S. HRG.

109660

FROM MEDICAID TO RETIREE BENEFITS:

HOW SENIORS IMPACT AMERICAS HEALTH CARE
COSTS

HEARING
BEFORE THE

SPECIAL COMMITTEE ON AGING

UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION

WASHINGTON, DC

JULY 13, 2006

Serial No. 10927

Printed for the use of the Special Committee on Aging

(
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WASHINGTON

30619 PDF

2006

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SPECIAL COMMITTEE ON AGING

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

(II)

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CONTENTS
Page

Opening
Opening
Opening
Opening
Opening

Statement
Statement
Statement
Statement
Statement

of
of
of
of
of

Senator
Senator
Senator
Senator
Senator

Gordon Smith .......................................................

Herb Kohl .............................................................
Ron Wyden ...........................................................
James Talent .......................................................
Debbie Stabenow .................................................
PANEL

OF

1
3
3
4
5

WITNESSES

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

6
30
55

APPENDIX
Prepared Statement of Senator Ken Salazar ........................................................

89

(III)

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FROM MEDICAID TO RETIREE BENEFITS:

HOW SENIORS IMPACT AMERICAS HEALTH
CARE COSTS
THURSDAY, JULY 13, 2006

U.S. SENATE,
SPECIAL COMMITTEE ON AGING,
Washington, DC.
The Committee met, pursuant to notice, at 10:06 a.m., in room
SD106, Dirksen Senate Office Building, Hon. Gordon H. Smith
(chairman of the committee) presiding.
Present: Senators Smith, Talent, Kohl, Wyden, Carper and Clinton.
OPENING STATEMENT OF SENATOR GORDON H. SMITH,
CHAIRMAN

The CHAIRMAN. Good morning, ladies and gentlemen. We welcome you all to this hearing of the U.S. Senate Special Committee
on Aging. We have a very important topic to consider today, From
Medicaid to Retiree Benefits: How Seniors Impact Americas Health
Care Costs.
We are joined by two very distinguished witnesses. Richard Wagoner is the president of General Motors and Janet Napolitano is
the Governor from my mothers home State, the great State of Arizona. We thank you so very much, Governor, for being here.
We will begin by having opening statements by my colleagues
and then we will turn to our witnesses. Our colleague, Debbie
Stabenow, will be introducing more formally Richard Wagoner. So
we thank you, Senator, for being here at this important hearing.
Our nation is facing a crisis. Health care costs continue to escalate, while quality continues to lag behind other industrialized nations. Just this past April, a study was released in the Journal of
the American Medical Association that compared the health status
and spending of Americans to that of British citizens. The results
were alarming. Not only did Americans have lower overall health
status, we are spending almost twice as much.
We will hear from our witnesses how health care costs continue
to impact employers, States and the Federal Governments ability
to deliver health care. The two driving factors for growth in health
care spending are continually high health care inflation and a
growing senior population. While the size of the over-age65 population cant be changed, steps can be taken to better their care and
create efficiencies to ensure we are spending our health care dollars wisely.
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Obviously, the question is asked why is this important. The National Center for Chronic Disease Prevention and Health Promotion estimates that 80 percent of people over age 65 have at
least one chronic health condition, and 50 percent of those have at
least two chronic conditions. Further, the size of this population is
projected to explode to 71.5 million people, or 20 percent of our population, by the year 2030, when all the baby-boomers will have retired.
These alarming statistics clearly indicate that our nation is facing a financial train wreck. That is why it is important to act now
to reform our system, and I believe the place to start is Medicaid.
The Medicaid program, which was created in 1965, has failed to
evolve over time. As innovations in the delivery and management
of care have become mainstream in the private sector, Medicaid
has remained firmly set in its original fee-for-service model.
However, Medicaid is not a failure. It is an integral and essential
component of Americas health care system, providing safety net
coverage to over 60 million Americans. These Americans are the
poor, the elderly and the disabled. However, as strongly as I support Medicaid, I am not an apologist for it. I do not believe Medicaid needs to be reformed. I do not believe it should be put on a
pedestal, never to be changed, I believe that reform is essential.
In that respect, I continue to try to be a bridge from my party,
the Republican Party, to the Democratic Party, fighting to protect
the program, but at the same time urging sound, rational reform.
That is the purpose of this hearing, to create a bipartisan forum
where all stakeholdersmembers, beneficiaries, providers and advocatescan come together to chart the future of Medicaid.
I hope that by starting this dialog now, we can develop sound
policies that are based on improving care and ensuring efficiency
rather than simply cutting funding to meet a dollar figure. In the
end, I fear the latter approach only ends up costing the country
more both in actual dollars spent and in the negative impact to
human life.
The Aging Committee has a long tradition of leading the Congress toward innovative and necessary changes to our social programs. In fact, the Social Security program and Medicare were created based on recommendations that came from this Committee.
We also have continued to operate in an open and bipartisan manner, and I have to make special note of Senator Kohl and the privilege and pleasure it is to work with him on such a basis.
As Congress embarks on changes to Medicaid, and hopefully the
entire health care system, we have an opportunity to once again
lead the way. We need to put ideology aside and develop solutions
that will ensure the long-term solvency of Medicaid. In doing so, I
am hopeful the combined effect will drive efficiencies and modernizations throughout the entire health care system.
As we will hear from our witnesses, both of whom oversee large
health care programs, utilizing the size and clout of Medicaid can
force innovation in the delivery of care and provide lower-cost,
higher-quality health care. It is time to act, and I hope my colleagues will join me as I begin a series of hearings and monthly
roundtable discussions focused on reforming Medicaid the right
way, not just the budget way.

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I look forward to hearing from our witnesses, and before we do
that, I will turn to my colleague, Senator Kohl.
OPENING STATEMENT OF SENATOR HERB KOHL

Senator KOHL. Well, thank you, Mr. Chairman, and, of course,

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

Senator WYDEN. Thank you, Mr. Chairman. Mr. Chairman, I

think I mentioned to you back when I was director of the Oregon
Gray Panthers, we used to say we dream of the idea of an Oregonian being Chairman of the Senate Committee on Aging. It is great
to see that you have the gavel in your hands, and I appreciate all
of our bipartisan work in this regard.
The CHAIRMAN. Thank you, Senator.
Senator WYDEN. I think it is well understood that escalating
health care costs are hitting America like a wrecking ball. This was
seen again yesterday when there was an announcement that Medicare premiums were going to go up at least 11 percent next year.
What that means is that many older people are going to be looking
to their companies and companies like General Motors in order to
secure good health care. Because health care is like an ecosystem,
if you cant secure your health care from Medicare and you cant
secure it on the retiree benefit side in the private sector, then, of
course, you slide on to Medicaid.

