1601 N. Tucson Blvd. Suite 9
Tucson, AZ 85716-3450
Phone: (800) 635-1196

Association of American Physicians and Surgeons, Inc.
A Voice for Private Physicians Since 1943
Omnia pro aegroto

Volume 61, No. 12 December 2005


"Payment for Performance" or "P4P" has acquired the aura of like-it-or-not inevitability, like other central planning fiascos such as DRGs and the RBRVS that preceded it. On cue, organized medicine is figuring out how to profit from doing it to ourselves before somebody else does.

Research so far has shown little or no return in increased quality on the investment in P4P. For example, the main result of P4P using rates of cervical cancer screening, mammography, and hemoglobin A testing would be to reward those with higher performance at baseline (Rosenthal MB et al., JAMA 2005;294:1788-1793). Yet despite the lack of demonstrated value, "almost every physician and hospital in the United States is now a potential participant in some form of [P4P] program" (Dudley RA, JAMA 2005;294:1821-1823.)

The Medicare Modernization Act of 2003, which also created the prescription drug benefit, gave CMS the authority to experiment. In the Premier Hospital Quality Incentive (PHQI) project, which involves the management of five chronic conditions, tentative results from 270 hospitals showed an increase in "composite quality score" from 79 to 86%. This measures, explains Richard Dolinar, M.D., "the percentage of the time that hospitals followed treatment instructions in pursuit of a bonus" (Heritage Backgrounder 1882, 10/5/05).

Of the 34 PHQI indicators, 27 are process measurements. As David Eddy of Kaiser Permanente acknowledges, "a process measure, by its very nature, micromanages." And outcomes measures, such as mortality, can be incentives to game the system say by avoiding the sickest patients.

If doctors focus on meeting artificial targets, the unmeasured patient outcomes will almost certainly worsen as British experience suggests (AAPS News, Oct 2003, 2004).

But Medicare is very sick, and Congress and CMS must prescribe. Senators Grassley and Baucus have introduced the Medicare Value Purchasing Act (MVP), S. 1356, creating Part E of Medicare. Meanwhile, CMS Administrator Mark McClellan seems determined to push P4P along, using his regulatory prerogatives. He speculated that within 10 years, P4P-based compensation could comprise up to 30% of the government's payments to providers.

As Medicare price controls are tightened, physicians may buy into P4P in an attempt to maintain their incomes. Private payers will surely follow Medicare's lead, compounding its effects. Income will be redistributed, writes Dr. Dolinar, to "providers who most successfully subordinate their judgment and creativity to the mandated protocols."

The alternative to paying for performance (i.e. for compliance) is payment for value. And value, by inexorable laws of economics, will be determined by the payer. P4P, in fact, serves the values and priorities of CMS and insurers very well. As Keith Syrett of the University of Bristol observed, "decision making by guideline offer[s] a means of scientifically depoliti- cizing the rationing debate."

The values of patients, of course, concern optimizing their own clinical outcomes, according to their own priorities. For both patients and physicians, P4P programs are a "lose/lose" proposition, with benefits accruing only to payers.

While P4P claims to be founded on "evidence-based medicine" (EBM), for which randomized controlled trials (RCTs) are the gold standard, RCTs cover only a few conditions and procedures, and for a limited length of time. "Guideline authors nearly always extrapolate to groups that were not adequately represented in the trials," states Dr. Alan M. Garber of Stanford University's School of Medicine.

Why check for microalbuminuria in a patient who is already on an ACE inhibitor, asks Dr. Dolinar. Or do an eye examination in a patient who is blind? Or a Pap smear in an older woman at extremely low risk for cervical cancer?

In her talk entitled "EBM: Perverting Science in a Quest for Control" at the 2005 AAPS annual meeting, Linda Gorman noted: "EBM offers a rationale for centralized decisions, ... with the stated goal of ending practice variations, thereby promoting the signal virtue of equality." It routinely confuses statistics with science and glosses over statistical limitations. By the time a guideline is written, it may already be outdated.

Even some in the new $1 billion "disease management" (DM) industry acknowledge that customized approaches work better than "one size fits all" (HealthLeaders News 10/31/05).

