutic foster care is kind of a catch-all term, 
and different States are giving it different meanings. But in 
terms of services, and particularly for individuals that are 
mental health services, etc., those are all covered services. 
It is the components that, as I suggested, pushing the corners 
of the envelope----
    Mr. Davis of Virginia. My time is up. Real quick, 
conceptually what would be covered and what wouldn't be 
covered? Do you have any concept of what you would be likely to 
approve and what you wouldn't in an unbundled----
    Mr. Smith. Again, when you are providing mental health 
counseling, when you are providing intensive mental health 
services, but when you are going and pushing to say therapeutic 
foster care also means child care or some other type of more of 
a social service, we would push back.
    Chairman Waxman. Thank you, Mr. Davis.
    Mr. Davis.
    Mr. Davis of Illinois. Thank you very much, Mr. Chairman. 
Thank you, Mr. Smith.
    Mr. Smith, in recent speeches the President has repeatedly 
said that the administration has a clear principle; that is, 
put poor children first. Medicaid is the program that insures 
the poorest children in America. Could you tell me how 
prohibiting public school nurses from enrolling kids in 
Medicaid is putting that principle of putting poor children 
first?
    Mr. Smith. Happy to respond, Mr. Davis.
    One of the issues that we face is in the administration and 
training side of what is being claimed. It is very difficult to 
actually establish what is happening when we pay that. School-
based administration really is concentrated on only a handful 
of States. Whether or not what they are doing with those funds 
is widely discussed, GAO has done studies and acknowledged that 
there were abuses in that setting.
    Through audits we are finding Medicaid paying for capital 
costs of schools because it is being hidden under 
administration, and Medicaid is being billed for indirect 
costs.
    We obviously want every child who is eligible to be signed 
up. I have had discussions with California, one of those 
States. Illinois uses school-based administration. Those two 
States combined account for 40 percent of all of the school 
administrative costs that Medicaid is being paid for.
    But if you want to sign a child up at school, which I have 
suggested to California, have the social workers take their 
laptop down to school on Tuesday afternoons and enroll people.
    Mr. Davis of Illinois. You express a number of allegations 
in your response. Could you tell me what sources of data CMS 
relied on to develop this proposed rule with respect to both 
school-based administrative claiming and transportation 
services?
    Mr. Smith. In terms of what data we have?
    Mr. Davis of Illinois. Yes.
    Mr. Smith. The data reporting is uneven because there are 
different line items in the Medicaid service categories and in 
administrative costs. There is not a school-based, per se, so 
we are, to a large extent, relying on the States on how they 
are reporting what they are doing. But in terms of informing 
our decision, going forward our Inspector General reports, our 
own financial management reviews, prior GAO reports. I know 
Marjorie was here previously and wasn't aware of whether GAO 
had spoken to school administration, but they did do a report 
in 2000.
    Mr. Davis of Illinois. Well, in this 2000 GAO report on 
school-based Medicaid services, it was indicated that what was 
then, of course, HCFA was providing confusing and inconsistent 
guidance across regions and had failed to prevent improper 
practices and claims in some States. I guess my question 
becomes: what activities has CMS engaged in to improve such 
oversight of school-based administrative claiming in response 
to this GAO report.
    Mr. Smith. Again, the way States typically talk to us is 
through their State plan amendments. As State plan amendments 
come in to us, we discuss those with the States, what is being 
covered, what is not.
    We did release a school-based administration claiming guide 
in 2003 to clarify, for example, on the match rate on skilled 
medical personnel.
    We have States out there claiming without State plan 
amendments. We have States out there claiming, saying that the 
non-Federal share is being paid for with certified public 
expenditures. We ask where are the certified public 
expenditures to show that, in fact, the cost has been incurred 
in the first place, that there was a non-Federal share. Quite 
frankly, States are often in difficulty producing such 
documentation.
    So we have been increasingly uncomfortable that this is an 
area that Medicaid is being appropriately making payments, 
whether or not there is sufficient accountability. That is my 
concern, that there is not.
    Mr. Davis of Illinois. So you can trust the Medicaid 
employees but not the school employees?
