Volume 61, No. 9 September 2005

NETWORKS

Networks, as in a system of crossed roads, can be useful, even essential, facilitating cooperation and commerce.

In radio or television, a network is a chain of transmitting stations controlled and operated as a unit (Webster's New World Dictionary 1960). The big three networks facilitated a monolithic definition of newsworthiness and cultural values, recently being challenged by cable and webcasting.

Third-party networks in medicine are more like the second type. They too tend to homogenize and "standardize" content, with not a little input from the commercial sponsors. And they are also under threat, from "consumer-driven health care," which gains much support from the internet.

Through the use of peer pressure, third-party supervision, and financial incentives and possibly pure intimidation networks influence physician thinking. Unquestionably, independent thinkers are a bane to central planners. "How to get reluctant physicians aligned with your strategic goals" and "how you can reduce physician push-back" are topics for a $227 audio conference by the Healthcare Intelligence Network.

"Nonuniformity," "disparity," and "fragmentation" are Bad Things. We need to "re-engineer the system" so that everybody participates in the "best practices" for diagnosis and treatment everywhere in the nation: including the usual litany of cholesterol screening, antitobacco counseling, mammography, blood pressure checks, and certain blockbuster drugs. Achieving the "industry transformation" goals requires, of course, the National Health Information Network (NHIN), stated NHIN czar David Brailer to the Ways and Means Committee.

"Pay for Performance" is an integral part of the restructuring with its implication that networks will drop physicians who incur too many expenses. If physicians insist on the standards set by the AMA House of Delegates (see p 2) for P4P, doctors could be "left behind in the regulatory setting," warned Trent Haywood, M.D., CMS acting deputy chief medical officer. Doctors will be "sidelined" and "not in a leadership capacity," he added (Am Med News 7/11/05).

In other words, doctors could lose their current preeminence. Information technology (IT) already permits their "fungible" work (radiology reading and calculating requirements for total parenteral nutrition) to be done offshore (Allen Weiss, M.D., Naples Community Hospital Healthcare System, to Ways and Means Committee). Only 11% of promised IT savings will accrue to "health care providers"; the other 89% would go to business and government (Patriot-News 7/27/05).

The key feature of "Health Management as a Serious Business Strategy," as presented by Dee Edington of the Univ of Michigan Health Management Center, is to manage the person, not the risk or the disease. A 19-year study involving millions of people showed that only 1.5% comply with any program to its conclusion (www.umich.edu/~hmrc).

Despite the momentum toward central control of both patients and doctors, the consolidation of the IT network requires, as in the game of Prisoner's Dilemma, that everyone act in a way that may seem contrary to his own interest before anyone enjoys the promised benefits. The tremendous up-front investment, and the recognition that benefits, if any, will be delayed for years, are impediments.

But the most serious threat seen by California insurance commissioner John Garamendi (see p 2) and other advocates of "universal care" (government takeover), is the rapidly increasing market penetration of Health Savings Accounts (HSAs).

Writes James G. Knight, M.D., "Once a significant number of Americans with [HSAs] are...fully vested and in control of their own health care future, it will be an almost impossible sell politically to push these voters into government-run health care." Garamendi et al. see the rapidly approaching HSA "tipping point" as a clear and present danger to their vision.

"The third-party payment system in primary care is going down," writes Robert Berry, M.D. "It will vaporize like the chief Nazgul, the Witch King, did in The Lord of the Rings after Eowyn stabbed him through the hole in his helmet. And we will be free of their coercion and terror."

Apparently foreseeing this threat, managed-care interests got Special Rules inserted into the HSA enabling statute to protect their networks. There can be higher deductibles for out- of-network providers. And no one (neither physicians, patients, nor banks) can benefit from the efficiencies of direct patient payment at the time of service because no one knows the network price until a claim is submitted for "re-pricing." The contract may not state the price clearly; obscure the price by unspecified bundling rules and modifiers; permit the third party to change fees without notice; or require adjudication of the claim before the provider can charge anything.

An insurance contract is a two-party contract between the subscriber and the company, which reimburses the subscriber when a loss is incurred. The remnant of the concept is the term "reimbursement," now misused to mean "fee." The Blues warped the concept back in the 1930s, writes Greg Scandlen, with the invention of third-party payment to providers, creating a triangle. "There is no accountability, and each point in the triangle is ignorant of what the others are doing."

