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Association of American Physicians and Surgeons, Inc.
A Voice for Private Physicians Since 1943
Omnia pro aegroto

Volume 60, No. 2 February 2004


"Once millions of HSAs are established, it will be almost impossible to reverse this program," writes Physicians for a National Health Program (PNHP) on its web site ( www.pnhp. org); thus, it calls for an immediate repeal of the Health Savings Accounts enabled in the Medicare Prescription Drug, Improvement and Modernization Act.

Editorialists called HSAs "Teddy's nightmare" (Wall St J 12/23/03) because a reinvigorated private medical insurance market could end the dream of Senators Kennedy, Clinton, et al. for Canadian-style socialized medicine.

Aetna, Fortis, and other insurers are writing policies, and the IRS has issued Notice 2004-2, available at http://www.irs.gov/pub/irs-drop/n-04-2.pdf. About 30% of employers are expected to start offering such plans, according to Helen Darling of the Washington Business Group on Health.

To be eligible, a person must have a qualifying high- deductible health plan (HDHP) and may not have coverage (even as a spouse or dependent) under a plan that is not an HDHP. An HDHP has an annual deductible of at least $1,000 and maximum annual out-of-pocket expenses of $5,000 for an individual or $2,000 and $10,000, respectively, for a family.

HSA trustees or custodians are not required by the IRS to determine whether an HSA distribution is used for qualified medical expenses. Individuals need to keep such records in the event of a tax audit. There is a 10% penalty on top of taxes for using the funds for non-qualified purposes, except after a beneficiary's death, disability, or attainment of age 65.

As PNHP points out, the tax advantages are not great, especially for those who don't pay taxes. The tax benefit ranges from $200 for a person with an adjusted gross income of $35,000 to $721 for a person with an AGI of $500,000 or greater (Wall St J, op. cit.) It's the insurance premium saving that is, over time, supposed to fund the deductible.

Many will probably choose, as PNHP fears, to use their HSA as a form of individual retirement account (IRA). If a head of household contributes 100% of a $4,000 deductible each year starting at age 30, and withdraws $1,000 per year to pay medical expenses, a nestegg of $284,509 would accumulate in 35 years, assuming a 5% rate of return, according to a chart distributed by the Archer MSA Coalition.

This individual benefit, PNHP laments, would come at the expense of "fragmenting the health care risk pool." If healthier subscribers withdraw from "comprehensive" plans, the cost of such coverage "may become so exorbitant that it doesn't exist for you or your employer may not be able to afford it," stated Edwin Park of the Center on Budget and Policy Priorities (Wall St J, op cit.).

At present, there is no common risk pool, observes Greg Scandlen of the Galen Institute, but rather tens of thousands of little risk pools. Moreover, the cost of comprehensive coverage is already so high that more employers and workers are doing without insurance altogether.

What PNHP has in mind, of course, is to create a giant risk pool with national health insurance. However, "there is no pooling when government pays," writes Linda Gorman of the Independence Institute. "Government payment is an entitlement, not insurance. Raw political power decides what government will spend on health care and who it is going to spend it on. Government has no contractual obligation to... allow you access to medical care. In the Netherlands, it simply encourages physicians to murder citizens judged to be consuming too many medical resources.

"Private insurance companies, on the other hand, have contractual obligations, and it is one of the wonders of the market system that they generally meet them."

Reliance on force vs. trust in voluntary contracts is the key difference between "social insurance" (compulsory income redistribution) and true insurance. The new plans based on consumer choice are "another nail in the coffin of health insurance as a form of social insurance," writes Victor Fuchs of Stanford University. He expects national health insurance to come to the U.S. in the wake of war, depression, or large-scale civil unrest (N Engl J Med 2002;246:1822-1824).

There may be only a narrow window of opportunity to avert a crisis in the affordability and availability of medical care, leading to cries for a government takeover from desperate patients and doctors trapped in the system. "Our society has been infected with a cancer called socialism," writes Joseph Lee Pugh. "If it isn't stopped this time, it won't be stopped again."

Citing the language of the bill, which will "keep judges, lawyers, tax attorneys, accountants, lobbyists, benefits counselors, financial advisors, and government bureaucrats fully employed for decades," Craig Cantoni calls HSAs "the antithesis of a free market." It's a "bizarre combination of Marxism and free-market capitalism that is embraced by a large number of conservatives." "Marxicon economics," he says, results from accepting the assumption that government should tax retirement savings in the first place.