    Mr. Smith. Mr. Davis, I think that there are a number of 
examples to where schools and the Medicaid agency, even at the 
State level, don't see eye to eye.
    Mr. Davis of Illinois. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Waxman. Thank you, Mr. Davis.
    Mr. Murphy.
    Mr. Murphy. Thank you very much, Mr. Chairman.
    I guess I want to talk about what is happening in the real 
world out there, which is that you simply can't take a look at 
the cuts that are being made in Medicaid and make statements 
such as the one that you have made, or at least that the agency 
has made, that special education funds should be taken care of 
by the Education Department or that services for people with 
mental illness should be the purview of SAMHSA and disease 
prevention should be in public health without figuring out that 
the Federal funds flowing to those programs are receiving the 
same, if not worse, cuts than you are seeing under the ones 
proposed by these regulations.
    It would be one thing if the cuts you were proposing now 
were being made up in increased or even stable funding in burn 
grant funding, juvenile justice funding, in IDEA funding, in 
maternal and child health block grant funding. But the fact is 
that at the same time that these regulations are being 
proposed, the very Federal funds that might assist States in 
trying to find other avenues of funding have been cut, as well, 
even with more Draconian cuts.
    So I guess the question is this: when you are taking a look 
at these cuts and making claims that these services should be 
picked up by other State programs, is there any effort to take 
a look at the other Federal programs that fund those services? 
And is there any recognition of the fact that those funds 
coming from the Federal Government that could potentially 
supplement States in order to make up for your cuts are 
experiencing even more drastic cuts? I mean, is there any view 
toward that big a picture?
    Mr. Smith. Thank you, Mr. Murphy. Again, in terms of 
service, Medicaid services that Medicaid covers that is a 
medically necessary service, again, we are saying yes to bill 
Medicaid for that individual and we will pay for it. 
Oftentimes, as I said, we are being stretched beyond that.
    I think, to some extent, again, because there are 
differences among States and local agencies where these 
services, programs vary across the country, what we often find 
it is it started at the local or State level and there is--
again, if you have a successful program that you believe is 
working, that is effective, that is helpful in that 
individual's life, you support that program.
    Medicaid usually comes later, because then they are saying 
now we have this program but we are paying for it with our own 
dollars, but if we call it Medicaid--and, Mr. Murphy, there are 
agencies, there are companies out there, that is their 
business, for helping States to maximize Federal revenue and 
helping States to say call it Medicaid. Now what was 100 
percent State or local funded, we can now cut it in half 
because we have called it Medicaid.
    Mr. Murphy. With all due respect, sir, I don't think that 
is what is happening, at least in Connecticut and many other 
States, that there are these rampant abuses happening of things 
just being called Medicaid. There are, in Connecticut's case, 
legitimate rehabilitative services that were covered fully with 
State dollars for years and now there is a choice being made to 
take advantage of what has, for a very long time, been an 
available Medicaid match.
    I guess you continue to provide testimony this afternoon 
regarding all these abuses. The solution then seems to be to 
cut out eligibility of those services rather than to spend some 
effort and finances and resources to root out the abuses that 
are happening and make sure that we do not reimburse for those.
    So it is a little hard to understand why we aren't here 
talking about ratcheting up the ability of CMS to root out 
abuse and fraudulent billing, rather than simply saying it is 
too hard to figure out whether these administrative costs are 
really being used for signing up kids or whether they are being 
used to build walls, and so we are just not going to cover it 
any more. Why don't we spend more time actually finding out who 
is abusing the system and allow those who are doing it right to 
still gain the benefit of the Medicaid match.
    Mr. Smith. Yes, sir. And we are trying to do both. I mean, 
we certainly want, through management reviews, through OIG 
audits, want to get the abusing also, but it is also everybody 
does want to know what the rules are and make sure all the 
rules apply to everyone. If in region one the Federal 
Government shouldn't be saying yes that is a rehabilitative 
service in region one, but in region nine it is not. That 
shouldn't happen, and that is, again, part of the rationale for 
rulemaking in the first place, to make certain everybody does 
have the same understanding.
