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HEALTH AND HUMAN SERVICES
Since 2001, the Administration:
• Passed and initiated implementation of comprehensive Medicare reform legislation,
adding prescription drug coverage and modernizing the Medicare program;
• Enrolled nearly 24 million Medicare beneficiaries in the Medicare prescription drug
benefit as of the middle of January 2006;
• Improved preparedness for a bioterror attack, providing over $7 billion to States,
localities, and hospitals;
• Fulfilled the President’s pledge to double funding for medical research through the
National Institutes of Health;
• Created or expanded nearly 900 Health Center sites, providing health care services
to an additional 4.3 million people;
• Approved 11 Health Insurance Flexibility and Accountability demonstrations, which at
full implementation, could result in approximately 825,000 individuals receiving health
coverage through Medicaid and the State Children’s Health Insurance Program; and
• Launched a national strategy to improve pandemic influenza preparedness.
The President’s Budget:
• Proposes a new financing measure to strengthen Medicare’s sustainability;
• Provides nearly $160 million to support advanced development of biodefense
countermeasures to be considered for procurement under Project BioShield;
• Provides access to health care through more than 300 new and expanded Health
Center sites, including 80 new sites in counties that have a high prevalence of poverty;
• Builds on the President’s health insurance reform proposals to promote Health
Savings Accounts and to expand coverage to more Americans with limited incomes;
• Provides $250 million for new healthy marriages and strengthening fatherhood
initiatives to improve the well-being of children;
• Provides $204 million for abstinence-only education programs;
• Provides $188 million to States, Faith-Based, and Community Organizations for a new
initiative to combat the spread of HIV/AIDS, particularly within minority communities;
and
• Continues the President’s November 1, 2005, commitment to obtain $7.1 billion from
the Congress to improve pandemic influenza preparedness.

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By preparing now, we can give our citizens some peace of mind knowing that our Nation is ready to act at the
first sign of danger, and that we have the plans in place to prevent and, if necessary, withstand an influenza
pandemic.
President George W. Bush
November 1, 2005

Protecting the Nation from an Influenza Pandemic
One of the most serious threats to public health in our time is a global influenza pandemic.
Pandemics happen when a new influenza virus emerges that is efficiently transmitted between
humans. Influenza pandemics in 1918, 1957, and 1968 killed approximately 40 million, 2 million,
and 1 million persons worldwide, respectively. A new strain of influenza virus has emerged in Asia,
one for which humans have no natural immunity. Should this new strain of influenza virus become
easily transmissible from human to human, millions around the world could become infected,
sparking a serious public health emergency.
The President has called attention to the seriousness of this issue and has developed a National
Strategy for Pandemic Influenza to guide preparedness and response to a pandemic. On November
1, 2005, the President submitted a $7.1 billion emergency supplemental request to the Congress to
improve the Nation’s readiness. The request makes possible the fulfillment of the President’s strategy by investing in international health surveillance and containment efforts; medical stockpiles;
the domestic capacity to produce emergency supplies of pandemic vaccine and antiviral medications;
and preparedness at all levels of government. On December 30, 2005, the President signed the Department of Defense, Emergency Supplemental Appropriations to Address Hurricanes in the Gulf
of Mexico, and Pandemic Influenza Act, 2006. The Act includes $3.8 billion for pandemic influenza
preparedness, the first installment of the President’s request to launch these critical activities. The
Budget includes a $2.3 billion allowance for the 2007 portion of the request to fulfill the next phase
of the President’s strategy.
The President’s Budget builds on the $7.1 billion commitment by requesting an additional $474
million across the Government to further improve readiness. The Budget requests $352 million in
2007 for continued implementation of the pandemic influenza preparedness plan at the Department
of Health and Human Services (HHS). Of this total, $188 million will allow the Centers for Disease
Control and Prevention (CDC) to improve public health surveillance both domestically and abroad,
establish more quarantine stations, develop diagnostic tests to identify potential pandemic influenza
strains rapidly, and work with foreign governments to help prevent the spread of a pandemic. The
National Institutes of Health (NIH) will receive $35 million to conduct clinical trials of pandemic influenza vaccine, and the Food and Drug Administration (FDA) will receive $50 million to improve the
Agency’s ability to review new pandemic influenza vaccines and drugs rapidly while assuring their
safety and effectiveness, and to maintain a library of virus strains to facilitate the rapid manufacture of vaccines as the virus evolves. The Budget also includes $79 million in the HHS Office of the
Secretary for international activities, development and deployment of rapid tests for detection, and
risk communication.

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All of these activities at HHS, in conjunction with pandemic influenza activities at the U.S. Department of Agriculture (USDA), Department of State, and U.S. Agency for International Development,
will greatly enhance the Nation’s ability to prepare for and respond to an influenza pandemic.

Health Centers: More Sites Expand Access to Quality Care
Locally run Health Centers deliver high-quality, affordable primary and preventive health
care to nearly 14 million patients at 3,700 sites
across the United States annually.
Health
Centers focus on providing care to low-income
individuals and those without health insurance.
Patients are charged for services based on their
ability to pay. An assessment of the program
found that it is effective in reducing hospiThis new Health Center site in Charles City, Virginia, opened in 2004.
talization rates and treating the uninsured.
According to Rod Manifold, Executive Director of Central Virginia
Approximately 86 percent of Health Centers’
Health Services, “The President’s Expansion Initiative has been
patients are at or below 200 percent of the
vital to opening health centers, like Charles City Regional Health
Services, in many of our highest-need communities.”
Federal poverty line. Since the President began
his commitment to expand services through Health Centers, 777 Health Center sites have been
established or expanded, and 3.7 million more people per year are being served. An estimated 120
new and expanded sites will be created in 2006.
The 2007 Budget continues this record of progress and will complete the President’s commitment
to create 1,200 new or expanded Health Center sites. More than 1.2 million additional individuals
will receive health care in 2007 through more than 300 new or expanded sites in rural areas and
underserved urban neighborhoods. Included in the President’s commitment is the goal to create a
Health Center in every poor county in America that lacks a Health Center and can support one. Of
the new sites created in 2007, 80 will be in high-poverty counties that lack a Health Center. Faithbased and community programs will also be encouraged to compete for these grants.

Biodefense: Protecting Against Terrorism
Biodefense Research, Development,
and Procurement. The Budget conThe threat of bioterrorism has brought new challenges to
tinues to invest heavily in research
our government, to our first responders and to our medical
and development that will lead to new
personnel. We are grateful for their service. Not long ago,
countermeasures against the most
few of these men and women could have imagined duties
dangerous threat agents. NIH supports
like monitoring the air for anthrax, or delivering antibiotics
on a massive scale. Yet, this is the world as we find it; this
basic research, which leads to breakNation refuses to let our guard down.
throughs in scientific knowledge, and
advanced development that converts
President George W. Bush
knowledge into products that can be
July 21, 2004
manufactured in large quantities.
Within the 2007 Budget’s $28.4 billion
for NIH, the Administration will
continue to fund biodefense research and development activities at nearly $1.9 billion. This includes
nearly $50 million for chemical countermeasure development and $47 million for radiological and
nuclear countermeasure development. The Budget includes nearly $160 million for advanced
development of medical countermeasures against threats of bioterrorism. Large investments in