But who will have time to customize while trying to adhere to a 400-page "P4P Prep Guide"?

Science fiction conceivably could happen; science fantasy is impossible. Isaac Asimov and Harlan Ellison once pointed out this distinction, recalls Gerry Smedinghoff. The faster-than-light (FTL) drive makes many of their stories a fantasy.

Patients who want medical care that respects their values and their priorities will have to confront economic reality as they move to "consumer-directed" care.

P4P is like the FTL drive: it's a useful device for spinning plots or central plans, but it can't make economic fictions work. These must be dispelled to restore payment for value.

Current retail prices in medicine are fiction. And too much about American medicine is opaque or secret, including the facts about cost-shifting, "provider" incentives, adverse effects of treatment, and hidden social-engineering agendas.

As actuary Gerry Smedinghoff notes, reduced transparency leads to bad measurement, which leads to bad contracts, which lead to moral hazard and bad behavior, which leads to regulation, which leads to still more opacity [plus higher costs].

Prices are the indispensable measure of value. Patients and physicians must be allowed to agree on an honest price for a freely chosen service. P4P is a reality-denying fantasy.

Value-Conscious Consumers

A June 2005 study on consumer-directed health plans by V. Agrawal et al. for McKinsey & Company shows that in comparison with "traditionally" insured consumers, CDHC subscribers were at least 50% more likely to ask about cost; 33% more likely to independently identify treatment alternatives; three times more likely to choose a less extensive, less expensive treatment; and 25% more likely to engage in healthy behaviors. They were twice as likely to forgo treatment for conditions they considered nuisances, but no more likely to forego treatment for serious conditions. They were at least as likely to receive preventive care and had a "longer-term mind set" in making medical decisions. They were 20% more likely to say that they carefully followed treatment regimens. Most were not satisfied with the provider information available to them; 80% wanted more information on prices.

Are consumers willing to pay for quality? Based on a nationwide survey of 2,028 insured persons, 14% said they were very willing to see a doctor who didn't take their insurance; 39% were somewhat willing; 26% were not very willing; and 21% were not at all willing (Harris Interactive, Wall Street Journal Online 8/19-23/05).


Doctors on Quality and Payment for Value

"We all have to learn to prioritize our own resources toward what we believe may be important to us...and accept the consequences. The game plan of `liberals' is to brainwash people into believing that government has the right to force us [to place a higher priority on the goals of others]."
Milton Kamsler, M.D., St. Augustine, FL

"HEDIS scores attempt to measure quality by counting the number of Pap smears and blood pressure checks patients received. That's not my definition of quality, which is closer to how patients are treated when they are actually sick."
Herbert Rubin, M.D., Los Angeles, CA

"Wouldn't eliminating third parties be the ultimate `pay for performance'? Let the consumer be the ultimate judge of both pay and performance."
Timothy Kriss, M.D., Versailles, KY


Why Socialists Hate HSAs

"The principle of insured services is `use it or lose it'... [But the HSA] `use it or save it' principle increases enrollees' responsibilities for costs incurred in their own care but decreases their responsibility for costs incurred in the care of strangers. HSAs thus shift the locus of rights and responsibilities...from governments and employers toward individual[s]....

"More broadly, the HSA is part of a vision that would increase authority for the individual in all aspects of society....

"Most industrialized countries assign the responsibility for setting health care priorities to government, which uses price controls and capacity limits to restrain expenditures."

Managed-care companies lack the "social legitimacy to perform ethically and emotionally charged tasks." Unlike others, apparently, Americans are also skeptical of government. The success of HSAs would jeopardize efforts to force Americans to subjugate their personal values to collectivist goals. See Robinson JC, N Engl J Med 2005:352:1199-1202.


Retainer-Based Practice Thrives in New England

Desiring to get back to old-fashioned independent practice, Michael J. Stein, M.D., of New Hampshire opened the only retainer-based family practice in New England last January. For a quarterly retainer, he offers housecalls, blood work, and unlimited office visits. He has hospital privileges, assists at surgeries, and does minor surgical procedures, often averting expensive ER visits. While offering 24/7 availability, he reports that patients are highly respectful of his time.