This small opening for consumer-directed medical care could, however, awaken Americans to the fact that combining insurance and medical care is "like buying a month's worth of groceries at the Seven-Eleven," explains Frank Timmins.

Talented physicians are opting out of third-party payment. Customers are demanding lower prices. The American Hospital Association is demanding a safe harbor from the Anti-Kickback Statute for giving uninsured patients a discount. Nonprofit hospitals are opening cash-based clinics. Prices are being posted on the internet. The "Health Care Rebellion" is well underway, writes Joseph Lee Pugh. It could be, in Churchill's words, "the end of the beginning," if not the beginning of the end.

Insights in Medical Economics

Risk v. Certainty. One insures risks events that might not occur. One pre-funds certainties such as the balloon payment on the mortgage [or retirement income]. People must under-stand that if they are lucky in life they will pay more in life and medical insurance premiums than they receive in benefits (just like home and auto), and this is good. A large part of the problem in medical financing results from confusing the purposes of insurance and pre-funding. --Gerry Smedinghoff

The Insurance Business and Casinos. Casinos do not gamble; they manage risk, basing all their decisions on statistics derived from the results of millions of bets. Insurers should also know exactly what their returns will be, given a large number of risk-takers (insureds). The more certain they are of results, the more they can lower their loading (margin). Unlike gamblers, smart subscribers should transfer catastrophic risk to competent risk managers to pool with predictable numbers.

If casinos were "risk-adjusted" and gamblers' bets all defined by a federal bureaucracy, the most inefficient casinos would win, and the most efficient would lose. The most important issue would become "how do we game the risk adjustment?" --Art Jetter

"Consumer-Directed Health Care" is a concept, not a product. CDH is designed to promote a generation of value- conscious customers. Mature technology exists to provide "price transparency" on the internet as well as information and decision support. The future is in flexibility and customization.

--Kevin Haugh, Business and Health Archive, 1/10/04

Opportunity for Upstarts. Giant insurers have no interest in seeing fully half of their cash flow disappear into the private savings accounts of 280 million individuals. I will cry crocodile tears over the down-sizing of this out-of-control industry!

--James G. Knight, M.D.

Insurance Has Always Been Risk-Rated. It cost more to insure the contents of a ship going to the Barbary Coast than one just crossing the English Channel. Ben Franklin's first insurance company in Philadelphia charged people living in wooden houses three times what it charged people in brick houses. Some people claim that folks can't help being sick and thus should be immune from risk-rating. Yet people who can't help being old pay more for life insurance and people who can't help being young pay more for auto insurance. People who are more likely to incur claims are willing to pay more for coverage; they value it more. --Greg Scandlen


Waiting Times

At www.nhs.uk, you can enter a postal code and find the waiting times for various procedures and consultations. Russell Faria, D.O., of Newport, OR, suggests the exercise of entering codes for impoverished and affluent areas to check for discrimination by postal code.

Waitlist times for Alberta, Canada, are available at www.health.gov.ab.ca .

More than 90% of stroke patients at Singapore General Hospital and Tan Tock Seng Hospital wait less than one hour for a CT scan, says Minister of State Balaji Sadasivan. Hospitals charge for the test and expect to recover their costs.


Doctors Design Their Own Savings Plans

Cheryl Reichert, M.D., Ph.D., of Montana writes that our current "non-system" has entered a self-perpetuating feedback loop with "spiraling costs for health insurance increasing the number of uninsured, [which accelerates] cost-shifting to the insured." In the competitive global economy, U.S. employment opportunites are reduced. She predicts government-sponsored and rationed care within a decade unless we have major reform.

Instead of spending $500 to $700 per month on a "traditional" policy like other members of her professional corporation, she bought a $20,000-deductible policy sponsored by the AMA for $1,108 per year and banked $500 per month. When premiums increased 40%, she switched to a $40,000 deductible. In 5 years, she has saved $30,000.

Dr. Reichert has not been able to locate other comparable plans; insurance executives tell her that very few families can afford this level of risk. But how can they afford the $500 to $700 monthly premiums that exclude most of the routine care that they actually use? They could, she says, take out a high-interest loan to cover the deductible if necessary.

Dr. Reichert chose a simple savings account that is not tax- sheltered: "I didn't want to be limited to annual government limits or conditions on how these dollars may be used."

