Volume 48, No. 2 February 1992

MEDICAL CARE COSTS TOO MUCH

The Good Samaritan gave the innkeeper two denarii- about two days' wages-to care for a man who been robbed, beaten, and left for dead.

Recently, a patient who had an uncomplicated appendectomy was billed $2,650 for three days in the hospital-not including the fees of the surgeon and the anesthesiologist. For many Americans, that is more than two months' wages.

An appendectomy would not have been available at any price 2,000 years ago. But 30 years ago, an uninsured American could still afford to pay for a routine operation.

Over the ages, the hours of labor required to earn most of the necessities and the luxuries of life have steadily declined. In comparison with other goods and services, the price of hospital care is anomalous and outrageous. It is no wonder that many Americans live in dread of medical expenses. A recent survey showed that 55% of respondents felt that the high cost of services was the most important health-care issue facing the country. And 51% of the survey respondents thought that the federal government had the primary responsibility to solve the problem (Wall St J 6/28/91).

In calling for government intervention, many point to the supposed efficiencies of a single-payer system, as in Canada. Canada spends ``only'' 8.9% of the Gross National Product on ``health'' care, compared with 11.6% in the U.S. That's about $1,990 (US dollars) per capita, versus $2,566 per capita in the U.S. About $100 of the $576 difference is due to the lower proportion of Canadians older than 65.

Do Canadians receive comparable care? Services received by patients are difficult to compare. Canadians see the doctor more often but have fewer CT scans. Is an office visit with a family physician who sees 80 to 120 patients a day (as many Canadian GPs must do to earn a living) the same as a consultation with an American specialist? Is it the equivalent of a CT scan that makes a definitive diagnosis?

Advocates claim that Canada has been able to contain costs and eliminate waste. Yet medical expenditures there are rising slightly faster than in the US (about 11% per year, double the rate of inflation). Ontario Health Minister Frances Lankin estimated that 30% of expenditures were ``waste'' (Toronto Sun 11/17/91). The tax burden is causing formerly docile Canadians to stage a rally on the steps of Queen's Park: ``The tea parties are forming and ready to board the boats'' (Toronto Sun 6/25/91). (In addition to the income tax, Canadians pay an 8% sales tax plus a 7% ``goods and services'' tax on everything, including postage stamps.)

The costs of Canadian ``rationing by the queue'' are difficult to calculate. Provincial ministries do not collect data on waiting times. The Fraser Institute estimated that productivity lost due to treatment delays was about the same as that lost due to strikes and lockouts.

The proposed solution to the problems of Canada's ``disintegrating health care system'' may sound familiar: ``a comprehensive national strategy, a major resetting of priorities, a reallocation of funds, better management.'' The British Columbia royal commission on health care made 650 recom- mendations, the majority requiring the government to expand bureaucratic control through thousands of additional regulations (Globe and Mail 11/23/91).

Cost Accounting

Hospital administrators admit that the charges on their bills are fictitious. The real source of the costs bears little if any relationship to the attribution. There is no line item for major cost components: cost-shifting, compliance with govern- ment regulations, liability insurance, interest on construction of unused capacity, legal fees, and claims-filing expenses.

Lacking good data for direct estimates of these costs, let us apply a mathematical method called ``working backwards.'' What should a three-day stay for an uncomplicated appendectomy cost? A nice hotel room can be had for $80 a day, including housekeeping. Patients with appendicitis don't eat much but require intravenous fluids. Allow $20 for food and $200 for the cost of solutions, needles, tubing, drugs, and expendable surgical supplies purchased wholesale. Allow $200 for renting a modern operating theater and instruments for about half an hour. Over three days, it is doubtful that the actual care of the patient required more than ten hours of the attention of nurses, pharmacists, and other personnel; allow 10 hours times $20/hour, or $200. The total comes to $860 or two weeks' wages at $10.75/- hour.