Although he is opted out of Medicare, his elderly patients are the most appreciative. "They toss their supplemental insurance and instead create medical savings account CDs to cover what little exposure they have."

"Doctors trap themselves by signing contracts with third parties," he writes. "If they wouldn't do this, we wouldn't have a problem. Then the arrangement would be purely between the subscriber and the insurer." He notes that the savings from the widespread use of his model would be "extraordinary."

Dr. Stein now has more than 220 patients, and plans to cap his practice at 600. His website is www.realdoc.net.


Doctors Support Medicare Cuts

"I do not share the desire to be slowly cooked like a frog. I want the heat to come up fast so we will jump out before we all die in a state of conscious sedation.... I am encouraging my Representative and Senators to allow the cuts to go ahead."
Thomas LaGrelius, M.D., Torrance, CA


"Unlike many of my colleagues, I realize that the Medicare program is unsustainable and is robbing today's workers of their future in an effort to pay for the retirement of others. I am also quite aware that as...physicians leave it in droves, our elected leaders will attempt to force us to provide charity care to the elderly and poor. This fight is inevitable.... The sooner physicians reject government medicine, the sooner politicians will show just how little freedom means, when there are angry seniors to placate."
Patrick Conrad, M.D., Niceville, FL


AAPS Calendar

Nov 18, 2005. Illini program at Northwestern Univ., Chicago, featuring debate between Drs. Quentin Young of PNHP and Jane Orient of AAPS. Call (800) 635-1196 for details.
Feb 11, 2006. Board of Directors meeting, Houston, TX.
Sept 13-16, 2006. 63rd annual meeting, Phoenix, AZ.

"Unlike the old Lockean rights, [the new rights] are not limitations on government, but just the opposite: authorizations for new areas of government control."
Joseph Sobran

Pennsylvania Courts Hold for Blue Cross

The Court of Common Pleas for Chester County (PA) granted summary judgment in favor of Independence Blue Cross, which had denied alcoholism treatment to the late Sandra Lobb, despite her family's desire to pay for it (see AAPS News, November 2005). The Superior Court affirmed in a non-precedential decision (Johnson v. Independence Blue Cross, No. 1310 EDA 2004), although dissenting justice McEwen wrote that there were "substantial issues of disputed material fact, which...may only be resolved by a jury."

Family members, the Court said, did not prove that they had offered payment and been refused. The patient's daughter, for example, could not recall exactly which facilities she had called from a listing in the phone book, or exactly why they had refused to accept her mother.

In the federal case, attorney Lawrence Otter writes, in a memorandum of law opposing IBC's motion to dismiss:

IBC's Motion...is a blatant attempt to mislead the court.... IBC is creating its own set of facts to extract itself from the contradictory position it finds itself in because of admissions before the Pennsylvania Commonwealth Court and the Pennsylvania legislature namely that IBC and not the plaintiff's physician has the final say on what is "medically" appropriate compared with the sworn testimony of its Medical Director that "We do not make medical decisions...."

Otter states that "the mendacity and audacity of IBC is beyond comprehension." He notes that "finding your personal physician has an overriding contractual relationship with your insurance carrier is like discovering your attorney is under contract to the opposing party."

The injury to the plaintiff's right to contract is felt by all Pennsylvania citizens with IBC insurance, Otter writes.

Court documents and Otter's statement to the Health and Human Services Committee of the Pennsylvania House of Representatives is posted in the Hall of Shame under "Bad Insurance Contracts."


Danger in Medical Staff Applications

Horty Springer, the nation's top hospital law firm, which holds seminars at luxury resorts to teach hospital administrators how to destroy physicians, has developed some shocking fine print that you might discover in your medical staff application:

To the fullest extent permitted by law, I extend absolute immunity to, release from any and all liability, and agree not to sue the hospital, its medical staff, their authorized representatives, and appropriate third parties for any matter relating to appointment, reappointment, clinical privileges, or my qualifications for the same.

