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

AAPS White Paper on Medicare Reform, 6/7/95


In 1967, Frederick B. Exner, M.D., a former Secretary of the Association of American Physicians and Surgeons wrote: "Medicare can never be sound...The projected tax increases when the plan was adopted should be enough to scare us even though they failed to scare the Congress; but actually they will provide only a fraction of what the expenses are sure to be." [In 1966, the maximum Medicare HI tax was only $46.20 per year.]

"The cost of medical care will skyrocket," predicted AAPS Director Robert Moorhead, M.D., noting that in 1967, hospital costs were already 100% higher than actuarial estimates.

In the 1995 Annual Report of the HI Trustees, Secretaries Reich, Rubin, and Shalala finally admitted that "the HI program is severely out of financial balance and the Trustees believe that Congress must take timely action to establish long-term financial stability for the program."

In 1993, proponents of Clinton-style reform looked to Medicare "savings" as a funding source. However, in the 1995 Hospital Insurance Trustees Report, public trustees David Walker and Stan Ross stated: "it is now clear that Medicare reform needs to be addressed as a distinct legislative initiative...The idea that reductions in Medicare expenditures should be available for other purposes, including even other health care purposes, is mistaken."

Medicare Part A has been a pay-as-you-go program. However, as outlays begin to exceed income, payments will have to be made from the Trust Fund. If no action is taken, the Trust Fund will be depleted within ten years, perhaps as early as 2002.

"To bring the HI program into actuarial balance even for the first 25 years...either outlays would have to be reduced by 30 percent or income increased by 44 percent (or some combination thereof...)", stated Secretaries Reich, Rubin, and Shalala (op. cit.)

Even these dramatic changes would be only a short-term palliative for current beneficiaries. They do not begin to address the problems that await the system when baby-boomers begin to retire.


Most of the proposed prescriptions involve tax increases and rationing, although the rationing is not called rationing, and the process is not made explicit.

Medicare Part A already takes 2.9 cents out of every dollar earned by a working person (because the "employer's share" is effectively paid by the worker also), with no deductions and no maximum tax. To sustain current benefits, this tax would have to rise to between 10 and 21 percent by 2040, depending on the assumptions used.

Medicare services are already restricted or rationed in several ways: (1) utilization review; (2) price controls ("prospective payment" by "diagnosis related group" or "DRG" for hospitals and restrictions on balance billing by physicians) and (3) managed care with capitation contracts. Nevertheless, expenditures have not been controlled.

Nor is there evidence that managed care has ever reduced the cost per equivalent service rendered. Evidence of an overall reduction in expenditures is equivocal at best, especially if the tendency for managed care to enroll healthier patients is considered (study by Mathematica Policy Research under HCFA contract number 500-88-00006). Inevitably, managed care puts patients in an automatic conflict of interest with their physicians, whose livelihood is controlled by the corporation. Availability and quality of medical services must be sacrificed.

Additional proposals to reduce expenditures include restricting the supply of certain medical practitioners (particularly specialist physicians), restricting technology, and promoting the withdrawal of treatment or active euthanasia.


We propose that our ideas as well as others be judged by the following criteria:

  1. Is government involvement increased or decreased?
  2. Is patient freedom increased or decreased?
  3. Does the proposal reward or punish individual citizens for being prudent and productive?
  4. Does the proposal strengthen or undermine the ethic of Hippocrates, under which the physician puts the patient first and swears to do no harm to anyone?
  5. Are more or fewer dollars being forcibly transferred from persons who earned or saved them to persons who did not?
  6. Is physician autonomy compromised for budgetary constraints rather than augmented for the protection of individual life and liberty?

AAPS favors ideas that move us in the direction of freedom and opposes those that move us toward serfdom, a command economy, or socialism.

Rating all ideas by these standard criteria would provide us with a compass so that we do not lose our directions in the thicket of specific proposals.


It is a fact that the government has promised its citizens benefits for which it cannot pay. There is no rational or prudent way to continue on this path. The direction must be changed. Medicare must be fundamentally transformed. The sooner the transformation is begun, the less painful it will be.

President Clinton recognized that a long-term solution to Medicare must correct the error in the entire medical system; he simply misdiagnosed the problem.

The root of the current problem of medical costs is government involvement: Rapid cost escalation began with Medicare, which destroyed (socialized) a significant part of the marketplace. The rest of the market was heavily damaged by the tax code that strongly favors employer-provided, nonportable prepayment for "health" benefits, in preference to individually owned, portable sickness and accident insurance. The key to reform is tax equity, along with the repeal of all other laws and regulations that favor employer-provided "insurance" (prepayment) over savings or individually owned true (catastrophic) insurance. Such reform can restore patients to their rightful place as the primary purchasers of (and decisionmakers in) medical care, and government to its constitutional role of protecting individual rights.

The foundation of Medicare is socialism. Socialism is morally wrong and economically disastrous. The ultimate AAPS goal is to replace the present collectivist system with an honest free marketplace, one based on voluntary exchange rather than coercive redistribution.

Most of this outline is concerned with the short term. These measures are meant to be a temporary means of mitigating the circumstances of those who are trapped in a government wealth- transfer system that is erroneously labelled insurance.

In the short term, there are two ways to balance the Medicare budget: increase revenue or decrease expenditures.

AAPS is opposed to increasing the payroll tax, which funds Medicare Part A, or the income tax, which subsidizes 75% of all Part B premiums, even those of the wealthiest senior citizens. It is both unjust and unconstitutional to burden one group of citizens (working people) to ease another (retirees). Furthermore, if the Medicare tax were increased to the levels needed for solvency of the system, the total tax burden would be confiscatory. Neither productivity nor domestic peace could survive.

