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

Volume 58, No. 8 August 2002


A common lie about the HIPAA privacy standards-most often a lie of omission-is that every physician must comply. In fact, not all physicians are "covered entities."

According to AAPS Past President Lois Copeland, M.D., of Hillsdale, NJ, the medical staff of her hospital was told on June 21 that "(1) all physicians would now be required to submit electronically; (2) all physicians would be required to form and follow a compliance plan; and (3) any patient refusing to sign the [notification of privacy policy] form was to be refused service, [lest] the physician be considered noncompliant and in jeopardy of a $250,000 fine and a potential jail term."

Not so. Medicare will require "covered entities" to file electronically after October 16, 2003, but practices with fewer than 10 full-time employees or no means to submit electronic claims are exempt (see AAPS News, July 2002). Covered physicians must make a "good faith effort" to have patients sign the notification statement, but-unlike the previous rule's meaningless "consent" form-a signature is not required to obtain treatment ( www.hhs.gov/ocr/hipaa/propmods.txt).

Physicians can remain or become non-covered, but to maintain this status requires vigilance. They must read all contracts and certifications and avoid becoming a business associate of a covered entity such as a hospital. According to attorney Vickie Yates Brown, hospital general counsels are asking whether they need to obtain such contracts with medical staff members. The answer is no; the regulations specifically state that physicians do not become business associates simply through membership on the medical staff.

Physicians need to understand clearly the implications of being a covered entity. One consideration is cost-which is so prohibitive that some "industry players" are asking whether it would be less costly to choose not to comply and simply to pay the penalties as a cost of doing business.

John Stephens, J.D., in a PriceWaterhouseCoopers publication, April, 2001, warns that the highly prescriptive rules are costly to implement and maintain, but easy for HHS to audit. With a maximum annual penalty of $25,000 for violating each "provision" of the three HIPAA standards, the cost of complete noncompliance could reach $1.4 million per year. If HHS counts "provisions" in a less simplistic way, the cost could be far higher. Moreover, failure of a covered entity to make a good- faith compliance effort might be interpreted by law enforcement agencies as the "intent" or "false pretenses" necessary to trigger the criminal penalties.

An even greater threat, Stephens points out, arises from statements certifying HIPAA compliance. These may be required by accreditation bodies such as NCQA and JCAHO, state regulators and licensing agencies, or federal programs including Medicare, Medicaid, and the Federal Employee Health Benefit Program. If a false certification is discovered-as through a bounty-seeking qui tam whistleblower-all the draconian penalties of the False Claims Act (FCA) could also be triggered ( pwchealth.com/articles.shtml).

Despite a couple of court decisions (Mikes, AAPS News, Feb 2002, and McLaren, AM News, 3/11/02) that might help put the brakes on the use of the FCA in actions arising from "tainted claims" (AAPS News, Dec 2001), Senator Charles Grassley (R-IA) is pressuring the Dept. of Justice to "clamp down on kickback prosecutions under the False Claims Act" (Medicare Compliance Alert 7/1/02). In a "surprisingly radical" Fifth Circuit decision in U.S. v. Southland Management Corporation, the Court took the view that "a false certification will result in a false claim as a matter of law if the making of the certification is required as a condition for payment...."

A dissenting opinion stated: "the government need only incorporate boiler-plate certifications of compliance with `all' statutes and regulations to put in play punitive FCA sanctions for most government contractors or beneficiaries.'' Moreover, the fact of participation in a government program could constitute an implied certification (Pogue v. American Healthcorp): see BNA's HCFR 6/12/02, pp. 501-507).

Besides the penalties for imperfect compliance with the "Highly Impossible Privacy Achievement Act," reasons to take the "country doctor's escape route" include protecting both patients' rights and your ability to practice good medicine.

For a privacy notification statement, a physician might as well give patients a Miranda warning-with the new proviso that physicians have no right to remain silent about confidences. The rules not only permit but enable fishing expeditions in a national data base, as to monitor "leading health indicators" such as obesity, sexual activity, and mental health, or to "leverage the existing health system" to achieve societal goals such as "eliminating health disparities" (NCVHS testimony, 12/14/01)-say better treatment of certain patients.

