Statement by
Tommy G. Thompson
Secretary, Department of Health and Human Services
President's FY 2004 budget for the Department of Health and Human Services (HHS)
before the
House Committee on Energy and Commerce

February 12, 2003

Good morning Mr. Chairman and members of the committee. I am honored to be here today to present to you the President's FY 2004 budget for the Department of Health and Human Services (HHS). I am certain you will find our budget exhibits a balanced proposal to improve the health and safety of our Nation.

The President's FY 2004 budget request continues to support the needs of the American people by increasing preparedness for terrorism, modernizing and strengthening Medicare, Medicaid, SCHIP; furthering the reach of the President's New Freedom Initiative; and, opening the doors of opportunity to all Americans.

The $539 billion proposed by the President for HHS will enable the Department to continue its important work with our partners at the State and local levels and the newly created Department of Homeland Security to secure our commitment to protecting our Nation and ensuring the health of all Americans. Many of our programs at HHS provide necessary services that contribute to the war on terrorism and provide us with a more secure future. I am particularly focused on: preparedness at the local level, ensuring the safety of food products, and research and development of vaccines and other therapies to counter potential bioterrorist attacks.

Our proposal includes a $37 billion increase over the FY 2003 budget, or about 7.3 percent. The discretionary portion of the HHS budget totals $65 billion in budget authority, which is an increase of $1.6 billion, or about 2.6 percent. HHS' mandatory outlays total $475.9 billion in this budget proposal, an increase of $32.3 billion, or roughly 6.8 percent.

Your committee will obviously be vital to achieving many of the Administration's most important priorities. I am grateful for the close partnership we have enjoyed in the past, and I look forward to working with you on an aggressive legislative agenda to advance the health and well being of millions of Americans. Today, I would like to highlight for you the key issues in the President's budget that fall under the Energy and Commerce Committee's jurisdiction.

Supporting the President's Disease Prevention Initiative

One of the most important issues on which we can work together is disease prevention. We all have heard the disturbing news about the prevalence of diabetes, obesity and asthma that could be prevented through very simple lifestyle changes. The statistics, I am sure, are as alarming to you as they are to me. The incidence of diabetes and obesity among Americans is up sharply in the past decade, putting millions more Americans at higher risk for heart disease, stroke and other related medical conditions.

Diabetes alone costs the nation nearly $100 billion each year in direct medical costs as well as indirect economic costs, including disability, missed work and premature death. Medical studies have shown that modest lifestyle changes -- such as getting more exercise and losing weight -- can reduce an individual's risks for developing these serious health conditions.

For this reason the HHS budget, consistent with the President's Healthier US effort, proposes a coordinated, Department-wide effort to promote a healthier lifestyle emphasizing prevention of obesity, diabetes, and asthma. The FY2004 budget includes a new investment of $100 million for targeted disease prevention.

Strengthening and Improving Medicare

Through the leadership of Chairmen Tauzin and Bilirakis, the Energy and Commerce Committee has been at the forefront of efforts to strengthen and improve the Medicare program. As we are all aware, we need to fill the gaps in current Medicare coverage. This committee has dedicated countless hours to increasing public understanding of the challenges confronting the program, and your efforts have significantly advanced the debate over program modernization. While we remain steadfastly committed to ensuring that America's seniors and individuals with disabilities can keep their current, traditional Medicare, the President has proposed numerous principles for Medicare enhancements to ensure that we are providing beneficiaries with the best possible care. The budget builds on those principles by dedicating $400 billion over ten years to strengthen and improve Medicare, including providing access to subsidized prescription drug coverage, better private options and better insurance protection through a modernized fee-for-service program.

Prescription Drug Coverage

Ensuring that Medicare beneficiaries have access to needed prescription drugs is a top priority for the President and me. This budget proposes a prescription drug benefit that would be available to all beneficiaries, protect them against high drug expenditures, and would provide additional assistance to low-income beneficiaries through generous subsidies to ensure ready access to needed drugs. The Administration's prescription drug plan would offer beneficiaries a choice of plans and would support the continuation of the coverage that many beneficiaries currently receive through employer-sponsored and other private health insurance.

