Volume 58, No. 12 December 2002

HIPAA SCOFFLAWS?

As of October 16, 2002, nearly three-quarters of the estimated 2 million HIPAA-covered entities are probably out of compliance with the law and subject to enforcement action.

CMS has received only some 550,000 requests for a year's extension on compliance with the transaction code sets; because more than 40,000 are on paper, the final count is not yet available. Although it is theoretically possible that the vast majority of covered entities have tested and are using the prescribed standards, this is highly unlikely. CMS itself is not in compliance, partly because it anticipates further changes in the rules (Karen Trudel, quoted in AM News 10/2/02). A radically different code set could be adopted in a few years, making all the work on meeting current HIPAA standards obsolete (ICD-10 on the Horizon, J AHIMA 2002;73(7):36-41).

For physicians entering practice after October 15, 2002, there is no way to obtain an extension. If they cannot accomplish a task that has proved impossible for large established practices, they will be violating federal law-unless they are noncovered entities. By federal law, they could be excluded from Medicare for using covered electronic transactions, even if required by insurers or State law.

Pervasive noncompliance puts CMS in a quandary. Could it really exclude more than 70% of physicians from Medicare and Medicaid, the penalty enacted by Congress?

At present, enforcement will be complaint driven. A form for submitting a complaint can be downloaded from www.cms.hhs.gov/hipaa . According to Karen Trudel, Elizabeth Holland, and other officials on an October 30 conference call, a covered entity will have the opportunity to file a corrective action plan before an enforcement action occurs. Obtaining compliance, not punishment, is the stated objective. Rules for enforcement actions are being written.

Confronted with the low rate of compliance, CMS is revising its estimates. Many of the entities it assumed to be covered are apparently small practices that plan to continue filing paper claims and remain noncovered; thus it is pretty good to have received 550,000 requests for extension after all.

In fielding questions from providers participating in their conference call, CMS officials admitted to not having all the answers. For example, how is full-time employee defined in determining whether a practice is small enough to qualify for an automatic waiver from the Medicare electronic claims filing requirement? (Rules are pending.) Does a physician owner count? (Probably.) Can an office required to file electronically continue to use paper for necessary corrections? (Not yet determined.) Are electronic claims required when Medicare is a secondary payer? (More rules are needed.)

CMS did clarify what types of transactions trigger the application of HIPAA rules. A fax originating as a piece of paper is not considered an electronic transmission, even if received by a computer modem. Querying a web browser to determine eligibility makes you covered. Getting the same information by telephone doesn't.

A representative of the American College of Physicians asked for the date after which a single electronic transaction turns a practice into a covered entity (April 14, 2003), and whether that status is reversible if one decides to revert to paper claims (probably so-the Office of Civil Rights is still developing guidance on that question). The key issue from an enforcement standpoint, in CMS's view, would be whether an entity was covered at the point in time when an alleged improper disclosure occurred. Further clarification was promised on the CMS Frequently Asked Questions site-but the CMS expert cautioned against construing any of her remarks as legal advice.

It is absolutely clear that CMS recognizes that noncovered entities are not subject to HIPAA. Its web site has an flow chart for determining your status.

Organized medicine, including the California Medical Association, also has conceded that physicians can be noncovered, though claiming that physicians will ultimately save money through HIPAA administrative simplification (Southern California Physician, Sept. 2002). AAPS has asked to see the evidence for that assertion.

Companies hawking compliance materials may claim that there is nothing to fear from enforcement unless one deliberately flouts the law (see p. 3 for precedents involving the fraud-and- abuse portions of HIPAA). They may also claim that compliance is easy-if and only if you buy their materials.

But according to CMS, HIPAA is larger and more complex than Y2K. Y2K was strictly a systems issue. These issues imposed [by HIPAA] on administrative operations affect everything from document storage, to medical procedures coding, to customer service. As vendors explain, HIPAA dramatically affects the culture of medicine.

CMS posts rules and interpretations on its web site, and you may address questions to [email protected]. To request notification of future conference calls, send an e-mail to [email protected]. Expensive advice from the burgeoning compliance industry will not be any more authoritative. Be sure to document CMS statements. AAPS members have access to our Limited Legal Consultation Service, and all may view and post messages on our forum ( aaps.forums.commentary.net or click on Forums at www.aapsonline.org).

