Volume 52, No. 10 October 1996


The most important recent jury trial in southern California is not the one America watched on television. Unlike the O.J. Simpson trial, this one resulted in a conviction.

Perhaps the most important difference between the two trials is that in the Simpson trial, although the guilt of the accused was in dispute, the occurrence of a crime was not.

In the trial of Jeffrey Jay Rutgard, M.D., there was no corpus delicti, but evidence was gathered by invading Dr. Rutgard's home and office and seizing the records of some 20,000 patient visits. After 2.5 years of study, prosecutors brought charges in 218 of the cases (1%), of which one-third were ultimately dismissed.

The victims were not patients (nearly all the patients had improved vision after being treated by Dr. Rutgard), but the Medicare program, which allegedly paid $65,140 for items such as ``medically unnecessary'' surgery between 1988 and 1992.

Upon conviction in June, 1995, Dr. Rutgard was sentenced to serve 135 months in prison, fined $150,000, and ordered to pay $16,206,908 in restitutionÄthe entire gross proceeds of all insurance payments during the entire period. Bail having been denied pending appeal, Dr. Rutgard was incarcerated for a time at Fort Dix, New Jersey, thousands of miles from his wife and five young children, and now is in prison camp in El Paso.

It is an uncontested fact that Dr. Rutgard is a highly skilled eye surgeon; other ophthalmologists referred family members to him. He was esteemed by most of his patients; 400 wrote letters on his behalf.

In his appeals briefs, Dr. Rutgard contends that he was denied a fair trial. The principal complaints include these: (1) Crucial defense witnesses were not allowed to testify. (2) Unfair limits were placed on cross-examination. (3) Defense counsel were unprepared because the government presented them with thousands of pages of documents and scores of witnesses at the last minute. (4) An unbiased jury was not assured because of limited voir dire and extensive exposure to adverse publicity.

Dr. Rutgard's trial counsel stated, ``I have never before been retained in a case involving an individual criminal defendant, other than John Delorean, which generated such extensive publicity.'' Television news covered the raid on Dr. Rutgard's office. ``Incendiary'' headlines included ``La Jolla Doctor Facing Probe Claims to Be God-Like.'' (Dr. Rutgard claimed that an unfortunate creative-writing exercise was falsely purported to come from his diary.) California Deputy Attorney General Sanford Feldman was quoted as saying that Dr. Rutgard ``is a threat to the health and safety of every patient he sees.''

Dr. Rutgard's license had previously been revoked in 1992 under a new state statute that streamlined judicial review of cases involving fraud. Between 1988 and 1992, the California Board of Medical Examiners had received 14 complaints, ranging from excessive prescribing to unnecessary tests and unwarranted surgeries.

Dr. Rutgard had been performing 24 to 30 eyelid surgeries or 30 to 40 cataract procedures on each of two surgery days per week. He performed 1% of the cataract operations in a seven- county area with 1000 ophthalmologists and submitted a very high percentage of the claims for certain other procedures (e.g. 90.4% of the lateral canthopexies; 12% of the vitrectomies). The government pointed only to the latter, and a statistician was not allowed to testify.

``You can't compete against this man-he's too good,'' stated defense attorney Mitchell Stein. ``Competitors in San Diego have a vested interest in getting rid of one of the best surgeons down there.''

Dr. Rutgard allegedly used his charm and caring bedside manner to lure elderly patients to have unnecessary surgery so that he could make more money. He sent employees to nursing homes to screen patients and provided free transportation to his clinic. He paid bonuses to employees based on the number of surgeries performed in patients they referred. (The court excluded testimony from two consultants who taught medical practices to use this method-which is not illegal.)

Specific charges include: (1) Routine waiver of copay- ments and deductibles. (One witness testified that this occurred about four times per month, based on what patients told her about their financial situation.) (2) Misuse of glare testing on the ``high'' setting to justify cataract surgery. (Jurors were not permitted to see a demonstration of how a cataract can affect vision in outdoor lighting.) (3) Charging $25 for pre-op EKGs (the basis for five counts).