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So I am very pleased that we are going to have our witnesses
today, Mr. Wagoner and Governor Napolitano, because I am interested in looking with them particularly at how as entitiesa big
private employer and a major Statehow they use their purchasing power in order to help drive down the costs of health care.
We have Senators here who have been of great help to Senator
Snowe and I, for example, in trying to life the restriction on Medicare so that Medicare could bargain to hold down the costs of medicine. We are just a handful of votes away, and I am sure Mr. Wagoner and Governor Napolitanoone of the first things that they do
is try to ensure that they can use their clout in the marketplace
in order to drive down the cost of health care.
What I will be asking you, Mr. Wagoner, first, because I know
you have thought a lot about health care and thought about it in
an innovative way, is about your ideas on shared responsibility in
terms of holding down health care costs and securing good services.
It seems to me that there is a role for government, there is a role
for the private sector, and I would also say as a Democrat there
is a role for the individual, as well. So I am really glad you are
here.
I note Senator Stabenow is here. You are running with the right
crowd, Mr. Wagoner, because Senator Stabenow has been a great
advocate for quality and affordable health care.
I thank my friend and colleague, Senator Smith, for bringing the
Committee together to examine these issues.
The CHAIRMAN. Thank you, Senator Wyden.
Senator Talent.
OPENING STATEMENT OF SENATOR JAMES TALENT

Senator TALENT. Thank you, Mr. Chairman. I want to echo what

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

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ment negotiated in good faith and that Senator Bond and I are trying to make certain gets respected, whatever else is done. So I
wanted to make certain the record had that in it.
Again, I am grateful to you and to Senator Kohl for holding this
important hearing. Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Senator.
Senator Stabenow.
STATEMENT OF SENATOR DEBBIE STABENOW

Senator STABENOW. Thank you, Mr. Chairman. I want to particularly thank you and Senator Kohl and all of my colleagues for beginning this series which is so critically important to all of us.
I am extremely pleased to have the opportunity to introduce the
chairman and CEO of General Motors, Rick Wagoner, today. Over
his 29-year career with General Motors, Rick has been involved, I
am sure, in every facet of the company. He was elected to his current position on May 1, 2003, after serving as president and chief
executive officer since June 2000, making him the youngest CEO
in GMs history.
Given his wealth of experience, it is no wonder that when Rick
Wagoner talks about health care, it makes national headlines and
people listen. I think his words are very important, and his experiences, and those that he represents in terms of an industry are
very, very important.
Health care costs are a huge challenge facing American businesses, as we know, who are trying to compete in a global economy.
The reason for that is that we fund health care differently than
any other country does, and this difference eats into the bottom
line for companies.
Let me just mention, if I might, in making the introduction that
there are many ways that we can work together. I have appreciated the work with General Motors on generic drugs, and Senator
Lott and I have legislation to close loopholes currently in the generic drug laws to be able to speed generics to the marketplace. We
have worked together on health IT, and I am sure Rick is going to
talk about e-prescribing. I would say again Senator Snowe and I
have legislation to move that forward, which I would look forward
to working with you on. There are so many areas where we can
work together.
Senator Wyden talked about shared responsibility, and I am sure
that Rick is going to be talking about the fact that 1 percent of
their employees have catastrophic costs, but that is somewhere between 20 to 25 percent of the entire cost of the company. There are
ways for us to come together and I hope that the Committee will
be recommending opportunities for us to partner on those issues,
as well as on Medicaid and Medicare.
As I indicated, Rick Wagoner speaks for an entire industry which
has created the middle class of this country, has given people goodpaying jobs, health care, pensions and security in retirement. As
our companies compete in a global economy, I hope that we will be
listening closely and listening to what Rick is saying today because
we have a stake in their success. We have a stake in their ability
to succeed in a global economy because that means our people suc-

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ceed, and I believe that means we keep the middle class of this
country.
So I am very pleased that Rick Wagoner is here. He is someone
that we hold in high esteem in Michigan for his work and for the
leadership of General Motors on a host of issues. Certainly, health
care is at the top of that list.
So welcome, Rick.
The CHAIRMAN. Thank you, Senator Stabenow.
Let me also now introduce, as well, our other witness who is the
Governor of the great State of Arizona, Janet Napolitano. When I
invited the Governor to participate in this hearing, it was because
I am aware of and following the great things she is doing for the
Medicaid population in Arizona and wanted very much to include
Arizonas experience in this important hearing.
As I invited her to be with us today, it was very clear to me in
our conversation that she had a much more important responsibility than being in Washington, DC today, not just running the
State of Arizona, but being with her niece for this week, and on
this Committee family comes first.
Governor, thank you so much for taking the time. I dont know
whether you have a time constraint where you would like to go
first in your testimony. We want to be respectful of that.
Governor Napolitano. Senator, thank you for that. I would like
to hear from Mr. Wagoner first and then I will dive in, and then
we will get to questions from the Committee.
The CHAIRMAN. Thank you so much, Governor.
Mr. CEO of General Motors, thank you so much for being here,
and we invite your testimony now.
STATEMENT OF G. RICHARD WAGONER, JR., CHAIRMAN AND
CHIEF EXECUTIVE OFFICER, GENERAL MOTORS CORPORATION, DETROIT, MI

Mr. WAGONER. Thank you very much. I very much appreciate it.
Chairman Smith, Senator Kohl, members of the Committee, it is
an honor to have a chance to testify.
Governor, thanks for joining us today and I will look forward to
your comments momentarily. I wanted to thank Senator Stabenow
for her kind introduction as well.
I would like to highlight a few of General Motors efforts to improve the delivery and efficiency of health care services for our employees, retirees and dependents. In addition, I have provided a detailed description of GMs key initiatives in my written testimony.
Let me start by giving a little background.
General Motors is the largest private purchaser of health care in
the United States, paying the health care costs for 1.1 million employees, retirees and dependents. Of those 1.1 million people, approximately 530,000 are age 60 or over. In 2005, General Motors
spent $5.3 billion for health care. That is more than we spent on
steel. In fact, a staggering $1.9 billion of that cost was for prescription drugs.
As you know, the U.S. spends more on health care as a percentage of GDP than any other industrialized country, and costs continue to rise, as has been pointed out earlier. Despite all that
spending, basic quality indicators would suggest the U.S. does not

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have the best health care. In short, we need to get greater value
for our health care dollar, and to do this requires the collaboration
of stakeholders on many levels.
In our own analysis, we found that GM employees and retirees
need three important things: first, better information on effective
treatments; second, better tools to identify effective and efficient
health care providers; third, education and outreach to prevent disease and better manage chronic illnesses.
To address these needs and to find innovative ways to create better health care delivery systems for all, GM is leading over 30 initiatives across the country. This morning, I would like to touch on
just a few of them.
For example, we have in place a number of programs and educational tools to help our employees, retirees and their families
stay healthier and better manage disease. Way back in 1996, GM,
along with the UAW, our largest union, launched Lifesteps, our
comprehensive health and wellness program designed to help individuals identify controllable health risks, develop plans to reduce
those risks and modify their lifestyles.
Today, more than 75 percent of GM employees and a very substantial number of retirees have participated in this Lifesteps program which has led to more than 1 million health risk appraisals
and the reduction of more than 185,000 specific health risks.
What is more, we found that when our employees participate in
Lifesteps as active employees, they are more likely to participate
in these programs as Medicare-eligible retirees. So as our employees retire and move into Medicare, we are providing Medicare with
a more health-conscious member and likely a healthier member.
Another GM initiative that focuses on prevention and disease
management is the Greater Flint Health Care Coalition Heart Failure Task Force. The goal of this program, which covers almost
200,000 General Motors employees, retirees and their families in
the greater Flint, MI area, is to encourage more physicians to follow established clinical guidelines in order to reduce health risks
and readmission rates, and offer a better quality of care.
We are pleased that early results show a significant improvement in the use of appropriate medications, better documentation
and compliance with guidelines. For example, of 2,500 heart patients, those treated at the eight participating hospitals had significantly lower mortality and readmission rates, than those treated at
six non-participating hospitals.
GM has also had an extensive health education campaign for all
of our employees, retirees and their families to help them become
better health care consumers. Back in 2001, we began to emphasize
to our employees and retirees the high quality and value of generic
drugs. As a result, we have been able to gain over 90-percent generic substitution, again with the support of union leadership.
Each percentage increase in generic use saves General Motors $4
million a year.
We also offer all of our employees and retirees many publications, including this comprehensive Health Care 101 guide that addresses major issues facing the health care system. We are also
helping our employees and retirees become better consumers by

