As a Governor and a former Member of this Committee, I have had the opportunity to work on Medicaid policy from different perspectives.From my new vantage point, I can tell you that the costs of this program can and do produce great challenges for my State and all States.There is no question that we need some changes to ensure that this program will be able to continue to serve as the critical safety net it has for almost 40 years.Having said this, we must also make certain than any change that is contemplated does not do more harm than good.We can never forget what a vulnerable population Medicaid serves.Its 47 million enrollees include over 23 million children, 5 million seniors and 8 million adults with disabilities.As such, we should strive to improve - and not undermine - the program's Federal-State financing and delivery partnership. 

Overview

Today, I would like to make four basic points. 

First, Medicaid plays an essential role in our health care delivery system, assuring affordable, meaningful insurance coverage for seniors, children, and disabled individuals.As the second largest proportion of State governments' budgets and the fastest growing part of our budgets, it also plays a critical role in the economic health of our communities, representing $3.4 million in business activity for every $1 million spent. 

Second, Medicaid costs are rising in spite of the best efforts of Governors to control them.The major cost challenges Medicaid faces - recession-driven enrollment increases, pharmaceutical cost increases, and the aging of America - are largely outside the Governors' control.Almost every state has had to consider and implement cuts in services, covered populations, and/or provider rates.Clearly, States need the Federal government to act now to assume its fair share of responsibility for financing and managing these growing costs. 

Third, Medicaid's historical federal/state partnership is a critical element and must be preserved.The Federal government has always participated proportionately in the rising costs of the Medicaid program.Now, while States are in desperate need of Federal assistance with increasing healthcare costs, the policy offered by the current Administration is simply to cap Federal cost increases and shift to the States the tough decisions about whether to cut people or services.States would be given a choice to accept short-term fiscal relief that is insufficient and will end in a few years, in order to obtain additional flexibility to design the program to meet each State's needs.Federal responsibility must increase as uninsured populations increase. 

And fourth, Congress should act to strengthen Medicaid and make the program more responsive to States' and beneficiaries' needs.Democratic Governors have and will continue to advocate for Federal policies that provide for increasing flexibility, immediate fiscal relief and long-term cost containment and that have already received broad-based support - amongst Governors and the Congress alike.We also welcome a serious, well thought-out discussion about even broader, more long-term Medicare and Medicaid reforms that seriously address flexibility issues and appropriate Federal and State divisions of coverage, delivery and financing responsibility.We call for a truly equitable prescription drug program for Medicare recipients, not one that forces seniors into managed care in order to obtain assistance with increasing drug costs.And we call on Congress to adopt legislation to cover the acute and long-term care costs of elderly and disabled beneficiaries so that States can focus on building a true safety net for children, seniors and disabled Americans not covered by Medicare. 

I.MEDICAID ROLE IN THE HEALTH AND ECONOMIES OF THE STATES

Medicaid is a lifeline for millions of the most vulnerable Americans.Fully two-thirds of the nation's nursing home residents are covered by the program.Medicaid assures affordable, meaningful insurance coverage for over one in five of all American children.In my home state of New Mexico, 44 percent of our children are enrolled in the Medicaid program.The majority of our nation's people with severe disabilities, including most people with HIV/AIDS, get their insurance through Medicaid.Until the recent round of State cuts to populations and benefits, this program was also helping States begin to address the issue of individuals who are unable to purchase or become insured.Because it helps low-income families, Medicaid is the only health insurance program in the nation whose enrollment increases during economic downturns, when States face lowered revenues and deficits.New Mexico is anticipating a 10 percent growth in enrollment in the next fiscal year, even without increased outreach efforts.It is worth noting, Mr. Chairman, that without Medicaid's enrollment increases in recent years, it is virtually certain that the nation would have at least 2 million more uninsured Americans, causing individual financial hardship and increases in uncompensated care in the healthcare industry. 