The demand for absolute immunity includes: " any actions, recommendations, reports, statements, communications, or disclosures involving me, which are made, taken, or received by the hospital, the medical staff, their authorized representatives, or appropriate third parties." It applies even if the application for staff privileges is rejected!

Absolute immunity is unheard of in most applications of the law, and physicians should object to its inclusion in their contracts. Members should immediately call the AAPS Limited Legal Consultation Service for advice.


Court Decides Against Privacy Rule Challenge

On Nov 1, after 9 months of deliberation, the U.S. Court of Appeals for the Third Circuit ruled against the plaintiff in Citizens for Health v. Leavitt, No. 04-2550.

According to an analysis by Jim Pyles, attorney for the plaintiffs, the Court agreed that plaintiffs had suffered an "injury in fact" to their medical privacy and that this injury is "causally connected and traceable" to the Amended Privacy Rule. The fact that this is happening under the "federal seal of approval" is "regrettable and disquieting."

The Court acknowledges that the Amended Rule grants "regulatory permission" for covered entities and their business associates to disclose identifiable health information without patients' consent and against their will.

Nevertheless, the Court refuses to consider the plaintiffs' Constitutional claims because the Rule did not "enhance the power" of covered entities to disclose medical information. "[T]here is no evidence that the nonconsensual uses and disclosures permitted by the Amended Rule were prohibited [under federal law] before the Rule went into effect."

The principle announced in this decision, Pyles states, "would permit the government to infringe any right that individuals would otherwise expect to have if the government merely `codifies' the private conduct in a governmental law."

AAPS has warned of the danger of the public-private partnership as a means of "outsourcing" violations of fundamental rights. It was a strategy implicitly discussed in the "Zelman memorandum" in the Clinton Task Force documents to enable the government to effectively forbid private spending for necessary medical services. (See the IBC case above, and www.aapsonline.org/judicial/zelman. txt.)

The decision and the AAPS amicus brief are posted at www.aapsonline.org/confiden/cvt.htm . The amicus brief was funded by the American Health Legal Foundation.


Prescribing Habits Scrutinized Under Part D

CMS's new Part D integrity contractors may follow the lead of Medicaid Fraud Control Units in analyzing physician prescribing patterns, seeking evidence of overutilization, kickbacks, or unnecessary or inappropriate prescriptions.

If a physician starts ordering more expensive medications because Medicare will now pay for them, the enforcers may suspect a kickback. Payment to "research" off-label uses may also be considered a kickback. Physicians need to try (and document) other therapies first, or a prescription for a drug may be deemed unnecessary.

Investigations of physicians who order more controlled substances than others are also expected to increase once Part D goes into effect (MCA 10/31/05).

CMS will be using data-mining technology. But industry leaders doubt that CMS will be able to stop Part D fraud because of the program's dizzying complexity (MCA 10/7/05).


HIPAA "Oversight" Justifies Intrusive Search

In invading the office of Dr. Young Moon of TN, the HHS OIG claims that its "oversight" function under HIPAA permits warrantless searching; videotaping exam rooms and bathrooms; intruding into a patient treatment; and copying all records, even of patients not covered by federal programs (AM News 8/8/05). Dr. Moon's trial is set for Nov. 29.


Pre-1890 Fees. Before the 1890 passage of the Sherman Anti-Trust Act, most physician fees were set by the county medical society. Unlike with current Medicare fees, the 1871 "Fee Bill" published by the Eric County Medical Society included a fee for "rising at night and prescribing" and a "traveling fee." For services rendered between 10 p.m. and 7 a.m., fees were doubled. While no one is arguing for price-setting by anyone, it is notable that since the inception of Medicare, most physicians have fully embraced that which their elder colleagues considered to be dishonorable especially providing heavily discounted or nearly free care under the auspices of "public authorities." Discussing fees with patients ahead of time, and expecting payment at time of service, now considered unseemly by socialists, were expected, honorable behavior in 1871. Now prosecuted as fraud, charitable discounts to persons of modest means were strongly encouraged except when patients brought on their condition by immoral behavior (i.e. in cases of venereal disease). Whatever one thinks of treatments given in 1871, physicians then understood the importance of honor and personal responsibility.
Lawrence R. Huntoon, M.D., Ph.D., Lake View, NY