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providing them with more information about providers and plans
in their communities.
This August, GM, along with other employers, will launch the
Dayton, Ohio Consumer Information Transparency Project. The
program will give more than 70,000 local health care consumers
some key shopping tools, like cost and quality information about
their health care providers. The goal is to educate patients to make
better-informed and effective health care choices and to create competition among providers based on cost of service and quality of
service.
Starting in 2006, GM began offering salaried workers and early
retirees a choice of two high-deductible health care plans with
health savings accounts. These plans have been very well received
and give GM employees and early retirees greater control over
their health care dollars, flexibility to choose their own providers
and tax-favored ways to save for current and future health care
costs.
Another critical tool to help patients become better health care
consumers is health information technology. We have projects in
several of our communities, including a collaborative effort with
Ford, DaimlerChrysler and Medco Health, which is supported by
the UAW and the State of Michigan. This Southeast Michigan
Electronic Prescribing Initiative encourages physicians to adopt
wireless hand-held devices to look up formularies and other prescription drug information, write prescriptions and send them directly to the pharmacy for filling. As a result, we have seen a significant reduction in adverse drug events and an increase in generic drug use by over 7 percent.
As I mentioned earlier, it takes collaboration by stakeholders in
the public and private sectors to develop a quality health care system. While there are numerous collaborative efforts that GM supports, I want to highlight two that are showing great promise.
In Michigan, GM is working with local health care providers,
businesses, unions, hospitals and the Greater Detroit Health Care
Council on a program called Save Lives, Save Dollars. The goal is
to make hospitals more financially accountable for their performance and give consumers price and quality information on physicians. We believe that this will drive our health care cost system
to achieve higher levels of performance, which will help save lives,
and greater overall efficiency, which will help save dollars.
The Save Dollars component will pay hospitals based on their
meeting established performance measures. When care and outcomes are improved, we expect to spend fewer dollars. This is
something we know from our own extensive experience in manufacturing. As you improve quality, you lower costs.
Another quick example of collaboration is the implementation of
the General Motors production system within health plans, hospitals and physician groups. GM has found that approximately 80
percent of a process, regardless of the industry, is comprised of
non-value-added activities. Since 1994, GM has held workshops in
over 400 hospitals to help those in the health care industry learn
how to be more efficient and eliminate waste. Average results have
yielded a 60-percent productivity increase, a 46-percent inventory
reduction and a 51-percent lead time improvement.

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So as you can see from all this, GM is investing considerable resources to find innovative ways to improve the quality and cost of
health care services. However, we also believe that much more can
be done with the support and engagement of Congress and other
public and private sector stakeholders.
Several key public and private initiatives that deserve attention
are a rigorous and robust, competitive prescription drug market in
which everyone has access to the full range of affordable pharmaceuticals, including generic biopharmaceutical drugs; policies that
give consumers and physicians information on the relative effectiveness of different drugs and treatments so they can compare and
distinguish treatment options; implementation of national health
IT legislation; release of the complete Medicare claims data base;
and, finally, a better public-private effort on high-cost cases. Just
1 percent of the population with chronic and serious illnesses accounts for almost 30 percent of total health care expenditures.
So in conclusion, GM is proud of the positive health care efforts
we have been making in our communities for our employees, retirees and their families. However, we all can and must do even more
to improve quality, reduce cost and get greater value for our health
care dollar. At GM, we are committed to working with both public
and private sector stakeholders to develop the solutions that will
improve the health care market for everyone.
Thank you again for the opportunity to share GMs experiences
with you today.
[The prepared statement of Mr. Wagoner follows:]

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30
The CHAIRMAN. Thank you, Mr. Wagoner.
Governor.
STATEMENT OF HON. JANET NAPOLITANO, GOVERNOR, STATE
OF ARIZONA, PHOENIX, AZ

Governor NAPOLITANO. Well, thank you, Mr. Chairman and

members of the Committee, for inviting me to be with you today.
I am sorry I cant be there in person, but as the Chairman referenced, I had a family obligation that I could not move.
I must say as the Governor of a Western State that using the
videoconferencing facilities to testify is a great service because it
allows me to stay in my State and do the day-to-day work of government and to provide you with information that I think will be
helpful. Indeed, I think I sit here in a unique position because normally Governors come to the Senate and they testify and they say
we need more money, we need more help.
I am here to say I think I can offer you some suggestions on the
policy side that will end up saving money for the country as a
whole. Indeed, there was a recent Lewin study that looked at Arizonas Medicaid program and said that if this were adopted nationally, it would save you $83 billion over the next 10 years. So I
thought what I would do in my testimony is highlight some of the
elements of that and why it works and why we think you dont
have to choose between cost containment and quality of care. You
can do both.
In Arizona, as you may know, we were the last State to adopt
a Medicaid program. That was in 1982, and we decided to design
a program different from all others. In fact, we have been operating
under a huge waiver since our beginning. We utilize managed care,
full risk-based capitation, effective procurement and market forces
to control costs. Our waiver allows us to use these tools and serve
seniors and other populations in a cost-effective way.
Now, without a doubt the most important component of our program is the partnership between the public and the private sectors.
This is the cornerstone of our model. Arizona contains costs while
providing high-quality services through use of managed competition with private sector managed care organizations, known as
MCOs.
Another key component of the model is that the MCOs we contract with are capitated at full risk for all services, including pharmaceuticals. The full risk contracting encourages MCOs to leverage
purchasing power, to establish their own formularies, to case-manage members and to appropriately manage health care utilization.
The model not only allows, but incentivizes MCOs to establish
formularies that mandate use of generic drugs.
While other States average a 50-percent rate of generic drug
usage, Arizona has a rate of 71 percent, and that is just for our
long-term care population. The Lewin study found that Arizonas
per-capita drug spending is the lowest in the Nation, without compromising quality.
Arizonas model also has seen significant savings from serving
our aging members in home and community-based settings. Arizona has been able to reverse previous trends and now serves more
than 63 percent of our aging population in home and community-

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based settings rather than more costly nursing facilities. This is
not only cost-effective, but it offers more options to our members
in how they receive their care and how they continue to live effectively and independently in their own homes.
I think we all agree that the most basic goal is to ensure that
Medicaid endures and it endures to serve our seniors and others
who rely on this program for their health care. I believe the Arizona model offers opportunities that other States and the Federal
Government should be encouraging.
Again, I want to thank you for this opportunity to testify before
you today and I would be happy to answer any questions that you
have. I have a more complete statement that I have submitted to
the Committee and I hope that you will include it in your deliberations.
[The prepared statement of Governor Napolitano follows:]

