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    Statement by
    Thomas A. Scully
    Administrator, Centers for Medicare & Medicaid Services
    Fiscal Year 2003 President's Budget Request
    for the Centers for Medicare & Medicaid Services

    before the
    House Subcommittee on Labor-HHS-Education Appropriations

    Accompanied by
    Kerry N.Weems
    Acting Deputy Assistant Secretary for Budget

    March 20, 2002

    Mr. Chairman and Members of the Subcommittee:

    Good morning. I am Thomas Scully, the Administrator of the Centers for Medicare & Medicaid Services (CMS). I am pleased to be here today to discuss CMS's fiscal year 2003 budget request and to answer your questions. But 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 fiscal year 2003. As always, we appreciate your support and look forward to working with the Members of this Committee. I might also add that the Committee staff, as has always been the case with this Committee, has been thorough, professional, and terrific to work with.

    The CMS is committed to administering Medicare and Medicaid in an effective and efficient manner and to providing essential services to millions of health care consumers and the health care providers that serve them. We have worked for 10 months now to make Medicare a more user-friendly, beneficiary-centered program. Many changes and improvements have been made, and many are still to come. I would like to briefly highlight our responsibilities and some of our recent accomplishments.

    As you know, last year we announced our new name, the Centers for Medicare & Medicaid Services. In addition, the agency was reorganized and simplified around three centers that better represent the agency's major lines of business. These changes represent a new openness and a new atmosphere at CMS. They also better reflect the agency's mission to serve Medicare and Medicaid beneficiaries and make it clear to the Americans, who rely on these programs, that the CMS is responsible for administering these programs. One of CMS's highest priorities is to create a "culture of responsiveness" to the needs and concerns of Medicare and Medicaid beneficiaries and their health care providers. This new attitude affects everything we do and sets the tone for how we interact with our stakeholders.

    The CMS is the Federal agency responsible for overseeing Medicare, Medicaid, and the State Children's Health Insurance Program (SCHIP). The 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. It is also responsible for implementing hundreds of statutory provisions enacted in recent years, including the 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, and the Benefits Improvement and Protection Act (BIPA) of 2000.

    The CMS is second only to Social Security in the level of Federal spending, and larger if the State portion of Medicaid is included. Medicare and Medicaid pay approximately one-third of national health expenditures and provide over 50 percent of the revenues of many hospitals and other health care providers. One in four Americans, approximately 79 million beneficiaries, relies on CMS programs for health care coverage. For 37 years, Medicare has 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.

    Let me briefly describe some of our progress so far on some of the Secretary's priorities. First, we have enhanced outreach and education with improved Medicare&You educational efforts. This includes a new advertising campaign, an expansion of the operating hours of the 1-800-MEDICARE number to 24 hours/day, seven days/week, which better meets beneficiaries' needs, and improved internet access to comparative information. One graphic measure of our success is that the volume of calls to 1-800-MEDICARE has increased by as much as 75 percent - and at the peak of our campaign, we received 65,000 calls per day. Through our website,, seniors, family members, and caregivers can compare benefits, costs, options, and provider quality information.

    Second, in November of 2001 we successfully launched a quality initiative to help nursing homes improve the quality of service they provide, as well as assist beneficiaries in comparing and selecting a facility. By focusing on 10 nursing home quality measures, developed by the National Quality Forum, this initiative will allow consumers to compare facilities. We are piloting the initiative in six States (Ohio is one, plus Florida, Maryland, Rhode Island, Colorado, and Washington), but will soon expand it nationwide. In addition, we plan to initiate a similar pilot program for home health providers later in 2002.

