SECRETARY SABATINI: Thank you. Thank you for the introduction and thank you for the invitation.

We were talking at the table, and I mentioned that I'm originally from upstate New York. I grew up there, and coming from Rochester, lived fairly close to Niagara Falls. As a youngster, my family used to take fairly regular outings to visit the falls, and I don't know if any of you have ever been to Niagara Falls, but Niagara Falls, especially Niagara Falls in the 1950s, was absolutely the tackiest place on this planet. Wherever you looked, there were souvenir shops and gift shops and museums, and they were all filled with memorabilia of these turn-of-the-century daredevils who used to wrap themselves in barrels and going roaring down the Niagara River and over the falls. As a kid, I used to say, boy, you know, what went through their minds when they were in these contraptions, going through this turbulent water saying, "how much longer before I go over the edge and then what's the crash going to be like?"

Now I know.

This is the second time that I've had this job. I was the health secretary in Maryland during the Schaeffer administration and have come back in the Ehrlich administration, and I regularly wake up scratching my head saying, "what the hell am I doing? How much further away is the cliff and how bad is it going to be when we crash?" Because that's what Medicaid is, and that's where we're going. It's not the Niagara River. It's an incredible river of dollars, and that little thing that's bouncing around in the turbulence is not a barrel. It's state budgets, and in some cases, I believe, the health care system that the poor people in this country depend upon.

I hate to tell this story, because it makes me think about how long I've been doing this stuff, but just before the enactment of H.R. 1 in 1965, the focus was on Title 18. That's was Secretary Wilbur Cohen was focused on. He wanted to have and leave as his legacy a Medicare program and health insurance for the elderly, and almost as an afterthought, they said, you know what, for a few bucks more, we can sweep up all these little state programs that are providing health care to the indigent population, and why don't we create a Title 19? It's no big deal, we'll do this thing, and we'll put it all together.

Well, that little afterthought has now grown into the Medicaid monster that is on its way to devouring all of us. It has now surpassed Medicare in terms of total cost. It's costing something in the neighborhood of $280 billion, and I see projections that say, within 10 years, it will be in the neighborhood of $600 billion. When that happens, it means that discretionary money in state budgets is going to all but disappear.

The last time I did this job, the big deal was that the Medicaid budget in Maryland had hit the billion-dollar mark, and everybody was just astounded. The budget for the current year for Medicaid in Maryland is about $4 billion, and it's continuing to grow at probably two to three times what the budgetary growth in the state is going to be. That’s projecting a base budget or current services budget for the state Medicaid program in Maryland next year to grow somewhere in the neighborhood of 10 to 12 percent--and if we're lucky and we get a revenue package and we get a slots bill, maybe we'll have a zero growth budget.

Right now, we're predicting a deficit of somewhere between 1 to 1.5 billion dollars in the budget. So, we have a program that just going to absolutely devour us, and there's no end in sight. We keep talking about all kinds of creative and wonderful things that we're going to do. I heard a discussion about the waivers, which are one of the true myths. Waivers are program expansions. They are nothing more than program expansions. We did a home and community-based waiver for the frail elderly. Guess what? The nursing home population hasn't gone down.

I can think of one waiver in the Medicaid program that may have been successful, and that was when we did the home and community-based waiver program for the developmentally disabled. Originally, that waiver worked, because the conditions for the waiver were, if you moved somebody out of an institution into the community, you could continue coverage under Medicaid, but you had to shut the bed down once they left. These other waivers don't do that. They are expansions. They are add-ons. They meet unmet needs--I'm not denying that. But they cost money.

The CHIP program is one of the new sort of great frauds. We are in the midst of the CHIP dip cycle-and for a state like Maryland that was very aggressive at the front end, we had very high enrollments and we were living off of the reallocation money. That reallocation money is going to very shortly disappear, and we're going to start having just another huge hole in our budget.

