[Senate Hearing 106-92]
[From the U.S. Government Publishing Office]
S. Hrg. 106-92
TOBACCO RECOUPMENT
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HEARING
before a
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
SPECIAL HEARING
__________
Printed for the use of the Committee on Appropriations
Available via the World Wide Web: http://www.access.gpo.gov/congress/senate
______
U.S. GOVERNMENT PRINTING OFFICE
57-117cc WASHINGTON : 1999
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For sale by the U.S. Government Printing Office
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COMMITTEE ON APPROPRIATIONS
TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri PATRICK J. LEAHY, Vermont
SLADE GORTON, Washington FRANK R. LAUTENBERG, New Jersey
MITCH McCONNELL, Kentucky TOM HARKIN, Iowa
CONRAD BURNS, Montana BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama HARRY REID, Nevada
JUDD GREGG, New Hampshire HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas RICHARD J. DURBIN, Illinois
JON KYL, Arizona
Steven J. Cortese, Staff Director
Lisa Sutherland, Deputy Staff Director
James H. English, Minority Staff Director
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Subcommittee on Departments of Labor, Health and Human Services, and
Education, and Related Agencies
ARLEN SPECTER, Pennsylvania, Chairman
THAD COCHRAN, Mississippi TOM HARKIN, Iowa
SLADE GORTON, Washington ERNEST F. HOLLINGS, South Carolina
JUDD GREGG, New Hampshire DANIEL K. INOUYE, Hawaii
LARRY CRAIG, Idaho HARRY REID, Nevada
KAY BAILEY HUTCHISON, Texas HERB KOHL, Wisconsin
TED STEVENS, Alaska PATTY MURRAY, Washington
JON KYL, Arizona DIANNE FEINSTEIN, California
ROBERT C. BYRD, West Virginia
(Ex officio)
Professional Staff
Bettilou Taylor
Mary Dietrich
Jim Sourwine
Aura Dunn
Ellen Murray (Minority)
Administrative Support
Kevin Johnson
Carole Geagley (Minority)
C O N T E N T S
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Page
Statement of Hon. Michael Hash, Deputy Administrator, Health Care
Financing Administration, Department of Health and Human
Services....................................................... 1
Opening statement of Senator Hutchison........................... 1
Summary statement of Michael Hash................................ 2
Prepared statement........................................... 4
Background....................................................... 4
Determining Federal taxpayers' fair share........................ 5
Federal taxpayers................................................ 6
Statement of Hon. Paul E. Patton, Governor of Kentucky and
executive committee member, National Governors Association..... 11
Prepared statement........................................... 13
Tobacco settlement funds belong to the States.................... 13
Governors oppose Federal restrictions............................ 14
Set-asides for smoking cessation programs are bad public policy.. 15
State revenue impacts of the tobacco agreement................... 15
Tobacco settlement............................................... 16
Statement of Hon. Mike Fisher, attorney general of Pennsylvania.. 17
Prepared statement........................................... 19
Key provisions................................................... 20
Letter from Mike Fisher to Governor Thomas J. Ridge.............. 23
Statement of Hon. John Cornyn, attorney general of Texas......... 24
Prepared statement........................................... 26
The Texas lawsuit................................................ 26
The misapplication of the Medicaid third-party liability
provisions to the lawsuit filed by the State of Texas.......... 26
The uses to which the money received by the State of Texas will
be dedica- ted................................................. 27
The little red hen............................................... 28
Statement of Hon. Tom Miller, attorney general of Iowa........... 28
Prepared statement........................................... 29
Tobacco funds.................................................... 30
Statement of Matthew Myers, executive vice president, National
Center for Tobacco-Free Kids................................... 38
Prepared statement........................................... 40
Major conclusions................................................
Medicaid and the State tobacco lawsuits..........................
Investing in tobacco prevention will save lives and money........
Material Submitted Subsequent to Conclusion of Hearing
Prepared statement of Senator Thad Cochran....................... 47
Prepared statement of Senator Larry E. Craig..................... 47
Letter from Alan G. Lance to Senator Larry Craig................. 48
Prepared statement of Senator Tom Harkin......................... 48
Prepared statement of Senator Richard J. Durbin.................. 49
Medicaid law..................................................... 49
Future Medicaid claims........................................... 49
Federal/State partnership........................................ 49
Budget implications.............................................. 50
Tobacco control programs......................................... 50
Governor's priorities............................................ 50
Public support................................................... 50
Prepared statement of Carl Tubbesing, deputy executive director,
National Conference of State Legislatures...................... 51
TOBACCO RECOUPMENT
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MONDAY, MARCH 15, 1999
U.S. Senate,
Subcommittee on Labor, Health and Human
Services, and Education, and Related Agencies,
Committee on Appropriations,
Washington, DC.
The subcommittee met at 11:36 a.m., in room SD-124, Dirksen
Senate Office Building, Hon. Kay Bailey Hutchison presiding.
Present: Senators Specter and Hutchison.
DEPARTMENT OF HEALTH AND HUMAN SERVICES
Health Care Financing Administration
STATEMENT OF HON. MICHAEL HASH, DEPUTY ADMINISTRATOR
opening statement of senator hutchison
Senator Hutchison. I think we are ready, and I apologize
for our running a little late. I just came in from the airport
and Senator Specter's train is late coming in from Pennsylvania
this morning. So that is the hazard of a Monday morning
hearing.
But I am very pleased to see the very first-rate witnesses
that we have been able to put together, because this is an
issue that is going to be coming to the floor very shortly and
I think having the witnesses explain their various positions
will be very important.
I would like to start with my own statement. I am on the
subcommittee which Senator Specter chairs, but I also am the
sponsor of S. 346, which is the vehicle that we are using to
deal with the tobacco recoupment issue. Senator Bob Graham is
my co-sponsor and we now have 43 co-sponsors of the bill. So I
am very pleased that we are going to be able to talk about
this.
In brief, my bill, along with Senator Graham, is to clarify
existing Federal law to prevent what I believe to be an
erroneous interpretation of that law by the Health Care
Financing Administration. HCFA's stated position has been that
every dollar of every State settlement is directly attributable
to Medicaid and that the Federal Government is therefore
entitled to 57 percent of those funds, which is the national
average Federal share of the Medicaid program.
I think that position is not correct on the merits. I have
looked at the law carefully and I just do not read into the law
what HCFA is claiming that it says. So I will look forward to
hearing from the HCFA representative to explain the point of
view of HCFA.
But I and the supporters of the bill believe that it is
wrong for the Federal Government to try to seize any of these
State funds. It will lead to years of protracted litigation
that would tie up the money. I would like for this to be
clarified, which is why I have put this bill onto the
supplemental appropriations bill. We definitely need to have
clarification.
Many State legislatures are meeting right now. Many of
these legislatures meet only once every 2 years, and they do
not feel comfortable spending the money as long as the HCFA
letter is out there saying that Medicaid is entitled to part of
these funds.
The fallback position as stated by the President to the
Governors recently is that, well, perhaps the Federal
Government does not need to take the money from Medicaid, but
they would like to have a 25 percent requirement that the
States spend the money on tobacco cessation programs. Well, I
have looked at the stated purposes for which many States are
going to use their recoupment funds and some of them do have
tobacco recoupment programs, some have them but not at the 25
percent level, and some big States especially, spending 25
percent of the money on tobacco recoupment for a State like--I
am sorry--for the cessation of tobacco use by teenagers, 25
percent of the funds for Texas or California would create quite
a few entrepreneurs for seminars in our State.
So I do not think that the Federal Government should try to
do a one size fits all approach here, nor on the merits do I
think that the Federal Government has any kind of rightful
claim. The Federal Government was not part of these lawsuits
and most certainly the fact that they have announced their
intention, the Justice Department, to sue the tobacco companies
shows that they have a separate cause of action, as I
understand it, based on Medicare.
So I am glad that we have experts in this field. I think
that we can clarify both the Federal Government position and
the State government position, and now is the time to begin.
Let me just lay out the ground rules quickly for you. Each
witness will have 5 minutes to make a statement and then
following that each Senator will have 5 minutes to ask
questions.
So with that, I would like to call the first panel, which
is Mr. Michael--which is represented by Mr. Michael Hash, the
Deputy Administrator of the Health Care Financing
Administration, fondly known as ``HCFA.'' Prior to joining HCFA
in April of 1998, Mr. Hash was a principal with Health Policy
Alternatives, a consulting firm specializing in health care
financing.
So, Mr. Hash we certainly welcome you to the panel and
would like to hear your interpretation of the law or whatever
you would like to say. Thank you.
summary statement of michael hash
Mr. Hash. Thank you, Senator Hutchison. We appreciate you
holding this hearing and inviting us to discuss our obligations
under current law to recoup Federal taxpayers' share of
Medicaid funds from State tobacco settlements.
State Governors and their attorneys general have achieved
an enormous victory. They have worked hard to hold tobacco
firms accountable for the health care costs of smoking-related
illnesses. We are pleased that many States, like the President
has suggested, want to use tobacco settlement money to fight
teen smoking, to protect tobacco farmers, to assist children,
and to promote the public health.
However, existing Federal law clearly requires States to
share all Medicaid recoveries from liable third parties with
Federal taxpayers, who pay more than half of all Medicaid
costs. Nothing in the law as we read it creates an exception
for tobacco settlements, regardless of their size. States
routinely share Medicaid recoupments with Federal taxpayers. In
fact, three States have already reported earlier tobacco
settlements with the Liggett Corporation.
My written testimony outlines the current legal authorities
and the history of this issue in some detail, so I will just
simply summarize for now. Federal law specifically requires
States to pursue Medicaid recoveries from third parties. The
law does not authorize the Federal Government to bring or
participate in these suits. States must return and report these
recoveries to HCFA so that Federal taxpayers receive their fair
share.
HCFA passes the savings from Medicaid recoupments back to
Federal taxpayers by subtracting the Federal share of Medicaid
recoupments, minus costs incurred by the States in obtaining
these recoveries, from future Medicare payments to the State.
Over the last 5 years Federal taxpayers have recouped more than
$1.5 billion from third party liability collections by the
States.
The State tobacco settlements clearly include restitution
for costs of Medicaid tobacco-related illnesses. In fact, the
States' tobacco settlements prohibit States from making any
future claims for Federal and State tobacco-related Medicaid
expenditures. That means that Federal taxpayers are precluded
from taking any action to recoup their fair share of Medicaid
expenditures for tobacco-related illnesses. Federal taxpayers
are, therefore, clearly entitled to a share of tobacco-related
Medicaid expenditures.
However, as the President has said in his budget and
otherwise, in lieu of exercising our claims under Federal law,
the administration has proposed giving States flexibility and
discretion over how these funds would be spent. Specifically,
the President has proposed that States keep 100 percent of the
tobacco settlement funds in exchange for a commitment to use a
portion of the funds to reduce youth smoking, to improve the
public health, to protect tobacco farmers, and to assist
children.
prepared statement
The details of this arrangement would be worked out through
negotiations with the Congress and the States. We want to work
with you and the States to find a bipartisan resolution of
Federal taxpayers' claims to tobacco settlements and one that
we agree is fair to all Americans.
I want to thank you again for holding this hearing and I am
happy to answer any questions that you might have.
[The statement follows:]
Prepared Statement of Michael Hash
Chairman Specter, Senator Harkin, distinguished subcommittee
members, thank you for inviting me to discuss the Health Care Financing
Administration's obligation under current law to recoup Federal
taxpayers' share of Medicaid funds from State tobacco settlements.
In November 1998, several State Attorneys General reached an
historic settlement with the tobacco industry that provides
reimbursement to the States for some of the health care costs
associated with treating smoking-related illnesses. The Attorneys
General deserve a great deal of praise for crafting this important
agreement. The settlement follows and confirms an important principle
established with the 1996 settlement with the Liggett tobacco
corporation: tobacco companies must be held accountable for the damage
their product does to our nation's health. Most importantly, the
national agreement will help curb smoking among our nation's youth, a
goal that the Administration and members of this Subcommittee share.
As the Subcommittee knows, the Administration began our tobacco
efforts four years ago with the strong leadership of the President,
Vice President, and the then Commissioner of the Food and Drug
Administration (FDA). The FDA then put in place a strong crackdown on
youth access to tobacco, the broadest and most significant effort to
date to protect our children from the dangers of tobacco. Last year,
the president sought comprehensive tobacco legislation and, while the
1998 State tobacco settlement was an important step in the right
direction, more must be done to protect our children and hold the
tobacco industry accountable.
We are here today to talk about Medicaid recoupment. Existing
Federal law clearly requires States to share all Medicaid recoveries
with Federal taxpayers. Nothing in the law creates an exception for
tobacco settlements, regardless of their size. States routinely report
and credit HCFA with the Federal share of third party liability
collections. It is worth highlighting that three States--Massachusetts,
Louisiana, and Florida--reported and credited to HCFA some of their
tobacco collections as part of a settlement with the Liggett
Corporation. Although the funds involved in the Liggett settlement are
much smaller than those at stake in the comprehensive settlement, these
initial payments indicate that the States understand their legal and
fiduciary responsibility to credit the Federal government with its
share of tobacco settlement proceeds.
Rather than having HCFA claim the full Federal share of the
comprehensive settlement through current law procedures, the
Administration has proposed an approach that gives States flexibility
and discretion over how these funds will be spent. Specifically, the
Administration proposes that States keep 100 percent of the tobacco
settlement funds in exchange for a commitment to use a portion of the
proceeds to reduce youth smoking, protect tobacco farmers, improve
public health and assist children. The details of this arrangement
would be worked out through negotiation with the States and Congress.
Without such an arrangement, not a single penny of tobacco settlement
funds would have to be used to reduce youth smoking.
background
Medicaid is a joint Federal/State partnership, in which States run
their own individual Medicaid programs within Federal guidelines, and
the Federal government pays for, on average, 57 percent of State
Medicaid costs. The Federal match rate is at least 50 percent in all
States and as high as 77 percent. State administrative costs, including
costs incurred in pursuit of Medicaid cost recoveries, qualify for
Federal matching at a rate of 50 percent.
Federal law specifically requires States to pursue Medicaid
recoveries from third parties. The law says States must report these
recoveries to HCFA so that Federal taxpayers receive their fair share
of such recoveries.
This dates back to the beginning of the Medicaid program. The Title
XIX Medicaid chapter of the Social Security Act at section 1903(d)(2)
specifically requires that Federal taxpayers be reimbursed for the
Federal share of Medicaid expenditures that States recovered from
liability cases involving third parties.
Section 1903(d) of the Social Security Act mandates that States
allocate from the amount of any Medicaid-related recovery the pro-rata
share to which the Federal Government is entitled. Specifically, this
law states:
(2)(A) The Secretary shall then pay to the State, in such
installments as he may determine, the amount so estimated,
reduced or increased to the extent of any overpayment or
underpayment which the Secretary determines was made under this
section to such State for any prior quarter and with respect to
which adjustment has not already been made under this
subsection.
(2)(B) Expenditures for which payments were made to the State
under subsection (a) shall be treated as an overpayment to the
extent that the State or local agency administering such plan
has been reimbursed for such expenditures by a third party
pursuant to the provisions of its plan in compliance with
section 1902(a)(25). . . .
(2)(3) The pro rata share to which the United States is
equitably entitled, as determined by the Secretary, of the net
amount recovered during any quarter by the State or any
political subdivision thereof with respect to medical
assistance furnished under the State plan shall be considered
an overpayment to be adjusted under this subsection.
These statutory requirements have been in existence for 30 years.
Furthermore, 42 U.S.C. Sec. Sec. 1396a(a)(25)(A), which became
effective March 31, 1968, establishes that it is the State's
responsibility `to ascertain the legal liability of third parties . . .
to pay for care and services available under the [State's Medicaid]
plan.'' Regulations set forth in 42 CFR 433.136 define `third party' as
``any individual, entity or program that is or may be liable to pay all
or part of the expenditures for medical assistance furnished under a
State plan.'' Also, 42 CFR 433.140(c) describes the State's obligation
clearly: ``If the State receives FFP [Federal financial participation]
in Medicaid payments for which it receives third party reimbursement,
the State must pay the Federal government a portion of the
reimbursement determined in accordance with the FMAP [Federal medical
assistance percentage] for the State.'' It is important to recognize
that unlike the States, the Federal Government is not authorized by the
Medicaid statute to sue third parties directly. This does not mean,
however, that Congress intended to abdicate its claim to such
recoveries. Rather, the Medicaid statute protects the Federal
Government's interests by explicitly making the States responsible for
both pursuing these recoveries, reporting them to HCFA, and ensuring
that the Federal Government receives its share. Thus, the State cannot
pursue only State claims; it is obligated to pursue both State and
Federal claims at the same time.
States routinely comply with this law. Three States--Florida,
Louisiana, and Massachusetts--reported recoupments of more than
$780,000 from tobacco settlements with the Liggett Corporation.
In fiscal 1998, States reported more than $642 million in
recoveries for medical costs for which another party was liable, often
because a judge ruled that the other party was at fault. Federal
taxpayers' share of third party liability Medicaid recoupments reported
from fiscal year 1994 through fiscal year 1998 totaled $1.5 billion.
HCFA passes savings from Medicaid recoupments back to Federal
taxpayers by subtracting the Federal share of Medicaid recoupments,
minus costs incurred by States in obtaining the recoveries, from future
Medicaid disbursements to States.
Just like in the tobacco settlements, States routinely undertake
Medicaid recoupment actions without any Federal involvement. In fact,
Federal law authorizes only States, and not the Federal government, to
file lawsuits under the Medicaid statute to recoup Medicaid funds. It
says it is States' responsibility ``to ascertain the legal liability of
third parties . . . to pay for care and services'' under State Medicaid
plans.
determining federal taxpayers' fair share
The State tobacco settlements clearly include restitution for the
costs to Medicaid of care for disease caused by tobacco. In fact, the
Florida settlement specifically states that it in part covers Medicaid
expenditures. In exchange for settlement funds, all the States gave up
all present and future claims, including all Federal Medicaid claims.
These settlements legally prohibit States from making any future claims
for tobacco-related Medicaid expenditures, and the Social Security Act
does not authorize the Federal government from bringing Medicaid
recoupment suits.
