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of American Physicians and Surgeons, Inc.
A Voice for Private Physicians Since 1943
Omnia pro aegroto
Volume 56, No. 8 August 2000
To the claim that the United States has the "best health
care system in the world," the World Health Organization (WHO)
has an authoritative answer in the World Health Report
2000: The U.S. is only 37th, just ahead of Cuba, which is
The report does not have a byline, except in the "Message
from the Director General" (Dr. Gro Harlem Brundtland). There are
various speculations about who wrote it.
Karl Marx was suggested by Robert Helms of the American
Enterprise Institute (Wall St J Europe 6/29/00). Like
the Communist Manifesto, the report advocates
progressive taxation. It does not, however, call for confiscating
private property outright or nationalizing the means of
Perhaps it was authored by Abbott and Costello; it is a
"Who's on First?" routine (" `WHO' Said What?" by Michael Arnold
Glueck, M.D., and Robert J. Cihak, M.D., AAPS President Elect,
Scripps Howard News Service 6/30/00).
Bismarck is credited for the first model of state-mandated
social insurance (p.12), but the concept has since evolved.
Students of the Clinton Health Care Task Force might suspect
the Robert Wood Johnson Foundation because of the allusions to
donations leveraged to affect public policy and institutional
structure and values. ("[D]onors ... help create the necessary
organizational and institutional capacity," p. 103.) RWJF and WHO
have a lot of ideas in common: clinical protocols, comprehensive
information gathering, primary health care, and contracts between
public and private entities. The health priorities are also
uncannily similar: immunizations, tobacco taxes, and condoms.
(For the worst scourge in Africa -malaria- which kills a baby
every 12 seconds, WHO offers "case management" and, where cost-
effective, impregnated mosquito nets; but no equations for the
megatonnage of "quality inputs" needed to match a ton of DDT.)
The best candidate for authorship, suggested by Greg
Scandlen of the National Center for Policy Analysis, is the Queen
of Hearts from Wonderland-judging from the report's through-the-
looking-glass perspective on ethics and economics.
Her Majesty's words mean exactly what she wants them to
mean: nothing more, nothing less. Her favorite words are
"fairness" and "goodness," which signify, according to Scandlen,
that "the disabled should be dead, health care should be strictly
rationed by the government, and no one should be allowed to pay a
doctor directly to provide a health service."
"Fairness" requires that prepayment should be the preferred,
if not the only means of purchasing services. It is "unfair" for
some to use their wealth to purchase better health, or for others
to take advantage of natural endowments such as good health to
enhance their wealth. It is "fair" to compel each person to
"contribute" to everybody else's health care-and ubiquitous and
costly administrators-but "unfair" to "force" him (if poor) or
allow him (if rich) to buy his own. "Fairness" means equality.
Because "health, unlike income or nonhuman assets, cannot be
directly redistributed" (Her Majesty might like to try!),
redistributing income is the best that can be done.
"Goodness" is measured by goal achievement, which requires
social choices. That's another problem with out-of-pocket
payments: "no one makes this choice [of expenditure levels]
overall; it results from millions of individual decisions."
The rankings by WHO are derived from the Philosopher Queens'
concepts of fairness and goodness. No points are awarded for
availability of highly trained personnel or state-of-the-art
equipment, response time of emergency services, or rates of
survival of critical illness. The "health level" is a function of
disability-adjusted life expectancy; disabled survivors of major
trauma lower the score. Health level accounts for only 25% of the
ranking; 25% is based on distribution of health, as in
"equality of child survival"; 12.5%, on health system
responsiveness; 12.5%, on distribution of
responsiveness; and 25%, on fairness of financial contribution.
Thus, 62.5% of the ranking is a measure of equality. Nations with
less diverse populations will always score higher-probably
explaining why Andorra ranks 4th, and Oman is 8th.
Dr. Brundtland is pictured with a benign smile, and the
rhetoric of the report is mild and restrained. But while the
Queen's heart may bleed for The Poor, there is but limited
compassion for the sick. Priorities will be enforced by rationing
care. Oregon is one model. Others include Colombia, Bangladesh,
"Rationing requires `careful governance of the agents' who
act for patients and assess their competing health needs." In
addition, "there is now a need for active stewardship to regulate
[control] the quality of diagnosis, prescribing, and compliance."