Medicaid represents a major source of reimbursement to our nation's health care providers and health plans, including 17 percent of hospital payments and nearly 50 percent of nursing home payments.Not surprisingly, the impact of Medicaid's contribution to the economy is significant. A recent report found that every million dollars spent on Medicaid creates another $3.4 million in business activity, supporting jobs and related businesses, especially in rural areas.In 2001, New Mexico saw the second highest rate of return of all the states with $5.76 in new state business activity per dollar of Medicaid spending.State Medicaid spending throughout the country generated almost 3 million jobs with wages in excess of $100 billion in FY 2001.New Mexico will have the second highest number of jobs generated per $1 million in State Medicaid spending.In fact, as bad as it is, the current recession would be much worse without the actual growth of jobs in the health care sector.In short, the positive role Medicaid has played for both our nation's health care and its economy cannot be overstated. 

Unfortunately, the challenges the program faces are at least as great as its successes.Medicaid cost growth is causing serious State budget problems.State revenues have plummeted, with 16 States actually experiencing negative growth in 2002.Coupled with greater demands on services due to the economic slowdown, States' year-end balances in 2002 were 70 percent below where they were in 2000.Medicaid is the largest single growth area for State budgets and has clearly contributed to this imbalance.The program's aggregate costs grew by 13 percent in 2002, the fastest growth in a decade.In New Mexico, we are fortunate to have a modicum of new revenues and reserves upon which to draw.However, over 55 percent of the growth in our State expenditures for FY 2004 will be for Medicaid, leaving little for teacher pay increases or non-Medicaid social services. 

To find a solution to this rapid cost growth in Medicaid, it is important to understand the problem.A recent survey of States found that the top three reasons for Medicaid cost growth were prescription drug costs, enrollment increases (largely driven by the downturn in the economy), and long-term care.What is remarkable about these cost drivers is their reflection of the challenges in the larger health system.These factors are not just driving Medicaid costs but are affecting Medicare, private insurance, and out-of-pocket spending on health care.They also are similar in that comprehensive responses to them require more than action by State Governors who by law cannot spend more than the revenues they can generate in any given year, and who have little control over these factors most associated with Medicaid cost growth. 

Prescription drug costs:States spend about $7 billion per year on Medicaid-covered prescription drugs, and that amount has grown in recent years at a rate of 20 percent per year.New Mexico's expenditures for prescription drugs in its fee-for-service Medicaid program have grown from $46 million in FY 2000 to $79 million in FY 2003, an increase of 73 percent.These expenditures represent about 8 percent of the entire Medicaid program costs in New Mexico. 

I am working with New Mexico's legislature to develop a Medicaid prescription drug program for seniors, with the non-federal costs born in part by State funds and in part by out-of-pocket costs to seniors.A significant proportion of this spending is for Medicare beneficiaries who should have had a prescription drug benefit years ago.Since its inception, Medicaid has been forced to fill the major coverage gap in Medicare's benefits for seniors with very low income or high health care costs.The Congressional Budget Office estimated last year that, from 2005 to 2012, States will spend about $120 billion on prescription drugs for Medicare beneficiaries.Moreover, the payment system for prescription drugs is largely set in law at the Federal level.States that have tried to extend rebates or extract additional discounts have frequently encountered political and legal challenges.In New Mexico, I am working with our State Legislative Medicaid Reform Committee to develop voluntary rebate programs, a preferred drug list, and pooling of resources to increase our pharmaceutical buying power to help contain these rising costs. 

Enrollment:Enrollment in Medicaid, the second cost factor named by States, has increased in large part due to the economic downturn - the worse fiscal crisis facing the States since World War II.The surge in unemployment has caused millions of families to lose their jobs and health insurance.For these families, Medicaid and SCHIP are the only affordable health insurance options.Since the year 2000, Medicaid enrollment has increased by 3 million, at a rate of 10 percent in most States.In New Mexico, enrollment has tripled since 1991, providing coverage for one of every five people in New Mexico and, as indicated above, 44 percent of my State's children.Without further changes to the program and without additional outreach efforts, we are anticipating a more-than-10 percent increase in enrollment in FY 2004.While some States have shouldered the cost of this enrollment increase, this cost increase has occurred at the same time that State revenues have plummeted and, for most States, the Federal contribution to Medicaid has declined.For many States, eliminating optional populations is the only solution to control this enrollment increase, leaving many children and adults uninsured. 

