AAPS News – Sept 2002

Volume 58, No. 9 September 2002

THE ADMINISTRATIVE COST FALLACY

According to advocates of socialized medicine, the United
States is “paying for national health insurance-and not getting
it” (Steffie Woolhandler and David Himmelstein, Health
Affairs 2002; 21(4):88-98, funded by the Soros and the
Robert Wood Johnson Foundations). Counting tax deductions and
indirect payments, as through the Federal Employees Health
Benefits Program (FEHBP), the current tax-financed share of
health spending is 59.8%, 15 points more than the 45.3% estimated
by the Centers for Medicare and Medicaid Services (CMS).

Between 1965 and 1999, Woolhandler and Himmelstein calculate
that tax-financed health expenditures per capita increased from
about $60 to about $2600. In 1965, such expenditures in the U.S.
were well below total spending levels in most developed
countries. In 1999, they exceeded total health spending
per capita in every nation except Switzerland. The federal
proportion of direct spending nearly tripled from 11.4% to 31.8%,
while the state and local government proportion remained stable
at about 13.5%.

“Government is already spending nearly enough [more than
$725 billion], but it’s spending it wrong,” stated Himmelstein. A
total government takeover “would require smaller tax increases
than most people imagine.”

“Our allegedly private health care system is funded mainly
by taxes,” the authors conclude. They then assert that the system
is under “private control” and imply that federal control of all
$1.2 trillion would end the squandering of resources.

The source of the magical savings to offset the cost of
caring for the uninsured and underinsured: administrative savings
and recovery of profits now “siphoned off” by insurers and drug
companies. Some major assumptions are needed:

1. Government programs are administered more efficiently
than private ones. Half of the estimated $309 billion in
health administration costs could be saved by shifting to
national health insurance, claim Woolhandler and Himmelstein.
After all, Medicare purportedly spends only 2% on administration,
and Medicaid 5%, in contrast to private industry costs of 12% to
20%.

Such estimates, however, omit many costs that are spread
through various agencies of federal, state, and local
governments. If these are considered, the administrative
overhead of public programs amounts to $0.27 per each dollar of
benefits to patients, compared with $0.16 for private insurance-
69% more, according to a study by Mark Litow for the Council
for Affordable Health Insurance (CAHI), March 1994.

Comparing like items-such as benefits development,
eligibility, payroll, and data processing-line by line, private
industry is consistently more efficient. CAHI adds to the
government’s tab the cost of developing legislation, writing
regulations, and judicial review, as well as $35 billion of the
1993 interest on the national debt and $5.2 billion in interest
for state borrowing for government-funded health programs.

Not included are the costs imposed on medical professionals
and institutions, either by government or private insurers. No
credible study of such costs has been done, though there are many
indications that the burden is huge and results in serious
barriers to access to services (AAPS News June 2001,
www.aapsonline.org/medicare/medrep.htm ). For example,
when a Texas Medicare contractor asked randomly selected
physician practices for additional documentation, 62% did not
bother to send it and had their claims denied: if a practice has
to do any extra work beyond submitting a claim for services worth
less than $65, it loses money (AM News 7/22/02).

2. Government accounting is honest. While passing a
corporate crime bill quadrupling the penalties for ordinary “mail
fraud” from 5 years to 20 years in prison, forcing attorneys
practicing before the SEC to turn in their clients, and imposing
the same punishment for “attempted” crimes as for crimes actually
committed, the government persists in financial mismanagement
much worse than Enron’s. For 5 years, the GAO has been unable to
render an opinion on government consolidated financial statements
because of material weakness in internal controls. In 2000 and
2001, $463 billion was looted from trust funds (T Schatz, Scripps
Howard 7/12/02). As early as the 1960s, statistician Barkev
Sanders warned that the Social Security Administration was
concealing the truth in actuarial estimates in order to sell
national health insurance (S Blevins, Medicare’s Midlife
Crisis, 2001).

“No corporation on earth comes close to the accounting fraud
practiced year after year by the federal government,” wrote Rep.
Ron Paul, M.D. (R-TX). “In fact, there is no real accountability
at all for the trillions in tax dollars…spent annually (
www.house.gov/paul).