What accounts for the other $1,790 of the bill? One hospital administrator estimated that all bills could be reduced by 41% if every patient (including those covered by Medicare and managed care plans) paid the full charges. So the sickness tax alone is $1,086. If the cost of compliance with regulations is 25% of the hospital bill, that would be about $391. The cost of filing the average insurance claim is about $25 ($8 to $10 billion annually to process 400 million claims). These costs alone total $1502.

Would-be reformers propose to increase nonmedical costs in order to decrease medical expenditures. They have it backwards. We should ask how to decrease worthless expenditures in order to increase medical services per dollar.

The real Relative Value question is this: How many bureaucrat-hours and reams of paper will replace one appen- dectomy, one CT scan, or one Good Samaritan?

The Medical Insurance Idea

We live in a changing world, full of perils and hazards, where goods and services are scarce. We are destined to work and act to live. Action¹ requires planning, appraising uncertain future values, assuming risks, and avoiding losses. Entrepreneurs direct capital into production based upon their appraisal of future values. Unanticipated changes in the physical world, changing values of consumers, and limited vision of entrepreneurs result in losses.

Risks are of two general types: speculative risk and pure risk. Speculative risk is the heart of entrepreneurial action. It can result in gain or loss. Hedging may control (lessen) some of the risk, but it also restricts potential for gain. Pure risk involves only the possibility of loss or no loss. There is no gain. The risk of dying is an example. Only pure risks (but not all such risks) can be controlled through the market technique of insurance. Insurable and noninsurable pure risks must be clearly distinguished.

Insurance consists of pooling and transferring risks to insurers who agree to indemnify (compensate) the insureds in the event of a loss. Insurance requires estimating future losses on the basis of historical data and statistical theory. Past average losses for the population at risk comprise the historical data. The insureds are a population sample. The sample average will vary from the historical population average in each premium period. This variation is the risk assumed by the insurer. As the sample size increases or the premium period lengthens, the risk decreases. Note that the risk prediction requires: (1) a randomly selected sample from (2) a population with random losses.

An insurance contract must define indemnifiable losses as to time, cause, place, and amount. As a rule of thumb, when chance of loss exceeds about 40% (as in insuring the life of a 99-year- old man), risk and administrative expense, and thus the premium, exceed the indemnification.

Adverse selection refers to the tendency of those with higher than average loss expectancy to insure in greater numbers than those with lower expectancy. This increases premiums and causes those with lower expected losses to reject the insurance. As this adverse selection becomes known to the insureds, selection becomes increasingly adverse. Insurers control adverse selection by restriction and classification of the insureds (underwriting). For example, a man with terminal cancer will not meet the underwriting standards for life insurance.

George Rejda² lists the following requirements for an insurable risk:

1. There must be a large number of homogeneous exposure units.
2. The loss must be accidental and unintentional.
3. The loss must be determinable and measurable.
4. The loss must not be catastrophic.³
5. The chance of loss must be calculable.
6. The premium must be economically feasible.

usefulness of such contracts. Historically, the early medical insurance contracts offered specific indemnification for listed illnesses and procedures.

People desire health and consider sickness and disability a loss. Living and aging make complete health virtually impos- sible, but medical care can remove some sickness and eliminate some disability. With each new input of care, larger costs yield lesser improvement. In a world of scarce goods and services, medical care competes with food, clothing, shelter, entertainment, etc. We evaluate the tolerable amount of sickness and disability against the marginal cost of its removal. Patients with medical care insurance have no interest in the cost to the insurer and insist on receiving the full care that their contract promises. There is no longer any sickness or disability that is tolerable because there is no marginal cost.

Developments of new and alternate care frustrate efforts to control indemnification by lists of exclusions (all care except ___. Theory predicts that undefined medical care cost indem- nification will result in rising premiums, overall increases in medical care costs, arbitrary interpretation of contractual obligations, and even coercion of doctors to restrict care. History has already confirmed this prediction.