    Mr. Murphy. And I think that this committee and this 
Congress would look forward to engaging in a process by which 
we standardize some of those understandings rather than using 
the non-standardization as an excuse to simply cutoff funding.
    The last thing I will say, Mr. Chairman, is that I do think 
that there needs to be a little bit more real-world experience 
put into these rules, whether it is the reality of what these 
new foster care guidelines will mean for families that are now 
going to have to maintain very detailed and complicated billing 
standards, whether it is the statement that you made that you 
should settle this question for California by simply sending a 
social worker down with a laptop. Well, in my State we don't 
have enough money to give laptops to all of our social workers, 
and the fact that they have more and more to do means that they 
have less and less time to go down to the school.
    The reality on the ground is that these school districts, 
these social service departments are stretched so thin, these 
parents who are taking on these very complex children with very 
complex illnesses are stretched so thin, both emotionally and 
logistically, that this is going to be very, very hard to 
implement, and I think very, very hard to understand for people 
that have less and less resources to do it with.
    I yield back the balance of my time.
    Chairman Waxman. Thank you, Mr. Murphy.
    Mr. Shays.
    Mr. Shays. Thank you. Again, Mr. Chairman, thank you for 
having this hearing.
    The sky isn't falling in. We are talking about $11 billion 
savings in the increase over 5 years. We will spend a grand 
total in the next 5 years of $1,258 billion, and it would be 
$11 billion more if you didn't make these savings. So there is 
a part of me that wants to know why you aren't doing a better 
job of getting savings, not to blame you for finding 9/10ths of 
1 percent in a budget.
    There is no undeclared war on the part of the Bush 
administration. I voted for the health care bill, CHIPs bill 
for young people, but the President had legitimate arguments. 
He said it shouldn't go to illegal aliens, he said it shouldn't 
go to adults, and he said we should be trying to get those 
children who are the poorest of the poor that are still part of 
the program. So I think the President's position, while it is 
not one that I voted for because I want to expand the program, 
is not one that says we are declaring war against kids.
    Let me ask you, with regard to inter-government transfers, 
can you speak to what challenges the inter-governmental 
transfers involving public, non-governmental hospitals raises 
for CMS, both from a fiscal integrity of the Medicaid program 
point of view and from conducting oversight of the use of 
Medicaid funds?
    Mr. Smith. Yes, Mr. Shays.
    Again, let me hasten to say there is an inter-governmental 
transfer recognized in the Medicaid statute that is 
permissible. What it means by that is the State can share its 
cost with local government. That is perfectly fine. We are not 
challenging that. But what has been termed inter-governmental 
transfer, we have generally been referring to it as recycling. 
With a provider in 1903, I believe, Congress put a limitation 
that says non-governmental entities cannot pay the State's 
share. I am simplifying it, but basically the taxes and 
donations provision.
    What was happening with non-governmental entities were 
payments were being made and then payments were being returned. 
We are looking at that as recycling, because we are saying what 
should we match. If the bill was presented to us for $100, that 
a service was provided for $100 and in a 50/50 State like 
Connecticut State paid $50, we paid $50, but we find out on the 
back end that the hospital or the nursing home returned, after 
they got paid, returned $25 back to the county or the State 
government.
    Mr. Shays. So in essence the Federal Government was paying 
more of the cost than 50 percent?
    Mr. Smith. Correct.
    Mr. Shays. Let me ask you another question. With regard to 
rehabilitation services, school transportation, school 
administrative costs, hospital outpatient services, and 
graduate medical education, the chairman said, if I heard him 
correctly, that these programs were going to be discontinued. 
Is Medicaid eliminating these services for eligible 
beneficiaries?
    Mr. Smith. No, sir. Medical services that are medically 
necessary will continue to be covered.
    Mr. Shays. And does CMS anticipate that these changes will 
result in the denial of services?
    Mr. Smith. There should not be being denied services 
because we clearly are saying we will pay our share for those 
services.