Long-term care:Third, long-term care costs have been rising rapidly, and this rate will only accelerate as the baby boom generation ages and needs this service.Within the next 27 years, the population age 65 years and older will increase by 60 percent over 2000 levels and one in five adults will be 65 or over.Neither private health insurance nor Medicare insures against the catastrophic costs of nursing home and other long-term care needs.Additionally, few insurers provide supportive services to enable people with disabilities to live at home.States, through Medicaid, have filled this gap, providing innovative and high-quality long-term care to citizens who need it.Eighty-two percent of the projected growth in Medicaid expenditures between 2002 and 2004 is attributable to increased costs for elderly and disabled individuals.Yet, because many of these people are also covered by Medicare, not only are there care-coordination and coordination of benefits (COB) problems between these two disparate programs, but there is cost shifting from Medicare to Medicaid and States.This will only worsen as the elderly population doubles by 2030 with the retirement of the baby boomers.Today, while seniors represent about 5 percent of New Mexico's Medicaid enrollees, costs associated with the healthcare for seniors represent 19 percent of New Mexico's Medicaid budget.Almost all the seniors enrolled in Medicaid are also eligible for Medicare.This is yet another example of the importance of integrating Medicare into any serious Medicaid reform debate. 

II.Medicaid's state/federal partnership

Medicaid was created as a partnership between the Federal and State governments.The Federal government requires certain mandated populations be served and identified mandated basic benefits be offered.States are provided considerable freedom to design a program that adds populations or benefits and defines services within certain parameters to meet the unique needs of each State.The Federal government provides oversight and assurance that basic access, quality and accountability requirements are achieved.When the costs of the program go up, these governmental partners share in the burden; when costs go down, they share in the savings.This sharing of financial risk creates a dynamic that allows States the flexibility to expand and contract coverage while maintaining core support for the poorest and sickest people that they cover. 

This federal/state partnership is particularly critical when there is an economic downturn.The Federal government's lack of a balanced budget requirement with which the States contend means that the Federal government is more able to absorb the increasing costs of healthcare for an increasing number of otherwise uninsured citizens.Any proposal that would put a limit on the growth in the Federal government's share of these costs while shifting the difficult decisions about coverage and benefits to the States would be an abdication of this historical partnership and the Federal government's role in assuring the health of our nation.

 All the Governors want more flexibility to meet their changing needs and the changing face of healthcare service delivery.However, flexibility should not mean having to cut people from the rolls, reducing coverage, or watching children and seniors suffer, or even die, due to lack of healthcare.And, all the Governors need immediate fiscal relief.But receiving new federal monies now to address immediate issues should not be coupled with acceptance today of a future drop in these funds when we know that healthcare costs are going to continue to rise. 

III.           Competing Reform PROPOSALS:what should congress do?

I applaud this Committee, the Congress and the President for taking up the issue of Medicaid reform.Indeed, my Democratic Governor colleagues and I agree with many of the sentiments expressed by Secretary Thompson in announcing the President's proposed Medicaid initiative.However, while we may agree on this program's importance and, to some degree, its challenges, we do not believe there are sufficient details of the Administration's proposal to determine the true impact at this time.The apparent solution: to provide State fiscal relief - however limited -- only to those Governors willing to accept a capped, block grant for most Federal Medicaid and SCHIP funding causes us great concern.The Federal government needs to step up to the plate, not away from it; if it does not, States will either be overwhelmed by the new costs and need OR will have to shift an excessive amount of the burden to populations least able to afford it and to providers already burdened with extensive uncompensated care. 

Later this week, the NGA will appoint a bipartisan Medicaid Task Force to review many different approaches to the financing and delivery challenges facing the Medicaid program and the other health systems it supplements.We look forward to working with all interested parties on this critically important issue and to receiving the Task Force's findings and recommendations.Some of our concerns are discussed below.