The unfettered market did not create this medical insurance monster. A growing stream of government programs and regulations has resuscitated the monster each time it staggered under market forces. In fact, the slide from defined medical loss insurance to insurance of medical care costs would never have occurred without governmental restrictions on the market. To the extent that we have insurance of medical care costs-insurance of the uninsurable-we have abandoned the market.

In our age, the market rarely returns once abandoned. Indeed, when government efforts fail to resuscitate private insurance, the outcry for government ``insurance'' rises. Of course, government does not offer insurance, which is a free- market phenomenon. Government imposes a scheme of taxes (rather than voluntary premiums) and benefits that are arbitrarily set and changed by government without contractual obligation. Everyone participates; thus there is no adverse selection. Government distributes medical care by legislation and regulation (i.e. by rationing, not risk control). With no market, there is no capital calculation and no information about patient values. Soon the individual values the offered medical care less than the other desirable goods he has forfeited to pay the taxes. The people feel a decrease in the standard of living even as the GNP increases.

If we return medical care to market distribution, we have not abandoned the unfortunates who cannot afford the cost of care. Before insurance, hospitals were largely charitable institutions. Doctors frequently reduced fees and provided free care for the indigent. The market has been the engine for social wealth and peace: wealth to provide the means of charity, and peace from the practice of charity. Why endorse untenable insurance when charity has worked well and also serves to strengthen the bonds of society?

A free market and charity are hallmarks of a free society.

Ralph O. Butz, MD, Chicago, IL

¹``Action'' as used by von Mises in Human Action; <sup>2</sup>Rejda, George E., Principles of Insurance 3rd ed., Foresman, 1989, pp. 21-25; <sup>3</sup>As defined by Rejda, ``catastrophic'' loss means that a large number of exposure units incur loss simultaneously as in a flood.

Petition for Writ of Certiorari Filed in US Supreme Court in Case of Caine v. Hardy

On December 23, 1991, a petition was filed requesting the US Supreme Court to review the en banc judgment of the Fifth Circuit Court in the case of Caine v. Hardy (see AAPS News, Nov. 1991, for a summary of the case).

The main question is this: Is there a cause of action under the Civil Rights Act of 1871 (42 U.S.C. §1983) and the Due Process Clauses of the Fifth and Fourteenth Amendments for a physician whose medical staff privileges at a public hospital were revoked without adequate notice or a hearing before unbiased decisionmakers, in violation of the medical staff bylaws and the Health Care Quality Improvement Act of 1986, 42 U.S.C. §11112 et seq.?

The petition also asks whether the Court of Appeals may ignore the Federal Rules of Civil Procedure. Can an appellate court decision be based on unsworn materials not presented at the trial court level? Can the trial court refuse to allow a plaintiff to amend his complaint to include alleged violations of the First Amendment to the US Constitution?

Dr. Caine claims that he was denied procedural due process at every stage of the peer review process, in retaliation for his exercise of his right to free speech. (He protested the granting of an exclusive anesthesia contract to the physicians who instigated the peer review proceedings.)

The petition states:

The petition states that the Court of Appeals departed so far from the accepted and usual course of judicial proceedings as to call for an exercise of the Supreme Court's power of supervision over the lower courts.

The en banc Court of Appeals, in ruling against Dr. Caine, stated that the failure of the defendants to follow hospital staff bylaws was not a violation of the Fourteenth Amendment because the act was ``random and unauthorized.'' Dr. Caine's petition argues that this reasoning conflicts with recent decisions of the US Supreme Court. In Zinermon v. Burch (494 U.S. at 138, 110 S.Ct. at 990), the Court ruled that depriving a psychiatric patient of the procedure set up to guard against unlawful confinement was `` `unauthorized' only in the sense that it was not an act sanctioned state law but, instead, was a `deprivation of constitutional rights...by an official's abuse of his position'.''