    Third, we are improving responsiveness to beneficiaries and providers. We created 11 "open door" policy forums to facilitate information sharing and improve communication between the agency and its partners and beneficiaries. These listening sessions and town hall meetings are held twice per month throughout the country. We have also established key contacts for the States to promote direct communication between CMS staff and beneficiary groups. Furthermore, CMS is an active participant and advisor in the Secretary's Regulatory Reform Initiative, which seeks to reduce regulatory burden on both providers and beneficiaries. 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 fiscal year 2003. First and foremost is strengthening Medicare, one of the Administration's top priorities. The President's budget dedicates $190 billion over ten years to support the President's framework for improvements and comprehensive Medicare modernization. This includes several programs that provide beneficiaries immediate assistance. One policy, Transitional Medicare Low-Income Drug Assistance, would provide prescription drug coverage to low-income beneficiaries. Under this proposal, we take immediate steps to make prescription drugs more affordable for the neediest Medicare beneficiaries until more comprehensive changes are enacted. In addition, we will reform the current Medicare+Choice payment system to keep existing plans in the program and to encourage new plans to join. We also plan to improve and expand the coverage available through Medigap and to expand competitive bidding for durable medical equipment to ensure that Medicare provides quality services and supplies at lower prices.

    In fiscal year 2003, we will remain focused on educating consumers by investing $122 million in discretionary resources toward the National Medicare&You Education Program. CMS plans to continue to enhance services provided via 1-800-MEDICARE to make decision-making for our beneficiaries even easier. We also plan to continue our national publicity campaign and we will improve services through

    In an effort to make the Federal Government more responsive, we are also working aggressively to improve the Medicaid and SCHIP waiver process. By streamlining the waiver approval process, developing a new data tracking system, and collaborating with the Department on existing review procedures, we hope to create a better system. We are also giving States more flexibility to expand insurance coverage to the uninsured through the new Health Insurance Flexibility and Accountability Demonstration Initiative waiver.

    Another high priority for the CMS is improving our accountability. Our request includes funding to help educate providers and find ways to reduce the regulatory burden on physicians. We also plan to refocus our program integrity efforts so that we can better differentiate between fraudulent providers and those who make honest billing mistakes. In addition, our fiscal year 2003 budget is predicated on achieving greater administrative efficiency. This includes managing our workforce more effectively to resolve problems, 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.

    The FY 2003 President's Budget request includes $51 million to modernize CMS's financial accounting systems. The Healthcare Integrated General Ledger Accounting System (HIGLAS) is a vital component in the Secretary's initiative to better centralize the Department's financial accounting process through the Unified Financial Management System (UFMS). When fully implemented, HIGLAS will integrate CMS financial data in a uniform way. It will also replace CMS's current legacy accounting system and related systems.

    Finally, I would just like to say a word about the Government Performance Results Act and our annual performance plan. The annual performance plan complements and supports the agency's fiscal year 2003 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 representing fiscal integrity is our goal to reduce improper payments made under the Medicare fee-for-service (FFS) program. We have been successful in showing sustained improvement in the national FFS error rate since the Department began tracking the Medicare error rate in FY 1996. To build on this success, we added another goal in FY 2001 to determine exactly where and with which provider or contractor errors are occurring so that we can more effectively take corrective action and better manage Medicare contractor performance.

    Now I would like to discuss CMS's FY 2003 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 2003, the Medicaid program will serve more than 40 million eligible persons. Federal Medicaid obligations for FY 2003 are estimated at almost $159 billion, an increase of 9.6 percent over the FY 2002 estimate. Combined Federal and State Medicaid expenditures are projected to exceed $278 billion in FY 2003, of which the Federal share is about 57 percent.


    Our FY 2003 request of $81.5 billion includes a Federal general revenue contribution to the Supplementary Medical Insurance (SMI) Trust Fund of $80.9 billion, a decrease of $427 million from the FY 2002 appropriation.


    Our FY 2003 Program Management request is $2.5 billion, an increase of 3.2 percent over the FY 2002 appropriation. This funding level will allow us to perform our operational functions and fund key budget priorities like improved beneficiary education and HIPAA implementation.

    Our Program Management request, while less than one percent of total program outlays, supports a host of activities. In fact, none of the $409 billion in federal program benefit payments could be paid without the activities and projects funded from this discretionary account.

    The Administration is proposing two user fees totaling $130 million. Before I discuss the line items or activities that comprise Program Management, I would like to describe these proposed user fees.