Michael Harris, M.D., of Michigan writes that a $10,000 deductible or higher provides much greater savings than the plans approved for MSAs or HSAs. He uses an HRA for himself and his employees to pay for premiums and routine care. He deposits $1,000 per month (after taxes) into a conservative investment account. For the same amount per year as he was spending with the Blue Cross PPO that he cancelled in 2001, he has accumulated $27,000 in two years.

"Employees do not understand that they are wasting part of their employment benefit in getting first-dollar coverage.... Everyone is paralyzed by (uninformed) fear," he writes.


A Patient's View

A patient who asked AAPS for a referral to a physician who likes cash-paying customers writes: "I am a small business owner who has had a Golden Rule MSA for more than four years. Even after increasing four-fold since we signed up for the plan, the MSA premiums are still only half of what PPOs and HMOs currently charge.... I have managed to bank a substantial amount of pre-tax money...that would otherwise be in the pockets of an insurance company." But insurance people try to scare people with the "huge risk of a $5,000 bill."


AAPS Calendar

Oct. 13-16, 2004. 61st annual meeting, Portland, Oregon.

Pain Doctor Wins License Back

The Alabama Court of Appeals has overturned the revocation of a pain doctor's license by the state medical board. Eley v. Medical Licensure Comm'n of Alabama, 2003 Ala. Civ. App. LEXIS 740 (Sept. 23, 2003). The court cited decisions in the past 6 years in Colorado, New Jersey, Ohio and Louisiana that reversed medical board sanctions for being "manifestly excessive in relation to the need to ensure public safety." The Alabama court emphasized that a pain "physician's conduct will be evaluated to a great extent by the treatment outcome, taking into account whether the drug used is medically and/or pharmacologically recognized to be appropriate for the diagnosis, the patient's needs including any improvement in functioning and recognizing that some types of pain cannot be completely relieved."


Most Influential Trials

The ten most influential trials affecting American history are summarized by AAPS General Counsel Andrew Schlafly under "Legal Issues" at www.aapsonline.org. These range from the trial of William Penn in 1670 and John Peter Zenger in 1735 to that of William Jefferson Clinton in 1999.

For physicians facing trials for prescribing controlled substances, the most important case to review is probably State of Kansas v. L. Stan Naramore, D.O., 25 Kan. App. 2d 302;965 P.2d 211; 1998 Kan. App. LEXIS 79 (AAPS News, Oct 1998).

The court stated: "While criminal guilt may be established by circumstantial evidence, the facts and circumstances in evidence must not only be consistent with each other and with the guilt of the defendant, but they must also be inconsistent with any reasonable theory of the defendant's innocence."

Tip of the Month: Both Adams and Jefferson viewed jury power as the ultimate check on tyranny. "Jury nullification" is the right of jurors to decide a case based on conscience, even if in conflict with the legal instructions given them by the court. A New Jersey appellate court just upheld this doctrine by siding with a juror who candidly told the judge she could not follow his instructions. State v. Jenkins, A-1271-02T4 (App. Div. Dec. 18, 2003). The trial judge had dismissed and replaced her in the jury deliberations. The Appellate Court reversed the subsequent jury verdict, holding that refusal to follow jury instructions is not a valid basis for dismissing a juror.


Medicaid Pays for Drug Habits

While doctors who treat Medicaid beneficiaries may go to prison for their patients' drug abuse or diversion (see www.aapsonline.org/painma n/actionsagainst.htm), the Medicaid program itself enables the drug trade. Some prescriptions that beneficiaries can fill for a copayment of $1 may be worth thousands of dollars on the street.

Kicking drug dealers out of the system would deter abuse, say police officers. "You cut five or 10 people off and put that in the paper, it would cause a bigger ripple than arresting 75 people in one county," said Capt. Mike Reichenbach of the Kentucky State Police drug-enforcement unit. However, federal rules prohibit ending benefits for recipients based on criminal convictions in state court, except while they are actually in prison. Many receive probation and do not lose their benefits (Estep B, Herald-Leader, Lexington, KY 12/28/03).


On Opioid Contracts

Physicians are under increasing pressure to force pain patients to sign contracts accepting an array of conditions, including the humiliation of urination on command, as a nonnegotiable condition of obtaining relief from unremitting agony, writes Frank Adams, M.D. The result: "the therapeutic alliance is replaced by an adversarial relationship."

The existence of such contracts gives the physician no protection from official sanctions, although not using contracts can result in an accusation of disregarding "recommended guidelines," arbitrarily interpreted as a standard of care.