3. Administration is the key to excess costs. Even if
$150 billion could be shaved from administrative costs, national
health insurance would worsen a far more important cause of
excess costs: overuse resulting from third-party payment itself.
Martin Feldstein estimates that moving from total out-of-pocket
payment to total third-party payment might increase expenditures
by as much as 250%. While some of the increase adds value-though
less than required to justify the expense-a substantial part is
deadweight loss. Much of the administrative load is designed to
control overuse, but is far less effective than the normal free-
market pressures exerted by customers spending their own money (S
Liebowitz, “Why Health Care Costs Too Much,” Cato Policy Analysis
211, 6/23/94).

If Physicians for a National Health Program really wanted to
cut costs, they’d be advocating SimpleCare and insurance for
catastrophes only. But as Robert Moffit points out month after
month in our Legislative Supplement, the argument is not about
money: it’s about structure and control.

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Siphoning Off Profits

Though socialist ideologues such as Physicians for a
National Health Program (PHNP) members Woolhandler and
Himmelstein malign private profit, its corrupting influence is
restrained in a free market by accountability to customers and
stockholders. (AAPS News July
1998, July 2000). Nonprofits, in
contrast, are accountable only to government.

Taxes siphon wealth away only from for-profits. When Blue
Cross of California converted to a for-profit, it had to fork
over $3.2 billion to compensate for taxes not paid. The
excess revenue of not-for-profits can be used for other purposes,
such as to compensate officers. In 2001, the executives of
nonprofit Premera Blue Cross earned about twice as much as those
of commercial insurers (Seattle Times 7/11/02).

Regulations that add cost but no value also siphon away
wealth that could be used to reward those who dedicate time and
talent to the enterprise, or who risk capital to fund it. William
Summers, M.D., of Albuquerque explains that the “doctor on the
treadmill” must pay opposing, nonproductive armies: government
bureaucrats through taxes, and compliance bureaucrats through
salaries.

Over the past 30 years in the U.S., the poor became a fund-
generating mechanism for both profits and non-profits. Under
charity care, there was no interest in seeing patients beyond
what was essential. But the system now needs the poor to be ill
to stay in business: the poor actually generate more revenue for
hospitals than HMO patients. Because most effective prevention-
lifestyle change-is not chargeable, there’s no revenue to be
gained from prevention, writes former Texas Health Commissioner,
William Reynolds Archer III, M.D. Despite rationing care by not
paying physicians and subjecting them to nightmarish
administrative burdens, Medicaid and SCHIP are bleeding state
budgets dry, with no end in sight. The attempt to integrate care
for the poor-which is basically an uninsurable risk-into a
private “insurance” system is a coming trainwreck. Dr. Archer
argues for separate, community-based, direct-care services run in
a wholly different way from private insurance, and not structured
in a way that increases costs and drives out private insurance.

The results of restoring private profit are best seen in a
five-year privatization experiment in socialist Sweden: private
nursing home costs-down 30%; costs of care among private special-

ists-down 40%. At St. G”ran’s, the privatized hospital, one of
the country’s largest: costs for laboratory tests and xrays-down
50%; overall hospital costs-down 30%; waiting times-down
dramatically; number of patients served-up by 100,000 per year
(NCPA Brief Analysis 369, 8/31/01).

Public-Private Profit Sharing

The Robert Wood Johnson Foundation-sponsored reform of
Colorado Medicaid is a model for government and its contractors
to split the profits from reducing treatment to desperately ill
people who have no choice. Schizophrenics are denied newer
antipsychotics-which cost thousands more but save money by
reducing hospitalization-until they have a psychotic break on
1950s drugs that frequently cause permanent damage. Teenagers
depressed because of breaking up a relationship have the same
claim on resources as patients incapable of normal functioning.
Proponents of “universal care” want to extend this model to all
(Linda Gorman, Independence Institute issue paper 2-2001,
4/19/01).