    The user fee proposals cover paper claims submission, and submission of duplicate or unprocessable claims. The costs of the new claims activities are currently absorbed in CMS's Program Management budget. We believe that these user fees are sound policy that could lead to positive change in the Medicare program. For example, the duplicate and unprocessable claims fee will deter providers from submitting these time-consuming, wasteful claims, leading to increased efficiency. For paper claims submissions, we believe that we need to encourage providers to rely on cost effective electronic claims submission. These fees could be waived for rural and other providers whose special circumstances would make it difficult for them to comply with these submission requirements. Our user fee proposal is consistent with the Administration's CMS Claims Processing User Fee Act of 2001 transmitted to Congress by Secretary Thompson on April 10, 2001.

    Since our FY 2003 request reflects our total funding needs, the enacted user fees should offset our appropriation by the amount of the proposal. We are eager to work with the Committee to ensure that CMS's funding level is sufficient to meet its program responsibilities.

    I would now like to discuss briefly the four line items that comprise Program Management: Medicare Operations; Federal Administration; Medicare Survey and Certification; and Research, Demonstration and Evaluation.


    The FY 2003 Medicare Operations request of $1,675.1 million reflects an increase of $141.1 million, or 9.2 percent, over the FY 2002 appropriation. We have changed the name of this Program Management line item activity from "Medicare Contractors" to "Medicare Operations." We believe that this new designation will focus attention more appropriately on the broad range of activities funded through this line item, rather than on a particular organization performing some of those activities. This request funds 50 private Medicare contractors who will process and pay nearly one billion fee-for-service claims, answer 40 million inquiries, process seven 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 various Medicare+Choice activities.

    As mentioned before, the request includes $122 million to support a variety of activities in our National Medicare&You Education Program. In addition, $75.1 million will be dedicated to the HIPAA privacy regulation and administrative simplification provisions. We have also placed special emphasis on projects that bolster the Secretary's efforts to move HHS forward in the area of information technology. The Medicare Operations request includes $47 million for HIGLAS.


    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 2003 request of $587.2 million represents an increase of $32.0 million, or 5.8 percent, over the FY 2002 appropriation. The Federal Administration budget covers salaries and benefits of CMS's Federal employees as well as information technology costs and operating costs for all of our offices. In fiscal year 2003, the budget includes 4,476 full time equivalents, a decrease of 156 FTEs from FY 2002, of which 63 will be transferred to the Department as part of an FTE consolidation for public affairs and legislation activities.


    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 2003 Medicare Survey and Certification budget request is $247.6 million, a decrease of $6.8 million or 2.7 percent below the FY 2002 appropriation. While this appears to be a decrease in our commitment to the survey process, it is not. This budget transfers $16.9 million in activities that were previously funded in the Survey and Certification activity to the Peer Review Organization (soon to be QIO) activity. This level will fund surveys and complaint visits for all provider types plus two new support contracts aimed at enhancing the survey process. We will continue to inspect providers at the same frequency as in FY 2002, except for accredited hospitals, which we will change from a five-percent per year recertification level to a one-percent per year recertification level. We expect a total of more than 23,000 inspections and almost 44,000 visits in response to complaints.

    This budget request includes $35.7 million for the Nursing Home Oversight Improvement Program (NHOIP). 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 2003 Research and Demonstration request is $28.4 million, a decrease of $88.8 million from the FY 2002 appropriation. This request is consistent with HHS plans to streamline research through its Research Coordination Council. The request consists of $28.4 million for a limited number of new and continuing projects initiated in the previous year, including the Medicare Current Beneficiary Survey and projects to refine and monitor prospective payment systems. Our budget also supports many projects mandated by BBA, BBRA, and BIPA. Lastly, it supports New Freedom Initiative demonstration activities intended to address workforce shortages of community service direct care workers.


    Our Program Management request - a 3.2 percent increase above the FY 2002 appropriation - will meet our basic operational needs while supporting the Administration 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 2003 budget request. I look forward to working with this Committee, and I would be happy to respond to any questions or suggestions that you may have.

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Last revised: April 8, 2002