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Testimony on FY 1997 Budget Request by John J. Callahan
Assistant Secretary for Management and Budget
and Chief Financial Officer
U.S. Department of Health and Human Services

Before the House Committee on Appropriations, Subcommittee on Labor, Health and Human Services, and Education
May 16,1996

Mr. Chairman and Members of the Subcommittee:

Good afternoon, Mr. Chairman and members of the Subcommittee. I am John J. Callahan, Assistant Secretary for Management and Budget and Chief Financial Officer of the Department of Health and Human Services. Here with me today is Dennis P. Williams, Deputy Assistant Secretary for Budget.

I am pleased to be here today presenting to you the fiscal year (FY) 1997 budget request for the Departmental Management accounts and to discuss, with my colleagues here at the table, some broader management topics of interest to the Committee.


My colleagues and I have had the experience of living in interesting times -- to paraphrase an old adage -- in our efforts to manage executive branch agencies in a ever-changing environment of dramatic organizational change, personnel streamlining, reinvention and innovation, and continuing budget reductions -- not to mention multiple continuing resolutions and agency furloughs.

In HHS, we have faced unique challenges over the past year. However, I believe that our actions in dealing with those challenges reflect a record of solid achievements, including a new -- and more streamlined -- headquarters corporate structure for the Department. Mr. Chairman, as the Secretary said in her earlier testimony, we're changing the way we do business at HHS -- not only in Medicare, Medicaid, and welfare, but throughout the Department. We are committed to strong, lean, business-like management procedures throughout the Department.

As part of the President's plan to dramatically shrink the size of the federal government, we reduced our staff by nearly 3,300 FTE, a full 5 percent, between FY 1994 and FY 1995 alone. To meet the goals of the President's plan, we have committed ourselves to a seven-year fight-sizing effort that will reduce the Department's personnel by 7,000 FTE (from the FY 1993 level) by the year 2000. Departmental Management resources, which were significantly impacted by government- wide streamlining, Social Security Administration (SSA) independence, and creation of the Program Support Center, shrunk by 60 percent, from 3,866 FTE in FY 1993 to the 1,548 FTE included in our FY 1997 budget request.

In March 1995, we successfully launched the Social Security Administration as an independent agency, thanks to the careful planning of both HHS and SSA staff. Although the negotiations went smoothly -- as evidenced by GAO reports on the subject -- the residual impact on the Department was substantial. In Departmental Management (DM), we transferred 25 percent of our total workforce to SSA, leaving many DM components with reduced staffing levels to carry out effective and efficient operations. For example, 85 percent of our Regional Personnel Offices and half of the General Counsel's office were transferred to SSA.

At the same time, we reassessed the management structure in the Department and determined that at the headquarters level many of the support services that the Office of the Assistant Secretary for Health (OASH) had provided to the PHS agencies could be reorganized and at least partially consolidated with the administrative services provided to the HHS Operating Divisions by the Office of the Secretary.

On May 11, 1995, Secretary Shalala announced the results of the Department's reevaluation of its structure, functions, and mission as part of President Clinton's historic effort to create a government that works better and costs less. One of the initiatives announced was the elimination of an entire layer of management by consolidating the Office of the Secretary and the Office of the Assistant Secretary for Health. Combining these two offices also allowed us to eliminate redundant functions and layers of review and transfer many functions to the Operating Divisions. By bringing together these two offices, we are in a better position to integrate health and human services policy and programs -- one of our principal goals.

As a result of this consolidation, a new Staff Division -- the Office of Public Health and Science (OPHS) -- was created under the Secretary and headed by the Assistant Secretary for Health (ASH). This merger has freed the Assistant Secretary for Health from day-to-day management responsibilities for the Public Health Service in order to strengthen this absolutely critical leadership and policy role in the Department's public health and science agenda. The ASH will, by necessity, have a "hybrid" role, acting as senior advisor to the Secretary on public health and science and providing senior professional leadership in the Department on population-based public health and clinical preventive services. In addition, the ASH provides leadership on cross-cutting Departmental public health and science initiatives; directs the program offices within OPHS; and, at the direction of the Secretary, provides assistance in managing the implementation of Secretarial decisions for the PHS Operating Divisions.

We also merged the operations of the Assistant Secretary for Management and Budget with the Assistant Secretary for Personnel Administration on October 1, 1995. The final result of both these reorganizations is a lean, tightly organized Office of the Secretary.

These important and significant changes in the structure of the corporate headquarters for the Department have been accomplished amidst significant personnel streamlining and unprecedented budgetary constraints. I am proud to say that we have accomplished these changes quickly and efficiently, and, most importantly, without having to involuntarily separate or furlough any HHS employees.