Financial Incentives Matter. A comparison of in- hospital complications in managed-care and fee-for-service patients in Sacramento and San Diego in 1995 and 1996 showed "significantly worse outcomes for HMO patients, particularly major surgery patients." Managed-care patients were about 15% more likely to have a complication conditional on observable patient characteristics. The authors concluded that "any positive effects of preventive care incentives created by managed care are more than outweighed by accompanying corner-cutting incentives." See: Haile PA, Stein RM. J Economics and Management Strategy 2002;11(spring):37-79.
Linda Gorman, Independence Institue, Englewood, CO


Who Needs Protection Against High Prices? Why don't we need protection against grocery stores? Gas stations? Auto dealers? Because the free market works. If someone overcharges, people go elsewhere. How is medicine different? Are doctors basically dishonest? Or has the mob invaded the practice of medicine? Medical care has moved far away from the free market, and prices have become so distorted that people believe they need "protection," as through things like PPOs. They pay high premiums, physicians get less, and the CEO of UnitedHealth Care made $124 million last year. But many of us have escaped the third-party trap. We make our fees known and do not overcharge one group to compensate for low government or managed-care fees, or to pay myriads of workers to fill out forms. Patient power and price transparency are what is needed to break the stranglehold of mob-like tactics, including those of Medicare.
Alieta Eck, M.D., Somerset, NJ


Doctors Will See Cash Patients. It may well be that 98% of doctors don't mind being lackeys on the government payroll. But I find that when a patient looks a doctor in the eye and says, "Read my lips, I'm a cash patient," the doctor usually accommodates. He may cock his head like the RCA dog at first, but eventually he does get it. It's frustrating that doctors don't have neon signs in their reception room: "HSAs Happily Accepted," or "Best Rates for Cash Payment." Why not have mass shreddings of HMO/PPO contracts?
Frank Timmins, HealthBenefitsReform Group


Price Transparency. My fees are published on two large billboards, on a sign in front of my office, in my waiting room, and on the internet (www.cashdoctor.com). I charge everyone the same. For someone who is truly down on his luck, I will discount my already discounted fees; charity is more effective above the AGI line than below it. I do not "reprice" to keep the business of someone who doesn't mind waiting three hours in the ER because my quoted fee of $135 to suture his laceration is more than the copayment on his insurance.
Robert S. Berry, M.D., Greeneville, TN


The "By the Way" Game. I have treated some cash-paying patients for some time, up to a year, who suddenly announce that they had Medicaid or out-of-state worker's compensation all along. I am told that no states have reciprocity with other states' comp claims. California can enforce its comp rules against me only if I agree in writing. Medicaid, however, has "look-back" rules, so since I am in Medicaid for established patients, I have to refund any money the patient has paid. For new uninsured patients, we now check names against the Medicaid eligibility list. Once in a while, we have to cancel an appointment with a patient who has lied to us, planning to recoup payments with the "by the way" ploy.
Russell W. Faria, D.O., Newport, OR


P4P Is a Lie. P4P means creating bureaucratic hassles to hobble care. It is absurd to think that the old-fashioned competitive evidence-based medicine we learned is inferior to government-sanctioned one-size-fits-all "EBM." The only reason for organized medicine to "sit at the table" to develop EBM and P4P is to teach government how to destroy the medical profession: Government contracts are more profitable than member dues. Nonparticipation remains the only answer.
Robert P. Gervais, M.D., Mesa, AZ

Legislative Alert

A Last Effort at Medicare Drug Delay

In direct defiance of the Congressional leadership and the White House, Sen. John McCain (R-AZ) and six other Senate Republicans have proposed major legislation to cut federal spending, including a provision to delay the Medicare prescription drug benefit by two full years. This would give Congress time to reconsider and redesign a rational and responsible benefit that is affordable for both seniors and taxpayers. A simple delay could produce big savings, between $40 to $80 billion.