 The President's Plan -- Capping the federal portion of Medicaid spending leaves States with all the risk.President Bush's proposed Medicaid plan would replace the historical state/federal partnership with a forced choice between limited and capped new resources and increasing flexibility and the status quo in which costs are rising beyond States' ability to control them.The President's proposal is not well-defined at this point.As questions are asked by Governors, advocates and media, it is clear that the proposal's details are not determined and in fact are changing.Without those details, it is hard for anyone to determine the exact implications for any particular State.However you look at it, this plan protects the Federal government's budget while shifting difficult decisions and/or exploding costs onto States and their citizens.The Federal government - despite its lack of a balanced budget requirement and broader revenue base - would leave States at full risk for the two-thirds of Medicaid costs that represent "optional" populations and services.While Federal financing for "mandatory" populations and services would remain as a Federally-matched entitlement, Federal financing for the two-thirds of the Medicaid program that is "optional" populations and services would be set in law, and would grow at an arbitrary, capped rate.Since 80 percent of spending on the elderly is "optional," 86 percent of nursing home residents are "optional" and 90 percent of long term care spending is "optional," and since these costs are the ones rising the quickest, this cap on "optional services" would be especially devastating for States. 

What would this mean if this proposal were applied to New Mexico?The Federal funding for prescription drug coverage in New Mexico - and all States for that matter-- would be capped.Why? Because prescription drug coverage is an optional benefit.If my State is unable to constrain drug costs, we would be forced to reduce coverage, drop other benefits or limit enrollment.Moreover, because Federal funding for most of our so-called "optional" nursing home residents would be capped, New Mexico's influx of older residents would be made even more vulnerable to coverage or service cuts should costs exceed what appears to be an arbitrarily-imposed capped formula.Similarly, spending on mental health would be capped under this proposal.Many of the rehabilitative services necessary for adults with serious mental illness and children with severe emotional disturbance are "optional."Inevitably, these caps for various populations and services would eventually force us to make unconscionable decisions between various populations in need, if we take this option in order to receive fiscal relief. 

In addition to these difficult choices, it is important to note that projections of health care costs are often wrong.The inflexibility of block grants punishes the States and their citizens for this unpredictability.An unexpected surge in unemployment, a breakthrough in medicine that produces miracles - but at a high cost - or an epidemic or rise in chronic illness could all create an unexpected demand for health coverage.Governors would be under immense pressure to be responsive, but the Federal funding commitment would be limited by the cap on its portion of these costs.If a Governor did not respond to the demand through Medicaid, his or her State would likely be on the hook for the cost in any event as it would pay - directly or indirectly - the costs of uncompensated emergency room use, delays in care that result in unnecessary hospitalization, and public health problems resulting from un-immunized people or untreated diseases.In addition, local economies and providers would suffer from the loss of Federal Medicaid revenue.What is more, a poor decision by one Governor in one State, would tie his or her successor Governors and their citizenry to a permanent limitation on Federal support for the foreseeable future, or until Congress acts again.

 What States Get In Return Is Not Likely to Be Worth the Gamble.In return for accepting the proposed Federally capped financing structure, States that opt for this approach would get a portion of the $3.25 billion allocated for 2004 and additional flexibility to design the Medicaid program as they want.The amount available for each State would depend in part on the number of States who choose this option.This amount of funds is actually less than the revenues the States are projected to lose if the President's economic stimulus bill is passed.It is one-fourth the amount of funds that would be made available with the enactment of the bipartisan and NGA-endorsed Collins, Hutchinson, Rockefeller, Nelson "State Budget Relief Act of 2003".It is less than one-tenth the amount of relief that Democratic Governors are advocating.And it is three times less than the King, Brown "State Budget Relief Act of 2003."Moreover, even if this funding were sufficient to meet today's needs, accepting the block grant on most Federal Medicaid funding means that this relief comes at the cost of coverage for State residents tomorrow.This creates an untenable position for future leaders saddled with choices made by their predecessors without the benefit of hindsight. 