    Mr. Shays. Let me ask you another question. On the first 
panel we heard from Ms. Barbara Miller about how important 
Medicaid rehabilitation services were to bringing her to where 
she is today. Can you speak to how, either under this proposed 
rule or under other aspects of the Medicaid program, maybe 
through waiver authorities, such services as psychiatric 
rehabilitation will still be covered?
    Mr. Smith. Yes, sir. It will take a little bit of an 
explanation, if you will forgive me. Rehabilitative services in 
terms of what she spoke so eloquently about, what is called 
assertive community treatment--and I have stated publicly and 
to all types of audiences that assertive community treatment is 
a model of care and it is a model of care that we do presently 
support, and we have said we are willing to support. We 
recently released a State Medicaid director letter again that 
is very pertinent to people with mental illness on peers of 
saying that Medicaid reimbursement is available for peer 
counseling.
    So, again, there are models of care that we currently 
support, that we believe we will continue to support under the 
rehabilitative services issue.
    The habilitation side to where you are getting into--it is 
not rehabilitation, but habilitation, such as an adult day 
center, that really belongs to the other side of the Medicaid 
program of home and community-based waivers, which really is 
more of a social support mechanism to pay for those things to 
help people stay in the community, but they are not 
rehabilitative services. They are not medical services.
    So States have that option, as well, for individuals to do 
adult--if you have a program for adult day program, that 
belongs on over on the home and community-based services side 
of the program and we would continue to support that if that is 
what the State chose to do.
    Mr. Shays. Thank you, Mr. Chairman.
    Mr. Smith. Yes, sir.
    Chairman Waxman. Thank you, Mr. Shays. We give a lot of 
options to States and everybody else to come up with money that 
the Federal Government won't buy. Or States also have the 
option of saying no, they don't have the money.
    Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman. And thanks to all the 
witnesses on both panels.
    I think the only thing we all can agree on is that no one 
would want Dennis Smith's job. It is a tough one.
    Everybody here knows that this is not just a hearing on 
whether we have illegally aggressive regulations being 
promulgated. The hearing is really about the collapse of the 
U.S. health care system, and this is just evidence of it. 
Rather than focus on the negative, I think it is important to 
recognize that we all have a responsibility in this collapse.
    I was struck by the testimony on the earlier panel of Drs. 
Gardner and Retchin, particularly the emergency room story, but 
Congress passed the law years ago and made it an unfunded 
Federal mandate. We require hospitals to see most all comers--
you can go on diversion--and we didn't pay them for it. We are 
surprised that the number of ERs in America have gone down 
relative to the needy population?
    There are so many other aspects of this problem. We really 
need hearings like this every day for years to try to get to 
the bottom of it.
    I am from a State that has been guilty of gaming the 
Medicaid system. I am embarrassed by that. As we took our 
legitimate 65 to 67 percent match, in some years we made it 92 
percent. Why? Because we wanted to and we could get away with 
it. That doesn't make it right.
    These six regulations, I don't think nobody here is 
defending them. You still have to because you work for the 
administration, but it is amazing that in such a giant program 
that only $11 billion of savings was found.
    I am not suggesting that these are the best ways, but this 
is such a fly speck of a larger problem. It is almost 
embarrassing.
    The Comptroller General of the United States, David Walker, 
has written that we face $50 trillion in outstanding 
obligations, mainly health care. Today we have no idea how to 
fund those.
    And not a penny of that $50 trillion is Medicaid, because 
we don't even have the analytical tools to describe the hole 
that we are in in Medicaid. Some analysts, like Hal Jackson of 
Harvard, say that these problems are getting worse to the rate 
of $3 trillion or $4 trillion a year. Of course, the President 
denies that because he doesn't want the broader measure of our 
deficit problems.
    But that means that any reform proposal that would gain 
ground on this problem would have to save more than $3 trillion 
or $4 trillion a year. That is unimaginable. I don't know of 
any group in this country who has come up with a reform 
proposal of that scale.