Medicare Choices

Medicare+Choice was introduced to provide beneficiaries with options in their health coverage. Over the past year, the Department has made significant strides in expanding beneficiaries' Medicare+Choice options by approving 33 new preferred provider organization through a demonstration. However, due to a variety of factors, in many parts of the country, few new plans have entered the program. More needs to be done to encourage plan participation in this important program. This Administration believes that Medicare+Choice payments need to be linked to the actual cost of providing care. America's seniors should have access to the same kind of reliable health care options as other citizens. We believe that we should move away from administered pricing to set Medicare+Choice rates and that those choices should be provided through a market-based system in which private plans compete to provide coverage for beneficiaries. Those beneficiaries who select less costly options should be able to keep most of the savings. It is time we give our seniors the choice they have been promised in Medicare.

Modernized Fee-for-Service

One of the basic tenets of our reform proposal is that seniors deserve the same range of health care delivery choices as federal employees enjoy. These choices should reflect the benefit innovations incorporated into private sector plans. The Administration is very interested in updating Medicare to reflect the insurance protections offered in the private sector. This system should modify and rationalize cost-sharing for beneficiaries who need acute care. A modernized Medicare should eliminate cost sharing for preventive benefits and provide catastrophic coverage to protect beneficiaries against the high costs caused by serious illnesses.

Strengthening and Improving Medicaid

State Health Care Partnership Allotments

Chairman Tauzin, as you know, states are confronting serious challenges in running their Medicaid programs. It is crucial that we do something now to stabilize Medicaid programs so we do not allow millions of Americans to go without health care. Under current law, states have every right to eliminate coverage of optional populations and to drop optional benefits. They are doing so. In the past year, 38 states have reduced services or eligibility and most states are currently considering other benefit or eligibility cutbacks. We want to give states another option. It is our responsibility to work together so that States can get the help they need in managing their health care budgets, while preventing further service and benefit cuts and expanding coverage for low income Americans.

Building on the success of the State Children's Health Insurance Program (SCHIP) and the Health Insurance Flexibility and Accountability (HIFA) demonstrations in increasing coverage while providing flexibility and reducing the administrative burden on States, the Administration proposes optional State Health Care Partnership Allotments to help States preserve coverage. Under this proposal, States would have the option of electing to continue the current Medicaid program or to choose partnership allotments. The allotment option provides States an estimated $12.7 billion in extra funding over seven (7) years over the expected growth rate in the current Medicaid and SCHIP budgets. If a State elects the allotments, the federal portion of the SCHIP and Medicaid funding would be combined and states would receive two individual allotments: one for long-term care and one for acute care. States would be required to maintain their current levels of spending on Medicaid and SCHIP, but at a lower rate of increase than current law.

States electing a partnership allotment would have to continue providing current mandatory services for mandatory populations. For optional populations and optional services, the increased flexibility of these allotments will allow each State to innovatively tailor its provision of health benefit packages for its low-income residents. For example, States could provide premium assistance to help families buy employer-based insurance. States could create innovative service delivery models for special needs populations including persons with HIV/AIDS, the mentally ill, and persons with chronic conditions without having to apply for a waiver. Another important part of the new plan would permit States to encourage the use of home and community based care without needing a waiver, thereby preventing or delaying inappropriate institutional care. Let me stress that this is an OPTION we are proposing for States.

New Freedom Initiative

Home and community-based care as an alternative to nursing homes for the elderly and disabled is a priority of this Administration. The New Freedom initiative represents part of the Administration's effort to make it easier for Americans with disabilities to be more fully integrated into their communities. Under this initiative, we are committed to promoting the use of at-home and community-based care as an alternative to nursing homes.