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basic research for biodefense countermeasures through NIH have helped create promising products
to protect Americans against the threat of a terrorist attack. These investments will accelerate
development of those products to help Project BioShield acquire them more quickly for the Strategic
National Stockpile.
Strategic National Stockpile. The Strategic National Stockpile contains drugs, vaccines, and other
medical supplies and equipment that can be delivered anywhere in the country within 12 hours
of a request for assistance. The Stockpile currently contains: enough smallpox vaccine for every
American; treatments for anthrax; countermeasures for injuries following a chemical, radiological,
or nuclear incident; and treatments for conventional explosive attacks. The 2007 Budget includes additional funding to improve the Nation’s ability to respond to biological and chemical weapons attacks
with life-saving treatments and supplies. The Budget also proposes increased funding for the storage
and maintenance of next-generation countermeasures, including new products purchased through
Project BioShield. The Budget continues to support State and local ability to respond quickly with
the distribution of countermeasures, especially in high-threat areas.
Medical Surge Capacity. In the event of a large-scale attack in one or more cities, existing medical
capacity could be quickly overwhelmed. The President designated HHS as the lead for coordinating
Federal support of State and local medical and public health response to mass-casualty events. The
Budget includes $50 million to purchase and store deployable medical care units, including medical
supplies and equipment that the Federal Government can deliver to an affected area. This initiative
also includes $20 million to enhance the Medical Reserve Corps and provide prior training and verification of credentials to ensure the availability of health care providers during such an emergency.
Over $7 billion has been provided to bolster State, local, and hospital preparedness since 2001. The
Budget continues support for these investments by proposing an additional $1.3 billion. Included in
the total for hospital preparedness is $25 million for a targeted, competitive demonstration program
to establish a state-of-the-art emergency care capability in one or more metropolitan areas. Equally
important is ensuring the ability to know what preparedness improvements have been made across
the Nation, and where vulnerabilities remain, so these continued investments can be targeted to
where they are needed most. HHS is engaged with State and local partners to establish performance
indicators and standards and reassess the distribution of funds, to ensure that these investments
are directed to most efficiently improve State, local, and hospital preparedness. HHS is also working
with the Department of Homeland Security and other Federal departments and agencies in a coordinated effort to develop a national preparedness goal and related metrics that will help assess the
Nation’s readiness and determine preparedness assistance needs. These steps will help maximize
the effect of each dollar toward reducing our actual vulnerabilities to potential attacks.
Defending the Nation’s Food Supply. The 2007 Budget continues the President’s commitment to
improving the safety of the food and agriculture supply. In 2007, FDA will continue to work with
USDA to improve protection of the Nation’s food supply from intentional or natural contamination.
The Budget requests a $20 million increase for FDA to develop testing methods to identify the presence of contamination quickly and accurately, and to improve its ability to respond once an incident
has occurred. The Food Emergency Response Network will continue to expand to allow for more rapid
analysis of food samples to respond to a terrorist attack and to more quickly identify outbreaks in the
food supply. Each of these activities will be coordinated with USDA, which will invest an additional
$322 million in 2007, to protect the food and agriculture supply from terrorist attacks.

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Promoting Health Information Technology
The Administration continues to place a high priority on making electronic health records available to most Americans, a goal set by the President in 2004. Widespread use of electronic health
records will help ensure Americans receive high quality medical care by providing doctors access to
patients’ medical history at the time of care. The Administration supports the adoption of health information technology (IT) as a normal cost of doing business to ensure patients receive high-quality
care. To encourage doctors and patients to adopt electronic health records, the Administration’s goal
is to promote conditions for a thriving free market. Identifying national standards will help focus
development efforts, increase demand for the technology, and ultimately create affordable technology. The creation of the American Health Information Community in the Fall of 2005 is one step
toward this goal. The Community will help ensure that there are certified technology products and
nationwide interoperability standards, which should help purchasers of health IT have confidence in
the investments they make.
The 2007 Budget includes $169 million to accelerate progress for this effort, including $116 million
for the Office of the National Coordinator for Health Information Technology; $50 million for the
Agency for Healthcare Research and Quality; and $3 million for the Office of the Assistant Secretary
for Planning and Evaluation. Continuing and new activities include efforts to:
• Promote nationwide interoperability of health IT systems through an industry-wide process to
harmonize standard development, maintenance, and refinements;
• Define the key elements of basic electronic health records for use in clinical settings, develop
working prototypes for the use of electronic health data in such priority areas as coordinated
chronic disease management and improved ambulatory care, and capture laboratory test data
in a standardized way;
• Pursue breakthroughs in health systems architecture, such as rapidly collecting and disseminating public health surveillance data electronically, and encouraging the use of personal health
records for patients to keep their own computer-readable medical history;
• Work closely with the Centers for Medicare and Medicaid Services (CMS) to advance the use of
electronic prescriptions nationally; and
• Continue to address key privacy and security issues to encourage the exchange of health information nationwide.

Expanding Affordable Health Care
The 2007 Budget includes a comprehensive, consumer-focused plan to address the problems of rising health care costs and the uninsured. The President’s plan to help reduce the rising cost of health
care while improving quality and safety includes an emphasis on price transparency and disclosure
of quality information. The plan also contains a package of proposals to promote: the use of health
savings accounts (HSAs); grants to States to encourage innovations in providing coverage to chronically ill individuals; association health plans; medical liability reform; and a national marketplace for
health insurance. This package of reforms will provide new and affordable health coverage options
for all Americans—targeted to those who need it most: low-income children and families; the chronically ill; employees of small businesses; and the self-employed.
Price and Quality Transparency. The President seeks the commitment of medical providers, insurance companies, and business leaders to help consumers obtain better information on health care
prices and quality. The Administration will leverage Federal resources and work with the private
sector to develop meaningful measures for health care quality and to emphasize the importance of
all-inclusive price information.

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Encouraging Health Savings Accounts. HSAs are a major tool to promote the Administration’s
long-term vision of a more consumer-driven health care system—a system in which benefits are affordable and portable, quality and patient satisfaction are high, and medical inflation is low. HSAs
combine a high-deductible health plan with a tax-advantaged personal savings account reserved for
medical purchases. This innovative approach gives the consumer greater ownership and control over
his or her health care, and for many consumers can be a more economical choice than traditional
insurance.
Created as part of the Medicare Modernization Act (MMA) in December 2003, HSAs have already
attracted an estimated one million enrollees. The Administration seeks to build on this promising beginning with a robust package of policies designed to make HSAs even more affordable and portable.
For a full description of this package, see the Federal Receipts chapter in the Analytical Perspectives
volume. The highlights include:
• Making high-deductible health plans more affordable by creating tax parity between employersponsored insurance and insurance purchased in the non-group market. The Budget proposes
to allow all individuals who purchase a high-deductible health plan in conjunction with an HSA
to deduct the amount of the health plan’s premium from their income and payroll taxes. Additionally, income tax deductible contributions to an individual’s HSA would also be exempt from
payroll taxes, which are paid by almost all workers.
• Increasing the maximum amount individuals can contribute to their HSA. Under current law,
individuals’ contributions are limited to the lesser of the amount of the deductible or $2,700 for
self-only coverage ($5,450 for family coverage) for 2006. Under this proposal, a person could
contribute—without paying income or payroll taxes on the contribution—up to the plan’s outof-pocket maximum, which is higher than the deductible.
• Establishing a refundable tax credit that would be available to those purchasing an
HSA-compatible high-deductible health plan.
• Enhancing portability of insurance by giving individuals the option of taking their health insurance with them. The Budget proposes to allow employers to offer and employees to select
portable HSA-compatible health plans. These policies would not be subject to State mandates
or regulations and would build on the 2006 proposal to create a national marketplace for health
insurance.
Focusing on the Chronically Ill. Chronically ill individuals often struggle to secure health insurance
coverage. The 2007 Budget proposes to create a competitive grant program whereby States compete
to receive funds to implement innovative policies to promote insurance among the chronically ill. For
this effort, $500 million would be available annually.
Reforming the Health Insurance Marketplace. In addition to the new initiatives to promote
affordable and effective health care, the 2007 Budget reproposes three initiatives to reform health
insurance markets across the country:
• Establishing association health plans that would allow small employers, civic groups, and community organizations to band together and use their purchasing power to negotiate lower-priced
coverage for their employees, members, and their families.
• Creating a competitive marketplace across State lines that maintains strong consumer protections.

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• Reforming medical liability law, which will increase access to quality and affordable health
care for all Americans, while reducing frivolous and time-consuming legal proceedings against
doctors and health care providers.

