Statement by
Thomas A. Scully
Administrator, Centers for Medicare & Medicaid Services/HHS
Fiscal Year 2004 Budget Request
before the
The House Subcommittee on Labor-HHS-Education Appropriations

April 3, 2003

Good morning Chairman Regula and members of the Subcommittee. I am pleased to be here today to discuss the Centers for Medicare & Medicaid Services' (CMS) fiscal year (FY) 2004 budget request and to answer your questions. First, I'd like to give you an overview of our budget, and tell you about some of our recent activities, as well as the priorities Secretary Thompson and I have for FY 2004. As always, we appreciate your support and look forward to working with you, Chairman Regula, and with the Members of this Subcommittee.

CMS is the Federal agency responsible for overseeing Medicare, Medicaid, and the State Children's Health Insurance Program (SCHIP). CMS also oversees the Medigap insurance industry and enforces the Clinical Laboratory Improvement Amendments (CLIA) and health insurance reform enacted under the Health Insurance Portability and Accountability Act (HIPAA) of 1996. We are also responsible for implementing hundreds of statutory provisions enacted in recent years, including HIPAA, the Balanced Budget Act (BBA) of 1997, the Balanced Budget Refinement Act (BBRA) of 1999, the Ticket to Work and Work Incentives Improvement Act of 1999, the Benefits Improvement and Protection Act (BIPA) of 2000, and, recently, the Trade Act of 2002.

CMS oversees one of the largest budgets of any agency in the Federal government. It pays one-third of national health expenditures and provides over half of the revenues of many hospitals and other health care providers. Approximately 82 million beneficiaries, almost 30 percent of all Americans, rely on CMS's programs for health care coverage. For 38 years, Medicare and Medicaid have helped pay medical bills for millions of older and low-income Americans, providing them with comprehensive health benefits they can count on. Few programs, public or private, have such a positive impact on so many Americans. We do this with the help of over 65,000 State and local employees and contract employees.

CMS is committed to administering Medicare and Medicaid effectively and efficiently and to providing essential services to millions of health care consumers and the health care providers that serve them. For almost two years, we have worked to make Medicare a more user-friendly, beneficiary-centered program and to make it clear to the Americans who rely on our programs that CMS is responsible for administering them. We have also moved the agency toward being more citizen-centered, and more open and responsive to the needs and concerns of Medicare and Medicaid beneficiaries and their health care providers. I believe that this new attitude influences everything we do and sets the tone for how we interact with our stakeholders. We have made many changes and improvements, with more still to come.

First and foremost, I want to talk about Medicare appeals reform. With your help, we plan to implement key provisions of the Benefits Improvement and Protection Act (BIPA) of 2000 and assume the Medicare hearing function currently performed by administrative law judges (ALJs) at the Social Security Administration (SSA).

We believe that the Medicare hearing function is more appropriately housed within CMS, and we are moving forward to achieve this. However, this is an especially challenging time for this workload. Right now, SSA ALJs take about 330 days to complete a Medicare hearing. Clearly, this is an unacceptable level of customer service. In BIPA, Congress sought to alleviate this problem by mandating a 90-day processing time for these cases, but we don't believe this affords sufficient time to properly develop and adjudicate an appeal, given the volume of work received. This is a particular concern given the "escalator clause" which allows beneficiaries to advance their case to the next level of appeal if a decision is not rendered within the statutory timeframe. This could result in hearings moving to the Departmental Appeals Board, only to be remanded back to an ALJ if they are not sufficiently developed, setting up an unending circle that would diminish beneficiary service rather than improve it.

We have proposed that all of the BIPA statutory timeframes be lengthened. We believe that more realistic timeframes, even if only at the initial levels of the appeal process, will reduce the number of cases at the higher, more costly adjudication levels. We look forward to working with you and the authorizing Committees toward the enactment of this proposal.