Adherence to the transaction code sets rules will dramat- ically change information systems, as all are forced to adopt a centrally mandated code set, possibly the ICD-10, which has 200,000 codes. Yet non-reimbursement codes are acknowledged to have an inaccuracy rate of 30 to 40% and lack a way to express basic concepts such as "blood pressure measurement" or "prenatal visit" (NCVHS testimony 4/15-16/97). It's as though records had to be translated from English into Navajo and back again, with severe punishment for inaccuracies. In the name of advancing information technology, every medically related fact, diagnosis, or procedure will have to be numerically coded even though computers now have an awesome capacity to handle natural languages. Records will be increasingly unusable for medical treatment, and full of unavoidable untruths. Only country doctors will be able to practice medicine.

HIPAA must be resisted, stopped, and turned back.

Lessons from Microsoft?

Do we need the federal government to dictate a standard format for medical information transfer? We don't need it to tell us what programming language or word processor to use.

The Dept. of HHS writes: "Without government action, a common standard might eventually emerge as the result of technological or market dominance. However, the uneven distribution of costs and benefits may have hindered the development of a voluntary industry-wide standard. Congress concluded that the current market is deadlocked and that the health care industry would benefit in the long run if government action were taken now to establish an industry standard"

(Federal Register, vol. 65, No. 160, 8/17/00, p. 50351).

Translation: Users don't agree on the best standard. Only the federal government can force some to bear net costs for the net benefit of others. Certain segments of the industry-such as the AMA-will benefit if their codes are imposed: no need to display the innovative genius of Microsoft, or risk antitrust prosecution for achieving predominance in a voluntary market. We'll be better off in the long run using what may be the equivalent of COBOL or WordStar until 3001.


CPT Confusing, Subjective

You may have already noticed this, but now it's documented in a study done by members of the American Health Information Management Association. Specialists with an average of 10 years coding experience agreed on the CPT E&M codes for six cases only 59% of the time-a performance only slightly better than that of physicians (FP News 2/15/02).


Opting Out Spreads

It's not just doctors: Home Depot has instructed its stores not to do business with the federal government to avoid having to comply with burdensome paperwork (Wall St J 6/18/02).

Although not actively encouraging physicians to opt out, the Washington State Medical Association now offers a guide for physicians who wish to do so ( www.wsma.org, under "reference materials" on the Membership/Resources page).


RIP, Andrew Mance, M.D., Country Doctor

Andrew Mance of Oakland, MD, died quietly at home at the age of 87-on Independence Day, July 4, like two other American freedom lovers, John Adams and Thomas Jefferson. Dr. Mance served patients in general practice from 1939 until a few days before his death. He never accepted a dime from government programs. He joined AAPS in 1966 and served on the Board of Directors in the early 1990s. He was honored by 600 patients (AAPS News, May 1996). In Thoughts-of a Country Doctor, an Immigrant's Son-in Poetry, he wrote:


Who, /Am I?
Do you see/ That building over there?
No, no/ The tallest one.
I am a grain of sand/ In the foundation.
I, am important.
Without me the building/ Would be incomplete;
I am a necessary bit/ In God's creation.


Nominating and Resolutions Committee Reports

The following slate will be presented at the annual meeting:

President-Elect: Dr. Mark Schiller of San Francisco, CA

Secretary: Dr. Charles McDowell of Alpharetta, GA

Treasurer: Dr. R. Lowell Campbell of Corsicana, TX

Directors: Drs. Claud Boyd of Augusta, GA; John Boyles, Jr., of Centerville, OH; Curtis Caine of Brandon, MS; James Coy of Punta Gorda, FL; Mary Jo Curran of Chicago, IL; Thomas Dorman of Federal Way, WA; W. Daniel Jordan of Atlanta, GA; and Delbert Meyer of Sacramento, CA.

Resolutions are due by Aug. 18. (Call 800-635-1196.)


Model Emergency Powers Faltering

AAPS General Counsel Andrew Schlafly writes: "I have reviewed the current status of state consideration of the Clintonesque Model State Emergency Health Powers Act (MEHPA), an appropriate task for Independence Day."

He found that 7 states had enacted portions of MEHPA: Arizona, Florida, Georgia, Maine, Maryland, Minnesota, and New Hampshire. No state has passed all, or nearly all, of the Model act. States that effectively rejected MEHPA by passing an alternative include Louisiana, South Dakota, Utah, and Vermont. States that rejected or shelved it: California, Connecticut, Idaho, Illinois, Kansas, Kentucky, Mississippi, Nebraska, Oklahoma, Washington, Wisconsin, and Wyoming.