In steps the Network and its government overseer. Patients and physicians will become fungible pieces serving the agenda of the controllers unless and until they declare independence.

The Network is portrayed in a Huntoon lampoon as a giant spider and a web superimposed on a U.S. map: "The WedontCare cooperating provider network wishes to establish a close, long-term relationship with cooperative providers so as to insure that those enrolled on our network are served more promptly preferably while they are still warm."

AMA Supports P4P

In a resolution opposed by the Board of Trustees, the AMA House of Delegates adopted a policy of opposing any "pay-for- performance" initiative that did not meet the AMA principles that it should (1) ensure quality of care, (2) foster the patient- physician relationship, (3) offer voluntary participation, (4) use accurate data and fair reporting, and (5) provide fair and equitable incentives.

AMA Secretary John Armstrong, M.D., said that the resolution "substantially changes the direction of our Association" and "ties our hands." Additionally, it "will not delay pay-for- performance" (Am Med News 7/11/05).

AAPS Past President Chester Danehower, M.D., AMA Delegate from the Illinois state medical society, told the Reference Committee that the AMA should oppose P4P altogether. Setting conditions implies acceptance of the principle.

At the same time that delegates said that they adamantly oppose the use of P4P for cost-cutting, they adopted the recommendations of a report that calls for using P4P and other strategies to cut the cost of caring for the 5% of patients who consume nearly 50% of medical expenditures (ibid., p 25).

Garamendi's Assertions, and the Facts

The Garamendi report titled "Priced Out: Health Care in California" claims that HSAs "put the entire health system at risk" because they are attractive to high-income people and the young and healthy. It ignores evidence that they are even more attractive to low-income and older people. Assurant Health found that 29% of its HSA policyholders had incomes under $50,000, 57% were older than 40, 73% were families with children, and 37% were previously uninsured. While Garamendi complains that "insurance coverage is shrinking while premiums are increasing," he recommends measures that will increase premiums further, such as mandated prescription drug coverage. The report also claims that financial disincentives in consumer-directed plans will cause people to forgo early treatment. In fact, HSA holders were as or more likely to receive preventive care, saying they would "save money in the long run." (See Galen Institute Health Policy Matters 8/5/05 and David Hogberg, American Spectator 8/8/05).

"Free" Software Quite Costly

Saying that lack of electronic records is one of the biggest barriers to quality improvements, Medicare announced its plans to give away the Vista software used in VA facilities, which is written in MUMPS. Reputedly, Vista is hard to establish and maintain, and installation costs at least $10,000 (NY Times 7/21/05). Many needed add-ons to the basic system are not free.

Medicare Modernization Boosts Managed Care

Although only 10% of Medicare beneficiaries have enrolled in an HMO, to take advantage of the MMA's prescription drug benefit they will either have to join an HMO (a "Medicare Advantage" plan) or a Prescription Drug Plan. Thus, most Medicare patients will have to deal with some form of managed care, at least for their drugs. Only drugs on the plan's formulary will be available, and physicians will have to deal with numerous different formularies (AzMed June 2005).

England "Wired" for IT

English primary care practices are "wired" because the pharmaceutical industry years ago offered free hardware and software in return for access to anonymized prescribing information. In the U.S., "innovative financing" for IT has been inhibited by concerns about Stark self-referral rules (Don Detmer, M.D., American Medical Informatics Assn, to Ways and Means). A safe harbor for IT financing has been proposed.

Connecting for Health (CFH), the world's biggest civil IT project, is intended to link 31,500 GPs in Britain to 300 hospitals and change the way almost 1.4 million NHS employees do their jobs. If CFH can't expand patient choice and shorten waiting lists, it will be seen as a major failure for Prime Minister Tony Blair.

Early hyperbole has given way to pessimism as some doctors "are balking at being asked to recast their clinical records in a uniform and, as they see it, time-consuming way." They are being asked to "go from a solipsistic to communitarian environment." Many fear that patient records will not be secure (Economist 7/21/05).

AAPS Urges Caution on NHIN

In a July 27 press release, AAPS warned Congress that "speeding on the information superhighway will result in a medical pile-up." In written testimony to the Ways and Means Committee, AAPS stated that "forcing technology on medicine by top-down central planning risks an end to advancements in information technology." Congress should "allow the technology to evolve, and be voluntarily adopted as it becomes useful."