A major factor in the ability to complete higher levels of adjudication on a timely basis envisioned by BIPA 521 is the availability of trained ALJs. We are considering alternative approaches, including the possibility of using mechanisms other than ALJs. For the past several years, there has been a moratorium on hiring new ALJs. This has contributed to SSA's problem issuing timely ALJ decisions for both their cases and ours. They have neither enough ALJs to reduce timeframes nor the ability to hire more. Therefore, both Medicare and disability appeals are taking too long. Despite a recent court ruling lifting the moratorium, it is unclear to us at this time when agencies will again be able to hire ALJs. Moreover, even if we were to have the authority to hire ALJs, we may not be able to hire a sufficient number, since all agencies that use ALJs have been subject to the moratorium and its consequences. This is a difficult challenge.

By transferring the Medicare appeals workload to CMS, SSA will be able to concentrate its efforts on the disability appeals backlog, but they will need their full contingent of ALJs for this effort. Since SSA needs all the ALJs they have just to meet their disability workloads, our chances of meeting our staffing needs with existing ALJs are very slim. If there is no change to the manner in which Medicare appeals are heard, there is a danger that beneficiaries will lose an appeal right they have had for years and that customer service will decline even more. Our budget seeks a way around this problem by including appropriation language that, if enacted, will give the Secretary the option to consider other approaches. We count on your support for this provision to help us improve beneficiary service.

While we have agreed with SSA in principle to assume responsibility for the Medicare hearings function effective October 1, 2003, we are still working out the details of the workload transfer.

Another aspect of appeals reform under BIPA section 521 involves the implementation of a new entity, qualified independent contractors or "QICs," which will review second-level appeals. Although BIPA requires that we contract with "at least 12" QICs, we have proposed contracting with no fewer than four QICs. We believe that consolidating responsibilities into four such entities will be more efficient and cost effective.

Finally, we are proposing a change in the implementation schedule. We believe it will take us 16 months, after receipt of funding, to establish the QICs and start processing cases. Extending the implementation date would be more realistic and would give us time to bid for and contract with these new entities, and to engage in start-up activities such as hiring and training staff. It will also give us time to develop an electronic case control system that will help CMS manage these new workloads and meet the BIPA requirement that each appellant have access to the status of the appeal. This system will make the appeals process more efficient by improving case tracking and record development.

We also want to get started on implementing the appeals process for coverage determinations as required by BIPA section 522.

We estimate that we will need $129 million in FY 2004 to accomplish these reforms. This includes $126 million to implement the Section 521 provisions, amended as we have proposed, and the related Medicare hearing function, and $3 million for start-up activities under section 522. I want to emphasize that this level of funding assumes enactment of the proposed BIPA modifications and the provision regarding increased flexibility in the way Medicare hearings are conducted.

Next, I'd like to briefly describe the progress we've made on some of the Secretary's priorities. First, we have enhanced our outreach and education activities with improved Medicare & You educational efforts. This includes a continuing advertising campaign, a continuation of expanded operating hoursū24 hours/day, seven days/weekūat the 1-800-MEDICARE call centers to better meet beneficiaries' needs, and improved Internet access to comparative information. The volume of calls continues to increase at a rate of about 30 percent each year. In FY 2002, we introduced a new beneficiary decision tool-the Medicare Personal Plan Finder-to our www.medicare.gov website allowing seniors, family members, and caregivers to compare benefits, costs, options, and provider quality information.

Together with the Department, we recently launched the national Nursing Home Quality Initiative which provides comparative information about the quality of nursing homes. This is an important step in CMS's comprehensive quality strategy. A recently released CMS study of 22 health care measures found that medical care for Medicare beneficiaries has improved significantly since 1998. We believe that public reporting initiatives can further improve the quality of health care delivery for our beneficiaries. We plan to include similar information on home health agencies in FY 2003.

