1601 N. Tucson Blvd. Suite 9
Tucson, AZ 85716-3450
Phone: (800) 635-1196
Hotline: (800) 419-4777
Association of American Physicians and Surgeons, Inc.
A Voice for Private Physicians Since 1943
Omnia pro aegroto

Volume 52, No. 2 February 1996


When asked for a copy of their patients' rights, managed care organizations were at a loss, reported Kathryn Serkes, who handles media relations for AAPS.

``But one of them offered me a list of patients' responsibilities,'' she said.

When a prospective buyer calls a managed care organization, she will find that application forms are readily available. But sometimes the MCO wants the signed application and a check before providing a list of benefits. And none of the representatives telephoned by Ms. Serkes was able to locate and send a copy of the provider contract.

As stories of MCO abuses proliferate in the mainstream media, and as further threats to private medicine appear on the legislative horizon, AAPS is proposing to Congress a Patients' Bill of Rights.

There is nothing basically new in the Patients' Bill of Rights, which is taken from the Patients' Freedoms articulated by the AAPS Assembly in 1990 and incorporated in the Principles of AAPS. It does make explicit the contractual provisions of managed care plans that are most likely to compromise medical treatment. Disclosure of most such provisions must be made to employers upon request, to comply with an Arizona statute that went into effect in January, 1996.

Natural rights of patients include the right to seek consultation with the physician(s) of their choice; to contract with their physician(s) on mutually agreeable terms; to be treated confidentially, with access to their records limited to those involved in their care or designated by the patient; and to use their own resources to purchase the care of their choice.

Patients also have the right to full disclosure from their insurance plan, including the existence of incentives to limit care; the full cost of the plan; authorization procedures; and any restrictions on physicians' freedom to criticize the plan or give advice based on the individual physician's own best judgment (``gag rules'').

The degree to which patients' rights have been compromised under managed care is clear when the AAPS Patients' Bill of Rights is compared with the ``Principles of Patients' Rights and Responsibilities'' endorsed by more than 100 health organizations.

``The endorsed principles suggest the need for patient protections in the following areas: choice among a reasonable number of providers and timely referral to specialists when needed;... access to open, easy-to- understand, and timely appeal process on negative coverage deci- sions;...the right to know the basis for provider payments and any potential conflicts of interest that may exist'' [emphasis added] (BNA's Health Care Policy Report 11/13/95).

Another document intended to be the basis for sample legislation, the Consumers' Bill of Rights, was developed by Consumers Union, Citizen Action, and Citizen Action of New York. This is basically another formulation of the socialist principle of some citizens' claim on the property and labor of others (illustrating its inherent constraints on freedom). It advocates: ``timely access to appropriate health care; an affordable choice of qualified health care professionals; [and]...representation in decision- making...'' [emphasis added] (BNA's Health Care Policy Week 12/4/95).

AAPS initiated its campaign with an advertisement in the December 11, 40th anniversary issue of National Review. All AAPS members will receive a copy of the Patients' Bill of Rights suitable for posting. Congressional sponsors for legislation are being sought.

AAPS will also help to publicize true experiences showing the human impact of corporate socialism or managed care. Reporters find few physicians who are willing to speak on the record about certain issues, especially ethical conflicts. Yet when physicians are forced to risk ``deselection'' or serious impairment of their families' financial well-being, they may find themselves compromising patient care.

AAPS Communications

Telephone: (800)635-1196; TeleFAX: (520)326-3529 or (703)716-3400 (also accessible to Media Relations Department)

World-Wide Web site is at http://www.misnet.com/aaps/

FAX-on-demand: (703)716-3404

Heartland PolicyFAX: (510)208-8000

Send us your FAX number if you would like to receive Action Alerts by FAX (send it again if your area code has changed, please).

Managed Care Statistics

Now that 50 million Americans are enrolled in HMOs, there is an increasing clamor for quality measurement. The National Committee for Quality Assurance (NCQA) has developed the ``flagship'' tool for evaluating managed care organizations: the Health Plan Employer Data and Information Set. HEDIS is now used by more than 300 health plans. At a conference sponsored by Harvard Medical School, Arnold Epstein (Robert Wood Johnson Fellow assigned to Sen. Kennedy's office at the time he chaired Working Group 9 of the Clinton Health Care Task Force) outlined the controversies about HEDIS. Quality measurements are a small component of the total and focus primarily on preventive care rather than outcomes. Furthermore, there is no risk adjustment.