Most importantly, AAPS objected to having patients' confidential records subjected to "sneak-a-peek" access by persons unknown to the patient, and without consent.

Can IT Bridge the "Quality Chasm"?

Extravagant promises about the NHIN find little actual support in the medical literature:

"Most studies [on the reliability of peer assessments] found ...that physician agreement regarding quality of care is only slightly better than the level expected by chance" (JAMA 1992;267:958-960).

"[C]onsiderable danger arises from...the use of [data on individual physicians] to include or exclude their services from insurance coverage...because the samples are too small and adjustment for severity of illness and socioeconomic status of ...patients is inadequate" (N Engl J Med 2004:350:2409- 2412).

"Few studies of [Computer-Based Clinical Decision Support Systems]...have assessed patient outcomes and only a small proportion of these have found benefits" (JAMA 1998: 280:1339-1346).

"High rates of clinically significant ADEs [adverse drug events], ordering errors, and unrecognized ADEs were noted at a VA hospital that had adopted a wide range of computer technologies and personnel strategies designed to improve medication safety" (Arch Intern Med 2005;165:1111-1116).

AAPS Calendar

Sept 21-24, 2005. 62nd annual meeting, Arlington, VA.
Oct 22, 2005. SEPP meeting in Pittsburgh, www.sepp.net.
Sept 13-16, 2006. 63rd annual meeting, Phoenix, AZ.

Top Canadian Court Stays Ruling

On June 9, the Supreme Court of Canada struck down Quebec's ban on private medical insurance (AAPS News, July 2005). Arguing that the decision could cause chaos in the delivery of medical services in the province, the Quebec and federal governments asked for an 18-month delay in implementation. The Court suspended the ruling for 12 months.

"It's almost as though there's a hidden constitution such that any ruling that goes against socialism is automatically suspended," stated AAPS Director Lawrence Huntoon, M.D. "You can see what socialists fear most freedom and the ability of people to make their own decisions. Allowing individuals to receive private medical care won't cause chaos, but socialists fear it will cause a loss of their control."

The only reason for maintaining the prohibition on private medicine, writes columnist Mark Steyn, is "reluctance to let go of the bedrock principle equality of ***, universal lack of access...." As one reader of the National Post had written, "one of the great virtues of socialized medicine was the way prominent wealthy influential figures such as Steyn and the prime minister were forced to use the same system as everybody else...." But this is meaningless in practice.

"I vote with my feet and drive south," replies Steyn. The money that Canadians spend on private medical care in Buffalo could be keeping Canadian doctors and nurses at home.

Peter MacKay, in Steyn's view the leading contender for the position of next Conservative loser, said the Supreme Court decision had "brought medicare into peril" and would leave us with a "10-tier system of private-public health care."

While Sweden, Holland, France, and "the rest of the EU's impeccably progressive pantywaist jurisdictions" permit private medicine, even nominal conservatives in Canada feel the need to prostrate themselves before the Liberal Party orthodoxy of "no tier health care," Steyn observes.

"I will never compromise public health insurance...because it is the only system that most Canadian families, including my own family, have ever used," proclaimed Stephen Harper.

"Well, yes, and the same could have been said of feudalism in tsarist Russia," notes Steyn (westernstandard.ca 7/11/05).

AAPS Objects to New System of Records (SOR)

The Dept of HHS has proposed to establish the HIPAA Information Tracking System (HITS) to store the results of investigations by the Office of E-Health Standards and Services (OESS) of alleged violations of the Transactions and Codes Sets, Security, and Unique Identifier provisions of HIPAA. The information will also be used to combat fraud and abuse.

"Due to investigatory activities, CMS is exempting this system from the notification, access, correction, and amendment provisions of the Privacy Act of 1974."

In comments on the proposed SOR, 70 F.R. 38944, AAPS raised three objections: (1) Complaints about a noncovered entity should never be entered into the SOR because HHS lacks jurisdiction. (2) It is baseless for SOR to maintain information about any entity for 25 years, five times longer than the statute of limitation for most crimes. (3) There are insufficient safeguards against access to information by "agency contractors or consultants."