The McCain proposal would also retain the Medicare Drug Discount Card, an ATM like card to be used for the purchase of prescription drugs, and would increase the annual subsidy for low-income seniors from $600 to $1,200 per year. Almost seven million seniors are enrolled in this program. Despite its indisputable success is giving seniors ample savings in a competitive market, Congress and the Administration have agreed, under current law, to shut it down on January 1, 2006, whether seniors like it or not.

Finally, McCain's proposal would accelerate the means testing for Medicare Part B. Taxpayers now pay 75% of premiums, and beneficiaries pay only 25%. Under the Medicare Modernization Act of 2003, premiums would increase for higher-income seniors (income more than $80,000 per year for individuals or $160,000 per year per couple), beginning in 2007. Starting the increase in 2006 would save $6 to $9 billion.

These Medicare proposals are part of a general package that includes a reduction in discretionary spending; a freeze on cost- of-living adjustments for members of Congress and federal employees; and rescission of the spending in the notorious $286 billion Highway Bill, particularly the pork projects that have outraged so many Americans, such as the notorious "Bridge to Nowhere" in Alaska. As the Senator and his colleagues have pointed out, federal spending has grown twice as fast under President Bush as it did under President Clinton. Since 2001, federal spending has increased 33% percent, with 55% being in the area of social programs. Thus far, the federal government has increased spending by another $71 billion to pay for Katrina relief. Congress has not yet enacted any offsets to pay for that additional spending.

Short of a Home Run: The Tax Reform Commission

On Nov 1, the President's Tax Reform Commission, chaired by former Senators John Breaux (D-LA) and Connie Mack (R-FL), issued its long-awaited report on tax policy recommendations. The Commission members had the opportunity to make history and dramatically improve the lives of millions of Americans. Tax reform deserves something a lot bolder than the "business as usual" approach that so often prevails inside the Beltway.

The Commission did not entirely strike out. On balance, its recommendations would be beneficial, especially with regard to the tax treatment of health insurance, which has remained largely unchanged since World War II.

The Current System

As readers of this column know, American citizens can get unlimited tax relief for the purchase of health insurance if and only if they get that insurance through the workplace. The value of this form of compensation is excluded from taxable income. While employees get a "tax exclusion" from both income and Social Security taxes, employers deduct the insurance premiums as a business expense, just like wages.

This is big money: the value of federal tax breaks for health insurance amounts to roughly $189 billion. Combined federal and state tax breaks came to almost $211 billion in 2004. This policy ties access to health insurance to the workplace.

During the postwar period, when most Americans worked at the same job for all or a large part of their working life, this arrangement enabled millions of Americans to have access to affordable group health insurance, not only while working, but also in retirement.

But times have changed. This is not your father's economy. As Labor Department statistics show, a worker today has changed jobs 10 times before the age of 38. A change or loss of employment doesn't automatically mean the loss of auto, homeowner's, or life insurance just health insurance. The employer owns the policy, and there is no true portability. Unless classified as self-employed, Americans have to buy their own insurance with after-tax dollars, adding as much as 40% to the cost. Not surprisingly, the uninsured are often low-income working people, especially those between jobs.

There are a host of other problems with the current tax treatment. It masks the true cost of medical care, fuels higher costs, and is dramatically regressive, with tax benefits going primarily to upper-income households.

The Tax Reform Commission should have recommended a wholesale reform, as proposed by the American Enterprise Institute, the Heritage Foundation, the National Center for Policy Analysis, plus literally hundreds, if not thousands of analysts and economists, who have long favored complete abolition of this current tax treatment of health insurance for well- established reasons.

One option would have been to replace the current tax breaks for health insurance with a universal health-care tax credit. Persons with lower income or higher medical costs could receive subsidies to help them afford coverage. In any case, all Americans, regardless of how they purchased medical coverage, would get direct and immediate tax relief or assistance. This would be fair, equitable, and efficient. Americans could own their own health policies, just like they own other insurance policies, and take them from job to job.

The Commission Recommendation

Instead of removing the exclusion for health benefits entirely, the Commission decided to simply cap it at $11,500 for family insurance coverage and $5,000 for single coverage. The proposal would index the cap to inflation, as measured by the consumer price index.

The proposed tax cap is likely to meet a series of objections.