Such report cards create an incentive to ``game the system'' by ``recruiting a different mix of patients, eliminating physicians with bad statistics, focusing on measured components to the detriment of other aspects of care, and upcoding diagnoses,'' according to Epstein. ``One of the scariest things is that if there is inadequate risk adjustment, people at risk will be avoided.'' He pointed to ``anecdotal evidence'' that in New York and Pennsylvania, patients in desperate need of care are having difficulty finding a surgeon (BNA's Health Care Policy Report 11/13/95).

As the use of HEDIS data expands, NCQA President Margaret O'Kane said that the committee needs to refine its analysis to better understand ``what the numbers mean'' (BNA's Medicare Report 12/1/95).

Many HMO evaluations rely on surveys of patient satisfaction-and the details may belie the headlines. According to an article entitled ``Ind. Managed Care Enrollees Give Quality of Care High Marks, Agency Says,'' only 78% of the 433 participants were satisfied with the program overall, and only 49% rated Hoosier Healthwise as better than their previous traditional Medicaid services (ibid.).

If sick patients are surveyed, managed care looks worse. When 473 nonelderly persons with a significant illness were looked at separately, in a study conducted at the Harvard School of Public Health, the 254 patients in managed care were more likely to complain that their physician provided care that was inappropriate or incorrect (12% vs. 5% of fee-for-service patients); failed to explain how to take prescriptions (10% vs 4%); or made them wait a long time for an appointment (17% vs 7%). Of those who saw specialists, managed-care patients were more likely to say that the examination was not thorough (12% vs. 3% FFS); the physician spent too little time (15% vs. 6%); or the physician did not care (15% vs. 7%). Managed-care patients were not more likely to receive preventive services (MSSNY's News of New York, Nov. 1995).

Although these results received little publicity, the New York Times carried a lengthy article about another study entitled ``H.M.O. Quality Called Equal, at Less Cost'' (9/8/95). The ``Medical Outcomes Study'' (funded by the same source, the Robert Wood Johnson Foundation, and published in JAMA 1995,274:1436-1444) showed that patients who are not very sick tend to remain stable over a two-to-four year period, regardless of the financing mechanism for their medical care. Surprise! (The mean baseline blood pressure in the hypertensive patients was 142/82, and the mean baseline blood glucose in the non-insulin-dependent diabetics ranged from 132 in the IPA patients to 193 in the FFS patients. The FFS patients were significantly older than the managed-care patients.)

Policy is being made despite the lack of evidence for the safety or efficacy of managed care of the truly sick-and in spite of troubling experience.

Recently, the State of New York capped ``voluntary'' enrollments in Medicaid HMOs, reporting that 13 of 18 plans had been cited with statements of deficiencies and the other five received letters of concern about problems that did not rise to the level of a formal citation.

One concern is misleading promotion, such as the ``classic bait and switch'' used by Oxford, or the failure to disclose that CIGNA, MetLife, and US Healthcare can override a primary care physician's decision to send a patient to a specialist or hospital (BNA's Health Care Policy Week 12/4/95).

Another problem was that State Health Department investigators posing as Medicaid patients were unable to get appointments for checkups or baby immunizations.

Despite such problems, New York is pressing for a federal waiver to make the program mandatory. Additionally, new standards and criteria would require managed care plans to make 60% of their network's physicians available for Medicaid patients in the program's first year, with the proportion increasing to 80% the second year and 100% the third year (BNA 12/1/95). Governor Pataki proposes to cut state Medicaid spending $1.1 billion by reducing payments and increasing the number of Medicaid recipients required to enroll in managed care from 660,000 to 1.2 million (BNA's Medicare Report 12/22/95).

A Government Solution?

Concerned about HMO horror stories such as those told in the New York Post, Rep. Jerrold Nadler (D-NY) introduced the Health Care Consumer Protection Act of 1995, with the cosponsorship of Ron Dellums (D-CA). This contains certain disclosure requirements, including some but not all of those in the AAPS Patients' Bill of Rights. However, all the details and enforcement provisions-for example, to ``ensure'' that insurers not offer inducements to practitioners-are at the discretion of the Secretary of HHS.