The defense has challenged the government to point to existing Medicare rules that Dr. Rutgard violated. Government attorneys argue that the technical billing rules don't matter since the accused was convicted of lying to Medicare.

The defense claimed there was insufficient evidence for such conviction: ``The government cannot argue that appellant routinely billed for surgeries not done and not allow him to call patients to prove that they were,'' wrote attorney Charles M. Sevilla. From a few anecdotes told by hostile employees, he stated that the government extrapolated to assert that the entire practice was ``permeated with fraud,'' so that all billings were assumed to be fraudulent and thus subject to forfeiture.

Additionally, Sevilla states that even if a 1990 amendment now authorizes courts to order this type of restitution, applying it to pre-1990 conduct is an ex post facto ruling.

The key issue in most charges was the definition of ``necessary.'' Defense attorney Juanita Brooks stated that ``the government is trying to set itself up as the only entity that can say when a medical procedure is necessary.'' This usually retroactive determination may also now define what is crime.

Portents of Kassebaum-Kennedy

Cases of alleged Medicare and Medicaid fraud covered in AAPS News since 1990 (Drs. Carol Brown, Jeffrey Rutgard, George Krizek, and Wanda Velez-Ruiz, and Mr. Perez-DeLeon), are harbingers of what is in store for many more physicians. Kassebaum-Kennedy expands the ``tools'' and causes of action previously available to prosecutors. An August 30 analysis by Thomas S. Crane, Thomas R. Courage, and Lawrence W. Vernaglia, published by the Bureau of National Affairs, shows that the AAPS warnings about this bill were by no means overstated. Key points made by these attorneys:

The Act does require advisory opinions, a provision strenuously opposed by law enforcement agencies. However, there is no sanction to the OIG if he fails to comply within the allowed 60 days, and the opinions do not apply to the Stark Law or, apparently, to definitions of medical necessity.

Even before Kassebaum-Kennedy, Attorney General Janet Reno boasted that prosecutorial activity had doubled. Is there now any way to practice medicine, other than as a capitated or salaried ``provider,'' without running the risk of bankruptcy and/or prison? Keeping a low profile, instead of being a high-earner like Dr. Rutgard, might help. However, according to data supplied by HCFA, two-thirds of the psychiatrists in the D.C. area billed more than Dr. Krizek did during the years of concern to them. One might try to err on the side of downcoding rather than upcoding, but this could be interpreted as offering an inducement to receive services.

Ignorance of the law is no excuse. But knowledge of the law is increasingly impossible-especially if the Ninth Circuit rules in the Rutgard case that the government doesn't even have to cite the violated rules in order to sentence a physician to 11.25 years in federal prison.

At some point, a court may be willing to rule that the prosecutors have finally exceeded the bounds of the Constitution. But at present, physicians accept money from insurers at their peril.

A revolutionary tribunal...; a law of the Suspected, which struck away all security for liberty or life, and delivered over any good and innocent person to any bad and guilty one, prisons gorged with people who had committed no offense and could obtain no hearing; these things became the established order...and seemed to be ancient usage before they were many weeks old....

Before that unjust Tribunal, there was little or no order of procedure, ensuring to any accused person any reasonable hearing. There could have been no such Revolution, if all laws, forms, and ceremonies had not first been so monstrously abused that the suicidal vengeance of the Revolution was to scatter them all to the winds. Charles Dickens, A Tale of Two Cities

Doctor Wins Round in Show-Down with HMO

When Keystone East, an affiliate of Pennsylvania Blue Shield and a major force in the Philadelphia HMO market, announced a capitation plan for specialists, Dion R. Ehrlich, M.D., who is in solo practice, wrote a letter to his patients:

``The payment plan may put me at risk of a conflict of interest with ... my patients. If I deny care, whether by talking a patient out of appropriate cataract surgery, or deferring visual fields or follow-up visits for glaucoma patients, or by limiting the patient's access to the best consultants..., I might earn more money. Patients are not told or do not understand how this hidden incentive may affect their care.''