Fighting Global AIDS
The President has made fighting the global spread of HIV/AIDS a top priority of his Administration.
The President’s Emergency Plan for AIDS Relief is a five-year, $15 billion commitment to support
and strengthen the AIDS-fighting strategies of many nations. At the time of the Plan’s inception
in 2003, only 50,000 people in sub-Saharan Africa were receiving antiretroviral treatment. Today,
after two years of Emergency Plan implementation, more than 395,000 sub-Saharan Africans are
receiving the drugs that allow them to survive this disease. The 2007 Budget includes $4 billion for
the President’s Emergency Plan for AIDS Relief, an increase of more than $740 million over 2006, to
further strengthen international efforts to combat this epidemic through support for comprehensive
prevention strategies and lifesaving treatments. The President’s Global AIDS Coordinator relies on
HHS to help implement this expansion and meet the President’s goals.

Controlling the Spread of HIV/AIDS through Testing and Treatment
One of the primary challenges in fighting the HIV/AIDS epidemic in the United States is stopping
the spread of the disease through the identification and treatment of individuals who are infected
with the HIV virus but do not know it. To address this problem, the Administration is proposing $188
million for an initiative that will focus Federal resources on HIV-testing, medical care, and outreach,
with the goal of ending the growth in the number of new AIDS cases and reducing the future burden
of the disease.
Testing, treatment, and outreach efforts will focus on at-risk populations, including low-income
and minority communities that are increasingly hardest hit with growing rates of new infections.
Routine testing and awareness campaigns will also be directed at incarcerated populations and drug
treatment facilities. The initiative will also provide additional funding to finance medications and
treatment for those currently in need, as well as individuals newly diagnosed with HIV/AIDS due to
increased testing efforts.

Improving and Modernizing Medicare
Implementing the Medicare Prescription Drug
Benefit. The MMA established the most important
new Medicare benefit in the program’s 40-year
history: new voluntary prescription drug coverage,
which began on January 1, 2006. Seniors and
people with disabilities who enroll in the benefit
are now expected to pay an average monthly
premium of around $25 in 2006, far lower than
previous projections of around $37. In every State,
beneficiaries have a choice of at least one plan
with monthly premiums below $21, and in many
parts of the country beneficiaries can enroll in
a drug plan for as little as $1.87 per month. In
addition, competition is enabling beneficiaries
to select plans that they prefer to the standard
Government-defined drug benefit.

The Medicare bus travels across the United States to educate
Medicare beneficiaries about the new prescription drug benefit.

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In every region, prescription drug plans are available with zero deductibles or deductibles lower
than Medicare’s standard annual deductible, and plans are available that allow beneficiaries to fill in
the “coverage gap” in the standard benefit. Through telephone and online support, and thousands of
community events and activities around the country, CMS and its partners are helping beneficiaries
learn about what the new drug benefit means for them. Open enrollment ends in May 2006.
The Medicare prescription drug benefit is off to a good start. As of the middle of January 2006,
nearly 24 million Medicare beneficiaries are participating in this important new benefit. This 24 million figure includes more than six million Medicare-Medicaid dual eligible beneficiaries, almost seven
million in employer-sponsored coverage of some kind, and about 3.6 million beneficiaries who have
signed up for stand-alone prescription drug coverage. In addition, three million Medicare-eligible
Federal retirees will continue to receive the drug coverage they already enjoy. Some implementation
issues will arise in any undertaking of this magnitude; resolving issues as they arise is a high priority.
Low-income beneficiaries are receiving additional assistance in paying for their drugs under the
new Medicare prescription drug benefit, making the drug coverage more affordable and accessible to
those most in need. The additional assistance allows these beneficiaries to pay reduced premiums
and deductibles for their drug coverage.
Advancing Medicare Advantage. The MMA created the Medicare Advantage (MA) program to offer
greater choices and higher quality care to beneficiaries through competition among private health
plans. Overall, private health plans offer more generous benefits and lower cost-sharing for beneficiaries than Medicare fee-for-service. Beneficiaries in MA now save an average of about $100 per
month in out-of-pocket costs compared to traditional Medicare, and beneficiaries in fair or poor health
save significantly more. The MMA successfully reversed a downward trend in private Medicare plan
enrollment, and approximately 13 percent of beneficiaries are currently enrolled in MA plans.
In 2006, most Medicare beneficiaries will be
able to choose from a variety of options to find a
MA plan that meets their needs and preferences
for how to get their care. CMS expects to
contract with a full range of private health
plans that will include health maintenance
organizations, preferred provider organizations
(PPOs), fee for service plans, and “special needs”
plans designed to provide specialized care and
support for beneficiaries with frailty or serious
chronic diseases. Approximately 98 percent of
Medicare beneficiaries will have access to some
kind of local private MA plan. Of the 3,066
President Bush discusses improvements to Medicare with
counties in the United States, 3,004 will have a
beneficiaries on August 29, 2005, at the Pueblo El Mirage RV Resort
and Country Club in El Mirage, Arizona.
participating local plan. For the first time, PPO
plans will be widely available in Medicare, with more than 80 percent of beneficiaries having access
to regional PPO plans.
Encouraging Beneficiary Choice. HSAs enable individuals to take greater control of their health
care choices. More than one million Americans have opted for an HSA since the President signed

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them into law in December 2003. However, Medicare still does not offer any HSA options. The Administration is developing new Medicare HSA choices for beneficiaries, including allowing people to
“age in” to Medicare with their existing HSAs.

Enhancing Medicaid and the State Children’s Health Insurance Program (SCHIP)
Medicaid is an open-ended means-tested entitlement program financed jointly by the Federal Government and States. The Federal Government pays on average 57 percent of Medicaid expenses.
Medicaid provides health coverage and services to nearly 53 million low-income children, pregnant
women, elderly persons, and disabled individuals during the year. In 2007, Federal Medicaid outlays
are estimated to be $199 billion.
SCHIP was established in 1997 to make available approximately
$40 billion over 10 years for States to provide health care coverage
to low-income, uninsured children who did not qualify for Medicaid. SCHIP gives States reasonable flexibility in effective program design while protecting beneficiaries through Federal standards. Since the beginning of the Administration, total enrollment
in SCHIP has grown by an estimated 1.5 million children, to a total of approximately 6.1 million in 2004. Current law rules for
distributing SCHIP funds can lead to shortfalls for some States.
The 2007 Budget will seek authority to target SCHIP funds more
efficiently to States with the most need.
The Deficit Reduction Act (DRA) takes important steps toward
achieving savings in Medicaid while promoting effective Medicaid
policy. The Administration commends the Congress’ successes, as
this legislation accomplishes many of the Administration’s 2006
Budget priorities. These accomplishments include provisions that
reform Medicaid long-term care eligibility and help individuals
prepare for possible long-term care needs, as well as provisions
Receiving prompt care.
that build on the President’s New Freedom Initiative, promoting
home- and community-based care options for people with disabilities.
Medicaid/SCHIP Modernization. In past years, States have expressed concerns regarding the
complex array of Medicaid laws, regulations, and administrative guidance as overly burdensome.
Medicaid rules prohibit States from providing care comparable to the private sector. States widely
believe that the Medicaid program structure has out-of-date requirements, which create higher costs
and prevent States from helping additional uninsured individuals get the coverage they need.
The DRA responds to State requests for additional flexibility by providing States with new options.
For non-disabled, non-elderly persons who are eligible for Medicaid, the DRA allows States to follow
the lead established by SCHIP and provide more flexible benefit packages that are more comparable
to those in the private sector. The DRA also establishes an option for States to raise the Federal
limits on allowable beneficiary cost sharing in Medicaid to offer more State flexibility and to keep
pace with inflation. As in SCHIP, which is already used by many States to cover similar populations,
States would be given the flexibility to apply cost sharing by income level, beneficiary category, or
service type in the form of premiums and/or co-payments, totaling no more than five percent of total
family income.
The changes included in the DRA represent meaningful Medicaid reform. The Administration will
take further steps to support States to use these reforms effectively to improve access to needed care
by developing new waiver initiatives. The Administration has achieved considerable success with

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the Health Insurance Flexibility and Accountability (HIFA) demonstration initiative, included in the
President’s Management Agenda, which emphasizes coordination of currently available Medicaid
and SCHIP funding with private insurance. Through the HIFA initiative, States can provide health
care to more beneficiaries with the same amount of funding by changing delivery systems and using
mainstream coverage, including coordination with employer plans. At full implementation, approximately 825,000 individuals may receive coverage through 11 approved HIFA waivers.
Building on the HIFA initiative and the approaches adopted by innovative States such as Florida,
the Administration will develop a new waiver initiative that emphasizes market-driven approaches
to health care. In conjunction with the DRA, this approach allows States to emphasize expanding
needed coverage to uninsured individuals and to promote greater continuity of coverage. This new
model will stress consumer-driven approaches to health care with access to affordable coverage while
giving States more tools to offer better health coverage to some current beneficiaries, as well as to
individuals who are currently uninsured. By broadening choices and encouraging competition in the
private market, Medicaid can continue to modernize through State-level reforms. The result will
be more seamless access to coverage for low-income families and children in Medicaid, as well as to
other uninsured persons with limited incomes.