A more specific law, the ``48-hour rule'' is proposed to protect against the ``drive-through delivery.'' The AAPS Board of Directors stated at its Jan. 6 meeting that mandatory 24-hour discharges after childbirth are contrary to sound medical practice. However, Dr. Lois Copeland, AAPS Immediate Past President, warned of the law of unintended consequences. A proliferation of regulations attempting to counter the hazards inherent in managed care would be obviated by a return to the Hippocratic ethic and true medical insurance, she noted.

``Let us put statistics on socialist rails in order that they shall not be detached from the class struggle.''

Stalin, Izvestia, Nov. 1929

The Criminalization of Medicine

Specific Intent. As prosecutors prepare to launch a raft of Medicare and Medicaid fraud cases, they face a vexing impediment: the necessity of proving that the accused knew that his specific act was against the law.

In Michigan, a note about the applicability of ``specific intent'' caused the attorney general to appeal a case that the State had won (People v. Premen, No. 152049, LC No. 91-003744 - see AAPS News Aug 1995). On Dec. 19, 1995, the Michigan Supreme Court handed down an order that the appeals court decision ``shall have no precedential force or effect,'' although it denied a request to review the decision itself. Two justices dissented to the order on the grounds that the published opinions of the Appeals Court ``are authoritative statements of the law, not by grace of this court, but by the power vested in the Court of Appeals by the Constitution.''

The dissenting justices further stated that such action should not be taken without notice to other persons who might be favorably or adversely affected by the action, and that the order did not comply with the constitutional imperative to give a statement of the facts and reasons for each decision.

Edgardo P‚rez-DeLeon will move for reconsideration of this order because of its importance in his own appeal. He was convicted of the ``general intent'' to collect Medicaid payment while acting as office manager for his wife's internal medicine practice (see AAPS News, Aug 1995). The judge refused to give ``specific intent'' instructions to the jury.

AAPS has received no answer to its Nov. 1 letter to the Michigan Board of Medicine, which asks: ``Does billing for an `office visit of established patient' in Michigan imply the performance of a physical examination in each and every instance of the use of [Evaluation and Management codes 99215, 99214, 99213, 99212, 99211, or, in 1990, codes 90070, 90060, 90050, and 90040]?'' The letter states that ``physicians are interested in...serving Medicare and Medicaid beneficiaries, but many are not willing to risk fines or imprisonment for incorrectly interpreting E&M codes.''

Mr. P‚rez was incarcerated for one year in the Ingham County Jail, but despite Freedom of Information Act requests has yet to receive an authoritative answer as to the illegality of the act for which he was convicted. He notes the dilemma of a physician faced with the requirement to (illegally) perform a ``medically unnecessary'' service such as a physician examination in order to be paid for rendering a necessary service. Because such conduct could be construed as fraud, physicians ``prefer to stay away from those government programs.''

While Deputy Attorney General Stanley Steinborn declined to be burdened with legal research to answer Mr. P‚rez's question, Mr. P‚rez pointed out that ``that research had to be done before your office decided to prosecute me.''

He also stated that ``if you don't understand what I mean, which is what the State Plan and the Public Health Code mean, it is probably because these laws are too complicated for you and for the rest of the people to understand. It has taken me a lot of time to unscramble them.''

Mr. P‚rez has also appealed to Arthur Weatherbee of HCFA to help process his FOIA request ``related to the clamping down of billing errors/incorrect combination of services that resulted in a 2,200 page manual.''

``The producers of a manual with 87,000 incorrect combinations of so-called comprehensive and component codes should know which is the appropriate way to bill for [brief discussion of a report, scheduling referral appointment, provision of a prescription with appropriate counseling, or completion of a disability form]....[I] included the news coverage [from AM News] on the coding clampdown so you know I am not inventing the unnamed manual.''

Mr. P‚rez believes that his billing was perfectly lawful.

In another action critical to expediting physician prosecutions, the Inspector General of HHS will consider appealing to the U.S. Supreme Court in the case of Hanlester Network v. Shalala CA 9, No. 93-55351, 11/15/95). The Ninth Circuit Court refused a petition for rehearing en banc its decision that ``a party can only violate the anti-kickback statute if it engages in prohibited conduct with the specific intent of disobeying the law-thereby requiring the government to prove a person knows he or she is violating the law'' (BNA's Medicare Report 12/1/95).