Those who do not recognize the authority of the federal government to dictate every aspect of communication with their patients-and who yet respect the rule of law-have only one choice: be a noncovered entity. Withdrawal from HIPAA's jurisdiction may mean forgoing some of the wonders of modern technology-until the HIPAA monster is repealed.

A National Medical Database

According to critics, AAPS's warning about government access to all American medical records is pure alarmism.

One of [AAPS's] inaccuracies is that there is a national computer data base into which all patients' records will be put if their healthcare providers are covered by HIPAA. This is simply false; there is no such database (S Calif Phys, op cit.).

The truth is that HIPAA itself does not create the database-it already exists. HIPAA enables and facilitates its expansion and use, especially after unique identifiers are issued.

CMS itself states that it possesses the nation's largest collection of health care data (consisting of over 60 systems of records), with information on over 74 million Americans (Federal Register 2002 (Oct 7);67(194):62482-62486).

As permitted under HIPAA, information retrieved from this system of records will be used to support regulatory, reimbursement, and policy functions performed within the agency or by a contractor or consultant; support constituent requests made to a Congressional representative; and support litigation involving the agency.

CMS is just now proposing a Privacy Accountability Database (PAD) to track disclosures allowed by HIPAA.

Any disclosure for routine use-that is, for a purpose compatible with the purpose(s) for which the information was collected-may be disclosed without the individual's consent.

Electronic Claims Require Reams of Paper

Those who hope to lower overhead by filing electronic claims, thus becoming a HIPAA-covered entity, need to warm up the copy machine. But don't bother to invest in professionally printed documents-anticipate frequent change. The privacy notification should state that the provider reserves the right to change its privacy practices at any time, and apply the new practice retroactively to all records.

The privacy notification cannot be short-it must contain the laundry list of HHS requirements. Nor can it use a cookie cutter approach, as it must reflect what actually happens in your facility. And do not forget the need to accommodate non-English speaking patients. The Office of Civil Rights is in charge of enforcing both the privacy rule and the language rule (Eli Research, Health Information Compliance Alert 9/02).

Chaos in April, 2003?

Unless CMS improves educational efforts by several orders of magnitude, enforcement of the Privacy Rule could cause widespread disruption of the health care system, a letter from the National Committee on Vital and Health Statistics (NCVHS) warns HHS (HIPAA Compliance Alert 11/02).

Covered entities face endless requirements from the transaction code sets rule, the Privacy Rule, and the terminally delayed security rule. Requirements might include penetration testing (attempting to hack into your own computer firewall); employment of an experienced security officer (for which potential demand greatly exceeds supply); special ID for mailroom personnel; and reinforced locks and sensors to block mailroom access by nonauthorized personnel (ibid.).

Napa County, California, employed 400 people to fill out data flow maps for departments affected by the Privacy Rule, tracking every copy of every item (ibid.).

Covered entities must build enthusiasm, say experts.

Doctors Not Ready, Not Informed, Unenthusiastic

Of 418 non-AAPS members who returned a survey card from a mailing on the possibility of being noncovered under HIPAA, only 13% agreed with the statement my office will be ready to comply with HIPAA in time for the deadlines, while 46% disagreed and the rest were not sure. Only 17% agreed with the statement I was previously aware of the `country doctor' exception; 73% disagreed and 6% were not sure. The 68 estimates of compliance costs ranged from $25 to $350,000, with a mean of $15,500 and a median of $9,000.

Doctors' open-ended comments on HIPAA are posted at www.aapsonline.org (click on country doctor escape route).

Republicans need to repudiate the administrative simplification section that they-apparently unwittingly- lifted word for word from the Clinton plan for the government takeover of American medicine. That'll never happen, stated a promoter of compliance software.

We'll see, replied AAPS Executive Director Jane Orient. When have doctors ever tried an approach other than rolling over for the latest government intrusion?

Markey Introduces Consent Act

Recognizing that HIPAA gives regulatory permission for nonconsented disclosure of virtually all personal health information-recorded in the past, present, or future-Rep. Edward Markey (D-MA) introduced H.R. 5646, the Stop Taking Our Health Privacy Act (STOPH) of 2002. This bill would essentially override the Bush Administration's August, 2002, revisions to the Privacy Rule, restoring the need to obtain written consent before use or disclosure of information, except for certain purposes such as filling a prescription.