In an unanimous decision handed down recently, the Supreme Court held that Congress enacted 1983 ``to enforce provisions of the Fourteenth Amendment against those who carry a badge of authority of a State and represent it in some capacity, whether they act in accordance with their authority or misuse it'' (Hafer v. Melo, ___ U.S. ___, 112 S.Ct. 358, 363, ___ L.Ed.2d ___ (1991)).

The Petitioner states that the Caine v. Hardy decision conflicts with well-established constitutional principles. Allowing it to stand would leave citizens at the mercy of government officials who abuse their positions of authority.

The Respondents in the case are permitted to file a response to the petition within 30 days.

CLIA Update

The federal government wants to know where all the clinical laboratories are. If you don't voluntarily tell them where to find you, and you keep doing lab tests, and they eventually catch up with you, HCFA officials can assure that you pay huge fines or go to jail.

Although the final regulations haven't been drafted for the implementation of the Clinical Laboratory Improvement Act of 1988, more than 640,000 laboratories (including physicians' office labs) have received six-page forms, due on January 29. These are separate from the financial disclosure form sent by HCFA in early September. The forms are electronically numbered so that they cannot be reproduced.

The registration fee, which will be ``slightly more'' than the $261 initially proposed, will be due after the regulations are issued, if physicians decide to continue doing laboratory work. To keep this option open, physicians must set aside up to four hours to complete the form now.

Although the regulations themselves are not available, physicians may purchase a book about them for $285-a small price to pay to help avoid fines of $10,000 per day.

The number of tests exempted from regulations under a certificate of waiver has been reduced from 28 to six: dipstick or tablet reagent urinalysis, fecal occult blood, ovulation tests, urine pregnancy tests, erythrocyte sedimentation rate, and hemoglobin testing. All other tests are of at least ``moderate complexity.'' Under the final draft rule, these would not have to be supervised by a pathologist or Ph.D. level scientist; a physician with at least one year of supervising such tests will do (BNA's Medicare Report, 12/13/91).

CLIA Expected to Increase Cancer Deaths

The stimulus for intrusive federal regulation of all clinical laboratories was sensational press reports about ``Pap smear mills.'' None of these laboratories were certified under the voluntary accreditation programs of the College of American Pathologists and the American Society of Cytology. Ironically, some of them were certified by HCFA under provisions of the Clinical Laboratory Improvement Act of 1967.

The CLIA of 1988 ``represents a radical transfer of authority for medical practice standards from expert health care professionals...to federal regulators who have little or no experience in the field of cytology'' (R Marshall Austin, MD, PhD, CAP Today, Feb 1991). The expected result is an increase in cervical cancer deaths due to significant increases in cost, reporting delays, and impaired access for the poor. (Since regulations similar to CLIA were implemented in New York State, the price of Pap smears tripled.)

New Members

AAPS welcomes Drs. Frank J. Adcock of Cordova, TN; Padmini Bhaskar of Seattle, WA; Kenneth L. Bussey of Champaign, IL; William Cantor of Woodcliff Lake, NJ; Loren J. Carter of Decatur, GA; Francis J. Cavanaugh, Jr. of Pittsburgh, PA; Fenwick Charters of Mt. Pleasant, TX; Howard Chavis of New York, NY; D.R. Cornelius of Mt. Vernon, WA; Brent W. Davis of Henryetta, OK; David Debyle of Aberdeen, WA; Richard Finch of Baytown, TX; Frederic G. Glatter of Highland Park, NJ; John Gragnani of Glenroe, MO; George R. Green of Abington, PA; Harold Hanson of Closter, NJ; J.E.B. Johnson of Lake Jackson, TX; Caroline and Robert Johnston of La Porte, TX; Charles Lefler of Brevard, NC; Donn Livingston of Olympia, WA; William H. Mahood of Abington, PA; Steven A. Moralez of San Antonio, TX; Anita C. Murcko of Phoenix, AZ; Theodore M. Onifer of Abington, PA; Dante R. Oreta of Grayson, KY; Chris Penoyar of Shelton, WA; Richard A. Pollock of Atlanta, GA; Charles Chip Potter of Reno, NV; Steven A. Proper of Tampa, FL; T.N. Rengel of Wausau, WI; Bruce Rosen of Englewood, NJ; Henry Rosin of Midland Park, NJ; John R. Sanders of Greenville, SC; Hugh Schuetz of Olympia, WA; Pat Scotti of Brooklyn, NY; Richard Sharrett of Scotch Plains, NJ; Robert Shugart of Concord, CA; David Sperling of Avon, CT; Michael D. Timmel of Ocoee, FL; Joseph Upton of Chestnut Hill, MA; William C. Waters, IV of Atlanta, GA; Michael Weiss of Columbus, OH; and Darrick Wells of Baytown, TX.