First, wouldn't a tax cap on the value of the exclusion erode health insurance coverage and actually increase the number of the uninsured? Not necessarily. The available revenues could be used to finance refundable tax credits and make insurance more widely available to those who do not get it through the workplace. The evidence is overwhelming that there is a direct correlation between job status and access to health insurance, and this would liberalize access to coverage, not constrain it. The broader the coverage, the less cost shifting; the less cost shifting, the better for premiums.

Second, wouldn't a tax cap increase the real cost of medical care and introduce new levels of complexity? No. Lowering the value of the health benefit to the capped amount would not be a bad thing. It should slow the growth in health insurance spending, especially where it is highest. The data show that the biggest tax breaks for health insurance go to upper-income employees in large firms. Not surprisingly, firms (e.g. Detroit's auto industry) have made extravagant promises, particularly to retirees, that they cannot keep, or have no intention of keeping. They are now whining that they need to have the taxpayer bail them out directly. It would be better to dampen the extravagance up front.

Would not a tax cap on the exclusion for health benefits introduce new administrative problems for employers and employees? The point is well taken. But, it does not have to be that way. It depends on how employers respond. If employers say, fine, we will pay $11,500 in tax-free money, and no more, that is likely to have a positive structural impact on the health insurance market. It could result in the system becoming administratively simpler. The reason: it is likely to accelerate the movement toward a defined-contribution system in health care, rather than the defined-benefit system that we have now.

A movement toward defined contribution would have several positive consequences. It would encourage carriers to design affordable plans that meet the cap. Those who wanted a more expensive plan could have it but would have to pay the balance in after-tax dollars. Defined contribution would create a greater incentive for insurers to offer catastrophic policies (the purpose of health insurance in the first place), encourage big deposits into health accounts, and establish greater predictability for employees as well as employers.

Another big benefit to moving toward defined contributions would be to encourage competing plans to become the direct agents of the true principals of health insurance the employees, not the employer. This would mean that insurers would have a direct incentive to provide service to the employees and their families with a minimum of hassle; otherwise, they would and should lose business. This would, of course, discourage these carriers from engaging in the intensive, counterproductive micromanagement that frustrates doctors and patients and drives up administrative costs.

What Next?

Congress will have to ponder these recommendations, and accept, reject, or modify them. If the proposed cap on the tax exclusion is accepted, the crucial policy question is what to do with the new revenues. With households now paying roughly 40% of their income in taxes of all kinds, any new revenues should go directly back to the citizens. The Commission says that it should replace revenues generated from other taxes, such as the alternative minimum tax (AMT). Another option would be to provide individual medical tax credits or vouchers for those who can't afford health insurance. This would reduce the number of America's uninsured. In either case, expanding health care coverage through the private sector will reduce the taxpayers' big bills for uncompensated care. Everyone wins.

The Medicaid Commission

Yet another commission is trying to figure out what to do with Medicaid: the nation's largest health program, with 53 million enrollees and an annual budget now of roughly $300 billion. It provides care for millions of children, their parents, pregnant women, disabled, elderly, and in some cases even childless adults, plus long-term care services to Americans who previously have been middle class. Such a diverse group of very different enrollees makes the redesign of the program necessary.

Both federal and state governments are struggling with Medicaid costs. Unlike the federal government, most states must maintain a balanced budget, and Medicaid obligations are squeezing out other priorities. For the first time, National Governors Association says, Medicaid has surpassed education as the largest part of state budgets. The biggest cost driver, which takes roughly 70 cents out of every Medicaid dollar, is long-term and custodial care.

The growth of middle-class entitlements threatens to shred the safety net for the poor. Politically, as everybody now knows, it is much easier to cut Medicaid than Medicare. Reimbursements for doctors and other health professionals are lower in Medicaid than in Medicare. And within Medicaid, to the extent that it continues to pick up the long-term care costs of an ever larger number of middle-class families, it too will be a less viable program for the poor and the truly indigent. Those who truly care about the poor can't agitate for lavish middle-class entitlement expansions. There's no money.

Robert Moffit is Director, the Center for Health Policy Studies at the Heritage Foundation, Washington, D.C.