Another way to increase revenues is to increase deductibles or copayments. At the outset of the program, for example, beneficiaries' premiums paid about half the cost of their Part B coverage.

The key to reducing government expenditures is to stop the government blank checks. This is an unavoidable necessity. The debate concerns the means to replace Medicare's currently open- ended entitlement. Many proposed solutions are the equivalent of replacing blank checks with ration coupons. The alternative favored by AAPS is to wean citizens from government entitlements. The methods proposed may be viewed as an orderly retreat from the coming prospect of intergenerational and class warfare warned of by former Senator Warren Rudman in May, 1995.

Government expenditures can instantly be cut by Congress to any desired level. The only restraint is political. Persons dependent upon government checks need to remember how insecure these payments are.

The term "expenditures" as used below refers to total expenditures, not just to government expenditures.

Many have come to believe that the medical marketplace is unique and that supply and demand mechanisms do not work the same way as in other areas of the economy. To resolve the apparent paradox, one needs to remember that the normal feedback mechanism (price) has been decoupled due to third-party payments for most medical services. Remember that supply is affected by the total payment that the supplier nets, and that demand is affected by the total amount that the recipient pays. For example, a high price lowers consumption if and only if payment is made by the customer, rather than an abstract and infinitely wealthy third party.

There are three ways to cut expenditures: (I) Reduce the cost per item or service; (II) reduce the number of items or services available (supply); or (III) reduce demand. (Of course, supply and demand interact. Human behavior is dynamic, not static, to the consternation of central planners.)

Reductions in supply or demand can be achieved voluntarily or coercively. If coercively, as through rationing and price controls, there are unacceptable side effects (preventable disability and premature death).

The following is an outline of specific measures to cut total expenditures:

I. Reducing the cost per item.

A. Reduce administrative overhead caused by government involvement:

1. Repeal claims filing requirements for physicians. Claims need be filed by patient only when the deductible is exceeded.

2. Repeal CLIA, outlandish OSHA rules, and other regulations that do not have a benefit justifying their cost.

B. Restore competitive forces by restoring to patients the control over their own money and the prospect of benefiting from prudent economizing. (MSAs are such a mechanism.)

C. Encourage innovation by repealing laws and regulations that restrict it (e.g. highly restrictive, burdensome, and costly FDA regulations, especially those that have minimal relevance to safety).

II. Reducing incentives to supply wasteful and unnecessary services (i.e. reduce incentives for fraud and abuse)

It is critical to put the patient back into the equation. This could be achieved by having no provision for the assignment of benefits. In the past, payment was properly and customarily made to beneficiaries only. Some physicians may object to this because they do not trust their patients to pay them. There are several ways to minimize abuse by patients, if this is a concern: sending the physician an EOB so that he will know the patient has been paid; pay with two-party or joint-payee checks; or require evidence of payment (as by credit card) before reimbursement is approved.

Reducing Medicare coverage (as may be essential to preserve solvency) will reduce the supply of services paid for by Medicare. But it need not deprive patients of access to beneficial care if alternate payment methods are in place.

III. Reducing demand for services.

A. Make provisions for patients to choose alternatives to the present Medicare benefit, both Part A and Part B. Beneficiaries are currently allowed to turn their Medicare benefit over to an HMO, which receives from the federal Treasury 95% of the actuarial value. (Due to selection of favorable risks, the percentage is probably too high, according to the Mathematica study cited above.) This method reduces supply. As an additional option, provision should be made for beneficiaries to keep an equivalent amount of money under their own control, as by purchasing catastrophic insurance and investing the remainder in a medical savings account. This method tends to reduce demand because patients benefit from economizing.

B. Encourage private contracting for services outside Medicare, even if Part A and Part B are continued. (As a first step, remove impediments such as the intimidation of physicians who treat Medicare-eligible patients outside the system.)

C. Make provision for disenrollment from Part A and encourage disenrollment from Part B.

1. Make provision for seniors to fund their own tax-free medical savings accounts, say by transferring equities and other assets such as their primary residence free of capital gains tax. Interest accumulates tax-free in MSAs. Provision could be made for passing MSAs on to heirs without estate tax.

2. Provide other tax benefits for disenrollment, such as sheltering a portion of Social Security or other income that would otherwise be taxed. The benefit could increase with age and with time out of Part B.

D. Reduce or cut certain benefits for services that are not essential to maintain life or prevent major disability, but make provision for these to be paid for by other means, including MSAs.

E. Restore copayments for laboratory tests and home health.

F. Abolish market-distorting price controls. These could be replaced by defined benefits (fixed indemnity, as distinguished from "cost-plus" or "usual, customary, and reasonable"). Patients would be responsible for the balance. Physicians would be free to adjust the balance in accordance with circumstances. The price would be determined by the market, not by the amount that could be extracted from a third party.

G. Quickly phase out all subsidies to senior citizens whose adjusted gross income is higher than the average adjusted after-payroll-tax income of those who are supporting Medicare, while assuring that all senior citizens have received at least as much in Medicare benefits as they and their employers have contributed.

H. Encourage voluntary giving. Tort reform and tax credits are two mechanisms to consider.

I. Encourage the development of alternate insurance mechanisms for retired persons of means who wish to have private insurance, as well as the continuation of insurance rather than its cancellation upon retirement, first by removing governmental impediments other than minimal regulation related to assuring fiscal solvency and deterring fraud.

J. Encourage working people to fund their own retirement, instead of becoming government dependents, and to remain in the workforce past the age of 65.

The long-term solution (I and J) must be developed immediately, before the demographic crisis of baby-boomer retirement.