Furthermore, "central policy and guidance" are required to
"coordinat[e] ... public and private investment decisions." If
stewardship is weak, goals will be defined de facto by purchasers
and market forces, rather than by Society.
Stewardship of health is ultimately the responsibility of
government, the report states. However, ministries of health are
vulnerable to "capture" by special interests and to political
pressures. Senior policy officials may have a rapid turnover.
Hierarchical bureaucracies have disadvantages. Hence the need for
unspecified private partners (such as "donors") with a vaguely
defined but crucial role in the new global scheme. This will
involve "virtual systems ... held together by a shared policy
vision and information, and by a variety of regulatory and
incentive systems designed to reward goal achievement and punish
capture, incompetence, and fraud."
The Queen may not be shouting "Off with their heads!", at
least not yet. But if Alice has studied the history of fascist
economies, she will understand the message to anyone who hopes to
rise above the level of the masses. (See www.who.int.)
Lessons for Medicare Anniversary
July 30, designated by AAPS for the annual commemoration of
Medicare Patient Freedom Day, marks the 35th anniversary of the
enactment of Medicare in 1965.
Recent proposals show the need to recall "Medicare's Origin:
the Economics and Politics of Dependency" (Charlotte Twight,
Cato Journal 1997;16(3):309-338, www.cato.org). This article details
how the government deliberately "restructured political
transaction costs" to overcome the public opposition that had
blocked Medicare for 50 years. "History shows that Medicare did
not and could not achieve passage without the misrepresentation,
cost concealment, tying, and incrementalism to which its
supporters ultimately resorted."
Such tactics have become the norm. For example, titles of
bills imply laudable objectives inconsistent with the
legislation's full impact. The Health Insurance Portability and
Accountability Act jeopardizes private medical practice and the
privacy of medical records. And the Patient's Bill of Rights
imposes a costly regulatory regime on all health insurance plans.
With Medicare, "the gulf between what the public thought and
what was actually in the bill was enormous." While advocates
raised the specter of financial ruin from catastrophic illness,
Medicare actually had no coverage for prolonged
hospitalizations [cf. the proposed drug benefit]. The disavowal
of federal controls over medical practice or charges were meant
to allay public anxiety but were disingenuous from the start. The
financing method concealed present and future costs; supporters
continually downplayed the regressive nature of the payroll tax,
which was called a "contribution."
Medicare still might not have passed had it not been tied to
the Social Security Amendments of 1965, which included an across-
the-board 7% increase in cash benefits to Social Security
recipients [cf. Medical Savings Accounts and HIPAA].
The original idea was to make Blue Cross the sole carrier,
bringing in some straightforward interest-group politics. The
public-private partnership idea aided passage in other ways. The
AHA preferred to have Blue Cross perform utilization review
because having the federal government do it would cast the
government in the role of "appearing to question or interfere in
medical practice," causing considerable furor. Blue Cross was to
"serve as a lightning rod, increasing the transaction costs to
the public of resisting involvement of the federal government."
Congress knew that Medicare would take money from the poor
and middle class to subsidize the rich; Sen. Allott (R-CO) called
it a "program of Robin Hood in reverse." It also knew that it
would create a vast new dependency. Sen. Mundt (R-SD) described
it as "another step toward destroying the independence and self-
reliance in America which is the last best hope of individual
freedom for all mankind." Seniors were not the main
beneficiaries: Sen. Carl Albert (D-OK) said Medicare will "serve
well those of us who support it."
Twight concludes: "America's willingness in 1993 to
seriously discuss a virtual government takeover of medical
practice in the United States via President Clinton's 1,342-page
Health Security Act attests to the long-run power of such changed
institutions to reshape people's ideologies and thus the degree
of government authority to which they acquiesce."
Oct. 25-28, 2000. 57th annual meeting, St. Louis.
Oct. 24-27, 2001. 58th annual meeting, Cincinnati.
NY Proposes Resolution for Free CPT Codes
At the AMA annual meeting in Chicago in June, the NY
delegation introduced a resolution asking the AMA to seek
legislation requiring HCFA to provide physicians, free of charge,
with all codes and information needed to complete HCFA forms
correctly, including National Correct Coding Initiative material.