AAPS is also pleased to welcome new student members-from Arizona: Kim Amjadi and Doug Freedberg; from Nevada: Stella Horton; and from Ohio: Tina M. Bruns, Vic Buenconsejo, Cynthia D. Caraballo, Constantine G. Economus, Shelly Heidelbaugh, David Jackman, Richard Kessler, Umesh N. Khot, Richard Marger, Philip E. McRill, Robert L. Miller, Mark Price, Amy Robins, Dave Rohner, Donna Rupolo, Gina M. Stoessner, Matthew J. Tompkins, Kevin Jerome Watt, John R. Wohlwend, and Shane A. Yates.

From the Utilization Review (UR) Front

The Office of Management and Budget (OMB) has proposed a PRO budget of $650 million for the next three years, a drastic cut from the current $955 million. The cut has provoked a strong bipartisan protest from Congress, led by Sen. David Durenberger (R-MN).

``Adding insult to injury,'' OMB also suggests that only half the PROs implement the vaunted Uniform Clinical Data Set (UCDS) project, while half continue the current work plan, so that costs and benefits can be compared. ``[The PRO's]

demoralization is now complete'' (Medical Utilization 12/5/91). OMB's action flies in the face of HCFA Administrator Gail Wilensky's tireless promotion of this algorithm-based ``epidemiological tool'' as the means to revolutionize peer review, quality assurance, and outcomes research. One demonstration project in Milwaukee has already shown that its nurses can reduce a chart to a set of UCDS data in only 45 minutes.

PROs may have their responsibilities increased stilll more. HHS sanctions chief James Patton and Inspector General Richard Kusserow are frustrated by administrative burdens that have caused the downturn in PRO sanction recommendations to the lowest level ever (only 12 in 1991). They are hampered by requirements that physicians be given corrective plans prior to a sanctions recommendation and that fines be limited to the dollar amount of contested service. Out of frustration, Patton recommends turning the entire process over to the PROs themselves, which could then act ``like [medical] licensing boards for Medicare.''

UR companies are cheered by a health care reform bill introduced by Senate Finance Committee Chairman Lloyd Bentsen (D- TX). The bill would allow them to keep medical review criteria secret. It would override state laws that prohibit or limit procedures used by qualified UR programs, force UR programs to reimburse provider expenses for complying with review, define UR as the ``practice of medicine'' (as a means of increasing UR firms' liability exposure), or limit UR access to provider personnel.

PROs are also encouraged by recent federal court decisions. In Goldsmith v. Harding Hospital, a district court dismissed a physician's medical staff privilege case, ruling that due process provisions of the Health Care Quality Improvement Act of 1986 did not create a cause of action for physicians allegedly denied due process. In Dozier v. Professional Foundation for Health Care, an appeals court overturned a lower court jury verdict that awarded compensatory and punitive damages to a physician allegedly defamed by a PRO payment denial letter. Also, the American Medical Peer Review Association sent congratulations to counsel for the Illinois PRO for winning the case of Wood v. Freedman, which established absolute immunity for PRO reviewers (see AAPS News, Jan 1992).