Florida Demonstration Tests Innovative Medicaid Reform
On October 19, 2005, the Administration approved Florida’s waiver request to reform its Medicaid program.
Florida’s innovative approach—the first of its kind—will empower participants to choose a plan that best
meets their needs while creating a marketplace in which plans compete.
The reform strategy includes flexibility for provider networks to create benefit packages that meet the unique
needs of patients, payments to plans based on the health status of their enrollees, and mechanisms that
allow participants to select the best plan for their individual needs. Florida’s reform program also provides the
opportunity for participants to opt out of their Medicaid benefit and use their State-paid premium to purchase
employer-sponsored insurance. Further, participants will be able to earn enhanced benefits by engaging in
healthy lifestyles that will allow them to purchase health care goods and services not provided by their plan.
Governor Jeb Bush said of the State’s effort, “Medicaid is a vital safety net for Florida’s most vulnerable, and
it’s time we transformed the program to reflect the needs of patients, rather than the dictates of government.”

Medicaid Commission and Modernization. This past year, the HHS Secretary established a Medicaid Commission to provide options for modernizing Medicaid in ways that would offer high-quality
health care to beneficiaries. In particular, the Commission is charged with developing long-term
recommendations that emphasize Medicaid’s financial sustainability.
The Administration looks forward to the Medicaid Commission’s recommendations as laying the
groundwork for additional future reforms. The Administration is committed to pursuing Medicaid
reforms that will build on the improvements included in the DRA. More progress can be made, such
as in the area of integrated care for individuals dually eligible for Medicaid and Medicare.

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Service Enhancements. The DRA enhances services for former welfare recipients by extending
Transitional Medical Assistance (TMA) through December 31, 2006. This program provides coverage for former welfare recipients entering the workforce, and the Administration proposes extending
the program through September 30, 2007. Similarly, the 2007 Budget proposes Cover the Kids, a
national outreach campaign. This initiative will provide $100 million in grants annually to enroll
additional Medicaid- and SCHIP-eligible children by combining the resources of the Federal Government, States, schools, and community organizations.
Health Insurance Portability and Accountability Act (HIPAA). Since enacted in 1996, HIPAA has
had the goal of increasing the continuity and accessibility of health insurance. To ensure that Medicaid and SCHIP beneficiaries receive the benefits of HIPAA coverage, the Administration proposes
two legislative changes: 1) make eligibility for a Medicaid/SCHIP Employer-Sponsored Insurance
(ESI) Program a qualifying event, allowing families to enroll in ESI immediately through special enrollment rather than waiting for an open enrollment period; and 2) require SCHIP programs to issue
certificates of creditable coverage promoting portable health coverage by verifying the period of time
an individual was covered by a specific health insurance policy.

Enhancing the Faith-Based and Community Initiative
Compassion Capital Fund. The 2007 Budget
provides $100 million to enhance the efforts
of faith-based and community organizations
serving low-income individuals and families.
Specifically, grassroots organizations will
receive training and technical assistance, as
well as targeted capacity building to better
meet the needs of the poor by improving their
delivery of social services. Also, the Budget
supports the First Lady’s Helping America’s
Youth Initiative by funding the capacity-building activities of organizations with a focus on
preventing violence and helping youths at risk
of gang influence.

The First Lady talks with students during a visit to the Church of the
Epiphany in Washington, D.C., as part of her Helping America’s Youth
Initiative.

Abstinence-Only Education. The 2007 Budget proposes $204 million for abstinence-only
education programs. This includes $137 million for the community-based abstinence education program, of which up to $10 million will fund the national abstinence education campaign. It also includes $50 million in mandatory funding for the State-based abstinence grants program, $13 million
for the Adolescent Family Life Program, and $4.5 million for evaluations of abstinence programs.
The Budget supports increasing funding for abstinence-only education programs to $270 million by
2009, and to continue providing $4.5 million for abstinence program evaluations each year.

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Access to Recovery.
Access to Recovery
represents an innovative approach to facilitating recovery from addiction by providing
individuals with vouchers for substance abuse
treatment. These vouchers enable addicted
and recovering individuals to personally
choose from a range of effective treatment and
recovery support options, including faith-based
and community providers. The 2007 Budget
includes $98 million for grants to 20 States to
provide access to effective treatments. Within
this amount, $25 million will be targeted to help
individuals recover from methamphetamine
abuse.
Methamphetamine addiction is a
growing problem in the United States that
inflicts serious harm on individuals, families,
and communities.

Increased Need for Methamphetamine Treatment
140
120

Number of treatment admissions
(in thousands) for persons aged 12 and over for
methamphetamine/amphetamine abuse.

100
80
60
40
20
0
1992

1995

1998

2001

2003

Source: Substance Abuse and Mental Health Administration Treatment Episode Data Set.

As part of the President’s efforts to expand choice and individual empowerment in Federal
assistance programs, the Administration will offer incentives to encourage States to provide a
wider array of innovative treatment options to those in need of recovery by voluntarily using their
Substance Abuse Block Grant funds for drug treatment vouchers. Building on the successful model
of the Access to Recovery program, distribution of block grant funds through a voucher system will
promote innovative drug and alcohol treatment and recovery programs, provide a wider array of
treatment provider options, and introduce into the system greater accountability and flexibility.
The Administration will also look for new opportunities to expand choice in other drug treatment
activities.
Mentoring Children of Prisoners. The 2007 Budget continues to fund the President’s initiative to
mentor the children of prisoners. The Budget provides $40 million to fund effective grantees.

Supporting Low-Income Families
Temporary Assistance for Needy Families (TANF). The DRA extends the successful TANF
program through September 2010 to provide assistance to families with children. Since the
reformed welfare program was created in 1996, the number of welfare recipients has continued
to decrease, and employment and earnings among the target population have increased. This is
reflected in the Program Assessment Rating Tool (PART) evaluation, where the program received
a rating of Moderately Effective, because it was able to demonstrate the program’s impact with
performance measures and independent evaluations. Reauthorization maintains the funding level,
strengthens work requirements to maximize self-sufficiency, and supports healthy marriage and
family formation.

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117

Supporting Healthy Marriages and Responsible Fatherhood. The Budget provides $250 million for
healthy marriage initiatives, of which $100 million is for competitive matching grants to States for
marriage promotion. It also includes $150 million for healthy marriage and responsible fatherhood
from welfare reauthorization. Of this, up to $50 million supports the new strengthening fatherhood
initiative for the 25 million children living in homes without fathers, and up to $2 million is for the
new child welfare demonstration grants for Tribes. The remaining funds support demonstrations, research, and technical assistance to promote family formation and healthy marriage. These programs
are funded by redirecting a portion of the savings from the elimination of the High Performance bonus
and the Reduction of the Out-of-Wedlock Birth Bonus.
Child Support Enforcement. The Child Support Enforcement program is designed to help lowincome and vulnerable families with children become self-sufficient by obtaining support from the
children’s non-custodial parents. Welfare reauthorization includes several of the Administration’s
proposals to more effectively collect and distribute child support to families. The Budget reproposes
additional provisions to further improve the program’s enforcement tools.
Enhancing Research. The Administration will explore how existing program administrative data,
such as the Federal Parent Locator Service, could be used to enhance the Government’s ability to
do more comprehensive research on the interactive effects of participation in Child Support; TANF;
Medicaid; and SCHIP, and the relationship of program participation to employment and wages. Understanding how employment patterns affect family well-being and Federal program participation
will help the Administration monitor progress toward the goal of family self-sufficiency.

