(Appropriations Subcommittee on Labor, Health and Human Services, and Education)

Madame Chairwoman, thank you for the opportunity to appear before this subcommittee today to testify on the Governors’ number one legislative priority, the retention of all funds received as a result of the settlement reached with the major tobacco companies of the nation.

I have submitted a lengthy written statement for the record, so my testimony today will be brief.

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. 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 purposes.

You’ve already mentioned the several differences states used in suing. 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.

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 or will spend on tobacco related illnesses personally or through their government.

The master settlement agreement represents a global settlement approach that covers 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 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.

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 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’s 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. 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.