AAPS has taken the position that the Bush revisions do nothing except reduce some of the administrative nightmare resulting from failure to distinguish disclosure from physician use of lawfully disclosed information. Moreover, the Clinton consent provision was meaningless in that patients' refusal to consent meant that physicians or facilities could-or might have to-refuse treatment. The only answer, in AAPS's view, is to repeal HIPAA administrative unsimplification.

Oregon Plan Thrashed; but They'll Be Back

Measure 23, with physician opposition led by AAPS, went down to defeat by a margin of nearly 4:1-even though the Oregon Medical Association did not even provide an argument against it for the voters' pamphlet. However, Mark Lindgren, Chair, Health Care for All Oregonians, said that the campaign had surpassed his personal goals: Even some opponents encouraged us to modify Measure 23's language and try again. He observed that many other innovative public policies such as Medicare and Social Security took years of debate.

AAPS Prevails on Pediatric Rule

In a high-profile case that reins in FDA authority (AAPS et al. v U.S. FDA et al., Civil Action 00-02898 (HHK)), the federal district court for the District of Columbia overturned the Pediatric Rule on October 17 (see AAPS News May 2002).

The Best Pharmaceuticals for Children Act (BPCA) and the Pediatric Rule are incompatible, the court held. Congress adopted an incentive scheme while the FDA adopted a command and control scheme. Unlike the BPCA, the Pediatric Rule gives the FDA the authority to refuse any new drug application if the manufacturer does not conduct pediatric testing. Moreover, if the law (21 U.S.C. 355(d)) truly gave the FDA all the authority it claimed, the door would be open to FDA's regulation of all off-label uses, based solely on the manufacturer's knowledge that such uses are commonplace.

The Pediatric Rule constituted a drastic change in the drug approval process, stated Sam Kazman, general counsel for the Competitive Enterprise Institute, a coplaintiff in the action. FDA essentially claimed it could force new uses, or new patient populations-in this case children-on a label.... The end result could be a far riskier and costly approval process....

Congress may yet grant the FDA the statutory authority that the court says it now lacks, in legislation sponsored by Senators Kennedy and Clinton (see AAPS News Sept 2002). While proponents claim to be concerned about children's safety, the FDA has refused to release data on harm done to healthy children in clinical trials, according to Vera Hassner Sharav of the Alliance for Human Research Protection.

Dr. and Mrs. Mitrione Sentenced to Prison

In a shocking decision handed down in Springfield, IL, on October 31, U.S. District Judge Jeanne Scott sentenced psychiatrist Robert Mitrione, M.D., to 23 months in prison, and his wife, Marla DeVore, to 15 months-despite the fact that she herself found that a star prosecution witness had given testimony that was false to a dramatic degree, leading to dismissal of all but two of the counts on which the pair had been convicted. As a sanction for the false testimony, the Judge reduced the prosecution's estimate of loss to the government from $14,611 to $11,255.

I believe greed and lack of judgment also entered into the decision to bill Medicare and Medicaid, the Judge said.

This case is being watched closely by some in the medical community, said prosecutor Patrick Hansen, in asking for the maximum sentences of 27 and 21 months (State Journal- Register 11/1/02).

The message that is received by those who follow the details (AAPS News Jan, June, Oct 2002), may be this: accepting Public Aid isn't worth the risk. Even if you can prove that you didn't get a fair trial, it won't help very much.

An appeal is pending.

Supreme Court to Hear Forced Drugging Case

The U.S. Supreme Court has granted writ of certiorari in the case of Charles (Tom) Sell, D.D.S., of Town and Country, MO, who has been imprisoned for five years without trial (AAPS News Apr, Nov 2002). The government wants the right to forcibly drug him, at its sole discretion as to type and dose of psychoactive drugs, to render him fit to stand trial.

Though prison doctors say he needs drugs, Richard DeMier, a clinical psychologist in Springfield, MO, wrote in a letter that Dr. Sell passed a course and got a perfect score on a test to determine whether he was mentally fit for trial.