New Horizons ``Coming attractions'' in fraud prosecutions, according to James Sheehan, assistant U.S. attorney for the Eastern District of Pennsylvania, include more cases brought against physicians for care beyond what is medically necessary or for exceeding billing limits or for denying care to HMO members. ``We can already see...situations where HMOs deny care and the doctor doesn't advocate for the patient because he or she is afraid of...getting kicked out of the network.'' Sheehan expects juries to side with patients: ``it's a very, very difficult issue to deal with if you're a defendant'' (ibid.)

The health care fraud and abuse provisions in the Clinton seven-year budget plan would make civil monetary penalties not subject to the automatic stay imposed under the Bankruptcy Code and would allow the interception of wire, oral, or electronic communications for fighting health care fraud. It would also make health care offenses predicate offenses to RICO (BNA's Health Care Policy Report 12/18/95).

The Managed Care and Fraud Working Group of the Dept. of Justice is trying to retool. Detecting and quantifying fraud is much more difficult in capitated systems with no billing records. Prosecutors will try to establish systemic underutilization rather than spotlighting individual medical decisions. Standards and baselines have not yet been cited in court (BNA's Medicare Report 12/8/95).

Making Malpractice a Crime. A decision in the Eighth Circuit could convert every malpractice case into a potential violation of the Emergency Medical Treatment and Active Labor Act (EMTALA or the ``Anti-Dumping Act''), according to Chief Justice Richard S. Arnold, dissenting in the case of Summers v. Baptist Medical Center, CA 8, No. 95-1468, 11/9/95).

Emergency room personnel discharged a patient who had fallen out of a tree, and the patient ended up in intensive care two days later with bilateral hemopneumothoraces. The case was remanded to the lower court to determine whether or not the patient had complained of chest pain and thus whether the emergency personnel had violated the required screening procedures in failing to perform a chest x-ray (BNA 12/15/95).

Missing a diagnosis through negligence is a civil tort. Failure to uniformly apply screening criteria is a federal crime.

Taking the Name of the Lord in Vain New regulations eliminate the $100,000 annual cap on penalties for misusing the symbols for HCFA or HHS and apply them to every individual piece of mail (BNA 12/1/95).

Members' Page

Semantic Notes. An article from the AP (which I am beginning to think stands for ``Associated with Pravda'') stated that ``complaints arose that aggressive marketing techniques were being employed [by HMOs] on some of those Medicaid recipients.'' That's a little like saying that ``aggressive solicitation techniques'' were employed by those who made an unexpected withdrawal from the bank at gunpoint. What actually happened was that certain HMOs were caught lying outright to Medicaid recipients so as to scare them into signing up with their HMO. The State decided to ``punish'' these HMOs by telling them that they would have to ``cool off'' for a bit and not sign up any more Medicaid patients-for six months....The New York State Health Commissioner then goes on to state that ``We are insisting that our taxpayer dollars buy quality care that is delivered in a cost- effective way.'' (The State pays $100 to the hospital for a physician assistant to see a Medicaid patient in the ER, or $7.50 for a physician to see the same patient in his office. Between July 1 and Oct 9, 1995, New York paid physicians $0 to see Medicaid patients in the ER, until a temporary restraining order was handed down.)

Closer to home, although the hospital CEO didn't get the Robert Wood Johnson Foundation Grant needed to form a ``one-stop shopping'' hospital network to enslave all the local doctors, he is now looking for other sources of funding (doctors' wallets). At a recent medical staff meeting, I was not allowed to speak about a bylaws change that called for ``corrective action'' (suspension or loss of privileges) for conduct that ``interferes with the operation of the hospital.'' The President of the medical staff assured me that the wording was only intended for those who were either drunk while practicing in the hospital or running naked in the halls. I was not reassured when he mentioned to me after the meeting that the hospital CEO ``didn't like the AAPS literature and other articles concerning the negative aspects of managed care that I had placed in the doctor's lounge.'' He indicated that should the hospital take any action for ``disruptive speech,'' I could always count on an appeal to the Executive Committee.

I'm beginning to think I might find a more friendly environment standing in the middle of Bosnia.
L.R. Huntoon, M.D., Ph.D., Jamestown, NY


Polls and Patient Satisfaction In any one year, only about 4% of people have a major health problem. Therefore, all polls on satisfaction with medical care should start with a baseline 96% satisfaction. Anything less indicates lack of satisfaction. So all of those 88% satisfied or 92% satisfied patient reports are really negative responses, not positive ones.
Frank R. Di Fiore, M.D., Private Physicians Newsletter


New Math and Newspeak. From a letter to AdminiStar, Medicare Part B Provider Service: According to the 1996 Fact Sheet on the inside front cover fold out in the Participation Program for Physicians Fee Schedules, there is a 0.4% increase in the fee schedule for nonsurgical services including anesthesia. The participating provider conversion factor was $14.15 in 1995, and is $14.12 in 1996.