It has been shown time and again that home care combines cost effective benefits with increased independence and quality of life for recipients. Because of this, we have proposed that the FY 2004 budget support a five-year demonstration called "Money Follows the Individual" Rebalancing Demonstration, in which the Federal Government will fully reimburse States for one year of Medicaid home and community -based services for individuals who move from institutions into home and community-based care. After this initial year, States will be responsible for matching payments at their usual Medicaid matching rate. The Administration will invest $350 million in FY 2004, and $1.75 billion over 5 years on this important initiative to help seniors and disabled Americans live in the setting that best supports their needs.

The Administration again proposes four demonstration projects as part of the President's New Freedom Initiative. Each promotes home and community-based care as an alternative to institutionalization. Two of the demonstrations are to provide respite services to caregivers of disabled adults and severely disabled children. The third demonstration will offer home and community-based services for children currently residing in psychiatric facilities. The fourth demonstration will test methods to address shortages of community direct care workers.

Medicaid Coverage for Spouses of Disabled Individuals

The Budget proposes to give States the option to extend Medicaid coverage for spouses of disabled individuals who return to work and are themselves eligible for supplemental security benefits. Under current law, individuals with disabilities might be discouraged from returning to work because the income they earn could jeopardize their spouse's Medicaid eligibility. This proposal would extend to the spouse the same Medicaid coverage protection this Committee was instrumental in offering to the disabled worker.

Extension of the QI-1 Program

Under current law, Medicaid programs pay Medicare Part B Premiums for qualifying individuals (QI-1s), who are defined as Medicare beneficiaries with incomes of 120% to 135% of poverty and minimal assets. This program was set to expire on December 31, 2002 but it is being extended under a series of continuing resolutions. The Budget would continue this premium assistance for five years.

Transitional Medicaid Assistance (TMA)

TMA provides health coverage for former welfare recipients after they enter the workforce. TMA allows families to remain eligible for Medicaid for up to 12 months after they lose welfare related Medicaid eligibility due to earnings from work, and was scheduled to sunset in September 2002. It has been extended through a series of continuing resolutions. This budget proposal would extend TMA for five more years, costing $400 million in FY2004, and $2.4 billion over five years. This program is an important factor in establishing independence for former welfare recipients by providing health care they could not otherwise afford.

We are also proposing modifications to TMA provisions to simplify it and make it work better with private insurance. These provisions include:

  • States will be given options to offer 12 months of continuous care to eligible participants.
  • States may waive income-reporting requirements for beneficiaries.
  • States that have Medicaid eligibility for children and families with incomes up to 185 percent of poverty may waive their TMA program requirements.
  • States have the option of offering TMA recipients "Health Coupons" to purchase private health insurance instead of offering traditional Medicaid benefits.

State Children's Health Insurance Program (SCHIP)

As you know, SCHIP was set up with a funding mechanism that required States to spend their allotments within a three-year window after which any unused funds would be redistributed among States that had spent all of their allotted funds. These redistributed funds would be available for one additional year, after which any unused funds would be returned to the Treasury. An estimated $830 million in FY 2000 funds are expected to go back to the Treasury at the end of FY2003. The Administration proposes that States be permitted to spend redistributed FY2000 funds through the end of FY2004. Extending the availability of SCHIP allotments would allow states to continue coverage for children who are currently enrolled and continue expanding coverage through HIFA waivers.

Medicaid Drug Rebate

Over the past year it has become evident that the best price component of the rebate can be confusing, as it is not always clear which prices a manufacturer must include when calculating and reporting to CMS its best price. In addition, best price may serve to limit the discounts that private sector purchasers are able to negotiate with pharmaceutical manufacturers. The Administration is interested working with this Committee and the Senate Finance Committee to explore policy options in this area that would improve the Medicaid drug pricing and reimbursement system and generate program savings. The current methodology sets rebates equal to the difference between a drug's average manufacturer's price (AMP) and the manufacturer's best price for that medication.