The fiscal note was $20,800,000. The resolution did not pass.
Hillary Clinton and Sen. Slade Gorton (R-WA) have a little
list of drugs that cost more in the U.S. than in Canada. And they
have a prescription for equalization-through the help of the
federal government. Gorton has teamed up with Washington Citizen
Action, which advocates a single- paymaster health-care system,
and introduced a bill that would prohibit drug companies from
charging Americans more for their products than they charge in
Michael Walker of the Fraser Institute points out that many
products, not just drugs, cost less in Canada. If they didn't,
they wouldn't sell. The collapse of the Canadian dollar over from
the past decade, from $0.87 to $0.67 in U.S. dollars, has
resulted in a 24% decline in Canadian personal incomes compared
with American. Moreover, from one-third to one-half of the price
differential is due to higher legal liability costs in the U.S.
(Wall St J 5/19/00).
Dr. William McArthur of Vancouver, BC, who is scheduled to
speak at the AAPS annual
meeting in October, explains that Canadian price controls can
force manufacturers to lower prices of certain products, thus
imposing a disproportionate share of development costs on
Americans. On the other hand, some drugs are more expensive in
Canada; in fact, the overall average price is higher in Canada
(NCPA Brief Analysis #323, 5/19/00).
Actuary Gerry Smedinghoff observes that if Canada, Germany,
France, or the UK buys drugs by the truckload, at a volume
discount, it hasn't eliminated the costs of distributing drugs to
the user, but has simply transferred them from the drug
manufacturer to taxpayers, with a loss in efficiency.
If the desire is to lower drug costs rather than
redistributing or "equalizing" them, the answer is to reform the
FDA, writes AAPS member William K. Summers, M.D., with James
Driscoll (Wall St J 6/21/00). The average cost of
developing a new drug is $650 million, of which $600 million is
spent on human efficacy trials. Then, the market rejects 70% of
new drugs for not being effective. "The FDA should be limited to
monitoring safety," the authors conclude.
Gerry Smedinghoff points out that in the early 1960s it cost
about $500,000 and took 25 months to develop a new drug and bring
it to market. Inflation would have raised that price to $1
million by 1978, but the actual cost then was $54 million and 8
years of effort (see Milton and Rose Friedman, Free to
Choose, 1979, p. 206). Silicon Valley operates on the
timetable known as Moore's Law, which holds that the cost of
digital technology drops by 50% every 18 months, while the speed
of microchips doubles. "The federal government and the FDA
operate on the timetable of Moron's Law, which doubles the cost
and time for approving a new drug every 18 months."
"The problem with the `uniqueness' of the drug industry is
not economic, but regulatory," Smedinghoff writes. "Take the FDA
out of the picture and 1,000 flowers will bloom."
Boy Scouts of America v. Dale: In what is
believed to be the most important ruling in a decade, the Supreme
Court upheld, 5:4, the right of the Boy Scouts of America (BSA)
to exclude homosexuals from serving as scoutmasters. Writing for
the majority, Chief Justice Rehnquist stated that the mission of
the BSA is to instill values in young people. The BSA asserts
that homosexuality is inconsistent with the values that it wishes
to instill. "It is not the role of the courts to reject a group's
expressed values because they disagree with those values or find
them internally inconsistent." The organization's "expressive
activity" was held to be protected under the First Amendment.
Justice Stevens dissented along with Justices Souter,
Ginsburg, and Breyer, writing that the Court failed to accord the
"courageous State" of New Jersey the respect due to the "right to
experiment" in social and economic matters. The New Jersey law
does not, in their view, "impose any serious burdens" on the
BSA's "collective effort on behalf of [its] shared goals." The
Judges also referenced the Scout's duty to be "obedient" even if
"he thinks [the laws] are unfair."
The dissenters see the case as one involving freedom of
association rather than expression. The former is far from
absolute: "until today, we have never once found a claimed right
to associate in the selection of members to prevail in the face
of a State's antidiscrimination law."
"This narrow decision reflects the precariousness of the
right to follow one's conscience if it conflicts with the goals
of a governmental social experiment," stated AAPS Executive
Director Jane M. Orient, M.D.