Contracts are supposed to prevent diversion, but there is no evidence that they actually do so. "The pain contract is nothing more than ritualistic behavior in support of a myth fueled by an ideology" (Adams F. Editor's corner, April/May 2003, www.texaspain.org).


Self-Funding Persecution

At the 60th annual meeting, Professor Ronald Libby of the University of North Florida presented figures from the Annual Reports of the Departments of HHS and Justice for the Health Care Fraud and Abuse Control Program (HCFAC). In 2001, $408 million was allocated and $1.36 billion was "recovered," including $454 million under the False Claims Act, $124 million from OIG audits, and $83 million paid to qui tam relators. Libby concludes:

"HCFAC is a self-funding and unaccountable bureaucracy targeting physicians for investigation and prosecution. Funds taken from doctors are recycled for further investigations and prosecutions of doctors."


Sham Peer Review Rampant

In a chilling series of articles published in the Pittsburgh Post-Gazette (www.post-gazette.com), Steve Twedt writes how physicians who try to protect their patients from harm can be labeled "disruptive" and possibly have their careers ruined.

"While it is unknown exactly how many physicians are targeted for patient advocacy," he writes, "a 1998 survey of 448 emergency physicians across the United States found that 23 percent had either lost a job, or were threatened with it, after they'd raised quality-of-care concerns."

The shroud of immunity and confidentiality over internal hospital investigations protects the hospital but means that physicians who are wrongly or maliciously accused may have no meaningful due process. Courts almost uniformly refuse to get involved (Twedt S, Post-Gazette 10/26/03).


Judge Resigns Over Sentencing Guidelines

Developed in 1986, the federal sentencing guidelines were meant to assure similar sentences for similar crimes nationwide. Combined with mandatory minimum sentences heralded as the solution to the "war on drugs," the result is too often lengthy sentences for "street criminals" but not for drug kingpins.

Retiring at the age of 60, U.S. District Court Judge Robert Cindrich said: "When the law provides a result that is repugnant, we must still follow the law. And you can only do that so many times before you start to wonder, `How many more times am I going to put my name on this sentence that I don't believe in?'"


New York Clawback. The new instructions promulgated by the N.Y. Dept. of Health for filing claims for "dual-eligibles" (Medicare/Medicaid patients) are so costly and complex that small practices will not be able to bear them. But just to make sure that hospital-owned clinics will have a significant advantage over solo practitioners, the new law provides that "hospital based/freestanding clinic services" will receive the full coinsurance amount, while independent physicians receive only 20%. To collect the paltry 20%, the physician will have to file two Medicaid claims (plus the Medicare claim) for each service: one for the deductible, and one for the coinsurance. Worse, the State's claim processing system wasn't programmed to handle the new rules when the law went into effect in July 2003. Because of the "overpayments" made to physicians, the State will be "making retroactive adjustments to recoup the payments made in excess of the reduced coinsurance amounts for claims that have already been submitted (July 1, 2003, through December 10, 2003)." This will be done gradually, over several payment cycles in the first quarter of 2004.

It's time for physicians to wake up and smell the frog.
Lawrence R. Huntoon, M.D., Ph.D., Lake View, NY


Cognitive Dissonance. I understand that the current crop of history students is being taught the evils of the past: monarchs were immoral because they looted the people. Yet students learn from the very same textbook that their progressive government is moral when it loots every grandchild to shower grandma with free drugs and medical care.
Robert P. Gervais, M.D., Mesa, AZ


Taxpayers Buy Cigarettes. I once did a survey of all TennCare patients admitted to the emergency room: 85% of them admitted to the triage nurse that they smoked. I asked them how much they smoked and told them how much it cost. One pack per day cost $1,000 per year, 2 packs $2,000. They had never done the math. I really would have no problem with their smoking or drinking if it weren't on the taxpayers' tab.
Robert S. Berry, M.D., Greeneville, TN


I once did the same: $3,000 per year amounts to $150,000 over 50 years. If a person saved this amount, and it doubled every 7 years, the approximate life-time investment equivalent is about $1.2 million. This shows that no one who has a little self- discipline needs to be on welfare. Some patients got really angry and said I had no right to make moral judgments. One reported me for harassment. I decided it wasn't worth the risk. Government control has built-in safeguards against correction.
Delbert H. Meyer, M.D., Carmichael, CA