The Sell case reflects a growing trend by federal prosecutors to seize as much power as they can, stated AAPS General Counsel Andrew Schlafly, who authored an amicus brief in favor of granting cert (St. Louis Post-Dispatch 11/4/02).

[The American Health Legal Foundation supported the amicus brief.]

Dr. McCarthy Pays $600,000 to Settle

After four years, $3 million in legal fees, and intense pressure to plead guilty to one count of money laundering, orthopedist Owen McCarthy, M.D., of Bradenton, FL, and his wife Dottie agreed to a $600,000 civil settlement of a Medicare fraud suit. Dr. McCarthy's former associate, Dr. Craig Boulris, will receive a reward of $84,000 for bringing the qui tam action. Medicare will recoup about $225,000 in overpayments, which Mrs. McCarthy said resulted from applying lessons she learned in billing and coding seminars.

Besides upcoding, the complaint also alleged that Dr. McCarthy employed unqualified physician assistants; Dr. McCarthy calculated that he saved Medicare more than $50,000 in actual payments by using assistants-who met all the criteria of the American Academy of Orthopedic Surgeons (AAOS) -rather than co- surgeons.

Dr. McCarthy states that Medicare actually defrauded him of more than $608,000 by shifting Medicare payments to Medicaid (which pays 40% less). AHCA, the agent for the Medicaid program in Florida, settled a class action suit with 23,000 physicians for $93,000,000. Dr. McCarthy will receive his share of $8,569.53 in three annual installments. In contrast to Dr. McCarthy's case, which was prominently covered for four years, this huge settlement never got any press.

Mohammed Atta shared the same FBI agent, Dr. McCarthy stated. Apparently, the agent was too preoccupied to check on students at nearby flight schools.

In a letter to William Tipton, CEO of the AAOS, Dr. McCarthy writes that the government's favorite target is doctors who have been in practice about 30 years and have saved up enough money to make the potential take worthwhile. The government allows prosecutors to encourage perjury and prevents doctors from defending themselves. They have the resources to bankrupt anybody in the medical profession.

Dr. McCarthy is not defeated. At age 66, he continues to take ER call at three hospitals.

Where the Money Is

In FY 2003, the final year of HIPAA-mandated budget increases for fraud-finding, an expenditure of $720 million is expected to bring in $11 billion in overpayments and fines.

No one who accepts government money is safe. Remember: OIG enforcement is alive and well and it takes into its sweep the big and proud along with the small and pitiful (Alice Gosfield, Medicare Compliance Alert 6/17/02).

AAPS Calendar

Jan. 31, 2003. Board of Directors, San Antonio, TX.
Feb. 1, 2003. San Antonio mtg with Bexar County Med Soc.
Sept. 17-20, 2003. 60th annual mtg, Point Clear, AL.

Note date change to avoid conflict with Rosh Hashanah.

Correspondence

Noncovered in New York. Our local Medicare carrier is apparently trying to force all physicians to submit claims electronically. With less than 30 days to go before the HIPAA extension deadline, Upstate Medicare told us that Medicare will no longer accept paper claims (with few exceptions) beginning October 16, 2003. It didn't say what the few exceptions are until I asked. Then it said that electronic claims were required unless the Secretary grants a waiver, and that the Secretary must grant such a waiver if there is no method available for the submission of claims in electronic form or if the entity submitting the claim is a small provider of services or supplies. It left small undefined [see p. 1].

I have worked very hard to maintain my status as a noncovered entity. In New York, this isn't easy. Public Health Law 2807-E4F requires all physicians to file electronically unless they submit fewer than 1,200 claims in a year, as we do. We had to write to the Dept. of Health to obtain a waiver.
Lawrence R. Huntoon, M.D., Ph.D., Jamestown, NY

U.S. Brain Drain. Many of the most talented and experienced physicians are declaring an emancipation date. Topping the list of reasons is managed care. Others include the degradation of the profession and liabilities such as HIPAA and EMTALA. Whoever would have thought that an accidental coding error could land you in jail while practicing good medicine!

At my daughter's university, the careers counselor mentioned how competitive engineering and business schools are. I asked about pre-med. None of the really smart or talented kids go into medicine any more, she informed me.