"We've done well in fighting it," he said.

Mr. Schlafly will debate a public health official in Florida, which passed the worst bill. Citizen activists are trying to get the bill rescinded.


Medical Savings Account Projects

A group of physicians, insurance agents, and others is close to the $30,000 in tax-deductible pledges required to launch a radio talk-show campaign to educate the public and Congress about the need to lift the crippling restrictions on Medical Savings Accounts. Also, the MSA audio/videotape program developed by the Pennsylvania chapter of AAPS is available. If interested in either project, call Dr. Jim Pendleton, (215) 938-0781, FAX (215) 938-8999; [email protected].


AAPS Calendar

Sept. 18. Board of Directors meeting, Tucson, AZ

Sept. 18-21. 59th annual meeting, Tucson, AZ.

Sept. 24-27, 2003. 60th annual mtg, Point Clear, AL.

* * *

"The simple step of a courageous individual is not to take part in the lie. One word of truth outweighs the world."
Alexander Solzhenitsyn

Privacy Suit Dismissed; AAPS to Appeal

On June 17, Judge Sim Lake of the U.S. District Court for the Southern District of Texas granted the government's motion to dismiss the case brought by AAPS, Rep. Ron Paul, M.D., and others challenging the HIPAA Privacy Rule.

The Judge held that the claim was not ripe: "Plaintiffs have not alleged that the government has accessed their medical records pursuant to the Privacy Rule." Before plaintiffs could suffer harm, "The Secretary of HHS would have to elect to exercise his oversight responsibilities...and would then have to proceed directly against the specific covered entity that possessed the protected health information of the plaintiffs. Even in such a scenario, the plaintiffs' particular health information might not be accessed or disclosed."

Before April 14, 2003, HCFA might issue new rules rendering the complaint moot, and to adjudicate the claim in the preenforcement stage "would pose a risk that the court would issue an impermissible advisory opinion."

The Judge agreed with HHS that expanding the rule beyond the electronic information specified by Congress "effectuates HIPAA's intent to promote the computerization of medical information." [We'll see.]

AAPS will file a notice of appeal soon.


Lawyers Sue over Privacy Rule

For only the second time in its 125-year history, the New York State Bar Association has filed suit against the federal government. The suit challenges the application of the Gramm Leach Bliley (GLB) Act to lawyers. GLB requires financial institutions to send privacy notices to their customers.

"Lawyers are already subject to strict ethical rules,... requiring us to keep client confidences and secrets. It is bureaucratic, unnecessary, and inefficient to require that we send out `privacy notices' as well," stated NYSBA President Steven C. Krane (nysba.org ).


Defining a Federal Crime

For any act to be criminal, Congress is supposed to enact a law giving clear notice of what constitutes a crime so that citizens will know how to behave. Though generally not very concerned about physicians indicted for Medicare fraud, the press has discovered, in the trial of the accounting firm of Arthur Anderson, that "it is often very difficult to know what does and does not constitute a federal crime." Andersen was convicted of felony obstruction of justice when the jury agreed that staff attorney Nancy Temple acted with "corrupt intent" in advising a partner on the Enron account to delete a passage from e-mail. The original jury instructions defined "corruptly" to mean doing the specified act with "an improper purpose" - a statement of law so broad to permit a conviction for almost anything. But somebody had to be convicted of something.

"They just forced us to come up with a guilty verdict," juror Wanda McKay told The New York Times.

Judge Melinda Harmon did what Congress is forbidden to do: create a new crime ex post facto, stated John S. Baker, Jr., professor of law at Louisiana State University. And if the standards to which Andersen was subjected were applied even- handedly, the FBI would be in the dock for mishandling reports from field agents about possible terrorist activity prior to the Sept. 11 attack (Wall St J 6/18/02).


Anti-Fraud Agency Destroys Documents

Facing an embarrassing audit of its own operations, which "could adversely affect the confidence of the public" in Defense Department audits, the Pentagon agency charged with exposing fraud simply destroyed documents and faked new ones. IRS reviewers found no problem with the phony documents, which were brought to light by a whistleblower. Twelve to fifteen officials in the DoD inspector general's office were involved in creating the false documents, at a cost of $83,000 to taxpayers (Peoria Journal Star 6/6/01).