That means Federal taxpayers are precluded from taking any other
route for recouping their fair share of Medicaid expenditures for
tobacco-related illnesses, and since their tax dollars went to States
to cover these costs. Federal taxpayers are, therefore, clearly
entitled to a share of the settlement for tobacco-related Medicaid
expenditures.
conclusion
We commend States for their historic achievement in obtaining
settlements from tobacco companies. The Social Security Act does not
authorize us to seek Medicaid restitutions from third parties, and only
States could have done what they did. We are currently working with our
colleagues at the Justice Department to secure a similar recovery from
tobacco companies for costs of treating tobacco-related diseases
incurred by Medicare and other Federal health programs outside of
Medicaid.
We want to work with you and States to find a resolution of Federal
taxpayers' claim to tobacco settlements that we all agree is fair to
all Americans. I thank you for holding this hearing, and I am happy to
answer your questions.
federal taxpayers
Senator Hutchison. Thank you, Mr. Hash.
I would like to first ask you about your statement that
Federal taxpayers would be shut out. The Justice Department has
given notice that it plans to sue the tobacco companies under
Medicare. So I do think--I do not see that the Federal
taxpayers are going to be shut out.
Mr. Hash. These are, Senator Hutchison, two distinctly
separate matters, I believe. On the one hand, the suit that you
refer to that the President announced in his State of the Union
Address reflects the recovery of direct health care costs to
Federal programs such as Medicare, the VA, the DOD, and other
direct Federal health care programs.
The matter of Medicaid expenditures, 57 percent on average
which are Federal, is the subject I think of our discussion
this morning, and under the law we do not have any recourse to
bring suits of our own. In fact, as a term of the settlements
that the States have entered into with the tobacco companies,
States have waived their rights to any future claims on
Medicaid, which would effectively extinguish any claims that
the Federal Government would have with respect to Medicaid.
Senator Hutchison. With respect to Medicaid, but would you
not accede to the point that Medicare is much more general in
coverage and perhaps is even a better Federal case as a first
point? And then second, if the Federal Government felt that it
had a fair claim under Medicaid, why did not the Federal
Government sue under Medicaid in the first place?
Mr. Hash. Well, with respect to the first question,
Senator, we believe that the Federal Government does have a
right to make a claim for Federal expenditures associated with
tobacco-related illnesses for Medicare beneficiaries.
With respect to your second question, regarding the ability
of the Federal Government to pursue its own claims with
Medicaid, as I indicated, our reading of the statute is that
the Federal Government is precluded from being a party to suits
under Medicaid. The statute specifically sets forth that States
are to pursue third party liabilities under the Medicaid
Program and then to in turn share those recoupments with the
Federal Government on the basis of the Federal Government's
share of the Medicaid Program.
Senator Hutchison. Does it bother you at all that many
States sued not even mentioning Medicaid as a cause of action?
Some of the causes of action were consumer protection,
racketeering, antitrust violations. Some States did assert
direct health care costs, but others did not. In some cases
Medicaid was thrown out, and in fact to my knowledge only
Florida even mentioned Medicaid in the final settlement. There
may have been one or two others, but the vast majority were on
other causes of action.
Mr. Hash. Senator, I think the answer to that question is
of course we would like to work with the States to identify any
evidence that they have that the settlements that they entered
into, in fact, do not reflect any Medicaid-related costs. But
as I mentioned earlier, the fact that they explicitly waived
any future claim against the companies with respect to Medicaid
expenditures suggests that the settlements are related to
Medicaid expenditures.
The Justice Department has reviewed the initial State
filings of the lawsuits and determined that they almost all
were predicated on Medicaid costs. There have been a number of
outside, independent studies that have found that smoking-
related costs attributable to the Medicaid Program are on
average about $12.9 billion a year.
Senator Hutchison. How did HCFA come to the $18.9 billion
figure in the President's budget?
Mr. Hash. Actually, I think with respect to that I should
respectfully refer you to the Office of Management and Budget.
But I think the shorter answer on that is that it is an
estimation of the portion of the 57 percent of the settlement
amount due to the Federal Government spread over a 4-year
period.
Senator Hutchison. I do not see how you can get to that
point. As I understand it, Medicaid is annually about $175
billion, so 57 percent would be much more than $18.9 billion.
Mr. Hash. It is a portion of the 57 percent of the State
settlements that is estimated to flow to the States over the
next 5 years.
Senator Hutchison. But is that not the average that would
go to the States of the Medicaid expenditures?
Mr. Hash. I believe that the $18.9 billion is related to
the 57 percent of the States' collective share of the
settlements that they would receive over the next 5 years.
Senator Hutchison. So you just based it on what the States'
take was, regardless of what the States alleged, what their
causes of action were? You just picked that number?
Mr. Hash. Well, as I said, Senator, I think what the
President intends here is that we work with the States to
review all the evidence that they may have regarding the basis
upon which their claims were made, in order that we can jointly
arrive at an appropriate allocation of the funds between
Medicaid and whatever other bases that the States may have made
in terms of their settlement.
Senator Hutchison. Let me--my time is almost up, but let me
just ask you: If you are taking the position that this is
Medicaid costs, how do you arrive then at the compromise that
the President proposed, which would be tobacco cessation
programs to the tune of 25 percent in lieu of the Medicaid
costs? Does that not seem a little far-fetched if Medicaid cost
reimbursement is your goal?
Mr. Hash. Well, Senator, I think the President's intention
is to work with the Congress and the States to arrive at a
mutual agreement about an appropriate allocation of these
funds. The President has suggested a number of what we believe
are shared national and Federal priorities, including assisting
children, reducing youth smoking, providing for the public
health, and assisting farmers who are adversely affected.
Those kinds of priorities are somewhat similar to what the
Congress and the administration worked on last year in the
context of the McCain bill, which I am sure you will recall set
forth a kind of menu of options. I think that is what the
President has in mind when he has taken the position of working
with the Congress and the States to arrive at a mutual
understanding and agreement about an appropriate allocation of
these funds.
Senator Hutchison. I think from the way you describe it,
respectfully, it is a Federal grab to say that, we are taking
this position because we think that it is Medicaid funds, but
if you just refuse to do that then let us give you a menu of
options that would be acceptable to the Federal Government for
you to spend the State-earned tobacco recoupment money.
I am not drawing the nexus there.
Mr. Hash. Well, I guess I would have to respectfully say
that we do not agree that this is a Federal grab, Senator. We
believe that under the law the Federal taxpayers are actually
entitled to their fair share of these recoupments because they
provided half of the funding, roughly, for the Medicaid program
along with the States.
So I think we do not see it in the same context as a
Federal grab. In the context of arriving at a mutual
understanding about how these proceeds could be most
effectively used, I think we are willing to look at a variety
of ways in which the money might be applied.
But absent some agreement that is really memorialized in
legislation, we would have no assurance that even one penny of
these funds would be used for preventing tobacco use by young
people or any other public health use. States could use them
for whatever purpose they might want, having nothing to do with
these pressing public health needs.
Senator Hutchison. Well, it just seems to me that if you
believe that Medicaid is entitled to reimbursement, that you
should pursue that option and not try to dictate to the States
the range of things that would be acceptable to the big brother
Federal Government, and perhaps you should pursue legislation
in Congress. If you think that Medicaid is really being
wronged, then perhaps the States did not have the right to
bypass the Federal Government under Medicaid, and if you think
that is a better cause of action why did you not just come to
Congress and ask for legislation that would override the
States?
Mr. Hash. Well, as I mentioned to you earlier, under
current law, Federal law, we do not have any standing to be a
plaintiff in a suit to recover third party liabilities from any
party, including tobacco companies. So we do not have----
Senator Hutchison. But that is exactly the question that I
am asking you: Why do you not pursue that if you really believe
that it is HCFA's right to do so?
Mr. Hash. I think the President's view on this is that we
should work together toward an acceptable agreement about the
allocation of the money which has now been awarded to the
States through their settlement agreements. That money is
there. We should work to make sure that it is applied to
pressing public health needs and to the prevention of youth
smoking.
Senator Hutchison. Well, I guess I would just hopefully,
respectfully, disagree that you could say it is Medicaid money,
but you are not pursuing your Federal right to come to Congress
and ask for the ability to sue, so the States are not wanting
to give you Medicaid money because many of their lawsuits were
not based on that, so the Federal Government should be able to
come in and say, well, if we are not going to have Medicaid
money and if we are not going to pursue our right to Congress
to file suit under Medicaid let us tell the States what they
should be doing with the money.
I think there is not a nexus, and hopefully we can work
with you or with the Justice Department on Medicare. I am glad
the Federal Government is going to sue the tobacco companies,
but I do not think that translates into taking the money that
the States authorized through State leadership--very
creatively, I might add.
They won and that money is theirs. Now let us go forward
and pursue another remedy, either through Medicaid or Medicare
or what this administration thinks is the proper way to go. I
will be helpful to you in that. But I will not be helpful to
you--in fact, I guess it is pretty clear I am going to try to
keep you from dictating to the States what they do with money
that I think they have earned fair and square and I hope they
will spend in many of the ways that you have named. But I just
do not think it is my place to tell them.
Mr. Hash. Well, Senator, I hope on behalf of the
administration that we can work with you because we would like
to have your help and the help of others in Congress and in the
States to work out an agreement with respect to the use of
these funds that is bipartisan and meets the priorities that
all agree upon. I think we are optimistic that can be done and
we hope you will be a part of that with us.
Senator Hutchison. Well, let us look for another funding
source.
Thank you, Mr. Hash.
Mr. Hash. Thank you, Senator.
Senator Hutchison. I do thank you for your courtesy, and we
will continue to work to find your rightful share.
Mr. Hash. Thank you.
NONDEPARTMENTAL WITNESSES
STATEMENT OF HON. PAUL E. PATTON, GOVERNOR OF KENTUCKY
AND EXECUTIVE COMMITTEE MEMBER, NATIONAL
GOVERNORS ASSOCIATION
Senator Hutchison. Now let me call Hon. Paul Patton--this
is panel two--the Governor of Kentucky; Hon. Michael Fisher,
the Attorney General of the Commonwealth of Pennsylvania; Hon.
John Cornyn, the Attorney General of Texas; and Hon. Tom
Miller, the Attorney General of Iowa.
I want to thank all of you for coming. I want to say again
that I think the States have been very creative in their
approach to the tobacco issue. I have read many of the reported
uses by the States and certainly they vary across the lot. Most
are certainly using their money for health care, but some are
not.
So I would welcome hearing from you your views on what you
think the right approach should be here. I would like to start
with Governor Patton.
Governor Patton. Thank you, Madam Chairwoman, for the
opportunity to talk with you this morning.
If I may, before I begin talking about the tobacco
settlement, express my concerns and the Governors' about the
proposal to take some of the TANIF funds, which I believe is a
part of this proposed legislation. I cannot imagine a greater
breach of faith between the Federal Government and the States,
a breach of faith that would cost my State, Kentucky, $5
million.
Three years ago we fully realized that if the economy
turned down the amount of extra money we could receive would be
very limited, certainly not adequate to handle an increased
caseload. Prudence dictated that we plan for a slowed economy
and most States have. I know in Kentucky we were cautious as we
implemented our program.
As it became apparent that the rolls were actually
dropping, we developed plans to spend our money on several
different programs to eliminate dependency permanently, much of
it on increased daycare services for working families.
Our 1998 fiscal balance of $44 million, the basis for
calculating the $5 million loss, is expected to drop to $14
million by the end of fiscal 1999. This year we will spend $30
million more than we are allocated from the Federal Government,
and I am sure that other States have similar stories.
I understand that had we reported our plans to spend
differently we would have shown a zero balance, like several
other States did. For Kentucky to lose $5 million which we
already have plans to spend and sorely need because of the way
we reported our plans is surely unfair, and I beseech you to
live up to the commitment made to the States and not change the
rules in the middle of the game.
Now I would like to address the Governors' No. 1
legislative priority, the retention of all funds received as a
result of the settlement reached with the major tobacco
companies. The Governors' position is clear, it is
longstanding, and was re-articulated in a policy resolution
adopted at the 1999 meeting here in Washington on February 23.
That meeting was attended by all but two of the Governors,
and I know of no Governor who does not agree with the
resolution. This is truly a bipartisan position. Stated simply,
our position is that the tobacco settlement funds belong to the
States.
There is a fundamental difference between the settlement we
reached and the proposals being promoted a year or so ago
involving Federal legislation to enact a tax on tobacco and
appropriate the proceeds for several different purposes. You
have already mentioned the many different reasons that States
used to claim damages. The State by State allotments were
determined, not based on Medicaid expenditures, but on an
overall picture of health care costs in a given State.
Speaking for Kentucky, I can assure you that I agreed to
the settlement on behalf of all Kentuckians as an attempt to
recover at least a small portion of the money they have or will
spend on tobacco-related illnesses personally or through their
government.
The master settlement agreement represents a global
settlement approach that covers States what sued for Medicaid,
States who had Medicaid claims thrown out of courts, and other
States that simply did not sue at all. The Medicaid third party
recovery provisions of the Social Security Act do not
encompass, nor did Congress intend them to apply to, situations
in which States initiated lawsuits on behalf of all of their
residents against manufacturers of products asserting a variety
of consumer protection and other causes of action. These
Medicaid provisions were adopted to facilitate reimbursements
from insurance companies for small claims and to provide a tool
to fight provider fraud. No one envisioned the use of the
provisions to take from the States payments received as a
result of massive State-originated negotiations with the
tobacco industry.
Let me summarize our position. Medicaid is not a major
component of the settlement and therefore the Federal
Government has no legitimate claim to the funds. Reduced
tobacco consumption will significantly reduce State revenue and
a part of these funds must be utilized to replace them.
By their words and actions, Governors and States are
allocating these funds for the most part to the same areas as
are being discussed in Washington. But the Governors, working
closely with State legislatures and concerned parties, must
have the flexibility to tailor the spending of these funds to
meet the needs of individuals in their States. There is simply
no reason to believe that the Federal Government's wisdom on
this issue is superior to the wisdom of the individual States
and territories.
prepared statement
Although States will spend significant amounts of money on
programs that improve the health, education, and welfare of
their citizens, States do not need to be told how to spend any
portion of their money.
Again, I thank you for the opportunity to be with the
committee, and when the rest of the panel presents I will be
glad to answer questions. Thank you very much.
[The statement follows:]
Prepared Statement of Gov. Paul E. Patton
Mr. Chairman, thank you for the opportunity to appear before this
subcommittee today to testify on the governors' number one legislative
priority.
tobacco settlement funds belong to the states
The nation's governors agree that the funds obtained in the
historic tobacco settlement agreement rightfully belong to the states.
The retention of all funds received as a result of the settlement
reached with the major tobacco companies of the nation. The governors'
position is clear it was re-articulated in a policy resolution adopted
at the 1999 winter meeting here in Washington on February 23rd. This
meeting was attended by all but two of the governors and I know of no
governor who does not agree with the resolution. This is truly a
bipartisan position. Simply stated, our position is that the tobacco
settlement funds belong to the states.
Without the states' leadership and years of commitment to
initiating and undertaking state lawsuits, we would not have achieved
this major goal--a comprehensive settlement of myriad claims against
the tobacco industry. After bearing all the risks and expenses in the
arduous negotiations and litigation in which the states have been
engaged we are now fully entitled to all the funds awarded to us.
The nation's governors strongly endorse S. 346, the Hutchison/
Graham tobacco recoupment protection bill, and applaud the support of
the many bipartisan cosponsors. It is crucial that the passage of this
legislation, without federal restrictions, take place this year.
There is a fundamental difference between the settlement we reached
and the proposals being promoted a year or so ago involving federal
legislation to enact a tax on tobacco and appropriate the proceeds for
several purposes. For the federal government to take the position that
the entire $246 billion settlement amount represents the recovery of
Medicaid-related expenditures and that therefore HCFA is entitled to
recoupment of 57 percent of the entire settlement is clearly untenable
for a number of reasons.
1. In the original state suits, states filed complaints that
included a variety of claims, such as consumer protection,
racketeering, antitrust, disgorgement of profits, and civil penalties
for violations of state laws. Medicaid was not mentioned at all in a
number of cases and was only one of a number of issues in many others.
Further, the state-by-state allotments were determined, not based on
Medicaid expenditures, but on an overall picture of health care costs
in a given state.
Speaking for Kentucky, I can assure you that I agreed to the
settlement on behalf of all Kentuckians as an attempt to recover at
least a small portion of the money they have spent or will spend on
tobacco-related illnesses, personally or through the federal
government. As a consequence, I view the money that the Kentucky state
government will receive as belonging to the people of Kentucky and
therefore the decision about how it should be spent should be made by
their representatives in the Kentucky General Assembly. Our legislature
does not meet this year, however they have already expressed, in a
joint resolution passed in our 1998 regular session, their intention to
make that decision on behalf of our people. The fact is that I believe
that we will devote these funds to the same kinds of activities as are
generally being discussed around the country and here in Washington.
But even if we do intend to spend the funds on programs that are
similar to the ones Washington would place in legislation, as a matter
of principle, the people of Kentucky, the legislature, and I would be
opposed to it. For the federal government to use its power to cause us
to have to involuntarily remit these funds to the federal treasury is
offensive and totally unacceptable.
2. It is important to note that, ultimately, the master settlement
agreement bears no direct relationship to any particular state lawsuit.
The master settlement agreement represents a global settlement approach
that represents states who sued for Medicaid, states who had Medicaid
claims thrown out of court, and other states that simply didn't sue at
all. The attorneys general were attempting to obtain a fair monetary
recovery for all states considering the variety of claims and requests
for relief and the common aims of the multistate settlement process.
3. The federal government was invited to participate in the
lawsuits, but declined. States were forced to bear all of the risk
initiating the suits and the entire fiscal burden of carrying forth the
unprecedented lawsuits against a well-financed industry that had never
lost such a case before. It wasn't until after state victory was
ensured that the federal government began to pay renewed attention to
state activities.
4. The Medicaid third-party recovery provisions of the Social
Security Act do not encompass, nor did Congress intend them to apply
to, situations in which states initiate lawsuits on behalf of all of
their residents against manufacturers of products, asserting a variety
of consumer protection and other causes of action. These Medicaid
provisions were adopted to facilitate reimbursements from insurance
companies for small claims and to provide a tool to fight provider
fraud. No one envisioned the use of the provisions to take from the
states payments received as the result of massive, state-originated
negotiations with the tobacco industry.