I'm afraid things will change only when truly influential people can no longer get appropriate care.
Mark Baldree, M.D., Phoenix, AZ, from Round-Up 9/02

A Forecast. The U.S. seems to have a frenzied passion for emulating the blunders of Great Britain. I assume that government tax-paid medical care will be no exception. A great many good doctors have left the British Isles, and people are obliged to look to Indians, Palestinians, Jamaicans, and other colonials for their medical care. Americans will have no place to go, except outside the profession. Early retirement will be the rule, and many will be locked into administrative jobs.
Charles Pavey, M.D., Columbus, OH, c. 1957

Reaping the Consequences. Much of Medicare was originally designed by doctors and hospitals to feather their own nests. Now the Medicare Frankenstein has turned on them with price controls, onerous restrictions, and prosecutions.
Craig Cantoni, Scottsdale, AZ

Another Option. From a letter sent to all local physicians with the AAPS FAQs: One does not have to put locks on the filing cabinet or have some High School Graduate poking around your office to find something wrong, as HIPAA suggests. Just do not file electronically! There is a billing service in the valley that will help you with the old paper method.
Tad Lonergan, M.D., Desert Hot Springs, CA

Noncovered or Bust! From a letter to CMS: I received a form and your letter regarding HIPAA (Health Interference Plan Absolutely Awful) and want to let you know that I only do hard copy, not electronic transfer of information.

I was the first plastic surgeon in Naples and have taken care of about 14,000 patients over 27 years, without a single complaint from patients about a violation of their privacy. I am basically a country doctor following in the footsteps of my great-grandfather, who practiced in rural KY in the 1900s.

Companies trying to sell me HIPAA compliance programs are coming out of the woodwork. Current Medicare payments barely exceed overhead; Medicaid often doesn't even do that. Forcing me to comply with HIPAA would cost well over $10,000, even more over time, which I am not prepared to pay. If forced to comply, I will probably quit.
Christopher Mogelvang, M.D., Naples, FL

Single-Payer Overhead. Anyone who believes that eliminating insurance companies will eliminate overhead is at best too naive to have an opinion worth listening to. Advocates may say that under single payer money goes to health care instead of overhead. In fact, Wharton professor Patricia Danzon's study of the Canadian system suggests that its overhead is about 45% of claims (Health Affairs, Spring 1992). Her estimate of costs for U.S. private insurers, net of government cost shifting, was 7.6% of claims.
Linda Gorman, Englewood, CO

The Hazard of Compromise. Politics is based on compromise (relative values) rather than absolute values. Compromise always leads to a lowering of standards because human beings tend to take the path of least resistance. In VietNam, troops on military patrol were told, Don't walk the trail. But since it was so much easier to walk the trail than to cut a new one through dense jungle, troops took the trail-and got ambushed.
Donald Kreutzer, M.D., Clarksville, MO

Are Government Entitlements Civilized? The very idea that we need government-provided medical care or retirement proves how uncivilized we have become-we can't trust people to care of their own families, much less their neighbors.
Richard Relph, HealthBenefitsReform group

Legislative Alert

Consider the implementation of the medical insurance tax credits in the trade bill. When the House and Senate passed and the President signed the Trade Adjustment Act, providing for tax credits for displaced workers, most sane health policy analysts saw this as a major policy victory, even though the number of displaced workers affected would be small.

Well, forget it. Senate Finance Committee Chairman Max Baucus (D-MT) sent an October 17 letter to Labor Secretary Elaine Chao (he misspelled her name Chow for some reason, even though she was confirmed by the Senate) warning her to be careful in drafting the rules to implement those tax credits, especially in the purchase of individual medical insurance policies. Specifically, Baucus said that we-meaning the Congress-did not intend that individuals would be able to use a tax credit in the trade bill to buy individual insurance through State-based coverage options, such as insurance pools through which individual medical insurers would be able to compete for consumers' dollars. In other words, if you think people will be able to rely upon States to help them secure coverage as individuals, you are mistaken, Lady! Instead, Baucus said that the conferees agreed to a provision that would allow the purchase of individual medical insurance if and only if the individual had had individual coverage for one month before losing his job. For those of you way out there in normal America who think this is a stupid and pointless restriction on the right of individuals to buy the plan of their choice, well, you are starting to understand what the so-called national health debate is all about.