AAPS Opposes Enactment of Pediatric Rule

Attempting to moot the challenge to the FDA’s Pediatric Rule
brought by AAPS, the Competitive Enterprise Institute, and
Consumer Alert, Senators Kennedy, Clinton, and others have
introduced S. 2394. In letters to members of the Senate Health,
Education, Labor, and Pensions (HELP) Committee, AAPS opposed the
bill, stating that it “denies potentially life-saving drugs to
patients of all ages, including seniors, until they can be tested
on children-even drugs that are not intended for children.” AAPS
believes that adults, not children, should bear the brunt of the
risks of drug testing. “We are appalled that this Rule, by the
FDA’s own calculation, exposes as many as 30% of the child
subjects to needless risk” (

www.aapsonline.org/legis/pedrule.htm).

Proponents of the bill describe a 1999 incident in which
seven infants in Tennessee required surgery for pyloric
obstruction after receiving erythromycin to control a pertussis
outbreak. This side effect, which occurs only in infants under
the age of 1 month, was previously unknown. A controlled study-
giving a drug solely for research purposes to enough infants to
turn up a 7 in 200 incidence of this side effect- would be
unethical. Erythromycin is still the drug of choice.

Studies are already in “crisis mode” due to failure of
patient recruitment efforts. “If you have a hypertensive kid,
hold on to him. He’ll be in hot demand,” said Robert Temple,
associate director for medical policy at the FDA (Wall St
J 5/29/02).

According to the Alliance for Human Research Protection,
parents are paid $645 to have a child participate in a study of
psychostimulant drugs.

Drug Costs, U.S. and Canada

With drugs as with other items, costs are often confused
with expenditures. Lawrence Reed, President of the Mackinac
Center for Public Policy, notes that drug expenditures
increased by 13.6% in 2000, reflecting new products and increased
overall use. However, the average price of drugs
increased by 3.9%, a rate comparable to overall inflation.
Between 1965 and 1999, costs for drugs (as for dental care,
vision care, and appliances, which also have a high percentage of
out-of-pocket payment) increased only 150-200%, while GDP
increased 94% and hospitalization by more than 350% (Liebowitz,
op. cit.).

In the Canadian paradise, where price controls siphon off
drug company profits to delay the bankruptcy of medicare,
patented drugs may be cheaper (even after getting the required
Canadian prescription), but generic and over-the-counter drugs
are about 30% more expensive than in the U.S. Up to half the
price differential on patented drugs is due to litigation costs.
Most new drugs are developed in the three countries without price
controls (the U.S., Britain, and Switzerland), where companies
can earn a sufficient return on investment (Thomas Bray, Wall
St J 7/23/02). Should Canada be called a freeloader?

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The Other War on Drugs

This drug war should really be called a war on patients with
chronic pain, because they will be the main casualties. But
federal law enforcement officers claim to be targeting the
“source” – doctors who prescribe OxyContin.

This probe is consuming more resources than any other drug
investigations in recent memory (Josh White, Washington
Post 8/4/02. p. A1). More than a dozen federal agencies and
scores of local and state officials are working feverishly to
build cases. It’s a complex job, as prosecutors find it difficult
to prove that a doctor knew-or should have known-that someone was
not a “bona fide patient.”

Gene Rossi, a federal prosecutor in Alexandria, VA, promises
to “root out [culprits] like the Taliban.”

Prosecutors are using racketeering and money laundering
statutes that used to be reserved for drug kingpins and Mafia
dons. “But they also work on these doctors,” stated Gregg Wood, a
health care fraud investigator in the U.S. attorney’s office in
Roanoke, VA. Investigators use records that the doctors
themselves are required to file with the government.

Among the targeted physicians is William Hurwitz, M.D., of
McLean, VA, who treats about 300 chronic pain patients dependent
on opioids. Dr. Hurwitz was eventually vindicated after his
license was revoked in 1996 (see AAPS News Nov 1996 and The Medical Sentinel
July/Aug
1998). His talk at the 2001 AAPS annual meeting on “Freedom
to Practice: the Role of Licensure Boards and Prosecutors” is
available on tape.

Dr. Hurwitz stated that prosecutors may be trying to obtain
a conviction for felony murder. Under laws intended to fight
organized crime, he could have all his assets seized and be
unable to pay a lawyer.

The government’s position seems to be, he said, that doctors
should be policemen, and policemen should be doctors.