According to my calculations, this represents a 0.21% decrease, not an increase. George Orwell would clearly appreciate this doublespeak (see 1984).
Lee A. Balaklaw, M.D., Louisa, KY


Cost Saving = Cost Shifting Statistically speaking, 10 to 20% of Medicare patients account for 70% of expenditures. If high users are just 70% as likely to join an HMO as the average patient, and if the HMO is paid 95% of the average cost, then the HMO makes a 16% profit even before it drastically cuts payments to hospitals and specialists. If high users are half as likely to join, the initial profit is 30.5%. and if the HMO also cuts payments by 30%, the profit is 51%.

The patients who show up at recruitment seminars are generally healthy enough to boogie after a hearty lunch. But should an unlucky HMO attract more than its share of high users, it can convert them into low users by delaying or denying services. If they get disgruntled and leave, it is doubtful that a salesman will try to woo them back.

Medicare HMOs give the illusion of an automatic 5% saving, but in effect they simply shift real medical expenses to the fee- for-service sector.
an Overmanaged California Physician

Reinventing Clinton Pennsylvania Blue Cross/Blue Shield is leading the charge to managed care since the death knell for the Clinton Plan. Their prescription for improving access in rural physician shortage areas: fewer physicians (through defeating ``any willing provider'' legislation). Physicians are coerced into participating by threatening ``loss of market share.'' They may be delisted or deselected without cause. Some contracts even prohibit physicians from discussing reimbursement concerns with patients if this may directly or indirectly cause them to disenroll. Why has Blue Shield, which is Pennsylvania's largest health insurer, offered its 7,000 employees and their dependents the indemnity type plan, but not the Keystone HMO plan?
Joseph Giordano, M.D., Sharon, PA President-Elect, Mercer County Medical Society

AAPS Calendar

Oct 10-12, 1996. 53rd annual meeting, La Jolla, CA.

Legislative Alert

Budget Stalemate

As of this writing, there is no resolution of the federal budget debate; 260,000 federal employees are idle and collecting partial pay. The entire episode opens up another vista into the thinking of official Washington. Federal workers, facing furloughs, are surely going to get paid. Private sector workers rarely, if ever, get paid. Moreover, when Clinton and Congress reached a temporary agreement to reopen the federal government last November, White House Chief of Staff Leon Panetta enthusiastically remarked that the short-term agreement now means that we could put America ``back to work,'' George Will, writing in the December 14th edition of The Washington Post, encapsulated the mentality precisely: ``Panetta apparently believes the federal government is America, or at least that American creativity is entirely contingent on the functioning of the federal government.''

At the creative Clinton White House, reinvention has reached its limits. First, Vice President Al Gore said that well, no, the Administration didn't really agree to CBO assumptions. Next, House Republicans explode. Then, Mike McCurry, the very busy White House press secretary (who at his rhetorical low point suggested that the Congressional leadership would be just as happy if the elderly were to die off) said that well, yes, the Vice president indeed misspoke, and the Clinton Administration was going to stick to the agreement to abide by the CBO assumptions, which Bill Clinton, after all, had signed.

The Resolution had passed the House of Representatives by 351 to 40, with 133 Democrats supporting the measure. Conservative and moderate Democrats are becoming increasingly restive and unhappy with the White House. Charles Stenholm (D-TX) is emerging as an independent power again in the House. As noted by Washington Post columnist James Glassman, another option is maturing for the House leadership if the Budget Talks with the White House continue to stall: start dealing directly with the new breed of ``Blue Dog'' Democrats who want to end this gridlock and pass a veto-proof, bipartisan balanced budget.

The White House still holds the high political ground, successfully painting Gingrich and his cohorts as unreasonable extremists. Clinton charges that the rambunctious House freshmen, the class of 94, are responsible for the stalemate. They won't budge on their basic commitment: a balanced budget in seven years, using ``honest'' numbers. They are doing precisely what they said they would do if they got elected.