We are also improving responsiveness to beneficiaries and providers. Our "open door" policy forums facilitate information sharing and improve communication between the agency and its partners and beneficiaries. We have held more than 140 of these meetings with more than 2,700 in-person participants and 15,700 participants on our toll-free call-in lines. We have also established key contacts for the States to promote direct communication between CMS staff and beneficiary groups. Furthermore, we have worked diligently over the past two years to reduce the regulatory burden on providers so that they can spend more time taking care of patients. Many of our actions have come from recommendations made by the Secretary's Advisory Committee on Regulatory Reform, of which CMS was an active member. We believe these are important strides in our goal to become more customer-focused.

Although we have made significant progress, we still have many important plans for FY 2004. First and foremost is strengthening Medicare, one of the Administration's top priorities. The President's budget dedicates $400 billion over ten years to support the President's framework for improvements and comprehensive Medicare modernization. This includes providing access to prescription drug coverage for all beneficiaries, providing incentives to expand and enhance managed care options, and modernizing fee-for-service by protecting beneficiaries against high out-of-pocket costs. I want to emphasize that the President's framework provides beneficiaries with more options-it does not take away options. Medicare beneficiaries who like traditional Medicare will be able to stay in traditional Medicare, with some improvements. Other beneficiaries will have other choices that may better suit their health care needs.

This budget also supports the Administration's proposal to modernize the Medicaid and SCHIP program by introducing more State flexibility and fiscal stability into the program. Under our proposal, States would have the option of continuing in the current Medicaid program or choosing partnership allotments. They will also be given significant flexibility to design health insurance options for their uninsured populations. In addition, the budget proposes extending the availability of expiring SCHIP funds until FY 2004.

Our request also includes significant new efforts to help disabled persons and their families. The New Freedom initiative promotes home and community-based care and represents part of the Administration's effort to make it easier for Americans with disabilities to be more fully integrated into their communities. The budget also proposes the extension of two programsūthe Transitional Medical Assistance program and a program to pay Medicare Part B premiums for certain low-income beneficiaries (QI-1).

In an effort to make the Federal Government more responsive, we have been working aggressively to improve the Medicaid and SCHIP waiver process. CMS has given States more flexibility to expand insurance coverage to the uninsured through the development of the Health Insurance Flexibility and Accountability Demonstration Initiative waiver and through the new Pharmacy Plus waiver. In addition, we have developed Independence Plus waivers, which expedite the ability of States to offer families greater opportunities to take charge of their own health and direct their own care. Streamlined templates were developed for these three types of waivers, which facilitate provision of information and can streamline Federal review and approval.

Another high priority for us is improving our accountability. We are refocusing our program integrity efforts so that we can better differentiate between fraudulent providers and those who make honest billing mistakes. We also plan to use $20 million from the Health Care Fraud and Abuse Control account to improve the fiscal integrity of the Medicaid and SCHIP programs and to strengthen Federal oversight of the States' financial practices.

We are also committed to improving our financial performance. Our FY 2004 request includes $57 million to continue building a financial management system that is compliant with the Federal Financial Management Improvement Act. This system, the Healthcare Integrated General Ledger Accounting System (HIGLAS), is a vital component in the Secretary's initiative to centralize the Department's financial accounting processes through its Unified Financial Management System. When fully implemented, HIGLAS will integrate CMS financial data in a uniform way and replace our current legacy systems.

In addition, our FY 2004 budget is predicated on achieving greater administrative efficiency. This includes managing our workforce more effectively, increasing employee skill levels, responding to Congress and other groups more promptly, and managing our work more strategically. Although we already accomplish most of our operational activities through outside contractors, we continue to analyze opportunities for competitive sourcing.

Finally, I would like to say a word about the Government Performance and Results Act (GPRA) and our annual performance plan. This plan complements and supports the agency's FY 2004 budget, and is integral to it. The agency is confident that performance measurement under GPRA will substantially improve management of CMS and its programs.