Strengthening Programs for Children
Early Childhood (Good Start, Grow Smart). Because it is important for children to enter school
ready to learn, the Administration has worked to improve early childhood programs through the
Good Start, Grow Smart initiative. The goals of this initiative are:
• Strengthening Head Start;
• Working with States to improve early childhood learning; and
• Providing parents, teachers, and caregivers with information on early learning.
To further these goals, the Budget supports reauthorization of Head Start and provides $6.8 billion,
enough to serve more than 900,000 children.
Child Welfare Program Option. The 2007 Budget seeks legislation to introduce an option for all
States so they can choose an alternative system for foster care. Flexible financing will allow States to
design programs with a stronger emphasis on child-abuse prevention, family support, and increased
flexibility in providing services.

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Prioritizing Resources
In 2006, the Congress terminated or reduced spending in a number of HHS programs that were
either duplicative, inefficient, or not producing results. This produced over $1 billion in savings.
The 2007 Budget builds upon this success by identifying additional low-performing or lower priority
programs that should be terminated or reduced. As the Administration strives to improve efficiency
and effectiveness, the Budget redirects resources to other public health and social service activities
that have greater accountability to improve the public health and welfare. Highlights are discussed
below.

Proposed Terminations and Reductions
(savings in millions)

Program

2006
Enacted 1

Program

2007
Proposed 2

Terminations
Health Facilities Construction
Congressional Earmarks .................................
Healthy Community Access Program .............
Youth Media Campaign ........................................
Early Learning Opportunities Fund ..................
National Youth Sports ...........................................
Real Choice Systems Change Grants ............
State Planning Grant Program ..........................
Community Food and Nutrition ..........................
Direct Service Worker Delivery Grants ...........
Trauma-Emergency Medical Services ............

483
83
59
36
18
15
11
7
3
3

Community Services Block Grant .....................
Preventive Health Block Grant ...........................
Urban Indian Health Program ............................
Community Economic Development ................
Emergency Medical Services for Children ....
Universal Newborn Screening ...........................
Traumatic Brain Injury ...........................................
Rural Community Facilities ..................................
Job Opportunities for Low-Income
Individuals .............................................................

630
99
33
27
20
10
9
7
6

Reductions
Health Professions .................................................
CDC Congressional Project Earmarks ...........
Programs of Regional and National
Significance ..........................................................
Preventive Health Block Grant ...........................

1
2

155
60
40
20

Social Services Block Grant ...............................
Children’s Hospital’s Graduate Medical
Education Payments .........................................
Health Professions .................................................
Rural Health ..............................................................
Programs of Regional and National
Significance ..........................................................
CDC Administrative Expenses ...........................
Poison Control Centers .........................................

500
198
136
133
71
30
10

Difference from 2005.
Difference from 2006.

Community Services Block Grant. The Community Services Block Grant (CSBG) provides funds
through States to Community Action Agencies to fund social services to reduce poverty and increase
self-sufficiency. The Budget eliminates CSBG because it lacks national performance measures and
does not award grants on a competitive basis. In addition, key CSBG services targeting employment,
housing, nutrition, and health care are also provided by other Federal programs. This is supported

THE BUDGET FOR FISCAL YEAR 2007

119

by findings from the PART evaluation, in which the program received a rating of Results Not Demonstrated.
Social Services Block Grant. The Budget reduces 2007 Social Services Block Grant (SSBG) funding
by $500 million. The 2005 PART identified several weaknesses of the block grant. While SSBG
provides State flexibility, as the Congress intended, it fails to ensure that funds are directed towards
activities that achieve results. Because SSBG is a funding stream, rather than a program, there are
no assessments of its effectiveness. In addition, the purposes of SSBG overlap substantially with
other categorical and flexible Federal social service programs.
Preventive Health Block Grant. The 2007 Budget proposes the elimination of the Preventive Health
Block Grant at CDC. The Budget proposes to increase the flexibility of CDC’s existing State categorical grants by allowing a portion of these funds to support primary prevention and health services.
This added flexibility maintains the accountability of CDC State categorical grants while limiting
redundancy, and gives States the tools they need to address public health concerns.
Health Professions. The Budget reduces unnecessary subsidies for health professions training. The
programs were created 40 years ago in response to an anticipated national shortage of physicians that
does not exist today. An assessment of the program found it was ineffective. No comprehensive evaluations link Health Professions grants to changes in supply, distribution, or minority representation
of physicians and other health professionals. The Budget improves access to health care by focusing
investments where there is a greater need, such as Health Centers and the supply of nurses.

Rationalizing Medicare Financing
Medicare Growing as Share of GDP
14%
12%

Part A
Part B

10%

Part D

8%

Total

6%
4%
2%
0
2004

2015

2026

2037

Source: 2005 Medicare Trustees Report.

2048

2059

2070 2079

Strengthening
Medicare’s
Long-Term
Financial Security. Medicare, which represents about two and a half percent of the
economy today, is projected to grow to about
12 percent of the economy by 2070. The
Medicare Trustees estimate that the Medicare
program will require $29.9 trillion over 75
years from the Federal budget above and
beyond dedicated revenues from the public.
This rapid growth in expenditures would
place a substantial burden on future budgets
and the economy. Reducing program growth
while continuing to promote high-quality care
is critical to minimizing Medicare’s burden
on the economy and ensuring the program’s
sustainability and effectiveness for future

generations.
The Administration has pursued a steady course toward Medicare reform and modernization. The
MMA brought Medicare into the 21st Century by adding a new drug benefit, bringing Medicare’s
benefits up to date with a much greater focus on preventive care. The MMA also took a first step
toward improving Medicare’s sustainability by requiring the Medicare Trustees’ Report to include a
new, comprehensive fiscal analysis of the program’s financing, and issue a warning if this analysis
projects Medicare’s dedicated revenues to fall below adequate levels.
The President’s Budget proposes to build on these steps toward a modern, sustainable Medicare
program by requiring further action should the share of Medicare spending funded by dedicated
revenues fall below adequate levels. If the Congress failed to act on recommendations to reach more

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sustainable financing levels, a modest slowdown in the rate of growth would be implemented through
a four-tenths of one percent reduction to all payments, similar to a reduction in the market basket
update. The reduction would grow by four-tenths of one percent every year that shortfalls continue to
occur. If the Congress preferred to enact more specific sustainability reforms in lieu of these modest
payment trends, expedited procedures would facilitate consideration.
The Deficit Reduction Act and the MMA are important steps in the process of improving Medicare’s
sustainability. The Budget includes a number of proposals that build upon this foundation to take
important further steps to enhance the long-term sustainability of the Medicare program. The 2007
Budget recognizes that accomplishing the goal of financial solvency for the Medicare program will
require a series of incremental reforms that can be achieved most smoothly and effectively if they
are implemented over many years.
Modernizing Medicare Financing. The MMA began to rationalize and strengthen financing of the
Medicare program by limiting the growth in subsidies for higher-income beneficiaries who are most
able to contribute to the costs of their coverage. This modernization gave these beneficiaries increased
ownership of and greater responsibility for their health care needs, while preserving Medicare’s capacity to provide more support for beneficiaries with more limited means. In order to strengthen the
program’s long-term fiscal sustainability, the Budget proposes to broaden the application of reduced
subsidies for higher-income beneficiaries.
Fostering Productivity. Individuals enrolled in Medicare today benefit from innovations that enable them to have improved quality of life as they age. Many of these changes in the delivery of care
and advances in technology, as well as other management improvements, also enhance the health
care system by improving productivity. The Budget proposes to consider these advances in making productivity adjustments to provider updates that allow Medicare to deliver high-quality care
and encourage efficiency. Prospective payments reward those providers who reduce their costs and
streamline their operations. Similarly, a productivity adjustment to inflation updates encourages
those facilities to improve efficiency.