If only I could sit back and say, look, it's gone from 1 billion to 4 billion dollars, but so what, look at what we've accomplished during this period of time, I'd feel good about it, but we're still losing the battle on uninsured. We've expanded coverage to an additional 150,000 people in Maryland, quadrupled the budget, and we have more uninsured families in Maryland today than we did before the 1998 implementation of CHIP. We are paying providers, especially physicians, so miserably that it's becoming increasingly difficult to find quality providers or to expect quality providers to continue participating in the program.

So, you've got a good news, bad news message. Good news is everybody's got a Medicaid card. Bad news is that you're not going to find a quality doctor who will accept it.

We just cannot continue going in the way we're going. When I see the inability of public policy makers to make some of the fundamental difficult choices that have to be made, I'm starting to become convinced that maybe what you have to do is just let the whole thing crash first and then we'll respond and rebuild it.

I believe the solution and the approach to Medicaid is to segment the program. I think there are four major problem areas.

One is that you have healthy families who are uninsured. I think the idea of solving the problem of uninsured families in this country through sort of incremental expansion of Medicaid and oozing into the solution to the problem is flawed public policy. It's not working. It's too expensive. I believe that every family in this country has a right to a basic health insurance program, that if they're poor--we can debate how you define poverty--they should not have to pay for it, and there ought to be a sliding scale subsidy for the working poor up to some level.

Secondly, long-term care is consuming 43 percent of the national Medicaid budget for 8 percent of the population; in Maryland, 30 percent of our budget is spent on long-term care costs, and it's for 4 percent of the population. I can explain, I think, the reason for that. We have fairly generous reimbursement policies for nursing homes, but we've got a very stringent eligibility standard of care level for eligibility. So, I think you can see what that difference is, but long-term care is rapidly becoming an entitlement for the elderly. The aggressiveness of the elder law bar is now allowing people of considerable means to impoverish themselves and have the state Medicaid programs take responsibility for their care. I believe and support what Senator Mikulski did some 10 years ago on the spousal impoverishment side. I think if you have an elderly couple and one of them needs to be institutionalized, the non-institutionalized spouse has a right to live in dignity and should not be impoverished. I don't think it's the fundamental intent of Medicaid to then protect those assets for succeeding generations, and that's what's happening. I think it's wrong, and I think it needs to be addressed.

I think that the solution-and Dennis [Smith], please listen to me-is to work together with the Federal Government to aggressively go after the issue of the dual eligibles. I am convinced that if we could find a way to take the dual eligible population and mandate that they go into a managed care program--a single payer, a capitated risk payment for both the Title 18 and Title 19-you would then have the incentive to provide care and start de-institutionalizing the elderly population by moving them out of nursing homes into less costly community-based type programs. I think that's what needs to be done.

Expanded waivers are not going to do it. We can expand waivers, but what happens is that, under the current system of waivers, as soon as we move somebody out of a nursing home into the community and that nursing home operator can change the sheets, they've filled it with another Medicaid recipient. So, you have add-on costs, not reduced costs.

Care for the chronically ill and disabled is the third problem area-that's the population that needs to be in an intensive managed care environment. Most states, as they've gone to mandated managed care, have carved that population out-they fixed the part of the problem that wasn't broken. It's not that women and children that are causing financial problems. It's the chronically ill, the disabled, and the elderly. So, that's where you need to focus your efforts. It's like Willie Sutton said: "Why do you rob banks? Because that's where the money is." That's where the money is in the Medicaid program. That's where significant savings are possible.

The fourth area is prescription drugs. Maryland is this tiny little state, five million people, and we are now spending, in the non-capitated part of our program, about $600 million a year for prescription drugs, and in the managed care, the MCO programs, there's another 130, 150 million dollars a year being spent on prescription drugs. The ultimate solution will probably have to be some kind of prescription drug coverage under Medicare, but in the meantime, effective management by the states of their prescription drug programs has the potential, I think, for very, very significant savings. There's a lot that can be done.