    Meanwhile, we are like the blind men of Hindustan. You 
know, we see a portion of the problem and each complain 
fiercely it looks like a snake to one, a tree trunk to another, 
a wall to another, and in fact it is an elephant. And we can 
get mad at each other and finger point and complain and all 
that, but meanwhile we are confronted by an elephant, and I 
don't see many people in Congress or outside of Congress that 
are doing much about it. We need comprehensive health care 
reform that looks at all aspects of the problem, because 
Medicaid is one of our most important programs.
    The chairman of this committee helped build this program. 
Committee staff helped build this program. It is painful for 
them to see it dismantled piecemeal, because piecemeal 
solutions don't work for anybody--patients, doctors, lawmakers, 
families.
    So it is hard to get at all these issues, and I know I just 
have a short period of time, but one of the unspoken issues in 
this hearing is federalism. Under Medicaid we give States so 
much leeway. I can't help but know the irony that there is Dr. 
Retchin sitting behind you and he used to run Virginia 
Medicaid. Dr. Gardner has her former Governor, now President of 
the United States, from Texas, and Texas is one of the States 
that has pioneered specialty hospitals that have no emergency 
rooms. The national case recently of the person who was dying 
in a Texas specialty hospital, had to call 9-1-1 because there 
was no emergency treatment in a Texas hospital because Texas 
law allows that to happen, why is that?
    Now, do we need to override State flexibility? That is an 
outrage. Yet, it is happening more and more across our country. 
And that is not technically a U.S. responsibility. The State 
did it.
    Texas has more uninsured children, I think, than almost any 
other State in America, 25 percent. What an embarrassment. 
Texas is not a poor State, but they are not taking care of 
their own kids. Is that our fault?
    So there are all these problems we are not beginning to 
deal with as a Nation, and I just have 5 minutes to make a 
quick statement, but, for the written record, I would like from 
you the policy choices that you could have made instead of 
these six regs, because there have to be other better ways to 
save money in the Medicaid program. We spend $2 trillion on 
health care in America, yet no one wants to give up a penny of 
what they are receiving, and yet we don't have the best health 
care in the world. So I would just like to know, from the menu 
of choices, why you all came up with this $11 billion and which 
choices you rejected.
    I see that my time has expired, Mr. Chairman. Thank you.
    Chairman Waxman. Thank you, Mr. Cooper.
    Mr. Cummings.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    Mr. Smith, it is good to see you again.
    Mr. Smith. Yes, sir.
    Mr. Cummings. As you know, on October 18, 2007, President 
Bush issued the Homeland Security Presidential Directive No. 
21. You are familiar with that, are you not?
    Mr. Smith. [No audible response.]
    Mr. Cummings. Well, let me tell you what it says. You look 
a bit confused. This directive is intended to establish a 
national strategy for public health and medical preparedness 
that will ``transform our national approach to protecting the 
health of the American people against all disasters.''
    Directive 21 instructs the Secretary of Health and Human 
Services to undertake several critical tasks. Among these are 
two of particular relevance to our hearing today. The first 
deals with medical surge capacity that we have heard a bit 
about during the first panel. Of course, that is the ability of 
the hospitals and the public health systems to treat large 
numbers of casualties in a short span of time.
    The second instructs the Secretary to ``identify any legal, 
regulatory, or other barriers to public health and medical 
preparedness in response from Federal, State, or local 
government or private sector sources that can be eliminated by 
appropriate regulatory or legislative action.''
    Based on what we heard from the physicians on the first 
panel, it seems clear that your proposed regulations constitute 
a significant legal and regulatory barrier to public health and 
medical preparedness and response, and, as such, they appear to 
violate the President's own directive.
    How do you respond to those concerns?
    Mr. Smith. Mr. Cummings, in terms of the cost regulation 
that we have proposed, as I have tried to explain, our policy 
says the hospital or nursing home or whomever is actually 
providing the service should get paid and get to keep the money 
for the service they provided. I don't see that as a conflict 
with what you have just described.
    Mr. Cummings. Did you hear I think it was Dr. Gardner's 
testimony when she talked about----
    Mr. Smith. I did, sir. Yes.