AAPS Calendar

Jan. 31, 1992. Board of Directors meeting, New Jersey.

Feb. 1, 1992. Medicine and Freedom: the Doctor, the Government, and the Law, Pascack Valley Hospital, Westwood, New Jersey.

Oct. 15-17, 1992. Annual Meeting, Seattle, WA.

Legislative Alert

Health Care Reform Takes Top Priority. Following the stunning upset of former United States Attorney General Richard Thornburgh by Senator Harris Wofford in the Pennsylvania Senate race, virtually every elected official in Washington is preoccupied with positioning himself on the emerging health care debate. Because Wofford made health care a central issue in his attack on both Thornburgh and the Bush Administration, there has been a renewed emphasis within the Administration to come up with a credible response.

The Democratic incumbent in Pennsylvania argued that every criminal in America has a right to a lawyer, therefore every working American should have a right to a doctor. Without being specific about his own program for reform, Wofford's populist appeal in recession-ridden Pennsylvania struck a responsive chord, and Thornburgh, the previously overwhelming favorite, lost a 40-point lead in the polls.

Over at HHS, Secretary Louis Sullivan and his team have been saying nice things about a consumer-oriented approach, relying on tax credits and free markets to assure access and control costs. But Sullivan does not have the lead on health policy; it appears to be centered in OMB, directly under the thumb of OMB Director Richard Darman. The OMB/White House team is keeping a close hold on its options. But President Bush wants something by January.

Democrats seem to be consolidating around an employer- mandated approach. Senate Republicans seem to be rallying around S 1936, introduced by Sen. Chafee of Rhode Island, and House Republicans are both restive and fuzzy. In any case, politicians in Washington have become dead serious about health care reform. Without some response to what pollsters and pundits have described as a growing crisis, their political survival is seen to be dependent on having some sort of answer. The challenges ahead for the medical profession loom even larger.

Relative Value Scale Final Rule. The November 15th release of the Final Rule has ended any prospect of threatened Congressional intervention, at least in the near term. Over the three-week recess ending January 3, congressional staffers will be sifting through constituent mail, looking closely for signs in their own districts of the fee schedule's impact. Beginning on January 1, 1992, the huge Medicare program will undergo the most significant regulatory change in its 25-year history.

The Final Rule represents a substantial budgetary change from the interim rule published last June 5th, which resulted in deeper than expected cuts. Of course, it represents no substantial change in policy.

The June 5th reductions resulted from HCFA's interpretation of the Omnibus Budget Reconciliation Act of 1990, which required ``budget neutrality'' in 1992. The key problem for HCFA was the calculation of the ``conversion factor,'' which included HCFA's assumptions of the behavioral response of physicians ``losing'' under the new fee schedule. (The ``old'' conversion factor was $26.87; the new CF is $30.42.)

After a storm of protest from physicians, a congressional

``remedy'' was introduced by Congressman Pete Stark (D-CA). This would have reversed HCFA's implementation rules and restored at least $7 billion in overall Medicare reimbursement for Medicare physicians. Stark garnered 267 House cosponsors for his measure. In the meantime, the Interim Rule

elicited more than 95,000 angry comments from physicians and a thorough internal review of the policies required to implement the law according to congressional intent.

Under the Final Rule, total Medicare spending for physi- cians' services will increase 74% during the five-year transition period, jumping from $27.3 billion in Calendar Year 1991 to $47.5 billion in 1996. The greatest single increase in Medicare reimbursement under the new RVS Rule will be enjoyed by optometrists, who will see an 41% increase in payments-per- service over the next four years, and an overall 148% increase in Medicare payments over that period. Virtually every medical specialty will show an increase, with the largest increase between 1991 and 1996 going to family practitioners, at 125%. The smallest increase will be registered by anesthesiologists at 50%. Originally designed by Harvard researchers to control runaway medical costs, the RVS as implemented will obviously do nothing of the kind.