Improving the Ryan White CARE Act’s Effectiveness through Reform
Much has changed in the epidemiology and medical management of HIV/AIDS since the Ryan
White CARE Act was enacted in 1990. Fifteen years ago, those diagnosed with the disease had little
hope of survival; patients today are living longer and healthier lives. The epidemiology of the disease
has also changed as minorities now make up the majority of new infections and, according to CDC,
many of these individuals have insufficient access to health care and the antiretroviral medications
they need.
The President has called for reauthorization of the Ryan White CARE Act to make the Act more
responsive to the HIV/AIDS epidemic of today, especially for African-American and other minority
communities who disproportionately suffer from the disease. The President’s principles to guide
reauthorization include:
• Focusing Federal resources on life-extending care, including the provision of life-saving antiretroviral medications;
• Ensuring greater flexibility in distribution of Federal resources and targeting funding to those
areas, such as minority communities, that are experiencing the greatest need; and
• Ensuring that recipients of funds can show that progress is being made and that the program
is achieving results.

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Enhancing the National Institutes of Health
NIH will invest $28.4 billion to support, conduct,
and foster biomedical research in 2007, embarking
on several new initiatives to contribute more effectively to the Nation’s strong biomedical research
foundation and to prepare for the future.
Accelerating Discovery. Initiated in 2003, the
NIH Roadmap for Medical Research speeds
research discoveries from the bench to the bedside
by directing resources to high-priority, emerging
areas to encourage innovation and scientific
breakthroughs.
The Roadmap charts new
pathways to discovery, designs interdisciplinary
scientific research teams, and re-engineers the
clinical research enterprise. The Budget also
DNA Double Helix, the genetic basis of all life.
supports a new Genes, Environment, and Health
Initiative with $68 million to accelerate discovery of the major genetic factors for diseases that have
a substantial public health impact. Additionally, the initiative will accelerate the development of
technology, which will help make clear the connection between genes and the environment on human
health. The request includes nearly $160 million to support activities related to the advanced
development of biodefense countermeasures and $35 million for pandemic influenza clinical trials
and studies.
Enhancing Management and Oversight. NIH will continue the establishment and staffing of the
Office of Portfolio Analysis and Strategic Initiatives (OPASI). In 2007, OPASI will serve as the center
of NIH portfolio management and coordination activities. OPASI will fill the crucial role of continually evaluating the benefits and impacts of NIH research investments, stimulating investments
in research involving multiple Institutes and Centers, and reviewing the vast portfolio of research
activities across NIH.
Developing Decision Support Tools. Also in 2007, NIH will continue the development of a knowledge
management system to assist with the oversight of its portfolio. This knowledge management system
will allow NIH to improve the reliability and consistency of reporting on NIH research investments,
increase transparency, and speed the process of collecting and querying grant data.

Targeting Children’s Hospital Payments
The Budget reforms Federal financing for Children’s Hospitals Graduate Medical Education payments. Federal funds currently go to free-standing children’s hospitals without regard to which hospitals most need the Federal assistance. The reformed payments will focus on those hospitals with
the greatest financial need that treat the largest number of uninsured patients and train the greatest
number of physicians.

Reforming the Community Mental Health Services Block Grant
The President’s New Freedom Commission on Mental Health found that mental health services in
the United States are fragmented and in disarray. The Commission put forth an agenda to transform
mental health care. The Budget helps carry out that agenda by reforming the Community Mental
Health Services Block Grant. The block grant allocates resources to every State for planning and services and currently offers little evidence of impact on mental health care. Under the reform proposal,

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States will use these funds to transform their mental health care systems and will track and report
on the results of these investments.

Improving the Health Status of American Indians and Alaska Natives
For over 50 years, the Indian Health Service
(IHS) has delivered health services to American Indians and Alaska Natives. Through
35
direct primary care, referrals for specialty
1972-1974
1999-2001
30
care, and public health services, IHS has
substantially improved the health status of
25
this population. Since 1972, the average death
20
rate from all causes for American Indians and
Alaska Natives has declined by 26 percent
15
overall, and as the accompanying chart shows,
the reduction is even greater in many disease
10
areas. Along with these gains come new
5
challenges. For example, a diabetes epidemic
among American Indians and Alaska Natives
0
Maternal
Gastrointestinal
Infant
Cervical
threatens to slow or even reverse some of this
Mortality
Disease
Cancer
Tuberculosis Mortality
progress. During this same period, the death
rate from diabetes has increased by 64 percent. American Indians and Alaska Natives are now
three times more likely to be diagnosed with diabetes than other Americans.
Mortality Rates for American Indians and
Alaska Natives have Declined

In response to this threat, IHS has been increasing activities related to the prevention and management of diabetes and set several performance goals to measure progress. IHS has increased the
percentage of American Indians and Alaska Natives with diabetes that have their blood sugar and
blood pressure under control, and has improved screening rates for other complications associated
with diabetes. Diabetics who control blood sugar and blood pressure and obtain recommended screenings experience fewer debilitating and costly complications from the disease. IHS is continuing to
improve surveillance and data collection in order to direct and manage resources to most effectively
address the growing problem of diabetes and further improve the health of American Indians and
Alaska Natives.

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123

Reducing Drug Use
Drug use by the Nation’s youth puts their
health and future at risk and strains families,
schools, and communities. Between 2002 and
2004, drug use by the Nation’s youth (between
the ages of 12 and 17) fell by about 200,000, a
drop of nine percent in the number of teenagers
using illicit drugs. The rate of drug use among
this age group fell from 11.6 percent in 2002
to 10.6 percent in 2004. The Administration is
building on this progress to discourage a new
generation of youth from taking these risks.
Valid and reliable data are central to assessing
the impact of drug control programs. The
2007 Budget strengthens data collection efforts
critical to support drug policy and further
reduce drug use.

Youth Drug Use is Decreasing
12
Percent of youth aged
12-17 who used an illicit
drug in the past month

11

10
2002

2003

2004

Source: National Survey on Drug Use and Health.

Modernizing FDA User Fees Strategies
Since the authorization of the Prescription Drug User Fee Act in 1992, the collection of fees has
been critical in leading to performance improvement in drug review. The Act has allowed FDA to
shorten the length of new drug reviews while maintaining the safety of newly improved drugs and
devices. Fees for reviews have been so successful in improving FDA performance that they have
also been implemented for medical devices and animal drugs in recent years. These fees also help
ensure that industries that benefit from rigorous FDA oversight share with the U.S. taxpayer the
responsibility for supporting this oversight.
The Budget proposes to expand the current drug, animal drug, and medical devices export certification fee to include food and animal feed. These certificates enhance the global competitiveness of
American food and feed producers by ensuring that the products meet certain requirements of law.
The President’s Budget eliminates the current preferential treatment of the food and feed industry.
The 2007 Budget also proposes new fees for re-inspections. FDA is statutorily required to inspect
manufacturing establishments on a regular basis. To further encourage industry improvement, fees
would be assessed for repeat inspections that are needed as a result of violations identified on the
first inspection.