AAPS General Counsel Andrew Schlafly wrote:

Fraud Control Efforts Intensified

California Attorney General Bill Lockyer is offering a $1,000 reward to anyone providing information that leads to the conviction of a provider for Medicaid fraud. "Condo commandos" can cash in without going to the trouble of building a whistleblower suit. Officials sent more than 3.9 million flyers to households with a Medi-Cal recipient, and 50,000 flyers for providers to post in their waiting rooms. There is an on-line complaint form at www.ag.ca.gov/bmfea. The AG is targeting schemes for offering low-income beneficiaries inducements, such as children's shoes, for undergoing an unnecessary medical procedure.

Such incentives will cause patients who don't understand their bills to blow things out of proportion, subjecting many physicians to unwarranted investigations or audits, warned attorney Gabe Imperato of Florida.

At least four other states are considering similar programs (Medicare Compliance Alert 7/11/05).

Other bounty hunters deployed by CMS include a new group of Recovery Audit Contractors (RACs) whose sole revenue is a contingency fee from recoveries based on miscoding, unnecessary services, or incorrect payment amounts. A 3-year pilot project has been launched in California, New York, and Florida (MCA 5/30/05).

State Medicaid Fraud Control Units (MFCUs) are under pressure to garner enough overpayments or fines to cover their costs; 14 MFCUs failed to break even. To help Washington's laggard MFCU, which returned only 65 cents on the dollar, the state health department is allowing MFCU to access the data mining database it created with an outside contractor (ibid.).

To keep providers from gaming the system by removing claims from scrutiny, CMS has ordered carriers to keep copies of all claims that are deleted or voided. Frequent deletions will be a red flag for an audit, so providers are urged to double-check claims for accuracy before submission (ibid.)

One bright spot is the reversal of Arthur Andersen's conviction too late to save his firm. This eases fears of destroying old documents as long as one follows a routine retention policy and is not under investigation, stated Vickie Yates Brown (MCA 6/13/05). Most adult records need to be kept 5 years; HIPAA compliance-related records, 6 years; and audit-related information, 7 years.

Chief CMS Medical Officer Suspended

Sean Tunis, M.D., named Chief Medical Officer of CMS in 2003, has had his medical license suspended. He has also been fined $20,000 and must complete 35 hours of CME before he can practice medicine again. Based on an anonymous letter, the Maryland Board alleged that Dr. Tunis had falsified CME certificates for 60 hours of credit, using government supplies, and had submitted them with an application for reappointment. Dr. Tunis admitted to fabricating the certificates but said he was confident he had simply been reconstructing the records for credits he had legitimately obtained (MD Net Guide 7/05).

Correspondence

Dueling Crises. You know it's a problem when you see a cartoon like this in the Buffalo News: Under a sign reading "New York, the Vampire State," Count Dracula ("Albany") is holding the damsel's body ("Taxpayer") in his arms. She's holding a note that reads "Medicaid costs."

I predict that Medicaid will encounter devastating financial problems before Medicare does. The burden of Medicaid taxes is oppressive, especially in New York, which has promised the most generous welfare benefits in the nation. Medicaid is the largest line item in every county budget in the state. Unfunded state mandates have bled county taxpayers dry. Farmers are complaining that they bear a disproportionate burden of property taxes because of their occupation. Erie County has spent so much on Medicaid that it cannot afford toilet paper for the county office building. Proctor & Gamble staved off an immediate crisis by donating a truckload of its new Charmin MegaRoll, a $16,000 value. Additional donations will be welcomed (Buffalo News 3/19/05).
Lawrence R. Huntoon, M.D., Ph.D., Lake View, NY

A New Bureaucracy. Call it the Dept of Officially Compelled Charity. Its motto would be "charity or jail," and its job would be to maintain an address to which all "health care providers" send bills for uncompensated care, provided that they have followed all federal and state affirmative action, contracting, hiring, and licensing regulations. The DOCCC would then root through the bills and pay whatever it feels like.
Linda Gorman, Independence Institute, Englewood, CO

Surviving on TennCare. Participating doctors learned the art of the "churn." This involves stacking the practice with relatively healthy patients and bringing them back every few months for 5-minute checks. The system sets up disincentives to caring for the truly sick and incentives for providing a lot of unnecessary care.
Robert Berry, M.D., Greeneville, TN