Many patients report that OxyContin has relieved otherwise
intractable, unbearable pain, and restored ability to function.
But streetdealers find “Redneck Heroin” to be one of their best
moneymakers. The drug is claimed to have killed 450 people. About
6 million prescriptions were written for it last year, giving a
fatality rate of about 1 in 100,000 prescriptions.

To put law-enforcement priorities in perspective, 430,000
deaths in the U.S. each year are attributed to tobacco; 110,000
to alcohol; 30,000 to suicide; 18,000 to homicide; and at least
7,600 to nonsteroidal anti-inflammatory agents (www.drugwarfacts.org).
According to National Vital Statistics Reports, vol. 48,
no. 11, there were 16,926 deaths from legal and illegal drugs in
1998. The North American Society of Pacing and Electrophysiology
claims that the death toll from prescription drugs alone is much
higher-more than 100,000 per year (

www.naspe-patients.org).

Related to the enforcement actions, there has been at least
one physician death from suicide. Dr. Benjamin Moore, who worked
at the Myrtle Beach [SC] Comprehensive Care and Pain Management
Clinic, pleaded guilty to fraud and to prescribing without “a
legitimate medical purpose,” though he performed no billing tasks
and, according to pain management experts, followed a
conservative office protocol for prescribing opioids. It is said
that he faced up to 45 years in prison (Wash Post,
op. cit.)-potential indictees and their families are
often confronted with such in terroram threats.

A plea to Congress from Judy Hall, a chronic pain patient
who took her own life (see www.cpmission.com),
states that up to a third of undermedicated pain patients commit
suicide.

Tip of the Month: The Fifth Circuit recently allowed a
hospital to suspend the privileges of a staff member/competitor
without any prior notice or opportunity to be heard. On
July 10th, the court affirmed Midland Memorial Hospital’s summary
suspension of cardiologist Dr. PV Patel, who had opened his own
labs and clinics that competed with Midland and members of its
staff. Patel v. Midland Mem. Hosp. & Med. Ctr., 2002
U.S. App. LEXIS 13834. A subsequent review exonerated Dr. Patel’s
surgeries, and his privileges were ultimately restored. But he
was denied a remedy for his damages. Moral: be alert to such
ambushes, and protest them as early as possible.

The Court relied heavily on the en banc decision in
Caine v. Hardy (see AAPS News Nov 1991), finding that “procedural due
process is a flexible concept whose contours are shaped by the
nature of the individual’s and the state interests in a
particular deprivation.” A pretext of public safety is enough for
a summary suspension, even if the defendant is not
actually dangerous. Dr. Patel’s racial discrimination
claims were dismissed because the statute “does not provide a
remedial cause of action against local government entities and
local government officials in their official capacities.”
References to Dr. Patel as “sand nigger” who was “parking his
camel” were considered by the Court to be mere “stray remarks.”

Board Violated Doctor’s Rights, Court Rules

“State medical boards may have to give the equivalent of a
Miranda warning to doctors they are investigating,” writes Howard
Fischer of Capitol Media Services, July 11, 2002.

In the case of Webb v.
Arizona Board of Medical Examiners (1 CA-CV 01-0010),
the Court of Appeals of Arizona reversed a lower court ruling and
found that the Board had denied due process of law to Yuma
surgeon Dale F. Webb, M.D.

Dr. Webb had treated a patient for an abscessed inguinal
node. Three months later, a metastatic anal cancer was diagnosed
at Scripps Clinic. After an informal interview, at which Dr. Webb
appeared without counsel, the Board censured him publicly for
“unprofessional conduct.”

Judges held that Dr. Webb was not advised that he had the
option to decline an informal hearing and choose a full, formal
hearing. Moreover, Dr. Webb had no opportunity to cross- examine
the adverse witness nor to submit evidence on his own behalf-
minimal requirements in a process that could result in
deprivation of the property right to practice medicine.

Dr. Webb stated that he did not believe it would have been
“good medicine to haul the patient into surgery and excise this
lymph node” when it appeared so infected. He felt that scheduling
a follow-up for two weeks later (for which the patient did not
report) was not “insufficiently aggressive.”