Representation without Taxation. Under our progressive tax system, many inhabitants do not pay income taxes, though there are hidden taxes and sales taxes. Some even get "refunds" for taxes they did not pay! Then there are "welfare" payments, though they may be unconstitutional. It's time for a change.
Robert M. Webster, M.D., Jasper, GA


Freedom for All. Let me as a patient contract with any insurer for anything we can mutually agree upon. Let me as a patient contract with any physician for any service we can mutually agree upon. No more pacts with the devil (like the AMA teaming up with the trial lawyers for a "Patients Bill of Rights"). Freedom for me means freedom for you and for insurers, brokers, hospitals, and everybody else. One person's freedom cannot be enhanced by diminishing another's.
Greg Scandlen, Frederick, MD


No Programs, No Mandates, No Systems! Too often, we get trapped into the idea of "creating" markets, or devising complex plans that "utilize market forces." You can't "direct" a market, at least not very efficiently. Markets direct themselves. We are usually best served by getting out of the way.
Sean Parnell, Heartland Institute


What About the Poor? We must demonstrate that the old and the sick are the ones who get hammered when medicine is centrally controlled by bean-counters. A group of disabled Medicaid dependents in Colorado have organized to protect the severely disabled from Medicaid. They want the cash to arrange their own care. It's tough to argue that expanding Medicaid is the best thing for the vulnerable when people intimately familiar with the program sit there in wheelchairs and tell you you're wrong. The educational voucher folks have been brilliant in taking the moral high ground away from public schools. We need to do the same for public medical care.
Linda Gorman, Englewood, CO


Why I Quit Medicare. It is illegal to accept money from any Medicare beneficiary, beyond the fee rules, for any covered service. If I accept 1 cent more for better or more timely service, I am a felon, like in Cuba, North Korea, and Canada. Even heavily socialized countries like England and France have an extensive market for private care. Just walk in and pay. Medicare has become a welfare program for the middle class. Doctors hate it for the underpayment and endless hassles. Patients hate it for the lack of access to the good doctors who have quit and the third-rate care the "benefit" now buys. I want my Medicare benefit to go into my HSA, so I'm in control of the money. Then I'll be free.
Herbert Rubin, M.D., UCLA School of Medicine

Legislative Alert

Medicare Fallout

Let's get this out of the way, so there is no misunderstanding. The Health Savings Accounts (HSAs), in Title XII of the Medicare Prescription Drug, Improvement and Modernization Act, are clearly the most desirable provisions of the otherwise flawed new law. But of course HSAs have nothing to do with Medicare. Nonetheless, for the first time, all Americans under the age of 65 will be able to take advantage of a more robust form of medical savings accounts (MSAs).

The new law sets a cap on contributions at $2,600 for individuals and $5,150 for families. For persons between the age of 55 and 64, there will be a catch-up provision, allowing an additional amount of $500, but capped at an additional $1,000 in 2009. Both employers and employees will be able to contribute to these accounts tax free, and patients will be able to pay directly for medical services. Already, Kay Cole James, the energetic Director of the Office of Personnel Management (OPM), the agency that runs the Federal Employees Health Benefits Program (FEHBP), is exploring ways to extend the HSA option to the FEHBP in 2004. Conservatives, libertarians, and champions of the free-market policy all applaud the effort. It is a significant victory for consumer choice and competition.

Now, let's get back to Medicare. The fallout from the Medicare explosion continues, and the policy and the politics are going to be affected in strange ways over the course of the next three election cycles. If anyone in Congress or the White House thought that the enactment of this legislation was going to take Medicare "off the table," as they say, they don't belong in the politics business. That business is for grown-ups. So, a few observations while the dust is still settling:

It is far short of real Medicare reform. In terms of the "premium support"/FEHBP style competitive model endorsed by the Bipartisan Commission in 1999 and the Bush Administration in 2001, the provisions of the new Medicare law are far short of Medicare reform. Tom Scully, Administrator of the Centers for Medicare and Medicaid Services (CMS), admitted as much when he told Professor Uwe Reinhardt of Princeton that "I don't know if folks really understand this, but the reforms we're now talking about are really quite modest by comparison with what was floating around two or three years ago" (Health Affairs, Nov/Dec 2003).

