Volume 59, No. 2 February 2003

INSURANCE MELTDOWN

As we are told daily, many doctors and patients are finding it impossible to afford insurance, or even to obtain it at any price. Patients are having to go without optimum medical care whether they have "coverage" or not.

The usual prescriptions include a generous dose of coercion by government and its private partners. Doctors are forced to buy professional liability ("malpractice") insurance and in some states to pay into an additional fund as a condition of having hospital privileges or even a license, as in Pennsylvania. And pressure rises to force everyone to pay for "universal coverage" through a tax (sometimes called a "premium").

The prescribed remedy for high costs is not just a failure. KJ Arrow, winner of the Nobel Prize in economics in 1972, announced that the main cause of cost increases is insurance.

Insurance, Arrow observed, is not an exchange of money for goods and services. Rather, "an insurance is a more subtle kind of contract; it is an exchange of money now for money payable contingent on the occurrence of certain events."

Limits to insurance which is basically risk-shifting are inherent in human nature. Arrow cited moral hazard, adverse selection, and transaction costs.

Reliance on third-party payment spawns an entitlement mentality: a "right" to compensation for adversity, and a corresponding obligation to pay, enforced by lawsuits.

Being sued is "like being indicted for a crime, except that the penalty is money," writes Philip K. Howard (Wall St J 7/31/02). The penalty, which can also include the destruction of a medical career, could actually be more painful than that inflicted on a criminal who intentionally harmed someone. And there are no sentencing guidelines.

Insurance against rank injustice sustained by legal fees up to $30,000 per hour, which are partly used to buy political influence to perpetuate the system is as impossible as insurance against acts of terrorism or war.

The risk shifting for both medical costs and liability is reaching Arrow's limit: the promises are exceeding the potential revenue. Pennsylvania is one of the first states to break down.

When physicians in Scranton planned to cease practice after the first of the year because of exploding liability premiums and tighter controls on fees, the government reacted as to a threatened crime. C. Michael Weaver, Secretary of the Commonwealth, notified Pennsylvania-licensed physicians that a work stoppage would constitute "abandonment," with consequences for their license.

Physicians are on the horns of a dilemma: lack of $1 million in coverage means delicensure in Pennsylvania (which mandates "universal coverage" for liability). For nonabandonment of patients practicing without a license due to noncoverage physicians could face felony charges.

Scranton physicians backed down, and northeast Pennsylvania's only trauma center remained open, after Governor- Elect Rendell promised to fight for $220 million in relief for physicians this year. The funds would come from a one-time surcharge on the reserves held by health insurers, primarily Blue Cross. With this infusion, high-risk specialists (general surgeons, obstetricians, orthopedists, and neurosurgeons) would be forgiven this year's payment to the MCARE fund, the state catastrophic fund that absorbs 40% of the liability cost, and others would have their payments halved.

Reserves can only be raided once, and one must wonder about the effect on patients' medical coverage.

Unlike true insurance such as life, collision, or homeowner's insurance, "health" and liability insurance make open-ended promises. Rejecting indemnity coverage leads inexorably to rationing of medical services. Rejecting limits on runaway jury awards (trial lawyers assert that any limits are unconstitutional in Pennsylvania) means unavailability of services.

Many doctors have already fled Pennsylvania. Though complete statistics are not available, the Politically Active Physicians Association (P.A.P.A.) has posted a list of "Disappearing Doctors," 12 pages long in small print, and "Closing Hospitals," 5 pages long ( www.fightingdocs.com).

The vicious cycle of more adverse outcomes and more payouts is set in motion. Inability to recruit radiologists means a 3- month delay in screening mammograms. A 100% increase in liability premiums forced the Guthrie Clinic in Sayre to forgo computerized prescription writing and modernizations in the surgery department. Brandywine Hospital closed its Level II trauma center, and injured patients must be transported 30 miles farther. Chester County had only 770 physicians paying catastrophic fund premiums in 2000 compared with 1,147 in 1997. Delaware County Memorial Hospital has lost one-third of its operating staff. Patients with back or neck pain may wait up to 6 months to see a neurosurgeon. Not a single hospital in South Philadelphia will deliver babies. That's just a sample.

The incoming Governor is setting up a task force. But what can it do if it rejects out of hand the only mechanism that has been shown effective in reducing premiums: caps on noneconomic awards? The "right to sue," like the "right to medical care," must be challenged (see p. 3). Neither is a "unilateral right of freedom, like free speech or a property right" (ibid.). Permitting one citizen and his lawyer to bring the full force of government upon another, with no standard of justice, is the opposite of a rule of law.