After denying Dr. Webb the opportunity to respond to the
Board investigator, Chairman Richard Zonis, M.D., announced the
censure and said, “That is on your record forever.” Only then was
Dr. Webb asked whether he had any questions.

“You’re saying it was damaging to the patient. In what way
would it have altered…” Chairman Zonis cut him off and declined
to “go into those details.”

The Court found that the Board could not “provide a fair
hearing on an issue of negligence without identifying the
standard of care and articulating the alleged deviation.” If the
Board undertakes on remand to establish that Dr. Webb’s conduct
was unprofessional, it must provide reviewable findings of actual
harm resulting from a deviation from an articulated standard of
care, and not just the opinion of Board members.

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Correspondence

A False Claim. Although the elitist bureaucrats claim
“low administrative costs,” in truth the administrative costs are
killing them. Upstate Medicare can’t even afford to continue
printing the Medicare Bulletin.

Although our office was one of the first in Western New York
to file electronically, and did so for more than a decade,
Medicare kicked me off its “security clearance” list for refusing
to sign their highly one-sided contract. Our computer can
generate a paper HCFA 1500 as easily as an electronic claim; the
difference is that it costs the carrier a lot more money because
personnel have to key in the data.

Doctors who request a paper copy of the on-line bulletin or
who file paper claims will help in speeding the ultimate demise
of the Medicare program.

Lawrence R. Huntoon, M.D., Ph.D., Jamestown, NY

HIPAA Process. If I fail to comprehend and obey all the
obtuse HIPAA “privacy” rules, my life could be ruined by a felony
charge for not adhering strictly to the “process”-even if no
patient is unhappy or has his rights violated. Still, very few
doctors-or lawyers or legislators-understand what you mean when
you say that HIPAA criminalizes medicine.

The Fourth Amendment does not apply under HIPAA, and
warrantless searches are justified, because government has the
right to control its property. By accepting government money,
doctors forfeit their private property rights.

Robert P. Gervais, M.D., Mesa, AZ

JCAHO and Pain. In 2001, I was diagnosed with
esophageal cancer. Miraculously, they say I am cured, but I still
require narcotics for pain control. In my experience, the only
thing the smiley faces and red pain cards did was pay bureaucrats
to meddle where they have no business. Physicians who didn’t know
how to treat pain properly continued not to treat it, and those
who did know helped me with my problem. For more details, see
www.drsheingorn.com
.
Larry Sheingorn, M.D., Rockville, MD

The Role of Lawyers. The common thread in the problems
of medical practice and the Andersen trial-where the accountants
were the fall guys-is the extraordinary power of lawyers to do
grave damage in every sphere while cloaking their activities in
the mantle of the Law. They are like a Fifth Column, penetrating
every nook and cranny of life, with no competence at anything
substantive. Their role is the manipulation of power. Dan Quayle
tried to make a dent in the system, but his efforts have
disappeared from sight.

Lawrence Cranberg, Ph.D., Austin, TX

One Way to Outlaw Private Medicine. In New Jersey, it
is illegal to practice without malpractice insurance, and
insurers are not writing new policies. Only the medical school
can hire doctors. This is one way to make all doctors state
employees.

Alieta Eck, M.D., Somerset, NJ

We’re Free! Dr. David MacDonald and I are now 100%
SimpleCare. We have had full clinics since we opened under this
arrangement. Patients are happy and very willing to bill their
insurers. We have no contracts with anyone. Patients choose
either the SimpleCare fee (no codes, minimal documentation) or a
CPT-coded superbill. They typically get reimbursed 60% of
charges, whereas we typically got only 45-50% when we were team
players as participating providers.

Vern Cherewatenko, M.D., Renton, WA

The Cost of Price Controls. Ironically, our goal of
removing uncertainty has actually increased it. It is certain
that Medicare and Medicaid will go broke. It is uncertain as to
when or how.

Charles Courtney, Riverside, IL

The Cost of Protection. For more than a decade I have
used a Peak Flow Meter. The plastic mouthpiece cracked, and I
went to Walgreen’s to replace it, or, if necessary, the whole
piece of plastic, which probably cost $0.25 to make. I was told I
could have it-with a prescription (when my doctor returns from
vacation) and $25, thanks to the government. After all, in
America we can’t have people running around unsupervised, blowing
into a piece of plastic.