Stenberg v. Carhart: The Court ruled 5:4 that
the Nebraska ban on partial birth abortion unless it is necessary
to save the life of the mother "violates the Federal
Constitution, as interpreted in Casey and Roe."
The lack of an exemption to preserve health is found to impose an
"undue burden" on a woman's right to choose an abortion.
Moreover, in banning procedures in which a "substantial portion"
of the child is in the birth canal before it is killed, the
statute is found to be too ambiguous: A local prosecutor might
interpret it to mean a foot, rather than a "child up to the
head," thus classifying a legal dismemberment abortion (D&E) as a
proscribed intact extraction (D&X). In a discussion that Justice
Breyer said might seem "cold or callous, to some, perhaps
horrifying," he quoted abortionist Carhart to the effect that in
a D&E, the os cervix actually performs the disarticulation after
he pulls a piece of the body through and exerts traction.
Breyer also noted that the Nebraska law "does not directly
further an interest `in the potentiality of human life' by saving
the fetus in question from destruction, as it regulates only a
method of performing abortion."
In a concurring opinion, Justices Stevens and Ginsburg
write: "the notion that either of these two equally gruesome
procedures performed at this late stage of gestation is more akin
to infanticide than the other...is simply irrational."
Strong dissents were filed by Justices Rehnquist, Scalia,
Kennedy, and Thomas, frequently citing the AAPS amicus brief.
Justice Scalia writes that the result was not just a
misapplication of the "undue burden" standard established in
Planned Parenthood of Southeastern Pa. v. Casey: It
shows the validity of his argument, in dissenting to that
opinion, that the "undue burden" concept is "unprincipled in
origin" and "unworkable in practice." The others write that the
health exception requirement "eviscerates Casey's undue
burden standard and imposes unfettered abortion-on-demand." It
would give "each physician a veto power over the State's
The decision is a departure from the fundamental canon that
statutes are to be construed in a way that avoids constitutional
difficulty. A "statute is not unconstitutional on its face merely
because we can imagine an aggressive prosecutor who would attempt
an overly aggressive application."
The State's interest goes beyond protecting an individual
unborn child; it includes "preserving the integrity of the
medical profession," "erecting barriers to infanticide," and
"forbidding medical procedures which ... might cause the medical
profession or society as a whole to become insensitive, even
disdainful, to life." Justices Stevens and Ginsburg may be unable
to discern a moral difference between a partial birth abortion
and other procedures, but Nebraska, 29 other states, the U.S.
Congress, and millions of Americans can.
The dissenters conclude: "We were reassured repeatedly in
Casey that not all regulations of abortion are
unwarranted and that the States may express profound respect for
fetal life. Under Casey, the regulation before us today
should easily pass constitutional muster. But the Court's
abortion jurisprudence is a particularly virulent strain of
Dr. DeTar Files Complaint on Redlener
John DeTar, M.D., reports that "in 1962, after General Edwin
Walker had been taken by the Kennedy Administration to the
Federal Springfield criminally insane facility,... I found that
a VA doctor, Charles Edward Smith, had `studied part of the
health record and the newspaper report' and decided that Gen.
Walker was insane. Smith's opinion was used by Bobby Kennedy to
justify the incarceration.... I was so incensed that I complained
to the AMA Judicial Council that Dr. Smith had violated the AMA
code of ethics by rendering a medical opinion without examining
his `patient.' The AMA bounced this to the American Law
Foundation, which ultimately (one to two years later) rendered an
opinion ... that what Dr. Smith did was okay, but no one else
should do it. This put a stop to incarcerating persons for
political incorrectness-for a while."
Dr. DeTar has written to the Office of Professional
Misconduct, NY Department of Health: "I allege that Irwin
Redlener, M.D., has scandalized the entire medical profession by
his words, actions, and deeds and that he is therefore a proper
candidate for loss of Medical License and criminal
prosecution.... As a matter of public record Dr. Redlener wrote a
letter, appeared on television and in radio interviews, and by
other other public actions did appraise the patient [Eli�n
Gonzalez] ... and provide an opinion on the home in which the
patient was resident, holding that the patient was in a state of
`imminent danger to his physical and emotional well-being in a
home' ... that was `psychologically abusive.' Dr. Redlener
therefore claimed competence to provide an opinion on a patient
whom he had never met, interviewed or examined (even rudimenta-
rily), also claiming intimate and personal knowledge of the
patient's home environment....