    Mr. Cummings. How does that strike you that anybody sitting 
in this room--we have, I guess, about 100 people in here--
anybody could get sick down there in Texas, I think it is, and 
be in a position where the patient that she talked about, not 
even able to get a bed. Does that bother you? I mean, when you 
hear things like that, does it make you think about that when 
you go to bed at night and put your family to bed? Do you say 
to yourself, Boy, it is kind of hard for me to sleep thinking 
that there are people in the United States, some of them my own 
neighbors, who might be placed in that position?
    Mr. Smith. Mr. Cummings, I have devoted most of my career 
to public service. I do it precisely for people who need the 
support and help of their neighbors.
    Mr. Cummings. And so you sleep well at night?
    Mr. Smith. Yes, sir, I do.
    Mr. Cummings. I see. So you feel, as far as these 
directives are concerned, when it comes to the graduates, the 
graduate schools, does that concern you that we may have some 
problems there? You heard the testimony about them?
    Mr. Smith. Health care has many different parts to it, and 
I absolutely want to make certain Medicaid does its part, but 
to take on the responsibility of other functions, programs, 
etc., there are lots of different choices on how to address the 
graduate medical situation and the hospitals, themselves, that 
participate in it.
    For example, in New York, as New York was one of the 
previous witnesses, New York has a $3 billion disproportionate 
share hospital system. They could use that entire amount for 
indigent care, but that is a choice that New York makes in the 
Federal-State partnership.
    Mr. Cummings. Well, I am going to conclude because I see we 
are running out of time and I see that Mr. Kucinich is here, 
but it seems clear that your agency's rulemaking will harm 
disaster preparedness in many of our Nation's cities and 
undermine Federal efforts to strengthen medical surge capacity 
for pandemic flu, bioterrorism, and other public health 
threats. At a time when the Congress is providing the 
Department of HHS billions to enhance emergency preparedness, 
your agency, in my opinion, is undermining key elements of our 
Nation's preparedness infrastructure.
    I have often said that when we come to positions that we 
should make them better. I know that you are going to leave 
here saying that you are going to probably make it better, but 
I am telling you, after your tenure I think it will be worse. I 
hate to say that. And I do pray for you as you sleep in peace.
    Chairman Waxman. Thank you, Mr. Cummings.
    Mr. Kucinich.
    Mr. Kucinich. Thank you. I want to thank my colleague, Mr. 
Cummings. I would ask him if he has a moment if he can stay, 
because these questions relate to something you and I have 
worked on together.
    Mr. Smith, in May you appeared before the Domestic Policy 
Subcommittee of this committee, which I am the Chair of the 
subcommittee, at a hearing on the serious failures to provide 
dental services to children in Medicaid in general and the 
resultant death of a child in Maryland, Deamonte Driver. At the 
time you said you would check on the actual services available 
in Maryland. Since that time, the subcommittee did its own 
research, including an audit of United Health Group's claims 
records in the county where Deamonte Driver lived and died.
    Here is what my subcommittee found: that Deamonte Driver 
was 1 of over 10,780 Medicaid eligible children in Maryland who 
are enrolled in United Health's Medicaid Managed Care 
Organization and who had not seen a dentist in 4 or more 
consecutive years. Only seven dentists provided 55 percent of 
total service to United beneficiaries in Prince George's 
County, MD. Nineteen dentists listed in United's dental network 
provided zero services to eligible children in Prince George's 
County, MD.
    Twenty-two dentists listed by United provided services to 
only one child merely a single time, and 45 dentists care for 
eligible children less than 10 times in Prince George's County, 
MD, and 7 dentists were unreachable by phone.
    These findings are appalling, but at least one thing has 
changed: United Health no longer denies the truth about the 
inadequacies of their provider network in Prince George's 
County, MD. On October 18th, they wrote a letter to me in which 
they conceded that my subcommittee's findings were accurate. 
They said, ``We concur with the majority staff's findings.''
    My question for you, Mr. Smith, is, would you please tell 
this committee if CMS had conducted an audit of United Health 
and was aware of the specific inadequacies of United's dental 
provider network prior to our subcommittee hearing?
    Mr. Smith. Prior to your hearing we had not looked at the 
individual records.