Dr. Ehrlich pointed out how the ``quality assurance'' program, with guidelines written by physicians themselves influenced by the financial incentives to deny care, is inadequate. ``Statistical claims by managed care companies lauding quality and satisfaction do not account for lost opportunities to help people return to the mainstream of life when elective procedures are withheld or deferred.''

Dr. Ehrlich decided not to participate in the program and recommended that his patients change insurers. Keystone demanded a retraction under threat of a lawsuit. They weren't happy with Dr. Ehrlich's proposed retraction, which they said was a ``re- publication of the same defamatory statements.''

As Dr. L.R. Huntoon noted, ``when it comes to standing up for ethical principles and telling patients the truth about capitation, MCOs consider the truth `defamatory'.''

Dr. Ehrlich stood his ground. Keystone is deferring the implementation of specialist capitation.

Many of Dr. Ehrlich's colleagues applauded his courage, though they themselves were unwilling to incur the legal and financial risks. AM News published an article on p. 8 of the Aug. 19 issue, headlined ``MD raises ruckus by challenging specialty capitation.'' The AMA ``strongly supports Dr. Ehrlich's patient-advocacy efforts'' but advises physicians to seek legal counsel before doing likewise. The duty to patients, said AMA attorney Carol O'Brien, ``must be balanced by prudence, given the significant legal protections extended to business relationships.''

The AMA apparently concludes that Dr. Ehrlich ``won't turn back change.'' AAPS believes that Dr. Ehrlich has shown the power of one man's voice. If his colleagues support him, it is the unethical business relationships that will perish.

Krizek Sanctions Should Be Overturned

On September 3, AAPS filed a brief amicus curiae on behalf of George Krizek, M.D. (see AAPS News Oct 1994 and Dec 1995). Attorneys Andrew Schlafly of New York and James Shannon of California argue as follows:

In this case, a government, hungry for revenue, destroyed the professional life of one of its citizens. Dr. Krizek, a distinguished psychiatrist, worked for 21 years among poor and elderly patients ``afflicted with horribly severe psychiatric disorders'' (United States v. Krizek, 858 F. Supp. 5, 8 (D.D.C. 1995), ``Krizek I''). He earned a modest income, compared with what doctors in private psychiatric practice are paid.

Dr. Krizek submitted claims for Medicare and Medicaid reimbursement using the complicated and, as the district court found, ``ambiguous'' guidelines set out in the CPT manual. Over 21 years, he submitted billings for about 5,500 days. In a Kafkaesque nightmare, the government spent years investigating 1,800 days worth of billings. After failing to bully a settlement from the Krizeks, the government brought an $80 million claim against them under the False Claims Act, 31 U.S.C.3729, et seq., demanding a $10,000 penalty for each $48 psychiatric session alleged to have been fraudulent.

At trial, the government lost every claim for which it attempted to offer specific evidence against the Krizeks. That should have ended the case. Instead, the government ultimately prevailed on two claims that it never pled: that the bills for three of 1,800 days included charges in excess of 24 hours and that on 264 days, Dr. Krizek had billed for more than 9 hours of patient treatment. The district court, presuming those charges fraudulent, invoked the maximum $10,000 penalty for each of 11 allegedly false items submitted for those days on which the Krizeks billed for more than 24 hours, and also added fines for each hour over 9 hours in a day, resulting in a total penalty of $157,105.38 in fines. See United States v. Krizek 909 F.Supp. 32 (D.D.C.1995), ``Krizek II.''