In addition, because the vast majority of the "optional" populations have incomes below poverty (about $9,000 a year), savings achieved by the proposed cost-sharing flexibility are low.Over half of the elderly covered by Medicaid are considered "optional".They are on Medicaid in the first place because they have been impoverished by health care costs.The income line between optional and mandatory coverage for parents is set at an average of 41 percent of the poverty line - about $3,600 of income for the year.How much cost-sharing can one obtain from these populations before either reducing access to needed care or shifting all the costs to health care providers?In New Mexico, a legislative Medicaid Reform Committee spent several months in 2002 looking at ways Medicaid costs could be controlled.That Committee found that while cost-sharing was an important component of cost control and should be implemented, it would only generate minimal savings for the program. 

States do need additional flexibility with regard to delivery system innovations.Eligibility categories and processes could and should be streamlined.Services that can be covered should be flexible to keep up with evidence-based practices.And we should consider adding funding to SCHIP for parents and uninsured adults and ensuring that benefits and cost sharing for higher income populations make sense.However, reducing benefits and increasing cost sharing on populations with extremely limited means or high health care costs would work to shift costs to seniors, families, and health care providers.Moreover, appropriate and well thought out flexibility reforms should not only be provided to States that agree to block grant a major portion of their programs; they need to be considered in the context of broad and thoughtful Medicare and Medicaid reforms that should and would benefit all States. 

Another vision for Medicaid reform.As my comments have made clear, Democratic Governors do not favor the status quo.I am unaware of any Democratic Governor who is anything but strongly supportive of Medicare and Medicaid reforms to be enacted this year.Frankly, we believe the sooner the better.We are reserving judgment on any final reform proposal until we understand the details, and until we have engaged in a process to determine the best approach for our States and the individuals they serve. 

If we learned anything from all the fights in Washington, D.C. over health reform in the last decade, we have learned that we must find a way to pursue changes that can attract bipartisan support.We should start this process by looking at the policies recommended by the majority of Governors.And, likewise, we should look at Medicare and Medicaid reforms that have broad, bipartisan support in the Congress. 

Both the NGA and the DGA have endorsed the bipartisan State Budget Relief Act of 2003, which would provide short-term fiscal relief to the States through a temporary Federal Medicaid payment increase.Congress should go further and set the Federal Medical Assistance Percentage (FMAP) to an on-going formula that is flexible and that would be responsive to economic downturns to help States maintain healthcare services and still live within their balanced budget requirements.Congress should also consider increased FMAP for Federal mandates such as translation services, transportation, emergency services for undocumented immigrants and EPSDT services for children.Frankly, in my State, some legislators and public commentators think of Medicaid as offering "rich benefits" because it covers things employer and commercial insurance often does not.Most of these so-called "rich benefits" are actually federal requirements for a State's participation in the program.For some of these services that are access mandates, the Federal government should be higher than the States' regular FMAP.Finally, Congress should provide opportunities for increases in disproportionate share hospitals for low DSH states and utilization of unspent SCHIP funds by those States such as New Mexico that could use such funds now.Prompt enactment of legislation such as this would provide the States the ability to avoid senseless and harmful cuts to some of our most vulnerable seniors and children.Moreover, such an investment is one of the most effective economic stimulus tools we have. 

One of the most important contributions you could make would be the passage of a meaningful, workable and bipartisan Medicare prescription drug benefit.If structured properly, such an initiative would rightly reduce States' prescription drug liability by finally providing Medicare beneficiaries who are also eligible for Medicaid (dual eligibles) the benefits they so desperately need.Governors from both parties want to be constructive players in this debate and have much to offer in terms of expertise in administering benefits and assisting low-income populations.The relationship between Medicare and Medicaid in funding acute, primary and long-term care needs of persons who are dually eligible also needs to be considered.When changes are made to Medicare, such as increased co-payments or premiums, the States have to pick up a portion of these costs through the Medicaid program.In fact, as new service mechanisms are developed, the federal government could actually save money in hospital costs while State costs in pharmaceutical and other costs could actually increase.

States' Medicaid programs are paying a larger share of health insurance costs for older and disabled persons.In 1984, Medicaid paid 30 percent of these costs and Medicare paid 70 percent.In 1998 this proportion had shifted to 40 percent for States and by 2012, the States' share of these costs is expected to be 45 percent.The Federal government's responsibility is decreasing for this population, and this latest proposal will decrease that responsibility further at a time when the population's needs are increasing. 