"If the behavior of Dr. Redlener is not an appropriate
subject for your investigation, ... then any other physician will
be free to duplicate his atrocious activities. The discrediting
of the medical profession will then advance ... to general
toleration of ... the illegal practice of medicine without the
patients even knowing that they have been evaluated in
absentia...." (See New York State Education Law, §6530).
The Fruits of "Cooperation". From a letter to Thomas
Reardon, M.D., President, AMA: Most members are now aware that in
1983 the AMA made a secret agreement with HCFA that resulted in
the CPT codes being used by HCFA as the exclusive coding system.
This generated a revenue stream of tens of millions of dollars
annually for the AMA, financed on the backs of physicians who are
forced to buy new coding books each year. The system has been
totally bastardized, with codes developed for individual services
being "bundled" into a single code. HCFA has decreed in its
"Correct Coding Initiative" (CCI) that the CPT codes are no
longer "correct." This rampant "bundling" is a fraud implemented
for the purpose of forcing physicians to finance medical care for
government dependents, since the government can no longer pay for
the care it promised to those it forced into dependency.
I assume the reason that the AMA has not fought the insult
of the CCI more vigorously is that such action might interfere
with the revenue stream from its "public-private partnership"
with HCFA. Meanwhile, physicians are being enslaved by the
government. It's time the AMA stopped focusing on its CPT book
sales and royalties and did something to help physicians rather
than hurting them.
Lawrence R. Huntoon, M.D., Ph.D., Jamestown, NY
The "Bundling" Scam. When you take your car for an oil
change, is the mechanic a criminal if he doesn't "bundle" in a
free brake job? Bundling is a fiction, a fraud. In a classic
Orwellian switch, the crime of cheating doctors out of their
hard-earned wages is turned on its head, and the doctors are
labelled as felons for "unbundling" or charging for their work.
This became possible when the profession allowed price-fixing in
Medicare and by proxy in insurance for all age groups.
Christopher Lyon, M.D., Ph.D., Newport Beach, CA
Other Partners. United Healthcare, under the name
Ingenix, recently purchased St. Anthony's Publishing, owner of
Medicode Publishing. Prior to the Ingenix purchase, printed
interpretations of ICD-9 and CPT-4 were not questioned.
In the spring issue of the AMA catalog, Medicode products
were listed. Medicode has a contract with the AMA. Perhaps
physicians could survive the insurance industry if known
insurance industry businesses were not used and promoted by
physicians' representatives such as the AMA.
Debbie Fehr, Coding Compliance Auditor, Phoenix, AZ
Ulterior Motives. Dr. Reardon's praise of United
HealthGroup for discontinuing preauthorizations [see AAPS
News June 2000] is exactly why I quit the AMA.... Dr. Reardon
praised United for doing exactly what the AMA criticizes, namely
making decisions for its own financial gain (saving $100 million
wasted on a pointless exercise), not for patient care.
Ian Schorr, M.D., Dover, NJ
Unity Works! Guided by AAPS leadership, especially Jose
Guerra, MD, and Andrew Schlafly, Esq., our medical staff, by
choosing strong physician leadership, was able to achieve
physician unity which was uncompromising in its quest for
physician-driven medical care.
The result: (1) We were able to prevent takeover of our
community hospital by a regional conglomerate; (2) We were able
to halt the hospital's predatory designs on physician's practices
and save our emergency medical group from being cannibalized; (3)
The hospital CEO resigned, having found "another opportunity"-he
persisted too long with his vision of managed care and insistence
on the "Mother-May-I" game....
Our next focus is to control costs by retaining decisions
locally, between employers and physicians. This will eliminate
much of the expense that corporate insurers add to the system. We
are returning to the physician/patient/hospital relationship
historically known as "fee for service."
Despite our successes, we remain on guard. The metastatic
seeds of non-medical healthcare (blueprint, agenda, and program)
were sown long ago. They have spread and are initially too small
to be seen. They will eventually grow, and when found, they must
be swiftly eradicated.
Thank you to all AAPS members. Without your support, AAPS
resources would not exist. Enlist your colleagues!