Is Medical Care a Public Good? In economics jargon, a public good is one that cannot or will not be produced for a profit, since it has large externalities. An externality exists when someone makes a decision that benefits him personally but creates a cost for someone else. Medical services have been turned into a public good by government policy that crowds out a consumer market and distorts supply and demand. Eighty percent of Americans now make medical decisions that benefit them personally but increase costs for others. Enjoy a risky lifestyle and expect someone else to pay for your surgery.
Craig Cantoni, Scottsdale, AZ

Where Does It End? Politicians have no stopping place when it comes to raiding your wallet to finance their schemes. Since they don't yet have 100% of our money, the day of reckoning can be postponed, perhaps until after they have retired from public life. They can buy more time with rationing and cost- shifting. You'd think they might have learned something from the Tennessee and other Medicaid experiments.
Joseph Lee Pugh, Diamondhead, MS

Mandated Benefits. The Health Insurance Association of America produced a study of the effects of mandated benefits on coverage (membership.hiaa.org/pdfs/jensenrpt.pdf), showing that as many as one in four uninsured Americans lacked benefits because of mandates. Blue Cross/Blue Shield once did an annual survey on mandates, but since it decided to oppose Association Health Plans, it has been characterizing mandates as "important consumer protections." Its anti-mandate material has become hard to find.
Greg Scandlen, Hagerstown, MD

IT in the Field. I receive electronic medical records from several states, from the local Veterans Administration hospital and from a few private physicians, mostly in large groups. Universally, these records are almost impossible to interpret well and are difficult and time-consuming to read. They are obviously directed toward maximizing payment, not toward communicating useful medical information clearly and succinctly. My physician friends who use EMRs complain that they are time- consuming and clumsy. My patients who see doctors who use EMRs complain that the doctor spends all his time punching data into the computer rather than paying attention to their concerns.
Anthony M. Perry, M.D., Scranton, PA

NHIN Another Blow to Patient Privacy. We have seen progressive loss of patient privacy. I am shocked at requests I receive for patient records on immunization without the patient/guardian's release, on the basis that it has been determined that "giving this information constitutes no risk to the patient." But personal information is as much a part of a person's possessions as an arm, a car, or a skill. The National Health Information Network must be absolutely rejected.
M. Kelly Sutton, M.D., Prescott, AZ

Get the Medical Record from the Original Source and Read It. It's amazing how many people acquire thick medical charts without ever having seen a real doctor to make the diagnosis. And how many records have been edited by patients who "lost" the note about the drug abuse history.
Russell W. Faria, D.O., Newport, OR

Legislative Alert

Congress is preparing several major health care bills. Senate Majority Leader Bill Frist has unveiled the Healthy America Act of 2005 (S.4), which includes major medical malpractice reform, information technology and patient safety provisions, and a health care tax credit that includes the expansion of health savings accounts (HSAs) to low-income workers in small businesses. The Senate is expected to take up the bill after the August recess. Meanwhile the House of Representatives is on a faster track. The House bills reflect Bush Administration health policy priorities; however, the House is not preparing to act on the Administration's tax credit proposals. Medicare, except possibly for revisiting physician payment, is also not on the table. GOP leaders are afraid that if they open up the big Medicare drug benefit, all Hell will break loose.

Association Health Plans. Rep. Sam Johnson (R- TX) has proposed legislation (H.R. 525) establishing AHPs. This would enable small businesses to join together to secure economies of scale and pool resources for health insurance. On July 25, the bill passed the House 263 to 165. Like many Bush initiatives, it faces an uncertain future in the Senate.

The large margin of the House victory was impressive, given the intensity of opposition among liberal organizations and think tanks. The Georgetown Health Policy Institute described the Johnson bill as a "license to steal" because it would allow "scam artists" to bypass state regulations, just like self-insured firms under ERISA, which are governed by rules issued by the Department of Labor. This is one of those odd cases in which the Left favors state over federal regulation.

There is no question that AHPs would improve coverage options for small businesses, many of which are forced to operate within the framework of a dysfunctional state small-group insurance system. In Maryland, for example, small businesses are required to buy a state-approved comprehensive health benefit package, with inflexible underwriting and a large number of mandates, within a "market" dominated by two carriers who carve up 94% of the total covered lives.