Governors want to work with our Federal partners on ways to reduce costs at least as much as to encourage them to provide needed and appropriate financial assistance during severe economic downturns. Along these lines, many Governors and Members on both sides of the aisle have supported ways to constrain pharmaceutical costs by reducing barriers to generic competition and, in some cases, supporting ways to increase and expand access to the pharmaceutical rebates and discounts.In New Mexico, we are engaging in a "Working Smarter" initiative to explore these issues as well as the expansion of disease management approaches to improve care and decrease rising costs of care for those with chronic illness.We are also undertaking initiatives to examine ways to utilize existing State dollars as match and ways to increase our collection of third party benefits and our detection and prevention of Medicaid fraud.

 States should be given more flexibility to cover pregnant women, parents, uninsurable adults and to expand coverage to children with disabilities.States should also be given flexibility to change or implement services and cost-sharing approaches that will encourage community-based cost-effective care, rehabilitation and supports.In New Mexico, we are exploring ways to create innovative approaches to addressing the needs of those who are uninsured.And, we are undertaking a Medicaid System Redesign effort this Spring and Summer to determine how best to structure and define services to meet the needs of New Mexico's residents. 

Finally, while my fellow Governors and I are focused on how to make ends meet now, we have a responsibility to think about the future of Medicaid, the future of Medicare, the future of long-term care, and how our health and retirement security systems are going to respond to the aging of America.The time is now to begin the discussion and to develop bipartisan solutions.I more than most Governors know how hard it is to do this in Washington, D.C., but we must take on these challenges. 

Medicaid, in particular, faces enormous challenges as both its long-term care costs increase with the changing demographics, and its basic health insurance role expands if only because the number of uninsured Americans grows unabated.I urge you all to rethink the Federal-State partnership.I, for one, believe that if Medicare were to assume all - or certainly a much greater portion -- of the health and long-term care costs of the elderly, then States could provide a true, nationwide safety net for all Americans, regardless of family type, illness, immigration status or age.I think we could build on SCHIP to create a Medicaid safety net for elderly and disabled Americans, as we have done for children.And I think we could contribute to a dialogue about how we set the nation on a path to ensure that all Americans have basic health insurance.  

Conclusion

In conclusion, I want to emphasize the importance of working across party lines at both the Federal and State levels to address challenges we all face.We faced a crossroads in the debate around Medicare and Medicaid in 1995 and 1996.After a face-off that literally closed down the Government, both parties eventually agreed to reject block grant approaches and provide more flexibility to the states in administering the Medicaid program and the establishment of the

SCHIP program.Ironically, in 1997, three Governors who have since become members of President Bush's cabinet, signed a letter to then President Clinton along with 38 other Governors.These three Governors included current HHS Secretary Tommy Thompson as well as Tom Ridge and Christine Whitman.This letter stated as follows:

We adamantly oppose a cap on federal Medicaid spending in any form.Unilateralcaps in federal Medicaid spending will result in cost shifts to states, enabling the federal government to balance its budget at the expense of the states. . . . Under a cap, once the federal spending obligation is fulfilled, states would become solely responsible for meeting uncontrollable program cost increases . . . Governors must be involved in any budget negotiations related to the future of Medicaid.

With a Congress and a nation so evenly divided politically, we must again find ways to govern across political lines. This cause is not served well by proposals that require states to agree to a block grant for much of the Medicaid population we serve in order to gain access desirable new flexibility and to short term fiscal relief - however insufficient.Democratic Governors stand ready to participate and contribute to this debate as I hope my comments have made clear.We strongly support reforms that would stop harsh cuts from occurring to the program and to the seniors and children it serves, to provide more flexibility to the States in administering the program, and to seriously engage in a substantive discussion to strengthen and modernize our retirement security programs, including Medicare and Medicaid. 

Mr. Chairman, I hope my comments have been responsive to your request.Again, it is a pleasure to appear before you and I would be happy to answer any questions you may have.