The good news is that the House guys are not sleeping. House Ways and Means Chairman Bill Thomas (R-CA), who was the lead House conferee on the trade bill, sent Secretary Chao an October 21 letter, making it clear that Senator Baucus has got it all wrong. Thomas told Chao that the intent of the policy was both clear and deliberately drafted in a way at variance with Senator Baucus's understanding.

Said Thomas: Specifically, Senator Baucus contends that the conferees did not intend to allow states to enter into agreements with individual insurers through state-based coverage options. That is exactly what the conferees intended. Specifically, under Section 35(e)(1)(f), the law allows individuals to use the credit for coverage through an arrangement entered into by a state and `a group health plan, an issuer of insurance, an administrator, or an employer.' The language is quite clear: states may contract with insurers in the individual market to provide health coverage for eligible individuals. In fact this language agreed to in conference did not change from the amendment offered by Senator Baucus-S. Amendment 3401-and passed by the Senate.

Once again: the debate is not about the money; it is not about the number of people affected. It's the structure, Stupid!

Question: Why stop the policy with those displaced by trade? Why not extend tax credits for the purchase of private medical plans to all of the unemployed? And then, why not just extend it to all uninsured Americans and let them into the private market? Recent research demonstrates the positive impact of tax credits on affordability of insurance, especially for working people. For example, University of Pennsylvania economists Mark Pauly and Bradley Herring found that a 50% premium credit could reduce the number of uninsured by as much as 52%. They also estimated that with a fixed credit of about $1,000, the number of uninsured would also drop by about 50%. Likewise, the President's Council for Economic Advisors found that for Preferred Provider Organization (PPO) plans, the average annual premium for a young male was $975 ($82 per month), and most of the uninsured are young. The CEA concluded that for young single men nearly three- quarters of the plans offer premiums less than the President's proposed $1,000 tax credit and over 90% of plans had premiums less than $2,000.

Back to the Medicare Mess

The Bush Administration is worried about the impact of the Medicare payment cuts, and fears that Congressional inaction will cause serious access problems for Medicare patients. Already, without factoring inflation into the analysis, physicians are facing a pay reduction in Medicare of almost 18% over the next three years. While the House of Representatives has enacted a $30 billion package of Medicare reimbursement increases, including increases for doctors, the Senate has not been able to bring the Baucus-Grassley compromise package-with an estimated $44 billion in provider reimbursements-to the Senate floor before the Congressional recess. So, what's new? The mess in the formulas governing physicians reimbursement in Medicare is symptomatic of the broader problem: a failure to change the way Medicare operates.

Largely ignoring Medicare reform, House and Senate members of both parties focused instead on adding poorly designed prescription drug programs of unknown cost to an already structurally flawed program. The political energy for this was partially fueled by a political passion to seize the upper hand, helped along by a vigorous campaign by the AARP, which said that doctors should get no reimbursement increases unless and until seniors got a meaningful drug benefit, which AARP lobbyists defined as a benefit worth at least $750 billion over a ten-year period. The AARP honchos sent stern messages to Congress that their membership-the vast army of senior citizens they claim to represent-would be very unhappy and would not understand it if Congress somehow managed to pay Medicare doctors this year but did not create a new $750-billion entitlement-their number-one legislative priority for 2002-this year also.

They huffed and they puffed, but curiously, while the drug issue will have played a role in the elections-to be decided as this goes to press-it has not caught the fire that AARP chieftains predicted and promised. Indeed, survey research shows that it has been a surprisingly tepid issue on the campaign trail, even colder than the patients' bill of rights.

The President and Congress should start a multi-year process of comprehensive Medicare reform based on patient choice and control and market competition. In the process, they should bypass the leftist screamers and focus on new retirees. There are a number of steps that they can take to get this process moving in the next Congress.

First, they could allow new retirees to take their current private medical plans into retirement with them as their primary coverage, and get a government contribution, in the form of premium support, to offset the cost of that coverage. New retirees, when they turn 65, could make a choice as to whether they wish to enroll in the old Medicare program, or continue with their private plan. This would create a seamless continuity of coverage and care for retirees.