Three disturbing aspects of this case bear on how the government might proceed against other physicians:

  1. The Government's Investigation. Government agents first contacted the Krizeks with a lie, asking if they could deliver a package. Agents appeared at their door to interrogate them. In August, 1991, Pennsylvania Blue Shield sought patient records without revealing that the purpose was to further the government's investigation. Another year and a half later, on Christmas Eve, 1992, the Krizeks were presented with a demand letter threatening suit unless a $250,000 cash settlement was agreed to immediately. The suit followed two weeks later; the Krizeks learned about it from the radio, after the government issued a press release.
  2. The Government's Failure of Proof. Both theories alleged against the Krizeks were rejected by the district court. The government failed to prove that any specific treatment was medically unnecessary or that Dr. Krizek ever improperly ``upcoded'' a single bill.
  3. The Government's Improper Presumption. In presuming the Krizeks liable under the False Claims Act, the district court apparently relied solely on the testimony of an expert witness, Dr. Norman L. Wilson, who stated that he ``had never submitted more than 9 hours worth of claims to Medicaid/Medicare in a single 24-hour period.'' Dr. Wilson is an administrator, whose work situation is quite different from Dr. Krizek's. When he learned what the district court made of his testimony, Dr. Wilson expressly disavowed it: ``I find it very disturbing that my statement ... was incorrectly interpreted by the Court as a standard for a typical workday of a psychiatrist.'' If anything, it is remarkable that Dr. Krizek could limit his overtime work to less than one day per week.

The District Court clearly erred when it presumptively imposed a $10,000 fine for every claim, no matter how small, that was filed in excess of a 24-hour day. The reality is that a busy physician will inevitably make errors on the dates of bills, particularly in the context of acute psychiatric care in urban hospitals. Shifts can often exceed 24 hours due to chronic understaffing and the tendency of emergencies to occur in clusters. Errors are particularly common once the clock passes midnight or the calendar passes January 1.

Given the large sample size (1800), three days with such errors are likely to be found in the bills of the most scrupulous professionals. Audits of bills submitted to the government by prestigious law firms frequently uncover charges in excess of 24 hours on one day. (See, for example, American Lawyer Media, L.P., The Recorder, September 26, 1995, p. 1 or The National Law Journal, October 12, 1992, p. 3). The frequency of such errors for the Krizeks was no greater than for law firms that were awarded legal fees in spite of them.

As it name suggests, the False Claims Act punishes the submission of false ``claims,'' which in the context of Medicare and Medicaid are requests for payment submitted on HCFA 1500 forms. It was a clear error for the Special Master to parse each 1500 Form into a separate claim for each item. The only reasonable construction of the penalty provision of the False Claims Act requires application of only one penalty to each submitted bill. The Supreme Court held as much in United States v. Bornstein, 423 U.S. 303 (1975).

The government should be restrained from overreaching in actions against physicians on the basis of an Act which was originally intended to address government contractors who were defrauding the government during the Civil War. Its onerous penalties were tailored for the context of large corporate billings. A $10,000 penalty for an overcharge on an aircraft carrier makes sense; for a Medicare claim for $48, it obviously does not. Improper billing by physicians is typically addressed under the more flexible administrative provisions of the Civil Monetary Penalties Law, 42 U.S.C. 1320a-7a (``CMPL''). The vast majority of prosecutions of health care fraud are brought under the CMPL; the Krizek case is one of only a few nationwide which have been brought under the False Claims Act. It is the only known case brought against a physician who actually rendered the subject services.

The sanctions of the False Claims Act are so dispropor- tionately large that the basic rule of criminal law that prohibits shifting of the burden of proof from the government onto the defendant ought to be applied. The Supreme Court has already held that the application of the civil False Claims Act in the Medicare context can be so punitive as to require certain protections usually afforded only criminal defendants. (See United States v. Halper, 490 U.S. 435 (1989), in which the penalties were substantially less than those sought by the government against the Krizeks.)

Dr. Krizek's alleged crime under the False Claims Act is derived from common law fraud, for which proof of intent is particularly necessary. The government, unable to satisfy its burden of proof with respect to an occasional error in a huge data sample cannot rightfully obtain a conviction by forcing the Krizeks to prove their innocence with respect to errors of nearly ten years ago.