The control rods of a free market voluntary transactions at a mutually agreed price, with the option of saying "no sale" have been outlawed in Pennsylvania. Medical and insurance costs are therefore exploding in an uncontrolled chain reaction. A containment structure of mandates, price controls, and threats only increases the pressure and worsens the end result.

Is It a Crime to Be Uninsured?

The history is summarized by the Physicians' Cincinnatus Society at www.cincinnatussociety.org/pamalprac.html.

The AMA opposes the linkage of licensure and liability insurance, said President-Elect Donald Palmisano, M.D., at a January 7 meeting with Pennsylvania physicians.

Proposed H.B. 2417 would repeal linkage and mandatory participation in MCARE. This fund is "red meat for malpractice sharks," states AAPS General Counsel Andrew Schlafly. There is little accountability for massive payouts.

Linkage traps physicians in Pennsylvania. One physician reported that relocation would cost $101,000 in tail coverage, including MCARE. If he can't pay, Pennsylvania will move to revoke his license, triggering a domino effect in other states. Thus, a practitioner with a spotless record is "held captive...by a corrupt, mismanaged state agency," writes Louis Meier, M.D.

Are Caps Unconstitutional in PA?

Legislation capping malpractice awards in Pennsylvania would surely be subject to constitutional challenge, probably based on Section 18, which reads:

In 1871, around the time that this provision was inserted, the Courts did recognize a right to reasonable pain and suffering awards. A basis for defending limits would be that $250,000 is more than adequate to allow the type of recovery contemplated at the time. A Pennsylvania trial court, affirmed in Morristown v. Moyer, 67 Pa. 355 (1871), held that:

Physician Wins in NPDB Action

A California physician has won a dramatic victory in fighting an adverse report to the National Practitioner Data Bank (NPDB). This case started when Dr. John Ulrich protested the laying off of fellow physicians by the San Francisco Department of Health. Within weeks of his protest, Laguna Honda Hospital initiated a peer review. He resigned to further protest the layoffs, but then learned that that could trigger an adverse report to the NPDB based on the pending review. So he attempted to rescind his resignation, but the hospital refused and then filed its adverse report, failing to tell the whole story. On October 11th, the Ninth Circuit held that he has a valid cause of action for the allegedly defamatory report to the NPDB, combined with the refusal to restore his privileges. Ulrich v. City & County of San Francisco, 2002 U.S. App. LEXIS 21245 (9th Cir. Oct. 11, 2002).

Liability Beyond Malpractice

On Nov. 12, 2002, the Arizona Supreme Court greatly expanded physician liability, applying the harsh remedies of the Adult Protective Services Act ("elder abuse statute") to ordinary medical negligence. McGill v. Albrecht, 2002 Ariz. LEXIS 197. This statute allows punitive damages without clear and convincing proof of evil, has a lengthy 7-year statute of limitations, and bypasses requirements of qualified expert testimony. The court ruled that a single omission by a doctor is "actionable abuse" if the omission (1) arises from the relationship between the caregiver and patient, (2) is closely connected to that relationship, (3) is linked to the service the caregiver undertook because of the patient's incapacity, and (4) is related to the problems that caused the incapacity. These conditions can be easily met by most plaintiffs.

In this case, the 62-year-old patient, who was being treated in a behavioral health facility, apparently died of cardiotoxi- city from chemotherapy for metastatic breast cancer. She was considered "incapacitated or vulnerable," having a long history of psychiatric illness. Dr. James L. Beach, her primary care physician of 2.5 years, had not ordered an annual mammogram.

The Arizona chapter of AAPS filed an amicus brief on behalf of Dr. Beach.

In Michigan, Frank Paul Bongiorno M.D., a wound specialist, was charged criminally under the adult abuse law for treating bedsores with surgical debridement (Med Econ 12/3/01). He could face four years in prison for each count.

Correspondence

If a Doctor Is a Patient.... According to an attorney who represents physicians, the Office of Professional Medical Conduct in NY (OPMC) may seek to obtain the medical records of physicians it is investigating, particularly if the physician has consulted a psychiatrist. The physician-patient is not informed that his records are being sought, and a treating physician was warned that he would be charged with professional misconduct if he didn't turn over the records. OPMC has now agreed not to make such threats, as a result of advocacy by the Medical Society of the State of New York. However, OPMC does not remind licensees of Public Health Law 230, which states: "No physician shall be required to report any information to the board which such physician has learned solely as a result of rendering treatment to another physician" (MSSNY's News of New York 5/02).
Lawrence R. Huntoon, M.D., Ph.D., Jamestown, NY

Why HIPAA? I recently asked a well-known healthcare attorney what HIPAA is fixing, if in 30 years of my practice I have never experienced or heard of any breach of privacy in the sphere of the doctor's office. I was told that when the Dr. Koop website was sold, all the patients' diagnoses were obtained by a commercial group that called patients to promote items related to their illnesses. Additionally, the insurance industry wants all medical records to be available on-line, and also wants national standards in order to cut insurers' expenses for compliance with many different state regulations.