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44
The CHAIRMAN. Thank you, Governor, and we will include your
full statement and we value very much your participation and your
insights.
Did you say that the number of savings for the Federal Government nationwide would be $83 billion?
Governor NAPOLITANO. Yes. This is based on a study done by the
Lewin Group looking at how we manage our health care costs
versus other States in the Medicaid area, and they said if you followed Arizonas model, those are the types of savings you would
incur.
But again, Mr. Chair, and to echo what you said in your opening
comments, it is not just about a budget number; it is about providing health care for people. I think the key point of that is you
can create those savings and still provide quality health care.
The CHAIRMAN. Well, that has been my point all along through
the Medicaid debate earlier in this Congress, and I have to say $83
billion isby the way, it is $83 billion over how many years?
Governor NAPOLITANO. Ten.
The CHAIRMAN. Ten years. That is enough even to get the attention of the U.S. Senate. But I think even more important than the
budget number, my point in my opening statement was, look, Medicaid needs reform. I think Arizona has shown a light as to how
you can reform it without compromising health and quality. I cant
thank you enough for that example and sharing it with us.
I guess the question I have for you is what has the Deficit Reduction Act of 2005 done to your ability positively or negatively. I
would be very interested in how we can mitigate any damage done
and not just replicate some of the good things you have done.
Governor NAPOLITANO. Mr. Senator, I think it is a little too soon
to know what the DRA really has done. What I do think we need
to communicate to HHS and the administration on the Medicaid
program is the need for flexibility in the States.
Our waiver has been in existence since 1982. It works, but we
still spend an ordinate amount of administrative time going back
to CMS to justify the waiver even though from a cost containment
perspective and a quality of care perspective this is probably one
of the most, if not the most effective Medicaid program in the country.
The CHAIRMAN. Are other States learning from you, asking these
questions, and specifically the State of Oregon?
Governor NAPOLITANO. I cant speak to Oregon, but I can say
that States and other Governors have been speaking with me. Of
course, we are all speaking with the Congress now because we are
all concerned that in the effort to reduce the Federal deficit, decisions will be made about Medicaid and other programs that are
budget-driven as opposed to policy-driven. I think from the view of
the Governors, we think, make the policy changes and then let the
budget work its way out.
The CHAIRMAN. Well, obviously the way you have worked it out,
it serves health, Medicaid and the budget, and I think that that is
the better approach to Medicaid reform and my point from the beginning.
As we go forward, Governor, and the Deficit Reduction Act is implemented, I would be very anxious to learn from you what its neg-

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ative positive impacts are in terms of flexibility so that we can be
responsive in a timely way and undo any damage that may have
been done.
Governor NAPOLITANO. Thank you, Senator, and I would be
happy to be speaking with you as we go through the implementation of the Deficit Reduction Act. I am the incoming chair of the
National Governors Association, so I am sure I will be hearing from
my colleagues around the country.
The CHAIRMAN. Well, that is terrific, and I hope that my Udall
cousins are all treating you well. Turn them over to me if they are
not.
Governor NAPOLITANO. Your Udall cousins are treating me very
well and we could use more of them. Thank you.
The CHAIRMAN. I think I have about 5,000 of them in Arizona.
Mr. Wagoner, thank you again. You know, as I listened to your
testimony and have considered some of the remarkable things you
have done, frankly, they almost seem to replicate many of the
things which the State of Arizona is trying to do. She has given us
a potential score from a study that was done. Have you been able
to score budgetarily or in health outcomes what your programs
have meant?
Mr. WAGONER. We havent, Senator, added them up. Frankly, I
think as the Governor mentioned, it is a little bit of, in some sense,
a dicey practice of doing it because we are really trying to do two
things. We are trying to improve quality of health care and quality
of peoples lives, and the cost of providing that. So the accounting
for it iswe try to be a little careful about being overly, let me say,
bean-counterish about it.
But for each of the programs that we do, as I indicated in my
testimony, we have a pretty good sense of what the cost would have
been in the absence of that program. Sometimes, it is cost-saving
to us. Sometimes, it is better health treatment. We would be more
than glad to sit down with the staff of the Committee and really
work through initiative by initiative those that I mentioned and
others that we filed in the written testimony that perhaps could
give you some insights on which kinds of activities generate which
kinds of savings.
The CHAIRMAN. Are you mindful of Fortune 500 companies or
perhaps even your competitors following similar enlightened models as General Motors is in health care?
Mr. WAGONER. Yes. I think different companies have begun to seriously focus their best thinking on health care costs at different
times because I think, to be honest, for some companies with different profiles of retirees, for example, it might not have been a big
cost item for them. But I would be surprised if there are many
large companies that dont have fairly sophisticated efforts going on
to try to both improve quality and reduce the cost of health care,
because it is frankly such an issue in global competitiveness today.
But I think maybe even more interesting, Senator, it is not just
large companies. We have, obviously, many suppliers of all sizes,
large and small, local and global, and dealers which tend to be medium or smaller businesses. We find that health care costs for
many of them is a very important issue because they find simply

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that it is a benefit their employees very much appreciate and really
want. Yet, the cost of it is unmanageable.
So they are very interested in having access to these ideas, as
well, but they obviously dont necessarily have the capability to
have the staffing or, as you referred to earlier, the purchasing
power that we do. I think it highlights to me the importance of
what you are doing on the Committee, which is not just improving
health care for General Motors, but focusing on can we do for the
whole system of health care costs in the United States.
The CHAIRMAN. Richard, 2 weeks ago we had in this Committee
a most fascinating hearing on a topic called medical tourism. We
had testimony from an ESOP-owned, a union-owned company, in
which they had come to an agreement with employees within their
union, within their company, to access health care in India. It is
called IndUS. This IndUS companyIndia U.S., I assume the acronym meansis staffed by Indians who are trained in American
medical schools and in American business schools and have replicated in India the finest medical facilities that you could find in
America.
The union representative told us of one employee who had a
heart issue. The cost of the heart surgery in North Carolina was
$96,000. In India, with equal care, competent physicians, and legal
rights, the cost was $6,000. Is this an issue that you all are looking
at?
Mr. WAGONER. I have to say I am familiar with it, having read
about stories such as those you are citing, but it is not something
that we have studied.
The CHAIRMAN. Is it something you will have to look at?
Mr. WAGONER. It is not something that we are looking at in detail right now. I would say just from the practical perspective, as
we see it, because of our size, we have felt that items like medical
carefor the most part, our employees would prefer to do it, if at
all possible, at a convenient location to where they live. Given the
number of people we insure, we hadnt really thought of the practicality, to be honest, of shipping high volumes of people overseas.
The CHAIRMAN. All the pre-ops were done by teleconferencing,
like we are doing with Governor Napolitano.
Mr. WAGONER. Right.
The CHAIRMAN. I was astounded by what I learned in that hearing and I just simply note it to you because there is a lot of difference between $6,000 and $96,000.
Mr. WAGONER. I think, Senator, if I could comment, I think perhaps something that we would learn from that is why can they do
that for $6,000. Certainly, there may be lower wage rates involved,
things that we could not replicate here, but I would suspect it is
a much more sophisticated systems-based answer than that, and I
think gets at the issue that I think bothers so many of us, which
is why cant we deliver the kind of health care system that people
want here at a much more efficient cost, because the costs of some
of these treatments like you are citing seem to be almost unimaginable.
It does suggest that if we put a number of these initiatives in
place which have been discussed, we really should have an opportunity to provide the kind of health care people want at a much