Medical Schools Pay $117 Million

In settlement of fraud allegations, the HHS Office of Inspector General has "recovered" $117 million as a result of the Physicians at Teaching Hospitals (PATH) Initiative, plus $50.9 million from similar audits initiated by local authorities. The highest settlement of $30 million was paid by the University of Pennsylvania. Many complaints focused on lack of adequate documentation of faculty supervision of work done by resident physicians-using stricter guidelines than those in force at the time services were rendered (AM News 6/3/02). The cost of the Corporate Integrity Agreements and new compliance plans was not estimated.


Tip of the Month: The misnamed Health Care Quality Improvement Act (HCQIA) confers qualified immunity on peer review committees that revoke hospital privileges. Such immunity applies only to the extent that the committees act based on a reasonable belief in improving health care, after a reasonable effort to obtain the facts, and after adequate notice and hearing procedures. Many state laws also confer immunity limited to good faith peer review. Yet some hospitals now seek "absolute immunity" by demanding that physicians contractually waive their rights, which would preclude relief even for bad faith peer review. Such demands are inconsistent with federal and state laws, and are typically contrary to the interests of physicians and their patients. Waiving rights often leads to regret.


Informed Consent for Abortion

A consent form used by Women's Choice Quality Health Center in San Antonio, TX, includes warnings of the risk of an incompetent cervix and a possible increase in lifetime risk of breast cancer. Brent Rooney of the Reduce Preterm Risk Coalition (RPRC) queries whether this increases the malpractice exposure of abortionists who lack such a form.

Rooney also cites studies showing that a previous abortion increases the risk of preterm births-doubling the risk of births at less than 34 weeks' gestation-and that no abortion clinics mention this risk (BMJ 2001;322:430).

The RPRC has announced a $444 prize to the first person to send a copy of a significant study showing a lower 12-month total mortality for women having an elective abortion compared with women carrying to term. This would tend to refute a study showing a 250% increased mortality in the year following the "end of pregnancy" through abortion rather than live birth (Acta Obstet Gynecol Scand 1997;76:651-657).

In supporting the Abortion Non-Discrimination Act (ANDA), H.R. 4691, AAPS states that physicians may decline to do abortions because of concerns about women's health.


First HIPAA Ripple. This past Sunday I had to perform carotid duplex scans on two patients with transient ischemic attack/stroke symptoms. I customarily follow good medical practice and compare the study with previous scans. But HIPAA stopped me from doing this. The cabinets containing the studies were securely locked. The hospital official in charge explained that they couldn't allow housekeeping staff to be around the unlocked files in the locked neurology department because of HIPAA privacy standards. None of the neurologists were supplied with keys to the cabinets. I'm sure patients will be comforted to know that while they're having a stroke, their records are secure so that even their own doctor can't see them.

The government is hog-tying doctors and partially gagging them, while constantly maligning them and poking them with sticks. Occasionally the government unties one hand so the doctor can reach into his pocket to pay increasing liability premiums for the privilege of participating in this game. It will end only when patients finally realize that the benefits of "free" medical care are outweighed by the consequences of being treated by a government hog-tied doctor.
Lawrence R. Huntoon, M.D., Ph.D.


Medicare+Choice. The July Report from Washington stated that Medicare+Choice programs have served many seniors well. My experience has been completely the opposite. Most of my patients leave these plans.
Leonard Biel, Jr., M.D., New York, NY


Corruption Is Contagious. When anyone finds a way to gain an advantage with deception, others will copy the scam. When people can't trust each other, much effort is wasted and every transaction is complex because of the need for self protection. The result is like an engine with so much internal friction that there is little net horsepower.

In impoverished countries, hard workers are considered stupid, and successful deceivers, intelligent. Now that plunder seems to make more sense than creative, productive work, wealthy America is on its way to Third-World poverty.
Ralph Rohweder, Alexandria, VA


Republicans Confess to Grand Larceny. Arizona Republicans Hayworth and Shadegg are running commercials bragging about "giving" seniors a new prescription entitlement, as if the money were coming from their pockets instead of being taken from taxpayers. They and the rest of the U.S. House of Lords should be put in stocks on the Capitol Mall, where children can "stone" them with McDonald's Happy Meals. After all, it is the children who will spend much of their adult lives paying off the looming Medicare and Social Security debts....