5. As I have already stated, the master settlement agreement
negotiated between the attorneys general and the tobacco companies is
separate and distinct from the agreement that failed to pass in the
105th Congress. That failed proposal would have represented almost
twice as much money, $368 billion compared to the current settlement of
$246 billion. The failed agreement was much more comprehensive,
representing both state and federal costs and requiring congressional
approval. In the context of the negotiations over the $368 billion
amount, the federal government may have had a legitimate claim to a
share of the settlement, but the proposal's failure in Congress
fundamentally changed the debate. Without passage of supporting
legislation, states were forced to proceed with their own lawsuits and
negotiate settlements based on nonfederal claims.
governors oppose federal restrictions
The nation's governors also are strongly opposed to any federal
restrictions on how states spend their tobacco funds. Each state must
be given the flexibility to tailor its spending to the unique needs of
its citizens. For example, some states need to be able to assist farm
communities while others may want to expand health coverage to the
uninsured. For example, to force Kentucky or Virginia to spend all
their funds on health insurance for children would represent flawed
federal policy when they need to assist farm communities. Similarly, to
force Vermont to spend all its funds on health insurance for children
would be unwise, given the low percentage of uninsured children in that
state.
Many governors, through state-of-the-state speeches or through
proposed or finalized state legislation, have already publicly
committed to spending these funds for the health and welfare needs of
their citizens. The majority of governors have already made commitments
to create trust funds and escrow accounts that will ensure that tobacco
settlement funds are spent on health care, services for children,
assistance for growers, education, and smoking cessation.
The nation's governors and state legislators are committed to
spending the settlement funds on a wide variety of state programs that
will reduce teen smoking and improve the health, education and public
welfare of each state's citizens. Ensuring this requires the
flexibility for states to spend the settlement funds on programs
targeted to the specific needs of each state. States do not need the
federal government to tell them when and how to spend the money.
Examples of spending commitments include the following.
--Governor Jane Dee Hull of Arizona has proposed: building medical
facilities and permanently funding a variety of health care
programs; forming a trust fund for research and education on
smoking cessation; establishing an up-front payment for a new
state mental hospital, new state health laboratory, and rural
health clinics; and funding a county health care block grant.
--Governor Gary Locke of Washington has proposed: increasing funding
for Washington's Basic Health Plan for working families;
expanding Medicaid health coverage for children in low-income
families; and establishing an endowment fund to help smokers
quit and convince young people not to use tobacco.
--Governor Frank O'Bannon of Indiana has proposed: increasing funding
for children's health, antismoking programs, other public
health programs, and support of local health departments;
expanding health insurance to low-income working families; and
providing support to tobacco farmers to ease their transition
to other crops.
--Governor James S. Gilmore III of Virginia has proposed:
establishing a fund for economic and agricultural development
targeted at assistance for farm communities hurt by the
settlement; establishing a health fund for children, community-
based treatment for mental illness, long-term care, and youth
antismoking programs; and establishing a fund that addresses
other critical needs such as education infrastructure.
set-asides for smoking cessation programs are bad public policy
One of the restrictions under consideration in the Senate is a
proposal to require states to spend 25 percent of the funds on smoking
cessation programs. Although the nation's governors agree with the goal
of substantially reducing smoking, we are adamantly opposed to this
restriction. It would represent very poor public policy. There are
already four major initiatives that are going into effect to reduce
smoking.
1. The price of tobacco has increased. The price of tobacco
products has already increased between 40 cents and 50 cents per pack.
Additional price increases may come over time as companies attempt to
hold profit margins and make settlement payments. These price increases
will substantially reduce smoking over time.
2. Two major programs in the settlement are dedicated to reducing
teen smoking and educating the public about tobacco-related diseases.
$250 million will create a national charitable foundation to support
the study of programs to reduce teen smoking and substance abuse and
prevent diseases associated with tobacco use. An additional $1.45
billion will create a National Public Education Fund to counter youth
tobacco use and educate consumers about tobacco-related diseases.
3. The settlement agreement has a significant number of
restrictions on advertising and promotion. The settlement prohibits
targeting youth in tobacco advertising, including a ban on the use of
cartoon or other advertising images that may appeal to children. The
settlement also prohibits all outdoor tobacco advertising, tobacco
product placement in entertainment or sporting events, and the
distribution and sale of apparel and merchandise with tobacco company
logos. Further, the settlement places restrictions on industry lobbying
against local, state, and federal laws. Over time, these restrictions
on tobacco companies' ability to market their products to children and
young adults will have a major impact on smoking.
4. States are already spending state funds on smoking cessation and
will substantially increase funding as the effectiveness of programs
becomes established. Many states have already invested years in program
design, modification, and evaluation to determine the best ways to
prevent youth from taking up cigarette smoking and helping youth and
adults quit smoking. Governors and states are highly motivated to
implement effective programs. We see the human and economic burdens of
tobacco use every day in lost lives, lost wages and worker
productivity, and medical expenditures for tobacco-related illnesses.
Thirteen states have already committed to creating a dedicated trust
fund or devoting considerable settlement revenues to smoking cessation
programs-Alabama, Alaska, Arizona, Delaware, Hawaii, Indiana, Maryland,
Massachusetts, Missouri, New Jersey, North Dakota, Vermont, and
Washington.
Given the fact that these four major initiatives to reduce smoking
are now being implemented, it is critical that additional spending be
well coordinated with these and other initiatives. Governors will
commit additional funds as the effectiveness of new programs is proven.
However, the funds must be well coordinated with these four new
initiatives. States must have the flexibility to spend funds in a cost-
effective way. They should not have to meet an artificial restriction
that has no basis in sound public policy.
state revenue impacts of the tobacco agreement
Although the tobacco agreement will create payments of $246 billion
to states over the next twenty-five years, the net revenue gain to
states may be substantially below that total as state tobacco tax-
revenues are substantially reduced. In 1996 state tobacco tax
collections were about $7.1 billion per year. Over the next twenty-five
years, these revenues will fall substantially below what they would
have been without a tobacco agreement.
There are three major reasons for this reduction in revenue. First,
the tobacco agreement has already increased the price of tobacco
products by from 40 cents to 50 cents per pack. This could reduce state
tobacco tax collections by around $700 million per year. However, over
time there is the possibility that tobacco companies will be forced to
increase prices more in order to maintain profit margins. If this were
to lead to another increase of 50 cents per pack, the combination of
the two price increases could lead to a reduction in state revenues of
$1.4 billion per year.
Second, in addition to the price effects, the tobacco agreement
puts a number of restrictions on advertising that will further reduce
smoking and thus state tax revenues.
Third, the foundation created in the agreement to fund national
smoking cessation programs coupled with state programs for smoking
cessation will further substantially reduce smoking and therefore state
tobacco tax revenues. Although it is difficult to provide an accurate
estimate of the reduction in tobacco revenues, the combination of
significant price increases coupled with major new smoking cessation
programs would likely reduce state tobacco tax revenues by tens of
millions of dollars over the twenty-five year period. This would
substantially reduce the net revenues from the tobacco agreement.
Further, there is another major potential offset to the settlement
funds if the volume of cigarette sales is reduced. Specifically, there
is a net revenue reduction for every percentage reduction more than 2
percent. For example, if the volume of cigarettes sold is reduced by 12
percent, state revenues from the agreement would be reduced by $14
billion over twenty-five years. Similarly, if the volume went down by
22 percent, then revenues would be $32 billion lower.
This reduction in overall tobacco use is one of the primary
purposes of the tobacco settlement, and the governors will applaud such
reductions. Although a worthy goal, such reductions will reduce net
funds available to states, and thus must be taken into consideration.
conclusion
The nation's governors feel strongly that the states are entitled
to all of the funds awarded to them in the tobacco settlement agreement
without federal seizure. The master settlement agreement is
fundamentally different from the proposals recently considered by the
Congress. It is a global settlement of myriad claims. Medicaid was not
the major focus or force in the settlement, and there is therefore no
legitimate federal claim to the funds. Reduced tobacco consumption will
significantly reduce state revenue and a part of these funds must be
utilized to replace them. By their words and actions, governors and
states are allocating these funds, for the most part, to the same areas
that are being discussed in Washington. But the governors, working
closely with state legislators and concerned parties must have the
flexibility to tailor the spending of these funds to meet the needs of
individuals in their states. There is no reason to believe that the
federal government's wisdom on this issue is superior to the wisdom of
the individual states and territories. Although states will spend
significant amounts of money on programs that improve the health,
education, and welfare of their citizens, states do not need to be told
how to spend any portion of their money.
I thank you again for the opportunity to appear before the
committee, and I would be happy to answer any questions you may have.
tobacco settlement
Senator Specter [presiding]. Thank you very much, Governor
Patton.
I regret my somewhat late arrival. The trains are having a
little problem, but not as much problem as Senator Harkin is
having, because he is in bed with a bad back.
But we welcome you to this hearing on such short notice. I
am sure you have gone over the history of the issue with the
emergency supplemental appropriations bill coming to the floor
perhaps later this week with a provision which Senator
Hutchison introduced the week before last which would give the
States the unfettered discretion to retain the money on the
tobacco settlement.
I received a call from our distinguished attorney general
in Pennsylvania bringing me up to date on the matter, and
Senator Harkin and I thought that it would be useful for this
subcommittee to have a hearing because we have the
responsibility for funding the Department of Health and Human
Services and HCFA. Both Senator Harkin and I had expressed
ourselves at the Appropriations Committee hearing of concern as
to allowing the States to retain all of the funds.
There is the existing provision of law which provides for
the Federal Government to retain a proportionate share, pegged
at some 57 percent, and it may be that we can reach an
accommodation as to the concerns which a number have expressed
about having an allocation of the funds directed toward
preventing youth smoking and the medical matters, which is the
reason we felt we ought to have this hearing.
There is a conflict between the Finance Committee and
Appropriations as to handling these matters. That is not a
matter of your concern, but an objection was lodged to Senator
Hutchison's amendment and an objection has been lodged to this
hearing. But I think we can work out the Senate turf battles.
The more important issue for Americans is what is going to
happen to the funds. The smoking issue is an overwhelming one.
I was reviewing the statistics again this morning; 400,000
people die each year from tobacco-related illnesses. The
projection is that some 5 million of those now under 18 will
die from tobacco-related illnesses. Enormous costs are
involved--$572 billion in health care expenditures each year by
the U.S. Government on tobacco-related illnesses, $7.3 billion
on Medicaid payments.
This morning I noted a news report that women who smoke
heavily--and this seems to have a curious causal relationship--
have children who have a higher incidence of being involved in
criminal activity. So you really wonder where the smoking issue
ends.
But we do appreciate the work of the attorneys general in
getting this $206 billion settlement. Not surprisingly, the
Federal Government was not involved. I do not think that
totally answers the question of the Federal Government's
interests in proportionate share. If we only dealt with the
Federal Government where they exercised diligence, we might not
deal with the Federal Government much at all.
But we thank you for your prompt attendance. I understand
that Governor Patton is the first of this panel to testify. So
we now turn to the Honorable Mike Fisher, who brings to this
hearing a very distinguished background as an Assistant
District Attorney and a State Senator and a candidate for
Governor, and a very distinguished Attorney General in
Pennsylvania.
General Fisher, the floor is yours.
STATEMENT OF HON. MIKE FISHER, ATTORNEY GENERAL OF
PENNSYLVANIA
Mr. Fisher. Thank you very much and good morning, Mr.
Chairman, and we thank you for calling this hearing. Good
morning, Senator Hutchison. We thank you for being here and for
your leadership on this issue.
I am very pleased to have the opportunity to address this
subcommittee today on behalf of the National Association of
Attorneys General concerning the States' historic settlement
with the tobacco industry. I have been asked to give a short
overview of the States' litigation against the industry and the
subsequent $206 billion settlement.
In 1994, Attorney General Mike Moore filed the first State
lawsuit against the tobacco industry on behalf of the State of
Mississippi, claiming that the industry had engaged in a 40-
year conspiracy to keep the truth from the public about the
addictive nature of nicotine to cultivate a new generation of
smokers.
By June 1997, more than 40 States had filed their own
lawsuits. On June 20 1997, attorneys general and the industry
announced a tentative settlement. The tobacco industry was
prepared to pay $368 billion, to acquiesce to FDA regulation,
and change its way of doing business. Of that settlement, $196
billion would have gone to the States and the balance would
have largely gone to the Federal Government. This agreement was
contingent on Congressional approval and, as you know, the
required legislation was not enacted.
In the summer of 1998, with roughly 36 State cases still
unresolved, the Congress having abandoned efforts to approve
the June 20 resolution, a second effort towards a multistate
settlement commenced. Between July and November 1998, a group
of attorneys general engaged in intensive negotiations with the
tobacco industry.
I was one of eight negotiators chosen by my colleagues to
represent the coalition of States suing the industry. After
months of negotiations, an agreement was signed on November 23,
1998, under which the industry agreed to pay the States $206
billion over 25 years. In addition, the agreement required the
industry to make major public health concessions on how it
would conduct business in the future. My written testimony
outlines those various provisions.
As we sit here today, State legislatures across the country
are studying how best to use these proceeds. Without question,
public health programs will be the principal recipient of
settlement funds. In Pennsylvania, for example, I have provided
to the Governor and our general assembly a blueprint for
action. We have proposed spending the money to enhance our
children's health insurance program and making more insurance
funds to adults who do not otherwise have insurance, expanding
funding for Pennsylvania's schools to offer comprehensive
tobacco use and prevention programs, increased funding for
medical research into tobacco-related diseases, and other
proposals which are included in my written testimony, a copy of
which is attached to my remarks.
Although Pennsylvania's plan is not yet final, Pennsylvania
Governor Tom Ridge has also stated that he wants to use the
money for public health purposes, including smoking prevention
and education programs. I am confident that our legislature
will support our goal to spend the $11.3 billion we will
receive on public health and tobacco cessation programs.
The information available to me indicates that almost all
the States have initiated plans to use the settlement dollars
on health-related programs.
I sued on behalf of the people of Pennsylvania, not for the
Federal Government. The States fought the tobacco industry for
more than 5 years, expended considerable time and resources,
and assumed 100 percent of the risk. During this whole period
of time the Federal Government sat on the sidelines. In fact,
the Department of Justice specifically declined to become
involved when it was asked. Therefore, it is wholly
inappropriate for the Federal Government to now demand to share
the States' proceeds.
Those who have advocated that the Federal Government is
entitled to share the proceeds have relied on a provision of
the Social Security Act. I believe that that provision does not
apply because the Federal Government does not have a valid
claim to funds received by the States for settlement of purely
State claims or for State share of Medicaid expenses.
Even more significantly, I want to emphasize that many of
the States' causes of action sought relief completely
independent----
Senator Specter. General Fisher, I must interrupt you for
just a moment. There has been a black bag left on the coat
stand in the corridor. So if anyone left it there, claim it now
because it is about to be removed, for obvious reasons.
Go ahead, General.
Mr. Fisher. Thank you, Mr. Chairman, and it was not mine.
Even more significantly, I want to emphasize that many of
the States' causes of action sought relief completely
independent of Medicaid. In Pennsylvania, for example, our
consumer protection claim brought about under the Commonwealth
unfair trade practices would have entitled us to recover a
penalty of $1,000 for each pack of cigarettes sold in the
Commonwealth and $3,000 if the sale was to a senior citizen.
Every State had claims which were separate and apart from
Medicaid funding, and I have listed the various examples in my
testimony.
The simple fact is that the States' lawsuits are not wholly
comprised of Medicaid reimbursements. Each State's claim was
based on violations of numerous State laws. For the Federal
Government to seek to recover a share of the States' settlement
of the $206 billion would in the view of the State attorneys
general be an attempt to take money from the States that
legitimately belongs to the States and represents the
settlement of purely States' claims.
Finally, let me address the proposal that a fixed
percentage of the State settlement funds be restricted to
smoking cessation and prevention efforts or, for that matter,
any other specific category. The States should be permitted to
use their money as they see fit. In fact, I firmly believe that
a Federal mandate could be detrimental to the efforts of the
Governors and the attorneys general to target most of the
settlement funds to public health.
Based on my past experience, I believe that legislators
could wind up viewing this funding mandate as a ceiling rather
than a floor, therefore making it more difficult for the States
to commit virtually all of their funds to public health.
prepared statement
Once again, Mr. Chairman, I would like to thank you for
providing me this opportunity to address the committee. I
believe the decisions which the Senate and the House of
Representatives will make will have a significant impact on the
health of Pennsylvania and our citizens throughout the United
States.
Mr. Chairman, I stand available to answer any questions.
Senator Specter. Thank you very much, General Fisher.
[The statement follows:]
Prepared Statement of Mike Fisher
Good morning, Chairman Specter, Senator Harkin, and distinguished
members of the Senate Appropriations Subcommittee on Labor, Health and
Human Services, and Education. Thank you for the opportunity to address
the Subcommittee today on behalf of the National Association of
Attorneys General concerning the States' historic settlement with the
Tobacco industry. I urge you to support Senator Hutchison's
legislation, which will allow the States to keep the money rightfully
earned as a result of this litigation. As you are aware, Senator
Hutchison's legislation, which now has 44 co-sponsors, has been amended
into the fiscal year 1999 supplemental appropriations bill that the
Senate will soon consider.
Before I begin my remarks, allow me to provide you with the
following submission from the National Conference of State
Legislatures, which also urges you to support legislation to protect
the states' funds from federal interference.
I've been asked to give you a short overview of the states'
litigation against the tobacco industry and the subsequent $206 billion
settlement. In 1994, Attorney General Mike Moore filed the first state
lawsuit against the Tobacco industry on behalf of the State of
Mississippi, claiming that the industry had engaged in a 40-year
conspiracy to keep the truth from the public about the addictive nature
of nicotine and to cultivate a new generation of smokers. Soon after I
was elected Pennsylvania's Attorney General in January 1997, I filed
suit against the tobacco industry and became the 23rd state to file. By
June of 1997, more than 40 states had filed their own lawsuits.