The "Premium Support Demo" is a fat target for the Left. While Section 241 of HR 1, the House version of the Medicare bill, provided for an FEHBP-style reform, in the final language of the House-Senate conference report that provision was watered down to a mere 6-city demonstration project beginning in 2010. The proof that this was broadly understood to be a toothless provision was evident when Senator Max Baucus (D-MT), in a revealing November 24 Senate floor speech in favor of the bill, told his Senate colleagues not to worry about it; it would be repealed:

I have heard some Senators claim that this is not the Senate bill because it contains something called premium support, and it has a so-called slush fund. Let me remind Senators, the so-called premium support is extremely watered down from what was in the House bill. It is time limited to 6 years. Only six cities will be demonstration projects. Low-income seniors in each of those six cities will be held harmless.... In addition, the premiums for those who are not low income are limited to a 5 percent change. Fee for service Medicare is held harmless in all respects in those six cities where there may be a demonstration project. They are held harmless in all respects, except the Part B premium may go up by no more than 5 percent. Any other change in these demonstration areas has to be enacted by Congress enacted by Congress to extend, enacted by Congress to expand, enacted by Congress to change. What has happened in the past when we have had these demos? They have been repealed. They have not been extended. In 1997, Congress set up premium support demonstration projects. Congress then rushed in to repeal them as quickly as they possibly could. They were gone. The same will happen here. Do my colleagues know why? Because the dollars provided to private plans in the premium support demonstration areas will be much less than in other parts in the country. The private plans will not be able to survive.

Mark my word, those plans, those physicians, and those providers in the demonstration MSAs are going to come to Congress and ask us to repeal it.

Will the Bush Administration or its successors really champion an FEHBP-style program, with a will to see it succeed? Good question. Last month, when HHS Secretary Tommy Thompson, supposedly a champion of free-market competition, was asked whether he thought the program would happen in 2010, he told Kate Schuler of CQ Today, "I don't."

It is going to contain nasty surprises. They will unfold over the next several months. Let's look at a prominent one: A restriction on Medigap coverage for drugs. As with all Medicare entitlements, Congress has standardized the prescription drug benefit to be offered by private plans. And as Robert Pear reports, the new law also prohibits Medicare beneficiaries from buying Medigap coverage to cover the deductible, the copayments, or the $2,850 "doughnut hole," because Congress wants to avoid duplication of the benefit and end the Medicare beneficiaries' insulation from costs. According to Pear, if a drug plan used a formulary, or a preferred list of drugs, and a Medicare patient wanted to use a drug not on the plan's formulary, he could appeal that decision but could not resort to additional private coverage to pay the cost of the non- formulary drug. (NY Times 12/7/03). Needless to say, for millions of seniors who buy Medigap coverage this will be an unwelcome development to put it mildly.

For the record: Medigap restrictions are not exactly a surprise. Ed Haislmaier, Visiting Research Fellow at the Heritage Foundation, called serious attention to this on July 17 ("How Congress's Medicare Drug Provisions Would Reduce Seniors' Existing Private Coverage," at www.heritage.org/ research/healthcare/bg1668.cfm), detailing the likely consequences, but the Congressional leadership obviously felt that this was not going to be a problem. As with so much else in this legislation, they were wrong.

Its costs are going to be explosive. While the Congres- sional Budget Office (CBO) estimated that the bill would cost $395 billion in the first ten years, CBO Director Douglas Holtz- Eakin, in a Dec. 8 speech to the Heritage Foundation, conceded that the bill could cost as much as $2 trillion during the 2014- 2023 period, when the baby boomers will be enrolling in Medicare in ever larger numbers. Meanwhile, liberals in Congress have already backed legislation that would more than double the costs of the first 10 years. Taxpayers and seniors alike are in for sticker shock.

Health-related spending in 2002 reached $1.6 trillion or $5,440 per person, according to CMS economists. Drug spending jumped 15.3% in 2002, slowing from previous years. But drug spending is still expected to increase its share of overall medical spending from 10.5% in 2003 to 14.5% in 2012 under current law, without taking into consideration the impact of the new entitlement.

It means the Era of Big Government is back. As opined in a remarkable editorial, "The most striking thing about the new Republicanism is the way it embraces big government. The Bush Administration has presided over a $400 billion expansion of Medicare entitlements." (NY Times 12/28/03). This expansion comes at a price, and both Left and Right will pay it. The impending entitlement expansion will not only threaten the Bush tax cuts, and any future tax cuts, but it could, paradoxically enough, spell deep trouble for liberal-activist government. Former OPM Director Don Devine, who served in the Reagan Administration, predicted years ago that the end result of the massive flow of dollars to retirees would otherwise be devastating to liberal activist government for the rest of society, so heavily based on the promotion of various social policies and programs.