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lower cost. I think that is one of the things that I know you are
working on here and we applaud it.
The CHAIRMAN. Well, there are a lot of Republican and Democrat
Senators wondering the same thing. So, anyway, my time is up and
I want to note Senator Hillary Clinton has joined us. We welcome
you, Senator, and we will just go in order of appearance and thank
you for being with us.
Senator Kohl.
Senator KOHL. Thank you very much.
Mr. Wagoner, you talked about the cost of health care spending,
of course, and the fact that almost 40 percent of your health care
spending is on prescription drugs. You talked about generic drugs
and the opportunities that they present you and, by extension, our
country to do something about the staggering costs of health care.
Will you talk about a little bit more generic drugs, their importance, in your opinion, to our Nation, the things that we need to
do here in Washington to see to it that generic drugs get full access
to the marketplace and not prevented from providing that kind of
cost saving to our country?
Mr. WAGONER. Senator, I think you have stated our position very
well. Our experience is as you suggest and we do think there has
been progress in enhancing the availability of generic drugs, and
we do see that as a significant element of cost control with no sacrifice in quality.
I think an area where we are seeing an opportunity to expand
generic options would be in the biopharmaceutical drugs, which
today do not have the proactive attention that traditional drugs do,
chemical-based drugs. We see that as an area where, frankly,
health care expenses are rising from a low base, but at an alarming
rate. So that would be an area, for example, thatspecific focus on
providing the resources where those drugs could be reviewed and
opened up to generics on a timely basiswould be a good example
of an area where we see significant additional opportunity to provide the kind of treatment that people want and need, but at a
much more effective cost than the current model provides.
Senator KOHL. In your statement, did you give us an estimate
on, in your judgment, what generic drug usage in your company is
saving you?
Mr. WAGONER. Well, yes. We said that of all of the formularies
that offer generic drugs, generic alternatives, we have had about a
90-percent success rate in converting from branded to generic. For
each point on that scale that we move, it saves us about $4 million.
So assuming this against a base of $1.9 billion, that would be a
savings of roughly $400 million, very significant in total.
I would say just from my own experience, from drug to drug you
could see savings even greater than that. I would also think, to be
honest, that having greater access to generics would also help to
keep the pricing of the brand name pharmaceuticals perhaps in a
more competitive light as well.
Senator KOHL. So can I conclude that you would suggest that we
need hereto the extent that we are in a position to influence the
process, we need here in Washington to see to it that everything
is done to open up the market to generic drugs which, as you pointed out, have absolutely no downside with respect to quality?

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Mr. WAGONER. Our experience has been very good. It has got, obviously, to be done on a thoughtful basis. I think that has worked
out very well from our experience. I want to be clear. I think prescription drugs do play an important role in the whole health care
system, too. So in no way, shape or form are we anti those. We
think they play an important role, but our experience is by enabling greater access to generics, making sure consumers understand the value equation in generics, those sorts of things can really help to provide, as the Governor said, very high-quality health
care at much lower cost. I think that is really what we are all talking about here.
Senator KOHL. Thank you very much, Mr. Wagoner.
Governor Napolitano, some States that have expanded home and
community-based services, such as your State, have experienced
cost increases which you have not, apparently, in what is called the
woodwork effect, which is that people who might not have participated in the State health care system join, as you know, when they
are offered programs that allow them to stay in their homes and
in their neighborhoods.
How have you managed to avoid this cost increase?
Governor NAPOLITANO. Yes, Senator, thank you. We have avoided the woodwork effect because we use a pre-assessment screening
tool, which is a very effective device. We interview people. We ascertain whether they are eligible for or would qualify for institutionalization or not, and it is those that would qualify for institutionalization that we then look toyes, you qualify, but would you
be better off in your own home, in your own setting, and have our
services delivered to you?
The use of that tooland this has been evaluated by a number
of entitieshas allowed us to increase the percentage of our seniors who can stay in their homes and have services delivered to
them. Like I said in my testimony, two-thirds of our seniors who
are in the long-term care program are getting long-term care at
home, as opposed to the majority of States where it is actually the
reverse statistic. But it is the use of this tool that allows us to
screen early and that prevents the woodwork effect from driving up
our costs.
Senator KOHL. Do you think that the relatively smaller size of
your State, as opposed to the really larger States in our country,
gives you a somewhat greater ability to do this kind of screening,
or do you think that does not affect it at all?
Governor NAPOLITANO. We are the 17th largest State in the
country, so we are at least medium, and we have a large senior
population. In fact, by the year 2020, 25 percent of our population
will be 65 or older. So it is to our interest to really think through
long-term care, think about it for ourselves, actually, because as
the baby-boomer ages, we need to think about the long-term care
models we want to employ, but then set up a system that allows
us to enable people who are capable to stay in their homes and live
as freely and independently and comfortably as possible.
Senator KOHL. That is very good.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Senator Kohl.

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49
So you wont think we are rude, they have called a vote. I would
propose that Senator Kohl and I rush over and vote and come back
while Senator Wyden and Senator Clinton ask questions, and we
will make sure we hold the vote open for our colleagues.
Here is the gavel, Ron.
Senator WYDEN [presiding]. Mr. Chairman, thank you.
Mr. Wagoner, as you know, since 1945 and Harry Truman, this
country has been trying to come up with a way to make sure that
all Americans could get essential, affordable health care. We
thought we had a shot at it in the early 1990s, as you know, and
at that time many corporations said we are not sure we can survive
if there is comprehensive health reform. What I hear a lot of companies saying now is we cant survive without comprehensive
health reform.
My first question to you is do you think we are at the point
again, a tipping point, when the companies would be willing to
work with the Congress in a bipartisan way for comprehensive reform, getting beyond these incremental steps?
Mr. WAGONER. I obviously cant speak for everybody, Senator. I
can say from General Motors perspectiveand certainly I talk to
my colleagues in the auto and auto supply businessthis is a huge
issue for us and I think I can assure you that we all would be most
interested in that form of engagement.
I can also tell you at the quarterly Business Roundtable survey
of the CEOs of the largest companies, which extends obviously far
beyond auto and auto supply and even manufacturing, they ask us
each quarter what are the toughest challenges you face in your
business, and health care, in the last number of surveys, has come
up as the biggest challenge that business faceshealth care costs.
So that would suggest to me that I think a fairly broad base of
the business community is very concerned about this issue. So I believe they would be willing to engage proactively, and I assure you
we would be.
Senator WYDEN. Tell me your thoughts about the idea of shared
responsibility, that there is a role for a government, there is a role
for the private sector and there is a role for the individual. This
obviously was a big topic of debate when Massachusetts, for example, considered their proposal.
What do you think the Congress ought to be pushing employers
to do as part of comprehensive health reform and saying to the employers, you are going to have be part of this as well; everybody is
going to have to be part of the equation? What can the Congress
expect employers to do in this regard?
Mr. WAGONER. Well, obviously, our model, Senator, is one that
involves the three parties really working together to fund the
health care expense, and it is one that we have had at GM for
many years.
My personal view on the matter to your broader question is I do
think there are things the Congress can act on right now which
would help to get at the broad-based issue of reducing health care
costs while improving quality. You are familiar with the list and
I mentioned a number of them today.
Obviously, the development of a sophisticated information technology center in health care would be worth billions of dollars to

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all providers, but does require some strong leadership. The use of
all of the data that we have on cost and qualitythere is no data
base that is as comprehensive, as high-quality, as good as the
Medicare claims data base. If we were able to provide that information, I think you would see significant improvements. There are
many, many more things, and my philosophy, frankly, has been we
should really push to get on those things that I think everyone can
agree on.
Senator WYDEN. I think you are right, and my seat-mate, Senator Clinton, has done very important work in the technology area,
but I do want to come back to this question of what the Congress
ought to expect from employers. I and others have been reluctant
to just impose mandates because if you just heap on mandates, you
can put people out of business.
But if we are going to have shared responsibilityand I am prepared to tell individuals they are going to have to pay a portion of
health costs in the futurewhat should the Congress ask of employers?
Mr. WAGONER. Well, again, I dont think I am in probably a position to tell you what should be required of all employers. You know
what we do. My experience is the more we can let market forces
work even in areas that are not purely market-type businesses,
which health care isnt, I think that is the better prescription. So
I think to be honest, I better leave it to you all to decide the specific contribution you expect of business.
We are contributing a lot. In fact, I think you would see, Senator,
that the direction that has been going on in businesses is businesses are reducing or even eliminating the health care benefits because they are so expensive particularly, for example, to retirees.
My preference is to resolve that, rather than specifically legislating
that businesses should provide itI think the fundamental issue is
we need to get our arms around the cost issue.
Senator WYDEN. Let me ask you about one idea that I am looking
at with respect to the role of the employer. I hear constantly from
businesses that their employees very often have to take a full day
off in order to get health care. In other words, their appointment
was for ten oclock. They show up at ten oclock, they wait until
noon, and essentially the worker and the company lose a full day
of productivity.
What do you think about the idea of essentially bringing health
care to the worksite? As we look at the role of the employer in a
shared responsibility system, we might try to look at this partnership so that the employer and government and the individual
might do something that was in everybodys interest, which is essentially to bring health care to the worksite so that we dont lose
a day of productivity. Is that something you might think is fruitful?
Mr. WAGONER. Well, I know that some companies have done
that. We have done that at specific sites and I think have had some
success doing it. I think basic demographics, things like that, will
drive whether it is economically attractive for everyone. If you have
a small business, perhaps it wouldnt be something that would
make sense from a stand-alone basis.
But I think it is something that a number of companies have
done at specific sites where there are enough people and the work