When we thought our cause lost, AAPS's strong hand guided us
from darkness. Keep up the great work!
Robert T. McQueeney, M.D., Marinette, WI
Medicare Drug Program. From a letter to Congress: A
prescription program, like any socialist endeavor, would be a
lose-lose situation. Without price controls a drug
program would benefit pharmaceutical companies and their
stockholders at the expense of taxpayers. With price
controls, research and development would suffer along with our
Many prescription drugs are very expensive, but adequate
alternatives are usually available. If not, free drug samples
help to lower the average cost. In our practice, which is neither
suburban nor rich, we have not seen any senior's life or limb in
jeopardy because of lack of access to medications. Access gaps
are filled by the prescription assistance programs already in
place: for example, the Smith-Kline-Beecham program for the
expensive heart drug Coreg. No patient who asks goes without. If
a Medicare prescription drug program is enacted, these charitable
outlays will disappear.
Shannon Grubb, M.D., Mt. Orab, UT
Legislative AlertCongress on Drugs
The House of Representatives has just passed a major
prescription drug program for Medicare patients on a largely
party-line vote of 217-214. The bill engendered political
theater. House Democrats walked out because the Rules Committee
did not permit a separate vote on the Democratic alternative
bill. Senate Minority Leader Thomas Daschle referred to the House
rules as Kremlinesque. Of course, anybody who remembers the Good
Old Days of House Speaker Tip O'Neill and Big John Dingell and
Big Dan Rostenkowski also remembers that GOP minority bills were
routinely railroaded far away from any serious consideration on
the House floor, and floor amendments were dismissed as cranky
annoyances by Republican rubes and backwoods hayseeds who
represented "Fly Over" country. Seen from 30,000 feet, that's the
territory where ordinary Americans engage in productive work so
they can ship the government 40% or more of their income.
The House bill will provide a benefit worth $40 billion over
5 years. It would give seniors the choice of at least two plans
offered by insurance companies, covering half of drug costs up to
$2,100, with a stop loss at $6,000. House Democrats are proposing
an $80 billion program over 5 years, based on the same benefit
structure as the Clinton plan, which is now estimated to cost
$250 billion over 10 years.
The House bill has three major elements: It is a subsidized,
voluntary prescription drug plan open to all 40 million Medicare
patients; it is delivered through private insurance and
Medicare+Choice plans; it will be administered by a new Medicare
Benefits Administration. Yes, MBA, very business-like. Unlike
HCFA, the new agency is designed to encourage competition, not
regulation. Maybe. We'll see.
Unquestionably, the House has a marginally better policy
than that developed by the White House and its allies in
Congress-who will, of course, stomp around, hold their breath,
turn blue, and periodically bloviate about the fact that the Tip
O'Neill style management of the House prescription drug debate
prevented seniors from getting the "real coverage" they deserve,
and getting it good and hard.
The basics are worth repeating. The Clinton Medicare drug
proposal would establish a subsidy for first-dollar drug
coverage, up to 50% of the cost of the drug bill up to $5000. The
subsidy -not in any way an insurance product-would be financed by
an artificially low "premium" of $26 per month. Yes, of course,
first-dollar coverage is not a prescription for cost control, but
that is not the point. The point is reducing private-sector
coverage in order to expand public-sector coverage. And the point
of public-sector coverage is government control. To fortify
the government control requires the right infrastructure. Presto,
the Clinton Administration and its allies have just the thing:
regional HCFA contractors, insulated by strong rules from any
consumer pressures. For economists, such an arrangement is the
worst of all possible worlds-a government-sponsored,
geographically based private monopoly.
Critics charge that the Clinton proposal expands federal
control over drug pricing; about 30% of all drug sales are to
seniors. The Boston Consulting Group reported that it can cost
more than $500 million to develop a new medicine. Controlling
revenue means controlling research and development.
With artificially low prescription drug premiums, the
incentives would fuel high utilization-doctors would be writing
prescriptions like mad-and the real costs of the drug benefit
would soar into the fiscal stratosphere. At which point, the
pressure would be to impose price controls or formularies. Price
Control + Benefit Control = The Ballgame.