Second, they could join a prescription drug security card to a prescription drug account and target the subsidies to low- income seniors who do not have access to drug coverage through retirement or supplemental coverage. This could be done by giving these seniors a prescription debit card plugged into a federally subsidized prescription drug account. With an initial deposit of funds between $600 and $800 per year for low-income retirees, the account could be rolled over tax free from year to year, with a catastrophic provision for high drug costs. Higher-income Medicare patients and their spouses could also contribute funds into the new account tax free, and it would thus function like a medical savings account. The idea has been proposed by Grace Marie Turner of the Galen Institute and Dr. Joseph Antos, a former Assistant Director of the Congressional Budget Office, now with the American Enterprise Institute.

Finally, they could encourage new retirees take advantage of the new health reimbursement arrangement that was approved by the Treasury Department last June. New Medicare beneficiaries should be able to take balances accumulated in Health Reimbursement Arrangements, Flexible Spending Accounts, and Medical Savings Accounts with them into retirement, maintain them as tax-free accounts with their own and employer contributions, paying for their care directly from these accounts without Medicare payment or regulatory restrictions. With such accounts, new Medicare patients could maintain the direct relationship with doctors they enjoyed during their working life.

Breakthrough for Health Care Choice in Maryland?

Of all places! On Halloween, Maryland House Speaker Casper R. Taylor, the most prominent Democrat in one of the most Democratic States, unveiled a comprehensive reform proposal. But unlike most of the legislation that normally is proposed in the Maryland, this one will set policy in a very different direction and have a distinctly bipartisan complexion.

In a major speech to business leaders in Cumberland, Maryland, sponsored by the Maryland Business for Responsive Government, a prominent business group, Taylor outlined the major components of a reform proposal that would include the use of Medicaid funds for private insurance, the use of tax credits for the purchase of individual coverage, a reform of the individual medical insurance market that would include the elimination of state benefit mandates on individual policies, a reinsurance mechanism to cope with plans burdened by adverse selection, and tax incentives and penalties governing the purchase of individual and group policies to discourage free riders who end up on public programs.

The Taylor proposal does not, of course, represent the conservative or libertarian ideal; far from it. But what is positively stunning is that it represents a significant change in the nature of the Maryland debate, a big break from the standard, almost rote, reliance on public program expansions, restrictions on patient choice, and increased regulation.

The Taylor proposal is not yet in legislative language, and it could improve. Key elements of the proposal are as follows:

Mainstreaming adult Medicaid enrollees into the private insurance market. Medicaid eligibility would increase from 46% of poverty ($4,000 per year) to 150% ($13,200 per year) in tandem with the Bush Administration HIFA waiver to use private-sector coverage for Medicaid-eligible adults. While Maryland liberals will like the Medicaid eligibility expansion, conservatives will like the privatization of the coverage.

The establishment of tax credits and tax penalties to discourage free riders. A sliding-scale refundable state tax credit would be created for adults between 150% and 250% of poverty-and a flat credit for persons above 250% of poverty. Upper-income individuals, at 300% of poverty ($26,580) and above, would lose their personal exemption on the state income tax if they refused to purchase medical insurance.

Reform of the medical insurance market. A voluntary choice cooperative, or purchasing pool, would be set up for individuals and families. For individual plans, Maryland's large number of state-mandated benefits would be eliminated, allowing the purchase of a basic health insurance package. Conservatives and libertarians likely won't be happy with modified community rating and guaranteed issue in the individual market. But they are likely to back his proposed reinsurance pool to cope with the problem of adverse selection. It is far less regulatory than the standard risk-adjustment mechanisms that are routinely promoted by reformers.

The role of employers as a clearinghouse for personal choice of health plans. Employers would not be required to subsidize health insurance for employees, but they would serve as a clearinghouse for employees in the voluntary choice cooperative. As Taylor told the Maryland Business for Responsive Government conference in Cumberland, Maryland, If we can make it easy for an employer, even for an employer that is not able to offer insurance to their employees on his or her own, to offer employees a choice of health plans through the purchasing clearinghouse, we can dramatically expand the number of people in this state with insurance without costing businesses much more than the time to hand out some health insurance information to new employees and repeat that process once a year thereafter. In effect, the Taylor proposal would function more like the federal employees program.

Maryland has, arguably, the most highly regulated medical sector in the nation. It leads the nation in mandates-58 at last count. The Taylor proposal does not resolve all of that. It is, however, still a work in progress, and the fundamental direction of the policy changes is sound.

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