There are noble-sounding arguments for all entitlements. Proponents never say "I'm buying special interest votes with your money" or "this free goody will have bad consequences, but I'll be retired on a princely pension by then."

The Framers thought that stealing was wrong, and philanthropy was a private matter. Now their successors not only steal but brag about it.
Craig Cantoni, Scottsdale, AZ


Actuaries Feel No Pain. Actuaries believe that everything in the universe can be reduced to a mathematical model that can be tweaked and manipulated. When real-world experience doesn't correspond to the model, the real world must be wrong. When doctors can't make the Marxist Labor Theory of Value (the RBRVS) work, the doctors can be thrown in jail for Medicare fraud-but not the actuaries who designed it. Having agreed to artificial prices for virtually every transaction, HMOs, hospitals [and doctors] are now having to live with them.
Gerry Smedinghoff, Phoenix, AZ


Duping the Public. Since 1943, there have been no real prices for medical services in the U.S. In fact, all prices are distorted by $600 billion in dead-weight costs of the transfer society. Managed Care and Single Payer both dupe the public by eliminating prices, but not costs. The result is impoverishment: witness Canada's 50-cent dollar.
Robert Gervais, M.D., Mesa, AZ


Market Prices = Democracy. The market is the closest mechanism to democracy that we have. People can't vote on every issue, but with the market, they vote with their money on every good or service that they buy. Patients who are free to go elsewhere are far more effective in controlling cost and quality than insurance or government inspectors or regulations. When Marx called our system "capitalism," it caused some to focus on the evil in corporations. In fact, the essence of our system is consumer choice; capital accumulation is just a tool of market operation. Efforts to replace consumer choice with government control (a system called "fascism") are based on faulty, mystical assumptions about human nature-and result in inefficiency, poor service, and grave danger.
James Pendleton, M.D., Bryn Athyn, PA


Trust Funds. Comments from a physicist: Governments should not be permitted to create the fiction of a trust fund. Salivating politicians and lobbyists spend most of their time figuring out how to tap it for the projects that do them the most political good-before someone else does.
Steve Barchet, M.D., Issaquah, WA

Legislative Alert

House Passes Medicare Legislation

Just before the July 4th recess, a bitter debate on Medicare ended in a close vote at 2 A.M. on June 28th. The House passed the Medicare Modernization and Prescription Drug Act (H.R. 4954) by a largely party-line vote of 221 to 208. The House Republicans' Medicare drug benefit has been estimated to cost $311 billion over 10 years, a significant increase over the Bush $190 billion proposal, but within the budget constraints agreed upon by the House of Representatives this year. Before final passage, House Minority Leader Richard Gephardt offered a motion to recommit the bill with instructions to report out the Democratic Leadership bill, the Medicare Prescription Drug Benefit and Discount Act, but Gephardt's motion was defeated by 223 to 204. Gephardt launched into a hot tirade about the House leadership's procedural hurdle and described the Republican legislation as a "sham" and a "fraud." Meanwhile, the Congressional Budget Office (CBO) estimated the cost of the Democrats' proposal at about $1 trillion over ten years.

Pay Adjustments for Doctors and Medical Facilities

The House bill provides for Medicare pay increases of 2% in 2003 and payment updates in 2004 and 2005 based on 2002 data. The total five-year estimate of the physician pay adjustments would amount to $21.3 billion. Under the terms of the bill, however, physicians would see a decrease in Medicare payment beginning in 2008. Thus, the Medicare administrative payment system and its price controls remain.

For hospitals, the Medicare reimbursement would amount to a $3.6 billion increase over the next ten years. Under the House bills, the hospitals would get an inflation update, with a slight modification in the formula. For skilled nursing facilities, there would be an increase in their prospective payment of 12% for 2003, 10% for 2004, and 8% for 2005. The House formula changes would reverse the impact of current Medicare law, which would otherwise have resulted in a $3 billion reduction in Medicare payments for fiscal year 2003. For home health agencies, the House bill eliminates a projected 15% Medicare payment reduction effective on October 1, 2002.