Jim McMahon, Pres., Analytical Consulting Co., Phx, AZ

Market Destruction. We have not had a competitive fee-
for-service marketplace since the Blues were incorporated. Before
then, medical costs consumed only 4.7% of GDP. Social planners,
bureaucrats, politicians, and special interest groups have
quadrupled growth in medical costs compared with the rate of
inflation, without improving access at the lower end of the
economic spectrum. These people are in denial, incapable of
recognizing the truth that we need to return to individual
rights, responsibility, and control.

Roger Beauchamp, D.D.S., Escanaba, MI

“Nonprofits.” Instead of hiding their losses, many tax-
exempt organizations, especially hospitals, routinely hide their
profits: it’s a reverse Enron scheme. They launder money through
a complicated accounting scheme with subsidiary vendors,
enriching management and local politicians and denying service to
patients. They will kill to avoid competition-as from physicians
who generate efficiencies that benefit patients.

“J Swift”

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Legislative Alert

Bush Launches Campaign to Reform
Malpractice Law

Good news!The President has announced a major
campaign to reform medical malpractice laws. In many states,
there is a medical malpractice crisis. Median jury awards
increased 43% between 1999 and 2000. Malpractice premiums are
soaring and could average a 20% increase or more this year. And
patient access to care is being compromised. The President is
asking Congress to address this issue. According to the White
House, medical malpractice reform could reduce costs to the
federal government by $30 billion a year or more, and could
reduce medical costs for all Americans by $60 billion or more.

HHS Secretary Tommy Thompson unveiled a new HHS report that
details the cost of inaction on the medical malpractice problem.
Said Thompson: “This is a problem for America’s doctors-and a
danger to all Americans. Americans are paying the price of
excessive lawsuits through higher insurance premiums, difficulty
in getting a doctor when they need one, higher taxes and missed
opportunities to improve patient safety. We must put an end to
the malpractice litigation lottery that favors a handful of
powerful personal injury lawyers and instead create a common
sense system that ensures injured patients receive fair and
prompt compensation without threatening access to quality care
for all other Americans.”

The HHS report focuses on the consequences of the current
system, particularly in obstetrics and among medical specialists,
noting that a major trauma center in Las Vegas, Nevada, was
forced to close because of the malpractice premiums being imposed
on trauma surgeons. Thompson’s team at HHS also underscored the
higher costs and the lowered quality of care that follows from
the practice of defensive medicine to ward off potential
lawsuits; the breakdown in communications on “adverse events” for
fear of inciting lawsuits; the aversion to high-risk specialties
and surgeries because of the fear of litigation; and the
reduction in volunteer services at community clinics caused by
the high cost of liability insurance. (The HHS report,
Confronting The New Health Care Crisis, is available at

aspe.hhs.gov/daltcp/reports/litrefm.pdf.)

The Bush Administration has endorsed the Health Act (H.R.
4600) legislation sponsored by Rep. Jim Greenwood (R-PA). It
would limit non-economic damages to $250,000; allow punitive
damages only in rare cases, capping them at twice the greater of
economic damages or $250,000; and impose a sliding scale cap on
attorneys’ fees in medical malpractice cases.

Strong opposition from congressional Democrats is certain.
The legal profession, even more so than organized labor, is the
biggest financial base of support for Democrats. According to the
Center for Responsive Politics, in the 2000 election, lawyers and
law firms have given about 72% of their $44 million in campaign
contributions to Democrats. In this year’s election cycle alone,
the Association of Trial Lawyers of America has distributed about
$1.8 million to candidates, and 87% of that amount has gone to
Democrats. In the first test vote this year, Senator Mitch
McConnell (R-KY) offered a medical malpractice reform amendment
to the Medicare prescription drug legislation being debated in
the Senate just before the August recess. It was handily
defeated.