One of our GPRA goals is to reduce improper payments made under the Medicare fee-for-service (FFS) program. We have reduced the national FFS error rate by more than half since the Department began tracking it in FY 1996. To build on this success, we will fully implement, in FY 2003, a Comprehensive Error Rate Testing program which will identify provider- and contractor-specific error rates so that we can take more effective corrective action and better manage Medicare contractor performance. We are also committed to reducing Medicaid and SCHIP payment error rates. This request supports the development of payment accuracy measurement methodologies for these programs.

Now I would like to discuss CMS's FY 2004 budget request and the three accounts for which this Committee makes appropriations: Grants to States for Medicaid; Payments to the Health Care Trust Funds; and CMS Program Management. I will briefly highlight the first two accounts and then discuss CMS's Program Management request in more detail since Program Management funds are key to accomplishing our priorities.


In FY 2004, the Medicaid program will serve more than 42 million eligible persons. Federal Medicaid obligations for FY 2004 are estimated at almost $177 billion, an increase of 8.8 percent over the FY 2003 estimate. Combined Federal and State Medicaid expenditures are projected to be $310.4 billion in FY 2004, of which the Federal share is about 57 percent.


Our FY 2004 request of $95.1 billion includes a Federal general revenue contribution to the Supplementary Medical Insurance (SMI) Trust Fund of $94.5 billion, an increase of $13.6 billion from the FY 2003 appropriation.


Our FY 2004 Program Management request is $2.7 billion, an increase of $168.6 million, or 6.6 percent, over the enacted FY 2003 appropriation. This funding level will allow us to perform our operational functions and fund key budget priorities such as implementing appeals reform and improving beneficiary education. This budget supports a total of 4,486 FTEs, a decrease of 175 FTEs from our current FY 2003 estimate.

Our Program Management request, while less than one percent of total program outlays, supports a host of activities. In fact, none of the $451 billion in Federal program benefit payments could be paid without the activities and projects funded from this discretionary account.

I would now like to discuss briefly the line items that comprise Program Management: Medicare Operations, Federal Administration, Medicare Survey and Certification, Research, Demonstration and Evaluation and, new in FY 2004, the CMS Revitalization Plan.


The FY 2004 Medicare Operations request of $1,776.9 million reflects an increase of $110.2 million, or 6.6 percent, over the FY 2003 appropriation. This request funds the 50 or so private Medicare contractors who will process and pay 1.1 billion fee-for-service claims, answer 45 million inquiries, process almost 8 million appeals, enroll and educate providers, assist beneficiaries, and carry out other responsibilities on CMS's behalf. In addition, it funds other activities that support these contractors, such as systems maintenance and data communications. It also supports various legislative mandates and Medicare+Choice activities.

We are asking for $122 million to continue supporting the various activities in our National Medicare & You Education Program, including $12.5 million for the State Health Insurance Assistance Program. In addition, $35.1 million will be dedicated to the HIPAA administrative simplification and privacy regulation provisions, including $10 million (and 10 FTEs) to begin HIPAA enforcement activities. We have also placed special emphasis on projects that bolster the Secretary's efforts to move HHS forward in the area of information technology, including $53.3 million for HIGLAS and $14 million to support the Secretary's efforts to modernize and strengthen the Department's systems environment.


The Federal Administration portion of the Program Management account supports the day?to?day operations of CMS's headquarters, as well as our 10 regional offices. The FY 2004 request of $580.6 million represents an increase of $8.8 million, or 1.5 percent, over the FY 2003 appropriation. This line item covers salaries and benefits of CMS's Federal employees as well as information technology costs and operating costs for all of our offices. It includes $3 million for BIPA section 522 start-up activities, $3.7 million for HIGLAS, and $13 million for the Administration's Healthy Start, Grow Smart program for mailing 13 months of brochures to new mothers on Medicaid.