The weakness of the approach is that the proposed associations are employment based, and thus they tend to reinforce the current system. While the proposal is clearly popular among small business organizations and trade associations, AHPs are not, in themselves, a direct and decisive step toward consumer-based medical coverage.

There is a way to make association plans work better. That is to include associations outside the workplace, including those sponsored by unions, trade associations, or ethnic or faith-based organizations. Such associations could be broadly available to employees in small firms, and could be financed through defined- contribution programs. The options could include HSAs and other innovative arrangements. Indeed, according to the latest data from eHealth Insurance, the nation's largest internet broker of insurance coverage, HSA plans continue to grow in number and are increasingly affordable. In the first half of 2005, 62.6% of HSA purchasers paid less than $100 per month for their insurance plans, and nearly 80% have prescription drug coverage.

Another entity that could emerge through an expanded version of AHPs is the ethical or faith-based health plan. These do not yet exist in any number. There is one such plan in the Federal Employees Health Benefits Program (FEHBP) that is sponsored by the Order of the Sisters of St. Francis, a Catholic organization, and it is likely that more such plans will arise. A broadened version of individual membership association plans would enable religious organizations to promote insurance policies compatible with the moral convictions of millions of Americans. Health officials would have to be directly responsible to individuals in addressing the ethical application of medical technologies. While conservatives often focus on the role of conscience clauses in protecting the rights of doctors, hospital officials, and other medical professionals, the change in the insurance market to enable persons to buy insurance that reflects their personal values would be an enormous step forward. Perhaps the Senate can take this up, if the House does not amend the legislation to incorporate this change.

Interstate Commerce in Health Insurance. Rep. John Shaddeg (R-AZ) has authored an innovative change in the health insurance markets: the creation of interstate commerce, enabling purchase of health insurance across state lines. This is a crucial element in the effort to control medical costs through market forces. At present, a typical health insurance plan for a family of four could be priced at $172 per month in Kansas or Missouri, while a similar plan would cost $840 per month in New York City (Wall St J 7/25/05). New York, like New Jersey and several other states, requires guaranteed issuance of coverage to all persons, plus community rating, which means that all persons regardless of their health status are to pay the same rates. There are more than 1,800 mandated benefits nationally, with some states, like Maryland and Minnesota, off the proverbial charts. According to the Council for Affordable Health Insurance, Minnesota has 61 and Maryland has 58.

The Shadegg proposal (H.R. 2355) was amended slightly in the House Energy and Commerce Committee, but was pulled from floor consideration in late July because of growing opposition among state regulators. It is likely to be put back on the active Congressional calendar after the August recess.

Rep. Charles Norwood (R-FL), a champion of the aborted "patients bill of rights" legislation, which would have created a massive federal regulatory regime, emerged as a Republican leader of those opposing the Shadegg bill. Norwood has been joined by members of the congressional delegations of New York and New Jersey, where state regulators impose heavy, costly sets of rules on health insurance, including lots of mandated benefits. Moreover, Blue Cross and Blue Shield representatives have also come out strongly against the proposal. During the July 24 House Energy and Commerce Committee mark-up, Shadegg agreed to address some of Norwood's main concerns and won approval of an amendment that would direct the Government Accountability Office (GAO) to do a 5-year study of premium prices, the uninsured, and persons with pre-existing medical conditions in all 50 states. Shadegg also agreed to delay, for one year, the effective date of the legislation, allowing states to review their regulations and mandates. House Democrats proposed dozens of amendments, which all failed on party-line votes. The measures were a transparent attempt to gut the legislation: requirements that state legislatures "OK" out-of-state insurers, that out-of-state policies conform to all of the state mandates, and that the insurance commissioner certify that an out-of-state carrier would not offer a policy harmful to citizens of the state, plus a series of federal benefit mandates.

The Shadegg bill has the potential to make health insurance more affordable for millions of Americans. As The Wall Street Journal noted, the current arrangement, which forces millions of families into an all-or-nothing option buy a Cadillac plan or go bare is an unjust public policy. As The Journal also editorialized, "It's no exaggeration to say that this could turn out to be the most humane and consequential domestic achievement of the Bush years."