While aggregate spending for all doctors will increase, the RVS will cut payments per service in virtually every specialty: Cardiology will see a 17% cut; gastroenterology, an 18% cut; nephrology, a 9% cut; neurology, a 4% cut; pulmonary medicine, a 2% cut; urology, an 8% cut; radiology, a 22% cut; anesthesiology, a 27% cut; pathology, a 20% cut; general surgery a 13% cut; neurosurgery, an 18% cut; opthalmology, a 21% cut; orthopaedic surgery, an 11% cut; plastic surgery, a 13% cut; and thoracic surgery, a 27% cut.

In revising the rule, HCFA would not budge on its behavioral assumptions, its projections about how physicians who ``lost'' under the new fee schedule would behave. HCFA still assumes that if a doctor loses $10,000 because of fee reductions, he will make up at least $5,000 by increasing volume. HCFA notes that volume changes have historically occurred, but declines to state why. (The AMA attributes the increases to changes in demand by beneficiaries.)

The Outlook for Relative Values. While most of the acrimony and debate on the oncoming RVS centered on its budgetary impact, the thorny problem of the ``values'' of the medical services themselves promises to become even thornier. Thus far, out of the 4,500 values HCFA got out of Harvard for its new fee schedule, it has had to revise at least 1,000 of them. While HCFA is quick to point out that the amount of revision for most of these has been small, it acknowledges that this entire process is going to be an ongoing task. A 120-day comment period is being provided for the RVUs that have already appeared in the Federal Register, even though these ``initial'' RVUs will go into effect on January 1, 1992. [Watch for an AAPS Action Alert.]

Look for HCFA to publish a revised list of RVUs in the Federal Register in the Fall of 1992, to take effect in January 1993. HCFA expects to update the ``values'' of the various medical procedures annually. Once this process has begun in earnest, it is likely that the decibel level will rise. Thanks to advocates of central planning in Congress and willing ac- complices in organized medicine, private practitioners can look forward to these bureaucratic battles every year, as different lobbyists for medical specialties will wrestle with each other and HCFA.

``True and Best'' Interpretation of the Law. HCFA's changes to appease the Washington lobbyists for organized medicine, plus Stark and Company up on Capitol Hill (who vowed to save the RVS and keep ``faith'' with doctors) is an interesting case study in bureaucratic politics. When HCFA published its first set of regulations last June, resulting in so much distress, it made the clear and unequivocal point that it was following the law. Gail Wilensky, HCFA Administrator, stated for the record, in testimony before Congress, that this was HCFA's true and best understanding of the provisions Congress had passed. In its November 15th release to the public, HCFA admitted: ``Although we believe that the proposed policy was and is the most obvious interpretation of the law, we have reexamined the statute and believe that another interpretation of law can be supported that maintains budget neutrality through the transition.''

Forget, for a moment, the policy winners and the policy losers, the political ``outcomes'' game in the RVS saga. Remember that these public servants have taken an oath to defend the Constitution and laws of the United States-to the best of their ability.

Tort Reform. Republicans in both the Senate and the House are making medical liability reform a key issue. It is included in S. 1936, ``The Health Equity Improvement and Access Act of 1991,'' introduced by Senator Chafee of Rhode Island. The Chafee bill calls for the Secretary of HHS to set up an advisory board on tort reform to make recommendations on a model ``voluntary alternative dispute resolution system.'' S.1936 also calls for expedited malpractice settlements and uniform standards for medical malpractice cases. Over in the House, Republican members are making the case that defensive medicine is helping to drive up costs, and that caps on attorneys fees and alternative methods of settling disputes are a necessity.

The main effort in the House is bipartisan. Calling the medical tort liability problem a national scandal, responsible for over $20 billion annually in extra health care costs, Con- gressmen Jon Kyl (R-AZ) and Charles Stenholm (D-TX) have introduced HR 3516, ``The Medical Care Injury Compensation Reform Act of 1991.'' The bill has 33 cosponsors.