Members' Page

Creeping Coercion. Those pesky amendments to the Constitution make it troublesome to take people's rights away. It's much easier, less obvious, and presumably less upsetting to simply ``encourage'' people to waive those rights.

The Fifth Amendment guarantees that no citizen ``shall be compelled in any criminal case to be a witness, against himself.'' Given the proper motivation (bright lights, sleep deprivation, rubber hose, etc.), people can be ``encouraged'' to incriminate themselves. Although such things are not used in our country today (they are obvious and upsetting), our government does ``help'' and ``encourage'' people to incriminate themselves. The most recent example is the PATH program (Physicians At Teaching Hospitals).

A socialist's dream, this program even gets doctors to pay for their own investigation, which will almost certainly find a crime, given the complexity and number of rules and regulations. For such cooperative doctors, the OIG may reduce the fines and penalties (Amer Acad Neurol News, 8/96).
Lawrence R. Huntoon, Jamestown, NY [For questions about the new Medicare rules for teaching physicians, contact David Johnson at (612)623-2443.]

The Effects of Coercion. Human action is propelled and steered by two factors: desires and fears. A free society moves more on the wheels of affirmative desires. Actions in a highly regimented society are mainly defensive....Escaping the censorious attention of the FDA and other police agencies can become more important than effective therapeutic action. Physicians become like bureaucrats-robots with blood. Regimentation has the effect of functionally beheading most members of a group, institution, or nation. Creative investigation and thought are at least inhibited and at worst prohibited.

One of my nine daughters told me about her degraded performance as a soccer player when the coach relentlessly yelled distracting directions to players on the field. Undivided focus on the realities of the game is of primary importance.
Ralph Rohweder, Mount Vernon, VA

Medical ``Necessity'' I enclose a letter I received from Florida Medical Quality Assurance, Inc., which has a contract with HCFA, concerning an 83-year-old woman with Alzheimer's disease, whom I saw once. The reason for her visit was to obtain a flu shot. I examined her because her husband said she had had a cold. I did not do a Pap smear or mammogram-she had refused them the previous year. I was not satisfied that her diagnosis was proved, so I ordered an extensive blood work-up, called her husband about several abnormalities, and asked that she return. She did not come back for a year, and at that time she again refused a Pap smear and mammogram. FMQAI demanded that I defend myself for not doing a comprehensive history and physical, an EKG (she had a cardiac history), and a Pap smear and mammogram, and for not offering Pneumococcal vaccine. I had no recollection of the patient so had to go back to the clinic, where I had worked part-time while recovering from a heart attack, to review the chart. FMQAI finally absolved me of ``any conduct which was indicative of a lack of quality care.'' No wonder Medicare is going broke!

I am convinced my disability occurred at just the right moment. After 45 years of practice, I simply could not continue under these threats.
Harry Ducilli, Jr., M.D., Amelia Island, FL

``Overpayment''. In 1992, I performed a bone marrow and a hospital visit on the same day. Medicare denied payment for both, but on review paid several months later. On 6/28/96 (4 years and 3 months later), they said I should never have been paid and was to return $127. On 7/5/96, I wrote a letter explaining why I had been paid. On 8/5/96, I was told they had already taken $56 from subsequent Medicare payments, and if I didn't pay the other $70 they would report me to the Justice Dept., the IRS, and other agencies I had never heard of.