Expansion of Health Care Pooling. The House is also considering an extension of federal funding for health insurance pooling demonstrations and programs, including high- risk pooling, also based on Rep. Shadegg's legislation (H.R. 3204). High-risk pooling mechanisms are another way to strengthen the safety net for persons, often very sick persons, who cannot get or afford medical coverage at standard market rates.

A Tax Cut for Medical Care?

While the Senate, and possibly the House, could still consider a tax-credit proposal this year, the President's Commission on Tax Reform, co-chaired by former Senators John Breaux of Louisiana and Connie Mack of Florida, is reportedly examining a more fundamental overhaul of the tax treatment of health insurance.

Reformers want big changes. Employers should continue to deduct company health benefits, just as they do wages, as a regular business expense. But on the treatment of individual tax relief for health insurance, there is a growing consensus among economists that the current tax exclusion for employer-based health insurance should be eliminated in favor of a universal health care tax credit system. Short of abolishing the exclusion, Congress should cap it at some equitable level. In sharp contrast to current policy, Congress could channel more assistance to Americans who need help purchasing medical coverage because of lower incomes or higher medical costs.

Medicaid Reform?

Health and Human Services (HHS) Secretary Leavitt has announced his appointments to the Administration's Medicaid Commission. It includes some conservative stars, such as Kay Coles James, former Director of the Office of Personnel Management (OPM), who oversaw the FEHBP and included HSA plans in the program; Grace Marie Turner, President of the free-market Galen Institute; and Dr. Robert Helms, Health Policy Director of the American Enterprise Institute. House and Senate Democrats attacked the process, called the Medicaid Commission a "sham" panel, and said that they would refuse to cooperate or accept any positions on the Commission. The Commission has to find a way to reduce spending by $10 billion over 5 years, and outline some policy recommendations for long-term Medicaid reform.

The Commission has a big task. Medicaid has grown to cover a broad and very diverse group of individuals. It provides care for more than 53 million children, parents, pregnant women, disabled, elderly, and even childless adults, plus long-term care to Americans who previously have been middle class. Moreover, it is suffering from serious rationing and quality problems. For example, a 2002 Medicare Payment Advisory Commission (Medpac) survey found that "approximately 40 percent of physicians restricted access for Medicaid patients " Not surprisingly, Medicaid is not a popular option among the uninsured. If people are given a choice, Commonwealth Fund survey found that 65% of Americans would prefer private coverage, and only 10% would want Medicaid or Medicare.

Medicaid presents an enormous financial problem as States, most of which must maintain a balanced budget, are facing worsening fiscal problems. Medicaid obligations are consuming a far greater portion of state budgets and squeezing out other priorities. For the first time, as the National Governors Association recently reported, Medicaid has surpassed education as the largest part of state budgets. Like all entitlements, Medicaid is becoming a challenge for Congress, too, with short and long-term federal budget issues. For Fiscal Year 2006, Medicaid is projected to cost the federal government $193 billion, and Congress expects to see growth rates ranging from 7 to 9% between 2006 and 2014.

An Agenda for Big Change?

What could the Commission recommend? Perhaps the first thing is to separate health and welfare spending. Medical services and social services are not the same, and much of what is funded by the Medicaid program has nothing to do with medical care. Congress and state legislators and administrators should start to make administrative and budgetary distinctions. One option at the federal level is for HHS to recognize this crucial distinction and start to move Medicaid long-term care into Administration for Children and Families, a welfare agency, and out of the Centers for Medicare and Medicaid Services (CMS). While moving around boxes on organization charts is normally a waste of time, this may not be. Congress, state legislators, and taxpayers must understand that Medicaid is fundamentally a welfare program, and should be treated as such, rather than as an afterthought to Medicare.

Likewise, the Commission could encourage baby boomers to purchase private long-term care insurance, and penalize those who refuse to do so and throw themselves on the good will and generosity of the taxpayers. Currently, 70% of Medicaid money is going to nursing facilities. Middle-class Americans are not planning for their needs, and they are spending down their assets and ending up as wards of the state. Medicaid, in other words, is becoming another middle-class entitlement. Bad idea. The relentless expansion of middle-class entitlements will shred the safety net for the poor. So, the Commission should show some gumption and call for limiting them.

It's politically easy to take on spending for small groups. But to take on the big middle-class entitlements, that takes guts.

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