The private sector is doing it and having good results. The public sector is not doing it and not having those results. In part, they're not doing it because of political pressures that are being brought to bear, which will not allow them to do it. But, we need to be able to aggressively enforce programs like preferred drug lists, supplemental rebates, limited formularies, and mail order prescriptions for maintenance drugs. The kind of things that are effectively working in the private sector will work in the public sector, and the public sector has the capacity to do it. Public sector is the last refuse of the industry. This is the last place that you have where there are literally no management controls.

For those of you who don’t live in the area, the biggest issue in Maryland in the last legislative session was the gaming bill, slot machines. But I think the pharmaceutical industry probably spent as much on lobbyists as the gambling industry did in the last session, and it looks like we're probably going to get a slot bill in the next session, so they'll probably out-spend them in the upcoming session. Little state, five million people, currently spending $4 billion on Medicaid. That's about $800 in taxes for every man, woman, and child in the State of Maryland going towards the support of the Medicaid program. In many cases, a family of four is spending more in taxes to support the Medicaid program than it is for its own health insurance. Something is wrong.

But I think that we can stop the barrel.

The other amazing thing about Niagara Falls is that, through the marvels of engineering, they've figured out ways to divert the Niagara River and can literally slow the water going over the falls to a trickle. I think we could probably do something like that in the Medicaid program if we could develop the courage that needs to be developed, and the partnerships that need to be developed, especially with the business community.

The business community has been terribly negligent in not being an active participant in this debate. The advocates have done a great job, and they do very, very well. The business community, though, is not present, doesn't even participate in the debate. Yet, they're the ones that are bearing the cost of this program, and they will continue to bear the cost. They need to come to the forefront and come to the forefront quickly. And we need to really work hand in hand at all levels of government to make some of the fundamental reforms that have to be made.

The consequence of not doing so will be the fiscal collapse of the health care system that is essential to providing quality care to poor people. We could easily return to the Medicaid mills of the past. We've got a short window to do these things, and if we don't take advantage of the opportunity that we have now, the alternative is to sit back and let it crash and then hopefully maybe we can build it from there.

SPEAKER: What specific measures would you propose to have more money come from families of people who go into nursing homes and less money coming from Medicaid?

SECRETARY SABATINI: I think you probably need--and this is a combination of state and Federal legislation--to make some changes in terms of some of the kind of trusts that are allowed to be set up to isolate and protect revenue. I will give you an example.

There's a community in Maryland called the Erikson Retirement. It's headquartered in Maryland. This is probably the largest continuing care, retirement community in the country. John Erikson really understands that business. He's got three places in Maryland and some in Pennsylvania. Michigan has a large one or two.

The deal is you go into this nursing home, and you give them a $200,000 deposit. It's held there. You pay rent. When you leave, you get your money back. But if you need long-term care while you're there, you get it. The cost of the nursing home care is deducted from that deposit. The other part of the deal is that if you exhaust that, then you stay there. They never throw you out.

Courts have recently ruled that that $200,000 is essentially the same as a house, and therefore, while it's a liquid asset, sitting there and available with a contract that was signed saying this is the deal, the nursing home can’t touch it. Erikson’s nursing home is rapidly turning into a Medicaid nursing home. That kind of stuff has got to stop.

Another problem is that Medicaid can impose a lien on a person's house, so that, if they go into a nursing home and they die, when the house is disposed of, the nursing home can file a claim against the estate. Bit if it's a couple and one of them goes into the nursing home and the surviving spouse stays in their house, if both die, there's no way the nursing home can file a claim against that estate. It passes down to the next generation. That doesn't make sense.

So, I think there are a lot of things that you can do to stop that and make those changes, and there's no question that community-based care offers better quality of life at significantly lower cost. But you've got to do it not as an add-on and not as an expansion but as a substitute for what we're doing, and I don't know how to get there other than through what I described.

SPEAKER: I'm wondering what your opinion is on Medicaid cash and counseling programs?

SECRETARY SABATINI: From everything I have seen it sounds very positive, and it's something that I would like to pursue participation in. But again, I think we've got an immediate crisis that we're going to have to look to find some savings.