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is time-sensitive and things of that sort. So we certainly dont rule
that out as one of the things that might help improve the productivity of the system.
Senator WYDEN. My time is up and, as you know, my seat-mate
has a longstanding interest in this issue, as well, and I am going
to give her the gavel and hope to come back.
Mr. WAGONER. Thank you.
Senator CLINTON [presiding]. Thank you. It is good to see you
again, Mr. Wagoner. Governor, welcome. We are delighted to have
you be part of this hearing as well.
Governor NAPOLITANO. Thank you.
Senator CLINTON. GM does business all over the world. You obviously are an American company with global reach and we hope
that continues. You have employees in how many countries, Mr.
Wagoner?
Mr. WAGONER. I would say we have employees probably in 40,
45 countries.
Senator CLINTON. Have you done an analysis of your health care
costs in those other 44 countries?
Mr. WAGONER. We have. It is concentrated primarily on the, let
me say, 20 countries where we have most of the employees.
Senator CLINTON. Do those include Canada, European countries,
as well as Asian countries?
Mr. WAGONER. They do, Senator, yes.
Senator CLINTON. Is that information that could be made available to this Committee in some non-proprietary way for a basis of
comparison?
Mr. WAGONER. We would be glad to share that information with
the Committee.
Senator CLINTON. Obviously, what I am trying to get at is that
I think American companies are being put in an impossible position
when it comes to a global economy. Ten years ago, if you had been
here, I think we would be talking on a slightly different plane
about what the challenges were, but 10 years is a lifetime when it
comes to the pace and speed of global competition with respect to
American jobs and American productivity and Americas standard
of living.
I think that when we look at health care costs, it is apparent
that you compete against companies in countries where individual
businesses dont provide health care costs, where that is provided
across the board, where everyone has to make a contribution
through the tax system. Some preliminary analyses that I have
seen show that if you add all of the costs on American business,
which include taxes, health care, workers comp, et cetera, the costs
that you are paying are considerably higher than what is paid for
health care in comparably advanced countries where everybody
pays into the system.
On the other side of the equation are those companies in countries that dont provide health care, where basically it is every person for himself. There is a rudimentary system, but there is no organized way, and therefore the costs are commensurately lower.
I have become increasingly convinced that we are getting a bad
deal in America and that GM is getting a bad deal and most of the
other companies that are doing the right thing by insuring employ-

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ees are getting a bad deal. But certainly companies like yours
which essentially bear the social contract of the last 50 years are
getting an especially bad deal because you are paying for what are
now considered retired employees, therefore unproductive employees who certainly did a great service to you and to our country, but
no longer are in the workforce.
I dont think this is a sustainable position, and I read your testimony and I really commend you for the many innovative programs
and the efforts that you have undertaken to try to squeeze down
your costs. I would be interested again, if this is not proprietary,
if you could provide this Committee with some sense of what the
costs are for running all these programsthe huge benefit-managing departments that large companies have to have, the costs of
third-party payers that large companies have to pay.
We spend $1.7 trillion on health care in this country. We spend
50 percent more than any other country and we dont even have
the highest results in terms of quality of health care when you look
across the board. So one of my continuing questions is why does
American business take such a bad deal. I mean, basically, you are
getting a really bad deal.
The cost of administering Medicare is much less than the cost of
administering your health care programs. The average cost of private insurance is considerably higher than the administrative costs
of Medicare. I dont know how it much it costs to pay for benefit
managers and the whole bureaucracy you have to pay for, but I assume it is considerable.
So why is it that American business doesnt just rise up and say
there has got to be better way here, and why dont you bring not
just your market power to bear, but your political power to get
some changes in this dysfunctional, overly expensive, unproductive
health care system that we all are paying for?
Mr. WAGONER. Senator, I share many of your views and I think
your analysis is correct that if you compare the cost of health care
that we pay for employees in the U.S. versus any other country
where we have significant production operations, it would be anywhere from somewhat to a lot higher, and I suspect that is true
for many businesses.
I think individual businesses probably look at your question
along the following lines. If they are like us, they see the high cost
of health care and so they are faced with several choices, such a
investing in other lower-cost locations. That is good for some businesses, but it is not good for the U.S. economy because we lose jobs.
Or they may perhaps tradeoff and say rather than giving significant wage increases, we will put that money into health care costs
for the employees. Or they may choose to not offer health care benefits or reduce the amount of health care benefits which they offer,
which I think is definitely a trend we see in business.
Senator CLINTON. Mr. Wagoner, I am so sorry, but they have told
me if I dont go to vote, I am not going to get to vote. I would love
to get the rest of your answer perhaps in writing and the information that you kindly offered to provide us.
Mr. WAGONER. I would be glad to do that.
Senator CLINTON. Thank you so very much for being here.
Mr. WAGONER. Yes, maam. Thank you.

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The CHAIRMAN [presiding]. Thank you, Senator Clinton.
Before we let you go, just a couple of follow-ups I had. Governor,
I am interested to know in Arizona how you have made sure that
private managed care organizations are focusing on managing care
and not managing costs. I am sure you know the difference. If they
are managing costs by saving money through delaying or denying
needed care, what is your role in that? How does the government
make sure that care is managed instead of costs being managed?
Governor NAPOLITANO. One is we are really one of the largest
purchasers of health care in the State and that gives us some market power. What we do is we have within our AHCCCS department, which is the acronym for our Medicaid area, a whole division
that is designed to make sure that quality of care is not sacrificed
for cost.
We also write into our vendor contracts a number of quality of
care provisions, including a provision that says you have to spend
84 percent of your capitated costs on direct rendition of services,
not on other expenditures. So both by oversight and by contract, we
endeavor to maintain the quality of care even as we try to control
costs.
The CHAIRMAN. Did I understand you to say that you are the
purchaser of prescription drugs as well?
Governor NAPOLITANO. Well, that is part of the capitated costs.
It is a full-risk, capitated program, and part of that is the pharmaceuticals. So we leave it to the MCOs and the market to figure out
how to provide medically adequate care in the sense that they get
the capitated costs. If they are able to achieve some savings someplace, they get the benefit of that. If not, they assume the risk of
that, and pharmaceuticals are a part of that calculation.
The CHAIRMAN. Richard, as you are no doubt aware, the Centers
for Medicare and Medicaid Services have tried without a great deal
of success to publish cost and quality information for various sectors of the health care industry. It hasnt been very successful, but
it appears like you might have been successful in the program you
described.
How were you able to secure participation of these groups and
how helpful have your employees and retirees found the information?
Mr. WAGONER. We have been able to do this successfully, I would
say, on a limited basis, in areas where obviously we have concentrations, high numbers of employees, so we can create data
bases that are meaningful and accurate. I think it has been very
helpful.
Just from personal experience, you look through and if you have
to go into some sort of elective surgery and there are eight hospitals in your area and you can look and see how many surgeries
they have done and what has been the success rate of those surgeries, I think it is the kind of thing that is very helpful. I dont
think that the average consumer of health care is used to doing
that sort of thing, which we find incredibly ironic.
When you go buy a car, one of the things you might do is go on
a website and try to get things like warranty performance or resale
values. People do that as second nature, and yet when they are
going to get some form of medical care, because that information