An important feature of our efforts to redefine the HHS corporate entity has been a planned effort to delegate administrative and program authorities to the Department's Operating Divisions to enable them to operate without excessive -- and unnecessary -centralized controls. The elimination of the management layer represented by OASH was a significant advance in this area -- all of the PHS agencies now report directly to the Secretary.

In March 1996, the Secretary approved a comprehensive array of human resources, administrative, and management delegations of authority to the HHS Operating Divisions to free the OPDIVs from unnecessary higher-level intrusion into day-to-day operations. (A list of these delegations of authority is attached.)

The Secretary, for example, delegated directly to the National Institutes for Health virtually all civil service personnel administration and personnel management authorities, as well as authorities connected with management of its share of the Senior Biomedical Research Service in order to provide NIH with greater flexibility to manage its research workforce, reduce costs, and recruit and retain the highest quality workforce.

The Secretary and the NIH Director have also signed a performance agreement committing to a vigorous and comprehensive evaluation of the impact after five years of this streamlined personnel system on the research environment.

In addition, we worked with NIH to identify options and bring about Departmental consensus on financing construction of a new Clinical Research Center and on re-inventing the Clinical Center's management and operations.


We have further improved our operations by moving toward more competitive, market-oriented organizations. We've created an innovative new Operating Division in the Department -- the Program Support Center -- whose sole purpose is to provide administrative services on a fee-for-service basis to customers throughout HHS and other federal agencies. The PSC combines the administrative service activities formerly located in the Office of the Secretary -- and funded under the OS Working Capital Fund -- with activities formerly in OASH, the Food and Drug Administration, the Health Resources and Services Administration, and the Indian Health Service -- formerly funded by the PHS Service and Supply Fund.

In addition to HHS offices and agencies, PSC customers include 12 other executive departments, 12 independent federal agencies, and the General Accounting Office. This agency is internally financed; under this arrangement, fees and service levels will be approved by a Board of Directors consisting of representatives of both customers and service providers. This customer-driven Board will provide an incentive for competitive pricing of quality services over the long term.. (A copy of the PSC functional statement is attached.)

After a nationwide search, the Secretary recently appointed Lynnda Regan as the first Director of the PSC. Ms. Regan is a highly respected executive from Westinghouse and brings to the Department valuable private sector knowledge and experience. With Ms. Regan's leadership and the management structure we have created, the PSC is really a model built for the future. It represents our fundamental commitment to business-like management throughout the Department.


Along with all of these changes that are unique to HHS, we have continued to work toward implementation of government-wide improvements through our participation in cross-servicing arrangements with other federal agencies and in other interagency initiatives.

The Department has long-term cross-servicing arrangements with other federal departments and agencies which represent the kinds of models that the reinvention teams have been pressing for government- wide:

In accordance with the Government Performance and Results Act, HHS submitted its application to OMB for the HRSA Division of Federal Occupational Health as its franchise fund pilot. Franchising is the application of competition and marketing principles to the delivery of common administrative services.

FOH is an excellent candidate for franchising because it has been in head-to-head competition with the private sector for some time and is a leader in federal cross-servicing with interagency agreements involving over 160 federal departments and agencies with projected annual expenditures and reimbursements of $100 million in FY 1996. FOH has been successful in retaining 97 percent of its customer base over the most recent four-year period (1992-1995).

The Payment Management System (PMS) is the Department's centralized grants payment system. PMS provides an effective disbursement mechanism for the Department's grant programs, and also provides these services under cross servicing arrangements to numerous other agencies (NASA, USIA, FEMA Labor, Interior, Agriculture, Energy, and Transportation). This system assures more timely and efficient cash management of the funds disbursed using the latest payment technologies, including electronic funds transfer and automated bank clearinghouse methods. PMS also substantially reduces the paperwork burden on grant recipients receiving funds.

In FY 1995, PMS made over $186 billion in grant payments to recipients, including state governments, hospitals, colleges, universities, and other profit and non-profit organizations receiving grants. During this year, outstanding results were achieved against the goals of increasing the quality and efficiency of service, while expanding cross servicing. As compared to FY 1994, PMS more than doubled the number of recipients who requested federal cash electronically, utilizing the Automated Clearing House (ACH) through the Federal Reserve Bank in Richmond. This method allows grant funds to be electronically deposited directly into the recipients bank account, at a transaction cost of $.04 versus $.30 for check transactions. In addition to cheaper transaction costs, ACH payments contribute significantly to improved cash management, as recipients can draw funds on an "as needed" basis, which decreases the occurrence of static federal cash in the recipients hands. This system also provides benefits to the recipient community as ACH payments are faster, easier, and paperless. In FY 1995, the PMS recorded revenues of $9 million for its fee-for-service activities.