SPEAKER: In my discussions with health underwriters in Maryland, it sounds like employers are about poised to step up to the plate, and I was wondering if that was your sense, and also, you mentioned some sort of basic health care benefit, and I was wondering if you could describe what that is, if you have any notion as to what your vision on that.

SECRETARY SABATINI: I think you're right. I think the employers are about to step up to the plate. I see that. And let me tell you, I think there's a couple of reasons for that. One, there is this Health Care For All group that has been very, very active. It started out as a group that advocated a single payer system, and they've moved away from that some. But what they haven't changed is saying, we want a mandatory payroll tax of 5 percent on small employers, 8 percent on large employers. If you're currently a small employer and you're offering a health care package that costs less than 5 percent, then you contribute the difference, the increment, into this pool. The pool will then be used to set up a state-run insurance program that is the richest benefit package you can possibly imagine.

So, you're a small employer. Most small employers who offer insurance pay more than 5 percent of the payroll for it. So, you're sitting there giving your employee a bare bones package at 6 percent. You're saying I can save money, drop the coverage, and let them go into this pool that will evolve to a single payer system at some point.

For large employers, they're paying less than 8 percent, and they're going to get the hell out of the state. But the business community is seeing that, and they're starting to understand. I keep telling them wake up, because if we don't do something that is better, you may end up with this program, and unless you are really part of the debate, you don't have anything to complain about. So, I think that momentum from the business community is developing.

I think a basic benefit package is a benefit package that offers in-patient, out-patient hospital care, certainly in-hospital physician services, some limited number of preventive and primary care visits, some form of prescription drug coverage, and maybe a mental health benefit that corresponds more closely to what your basic packages in the private sector have. I think people who have chronic and persistent mental health problems ought to be handled separately, and there's a special group of people under the category of people with chronic illnesses and disabilities that I described.

The MCO program is not only an incredibly rich benefit package, but who else offers people a health insurance package that says here is your health insurance package, and by the way, you're poor and it's free, but I also want to remind you that, because you're poor, you must be stupid, so we're going to send the health police to your house on a regular basis to make sure you are really using those services and going out and doing it? We mandate that MCO's have to have at least 70 percent of their enrollees get dental care once a year. Butat some point people are going to have to take responsibility for their own lives.

I believe that good government can and should help people solve their problems and it's the appropriate role of government to keep problems from becoming crushing and over-burdensome. I don't think that we can take ownership of the problems and solve them.

Let me add one more thing. I think the other opportunity that we have to get something done in reducing the number of uninsured by a significant amount in Maryland is that having a Republican governor for the first time in 35 years gives us an opportunity to do something that would have never happened before. I say that because I think the business community is on edge about what might happen, and they're willing to trust a Republican governor and say, let's support this and let's do it, and I really think that's an opportunity that we need to capitalize on.

It's sort of the Nixon going to China syndrome.

SPEAKER: If you were operating under a no-strings Medicaid block grant, would you be able to cover more of the uninsured in Maryland, and secondly, what other changes might you make in your program?

SECRETARY SABATINI: I think the answer is yes, assuming the funding levels for the block grant are okay and reasonable. Where I would probably go is to have a basic benefit package that people who are Medicaid-eligible can get a voucher to go out and buy, or if they don't choose a package, they'd be assigned a package, and some kind of a sliding scale subsidy for the working poor to allow them to buy it.

I would probably try to do that through tax credits and incentives to employers to offer health insurance. I would develop purchasing co-ops, so we don't worry about small groups, large groups, medium groups, put enough people through the co-op, everybody is in a large group. And then I would have a very rigorous managed care program for the chronically ill and disabled, mandated managed care with risk-sharing corridors, development of specialty MCO's to make sure that people get the quality care that they need to have when they have these kind of difficult and complex problems.

And you heard what I said about the elderly, and then very aggressive pharmacy benefit management practices.

MR. HEYLEN [Civic Service]: I'm a Maryland resident, so I'm looking with some interest on the conversation. Can you tell me what part of Maryland's Medicaid is the basic Federal requirement and what part's been added on by the legislature, and if one way to save money is to cut back on what the legislature has added to the Medicaid eligibility or benefits or whatever, what political problems do you see in trying to cut back on an entitlement?