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isnt easily available, they dont do that. So this is where I think
use of the Medicare claims data base in a thoughtful way would
really help make everyone out there a smarter consumer.
I think as the Governor mentioned, we dont discount the role of
individuals and the private enterprise system reacting to opportunities, and we think there is nothing like data on cost and quality
of outcomes that would really help to drive people to the efficient
and low-cost and high-quality providers of various services.
The CHAIRMAN. Senator Kohl has a follow-up.
Senator KOHL. Thank you.
Just a word from each of you, if you would, on the importance
of health information technology programs, their startup costs, but
the payment that you get and how important you think these programs are in controlling the cost of health care and the sense of
urgency or importance that you attach to it.
We will start with you, Governor.
Governor NAPOLITANO. Thank you, Senator Kohl. Over a year
ago, I issued an executive order and what I did through that executive order was create task force that was called the Health-e Connection. What it was designed to do was to bring together public
and private providers to look at how we input technology and have
a statewide technology basis to our health care system.
We are now in the process of implementing the recommendations
of that group and our goal is within the next few years to have
medical records online, accessible to providers. It is a quality of
care issue, it is a cost containment issue and it is the wave of the
future.
One of the amazing things we found out as we went through the
task force work is how paper-driven the medical industry is. For
all the science that underlies medicine, their recordkeeping is in
the 19th century. So to convert everything to a system that is universally accessible that allows us to transfer records on a real-time
basis so that doctors and ER physicians have real-time information
is a great development, I think, that the States are doing this. The
Federal Government could help us by incentivizing that and providing grants or whatever to other States to do the same thing.
Senator KOHL. Very good.
Mr. Wagoner.
Mr. WAGONER. I wholly endorse what the Governor said. I think
she laid out the benefits. The case is compelling. You would be sensitive from your own background. The application of information
technology, while it has taken a while, has moved across every sector of our economymanufacturing, services, now into education.
Health care has been, for a variety of reasons, very slow to embrace
the opportunity. It is gold lying on the streets and we really need
to get at it.
Things like enacting the bill sponsored by Senators Enzi, Kennedy, Frist and Clinton for example, with a sense of urgency would
be a great way to begin to capture more and more the benefits
here. But it is just viewed by everyone I talk toprofessionals in
the field, our own business experiencethat the benefits are huge.
It does require some investment, as you say, but the return is
going to be terrific.

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Senator KOHL. Those are good answers. I thank you both very
much.
I thank you, Mr. Chairman.
The CHAIRMAN. Richard Wagoner and Governor Napolitano, we
cant thank you enough for sharing your time on this very important issue, an issue that eventually will be better reformed because
of the work that you are doing and the Federal Government needs
to do. So for that, we extend to your our heartfelt gratitude. With
that, we wish you a good day and we will call up our second witness.
Mr. WAGONER. Thank you very much.
Governor NAPOLITANO. Thank you, sir.
The CHAIRMAN. Thank you.
Mr. Don Marron is the acting director of the Congressional Budget Office.
We welcome you. Thank you, Don.
He will present a new CBO report that examines the cost implications seniors have on Americas health care system, with a special focus on the Medicaid program and how its cost growth will
fuel significant challenges for the entire Federal budget.
Thank you, and the mike is yours.
STATEMENT OF DONALD B. MARRON, ACTING DIRECTOR,
CONGRESSIONAL BUDGET OFFICE, WASHINGTON, DC

Mr. MARRON. Thank you, Mr. Chairman. It is a pleasure to be

here today to discuss the Medicaid program and the challenges it
faces as a result of rising health care costs and demographic pressures. As you mentioned, my written testimony today is, in essence,
a primer on Medicaid and some of the forces that are driving
spending increases in it, and both looking back where we have
been and looking forward to where we may be going.
To start withand this will come as no surpriseMedicaid is a
very large program both in terms of enrollment and spending. In
fiscal 2006, Medicaid will cover about 60 million people1 in 5
Americansmaking it the largest Government health insurance
program by enrollment. Federal spending for the program this year
will total about $190 billion. That is about 7 percent of the overall
Federal budget and about 1.5 percent of the overall U.S. economy.
Including State spending, which itself is more than $100 billion,
Medicaid spending is comparable in size to the net outlays for
Medicare. It is a very large program.
Now, in thinking about the size of the program, it is important
to distinguish between who the enrollees are and where the money
goes. It turns out that most Medicaid enrollees by numbers are
children, their parents, and pregnant women. Together, those
groups comprise about three-quarters of Medicaid enrollment, but
they only comprise about 30 percent of the benefit spending. The
aged and the disabled, on the other hand, have much higher costs
than those other groups. So while they comprise only one-quarter
of Medicaid enrollment, they are the ones who account for about 70
percent of Medicaid benefit spending.
As you know, Medicaid costs have risen rapidly in recently decades. These increases reflect both increases in enrollmenta growing population and expanded enrollment in the programsand ris-

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56
ing costs per enrollee. The growth in enrollment has been particularly pronounced among disabled beneficiaries.
Looking ahead over the next 10 years, for which CBO constructs
projections as part of our baseline exercise, we project that rising
costs per enrolleethat is, so rising health care costs per person
will play the dominant role in driving Medicaids overall cost
growth.
The factors that drive Medicaid cost growth and the challenges
the program faces are similar in many ways to those that face the
U.S. health care system as a whole. As you know, health care
spending generally in the United States has risen much faster than
the economy in recent years. It now accounts for almost 16 percent
of the GDP, up from 8 percent back in 1975.
Most analysts agree that the bulk of this growth reflects increasing use of new medical technologies, or more generally the increased capabilities of medicine. Those advances enable us to treat
new conditions, to improve upon existing treatments and to treat
more people. Other factors have also contributed to the growth in
spendingaging, increasing incomes, deeper insurance coverage.
But, together, those explain much less of the spending increases.
As an economist, I should emphasize that increased spending on
health care is not necessarily a bad thing. The key issueand this
was discussed on the first panelis whether that spending provides essential value and benefits that are commensurate with the
spending. If it makes sense for the U.S. people and the U.S. economy to spend more on health care because it is delivering benefits
that are worth it, that is fine.
The chief concerns, however, are: A) that there may be concerns
that we are not getting benefits commensurate with the spending,
and that, B) we have a system in which there is a significant
amount of Federal spending for health care. So, obviously, as that
spending rises, it places pressures on the rest of the Federal budget.
You mentioned earlier on, Mr. Chairman, that it is important to
think about the interactions between Medicaid and the health system as a whole. What I would like to emphasize is that the factors
driving health care spending generally are important for Medicaid
because as capabilities and standards for the delivery of care increase generally in the health care system, they tend to be incorporated into Medicaid as well. In part, that reflects the choice of
administrators about what procedures to cover, and in part it reflects the tendency of physicians to provide a comparable level of
care to all of their patients.
As this Committee is well aware, the rapid growth in Medicaid
spending will occur at a time when the Federal budget will face increasing pressures due to health care costs and the aging of the
population. As I mentioned earlier, CBO estimates that Medicaid
spending this year will be about 1.5 percent of GDP. CBO projects
that under current law Federal spending for Medicaid will reach
about 2 percent of GDP in 10 years, by 2015, and under intermediate assumptions about future health care costs, could reach 4
percent of GDP by 2050.
So under current trends, under current law, the Medicaid program would take up a larger and larger share of the U.S. economy