The business world caused any problems and will reap any benefits, while physicians pay the costs. Fair?
Ian Schorr, M.D., Dover, NJ

HIPAA Impedes Care. The only way that I can avoid compliance with the so-called privacy regulations is to quit my job as an academic anesthesiologist. As more hospitals implement these rules, it is becoming increasingly difficult to obtain information needed for preanesthetic evaluation. Comparison EKGs, stress tests, and other hospital records are virtually impossible to obtain unless the patient comes here to sign a release for each specific piece of information. Considering that all this is readily available to government and insurers, HIPAA doesn't seem to be doing anything to safeguard the patients's interests especially their interest in survival.
Terry Lynn Edwards, M.D., Pittsburgh, PA

Privacy Requires Private Medicine. The data collection requirement in Minnesota (see www.cchconline.org/pdf/data_rules.pdf ) is dreadful. It is noteworthy that the "29.8% who receive health coverage through self-insured companies employers who use their own reserves to pay for employee health care expenses and the 9.1% who are uninsured will not yet have their data collected or placed in a state database." Once again, private medicine is the solution!
Andrew Schlafly, AAPS General Counsel

Get Out of HIPAA! The complex rules governing physician electronic communications restrict free speech and are unconstitutional. Organized medicine must sue! Meanwhile, all doctors should shift to paper billing.
Samuel Nigro, M.D., Cleveland Heights, OH

"Nonparticipation." When the U.S. Chamber of Commerce recommended that its members not do business ("participate") in Mississippi until tort reform passed, the miracle happened (Wall St J 12/03/02). This leads me to conclude that the AAPS policy of nonparticipation is correct. If all doctor organizations refused to assist government in setting up coding, HIPAA rules, etc., much abuse would cease. Government needs the expertise supplied by its prostrate subjects. Doctors should know there is no point in discussions with government change agents bent on the total regimentation of society.
Robert P. Gervais, M.D., Mesa, AZ

Physician Oppression in Canada. Canadian organized medicine continues to push the preservation of the current government monopoly in medicine while "organizing it better." But the enclosed full-page advertisement in The Medical Post of Nov. 12 helps to show the deep problems in this country. The ad speaks of "the deterioration of the conditions of medical practice, the burdens..., the desire for a balanced lifestyle, quotas that keep doctors from accepting new patients, ... and the government's interference. Everything is over-regulated and over- supervised, and there is no longer room for initiative."

Bill 114 gave the Quebec provincial government the power to order doctors to work in emergency departments. And it was used. Bailiffs appeared at physicians' homes ordering them to report to work.
Patrick Hewlett, M.D., Toronto, Ontario

Prognosis. I'm an oncologist. I know a terminal condition when I see it. Medicare is not going to make it. From now on, the federal government will pass the costs down the line to doctors and hospitals, hoping to stretch out the time to its demise. We're begging for scraps from the table. Physicians are sinking along with the rest of the middle class. It's no longer a zero-sum game; it's a negative sum.... The crooks are at the top of the food chain. Opting out of Medicare makes sense to a lot of conscientious physicians.
Rex Greene, M.D., San Mateo, CA

Legislative Alert

Conservatives, libertarians, and the friends of personal freedom in Congress and in state legislatures everywhere will have an unprecedented opportunity to move forward an aggressive agenda for patient choice and control of the financing and delivery of medical services in 2003. The White House has a pro- patient choice agenda for both private insurance and Medicare. Both the White House staff and the team at HHS are solid advocates of free-market decision-making in medical care. The House of Representatives has been an engine of real change for the last two years, pushing everything from expanded medical savings accounts and tax credits to medical malpractice reform. And the Senate, now headed by Senator Bill Frist (R-TN), a cardiovascular surgeon, is likely to be a player, rather than an obstacle to choice-based changes. The constellation is aligned. But it will take serious preparation, both in terms of policy and politics.