    Mr. Kucinich. Since the hearing has CMS conducted an audit?
    Mr. Smith. I spoke with counsel beforehand. I would be 
happy to speak with you off the record, if that would be fine.
    Mr. Kucinich. You took an oath.
    Mr. Smith. I did take an oath.
    Mr. Kucinich. Has CMS conducted an audit?
    Mr. Smith. We are taking additional steps, Mr. Kucinich.
    Mr. Kucinich. What about the findings?
    Mr. Smith. The findings, sir, are not in at this point. We 
have not made a final determination.
    Mr. Kucinich. Will you provide this committee all documents 
and findings within 2 weeks?
    Mr. Smith. I don't expect it will be completed by then, Mr. 
Kucinich, but when we are completed we will be happy to share 
the information we have with the subcommittee, with the full 
committee.
    Mr. Kucinich. Will you provide them in 4 weeks?
    Mr. Smith. [No audible response.]
    Mr. Kucinich. Six weeks? Eight weeks? Three months? Four 
months? When will you provide this committee with the 
information that you claim you are trying to get that reflects 
upon the death of a young man? When will you provide us with 
the information?
    Mr. Smith. I will furnish it as soon as it is completed. I 
will furnish you all the records that we have. I am not certain 
when this will be conducted. I expect it will be done before 
the end of the year.
    Mr. Kucinich. Mr. Chairman and Mr. Smith, Mr. Smith, we 
know how bad the problem is in the State of Maryland and we 
know where you were before our committee hearing. We are 
wondering what a national audit would show. Has CMS undertaken 
a national audit in this regard?
    Mr. Smith. We are looking at other States, Mr. Kucinich.
    Mr. Kucinich. Will you provide this committee all documents 
and findings on those audits?
    Mr. Smith. I am happy to provide what we find.
    Mr. Kucinich. How many other States, sir?
    Mr. Smith. We have just started another State. We are 
looking at States to look beyond that in terms of where to go 
after that.
    Mr. Kucinich. Mr. Chairman, I ask unanimous consent to have 
another minute.
    Chairman Waxman. OK.
    Mr. Kucinich. I would just say that our subcommittee is 
going to be relentless on this, Mr. Smith. You are not going to 
be able to avoid--unanimous consent, Mr. Chairman, for another 
minute. My time has expired.
    Chairman Waxman. I am sorry. The problem we have now is we 
have a vote.
    Mr. Kucinich. I just want to conclude then by saying that 
you are not going to be able to avoid the scrutiny of our 
subcommittee or, I am sure, of this full committee. There is a 
little boy in Maryland who died. We are not going to have any 
more children dying because CMS has not done effective 
oversight of these people who are providing care in the name of 
the Government of the United States, period.
    Mr. Smith. Mr. Kucinich, if I may, Mr. Chairman, I think 
the work of the subcommittee was extremely helpful and 
important, and I hope that you would view us as working 
together on the problem rather than seeing us as an adversary 
on this issue, because I do not feel that way. I think that we 
share the same interest.
    Mr. Kucinich. I agree. We are going to work together.
    Chairman Waxman. Mr. Engel, do you have some questions you 
want to ask in the short time we have left?
    Mr. Engel. Yes, thank you. Thank you, Mr. Chairman. Let me 
thank you for allowing me to participate. I know there is a 
vote on, so rather than ask all the questions I just want to 
make a very brief statement.
    I want to thank you for your leadership. Obviously, I have 
also been very troubled by the recent rules proposed by CMS and 
from what I consider their absolute disregard for Congress. 
Major Medicaid reforms require a congressional role, and by 
rushing to publish these regulations CMS, in my opinion, has 
disregarded congressional opposition and attempted to usurp 
Congress' role and, more importantly, CMS appears to have no 
regard for our safety net providers and the low income people 
whose health care would be decimated if these rules were 
allowed to come to be inactive.