Fighting Bioterrorism

As Americans confront the realities of terrorism and hatred around us, it is imperative that the Federal Government be prepared to keep our citizens safe and healthy. HHS's $3.6 billion bioterrorism budget proposal substantially expands ongoing medical research, maintains State and local preparedness funding, and includes targeted investments to protect our food supply. The President's proposal significantly expands NIH research funding needed to develop vaccines and medicines that will make biologic agents much less effective as weapons. HHS will continue to manage the Strategic National Stockpile, funded by DHS, and also provide the scientific and public health direction needed to ensure that the pharmaceutical stockpiles include proper amounts of effective drugs , vaccines, other biologics, certain emergency medical equipment, and associated material.

HHS and the Department of Homeland Security will spearhead the development of Project Bioshield. This project, which the President just announced, will bring together the resources of the United States government in an innovative effort to develop defenses against bioterror before they are ever needed. Project Bioshield will have three (3) major goals:

  • Ensure sufficient resources are available to procure the next-generation countermeasures. A guaranteed funding source must be available to enable the government to purchase vaccines and other therapies as soon as experts believe they can be made safe and effective, and spur the industry investment needed to produce them.
  • Speed up NIH research and advanced development, providing more flexible contracting and procurement authorities for critical biodefense work.
  • Make promising treatments available more quickly for use in emergencies by establishing a new FDA Emergency Use Authorization for promising medical countermeasures that are under development. This provides greater flexibility in emergency situations than the current Investigational New Drug (IND) authority.

Funding for this work will be in the new Department of Homeland Security (DHS) which will make determinations about what countermeasures may be needed based on threat assessments. HHS will provide the scientific direction, and carry out the actual procurements.

Improving the Nation's Health

In an effort to improve the Nation's health, the budget includes initiatives to reduce drug-related medical costs and carry out the Best Pharmaceuticals for Children Act. The request for the Food and Drug Administration (FDA) includes $13 million to increase Americans' access to safe, effective, and less expensive generic drugs. The budget also includes an additional $30 million in NIH and FDA funding to expand Federal and private research to improve information for prescribing pharmaceuticals to children.

The HHS budget includes a series of improvements in the financing of childhood vaccines to meet three goals -- improve vaccine access, restore tetanus and diphtheria toxoid vaccines (Td, DT) to the Vaccine for Children (VFC) program, and build a national stockpile of childhood vaccine. To ensure against future shortages, HHS will use its current authority to begin building a vendor-managed, 6-month supply of all childhood vaccines by 2006. In addition, legislation will be proposed to improve access to VFC vaccines for children already entitled to them. The budget proposes to expand the number of access points for underinsured children - those whose private insurance does not cover the immunizations - by allowing them to receive their VFC vaccines at State and local public health clinics. The Administration also proposes to restore tetanus - diphtheria booster to the VFC program. The VFC caps prices for the few remaining vaccines that were in use prior to 1993, but the price caps are so low that tetanus-diphtheria booster was removed from the VFC program in 1998 when no vendor would bid on the contract.

The budget also contains $100 million to begin working with industry to ensure the nation has an adequate and a timely supply of influenza vaccine in the event of a pandemic. We cannot stockpile influenza vaccine, and current manufacturing methods could not surge to meet the Nation's needs in a pandemic. Funds will be used for activities to ensure a year-round influenza vaccine production capacity and the development and implementation of rapidly expandable production technologies.

In FY 2003, we are completing a 5-year doubling of the budget of the National Institutes of Health (NIH). This year, we continue that commitment with a budget of $27.9 billion, a net increase of $550 million over last year. As a result of one-time projects being funded in fiscal year 2003, and not needing to be re-financed, actual NIH research will increase by $1.9 billion, or 7.5%, and will fund a record number of new and competing research grants.