While the House bill may be better than the Clinton
proposal, it falls far short of the comprehensive, patient-
centered Medicare reform that a growing number of members from
both sides of the aisle see as necessary, especially for the next
generation of senior citizens. Moreover, the House policy is
still burdened with three major potential difficulties. First,
the program emphasizes up-front coverage and relies on
Medicare+Choice plans-already in deep trouble-to deliver the
goods. Second is the perennial problem of eligibility and the
impact of subsidies for low-income people. If subsidies are too
low, they don't help the people who need the help. If subsidies
are too high, private entities are encouraged to dump retirees.
And then there is the problem of adverse selection. What happens
when high-risk patients congregate in a few plans, driving costs
up and forcing these plans to fold?
Medicare and the Budget Surplus
Official Washington is awash in accounting gimmicks, and the
fondness for same is bipartisan. The latest is the so-called
Medicare Lock Box. It sounds great. Lock Medicare monies or
budget surpluses away for a rainy day, and there will be plenty
of money for Medicare, and then we won't have to do the hard work
of reforming the thing. A socialist's dream.
Clinton announced recently that budget surpluses are going
to be richer than expected: $4.19 trillion over 10 years. Too
many Americans believe that surpluses somehow mean an automatic
reduction of the national debt. But that can occur only if
Congress and the White House make sure that every penny of the
projected surplus goes to debt reduction. Fat chance. Flush with
unforeseen cash, based on a better-than-expected economic
performance and higher-than-expected revenues, the President has
offered Congressional Republicans a "New Deal": Give Clinton a
$250 billion Medicare prescription drug benefit, and he would
agree to marriage penalty tax relief worth $250 billion over the
same period of time (10 years). The response: No Deal. Wise
decision. One of President Reagan's worst mistakes was to trade
tax reductions for promised cuts in spending, which never
materialized. Don't trust, and there is no need to verify.
As to the Medicare Lock Box, please recall that Republicans
proposed a similar solution for Social Security in 1999. The idea
is to put the money in a real safe place, perhaps under Alan
Greenspan's pillow at the Federal Reserve. A variant of this idea
has been proposed by Al Gore. Under his formulation, projected
surpluses in the hospitalization trust fund would be put in the
Lock Box, wherever it is, and used to reduce the national debt.
Then, as the national debt is reduced, the government would
reinvest the Medicare interest savings. This would be done by
putting Treasury Bonds into the Medicare Part A Trust Fund. There
is a hitch: Treasury bonds are really IOUs, promises to pay that
are to be redeemed by general revenues-tax dollars from you and
me and the kids. Gore claims that his proposal would enable the
government to extend the life of the Medicare trust fund by about
The Lock Box proposal would have two effects. The political
effect would undercut tax cuts. The structural effect would
establish, in principle, general revenue funding for Medicare
Part A, which was designed as a traditional "social insurance"
program in which, at least in principle, beneficiary taxes would
pay for beneficiary benefits. This structural reliance on
general revenues would complete the transformation of Medicare
into a welfare program. It is precisely the kind of policy
change that would have driven the old liberals nuts with rage,
but they are all, or most of them, strangely silent on this
radical change. That must mean that either the old liberals are
really gone, or that they have lost their voices or their
principles. Thus far, the only news analyst to even address this
change is Chris Matthews, a former Tip O'Neill staffer, who now
hosts the popular television news talk show Hardball. In
the longer term, making Medicare more explicitly a welfare
program undermines political support, especially among young
people. But, that's tomorrow, as Clinton might say, and this is
While the Lock Box concept is politically attractive, grown-
ups should not be misled but should recognize it for what it is:
a statement of good intentions. It changes nothing.
In reality, Congress can always vote to spend the money in
the Lock Box on other priorities any time it wishes. Recall,
too, that its viability depends on future surpluses.
Federal budget surpluses are notoriously volatile. We could just
as quickly end up with big shifts in the opposite direction. Most
importantly, the Lock Box ignores the fact that Medicare spending
is going to gobble up larger and larger chunks of the federal
budget and the national economy. Comptroller General David Walker
has told Congress that the Medicare program is "unsustainable"
in its current form-with or without the Lock Box.