If I were an internist, I would quit seeing Medicare patients today. As a consultant, I have been reluctant to leave my doctor friends. For now, in the office my Medicare patients are being billed at the time of the visit and supplied with an explanation of ``unassigned'' Medicare benefits. After initial horror and disbelief, my patients have actually started to come to my office with a check in hand. I am happier to see them and I try very hard to give them their money's worth. I do lots more talking and explaining, which I am sure is ``medically unnecessary'' by Medicare standards....
Linda W. Wilson, M.D., Culver City, CA

What Is a ``Disruptive Physician''? I enclose an announcement from the Alabama Board concerning a conference on the ``disruptive physician.'' The brochure implies that such doctors are drug or alcohol abusers or sexual harassers; however, ``impaired physician'' has been the P.C. term for such persons. Could it be that physicians who insist on full and free discussion of matters such as quality of care under HMOs, intrusion into medical practices by hospital CEOs, or insistence on objective peer review are to be slandered with the implication of drug, alcohol, or sexual abuse as a means of eliminating their credibility? Please check it out.
John C. Freeman, M.D., Pinehurst, NC

Do you make housecalls? If you do and would like to talk about it, please call Kathryn Serkes, (202)333-3855, or AAPS?.

Legislative Alert: AAPS Report from Washington

They're Back!!!

Those Munchkins who thought the bad old Clinton Plan, like the Wicked Witch of the West, was dead can just forget that merrily skipping, ding-dong stuff. Wake up and smell the sulphur.

The President's recent announcement of a ``National Commission on Health Care Quality,'' chaired by Labor Secretary Robert Reich and HHS Secretary Donna Shalala - both known through the entire civilized world as paragons of political moderation-is the first step in the Long March back to Clinton-style regulation of medicine. Hillary is apparently letting her pal Shalala and Secretary Reich carry the water this time. They will be joined by 20 others. Look for a politically correct selection of ``consumers'' (not real consumers, but consumer advocates who advocate denial of consumer choice), health care ``providers'' (a ``provider'' is a policy wonk word, a lexicological insult to physicians), insurers (the folk who will be judges in their own cause), labor leaders (the biggest cheerleaders for the Canadian Health Care System), and business executives (the folks who want to dump corporate retirees and have taxpayers pick up the cost).

The ostensible reason for the formation of the commission is to ``protect'' consumers against the rapid changes in the ``health- care'' sector of the economy. The reason: the growth of managed- care plans in the employment-based medical insurance industry has been accompanied by abuses. The First Lady already cited the practice of employer-sponsored managed care plans throwing mothers and newborns from hospitals 24 hours after birth, and the practice of managed-care plans restricting discussions between doctors and patients on the types of treatments available. No, duh. What can anyone with an IQ bigger than a melting ice cube expect a system where you get paid more for doing less?

The one simple answer to all of this, of course, will doubtless be studiously ignored by the new Clinton Task Force: give patients the right and responsibility to fire the insurance companies that restrict their care. Do that by changing the tax treatment of insurance, and allowing consumers, not just employers, the right to own their own insurance policies.

The growth in managed care has jumped by 60% in the past five years, and now more than half of all American workers and their families are enrolled in health maintenance organizations (HMOs). Managed care, the way it is constructed, is threatening the quality of medical services, say the Clintons; the Administration says it has been getting lots of complaints.

In other words, the new Clinton commission is to protect consumers from the emergence of precisely the type of insurance arrangements, established through compulsory regional alliances and financed through an employer mandate, that the old Clinton Plan had proposed to impose on the rest of the country anyway. Yes, this does make sense-politically.

First, Government rules create, through the tax code, a monopoly in the medical insurance market for employment-based plans, in which there is a disconnect between the interests of the consumer (the employee) and the customer (in this case the employer). This is the product of a 50-year-old historical accident. But for planning purposes, it will do. The employer, whose economic interests are different from those of the consumer, cannot be expected to protect the employee's interest.

Second, no surprise, the first set of government rules creates the need for another set of government rules to protect consumers. At the state level, there are over 1,000 mandated benefit laws, plus reams and reams of rate-setting rules, and various other regulatory contraptions, many of which, like the Federal Income Tax Code, defy all human understanding.