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and, in addition, a larger and larger share of the Federal budget.
Such potential cost growth is a particular challenge since Social Security and, in particular, Medicare will experience significant cost
growth at the same time.
Under CBOs projections, Social Security spending might increase by about 2 percent of GDP by 2050 and Medicare spending
might increase by about 5.5 percent of GDP. Together, again, under
current law, those three programs would take up about 19 percent
of GDP several decades out, which is about what overall Federal
spending today is when you strip out interest on the debt.
Now, I should emphasize that these estimates are subject to
great uncertainty. Demographic trends can be projected with some
confidence, but future growth of health care costs is highly uncertain. It is easy to imagine scenarios in which the growth of health
care costs is higher than our intermediate projections, and it is entirely possible that it will turn out to be lower as well.
Still, these projections highlight the long-term budget challenges
that we face, and again I want to emphasize they are primarily, it
turns out, driven by rising health care costs per enrollee. That is
the predominant contributor to it, and changing demographics are
also an important but secondary factor.
Because of these looming fiscal pressures, there has been increasing interest on ways to control spending in these programs. In
thinking about Medicaid in particular, there is sort of a basic menu
of choices that you could have. Since it is a joint State-Federal program, obviously one line of direction of pursuing savings for the
Federal Government is to shift more costs onto the States. Another
obvious approach is to have beneficiaries of the program bear more
costs. That would reduce Federal spending and it also might induce
some people to demand fewer services through the Medicaid program.
Or you could try to pursue ways to make the delivery of care
more efficient so that you have the possibility of having less spending and a higher quality of care. The challenge with those approaches is that finding mechanisms that accomplish that are actually quite challenging. Reference was made on the earlier panel
about the woodwork effect. The woodwork effect comes from a situation in which there was a desire to pursue a more efficient way
of delivering care in which you move people from an institutional
setting to a community or home-based setting.
That has the effect of being more efficient, lower-cost per beneficiary, but in many implementations of that you discover this
woodwork effect that more beneficiaries come forward. Then as a
result, if your concern is Federal spending, you may not
The CHAIRMAN. It gets its name from people coming out of the
woodwork for it?
Mr. MARRON. Exactly.
The CHAIRMAN. All right.
Mr. MARRON. You may not get the reductions in overall spending
that you might have thought just by comparing the per-capita costs
of the two systems. Again this also raises an issue raised earlier
about to what extent you want to focus just on the budget side
versus kind of the delivery and efficiency of care.
With that, I am happy to take any questions you have.

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The CHAIRMAN. Well, on that issueand I know that has been
the problem with home care, is the woodwork effect, and yet it does
seem to me if they are entitled to be a part of the program and
they come out of the woodwork and they are there are under law
and it is more efficient and perhaps even better care and less cost,
I guess that is the catch22 we are in.
I want to take you back to a comment, if you were here, from
Governor Napolitano about the Lewin Group report.
Mr. MARRON. Yes.
The CHAIRMAN. Their report has shown that the Medicaid program would secure $83 billion over 10 years in savings if all the
States moved to a full capitation, managed care model. I am wondering, do you value that study, do you agree with that study?
Could you comment on the viability of their projections, whether
CBO has done any related research that would verify that kind of
a number?
Mr. MARRON. Certainly. We took a very quick glance at the study
this morning. We have not reviewed it in any great detail. What
I took from it from a quick glance is the $83 billion number that
you mentioned. That would be for the Medicaid program as a
whole. For the States involved, it turns out that the FMAP is about
56 percent, on average, so that translates into about $46 billion in
potential savings for the Federal Government over the next 10
years.
I guess, first, just going back toand this is one of these classic
issues with these programs about what is a big number and what
is a small number. Forty-six billion dollars is in one sense an astronomical number. It is interesting. When you compare it to the 10year spending in the Medicaid program at the Federal level, it still
works out to be less than 2 percent. So it is relatively small compared to the overall program, but obviously a significant amount of
money.
The CHAIRMAN. Yes.
Mr. MARRON. As I understand it again basically just from a quick
glance, their analysis presumes that these changes would essentially happen overnight. Obviously, any policy initiatives that
would try to pursue thempresumably, there would be some
phase-in period over which they would occur. So I would expect
lower savings just for that reason.
States at the moment currently have the flexibility to pursue
many kinds of managed care programs on their own, and so you
face sort of the classic question about why isnt this already being
done.
The CHAIRMAN. Why isnt it?
Mr. MARRON. Well, it is interesting. Arizona is clearly a very special case. As the Governor mentioned, they were the last entrant
into the Medicaid program, and they are by far the most intensive
users of managed care. For me, this sort of raises this classic issue
with a program like Medicaid.
Medicaid has this great sort of laboratories of democracy approach, in which it gives the individual States a great deal of freedom to try to choose what works best and it gives the other States
an opportunity to learn from that. But it also gives the States an

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opportunity to design programs that best fit their culture, their
population, their needs, their health care delivery system.
It raises, then, a question about how well can you transfer the
results in one State that has specifically chosen that approach to
other States that for various reasons havent. I think that would
be the key issue in trying to figure out whether
The CHAIRMAN. Can you give me an example of some challenges,
say, hypothetically Arkansas would have adopting what Arizona
has? Are there States that you could compare that would have particular challenges evolving to such a capitated system?
Mr. MARRON. I think the primary challenge would be that Arizona has worked at managed care since 1982.
The CHAIRMAN. Managed care isnt as accessible in other States?
Mr. MARRON. That not every other State has chosen to go that
far. So it is not something where you can easily just switch from
a more fee-for-service-oriented delivery system.
The CHAIRMAN. It takes a more mature industry in health care
to deal with their system.
Mr. MARRON. Yes, and then there may also be differences in the
population covered, but I am afraid I dont have those details at my
fingertips.
The CHAIRMAN. Do you ever do studies that actually make recommendations to CMS on these kinds of things or encouragement
to give these kinds of waivers because something is working and
something is not?
Mr. MARRON. We at CBO studiously avoid recommendations of
any kind, if possible. Our job is essentially to serve you and to give
you the kinds of information that will be helpful for guiding policy
decisions, and we are happy to assist you in that way.
The CHAIRMAN. Well, obviously, we are going to have to do something continually on the whole entitlement category because eventually we will have no choice, because the entitlement side of the
ledger is going to consume everything on the discretionary side. I
think that is unsustainable to the American people, as well.
Your analysis is appreciated today. It has been helpful and I
have found this hearing very worthwhile. I hope maybe you have
got a few ideas you can distill for us to make some recommendations to the Congress, and then maybe to OMB, too. I know there
is always that fight, too.
Thank you very much, Don, and we are grateful for your presence, and for all of you who have participated.
[The prepared statement of Mr. Marron follows:]

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87
The CHAIRMAN. With that, this hearing is adjourned.
[Whereupon, at 11:31 a.m., the Committee was adjourned.]

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APPENDIX
PREPARED STATEMENT

OF

SENATOR KEN SALAZAR

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

(89)

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