The House bill contains a variety of miscellaneous provisions governing payment for rural hospitals, durable medical equipment, the provision of new Medicare coverage for physical examinations and cholesterol screening. It also has incorporated Medicare regulatory relief provisions.

Changes to Medicare MSAs and Medicare+Choice

The House bill permanently extends the Medicare Medical Savings Accounts and removes caps on enrollment and also makes some genuine improvements in the beleaguered Medicare +Choice program. The bill changes the formula for paying private health plans to the higher of the adjusted average per capita cost (AAPC) or 100% of the Medicare fee-for-service plan. (The AAPC formula determines payment by dividing the number of Medicare patients into the cost of providing that care in any given county). In the meantime, Medicare+Choice plans would be able to apply for payment based on a statewide, rather than countrywide area. Also, Medicare patients would be able to keep 75% of any savings from enrolling in Medicare +Choice; the government would retain the other 25%. The bill also creates a four-year demonstration program to establish full competition between Medicare+Choice and fee for service, which would commence if there are at least two Medicare +Choice plans and they would enroll 50% of all seniors.

The House Drug Benefit

The major provision of the House-passed bill was the addition of a multibillion dollar drug benefit, explicitly created as a new entitlement-meaning, of course, that it will be like any other Medicare benefit, and will be progressively subject to legislative and bureaucratic restrictions.

The House bill provides for the drug benefit with a $33-per- month premium, with a $250 annual deductible, delivered through private health insurance plans. Beyond these premiums and deductible standards, the drug benefit would have a sliding scale of government subsidies depending on the cost of the benefit. With lowest costs, running between $251 to $1,000, the Medicare patient would pay only 20%. When costs run between $1,001 and $2,000, the Medicare patient would pay 50%. When costs run between $2,001 and $3,700, the Medicare patient would pay 100% of the costs, but at a 30% discount. For any prescription drug costs above $3,700, the federal government would pick up the entire bill. At the same time, the bill provides for explicit means testing for seniors who participate in the drug program. For seniors below 150% of the official poverty line, the federal government would pick up the full cost. Federal subsidies for Medicare patients would phase out at 175% of the official level of poverty.

A Medicare Benefits Administration would oversee both the drug benefit program and Medicare+Choice. The stated objective is to create a new agency that would be more market friendly than CMS, the successor to HCFA. (We'll see.) The bill also sets up a Medicare Prescription Drug Trust Fund.

The House bill is fairly prescriptive. Under the terms of the legislation, private plans must issue prescription drug care to Medicare patients and have a "cost and drug utilization management program." While private companies are to offer the drug benefit, the prescription drug plans must have a pharmacy network of at least two pharmacies, and a point-of-service option that allows seniors to go outside of the pharmacy network. The bill also provides for subsidies to employers, presumably as an incentive for them to maintain coverage. The federal contribution to employers would be 67 cents on the dollar for the premium of each Medicare beneficiary when the plan provides the standard drug benefit package embodied in the bill. Obviously, the incentive for employers is to drop private coverage if it does not or will not meet the government standard. (In an earlier set of talking points, House Republican staff circulated an estimate from CBO that said that 90% of seniors would likely end up in their new drug program. So, in effect, like the legislation authored by Senate and House leftists, the House Republican plan would surely displace the existing private market for prescription drugs.) The estimated cost of this proposed drug benefit would amount to $311 billion over ten years.

"The Drug Doughnut"

The exposure of Medicare patients to the progressively higher share of drug costs between the first $2,001 and the $3,700 cap-the hole in the middle of the benefit subsidy-is what Democratic critics have been calling "the Doughnut." It is not clear why the government contribution gets progressively less as the drug costs mount; this is the reverse of most normal insurance arrangements. It is clear that this curious architecture will put a brake on rising costs. Whatever its analytical merits, it is a politically difficult sell to ordinary folks, who are trying to grasp the rationale for the government paying such a high portion of smaller, up-front costs, but leaving them vulnerable to progressively higher costs until they reached $3,700 or more.