Next, the government finds that its various sets of government rules, aside from creating even more problems, requiring even more rules, are inadequate, and need simplification. That's where Canadian-style command and control blows in a cold front of regulatory simplicity which will scatter the cumbersome micromanagement accompanying the managed care/ managed competition model. The Government gives you the health care it can afford, and you take what they give you. End of story. The original Clinton plan, as folks in the Administration knew and some even admitted before the ink was wet on the legislative language, was a halfway house to a Canadian style health care system, with the government setting a global budget for both public and private medical spending.

Don't expect the Clinton team to make the same mistakes with this new task force that they did with their supersecret task force gambit. This time they are going to do the process right. Liberals are normally good at process; process is their thing. If anything, the ever-elastic Clintons have demonstrated that they are resourceful. Look for hearings to be held all around the country to focus in on the inherent weakness of the ``free market'' and horror stories generated by the corporate bureaucracies that run managed-care plans, with recommendations to toughen up the regulations even more or scrap them altogether in favor of a giant version of Medicare. In any case, this is likely to turn into another attempt to hammer home a nationalized health care system, doubtless in the image and likeness of Hillary and the gaggle of Washington policy nerds who love to collect an analyze tons of data and do good to millions of others, whether they like it or not.

Consider the broader context. Attacking the excesses of managed care, like attacking the excesses of the welfare system, is sure to appeal to the broad middle class. President Clinton has been ``moving right'' with symbolic and substantive gestures, including his signature of the Congressional welfare bill, which liberals in Congress denounced as a sellout to House Speaker Newt Gingrich. Even NBC's Tim Russert on the August 26th Today Show was compelled to remark: ``He wants people to go up to the podium and criticize his welfare bill because he can then say to the white suburban voter, `Listen, look who's against me, the liberals, some of the minorities. I'm on your side on welfare reform. I even stood up to the liberals in my own party. Isn't that character?' ''

Consider also the timing. Dick Morris, the political prostitute that President Clinton hired to make him look and sound more and more like a moderate Democrat, hasn't been gone three weeks, after his escapade with a $200-per-hour call girl, and Clinton is back on an issue of health care reform- something that has been poison to him and his Congressional allies during the last two years. This time, without Morris calibrating the right ``triangulation'' pitch, it is likely that President Clinton, following the predictable script of Shalala and Reich, will be starting to move to the left on health policy.

The Deepening Medicare Mess

Nobody wants to talk about it. The Republicans don't want to talk about it because they will be branded as heartless and insensitive. Clinton is not likely to spend too much time on it because, if elected, he will have to do something to Medicare very similar-at least in terms of bucks if not policy-to Medicare spending. But the facts keep rolling in. Congressman Bill Archer (R-TX), who chairs the House Ways and Means Committee, recently reported that Medicare is running our of money even faster than the Medicare Trustees anticipated this year, and the Medicare Trustees say this year that the Medicare Trust Fund is running out of money even faster than they predicted last year.

The news on Medicare is simple: the situation is invariable worse than you thought it was; the government actuaries are always-as a matter of course-wrong. According to Archer, as reported in the August 24th Washington Post, the July 1996 loss was $3.3 billion, five times larger than the $683 million decline in July 1995. During the recent budget debate, the Congressional Republicans originally proposed slowing the growth by a little more than 7%, and saving, on the basis of a CBO calculation, $192 billion, or $78 billion less over the same budget cycle. The latest Congressional proposal is to cut Medicare program growth by $168 billion; the White House has proposed cutting program growth by $118 billion. Nobody, at least among grown-ups, thinks that these patchwork compromise efforts will do anything to avert fiscal disaster in the Medicare program. The public, which likes the benefits, but doesn't want to pay for them, is of course, in steadfast denial. But the system is collapsing out from under them.