The Un-Housebroken

Like them or dislike them, the House freshmen actually mean what they say. They make written promises to the public, en masse, and they establish the grounds of a new public trust. If they break that trust, then, they say, they are no different from previous Congressmen. If the public changes its mind on the balanced budget, or what it takes to get to a balanced budget, then the public can throw them out.

While the President is beating the tar out of Gingrich and Co. in the public opinion polls, Gingrich is winning on the ground. With only limited support from the Senate, the House is dramatically changing the terms of the national debate, even more than Mr. Clinton's allies on Capitol Hill would care to admit. The evidence is in the numbers. For example, the federal budget represents 21.3% of the Gross Domestic Product of America. The Balanced Budget Act of 1995, enacted by the Congress and vetoed by the President, would reduce federal spending significantly and reduce the federal budget to 17.2% of the GDP in ten years. The Clinton Budget proposal, lacking in the same level of precise detail, would nonetheless reduce the federal budget to 18.2% of GDP over the same period. In other words, the Speaker and his team are setting the policy pace. The Administration is reluctantly following.

Medicare: Center of the Storm

The temptation to beat the Congressional leadership about the head with the Medicare club is nigh irresistible to any vote- seeking politician. According to Robert J. Blendon of the Harvard School of Public health, Americans place Medicare last on a list of programs they would like to see cut or reduced in order to deal with the budget problem, even behind social security. Funding for the arts, welfare, and food stamps all ranked at the top, in that order. From the standpoint of conventional political wisdom, Gingrich and company are either certifiably nuts or uncommonly courageous. Interestingly enough, Medicaid has been subsumed under the welfare controversy, and gets much less popular support.

The Congressional proposal favors reducing the growth in Medicare spending to twice the rate of inflation, or almost identical to the rate of growth proposed by the Clinton Administration in 1993, at the time it was trying to sell its gargantuan health-care extravaganza. Indeed, Leon Panetta even uses the Clinton Health Plan, that nobody (not even liberals on Ways and Means) wanted, as a justification for the reduction in Medicare spending two years ago, saying that the whole package- including the powerful National Health Board, the Regional Alliances, the 90,000 or so bureaucrats required to process the paperwork, would be better for senior citizens. This is the reinvention of Chutzpah. Incredible stuff, of course, given the fact that none of the Medicare reductions would have been plowed back into the Medicare system. These ``savings'' would instead have gone to pay, inadequately of course, for the skyrocketing costs of the Clinton Health Care Plan, which, according to the February, 1994, CBO estimates, would have added another $70 billion to the federal deficits.

But again, the numbers. Under the current budget projections, total Medicare spending would reach $332 billion in 2002. By reducing the rate of spending, the Congressional Medicare reform plan would mean that Americans would spend $289 billion in 2002. Under the Clinton Budget proposal, Americans would spend $301 billion that year. The difference-$12 billion, or 4%-is being called the ``difference between extremism and sweet reason.''

Some ask how long the Administration can keep this up. Perhaps more to the point is the question of whether the Congressional conservatives are really doing enough.

The Academy Weighs In, Again

A partial answer to the latter question was recently supplied by the American Academy of Actuaries in a special December 21st report: ``The GOP's version, the Medicare Preservation Act (MPA), imposes fiscal controls on the Medicare program that go a long way toward solving the program's longterm economic problems.'' But the Academy also sounded a cautionary note, saying that this reform could ``jeopardize access to high quality care for all those who remain in the traditional fee-for- service Medicare plan.''

In speaking of the Administration's Plan, Guy King, the former HCFA Actuary who chaired the Academy's working group on Medicare reform, says, ``It can only be considered a stopgap measure because it falls short of addressing the significant longterm financial problems of the Medicare program. It is similar to the quick fixes enacted in the past that have allowed the Medicare program to fall into its current financial state. This proposal also includes accounting tricks to achieve short- term fiscal soundness in the hospital insurance program. In the long run, these tricks may undermine the economic discipline of the trust fund.''

The Academy also noted that the Administration's reform plan would be ``considerably more restrictive'' than the Congressional plan in the choices available to seniors.

On the handling of ``provider reimbursement,'' the Academy was critical of both the Clinton Plan and the Congressional leadership plan: ``Both rely heavily on reductions in unit payments to providers to achieve savings. Reducing unit payments won't produce incentives for reducing the rate of growth in health care expenditures,'' said King.