    As you discussed today, CMS issued a proposed Medicaid 
regulation that, in my opinion, threatens public hospitals' 
ability to deliver vital services and stand ready in the case 
of a natural disaster or public emergency. This regulation 
would cut at least $4 billion in Medicaid funding to safety net 
hospitals nationwide over 5 years, and CMS subsequently added 
and issued an additional regulation that would force billions 
of dollars in Medicaid payment reductions to teaching 
hospitals, many of whom are public hospitals, which hampers the 
ability of these providers to provide essential services, 
including the education of the next generation of medical 
professionals, despite a shortage of medical professionals.
    While we have a 1-year moratorium in place until next May 
on staying these regulations, if we don't act soon, States, 
hospitals, and safety net providers are going to have to 
prepare for the worse, which is catastrophic draft and funding. 
That is why I introduced H.R. 3533, which has been mentioned 
several times here today, the Public and Teaching Hospitals 
Preservation Act, which I am proud to say has 143 bipartisan 
co-sponsors. You, Mr. Chairman, have been instrumental.
    Mr. Smith, I am just wondering if you could please submit 
to me for the record. It is not possible--some of our 
colleagues said it before--with the financial pressure these 
institutions face, these public hospital systems, to sustain 
these kinds of sweeping cuts, so I would like you to, in 
writing, tell me how you expect safety net providers that 
provide essential care to hundreds of thousands of patients 
that walk through their doors to continue delivering this care. 
It is just not possible. It is not possible.
    And the second question is: the teaching hospitals in my 
home State of New York currently receive $1.2 billion in 
Medicaid GME, graduate medical education, payments annually. If 
your proposal to eliminate Medicaid GME payments is 
implemented, you will be essentially cutting medical education 
payments to New York by 40 percent. We have 15 percent of the 
teaching hospitals in the country, so it is simply a 
devastating cut to the teaching hospitals in New York; indeed, 
to the country, and hospitals across the State. So I do not 
understand why the administration is pulling support away from 
training America's future doctors, particularly at a time when 
there was a well-documented physicians' shortage looming.
    If each payer isn't expected to contribute its fair share, 
who is expected to make up the difference?
    I will take it in writing, but I just think these are 
unconscionable.
    Mr. Smith. We will be happy to respond, sir.
    Chairman Waxman. Thank you, Mr. Engel.
    Mr. Smith, as we conclude, your proposals would have the 
impact of reducing payment to the States by $11 billion over 
the next 5 years. The costs that these Federal dollars now pay 
for will not magically disappear. People with mental illness 
will still need rehabilitation services, school-age children 
will still need health care. But under your proposed rules, the 
Federal Government will no longer pay for many of these costs. 
In other words, what is being proposed is a massive cost shift 
from the Federal Government to the States, the largest Medicaid 
regulatory cost shift in memory, and Medicaid has always been a 
Federal-State partnership.
    Second, these proposed rules will result in major 
disruptions in the State Medicaid programs. Some of these rules 
threaten key elements of our Nation's health care 
infrastructure and could harm emergency preparedness. These 
effects are not well understood because CMS has not done any 
State by State specific analysis of the impact of its 
regulation. Perhaps this is because CMS does not have the 
necessary information, perhaps it is because CMS doesn't want 
to know. In either case, it is very troubling.
    I hope, Mr. Smith, that you or Secretary Leavitt will be 
moved by what we have learned today and direct CMS to withdraw 
these proposed rules. If it does not, it will be up to the 
Congress to take the necessary measures to protect States, 
hospitals, physicians, and Medicaid beneficiaries from these 
reckless proposals.
    I think you understand where we are coming from, what we 
feel about this. There is a great deal of intensity. I have to 
tell you, I don't recall your being elected to any office to 
write the laws. We were. If you are acting improperly, we will 
have to take appropriate measures to make sure the laws are 
enforced, not denigrated.
    Thank you for being here. Thanks to the first panel, as 
well. That concludes our hearing. The meeting stands adjourned.
    [Whereupon, at 2:05 p.m., the committee was adjourned.]
    [The prepared statements of Hon. Edolphus Towns, Hon. Danny 
K. Davis, Hon. Diane E. Watson, and Hon. Bruce L. Braley, and 
additional information submitted for the hearing record 
follow:]

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


                                 