On June 20, 1997, the Attorneys General and the industry announced
a tentative settlement. The tobacco industry was prepared to pay $368
billion, to acquiesce to FDA regulation and change its way of doing
business. Of that settlement, $196 billion would have gone to the
states and the balance would largely have gone to the federal
government. This agreement was contingent on Congressional approval and
as you know the required legislation was not enacted. During the period
of Congressional review, the states' litigation continued and, to the
consternation of the industry, the states' cases began to go to trial.
The industry agreed to settle individually the lawsuits brought by
Mississippi, Florida and Texas and Minnesota.
In the summer of 1998, with roughly 36 state cases still unresolved
and with Congress having abandoned efforts to approve the June 20
resolution, a second effort towards a multi-state settlement commenced.
This time around, the negotiators focused only on settling the states'
claims, and set aside those issues in the prior year's negotiation
which required Congressional action.
Between July and November of 1998, a group of Attorneys General
engaged in intensive negotiations with the tobacco industry. I was one
of the eight negotiators chosen by my colleagues to represent the
coalition of states suing the industry. After months of negotiations,
an agreement was signed on November 23, 1998 under which the industry
agreed to pay the states $206 billion over 25 years to settle our
claims. I can assure you the states were proceeding on the assumption
that whatever settlement funds were received would belong 100 percent
to the states. That is why we ultimately agreed to a total settlement
figure of $206 billion, an amount almost identical to what the states
were to receive from the June 20th resolution, rather than the $368
billion that the tobacco industry had originally agreed to in the
proposed global settlement in June 1997.
In addition, the Agreement required the industry to make major
public health concessions on how it would conduct business in the
future. I want to emphasize, these were concessions which most likely
would not have been obtainable in any state's individual lawsuit.
key provisions
While it would be impossible for me to discuss all the terms of
this complex agreement in the time available, I want to point out the
major provisions of the Agreement. These provisions include
restrictions on the tobacco industry's business practices, advertising
and marketing, especially as they relate to children. The Agreement:
--removes and bans all tobacco billboards.
--prohibits the direct or indirect targeting of minors in the
advertising, promotion, or marketing of tobacco products.
--bans the use of cartoons in advertising, marketing, and packaging.
--restricts brand name sponsorships.
--removes and bans all transit tobacco advertisements.
--bans payment for product placement in movies as well as in
television shows, theatrical performances, live theater,
recorded performances, and video games.
--restricts distribution of free samples to adult-only facilities.
--requires proof of age for distribution of free gifts.
--restricts the use of brand names by third parties and requires
tobacco companies to enforce their trademarks.
The Agreement also:
--establishes a minimum pack size of 20 cigarettes.
--requires corporate culture changes among the tobacco defendants,
including commitment to assist in the reduction of youth
smoking.
--dissolves the Tobacco Institute, The Council for Tobacco Research,
and the Council for Indoor Air Research, and mandates that
future trade associations do not act like those of the past.
--restricts lobbying against laws that limit non-tobacco products
that look like tobacco products (e.g., bubble gum).
--establishes a user-friendly searchable web site of all industry
produced documents.
--establishes a counter-advertising fund and education foundation of
at least $1.45 billion, which includes $250 million to fund the
study of youth smoking.
--establishes a $50 million enforcement fund with the National
Association of Attorneys General.
Upon full implementation of the settlement, these fundamental
industry restrictions and reforms, in combination with the public
health, youth smoking cessation, and medical research programs
contemplated by this $206 billion settlement, will by all accounts
produce significant results in the saving of lives and reduction of
teen smoking.
As we sit here today, State Legislatures across the country are
studying how best to use these proceeds. Without question, public
health programs will be the principal recipient of the settlement
funds. In Pennsylvania, for example, I have provided to the Governor
and our General Assembly the following blueprint for action:
--Supplement funding for Pennsylvania's children's health insurance
program and make funding available for adults without insurance
who have not reached the Medicare eligibility age.
--Expand funding for PA schools to offer comprehensive programs on
tobacco use prevention.
--Increase funding for medical research into tobacco-related
diseases.
--Increase funding for effective smoking cessation programs.
--Expand funding for increased enforcement of youth smoking laws.
--Increase support for community-based anti-smoking programs.
(A copy of my recommendations to the Governor is attached for your
review.)
Although Pennsylvania's plan is not yet final, Pennsylvania
Governor Tom Ridge has also stated that he wants to use the money for
public health purposes, including smoking prevention and education
programs. I am confident that our legislature will support our goal to
spend the $11.3 billion on public health and tobacco cessation
programs.
The information available to me indicates that almost all the
States have initiated plans to use settlement dollars on public health-
related programs. These plans are jeopardized by the federal
government's threat to recoup the money or restrict how it can be used.
I sued on behalf of the people of Pennsylvania, not for the federal
government. The states fought the tobacco industry for more than five
years, expended considerable time and resources, and assumed 100
percent of the risk. During this whole time period, the federal
government sat on the sidelines. In fact, the Department of Justice
specifically declined to become involved when asked. It is wholly
inappropriate for the federal government to now demand a share of the
states' proceeds.
Those who have advocated that the federal government is entitled to
a share of the proceeds have relied on a provision in the Medicaid Act.
I believe that provision does not apply because the federal government
does not have a valid claim to funds received by the states for
settlement of purely state claims or for the states' share of medicaid
expenses. The relevant provisions of the Medicaid Act, 42 U.S.C.
Sec. 1396a(a)(25) and Sec. 1396b(d), do not justify, let alone require,
the federal government's attempt to recover part of the states'
settlement. Under Sec. 1396b(d)(3), the United States can seek a ``pro
rata share [of reimbursements] to which the United States is equitably
entitled, as determined by the Secretary,'' by way of reduction to
federal payments to states. However, under the states' settlement
agreement, the federal government is not ``equitably entitled'' to any
portion of the settlement, because the settlement as to that portion
which may be for Medicaid represents only the states' portion of
tobacco-related Medicaid expenses. The federal government's equitable
portion was only reflected in the proposed $368 billion settlement of
June 1997 that Congress failed to approve.
Even more significantly, I want to emphasize that many of the
states' causes of action sought relief completely independent of
Medicaid. In Pennsylvania, for example, our consumer protection claim
brought under the Commonwealth's Unfair Trade Practices Act would have
entitled us to recover a penalty of $1,000 for each pack of cigarettes
sold in the Commonwealth and $3,000 if the sale was to a senior
citizen. In addition, prevailing on this claim could have resulted in
the court ordering the surrender of all corporate profits the tobacco
industry had from its sales in Pennsylvania.\1\
---------------------------------------------------------------------------
\1\ Pennsylvania's complaint had ten distinct counts: Count 1,
Civil Conspiracy/Concert of Action; Count 2, Undertaking a Special
Duty--willful and negligent breach; Count 3, Fraudulent
Misrepresentation; Count 4, Fraudulent Concealment; Count 5, Negligent
Design; Count 6, Strict Liability; Count 7, Unfair Trade Practices
(consumer protection); Count 8, Public Nuisance; Count 9, Negligent and
Intentional Entrustment; and Count 10, Unjust enrichment/Restitution.
---------------------------------------------------------------------------
Every state had claims which were separate and apart from Medicaid
funding. For example:
--Many states, like Pennsylvania, had claims for violation of their
consumer protection laws. Remedies included significant
monetary penalties for each violation, and there were millions
of potential violations.
--Many states, for example, Florida, Ohio and Texas had viable RICO
claims. Available remedies included surrender of corporate
profits and treble damages. Billions of dollars were at stake.
--Several states had public nuisance claims. In Iowa, for example,
the remedy requested was the refund of the entire price of each
cigarette pack sold.
--Numerous states, such as Connecticut, Minnesota, Vermont and
Washington had state law antitrust claims. As in the case of
the RICO claims, available remedies included surrender of
corporate profits and treble damages.
--Vermont asserted a claim for violations of its Public Health Act.
The remedy was a staggering penalty of $10,000 per violation
per day.
--Even where a state asserted a Medicaid related claim, it was never
the sole avenue for relief. Hence, when the Iowa Supreme Court
affirmed the dismissal of the Medicaid portion of Iowa's
complaint, Iowa's case continued. Similarly, California's case
continued even after the dismissal of its Medical claims.
The simple fact is that the states' lawsuits were not wholly
comprised of Medicaid reimbursements. Each state's claim was based on
violations of numerous state laws. For the federal government to seek
to recover a share of the state settlement of $206 billion would, in
the view of the state Attorneys General, be an effort to take money
from the states that legitimately belongs to the states and represents
the settlement of purely state claims. I can assure you that any such
effort would inevitably result in nationwide litigation between the
federal government and the states. This would result in a diversion of
monies which could otherwise be spent for public health.
Finally, let me address the proposal that a fixed percentage of the
states' settlement funds be restricted to smoking cessation and
prevention efforts or, for that matter, any other specific category.
States should be permitted to use their money as they see fit to meet
their particular state's needs. As a former state legislator of 22
years, I find offensive the notion that the states can't be trusted to
spend their money wisely. In fact, I believe that the states are better
situated to determine what level of spending on particular programs
makes the most sense to the people in that state. These are decisions
that need to be made at home and not handed down or monitored by a new
federal bureaucracy.
In addition, I firmly believe that a federal mandate could be
detrimental to efforts by Governors and Attorneys General to target
most of the settlement funds to public health funding in the long term.
Based upon my past experience, I believe that legislators could wind up
viewing this funding mandate as a ceiling rather than a floor for
public health spending. The State Legislatures may see the federal
government's mandate as a maximum amount they need to dedicate to
public health measures. This would undercut all we have attempted to
gain. Give the states who did the work to attain this historic
settlement the freedom to develop the public health spending plan that
best meets the needs of their people over the next 25 years. We took
the risk--allow us to do the job.
Once again, I would like to thank you for providing me with this
opportunity to address this Committee. I believe that these decisions
can have a significant impact on the health of Pennsylvanians and our
citizens throughout the United States.
______
Letter From Mike Fisher to Governor Thomas J. Ridge
Commonwealth of Pennsylvania,
Office of Attorney General,
Harrisburg, PA, January 14, 1999.
Hon. Thomas J. Ridge,
Governor, Commonwealth of Pennsylvania,
Harrisburg, PA.
Dear Governor Ridge: I am very pleased to inform you that on
January 13, 1999, Judge John Herron, Administrative Judge of the Court
of Common Pleas of Philadelphia County, approved the Pennsylvania
tobacco settlement and consent decree, which I helped to negotiate on
behalf of the Commonwealth. By dismissing all objections to our $11.3
billion tobacco settlement, Judge Herron has paved the way for the
timely implementation of the significant health policies and monies
which are due Pennsylvania under the settlement. Because this consent
decree holds the participating state attorneys general responsible for
enforcing its provisions, I can assure you that I will do everything in
my power to ensure that the tobacco industry operates within the
parameters of this agreement.
Decisions on how the settlement proceeds will be used need to be
made in the near future by you and the General Assembly. I look forward
to working with you in that process. As Pennsylvania's share of the
1998 payment may be received prior to the beginning of the next fiscal
year, I would ask you to consider creating a restricted Tobacco
Recovery Fund into which all of the tobacco dollars will first be
deposited upon receipt from the escrow agent. Preservation of monies in
this way will conserve the principal and result in earnings, actually
increasing the amount of dollars available to the Commonwealth.
There are a number of initial recommendations on where these funds
could best be directed that I would like to offer for your
consideration:
1. Establishment of a Pennsylvania Tobacco Settlement Advisory
Panel. The purpose of this oversight panel would be to advise the
Governor and the General Assembly on the best use of the proceeds
coming to the State as a result of the settlement. This panel's ongoing
role would be to recommend, review and monitor those programs and
initiatives chosen to receive funding from the settlement funds.
2. Supplement Funding for Pennsylvania's Children's Health
Insurance Program. As you are aware, the General Assembly greatly
expanded the scope of this program in 1998, making CHIP available to
even more of Pennsylvania's children. Proceeds from the settlement
could be used to ensure full funding of the program now, and in the
future.
3. Encourage Pennsylvania's Schools to Offer Comprehensive School-
Based Programs on Tobacco Use Prevention. The key to curtailing tobacco
use is to educate our children about its deadly effects. Funds should
be made available to our schools and education professionals in order
to give them the resources to acquire and develop new, innovative
educational programs designed to make children understand the perils of
tobacco use.
4. Increase Funding for Medical Research to Improve the Diagnosis
and Treatment of Tobacco-Related Illnesses. Pennsylvania is home to
some of the pre-eminent research hospitals and cancer centers in the
nation. Pennsylvania should substantially increase its commitment to
these institutions, allowing them to strengthen and expand their
efforts in diagnosing and treating cancer and other tobacco-related
illnesses.
5. Increase Funding for Effective Smoking Cessation Programs.
Effective and accessible cessation programs are integral to any
comprehensive state tobacco control effort. Steps should be taken to
provide direct cessation services to the medically uninsured and
medical assistance recipients. Revenues could also be used to encourage
private health plans to cover cessation programs.
6. Limit Youth Access to Tobacco Products. Funds should be used to
develop and enhance retail education programs to ensure that store
owners are aware of the law and are taking every necessary measure to
limit youth access to tobacco products. In addition, state and local
law enforcement agencies, including the Office of Attorney General,
should receive funding to implement tougher enforcement initiatives.
7. Support Community-Based Anti-Smoking Programs. The Center for
Disease Control and Prevention reports that some of the most effective
anti-smoking initiatives are community-based programs. Local programs
can effectively utilize individual community leaders, community
businesses, ethnic and cultural groups, and school and youth
organizations.
Directing the funds to be derived from this settlement to these
kind of efforts, as well as other related proposals, will be important
for Pennsylvania's future. The careful selection of where this money is
spent, should help Pennsylvania to defeat any claim that may be
asserted by the Health Care Financing Administration seeking
reimbursement for federal medical assistance funding.
I am truly grateful to have had the opportunity to help negotiate
this historic settlement, and proud to represent Pennsylvania in this
action, and I look forward to working with you to assure that the best
decisions are made in utilizing these dollars.
Very truly yours,
Mike Fisher,
Attorney General.
STATEMENT OF HON. JOHN CORNYN, ATTORNEY GENERAL OF
TEXAS
Senator Specter. Our next witness is the distinguished
Attorney General from the State of Texas, John Cornyn----
Senator Hutchison. ``CORR-nin.''
Senator Specter. ``CORR-nin.'' Always good to have a fellow
Texan here.
Mr. Cornyn. You bet.
Senator Specter. Mr. Corrnyn has been in the practice of
law, a member of the State judiciary, a district judge, a
presiding judge, and a member of the Texas Supreme Court.
Welcome, Judge--General Cornyn. We look forward to your
testimony.
Mr. Cornyn. Thank you, Chairman Specter. It is a pleasure
for me to be here today before the committee and particularly
to support the efforts of my Senator, Texas Senator Kaye Bailey
Hutchison, by clarifying and attempt to clarify what I believe
to be the current law, which is that the funds that have been
recovered by the States through their individual tobacco
lawsuits as well as the collective settlement of 46 States
amounting to $206 billion, that those are not recoverable by
the Federal Government, but HCFA, based on the legal theories
that were alleged in virtually every State, with maybe one or
two exceptions.
I first would like to discuss the lawsuit that was brought
by the State of Texas, which was settled separately, as you may
recall, in January of 1998, and to address the various legal
theories that were alleged in that case. I would also like to
explain to you why any attempt on the part of the Federal
Government to withhold Medicaid dollars which the State is
legally authorized to receive is without legal justification.
Finally, I would like to provide you with some information
about the various programs to which the Texas tobacco recovery
already--will be dedicated under a memorandum of understanding
between the leaders of our State Senate, our House
appropriations committee, and my predecessor attorney general.
The Federal Government I believe has no legal right to
withhold Federal Medicaid money, money that the State of Texas
is legally authorized to receive, money that provides health
care to children and poor people all over Texas, because the
State of Texas did not bring a cause of action seeking recovery
of Medicaid money under the Medicaid third party recovery
program. In short, I do not believe there should be a Medicaid
recoupment because no Medicaid recovery was either sought or
obtained.
The Texas lawsuit was brought to recover money expended by
the State to provide medical treatment to citizens suffering
from smoking-related illnesses and to seek appropriate
injunctive relief against the defendants' continued illegal
conduct. The general categories of claims were four in number:
first, the Federal Racketeer-Influenced and Corrupt
Organization Act, or RICO; secondly, Federal and State
antitrust claims; third, equitable principles of Federal and
State common law; and fourth, under products liability law.
The State of Texas made no claims seeking recovery of
Medicaid money under the third party recovery program, and yet
the Federal Government is now threatening to withhold Medicaid
money which the State of Texas is authorized by law to receive.
I believe that if you look, in short, at the allegations
contained in the Texas lawsuit and in the judgment that was
actually, the settlement that was actually obtained awarding
the State of Texas $17.3 billion against the tobacco industry,
in addition to $3.3 billion in attorney's fees through a
national arbitration award, that you will see that none of it
relates in any way to the Medicaid program.
Now, I would like to mention to you that under the
memorandum of understanding entered into by the chairman of the
Senate finance committee of the State of Texas and the House
appropriations committee and the attorney general at the time,
my predecessor, there are funds dedicated to tobacco cessation
programs. In fact, under the memorandum of understanding $200
million would already go to a tobacco cessation funding
program. I believe, based on the comments of the leadership in
the State Senate and the State House, that in fact the vast
majority of the funds will go to public health as well as
tobacco cessation programs.
Now, if you will forgive me, when I learned a little bit
more about the nature of Senator Hutchison's proposal and
HCFA's claim to recoup up to 57 percent of what the States had
recovered, I was reminded of a play that my daughter
participated in when she was in elementary school called ``The
Little Red Hen.''
You may recall that the little red hen asked the cat and
the rat and the pig to help her plant wheat, harvest the wheat,
grind it into flour, and finally bake it into bread. And even
though each of them were unwilling to help with the hard work,
once the fruits of her labor were plain they were more than
willing to enjoy the fruits of the little red hen's labor.
Now, the little red hen in this instance is the States, who
asked for and received no help from the Federal Government when
it took on the tobacco industry. But now, after the risks have
been taken, after the work has been done, the Federal
Government is like the cat, the rat, and the pig in ``The
Little Red Hen,'' all of whom want to enjoy the benefits of the
States' labor.
prepared statement
In summary, Mr. Chairman, members of the committee, the
attempted recoupment by HCFA of the tobacco recoveries of the
State of Texas and the other States is not fair, it is not the
law, and this committee ought to reject it.