SECRETARY SABATINI: Well, all of the CHIP expansion was a state add-on. There was no Federal mandate for us to do anything, and the basic Federal mandate is that we have to cover children up to 185 percent of poverty, under the basic Title 19 program, the Medicaid program.

All of these so-called waivers, in my opinion, are add-ons, because they've all resulted in expansion of services, and all of these waivers are either the home and community-based waiver, which adds additional populations, or demonstration waivers.

I don't know what the hell they're designed to demonstrate, and we never seem to be able to reach a conclusion as to what we've demonstrated, because they go forever and ever, but it's the only way you can find the flexibility to cover populations that would not be otherwise covered. So, you say, hey, why don't we do a demonstration and we'll show something, and you do that.

And then there are other things there that are technically add-ons. For example, prescription drug coverage is not a Federally mandated service under the basic Title 19 of the Social Security Act. So, you could argue that that is an add-on, but it would be insane not to have prescription drug coverage.

And there's some other things. I spent $19 million for non-emergency transportation in Maryland. Who do you know who has a health insurance package that says, by the way, in addition to covering the doctor's office and the prescription drugs and the hospital costs and diagnostic tests and all these other things, we'll pay the cost of the taxicab for you to go and see your doctor for a routine visit? That's not an add-on. That's sort of a mandate.

As for the political pressures, I'll give you an example. The first Ehrlich administration budget was put together as quickly as we could after the election, sent to the legislature. We made a decision that we would fully fund the existing Medicaid program and we would fully fund the CHIP program.

The legislature, led by one courageous conservative Democrat from southern Maryland, said, we've got to do something. This CHIP program is out of control and we're starting to see some real problems on the horizon. He said we're going to change it, and we're going to mandate a premium for that section of the population between 185 and 200 percent of poverty. That was not in the original expansion.

And then he went further and said we're going to freeze eligibility between 200 and 300, no new enrollees. Nobody is going to get thrown off, but no new people coming on to that group.

We disagreed, and said that while Medicaid needs a fundamental restructuring, we need some time to take a real look at the fundamentals of the program, and this is not the time to just go piece-mealing away. The legislature, in its wisdom, decided to do it anyway, and you know what? It was the right thing to do, but they took the money out of the budget and then passed language in the budget reconciliation act that, executive branch, you will charge a premium for 185 to 200, you will freeze enrollment, and you will promulgate regulations to do this. We said you don't need regulations, the state is self-implementing, and they said no, you will promulgate regulation. That was in the statute.

So, we sent the regulations down to Annapolis about a month ago, and a legislative committee convened to review the regulations and said what the hell are you doing this for, don't you care about kids? How can you be so cruel? What were you thinking of when you did something like this? My response was I feel like I've fallen through the looking glass. I said don't do it, you told me do it anyway, now I'm doing it, and you're screaming don't do it. And we're going to move forward. We're going to implement it. I don't know if you saw the front page of yesterday's Baltimore Sun, but everybody's saying how can you do this?

And I guess they were well intentioned, but the federal government sent us this enhanced federal match as part of the tax act. They raised the federal match by 2.95 percent for a 15-month period, and it's nice--it's going to give us $153 million in windfall revenue that will be helpful, and that's the good news. The bad news is nobody understands that it's one-time money and that the program is running a deficit, and we have a huge budget deficit coming up in '05 that we don't know how we're going to deal with.

So, the reaction is that we don't have a problem anymore. We don't need any of the Medicaid reductions or restructuring or changes that we made. We've got that $153 million. The problem's solved. You say but it's one-time money, guys, and I've got a 50 million carryover '03 deficit that I have to fund. I've got a hospital rate increase that was unbudgeted. I've got rate increases for the managed care organizations that was unbudgeted, and I've got a structural problem with my '05 budget. And they say, yeah, but that's a long way off, 15 months, you've got this money right now.