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Improving Quality of Care for Medicare Beneficiaries
Encouraging Provider Quality. The Administration has undertaken initiatives to improve
care, reduce errors, and improve efficiency for
Medicare beneficiaries by holding providers
accountable for quality and supporting care
improvements that enhance quality while
improving efficiency. The Medicare website
now displays quality data that allow consumers
to make informed choices by comparing the
performances of hospitals, skilled nursing
facilities, home health agencies, and dialysis
facilities. Recently, Medicare has expanded
these efforts to include a voluntary reporting
Consumers can evaluate hospital efforts to prevent surgical infections
system for physicians to provide information
by viewing quality measures at CMS’ Hospital Compare website.
on the quality of beneficiary care, as well as
systems for widespread reporting on hospital patient satisfaction and surgical results.
The Administration supports greater availability of reliable and consistent quality information
through incentives for quality reporting that do not increase Medicare costs. CMS is also working
with providers to identify and test budget-neutral incentives that will stimulate Medicare providers
to improve performance on quality and efficiency measures.
The Administration supports provider payment reforms that would encourage quality and efficiency, and discourage increased complications and costs. Building on provisions in the DRA, CMS
will work collaboratively with private and public organizations to implement reforms that support
higher-quality care and improved efficiency. Many of the opportunities to improve quality and efficiency involve post-acute care. Medicare often pays very different amounts for post-acute care for
beneficiaries with similar needs, and often pays more when preventable complications leading to
readmissions and other health problems occur in the post-acute system. The Budget proposes to
build on the Administration’s quality initiatives by ensuring that patients are served in the most
medically appropriate and efficient setting for high-quality post-acute care.
An important component of these reforms is consideration of better ways to encourage more efficient and high quality physician services. The Administration supports reforms in physician payment that do not increase costs for taxpayers or for Medicare and its beneficiaries, such as differential
updates initially for physicians that report on quality measures and later for physicians that achieve
efficient and high-quality care.
Promoting Competition. The MMA included provisions to incorporate market competition into
purchasing medical items needed to treat beneficiaries. Competition is an important approach to
improving care for beneficiaries by enhancing quality and lowering costs. The Administration will
implement a competitive bidding program in July 2006 to enable physicians to obtain certain drugs
used in their offices at lower prices. The Administration will expand the use of additional competitive bidding programs in 2007, for example, into the purchase of medical supplies and equipment. In
particular, the Budget proposes to integrate competitive bidding into payment of clinical laboratory
services.

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125

Advancing Medicare Contracting Reform
The 1965 Medicare Act mandated that Medicare use private insurance companies to process claims.
Since that time, Medicare has paid the contractors based on cost with little discretion of payment for
performance or efficiency. This administrative structure is not keeping pace with the evolving health
care delivery system. The MMA requires that CMS transition to competitive contracts by 2011. The
Administration is accelerating implementation with completion targeted in 2009. It removes the restrictions that have prevented full and open competition for the fee-for-service workload. As a result,
Medicare will consolidate from the current arrangement of about 40 contractors for processing Parts
A and B fee-for-service claims to 15 single or multi-State regions. The agency will award one contract for each region that covers claims processing services and recompete these contracts every five
years. CMS will tie payments to accuracy and efficiency of contractors’ claims processing services. In
addition, the Administration will work to improve efficiency and quality, and better target resources
in the Quality Improvement Organization program.

Continuing Medicare Program Integrity
Medicare program integrity efforts have yielded savings from the recovery of erroneous overpayments and the collection of criminal fines and penalties. The 2007 Budget continues this effort with
$1.1 billion from the Health Care Fraud and Abuse Control account to fight improper Medicare payments. The Budget requests $118 million for efforts to protect the new Medicare prescription drug
benefit and the MA program against fraud, waste, and error, as well as reduce errors in Medicaid.
These funds are part of a Government-wide proposal to fund program integrity activities through a
discretionary cap adjustment. In addition, the Budget proposes to encourage Medicare providers to
collect payments from beneficiaries who do not meet their obligations to contribute to the cost of their
medical care.

Strengthening Federal Health Benefit Payments
Private health insurance payers supplement coverage for some beneficiaries enrolled in Federal
health benefit programs. In certain cases, due to lack of accurate and complete information about
such private coverage, the Federal Government mistakenly pays too much or too little for a beneficiary’s care. To help ensure appropriate payments and assist in recouping mistaken payments, the
Budget proposes to establish a data clearinghouse that would work to determine whether a private
insurance company or the Government should pay for a beneficiary’s health benefits. Federal health
programs benefiting from this clearinghouse would include Medicare, the Department of Veterans
Affairs, the Department of Defense’s Tricare program, and the Federal Employees Health Benefits
Program, among others.

Reforming Medicaid Financing and Services
Medicaid is an open-ended Federal-State partnership with a shared financing structure. In certain
circumstances, opportunities exist for States to draw down Federal matching funds inappropriately,
which threaten this joint relationship and the financial stability of the Medicaid program. The 2007
Budget proposes reforms that enhance past efforts to create service efficiencies and to assure the
fiscal integrity of Medicaid and SCHIP.
Reforming Payments to Government Providers. The Administration proposes to improve further
the integrity of the Medicaid matching rate system by proposing steps to curb financing arrangements used by a number of States to avoid the legally determined State matching fund requirements.

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Through various mechanisms, Federal funds are returned from providers back to the State and “recycled” to draw additional Federal dollars. The Budget proposes to build on CMS’ efforts to identify and
recover diverted payments that are not used for their intended purposes. The Budget also proposes
to limit Federal reimbursement for Government providers to no more than cost. This proposal would
curb excessive payments and still preserve a State’s ability to pay reasonable rates to Government
providers.
Reforming Provider Taxes. Under certain conditions, States may use the proceeds of taxes collected
from a certain class of health providers to help finance the State’s share of Medicaid expenses. Under
current rules, the tax cannot exceed six percent of revenues and must be applied uniformly across
all health care providers in the same class (e.g., all hospitals). Although current law requires States
to tax all providers within a class—regardless of how many Medicaid patients they serve—statute
allows States to tax only Medicaid managed care organizations. The DRA amends the statute to
require States to tax all managed care organizations uniformly.
In addition to the reform included in the DRA that treats managed care organizations the same as
other classes of health care providers with respect to provider tax requirements, HHS will publish a
regulation that phases down the allowable tax rate from six percent to three percent. HHS will also
take necessary administrative steps to clarify and codify existing policies used to determine whether
provider taxes comply with statute including revising existing regulations.
Third Party Liability. By statute, Medicaid is the payer of last resort and should only be billed
after all other liable parties have reimbursed their share of the claim. Statute and regulation require
States to ensure that Medicaid recipients avail themselves of all other resources—legally responsible
third parties—to pay for their medical needs before using Medicaid. The 2007 Budget includes a
package of proposals designed to enhance existing third party liability policy.
Additionally, through waivers of the so-called cost avoidance methodology, HHS allows States to
“pay and chase,” that is, to pay a claim when it is received initially and then to seek reimbursement
from liable parties. The Administration plans, through administrative action, to require States to uphold the cost avoidance standard for pharmacy claims, thereby eliminating the pay and chase option.
Service Reforms. The service reform included in the DRA tightens the definition of targeted case
management services allowable for reimbursement under Medicaid. The 2007 Budget includes a
legislative proposal to align the administrative matching rate for targeted case management services
to 50 percent, consistent with Federal reimbursement for case management across Federal programs.
In addition, the Budget proposes a package of initiatives designed to address service areas susceptible to abuse and to target Medicaid dollars more efficiently. To ensure proper use of Federal
funds, the Administration plans to clarify through regulation the statutory Disproportionate Share
Hospital program provisions and allowable services that can be claimed as rehabilitation services.
In addition, the Budget plans to prohibit Federal Medicaid reimbursement for school-based administration or transportation costs established under the Individuals with Disabilities Education Act
(IDEA); these are costs not traditionally paid for through Medicaid. This plan would maintain the
original intent of IDEA while insuring appropriate use of Federal funds.
Cost Allocation. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996
capped Federal funding for administrative costs under TANF and eliminated the open-ended matching structure for administrative costs in Aid to Families with Dependent Children (AFDC). Under
the AFDC structure, States generally allocated most of the common eligibility determination costs
for AFDC, Medicaid, and Food Stamps to AFDC/TANF. As a result, administrative costs associated