Thank you very much.
Senator Specter. Thank you very much, Attorney General
Cornyn.
I very well remember the ``Little Red Hen'' story. I just
have one question before we go on to the next witness, is the
Federal Government the cat, the rat, or the pig, or a
combination of rat and pig? [Laughter.]
Mr. Cornyn. I believe I will not comment on that, Senator.
Senator Specter. Well, we will press you for an answer when
the questions and answers comes.
[The statement follows:]
Prepared Statement of John Cornyn
Thank you for allowing me to offer my testimony on Senator
Hutchison's proposal. I would like briefly to address three issues:
--I would like to discuss the lawsuit brought by the State of Texas
against the tobacco companies and to address the various causes
of action and specific items of relief that we sought.
--I would like to explain to you why any attempt on the part of the
federal government to withhold Medicaid dollars which the state
is legally authorized to receive is without legal
justification.
--And finally, I would like to provide you with information about the
various programs on which the State of Texas is expending money
that it has received in its tobacco settlement.
the texas lawsuit
Simply put, the federal government has no legal right to withhold
federal Medicaid money--money that the State of Texas is legally
authorized to receive--money that provides health care to children and
poor people all over Texas--because the State of Texas did not bring a
cause of action seeking recovery of Medicaid money under the Medicaid
third-party liability program.
The lawsuit filed by Texas was brought to recover money expended by
the State to provide medical treatment to citizens suffering from
smoking-related illnesses and to seek appropriate injunctive relief and
the defendants' continued illegal conduct.
The State alleged violations or causes of action in four broad
areas of law: (1) Federal Racketeer Influenced and Corrupt
Organizations Act (RICO); (2) Federal and state Antitrust Acts; (3)
Equitable principles of Federal and State Common Law; and (4) Product
Liability Law. The State of Texas made no claim seeking recovery of
Medicaid money under the third-party liability program. And yet the
federal government is threatening to withhold Medicaid money to which
the State of Texas is authorized by law to receive--money that pays for
health care treatment to children and the poor in the State of Texas--
in an attempt to lay claim to money to which the federal government has
no right.
the misapplication of the medicaid third-party liability provisions to
the lawsuit filed by the state of texas
It is widely believed that the State of Texas--that, indeed, each
of the fifty states--filed suit against the tobacco companies under
each state's Medicaid third-party liability recovery statutory
provisions that each state participating in the Medicaid program is
required to enact. I have not examined the pleadings filed by each of
the fifty states, so I cannot declare that no other state filed a cause
of action and sought relief under that state's Medicaid third-party
liability recovery statutory program. But I can declare that the State
of Texas did not. Then why do so many assume that we did? The answer to
that can be explained by any first year law student.
As every first year law student knows, proving up damages and
proving liability are two very different things. Simply put, there are
two components that an attorney bringing a lawsuit that seeks relief in
the form of damages is required to prove. First, the attorney must
prove a theory of liability--a theory, whether a violation of common
law or statutory law, that imposes a duty to act or not act on the
defendant sued. And second, the attorney must prove damages, however
calculated.
In the tobacco lawsuit filed by the State of Texas, the State
proved damages by estimating the amount of money that the State expends
on health care costs involving tobacco-related illnesses. And what more
logical place to seek information on the costs incurred by the State
than by examining expenses incurred under the State's largest health
care program--the Medicaid program. But that was not the only component
in calculating the costs of health care incurred by the State. The
State also examined costs incurred in providing health care to the
indigent, to persons in jails and prisons, and to persons receiving
care in public hospitals, none of which are part of the Medicaid
program.
Moreover, in alleging liability, the State never claimed a
violation of or sought recovery under the State's Medicaid third-party
liability recovery program. As we have seen, the State of Texas alleged
violations of or asserted claims under federal and state statutes and
federal and state common law under 15 different causes of action and
sought 20 specific items of relief--and not one cited or even mentioned
state or federal Medicaid provisions.
Thus, as a matter of law, the federal government is not entitled to
lay claim to any of the money received by the State of Texas under its
settlement agreement with the tobacco companies.
the uses to which the money received by the state of texas will be
dedicated
I've addressed the legal issues involved. Now let me address the
public policy issues. Any attempt by the federal government to dictate
to the states how the tobacco money must be spent rests, in part, on
the paternalistic notion that the federal government knows better than
the state does what the health care needs of those states are. But each
state's needs are different and each state should decide just how its
money should be spent.
The State of Texas will receive an estimated $17.3 billion during
the next 25 years by virtue of its settlement with the tobacco
companies and all of the money that the State has received so far has
been earmarked for health-related expenditure, either in the form of
direct reimbursements to political subdivision providing health care
and to health education facilities or in the form of the creation of
permanent trust funds, the income from which will be used for public
health and health education, including:
$2.3 billion was been directly set aside for counties and hospital
districts to compensate them for unreimbursed health care costs. First,
there will be direct disbursements of money--$450,000,000 in total--
during this year and the following two years to reimburse counties and
hospital districts for unreimbursed health care costs they incur
providing health care to indigents, to persons in jail, and to persons
in prison. The remaining approximately $1.8 billion will be placed in a
permanent trust fund created by law, the earnings from which will, in
perpetuity, be used to reimburse the counties and hospital districts.
During the next two years, the legislature proposes to disburse
$881 million to fund, in conjunction with the federal government, a
children's health insurance program; a state-wide tobacco pilot program
for anti-smoking program directed at children; and the creation of 11
different permanent endowments at 11 public institutions, the income
from which will support research and other programs that benefit public
health, the creation and operation of a children's cancer center, and
the creation of an institute for border health. Specifically, the
proposed expenditures include:
1. $151 million or other such amounts as needed for the purpose of
providing funding, in conjunction with the federal government, for the
Children's Health Insurance Program pursuant to Title XXI of the Social
Security Act;
2. $200 million to fund tobacco pilot program for the purpose of
supporting smoking cessation program, enforcement of juvenile smoking
laws, counter-marketing promotional efforts directed toward youth,
general anti-tobacco educational programs, and other similar
activities;
3. $200 million to create an endowment for the benefit of the
University of Texas Health Science Center at San Antonio for the
purpose of establishing, maintaining, and operating a children's cancer
center;
4. $100 million to the University of Texas M. D. Anderson Cancer
Center in Houston to create an endowment fund for research and other
programs that benefit public health;
5. $50 million to the Texas Tech University Health Science Center
and the University of Texas at El Paso to create an endowment fund for
research and other programs, including the establishment and operation
of an institute for border health;
6. $50 million to the University of Texas Southwestern Medical
Center at Dallas to create an endowment fund for research and other
programs that benefit the public health;
7. $25 million to the University of Texas Medical Branch at
Galveston to create an endowment for research and other programs that
benefit the public health;
8. $25 million to the University of Texas Health Science Center at
Houston to create an endowment fund for research and other programs
that benefit the public health;
9. $25 million to the University of Texas at Tyler to create an
endowment fund for research and other programs to benefit the public
health;
10. $25 million to Texas A&M University Health Science Center to
create an endowment fund for research and other programs that benefit
the public health;
11. $25 million to the University of North Texas Health Science
Center at Fort Worth to create an endowment fund for research and other
programs that benefit the public health;
12. $5 million to the Regional Academic Health Center to create an
endowment fund for research and other programs that benefit the public
health.
And finally, the memorandum of understanding calls for the creation
of four separate permanent trust funds, the earnings of which will be
used for the following: 1. Tobacco education and enforcement; 2.
Children and public health; 3. Emergency medical services and trauma
care; and 4. Rural health facility capital improvements.
the little red hen
The recoupment claims of the federal government, for funds that
they played no role in obtaining, remind me of the children's story
about the Little Red Hen. You remember: the little red hen asked the
cat, the rat, and the pig, to help her plant the wheat, harvest it
after it had grown, grind it into flour, and finally bake it into
bread. But even though they were unwilling to help with the hard work,
all of the little red hen's neighbors were willing to enjoy the fruits
of her labor.
Now, the little red hen in this instance is the states, who asked
for and received no help from the federal government when it took on
the tobacco industry. But now, after the risks have been taken by the
state, after the work has been done, the federal government is like the
cat, the rat, and the pig--all of whom wanted to enjoy the benefits of
someone else's labor.
In summary, Senators: Its not fair, it's not the law, and this
committee ought to reject it.
STATEMENT OF HON. TOM MILLER, ATTORNEY GENERAL OF IOWA
Senator Specter. Our next witness is the Honorable Tom
Miller, Attorney General of Iowa. He served in that position
from 1979 to 1991 and again since 1995; former city attorney
and private practitioner. Welcome, Attorney General Miller. We
look forward to your testimony.
Mr. Miller. Thank you, Senator Specter and Senator
Hutchison, for having this hearing and for inviting me. What I
want to do is briefly describe the Iowa hearings, briefly talk
about first principles, talk about how we want to spend the
money in Iowa, at least I hope we spend the money in Iowa, and
then summarize.
In Iowa we brought a common law, a series of common law
claims for the Medicaid money. We also brought a Consumer Fraud
Act claim. We felt that the Consumer Fraud Act claim was the
stronger one of the two, and indeed the court rulings bore that
out.
I would mention, however, that to the extent we prevail on
consumer fraud there is some obligation of one type or another
to spend that money either returning it to individual smokers,
which would be impossible, or spending it on tobacco
prevention. So tobacco prevention really is tied to the
consumer fraud claim.
We brought a State RICO claim. We brought a claim
concerning nuisance. And we were looking for a series of fines.
So we tried to hit a number of aspects in our lawsuit. The one
that looked to be the most successful would have been consumer
fraud.
Whenever we deal with these issues, particularly if they
are complex or difficult or controversial, we always go back to
the first principles of why we did this in the first place. We
did it for two reasons, brought these lawsuits. The first
reason for many of us, including myself, were the reasons that
you alluded to a few minutes ago, Senator Specter: 400,000
Americans dying each year from tobacco-related disease, 5,000
Iowans, 3,000 kids starting every day, 1,000 of those will die
from tobacco-related disease. That is the main reason that we
got in the lawsuits. That is the main reason I think we are
here today.
We got in the lawsuits, too, for the money. The money was
considerable and important to us, but in the whole scheme of
things secondary.
In Iowa, what I have proposed and our Governor, Tom
Vilsack, has agreed in principle to these proposals, although
he has not signed onto the dollar amounts, we propose to spend
each year $17.7 million of the recovery on tobacco prevention
type programs, about $8.5 million on school-based programs,
cessation, research, local and community programs, about $6.5
million on public education, including TV and media ads, $2
million on enforcement, and one-half million on evaluation,
what is working and what is not working.
We are at the point where our legislature is coming down
towards the end. Decisions have to be made. It is very, very
important to our State that you all make the decision on what
happens to this money that is claimed by the Federal
Government.
Senator Hutchison, we are deeply indebted for you to take
the leadership on this issue and, as we discussed this morning,
bring about sort of a coup on the Senate Appropriations
Committee to get us to where we are. We are deeply indebted to
you.
I also took heart from the witness from the administration
when he indicated that they are willing to compromise on this.
They have had their set of priorities where they want the State
money to be spent. As they indicate that there is movement to
compromise on that, I would hope that there is some compromise
resolution, because what I would hate to see happen is for the
Congress and the administration to continue to fight on this
issue and not reach resolution.
prepared statement
In that case, the Governor of Iowa, the Attorney General of
Iowa, the legislature in Iowa, and all Iowans lose, because we
cannot spend that money, and we would spend it, I think, in an
intelligent way.
I just would encourage some sort of compromise to get this
resolved and have us do our good works in the State. Thank you.
[The statement follows:]
Prepared Statement of Tom Miller
I appreciate the opportunity to testify before this subcommittee on
an issue of great importance to my state and the nation.
My message today is simple. When leaders in Washington and in state
capitols discuss tobacco issues (including today's issue of federal
recoupment) the focus should always remain on the key public policy
goal--reducing the death and suffering caused by tobacco usage. Tobacco
is the number one preventable cause of death in the United States. The
statistics are staggering--420,000 Americans, including 5000 Iowans,
die yearly from smoking. In the relatively small state of Iowa,
approximately 12,000 Iowa kids become new daily smokers each year and
about 4,000 of these will die from tobacco caused disease.
The State of Iowa has been in the fight against the tobacco
industry for some time. On November 27, 1996, Iowa became one of the
earlier states to file a lawsuit against the tobacco companies. Our
lawsuit contained several causes of action. Not only did it include a
claim for reimbursement of Medicaid costs incurred as a result of
tobacco related illnesses, but strong claims under the Iowa Consumer
Fraud Act, common law nuisance and the new Iowa law concerning ongoing
criminal conduct.
Since the settlement agreement was signed on November 23, 1998,
attention in Iowa, like all states, has turned to how the settlement
money should be expended. On February 18, 1999, I, along with Tobacco
Free Iowa (a state-wide tobacco control coalition) proposed that $17.7
million of the settlement money be spent on a Comprehensive Iowa Plan
for Tobacco Prevention and Control. I was joined at the announcement by
Governor Tom Vilsack who pledged to support an effective tobacco
control program in our state. Leaders of both parties in the Iowa
Legislature also have indicated a willingness to support efforts to
reduce youth tobacco use.
The Comprehensive Iowa Plan for Tobacco Prevention and Control is
based on recommendations of the Centers for Disease Control and input
from tobacco control advocates in Iowa. The plan has five components:
The first component will support state and local programs to reduce
tobacco use, including school programs, cessation programs, research,
local partnerships and community programs, and educational programs.
The second component is sponsorship and support of public education
through tobacco-free media messages on TV, radio, and other media, and
special events and promotions. The third component is strengthening of
enforcement of tobacco control laws by local law enforcement and
creating a tobacco control unit in the Attorney General's Office. The
fourth component is the ongoing monitoring, assessment, and evaluation
of the plan.
Based on the experience of other states (notably California and
Massachusetts, and more recently Oregon), I believe this plan can have
a real impact in reducing the prevalence of teen smoking in Iowa.
The issue in front of this subcommittee today, of course, is
whether the federal government should try to recoup part of settlement
recovery. I strongly urge the Congress to allow states to keep all of
money. This is a fair and just result. The states took the risks,
invested the time, money, and talent, and brought these lawsuits to a
successful resolution. The states should receive the rewards.
I also urge the Congress and the administration to act in an
expeditious manner. Delay on this matter only adds uncertainty and
confusion. This issue has been before the Congress and the
Administration for over one and one-half years. There was an
opportunity to resolve the Medicaid recoupment question as part of the
budget bill last year--the Congress and the Administration failed to do
so. In Iowa, the Governor and the Legislature want to appropriate the
money in a responsible way that benefits our citizens. They cannot do
so until you and the President act.
I thank you for the opportunity to testify today.
tobacco funds
Senator Specter. Thank you very much, Attorney General
Miller.
With only 2 of us here, I think we will set the clock at 10
minutes and see how that goes.
We have just received a letter from the Secretary of Health
and Human Services, Donna Shalala--it actually arrived shortly
after noon, 12:03--expressing the Secretary's strong opposition
to the provisions approved by the Senate Appropriations
Committee, a good bit tougher in tone--and we will make this
available to you--than the testimony which was given earlier
today by Deputy Administrator Hash, whereas I note the prepared
text suggests that the States keep 100 percent of the tobacco
funds in exchange for a commitment to use a portion of the
proceeds to reduce youth smoking, protect tobacco farmers,
improve public health, and assist children.
As I listen to the testimony, especially by Attorney
General Cornyn and Attorney General Miller, and I think by
Attorney General Fisher, too, that the Federal Government has
no claim to the funds, so in a sense the legislation would be
unnecessary, although there might be considerable controversy.
So I think there is an interest, as General Miller expressed,
to resolve it so that plans can be made and so that we do not
get into litigation between the States and the Federal
Government, which would be both unseemly and very, very costly
and time-consuming.
Everyone has talked about using the funds for smoking
prevention and for medical purposes. There have been a variety
of percentages tossed around by a number of Senators as to how
much ought to be allocated for those purposes. But from what I
hear, all the money, at least under the memorandum of intent
which Attorney General Miller talked about and the programs
that General Fisher is talking about, Mr. Cornyn as well--and I
would be interested in your views on this, too, Governor
Patton, because I did not hear your testimony; I came in right
at the tail end--if the money is all to be spent along those
lines, what would the objection be to having that as a
condition, that all the funds be spent in the lines which you
gentlemen have testified to?
What do you think, Attorney General Miller?
Mr. Miller. Well, like I said, I feel very strongly that
you all should compromise on this and work it out. One possible
area of compromise is to say that some of this money really was
through the consumer remedy and that that money in effect
should be spent on tobacco prevention. What that percentage is,
I do not know what the magic percentage is.
But I think if there is some compromise the bulk of the
money should be free and clear, that there should be no
conditions on the money. Part of it perhaps should be on
tobacco prevention to dovetail with the consumer remedy that
was in most of our lawsuits and was very, very much part of
ours.
I think that if there is any condition on part of the
money, there should not be a lot of regulation. There has been
some talk about States certifying that they have spent the
money in the category. Maybe that should work. If there is a
tobacco prevention category, States should have great freedom
to use it in whatever ways that they want in tobacco
prevention, consistent with the concept of laboratories of
democracy.
But I view that as some sort of compromise that maybe you
all could work towards at some point.
Senator Specter. Well, I think your point about the absence
of regulation is a good point and one that I would subscribe
to. I do not see having a limitation only to a portion of
consumer fraud, which would then implicate tobacco prevention.
Attorney General Shalala thinks she has a claim to this on
Medicaid. I do not know what the quality of the case is. I know
it is one which ought not to be litigated. But if there is a
claim on Medicaid, then that would support a conclusion that
some of the funds ought to be used for health purposes.
Governor Patton, what is your thinking on this?
Governor Patton. Well, there is a fundamental principle
involved. As the attorneys general have stated and we the
governors reiterate, this is the State funds that have been
recovered for a broad variety of things like many other things
that we may recover money for, and it really is a decision that
should be made by the States.