The Bush Administration has another potentially serious
problem in its federal malpractice campaign. Tort law is state
law. There is nothing in the Constitution that would give the
Congress the authority to override the states’ tort laws, and
many conservatives in Congress, particularly those conservatives
who have made a career out of fighting unconstitutional
expansions of federal authority over states, are not likely to
back the Administration’s efforts to federalize medical
malpractice law. This is true even though many are sympathetic to
the plight of the physicians. So, look for some serious
Constitutional wrangling among conservatives on Capitol Hill.

Nonetheless, this is good news for doctors and patients
alike. The Bush Administration has put the medical malpractice
problem front and center of the national policy agenda. It will
force a real debate. And even in the absence of comprehensive
federal legislation, the debate is likely to spur the several
states to remedial action. Already, the Governor of Nevada has
called the state legislature into a special session to deal with
the Nevada crisis. Specifically, states could take steps in
reducing the growing pressures on physicians by applying Rep. Jim
Greenwood’s medical malpractice reform proposals as amendments to
state tort laws. Such provisions could include : an up-front
disclosure of attorneys’ fees; a limitation on non-economic
damages (such as pain and suffering) of up to $250,000;
restricting punitive damages to $250,000 or twice the amount of
economic damages (such as medical expenses or the cost of
domestic services); and a limitation on attorneys’ fees ensuring
that the maximum amount of recovery for damages would go to
patients. A sound malpractice reform measure would also provide
for unlimited economic damages. A similar model for
medical malpractice reform would be the Medical Injury
Compensation Reform Act of 1975, enacted by the California
legislature.

A Small Victory on Trade Legislation

More good news.For the first time in the history of
the federal tax code, Congress has provided individual tax relief
for the purchase of medical insurance. As part of the Trade
Adjustment Act, House and Senate conferees agreed to a 65%
advanceable, refundable health care tax credit for workers
displaced by trade adjustments, an estimated 195,000 persons.
These workers could use the tax credit for their COBRA coverage
(if eligible), enrollment in state high-risk pools, health
insurance plans offered to state employees, or plans similar to
those offered to state employees. Tax credits would also be
available to workers who secured coverage through group insurance
plans, employers, their spouse’s employer, or a state arrangement
with the private sector to create a health insurance pool. Tax
credits could not be used to buy into Medicaid, nor could they be
used to purchase individual medical insurance, unless the worker
had previously owned such a policy one month before losing his
job. (In the trade bill negotiations, Congressional leftists
insisted on limiting workers’ options to buy medical insurance on
the individual market-nothing new there.) The trade legislation
would also give states $1 million each to set up high-risk pools
and matching funds for states with already established high-risk
pools. It’s a small step, but a major change in federal policy.

The Big July Drug Bust

On July 31, the Senate, after an intense and bitter
debate, failed to deliver a Medicare prescription drug bill,
ending the likelihood that Congress would enact any Medicare
prescription drug benefit this year. Because of the pre-ordained
Senate budget rules, any proposal to craft a prescription drug
benefit would either have to fall within the Senate budget limit
($300 billion over ten years) or secure 60 votes necessary to
waive the Senate budget rules. In a series of votes, four Senate
Medicare drug proposals failed to garner the necessary 60 votes:
the Senate Democratic Leadership proposal, the $594 billion
Graham-Miller-Kennedy bill; the $370 billion Tripartisan Plan,
backed by Senators Grassley, Jeffords, and Breaux; the $160
billion Hagel-Ensign catastrophic coverage plan; and finally, as
a last-ditch effort by Democrats, the $390 billion Graham-Smith
“compromise.” All down the tubes.

The Graham-Smith “compromise”-the proposal offered by Sen.
Robert Graham (D-FL) and Gordon Smith (R-OR)-was the last measure
to be considered; it went down by a mixed party vote of 49 to 50.
Senate leftists dubbed the proposal a compromise because they
conceded their key objective of securing a “universal”
prescription drug benefit and instead agreed to target subsidies
to low-income Medicare patients. In other words, they agreed to
“means testing,” a major break from past policies. According to
syndicated columnist Matt Miller, each year roughly $200 billion
in federal entitlements and tax subsidies goes to people earning
more than $50,000; that’s a lot of votes. Senate conservatives
were not mollified and largely voted against the proposal, and
with good reason: none of these proposals included any serious
structural changes in Medicare.