This was again confirmed by the most recent study on the entitlement system conducted by the Congressional Budget Office (CBO). This nonpartisan body is arguing that federal health care costs are skyrocketing, and that in 1996, federal spending on Medicare and Medicaid is expected to reach $300 billion, or nearly 20% of the federal budget. Over the past ten years, Medicare spending has grown more quickly than spending in any other government program except Medicaid. In 1996, Medicare will spend a total of $200 billion. By 2002, Medicare spending alone will climb to $332 billion, projected at an annual rate of increase of 8.9%, compared with a growth rate projected at 4.8% over the same six year period. The 8.9% rate is lower than the 11% rate we have experienced in the recent past. But, as CBO notes, we are in a period of relatively slow growth in Medicare because the ``baby bust'' generation is coming on more slowly now. That will change after 2010. When the first tidal wave of baby boomers starts hitting Medicare's breach, the growth of the program and its costs will escalate dramatically and continue until about 2030. At that point, the Merry Mouseketeers should be passing on.

In preparing its reports for Congress, CBO says that Congress can select from a wide variety of options to control the growth in Medicare spending. If they wish, and the Clinton Administration will likely recommend this course, they can belly up to the bar and tighten the Medicare reimbursement rates, toughen up the silly RBRVS or the DRG systems. They could simply lower annual updates for payments to doctors and hospitals and develop more elaborate administrative pricing mechanisms. If they decide to let the doctors practicing fee-for-service medicine off the hook, which is unlikely, Congress could try to squeeze more savings out of the Medicare HMO program. They could do this by changing the current formula and lowering the payments below 95% of the fee-for-service rate. Or Congress could ``institute new payment methods'' such as competitive bidding for HMO plans, like the Department of Defense. Also included in the CBO recommendations is change in the current financing structure, transforming Medicare into a defined contribution plan, something akin to what the Congressional Republicans proposed during the past two years. Short of that, Medicare spending could be slowed by increasing the deductibles and copayments among the beneficiaries or raising premiums, either across the board-unlikely-or on the basis of income - more likely. Nobody thinks this is going to be easy. That's why nobody wants to talk about Medicare.

If nothing is done, a fiscal disaster is unavoidable. So are huge taxes.

Messed Up Medicare Payments

The Health Care Financing Administration (HCFA), home of Nurse Ratchet, admits that Medicare may be overpaying HMOs by 7% because its government payment formula does not take health status into account. Unless the funding formula is made right, the losses are going to accelerate in the ``cost- effective'' Medicare HMO program. CBO projects that the total enrollment in Medicare HMOs will increase from 9%, where it is today, to about 17% by 2002.

Currently, HMO Medicare payments are set at 95% of the estimated average per capita cost of treating beneficiaries under the fee-for-service method, adjusting for the beneficiaries' age, sex, and welfare status. According to the HCFA study, if HMO enrollees had stayed in fee-for-service programs, Medicare would have paid 88% of the national average. According to Bruce Vladek, HCFA Administrator, the findings confirm the need to have a payment formula that adjusts for the health status of Medicare beneficiaries. There are more than 200 HMO contracts with Medicare, having a combined enrollment of 3.5 million beneficiaries. HCFA admits that its latest findings on its flawed HMO payment formula are consistent with an earlier study of the Medicare HMO program, conducted by Mathematica Policy Research, which found that Medicare was losing about 6% on the program. Earlier, Price Waterhouse, in its own analysis of the problem, said that Medicare was not paying more for beneficiaries in HMOs. But the 1996 HCFA study is based on a larger and more recent sample of Medicare beneficiaries.

This is an old story. Administrative pricing, like government actuarial projections on the cost of the Medicare program, are rarely if ever ``right.'' Only markets can yield a ``right'' price; government estimates cannot.

Beyond overpayments in Medicare, the managed-care industry is generating a genuine backlash. In the meantime, it is all but certain that Congress will address the HMO abuses by adding more regulation, rather that getting to the heart of the problem by changing the tax treatment of medical insurance and setting up a consumer choice system. Employers are in charge, to be replaced by bureaucrats. Somebody should ask a simple question: If your auto insurance company were abusing you or your homeowners insurance policy were not up to par, why is it that you can fire those companies? And why can't you fire your health insurance company? Answer: because your insurance policy is not yours; it belongs to your employer.