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

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.