The "Doughnut Issue" has been a tough one for the GOP to handle in the media. House Republicans have responded to this criticism by saying that their proposal is the only Congressional proposal-now on the table-that lowers drug prices for seniors and gives all seniors an immediate drug discount of 15%, including the discounts for costs between $2,001 and $3,700. In a remarkable turn of political rhetoric, House Speaker Dennis Hastert has issued talking points that proudly make the argument that the House Republican Plan lowers the seniors' prescription drug costs by "cutting into the bottom line of the pharmaceutical companies through best price competition and the promotion of generic drugs." (Ironically enough, the piece is called "Reality Check: Exposing Democrat Hypocrisy on Which Plan Really Benefits Prescription Drug Companies," produced by the Speaker's Prescription Drug Action Team.) Price competition does lower costs, of course. But what is so odd about this is the Leftist slant to the House Republican rhetoric: the pharmaceutical companies are the problem, and a celebrated policy objective is to cut into "the bottom line" of the most research-intensive industry in the world. Why would a sane person want to cut into the bottom line of an industry that commits a higher percentage of sales revenues, roughly 20%, to research and development than any other? Moreover, the average profit margin of pharmaceuticals is high, but not out of line with profit margins in banking or real estate or communications, while the pharmaceuticals' tax liability (at 33.8%) is higher than all other industries. This is now the House Message. That's what happens, of course, when you don't have a clear vision of your own and you are reduced to the pathetic spectacle of borrowing the language and symbols of your opponents to "stay in the game."

House Republicans have been aided in their battle by the issuance of a Department of Health and Human Services (HHS) report favorable to their legislation, which said that the House bill would cut prescription drug costs: "Those who now pay full retail prices would typically see the costs of each prescription cut by 60 to 85%, and their overall out of pocket drug costs would fall by as much as 70%." The HHS report also makes the standard "economies of scale" argument: "The savings from the House Republican plan include a substantial price discount, made possible by letting all seniors aggregate their purchasing power for the first time. It's common sense to give them the same means to get lower drug prices that are widely used for those under 65." So says HHS.

As this Medicare prescription drug debate matures, watch how the "economies of scale" argument becomes a weapon of choice for the Left. It is an effective weapon in the real campaign against consumer choice, price competition, and free markets. It easily becomes the economic argument for national health insurance programs and direct purchasing of medical services by the government. If the taxpayers, through an act of Congress, just purchased all of the prescription drugs now and up-ended this inefficient private market, then the government could directly provide prescription drugs more cheaply for everybody, and they could do the same for medical devices, hospitalization, and physicians' services. Even better, not only could the government get those costs down, it could pass laws, rules, and regulations to keep them down. And, of course, we could do the same for food, clothing, housing, daycare, video games, lemonade stands-you name it. The essence of the nineteenth century Socialist argument was-and is-that government is not only more "equitable" in its distribution of goods and services, but also more efficient and productive.

The HHS report argues that House and Senate Democrat proposals, with projected costs running between $600 and $750 billion over ten years, would end up raising the costs of most prescription drugs by 15% or more, encouraging a price explosion and inviting, no, pleading for, price controls on prescription drugs. The House Speaker's Prescription Drug Action Team correctly note that House and Senate Democrats have offered legislation that incorporates no serious price competition. The Democrats' proposals use direct subsidies rather than an insurance mechanism to finance and deliver the benefit, with a co-payment structure tilted toward generics. In the leading Senate Democrat plan, seniors would pay a $10 copayment for the purchase of generic drugs, the cheaper drugs, but a $40 copayment for the original or the brand-name drugs. Nonetheless, with no functioning market and no price competition to control costs, the incentives are still to increase costs. But that would only lay the groundwork for the next Leftist policy objective: price controls. After all, health policy analysts on the Left, and their political allies in Congress, like price controls, believe in price controls, and can't wait to impose price controls. They will only refer to them as "spending controls" or "cost controls," or some other such language designed to insult your intelligence.

Design Problems

If one considers the House Republican "Doughnut" a design problem, then one must ask why the Senate Democrats want to go through the elaborate process of setting up a Medicare prescription drug benefit within the current Medicare program and then sunset it in 2010. This is a new creation: A Temporary Entitlement. Curiously, the Senate Democrats' legislative proposal would suddenly end the Medicare prescription drug benefit at the very same time that massive 77 million Baby Boomer generation starts to retire. Just why Senate Democrats propose to do this is unclear on the face of it, but Capitol Hill observers think that the main reason is that the price tag on the leading Democratic bill would produce sticker shock in any responsible person who is not already paralyzed by the public cost of liberal political promises. A temporary entitlement? Don't worry, they don't mean it.

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