The Stakes

Federal employees, angry at being furloughed or declared ``non-essential'' (that politically incorrect designation was recently changed by the Gore Reinvention Team to ``non- emergency'') are complaining that Congress (mostly) and the White House are sacrificing the continuity of good government for short-term political gain, etc. Nothing could be further from the truth. Nothing quite like this has happened in memory. The Congress and the White House are engaged in a titanic political struggle, which will affect every man, woman, and child in America. At issue are the size and scope of federal government's reach and authority and the economic future of the nation.

For the short term, according to an econometric analysis conducted by the Heritage Foundation using the model developed by Lawrence Meyer and Associates (the same one used by OMB and the Federal Reserve Board), a balanced budget will mean an addition $32.1 billion in real disposable income for American families over the period 1995 through 2002; an additional $66.2 billion in consumption spending; an additional $88.2 billion in real nonresidential fixed investment; and an additional 103,700 housing starts. The analysis notes that these economic benefits are fully realized through the happy combination of spending reductions and tax reductions that official Washington's friends in the press find so repulsive. They lead to higher household spending, lower interest rates, increased productivity, greater capital investment, and less inflation. Says Dr. William Beach, an economist and tax analyst who oversaw the study, the results are heartening but would be even better if Congress were to enact a major reform of the federal tax code (such as a flat tax) to spur large capital formation in the economy.

A European Future for Peoria?

In addition to the short-term costs of failure to balance the budget, Congressional failure to get entitlement spending under control will result in what Robert Samuelson recently called America's French Connection-not illegal drug trade, but the kind of unhealthy relationship between the citizens and the welfare state that characterizes the current French Republic, now undergoing strikes and similar incidents of civil unrest related to government spending cutbacks. Today, total government spending is 34% percent of America's national income. With the notable exception of liberals in Congress and the universities, most Americans are likely to think that this amount is too high. In France, it is 54% percent. In Germany, it is now more than 50%. And in Sweden, it is 67%.

The problem is that the public, in France and elsewhere in Western Europe's social democracies, likes the modern welfare state and all of its many ``free'' benefits but doesn't want to pay for them with higher taxes. This is the crux of America's Medicare debate also. The public would prefer to pass the costs to posterity through continued deficit financing. This act of collective self-delusion only puts off the worsening economic problem while making the solutions ever more politically unpalatable. In the current economic and political conflicts in France, Americans can see their future.

Even Germany, the alleged economic powerhouse of Europe, is succumbing to the problem. As Dr. Wilfried Prewo, a German economist with the Hanover Chamber of Commerce, noted in a remarkable December 8th speech to the Graduate School of the City University of New York, Western Europe is now suffering from high unemployment in spite of its economic growth. And the main cause of the sluggish Western European job growth is the high cost of labor. In Germany, following the ``Bismarckian'' model, social programs are linked to employment, and thus are incorporated into labor costs. In 1995, German payroll taxes amounted to 18.6% of gross wages for pension insurance; 13.3% for health insurance; 1% for nursing care; and 6.5% for unemployment insurance, totalling 39.4% of gross wages. While half of this is ``paid for'' by employers, the German system, like all employer mandates, is actually a tax on labor. The German worker's ``half'' of the payroll tax, together with his other taxes, reduces his net pay to 20% below the level of American workers.

The German state takes and distributes an ever larger share of the national economic pie. But that is no guarantee of a higher standard of living, contrary to the obsolete ideological junk that European socialists continue to preach and promise.

Like the United States, the Germans today are going through a demographic revolution: more and more retirees are increasingly dependent on fewer and fewer active employees. By 2030, the ratio will be worse than the United States: ``...there will be one pensioner for one active worker with the consequence that the worker's pension payroll tax would, on average, equal the average pension.'' Meanwhile, the costs of the social welfare system in Germany are exploding. According to Prewo, welfare expenditures equalled investment outlays in 1970. By 1993, they were double the investment outlays.

German Chancellor Helmut Kohl once remarked that when the German government takes more than 50% of the national income, the direction is back toward the repressive Communism that Germans fought to escape: ``The welfare state impoverishes the current generation, deprives future generations of growth opportunities, and even shifts further liabilities onto a weakened future generation. The welfare state's fate will mirror that of the equally morally corrupt and economically exhausted socialist systems at the end of the 1980's. Without reform, it will implode just as Eastern Europe did in 1989.''

Return to the home page

click here