Auditor General Jack Wagner Finds $1.34 Billion in Tobacco Settlement Funds Diverted to Plug Budget Holes

Diversions hurt adultBasic insurance and tobacco prevention programs

HARRISBURG, Pa., March 3, 2011 /PRNewswire-USNewswire/ -- Auditor General Jack Wagner today recommended that Gov. Corbett and the General Assembly use incoming tobacco settlement dollars as intended to provide adultBasic health insurance to Pennsylvanians who don't qualify for Medicaid.  He said that $1.34 billion in tobacco settlement funds have already been quietly diverted from the uses originally intended by the Tobacco Settlement Act of 2001.

More than 40,000 Pennsylvanians lost the state-subsidized health coverage Feb. 28 when the state shuttered the program for enrollees who couldn't afford private health insurance but earned too much to qualify for Medicaid. An additional 500,000 Pennsylvanians were on a waiting list for the program when it was shut down.

In a special report issued at a press conference today, Wagner noted that the $1.34 billion in diverted funds represents 30 percent of the Tobacco Settlement Fund payments received since 1999. The diversions, which include $432 million to the general fund for unspecified purposes, siphoned money not only from health initiatives like adultBasic and tobacco cessation activities but also from a separate endowment account intended to benefit future Pennsylvanians.  

The Tobacco Settlement Act, passed by the General Assembly in 2001, specifically mandated how the state should use the annual tobacco company payments.  But according to Wagner's special report, the mandates were quietly overridden, thus allowing the decimation of adultBasic, the Health Endowment Account, and the tobacco use prevention and cessation program. The endowment account will be empty by June 1, and the tobacco prevention/cessation program was drained to the point that it received an "F" grade from the American Lung Association.

Wagner said that Gov. Corbett and the General Assembly should use incoming tobacco settlement payments for adultBasic until 2014 when federal health care reform kicks in.  He also said the state should actively search for additional public and private funds if more are needed.

"The mishandling of tobacco settlement funds is yet another example of how the state's dysfunctional budgetary process is negatively impacting the lives of Pennsylvanians," Wagner said. "With the commonwealth still mired in its greatest economic crisis since the Great Depression, now is not the time to reduce or eliminate health coverage for hard-working Pennsylvanians – or for reducing funds to prevent smoking and to help those who want to quit."

Wagner noted that more than 20,000 Pennsylvanians die each year from smoking-related illnesses, and that residents of the commonwealth spend more than $5 billion a year treating smoking-related illnesses. He also pointed out that, according to the American Lung Association, 18.4 percent of Pennsylvania's high school seniors are smokers – not far below the adult smoking rate of 20 percent.

Yet, Pennsylvania ranks only 30th in the nation in funding programs to prevent youth smoking and to help smokers quit. According to Wagner's special report, funding for tobacco prevention and cessation declined from $50.5 million in 2002-03 to $14.7 million in 2010-11.  

"This is an ominous trend line for the health of future Pennsylvanians," Wagner said. "We can do better for our children – and we should."

Pennsylvania was one of 46 states that settled litigation in 1998 with five major tobacco companies to recover medical expenses for Medicaid enrollees with tobacco-related illnesses. Under the Master Settlement Agreement, the tobacco companies agreed to pay the states beginning in 2000 and each year thereafter.

Wagner said that in 2000, then-Gov. Tom Ridge issued Pennsylvania's Health Investment Plan, which proposed several health initiatives to be funded by the tobacco settlement money.  The Tobacco Settlement Act followed, outlining the principles in the Health Investment Plan, which included making Pennsylvanians healthier.  Wagner voted for the law as a state senator.

The Tobacco Settlement Act mandated that annual tobacco settlement payments be used according to these percentages: 8 percent deposited to an endowment account for the future, 30 percent for adultBasic and Medicaid for workers with disabilities, 18 percent for health research, 13 percent for home- and community-based services for the elderly, 12 percent for tobacco prevention and cessation programs, 10 percent to reimburse hospitals for uncompensated care, 8 percent to expand the PACENET prescription drug program, and 1 percent for cancer research.

Wagner said that the programs were funded as mandated until 2005 when Pennsylvania started its "redirections" that year and every year thereafter.

When the funding for tobacco cessation programs was at its intended level, the state paid for year-round programs to educate the public, including children, on the dangers of smoking, and to promote a quit-smoking hotline.  The quit-smoking hotline used to get most calls from television advertising, but the reduced funding now allows only one statewide media effort each year.

Funding for adultBasic plummeted over the past seven years, going from $112 million in fiscal year 2003-04 to just $21.7 million this fiscal year. Enrollment declined from a high of 54,000 to just over 40,000 on Feb. 28, 2011, the day the program ended.  About 63 percent of the enrollees who lost coverage this week were women, many of whom were employed by jobs that had no health benefits, Wagner said.

Former Gov. Rendell induced four of the state's private insurers – Capital Blue Cross, Highmark, Independence Blue Cross and Blue Cross of Northeastern Pennsylvania – to make annual contributions to adultBasic as a substitute for the state's funding, but their voluntary contributions ended this week without a back-up plan by the state to replace them.

In total, $1.34 billion in tobacco settlement dollars was redirected from its original purpose, Wagner said. His auditors found that $432.4 million was redirected to the state's General Fund for unspecified purposes, $121 million was used to fulfill a General Fund obligation to the Public School Employees' Retirement System, and $795.3 million was used to fund Medicaid long-term care for seniors and persons with disabilities.

Wagner expressed concern that the Health Endowment Account, which was created to set aside funds for future use or to pay for emergency health care needs, will end this fiscal year with a zero balance.  In fiscal year 2007-08, the account contained $658 million.

"It is unconscionable that this account, designed to provide funding for health-related programs if and when the annual settlement payments decreased or stopped, has essentially been raided to cover General Fund budget shortfalls," Wagner said.

Wagner's special report made two recommendations for the remaining $5.4 billion in tobacco settlement payments the state is projected to receive over the next 15 years, including:

• In the near term, Gov. Corbett and the General Assembly should use incoming tobacco settlement funds to pay for adultBasic, to bridge the gap until health insurance becomes widely available under national health-care reform beginning Jan. 1, 2014.
• Gov. Corbett and the General Assembly should hold immediate public hearings throughout the commonwealth to discuss the long-term use of incoming tobacco settlement dollars to determine if the money should be used according to the original intentions, including funding critically important tobacco prevention and cessation programs, or if new priorities should be established.

Auditor General Jack Wagner is responsible for ensuring that all state money is spent legally and properly.  He is the commonwealth's elected independent fiscal watchdog, conducting financial audits, performance audits and special investigations.  The Department of the Auditor General conducts thousands of audits each year.  To learn more about the Department of the Auditor General, taxpayers are encouraged to visit the department's website at www.auditorgen.state.pa.us.

SOURCE Pennsylvania Department of the Auditor General