The Supply Service Center at Perry Point, Maryland, operates a full service medical supply depot whose activities include the purchase, receipt, storage, packing, distribution, shipping and inventory control of drugs, chemicals, medical and hospital supplies, and special program needs. The depot provides support to over 1,700 customers worldwide and is an economical source of supply for all federal customers.

We are equally proud of several new intergovernmental initiatives launched in the past year which will leverage government-wide resources to achieve important national objectives.

Earlier this week, the Secretary marked the first-year anniversary of HHS' anti-fraud and abuse initiative, Operation Restore Trust, announcing that new approaches in the pilot program have already identified $42.3 million in fines, restitutions, settlements, and recovery of overpayments. This represents a return of nearly $10 in recoveries for every $1 spent on the project. ORT is a two-year effort to combat health care fraud, waste, and abuse in the five states with the highest Medicare expenditures.

In Operation Restore Trust, HHS designated an interdisciplinary project team of federal and state government representatives to target Medicare abuse and misuse in California, Florida, New York, Texas, and Illinois. These states account for 38.5 percent of Medicaid beneficiaries and 34 percent of Medicare beneficiaries. The team is focusing on home health care, nursing home care, and medical equipment and supplies -- three of the fastest growing areas in Medicare.

Three agencies within HHS -- the Office of Inspector General, the Health Care Financing Administration, and the Administration on Aging -- are involved in ORT, as is the Department of Justice. As HHS Inspector General June Gibbs Brown has said: "Operation Restore Trust is proving what it was meant to prove: that a new focus on fraud and abuse, and new cooperative approaches, can help us to better protect federal Medicare and Medicaid dollars."

In FY 1997, we are seeking permanent legislation to expand Operation Restore Trust to include all states and all services covered by Medicare. We will continue to work with State Medicaid Fraud Control Units and law enforcement agencies to ensure that claims are properly paid in both Medicare and Medicaid. To achieve our objectives, two new HHS programs, along with new initiatives in the Department of Justice, designed specifically to fight health care fraud and abuse are proposed: the Medicare Anti-Fraud and Abuse Program (MAAP) in the Office of Inspector General and the Medicare Benefit Integrity System (MBIS) in the Health Care Financing Administration. These new mandatory programs will provide secure and dependable funding for anti-fraud and abuse efforts.

Another important interagency initiative is the National Disaster Medical System (NDMS) administered by the HHS Office of Emergency Preparedness -- an activity funded through the Departmental Management account. The NDMS is a cooperative asset-sharing partnership among HHS, the Department of Defense, the Department of Veterans Affairs, the Federal Emergency Management Agency, state and local governments, and the private sector. NDMS includes deployable medical response capability to the disaster site or receiving location, a medical evacuation system, and more than 110,000 pre-committed non-federal acute care hospital beds in more than 1,800 hospitals throughout the country. NDMS does not replace state and local disaster planning efforts; rather it is prepared to supplement and assist when state and local medical resources are overwhelmed and federal assistance is required.

In short, the Department remains committed to intra-agency and interagency cooperation in providing cost-effective services.


The implementation of the Chief Financial Officers (CFO) Act has significantly strengthened the Department's financial management. Under the CFO 5-Year Plan, HHS has continued to make great strides in this area:

  • Our emphasis on compatible financial systems should facilitate the preparation of Department-wide financial statements. For example, 96% of our financial systems have implemented the government-wide Standard General Ledger and 96% of our core accounting systems meet the government-wide functional requirements.

  • We have made significant progress in implementing Electronic Funds Transfer (EFT) in lieu of paper checks as a more efficient means of disbursing federal funds. Currently over 99% of our grant payments and about 90% of our salary payments are made via EFT.

HHS continues to meet the legislative requirements of the Federal Acquisition Streamlining Act, as well as the electronic commerce goals set forth by this Administration. Previously, HHS met the initial legislative and Presidential goals when it established the necessary computer infrastructure within the Department to carry out electronic commerce with the business community and when it became one of the first Federal agencies to transmit a procurement request over the government-wide computer network. Additional accomplishments in implementing electronic commerce include:

  • The implementation of electronic commerce procurement capabilities in six of our major components -- FDA, NIH, OS, HCFA, PSC and CDC.