We are investing $50 million in a new program at AHRQ to increase investments in information technology in hospitals that will improve patient safety. Of this amount, $26 million will be used to focus on small and rural hospitals. Proven technologies like computerized physician order entry and automated medication dispensing systems improve the safety and quality of care.

We must do everything within our abilities to address the disparities in health care in this Nation. The FY2004 budget proposes numerous activities to move away from such inequities.

  • The budget continues the third year of the President's Health Center Initiative with a total of $1.6 billion, an increase of $169 million, to provide health care services to nearly 14 million individuals. In support of the Health Center Initiative, the President is also seeking to expand the National Health Service Corps to increase the number of health care providers in rural and underserved areas. Additionally, the Budget will increase efforts to recruit underrepresented minorities for participation in the program and better serve minority populations.
  • The budget also proposes a $10 million increase for the breast and cervical cancer program through the Centers for Disease Control and Prevention, which supports screenings for low-income, underinsured, and uninsured women between the ages of 50-64.
  • The Ryan White AIDS Drug Assistance Program will receive an increase of $100 million or 16 percent to purchase medications for an additional 9,000 persons living with HIV/AIDS, for a total of nearly 100,000 clients during the fiscal year.
  • Indian Health Services will receive an increase of $73 million, including $20 million to provide sanitation facilities to over 22,000 American Indian Homes and $25 million to improve health care not available through IHS or tribal providers.

Faith Based and Community Initiatives

In support of the President's Faith-Based and Community Initiative, the HHS FY2004 budget supports programs that promote positive relationships that link faith- and community-based organizations, State and local governments, and Federal partners to develop a shared picture for substance abuse treatment and positive youth development.

We are proposing to establish a new $200 million drug treatment program. For some individuals, recovery is best assured when it is achieved in a program that recognizes the power of spiritual resources in transforming lives. Under this new program, individuals with a drug or alcohol problem who lack the private resources for treatment will be given a voucher that they can redeem for drug treatment services. The program will give them the ability to choose among a range of effective treatment options, including faith-based and community-based treatment facilities. Another important program that helps some of our most vulnerable children is the Mentoring Children of Prisoners program. We are asking for funds to be increased to $50 million, which would in turn be made available to faith-based community-based, and public organizations for programs that provide supportive one-on-one relationships with caring adults to these children who are more likely to succumb to substance abuse, gang activity, early childbearing and delinquency. In addition, the budget request for the Compassionate Capital Fund is $100 million, the same amount requested in FY2003, and an increase of $70 million over the FY2002 appropriation. These funds would continue to be used to support the efforts of charitable organizations in expanding model social service programs. The Fund would also continue to provide technical assistance to faith- and community-based organizations to expand and enhance their services. These are just a few examples of the services that can be provided to those in need under this initiative.

President's Management Agenda

I am committed to improving the management of the Department of Health and Human Services, and I realize that as we work to improve the health and well-being of every American citizen, we also need to improve ourselves. The FY2004 budget supports the President's Management Agenda and includes cost savings from consolidating administrative functions; organizational delayering to speed decision making processes; competitive sourcing; implementation of effective workforce planning and human capital management strategies; and adoption of other economies and efficiencies in administrative operations. We have also included savings in information technology (IT) which will be realized from ongoing IT consolidation efforts and spending reductions made possible through the streamlining or elimination of lower priority projects. I am also very excited about the IT infrastructure consolidation which should be fully implemented by October, 2003, that will further reduce infrastructure expenditures for several HHS agencies.

Improving the Health and Safety of our Nation

Mr. Chairman, the budget I bring before you today contains many different elements of a single proposal; what binds these fundamental elements together is the desire to improve the lives of the American people. All of our proposals, from building upon the successes of welfare reform to protecting the nation against bioterrorism; from increasing access to health care, to strengthening Medicare, all these proposals are put forward with the simple goal of ensuring a safe and healthy America. I know this is a goal we all share, and with your support, we are committed to achieving it.

Last Revised: February 14, 2003