THE BUDGET FOR FISCAL YEAR 2007

127

with Medicaid were inappropriately included in the TANF block grant. This proposal would reduce
Medicaid administrative funding to reflect costs covered by the TANF block grant.
Medicaid and SCHIP Financial Management. Health Care Fraud and Abuse account entities will
develop a comprehensive plan for Medicaid and SCHIP program integrity. HHS will continue activities in 2007 to measure improper payments in Medicaid and SCHIP and begin reporting error rates
for certain components of Medicaid and SCHIP in the 2007 Performance and Accountability Report.
Medicaid Prescription Drugs.
The DRA
makes several changes to the way prescription
drugs are paid for in Medicaid. First, it amends
the Federal upper payment limit to apply to
more drugs. Second, the DRA maximizes rebate
collections for authorized generics and drugs
administered in a physician’s office. Third,
it extends 340B drug discounts to certain
children’s hospitals. The 2007 Budget proposes
several other changes to prescription drug
coverage and payment that would:
• Restructure Pharmacy Reimbursement.
The HHS Inspector General has docThe Budget proposes to reduce overpayments for prescription drugs.
umented substantial overpayment for
pharmacy services in recent years. The 2007 Budget proposes building on the Federal upper
payment limit calculation changes in the DRA to further reduce these overpayments.
• Amend the Medicaid Drug Rebate Formula to Remove Best Price in a Budget Neutral Manner.
The Budget reproposes a Medicaid drug rebate change from the 2006 Budget. Drug manufacturers pay rebates to States to have their drugs covered by Medicaid. Part of the rebate formula
is the lowest private market price, referred to as best price. Best price effectively acts as a price
floor, interfering with the competitive marketplace and preventing manufacturers from negotiating better discounts with large purchasers. Replacing the current rebate with a budget neutral
flat rebate will allow private purchasers to negotiate lower drug prices, while creating neither
savings nor costs for the Federal Government.
• Allow States to Use Managed Formularies. The 2007 Budget proposes allowing States to use
managed formularies, which are a common cost control tool for private insurers. With managed
formularies, States will have greater control over drug coverage and greater leverage to negotiate discounts with drug manufacturers.

Update on the President’s Management Agenda
The table that follows provides an update on HHS’ implementation of the President’s Management
Agenda as of December 31, 2005.

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Human Capital

Competitive
Sourcing

Financial
Performance

E-Government

Budget and
Performance
Integration

Status
Progress
In support of the Human Capital initiative, HHS developed a Department-wide performance appraisal system
that mirrors its SES system, thus linking all employees to program goals and objectives. Initial roll-out of this
system commences in the beginning of calendar year 2006. HHS estimates net savings of $400 million over
the next several years for its competitive sourcing competitions that were conducted in 2003, 2004, and 2005.
HHS issued its annual Performance and Accountability Report on the November 15, 2005 due date, and for the
seventh year in a row, HHS’ auditors issued an unqualified or clean audit opinion. In E-Gov, HHS leads the
development of Federal health data standards, which will pave the way for consensus national standards to
support implementation of electronic health records by hospitals and doctors nationwide.

Initiative

Status

Progress

Faith-Based and Community Initiative
Real Property Asset Management
Eliminating Improper Payments
Broadening Health Insurance Coverage through State Initiatives
Arrow indicates change in status rating since the prior evaluation as of September 30, 2005.
HHS collects accurate and timely data on the Faith-Based and Community Initiative grantees. In addition, HHS
is working to implement outcome based evaluations of its main programs—Compassion Capital Fund, Access
to Recovery, and Mentoring Children of Prisoners.
HHS has successfully developed a real property asset management plan; compiled an inventory of owned,
leased, and otherwise managed properties; and established performance measures that are consistent with the
Federal Real Property Council’s guidance.
HHS’ annual Performance and Accountability Report includes an annual estimated error rate for Medicare that
accounts for nearly 50 percent of improper payments that have been reported Government-wide. Due to
improvements in the stewardship of Medicare funds, the error rate dropped from 10.1 percent in 2004 to 5.2
percent in 2005, a reduction of $9.6 billion. HHS also reduced improper payments in Head Start from 3.9 percent
in 2004 to 1.6 percent in 2005, a reduction of $145 million, and Foster Care from 10.3 percent in 2004 to 8.6
percent in 2005, a reduction of $31 million. HHS is also working to expand the number of programs reporting
estimated improper payments and improve the accuracy of estimates.
HIFA demonstrations, at full implementation, could result in approximately 825,000 individuals receiving
health coverage through Medicaid and SCHIP. CMS continues to approve HIFA demonstrations and use its
administrative flexibility, in conjunction with States, to increase the number of people who have health insurance.

THE BUDGET FOR FISCAL YEAR 2007

129

Department of Health and Human Services
(In millions of dollars)

2005
Actual

Estimate
2006

2007

Spending
Discretionary Budget Authority:
Food and Drug Administration ..........................................................................
Program level (non-add) ................................................................................
Health Resources and Services Administration 1 ....................................
Program level (non-add) ................................................................................
Indian Health Service ...........................................................................................
Program level (non-add) ................................................................................
Centers for Disease Control and Prevention 1 ...........................................
Program level (non-add) ................................................................................
National Institutes of Health 1 ...........................................................................
Program level (non-add) ................................................................................
Substance Abuse and Mental Health Services Administration ............
Program level (non-add) ................................................................................
Agency for Healthcare Research and Quality .............................................
Program level (non-add) ................................................................................
Centers for Medicare and Medicaid Services 2 .........................................
Program level (non-add) ................................................................................
MedPAC and GDM/OCR Trust Funds ............................................................
Discretionary HCFAC ...........................................................................................
Administration for Children and Families ......................................................
Program level (non-add) ................................................................................
Administration on Aging ......................................................................................
Office of the Secretary .........................................................................................
Program level (non-add) ................................................................................
Health Information Technology .........................................................................
Program level (non-add) ................................................................................
Office of Medicare Appeals ................................................................................
Public Health and Social Services Emergency Fund 1 ...........................
Program Support Center: Medicare eligible retiree accrual ..................
Office of the Inspector General ........................................................................

1,427
1,801
7,288
7,332
2,985
3,813
6,152
6,419
28,393
28,650
3,268
3,392
—
319
2,666
4,098
19
—
13,545
13,905
1,393
404
518
—
20
58
142
—
40

1,475
1,856
6,555
6,600
3,045
3,879
5,976
6,243
28,410
28,587
3,205
3,327
—
319
3,080
3,901
19
—
13,704
13,764
1,363
380
492
42
61
59
53
34
39

1,545
1,947
6,220
6,264
3,170
4,004
5,809
6,076
28,428
28,587
3,134
3,260
—
319
3,115
3,978
19
118
12,287
12,847
1,335
396
526
88
116
74
160
36
44

Subtotal, Discretionary budget authority ...........................................................

67,780

67,439

65,978

Estimated future emergency funding for pandemic influenza
preparedness ......................................................................................................
Total, Discretionary budget authority ..................................................................

—
67,780

—
67,439

2,300
68,278

Memorandum: Budget authority from enacted supplementals .................

408

3,410

—

Total, Discretionary outlays ....................................................................................

66,536

67,977

70,635

130

HEALTH AND HUMAN SERVICES

Department of Health and Human Services—Continued
(In millions of dollars)

2005
Actual
Mandatory Outlays:
Medicare:
Existing law .........................................................................................................
Legislative proposal .........................................................................................
Medicaid/SCHIP:
Existing law .........................................................................................................
Legislative proposal .........................................................................................
All other programs:
Existing law .........................................................................................................
Legislative proposal .........................................................................................
Total, Mandatory outlays .........................................................................................
Total, Outlays ...............................................................................................................
1
2

Estimate
2006

2007

294,334
—

337,922
—

389,502
2,453

186,849
—

198,109
—

204,689
546

32,232
—
513,415

35,651
—
571,682

34,642
389
627,315

579,951

639,659

697,950

For comparability, the 2005 Actual reflects Bioterrorism funds in the individual operating divisions, instead of the Public Health and Social
Services Emergency Fund.
Amounts appropriated to the Social Security Administration (SSA) from the Hospital Insurance and Supplementary Medical Insurance accounts
are included in the corresponding table in the SSA chapter.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102