I think getting down to micromanagement in the area of like
smoker cessation just illustrates the lack of wisdom for the
Federal Government to make these decisions. These gentlemen
evidently paid a great deal of attention to smoker cessation
programs in the negotiations. For one thing, the cost of the
program, 45 cents a pack, is in itself a vehicle of reducing
consumption of cigarette products.
The prohibition against many, many forms of advertisement--
another smoker cessation program. The allocation of almost $2
billion specifically for smoker cessation programs illustrates
that the attorneys general addressed this subject as a part of
this settlement. On the one side they negotiated some smoker
cessation programs and on the other side they negotiated some
compensation for damages to various degrees.
So then for the Federal Government to come in and say,
well, what the attorneys general negotiated is not adequate and
we need to insist on a certain portion of the States' money
going for this, I think is incorrect. So I think that--I think
that as a practical matter most of the money will end up being
spent in the areas that is generally being discussed both in
the State and the Federal level, as my comments related.
But as a matter of principle, I think that the Federal
Government should clarify the intent of the existing
legislation because, as these gentlemen have said, we have a
very strong position the Federal Government does not have this
authority. If the administration is going to continue to
insist, as they indicate that they have, the effect of Federal
Government legislation will just eliminate protracted
litigation, which will delay this money being effectively used
for the benefit of the people of the country.
Senator Specter. Well, Governor Patton, I do not agree with
you as a matter of principle that the States ought to have full
sway to make the decision. Secretary Shalala in her letter
points out that in 1998 States recovered some $642 million from
third party claims and the Federal share was some $400 million.
You may articulate as a practical matter that the funds
will be used for cessation and public health purposes, but they
may not be. I am not talking about micromanagement, but,
speaking only for myself, I am not prepared to turn over all
the money carte blanche to the States.
There just simply needs to be assurance that the moneys
will not be used for some other important State purpose. But I
am not at all talking about micromanagement. Suppose the
conditions were that there would be on tobacco prevention just
as Attorney General Fisher outlines it, and school education
and public education and insurance coverage for children who
cannot afford it, but that will be given related to damages
caused by tobacco, and without any regulations, and something
along the certification line which would be minimally
intrusive? Attorney General Fisher, what is your thought about
a proposal like that?
Mr. Fisher. Mr. Chairman, I think the problem with a
proposal like that is that not one shape does fit all. You have
50 States across this country and the District of Columbia and
territories who have shared or will share in this settlement or
their four individual State settlements.
I think you have to go back to the fundamental principle of
whose moneys are we talking about. I believe these moneys are
clearly moneys which were obtained by the States as a result of
their State lawsuits. I am willing to admit, as I have in my
testimony, that part of our suit did seek recovery of some
Medicaid funds. There is no question about that. But we did
have other counts contained therein.
But there is a real difficult--I think it is going to be
extremely difficult for the Congress and for the Federal
Government to try to ascertain what that set percentage is
across the board. When you try to put some categorical
earmarking on the funds, I believe it presents some real
difficulties in the various States shaping an appropriate
program.
Senator Specter. Well, suppose there are no categorical
amounts, that the whole fund is left to the States, but with
the kind of broad outlines that you have articulated that it is
your view the moneys ought to be spent for.
Mr. Fisher. The one point that I raised in my testimony, I
am concerned that--let us say that the resolution was that 15
percent of the total dollars was to be spent on a laundry list
of funds.
Senator Specter. I was thinking something more like 100
percent.
Mr. Fisher. Well, I would like to stay between 5 and 15
percent. But just so whatever the percentage was.
Senator Specter. Well, I am not going to go above 100
percent, no matter what you say. [Laughter.]
Mr. Fisher. And I will not go below zero, I promise.
But whatever the percentage is, I think the potential then
is that when we are working and as the governor and I are
working back in Pennsylvania to try to convince the
legislature--and I think we have made real progress--that we
should spend practically all of our funds on public health and
tobacco cessation programs, that by earmarking one percentage
for a specific category you may give many legislators a signal
that then they can spend the rest of the moneys for such things
as tax reduction and filling potholes and other projects which
really were not the intent of what I filed my suit for and my
colleagues filed suit for.
I think that is one of the real dangers in the Federal
Government's stepping in and implementing a mandate that I do
not believe is necessary for the States to carry out
comprehensive programs.
Senator Specter. Well, my red light is on, Attorney General
Cornyn. So I am going to leave you to Senator Hutchison, and I
hope she does pursue whether the Federal Government is the cat,
the rat, or the pig.
Senator Hutchison.
Senator Hutchison. I think General Cornyn and I would
probably agree on the answer, but neither of us are going to
probably share that with you today.
Let me say first I do thank the chairman for holding this
hearing and for having this panel, because I think we are
getting the views of the people who are out there on the front
line dealing with this issue and many of the ones who were
creative enough to go forward on this settlement.
I have a question first for General Cornyn, and that is on
the 25 percent ``set-aside'' for tobacco cessation programs.
You mentioned that you thought probably Texas would be spending
maybe $200 million out of the $2 billion-some, which would not
meet the 25 percent category probably. But regardless of that,
it has been suggested when you are talking about not having
strings and trying to do it in a way that is not obtrusive on
State authority that Secretary Shalala should have the ability
to veto Medicaid money, the State's portion, if she finds that
the State has failed to meet her definition of the 25 percent
in the categories which she has mentioned--reduce youth
smoking, protect tobacco farmers, assist children, and promote
public health--and if she feels that that 25 percent does not
meet those stated purposes, that she would withhold the money.
Now, I would like to ask you, what would that do to a
State's budgeting process?
Mr. Cornyn. Well, of course the impact would be on the most
vulnerable portion of our population, the beneficiaries of the
Medicaid program. I think just the lack of wisdom of that I
would like to think is obvious.
Also, under the Texas settlement, which totaled $17.3
billion plus attorney's fees, that would be $4.3 billion that
is mandated by the Federal Government to be spent on smoking
cessation programs. As you alluded to earlier----
Senator Hutchison. You would have a fancy program.
Mr. Cornyn [continuing]. It would be quite a cottage
industry on providing smoking cessation programs in the State.
As I said, under the memorandum of understanding and I
believe under the appropriation bill that has already been
introduced in the Texas legislature there is a provision made
for a substantial amount, $200 million, for smoking cessation
programs in Texas.
So I think you are a better expert than I am in terms of
its budgetary impact, but I think it is fair to conclude it
would have a disruptive impact on the State's ability to plan
how to spend this money in the manner it deems most
appropriate.
Senator Hutchison. Let me ask another question. In Donna
Shalala's letter, which I just received this morning as well,
it states that perhaps there could be legislation, Federal
legislation that would resolve the Federal claim, the Medicaid
claim, in exchange for a commitment by the States to use that
portion of the settlement for shared priorities--reduce youth
smoking, protect tobacco farmers, assist children, and promote
public health.
My question to the attorneys general, any of whom would
like to answer, is if we could pass a law that would require
the 25 percent, why would we not be able to pass a law that
would allow the Federal Government to make a claim under
Medicaid and change the present statutory mechanism?
Mr. Cornyn. Well, the concern that jumps out at me,
Senator, is a retroactivity problem under the United States
Constitution. In the case of the Texas settlement, the
settlement was consummated in January of 1998 and now to pass a
law, which ordinarily should operate prospectively, to operate
retroactively to pick up and dictate the terms of how that
money is spent I think creates some very serious constitutional
questions.
Senator Hutchison. I was really referring to the Federal
Government's ability, the Congress, to pass a law saying,
changing the statutory language that precludes the Federal
Government from being part of a settlement or an overpayment.
In fact, let me just go back to the point that, is not the
language upon which HCFA is relying that--is it not usually
used for overpayments or mistakes in billing?
Is there a record of it having been used for other types of
lawsuit results in the past? Or is this a new and creative
interpretation? Then following that, if that is the case, could
we not change the law?
Mr. Cornyn. I think this is a novel application of the
third party recovery provisions under the Social Security Act,
and I know of no precedent. In fact, my review of the law shows
that this would be the first time that this type of thing has
happened.
As to changing the law for future prospective lawsuits by
the Federal Government against the tobacco industry to recover
for their share of the Medicaid costs, I think that is
certainly within the power of the Federal Government to do,
which would authorize that kind of litigation.
Senator Hutchison. Yes, General Fisher?
Mr. Fisher. Senator Hutchison, I would agree with General
Cornyn on that, that I think that Congress could change the law
however they say fit in that regard.
But I also direct this subcommittee to the fact that there
is currently a law on the books, which is the Federal Medical
Care Recovery Act, which we believe--and our counsel has
provided us a legal memorandum--which we believe if the Federal
Government chose to exercise their rights to recover their
Federal share of Medicaid, that they could pursue that remedy
under that existing act.
But even if someone disagreed with this interpretation and
felt that you needed additional Federal legislation, I believe
you could change the Social Security Act to make it clear that
the Federal Government did have a right to go after the
industry for that balance that in essence was left on the
table.
Remember, there is a difference between $206 billion and
$368 billion, and that $368 billion--that difference is the
amount of money which otherwise would have gone to the Federal
had the original June 20th resolution been enacted.
Senator Hutchison. Then you agree with General Cornyn's
interpretation of the present HCFA statute, that it is usually
used for overbilling and mistakes in billing?
Mr. Fisher. Yes, I do concur with that.
Senator Hutchison. General Miller?
Mr. Miller. I would just, add one other category where it
is commonly used is on personal injury actions, where someone
is in an automobile accident, Medicaid has paid for the medical
costs, and then routinely the States secure part of that, that
judgment or settlement, for the Medicaid expenditures and then
that is shared with the Federal Government. That is where it is
commonly done.
Senator Hutchison. It is a cost related to that particular
type of lawsuit.
Mr. Miller. Right.
Senator Hutchison. Rather than a general sort of
scattershot, which is what they are claiming now, from what I
see.
Mr. Miller. Yes; they are claiming that this is analogous
to those kinds of accidents.
I would agree with my colleague from Texas, though, that to
try and do it now sort of looking back would be difficult. The
tobacco companies would argue that it is unfair, perhaps
unconstitutional, for them to pay the States and the Federal
Government if you authorized a Federal action for the same sort
of thing.
Senator Hutchison. You are saying Medicare is the better
approach for the Federal Government than Medicaid?
Mr. Miller. Very much so.
Senator Hutchison. Governor Patton, you probably could
speak to the issue of what it does to a budgetary process if
the Federal Government arbitrarily says 25 percent has to be
spent on certain types of programs. What would that do to your
budgeting capabilities in Kentucky?
Governor Patton. Well, until this issue is settled I would
not recommend the expenditure of any of the funds, because it
would be irresponsible to do so. Our legislature does not meet
until next year, so we are really not up against the plow like
some of the other States are. But we do want to have this issue
resolved in a way that will let us begin, very quickly to begin
to think about the use of these funds.
Senator Hutchison. Would the other States like to talk
about whether money is being withheld? I understood that some
are putting it into escrow until this matter is settled. So it
is clearly something that we need to address and clarify, from
the things that I have heard.
Are any of you others having experiences of this type?
Mr. Miller. Exactly. We are certainly in that situation.
All of the legislative leaders and the governor and I think it
would be irresponsible to spend the money with the Federal
claim laying out there. So we are really paralyzed as to that
amount. So it is extremely important that the Congress and the
administration act as quickly as possible on this.
Senator Hutchison. Do you think you would have
clarification if the Secretary of Health and Human Services
were able to essentially withhold your Medicaid money in the
future if her interpretation of your use of the funds and yours
differed?
Mr. Fisher. Senator, I believe if that occurred, if there
was no action by the Congress and there was even the threat of
the withholding of the Medicaid funds, I would anticipate that
there would probably be a lawsuit, which would be an
unfortunate result because that would just be a further
dissipation of the resources.
But I concur with Attorney General Miller that we believe
that we need a resolution of this issue as quickly as possible.
Senator Hutchison. Thank you, all of you, for sharing your
particular situation. I do hope we can act quickly in the
supplemental appropriations bill. I hope the Federal Government
will pursue its own avenues through Medicare. They have that
option. It is a bigger, I think more appropriate, area of
interest than Medicaid.
I most of all hope that we do not create another Federal
string of regulations and bureaucracies that would cause the
States to do as you have just suggested they might, and that is
to have to wait or hold money in escrow or not have the freedom
to spend it. I do trust in the States that, even if they do not
meet the exact specific test--for instance, Kentucky is going
to help tobacco farmers, but Texas is not; Texas is going to
use it for health care; Michigan is going to use it for
scholarships.
I do not think that we are going to get far afield here,
but I do think that it is the States' money and I do not think
they need to have strings that turn into regulations that turn
into vetoes of Medicaid funds. We have seen this path before
and I hope we can avoid it on this issue in the future.
Thank you, and thank you, Mr. Chairman.
Senator Specter. Thank you, Senator Hutchison.
I think there is agreement that--we do not need the lights.
We are about to move on to the next panel, but just a few
concluding comments. I think there is agreement that we ought
to get it resolved so that you can have certainty as to how to
proceed. I think that is plain.
The statute provides that the States do have the
responsibility for initiating the litigation, States or local
agency administering such plans shall take, et cetera, the
legal action. So I think that in the States undertaking the
matter it was, at least by the Federal statute, the States'
obligation.
The statute further provides that ``the pro rata share to
which the United States is equitably entitled, as determined by
the Secretary.'' So that, absent some change in law, the
Secretary can make that determination.
I share the frustration of the States on mandates, unfunded
mandates--we are trying to stop those--on the regulatory
system, and on a lot of strings which are attached. I am not
sure exactly what is going to happen on the floor of the U.S.
Senate, but I have a sense that there will be a majority which
will favor some sort of general guidance as to how the funds
are going to be used. I do not know what that percentage is
going to be.
When you talk about an action on behalf of consumers for
consumer fraud, as Attorney General Miller outlines, there may
be an obligation or there may be some claim of a class to
enforce proceeds to go in a certain direction. I do not know,
and I would like to see litigation avoided.
But if you talk about the broad categories and you talk
about a simple certification, I do not think we are in an area
where there is over-Federal intrusion. But what I would request
that each of you gentlemen do is to provide us with a
generalized set of standards that you think would be easiest
for you to live with, without prejudice. Not that you agree to
them, but instead of having us work out a delineation or an
enumeration, to have you work it out, so that the funds are not
used for some totally collateral purpose.
I do not want to become involved in an enumeration of some
actions in some States, fortunately not Iowa, Kentucky,
Pennsylvania, or Texas, where there has been a demonstrated
need for some sort of general guidelines. But we do want to
work with you. We do want to get it resolved.
We do want to thank you for what you have done, and this
hearing is designed to shed some light on the subject, to have
a better understanding by us of your points of view and to try
to work it out.
We thank you very much for coming.
Senator Hutchison. Thank you.
Senator Specter. We move now to the third panel.
[Pause.]
STATEMENT OF MATTHEW MYERS, EXECUTIVE VICE PRESIDENT,
NATIONAL CENTER FOR TOBACCO-FREE KIDS
Senator Specter. We now move to our third panel, Mr.
Matthew Myers, executive vice president and general counsel of
the National Center for Tobacco-Free Kids. The center is a
privately funded organization established to focus attention on
reducing tobacco use among children.
Welcome, Mr. Myers. We appreciate your coming and look
forward to your testimony.
Mr. Myers. Mr. Chairman, thank you for holding the hearing.
I am delighted to be here. This hearing does address very
important issues about what the Congress should do with regard
to the Federal share of the funds the States are due to receive
from the November 1998 settlement of the cases they brought
against the tobacco industry.
I have four basic points and I would like to make them
briefly. The first is the States and the State attorneys
general deserve enormous credit. Without their efforts, we
would not have the opportunity now before us today. If, but
only if, we use the money wisely, we have the opportunity to
make major advances in reducing the number of our children who
become addicted to tobacco.
However, given the Government's Federal role in the
Medicaid Program, the fact that the States took the lead in
suing the tobacco companies does not alter the core legal
premise that the Federal Government has a legitimate claim to a
significant portion of the funds to be paid by the tobacco
companies. At the heart of many of these cases and indeed the
catalyst for the early cases was a claim that the State had
spent millions and in some cases billions of dollars in
Medicaid funds treating tobacco-caused disease. I do not need
to tell this committee that the Medicaid Program is a Federal-
State partnership in which the Federal Government pays over 50
percent of every dollar spent.
Even in those State-initiated cases--and I think this is
very important--where less emphasis was placed on the
recoupment of Medicaid dollars, those cases which did not cite
the Medicaid statute at all, or in those very few cases where a
Medicaid claim was made and was cut back by the courts, the
Medicaid Program is implicated.
Now, why do I say that? In return for the tobacco
industry's agreement to the terms of this particular
settlement, the States agreed to accept the tobacco companies'
payments as full payment for any claims which the State
asserted or could have asserted for costs incurred in treating
tobacco-caused disease. That includes the Medicaid claims. What
that means is that by the terms of the settlements, even when
they had not referred to Medicaid, the States accepted the
payments in return for full payment of any possible Medicaid
claim the States or the Federal Government might have had,
past, present, or future.
Senator Hutchison talked about the possibility of passing a
law giving the Federal Government the right to sue under
Medicaid. Well, unfortunately, at least as it relates to
tobacco it is too late, because the States in their settlement
have already waived any Federal claim as well as their own
claim to these dollars.
The hard reality is this State settlement is all of the
money either the Federal Government or the State government is
going to receive as a result of the billions of dollars of
Medicaid payments that have been made or that in the future
will be made. Thus, we reach the same conclusion that you do,
Senator Specter: The Federal Government has a legitimate claim
to a significant portion of the moneys.
However, having reached that claim, we also think that this
should be an area in which we do not fight. We support the
States' request to have the money go back, provided that a
significant portion of the money is actually used for the
purposes for which the cases were brought.
Senator Specter. Significant portion? Why not all of it?
Mr. Myers. Well, to the extent that we could avoid getting
into a fight with the States about how much of the money is
Federal money versus State money, we would like to do so in the
nature of a compromise. We believe that, based on the data
supplied by the Centers for Disease Control and others, that
you need at least 20 to 25 percent of the overall money, and it
will vary somewhat from State to State of course, in order to
fund comprehensive, effective tobacco control programs.