The Left is struggling with persistent problems of its own. For example, its big initiative in 2001-2002 after the cost- driving regulatory provisions of the patients' bill of rights started sinking it was Medicaid expansion. Senators Kennedy, Daschle, and Rockefeller were strong champions of Medicaid expansion for working families who had lost their jobs and their medical insurance. Meanwhile, Senator Daschle (D-SD), as Senate Majority Leader, blocked House-passed tax credits for the expansion of private coverage twice. Medicaid with no choice for most working people was the choice du jour. The exception: guys enrolled in large corporate plans, often heavily unionized, who would be given a federal subsidy to help them keep their already generous, tax-favored COBRA coverage.

Cost control? Simple. Medicaid has formidable price controls, and even more control is possible through reduced access to drugs by establishing complicated drug formularies. Ugly, but simple. (That's why expanding prescription drug coverage for seniors through Medicare is so simple, too. Right?)

Nevertheless, advocates of government program expansions are faced with mounting budget problems, plus the fact that most Americans with two ounces of gray matter between their ears have little or no desire to enroll in Medicaid anyway. Here's the trick: how do you get millions of sane Americans to think that Medicaid is better than private coverage? Recent surveys of the uninsured, conducted by the Kaiser Family Foundation no less, showed that among the uninsured, there was a clear preference for private rather than government coverage. That's the political problem that the Medicaid expansion team in Congress and in the liberal foundations have not effectively addressed.

Then, consider the state-based single-payer initiatives: Socialized medicine, straight up. No disguises or clever Clintonesque descriptions. The Oregon debacle was really the big story of 2002. The ingredients seemed right. The right electorate. The right initiative: big tax increases and a generous comprehensive benefits package. Oregon is what the cognoscenti call a "progressive" state "progressive" in ways that, say, Utah, is not and probably, Robert Redford notwithstanding, never will be. And that's why the four-to-one voter rejection of the Oregon initiative is stunning, and a genuine political setback for the government-control crowd, though one can depend on their redoubling their efforts. They'll be back. Probably someplace else, but it hard to imagine a more fertile electorate than Oregon's except in Maine or Maryland.

Recall that there was that now-forgotten (well, not quite forgotten) single-payer initiative enacted in Maine. The Maine state legislature voted for the plan, said they wanted it, were serious about, and no kidding, were going to do it, but the Maine plan got bogged down last year in the messy details of implementation. The Maine commission that was supposed to report its plan of implementation in March 2002 did not issue that report, and they are still in the business of trying to figure out exactly how they are going to do it. The simple single-player system, of course, is not so simple after all as every serious health policy analyst knows. But they'll be back, too.

And Maryland? Recall that there was a Maryland single-payer initiative in 2001, backed by the Maryland Health Care Initiative with a $1.7 million war chest and the support of literally thousands of organizations in Maryland, including liberal advocacy, labor, and church groups. But that effort faltered too, withered under the fire of tough-minded economic analysis, largely conducted by the Maryland Businesses for Responsive Government (MBRG), an aggressive and highly resourceful organization of business leaders that stood virtually alone, financially and politically, in opposing the government takeover of medicine. The MBRG proposed market-based reforms and enlisted support from prominent conservative and moderate Democrats, including the former Speaker of the Maryland House of Delegates, Casper Taylor. Taylor told his leftist colleagues that they could have single payer in Maryland, except then they would have to figure out how to keep employers from leaving the state.

The political fortunes of MHCI and MBRG changed dramatically in 2002 with the defeat of Lieutenant Governor Kathleen Kennedy Townsend (KKT) for Governor. (KKT was the second Dynasty member, after Mark Shriver failed in his congressional bid, to go down in defeat in Maryland). Former Congressman Robert Ehrlich is to be the first Republican Governor in Maryland in 36 years. With Maryland's chief executive being among the most powerful in the nation, it is unlikely that the single-payer initiative has much chance of surviving. MHCI has since retreated from the single- payer option and has fashioned a new government medical plan financed by a pay-or-play mechanism for Maryland business. Yes, that's right. It looks eerily similar to the old Clinton plan. Expect the single-payer folks to take a leaf from the Maryland experience and try to refashion their initiative as a brand "new" system that relies on all employers to pay their "fair share." Expect, in other words, key ingredients of the old Clinton Plan to resurface at the state level. You've read it here first.

Opponents of patient choice and control are clearly on the defensive: consider the record number of studies and reports issued by liberal policy groups and foundations critical of tax credits and other market-oriented changes. The champions of personal freedom in health care can still blow it, however, by failing to do their political and their policy homework.

Laying the Groundwork for Congressional Change

Conservatives in Congress and elsewhere can press an aggressive agenda if they define clearly the terms of the debate. Two key studies are in order.