  • CDC has fully automated its processes for buying vaccines for use by the states under the Vaccine For Children program. The states request vaccine from CDC, CDC places orders with the vendors (about $24 million worth monthly), the vendors submit invoices to CDC and CDC pays the vendors all electronically with minimal manual intervention.

  • IHS is collecting payments electronically, which has cut the processing time from 45 to 14 days, thus increasing the interest earned by $200,000 per month.

HHS is also actively pursuing the implementation of modem technology and new business procedures to improve and streamline our administrative processes. For example:

We have implemented a Travel Management System which fully automates the travel functions by eliminating the use of paper travel orders and vouchers and reimburses the traveler via direct deposit. We have also significantly reduced the need for cash advances by taking advantage of the travel credit card.

HHS has also implemented alternative payment procedures which rely on statistical sampling to provide a more efficient vendor payment process and to reduce Prompt Payment interest penalties.

  • Under the Government Performance and Results Act (GPRA), HHS continues to prepare for the full implementation of the Act by 1998 by:

  • Participating in a number of ongoing pilots with OMB, including the Office of Child Support Enforcement and the Food and Drug Administration's Prescription Drug User Fee Program.

  • Creating a cross-cutting HHS roundtable involving finance, budget planning and programs to address GPRA implementation. The roundtable is using this approach to integrate budget, financial and program performance information for more results oriented management decision-making.

  • Co-chairing the government-wide Research Roundtable of over 20 federal agencies to identify performance measurement issues and approaches for research programs.

As a member of OMB's Federal Credit Policy Working Group, we are deeply involved with working with other agencies -- including Education, Housing and Urban Development, Veterans Affairs, Small Business Administration, and others -- to not only recover monies owed the government, but also to analyze our current credit collection efforts and jointly design effective credit management program performance measures in coordination with GPRA.

At the end of this month, HHS will report to the Congress on its efforts to follow up on the recommendations of the HHS Inspector General. I can report now that the Department continues to emphasize timely resolution of audits which identify money owed to the Department. HHS continues to reduce its inventory of unresolved audits that require financial restitution to the government. Three years ago, at the end of March 1993, HHS had an inventory of 506 unresolved audits where the collection of funds was required, and 274 of those were audits over one year old. In the last three years, HHS has gradually reduced this ongoing inventory of unresolved audits. In March 1996, the inventory has been reduced to 306, representing a reduction of 40 percent. Only 159 of those are over one year old, also a 40 percent reduction. The funds associated with this activity are important to this Department in the last six months, HHS agencies have resolved audits worth approximately $150 million in savings to the Department.


Let me briefly discuss the unique and important role that the Departmental Management budget performs in the Department. DM is a consolidated display of budget accounts that includes all activities funded under three separate appropriations: General Departmental Management, Office for Civil Rights, and Policy Research.

The DM components directly administer programs providing legal services, appellate reviews and adjudication, and civil rights enforcement efforts in support of all HHS Operating Divisions (through the Office of General Counsel, Department Appeals Board, and Office for Civil Rights) and assist the Secretary in providing executive leadership over the organizations, programs, and activities of the Department. In addition, the new Office of Public Health and Science advises the Secretary on public health and science issues; provides senior professional leadership in the Department on population based public health and clinical preventive services; provides leadership on cross-cutting Departmental public health and science initiatives; directs the program offices within OPHS; and, at the direction of the Secretary, provides assistance in managing the implementation of Secretarial decisions for the PHS Operating Divisions.

The FY 1997 budget request for Departmental Management includes $176 million in appropriated funds and 1,548 FTE. This request includes $5 million to support the Department's responsibilities as lead Federal agency under the Federal Response Plan for managing the government's response to the health and medical consequences of a major terrorist event. In view of Congressional action on our FY 1996 appropriation -- in which the Congress increased funding for several OPHS program offices and established additional funding for anti- terrorism activities under the Public Health and Social Services Emergency Fund to be carried out under this account -- this request is a reduction of $6 million, or 3 percent, from the FY 1996 enacted level.

Mr. Chairman, the Secretary will continue with her efforts to promote sound fiscal management throughout the Department. I want to thank this committee for providing us the flexibility contained in the FY 1996 appropriations bill, and the Secretary intends to exercise that flexibility with due diligence. In summary, I believe that the FY 1997 budget request for Departmental Management will provide sufficient funds to operate effectively and efficiently. Thank you again, Mr. Chairman, for the opportunity to present our budget to the Subcommittee. I will be happy to answer any questions that you may have about this request or other management topics of interest to the Committee.

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