Cost containment means pain. As CBO notes, in an entitlement program that pain can be administered through cuts in benefits, reductions in eligibility, or cuts in payment for services. The cuts translate into a reduction in quality and access to care. The only "cost containment" that will work with the least pain, and a pain that is easiest to relieve for low-income patients, is the one Heritage, the American Enterprise Institute, and the Progressive Policy Institute have all proposed: a "premium support" financing system (a version of the defined contribution approach). Perhaps when the inevitable "provider" fee cuts start in 2007 and 2008, Congress will rethink the whole thing, and may even go back to a reconsideration of the premium-support model. Meanwhile, pass the anesthesia.

It's not the political slam dunk the White House envisioned. Seniors, particularly those with solid drug coverage, won't like this once they understand it. And they will soon. Let's start with the polls. During the height of the Senate debate, the Galen Institute hired John Zogby to test approval of the Senate drug bill; almost three-quarters said they didn't like it. More recently, according a poll released by the National Annenberg Election survey, the support for the new law dropped from 61% percent to 21% when respondents learned the details (Palm Beach Post 12/31/03). Then, according to the Kaiser Family Foundation, many voters still don't even grasp the basic facts. After Congress enacted the Medicare law, only 39% of adults said that they knew it passed; 49% said they did not know it passed; and 13% did not believe that the bill had really passed after all. In a second Kaiser survey, conducted in December 2003, 59% of seniors knew the bill had passed, but 40% believed that the law did not pass. Meanwhile, there is no nationally prominent conservative seniors' organization in the country none that is countering the AARP on its support for the legislation, and the AARP itself, not surprisingly, is already losing membership over this mess. This is an historically significant failure of leadership among seniors' organizations.

The Left is already plowing this fertile ground. Ron Pollock of Families USA, no ideological champion of the free market, is planning to visit 25 states in March and April to educate the public on the new law (NY Times 1/6/94).

Senator Edward M. Kennedy (D-MA) says that he has only just begun to fight, and has introduced legislation to roll back large chunks of the Medicare law and fill up the "doughnut hole." Likewise, Senate Minority Leader Tom Daschle (D-SD) dropped his bill a Medicare "technical corrections" bill just before Christmas. It would, among other things, end HSAs and kill the FEHBP-style demo project. According to the Times, Democrats will use every available means in the upcoming session of Congress to amend or attack the new law.

It will mean more, not less, Congressional micro- management of Medicare. Former HHS Secretary Donna Shalala has already fired the first shot in what will likely be a mind- numbing conflict over the technical issues involved in crafting new regulations. In a recent Washington Post op ed piece, Shalala writes, "The agency will have to make literally thousands of decisions as it develops the rules and procedures for this program, many of which will significantly affect beneficiaries and prescription drug plans alike."

Needless to say, this congressional and bureaucratic excess does not characterize the FEHBP, which is governed by very few rules and an entirely different set of principles.

It sets the stage for price controls on drugs. The pharmaceutical industry will see a significant volume increase in its product and continue investment in research and develop-ment, and thus the production of new drugs. But recent trends are troubling. According to CMS, 35 new drugs entered the market in 1999; 25 in 2000-2001; and only 17 in 2002.

Expect the Left to ratchet up the case for drug price controls, either directly or through government monopsony purchasing of prescription drugs. Already, Senator Kennedy is arguing that the Bush Administration and its allies in Congress are putting corporate profits ahead of patients. That rhetoric will ratchet up over the next several months. And none other than John Rother, a top executive of AARP, has indicated that now that the Medicare drug provisions are enacted into law, the next big issue will be pricing of pharmaceuticals.

Although drug stocks may react positively at first, the long-term impact of the bill on the drug companies cannot be in doubt. According to June 11, 2003, report of the International Strategy and Investment Group (ISI Group):

Even though the federal government would not act as a monopsony purchase or drugs initially, we believe that outcome is almost inevitable. Medicare is already a fiscal train wreck waiting to happen. Add a drug benefit, the cost of which is expected to increase by 12 percent per year, and Congress will have little choice but to pay far less for drugs in the future. The long run threat to industry is significant because with a universal drug benefit in place, government will be purchasing more than half the drugs consumed in the US [emphasis in original].

Robert Moffit is Director, the Center for Health Policy Studies at the Heritage Foundation, Washington, D.C.