The Medicare Survey and Certification activity ensures that facilities participating in Medicare meet Federal health, safety and program standards. The Medicaid survey and certification counterpart is funded through the grants to States for Medicaid appropriation. Survey and certification activities seek to secure quality services for all Medicare and Medicaid beneficiaries. The FY 2004 Medicare Survey and Certification budget request is $247.6 million, a decrease of $5.1 million or 2.0 percent below the FY 2003 appropriation, but equal to our FY 2003 request. This level will allow CMS to continue inspecting long-term care facilities and home health agencies at the legislatively mandated frequencies. All other provider types will be inspected at the same frequency as in FY 2003. We expect a total of more than 23,000 inspections and almost 48,000 visits in response to complaints.

The FY 2004 budget request includes $40 million for the Nursing Home Oversight Improvement Program (NHOIP). Of this amount, $35.2 million will be funded from the Medicare Survey and Certification account and the remaining $4.8 million will be funded from the Federal Administration account. The NHOIP has been successful at providing training to State surveyors, monitoring abuse prevention efforts, becoming more responsive to complaints, and developing State sanction options. We will continue these current activities and others to ensure that Medicare beneficiaries in nursing homes receive quality care in a safe environment. We have made significant strides in the areas targeted by the NHOIP and we are committed to continue working with residents and their families, advocacy groups, providers, States, and Congress to ensure that residents receive the quality care and protection they deserve.


The FY 2004 request for Research, Demonstrations and Evaluations is $63.4 million, a decrease of $10.3 million from the FY 2003 appropriation. This request includes $40 million for Real Choice Systems Change grants, $3 million for the New Freedom Initiative demonstration activities intended to address workforce shortages of community service direct care workers, and $20.4 million for a limited number of new and continuing projects, including the Medicare Current Beneficiary Survey, and projects mandated by recent legislation. Our request is consistent with the Department's plans to streamline research through its Research Coordination Council.


CMS's FY 2004 request includes $65 million in two-year money to initiate a new, multi-year investment fund to revitalize CMS systems operations. Previous efforts have been compromised by the competition for limited discretionary budget resources and CMS's growing claims processing and legislative mandate workloads. Designating the CMS Revitalization Plan as a new, separate line item within CMS's Program Management account will ensure that these funds are dedicated to overhauling outdated technologies, policies, and procedures and to the continuing effort to bring the Medicare and Medicaid programs into the 21st Century. In 2004, the revitalization plan will focus on systems-related (information technology) activities. Over half of this first-year request will be used to address known security risks and vulnerabilities, develop systems security plans, and implement an on-going security program. The balance will be used to begin to modernize the Medicare fee-for-service claims processing systems, develop a modern data warehousing environment, and invest in e-gov security infrastructure modernization.

Last, the Administration is proposing user fees to help improve the efficiency of claims and appeals processing. I would like to briefly describe our two user fee proposals for this budget.


FY 2004 user fee proposals total $201 million, and include fees for the submission of duplicate or unprocessable claims and a fee for providers who file an appeal with the new qualified independent contractors or QICs. We believe that these user fees are sound policy that will lead to positive change in the Medicare program, if enacted. For example, the duplicate and unprocessable claims fee ($2.50) will deter providers from submitting time-consuming, wasteful claims. Similarly, the $50 appeals filing fee will heighten provider awareness of the reformed appeals process and deter frivolous appeals.

Since our FY 2004 request reflects our total funding needs, the enacted user fees would offset our appropriation by the amount of the proposal. We are eager to work with the Subcommittee to ensure that CMS's funding level is sufficient to meet its program responsibilities.


Our FY 2004 Program Management request-a 6.6 percent increase above the FY 2003 appropriation- will meet our basic operational needs while supporting the Administration's goals and improving beneficiary education and providing health care choices for our beneficiaries. We believe we can continue to make meaningful changes to the programs we administer within these funding levels.

Thank you for the opportunity to present CMS's FY 2004 budget request. I look forward to working with you, Mr. Regula, and with this Subcommittee, and am happy to respond to any questions or suggestions that you may have.

Last Revised: April 3, 2003