Both Democrats and Republicans in the House and Senate favor
policies that would subsidize the drug coverage of low-income
seniors, and would provide universal access to prescription drug
coverage. The major breakdown in the consensus is on design and
management. As Helen Dewar noted, “The Republicans wanted a plan
that would rely on private insurers, saying it would promote
competition and drive down costs. Democrats wanted a program that
would be administered by Medicare, saying it’s too risky to hand
the program over to private industry” (Washington Post
7/31/02).

In other words, the real issues in this Senate debate (as in
every health policy debate since Hillary’s plan crashed and
burned on the Senate floor in September of 1994) were never about
the amount of money. The real issues were-and are-structural.
Structure determines control. Once again-with feeling this time-
we must remind our friends: It’s the structure, stupid!

Structural Differences

Based on their recent proposals, congressional
conservatives and moderates clearly favor a reliance on private-
sector plans to deliver high-quality prescription drug coverage
to senior citizens. The nifty policy trick is how does one do
that, while keeping CMS from regulating private entities to the
point that they are no longer really private, but mere extensions
of bureaucratic decision-making. Good question. Tough to answer
in the clinch, too.

In sharp contrast, leftists in Congress generally favor
reliance on Medicare as currently structured as the vehicle for
drug coverage. What many senior citizens do not know is that the
management record of the agency that runs Medicare is one of the
worst performing of any in the federal government. Because the
Medicare managerial problems largely impact on doctors,
hospitals, and other medical professionals, senior citizens are
largely insulated from them. Most doctors but few seniors know
that government management is no guarantee of efficiency or fair
dealing, and no protection from bad behavior like that of
officials at such corporate giants as Arthur Andersen or Enron.
The Medicare bureaucracy can hurt you. Hurt you real bad.

Looming Medicare Costs

With the last minute collapse of the “compromise”
Medicare drug proposal in the Senate, the bipartisan Concord
Coalition issued an urgent and eminently sensible statement. Stop
it. Just stop it. Stop adding Medicare drug benefits without
reforming the Medicare program itself.

Medicare reform is not about today’s Medicare patient
population; it is about tomorrow’s Medicare population. In the
1960s, entitlements made up about 30% of federal spending; today
they account for two-thirds of all federal spending, and
climbing. The Congressional Budget Office (CBO) has issued yet
another report: The Looming Budgetary Impact of Society’s
Aging. You have heard it all before. But the latest is worth
repeating. CBO points out that the rapidly aging American
population is being serviced in the “current pay as you go
scheme” by progressively fewer workers. In 1960, the life
expectancy of women who had reached age 65 was 82.4; in 2000, it
was 84.7; in 2030, it will reach 86.6. In 1960, the number of
births per woman was 3.6; in 2000, it was 2.13; in 2030, it will
be 1.95. In 1960, the over-65 population represented 17.3% of the
population 20 to 64, the working population; in 2000, it
represented 21.1%; in 2030, it will equal 35.5%. While the
population over 65 will double by 2035, the number of workers to
pay the bills for that population will only grow by 17%. And
while the growth in medical costs now routinely outpaces the
growth in GDP, CBO says we can expect these costs to grow at an
even faster rate, not merely because the Big Baby Boom will
gobble up Medicare dollars, but because of the increasingly
intensive demand for ever advancing medical technology. Thus
Medicare will eat up a larger and larger share of the “nation’s
production.”

Congress does have access to the best work of responsible
officials at the Government Accounting Office (GAO), the CBO, and
top-level economists among the nation’s leading public policy
institutions. But because Medicare’s insolvency is “years away,”
and nobody’s Medicare benefits are at stake today, the prevailing
attitude in Congress seems to be that we should all just cool our
jets and wait until the “time is ripe” before actually doing
something serious. CBO once again is sounding the warning. ”
[T]he problem with waiting is that doing so may not leave
sufficient transition time to deal with it (the entitlement
crisis) in a gradual fashion.” Is anybody on Capitol Hill
listening? Hello?

Robert Moffit is a prominent Washington health policy
analyst and Director of Domestic Policy at the Heritage
Foundation.