Indeed, during the negotiations----
Senator Specter. Tobacco control, but how about medical----
Mr. Myers. Tobacco prevention programs. Well, let me limit
it to that and then return to that question, because I think it
is a very important point that you make.
Indeed, during the negotiations it has been widely reported
that some of the smaller States, the Dakotas, argued that their
State ought to receive an increased proportion of the moneys
precisely because there was a minimum amount of money that was
necessary to fund a meaningful tobacco prevention and control
program. That is why they got the money.
Now, there are some States, as you heard today, that are
proposing to spend the money on precisely the sort of programs
about which we are talking about. Iowa, Washington, New Jersey
are leaders in this. But unfortunately there are a substantial
number of States that are talking about spending these dollars
on everything but programs to reduce tobacco use or in some
cases on public health.
We would of course share your desire to see that money that
was paid by the tobacco companies as a result of the death and
disease that they have caused, are causing, and will cause be
used to improve the public health. So we do agree on that
point, Senator Specter, 100 percent.
For us it is very important to realize that the decision
that the Congress makes about whether to ensure that money is
spent on public health and tobacco prevention will actually
affect the amount of money that Congress and the Federal
Government pays on Medicaid programs in the future. As a result
of the leadership of some States, we now know that effective
programs to prevent tobacco use and to help smokers quit--we
can dramatically reduce the death toll and the disease and the
Medicaid costs from tobacco prevention programs.
Let me cite you a few examples, because I think it is very
important to understand. In 1996, Oregon initiated the type of
comprehensive tobacco prevention program we are talking about.
In a 2-year period they reduced tobacco use in their State by
11.3 percent, dramatically higher than the national average.
In 1993, Massachusetts initiated a comprehensive tobacco
prevention program, and there are three facts about that
program that are critical. One is during that period of time
they reduced smoking in their State by over 30 percent, over 3
times the national average.
Second, while smoking rates skyrocketed among children
elsewhere, they did not in Massachusetts and, indeed, they even
went down among eighth graders.
Third, in the short term Massachusetts succeeded in cutting
smoking among pregnant women by 50 percent. As a direct result
of that, Massachusetts encountered a dramatically lower rate of
premature births.
California saw the same thing after they initiated their
tobacco prevention program, and California has estimated that
in the 6 years their program has been in existence they have
saved 10,800 women from suffering from a premature birth. If
that data is correct, and there is every reason to believe that
it is, California's tobacco prevention program has paid for
itself already.
In other words, we think it is vitally important for
Congress to step in and provide some guidance to the States,
rather than for us all to fight about what proportion of this
money is Medicaid money and what should be done with it. We
know that if a significant percentage of the money is spent on
programs to prevent tobacco use we can have a significant
impact on the number of kids who become addicted, we can have
over the long run a significant impact on disease rates of
diseases like lung cancer, and in the short run we can have a
dramatic impact on smoking and the health of pregnant women. We
also know that over the long run we can save the Medicaid
program, Federal and State, billions and billions of dollars.
prepared statement
We think this is an issue in which the Federal Government
has a direct financial interest and a direct policy interest.
We support the positions that you took earlier to ensure that
guidance is given to the States. If the State cases that were
brought, as General Miller said, with the primary goal of
reducing tobacco use and the amount of money we spend on
tobacco-caused disease is to be met, it is essential that
Congress express its views and ensure that at least a
significant portion of the money be used for these purposes.
Thank you.
[The statement follows:]
Prepared Statement of Matthew Myers
Good morning Mr. Chairman, and members of the committee. My name is
Matthew Myers. I am the Executive Vice President and General Counsel of
the National Center for Tobacco-Free Kids, a national organization
created to protect children from tobacco by raising awareness that
tobacco use is a pediatric disease, by changing public policies to
limit the marketing and sales of tobacco to children, by altering the
environment in which tobacco use and tobacco policy decisions are made,
and by actively countering the tobacco industry and the influence of
its special interest. The National Center is a membership organization
with over 125 members, including many of this nation's major public
health organizations and other groups concerned about the health and
welfare of our nation's children.
Mr. Chairman, I would like to thank you for holding this hearing to
focus attention on what the Congress should do with regard to the
federal share of the funds the states are due to receive from the
November 1998 settlement of the cases they brought against the major
tobacco companies. The answer to this important question will have an
impact on federal Medicaid policy, the amount of money available to the
federal government for Medicaid and other purposes, the amount of money
the states retain as a result of the tobacco settlement, and whether
the tobacco settlement actually results in the funding of programs in
every state in the nation to reduce tobacco use, particularly among
children.
major conclusions
Before we go into more detail, I would like to summarize the
National Center's key points:
(1) The state attorneys deserve enormous credit. Without their
efforts we would not have the opportunity now facing us. They initiated
litigation when no one thought they could win; they used the litigation
to develop a national consensus about the responsibility of the tobacco
companies to reimburse taxpayers for the billions of dollars being
spent to treat tobacco caused disease; and they forced the tobacco
companies to the table. If we use the money from their agreement
wisely, we have an opportunity to make major advances, advances that
would not have otherwise been possible.
(2) Given the federal government's role in the Medicaid program,
the fact that state attorneys general took the lead in suing the
tobacco companies does not alter the conclusion that the federal
government has a legal entitlement to a significant portion of the
funds to be paid by the tobacco companies in the settlement of these
cases.
(3) Despite having reached the conclusion that the federal
government is entitled to a portion of these funds, we support the
states' request that the federal government waive its right to these
funds, provided that the waiver is conditioned on the states spending a
sufficient amount on programs to actually prevent and reduce tobacco
use--at least twenty-five percent of the total the states receive. This
condition is necessary in order to accomplish the purpose for which the
cases were brought and to take the steps necessary to reduce the burden
on the Medicaid system of tobacco caused disease. Without Congressional
action it is now clear that some states will fund programs to prevent
and reduce tobacco use with these funds, but many will not do so.
(4) We support the states' request because a number of states have
already demonstrated what can be accomplished when a state takes the
lead in the fight to reduce tobacco use. There now exists a sound
scientific basis to demonstrate that a multifaceted tobacco prevention
effort at the state and local level, if adequately funded and properly
administered, does reduce tobacco use and can save a significant amount
of money in health care dollars. While state programs do not replace
the need for federal action in certain areas, funding state and local
tobacco prevention and reduction efforts is good health policy and good
fiscal policy.
medicaid and the state tobacco lawsuits
At the heart of many of the state tobacco cases was a claim that
the state had spent millions, and in some cases billions, of dollars in
Medicaid funds treating tobacco caused disease. As this committee is
well aware, the Medicaid program is a federal/state partnership in
which the federal government pays over fifty cents of every dollar
spent. When a state joins the Medicaid program, it agrees that it will
be the entity responsible for taking the steps to recover any funds
paid out through the Medicaid program as the result of the wrong doing
of a third party. The Medicaid program further provides that if a state
succeeds in its efforts to recover these funds, the federal government
is automatically entitled to the portion of the recovery that reflects
the federal government's share of the original payment.
Even in those state initiated cases where less emphasis was put on
the claim for recoupment of Medicaid dollars, those cases which did not
specifically cite the Medicaid program, or those cases where the courts
limited the state's ability to seek Medicaid recoupment, the federal
Medicaid program is impacted by the settlement. Why do we reach this
conclusion? In return for the tobacco industry agreeing to the terms of
the settlement, the states agreed to accept the tobacco companies'
payments as full payment for any claims which the state had asserted or
could have asserted for costs incurred in treating tobacco caused
disease, including those related to the Medicaid program. They also
released the tobacco companies from both the state's and the federal
government's right to seek further recovery of money they will spend on
tobacco caused disease. Since the federal government's Medicaid rights
are dependent on the states, the state settlement cuts off the claims
of the federal government.
The federal government has incurred billions of dollars in Medicaid
costs due to tobacco and will continue to do so. Beyond its share of
the settlement, these are funds it can not now recover. No matter how
these cases are characterized, the settlement directly affects the
federal government's ability to recover reimbursement for past, present
or future payments of federal Medicaid dollars for tobacco caused
disease. Thus, what the Congress does now has an impact on Medicaid
policy and the amount of money that will be available to the federal
treasury. It will also have an impact on whether federal Medicaid
related expenditures for tobacco caused disease increase or decrease in
the future.
If the federal government waives its share of the tobacco
settlement funds, a significant portion of these funds should be
dedicated to reducing tobacco use:
It has been estimated that annually the federal government spends
as much as 7.4 billion dollars through the Medicaid program to pay for
treating individuals with tobacco caused disease. Unless strong action
is taken to reverse current trends these expenditures and the tobacco
problem will only continue to grow. Smoking among high school seniors
in the United States is near a 19-year high. Since 1991 past-month
smoking has increased by 35 percent among 8th graders. Over the past 10
years the number of kids under 18 who become daily smokers each year
has increased by over 70 percent. Nationwide, the Centers for Disease
Control and Prevention has estimated that more than 3,000 kids become
new daily smokers each and every day.
When the states brought these cases they said that they did so in
order to reduce tobacco use, particularly among children. Virtually
every public official involved in bringing and prosecuting these cases
stated repeatedly that the goal of these cases was to fund programs
designed to reduce the number of our children who become addicted to
tobacco and to assist and encourage adults to quit using tobacco. It is
clear that those who negotiated the November 1998 settlement intended
for some of the funds to be used to fund programs to reduce tobacco
use. For example, it has been widely reported that during the
negotiations that led up to the November 1998 settlement, the
representatives of the smaller states in those negotiations asked for
additional funds as part of the settlement based upon the explicit
premise that in a small state there is a minimal amount of money that
is necessary to conduct an effective and meaningful tobacco prevention
program.
The governors and state legislatures in a number of states have
proposed to devote significant resources to protecting kids and
reducing the terrible toll of tobacco. These states will have to do
nothing different if our proposal is adopted. Yet, because the multi-
state settlement makes no provision for how the money will be spent, in
a number of other states there are plans to spend little or none of the
money on programs to reduce tobacco use. In those states it now appears
that funds obtained as the result of the toll of tobacco will be
diverted to purposes which will do nothing to reduce the number of our
children who become addicted to tobacco or to reduce the amount of
money that the government will spend to treat tobacco caused disease in
the future.
investing in tobacco prevention will save lives and money
Virtually everyone agrees upon the essential components of a state
based comprehensive tobacco prevention program. They include: public
education campaigns to deglamourize and discourage tobacco use;
effective school based programs, community based programs, treatment
for those who want to quit, adequate funding for enforcing existing
laws, and funds to evaluate the effectiveness of programs on an ongoing
basis.
There is now substantial scientific evidence to demonstrate that
comprehensive state and local tobacco control programs work and
independent studies from those states that have already initiated
programs support this conclusion. For example, in 1996 Oregon passed an
increase in its excise tax and initiated a comprehensive tobacco
control program. The CDC has now reported that in the 2 years Oregon's
program has been in existence, tobacco use in Oregon dropped by 11.3
percent, an increase far greater than the national average. Of that
increase, the scientific evidence demonstrates that nearly one-half of
the decline was directly related to the newly created tobacco
prevention programs.
Massachusetts initiated a comprehensive tobacco control program in
1993 after the enactment of a statewide initiative that increased its
tobacco excise tax. Between 1992 and 1998 consumption of tobacco
products in Massachusetts declined by over 30 percent, three times the
national average. In addition, Massachusetts did not experience the
dramatic increase in teen smoking that occurred throughout the rest of
the country during this period. Perhaps most critically, while smoking
increased among 8th graders nationally, it actually decreased in
Massachusetts.
The Massachusetts program produced results in another area that
receives far too little focus. As a direct result of the Massachusetts
program, smoking among pregnant women in Massachusetts declined by 47.8
percent during this period, the steepest decline in the nation. The
decline in smoking among pregnant women produced immediate financial
and health results. It resulted in a significant reduction in premature
births and other pregnancy complications among Massachusetts'
population, saving very substantial amounts of money.
In 1989 California increased its excise tax and used the funds to
institute a comprehensive tobacco control program. Subsequently tobacco
use in California dropped by 38 percent, more than twice the national
average. As in Massachusetts, California has avoided the dramatic
increase in teen smoking that has occurred nationally, and smoking
among pregnant women dropped by nearly one half. It has been estimated
that in California alone the tobacco prevention program resulted in
over 10,800 fewer premature births.
As a result of the tobacco settlement in Florida in 1997, Florida
has recently initiated a comprehensive tobacco prevention program. It
is too early in Florida to see actual changes in consumption, but there
has already been documented increased awareness by children of the
health effects of tobacco and changed attitudes among children about
tobacco.
In short the tobacco prevention programs which could be funded by
using a portion of the money the states receive from the settlement of
these lawsuits could save millions of lives and billions of healthcare
dollars. It is about the most cost-effective investment Congress can
make.
conclusion
What the Congress decides to do with the federal portion of the
money paid by the tobacco companies to the states will set a precedent
for the Medicaid program and, as the Congressional Budget Office
recognized, also affects the federal budget. Most importantly from our
standpoint, what the Congress decides on this issue will also directly
affect whether programs are put in place nationwide to reduce tobacco
use among children.
We support the states' request to have the federal government waive
its claims to these funds, but only if the waiver is conditioned on the
states' spending at least 25 percent of the funds to accomplish the
dual goals that prompted these cases--reduce tobacco use, particularly
among children and reduce the burden on the Medicaid system by reducing
tobacco caused disease.
Senator Specter. Mr. Myers, what do you recommend? You have
talked about ``significant'' on a couple of occasions. I
suggested at one point 100 percent and you did not take that
figure. What figure would you insert in your amendment if you
were filing one on the Senate floor?
Mr. Myers. Mr. Chairman----
Senator Specter. I do not want to elevate you too fast
here, but what do you think?
Mr. Myers. I appreciate that.
Senator Specter. Or de-elevate you. I am not sure.
Mr. Myers. Certainly an elevation.
I am here on behalf of an organization that works for the
goal of reducing tobacco use, particularly among children. The
ultimate policy I have expressed also represents the views of
the ENACT coalition, which is a broadly based public health
coalition of groups----
Senator Specter. Are you refusing to answer the question,
Mr. Myers?
Mr. Myers. No, I am about to give you the answer.
Like the American Cancer Society, the American Heart
Association----
Senator Specter. Why do you not start there and then
disclaim.
Mr. Myers. OK. The only area in which I have precise
expertise is the amount of money needed to be spent on programs
to reduce tobacco use, and in that area we believe that at
least 20 to 25 percent of the money must be spent. The
additional amount of money that ought to be spent on programs
for public health purposes is an area that is beyond our
expertise, in which we would be delighted to work with you.
Senator Specter. You said that some States are talking
about other programs for use of this money.
Mr. Myers. Yes, sir.
Senator Specter. What specifically do you have in mind?
Mr. Myers. Well, we can run a broad range of proposals, and
very few States have reached a final conclusion at this
juncture, many of the programs those that we would support and
others are completely different. For example, in Rhode Island
the Governor has proposed to use a substantial portion of the
funds to reduce the car tax, which may or may not be a good
idea, but it is certainly not why the lawsuit was brought.
In a number of other States their proposals are to spend
the money on dealing with educational crises that have been in
existence for a long period of time.
Senator Specter. Education unrelated to smoking?
Mr. Myers. No; just education in general, financing the
school systems.
Senator Specter. Which States are talking about that?
Mr. Myers. In Ohio the Governor has raised that as a major
issue, although there are also major proposals in the
legislature to spend some, a substantial amount of money, on
programs to reduce tobacco use. We do not yet know how that
debate is going to come out.
Senator Specter. Any other purposes that you have heard
about?
Mr. Myers. Besides for education? Yes. The State of
Louisiana, which does not yet have a formal proposal, at one
point talked about using the funds--actually selling the
entitlement to the settlement and then using the funds for debt
reduction. The Governor of New York has also spoken about using
the funds primarily for the purpose of debt reduction.
In at least one western State there has been talk about
using the money to deal with the water crisis or water problems
in that State.
I am not passing judgment on whether those are laudable
goals or not laudable goals. They are simply not the reason
these cases were brought, and if the money is diverted to those
purposes what it means is that the continuing high tobacco use
rates among children will only continue to rise and that we
will have missed an historic opportunity to reduce tobacco use
among children.
Senator Specter. Well, thank you very much, Mr. Myers, for
your testimony. We are going to have to formulate a program for
amendment, because I do intend to offer one. A number of
Senators have talked about it. Senator Harkin has talked about
it, other Senators have talked about it.
But I share your concern about not giving carte blanche to
the States. I do not think it ought to be used for a car tax or
for general debt reduction. You have a very specific problem,
you have a very specific recovery, and I believe that there may
well be a legal right on the part of the citizens who have been
damaged to have these funds used to alleviate the specific
damage.
CONCLUSION OF HEARING
Thank you all very much for being here, that concludes our
hearing. The subcommittee will stand in recess subject to the
call of the Chair.
[Whereupon, at 1:08 p.m., Monday, March 15, the hearing was
concluded, and the subcommittee was recessed, to reconvene
subject to the call of the Chair.]
MATERIAL SUBMITTED SUBSEQUENT TO CONCLUSION OF HEARING
[Clerk's note.--The following material was not presented at
the hearing, but was submitted to the subcommittee for
inclusion in the record subsequent to the hearing:]
CONGRESSIONAL WITNESSES
Prepared Statement of Senator Thad Cochran
Mr. Chairman, I applaud my colleague from Texas, Senator Kay Bailey
Hutchison's, work to protect the state tobacco settlements from
recoupment by the federal government.
The State of Mississippi was the first state in the nation to file
suit and settle with the tobacco industry. The money our state will
receive under its settlement agreement should be spent in accordance
with the needs of our state as determined by our state's public
officials--not by the federal government.
I am pleased to support Senator Hutchison's tobacco recoupment
amendment to the fiscal year 1999 supplemental appropriations bill.
______
Prepared Statement of Senator Larry E. Craig
Mr. Chairman, thank you for holding this critical hearing on the
Clinton Administration's attempt to seize a large portion of the
tobacco settlement from the states.
The full Committee has already spoken to this issue by adopting
Senator Hutchison's legislation, which I was proud to cosponsor, as an
amendment to the supplemental appropriations bill the Senate should be
considering in the near future.
I am not a lawyer, and maybe that's why I'm not particularly
impressed by all the legal hairsplitting we've been hearing from the
government's lawyers about their claim to these funds. But you don't
have to be a lawyer to recognize unfairness when you see it.