HR 3516 authorizes the Secretary of HHS to make grants to the several states to implement and evaluate ``innovative systems'' to settle medical malpractice disputes. States will have the primary responsibility of developing ``alternative dispute resolution systems.'' At the same time, HHS will serve as a clearinghouse for different state programs: a data bank of information for states to learn what methods are most effective in settling these kinds of disputes.

On the issue of tort law itself, HR 3516 declares federal tort law to supersede state law only when the federal law is more ``stringent.'' Some of the key changes to tort law proposed by Kyl and Stenholm include new standards for determining negligence and new limitations on the damages plaintiffs can seek against doctors.

On the subject negligence, HR 3516 provides that no defendant can be found to have committed medical malpractice unless the defendants' conduct at the time he was giving care was ``not reasonable.'' The key damage limitations include a cap on noneconomic losses at $250,000; mandatory periodic payments for damages exceeding $100,000; a limitation of attorney's contingency fees to 25% for the first $150,000 and 15% for all amounts greater than $150,000. Punitive damages are limited to twice the compensatory damage award.

Other provisions of the bill dealing with physicians include a statute of limitations of two years from the time of the injury; a limitation on the liability of obstetricians whose first contact with the patient is the delivery of the baby. Such doctors are not to be held liable for medical problems developed during the term of the pregnancy, but only for actions during labor and delivery.

For further information on HR 3516, please contact: Representative Jon Kyl, 313 Cannon House Office Bldg. Washington, D.C. 20515. All correspondence should be brought to the attention of Cindi Berry.

HMOs and Medicare. Rep. Henry Waxman's Subcommittee on Health and Environment, the second most important health panel of the House of Representatives, is investigating reported cases of poor performance and other deficiencies in Medicare's HMO program.

Last November 15th, the General Accounting Office (GAO), the investigatory arm of Congress, reported to the Subcommittee that HCFA has not been effective in regulating its HMO contractors, and has been either unwilling or unable to enforce Medicare standards on HMO's serving Medicare beneficiaries. Waxman called upon HCFA Administrator Gail Wilensky to explain the agency's case, noting that he supported managed care in the Medicare program but expressed his disappointment with HCFA's enforcement of its own standards. Wilensky promised to try harder.

Physician Referral and Ownership. Renewed Congressional interest in this topic has been stimulated by a report of the Florida Health Care Cost Containment Board that conducted an in-depth study of physician business arrangements and referrals. The study, released to the Subcommittee last October, found that 44% of doctors in Florida had ownership interests in medical facilities. A total of 91% of these doctors, according to the Florida panel, were concentrated in specialties that would be most likely to refer patients, such as internal medicine and general practice. The other 9% were specialists such as radiologists, pathologists and anesthesiologists. Over 41% of these doctors had an investment interest in a diagnostic imaging facility, an MRI or CAT scan complex, and 16% had investments in clinical laboratories.

The Florida report focused heavily on the diagnostic business. About 93% of the diagnostic centers are owned by physicians in Florida, either in whole or in part. Likewise, more than 60% of the clinical labs are owned by doctors. The thrust of the Florida report to the Ways and Means panel was that this set of business relationships among physicians and this high rate of referral did not improve ``patient access'' in ``underserved areas,'' and that ``joint ventures'' were most frequent in high- density and ``high-profit'' areas. The Florida study also con- cluded that both utilization and prices were higher in physician- owned clinics, medical centers, or diagnostic facilities.

Most witnesses who have thus far testified before the Subcommittee on Health, including both business groups as well as organized medicine, are in favor of legislation to make it illegal for physicians to refer patients to facilities in which they have a financial or ownership interest. (See AAPS News, December, 1991, for the Health Law Commentary concerning regulations about referrals of Medicare patients to clinical diagnostic laboratories in which a physician has an ownership interest.)