A study on the uninsured. The question is not whether we can afford to have equitable individual tax relief for the purchase of private medical insurance, but rather can we afford not to. How much higher are our premiums and taxes because of the uninsured? One thing that could clarify the issue is an analysis of the total cost of the uninsured to the taxpayers, by the Congressional Budget Office (CBO), the General Accounting Office (GAO), or an independent foundation or actuarial firm. What do we pay in public programs, as well as in the cost of uncompensated care for doctors and hospitals? How much do we pay annually for the uninsured in these costs? The Comptrollers Office of the State of Texas has already done this, estimating that Texans pay about $1,000 per uninsured Texan, or roughly the same amount that President Bush has proposed for his national program of tax credits for the uninsured.

But that's not all. Congress could require GAO or some other relevant body to make an estimate of the reduction of these costs that would be realized by enacting Bush's $89 billion (over ten years) tax-credit proposal.

A study on the real administrative costs of Medicare. The Medicare debate is not, as we have said repeatedly, about money. It is about the quality of care that is available and will be available for the next generation of senior citizens, when the unfunded liabilities hit the program big time. In about eight years, to be precise. The problem is that many taxpayers and seniors are only dimly aware of these problems, and don't fully grasp either their costs or their consequences. For example, HHS witnesses routinely testify before Congress that the administrative costs of Medicare are very low, roughly 2% of the benefits paid. As a technical matter, this is correct; it is also utterly misleading. There are huge costs that are not counted, most importantly the costs to doctors, hospitals, home health agencies, nursing homes, and other medical professionals in complying with Medicare rules. These transactional costs are real, and they are shifted onto the private sector. And they find their way into the strained budgets of private physicians and medical facilities and show up nowhere on Medicare's books. They are yet another manifestation of the federal government's vast system of unfunded mandates on the private sector.

Congress could clarify these "off-budget" costs by ordering: (1) a comprehensive analysis of the administrative and compliance costs that Medicare's regulatory system and paperwork imposes on doctors, hospitals, home health agencies, nursing homes, and others; (2) estimating how much this regulatory imposition costs in reductions in time, effort, and money spent on patient care. At the same time, Congress could authorize a comparative analyses of the administrative and compliance costs that the Office of Personnel Management (OPM) imposes on private sector plans in the Federal Employees Health Benefits Program (FEHBP), and the doctors, hospitals, and other providers contracting with those plans. If FEHBP is to be the model for the future of Medicare, then this kind of analysis would be especially worthwhile. Solid empirical analysis would also help in many other debates.

Laying the Groundwork for State-Based Change

State legislators can also embark on an aggressive policy agenda to improve access to affordable medical insurance and to improve the delivery of medical services. For example:

Allow any displaced worker eligible for federal assistance under the recently enacted Trade Adjustment Act to enroll in private plans offered to state employees. Under the trade bill, workers displaced by changes in international trade qualify for a 65% federal tax credit for the purchase of their medical insurance. State officials could help secure the success of this new federal tax credit by aggressively signing up these workers.

Create a state-based information clearing house on health plans available for residents in the state. Those who do not get medical insurance at work often do not know where to secure affordable coverage, even if it is available. State officials could make that information available in an easy and accessible way, perhaps through such agencies as the Department of Motor Vehicles or the Revenue Department.

Secure an HHS waiver and establish Routine Care Accounts for Medicaid beneficiaries. State officials could set up a cash account for each Medicaid recipient with a PIN number and a debit card. Payments for routine medical services doctors' visits, regular check-ups and preventive care could be paid directly out of the routine care account. While doctors would get quick and timely payment for their services, Medicaid enrollees could avoid emergency rooms and roll the unused funds over each year in their account. When they leave welfare or get a job in the private sector, the unused funds could be transferred to pay for private insurance or put into a medical savings account.

Secure a Health Insurance Flexibility and Accountability waiver from HHS. The Bush Administration introduced its Health Insurance Flexibility and Accountability (HIFA) demonstration initiative with an expedited approval process "to encourage new comprehensive state approaches that will increase the number of individuals with health insurance coverage within current-level Medicaid and SCHIP resources." With a HIFA waiver, state officials could expand private coverage for the uninsured.

Secure an independent econometric analysis of the cost of state mandates and insurance rules. An analysis would reveal their impact on the cost of insurance, and their impact on individuals and families seeking insurance in the private market.

Allow state and municipal employees to take advantage of the new Health Reimbursement Arrangements (HRAs). The U.S. Treasury Department last year issued a major tax ruling that employers could put aside funds in a tax-free health care account for employees, and roll them over, tax free, year after year. Employers could make the accumulated funds available to employees when they retire, to offset their medical expenses. While not as robust an option as a medical savings account, in which the employee owns the money, city and state officials can offer them to their employees.

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