In fact, I think my little granddaughter would recognize the story
that's unfolding in Washington today: it's called the ``Little Red
Hen.'' As my colleagues probably will recall, this story is about some
people doing all the work and other people, who didn't lift a finger to
help, wanting to share in the product of that work.
In this case, we have the states who initiated lawsuits against the
tobacco industry, who took all the risks, who received no assistance
from the federal government in making their claims, and who ultimately
succeeded in negotiating the historic Master Settlement Agreement last
November. Now that the work has been done by these 46 little red hens,
and the other four who negotiated individual settlements, the federal
government wants to sweep in and take away 57 percent of the funds.
Mr. Chairman, I do not think what we have here is an attempt to
assert legal rights, but an attempt to assert control. Quite simply,
the federal government wants to direct the spending of these funds by
the states, despite the fact that this effort is likely to provoke more
litigation, which in turn will only prevent the funds from benefiting
the health or welfare of any state's residents. I do not think the
federal government has the law on its side, and I know it doesn't have
the equities or even common sense on its side.
At this point, I would ask unanimous consent to place in the record
of the hearing a letter from Idaho Attorney General Al Lance, objecting
to the Administration's attempted money grab. I wholeheartedly agree
with Attorney General Lance's confidence that the Idaho state
legislature is quite capable of properly determining how Idaho's share
of the tobacco settlement should be spent.
It is my strong hope that the Administration will allow my state's
legislature, and those of the other 49 states, to make these decisions
without interference by abandoning its effort at recoupment. Failing
that, I hope Congress will take action to protect the right of the
states in this matter.
______
Letter From Alan G. Lance to Senator Larry Craig
State of Idaho,
Office of the Attorney General,
January 13, 1999.
Re Idaho tobacco settlement monies
Hon. Larry Craig,
U.S. Senate,
Washington, DC.
Dear Senator Craig: You are no doubt aware that Idaho settled its
lawsuit against the tobacco defendants. Under the settlement agreement,
Idaho is set to receive annual payments totaling $711 million over the
first 25 years of the settlement. Now that the settlement is complete,
it is my understanding that the Clinton Administration intends to lay
claim on a significant portion of settlement monies for its own use.
This is wrong. I ask that you help Idaho protect itself from this money
grab by supporting appropriate federal legislation.
Idaho was one of 40 states that filed suit against various tobacco
defendants, alleging violations of various state statutes. In Idaho's
complaint we sought reparation for damages incurred by the State, as
well as civil penalties, costs, and fees as a result of the defendants'
actions. We alleged as damages the increased Medicaid costs
attributable to tobacco use, which Idaho has spent, as well as the
increased insurance premiums attributable to smoking that the State has
paid for its state employees. We sought civil penalties under our
consumer protection laws.
Section 1903(d) of the Social Security Act provides that a State
must allocate from the amount of any Medicaid-related recovery ``the
pro-rata share to which the United States is equitably entitled.''
Relying upon this statute, it is our understanding that the Health Care
Financing Administration will be taking the position that Idaho's
settlement payments represent a credit applicable to Idaho's Medicaid
program, regardless of whether the monies are received directly by the
State's Medicaid program. This should not be so.
It is not equitable for the federal government to take the fruits
of the states' efforts. This is particularly true in this case. Idaho
filed its suit, took significant risks, and fought for significant
changes in how the tobacco industry will market its products. What did
the Clinton Administration do in this regard with the federal
government's vast resources? Nothing.
I have great confidence that Idaho's Legislature will properly
determine how Idaho's tobacco proceeds should be spent. I am sure you
share that trust as well. That will not happen, however, if the federal
government is allowed to take that money and spend it as it pleases. I
ask for your assistance in making sure that does not happen.
Sincerely,
Alan G. Lance,
Attorney General.
______
Prepared Statement of Senator Tom Harkin
Mr. Chairman, thank you for holding this hearing. As you know, I am
strongly opposed to the amendment Senator Hutchison has attached to the
supplemental which would turn over all of the Federal share of the
tobacco settlement to the States without any requirement that a penny
of the funds will be used to reduce teen smoking.
I know that some are saying that the federal government had no role
in these lawsuits and therefore no right to these funds. They are
wrong. The Federal taxpayer has every right to their share of the
tobacco settlement. Medicaid is a federal-state partnership and the
federal government pays an average of 57 percent of the costs of each
state's Medicaid program.
Under the Social Security Act, it is the responsibility of the
states to recover any costs caused by third parties. In fact, the law
says that only the states can file such suits. Medicaid law then
requires the states to turn back to the federal government its share of
any money the state recovers.
While I understand that not all of the states based their cases
entirely on lost Medicaid costs, when the states settled this case in
November 1998, even those that did not include a Medicaid claim in
their suit waived their right (and therefore, the federal government's
right) to recover tobacco-related Medicaid costs in the future.
The state suits began with the important goal of redressing the
harms caused by tobacco; we owe it to our children and grandchildren to
try to reduce that harm for future generations. Therefore, I will be
offering an amendment on the Floor that will require States to devote
some portion of the tobacco settlement proceeds to tobacco control
programs.
Smoking among high school students has increased 32 percent from
1991 to 1997. Sadly, a number of States may not spend even a penny of
the settlement dollars on preventing tobacco use among children. I feel
very strongly that if we are going to allow the States to keep all of
the proceeds of the tobacco settlement, the States must be required to
commit some portion of those funds to reduce tobacco use, especially
among kids.
I look forward to hearing from our witnesses today and I want to
especially welcome, the Attorney General from my home State of Iowa,
Mr. Tom Miller. I want to commend Attorney General Miller and our new
Governor of Iowa, Governor Vilsack, who have announced their plans to
direct next year over $17 million of Iowa's tobacco settlement proceeds
to tobacco prevention activities. I hope all States will follow Iowa's
lead and use the tobacco dollars for what they were intended to be used
for when all this tobacco litigation was started.
______
Prepared Statement of Senator Richard J. Durbin
Mr. Chairman, I am pleased that you have called this hearing on a
very important issue that has not received sufficient scrutiny in the
Congress. The premature addition of the Hutchison amendment to the
supplemental appropriations bill is an attempt to push the Congress
into a hasty decision with billions of dollars and important public
health issues at stake. This hearing will help shed light on those
issues as we consider the conditions under which the federal government
may relinquish its legitimate claim to its share of the Medicaid
tobacco settlement funds.
medicaid law
The first point to emphasize is that the federal government is
entitled to a share of the payments attributable to Medicaid costs from
the settlement between the states and the tobacco companies.
The Medicaid program is a federal/state partnership with each
paying a portion of the program's costs. On average, the federal share
of the Medicaid program is 57 percent. The states are obligated under
long-standing Medicaid law to recoup any costs caused by third parties.
Indeed, the law says that only the states can file such suits even
though part of what they recover belongs to the federal government.
Medicaid law then requires each state to turn back to the federal
government its share of any money the state recovers. Clearly, the
federal government is entitled to a portion of the recovery from the
tobacco companies.
future medicaid claims
Many people are not aware that the states agreed to relinquish
future Medicaid claims against the tobacco companies, regardless of
whether their current lawsuits involved Medicaid claims. The Master
Settlement Agreement (MSA) includes provisions that settle all past and
future Medicaid claims against the tobacco companies. This means the
MSA settles federal claims, because current law requires the states to
pursue third parties such as the tobacco companies on behalf of the
states and federal government. Therefore, when the states waived their
right to recover tobacco-related Medicaid costs in the future, they
essentially waived the right of the federal government as well.
The federal government has paid, and will continue to pay, one-half
or more of the Medicaid costs associated with treating tobacco-caused
diseases, even though the states have now waived the federal
government's right to any further tobacco related Medicaid recovery.
This further underscores the federal right to a share of the settlement
proceeds.
federal/state partnership
The states and the federal government share in both the costs and
the recoveries under the Medicaid program. When states pursue third-
party Medicaid claims, the federal government shares half the costs of
these collection efforts. The federal government is legally required to
reimburse states for such costs whether a state wins or loses its
litigation.
States routinely follow the requirements of the Medicaid statute,
which protects the federal government's interests by explicitly making
the states responsible for pursuing these recoveries, reporting them to
the Health Care Financing Administration (HCFA), and ensuring that the
federal government receives the share to which it is entitled. In
fiscal year 1997, the total collected by the states for third party
liability Medicaid reimbursements was $638 million, of which $362
million was returned by the states to the federal government as the
federal share of the recoupments.
There is even more direct evidence that the states were aware that
they would have to reimburse the federal government after agreeing to
settle their cases against the tobacco industry. In March 1996, five
states (FL, LA, MA, MI, WV) settled with the Liggett tobacco company.
That year three states (FL, LA, MA) credited HCFA with a portion of the
$200,000 payment they each received from Liggett. In 1997, two states
(LA, MA) credited HCFA with a share of the $91,000 payments they each
received.
budget implications
Congressional action to change current law to waive the federal
claim has federal budget implications. The Congressional Budget Office
(CBO) has estimated that possible federal recoveries from the states
total $14 billion over five years and $28 billion over 10 years.
However, CBO has also assumed that there is a 25 percent probability
that HCFA will successfully retrieve these funds and, therefore,
estimates for scoring purposes that the federal recovery from the state
tobacco suits will total $2.9 billion over five years and $6.8 billion
over 10 years. Any legislation that allows the states to keep all of
the funds requires an offset of this magnitude or a waiving of the
federal Budget Act.
tobacco control programs
Congress has an obligation to ensure that at least a significant
portion of the federal money is used to reduce the tragedy of tobacco
use, particularly among our nation's children. This does not require,
and I am not advocating, that we physically take back the federal
money. Instead, we could leave the money in the hands of the states
with clear assurances that the money will be used for appropriate
purposes and not just used to build a new state capitol building or for
other purposes unrelated to tobacco, health care, and children.
Any Medicaid recoupment bill should give a mandatory share of the
money to youth tobacco use prevention programs. Otherwise, many states
will spend none of it on youth tobacco use, as several states have
already proposed. The Centers for Disease Control estimates that each
state will have to spend a minimum of an average of 25 percent of their
settlement dollars to run an effective tobacco control program. A
``lookback'' program can assess the success of each state's effort to
reduce underage tobacco use and whether this percentage can be raised
or lowered.
governor's priorities
Where should we turn for guidance on how the federal share of the
settlement money should be spent? I propose that we listen first to the
priorities the National Governors Association (NGA) has already
identified. According to the NGA Policy on Tobacco Settlement Funds
adopted at their 1999 Winter meeting, ``The nation's Governors are
committed to spending a significant portion of the settlement funds on
smoking cessation programs, health care, education, and programs
benefiting children.''
This range of programs is appropriate. But the first priority is
that these settlements resulted from the harms caused by tobacco; at
least a part of the funds should be spent to reduce that harm in the
future. This will help protect kids and save both federal and state
dollars in the long run.
public support
Finally, I would like to note that the public supports a large
portion of the settlement money going to tobacco control programs.
Polling conducted by the American Heart Association last November found
that 74 percent of voters support dedicating at least half of these
dollars to tobacco addiction treatment and efforts to educate teens
about the dangers of tobacco.
Mr. Chairman, while we should not grant the dream wish of the
governors and turn this money over to them without any guidance on how
it should be spent, we should listen to the priorities outlined by the
governors and the concerns of the American public as we determine the
terms under which we relinquish the federal share of this money.
I am less concerned with who is spending the money than I am with
how it is being spent and whether the goal of reducing underage
addiction to tobacco is being seriously addressed.
I thank you for the opportunity to share my thoughts with you today
on this important issue.
______
NONDEPARTMENTAL WITNESS
Prepared Statement of Carl Tubbesing, Deputy Executive Director,
National Conference of State Legislatures
Since the Master Settlement Agreement (MSA) was signed last
November, state legislators across the country have been studying the
provisions of the agreement and determining what actions they need to
take to implement the agreement in their respective states. As you know
by now, this is a complicated legal proceeding. It presents
particularly special challenges to short session states. States are
taking many different approaches, but are unified on one issue. These
funds are state funds and there is no room for intrusion of the federal
government in the state budget and appropriation process.
Representative Robert Junell of Texas came to Washington, D.C. in
January to participate in the press conference jointly sponsored by
your colleagues, Senator Kay Bailey Hutchison and Senator Bob Graham
regarding the introduction of S. 346, a bill NCSL vigorously supports.
This bill, which is now part of S. 544, the fiscal year 1999
Supplemental Appropriations bill, is a top priority for NCSL and
legislatures across the country. Representative Junell compared the
states to the ``Little Red Hen.'' For those of you unfamiliar with this
story, I will briefly describe it here.
The Little Red Hen decided she wanted some fresh homemade bread and
set about asking her friends and neighbors to help her with the
process. Finding no takers, the Little Red Hen bought the seeds,
planted the seeds, watered and weeded the plants, gathered the wheat,
separated the grain, ground the grain into flour, made the dough,
kneaded the dough and finally put the bread in the oven to bake. I may
have missed a step or two along the way, but I hope you got the
picture. All along the way the Little Red Hen asked for help, but
received none. When the bread was finally ready, the Little Red Hen set
a nice table and sat down to enjoy the fruits of her labor. Remember
the Little Red Hen is representing the states. This is when the federal
government steps in. As the Little Red Hen is slicing her loaf of
bread, all the friends and neighbors who didn't have time, or the
inclination to help show up with plates ready to join the feast. The
Little Red Hen was not prepared to share. Neither are the states.
The Congress and the Administration failed in its efforts to enact
tobacco legislation last year. States, through their attorneys general,
continued to move forward and ultimately reached a compromise that was
formalized in the Master Settlement Agreement on November 23, 1998.
Four other states (Florida, Minnesota, Mississippi and Texas)
independently reached agreements with the tobacco manufacturers. As a
result, 50 states as well as the District of Columbia, American Samoa,
the U.S. Virgin Islands, Puerto Rico, Guam and the Northern Mariana
Islands have succeeded where the federal government failed. We firmly
believe that these funds, recovered on behalf of the citizens of these
states and jurisdictions, should be disbursed according to state law,
with no interference or direction from Washington, D.C.
There has been considerable concern expressed about how states
might spend these settlement dollars. NCSL, through its Health Policy
Tracking Service (HPTS), is tracking all state tobacco settlement
legislation. The information is published in an issue brief, ``Tobacco
Settlement Distribution,'' that is updated weekly to reflect the most
recent legislative action. Most state legislatures are still in
session, so it is not possible to predict what legislation will
ultimately be adopted, but I can tell you what has been introduced and
discuss some general trends. Below is a chart from the most recent
issue brief. This issue brief has been submitted for the record by
Attorney General Mike Fisher of Pennsylvania, who testified before the
subcommittee during the hearing on March 15, 1999.
STATE TOBACCO SETTLEMENT LEGISLATION 1999
[Updated March 12, 1999]
------------------------------------------------------------------------
Number of
Number of States with Percent of
Category bills bills from States
column 1
------------------------------------------------------------------------
Child development................ 11 7 14
CHIP/children's health........... 36 20 40
Smoking cessation, education, 64 25 50
prevention......................
Access to health care for low 82 32 64
income people...................
Tobacco growers/communities...... 29 9 18
Trust funds...................... 126 37 74
Education........................ 21 11 22
Graduate medical education....... 10 6 12
Long term care................... 10 8 16
Tax cuts/tax credits............. 13 9 18
Medicaid recoupment.............. 34 25 50
Other \1\........................ 81 30 60
-------------
Total bills................ 517
------------------------------------------------------------------------
\1\This category includes a number of health-related proposals including
funding for: insurance risk pools, cancer research, women's health
programs, HIV programs, prosthetic devices, veteran's homes, and
medical equipment.
Three quarters of the states have proposed trust funds. This
reflects, at least in part, the uncertainty surrounding the actual
amount of funds that will become available to states. Part of the
uncertainty is built into the Master Settlement Agreement, through the
potential imposition of offsets and adjustments, but the most
significant question for states is whether the Health Care Financing
Administration (HCFA) will be permitted to seize as much as 80 percent
of a state's allotment. It is clear by looking at the chart that a
majority of states are inclined to spend these funds on health care and
services for children and the indigent. Fifty percent of the states
have proposed to fund smoking cessation, education and prevention
programs.
Not reflected in the chart, but important to consider, is the fact
that some states, Texas, New York and California come to mind, have
agreed to allocate a significant amount, as much as 50 percent of their
settlement funds, to local jurisdictions. Federally imposed mandated
earmarking will certainly interfere with these carefully developed
agreements and severely restrict state flexibility. Finally, national
earmarking fails to account for actions already underway in the states.
NCSL believes the federal system we have in place is working. The
public is providing input and legislators across the country are
responding. We do not believe Washington, DC, can do better.
For the convenience of the subcommittee members, I will quickly
review what has been proposed in the states with members on the
subcommittee (I have not included Pennsylvania, Iowa and Texas because
they had representatives at the hearing): Mississippi (trust fund,
health care); Washington (trust fund, health care); New Hampshire
(education, smoking cessation); Idaho (trust fund); Alaska (health
care, tobacco cessation); Arizona (mental health facility, localities
for health care); South Carolina (tobacco growers); Hawaii (health
care, youth tobacco cessation programs); Rhode Island (community health
centers, mental health centers, trust fund, smoking cessation);
Wisconsin (CHIP, youth tobacco cessation programs); and California
(health care, women's health, children's health, smoking cessation, aid
to cities and counties).
Finally, nine states are considering bills that would provide
assistance to tobacco growers and to impacted communities. The
importance of these bills should not be underestimated or disparaged.
Agreements such as the one recently reached in the State of Virginia,
where the state will spend funds to assist tobacco growers and to
reduce the incidence of smoking among teenagers is just the kind of
agreement that would be made more difficult to reach, if the federal
government were to become involved.
NCSL urges the members of the Subcommittee to support the provision
in S. 544 that would prohibit the Health Care Financing Administration
from seizing state tobacco settlement funds. This action will permit
states to move forward with all deliberate speed to complete
implementation of the settlement agreement and to fund important health
care and other initiatives that are to be funded through this effort.
I thank you for your kind consideration and hope that you will call
upon NCSL if you have any questions or if we can be of additional
assistance to you.