The Medicare+Choice Disaster
Private health plans, faced with a combination of mind-
numbing micro-management by the Administration and incompetent
price setting by Congress, are dropping out of the three-year-old
"Medicare+Choice" program. On June 29, Karen Ignani of the
American Association of Health Plans announced that more than
711,000 Americans would be affected by health plan withdrawals.
That very same day, Aetna U.S. Health Care notified HCFA that it
was withdrawing from the Medicare + Choice program in 11 states,
including Florida and Texas, and that this action would affect
355,000 Medicare patients. Aetna CEO William Donaldson said: "The
decision to exit certain Medicare markets was reached with great
reluctance, but was made after an exhaustive review of
alternatives, such as significant benefit and premium
While official Washington offers lame excuses for the
continuing loss of private coverage, the real reason is bad
federal policy, especially the massive over-regulation of plans
by HCFA. Having HCFA organize a market is like putting the Mafia
in charge of the Better Business Bureau.
"Private" plans in Medicare are private in name only. The
inflexible bureaucratic structure, which is based on price
controls and central planning, was made worse by the Balanced
Budget Act of 1997 (BBA). In his July 22, 1999, testimony before
the Senate Finance Committee, CBO Director Dan Crippen stated:
"Under current law, there is effectively no price competition
among Medicare+Choice plans. Medicare uses an administered
pricing system to set its payments to plans, and plans are not
permitted to offer cash rebates or other financial incentives to
encourage enrollment. Instead, they have incentives to increase
optional benefits rather than to reduce costs. Consequently, even
if the beneficiaries gain if they enroll in managed care plans
that are more efficient than fee for service, Medicare does not.
Moreover, beneficiaries who might prefer less generous benefits
for a lower price do not have that option."
Managed-care plans in Medicare are paid on the basis of a
formula. Congress determined that under the old formula, where
payments were tied to the performance of fee-for-service
medicine, the taxpayers were paying too much, and that the
federal government was the only organization in America that was
actually losing money on managed-care plans. So, with enactment
of the notorious BBA, Congress substantially altered the formula,
resulting in a $97 billion reduction in Medicare payments to
these plans over a 10-year period. While medical costs are again
rising and at rates approaching double digits, the formula
provides for a 2% increase. HCFA insists that participating
plans were still "overpaid" because they attracted better health
risks. HCFA, once again, was wrong. Under administrative pricing,
the federal government either pays too much, or too little, or
does not account for enough factors in the price setting, or does
not account for the right factors. Official Washington insists,
however, on sticking with this old failed system.
HCFA's Regulatory Overkill
In a detailed and penetrating analysis, The
Medicare+Choice Program: Is It Code Blue? (Washington: Shaw
Pittman, June 8, 2000,
Ziegler and Bruce Fried, a former Director of the Center for
Health Plans and Providers at HCFA, write, "The regulatory
complexity of the M+C program has taken on mammoth
proportions.... [T]he breadth and depth of regulatory
requirements have imposed a level of micro-management that
significantly hampers-or, in some instances, restricts
altogether-the ability of M+COs to make essential business
decisions regarding how care should be financed and operations
The requirements go far beyond Congressional intent.
For example, the law directed the Secretary of HHS to develop
a risk-adjustment mechanism accounting for variations in costs.
Ignoring private-sector specialists, HCFA developed an extremely
complicated mechanism that requires plans to collect and report
"encounter data" for each medical service given to each Medicare
patient. As Fried and Ziegler observe, "This requires M+COs to
essentially create Medicare fee for service claims and submit
them to HCFA-not for payment, but for the sole purpose of scoring
each beneficiary's health risk. As a result, M+COs must redesign
their data systems and train staff to handle complicated fee for
service coding protocols, electronic formats, and specialized
procedures (such as edit programs)." While Congress did not
intend this mechanism to reduce payments to Medicare+Choice
plans, the proposed methodology will reduce plan payments by an
additional $11.2 billion over the period 2002 to 2004. Thus far,
Congress has done nothing to reverse these regulatory excesses.
Incredibly, the same Washington experts who have brought
about this disaster now want to give HCFA control over
prescription drugs. No, they can't be dismissed as incompetent
clowns. No, they are not crazy. Yes, they are deadly serious.
Robert Moffit is a prominent Washington health policy
analyst and Director of Domestic Policy at the Heritage